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 OCTOBER 31, 2006
[ ] 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)
1,237,219 SHARES, $1.00 PAR VALUE, AS OF NOVEMBER 30, 2006
Seq. Page 1
INDEX TO QUARTERLY REPORT OF GYRODYNE COMPANY OF AMERICA, INC.
QUARTER ENDED OCTOBER 31, 2006
Seq. Page
Form 10-Q Cover 1
Index to Form 10-Q 2
Part I Financial Information 3
Item I 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 4 Controls and Procedures 13
Part II - Other Information 13
Item 6 Exhibits 13
Signatures 13
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 I Financial Statements
GYRODYNE COMPANY OF AMERICA, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS October 31, April 30,
------ 2006 2006
(Unaudited)
------------ ------------
REAL ESTATE
Rental property:
Land $ 3,017 $ 3,017
Building and improvements 3,062,059 2,876,087
Machinery and equipment 205,274 157,797
------------ ------------
3,270,350 3,036,901
Less accumulated depreciation 2,521,105 2,492,819
------------ ------------
749,245 544,082
------------ ------------
Land held for development:
Land 558,466 558,466
Land development costs 78,356 8,707
------------ ------------
636,822 567,173
------------ ------------
Total real estate, net 1,386,067 1,111,255
CASH AND CASH EQUIVALENTS 2,957,854 27,012,688
INVESTMENT IN MARKETABLE SECURITIES 23,786,285 -
DEPOSIT ON PROPERTY 504,000 -
RENT RECEIVABLE, net of allowance for doubtful accounts
of $42,000 and $30,000, respectively 88,344 93,173
INTEREST RECEIVABLE 469,564 921,385
PREPAID EXPENSES AND OTHER ASSETS 345,650 308,361
PREPAID PENSION COSTS 1,102,271 1,133,497
------------ ------------
Total Assets $ 30,640,035 $ 30,580,359
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Accounts payable and accrued expenses $ 798,245 $ 921,294
Tenant security deposits payable 161,751 163,886
Deferred income taxes 9,446,639 9,358,000
------------ ------------
Total Liabilities 10,406,635 10,443,180
------------ ------------
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 8,399,134 8,399,134
Accumulated Other Comprehensive Income:
Unrealized Gain from Marketable Securities 137,798 -
Retained Earnings 12,005,868 12,047,445
------------ ------------
22,073,886 21,977,665
Less cost of shares of common stock held in treasury; 293,867 shares (1,840,486) (1,840,486)
------------ ------------
Total Stockholders' Equity 20,233,400 20,137,179
------------ ------------
Total Liabilities and Stockholders' Equity $ 30,640,035 $ 30,580,359
============ ============
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
October 31, October 31,
2006 2005 2006 2005
------------ ------------ ------------ ------------
REVENUE FROM RENTAL PROPERTY $ 670,423 $ 980,700 $ 337,499 $ 486,166
------------ ------------ ------------ ------------
RENTAL PROPERTY EXPENSES:
Real estate taxes 105,062 80,909 52,531 40,455
Operating and maintenance 236,747 181,501 120,087 92,573
Depreciation 28,286 37,371 14,794 18,685
------------ ------------ ------------ ------------
TOTAL RENTAL PROPERTY EXPENSES 370,095 299,781 187,412 151,713
------------ ------------ ------------ ------------
INCOME FROM RENTAL PROPERTY 300,328 680,919 150,087 334,453
GENERAL AND ADMINISTRATIVE
(EXPENSES) AND OTHER INCOME:
General and administrative (expenses) (1,063,651) (869,908) (490,954) (429,776)
Gain on sale of real estate - 1,136,705 - 874,388
Interest income 694,028 30,881 361,745 13,369
------------ ------------ ------------ ------------
TOTAL GENERAL AND ADMINISTRATIVE
(EXPENSES) AND OTHER INCOME (369,623) 297,678 (129,209) 457,981
------------ ------------ ------------ ------------
(LOSS) INCOME BEFORE INCOME TAXES (69,295) 978,597 20,878 792,434
(BENEFIT) PROVISION FOR INCOME TAXES (27,718) 391,439 8,351 316,973
------------ ------------ ------------ ------------
NET (LOSS) INCOME $ (41,577) $ 587,158 $ 12,527 $ 475,461
============ ============ ============ ============
NET (LOSS) INCOME PER COMMON SHARE:
Basic $ (0.03) $ 0.48 $ 0.01 $ 0.39
============ ============ ============ ============
Diluted $ (0.03) $ 0.46 $ 0.01 $ 0.37
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Basic 1,237,219 1,224,243 1,237,219 1,230,761
============ ============ ============ ============
Diluted 1,237,219 1,270,968 1,280,945 1,278,290
============ ============ ============ ============
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
October 31,
-----------
2006 2005
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (41,577) $ 587,158
------------ ------------
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Depreciation and amortization 38,533 59,202
