US Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended JUNE 30, 2007
-------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____________ to ____________
Commission file number 0-1684
Gyrodyne Company of America, Inc.
---------------------------------
(Exact name of small business issuer 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
--------------
(Issuer'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 JULY 31, 2007
Seq. Page 1
INDEX TO QUARTERLY REPORT OF GYRODYNE COMPANY OF AMERICA, INC.
QUARTER ENDED JUNE 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 9
Item 3 Quantitative and Qualitative Disclosures About Market Risk 13
Item 4T Controls and Procedures 13
Part II - Other Information 14
Item 1 Legal Proceedings 14
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 June 30, December 31,
------ 2007 2006
(Unaudited)
------------ ------------
REAL ESTATE:
Rental property:
Land $ 2,303,017 $ 3,017
Building and improvements 10,000,536 3,140,332
Machinery and equipment 179,335 179,335
------------ ------------
12,482,888 3,322,684
Less accumulated depreciation 2,531,812 2,500,907
------------ ------------
9,951,076 821,777
------------ ------------
Land held for development:
Land 558,466 558,466
Land development costs 607,293 321,514
------------ ------------
1,165,759 879,980
------------ ------------
Total real estate, net 11,116,835 1,701,757
Cash and Cash Equivalents 3,089,440 2,951,287
Investment In Marketable Securities 12,124,336 23,797,515
Deposit On Property - 504,000
Rent Receivable, net of allowance for doubtful accounts
of $15,000 and $46,000, respectively 58,643 106,959
Interest Receivable 405,936 468,679
Prepaid Expenses And Other Assets 534,803 337,045
Prepaid Pension Costs 1,101,841 1,080,473
------------ ------------
Total Assets $ 28,431,834 $ 30,947,715
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Accounts payable $ 213,527 $ 687,384
Accrued liabilities 273,701 2,174,460
Tenant security deposits payable 224,836 159,785
Mortgage payable 5,544,319 -
Deferred income taxes 7,410,000 8,135,000
------------ ------------
Total Liabilities 13,666,383 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 89,100 280,042
Balance of undistributed income other than gain or loss
on sales of properties 6,704,567 11,615,310
------------ ------------
16,303,148 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 14,765,451 19,791,086
------------ ------------
Total Liabilities and Stockholders' Equity $ 28,431,834 $ 30,947,715
============ ============
See notes to consolidated financial statements
Seq. Page 3
GYRODYNE COMPANY OF AMERICA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended Three Months Ended
June 30, June 30,
----------------------------- -----------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
Revenues
Rental Income $ 600,963 $ 634,607 $ 314,104 $ 323,071
Interest Income 651,399 874,097 268,765 316,072
------------ ------------ ------------ ------------
1,252,362 1,508,704 582,869 639,143
------------ ------------ ------------ ------------
Expenses
Rental expenses 391,577 383,109 191,320 169,135
General and administrative expenses 1,402,942 1,398,533 737,690 676,619
Depreciation 30,904 23,054 15,687 7,280
Interest expense 3,514 - 3,514 -
------------ ------------ ------------ ------------
1,828,937 1,804,696 948,211 853,034
------------ ------------ ------------ ------------
Loss from Operations Before Benefit for
Income Taxes (576,575) (295,992) (365,342) (213,891)
Benefit for Income Taxes (825,989) (330,814) (800,184) (297,973)
------------ ------------ ------------ ------------
Net Income $ 249,414 $ 34,822 $ 434,842 $ 84,082
============ ============ ============ ============
Net Income Per Common Share:
Basic $ 0.20 $ 0.03 $ 0.34 $ 0.07
============ ============ ============ ============
Diluted $ 0.20 $ 0.03 $ 0.34 $ 0.07
============ ============ ============ ============
Weighted Average Number Of Common
Shares Outstanding:
Basic 1,269,689 1,237,183 1,289,878 1,237,219
============ ============ ============ ============
Diluted 1,269,689 1,259,839 1,289,878 1,282,530
============ ============ ============ ============
See notes to consolidated financial statements
Seq. Page 4
GYRODYNE COMPANY OF AMERICA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
-----------------------------
2007 2006
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 249,414 $ 34,822
------------ ------------
Adjustments to reconcile net income to net cash (used in) provided
by operating activities:
Depreciation and amortization 36,173 42,293
Bad debt expense 12,000 12,000
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Land development costs (285,779) (16,232)
Accounts receivable 36,316 25,973
Interest receivable 62,743 (49,185)
Condemnation receivable - 26,336,421
Prepaid expenses and other assets (203,026) (173,976)
Prepaid pension costs (21,368) 49,085
(Decrease) increase in liabilities:
Accounts payable (473,855) (28,359)
Accrued liabilities (1,900,760) (30,150)
Deferred income taxes (725,000) (575,684)
Tenant security deposits 65,051 (57,981)
------------ ------------
Total adjustments (3,397,505) 25,534,205
------------ ------------
Net cash (used in) provided by operating activities (3,148,091) 25,569,027
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Costs associated with property, plant and equipment (3,622,757) (148,452)
Purchase of marketable securities - (21,788,799)
Proceeds from sale of marketable securities 7,199,204 -
Deposit on property 504,000 -
Principal repayments on investment in marketable securities 4,283,033 -
------------ ------------
Net cash provided by (used in) investment activities 8,363,480 (21,937,251)
------------ ------------
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 6,872 -
------------ ------------
Net cash (used in) provided by financing activities (5,077,236) 74,052
------------ ------------
Net increase in cash and cash equivalents 138,153 3,705,828
Cash and cash equivalents at beginning of period 2,951,287 1,626,052
------------ ------------
Cash and cash equivalents at end of period $ 3,089,440 $ 5,331,880
============ ============
Supplemental cash flow information:
Interest paid $ 3,514 $ -
============ ============
Cash distributions paid $ 5,160,157 $ -
============ ============
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. The converted buildings consist
of approximately 127,392 rentable square feet housing 49 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 remains
undeveloped.
