-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AcMHPkNkbaB6d83lR+8qB9Ogoa0zhJTCjucC8uD1hwVD3/8m30NqYMYgZjZLaWjO oNbEEsFmFtYJPO26El0PhA== 0001144204-04-003706.txt : 20040329 0001144204-04-003706.hdr.sgml : 20040329 20040329141157 ACCESSION NUMBER: 0001144204-04-003706 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRESIDENTIAL REALTY CORP/DE/ CENTRAL INDEX KEY: 0000731245 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 131954619 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08594 FILM NUMBER: 04695593 BUSINESS ADDRESS: STREET 1: 180 S BROADWAY CITY: WHITE PLAINS STATE: NY ZIP: 10605 BUSINESS PHONE: 9149481300 MAIL ADDRESS: STREET 1: 180 SOUTH BROADWAY CITY: WHITE PLAINS STATE: NY ZIP: 10605 10-K 1 v01924_10k.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003 Commission file number 1-8594 PRESIDENTIAL REALTY CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 13-1954619 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 180 South Broadway, White Plains, New York 10605 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 914-948-1300 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered ------------------- ---------------- Class A Common Stock American Stock Exchange Class B Common Stock American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None - -------------------------------------------------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes __x__ No_______ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ____ No ___X___ The aggregate market value of voting stock held by nonaffiliates of the registrant based on the closing price of the stock at June 30, 2003 was $25,525,000. The registrant has no non-voting stock. The number of shares outstanding of each of the registrant's classes of common stock on March 5, 2004 was 478,840 shares of Class A common and 3,308,948 shares of Class B common. Documents Incorporated by Reference: The Company's definitive Proxy Statement for its Annual Meeting of Shareholders to be held on June 15, 2004, which Proxy Statement will be filed with the Securities and Exchange Commission pursuant to Regulation 14A, is incorporated by reference into Part III of this Form 10-K. PRESIDENTIAL REALTY CORPORATION INDEX FACING PAGE 1 INDEX 2 PART I Item 1. Business 3 Item 2. Properties 17 Item 3. Legal Proceedings 20 Item 4. Submission of Matters to a Vote of Security Holders 20 PART II Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 20 Item 6. Selected Financial Data 23 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 25 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 48 Item 8. Financial Statements and Supplementary Data 48 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 48 Item 9A. Controls and Procedures 48 PART III Item 10. Directors and Executive Officers of the Registrant 49 Item 11. Executive Compensation 49 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 49 Item 13. Certain Relationships and Related Transactions 49 Item 14. Principal Accountant Fees and Services 49 Part IV. Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 49 Table of Contents to Consolidated Financial Statements 55 2 Forward-Looking Statements Certain statements made in this report may constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include statements regarding the intent, belief or current expectations of the Company and its management and involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, the following: general economic and business conditions, which will, among other things, affect the demand for apartments or commercial space, availability and creditworthiness of prospective tenants, lease rents and the terms and availability of financing; adverse changes in the real estate markets including, among other things, competition with other companies; risks of real estate development and acquisition; governmental actions and initiatives; and environment/safety requirements. ITEM I. BUSINESS (a) General Presidential Realty Corporation is a Delaware corporation organized in 1983 to succeed to the business of a company of the same name which was organized in 1961 to succeed to the business of a closely held real estate business founded in 1911. The terms "Presidential" or the "Company" refer to the present Presidential Realty Corporation or its predecessor company of the same name and to any subsidiaries. Since 1982 the Company has elected to be treated as a real estate investment trust ("REIT") for Federal and State income tax purposes. See Qualification as a REIT. The Company's principal assets fall into the following categories: (i) Approximately 24% of the Company's assets are equity interests in twelve rental properties. These properties have an historical cost of $21,733,005, less accumulated depreciation of $6,617,535, resulting in a net carrying value of $15,115,470 at December 31, 2003. See Properties below. 3 (ii) Approximately 35% of the Company's assets are classified as "Assets related to discontinued operations". This category of assets relates to operating properties that are being held for sale. The Company estimates that the sale of these properties will close within one year. These assets are carried at the lower of cost (net of accumulated depreciation and amortization) or fair value less costs to sell. Depreciation and amortization are discontinued when the property is classified as a discontinued operation. At December 31, 2003, assets related to discontinued operations were $22,158,540. See Management's Discussion and Analysis of Financial Condition and Results of Operations. (iii) Approximately 34% of the Company's assets consists of notes receivable, which are reflected on the Company's Consolidated Balance Sheet at December 31, 2003 as "Mortgage portfolio: sold properties and other - net". The $28,656,210 aggregate principal amount of these notes have been reduced by $1,047,628 of discounts (which reflect the difference between the stated interest rates on the notes and the market interest rates at the time the notes were accepted) and $6,233,390 of gains on sales which have been deferred. See Notes 1-B, 1-C, 1-D and 3 of Notes to Consolidated Financial Statements. Accordingly, the net carrying value of the Company's "Mortgage portfolio: sold properties and other" was $21,375,192 at December 31, 2003. All of the loans included in this category of assets were current at December 31, 2003. Notes reflected under "Mortgage portfolio: sold properties and other - net" consist primarily of notes received from sales of real properties previously owned by the Company. This category of assets also includes loans originated by the Company in the aggregate principal amount of $8,875,000 and notes in the aggregate principal amount of $196,210 which relate to sold cooperative apartments. (iv) A small portion of the Company's assets consists of notes receivable in the aggregate principal amount of $378,524 resulting from loans made to Ivy Properties, Ltd. ("Ivy") in connection with the conversion of apartment buildings to cooperative ownership or the sale in 1981 by the Company to Ivy of an apartment project. These loans are reflected on the Company's Consolidated Balance Sheet at December 31, 2003 as "Mortgage portfolio: related parties - net". The principal amounts of these notes have been reduced by discounts and valuation reserves of $61,951 and these notes have a net carrying value at December 31, 2003 of $316,573. Management believes that it holds sufficient collateral to protect its interests in all of the outstanding loans to Ivy to the extent of the net carrying value of these loans. At December 31, 2003, all of the loans due from related parties were current. See Relationship with Ivy Properties, Ltd. and Notes 3 and 19 of Notes to Consolidated Financial Statements. 4 Under the Internal Revenue Code of 1986, as amended (the "Code"), a REIT which meets certain requirements is not subject to Federal income tax on that portion of its taxable income which is distributed to its shareholders, if at least 90% of its "real estate investment trust taxable income" (exclusive of capital gains) is so distributed. Since January 1, 1982, the Company has elected to be taxed as a REIT and has paid regular quarterly cash distributions. Total dividends paid by the Company in 2003 were $.64 per share. While the Company intends to operate in such a manner as to enable it to be taxed as a REIT, and to pay dividends in an amount sufficient to maintain REIT status, no assurance can be given that the Company will, in fact, continue to be taxed as a REIT, that distributions will be maintained at the current rate or that the Company will have cash available to pay sufficient dividends in order to maintain REIT status. See Qualification as a REIT and Market for the Registrant's Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities. At December 31, 2003, the Company employed twelve persons. (b) Investment Strategies The Company's current overall investment strategy is to make investments in real property which offer attractive current yields with, in some cases, potential for capital appreciation. The Company's investment policy is not contained in or subject to restrictions included in the Company's Certificate of Incorporation or Bylaws, and there are no limits in the Company's Certificate of Incorporation or Bylaws on the percentage of assets which it may invest in any one type of asset or the percentage of securities of any one issuer which it may acquire. The investment policy may, therefore, be changed by the Directors or Officers of the Company without the concurrence of the holders of its outstanding stock. However, to continue to qualify as a REIT, the Company must restrict its activities to those permitted under the Code. See Qualification as a REIT. 5 The Company's current primary investment strategies are as follows: (i) Equity Properties The Company's current investment policy is focused on acquiring additional equity interests in income producing properties, principally moderate income apartment properties in the eastern United States. Although the Company's present intention is to acquire additional moderate income apartment properties, Presidential has in the past invested in other commercial properties, including office buildings, shopping centers and light industrial properties, and may do so in the future. Geographically, the Company expects to invest primarily in the eastern United States, although Presidential has in the past invested in other locations and may do so in the future. However, the Company's plans to expand its portfolio of real estate equities may be adversely affected by, among other things a) limitations on its ability to obtain funds for investment on satisfactory terms from external sources and b) competition for investment properties from other potential purchasers with greater financial resources. While it is Presidential's policy to acquire properties for long term investment, it may from time to time sell its equity interests in such properties. While Presidential still seeks to use its funds available for investment to acquire equity interests in real estate, the Company in recent years has not found any such investments that offer rates of return satisfactory to the Company or otherwise meet the Company's investment criteria. Accordingly, the Company has from time to time used its funds available for investment to make loans secured by interests in real estate. See Holding of Notes below. (ii) Holding of Notes The Company holds and expects to continue to hold long term mortgage notes obtained from the sales of real property previously owned by the Company. These notes provide for balloon principal payments at varying times. The Company may in appropriate circumstances agree to extend and modify these notes and may make additional loans secured by interests in real property. See the table set forth below under Loans and Investments. It should be noted that there can be no assurance that the balloon principal payments due in accordance with the purchase money notes will actually be made when due. 6 The capital gains from sales of real properties previously owned by the Company are recognized for income tax purposes on the installment method as principal payments are received. To the extent that any such gain is recognized by Presidential, or to the extent that Presidential incurs a capital gain from the sale of a property, it may, as a REIT, either (i) elect to retain such gain, in which event it will be required to pay Federal and State income tax on such gain, (ii) distribute all or a portion of such gain to shareholders, in which event Presidential will not be required to pay taxes on the gain to the extent that it is distributed to shareholders or (iii) elect to retain such gain and designate it as a retained capital gain dividend, in which event the Company would pay the Federal tax on such gain, the shareholders would be taxed on their share of the undistributed long-term capital gain and the shareholders would receive a tax credit for their share of the Federal tax that the Company paid and increase the tax basis of their stock for the difference between the long-term capital gain and the tax credit. To the extent that Presidential retains any principal payments on notes or proceeds of sale, the proceeds, after payment of any taxes, will be available for future investment. Presidential has not adopted a specific policy with respect to the distribution or retention of capital gains, and its decision as to any such gain will be made in connection with all of the circumstances existing at the time the gain is recognized. The Company has in the last three years made, and may continue to make, additional loans secured by interests in real property. These loans may be "mezzanine" type loans which are secured by subordinate security interests in real property or by ownership interests in entities that own real property, and may in some cases include personal guarantees from the borrower. These loans carry interest rates in excess of rates obtainable on first priority loans. See notes to the Mortgage portfolio: notes receivable-sold properties and other table under Loans and Investments. 7 (iii) Funding of Investments In the past, the Company has obtained funds to make loans and investments from excess cash from operations or capital transactions, loans from financial institutions secured by specific real property or from general corporate borrowings. Such loans have in the past been, and may in the future be, secured by real property and provide for recourse to Presidential. However, funds may not be readily available from these sources and such unavailability may limit the Company's ability to make new investments. See Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources. (c) Loans and Investments The following tables set forth information as of December 31, 2003 with respect to the mortgage loan portfolio resulting from the sale of properties or loans originated by the Company and the loan portfolio due from Ivy. 8 MORTGAGE PORTFOLIO: NOTES RECEIVABLE - SOLD PROPERTIES AND OTHER DECEMBER 31, 2003 - -------------------------------------------------------------------------------- Note Deferred Name of Property Receivable Discount Gain - --------------------------- ------------ ------------ ----------- Chelsea Village Apartments (a) (1) $4,000,000 (c) $1,039,991 $ Atlantic City, NJ Liberty Gardens (a) (1) 1,100,000 (c) Bergenfield, NJ Town Oaks Apartments (a) (1) 1,775,000 (c) South Bound Brook, NJ Encore Apartments (2) 8,550,000 3,241,540 New York, NY Mark Terrace Associates (3) 935,000 Bronx, NY Newcastle Apartments 6,000,000 2,991,850 Greece, NY Pinewood I & II 100,000 Des Moines, IA Reisterstown Apartments (4) 1,500,000 (c) Baltimore, MD Virginia Apartment Properties (5) 4,500,000 (c) Various Sold Co-op Apartments (b) 196,210 7,637 ------------ ------------ ----------- Total Notes Receivable- Sold Properties and Other $28,656,210 $1,047,628 $6,233,390 ============ ============ =========== Net Interest Carrying Maturity Rate Name of Property Value Date 2003 - ----------------------------- --------------- --------- ------------- Chelsea Village Apartments $2,960,009 2009 10.50% Atlantic City, NJ Liberty Gardens 1,100,000 2009 13.00-10.50% Bergenfield, NJ Town Oaks Apartments 1,775,000 2009 11.50-10.50% South Bound Brook, NJ Encore Apartments 5,308,460 2009 10.17% New York, NY Mark Terrace Associates 935,000 2005 9.16% Bronx, NY Newcastle Apartments 3,008,150 2006 6.45% Greece, NY Pinewood I & II 100,000 2008 12.00% Des Moines, IA Reisterstown Apartments 1,500,000 2008 10.50% Baltimore, MD Virginia Apartment 4,500,000 2013 11.50% Properties Various Sold Co-op 188,573 Various Various Apartments --------------- Total Notes Receivable- Sold Properties and Other $21,375,192 =============== (a) These three apartment properties are security for all three loans. (b) Notes received from the sales of cooperative apartments. Interest rates and maturity dates vary in accordance with the terms of each individual note. (c) These loans were made to various companies that are controlled by David Lichtenstein. Some, but not all, of these loans are guaranteed in whole or in part by Mr. Lichtenstein. The aggregate net carrying value of all of the loans made by Presidential to companies controlled by Mr. Lichtenstein is approximately $11,835,000 and all such loans are in good standing. 9 (1) The Company obtained security interests in the ownership interests in the entities that own Chelsea Village Apartments, Liberty Gardens and Town Oaks Apartments, all of which are located in New Jersey. The Company's security interests collateralize the following loans: (i) The $4,000,000 note was received by the Company in 1999 as a result of the sale of the Fairfield Towers Mortgages. The interest rate is 10.50% per annum and the note matures on February 18, 2009. The discount on this note was computed at a rate of 18%. (ii) In July, 2003, the Company modified its $1,100,000 loan, reducing the interest rate from 13% per annum to 10.50% per annum until June 30, 2006. Thereafter on July 1, 2006 and July 1, 2008 the interest rate changes to a rate equal to 900 basis points above the six month LIBOR rate in effect immediately prior to the change, with a minimum rate of 10.50% per annum. At the Company's request, this loan was modified to delay the borrower's right to prepay the note and, in consideration thereof, to reduce the interest rate. The loan is collateralized by the three apartment properties discussed above and by a $750,000 personal guarantee by the borrower's principal. The note matures on February 18, 2009. (iii) In July, 2003, the Company also modified its $1,775,000 loan. At the Company's request, the maturity date of the loan was extended from July 19, 2003 to February 18, 2009 and the interest rate was reduced from 11.50% per annum to 10.50% per annum until June 30, 2006. Thereafter on July 1, 2006 and July 1, 2008 the interest rate changes to a rate equal to 900 basis points above the six month LIBOR rate in effect immediately prior to the change, with a minimum rate of 10.50% per annum. This loan was modified to provide for reduced interest rates in order to extend the maturity date and keep the loan outstanding at an attractive rate of interest. This loan is also collateralized by the three apartment properties discussed above and by an $887,500 personal guarantee by the borrower's principal. (2) In April, 2002, the $12,300,000 note secured by a second mortgage on the Encore Apartments in New York, New York was modified at the Company's request. Under the terms of the modification, Presidential received a principal repayment of $3,750,000 and additional interest of $369,000 (which was due under the terms of the original note). The $8,550,000 balance of the note matures on April 30, 2009. The interest rate on the note is 9% per annum from July 1, 2002 through April 18, 2004, 10% per annum from April 19, 2004 through April 18, 2007 and 10.5% per annum from April 19, 2007 through maturity, with additional interest of $171,000 due at maturity. The effective interest rate over the term of the note is 10.17% per annum. The $8,550,000 note is secured by a second mortgage on the Encore apartment property and by a pledge of the ownership interests in the entity owning the Encore Apartments. 10 (3) In March, 2003, in response to the borrower's decision to prepay the Mark Terrace note, the Company modified the terms of the note. The Company agreed to give the borrower annual options to extend the maturity date from November 29, 2005 to November 29, 2008 and to fix the interest rate at the current 9.16% per annum until maturity. The Company will receive principal payments of $25,000 each on January 1, 2004 (received) and November 29, 2004. If the borrower exercises its options to extend the note, the Company will receive principal payments of $100,000 on each of November 30, 2005, November 30, 2006 and November 30, 2007. The note is collateralized by unsold cooperative apartments at the Mark Terrace property. As apartments are sold, the Company receives principal payments ranging from $20,000 to $35,000 per unit depending upon the size of the unit. This represents an increase from the $16,000 payment required to release units prior to the modification. (4) In February, 2003, the Company made a $1,500,000 loan collateralized by ownership interests in Reisterstown Square Associates, LLC, which owns Reisterstown Apartments in Baltimore, Maryland, and by a personal guarantee from the borrower. The loan matures on January 31, 2008 and has an annual interest rate of 10.50% until January 31, 2005. Thereafter, the interest rate changes every six months to a rate equal to 800 basis points above the six month LIBOR rate, with a minimum rate of 10.50% per annum. 11 (5) In October, 2003, the Company made a $4,500,000 loan collateralized by ownership interests in nine apartment properties located in the Commonwealth of Virginia. The loan matures on October 23, 2013 and basic interest accrues at an annual rate of 11.50% through October 23, 2007 and at 11% per annum from October 24, 2007 to maturity. For the first five years of the loan, a portion of the basic interest equal to 2% per annum is deferred and is payable on the fifth anniversary of the loan. In addition to the basic interest accruing on the loan, the Company is entitled to receive additional interest equal to 25% of any net sales or refinancing proceeds resulting from sales or refinancing of the nine properties. In connection with the loan, Presidential received a $22,500 commitment fee. Presidential has made five loans in the aggregate outstanding principal amount of $12,875,000 to entities that are controlled by David Lichtenstein. Some, but not all, of these loans are guaranteed in whole or in part by Mr. Lichtenstein. At December 31, 2003, the aggregate net carrying value of all of the loans made by Presidential to entities controlled by Mr. Lichtenstein is approximately $11,835,000, and all of such loans are in good standing. While the Company believes that all of these loans are adequately secured, a default by Mr. Lichtenstein on some or all of these loans could have a material adverse effect on Presidential's business and operating results. 12 MORTGAGE PORTFOLIO: NOTES RECEIVABLE - RELATED PARTIES DECEMBER 31, 2003 - --------------------------------------------------------------------------------
Net Interest Note Carrying Maturity Rate Name of Property Receivable Discount Value Date 2003 - ---------------- ------------- ------------ ------------- --------- --------------- UTB End Loans (1) $92,619 $46,720 $45,899 Various Various Consolidated Loans (2) 0 2016 Chase Prime University Towers (3) 285,905 15,231 270,674 Various 11.80 to 25.33% New Haven, CT ------------- ------------ ------------- $378,524 $61,951 $316,573 ============= ============ =============
(1) Included in the $46,720 discount on these notes is a valuation reserve of $26,887. This valuation reserve was recorded by the Company in 1997 to reflect a decline in the fair value of the underlying collateral. (2) As part of the Settlement Agreement with Ivy in 1991, certain of Presidential's outstanding nonrecourse loans (most of which had previously been written down to zero) were consolidated into two notes which currently have an aggregate outstanding principal balance of $4,770,050 and a net carrying value of zero. Presidential does not expect to recover any material principal amounts on these notes. However, to the extent that Presidential does receive payments, such payments will be applied to unpaid and unaccrued interest and recognized as income. During 2003, the Company received interest payments of $275,750 on these notes. At December 31, 2003, the total unpaid and unaccrued interest was $3,497,417 (see Relationship with Ivy Properties, Ltd. below and Note 19 of Notes to Consolidated Financial Statements). (3) These notes represent a 100% interest in notes receivable held by UTB Associates, a limited partnership in which Presidential has a 75% interest. These notes are amortized over a period of approximately 28 years from the date of a co-op apartment sale. Included in the $15,231 discount on these notes is a valuation reserve of $9,849. This valuation reserve was recorded by the Company in 1997 to reflect a decline in the estimated fair value of the underlying collateral. 13 (d) Qualification as a REIT Since 1982, the Company has operated in a manner intended to permit it to qualify as a REIT under Sections 856 to 860 of the Code. The Company intends to continue to operate in a manner to permit it to qualify as a REIT. However, no assurance can be given that it will be able to continue to operate in such a manner or to remain qualified. In any year that the Company qualifies as a REIT and meets other conditions, including the distribution to stockholders of at least 90% of its "real estate investment trust taxable income" (excluding long-term capital gains but before a deduction for dividends paid), the Company will be entitled to deduct the distributions that it pays to its stockholders in determining its ordinary income and capital gains that are subject to federal income taxation (see Note 9 of Notes to Consolidated Financial Statements). Income not distributed is subject to tax at rates applicable to a domestic corporation. In addition, the Company is subject to an excise tax (at a rate of 4%) if the amounts actually or deemed distributed during the year do not meet certain distribution requirements. In order to receive this favorable tax treatment, the Company must restrict its operations to those activities which are permitted under the Code and to restrict itself to the holding of assets that a REIT is permitted to hold. No assurance can be given that the Company will, in fact, continue to be taxed as a REIT; that distributions will be maintained at the current rate; that the Company will have sufficient cash to pay dividends in order to maintain REIT status or that it will be able to make cash distributions in the future. In addition, even if the Company continues to qualify as a REIT, the Board of Directors has the discretion to determine whether or not to distribute long-term capital gains and other types of income not required to be distributed in order to maintain REIT tax treatment. (e) Relationship with Ivy Properties, Ltd. From 1979 to 1989, Presidential made loans to Ivy Properties, Ltd. and its affiliates ("Ivy") in connection with Ivy's cooperative conversions of apartment properties in the New York metropolitan area. In 1981, UTB Associates, a partnership controlled by Presidential, sold an apartment property to Ivy in return for purchase money notes. In addition, in 1984, Presidential sold to 14 Ivy its 50% partnership interest in the partnership which owned Overlook Gardens, a 308 unit apartment complex in Alexandria, Virginia for a purchase money note. Ivy is owned by Thomas Viertel, Steven Baruch and Jeffrey Joseph (the "Ivy Principals"), who are the sole partners of Pdl Partnership, which owns 198,735 shares of the Company's Class A common stock. As a result of the ownership of these shares and 24,601 additional shares of Class A common stock owned in the aggregate individually by the Ivy Principals, Pdl Partnership and the Ivy Principals have beneficial ownership of an aggregate of approximately 47% of the outstanding shares of Class A common stock of the Company, which class of stock is entitled to elect two-thirds of the Board of Directors of the Company. By reason of such beneficial ownership, the Ivy Principals are in a position substantially to control elections of the Board of Directors of the Company. Jeffrey Joseph is the President and a Director of Presidential. Thomas Viertel, an Executive Vice President and the Chief Financial Officer of Presidential, is the son of Joseph Viertel, a Director and a former President of Presidential, and the nephew of Robert E. Shapiro, Chairman of the Board of Directors and a former President of Presidential. Steven Baruch, an Executive Vice President of Presidential, is the cousin of Robert E. Shapiro and Joseph Viertel. In November, 1999, these three officers exercised stock options for the purchase of an aggregate of 60,000 shares of Class B common stock at an exercise price of $6.125 per share. Presidential made loans totaling $367,500 to these officers for the payment of the purchase price of the 60,000 shares. The loans, which are recourse loans, provide for an interest rate of 8% per annum, mature on November 30, 2004 and are secured by a security interest in the shares. For the year ended December 31, 2003, interest income on these notes was $29,400. These three officers own an aggregate of 104,954 shares of the Company's Class B common stock. In 1999, these officers were granted options to purchase an additional 60,000 shares of Class B common stock. As a result of the deterioration of the sales market for cooperative apartments in the New York metropolitan area in 1989 and 1990, Ivy defaulted on certain of its outstanding loans from Presidential in 1990 and 1991. In November, 1991, Presidential and Ivy consummated a Settlement Agreement with respect to various outstanding loans to Ivy. The Settlement Agreement was negotiated for Presidential by a committee of three members of the Board of Directors with no affiliations with the Ivy Principals (the "Independent Committee") and an officer of Presidential who was not affiliated with the Ivy Principals, and was approved unanimously by the Board of Directors of Presidential. 15 In connection with the Settlement Agreement, most of Ivy's subordinate nonrecourse debt to Presidential was consolidated, on modified terms, into two nonrecourse loans (collectively, the "Consolidated Loans") which were collateralized by substantially all of Ivy's remaining business assets not otherwise disposed of pursuant to the Settlement Agreement (collectively, the "Consolidated Collateral") and required payments to be made only from certain proceeds of sale of the Consolidated Collateral. Since substantially all of the Consolidated Collateral has been sold and the sales proceeds used to pay other obligations of Ivy as permitted by the terms of the Settlement Agreement, Presidential does not expect to recover any material principal amounts on the Consolidated Loans. However, in 1996 Presidential and the Ivy Principals agreed to modify the Settlement Agreement to provide that the Ivy Principals will make payments on the Consolidated Loans in an amount equal to 25% of the operating cash flow (after provision for certain reserves) of Scorpio Entertainment, Inc. ("Scorpio"), a company owned by two of the Ivy Principals which acts as a producer of theatrical productions. Scorpio is one of the producers of "The Producers", a much acclaimed Broadway show which opened in April, 2001, and of "Hairspray", another highly acclaimed Broadway musical which opened in August, 2002. "The Producers" recouped its original investment on Broadway in November, 2001 and has distributed profits regularly since then. A national tour commenced performances in September, 2002, recouped its original investment in May, 2003, and has begun distributing profits. A second tour commenced performances in June, 2003. A production in Toronto, Canada began performances in November, 2003. Additional tours and productions are scheduled. "Hairspray" recouped its original investment on Broadway in March, 2003 and began making profit distributions in June, 2003. A national tour commenced performances in September, 2003 and additional productions are scheduled. Amounts received by Presidential from Scorpio will be applied to unpaid and unaccrued interest on the Consolidated Loans and recognized as income. The Company anticipates that these amounts will be significant over the next several years. However, the continued profitability of any theatrical production is by its nature uncertain and management believes that any estimate of payments from Scorpio on the Consolidated Loans for future periods is too speculative to project. During 2003, Presidential received $275,750 of interest payments on the Consolidated Loans. At December 31, 2003, the unpaid and unaccrued interest was $3,497,417. As of December 31, 2003, the Consolidated Loans had an outstanding principal balance of $4,770,050 and a net carrying value of zero. 16 The table entitled "Mortgage portfolio: notes receivable - related parties" set forth under Loans and Investments above reflects all loans to Ivy outstanding at December 31, 2003. All of such loans are current under their modified terms. Management believes that it holds sufficient collateral to protect its interests in the loans that remain outstanding to Ivy to the extent of the net carrying value of these loans. Any transactions relating to the implementation of the terms of the Settlement Agreement, or otherwise involving the Ivy Principals, are subject to the approval of the Independent Committee. (f) Competition The real estate business is highly competitive in all respects. In attempting to expand its portfolio of owned properties, the Company will be in competition with other potential purchasers for properties and sources of financing, most of whom will be larger and have greater financial resources than the Company. As a result of such competition, there can be no assurance that the Company will be able to obtain opportunities for new investments at attractive rates of return. ITEM 2. PROPERTIES As of December 31, 2003, the Company had an ownership interest in 694 apartment units and 410,500 square feet of commercial, industrial and professional space, all of which are carried on the balance sheet at $15,115,470 (net of accumulated depreciation of $6,617,535). The Company has mortgage debt on the majority of these properties in the aggregate principal amount of $16,741,884, all of which is nonrecourse to Presidential with the exception of $1,200,000 secured by the mortgage on the Building Industries Center property and $190,381 secured by the mortgage on the Mapletree Industrial Center property. Included in the 694 apartment units owned by Presidential are 52 cooperative apartment units. Although it may from time to time sell individual or groups of these apartments, Presidential intends to continue to hold them as rental apartments. 17 As of December 31, 2003, the Company also has ownership interests in two apartment properties that are being held for sale and are classified as assets related to discontinued operations. At December 31, 2003, the carrying value of these two properties was $21,666,057 (net of accumulated depreciation of $3,661,054) and the mortgage debt, which is nonrecourse to Presidential, was $21,201,234. In addition, PDL, Inc. (a wholly owned subsidiary of Presidential) is the general partner of PDL, Inc. and Associates Limited Co-Partnership ("Home Mortgage Partnership"). PDL, Inc. and Presidential have an aggregate 31% general and limited partner interest in the Home Mortgage Partnership. The Home Mortgage Partnership owns and operates an office building, with 211,000 square feet of commercial space, located in Hato Rey, Puerto Rico. Presidential accounts for its investment in this partnership under the equity method. At December 31, 2003, the Company's investment in the partnership had a negative basis for financial reporting purposes of $2,411,112. The negative basis was a result of distributions received from the partnership in excess of investments and earnings, and not a result of partnership operating losses. For the year ended December 31, 2003, the Company's equity in income from the partnership was $377,953. The chart below lists the Company's properties as of December 31, 2003. 18 REAL ESTATE
Average Vacancy Mortgage Rate Balance PROPERTY Rentable Percent December 31, Maturity Interest Space (approx 2003 2003 Date Rate RESIDENTIAL APARTMENT BUILDINGS Cambridge Green, Council Bluffs, IA 201 Apt. Units (5) 12.18% $3,011,221 October, 2029 6.65% Crown Court, New Haven, CT (2) 105 Apt. Units (5) (Net Lease) 2,497,492 November, 2021 7.00% & 2,000 sq.ft. of comml. space Fairlawn Gardens, Martinsburg, WV 112 Apt. Units (5) 9.48% 2,160,997 (1) April, 2008 7.06% Farrington Apartments, Clearwater, FL 224 Apt. Units (5) 17.17% 7,681,793 (1) May, 2010 8.25% INDIVIDUAL COOPERATIVE APARTMENTS Towne House, New Rochelle, NY 42 Apt. Units (5) 4.31% Various Cooperative Apartments, NY & CT 10 Apt. Units (5) 7.92% COMMERCIAL BUILDINGS Building Industries Center, White Plains, NY 23,500 sq.ft. 0.00% 1,200,000 (1) January, 2009 5.45% Mapletree Industrial Center, Palmer, MA 385,000 sq.ft. 5.52% 190,381 June, 2011 4.25% ------------- $16,741,884 ============= REAL ESTATE OF DISCONTINUED OPERATIONS RESIDENTIAL APARTMENT BUILDINGS Continental Gardens, Miami, FL (3) 208 Apt. Units (5) 7.27% $7,597,483 (1) August, 2007 8.16% Preston Lake Apartments, Tucker, GA (4) 320 Apt. Units (5) 19.11% 13,603,751 (1) May, 2010 8.15% ------------- $21,201,234 =============
(1) These mortgages amortize monthly with a balloon payment due at maturity. (2) The Crown Court property is subject to a long-term net lease containing an option to purchase in 2009. (3) The Continental Gardens property is under contract for sale. (4) The Preston Lake Apartments property is being held for sale. See Management's Discussion and Analysis of Financial Condition and Results of Operations. (5) With the exception of Crown Court and the individual cooperative apartments, the apartment properties owned by the Company are garden-style apartments. Typically apartment units range from one bedroom/one bath units to three bedroom/two bath units and rentable area ranges from 517 square feet to 1,352 square feet. 19 In the opinion of management, all of the Company's properties are adequately covered by insurance in accordance with normal insurance practices. All real estate owned by the Company is owned in fee simple with title generally insured for the benefit of the Company by reputable title insurance companies. The mortgages on the Company's properties have fixed rates of interest and the majority of the mortgages amortize monthly with balloon payments due at maturity. ITEM 3. LEGAL PROCEEDINGS As a result of continuing operating losses at the Company's Preston Lake Apartments property in Tucker, Georgia, the Company decided not to make the monthly payment due February 1, 2004 on the first mortgage note secured by the property. On February 17, 2004, the Federal National Mortgage Association, the holder of the mortgage, commenced an action in the Superior Court of Gwinnett County, Georgia, against Presidential Preston Lake Corp., the Company's wholly-owned subsidiary that owns the property ("the Owning Entity"), to enforce an Assignment of Rents and appoint a receiver, and subsequent thereto the Owning Entity consented to the relief sought. On March 5, 2004, the holder of the mortgage notified the Owning Entity that it was commencing non-judicial foreclosure proceedings against the property. The foreclosure sale is currently scheduled for April 4, 2004. The mortgage note is nonrecourse and the Company has no liability for repayment of the indebtedness. The Company has advised the holder of the mortgage that it is willing to transfer ownership of the property to it in lieu of foreclosure. See Management's Discussion and Analysis of Financial Condition and Results of Operations - Discontinued Operations below. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES (a) The principal market for the Company's Class A and Class B Common Stock is the American Stock Exchange (ticker symbols PDL A and PDL B). The high and low prices for the stock on such principal exchange for each quarterly period during the past two years, and the per share dividends declared per quarter, are as follows: 20
Stock Prices Dividends ------------------------------------------------ Declared Per Class A Class B Share on --------------------- ---------------------- Class A and High Low High Low Class B -------- -------- --------- -------- ------- Calendar 2003 First Quarter $ 7.50 $ 7.05 $ 7.45 $ 6.45 $ .16 Second Quarter 7.60 7.30 8.10 6.85 .16 Third Quarter 9.10 8.00 10.40 8.00 .16 Fourth Quarter 8.70 7.70 8.05 7.00 .16 Calendar 2002 First Quarter $ 9.50 $ 8.00 $ 7.10 $ 6.00 $ .16 Second Quarter 9.00 6.90 7.20 6.10 .16 Third Quarter 7.34 6.70 7.00 6.21 .16 Fourth Quarter 7.35 7.20 7.60 6.55 .16
(b) The number of record holders for the Company's Common Stock at December 31, 2003 was 122 for Class A and 575 for Class B. (c) Under the Code, a REIT which meets certain requirements is not subject to Federal income tax on that portion of its taxable income which is distributed to its shareholders, if at least 90% of its "real estate investment trust taxable income" (exclusive of capital gains) is so distributed. Since January 1, 1982, the Company has elected to be taxed as a REIT and has paid regular quarterly cash distributions. No assurance can be given that the Company will, in fact, continue to be taxed as a REIT, or that the Company will have sufficient cash to pay dividends in order to maintain REIT status. See Qualification as a REIT above. 21 (d) Stock Option Plan not approved by security holders (for additional information on the 1999 Stock Option Plan, see Note 15 of Notes to the Consolidated Financial Statements):
Number of securities Weighted-average Number of securities to be issued upon exercise exercise price of remaining available of outstanding options outstanding options for future issuance under equity compensation plans excluding securities reflected in column (a) (a) (b) (c) 60,000 $6.375 90,000
22 ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31, -------------------------------------------------------- 2003 2002 2001 2000 1999 --------- -------- --------- -------- --------- (Amounts in thousands, except per common share data) Selected Data from Consolidated Statements of Operations: Revenues: Rental $ 5,502 $ 5,595 $ 5,451 $4,998 $ 3,485 Interest on mortgages 2,914 2,900 3,330 3,226 3,853 Other 28 21 27 38 71 --------- -------- --------- -------- --------- Total $8,444 $ 8,516 $8,808 $8,262 $ 7,409 ========= ======== ========= ======== ========= Income before net gain (loss) from sales of properties, notes and securities $ 325 $ 699 $ 950 $ 1,171 $ 1,090 Net gain (loss) from sales of properties, notes and securities (1)(2) 1,029 3,873 1,198 (5) 7,703 --------- -------- --------- -------- --------- Income from continuing operations 1,354 4,572 2,148 1,166 8,793 --------- -------- --------- -------- --------- Discontinued Operations: Income (loss) from discontinued operations (3) (466) 42 473 47 288 Impairment of real estate held for sale (4) (3,110) Net gain from sales of discontinued operations (5) 1,486 --------- -------- --------- -------- --------- Total income (loss) from discontinued operations (3,576) 1,528 473 47 288 --------- -------- --------- -------- --------- Net Income (Loss) $(2,222) $ 6,100 $ 2,621 $ 1,213 $ 9,081 ========= ======== ========= ======== ========= Earnings per common share (basic and diluted): Income before net gain from sales of properties, notes and securities $ 0.09 $ 0.18 $ 0.26 $ 0.32 $ 0.30 Net gain from sales of properties, notes and securities 0.27 1.04 0.32 0.00 2.12 --------- -------- --------- -------- --------- Income from continuing operations 0.36 1.22 0.58 0.32 2.42 --------- -------- --------- -------- --------- Discontinued Operations: Income (loss) from discontinued operations (0.12) 0.01 0.13 0.01 0.08 Impairment of real estate held for sale (0.83) Net gain from sales of discontinued operations 0.40 --------- -------- --------- -------- --------- Total income (loss) from discontinued operations (0.95) 0.41 0.13 0.01 0.08 --------- -------- --------- -------- --------- Net Income (Loss) per Common Share - basic $ (0.59) $ 1.63 $ 0.71 $ 0.33 $ 2.50 ========= ======== ========= ======== ========= Net Income (Loss) per Common Share - diluted $ (0.59) $ 1.63 $ 0.71 $ 0.33 $ 2.50 ========= ======== ========= ======== ========= Cash distributions per common share $ 0.64 $ 0.64 $ 0.64 $ 0.64 $ 0.64 ========= ======== ========= ======== ========= Weighted average number of shares outstanding - basic 3,766 3,735 3,716 3,698 3,629 ========= ======== ========= ======== ========= Weighted average number of shares outstanding - diluted 3,773 3,739 3,718 3,698 3,633 ========= ======== ========= ======== =========
