The Management’s Discussion and Analysis of Financial Condition and Results of Operations is designed to be read in conjunction with the financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations in the last annual report on Form 10-K.
OPERATIONS OVERVIEW
We are primarily engaged in real estate land sales and development, reinvestment of land sales proceeds into income properties, self development of income properties, and golf course operations. We own approximately 11,200 acres in Florida, of which approximately 10,200 are located within and form a substantial portion
of the western boundary of the City of Daytona Beach. Our lands are well-located in the central Florida Interstate-4 and Interstate-95 corridors, providing an excellent opportunity for reasonably stable land sales in future years.
With our substantial land holdings in Daytona Beach, we have parcels available for the entire spectrum of real estate uses. Along with land sales, we selectively develop parcels primarily for commercial uses. Although pricing levels and changes by us and our immediate competitors can affect sales, we generally enjoy
a competitive edge due to low costs associated with long-time land ownership and a significant ownership position in the immediate market. As a general policy we do not discount sales prices to accelerate land sales.
Until the dramatic downturn in the national and local economies in 2008, sales activity on Company owned lands had been strong over the last several years. Development activities on and around Company owned lands continued relatively strong throughout 2008 with the commencement and completion of projects planned or
in process before the downturn. Sales and development activities over the last several years included: the sale of 120 acres of land to Florida Hospital for the construction of a new hospital, which opened in July of this year; the expansion of the Daytona Beach Auto Mall; the opening of a second office building in the Cornerstone Office Park; continued development within the 250-acre Gateway Commerce Park (where a 32,000 square-foot industrial building was completed in early 2009) and the 60-acre
Interstate Commerce Park, both adjacent to Interstate 95, and the sale of approximately 100 acres of land west of Interstate 95 on which a private high school was constructed and opened in August 2008. In early 2009, the City of Daytona Beach police headquarters, located adjacent to Gateway Commerce Park, was completed and occupied. In the first half of 2008, development also commenced on a 288-unit apartment complex, a medical office building, and a townhouse residential community on the east
side of Interstate 95. During the first quarter of 2009, construction commenced on an upscale restaurant on property the Company sold during the fourth quarter of 2008 on a parcel adjacent to the Interstate 95 and LPGA Boulevard interchange. On the west side of the interstate, development has been completed on a fire station, a hotel, and a 59,000 square-foot furniture retail store in the Interstate Commerce Park, with a new elementary school scheduled to open in August of 2009.
These commercial and residential development activities tend to create additional buyer interest and sales opportunities, although weak economic conditions led us to enter 2009 with a smaller than normal backlog of contracts, a portion of which are subject to contingencies.
In 2000, we initiated a strategy of investing in income properties utilizing the proceeds of agricultural land sales qualifying for income tax deferral through like-kind exchange treatment for tax purposes. As of June 30, 2009, we have invested approximately $120 million in twenty-six income properties through this
process. With this investment base in income properties, lease revenue of approximately $9.3 million is projected to be generated annually. This income, along with income from additional net-lease income property investments, will decrease earnings volatility in future years and add to overall financial performance. This has enabled us to enter into the business of building, leasing, and holding in our portfolio select income-producing properties that are strategically located on our lands.
We currently have two self-developed projects in process. The first project is a two-building 31,000 square-foot flex office space complex located within Gateway Commerce Park. Construction of these buildings was completed in 2008. As of June 30, 2009, there was one tenant under lease for approximately
3,840 square feet, with negotiations ongoing with additional tenant prospects. Also under development is the first phase of a 12-acre, 4-lot commercial complex, located at the corner of LPGA and Williamson Boulevards in Daytona Beach, Florida. The parcel includes a 23,000 square-foot “Class A” office building. With the exception of tenant improvements, construction of the building has been completed. Approximately 75% of the building is under lease to
two tenants. The first tenant occupied the building in mid-July with the second tenant expected to occupy the building in September.
