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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
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Commission File No. 33-22976-NY
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INTERVEST MORTGAGE CORPORATION
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(Exact name of registrant as specified in its charter)
New York 13-3415815
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(State or other jurisdiction (I.R.S. employer
of incorporation) identification no.)
10 ROCKEFELLER PLAZA, SUITE 1015
NEW YORK, NEW YORK 10020-1903
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(Address of principal executive offices)
(212) 218-2800
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
YES X NO .
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act): YES NO X .
--- ---
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
Title of Each Class: Shares Outstanding:
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Common Stock, no par value per share 100 shares outstanding at April 30, 2004
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INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES
FORM 10-Q
MARCH 31, 2004
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
----
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
as of March 31, 2004 (Unaudited) and December 31, 2003 . . . . . . . 2
Condensed Consolidated Statements of Operations (Unaudited)
for the Three-Months Ended March 31, 2004 and 2003 . . . . . . . . . 3
Condensed Consolidated Statements of Changes in Stockholder's
Equity (Unaudited) for the Three-Months Ended
March 31, 2004 and 2003 . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Three-Months Ended March 31, 2004 and 2003 . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements (Unaudited) . . . 6
Review by Independent Certified Public Accountants . . . . . . . . . . 10
Review Report of Independent Certified Public Accountants . . . . . . 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . . 16
ITEM 4. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . 17
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES. . . . . . . . . . . . . . . . . . . . . . . 17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES . . . . . . . . . . . . . . . . 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . 17
ITEM 5. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . 17
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
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The Company is making this statement in order to satisfy the "Safe Harbor"
provision contained in the Private Securities Litigation Reform Act of 1995. The
statements contained in this report on Form 10-Q that are not statements of
historical fact may include forward-looking statements that involve a number of
risks and uncertainties. Such forward-looking statements are made based on
management's expectations and beliefs concerning future events impacting the
Company and are subject to uncertainties and factors relating to the Company's
operations and economic environment, all of which are difficult to predict and
many of which are beyond the control of the Company, that could cause actual
results of the Company to differ materially from those matters expressed in or
implied by forward-looking statements. The following factors are among those
that could cause actual results to differ materially from the forward-looking
statements: changes in general economic, market and regulatory conditions, the
development of an interest rate environment that may adversely affect the
Company's net interest income, other income or cash flow anticipated from the
Company's operations, investment and lending activities; and changes in laws and
regulations affecting the Company.
1
PART I. FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
- ----------------------------
INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
($ in thousands) 2004 2003
- --------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Cash and due from banks $ 2,247 $ 1,379
Short-term investments 21,173 24,393
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Total cash and cash equivalents 23,420 25,772
Mortgage loans receivable (net of unearned fees and discounts and allowance for
loan losses of $231 and $191, respectively-notes 2 and 3) 92,114 89,116
Accrued interest receivable 635 642
Fixed assets, net 77 86
Deferred debenture offering costs, net (note 4) 3,227 2,851
Other assets 1,187 1,111
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TOTAL ASSETS $ 120,660 $ 119,578
==============================================================================================================
LIABILITIES
Mortgage escrow funds payable $ 2,053 $ 1,671
Subordinated debentures payable (note 5) 88,350 87,350
Debenture interest payable at maturity (note 5) 9,899 12,052
Other liabilities 672 332
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TOTAL LIABILITIES 100,974 101,405
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STOCKHOLDER'S EQUITY
Class A common stock (no par value, 200 shares authorized, 100 shares issued and
outstanding) 2,100 2,100
Class B common stock (no par value, 100 shares authorized, none issued) - -
Additional paid-in-capital 9,510 8,510
Retained earnings 8,076 7,563
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TOTAL STOCKHOLDER'S EQUITY 19,686 18,173
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TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 120,660 $ 119,578
==============================================================================================================
See accompanying notes to condensed consolidated financial statements.
2
INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE-MONTHS ENDED
MARCH 31,
----------------------
($ in thousands) 2004 2003
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REVENUES
Interest and fee income on mortgages $ 2,250 $ 2,019
Interest income on short-term investments 86 73
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Total interest and fee income 2,336 2,092
Service agreement income - related party (note 6) 842 487
Gain on early repayment of mortgages 233 8
Other income 65 44
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TOTAL REVENUES 3,476 2,631
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EXPENSES
Interest on debentures 1,731 1,442
Amortization of deferred debenture offering costs 289 216
Provision for loan losses 40 57
General and administrative 461 392
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TOTAL EXPENSES 2,521 2,107
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Income before income taxes 955 524
Provision for income taxes 442 239
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NET INCOME $ 513 $ 285
==========================================================================
See accompanying notes to condensed consolidated financial statements.
