U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K/A
Amendment No. 1
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the fiscal year ended December 31, 2007
OR
[ ] 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 (I.R.S. Employer
incorporation or organization) Identification No.)
1 FLOWERFIELD, SUITE 24, ST. JAMES, NY 11780
-------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (631) 584-5400
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $1.00 PAR VALUE
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all the reports
required to be filed by Section 13 or Section 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer," and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [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]
The aggregate market value of voting common stock held by non-affiliates of the
registrant on June 30, 2007 was $32,718,260. The aggregate market value was
computed by reference to the closing price on such date of the common stock as
reported on the NASDAQ Stock Market. Shares of common stock held by each
executive officer and director and by each person who to the registrant's
knowledge owns 5% or more of the outstanding voting stock have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
On February 18, 2008 1,289,878 shares of the Registrant's common stock, par
value $1 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
----
1
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-K/A amends the original Report on Form 10-K of
Gyrodyne Company of America, Inc. for the fiscal year ended December 31, 2007,
filed with the Securities and Exchange Commission on March 28, 2008, to add
certain information required on Form 10-K:
Report of Independent Registered Public Accounting Firm signature.
GYRODYNE COMPANY OF AMERICA, INC. AND SUBSIDIARIES
--------------------------------------------------
REPORT ON AUDITS OF CONSOLIDATED
FINANCIAL STATEMENTS
Years Ended December 31, 2007 and 2006
GYRODYNE COMPANY OF AMERICA, INC
AND SUBSIDIARIES
Contents
--------------------------------------------------------------------------------
Years Ended December 31, 2007 and 2006 Pages
--------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statement of Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6 - F-21
--------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Gyrodyne Company of America, Inc. and Subsidiaries
St. James, New York
We have audited the accompanying consolidated balance sheets of Gyrodyne Company
of America, Inc. and Subsidiaries (the "Company") as of December 31, 2007 and
December 31, 2006 and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended December 31, 2007 and
December 31, 2006. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, audits of its internal control
over financial reporting. Our audits include consideration of internal control
over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Gyrodyne Company of
America, Inc. and Subsidiaries as of December 31, 2007 and December 31, 2006 and
the results of their operations and their cash flows for the years ended
December 31, 2007 and December 31, 2006 in conformity with accounting principles
generally accepted in the United States of America.
/s/ Holtz Rubenstein Reminick LLP
Melville, New York
March 27, 2008
--------------------------------------------------------------------------------
F-1
GYRODYNE COMPANY OF AMERICA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets December 31,
--------------------------------------------------------------------------------------------------------------------------
2007 2006
--------------------------------------------------------------------------------------------------------------------------
Assets
Real Estate:
Rental property:
Land $ 2,303,017 $ 3,017
Building and improvements 10,345,449 3,140,332
Machinery and equipment 179,335 179,335
------------------------------
12,827,801 3,322,684
Less Accumulated Depreciation 2,651,084 2,500,907
------------------------------
10,176,717 821,777
------------------------------
Land held for development:
Land 558,466 558,466
Land development costs 781,426 321,514
------------------------------
1,339,892 879,980
------------------------------
Total Real Estate, net 11,516,609 1,701,757
Cash and Cash Equivalents 3,455,141 2,951,287
Investment in Marketable Securities 10,816,269 23,797,515
Deposits on Property - 504,000
Rent Receivable, net of allowance for doubtful
accounts of $14,000 and $46,000, respectively 94,693 106,959
Interest Receivable 64,712 468,679
Prepaid Expenses and Other Assets 352,477 337,045
Prepaid Pension Costs 1,125,328 1,080,473
------------------------------
Total Assets $ 27,425,229 $ 30,947,715
==============================
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable $ 617,558 $ 687,384
Accrued liabilities 174,007 2,174,460
Tenant security deposits payable 275,343 159,785
Mortgage Payable 5,502,623 -
Deferred income taxes 7,832,000 8,135,000
------------------------------
Total Liabilities 14,401,531 11,156,629
------------------------------
Commitments and Contingencies
Stockholders' Equity:
Common stock, $1 par value; authorized 4,000,000 shares; 1,531,086
shares issued; 1,289,878 and 1,237,219 shares outstanding, respectively 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 148,415 280,042
Balance of undistributed income from other than gain or loss on sales of properties 4,903,499 11,615,310
------------------------------
14,561,395 21,631,572
Less Cost of Shares of Common Stock Held in Treasury; 241,208 and
293,867, respectively (1,537,697) (1,840,486)
------------------------------
Total Stockholders' Equity 13,023,698 19,791,086
------------------------------
Total Liabilities and Stockholders' Equity $ 27,425,229 $ 30,947,715
==============================
--------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. F-2
GYRODYNE COMPANY OF AMERICA, INC. AND SUBSIDIARIES
Consolidated Statements of Operations Years Ended December 31,
-----------------------------------------------------------------------------------------
2007 2006
-----------------------------------------------------------------------------------------
Revenues
Rental income $ 1,879,882 $ 1,313,970
Interest income 1,038,150 1,594,988
------------------------------
2,918,032 2,908,958
------------------------------
Expenses
Rental expenses 896,340 731,530
General and administrative expenses 3,332,332 2,553,142
Depreciation 150,176 48,402
Provison for loss of interest on condemnation proceeds 332,377 -
Interest expense 162,450 -
------------------------------
4,873,675 3,333,074
------------------------------
Loss from operations before loss on condenmation
of rental property (1,955,643) (424,116)
Loss on condemnation of rental property - (1,500,000)
------------------------------
Loss Before Benefit for Income Taxes (1,955,643) (1,924,116)
Benefit for Income Taxes (403,989) (1,747,814)
------------------------------
Net Loss $ (1,551,654) $ (176,302)
==============================
Net Loss Per Common Share:
Basic $ (1.21) $ (0.14)
==============================
Diluted $ (1.21) $ (0.14)
==============================
Weighted Average Number of Common Shares Outstanding:
Basic 1,279,867 1,237,201
==============================
Diluted 1,279,867 1,237,201
==============================
-----------------------------------------------------------------------------------------
See notes to consolidated financial statements. F-3
GYRODYNE COMPANY OF AMERICA, INC.
AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2007 and 2006
------------------------------------------------------------------------------------------------------------------------------------
$1 Par Value
Common Stock Accumulated
------------------------ Additional Other Treasury Stock
Par Paid in Comprehensive Income ------------------------- Total
Shares Value Capital Income (Deficit) Shares Cost Equity
----------- ------------ ----------------------------------------- ----------- ------------- -------------
Balance, January 1,
2006 1,531,086 $ 1,531,086 $ 8,399,134 $ - $ 11,791,612 293,867 $ (1,840,486) $ 19,881,346
Tax Reduction - Stock
Options - - (194,000) - - - - (194,000)
Unrealized Gain from
Marketable Securities - - - 280,042 - - - 280,042
Net Loss - - - - (176,302) - - (176,302)
----------- ------------ ----------------------------------------- ----------- ------------- -------------
Balance, December 31,
2006 1,531,086 1,531,086 8,205,134 280,042 11,615,310 293,867 (1,840,486) 19,791,086
Exercise of Stock
Options (226,739) (52,659) 302,789 76,050
Unrealized Loss from
Marketable Securities (131,627) (131,627)
Cash Distribution Payment (5,160,157) (5,160,157)
Net Loss (1,551,654) (1,551,654)
----------- ------------ ----------------------------------------- ----------- ------------- -------------
Balance, December 31,
2007 1,531,086 $ 1,531,086 $ 7,978,395 $ 148,415 $ 4,903,499 241,208 $ (1,537,697) $ 13,023,698
=========== ============ ========================================= =========== ============= =============
------------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. F-4
GYRODYNE COMPANY OF AMERICA, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows Years Ended December 31,
-------------------------------------------------------------------------------------------------
2007 2006
-------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net loss $ (1,551,654) $ (176,302)
------------------------------
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 164,594 76,038
Deferred income taxes (303,000) (1,581,135)
Bad debt expense 34,000 24,000
Net periodic pension benefit (income) cost (44,855) 91,700
Provision for loss of interest on condemnation proceeds 332,377 -
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Land development costs (459,912) (321,514)
Accounts receivable (21,734) (18,876)
Interest receivable 71,590 (64,429)
Condemnation receivable - 26,315,000
Prepaid expenses and other assets 83,395 (249,614)
(Decrease) increase in liabilities:
Accounts payable (69,825) 295,818
Accrued liabilities (2,000,453) 1,555,910
Income taxes payable - (238,548)
Tenant security deposits 115,558 (52,354)
------------------------------
Total adjustments (2,098,265) 25,831,996
------------------------------
Net Cash (Used in) Provided by Operating Activities (3,649,919) 25,655,694
------------------------------
Cash Flows from Investing Activities:
Costs associated with property, plant and equipment (3,449,926) (383,037)
Deposits on property - (504,000)
Proceeds from sale of marketable securities 7,199,204 -
Purchases of marketable securities - (24,784,143)
Principal repayments on investment in marketable securities 5,650,415 1,266,669
------------------------------
Net Cash Provided by (Used in) Investing Activities 9,399,693 (24,404,511)
------------------------------
Cash Flows from Financing Activities:
Cash Distribution Payment (5,160,157) -
Principal payments on mortgage (48,601) -
Loan origination fees (113,211) -
Proceeds from exercise of stock options 76,049 74,052
------------------------------
Net Cash (Used in) Provided by Financing Activities (5,245,920) 74,052
------------------------------
Net Increase in Cash and Cash Equivalents 503,854 1,325,235
Cash and Cash Equivalents, beginning of year 2,951,287 1,626,052
------------------------------
Cash and Cash Equivalents, end of year $ 3,455,141 $ 2,951,287
==============================
Supplemental cash flow information:
Interest paid $ 162,450 $ -
==============================
Assumption of mortgage payable $ 5,551,191 $ -
==============================
Income taxes $ 12,918 $ 31,193
==============================
-------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. F-5
GYRODYNE COMPANY OF AMERICA, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Years Ended December 31, 2007 and 2006
--------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
Organization and nature of operations - Gyrodyne Company of America, Inc.
and Subsidiaries (the "Company") is primarily a lessor of industrial and
commercial real estate to unrelated diversified entities located in Long
Island, New York, and is also pursuing development plans of its remaining
real estate holdings. Effective May 1, 2006, the Company elected to be
taxed as a real estate investment trust ("REIT") under the Internal Revenue
Code of 1986, as amended and as such has changed its fiscal year end to
December 31.
The State University of New York at Stony Brook has acquired part of the
Company's real estate property located in Stony Brook/St. James, New York
through eminent domain. See Note 18.
Principles of consolidation - The accompanying consolidated financial
statements include the accounts of Gyrodyne Company of America, Inc.
("GCA") and all majority owned subsidiaries. Investments in affiliates in
which the Company has the ability to exercise significant influence, but
not control, would be accounted for under the equity method. Investment
interests in excess of 5% in limited partnerships are accounted for under
the equity method.
All consolidated subsidiaries are wholly owned. All significant
inter-company transactions have been eliminated.
Rental real estate - Rental real estate assets, including land, buildings
and improvements, furniture, fixtures and equipment, are stated at cost,
and reported net of accumulated depreciation and amortization. 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.
Real estate held for development - 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 an annual 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 are less than the carrying value of the
property. Such cash flows 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.
