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 July 31, 2004
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 No.: 2-27018
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY
(Exact name of registrant as specified in its charter)
New Jersey 22-1697095
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
505 Main Street, P.O. Box 667, Hackensack, New Jersey 07602
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 201-488-6400
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report.
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.
|X| Yes |_| No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
|_| Yes |X| No
As of September 13, 2004, there were 6,423,152 shares of beneficial interest
issued and outstanding.
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY
INDEX
Part I: Financial Information
Item 1: Unaudited Condensed Consolidated Financial Statements
a.) Condensed Consolidated Balance Sheets as at July 31, 2004
and October 31, 2003;
b.) Condensed Consolidated Statements of Income, Comprehensive
Income and Undistributed Earnings for the Nine and Three
Months Ended July 31, 2004 and 2003;
c.) Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended July 31, 2004 and 2003;
d.) Notes to Condensed Consolidated Financial Statements.
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Item 3: Quantitative and Qualitative Disclosures About Market Risk.
Item 4: Controls and Procedures.
Part II: Other Information
Item 6: Exhibits
Item 1: Financial Statements
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 31, October 31,
2004 2003
---- ----
(Unaudited) (See Note 1)
----------- ------------
(In Thousands of Dollars)
-------------------------
ASSETS
Real estate, at cost, net of accumulated depreciation $ 160,659 $ 116,290
Real estate held for sale -- 14,426
Cash and cash equivalents 19,357 14,437
Tenants' security accounts 1,764 1,332
Sundry receivables 3,892 4,326
Prepaid expenses and other assets 2,044 2,183
Deferred charges, net 2,963 2,770
--------- ---------
Totals $ 190,679 $ 155,764
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgages payable $ 148,708 $ 115,895
Mortgage applicable to real estate held for sale -- 10,872
Accounts payable and accrued expenses 1,690 1,604
Dividends payable 1,285 2,367
Tenants' security deposits 2,207 1,804
Deferred revenue 53 241
Interest rate swap contract 93 201
--------- ---------
Total liabilities 154,036 132,984
--------- ---------
Minority interest 3,643 640
--------- ---------
Commitments and contingencies
Shareholders' equity:
Shares of beneficial interest without par value:
8,000,000 shares authorized;
6,423,152 and 6,311,152 shares issued
and outstanding 20,694 19,854
Undistributed earnings 12,399 2,487
Accumulated other comprehensive loss (93) (201)
--------- ---------
Total shareholders' equity 33,000 22,140
--------- ---------
Totals $ 190,679 $ 155,764
========= =========
See Notes to Consolidated Financial Statements.
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME, COMPREHENSIVE INCOME AND
UNDISTRIBUTED EARNINGS
NINE AND THREE MONTHS ENDED JULY 31, 2004 AND 2003
Nine Months Ended Three Months Ended
--------------------- ---------------------
July 31, July 31,
--------------------- ---------------------
2004 2003 2004 2003
(In Thousands Of Dollars, Except Per Share Amounts)
INCOME
Revenue:
Rental income $ 18,857 15,618 7,020 5,302
Reimbursements 2,954 2,872 887 1,001
Sundry income 127 127 62 47
-------- -------- -------- --------
Totals 21,938 18,617 7,969 6,350
-------- -------- -------- --------
Expenses:
Operating expenses 4,683 3,912 1,669 1,189
Management fees 901 795 348 283
Real estate taxes 2,980 2,712 952 976
Depreciation 2,702 1,866 1,122 623
Minority interest 312 169 90 (163)
-------- -------- -------- --------
Totals 11,578 9,454 4,181 2,908
-------- -------- -------- --------
Operating income 10,360 9,163 3,788 3,442
Investment income 127 151 38 50
Interest expense including amortization
of deferred financing costs (6,742) (5,828) (2,610) (2,276)
-------- -------- -------- --------
Income from continuing operations 3,745 3,486 1,216 1,216
-------- -------- -------- --------
Discontinued operations:
Income from discontinued operations 607 738 159 210
Gain on disposal 12,754 -- 12,754 --
Minority interest in discontinued operations (3,340) (184) (3,228) (52)
-------- -------- -------- --------
Income from discontinued operations 10,021 554 9,685 158
-------- -------- -------- --------
Net income $ 13,766 $ 4,040 $ 10,901 $ 1,374
======== ======== ======== ========
Basic earnings per share:
Continuing operations $ 0.59 $ 0.56 $ 0.19 $ 0.19
Discontinued operations 1.57 0.09 1.51 0.03
-------- -------- -------- --------
Net income $ 2.16 $ 0.65 $ 1.70 $ 0.22
======== ======== ======== ========
Diluted earnings per share:
Continuing operations $ 0.56 $ 0.53 $ 0.18 $ 0.18
Discontinued operations 1.51 0.08 1.44 0.02
-------- -------- -------- --------
Net income $ 2.07 $ 0.61 $ 1.62 $ 0.20
======== ======== ======== ========
Weighted average shares outstanding:
Basic 6,367 6,258 6,423 6,276
Diluted 6,633 6,565 6,748 6,580
COMPREHENSIVE INCOME
Net Income $ 13,766 $ 4,040 $ 10,901 $ 1,374
Other comprehensive income (loss):
Unrealized gain (loss) on interest
rate swap contract 108 (152) 35 156
-------- -------- -------- --------
Comprehensive income $ 13,874 $ 3,888 $ 10,936 $ 1,530
======== ======== ======== ========
UNDISTRIBUTED EARNINGS
Balance, beginning of period $ 2,487 $ 2,589 $ 2,783 $ 3,072
Net income 13,766 4,040 10,901 1,374
Less dividends (3,854) (3,301) (1,285) (1,118)
-------- -------- -------- --------
Balance, end of period $ 12,399 $ 3,328 $ 12,399 $ 3,328
======== ======== ======== ========
Dividends per share $ 0.60 $ 0.53 $ 12,399 $ 3,328
======== ======== ======== ========
See Notes to Consolidated Financial Statements.
