UNITED STATES
SEC
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 March 31, 2007 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ______ to ________
Commission file number: 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 [ ] No [X]
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. (Check
one):
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]
The number of the registrant's common shares outstanding as of February 1,
2008 was 13,472,281.
GTJ REIT, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER
ENDED MARCH 31, 2007
TABLE OF CONTENTS
Page
-----
PART I. FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 3
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 29
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 34
Item 4. CONTROLS AND PROCEDURES 34
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS 35
Item 1A. RISK FACTORS 35
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 45
Item 3. DEFAULTS UPON SENIOR SECURITIES 45
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 45
Item 5. OTHER INFORMATION 45
Item 6. EXHIBITS 46
SIGNATURES 49
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
GTJ REIT, INC. AND SUBSIDIARIES
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page
Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2007 (unaudited)
and December 31, 2006 (audited)............................................. 5
Condensed Consolidated Statements of Operations for the three months
ended March 31, 2007 and 2006 (unaudited).................................. 6
Condensed Consolidated Statement of Stockholders' Equity for the three
months ended March 31, 2007 (unaudited).................................... 7
Condensed Consolidated Statements of Cash Flows for the three months ended
March 31, 2007 and 2006 (unaudited)........................................ 8
Notes to Condensed Consolidated Financial Statements as of March 31, 2007
(unaudited)................................................................. 10
3
Basis of Presentation
The financial information is divided into two sections. The first section,
Item 1, includes the unaudited condensed consolidated financial statements,
including related footnotes. The second section, Item 2, consists of
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the three months ended March 31, 2007.
The condensed consolidated balance sheet as of March 31, 2007, the related
condensed consolidated statements of operations for the three months ended March
31, 2007 and 2006, the condensed consolidated statement of stockholders' equity
for the three months ended March 31, 2007, and the condensed consolidated
statements of cash flows for the three months ended March 31, 2007 and 2006
included in Item 1 have been prepared by GTJ REIT, Inc.("the Company"), without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). Certain information and footnote disclosures normally included
in financial statements prepared in accordance with U.S. generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the accompanying condensed
consolidated financial statements include all adjustments, which are of a normal
and recurring nature, necessary to summarize fairly the Company's consolidated
financial position and results of operations. The results of operations for the
three months ended March 31, 2007 and 2006, or for any other interim period, may
not be indicative of future performance. These financial statements should be
read in conjunction with the financial statements and notes thereto and
pro-forma financial information included in the Company's Form 8-K/A filed on
November 9, 2007.
4
GTJ REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31,
March 31, 2007 2006
---------------- ---------------
(unaudited)
ASSETS (in thousands, except share data)
Real estate at cost:
Land $ 85,051 $ 434
Buildings and improvements 7,708 6,591
------------------ ---------------
92,759 7,025
Less: accumulated depreciation and amortization (5,536) (5,476)
------------------ ---------------
Net real estate for investment 87,223 1,549
Cash and cash equivalents 12,734 9,519
Available for sale securities 3,817 1,219
Restricted cash 3,638 451
Accounts receivable 6,569 -
Operating subsidies receivable 3,184 492
Due from affiliates - 5,402
Investments in affiliates - 1,971
Other assets, net 6,828 2,108
Deferred leasing commissions 1,987 1,221
Machinery and equipment, net 1,688 10
------------------ ---------------
Total assets $ 127,668 $ 23,942
================== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 1,865 $ 18
Line of credit 420 -
Note payable 1,666 -
Income tax payable 817 4,840
Due to affiliates - 1,183
Deferred tax liability 955 -
Unpaid losses and loss adjustment expenses 4,341 -
Other liabilities, net 3,894 908
------------------ ---------------
13,958 6,949
------------------ ---------------
Commitments and contingencies
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 and
10,000,000 shares issued and outstanding at March 31, 2007, and common stock, no
par value; 4,750 shares authorized and 3,766.50 shares issued
and outstanding at December 31, 2006 1 377
Additional paid-in capital 96,034 -
Retained earnings 17,212 16,189
Accumulated other comprehensive income 463 427
------------------ ---------------
113,710 16,993
------------------ ---------------
Total liabilities and stockholders' equity $ 127,668 $ 23,942
================== ===============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
GTJ REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
March 31,
---------------------------------
2007 2006 (Restated)
------------ ----------------
(Unaudited)
(in thousands, except share and
per share data)
Operating revenue and subsidies $ 999 $ 913
------------ ----------------
Operating expenses:
General and administrative expenses 57 -
Depreciation and amortization 66 87
------------ ----------------
Total operating expenses 123 87
Operating income 876 826
Interest income 99 -
------------ ----------------
Income from continuing operations before
income taxes and equity in earnings of
affiliated companies 975 826
Provision for income taxes (315) (294)
Equity in earnings of affiliated companies,
net of tax 60 604
------------ ----------------
Income from continuing operations 720 1,136
Discontinued Operation:
Loss from operations of discontinued
operation, net of taxes (147) (629)
Gain on sale of discontinued operation,
net of taxes - 6,535
------------ ----------------
(Loss) income from discontinued operation,
net of taxes (147) 5,906
------------ ----------------
Net income $ 573 $ 7,042
============ ================
Income per common share - basic and diluted:
Income from continuing operations $ 3.24 $ 301.57
============ ================
Loss from operations of discontinued operation,
net of taxes $ (0.66) $(167.11)
============ ================
Gain on sale of discontinued operation, net
of taxes $ - $1,735.12
============ ================
Net income $ 2.58 $1,869.58
============ ================
Weighted-average common shares outstanding-basic
and diluted 222,222.2 3,766.5
============ ================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
GTJ REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except share and per share data)
Accumulated
Preferred Stock Common Stock Additional Other Total
Outstanding Outstanding Paid-In- Retained Comprehensive Stockholders'
Shares Amount Shares Amount Capital Earnings Income Equity
------------ -------- ------------ --------- ---------- ---------- --------------- ------------------
Balance at
January 1, 2007 - $ - 3,766.50 $377 $ - $ 16,189 $ 427 $ 16,993
Prior period
adjustment - - - - - 600 - 600
------------ -------- ------------ --------- ---------- ---------- --------------- ------------------
Balance at
January 1,
2007, as
restated - - 3,766.50 377 - 16,789 427 17,593
Dividends paid,
$39.82 per share (150) (150)
Shares issued
in connection
with merger - - 10,000,000 1 (1) - - -
Recapitalization
of Company - - (3,766.50) (377) 96,035 - - 95,658
Comprehensive
income:
Net income - - - - 573 - 573
Unrealized gain
on
available-for-sale
securities - - - - - 36 36
-----------------
Total
comprehensive
income - - - - - - 609
------------ -------- ------------ --------- ---------- ---------- --------------- ------------------
Balance at
March 31, 2007
(unaudited) - $ - 10,000,000 $ 1 $96,034 $ 17,212 $ 463 $ 113,710
============ ======== ============ ========= ========== ========== =============== ==================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
7
GTJ REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended
March 31,
2006
2007 (Restated)
---------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES (Unaudited)
Net income $ 573 $ 7,042
(Loss) income from discontinued operation (147) 5,906
---------------- --------------
Income from continuing operations 720 1,136
Adjustments to reconcile net income to net cash used in operating
activities:
Cash provided by (used in) operating activities:
Provisions for deferred taxes 66 (70)
Provisions for injuries and damages claims - 163
Equity in earnings of affiliated
companies, net of tax (60) (604)
Depreciation and amortization 66 87
Other 5 (73)
Changes in operating assets and liabilities:
Operating subsidies receivable-
