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 September 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 ------- 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 November 6, 1998 was 478,940 shares of Class A common and 3,121,198 shares of Class B common. PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES Index to Form 10-Q For the Nine Months Ended September 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 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) Assets September 30, December 31, 1998 1997 ---------------- ---------------- Mortgage portfolio (Note 2): Sold properties, accrual $43,545,864 $43,871,400 Related parties, accrual 1,713,997 2,350,899 Sold properties, impaired 17,662,927 17,878,458 ---------------- ---------------- Total mortgage portfolio 62,922,788 64,100,757 ---------------- ---------------- Less discounts: Sold properties, accrual 4,301,075 5,055,574 Related parties, accrual 152,419 160,735 Sold properties, impaired 7,617,236 7,675,111 ---------------- ---------------- Total discounts 12,070,730 12,891,420 ---------------- ---------------- Less deferred gains: Sold properties, accrual 12,546,661 12,550,333 Related parties, accrual 935,156 1,543,342 Sold properties, impaired 6,380,679 6,432,055 ---------------- ---------------- Total deferred gains 19,862,496 20,525,730 ---------------- ---------------- Net mortgage portfolio (of which $899,790 in 1998 and $756,751 in 1997 are due within one year) 30,989,562 30,683,607 ---------------- ---------------- Real estate (Note 3) 34,536,464 27,690,535 Less: accumulated depreciation 6,991,263 6,404,797 ---------------- ---------------- Net real estate 27,545,201 21,285,738 ---------------- ---------------- Minority partners' interest (Note 4) 7,328,615 3,779,408 Prepaid expenses and deposits in escrow 2,311,857 1,190,158 Other receivables (net of valuation allowance of $93,840 in 1998 and $129,484 in 1997) 645,147 715,407 Other receivables (related party) 7,972 8,287 Securities available for sale (Note 5) 1,059,763 226,550 Cash and cash equivalents 2,311,125 979,712 Other assets 1,999,722 1,140,571 ---------------- ---------------- Total Assets $74,198,964 $60,009,438 ================ ================ See notes to consolidated financial statements. PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) Liabilities and Stockholders' Equity September 30, December 31, 1998 1997 ---------------- ---------------- Liabilities: Mortgage debt (Note 6): Properties owned $39,826,031 $26,271,093 Wrap mortgage debt on sold properties 4,790,271 5,149,217 ---------------- ---------------- Total (of which $891,878 in 1998 and $1,133,721 in 1997 are due within one year) 44,616,302 31,420,310 Note payable to bank (of which $156,552 in 1998 and $147,190 in 1997 are due within one year) (Note 7) 10,433,301 10,542,552 Executive pension plan liability 1,515,235 1,601,411 Accrued liabilities 2,820,840 2,276,898 Accrued postretirement costs 566,106 574,637 Deferred income 189,317 274,097 Accounts payable 315,216 481,248 Distribution payable on common stock 575,915 Other liabilities 785,526 665,202 ---------------- ---------------- Total Liabilities 61,817,758 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 September 30, 1998 December 31, 1997 313,175 311,377 ----------- ------------------ --------------------- Authorized: 10,000,000 10,000,000 Issued: 3,131,751 3,113,773 Treasury: 11,224 14,224 Additional paid-in capital 2,143,714 2,043,653 Retained earnings 10,026,934 9,943,241 Net unrealized gain on securities available for sale (Notes 5 and 9) 1,456 19,505 Class B, treasury stock (at cost) (Note 10) (151,967) (192,587) ---------------- ---------------- Total Stockholders' Equity 12,381,206 12,173,083 ---------------- ---------------- Total Liabilities and Stockholders' Equity $74,198,964 $60,009,438 ================ ================ See notes to consolidated financial statements. PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) NINE MONTHS ENDED SEPTEMBER 30, ----------------------------------- 1998 1997 --------------- ---------------- Income: Rental $7,144,012 $6,159,768 Interest on mortgages - sold properties 2,847,079 3,112,030 Interest on wrap mortgages 960,181 976,361 Interest on mortgages - related parties 372,717 174,021 Investment income 117,733 105,447 Other 34,764 45,969 --------------- ---------------- Total 11,476,486 10,573,596 --------------- ---------------- Costs and Expenses: General and administrative 2,031,474 1,712,657 Interest on note payable and other 849,400 775,050 Interest on wrap mortgage debt 155,988 172,167 Amortization of loan acquisition costs 24,344 22,051 Depreciation on non-rental property 18,130 18,406 Rental property: