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 JULY 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
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Gyrodyne Company of America, Inc.
---------------------------------
(Exact name of small business issuer as specified in its charter)
New York 11-1688021
-------- ----------
(State or other jurisdiction (IRS Employer Identification No.)
of 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 Address: 102 Flowerfield, St. James, N.Y. 11780
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(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 AUGUST 31, 2006
Seq. Page 1
INDEX TO QUARTERLY REPORT OF GYRODYNE COMPANY OF AMERICA, INC.
QUARTER ENDED JULY 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 12
Item 4 Controls and Procedures 12
Part II - Other Information 12
Item 6 Exhibits 12
Signatures 12
Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certification 13
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 14
Seq. Page 2
Part I Financial Information
Item I Financial Statements
GYRODYNE COMPANY OF AMERICA, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS July 31, April 30,
------ 2006 2006
(Unaudited)
------------ ------------
REAL ESTATE
Rental property:
Land $ 3,017 $ 3,017
Building and improvements 2,922,792 2,876,087
Machinery and equipment 202,473 157,797
------------ ------------
3,128,282 3,036,901
Less accumulated depreciation 2,506,312 2,492,819
------------ ------------
621,970 544,082
------------ ------------
Land held for development:
Land 558,466 558,466
Land development costs 43,976 8,707
------------ ------------
602,442 567,173
------------ ------------
Total real estate, net 1,224,412 1,111,255
CASH AND CASH EQUIVALENTS 5,962,074 27,012,688
INVESTMENT IN MARKETABLE SECURITIES 21,284,177 -
RENT RECEIVABLE, net of allowance for doubtful accounts of
$36,000 and $30,000,
respectively 110,355 93,173
INTEREST RECEIVABLE 458,579 921,385
PREPAID EXPENSES AND OTHER ASSETS 474,502 308,361
PREPAID PENSION COSTS 1,117,884 1,133,497
------------ ------------
Total Assets $ 30,631,983 $ 30,580,359
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Accounts payable and accrued expenses $ 927,455 $ 921,294
Tenant security deposits payable 155,286 163,886
Deferred income taxes 9,399,000 9,358,000
------------ ------------
Total Liabilities 10,481,741 10,443,180
------------ ------------
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 67,167 -
Retained Earnings 11,993,341 12,047,445
------------ ------------
21,990,728 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 20,150,242 20,137,179
------------ ------------
Total Liabilities and Stockholders' Equity $ 30,631,983 $ 30,580,359
============ ============
See notes to consolidated financial statements
Seq. Page 3
GYRODYNE COMPANY OF AMERICA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
July 31,
2006 2005
------------ ------------
REVENUE FROM RENTAL PROPERTY $ 332,924 $ 494,534
------------ ------------
RENTAL PROPERTY EXPENSES:
Real estate taxes 52,531 40,454
Operating and maintenance 116,660 88,928
Depreciation 13,492 18,686
------------ ------------
TOTAL RENTAL PROPERTY EXPENSES 182,683 148,068
------------ ------------
INCOME FROM RENTAL PROPERTY 150,241 346,466
GENERAL AND ADMINISTRATIVE
(EXPENSES) AND OTHER INCOME:
General and administrative (expenses) (572,697) (440,132)
Gain on sale of real estate - 262,317
Interest income 332,283 17,512
------------ ------------
TOTAL GENERAL AND ADMINISTRATIVE
(EXPENSES) AND OTHER INCOME (240,414) (160,303)
------------ ------------
(LOSS) INCOME BEFORE INCOME TAXES (90,173) 186,163
(BENEFIT) PROVISION FOR INCOME TAXES (36,069) 74,466
------------ ------------
NET (LOSS) INCOME $ (54,104) $ 111,697
============ ============
NET (LOSS) INCOME PER COMMON SHARE:
Basic $ (0.04) $ 0.09
============ ============
Diluted $ (0.04) $ 0.09
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Basic 1,237,219 1,217,725
============ ============
Diluted 1,237,219 1,263,647
============ ============
See notes to consolidated financial statements
Seq. Page 4
GYRODYNE COMPANY OF AMERICA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
July 31,
2006 2005
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (54,104) $ 111,697
------------ ------------
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Depreciation and amortization 19,541 29,602
Bad debt expense 6,000 6,000
Deferred income tax provision - 74,932
Pension expense 15,613 29,007
Gain on sale of real estate - (262,317)
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Land development costs (35,269) (97,222)
Accounts receivable (23,182) (19,313)
Interest receivable 462,806 -
Prepaid expenses and other assets (167,350) (200,087)
Prepaid pension costs - (50,000)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 6,161 (22,457)
Tenant security deposits (8,600) (10,195)
------------ ------------
Total adjustments 275,720 (522,050)
------------ ------------
Net cash provided by (used in) operating activities 221,616 (410,353)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (91,381) -
Proceeds from mortgage receivable - 300,000
Purchase of marketable securities (21,788,799) -
Principal repayments on investment in marketable securities 607,950 -
------------ ------------
Net cash (used in) provided by investment activities (21,272,230) 300,000
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of loans payable - (1,853)
Proceeds from exercise of stock options - 250,662
------------ ------------
Net cash provided by financing activities - 248,809
------------ ------------
Net (decrease) increase in cash and cash equivalents (21,050,614) 138,456
Cash and cash equivalents at beginning of period 27,012,688 844,405
------------ ------------
Cash and cash equivalents at end of period $ 5,962,074 $ 982,861
============ ============
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 month periods
ended July 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 month period ended July 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 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:
Three months ended
July 31,
2006 2005
---------- ----------
Basic 1,237,219 1,217,725
Effect of dilutive securities 0 45,922
---------- ----------
Diluted 1,237,219 1,263,647
========== ==========
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 July 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 July 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
month period ended July 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 months ended July 31, 2005
totaled $0.
