Item 1. Business
Information Regarding Forward-Looking Statements
This report contains forward-looking statements that involve risks and uncertainties. We generally use words such as "believe," "may," "could," "will," "intend," "expect," "anticipate," "plan," and similar expressions to identify forward-looking statements. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including the risks described below and elsewhere in this report. Although we believe the expectations reflected in the forward-looking statements are reasonable, they relate only to events as of the date on which the statements are made, and our future results, levels of activity, performance or achievements may not meet these expectations. We do not intend to update any of the forward-looking statements after the date of this document to conform these statements to actual results or to changes in our expectations, except as required by law.
History
On September 4, 1963, we were incorporated in the State of Oklahoma as Dorsett Educational Systems, Inc. On December 20, 2002, we changed our name to Gift Liquidators, Inc.
As of September 28, 2005 (the "Closing Date"), David Mladen purchased 11,000 shares of our Series A Convertible Preferred Stock, $0.01 par value per share ("Series A Preferred Stock"), for an aggregate purchase price of $10,000 (the "Preferred Stock Purchase Transaction"). As of the Closing Date, each share of Series A Preferred Stock was convertible into 5 shares of our common stock, $0.01 par value per share ("Common Stock"), subject to adjustment for stock dividends, stock splits, reclassifications, and similar events. Further, as of the Closing Date, two of our former stockholders, one of whom was an officer and director of the Company, sold an aggregate of 33,761 shares of our Common Stock to Mr. Mladen, which amount represented 28.6% of our issued and outstanding Common Stock (the "Common Stock Purchase Transaction," and, together with the Preferred Stock Purchase Transaction, the "Stock Purchase Transactions"). As a result of the Stock Purchase Transactions, Mr. Mladen controlled approximately 51.3% of our voting power. In addition, as of the Closing Date, our existing officers and directors resigned, and Mr. Mladen was appointed as our sole officer and director.
Mr. Mladen entered into the Stock Purchase Transactions, described above, with the specific intention of taking control of our Company, and, subsequently, causing it to acquire Eternal Enterprise, Inc. ("Eternal"), a Connecticut corporation, which owned eight residential real estate properties (each a "Property," and collectively, the "Properties"), located at the following addresses:
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154-160A Collins Street, Hartford, CT;
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Evergreen Avenue, Hartford, CT;
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& 255 Laurel Street, Hartford, CT;
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Laurel Street, Hartford CT;
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Laurel Street, Hartford, CT;
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Laurel Street, Hartford, CT;
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117-145 S. Marshall Street, Hartford, CT; and
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Webster Street, Hartford, CT.
Between October 26, 2005 and October 31, 2005, we formed eight Delaware limited partnerships as wholly-owned subsidiaries of ours (the "Limited Partnerships"), as follows:
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Excellency Investment Realty Trust I, L.P.;
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Excellency Investment Realty Trust II, L.P.;
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Excellency Investment Realty Trust III, L.P.;
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Excellency Investment Realty Trust IV, L.P.;
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Excellency Investment Realty Trust V, L.P.;
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Excellency Investment Realty Trust VI, L.P.;
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Excellency Investment Realty Trust VII, L.P.; and
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Excellency Investment Realty Trust VIII, L.P.
As of November 4, 2005, we acquired Eternal, when the stockholders of Eternal, which consisted of Mr. Mladen and certain of his family members (the "Pre-Acquisition Eternal Stockholders"), exchanged 100% of the issued and outstanding shares of common stock of Eternal, for (i) limited partnership interests representing 20% of the total partnership interests of each of the Limited Partnerships, and (ii) promissory notes in the aggregate principal amount of $2,600,000 (the "Notes") (the "Eternal Acquisition"). The partnership interests of the Limited Partnerships were exchanged for shares of capital stock of Eternal based upon the ratio of each Property's value versus the aggregate value of all of the Properties. In consideration for our ownership of the remaining 80% of the total partnership interests of each of the Limited Partnerships, we agreed to assume the Notes.
Pursuant to the Partnership Agreements of the Limited Partnerships, among other things, (i) we are the general partner of each of the Limited Partnerships, and (ii) we have the right to compel the limited partners (i.e., the Pre-Acquisition Eternal Stockholders) to exchange 100% of their limited partnership interests for shares of our Common Stock. In the event that we, as general partner of the Limited Partnerships, compel the limited partners to exchange their limited partnership interests for shares of our Common Stock, certain family members of Mr. Mladen would become shareholders of ours.
As of December 29, 2005, we entered into a Purchase and Sale Agreement with Goran Mladen, David Mladen's son (the "Purchase Agreement"), pursuant to which we purchased all of the limited partnership interests of the Limited Partnerships owned by Goran Mladen. As a result, we now own approximately 81% of the partnership interests of each of the Limited Partnerships.
Following the Stock Purchase Transactions and the Eternal Acquisition, the business of Eternal, which is now 100% owned, in the aggregate, by the Limited Partnerships, became our primary business.
We intend to qualify as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended. Therefore, in fiscal 2006 our management determined to change our domicile to the State of Maryland, to take advantage of Maryland's detailed and comprehensive REIT laws.
On September 20, 2006, we reincorporated in the State of Maryland by virtue of our merger with and into our wholly-owned subsidiary, Excellency Investment Realty Trust, Inc., a Maryland corporation (the "Reincorporation by Merger"). As a result of the Reincorporation by Merger, among other things:
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The surviving company and successor filer is known as Excellency Investment Realty Trust, Inc.;
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Each share of our issued and outstanding Common Stock and preferred stock was converted into one share of Excellency Investment Realty Trust, Inc.'s common stock and preferred stock, respectively;
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The title to all of our property automatically vested in Excellency Investment Realty Trust, Inc.;
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Excellency Investment Realty Trust, Inc. assumed all of our liabilities;
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Corporate actions of the surviving entity are now governed by the Maryland Corporations and Associations Law and by Excellency Investment Realty Trust's Articles of Amendment and Restatement of Articles of Incorporation and Bylaws;
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David Mladen, our sole officer and director, continued to serve as the sole officer and director of the surviving entity;
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The trading symbol for the surviving entity's common stock, which is quoted on the over-the-counter bulletin board of the National Association of Securities Dealers, was changed to "EIVR"; and
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The total number of shares of stock which the surviving entity is authorized to issue increased to 201,000,000 shares, of which 200,000,000 shares are common stock, $0.01 par value per share and 1,000,000 are preferred stock, par value $0.01.
While the Reincorporation by Merger resulted in changes to our name and state of incorporation, as well as the other changes listed above, it did not result in any material changes to our business, management, assets, liabilities or net worth.
Our Business
General
We are engaged in the business of acquiring, developing, holding for investment, operating and selling apartment properties in metropolitan areas on the east coast of the United States. We intend to qualify as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended.
Through our subsidiaries, we own eight residential real estate Properties, consisting of an aggregate of 271 apartment units, and comprising a total of approximately 221,839 square feet, all of which are leased to residential tenants, as more fully described in Item 2 below. Each of the Properties is located in the metropolitan Hartford area of Connecticut. At December 31, 2008, the Properties' occupancy rate was approximately 90.4%.
We operate in the real estate industry segment. We do not have any foreign operations, and our business is not seasonal. See the Consolidated Financial Statements attached hereto and incorporated by reference herein for financial information relating to our industry segment.
Business Strategies
Our objective is to generate stable and increasing cash flow and asset value by acquiring, developing, holding for investment, operating and selling residential real estate properties in metropolitan areas on the east coast of the United States. Our policy is to acquire assets primarily for current income generation. In addition, we will invest in properties located in markets which offer favorable value and growth prospects.
Our long-term goals are to rent and improve our Properties and to acquire additional properties with income and capital appreciation potential as suitable opportunities arise. When appropriate, we may sell or refinance selected properties. Proceeds from any such sales or refinancings will be reinvested in acquisitions of other properties, or used for operating expenses, or reserves, as we determine.
Property Selection
When making investments in residential real estate properties, we consider relevant real property and financial factors, including the condition and location of the property, its income-producing capacity and the prospects for its long-term appreciation. Residential real estate properties under consideration are first subjected to a comprehensive due diligence review. A property must be in what we consider to be a quality market area within locations that provide stability and upside potential.
The following describes the factors we consider when deciding whether to invest in a property:
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Location considerations include characteristics of the surrounding area and the suitability of the neighborhood services and amenities available to the resident base. Property considerations include physical aspects of the property, its condition, quality of design and materials and its amenities.
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The market area is characterized as having current and long-term suitable demographic and economic conditions. We consider supply and demand factors and determine whether the capture rates in the primary and secondary market areas are within appropriate standards for the resident base. We also consider the competitive advantage of the community as compared with competing properties in the same market area.
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In our determination of the stability of the properties operations, we consider the potential impact of rent growth, turnover, rent discounts, concessions and other factors that exist or may exist in the competitive environment.
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We must determine, through third-party environmental and engineering assessments, that the property is not subject to any recognized environmental or physical conditions or deferred maintenance costs that would impact the future operations, marketability or salability of the property.
Financing
As of December 27, 2005, we borrowed an aggregate of $8,224,000 from Astoria Federal Mortgage Corp., in connection with the refinancing of our Properties, evidenced by eight notes payable (the "Mortgage Notes"). The Mortgage Notes bear interest at an initial rate of 5.625%. The loans are repayable in monthly installments of principal and interest, due on the first day of each month. The Mortgage Notes mature on January 1, 2018, at which time the entire unpaid principal balance, plus accrued interest thereon, shall be payable. The Mortgage Notes are secured against each respective Property, and, David Mladen, our majority stockholder, officer and director, has guaranteed up to 5% of the outstanding balance of the principal with interest for the life of the loan. As of December 31, 2008 and 2007, an aggregate of $7,890,446 and $8,011,007 respectively, was due under the Mortgage Notes.
We expect that the rental income we receive from tenants of our Properties will be our primary source of funds going forward. In order to acquire additional apartment properties, we may pursue one or a combination of alternatives, as follows:
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We may determine to take out additional loans to purchase interests in additional properties;
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We may raise funds through any one or a combination of debt offerings and equity offerings, and use such funds to purchase interests in additional properties; or
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We may determine to acquire additional interests in properties as sufficient funds are raised from rental income.
Property Management
Until June 30, 2006, our Properties were managed by White Knight Management, LLC ("White Knight"), a related party owned (i) 99% by Goran Mladen, the son of David Mladen, our majority shareholder, officer and director, and (ii) 1% by Gorica Mladen, David Mladen's daughter. The Properties were managed pursuant to an oral agreement we had with White Knight, according to which White Knight collected the rents for all eight of our Properties and paid our operating expenses. In consideration for such services, White Knight was entitled to retain a management fee of approximately 4% of our rent revenues.
Effective July 1, 2006, we discontinued our arrangement with White Knight and assumed all responsibilities for the management of our Properties. Therefore, there were no property management fees for the fiscal year ended December 31, 2007 or 2008.
As of January 1, 2007, we have consolidated our financial statements with White Knight. In accordance with the Financial Accounting Standards Board ("FASB") Interpretation No. 46R, "Consolidation of Variable Interest Entities" ("FIN 46R"), an interpretation of Accounting Research Bulletin No. 51, a variable-interest entity ("VIE") is to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE's residual returns.