injuries and damages withholding - (1,266)
Other receivables - (9)
Due from affiliates (1,135) 692
Prepaid expenses and other assets 43 1,166
Prepaid income taxes - 104
Other assets - (733)
Deferred leasing commissions 15 (1,282)
Accounts payable and accrued expenses (5) (2,819)
Income tax payable (5,073) 3,467
Other current liabilities (94) (1,325)
Net cash provided by (used in) discontinued operation 147 (4,991)
---------------- --------------
Net cash used in operating activities
(5,305) (6,357)
---------------- --------------
Investing activities:
Cash acquired in merger 8,670 -
Proceeds from sale of discontinued operation - 11,143
---------------- --------------
Net cash provided by investing activities
8,670 11,143
---------------- -- --------------
Financing activities:
Dividends paid (150) (75)
---------------- --------------
Net cash used in financing activities (150) (75)
---------------- --------------
Net increase in cash and cash equivalents 3,215 4,711
Cash and cash equivalents at the beginning of period 9,519 1,010
---------------- --------------
Cash and cash equivalents at the end of period $ 12,734 $ 5,721
================ ==============
Supplemental cash flow information:
Interest paid $ - $ -
================ ==============
Cash paid for taxes $ 5 $ 28
================ ==============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
8
GTJ REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Supplemental non-cash investing activities- Merger with Triboro
Three Months Ended
March 31,
2007 2006
---------------- --------------
Cash and cash equivalents $ 4,559 $ -
Operating subsidies receivables 1,752 -
Deferred leasing commissions 782 -
Other assets, net 1,512 -
Securities available for sale 1,362 -
Property and equipment 39,400 -
Income tax payable (294) -
Other liabilities, net (629) -
Fair value of real property through its ownership
interest in GTJ 15,638 -
Fair value of operating assets and liabilities
through its ownership interest in GTJ 2,320 -
---------------- --------------
Total purchase price in common stock $ 66,402 $ -
================ ==============
Supplemental non-cash investing activites-
Merger with Jamaica
Cash and cash equivalents $ 190 $ -
Operating subsidies receivables 941 -
Deferred leasing commissions - -
Other assets, net 964 -
Securities available for sale 440 -
Property and equipment 23,100 -
Income tax payable (157) -
Other liabilities, net (422) -
Fair value of real property through its ownership
interest in GTJ 7,819 -
Fair value of operating assets and liabilities
through its ownership interest in GTJ 1,160 -
---------------- --------------
Total purchase price in common stock $ 34,035 $ -
================ ==============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
9
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Description of Business and Recent Events
GTJ REIT, Inc. (the "Company" or "GTJ REIT") was incorporated in Maryland
on June 23, 2006 as a blank check company and was formed to engage in any lawful
act or activity including, without limitation or obligation, qualifying as a
real estate investment trust 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.
At March 29, 2007, the Company commenced operations upon the completion of
the Reorganization described below. The Company has selected December 31 as its
fiscal year end.
On July 24, 2006, the Company entered into merger agreements and
subsequently closed on March 29, 2007 into merger agreements (the "Agreements")
with by and among 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"); GTJ REIT, 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 effect of the mergers is to
complete a Reorganization ("Reorganization") into 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:
o Each share of Green common stock was converted into 1,117.429975
shares of the Company's common stock.
o Each share of Triboro common stock was converted into 2,997.964137
shares of the Company's common stock.
o Each share of Jamaica common stock was converted into 195.001987
shares of the Company's common stock.
The Bus Companies, including their subsidiaries, own a total of six
rentable parcels of real property, four of which are leased to the City of New
York, one of which is leased to a commercial tenant (all five on a triple net
basis), and one of which is used in part by the Bus Companies' existing
operations and the remainder of which is leased to a commercial tenant, not on a
triple net basis. There is an additional property of negligible size which is
not rentable. Prior to the Reorganization, the Bus Companies and their
subsidiaries, collectively, operated a group of outdoor maintenance businesses
and a paratransit business, which have been acquired as part of the merger.
On July 1, 2007, the Company adopted a Real Estate Investment ("REIT")
structure. In order to adopt a REIT structure, it was necessary to combine the
Bus Companies and their subsidiaries under a single holding company, the
"Reorganization." 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.
10
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
Based on third-party valuations of the real property, outdoor maintenance
businesses, and the paratransit business, and considering the ownership of the
same in whole or part by each of the Bus Companies, the Company has been advised
by an outside appraisal firm that the relative valuation of each of the Bus
Companies (as part of GTJ REIT, Inc.) is Green--42.088%, Triboro--38.287% and
Jamaica--19.625%. Accordingly, under the Reorganization, 10,000,000 shares of
the Company common stock were distributed. 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.
As part of becoming a REIT, the Company is required, after the
Reorganization, to make a distribution of the Bus Companies' historical
undistributed earnings and profits, calculated to be an estimated $62,060,000
(see Note 14). The Company will distribute up to $20,000,000 in cash, and also
make available for distribution 3,775,399 shares of the Company's common stock,
valued at $11.14 per share calculated as follows:
Total Value of the Bus Companies $ 173,431,797
Assumed E&P--Cash distribution 20,000,000
----------------
Total value after cash distribution 153,431,797
Assumed E&P--Stock distribution 42,000,000
----------------
Total value after stock distribution $ 111,431,797
================
Reorganization shares 10,000,000
Share Value Post Earnings and Profits $ 11.14
================
The Reorganization was accounted for under the purchase method of
accounting as required by Statement of Financial Accounting Standards No. 141
"Business Combinations", ("SFAS No. 141") issued by the Financial Accounting
Standards Board. Since GTJ REIT has been formed to issue equity interests to
effect a business combination, as required by SFAS No. 141, one of the existing
combining entities was required to be determined the acquiring entity. Under
SFAS No. 141, 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. As a result of the Reorganization, Green shareholders have a
42.088% voting interest, Triboro shareholders have a 38.287% voting interest,
and Jamaica shareholders have a 19.625% voting interest. Additionally, under
SFAS No. 141, 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 may elect a combination of cash and stock, or exclusively
cash or stock. If more than $20,000,000 of cash is elected in the aggregate,
cash distributed to each stockholder electing to receive some or all of his or
her distribution in cash will be reduced such that the aggregate cash
distribution will total $20,000,000, and the balance of the distribution to each
such stockholder will be made in the Company's common stock. The Company expects
to distribute $20,000,000 in cash and 3,775,399 shares (with an approximate
value of $42,060,000). Green's assets at December 31, 2006 total $23.9 million
as compared to Triboro's assets of $19.4 million, and Jamaica's assets of $10.2
million, and Green's revenues on a going forward basis are expected to exceed
that of Triboro and Jamaica. As a result of these facts, Green is deemed to be
the accounting acquirer for this transaction and the historical financial
statements of the newly formed Company will be those of Green.
11
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
Under the purchase method of accounting, Triboro's and Jamaica's assets and
liabilities were acquired by Green and have been recorded at their fair value.
Accordingly, under the Reorganization, 10,000,000 shares of the Company's common
stock were distributed, 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 fair values of the assets acquired and
liabilities assumed at the date of acquisition. The fair values are based on
third-party valuation. The fair value of the net assets acquired exceeded the
total consideration for the acquisition by approximately $1,630,000 and
$1,800,000 for Triboro and Jamaica, respectively, resulting in negative
goodwill. The fair value of net assets acquired for the remaining interest in
GTJ, not previously owned by Green, exceeded the total consideration for the
acquisition by approximately $1,750,000, resulting in negative goodwill. The
excess (negative goodwill) aggregating $5,180,000 was allocated on a pro rata
basis to long-lived assets.