Depreciation and amortization - Depreciation and amortization are provided
on the straight-line method over the estimated useful lives of the assets,
as follows:
--------------------------------------------------------------------------------
F-6
GYRODYNE COMPANY OF AMERICA, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Years Ended December 31, 2007 and 2006
--------------------------------------------------------------------------------
Buildings and Improvements 10 to 39 years
Machinery and Equipment 3 to 20 years
Expenditures for maintenance and repairs are charged to operations as
incurred. Significant renovations are capitalized.
Revenue recognition - Minimum revenues from rental property are recognized
on a straight-line basis over the terms of the related leases. The excess
of rents recognized over amounts contractually due, if any, are 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.
Allowance for doubtful accounts - Management must make estimates of the
uncollectability of accounts receivable. Management specifically analyzes
accounts receivable and analyzes historical bad debts, customer
concentrations, customer credit-worthiness, current economic trends and
changes in customer payment terms when evaluating the adequacy of the
allowance for doubtful accounts.
Investments - The Company has a 10.93% limited partnership interest in
Callery-Judge Grove, L.P. (the "Grove") that owns a 3500+ acre citrus grove
in Palm Beach County, Florida. The Company is accounting for this
investment under the equity method in accordance with Emerging Issue Task
Force ("EITF") Topic D-46 "Accounting for Limited Partnership Investments"
and the guidance in paragraph 8 of AICPA Statement of Position ("SOP")
78-9, "Accounting for Investments in Real Estate Ventures."
Cash equivalents - The Company considers all highly liquid debt instruments
purchased with maturities of three months or less to be cash equivalents.
Investment in Marketable Securities - Marketable securities are carried at
fair value and consist primarily of investments in marketable equity
securities. The Company classifies its marketable securities portfolio as
available-for-sale. This portfolio is continually monitored for differences
between the cost and estimated fair value of each security. If the Company
believes that a decline in the value of an equity security is temporary in
nature, the Company records the change in other comprehensive income (loss)
in stockholders' equity. If the decline is believed to be other than
temporary, the equity security is written down to the fair value and a
realized loss is recorded on the Company's statement of operations. There
was no realized loss recorded by the Company's due to the write down in
value for the years ended December 31, 2007 and 2006. The Company's
assessment of a decline in value includes, among other things, the
Company's current judgment as to the financial position and future
prospects of the entity that issued the security. If that judgment changes
in the future, the Company may ultimately record a realized loss after
having initially concluded that the decline in value was temporary.
Deposits on Property - Deposits are paid on properties the Company is
evaluating for purchase. Real estate deposits are capitalized when paid and
may become nonrefundable under certain circumstances. When properties are
acquired, the deposits paid by the Company are applied to the total
purchase price.
Net loss per common share and per common equivalent share - The
reconciliations for the years ended December 31, 2007 and 2006 are as
follows:
--------------------------------------------------------------------------------
F-7
GYRODYNE COMPANY OF AMERICA, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Years Ended December 31, 2007 and 2006
--------------------------------------------------------------------------------
Weighted
Average Net Loss
Year Ended December 31, 2007 Net Loss Shares Per Share
------------------------------------------------------------------------------------------------
Basic EPS $(1,551,654) 1,279,867 $ (1.21)
Effect of Dilutive Securities - common stock options - - -
-----------------------------------------
Diluted EPS $(1,551,654) 1,279,867 $ (1.21)
=========================================
Weighted
Average Net Loss
Year Ended December 31, 2006 Net Loss Shares Per Share
-----------------------------------------------------------------------------------------------
Basic EPS $ (176,302) 1,237,201 $ (.14)
Effect of Dilutive Securities - common stock options - - -
-----------------------------------------
Diluted EPS $ (176,302) 1,237,201 $ (.14)
=========================================
Income taxes - Effective May 1, 2006, the Company operated as a real estate
investment trust for federal and state income tax purposes. As a REIT, the
Company is generally not subject to income taxes. To maintain its REIT
status, the Company is required to distribute annually as dividends at
least 90% of its REIT taxable income, as defined by the Internal Revenue
Code ("IRC"), to its shareholders, among other requirements. If the Company
fails to qualify as a REIT in any taxable year, the Company will be subject
to Federal and state income tax on its taxable income at regular corporate
tax rates. Although the Company qualified for taxation as a REIT, the
Company may be subject to certain state and local taxes on its income and
property and Federal income and excise taxes on its undistributed income.
The Company believes that it has met the REIT distribution and technical
requirements for the year ended December 31, 2007 and the eight months
ended December 31, 2006 and therefore, qualified as a REIT and was not
subject to any federal and state income taxes. Management intends to
continue to adhere to these requirements and maintain the Company's REIT
status. See Note 18 with regard to contingencies.
The Company's investment in the Grove is held as a taxable REIT subsidiary
of the Company and is subject to federal and state income taxes. Taxable
REIT subsidiaries perform non-customary services for tenants, hold assets
that the Company cannot hold directly and generally may engage in any real
estate or non-real estate related business. Accordingly, through the
investment in the Grove, the Company is subject to corporate federal and
state income taxes on the Company's share of the Grove's taxable income for
the year ended December 31, 2007 and the eight months ended December 31,
2006.
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.
Stock-based compensation - Effective January 1, 2006, the Company's stock
options are accounted for in accordance with the recognition and
measurement provisions of Statement of Financial Accounting Standards
("FAS") No. 123 (revised 2004), Share-Based Payment ("FAS 123(R)"), which
replaces FAS No. 123, Accounting for Stock-Based Compensation, and
supersedes Accounting Principles Board Opinion ("APB") No. 25, Accounting
for Stock Issued to Employees, and related interpretations. FAS 123 (R)
requires compensation costs related to share-based payment transactions,
including employee stock options, to be recognized in the financial
statements. In addition, the Company adheres to the guidance set forth
--------------------------------------------------------------------------------
F-8
GYRODYNE COMPANY OF AMERICA, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Years Ended December 31, 2007 and 2006
--------------------------------------------------------------------------------
within Securities and Exchange Commission ("SEC") Staff Accounting Bulletin
("SAB") No. 107, which provides the Staff's views regarding the interaction
between SFAS No. 123(R) and certain SEC rules and regulations and provides
interpretations with respect to the valuation of share-based payments for
public companies.
