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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

x       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2011

 

or

 

o          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from            to           

 

Commission file number:  0001368757

 

GTJ REIT, INC.

(Exact name of registrant as specified in its charter)

 

MARYLAND		20 -5188065
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

 

444 Merrick Road

Lynbrook, New York

11563

(Address of principal executive offices)

(Zip Code)

 

(516) 881-3535

(Registrant’s telephone number, including area code)

 

N/A

(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  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “small reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer o		Accelerated filer o
Non-accelerated filer o		Smaller reporting company x
(Do not check if smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date: 13,587,051 shares of common stock as of November 8, 2011.

 

 

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GTJ REIT, INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2011

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION	2
Item 1. Financial Statements	2
Consolidated Balance Sheets at September 30, 2011 (Unaudited) and December 31, 2010	2
Consolidated Statements of Income (Unaudited) for the Three and Nine Months Ended September 30, 2011 and 2010	3
Consolidated Statement of Stockholders’ Equity (Unaudited) for the Nine Months Ended September 30, 2011	4
Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2011 and 2010	5
Notes to the Consolidated Financial Statements (Unaudited)	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3. Quantitative and Qualitative Disclosures about Market Risk	41
Item 4. Controls and Procedures	41
PART II. OTHER INFORMATION	42
Item 1. Legal Proceedings	42
Item 1A. Risk Factors	42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3. Defaults Upon Senior Securities	42
Item 4. Removed and Reserved	42
Item 5. Other Information	42
Item 6. Exhibits	42
Signatures	44

 

EX-31.1: CERTIFICATION

EX-31.2: CERTIFICATION

EX-32.1: CERTIFICATION

EX-32.2: CERTIFICATION

 

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GTJ REIT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share data)

 

		September 30,			December 31,
		2011			2010
		(Unaudited)
ASSETS
Real estate at cost:
Land		$	88,584		$	88,584
Buildings and improvements		24,727			24,539
		113,311			113,123
Less: accumulated depreciation and amortization		(9,953		)	(9,221		)
Net real estate held for investment		103,358			103,902
Cash and cash equivalents		8,033			10,720
Available-for-sale securities		2,327			2,748
Restricted cash		756			875
Accounts receivable, net		263			174
Other assets		8,013			7,140
Deferred charges, net		3,484			3,368
Assets of discontinued operations		6,223			8,768
Intangible assets, net		682			1,296
Machinery and equipment, net		1,486			1,523
Total assets		$	134,625		$	140,514
LIABILITIES AND STOCKHOLDERS’ EQUITY
Mortgage note payable		$	45,500		$	45,500
Accounts payable and accrued expenses		54			296
Unpaid losses and loss-adjustment expenses		1,988			2,159
Liabilities of discontinued operations		1,161			1,591
Other liabilities, net		2,700			2,477
Total liabilities		51,403			52,023
Stockholders’ equity:
Preferred stock, $.0001 par value; 10,000,000 shares authorized and none issued and outstanding		—			—
Common stock, $.0001 par value; 100,000,000 shares authorized; 13,587,051 and 13,529,131 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively		1			1
Additional paid-in capital		137,784			137,470
Cumulative distributions in excess of net income		(54,854		)	(49,398		)
Accumulated other comprehensive income		291			418
Total stockholders’ equity		83,222			88,491
Total liabilities and stockholders’ equity		$	134,625		$	140,514

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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GTJ REIT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

For the Three and Nine Months Ended September 30, 2011 and 2010

(Unaudited, amounts in thousands, except share and per share data)

 

		Three Months Ended, September 30,						Nine Months Ended, September 30,
		2011			2010			2011			2010
Revenues:
Property rentals		$	3,521		$	3,357		$	10,397		$	10,012
Other revenue		276			301			1,093			897
Total revenues		3,797			3,658			11,490			10,909
Operating expenses:
General and administrative expenses		1,982			975			5,475			3,055
Equipment maintenance and garage expenses		158			162			464			417
Transportation expenses		8			14			23			47
Contract maintenance and station expenses		4			1			91			1
Insurance and safety expenses		175			214			380			332
Operating and highway taxes		106			108			221			369
Other operating expenses		374			65			1,219			200
Depreciation and amortization expense		350			346			1,011			1,035
Total operating expenses		3,157			1,885			8,884			5,456
Operating income		640			1,773			2,606			5,453
Other income (expense):
Interest income		17			31			66			99
Interest expense		(632		)	(627		)	(1,889		)	(1,548		)
Change in insurance reserves		(113		)	—			(149		)	(31		)
Other		(154		)	(11		)	(141		)	(5		)
Total other income (expense):		(882		)	(607		)	(2,113		)	(1,485		)
(Loss) income from continuing operations before loss from equity affiliates and income taxes		(242		)	1,166			493			3,968
Income from equity affiliates		—			—			—			—
(Loss) income before provision for income taxes		(242		)	1,166			493			3,968
Provision for income taxes		23			15			1			26
(Loss) income from continuing operations, net of income taxes		(265		)	1,151			492			3,942
Discontinued Operations:
Loss from discontinued operations, net of income taxes		(1,428		)	(675		)	(1,339		)	(1,921		)
Net (loss) income		$	(1,693	)	$	476		$	(847	)	$	2,021
Income per common share - basic and diluted:
(Loss) income from continuing operations		$	(0.02	)	$	0.09		$	0.04		$	0.29
Loss from discontinued operations		$	(0.10	)	$	(0.05	)	$	(0.10	)	$	(0.14	)
Net (loss) income		$	(0.12	)	$	0.04		$	(0.06	)	$	0.15
Weighted-average common shares outstanding – basic and diluted		13,587,051			13,529,131			13,553,105			13,494,355

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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GTJ REIT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For the Nine Months Ended September 30, 2011

(Unaudited, amounts in thousands, except share and per share data)

 