(1) The 2002 net gain from sales of properties, notes and securities includes a net gain of $3,750,000 from principal payments received on the New Haven Towers note receivable, which is secured by the Encore Apartments. (2) The 1999 net gain from sales of properties, notes and securities includes a net gain of $7,394,000 from the sale of the Fairfield Towers First and Second Mortgage Notes and a net gain of $1,000,000 from principal repayments received on the Crown Tower and Madison Towers Notes. These gains were partially offset by a $1,450,000 loss on the sale of securities. (3) Operations of properties held for sale or sold have been reclassified from rental property operations to discontinued operations for all prior years presented. In 2003, the Company contracted for the sale of the Continental Gardens property and decided to sell the Preston Lake Apartments property. In 2002, the Company sold the Sunwood Apartments property, the University Towers Professional Space Lease property and the Towers Shoppers Parcade property. (4) In 2003, the Company recorded an impairment charge to reduce the carrying value of the Preston Lake Apartments assets related to discontinued operations to their estimated fair value less costs to sell. (5) The 2002 net gain from sales of discontinued operations includes a net gain of $1,143,000 from the sale of the Sunwood Apartments property (net of a $499,000 provision for Federal taxes) and net gains of $189,000 and $154,000 from the sale of the University Towers Professional Space Lease property and the Towers Shoppers Parcade property, respectively. 23 ITEM 6. SELECTED FINANCIAL DATA (CONCLUDED)
DECEMBER 31, ------------------------------------------------------------ 2003 2002 2001 2000 1999 -------- -------- -------- -------- -------- (Amounts in thousands) Selected Data from Consolidated Balance Sheets: Real estate(1) $ 21,733 $ 21,524 $ 21,266 $ 20,984 $ 11,002 Less: accumulated depreciation 6,618 6,042 5,477 4,929 4,449 -------- -------- -------- -------- -------- Net real estate $ 15,115 $ 15,482 $ 15,789 $ 16,055 $ 6,553 ======== ======== ======== ======== ======== Net mortgage portfolio $ 21,692 $ 17,608 $ 16,410 $ 15,795 $ 15,857 ======== ======== ======== ======== ======== Assets related to discontinued operations (2) $ 22,159 $ 25,582 $ 32,678 $ 33,416 $ 16,214 ======== ======== ======== ======== ======== Total assets $ 63,111 $ 67,781 $ 69,321 $ 69,252 $ 49,256 ======== ======== ======== ======== ======== Mortgage debt - includes amounts due in one year(1) $ 16,742 $ 15,768 $ 15,978 $ 16,171 $ 9,337 ======== ======== ======== ======== ======== Liabilities related to discontinued operations(2) $ 21,473 $ 21,719 $ 26,663 $ 26,916 $ 13,049 ======== ======== ======== ======== ======== Accumulated other comprehensive loss $ (2,845) $ (2,641) $ (1,752) $ (1,431) $ (1,660) ======== ======== ======== ======== ======== Stockholders' equity $ 15,708 $ 20,272 $ 17,309 $ 17,284 $ 18,108 ======== ======== ======== ======== ========
(1) In March, 2000, the Company acquired Farrington Apartments for a purchase price of $9,796,000 and obtained a $7,900,000 first mortgage loan on the property. (2) Assets and related liabilities applicable to properties held for sale or sold have been reclassified to assets related to discontinued operations and liabilities related to discontinued operations for all prior years presented. In 2003, the Company contracted for the sale of the Continental Gardens property and decided to sell the Preston Lake Apartments property. In 2002, the Company sold the Sunwood Apartments property, the University Towers Professional Space Lease property and the Towers Shoppers Parcade property. 24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Presidential Realty Corporation is taxed for federal income tax purposes as a real estate investment trust and owns real estate and makes loans secured by interests in real estate. Real Estate Loans During 2003, the Company made two new loans in the aggregate principal amount of $6,000,000, which loans are secured by the ownership interests in entities that own real property. Management believes that under current market conditions it can obtain better returns from these types of investments, which have current interest rates ranging from 10.5% to 11.5% per annum, than the returns available from the ownership and operation of real estate. In addition, in 2003, in order to deter some borrowers from prepaying loans that were outstanding at favorable interest rates, the Company modified three loans, which modifications, while slightly reducing the interest rates on the notes, extended the maturity dates and restricted prepayment for additional periods. In addition, the Company received repayments of $2,954,882 on its loan portfolio. Rental Property Operations The Company's income from rental property operations was adversely affected during 2003 as a result of increasing vacancy losses and expenses at its Farrington Apartments property. In an effort to improve vacancy levels at this property, the Company has offered reduced rents and rental concessions. Discontinued Operations In 2003, the Company contracted to sell its Continental Gardens property for a sales price of $21,500,000 and the sale is expected to close in the second or third quarter of 2004. The Company estimates the net cash proceeds of sale to be approximately $12,200,000 and expects to utilize all or a portion of the proceeds to purchase other properties and treat the sale and purchase as a tax free exchange to the extent necessary to defer taxes on the sale. 25 As a result of the poor performance of the Company's Preston Lake Apartments property, the Company decided in the third quarter of 2003, to sell that property and has classified the property as a discontinued operation. As a result of this decision to sell the property, the Company was required to record the asset at the lower of the carrying value or the fair value less costs to sell. Therefore, the Company recorded a $3,110,000 impairment charge to reduce the carrying value of the property to its estimated fair value less costs to sell. Critical Accounting Policies In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP"), management is required to make estimates and assumptions that affect the financial statements and disclosures. These estimates require management's most difficult, complex or subjective judgments. Management has discussed with the Company's Audit Committee the implementation of the critical accounting policies described below and the estimates required with respect thereto. Real Estate Real estate is carried at cost, net of accumulated depreciation and amortization. Additions and improvements are capitalized and repairs and maintenance are charged to rental property operating expenses as incurred. Depreciation is generally provided on the straight-line method over the estimated useful life of the asset. The useful life of each property, as well as the allocation of the costs associated with a property to its various components, requires estimates by management. If management incorrectly estimates the allocation of those costs or incorrectly estimates the useful lives of its real estate, depreciation expense may be misstated. The Company reviews each of its properties, including the property held by PDL, Inc. and Associates Limited Co-Partnership ("Home Mortgage Partnership"), for impairment at least annually or more often if events or changes in circumstances warrant. If impairment were to occur, the property would be written down to its estimated fair value. The Company assesses impairment based on undiscounted cash flow estimates that utilize appropriate capitalization rates. The future estimated cash flows of a property are based on current rental revenues and operating expenses, as well as the current local economic climate of the property. Considerable judgment is required in making these estimates and changes in these estimates could cause the estimated cash flows to change and impairment could occur. As of December 31, 2003, the Company's net real estate was $15,115,470 and the Home Mortgage Partnership's net real estate was $4,295,672. No impairments have been recorded on any of these properties (exclusive of assets included in discontinued operations). 26 Assets and Liabilities Related to Discontinued Operations Assets related to discontinued operations are carried at the lower of cost(net of accumulated depreciation and amortization) or fair value less costs to sell. An operating property is classified as held for sale and, accordingly, as a discontinued operation when, in the judgment of management, a sale that will close within one year is probable. The Company discontinues depreciation and amortization when a property is classified as a discontinued operation. At December 31, 2003, assets related to discontinued operations were $22,158,540, after an impairment charge of $3,110,000 which reduced the carrying value of a property held for sale to its estimated fair value less costs to sell. The amount ultimately realized upon disposition of that property could vary materially from this estimate. Liabilities related to assets held for sale consist primarily of the $21,201,234 nonrecourse mortgage debt on the properties, which will either be assumed by the purchaser or repaid from the proceeds of the sale. At December 31, 2003, total liabilities related to discontinued operations were $21,472,782 (see Discontinued Operations below). Mortgage Portfolio The Company evaluates the collectibility of both accrued interest and principal on its $29,034,734 mortgage portfolio to determine whether there are any impaired loans. If a mortgage loan were considered to be impaired, the Company would establish a valuation allowance equal to the difference between a) the carrying value of the loan, and b) the present value of the expected cash flows from the loan at its effective interest rate, or at the estimated fair value of the real estate collateralizing the loan. Although, a loan modification could be an indicator of a possible impairment, the Company has in the past, and may in the future, modify loans for business purposes and not as a result of debtor financial difficulties. Income on impaired loans is recognized only as cash is received. All loans are current as to payment of principal and interest according to their terms, as modified, and no loans have been classified as impaired. 27 Allowance for Doubtful Accounts Management assesses the collectibility of amounts due from tenants and other receivables, using indicators such as past-due accounts, the nature and age of the receivable, the payment history and the ability of the tenant or debtor to meet its payment obligations. Management's estimate of allowances for doubtful accounts is subject to revision as these factors change. Rental revenue is recorded on the accrual method and rental revenue recognition is generally discontinued when the tenant in occupancy is delinquent for ninety days or more and bad debt expense is charged for vacated tenant accounts. At December 31, 2003, other receivables, net of an allowance for doubtful accounts of $180,613, were $770,360. For the year ended December 31, 2003, bad debt expense (all of which was for tenant obligations) was $91,218, less than 2% of total rental revenues. Pension Plans The Company maintains a qualified defined benefit pension plan, which covers substantially all of its employees. The plan provides for monthly retirement benefits commencing at age 65. The Company makes annual contributions that meet the minimum funding requirements and the maximum contribution levels under the Internal Revenue Code. Contributions for the years ended December 31, 2003, 2002 and 2001 were $1,070,951, $740,536 and $407,204, respectively. Required contributions for 2004 are approximately $544,000 (see Defined Benefit Plan below). Net periodic benefit costs for the years ended December 31, 2003, 2002 and 2001 were $635,062, $508,000 and $431,576, respectively. The accumulated benefit obligation at December 31, 2003 was $5,485,431 and the fair value of the plan assets was $4,087,727. At December 31, 2003 and 2002, the discount rate used in computing the accumulated benefit obligation was 6.25% and 6.50%, respectively. The expected rate of return on plan assets was 7% for both years. Management regularly reviews the plan assets, the actuarial assumptions and the expected rate of return. Changes in actuarial assumptions, interest rates or changes in the fair value of the plan assets can materially affect the benefit obligation, the required funding and the benefit costs. 28 In addition, the Company has contractual retirement agreements with certain active and retired officers providing for unfunded pension benefits. The Company accrues on an actuarial basis the estimated costs of these benefits during the years the employee provides services. The benefits generally provide for annual payments in specified amounts for each participant for life, commencing upon retirement, with an annual cost of living increase. Pursuant to a January 1, 2002 amendment, the benefit commencement date for three active officers was changed to four years after they actually retire. Benefits paid for the years ended December 31, 2003, 2002 and 2001 were $445,683, $435,286, and $427,235, respectively. Benefit costs for the years ended December 31, 2003, 2002 and 2001 were $360,365, $320,716 and $512,680, respectively. The accumulated contractual pension benefit obligation at December 31, 2003 was $2,866,504. At December 31, 2003 and 2002, the discount rate used in computing the accumulated benefit obligation was 6.25% and 6.50%, respectively. Changes in interest rates and actuarial assumptions, amendments to the plan and life expectancies could materially affect benefit costs and the contractual accumulated pension benefit obligation. Income Taxes The Company operates in a manner intended to enable it to continue to qualify as a Real Estate Investment Trust ("REIT") under Sections 856-860 of the Code. Under those sections, a REIT which meets certain requirements is not subject to Federal income tax on that portion of its taxable income which is distributed to its shareholders, if at least 90% of its REIT taxable income (exclusive of capital gains) is so distributed. The Company has distributed 100% of its REIT taxable income (exclusive of capital gains) for the 2003 year and expects to distribute all of its remaining 2003 taxable income during 2004 and, accordingly, has made no provision for income taxes. If the Company failed to distribute the required amounts of income to its shareholders, or otherwise fails to meet the REIT requirements, it would fail to qualify as a REIT and substantial adverse tax consequences could result. Results of Operations 2003 vs 2002 Revenues decreased by $72,204 primarily as a result of decreases in rental revenues. Rental revenues decreased by $93,974 primarily due to a decrease in rental revenue of $105,753 at the Farrington Apartments property as a result of increased vacancies at that property. These decreases were offset by net increases of $11,779 at all other rental properties. 29 Interest on mortgages-related parties increased by $18,014 primarily as a result of an increase of $80,000 in payments of interest income received on the Consolidated Loans and an increase in amortization of discounts of $20,974 on the UTB End Loans and the UTB Associates notes receivable. These increases were partially offset by a decrease of $73,426 in interest income on the Overlook note receivable which was repaid in March, 2003. In addition, there was a $9,463 decrease in interest income on the UTB Associates notes receivable as a result of prepayments received on those notes in 2003. Costs and expenses increased by $394,689 primarily due to increases in general and administrative expenses, rental property operating expenses and real estate tax expense. General and administrative expenses increased by $50,143 primarily as a result of a $182,373 increase in defined benefit plan expenses and contractual pension and postretirement benefits expenses. In addition, there was a $67,321 increase in professional fees. These increases were partially offset by a $191,271 decrease in salary expense (of which $211,263 pertains to a decrease in executive bonuses). Rental property operating expenses increased by $306,689 as a result of increased operating expenses in a number of categories. Insurance expense increased by $152,458, bad debt expense increased by $60,958, snow removal and fuel and utilities increased by $64,815, payroll expenses increased by $17,244 and professional fees increased by $9,584. The $152,458 increase in insurance expense was partially the result of insurance claim proceeds of $80,627 which were received in the 2002 year and reduced insurance expense for 2002. Real estate tax expense increased by $39,195 primarily as a result of increased real estate taxes on the Crown Court property, the Building Industries Center property and the Cambridge Green property. Other income increased by $88,005 primarily as a result of an $82,389 increase in equity in income of partnership. During 2002, the Company purchased an additional 4% interest in the Home Mortgage Partnership increasing its ownership interest from 27% to 31%. The increase in partnership interest increased the Company's share of net income from the partnership. 30 Income from continuing operations before net gain from sales of properties decreased by $373,385, from $698,511 in 2002 to $325,126 in 2003. The $373,385 decrease was primarily a result of a decrease in income from rental property operations of $439,704, which was partially offset by the increase in equity in income of partnership of $82,389. The decrease in income from rental property operations was primarily a result of an increased loss of $158,668 on the Farrington Apartments property primarily as a result of increased vacancy losses. The Cambridge Green property had a decrease in operating income of $131,893, of which $80,627 was due to insurance claim proceeds received in 2002, which resulted in increased insurance expense in 2003. In addition, the Mapletree Industrial Center property, the Fairlawn Gardens property and various cooperative apartment units had decreases in operating income of $139,784, which were a result of increases in repairs and maintenance expenses, utilities expenses and insurance expense. Net gain from sales of properties consists primarily of recognition of deferred gains from sales in prior years. The recognition of such gains depends on the timing of sales or the receipt of installments or prepayments on purchase money notes. In 2003, the net gain from sales of properties was $1,028,596 compared with $3,873,119 in 2002: Gain from sales recognized for the year ended December 31, 2003 2002 ---------- ---------- Deferred gains recognized upon receipt of principal payments on notes: Overlook $ 880,927 $ 26,929 Cooperative apartment notes 44,652 24,402 Encore 3,750,000 Sale of property: 6300 Riverdale Ave. apartment units 103,017 71,788 ---------- ---------- Net gain $1,028,596 $3,873,119 ========== ========== Discontinued Operations: Loss from discontinued operations before impairment of real estate held for sale and net gain from sales of discontinued operations was $466,060 in 2003 compared to income of $42,093 in 2002. In the third quarter of 2003, the Company decided to sell the Preston Lake Apartments property in Tucker, Georgia because, despite the Company's efforts to improve occupancy and rent levels, the property continued to operate at a loss. For the year ended December 31, 2003, the property had an operating loss of $857,346 (see below). In the second quarter of 2003, the Company decided to sell the Continental Gardens property in Miami, Florida. In September, 2003, the Company entered into a contract for the sale of the Continental Gardens property (see below). During 2002, the Company sold the Sunwood Apartments property in Miami, Florida, the Towers Shoppers Parcade property in New Haven, Connecticut and the University Towers Professional Space Lease property in New Haven, Connecticut. 31 During 2003, the Company recorded a $3,110,000 impairment loss on the Preston Lake Apartments property. As a result, the carrying value of assets related to discontinued operations were written down by the $3,110,000 and income (loss) from discontinued operations was charged with an impairment loss on real estate held for sale (see below). The following table compares the total loss or income for the years ended December 31, for properties included in discontinued operations:
2003 2002 ----------- ----------- Income (loss) from discontinued operations: Preston Lake Apartments, Tucker, GA $ (857,346) $ (440,266) Continental Gardens, Miami, FL 391,286 280,593 Sunwood Apartments, Miami, FL 180,085 University Towers Professional Space Lease, New Haven, CT 22,086 Towers Shoppers Parcade, New Haven, CT (405) ----------- ----------- Income (loss) from discontinued operations (466,060) 42,093 ----------- ----------- Impairment of real estate held for sale: Preston Lake Apartments, Tucker, GA (3,110,000) ----------- ----------- Net gain from sales of discontinued operations: Sunwood Apartments, Miami, FL 1,142,734 University Towers Professional Space Lease, New Haven, CT 189,604 Towers Shoppers Parcade, New Haven, CT 153,579 ----------- ----------- Net gain from sales of discontinued operations 1,485,917 ----------- ----------- Total income (loss) from discontinued operations $(3,576,060) $ 1,528,010 =========== ===========
32 Balance Sheet Net mortgage portfolio increased by $4,083,975 primarily as a result of a $4,500,000 loan made in October, 2003 and a $1,500,000 loan made in February, 2003. These increases were partially offset by repayments received on the mortgage portfolio. In March, 2003, the Company received repayment of its notes collateralized by Woodland Village, in Hartford, Connecticut. Presidential received cash of $2,243,190, of which $873,754 repaid the Overlook loan for which a portion of the Woodland Village notes stood as collateral. As a result, mortgage receivables decreased by $2,243,190 and deferred gains on sale decreased by $873,754 (a net effect of $1,369,436 on the mortgage portfolio) and an $873,754 deferred gain was recognized. In addition, the Company received principal payments of $365,000 on the Mark Terrace note and principal payments of $216,079 on sold co-op apartment notes. The $4,500,000 loan is collateralized by ownership interests in nine apartment properties located in the Commonwealth of Virginia. The loan matures on October 23, 2013 and basic interest accrues at an annual rate of 11.50% through October 23, 2007 and at 11% per annum from October 24, 2007 to maturity. For the first five years of the loan, a portion of the basic interest equal to 2% per annum is deferred and is payable on the fifth anniversary of the loan. The $1,500,000 loan is collateralized by ownership interests in Reisterstown Square Associates, LLC, which owns Reisterstown Apartments in Baltimore, Maryland, and by a personal guarantee from the borrower. The loan matures in January, 2008 and has an annual interest rate of 10.50% until January, 2005. Thereafter the interest rate changes every six months to a rate equal to 800 basis points above the six month LIBOR rate, with a minimum rate of 10.50% per annum. Assets related to discontinued operations decreased by $3,423,742 primarily due to the $3,110,000 write-down of the carrying value of the Preston Lake Apartments property. In addition, depreciation and amortization of mortgage costs of $507,452 recorded prior to the reclassification of the properties as "held for sale" decreased assets related to discontinued operations. These decreases were partially offset by additions and improvements of $221,317. 33 Other receivables increased by $332,376 primarily as a result of increases of $151,544 in accrued interest receivable and increases in other receivables of $172,343. Increases in accrued interest receivable are the result of the terms of the notes receivable and not a result of delinquencies. Increases in other receivables were primarily due to approximately $155,000 of damage settlement claims due from insurance carriers for fire and flood damage which occurred at three properties in 2003. Mortgage debt increased by $973,508 primarily as a result of a new $1,200,000 mortgage obtained on the Building Industries Center property. The mortgage bears interest at the rate of 5.45% per annum, requires monthly payments of principal and interest of $7,333 and has a $1,072,906 balloon payment due at maturity on January 1, 2009. Liabilities related to discontinued operations decreased by $245,804 primarily as a result of principal payments on mortgage debt of $222,206. Defined benefit plan liability decreased by $379,289 primarily as a result of the improvement in the return on the pension plan asset portfolio and increased employer contributions in 2003. The fair value of the pension plan assets increased from $2,498,859 in 2002 to $4,087,727 in 2003. Accrued liabilities and accrued taxes payable decreased by $639,265. In 2003, the Company paid the $498,750 taxes payable which resulted from the $1,425,000 undistributed long-term capital gain dividend designated in 2002. Accrued liabilities decreased by $140,515 primarily as a result of a $211,263 decrease in executive bonus accruals. Accounts payable increased by $125,269 as a result of increased accounts payable for rental property operations. The increases in accounts payable are the result of payment timing and not of insufficient cash flows. Results of Operations 2002 vs 2001 Revenues decreased by $292,064 primarily as a result of decreases in interest income on mortgages-sold properties and other. These decreases were partially offset by increases in rental revenues and interest income on mortgages-related parties. 34 Rental revenues increased by $144,920 primarily as a result of increased rental revenues at the Company's rental properties. Interest on mortgages-sold properties and other decreased by $573,045 primarily due to the $255,281 amortization of discount in 2001 on the Woodgate note as a result of the principal payment received on that note in 2001. Interest income and amortization of discount decreased by $359,835 on the Encore note receivable as a result of the $3,750,000 principal payment received on that note in April, 2002. In addition, interest income on the Westgate note receivable decreased by $50,750 as a result of a decrease in the interest rate, which occurred in August, 2001, in accordance with the terms of the note. The interest rate on the note for the period August 1, 2001 through July 31, 2006 is 6.45% per annum and is based on the yield of United States Treasury bills maturing on July 1, 2006 plus 150 basis points. The prior interest rate was 7.9% per annum. These decreases were offset by interest income of $94,124 earned on a new $1,775,000 loan made in July, 2002 with an interest rate of 11.5% per annum. Interest on mortgages-related parties increased by $142,085 primarily as a result of an increase of $152,342 in payments of interest income received on the Consolidated Loans. Payments on the Consolidated Loans are based on a percentage of operating cash flows of an entity related to the debtor. Costs and expenses increased by $7,792 primarily due to increases in rental property operating expenses and real estate tax expenses, offset by a decrease in general and administrative expenses. General and administrative expenses decreased by $63,653 primarily as a result of decreases of $170,580 in contractual pension and postretirement benefits expenses, as a result of an amendment extending the pension benefit commencement date for three active officers from age 65 to age 69, or four years after they actually retire, if later. These decreases were offset by increases of $76,424 in defined benefit plan expenses and an increase of $24,248 in professional services. Rental property operating expenses increased by $57,286 primarily as a result of increases of $22,168 in professional fees, an increase of $22,057 in repairs and maintenance and an $11,162 increase in bad debts. Real estate tax expense increased by $12,328 primarily as a result of increased real estate taxes on the Crown Court property. 35 Other income increased by $48,069 primarily as a result of a $33,583 increase in equity in income of partnership. During 2002, the Company purchased an additional 4% interest in the Home Mortgage Partnership increasing its ownership interest from 27% to 31%. The increase in partnership interest increased the Company's share of net income from the partnership. In addition, investment income increased by $14,486 primarily as a result of increased cash investments. Income from continuing operations before net gain from sales of properties decreased by $250,726, from $949,237 in 2001 to $698,511 in 2002. The $250,726 decrease was primarily a result of a $430,960 net decrease in interest income on the Company's mortgage portfolio (sold properties and other and related parties) as discussed above. This decrease was partially offset by an increase in income from rental property operations of $72,610, an increase in other income of $48,069 and a decrease in general and administrative expenses of $63,653. Net gain from sales of properties consists primarily of recognition of deferred gains from sales in prior years. The recognition of such gains depends on the timing of sales or the receipt of installments or prepayments on purchase money notes. In 2002, the net gain from sales of properties was $3,873,119 compared with $1,198,428 in 2001: Gain from sales recognized for the year ended December 31, 2002 2001 ---------- ---------- Deferred gains recognized upon receipt of principal payments on notes: Encore - $3,750,000 principal payment $3,750,000 Woodgate - $1,175,500 principal payment $ 684,991 Mark Terrace 462,250 Overlook 26,929 26,500 330 West 72nd St. - co-op apt. notes 24,402 24,687 Sale of property: 6300 Riverdale Ave. apartment units 71,788 ---------- ---------- Net gain $3,873,119 $1,198,428 ========== ========== Income from discontinued operations before net gain from sales of discontinued operations was $42,093 in 2002 compared to $473,370 in 2001. In 2003, the Company decided to sell the Preston Lake Apartments property and the Continental Gardens property. The operations of those properties have been reclassified to discontinued operations for the years 2002 and 2001. During 2002, the Company sold the Sunwood Apartments property, the Towers Shoppers Parcade property and the University Towers Professional Space Lease property. 36 The following table compares the total loss or income for the years ended December 31, for properties included in discontinued operations:
2002 2001 ----------- ----------- Income from discontinued operations: Preston Lake Apartments, Tucker, GA $ (440,266) $ (48,365) Continental Gardens, Miami, FL 280,593 289,305 Sunwood Apartments, Miami, FL 180,085 197,884 University Towers Professional Space Lease, New Haven, CT 22,086 29,569 Towers Shoppers Parcade, New Haven, CT (405) 4,977 ----------- ----------- Income from discontinued operations 42,093 473,370 ----------- ----------- Net gain from sales of discontinued operations: Sunwood Apartments, Miami, FL 1,142,734 University Towers Professional Space Lease, New Haven, CT 189,604 Towers Shoppers Parcade, New Haven, CT 153,579 ----------- ----------- Net gain from sales of discontinued operations 1,485,917 ----------- ----------- Total income from discontinued operations $ 1,528,010 $ 473,370 =========== ===========
Funds From Operations Funds from operations ("FFO") represents net income (loss) computed in accordance with GAAP, excluding gains or losses from sales of properties (including properties classified as discontinued operations), plus depreciation and amortization on real estate. FFO is calculated in accordance with the National Association of Real Estate Investment Trusts' ("NAREIT") definition. There are no material legal or functional restrictions on the use of FFO. FFO should not be considered as an alternative to net income as an indicator of the Company's operating performance. Management considers FFO a supplemental measure of operating performance and uses FFO as a measure for reviewing the Company's operating performance between periods and for comparing performance to other REITS. 37 FFO is summarized in the following table:
Year ended December 31, ----------------------- 2003 2002 2001 ----------- ----------- ----------- Net Income (Loss) $(2,222,338) $ 6,099,640 $ 2,621,035 Net gain from sales of properties (1,028,596) (3,873,119) (1,198,428) Net gain from sales of discontinued operations (1,485,917) Depreciation and amortization on: Real estate 581,152 569,015 547,422 Real estate of discontinued operations 486,467 779,890 918,913 Real estate of partnership 96,346 90,704 82,283 ----------- ----------- ----------- Funds From (Used In) Operations (1) $(2,086,969) $ 2,180,213 $ 2,971,225 =========== =========== =========== Distributions paid to shareholders $ 2,410,963 $ 2,390,579 $ 2,378,222 =========== =========== =========== FFO payout ratio (2) -- 109.6% 80.0% ==== ===== =====
(1) NAREIT's revised guidance, issued in October, 2003, provides that impairment write-downs should not be added back to net income in calculating FFO. Accordingly, the Company has not added back the $3,110,000 write-down taken in 2003 to net income in computing FFO for the year ended December 31, 2003. (2) In 2003, the Company decided to maintain its cash dividend at the annual rate of $.64 per share despite the fact the dividends paid exceeded funds from operations. As a result of balloon payments received on the Company's mortgage portfolio and proceeds from sales of properties, the Company had funds available to it for distribution to shareholders notwithstanding the fact that there were no funds from operations in 2003. See Liquidity and Capital Resources below. Liquidity and Capital Resources Management believes that the Company has sufficient liquidity and capital resources to carry on its existing business and, barring any unforeseen circumstances, to pay the dividends required to maintain REIT status in the foreseeable future. Except as discussed herein, management is not aware of any other trends, events, commitments or uncertainties that will have a significant effect on liquidity. 38 Presidential obtains funds for working capital and investment from its available cash and cash equivalents, from operating activities, from refinancing of mortgage loans on its real estate equities, or from sales of such equities and from repayments on its mortgage portfolio. The Company also has at its disposal a $250,000 unsecured line of credit and a $250,000 commercial loan available from a lending institution. Presidential pays an annual 1% fee for the line of credit and plans to renew this line of credit when it expires in April, 2004. At December 31, 2003, there were no outstanding balances due under the line of credit or the term loan. If the Company successfully completes the sale of the Continental Gardens property, the proceeds of sale will substantially improve the Company's liquidity and capital resources. In addition, if the Company is successful in selling Preston Lake Apartments, or if the holder of the first mortgage forecloses on the property, the Company's liquidity will be improved because it will no longer continue to sustain operating and cash flow losses on that property. See Discontinued Operations below. At December 31, 2003, Presidential had $1,372,818 in available cash and cash equivalents, a decrease of $5,365,950 from the $6,738,768 at December 31, 2002. This decrease in cash and cash equivalents was due to cash used in investing activities of $3,908,027 and cash used in financing activities of $1,483,504, offset by cash provided by operating activities of $25,581. During 2003 and 2002, the Company paid cash distributions to shareholders which exceeded cash flows from operating activities. Periodically the Company receives balloon payments on its mortgage portfolio and net proceeds from sales of discontinued operations. These payments are available to the Company for distribution to its shareholders or the Company may retain these payments for future investment. The Company may in the future, as it did in 2003 and 2002, pay dividends in excess of its cash flow from operating activities if management believes that the Company's liquidity and capital resources are sufficient to pay such dividends. To the extent that payments received on its mortgage portfolio or payments received from sales are taxable as capital gains, the Company has the option to distribute the gain to its shareholders or retain the gain and pay Federal income tax on it. The Company does not have a specific policy as to the retention or distribution of capital gains. The Company's dividend policy regarding capital gains for future periods will be based upon many factors including, but not limited to, the Company's present and projected liquidity, its desire to retain funds available for additional investment, its historical dividend rate and its ability to reduce taxes by paying dividends. While the Company has maintained the $.64 dividend rate in 2003, no assurances can be given that the present dividend rate will be maintained in the future. 39 Insurance The Company carries comprehensive liability, fire, flood (where necessary), extended coverage, rental loss and acts of terrorism insurance on all of its properties. Management believes that all of its properties are adequately covered by insurance. In 2003, the cost for this insurance was approximately $398,000. The Company has renewed its insurance coverage for 2004, and the decrease in premium costs is approximately 4%. Although the Company has been able to obtain terrorism coverage on its properties in the past, this coverage may not be available in the future. Defined Benefit Plan In 2003, the Company made contributions of approximately $1,071,000 for its Defined Benefit Plan. Pursuant to its actuary's estimates, the contribution requirements in 2004 will be approximately $544,000, a decrease of approximately $527,000. The decrease in pension plan contributions is a result of positive returns on the pension plan asset portfolio and increased contributions in 2003. Consolidated Loans Presidential holds two nonrecourse loans (the "Consolidated Loans"), which were collateralized by substantially all of the remaining assets of Ivy Properties, Ltd. and its affiliates ("Ivy"). At December 31, 2003, the Consolidated Loans have an outstanding principal balance of $4,770,050 and a net carrying value of zero. Pursuant to existing agreements between the Company and the Ivy principals, the Company is entitled to receive, as payments of principal and interest on the Consolidated Loans, 25% of the cash flow of Scorpio Entertainment, Inc. ("Scorpio"), a company owned by two of the Ivy principals, (Steven Baruch, Executive Vice President of Presidential, and Thomas Viertel, Executive Vice President and Chief Financial Officer of Presidential), to carry on theatrical productions. Amounts received by Presidential from Scorpio will be applied to unpaid and unaccrued interest on the Consolidated Loans and recognized as income. The Company anticipates that these amounts could be significant over the next several years. However, the continued profitability of any theatrical production is by its nature uncertain and management believes that any estimate of payments from Scorpio on the Consolidated Loans for future periods is too speculative to project. Presidential received payments of $275,750 in 2003, $195,819 in 2002 and $43,477 in 2001 of interest income on the Consolidated Loans. At December 31, 2003, the unpaid and unaccrued interest was $3,497,417. 40 Operating Activities Cash from operating activities includes interest on the Company's mortgage portfolio, net cash received from rental property operations and distributions received from partnership, which were $2,736,073, $516,887 and $430,901 in 2003, respectively. Net cash received from rental property operations is net of distributions from partnership operations to minority partners but before additions and improvements and mortgage amortization. Investing Activities Presidential holds a portfolio of mortgage notes receivable. During 2003, the Company received principal payments of $2,954,882 on its mortgage portfolio, of which $2,889,823 represented prepayments and balloon payments. Prepayments and balloon payments are sporadic and cannot be relied upon as a regular source of liquidity. In February, 2003, the Company made a $1,500,000 loan secured by ownership interests in Reisterstown Town Square Associates, LLC, which owns Reisterstown Apartments in Baltimore, Maryland, and by a personal guarantee from the borrower. The loan matures on January 31, 2008 and has an annual interest rate of 10.50% until January, 2005 and thereafter the rate is recalculated every six months with a minimum rate of 10.50% per annum. In October, 2003, the Company made a $4,500,000 loan collateralized by ownership interests in nine apartment properties located in the Commonwealth of Virginia. The loan matures on October 23, 2013 and basic interest accrues at an annual rate of 11.50% through October 23, 2007 and at 11% per annum from October 24, 2007 to maturity. For the first five years of the loan, a portion of the basic interest equal to 2% per annum is deferred and is payable on the fifth anniversary of the loan. In addition to the basic interest accruing on the loan, the Company is entitled to receive additional interest equal to 25% of any net sales or refinancing proceeds resulting from sales or refinancing of the nine properties. In connection with the loan, Presidential received a $22,500 commitment fee. This loan was made to a company controlled by an individual who also controls other companies to whom Presidential has previously made four other collateralized loans. Some, but not all, of these other loans are guaranteed in whole or in part by the individual. The aggregate net carrying value of all of the loans made by Presidential to companies controlled by the individual is approximately $11,835,000 and all of such loans are in good standing. 41 During 2003, the Company invested $223,474 in additions and improvements to its properties. It is projected that additions and improvements in 2004 will be approximately at the same level. In 2003, the Company also purchased an additional 8-1/3% interest in the UTB Associates partnership for a purchase price of $39,443. Financing Activities The Company's indebtedness at December 31, 2003, consisted of $16,741,884 of mortgage debt. The mortgage debt, which is collateralized by individual properties, is nonrecourse to the Company with the exception of the $1,200,000 Building Industries Center mortgage and the $190,381 Mapletree Industrial Center mortgage, which are collateralized by the properties and are recourse to Presidential. In addition, some of the Company's mortgages provide for Company liability for damages resulting from specified acts or circumstances, such as for environmental liabilities and fraud. Generally, mortgage debt repayment is serviced with cash flow from the operations of the individual properties. During 2003, the Company made $226,492 of principal payments on mortgage debt. In December, 2003, the Company obtained a new $1,200,000 mortgage on its Building Industries Center property. The mortgage bears interest at the rate of 5.45% per annum, requires monthly payments of principal and interest of $7,333 and has a balloon payment of $1,072,906 due at maturity on January 1, 2009. The mortgages on the Company's properties are at fixed rates of interest. With the exception of three mortgages which will be fully amortized by periodic principal payments, the remaining mortgages have balloon payments due at maturity as follows: 42 Outstanding Maturity Interest Balloon Property Balance Date Rate Payment -------- ------- ---- ---- ------- Building Industries Center $1,200,000 Jan., 2009 5.45% $1,072,906 Fairlawn Gardens 2,160,997 April,2008 7.06 2,012,668 Farrington Apts. 7,681,793 May, 2010 8.25 7,106,299 During 2003, Presidential declared and paid cash distributions of $2,410,963 to its shareholders and received proceeds from its dividend reinvestment and share purchase plan of $253,606. Discontinued Operations For the years ended December 31, 2003, 2002 and 2001, income (loss) from discontinued operations includes the Continental Gardens property, which is under contract for sale, and the Preston Lake Apartments property, which is currently being marketed for sale. Both of these properties have been designated as held for sale. In addition, income (loss) from discontinued operations in 2002 and 2001 includes the Sunwood Apartments property, the University Towers Professional Space Lease property and the Towers Shoppers Parcade property, all of which were sold during the year ended December 31, 2002. 43 The following table summarizes income for the properties sold or held for sale.