Insurance
We believe that our Properties are adequately insured.
Government Regulation
Our Properties must comply with Title III of the Americans with Disabilities Act (the "ADA") to the extent that they are "public accommodations" or "commercial facilities" as defined in the ADA. The ADA does not consider residential real estate properties to be public accommodations or commercial facilities, except for portions of such properties that are open to the public. In addition, the Fair Housing Amendments Act of 1988 (the "FHAA") requires residential real estate properties first occupied after March 13, 1990, to be accessible to the handicapped. Other laws also require apartment buildings to be handicap accessible.
In addition, under various federal, state and local laws, an owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on, under or in the property. This liability may be imposed without regard to whether the owner or operator knew of, or was responsible for, the presence of the substances. Other law imposes on owners and operators certain requirements regarding conditions and activities that may affect human health or the environment.
Further, like many real estate operators, we are subject to premises liability laws, housing discrimination laws and landlord-tenant laws.
We are not aware of any material noncompliance, liability or claim relating to any of the aforementioned regulations in connection with any of our Properties.
Competition
We have acquired and intend to acquire interests in residential real estate properties on the east coast of the United States wherever suitable communities are identified by us. We will compete with many REITs, real estate partnerships, real estate operating companies and other investors, including banks and insurance companies, many of which will have greater financial resources than we do, in the acquisition and operation of properties. All of our residential real estate properties will be located in developed areas that include other multifamily residential properties. The number of competitive properties in a particular area could have a material effect on our ability to lease units at our properties and on the rents charged at the properties. While there are no dominant competitors in the industry, the market for acquiring residential real estate properties on the east coast of the United States is extensive and local in nature. We may be competing with other entities that have greater resources than we do, including several with national portfolios valued at billions of dollars, and whose management may have more experience than our management. In addition, other forms of housing, including manufactured housing community properties and single-family housing provide alternatives to potential residents of multifamily residential properties. We seek to grow by acquiring residential real estate properties in selected targeted markets. We intend to compete for the acquisition of properties by identifying opportunities that other competitors do not appreciate and by offering the highest acquisition price possible within the parameters of our investment objectives and policies. We cannot predict how successful we will be in identifying and acquiring suitable properties.
Employees
We currently have two (2) employees, David Mladen, who is our President and Chief Executive Officer, a director of ours, and our majority shareholder, and Richard A. Pelletier, who is our Chief Financial Officer. Our subsidiary Limited Partnerships, described elsewhere in this annual report, currently have no employees. Eternal Enterprise, Inc., which is 100% owned, in the aggregate, by our subsidiary Limited Partnerships, currently employs ten (10) individuals, including Goran Mladen and Gorica Mladen, the son and daughter of David Mladen. Eternal's employees are primarily involved in the supervision and maintenance of the Properties. White Knight Management, a company we recently consolidated our financial statements with in accordance with FIN 46R, has no employees.
Item 1A.
Item 1A.
Risk Factors
Not applicable.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Properties (Unaudited)
General
As of December 31, 2008, we owned eight (8) residential real estate properties consisting of 247 units. The table below lists the location of our properties, the number and type of units in each property, the range of rents, and the vacancies of these properties as of December 31, 2008.
Laurel Street is currently under renovation. It was anticipated that the renovations would be completed by the end of 2008, however, due to cash flow and limited availability of financing in the current market, renovations have been slowed. These renovations are anticipated to be competed sometime in 2009.
Financing
As of December 27, 2005, we borrowed an aggregate of $8,224,000 from Astoria Federal Mortgage Corp., in connection with the refinancing of our Properties, evidenced by eight notes payable (the "Mortgage Notes"). The Mortgage Notes bear interest at an initial rate of 5.625%. The loans are repayable in monthly installments of principal and interest, due on the first day of each month. The Mortgage Notes mature on January 1, 2018, at which time the entire unpaid principal balance, plus accrued interest thereon, shall be payable. The Mortgage Notes are secured against each respective Property, and, David Mladen, our majority stockholder, officer and director, has guaranteed up to 5% of the outstanding balance of the principal with interest for the life of the loan.
The following table sets forth certain material terms of each of the Mortgage Notes as of December 31, 2008:
We used the amounts borrowed from Astoria Federal Mortgage Corp. to repay the aggregate amount of $5,263,472 of principal and interest we owed under previous mortgages with Credit Suisse First Boston Mortgage Capital, LLC. In connection with such refinancing, we incurred approximately $654,083 in pre-payment penalties in fiscal 2005. The remaining funds have been used to purchase all of the limited partnership interests of our subsidiary Limited Partnerships owned by Goran Mladen, the son of our majority stockholder and sole officer and director, and for general working capital purposes.
Objectives
Our objective is to generate stable and increasing cash flow and asset value by acquiring, developing, holding for investment, operating and selling residential real estate properties in metropolitan areas on the east coast of the United States. Our policy is to acquire assets primarily for current income generation. In addition, we will invest in properties located in markets which offer favorable value and growth prospects.
Our long-term goals are to rent and improve our properties and to acquire additional properties with income and capital appreciation potential as suitable opportunities arise. When appropriate, we may sell or refinance selected properties. Proceeds from any such sales or refinancings will be
reinvested in acquisitions of other properties, or used for operating expenses, or reserves, as we determine.
Item 3.
Item 3. Legal Proceedings
Securities and Exchange Commission v. Excellency Investment Realty Trust, Inc. and David D. Mladen, Case No. 308CV01583 filed in the United Stated District Court District of Connecticut on October 16, 2008. This case involves an alleged fraudulent market manipulation scheme in which Defendants Excellency Investment Realty Trust, Inc. and David D. Mladen, our president, chief executive officer and majority shareholder, allegedly engaged in a number of transactions designed to artificially inflate the price of our common stock. Our attorneys have been instructed to vigorously defend against this action. It is too early to ascertain a probable outcome.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to the shareholders during 2008.
PART II - Other Information
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our Common Stock is quoted on the OTC Bulletin Board of the Financial Industry Regulatory Authority ("FINRA"). Through approximately October 15, 2005, our trading symbol was "GFTL." Following a 15-for-1 reverse stock split we effected on or around that date, our trading symbol was changed to "GFLQ." Following our Reincorporation by Merger in Maryland, and resulting name change, effective as of September 20, 2006, our trading symbol was changed to "EIVR."
There has been practically no "public market" for shares of our Common Stock. No assurance can be given that any market for our Common Stock will develop or be maintained.
Holders
As of the date hereof, the number of record holders of our Common Stock was approximately 555. The aggregate number of shares outstanding as of the date hereof is 43,861,537.
Dividends
We have not declared any cash dividends with respect to our Common Stock and do not intend to declare dividends in the foreseeable future. Our future dividend policy cannot be ascertained with any certainty.
Securities Authorized for Issuance Under Equity Compensation Plans
We currently have no equity compensation plans.
Recent Sales of Unregistered Securities
In the three-month period ended December 31, 2008, and subsequent periods through the date hereof, we issued unregistered securities, as follows:
Issuance of Shares for Past Services
On December 16, 2008, the company issued 100,000 restricted common shares to Carlos D. Carrillo for payment against an outstanding invoice dated October 11, 2008.
Purchases of Equity Securities by the Small Business Issuer and Affiliated Purchasers
Between July, 2006 and September, 2006, we purchased an aggregate of 4,969 shares of our Common Stock in the open market, through a brokerage account (the "Brokerage Account") held in the name of Excellency Investment Realty Trust I, L.P., a limited partnership which is owned (i) 81% by the Company, and (ii) 19%, collectively, by David Mladen, our majority shareholder and sole officer and director, and his son, daughter-in-law, daughter, and son-in-law. For accounting purposes, these purchases were treated as treasury stock.
2,500 of the purchased shares were resold in the open market. The purchase price per share for these shares was between $8.16 and $24.44. The selling price per share for these shares was between $11.66 and $24.26. The difference between the aggregate purchase price and the aggregate sales price of $16,359 was recorded as additional paid in capital in the accompanying consolidated financial statements.
As of December 31, 2008, 2,469 remaining shares of our common stock are held in the Brokerage Account. We paid an aggregate of $34,168, or an average of $13.83 per share, for the 2,469 remaining shares of stock, and have recorded the acquisition of these shares as treasury stock shares at cost in the accompanying consolidated financial statements.
Item 6.
Item 6. Selected Financial Data
A smaller reporting company is not required to provide the information required by this item.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto, and other financial information included elsewhere in this Form 10-K. This report contains forward-looking statements that involve risks and uncertainties. Actual results in future periods may differ materially from those expressed or implied in such forward-looking statements as a result of a number of factors, including, but not limited to, the risks discussed under the heading "Risk Factors" and elsewhere in this Form 10-K.
Overview
Critical Accounting Policies, Estimates and New Accounting Pronouncements
The “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section includes a discussion of our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Our accounting policies are more fully described in Note 2 of “Notes to Consolidated Financial Statements.” However, certain policies are especially meaningful to our portrayal of results of operations and financial condition, and thus require the application of more particular judgment and thus are subject to a greater intrinsic level of risk. Accounting policies that involve estimates meeting both of the following criteria are considered by management to be “critical” accounting policies. First, the estimate requires us to make assumptions about matters that are highly uncertain at the time that the accounting estimate is made. Second, alternate estimates in the current period, or changes in the estimate that are reasonably likely in future periods, would have a material impact on the presentation of our financial condition, changes in financial condition or results of operations.
The following are summaries of our critical accounting policies:
Revenue Recognition
The Company records revenue each month of a tenant’s rental contract. It is at this point that the price is fixed per the rental agreement, collectability is reasonably assured based on a tenant’s rent payment, and the apartment unit has been provided to the tenant. The Company recognizes its revenues in the same manner as they are contractually earned as such policy complies with the following criteria: (i) persuasive evidence of an arrangement exists; (ii) the services have been provided; (iii) the fee is fixed and determinable; and, (iv) collectibility is reasonably assured.
Property, Equipment & Real Estate
Property, Equipment, Land, Buildings and Improvements are recorded at cost. Buildings and Improvements are depreciated over 27.5 years using the straight line method of depreciation. We changed the number of years for depreciation from 40 to 27.5, which was treated as a change in accounting estimate. Depreciation expense was $206,970 and $206,963 for 2008 and 2007 respectively. Total accumulated depreciation was $1,553,962 and $1,346,992 as of December 31, 2008 and 2007 respectively. Expenditures for maintenance and repairs, which do not generally extend the useful life of the related assets, are charged to operations as incurred. Gains or losses on disposal of property and equipment are reflected in the statement of income in the year of disposal.
Long-lived Assets
Long-lived assets consist of property and equipment. Long-lived assets are reviewed for impairment whenever events or circumstances indicate their carrying value may not be recoverable. When such events or circumstances arise, an estimate of the future undiscounted cash flows produced by the asset, or the appropriate grouping of assets, is compared to the asset's carrying value to determine if impairment exists pursuant to the requirements of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. If the asset is determined to be impaired, the impairment loss is measured based on the excess of its carrying value over its fair value. Assets to be disposed of are reported at the lower of their carrying value or net realizable value. This policy resulted in an asset impairment of $186,909 in 2007, which is reflected in Note 11.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. As of December 31, 2008 and 2007, the Company has no cash equivalents
Accounts Receivable - Tenants
Tenant receivables are reported net of an allowance for doubtful accounts. Management has elected to be as conservative as possible and included 100% of its moved out tenant receivables and 75% of its current tenant receivables in its allowance for doubtful accounts, even though it has judgments against many of the tenants. As of December 31, 2008, and 2007, the Company has recorded an allowance for doubtful accounts of $820,795 and $701,847, respectively. Any positive effect of collecting on these judgments has not been reflected in these statements. An allowance for doubtful accounts is established based upon the tenants’ aging and prior history with specific tenants.
