Form 10-Q
Securities and Exchange Commission
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended SEPTEMBER 30, 2007
--------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-1684
Gyrodyne Company of America, Inc.
---------------------------------
(Exact name of registrant as specified in its charter)
New York 11-1688021
-------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1 Flowerfield, Suite 24, St. James, N.Y. 11780
----------------------------------------------
(Address of principal executive offices)
(631) 584-5400
--------------
(Registrant's telephone number)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer __ Accelerated Filer __ Non-accelerated Filer X
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes __ No X
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date
1,289,878 SHARES, $1.00 PAR VALUE, AS OF OCTOBER 31, 2007
Seq. Page 1
INDEX TO QUARTERLY REPORT OF GYRODYNE COMPANY OF AMERICA, INC.
QUARTER ENDED SEPTEMBER 30, 2007
Seq. Page
Form 10-Q Cover 1
Index to Form 10-Q 2
Part I Financial Information 3
Item 1 Financial Statements 3
Consolidated Balance Sheet (unaudited) 3
Consolidated Statements of Operations (unaudited) 4
Consolidated Statements of Cash Flows (unaudited) 5
Footnotes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3 Quantitative and Qualitative Disclosures About Market Risk 14
Item 4T Controls and Procedures 14
Part II - Other Information 14
Item 1 Legal Proceedings 14
Item 1A Risk Factors 15
Item 6 Exhibits 15
Signatures 15
Exhibits:
---------
Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certification
Exhibit 32.1 CEO/CFO Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Seq. Page 2
Part I Financial Information
Item 1 Financial Statements
GYRODYNE COMPANY OF AMERICA, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS September 30, December 31,
------ 2007 2006
(Unaudited)
------------ ------------
REAL ESTATE:
Rental property:
Land $ 2,303,017 $ 3,017
Building and improvements 10,214,887 3,140,332
Machinery and equipment 179,335 179,335
------------ ------------
12,697,239 3,322,684
Less accumulated depreciation 2,590,710 2,500,907
------------ ------------
10,106,529 821,777
------------ ------------
Land held for development:
Land 558,466 558,466
Land development costs 745,017 321,514
------------ ------------
1,303,483 879,980
------------ ------------
Total real estate, net 11,410,012 1,701,757
Cash and Cash Equivalents 3,002,488 2,951,287
Investment In Marketable Securities 11,736,523 23,797,515
Deposit On Property - 504,000
Rent Receivable, net of allowance for doubtful accounts of $21,000
and $46,000, respectively 141,321 106,959
Interest Receivable 403,850 468,679
Prepaid Expenses And Other Assets 422,240 337,045
Prepaid Pension Costs 1,112,525 1,080,473
------------ ------------
Total Assets $ 28,228,959 $ 30,947,715
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 196,233 $ 687,384
Accrued liabilities 188,919 2,174,460
Tenant security deposits payable 267,109 159,785
Mortgage payable 5,523,604 -
Deferred income taxes 7,410,000 8,135,000
------------ ------------
Total Liabilities 13,585,865 11,156,629
------------ ------------
Commitments And Contingencies
STOCKHOLDERS' EQUITY:
Common stock, $1 par value; authorized 4,000,000 shares;
1,531,086 shares issued 1,531,086 1,531,086
Additional paid-in capital 7,978,395 8,205,134
Accumulated Other Comprehensive Income:
Unrealized Gain from Marketable Securities 124,887 280,042
Balance of undistributed income other than gain or loss on sales
of properties 6,546,423 11,615,310
------------ ------------
16,180,791 21,631,572
Less cost of shares of common stock held in treasury; 241,208
and 293,867 shares, respectively (1,537,697) (1,840,486)
------------ ------------
Total Stockholders' Equity 14,643,094 19,791,086
------------ ------------
Total Liabilities and Stockholders' Equity $ 28,228,959 $ 30,947,715
============ ============
See notes to consolidated financial statements
Seq. Page 3
GYRODYNE COMPANY OF AMERICA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended Three Months Ended
September 30, September 30,
----------------------------- -----------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
Revenues
Rental Income $ 1,214,646 $ 975,349 $ 613,683 $ 340,742
Interest Income 845,811 1,237,967 194,412 363,871
------------ ------------ ------------ ------------
2,060,457 2,213,316 808,095 704,613
------------ ------------ ------------ ------------
Expenses
Rental expenses 618,776 546,826 227,198 163,717
General and administrative expenses 2,003,482 1,942,915 600,541 544,383
Depreciation 89,802 37,690 58,898 14,636
Interest expense 83,115 - 79,601 -
------------ ------------ ------------ ------------
2,795,175 2,527,431 966,238 722,736
------------ ------------ ------------ ------------
Loss from Operations Before Benefit for
Income Taxes (734,718) (314,115) (158,143) (18,123)
Benefit for Income Taxes (825,989) (330,814) - -
------------ ------------ ------------ ------------
Net Income (loss) $ 91,271 $ 16,699 $ (158,143) $ (18,123)
============ ============ ============ ============
Net Income (loss) Per Common Share:
Basic $ 0.07 $ 0.01 $ (0.12) $ (0.01)
============ ============ ============ ============
Diluted $ 0.07 $ 0.01 $ (0.12) $ (0.01)
============ ============ ============ ============
Weighted Average Number Of Common
Shares Outstanding:
Basic 1,276,493 1,237,195 1,289,878 1,237,219
============ ============ ============ ============
Diluted 1,276,493 1,252,299 1,289,878 1,237,219
============ ============ ============ ============
See notes to consolidated financial statements
Seq. Page 4
GYRODYNE COMPANY OF AMERICA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
-----------------------------
2007 2006