3
INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(Unaudited)
THREE-MONTHS ENDED
MARCH 31,
----------------------
($in thousands) 2004 2003
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COMMON STOCK
- --------------------------------------------------------------------
Balance at beginning and end of period $ 2,100 $ 2,100
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ADDITIONAL PAID-IN-CAPITAL
Balance at beginning of period 8,510 3,509
Contribution from Parent Company 1,000 1,001
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Balance at end of period 9,510 4,510
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RETAINED EARNINGS
Balance at beginning of period 7,563 5,804
Net income for the period 513 285
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Balance at end of period 8,076 6,089
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TOTAL STOCKHOLDER'S EQUITY AT END OF PERIOD $ 19,686 $ 12,699
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See accompanying notes to condensed consolidated financial statements.
4
INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE-MONTHS ENDED
MARCH 31,
------------------------
($ in thousands) 2004 2003
- ---------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 513 $ 285
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 9 8
Provision for loan losses 40 57
Amortization of deferred debenture offering costs 289 216
Amortization of premiums, fees and discounts, net ( 225) ( 181)
Gain on early repayment of mortgage loans receivable ( 233) ( 8)
Increase in mortgage escrow funds payable 382 363
Decrease in debenture interest payable at maturity ( 2,153) ( 96)
Change in all other assets and liabilities, net 725 116
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NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES ( 653) 760
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INVESTING ACTIVITIES
Principal repayments of mortgage loans receivable 14,263 12,081
Originations of mortgage loans receivable ( 17,297) ( 24,375)
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NET CASH USED IN INVESTING ACTIVITIES ( 3,034) ( 12,294)
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FINANCING ACTIVITIES
Proceeds from issuance of debentures, net of offering costs 9,335 6,946
Principal repayments of debentures ( 9,000) ( 1,400)
Capital contribution from Parent Company 1,000 1,001
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NET CASH PROVIDED BY FINANCING ACTIVITIES 1,335 6,547
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Net decrease in cash and cash equivalents ( 2,352) ( 4,987)
Cash and cash equivalents at beginning of period 25,772 17,946
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 23,420 $ 12,959
=======================================================================================
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest $ 3,884 $ 1,540
Income taxes 240 450
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See accompanying notes to condensed consolidated financial statements.
5
INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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NOTE 1 - GENERAL
The condensed consolidated financial statements of Intervest Mortgage
Corporation and Subsidiaries (the "Company") in this report have not been
audited except for the information derived from the audited Consolidated Balance
Sheet as of December 31, 2003. The financial statements in this report should be
read in conjunction with the consolidated financial statements and related notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2003.
The condensed consolidated financial statements include the accounts of
Intervest Mortgage Corporation and its wholly owned subsidiaries, Intervest
Distribution Corporation and Intervest Realty Servicing Corporation. All
material intercompany accounts and transactions have been eliminated in
consolidation.
The Company is engaged in the real estate business, including the origination
and purchase of real estate mortgage loans, consisting of first mortgage loans
and junior mortgage loans. The Company's investment policy emphasizes the
investment in mortgage loans on income producing properties.
The Company is a wholly owned subsidiary of Intervest Bancshares Corporation
(the "Parent Company"). Officers of the Company are Directors of the Company and
are officers, principal shareholders and Directors of the Parent Company.
In the opinion of management, all material adjustments necessary for a fair
presentation of financial condition and results of operations for the interim
periods presented in this report have been made. These adjustments are of a
normal recurring nature. The results of operations for the interim periods are
not necessarily indicative of results that may be expected for the entire year
or any other interim period. In preparing the condensed consolidated financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses. Actual
results could differ from those estimates. Certain reclassifications have been
made to prior period amounts to conform to the current periods' presentation.
6
INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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NOTE 2 - MORTGAGE LOANS RECEIVABLE
Mortgage loans receivable are summarized as follows:
At March 31, 2004 At December 31, 2003
($in thousands) # of loans Amount # of loans Amount
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Residential multifamily mortgage loans receivable 52 $50,446 47 $48,039
Commercial real estate mortgage loans receivable 38 31,277 32 30,596
Land and land development loans receivable 3 11,727 3 11,782
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Mortgage loans receivable 93 93,450 82 90,417
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Deferred loan fees and unamortized discount (1,105) (1,110)
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Mortgage loans receivable, net of fees and discount 92,345 89,307
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Allowance for mortgage loan losses (231) (191)
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Mortgage loans receivable, net $92,114 $89,116
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The following table shows scheduled contractual principal repayments of the loan
portfolio at March 31, 2004:
($in thousands)
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For the nine-months ended December 31, 2004 $16,530
For the year ended December 31, 2005 42,043
For the year ended December 31, 2006 14,965
For the year ended December 31, 2007 3,332
For the year ended December 31, 2008 3,989
Thereafter 12,591
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$93,450
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NOTE 3 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the periods indicated is
summarized as follows:
Three-Months Ended
March 31,
----------------------
($in thousands) 2004 2003
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Balance at beginning of period $ 191 $ 101
Provision charged to operations 40 57
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Balance at end of period $ 231 $ 158
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At March 31, 2004, there were no impaired loans or loans which were ninety days
past due and still accruing interest. At December 31, 2003, two real estate
loans with an aggregate principal balance of $1,057,000 were on nonaccrual
status and impaired. During the quarter ended March 31, 2004, one of these
loans was repaid and the other paid all past due interest and was returned to
accrual status.