The following table summarizes the preliminary allocation of the purchase
price in the form of a condensed balance sheet reflecting the estimated fair
values of the amounts assigned to each major asset and liability caption of the
acquired entities as of 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 580 290 870
------ ------ -------
Total assets $ 72,530 $ 37,217 $ 109,747
------ ------ -------
Accounts payable and accrued expenses 741 371 1,112
Line of credit 168 84 252
Note payable 666 333 999
Income tax payable 294 157 451
Deferred tax liability 679 339 1,018
Unpaid losses and loss adjustment expenses 1,736 868 2,605
Other liabilities 1,844 1,030 2,873
----- ----- -----
Total liabilities 6,128 3,182 9,310
----- ----- -----
Fair value of net assets acquired $ 66,402 $ 34,035 $ 100,437
====== ====== =======
12
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
The results of operations for Triboro, Jamaica and GTJ for the period from
March 29, 2007 to March 31, 2007, are not reflected in the Company's results for
the three months ended March 31, 2007 in the accompanying condensed consolidated
statement of operations as the results were deemed to be immaterial.
Unaudited Pro-Forma Financial Information
The following presents the unaudited pro-forma combined results of
operations of the Company with Green, Jamaica, Triboro and GTJ included for the
periods preceding the merger on March 29, 2007( in thousands, except share and
per share data).
For the Three Months Ended
March 31,
----------------------------
2007 2006
----------- ------------
(Unaudited)
Revenues $ 12,008 $ 9,034
=========== ============
Net income from continuing operations $ 1,702 $ 1,521
=========== ============
Net income (1) $ 1,426 $ 15,925
=========== ============
Pro-forma basic and diluted
net income per common share $ 0.14 $ 1.59
=========== ============
Pro-forma weighted average
common shares outstanding
- basic and diluted 10,000,000 10,000,000
=========== ============
(1) Net income in 2006 includes a loss from discontinued operation, net of
taxes of $3,114 and a gain on sale of discontinued of operation, net
of taxes of $17,518 resulting in income from discontinued operation of
$14,404.
The pro forma combined results are not necessarily indicative of the
results that actually would have occurred if the mergers of Triboro, Jamaica and
GTJ had been completed as of the beginning of 2007 or 2006, nor are they
necessarily indicative of future consolidated results.
The Company became a REIT on July 1, 2007. In order to remain a REIT, the
Company will be required to distribute to its stockholders each year an amount
equal to at least 90% of its annual net income, exclusive of net capital gains,
if any.
Basis of Presentation
The condensed consolidated financial statements include the accounts of the
Company and its majority-owned or otherwise controlled subsidiaries. All
intercompany accounts and transactions have been eliminated. The Company has
included the results of operations of acquired companies from the closing date
of the acquisition. Since the operating cycle of real estate companies tends to
exceed one year, the Company has presented an unclassified balance sheet.
13
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes
included in the Form 8K/A. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles in the United States ("GAAP") have been condensed or
omitted pursuant to such rules and regulations. The condensed consolidated
balance sheet as of December 31, 2006 was derived from the Company's audited
financial statements for the year ended December 31, 2006, but does not include
all disclosures required by GAAP. However, the Company believes the disclosures
are adequate to make the information presented not misleading.
Use of Estimates:
The preparation of condensed consolidated financial statements in
conformity with GAAP requires management to make estimates, judgments and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and related disclosure of contingent assets and liabilities. On an
on-going basis, the Company evaluates its estimates, including those related to
uncollectible receivables, the useful lives of long-lived assets including
property and equipment, income taxes and contingencies. The Company bases its
estimates of the carrying value of certain assets and liabilities on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, when these carrying values are not readily available
from other sources. Actual results may differ from these estimates.
Reportable Segments:
The Company operates in four reportable segments: Real Estate Operations,
Outside Maintenance and Shelter Cleaning Operations, Insurance Operations, and
Paratransit Operations, all of which are conducted throughout the U.S., with the
exception of the Insurance Operations which are conducted in the Cayman Islands.
o Real Estate Operations rents Company owned real estate located in New
York.
o Outside Maintenance and Shelter Cleaning Operations provide outside
maintenance and shelter cleaning services to outdoor advertising
Companies in New York, New Jersey, Arizona and California.
o Insurance Operations assumes reinsurance of worker's compensation,
vehicle liability and covenant liability of the Company and its
affiliated Companies from an unrelated insurance Company based in the
United States of America.
o Paratransit Operations provide paratransit service in New York for
physically and mentally challenged persons who are unable to use
standard public transportation.
Revenue Recognition--Real Estate Operations:
The Company recognizes revenue in accordance with Statement of Financial
Accounting Standards No. 13,"Accounting for Leases", as amended, referred to
herein as SFAS No. 13. SFAS No. 13 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. 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
14
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
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. Minimum rental
income is recognized on a straight-line basis over the term of the lease. The
excess of amounts so recognized over amounts due pursuant to the underlying
leases amounted to approximately $1,541,000 at March 31, 2007.
Revenue Recognition--Paratransit Operations:
Paratransit and transit operations and charter services are recognized upon
completion of the related bus trip.
Revenue Recognition--Outside Maintenance and Shelter Cleaning Operations:
Cleaning, maintenance and claims service revenue is recognized upon
completion of the related service.
Revenue Recognition--Insurance Operations:
Premiums are recognized as revenue on a pro rata basis over the policy
term. The portion of premiums that will be earned in the future are deferred and
reported as unearned premiums.
Earnings (Loss) Per Share Information:
In accordance with SFAS No. 128, "Earnings Per Share", basic earnings per
common share ("Basic EPS") is computed by dividing the net income (loss) by the
weighted-average number of common shares outstanding. Diluted earnings per
common share ("Diluted EPS") is computed by dividing net income (loss) by the
weighted-average number of common shares and dilutive common share equivalents
and convertible securities then outstanding. There were no common stock
equivalents for any of the periods presented in the Company's condensed
consolidated statements of operations
The following table sets forth the computation of basic and diluted per
share information (in thousands, except share and per share data):
Three Months Ended
March 31, March 31,
2007 2006
------------ ---------------
(unaudited)
Numerator:
Net income $ 573 $ 7,042
============ ===============
Denominator:
Weighted average common shares outstanding-
basic and diluted 222,222.2 3,766.5
============ ===============
Basic and Diluted Per Share Information:
Net income per share--Basic and diluted $ 2.58 $1,869.58
============ ===============
Impairment of Long-Lived Assets:
The Company assesses long-lived assets for impairment whenever there is an
indication that the carrying amount of the asset may not be recoverable.
Recoverability of these assets is determined by comparing the
15
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
forecasted undiscounted cash flows generated by those assets to their net
carrying values. The amount of impairment loss, if any, will generally be
measured by the difference between the net book value of the assets and the
estimated fair value of the related assets.
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.
Restricted cash represents certain certificates of deposit amounting to
approximately $451,000 at March 31, 2007 and December 31, 2006, that are on
deposit with various government agencies as collateral to meet statutory
self-insurance funding requirements.
In addition, at March 31, 2007, AIG held $3,187,007 on behalf of the
Company that was restricted by AIG for the purpose of the payment of insured
losses.