Year Ended December 31, ----------------------- 2003 2002 2001 ----------- ----------- ----------- Revenues: Rental $ 4,067,705 $ 5,238,673 $ 6,176,054 Interest 34,004 ----------- ----------- ----------- Total 4,067,705 5,272,677 6,176,054 ----------- ----------- ----------- Rental property expenses: Operating expenses 1,873,094 1,956,381 2,145,322 Interest on mortgage debt 1,752,473 1,974,451 2,095,217 Real estate taxes 402,328 478,554 499,301 Depreciation on real estate 486,467 779,890 918,913 Amortization of mortgage costs 20,985 39,189 41,162 ----------- ----------- ----------- Total 4,535,347 5,228,465 5,699,915 ----------- ----------- ----------- Other income - investment income 1,582 8,927 12,020 ----------- ----------- ----------- Income (loss) before minority interest (466,060) 53,139 488,159 Minority interest (11,046) (14,789) ----------- ----------- ----------- Income (loss) from discontinued operations (466,060) 42,093 473,370 ----------- ----------- ----------- Impairment of real estate held for sale (3,110,000) ----------- ----------- ----------- Gain from sale of discontinued operations: Net gain before provision for income taxes and minority interest 2,079,497 Provision for federal taxes (498,750) Minority interest (94,830) ----------- ----------- ----------- Net gain from sale of discontinued operations 1,485,917 ----------- ----------- ----------- Total income (loss) from discontinued operations $(3,576,060) $ 1,528,010 $ 473,370 =========== =========== ===========
During 2003, the Company entered into conditional contracts for the sale of the Continental Gardens property in Miami, Florida, which contracts were terminated by the purchasers. In September, 2003, the Company entered into a new contract for the sale of this property for a sales price of $21,500,000. The contract became unconditional on November 7, 2003, subject to the Company's obligation to reduce radon levels at some of the apartments and the purchaser made a contract deposit of $500,000 in escrow. Subsequent to year end, the Company satisfied the radon remediation condition and the sale is expected to close in the second or third quarter of 2004. If the sale is completed pursuant to this contract, the gain from the sale for financial reporting purposes is estimated to be approximately $11,089,000. Presidential intends to utilize all or a portion of the estimated net proceeds of $12,200,000 from the sale to purchase another property or properties and treat the sale and purchase as a tax free exchange under Section 1031 of the Internal Revenue Code ("IRC"). There can be no assurances, however, that the sale will close or that the amount ultimately realized will not change from the amount described herein or that a satisfactory exchange property will be found. However, if a successful tax free exchange under Section 1031 of the IRC does not occur, the Company would be subject to tax on its undistributed capital gains. 44 In the third quarter of 2003, the Company decided to sell Preston Lake Apartments, a 320-unit apartment property in Tucker, Georgia. The property has had consistent vacancy problems and is located in an area that has a struggling economy. In spite of the Company's efforts to reduce the vacancy levels and to cut expenses at the property, the occupancy rate for 2003 was approximately 81%. For the year ended December 31, 2003, gross revenues were $1,999,903 and the loss from operations was $857,346 (which includes depreciation expense of $359,484). At December 31, 2003, the outstanding mortgage balance was $13,603,751, the interest rate is 8.15% per annum and the mortgage matures in May, 2010. The property has been listed for sale with a real estate broker and although the Company has not obtained a firm purchase commitment to date, based upon offers made by prospective purchasers, the Company estimated that the fair value of the property, less costs to sell, was below the $16,204,950 carrying value of the property (net of accumulated depreciation of $1,628,334). Therefore, in 2003, the Company recorded an impairment charge in the amount of $3,110,000 to reduce the carrying value of the assets related to discontinued operations to their fair value less costs to sell. There can be no assurances that the property will be sold or that the amount ultimately realized will not change from the recorded fair value less costs to sell. After December 31, 2003, the Company decided not to make the monthly payment due February 1, 2004 on the first mortgage note secured by Preston Lake Apartments. The holder of the first mortgage has commenced foreclosure proceedings and Presidential has consented to the appointment of a receiver for the property. The Company is continuing to attempt to sell the property for a price approximately equal to the outstanding principal balance of the mortgage. Alternatively, the Company is willing to transfer ownership of the property to the holder of the first mortgage in lieu of foreclosure. 45 The outstanding principal balance of the mortgage debt on February 1, 2004 was $13,595,028. The mortgage note is nonrecourse and the Company has no personal liability for repayment of the indebtedness. For the year ended December 31, 2003, the operations of the property had a net loss of $857,346 and the total cash deficiencies were $710,562. In 2003, Presidential advanced approximately $801,000 to fund cash deficiencies of the property. At December 31, 2003, assets related to discontinued operations were $22,158,540 and liabilities related to discontinued operations were $21,472,782. Cash from discontinued operations for the years ended December 31, 2003, 2002 and 2001 was as follows: cash provided by operating activities was $59,721, $865,069 and $1,329,240, cash provided by (used in) investing activities was $(221,317), $8,325,935 and $(177,970) and cash used in financing activities was $222,206, $4,888,277 and $255,420, respectively. Contractual Commitments The Company's significant contractual commitments are its liabilities under mortgage debt and employment agreements which are payable as follows: Mortgage Employment Debt Agreements Total ---- ---------- ----- Year ending December 31: 2004 $ 261,799 $ 825,650 $ 1,087,449 2005 284,597 825,650 1,110,247 2006 305,270 305,270 2007 327,482 327,482 2008 2,331,076 2,331,076 2009 - 2029 13,231,660 13,231,660 ----------- ----------- ----------- TOTAL $16,741,884 $ 1,651,300 $18,393,184 =========== =========== =========== 46 In addition, the Company has contractual commitments for pension and postretirement benefits. The contractual pension benefits generally provide for annual payments in specified amounts for each participant for life, commencing upon retirement, with an annual adjustment for an increase in the consumer price index. The contractual benefit plans are not funded. For the year ended December 31, 2003, the Company paid $445,683 for pension benefits and $60,552 for postretirement benefits. The Company expects that payments for these contractual benefits will be $516,732 in 2004. Environmental Matters The Company is not aware of any environmental issues at any of its properties except that in 2003, the Company became aware of the presence of radon gas at above normal levels in many of the first floor apartments at its Continental Gardens property in Miami, Florida. The Company has installed radon mitigation devices at all of the ground floor apartments at a cost of approximately $90,000. The presence, with or without the Company's knowledge, of hazardous substances at any of its properties could have an adverse effect on the Company's consolidated financial statements. Recent Accounting Pronouncements During 2003, the Company was required to implement several new Financial Accounting Standards Board ("FASB") statements and interpretations, none of which had a significant impact on the Company's consolidated financial statements. In January of 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities", which was amended by Interpretation No. 46(R) in December of 2003. This Interpretation clarifies the application of existing accounting pronouncements to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. As it applies to Presidential, Interpretation No. 46(R) will be immediately effective for all variable interest entities on March 31, 2004. The adoption of Interpretation No. 46 is expected to have no impact on the Company's consolidated financial statements. 47 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's financial instruments consist primarily of mortgage notes receivable and mortgage notes payable. Substantially all of these instruments bear interest at fixed rates, so the Company's cash flows from them are not directly impacted by changes in market rates of interest. Changes in market rates of interest impact the fair values of these fixed rate assets and liabilities. However, because the Company generally holds its notes receivable until maturity and repays its notes payable at maturity or upon sale of the related properties, any fluctuations in values do not impact the Company's earnings, balance sheet or cash flows. However, since some of the Company's mortgage notes payable are at fixed rates of interest and provide for yield maintenance payments upon prepayment prior to maturity, if market interest rates are lower than the interest rates on the mortgage notes payable, the Company's ability to sell the properties securing the notes may be adversely affected and the net proceeds of any sale may be reduced because of the yield maintenance requirements. The Company does not own any derivative financial instruments or engage in hedging activities. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Table of Contents to Consolidated Financial Statements. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES (a) As of the end of the period covered by this Annual Report on Form 10-K, the Company carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in this report. (b) There has been no change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that has materially affected or is reasonably likely to materially affect the Company's internal control over financial reporting. 48 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Reference is made to the Company's definitive Proxy Statement for its Annual Meeting of Shareholders to be held June 15, 2004, which Proxy Statement will be filed with the Securities and Exchange Commission pursuant to Regulation 14A and which is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Reference is made to the Company's definitive Proxy Statement for its Annual Meeting of Shareholders to be held June 15, 2004, which Proxy Statement will be filed with the Securities and Exchange Commission pursuant to Regulation 14A and which is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Reference is made to the Company's definitive Proxy Statement for its Annual Meeting of Shareholders to be held June 15, 2004, which Proxy Statement will be filed with the Securities and Exchange Commission pursuant to Regulation 14A and which is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Reference is made to the Company's definitive Proxy Statement for its Annual Meeting of Shareholders to be held June 15, 2004, which Proxy Statement will be filed with the Securities and Exchange Commission pursuant to Regulation 14A and which is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Reference is made to the Company's definitive Proxy Statement for its Annual Meeting to Shareholders to be held June 15, 2004, which Proxy Statement will be filed with the Securities and Exchange Commission pursuant to Regulation 14A and which is incorporated herein by reference. ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) and (d) A Table of Contents to Consolidated Financial Statements and Schedules is included in this report. 49 (b) No report on Form 8-K was filed during the calendar quarter ended December 31, 2003. (c) Exhibits: 3.1 Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.5 to Post-effective Amendment No. 1 to the Company's Registration Statement on Form S-14, Registration No. 2-83073). 3.2 Certificate of Amendment to Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1987, Commission File No. 1-8594). 3.3 Certificate of Amendment to Certificate of Incorporation of the Company, filed July 21, 1988 with the Secretary of State of the State of Delaware (incorporated herein by reference to Exhibit 3.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1988, Commission File No. 1-8594). 3.4 Certificate of Amendment to Certificate of Incorporation of the Company, filed on September 12, 1989 with the Secretary of State of the State of Delaware (incorporated herein by reference to Exhibit 3.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1989, Commission File No. 1-8594). 3.5 By-laws of the Company (incorporated herein by reference to Exhibit 3.7 to Post-effective Amendment No. 1 to the Company's Registration Statement on Form S-14, Registration No. 2-83073). 10.1 Employment Agreement dated as of November 1, 1982 between the Company and Robert E. Shapiro, as amended by Amendments dated March 1, 1983, November 25, 1985, February 23, 1987 and January 4, 1988, (incorporated herein by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1988, Commission File No. 1-8594). 10.2 Employment Agreement dated as of November 1, 1982 between the Company and Joseph Viertel, as amended by Amendments dated March 1, 1983, November 22, 1985, February 23, 1987, (incorporated herein by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, Commission File No. 1-8594). 50 10.3 Settlement Agreement dated November 14, 1991 between the Company and Steven Baruch, Jeffrey F. Joseph and Thomas Viertel, (incorporated herein by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991, Commission File No. 1-8594). 10.4 First Amendment dated August 1, 1996 to Settlement Agreement dated November 14, 1991 between the Company and Steven Baruch, Jeffrey F. Joseph and Thomas Viertel (incorporated herein by reference to Exhibit 10.13 to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1997, Commission File No. 1-8594). 10.5 Presidential Realty Corporation Defined Benefit Plan dated December 16, 1994, (incorporated herein by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, Commission File No. 1-8594). 10.6 First and Second Amendments dated December 11, 1995 and December 8, 1999, respectively, to the Presidential Realty Corporation Defined Benefit Plan (incorporated herein by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999, Commission File No. 1-8594). 10.7 Employment Agreement dated January 1, 2003 between the Company and Jeffrey F. Joseph (incorporated herein by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended December 31, 2002, Commission File No. 1-8594). 10.8 Employment Agreement dated January 1, 2003 between the Company and Steven Baruch (incorporated herein by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year ended December 31, 2002, Commission File No. 1-8594). 10.9 Employment Agreement dated January 1, 2003 between the Company and Thomas Viertel (incorporated herein by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year ended December 31, 2002, Commission File No. 1-8594). 10.10 Employment Agreement dated January 1, 2003 between the Company and Elizabeth Delgado. 10.11 1999 Stock Option Plan for 150,000 shares of Class B common stock (incorporated herein by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999, Commission File No. 1-8594). 51 10.12 Third Amendment dated December 30, 2002 to the Presidential Realty Corporation Defined Benefit Plan. 10.13 Amended and Restatement dated September 10, 2003 to the Presidential Realty Corporation Defined Benefit Plan. 21. List of Subsidiaries of Registrant as of December 31, 2003. 31.1 Certification of Chief Executive Officer of the Company pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. 31.2 Certification of Chief Financial Officer of the Company pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. 32.1 Certification of Chief Executive Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99. Financial Statements of PDL, Inc. and Associates Limited Co-Partnership pursuant to Rule 3-09 of Regulation S-X. 52 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PRESIDENTIAL REALTY CORPORATION By: /s/ THOMAS VIERTEL ------------------------------------ Thomas Viertel Chief Financial Officer March 23, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature and Title Date ------------------- ---- By: ROBERT E. SHAPIRO March 23, 2004 ------------------------------------ Robert E. Shapiro Chairman of the Board of Directors and Director By: JEFFREY F. JOSEPH March 23, 2004 ------------------------------------ Jeffrey F. Joseph President and Director (Chief Executive Officer) By: THOMAS VIERTEL March 23, 2004 ------------------------------------ Thomas Viertel Executive Vice President (Chief Financial Officer) By: ELIZABETH DELGADO March 23, 2004 ------------------------------------ Elizabeth Delgado Treasurer (Principal Accounting Officer) By: RICHARD BRANDT March 23, 2004 ------------------------------------ Richard Brandt Director 53 SIGNATURES (Continued) Signature and Title Date ------------------- ---- By: MORTIMER M. CAPLIN March 23, 2004 ------------------------------------ Mortimer M. Caplin Director By: ROBERT FEDER March 23, 2004 ------------------------------------ Robert Feder Director By: JOSEPH VIERTEL March 23, 2004 ------------------------------------ Joseph Viertel Director 54 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES TABLE OF CONTENTS TO CONSOLIDATED FINANCIAL STATEMENTS Page Independent Auditors' Report 56 CONSOLIDATED FINANCIAL STATEMENTS: Consolidated Balance Sheets - December 31, 2003 and 2002 57 Consolidated Statements of Operations for the Years Ended December 31, 2003, 2002 and 2001 58 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2003, 2002 and 2001 59 Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001 60 Notes to Consolidated Financial Statements 62 CONSOLIDATED SCHEDULES: II. Valuation and Qualifying Accounts for the Years Ended December 31, 2003, 2002 and 2001 93 III. Real Estate and Accumulated Depreciation at December 31, 2003 94 IV. Mortgage Loans on Real Estate at December 31, 2003 96 NOTE: All schedules, other than those indicated above, are omitted because of the absence of the conditions under which they are required or because the required information is included in the consolidated financial statements or the notes to the consolidated financial statements. 55 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders Presidential Realty Corporation White Plains, New York We have audited the accompanying consolidated balance sheets of Presidential Realty Corporation and subsidiaries (the "Company") as of December 31, 2003 and 2002, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedules listed in the foregoing Table of Contents. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Presidential Realty Corporation and subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. Deloitte & Touche LLP Stamford, Connecticut March 23, 2004 56 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, December 31, 2003 2002 --------------- --------------- Assets Real estate (Note 2) $21,733,005 $21,523,881 Less: accumulated depreciation 6,617,535 6,041,944 --------------- --------------- Net real estate 15,115,470 15,481,937 --------------- --------------- Mortgage portfolio (Note 3): Sold properties and other - net 21,375,192 17,217,874 Related parties - net 316,573 389,916 --------------- --------------- Net mortgage portfolio 21,691,765 17,607,790 --------------- --------------- Assets related to discontinued operations (Note 4) 22,158,540 25,582,282 Prepaid expenses and deposits in escrow 1,198,753 1,158,157 Other receivables (net of valuation allowance of $180,613 in 2003 and $99,249 in 2002) 770,360 437,984 Cash and cash equivalents 1,372,818 6,738,768 Other assets 803,062 773,583 --------------- --------------- Total Assets $63,110,768 $67,780,501 =============== =============== Liabilities and Stockholders' Equity Liabilities: Mortgage debt (Note 5) $16,741,884 $15,768,376 Liabilities related to discontinued operations (Note 4) 21,472,782 21,718,586 Contractual pension and postretirement benefits liabilities (Note 16) 3,396,393 3,328,083 Defined benefit plan liability (Note 17) 1,393,341 1,772,630 Accrued liabilities 1,129,188 1,269,703 Accrued taxes payable (Note 9) - 498,750 Accounts payable 344,067 218,798 Distributions from partnership in excess of investment and earnings (Note 6) 2,411,112 2,358,164 Other liabilities 444,238 460,185 --------------- --------------- Total Liabilities 47,333,005 47,393,275 --------------- --------------- Minority Interest in Consolidated Partnership (Note 7) 69,346 115,623 --------------- --------------- Stockholders' Equity: Common stock; par value $.10 per share (Note 12) Class A, authorized 700,000 shares, issued 478,940 shares and 100 shares held in treasury 47,894 47,894 Class B December 31, 2003 December 31, 2002 330,667 326,899 ----------- ----------------- ----------------- Authorized: 10,000,000 10,000,000 Issued: 3,306,674 3,268,986 Treasury: 1,897 1,897 Additional paid-in capital 3,189,840 2,919,080 Retained earnings 15,374,021 20,007,322 Accumulated other comprehensive loss (2,845,097) (2,640,684) Treasury stock (at cost) (21,408) (21,408) Notes receivable for exercise of stock options (Note 19) (367,500) (367,500) --------------- --------------- Total Stockholders' Equity 15,708,417 20,271,603 --------------- --------------- Total Liabilities and Stockholders' Equity $63,110,768 $67,780,501 =============== ===============
See notes to consolidated financial statements. 57 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ------------------------------------------------ 2003 2002 2001 ------------ ------------ ------------- Revenues: Rental $5,501,483 $5,595,457 $5,450,537 Interest on mortgages - sold properties and other 2,550,417 2,553,461 3,126,506 Interest on mortgages - related parties 363,886 345,872 203,787 Other revenues 27,766 20,966 26,990 ------------ ------------ ------------- Total 8,443,552 8,515,756 8,807,820 ------------ ------------ ------------- Costs and Expenses: General and administrative 3,114,660 3,064,517 3,128,170 Depreciation on non-rental property 26,721 27,905 28,770 Rental property: Operating expenses 2,992,313 2,685,624 2,628,338 Interest on mortgage debt 1,192,722 1,206,947 1,227,219 Real estate taxes 642,985 603,790 591,462 Depreciation on real estate 581,152 569,015 547,422 Amortization of mortgage costs 25,441 23,507 22,132 ------------ ------------ ------------- Total 8,575,994 8,181,305 8,173,513 ------------ ------------ ------------- Other Income: Investment income 93,577 87,961 73,475 Equity in income of partnership (Note 6) 377,953 295,564 261,981 ------------ ------------ ------------- Income before minority interest and net gain from sales of properties 339,088 717,976 969,763 Minority interest (13,962) (19,465) (20,526) ------------ ------------ ------------- Income before net gain from sales of properties 325,126 698,511 949,237 Net gain from sales of properties 1,028,596 3,873,119 1,198,428 ------------ ------------ ------------- Income from continuing operations 1,353,722 4,571,630 2,147,665 ------------ ------------ ------------- Discontinued Operations (Note 4): Income (loss) from discontinued operations (466,060) 42,093 473,370 Impairment of real estate held for sale (3,110,000) - - Net gain from sales of discontinued operations (includes a provision for Federal taxes of $498,750 in 2002) - 1,485,917 - ------------ ------------ ------------- Total income (loss) from discontinued operations (3,576,060) 1,528,010 473,370 ------------ ------------ ------------- Net Income (Loss) ($2,222,338) $6,099,640 $2,621,035 ============ ============ ============= Earnings per Common Share (basic and diluted): Income before net gain from sales of properties $0.09 $0.18 $0.26 Net gain from sales of properties 0.27 1.04 0.32 ------------ ------------ ------------- Income from continuing operations 0.36 1.22 0.58 ------------ ------------ ------------- Discontinued Operations (Note 4): Income (loss) from discontinued operations (0.12) 0.01 0.13 Impairment of real estate held for sale (0.83) - - Net gain from sales of discontinued operations - 0.40 - ------------ ------------ ------------- Total income (loss) from discontinued operations (0.95) 0.41 0.13 ------------ ------------ ------------- Net Income (Loss) per Common Share - basic ($0.59) $1.63 $0.71 ============ ============ ============= - diluted ($0.59) $1.63 $0.71 ============ ============ ============= Cash Distributions per Common Share (Note 13) $0.64 $0.64 $0.64 ============ ============ ============= Weighted Average Number of Shares Outstanding - basic 3,765,989 3,735,415 3,715,915 ============ ============ ============= - diluted 3,773,279 3,739,331 3,718,250 ============ ============ =============
See notes to consolidated financial statements. 58 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated Additional Other Common Paid-in Retained Comprehensive Stock Capital Earnings (Loss) Income ----------- ----------- ------------ -------------- Balance at January 1, 2001 $370,909 $2,677,126 $16,055,448 ($1,430,933) Net proceeds from dividend reinvestment and share purchase plan 1,402 85,339 Cash distributions ($.64 per share) (2,378,222) Issuance of stock (Note 14) 300 16,635 Purchase of treasury stock Comprehensive income: Net income 2,621,035 Other comprehensive income- Net unrealized gain on securities available for sale 1,544 Minimum pension liability adjustment (323,062) Comprehensive income ----------- ----------- ------------ -------------- Balance at December 31, 2001 372,611 2,779,100 16,298,261 (1,752,451) Net proceeds from dividend reinvestment and share purchase plan 1,882 120,747 Cash distributions ($.64 per share) (2,390,579) Issuance of stock (Note 14) 300 19,233 Comprehensive income: Net income 6,099,640 Other comprehensive income- Net unrealized gain on securities available for sale 802 Minimum pension liability adjustment (889,035) Comprehensive income ----------- ----------- ------------ -------------- Balance at December 31, 2002 374,793 2,919,080 20,007,322 (2,640,684) Net proceeds from dividend reinvestment and share purchase plan 3,468 250,138 Cash distributions ($.64 per share) (2,410,963) Issuance of stock (Note 14) 300 20,622 Comprehensive income (loss): Net loss (2,222,338) Other comprehensive income- Net unrealized gain on securities available for sale 2,448 Minimum pension liability adjustment (206,861) Comprehensive loss ----------- ----------- ------------ -------------- Balance at December 31, 2003 $378,561 $3,189,840 $15,374,021 ($2,845,097) =========== =========== ============ ==============
Notes Receivable Total Treasury for Exercise of Comprehensive Stockholders' Stock Stock Options Income (Loss) Equity ---------- ------------- ------------- ------------- Balance at January 1, 2001 ($21,088) ($367,500) $17,283,962 Net proceeds from dividend reinvestment and share purchase plan 86,741 Cash distributions ($.64 per share) (2,378,222) Issuance of stock (Note 14) 16,935 Purchase of treasury stock (320) (320) Comprehensive income: Net income $2,621,035 2,621,035 Other comprehensive income- Net unrealized gain on securities available for sale 1,544 1,544 Minimum pension liability adjustment (323,062) (323,062) ------------- Comprehensive income $2,299,517 ============= ---------- ------------- ------------- Balance at December 31, 2001 (21,408) (367,500) 17,308,613 Net proceeds from dividend reinvestment and share purchase plan 122,629 Cash distributions ($.64 per share) (2,390,579) Issuance of stock (Note 14) 19,533 Comprehensive income: Net income $6,099,640 6,099,640 Other comprehensive income- Net unrealized gain on securities available for sale 802 802 Minimum pension liability adjustment (889,035) (889,035) ------------- Comprehensive income $5,211,407 ============= ---------- ------------- ------------- Balance at December 31, 2002 (21,408) (367,500) 20,271,603 Net proceeds from dividend reinvestment and share purchase plan 253,606 Cash distributions ($.64 per share) (2,410,963) Issuance of stock (Note 14) 20,922 Comprehensive income (loss): Net loss ($2,222,338) (2,222,338) Other comprehensive income- Net unrealized gain on securities available for sale 2,448 2,448 Minimum pension liability adjustment (206,861) (206,861) ------------- Comprehensive loss ($2,426,751) ============= ---------- ------------- ------------- Balance at December 31, 2003 ($21,408) ($367,500) $15,708,417 ========== ============= =============
See notes to consolidated financial statements. 59 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------------------------------ 2003 2002 2001 -------------- -------------- -------------- Cash Flows from Operating Activities: Cash received from rental properties $5,386,787 $5,620,856 $5,397,210 Interest received 2,736,073 3,187,089 2,959,656 Distributions received from partnership 430,901 282,980 227,080 Miscellaneous income 19,511 18,470 24,494 Interest paid on rental property mortgage debt (1,194,044) (1,238,085) (1,230,925) Cash disbursed for rental property operations (3,644,994) (3,396,377) (3,179,725) Cash disbursed for general and administrative costs (3,768,374) (3,379,719) (2,899,301) -------------- -------------- -------------- Net cash (used in) provided by continuing operations (34,140) 1,095,214 1,298,489 Net cash provided by discontinued operations 59,721 865,069 1,329,240 -------------- -------------- -------------- Net cash provided by operating activities 25,581 1,960,283 2,627,729 -------------- -------------- -------------- Cash Flows from Investing Activities: Cash flows from continuing operations: Payments received on notes receivable 2,954,882 4,478,370 2,055,976 Payments disbursed for investments in notes receivable (6,000,000) (1,775,000) (1,100,000) Payments of taxes payable on gain from sale (498,750) - - Payments disbursed for additions and improvements (223,474) (284,787) (314,821) Purchase of additional interest in partnership (39,443) (255,500) (50,000) Other 120,075 91,170 (320) -------------- -------------- -------------- (3,686,710) 2,254,253 590,835 -------------- -------------- -------------- Cash flows from discontinued operations: Proceeds from sales of properties - 8,449,522 - Payments disbursed for additions and improvements (221,317) (123,587) (177,970) -------------- -------------- -------------- (221,317) 8,325,935 (177,970) -------------- -------------- -------------- Net cash (used in) provided by investing activities (3,908,027) 10,580,188 412,865 -------------- -------------- -------------- Cash Flows from Financing Activities: Cash flows from continuing operations: Principal payments on mortgage debt (226,492) (212,006) (192,821) Mortgage proceeds 1,200,000 - - Mortgage costs paid (46,587) - - Distributions to minority partners (30,862) (221,694) (25,007) Cash distributions on common stock (2,410,963) (2,390,579) (2,378,222) Proceeds from dividend reinvestment and share purchase plan 253,606 122,629 86,741 -------------- -------------- -------------- (1,261,298) (2,701,650) (2,509,309) -------------- -------------- -------------- Cash flows from discontinued operations: Principal payments on mortgage debt (222,206) (246,398) (255,420) Repayment of mortgage debt from sale of property - (4,641,879) - -------------- -------------- -------------- (222,206) (4,888,277) (255,420) -------------- -------------- -------------- Net cash used in financing activities (1,483,504) (7,589,927) (2,764,729) -------------- -------------- -------------- Net (Decrease) Increase in Cash and Cash Equivalents (5,365,950) 4,950,544 275,865 Cash and Cash Equivalents, Beginning of Year 6,738,768 1,788,224 1,512,359 -------------- -------------- -------------- Cash and Cash Equivalents, End of Year $1,372,818 $6,738,768 $1,788,224 ============== ============== ==============
See notes to consolidated financial statements. 60 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, --------------------------------------------------------- 2003 2002 2001 --------------- --------------- -------------- Reconciliation of Net Income (Loss) to Net Cash (Used in) Provided by Operating Activities Net Income (Loss) ($2,222,338) $6,099,640 $2,621,035 --------------- --------------- -------------- Adjustments to reconcile net income (loss) to net cash (used in) provided by continuing operations: Net gain from sales of properties (1,028,596) (3,873,119) (1,198,428) Net gain from sales of discontinued operations - (1,485,917) - Impairment of real estate held for sale 3,110,000 - - Loss (income) from discontinued operations 466,060 (42,093) (473,370) Equity in income of partnership (377,953) (295,564) (261,981) Depreciation and amortization 633,314 620,427 598,324 Issuance of stock for fees and expenses 20,922 19,533 16,935 Amortization of discounts on notes and fees (138,446) (134,942) (467,802) Minority interest 13,962 19,465 20,526 Distributions received from partnership 430,901 282,980 227,080 Changes in assets and liabilities: Decrease (increase) in other receivables (283,718) 310,493 76,100 Increase (decrease) in accounts payable and accrued liabilities (634,390) (321,751) 93,946 Increase (decrease) in other liabilities 2,986 34,465 (17,190) Decrease (increase) in prepaid expenses, deposits in escrow and deferred charges (18,589) (161,021) 42,116 Other (8,255) 22,618 21,198 --------------- --------------- -------------- Total adjustments 2,188,198 (5,004,426) (1,322,546) --------------- --------------- -------------- Net cash (used in) provided by continuing operations (34,140) 1,095,214 1,298,489 --------------- --------------- -------------- Discontinued operations: Income (Loss) from Discontinued Operations (466,060) 42,093 473,370 --------------- --------------- -------------- Adjustments to reconcile income (loss) to net cash provided by discontinued operations: Depreciation and amortization 507,452 819,079 960,075 Amortization of discounts on notes - (34,004) - Minority interest - 11,046 14,789 Net change in operating assets and liabilities 18,329 26,855 (118,994) --------------- --------------- -------------- Total adjustments 525,781 822,976 855,870 --------------- --------------- -------------- Net cash provided by discontinued operations 59,721 865,069 1,329,240 --------------- --------------- -------------- Net cash provided by operating activities $25,581 $1,960,283 $2,627,729 =============== =============== ==============
See notes to consolidated financial statements. 61 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Presidential Realty Corporation ("Presidential" or the "Company"), a Real Estate Investment Trust ("REIT"), is engaged principally in the ownership of income producing real estate and in the holding of notes and mortgages secured by real estate. Presidential operates in a single business segment, investments in real estate related assets. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. Real Estate - Real estate is stated at cost. Generally, depreciation is provided on the straight-line method over the assets' estimated useful lives, which range from twenty to fifty years for buildings and from three to ten years for furniture and equipment. Maintenance and repairs are charged to operations as incurred and renewals and replacements are capitalized. The Company reviews each of its property investments for possible impairment at least annually, and more frequently if circumstances warrant. Impairment of properties is determined to exist when estimated amounts recoverable through future operations on an undiscounted basis are below the properties' carrying value. If a property is determined to be impaired, it is written down to its estimated fair value. B. Mortgage Portfolio - Net mortgage portfolio represents the outstanding principal amounts of notes receivable reduced by discounts and/or deferred gains. The primary forms of collateral on all notes receivable are real estate and ownership interests in entities that own real property, and may include borrower personal guarantees. The Company periodically evaluates the collectibility of both accrued interest on and principal of its notes receivable to determine whether they are impaired. A mortgage loan is considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the existing contractual terms of the loan. The Company also considers loan modifications as possible indicators of impairment, although all modifications during the three years ended December 31, 2003 have been at the Company's request for business purposes and not as a result of debtor financial difficulties. When the mortgage loan is considered to be impaired, the Company establishes a valuation allowance equal to the difference between a) the carrying value of the loan, and b) the present value of the expected cash flows from the loan at its effective interest rate, or at the estimated fair value of the real estate collateralizing the loan. Income on impaired loans, including interest, and the recognition of deferred gains and unamortized discounts, is recognized only as cash is received. The Company currently has no loans that are impaired according to their terms as modified. 62 C. Sale of Real Estate - Presidential complies with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 66, "Accounting for Sales of Real Estate". Accordingly, the gains on certain transactions are deferred and are being recognized on the installment method until such transactions have complied with the criteria for full profit recognition. D. Discounts on Notes Receivable - Presidential assigned discounted values to long-term notes received from the sales of properties to reflect the difference between the stated interest rates on the notes and market interest rates at the time of acceptance. Such discounts are being amortized using the interest method. E. Principles of Consolidation - The consolidated financial statements include the accounts of Presidential Realty Corporation and its wholly owned subsidiaries. Additionally, the consolidated financial statements include 100% of the account balances of UTB Associates, a partnership in which Presidential is the general partner and owns a 75% interest (see Note 7). All significant intercompany balances and transactions have been eliminated. F. Rental Revenue Recognition - The Company acts as lessor under operating leases. Rental revenue is recorded on the accrual method. Recognition of rental revenue is generally discontinued when the rental is delinquent for ninety days or more, or earlier if management determines that collection is doubtful. G. Net Income (Loss) Per Share - Basic net income (loss) per share data is computed by dividing net income (loss) by the weighted average number of shares of Class A and Class B common stock outstanding during each year. Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted average shares outstanding, including the dilutive effect, if any, of stock options outstanding. The dilutive effect of stock options is calculated using the treasury stock method. 63 H. Cash and Cash Equivalents - Cash and cash equivalents includes cash on hand, cash in banks and money market funds. I. Benefits - The Company follows SFAS Nos. 87, 106 and 132 in accounting for pension and postretirement benefits (see Notes 16 and 17). J. Management Estimates - The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated balance sheets and the reported amounts of income and expense for the reporting period. Actual results could differ from those estimates. K. Accounting for Stock Options - The Company complies with the additional disclosures required when necessary by SFAS No. 123, "Accounting for Stock-Based Compensation", but has elected to continue to account for employee stock-based compensation as prescribed by Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees". The Company has not granted any stock options in the last three years. For the years ended December 31, 2003, 2002 and 2001, there would have been no additional compensation expense if the Company had applied the fair value based method of accounting to its existing options because all were vested. L. Discontinued Operations - The Company complies with the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This statement requires that the results of operations, including impairment, gains and losses related to the properties that have been sold or properties that are intended to be sold be presented as discontinued operations in the statements of operations for all periods presented and the assets and liabilities of properties intended to be sold are to be separately classified on the balance sheet. Properties designated as held for sale are carried at the lower of cost or fair value less costs to sell and are not depreciated. M. Adoption of Recent Accounting Pronouncements - The Company adopted SFAS No. 143, "Accounting for Asset Retirement Obligations" on January 1, 2003. On January 1, 2003, the Company also adopted SFAS No. 145, "Rescission of SFAS No. 4, 44 and 64, Amendment of SFAS No. 13, and Technical Corrections" and SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". In addition, in 2003, SFAS No. 148 "Accounting for Stock-Based Compensation-Transition and Disclosure" and Interpretation No. 45 "Guarantors' Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" were adopted by the Company. Implementation of these statements did not have a material impact on the Company's consolidated financial statements. 64 In January of 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46, "Consolidation of Variable Interest Entities", which was amended by Interpretation No. 46(R) in December of 2003. This Interpretation clarifies the application of existing accounting pronouncements to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. As it applies to Presidential, Interpretation No. 46(R) will be immediately effective for all variable interest entities on March 31, 2004. The adoption of Interpretation No. 46 is expected to have no impact on the Company's consolidated financial statements. In April, 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". SFAS No. 149 amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 had no impact on the Company's consolidated financial statements. In May, 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity". SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that certain financial instruments be classified as liabilities that were previously considered equity. In October of 2003, the FASB agreed to defer, indefinitely, the application of paragraphs 9 and 10 of SFAS No. 150 regarding mandatorily redeemable non-controlling interests in subsidiaries that would not be liabilities under SFAS No. 150 for the subsidiary. The adoption of the remaining provisions of this pronouncement on July 1, 2003 had no impact on the Company's consolidated financial statements. 65 In December, 2003, the FASB issued a revision to SFAS No. 132 "Employers' Disclosures about Pensions and Other Postretirement Benefits". This statement revises employers' disclosures about pension plans and other postretirement benefit plans. It requires additional disclosures related to the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. It does not change the measurement or recognition of those plans. The adoption of the provisions of this statement did not have a material impact on the Company's consolidated financial statements. N. Reclassification - Certain prior year amounts have been reclassified to conform with the 2003 presentation. 2. REAL ESTATE Real estate is comprised of the following: December 31, ------------ 2003 2002 ---- ---- Land $ 2,595,475 $ 2,592,424 Buildings 18,970,670 18,767,483 Furniture and equipment 166,860 163,974 ----------- ----------- Total real estate $21,733,005 $21,523,881 =========== =========== Four of the properties owned by the Company represented 28%, 20%, 16% and 13% of total rental revenue in 2003; 30%, 20%, 15% and 13% of total rental revenue in 2002; and 30%, 20%, 14% and 13% of total rental revenue in 2001. 3. MORTGAGE PORTFOLIO The Company's mortgage portfolio includes notes receivable - sold properties and other, and notes receivable - related parties. Notes receivable - sold properties and other consist of: (1) Long-term purchase money notes from sales of properties previously owned by the Company and loans and mortgages originated by the Company. These notes receivable have varying interest rates with balloon payments due at maturity. 66 (2) Notes receivable from sales of cooperative apartment units. These notes generally have market interest rates and the majority of these notes amortize monthly with balloon payments due at maturity. Notes receivable - related parties are all due from Ivy Properties, Ltd. or its affiliates (collectively "Ivy") and consist of: (1) Purchase money notes resulting from sales of property or partnership interests to Ivy. (2) Notes receivable relating to loans made by the Company to Ivy in connection with Ivy's cooperative conversion business. At December 31, 2003, all of the notes in the Company's mortgage portfolio are current, in accordance with their terms, as modified. The following table summarizes the components of the mortgage portfolio: 67 MORTGAGE PORTFOLIO - -------------------------
Sold Properties and Other -------------------------------------------------------- Properties Other Cooperative previously (originated apartment owned loans) units Total ------------ ------------- ------------- ------------ December 31, 2003 - -------------------- Notes receivable $19,585,000 $8,875,000 $196,210 $28,656,210 Less: Discounts 1,039,991 7,637 1,047,628 Deferred gains 6,233,390 6,233,390 ------------ ------------- ------------- ------------ Net $12,311,619 $8,875,000 $188,573 $21,375,192 ============ ============= ============= ============ Due within one year $50,000 $62,730 $112,730 Long-term 12,261,619 $8,875,000 125,843 21,262,462 ------------ ------------- ------------- ------------ Net $12,311,619 $8,875,000 $188,573 $21,375,192 ============ ============= ============= ============ December 31, 2002 - -------------------- Notes receivable $21,330,678 $2,875,000 $447,803 $24,653,481 Less: Discounts 1,148,843 8,722 1,157,565 Deferred gains 6,233,390 44,652 6,278,042 ------------ ------------- ------------- ------------ Net $13,948,445 $2,875,000 $394,429 $17,217,874 ============ ============= ============= ============ Due within one year $46,741 $1,775,000 $177,244 $1,998,985 Long-term 13,901,704 1,100,000 217,185 15,218,889 ------------ ------------- ------------- ------------ Net $13,948,445 $2,875,000 $394,429 $17,217,874 ============ ============= ============= ============
MORTGAGE PORTFOLIO - ------------------
Related Parties ---------------------------------------- ------------- Properties Cooperative Total previously conversion mortgage owned loans Total portfolio ------------ ------------ ------------ ------------- December 31, 2003 - -------------------- Notes receivable $285,905 $92,619 $378,524 $29,034,734 Less: Discounts 15,231 46,720 61,951 1,109,579 Deferred gains 6,233,390 ------------ ------------ ------------ ------------- Net $270,674 $45,899 $316,573 $21,691,765 ============ ============ ============ ============= Due within one year $18,615 $10,443 $29,058 $141,788 Long-term 252,059 35,456 287,515 21,549,977 ------------ ------------ ------------ ------------- Net $270,674 $45,899 $316,573 $21,691,765 ============ ============ ============ ============= December 31, 2002 - ----------------- Notes receivable $1,207,831 $118,681 $1,326,512 $25,979,993 Less: Discounts 27,362 78,307 105,669 1,263,234 Deferred gains 830,927 830,927 7,108,969 ------------ ------------ ------------ ------------- Net $349,542 $40,374 $389,916 $17,607,790 ============ ============ ============ ============= Due within one year $50,152 $11,913 $62,065 $2,061,050 Long-term 299,390 28,461 327,851 15,546,740 ------------ ------------ ------------ ------------- Net $349,542 $40,374 $389,916 $17,607,790 ============ ============ ============ =============
68 Loans, Payoffs and Prepayments In February, 2003, the Company made a $1,500,000 loan collateralized by ownership interests in Reisterstown Square Associates, LLC, which owns Reisterstown Apartments in Baltimore, Maryland, and by a personal guarantee from the borrower. The loan matures on January 31, 2008 and has an annual interest rate of 10.50% until January 31, 2005. Thereafter, the interest rate changes every six months to a rate equal to 800 basis points above the six month LIBOR rate, with a minimum rate of 10.50% per annum. In March, 2003, the Company received repayment of its note collateralized by Woodland Village in Hartford, Connecticut. Presidential received cash of $2,243,190, of which $873,754 was applied to the repayment of the Overlook loan for which a portion of the Woodland Village notes stood as collateral. As a result, the Company recognized $873,754 of previously deferred gain. In October, 2003, the Company made a $4,500,000 loan collateralized by ownership interests in nine apartment properties located in the Commonwealth of Virginia. The loan matures on October 23, 2013 and basic interest accrues at an annual rate of 11.50% through October 23, 2007 and at 11% per annum from October 24, 2007 to maturity. For the first five years of the loan, a portion of the basic interest equal to 2% per annum is deferred and is payable on the fifth anniversary of the loan. In addition to the basic interest accruing on the loan, the Company is entitled to receive additional interest equal to 25% of any net sales or refinancing proceeds resulting from sales or refinancing of the nine properties. In connection with the loan, Presidential received a $22,500 commitment fee. In January, 2001, the Company received payment in full on its $1,175,500 Woodgate note receivable that had been secured by the Windsor at Arbors property in Alexandria, Virginia. As a result, the Company recognized $255,281 of unamortized discount and $684,991 of deferred gain. Modifications In March, 2003, in response to the borrower's decision to prepay the Mark Terrace note, the Company modified the terms of the note. The Company agreed to give the borrower annual options to extend the maturity date from November 29, 2005 to November 29, 2008 and to fix the interest rate at the current 9.16% per annum until maturity. The Company will receive principal payments of $25,000 each on January 1, 2004 (received) and November 29, 2004. If the borrower exercises its options to extend the note, the Company will receive principal payments of $100,000 on each of November 30, 2005, November 30, 2006 and November 30, 2007. The note is collateralized by unsold cooperative apartments at the Mark Terrace property. As apartments are sold, the Company receives principal payments ranging from $20,000 to $35,000 per unit depending upon the size of the unit. This represents an increase from the $16,000 payment required to release units prior to the modification. During 2003, 2002 and 2001, the Company received $365,000, $352,000 and $529,262, respectively, in principal payments on the Mark Terrace note and the balance of the note at December 31, 2003 was $935,000. 69 In July, 2003, the Company modified the terms of its $1,100,000 (originated in February, 2001) and $1,775,000 (originated in July, 2002) loans, collateralized by ownership interests in three apartment properties located in New Jersey and by personal guarantees from the borrower of $750,000 and $887,500, respectively. The maturity date of the $1,775,000 loan was extended at the Company's request from July 19, 2003 to February 18, 2009, which is the same maturity date as the $1,100,000 loan. Effective July 1, 2003, interest on these loans will be payable monthly at the annual rate of 10.50% for the first three years, and changed thereafter on July 1, 2006 and July 1, 2008 to an annual rate equal to 900 basis points above the six month LIBOR rate in effect immediately prior to the change, with a minimum rate of 10.50% per annum. Prior to the modification, the $1,100,000 loan and the $1,775,000 loan had annual interest rates of 13% and 11.50%, respectively. These loans were modified to provide for reduced interest rates in order to extend the maturity date of the $1,775,000 loan and keep the principal balance of that loan outstanding at an attractive interest rate and to delay the borrower's right to prepay the $1,100,000 loan. As a result, both loans will now have the same interest rates and maturity dates. The three properties in New Jersey also collateralize the $4,000,000 Fairfield Towers loan. In April, 2002, the $12,300,000 New Haven note secured by a second mortgage on the Encore Apartments in New York, New York was modified at the Company's request. Under the terms of the modification, Presidential received a principal repayment of $3,750,000 and additional interest of $369,000 (which was due under the terms of the original note). The $8,550,000 balance of the note was modified to extend the maturity date from June 29, 2002 until April 30, 2009. The interest rate on the note is 11% per annum through June 30, 2002, 9% per annum from July 1, 2002 through April 18, 2004, 10% per annum from April 19, 2004 through April 18, 2007 and 10.50% per annum from April 19, 2007 through maturity, with additional interest of $171,000 due at maturity. The effective interest rate over the term of the note is 10.17% per annum. The $8,550,000 note is secured by a second mortgage on the Encore apartment property and by a pledge of the ownership interests in the entity owning the Encore Apartments. In connection with the modification, Presidential received a $21,375 commitment fee and recognized a previously deferred gain of $3,750,000, which is included in net gain from sales of properties in the Consolidated Statements of Operations. 70 4. DISCONTINUED OPERATIONS For the years ended December 31, 2003, 2002 and 2001, income (loss) from discontinued operations includes the Continental Gardens property, which is under contract for sale, and the Preston Lake Apartments property, which is currently being marketed for sale. Both of these properties have been designated as held for sale. In addition, income (loss) from discontinued operations in 2002 and 2001 included the Sunwood Apartments property, the University Towers Professional Space Lease property and the Towers Shoppers Parcade property, all of which were sold during the year ended December 31, 2002. 71 The following table summarizes income for the properties sold or held for sale.
