SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-8594
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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, indicating area code 914-948-1300
------------
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
such filing requirements for the past 90 days. Yes x No
------ ------
The number of shares outstanding of each of the issuer's classes of common stock
as of the close of business on August 7, 1998 was 478,940 shares of Class A
common and 3,116,697 shares of Class B common.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
Index to Form 10-Q
For the Six Months Ended
June 30, 1998
Part I - Financial Information (Unaudited)
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
<TABLE>
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
<CAPTION>
Assets June 30, December 31,
1998 1997
---------------- ----------------
<S> <C> <C>
Mortgage portfolio (Note 2):
Sold properties, accrual $43,663,011 $43,871,400
Related parties, accrual 1,728,718 2,350,899
Sold properties, impaired 17,735,787 17,878,458
---------------- ----------------
Total mortgage portfolio 63,127,516 64,100,757
---------------- ----------------
Less discounts:
Sold properties, accrual 4,552,520 5,055,574
Related parties, accrual 155,173 160,735
Sold properties, impaired 7,636,926 7,675,111
---------------- ----------------
Total discounts 12,344,619 12,891,420
---------------- ----------------
Less deferred gains:
Sold properties, accrual 12,546,661 12,550,333
Related parties, accrual 940,129 1,543,342
Sold properties, impaired 6,398,157 6,432,055
---------------- ----------------
Total deferred gains 19,884,947 20,525,730
---------------- ----------------
Net mortgage portfolio (of which $773,699 in 1998
and $756,751 in 1997 are due within one year) 30,897,950 30,683,607
---------------- ----------------
Real estate (Note 3) 27,891,032 27,690,535
Less: accumulated depreciation 6,783,508 6,404,797
---------------- ----------------
Net real estate 21,107,524 21,285,738
---------------- ----------------
Minority partners' interest (Note 4) 7,391,068 3,779,408
Prepaid expenses and deposits in escrow 2,177,880 1,190,158
Other receivables (net of valuation allowance of
$145,258 in 1998 and $129,484 in 1997) 558,584 715,407
Other receivables (related party) 8,065 8,287
Securities available for sale (Note 5) 274,503 226,550
Cash and cash equivalents 4,855,637 979,712
Other assets 1,968,740 1,140,571
---------------- ----------------
Total Assets $69,239,951 $60,009,438
================ ================
See notes to consolidated financial statements.
</TABLE>
<TABLE>
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
<CAPTION>
Liabilities and Stockholders' Equity
June 30, December 31,
1998 1997
---------------- ----------------
<S> <C> <C>
Liabilities:
Mortgage debt (Note 6):
Properties owned $35,029,837 $26,271,093
Wrap mortgage debt on sold properties 4,910,994 5,149,217
---------------- ----------------
Total (of which $829,491 in 1998 and $1,133,721
in 1997 are due within one year) 39,940,831 31,420,310
Note payable to bank (of which $153,367 in 1998
and $147,190 in 1997 are due within one year) (Note 7) 10,470,469 10,542,552
Executive pension plan liability 1,544,280 1,601,411
Accrued liabilities 2,519,399 2,276,898
Accrued postretirement costs 570,100 574,637
Deferred income 265,383 274,097
Accounts payable 288,945 481,248
Other liabilities 691,840 665,202
---------------- ----------------
Total Liabilities 56,291,247 47,836,355
---------------- ----------------
Stockholders' Equity:
Common stock; par value $.10 per share
Class A, authorized 700,000 shares, issued and
outstanding 478,940 shares 47,894 47,894
Class B June 30, 1998 December 31, 1997 312,779 311,377
----------- -------------------- ----------------------
Authorized: 10,000,000 10,000,000
Issued: 3,127,786 3,113,773
Treasury: 11,224 14,224
Additional paid-in capital 2,117,486 2,043,653
Retained earnings 10,596,679 9,943,241
Net unrealized gain on securities available for sale (Notes 5 and 9) 25,833 19,505
Class B, treasury stock (at cost) (Note 10) (151,967) (192,587)
---------------- ----------------
Total Stockholders' Equity 12,948,704 12,173,083
---------------- ----------------
Total Liabilities and Stockholders' Equity $69,239,951 $60,009,438
================ ================
See notes to consolidated financial statements.
</TABLE>
<TABLE>
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------------
1998 1997
-------------- ---------------
Income:
<S> <C> <C>
Rental $4,709,588 $4,040,286
Interest on mortgages - sold properties 1,896,418 2,182,126
Interest on wrap mortgages 641,496 652,233
Interest on mortgages - related parties 263,564 115,357
Investment income 66,593 87,220
Other 28,930 34,482
-------------- ---------------
Total 7,606,589 7,111,704
-------------- ---------------
Costs and Expenses:
General and administrative 1,401,101 1,129,095
Interest on note payable and other 568,656 477,080
Interest on wrap mortgage debt 105,367 116,104
Amortization of loan acquisition costs 16,229 14,040
Depreciation on non-rental property 11,777 13,083
Rental property:
Operating expenses 2,043,870 2,017,307
Interest on mortgages 1,181,120 1,083,567
Real estate taxes 439,278 349,338
Depreciation on real estate 379,655 353,427
Amortization of mortgage costs 161,359 67,476
Minority interest share of partnership income 214,179 215,656
-------------- ---------------
Total 6,522,591 5,836,173
-------------- ---------------
Income before net gain from sales of properties and securities 1,083,998 1,275,531
Net gain from sales of properties and securities 681,218 507,873
-------------- ---------------
Net Income $1,765,216 $1,783,404
============== ===============
Earnings per Common Share (Note 1-C):
Income before net gain from sales of properties and securities $0.30 $0.36
Net gain from sales of properties and securities 0.19 0.14
-------------- ---------------
Net Income per Common Share $0.49 $0.50
============== ===============
Cash Distributions per Common Share $0.31 $0.30
============== ===============
Weighted Average Number of Shares Outstanding 3,586,805 3,557,194
============== ===============
See notes to consolidated financial statements.