Operating expenses 3,108,535 3,095,087 Interest on mortgages 1,889,461 1,606,012 Real estate taxes 655,258 583,510 Depreciation on real estate 587,410 543,976 Amortization of mortgage costs 174,920 247,248 Minority interest share of partnership income 359,901 285,398 --------------- ---------------- Total 9,854,821 9,061,562 --------------- ---------------- Income before net gain from sales of properties and securities 1,621,665 1,512,034 Net gain from sales of properties and securities 725,107 562,658 --------------- ---------------- Net Income $2,346,772 $2,074,692 =============== ================ Earnings per Common Share (Note 1-C): Income before net gain from sales of properties and securities $0.45 $0.42 Net gain from sales of properties and securities 0.20 0.16 --------------- ---------------- Net Income per Common Share $0.65 $0.58 =============== ================ Cash Distributions Declared per Common Share $0.63 $0.60 =============== ================ Weighted Average Number of Shares Outstanding 3,589,889 3,560,549 =============== ================ See notes to consolidated financial statements. PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) THREE MONTHS ENDED SEPTEMBER 30, ----------------------------------- 1998 1997 --------------- ---------------- Income: Rental $2,434,424 $2,119,482 Interest on mortgages - sold properties 950,661 929,904 Interest on wrap mortgages 318,685 324,128 Interest on mortgages - related parties 109,153 58,664 Investment income 51,140 18,227 Other 5,834 11,487 --------------- ---------------- Total 3,869,897 3,461,892 --------------- ---------------- Costs and Expenses: General and administrative 630,373 583,562 Interest on note payable and other 280,744 297,970 Interest on wrap mortgage debt 50,621 56,063 Amortization of loan acquisition costs 8,115 8,011 Depreciation on non-rental property 6,353 5,323 Rental property: Operating expenses 1,064,665 1,077,780 Interest on mortgages 708,341 522,445 Real estate taxes 215,980 234,172 Depreciation on real estate 207,755 190,549 Amortization of mortgage costs 13,561 179,772 Minority interest share of partnership income 145,722 69,742 --------------- ---------------- Total 3,332,230 3,225,389 --------------- ---------------- Income before net gain from sales of properties and securities 537,667 236,503 Net gain from sales of properties and securities 43,889 54,785 --------------- ---------------- Net Income $581,556 $291,288 =============== ================ Earnings per Common Share (Note 1-C): Income before net gain from sales of properties and securities $0.15 $0.06 Net gain from sales of properties and securities 0.01 0.02 --------------- ---------------- Net Income per Common Share $0.16 $0.08 =============== ================ Cash Distributions Declared per Common Share $0.32 $0.30 =============== ================ See notes to consolidated financial statements. PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) NINE MONTHS ENDED SEPTEMBER 30, ---------------------------------------- 1998 1997 -------------- -------------- Cash Flows from Operating Activities: Cash received from rental properties $6,961,116 $6,286,420 Interest received 3,434,791 3,153,392 Miscellaneous income 30,892 58,412 Interest paid on rental property mortgages (1,853,848) (1,601,631) Interest paid on wrap mortgage debt (155,988) (172,167) Interest paid on note payable (694,486) (621,470) Cash disbursed for rental property operations (4,436,811) (3,525,980) Cash disbursed for general and administrative costs (1,363,154) (1,250,233) -------------- -------------- Net cash provided by operating activities 1,922,512 2,326,743 -------------- -------------- Cash Flows from Investing Activities: Payments received on notes receivable 1,226,401 2,243,184 Payments disbursed for investments in notes receivable (60,000) (3,009,946) Payments disbursed for additions and improvements (355,398) (1,373,328) Proceeds from sale of property 74,550 Purchase of property (6,549,637) Proceeds from sales of securities 23,986 645,943 Purchases of securities (853,812) (79,202) Purchase of 1% interest in partnership (60,000) -------------- -------------- Net cash used in investing activities (6,493,910) (1,633,349) -------------- -------------- Cash Flows from Financing Activities: Principal payments on mortgage debt: Properties owned (331,237) (435,575) Wrap mortgage debt on sold properties (358,946) (346,305) Mortgage debt payment from proceeds of mortgage refinancing (10,788,825) (7,771,546) Mortgage proceeds 24,675,000 8,120,000 Mortgage refinancing repairs and replacement escrows (558,730) Mortgage costs (574,612) (192,875) Note payable proceeds 2,500,000 Principal payments on note payable (109,251) (479,376) Cash distributions on common stock (2,263,079) (2,138,126) Proceeds from dividend reinvestment and share purchase plan 121,599 133,531 Distributions to minority partners (3,909,108) (304,411) -------------- -------------- Net cash provided by (used in) financing activities 5,902,811 (914,683) -------------- -------------- Net Increase (Decrease) in Cash and Cash Equivalents 1,331,413 (221,289) Cash and Cash Equivalents, Beginning of Period 979,712 1,392,135 -------------- -------------- Cash and Cash Equivalents, End of Period $2,311,125 $1,170,846 ============== ============== See notes to consolidated financial statements. PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) NINE MONTHS ENDED SEPTEMBER 30, ----------------------------------------- 1998 1997 --------------- --------------- Reconciliation of Net Income to Net Cash Provided by Operating Activities Net Income $2,346,772 $2,074,692 --------------- --------------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 804,804 831,681 Gain from sales of properties and securities (725,107) (562,658) Issuance of treasury stock 15,660 Amortization of discounts on notes and fees (820,690) (1,122,928) Decrease in accounts receivable 70,575 55,190 Increase in accounts payable and accrued liabilities 283,203 415,405 Decrease in deferred income (84,780) (61,617) Increase in prepaid expenses, deposits in escrow and deferred charges (644,656) (205,451) Increase in security deposit restricted funds (378,363) Increase in security deposit liabilities 124,196 68,723 Minority share of partnership income 359,901 285,398 Distribution payable on common stock 575,915 535,864 Other (4,918) 12,444 --------------- --------------- Total adjustments (424,260) 252,051 --------------- --------------- Net cash provided by operating activities $1,922,512 $2,326,743 =============== =============== 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. PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 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 nine months ended September 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 in conformity with generally accepted accounting principles, 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. 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 September 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 $17,662,927 and have a net carrying value of $3,665,012 after deducting discounts of $7,617,236 and deferred gains of $6,380,679. The Grant House wraparound mortgage note wraps around and is subordinate to a first mortgage with an outstanding principal balance of $2,260,248 at September 30, 1998, which is equal to the net carrying value of the Grant House wraparound note. At September 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 nine months ended September 30, 1998 and September 30, 1997 was $17,760,442 and $16,162,040, 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 nine months ended September 30, 1998. The following table reflects the activity in impaired loans: IMPAIRED LOANS - -------------- Impaired Impaired Loan Additions Loan Balance (Payments) Balance Loan Description 12/31/97 1998 9/30/98 - ------------------------------------------------ ----------------- ----------------- ----------------- Notes receivable-sold properties: Properties previously owned- Fairfield Towers Second Mortgage $14,488,337 ($109,251) $14,379,086 Grant House (1) 3,390,121 (106,280) 3,283,841 ----------------- ----------------- ----------------- Total $17,878,458 ($215,531) $17,662,927 ================= ================= ================= Discount Net on Deferred Carrying Loans Gain Value Loan Description 9/30/98 9/30/98 9/30/98 - ------------------------------------------------ ----------------- ----------------- ----------------- Notes receivable-sold properties: Properties previously owned- Fairfield Towers Second Mortgage ($7,617,236) ($5,357,086) $1,404,764 Grant House (1) (1,023,593) 2,260,248 ----------------- ----------------- ----------------- Total ($7,617,236) ($6,380,679) $3,665,012 ================= ================= ================= Nine months ended September 30, ---------------------------------------- 1998 1997 ----------------- ----------------- Reported Interest Income and Amortization of Discount (Cash Basis) - ---------------------------------------------------------- Fairfield Towers Second Mortgage - interest income $12,401 $62,579 Fairfield Towers Second Mortgage - amortization of discount 57,875 64,397 Grant House - interest income (1) 51,923 Overlook - interest income (2) 70,869 Overlook - additional interest income (2) 17,527 ----------------- ----------------- Total $122,199 $215,372 ================= ================= Recognized