The following table represents the Company's stock options granted, exercised
and forfeited during the first three 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 July 31, 2006 67,105 $ 16.42 1.24 $2,225,448
========== ========== ========== ==========
Vested and Exercisable at July 31, 2006 67,105 $ 16.42 1.24 $2,225,448
========== ========== ========== ==========
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 months ended July 31, 2006 and 2005:
Three Months Ended
July, 31
2006 2005
---------- ----------
Pension Benefits
Service Cost $ 33,081 $ 34,606
Interest Cost 31,634 31,319
Expected Return on Plan Assets (59,159) (57,056)
Amortization of Prior-Service Cost 10,057 18,184
Amortization of Net Loss 0 1,954
---------- ----------
Net Periodic Benefit Cost After
Curtailments and Settlements $ 15,613 $ 29,007
========== ==========
During the three months ended July 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
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 July 31, Amount
----------------------------------------------------------
2007 $ 790,000
2008 525,000
2009 309,000
2010 282,000
2011 183,000
Thereafter 1,588,000
--------------
$ 3,677,000
==============
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. 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.
10. Recent Accounting Pronouncements:
In December 2004, the FASB issued Statement No. 123(R), ("FAS 123(R)")
"Share-Based Payment". This statement replaces FASB Statement No. 123,
"Accounting for Stock-Based Compensation", and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees". FAS 123(R) covers a wide range of
share-based compensation, including stock options, and requires that the
compensation cost relating to share-based transactions be measured at fair value
and recognized in the financial statements. This statement is effective with the
first interim reporting period following an annual filing after December 15,
2005.
Seq. Page 8
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements made in this Form 10-Q that are not historical facts contain
"forward-looking information" within the meaning of the Private Securities
Litigation Reform Act of 1995, and Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act") both as
amended, which can be identified by the use of forward-looking terminology such
as "may," "will," "anticipates," "expects," "projects," "estimates," "believes,"
"seeks," "could," "should," or "continue," the negative thereof, other
variations or comparable terminology. Important factors, including certain risks
and uncertainties with respect to such forward-looking statements, that could
cause actual results to differ materially from those reflected in such forward
looking statements include, but are not limited to, the effect of economic and
business conditions, including risk inherent in the Long Island, New York and
Palm Beach County, Florida real estate markets, the ability to obtain additional
capital in order to develop the Company's existing real estate and other risks
detailed from time to time in its SEC reports. The Company assumes no obligation
to update the information in this Form 10-Q.
Critical Accounting Policies
----------------------------
The consolidated financial statements of the Company include accounts of the
Company and all majority-owned and controlled subsidiaries. The preparation of
financial statements in conformity with GAAP requires management to make
estimates and assumptions in certain circumstances that affect amounts reported
in the Company's consolidated financial statements and related notes. In
preparing these financial statements, management has utilized information
available including its past history, industry standards and the current
economic environment, among other factors, in forming its estimates and
judgments of certain amounts included in the consolidated financial statements,
giving due consideration to materiality. It is possible that the ultimate
outcome as anticipated by management in formulating its estimates inherent in
these financial statements might not materialize. However, application of the
critical accounting policies below involves the exercise of judgment and use of
assumptions as to future uncertainties and, as a result, actual results could
differ from these estimates. In addition, other companies may utilize different
estimates, which may impact comparability of the Company's results of operations
to those of companies in similar businesses.
Revenue Recognition
-------------------
Rental revenue is recognized on a straight-line basis, which averages minimum
rents over the terms of the leases. The excess of rents recognized over amounts
contractually due, if any, is included in deferred rents receivable on the
Company's balance sheets. Certain leases also provide for tenant reimbursements
of common area maintenance and other operating expenses and real estate taxes.
Ancillary and other property related income is recognized in the period earned.
Real Estate
-----------
Rental real estate assets, including land, buildings and improvements,
furniture, fixtures and equipment are recorded at cost. Tenant improvements,
which are included in buildings and improvements, are also stated at cost.
Expenditures for ordinary maintenance and repairs are expensed to operations as
they are incurred. Renovations and/or replacements, which improve or extend the
life of the asset, are capitalized and depreciated over their estimated useful
lives.