Deferred Financing Costs
The Company incurred approximately $178,000 of deferred financing costs related to Mortgage Notes Payable, which is being amortized over the life of the mortgage notes payable (twelve years). Amortization expense, calculated using the effective interest method, was $13,175 and $10,810 for the years ended December 31, 2008 and 2007 respectively.
Escrow Account
The Company’s mortgage note holder requires the holding of escrow payments for the purposes of paying real estate taxes and insurance on the Company’s properties. The balance is recorded at cost.
Mortgage Notes Payable
The Mortgage Notes are collateralized by each respective Property. David Mladen, the Company's majority stockholder and an officer and director, has guaranteed up to 5% of the outstanding balance of the principal with interest for the life of the loan. These are reported at the then principal balance of the notes. The initial interest rate on the Mortgage Note of 5.625% will remain in effect for eighty four (84) months. Thereafter, the Mortgage Notes bear interest at a rate equal to the five (5) year "Fixed Rate Advance" as determined by the Federal Home Bank of New York, plus two and one half percent (2.5%), rounded to the nearest one-eighth of one percent (0.125%) and the interest rate will be adjusted every sixty (60) months. The loans are repayable in monthly installments of principal and interest (which total $47,343), due on the first day of each month, commencing February 1, 2006. The principal and interest payments are based on a 360 month amortization. The Mortgage Notes mature on January 1, 2018, at which time the entire unpaid principal balance, plus accrued interest thereon, shall be due.
Promissory Notes Payable - Related Party
On November 4, 2005 (the "Loan Date"), the Pre-Acquisition Eternal Stockholders of Eternal Enterprise, Inc., which were comprised of David Mladen, the Company's majority shareholder and the then sole officer and director, and Mr. Mladen's son, daughter-in-law, daughter, and son-in-law, exchanged, in the aggregate, 100% of the issued and outstanding shares of common stock of Eternal, for (i) limited partnership interests representing 20% of the total partnership interests in each of the Limited Partnerships, and (ii) unsecured promissory notes payable to the Pre-Acquisition Eternal Stockholders in the aggregate principal amount of $2,610,006 (the "LP Notes"), pursuant to Contribution Agreements between the Pre-Acquisition Eternal Stockholders and the Limited Partnerships. In consideration for the Company's ownership of 80% of the total partnership interests of each of the Limited Partnerships, the Company agreed to assume the LP Notes.
Security Deposits
The Company records security deposits received from tenant’s as a liability. Upon termination of occupancy, the security deposit (net of any costs incurred) is returned to the tenant.
Contingent Liabilities
The Company has previously accounted for registration rights agreements as a separate freestanding instrument and accounted for liquidated damages provision as a derivative liability in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," Emerging Issue Task Force ("EITF") 00-19, "Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Company's Own Stock," and EITF 05-04, "The Effect of a Liquidating Damages Clause in a Free Standing Financial Instrument Subject to EITF 00-19." Accordingly the liability was recorded at estimated fair value based on an estimate of the probability and costs of cash penalties being incurred and is revalued at each balance sheet date with changes in value recorded as other non-operating income or expenses.
As of January 1, 2007, the Company adopted EITF 00-19-2 which called for registration rights agreement penalties to be assessed pursuant to FASB Statement Number 5. After determining loss was probable, the Company, with the assistance of a valuation expert, assessed the probability of an effective registration statement and determined that based upon a probability analysis the contingent liability was $3,745,394 and $4,071,921 as of December 31, 2008 and 2007, respectively.
Fair Value of Financial Instruments
Accounting principles generally accepted in the United States of America require disclosing the fair value of financial instruments to the extent practicable for financial instruments, which are recognized or unrecognized in the balance sheet. The fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement. In assessing the fair value of these financial instruments, the Company uses a variety of methods and assumptions, which were based on estimates of market conditions and risks existing at that time. For certain instruments, including cash, accounts receivable, accounts payable, accrued interest and promissory notes payable, it was estimated that the carrying amount approximated fair value for the majority of these instruments because of their short maturity. The fair value of the Company's property and equipment is estimated to approximate their net book values.
Income Taxes
The Company accounts for income taxes under the provisions of SFAS No. 109, Accounting for Income Taxes. SFAS 109 requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Pursuant to SFAS No. 109 the Company is required to compute tax asset benefits for net operating losses carried forward. The potential benefit of net operating losses of $9,363,877 (which will begin to expire in the year 2026), has not been recognized in these financial statements because the Company cannot be assured it is more likely than not it will utilize the net operating losses carried forward in future years.
Stock-based Compensation
On January 1, 2006, the Company adopted SFAS 123 (revised 2004), Share-Based Payment (“SFAS 123(R)”), which requires the measurement and recognition of compensation expense for all share-based awards made to employees and directors, including employee stock options and shares issued through its employee stock purchase plan, based on estimated fair values. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin 107 (“SAB 107”) relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R). The Company adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of the beginning in 2006. The Company’s financial statements as of and for the year ended December 31, 2007 reflect the impact of SFAS 123(R). In accordance with the modified prospective transition method, the Company’s financial statements for prior periods do not include the impact of SFAS 123(R).
The Company’s determination of estimated fair value of share-based awards utilizes the Black-Scholes option-pricing model. The Black-Scholes model is affected by the Company’s stock price as well as assumptions regarding certain highly complex and subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors.
Going Concern
The Company has suffered recurring losses from operations. During the year ended December 31, 2008, the Company had a net loss of ($2,165,274), and has a net accumulated deficit of $16,916,897 as of December 31, 2008, all of which raise substantial doubt about the Company's ability to continue as a going concern. Management does plan to raise capital through any combination of debt and equity financing. However, the Company has no assurance that sufficient cash flow will be generated in the future to meet its operating requirements. As a result of the above, the accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Recent Accounting Pronouncements and Interpretations
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities-including an amendment of FASB Statement No. 115." FAS 159 became effective for the Company on January 1, 2008. This standard permits companies to choose to measure many financial instruments and certain other items at fair value and report unrealized gains and losses in earnings. Such accounting is optional and is generally to be applied instrument by instrument. The Company does not anticipate that election, if any, of this fair-value option will have a material effect on the consolidated results of operations, financial position or cash flows.
In December 2007, the FASB issued SFAS No. 141R, "Business Combinations, and SFAS No.160, "Non-Controlling Interest in Consolidated Financial Statements." SFAS No.141R requires an acquirer to measure the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquire at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. SFAS No. 160 clarifies that a non-controlling interest in a subsidiary should be reported as equity in the consolidated financial statements. The calculation of earnings per share will continue to be based on income amounts attributable to the parent. SFAS No.141R and SFAS No.160 are effective for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption is prohibited. We have not yet determined the effect on our consolidated financial statements, if any, upon adoption of SFAS No.141R or SFAS No.160. The implementation of the above pronouncements is not expected to have a material effect on the Company's consolidated financial statements or disclosures.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”. SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (“GAAP”) in the United States (the GAAP hierarchy). SFAS 162 becomes effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board (“PCAOB”) amendment to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles” and is not expected to have a significant impact on our consolidated financial statements.
Results of Operations - Comparison of Years Ended December 31, 2008 versus
The following summarizes changes in our operations for the twelve-month periods ended December 31, 2008 and 2007.
We had a net loss of $2,165,274 for 2008, compared to a net loss of $6,621,450 for same period in 2007. One of the main reasons for this reduction was a decrease in our general and administrative expenses of $529,691. In addition, in 2007, we incurred a loss on registration rights penalty of $5,094,721, as compared to $1,833,473 in 2008
Rental Revenue
Revenues increased $169,737, to $1,771,754 from $1,602,017, or approximately 11%, in 2008, compared to the same period in the prior year. This increase was primarily related to a combination of higher occupancy rates and higher rents at our Properties.
Property Operating Costs
Property operating costs decreased $135,460, to $1,074,159 from $1,209,619, or approximately 11%, in 2008 as compared to 2007. The decrease was primarily related to decreases in our supplies and repair costs.
General and Administrative
General and administrative expense decreased $529,691, to $205,743 in 2008, from $735,434 in 2007, or approximately 72%. The amount decreased primarily due to a decrease in professional fees we incurred, as compared to the prior year.
Depreciation and Amortization
Depreciation and amortization expense in 2008 was $220,143 as compared to $217,774, for the prior year, which is consistent year over year.
Interest Expense
Interest expense decreased $42,238, to $609,318 from $651,556, or approximately 6%, in 2008, as compared to 2007. The reason for this decrease was primarily related to decreased interest on outstanding promissory notes.
Loss on Registration Rights Penalty
In 2007, we incurred a registration rights penalty of $5,094,721, resulting from our failure to satisfy certain registration requirements, as further described in the "Liquidated Damages" section above. In 2008 the loss was $1,833,473, a 64% decrease.
Realized Loss from Sales of Trading Securities
In 2007, we had a realized loss on sales of trading securities of $158,921. During 2007, we discontinued our practice of trading equity securities of publicly traded companies. Therefore we did not have a similar loss in 2008.
Liquidity and Capital Resources
As of December 31, 2008, our cash and cash equivalents were $47,268, a decrease of $194,281 from the beginning of our fiscal year. All cash and cash equivalents are held in money market or checking accounts.
In previous periods we have suffered recurring losses from operations. As of December 31, 2008, we had a net stockholders' deficit of $14,665,411.
We expect that the rental income we receive from tenants of our properties will be our primary source of funds going forward. In order to acquire additional apartment properties, and, if necessary, to fund our operations, we may determine to take out additional loans from financial institutions or raise funds from one or a combination of debt offerings and equity offerings. Management plans to manage cash flows carefully. However, we have no assurance that sufficient cash flow will be generated in the future to meet our operating requirements. This raises substantial doubt about our ability to continue as a going concern.
Uses of Capital
Net Cash From Operations
During 2008, $31,413 was provided by operations, compared to $503,536 used in operations in 2007. The main reasons for this change were a $832,519 increase in operating income for 2008, as compared to 2007, partially offset by a reduction of $135,211 in our accounts payable and accrued expenses for the period, combined with our loss on sale of trading securities of $158,921 in the same period in 2007, which was not repeated in 2008.
Net Cash From Investing Activities
During 2008, $0 cash was provided by investing activities, compared to $95,379 provided by investing in 2007. The reason for this change was our discontinuance of our practice of trading equity securities of publicly traded companies prior to 2008.
Net Cash From Financing Activities
During 2008, we used $225,694 in financing activities, compared to $444,037 used in 2007.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
A smaller reporting company is not required to provide the information required by this item.
Item 8.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Excellency Investment Realty Trust, Inc.