Accounts Receivable:
Accounts receivable consist of trade receivables recorded at the original
invoice amount, less an estimated allowance for uncollectible accounts. The
Company has a contract with the City of New York which requires retainage in the
amount of $484,708 and $387,288 as of March 31, 2007 and December 31, 2006,
respectively. 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 period in which the estimate is 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.
Amortization of Deferred Leasing Commissions:
Deferred leasing commissions are amortized using the straight-line method
over the life of the lease.
Property and Equipment:
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets
as follows:
Useful
lives
----------------
Buildings and improvements 10-25 years
Equipment 8 - 25 years
The Company recorded depreciation expense of $66,000 and $87,000 related to
these assets for the three months ended March 31, 2007 and 2006, respectively
(See Notes 6 and 14).
16
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
Available for Sale Securities:
The Company accounts for its available for sale securities in accordance
with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Management determines the appropriate classification of debt
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. Debt securities are classified as available-for-sale.
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses, net of tax, reported in accumulated other comprehensive income
(loss), 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 consolidated statement of operations. The cost of securities sold
is based on the specific identification method. Estimated fair value is
determined based on market quotes.
Income Taxes:
The Company accounts for income taxes under the asset and liability method,
as required by the provisions of SFAS No. 109, "Accounting for Income Taxes."
Under this method, 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.
Comprehensive Income:
The Company follows the provisions of SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 sets forth rules for the reporting and
display of comprehensive income and its components. SFAS No. 130 requires
unrealized gains or losses on the Company's available-for-sale securities to be
included in 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 becomes available (See Note 5).
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 Note 5).
Insurance Liabilities:
The liability or 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 the advice of an independent attorney, while the
liability for adverse claims development is based on the director's best
estimates. Such liabilities are necessarily based on estimates and, while the
directors believe that the amounts are adequate, the ultimate liabilities may be
in excess of or less than the amounts recorded and 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
17
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
be material to the financial statements. The methods for making such estimates
and for establishing the resulting liabilities are continually renewed, and any
adjustments are reported in current earnings.
Recently Issued Accounting Pronouncements:
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 157 Fair Value
Measurements. This statement defines fair value, establishes a fair value
hierarchy to be used in U.S. generally accepted accounting principles and
expands disclosures about fair value measurements. Although this statement does
not require any new fair value measurements, the application could change
current practice. The statement is effective for fiscal years beginning after
November 15, 2007. The Company is currently evaluating the impact of this
statement to its financial position and results of operations.
In February, 2007, FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities including an amendment of SFAS 115."
This statement provides companies with an option to report selected financial
assets and liabilities at fair value. This statement is effective for fiscal
years beginning after November 15, 2007 with early adoption permitted. The
Company is currently assessing the impact of SFAS No. 159 and has not yet
determined what effect, if any, the adoption of SFAS No. 159 will have on the
Company's financial position or results of operations.
In December 2007, the FASB issued SFAS 141R, "Business Combinations" which
replaces SFAS 141. The statement retains the purchase method of accounting for
acquisitions, but requires a number of changes, including changes in the way
assets and liabilities are recognized in purchase accounting, the recognition of
assets acquired and liabilities assumed arising from contingencies, the
capitalization of in-process research and development at fair value, and
requires the expensing of acquisition-related costs as incurred. The statement
will apply prospectively to business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on
or after December 15, 2008. The Company is currently evaluating the effect of
this statement.
In December 2007, the FASB issued Statement of Financial Accounting
Standards No. 160, "Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51"("SFAS 160"). This statement will change
the accounting and reporting for minority interests which will be
recharacterized as noncontrolling interests and classified as a component of
equity. SFAS 160 is effective for fiscal years beginning on or after December
15, 2008. SFAS 160 requires retroactive adoption of the presentation and
disclosure requirements for existing minority interests for all periods
presented. The Company is currently evaluating the effect of this statement.
18
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. DISCONTINUED OPERATIONS:
On November 29, 2005, Green entered into an agreement and subsequently
closed on January 9, 2006 with the City of New York to buy all of Green's assets
used in connection with Green's bus operations. Accordingly, the results of
Green's bus operations have been presented as discontinued operations in the
Company's condensed consolidated financial statements for all periods presented.
The following table sets forth the detail of Green's income (loss) from
discontinued operations (in thousands):
Bus Operations
------------------
For the three months ended March 31, 2007:
Revenues from discontinued operation $ -0-
==================
Loss from operations of discontinued operation $ (16)
Provision for income taxes (131)
------------------
Loss from discontinued operation, net of taxes $ (147)
==================
For the three months ended March 31, 2006:
Revenues from discontinued operation (Restated) $ 3,864
==================
Income from operations of discontinued operation $ 72
Provision for income taxes (701)
------------------
Loss from discontinued operation, net of taxes $ (629)
==================
Gain on sale of discontinued operation $ 9,989
Provision for income taxes (3,454)
------------------
Gain on sale of discontinued operation, net of taxes $ 6,535
==================
Net cash provided by discontinued operations was $147,000 for the three months
ended March 31, 2007 and net cash used in discontinued operations was $4,991,000
for the three months ended March 31, 2006.
19
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. OTHER ASSETS, NET:
Other assets, net, consist of the following (in thousands):
March 31, 2007 December 31, 2006
-------------- -----------------
(unaudited)
Other receivables $ 50 $ 31
Deferred acquisition costs - 958
Discontinued operations 1,052 -
Prepaid expenses 1,077 18
Prepaid income taxes 2,121 -
Rental income in excess of amount billed 1,541 581
Other assets 987 520
----------- ---------------
$ 6,828 $ 2,108
=========== ===============
4. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES:
The liability for losses and loss adjustment expenses at March 31, 2007 have
been reflected in connection with the merger transaction (see Note 1) and is
summarized as follows (in thousands):
March 31, 2007 December 31, 2006
-------------- -----------------
(unaudited)
Reported claims $ 3,149 $ -
Provision for incurred but not
reported claims 1,192 -
-------------- -----------------
$ 4,341 $ -
============== =================
Management is responsible for estimating the provisions for outstanding
losses. The directors have recognized in the financial statements a provision
for outstanding losses of $4,341 at March 31, 2007. An actuarial study was
independently completed which estimated that at March 31, 2007, the total
outstanding losses at an expected level, are between $3,893 and $4,660. In their
analysis, the actuaries have used industry based data which may or may not be
representative of the Company's ultimate liabilities.
In the opinion of the directors, the provision for losses and
loss-adjustment expenses is adequate to cover the expected ultimate liability
under the insurance policies written. 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.
20
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. OTHER LIABILITIES, NET:
Other liabilities consist of the following (in thousands):
March 31, 2007 December 31, 2006
----------------- -----------------
(Unaudited)
Accrued professional fees $ 552 $ 164
Discontinued operations 967 -
Other 579 -
Deposit liability 173 -
Accrued environmental costs 1,315 436
Amount due to City of New York 308 308
----------------- ----------------
$ 3,894 $ 908
================= ================
6. NOTE PAYABLE TO BANK:
On December 30, 2003, the Green Bus Lines, Inc. and Subsidiary, along with
the Triboro Coach Corporation and Subsidiaries, Jamaica Central Railways, Inc.
and Subsidiaries, Command Bus Company, Inc., and G.T.J. Company, Inc. and
Subsidiaries (the "Affiliated Group"), replaced its then-existing credit
facility with a new facility consisting of mortgages and lines of credit which
had an expiration date of June 30, 2004. The facility had been renegotiated over
several renewals and was extended to June 30, 2007. In July of 2007, the
Affiliated group terminated its relationship with the lender and paid all
amounts outstanding under the line of credit. Under the terms of the agreement,
the entire group had a $6.5 million facility consisting of a $4 million line of
credit, which was secured by approximately $4.5 million of cash and bonds held
by the Affiliated Group and a $2.5 million second mortgage secured by a mortgage
on property owned by G.T.J. Company, Inc, in New York City. The facility of $6.5
million was being used to finance the working capital needs of the Affiliated
Group. The facility bore interest at the prime rate and was adjusted from time
to time. The loans were collateralized by all tangible assets of the Affiliated
Group.