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JULY 31, 2004 AND 2003
2004 2003
---- ----
(In Thousands of Dollars)
Operating activities:
Net income $ 13,766 $ 4,040
Adjustments to reconcile net income to net cash provided by
operating activities (including discontinued operations):
Depreciation 2,702 1,866
Amortization 266 243
Deferred revenue (188) 74
Minority interest 3,652 353
Gain on disposal of discontinued operations (12,754) --
Changes in operating assets and liabilities:
Tenants' security accounts (432) (50)
Sundry receivables, prepaid expenses and other assets 1,184 (4,103)
Accounts payable and accrued expenses 86 1,073
Tenants' security deposits 403 207
-------- --------
Net cash provided by operating activities 8,685 3,703
-------- --------
Investing activities:
Capital expenditures (1,485) (494)
Proceeds from disposal of discontinued operations 15,238 --
Acquisition of real estate (16,003)(a) (14,007)(b)
-------- --------
Net cash used in investing activities (2,250) (14,501)
-------- --------
Financing activities:
Repayment of mortgages (1,312) (1,227)
Proceeds from notes and mortgage financing 4,542 9,117
Proceeds from exercise of stock options 840 540
Dividends paid (4,936) (4,287)
Contributions by minority interests -- 5,400
Distribution to minority interest (649) (5,886)
-------- --------
Net cash (used) provided by financing activities (1,515) 3,657
-------- --------
Net increase (decrease) in cash and cash equivalents 4,920 (7,141)
Cash and cash equivalents, beginning of period 14,437 15,634
-------- --------
Cash and cash equivalents, end of period $ 19,357 $ 8,493
======== ========
Supplemental disclosure of cash flow data:
Interest paid $ 6,598 $ 5,697
======== ========
Income taxes paid $ 23 $ 9
======== ========
Dividends declared but not paid $ 1,285 $ 1,104
======== ========
(a) In April 2004, S And A Commercial Associates LP, a 75% owned subsidiary of
FREIT, completed the acquisition of a 269 unit high rise apartment
building in Hackensack, NJ for approximately $45,586,000, in part with the
proceeds of a $29,583,000 mortgage.
(b) (i) In November 2002, Wayne PSC, LLC, a 40% owned subsidiary of FREIT,
completed the acquisition of a 323,000 sq. ft. shopping center in Wayne,
NJ, for approximately $33,282,000, in part with the proceeds of a
$26,500,000 mortgage. (ii) In July 2003, Damascus Centre LLC, a 100% owned
subsidiary of FREIT, completed the acquisition of a 139,000 sq ft.
shopping center in Damascus, MD for approximately $9,833,000, in part by
assuming a mortgage in the amount of $2,608,000.
See Notes to Consolidated Financial Statements.
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of presentation:
The accompanying condensed consolidated financial statements have been prepared
without audit, in accordance with accounting principles generally accepted in
the United States of America for interim financial statements and pursuant to
the rules of the Securities and Exchange Commission. Accordingly, certain
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements have been
omitted. It is the opinion of management that all adjustments considered
necessary for a fair presentation have been included, and that all such
adjustments are of a normal recurring nature.
The consolidated results of operations for the nine and three months ended July
31, 2004 are not necessarily indicative of the results to be expected for the
full year. The unaudited condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and related notes
included in FREIT's Annual Report on Form 10-K for the year ended October 31,
2003.
Effects of recent accounting pronouncements:
In December 2003, the FASB issued revised FIN 46, "Consolidation of Variable
interest Entities, an Interpretation of Accounting Research Bulletin No. 51."
("FIN 46R"). FIN 46R requires the consolidation of an entity in which an
enterprise absorbs a majority of the entity's expected losses, receives a
majority of the entity's expected residual returns, or both, as a result of
ownership, contractual or other financial interests in the entity (variable
interest entities, or "VIEs"). Currently, entities are generally consolidated by
an enterprise when it has a controlling financial interest through ownership or
a majority voting interest in the entity. FIN 46R is applicable for financial
statements of public entities that have interests in VIEs or potential VIEs
referred to as special-purpose entities for periods ending after December 31,
2003. Applications by public entities for all other types of entities are
required in financial statements for periods ending after March 15, 2004.
In accordance with the definition of related parties as defined in paragraph 16
of FIN 46R and the guidance in paragraph 4h, it is the belief of the management
of FREIT that FIN 46R is applicable to Westwood Hills, LLC and Wayne PSC, LLC,
both 40% owned by FREIT. Because of this determination, FREIT has consolidated
these two entities in addition to its 75% owned subsidiary, S And A Commercial
Associates Limited Partnership ("S And A") and its wholly-owned subsidiary,
Damascus Centre, LLC, commencing with the quarter ended April 30, 2004, and has
restated its October 31, 2003 balance sheet and the prior periods reported in
this Form 10-Q. The consolidation of these two entities did not have any impact
on FREIT's equity, net income, or earnings per share.
Reclassification:
Certain accounts in the 2003 financial statements have been reclassified to
conform to the current presentation.
Note 2 - Earnings per share:
FREIT has presented "basic" and "diluted" earnings per share in the accompanying
consolidated statements of income in accordance with the provisions of Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128").
Basic earnings per share is calculated by dividing net income by the weighted
average number of shares outstanding during each period. The calculation of
diluted earnings per share is similar to that of basic earnings per share,
except that the denominator is increased to include the number of additional
shares that would have been outstanding if all potentially dilutive shares, such
as those issuable upon the exercise of stock options and warrants, were issued
during the period.
In computing diluted earnings per share for each of the nine and three month
periods ended July 31, 2004 and 2003, the assumed exercise of all of FREIT's
outstanding stock options, adjusted for application of the treasury stock
method, would have increased the weighted average number of shares outstanding
as shown in the table below. All shares and per share amounts have been restated
for the two-for-one stock split which became effective March 31, 2004.