Golf operations consist of the operation of two championship golf courses, and a clubhouse facility, including food and beverage activities located within the LPGA International mixed-use residential community on the west side of Interstate 95, south and east of LPGA Boulevard. The Champions course was designed by Rees
Jones and the Legends course was designed by Arthur Hills.
Our agricultural operations consist of growing, managing, and selling timber and hay on approximately 10,700 acres of land primarily on the west side of Daytona Beach, Florida. We are currently in the process of converting a significant portion of our timberlands to hay production.
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During the quarter ended June 30, 2009, the Company posted net income totaling $187,809, equivalent to $.03 per share. These profits were generated from the sale of seven acres of real estate and strong earnings from income properties, but represent a significant downturn from 2008’s second quarter
profits of $2,171,192, equivalent to $.38 per share. The unfavorable results were attributed to higher general and administrative expenses due to higher stock options expense and increased costs related to the Company’s recent proxy contest and ongoing shareholder litigation.
Net income totaled $510,015, equivalent to $.09 per share, for the first six months of 2009. This net income also represented a substantial downturn from the prior year’s same period profits which totaled $2,327,316, equivalent to $.41 per share. The unfavorable results again can primarily be attributed to higher general and administrative costs
also due to increased expenses associated with stock options and shareholder relations. In addition, during 2008, the decrease in the price of the Company’s stock resulted in an adjustment to income for the decreased stock option accruals for both the second quarter and first six months.
We also use Earnings before Depreciation, Amortization, and Deferred Taxes (EBDDT) as a performance measure. Our strategy of investing in income properties through the deferred tax like-kind exchange process produces significant amounts of depreciation and deferred taxes.
The following is the calculation of EBDDT:
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|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30,
2009 |
|
|
June 30,
2008 |
|
Net Income |
|
$ |
187,809 |
|
|
$ |
2,171,192 |
|
Add Back: |
|
|
|
|
|
|
|
|
Depreciation and Amortization |
|
|
685,270 |
|
|
|
664,831 |
|
Deferred Taxes |
|
|
260,631 |
|
|
|
1,248,616 |
|
E Earnings before Depreciation, Amortization, and Deferred Taxes |
|
$ |
1,133,710 |
|
|
$ |
4,084,639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
June 30,
2009 |
|
|
June 30,
2008 |
Net Income |
|
$ |
510,015 |
|
|
$ |
2,327,316 |
Add Back: |
|
|
|
|
|
|
|
Depreciation and Amortization |
|
|
1,368,157 |
|
|
|
1,289,761 |
Deferred Taxes |
|
|
113,863 |
|
|
|
815,599 |
Earnings before Depreciation, Amortization, and Deferred Taxes |
|
$ |
1,992,035 |
|
|
$ |
4,432,676 |
|
|
|
|
|
|
|
|
EBDDT is calculated by adding depreciation, amortization, and the change in deferred income tax to net income, as they represent non-cash charges. EBDDT is not a measure of operating results or cash flows from operating activities as defined by U.S. generally accepted accounting principles. Further, EBDDT is not necessarily indicative of cash availability to fund cash needs and should not
be considered as an alternative to cash flow as a measure of liquidity. We believe, however, that EBDDT provides relevant information about operations and is useful, along with net income, for an understanding of our operating results.
EBDDT totaling $1,133,710 and $1,992,035 for the second quarter and first six months of 2009, respectively, was significantly lower than 2008’s second quarter and first six months, EBDDT amounting to $4,084,639 and $4,432,676, respectively. The decrease in EBDDT for both periods was not only the result of lower earnings, but
was also due to the reduced add back for deferred income taxes, primarily associated with taxes relating to stock options accruals.
13
REAL ESTATE OPERATIONS
REAL ESTATE SALES
During the second quarter and first six months of 2009, sales of 7 acres of land produced revenues of $1,620,800 and $1,626,893, respectively, which generated profits totaling $1,300,058 and $1,070,023 for those periods, respectively. During 2008’s second quarter, revenues totaling $2,186,210 and profits
amounting to $1,717,135 were generated on the sale of 21 acres of property. The sale of the 21 acres of land generated revenues and profits of $2,261,054 and $1,374,201, respectively for the first six months of 2008.