Gain from Sale of Property - ---------------------------------------------------------- Fairfield Towers Second Mortgage $51,376 $57,166 Overlook (2) 17,840 ----------------- ----------------- Total $51,376 $75,006 ================= ================= 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 $731,394 $683,043 Fairfield Towers Second Mortgage - additional interest income 69,634 Fairfield Towers Second Mortgage - amortization of discount 950,757 792,046 Grant House - interest income (1) 56,250 ----------------- ----------------- Total $1,738,401 $1,544,723 ================= ================= <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 $51,923 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 $2,260,248 which it wraps around. (2) The Overlook loan was reclassified to accrual status at December 31, 1997. </FN> 3. REAL ESTATE Real estate is comprised of the following: September 30, December 31, 1998 1997 ------------ ----------- Land $ 5,454,549 $ 3,774,779 Buildings and leaseholds 28,853,829 23,729,409 Furniture and equipment 228,086 186,347 ----------- ----------- Total real estate $34,536,464 $27,690,535 =========== =========== In August, 1998, the Company purchased Sunwood Apartments, a 105 unit apartment building complex in Miami, Florida, for a purchase price of $6,100,000. Presidential obtained a $4,875,000 first mortgage loan on the property. 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: September 30, December 31, 1998 1997 ------------ ----------- Home Mortgage Partnership $7,506,989 $3,963,378 UTB Associates (178,374) (183,970) ---------- ---------- Total minority partners' interest $7,328,615 $3,779,408 ========== ========== 5. SECURITIES AVAILABLE FOR SALE The cost and fair value of securities available for sale are as follows: September 30, December 31, 1998 1997 ------------ ----------- Cost $1,058,307 $207,045 Gross unrealized gains 12,798 19,612 Gross unrealized losses (11,342) (107) ---------- -------- Fair value $1,059,763 $226,550 ========== ======== Sales activity results for securities available for sale are as follows: Nine Months Ended September 30, ------------------------------- 1998 1997 ---- ---- Gross sales proceeds $23,986 $649,110 ======= ======== Gross realized gains $21,436 $ 52,420 Gross realized losses (37,264) ------- -------- Net realized gain $21,436 $ 15,156 ======= ======== 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. In connection with its acquisition of Sunwood Apartments in August, 1998, Presidential obtained a $4,875,000 first mortgage. The mortgage bears interest at the rate of 6.55%, requires monthly payments of principal and interest of $30,974 and matures on September 1, 2008 with a $4,146,347 balloon payment due at maturity. 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 repaid. This limited guarantee was $1,403,583 at September 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 September 30, 1998 payments on the Fleet note payable were current. The outstanding note balance at September 30, 1998 and December 31, 1997 was $10,433,301 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 September 30, 1998, no advances are outstanding on this line of credit. 8. INCOME TAXES Presidential has elected to qualify as a Real Estate Investment Trust under the Internal Revenue Code. 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. Upon filing the Company's income tax return for the year ended December 31, 1997, Presidential applied its available 1997 stockholders' distributions and elected to apply (under Section 858 of the Internal Revenue Code) all but approximately $199,000 of its 1998 stockholders' distributions to reduce its taxable income for 1997 to zero. Furthermore, the Company had taxable income (before distributions to stockholders) for the nine months ended September 30, 1998 of approximately $1,483,000 ($.41 per share), which included approximately $687,000 ($.19 per share) of capital gains. This amount will be reduced by the $199,000 ($.06 per share) of its 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 September 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 nine months ended September 30, 1998 and 1997 was $2,328,723 and $2,066,166, 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 September 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 NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 Results of Operations Financial Information for the nine months ended September 30, 1998 and 1997: - ------------------------------------------------------------------------------- Revenue increased by $902,890 from $10,573,596 in 1997 to $11,476,486 in 1998 primarily as a result of increases in rental