As of March 31, 2007 and December 31, 2006, $420,300 and $ 0, respectively,
were outstanding under this line of credit. The line bore interest at a
fluctuating rate based on the bank's prime rate (8.25% at March 31, 2007).
The Affiliated Group was required to satisfy certain financial ratios and
covenants. Tangible net worth was not to be less than $22,000,000 as of December
31, 2006, the cash flow coverage ratio was not to be less than 1.1 to 1.0, the
Leverage Ratio was not to be more than 4.5 to 1.0, and capital expenditures were
not to be more than $2,000,000 in any fiscal year.
The Affiliated Group did not meet certain covenants for these financial
statements and requested waivers from the bank for the breach of these
covenants. Waivers were received by the Affiliated Group.
The outstanding debt under this line of credit was paid in June 2007 (see
Note 14).
21
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. STOCKHOLDERS' EQUITY:
Common Stock
The Company is authorized to issue 100,000,000 shares of common stock,
$.0001 par value per share, available for issuance. 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.
The common stock is not convertible or subject to redemption.
During the quarter ended March 31, 2007, the Company paid dividends to its
stockholders totaling $150,000.
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.
8. RELATED PARTY TRANSACTIONS
Douglas A. Cooper, an officer and director of the Company and the nephew of
Jerome Cooper (Chairman of the Board) is Co-Managing partner of Ruskin, Moscou,
Faltischek, P.C. ("RMF"), which has acted as counsel to the Company for
approximately eight years. Fees paid by Green to RMF for the three months ended
March 31, 2007 and 2006 were $3,025 and $6,036, respectively. The amount owed to
RMF at March 31, 2007 was approximately $130,000. There were no amounts due to
RMF at December 31, 2006.
9. INCOME TAXES:
Effective January 1, 2007, the Company adopted Financial Accounting
Standards Board Interpretation No. 48, "Accounting for Uncertainty in Income
Taxes" ("FIN 48") -- an interpretation of FASB Statement No. 109, "Accounting
for Income Taxes." The Interpretation 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 FIN 48, 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. FIN 48 also provides guidance on
de-recognition, classification, interest and penalties on income taxes,
accounting in interim periods and requires increased disclosures. At the date of
adoption, and as of March 31, 2007, the Company does not have a liability for
unrecognized tax benefits.
The Company files income tax returns in the U.S. federal jurisdiction and
the states of New York, New Jersey, California, Arizona and New York City. The
Company is subject to U.S. federal or state income tax examinations by tax
authorities for years after 2002. During the periods open to examination, the
Company has net operating loss and tax credit carry forwards for U.S. federal
and state tax purposes that have attributes from closed periods. Since these net
operating losses and tax credit carry forwards may be utilized in future
periods, they remain subject to examination. The Company's policy is to record
interest and penalties on uncertain tax provisions as income tax expense. As of
March 31, 2007, the Company has no accrued interest or penalties related to
uncertain tax positions. The Company believes that it has not taken any
uncertain tax positions that would impact its condensed consolidated financial
statements as of March 31, 2007.
22
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. INCOME TAXES (Continued):
Green Bus Lines, Inc., and Subsidiary is currently under examination by the
Internal Revenue Service for its U.S. Corporate Income Tax Return for the tax
year ended December 31, 2005. There have been no adjustments proposed in
connection with the examination.
The Company's effective tax rate is 32.3% and 35.6% for the three months
ended March 31, 2007 and 2006, respectively. The Company's effective tax rate
for the three months ended March 31, 2007 and 2006 differed from the federal
statutory rate primarily due to taxes associated with depreciation and
amortization expense, deferred rent, and other adjustments.
In January 2007, the Company recorded a prior period adjustment to reflect
an error made in 2006 related to recording a federal and state income tax
expense entry. The error had no effect on net income for three months ended
March 31, 2007. Had the error not been made, net income for Green would have
increased by $600,000 ($159.29 per share) for the year ended December 31, 2006
(see Note 12).
10. COMMITMENTS AND CONTINGENCIES:
Legal Matters:
Appraisal Proceedings
On March 26, 2007, there was a joint special meeting of the stockholders of
the Bus Companies. The business considered at the meeting was the merger of:
Green with and into Green Acquisition; Triboro with and into Triboro
Acquisition; and Jamaica with and into Jamaica Acquisition. Appraisal rights
were perfected by stockholders of the Bus Companies who would have received
approximately 366,133 shares of the Company's common stock to be issued
following the mergers. The mergers were carried out on March 29, 2007.
Consequently, the Bus Companies made good faith offers to such stockholders
based on the value of the Company's common stock of $7.00 per share, eighty
percent (80%) of which was advanced to them. On May 25, 2007, Green Acquisition,
Triboro Acquisition and Jamaica Acquisition, commenced appraisal proceedings in
Nassau County Supreme Court, as required by the New York Business Corporation
Law. Eight of the stockholders (the "Claimants") who sought appraisal rights
(the others had either settled or withdrawn their demands) have answered the
petition filed in connection with the appraisal proceeding and moved for
pre-trial discovery. Collectively, the Claimants have been paid $1,351,120
pursuant to the Company's good faith offer. The Claimants would have received
approximately 241,272 shares of the Company's common stock following the mergers
of the Bus Companies. The Company's ultimate liability cannot presently be
determined. In addition, two stockholders have been paid an aggregate of
$435,457 pursuant to the Company's good faith offer. These stockholders would
have received approximately 62,208 shares.
The Company is involved in several lawsuits and other disputes which arose
in the ordinary course of business; however, management believes that these
matters will not have a material adverse effect, individually or in the
aggregate, on the Company's financial position or results of operations.
23
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. COMMITMENTS AND CONTINGENCIES: (Continued)
Environmental Matters
The Company's real property has had activity regarding removal and
replacement of underground storage tanks. Upon removal of the old tanks, any
soil found to be unacceptable was thermally treated off site to burn off
contaminants. Fresh soil was brought in to replace earth which had been removed.
There are still some levels of contamination at the sites, and groundwater
monitoring programs have been put into place at certain locations. In July 2006,
the Company entered into an informal agreement with the New York State
Department of Environmental Conservation ("NYSDEC") whereby the Company has
committed to a three-year remedial investigation and feasibility study (the
"Study") for all site locations. In conjunction with this informal agreement,
the Company has retained the services of an environmental engineering firm to
assess the cost of the Study. The Company's engineering report has an estimated
cost range in which the low-end of the range, of approximately $5.2 million (of
which the Company's portion is $1.4 million) was only for the Study. In
addition, a high-end range estimate, of approximately $10.4 million (of which
the Company's portion was $2.8) was included which provided a "worst case"
scenario whereby the Company would be required to perform full remediation on
all site locations. While management believes that the amount of the Study and
related remediation is likely to fall within the estimated cost range, no amount
within that range can be determined to be the better estimate. Therefore,
management believes that recognition of the low-range estimate is appropriate.