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 $73,032.85. 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 June 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 65% $1,172,504 $14.25 49 0
Port Jefferson Station, NY 41,651 97% $876,394 $21.69 21 0
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 six month
periods ended June 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.
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 six month periods ended June 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.
Seq. Page 6
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 agency hybrid mortgage backed securities 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:
Six months ended Three months ended
June 30, June 30,
2007 2006 2007 2006
---------- ---------- ---------- ----------
Basic 1,269,689 1,237,183 1,289,878 1,237,219
Effect of dilutive securities - 22,656 - 45,311
---------- ---------- ---------- ----------
Diluted 1,269,689 1,259,839 1,289,878 1,282,530
========== ========== ========== ==========
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 quarter ended June 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 (8.25 % at June 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 June 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.
8. Stock Options:
The Company's results for the three and six month periods ended June 30, 2007
include share-based compensation expense totaling $0.
The following table represents the Company's stock options granted, exercised
and forfeited during the six months of fiscal 2007.
Seq. Page 7
Weighted
Weighted Average
Average Remaining Aggregate
Number Exercise price Contractual Intrinsic
Stock Options of Shares per Share Term Value
--------------------------------------------------------------------------------------------
Outstanding at January 1, 2007 67,105 $ 16.42 - -
--------------------------------------------------------------------------------------------
Granted - - - -
--------------------------------------------------------------------------------------------
Exercised (67,105) $ 16.42 - -
--------------------------------------------------------------------------------------------
Forfeited/expired - - - -
--------------------------------------------------------------------------------------------
Outstanding at June 30, 2007 - $ - - -
--------------------------------------======================================================
--------------------------------------------------------------------------------------------
Vested and Exercisable at
June 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 six months ended June 30, 2007 and
2006:
Six Months Ended Three Months Ended
June 30, June 30,
------------------------- -------------------------
2007 2006 2007 2006
---------- ---------- ---------- ----------
Pension Benefits
Service Cost $ 60,696 $ 43,248 $ 30,348 $ 21,624
Interest Cost 66,054 42,699 33,027 21,349
Expected Return on Plan Assets (149,178) (79,550) (74,589) (39,775)
Amortization of Prior-Service Cost - 20,115 - 10,058
---------- ---------- ---------- ----------
Net Periodic Benefit Cost After
Curtailments and Settlements $ (22,428) $ 26,512 $ (11,214) $ 13,256
========== ========== ---------- ----------
During the six months ended June 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 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 June 30, Amount
-------------------------------------------------------------------------
2008 $ 1,463,000
2009 730,000
2010 580,000
2011 275,000
2012 103,000
Thereafter 40,000
-----------------
$ 3,191,000
=================
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 will pay it
$1,000,000 in thirty six equal monthly installments commencing on March 1, 2007,
Seq. Page 8
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 $73,032.85. 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. Approximately $64,344 of costs associated with the
acquisition was capitalized as buildings. The purchase price was allocated as
follows:
Land $ 2,300,000
Building $ 6,614,344
Mortgage payable $(5,551,191)
Cash $ 3,363,153
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 Distributions:
On March 13, 2007 the Board of Directors declared a special distribution in the
amount of $4.00 per share payable on April 9, 2007 to all shareholders of record
on March 26, 2007. This special distribution amounted to $5,160,157 and was paid
from the advance payment funds received as a result of the condemnation.
14. Formation of Investment Committee:
The Board of Directors created an Investment Committee 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.
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.
Seq. Page 9
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.