income and interest on mortgages- related parties. These increases were offset by a decrease in interest on mortgages-sold properties. Rental income increased by $984,244 from $6,159,768 in 1997 to $7,144,012 in 1998 primarily as a result of increases of $429,967 at the Home Mortgage property (formerly Metmor Plaza) and increases of $263,810 at the Fairlawn Gardens property (formerly Kent Terrace). On August 31, 1998, the Company purchased Sunwood Apartments, a 105 unit apartment property in Miami, Florida. Rental income from the Sunwood property was $81,455. In addition, rental income increased at all other properties by $209,012. Interest on mortgages-related parties increased by $198,696 from $174,021 in 1997 to $372,717 in 1998 primarily as a result of increases in interest on the Consolidated Loans of $153,451 and increases in interest on the Overlook loan of $52,951. Interest on mortgages-sold properties decreased by $264,951 from $3,112,030 in 1997 to $2,847,079 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 $50,178 of interest received on the Fairfield Towers Second Mortgage. These decreases were offset by increases of $83,538 in interest income from the Fairfield Towers First Mortgage and $94,154 from the amortization of discounts on the mortgage portfolio. Costs and expenses increased by $793,259 from $9,061,562 in 1997 to $9,854,821 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 an increase in minority interest share of partnership income. These increases were partially offset by a decrease in amortization of mortgage costs. General and administrative expenses increased by $318,817 from $1,712,657 in 1997 to $2,031,474 in 1998 primarily due to increases in franchise tax expense of $221,935, resulting from the partnership distribution received from the proceeds of the mortgage refinancing on the Home Mortgage property and the taxes thereon. In addition, there were increases in salary expense of $76,900 (of which $77,122 pertains to increases in executive bonuses), stationery and printing expenses increased by $7,233 and there was an increase in directors fees of $7,530. 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 September 30, 1998, $15,660 of the prepaid directors fees were expensed. Interest on note payable and other increased by $74,350 from $775,050 in 1997 to $849,400 in 1998 primarily due to a $44,269 increase in interest expense on the note payable as a result of the additional $2,500,000 loan advanced in 1997. In addition, the amortization of discounts on deferred payables increased by $29,173. Mortgage interest expense increased by $283,449 from $1,606,012 in 1997 to $1,889,461 in 1998 as a result of the refinancing of the mortgage on the Home Mortgage property in April of 1998, the new mortgage obtained on the Fairlawn Gardens property in March of 1998 and the mortgage obtained on Sunwood Apartments, which was purchased in August of 1998. Mortgage interest on the Home Mortgage property increased by $185,297. Mortgage interest was $87,806 on the Fairlawn Gardens property and $27,496 on the Sunwood Apartments property. Real estate tax expense increased by $71,748 from $583,510 in 1997 to $655,258 in 1998 primarily as a result of increases in real estate tax expense at the Crown Court 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 $43,434 from $543,976 in 1997 to $587,410 in 1998 as a result of improvements and additions made to the properties in 1997 and 1998. The addition of the Sunwood Apartments property in 1998 also increased depreciation expense by $13,557. Amortization of mortgage costs decreased by $72,328 from $247,248 in 1997 to $174,920 in 1998 primarily as a result of the $146,097 write-off in 1997 of unamortized mortgage costs associated with the prior mortgage on the Continental Gardens property, which was refinanced in July, 1997. This decrease was offset by the $107,412 write-off in 1998 of unamortized mortgage costs associated with the prior mortgage on the Home Mortgage property, which was refinanced in April, 1998. In addition, mortgage costs for the refinanced mortgage on the Home Mortgage property were less than the mortgage costs on the prior mortgage which resulted in a $44,593 decrease in amortization of mortgage costs. Minority share of partnership income increased by $74,503 from $285,398 in 1997 to $359,901 in 1998 primarily as a result of an increase 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 $725,107 compared with $562,658 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 $608,186 and $51,376, 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 $17,840 and $57,166, respectively, from principal payments received on the Overlook loan and the Fairfield