We have audited the accompanying consolidated balance sheets of Excellency Investment Realty Trust, Inc. as of December 31, 2008 and 2007 and the related consolidated statements of operations, changes in stockholders' deficit, and cash flows for the periods then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Excellency Investment Realty Trust, Inc. as of December 31, 2008 and 2007, and the results of its operations, changes in stockholders' deficit and cash flows then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company suffered a net loss from operations and has a net capital deficiency, which raises substantial doubt about its ability to continue as a going concern. Management's plans regarding those matters also are described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
As discussed in Note 14 to the financial statements, the Company has restated its consolidated financial statements as of and for the year ended December 31, 2007 to write off unsupported assets and record an accrued registration rights penalty. Unaudited restatement information is presented in Note 14 for the year ended December 31, 2007.
/s/ M&K CPAS, PLLC
Houston, Texas
www.mkacpas.com
April 13,
EXCELLENCY INVESTMENT REALTY TRUST, INC.
(FORMERLY KNOWN AS GIFT LIQUIDATORS, INC.)
CONSOLIDATED BALANCE SHEETS
As of December 31, 2008 and 2007 (RESTATED)
EXCELLENCY INVESTMENT REALTY TRUST, INC.
(FORMERLY KNOWN AS GIFT LIQUIDATORS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 (RESTATED)
See accompanying notes to consolidated financial statements.
EXCELLENCY INVESTMENT REALTY TRUST, INC.
(FORMERLY KNOWN AS GIFT LIQUIDATORS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 (RESTATED)
See accompanying notes to consolidated financial statements.
EXCELLENCY INVESTMENT REALTY TRUST, INC.
(FORMERLY KNOWN AS GIFT LIQUIDATORS, INC.)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
JANUARY 1, 2007 THROUGH DECEMBER 31, 2008
See accompanying notes to consolidated financial statements
EXCELLENCY INVESTMENT REALTY TRUST, INC.
(FORMERLY KNOWN AS GIFT LIQUIDATORS, INC.)
Notes to Financial Statements
Note 1 - ORGANIZATION AND NATURE OF BUSINESS
Company Background
Excellency Investment Realty Trust, Inc. (f/k/a Gift Liquidators, Inc.) and its predecessor companies were originally incorporated in 1963 as Dorsett Educational Systems, Inc. ("Dorsett"). From 1963 through the mid-1980's, Dorsett was in the business of developing and marketing educational material. During that same period, the stock of Dorsett was publicly traded.
In 1990, Dorsett acquired, in a stock for stock exchange, a privately owned business that developed, marketed and distributed a diverse line of gift and novelty products, and changed its name to Laid Back Enterprises, Inc. ("Laid Back"). From that date, until December 2002, Laid Back continued its development, marketing and distribution of gift products, seasonal retailing and closeout liquidation of gift products.
On December 20, 2002, Laid Back's shareholders voted to split-off its gift inventory liquidation business from its gift design and merchandising business. Pursuant to a Split-Off Agreement, dated December 20, 2002 (the "Split-Off Agreement"), Laid Back distributed its gift design and merchandising business to Max Colclasure and Ronald Hurt in exchange for a substantial portion of the shares of Laid Back owned by Mr. Colclasure and Mr. Hurt. The shareholders also voted to approve a change of name from Laid Back to Gift Liquidators, Inc.
Prior to the split-off, Mr. Colclasure and Mr. Hurt owned 64.72% and 6.42% of the stock of Laid Back, respectively. Minority shareholders owned the remaining outstanding stock. Subsequently, Mr. Colclasure and Mr. Hurt acquired all of the remaining outstanding stock of the gift design and merchandising business, thereafter known as Laid Back, and Mr. Colclasure acquired 25.78% of the gift inventory liquidation business now known as Gift Liquidators, Inc. (hereinafter, the "Company"), with the remaining shareholders owning 74.22% of the Company.
Pursuant to the Split-Off Agreement, on December 20, 2002, all of the assets, liabilities and operations were transferred to Laid Back, except for gift liquidation inventory valued at $400,019, which was retained by the Company. In addition, all employees of the Company became employees of Laid Back. Since the Company had no employees, it entered into an Administrative Services Agreement with Laid Back, dated December 20, 2002 (the "Administrative Services Agreement"), to share administrative functions and personnel. The administrative services, for which the Company reimbursed Laid Back, included sales, marketing, accounting and customer service. In addition, the Company entered into a Tax Sharing Agreement with Laid Back, dated December 20, 2002 (the "Tax Sharing Agreement"), pursuant to which the Company shared certain tax responsibilities with Laid Back.
During the third quarter of 2005, the Company's management determined that it would no longer pursue its interests in the gift liquidation business. As of September 28, 2005 (the "Closing Date"), the Company entered into a Preferred Stock Purchase Agreement with David Mladen, pursuant to which Mr. Mladen purchased 11,000 shares of the Company's Series A Convertible Preferred Stock, $0.01 par value per share ("Series A Preferred Stock"), for an aggregate purchase price of $10,000 (the "Preferred Stock Purchase Transaction"). As of the Closing Date, each share of the Company's Series A Preferred Stock was convertible at any time, at the holder's option, into 5 shares of the Company's common stock, $0.01 par value per share ("Common Stock"), subject to adjustment for stock dividends, stock splits, reclassifications, and similar events.
In addition, as of the Closing Date, two of the Company's former stockholders, including Mr. Colclasure, a former officer and director of the Company, sold an aggregate of 33,761 shares of the Company's Common Stock to Mr. Mladen, which amount represented 28.6% of the Company's issued and outstanding Common Stock, for an aggregate purchase price of $325,000 (the "Common Stock Purchase Transaction").
Further, as of the Closing Date, the Company's existing officers and directors resigned, and Mr. Mladen was appointed as the Company's sole officer and director.
As a result of the Preferred Stock Purchase Transaction and the Common Stock Purchase Transaction (jointly, the "Purchase Transactions"), as of the Closing Date, Mr. Mladen owned and/or controlled approximately 51% of the Company's voting power. By virtue of (i) the percentage of the Company's Common Stock Mr. Mladen acquired, (ii) the number of shares of Common Stock Mr. Mladen would receive upon conversion of the shares of Preferred Stock he purchased, (iii) the resignation of all of the Company's officers and directors, and (iv) the appointment of Mr. Mladen as the Company's sole officer and director, there was deemed to have been a "change in control" of the Company as of the Closing Date.
As of the Closing Date, the Company:
·
terminated its Administrative Services Agreement with Laid Back;
·
terminated its Tax Sharing Agreement with Laid Back; and
·
entered into an Asset Sale Agreement with Laid Back (the "Asset Sale Agreement").
Pursuant to the Asset Sale Agreement, effective as of the Closing Date, the Company sold all of its non-cash assets, including certain inventory, to Laid Back, in exchange for the cancellation of the Company's indebtedness to Laid Back in the aggregate amount of $50,485. As a result of the above transactions, the Company became a "shell company", as defined by Securities Act Rule 405 and Exchange Act Rule 12b-2 as a company other than an asset-backed issuer, with (a) no or nominal operations, and (b) either (i) no or nominal assets; (ii) assets consisting solely of cash and cash equivalents; or (iii) assets consisting of any amount of cash and cash equivalents and other nominal assets.
FIN 46R, which amended FIN 46, "Consolidation of Variable Interest Entities," an interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," requires an existing unconsolidated variable interest entity to be consolidated by its primary beneficiary if the entity does not effectively disperse risk among all parties involved or if other parties do not have significant capital to finance activities without subordinated financial support from the primary beneficiary. White Knight Management, LLC is now considered a VIE and the Company its primary beneficiary both as of December 31, 2008 and 2007, and as a result is consolidated within the balances presented on the financial statements.
Note 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNING POLICIES
Audited Consolidated Financial Statements
The December 31, 2008 consolidated financial statements presented herein are audited, and in the opinion of management, include all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of financial position, results of operations and cash flows.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Excellency Investment Realty Trust, Inc., its controlled subsidiaries comprised of certain Limited Partnerships (see Note 1), and Eternal Enterprise, Inc. (wholly owned in the aggregate by the Limited Partnerships) (hereinafter collectively referred to as the "Company"). As noted above, the historical financial statements as presented reflect the operations of Eternal as a result of the Reverse Merger. The Company records minority interest for the non-owned portions of consolidated subsidiaries, however, these subsidiaries have not generated any income to warrant the recording of such minority interests through December 31, 2008. All significant inter-company transactions and accounts have been eliminated in the consolidated financial statements.
The accompanying consolidated financial statements include accounts of White Knight Management, LLC. in which the Company has a controlling financial interest. The usual condition for a controlling financial interest is ownership of a majority of the voting interests of an entity. However, a controlling financial interest may also exist in entities, such a special purpose entity ("SPE"), through arrangements that do not involve voting interest. The Company has determined that White Knight Management, LLC is a VIE and that the Company is the primary beneficiary as of December 31, 2008 and 2007.
Revenue Recognition
The Company records revenue each month of a tenant’s rental contract. It is at this point that the price is fixed per the rental agreement, collectability is reasonably assured based on a tenant’s rent payment, and the apartment unit has been provided to the tenant. The Company recognizes its revenues in the same manner as they are contractually earned as such policy complies with the following criteria: (i) persuasive evidence of an arrangement exists; (ii) the services have been provided; (iii) the fee is fixed and determinable; and, (iv) collectibility is reasonably assured.
Property, Equipment & Real Estate
Property, Equipment, Land, Buildings and Improvements are recorded at cost. Buildings and Improvements are depreciated over 27.5 years using the straight line method of depreciation. We changed the number of years for depreciation from 40 to 27.5, which was treated as a change in accounting estimate. Depreciation expense was $206,968 and $206,963 for 2008 and 2007, respectively. Total accumulated depreciation was $1,553,962 and $1,346,992 as of December 31, 2008 and 2007 respectively. Expenditures for maintenance and repairs, which do not generally extend the useful life of the related assets, are charged to operations as incurred. Gains or losses on disposal of property and equipment are reflected in the statement of income in the year of disposal.
Long-lived Assets
Long-lived assets consist of property and equipment. Long-lived assets are reviewed for impairment whenever events or circumstances indicate their carrying value may not be recoverable. When such events or circumstances arise, an estimate of the future undiscounted cash flows produced by the asset, or the appropriate grouping of assets, is compared to the asset's carrying value to determine if impairment exists pursuant to the requirements of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. If the asset is determined to be impaired, the impairment loss is measured based on the excess of its carrying value over its fair value. Assets to be disposed of are reported at the lower of their carrying value or net realizable value. This policy resulted in an asset impairment of $186,909 in 2007, which is reflected in Note 14.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. As of December 31, 2008 and 2007, the Company has no cash equivalents
Accounts Receivable - Tenants
Tenant receivables are reported net of an allowance for doubtful accounts. Management has elected to be as conservative as possible and included 100% of its moved out tenant receivables and 75% of its current tenant receivables in its allowance for doubtful accounts, even though it has judgments against many of the tenants. As of December 31, 2008, and 2007, the Company has recorded an allowance for doubtful accounts of $820,795 and $701,847, respectively. Any positive effect of collecting on these judgments has not been reflected in these statements. An allowance for doubtful accounts is established based upon the tenants’ aging and prior history with specific tenants.