NOTE 4 - DEFERRED DEBENTURE OFFERING COSTS
Deferred debenture offering costs are summarized as follows:
At March 31, At December 31,
($in thousands) 2004 2003
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Deferred debenture offering costs $ 7,796 $ 7,209
Less accumulated amortization (4,569) (4,358)
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Deferred debenture offering costs, net $ 3,227 $ 2,851
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7
INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 5 - SUBORDINATED DEBENTURES PAYABLE
The following table summarizes debentures payable.
At March 31, At December 31,
-------------------------------
($in thousands) 2004 2003
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Series 05/12/95 - interest at 2% above prime - due April 1, 2004 $ - $ 9,000
Series 10/19/95 - interest at 2% above prime - due October 1, 2004 9,000 9,000
Series 05/10/96 - interest at 2% above prime - due April 1, 2005 10,000 10,000
Series 10/15/96 - interest at 2% above prime - due October 1, 2005 5,500 5,500
Series 04/30/97 - interest at 1% above prime - due October 1, 2005 8,000 8,000
Series 11/10/98 - interest at 9% fixed - due January 1, 2005 2,600 2,600
Series 06/28/99 - interest at 8 1/2% fixed - due July 1, 2004 2,000 2,000
Series 06/28/99 - interest at 9% fixed - due July 1, 2006 2,000 2,000
Series 09/18/00 - interest at 8 1/2% fixed - due January 1, 2006 1,250 1,250
Series 09/18/00 - interest at 9% fixed - due January 1, 2008 1,250 1,250
Series 08/01/01 - interest at 7 1/2% fixed - due April 1, 2005 1,750 1,750
Series 08/01/01 - interest at 8% fixed - due April 1, 2007 2,750 2,750
Series 08/01/01 - interest at 8 1/2% fixed - due April 1, 2009 2,750 2,750
Series 01/17/02 - interest at 7 1/4% fixed - due October 1, 2005 1,250 1,250
Series 01/17/02 - interest at 7 1/2% fixed - due October 1, 2007 2,250 2,250
Series 01/17/02 - interest at 7 3/4% fixed - due October 1, 2009 2,250 2,250
Series 08/05/02 - interest at 7 1/4% fixed - due January 1, 2006 1,750 1,750
Series 08/05/02 - interest at 7 1/2% fixed - due January 1, 2008 3,000 3,000
Series 08/05/02 - interest at 7 3/4% fixed - due January 1, 2010 3,000 3,000
Series 01/21/03 - interest at 6 3/4% fixed - due July 1, 2006 1,500 1,500
Series 01/21/03 - interest at 7 % fixed - due July 1, 2008 3,000 3,000
Series 01/21/03 - interest at 7 1/4% fixed - due July 1, 2010 3,000 3,000
Series 07/25/03 - interest at 6 1/2% fixed - due October 1, 2006 2,500 2,500
Series 07/25/03 - interest at 6 3/4% fixed - due October 1, 2008 3,000 3,000
Series 07/25/03 - interest at 7 % fixed - due October 1, 2010 3,000 3,000
Series 11/28/03 - interest at 6 1/4% fixed - due April 1, 2007 2,000 -
Series 11/28/03 - interest at 6 1/2% fixed - due April 1, 2009 3,500 -
Series 11/28/03 - interest at 6 3/4% fixed - due April 1, 2011 4,500 -
- ----------------------------------------------------------------------------------------------------------
$ 88,350 $ 87,350
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(1) Prime represents prime rate of JPMorganChase Bank, which was 4.00% on March 31, 2004 and December 31,
2003. The debentures have a maximum interest rate of 12%.
In January of 2004, the Company issued its Series 11/28/03 debentures in the
principal amount of $10,000,000. Net proceeds, after deferred offering costs,
amounted to $9,252,000. Of the $10,000,000, $8,250,000 accrue and pay interest
quarterly and $1,750,000 accrue and compound interest quarterly until maturity.
On March 1, 2004, Intervest Mortgage Corporation's Series 5/12/95 debentures due
April 1, 2004 were redeemed for $9,000,000 of principal and $2,749,000 of
accrued interest.
