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| GYRO > SEC Filings for GYRO > Form 10-Q on 13-Nov-2008 | All Recent SEC Filings |
13-Nov-2008
Quarterly Report
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, both as amended, which can
be identified by the use of forward-looking terminology such as "may," "will,"
"anticipates," "expects," "projects," "estimates," "believes," "seeks," "could,"
"should," or "continue," the negative thereof, other variations or comparable
terminology. Important factors, including certain risks and uncertainties, with
respect to such forward-looking statements that could cause actual results to
differ materially from those reflected in such forward-looking statements
include, but are not limited to, the effect of economic and business conditions,
including risks inherent in the Long Island, Metropolitan New York and Palm
Beach County, Florida real estate markets, the ability to obtain additional
capital in order to develop the existing real estate, uncertainties associated
with the Company's litigation against the State of New York for just
compensation for the Flowerfield property taken by eminent domain, and other
risks detailed from time to time in the Company's SEC reports. The Company
assumes no obligation to update the information in this Form 10-Q. We qualify
all of our forward-looking statements by the foregoing cautionary statements.
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.
Rental revenue is recognized on a straight-line basis, which averages minimum rents over the terms of the leases. The excess of rents recognized over amounts contractually due, if any, is included in deferred rents receivable on the Company's balance sheets. Certain leases also provide for tenant reimbursements of common area maintenance and other operating expenses and real estate taxes. Ancillary and other property related income is recognized in the period earned.
Real Estate
Rental real estate assets, including land, buildings and improvements, furniture, fixtures and equipment are recorded at cost. Tenant improvements, which are included in buildings and improvements, are also stated at cost. Expenditures for ordinary maintenance and repairs are expensed to operations as they are incurred. Renovations and/or replacements, which improve or extend the life of the asset, are capitalized and depreciated over their estimated useful lives.
Depreciation is computed utilizing the straight-line method over the estimated useful life of ten to thirty nine years for buildings and improvements and three to twenty years for machinery and equipment.
The Company is required to make subjective assessments as to the useful life of its properties for purposes of determining the amount of depreciation to reflect on an annual basis with respect to those properties. These assessments have a direct impact on the Company's net income. Should the Company lengthen the expected useful life of a particular asset, it would be depreciated over more years, and result in less depreciation expense and higher annual net income.
Real estate held for development is stated at the lower of cost or net realizable value. In addition to land, land development and construction costs, real estate held for development includes interest, real estate taxes and related development and construction overhead costs which are capitalized during the development and construction period. Net realizable value represents estimates, based on management's present plans and intentions, of sale price less development and disposition cost, assuming that disposition occurs in the normal course of business.
Long Lived Assets
On a periodic basis, management assesses whether there are any indicators that the value of the real estate properties may be impaired. A property's value is considered to be impaired 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."
The Company is reporting a net loss totaling $310,038 for the three month period
ended September 30, 2008 compared to a net loss totaling $158,143 for the same
period last year. For the nine month period ended September 30, 2008, the
Company is reporting net income totaling $2,205,026 as compared to net income
totaling $91,271 for the same period of the prior year. Both nine month
reporting periods reflect a benefit for income taxes resulting from the
reinvestment of condemnation proceeds and the deferral of tax pursuant to
Section 1033 of the Internal Revenue Code. Those benefits amounted to $2,800,000
and $825,989 for 2008 and 2007, respectively. In 2007, the Company also
recognized a $100,989 benefit for a prior year tax refund. Per share losses
amounted to $0.24 and $0.12 for the three month periods of 2008 and 2007 while
per share earnings amounted to $1.71 and $0.07 for the nine month periods of
2008 and 2007, respectively.
Revenues increased by $162,708 for the current quarter, amounting to $956,112 compared to $793,404 for the same period last year. Rental income increased by $231,294 which, for the most part, is attributable to the June 2008 acquisition of the Cortlandt Medical Center in northern Westchester County, New York. Interest income declined by $68,586 for the quarter, amounting to $125,826 compared to $194,412 for the same period in the prior year and is the result of an overall reduction in investment securities and the redeployment of those funds into the acquisition of real estate. Additionally, investment securities were sold to accommodate the payment of a special cash distribution to shareholders in 2007.
Expenses for the three month period increased by $314,603 amounting to $1,266,150 compared to $951,547 for the prior year. Expenses for the nine month period increased by $505,488, amounting to $3,285,972 compared to $2,780,484 during the prior year. Reflecting the two newly acquired properties in Port Jefferson and Cortlandt Manor, rental expenses, depreciation, and interest expense all increased when compared to prior year for both three and nine month reporting periods.
For the three month period ended September 30, 2008, rental expenses, depreciation, and interest expense increased by $143,528, $49,747, and $60,538, respectively. In addition, general and administrative expenses increased by $60,790. Contributing factors included increases in salaries and benefits, corporate governance, and condemnation litigation expenses which increased by $29,212, $14,327, and $33,643, respectively, while directors fees and expenses decreased by $18,525.