Deferred Financing Costs
The Company incurred approximately $178,000 of deferred financing costs related to Mortgage Notes Payable, which is being amortized over the life of the mortgage notes payable (twelve years). Amortization expense, calculated using the effective interest method, was $13,175 and $10,810 for the years ended December 31, 2008 and 2007 respectively.
Escrow Account
The Company’s mortgage note holder requires the holding of escrow payments for the purposes of paying real estate taxes and insurance on the Company’s properties. The balance is recorded at cost.
Mortgage Notes Payable
The Mortgage Notes are collateralized by each respective Property. David Mladen, the Company's majority stockholder and an officer and director, has guaranteed up to 5% of the outstanding balance of the principal with interest for the life of the loan. These are reported at the then principal balance of the notes. The initial interest rate on the Mortgage Note of 5.625% will remain in effect for eighty four (84) months. Thereafter, the Mortgage Notes bear interest at a rate equal to the five (5) year "Fixed Rate Advance" as determined by the Federal Home Bank of New York, plus two and one half percent (2.5%), rounded to the nearest one-eighth of one percent (0.125%) and the interest rate will be adjusted every sixty (60) months. The loans are repayable in monthly installments of principal and interest (which total $47,343), due on the first day of each month, commencing February 1, 2006. The principal and interest payments are based on a 360 month amortization. The Mortgage Notes mature on January 1, 2018, at which time the entire unpaid principal balance, plus accrued interest thereon, shall be due.
Promissory Notes Payable - Related Party
On November 4, 2005 (the "Loan Date"), the Pre-Acquisition Eternal Stockholders of Eternal Enterprise, Inc., which were comprised of David Mladen, the Company's majority shareholder and the then sole officer and director, and Mr. Mladen's son, daughter-in-law, daughter, and son-in-law, exchanged, in the aggregate, 100% of the issued and outstanding shares of common stock of Eternal, for (i) limited partnership interests representing 20% of the total partnership interests in each of the Limited Partnerships, and (ii) unsecured promissory notes payable to the Pre-Acquisition Eternal Stockholders in the aggregate principal amount of $2,610,006 (the "LP Notes"), pursuant to Contribution Agreements between the Pre-Acquisition Eternal Stockholders and the Limited Partnerships. In consideration for the Company's ownership of 80% of the total partnership interests of each of the Limited Partnerships, the Company agreed to assume the LP Notes.
Security Deposits
The Company records security deposits received from tenant’s as a liability. Upon termination of occupancy, the security deposit (net of any costs incurred) is returned to the tenant.
Contingent Liabilities
The Company has previously accounted for registration rights agreements as a separate freestanding instrument and accounted for liquidated damages provision as a derivative liability in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," Emerging Issue Task Force ("EITF") 00-19, "Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Company's Own Stock," and EITF 05-04, "The Effect of a Liquidating Damages Clause in a Free Standing Financial Instrument Subject to EITF 00-19." Accordingly the liability was recorded at estimated fair value based on an estimate of the probability and costs of cash penalties being incurred and is revalued at each balance sheet date with changes in value recorded as other non-operating income or expenses.
As of January 1, 2007, the Company adopted EITF 00-19-2 which called for registration rights agreement penalties to be assessed pursuant to FASB Statement Number 5. After determining loss was probable, the Company, with the assistance of a valuation expert, assessed the probability of an effective registration statement and determined that based upon a probability analysis the contingent liability was $3,745,394 and $4,071,921 as of December 31, 2008 and 2007, respectively.
Fair Value of Financial Instruments
Accounting principles generally accepted in the United States of America require disclosing the fair value of financial instruments to the extent practicable for financial instruments, which are recognized or unrecognized in the balance sheet. The fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement. In assessing the fair value of these financial instruments, the Company uses a variety of methods and assumptions, which were based on estimates of market conditions and risks existing at that time. For certain instruments, including cash, accounts receivable, accounts payable, accrued interest and promissory notes payable, it was estimated that the carrying amount approximated fair value for the majority of these instruments because of their short maturity. The fair value of the Company's property and equipment is estimated to approximate their net book values.
Income Taxes
The Company accounts for income taxes under the provisions of SFAS No. 109, Accounting for Income Taxes. SFAS 109 requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Pursuant to SFAS No. 109 the Company is required to compute tax asset benefits for net operating losses carried forward. The potential benefit of net operating losses of $9,363,877, has not been recognized in these financial statements because the Company cannot be assured it is more likely than not it will utilize the net operating losses carried forward in future years.
Stock-based Compensation
On January 1, 2006, the Company adopted SFAS 123 (revised 2004), Share-Based Payment (“SFAS 123(R)”), which requires the measurement and recognition of compensation expense for all share-based awards made to employees and directors, including employee stock options and shares issued through its employee stock purchase plan, based on estimated fair values. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin 107 (“SAB 107”) relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R). The Company adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of the beginning in 2006. The Company’s financial statements as of and for the year ended December 31, 2007 reflect the impact of SFAS 123(R). In accordance with the modified prospective transition method, the Company’s financial statements for prior periods do not include the impact of SFAS 123(R).
The Company’s determination of estimated fair value of share-based awards utilizes the Black-Scholes option-pricing model. The Black-Scholes model is affected by the Company’s stock price as well as assumptions regarding certain highly complex and subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors.
Loss Per Common Share
Net loss per common share is based on the weighted average number of shares of common stock outstanding during the applicable period. Basic loss per share is computed by dividing loss available to common stockholders by the weighted average number of common shares outstanding during the period. The common stock equivalents for the Company's preferred stock and treasury shares were not included in the computation of diluted loss per share because that would have diluted earnings per share that had a basic loss per share of $0.05 and $0.15, for the years ended December 31, 2008 and 2007, respectively.
Recent Accounting Pronouncements and Interpretations
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities-including an amendment of FASB Statement No. 115." FAS 159 became effective for the Company on January 1, 2008. This standard permits companies to choose to measure many financial instruments and certain other items at fair value and report unrealized gains and losses in earnings. Such accounting is optional and is generally to be applied instrument by instrument. The Company does not anticipate that election, if any, of this fair-value option will have a material effect on the consolidated results of operations, financial position or cash flows.
In December 2007, the FASB issued SFAS No. 141R, "Business Combinations, and SFAS No.160, "Non-Controlling Interest in Consolidated Financial Statements." SFAS No.141R requires an acquirer to measure the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquire at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. SFAS No. 160 clarifies that a non-controlling interest in a subsidiary should be reported as equity in the consolidated financial statements. The calculation of earnings per share will continue to be based on income amounts attributable to the parent. SFAS No.141R and SFAS No.160 are effective for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption is prohibited. We have not yet determined the effect on our consolidated financial statements, if any, upon adoption of SFAS No.141R or SFAS No.160. The implementation of the above pronouncements is not expected to have a material effect on the Company's consolidated financial statements or disclosures.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”. SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (“GAAP”) in the United States (the GAAP hierarchy). SFAS 162 becomes effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board (“PCAOB”) amendment to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles” and is not expected to have a significant impact on our consolidated financial statements.
Financial Statement Presentation
Because the Company is engaged in the rental and sale of real estate, the operating cycle may extend beyond one year. Accordingly, following the usual practice of the real estate industry, the accompanying consolidated balance sheet is unclassified.
Use of Estimates
The preparation of the Company's consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. Management makes these estimates using the best information available at the time the estimates are made; however actual results could differ materially from those estimates.
Note 3 - GOING CONCERN
The Company has suffered recurring losses from operations. During the year ended December 31, 2008, the Company had a net loss of ($2,165,274), and has a net accumulated deficit of $16,916,897 as of December 31, 2008, all of which raise substantial doubt about the Company's ability to continue as a going concern. Management does plan to raise capital through any combination of debt and equity financing. However, the Company has no assurance that sufficient cash flow will be generated in the future to meet its operating requirements. As a result of the above, the accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Note 4 - NOTES PAYABLE
Promissory Notes Payable - Related Parties
On November 4, 2005 (the "Loan Date"), the Pre-Acquisition Eternal Stockholders of Eternal Enterprise, Inc., which were comprised of David Mladen, the Company's majority shareholder and the then sole officer and director, and Mr. Mladen's son, daughter-in-law, daughter, and son-in-law, exchanged, in the aggregate, 100% of the issued and outstanding shares of common stock of Eternal, for (i) limited partnership interests representing 20% of the total partnership interests in each of the Limited Partnerships, and (ii) unsecured promissory notes payable to the Pre-Acquisition Eternal Stockholders in the aggregate principal amount of $2,610,006 (the "LP Notes"), pursuant to Contribution Agreements between the Pre-Acquisition Eternal Stockholders and the Limited Partnerships. In consideration for the Company's ownership of 80% of the total partnership interests of each of the Limited Partnerships, the Company agreed to assume the LP Notes.
The interest rate on the LP Notes is 7% per annum. The entire balance of principal and interest of the LP Notes is due and payable on November 4, 2010. The LP Notes may be prepaid without penalty. All payments shall be applied first toward the payment of interest and the balance towards the reduction of principal.
As of December 31, 2008 and 2007, the LP Notes payable were $2,166,698 and $2,292,871, respectively.
Principal payment maturities on the mortgage outstanding at December 31, 2008 are:
Mortgage Notes Payable
On December 27, 2005, the Company borrowed an aggregate of $8,224,000 from Astoria Federal Mortgage Corp. ("Astoria"), in connection with the refinancing of the Properties, evidenced by eight notes payable (the "Mortgage Notes"). The initial interest rate on the Mortgage Note of 5.625% will remain in effect for eighty four (84) months. Thereafter, the Mortgage Notes bear interest at a rate equal to the five (5) year "Fixed Rate Advance" as determined by the Federal Home Bank of New York, plus two and one half percent (2.5%), rounded to the nearest one-eighth of one percent (0.125%) and the interest rate will be adjusted every sixty (60) months. The loans are repayable in monthly installments of principal and interest (which total $47,343), due on the first day of each month, commencing February 1, 2006. The principal and interest payments are based on a 360 month amortization. The Mortgage Notes mature on January 1, 2018, at which time the entire unpaid principal balance, plus accrued interest thereon, shall be due.
The Mortgage Notes are collateralized by each respective Property. David Mladen, the Company's majority stockholder and an officer and director, has guaranteed up to 5% of the outstanding balance of the principal with interest for the life of the loan. The Company incurred approximately $178,000 of deferred financing costs related to these loans, which is being amortized over the life of the mortgage notes payable (twelve years). Amortization expense, calculated using the effective interest method, was $13,175 and $10,810 for the years ended December 31, 2008 and 2007, respectively.
The following sets forth the amounts outstanding on each of the Notes as of December 31, 2008, and the required monthly principal and interest payments:
In connection with the refinancing described above, the Company defeased its existing mortgage with Credit Suisse First Boston Mortgage Capital, LLC. The Company incurred approximately $654,000 in costs associated with the defeasance. Additionally, the Company wrote-off the remaining deferred financing costs related to the mortgage totaling approximately $110,000. The remaining funds have been used to purchase all of the limited partnership interests of our subsidiary Limited Partnerships owned by Goran Mladen, the son of the Company's sole officer and director and majority stockholder, and for working capital purposes.