Towers Second Mortgage. Financial Information for the three months ended September 30, 1998 and 1997: - ------------------------------------------------------------------------------- Revenue increased by $408,005 from $3,461,892 in 1997 to $3,869,897 in 1998 primarily as a result of increases in rental income, interest on mortgages-related parties and investment income. Rental income increased by $314,942 from $2,119,482 in 1997 to $2,434,424 in 1998 primarily as a result of increases of $179,731 at the Home Mortgage property, rental income of $81,455 at the Sunwood Apartments property and increases at all other properties of $53,756. Interest on mortgages-related parties increased by $50,489 from $58,664 in 1997 to $109,153 in 1998 primarily as a result of increases in interest on the Consolidated Loans of $55,975. Investment income increased by $32,913 from $18,227 in 1997 to $51,140 in 1998 primarily as a result of increases in cash and cash equivalents and the interest earned thereon. Costs and expenses increased by $106,841 from $3,225,389 in 1997 to $3,332,230 in 1998 primarily due to increases in general and administrative expenses, interest on mortgages and minority interest share of partnership income. These increases were offset by decreases in interest expense on note payable and other, real estate taxes and amortization of mortgage costs. General and administrative expenses increased by $46,811 from $583,562 in 1997 to $630,373 in 1998 primarily due to an increase of $62,063 in franchise tax expense resulting from the partnership distribution received from the proceeds of the mortgage refinancing on the Home Mortgage property and the taxes thereon. This increase was offset by a $17,719 decrease in professional fees. Interest on note payable and other decreased by $17,226 from $297,970 in 1997 to $280,744 in 1998 primarily due to a $27,487 decrease in interest expense on the note payable. This decrease was offset by a $9,725 increase in the amortization of discounts on deferred payables. Mortgage interest expense increased by $185,896 from $522,445 in 1997 to $708,341 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 $108,579 and mortgage interest on the Fairlawn Gardens property was $41,831. In addition, the purchase of the Sunwood Apartments property in August, 1998, resulted in mortgage interest of $27,496. Real estate tax expense decreased by $18,192 from $234,172 in 1997 to $215,980 in 1998 primarily as a result of a $34,870 decrease in real estate tax expense at the Cambridge Green property. This decrease was partially offset by an increase in real estate tax expense of $10,413 at the Continential Gardens property and $7,434 of real estate tax expense for the Sunwood Apartments property. Amortization of mortgage costs decreased by $166,211 from $179,772 in 1997 to $13,561 in 1998 as a result of the $146,097 write-off in 1997 of unamortized mortgage costs associated with the prior mortgage on the Continental Gardens property and a $24,302 decrease in amortized mortgage costs on the Home Mortgage property. Minority interest share of partnership income increased by $75,980 from $69,742 in 1997 to $145,722 in 1998 primarily as a result of an increase 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 $43,889 compared with $54,785 in 1997. In the 1998 period, the Company recognized deferred gains of $4,973 and $17,478, 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 $6,081 and $22,915, respectively, from principal payments received on the Overlook loan and the Fairfield Towers Second Mortgage. Balance Sheet Real estate increased by $6,845,929 from $27,690,535 at December 31, 1997 to $34,536,464 at September 30, 1998 due to the purchase of Sunwood Apartments, a 105 unit apartment property in Miami, Florida, in August, 1998. The capitalized cost of this property was $1,680,000 for land and $4,860,251 for buildings and improvements. Additions and improvements to other properties were $305,678. The receivable for minority partners' interest increased by $3,549,207 from $3,779,408 at December 31, 1997 to $7,328,615 at September 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 $1,121,699 from $1,190,158 at December 31, 1997 to $2,311,857 at September 30, 1998 as a result of increases of $70,874 in prepaid franchise taxes, increases of $37,193 in prepaid expenses as a result of the addition of the Sunwood Apartments property, increases of $455,983 in mortgagee real estate tax and insurance escrows and an increase of $561,570 in replacement reserve mortgagee escrow funds. These increases were a result of the mortgages obtained in 1998 on the Home Mortgage, Fairlawn Gardens and the Sunwood Apartments properties. Securities