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 SIX MONTHS ENDED JUNE 30, 2007
AS COMPARED TO THE THREE AND SIX MONTHS ENDED JUNE 30, 2006
The Company is reporting net income of $434,842 for the three month period ended
June 30, 2007 compared to net income of $84,082 for the same period last year.
The current reporting period includes a benefit for income taxes amounting to
$800,184 while the prior year results reflect a $297,973 benefit for income
taxes. The June 30, 2007 benefit results primarily from the reinvestment of
condemnation proceeds, a refund from fiscal year 2004 and the prior year benefit
is related to a deferred income tax adjustment resulting from the Company's
Seq. Page 10
conversion to a real estate investment trust (REIT). For the six months ended
June 30, 2007, the Company is reporting net income of $249,414 compared to net
income totaling $34,822 for the same prior last year. The current year results
include a benefit for taxes of $825,989 while the prior year includes a benefit
for taxes totaling $330,814. In addition to the 2004 refund reflected in the
quarterly results, the six month benefit for taxes includes a $27,724 refund
from 2006. Per share income for the three and six month periods ended June 30,
2007 amounted to $0.34 and $0.20, respectively, compared to per share earnings
of $0.07 and $0.03 for the same periods during the prior year, respectively.
Revenues declined by $56,274, amounting to $582,869 for the current quarter
compared to $639,143 for the same period last year. Contributing factors
included declines of $8,967 in rental income and $47,307 in interest income
which, for the most part, is associated with a reduction in interest bearing
deposits. For the six months ended June 30, 2007, revenues declined by $256,342
and totaled $1,252,362 compared to $1,508,704 for the same period during the
prior year and include declines of $33,644 and $222,698 in rental and interest
income, respectively. Rental income was impacted by $91,639 associated with the
previously reported surrender of certain demised premises by a major tenant and
the net affect of terminated and new tenant leases totaling $59,437. Subsequent
to June 30, 2007, the surrendered premises comprising 12,980 square feet were
leased to a former tenant for occupancy beginning on August 1, 2007. In
addition, 11,440 square feet of space has been leased for occupancy as of July
1, 2007. Both leases are short term in nature and have the capacity to generate
$305,400 in annualized revenue and will increase the occupancy rate at
Flowerfield from 65% to 84%. The major contributing factor to the decrease in
interest income is the fact that the prior year period included an interest
payment of $538,556 relating to the Advance Payment on the condemnation of the
Company's Flowerfield property; this was partially offset by an increase of
$337,049 in interest earned on investments in marketable securities.
Expenses increased by $95,177 for the three months ended June 30, 2007,
amounting to $948,211 compared to $853,034 for the same period last year. Rental
expenses, which increased by $22,185, amounted to $191,320 compared to $169,135
for the prior year. Repairs and maintenance and property and casualty insurance
premiums accounted for $38,504 and $11,853, respectively, in increased expenses
and were partially mitigated by reduced salary and benefit expense totaling
$9,324. Additionally, real estate taxes decreased by $19,024 as a result of
capitalizing certain expenses associated with the recent filing of a development
application for the Flowerfield property. For the six months ended June 30,
2007, rental expenses increased by $8,468, amounting to $391,577 compared to
$383,109 for the same period during the prior year. As in the case of the
quarterly results, repairs and maintenance and property and casualty insurance
premiums accounted for increases of $63,716 and $16,161, respectively;
capitalized real estate taxes and salaries and benefits declined by $59,904 and
$10,284, respectively.
General and administrative expenses for the quarter ended June 30, 2007 amounted
to $737,690, an increase of $61,071 when compared to the $676,619 reported for
the same period last year. Corporate governance, salaries and benefits, and
directors fees increased by $87,402, $61,742, and $15,668, respectively, when
compared to the same three month period of the prior year. The increase in
corporate governance was primarily the result of legal expenses relating to the
Company's annual meeting and SEC filings. These increases were partially offset
by reductions in several areas totaling $103,740, of which, the most significant
were professional fees, pension expense, and condemnation litigation expenses
which declined by $40,889, $30,761, and $14,617, respectively. In comparison to
the prior year, the decrease in professional fees was, for the most part,
reductions in legal expenses associated with the Company's election of REIT
status and the termination of contractual agreements with Landmark National. For
the six month period ended June 30, 2007, general and administrative expenses
increased nominally by $4,409. During this period, compared to the same six
months of the prior year, salaries and benefits and directors fees increased by
$38,844 and $26,140, respectively, and corporate governance and professional
fees increased by $110,008 and $72,872, respectively. In addition to the items
that impacted the quarterly results, corporate governance expenses increased by
$20,840 for legal matters associated with Board Committees for the six month
reporting period. The increased level of professional fees is the result of
several contributing factors, the most significant being costs associated with
consulting fees relating to Sarbanes-Oxley compliance and the conversion of the
Company's accounting system. Additionally, costs relating to a landlord/tenant
issue and fees associated with the engagement of investment bankers also
increased. Partially offsetting the foregoing increases, expenses associated
with the Company's condemnation litigation declined by $73,559 and prior year
results included nonrecurring costs related to the development of a strategic
plan totaling $68,235. The Company's pension plan expense reflected a net
improvement of $70,452 and several additional reductions totaling $31,209 were
also realized in the current six month period.
