Item 1. Financial Statements
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
2007 2006
------------- -------------
(unaudited)
ASSETS
Residual interests in securitized portfolios $ 47,899 $ 45,318
------------- -------------
Mortgage loans receivable from affiliated partnerships
(net of unearned interest of $17,371 for 2007 and $19,049 for 2006)
21,879 23,688
Allowance for loan losses 3,486 2,986
------------- -------------
Net mortgage loans receivable 18,393 20,702
------------- -------------
Cash (including restricted cash of $5 and $33 for 2007
and 2006) 352 891
Investments
Real estate at cost (net of accumulated depreciation and
Amortization of $1,103 for 2007 and $963 for 2006) 7,348 7,488
Affiliated limited partnerships (net of allowance for
losses of $448, for 2007 and 2006) 845 940
Net deferred tax asset 2,656 2,543
Prepaid expenses and other assets 1,862 832
Other assets of discontinued operations 1,741 1,772
------------- -------------
Total assets $ 81,096 $ 80,486
============= =============
|
(continued)
See notes to consolidated financial statements.
1
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
(continued)
September 30, December 31,
2007 2006
------------- -------------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable - residual interests $ 39,111 $ 37,849
Underlying mortgages payable 6,980 9,175
Debt - other 10,508 10,309
Debt - affiliates 2,089 1,274
Redeemed notes payable-litigation settlement 775 778
Deferred income 142 19
Security deposits, accounts payable and accrued
liabilities 222 223
Liabilities of discontinued operations 284 950
------------- -------------
Total liabilities 60,111 60,577
------------- -------------
Commitments and contingencies
Shareholders' equity:
Preferred stock $10.00 par value, authorized, issued
and outstanding 100 shares for 2007 and 2006 1 1
Preferred stock, $.01 par value, authorized 5,000,000
shares for 2007 and 2006, issued and outstanding -0-
Common stock, $.01 par value, authorized - 90,000,000 shares issued and
outstanding 32,909,353 for 2007 and 38,315,466 for 2006 329 383
Additional paid-in capital 97,040 97,635
Deficit (76,385) (78,110)
------------- -------------
Total shareholders' equity 20,985 19,909
------------- -------------
Total liabilities and shareholders' equity $ 81,096 $ 80,486
============= =============
|
See notes to consolidated financial statements.
2
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
Three Months Ended
September 30,
-------------------
2007 2006
------- -------
Income from affiliates:
Interest on mortgage loans $ 663 $ 692
Partnership management fees 62 56
Management fees 62 56
Transaction and other fees from partnerships 53 1
Distributions from partnerships 169 --
Income from others:
Interest income - residual interests 1,427 1,282
Net rental income (including depreciation and
amortization of $49 for 2007 and $43 for 2006) 173 195
Distributions from investments 62 --
Other income and interest 18 31
------- -------
2,689 2,313
------- -------
Operating expenses:
General and administrative 430 411
Asset Servicing Fee - NPO Management LLC 188 184
Legal and professional fees 53 29
Provision for loan losses 150 100
Interest expense:
Underlying mortgages 143 186
Notes payable - residual interests 776 742
Affiliates 63 37
Others 247 242
------- -------
2,050 1,931
------- -------
Income from continuing operations before income tax benefit 639 382
Income tax benefit (expense) 6 (222)
------- -------
Income from continuing operations 645 160
Loss from discontinued operations - net of tax of $-0- in
both periods (77) (9)
------- -------
Net income $ 568 $ 151
======= =======
(continued)
|
See notes to consolidated financial statements.
3
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
Nine Months Ended
September 30,
-------------------
2007 2006
------- -------
Income from affiliates:
Interest on mortgage loans $ 2,037 $ 2,083
Gain on satisfaction of mortgage loans 476 --
Partnership management fees 195 191
Management fees 186 176
Transaction and other fees from partnerships 138 2
Distributions from partnerships 169 40
Income from others:
Interest income - residual interests 4,216 3,804
Net rental income (including depreciation and
amortization of $146 for 2007 and $140 for 2006) 543 612
Distributions from investments 62 13
Other income and interest 57 77
------- -------
8,079 6,998
------- -------
Operating expenses:
General and administrative 1,237 1,157
Asset Servicing Fee - NPO Management LLC 560 545
Legal and professional fees 204 159
Provision for loan losses 500 300
Interest expense:
Underlying mortgages 444 593
Notes payable - residual interests 2,311 2,191
Affiliates 165 182
Others 742 714
------- -------
6,163 5,841
------- -------
Income from continuing operations before income tax
benefit 1,916 1,157
Income tax benefit 38 73
------- -------
Income from continuing operations 1,954 1,230
Loss from discontinued operations - net of tax of $-0-
in both periods (229) (51)
------- -------
Net income $ 1,725 $ 1,179
======= =======
(continued)
|
See notes to consolidated financial statements.
4
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share and per share data)
(unaudited)
(continued)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- ---------------------------------
2007 2006 2007 2006
-------------- -------------- -------------- --------------
Basic earnings per share:
Income from continuing operations $ .02 $ .00 $ .06 $ .03
Loss from discontinued operations .00 .00 (.01) .00
-------------- -------------- -------------- --------------
Net Income $ .02 $ .00 $ .05 $ .03
============== ============== ============== ==============
Diluted earnings per share:
Income from continuing operations $ .01 $ .00 $ .04 $ .02
Loss from discontinued operations .00 .00 .00 .00
-------------- -------------- -------------- --------------
Net Income $ .01 $ .00 $ .04 $ .02
============== ============== ============== ==============
Weighted average shares outstanding - basic 32,909,353 38,315,466 34,434,154 38,315,466
Effect of dilutive securities 18,430,002 18,638,114 18,059,601 20,809,286
-------------- -------------- -------------- --------------
Weighted average shares outstanding - diluted 51,339,355 56,953,580 52,493,755 59,124,752
============== ============== ============== ==============
|
See notes to consolidated financial statements.