		Preferred Stock					Common Stock					Additional-			Cumulative Distributions			Accumulated Other			Total
		Outstanding Shares		Amount			Outstanding Shares		Amount			Paid-In- Capital			in Excess of Net Income			Comprehensive Income			Stockholders’ Equity
Balance at December 31, 2010		—		$	—		13,529,131		$	1		$	137,470		$	(49,398	)	$	418		$	88,491
Distributions - common stock, $0.34 per share		—		—			—		—			—			(4,609		)	—			(4,609		)
Stock-based compensation		—		—			—		—			314			—			—			314
Issuance of restricted shares							57,920		—			—			—			—			—
Comprehensive income:
Net loss		—		—			—		—			—			(847		)	—			(847		)
Unrealized loss on available-for-sale securities, net		—		—			—		—			—			—			(127		)	(127		)
Total comprehensive loss		—		—			—		—			—			—			—			(974		)
Balance at September 30, 2011		—		$	—		13,587,051		$	1		$	137,784		$	(54,854	)	$	291		$	83,222

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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GTJ REIT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, 2011 and 2010

(Unaudited, amounts in thousands, except share and per share data)

 

		Nine Months Ended September 30,
		2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income		$	(847	)	$	2,021
Loss from discontinued operations		1,339			1,921
Income from continuing operations		492			3,942
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities
Stock-based compensation		314			371
Changes in insurance reserves		(170		)	(118		)
Depreciation and amortization		923			962
Amortization of deferred financing costs		190			154
Amortization of deferred charges		97			78
Amortization of intangible assets		614			614
Changes in operating assets and liabilities:
Accounts receivable		(89		)	1,098
Other assets		(873		)	(1,484		)
Deferred charges		(403		)	(1,837		)
Accounts payable and other liabilities		(20		)	(1,050		)
Net cash provided by operating activities		1,075			2,730
Cash flow from investing activities:
Purchases of machinery and equipment		(342		)	(235		)
Purchase of investments		(273		)	(278		)
Proceeds from sale of investments		567			603
Restricted cash		119			88
Net cash provided by investing activities		71			178
Cash Flow from financing activities:
Proceeds from mortgage note payable		—			45,500
Repayment of secured revolving credit facility		—			(43,215		)
Dividends paid		(4,609		)	(4,320		)
Earnings and profits distribution		—			(89		)
Net cash used in financing activities		(4,609		)	(2,124		)
Cash flow provided by (used in) discontinued operations:
Operating activities		776			(1,198		)
Net decrease in cash and cash equivalents		(2,687		)	(414		)
Cash and cash equivalents at the beginning of period		10,720			10,424
Cash and cash equivalents at the end of period		$	8,033		$	10,010
Supplemental cash flow information:
Cash paid for interest		$	1,723		$	1,394
Cash paid for taxes		$	7		$	64

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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GTJ REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(Unaudited)

 

1.    ORGANIZATION AND BASIS OF PRESENTATION:

 

Description of Business

 

GTJ REIT, Inc. (the “Company” or “GTJ REIT”) was incorporated in Maryland on June 23, 2006 to engage in any lawful act or activity including, without limitation, qualifying as a real estate investment trust (“REIT”) under Sections 856 through 860, or any successor sections of the Internal Revenue Code of 1986, as amended (the “Code”), for which corporations may be organized under Maryland General Corporation Law. The Company has focused primarily on the ownership and management of commercial real estate located in New York City and also has one property located in Farmington, Connecticut (“Real Estate Operations”). In addition, the Company, through its taxable REIT subsidiaries, provides outdoor maintenance and shelter cleaning services to outdoor advertising companies and government agencies in New York, New Jersey, Arizona, and California, as well as electrical construction services to a broad range of commercial, industrial, institutional, and governmental customers in New York (Outdoor Maintenance Operations”), and operates and manages parking garage facilities located in New York City (“Other Operations”).

 

On March 29, 2007, the Company commenced operations upon the completion of the Reorganization described below. Effective July 1, 2007, the Company elected to be treated as a REIT under the Code and elected December 31 st  as its fiscal year end. Additionally, in connection with the Tax Relief Extension Act of 1999 (“RMA”), the Company is permitted to participate in activities outside the normal operations of the REIT so long as these activities are conducted in entities which elect to be treated as taxable subsidiaries under the Code subject to certain limitations.

 

At September 30, 2011, the Company owned seven properties containing a total of approximately 561,000 square feet of leasable area.

 

Reorganization

 

 On July 24, 2006, the Company entered into an Agreement and Plan of Merger (the “Agreement”) with Triboro Coach Corp., a New York corporation (“Triboro”); Jamaica Central Railways, Inc., a New York corporation (“Jamaica”); Green Bus Lines, Inc., a New York corporation (“Green” and together with Triboro and Jamaica, collectively referred to as the “Bus Companies” and each referred to as a “Bus Company”); Triboro Acquisition, Inc., a New York corporation (“Triboro Acquisition”); Jamaica Acquisition, Inc., a New York corporation (“Jamaica Acquisition”); and Green Acquisition, Inc., a New York corporation (“Green Acquisition,” and together with Jamaica Acquisition and Triboro Acquisition collectively referred to as the “Acquisition Subsidiaries” and each referred to as an “Acquisition Subsidiary”). The transactions contemplated under the Agreement closed on March 29, 2007. The effect of the merger transactions was to complete a reorganization (“Reorganization”) of the ownership of the Bus Companies into the Company with the surviving entities of the merger of the Bus Companies with the Acquisition Subsidiaries becoming wholly-owned subsidiaries of the Company and the former shareholders of the Bus Companies becoming stockholders in the Company.

 

Under the terms of the Agreements, each share of common stock of each Bus Company’s issued and outstanding shares immediately prior to the effective time of the mergers, was converted into the right to receive the following shares of the Company’s common stock:

 

·                   Each share of Green common stock was converted into the right to receive 1,117.429975 shares of the Company’s common stock.

 

·                   Each share of Triboro common stock was converted into the right to receive 2,997.964137 shares of the Company’s common stock.

 

·                   Each share of Jamaica common stock was converted into the right to receive 195.001987 shares of the Company’s common stock.