Nine Months Ended Three Months Ended
July 31, July 31,
---------------------- ----------------------
2004 2003 2004 2003
---- ---- ---- ----
Basic weighted average
shares outstanding 6,367,152 6,257,152 6,423,152 6,275,152
Shares arising from assumed
exercise of stock options 266,257 307,858 324,682 304,858
Dilutive weighted average shares ---------------------- ----------------------
outstanding 6,633,409 6,565,010 6,747,834 6,580,010
====================== ======================
Basic and diluted earnings per share, based on the weighted average number
of shares outstanding during each period, are comprised of ordinary income
and principally capital gain income as indicated in the following
table:
Nine Months Ended Three Months Ended
----------------------- -----------------------
July 31, July 31,
----------------------- -----------------------
2004 2003 2004 2003
---- ---- ---- ----
(In Thousands Of Dollars, Except Per Share Amounts)
Income from continuing operations (a) $ 3,745 $ 3,486 $ 1,216 $ 1,216
Discontinued operations, net of
minority interest:
Income from discontinued operations (a) 455 554 119 158
Gain on disposal (b) 9,566 9,566
----------------------- -----------------------
Income from discontinued operations 10,021 554 9,685 158
----------------------- -----------------------
Net income $ 13,766 $ 4,040 $ 10,901 $ 1,374
======================= =======================
Basic earnings per share:
Continuing operations (a) $ 0.59 $ 0.56 $ 0.19 $ 0.19
Discontinued operations:
Income from discontinued operations (a) 0.07 0.09 0.02 0.03
Gain on disposal ((b) 1.50 1.49
----------------------- -----------------------
Income from discontinued operations 1.57 0.09 1.51 0.03
----------------------- -----------------------
Net income $ 2.16 $ 0.65 $ 1.70 $ 0.22
======================= =======================
Diluted earnings per share:
Continuing operations (a) $ 0.56 $ 0.53 $ 0.18 $ 0.18
Discontinued operations:
Income from discontinued operations (a) 0.07 0.08 0.02 0.02
Gain on disposal (b) 1.44 1.42
----------------------- -----------------------
Income from discontinued operations 1.51 0.08 1.44 0.02
----------------------- -----------------------
Net income $ 2.07 $ 0.61 $ 1.62 $ 0.20
======================= =======================
(a) Ordinary income.
(b) Capital gain income.
Note 3- Equity incentive plan:
All references to the amount of stock options granted, option price, fair value,
or shares exercised have been adjusted to reflect the March 31, 2004 two-for-one
stock split. On September 10, 1998, the Board of Trustees approved FREIT's
Equity Incentive Plan (the "Plan") which was ratified by FREIT's shareholders on
April 7, 1999, whereby up to 920,000 of FREIT's shares of beneficial interest
may be granted to key personnel in the form of stock options, restricted share
awards and other share-based awards.
Upon ratification of the Plan on April 7,1999, FREIT issued 754,000 stock
options which it had previously granted to key personnel on September 10, 1998.
The fair value of the options on the date of grant was $7.50 per share. During
May 2003, options to purchase 72,000 shares at $7.50 per share were exercised,
and on February 24, 2004, options to purchase 112,000 shares were exercised at
$7.50 per share. The remaining options for 570,000 shares are all outstanding at
July 31, 2004, and are exercisable through September 2008.
In the opinion of management, if compensation costs for the stock options
granted in 1999 had been determined based on the fair value of the options at
the grant date under the provisions of SFAS 123 using the Black-Scholes option
pricing model, FREIT's pro forma net income and pro forma basic net income per
share arising from such computation would not have differed materially from the
corresponding historical amounts.
Note 4- Segment information:
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", established standards for reporting financial information about
operating segments in interim and annual financial reports and provides for a
"management approach" in identifying the reportable segments.
FREIT has determined that it has two reportable segments: retail properties and
residential properties. These reportable segments offer different products, have
different types of customers, and are managed separately because each requires
different operating strategies and management expertise. The retail segment
contains seven separate properties and the residential segment contains nine
properties. The accounting policies of the segments are the same as those
described in Note 1 in FREIT's Annual Report on Form 10-K.
The chief operating decision-making group of FREIT's retail segment, residential
segment and corporate/other is comprised of the Board of Trustees.
FREIT assesses and measures segment operating results based on net operating
income ("NOI"). NOI is based on operating revenue and expenses directly
associated with the operations of the real estate properties, but excludes
deferred rents (straight lining), depreciation, and financing costs. NOI is not
a measure of operating results or cash flows from operating activities as
measured by accounting principles generally accepted in the United States of
America, and is not necessarily indicative of cash available to fund cash needs
and should not be considered an alternative to cash flows as a measure of
liquidity.
Real estate rental revenue, operating expenses, NOI and recurring capital
improvements for the reportable segments are summarized below and reconciled to
consolidated net income for the nine and three months ended July 31, 2004 and
2003. Asset information is not reported since FREIT does not use this measure to
assess performance.