While additional costs associated with environmental remediation and monitoring
are probable, it is not possible at this time to reasonably estimate the amount
of any future obligation until the Study has been completed. As of March 31,
2007, the Company has recorded a liability of $1,314,521 related to its portion
of the Study as disclosed in the engineering report. Presently, the Company is
not aware of any claims or remediation requirements from any local, state or
federal government agencies. Each of the properties is a commercial zone and is
still used as transit depots, including maintenance of vehicles.
11. SIGNIFICANT TENANT:
One tenant, included in the condensed consolidated statement of operations,
constituted 100% of rental revenue for the three months ended March 31, 2007 and
for the three months ended March 31, 2006.
12. RESTATEMENT AND PRIOR PERIOD ADJUSTMENT:
Restatement
The Company restated its previously issued consolidated balance sheet,
consolidated statement of operations, and cash flows for three months ended
March 31, 2006. The restatement relates to the reclassification of certain
assets and liabilities from discontinued operations to continuing operations.
The restatement did not change net income, for any of the periods
presented.
The restatement resulted in the following changes to the Company's
statement of operations and cash flows for the three months ended March 31,
2006.
24
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
12. RESTATEMENT AND PRIOR PERIOD ADJUSTMENT: (Continued)
For the Three Months Ended March 31,
2006
--------------------------------------
(in thousands)
--------------------------------------
(unaudited)
--------------------------------------
As Reported As Restated
------------ ------------
Consolidated Statement of Operations
Income from continuing operations $ 1,169 $ 1,136
Discontinued operations:
Income from discontinued operation, net of taxes 5,873 5,906
------------ ------------
Net income $ 7,042 $ 7,042
============= ============
For the Three Months Ended March 31,
2006
--------------------------------------
(in thousands)
As Reported As Restated
------------ ------------
Consolidated Statement of Cash Flows
Net cash provided by (used in) operating activities $ 4,441 $ (6,357)
Net cash provided by investing activities 345 11,143
Net cash used in financing activities (75) (75)
Prior Period Adjustment
Retained earnings at January 1, 2007 has been adjusted to correct an error
made in 2006 related to recording a federal and state income tax expense entry.
Had the error not been made, Green's net income for the year ended December 31,
2006 would have increased by approximately $600,000 and $159.29 per share.
13. SEGMENTS:
Segment Information:
The operating segments reported below are segments of the Company for which
separate financial information is available and for which operating results as
measured by income from operations are evaluated regularly by executive
management in deciding how to allocate resources and in assessing performance.
The accounting policies of the business segments are the same as those described
in the Summary of Significant Accounting Policies (Note 1).
The Company operates in four reportable segments: Real Estate Operations,
Outside Maintenance and Shelter Cleaning Operations, Insurance Operations, and
Paratransit Operations, all of which are conducted throughout the U.S., with the
exception of the Insurance Operations which are conducted in the Cayman Islands.
Real Estate Operations rents Company owned real estate located in New York.
Outside Maintenance and Shelter Cleaning Operations provides outside
maintenance and cleaning services to outdoor advertising companies in New York,
New Jersey, Arizona and California.
25
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
13. SEGMENTS: (Continued)
Insurance Operations assumes reinsurance of worker's compensation, vehicle
liability and covenant liability of the Company and its affiliated Companies
from an unrelated insurance company based in the United States of America.
Paratransit Operations provide paratransit service in New York for
physically and mentally challenged persons who are unable to use standard public
transportation.
The summarized segment information (excluding discontinued operations), as of
and for the three months ended March 31, 2007 and 2006 are as follow (in
thousands):
Three Months Ended
March 31, 2007
------------------------------------------------------------------------------------------------
Real Estate Outside Insurance Paratransit
Operations Maintenance Operations Operations Eliminations Total
------------------------------------------------------------------------------------------------
Operating revenue and $ 999 $ - $ - $ - $ - $ 999
subsidies
Operating expenses 123 - - - - 123
------------- -------------- ------------ ---------------- --------------- ---------------
Operating income 876 - - - - 876
Interest income 99 - - - - 99
------------- -------------- ------------ ---------------- --------------- ---------------
Income from continuing
operations before income
taxes and equity in earnings 975 - 975
of affiliated companies
Provision for income taxes (315) - - - - (315)
Equity in earnings of
affiliated companies, net of
tax 60 - - - - 60
------------- -------------- ------------ ---------------- --------------- ---------------
Income from continuing
operations $ 720 $ - $ - $ - $ - $ 720
============= ============== ============ ================ =============== ===============
Total assets $ 107,999 $ 14,024 $ 5,355 $ 3,414 $ (3,084)$ 127,668
============= ============== ============ ================ =============== ===============
Capital expenditures $ - $ - $ - $ - $ - $ -
============= ============== ============ ================ =============== ===============
Depreciation and amortization $ 66 $ - $ - $ - $ - $ 66
============= ============== ============ ================ =============== ===============
Three Months Ended
March 31, 2006
------------------------------------------------------------------------------------------------
Real Estate Outside Insurance Paratransit
Operations Maintenance Operations Operations Eliminations Total
------------------------------------------------------------------------------------------------
Operating revenue and $ 913 $ - $ - $ - $ - $ 913
subsidies
Operating expenses 87 - - - - 87
------------- -------------- ------------ ---------------- --------------- ---------------
Income from continuing
operations before income
taxes and equity in earnings
of affiliated companies 826 - - - - 826
------------- -------------- ------------ ---------------- --------------- ---------------
Provision for income taxes (294) - - - - (294)
Equity in earnings of
affiliated companies, net of 604
tax 604
-------------- ------------ ------------- ---------------- ---------------- --------------
Income from continuing
operations $ 1,136 $ - $ - $ - $ - $ 1,136
============== ============ ============= ================ ================ ==============
Total assets $ 32,541 $ - $ - $ - $ - $ 32,541
============== ============ ============= ================ ================ ==============
Capital expenditures $ - $ - $ - $ - $ - $ -
============== ============ ============= ================ ================ ==============
Depreciation and amortization $ 87 $ - $ - $ - $ - $ 87
============== ============ ============= ================ ================ ==============
26
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
14. SUBSEQUENT EVENTS:
ING Financing Agreement:
On July 2, 2007, the Company entered into a Loan Agreement, dated as of
June 30, 2007 (the "Loan Agreement"), among certain direct and indirect
subsidiaries of the Company, namely, Green Acquisition, Inc., Triboro
Acquisition, Inc., Jamaica Acquisition, Inc., 165-25 147th Avenue, LLC, 49-19
Rockaway Beach Boulevard, LLC, 85-01 24th Avenue, LLC, 114-15 Guy Brewer
Boulevard, LLC, (collectively, the "Borrowers"); and ING USA Annuity and Life
Insurance Company; ING Life Insurance and Annuity Company; Reliastar Life
Insurance Company; and Security Life Of Denver Insurance Company (collectively,
the "Initial Lenders" and, together with any other Lenders from time to time
party hereto, the "Lenders"). Pursuant to the terms of the Loan Agreement, the
Lenders will provide multiple loan facilities in the amounts and on the terms
and conditions set forth in such Loan Agreement. The aggregate of all loan
facilities under the Loan Agreement shall not exceed $72,500,000. On July 2,
2007, the Initial Lenders made an initial $17,000,000 term loan. In addition to
the initial term loan, the Lenders collectively made a mortgage loan of
$1,000,000 to the Borrowers. Interest on the loans shall be paid monthly. The
interest on each loan is 6.59% per annum. In addition, there is a one-tenth of
one percent non-use fee on the unused portion of the loan facility. The
principal shall be paid on the maturity date pursuant to the terms set forth in
the Loan Agreement, namely July 1, 2010, unless otherwise extended or renewed.