 

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GTJ REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(Unaudited)

 

1.    ORGANIZATION AND BASIS OF PRESENTATION (Continued):

 

The Bus Companies, including their subsidiaries, owned a total of six rentable parcels of real property (all on a triple net basis), four of which are leased to the City of New York, one of which is leased to a commercial tenant, and one of which a portion is leased to a commercial tenant and the remainder, which was utilized by the Company’s discontinued paratransit business, and is available for lease. There was an additional property of negligible size which was not rentable. Prior to the Reorganization, the Bus Companies and their subsidiaries, collectively, operated a group of outdoor maintenance businesses and the discontinued paratransit business, which was acquired as part of the Reorganization.

 

Following the completion of the Reorganization, on July 1, 2007, the Company elected to be treated as a REIT under the applicable provisions of the Code. In order to adopt a REIT structure, it was necessary to combine the Bus Companies and their subsidiaries under a single holding company. The Company is the holding company. The Company has formed three wholly-owned New York corporations and each of the Bus Companies merged with one of these subsidiaries to become wholly-owned subsidiaries of the Company. The mergers required the approval of the holders of at least 66 2/3% of the outstanding shares of common stock of each of Green, Triboro and Jamaica, voting separately and not as one class, which was obtained on March 26, 2007.

 

Based on third-party valuations of the real property, outdoor maintenance businesses, and the paratransit business (which was discontinued as of September 30, 2008), and considering the ownership of the same in whole or part by each of the Bus Companies, the Company was advised by an independent appraisal firm that the relative valuation of each of the Bus Companies (as part of GTJ REIT, Inc.) and in connection with the Reorganization was as follows: Green-42.088%, Triboro-38.287% and Jamaica-19.625%. Accordingly, under the Reorganization, 10,000,361 shares (including 361 fractional shares) of the Company’s common stock were distributed to the former shareholders of Green, Triboro, and Jamaica in exchange for their shares in the Bus Companies. Exclusive of fractional shares, 4,208,800 shares were distributed to the shareholders of Green, 3,828,700 shares to the shareholders of Triboro and 1,962,500 shares to the shareholders of Jamaica, in proportion to the outstanding shares held by such shareholders of each Bus Company, respectively.

 

As part of becoming a REIT, the Company was required, after the Reorganization, to make a distribution of the Bus Companies’ historical undistributed earnings and profits, calculated to be an estimated $62.1 million (see Note 10). The Company agreed to distribute up to $20.0 million in cash, and 3,775,400 shares of the Company’s common stock, valued at $11.14 per share solely for purposes of the distribution, calculated as follows:

 

Total value of the Bus Companies		$	173,431,797
Assumed Earnings and Profits — Cash distribution		20,000,000
Total value after cash distribution		153,431,797
Assumed Earnings and Profits — Stock distribution		42,000,000
Total value after stock distribution		$	111,431,797
Reorganization shares		10,000,000
Share Value for purposes of Post Earnings and Profits distribution		$	11.14

 

The Reorganization was accounted for under the purchase method of accounting as required by Accounting Standards Codification (“ASC”) 805. Because the Company has been formed to issue equity interests to effect a business combination, as required by ASC 805, one of the existing combining entities was required to be determined the acquiring entity. Under ASC 805, the acquiring entity is the combining entity whose owners as a group retained or received the larger portion of the voting rights in the combined entity. Immediately following the Reorganization, the former Green shareholders had a 42.088% voting and economic interest in the Company, the former Triboro shareholders had a 38.287% voting and economic interest in the Company, and the former Jamaica shareholders had a 19.625% voting and economic interest in the company. Additionally, under ASC 805, in determining the acquiring entity, consideration was given to which combining entity initiated the combination and whether the assets, revenues, and earnings of one of the combining entities significantly exceed those of the others.

 

Each stockholder elected to receive cash or stock, or a combination of both. If more than $20.0 million of cash was elected in the aggregate, cash distributed to each stockholder electing to receive some or all of his or her distribution in cash was

 

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GTJ REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(Unaudited)

 

1.    ORGANIZATION AND BASIS OF PRESENTATION (Continued):

 

to be reduced such that the aggregate cash distribution would total approximately $20.0 million and the balance of the distribution to each such stockholder will be made in the Company’s common stock.  The Company distributed approximately $19.9 million in cash and 3,775,400 shares of common stock (with a value of approximately $42.1 million). The undistributed cash balance of approximately $0.1 million is included in other liabilities in the condensed consolidated balance sheet at September 30, 2011. Green’s assets at December 31, 2006 totaled approximately $23.9 million as compared to Triboro’s assets of approximately $19.4 million, and Jamaica’s assets of approximately $10.2 million, and Green’s revenues on a going forward basis were expected to exceed that of Triboro and Jamaica. As a result of these facts, Green was deemed to be the accounting acquirer and the historical financial statements of the Company are those of Green.

 

Under the purchase method of accounting, Triboro’s and Jamaica’s assets and liabilities were acquired by Green and have been recorded at their estimated fair value. Accordingly, under the Reorganization, 10,000,000 shares of the Company’s common stock were distributed (exclusive of 361 fractional shares), 4,208,800 shares to the shareholders of Green, 3,828,700 shares to the shareholders of Triboro and 1,962,500 shares to the shareholders of Jamaica, in such case in proportion to the outstanding shares held by such shareholders of each Bus Company, respectively.

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. The fair values are based on third-party valuations. The fair value of the net assets acquired for the remaining interest in GTJ, not previously owned by Green, exceeded the total consideration for the acquisition by approximately $6.0 million (of which an additional adjustment of approximately $1.1 million was recorded at December 31, 2007 to adjust certain acquired deferred tax liabilities), resulting in negative goodwill. The excess negative goodwill was allocated on a pro rata basis and recorded as a reduction of long-lived assets.