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 91,271 $ 16,699
------------ ------------
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 99,623 61,072
Bad debt expense 18,000 18,000
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Land development costs (423,503) (48,489)
Accounts receivable (52,362) (33,769)
Interest receivable 64,829 (88,577)
Condemnation receivable - 26,336,421
Prepaid expenses and other assets (95,015) (94,397)
Prepaid pension costs (32,052) 64,698
(Decrease) increase in liabilities:
Accounts payable (491,150) (45,016)
Accrued liabilities (1,985,542) 5,704
Deferred income taxes (725,000) (493,069)
Tenant security deposits 107,324 (54,429)
------------ ------------
Total adjustments (3,514,848) 25,628,149
------------ ------------
Net cash (used in) provided by operating activities (3,423,577) 25,644,848
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Costs associated with property, plant and equipment (3,823,364) (277,032)
Purchase of marketable securities - (24,866,711)
Proceeds from sale of marketable securities 7,199,204 -
Deposit on property 504,000 -
Principal repayments on investment in marketable securities 4,706,633 831,126
------------ ------------
Net cash provided by (used in) investment activities 8,586,473 (24,312,617)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 76,049 74,052
Cash distribution payment (5,160,157) -
Principal payments on mortgage (27,587) -
------------ ------------
Net cash (used in) provided by financing activities (5,111,695) 74,052
------------ ------------
Net increase in cash and cash equivalents 51,201 1,406,283
Cash and cash equivalents at beginning of period 2,951,287 1,626,052
------------ ------------
Cash and cash equivalents at end of period $ 3,002,488 $ 3,032,335
============ ============
Supplemental cash flow information:
Interest paid $ 83,115 $ -
============ ============
Mortgage payable $ 5,551,191 $ -
============ ============
See notes to consolidated financial statements
Seq. Page 5
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Description of Business
Gyrodyne Company of America, Inc. (the "Company") was organized in 1946 as a
corporation under the laws of the State of New York. The Company's headquarters
are located at 1 Flowerfield, Suite 24, St. James, New York 11780. Its main
phone number is (631) 584-5400. The Company maintains a website at
www.gyrodyne.com.
The Company was, from its inception and for the next 25 years, engaged in
design, testing, development, and production of coaxial helicopters primarily
for the U.S. Navy. Following a sharp reduction in the Company's helicopter
manufacturing business and its elimination by 1975, the Company began converting
its vacant manufacturing facilities and established its rental property
operation. The Company has since concentrated its efforts on the development of
its real estate holdings in St. James, New York and acquiring new properties.
The converted buildings consist of approximately 127,392 rentable square feet
housing 50 tenants in space suitable for office, engineering, manufacturing, and
warehouse use. The property, which is known as Flowerfield, consists of 68
acres. Approximately 10 acres are utilized for the rental property and the
balance of 58 acres remains undeveloped.
Gyrodyne adopted a new strategic plan in December of 2005 whose objective is to
position the Company to achieve one or more shareholder liquidity events in a
reasonable period of time that would put the maximum amount of cash or
marketable securities in the hands of the Company's shareholders in a tax
efficient manner. The plan calls for achieving this objective by pursuing
conversion to a REIT, disposition and redeployment of the assets of the Company
in a tax efficient manner, maximization of the value for the remaining 68 acres
at Flowerfield, and vigorous pursuit of maximum value from the State of New York
for the 245.5 acres of Flowerfield taken by eminent domain.
Effective May 1, 2006, the Company elected to be taxed as a Real Estate
Investment Trust ("REIT") for federal and state income tax purposes. The Company
plans to acquire, manage and invest in a diversified portfolio of real estate
composed of office, industrial, retail and service properties.
On June 27, 2007, the Company acquired ten buildings in the Port Jefferson
Professional Park in Port Jefferson Station, New York. The buildings were
acquired for an aggregate purchase price of $8,850,000. The buildings, located
at 1-6, 8, 9 and 11 Medical Drive and 5380 Nesconset Highway in Port Jefferson
Station, are situated on 5.16 acres with 41,651 square feet of rentable space.
The purchase price per square foot was $212.48 and the aggregate monthly rent
flow from the property is currently $73,848.03. The property has a 97% occupancy
rate. The Company satisfied $5,551,191.38 of the purchase price by the
assumption of the existing mortgage debt on the property and the remainder in
cash after adjustments. (See NOTE 7)
The following table sets forth certain information as of September 30, 2007 for
properties operated by the Company:
Annual Number Of
Base Tenants Who
Rentable Annual Rent Number Occupy 10%
Square Percent Base Per Leased Of Or More Of
Property Feet Leased Rent SQ. FT. Tenants Rentable Sq. Ft.
-------- ---- ------ ---- ------- ------- ----------------
St. James, NY 127,392 88% $1,539,160 $13.75 50 1
Port Jefferson Station, NY 41,651 97% $886,176 $21.94 21 0
The Company has one tenant with over 10% of the rentable square footage. The
principal nature of this tenant's business is a continuing day treatment program
for adults. The principal provisions of its lease include the rental of 12,980
square feet of space with a monthly base rent of $18,200, expiring April 30,
2008.