Prior to January 1, 2006, the Company accounted for similar transactions in
accordance with APB No. 25 which employed the intrinsic value method of
measuring compensation cost. Accordingly, compensation expense was not
recognized for fixed stock options if the exercise price of the option
equaled or exceeded the fair value of the underlying stock at the grant
date.
While FAS No. 123 encouraged recognition of the fair value of all
stock-based awards on the date of grant as expense over the vesting period,
companies were permitted to continue to apply the intrinsic value-based
method of accounting prescribed by APB No. 25 and disclose certain
pro-forma amounts as if the fair value approach of SFAS No. 123 had been
applied.
In adopting FAS 123(R), the Company applied the modified prospective
approach to transition. Under the modified prospective approach, the
provisions of FAS 123 (R) are to be applied to new awards and to awards
modified, repurchased, or cancelled after the required effective date.
Additionally, compensation cost for the portion of awards for which the
requisite service has not been rendered that are outstanding as of the
required effective date shall be recognized as the requisite service is
rendered on or after the required effective date. The compensation cost for
that portion of awards shall be based on the grant-date fair value of those
awards as calculated for either recognition or pro-forma disclosures under
FAS 123.
As the requisite service period had been rendered for the outstanding
stock-based awards prior to the adoption of FAS 123(R), the Company's
results for the years ended December 31, 2007 and 2006 do not include any
share-based compensation expense.
Use of estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates. The most significant assumptions and estimates relate to
depreciable lives and the valuation of real estate.
Comprehensive Income - The Company reports comprehensive income in
accordance with SFAS No. 130, Reporting Comprehensive Income. This
statement defines comprehensive income as the changes in equity of an
enterprise except those resulting from stockholders' transactions.
Accordingly, comprehensive income includes certain changes in equity that
are excluded from net income. The Company's only comprehensive income items
were net income and the unrealized change in fair value of marketable
securities.
New accounting pronouncements - In February 2007, the FASB issued Statement
No. 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.
--------------------------------------------------------------------------------
F-9
GYRODYNE COMPANY OF AMERICA, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Years Ended December 31, 2007 and 2006
--------------------------------------------------------------------------------
In December 2007, the FASB issued Statement No. 141R ("FAS 141R") "Business
Combinations". This Statement replaces FASB Statement No. 141, "Business
Combinations". This Statement defines the acquirer as the entity that
obtains control of one or more businesses in the business combination and
establishes the acquisition date as the date that the acquirer achieves
control. This Statement's scope is broader than that of Statement 141,
which applied only to business combinations in which control was obtained
by transferring consideration. By applying the same method of
accounting--the acquisition method--to all transactions and other events in
which one entity obtains control over one or more other businesses, this
Statement improves the comparability of the information about business
combinations provided in financial reports. This Statement requires the
acquiring entity in a business combination to recognize all (and only) the
assets acquired and liabilities assumed in the transaction and establishes
the acquisition-date fair value as the measurement objective for all assets
acquired and liabilities assumed in a business combination. Certain
provisions of this statement will, among other things, impact the
determination of acquisition-date fair value in a business combination
(including contingent consideration); exclude transaction costs from
acquisition accounting and change accounting practice for acquired
contingencies, acquisition-related restructuring costs and tax benefits.
This Statement applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. An entity may not apply it
before that date. The effective date of this Statement is the same as that
of the related FASB Statement No. 160, "Noncontrolling Interests in
Consolidated Financial Statements".
In December 2007, the FASB issued Statement No. 160 ("FAS 160")
"Noncontrolling Interests in Consolidated Financial Statements--an
amendment of ARB No. 51". This Statement amends ARB 51 to establish
accounting and reporting standards for the noncontrolling interest ("NCI")
in a subsidiary and for the deconsolidation of a subsidiary. It clarifies
that a noncontrolling interest in a subsidiary is an ownership interest in
the consolidated entity that should be reported as equity in the
consolidated financial statements. This Statement requires disclosure, on
the face of the consolidated statement of income, of the amounts of
consolidated net income attributable to the parent and to the
noncontrolling interest. The Statement requires that losses of a partially
owned consolidated subsidiary be allocated to the NCI even when such
allocation might result in a deficit balance. This Statement is effective
for fiscal years, and interim periods within those fiscal years, beginning
on or after December 15, 2008 (that is, January 1, 2009, for entities with
calendar year-ends). Earlier adoption is prohibited. The effective date of
this Statement is the same as that of the related Statement 141R. The
Company is currently evaluating the future impacts and disclosures of FAS
141R and FAS 160.
2. Investment in Marketable Securities
The historical cost and estimated fair value of investments in marketable
securities available for sale as of December 31, 2007 and 2006 are as
follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------
Mortgage-backed Securities - 2007 $ 10,667,854 $ 148,415 $ - $ 10,816,269
=========================================================
Mortgage-backed Securities - 2006 $ 23,517,473 $ 280,042 $ - $ 23,797,515
=========================================================
There was a realized gain of $40,651 for the year ended December 31, 2007
and no realized gains or losses on sales of securities available-for-sale
for the year ended December 31, 2006. The fair value of mortgage-backed
securities was estimated using quoted market prices. None of the securities
with an unrealized loss at December 31, 2007 and 2006 are considered to be
other-than-temporarily impaired. The Company's investment is in hybrid
mortgage-backed securities, with a AAA rating fully guaranteed by agencies
of the U.S. Government. At December 31, 2007, marketable securities had an
average life of approximately two years.