 

The following table summarizes the allocation of the purchase price in the form of a condensed consolidated balance sheet reflecting the estimated fair values (after the allocation of negative goodwill) of the amounts assigned to each major asset and liability caption of the acquired entities at the date of acquisition (in thousands):

 

		Triboro			Jamaica			Total
Issuance of stock		$	66,402		$	34,035		$	100,437
Cash and cash equivalents		$	6,126		$	974		$	7,100
Restricted cash		1,275			637			1,912
Accounts receivable		2,627			1,314			3,941
Operating subsidies receivables		1,752			941			2,693
Deferred leasing commissions		782			—			782
Other assets		2,682			1,549			4,231
Securities available for sale		1,668			593			2,261
Real property and equipment		55,038			30,919			85,957
Machinery and equipment		149			75			224
Total assets		72,099			37,002			109,101
Accounts payable and accrued expenses		741			371			1,112
Revolving credit borrowings		168			84			252
Note payable		666			333			999
Income tax payable		294			157			451
Deferred tax liability		248			124			372
Unpaid losses and loss adjustment expenses		1,736			868			2,604
Other liabilities		1,844			1,030			2,874
Total liabilities		5,697			2,967			8,664
Fair value of net assets acquired		$	66,402		$	34,035		$	100,437

 

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GTJ REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(Unaudited)

 

1.    ORGANIZATION AND BASIS OF PRESENTATION (Continued):

 

On March 29, 2010, Shelter Electric Maintenance Corp. and Shelter Electric Acquisition Subsidiary LLC invested approximately four hundred dollars in exchange for a 40% interest in a joint venture with Morales Electrical Contracting, Inc., a Minority Women Owned Business Enterprise (“MWBE”). The joint venture was formed to secure MWBE contracts for the purpose of providing electrical construction services.

 

On August 13, 2010, the Company formed Shelter Parking Corp., a New York corporation, to operate and manage parking facilities in the New York tri-state area. On September 30, 2010, Shelter Parking Corp., through its wholly owned subsidiary, Shelter Parking Brevard, LLC, entered into a fifteen year lease agreement to operate a parking garage facility at 245 East 54 th  Street. At September 30, 2011, this was the only parking garage facility operated by the Company.

 

On July 25, 2011, the Board of Directors (the “Board”) of the Company voted to divest the Company of substantially all of its taxable REIT subsidiaries. It is expected the divestiture of these subsidiaries will take the form of a sale as a going concern and/or, as appropriate, an orderly liquidation of assets, in order to maximize their value.  The Company is presently evaluating the status of its parking garage operations, and will make a determination as to its status in the near future.  It is expected that this divestiture will be substantially complete within six months from the date the Board voted on the divestiture.  Following the divestiture of these subsidiaries, the Company will continue to focus on its Real Estate Operations.

 

Basis of Presentation and Principles of Consolidation:

 

The accompanying unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete financial statements, although management believes that the disclosures presented herein are adequate to make the accompanying unaudited consolidated interim financial statements presented not misleading.

 

The accompanying unaudited consolidated financial statements include the financial statements of the Company, its wholly-owned subsidiaries, and partnerships or other joint ventures. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All significant intercompany transactions and balances have been eliminated in consolidation.

 

The results of operations for the three and nine months ended September 30, 2011 are not necessarily indicative of results that may be expected for the entire year ending December 31, 2011. The accompanying unaudited consolidated interim financial statements should be read in conjunction with the Company’s audited consolidated annual financial statements and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

 

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

 

Use of Estimates:

 

The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, and related disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. All of these estimates reflect management’s best judgment about current economic and market conditions and their effects based on information available as of the date of these consolidated financial statements.  If such conditions persist longer or deteriorate further than expected, it is reasonably possible that the judgments and estimates could change, which may result in impairments of certain assets.

 

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GTJ REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(Unaudited)

 

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

 

Significant estimates include those related to uncollectible receivables, the useful lives of long lived assets including property and equipment and intangible assets, impairment of assets, income taxes, contingencies, environmental matters, insurance liabilities, and stock-based compensation.

 

Reclassifications:

 

Certain prior period amounts have been reclassified to conform to the current year presentation.

 

Real Estate Investments:

 

Real estate assets are stated at cost, less accumulated depreciation and amortization. All costs related to the improvement or replacement of real estate properties are capitalized. Additions, renovations and improvements that enhance and/or extend the useful life of a property are also capitalized. Expenditures for ordinary maintenance, repairs and improvements that do not materially prolong the normal useful life of an asset are charged to operations as incurred.

 

Upon the acquisition of real estate properties, the fair values of the real estate purchased are allocated to the acquired tangible assets (consisting of land, buildings, and building improvements) and identified intangible assets and liabilities (consisting of above-market and below-market leases and in-place leases) in accordance with ASC 805. The Company utilizes methods similar to those used by independent appraisers in estimating the fair value of acquired assets and liabilities. The fair value of the tangible assets of an acquired property considers the value of the property “as-if-vacant.” The fair value reflects the depreciated replacement cost of the asset. In allocating purchase price to identified intangible assets and liabilities of an acquired property, the values of above-market and below-market leases are estimated based on the differences between (i) contractual rentals and the estimated market rents over the applicable lease term discounted back to the date of acquisition utilizing a discount rate adjusted for the credit risk associated with the respective tenants and (ii) the estimated cost of acquiring such leases giving effect to the Company’s history of providing tenant improvements and paying leasing commissions, offset by a vacancy period during which such space would be leased. The aggregate value of in-place leases is measured by the excess of (i) the purchase price paid for a property after adjusting existing in-place leases to market rental rates over (ii) the estimated fair value of the property “as-if-vacant,” determined as set forth above.

 

Above and below market leases acquired are recorded at their fair values. The capitalized above-market lease values are amortized as a reduction of rental revenue over the remaining term of the respective leases and the capitalized below-market lease values are amortized as an increase to rental revenue over the remaining term of the respective leases. The value of in-place leases is based on the Company’s evaluation of the specific characteristics of each tenant’s lease. Factors considered include estimates of carrying costs during expected lease-up periods, current market conditions, and costs to execute similar leases. The values of in-place leases are amortized over the remaining term of the respective leases. If a tenant vacates its space prior to its contractual expiration date, any unamortized balance of the related intangible asset is expensed.

 

Depreciation and Amortization:

 

The Company uses the straight-line method for depreciation and amortization. Properties and property improvements are depreciated over their estimated useful lives, which range from 10 to 25 years. Furniture and fixtures, equipment, and transportation equipment are depreciated over estimated useful lives that range from 5 to 10 years. Tenant improvements are amortized over the shorter of the remaining non-cancellable term of the related leases or their useful lives.