5
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands except share data)
(unaudited)
Preferred Stock Common Stock Additional
----------------------- ------------------------- Paid - In
Shares Amount Shares Amount Capital Deficit Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance - January 1, 2007 100 $ 1 38,315,466 $ 383 $ 97,635 $ (78,110) $ 19,909
----------- ----------- ----------- ----------- ----------- ----------- -----------
Repurchase of outstanding common stock -- -- (5,406,113) (54) (595) -- (649)
Net income -- -- -- -- -- 1,725 1,725
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance - September 30, 2007 100 $ 1 32,909,353 $ 329 $ 97,040 $ (76,385) $ 20,985
=========== =========== =========== =========== =========== =========== ===========
|
See notes to consolidated financial statements.
6
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
September 30,
---------------------
2007 2006
-------- --------
Cash flows from operating activities:
Continuing operations:
Income from continuing operations $ 1,954 $ 1,230
Adjustments to reconcile income to net cash used in
operating activities from continuing operations
Interest income accreted on residual interests (886) (521)
Accrued interest added to indebtedness (36) 18
Depreciation 140 140
Provision for loan losses 500 300
Amortization of unearned interest on loan receivables (1,678) (932)
Net increase in deferred tax asset (113) (155)
Net (increase) decrease in prepaid financing and (353) 27
other assets
Net decrease in accounts payable,
security deposits and accrued liabilities (1) (255)
Net increase in deferred income 123 122
-------- --------
Net cash used in continuing operations (350) (26)
-------- --------
Discontinued operations:
Loss from discontinued operations - net of tax (229) (51)
Net decrease in assets and liabilities of discontinued
Operations (635) (81)
-------- --------
Net cash used in discontinued operations (864) (132)
-------- --------
Net cash used in operating activities (1,214) (158)
-------- --------
|
(continued)
See notes to consolidated financial statements
7
DVL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
(continued)
Nine Months Ended
September 30,
---------------------
2007 2006
-------- --------
Cash flows from investing activities:
Continuing operations:
Collections on loans receivable $ 3,487 $ 2,306
Real estate acquisitions and capital improvements -- (9)
Net decrease (increase) in affiliated limited partnership
interest and other investments 95 (14)
-------- --------
Net cash provided by investing activities 3,582 2,283
-------- --------
Cash flows from financing activities:
Continuing operations:
Proceeds from new borrowings 5,085 --
Principal payments on debt (4,035) (87)
Net increase in prepaid financing costs (677) --
Repurchase of outstanding common stock (649) --
Payments on underlying mortgages payable (2,195) (2,047)
Payments on notes payable - residual interest (433) (506)
Payments related to debt redemptions (3) (11)
-------- --------
Net cash used in financing activities (2,230) (2,651)
-------- --------
Net decrease in cash (539) (526)
Cash, beginning of period 891 1,863
-------- --------
Cash, end of period $ 352 $ 1,337
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 3,614 $ 3,582
======== ========
Cash paid for income taxes $ 105 $ 90
======== ========
Supplemental disclosure of non-cash investing and financing activities:
Residual interests in securitized portfolios - increase $ 1,695 $ 1,108
======== ========
Notes payable - residual interests - increase $ 1,695 $ 1,108
======== ========
|
See notes to consolidated financial statements.
8
DVL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Dollars in thousands unless otherwise noted
(except share and per share amounts)
1. Basis of Presentation
In the opinion of DVL, Inc. ("DVL" or the "Company"), the accompanying
financial statements contain all adjustments (consisting of only normal
accruals) necessary in order to present a fair presentation of the consolidated
financial position of DVL and the consolidated results of its operations for the
periods set forth herein. The results of the Company's operations for the nine
months ended September 30, 2007 should not be regarded as indicative of the
results that may be expected from its operations for the full year. For further
information, refer to the consolidated financial statements and the accompanying
notes included in DVL's Annual Report on Form 10-KSB for the year ended December
31, 2006.
2. Reclassifications
Certain amounts from 2006 have been reclassified to conform to the
presentation for the three and nine months ended September 30, 2007.
3. Residual Interests in Securitized Portfolios
In accordance with the purchase agreements entered into with respect to
the residual interests from the acquisition dates through September 30, 2007,
the residual interest in securitized portfolios and the notes payable were
increased by approximately $7,673 as a result of purchase price adjustments.
Adjustments to the receivables based on the performance of the underlying
periodic payment receivables, both increases and decreases, could be material in
the future. Permanent impairments are recorded immediately through results of
operations. Favorable changes (increases) in future cash flows are recognized
through results of operations as interest over the remaining life of the
retained interest.
The Company's wholly owned subsidiary, S2 Holdings, Inc. ("S2"), owns
99.99% Class B member interests in Receivables II A, LLC and Receivables II B,
LLC which own five securitized receivable pools. Receivables II A, LLC and
Receivables II B, LLC are consolidated into S2 for financial statement reporting
purposes.
The Company considered Financial Accounting Standards Board Interpretation
No. 46R "Consolidation of Variable Interest Entities" when consolidating S2's
ownership of its member interests. The Company determined that S2's member
interests do not meet the definition of variable interest entities.