Real estate costs and expenses decreased in both the second quarter and first six months of 2009 compared to 2008’s same periods as the result of lower costs of sales on the lower sales volume, and reduced real estate taxes, compensation and agriculture harvesting costs.
INCOME PROPERTIES
Revenues from income properties increased by a modest 1% rise in 2009’s second quarter to $2,338,079, with net income decreasing 2% to $1,824,332. The decline in net income was the result of a 11% increase in income properties costs and expenses
to $513,747. The rise in costs and expenses were due to depreciation and operating costs associated with the two new self developed properties. Construction of the flex office building was completed during the fourth quarter of 2008, with construction of the “Class A” office building completed in the second quarter of 2009. Net income totaling $1,856,300 was produced on revenues of $2,320,993 during 2008’s second quarter.
During the first six months of 2009, income properties revenues totaling $4,677,049 produced profits of $3,671,006. These revenues and profits represented increases of 4% and 2%, respectively, when compared to the prior year’s first six-month period. Profits from income properties of $3,600,530 were
recorded in 2008’s first six months on revenues totaling $4,494,466. The increase in revenues and income were the direct result of the April 2008 purchase of a Harris Teeter supermarket property located in Charlotte, North Carolina.
GOLF OPERATIONS
Losses from golf operations for the quarter ended June 30, 2009, totaled $477,774, a 1% improvement over the loss of $480,654 posted in 2008’s second quarter. The modest improvement was achieved despite a 2% decline in total revenues. Revenues
of $1,262,204 were generated in 2009’s second quarter with revenues amounting to $1,288,152 realized in 2008’s same period. The decrease in revenues was the result of a 5% fall in revenues from golfing activities, offset by a 5% gain in food and beverage activities. The number of rounds played during the period rose 13%, while the average rate paid per round played decreased 14%. Golf operations costs and expenses were reduced 2%, to $1,739,978, on lower compensation
and golf course maintenance costs.
During the first six months of 2009, a loss of $622,201 was realized from golf operations. This loss represented a 13% reduction from the loss of $718,071 generated in 2008’s first six month period. Revenues amounting to $2,684,971 were produced
during the period, a 1% rise over the prior year’s revenues totaling $2,667,703 posted during the six month period. The revenue gain was generated on a 1% decrease in golfing activities revenues offset by a 6% gain in food and beverage revenues. The number of rounds of golf played during the six month period rose 27% over the prior year, but was offset by a 20% decline in the average rate paid per round played. Lower compensation costs and golf course maintenance costs resulted
in a 2% decrease in golf operations costs and expenses.
GENERAL, CORPORATE, AND OTHER
When compared to the prior year’s same period, interest and other income decreased 72% for the quarter ended June 30, 2009, to $39,447 and 76% for the six-month period to $105,994. These declines resulted from lower investment interest earned on decreased investment securities, lower interest earned on mortgage notes receivable
due to the non-accrual of interest on delinquent notes and lower interest on funds held for reinvestment through the like-kind exchange process. During 2008’s second quarter and first six months, interest and other income totaled $142,122 and $444,750, respectively.
General and administrative expenses totaled $2,386,052 in 2009’s second quarter. During the second quarter of 2008, general and administrative expenses resulted in a $76,058 net credit. This credit was the result of a $1,360,675 credit for stock
option expenses due to the lower price of Company stock. Stock option expense totaled $728,405 in 2009’s second quarter due to a rise in the price of Company stock. Also contributing to the higher general and administrative costs was approximately $550,000 in costs expended on the proxy contest and shareholder litigation.
Increased stock options accruals in addition to significant expenses related to the shareholder litigation and proxy contest also accounted for the rise in general and administrative expenses during the first six months of 2009. Additional stock option accruals accounted for $1,913,516
of the variance in general and administrative expenses between the two periods with litigation and proxy costs adding $660,000. General and administrative expenses totaled $3,411,469 and $1,144,942 for the six-month periods ended June 30, 2009 and 2008, respectively.