--------------------------------------------------------------------------------
F-10
GYRODYNE COMPANY OF AMERICA, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Years Ended December 31, 2007 and 2006
--------------------------------------------------------------------------------
3. Interest Receivable
In connection with the condemnation of the Flowerfield property, the
Company had accrued interest commencing with the date Stony Brook
University took title to the property, in November 2005, until the time the
Company received the advance payment, in March 2006. Pursuant to the New
York State Eminent Domain Procedure Law, both the advance payment and any
additional award from the Court of Claims bear interest at the current
statutory rate of 9% simple interest from the date of the taking.
As of December 31, 2007, the Company recorded a provision for loss of
interest on condemnation proceeds amounting to $332,377 which represents a
portion of the previously recorded interest receivable of $921,385
pertaining to the Advance Payment in connection with the 2005 condemnation
of 245 acres of property and certain buildings by the State University of
New York at Stony Brook. During the year ended December 31, 2006, the
Company received $589,008 of interest on the Advance Payment. Although the
Company had been assured by counsel representing the State that a statutory
interest rate of 9% was due and payable on the Advance Payment of $26.3
million, the State of New York has now taken the position that a lesser
interest rate was applicable. The Company plans on pursuing the loss of
interest on condemnation along with its claim for $158 million in
additional compensation in the Court of Claims of the State of New York.
See Note 18.
4. Investment in Grove Partnership
The Company has a 10.93% limited partnership interest in the Callery-Judge
Grove, L.P. (the "Grove"). As of December 31, 2007 and 2006, the carrying
value of the Company's investment, under the equity method, was $0. As a
result, the Company did not record any of the losses for either fiscal
year.
The Grove has reported to its limited partners that in June 2007 it
received an independent appraisal report of the citrus grove property,
which is now the subject of development applications. Based upon the
appraised value of the citrus grove operations and property, at December
31, 2007 and 2006, strictly on a pro-rata basis, the estimated fair value
of the Company's interest in the Grove would be approximately $22,400,000
and $22,500,000 respectively, without adjustment for minority interest and
lack of marketability discount. The Company cannot predict what, if any,
value it will ultimately realize from this investment.
The fiscal year end of the Grove is June 30. Summarized financial
information of the Grove as of June 30, 2007 and 2006 is as follows:
Years Ended June 30, 2007 2006
---------------------------------------------------------------------------
(in thousands) (in thousands)
Total Current Assets $ 9,686 $ 6,306
Total Assets 21,234 23,572
Total Current Liabilities 1,687 1,280
Total Liabilities 34,730 24,345
Total Partners' Capital (13,496) (773)
Total Revenues 2,420 2,588
Net Loss (12,668) (3,463)
--------------------------------------------------------------------------------
F-11
GYRODYNE COMPANY OF AMERICA, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Years Ended December 31, 2007 and 2006
--------------------------------------------------------------------------------
5. Accrued Liabilities
December 31,
-----------------------------------------------------------------------
2007 2006
-----------------------------------------------------------------------
Condemnation costs - termination fee $ - $2,000,000
Payroll and related taxes 83,542 72,339
Professional fees 64,700 66,603
Directors fees 24,500 30,500
Other 1,265 5,018
------------------------
Total $ 174,007 $2,174,460
========================
6. Mortgage Payable
In June 2007, in connection with the purchase of the Port Jefferson
Professional Park, the Company assumed a $5,551,191 mortgage payable to a
bank (the "Mortgage"). The Mortgage bears interest at 5.75% through
February 1, 2012 and adjusts to the higher of 5.75% or 275 basis points in
excess of the Federal Home Loan Bank's five year Fixed Rate Advance ("Fixed
Rate Advance") thereafter. The Mortgage is payable in monthly installments
of principal and interest totaling $33,439 through February 2012. From
March 1, 2012 through February 1, 2022, the minimum monthly installment
will be no less than $33,439 and will vary based upon the Fixed Rate
Advance. In February 2022, a balloon payment is due of approximately
$3,668,000. The Mortgage is collateralized by the Port Jefferson
Professional Park in Port Jefferson Station, New York.
Interest expense for the year ended December 31, 2007 approximated
$162,000.
The mortgage payable matures as follows:
Years Ending December 31, Amount
---------------------------------------------------------------------------
2008 $86,721
2009 91,841
2010 97,263
2011 103,006
2012 109,087
Thereafter 5,014,705
7. Income Taxes
The Company files a federal and state income tax return that includes all
100% owned non taxable REIT subsidiaries. The Company files separate state
income tax returns for its taxable REIT subsidiary.
The benefit for income taxes is comprised of the following:
--------------------------------------------------------------------------------
F-12
GYRODYNE COMPANY OF AMERICA, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Years Ended December 31, 2007 and 2006
--------------------------------------------------------------------------------
Year Ended December 31,
-------------------------------------------------------
2007 2006
-------------------------------------------------------
Current:
Federal $ (100,989) $ (141,677)
State - (25,002)
---------------------------
(100,989) (166,679)
---------------------------
Deferred:
Federal (143,000) (599,135)
State (160,000) (982,000)
---------------------------
(303,000) (1,581,135)
---------------------------
$ (403,989) $(1,747,814)
===========================
December 31,
---------------------------------------------------------------------------
2007 2006
---------------------------------------------------------------------------
Deferred Tax Liabilities:
Unrealized gain on investment in Citrus Grove $ (905,000) $ (502,000)
Gain on condemnation (a) (6,927,000) (7,633,000)
---------------------------
Total Deferred Tax Liabilities (7,832,000) (8,135,000)
---------------------------
Net Deferred Income Taxes $(7,832,000) $(8,135,000)
===========================
Effective May 1, 2006, the Company elected to be taxed as a REIT for state
income tax and federal income tax purposes under section 856(c)(1) of the
Internal Revenue Code (the "Code"). As a result of the election, the
Company converted to a December 31, fiscal year end. As long as the Company
qualifies for taxation as a REIT, it generally will not be subject to
federal and state income tax. If the Company fails to qualify as a REIT in
any taxable year, it will be subject to federal and state income tax on its
taxable income at regular corporate rates. Unless entitled to relief under
specific statutory provisions, the Company will also be disqualified for
taxation as a REIT for the four taxable years following the year in which
it loses its qualification. Even if the Company qualifies as a REIT, it may
be subject to certain state and local taxes on its income and property and
to federal income and excise taxes on its undistributed income.