2. Basis of Quarterly Presentations:
The accompanying quarterly financial statements have been prepared in conformity
with accounting principles generally accepted in the United States ("GAAP"). The
financial statements of the Registrant included herein have been prepared by the
Registrant pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC) and, in the opinion of management, reflect all adjustments
which are necessary to present fairly the results for the three and nine month
periods ended September 30, 2007 and 2006.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with GAAP have been condensed or omitted
pursuant to such rules and regulations; however, management believes that the
disclosures are adequate to make the information presented not misleading.
Seq. Page 6
This report should be read in conjunction with the audited financial statements
and footnotes therein included in the Transition Report on Form 10-K for the
eight months ended December 31, 2006.
The results of operations for the three and nine month periods ended September
30, 2007 are not necessarily indicative of the results to be expected for the
full year.
3. Principle of Consolidation:
The accompanying consolidated financial statements include the accounts of
Gyrodyne Company of America, Inc. ("Company") and its wholly-owned subsidiaries.
All intercompany balances and transactions have been eliminated.
4. Investment in Marketable Securities
The Company's marketable securities consist of debt securities classified as
available-for-sale and are reported at fair value, with the unrealized gains and
losses excluded from operating results and reported as a separate component of
stockholders' equity net of the related tax effect. These debt securities
consist of hybrid mortgage backed securities that are fully guaranteed by
agencies of the U. S. Government and are managed by and held in an account with
a major financial institution.
5. Earnings Per Share:
Basic earnings per common share are computed by dividing net income by the
weighted average number of shares of common stock outstanding during the period.
Dilutive earnings per share gives effect to stock options and warrants which are
considered to be dilutive common stock equivalents. Basic income per common
share was computed by dividing net income by the weighted average number of
shares of common stock outstanding. Diluted income per common share gives effect
to the impact of options. Treasury shares have been excluded from the weighted
average number of shares.
The following is a reconciliation of the weighted average shares:
Nine months ended Three months ended
September 30, September 30,
2007 2006 2007 2006
------------ ------------ ------------ ------------
Basic 1,276,493 1,237,195 1,289,878 1,237,219
Effect of dilutive securities - 15,104 - -
------------ ------------ ------------ ------------
Diluted 1,276,493 1,252,299 1,289,878 1,237,219
============ ============ ============ ============
6. Income Taxes:
Deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. For the nine months ended September 30, 2007, the
Company recorded a deferred tax benefit of $725,000 relating to the reinvestment
of condemnation proceeds.
7. Bank Obligations:
The Company's line of credit has a maximum borrowing limit of $1,750,000, bears
interest at the lending institution's prime-lending rate (7.75 % at September
30, 2007) plus 1%, and is subject to certain financial covenants. The line is
secured by certain real estate and expires on June 1, 2009. As of September 30,
2007 and December 31, 2006, $1,750,000 was available under this agreement and
the Company was in compliance with the financial covenants.
In connection with the acquisition of the Port Jefferson property, the Company
assumed the outstanding mortgage on the property held by Astoria Federal Savings
and Loan Association in the amount of $5,551,191 payable in monthly installments
of $47,393.50, which includes real estate taxes currently at $13,954.78. The
mortgage was dated January 6, 2005 in the amount of $5,730,000 at an interest
rate of 5.75%. The interest rate is adjusted on February 1, 2012 and February 1,
2017 to 2.75% above the five year Fixed Rate Advance as determined and reported
by the Federal Home Loan Bank of New York, rounded to the nearest one-eighth of
one percent, but no lower than 5.75%. The mortgage is scheduled to be satisfied
in February 2022. The collateral for the loan is the real property and the
underlying leases. Loan origination fees in the amount of $112,166 have been
recorded in connection with the assumption of the mortgage and will be amortized
over the remaining life of the mortgage of approximately 15 years.
Seq. Page 7
8. Stock Options:
The Company's results for the three and nine month periods ended September 30,
2007 include share-based compensation expense totaling $0.
The following table represents the Company's stock options granted, exercised
and forfeited during the nine months of fiscal 2007.
Weighted Weighted
Average Average
Exercise Remaining Aggregate
Number of price Contractual Intrinsic
Stock Options Shares per Share Term Value
---------------------------------- ------------ ------------ ------------ ------------
Outstanding at January 1, 2007 67,105 $ 16.42 - -
Granted - - - -
Exercised (67,105) $ 16.42 - -
Forfeited/expired - - - -
Outstanding at September 30, 2007 - $ - - -
============ ============ ============ ============
Vested and Exercisable at
September 30, 2007 - $ - - -
============ ============ ============ ============
9. Retirement Plans:
The Company records net periodic pension benefit cost pro rata throughout the
year. The following table provides the components of net periodic pension
benefit cost for the plan for the three and nine months ended September 30, 2007
and 2006:
Nine Months Ended Three Months Ended
September 30, September 30,
----------------------------- -----------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
Pension Benefits
Service Cost $ 91,044 $ 64,872 $ 30,348 $ 21,624
Interest Cost 99,081 64,048 33,027 21,349
Expected Return on Plan Assets (223,767) (119,325) (74,589) (39,775)
Amortization of Prior-Service Cost - 30,173 - 10,058
------------ ------------ ------------ ------------
Net Periodic Benefit Cost After
Curtailments and Settlements $ (33,642) $ 39,768 $ (11,214) $ 13,256
============ ============ ============ ============
During the nine months ended September 30, 2007 and 2006, the Company did not
make a contribution to the plan. The Company has no minimum required
contribution for the December 31, 2007 plan year.