Year ended December 31, ------------------------------------------------- 2003 2002 2001 ----------- ----------- ----------- Revenues: Rental $ 4,067,705 $ 5,238,673 $ 6,176,054 Interest 34,004 ----------- ----------- ----------- Total 4,067,705 5,272,677 6,176,054 ----------- ----------- ----------- Rental property expenses: Operating expenses 1,873,094 1,956,381 2,145,322 Interest on mortgage debt 1,752,473 1,974,451 2,095,217 Real estate taxes 402,328 478,554 499,301 Depreciation on real estate 486,467 779,890 918,913 Amortization of mortgage costs 20,985 39,189 41,162 ----------- ----------- ----------- Total 4,535,347 5,228,465 5,699,915 ----------- ----------- ----------- Other income: Investment income 1,582 8,927 12,020 ----------- ----------- ----------- Income (loss) before minority interest (466,060) 53,139 488,159 Minority interest (11,046) (14,789) ----------- ----------- ----------- Income (loss) from discontinued operations (466,060) 42,093 473,370 ----------- ----------- ----------- Impairment of real estate held for sale (3,110,000) ----------- ----------- ----------- Gain from sale of discontinued operations: Net gain before provision for income tax and minority interest 2,079,497 Provision for federal taxes (498,750) Minority interest (94,830) ----------- ----------- ----------- Net gain from sale of discontinued operations 1,485,917 ----------- ----------- ----------- Total income (loss) from discontinued operations $(3,576,060) $ 1,528,010 $ 473,370 =========== =========== ===========
72 In April and June, 2003, the Company entered into conditional contracts for the sale of the Continental Gardens property in Miami, Florida, which contracts were terminated by the purchasers in May and August, 2003, respectively. In September, 2003, the Company entered into a new contract for the sale of this property for a sales price of $21,500,000. The contract was subject to termination by the purchaser prior to the expiration of the due diligence period on November 7, 2003. The contract became unconditional on November 7, 2003, subject to the Company's obligation to reduce radon levels at some of the apartments and the purchaser made a contract deposit of $500,000 in escrow. Subsequent to year end, the Company satisfied the radon remediation condition and the sale is expected to close in the second or third quarter of 2004. If the sale is completed pursuant to this contract, the gain from the sale, for financial reporting purposes, is estimated to be approximately $11,089,000. Presidential intends to utilize all or a portion of the net proceeds from the sale to purchase another property or properties and treat the sale and purchase as a tax free exchange under Section 1031 of the Internal Revenue Code ("IRC"). There can be no assurances, however, that the sale will close or that the amount ultimately realized will not change from the amount described herein or that a satisfactory exchange property will be found. However, if a successful tax free exchange under Section 1031 of the IRC does not occur, the Company would be subject to tax on its undistributed capital gains. In the third quarter of 2003, the Company decided to sell Preston Lake Apartments, a 320-unit apartment property in Tucker, Georgia. The property has experienced vacancy problems and is located in an area that has a struggling economy. In spite of the Company's efforts to reduce the vacancy levels and to cut expenses at the property, the occupancy rate for 2003 was approximately 81%. For the year ended December 31, 2003, gross revenues were $1,999,903 and the loss from operations was $857,346 (which includes depreciation expense of $359,484). At December 31, 2003, the outstanding mortgage balance was $13,603,751, the interest rate is 8.15% per annum and the mortgage matures in May, 2010. The property has been listed for sale with a real estate broker and although the Company has not obtained a firm purchase commitment to date, based upon offers made by prospective purchasers, the Company estimated that the fair value of the property, less costs to sell, was below the $16,204,950 net carrying value of the property. Therefore, in the third quarter of 2003, based on its decision to sell the property in the near term, rather than to hold it as a long-term investment, the Company recorded an impairment charge in the amount of $2,527,334 and, based on additional information and offers received, recorded an additional impairment charge in the amount of $582,666 in the fourth quarter of 2003. The total impairment charge of $3,110,000 was recorded to reduce the carrying value of the assets related to discontinued operations to their estimated fair value less costs to sell. There can be no assurances that the property will be sold or that the amount ultimately realized will not change from the recorded fair value less costs to sell. 73 After December 31, 2003, the Company decided not to make the monthly payment due February 1, 2004 on the first mortgage note secured by Preston Lake Apartments. The holder of the first mortgage has commenced foreclosure proceedings and Presidential has consented to the appointment of a receiver for the property. The Company is continuing to attempt to sell the property for a price approximately equal to the outstanding principal balance of the mortgage. Alternatively, the Company is willing to transfer ownership of the property to the holder of the first mortgage in lieu of foreclosure. The outstanding principal balance of the mortgage debt on February 1, 2004 was $13,595,028. The mortgage note is nonrecourse and the Company has no personal liability for repayment of the indebtedness. For the year ended December 31, 2003, the operations of the property had a net loss of $857,346 and the total cash deficiencies were $710,562. In 2003, Presidential advanced approximately $801,000 to fund cash deficiencies of the property. On August 30, 2002, the Company consummated the sale of its Sunwood Apartments property in Miami, Florida to Sunwood Development LLC for a sales price of $8,000,000. The net cash proceeds of sale, after repayment of the $4,641,879 first mortgage loan, a brokerage fee of $240,000 and other expenses of sale of $39,139, were $3,078,982. Presidential recognized in 2002, for financial reporting purposes, a gain from the sale of $1,142,734 net of Federal taxes of $498,750 (see Note 9). In May, 2002, UTB Associates, a consolidated partnership in which the Company held a 66-2/3% interest at that time, finalized a settlement of certain litigation issues with University Towers Owners Corp. UTB Associates was a tenant under a lease (the "Professional Space Lease") of 24,400 square feet of professional office space at University Towers, a cooperative apartment building in New Haven, Connecticut. Under the terms of the settlement, UTB Associates agreed to the termination of the lease and the subleases and the associated tenant improvements were assigned to University Towers Owners Corp., the cooperative corporation. In addition, Presidential transferred to the cooperative corporation its interest in the Towers Shoppers Parcade property, which was used for parking for tenants at the professional space property. In return, UTB Associates and Presidential were to receive monthly payments over a nine-year period from the cooperative corporation under the terms of two non-interest bearing promissory notes of $660,000 and $190,000, respectively. However, in November, 2002, the notes due from University Towers Owners Corp. were repaid in full. Under the terms of the notes, the prepayment price was equal to the present value of the projected note payments calculated at a discount rate of 3% per annum. As a result, UTB Associates and the Company received total payments of $757,365 including a total prepayment of $696,624 after a discount of $92,635. 74 The net book value of the assets transferred to the cooperative corporation in May, 2002 was $212,488 and $3,146 by UTB Associates and Presidential, respectively. After closing costs, UTB Associates recorded a gain on sale of $284,434 (including the minority interest share of $94,830) and amortization of discount of $26,377 in 2002. Presidential recorded a gain on sale of $153,579 and amortization of discount of $7,627 in 2002. The combined assets and liabilities of the Continental Gardens and the Preston Lake Apartments properties are presented separately as discontinued operations in the consolidated balance sheets. The components are as follows:
December 31, ------------ 2003 2002 ------------ ------------ Assets related to discontinued operations: Land $ 4,688,000 $ 4,688,000 Buildings 20,392,964 23,302,099 Furniture and equipment 246,147 225,695 Less: accumulated depreciation (3,661,054) (3,174,587) ------------ ------------ Net real estate 21,666,057 25,041,207 Other assets 492,483 541,075 ------------ ------------ Total $ 22,158,540 $ 25,582,282 ============ ============ Liabilities related to discontinued operations: Mortgage debt $ 21,201,234 $ 21,423,439 Other liabilities 271,548 295,147 ------------ ------------ Total $ 21,472,782 $ 21,718,586 ============ ============
5. MORTGAGE DEBT All mortgage debt is secured by individual properties and is nonrecourse to the Company with the exception of the $1,200,000 mortgage on the Building Industries Center property in White Plains, New York and the $190,381 mortgage on the Mapletree Industrial Center property in Palmer, Massachusetts, which are recourse to Presidential. 75 In December, 2003, the Company obtained a new $1,200,000 mortgage on its Building Industries Center property. The mortgage bears interest at the rate of 5.45% per annum, requires monthly payments of principal and interest of $7,333 and has a balloon payment of $1,072,906 due at maturity on January 1, 2009. Amortization requirements of all mortgage debt as of December 31, 2003 are summarized as follows: Year ending December 31: 2004 $ 261,799 2005 284,597 2006 305,270 2007 327,482 2008 2,331,076 2009 - 2029 13,231,660 ----------- TOTAL $16,741,884 =========== Interest on mortgages is payable at fixed rates, summarized as follows: Interest rates: 4.25%-5.45% $ 1,390,381 6.65% 3,011,221 7%-7.06% 4,658,489 8.25% 7,681,793 ----------- TOTAL $16,741,884 =========== 6. DISTRIBUTIONS FROM PARTNERSHIP IN EXCESS OF INVESTMENT AND EARNINGS PDL, Inc. (a wholly owned subsidiary of Presidential) is the general partner of PDL, Inc. and Associates Limited Co-Partnership ("Home Mortgage Partnership"). The partnership owns and operates an office building in Hato Rey, Puerto Rico. Presidential and PDL, Inc. have an aggregate 31% general and limited partner interest in Home Mortgage Partnership at December 31, 2003. This interest has increased from 26% owned prior to 2001 as a result of a 1% interest acquired for a purchase price of $50,000 in 2001 and a 4% interest acquired for $255,500 in 2002. The Company accounts for its investment in this partnership under the equity method, because it exercises significant influence, but not control, over the partnership's affairs. 76 The Company's interest in the Home Mortgage Partnership has a negative basis and therefore is classified as a liability on the Company's consolidated balance sheets, under the caption "distributions from partnership in excess of investment and earnings". The negative basis is solely due to the refinancing of the mortgage on the property owned by the partnership and the distribution of the proceeds to the partners in excess of their investment in prior years, and not due to partnership operating losses. Summary financial information for Home Mortgage Partnership is as follows:
December 31, ------------ 2003 2002 ------------ ------------ Condensed Balance Sheets Net real estate $ 4,295,672 $ 4,471,850 Prepaid expenses and deposits in escrow 742,795 804,205 Cash and cash equivalents 813,306 696,220 Receivables and other assets 567,474 622,500 ------------ ------------ Total Assets $ 6,419,247 $ 6,594,775 ============ ============ Nonrecourse mortgage debt $ 16,531,798 $ 16,737,569 Other liabilities 751,666 550,624 ------------ ------------ Total Liabilities 17,283,464 17,288,193 Partners' Deficiency (10,864,217) (10,693,418) ------------ ------------ Total Liabilities and Partners' Deficiency $ 6,419,247 $ 6,594,775 ============ ============ On the Company's Consolidated Balance Sheets: Distributions from partnership in excess of investment and earnings $ 2,411,112 $ 2,358,164 ============ ============
Year Ended December 31, ----------------------- 2003 2002 2001 ----------- ----------- ----------- Condensed Statements of Operations Revenues $ 4,708,104 $ 4,384,810 $ 4,233,202 Interest on mortgage debt (1,244,476) (1,259,330) (1,273,117) Other expenses (2,252,836) (2,132,776) (2,003,623) Investment income 8,410 16,803 39,896 ----------- ----------- ----------- Net Income $ 1,219,202 $ 1,009,507 $ 996,358 =========== =========== =========== On the Company's Consolidated Statements of Operations: Equity in income of partnership $ 377,953 $ 295,564 $ 261,981 =========== =========== ===========
77 7. MINORITY INTEREST IN CONSOLIDATED PARTNERSHIP Presidential is the general partner of UTB Associates, a partnership in which Presidential had a 66-2/3% interest at December 31, 2002. In January, 2003, Presidential acquired an additional 8-1/3% interest in UTB Associates for a purchase price of $39,443 thereby increasing its ownership interest to 75%. As the general partner of UTB Associates, Presidential exercises control over this partnership through its ability to manage the affairs of the partnership in the ordinary course of business, including the ability to approve the partnership's budgets, and through its significant equity interest. Accordingly, Presidential consolidates this partnership in the accompanying financial statements. The minority interest reflects the minority partners' equity in the partnership. 8. LINE OF CREDIT The Company has an unsecured $250,000 line of credit from a lending institution. The interest rate is 1% above the prime rate and the line of credit is renewable in April, 2004. Presidential pays a 1% annual fee for the line of credit. In October, 2003, the Company borrowed $250,000 under the line of credit at an interest rate of 5% per annum and repaid it in December, 2003. There were no borrowings under this line of credit during 2002 and 2001. In addition, the Company has an agreement with the same lending institution whereby it can borrow up to $250,000 under a commercial loan. The loan would be available if needed only after the Company had fully borrowed against the $250,000 line of credit. The interest rate would be 1% above the prime rate. The loan would be collateralized by the cash deposits that the Company maintains at the lending institution. The Company has not borrowed under this agreement. 9. INCOME TAXES Presidential has elected to qualify as a Real Estate Investment Trust under the Internal Revenue Code. A REIT which distributes at least 90% of its real estate investment trust taxable income to its shareholders each year by the end of the following year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders. 78 Upon filing the Company's income tax return for the year ended December 31, 2002, Presidential applied its available 2002 stockholders' distributions and elected to apply (under Section 858 of the Internal Revenue Code) all but approximately $154,000 of its year 2003 stockholders' distributions to reduce its taxable income for 2002 to zero. For the year ended December 31, 2002, the Company retained undistributed capital gains designated as paid to shareholders (under Section 857(b)(3)(D) of the Internal Revenue Code) in the amount of $1,425,000 ($.38 per share) and paid income taxes of $498,750 in January, 2003 on that retained gain. For the year ended December 31, 2003, the Company had taxable income (before distributions to stockholders) of approximately $964,000 ($.25 per share), which included approximately $791,000 ($.21 per share) of capital gains. This taxable income will be reduced by the $154,000 ($.04 per share) of its 2003 distributions that were not utilized in reducing the Company's 2002 taxable income. In addition, the Company may elect to apply any eligible year 2004 distributions to reduce its 2003 taxable income. As previously stated, in order to maintain REIT status, Presidential is required to distribute 90% of its REIT taxable income (exclusive of capital gains). As of December 31, 2003, Presidential has distributed all of the required 90% ($.04 per share) of its 2003 REIT taxable income exclusive of capital gains. In addition, although no assurances can be given, the Company currently expects that it will not have to pay Federal income taxes for 2003 because its present intention is to distribute all of its 2003 taxable income during 2003 and 2004. Therefore, no provision for income taxes has been made at December 31, 2003. Presidential has, for tax purposes, reported the gain from the sale of certain of its properties using the installment method. 10. COMMITMENTS AND CONTINGENCIES Presidential is not a party to any material legal proceedings except as noted below. As described in Note 4, the Company decided not to make the monthly payment due on February 1, 2004 on the first mortgage note secured by Preston Lake Apartments. The holder of the first mortgage has appointed a receiver and has commenced non-judicial foreclosure proceedings against the property. The foreclosure sale is currently scheduled for April 4, 2004. The mortgage note is nonrecourse and the Company has no liability for repayment of the indebtedness. The Company has advised the mortgagee that it is willing to transfer ownership of the property to it in lieu of foreclosure. 79 In addition, the Company may be a party to routine litigation incidental to the ordinary course of its business. In the opinion of management, all of the Company's properties are adequately covered by insurance in accordance with normal insurance practices. The Company is not aware of any environmental issues at any of its properties except that in 2003, the Company became aware of the presence of radon gas at above normal levels in many of the first floor apartments at its Continental Gardens property in Miami, Florida. The Company has installed radon mitigation devices at all of the ground floor apartments at a cost of approximately $90,000. The presence, with or without the Company's knowledge, of hazardous substances at any of its properties could have an adverse effect on the Company's operating results and financial condition. 11. CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of its mortgage portfolio and cash and cash equivalents. The Company's mortgage portfolio consists of long-term notes receivable collateralized by real estate located in six states (primarily New York, New Jersey and Virginia). The real estate collateralizing these notes, consisting primarily of moderate income apartment properties and, to a lesser extent, cooperative apartment units, has at a minimum an estimated fair value equal to the net carrying value of the notes. Included in the mortgage portfolio are five collateralized loans made to different companies, all of which are controlled by the same individual. Some, but not all, of these loans, are guaranteed in whole or in part by the individual. The aggregate net carrying value of all of the loans made by Presidential to companies controlled by the individual is approximately $11,835,000 and all of such loans are in good standing. The Company generally maintains its cash in money market funds with high credit quality financial institutions. Periodically, the Company may invest in time deposits with such institutions. Although the Company may maintain balances at these institutions in excess of the FDIC insurance limit, the Company does not anticipate and has not experienced any losses. 80 12. COMMON STOCK The Class A and Class B common stock of Presidential have identical rights except that the holders of Class A common stock are entitled to elect two-thirds of the Board of Directors and the holders of the Class B common stock are entitled to elect one-third of the Board of Directors. Other than as described in Note 15, no shares of common stock of Presidential are reserved. 13. DISTRIBUTIONS ON COMMON STOCK For income tax purposes, distributions paid on common stock are allocated as follows: Total Taxable Taxable Year Distribution Ordinary Income Capital Gain 2003 $0.64 $0.04 $0.60 2002 0.64 0.10 0.54 2001 0.64 0.48 0.16 Designated Undistributed Long-Term Capital Gains: On December 31, 2002, the Company elected to retain $0.38 per share of long-term capital gains received in 2002. This undistributed long-term capital gain of $0.38 per share was taxable to shareholders as a long-term capital gains distribution. Shareholders received a tax credit of $0.13 per share and increased the tax basis of their shares by $0.25 per share. 14. STOCK COMPENSATION During the first quarter of each year, three directors of the Company each receive 1,000 shares of the Company's Class B common stock as partial payment for directors' fees for the year. As a result of these transactions, the Company records an amount for directors' fees based on the market value of the Class B common stock at the grant date, records additions to the Company's Class B common stock of $300 at par value of $.10 per share and the balance is added to additional paid-in capital. 81 Stock compensation activity for the three years ended December 31, 2003 was as follows: Market Value Total Year per Share Directors' Fees ---- --------- --------------- 2003 $6.974 $20,922 2002 6.511 19,533 2001 5.645 16,935 15. STOCK OPTION PLANS In 1999, the Company adopted a Nonqualified Stock Option Plan (the "1999 Stock Option Plan"). The 1999 Stock Option Plan provides that options to purchase up to 150,000 shares of the Company's Class B common stock may be issued prior to December 31, 2003 to the Company's key employees at exercise prices equal to the market value on the date the option is granted. On November 10, 1999, options to purchase a total of 60,000 shares were granted to three of the Company's officers at an exercise price of $6.375 per share. All of the options are exercisable at December 31, 2003 and expire on November 10, 2005. No other options have been granted, exercised or cancelled under this plan. The Company has agreed that to the extent that any of the existing stock options held by these officers are either exercised or lapse, the Company will grant new options in the amount of the stock options that have either been exercised or lapse, which new options will have an exercise price equal to the closing price of the Class B common stock on the date that the new option is actually granted, will have a term of six years from the date such new option is granted and will be otherwise subject to the terms of the 1999 Stock Option Plan or any successor plan. 16. CONTRACTUAL PENSION AND POSTRETIREMENT BENEFITS Presidential has employment contracts with several active and retired officers and employees. These contracts provide for annual pension benefits and other postretirement benefits such as health care benefits. The pension benefits generally provide for annual payments in specified amounts for each participant for life, commencing upon retirement, with an annual adjustment for an increase in the consumer price index. Pursuant to a January 1, 2002 amendment, the benefit commencement date for three active officers was changed to four years after they actually retire. The Company accrues on an actuarial basis the estimated costs of these benefits during the years the employee provides services. Periodic benefit costs are reflected in general and administrative expenses. The contractual benefit plans are not funded. The Company uses a December 31 measurement date for the contractual benefit plans. 82 The assumed health care cost trend rate at December 31, 2001 was 11% for 2001, decreasing gradually each successive year until it reaches 5% by the year 2013. The following tables summarize the actuarial costs of the contractual pension and postretirement benefits: 83 CONTRACTUAL PENSION AND POSTRETIREMENT BENEFITS
Contractual Pension Benefit Contractual Postretirement Benefits Year Ended December 31, Year Ended December 31, ------------------------------------------- ---------------------------------------- 2003 2002 2001 2003 2002 2001 ---- ---- ---- ---- ---- ---- Components of net periodic benefit cost: Service cost $37,469 $32,599 $65,547 $18,663 $18,540 $13,953 Interest cost 153,952 162,649 184,004 40,618 38,163 34,140 Amortization of prior service cost (24,693) (24,693) 21,683 (9,612) (9,612) (9,612) Recognized actuarial loss 193,637 150,161 241,446 26,865 13,781 1,007 -------------- -------------- ----------- ------------- ------------ ----------- Net periodic benefit cost $360,365 $320,716 $512,680 $76,534 $60,872 $39,488 ============== ============== =========== ============= ============ =========== Weighted average assumptions as of January 1, 2003 2002 2001 2003 2002 2001 ---- ---- ---- ---- ---- ---- Discount rate 6.50% 7.00% 7.00% 6.50% 7.00% 7.00% Expected return on plan assets N/A N/A N/A N/A N/A N/A Rate of compensation increase N/A N/A N/A N/A N/A N/A
The recorded contractual pension and postretirement benefits liability of $3,396,393 at December 31, 2003 is comprised of $2,866,504 for pension benefits and $529,889 for postretirement benefits. The accumulated pension and postretirement benefit obligations and recorded liabilities, none of which has been funded, were as follows:
Contractual Pension Benefit Contractual Postretirement Benefits December 31, December 31, ------------------------------ --------------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Change in benefit obligation: Benefit obligation at beginning of year $2,814,176 $3,114,398 $581,493 $585,317 Service cost 37,469 32,599 18,663 18,540 Interest cost 153,952 162,649 40,618 38,163 Amendments (355,553) (86,926) Actuarial loss (gain) 306,590 295,369 66,409 (5,904) Benefits paid (445,683) (435,286) (60,552) (54,623) -------------- -------------- ------------- ------------ Benefit obligation at end of year 2,866,504 2,814,176 559,705 581,493 -------------- -------------- ------------- ------------ Change in plan assets: Employer contributions 445,683 435,286 60,552 54,623 Benefits paid (445,683) (435,286) (60,552) (54,623) -------------- -------------- ------------- ------------ Fair value of plan assets at end of year 0 0 0 0 -------------- -------------- ------------- ------------ Funded status (2,866,504) (2,814,176) (559,705) (581,493) Unrecognized net actuarial loss 1,685,281 1,572,329 140,772 101,228 Unrecognized prior service cost (234,482) (259,175) (110,956) (33,642) -------------- -------------- ------------- ------------ Net amount recognized ($1,415,705) ($1,501,022) ($529,889) ($513,907) ============== ============== ============= ============ Amounts recognized in the balance sheet consist of: Accrued benefit liability ($2,866,504) ($2,814,176) ($529,889) ($513,907) Accumulated other comprehensive loss 1,450,799 1,313,154 -------------- -------------- ------------- ------------ Net amount recognized ($1,415,705) ($1,501,022) ($529,889) ($513,907) ============== ============== ============= ============ Additional disclosure items for the underfunded plans at December 31: Accumulated benefit obligation $2,866,504 $2,814,176 $559,705 $581,493 Projected benefit obligation 2,866,504 2,814,176 559,705 581,493 Fair value of plan assets N/A N/A N/A N/A Weighted average assumptions as of December 31: Discount rate 6.25% 6.5% 6.25% 6.5% Expected return on plan assets N/A N/A N/A N/A Rate of compensation increase N/A N/A N/A N/A
Assumed health care cost trend rates have a significant effect on the amounts reported for the postretirement benefits plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1-Percentage- 1-Percentage- Point Increase Point Decrease ----------------------------- Effect on total service and interest cost components $6,012 ($5,207) Effect on postretirement benefit obligation $51,493 ($44,776)
84 All measures of the accumulated postretirement benefit obligation and the net periodic postretirement benefit cost included in this footnote do not reflect the effect of recently enacted legislation. On December 7, 2003, a new law was enacted named the Medicare Prescription Drug Improvement and Modernization Act of 2003. Specific authoritative guidance on the accounting for the federal subsidy possibly payable under the Act is pending and that guidance, when issued, could require the Company to change previously reported information. The contractual pension and postretirement benefit plans are non-funded plans, employer contributions equal benefit payments. The Company estimates that the contractual payments for 2004 will be as follows: Contractual pension benefit payments $457,666 Contractual postretirement benefit payments 59,066 17. DEFINED BENEFIT PLAN The Company has a noncontributory defined benefit pension plan, which covers substantially all of its employees. The plan provides monthly retirement benefits commencing at age 65. The monthly benefit is equal to the sum of (1) 7.15% of average monthly compensation multiplied by the total number of plan years of service (up to a maximum of 10 years), plus (2) .62% of such average monthly compensation in excess of one-twelfth of covered compensation multiplied by the total number of plan years of service (up to a maximum of 10 years). The Company makes annual contributions that meet the minimum funding requirements and the maximum contribution limitations under the Internal Revenue Code. Periodic pension costs are reflected in general and administrative expenses. The Company uses a December 31 measurement date for the plan.
Year Ended December 31, ----------------------------------------------- 2003 2002 2001 --------- --------- --------- Components of net periodic benefit cost: Service cost $ 492,248 $ 447,845 $ 417,007 Interest cost 281,685 231,702 196,421 Expected return on plan assets (217,244) (185,287) (189,683) Amortization of prior service cost 12,616 12,616 12,616 Amortization of accumulated loss (gain) 65,757 1,124 (4,785) --------- --------- --------- Net periodic benefit cost $ 635,062 $ 508,000 $ 431,576 ========= ========= =========
85 Weighted average assumptions as of January 1, 2003 2002 2001 ---- ---- ---- Discount rate 6.5% 7% 7% Expected return on plan assets 7% 7% 7% Rate of compensation increase 5% 5% 5% The following sets forth the plan's funded status and amount recognized in the Company's consolidated balance sheets:
December 31, ------------ 2003 2002 ---- ---- Change in benefit obligation: Benefit obligation at beginning of year $ 4,333,619 $ 3,534,826 Service cost 492,248 447,845 Interest cost 281,685 231,702 Actuarial loss 377,879 534,268 Benefits paid (415,022) ----------- ----------- Benefit obligation at end of year 5,485,431 4,333,619 ----------- ----------- Change in plan assets: Fair value of plan assets at beginning of year 2,498,859 2,478,800 Actual return on plan assets 517,917 (305,455) Employer contributions 1,070,951 740,536 Benefits paid (415,022) ----------- ----------- Fair value of plan assets at end of year 4,087,727 2,498,859 ----------- ----------- Funded status actuarial (1,397,704) (1,834,760) Unrecognized prior service cost 143,822 156,438 Unrecognized loss 1,404,857 1,393,408 ----------- ----------- Net amount recognized $ 150,975 $ (284,914) =========== =========== Amounts recognized in the balance sheet consist of: Accrued benefit liability $(1,393,341) $(1,772,630) Intangible asset 143,822 156,438 Accumulated other comprehensive loss 1,400,494 1,331,278 ----------- ----------- Net amount recognized $ 150,975 $ (284,914) =========== ===========
86 Additional disclosure items for the underfunded plan at December 31: 2003 2002 ---------- ---------- Accumulated benefit obligation $5,481,068 $4,271,489 Projected benefit obligation 5,485,431 4,333,619 Fair value of plan assets 4,087,727 2,498,859 Weighted-average assumptions as of December 31: 2003 2002 ----- ----- Discount rate 6.25% 6.5% Expected return on plan assets N/A N/A Rate of compensation increase 5% 5% The Company periodically reviews its assumptions for the rate of return on the plan's assets. The assumptions are based primarily on the long-term historical performance of the assets of the plan. Differences in the rates of return in the near term are recognized as gains or losses in the period that they occur. December 31, ------------ 2003 2002 ---- ---- Plan Assets: Cash and cash equivalents $ 168,030 $ 288,493 Securities available for sale 3,919,697 2,210,366 ---------- ---------- Total plan assets $4,087,727 $2,498,859 ========== ========== Presidential's weighted-average asset allocations by asset category are as follows: Equities 67% 58% Fixed income 28% 30% Cash and money market funds 5% 12% --- --- Total 100% 100% === === The Company has consistently applied what it believes to be an appropriate investment strategy for the defined benefit plan. The Company invests primarily in a) equities of listed corporations, b) fixed income funds consisting of corporate bonds, United States treasury bonds and government mortgage backed securities and c) cash and money market funds. 87 Cash Flows The Company's funding policy for the plan is based on contributions at the minimum and maximum amounts required by law. The Company expects to contribute $544,000 to the plan in 2004. 18. DIVIDEND REINVESTMENT AND SHARE PURCHASE PLAN Presidential maintains a Dividend Reinvestment and Share Purchase Plan (the "Plan"). Under the Plan, stockholders may reinvest cash dividends and make optional cash payments to purchase Class B common stock without incurring any brokerage commission or service charge. Additionally, the price of Class B common stock purchased with reinvested cash dividends will be discounted by 5% from the average of the high and low market prices of the five days immediately prior to the dividend payment date, as reported on the American Stock Exchange. Class B Common Shares issued under the Plan are summarized below: Net Proceeds Shares Received ------ -------- Total shares issued at January 1, 2001 381,129 $2,573,634 Shares issued during 2001 14,018 86,741 ------- ---------- Total shares issued at December 31, 2001 395,147 2,660,375 Shares issued during 2002 18,820 122,629 ------- ---------- Total shares issued at December 31, 2002 413,967 2,783,004 Shares issued during 2003 34,688 253,606 ------- ---------- Total shares issued at December 31, 2003 448,655 $3,036,610 ======= ========== 19. RELATED PARTY TRANSACTIONS In connection with the exercise of stock options in November, 1999, the Company loaned $367,500 in the aggregate to three of its officers to pay for the purchase of the stock. The recourse notes, secured by the stock, bear interest at 8% per annum, payable quarterly, and the principal is due at maturity on November 30, 2004. Presidential recognized interest income on these notes of $29,400 in each of the years ended December 31, 2003, 2002 and 2001. As shown in Note 3, the Company holds nonrecourse purchase money notes receivable from Ivy, relating to properties sold to Ivy in prior years, as well as nonrecourse notes receivable relating to loans made to Ivy in connection with Ivy's former cooperative conversion business. In the aggregate, the loans receivable from Ivy had a carrying amount of $378,524 as of December 31, 2003, and a net carrying amount of $316,573, after deducting discounts. Presidential received interest of $342,131, $345,090 and $195,444 from Ivy during 2003, 2002 and 2001, respectively, on these loans. 88 In addition, in 2003, 2002 and 2001, Presidential recognized $21,755, $782 and $8,343, respectively, of income representing the amortization of discounts on notes receivable. One of the notes has an outstanding principal balance of $4,770,050 at December 31, 2003. This note was received by the Company in 1991 for nonrecourse loans that had been previously written off by the Company. Accordingly, this note was recorded at zero except for a $155,584 portion of the note that was adequately secured and which was repaid in 2002. In 1996, the Company and Ivy agreed that the only payments required under the terms of the note would be in an amount equal to 25% of the operating cash flow (after provision for certain reserves) of Scorpio Entertainment, Inc. ("Scorpio"), a company owned by two of the owners of Ivy. Scorpio acts as a producer of theatrical productions. The Company received $275,750 of interest during 2003, $8,733 of principal payments and $195,819 of interest on this loan during 2002, and $15,961 of principal payments and $43,477 of interest during 2001. The Company does not expect to recover any material principal amounts on this note; amounts received from Scorpio will be applied to unpaid, unaccrued interest and recognized as income when received. At December 31, 2003, the unpaid and unaccrued interest was $3,497,417. All outstanding loans from Ivy at December 31, 2003 are current in accordance with their modified terms. Management believes that Presidential holds sufficient collateral to protect its interests in the loans that remain outstanding from Ivy to the extent of the net carrying value of these loans. The loans from Ivy were subject to various settlement agreements and modifications in previous years. Ivy is owned by three officers of the Company, who also hold beneficial ownership of an aggregate of approximately 47% of the outstanding shares of Class A common stock of the Company, which class of stock is entitled to elect two-thirds of the Board of Directors of the Company. Because of the relationship between the owners of Ivy and the Company, all transactions with Ivy are negotiated on behalf of the Company, and subject to approval, by a committee of three members of the Board of Directors with no affiliations with the owners of Ivy. 89 20. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS Estimated fair values of the Company's financial instruments as of December 31, 2003 and 2002 have been determined using available market information and various valuation estimation methodologies. Considerable judgement is required to interpret the effects on fair value of such items as future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. The estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. Also, the use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair values. The following table summarizes the estimated fair values of financial instruments:
December 31, 2003 December 31, 2002 ----------------- ----------------- (Amounts in thousands) Net Estimated Net Estimated Carrying Fair Carrying Fair Value (1) Value Value (1) Value ------- ------- ------- ------- Assets: Cash and cash equivalents $ 1,373 $ 1,373 $ 6,739 $ 6,739 Notes receivable- sold properties and other 21,375 28,901 17,218 24,383 Notes receivable- related parties 317 431 390 1,394 Liabilities: Mortgage debt 16,742 16,862 15,768 15,893
(1) Net carrying value is net of discounts and deferred gains where applicable. The fair value estimates presented above are based on pertinent information available to management as of December 31, 2003 and 2002. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued since December 31, 2003 and, therefore, current estimates of fair value may differ significantly from the amounts presented above. 90 Fair value methods and assumptions are as follows: Cash and Cash Equivalents - The estimated fair value approximates carrying value, due to the short maturity of these investments. Notes Receivable - The fair value of notes receivable has been estimated by discounting projected cash flows using current rates for similar notes receivable. Mortgage Debt - The fair value of mortgage debt has been estimated by discounting projected cash flows using current rates for similar debt. 21. FUTURE MINIMUM ANNUAL BASE RENTS Future minimum annual base rental revenue for the next five years for commercial real estate owned at December 31, 2003, and subject to non-cancelable operating leases is as follows: Year Ending December 31, 2004 $ 526,758 2005 211,487 2006 108,720 2007 29,203 2008 900 Thereafter 900 ---------- Total $ 877,968 ========== The above table assumes that all leases which expire are not renewed and tenant renewal options are not exercised, therefore neither renewal rentals nor rentals from replacement tenants are included. The above table does not reflect the annual base rental revenue for residential apartments owned, as the leases for residential apartment units are usually for one year terms. 91 22. QUARTERLY FINANCIAL INFORMATION - UNAUDITED (Amounts in thousands, except earnings per common share) Earnings Year Per Ended Net Common December 31 Revenues (1) Income (Loss) Share (4) - ----------- ------------ ------------- ---------- 2003 - ---- First $ 2,120 $ 818 $ 0.22 Second 2,111 21 0.01 Third 2,019 (2,572) (2) (0.68) (2) Fourth 2,194 (489) (2) (0.13) (2) 2002 - ---- First $ 2,145 $ 137 $ 0.04 Second 2,134 3,960 (3) 1.06 (3) Third 2,154 1,520 0.41 Fourth 2,083 483 0.13 (1) Amounts have been adjusted to give effect to the reclassification from revenues to discontinued operations for the Continental Gardens property and the Preston Lake Apartments property, which have been designated as held for sale. (2) Net loss for the third quarter of 2003 includes an impairment charge in the amount of $2,527,334 to reduce the carrying value of the assets related to discontinued operations of Preston Lake Apartments to their fair value less costs to sell. This estimate was based on offers received for the sale of that property at that time. During the fourth quarter of 2003, the Company recorded an additional impairment charge of $582,666 on that property as a result of a further decline in the estimated fair value less costs to sell. (3) Net income for the second quarter of 2002 includes the recognition of a previously deferred gain of $3,750,000 from the 1984 sale of the New Haven property as a result of a $3,750,000 partial principal payment received on the note. (4) Earnings per common share are computed independently for each of the quarters presented. Therefore, the sum of quarterly earnings per share may not equal the total computed for the year, as is the case in 2003 and 2002. 92
VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 SCHEDULE II - ------------------------------------------------------------------------------------------------------------------ BALANCE AT CHARGED BALANCE BEGINNING TO AT END CLASSIFICATION OF YEAR EXPENSES DEDUCTIONS (1) OF YEAR - ----------------------- --------------- -------------- ------------------- ------------------ 2003 ------ Discount on mortgage portfolio and valuation allowance for other receivables $1,362,483 $158,794 $231,085 $1,290,192 =============== ============== =================== ================== 2002 ------ Discount on mortgage portfolio and valuation allowance for other receivables $1,450,637 $78,602 $166,756 $1,362,483 =============== ============== =================== ================== 2001 ------ Discount on mortgage portfolio and valuation allowance for other receivables $1,832,092 $44,055 $425,510 $1,450,637 =============== ============== =================== ==================
(1) Represents amortization of discount on mortgages and notes using the interest method and also includes write-off of discounts on notes due to prepayments on notes. 93 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES - ------------------------------------------------ REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 2003 SCHEDULE III - --------------------------------------------------------------------------------
INITIAL COST TO COMPANY -------------------------- COSTS CAPITALIZED BUILDING SUBSEQUENT TO AMOUNT OF AND ACQUISITION PROPERTIES ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS (1) - -------------------- -------------------------- ------------- --------------- APARTMENT BUILDINGS Cambridge Green, Council Bluffs, IA $3,011,221 $200,000 $2,034,315 $1,577,912 Crown Court, New Haven, CT 2,497,492 168,000 3,077,445 58,481 Fairlawn Gardens Martinsburg, WV 2,160,997 71,408 657,805 1,266,353 Farrington Apartments Clearwater, FL 7,681,793 1,900,000 7,896,421 289,716 INDIVIDUAL COOPERATIVE APARTMENTS Emily Towers, Flushing, NY 6,704 44,811 3,762 Sherwood House, Long Beach, NY 7,316 51,930 (29,149)(2) 6300 Riverdale Ave., Riverdale, NY 10,164 66,032 (47,856)(2) 330 W.72nd St., New York, NY 20,891 28,013 Towne House, New Rochelle, NY 61,051 343,286 234,766 University Towers, New Haven, CT 1,375 54,735 2,856 COMMERCIAL BUILDINGS Building Industries Center, White Plains, NY 1,200,000 61,328 496,198 624,255 Mapletree Industrial Center, Palmer, MA 190,381 79,100 413,581 ------------- ----------- ------------- --------------- TOTAL $16,741,884 $2,587,337 $14,750,991 $4,394,677 ============= =========== ============= ===============
GROSS AMOUNT AT WHICH CARRIED AT CLOSE OF YEAR (3) (4) (5) -------------------------------------------- BUILDING AND ACCUMULATED PROPERTIES LAND IMPROVEMENTS TOTAL DEPRECIATION - ---------------------- ------------ --------------- ------------- ------------- APARTMENT BUILDINGS Cambridge Green, Council Bluffs, IA $200,000 $3,612,227 $3,812,227 $1,337,184 Crown Court, New Haven, CT 168,000 3,135,926 3,303,926 2,728,816 Fairlawn Gardens Martinsburg, WV 71,408 1,924,158 1,995,566 319,079 Farrington Apartments Clearwater, FL 1,900,000 8,186,137 10,086,137 966,940 INDIVIDUAL COOPERATIVE APARTMENTS Emily Towers, Flushing, NY 6,704 48,573 55,277 1,314 Sherwood House, Long Beach, NY 1,788 28,309 30,097 4,618 6300 Riverdale Ave., Riverdale, NY 3,677 24,663 28,340 5,419 330 W.72nd St., New York, NY 20,891 28,013 48,904 6,223 Towne House, New Rochelle, NY 81,204 557,899 639,103 113,070 University Towers, New Haven, CT 1,375 57,591 58,966 11,516 COMMERCIAL BUILDINGS Building Industries Center, White Plains, NY 61,328 1,120,453 1,181,781 1,014,922 Mapletree Industrial Center, Palmer, MA 79,100 413,581 492,681 108,434 ------------ --------------- ------------- ------------- TOTAL $2,595,475 $19,137,530 $21,733,005 $6,617,535 ============ =============== ============= =============
YEARS ON WHICH DE- PRECIATION IN LATEST INCOME STATE- DATE OF DATE MENT IS PROPERTIES CONSTRUCTION ACQUIRED COMPUTED - ---------------------- ------------- --------- ----------- APARTMENT BUILDINGS Cambridge Green, Council Bluffs, IA 1974 1992 50 Crown Court, New Haven, CT 1973 1973 40 Fairlawn Gardens Martinsburg, WV 1964 1996 50 Farrington Apartments Clearwater, FL 1973-1974 2000 35 INDIVIDUAL COOPERATIVE APARTMENTS Emily Towers, Flushing, NY 2003 31 1/2 Sherwood House, Long Beach, NY 1997 31 1/2 6300 Riverdale Ave., Riverdale, NY 1997 31 1/2 330 W.72nd St., New York, NY 1997 31 1/2 Towne House, New Rochelle, NY 1997 31 1/2 University Towers, New Haven, CT 1997 31 1/2 COMMERCIAL BUILDINGS Building Industries Center, White Plains, NY 1956 1966 25 Mapletree Industrial Center, Palmer, MA 1902-1966 1974 20 TOTAL
(1) Includes furniture and equipment of $166,860. (2) Includes sales of cooperative apartments. 94 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES - ------------------------------------------------ REAL ESTATE AND ACCUMULATED DEPRECIATION SCHEDULE III DECEMBER 31, 2003 (CONCLUDED) - -------------------------------------------------------------------------------- (3) The aggregate cost of real estate for Federal income tax purposes is $23,593,605 at December 31, 2003. (4) The reconciliations of the total cost of real estate at the beginning of each year with the total cost at the end of each year are as follows:
YEAR ENDED DECEMBER 31, ------------------------------------------------------------- 2003 2002 2001 -------------- -------------- ------------- Balance at the beginning of year $21,523,881 $21,266,029 $20,984,366 Additions during the year: Additions and improvements 239,961 280,864 281,663 -------------- -------------- ------------- 21,763,842 21,546,893 21,266,029 Deductions during the year: Dispositions 30,837 23,012 -------------- -------------- ------------- Balance at end of year $21,733,005 $21,523,881 $21,266,029 ============== ============== =============
(5) The reconciliations of the accumulated depreciation at the beginning of each year with the total shown at the end of each year are as follows:
YEAR ENDED DECEMBER 31, ------------------------------------------------------------- 2003 2002 2001 -------------- -------------- ------------- Balance at the beginning of year $6,041,944 $5,476,559 $4,929,137 Additions during the year: Depreciation charged to income 581,152 569,015 547,422 -------------- -------------- ------------- 6,623,096 6,045,574 5,476,559 Deductions during the year: Dispositions and replacements 5,561 3,630 -------------- -------------- ------------- Balance at end of year $6,617,535 $6,041,944 $5,476,559 ============== ============== =============
95 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES - ------------------------------------------------ MORTGAGE LOANS ON REAL ESTATE SCHEDULE IV DECEMBER 31, 2003 PAGE 1 - --------------------------------------------------------------------------------
PERIODIC INTEREST MATURITY PAYMENT DESCRIPTION RATE DATE TERMS ------------------------- ------------ ----------- ------------ First Mortgages: Apartment buildings: Greece, NY 6.45% 2006 (2) Sold Co-op Apartments: Flushing, NY (1 note) 8.00% 2004 (3) Long Beach, NY (1 note) 9.00% 2010 (4) New Rochelle, NY (8 notes) 7.75-9.50% 2004-2010 (3) (4) New York, NY (1 note) 5.50-4.375% 2016 (4) Total First Mortgage Loans Junior Mortgages: Apartment buildings: Balitimore, MD 10.50% 2008 (5) (2) (10) Bronx, NY 9.16% 2005 (6) Atlantic City, NJ ) 10.50% 2009 (7) (2) (10) Bergenfield, NJ ) South Bound Brook, NJ) Des Moines, IA 12.00% 2008 (2) New York, NY 10.17% 2009 (8) (2) Bedford, VA ) 11.50-11.00% 2013 (9) (2) (10) Blacksburg, VA ) Christiansburg, VA ) Harrisonburg, VA ) Roanoke, VA ) Rocky Mount, VA ) Salem, VA ) Total Junior Mortgage Loans Total Mortgage Loans
PRINCIPAL AMOUNT OF LOANS SUBJECT CARRYING TO DELINQUENT PRIOR FACE AMOUNT AMOUNT OF PRINCIPAL OR DESCRIPTION MORTGAGES OF MORTGAGE MORTGAGE (1) INTEREST ------------------------- ------------- ------------ ------------ --------------- First Mortgages: Apartment buildings: Greece, NY $ $6,000,000 $3,008,150 Sold Co-op Apartments: Flushing, NY (1 note) 16,999 16,999 Long Beach, NY (1 note) 6,204 6,204 New Rochelle, NY (8 notes) 148,174 147,390 New York, NY (1 note) 24,833 17,980 ------------- ------------ ------------ --------------- Total First Mortgage Loans 6,196,210 3,196,723 ------------- ------------ ------------ --------------- Junior Mortgages: Apartment buildings: Balitimore, MD 13,131,885 1,500,000 1,500,000 Bronx, NY 4,216,070 935,000 935,000 Atlantic City, NJ ) 6,438,598 6,875,000 5,835,009 Bergenfield, NJ ) 8,587,418 South Bound Brook, NJ) 3,108,262 Des Moines, IA 100,000 100,000 New York, NY 67,264,269 8,550,000 5,308,460 Bedford, VA ) 2,336,200 4,500,000 4,500,000 Blacksburg, VA ) 2,791,560 Christiansburg, VA ) 2,625,729 Harrisonburg, VA ) 3,713,959 Roanoke, VA ) 12,426,933 Rocky Mount, VA ) 495,180 Salem, VA ) 3,439,308 ------------- ------------ ------------ --------------- Total Junior Mortgage Loans 130,575,371 22,460,000 18,178,469 ------------- ------------ ------------ --------------- Total Mortgage Loans $130,575,371 $28,656,210 $21,375,192 ============= ============ ============ ===============
96 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES - ------------------------------------------------
MORTGAGE LOANS ON REAL ESTATE SCHEDULE IV DECEMBER 31, 2003 CONTINUED - ------------------------------------------------------------------------------------------------------------------------------------ Year Ended Year Ended Year Ended ---------------------------- ------------------------------- ------------------------------- December 31, 2003 December 31, 2002 December 31, 2001 ---------------------------- ------------------------------- ------------------------------- Balance at beginning of year $ $17,217,874 $ $15,995,237 $ $15,345,903 Additions during the year: New mortgage loans 6,000,000 1,775,000 1,100,000 Less: Discounts on additions ------------- --------------- ---------------- Net addition to carrying amount 6,000,000 1,775,000 1,100,000 Deductions during the year: Collections of principal 1,997,271 4,425,883 1,987,016 Less: Amortization of discounts 109,937 99,117 364,422 Deferred gains recognized 44,652 3,774,403 1,171,928 ------------- --------------- ---------------- Net reduction of carrying amount 1,842,682 552,363 450,666 --------------- ---------------- --------------- Balance at end of year $21,375,192 $17,217,874 $15,995,237 =============== ================ ===============