Bad debt expense 12,000 12,000
Pension expense 31,226 58,015
Gain on sale of real estate - (1,136,705)
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Land development costs (69,649) (218,651)
Accounts receivable (7,171) (43,386)
Interest receivable 451,821 -
Prepaid expenses and other assets (39,410) (43,065)
Prepaid pension costs - (50,000)
(Decrease) increase in liabilities:
Accounts payable and accrued expenses (119,767) 66,355
Income taxes payable - 231,405
Tenant security deposits (2,135) (10,761)
------------ ------------
Total adjustments 295,448 (1,075,591)
------------ ------------
Net cash provided by (used in) operating activities 253,871 (488,433)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Costs associated with property, plant and equipment (236,735) -
Deposit on property (504,000) -
Proceeds from mortgage receivable - 1,300,000
Purchase of marketable securities (24,792,258) -
Principle repayments on investment in marketable securities 1,224,288 -
------------ ------------
Net cash (used in) provided by investment activities (24,308,705) 1,300,000
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of loans payable - (3,705)
Proceeds from exercise of stock options - 252,378
------------ ------------
Net cash provided by financing activities - 248,673
------------ ------------
Net (decrease) increase in cash and cash equivalents (24,054,834) 1,060,240
Cash and cash equivalents at beginning of period 27,012,688 844,405
------------ ------------
Cash and cash equivalents at end of period $ 2,957,854 $ 1,904,645
============ ============
See notes to consolidated financial statements
Seq. Page 5
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. 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 October 31, 2006 and 2005.
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 Annual Report on Form 10-K for the fiscal
year ended April 30, 2006.
The results of operations for the three and six month periods ended October 31,
2006 are not necessarily indicative of the results to be expected for the full
year.
2. 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.
3. Investment in Marketable Securities
The Company's marketable securities consist of debt securities classified as
available-for-sale and 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 on deposit with a major
financial institution.
4. 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 loss per common share
was computed by dividing net loss by the weighted average number of shares of
common stock outstanding. Diluted loss per common share does not give effect to
the impact of options because their effect would have been anti-dilutive.
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
October 31, October 31,
2006 2005 2006 2005
---------- ---------- ---------- ----------
Basic 1,237,219 1,224,243 1,237,219 1,230,761
Effect of dilutive securities - 46,725 43,726 47,529
---------- ---------- ---------- ----------
Diluted 1,237,219 1,270,968 1,280,945 1,278,290
========== ========== ========== ==========
5. 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.
6. Revolving Credit Note:
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 October 31,
2006) 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 October 31,
2006 and 2005, $1,750,000 was available under this agreement and the Company was
in compliance with the financial covenants.
Seq. Page 6
7. Stock Options:
Effective May 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 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 May 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 December 2002, FAS No. 148,
Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment
of SFAS No. 123, was issued, which, in addition to providing alternative methods
of transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation, required more prominent pro-forma disclosures
in both the annual and interim financial statements. The Company complied with
these disclosure requirements for all applicable periods prior to May 1, 2006.
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 a result of the adoption of FAS 123 (R), the Company's results for the three
and six month period ended October 31, 2006 include share-based compensation
expense totaling $0. Stock compensation expense recorded under APB No. 25 in the
consolidated statements of operations for the three and six months ended October
31, 2005 totaled $0.
The following table represents the Company's stock options granted, exercised
and forfeited during the six months of fiscal 2007.