Nine Months Ended Three Months Ended
July 31, July 31,
2004 2003 2004 2003
---- ---- ---- ----
(in thousands of dollars)
Real estate revenue:
Retail (a) $ 12,603 $ 11,068 $ 4,032 $ 3,803
Residential 9,099 7,353 3,856 2,488
-------- -------- -------- --------
Totals 21,702 18,421 7,888 6,291
-------- -------- -------- --------
Real estate operating expenses:
Retail 4,055 3,942 1,124 1,360
Residential 3,968 3,034 1,637 991
-------- -------- -------- --------
Totals 8,023 6,976 2,761 2,351
-------- -------- -------- --------
Net operating income:
Retail 8,548 7,126 2,908 2,443
Residential 5,131 4,319 2,219 1,497
-------- -------- -------- --------
Totals $ 13,679 $ 11,445 $ 5,127 $ 3,940
======== ======== ======== ========
Recurring capital improvements:
Residential $ 646 $ 328 $ 444 $ 131
======== ======== ======== ========
Reconciliation to consolidated
net income:
Segment NOI $ 13,679 $ 11,445 $ 5,127 $ 3,940
Deferred rents - straight-lining 235 197 80 59
Net investment income 127 151 38 50
General and administrative expenses (540) (444) (207) (97)
Depreciation (2,702) (1,866) (1,122) (623)
Discontinued operations 10,021 554 9,685 158
Financing costs (6,742) (5,828) (2,610) (2,276)
Minority interest (312) (169) (90) 163
-------- -------- -------- --------
Net Income $ 13,766 $ 4,040 $ 10,901 $ 1,374
======== ======== ======== ========
(a) A Tenant in FREIT's Westridge Square shopping center and FREIT have
entered into a lease termination agreement whereby Tenant paid FREIT a
lump sum payment of approximately $1.8 million ($750,000 as a rent
termination payment for past and future rent payments and $1,035,000 for
repairing and refurbishing space vacated by Tenant) to terminate the
lease. The mortgage lender has agreed to the termination agreement and has
entered into an escrow agreement with FREIT whereby the entire lump sum
payment made by the Tenant has been deposited in an interest bearing
escrow account held for the benefit of the mortgage lender. Up to $750,000
will be disbursed to FREIT (a) in monthly installments of $31,595 over
approximately twenty four (24) months, or (b) the balance of the
un-disbursed $750,000 will be disbursed to FREIT once the mortgage lender
is provided with a Certificate of Occupancy ("C of O") covering all of the
space vacated by the Tenant. The balance of the lease termination payment
of approximately $1 million representing a Tenant Improvement ("TI")
Reserve, will be disbursed to FREIT in $250,000 increments as comparable
amounts of TI's are incurred, or in full at the earlier of when a C of O
is obtained and the space vacated by the Tenant leased and re-occupied, or
when the mortgage loan has been re-paid. Approximately $300,000,
representing the difference between the $750,000 rent termination payment
and rents already accrued, was included in revenue for the first quarter
of fiscal 2004.
Note 5 - Acquisition and Discontinued Operations:
On June 22, 2004, S And A closed on its contract for the sale of the Olney Town
Center ("OTC") in Olney, Maryland. The sale price for the property was $28.2
million. The property was acquired in April 2000 for approximately $15.5
million. S And A utilized part of the selling price to repay the approximate $11
million first mortgage on the property. The operations of OTC are being
classified as Discontinued Operations. For financial statement proposes, S And A
recognized a gain of approximately $12.8 from the sale.
On April 16, 2004, S And A closed on the purchase of The Pierre apartments. The
Pierre is a 269-unit luxury high-rise apartment building located in Hackensack,
N.J. The contract purchase price for The Pierre was approximately $44 million.
This amount, together with estimated transaction costs of approximately $2
million, resulted in total acquisition costs of approximately $46 million. The
acquisition costs were financed in part by a mortgage loan in the approximate
amount of $29.6 million and the balance of approximately $16 million in cash.
FREIT provided 75% of the cash required with the balance of approximately $4.2
million provided by the 25% minority owners of S And A.
The net proceeds from the OTC sale after the repayment of the first mortgage
repaid FREIT and the 25% minority owners for their advances made to acquire The
Pierre.
S And A has structured the sale of OTC and the purchase of The Pierre in a manor
that would qualify as a like kind exchange of real estate pursuant to Section
1031 of the Internal Revenue Code, and resulted in a deferral for income tax
purposes of the realization of gain on the sale of OTC. Since it is the
intention of FREIT to continue to qualify as a real estate investment trust,
deferred tax would be minimal.
The following Unaudited pro forma information shows the results of operations
for nine and three months ended July 31, 2004 and 2003 for FREIT and
Subsidiaries as though The Pierre had been acquired at the beginning of fiscal
2003:
Nine Months Ended Three Months Ended
July 31, July 31,
2004 2003 2004 2003
---- ---- ---- ----
(In Thousands of Dollars, Except Per Share Amounts)
Revenues $ 24,364 $ 22,552 $ 8,007 $ 7,663
Net expenses 20,258 19,134 6,701 6,697
Minority Interest 324 110 90 (185)
--------- --------- --------- ---------
Income before discontinued operations 3,782 3,308 1,216 1,151
Discontinued Operations 10,021 554 9,685 158
--------- --------- --------- ---------
Net Income $ 13,803 $ 3,862 $ 10,901 $ 1,309
========= ========= ========= =========
Basic Earnings Per Share:
Continuing operations $ 0.59 $ 0.53 $ 0.19 $ 0.18
Discontinued operations 1.57 0.09 1.51 0.03
--------- --------- --------- ---------
Net Income $ 2.16 $ 0.62 $ 1.70 $ 0.21
========= ========= ========= =========
Diluted earnings per share:
Continuing operations $ 0.57 $ 0.50 $ 0.18 $ 0.17
Discontinued operations 1.51 0.08 1.44 0.02
--------- --------- --------- ---------
Net Income $ 2.08 $ 0.58 $ 1.62 $ 0.19
========= ========= ========= =========
The unaudited pro forma results include adjustments for depreciation based on
the purchase price and increased interest expense based on the mortgage placed
on the property at acquisition date.
The unaudited pro forma results of operations set forth above are not
necessarily indicative of the results that would have occurred had the
acquisition been made at the beginning of fiscal 2003 or of future results of
operations of FREIT's combined properties.
The acquisition price for the building, including closing costs, was
approximately $45.6 million. Based on a detailed appraisal of the property, the
purchase price was allocated as follows: approximately $37.5 million (82.2%) was
allocated to the building and other improvements and approximately $8.1 million
(17.8%) was allocated towards land. Value attributable to leases was considered
immaterial due to their short-term nature.
* *
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations.
- --------------------------------------------------------------------------------
Cautionary Statement Identifying Important Factors That Could Cause FREIT's
Actual Results to Differ From Those Projected in Forward Looking Statements.