Depreciation expenses totaled $15,687 and $30,904 for the three and six month
periods ended June 30, 2007, respectively, compared to $7,280 and $23,054 for
the respective periods during the prior year.
As a result of the foregoing, the Company is reporting a loss from operations
before benefit for income taxes of $365,342 for the quarter ended June 30, 2007
and $576,575 for the six months then ended. For the three and six month periods
of the prior year, the Company experienced losses from operations before benefit
for income taxes of $213,891 and $295,992, respectively.
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 $73,032.85. 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.
Seq. Page 11
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:
Six Months Ended Three Months Ended
June 30, 2007 June 30, 2007
------------------------------------------------------------------------------------------
Net Income $ 249,414 $ 434,842
------------------------------------------------------------------------------------------
Benefit from income taxes (725,000) (725,000)
------------------------------------------------------------------------------------------
Depreciation 22,462 11,466
------------------------------------------------------------------------------------------
Funds from operations $ (453,124) $ (278,692)
------------------------------------------------------------------------------------------
Funds from operations per share $ (0.36) $ (0.22)
------------------------------------------------------------------------------------------
Weighted average common shares outstanding 1,269,689 1,289,878
----------------------------------------------------======================================
LIQUIDITY AND CAPITAL RESOURCES
Net cash (used in) provided by operating activities were $(3,148,091) and
$25,569,027 during the six months ended June 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 $8,363,480 and
$(21,937,251) during the six months ended June 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 securities for
$7,199,204 and $4,283,033, respectively. This was mitigated by costs associated
with property, plant and equipment net of a deposit for $(3,118,757).
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 $(21,788,799).
Net cash (used in) provided by financing activities was $(5,077,236) and $74,052
during the six months ended June 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 of $(5,160,157). This was primarily
offset by proceeds from the exercise of stock options totaling $76,049. 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
9.25% at June 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 June 30, 2007, the Company had cash and cash equivalents of $3,089,440 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 $15,294,421 at June 30, 2007. Net prepaid
expenses and other assets shown in the accompanying chart does not include
$122,404 and $28,309 of furniture and fixtures, net, and loan origination fees,
net, for the six months ended June 30, 2007 and 2006, respectively.
Seq. Page 12
June 30,
----------------------------
2007 2006
------------ ------------
Current assets:
Cash and cash equivalents $ 3,089,440 $ 2,951,287
Investment in marketable securities 12,124,336 23,797,515
Deposit on property - 504,000
Rent receivable, net 58,643 106,959
Interest receivable 405,936 468,679
Net prepaid expenses and other assets 412,399 308,736
------------ ------------
Total current assets $ 16,090,754 $ 28,137,176
------------ ------------
Current liabilities:
Accounts payable $ 213,527 $ 687,384
Accrued liabilities 273,701 2,174,460
Tenant security deposits payable 224,836 159,785
Mortgage payable, current portion 84,269 -
------------ ------------
Total current liabilities $ 796,333 $ 3,021,629
------------ ------------
Working capital $ 15,294,421 $ 25,115,547
============ ============
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 will now
assess available development options for the Grove under existing laws.
(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 conditions, changes
in financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to investors.
Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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.
Seq. Page 13
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 June 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.
Faith Enterprises v. Gyrodyne, Supreme Court, Suffolk County, Index # 3511/100
------------------------------------------------------------------------------
Faith Enterprises, 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 of the suite, Faith Enterprises
failed to pay the full monthly rent due under the lease. The Company served
Faith Enterprises 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 Enterprises with a 10-day notice of default. Faith
Enterprises 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
Enterprises 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 Enterprises 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 Enterprises' 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 is returnable in
court on August 15, 2007. Faith has until July 30, 2007, to serve its opposition
papers. Gyrodyne's reply papers are due August 14, 2007. 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.
Items 2 through 5 are not applicable to the three months ended June 30, 2007.
Seq. Page 14
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: August 9, 2007 /S/ Stephen V. Maroney
----------------------
Stephen V. Maroney
President, Chief Executive Officer
and Treasurer
Date: August 9, 2007 /S/ Frank D'Alessandro
----------------------
Frank D'Alessandro
Controller
Seq. Page 15