14
LIQUIDITY AND CAPITAL RESOURCES
Cash, restricted cash, and investment securities totaled $5,660,746 at June 30, 2009, with no funds being held for reinvestment through the like-kind exchange process. This balance represents a $451,674 decline from the year-end 2008 balance of $6,112,420. In addition to the decrease
in cash and investment securities during the six-month period, notes payable increased $3,082,528, with $5,244,799 outstanding on the Company’s $20,000,000 revolving line of credit at June 30, 2009.
The uses of these funds during the period primarily consisted of construction and development activities, the continuation of our hay conversion program, payment of income taxes and the payment of dividends. The use of funds for construction and development activities approximated $2,400,000 and included the construction of a road
on our core lands adjacent to LPGA Boulevard and completion of the 23,000 square-foot “Class A” office building. Approximately $550,000 was used on the hay conversion. Dividends of $1,145,120, equivalent to $.20 per share, were paid during the period, with an additional $1,924,919 paid for income taxes.
During the fourth quarter of 2008, our Board of Directors authorized a program to repurchase shares of our common stock having an aggregate value of up to $8,000,000. The authorization permits us to effect the repurchases from time to time through a variety of methods including open market repurchases and privately negotiated transactions.
The repurchase plan is intended to be funded through reduced dividend payments in the future. We have no plans to increase debt to fund the repurchase plan. Through August 1, 2009, 4,660 shares had been repurchased at a total cost of $104,648, with no repurchases occurring in the second quarter of 2009.
Capital expenditures for the remainder of 2009 are projected to approximate $5.3 million, net of reimbursements from development partners. These expenditures include the completion of road construction and the “Class A” office building tenant improvements, and the continuation of the conversion of timber lands to hay. Also included
in capital expenditures during 2009 is the acquisition of property through Internal Revenue Code Section 1033 involuntary conversion under threat of condemnation tax deferral provisions. We plan to reinvest $8.5 million by year-end 2009 through this process.
At the end of 2008, the Company focused its efforts on obtaining federal stimulus dollars to extend Dunn Avenue, a major east/west thoroughfare bridging Interstate 95, to provide improved access to Company lands. In June, the Company entered into a cost sharing agreement with the City of Daytona Beach and the County of Volusia that will
allow the use of federal funds to build this road project. The Company's cost participation of $1,125,000 is not due until 2010.
Capital to fund the planned expenditures in 2009 is expected to be provided from cash and investment securities (as they mature), operating activities, and financing sources that are currently in place, including the $20 million revolving line of credit, which matures on March 29, 2010.
We also believe that we have the ability, if needed, to borrow on a non-recourse basis against our existing income properties, which are all free of debt as of the date of this filing. As additional funds become available through qualified sales, we expect to reinvest in additional real estate opportunities.
Our Board of Directors and management continually review the allocation of any excess capital with the goal of providing the highest long-term return for all shareholders. The reviews consider various alternatives, including increasing or decreasing regular dividends, declaring special dividends, repurchasing stock, and retaining funds
for reinvestment, including road development and hay conversion of timber lands. The Board of Directors has reaffirmed its support for the stated business plan of reinvesting agricultural land sales proceeds into 1031 tax-deferred income-producing properties, self-development of income properties, and the creation of infrastructure and entitlements on Company lands to increase long-term shareholder value.
At its regular Board of Directors meeting on July 22, 2009, the Company declared a dividend of $.05 per share. This dividend represents a reduction of $.05 per share from the previous quarter’s dividend. The Company believes that while it is important to provide a
quarterly dividend to its shareholders, at this time the Company can better allocate a portion of the funds used to pay the dividends for capital investments that will deliver greater long-term shareholder value.