For the nine month period, rental expenses, depreciation, and interest expense increased by $282,519, $159,091, and $234,629, respectively, while general and administrative expenses declined by $170,751. There were several contributing factors to the overall reduction in general and administrative expenses despite increases in salaries and benefits, and condemnation litigation expenses of $8,816 and $66,300, respectively, as well as increases in pension plan and travel expenses of $41,139 and $21,596, respectively. Fees for outside services decreased by $55,839, legal and consulting fees decreased by $215,821, and directors fees and expenses decreased by $31,804. The decrease in fees for outside services consisted of reductions in SEC and Sarbanes-Oxley compliance fees and a prior year change in the Company's internal accounting system. Legal and consulting fees reflect a reduction in REIT related legal fees and investment banking services which amounted to $79,535 and $120,242, respectively. An additional reduction of $25,819 was realized relating to landlord/tenant legal matters.
As a result, the Company is reporting a loss from operations before benefit for income taxes of $310,038 for the current quarter ended September 30, 2008 compared to a loss of $158,143 for the same period last year. For the nine month period, a loss from operations totaling $594,974 is being reported compared to a loss of $734,718 for the same period last year. A major contributing factor towards the current year operating losses is the fact that expenses associated with the condemnation litigation amounted to $138,887 and $347,308 for the three and nine month periods, respectively.
Net cash used in operating activities was $1,035,570 and $3,311,411 during the nine months ended September 30, 2008 and 2007, respectively. The cash used in operating activities in the current period was primarily related to increased land development costs of $328,830, increased payments to vendors of $322,756 and the prepayment of expenses and other assets of $171,101. The cash used in operating activities in the prior period was primarily related to the payment of $2,000,000 to Landmark National in consideration for services previously provided by Landmark and for Landmark's agreement not to pursue any claim under the Golf Operating Agreement or the Asset Management Agreement, each dated April 9, 2002, for 10% of all proceeds from the condemnation of 245.5 acres of Flowerfield and any future sale and / or development of the remaining Flowerfield acreage. There were also increased payments to vendors of $491,150 and increased land development costs of $423,503.
Net cash (used in) provided by investing activities was $(5,708,374) and $8,586,473 during the nine months ended September 30, 2008 and 2007, respectively. Cash used in investing activities in the current period primarily consisted of the purchase of the Cortlandt Medical Center for $7,014,362 partially offset by principal repayments of marketable securities of $2,252,993. The cash provided by investing activities in the prior period was in connection with the sale and principal repayments of marketable securities of $7,199,204 and $4,706,633, respectively. This was partially offset by costs associated with the purchase of the Port Jefferson Professional Park, net of an assumed mortgage and deposit on property, for $2,859,153.
Net cash provided by (used in) financing activities was $5,003,763 and $(5,223,861) during the nine months ended September 30, 2008 and 2007, respectively. The net cash provided by financing activities in the current period was primarily in connection with obtaining a mortgage of $5,250,000 for the purchase of the Cortlandt Medical Center. The net cash used during the prior period was principally the result of a cash distribution payment of $5,160,157.
Beginning in the second half of 2007, the residential mortgage and capital markets began showing signs of stress, primarily in the form of escalating default rates on sub-prime mortgages, declining residential home values and increasing inventory nationwide. This "credit crisis" spread to the broader commercial credit markets and has reduced the availability of financing and widened spreads. These factors, coupled with a slowing economy, have reduced the volume of real estate transactions and increased capitalization rates. Despite the fact that the Company has invested in medical office buildings, an asset class that has been less vulnerable, if these conditions continue, our portfolio may experience lower occupancy and effective rents, which would result in a corresponding decrease in net income, funds from operations, and cash flows.
LIMITED PARTNERSHIP INVESTMENT
Our limited partnership investment in the Callery Judge Grove, LP (the "Grove") is carried on the Company's balance sheet at $0 as a result of recording losses equal to the carrying value of the investment. This investment represents a 10.93% ownership interest in a limited partnership that owns a 3500+ acre citrus grove in Palm Beach County, Florida. The Grove is the subject of a development plan consisting of 2,996 residential units and 235,000 square feet of mixed commercial, retail, and office space which was recently approved by the Palm Beach County Planning Commission.
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.
Not required for smaller reporting companies.
Item 4T. 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 September 30, 2008. Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective, in all material respects, to provide reasonable assurance that information required to be disclosed in the reports the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. It should be noted that design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions regardless of how remote.
There have been no changes in the Company's internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rule 13a-15 that occurred during the Company's last fiscal quarter that has materially affected, or that is reasonably likely to materially affect, the Company's internal control over financial reporting.
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