97 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES MORTGAGE LOANS ON REAL ESTATE SCHEDULE IV DECEMBER 31, 2003 CONTINUED 1) Carrying value is net of discounts and deferred gains. The aggregate net carrying value of this portfolio for tax purposes at December 31, 2003, is $13,374,826. 2) Entire principal due at Final Maturity Date. 3) Principal amortization each year with a balloon payment in the year of maturity. 4) Principal amortization each year through maturity. 5) In February, 2003, the Company made a $1,500,000 loan collateralized by ownership interests in Reisterstown Square Associates, LLC, which owns Reisterstown Apartments in Baltimore, Maryland and by a personal guarantee from the borrower. The loan matures on January 31, 2008 and has an annual interest rate of 10.50% per annum until January 31, 2005. Thereafter the interest rate changes every six months to a rate equal to 800 basis points above the six month LIBOR rate, with a minimum rate of 10.50% per annum. 6) In March, 2003, in response to the borrower's decision to prepay this note, the Company modified the terms of the note, agreeing to give the borrower annual options to extend the maturity date of the note from November 29, 2005 to November 29, 2008 and to fix the interest rate at 9.16% per annum until maturity. The Company will receive principal payments of $25,000 each on January 1, 2004 (received) and November 29, 2004. If the borrower exercises its options to extend the note, the Company will receive principal payments of $100,000 on each of November 30, 2005, November 30, 2006 and November 30, 2007. The note is collateralized by unsold cooperative apartments at the Mark Terrace property and as the apartments are sold, the Company receives principal payments ranging from $20,000 to $35,000 per unit depending upon the size of the unit. 7) The Company obtained security interests in the ownership interests in the entities that own three apartment properties located in New Jersey. The Company's security interests collateralize the following notes: 98 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES MORTGAGE LOANS ON REAL ESTATE SCHEDULE IV DECEMBER 31, 2003 CONTINUED (i) The $4,000,000 note obtained from the 1999 sale of the Fairfield Towers Mortgages. The note has an interest rate of 10.50% per annum and matures on February 18, 2009. (ii) In July, 2003, the Company modified its $1,100,000 loan, reducing the interest rate from 13% per annum to 10.50% per annum until June 30, 2006. Thereafter on July 1, 2006 and July 1, 2008 the interest rate changes to a rate equal to 900 basis points above the six month LIBOR rate in effect immediately prior to the change, with a minimum rate of 10.50% per annum. This loan was modified to delay the borrower's right to prepay the note and, in consideration thereof, to reduce the interest rate. The loan is collateralized by the three apartment properties discussed above and by a $750,000 personal guarantee by the borrower's principal. The note matures on February 18, 2009. (iii) In July, 2003, the Company also modified its $1,775,000 loan. At the Company's request, the maturity date of the loan was extended from July 19, 2003 to February 18, 2009 and the interest rate was reduced from 11.50% per annum to 10.50% per annum until June 30, 2006. Thereafter on July 1, 2006 and July 1, 2008 the interest rate changes to a rate equal to 900 basis points above the six month LIBOR rate in effect immediately prior to the change, with a minimum rate of 10.50% per annum. This loan was modified to provide for reduced interest rates in order to extend the maturity date and keep the loan outstanding at an attractive rate of interest. This loan is also collateralized by the three apartment properties discussed above and by an $887,500 personal guarantee by the borrower's principal. 99 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES MORTGAGE LOANS ON REAL ESTATE SCHEDULE IV DECEMBER 31, 2003 CONCLUDED 8) In April, 2002, the $12,300,000 note secured by a second mortgage on the Encore Apartments in New York, New York was modified at the Company's request. Under the terms of the modification, Presidential received a principal repayment of $3,750,000 and additional interest of $369,000 (which was due under the terms of the original note). The $8,550,000 balance of the note matures on April 30, 2009. The interest rate on the note is 9% per annum from July 1, 2002 through April 18, 2004, 10% per annum from April 19, 2004 through April 18, 2007 and 10.5% per annum from April 19, 2007 through maturity, with additional interest of $171,000 due at maturity. The effective interest rate over the term of the note is 10.17% per annum. The $8,550,000 note is secured by a second mortgage on the Encore apartment property and by a pledge of the ownership interests in the entity owning the Encore Apartments. 9) In October, 2003, the Company made a $4,500,000 loan collateralized by ownership interests in nine apartment properties located in the Commonwealth of Virginia. The loan matures on October 23, 2013 and basic interest accrues at an annual rate of 11.50% through October 23, 2007 and at 11% per annum from October 24, 2007 to maturity. For the first five years of the loan, a portion of the basic interest equal to 2% per annum is deferred and is payable on the fifth anniversary of the loan. In addition, to the basic interest accruing on the loan, the Company is entitled to receive additional interest equal to 25% of any net sales or refinancing proceeds resulting from sales or refinancing of the nine properties. 10) The aggregate net carrying value of these loans is approximately $11,835,000 and are made to companies controlled by one individual. In addition to being collateralized by real estate interests some, but not all, of these loans are guaranteed in whole or in part by that individual. At December 31, 2003, all of these loans are in good standing. 100 EX-10.10 3 v01924_ex10-10.txt Exhibit 10.10 FIFTH MODIFICATION OF EMPLOYMENT AGREEMENT AGREEMENT, made as of the 1st day of January, 2003, by and between PRESIDENTIAL REALTY CORPORATION, a Delaware corporation having offices at 180 South Broadway, White Plains, New York 10605 (the "Company") and ELIZABETH DELGADO, residing at 90 Ramsey Avenue, Yonkers, New York 10701 (the "Employee"). W I T N E S S E T H: WHEREAS, the Company and Employee have entered into an Employment Contract dated as of January 1, 1989, (the "Employment Agreement"), which Employment Agreement was modified by a First Modification to Employment Agreement dated January 1, 1992, a Second Modification to Employment Agreement dated January 1, 1995, a Third Modification of Employment Agreement dated as of January 1, 1998; and a Fourth Modification Agreement dated as of January 1, 2000; and WHEREAS, pursuant to mutual agreement and pursuant to authorization of the Compensation Committee of the Board of Directors of the Company, the parties desire to modify the Employment Agreement as of January 1, 2003 as provided for herein. NOW, THEREFORE, in consideration of the mutual promises contained herein and for other good and valuable consideration, the parties hereto agree that the Employment Agreement is hereby modified, effective January 1, 2003, to read in full as follows: WHEREAS, Employee has been employed by the Company since 1975 and has served as Treasurer since June 1, 1986; and WHEREAS, the Company and Employee desire that Employee shall continue to render services to the Company. NOW, THEREFORE, in consideration of the premises and mutual covenants hereinafter contained, the parties hereto agree as follows: I. The Company hereby employs the Employee, and the Employee hereby accepts employment, upon the terms and condition hereinafter set forth. II. The Employee is hereby employed for an active period and for a retirement period, upon the terms and conditions hereinafter set forth. III. The Active Period A. The active period shall commence on January 1, 2003 and terminate on December 31, 2005 unless sooner terminated as provided herein or unless such termination date is postponed by mutual agreement between the Company and the Employee. B. During the fiscal year 2003, the Company agrees to pay to Employee a salary of $117,503. C. During each of the fiscal years included within the active period subsequent to the fiscal year 2003, the Company shall pay to Employee such salary as may be authorized and directed by the Company's Board of Directors; provided, however, that in no event shall the Directors so authorize a salary less than that established for the fiscal year 2003 as aforesaid. Salary is to be established each year by the Compensation Committee of the Board of Directors, taking into account inflation and the general health of the Company. IV. During the Active Period: A. In general, Employee shall continue to perform for the Company services substantially of the same character as those heretofore performed by her; that is, she shall perform the duties reasonably required to be performed by the Treasurer and Secretary. B. Employee shall travel when necessary on the affairs of the Company. However, Employee shall continue to be assigned, as heretofore, to the principal executive offices of the Company. The Company shall maintain and make available to Employee the free use of a suitable automobile. C. Employee shall be furnished with an office and with such other facilities and services as are suitable to her position and adequate for the performance of her duties. D. The Company shall promptly pay, or reimburse the Employee for, all reasonable expenses incurred by Employee in connection with the performance of her duties to the Company hereunder. E. Employee shall devote her full time and efforts during normal business days and hours to the business and affairs of the Company (allowing reasonable time for vacations). She shall not engage in or render services to or become associated with any other business; provided, however, that Employee may in her spare time engage in other business activity which does not interfere with the performance of her duties hereunder and which is not competitive with, or does not otherwise adversely affect, the business of the Company. Nothing contained in this subparagraph E shall be construed to prevent Employee from absenting herself from the Company's offices, from time to time, during normal business days and hours, for purposes of engaging in recreational activity, provided that such absences shall not interfere with the performance by the Employee of her duties hereunder. V. Physical or Mental Incapacity: If at any time during the active period, the Employee becomes so physically or mentally incapacitated as to be unable to attend to her normal duties, she shall nevertheless continue to receive her full compensation until such time as said incapacity shall have endured for one year from the onset thereof, regardless of whether or not the active period of employment shall in the meantime expire by its terms. Thereafter, during the balance, if any, of the active period of employment under this contract, Employee shall receive compensation ("Disability half-pay") at the rate of one-half (1/2) of the full rate of compensation she was receiving at the onset of her incapacity until such time as the Employee shall be able and eligible to resume her normal duties at full compensation with the Company. VI. The Retirement Period Except as otherwise provided herein, the retirement period shall commence on December 31, 2008. The commencement of the retirement period may be postponed by mutual agreement between the Company and the Employee. The retirement period shall end on the day of the Employee's death. VII. A. During the Retirement Period. Subject to the provision of subsection D below, during the retirement period, the Company agrees to pay to Employee each year an amount equal to the "Percentage" (as hereinafter defined) times the higher of the two following alternative figures: (1) An average figure which is the result obtained by adding the three highest amounts of annual total compensation paid, on a fiscal year basis, to the Employee during Employee's active period of employment and dividing such addition by three. Annual total compensation for each of such three fiscal years being averaged as aforesaid shall be deemed (a) to include salary plus the dollar value of any bonus paid to the Employee on account of (i.e., attributed to) her services during that fiscal year, even though (in the case of any bonus paid in stock) delivery of the certificates representing any stock bonus may have occurred subsequent to the end of said fiscal year. For the purposes of this Paragraph VII A, the value of any stock bonus shall be its market price as of the close of business on the date of the receipt of said stock by the Employee; Or (2) $117,503 The "Percentage" shall be the sum of (i) thirty-one and four tenths (31.4%) per cent plus (ii) two and six tenths (2.6%) per cent times the number of years of active employment completed by the Employment subsequent to December 31, 1997. B. For purposes of the calculation, as contemplated by subparagraph A of this Paragraph VII, of payments to Employee during the retirement period, the first year of physical or mental incapacity, as described in Paragraph V above, shall be deemed to constitute active period employment hereunder. C. Inflation having become a stubbornly pervasive fact of the American economy, and in a effort to offset partially the hardship caused thereby, the retirement stipends provided for herein shall be increased yearly after the first year of retirement by 50% of the increase in the Consumer Price Index during the prior year (December to December) or by 5%, whichever is less. D. Notwithstanding anything else to the contrary contained herein (i) the amount to be paid by the Company to the Employee each year during the retirement period pursuant to this Section VII shall not exceed $50,046; and (ii) any payments to be made to Employee under this Section VII shall be reduced dollar for dollar by any payments payable to the Employee as a Participant under the Company's Defined Benefit Pension Plan on the assumption that the Employee elects to receive the individual benefit payable only to Employee during the lifetime of Employee (and not a joint and several benefit or a lump sum payment). E. At the commencement of the retirement period, the Company shall transfer to the Employee the automobile than being made available to Employee by the Company (if owned by the Company) in accordance with the provisions in Paragraph IV B, above; provided, however, that if the then undepreciated value of such automobile on the books of the Company shall exceed $6,000, the Employee shall pay to the Company, as the sole consideration for such transfer, a cash amount equal to such excess. VIII. Payments Noncontestable. Employee's right to receive the payments provided for by Paragraph VII above shall not be contestable by the Company. IX. Life Insurance and Medical Policies At all times during the active period (including in said active period any periods during which the Employee shall be receiving compensation, even though incapacitated, as set forth in Paragraph V above), and during the retirement period, to the extent permitted by the insurance companies, the Company shall to the extent available maintain in full force and effect, and upon bases at least as favorable to the Employee as those existing for the benefit of Employee at the time of retirement, the group policies, hospitalization insurance policy and the major medical policy. X. Miscellaneous. A. Cash compensation payable to the Employee hereunder shall be paid in installments in accordance with the general practice of the Company relating to the payment of salaries to its employees, but in any event not less often than monthly. B. If the Company shall, at any time, be merged or consolidated into or with any other corporation or if substantially all the assets of the Company are transferred to another corporation, the provisions of this Agreement shall be binding upon and inure to the benefit of the Company resulting from such merger or consolidation or to which such assets shall be transferred, and this provision shall apply in the event of any subsequent merger, consolidation or transfer. C. In the event that the Company elects to liquidate its assets and terminate its business, the Company shall have the right at any time after implementation of such action on ninety (90) days' prior written notice to Employee to terminate the active period. D. The rights and benefits of Employee under this Agreement are personal to her, and no such right or benefit shall be subject to voluntary or involuntary alienation, assignment or transfer." IN WITNESS WHEREOF, the parties hereto have hereunto executed this Second Modification to Employment Agreement as of the day and year first above written. BY: /s/ Elizabeth Delgado ------------------------------- Elizabeth Delgado, Treasurer PRESIDENTIAL REALTY CORPORATION BY: /s/ Jeffrey F. Joseph ------------------------------- Jeffrey F. Joseph, President EX-10.12 4 v01924_ex10-12.txt Exhibit 10.12 EGTRRA GOOD FAITH AMENDMENT TO THE PRESIDENTIAL REALTY CORPORATION DEFINED BENEFIT PLAN WHEREAS, Presidential Realty Corporation (the "Employer") heretofore established a defined benefit pension plan known as the Presidential Realty Corporation Defined Benefit Plan (the "Plan") in recognition of the contribution made to its successful operation by its employees and for the exclusive benefit of its eligible employees; and WHEREAS, the Employer desires to amend the Plan to incorporate certain of the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"); and WHEREAS, under the terms of the Plan, the Employer has the ability to amend the Plan; NOW, THEREFORE, effective as of the first day of the Plan Year commencing after December 31, 2001, except as otherwise herein provided, the Employer, in accordance with the provisions of the Plan pertaining to amendments thereof, hereby amends the Plan to provide as follows: Section 1: Preamble 1.1 This Amendment of the Plan is adopted to reflect certain provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"), the model amendment of Revenue Ruling 2001-62 and other relevant federal law. This Amendment is intended as good faith compliance with the requirements of EGTRRA and the model amendment provisions of Revenue Ruling 2001-62 and is to be construed in accordance with EGTRRA, the model amendment of Revenue Ruling 2001-62 and guidance issued thereunder. Except as otherwise provided, this Amendment shall be effective as of the first day of the first Plan Year beginning after December 31, 2001. 1.2 This Amendment shall supersede the provisions of the Plan to the extent those provisions are inconsistent with the provisions of this amendment. The Articles in this amendment are numbered independently of the Plan document, except where a reference to the Plan is clearly indicated. Terms referenced in this Amendment may also be defined independently of the Plan document. Section 2: Limitations on Benefits 2.1 This Section 2 shall be effective for "limitation years" ending after December 31, 2001. 2.2 Benefit increases resulting from the increase in the limitations of Code Section 415(b) will be provided to all current Participants who are actively employed (with benefits limited by Code Section 415(b)) who have an Accrued Benefit under the Plan immediately prior to the effective date of this Section (other than an Accrued Benefit resulting from a benefit increase solely as a result of the increases in limitations under Code Section 415(b)). 1 2.3 Definitions. (a) Defined benefit dollar limitation. The defined benefit dollar limitation is $160,000, as adjusted, effective January 1 of each year, under Code Section 415(d) in such manner as the Secretary shall prescribe, and payable in the form of a straight life annuity. A limitation as adjusted under Code Section 415(d) will apply to "limitation years" ending with or within the calendar year for which the adjustment applies. (b) Maximum permissible benefit. The maximum permissible benefit is the lesser of the defined benefit dollar limitation or the defined benefit compensation limitation (both adjusted where required, as provided in paragraph (1) and, if applicable, in paragraphs (2) or (3) of this Amendment subsection 2.3. (1) If the Participant has fewer than 10 years of participation in the Plan, the defined benefit dollar limitation shall be multiplied by a fraction, (i) the numerator of which is the number of years (or part thereof) of participation in the Plan and (ii) the denominator of which is 10. In the case of a Participant who has fewer than 10 years of service with the employer, the defined benefit compensation limitation shall be multiplied by a fraction, (i) the numerator of which is the number of years (or part thereof) of service with the employer and (ii) the denominator of which is 10. (2) If the benefit of a Participant begins prior to age 62, the defined benefit dollar limitation applicable to the Participant at such earlier age is an annual benefit payable in the form of a straight life annuity beginning at the earlier age that is the actuarial equivalent of the defined benefit dollar limitation applicable to the Participant at age 62 (adjusted under (1) above, if required). The defined benefit dollar limitation applicable at an age prior to age 62 is determined as the lesser of (i) the actuarial equivalent (at such age) of the defined benefit dollar limitation computed using the interest rate and mortality table (or other tabular factor) specified in the Plan and (ii) the actuarial equivalent (at such age) of the defined benefit dollar limitation computed using a 5 percent interest rate and the applicable mortality table as defined in the Plan. Any decrease in the defined benefit dollar limitation determined in accordance with this paragraph (2) shall not reflect a mortality decrement if benefits are not forfeited upon the death of the Participant. If any benefits are forfeited upon death, the full mortality decrement is taken into account. (3) If the benefit of a Participant begins after the Participant attains age 65, the defined benefit dollar limitation applicable to the Participant at the later age is the annual benefit payable in the form of a straight life annuity beginning at the later age that is actuarially equivalent to the defined benefit dollar limitation applicable to the Participant at age 65 (adjusted under (1) above, if required). The actuarial equivalent of the defined benefit dollar limitation applicable at an age after age 65 is determined as (i) the lesser of the actuarial equivalent (at such age) of the defined benefit dollar limitation computed using the interest rate and mortality table (or other tabular factor) specified in the Plan and (ii) the actuarial equivalent (at such age) of the defined benefit dollar limitation computed using a 5 percent interest rate assumption and the applicable mortality table as defined in the Plan. For these purposes, mortality between age 65 and the age at which benefits commence shall be ignored. 2 Section 3: Increase in Compensation Limits 3.1 The annual Compensation of each Participant taken into account in determining benefit accruals in any Plan Year beginning after December 31, 2001, shall not exceed $200,000. Annual Compensation means Compensation during the Plan Year or such other consecutive 12-month period over which Compensation is otherwise determined under the Plan (the determination period). For purposes of determining benefit accruals in a Plan Year beginning after December 31, 2001, Compensation for any prior determination period shall be limited to the applicable dollar limitation then in effect for such determination period pursuant to the provisions of Code Section 401(a)(17)(A). 3.2 Cost-of-living adjustment. The $200,000 limit on annual Compensation described in Section 3.1 hereof shall be adjusted for cost-of-living increases in accordance with Code Section 401(a)(17)(B). The cost-of-living adjustment in effect for a calendar year applies to annual Compensation for the determination period that begins with or within such calendar year. Section 4: Modification of Top Heavy Rules 4.1 This Section 4 shall apply for purposes of determining whether the Plan is a Top Heavy plan under Code Section 416(g) for Plan Years beginning after December 31, 2001, and whether the Plan satisfies the minimum benefits requirements of Code Section 416(c) for such years. 4.2 Determination of top-heavy status. (a) Key Employee. Key Employee means any Employee or former Employee (including any deceased Employee) who at any time during the Plan Year that includes the determination date was an officer of the Employer having annual Compensation greater than $130,000 (as adjusted under Code Section 416(i)(1) for Plan Years beginning after December 31, 2002), a 5-percent owner of the Employer, or a 1-percent owner of the Employer having annual Compensation of more than $150,000. For this purpose, annual Compensation means compensation within the meaning of Code Section 415(c)(3). The determination of who is a Key Employee will be made in accordance with Code Section 416(i)(1) and the applicable regulations and other guidance of general applicability issued thereunder. (b) Determination of present values and amounts. This Amendment subsection (b) shall apply for purposes of determining the present values of accrued benefits and the amounts of account balances of Employees as of the determination date. 3 (1) Distributions during year ending on the determination date. The present values of accrued benefits and the amounts of account balances of an Employee as of the determination date shall be increased by the distributions made with respect to the Employee under the Plan and any plan aggregated with the Plan under Code Section 416(g)(2) during the 1-year period ending on the determination date. The preceding sentence shall also apply to distributions under a terminated plan which, had it not been terminated, would have been aggregated with the Plan under Code Section 416(g)(2)(A)(i). In the case of a distribution made for a reason other than separation from service, death, or disability, this provision shall be applied by substituting "5-year period" for "1-year period." (2) Employees not performing services during year ending on the determination date. The accrued benefits and accounts of any individual who has not performed services for the Employer during the 1-year period ending on the determination date shall not be taken into account. 4.3 For purposes of satisfying the minimum benefit requirements of Code Section 416(c)(1) and the Plan, in determining years of service with the Employer, any service with the Employer shall be disregarded to the extent that such service occurs during a Plan Year when the Plan benefits (within the meaning of Code Section 410(b)) no Key Employee or former Key Employee. Section 5: Direct Rollover of Lump Sum Plan Distributions 5.1 This Amendment Section 5 shall apply to distributions made after December 31, 2001. 5.2 For purposes of the Plan's direct rollover provisions, an eligible rollover distribution shall also include Participant after-tax contributions, if any, and an eligible retirement plan shall also mean an annuity contract described in Code Section 403(b) and an eligible plan under Code Section 457(b) which is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state and which agrees to separately account for amounts transferred into such plan from this Plan. The definition of eligible retirement plan shall also apply in the case of a distribution to a surviving spouse, or to a spouse or former spouse who is the alternate payee under a qualified domestic relation order, as defined in Code Section 414(p). Section 6: Applicable Mortality Table 6.1 This Amendment Section 6 shall apply to distributions with Annuity Starting Dates on or after December 31, 2002. 6.2 Notwithstanding any other Plan provisions to the contrary, the Applicable Mortality Table used for purposes of adjusting any benefit or limitation under Code Section 415(b)(2)(B), (C), or (D) and the Applicable Mortality Table used for purposes of satisfying the requirements of Code Section 417(e) is the table prescribed in Rev. Rul. 2001-62. 6.3 For any distribution with an Annuity Starting Date on or after the effective date of this Section and before the adoption date of this Section, if application of the amendment as of the Annuity Starting Date would have caused a reduction in the amount of any distribution, such reduction is not reflected in any payments made before the adoption date of this Section. However, the amount of any such reduction that is required under Code Section 415(b)(2)(B) must be reflected actuarially over any remaining payments to the Participant. 4 IN WITNESS WHEREOF, the Employer has caused this Amendment to be executed by a duly authorized person this 30th day of December 30, 2002. PRESIDENTIAL REALTY CORPORATION By: /s/ Jeffrey F. Joseph Title: President 5 EX-10.13 5 v01924_ex10-13.txt Exhibit 10.13 PRESIDENTIAL REALTY CORPORATION DEFINED BENEFIT PLAN TABLE OF CONTENTS ARTICLE I DEFINITIONS ARTICLE II ADMINISTRATION 2.1 POWERS AND RESPONSIBILITIES OF THE EMPLOYER...........................13 2.2 DESIGNATION OF ADMINISTRATIVE AUTHORITY...............................14 2.3 POWERS AND DUTIES OF THE ADMINISTRATOR................................14 2.4 RECORDS AND REPORTS...................................................15 2.5 APPOINTMENT OF ADVISERS...............................................16 2.6 PAYMENT OF EXPENSES...................................................16 2.7 CLAIMS PROCEDURE......................................................16 2.8 CLAIMS REVIEW PROCEDURE...............................................16 ARTICLE III ELIGIBILITY 3.1 CONDITIONS OF ELIGIBILITY.............................................17 3.2 EFFECTIVE DATE OF PARTICIPATION.......................................17 3.3 DETERMINATION OF ELIGIBILITY..........................................18 3.4 TERMINATION OF ELIGIBILITY............................................18 3.5 REHIRED EMPLOYEES AND BREAKS IN SERVICE...............................18 3.6 ELECTION NOT TO PARTICIPATE...........................................19 ARTICLE IV CONTRIBUTION AND VALUATION 4.1 PAYMENT OF CONTRIBUTIONS..............................................19 4.2 ACTUARIAL METHODS.....................................................19 4.3 QUALIFIED MILITARY SERVICE............................................20 ARTICLE V BENEFITS 5.1 RETIREMENT BENEFITS...................................................20 5.2 MINIMUM BENEFIT REQUIREMENT FOR TOP HEAVY PLAN........................22 5.3 PAYMENT OF RETIREMENT BENEFITS........................................23 5.4 DISABILITY RETIREMENT BENEFITS........................................23 5.5 DEATH BENEFITS........................................................23 5.6 TERMINATION OF EMPLOYMENT BEFORE RETIREMENT...........................26 5.7 DISTRIBUTION OF BENEFITS..............................................28 5.8 DISTRIBUTION OF BENEFITS UPON DEATH...................................33 5.9 TIME OF SEGREGATION OR DISTRIBUTION...................................36 5.10 DISTRIBUTION FOR MINOR OR INCOMPETENT BENEFICIARY.....................37 5.11 LOCATION OF PARTICIPANT OR BENEFICIARY UNKNOWN........................37 5.12 EFFECT OF SOCIAL SECURITY ACT.........................................37 5.13 LIMITATIONS ON DISTRIBUTIONS..........................................37 5.14 QUALIFIED DOMESTIC RELATIONS ORDER DISTRIBUTION.......................38 5.15 LIMITATION OF BENEFITS ON TERMINATION.................................38 ARTICLE VI CODE SECTION 415 LIMITATIONS 6.1 ANNUAL BENEFIT........................................................39 6.2 MAXIMUM ANNUAL BENEFIT................................................40 6.3 ADJUSTMENTS TO ANNUAL BENEFIT AND LIMITATIONS.........................41 6.4 ANNUAL BENEFIT NOT IN EXCESS OF $10,000...............................42 6.5 PARTICIPATION OR SERVICE REDUCTIONS...................................42 6.6 ELIMINATION OF MULTIPLE PLAN REDUCTION................................43 ARTICLE VII TRUSTEE 7.1 BASIC RESPONSIBILITIES OF THE TRUSTEE.................................43 7.2 INVESTMENT POWERS AND DUTIES OF THE TRUSTEE...........................44 7.3 OTHER POWERS OF THE TRUSTEE...........................................44 7.4 DUTIES OF THE TRUSTEE REGARDING PAYMENTS..............................46 7.5 TRUSTEE'S COMPENSATION AND EXPENSES AND TAXES.........................47 7.6 ANNUAL REPORT OF THE TRUSTEE..........................................47 7.7 AUDIT ................................................................48 7.8 RESIGNATION, REMOVAL AND SUCCESSION OF TRUSTEE........................48 7.9 TRANSFER OF INTEREST..................................................49 7.10 TRUSTEE INDEMNIFICATION...............................................49 7.11 DIRECT ROLLOVER.......................................................49 ARTICLE VIII PLAN AMENDMENT 8.1 AMENDMENT.............................................................50 ARTICLE IX PLAN TERMINATION 9.1 TERMINATION...........................................................51 9.2 LIMITATION OF BENEFITS ON PLAN TERMINATION............................54 ARTICLE X MERGER, CONSOLIDATION OR TRANSFER OF ASSETS 10.1 REQUIREMENTS..........................................................54 ARTICLE XI TOP HEAVY 11.1 TOP HEAVY PLAN REQUIREMENTS...........................................55 11.2 DETERMINATION OF TOP HEAVY STATUS.....................................55 ARTICLE XII MISCELLANEOUS 12.1 PARTICIPANT'S RIGHTS..................................................58 12.2 ALIENATION............................................................58 12.3 CONSTRUCTION OF PLAN..................................................60 12.4 GENDER AND NUMBER.....................................................60 12.5 LEGAL ACTION..........................................................60 12.6 PROHIBITION AGAINST DIVERSION OF FUNDS................................60 12.7 EMPLOYER'S AND TRUSTEE'S PROTECTIVE CLAUSE............................60 12.8 INSURER'S PROTECTIVE CLAUSE...........................................61 12.9 RECEIPT AND RELEASE FOR PAYMENTS......................................61 12.10 ACTION BY THE EMPLOYER................................................61 12.11 NAMED FIDUCIARIES AND ALLOCATION OF RESPONSIBILITY....................61 12.12 HEADINGS..............................................................62 12.13 APPROVAL BY INTERNAL REVENUE SERVICE..................................62 12.14 UNIFORMITY............................................................62 PRESIDENTIAL REALTY CORPORATION DEFINED BENEFIT PLAN THIS AGREEMENT, hereby made and entered into this 10th day of September , 2003, by and between Presidential Realty Corporation (herein referred to as the "Employer") and Robert Feder and Thomas Viertel (herein referred to as the "Trustee"). W I T N E S S E T H: WHEREAS, the Employer heretofore established a Pension Plan and Trust effective January 1, 1994, (hereinafter called the "Effective Date") known as Presidential Realty Corporation Defined Benefit Plan (herein referred to as the "Plan") in recognition of the contribution made to its successful operation by its employees and for the exclusive benefit of its eligible employees; and WHEREAS, under the terms of the Plan, the Employer has the ability to amend the Plan, provided the Trustee joins in such amendment if the provisions of the Plan affecting the Trustee are amended; WHEREAS, the Employer has previously adopted an "EGTRRA Good Faith Amendment, and such amendment shall remain as an amendment to this restated Plan as set forth below; NOW, THEREFORE, effective January 1, 1997, except as otherwise provided, the Employer and the Trustee in accordance with the provisions of the Plan pertaining to amendments thereof, hereby amend the Plan in its entirety and restate the Plan to provide as follows: ARTICLE I DEFINITIONS 1.1 "Accrued Benefit" means the retirement benefit a Participant is entitled to receive pursuant to the retirement benefit formula set forth in Section 5.1. In the event a Participant terminates employment prior to Normal Retirement Date, the Participant's Accrued Benefit shall be equal to the amount determined under the retirement benefit formula computed as of the Participant's date of termination of employment. Notwithstanding anything herein to the contrary, a Participant's Accrued Benefit attributable to the retirement benefit formula at the close of any Plan Year coinciding with or next following the Participant's attainment of Normal Retirement Age shall be equal to the monthly retirement benefit formula determined pursuant to Section 5.1(d) based upon service and Average Monthly Compensation determined at the close of any such Plan Year. Notwithstanding the above, a Participant's Accrued Benefit derived from Employer contributions shall not be less than the minimum Accrued Benefit, if any, provided pursuant to Section 5.2. 1 1.2 "Act" means the Employee Retirement Income Security Act of 1974, as it may be amended from time to time. 1.3 "Actuarial Equivalent" means a form of benefit differing in time, period, or manner of payment from a specific benefit provided under the Plan but having the same value when computed using Pre-Retirement Table: None; Post-Retirement Table: 1983 Group Annuity converted to Unisex and Pre-Retirement Interest: 8%; Post-Retirement Interest: Notwithstanding the foregoing, effective with the later of (1) the adoption date of an amendment that changes the interest rate or the mortality table assumptions, or (2) the first day of the Plan Year beginning in 1995, the mortality table and the interest rate for the purposes of determining an Actuarial Equivalent amount (other than nondecreasing life annuities payable for a period not less than the life of a Participant or, in the case of a Pre-Retirement Survivor Annuity, the life of the surviving spouse) shall be the "Applicable Mortality Table" and the "Applicable Interest Rate" described below. However, if prior to such effective date, the Plan used an interest rate other than the Pension Benefit Guaranty Corporation interest rate (or an interest rate or rates based on the Pension Benefit Guaranty Corporation interest rate) in determining the present value of a Participant's Accrued Benefit, the mortality table and the interest rate for the purposes of determining an Actuarial Equivalent amount (other than nondecreasing life annuities payable for a period not less than the life of a Participant or, in the case of a Pre-Retirement Survivor Annuity, the life of the surviving spouse) shall be the mortality table and the interest rate specified above or the "Applicable Mortality Table" and the "Applicable Interest Rate" described below, whichever produces the greater benefit: (a) The "Applicable Mortality Table" means the table prescribed by the Secretary of the Treasury. Such table shall be based on the prevailing commissioner's standard table (described in Code Section 807(d)(5)(A)) used to determine reserves for group annuity contracts issued on the date as of which present value is being determined (without regard to any other subparagraph of Code Section 807(d)(5)). (b) The "Applicable Interest Rate" means the annual rate of interest on 30-year Treasury securities determined as of the first calendar month preceding the first day of the Plan Year during which the Annuity Starting Date occurs. However, except as provided in Regulations, if a Plan amendment (including this amendment and restatement) changes the time for determining the "Applicable Interest Rate" (including an indirect change as a result of a change in the Plan Year), any distribution for which the Annuity Starting Date occurs in the one-year period commencing at the time the Plan amendment is effective (if the amendment is effective on or after the adoption date) must use the interest rate as provided under the terms of the Plan after the effective date of the amendment, determined at either the date for determining the interest rate before the amendment or the date for determining the interest rate after the amendment, whichever results in the larger distribution. If the Plan amendment is adopted retroactively (that is, the amendment is effective prior to the adoption date), the Plan must use the interest rate determination date resulting in the larger distribution for the period beginning with the effective date and ending one year after the adoption date. 2 Notwithstanding the above, if a benefit is distributed in a form other than a nondecreasing annuity payable for a period not less than the life of a Participant or, in the case of a Pre-Retirement Survivor Annuity, the life of the surviving spouse, the interest rate used in determining the Actuarial Equivalent of the portion of the excess/offset portion of the monthly retirement benefit pursuant to Section 5.1(a) shall not be less than the lesser of 7.5% or the "Applicable Interest Rate." In the case of a distribution (other than nondecreasing life annuities payable for a period not less than the life of a Participant or, in the case of a Pre-Retirement Survivor Annuity, the life of the surviving spouse) that was made in a Plan Year beginning after December 31, 1994, and before the later of (1) the adoption date of an amendment that changes the interest rate or the mortality table assumptions, or (2) the first day of the Plan Year beginning in 1995, the calculation shall be made by using the interest rate determined under the regulations of the Pension Benefit Guaranty Corporation for determining the present value of a lump sum distribution on plan termination that were in effect on September 1, 1993, and using the provisions of the Plan as in effect on the day before December 8, 1994; but only if such provisions of the Plan met the requirements of Code Section 417(e)(3) and Regulation 1.417(e)-1(d) as in effect on the day before December 8, 1994. In the event this Section is amended, the Actuarial Equivalent of a Participant's Accrued Benefit on or after the date of change shall be determined (unless otherwise permitted by law or Regulation) as the greater of (1) the Actuarial Equivalent of the Accrued Benefit as of the date of change computed on the old basis, or (2) the Actuarial Equivalent of the total Accrued Benefit computed on the new basis. 1.4 "Administrator" means the Employer unless another person or entity has been designated by the Employer pursuant to Section 2.2 to administer the Plan on behalf of the Employer. 1.5 "Affiliated Employer" means any corporation which is a member of a controlled group of corporations (as defined in Code Section 414(b)) which includes the Employer; any trade or business (whether or not incorporated) which is under common control (as defined in Code Section 414(c)) with the Employer; any organization (whether or not incorporated) which is a member of an affiliated service group (as defined in Code Section 414(m)) which includes the Employer; and any other entity required to be aggregated with the Employer pursuant to Regulations under Code Section 414(o). 1.6 "Aggregate Account" means, with respect to each Participant, the value of all accounts maintained on behalf of a Participant, whether attributable to Employer or Employee contributions, used to determine Top Heavy Plan status under the provisions of a defined contribution plan included in any Aggregation Group (as defined in Section 11.2). 1.7 "Anniversary Date" means January 1. 1.8 "Annuity Starting Date" means, with respect to any Participant, the first day of the first period for which an amount is paid as an annuity, or, in the case of a benefit not payable in the form of an annuity, the first day on which all events have occurred which entitles the Participant to such benefit. 3 1.9 "Average Monthly Compensation" means the monthly Compensation of a Participant averaged over the 5 consecutive Plan Years which produce the highest monthly average within the last ten (10) completed years of participation. If a Participant has less than 5 consecutive Plan Years of service from date of participation to date of termination, the Participant's Average Monthly Compensation will be based on the Participant's monthly Compensation during the Participant's months of service from date of participation to date of termination. Compensation subsequent to termination of participation pursuant to Section 3.4 shall not be recognized. 1.10 "Beneficiary" means the person (or entity) designated as provided in Section 5.5 to receive the benefits which are payable under the Plan upon or after the death of a Participant. 1.11 "Code" means the Internal Revenue Code of 1986, as amended or replaced from time to time. 1.12 "Compensation" with respect to any Participant means such Participant's wages for the Plan Year within the meaning of Code Section 3401(a) (for the purposes of income tax withholding at the source) but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Code Section 3401(a)(2)). Notwithstanding the foregoing, if compensation for any prior determination period is taken into account in determining a Participant's benefits for the current Plan Year, Compensation means compensation determined pursuant to the terms of the Plan then in effect. For purposes of this Section, the determination of Compensation shall be made by: (a) excluding (even if includible in gross income) reimbursements or other expense allowances, fringe benefits (cash or noncash), moving expenses, deferred compensation, and welfare benefits. (b) including amounts which are contributed by the Employer pursuant to a salary reduction agreement and which are not includible in the gross income of the Participant under Code Sections 125, 132(f)(4) for Plan Years beginning after December 31, 2000, 402(e)(3), 402(h)(1)(B), 403(b) or 457(b), and Employee contributions described in Code Section 414(h)(2) that are treated as Employer contributions. Compensation in excess of $150,000 (or such other amount provided in the Code) shall be disregarded. Such amount shall be adjusted for increases in the cost of living in accordance with Code Section 401(a)(17)(B), except that the dollar increase in effect on January 1 of any calendar year shall be effective for the Plan Years beginning with or within such calendar year. If Compensation for any prior determination period is taken into account in determining a Participant's benefits for the current Plan Year, the compensation for such prior determination period is subject to the applicable annual compensation limit in effect for that prior period. For this purpose, in determining benefits in Plan Years beginning on or after January 1, 1989, the annual compensation limit in effect for determination periods beginning before that date is $200,000 (or such other amount as adjusted for increases in the cost of living in accordance with Code Section 415(d) for determination periods beginning on or after January 1, 1989 and in accordance with Code Section 401(a)(17)(B) for determination periods beginning on or after January 1, 1994). For determination periods beginning prior to January 1, 1989, the $200,000 limit shall apply only to Top Heavy Plan Years and shall not be adjusted. For any short Plan Year the Compensation limit shall be an amount equal to the Compensation limit for the calendar year in which the Plan Year begins multiplied by the ratio obtained by dividing the number of full months in the short Plan Year by twelve (12). 4 For Plan Years beginning after December 31, 1996, for purposes of determining Compensation, the family member aggregation rules of Code Section 401(a)(17) and Code Section 414(q)(6) (as in effect prior to the Small Business Job Protection Act of 1996) are eliminated. In determining Average Monthly Compensation, the elimination of the family member aggregation rules are treated as having been in effect for earlier years. 1.13 "Contract" or "Policy" means any life insurance policy, retirement income policy or annuity contract (group or individual) issued pursuant to the terms of the Plan. In the event of any conflict between the terms of this Plan and the terms of any contract purchased hereunder, the Plan provisions shall control. 1.14 "Covered Compensation" with respect to any Participant for a Plan Year means the average (without indexing) of the Taxable Wage Bases in effect for each calendar year during the 35-year period (regardless of the Participant's year of birth) ending with the last day of the calendar year in which the Participant attains (or will attain) Social Security Retirement Age. The determination of each Participant's Covered Compensation shall be made with reference to Regulation 1.401(l)-1(c)(7). A Participant's Covered Compensation shall be adjusted each Plan Year and no increase in Covered Compensation shall decrease a Participant's Accrued Benefit. In determining the Participant's Covered Compensation for a Plan Year, the Taxable Wage Base for all calendar years beginning after the first day of the Plan Year is assumed to be the same as the Taxable Wage Base in effect as of the beginning of the Plan Year. A Participant's Covered Compensation for a Plan Year before the 35-year period described above is the Taxable Wage Base in effect as of the beginning of the Plan Year. A Participant's Covered Compensation for a Plan Year after the 35-year period described above is the Participant's Covered Compensation for the Plan Year during which the 35-year period ends. Any change in a Participant's Covered Compensation shall not cause any reduction in the Participant's Accrued Benefit. 1.15 "Earliest Retirement Age" means the earliest date on which, under the Plan, the Participant could elect to receive retirement benefits. 1.16 "Early Retirement Date." This Plan does not provide for a retirement date prior to Normal Retirement Date. 1.17 "Eligible Employee" means any Employee, except that: Employees who are Receptionists shall not be eligible to participate in this Plan. 5 Employees who are Leased Employees within the meaning of Code Sections 414(n)(2) and 414(o)(2) shall not be eligible to participate in this Plan. Employees whose employment is governed by the terms of a collective bargaining agreement between Employee representatives (within the meaning of Code Section 7701(a)(46)) and the Employer under which retirement benefits were the subject of good faith bargaining between the parties will not be eligible to participate in this Plan unless such agreement expressly provides for coverage in this Plan. Employees who are nonresident aliens (within the meaning of Code Section 7701(b)(1)(B)) and who receive no earned income (within the meaning of Code Section 911(d)(2)) from the Employer which constitutes income from sources within the United States (within the meaning of Code Section 861(a)(3)) shall not be eligible to participate in this Plan. Employees of Affiliated Employers shall not be eligible to participate in this Plan unless such Affiliated Employers have specifically adopted this Plan in writing. Employees classified by the Employer as independent contractors who are subsequently determined by the Internal Revenue Service to be Employees shall not be Eligible Employees. 1.18 "Employee" means any person who is employed by the Employer or Affiliated Employer, and excludes any person who is employed as an independent contractor. Employee shall include Leased Employees within the meaning of Code Sections 414(n)(2) and 414(o)(2) unless such Leased Employees are covered by a plan described in Code Section 414(n)(5) and such Leased Employees do not constitute more than 20% of the recipient's non-highly compensated work force. 1.19 "Employer" means Presidential Realty Corporation and any successor which shall maintain this Plan; and any predecessor which has maintained this Plan. The Employer is a corporation, with principal offices in the State of New York. 1.20 "Fiduciary" means any person who (a) exercises any discretionary authority or discretionary control respecting management of the Plan or exercises any authority or control respecting management or disposition of its assets, (b) renders investment advice for a fee or other compensation, direct or indirect, with respect to any monies or other property of the Plan or has any authority or responsibility to do so, or (c) has any discretionary authority or discretionary responsibility in the administration of the Plan. 1.21 "Fiscal Year" means the Employer's accounting year of 12 months commencing on January 1 of each year and ending the following December 31. 1.22 "Former Participant" means a person who has been a Participant, but who has ceased to be a Participant for any reason. 1.23 "415 Compensation" with respect to any Participant means such Participant's wages for the Plan Year within the meaning of Code Section 3401(a) (for the purposes of income tax withholding at the source) but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Code Section 3401(a)(2)). 6 For "limitation years" beginning after December 31, 1997, for purposes of this Section, the determination of "415 Compensation" shall include any elective deferral (as defined in Code Section 402(g)(3)), and any amount which is contributed or deferred by the Employer at the election of the Participant and which is not includible in the gross income of the Participant by reason of Code Sections 125, 132(f)(4) for "limitation years" beginning after December 31, 2000 or 457. 1.24 "Highly Compensated Employee" means, for Plan Years beginning after December 31, 1996, an Employee described in Code Section 414(q) and the Regulations thereunder, and generally means any Employee who: (a) was a "five percent owner" as defined in Section 1.28(c) at any time during the "determination year" or "look-back year"; or (b) for the "look-back year" had "415 Compensation" from the Employer in excess of $80,000. The $80,000 amount is adjusted at the same time and in the same manner as under Code Section 415(d), except that the base period is the calendar quarter ending September 30, 1996. The "determination year" means the Plan Year for which testing is being performed, and the "look-back year" means the immediately preceding twelve (12) month period. A highly compensated former Employee is based on the rules applicable to determining Highly Compensated Employee status as in effect for the "determination year," in accordance with Regulation 1.414(q)-1T, A-4 and IRS Notice 97-45 (or any superseding guidance). In determining whether an Employee is a Highly Compensated Employee for a Plan Year beginning in 1997, the amendments to Code Section 414(q) stated above are treated as having been in effect for years beginning in 1996. For purposes of this Section, for Plan Years beginning prior to January 1, 1998, the determination of "415 Compensation" shall be made by including amounts that would otherwise be excluded from a Participant's gross income by reason of the application of Code Sections 125, 402(e)(3), 402(h)(1)(B), and, in the case of Employer contributions made pursuant to a salary reduction agreement, Code Section 403(b). In determining who is a Highly Compensated Employee, Employees who are non-resident aliens and who received no earned income (within the meaning of Code Section 911(d)(2)) from the Employer constituting United States source income within the meaning of Code Section 861(a)(3) shall not be treated as Employees. Additionally, all Affiliated Employers shall be taken into account as a single employer and Leased Employees within the meaning of Code Sections 414(n)(2) and 414(o)(2) shall be considered Employees unless such Leased Employees are covered by a plan described in Code Section 414(n)(5) and are not covered in any qualified plan maintained by the Employer. The exclusion of Leased Employees for this purpose shall be applied on a uniform and consistent basis for all of the Employer's retirement plans. Highly Compensated Former Employees shall be treated as Highly Compensated Employees without regard to whether they performed services during the "determination year." 7 1.25 "Highly Compensated Participant" means any Highly Compensated Employee who is eligible to participate in the component of the Plan being tested. 