Interest is paid quarterly on the Company's debentures except for the following:
$1,950,000 of Series 10/19/95; $1,980,000 of Series 5/10/96; all of 11/10/98,
6/28/99, 9/18/00; $770,000 of Series 8/01/01; $270,000 of Series 1/17/02;
$1,520,000 of Series 8/05/02; and $1,750,000 of Series 11/28/03 debentures,
which accrue and compound interest quarterly, with such interest due and payable
at maturity. Any debenture holder of Series 10/19/95 and 5/10/96 whose interest
accrues and is due at maturity may at any time elect to receive the accrued
interest and subsequently receive regular payments of interest.
The holders of Series 11/10/98 thru 9/18/00 and 1/17/02 thru 11/28/03 debentures
can require the Company repurchase the debentures for face amount plus accrued
interest each year (beginning October 1, 2005 for Series 01/17/02, January 1,
2006 for Series 08/05/02, July 1, 2006 for Series 1/21/03, October 1, 2006 for
Series 7/25/03 and January 1, 2007 for Series 11/28/03) provided, however, in no
calendar year will the Company be required to purchase more than $100,000 in
principal amount of each maturity, in each series of debentures, on a
non-cumulative basis.
8
INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 5 - SUBORDINATED DEBENTURES PAYABLE, CONTINUED
The Company's debentures may be redeemed at its option at any time, in whole or
in part, for face value, except for Series 7/25/03 and 11/28/03. Redemptions
would be at a premium of 1% if they occurred prior to July 1, 2004 for Series
07/25/03 and January 1, 2005 for Series 11/28/03. All the debentures are
unsecured and subordinate to all present and future senior indebtedness, as
defined in the indenture related to each debenture.
The Company has notified holders of Series 6/28/99 debentures due to mature on
July 1, 2004 that these debentures will be redeemed on May 1, 2004. At that
time, $2,000,000 of principal and $980,000 accrued interest through April 30,
2004 will be paid to the holders of these debentures.
The Company has filed a registration statement related to the offering of
additional subordinated debentures. It is anticipated that debentures in an
aggregate principal amount of up to $11,500,000 will be issued in the second
quarter of 2004.
Scheduled contractual maturities of debentures as of March 31, 2004 are
summarized as follows:
($in thousands) Principal Accrued Interest
- ---------------------------------------------------------------------------
For the nine-months ended December 31, 2004 $ 11,000 $ 4,144
For the year ended December 31, 2005 29,100 3,469
For the year ended December 31, 2006 9,000 1,491
For the year ended December 31, 2007 7,000 80
For the year ended December 31, 2008 10,250 515
Thereafter 22,000 200
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$ 88,350 $ 9,899
- ---------------------------------------------------------------------------
NOTE 6 - RELATED PARTY TRANSACTIONS
The Company participates with Intervest National Bank (another wholly owned
subsidiary of the Parent Company) in certain mortgage loans receivable. The
aggregate balance of the Company's participations in these mortgages was
$4,032,000 and $5,533,000 at March 31, 2004 and December 31, 2003, respectively.
The Company has a service agreement, which renews each January 1, unless
terminated by either party, with Intervest National Bank with respect to
mortgage loan originations and servicing for them. The Company earned $842,000
from Intervest National Bank for the three-months ended March 31, 2004, and
$487,000 for the three-months ended March 31, 2003, in connection with this
service agreement.
The Company has interest-bearing and noninterest-bearing deposit accounts with
Intervest National Bank totaling $20,144,000 at March 31, 2004 and $18,869,000
at December 31, 2003. The Company received interest income of $45,000 from
Intervest National Bank for the three-months ended March 31, 2004, and $17,000
for the three-months ended March 31, 2003, respectively, in connection with such
deposits. These amounts are included in interest income in the condensed
consolidated statement of operations.
Intervest Securities Corporation (another wholly owned subsidiary of the Parent
Company) received commissions and fees aggregating $56,000 and $39,000 for the
three-months ended March 31, 2004 and 2003, respectively in connection with the
placement of subordinated debentures of the Company.
The Company paid fees of approximately $10,000 and $55,000 for the three-months
ended March 31, 2004 and 2003, respectively for legal services rendered by a law
firm, a principal of which is a director of the Company. The Company paid
commissions and fees in connection with the placement of debentures aggregating
$315,000 and $274,000 for the three-months ended March 31, 2004 and 2003,
respectively to a broker/dealer, a principal of which is a director of the
Company.
9
INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES
REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Eisner LLP, the Company's independent certified public accountants, have made a
limited review of the condensed consolidated financial statements as of March
31, 2004, and for the three-month periods ended March 31, 2004 and 2003
presented in this document, in accordance with standards established by the
American Institute of Certified Public Accountants.