CRITICAL ACCOUNTING POLICIES
The profit on sales of real estate is accounted for in accordance with the provisions of SFAS No. 66, “Accounting for Sales of Real Estate” (“SFAS 66”). We recognize revenue from the sale of real estate at the time the sale is consummated unless the property is sold on a deferred payment plan and the initial
payment does not meet criteria established under SFAS 66, or we retain continuing involvement with the property. A majority of our land sales contracts contain an anti-speculation clause. This clause requires the buyer to begin construction of their project within a specified period of time, generally two years. If this requirement is not met, we have the right, but not the obligation, to repurchase the property at its original sales price.
We acquire income properties with long-term leases in place. Upon acquisition, the portion of the purchase price which represents the market value associated with the lease is allocated to an intangible asset. The amount of the intangible asset represents the cost of replacing the tenant should the lease be discontinued. Factors such as vacancy
period, tenant improvements, and lease commissions, among others, are considered in calculating the intangible asset. The intangible asset is amortized over the remaining life of the lease at the time of acquisition. At June 30, 2009, the intangible asset associated with the income properties totaled $4,799,234, net of amortization of $1,797,306.
In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we have reviewed the recoverability of long-lived assets, including real estate development, income properties, and other property, plant, and equipment for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may or may not be recoverable. Long-lived assets are evaluated for impairment by using an undiscounted cash flow approach which considers future estimated capital expenditures. Impairment on long-lived assets is measured at fair value. There has been no impairment of long-lived assets reflected in the consolidated financial statements.
At the time our debt was refinanced in 2002, we entered into an interest rate swap agreement. This swap arrangement changes the variable-rate cash flow exposure on the debt obligations to fixed cash flows so that we can manage fluctuations in cash flows resulting from interest rate risk. This swap arrangement essentially creates the equivalent
of fixed-rate debt. The above referenced transaction is accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Certain Hedging Activities,” and SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities, an Amendment of SFAS No. 133.” The accounting requires the derivative to be recognized on the balance sheet at its fair value and the changes in fair value to be accounted for as other comprehensive income or loss.
We measure the ineffectiveness of the interest rate swap derivative by comparing the present value of the cumulative change in the expected future cash flows on the variable leg of the swap with the present value of the cumulative change in the expected future interest cash flows on the floating rate liability. This measure resulted in no
ineffectiveness for the periods ended June 30, 2009 and June 30, 2008. A liability in the amount of $762,816 at June 30, 2009, has been established on our balance sheet. The change in fair value, net of applicable taxes, in the cumulative amount of $468,560 at June 30, 2009, has been recorded as accumulated other comprehensive loss, a component of shareholders’ equity.
We maintain a stock option plan pursuant to which 500,000 shares of our common stock may be issued. The current Plan was approved at the April 25, 2001 shareholders’ meeting. Under the Plan, the option exercise price equals the stock market price on the date of grant. The options generally vest over five years and all expire after
ten years. The Plan provides for the grant of (1) incentive stock options, which satisfy the requirements of Internal Revenue Code (IRC) Section 422, and (2) non-qualified options, which are not entitled to favorable tax treatment under IRC Section 422. No optionee may exercise incentive stock options in any calendar year for shares of common stock having a total market value of more than $100,000 on the date of grant (subject to certain carryover provisions).
In connection with the grant of non-qualified options, a stock appreciation right for each share covered by the option may also be granted. The stock appreciation right will entitle the optionee to receive a supplemental payment, which may be paid in whole or in part in cash or in shares of common stock equal to a portion of the spread between
the exercise price and the fair market value of the underlying shares at the time of exercise. All options granted to date have been non-qualified options.
Both our stock options and stock appreciation rights are liability classified awards under SFAS No. 123R and are required to be remeasured to fair value at each balance sheet date until the award is settled.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The principal market risk (i.e., the risk of loss arising from adverse changes in market rates and prices) to which we are exposed is interest rates. The objective of our asset management activities is to provide an adequate level of liquidity to fund operations and capital expansion, while minimizing market risk. We
utilize overnight sweep accounts and short-term investments to minimize the interest rate risk. We do not actively invest or trade in equity securities. We do not believe that our interest rate risk related to cash equivalents and short-term investments is material due to the nature of the investments.