(a) In accordance with Section 1033 of the Internal Revenue Code, the
Company has deferred recognition of the gain on the condemnation of
its real property for income tax purposes. If the Company replaces the
condemned property with like kind property within three years (or such
extended period if requested and approved by the Internal Revenue
Service at its discretion) after April 30, 2006, recognition of the
gain is deferred until the newly acquired property is disposed of. On
June 27, 2007 the Company acquired the Port Jefferson Professional
Park and replaced a portion of the condemned property totaling
$8,914,344 which represents a reinvestment of only a portion of the
condemnation proceeds. The Company will continue to recognize a
deferred tax liability for the potential effect of the gain on
condemnation. As of December 31, 2007, the remaining balance of
condemnation proceeds to be reinvested is approximately $17,401,000.
--------------------------------------------------------------------------------
F-13
GYRODYNE COMPANY OF AMERICA, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Years Ended December 31, 2007 and 2006
--------------------------------------------------------------------------------
A reconciliation of the federal statutory rate to the Company's effective
tax rate is as follows:
Year Ended December 31,
-----------------------------------------------------------------------
2007 2006
-----------------------------------------------------------------------
U.S. Federal Statutory Income Rate - -
State Income Tax, net of federal
tax benefits - -
Reversal of Deferred Taxes
Resulting from REIT
Election and Reinvestment of
Condemnation Proceeds (15.4)% (90.8)%
Other Differences, net (5.3)% -
---------------------------
(20.7)% (90.8)%
===========================
8. Retirement Plans
The Company has a noncontributory defined benefit pension plan covering
substantially all of its employees. The benefits are based on annual
average earnings for the highest sixty (60) months (whether or not
continuous) immediately preceding the Participant's termination date.
Annual contributions to the plan are at least equal to the minimum amount,
if any, required by the Employee Retirement Income Security Act of 1974 but
no greater than the maximum amount that can be deducted for federal and
state income tax purposes. Contributions are intended to provide not only
for benefits attributed to service to date but also those expected to be
earned in the future. During the years ended December 31, 2007 and 2006,
the Company was not required and did not make any contributions to the
Plan.
The following tables provide a reconciliation of the changes in the plan's
benefit obligations and fair value of assets over years ended December 31,
2007 and 2006 and a statement of the funded status as of December 31, 2007
and 2006:
--------------------------------------------------------------------------------
F-14
GYRODYNE COMPANY OF AMERICA, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Years Ended December 31, 2007 and 2006
--------------------------------------------------------------------------------
December 31,
--------------------------------------------------------------------------
2007 2006
--------------------------------------------------------------------------
Pension Benefits
Reconciliation of Benefit Obligation:
Obligation $ 2,341,336 $ 2,058,304
Service cost 121,392 86,496
Interest cost 132,108 85,398
Actuarial (gain) loss (195,242) 198,197
Benefit payments (173,637) (87,059)
--------------------------
Obligation $ 2,225,957 $ 2,341,336
==========================
Reconciliation at Fair Value of Plan Assets:
Fair value of plan assets, beginning of year $ 3,808,671 $ 3,039,786
Actual return on plan assets (780,471) 855,944
Benefit payments (173,637) (87,059)
--------------------------
Fair Value of Plan Assets, end of year 2,854,563 3,808,671
--------------------------
Funded Status:
Funded status 628,606 1,467,335
Unrecognized (gain) loss 496,722 (386,862)
--------------------------
Net Amount Recognized $ 1,125,328 $ 1,080,473
==========================
The accumulated benefit obligation was $1,883,163 and $2,010,555 as of
December 31, 2007 and 2006, respectively.
The following table provides the components of net periodic benefit cost
for the plans for the years ended December 31, 2007 and 2006 :
December 31,
---------------------------
2007 2006
---------------------------
Pension Benefits
Service Cost $ 121,392 $ 86,496
Interest Cost 132,108 85,398
Expected Return on Plan Assets (298,355) (159,100)
Amortization of Prior-Service Cost - 40,230
--------------------------
Net Periodic Benefit Cost After
Curtailments and Settlements $ (44,855) $ 53,024
==========================
December 31,
--------------------------------------------------------------------------
2007 2006
--------------------------------------------------------------------------
Pension Benefits
Weighted-Average Assumptions
Discount rate 6.59% 5.77%
Expected return on plan assets 8.00% 8.00%
Rate of compensation increase 5.00% 5.00%
--------------------------------------------------------------------------------
F-15
GYRODYNE COMPANY OF AMERICA, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Years Ended December 31, 2007 and 2006
--------------------------------------------------------------------------------
The Plan's investment objectives are expected to be achieved through a
portfolio mix of Company stock, other investments, and cash and cash
equivalents which reflect the Plan's desire for investment return.