10. Commitments and Contingencies
Lease revenue commitments - The future minimum revenues from rental
property under the terms of all noncancellable tenant leases, assuming no
new or renegotiated leases are executed for such premises, for future years
are approximately as follows:
Twelve Months Ending September 30, Amount
---------------------------------------------------------------------------
2008 $ 1,837,000
2009 685,000
2010 554,000
2011 182,000
2012 79,000
Thereafter 26,000
-----------
$ 3,363,000
===========
Seq. Page 8
Employment agreements - The Company has employment contracts with two
officers that provide for annual salaries aggregating approximately
$381,000 and a severance payment equivalent to three years salary and other
benefits in the event of a change in control, termination by the Company
without cause or termination by the officer for good reason.
Land development contract - On February 12, 2007, the Company entered into
an agreement with Landmark National to terminate two agreements, the Golf
Operating Agreement and the Asset Management Agreement, both dated April 9,
2002. In addition to abandoning its claim for 10% of all proceeds related
to the condemnation and any sale and/or development of the remaining
Flowerfield acreage, Landmark agreed to provide consulting services in
connection with the eminent domain litigation against the State University
of New York at Stony Brook. See Part II, Item 1, Legal Proceedings. The
agreement also includes consideration for previously provided services. The
Company paid Landmark $2,000,000, of which $500,000 was accrued by the
Company during its year ended April 30, 2006. In addition, the Company
retained Landmark and is paying it $1,000,000 in thirty six equal monthly
installments commencing on March 1, 2007, for general consulting, review of
pertinent documents, consultations regarding land planning and economic
feasibility studies and coordination with project engineers associated with
the Company's claim for additional compensation in the eminent domain
litigation. As a result of the foregoing payment of $2,000,000, the Company
accrued $1,500,000 as additional condemnation expense for the eight months
ended December 31, 2006. The Company intends to add the $2,000,000 to the
existing claim for additional compensation with regard to the condemnation.
11. Acquisition of Properties
On June 27, 2007, the Company acquired ten buildings in the Port Jefferson
Professional Park in Port Jefferson Station, New York. The buildings were
acquired for an aggregate purchase price of $8,850,000. The buildings,
located at 1-6, 8, 9 and 11 Medical Drive and 5380 Nesconset Highway in
Port Jefferson Station, are situated on 5.16 acres with 41,651 square feet
of rentable space. The purchase price per square foot was $ 212.48 and the
aggregate monthly rent flow from the property is currently $73,848.03. The
property has a 97% occupancy rate. The Company assumed an existing mortgage
debt on the property in the amount of $5,551,191.38. The remainder of the
purchase price was paid in cash totaling $3,363,153, after adjustments.
Approximately $81,922 of costs associated with the acquisition was
capitalized as buildings during the nine months ended September 30, 2007.
The purchase price was allocated as follows:
Land $ 2,300,000
Building $ 6,614,344
------------
$ 8,914,344
============
12. Recent Accounting Pronouncements:
In February 2007, the Financial Accounting Standards Board ("FASB") issued
FAS 159, "The Fair Value Option for Financial Assets and Financial
Liabilities--Including an amendment of FASB Statement No. 115". This
Statement applies to all entities, including not-for-profit organizations.
Most of the provisions of this Statement apply only to entities that elect
the fair value option. However, the amendment to FASB Statement No. 115,
Accounting for Certain Investments in Debt and Equity Securities, applies
to all entities with available-for-sale and trading securities. Some
requirements apply differently to entities that do not report net income.
This Statement is effective as of the beginning of an entity's first fiscal
year that begins after November 15, 2007. The Company does not believe this
pronouncement will have a material effect on its financial statements.
13. Special Distribution:
On March 13, 2007 the Board of Directors approved a special distribution in
the amount of $4.00 per share which was paid on April 9, 2007 to all
shareholders of record on March 26, 2007. This special distribution
amounted to $5,160,157.
14. Formation of Investment Committee:
The Board of Directors created an Investment Committee comprised of
independent directors effective as of June 7, 2007 for the purpose of (i)
considering all investment opportunities proposed by management; (ii)
evaluating whether such investments are appropriate REIT-qualified
investments, (iii) considering the implication of such investments under
Section 1033 of the Internal Revenue Code, and (iv) acting as a liaison
between management and the Board of Directors. The Board of Directors
appointed Nader G. M. Salour (Chairman), Ronald J. Macklin and Elliot H.
Levine to serve on the Investment Committee.
Seq. Page 9
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements made in this Form 10-Q that are not historical facts contain
"forward-looking information" within the meaning of the Private Securities
Litigation Reform Act of 1995, and Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act") both as
amended, which can be identified by the use of forward-looking terminology such
as "may," "will," "anticipates," "expects," "projects," "estimates," "believes,"
"seeks," "could," "should," or "continue," the negative thereof, other
variations or comparable terminology. Important factors, including certain risks
and uncertainties with respect to such forward-looking statements, that could
cause actual results to differ materially from those reflected in such forward
looking statements include, but are not limited to, the effect of economic and
business conditions, including risk inherent in the Long Island, New York and
Palm Beach County, Florida real estate markets, the ability to obtain additional
capital in order to develop the Company's existing real estate and other risks
detailed from time to time in its SEC reports. The Company assumes no obligation
to update the information in this Form 10-Q.