The loan facilities are collateralized by: (1) an Assignment of Leases and
Rents on four bus depot properties (the "Depots") owned by certain of the
Borrowers and leased to the City of New York, namely (a) 49-19 Rockaway Beach
Boulevard; (b) 165-25 147th Avenue; (c) 85-01 24th Avenue and (d) 114-15 Guy
Brewer Boulevard; (2) Pledge Agreements under which (i) GTJ REIT pledged its
100% stock ownership in each of: (a) Green Acquisition; (b) Triboro Acquisition,
and (c) Jamaica Acquisition, (ii) Green Acquisition pledged its 100% membership
interest in each of (a) 49-19 Rockaway Beach Boulevard, LLC and (b) 165-25 147th
Avenue, LLC, (iii) Triboro Acquisition pledged its 100% membership interest in
85-01 24th Avenue, LLC, and (d) Jamaica Acquisition pledged its 100% membership
interest in 114-15 Guy Brewer Boulevard, LLC, and (3) a LIBOR Cap Security
Agreement under which GTJ Rate Cap LLC, a wholly owned subsidiary of the
Company, pledged its interest in an interest rate cap transaction evidenced by
the Confirmation and ISDA Master Agreement, dated as of December 13, 2006, with
SMBC Derivative Products Limited. The Company had assigned its interest in the
interest rate cap transaction to GTJ Rate Cap LLC prior to entering into the
Loan Agreement. $1,000,000 of the loan is secured by a mortgage in the amount of
$1,000,000 on the Depots collectively ($250,000 for each Depot).
In addition to customary non-financial covenants, the Borrowers are
obligated to comply with the following financial covenants (1) the Borrowers
will not permit the ratio of (a) Consolidated Net Operating Income for any
period of four consecutive Fiscal Quarters to (b) Consolidated Debt Service for
such period, to be less than 1.3 to 1.0; (2) the Borrowers will not permit the
ratio of (a) Consolidated Net Operating Income from Unencumbered Assets for any
period of four consecutive Fiscal Quarters to (b) Consolidated Unsecured Debt
Service for such period, to be less than 1.3 to 1.0; (3) the Borrowers will not
permit the ratio of (a) Consolidated Debt at any time to (b) Total Assets Value
at such time, to be greater than 0.6 to 1.0; and (4) the Borrowers will not
permit the ratio of (a) Total Unencumbered Assets Value at any time to (b)
Consolidated Unsecured Debt at such time, to be less than 1.5 to 1.0.
As of December 31, 2007, $20,000,000 was outstanding under this line of
credit.
27
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
14. SUBSEQUENT EVENTS: (Continued)
Special Distribution of Earnings and Profits
On August 20, 2007, the Board of Directors of the Company declared a
special distribution of accumulated earnings and profits on the Company's common
stock of $6.40 per Company share, payable in $20,000,000 of cash and 3,775,400
of the Company's common stock. For the purposes of the special distribution, the
Company's common stock was valued at $11.14, as indicated in the proxy
statement/prospectus dated February 9, 2007 filed with the Securities and
Exchange Commission and disseminated to the stockholders of the Bus Companies in
connection with the March 26, 2007 special joint meeting of the stockholders of
the Bus Companies at which meeting such stockholders voted on a reorganization
of those companies with and into the Company. The special distribution
aggregated approximately $62,060,000. The holders of the Company's shares, and
the holders of shares of the Bus Companies, as of the close of business on
August 20, 2007, the record date for the special distribution (the "Holders"),
were eligible for the special distribution. The Holders were required to make an
election as to the amount of the Company's shares and/or cash the Holders wished
to receive as their respective portions of the special distribution. Holders
were advised, due to the limitation of the aggregate amount of cash available
for the special distribution, that their actual distribution might not be in the
proportion of cash and the Company's shares they elected, but could be based on
a proration of the available cash after all elections (ie: not on a first
come-first served basis). The Company calculated the proportion of cash and the
Company's shares that were distributed to the Holders based upon the Holder's
election and the amount of cash available for the special distribution.
In October 2007, cash of $20,000,000 and 3,775,400 shares of the Company's
common stock were distributed to the Holders. Such cash was borrowed against the
line of credit from the Lenders.
Stock Option Plan
On June 11, 2007, the Board of Directors approved the Company's 2007
Incentive Award Plan (the "Plan"). The effective date of the Plan is June 11,
2007, subject to stockholder approval.
The Plan will cover directors, officers, key employees and consultants of
the Company. The purpose of the Plan is to further the growth, development and
financial success of the Company and to obtain and retain the services of the
above individuals considered essential to the long range success of the Company.
The Plan may provide for awards in the form of restricted shares, incentive
stock options, non-qualified stock options and stock appreciation rights. The
aggregate number of shares of common stock which may be awarded under the Plan
is 1,000,000 shares.
Real Estate Acquisition
On February 1, 2008, the Company entered into an agreement to purchase a
property located in the Hartford, Connecticut area. In connection with this
agreement, the Company has made an initial deposit in the amount of $2,300,000.
The purchase price of the property is approximately $23,300,000.
Paratransit Operations
In February 2008, the Company was notified by the New York City Transit
Agency of the Metropolitan Transit Authority (the "Agency") that a Request for
Proposal to renew the Company's existing paratransit service contract after
September 30, 2008 would not be considered by the Agency. The Paratransit
Operations were acquired as part of the Reorganization that occurred on March
29, 2007.
The Paratransit Operations' revenues and net losses for the year ended
December 31, 2006 and for the period January 1, 2007 through March 29, 2007 were
as follows (in thousands):
- ----------------- ---------------- -------------------
Year Ended January 1,
December 31, 2007 through
2006 March 29, 2007
- ----------------- ---------------- -------------------
Revenues $10,176 $2,918
- ----------------- ---------------- -------------------
Net loss $ (696) $ (98)
- ----------------- ---------------- -------------------
The Company is in the process of evaluating this decision and its possible
effects on its future business plans.
28
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
The following results of operations pertain to Green Bus Company,
Inc., and Subsidiary and GTJ REIT, Inc. The results of operations for
Triboro, Jamaica and GTJ for the period from March 29, 2007 to March 31,
2007 are not reflected in the accompanying condensed consolidated statement
of operations of the Company for the three months ended March 31, 2007 as
such amounts were not deemed to be material in relation to the Company's
consolidated financial statements as a whole.
Three Months Ended March 31, 2007 vs. Three Months Ended March 31, 2006
The following table sets forth results of operations of the Company
for the periods indicated (in thousands):
Three Months Ended
March 31,
--------------------------
2007 2006
--------- --------------
(in thousands)
Operating revenue and subsidies $ 999 $ 913
--------- --------------
Operating expenses:
General and administrative expenses 57 -
Depreciation and amortization 66 87
--------- --------------
Total operating expenses 123 87
Operating income 876 826
Interest income 99 -
--------- --------------
Income from continuing operations before
income taxes, equity in earnings of affiliated
companies 975 826
Provision for income taxes (315) (294)
Equity in earnings of affiliated companies,
net of tax 60 604
--------- --------------
Income from continuing operations 720 1,136
Discontinued Operation:
Loss from operations of discontinued
operations, net of taxes (147) (629)
Gain on sale of discontinued operation,
net of taxes - 6,535
--------- --------------
(Loss) income from discontinued operation,
net of taxes (147) 5,906
--------- --------------
Net income $ 573 $ 7,042
========= ==============
Operating Revenue and Subsidies
Operating revenue for the three months ended March 31, 2007 and 2006
represents rental income from New York City. Such rental income commenced on
January 9, 2006, thereby accounting for the increase of $86 or 9.4% from 2006 to
2007
General and Administrative Expenses
General and administrative expenses for the three months ended March 31,
2007 were $57 versus $ 0 for the three months ended March 31, 2006, as general
and administrative expenses in 2006 were included in discontinued operations.