9
4. Real Estate
On October 24, 2006, the town of Kearny, New Jersey (the "Town"), approved
an agreement (the "Conditional Agreement") between the Company and the Town,
pursuant to which the Town agreed to designate DVL as the conditional
redeveloper of a portion of the Passaic Avenue Redevelopment Area located in the
Town (such portion, the "Property"), a substantial portion of which Property is
currently owned by the Company. Pursuant to the Conditional Agreement, among
other things, the Company is required to obtain letters of interest from
prospective tenants and lenders or other financing sources, prepare conceptual
plans and a developmental timetable and negotiate with an adjacent property
owner. In addition, the Conditional Agreement requires the Company to negotiate
the terms of a definitive redevelopment agreement; provided, however, that the
Conditional Agreement expressly provides that the Town is under no obligation to
enter into such a definitive redevelopment agreement with the Company. The
Conditional Agreement is terminable by the Town on seven days written notice for
failure by the Company to comply with the terms of the Conditional Agreement. As
of November 11, 2007, the Town of Kearny preliminarily approved the Development
Plan and continued the designation of DVL as the Conditional Developer. There
can be no assurance that the Town will continue its approval process or that the
Company will be able to obtain leases with tenants acceptable to the Town. Under
the Conditional Agreement, the Company agreed to pay the Town's costs and
expenses and the Company has deposited $70 in escrow to cover such costs and
expenses, which costs will exceed the amount of such escrowed funds.
In connection with the development of the Property (as defined below), in
August 2007, the Company's wholly owned subsidiary, DVL Kearny Holdings, LLC
("DVL Holdings") entered into a Construction Loan Agreement (the "Construction
Loan Agreement") between CapMark Bank ("CapMark"), Urban Development Fund II,
LLC ("Urban Fund") and Paramount Community Development Fund ("Paramount" and
collectively with CapMark and Urban Fund, the "Lenders"). Pursuant to the
Construction Loan Agreement, the Lenders agreed to extend loans to DVL Holdings
in the aggregate principal amount of up to $30.2 million (the "Loans") to
finance construction, acquisition and other costs associated with the Property.
The Loans are secured by a first lien on the Property and a first lien on the
OutParcel (as defined below). The Loans mature in phases with a final maturity
date of March 1, 2010. The Loans accrue interest at a rate per annum is equal to
the 30 day libor rate plus the applicable margin, as defined. In the Initial
Predevelopment Loan Phase (as defined in the Construction Loan Agreement),
advances of $4,225 principal amount were made to DVL Holdings in August, 2007
and such advances currently accrue interest at a rate per annum equal to 2.50%
over the 30 day LIBOR rate with interest payable monthly; provided, however,
that in no event shall the aggregate principal amount of advances of the Loans
during the Predevelopment Loan Phase exceed $6,600,000; and provided, that any
such additional advances may only be used to pay interest on the Loans and to
acquire a certain property adjacent to the Property (the "OutParcel"). At
September 30, 2007 the applicable interest rate is 8.18%. The Initial
Predevelopment Loan Phase expires on December 11, 2007. The principal amount of
Loans made during the Predevelopment Loan Phase will mature on March 1, 2010;
provided, however, that in the event that certain conditions are not satisfied
by December 11, 2007 (including, without limitation, obtaining necessary
approvals by the Town, the entering into a definitive redevelopment agreement
and approval by the lenders of the final plans for the development of the
Property), such loans will become due and payable on December 11, 2007. Although
the Company believes that it is unlikely that such conditions will fail to be
satisfied by December 11, 2007, in such event , the Company's inability to
receive an extension of such date from the Lenders or its inability to refinance
the Loans would have a material adverse effect on the Company's financial
condition. Additional borrowings may be made from time to time in accordance
with the terms of the Construction Loan Agreement based on satisfaction of
certain conditions including acquisition of the OutParcel and the completion of
certain phases of the construction of the Property. Any additional loans made
pursuant to the Construction Loan Agreement accrue interest at a rate per annum
equal to the 30 day libor rate plus the applicable margin, as defined. Principal
plus accrued and unpaid interest are payable March 1, 2010 unless extended per
the Construction Loan Agreement. Commencement of the Construction Loan Phase (as
defined in the Construction Loan Agreement) is conditioned on submission by DVL
Holdings of the final plans for the development of the Property and approval of
such Plans by the Lenders. Events of Default (as defined in the Construction
Loan Agreement) include, among other things, the failure of DVL Holdings to
acquire the OutParcel within nine months after August 14, 2007 or the failure to
commence construction by such date.
10
5. Transactions with Affiliates
Monies Received
The Company has provided management, accounting, and administrative
services to certain entities which are affiliated with NPO Management, LLC
("NPO") and/or, Blackacre Capital, LLC ("Blackacre"), which are entities engaged
in real estate lending and management transactions and are affiliated with
certain stockholders and insiders of the Company. The fee income from management
service contracts are as follows:
Fee Income Fee Income Fee Income
Fee Income For For The Three For The Nine For The Nine
The Three Months Months Months Months
Ended Ended Ended Ended
Affiliate 09/30/07 09/30/06 09/30/07 09/30/06
----------------- ---------------- ---------------- ---------------- ----------------
NPO and Blackacre $ 6 $ 6 $ 18 $ 28
NPO $ 56 $ 50 $ 168 $ 148
|
Monies Paid
A. The Company recorded fees to NPO of $560 and $545 for the Nine Months
Ended September 30, 2007 and 2006, respectively, under an Asset Servicing
Agreement (the "Asset Servicing Agreement") between the Company and NPO,
pursuant to which NPO provides the Company with asset management, advisory
and administrative services relating to the assets of the Company and its
Affiliated Limited Partnerships. During 2007 and 2006 the Company provided
office space required under the Asset Servicing Agreement to NPO
consisting of approximately 500 square feet of the Company's New York
location.
B. Millennium Financial Services, an affiliate of NPO, received fees from the
Company representing compensation and reimbursement of expenses for
collection services as follows:
Fees Recorded Fees Recorded Fees Recorded
Fees Recorded For For The Three For The Nine For The Nine
The Three Months Months Months Months
Ended Ended Ended Ended
09/30/07 09/30/06 09/30/07 09/30/06
---------------- ---------------- ---------------- ----------------
$ 27 $ 27 $ 81 $ 81
|
C. Interest expense on amounts due to affiliates was as follows:
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
09/30/07 09/30/06 09/30/07 09/30/06
Pemmil Funding $ 63 $ 37 $ 165 $ 182
$ 63 $ 37 $ 165 $ 182
|
6. Contingent Liabilities
During the Nine Months Ended September 30, 2007 and 2006 the Company
expensed approximately $85 and $67, respectively, during each period, for
amounts due to the Limited Partnership Settlement Fund of which $-0- and $41,
was accrued at September 30, 2007 and 2006. These costs have been netted against
the interest on mortgage loans.