Weighted Weighted
Average Average
Exercise Remaining Aggregate
Number of price per Contractual Intrinsic
Stock Options Shares Share Term Value
---------- ---------- ---------- ----------
Outstanding at May 1, 2006 67,105 $ 16.42 - -
Granted - - - -
Exercised - - - -
Forfeited/expired - - - -
Outstanding at October 31, 2006 67,105 $ 16.42 .98 $1,908,713
========== ========== ========== ==========
Vested and Exercisable at
October 31, 2006 67,105 $ 16.42 .98 $1,908,713
========== ========== ========== ==========
Seq. Page 7
8. 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 October 31, 2006
and 2005:
Six Months Ended Three Months Ended
October 31, October 31,
------------------------ ------------------------
2006 2005 2006 2005
---------- ---------- ---------- ----------
Pension Benefits
Service Cost $ 66,162 $ 69,213 $ 33,081 $ 34,607
Interest Cost 63,268 62,638 31,634 31,319
Expected Return on Plan Assets (118,318) (114,112) (59,159) (57,056)
Amortization of Prior-Service Cost 20,114 36,369 10,057 18,185
Amortization of Net Loss 0 3,907 0 1,953
---------- ---------- ---------- ----------
Net Periodic Benefit Cost After
Curtailments and Settlements $ 31,226 $ 58,015 $ 15,613 $ 29,008
========== ========== ========== ==========
During the six months ended October 31, 2005, the Company made a $50,000
contribution to the plan. The Company has no minimum required contribution for
the April 30, 2007 plan year.
9. 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 October 31, Amount
--------------------------------------------------------------------------------
2007 $ 900,000
2008 517,000
2009 291,000
2010 255,000
2011 183,000
Thereafter 1,543,000
-------------
$ 3,689,000
=============
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 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. As
a result of the University's condemnation of the Flowerfield property, the
Company has accrued a $500,000 termination fee pursuant to the contract. The
Company was advised by Landmark that it believes that it is entitled to 10% of
all condemnation proceeds pursuant to a 10% incentive fee provision. The Company
does not believe that the condemnation triggers the incentive fee and believes
that Landmark's position is based upon an erroneous interpretation of the
incentive fee provision. Both parties have agreed to participate in discussions
that are aimed at resolving our differences. Those discussions began recently
and are ongoing.
Purchase agreement - On October 12, 2006, the Company entered into a Contract of
Sale (the "Contract") by and between the Company and Frank M. Pellicane Realty,
LLC and Pelican Realty, LLC (collectively, the "Seller") to acquire land and
buildings comprising, in significant part, a medical office complex known as
Port Jefferson Professional Park in Port Jefferson Station, New York. The
Contract relates specifically to ten office buildings, located at 1-6, 8, 9 and
11 Medical Drive and 5380 Nesconset Highway, which are situated on 5.16 acres
with approximately 40,000 square feet of rentable space (the "Property") and a
current occupancy rate of 97%. The purchase price per square foot is currently
$221.25 and the aggregate annual rental revenue from the property is currently
$888,000. The implied net operation income capitalization rate for this
transaction is approximately 7.5%. Other than with respect to the Contract
itself, there is no material relationship between the Company and the Seller.
Seq. Page 8
The purchase price for the Property is $8.85 million, $500,000 of which was paid
as a refundable deposit upon the signing of the Contract, and the remainder,
subject to any adjustments, is required to be paid at closing. The closing is
expected to take place 45 days from the date of the Contract and is subject to
customary representations and conditions. Under the Contract, the Company has
the right to elect either to pay all cash at closing or apply to assume the
terms of an existing mortgage loan due February 1, 2022 at a current interest
rate of 5.75%. The Contract is subject to a 30-day inspection period during
which the Company may, at its own expense, arrange for environmental and/or
engineering inspections. The Company may terminate the Contract, for any or no
reason, prior to the expiration of the inspection period.
Upon acquisition, the Company intends to continue to operate the office space
pursuant to existing leases. At October 31, 2006, there were no deferred
expenses recorded in relation to this transaction.