Their report furnished pursuant to Article 10 of Regulation S-X is included
herein.
10
REPORT ON REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholder
Intervest Mortgage Corporation
New York, New York:
We have reviewed the condensed consolidated balance sheet of Intervest
Mortgage Corporation and Subsidiaries (the "Company") as of March 31, 2004, and
the related condensed consolidated statements of operations, changes in
stockholder's equity and cash flows for the three-month periods ended March 31,
2004 and 2003. These financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
for them to be in conformity with accounting principles generally accepted in
the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as of
December 31, 2003 and the related consolidated statements of operations, changes
in stockholder's equity and cash flows for the year then ended (not presented
herein), and in our report dated February 3, 2004, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 2003 is fairly stated in all material respects in relation to
the consolidated balance sheet from which it has been derived.
/s/ Eisner LLP
- ---------------
New York, New York
April 19, 2004
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
- -------
Intervest Mortgage Corporation and its wholly owned subsidiaries, Intervest
Distribution Corporation and Intervest Realty Servicing Corporation (hereafter
referred to as the "Company" on a consolidated basis), are engaged in the real
estate business, including the origination and purchase of real estate mortgage
loans, consisting of first mortgage and junior mortgage.
Intervest Bancshares Corporation (which is a financial holding company and
hereafter referred to as the "Parent Company") owns 100% of the capital stock of
the Company. The Company's executive officers are directors of the Company and
are also officers, directors and principal shareholders of the Parent Company.
In addition to Intervest Mortgage Corporation, the Parent Company also owns
Intervest National Bank (a national bank with it headquarters and full-service
banking office in Rockefeller Center, New York, and four full-service banking
offices in Clearwater, Florida and one in South Pasadena, Florida) and Intervest
Securities Corporation (a broker/dealer that is an NASD and SIPC member firm
also located in Rockefeller Center, New York). Intervest Securities Corporation
participates as a selected dealer from time to time in the Company's offerings
of debentures.
The Company has historically invested primarily in short-term real estate
mortgage loans that mature within approximately five years and are secured by
income producing real property. The properties to be mortgaged are inspected by
representatives of the Company and mortgage loans are made only on those type of
properties where management is knowledgeable as to operating income and expense.
The Company generally relies upon management in connection with the valuation of
properties. From time to time, however, it may engage independent appraisers
and other agents to assist in determining the value of income-producing
properties underlying mortgages, in which case the costs associated with such
services are generally paid by the mortgagor. The Company does not finance new
construction. While the Company has not previously made acquisitions of real
property, it may also, from time to time, acquire interests in real property,
including fee interests.
The Company's mortgage portfolio is composed predominantly of mortgages on
multi-family residential properties, many of which are subject to applicable
rent control and rent stabilization statutes and regulations. In both cases,
any increases in rent are subject to specific limitations. As such, properties
of the nature of those constituting the most significant portion of the
Company's mortgage portfolio are not affected by the general movement of real
estate values in the same manner as other income-producing properties.
The prepayment of mortgage loans tends to increase during periods of declining
interest rates and tends to decrease during periods of increasing interest
rates. Certain of the Company's mortgages include prepayment provisions, and
others prohibit prepayment of indebtedness entirely
The Company's profitability depends on its net interest income, which is the
difference between interest income generated from its mortgage loans and the
interest expense, inclusive of amortization of offering costs, incurred on its
debentures. The Company's profitability is also affected by its noninterest
income and expenses, provision for loan losses and income taxes. Noninterest
income consists of fee income from providing mortgage loan origination and
other services to Intervest National Bank as well as loan service charges and
prepayment income generated from the Company's loan portfolio. Noninterest
expense consists mainly of compensation and benefits expense, occupancy
expenses, professional fees, insurance expense and other operating expenses.
The Company's profitability is significantly affected by general economic and
competitive conditions, changes in market interest rates, government policies
and actions of regulatory authorities. Since the properties underlying the
Company's mortgages are concentrated in the New York City area, the economic
conditions in that area also have an impact on the Company's operations.
Additionally, terrorist acts, such as those that occurred on September 11, 2001,
and armed conflicts, such as the recent Gulf War, may have an adverse impact on
economic conditions.
12
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2004 AND DECEMBER 31, 2003
- -------------------------------------------------------------------------
Total assets at March 31, 2004 increased to $120,660,000, from $119,578,000 at
December 31, 2003. The increase is primarily due to new mortgage loans of
$17,297,000, offset by $14,263,000 of payoffs and amortization. This increase
was also offset by a $2,352,000 decrease in cash and cash equivalents. The
increase in total assets was primarily funded by a capital contribution of
$1,000,000 from the Parent Company and $513,000 of income for the first three
months of 2004.