The defined benefit plan had the following asset allocations as of their
respective measurement dates:
December 31,
--------------------------------------------------------------------------
2007 2006
--------------------------------------------------------------------------
Common Stock - Gyrodyne Company of America, Inc. 97.6% 98.6%
Other Funds 2.4% 1.4%
-------------------------
Total 100.0% 100.0%
=========================
Securities of the Company included in plan assets are as follows:
December 31,
--------------------------------------------------------------------------
2007 2006
--------------------------------------------------------------------------
Number of Shares 60,580 60,580
Market Value $ 2,784,863 $ 3,755,960
Expected approximate future benefit payments are as follows:
Years Ending December 31, Amount
--------------------------------------------------------------------------
2008 $ 171,331
2009 161,143
2010 151,098
2011 168,764
2012 159,167
2013 - 2017 670,125
9. Stock Option Plans
Incentive Stock Option Plan - The Company had a stock option plan (the
"Plan") which expired in October 2003, under which participants were
granted Incentive Stock Options ("ISOs"), Non-Qualified Stock Options
("NQSOs") or Stock Grants. The purpose of the Plan was to promote the
overall financial objectives of the Company and its shareholders by
motivating those persons selected to participate in the Plan to achieve
long-term growth in shareholder equity in the Company and by retaining the
association of those individuals who were instrumental in achieving this
growth. Such options or grants became exercisable at various intervals
based upon vesting schedules as determined by the Compensation Committee.
The options were to expire between April 2007 and May 2008.
The ISOs were granted to employees and consultants of the Company at a
price not less than the fair market value on the date of grant. All such
options were authorized and approved by the Board of Directors, based on
recommendations of the Compensation Committee.
ISOs were granted along with Stock Appreciation Rights, which permitted the
holder to tender the option to the Company in exchange for stock, at no
cost to the optionee, that represented the difference between the option
price and the fair market value on date of exercise. NQSOs were issued with
Limited Stock Appreciation Rights, which were exercisable, for cash, in the
event of a change of control. In addition, an incentive kicker was provided
for Stock Grants, ISOs and NQSOs, which increased the number of grants or
options based on the market price of the shares at exercise versus the
option price.
--------------------------------------------------------------------------------
F-16
GYRODYNE COMPANY OF AMERICA, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Years Ended December 31, 2007 and 2006
--------------------------------------------------------------------------------
Non-Employee Director Stock Option Plan - The Company adopted a
non-qualified stock option plan for all non-employee Directors of the
Company in October 1996. The plan expired in September 2000. Each
non-employee Director was granted an initial 2,500 options on the date of
adoption of the plan. These options were exercisable in three equal annual
installments commencing on the first anniversary date subsequent to the
grant. Additionally, each non-employee Director was granted 1,250 options
on each January 1, 1997 through 2000, respectively. These additional
options were exercisable in full on the first anniversary date subsequent
to the date of grant. The options were to expire in January 2007.
A summary of the Company's various fixed stock option plans as of December
31, 2007 and 2006 and changes during the years then ended is presented
below:
December 31,
-------------------------------------------------------------------------------------------------------
2007 2006
-----------------------------------------------------------------------------------------------------
Weighted Weighted
Average Average
Fixed Stock Options Exercise Exercise
Shares Price Shares Price
-----------------------------------------------------------------------------------------------------
Outstanding, beginning of period 67,105 $ 16.42 73,980 $ 16.14
Granted -
Exercised (67,105) $ 16.42 (6,875) $ 13.46
Forfeited - -
Canceled - -
------------- --------------
Outstanding, end of period - - 67,105 $ 16.42
============= ==============
Options Exercisable, year end - - 67,105 $ 16.42
============= ==============
Incentive Compensation Plan - The Company has an incentive compensation
plan for all full-time employees and members of the Board in order to
promote shareholder value. The benefits of the incentive compensation plan
are realized only upon a change in control of the Company.
Change-in-control is defined as the accumulation by any person, entity or
group of 30% or more of the combined voting power of the Company's voting
stock or the occurrence of certain other specified events. In the event of
a change in control, the Company's plan provides for a cash payment equal
to the difference between the plan's "establishment date" price of $15.39
per share and the per share price of the Company's common stock on the
closing date, equivalent to 100,000 shares of Company common stock, such
number of shares and "establishment date" price per share subject to
adjustments to reflect changes in capitalization. The payment amount would
be distributed to eligible participants based upon their respective
weighted percentages (ranging from .5% to 18.5%).
10. Revolving Credit Line
The Company's line of credit has a borrowing limit of $1,750,000, bears
interest at the lending institution's prime-lending rate (7.25% at December
31, 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
December 31, 2007, and 2006, $1,750,000 was available under this agreement
and the Company was in compliance with the financial covenants.
--------------------------------------------------------------------------------
F-17
GYRODYNE COMPANY OF AMERICA, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Years Ended December 31, 2007 and 2006
--------------------------------------------------------------------------------
11. Concentration of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash and cash
equivalents and U.S. Government securities. The Company places its
temporary cash investments with high credit quality financial institutions
and generally limits the amount of credit exposure in any one financial
institution. At times the Company maintains bank account balances, which
exceed FDIC 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
December 31, 2007 and 2006.
12. Commitments
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:
Years Ending December 31, Amount
--------------------------------------------------------------------------
2008 $1,688,000
2009 811,000
2010 603,000
2011 214,000
2012 66,000
Thereafter 15,000
-----------
$3,397,000
===========
The Company was leasing office space in St. James, New York on a
month-to-month basis through April 30, 2006. Rental expense for the year
ended December 31, 2006 was $18,594. On May 1, 2006, the Company moved into
its current facility which it owns and therefore no longer has rent
expense.
Employment agreements - Effective January 23, 2003, the Company amended the
existing employment contracts with two officers, which provide for annual
salaries aggregating approximately $381,000. The terms of the agreements
were extended from one to three years and provide for a severance payment
equivalent to three years salary in the event of a change in control.