Principal payment maturities on the mortgage outstanding at December 31, 2008 are:
Note 5 - INVESTMENTS IN TRADING SECURITIES
The Company's investments are comprised of equity securities of publicly traded companies. During the year ended December 31, 2007, the Company sold its investments for a realized loss of $158,921. As of December 31, 2008, the Company no longer held any investments.
Between July, 2006, and September, 2006, the Company purchased an aggregate of 4,969 shares of its common stock in the open market, through a brokerage account held in the name of Excellency Investment Realty Trust I, L.P., a limited partnership which is owned (i) 81% by the Company, and (ii) 19%, collectively, by David Mladen, the Company's majority shareholder and sole officer and director, and his son, daughter-in-law, daughter, and son-in-law. For accounting purposes, these purchases were treated as treasury stock of which 2,500 of the purchased shares were resold in the open market. The purchase price of these shares was between $8.16 and $24.44, and the selling price per share was between $11.66 and $24.26, or an average aggregate sales price of $17.44. The difference between the purchased price and the sales price of $16,359 was recorded as additional paid in capital in the accompanying consolidated financial statements. The Company paid $34,168 or $13.83 per share for these 2,469 shares of stock, and has recorded the acquisition of these shares as treasury stock shares at cost in the accompanying consolidated financial statements. As of December 31, 2008, 2,469 shares of the Company's common stock are held in the Company's brokerage account. The Company plans to hold and not sell the Treasury Stock.
Note 6 - RELATED PARTY TRANSACTIONS
Rent-Free Apartments
The Company provided a rent-free apartment to David Mladen, its majority shareholder and an officer and director. As a result, the Company has recorded compensation expense to David Mladen in the aggregate amount of $6,000, for the year ended December 31, 2008, which was the fair value of apartment rental.
See related party note disclosure in Note 4.
Note 7 - STOCKHOLDERS' DEFICIT
Liquidated Damages
In connection with David Mladen's purchase of 11,000 shares of the Company's Series A Preferred Stock (the "Series A Preferred Stock"), the Company entered into a Registration Rights Agreement with Mr. Mladen (the "Registration Rights Agreement"), pursuant to which the Company agreed to prepare and, on or prior to the sixtieth (60th) day following the date of such purchase, file with the Securities and Exchange Commission ("SEC"), a Resale Registration Statement on Form SB-2 (the "Resale Registration Statement"), to register all of the shares of the Company's Common Stock underlying the Series A Preferred Stock (the "Conversion Shares"). Further, pursuant to the Registration Rights Agreement, the Company is required to use best efforts to (a) have the SEC declare the Resale Registration Statement effective within ninety (90) days after filing the Resale Registration Statement with the SEC (or one hundred and twenty (120) days in the event any comments on the Registration Statement are received from the SEC), and (b) maintain the effectiveness of the Resale Registration Statement until all such common shares have been sold or may be sold without volume restrictions pursuant to Rule 144(k) of the Securities Act of 1933, as amended.
If the Company (i) fails to file the Resale Registration Statement, or (ii) fails to have the Registration Statement declared effective within the required period, or (iii) if effectiveness is not maintained, the Registration Rights Agreement requires the Company to make payments to Mr. Mladen in an aggregate amount equal to two percent (2%) per month of $9,000,000 (assuming the sale of $9,000,000 of the aggregate fair market value of the Conversion Shares) ("Outstanding Principal Amount"), multiplied by the number of months (prorated for partial months) until the failure is cured.
As of June 30, 2006, the Resale Registration Statement had not been filed. At that time, Mr. Mladen agreed to waive $1,174,000 of liquidated damages due to him, and such amount was accounted for as a contribution of capital as of that date.
On October 24, 2006, the Resale Registration Statement had still not been filed. At that time, Mr. Mladen agreed to waive an additional $720,000 in liquidated damages, for the period between July 1, 2006, and October 31, 2006, in consideration for 43,500 shares of the Company's Series C Preferred Stock.
As of December 31, 2006, $720,000 of these liquidated damages have been issued as preferred stock and subsequently converted to common stock.
As of December 31, 2007, the Resale Registration Statement had still not been filed, and the accrued liability of $2,264,000 had been recorded.
As of December 31, 2008, the Resale Registration Statement had still not been filed, and the accrued liability of $2,160,000 had been recorded, resulting in a balance of $4,424,000.
On November 29, 2006, the Company filed a Registration Statement on Form SB-2 (the "Resale Registration Statement") with the Securities and Exchange Commission (the "Commission") to register (i) 5,000,000 shares of common stock issuable to Dutchess Private Equities Fund, LP ("Dutchess") in connection with an Investment Agreement between the Company and Dutchess and (ii) 1,573,000 shares of Common Stock issuable upon conversion of shares of the Company's Series A Convertible Preferred Stock held by David Mladen, the Company's sole officer, director and majority shareholder.
On February 2, 2007, the Company filed a request to withdraw the Registration Statement with the Commission. Mr. Mladen had agreed to waive the liquidated damages which were due to him through June 30, 2007, but as a result of the withdrawal of the Registration Statement the contingent liability increased to $4,071,921 as of December 31, 2007, and the accrued liability increased to $2,264,000 as of December 31, 2007, and $4,424,000 as of December 31, 2008.
The Company had adopted View C of EITF 05-4, "Effect of Liquidated Damages Clause on a Freestanding Financial Instrument Subject to EITF 00-19" ("EITF 05-4"). Accordingly, the Company classified as liability instruments, the fair value of registration rights agreements when such agreements (i) require it to file, and cause to be declared effective under the Securities Act, a registration statement with the SEC within contractually fixed time periods, and (ii) provide for the payment of liquidating damages in the event of its failure to comply with such agreement.
Previously under View C of EITF 05-4, (i) registration rights with these characteristics were accounted for as derivative financial instruments at fair value and (ii) contracts that are (a) indexed to and potentially settled in an issuer's own stock and (b) permit gross physical or net share settlement with no net cash settlement alternative were classified as equity instruments. The Company has adopted EITF 00-19-2 and as a result no longer classifies these registration rights as a derivative instrument. Due to the probable loss, the Company, with the help of a valuation specialist, determined the likely settlement to be $3,745,394 and $4,071,921 at December 31, 2008 and 2007, respectively, which is accrued as a contingent liability.
Series A Preferred Stock
As of September 28, 2005, the Company filed a Certificate of Designation of Series A Convertible Preferred Stock (the "Series A Certificate of Designation") designating a Series of 11,000 shares of Series A Convertible Preferred Stock, $0.01 par value per share (the "Series A Preferred Stock"). Pursuant to the Series A Certificate of Designation, as amended on July 12, 2006, holders of the Company's Series A Preferred Stock:
o
shall be entitled to cast one hundred forty three (143) votes per share of Series A Preferred Stock upon all matters submitted to a vote of the holders of the Company's Common Stock;
o
shall be entitled to receive dividends when and as declared by the Company's Board of Directors; and
o
shall be entitled to convert each of their shares of Series A Preferred Stock into one hundred forty three (143) shares of the Company's Common Stock, at any time, and from time to time, for no additional consideration.
The shares of Series A Preferred Stock:
o
shall be not be reissued after they are reacquired by the Company by reason of repurchase or otherwise, and all such shares shall be returned to the status of undesignated shares of the Company's Preferred Stock; and
o
shall be adjusted in the event of stock splits, stock combinations, mergers, reorganizations, or other such events.
On March 6, 2007, David Mladen, the Company's majority stockholder and an officer and director, converted 1,000 shares of the Company's Series A Preferred Stock into 143,000 shares of the Company's common stock.
As of December 31, 2008, 10,000 shares of the Company's Series A Preferred Stock were issued and outstanding, and held by David Mladen, the Company's majority shareholder and an officer and director.
Series B Preferred Stock
On March 10, 2006, the Company filed a Certificate of Designation of Series B Preferred Stock (the "Series B Certificate of Designation") designating a series of 20,000 shares of Preferred Stock of the Company, $0.01 par value (the "Series B Preferred Stock"). Pursuant to the Series B Certificate of Designation, holders of the
Company's Series B Preferred Stock:
o
shall be entitled to cast one hundred (100) votes per share of Series B Preferred Stock upon all matters submitted to a vote of the holders of the Company's Common Stock;
o
shall not be entitled to receive dividends when and as declared, out of the Company's net profits;
o
shall not be entitled to a liquidation preference in the event of any liquidation, dissolution or winding up of the Company; and
o
shall not be entitled to convert their shares of Series B Preferred Stock into shares of the Company's Common Stock.
In addition, the shares of Series B Preferred Stock:
o
shall not be redeemable by the Company;
o
shall rank junior to all other series of the Company's Preferred Stock as to the distributions of assets, unless the terms of any such series shall provide otherwise;
o
shall be not be reissued after they are reacquired by the Company by reason of repurchase or otherwise, and all such reacquired shares shall be returned to the status of undesignated shares of the Company's Preferred Stock; and
o
shall be adjusted in the event of stock splits, stock combinations, mergers, reorganizations, or other such events.
So long as any shares of Series B Preferred Stock remain issued and outstanding, the Company shall not, without the consent of the holders of a majority of the shares of Series B Preferred Stock then outstanding:
o
amend, alter or repeal any provision of the Company's Certificate of Incorporation (including the Certificate of Designation), or Bylaws;
o
authorize, or increase the authorized amount of any additional class or series of stock; or
o
effect any reclassification of the Series B Preferred Stock.
The Series B Certificate of Designation may be amended by vote of both the Company's Board of Directors and the holders of a majority of the outstanding shares of Series B Preferred Stock.
As of December 31, 2007 and 2008, no shares of the Company's Series B Preferred Stock were issued or outstanding.
Series C Convertible Preferred Stock
On October 6, 2006, the Company's Board of Directors approved the reclassification and designation of 43,500 shares of the Company's authorized preferred stock, $0.01 par value per share, designated as series C convertible preferred stock ("Series C Preferred Stock"). On October 11, 2006, the Company filed Articles Supplementary to the Articles (the "Articles Supplementary") with the State Department of Assessments and Taxation of Maryland, reclassifying and designating the Series C Preferred Stock and fixing the rights and preferences of such series. Pursuant to the Articles Supplementary, the holders of the Company's Series C Preferred Stock:
o
shall be entitled to cast one thousand (1,000) votes per share of Series C Preferred Stock upon all matters submitted to a vote of the holders of the Company's Common Stock;
o
shall be entitled to receive dividends when and as declared by the Company's Board of Directors; and
o
shall be entitled to convert each of their shares of Series C Preferred Stock into one thousand (1,000) shares of the Company's Common Stock, at any time, and from time to time, for no additional consideration.
The shares of Series C Preferred Stock:
o
shall be not be reissued after they are reacquired by the Company by reason of repurchase or otherwise, and all such shares shall be returned to the status of undesignated shares of the Company's Preferred Stock; and
o
shall be adjusted in the event of stock splits, stock combinations, mergers, reorganizations, or other such events.
On October 18, 2006, the Company issued the 43,500 shares of Series C Preferred Stock (the "Series C Preferred Shares") to David Mladen, the Company's majority shareholder and sole officer and director. The Series C Preferred Shares were issued to Mr. Mladen in consideration for his agreement to waive $720,000 of liquidated damages due to him, for the period of July 1, 2006 through October 31, 2006, by virtue of the Company's failure to satisfy certain of its registration requirements.