 

Deferred Charges:

 

Deferred charges consist principally of leasing commissions, which are amortized ratably over the life of the related tenant leases, and financing costs, which are amortized over the terms of the respective debt agreements.

 

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GTJ REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(Unaudited)

 

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

 

Asset Impairment:

 

The Company applies the guidance in ASC 360-10-05 to recognize and measure impairment of long-lived assets. Management reviews each real estate investment for impairment whenever events or circumstances indicate that the carrying value of a real estate investment may not be recoverable. The review of recoverability is based on an estimate of the future cash flows that are expected to result from the real estate investment’s use and eventual disposition. Such cash flow analyses includes factors such as expected future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If an impairment event exists due to the projected inability to recover the carrying value of a real estate investment, an impairment loss is recorded to the extent that the carrying value exceeds estimated fair value. Management is required to make subjective assessments as to whether there are impairments in the value of its real estate holdings. These assessments could have a direct impact on net income, because an impairment loss is recognized in the period that the assessment is made. There were no indicators of impairment at September 30, 2011.

 

When impairment indicators are present, investments in affiliated companies are reviewed for impairment by comparing their fair values to their respective carrying amounts. The Company makes its estimate of fair value by considering certain factors including discounted cash flow analyses. If the fair value of the investment has dropped below the carrying amount, management considers several factors when determining whether an other-than-temporary decline in market value has occurred, including the length of the time and the extent to which the fair value has been below cost, the financial condition and near-term prospects of the affiliated company, and other factors influencing the fair market value, such as general market conditions. As a result of the Company’s assessment, the Company recorded an allowance of approximately $0.9 million against notes receivable and related interest, wrote off approximately $0.4 million of goodwill and intangibles, recorded an allowance of approximately $0.3 million against accounts receivable, and recorded an impairment of fixed assets of approximately $0.3 million as of September 30, 2011.

 

Reportable Segments:

 

As of September 30, 2011, the Company primarily operated in two reportable segments: (i) Real Estate Operations and (ii) Other Operations.

 

·                   Real Estate Operations rent Company owned real estate located in New York and Connecticut.

 

·                   Other Operations provide various services to customers, including (i) personnel support, consulting, and maintenance services to the Metropolitan Transit Authority Bus Company (“MTABC”) for payroll, human resource, dispatch, procurement, inventory, and shop management systems for certain bus depots (ii) parking operations which operates and manages parking garage facilities in the New York area, and (iii) insurance operations which assumes reinsurance of worker’s compensation, vehicle liability, and covenant liability of the Company and its affiliated companies from unrelated insurance companies based in the United States of America.

 

Both segment’s operations are conducted within the U.S., with the exception of the insurance operations which is conducted in the Cayman Islands.

 

As of July 25, 2011, the Company determined to divest itself of its Outdoor Maintenance, Shelter Cleaning, and Electrical Contracting businesses (“Outdoor Maintenance Operations”). These operations are presented as discontinued operations in the consolidated statements of income.

 

Revenue Recognition—Real Estate Operations:

 

The Company recognizes revenue in accordance with ASC 840-20-25, which requires that revenue be recognized on a straight-line basis over the term of the lease unless another systematic and rational basis is more representative of the time pattern in which the use benefit is derived from the leased property. For the nine months ended September 30, 2011, four tenants constituted approximately 63%, 16%, 12%, and 8% of rental revenue, and two tenants each constituted approximately 1% of rental revenue. For the nine months ended September 30, 2010, five tenants constituted approximately 66%, 16%, 12%, 5%, and 1% of rental revenue.

 

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GTJ REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(Unaudited)

 

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

 

In those instances in which the Company funds tenant improvements and the improvements are deemed to be owned by the Company, revenue recognition will commence when the improvements are substantially completed and possession or control of the space is turned over to the tenant. When the Company determines that the tenant allowances are lease incentives, the Company commences revenue recognition when possession or control of the space is turned over to the tenant for tenant work to begin. The properties are being leased to tenants under operating leases. The cumulative excess revenue recognized over amounts due pursuant to the underlying leases amounted to approximately $7.2 million and $6.7 million at September 30, 2011 and December 31, 2010, respectively (see Note 4).

 

Property operating expense recoveries from tenants of common area maintenance, real estate, and other recoverable costs are recognized in the period that the related expenses are incurred.

 

Revenue Recognition—Outside Maintenance and Shelter Cleaning Operations:

 

Cleaning and maintenance revenue is recognized upon completion of the related service and is presented as part of discontinued operations in the consolidated statements of income (see Note 7 for further discussion regarding discontinued operations).

 

Revenue Recognition—Electrical Contracting Operations:

 

The Company recognizes revenues from long-term construction contracts on the percentage-of-completion method in accordance with ASC 605-35. Percentage-of-completion is measured principally by the percentage of costs incurred to date for each contract to the estimated total costs for such contract at completion. Contract costs include all direct costs related to the performance and completion of the contracts. Estimated losses on the long term construction contracts are recognized in the period in which such losses are determined. Revenues are presented as part of discontinued operations in the consolidated statements of income (see Note 7 for further discussion regarding discontinued operations).

 

Revenue Recognition—Parking Garage Operations:

 

Our parking garage facility charges a monthly or hourly fee to provide parking services.  Revenue is recognized during the period services are performed.

 

Earnings Per Share Information:

 

In accordance with ASC 260-10-45, the Company presents both basic and diluted earnings per share. Basic earnings per share excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, where such exercise or conversion would result in a lower per share amount. Restricted stock was included in the computation of diluted earnings per share and stock option awards were excluded from the computation of diluted earnings per share because the awards would have been antidilutive for the periods presented.

 

Discontinued Operations:

 

The condensed consolidated financial statements of the Company present the operations of the Outdoor Maintenance, Shelter Cleaning, Electrical Contracting, and Paratransit Operations as discontinued operations (Note 7) in accordance with ASC 205-20-55 for the three and nine months ended September 30, 2011 and 2010.

 

Cash and Cash Equivalents:

 

The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents.