Cash and cash equivalents amounted to $23,420,000 at March 31, 2004, compared to
$25,772,000 at December 31, 2003. The decrease was reflected in a lower level of
short term investments in the form of commercial paper which was partially
offset by an increase in balances maintained in money market accounts. The
decrease was the result of funding of additional mortgage loans.
Mortgage loans receivable, net of unearned income and allowance for loan losses,
amounted to $92,114,000 at March 31, 2004, compared to $89,116,000 at December
31, 2003. The increase was due to new originations exceeding repayments during
the period.
Deferred debenture offering costs, net of accumulated amortization, increased to
$3,227,000 at March 31, 2004, from $2,851,000 at December 31, 2003. The increase
was primarily due to the incremental costs associated with the issuance of
Series 11/28/03 subordinated debentures, which was partially offset by normal
amortization.
Total liabilities at March 31, 2004 decreased to $100,974,000, from $101,405,000
at December 31, 2003. The decrease was primarily due to the redemption of Series
5/12/95 debentures in the principal amount of $9,000,000 plus accrued interest
of $2,749,000 on those debentures. This decrease was mostly offset by the
issuance of subordinated debentures with a principal amount of $10,000,000, a
higher level of mortgage escrow funds payable and an increase in income taxes
payable.
Subordinated debentures outstanding at March 31, 2004 increased to $88,350,000,
from $87,350,000 at December 31, 2003 as a result of the issuance of $10,000,000
of Series 11/28/03 debentures primarily offset by the redemption of Series
5/12/95 debentures with a principal balance of $9,000,000. Debenture interest
payable decreased to $9,899,000 at March 31, 2004, from $12,052,000 at December
31, 2003, primarily due to the payment of $2,749,000 of accrued interest on the
debentures that were redeemed which was partially offset by the accrual of
interest on the balance of the debentures outstanding.
Mortgage escrow funds increased to $2,053,000 at March 31, 2004, an increase of
$382,000 from the December 31, 2003 balance of $1,671,000. This increase was
primarily due to new escrow funds resulting from the increase in mortgage loans
receivable. Mortgage escrow funds payable represent advance payments made by the
borrowers for taxes, insurance and other charges remitted by the Company to
third parties.
Stockholder's equity increased to $19,686,000 at March 31, 2004, from
$18,173,000 at year-end 2003. The increase was due to a capital contribution of
$1,000,000 from the Parent Company and net income of $513,000 for the
three-months ended March 31, 2004.
COMPARISON OF RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2004 AND
- ----------------------------------------------------------------------------
2003
- ----
The Company recorded net income of $513,000 for the first quarter of 2004,
compared to net income of $285,000 for the first quarter of 2003.
The following table provides information on average assets, liabilities and
stockholders' equity; yields earned on interest-earning assets; and rates paid
on interest-bearing liabilities for the first quarter of 2004 and 2003. The
yields and rates shown are based on a computation of income/expense (including
any related fee income or expense) for each year divided by average
interest-earning assets/interest-bearing liabilities during each quarter.
13
Average balances are derived from daily balances. Net interest margin is
computed by dividing net interest and dividend income by the average of total
interest-earning assets during each quarter.
For the Quarter Ended March 31,
-------------------------------
2004 2003
------------------------------------------------------------
Average Interest Yield/ Average Interest Yield/
($in thousands) Balance Inc./Exp. Rate Balance Inc./Exp. Rate
- ---------------------------------------------------------------------------------------------------------
Assets
Mortgage loans receivable $ 90,518 $ 2,250 10.00% $ 75,292 $ 2,019 10.88%
Short-term investments 27,461 86 1.26 19,500 73 1.52
- ---------------------------------------------------------------------------------------------------------
Total interest-earning assets 117,979 $ 2,336 7.96% 94,792 $ 2,092 8.95%
- ---------------------------------------------------------------------------------------------------------
Noninterest-earning assets 6,624 3,610
- ---------------------------------------------------------------------------------------------------------
Total assets $124,603 $ 98,402
- ---------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Debentures and accrued interest payable $103,554 $ 2,020 7.84% $ 85,127 $ 1,658 7.90%
Noninterest-bearing liabilities 2,271 1,454
Stockholders' equity 18,778 11,821
- ---------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $124,603 $ 98,402
- ---------------------------------------------------------------------------------------------------------
Net interest income $ 316 $ 434
- ---------------------------------------------------------------------------------------------------------
Net interest-earning assets/margin $ 14,425 1.08% $ 9,665 1.86%
- ---------------------------------------------------------------------------------------------------------
Ratio of total interest-earning assets
to total interest-bearing liabilities 1.14x 1.11x
- ---------------------------------------------------------------------------------------------------------
Net interest income amounted to $316,000 in the first quarter of 2004, compared
to $434,000 in the first quarter of 2003. The growth in average interest-earning
assets was more than offset by the Company's yield on interest-earning assets
decreasing at a faster pace than its cost of debentures. The growth in average
assets consisted of net new mortgage loans of $15,226,000 and a $7,961,000
increase in short-term investments which were funded primarily by new debentures
of $18,427,000 and a $6,957,000 increase in average stockholders' equity.