Critical Accounting Policies
----------------------------
The consolidated financial statements of the Company include accounts of the
Company and all majority-owned and controlled subsidiaries. The preparation of
financial statements in conformity with GAAP requires management to make
estimates and assumptions in certain circumstances that affect amounts reported
in the Company's consolidated financial statements and related notes. In
preparing these financial statements, management has utilized information
available including its past history, industry standards and the current
economic environment, among other factors, in forming its estimates and
judgments of certain amounts included in the consolidated financial statements,
giving due consideration to materiality. It is possible that the ultimate
outcome as anticipated by management in formulating its estimates inherent in
these financial statements might not materialize. However, application of the
critical accounting policies below involves the exercise of judgment and use of
assumptions as to future uncertainties and, as a result, actual results could
differ from these estimates. In addition, other companies may utilize different
estimates, which may impact comparability of the Company's results of operations
to those of companies in similar businesses.
Revenue Recognition
-------------------
Rental revenue is recognized on a straight-line basis, which averages minimum
rents over the terms of the leases. The excess of rents recognized over amounts
contractually due, if any, is included in deferred rents receivable on the
Company's balance sheets. Certain leases also provide for tenant reimbursements
of common area maintenance and other operating expenses and real estate taxes.
Ancillary and other property related income is recognized in the period earned.
Real Estate
-----------
Rental real estate assets, including land, buildings and improvements,
furniture, fixtures and equipment are recorded at cost. Tenant improvements,
which are included in buildings and improvements, are also stated at cost.
Expenditures for ordinary maintenance and repairs are expensed to operations as
they are incurred. Renovations and/or replacements, which improve or extend the
life of the asset, are capitalized and depreciated over their estimated useful
lives.
Depreciation is computed utilizing the straight-line method over the estimated
useful life of ten to thirty nine years for buildings and improvements and three
to twenty years for machinery and equipment.
The Company is required to make subjective assessments as to the useful life of
its properties for purposes of determining the amount of depreciation to reflect
on an annual basis with respect to those properties. These assessments have a
direct impact on the Company's net income. Should the Company lengthen the
expected useful life of a particular asset, it would be depreciated over more
years, and result in less depreciation expense and higher annual net income.
Real estate held for development is stated at the lower of cost or net
realizable value. In addition to land, land development and construction costs,
real estate held for development includes interest, real estate taxes and
related development and construction overhead costs which are capitalized during
the development and construction period. Net realizable value represents
estimates, based on management's present plans and intentions, of sale price
less development and disposition cost, assuming that disposition occurs in the
normal course of business.
Long Lived Assets
-----------------
On a periodic basis, management assesses whether there are any indicators that
the value of the real estate properties may be impaired. A property's value is
impaired only if management's estimate of the aggregate future cash flows
(undiscounted and without interest charges) to be generated by the property is
less than the carrying value of the property. Such future cash flow estimates
consider factors such as expected future operating income, trends and prospects,
as well as the effects of demand, competition and other factors. To the extent
impairment occurs, the loss will be measured as the excess of the carrying
amount of the property over the fair value of the property.
Seq. Page 10
The Company is required to make subjective assessments as to whether there are
impairments in the value of its real estate properties and other investments.
These assessments have a direct impact on the Company's net income, since an
impairment charge results in an immediate negative adjustment to net income. In
determining impairment, if any, the Company has adopted Financial Accounting
Standards Board ("FASB") Statement No. 144, "Accounting for the Impairment or
Disposal of Long Lived Assets."
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
AS COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006
The Company is reporting a net loss of $158,143 for the quarter ending September
30, 2007 compared to a net loss of $18,123 for the same three month period
during the prior year. For the nine month period ended September 30, 2007, the
Company is reporting net income of $91,271 compared to net income of $16,699.
These nine month results include a benefit for income taxes of $825,989 and
$330,814 for the 2007 and 2006 periods, respectively. Per share losses for the
current quarter amount to $0.12 compared to a loss of $0.01 for the same prior
year quarter while earnings per share amounted to $0.07 and $0.01 for the nine
months ended September 30, 2007 and 2006, respectively.
Revenues increased by $103,482 for the current quarter, amounting to $808,095
compared to $704,613 for the same period last year. Contributing factors
included an increase of $272,941 in rental revenues, which amounted to $613,683
compared to $340,742 for the same period last year. This increase was the result
of the acquisition of the Port Jefferson Professional Park as well as increased
income from the Flowerfield rental property which amounted to $246,057 and
$26,884, respectively. Partially offsetting this increased activity, interest
income declined by $169,459 for the quarter, amounting to $194,412 and $363,871
for the 2007 and 2006 periods, respectively. The decline was primarily the
direct result of the sale of investment securities to fund both the purchase of
the Port Jefferson property and the special $4.00 per share distribution to
shareholders earlier this year. Interest on those investments declined by
$186,218 while income on interest bearing deposits increased by $16,759.
For the nine month period ended September 30, 2007, revenues declined by
$152,859, amounting to $2,060,457 compared to $2,213,316 for the same period
last year. The variance is comprised of a combination of a $239,297 increase in
rental income and a decrease of $392,156 in interest income. In the case of
rental income, which amounted to $1,214,646 for the current reporting period
compared to $975,349 during the prior year, the increase is primarily
attributable to the Port Jefferson acquisition. Interest income totaled $845,811
compared to $1,237,967 for the prior year. Current interest rates, which are
considerably lower than the 9% statutory rate accrued on the $26.3 million
condemnation Advance Payment during the prior year, coupled with the fact that
only a portion of those funds are currently invested in interest bearing assets
are the major contributing factors to the decrease in interest income.