11
7. Shareholder's Equity
In 1996, affiliates of NPM Capital, LLC ("NPM") acquired 1,000,000 shares
(the "Base Shares") of DVL Common Stock and DVL issued to affiliates of NPM and
NPO warrants (the "Warrants") to purchase shares of Common Stock which, when
added to the Base Shares, aggregate 49% of the outstanding Common Stock of DVL,
subject to certain adjustments, on a fully diluted basis expiring December 31,
2007. The original exercise price of the Warrants was $.16 per share, subject to
applicable anti-dilution provisions and subject to a maximum aggregate exercise
price of $2,066. At September 30, 2007, shares underlying the Warrants
aggregated 31,310,704 at an exercise price of $.05 per share. None of these
warrants had been exercised through September 30, 2007.
On March 19, 2007, the Company entered into a Stock Repurchase Agreement
(the "Stock Repurchase Agreement") dated March 16, 2007 with Blackacre Bridge
Capital, L.L.C., a New York limited liability company ("Blackacre Bridge") and
Blackacre Capital Group, L.P., a Delaware limited partnership ("Blackacre
Capital" and collectively with Blackacre Bridge, the "Sellers"). Pursuant to the
Stock Repurchase Agreement, in a private transaction, the Company repurchased
4,753,114 shares of its common stock from Blackacre Bridge and 653,000 shares of
its common stock from Blackacre Capital (collectively referred to herein as the
"Shares"). The Company purchased the Shares for a cash purchase price of $0.12
per Share for an aggregate cash purchase price of $649. The Shares represented
all of the shares of the Company's common stock owned by the Sellers and their
respective affiliates, including Stephen Feinberg. All such parties, including
Sellers, beneficially owned in excess of 10% of the Company's outstanding common
stock prior to the repurchase of all such Shares by the Company.
On March 16, 2007, the Company entered into Amendment No. 1 to the Pemmil
Loan Agreement, dated March 15, 2007 with Pemmil, pursuant to which Pemmil
loaned the Company $650 on March 16, 2007 to fund the Company's purchase of the
Shares under the Stock Repurchase Agreement.
8. Discontinued Operations
In October 2004, DVL entered into an Agreement with the owners of the
properties which were subject to a leasehold held by the Company, pursuant to
which the leasehold was cancelled in consideration of the owners agreeing to
repay to DVL certain out-of-pocket expenses, including real estate taxes and
environmental remediation costs as well as $50 upon completion of a sale of the
property to a third party. In the event that the sale is not consummated and the
third party continues to lease space at the property, DVL will receive a
proportionate share of the net income from such lease until such time as DVL has
been paid its out-of-pocket expenses plus $50. As of September 30, 2007, the
sale has not been consummated and the third party continues to lease space at
the property. The total expenses to be reimbursed to DVL are approximately $697
not including the $50 fee. Activity related to the real estate lease interest is
included in discontinued operations.
12
In April, 2006 the Company entered into an Agreement of Sale providing for
the sale of the Fort Edward, NY property to an unaffiliated third party, which
was amended to obligate the Company, as a condition to the closing of the sale
of the property, to perform environmental remediation work specified in the
agreement. The agreement calls for the Company to convey the property to the
potential buyer for an agreed upon price of $475. The Company and the potential
buyer are in disagreement as to the required level of cleanup required under the
terms of the Agreement of Sale. The potential buyer has instituted an action for
specific performance. The Company believes that the compliance can be achieved
with a lesser degree of clean up. In the interim, the Company has instituted
suit against the alleged polluter, based on testimony provided to the Company by
third parties.
As of September 30, 2007 the Company has capitalized approximately $1,000
of environmental remediation costs in connection with remediation of
environmental issued in Fort Edward, NY. The Company anticipates that it will
eventually recover substantially all of the capitalized remediation costs of the
property through the net proceeds received from the sale and reimbursement from
certain wrongdoers and has instituted litigation against the companies
requesting reimbursement for the clean up.
There can be no assurance that the Company will recover all of the costs
of such remediation within the foreseeable future or at all. Such inability to
recover all of such remediation costs could have an adverse effect on the
Company's financial condition. The Company currently accounts for the property
as an "other asset from discontinued operations" in its financial statements
(See Item 7) at a carrying value of $997 after recording a provision for losses
of $100 which is included in "loss from discontinued operations".
RESTRICTION ON CERTAIN TRANSFERS OF COMMON STOCK: Each share of the stock
of the Company includes a restriction prohibiting sale, transfer, disposition or
acquisition of any stock until March 31, 2009 without the prior consent of the
Board of Directors of the Company by any person or entity that owns or would own
5% or more of the issued and outstanding stock of the Company if such sale,
purchase or transfer would, in the opinion of the Board, jeopardize the
Company's preservation of its federal income tax attributes under Section 382 of
the Internal Revenue Code.
13
8. Earnings per share (unaudited)
The following table presents the computation of basic and diluted per share data
for the Three and Nine Months Ended September 30, 2007 and 2006.