Land development contract - The Company entered into a Golf Operating and
Asset Management Agreement (the "Agreement") with Landmark National
("Landmark") for the design and development of an 18-hole championship golf
course community. On February 12, 2007, as a result of the State University
of New York at Stony Brook's ("the University's") condemnation of the
Flowerfield property, 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. 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 December
31, 2005 as a termination fee. In addition the Company retained Landmark
and will pay them $1,000,000 over the next thirty-six months, commencing on
March 1, 2007, in recognition of services rendered between 2004 and 2006,
and 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. As a result of the initial payment due of $2,000,000, the
--------------------------------------------------------------------------------
F-18
GYRODYNE COMPANY OF AMERICA, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Years Ended December 31, 2007 and 2006
--------------------------------------------------------------------------------
Company had accrued $1,500,000 as additional condemnation expense for the
eight months ended December 31, 2006. As is the case with various other
expenses relating to the condemned property, the Company intends to add the
$2,000,000 to the existing claim for additional compensation with regard to
the condemnation.
13. Fair Value of Financial Instruments
The methods and assumptions used to estimate the fair value of the
following classes of financial instruments were:
The carrying amount of cash, receivables and payables and certain other
short-term financial instruments approximate their fair value.
The estimated fair value of the Company's investment in the Callery Judge
Grove Partnership at December 31, 2007, based upon an independent third
party appraisal report, is approximately $22,400,000 without adjustment for
minority interest and lack of marketability discount, based on the
Company's ownership percentage.
14. Related Party Transactions
A law firm related to a director provided legal services to the Company for
which it was compensated approximately $1,000 and $8,000 for the years
ended December 31, 2007 and December 31, 2006, respectively. As of January
1, 2005, the aforementioned law firm is no longer primary outside legal
counsel to the Company.
15. Major Customers
For the year ended December 31, 2007 rental income from the three largest
tenants represented 9%, 7% and 5% of total rental income.
For the year ended December 31, 2006 rental income from the three largest
tenants represented 15%, 11% and 9% of total rental income.
16. Supplementary Information - Quarterly Financial Data (Unaudited)
Year Ended December 31, 2007 First Second Third Fourth
---------------------------------------------------------------------------------------------
Rental Income $ 286,859 $ 314,104 $ 613,683 $ 665,236
Rental Property Expense (200,258) (191,320) (227,198) (277,564)
--------------------------------------------------------
Income from Rental Property 86,601 122,784 386,485 387,672
--------------------------------------------------------
Net (Loss) Income $ (185,428) $ 434,842 $ (158,143) $(1,642,925)
========================================================
Net (Loss) Income Per Common Share
Basic $ (.15) $ .34 $ (.12) $ (1.28)
========================================================
Diluted $ (.15) $ .34 $ (.12) $ (1.28)
========================================================
--------------------------------------------------------------------------------
F-19
GYRODYNE COMPANY OF AMERICA, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Years Ended December 31, 2007 and 2006
--------------------------------------------------------------------------------
Year Ended December 31, 2006 First Second Third Fourth
--------------------------------------------------------------------------------------
Rental Income $ 311,536 $ 323,071 $ 340,742 $ 338,621
Rental Property Expense (210,908) (169,135) (163,717) (187,770)
------------------------------------------------
Income from Rental Property 100,628 153,936 177,025 150,851
------------------------------------------------
Net Income (Loss) $ 115,332 $ 84,082 $ (18,123) $(357,593)
================================================
Net Income (Loss) Per Common Share
Basic $ .09 $ .07 $ (.01) $ (.29)
================================================
Diluted $ .09 $ .07 $ (.01) $ (.29)
================================================
17. Interest Income
Interest income consists of the following:
Year Ended December 31,
------------------------------------------------------------------
2007 2006
------------------------------------------------------------------
Interest on Condemnation Advance
Payment $ - $ 538,556
Interest Income on Investments 871,046 911,324
Interest Income - Other 167,104 145,108
-----------------------
$1,038,150 $1,594,988
=======================
18. Contingencies
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 245.5 acres of the Company's Flowerfield
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 bear interest at the current statutory rate of 9% simple
interest from the date of the taking through the date of payment. See Note
3 for a further discussion of the accrued interest on the proceeds on the
condemnation of the Flowerfield property.
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 245.5 acres of the
Company's Flowerfield 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 ("Faith") a tenant at 7 Flowerfield failed to fulfill its
rental payment obligation. In February 2007, the Company served Faith with
a notice of default. Faith subsequently sued the Company in Suffolk Supreme
Court, seeking $7 million in damages on each of three claims (breach of
contract, fraudulent inducement and tortuous interference with business)
and also seeking to enjoin the Company from commencing a non-payment
eviction proceeding (which the Court denied). The Company thereafter
commenced a non-payment proceeding, in which Faith agreed to an order to
--------------------------------------------------------------------------------
F-20
GYRODYNE COMPANY OF AMERICA, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Years Ended December 31, 2007 and 2006
--------------------------------------------------------------------------------
vacate the premises and for a judgment of past due rent of $115,051. Faith
vacated the premises in April 2007. Faith continues to pursue its claims
for damages in the Suffolk Supreme Court action. In November 2007, the
Company commenced a third-party action against the guarantors of Faith's
lease, Thomas O. Dodge, Cathleen Dodge, Michael Maurer and Kelly Maurer. In
January 2008, Plaintiff (Faith) filed a motion to consolidate this case
with another matter it had commenced against the entities from whom Faith
purchased the business. The Court has not yet ruled on this motion.
If the Company does not reinvest the condemnation proceeds received on the
condemned property in accordance with Internal Revenue Code section 1033,
the gain on condemnation of the Company's Flowerfield property will be
subject to federal and state taxes. The Company must replace the condemned
property by April 2009. In June 2007, the Company closed on the purchase of
a medical office complex known as Port Jefferson Professional Park in Port
Jefferson Station, New York. The acquisition price was $8,914,344. The Port
Jefferson Professional Park qualifies as replacement property under IRC
section 1033.
--------------------------------------------------------------------------------
F-21