1.26 "Hour of Service" means, for purposes of eligibility for participation, vesting and benefit accrual, (1) each hour for which an Employee is directly or indirectly compensated or entitled to compensation by the Employer for the performance of duties (these hours will be credited to the Employee for the computation period in which the duties are performed); (2) each hour for which an Employee is directly or indirectly compensated or entitled to compensation by the Employer (irrespective of whether the employment relationship has terminated) for reasons other than performance of duties (such as vacation, holidays, sickness, jury duty, disability, lay-off, military duty or leave of absence) during the applicable computation period (these hours will be calculated and credited pursuant to Department of Labor regulation 2530.200b-2 which is incorporated herein by reference); (3) each hour for which back pay is awarded or agreed to by the Employer without regard to mitigation of damages (these hours will be credited to the Employee for the computation period or periods to which the award or agreement pertains rather than the computation period in which the award, agreement or payment is made). The same Hours of Service shall not be credited both under (1) or (2), as the case may be, and under (3). Notwithstanding (2) above, (i) no more than 501 Hours of Service are required to be credited to an Employee on account of any single continuous period during which the Employee performs no duties (whether or not such period occurs in a single computation period); (ii) an hour for which an Employee is directly or indirectly paid, or entitled to payment, on account of a period during which no duties are performed is not required to be credited to the Employee if such payment is made or due under a plan maintained solely for the purpose of complying with applicable worker's compensation, or unemployment compensation or disability insurance laws; and (iii) Hours of Service are not required to be credited for a payment which solely reimburses an Employee for medical or medically related expenses incurred by the Employee. For purposes of (2) above, a payment shall be deemed to be made by or due from the Employer regardless of whether such payment is made by or due from the Employer directly, or indirectly through, among others, a trust fund, or insurer, to which the Employer contributes or pays premiums and regardless of whether contributions made or due to the trust fund, insurer, or other entity are for the benefit of particular Employees or are on behalf of a group of Employees in the aggregate. For purposes of this Section, Hours of Service will be credited for employment with other Affiliated Employers. The provisions of Department of Labor regulations 2530.200b-2(b) and (c) are incorporated herein by reference. 8 1.27 "Investment Manager" means an entity that (a) has the power to manage, acquire, or dispose of Plan assets and (b) acknowledges fiduciary responsibility to the Plan in writing. Such entity must be a person, firm, or corporation registered as an investment adviser under the Investment Advisers Act of 1940, a bank, or an insurance company. 1.28 "Key Employee" means an Employee as defined in Code Section 416(i) and the Regulations thereunder. Generally, any Employee or former Employee (as well as each of the Employee's or former Employee's Beneficiaries) is considered a Key Employee if the Employee, at any time during the Plan Year that contains the "Determination Date" or any of the preceding four (4) Plan Years, has been included in one of the following categories: (a) an officer of the Employer (as that term is defined within the meaning of the Regulations under Code Section 416) having annual "415 Compensation" greater than 50 percent of the amount in effect under Code Section 415(b)(1)(A) for any such Plan Year. (b) one of the ten employees having annual "415 Compensation" from the Employer for a Plan Year greater than the dollar limitation in effect under Code Section 415(c)(1)(A) for the calendar year in which such Plan Year ends and owning (or considered as owning within the meaning of Code Section 318) both more than one-half percent interest and the largest interests in the Employer. (c) a "five percent owner" of the Employer. "Five percent owner" means any person who owns (or is considered as owning within the meaning of Code Section 318) more than five percent (5%) of the outstanding stock of the Employer or stock possessing more than five percent (5%) of the total combined voting power of all stock of the Employer or, in the case of an unincorporated business, any person who owns more than five percent (5%) of the capital or profits interest in the Employer. In determining percentage ownership hereunder, employers that would otherwise be aggregated under Code Sections 414(b), (c), (m) and (o) shall be treated as separate employers. (d) a "one percent owner" of the Employer having an annual "415 Compensation" from the Employer of more than $150,000. "One percent owner" means any person who owns (or is considered as owning within the meaning of Code Section 318) more than one percent (1%) of the outstanding stock of the Employer or stock possessing more than one percent (1%) of the total combined voting power of all stock of the Employer or, in the case of an unincorporated business, any person who owns more than one percent (1%) of the capital or profits interest in the Employer. In determining percentage ownership hereunder, employers that would otherwise be aggregated under Code Sections 414(b), (c), (m) and (o) shall be treated as separate employers. However, in determining whether an individual has "415 Compensation" of more than $150,000, "415 Compensation" from each employer required to be aggregated under Code Sections 414(b), (c), (m) and (o) shall be taken into account. 9 For purposes of this Section, the determination of "415 Compensation" shall be made by including amounts which are contributed by the Employer pursuant to a salary reduction agreement and which are not includible in the gross income of the Participant under Code Sections 125, 132(f)(4) for Plan Years beginning after December 31, 2000, 402(e)(3), 402(h)(1)(B), 403(b) or 457(b), and Employee contributions described in Code Section 414(h)(2) that are treated as Employer contributions. 1.29 "Late Retirement Date" means the first day of the month coinciding with or next following a Participant's actual Retirement Date after having reached Normal Retirement Date. 1.30 "Leased Employee" means, for Plan Years beginning after December 31, 1996, any person (other than an Employee of the recipient Employer) who pursuant to an agreement between the recipient Employer and any other person or entity ("leasing organization") has performed services for the recipient (or for the recipient and related persons determined in accordance with Code Section 414(n)(6)) on a substantially full time basis for a period of at least one year, and such services are performed under primary direction or control by the recipient Employer. Contributions or benefits provided a Leased Employee by the leasing organization which are attributable to services performed for the recipient Employer shall be treated as provided by the recipient Employer. Furthermore, Compensation for a Leased Employee shall only include Compensation from the leasing organization that is attributable to services performed for the recipient Employer. A Leased Employee shall not be considered an Employee of the recipient Employer: (a) if such employee is covered by a money purchase pension plan providing: (1) a nonintegrated employer contribution rate of at least 10% of compensation, as defined in Code Section 415(c)(3), but, for Plan Years beginning prior to January 1, 1998, including amounts which are contributed by the Employer pursuant to a salary reduction agreement and which are not includible in the gross income of the Participant under Code Sections 125, 402(e)(3), 402(h)(1)(B), 403(b) or 457(b), and Employee contributions described in Code Section 414(h)(2) that are treated as Employer contributions, and, for Plan Years beginning prior to January 1, 2001, excluding amounts that are not includible in gross income under Code Section 132(f)(4); (2) immediate participation; (3) full and immediate vesting; and (b) if Leased Employees do not constitute more than 20% of the recipient Employer's nonhighly compensated work force. 1.31 "Non-Highly Compensated Participant" means, for Plan Years beginning after December 31, 1996, any Participant who is not a Highly Compensated Employee. 1.32 "Non-Key Employee" means any Employee or former Employee (and such Employee's or former Employee's Beneficiaries) who is not, and has never been a Key Employee. 10 1.33 "Normal Retirement Age" means the Participant's 65th birthday, or the Participant's 5th anniversary of joining the Plan, if later. A Participant shall become fully Vested in the Participant's Normal Retirement Benefit upon attaining Normal Retirement Age. 1.34 "Normal Retirement Date" means the first day of the month coinciding with or next following the Participant's Normal Retirement Age. 1.35 "1-Year Break in Service" means the applicable computation period during which an Employee has not completed more than 500 Hours of Service with the Employer. Further, solely for the purpose of determining whether a Participant has incurred a 1-Year Break in Service, Hours of Service shall be recognized for "authorized leaves of absence" and "maternity and paternity leaves of absence." Years of Service and 1-Year Breaks in Service shall be measured on the same computation period. "Authorized leave of absence" means an unpaid, temporary cessation from active employment with the Employer pursuant to an established nondiscriminatory policy, whether occasioned by illness, military service, or any other reason. A "maternity or paternity leave of absence" means, for Plan Years beginning after December 31, 1984, an absence from work for any period by reason of the Employee's pregnancy, birth of the Employee's child, placement of a child with the Employee in connection with the adoption of such child, or any absence for the purpose of caring for such child for a period immediately following such birth or placement. For this purpose, Hours of Service shall be credited for the computation period in which the absence from work begins, only if credit therefore is necessary to prevent the Employee from incurring a 1-Year Break in Service, or, in any other case, in the immediately following computation period. The Hours of Service credited for a "maternity or paternity leave of absence" shall be those which would normally have been credited but for such absence, or, in any case in which the Administrator is unable to determine such hours normally credited, eight (8) Hours of Service per day. The total Hours of Service required to be credited for a "maternity or paternity leave of absence" shall not exceed the number of Hours of Service needed to prevent the Employee from incurring a 1-Year Break in Service. 1.36 "Participant" means any Eligible Employee who participates in the Plan and has not for any reason become ineligible to participate further in the Plan. 1.37 "Participant's Cumulative Permitted Disparity Limit" is equal to thirty-five (35) minus the number of years credited to the Participant for purposes of the benefit formula or the accrual method under the plan under one or more qualified plans or simplified employee pensions (whether or not terminated) ever maintained by the Employer, other than years for which a Participant earned a year of credited service under this Plan. For purposes of determining the Participant's Cumulative Permitted Disparity Limit, all years ending in the same calendar year are treated as the same year. If the Participant's Cumulative Permitted Disparity Limit is less than the period of years specified in Section 5.1(a), then for years after the Participant reaches the Cumulative Permitted Disparity Limit and through the end of the period specified in Section 5.1(a), the Participant's benefit will be equal to the excess benefit percentage, or, if the Participant's benefit after the latest Fresh-Start Date is not accrued under the fractional accrual rule and the plan does not satisfy Code Section 411(b)(1)(f), 133 1/3 percent of the base benefit percentage, if lesser, times Average Monthly Compensation. 11 1.38 "Plan" means this instrument, including all amendments thereto. 1.39 "Plan Year" means the Plan's accounting year of twelve (12) months commencing on January 1 of each year and ending the following December 31. 1.40 "Plan Year of Service" means a Plan Year during which an Employee is a Participant and completes 1000 Hours of Service. However, in determining whether a Participant has completed a Plan Year of Service in a short Plan Year, the number of the Hours of Service required shall be proportionately reduced based on the number of full months in the short Plan Year. 1.41 "Pre-Retirement Survivor Annuity" means an immediate annuity for the life of the surviving spouse of a Participant who dies prior to the Participant's Annuity Starting Date. 1.42 "Present Value of Accrued Benefit" means the Actuarial Equivalent lump-sum amount of a Participant's Accrued Benefit at date of valuation. Notwithstanding the foregoing, the Present Value of Accrued Benefit for the determination of Top Heavy Plan status shall be made exclusively pursuant to the provisions of Section 11. 1.43 "Regulation" means the Income Tax Regulations as promulgated by the Secretary of the Treasury or a delegate of the Secretary of the Treasury, and as amended from time to time. 1.44 "Retired Participant" means a person who has been a Participant, but who has become entitled to retirement benefits under the Plan. 1.45 "Retirement Date" means the date as of which a Participant retires whether such retirement occurs on a Participant's Normal Retirement Date or Late Retirement Date (see Section 5.1). 1.46 "Social Security Retirement Age" means the age used as the retirement age under Section 216(l) of the Social Security Act, except that such section shall be applied without regard to the age increase factor and as if the early retirement age under Section 216(l)(2) of such Act were 62. 1.47 "Taxable Wage Base" means, with respect to any calendar year, the contribution and benefit base in effect under Section 230 of the Social Security Act at the beginning of the calendar year. 1.48 "Terminated Participant" means a person who has been a Participant, but whose employment has been terminated other than by death or retirement. 1.49 "Top Heavy Plan" means a plan described in Section 11.2(a). 1.50 "Top Heavy Plan Year" means a Plan Year during which the Plan is a Top Heavy Plan. 12 1.51 "Trustee" means the person or entity named as trustee herein or in any separate trust forming a part of this Plan, and any successors. 1.52 "Trust Fund" means the assets of the Plan and Trust as the same shall exist from time to time. 1.53 "Vested" means the portion of a Participant's benefits under the Plan that are nonforfeitable. 1.54 "Year of Service" means the computation period of twelve (12) consecutive months, herein set forth, during which an Employee has at least 1000 Hours of Service. For purposes of eligibility for participation, the initial computation period shall begin with the date on which the Employee first performs an Hour of Service. The participation computation period beginning after a 1-Year Break in Service shall be measured from the date on which an Employee again performs an Hour of Service. The participation computation period shall shift to the Plan Year which includes the anniversary of the date on which the Employee first performed an Hour of Service. An Employee who is credited with the required Hours of Service in both the initial computation period (or the computation period beginning after a 1-Year Break in Service) and the Plan Year which includes the anniversary of the date on which the Employee first performed an Hour of Service, shall be credited with two (2) Years of Service for purposes of eligibility to participate. For vesting purposes, the computation periods shall be the Plan Year, including periods prior to the Effective Date of the Plan. The computation period shall be the Plan Year if not otherwise set forth herein. Notwithstanding the foregoing, for any short Plan Year, the determination of whether an Employee has completed a Year of Service shall be made in accordance with Department of Labor regulation 2530.203-2(c). Years of Service with any Affiliated Employer shall be recognized. ARTICLE II ADMINISTRATION 2.1 POWERS AND RESPONSIBILITIES OF THE EMPLOYER (a) In addition to the general powers and responsibilities otherwise provided for in this Plan, the Employer shall be empowered to appoint and remove the Trustee and the Administrator from time to time as it deems necessary for the proper administration of the Plan to ensure that the Plan is being operated for the exclusive benefit of the Participants and their Beneficiaries in accordance with the terms of the Plan, the Code, and the Act. The Employer may appoint counsel, specialists, advisers, agents (including any nonfiduciary agent) and other persons as the Employer deems necessary or desirable in connection with the exercise of its fiduciary duties under this Plan. The Employer may compensate such agents or advisers from the assets of the Plan as fiduciary expenses (but not including any business (settlor) expenses of the Employer), to the extent not paid by the Employer. 13 (b) The Employer shall establish a "funding policy and method," i.e., it shall determine whether the Plan has a short run need for liquidity (e.g., to pay benefits) or whether liquidity is a long run goal and investment growth (and stability of same) is a more current need, or shall appoint a qualified person to do so. The Employer or its delegate shall communicate such needs and goals to the Trustee, who shall coordinate such Plan needs with its investment policy. The communication of such a "funding policy and method" shall not, however, constitute a directive to the Trustee as to the investment of the Trust Funds. Such "funding policy and method" shall be consistent with the objectives of this Plan and with the requirements of Title I of the Act. (c) The Employer shall periodically review the performance of any Fiduciary or other person to whom duties have been delegated or allocated by it under the provisions of this Plan or pursuant to procedures established hereunder. This requirement may be satisfied by formal periodic review by the Employer or by a qualified person specifically designated by the Employer, through day-to-day conduct and evaluation, or through other appropriate ways. 2.2 DESIGNATION OF ADMINISTRATIVE AUTHORITY The Employer shall be the Administrator. The Employer may appoint any person, including, but not limited to, the Employees of the Employer, to perform the duties of the Administrator. Any person so appointed shall signify acceptance by filing written acceptance with the Employer. Upon the resignation or removal of any individual performing the duties of the Administrator, the Employer may designate a successor. 2.3 POWERS AND DUTIES OF THE ADMINISTRATOR The primary responsibility of the Administrator is to administer the Plan for the exclusive benefit of the Participants and their Beneficiaries, subject to the specific terms of the Plan. The Administrator shall administer the Plan in accordance with its terms and shall have the power and discretion to construe the terms of the Plan and to determine all questions arising in connection with the administration, interpretation, and application of the Plan. Any such determination by the Administrator shall be conclusive and binding upon all persons. The Administrator may establish procedures, correct any defect, supply any information, or reconcile any inconsistency in such manner and to such extent as shall be deemed necessary or advisable to carry out the purpose of the Plan; provided, however, that any procedure, discretionary act, interpretation or construction shall be done in a nondiscriminatory manner based upon uniform principles consistently applied and shall be consistent with the intent that the Plan shall continue to be deemed a qualified plan under the terms of Code Section 401(a), and shall comply with the terms of the Act and all regulations issued pursuant thereto. The Administrator shall have all powers necessary or appropriate to accomplish the Administrator's duties under the Plan. 14 The Administrator shall be charged with the duties of the general administration of the Plan as set forth under the terms of the Plan, including, but not limited to, the following: (a) the discretion to determine all questions relating to the eligibility of Employees to participate or remain a Participant hereunder and to receive benefits under the Plan; (b) to compute, certify, and direct the Trustee with respect to the amount and the kind of benefits to which any Participant shall be entitled hereunder; (c) to authorize and direct the Trustee with respect to all discretionary or otherwise directed disbursements from the Trust; (d) to maintain all necessary records for the administration of the Plan; (e) to interpret the provisions of the Plan and to make and publish such rules for regulation of the Plan as are consistent with the terms hereof; (f) to determine the size and type of any Contract to be purchased from any insurer and to designate the insurer from which such Contract shall be purchased. All Policies shall be issued on a uniform basis as of each Anniversary Date with respect to all Participants under similar circumstances; (g) to compute and certify to the Employer and to the Trustee from time to time the sums of money necessary or desirable to be contributed to the Plan; (h) to consult with the Employer and the Trustee regarding the short and long-term liquidity needs of the Plan in order that the Trustee can exercise any investment discretion in a manner designed to accomplish specific objectives; (i) to prepare and implement a procedure for notifying Participants and Beneficiaries of their rights to elect joint and survivor annuities and Pre-Retirement Survivor Annuities as required by the Act and regulations thereunder; (j) to determine the validity of, and take appropriate action with respect to, any qualified domestic relations order received by it; and (k) to assist any Participant regarding the Participant's rights, benefits, or elections available under the Plan. 2.4 RECORDS AND REPORTS The Administrator shall keep a record of all actions taken and shall keep all other books of account, records, policies, and other data that may be necessary for proper administration of the Plan and shall be responsible for supplying all information and reports to the Internal Revenue Service, Department of Labor, Participants, Beneficiaries and others as required by law. 15 2.5 APPOINTMENT OF ADVISERS The Administrator, or the Trustee with the consent of the Administrator, may appoint counsel, specialists, advisers, agents (including nonfiduciary agents) and other persons as the Administrator or the Trustee deems necessary or desirable in connection with the administration of this Plan, including but not limited to agents and advisers to assist with the administration and management of the Plan, and thereby to provide, among such other duties as the Administrator may appoint, assistance with maintaining Plan records and the providing of investment information to the Plan's investment fiduciaries. 2.6 PAYMENT OF EXPENSES All expenses of administration may be paid out of the Trust Fund unless paid by the Employer. Such expenses shall include any expenses incident to the functioning of the Administrator, or any person or persons retained or appointed by any named Fiduciary incident to the exercise of their duties under the Plan, including, but not limited to, fees of accountants, counsel, Investment Managers, and other specialists and their agents, the costs of any bonds required pursuant to Act Section 412, and other costs of administering the Plan. Until paid, the expenses shall constitute a liability of the Trust Fund. 2.7 CLAIMS PROCEDURE Claims for benefits under the Plan may be filed in writing with the Administrator. Written notice of the disposition of a claim shall be furnished to the claimant within ninety (90) days after the application is filed, or such period as is required by applicable law or Department of Labor regulation. In the event the claim is denied, the reasons for the denial shall be specifically set forth in the notice in language calculated to be understood by the claimant, pertinent provisions of the Plan shall be cited, and, where appropriate, an explanation as to how the claimant can perfect the claim will be provided. In addition, the claimant shall be furnished with an explanation of the Plan's claims review procedure. 2.8 CLAIMS REVIEW PROCEDURE Any Employee, former Employee, or Beneficiary of either, who has been denied a benefit by a decision of the Administrator pursuant to Section 2.7 shall be entitled to request the Administrator to give further consideration to a claim by filing with the Administrator a written request for a hearing. Such request, together with a written statement of the reasons why the claimant believes the claim should be allowed, shall be filed with the Administrator no later than sixty (60) days after receipt of the written notification provided for in Section 2.7. The Administrator shall then conduct a hearing within the next sixty (60) days, at which the claimant may be represented by an attorney or any other representative of such claimant's choosing and expense and at which the claimant shall have an opportunity to submit written and oral evidence and arguments in support of the claim. At the hearing (or prior thereto upon five (5) business days written notice to the Administrator) the claimant or the claimant's representative shall have an opportunity to review all documents in the possession of the Administrator which are pertinent to the claim at issue and its disallowance. Either the claimant or the Administrator may cause a court reporter to attend the hearing and record the proceedings. In such event, a complete written transcript of the proceedings shall be furnished to both parties by the court reporter. The full expense of any such court reporter and such transcripts shall be borne by the party causing the court reporter to attend the hearing. A final decision as to the allowance of the claim shall be made by the Administrator within sixty (60) days of receipt of the appeal (unless there has been an extension of sixty (60) days due to special circumstances, provided the delay and the special circumstances occasioning it are communicated to the claimant within the sixty (60) day period). Such communication shall be written in a manner calculated to be understood by the claimant and shall include specific reasons for the decision and specific references to the pertinent Plan provisions on which the decision is based. 16 ARTICLE III ELIGIBILITY 3.1 CONDITIONS OF ELIGIBILITY Any Eligible Employee who has completed one (1) Year of Service and has attained age 21 shall be eligible to participate hereunder as of the date such Employee has satisfied such requirements. However, any Employee who was a Participant in the Plan prior to the effective date of this amendment and restatement shall continue to participate in the Plan. 3.2 EFFECTIVE DATE OF PARTICIPATION An Eligible Employee shall become a Participant effective as of the earlier of the first day of the Plan Year or the first day of the seventh month of such Plan Year coinciding with or next following the date such Employee met the eligibility requirements of Section 3.1, provided said Employee was still employed as of such date (or if not employed on such date, as of the date of rehire if a 1-Year Break in Service has not occurred or, if later, the date that the Employee would have otherwise entered the Plan had the Employee not terminated employment). If an Employee, who has satisfied the Plan's eligibility requirements and would otherwise have become a Participant, shall go from a classification of a noneligible Employee to an Eligible Employee, such Employee shall become a Participant on the date such Employee becomes an Eligible Employee or, if later, the date that the Employee would have otherwise entered the Plan had the Employee always been an Eligible Employee. If an Employee, who has satisfied the Plan's eligibility requirements and would otherwise become a Participant, shall go from a classification of an Eligible Employee to a noneligible class of Employees, such Employee shall become a Participant in the Plan on the date such Employee again becomes an Eligible Employee, or, if later, the date that the Employee would have otherwise entered the Plan had the Employee always been an Eligible Employee. However, if such Employee incurs a 1-Year Break in Service, eligibility will be determined under the Break in Service rules set forth in Section 3.5. 17 3.3 DETERMINATION OF ELIGIBILITY The Administrator shall determine the eligibility of each Employee for participation in the Plan based upon information furnished by the Employer. Such determination shall be conclusive and binding upon all persons, as long as the same is made pursuant to the Plan and the Act. Such determination shall be subject to review pursuant to Section 2.8. 3.4 TERMINATION OF ELIGIBILITY In the event a Participant shall go from a classification of an Eligible Employee to an ineligible Employee, such Former Participant shall continue to vest in the Plan for each Year of Service completed while a noneligible Employee, until such time as the Former Participant's Accrued Benefit shall be forfeited or distributed pursuant to the terms of the Plan. 3.5 REHIRED EMPLOYEES AND BREAKS IN SERVICE (a) If any Participant becomes a Former Participant due to severance from employment with the Employer and is reemployed by the Employer before a 1-Year Break in Service occurs, the Former Participant shall become a Participant as of the reemployment date. (b) If any Participant becomes a Former Participant due to severance from employment with the Employer and is reemployed after a 1-Year Break in Service has occurred, Years of Service shall include Years of Service prior to the 1-Year Break in Service subject to the following rules: (1) In the case of a Former Participant who under the Plan does not have a nonforfeitable right to any interest in the Plan resulting from Employer contributions, Years of Service before a period of 1-Year Break in Service will not be taken into account if the number of consecutive 1-Year Breaks in Service equal or exceed the greater of (A) five (5) or (B) the aggregate number of pre-break Years of Service. Such aggregate number of Years of Service will not include any Years of Service disregarded under the preceding sentence by reason of prior 1-Year Breaks in Service. (2) A Former Participant who has not had Years of Service before a 1-Year Break in Service disregarded pursuant to (1) above, shall participate in the Plan as of the date of reemployment. (c) If any Participant becomes a Former Participant due to severance of employment with the Employer and again becomes a Participant, such renewed participation shall not result in duplication of benefits. Accordingly, if such Participant has received a distribution of a Vested Accrued Benefit under the Plan by reason of prior participation (and such distribution has not been repaid to the Plan with interest within a period of the earlier of five (5) years after the first date on which the Participant is subsequently reemployed by the Employer or the close of the first period of five (5) consecutive 1-Year Breaks in Service commencing after the distribution), the Participant's Accrued Benefit shall be reduced by the Actuarial Equivalent (at the date of distribution) of the Present Value of the Accrued Benefit as of the date of distribution. Any repayment by a Participant shall be equal to the total of: 18 (1) the amount of the distribution, (2) interest on such distribution compounded annually at the rate of five percent (5%) per annum from the date of distribution to the date of repayment or to the last day of the first Plan Year ending on or after December 31, 1987, if earlier, and (3) interest on the sum of (1) and (2) above compounded annually at the rate of one-hundred-twenty percent (120%) of the federal mid-term rate (as in effect under Code Section 1274 for the first month of a Plan Year) from the beginning of the first Plan Year beginning after December 31, 1987 or the date of distribution, whichever is later, to the date of repayment. 3.6 ELECTION NOT TO PARTICIPATE An Employee, for Plan years beginning on or after the later of the adoption date or effective date of this amendment and restatement, may, subject to the approval of the Employer, elect voluntarily not to participate in the Plan. The election not to participate must be irrevocable and communicated to the Employer, in writing, within a reasonable period of time before the beginning of the first Plan Year. ARTICLE IV CONTRIBUTION AND VALUATION 4.1 PAYMENT OF CONTRIBUTIONS No contribution shall be required under the Plan from any Participant. The Employer shall pay to the Trustee from time to time such amounts in cash as the Administrator and Employer shall determine to be necessary to provide the benefits under the Plan determined by the application of accepted actuarial methods and assumptions. The method of funding shall be consistent with Plan objectives. 4.2 ACTUARIAL METHODS In establishing the liabilities under the Plan and contributions thereto, the enrolled actuary will use such methods and assumptions as will reasonably reflect the cost of the benefits. The Plan assets are to be valued on the last day of the Plan Year (or on any other date determined by the Administrator) using any reasonable method of valuation that takes into account fair market value pursuant to Regulations. There must be an actuarial valuation of the Plan at least once every year. 19 4.3 QUALIFIED MILITARY SERVICE Notwithstanding any provision of this Plan to the contrary, effective December 12, 1994, contributions, benefits and service will be provided in accordance with Code Section 414(u). ARTICLE V BENEFITS 5.1 RETIREMENT BENEFITS (a) The amount of monthly retirement benefit to be provided for each Participant who retires on the Participant's Normal Retirement Date shall be equal to the Participant's Accrued Benefit (herein called the Participant's Normal Retirement Benefit). For Plan Years commencing prior to January 1, 2000, the amount of monthly retirement benefit to be provided for each Participant who retires on his Normal Retirement Date prior to January 1, 2000 shall be equal to his Accrued Benefit equal to the sum of (1) 6.5% of such Participant's Average Monthly Compensation multiplied by the Participant's total number of Plan Years of Service (up to a maximum of 10 years), plus (2) 0.62% of such Average Monthly Compensation in excess of one-twelfth of Covered Compensation multiplied by the Participant's total number of Plan Years of Service (up to a maximum of 10 years), computed to the nearest dollar. Effective January 1, 2000, and solely for Participants who are Eligible Employees on and after January 1, 2000, a Participant's Accrued Benefit is based on a retirement benefit formula equal to the sum of (1) 7.15% of such Participant's Average Monthly Compensation multiplied by the Participant's total number of Plan Years of Service (up to a maximum of 10 years), plus (2) 0.62% of such Average Monthly Compensation in excess of one-twelfth of Covered Compensation multiplied by the Participant's total number of Plan Years of Service (up to a maximum of 10 years), computed to the nearest dollar. No other qualified plan or simplified employee pension, as defined in Code Section 408(k), maintained by the Employer shall (1) impute disparity pursuant to Regulation 1.401(a)(4)-7 for any Participant and (2) provide for permitted disparity pursuant to Code Section 401(l). Additionally, the number of Plan Years of Service taken into account for any Participant will not exceed the Participant's Cumulative Permitted Disparity Limit as defined in Section 1.37. The "Normal Retirement Benefit" of each Participant shall not be less than the largest periodic benefit that would have been payable to the Participant upon separation from service at or prior to Normal Retirement Age under the Plan exclusive of social security supplements, premiums on disability or term insurance, and the value of disability benefits not in excess of the "Normal Retirement Benefit." For purposes of comparing periodic benefits in the same form, commencing prior to and at Normal Retirement Age, the greater benefit is determined by converting the benefit payable prior to Normal Retirement Age into the same form of annuity benefit payable at Normal Retirement Age and comparing the amount of such annuity payments. In the case of a Top Heavy Plan, the "Normal Retirement Benefit" shall not be smaller than the minimum benefit to which the Employee is entitled under Section 5.2. 20 (b) This Plan does not provide for a retirement date prior to Normal Retirement Date. In the event a Participant retires prior to the Participant's Normal Retirement Date, the Participant's benefit shall be the benefit payable per Section 5.6(a). (c) The Normal Retirement Benefit payable to a Participant pursuant to this Section 5.1 shall be a monthly pension commencing on the Participant's Retirement Date and continuing for life. However, the form of distribution of such benefit shall be determined pursuant to the provisions of Section 5.7. (d) At the request of a Participant, the Participant may be continued in employment beyond Normal Retirement Date. In such event, effective September 1, 2003, the Participant may elect one of the following: (1) To postpone receiving the payment of monthly retirement benefits until actual retirement. At the close of each Plan Year prior to actual Retirement Date, a Participant shall be entitled to a retirement benefit equal to the greater of (i) the Actuarial Equivalent of the monthly retirement benefit such Participant was entitled to at the close of the prior Plan Year, or (ii) the Participant's Accrued Benefit determined at the close of the Plan Year. The monthly retirement benefit calculated pursuant to this Section 5.1(d)(1) shall be offset by the actuarial value (determined pursuant to Section 1.3) of the total benefit distributions (pursuant to Section 5.7(e)) made by the close of the Plan Year. (2) To commence receiving the payment of monthly retirement benefits provided for in the Plan (including a lump sum) as though actual retirement had occurred on a Normal Retirement Date. At the close of each Plan Year prior to actual Retirement Date, such Participant shall be entitled to a monthly retirement benefit payable each subsequent Plan Year equal to the greater of (i) the Participant's monthly retirement benefit determined at the close of the prior Plan Year, or (ii) the Participant's Accrued Benefit determined at the close of the Plan Year, offset by the actuarial value (determined pursuant to Section 1.3) of the total benefit distributions made by the close of the Plan Year. Except with respect to a "five (5) percent owner," a Participant's Accrued Benefit is actuarially increased to take into account the period after age 70 1/2 in which the Participant does not receive any benefits under the Plan. The actuarial increase begins on the April 1 following the calendar year in which the Participant attains age 70 1/2 (January 1, 1997 in the case of a Participant who attained age 70 1/2 prior to 1996), and ends on the date on which benefits commence after retirement in an amount sufficient to satisfy Code Section 401(a)(9). 21 The amount of actuarial increase payable as of the end of the period for actuarial increases must be no less than the Actuarial Equivalent of the Participant's retirement benefits that would have been payable as of the date the actuarial increase must commence plus the Actuarial Equivalent of additional benefits accrued after that date, reduced by the Actuarial Equivalent of any distributions made after that date. The actuarial increase is generally the same as, and not in addition to, the actuarial increase required for that same period under Code Section 411 to reflect the delay in payments after normal retirement, except that the actuarial increase required under Code Section 401(a)(9)(C) must be provided even during the period during which a Participant is in Act Section 203(a)(3)(B) service. 5.2 MINIMUM BENEFIT REQUIREMENT FOR TOP HEAVY PLAN (a) The minimum Accrued Benefit derived from Employer contributions to be provided under this Section for each Non-Key Employee who is a Participant during a Top Heavy Plan Year shall equal the product of (1) one-twelfth (1/12th) of "415 Compensation" averaged over the five (5) consecutive "limitation years" (or actual number of "limitation years," if less) which produce the highest average, and (2) the lesser of (i) two percent (2%) multiplied by Plan Years of Service, or (ii) twenty percent (20%), expressed as a single life annuity. (b) For purposes of providing the minimum benefit under Code Section 416, a Non-Key Employee who is not a Participant solely because (1) such Employee's Compensation is below a stated amount or (2) such Employee declined to make mandatory contributions (if required) to the Plan will be considered to be a Participant. Furthermore, such minimum benefit shall be provided regardless of whether such Non-Key Employee is employed on a specified date. (c) For purposes of this Section, Plan Years of Service for any Plan Year beginning before January 1, 1984, or for any Plan Year during which the Plan was not a Top Heavy Plan shall be disregarded. (d) For purposes of this Section, "415 Compensation" for any "limitation year" ending in a Plan Year which began prior to January 1, 1984, subsequent to the last "limitation year" during which the Plan is a Top Heavy Plan, or in which the Participant failed to complete a Plan Year of Service, shall be disregarded. (e) For the purposes of this Section, "415 Compensation" in excess of $150,000 (or such other amount provided in the Code) shall be disregarded. Such amount shall be adjusted for increases in the cost of living in accordance with Code Section 401(a)(17)(B), except that the dollar increase in effect on January 1 of any calendar year shall be effective for the Plan Year beginning with or within such calendar year. If "415 Compensation" for any prior determination period is taken into account in determining a Participant's minimum benefit for the current Plan Year, the "415 Compensation" for such determination period is subject to the applicable annual "415 Compensation" limit in effect for that prior period. For this purpose, in determining the minimum benefit in Plan Years beginning on or after January 1, 1989, the annual "415 Compensation" limit in effect for determination periods beginning before that date is $200,000 (or such other amount as adjusted for increases in the cost of living in accordance with Code Section 415(d) for determination periods beginning on or after January 1, 1989, and in accordance with Code Section 401(a)(17)(B) for determination periods beginning on or after January 1, 1994). For determination periods beginning prior to January 1, 1989, the $200,000 limit shall apply only for Top Heavy Plan Years and shall not be adjusted. For any short Plan Year the "415 Compensation" limit shall be an amount equal to the "415 Compensation" limit for the calendar year in which the Plan Year begins multiplied by the ratio obtained by dividing the number of full months in the short Plan Year by twelve (12). 22 (f) If Section 5.1(c) provides for the Normal Retirement Benefit to be paid in a form other than a single life annuity, the Accrued Benefit under this Section shall be the Actuarial Equivalent of the minimum Accrued Benefit under (a) above pursuant to Section 1.3. (g) If payment of the minimum Accrued Benefit commences at a date other than Normal Retirement Date, the minimum Accrued Benefit shall be the Actuarial Equivalent of the minimum Accrued Benefit commencing at Normal Retirement Date pursuant to Section 1.3. (h) To the extent required to be nonforfeitable under Section 5.6, the minimum Accrued Benefit under this Section may not be forfeited under Code Section 411(a)(3)(B) or Code Section 411(a)(3)(D). 5.3 PAYMENT OF RETIREMENT BENEFITS When a Participant retires, the Administrator shall immediately take pursuant to the Plan all necessary steps and execute all required documents to cause the payment of the Participant's Accrued Benefit pursuant to the Plan. 5.4 DISABILITY RETIREMENT BENEFITS No disability benefits, other than those payable upon termination of employment, are provided in this Plan. 5.5 DEATH BENEFITS (a) If a Participant dies prior to the Participant's Retirement Date, such Participant's Beneficiary shall receive a death benefit equal to the Actuarial Equivalent of the Accrued Benefit determined as of the Anniversary Date subsequent to or coinciding with the date of death. 23 (b) Death benefits payable by reason of the death of a Participant or a Retired Participant shall be paid to such Participant's Beneficiary in accordance with the following provisions: (1) Upon the death of a Participant subsequent to the Participant's Retirement Date, but prior to the Annuity Starting Date, the Participant's Beneficiary shall be entitled to a death benefit in an amount equal to the Actuarial Equivalent of the benefit the Participant would have received at the Participant's Retirement Date, credited with interest subsequent to such date at the rate determined under Code Section 411(c)(2)(C), if applicable. (2) Upon the death of a Participant subsequent to the Annuity Starting Date, the Participant's Beneficiary shall be entitled to whatever death benefit may be available under the settlement arrangements pursuant to which the Participant's benefit is made payable. (3) In the event of a Terminated Participant's death subsequent to the Participant's termination of employment, the Participant's Beneficiary shall receive the Present Value of such Participant's Vested Accrued Benefit as of the Anniversary Date coinciding with or next following the date of the Participant's death. (c) The Administrator may require such proper proof of death and such evidence of the right of any person to receive the death benefit payable as a result of the death of a Participant as the Administrator may deem desirable. The Administrator's determination of death and the right of any person to receive payment shall be conclusive. (d) Unless otherwise elected in the manner prescribed in Section 5.8, the Beneficiary of the death benefit shall be the Participant's surviving spouse, who shall receive such benefit in the form of a Pre-Retirement Survivor Annuity pursuant to Section 5.8. Except, however, the Participant may designate a Beneficiary other than the spouse if: (1) the Participant and the Participant's spouse have validly waived the Pre-Retirement Survivor Annuity in the manner prescribed in Section 5.8, and the spouse has waived the right to be the Participant's Beneficiary, or (2) the Participant is legally separated or has been abandoned (within the meaning of local law) and the Participant has a court order to such effect (and there is no qualified domestic relations order which provides otherwise), or (3) the Participant has no spouse, or (4) the spouse cannot be located. 24 In such event, the designation of a Beneficiary shall be made on a form satisfactory to the Administrator. A Participant may at any time revoke a designation of a Beneficiary or change a Beneficiary by filing written (or in such other form as permitted by the Internal Revenue Service) notice of such revocation or change with the Administrator. However, the Participant's spouse must again consent in writing (or in such other form as permitted by the Internal Revenue Service) to any change in Beneficiary unless the original consent acknowledged that the spouse had the right to limit consent only to a specific Beneficiary and that the spouse voluntarily elected to relinquish such right. In the event no valid designation of Beneficiary exists, or if the Beneficiary is not alive, at the time of the Participant's death, the death benefit shall be payable to the Participant's estate. Additionally, if the Beneficiary does not predecease the Participant, but dies prior to the distribution of the death benefit, the death benefit will be paid to the Beneficiary's estate. (e) The benefit payable under this Section shall be paid pursuant to the provisions of Sections 5.8 and 5.9. (f) In no event shall the death benefit payable to a surviving spouse be less than the Actuarial Equivalent of the "minimum spouse's death benefit." (g) For the purposes of this Section, the "minimum spouse's death benefit" means a death benefit for a Vested married Participant payable in the form of a Pre-Retirement Survivor Annuity. Such annuity payments shall be equal to the amount which would be payable as a survivor annuity under the joint and survivor annuity provisions of the Plan if: (1) in the case of a Participant who dies after the Earliest Retirement Age, such Participant had retired with an immediate joint and survivor annuity on the day before the Participant's date of death, or (2) in the case of a Participant who dies on or before the Earliest Retirement Age, such Participant had: (i) separated from service on the earlier of the actual time of separation or the date of death, (ii) survived to the Earliest Retirement Age, (iii) retired with an immediate joint and survivor annuity at the Earliest Retirement Age based on the Participant's Vested Accrued Benefit on date of death, and (iv) died on the day after the day on which said Participant would have attained the Earliest Retirement Age. 25 5.6 TERMINATION OF EMPLOYMENT BEFORE RETIREMENT (a) Payment to a Former Participant of the Vested portion of such Former Participant's Accrued Benefit, unless such Former Participant otherwise elects, shall begin not later than the 60th day after the close of the Plan Year in which the latest of the following events occurs: (1) the date on which the Participant attains the earlier of age 65 or the Normal Retirement Age specified herein; (2) the 10th anniversary of the year in which the Participant commenced participation in the Plan; or (3) the date the Participant terminates service with the Employer. However, for Plan Years beginning after August 5, 1997, the Administrator shall direct the earlier payment of the entire Vested portion of the Present Value of Accrued Benefit, but only if it does not exceed $5,000 ($3,500 for Plan Years beginning prior to August 6, 1997) and, if the distribution is made prior to October 17, 2000, has never exceeded $5,000 ($3,500 for Plan Years beginning prior to August 6, 1997) at the time of any prior distribution. That portion of a Terminated Participant's Accrued Benefit that is forfeited shall be used only to reduce future costs of the Plan at such time as it becomes a forfeiture. That portion of a Terminated Participant's Accrued Benefit that is not Vested shall become a forfeiture on the last day of the Plan Year following the Plan Year in which the Participant terminates employment. Notwithstanding the foregoing, if a Terminated Participant is reemployed prior to incuring five (5) consecutive 1-Year Breaks in Service, the Accrued Benefit that is not vested shall be restored to such Participant, if applicable pursuant to Section 3.5 of the Plan. For purposes of this Section 5.6, if the value of a Terminated Participant's Vested Accrued Benefit is zero, the Terminated Participant shall be deemed to have received a distribution of such zero percent Vested Accrued Benefit. (b) The Vested portion of any Participant's Accrued Benefit shall be a percentage of the Participant's Accrued Benefit determined on the basis of the Participant's number of Years of Service according to the following schedule: Vesting Schedule Years of Service Percentage Less than 3 0 % 3 20 % 4 40 % 5 60 % 6 80 % 7 100 % 26 (c) Notwithstanding the vesting provided for in paragraph (b) above, for any Top Heavy Plan Year, the Vested portion of the Accrued Benefit of any Participant who has an Hour of Service after the Plan becomes top heavy shall be a percentage of the Participant's Accrued Benefit determined on the basis of the Participant's number of Years of Service according to the following schedule: Vesting Schedule Years of Service Percentage Less than 2 0 % 2 20 % 3 40 % 4 60 % 5 80 % 6 100 % If in any subsequent Plan Year, the Plan ceases to be a Top Heavy Plan, the Administrator shall revert to the vesting schedule in effect before this Plan became a Top Heavy Plan. Any such reversion shall be treated as a Plan amendment pursuant to the terms of the Plan. (d) Notwithstanding the vesting schedule above, the Vested percentage of a Participant's Accrued Benefit shall not be less than the Vested percentage attained as of the later of the effective date or adoption date of this amendment and restatement. (e) The computation of a Participant's nonforfeitable percentage of such Participant's interest in the Plan shall not be reduced as the result of any direct or indirect amendment to this Plan. In the event that the Plan is amended to change or modify any vesting schedule, or if the Plan is amended in any way that directly or indirectly affects the computation of the Participant's nonforfeitable percentage, or if the Plan is deemed amended by an automatic change to a top heavy vesting schedule, then each Participant with at least three (3) Years of Service as of the expiration date of the election period may elect to have such Participant's nonforfeitable percentage computed under the Plan without regard to such amendment or change. If a Participant fails to make such election, then such Participant shall be subject to the new vesting schedule. The Participant's election period shall commence on the adoption date of the amendment and shall end sixty (60) days after the latest of: (1) the adoption date of the amendment, (2) the effective date of the amendment, or (3) the date the Participant receives written notice of the amendment from the Employer or Administrator. 