 

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GTJ REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(Unaudited)

 

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

 

Restricted Cash:

 

The Company has restricted cash held by AIG on behalf of the Company that is restricted by the insurance carrier for the purpose of the payment of insured losses.  At September 30, 2011, and December 31, 2010, the Company had restricted cash in the amount of $0.8 million and $0.9 million, respectively.

 

Accounts Receivable:

 

Accounts receivable consist of trade receivables recorded at the original invoice amounts, less an estimated allowance for uncollectible accounts. Trade credit is generally extended on a short-term basis; thus trade receivables generally do not bear interest. Trade receivables are periodically evaluated for collectibility based on past credit histories with customers and their current financial conditions. Changes in the estimated collectibility of trade receivables are recorded in the results of operations for the periods in which the estimates are revised. Trade receivables that are deemed uncollectible are offset against the allowance for uncollectible accounts. The Company generally does not require collateral for trade receivables.

 

Available-for-Sale Securities:

 

The Company accounts for its marketable debt and equity securities as available-for-sale securities in accordance with ASC 320-10-35. Management determines the appropriate classification of debt and equity securities at the time of purchase and reevaluates such designation as of each balance sheet date.

 

Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in accumulated other comprehensive income, a component of stockholders’ equity. Interest on securities is included in interest income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in the accompanying condensed consolidated statements of income. The cost of securities sold is based on the specific identification method. Estimated fair value is determined based on quoted market prices.

 

Fair Value Measurement:

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measurements, a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies, is as follows:

 

Level 1 —Valuations based on quoted prices for identical assets and liabilities in active markets.

 

Level 2 —Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

 

Level 3 —Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.

 

Income Taxes:

 

The Company is organized and conducts its operations to qualify as a REIT for federal income tax purposes. Accordingly, the Company is generally not subject to federal income taxation on the portion of its income that qualifies as REIT taxable income, to the extent that it distributes at least 90% of its taxable income to its stockholders and complies with certain other requirements as defined under Section 856 through 860 of the Code.

 

The Company also participates in certain activities conducted by entities which elected to be treated as taxable subsidiaries under the Code. As such, the Company is subject to federal, state and local taxes on the income from these activities. The Company accounts for income taxes under the asset and liability method, as required by the provisions of ASC 740-10-30.

 

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GTJ REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(Unaudited)

 

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

 

Under this method, deferred tax assets and liabilities are established 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. The Company provides a valuation allowance for deferred tax assets for which it does not consider realization of such assets to be more likely than not.

 

ASC 740-10-65 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740-10-65, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740-10-65 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. As of September 30, 2011 and December 31, 2010, the Company has determined that no liabilities are required in connection with unrecognized tax positions.

 

Comprehensive Income:

 

The Company follows the provisions of ASC 220-10-45, which sets forth rules for the reporting and display of comprehensive income and its components. ASC 220-10-45 requires unrealized gains or losses on the Company’s available-for-sale securities to be included in accumulated other comprehensive income, net of taxes and as a component of stockholders’ equity.

 

Environmental Matters:

 

Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. These accruals are adjusted periodically as assessment and remediation efforts progress or as additional technical or legal information become available.

 

Environmental costs are capitalized if the costs extend the life of the property, increase its capacity, and/or mitigate or prevent contamination from future operations. Environmental costs are also capitalized in recognition of legal asset retirement obligations resulting from the acquisition, construction and/or normal operation of a long-lived asset. Costs related to remedial investigation and feasibility studies, environmental contamination treatment and cleanup are charged to expense. Estimated future incremental operations, maintenance, and management costs directly related to remediation are accrued when such costs are probable and estimable (see Notes 6 and 13).

 

Insurance Liabilities:

 

The liability for losses and loss-adjustment expenses includes an amount for claims reported and a provision for adverse claims development. The liability for claims reported is based on management’s best estimates, while the liability for adverse claims development is based on independent actuarial reports. While management believes that the estimated liabilities are adequate, the ultimate liabilities may be in excess of or less than the amounts recorded. It is reasonably possible that the expectations associated with these amounts could change in the near-term (within one year). The effect of such changes could be material to the condensed consolidated financial statements. The methods for making such estimates and for establishing the resulting liabilities are continually reviewed, and any adjustments are reported in current earnings.

 

Concentrations of Credit Risk:

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash equivalents, which from time-to-time exceed the Federal depository insurance coverage. All non-interest bearing transaction accounts are fully insured by the Federal Deposit Insurance Corporation through December 31, 2012.

 

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GTJ REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(Unaudited)

 

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

 

Investment in Equity Affiliates:

 

The Company invests in joint ventures that are formed to perform electrical construction services. These investments are generally recorded under either the equity or cost method of accounting. Under the equity method of accounting, the Company records its share of the net income and losses from the underlying operations and any other-than-temporary impairment on these investments on a single line item in the condensed consolidated statements of income as income or losses from equity affiliates.

 

Variable Interest Entities:

 

The Company accounts for variable interest entities (“VIEs”) in accordance with ASC 810-10-50. A VIE is defined as an entity in which equity investors (i) do not have the characteristics of a controlling financial interest, and/or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional financial support from other parties. A VIE is required to be consolidated by its primary beneficiary, which is defined as the party that (i) has the power to control the activities that impact the VIE’s economic performance and (ii) has the right to receive the majority of expected returns or the obligation to absorb the majority of expected losses that could be material to the VIE.

 

As of September 30, 2011, the Company has one investment in a VIE with an aggregate carrying amount of $1.0 million. For the VIE identified, the Company is not the primary beneficiary and as such the VIE is not consolidated in the Company’s condensed consolidated financial statements. The Company accounts for this investment under the equity method of accounting.

 

Stock-Based Compensation:

 

The Company has a stock-based compensation plan, which is described in Note 10. The Company accounts for stock-based compensation in accordance with ASC 718-30-30, which establishes accounting for stock-based awards exchanged for employee services. Under the provisions of ASC 718-10-35, share-based compensation cost is measured at the grant date, based on the fair value of the award, and is expensed against earnings at the grant date (for the portion that vests immediately) or ratably over the respective vesting periods.