</TABLE>
<TABLE>
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
<CAPTION>
THREE MONTHS ENDED JUNE 30,
----------------------------------
1998 1997
-------------- ---------------
Income:
<S> <C> <C>
Rental $2,342,122 $2,017,982
Interest on mortgages - sold properties 952,817 892,497
Interest on wrap mortgages 320,064 306,708
Interest on mortgages - related parties 98,564 57,571
Investment income 37,780 42,538
Other 25,080 10,066
-------------- ---------------
Total 3,776,427 3,327,362
-------------- ---------------
Costs and Expenses:
General and administrative 738,676 539,541
Interest on note payable and other 283,625 248,279
Interest on wrap mortgage debt 52,000 57,393
Amortization of loan acquisition costs 8,114 7,218
Depreciation on non-rental property 6,574 6,344
Rental property:
Operating expenses 1,005,908 1,029,964
Interest on mortgages 652,983 544,918
Real estate taxes 219,641 197,740
Depreciation on real estate 191,370 180,396
Amortization of mortgage costs 124,067 33,738
Minority interest share of partnership income 42,176 69,522
-------------- ---------------
Total 3,325,134 2,915,053
-------------- ---------------
Income before net gain from sales of properties and securities 451,293 412,309
Net gain from sales of properties and securities 617,649 18,497
-------------- ---------------
Net Income $1,068,942 $430,806
============== ===============
Earnings per Common Share (Note 1-C):
Income before net gain from sales of properties and securities $0.12 $0.12
Net gain from sales of properties and securities 0.18 0.00
-------------- ---------------
Net Income per Common Share $0.30 $0.12
============== ===============
Cash Distributions per Common Share $0.16 $0.15
============== ===============
See notes to consolidated financial statements.
</TABLE>
<TABLE>
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------------
1998 1997
-------------- --------------
Cash Flows from Operating Activities:
<S> <C> <C>
Cash received from rental properties $4,602,224 $4,220,524
Interest received 2,362,793 2,144,925
Miscellaneous income 27,682 47,569
Interest paid on rental property mortgages (1,171,692) (1,059,614)
Interest paid on wrap mortgage debt (105,367) (116,104)
Interest paid on note payable (466,545) (369,510)
Cash disbursed for rental property operations (3,287,776) (2,074,981)
Cash disbursed for general and administrative costs (1,406,232) (1,223,336)
-------------- --------------
Net cash provided by operating activities 555,087 1,569,473
-------------- --------------
Cash Flows from Investing Activities:
Payments received on notes receivable 1,021,673 1,693,330
Payments disbursed for investments in notes receivable (60,000) (3,006,442)
Payments disbursed for additions and improvements (244,036) (911,061)
Proceeds from sale of property 74,550
Purchase of property (9,386)
Proceeds from sales of securities 523,790
Purchases of securities (41,625) (79,202)
Purchase of 1% interest in partnership (60,000)
-------------- --------------
Net cash provided by (used in) investing activities 741,176 (1,839,585)
-------------- --------------
Cash Flows from Financing Activities:
Principal payments on mortgage debt:
Properties owned (252,431) (288,305)
Wrap mortgage debt on sold properties (238,223) (229,834)
Mortgage debt payment from proceeds of mortgage refinancing (10,788,825)
Mortgage proceeds 19,800,000
Mortgage refinancing repairs and replacement escrows (558,730)
Mortgage costs (467,404) (218,046)
Note payable proceeds 2,500,000
Principal payments on note payable (72,083) (294,275)
Cash distributions on common stock (1,111,778) (1,067,098)
Proceeds from dividend reinvestment and share purchase plan 94,975 82,180
Distributions to minority partners (3,825,839) (244,241)
-------------- --------------
Net cash provided by financing activities 2,579,662 240,381
-------------- --------------
Net Increase (Decrease) in Cash and Cash Equivalents 3,875,925 (29,731)
Cash and Cash Equivalents, Beginning of Period 979,712 1,392,135
-------------- --------------
Cash and Cash Equivalents, End of Period $4,855,637 $1,362,404
============== ==============
See notes to consolidated financial statements.
</TABLE>
<TABLE>
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Reconciliation of Net Income to Net Cash
Provided by Operating Activities
Net Income $1,765,216 $1,783,404
--------------- ---------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 569,020 448,026
Gain from sales of properties and securities (681,218) (507,873)
Issuance of treasury stock 10,440
Amortization of discounts on notes and fees (546,801) (870,078)
Decrease in accounts receivable 157,045 112,368
Increase (decrease) in accounts payable and accrued liabilities (11,470) 357,175
Increase (decrease) in deferred income (8,714) 5,752
Increase in prepaid expenses, deposits in escrow
and deferred charges (644,533) (55,414)
Increase in security deposit restricted funds (293,667)
Increase in security deposit liabilities 27,886 67,370
Miscellaneous (2,296) 13,087
Minority share of partnership income 214,179 215,656
--------------- ---------------
Total adjustments (1,210,129) (213,931)
--------------- ---------------
Net cash provided by operating activities $555,087 $1,569,473
=============== ===============
Supplemental noncash disclosures:
Property received in satisfaction of debt $11,569 $45,765
=============== ===============
Net carrying value of foreclosed properties
reclassified to real estate $588,683
===============
See notes to consolidated financial statements.