Three Months Ended September 30,
-------------------------------------------------------------------------------------
2007 2006
Weighted Average Weighted Average
Number of Per Share Number of Per Share
Amount Shares Amount Amount Shares Amount
------ ---------------- ----------- ------ ---------------- -----------
Basic EPS,
Net income available to common stockholders $ 645 32,909,353 $ .02 $ 160 38,315,466 $ .00
=========== ===========
Effect of dilutive stock options and warrants (77) 18,430,002 (9) 18,638,114
------ ---------------- ------ ----------------
Diluted EPS,
Net income available to common stockholders $ 568 51,339,355 $ .01 $ 151 56,953,580 $ .00
====== ================ =========== ====== ================ ===========
Nine Months Ended September 30,
-------------------------------------------------------------------------------------
2007 2006
Weighted Average Weighted Average
Number of Per Share Number of Per Share
Amount Shares Amount Amount Shares Amount
------ ---------------- ----------- ------ ---------------- -----------
Basic EPS,
Net income available to common stockholders $1,954 34,434,154 $ .05 $1,230 38,315,466 $ .03
=========== ===========
Effect of dilutive stock options and warrants (229) 18,059,601 (51) 20,809,286
------ ---------------- ------ ----------------
Diluted EPS,
Net income available to common stockholders $1,725 52,493,755 $ .04 $1,179 59,124,752 $ .02
====== ================ =========== ====== ================ ===========
|
14
9. Segment Information
The Company has two reportable segments; real estate and residual interests. The
real estate business is comprised of real estate assets, mortgage loans on real
estate, real estate management and investments in affiliated limited
partnerships which own real estate. The residual interests business is comprised
of investments in residual interests in securitized receivables portfolios. The
corporate/other net income of $268 and $124 in 2007 and 2006 respectively,
include $113 and $155 of deferred income tax benefit, respectively.
Nine Months Ended
September 30,
------------------------
2007 2006
-------- --------
Revenues
Residual interests $ 4,216 $ 3,804
Real estate 3,637 3,077
Corporate/other 226 117
-------- --------
Total consolidated revenues $ 8,079 $ 6,998
======== ========
Net income (loss)
Residual interests $ 1,901 $ 1,607
Real estate (215) (501)
Corporate/other 268 124
-------- --------
Total income from continuing operations $ 1,954 $ 1,230
======== ========
Assets
Residual interests $ 47,899 $ 43,827
Real estate 30,541 32,811
Corporate/other 2,656 2,450
-------- --------
Total consolidated assets $ 81,096 $ 79,088
======== ========
|
15
10. Discontinued Operations
The Company classifies certain real estate holdings as held for sale and has
disposed of certain real estate assets. The Company's property located in Fort
Edward, New York is included as real estate assets held for sale. The Fort
Edward asset and related liability includes an accrual for environmental
remediation. The operation of such assets for all periods presented have been
recorded as discontinued operations in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 144 "Accounting for the
Impairment or Disposal of Long Lived Assets."
Discontinued operations for the Nine Months Ended September 30, 2007 and 2006
are summarized as follows:
September 30,
2007 2006
-------- --------
Loss from discontinued operations $ 229 $ 51
======== ========
|
Other assets and other liabilities of discontinued operations at September
30, 2007 and 2006 are summarized as follows:
September 30,
2007 2006
-------- --------
Other assets $ 1,741 $ 1,059
======== ========
Other liabilities $ 284 $ 310
======== ========
|
16
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
(in thousands)
This Quarterly Report on Form 10-QSB for the quarter ended September 30, 2007
contains statements which 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. Those statements include
statements regarding the intent, belief or current expectations of DVL and its
management team. DVL's stockholders and prospective investors are cautioned that
any such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, and that actual results may differ materially
from those projected in the forward-looking statements. Such risks and
uncertainties include, among other things, general economic conditions and other
risks and uncertainties that are discussed herein and in the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 2006.
None of the recently issued accounting standards had any effect on the Company's
consolidated financial statements.
On October 24, 2006, the town of Kearny, New Jersey (the "Town"), approved
an agreement (the "Conditional Agreement") between the Company and the Town,
pursuant to which the Town agreed to designate DVL as the conditional
redeveloper of a portion of the Passaic Avenue Redevelopment Area located in the
Town (such portion, the "Property"), a substantial portion of which Property is
currently owned by the Company. Pursuant to the Conditional Agreement, among
other things, the Company is required to obtain letters of interest from
prospective tenants and lenders or other financing sources, prepare conceptual
plans and a developmental timetable and negotiate with an adjacent property
owner. In addition, the Conditional Agreement requires the Company to negotiate
the terms of a definitive redevelopment agreement; provided, however, that the
Conditional Agreement expressly provides that the Town is under no obligation to
enter into such a definitive redevelopment agreement with the Company. The
Conditional Agreement is terminable by the Town on seven days written notice for
failure by the Company to comply with the terms of the Conditional Agreement. As
of November 11, 2007, the Town of Kearny preliminarily approved the Development
Plan and continued the designation of DVL as the Conditional Developer. There
can be no assurance that the Town will continue its approval process or that the
Company will be able to obtain leases with tenants acceptable to the Town. Under
the Conditional Agreement, the Company agreed to pay the Town's costs and
expenses and the Company had deposited $70 in escrow to cover such costs and
expenses, which costs will exceed the amount of such escrowed funds.
In connection with the development of the Property (as defined below), in
August 2007, the Company's wholly owned subsidiary, DVL Kearny Holdings, LLC
("DVL Holdings") entered into a Construction Loan Agreement (the "Construction
Loan Agreement") between CapMark Bank ("CapMark"), Urban Development Fund II,
LLC ("Urban Fund") and Paramount Community Development Fund ("Paramount" and
collectively with CapMark and Urban Fund, the "Lenders"). Pursuant to the
Construction Loan Agreement, the Lenders agreed to extend loans to DVL Holdings
in the aggregate principal amount of up to $30.2 million (the "Loans") to
finance construction, acquisition and other costs associated with the Property.