 

Recently Issued Accounting Pronouncements:

 

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05, “Comprehensive Income” which requires U.S. GAAP to conform to the disclosure requirements of International Financial Reporting Standards (“IFRS”).  The amendment eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity and requires a separate Statement of Comprehensive Income or two consecutive statements in the statement of operations and in a separate statement of comprehensive income.  This guidance is effective for interim and annual periods beginning after December 15, 2011. The Company is currently evaluating if this ASU will have any potential impact on its condensed consolidated financial statements.

 

In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurements” which clarifies the application of existing fair value requirements, including those related to highest and best use concepts, and expands the disclosure requirements for fair value measurements categorized within Level 3 of the fair value hierarchy.  This guidance is effective for interim and annual periods beginning after December 15, 2011. The Company is currently evaluating if this ASU will have any potential impact on its condensed consolidated financial statements.

 

3.    AVAILABLE-FOR-SALE SECURITIES:

 

The Company accounts for debt and equity securities as available-for-sale securities in accordance with ASC 320-10-35. Management determines the appropriate classification of debt and equity securities at the time of purchase and reevaluates such designation as of each balance sheet date. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in accumulated other comprehensive income, a component of stockholders’ equity. Interest on

 

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GTJ REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(Unaudited)

 

3.    AVAILABLE-FOR-SALE SECURITIES (Continued):

 

securities is included in interest income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in the accompanying consolidated statements of income.

 

The following is a summary of available-for-sale securities at September 30, 2011 and December 31, 2010 (in thousands):

 

		Available-for-Sale Securities
September 30, 2011		Face Value			Amortized Cost			Unrealized Gains			Estimated Fair Value
Equity securities		$	—		$	—		$	213		$	213
Money market fund		695			695			—			695
U.S. Treasury/U.S. Government debt securities		1,363			1,368			51			1,419
Total available-for-sale securities		$	2,058		$	2,063		$	264		$	2,327

 

		Available-for-Sale Securities
December 31, 2010		Face Value			Amortized Cost			Unrealized Gains			Estimated Fair Value
Equity securities		$	—		$	—		$	338		$	338
Money market fund		752			752			—			752
U.S. Treasury/U.S. Government debt securities		1,597			1,602			56			1,658
Total available-for-sale securities		$	2,349		$	2,354		$	394		$	2,748

 

Accumulated other comprehensive income for the nine months ended September 30, 2011 and year ended December 31, 2010 includes net unrealized holding (losses) gains of approximately ($127,000) and $51,000, respectively. No amounts were reclassified from other comprehensive income to income for the nine months ended September 30, 2011, or for the year ended December 31, 2010.

 

The following is a summary of the contractual maturities of U.S. Government Debt Securities as of September 30, 2011:

 

			Amortized Cost			Estimated Fair Value
	Due in:
	2011		$	—		$	—
	2012 — 2016		1,108			1,153
	2017 — 2021		160			162
	2022 and later		100			104
	Total		$	1,368		$	1,419

 

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GTJ REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(Unaudited)

 

4.    OTHER ASSETS:

 

Other assets consist of the following (in thousands):

 

		September 30,			December 31,
		2011			2010
Prepaid expenses		$	301		$	142
Prepaid and refundable income taxes		36			37
Rental income in excess of amount billed		7,217			6,736
Notes receivable		14			14
Security deposits		428			192
Other assets		17			19
		$	8,013		$	7,140

 

5.    UNPAID LOSSES AND LOSS-ADJUSTMENT EXPENSES:

 

The liability for losses and loss-adjustment expenses in connection with certain previous insurance claims is summarized as follows (in thousands):

 

		September 30, 2011			December 31, 2010
Reported claims		$	1,709		$	2,027
Provision for incurred but not reported claims		279			132
		$	1,988		$	2,159

 

Management is responsible for estimating the provisions for outstanding losses. An actuarial study was independently completed and estimated that at December 31, 2010, the total outstanding losses at an expected level, are between approximately $1.3 million and $1.6 million. In their analysis, the actuaries have used industry based data which may or may not be representative of the Company’s ultimate liabilities.  In addition, the provision at December 31, 2010, included $0.8 million for outstanding losses which was not a part of the actuarial study.

 

In the opinion of management, the provision for losses and loss-adjustment expenses is adequate to cover the expected ultimate liability under the insurance policies. However, consistent with most companies with similar operations, the Company’s estimated liability for claims is ultimately based on management’s expectations of future events. It is reasonably possible that the expectations associated with these amounts could change in the near term (that is, within one year) and that the effect of such changes could be material to the condensed consolidated financial statements.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(Unaudited)

 

6.    OTHER LIABILITIES:

 

Other liabilities consist of the following (in thousands):

 

		September 30,			December 31,
		2011			2010
Accrued dividends		$	1,087		$	1,082
Accrued earnings and profits distribution		99			99
Accrued professional fees		150			106
Accrued wages		2			2
Accrued environmental costs		258			600
Accrued income taxes		1			—
Deposit liability		311			—
Deferred tax liability		—			23
Prepaid rent		259			380
Other		533			185
		$	2,700		$	2,477

 

7.    DISCONTINUED OPERATIONS:

 

On July 25, 2011, the Board of Directors of the Company voted to divest the Company of substantially all of its taxable REIT subsidiaries (“Outdoor Maintenance segment”). It is expected the divestiture of these subsidiaries will take the form of a sale as a going concern and/or, as appropriate, an orderly liquidation of assets, in order to maximize their value.  The Company is presently evaluating the status of its parking garage operations, and will make a determination as to their status in the near future.  It is expected that this divestiture will be substantially complete within six months from the date the Board voted on the divestiture.  Following the divestiture of these subsidiaries, the Company will continue to focus on its Real Estate Operations. The assets and liabilities associated with the Outdoor Maintenance segment have been classified as assets and liabilities of discontinued operations for all periods presented. The results of operations of the Outdoor Maintenance segment for all periods presented are classified as “Loss from discontinued operations, net of taxes.”