</TABLE>
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. General - Presidential Realty Corporation ("Presidential" or the "Company"),
a Real Estate Investment Trust ("REIT"), is engaged principally in the holding
of notes and mortgages secured by real estate and in the ownership of income
producing real estate.
B. Principles of Consolidation - The consolidated financial statements include
the accounts of Presidential Realty Corporation and its wholly owned
subsidiaries. Additionally, the accompanying consolidated financial statements
include 100% of the account balances of UTB Associates and PDL, Inc. and
Associates Limited Co-Partnership ("Home Mortgage Partnership" formerly known as
Metmor Plaza Associates), partnerships in which Presidential or PDL, Inc., a
wholly owned subsidiary of Presidential, is the General Partner.
All significant intercompany balances and transactions have been eliminated.
C. Net Income Per Share - Basic net income per share data is computed by
dividing the net income by the weighted average number of shares of Class A and
Class B common stock outstanding and common stock equivalents during each
period. Basic net income per share and diluted income per share are the
same for the six months ended June 30, 1998 and 1997. The dilutive effect of
stock options is calculated using the treasury stock method.
D. Basis of Presentation - The accompanying unaudited consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information. In the opinion of management, all
adjustments (consisting of only normal recurring accruals) considered necessary
for a fair presentation of the results for the respective periods have been
reflected. These financial statements and accompanying notes should be read in
conjunction with the Company's Form 10-K for the year ended December 31, 1997.
E. Management Estimates - In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the consolidated
balance sheets and income and expense for the period. Actual results could
differ from those estimates.
2. MORTGAGE PORTFOLIO
The Company's mortgage portfolio includes notes receivable - sold properties and
notes receivable - related parties and includes both accrual and impaired loans.
Notes receivable - sold properties consist of:
(1) Long-term purchase money notes from sales of properties previously owned by
the Company or notes purchased by the Company. These purchase money notes have
varying interest rates with balloon payments due at maturity.
(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.
The Woodland notes receivable were modified in March, 1998, as a result of the
sale of the property and the assumption of the notes by the purchasers. The
interest rate on the notes was increased from 9% to 10% through 2001 and will
increase to 10.25% thereafter.
At June 30, 1998, all of the notes in the Company's mortgage portfolio are
current with the exception of two sold properties notes, the Fairfield Towers
Second Mortgage and the Grant House wraparound mortgage note, which are
classified as impaired loans. These two loans are in the aggregate amount of
$17,735,787 and have a net carrying value of $3,700,704 after deducting
discounts of $7,636,926 and deferred gains of $6,398,157. The Grant House
wraparound mortgage note wraps around and is subordinate to a first mortgage
with an outstanding principal balance of $2,295,940 at June 30, 1998, which is
equal to the net carrying value of the Grant House wraparound note. At June 30,
1998, all payments due on the first mortgage have been paid. The Company has
determined that no allowances for credit losses are required for these impaired
loans because the net carrying value of these loans is less than the estimated
fair value of the underlying collateral.
The Company recognizes income on the impaired loans only to the extent that such
income is actually received. The average recorded investment in impaired loans
during the six months ended June 30, 1998 and June 30, 1997 was $17,807,401 and
$16,187,019, respectively.
There have been no significant changes in the status of the impaired loans since
December 31, 1997. There were no condominium sales at the Fairfield Towers
property during the six months ended June 30, 1998.
The following table reflects the activity in impaired loans:
<TABLE>
IMPAIRED LOANS
- --------------
<CAPTION>
Impaired Impaired
Loan Additions Loan
Balance (Payments) Balance
Loan Description 12/31/97 1998 6/30/98
- ------------------------------------------------ ----------------- ----------------- -----------------
<S> <C> <C> <C>
Notes receivable-sold properties:
Properties previously owned-
Fairfield Towers Second Mortgage $14,488,337 ($72,083) $14,416,254
Grant House (1) 3,390,121 (70,588) 3,319,533
----------------- ----------------- -----------------
Total $17,878,458 ($142,671) $17,735,787
================= ================= =================
Discount Net
on Deferred Carrying
Loans Gain Value
Loan Description 6/30/98 6/30/98 6/30/98
- ------------------------------------------------ ----------------- ----------------- -----------------
Notes receivable-sold properties:
Properties previously owned-
Fairfield Towers Second Mortgage ($7,636,926) ($5,374,564) $1,404,764
Grant House (1) (1,023,593) 2,295,940
----------------- ----------------- -----------------
Total ($7,636,926) ($6,398,157) $3,700,704
================= ================= =================
Six months ended June 30,
----------------------------------------
1998 1997
----------------- -----------------
Reported Interest Income and
Amortization of Discount (Cash Basis)
- ---------------------------------------------------------
Fairfield Towers Second Mortgage - interest income $8,237 $58,561
Fairfield Towers Second Mortgage - amortization of discount 38,185 38,582
Grant House - interest income (1) 34,882
Overlook - interest income (2) 47,077
Overlook - additional interest income (2) 11,987
----------------- -----------------
Total $81,304 $156,207
================= =================
Recognized Gain from Sale of Property
- ---------------------------------------------------------
Fairfield Towers Second Mortgage $33,898 $34,251
Overlook (2) 11,759
----------------- -----------------
Total $33,898 $46,010
================= =================
Nonreported Interest Income and Amortization of Discount
- ---------------------------------------------------------
The following additional amounts would have been reported if these loans had
been fully performing:
Fairfield Towers Second Mortgage - interest income $487,323 $436,780
Fairfield Towers Second Mortgage - additional interest income 43,213
Fairfield Towers Second Mortgage - amortization of discount 634,236 532,380
Grant House - interest income (1) 37,500
----------------- -----------------
Total $1,159,059 $1,012,373
================= =================
<FN>
(1) Grant House was classified as an impaired loan at December 31, 1997 and, as
a result, no amounts are listed for the 1997 period. The interest income of
$34,882 reported for the 1998 period represents interest received on the
wraparound first mortgage debt. The net carrying value of this wraparound
mortgage note is equal to the first mortgage debt of $2,295,940 which it
wraps around.