Expenses increased by $243,502 for the three months ended September 30, 2007,
amounting to $966,238 compared to $722,736 for the same period last year.
Contributing factors include a $63,481 increase in rental property expenses, a
$56,158 increase in general and administrative expenses, and increased
depreciation and interest expenses of $44,262 and $79,601, respectively. Rental
property expenses reflect increases of $28,241 and $22,406 in building and
grounds repair and maintenance and real estate taxes, respectively, which were
primarily associated with the newly acquired Port Jefferson property. Likewise,
the Company also experienced increases of $14,420 and $9,054 in utility expenses
and property and casualty insurance premiums generally associated with the Port
Jefferson property. These increases were partially reduced by $13,019 in salary
and benefit costs due to a staff reduction. The increase in general and
administrative expenses for the quarter is attributable to a $67,154 increase in
condemnation litigation costs, a $42,167 increase in corporate governance
expenses, and a $30,322 increase in directors fees and expenses. These increases
were partially offset by reductions of $55,949 and $26,297 in professional fees
and pension plan expenses, respectively. The increases in depreciation and
interest expense for the quarter are attributable to the Port Jefferson property
acquisition and the related mortgage payable.
As a result, the Company is reporting a loss from operations of $158,143 for the
three months ended September 30, 2007 compared to a loss of $18,123 for the same
period last year.
For the nine months ended September 30, 2007, expenses increased by $267,744
amounting to $2,795,175 compared to $2,527,431 during the same period last year.
As in the case of the current quarter, the Company experienced similar increases
of $71,950 in rental expense, $60,567 in general and administrative expense, and
$52,112 and $83,115 in depreciation and interest expenses, respectively. With
respect to rental expense, inclusive of the Port Jefferson acquisition, building
and grounds repair and maintenance increased by $91,957 as did property and
casualty insurance premiums and utilities, which increased by $25,215 and
$17,663, respectively. The foregoing were somewhat mitigated by reductions in
real estate taxes, attributable to the capitalization of taxes related to the
Flowerfield development plan, and salaries and benefits, due to staff reduction,
which declined by $37,497 and $23,302, respectively. General and administrative
expenses reflect increases in corporate governance expenses totaling $152,175,
directors fees and expenses of $56,462, salaries and benefits of $39,232, and
outside professional fees amounting to $16,922. These increases were partially
offset by a reduction of $96,749 in pension plan expenses and by the fact that
the prior year included $68,235 in costs associated with strategic planning and
$18,594 in office rental expense, both of which were non-recurring in the
current period. Additionally, the Company experienced reductions of $12,763,
Seq. Page 11
$7,878, and $6,405 in travel and entertainment expense, loan origination fees,
and condemnation expense, respectively. The increase in depreciation expense is
primarily attributable to the Port Jefferson acquisition which accounted for
$42,475 of the total variance to the prior year. Likewise, the entire increase
in interest expense is attributable to the Port Jefferson property acquisition
and related mortgage payable.
For the nine month period, the Company is reporting a loss before benefit for
income taxes of $734,718 compared to a loss of $314,115 for the same period last
year. As mentioned earlier in this report, the Company recognized a benefit for
income taxes of $825,989 and $330,814 for the nine month periods ended September
30, 2007 and 2006, respectively, resulting in net income of $91,271 and $16,699,
respectively. The current year benefit consists of $725,000 attributable to the
acquisition of the Port Jefferson property, which represents the reinvestment of
a portion of the Advance Payment on the Flowerfield condemnation, and prior year
refunds. The 2006 benefit consists of a deferred income tax adjustment of
$297,974 resulting primarily from additional book to tax differences in the
Callery-Judge Grove income.
On June 27, 2007, the Company acquired ten buildings in the Port Jefferson
Professional Park in Port Jefferson Station, New York. The buildings were
acquired for an aggregate purchase price of $8,850,000. The buildings, located
at 1-6, 8, 9 and 11 Medical Drive and 5380 Nesconset Highway in Port Jefferson
Station, are situated on 5.16 acres with 41,651 square feet of rentable space.
The purchase price per square foot was $ 212.48 and the aggregate monthly rent
flow from the property is currently $73,848.03. The property has a 97% occupancy
rate. The Company satisfied $5,551,191.38 of the purchase price by the
assumption of the existing mortgage debt on the property and the remainder in
cash after adjustments.
FUNDS FROM OPERATIONS
The Company defines Funds from Operations ("FFO"), a non-GAAP measure,
consistent with the National Association of Real Estate Investment Trusts
definition, as net income available to common shareholders, plus depreciation
and amortization of assets uniquely significant to the real estate industry,
reduced by gains and increased by losses on (i) sales of investment property and
(ii) extraordinary items.
The Company considers FFO to be an appropriate supplemental measure of a REIT's
operating performance as it is based on a net income analysis of property
portfolio performance that excludes non-cash items such as depreciation. The
historical accounting convention used for real estate assets requires
straight-line depreciation of buildings and improvements, which implies that the
value of real estate assets diminishes predictably over time. Since real estate
values historically rise and fall with market conditions, presentations of
operating results for a REIT, using historical accounting for depreciation,
could be less informative. The use of FFO is recommended by the REIT industry as
a supplemental performance measure.
Presentation of this information is intended to assist the reader in comparing
the operating performance of different REITs, although it should be noted that
not all REITs calculate FFO the same way, so comparisons with other REITs may
not be meaningful. Furthermore, FFO is not necessarily indicative of cash flow
available to fund cash needs and should not be considered as an alternative to
net income as an indication of the Company's performance.