available for sale increased by $833,213 from $226,550 at December 31, 1997 to $1,059,763 at September 30, 1998. This increase was the result of purchases of marketable debt securities of $853,812, offset by the sale of securities at a cost of $2,550 and the reduction in the fair value of securities available for sale of $18,049. Cash and cash equivalents increased by $1,331,413 from $979,712 at December 31, 1997 to $2,311,125 at September 30, 1998, primarily 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 $608,186 were received on the Overlook loan. The additions to cash and cash equivalents were partially offset by the $1,834,214 of funds disbursed for the purchase of Sunwood Apartments and the $853,812 paid for the purchase of marketable debt securities, primarily interest-bearing corporate bonds. Other assets increased by $859,151 from $1,140,571 at December 31, 1997 to $1,999,722 at September 30, 1998 primarily as a result of a $574,612 increase in mortgage costs for the mortgages obtained in 1998, which were partially offset by the $199,264 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 and $98,599 of tenant security deposits were deposited for the security deposits held at the Sunwood Apartments property. Office furniture and equipment increased by $36,662 and deferred charges increased by $86,908. Mortgage debt on properties owned increased by $13,554,938 from $26,271,093 at December 31, 1997 to $39,826,031 at September 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, the new $2,300,000 mortgage on the Fairlawn Gardens property and the $4,875,000 mortgage on the Sunwood Apart- ments property. These increases were offset by principal payments of $331,237. Year 2000 Compliance The year 2000 issue occurred as a result of computer software programs recognizing a two-digit date code instead of a four-digit code. Therefore, in date sensitive software, the year 2000 would be recognized as the year 1900. Many computer systems and software programs will have to be updated to comply with the Year 2000 requirements. Readiness The Company's business and information technology systems ("IT") have been assessed for Year 2000 compliance and the Company anticipates that the required changes will be completed by June, 1999. During the fourth quarter of 1998, the Company will continue to assess the non-information technology systems ("NIT") that may have Year 2000 problems and address such problems. In addition, the Company will contact all third parties that have an effect on the Company's business transactions for verification of their compliance with the Year 2000. Phase I The Company has completed its assessment of its headquarters IT system, which includes accounts payable, accounts receivable, general ledger, spreadsheets and financial information systems. All updates to systems are near completion with the exception of the Company's accounts receivable system, which is estimated to be completed by June, 1999. Management believes that the telephone systems, communication systems and data collection systems at the Company's headquarters are Year 2000 compliant. Phase II During the fourth quarter of 1998, the Company will continue to assess its non-information technology systems . These systems are located at the Company's properties and would include elevators, heating and air conditioning systems, lighting and security systems. It is anticipated that the assessment and remedial action (if required) would be completed by the end of 1998. The majority of the Company's properties are apartment properties with limited technology systems. Phase III In addition, during the fourth quarter of 1998, the Company will be sending requests to tenants, mortgagors, and all third party vendors for written verification that their systems are Year 2000 compliant in relation to their activities with the Company. This phase is also estimated to be completed by the end of 1998. Costs At September 30, 1998, the costs related to the Year 2000 compliance have been minimal. The Company has capitalized approximately $30,600 for replacement of equipment and has expensed approximately $2,000 for the upgrading of its systems. The estimated costs to complete Phase I is approximately $10,000 and the estimated costs to assess Phases II and III are minimal. Until the assessment of Phase II is completed, the Company cannot estimate the costs for remedial action if such action is required. The Company does not anticipate these costs to have a material effect on the Company's consolidated financial statements. Risk Factors and Contingency Plan The Company does not anticipate any problems in finalizing the updating of its IT or NIT systems by the projected target date