Depreciation is computed utilizing the straight-line method over the estimated
useful life of ten to thirty 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
Seq. Page 9
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."
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 MONTHS ENDED JULY 31, 2006
AS COMPARED TO THE THREE MONTHS ENDED JULY 31, 2005
The Company is reporting a net loss for the three months ending July 31, 2006
amounting to $54,104 compared to net income totaling $111,697 for the same
period last year. This decline of $165,801 includes several contributing factors
which are detailed in this report. On a diluted basis, the results represent a
per share loss of $0.04 compared to income of $0.09 per share for the 2006 and
2005 periods, respectively.
Reflecting primarily the loss of earnings caused by the condemnation of certain
properties previously reported, revenues from rental property declined by
$161,610 or 33% to $332,924 for the current period compared to $494,534 for the
same quarter last year. The condemnation accounted for $151,713 of the variance
while the balance represented the net change in tenancies.
Rental property expenses amounted to $182,683 reflecting an increase of $34,615
or 23% over the prior year total of $148,068. Real estate taxes accounted for
$12,077 of the variance while operating and maintenance expenses increased by
$27,732. Depreciation expenses declined by $5,194. As reported in a previous
filing, real estate taxes attributable to undeveloped portions of the
Flowerfield property 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. The increase in operating and maintenance expenses is attributable to
a $25,817 increase in property and casualty insurance premiums and an $11,747
increase in repair and maintenance costs. With reference to the reported
increase in insurance premiums it should be noted that last year's results
included $35,822 in reimbursements from tenants that pertained to a prior
period. Costs associated with outside services were reduced by $8,427.
Based on the foregoing, income from rental property declined by $196,225 to
$150,241 compared to $346,466 during the same period last year.
General and administrative expenses and other income amounted to a net expense
of $240,414 and $160,303 for the current three month period and the prior year,
respectively. For the quarter ending July 31, 2006, general and administrative
expenses totaled $572,697 and represents an increase of $132,565 over the
results of the prior year when expenses amounted to $440,132. The major
contributing factor to this increase was $71,041 in costs associated with
preparing our claim for additional compensation for the condemned property in
the Court of Claims of the State of New York. Additionally, the Company
experienced increased levels of expense for outside services and legal and
consulting which amounted to $15,517 and $100,189, respectively. The increase in
outside services 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 reflects costs associated with
services from our investment bankers, the planned conversion to a Real Estate
Investment Trust ( REIT ), and various other corporate matters. Partially
offsetting these increases, the current period also reflects decreases of
$13,910 in rental expense, $26,531 in corporate governance matters, and $13,394
in pension expense. Last year, other income included $262,317 in gains from the
sale of real estate. Interest income for the period increased by $314,771,
totaling $332,283 compared to $17,512 during the prior year. This increase is
attributable to the investment of the previously reported Advance Payment of
$26.3 million related to the condemnation of 245.5 acres of the Flowerfield
property.
Seq. Page 10
As a result, the Company is reporting a loss before taxes of $90,173 compared to
income before taxes totaling $186,163 for the same three month period during the
prior year.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used in) operating activities was $221,616 and $(410,353)
during the three months ended July 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 were
funds used in the prepayment of real estate taxes as well as land development
costs.
Net cash (used in) provided by investing activities were $(21,272,230) and
$300,000 during the three months ended July 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 a prepayment of $300,000 to
the Company's mortgage receivable.
Net cash provided by financing activities was $0 and $248,809 during the three
months ended July 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 July 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 July 31, 2006, the Company had cash and cash equivalents of $5,962,074 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 $27,180,000 at July 31, 2006. Net prepaid
expenses and other assets shown in the accompanying chart does not include
$26,946 and $65,741 of furniture and fixtures, net, and loan origination fees,
net, for the three months ended July 31, 2006 and July 31, 2005, respectively.
July 31,
2006 2005
------------ ------------
Current assets:
Cash and cash equivalents $ 5,962,074 $ 982,861
Investment in marketable securities 21,284,177 0
Rent receivable, net 110,355 75,622
Interest receivable 458,579 0
Mortgage receivable 0 1,000,000
Net prepaid expenses and other assets 447,556 326,143
------------ ------------
Total current assets 28,262,741 2,384,626
------------ ------------
Current liabilities:
Accounts payable and accrued expenses 927,455 182,324
Tenant security deposits payable 155,286 219,089
Current portion of loans payable 0 7,411
------------ ------------
Total current liabilities 1,082,741 408,824
------------ ------------
Working capital $ 27,180,000 $ 1,975,802
============ ============
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.
Seq. Page 11
(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
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 July 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 July 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: August 31, 2006 /S/ Stephen V. Maroney
----------------------
Stephen V. Maroney
President, Chief Executive Officer
and Treasurer
Date: August 31, 2006 /S/ Frank D'Alessandro
----------------------
Frank D'Alessandro
Controller
Seq. Page 12