The Loans are secured by a first lien on the Property and a first lien on the
OutParcel (as defined below). The Loans mature in phases with a final maturity
date of March 1, 2010. The Loans accrue interest at a rate per annum is equal to
the 30 day libor rate plus the applicable margin, as defined. In the Initial
Predevelopment Loan Phase (as defined in the Construction Loan Agreement),
advances of $4,225 principal amount were made to DVL Holdings in August, 2007
and such advances currently accrue interest at a rate per annum equal to 2.50%
over the 30 day LIBOR rate with interest payable monthly; provided, however,
that in no event shall the aggregate principal amount of advances of the Loans
during the Predevelopment Loan Phase exceed $6,600,000; and provided, that any
such additional advances may only be used to pay interest on the Loans and to
acquire a certain property adjacent to the Property (the "OutParcel"). At
September 30, 2007 the applicable interest rate is 8.18%. The Initial
Predevelopment Loan Phase expires on December 11, 2007. The principal amount of
Loans made during the
17
Predevelopment Loan Phase will mature on March 1, 2010; provided, however, that
in the event that certain conditions are not satisfied by December 11, 2007
(including, without limitation, obtaining necessary approvals by the Town, the
entering into a definitive redevelopment agreement and approval by the lenders
of the final plans for the development of the Property), such loans will become
due and payable on December 11, 2007. Although the Company believes that it is
unlikely that such conditions will fail to be satisfied by December 11, 2007, in
such event , the Company's inability to receive an extension of such date from
the Lenders or its inability to refinance the Loans would have a material
adverse effect on the Company's financial condition. Additional borrowings may
be made from time to time in accordance with the terms of the Construction Loan
Agreement based on satisfaction of certain conditions including acquisition of
the OutParcel and the completion of certain phases of the construction of the
Property. Any additional loans made pursuant to the Construction Loan Agreement
accrue interest at a rate per annum equal to the 30 day libor rate plus the
applicable margin, as defined. Principal plus accrued and unpaid interest are
payable March 1, 2010 unless extended per the Construction Loan Agreement.
Commencement of the Construction Loan Phase (as defined in the Construction Loan
Agreement) is conditioned on submission by DVL Holdings of the final plans for
the development of the Property and approval of such Plans by the Lenders.
Events of Default (as defined in the Construction Loan Agreement) include, among
other things, the failure of DVL Holdings to acquire the OutParcel within nine
months after August 14, 2007 or the failure to commence construction by such
date.
In April, 2006 the Company entered into an Agreement of Sale providing for
the sale of the Fort Edward, NY property to an unaffiliated third party, which
was amended to obligate the Company, as a condition to the closing of the sale
of the property, to perform environmental remediation work specified in the
agreement. The agreement calls for the Company to convey the property to the
potential buyer for an agreed upon price of $475. The Company and the potential
buyer are in disagreement as to the required level of cleanup required under the
terms of the Agreement of Sale. The potential buyer has instituted an action for
specific performance. The Company believes that the compliance can be achieved
with a lesser degree of clean up. In the interim, the Company has instituted
suit against the alleged polluter, based on testimony provided to the Company by
third parties.
As of September 30, 2007 the Company has capitalized approximately $1,000
of environmental remediation costs in connection with remediation of
environmental issues in Fort Edward, NY. The Company anticipates that it will
eventually recover substantially all of the capitalized remediation costs of the
property through the net proceeds received from the sale and reimbursement from
certain wrongdoers and has instituted litigation against the Companies
requesting reimbursement for the clean up. There can be no assurance that the
Company will recover all of the costs of such remediation within the foreseeable
future or at all. Such inability to recover all of such remediation costs could
have an adverse effect on the Company's financial condition. The Company
currently accounts for the property as an "other asset from discontinued
operations" in its financial statements (See Item 7) at a carrying value of $997
after recording a provision for losses of $100 which is included in "loss from
discontinued operations".
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no material changes to the Critical Accounting Policies
and Estimates described in our Annual Report on Form 10-KSB for the year ended
December 31, 2006 filed with the SEC on April 2, 2007.
18
RESULTS OF OPERATIONS
Three Months Ended September 30, 2007 Compared to Three Months Ended September
30, 2006
DVL had income from continuing operations of $645 and $160 for the Three Months
Ended September 30, 2007 and 2006, respectively.
Interest income on mortgage loans decreased to $663 and interest expense on
underlying mortgages decreased to $143 reflecting the application of a greater
portion of each monthly payment to the outstanding principal balances.
Three Months Ended Three Months Ended
September 30, 2007 September 30, 2006
------------------ ------------------
Interest income on mortgage loans $ 663 $ 692
Interest expense on underlying mortgages $ 143 $ 186
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Transaction and other fees from affiliated limited partnerships were as follows:
Three Months Ended Three Months Ended
September 30, 2007 September 30, 2006
------------------ ------------------
$ 53 $ 1
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Transaction fees are earned by the Company in connection with sales or leasing
of partnership properties.
Interest income on residual interests and interest expense on the related notes
payable increased as a result of purchase price adjustments pursuant to the
purchase agreements entered into by the Company with respect to Receivables II-A
and Receivables II-B.
Three Months Ended Three Months Ended
September 30, 2007 September 30, 2006
------------------ ------------------
Interest income on residual interests $ 1,427 $ 1,282
Interest expense on related notes payable
$ 776 $ 742
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Net rental income decreased primarily as a result of decreased gross rental
income. Gross rental income reflects decreased occupancy in anticipation of the
Kearny redevelopment project.
Three Months Ended Three Months Ended
September 30, 2007 September 30, 2006
------------------ ------------------
Net rental income from others $ 173 $ 195
Gross rental income from others $ 328 $ 357
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General and administrative expenses increased in 2007 from 2006 primarily as a
result of increased employee costs.
Three Months Ended Three Months Ended
September 30, 2007 September 30, 2006
------------------ ------------------
General and administrative $ 430 $ 411
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19
The asset servicing fee due from the Company to NPO increased pursuant to the
terms of the Asset Servicing Agreement which calls for an adjustment to reflect
changes in the consumer price index.