During the first quarter of 2004, the Company continued to operate in a
refinancing environment where higher rate loans were paid off and lower rate
loans were added to our portfolio. This contributed to a reduction in the net
interest income, the effects of which were offset by an increase in gain on
early repayment of loans. In addition, a debenture offering closed in January
2004 increasing our interest expense. As mortgages close and those funds are
utilized, the interest expense of the debentures will be offset by the increased
interest income.
The yield on interest-earning assets decreased 99 basis points (bp) to 7.96% due
to lower rates on new mortgage loans originated, prepayments of higher-yielding
loans and lower yields earned on short-term investments. The cost of debentures
decreased 6 bp to 7.84%, largely due to lower rates paid on floating-rate
debentures. These debentures are indexed to the JPMorgan Chase Bank prime rate,
which decreased by a total of 25 bp from the first quarter of 2003.
Service agreement income was $842,000 for the first quarter of 2004, compared to
$487,000 in the same period of 2003. The increase of $355,000 was the result of
increased loan origination services provided to Intervest National Bank.
Gain on early repayment of mortgages increased to $233,000 for the quarter ended
March 31, 2004 from $8,000 for the quarter ended March 31, 2003. The increase of
$225,000 was mostly due to additional penalty interest collected on three loans
that were repaid prior to maturity.
The provision for loan losses was $40,000 for the first quarter of 2004,
compared to $57,000 in the same period of 2003. The decrease was primarily due
to a lower level of new loan originations in the first quarter of 2004 compared
to the first quarter of 2003.
General and administrative expenses increased to $461,000 for the quarter ended
March 31, 2004, from $392,000 for the same period of 2003. The increase was
primarily the result of an increase in salaries and employee benefits of
$51,000, and an increase in director fees of $17,000.
14
The provision for income taxes for the quarter ended March 31, 2004 amounted to
$442,000, compared to $239,000 for the quarter ended March 31, 2003. The
Company's effective tax rate was approximately 46% for both periods. The Company
files consolidated Federal, New York State and New York City income tax returns
with its Parent Company.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company manages its liquidity position on a daily basis to assure that funds
are available to meet operations, loan and investment funding commitments and
the repayment of borrowed funds. The Company's principal sources of funds have
consisted of borrowings (through the issuance of its subordinated debentures),
mortgage repayments and cash flow generated from ongoing operations. For
information about the cash flows from the Company's operating, investing and
financing activities, see the condensed consolidated statements of cash flows in
this report.
At March 31, 2004, the Company has issued commitments to lend approximately
$42,375,000. If all these commitments were to close, they would be funded by the
combination of cash on hand, the proceeds from the sale of additional debentures
and the proceeds from the scheduled maturities of existing loans.
During the first three-months of 2004, the Company received a capital
contributions of $1,000,000 from the Parent Company.
The Company considers its current liquidity and sources of funds sufficient to
satisfy its outstanding lending commitments and its maturing liabilities. For
the nine months ending December 31, 2004, the Company is required to pay
$11,000,000 principal and $4,144,000 of accrued interest on maturing
subordinated debentures. The company expects to repay these debentures and
related accrued interest from working capital and / or the proceeds from
maturing mortgage loans.
The Company has notified holders of Series 6/28/99 debentures due to mature on
July 1, 2004 that these debentures will be redeemed on May 1, 2004.
The Company has filed a registration statement related to its proposed issuance
of additional subordinated debentures. It is anticipated that debentures in an
aggregate principal amount of up to $11,500,000 will be issued during the three
months ending June 30, 2004.
ASSET AND LIABILITY MANAGEMENT
- ------------------------------
Interest rate risk arises from differences in the repricing of assets and
liabilities within a given time period. The primary objective of the Company's
asset/liability management strategy is to limit, within its established
guidelines, the adverse impact of changes in interest rates on the Company's net
interest income and capital.
The Company uses "gap analysis," which measures the difference between
interest-earning assets and interest-bearing liabilities that mature or reprice
within a given time period, to monitor its interest rate sensitivity. The
Company's one-year interest rate sensitivity gap was a positive $53,011,000, or
44% of total assets, at March 31, 2004, compared to a positive $43,996,000, or
37%, at December 31, 2003. The increase was primarily due to the origination of
new floating-rate loans as well as existing loans migrating into the less than
one-year maturity time frame. The new loans were funded by debentures with terms
of greater than one year.