(2) The Overlook loan was reclassified to accrual status at December 31, 1997.
</FN>
</TABLE>
3. REAL ESTATE
Real estate is comprised of the following:
June 30, December 31,
1998 1997
----------- -----------
Land $ 3,774,549 $ 3,774,779
Buildings and leaseholds 23,903,042 23,729,409
Furniture and equipment 213,441 186,347
----------- -----------
Total real estate $27,891,032 $27,690,535
=========== ===========
4. MINORITY PARTNERS' INTEREST
Presidential is the General Partner of UTB Associates and Pdl, Inc., a wholly
owned subsidiary of Presidential, is the General Partner of Home Mortgage
Partnership. Presidential has a 66-2/3% interest in UTB Associates. Presidential
and PDL, Inc. have an aggregate 26% interest in Home Mortgage Partnership. As
the General Partner of these partnerships, Presidential and PDL, Inc.,
respectively, exercise effective control over the business of these
partnerships, and, accordingly, Presidential has included 100% of the account
balances of these partnerships in the accompanying financial statements. The
minority partners' interest reflects the minority partners' equity in the
partnerships.
The minority partners' interest in the Home Mortgage Partnership is a negative
interest and therefore, minority partners' interest is a net receivable on the
Company's financial statements. The negative basis for each partner's interest
in the Home Mortgage Partnership is due to the refinancing of the mortgage on
the property and the distribution of the proceeds to the partners. The mortgage
debt, which is included in the Company's financial statements, is substantially
in excess of the historical cost of the property and the estimated fair value of
the property is significantly greater than the mortgage debt. The minority
partners' interest should be recovered if the partnership sold the property and
the partnership is liquidated.
Minority partners' interest is comprised of the following:
June 30, December 31,
1998 1997
----------- -----------
Home Mortgage Partnership $7,572,387 $3,963,378
UTB Associates (181,319) (183,970)
---------- ----------
Total minority partners' interest $7,391,068 $3,779,408
========== ==========
5. SECURITIES AVAILABLE FOR SALE
The cost and fair value of securities available for sale are as follows:
June 30, December 31,
1998 1997
-------- -----------
Cost $248,670 $207,045
Gross unrealized gains 30,448 19,612
Gross unrealized losses (4,615) (107)
-------- --------
Fair value $274,503 $226,550
======== ========
During the six months ended June 30, 1998, there were no sales of securities
available for sale. During the six months ended June 30, 1997, the Company
sold securities available for sale for gross proceeds of $526,110 and a net loss
of $10,634. The net loss of $10,634 included gross realized losses of $37,264,
offset by gross realized gains of $26,630.
6. MORTGAGE DEBT
In March, 1998, the Company obtained a $2,300,000 mortgage on its Fairlawn
Gardens property (formerly Kent Terrace). The mortgage bears interest at the
rate of 7.06% per annum, requires monthly payments of principal and interest of
$15,395 and matures on April 1, 2008 with a $2,012,668 balloon payment due at
maturity.
In April, 1998, the Company refinanced the mortgage on the Home Mortgage
property (formerly known as Metmor Plaza). The prior mortgage balance of
$10,788,825 was paid from the proceeds of the new $17,500,000 mortgage. The new
mortgage bears interest at the rate of 7.38% per annum for the first ten years
and requires monthly payments of principal and interest of $120,928 until the
anticipated repayment date of May 11, 2008, at which time the then outstanding
principal balance of $15,445,099 is expected to be repaid. 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.
7. NOTE PAYABLE TO BANK
In connection with the Company's purchase of the Fairfield Towers First Mortgage
in 1996, the Company obtained a bank loan from Fleet Bank, N.A. ("Fleet"). The
note, which matures on October 30, 2001, is secured by a collateral assignment
of the Fairfield Towers First Mortgage and is nonrecourse to Presidential except
for a limited guarantee, the amount of which reduces as the principal balance is
reduced. This limited guarantee was $1,408,583 at June 30, 1998. The interest
rate is variable and is based at the Company's election on either the bank's
prime rate plus 1%, a cost of funds rate plus 3%, or various LIBOR rates plus
3%. The note amortizes monthly based on a 9.25% interest rate for a 25 year
term. In addition, upon the sale of condominium units, the Company is required
to make principal payments to Fleet in an amount equal to the amount of
principal payments received by the Company on the Fairfield Towers First
Mortgage. At June 30, 1998 payments on the Fleet note payable were current. The
outstanding note balance at June 30, 1998 and December 31, 1997 was $10,470,469
and $10,542,552, respectively.
The Company obtained an unsecured $250,000 line of credit from a lending
institution in 1997. The interest rate is 1% above the prime rate and the line
of credit expires in February, 1999. Presidential pays a 1% annual fee for the
line of credit. At June 30, 1998, no advances are outstanding on this line of
credit.