Readers of this discussion are advised that the discussion should be read in
conjunction with the unaudited condensed consolidated financial statements of
FREIT (including related notes thereto) appearing elsewhere in this Form 10-Q,
and the consolidated financial statements included in FREIT's most recently
filed Form 10-K. Certain statements in this discussion may constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements reflect FREIT's
current expectations regarding future results of operations, economic
performance, financial condition and achievements of FREIT, and do not relate
strictly to historical or current facts. FREIT has tried, wherever possible, to
identify these forward-looking statements by using words such as "believe,"
"expect," "anticipate," "intend, " "plan," " estimate," or words of similar
meaning.
Although FREIT believes that the expectations reflected in such forward-looking
statements are based on reasonable assumptions, such statements are subject to
risks and uncertainties, which may cause the actual results to differ materially
from those projected. Such factors include, but are not limited to, the
following: general economic and business conditions, which will, among other
things, affect demand for rental space, the availability of prospective tenants,
lease rents and the availability of financing; adverse changes in FREIT's real
estate markets, including, among other things, competition with other real
estate owners, risks of real estate development and acquisitions; governmental
actions and initiatives; and environmental/safety requirements.
- --------------------------------------------------------------------------------
Overview
FREIT is an equity real estate investment trust ("REIT") that owns a portfolio
of residential apartment and retail properties. Our revenues consist primarily
of fixed rental income and additional rent in the form of expense reimbursements
derived from our income producing retail properties.
Effects of recent accounting pronouncements:
In December 2003, the FASB issued revised FIN 46, "Consolidation of Variable
interest Entities, an Interpretation of Accounting Research Bulletin No. 51."
("FIN 46R"). FIN 46R requires the consolidation of an entity in which an
enterprise absorbs a majority of the entity's expected losses, receives a
majority of the entity's expected residual returns, or both, as a result of
ownership, contractual or other financial interests in the entity (variable
interest entities, or "VIEs"). Currently, entities are generally consolidated by
an enterprise when it has a controlling financial interest through ownership or
a majority voting interest in the entity. FIN 46R is applicable for financial
statements of public entities that have interests in VIEs or potential VIEs
referred to as special-purpose entities for periods ending after December 31,
2003. Applications by public entities for all other types of entities are
required in financial statements for periods ending after March 15, 2004.
In accordance with the definition of related parties as defined in paragraph 16
of FIN 46R and the guidance in paragraph 4h, it is the belief of the management
of FREIT that FIN 46R is applicable to Westwood Hills, LLC and Wayne PSC, LLC,
both 40% owned by FREIT. Because of this determination, FREIT has consolidated
these two entities in addition to its 75% owned subsidiary, S And A and its
wholly-owned subsidiary, Damascus Centre, LLC, commencing with the quarter ended
April 30, 2004, and has restated its October 31, 2003 balance sheet and the
prior periods reported in this Form 10-Q. The consolidation of these two
entities did not have any impact on FREIT's equity, net income, or earnings per
share.
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
The Securities and Exchange Commission ("SEC") recently issued disclosure
guidance for "Critical Accounting Policies". The SEC defines Critical Accounting
Policies as those that require the application of management's most difficult,
subjective, or complex judgments, often because of the need to make estimates
about the effect of matters that are inherently uncertain and may change in
subsequent periods.
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, the preparation of which
takes into account estimates based on judgments and assumptions that affect
certain amounts and disclosures. Accordingly, actual results could differ from
these estimates. The accounting policies and estimates used and outlined in Note
1 to our Consolidated Financial Statements included in our annual report on Form
10-K, for the year ended October 31, 2003, have been applied consistently as at
July 31, 2004 and October 31, 2003, and for
the nine and three months ended July 31, 2004 and 2003. We believe that the
following accounting policies or estimates require the application of
management's most difficult, subjective, or complex judgments:
Revenue Recognition: Base rents, additional rents based on tenants' sales volume
and reimbursement of the tenants' share of certain operating expenses are
generally recognized when due from tenants. The straight-line basis is used to
recognize base rents under leases if they provide for varying rents over the
lease terms. Straight-line rents represent unbilled rents receivable to the
extent straight-line rents exceed current rents billed in accordance with lease
agreements. Before FREIT can recognize revenue, it is required to assess, among
other things, its collectibility. If we incorrectly determine the collectibility
of revenue, our net income and assets could be overstated.
Real Estate: Real estate is carried at cost, net of accumulated depreciation. As
at July 31, 2004 FREIT's carrying amount of its real estate, net of depreciation
is $160.7 million. Maintenance and repairs are charged to operations as
incurred. Depreciation requires an estimate by management of the useful life of
each property and improvement as well as an allocation of the costs associated
with a property to its various components. If FREIT does not allocate these
costs appropriately or incorrectly estimates the useful lives of its real estate
depreciation expense may be misstated.
When we acquire real estate assets, we assess the fair value of the acquired
assets (in accordance with Statements of Financial Accounting Standards ("SFAS")
No. 141 and 142) and allocate the purchase price to the asset's components -
land, building, leases, etc. - based on these assessments. FREIT assesses fair
value based on estimated cash flow projections that utilize appropriate discount
and capitalization rates and available market information, or independent
appraisals. Initial valuation assessments are subject to change until such
information is finalized no later than six months from the acquisition date.
Valuation of Long-Lived Assets: We periodically assess the carrying value of
long-lived assets whenever we determine that events or changes in circumstances
indicate that their carrying amount may not be recoverable. When FREIT
determines that the carrying value of long-lived assets may be impaired, the
measurement of any impairment is based on a projected discounted cash flows
method determined by FREIT's management. While we believe that our discounted
cash flow methods are reasonable, different assumptions regarding such cash
flows may significantly affect the measurement of impairment.
In October 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 requires the
reporting of discontinued operations to include components of an entity that
have either been disposed of or are classified as held for sale. FREIT has
adopted SFAS No. 144. On June 22, 2004 FREIT, through its 75% owned subsidiary S
And A, closed the contract for the sale of the OTC property in Olney, Maryland.