FFO is calculated as follows:
Nine Months Three Months
Ended Ended
September 30, September 30,
2007 2007
------------ ------------
Net income (loss) $ 91,271 $ (158,143)
Condemnation costs 281,007 105,244
Benefit from income taxes (725,000) -
Depreciation 77,139 54,677
Funds from operations $ (275,583) $ 1,778
============ ============
Funds from operations per share $ (0.22) $ 0.00
============ ============
Weighted average common shares outstanding 1,276,493 1,289,878
============ ============
LIQUIDITY AND CAPITAL RESOURCES
Net cash (used in) provided by operating activities were $(3,423,577) and
$25,644,848 during the nine months ended September 30, 2007 and 2006,
respectively. The cash (used in) operating activities in the current period was
primarily related to the payment of $(2,000,000) to Landmark in connection with
an agreement to terminate two agreements, the Golf Operating Agreement and the
Asset Management Agreement, both dated April 9, 2002. The cash provided by
operating activities in the prior period consists of the receipt of $26,315,000
from the State of New York on the condemnation advance payment.
Net cash provided by (used in) investing activities was $8,586,473 and
$(24,312,617) during the nine months ended September 30, 2007 and 2006,
respectively. The cash provided by investing activities in the current period
was primarily related to the sale and principal repayments of marketable
Seq. Page 12
securities for $7,199,204 and $4,706,633, respectively. This was mitigated by
costs associated with property, plant and equipment net of a deposit for
$(3,319,364). Substantially all of these costs are related to the purchase of
the Port Jefferson Professional Park. The principal use of cash in the prior
period was related to the purchase of marketable securities of $(24,866,711).
Net cash (used in) provided by financing activities was $(5,111,695) and $74,052
during the nine months ended September 30, 2007 and 2006, respectively. The net
cash (used in) financing activities during the current period was the result of
a cash distribution payment to shareholders in the amount of $(5,160,157). Cash
provided by financing activities in the prior period was from proceeds from the
exercise of stock options. The Company has a $1,750,000 revolving credit line
with a bank, bearing interest at a rate of prime plus one percent which was
8.75% at September 30, 2007. The unused portion of the credit line, which is the
total line of $1,750,000, will enhance the Company's financial position and
liquidity and be available, if needed, to fund any unforeseen expenses.
As of September 30, 2007, the Company had cash and cash equivalents of
$3,002,488 and anticipates having the capacity to fund normal operating, general
and administrative expenses, and its regular debt service requirements. Working
capital, which is the total of current assets less current liabilities as shown
in the accompanying chart, amounted to $14,850,823 at September 30, 2007. Net
prepaid expenses and other assets shown in the accompanying chart does not
include $117,852 and $27,451 of furniture and fixtures, net, and loan
origination fees, net, for the nine months ended September 30, 2007 and 2006,
respectively.
September 30,
----------------------------
2007 2006
------------ ------------
Current assets:
Cash and cash equivalents $ 3,002,488 $ 2,951,287
Investment in marketable securities 11,736,523 23,797,515
Deposit on property - 504,000
Rent receivable, net 141,321 106,959
Interest receivable 403,850 468,679
Net prepaid expenses and other assets 304,388 309,594
------------ ------------
Total current assets $ 15,588,570 $ 28,138,034
------------ ------------
Current liabilities:
Accounts payable $ 196,233 $ 687,384
Accrued liabilities 188,919 2,174,460
Tenant security deposits payable 267,109 159,785
Mortgage payable, current portion 85,486 -
------------ ------------
Total current liabilities $ 737,747 $ 3,021,629
------------ ------------
Working capital $ 14,850,823 $ 25,116,405
============ ============
LIMITED PARTNERSHIP INVESTMENT
Our limited partnership investment in the Callery Judge Grove, LP (the "Grove")
is carried on the Company's balance sheet at $0 as a result of recording losses
equal to the carrying value of the investment. This investment represents a
10.93% ownership interest in a limited partnership that owns a 3500+ acre citrus
grove in Palm Beach County, Florida. The land was the subject of a change of
zone application for a mixed use of residential, commercial and industrial
development. This application has been rejected by the Palm Beach County Board
of County Commissioners. The Company understands that the Partnership has filed
an application with Palm Beach County for residential development at a level of
density which was reduced from the previous application.
(c) OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on its financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to investors.
Seq. Page 13
Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company places its temporary cash investments with high credit quality
financial institutions and, by policy, limits the amount of credit exposure in
any one financial institution. Certain financial instruments could potentially
subject the Company to concentrations of credit risk, such as cash equivalents
and longer-term investments. At times the Company maintains bank account
balances, which exceed FDIC insurance limits. The Company has not experienced
any losses in such accounts and believes that it is not exposed to any
significant credit risk on cash. Management does not believe significant credit
risk exists at September 30, 2007. As of September 30, 2007, the Company's
investments were in hybrid mortgaged backed securities that are fully guaranteed
by agencies of the U.S. Government with an effective duration of between one and
two years and totaled approximately $11,700,000.
With the exception of the reduction in longer-term investments from $23,800,000
to $11,700,000, the Company believes there have been no significant changes in
market risk from that disclosed in the Company's Transition Report on Form 10-K
for the eight months ended December 31, 2006.