27 (f) In determining Years of Service for purposes of vesting under the Plan, Years of Service prior to the vesting computation period in which an Employee attained age eighteen shall be excluded. 5.7 DISTRIBUTION OF BENEFITS (a)(1) Unless otherwise elected as provided below, a Participant who is married on the Annuity Starting Date and who does not die before the Annuity Starting Date shall receive the value of all of such Participant's benefits in the form of a joint and survivor annuity. The joint and survivor annuity is an annuity that commences immediately and shall be the Actuarial Equivalent of a single life annuity. Such joint and survivor benefits following the Participant's death shall continue to the spouse during the spouse's lifetime at a rate equal to fifty percent (50%) of the rate at which such benefits were payable to the Participant. This joint and fifty percent (50%) survivor annuity shall be considered the designated qualified joint and survivor annuity and automatic form of payment for the purposes of this Plan. An unmarried Participant shall receive the value of such Participant's benefit in the form of a life annuity. Such unmarried Participant, however, may elect in writing to waive the life annuity. The election must comply with the provisions of this Section as if it were an election to waive the joint and survivor annuity by a married Participant, but without the spousal consent requirement. The joint and survivor annuity and the life annuity form of distribution shall be the Actuarial Equivalent of the benefits due the Participant. (2) Any election to waive the joint and survivor annuity must be made by the Participant in writing (or in such other form as permitted by the Internal Revenue Service) during the election period and be consented to in writing (or in such other form as permitted by the Internal Revenue Service) by the Participant's spouse. If the spouse is legally incompetent to give consent, the spouse's legal guardian, even if such guardian is the Participant, may give consent. Such election shall designate a Beneficiary (or a form of benefits) that may not be changed without spousal consent (unless the consent of the spouse expressly permits designations by the Participant without the requirement of further consent by the spouse). Such spouse's consent shall be irrevocable and must acknowledge the effect of such election and be witnessed by a Plan representative or a notary public. Such consent shall not be required if it is established to the satisfaction of the Administrator that the required consent cannot be obtained because there is no spouse, the spouse cannot be located, or other circumstances that may be prescribed by Regulations. The election made by the Participant and consented to by such Participant's spouse may be revoked by the Participant in writing (or in such other form as permitted by the Internal Revenue Service) without the consent of the spouse at any time during the election period. A revocation of a prior election shall cause the Participant's benefits to be distributed as a joint and survivor annuity. The number of revocations shall not be limited. Any new election must comply with the requirements of this paragraph. A former spouse's waiver shall not be binding on a new spouse. 28 (3) The election period to waive the joint and survivor annuity shall be the ninety (90) day period ending on the Annuity Starting Date. (4) For purposes of this Section, spouse or surviving spouse means the spouse or surviving spouse of the Participant, provided that a former spouse will be treated as the spouse or surviving spouse and a current spouse will not be treated as the spouse or surviving spouse to the extent provided under a qualified domestic relations order as described in Code Section 414(p). (5) With regard to the election, the Administrator shall provide to the Participant no less than thirty (30) days and no more than ninety (90) days before the Annuity Starting Date a written (or in such other form as permitted by the Internal Revenue Service) explanation of: (i) the terms and conditions of the joint and survivor annuity, (ii) the Participant's right to make, and the effect of, an election to waive the joint and survivor annuity, (iii) the right of the Participant's spouse to consent to any election to waive the joint and survivor annuity, and (iv) the right of the Participant to revoke such election, and the effect of such revocation. (6) Notwithstanding the above, with respect to distributions made after December 31, 1996, if the Participant elects (with spousal consent, if applicable) to waive the requirement that the explanation be provided at least thirty (30) days before the Annuity Starting Date, the election period shall be extended to the thirtieth (30th) day after the date on which such explanation is provided to the Participant, unless the thirty (30) day period is waived pursuant to the following provisions. Any distribution provided for in this Section 5.7 may commence less than thirty (30) days after the notice required by Code Section 417(a)(3) is given provided the following requirements are satisfied: (i) the Administrator clearly informs the Participant that the Participant has a right to a period of thirty (30) days after receiving the notice to consider whether to waive the joint and survivor annuity and to elect (with spousal consent) to a form of distribution other than a joint and survivor annuity; (ii) the Participant is permitted to revoke an affirmative distribution election at least until the Annuity Starting Date, or, if later, at any time prior to the expiration of the seven (7) day period that begins the day after the explanation of the joint and survivor annuity is provided to the Participant; 29 (iii) the Annuity Starting Date is after the date that the explanation of the joint and survivor annuity is provided to the Participant. However, the Annuity Starting Date may be before the date that any affirmative distribution election is made by the Participant and before the date that the distribution is permitted to commence under (iv) below; and (iv) distribution in accordance with the affirmative election does not commence before the expiration of the seven (7) day period that begins the day after the explanation of the joint and survivor annuity is provided to the Participant. (b) In the event a married Participant duly elects pursuant to paragraph (a)(2) above not to receive benefits in the form of a joint and survivor annuity, or if such Participant is not married, in the form of a life annuity, the Administrator, pursuant to the election of the Participant, shall direct the Trustee to distribute to a Participant or such Participant's Beneficiary an amount which is the Actuarial Equivalent of the monthly retirement benefit provided in Section 5.1(c) in one or more of the following methods: (1) One lump-sum payment in cash. (2) Monthly pension payable over the life of the Participant. (3) Reduced monthly pension payable over the life of the Participant and the life of the Participant's designated Beneficiary (50% joint and survivor annuity). (4) Reduced monthly pension payable over the life of the Participant and the life of the Participant's designated Beneficiary (75% joint and survivor annuity). (5) Reduced monthly pension payable over the life of the Participant and the life of the Participant's designated Beneficiary (100% joint and survivor annuity). However, any such annuity may not be in any form that will provide for payments over a period extending beyond either the life of the Participant (or the lives of the Participant and the Participant's designated Beneficiary) or the life expectancy of the Participant (or the life expectancy of the Participant and the Participant's designated Beneficiary). 30 (c) The present value of a Participant's joint and survivor annuity derived from Employer and Employee contributions may not, for Plan Years beginning after August 5, 1997, be paid without the Participant's and the Participant's spouse's written (or in such form as permitted by the Internal Revenue Service) consent if the value exceeds $5,000 ($3,500 for Plan Years beginning prior to August 6, 1997) or, if the distribution is made prior to October 17, 2000, has ever exceeded $5,000 ($3,500 for Plan Years beginning prior to August 6, 1997) at the time of any prior distribution and the benefit is "immediately distributable." However, spousal consent is not required if the distribution will be made in the form of a joint and survivor annuity and the benefit is "immediately distributable." A benefit is "immediately distributable" if any part of the benefit could be distributed to the Participant (or surviving spouse) before the Participant attains (or would have attained if not deceased) the later of the Participant's Normal Retirement Age or age 62. Any consent required by this Section 5.7(c) must be obtained not more than ninety (90) days before commencement of the distribution and shall be made in a manner consistent with Section 5.7(a)(2). If, for Plan Years beginning after August 5, 1997, the value of the Participant's benefit derived from Employer and Employee contributions does not exceed $5,000 ($3,500 for Plan Years beginning prior to August 6, 1997) and, if the distribution is made prior to October 17, 2000, has never exceeded $5,000 ($3,500 for Plan Years beginning prior to August 6, 1997) at the time of any prior distribution, then the Administrator shall direct the Trustee to immediately distribute such benefit in a lump sum without the Participant's and the Participant's spouse's written consent. No distribution may be made under the preceding sentence after the Annuity Starting Date unless the Participant and the Participant's spouse consent in writing (or in such form as permitted by the Internal Revenue Service) to such distribution. (d) The following rules will apply to the consent requirements set forth in subsection (c): (1) No consent shall be valid unless the Participant has received a general description of the material features and an explanation of the relative values of the optional forms of benefit available under the Plan that would satisfy the notice requirements of Code Section 417. (2) The Participant must be informed of the right to defer receipt of the distribution. If a Participant fails to consent, it shall be deemed an election to defer the commencement of payment of any benefit. However, any election to defer the receipt of benefits shall not apply with respect to distributions which are required under Section 5.7(e). (3) Notice of the rights specified under this paragraph shall be provided no less than thirty (30) days and no more than ninety (90) days before the Annuity Starting Date. Notwithstanding the above, the Annuity Starting Date may be a date prior to the date the explanation is provided to the Participant if the distribution does not commence until at least thirty (30) days after such explanation is provided, subject to the waiver of the thirty (30) day period as provided for in Section 5.7(a)(6). 31 (4) Written (or such other form as permitted by the Internal Revenue Service) consent of the Participant to the distribution must not be made before the Participant receives the notice and must not be made more than ninety (90) days before the Annuity Starting Date. (5) No consent shall be valid if a significant detriment is imposed under the Plan on any Participant who does not consent to the distribution. Any such distribution may commence less than thirty (30) days, subject to Section 5.7(a)(5), after the notice required under Regulation 1.411(a)-11(c) is given, provided that: (1) the Administrator clearly informs the Participant that the Participant has a right to a period of at least thirty (30) days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and (2) the Participant, after receiving the notice, affirmatively elects a distribution. (e) Notwithstanding any provision in the Plan to the contrary, the distribution of a Participant's benefits made on or after January 1, 1997, whether under the Plan or through the purchase of an annuity contract, shall be made in accordance with the following requirements and shall otherwise comply with Code Section 401(a)(9) and the Regulations thereunder (including Regulation 1.401(a)(9)-2), the provisions of which are incorporated herein by reference: (1) A Participant's benefits shall be distributed or must begin to be distributed not later than April 1st of the calendar year following the later of (i) the calendar year in which the Participant attains age 70 1/2 or (ii) the calendar year in which the Participant retires, provided, however, that this clause (ii) shall not apply in the case of a Participant who is a "five (5) percent owner" at any time during the Plan Year ending with or within the calendar year in which such owner attains age 70 1/2. Such distributions shall be equal to or greater than any required distribution. Alternatively, if the distribution is to be in the form of a joint and survivor annuity or single life annuity, then distributions must begin no later than the applicable April 1st as determined under the preceding paragraph and must be made over the life of the Participant (or the lives of the Participant and the Participant's designated Beneficiary) in accordance with Regulations. (2) Distributions to a Participant and the Participant's Beneficiaries shall only be made in accordance with the incidental death benefit requirements of Code Section 401(a)(9)(G) and the Regulations thereunder. 32 With respect to distributions under the Plan made for calendar years beginning on or after January 1, 2001, the Plan will apply the minimum distribution requirements of Code Section 401(a)(9) in accordance with the Regulations under Code Section 401(a)(9) that were proposed on January 17, 2001, notwithstanding any provision of the Plan to the contrary. This amendment shall continue in effect until the end of the last calendar year beginning before the effective date of final Regulations under Code Section 401(a)(9) or such other date specified in guidance published by the Internal Revenue Service. (f) For purposes of this Section, the life expectancy of a Participant and a Participant's spouse (other than in the case of a life annuity) shall not be redetermined in accordance with Code Section 401(a)(9)(D). Life expectancy and joint and last survivor expectancy shall be computed using the return multiples in Tables V and VI of Regulation 1.72-9. (g) All annuity Contracts under this Plan shall be non-transferable when distributed. Furthermore, the terms of any annuity Contract purchased and distributed to a Participant or spouse shall comply with all of the requirements of the Plan. 5.8 DISTRIBUTION OF BENEFITS UPON DEATH (a) Unless otherwise elected as provided below, a Vested Participant who dies before the Annuity Starting Date and who has a surviving spouse shall have the death benefit paid to the surviving spouse in the form of a Pre-Retirement Survivor Annuity. The Participant's spouse may direct that payment of the Pre-Retirement Survivor Annuity commence within a reasonable period after the Participant's death (but not later than the month in which the Participant would have attained the Earliest Retirement Age under the Plan if the Participant dies on or before the Earliest Retirement Age). If the spouse does not so direct, payment of such benefit will commence at the time the Participant would have attained the later of Normal Retirement Age or age 62. However, the spouse may elect a later commencement date, subject to the rules specified in Section 5.8(g). (b) Any election to waive the Pre-Retirement Survivor Annuity before the Participant's death must be made by the Participant in writing (or in such other form as permitted by the Internal Revenue Service) during the election period and shall require the spouse's irrevocable consent in the same manner provided for in Section 5.7(a)(2). Further, the spouse's consent must acknowledge the specific nonspouse Beneficiary. Notwithstanding the foregoing, the nonspouse Beneficiary need not be acknowledged, provided the consent of the spouse acknowledges that the spouse has the right to limit consent only to a specific Beneficiary and that the spouse voluntarily elects to relinquish such right. (c) The election period to waive the Pre-Retirement Survivor Annuity shall begin on the first day of the Plan Year in which the Participant attains age thirty-five (35) and end on the date of the Participant's death. An earlier waiver (with spousal consent) may be made provided a written (or in such other form as permitted by the Internal Revenue Service) explanation of the Pre-Retirement Survivor Annuity is given to the Participant and such waiver becomes invalid at the beginning of the Plan Year in which the Participant turns age thirty-five (35). In the event a Vested Participant separates from service prior to the beginning of the election period, the election period shall begin on the date of such separation from service. 33 (d) With regard to the election, the Administrator shall provide each Participant within the applicable period, with respect to such Participant (and consistent with Regulations), a written (or in such other form as permitted by the Internal Revenue Service) explanation of the Pre-Retirement Survivor Annuity containing comparable information to that required pursuant to Section 5.7(a)(5). For the purposes of this paragraph, the term "applicable period" means, with respect to a Participant, whichever of the following periods ends last: (1) The period beginning with the first day of the Plan Year in which the Participant attains age thirty-two (32) and ending with the close of the Plan Year preceding the Plan Year in which the Participant attains age thirty-five (35); (2) A reasonable period after the individual becomes a Participant; (3) A reasonable period ending after the Plan no longer fully subsidizes the cost of the Pre-Retirement Survivor Annuity with respect to the Participant; (4) A reasonable period ending after Code Section 401(a)(11) applies to the Participant; or (5) A reasonable period after separation from service in the case of a Participant who separates before attaining age thirty-five (35). For this purpose, the Administrator must provide the explanation beginning one (1) year before the separation from service and ending one (1) year after such separation. If such a Participant thereafter returns to employment with the Employer, the applicable period for such Participant shall be redetermined. For purposes of applying this Section 5.8(d), a reasonable period ending after the enumerated events described in paragraphs (2), (3) and (4) is the end of the two (2) year period beginning one (1) year prior to the date the applicable event occurs, and ending one (1) year after that date. (e) If the present value of the Pre-Retirement Survivor Annuity derived from Employer and Employee contributions does not exceed $5,000 ($3,500 for Plan Years beginning prior to August 6, 1997) and, if the distribution is made prior to October 17, 2000, has never exceeded $5,000 ($3,500 for Plan Years beginning prior to August 6, 1997) at the time of any prior distribution, then the Administrator shall direct the immediate distribution of the present value of the Pre-Retirement Survivor Annuity to the Participant's spouse. No distribution may be made under the preceding sentence after the Annuity Starting Date unless the spouse consents in writing (or in such other form as permitted by the Internal Revenue Service) to such distribution. If the value exceeds $5,000 ($3,500 for Plan Years beginning prior to August 6, 1997) or, if the distribution is made prior to October 17, 2000, has ever exceeded $5,000 ($3,500 for Plan Years beginning prior to August 6, 1997) at the time of any prior distribution, then an immediate distribution of the entire amount of the Pre-Retirement Survivor Annuity may be made to the surviving spouse, provided such surviving spouse consents in writing (or in such other form as permitted by the Internal Revenue Service) to such distribution. Any consent required under this paragraph must be obtained not more than ninety (90) days before commencement of the distribution and shall be made in a manner consistent with Section 5.7(a)(2). 34 The present value in this regard shall be determined as provided in Section 1.42. Notwithstanding the foregoing, the present value of the Pre-Retirement Survivor Annuity shall be determined as provided in Section 1.42. (f)(1) To the extent the death benefit is not paid in the form of a Pre-Retirement Survivor Annuity, it shall be paid to the Participant's Beneficiary in one of the following methods, as elected by the Participant (or if no election has been made prior to the Participant's death, by the Participant's Beneficiary), subject to the rules specified in Section 5.8(g): (i) One lump-sum payment in cash. (ii) Payment in monthly, quarterly, semi-annual, or annual cash installments over a period to be determined by the Participant or the Participant's Beneficiary. After periodic installments commence, the Beneficiary shall have the right to direct the Trustee to reduce the period over which such periodic installments shall be made, and the Trustee shall adjust the cash amount of such periodic installments accordingly. (2) In the event the death benefit payable pursuant to Section 5.5 is payable in installments, then, upon the death of the Participant, the Administrator may direct the Trustee to segregate the death benefit into a separate account, and the Trustee shall invest such segregated account separately, and the funds accumulated in such account shall be used for the payment of the installments. (g) Notwithstanding any provision in the Plan to the contrary, distributions upon the death of a Participant shall be made in accordance with the following requirements and shall otherwise comply with Code Section 401(a)(9) and the Regulations thereunder. If it is determined, pursuant to Regulations, that the distribution of a Participant's interest has begun and the Participant dies before the entire interest has been distributed, the remaining portion of such interest shall be distributed at least as rapidly as under the method of distribution selected pursuant to Section 5.7 as of the date of death. If a Participant dies before receiving any distributions of the interest in the Plan or before distributions are deemed to have begun pursuant to Regulations, then the death benefit shall be distributed to the Participant's Beneficiaries by December 31st of the calendar year in which the fifth anniversary of the Participant's date of death occurs. 35 However, the 5-year distribution requirement of the preceding paragraph shall not apply to any portion of the deceased Participant's interest which is payable to or for the benefit of a designated Beneficiary. In such event, such portion shall be distributed over the life of such designated Beneficiary (or over a period not extending beyond the life expectancy of such designated Beneficiary) provided such distribution begins not later than December 31st of the calendar year immediately following the calendar year in which the Participant died. However, in the event the Participant's spouse (determined as of the date of the Participant's death) is the designated Beneficiary, the requirement that distributions commence within one year of a Participant's death shall not apply. In lieu thereof, distributions must commence on or before the later of: (1) December 31st of the calendar year immediately following the calendar year in which the Participant died; or (2) December 31st of the calendar year in which the Participant would have attained age 70 1/2. If the surviving spouse dies before distributions to such spouse begin, then the 5-year distribution requirement of this Section shall apply as if the spouse was the Participant. (h) For purposes of this Section, the life expectancy of a Participant and a Participant's spouse (other than in the case of a life annuity) shall not be redetermined in accordance with Code Section 401(a)(9)(D). Life expectancy and joint and last survivor expectancy shall be computed using the return multiples in Tables V and VI of Regulation 1.72-9. (i) For purposes of this Section, any amount paid to a child of the Participant will be treated as if it had been paid to the surviving spouse if the amount becomes payable to the surviving spouse when the child reaches the age of majority. 5.9 TIME OF SEGREGATION OR DISTRIBUTION Except as limited by Sections 5.7 and 5.8, whenever the Trustee is to make a distribution or to commence a series of payments the distribution or series of payments may be made or begun on such date or as soon thereafter as is practicable. However, unless a Former Participant elects in writing to defer the receipt of benefits (such election may not result in a death benefit that is more than incidental), the payment of benefits shall begin not later than the sixtieth (60th) day after the close of the Plan Year in which the latest of the following events occurs: (a) the date on which the Participant attains the earlier of age 65 or the Normal Retirement Age specified herein; (b) the tenth (10th) anniversary of the year in which the Participant commenced participation in the Plan; or (c) the date the Participant terminates service with the Employer. Notwithstanding the foregoing, the failure of a Participant and, if applicable, the Participant's spouse, to consent to a distribution that is "immediately distributable" (within the meaning of Section 5.7), shall be deemed to be an election to defer commencement of payment of any benefit sufficient to satisfy this Section. 36 5.10 DISTRIBUTION FOR MINOR OR INCOMPETENT BENEFICIARY In the event a distribution is to be made to a minor or incompetent Beneficiary, then the Administrator may direct that such distribution be paid to the legal guardian, or if none in the case of a minor Beneficiary, to a parent of such Beneficiary or a responsible adult with whom the Beneficiary maintains residence, or to the custodian for such Beneficiary under the Uniform Gift to Minors Act or Gift to Minors Act, if such is permitted by the laws of the state in which said Beneficiary resides. Such a payment to the legal guardian, custodian or parent of a minor Beneficiary shall fully discharge the Trustee, Employer, and Plan from further liability on account thereof. 5.11 LOCATION OF PARTICIPANT OR BENEFICIARY UNKNOWN In the event that all, or any portion, of the distribution payable to a Participant or Beneficiary hereunder shall, at the later of the Participant's attainment of age 62 or Normal Retirement Age, remain unpaid solely by reason of the inability of the Administrator, after sending a registered letter, return receipt requested, to the last known address, and after further diligent effort, to ascertain the whereabouts of such Participant or Beneficiary, the amount so distributable shall be forfeited and shall be used to reduce the cost of the Plan. Notwithstanding the foregoing, effective January 1, 1997, or if later, the adoption date of this amendment and restatement, if the value of a Participant's Vested benefit derived from Employer and Employee contributions does not exceed $5,000 ($3,500 for Plan Years beginning prior to August 6, 1997), then the amount distributable may, in the sole discretion of the Administrator, either be treated as a forfeiture, or be paid directly to an individual retirement account described in Code Section 408(a) or an individual retirement annuity described in Code Section 408(b) at the time it is determined that the whereabouts of the Participant or the Participant's Beneficiary cannot be ascertained. In the event a Participant or Beneficiary is located subsequent to the benefit being forfeited, such benefit shall be restored unadjusted for earnings or losses. However, regardless of the preceding, a benefit which is lost by reason of escheat under applicable state law is not treated as a forfeiture for purposes of this Section nor as an impermissable forfeiture under the Code. 5.12 EFFECT OF SOCIAL SECURITY ACT Benefits being paid to a Participant or Beneficiary under the terms of the Plan may not be decreased by reason of any post-separation Social Security benefit increases or by the increase of the Social Security wage base under Title II of the Social Security Act. Benefits to which a Former Participant has a Vested interest may not be decreased by reason of an increase in a benefit level or wage base under Title II of the Social Security Act. 5.13 LIMITATIONS ON DISTRIBUTIONS In the event a Participant receives a distribution of the Vested Accrued Benefit prior to Normal Retirement Age (determined without regard to any years of participation), the excess/offset percentage, whichever is applicable in Section 5.1(a), shall be limited to .75/26.25%, whichever is applicable, reduced 1/15th for each of the first five (5) years and 1/30th for each of the next five (5) years and reduced actuarially for each additional year thereafter that the date on which the benefit commences precedes the Participant's Social Security Retirement Age. With respect to benefits commencing prior to the Participant attaining age 55, the .75/26.25% shall be further reduced (on a monthly basis to reflect the month in which benefits commence) to a percentage that is the Actuarial Equivalent of the .75/26.25% (as reduced in accordance with the preceding sentence) applicable to a benefit commencing in the month in which the Participant attains age 55. For purposes of this paragraph, a benefit commences on the first day of the period for which the benefit is paid. Notwithstanding the above, if such benefit is distributed in a form other than a nondecreasing life annuity payable for a period not less than the life of such Participant and the Actuarial Equivalent of the Vested Accrued Benefit of such Participant attributable to .75/26.25% is greater than the benefit calculated above, such amount shall be the benefit limitation. 37 5.14 QUALIFIED DOMESTIC RELATIONS ORDER DISTRIBUTION All rights and benefits, including elections, provided to a Participant in this Plan shall be subject to the rights afforded to any "alternate payee" under a "qualified domestic relations order." Furthermore, a distribution to an "alternate payee" shall be permitted if such distribution is authorized by a "qualified domestic relations order," even if the affected Participant has not separated from service and has not reached the Earliest Retirement Age. For the purposes of this Section, "alternate payee" and "qualified domestic relations order" shall have the meaning set forth under Code Section 414(p). 5.15 LIMITATION OF BENEFITS ON TERMINATION (a) Benefits distributed to any of the twenty-five (25) Highly Compensated Participants with the greatest compensation in the current or prior year are restricted such that the monthly payments are no greater than an amount equal to the monthly payment that would be made on behalf of such individual under a straight life annuity that is the Actuarial Equivalent of the sum of the individual's Accrued Benefit, the individual's other benefits under the Plan (other than a social security supplement within the meaning of Regulation 1.411(a)-7(c)(4)(ii)), and the amount the individual is entitled to receive under a social security supplement. However, the limitation of this Section 5.15 shall not apply if: (1) after payment of the benefit to an individual described above, the value of Plan assets equals or exceeds one-hundred-ten percent (110%) of the value of current liabilities, as defined in Code Section 412(l)(7); (2) the value of the benefits for an individual described above is less than 1 percent of the value of current liabilities before distribution; or (3) the value of the benefits payable under the Plan to an individual described above does not exceed $5,000 ($3,500 for Plan Years beginning prior to August 6, 1997). (b) For purposes of this Section, benefit includes any periodic income, any withdrawal values payable to a living Participant, and any death benefits not provided for by insurance on the individual's life. 38 (c) An individual's otherwise restricted benefit may be distributed in full to the affected individual if, prior to receipt of the restricted amount, the individual enters into a written agreement with the Administrator to secure repayment to the Plan of the restricted amount. The restricted amount is the excess of the amounts distributed to the individual (accumulated with reasonable interest) over the amounts that could have been distributed to the individual under the straight life annuity described above (accumulated with reasonable interest). The individual may secure repayment of the restricted amount upon distribution by: (1) entering into an agreement for promptly depositing in escrow with an acceptable depositary, property having a fair market value equal to at least one-hundred-twenty-five percent (125%) of the restricted amount; (2) providing a bank letter of credit in an amount equal to at least one-hundred percent (100%) of the restricted amount; or (3) posting a bond equal to at least one-hundred percent (100%) of the restricted amount. The bond must be furnished by an insurance company, bonding company or other surety for federal bonds. (d) The escrow arrangement may permit an individual to withdraw from escrow amounts in excess of one-hundred-twenty-five percent (125%) of the restricted amount. If the market value of the property in an escrow account falls below one-hundred-ten percent (110%) of the remaining restricted amount, the individual must deposit additional property to bring the value of the property held by the depositary up to one-hundred-twenty-five percent (125%) of the restricted amount. The escrow arrangement may provide that the individual has the right to receive any income from the property placed in escrow, subject to the individual's obligation to deposit additional property, as set forth in the preceding sentence. (e) A surety or bank may release any liability on a bond or letter of credit in excess of one-hundred percent (100%) of the restricted amount. (f) If the Administrator certifies to the depositary, surety or bank that the individual (or the individual's estate) is no longer obligated to repay any restricted amount, a depositary may deliver to the individual any property held under an escrow arrangement, and a surety or bank may release any liability on an individual's bond or letter of credit. ARTICLE VI CODE SECTION 415 LIMITATIONS 6.1 ANNUAL BENEFIT For purposes of this Article, effective with the first day of the first "limitation year" beginning after December 31, 1994, "annual benefit" means the benefit payable annually under the terms of the Plan (exclusive of any benefit not required to be considered for purposes of applying the limitations of Code Section 415 to the Plan) payable in the form of a straight life annuity with no ancillary benefits. If the benefit under the Plan is payable in any other form, the "annual benefit" shall be adjusted to the equivalent of a straight life annuity pursuant to Section 6.3(c). Notwithstanding the foregoing, with respect to the Code Section 415 limitations prior to the effective date of this Article VI, the Old Law Benefit shall be determined on the basis of Code Section 415(b)(2)(E) as in effect on December 7, 1994. 39 6.2 MAXIMUM ANNUAL BENEFIT (a) Notwithstanding the foregoing and subject to the exceptions below, the maximum "annual benefit" payable to a Participant under this Plan in any "limitation year" shall equal the lesser of: (1) $90,000 payable as a straight life annuity, or (2) one hundred percent (100%) of the Participant's "415 Compensation" averaged over the three consecutive "limitation years" (or actual number of "limitation years" for Employees who have been employed for less than three consecutive "limitation years") during which the Employee had the greatest aggregate "415 Compensation" from the Employer. (b) For purposes of applying the limitations of Code Section 415, the "limitation year" shall be the Plan Year. All qualified plans maintained by the Employer must use the same "limitation year." If the "limitation year" is amended to a different twelve (12) consecutive month period, the new "limitation year" must begin on a date within the "limitation year" in which the amendment is made. (c) The dollar limitation under Code Section 415(b)(1)(A) stated in paragraph (a)(1) above shall be adjusted annually as provided in Code Section 415(d) pursuant to the Regulations. The adjusted limitation is effective as of January 1st of each calendar year and is applicable to "limitation years" ending with or within that calendar year. (d) The limitation stated in paragraph (a)(2) above for Participants who have separated from service with a non-forfeitable right to an Accrued Benefit shall be automatically adjusted by multiplying such limitation by the cost-of-living adjustment factor prescribed by the Secretary of the Treasury under Code Section 415(d) in such manner as the Secretary shall prescribe. The adjusted limitation shall apply to "limitation years" ending with or within the calendar year of the date of the adjustment. (e) For the purpose of this Article, all qualified defined benefit plans (whether terminated or not) ever maintained by the Employer shall be treated as one defined benefit plan. If a Participant is, or has ever been, a participant in more than one defined benefit plan maintained by the Employer, the sum of the Participant's "annual benefits" from all such plans may not exceed the maximum "annual benefit" of this Section 6.2. Where the Participant's Employer-provided benefits under all defined benefit plans ever maintained by the Employer (determined as of the same age) would exceed the maximum "annual benefit" applicable at that age, the Employer will reduce the rate of accrual in this Plan to the extent necessary so that the total "annual benefit" payable at any time under such plans will not exceed the maximum "annual benefit." 40 (f) For the purpose of this Article, if the Employer is a member of a controlled group of corporations, trades or businesses under common control (as defined by Code Section 1563(a) or Code Section 414(b) and (c) as modified by Code Section 415(h)) or is a member of an affiliated service group (as defined by Code Section 414(m)), all Employees of such Employers shall be considered to be employed by a single Employer. (g) For the purpose of this Article, if this Plan is a Code Section 413(c) plan, each Employer who maintains this Plan will be considered to be a single Employer. (h) Notwithstanding anything contained in this Article to the contrary, the limitations, adjustments and other requirements prescribed in this Article shall at all times comply with the provisions of Code Section 415 and the Regulations thereunder. 6.3 ADJUSTMENTS TO ANNUAL BENEFIT AND LIMITATIONS (a) If the "annual benefit" begins before the Participant's Social Security Retirement Age, but on or after age 62, the $90,000 limitation shall be reduced by: (1) in the case of a Participant whose Social Security Retirement Age is 65, 5/9 of 1% for each month by which benefits commence before the month in which the Participant attains age 65, or (2) in the case of a Participant whose Social Security Retirement Age is greater than 65, 5/9 of 1% for each of the first 36 months and 5/12 of 1% for each additional month (up to 24) by which benefits commence before the month in which the Participant attains Social Security Retirement Age. If the "annual benefit" begins before age 62, the $90,000 limitation shall be the actuarial equivalent of the Participant's limitation for benefits commencing at age 62, reduced for each month by which benefits commence before the month in which the Participant attains age 62. In order to determine actuarial equivalence for this purpose, the lesser of the equivalent amount computed using the Plan interest rate and Plan mortality table (or other tabular factor) and the amount computed using five percent (5%) interest and the "Applicable Mortality Table" shall be used. The mortality decrement shall be ignored to the extent that a forfeiture does not occur at death. (b) If the "annual benefit" begins after the Participant's Social Security Retirement Age the $90,000 limitation shall be increased so that it is the actuarial equivalent of the $90,000 limitation at the Participant's Social Security Retirement Age. In order to determine actuarial equivalence for this purpose, the lesser of the equivalent amount computed using the Plan interest rate and Plan mortality table (or other tabular factor) used for actuarial equivalence for late retirement benefits under the Plan and the equivalent annual amount computed using five percent (5%) and the "Applicable Mortality Table" shall be used. The mortality decrement shall be ignored to the extent that a forfeiture does not occur at death. 41 (c) For purposes of adjusting the "annual benefit" to a straight life annuity, the equivalent "annual benefit" shall be the greater of the equivalent "annual benefit" computed using the Plan interest rate and Plan mortality table (or other tabular factor) and the equivalent "annual benefit" computed using five percent (5%) interest rate assumption and the "Applicable Mortality Table." If the "annual benefit" is paid in a form other than a nondecreasing life annuity payable for a period not less than the life of a Participant or, in the case of a Pre-Retirement Survivor Annuity, the life of the surviving spouse, the "Applicable Interest Rate" shall be substituted for five percent (5%) in the preceding sentence. (d) For purposes of Sections 6.1, 6.3(a) and 6.3(b), no adjustments under Code Section 415(d) shall be taken into account before the "limitation year" for which such adjustment first takes effect. (e) For purposes of Section 6.1, no actuarial adjustment to the benefit is required for (1) the value of a qualified joint and survivor annuity, (2) benefits that are not directly related to retirement benefits (such as a qualified disability benefit, pre-retirement death benefits, and post-retirement medical benefits), and (3) the value of post-retirement cost-of-living increases made in accordance with Code Section 415(d) and Regulation 1.415-3(c)(2)(iii). The "annual benefit" does not include any benefits attributable to Employee contributions or rollover contributions, or the assets transferred from a qualified plan that was not maintained by the Employer. 6.4 ANNUAL BENEFIT NOT IN EXCESS OF $10,000 This Plan may pay an "annual benefit" to any Participant in excess of the Participant's maximum "annual benefit" if the "annual benefit" derived from Employer contributions under this Plan and all other defined benefit plans maintained by the Employer does not in the aggregate exceed $10,000 for the "limitation year" or for any prior "limitation year" and the Employer has not at any time maintained a defined contribution plan, a welfare benefit fund under which amounts attributable to post-retirement medical benefits are allocated to separate accounts of key employees (as defined in Code Section 419(A)(d)(3)), or an individual medical account in which the Participant participated. For purposes of this paragraph, if this Plan provides for voluntary or mandatory Employee contributions, such contributions will not be considered a separate defined contribution plan maintained by the Employer. 6.5 PARTICIPATION OR SERVICE REDUCTIONS If a Participant has less than ten (10) years of participation in the Plan at the time the Participant begins to receive benefits under the Plan, the limitations in Sections 6.2(a)(1) and 6.3 shall be reduced by multiplying such limitations by a fraction (a) the numerator of which is the number of years of participation (or part thereof) in the Plan and (b) the denominator of which is ten (10), provided, however, that said fraction shall in no event be less than 1/10th. The limitations of Sections 6.2(a)(2) and 6.4 shall be reduced in the same manner except the preceding sentence shall be applied with respect to years of service with the Employer rather than years of participation in the Plan. 42 6.6 ELIMINATION OF MULTIPLE PLAN REDUCTION Effective as of the first day of the first "limitation year" beginning on or after January 1, 2000 (the "effective date"), and notwithstanding any other provision of the Plan, the Accrued Benefit for any Participant shall be determined without applying the limitations of Code Section 415(e) as in effect on the day immediately prior to the "effective date." ARTICLE VII TRUSTEE 7.1 BASIC RESPONSIBILITIES OF THE TRUSTEE (a) The Trustee shall have the following categories of responsibilities: (1) Consistent with the "funding policy and method" determined by the Employer, to invest, manage, and control the Plan assets subject, however, to the direction of the Employer or an Investment Manager if the Trustee should appoint such manager as to all or a portion of the assets of the Plan; (2) At the direction of the Administrator, to pay benefits required under the Plan to be paid to Participants, or, in the event of their death, to their Beneficiaries; and (3) To maintain records of receipts and disbursements and furnish to the Employer and/or Administrator for each Plan Year a written annual report pursuant to Section 7.6. (b) In the event that the Trustee shall be directed by the Employer, or an Investment Manager with respect to the investment of any or all Plan assets, the Trustee shall have no liability with respect to the investment of such assets, but shall be responsible only to execute such investment instructions as so directed. (1) The Trustee shall be entitled to rely fully on the written (or other form acceptable to the Administrator and the Trustee, including, but not limited to, voice recorded) instructions of the Employer, or any Fiduciary or nonfiduciary agent of the Employer, in the discharge of such duties, and shall not be liable for any loss or other liability, resulting from such direction (or lack of direction) of the investment of any part of the Plan assets. 43 (2) The Trustee may delegate the duty of executing such instructions to any nonfiduciary agent, which may be an affiliate of the Trustee or any Plan representative. (c) If there shall be more than one Trustee, they shall act by a majority of their number, but may authorize one or more of them to sign papers on their behalf. 7.2 INVESTMENT POWERS AND DUTIES OF THE TRUSTEE (a) The Trustee shall invest and reinvest the Trust Fund to keep the Trust Fund invested without distinction between principal and income and in such securities or property, real or personal, wherever situated, as the Trustee shall deem advisable, including, but not limited to, stocks, common or preferred, open-end or closed-end mutual funds, bonds and other evidences of indebtedness or ownership, and real estate or any interest therein. The Trustee shall at all times in making investments of the Trust Fund consider, among other factors, the short and long-term financial needs of the Plan on the basis of information furnished by the Employer. In making such investments, the Trustee shall not be restricted to securities or other property of the character expressly authorized by the applicable law for trust investments; however, the Trustee shall give due regard to any limitations imposed by the Code or the Act so that at all times the Plan may qualify as a qualified Pension Plan and Trust. (b) The Trustee may employ a bank or trust company pursuant to the terms of its usual and customary bank agency agreement, under which the duties of such bank or trust company shall be of a custodial, clerical and record-keeping nature. 7.3 OTHER POWERS OF THE TRUSTEE The Trustee, in addition to all powers and authorities under common law, statutory authority, including the Act, and other provisions of the Plan, shall have the following powers and authorities, to be exercised in the Trustee's sole discretion: (a) To purchase, or subscribe for, any securities or other property and to retain the same. In conjunction with the purchase of securities, margin accounts may be opened and maintained; (b) To sell, exchange, convey, transfer, grant options to purchase, or otherwise dispose of any securities or other property held by the Trustee, by private contract or at public auction. No person dealing with the Trustee shall be bound to see to the application of the purchase money or to inquire into the validity, expediency, or propriety of any such sale or other disposition, with or without advertisement; 44 (c) To vote upon any stocks, bonds, or other securities; to give general or special proxies or powers of attorney with or without power of substitution; to exercise any conversion privileges, subscription rights or other options, and to make any payments incidental thereto; to oppose, or to consent to, or otherwise participate in, corporate reorganizations or other changes affecting corporate securities, and to delegate discretionary powers, and to pay any assessments or charges in connection therewith; and generally to exercise any of the powers of an owner with respect to stocks, bonds, securities, or other property. However, the Trustee shall not vote proxies relating to securities for which it has not been assigned full investment management responsibilities. In those cases where another party has such investment authority or discretion, the Trustee will deliver all proxies to said party who will then have full responsibility for voting those proxies; (d) To cause any securities or other property to be registered in the Trustee's own name, in the name of one or more of the Trustee's nominees, in a clearing corporation, in a depository, or in book entry form or in bearer form, but the books and records of the Trustee shall at all times show that all such investments are part of the Trust Fund; (e) To borrow or raise money for the purposes of the Plan in such amount, and upon such terms and conditions, as the Trustee shall deem advisable; and for any sum so borrowed, to issue a promissory note as Trustee, and to secure the repayment thereof by pledging all, or any part, of the Trust Fund; and no person lending money to the Trustee shall be bound to see to the application of the money lent or to inquire into the validity, expediency, or propriety of any borrowing; (f) To keep such portion of the Trust Fund in cash or cash balances as the Trustee may, from time to time, deem to be in the best interests of the Plan, without liability for interest thereon; (g) To accept and retain for such time as the Trustee may deem advisable any securities or other property received or acquired as Trustee hereunder, whether or not such securities or other property would normally be purchased as investments hereunder; (h) To make, execute, acknowledge, and deliver any and all documents of transfer and conveyance and any and all other instruments that may be necessary or appropriate to carry out the powers herein granted; (i) To settle, compromise, or submit to arbitration any claims, debts, or damages due or owing to or from the Plan, to commence or defend suits or legal or administrative proceedings, and to represent the Plan in all suits and legal and administrative proceedings; (j) To employ suitable agents and counsel and to pay their reasonable expenses and compensation, and such agent or counsel may or may not be agent or counsel for the Employer; 45 (k) To apply for and procure from responsible insurance companies, to be selected by the Administrator, as an investment of the Trust Fund such annuity, or other Contracts (on the life of any Participant) as the Administrator shall deem proper; to exercise, at any time or from time to time, whatever rights and privileges may be granted under such annuity, or other Contracts; to collect, receive, and settle for the proceeds of all such annuity or other Contracts as and when entitled to do so under the provisions thereof; (l) To invest funds of the Trust in time deposits or savings accounts bearing a reasonable rate of interest or in cash or cash balances without liability for interest thereon; (m) To invest in Treasury Bills and other forms of United States government obligations; (n) To invest in shares of investment companies registered under the Investment Company Act of 1940; (o) To sell, purchase and acquire put or call options if the options are traded on and purchased through a national securities exchange registered under the Securities Exchange Act of 1934, as amended, or, if the options are not traded on a national securities exchange, are guaranteed by a member firm of the New York Stock Exchange regardless of whether such options are covered; (p) To deposit monies in federally insured savings accounts or certificates of deposit in banks or savings and loan associations; (q) To pool all or any of the Trust Fund, from time to time, with assets belonging to any other qualified employee pension benefit trust created by the Employer or any Affiliated Employer, and to commingle such assets and make joint or common investments and carry joint accounts on behalf of this Plan and Trust and such other trust or trusts, allocating undivided shares or interests in such investments or accounts or any pooled assets of the two or more trusts in accordance with their respective interests; (r) To do all such acts and exercise all such rights and privileges, although not specifically mentioned herein, as the Trustee may deem necessary to carry out the purposes of the Plan. 7.4 DUTIES OF THE TRUSTEE REGARDING PAYMENTS At the direction of the Administrator, the Trustee shall, from time to time, in accordance with the terms of the Plan, make payments out of the Trust Fund. The Trustee shall not be responsible in any way for the application of such payments. 