Accordingly, FREIT has reclassified the net income from the operations of the
property as Discontinued Operations for all periods presented. The adoption of
SFAS No. 144 did not have an impact on net income; but only impacted the
presentation of this property within the consolidated statements of income.
We believe that income from continuing operations (which excludes the operations
of OTC) is the most significant element of net income. Accordingly, all
references and comparisons refer to income from continuing operations unless
otherwise stated.
All references to per share amounts are on a diluted basis unless otherwise
indicated and have been restated for the March 31, 2004 two-for-one stock split.
Results of Operations:
Nine and Three Months Ended July 31, 2004 and 2003
Revenue for the nine months ended July 31, 2004 ("Current Nine Months")
increased 17.8% to $21,938,000 compared to $18,617,000 for the nine months ended
July 31, 2003 ("Prior Year's Nine Months"). Revenue for the quarter ended July
31, 2004 ("Current Quarter") increased 25.5% to $7,969,000 compared to
$6,350,000 for the quarter ended July 31, 2003 ("Prior Year's Quarter").
Income from continuing operations increased 7.4% to $3,745,000 during the
Current Nine Months compared to $3,486,000 for the Prior Year's Nine Months. The
Current Nine Months revenue and net income include a one-time item of $308,000
representing a gain from a lease termination payment made by a former tenant of
FREIT (see discussion below).
Income from continuing operations for the Current Quarter and the Prior Year's
Quarter remained flat at $1,216,000.
In June 2004 FREIT's 75% owned subsidiary sold OTC. This sale resulted in a gain
for financial statement purposes of approximately $12.8 million. This gain plus
the operations of OTC, less the 25% interest in these items attributable to the
minority interest added approximately $10 million and $9.7 million to net income
for the Current Nine Months and Current Quarter respectively. These items have
been classified as income from Discontinued Operations.
The consolidated results of operations for the nine and three months ended July
31, 2004 are not necessarily indicative of the results to be expected for the
full year.
SEGMENT INFORMATION
The following table sets forth comparative operating data for FREIT's real
estate segments from continuing operations:
Nine Months Ended Three Months Ended
July 31, July 31,
----------------------------------- -----------------------------------
Increase Increase
2004 2003 (Decrease) 2004 2003 (Decrease)
---- ---- ---------- ---- ---- ----------
(in thousands of dollars)
Retail Properties:
Rental income:
Same properties $ 11,756 $ 11,068 $ 688 $ 3,748 $ 3,803 $ (55)
New properties 847 -- 847 284 -- 284
---------------------------------- ----------------------------------
Total revenues 12,603 11,068 1,535 4,032 3,803 229
---------------------------------- ----------------------------------
Operating expenses:
Same properties 3,757 3,942 (185) 1,027 1,360 (333)
New properties 298 -- 298 97 -- 97
---------------------------------- ----------------------------------
Total expenses 4,055 3,942 113 1,124 1,360 (236)
---------------------------------- ----------------------------------
Net operating income:
Same properties 7,999 7,126 873 2,721 2,443 278
New properties 549 -- 549 187 -- 187
---------------------------------- ----------------------------------
Total Retail NOI $ 8,548 $ 7,126 $ 1,422 $ 2,908 $ 2,443 $ 465
================================== ==================================
Residential properties:
Rental income:
Same properties $ 7,478 7,353 125 2,516 2,488 28
New properties 1,621 -- 1,621 1,340 -- 1,340
---------------------------------- ----------------------------------
Total revenues 9,099 7,353 1,746 3,856 2,488 1,368
---------------------------------- ----------------------------------
Operating expenses:
Same properties 3,260 3,034 226 1,047 991 56
New properties 708 -- 708 590 -- 590
---------------------------------- ----------------------------------
Total expenses 3,968 3,034 934 1,637 991 646
---------------------------------- ----------------------------------
Net operating income:
Same properties 4,218 4,319 (101) 1,469 1,497 (28)
New properties 913 -- 913 750 -- 750
---------------------------------- ----------------------------------
Total Residential NOI $ 5,131 $ 4,319 $ 812 $ 2,219 $ 1,497 $ 722
================================== ==================================
Combined real estate NOI $ 13,679 $ 11,445 $ 5,127 $ 3,940
Reconciliation to
consolidated net income:
Deferred rents 235 197 80 59
Net investment income 127 151 38 50
Administrative expenses (540) (444) (207) (97)
Depreciation (2,702) (1,866) (1,122) (623)
Discontinued operations 10,021 554 9,685 158
Financing costs (6,742) (5,828) (2,610) (2,276)
Minority interests (312) (169) (90) 163
--------------------- ---------------------
Net income $ 13,766 $ 4,040 $ 10,901 $ 1,374
===================== =====================
The above table details the comparative NOI for FREIT's Retail and Residential
Segments, and reconciles the combined NOI to consolidated net income. NOI is
based on operating revenue and expenses directly associated with the operations
of the real estate properties, but excludes deferred rents (straight lining),
depreciation, and financing costs. FREIT assesses and measures segment operating
results based on NOI. NOI is not a measure of operating results or cash flow as
measured by generally accepted accounting principles, and is not necessarily
indicative of cash available to fund cash needs and should not be considered an
alternative to cash flows as a measure of liquidity.
RETAIL SEGMENT
FREIT's retail properties for continuing operations consist of seven (7)
properties totaling approximately 1,050,000 sq. ft. Six are multi-tenanted
retail centers and one is a single tenanted store.