Item 4T CONTROLS AND PROCEDURES
We maintain a set of disclosure controls and procedures designed to reasonably
assure that information required to be disclosed by us in reports that we file
or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms. Disclosure controls
are also designed reasonably to assure that information required to be disclosed
is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer. The evaluation of our disclosure controls
performed by our Chief Executive Officer and Chief Financial Officer included
obtaining an understanding of the design and objective of the controls, the
implementation of those controls and the results of the controls on this report
on Form 10-Q. In the course of the evaluation of disclosure controls, we
reviewed the controls that are in place to record, process, summarize and
report, on a timely basis, matters that require disclosure in our reports filed
under the Exchange Act. We also considered the adequacy of the items disclosed
in this report on Form 10-Q.
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of the Company's disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) as of September 30, 2007. Based upon that evaluation, the Company's
Chief Executive Officer and Chief Financial Officer has concluded that the
disclosure controls and procedures were effective, in all material respects, to
provide reasonable assurance that information required to be disclosed in the
reports the Company files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission. It should be noted
that design of any system of controls is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions regardless of how remote.
There have been no changes in the Company's internal control over financial
reporting identified in connection with the evaluation required by paragraph (d)
of Exchange Act Rule 13a-15 that occurred during the Company's last fiscal
quarter that has materially affected, or that is reasonably likely to materially
affect, the Company's internal control over financial reporting.
Part II Other Information
Item 1 Legal Proceedings
Gyrodyne Company of America, Inc. v. The State University of New York at Stony
------------------------------------------------------------------------------
Brook
-----
On November 2, 2005, the State University of New York at Stony Brook (the
"University") filed an acquisition map with the Suffolk County Clerk's office
and vested title in approximately 245.5 acres of the Company's property known as
Flowerfield (the "Property") pursuant to the New York Eminent Domain Procedure
Law (the "EDPL"). On March 27, 2006, the Company received payment from the State
of New York in the amount of $26,315,000, which the Company had previously
elected under the EDPL to accept as an advance payment for the Property. Under
the EDPL, both the advance payment and any additional award from the Court of
Claims generally bear interest at the current statutory rate of 9% simple
interest from the date of the taking through the date of payment.
On May 1, 2006, the Company filed a Notice of Claim with the Court of Claims of
the State of New York seeking $158 million in damages from the University
resulting from the condemnation of the Property. While the Company believes that
a credible case for substantial additional compensation can be made, it is
possible that the Company may be awarded a different amount than is being
requested, including no compensation, or an amount that is substantially lower
than the Company's claim for $158 million. It is also possible that the Court of
Claims could ultimately permit the State to recoup part of its advance payment
to the Company.
Seq. Page 14
Faith Enterprises v. Gyrodyne, Supreme Court, Suffolk County, Index # 3511/100
------------------------------------------------------------------------------
Faith Enterprises, ("Faith") an operator of a child care center as a franchisee
of Kiddie Academy, leased a suite of offices from the Company under a 15-year
lease which commenced in March 2005 with a five-year option. Beginning
approximately July 2005 and continuing throughout its occupation, Faith failed
to pay the full monthly rent due under the lease. The Company served Faith with
a series of default notices. The franchisor was also notified of the default but
did not elect to terminate the franchise agreement nor pay the rent deficiency
on behalf of the franchisee. In February 2007, the Company served Faith with a
10-day notice of default. Faith then commenced this action in New York State
Supreme Court for Suffolk County seeking damages for breach of contract,
fraudulent inducement and tortuous interference with business, claiming that the
Company's issuance of press releases in December 2006 and January 2007 about its
submission of an application to the Town of Smithtown to rezone its property
caused Faith financial damages in lost clientele. Faith Enterprises is seeking
$7 million in damages on each of the three claims and is requesting that it not
pay rent during the pendency of the proceeding. Faith also filed an application
for a Yellowstone injunction and a preliminary injunction to forestall the
Company from proceeding with the non-payment eviction proceeding. The Company
opposed that application and, in an order dated February 21, 2007, the Court
denied Faith's request in its entirety. The Company also served and filed a
motion to dismiss the entire case. In response to the motion to dismiss, Faith
served an amended complaint. Gyrodyne filed an amended motion to dismiss the
amended complaint, which was denied on October 2, 2007. We are preparing the
answer to the amended complaint and a third-party complaint against the four
individual guarantors of the Lease. The Company also commenced a proceeding in
the District Court seeking to evict Faith Enterprises for non-payment of rent.
That proceeding was commenced in March 2007, upon the Supreme Court's decision
denying Faith Enterprises' request for preliminary injunctive relief. Faith
consented to the issuance of an order by the District Court to vacate the
premises and for a judgment for past due rent. Faith vacated the premises on
April 6, 2007.
In addition, in the normal course of business, the Company is a party to various
legal proceedings. After reviewing all actions and proceedings pending against
or involving the Company, Management considers the aggregate loss, if any, will
not be material.
Item 1A Risk Factors
There were no material changes to the Company's risk factors in the third
quarter of 2007.
Items 2 through 5 are not applicable to the three months ended September 30,
2007.
Item 6 Exhibits
31.1 Rule 13a-14(a)/15d-14(a) Certification.
32.1 CEO/CFO Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GYRODYNE COMPANY OF AMERICA, INC.
Date: October 29, 2007 /S/ Stephen V. Maroney
----------------------
Stephen V. Maroney
President, Chief Executive Officer and Treasurer
Date: October 29, 2007 /S/ Frank D'Alessandro
----------------------
Frank D'Alessandro
Controller
Seq. Page 15