On October 24, 2006, Mr. Mladen converted the Series C Preferred Shares into 43,500,000 shares of the Company's Common Stock.
Note 8 - CONTINGENCY
Periodic Filings
Under a 2005 rule change, OTC Bulletin Board ("OTCBB") issuers that are cited for filing delinquency three times in a 24-month period and those removed for failure to file two times in a 24-month period will be ineligible for quotation by an NASD member. Following removal under this new rule, an issuer's securities would again become eligible for quotation on the OTCBB when the issuer has filed periodic reports for one year in a timely manner.
In 2008 the Company has been late in two of its periodic filings with the Securities and Exchange Commission ("SEC"). Accordingly, the Company may be ineligible for quotation by an NASD member if it is delinquent one more time in its periodic filings with the SEC during the applicable 24-month period.
Note 9 - INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109, Accounting for Income Taxes. SFAS 109 requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Pursuant to SFAS No. 109 the Company is required to compute tax asset benefits for net operating losses carried forward. The potential benefit of net operating losses of $9,363,877 (which begin to expire in 2026), has not been recognized in these financial statements because the Company cannot be assured it is more likely than not it will utilize the net operating losses carried forward in future years.
Note 10 - PROPERTY, PLANT AND EQUIPMENT
Property, Equipment, Land, Buildings and Improvements are recorded at cost. Buildings and Improvements are depreciated over 27.5 years using the straight line method of depreciation. We changed the number of years for depreciation from 40 to 27.5, which was treated as a change in accounting estimate. Depreciation expense was $206,968 and $206,963 for 2008 and 2007 respectively. Total accumulated depreciation was $1,553,962 and $1,346,992 as of December 31, 2008 and 2007 respectively. The change in estimate resulted in lower depreciation expense and higher net income of approximately $83,000 in 2007, the first year of the change.
These assets serve as collateral for the mortgages notes that they are financed by.
Note 11 - CONCENTRATIONS
The company is dependent upon the real estate market, which is currently in decline. If the market should continue to decline, it could have an adverse impact on Excellency’s business.
Note 12 - CONTINGENCY & COMMITMENT
Leases and payouts of the Company are included in Note 4 - Notes Payable above. The Company has no other leases or payouts.
Litigation:
Securities and Exchange Commission v. Excellency Investment Realty Trust, Inc. and David D. Mladen, Case No. 308CV01583 filed in the United Stated District Court District of Connecticut on October 16, 2008. This case involves an alleged fraudulent market manipulation scheme in which Defendants Excellency Investment Realty Trust, Inc. and David D. Mladen, our president, chief executive officer and majority shareholder, allegedly engaged in a number of transactions designed to artificially inflate the price of our common stock. Our attorneys have been instructed to vigorously defend against this action. It is too early to ascertain a probable outcome.
Note 13 - CONSOLIDATED VARIABLE INTEREST ENTITY
Until June 30, 2006, our Properties were managed by White Knight Management, LLC ("White Knight"), a related party owned (i) 99% by Goran Mladen, the son of David Mladen, our majority shareholder, officer and director, and (ii) 1% by Gorica Mladen, David Mladen's daughter. The Properties were managed pursuant to an oral agreement we had with White Knight, according to which White Knight collected the rents for all eight of our Properties and paid our operating expenses. In consideration for such services, White Knight was entitled to retain a management fee of approximately 4% of our rent revenues.
Effective July 1, 2006, we discontinued our arrangement with White Knight and assumed all responsibilities for the management of our Properties. Therefore, there were no property management fees for the fiscal year ended December 31, 2007 or 2008.
As of January 1, 2007, we have consolidated our financial statements with White Knight. In accordance with the Financial Accounting Standards Board ("FASB") Interpretation No. 46R, "Consolidation of Variable Interest Entities" ("FIN 46R"), an interpretation of Accounting Research Bulletin No. 51, a variable-interest entity ("VIE") is to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE's residual returns.
Included in the balances consolidated are a line of credit with a balance of $70,991 and $47,861 as of December 31, 2008 and 2007, respectively. Also consolidated are cash balances of approximately $3,000 and $400 at December 31, 2008 and 2007, respectively. Since Excellency Investment Realty Trust does not own any interest in White Knight Management, the interest expense recorded on the line of credit is excluded from net income on the consolidated statement of operations.
Note 14 - RESTATEMENT
The Company has restated its previously issued December 31, 2007 consolidated financial statements for matters related to the following previously reported items: asset impairment, improvements, accounts receivable, deferred financing costs, other assets, line of credit, accrued expenses, accrued registration rights penalty, minority interest, additional paid in capital, rental revenue, operating expenses, general and administrative expenses, depreciation, and interest expense. The accompanying financial statements for the year ended December 31, 2007 have been restated to reflect the corrections in accordance with Statement of Financial Accounting Standards No. 154, “Accounting Change and Error Corrections”. This restatement is primarily due to the lack of adequate records to support the previously reported 2007 items. The loss per share increased (.08) to (0.15) per share as a result of these changes. The following is a summary of the restatements for December 31, 2007:
Description of Net Changes:
Building and improvements were reduced to property reflect repairs that were previously classified incorrectly as improvements, resulting in an impairment of our long-lived asset (real estate).
Accumulated depreciation increased due mainly to the reduction of the number of years for depreciation, from 40 to 27.5, which was treated as a change in accounting estimate.
Accounts receivable, net of allowance for doubtful accounts decreased due to management’s new policy which has elected to be as conservative as possible and included 100% of its moved out tenant receivables and 75% of its current tenant receivables in its allowance for doubtful accounts, even though it has judgments against many of the tenants. It was previously estimated by management that only 50% of current tenant receivables should be classified as doubtful accounts.
Deferred Financing Costs, net of accumulated amortization increased due to a change in accounting method for amortizing these costs using the effective interest method, versus straight line in previous reporting.
Other assets decreased by $11,136 due to a write off of prepaid insurance which was just a monthly payment, not a prepayment.
Line of credit increased due to the recording of a credit line which affects the minority interest investment in White Knight Management, Inc.
Accrued expenses increased due to the correction of previously calculated accrued interest expense.
Accrued registration rights penalty and contingent portion increased due to a re-valuation by professional appraisers.
Minority Interest is newly reported to property reflect Company’s investment in White Knight Management, Inc. which had been previously reported as a component of additional paid in capital.
Additional paid in capital was decreased mostly to change the classification of “minority interest”, noted above.
Accumulated deficit increased due to an increase in the net loss reported for the year ended December 31, 2007.
Rental revenue was reduced to properly report rental revenue and exclude security deposits.
Property operating costs were increased mainly to reflect the more conservative calculation of bad debt expense, additional accrued property taxes, and additional accrued CNG utilities expense.
General and administrative expenses were increased due mainly to the accrual of additional insurance expenses.
Depreciation and amortization was increased mainly due to the reduction of the number of years for depreciation, from 40 to 27.5, which was treated as a change in accounting estimate.
Interest expense was increased to reflect the proper calculation of accrued interest.
Asset impairment was added to properly reflect repairs that were previously classified incorrectly as improvements, resulting in an impairment of our long-lived asset (real estate).
Loss on registration rights penalty increased due to a re-valuation by professional appraisers.
Item 9.
Item 9.
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A.
Controls and Procedures
See Item 9A(T) below.
Item 9A(T).
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rule 13a-1 5(e) promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"), that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2008. Based on the evaluation of these disclosure controls and procedures, and in light of the material weaknesses found in our internal controls over financial reporting, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining effective internal control over financial reporting. Under the supervision of our Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2008 using the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
During our review of controls for the audited period ended December 31, 2008, and in the process of preparing our Annual Report, our management discovered that there are material weaknesses in our internal controls over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses identified during the preparation of the Annual Report were (i) insufficient evidence of a robust corporate governance function; (ii) lack of sufficient resources with SEC, generally accepted accounting principals (GAAP); (iii) inadequate security over information technology and (iv) lack of evidence to document compliance with the operation of internal accounting controls in accordance with our policies and procedures. These control deficiencies could result in a material misstatement of significant accounts or disclosures that would result in a material misstatement to our interim or annual financial statements that would not be prevented or detected. Accordingly, management has determined that these control deficiencies constitute material weaknesses.
Management’s Report on Internal Control over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act, as amended. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2008. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. We have identified the following material weaknesses:
1.
As of December 31, 2008, we did not maintain effective controls over the control environment. Specifically we have not developed and effectively communicated to our employees its accounting policies and procedures. This has resulted in inconsistent practices. Further, the Board of Directors does not currently have any independent members and no director qualifies as an audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-B. Since these entity level programs have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness.
2.
As of December 31, 2008, we did not maintain effective controls over financial statement disclosure. Specifically, controls were not designed and in place to ensure that all disclosures required were originally addressed in our financial statements. Accordingly, management has determined that this control deficiency constitutes a material weakness.
3.
This lack of internal controls over financial reporting resulted in the restatement of our December 31, 2007 financial statements, as presented herein, and in Note 14 to the included financial statements.
Because of these material weaknesses, management has concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2008, based on the criteria established in "Internal Control-Integrated Framework" issued by the COSO.
Changes in Internal Control Over Financial Reporting
There were no changes in internal controls over financial reporting that occurred during the year ended December 31, 2008, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management is currently evaluating remediation plans for the above control deficiencies.
In light of the existence of these control deficiencies, the Company concluded that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by the company’s internal controls.
As a result, management has concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2008 based on criteria established in Internal Control-Integrated Framework issued by COSO.
M&K CPAS, PLLC, an independent registered public accounting firm, was not required to and has not issued an attestation report concerning the effectiveness of our internal control over financial reporting as of December 31, 2008 pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Item 9B.
Item 9B. Other Information.
Legal Proceedings.
Securities and Exchange Commission v. Excellency Investment Realty Trust, Inc. and David D. Mladen, Case No. 308CV01583 filed in the United Stated District Court District of Connecticut on October 16, 2008. This case involves an alleged fraudulent market manipulation scheme in which Defendants Excellency Investment Realty Trust, Inc. and David D. Mladen, our president, chief executive officer and majority shareholder, allegedly engaged in a number of transactions designed to artificially inflate the price of our common stock. Our attorneys have been instructed to vigorously defend against this action. It is too early to ascertain a probable outcome.
Replacement of Chief Financial Officer
Effective as of October 8, 2007, we entered into an engagement agreement ("Agreement") with ANG Group, Inc. ("ANG"), pursuant to which, in consideration for a monthly fee of $4,000, ANG was to provide us with certain services (the "Services"), including making available to us Daniel Norensberg (or another individual acceptable to us in our sole discretion) to serve as our Chief Financial Officer.
We believe that, between October 8, 2007 and February 29, 2008, Mr. Norensberg did not adequately provide the Services. Further, despite numerous attempts to contact Mr. Norensberg, we have not heard from him since approximately March 1, 2008. In addition, ANG did not provide us with any potential candidates to replace Mr. Norensberg. This has caused us material hardship in connection with, among other things, (a) our ability to prepare and timely file this Annual Report on Form 10-K for the fiscal year ended December 31, 2008, and (b) our ability to timely evaluate and report on the effectiveness of our disclosure controls and procedures in accordance with Section 404 of the Sarbanes Oxley Act of 2002.