As indicated in the above table, revenues from our retail segment for the
Current Nine Months are up by $1,535,000 (13.9%) and NOI is up $1,422,000 (20%)
to $8,548,000. Revenue and net operating income includes a one-time item of
$308,000 representing the gain from a lease termination payment made by a former
tenant located at FREIT's Westridge Square shopping center. FREIT and the tenant
entered into a lease termination agreement whereby Tenant paid FREIT a lump sum
payment of approximately $1.8 million ($750,000 as a rent termination payment
for past and future rent payments and $1,035,000 for repairing and refurbishing
space vacated by Tenant). The tenant made the payment in February 2004. The
mortgage lender has agreed to the termination agreement and has entered into an
escrow agreement with FREIT whereby the entire lump sum payment made by the
Tenant has been deposited in an interest bearing escrow account held for the
benefit of the mortgage lender. Up to $750,000 will be disbursed to FREIT in
monthly installments of $31,595 over approximately twenty four (24) months, or
the balance of the un-disbursed $750,000 will be disbursed to FREIT once the
mortgage lender is provided with a C of O covering all of the space vacated by
the Tenant. The balance of the lease termination payment of approximately $1
million representing a Tenant Improvement ("TI") Reserve, will be disbursed to
FREIT in $250,000 increments as comparable amounts of TI's are incurred, or in
full at the earlier of when a C of O is obtained and the space vacated by the
Tenant leased and re-occupied, when the mortgage loan has been re-paid. The
former tenant's total rent and expense reimbursements aggregated approximately
$488,000 per year.
Revenues and NOI from same properties (those properties included in the Current
Nine Months and the Prior Year's Nine Months), excluding the one-time lease
termination income, were up 3.4% and 7.9% respectively for the Current Nine
Months over the Prior Year's Nine Months. Operating expenses for the same
properties declined 4.7% during the Current Nine Months compared to the Prior
Year's Nine Months.
ASSET SALE:
On June 22, 2004, S And A closed on its contract for the sale of OTC in Olney,
Maryland. The sale price for the property was $28.2 million. The property was
acquired in April 2000 for approximately $15.5 million. FREIT recognized a gain
of approximately $12.8 million from the sale. S And A utilized part of the
selling price to repay the approximate $11 million first mortgage on the
property. The operations of OTC have been classified as Discontinued Operations.
The net proceeds from the OTC sale after the repayment of the first mortgage
were used to repay FREIT and the 25% minority owners for their advances made to
acquire The Pierre. (See below).
RESIDENTIAL SEGMENT
FREIT operates nine (9) multi-family apartment communities totaling 986
apartment units. The NOI of our residential properties is summarized in the
above table.
On April 16, 2004, S And A closed on the purchase of The Pierre apartments. The
Pierre is a 269-unit high-rise apartment building located in Hackensack, N.J.
The contract purchase price for The Pierre was approximately $44 million. This
amount, together with estimated transaction costs of approximately $2 million,
resulted in total acquisition costs of approximately $46.0 million. The
acquisition costs were financed in part by a mortgage loan in the approximate
amount of $29.6 million and the balance of approximately $16.4 million in cash.
FREIT provided 75% of the cash required with the balance, of approximately $4.2
million provided in the form of a note, provided by the 25% minority owners of S
And A. Cash proceeds received from the sale of OTC (see above) were used to
repay these advances.
Residential revenue for Same Properties for the Current Nine Months and Current
Quarter increased modestly over the prior year's comparable periods. These
increases were insufficient to cover the increased expenses during the same
periods. The increases in expenses are principally attributable to
Make-Ready-Expenses, collection losses, and advertising. While apartment rental
increases are holding, average occupancy during the Current Quarter was 95.7%
(up from 93.7% for the quarter ended April 30, 2004) compared to an average
occupancy of 97.1% during the Prior Year's Quarter.
FINANCING COSTS
Financing costs are summarized as follows:
Nine Months Ended Three Months Ended
July 31, July 31,
------------------ ------------------
2004 2003 2004 2003
Fixed rate mortgages:
1st Mortgages:
Existing $ 3,903 $ 3,900 $ 1,400 $ 1,626
New
Damascus 170 55
Pierre 479 409
2nd Mortgages 1,981 1,775 657 597
Other 65 21 39 9
------- ------- ------- -------
Total interest expense 6,598 5,696 2,560 2,232
Amortization of deferred
mortgage costs 144 132 50 44
Total financing costs from ------- ------- ------- -------
continuing operations $ 6,742 $ 5,828 $ 2,610 $ 2,276
======= ======= ======= =======
Financing Costs for the Current Nine Months and Current Quarter increased by
$914,000 and $334,000 respectively over the prior year's comparable periods. The
increases are principally attributable to the mortgages from the newly acquired
Damascus and Pierre properties, the approximate $5.5 million increase in the
first mortgage on the Preakness property, and from the interest costs relating
to the second mortgages placed on several of FREIT's residential properties.
LIQUIDITY AND CAPITAL RESOURCES
Our financial condition remains strong. Net Cash Provided By Operating
Activities was $8.7 million for the Current Nine Months compared to $3.7 million
for the Prior Year's Nine Months. We expect that cash provided by operating
activities will be adequate to cover mandatory debt service payments, recurring
capital improvements and dividends necessary to retain qualification as a REIT
(90% of taxable income).
As at July 31, 2004, we had cash and cash equivalents totaling $19.4 million.
As previously reported, we are planning the construction of 129 apartment rental
units in Rockaway, NJ. The total capital required for this project is estimated
at $13.8 million. We expect to finance these costs, in part, from construction
and mortgage financing and, in part, from funds available in our institutional
money market investment.
At July 31, 2004 FREIT's aggregate outstanding mortgage debt was $148.7 million
and bears a fixed weighted average interest rate of 6.5%, and an average life of
approximately 8.3 years. These fixed rate mortgages are subject to amortization
schedules that are longer than the term of the mortgages. As such, balloon
payments for all mortgage debt will be required as follows:
Fiscal Year $ Millions
----------- ----------
2007 $ 15.7
2008 $ 5.9
2010 $ 12.3
2013 $ 8.0
2014 $ 26.1
2016 $ 24.6
2019 $ 28.3
The following table shows the estimated fair value and carrying value of our
long-term debt at July 31, 2004 and October 31, 2003:
July 31, October 31,
(In Millions) 2004 2003
------------- ---- ----
Fair Value $152 $132
Carrying Value $149 $127
Fair values are estimated based on market interest rates at July 31, 2004 and
October 31, 2003 and on discounted cash flow analysis. Changes in assumptions or
estimation methods may significantly affect these fair value estimates.