Three Months Ended Three Months Ended
September 30, 2007 September 30, 2006
------------------ ------------------
$ 188 $ 184
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The Company recorded a provision for losses on its mortgage portfolio of $150
during the three months ended September 30, 2007.
Three Months Ended Three Months Ended
September 30, 2007 September 30, 2006
------------------ ------------------
Provision for losses $ 150 $ 100
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Interest expense relating to other debts increased as a result of increases in
loan principal as well as increases in interest rates on variable rate bank
loans.
Three Months Ended Three Months Ended
September 30, 2007 September 30, 2006
------------------ ------------------
$ 247 $ 242
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The Company accrued expenses of $25 and $ 32 for alternative minimum taxes
during each of the three months ended September 30, 2007 and 2006. The Company
recognized $31 of deferred income tax benefits during the three months ended
September 30, 2007 and $190 of deferred tax expense during the three months end
September 30, 2006, as a result of changes in the valuation allowance on
deferred tax assets. This resulted in income tax benefit as follows:
Three Months Ended Three Months Ended
September 30, 2007 September 30, 2006
------------------ ------------------
Income tax benefit (expense) $ 6 $ (222)
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Discontinued operations consist of the operations of business segments the
Company considers as held for sale or has disposed of.
Three Months Ended Three Months Ended
September 30, 2007 September 30, 2006
------------------ ------------------
Loss from discontinued operations $ (77) $ (9)
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20
Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30,
2006
DVL had income from continuing operations of $1,954, and $1,230 for the nine
months ended September 30, 2007 and 2006, respectively.
Interest income on mortgage loans from affiliates decreased and interest expense
on underlying mortgages decreased reflecting the application of a greater
portion of each monthly payment to the outstanding principal balances.
Nine Months Ended Nine Months Ended
September 30, 2007 September 30, 2006
------------------ ------------------
Interest income on mortgage loans $ 2,037 $ 2,083
Interest expense on related notes payable $ 444 $ 593
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The gain on satisfaction of mortgage loans results when the net proceeds on the
satisfaction of a mortgage is greater than its carrying value.
Nine Months Ended Nine Months Ended
September 30, 2007 September 30, 2006
------------------ ------------------
Gain on satisfaction of mortgage loans $ 476 $ --
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Interest income on residual interests and interest expense on the related notes
payable increased as a result of purchase price adjustments pursuant to the
Purchase Agreements entered into by the Company with respect to Receivables II-A
and Receivables II-B.
Nine Months Ended Nine Months Ended
September 30, 2007 September 30, 2006
------------------ ------------------
Interest income on residual interest $ 4,216 $ 3,804
Interest expense on related notes payable $ 2,311 $ 2,191
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Management fees increased as a result of an agreed upon reimbursement of
allocated expenses.
Nine Months Ended Nine Months Ended
September 30, 2007 September 30, 2006
------------------ ------------------
$ 186 $ 176
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Transaction and other fees from affiliated limited partnerships were as follows:
Nine Months Ended Nine Months Ended
September 30, 2007 September 30, 2006
------------------ ------------------
$ 138 $ 2
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Transaction fees are earned by the Company in connection with sales or leasing
of partnership properties.
Net rental income decreased primarily as a result of decreased gross rental
income. Gross rental income reflects decreased occupancy in anticipation of the
Kearny redevelopment project.
Nine Months Ended Nine Months Ended
September 30, 2007 September 30, 2006
------------------ ------------------
Net rental income from others $ 543 $ 612
Gross rental income from others $ 1,011 $ 1,069
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21
General and administrative expenses increase in 2007 from 2006 primarily as a
result of increased employee costs and insurance expense.
Nine Months Ended Nine Months Ended
September 30, 2007 September 30, 2006
------------------ ------------------
General and administrative $ 1,237 $ 1,157
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The asset servicing fee due from the Company to NPO increased pursuant to the
terms of the Asset Servicing Agreement which calls for an adjustment to reflect
changes in the consumer price index.
Nine Months Ended Nine Months Ended
September 30, 2007 September 30, 2006
------------------ ------------------
$ 560 $ 545
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The Company recorded a provision for losses on its mortgage portfolio of $500
during the nine months ended September 30, 2007.
Nine Months Ended Nine Months Ended
September 30, 2007 September 30, 2006
------------------ ------------------
Provision for losses $ 500 $ 300
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Interest expense related to other debts increased reflecting increased loan
principal as well as increases in interest rates on variable rate bank loans.
Nine Months Ended Nine Months Ended
September 30, 2007 September 30, 2006
------------------ ------------------
$ 742 $ 714
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The Company accrued expenses of $75 and $82 for alternative minimum taxes in
each of the nine months ending September 30, 2007 and 2006. The Company
recognized $113 and $155 of deferred income tax benefits in 2007 and 2006,
respectively, as a result of changes in the valuation allowance on deferred tax
assets. This resulted in income tax benefit as follows:
Nine Months Ended Nine Months Ended
September 30, 2007 September 30, 2006
------------------ ------------------
Income tax benefit $ 38 $ 73
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Discontinued operations consist of the operations of business segments the
Company considers held for sale or has disposed of.
Nine Months Ended Nine Months Ended
September 30, 2007 September 30, 2006
------------------ ------------------
Loss from discontinued operations $ (229) $ (51)
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22
Liquidity and Capital Resources
The Company's cash flow from operations is generated principally from
rental income from its ownership of real estate, distributions in connection
with residual interests in securitized portfolios, interest on its mortgage
portfolio, management fees and transaction and other fees received as a result
of the sale and/or refinancing of partnership properties and mortgages.
The Company's cash balance was $352 at September 30, 2007, compared to
$891 at December 31, 2006.
The Company believes that its anticipated cash flow provided by operations
and other sources is sufficient to meet its current operating cash requirements
for the next twelve months. The Company has in the past and expects in the
future to continue to augment its cash flow from operations with additional cash
generated from either the sale or refinancing of its assets and/or borrowings.