8. INCOME TAXES
Presidential elected to qualify as a Real Estate Investment Trust effective
January 1, 1982 under Sections 856-860 of the Internal Revenue Code. Under those
sections, a REIT which distributes at least 95% 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.
For the year ended December 31, 1997, the Company had taxable income (before
distributions to stockholders) of approximately $2,633,000 ($.74 per share),
which included approximately $1,480,000 ($.42 per share) of capital gains. This
amount will be reduced by approximately $557,000 ($.16 per share) of the 1997
distributions that were not utilized in reducing the Company's 1996 taxable
income and by any eligible 1998 distributions that the Company may elect (under
Section 858 of the Internal Revenue Code) to utilize as a reduction of its 1997
taxable income.
As previously stated, in order to retain REIT status, Presidential is required
to distribute 95% of its REIT taxable income (exclusive of capital gains). As of
June 30, 1998, Presidential has distributed the required 95% of its 1997 REIT
taxable income. In addition, although no assurances can be given, it is the
Company's present intention to distribute all of its 1997 taxable income and,
therefore, no provision for income taxes was made at December 31, 1997.
Furthermore, the Company had taxable income (before distributions to
stockholders) for the six months ended June 30, 1998 of approximately $1,233,000
($.34 per share), which included approximately $662,000 ($.18 per share) of
capital gains. This amount will be reduced by 1998 distributions that were not
utilized in reducing the Company's 1997 taxable income and by any eligible 1999
distributions that the Company may elect to utilize as a reduction of its 1998
taxable income.
Presidential intends to continue to maintain its REIT status and although no
assurances can be given at this time, the Company expects that it will not have
to pay Federal income taxes for 1998 because its present intention is to
distribute all of its 1998 taxable income during 1998 and 1999. Therefore, no
provision for income taxes has been made at June 30, 1998.
Presidential has, for tax purposes, reported the gain from the sale of certain
of its properties using the installment method.
9. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" in the first quarter of 1998. The Company's
only element of other comprehensive income is the change in the unrealized gain
on the Company's securities available for sale. Thus, comprehensive income,
which consists of net income plus or minus other comprehensive income, for the
six months ended June 30, 1998 and 1997 was $1,771,544 and $1,774,948,
respectively.
10. TREASURY STOCK
In March, 1998, three directors of the Company were each given 1,000 shares of
the Company's Class B common stock as partial payment for directors fees for the
1998 year. Such shares had been held in treasury at an average cost of
approximately $13.54 per share. The average market value for the previous month
of the Class B common stock, on which the fees were based, was $6.96 per share.
As a result of this transaction, the Company recorded $20,880 for prepaid
directors fees (to be amortized during 1998) based on the average market value
of the stock. Treasury stock was reduced by a cost of $40,620 and additional
paid-in capital was charged $19,740 for the excess of the cost over the market
value.
11. COMMITMENTS AND CONTINGENCIES
The Company has incurred costs for environmental site investigations and the
related response action outcome for potentially hazardous drums found at one
site on its Mapletree Industrial Center property in Palmer, Massachusetts. As of
December 31, 1997, the site investigation work was completed and remedial action
was in progress and the Company had a balance of $35,600 in accrued
environmental costs. At June 30, 1998, there have been no changes to the 1997
estimated costs. Actual costs incurred may vary from these estimates due to the
inherent uncertainties involved.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 1998 AND 1997
Results of Operations
Financial Information for the six months ended June 30, 1998 and 1997:
- -------------------------------------------------------------------------------
Revenue increased by $494,885 from $7,111,704 in 1997 to $7,606,589 in 1998
primarily as a result of increases in rental income and interest on mortgages-
related parties. These increases were offset by decreases in interest on
mortgages-sold properties and investment income.
Rental income increased by $669,302 from $4,040,286 in 1997 to $4,709,588 in
1998 primarily as a result of increases of $250,236 at the Home Mortgage
property (formerly Metmor Plaza), increases of $263,993 at the Fairlawn Gardens
property (formerly Kent Terrace) and increases at all other properties of
$155,073.
Interest on mortgages-related parties increased by $148,207 from $115,357 in
1997 to $263,564 in 1998 primarily as a result of increases in interest on the
Consolidated Loans of $97,476 and increases in interest on the Overlook loan of
$57,570.
Interest on mortgages-sold properties decreased by $285,708 from $2,182,126 in
1997 to $1,896,418 in 1998 primarily due to the $382,796 amortization of
discount on the Cedarbrooke note which was recorded in 1997 as a result of the
prepayment of the Cedarbrooke note in 1997. In addition, there was a decrease of
$50,324 of interest received on the Fairfield Towers Second Mortgage. These
decreases were offset by increases of $86,949 in interest income from the
Fairfield Towers First Mortgage and $67,956 from the amortization of discounts
on the mortgage portfolio.
Investment income decreased by $20,627 from $87,220 in 1997 to $66,593 in 1998
primarily as a result of decreased dividend income on securities available for
sale.
Costs and expenses increased by $686,418 from $5,836,173 in 1997 to $6,522,591
in 1998 primarily due to increases in general and administrative expenses,
interest on note payable and other, interest on mortgages, real estate tax
expense, depreciation expense and amortization of mortgage costs.