10. Recent Accounting Pronouncements:
In July 2006 the FASB issued Financial Interpretation No. 48, Accounting for
Uncertainty in Income Taxes ("FIN 48"), as an interpretation of SFAS No. 109,
Accounting for Income Taxes. FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in an enterprise's financial statements in accordance
with SFAS No. 109 and prescribes a recognition threshold of more-likely-than-not
to be sustained upon examination. Measurement of the tax uncertainty occurs if
the recognition threshold has been met. FIN 48 also provides guidance on
derecognition, classification, interest, penalties, accounting in interim
periods, disclosure, and transition. FIN 48 will be effective beginning February
1, 2007. Differences between the amounts recognized in the statements of
financial position prior to the adoption of FIN 48 and the amounts reported
after adoption should be accounted for as a cumulative-effect adjustment
recorded to the beginning balance of retained earnings. The Company is still
evaluating the impact, if any, the adoption of this interpretation will have on
the Company's financial position, cash flows, and results of operations.
In September 2006, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial Statements ("SAB 108").
SAB 108 provides interpretive guidance on how the effects of the carryover or
reversal of prior year misstatements should be considered in quantifying a
current year misstatement. The SEC staff believes that registrants should
quantify errors using both a balance sheet and an income statement approach and
evaluate whether either approach results in quantifying a misstatement that,
when all relevant quantitative and qualitative factors are considered, is
material. SAB 108 is effective for the Company's fiscal year ending April 30,
2007. We do not expect SAB 108 to have a material impact on our consolidated
financial statements.
In September 2006, the FASB issued Statement No. 157 ("FAS 157") "Fair Value
Measurements". This statement defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles (GAAP), and
expands disclosures about fair value measurements. This statement applies under
other accounting pronouncements that require or permit fair value measurements,
the FASB having previously concluded in those accounting pronouncements that
fair value is the relevant measurement attribute. Accordingly, this statement
does not require any new fair value measurements. However, for some entities,
the application of this Statement will change current practice. The changes to
current practice resulting from the application of this Statement relate to the
definition of fair value, the methods used to measure fair value, and the
expanded disclosures about fair value measurements. This Statement is effective
for financial statements issued for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years.
In September 2006, the FASB issued Statement No. 158 ("FAS 158") "Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans--an
amendment of FASB Statements No. 87, 88, 106, and 132(R)". This statement
improves financial reporting by requiring an employer to recognize the
overfunded or underfunded status of a defined benefit postretirement plan (other
than a multiemployer plan) as an asset or liability in its statement of
financial position and to recognize changes in that funded status in the year in
which the changes occur through comprehensive income of a business entity or
changes in unrestricted net assets of a not-for-profit organization. This
statement also improves financial reporting by requiring an employer to measure
the funded status of a plan as of the date of its year-end statement of
financial position, with limited exceptions. An employer with publicly traded
equity securities is required to initially recognize the funded status of a
defined benefit postretirement plan and to provide the required disclosures as
of the end of the fiscal year ending after December 15, 2006. The Company does
not believe that adoption of this statement will have a material effect on its
financial statements.
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
Seq. Page 9
cause actual results to differ materially from those reflected in such forward
looking statements include, but are not limited to, the effect of economic and
business conditions, including risk inherent in the Long Island, New York and
Palm Beach County, Florida real estate markets, the ability to obtain additional
capital in order to develop the Company's existing real estate and other risks
detailed from time to time in its SEC reports. The Company assumes no obligation
to update the information in this Form 10-Q.
Critical Accounting Policies
----------------------------
The consolidated financial statements of the Company include accounts of the
Company and all majority-owned and controlled subsidiaries. The preparation of
financial statements in conformity with GAAP requires management to make
estimates and assumptions in certain circumstances that affect amounts reported
in the Company's consolidated financial statements and related notes. In
preparing these financial statements, management has utilized information
available including its past history, industry standards and the current
economic environment, among other factors, in forming its estimates and
judgments of certain amounts included in the consolidated financial statements,
giving due consideration to materiality. It is possible that the ultimate
outcome as anticipated by management in formulating its estimates inherent in
these financial statements might not materialize. However, application of the
critical accounting policies below involves the exercise of judgment and use of
assumptions as to future uncertainties and, as a result, actual results could
differ from these estimates. In addition, other companies may utilize different
estimates, which may impact comparability of the Company's results of operations
to those of companies in similar businesses.