The cash flow from the Company's member interests in Receivables II-A and
Receivables II-B should provide significant liquidity to the Company.
The purchase agreements with respect to such acquisition contain annual
minimum and maximum levels of cash flow that will be retained by the Company
after the payment of interest and principal on the notes payable, which are as
follows:
Years Minimum Maximum
----- ------- -------
2007 to 2009 $ 743 $ 880
|
2010 to final payment on the notes* $1,050 $1,150
* Final payment on the notes payable expected in 2015 related to the
Receivables II-A transaction and 2017 for the Receivables II-B
transaction.
The Company believes it will continue to receive significant cash flow
after final payment of the notes payable.
23
Acquisitions and Financings
Loans payable which are scheduled to become due through 2010 are as follows:
Outstanding
Original Balance Including
Loan Accrued Interest at Due
Purpose Creditor Amount September 30, 2007 Date
------- -------- ------ ------------------ ----
Repurchase of Notes
Issued by the Company Pemmil (1)(6) $ 2,500 $ 2,089 12/27/08
Purchase of Real Estate Assets Unaffiliated Bank (2) $ 4,500 $ 1,160 03/01/08
Purchase of Real Estate Assets Unaffiliated Bank (3) $ 2,668 $ 2,360 06/30/08
Purchase of Mortgages Unaffiliated Bank (4) $ 1,400 $ 1,259 01/31/09
Refinancing of Repurchase of
Notes Issued by the Company Unaffiliated Bank (5) $ 1,500 $ 1,459 06/01/09
Construction Financing Unaffiliated Bank (7) $ 4,225 $ 4,270 03/01/10
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(1) Interest rate is 12% per annum, compounded monthly. Interest is added to
principal and is paid from a portion of cash received in satisfaction of
certain mortgage loans. This loan is held by a Company owned by affiliates
including Messrs. Casnoff, Chazanoff and Cohen.
(2) Interest rate is prime plus 2% per annum. Monthly payments are interest
only. The Company and the lender formally extended the due date to March
1, 2008. A principal payment of $3,350 was made from the proceeds of the
Construction Loan Agreement as discussed in (7) below. Such loan becomes
immediately due on March 1, 2008 and the inability of the Company to
refinance or definitively extend such loan would have a material adverse
effect on the Company's financial condition.
(3) Interest rate is 7.5% per annum with a balloon payment due June 30, 2008
of $2,285.
(4) Interest rate is prime plus .5% per annum payable monthly. Monthly
payments are interest only. Annual principal payments of $50 are
required.
(5) Interest rate is fixed at 7.75% per annum payable monthly. Monthly
payments are Interest only. An annual principal payment of $50 is
required. The majority of the loan proceeds were used to paydown an
existing loan which accrues interest at a higher rate.
(6) Pemmil Funding, LLC ("Pemmil") previously made a loan to the Company in
the original principal amount of $2,500 pursuant to the terms of that
certain Loan and Security Agreement, dated December 27, 2005 (the "Pemmil
Loan Agreement") between Pemmil and the Company evidenced by the Original
Term Note (which has subsequently been amended and restated pursuant to
the Amendment No.1). The outstanding obligations under the Pemmil Loan
Agreement and Original Term note through and including March 15, 2007 were
$1,190 in principal and $116 in accrued and unpaid interest. The Pemmil
Loan Agreement provides that the principal and unpaid interest are due
December 27, 2008
24
and provides for interest at a rate of 12% per annum, compounded monthly.
Interest is payable monthly on the loan, but the Company may elect not to
make any such interest payment when due, and such amount of unpaid monthly
interest shall be added to principal. The Company is required to prepay
the loan (plus any accrued and unpaid interest) to the extent that the
Company consummates certain capital transactions (as defined in the Pemmil
Loan Agreement) that result in net proceeds (as defined in the Pemmil Loan
Agreement) to the Company. Pemmil may, in its sole discretion,
accelerate the Loan after the occurrence and during the continuance of an
event of default (as defined in the Pemmil Loan Agreement). The
obligations under the Pemmil Loan Agreement are secured by a subordinated
pledge of the Company's equity interest in S2 Holding, Inc., the Company's
wholly-owned subsidiary. The Company may prepay all or a portion of the
loan at any time prior to maturity without penalty or premium.
To fund the purchase of the Shares by the Company pursuant to the Stock
Repurchase Agreement, Pemmil made an additional loan advance to the
Company in the principal amount of $650 pursuant to Amendment No. 1 to
Loan and Security Agreement, entered into by the Company on March 16, 2007
("Amendment No. 1"). Under Amendment No. 1, all accrued and unpaid
interest outstanding at March 15, 2007 was added to the principal amount
outstanding under the Pemmil Loan Agreement and Pemmil loaned to the
Company an additional $650 principal amount which increased the total
outstanding principal amount outstanding under the Pemmil Loan Agreement
to $1,956. Such principal amount was evidenced by an Amended and Restated
Term Note made by the Company to Pemmil which was executed simultaneously
with Amendment No. 1. In general, except as modified and amended by
Amendment No. 1 as described above, the terms and provisions of the Pemmil
Loan Agreement were unchanged and remain in full force and effect.
(7) Represents Loans made in the Predevelopment Loan Phase under the
Construction Loan Agreement which accrues interest at 2.50% over the 30
day libor rate that is payable monthly. Principal plus accrued and unpaid
interest are due and payable on March 1, 2010.
IMPACT OF INFLATION AND CHANGES IN INTEREST RATES
The Company's portfolio of mortgage loans made to affiliated limited
partnerships consists primarily of loans made at fixed rates of interest.
Therefore, increases or decreases in market interest rates are generally not
expected to have an effect on the Company's earnings. Other than as a factor in
determining market interest rates, inflation has not had a significant effect on
the Company's net income.
25