General and administrative expenses increased by $272,006 from $1,129,095 in
1997 to $1,401,101 in 1998 primarily due to increases in franchise tax expense
of $159,872, resulting from the partnership distribution received from the
proceeds of the mortgage on the Home Mortgage property and the taxes thereon. In
addition, there were increases in salary expense of $81,937 (of which $92,862
pertains to increases in executive bonuses offset by decreases of $10,925 in
salary expense), professional fees increased by $17,276, stationery and printing
expenses increased by $7,969 and there was an increase in directors fees of
$6,070. In the 1998 period, three directors of the Company were each given 1,000
shares of the Company's Class B common stock as partial payment for directors
fees. Such shares had been held in treasury at an average cost of $13.54 per
share. The average market value of the Class B common stock, on which the fees
were based, was $6.96 per share. As a result, the Company recorded $20,880 in
prepaid directors fees based on the average market value of the stock, treasury
stock was reduced by a cost of $40,620 and additional paid-in capital was
charged $19,740 for the excess of the cost over the market value. At June 30,
1998, $10,440 of the prepaid directors fees were expensed.
Interest on note payable and other increased by $91,576 from $477,080 in 1997 to
$568,656 in 1998 primarily due to a $71,755 increase in interest expense on the
note payable as a result of the additional $2,500,000 loan advanced in 1997.
Mortgage interest expense increased by $97,553 from $1,083,567 in 1997 to
$1,181,120 in 1998 as a result of the refinancing of the mortgage on the Home
Mortgage property in April of 1998, and the new mortgage obtained on the
Fairlawn Gardens property in March of 1998. Mortgage interest on the Home
Mortgage property increased by $76,718 and mortgage interest on the Fairlawn
Gardens property was $45,975.
Real estate tax expense increased by $89,940 from $349,338 in 1997 to $439,278
in 1998 primarily as a result of increases in real estate tax expense at the
Crown Court, Cambridge Green and Home Mortgage properties. The 1997 real estate
tax expense included refunds of $46,143 for prior years' taxes at the Crown
Court property.
Depreciation on real estate increased by $26,228 from $353,427 in 1997 to
$379,655 in 1998 as a result of improvements and additions made to the
properties in 1997.
Amortization of mortgage costs increased by $93,883 from $67,476 in 1997 to
$161,359 in 1998 as a result of the $107,412 write-off of unamortized mortgage
costs associated with the prior mortgage on the Home Mortgage property. The
mortgage on the Home Mortgage property was refinanced in April, 1998 and the
prior mortgage was repaid from the proceeds of the new mortgage.
Net gain from sales of properties and securities are sporadic (as they depend on
the timing of sales or the receipt of installments or prepayments on purchase
money notes). In 1998, the net gain from sales of properties and securities was
$681,218 compared with $507,873 in 1997. In the 1998 period, the Company
recognized a gain of $40,435 from the sale of a cooperative apartment unit at
Sherwood House. In addition, the Company recognized deferred gains of $603,213
and $33,898, respectively, from principal payments received on the Overlook
loan and the Fairfield Towers Second Mortgage. In the 1997 period, the
Company recognized $472,497 of deferred gain from the sale of the Cedarbrooke
property as a result of a $1,074,200 principal prepayment received on that
note. In addition, the Company recognized deferred gains of $11,759 and
$34,251, respectively, from principal payments received on the Overlook
loan and the Fairfield Towers Second Mortgage.
Financial Information for the three months ended June 30, 1998 and 1997:
- -------------------------------------------------------------------------------
Revenue increased by $449,065 from $3,327,362 in 1997 to $3,776,427 in 1998
primarily as a result of increases in rental income, interest on mortgages-sold
properties, interest on mortgages-related parties and other income.
Rental income increased by $324,140 from $2,017,982 in 1997 to $2,342,122 in
1998 primarily as a result of increases of $180,219 at the Home Mortgage
property, increases of $110,525 at the Fairlawn Gardens property and increases
at all other properties of $33,396.
Interest on mortgages-sold properties increased by $60,320 from $892,497
in 1997 to $952,817 in 1998 primarily due to increases of $20,806 in interest
income from the Fairfield Towers First Mortgage and $33,688 from the
amortization of discounts on the mortgage portfolio.
Interest on mortgages-related parties increased by $40,993 from $57,571 in 1997
to $98,564 in 1998 primarily as a result of increases in interest on the
Consolidated Loans of $38,695.
Other income increased by $15,014 from $10,066 in 1997 to $25,080 in 1998 as a
result of a $20,000 fee received in 1998 in connection with the refinancing of
the Home Mortgage property mortgage.
Costs and expenses increased by $410,081 from $2,915,053 in 1997 to $3,325,134
in 1998 primarily due to increases in general and administrative expenses,
interest on note payable and other, interest on mortgages, real estate tax
expense and amortization of mortgage costs. These increases were offset by a
decrease in minority interest share of partnership income.
General and administrative expenses increased by $199,135 from $539,541 in
1997 to $738,676 in 1998 primarily due to an increase of $157,372 in franchise
tax expense resulting from the partnership distribution received from the
proceeds of the mortgage on the Home Mortgage property and the taxes thereon. In
addition, there were increases in salary expense of $45,223 (of which $41,503
pertains to increases in executive bonuses).
Interest on note payable and other increased by $35,346 from $248,279 in 1997 to
$283,625 in 1998 primarily due to a $25,565 increase in interest expense on the
note payable as a result of the additional $2,500,000 loan advanced in 1997.
Mortgage interest expense increased by $108,065 from $544,918 in 1997 to
$652,983 in 1998 as a result of the refinancing of the mortgage on the Home
Mortgage property in April, 1998 and the new mortgage obtained on the Fairlawn
Gardens property in March, 1998. Mortgage interest on the Home Mortgage property
increased by $81,072 and mortgage interest on the Fairlawn Gardens property was
$40,562.