As a result, we replaced Mr. Norensberg with Carlos D. Carrillo as of March 24, 2008, and have terminated the Agreement, effective as of such date. However due to the distance of Mr. Carrillo from the offices of the Company, it was determined that he would not adequately provide the financial and accounting services that the Company required. As a result, we replaced Mr. Carrillo with J&R Business & Financial Consulting, LLC (“J&R”). Effective October 1, 2008, we entered into an engagement agreement with J&R, pursuant to which, in consideration for a monthly fee of $5,000, J&R is to provide us with certain services (the "Services"), including making available to us Richard Pelletier to serve as our Chief Financial Officer.
As of April 15, 2009, the Company owed J&R $25,000 in outstanding fees, and is Currently in negotiations with J&R to issue unrestricted common stock at its current fair market value to J&R in consideration for its outstanding invoices.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
Our board of directors consists of only one class. Currently, we have three directors and two executive officers. We may appoint and elect additional directors and hire additional officers in the near future. Our directors typically serve until the next annual meeting of stockholders and until their successors are elected and qualified, or until their earlier death, retirement, resignation or removal. We also have provided a brief description of the business experience of our directors and executive officers during the past five years.
David Mladen. Mr. Mladen has been our President and Chief Executive Officer, and a director of ours, since September 29, 2005. He is our sole officer and director. Mr. Mladen has been President of Eternal Enterprises, Inc., a real estate investing company, since 1997. Mr. Mladen has no additional directorships with reporting companies.
Richard Pelletier. Mr. Pelletier was named as our Chief Financial Officer, effective as of October 1, 2008. Mr. Pelletier has over 28 years of CPA experience Mr. Pelletier, received a BS from Bryant College, located in Smithfield, RI in 1981.
Vera Mladen. Mrs. Mladen has been a director of ours since October 18, 2007. She is the spouse of David Mladen, our President and Chief Executive Officer and a director of ours. Mrs. Mladen is our office manager and has been the office manager of Eternal Enterprises, Inc. since 1997. Mrs. Mladen is a veteran of over 25 years in the management of real estate with her husband, helping manage residential and commercial properties.
Fedele Adduci. Mr. Adduci has been a director of ours since October 18, 2007. He is the son-in-law of David Mladen, our President and Chief Executive Officer and a director of ours. Mr. Adduci is our Field Manager. Mr. Adduci has worked for various companies owned by Mr. Mladen since 2002. Mr. Adduci is a graduate of Queen's College in New York.
Significant Employees
We have no employees who are not executive officers, but who are expected to make a significant contributions to the Company's business. Two of our employees, Goran Mladen and Gorica Mladen, are the children of David Mladen, our majority shareholder, officer and director.
Family Relationships
Vera Mladen, a director of ours, is the spouse of David Mladen, our President and Chief Executive Officer and a director of ours. Fedele Adduci is the son-in-law of David Mladen and Vera Mladen.
Involvement in Certain Legal Proceedings
During the past five years, none of our directors, persons nominated to become directors, executive officers, promoters or control persons: (except as noted in Item 9 B above)
o
was a general partner or executive officer of any business against which any bankruptcy petition was filed, either at the time of the bankruptcy or two years prior to that time;
o
was convicted in a criminal proceeding or named subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
o
was subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or
o
was found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.
Audit Committee Financial Expert
The Securities Exchange Commission has adopted rules to implement certain requirements of the Sarbanes-Oxley Act of 2002 pertaining to public company audit committees. One of the rules adopted by the SEC requires a company to disclose whether it has an "audit committee financial expert" serving on its audit committee. Our board of directors has not yet established an audit committee. As such, our board has not yet appointed an audit committee financial expert. At this time, our directors believe it would be desirable to have an audit committee, and for the audit committee to have an audit committee financial expert serving on the committee. While informal discussions as to potential candidates have occurred, at this time no formal search process has commenced.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 and the rules there under require our officers and directors, and persons who beneficially own more than ten percent of our common stock to file reports of ownership and changes in ownership with the Securities and Exchange Commission and to furnish us with copies.
To our knowledge, based solely on a review of such materials as are required by the Securities and Exchange Commission, none of our officers,
directors or beneficial holders of more than 10% of our issued and outstanding shares of Common Stock failed to timely file with the Securities and Exchange Commission any form or report required to be so filed pursuant to Section 16(a) of the Securities Exchange Act of 1934, during the fiscal year ended December 31, 2008, except that:
o
David Mladen did not file a Form 5 within forty-five (45) days after the end of fiscal 2007 to report changes in his beneficial ownership.
o
Neither Vera Mladen nor Fedele Adduci filed Form 3s to report their appointment as directors of ours.
o
Richard Pelletier did not file a Form 3 to report his appointment as our Chief Financial Officer.
Code of Ethics
We have not yet adopted a code of ethics policy. We intend to adopt a code of ethics policy in the future.
Item 11.
Item 11. Executive Compensation
Summary Compensation
For the fiscal years ended December 31, 2008 and 2007, except as noted in Item 9b, and herein described, above, there has been no executive compensation to our named executive officers.
(1) In fiscal 2008, we provided rent-free apartments to Mr. Mladen and one of his family members in one of our Properties. As a result, we charged Mr. Mladen with a compensation expense in the aggregate amount of $6,000.
Outstanding Equity Awards at Fiscal Year-End
We have no outstanding equity awards as of the fiscal year ended December 31, 2008.
Employment Contracts and Termination of Employment and Change-in-Control Arrangements
Except as noted above, through December 31, 2008, there were no employment contracts, compensatory plans or arrangements, including payments to be received from us, with respect to any director or executive officer of ours which would in any way result in payments to any such person because of his or her resignation, retirement or other termination of employment with the company or any subsidiary, any change in control, or a change in the person's responsibilities following a change in control:
Compensation of Directors
There are no standard arrangements pursuant to which our directors are compensated for any services provided as director. No additional amounts are payable to our directors for committee participation or special assignments.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth information regarding the beneficial ownership of our Common Stock as of the date hereof, by (i) each person known by us to be the beneficial owner of more than 5% of our Common Stock; (ii) each director; and (iii) all directors and executive officers as a group. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes voting or investment power with respect to the securities. Shares of our Common Stock that may be acquired by an individual or group within sixty (60) days of the date hereof, pursuant to the exercise of options or warrants, or conversion of convertible securities, are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the table. Percentage of ownership is based on 43,861,537 shares of Common Stock outstanding as of the date hereof.
Except as indicated in the footnotes to this table, we believe that the stockholders named in this table have sole voting and investment power with respect to all shares of common stock shown to be beneficially owned by them based on information provided to us by such shareholders. Unless otherwise indicated, the address for each director and executive officer listed is: c/o Excellency Investment Realty Trust, Inc., 270 Laurel Street, 1st Floor, Hartford, Connecticut 06105.
* Denotes less than 1%
(1) Includes: (i) 30,000,000 shares of Common Stock currently held by Blue Rose Trust Fund, a trust controlled by David Mladen, (ii) 12,378,147 shares of Common Stock currently held by Mr. Mladen, (iii) 1,430,000 shares of Common Stock Mr. Mladen would receive upon the conversion of shares of Series A Preferred Stock he currently holds; and (iii) 2,469 shares of our Common Stock held by Excellency Investment Realty Trust I, LP, a company controlled by Mr. Mladen.
(2) Vera Mladen is deemed to beneficially own (i) 30,000,000 shares of Common Stock currently held by Blue Rose Trust Fund, a trust controlled by her husband David Mladen, (ii) 12,378,147 shares of Common Stock currently held by Mr. Mladen, (iii) 1,430,000 shares of Common Stock Mr. Mladen would receive upon the conversion of shares of Series A Preferred Stock he currently holds; and (iii) 2,469 shares of our Common Stock held by Excellency Investment Realty Trust I, LP, a company controlled by Mr. Mladen.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Certain Relationships and Related Transactions
As is discussed in Note 6 to the financial statements, The Company provided a rent-free apartment to David Mladen, its majority shareholder and an officer and director. As a result, the Company has recorded compensation expense to David Mladen in the aggregate amount of $6,000, for the year ended December 31, 2008, which was the fair value of apartment rental.
Promissory Notes Assumed from Limited Partnerships
As of November 4, 2005 (the "Loan Date"), the Pre-Acquisition Eternal Stockholders of Eternal Enterprise, Inc., which were comprised of David Mladen, our majority shareholder and sole officer and director, and Mr. Mladen's son, daughter-in-law, daughter, and son-in-law, exchanged, in the aggregate, 100% of the issued and outstanding shares of common stock of Eternal, for (i) limited partnership interests representing 20% of the total partnership interests in each of the Limited Partnerships, and (ii) unsecured promissory notes payable to the Pre-Acquisition Eternal Stockholders in the aggregate principal amount of $2,610,006 (the "LP Notes"). In consideration for our ownership of 80% of the total partnership interests of each of the Limited Partnerships, we agreed to assume the LP Notes.
The interest rate on the LP Notes is 7% per annum. The entire balance of principal and interest of the LP Notes is due and payable on November 4, 2010. The LP Notes may be prepaid without penalty.
For the year ended December 31, 2008, we paid Mr. Mladen a total of $306,971 of principal due under his portion of the LP Notes. For the year ended December 31, 2007, we paid Mr. Mladen a total of $201,862 of principal and $158,608 of interest due under his portion of the LP Notes. As of December 31, 2008 and 2007, the total amount due under the LP Notes was $2,166,698 and $2,292,871 respectively.
Director Independence
Our Common Stock is currently approved for quotation on the Over-the-Counter Bulletin Board maintained by the FINRA under the symbol "EIVR." None of the directors currently on our board of would qualify as independent directors under the rules of the American Stock Exchange, the New York Stock Exchange, or The Nasdaq Stock Market because they all (i) currently own a significant percentage of our shares, and/or (ii) are currently employed by us, and/or (iii) have been actively involved in our management, and/or (iv) otherwise fall into one or more of the enumerated categories of people who cannot be considered independent directors.
Item 14.
Item 14. Principal Accounting Fees and Services
We paid M&K CPAS, PLLC audit and review fees of approximately $30,000 for 2007 and $65,000 for 2008. Additionally, our previous accountant, Weinberg and Company, was paid audit and review fees of approximately $154,568 for 2007.
Tax Fees. We have not paid any money for tax related services.
All Other Fees. We have not paid any money for audit related fees.
Audit Committee pre-approval policies and procedures. The entire Board of Directors, which acts as our audit committee, approved the engagement of M&K CPAS, PLLC.
Item 15.
Item 15. Exhibits, Financial Statement Schedules
____________________
* Filed herewith.
** Incorporated by reference as indicated.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ David Mladen
President, Chief Executive Officer, Director (Principal Executive Officer)
April 15, 2009
David Mladen
/s/ Richard Pelletier
Interim Chief Financial Officer (Principal Financial and Accounting Officer)
April 15, 2009
Richard Pelletier
/s/ Vera Mladen
Director
April 15, 2009
Vera Mladen
/s/ Fedele Adduci
Director
April 15, 2009
Fedele Adduci