46 7.5 TRUSTEE'S COMPENSATION AND EXPENSES AND TAXES The Trustee shall be paid such reasonable compensation as set forth in the Trustee's fee schedule (if the Trustee has such a schedule) or as agreed upon in writing by the Employer and the Trustee. However, an individual serving as Trustee who already receives full-time pay from the Employer shall not receive compensation from the Plan. In addition, the Trustee shall be reimbursed for any reasonable expenses, including reasonable counsel fees incurred by it as Trustee. Such compensation and expenses shall be paid from the Trust Fund unless paid or advanced by the Employer. All taxes of any kind whatsoever that may be levied or assessed under existing or future laws upon, or in respect of, the Trust Fund or the income thereof, shall be paid from the Trust Fund. 7.6 ANNUAL REPORT OF THE TRUSTEE (a) Within a reasonable period of time after the later of the Anniversary Date or receipt of the Employer contribution for each Plan Year, the Trustee, or its agent, shall furnish to the Employer and Administrator a written statement of account with respect to the Plan Year for which such contribution was made setting forth: (1) the net income, or loss, of the Trust Fund; (2) the gains, or losses, realized by the Trust Fund upon sales or other disposition of the assets; (3) the increase, or decrease, in the value of the Trust Fund; (4) all payments and distributions made from the Trust Fund; and (5) such further information as the Trustee and/or Administrator deems appropriate. (b) The Employer, promptly upon its receipt of each such statement of account, shall acknowledge receipt thereof in writing and advise the Trustee and/or Administrator of its approval or disapproval thereof. Failure by the Employer to disapprove any such statement of account within thirty (30) days after its receipt thereof shall be deemed an approval thereof. The approval by the Employer of any statement of account shall be binding on the Employer and the Trustee as to all matters contained in the statement to the same extent as if the account of the Trustee had been settled by judgment or decree in an action for a judicial settlement of its account in a court of competent jurisdiction in which the Trustee, the Employer and all persons having or claiming an interest in the Plan were parties. However, nothing contained in this Section shall deprive the Trustee of its right to have its accounts judicially settled if the Trustee so desires. 47 7.7 AUDIT (a) If an audit of the Plan's records shall be required by the Act and the regulations thereunder for any Plan Year, the Administrator shall direct the Trustee to engage on behalf of all Participants an independent qualified public accountant for that purpose. Such accountant shall, after an audit of the books and records of the Plan in accordance with generally accepted auditing standards, within a reasonable period after the close of the Plan Year, furnish to the Administrator and the Trustee a report of the audit setting forth the accountant's opinion as to whether any statements, schedules or lists that are required by Act Section 103 or the Secretary of Labor to be filed with the Plan's annual report, are presented fairly in conformity with generally accepted accounting principles applied consistently. (b) All auditing and accounting fees shall be an expense of and may, at the election of the Employer, be paid from the Trust Fund. (c) If some or all of the information necessary to enable the Administrator to comply with Act Section 103 is maintained by a bank, insurance company, or similar institution, regulated, supervised, and subject to periodic examination by a state or federal agency, then it shall transmit and certify the accuracy of that information to the Administrator as provided in Act Section 103(b) within one hundred twenty (120) days after the end of the Plan Year or such other date as may be prescribed under regulations of the Secretary of Labor. 7.8 RESIGNATION, REMOVAL AND SUCCESSION OF TRUSTEE (a) Unless otherwise agreed to by both the Trustee and the Employer, a Trustee may resign at any time by delivering to the Employer, at least thirty (30) days before its effective date, a written notice of resignation. (b) Unless otherwise agreed to by both the Trustee and the Employer, the Employer may remove a Trustee at any time by delivering to the Trustee, at least thirty (30) days before its effective date, a written notice of such Trustee's removal. (c) Upon the death, resignation, incapacity, or removal of any Trustee, a successor may be appointed by the Employer; and such successor, upon accepting such appointment in writing and delivering same to the Employer, shall, without further act, become vested with all the powers and responsibilities of the predecessor as if such successor had been originally named as a Trustee herein. Until such a successor is appointed, the remaining Trustee or Trustees shall have full authority to act under the terms of the Plan. (d) The Employer may designate one or more successors prior to the death, resignation, incapacity, or removal of a Trustee. In the event a successor is so designated by the Employer and accepts such designation, the successor shall, without further act, become vested with all the powers and responsibilities of the predecessor as if such successor had been originally named as Trustee herein immediately upon the death, resignation, incapacity, or removal of the predecessor. 48 (e) Whenever any Trustee hereunder ceases to serve as such, the Trustee shall furnish to the Employer and Administrator a written statement of account with respect to the portion of the Plan Year during which the individual or entity served as Trustee. This statement shall be either (i) included as part of the annual statement of account for the Plan Year required under Section 7.6 or (ii) set forth in a special statement. Any such special statement of account should be rendered to the Employer no later than the due date of the annual statement of account for the Plan Year. The procedures set forth in Section 7.6 for the approval by the Employer of annual statements of account shall apply to any special statement of account rendered hereunder and approval by the Employer of any such special statement in the manner provided in Section 7.6 shall have the same effect upon the statement as the Employer's approval of an annual statement of account. No successor to the Trustee shall have any duty or responsibility to investigate the acts or transactions of any predecessor who has rendered all statements of account required by Section 7.6 and this subparagraph. 7.9 TRANSFER OF INTEREST Notwithstanding any other provision contained in this Plan, the Trustee at the direction of the Administrator shall transfer the Vested interest, if any, of a Participant to another trust forming part of a pension, profit sharing or stock bonus plan maintained by such Participant's new employer and represented by said employer in writing as meeting the requirements of Code Section 401(a), provided that the trust to which such transfers are made permits the transfer to be made. 7.10 TRUSTEE INDEMNIFICATION The Employer agrees to indemnify and hold harmless the Trustee against any and all claims, losses, damages, expenses and liabilities the Trustee may incur in the exercise and performance of the Trustee's power and duties hereunder, unless the same are determined to be due to gross negligence or willful misconduct. 7.11 DIRECT ROLLOVER (a) Notwithstanding any provision of the Plan to the contrary that would otherwise limit a "distributee's" election under this Section, a "distributee" may elect, at the time and in the manner prescribed by the Administrator, to have any portion of an "eligible rollover distribution" that is equal to at least $500 paid directly to an "eligible retirement plan" specified by the "distributee" in a "direct rollover." (b) For purposes of this Section the following definitions shall apply: 49 (1) An "eligible rollover distribution" is any distribution of all or any portion of the balance to the credit of the "distributee," except that an "eligible rollover distribution" does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the "distributee" or the joint lives (or joint life expectancies) of the "distributee" and the "distributee's" designated beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Code Section 401(a)(9); the portion of any other distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities); any hardship distribution described in Code Section 401(k)(2)(B)(i)(IV) made after December 31, 1999; and any other distribution that is reasonably expected to total less than $200 during a year. (2) An "eligible retirement plan" is an individual retirement account described in Code Section 408(a), an individual retirement annuity described in Code Section 408(b), an annuity plan described in Code Section 403(a), or a qualified trust described in Code Section 401(a), that accepts the "distributee's" "eligible rollover distribution." However, in the case of an "eligible rollover distribution" to the surviving spouse, an "eligible retirement plan" is an individual retirement account or individual retirement annuity. (3) A "distributee" includes an Employee or former Employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Code Section 414(p), are "distributees" with regard to the interest of the spouse or former spouse. (4) A "direct rollover" is a payment by the Plan to the "eligible retirement plan" specified by the "distributee." ARTICLE VIII PLAN AMENDMENT 8.1 AMENDMENT (a) The Employer shall have the right at any time to amend this Plan, subject to the limitations of this Section. However, any amendment which affects the rights, duties or responsibilities of the Trustee or Administrator may only be made with the Trustee's or Administrator's written consent. Any such amendment shall become effective as provided therein upon its execution. The Trustee shall not be required to execute any such amendment unless the amendment affects the duties of the Trustee hereunder. 50 (b) No amendment to the Plan shall be effective if it authorizes or permits any part of the Trust Fund (other than such part as is required to pay taxes and administration expenses) to be used for or diverted to any purpose other than for the exclusive benefit of the Participants or their Beneficiaries or estates; or causes any reduction in the Accrued Benefit of any Participant (except to the extent permitted under Code Section 412(c)(8)); or causes or permits any portion of the Trust Fund to revert to or become property of the Employer. (c) Except as permitted by Regulations, no Plan amendment or transaction having the effect of a Plan amendment (such as a merger, plan transfer or similar transaction) shall be effective to the extent it eliminates or reduces any "Section 411(d)(6) protected benefit" or adds or modifies conditions relating to "Section 411(d)(6) protected benefits" which results in a further restriction on such benefit unless such "Section 411(d)(6) protected benefits" are preserved with respect to benefits accrued as of the later of the adoption date or effective date of the amendment. "Section 411(d)(6) protected benefits" are benefits described in Code Section 411(d)(6)(A), early retirement benefits and retirement-type subsidies, and optional forms of benefit. (d) If this Plan is amended and an effect of such amendment is to increase current liability (as defined in Code Section 401(a)(29)(E)) under the Plan for a Plan Year, and the funded current liability percentage of the Plan for the Plan Year in which the amendment takes effect is less than sixty percent (60%), including the amount of the unfunded current liability under the Plan attributable to the amendment, the amendment shall not take effect until the Employer (or any member of a controlled group which includes the Employer) provides security to the Plan. The form and amount of such security shall satisfy the requirements of Code Section 401(a)(29)(B) and (C). Such security may be released provided the requirements of Code Section 401(a)(29)(D) are satisfied. ARTICLE IX PLAN TERMINATION 9.1 TERMINATION (a) The Employer shall have the right to terminate the Plan by delivering to the Trustee and Administrator written notice of such termination. However, any termination (other than a partial termination or an involuntary termination pursuant to Act Section 4042) must satisfy the requirements and follow the procedures outlined herein and in Act Section 4041 for a Standard Termination or a Distress Termination. Upon any termination (full or partial), all amounts shall be allocated in accordance with the provisions hereof and the Accrued Benefit, to the extent funded as of such date, of each affected Participant shall become fully Vested and shall not thereafter be subject to forfeiture. However, Participants who were not fully Vested at the time they received a complete distribution of their benefits prior to the date of termination, shall not become entitled to any additional benefits on account of Plan termination. The preceding sentence does not apply to Participants affected by a partial termination by operation of law. 51 (b) Standard Termination Procedure -- (1) The Administrator shall first notify all "affected parties" (as defined in Act Section 4001(a)(21)) of the Employer's intention to terminate the Plan and the proposed date of termination. Such termination notice must be provided at least sixty (60) days prior to the proposed termination date. However, in the case of a standard termination, it shall not be necessary to provide such notice to the Pension Benefit Guaranty Corporation (PBGC). As soon as practicable after the termination notice is given, the Administrator shall provide a follow-up notice to the PBGC setting forth the following: (i) a certification of an enrolled actuary of the projected amount of the assets of the Plan as of the proposed date of final distribution of assets, the actuarial present value of the "benefit liabilities" (as defined in Act Section 4001(a)(16)) under the Plan as of the proposed termination date, and confirmation that the Plan is projected to be sufficient for such "benefit liabilities" as of the proposed date of final distribution; (ii) a certification by the Administrator that the information provided to the PBGC and upon which the enrolled actuary based the certification is accurate and complete; and (iii) such other information as the PBGC may prescribe by regulation. The certification of the enrolled actuary and of the Administrator shall not be applicable in the case of a plan funded exclusively by individual insurance contracts. (2) No later than the date on which the follow-up notice is sent to the PBGC, the Administrator shall provide all Participants and Beneficiaries under the Plan with an explanatory statement specifying each such person's "benefit liabilities," the benefit form on the basis of which such amount is determined, and any additional information used in determining "benefit liabilities" that may be required pursuant to regulations promulgated by the PBGC. (3) A standard termination may only take place if at the time the final distribution of assets occurs, the Plan is sufficient to meet all "benefit liabilities" determined as of the termination date. (c) Distress Termination Procedure -- 52 (1) The Administrator shall first notify all "affected parties" of the Employer's intention to terminate the Plan and the proposed date of termination. Such termination notice must be provided at least sixty (60) days prior to the proposed termination date. As soon as practicable after the termination notice is given, the Administrator shall also provide a follow-up notice to the PBGC setting forth the following: (i) a certification of an enrolled actuary of the amount, as of the proposed termination date, of the current value of the assets of the Plan, the actuarial present value (as of such date) of the "benefit liabilities" under the Plan, whether the Plan is sufficient for "benefit liabilities" as of such date, the actuarial present value (as of such date) of benefits under the Plan guaranteed under Act Section 4022, and whether the Plan is sufficient for guaranteed benefits as of such date; (ii) in any case in which the Plan is not sufficient for "benefit liabilities" as of such date, the name and address of each Participant and Beneficiary under the Plan as of such date; (iii) a certification by the Administrator that the information provided to the PBGC and upon which the enrolled actuary based the certification is accurate and complete; and (iv) such other information as the PBGC may prescribe by regulation. The certification of the enrolled actuary and of the Administrator shall not be applicable in the case of a plan funded exclusively by individual insurance contracts. (2) A distress termination may only take place if: (i) the Employer demonstrates to the PBGC that such termination is necessary to enable the Employer to pay its debts while staying in business, or to avoid unreasonably burdensome pension costs caused by a decline in the Employer's work force; (ii) the Employer is the subject of a petition seeking liquidation in a bankruptcy or insolvency proceeding which has not been dismissed as of the proposed termination date; or (iii) the Employer is the subject of a petition seeking reorganization in a bankruptcy or insolvency proceeding which has not been dismissed as of the proposed termination date, and the bankruptcy court (or such other appropriate court) approves the termination and determines that the Employer will be unable to continue in business outside a Chapter 11 reorganization process and that such termination is necessary to enable the Employer to pay its debts pursuant to a plan of reorganization. 53 (d) Priority and Payment of Benefits: In the case of a distress termination, upon approval by the PBGC that the Plan is sufficient for "benefit liabilities" or for "guaranteed benefits," or in the case of a standard termination, a letter of non-compliance has not been issued within the sixty (60) day period (as extended) following the receipt by the PBGC of the follow-up notice, the Administrator shall allocate the assets of the Plan among Participants and Beneficiaries pursuant to Act Section 4044(a). As soon as practicable thereafter, the assets of the Trust shall be distributed to the Participants and Beneficiaries, in cash or through the purchase of irrevocable commitments from an insurer, in a manner consistent with Section 5.7. However, if all liabilities with respect to Participants and Beneficiaries under the Plan have been satisfied and there remains a balance in the Trust due to erroneous actuarial computation, such balance, if any, shall be returned to the Employer. In the case of a distress termination in which the PBGC is unable to determine that the Plan is sufficient for guaranteed benefits, the assets of the Plan shall only be distributed in accordance with proceedings instituted by the PBGC. (e) The termination of the Plan shall comply with such other requirements and rules as may be promulgated by the PBGC under authority of Title IV of the Act, including any rules relating to time periods or deadlines for providing notice or for making a necessary filing. 9.2 LIMITATION OF BENEFITS ON PLAN TERMINATION In the event of Plan termination, the benefit of any Highly Compensated Participant or any highly compensated former employee shall be limited to a benefit that is nondiscriminatory under Code Section 401(a)(4). ARTICLE X MERGER, CONSOLIDATION OR TRANSFER OF ASSETS 10.1 REQUIREMENTS Before this Plan can be merged or consolidated with any other qualified plan or its assets or liabilities transferred to any other qualified plan, the Administrator must secure (and file with the Secretary of Treasury at least thirty (30) days beforehand) a certification from a government-enrolled actuary that the benefits which would be received by a Participant of this Plan, in the event of a termination of the Plan immediately after such transfer, merger or consolidation, are at least equal to the benefits the Participant would have received if the Plan had terminated immediately before the transfer, merger or consolidation, and such transfer, merger or consolidation does not otherwise result in the elimination or reduction of any "Section 411(d)(6) protected benefits" as described in Section 8.1. 54 ARTICLE XI TOP HEAVY 11.1 TOP HEAVY PLAN REQUIREMENTS For any Top Heavy Plan Year, the Plan shall provide the special vesting requirements of Code Section 416(b) pursuant to Section 5.6 of the Plan and the special minimum benefit requirements of Code Section 416(c) pursuant to Section 5.2 of the Plan. 11.2 DETERMINATION OF TOP HEAVY STATUS (a) This Plan shall be a Top Heavy Plan for any Plan Year in which, as of the Determination Date, (1) the Present Value of Accrued Benefits of Key Employees and (2) the sum of the Aggregate Accounts of Key Employees under this Plan and all plans of an Aggregation Group, exceeds sixty percent (60%) of the Present Value of Accrued Benefits and the Aggregate Accounts of all Key and Non-Key Employees under this Plan and all plans of an Aggregation Group. If any Participant is a Non-Key Employee for any Plan Year, but such Participant was a Key Employee for any prior Plan Year, such Participant's Present Value of Accrued Benefit and/or Aggregate Account balance shall not be taken into account for purposes of determining whether this Plan is a Top Heavy Plan (or whether any Aggregation Group which includes this Plan is a Top Heavy Group). In addition, if a Participant or Former Participant has not performed any services for any Employer maintaining the Plan at any time during the five year period ending on the Determination Date, any accrued benefit for such Participant or Former Participant shall not be taken into account for the purposes of determining whether this Plan is a Top Heavy Plan. (b) Aggregate Account: A Participant's Aggregate Account as of the Determination Date shall be determined under applicable provisions of the defined contribution plan used in determining Top Heavy Plan status. (c) "Aggregation Group" means either a Required Aggregation Group or a Permissive Aggregation Group as hereinafter determined. (1) Required Aggregation Group: In determining a Required Aggregation Group hereunder, each plan of the Employer in which a Key Employee is a participant in the Plan Year containing the Determination Date or any of the four preceding Plan Years, and each other plan of the Employer which enables any plan in which a Key Employee participates to meet the requirements of Code Sections 401(a)(4) or 410, will be required to be aggregated. Such group shall be known as a Required Aggregation Group. In the case of a Required Aggregation Group, each plan in the group will be considered a Top Heavy Plan if the Required Aggregation Group is a Top Heavy Group. No plan in the Required Aggregation Group will be considered a Top Heavy Plan if the Required Aggregation Group is not a Top Heavy Group. 55 (2) Permissive Aggregation Group: The Employer may also include any other plan not required to be included in the Required Aggregation Group, provided the resulting group, taken as a whole, would continue to satisfy the provisions of Code Sections 401(a)(4) and 410. Such group shall be known as a Permissive Aggregation Group. In the case of a Permissive Aggregation Group, only a plan that is part of the Required Aggregation Group will be considered a Top Heavy Plan if the Permissive Aggregation Group is a Top Heavy Group. No plan in the Permissive Aggregation Group will be considered a Top Heavy Plan if the Permissive Aggregation Group is not a Top Heavy Group. (3) Only those plans of the Employer in which the Determination Dates fall within the same calendar year shall be aggregated in order to determine whether such plans are Top Heavy Plans. (4) An Aggregation Group shall include any terminated plan of the Employer if it was maintained within the last five (5) years ending on the Determination Date. (d) "Determination Date" means (a) the last day of the preceding Plan Year, or (b) in the case of the first Plan Year, the last day of such Plan Year. (e) Present Value of Accrued Benefit: In the case of a defined benefit plan, a Participant's Present Value of Accrued Benefit shall be determined: (1) in the case of a Participant other than a Key Employee, using the single accrual method used for all plans of the Employer and Affiliated Employers, or if no such single method exists, using a method which results in benefits accruing not more rapidly than the slowest accrual rate permitted under Code Section 411(b)(1)(C). (2) as of the most recent "actuarial valuation date," which is the most recent valuation date within a twelve (12) month period ending on the Determination Date. (3) for the first Plan Year, as if (a) the Participant terminated service as of the Determination Date; or (b) the Participant terminated service as of the actuarial valuation date, but taking into account the estimated Accrued Benefits as of the Determination Date. (4) for the second Plan Year, the Accrued Benefit taken into account for a current Participant must not be less than the Accrued Benefit taken into account for the first Plan Year unless the difference is attributable to using an estimate of the Accrued Benefit as of the Determination Date for the first Plan Year and using the actual Accrued Benefit for the second Plan Year. 56 (5) for any other Plan Year, as if the Participant terminated service as of the actuarial valuation date. (6) the actuarial valuation date must be the same date used for computing the defined benefit plan minimum funding costs, regardless of whether a valuation is performed that Plan Year. (7) by not taking into account proportional subsidies. (8) by taking into account nonproportional subsidies. (f) The calculation of a Participant's Present Value of Accrued Benefit as of a Determination Date shall be the sum of: (1) the Present Value of Accrued Benefit using the actuarial assumptions of Section 1.3, which assumptions shall be identical for all defined benefit plans being tested for Top Heavy Plan status. (2) any Plan distributions made within the Plan Year that includes the Determination Date or within the four (4) preceding Plan Years. However, in the case of distributions made after the valuation date and prior to the Determination Date, such distributions are not included as distributions for top heavy purposes to the extent that such distributions are already included in the Participant's Present Value of Accrued Benefit as of the valuation date. Notwithstanding anything herein to the contrary, all distributions, including distributions under a terminated plan which if it had not been terminated would have been required to be included in an Aggregation Group, will be counted. Further, benefits paid on account of death, to the extent such benefits do not exceed the Present Value of Accrued Benefits existing immediately prior to death, shall be treated as distributions for the purposes of this paragraph. (3) any Employee contributions, whether voluntary or mandatory. However, amounts attributable to tax deductible Qualified Voluntary Employee Contributions shall not be considered to be a part of the Participant's Present Value of Accrued Benefit. (4) with respect to unrelated rollovers and plan-to-plan transfers (ones which are both initiated by the Employee and made from a plan maintained by one employer to a plan maintained by another employer), if this Plan provides the rollovers or plan-to-plan transfers, it shall always consider such rollovers or plan-to-plan transfers as a distribution for the purposes of this Section. If this Plan is the plan accepting such rollovers or plan-to-plan transfers, it shall not consider such rollovers or plan-to-plan transfers accepted after December 31, 1983, as part of the Participant's Present Value of Accrued Benefit. 57 (5) with respect to related rollovers and plan-to-plan transfers (ones either not initiated by the Employee or made to a plan maintained by the same employer), if this Plan provides the rollovers or plan-to-plan transfers, it shall not be counted as a distribution for purposes of this Section. If this Plan is the plan accepting such rollovers or plan-to-plan transfers, it shall consider such rollovers or plan-to-plan transfers as part of the Participant's Present Value of Accrued Benefit, irrespective of the date on which such rollovers or plan-to-plan transfers are accepted. (6) for the purposes of determining whether two employers are to be treated as the same employer in (4) and (5) above, all employers aggregated under Code Section 414(b), (c), (m) or (o) are treated as the same employer. (g) "Top Heavy Group" means an Aggregation Group in which, as of the Determination Date, the sum of: (1) the Present Value of Accrued Benefits of Key Employees under all defined benefit plans included in the group, and (2) the Aggregate Accounts of Key Employees under all defined contribution plans included in the group, exceeds sixty percent (60%) of a similar sum determined for all Participants. ARTICLE XII MISCELLANEOUS 12.1 PARTICIPANT'S RIGHTS This Plan shall not be deemed to constitute a contract between the Employer and any Participant or to be a consideration or an inducement for the employment of any Participant or Employee. Nothing contained in this Plan shall be deemed to give any Participant or Employee the right to be retained in the service of the Employer or to interfere with the right of the Employer to discharge any Participant or Employee at any time regardless of the effect which such discharge shall have upon the Employee as a Participant of this Plan. 12.2 ALIENATION (a) Subject to the exceptions provided below, and as otherwise permitted by the Code and the Act, no benefit which shall be payable out of the Trust Fund to any person (including a Participant or the Participant's Beneficiary) shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, or charge the same shall be void; and no such benefit shall in any manner be liable for, or subject to, the debts, contracts, liabilities, engagements, or torts of any such person, nor shall it be subject to attachment or legal process for or against such person, and the same shall not be recognized by the Trustee, except to such extent as may be required by law. 58 (b) Subsection (a) shall not apply to a "qualified domestic relations order" defined in Code Section 414(p), and those other domestic relations orders permitted to be so treated by the Administrator under the provisions of the Retirement Equity Act of 1984. The Administrator shall establish a written procedure to determine the qualified status of domestic relations orders and to administer distributions under such qualified orders. Further, to the extent provided under a "qualified domestic relations order," a former spouse of a Participant shall be treated as the spouse or surviving spouse for all purposes under the Plan. (c) Subsection (a) shall not apply to an offset to a Participant's accrued benefit against an amount that the Participant is ordered or required to pay the Plan with respect to a judgment, order, or decree issued, or a settlement entered into, on or after August 5, 1997, in accordance with Code Sections 401(a)(13)(C) and (D). In a case in which the survivor annuity requirements of Code Section 401(a)(11) apply with respect to distributions from the Plan to the Participant, if the Participant has a spouse at the time at which the offset is to be made: (1) either such spouse has consented in writing to such offset and such consent is witnessed by a notary public or representative of the Plan (or it is established to the satisfaction of a Plan representative that such consent may not be obtained by reason of circumstances described in Code Section 417(a)(2)(B)), or an election to waive the right of the spouse to either a qualified joint and survivor annuity or a qualified pre-retirement survivor annuity is in effect in accordance with the requirements of Code Section 417(a), (2) such spouse is ordered or required in such judgment, order, decree or settlement to pay an amount to the Plan in connection with a violation of fiduciary duties, or (3) in such judgment, order, decree or settlement, such spouse retains the right to receive the survivor annuity under a qualified joint and survivor annuity provided pursuant to Code Section 401(a)(11)(A)(i) and under a qualified pre-retirement survivor annuity provided pursuant to Code Section 401(a)(11)(A)(ii). 59 12.3 CONSTRUCTION OF PLAN This Plan and Trust shall be construed and enforced according to the Code, the Act and the laws of the State of New York, other than its laws respecting choice of law, to the extent not pre-empted by the Act. 12.4 GENDER AND NUMBER Wherever any words are used herein in the masculine, feminine or neuter gender, they shall be construed as though they were also used in another gender in all cases where they would so apply, and whenever any words are used herein in the singular or plural form, they shall be construed as though they were also used in the other form in all cases where they would so apply. 12.5 LEGAL ACTION In the event any claim, suit, or proceeding is brought regarding the Trust and/or Plan established hereunder to which the Trustee, the Employer or the Administrator may be a party, and such claim, suit, or proceeding is resolved in favor of the Trustee, the Employer or the Administrator, they shall be entitled to be reimbursed from the Trust Fund for any and all costs, attorney's fees, and other expenses pertaining thereto incurred by them for which they shall have become liable. 12.6 PROHIBITION AGAINST DIVERSION OF FUNDS (a) Except as provided below and otherwise specifically permitted by law, it shall be impossible by operation of the Plan or of the Trust, by termination of either, by power of revocation or amendment, by the happening of any contingency, by collateral arrangement or by any other means, for any part of the corpus or income of any Trust Fund maintained pursuant to the Plan or any funds contributed thereto to be used for, or diverted to, purposes other than the exclusive benefit of Participants, Former Participants, or their Beneficiaries. (b) In the event the Employer shall make an excessive contribution under a mistake of fact pursuant to Act Section 403(c)(2)(A), the Employer may demand repayment of such excessive contribution at any time within one (1) year following the time of payment and the Trustees shall return such amount to the Employer within the one (1) year period. Earnings of the Plan attributable to the contributions may not be returned to the Employer but any losses attributable thereto must reduce the amount so returned. 12.7 EMPLOYER'S AND TRUSTEE'S PROTECTIVE CLAUSE The Employer, Administrator and Trustee, and their successors, shall not be responsible for the validity of any Contract issued hereunder or for the failure on the part of the insurer to make payments provided by any such Contract, or for the action of any person which may delay payment or render a Contract null and void or unenforceable in whole or in part. 60 12.8 INSURER'S PROTECTIVE CLAUSE Except as otherwise agreed upon in writing between the Employer and the insurer, an insurer which issues any Contracts hereunder shall not have any responsibility for the validity of this Plan or for the tax or legal aspects of this Plan. The insurer shall be protected and held harmless in acting in accordance with any written direction of the Trustee, and shall have no duty to see to the application of any funds paid to the Trustee, nor be required to question any actions directed by the Trustee. Regardless of any provision of this Plan, the insurer shall not be required to take or permit any action or allow any benefit or privilege contrary to the terms of any Contract which it issues hereunder, or the rules of the insurer. 12.9 RECEIPT AND RELEASE FOR PAYMENTS Any payment to any Participant, the Participant's legal representative, Beneficiary, or to any guardian or committee appointed for such Participant or Beneficiary in accordance with the provisions of the Plan, shall, to the extent thereof, be in full satisfaction of all claims hereunder against the Trustee and the Employer, either of whom may require such Participant, legal representative, Beneficiary, guardian or committee, as a condition precedent to such payment, to execute a receipt and release thereof in such form as shall be determined by the Trustee or Employer. 12.10 ACTION BY THE EMPLOYER Whenever the Employer under the terms of the Plan is permitted or required to do or perform any act or matter or thing, it shall be done and performed by a person duly authorized by its legally constituted authority. 12.11 NAMED FIDUCIARIES AND ALLOCATION OF RESPONSIBILITY The "named Fiduciaries" of this Plan are (1) the Employer, (2) the Administrator, (3) the Trustee, and (4) any Investment Manager appointed hereunder. The named Fiduciaries shall have only those specific powers, duties, responsibilities, and obligations as are specifically given them under the Plan, including, but not limited to, any agreement allocating or delegating their responsibilities, the terms of which are incorporated herein by reference. In general, the Employer shall have the sole responsibility for making the contributions provided for under Section 4.1; and shall have the authority to appoint and remove the Trustee and the Administrator; to formulate the Plan's "funding policy and method"; and to amend or terminate, in whole or in part, the Plan. The Administrator shall have the sole responsibility for the administration of the Plan, including, but not limited to, the items specified at Article II of the Plan, as the same may be allocated or delegated thereunder. The Trustee shall have the sole responsibility of management of the assets held under the Trust, except to the extent directed pursuant to Article II or with respect to those assets, the management of which has been assigned to an Investment Manager, who shall be solely responsible for the management of the assets assigned to it, all as specifically provided in the Plan. Each named Fiduciary warrants that any directions given, information furnished, or action taken by it shall be in accordance with the provisions of the Plan, authorizing or providing for such direction, information or action. Furthermore, each named Fiduciary may rely upon any such direction, information or action of another named Fiduciary as being proper under the Plan, and is not required under the Plan to inquire into the propriety of any such direction, information or action. It is intended under the Plan that each named Fiduciary shall be responsible for the proper exercise of its own powers, duties, responsibilities and obligations under the Plan as specified or allocated herein. No named Fiduciary shall guarantee the Trust Fund in any manner against investment loss or depreciation in asset value. Any person or group may serve in more than one Fiduciary capacity. 61 12.12 HEADINGS The headings and subheadings of this Plan have been inserted for convenience of reference and are to be ignored in any construction of the provisions hereof. 12.13 APPROVAL BY INTERNAL REVENUE SERVICE Notwithstanding anything herein to the contrary, if, pursuant to an application for qualification filed by or on behalf of the Plan by the time prescribed by law for filing the Employer's return for the taxable year in which the Plan is adopted, or such later date that the Secretary of the Treasury may prescribe, the Commissioner of Internal Revenue Service or the Commissioner's delegate should determine that the Plan does not initially qualify as a tax-exempt plan under Code Sections 401 and 501, and such determination is not contested, or if contested, is finally upheld, then if the Plan is a new plan, it shall be void ab initio and all amounts contributed to the Plan by the Employer, less expenses paid, shall be returned within one (1) year and the Plan shall terminate, and the Trustee shall be discharged from all further obligations. If the disqualification relates to an amended plan, then the Plan shall operate as if it had not been amended. 12.14 UNIFORMITY All provisions of this Plan shall be interpreted and applied in a uniform, nondiscriminatory manner. In the event of any conflict between the terms of this Plan and any Contract purchased hereunder, the Plan provisions shall control. 62 IN WITNESS WHEREOF, this Plan has been executed the day and year first above written. Presidential Realty Corporation By Jeffrey F. Joseph ------------------------------- EMPLOYER ATTEST Elizabeth Delgado --------------------------- Robert Feder and Thomas Viertel By Thomas Viertel ------------------------------- TRUSTEE Robert Feder ------------------------------- TRUSTEE 63 EX-21 6 v01924_ex-21.txt EXHIBIT 21 LIST OF SUBSIDIARIES OF PRESIDENTIAL REALTY CORPORATION AS OF DECEMBER 31, 2003 (1) PDL, Inc. organized under the laws of the State of Delaware, which carries on business under its own name. (2) Presidential Realty of Iowa, Incorporated, organized under the laws of the State of Iowa, which carries on business under its own name. (3) Presidential Continental Gardens Corp., organized under the laws of the State of Florida, which carries on business under its own name. (4) Fairlawn Gardens Corp., organized under the laws of the State of West Virginia, which carries on business under its own name. (5) Presidential Farrington Corp., organized under the laws of the State of Florida, which carries on business under its own name. (6) Presidential Preston Lake Corp., organized under the laws of the State of Georgia, which carries on business under its own name. (7) Presidential Matmor Corp., organized under the laws of the State of Delaware, which carries on business under its own name. EX-31.1 7 v01924_ex31-1.txt Exhibit 31.1 CERTIFICATION I, Jeffrey F. Joseph, Chief Executive Officer of Presidential Realty Corporation (the "Company"), certify that: 1. I have reviewed this annual report on Form 10-K of the Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this annual report; 4. The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any changes in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting; and 5. The Company's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the Audit Committee of the Board of Directors: a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting. DATE: March 23, 2004 By: /s/ Jeffrey F. Joseph -------------------------- Jeffrey F. Joseph Chief Executive Officer EX-31.2 8 v01924_ex31-2.txt Exhibit 31.2 CERTIFICATION I, Thomas Viertel, Chief Financial Officer of Presidential Realty Corporation (the "Company"), certify that: 1. I have reviewed this annual report on Form 10-K of the Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this annual report; 4. The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any changes in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting; and 5. The Company's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the Audit Committee of the Board of Directors: a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting. DATE: March 23, 2004 By: /s/ Thomas Viertel ------------------------- Thomas Viertel Chief Financial Officer EX-32.1 9 v01924_ex32-1.txt Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of Presidential Realty Corporation (the "Company") for the period ending December 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jeffrey F. Joseph, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934: and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and the results of operations of the Company. Presidential Realty Corporation By: /S/ JEFFREY F. JOSEPH ------------------------- Jeffrey F. Joseph Chief Executive Officer Date: March 23, 2004 EX-32.2 10 v01924_ex32-2.txt Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of Presidential Realty Corporation (the "Company") for the period ending December 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Thomas Viertel, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934: and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and the results of operations of the Company. Presidential Realty Corporation By: /S/ THOMAS VIERTEL --------------------------- Thomas Viertel Chief Financial Officer Date: March 23, 2004 EX-99.1 11 v01924_ex99-1.txt EXHIBIT 99 PDL, INC. AND ASSOCIATES, LIMITED COPARTNERSHIP Financial Statements for the Years Ended December 31, 2003, 2002 and 2001 and Independent Auditors' Report INDEPENDENT AUDITORS' REPORT PDL, Inc. and Associates, Limited Copartnership We have audited the accompanying balance sheets of PDL, Inc. and Associates, Limited Copartnership (the "Partnership") as of December 31, 2003 and 2002, and the related statements of operations and partners' deficiency and of cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Partnership at December 31, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. Deloitte & Touche LLP Stamford, Connecticut March 23, 2004 PDL, INC. AND ASSOCIATES, LIMITED COPARTNERSHIP BALANCE SHEETS DECEMBER 31, 2003 AND 2002 - --------------------------------------------------------------------------------
ASSETS 2003 2002 CASH AND CASH EQUIVALENTS $ 1,097,648 $ 1,216,333 ACCOUNTS RECEIVABLE - Net of valuation allowance of $61,429 55,638 71,155 in 2003 and $77,930 in 2002 PROPERTY - Net of accumulated depreciation of $3,619,297 in 2003 4,295,672 4,471,850 and $3,308,503 in 2002 CASH IN ESCROW 621,367 575,998 PREPAID EXPENSES 122,627 228,207 DEFERRED MORTGAGE COSTS - Net of accumulated amortization of $211,263 226,295 270,954 ------------ ------------ TOTAL $ 6,419,247 $ 6,834,497 ============ ============ LIABILITIES AND PARTNERS' DEFICIENCY ACCOUNTS PAYABLE $ 115,367 $ 122,135 ACCRUED EXPENSES 322,260 370,986 OTHER LIABILITIES 314,039 297,225 MORTGAGE PAYABLE 16,531,798 16,737,569 ------------ ------------ Total liabilities 17,283,464 17,527,915 ------------ ------------ GENERAL PARTNER'S DEFICIENCY (108,642) (106,934) LIMITED PARTNERS' DEFICIENCY (10,755,575) (10,586,484) ------------ ------------ Total partners' deficiency (10,864,217) (10,693,418) ------------ ------------ TOTAL $ 6,419,247 $ 6,834,497 ============ ============
See notes to financial statements. -2- PDL, INC. AND ASSOCIATES, LIMITED COPARTNERSHIP STATEMENTS OF OPERATIONS AND PARTNERS' DEFICIENCY YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 - --------------------------------------------------------------------------------
2003 2002 2001 INCOME: Rent $ 4,637,093 $ 4,304,830 $ 4,192,844 Other 79,420 96,783 80,254 ------------ ------------ ------------ Total income 4,716,513 4,401,613 4,273,098 ------------ ------------ ------------ EXPENSES: Interest 1,244,476 1,259,676 1,273,260 Utilities 603,340 551,205 550,754 Repairs and maintenance 313,406 318,069 293,531 Depreciation 310,794 310,924 313,406 Real estate taxes, other taxes and fees 277,551 263,562 262,926 Insurance 224,777 196,925 128,226 Management fees 154,506 130,687 126,326 Security services 72,212 72,270 72,270 Rental expenses, including commissions 72,055 80,787 76,652 Salaries and wages 70,472 71,783 68,864 Amortization of mortgage costs 44,658 42,024 39,535 Provision for bad debts--net of recoveries 24,418 16,752 (5,789) Parking 23,040 23,040 21,960 Professional services 23,005 17,475 21,702 Other 38,602 36,927 33,117 ------------ ------------ ------------ Total expenses 3,497,312 3,392,106 3,276,740 ------------ ------------ ------------ NET INCOME 1,219,201 1,009,507 996,358 PARTNERS' DEFICIENCY--Beginning of year (10,693,418) (10,732,925) (10,865,283) DISTRIBUTIONS (1,390,000) (970,000) (864,000) ------------ ------------ ------------ PARTNERS' DEFICIENCY--End of year $(10,864,217) $(10,693,418) $(10,732,925) ============ ============ ============
See notes to financial statements. -3- PDL, INC. AND ASSOCIATES, LIMITED COPARTNERSHIP STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 - --------------------------------------------------------------------------------
2003 2002 2001 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,219,201 $ 1,009,507 $ 996,358 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 355,452 352,948 352,941 Provision for bad debts 24,418 16,752 (5,789) Changes in assets and liabilities: Increase in notes and accounts receivable (8,901) (25,133) (7,066) Decrease (increase) in prepaid expenses 105,581 (125,613) 31,827 Increase in cash in escrow (45,369) (26,711) (87,335) (Decrease) increase in accounts payable (6,768) 3,166 (20,757) (Decrease) increase in accrued expenses (48,726) 6,869 44,456 Increase (decrease) in other liabilities 16,814 (10,575) (13,772) ----------- ----------- ----------- Net cash provided by operating activities 1,611,702 1,201,210 1,290,863 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Building additions and improvements (134,616) (125,008) (86,985) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Mortgage principal payments (205,771) (190,981) (177,254) Distributions to partners (1,390,000) (970,000) (864,000) ----------- ----------- ----------- Net cash used in financing activities (1,595,771) (1,160,981) (1,041,254) ----------- ----------- ----------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (118,685) (84,779) 162,624 CASH AND CASH EQUIVALENTS - Beginning of year 1,216,333 1,301,112 1,138,488 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS - End of year $ 1,097,648 $ 1,216,333 $ 1,301,112 =========== =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: CASH PAID FOR INTEREST $ 1,245,362 $ 1,260,498 $ 1,274,021 =========== =========== ===========
See notes to financial statements. -4- PDL, INC. AND ASSOCIATES, LIMITED COPARTNERSHIP NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES GENERAL - PDL, Inc. and Associates, Limited Copartnership (the "Partnership") was formed in June of 1990. The general partner is PDL, Inc., a wholly-owned subsidiary of Presidential Realty Corporation. The primary asset of the Partnership is an office building located in Hato Rey, Puerto Rico, known as Home Mortgage Plaza. INCOME TAXES - No provision has been made for income taxes because, as a partnership, such taxes are the responsibility of the individual partners. PROPERTY - Property, principally a building, is stated at cost less accumulated depreciation. Depreciation is provided on the straight-line method over the estimated useful lives of the assets, generally ten to thirty-one years. Building improvements are capitalized. Repairs and maintenance are charged to operations as incurred. The Partnership reviews its investment in its property for possible impairment at least annually, and more frequently if circumstances warrant. Impairment is determined to exist when estimated amounts recoverable through future operations on an undiscounted basis are below the property's carrying value. If the property is determined to be impaired, it would be written down to its estimated fair value. No impairment exists at December 31, 2003 and 2002. DEFERRED MORTGAGE COSTS - Deferred mortgage costs are amortized over the term of the mortgage using the interest method. USE OF ESTIMATES - The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS - For the purposes of this statement, the Partnership considers liquid investments having an original maturity of three months or less to be cash equivalents. CASH IN ESCROW - Cash in escrow is restricted deposits held by the mortgagee for payments of real estate taxes, insurance, leasing commissions and replacements for the property. REVENUE RECOGNITION - The Partnership acts as a lessor under operating leases with rental revenue recognized on a straight-line basis over the related lease term. 2. MORTGAGE PAYABLE The building is subject to a mortgage payable dated April 1998 with an original principal balance of $17,500,000. The non-recourse mortgage bears interest at a rate of 7.38% per annum until May 11, 2008, at which time it is the intent of management to repay the outstanding principal balance through a refinancing of the property. However, the maturity date of the mortgage is May 11, 2028 and if the mortgage is not repaid in 2008, the interest rate will be increased by 2% and additional repayments will be required from the surplus cash flows from the operations of the property (after payment of operating expenses) which will be applied to the outstanding principal amount. -5- Scheduled principal payments on the mortgage payable are as follows: 2004 $ 218,129 2005 238,601 2006 257,079 2007 276,988 2008 and thereafter 15,541,001 ----------- $16,531,798 =========== 3. RELATED PARTY TRANSACTIONS Included in the statement of operations and partners' deficiency are $15,000, $15,000 and $12,500 of general partner administrative fees for the years ended December 31, 2003, 2002, and 2001, respectively. 4. MINIMUM FUTURE RENTAL INCOME The Partnership is the lessor for various commercial tenants under noncancelable operating leases. The future noncancelable lease payments are as follows: 2004 $ 2,994,549 2005 1,154,408 2006 572,422 2007 314,741 2008 and thereafter 129,997 ----------- $ 5,166,117 =========== ****** -----END PRIVACY-ENHANCED MESSAGE-----