Real estate tax expense increased by $21,901 from $197,740 in 1997 to $219,641
in 1998 primarily as a result of increases in real estate tax expense at the
Home Mortgage and Cambridge Green properties.
Amortization of mortgage costs increased by $90,329 from $33,738 in 1997 to
$124,067 in 1998 as a result of the $107,412 write-off of unamortized mortgage
costs associated with the prior mortgage on the Home Mortgage property.
Minority interest share of partnership income decreased by $27,346 from $69,522
in 1997 to $42,176 in 1998 as a result of a decrease in partnership income on
the Home Mortgage property.
Net gain from sales of properties and securities are sporadic (as they depend on
the timing of sales or the receipt of installments or prepayments on purchase
money notes). In 1998, the net gain from sales of properties and
securities was $617,649 compared with $18,497 in 1997. In the 1998 period, the
Company recognized deferred gains of $596,854 and $17,123, respectively, from
principal payments received on the Overlook loan and the Fairfield Towers Second
Mortgage. In the 1997 period, the Company recognized deferred gains of $5,946
and $17,558, respectively, from principal payments received on the Overlook loan
and the Fairfield Towers Second Mortgage.
Balance Sheet
The receivable for minority partners' interest increased by $3,611,660 from
$3,779,408 at December 31, 1997 to $7,391,068 at June 30, 1998, as a result of
the $3,670,400 distribution made to the minority partners of the Home Mortgage
Partnership from the proceeds from the refinancing of the mortgage on the Home
Mortgage property.
Prepaid expenses and deposits in escrow increased by $987,722 from $1,190,158 at
December 31, 1997 to $2,177,880 at June 30, 1998 as a result of increases of
$150,866 in prepaid franchise taxes, increases of $267,484 in mortgagee real
estate tax and insurance escrows and an increase of $579,529 in replacement
reserve mortgagee escrow funds. These increases were a result of the mortgages
obtained in 1998 on the Home Mortgage and Fairlawn Gardens properties.
Cash and cash equivalents increased by $3,875,925 from $979,712 at December 31,
1997 to $4,855,637 at June 30, 1998 as a result of the $2,300,000
mortgage obtained from the financing of the Fairlawn Gardens property. The
Company also received a $1,006,276 partnership distribution (net of taxes paid)
from the Home Mortgage Partnership as a result of the refinancing of the
mortgage on the Home Mortgage property and principal payments of $603,213 were
received on the Overlook loan.
Other assets increased by $828,169 from $1,140,571 at December 31, 1997 to
$1,968,740 at June 30, 1998 primarily as a result of a $467,404 increase in
mortgage costs for the mortgages obtained in 1998, which were partially offset
by the $177,588 amortization of mortgage and loan acquisition costs. In
addition, $274,814 of tenant security deposits at the Home Mortgage property
were transferred from cash and cash equivalents to restricted funds, in
accordance with the terms of the refinanced mortgage. Deferred charges increased
by $225,981 as a result of expenditures made for the proposed acquisition of an
apartment complex in Miami, Florida. Home office furniture and equipment
increased by $30,481, primarily for costs associated with the purchase of new
computer systems in preparation for the year 2000.
Mortgage debt on properties owned increased by $8,758,744 from $26,271,093 at
December 31, 1997 to $35,029,837 at June 30, 1998. This increase was the result
of the refinancing of the Home Mortgage property, which increased the mortgage
debt on that property by $6,711,175, and the new $2,300,000 mortgage on the
Fairlawn Gardens property. These increases were offset by principal payments of
$252,431.
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 retail space or retail goods, 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.
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. The Company is seeking to expand its portfolio of real
estate equities and plans to utilize for this purpose a portion of its available
funds and additional funds that the Company may receive from balloon payments
due on the Company's notes receivable as they mature, as well as funds that may
be available from external sources. However, the Company's plans to expand its
portfolio of real estate equities may be adversely affected by limitations on
its ability to obtain funds for investment on satisfactory terms from external
sources. Except as discussed herein, management is not aware of any other
trends, events, commitments or uncertainties that will have a significant effect
on liquidity.
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, and from repayments of its mortgage
portfolio. The Company also has at its disposal a $250,000 unsecured line of
credit from a lending institution.
At June 30, 1998, Presidential had $4,855,637 in available cash and cash
equivalents, an increase of $3,875,925 from the $979,712 at December 31, 1997.
This increase in cash and cash equivalents was due to cash provided by operating
activities of $555,087, investing activities of $741,176 and financing
activities of $2,579,662.
Operating Activities
Presidential's principal source of cash from operating activities is from
interest on its mortgage portfolio, which was $1,790,881 in 1998, net of
interest payments on wrap mortgage debt and note payable. In 1998, net cash
used for rental property operations was $12,683, which is net of distributions
from partnership operations to minority partners but before additions and
improvements and mortgage amortization. The net cash used for rental property
operations includes an expenditure of $274,814 for the funding of security
deposits for the Home Mortgage property in accordance with the terms of the
refinanced mortgage on that property.
Investing Activities
Presidential holds a portfolio of mortgage notes receivable which consist
primarily of notes arising from sales of real properties previously owned by the
Company. Some of these notes wrap around underlying mortgage debt (the
"Underlying Debt") which is paid by Presidential only out of funds received on
its mortgage portfolio relating to the Underlying Debt. During 1998, the Company
received principal payments of $783,450 on its mortgage portfolio (net of any
principal payments attributable to the Underlying Debt), of which $707,519
represented prepayments, which are sporadic and cannot be relied upon as a
regular source of liquidity.