FREIT expects to re-finance the individual mortgages with new mortgages when
their terms expire. To this extent we have exposure to interest rate risk on our
fixed rate debt obligations. If interest rates, at the time any individual
mortgage note is due, are higher than the current fixed interest rate, higher
debt service may be
required, and/or re-financing proceeds may be less than the amount of mortgage
debt being retired. For example, at July 31, 2004 a one percent interest rate
increase would reduce the Fair Value of our debt by $9.1 million, and a one
percent decrease would increase the Fair Value by $10.9 million.
We believe that the values of our properties will be adequate to command
re-financing proceeds equal to, or higher, than the mortgage debt to be
re-financed. We continually review our debt levels to determine if additional
debt can prudently be utilized for property acquisition additions to our real
estate portfolio that will increase income and cash flow to shareholders.
Interest rate swap contract: To reduce interest rate volatility, FREIT uses "pay
fixed, receive floating" interest rate swaps to convert floating interest rates
to fixed interest rates over the terms of certain loans. We enter into these
swap contracts with a Counterparty that is usually a high-quality commercial
bank.
In essence, we agree to pay our Counterparty a fixed rate of interest on a
dollar amount of notional principal (which corresponds to our mortgage debt)
over a term equal to the terms of the mortgage note. Our Counterparty, in
return, agrees to pay us a short-term rate of interest - generally LIBOR - on
that same notional amount over the same term as our mortgage note.
FAS 133 requires us to mark-to-market fixed pay interest rate swaps. As the
floating interest rate varies from time-to-time over the term of the contract,
the value of the contract will change upward or downward. If the floating rate
is higher than the fixed rate, the value of the contract goes up and there is a
gain and an asset. If the floating rate is less than the fixed rate, there is a
loss and a liability. These gains or losses will not affect our income
statement. Changes in the fair value of these swap contracts will be reported in
earnings of other comprehensive income and appear in the equity section of our
balance sheet.
This gain or loss represents the economic consequence of liquidating our fixed
rate swap contracts and replacing them with like-duration funding at current
market rates, something we would likely never do.
FREIT had a variable interest rate mortgage securing its Patchogue, NY property.
To reduce interest rate fluctuations, during 2002, FREIT entered into an
interest rate swap contract. This rate swap contract effectively converted
variable interest rate payments to fixed interest rate payments. The contract
was initially based on a notional amount of approximately $6,769,000 ($6,611,000
at July 31, 2004). FREIT has the following derivative-related risks with its
swap contract: 1) early termination risk, and 2) Counterparty credit risk.
Early Termination Risk: If FREIT wants to terminate its swap contract before
maturity, it has to be bought out or terminated at market value; i.e., the
difference in the present value of the anticipated net cash flows from each of
the swap's parties. If current variable interest rates are below FREIT's fixed
interest rate payments, this could be costly. At July 31, 2004, FREIT's
liability for early termination would be $93,000. This amount has been included
in comprehensive income. Conversely, if interest rates rise above FREIT's fixed
interest payments and FREIT wished early termination, FREIT would realize a gain
on termination.
Counterparty Credit Risk: Each party to a swap contract bears the risk that its
Counterparty will default on its obligation to make a periodic payment. FREIT
reduces this risk by entering swap contracts only with major financial
institutions that are experienced market makers in the derivatives market.
FREIT also has the ability to draw, if needed, against its $14 million, two-year
revolving line of credit. During fiscal 2004 FREIT drew (borrowed) approximately
$4 million against this line, which was used for the acquisition of The Pierre.
This borrowing was repaid during the third quarter ended July 31, 2004.
INFLATION
Inflation can impact the financial performance of FREIT in various ways. Our
retail tenant leases normally provide that the tenants bear all or a portion of
most operating expenses, which can reduce the impact of inflationary increases
on FREIT. Apartment leases are normally for a one-year term, which may allow us
to seek increased rents as leases renew or when new tenants are obtained.
Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Liquidity and Capital Resources" above.
Item 4: Controls and Procedures
As at the end of the period covered by this quarterly report on Form 10-Q, we
carried out an evaluation of the effectiveness of the design and operation of
FREIT's disclosure controls and procedures. This evaluation was carried out
under the supervision and with participation of FREIT's management, including
FREIT's Chairman and Chief Executive Officer and Chief Financial Officer, who
concluded that FREIT's disclosure controls and procedures are effective. There
has been no change in FREIT's internal control over financial reporting that
occurred during FREIT's last fiscal quarter that has materially affected, or is
reasonably likely to material affect, FREIT's internal control over financial
reporting.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in FREIT's reports
filed or submitted under the Exchange Act is recorded, processed, summarized,
and reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in
FREIT's reports filed under the Exchange Act is accumulated and communicated to
management, including FREIT's Chief Executive Officer and Chief Financial
Officer as appropriate, to allow timely decisions regarding required disclosure.
Part II Other Information
Item 4: Submission of Matters to a Vote of Security Holders.
None
Item 6. Exhibits
None
Exhibit Index
Exhibit 31.1 Section 302 Certification of Chief Executive Officer
Exhibit 31.2 Section 302 Certification of Chief Financial Officer
Exhibit 32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350
Exhibit 32.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350
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.
FIRST REAL ESTATE INVESTMENT
TRUST OF NEW JERSEY
(Registrant)
Date: September 14, 2004
/s/ Robert S. Hekemian
--------------------------
(Signature)
Robert S. Hekemian.
Chairman of the Board and Chief Executive
Officer
/s/ Donald W. Barney
--------------------------
(Signature)
Donald W. Barney
President, Treasurer and Chief Financial Officer
(Principal Financial/Accounting Officer)