Revenue Recognition
-------------------
Rental revenue is recognized on a straight-line basis, which averages minimum
rents over the terms of the leases. The excess of rents recognized over amounts
contractually due, if any, is included in deferred rents receivable on the
Company's balance sheets. Certain leases also provide for tenant reimbursements
of common area maintenance and other operating expenses and real estate taxes.
Ancillary and other property related income is recognized in the period earned.
Real Estate
-----------
Rental real estate assets, including land, buildings and improvements,
furniture, fixtures and equipment are recorded at cost. Tenant improvements,
which are included in buildings and improvements, are also stated at cost.
Expenditures for ordinary maintenance and repairs are expensed to operations as
they are incurred. Renovations and/or replacements, which improve or extend the
life of the asset, are capitalized and depreciated over their estimated useful
lives.
Depreciation is computed utilizing the straight-line method over the estimated
useful life of ten to thirty 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."
Seq. Page 10
Stock-Based Compensation
------------------------
Effective May 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 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 May 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.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED OCTOBER 31, 2006
AS COMPARED TO THE THREE AND SIX MONTHS ENDED OCTOBER 31, 2005
The Company is reporting net income of $12,527 for the quarter ending October
31, 2006 compared to net income of $475,461 for the same period of the prior
year and a net loss of $41,577 for the six months then ended compared to net
income of $587,158 in the prior year.
Diluted per share earnings for the current quarter amounted to $0.01 compared to
$0.37 in the prior year and a per share loss of $(0.03) compared to earnings of
$0.46 for the six months ending October 31, 2006 and 2005, respectively.
Revenue from rental property declined in both the three and six month periods of
the current year, amounting to $337,499 and $670,423, respectively , compared to
$486,166 and $980,700 for the comparable periods last year. The decreases
amounted to $148,667 for the quarter and $310,277 for the six month period. The
decline in revenues was primarily caused by the condemnation which accounted for
$140,477 and $280,955 for the three and six month periods, respectively.
Rental property expenses totaled $187,412 for the quarter compared to $151,713
during the prior year. For the most part, the increase of $35,699 is attributed
to maintenance and repairs of $21,400 and real estate taxes of $12,077 which
were previously capitalized as a result of the filed plans to develop a
residential golf course community. Following the condemnation of a major portion
of that property, the taxes on the remaining acreage have been expensed. For the
six month period, expenses increased by $70,314 amounting to $370,095 compared
to $299,781. As in the case of the quarterly results, the increase was due to
maintenance and repairs of $33,145, real estate taxes of $24,153 and property
and casualty insurance premiums of $28,305 partially mitigated by savings in
outside services of $9,625.
As a result, income from rental property amounted to $150,087 and $334,453 for
the three months ending October 31, 2006 and 2005, respectively, while income
for the six month reporting period amounted to $300,328 and $680,919,
respectively.
General and administrative expenses and other income reflect a net expense of
$129,209 for the quarter compared to income of $457,981 for the same period last
year, negatively impacting earnings by $587,190. The major contributing factor
to this decline is the fact that 2005 results included a gain on the sale of
real estate totaling $874,388. General and administrative expenses which
increased by $61,178 for the quarter, amounted to $490,954 compared to $429,776
for the same period last year. For the three months ended October 31, 2006,
costs associated with the condemnation litigation accounted for $27,127. In
addition, fees for outside services and legal and consulting increased by
$98,668 as well as management and custody fees of $9,926. For the quarter,
interest income amounted to $361,745 compared to $13,369 during the prior year,
an increase of $348,376. This was complimented by reductions in corporate
governance of $47,797, pension expense of $13,394 and the elimination of rent
expense which totaled $13,776.