and intends to test these systems prior to the year 2000. However, the Company's business operations could be affected if financial institutions, utility companies and major suppliers of services, which are utilized by the Company, fail to become Year 2000 compliant. The effect of non-compliance by these third party vendors is not determinable at this time. The Company does not anticipate that the Year 2000 issue will have an adverse effect on the ability of its mortgagors or tenants to make payments due to the Company in a timely fashion. At this time, no formal contingency plan has been developed by the Company. Upon completion of Phase II and Phase III, the Company will analyze the need for a contingency plan. 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 September 30, 1998, Presidential had $2,311,125 in available cash and cash equivalents, an increase of $1,331,413 from the $979,712 at December 31, 1997. This increase in cash and cash equivalents was due to cash provided by operating activities of $1,922,512 and financing activities of $5,902,811, offset by cash used in investing activities of $6,493,910. Operating Activities Presidential's principal source of cash from operating activities is from interest on its mortgage portfolio, which was $2,584,317 in 1998, net of interest payments on wrap mortgage debt and note payable. In 1998, net cash received from rental property operations was $431,749, which is net of distributions from partnership operations to minority partners but before additions and improvements and mortgage amortization. The net cash received from 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 $867,455 on its mortgage portfolio (net of any principal payments attributable to the Underlying Debt), of which $744,686 represented prepayments, which are sporadic and cannot be relied upon as a regular source of liquidity. On August 31, 1998, the Company purchased Sunwood Apartments, a 105 unit apartment property in Miami, Florida. The purchase price of the property was $6,100,000 and the Company obtained a new $4,875,000 first mortgage loan secured by the property. While the Company has only operated the property since August 31, the property has a solid and stable operating history and the Company believes that it will contribute to the Company's cash flow in 1998 and subsequent years. During 1998, the Company invested $355,398 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 equity and debt securities which increased by $833,213 from $226,550 at December 31, 1997 to $1,059,763 at September 30, 1998 as a result of the purchase of debt securities (primarily interest-bearing corporate bonds) of $853,812 offset by a decrease in the fair value of securities of $18,049 and the sale of securities at a cost of $2,550. Financing Activities The Company's indebtedness at September 30, 1998, includes $44,616,302 of mortgage debt (including $4,790,271 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 $275,212 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 $331,237 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. In August, 1998, Presidential obtained a $4,875,000 mortgage in connection with its acquisition of Sunwood Apartments. The mortgage bears interest at the rate of 6.55% per annum, requires monthly payments of principal and interest of $30,974 and matures on September 1, 2008 with a $4,146,347 balloon payment due at maturity. 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, Continental Gardens and Sunwood Apartments, which have balloon payments due at maturity. The Company's indebtedness at September 30, 1998 includes a $10,433,301 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 repaid and was limited to $1,403,583 at September 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 $109,251. During 1998, Presidential declared cash distributions of $2,263,079 (including $575,915 payable in the fourth quarter) to its shareholders and received proceeds from its dividend reinvestment and share purchase plan of $121,599. 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 September 30, 1998, the outstanding principal balances on the Fairfield Towers First Mortgage and the Fairfield Towers Second Mortgage were $17,176,884 and $14,379,086, 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 September 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 nine months ended September 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 September 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: November 12, 1998 By: /s/ Jeffrey F. Joseph --------------------- Jeffrey F. Joseph President DATE: November 12, 1998 By: /s/ Elizabeth Delgado --------------------- Elizabeth Delgado Treasurer