During 1998, the Company invested $244,036 in additions and improvements to its
properties. The Company sold one cooperative apartment at Sherwood House in Long
Beach, New York and received net proceeds of $74,550.
The Company also holds a portfolio of marketable equitable securities which
increased by $47,953 from $226,550 at December 31, 1997 to $274,503 at June 30,
1998 as a result of the purchase of securities of $41,625 and an increase in the
fair value of securities of $6,328.
Financing Activities
The Company's indebtedness at June 30, 1998, includes $39,940,831 of mortgage
debt (including $4,910,994 of underlying indebtedness on properties not owned by
the Company but on which the Company holds wraparound mortgages). The mortgage
debt, which is secured by individual properties, is nonrecourse to the Company
with the exception of the $278,177 Mapletree Industrial Center mortgage, which
is secured by the property and a guarantee of repayment by Presidential. In
addition, some of the Company's mortgages provide for personal 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 1998, the Company made $252,431 of principal payments on
mortgage debt on properties which it owns.
The Company obtained a $2,300,000 mortgage on its Fairlawn Gardens property in
March of 1998. The mortgage matures in April, 2008 with a balloon payment of
$2,012,668 due at maturity. The mortgage requires monthly payments of principal
and interest of $15,395 and has an interest rate of 7.06% per annum. In April of
1998, the Company completed the refinancing of the mortgage on the Home Mortgage
property and the prior mortgage balance of $10,788,825 was paid from the
proceeds of the new $17,500,000 mortgage. The new mortgage bears interest at the
rate of 7.38% per annum for the first ten years, requires monthly payments of
principal and interest of $120,928 until the anticipated repayment date of May
11, 2008 at which time the then outstanding principal balance of $15,445,099 is
expected to be repaid. 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.
The mortgages on the Company's properties are self-liquidating at fixed rates of
interest with the exception of the mortgages on Home Mortgage, Building
Industries Center, Fairlawn Gardens and Continental Gardens, which have
balloon payments due at maturity.
The Company's indebtedness at June 30, 1998 includes a $10,470,469 bank loan
payable to Fleet. The note, which matures on October 30, 2001, is nonrecourse to
Presidential except for a limited guarantee, the amount of which reduces as the
principal balance is reduced and was limited to $1,408,583 at June 30, 1998. The
interest rate is variable and is based at the Company's election on either the
bank's prime rate plus 1%, a cost of funds rate plus 3%, or various LIBOR rates
plus 3%. The note amortizes monthly based on a 9.25% interest rate for a 25 year
term with additional principal payments due upon the sale of condominium units.
During 1998, the Company made principal payments of $72,083.
During 1998, Presidential declared and paid cash distributions of $1,111,778 to
its shareholders and received proceeds from its dividend reinvestment and share
purchase plan of $94,975.
Fairfield Towers
The Company's financial performance and liquidity in 1998 and subsequent years
will be affected by the results of the condominium conversion of Fairfield
Towers Apartments in Brooklyn, New York by the owner of that property and the
rental operations of the unsold condominium units. At June 30, 1998, the
outstanding principal balances on the Fairfield Towers First Mortgage and the
Fairfield Towers Second Mortgage were $17,176,884 and $14,416,254, respectively.
The Fairfield Towers First Mortgage provides for monthly interest payments of 1%
above the prime rate and principal repayments prior to maturity upon the sale of
individual condominium units. Until the Fairfield Towers First Mortgage is
repaid, Presidential will receive basic interest on the Fairfield Towers Second
Mortgage only out of net cash flow from operations of the property and release
payments upon the sale of each condominium unit in the amount of $3,000 per
unit. All unpaid basic interest and additional interest (which is based on
percentages of gross sales proceeds) will be deferred until after repayment of
the Fairfield Towers First Mortgage.
Since the conversion of the property to condominium status in 1994, a total of
155 units had been sold and 997 units are owned by the sponsor, the majority of
which are occupied as rental units.
Environmental Matters
At June 30, 1998, the Company is continuing with its environmental project for
the investigation and removal of potentially hazardous drums found at one site
on its Mapletree Industrial Center property in Palmer, Massachusetts. Accrued
liabilities for environmental matters have been recorded in operating expenses
when it is probable that a liability has been incurred and the amount of the
liability can be reasonably estimated. These estimates are exclusive of claims
against third parties and have not been discounted. Actual costs incurred may
vary from these estimates due to the inherent uncertainties involved. The
Company believes that any additional liability in excess of amounts provided
which may result from the resolution of this matter will not have a material
adverse effect on the financial condition, liquidity or the cash flow of the
Company. The site investigation at the Mapletree Industrial Center site was
completed and remedial action is in progress. At December 31, 1997, the accrued
expense for the remedial action was $35,600. For the six months ended June 30,
1998, there were no environmental costs charged to operations.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 27. Financial Data Schedule.
(b) No reports on form 8-K have been filed during the quarter ended June 30,
1998.
SIGNATURES
Pursuant to the requirements 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
(Registrant)
DATE: August 11, 1998 By: /s/ Jeffrey F. Joseph
---------------------
Jeffrey F. Joseph
President
DATE: August 11, 1998 By: /s/ Elizabeth Delgado
---------------------
Elizabeth Delgado
Treasurer
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<CASH> 4,855,637
<SECURITIES> 274,503
<RECEIVABLES> 31,609,857
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