We manage our debt considering investment opportunities and risk, tax consequences, and overall financial strategies. We are primarily exposed to interest rate risk on our $8,000,000 ($6,388,064 outstanding at June 30, 2009) long-term mortgage. The borrowing bears a variable rate of interest based on market rates. Management’s
objective is to limit the impact of interest rate changes on earnings and cash flows and to lower the overall borrowing costs. To achieve this objective, we entered into an interest rate swap agreement during the second quarter of 2002. A hypothetical change in the interest rate of 100 basis points (i.e. 1%) would not materially affect our financial position, results of operations, or cash flows.
As of the end of the period covered by this report, an evaluation, as required by Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934 (the “Exchange Act”), was carried out under the supervision and with the participation of the Company's management, including the Chief Executive Officer
("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act). Based on that evaluation, the CEO and CFO have concluded that the design and operation of the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits 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 to provide reasonable assurance that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company's management, including its CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. There were no changes in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under
the Exchange Act) during the fiscal quarter ended June 30, 2009, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
16
In December 2008, Wintergreen Advisers, LLC (“Wintergreen”), a Delaware limited liability company and the largest shareholder of the Company, filed a Verified Application for Court Ordered Inspection of the Company’s business records in the Circuit Court of the Seventh Judicial Circuit in and for Volusia County, Florida. The
complaint alleges that the Company has not satisfied Wintergreen’s second demand to inspect certain corporate records, and Wintergreen is seeking an order requiring the Company to make additional records available for inspection and also requiring the Company to pay Wintergreen’s costs, including reasonable attorneys’ fees, reasonably incurred to obtain the order. The final hearing on the matter commenced on July 28, 2009, but was not completed and will be rescheduled for a later date
not yet set by the court. As a result, the matter remains unresolved, and no relief has been granted by the court as of the date of the filing of this Form 10-Q.
Certain statements contained in this report (other than statements of historical fact) are forward-looking statements. The words “believe,” “estimate,” “expect,” “intend,” “anticipate,” “will,” “could,” “may,” “should,”
“plan,” “potential,” “predict,” “forecast,” “project,” and similar expressions and variations thereof identify certain of such forward-looking statements, which speak only as of the dates on which they were made. Forward-looking statements are made based upon management’s expectations and beliefs concerning future developments and their potential effect upon the Company. There can be no assurance that future developments will be in accordance with
management’s expectations or that the effect of future developments on the Company will be those anticipated by management.
We wish to caution readers that the assumptions which form the basis for forward-looking statements with respect to or that may impact earnings for the year ended December 31, 2009, and thereafter, include many factors that are beyond the Company’s ability to control or estimate precisely. These risks and uncertainties
include, but are not limited to, the strength of the real estate market in the City of Daytona Beach and Volusia County, Florida; the impact of a prolonged recession or further downturn in economic conditions; our ability to successfully execute acquisition or development strategies; any loss of key management personnel; changes in local, regional, and national economic conditions affecting the real estate development business and income properties; the impact of environmental and land use regulations; the impact
of competitive real estate activity; variability in quarterly results due to the unpredictable timing of land sales; the loss of any major income property tenants; and the availability of capital. These risks and uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements.
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. There have been no material changes to those risk factors. The risks
described in the Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company.
While we periodically reassesses material trends and uncertainties affecting our results of operations and financial condition, we do not intend to review or revise any particular forward-looking statement referenced herein in light of future events.
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UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
ISSUER REPURCHASES OF EQUITY SECURITIES
In November 2008, the Company’s Board of Directors authorized the repurchase by the Company from time to time of up to $8 million of its common stock. This share repurchase program does not have a stated expiration date. There were no repurchases made under the program during the quarter ended June 30, 2009.
From inception of the program, the Company has repurchased 4,660 shares of its common stock at a total cost of $104,648.