For the six months ending October 31, 2006, general and administrative expenses
and other income reflect a net expense of $369,623 compared to income of
$297,678 for the same period last year, negatively impacting earnings by
$667,301. Again, the major contributing factor to this decrease is the
aforementioned 2005 gain on the sale of real estate totaling $1,136,705. General
and administrative expenses amounted to $1,063,651 compared to $869,908 for the
same six month period last year, an increase of $193,743. Mirroring the
quarterly results, the six month period included costs associated with
condemnation litigation of $98,169. Additionally, other contributing factors
include fees for outside services and legal and consulting increases of $214,374
as well management and custody fees which totaled $19,843. The six month results
include $694,028 in interest income compared to $30,881 for the same period last
year. As in the case of the quarterly results, this increase of $663,147
reflects the investment of proceeds from an advance payment relating to the
November 2005 condemnation of 245.5 acres of Flowerfield property. In addition,
there were reductions in corporate governance of $74,328, pension expense of
$26,789 and the elimination of rent expense which totaled $27,686.
Seq. Page 11
The increase, in both the three and six month periods, for outside services is
$36,427 and $51,944, respectively, and is primarily attributable to the
engagement of a consulting group for special projects which included the
installation of a new accounting system. The increase in legal and consulting
fees amounted to $62,241 and $162,430 for the three and six month periods,
respectively, and reflect costs associated with services from our investment
bankers, the planned conversion to a Real Estate Investment Trust ( REIT ), and
various other corporate matters.
As a result, the Company is reporting income before taxes for the quarter ending
October 31, 2006 totaling $20,878 compared to $792,434 during the prior year.
For the six month reporting period, the Company is reporting a loss before taxes
totaling $69,295 compared to income before taxes of $978,597 for the same period
last year.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used in) operating activities was $253,871 and $(488,433)
during the six months ended October 31, 2006 and 2005, respectively. The cash
provided by operating activities in the current period was primarily related to
the receipt of a portion of the interest due from the State of New York on the
condemnation advance payment. The primary use of cash in the prior period was
primarily related to land development costs.
Net cash (used in) provided by investing activities were $(24,308,705) and
$1,300,000 during the six months ended October 31, 2006 and 2005, respectively.
The principal use of cash in the current period was primarily related to the
investment in REIT qualified mortgage backed securities. The cash provided by
investing activities in the prior period represents proceeds of $1,300,000 to
the Company's mortgage receivable.
Net cash provided by financing activities was $0 and $248,673 during the six
months ended October 31, 2006 and 2005, respectively. The net cash provided
during the prior period was primarily the result of 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
October 31, 2006. 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 October 31, 2006, the Company had cash and cash equivalents of $2,957,854
and anticipates having the capacity to fund normal operating 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 $27,165,668 at October 31, 2006. Net prepaid
expenses and other assets shown in the accompanying chart does not include
$26,033 and $41,111 of furniture and fixtures, net, and loan origination fees,
net, for the six months ended October 31, 2006 and October 31, 2005,
respectively.
October 31,
2006 2005
------------ ------------
Current assets:
Cash and cash equivalents $ 2,957,854 $ 1,904,645
Investment in marketable securities 23,786,285 0
Deposit on property 504,000 0
Rent receivable, net 88,344 93,695
Interest receivable 469,564 0
Net prepaid expenses and other assets 319,617 163,244
------------ ------------
Total current assets 28,125,664 2,161,584
------------ ------------
Current liabilities:
Accounts payable and accrued expenses 798,245 286,577
Tenant security deposits payable 161,751 218,523
Income taxes payable 0 231,405
------------ ------------
Total current liabilities 959,996 736,505
------------ ------------
Working capital $ 27,165,668 $ 1,425,079
============ ============
Seq. Page 12
LIMITED PARTNERSHIP INVESTMENT
Our limited partnership investment in the Callery Judge Grove, LP 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 is currently the subject of a change of zone
application for a mixed use of residential, commercial and industrial
development. We have no current forecast as to the likelihood of, or the timing
required to achieve these entitlements that might impact the Grove's value.
(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 Annual Report on Form 10-K for the fiscal year
ended April 30, 2006.
Item 4 CONTROLS AND PROCEDURES
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 October 31, 2006. 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
ensure that information required to be disclosed in the reports the Company
files and 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
Items 1 through 5 are not applicable to the three months ended October 31, 2006.
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: December 12, 2006 /S/ Stephen V. Maroney
----------------------
Stephen V. Maroney
President, Chief Executive Officer
and Treasurer
Date: December 12, 2006 /S/ Frank D'Alessandro
----------------------
Frank D'Alessandro
Controller
Seq. Page 13