 

The following table sets forth the detail of the loss from discontinued operations for the three and nine months ended September 30, 2011 (in thousands):

 

		Three Months Ended			Nine Months Ended
		September 30, 2011			September 30, 2011
Revenues from discontinued operations		$	5,623		$	14,693
Loss from discontinued operations, net of income taxes		$	(1,428	)	$	(1,339	)

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(Unaudited)

 

7.    DISCONTINUED OPERATIONS (Continued):

 

The carrying amounts of the major classes of assets and liabilities of the Outdoor Maintenance segment included in discontinued operations are as follows:

 

		September 30,			December 31,
		2011			2010
Assets:
Cash		$	191		$	455
Accounts receivable, net		3,431			4,302
Intangible assets		—			514
Machinery and equipment, net		541			965
Other assets, net		2,060			2,533
		$	6,223		$	8,768
Liabilities:
Accounts payable and accrued expenses		428			422
Other liabilities, net		733			1,168
		$	1,161		$	1,591

 

The following tables present the uncompleted contracts in progress:

 

		September 30, 2011			December 31, 2010
Costs on contracts in progress		$	2,038		$	1,590
Estimated earnings		261			378
		2,299			1,968
Less: billings to date		(1,055		)	(1,644		)
		$	1,244		$	324

 

The excess of billings over revenues earned to date and revenues earned to date over billings are included in other liabilities and other assets, respectively, on the accompanying condensed consolidated balance sheets as of:

 

		September 30, 2011			December 31, 2010
Costs and estimated earnings in excess of billings on uncompleted contracts		$	1,244		$	739
Billings in excess of costs and estimated earnings on uncompleted contracts		—			(415		)
		$	1,244		$	324

 

8.    MORTGAGE NOTE PAYABLE:

 

Hartford Loan Agreement:

 

On July 1, 2010, two indirect subsidiaries of the Company, 165-25 147th Avenue, LLC and 85-01 24th Avenue, LLC (collectively, the “Borrower”) entered into a Fixed Rate Term Loan Agreement (the “Hartford Loan Agreement”) with Hartford Life Insurance Company, Hartford Life and Accident Insurance Company and Hartford Life and Annuity Insurance Company (collectively, the “Lenders”) pursuant to which the Lenders made a term loan to Borrower in the aggregate principal amount of $45,500,000 (the “Loan”).  The Loan was evidenced by certain promissory notes, executed simultaneously therewith, payable to the order of (i) Hartford Life Insurance Company in the stated amount of $25,000,000; (b) Hartford Life and Accident Insurance

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(Unaudited)

 

8.    MORTGAGE NOTE PAYABLE (Continued):

 

Company in the stated principal amount of $10,500,000; and (c) Hartford Life and Annuity Insurance Company in the stated principal amount of $10,000,000 (collectively, the “Notes”).  The proceeds from the Loan were used to satisfy in full the Company’s obligations under the previous ING Loan Agreement.

 

The obligations under the Hartford Loan Agreement are secured by, among other things, a first priority mortgage lien and security interest on certain (a) improved real estate commonly known as 165-25 147th Avenue, Laurelton, Queens, New York and 85-01 24th Avenue, East Elmhurst, Queens, New York  (collectively, the “Real Estate”), and (b) personal property and other rights of the Borrower, all as more specifically described in that certain Consolidated, Amended and Restated Mortgage, Security Agreement and Fixture Filing dated as of July 1, 2010 (the “Mortgage”) and that certain Assignment of Leases and Rents dated as of July 1, 2010 among the Lenders and the Borrower, and other ancillary documents. The outstanding principal balance of the Loan shall bear interest at the fixed rate of 5.05% per annum.  The Borrower is required to make monthly payments of interest only in the amount of $191,479. The principal is payable on the maturity date, July 1, 2017.

 

9.    SECURED REVOLVING CREDIT FACILITY:

 

On August 26, 2011, the Company and Manufacturers and Traders Trust Company (“M&T”) entered into a certain credit agreement (the “Credit Agreement”). The Credit Agreement provides for, among other things, a $10 million revolving credit facility (the “Revolver”). The Revolver is available to the Company to be used for Permitted Acquisitions (as defined in the Credit Agreement) and for general working capital and other corporate purposes. The Credit Agreement requires that the Company satisfy certain financial covenants, including: (i) minimum Net Worth, (ii) Fixed Charge Coverage Ratio, (iii) Leverage Ratio and (iv) Liquidity, all as defined in the Credit Agreement, and other restrictions and covenants that are usual and customary in agreements of this type. As a condition to M&T entering into the Credit Agreement, the Company agreed to indemnify M&T against certain claims pursuant to that certain Environmental Compliance and Indemnification Agreement, dated as of August 26, 2011.

 

The obligations under the Revolver are guaranteed by Farm Springs Road, LLC, a wholly-owned subsidiary of the Company (“Farm Springs”). The guaranty of Farm Springs is secured by a first priority mortgage lien and security interest on real property owned by Farm Springs and located at 8 Farm Springs Road, Farmington, Connecticut, as more specifically described in that certain Open-End Mortgage Agreement, dated as of August 26, 2011, and that certain General Assignment of Rents, dated as of August 26, 2011, by and between M&T and the Company. The maturity date for the Revolver is August 26, 2014. Borrowings under the Revolver bear interest, at the Borrower’s option, at either: (i) the M&T’s prime rate plus 2.0% or (ii) the London Interbank Offered Rate (“LIBOR”) plus 3.5% which is subject to a minimum rate of 4.0%.

 

10.    STOCKHOLDERS’ EQUITY:

 

Common Stock:

 

The Company is authorized to issue 100,000,000 shares of common stock, $.0001 par value per share. The Company has authorized the issuance of up to 15,564,454 shares of the Company’s common stock in connection with the Reorganization and the earnings and profits distribution of which a total of 13,472,281 shares has been issued by the Company.  On June 17, 2010, and June 9, 2011, the Company issued 56,850, and 57,920, restricted shares of common stock, respectively, under its stock incentive plan. As of September 30, 2011, a total of 13,587,051 shares have been issued by the Company (see Note 1).

 

Preferred Stock:

 

The Company is authorized to issue 10,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors. No shares have been issued as of September 30, 2011.

 

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