The Company has a "floor," or minimum rate, on many of its floating-rate loans
that is determined in relation to prevailing market rates on the date of
origination. This floor only adjusts upwards in the event of increases in the
loan's interest rate. This feature reduces the effect on interest income of a
falling rate environment because the interest rates on such loans do not reset
downward. For a further discussion of interest rate risk and gap analysis,
including the assumptions used in preparing the gap table, see the Company's
2003 Annual Report on Form 10-K, pages 10 and 11.
The table that follows summarizes the Company's interest-earning assets and
interest-bearing liabilities as of March 31, 2004, that are scheduled to
mature or reprice within the periods shown.
15
0-3 4-12 Over 1-4 Over 4
($in thousands) Months Months Years Years Total
- ---------------------------------------------------------------------------------------
Floating- rate loans $63,174 - - - $ 63,174
Fixed- rate loans 5,311 $ 8,023 $ 9,158 $ 7,784 30,276
- ---------------------------------------------------------------------------------------
Total loans 68,485 8,023 9,158 7,784 93,450
Short-term investments 21,173 - - - 21,173
- ---------------------------------------------------------------------------------------
Total rate-sensitive assets $89,658 $ 8,023 $ 9,158 $ 7,784 $114,623
- ---------------------------------------------------------------------------------------
Debentures payable $34,500 $ 2,600 $ 23,250 $ 28,000 $ 88,350
Accrued interest on debentures 5,999 1,571 2,129 200 9,899
- ---------------------------------------------------------------------------------------
Total rate-sensitive liabilities $40,499 $ 4,171 $ 25,379 $ 28,200 $ 98,249
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
GAP (repricing differences) $49,159 $ 3,852 $ (16,221) $(20,416) $ 16,374
- ---------------------------------------------------------------------------------------
Cumulative GAP $49,159 $53,011 $ 36,790 $ 16,374 $ 16,374
- ---------------------------------------------------------------------------------------
Cumulative GAP to total assets 40.74% 43.93% 30.49% 13.57% 13.57%
- ---------------------------------------------------------------------------------------
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
interest rates. The Company's market risk arises primarily from interest rate
risk inherent in its lending and debenture-issuance activities. The Company has
not engaged in and accordingly has no risk related to trading accounts,
commodities or foreign exchange. The measurement of market risk associated with
financial instruments is meaningful only when all related and offsetting on-and
off-balance sheet transactions are aggregated, and the resulting net positions
are identified. Disclosures about the fair value of financial instruments as of
December 31, 2003 and 2002, which reflect changes in market prices and rates,
can be found in note 12 of the notes to consolidated financial statements
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2003. Management believes that there have been no significant changes in the
Company's market risk exposure since December 31, 2003.
Management actively monitors and manages the Company's interest rate risk
exposure. The primary objective in managing interest rate risk is to limit,
within established guidelines, the adverse impact of changes in interest rates
on the Company's net interest income and capital. For a further discussion, see
the section "Asset and Liability Management."
ITEM 4. CONTROLS AND PROCEDURES
a) Evaluation of disclosure controls and procedures. The Company maintains
---------------------------------------------------
controls and procedures designed to ensure that information required to be
disclosed in the reports that the Company files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the rules and forms of the Securities and Exchange
Commission. Based upon his evaluation of those controls and procedures
performed within 90 days of the filing date of this report, the Principal
Executive and Principal Financial Officer of the Company concluded that the
Company's disclosure controls and procedures were adequate.
b) Changes in internal controls. The Company made no significant changes in
------------------------------
its internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation of those controls by the
Principal Executive and Principal Financial Officer.
16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
(a) Not Applicable
(b) Not Applicable
(c) Not Applicable
(d) Not Applicable
(e) Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not pplicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Not Applicable
(b) Not Applicable
(c) Not Applicable
(d) Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report:
31 - Certification of the principal executive and financial
officer pursuant to Section 302 of the Sarbanes- Oxley Act
of 2003.
32 - Certification of the principal executive and financial
officer pursuant to Section 906 of the Sarbanes- Oxley Act
of 2003.
(b) No reports on Form 8-K were filed during the reporting period covered by
this report.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
INTERVEST MORTGAGE CORPORATION
Date: May 12, 2004 By: /s/ Lowell S. Dansker
---------------------------
Lowell S. Dansker, President (Principal
Executive Officer), Treasurer (Principal
Financial Officer and Principal Accounting
Officer) and Director
Date: May 12, 2004 By: /s/ Lawrence G. Bergman
---------------------
Lawrence G. Bergman, Vice President,
Secretary and Director
17