29
Depreciation and Amortization
Depreciation and amortization expense was $66 for the three months ended
March 31, 2007 versus $87 for the three months ended March 31, 2006, a decrease
of $21. Depreciation and amortization expense represents depreciation and
amortization on Green's property and equipment.
Interest Income
Interest income for the three months ended March 31, 2007 was $99 versus $0
for the three months ended March 31, 2006, as interest income in 2006 was
included in discontinued operations.
Provision for Income Taxes
The provision for income tax represents federal, state and local taxes on
income before income taxes. The provision for income taxes was $315 for an
effective rate of 32.3% for the three months ended March 31, 2007 and $294 for
an effective rate of 35.6% for the three months ended March 31, 2006.
Equity in Earnings Of Affiliated Companies, Net of Taxes
Equity in earnings of affiliated companies, net of tax was $60 for the
three months ended March 31, 2007 compared to $604 for the three months ended
March 31, 2006. Since the affiliated companies are owned 100% by the Company
after the reorganization on March 29, 2007, the results of operations of such
former affiliated companies are included in the consolidated results of
operations of the Company.
Loss from Operations of Discontinued Operation, Net of Taxes
The loss from discontinued operation reflects the operating results of
Green's bus operations. The discontinued operation reflected a loss of $147 for
the three months ended March 31, 2007 versus a loss of $629 for the three months
ended March 31, 2006. The decrease in loss from 2006 to 2007 loss primarily
pertains to the winding down of the bus operations with no corresponding income.
Gain on Sale of Discontinued Operation, Net of Taxes
The gain on sale of the discontinued operation reflects the gain on the
sale of Green's bus operations to New York City in the first quarter of 2006.
Net Income
For the three months ended March 31, 2007, the Company had net income of
$573 versus net income of $7,042 for the three months ended March 31, 2006. The
decrease in net income is primarily attributable to the gain on the sale of
Green's bus operations to New York City in the first quarter of 2006.
30
Liquidity and Capital Resources
The Company's primary liquidity and capital requirements are to fund
working capital for current operations. The Company's liquidity and capital
requirements are expected to be primarily met from funds generated from
operations and borrowings under its line of credit with ING.
Net cash used in operating activities was $5,305 for the three months ended
March 31, 2007 as compared with $6,357 for the same period last year. For 2007,
cash used in operating activities of $5,305 was primarily related to (i) net
income from continuing operations of $720, reduced by (ii) a decrease in income
taxes payable of $5,073 and (iii) a decrease in due from affiliates of $1,135.
For 2006, cash used in operating activities of $6,357 was primarily related to
(i) net income from continuing operations of $1,136, reduced by (ii) net cash
used in discontinued operation of $4,991, (iii) a decrease in accounts payable
of $2,819, (iv) a decrease in operating subsidies receivable of $1,266, (v) a
decrease in other current liabilities of $1,325, (vi) a decrease in deferred
leasing commissions of $1,282, increased by (vii) an increase in income taxes
payable of $3,467 and (viii) an increase in prepaid expenses and other assets of
$1,166.
Net cash provided by investing activities was $8,670 for the three months
ended March 31, 2007 as compared with $11,143 provided for the same period last
year. The $8,670 for the three months ended March 31, 2007 relates to cash
received as a result of the Reorganization. The $11,143 in cash provided for the
three months ended March 31, 2006 relates to cash received from the sale of
Green's bus routes to New York City.
Net cash used by financing activities was $150 for the three months ended
March 31, 2007 compared with $75 used in financing activities for the same
period last year. The change in cash from the prior period was primarily related
to the payment of increased dividends to shareholders of Green's stock in 2007
compared to 2006.
Ongoing cash needs
GTJ REIT is not presently expected to require cash for its operations.
However, GTJ REIT will require cash for paying dividends to its shareholders and
paying the costs related to the Reorganization. Income produced by the real
properties, coupled with availability under the line of credit, should be
sufficient to meet the Company's cash requirements for the next twelve months.
REIT Related Payments
As a REIT, GTJ REIT will be required to distribute to its stockholders each
year an amount equal to at least 90% of its annual net income, exclusive of net
capital gains, and may elect to distribute 100% thereof in order to avoid
taxation at the corporate level. These distributions are expected to primarily
utilize GTJ REIT's rental income.
Special Distribution of Earnings and Profits
In addition, GTJ REIT will be required to make a one-time distribution of
undistributed historical earnings and profits of the Bus Companies. On August
20, 2007, the Board of Directors of GTJ REIT declared a special distribution of
accumulated earnings and profits on GTJ REIT's common stock of $6.40 per GTJ
REIT share, payable in $20,000,000 of cash and in 3,775,400 shares of GTJ REIT
common stock. For the purposes of the special distribution, common stock was
valued at $11.14, as indicated in the proxy statement/prospectus dated February
9, 2007 filed with the Securities and Exchange Commission and distributed to the
stockholders of the Bus Companies in connection with the March 26, 2007 special
joint meeting of the stockholders of the Bus Companies at which meeting such
stockholders voted on a reorganization of those companies with and into GTJ
REIT. The special distribution aggregated $62,060,000. The holders of GTJ REIT
shares, and the holders of shares of the Bus Companies, as of the close of
business on August 20, 2007, the record date for the special distribution (the
"Holders"), were eligible for the special distribution. The Holders were
required to make an election as to the amount of GTJ REIT shares and/or cash the
Holders wished to receive as their respective portion of the special
distribution. Holders were advised, due to the limitation of the aggregate
amount of cash available for the special distribution, that their actual
distribution might not be in the proportion of cash and GTJ REIT shares they
elected, but could be based on a pro ration of the available cash after all
elections (ie: not on a first come-first served basis). GTJ REIT calculated the
proportion of cash and GTJ REIT shares that were distributed to the Holders
based upon the Holder's election and the amount of cash available for the
special distribution.
31
In October 2007, cash of $20,000,000 and shares of 3,775,400 of GTJ REIT
stock, valued at approximately $42,000,000, were distributed to the Holders.
Such cash was borrowed against the line of credit from the Lenders.
ING Financing Agreement
On July 2, 2007, GTJ REIT entered into a Loan Agreement, dated as of June
30, 2007 (the "Loan Agreement"), among GTJ REIT and certain direct and indirect
subsidiaries of GTJ REIT, namely, Green Acquisition, Inc., Triboro Acquisition,
Inc. and Jamaica Acquisition, Inc., 165-25 147th Avenue, LLC, 49-19 Rockaway
Beach Boulevard, LLC, 85-01 24th Avenue, LLC, 114-15 Guy Brewer Boulevard, LLC,
(collectively, the "Borrowers"); and ING USA Annuity and Life Insurance Company;
ING Life Insurance and Annuity Company; Reliastar Life Insurance Company; and
Security Life Of Denver Insurance Company (collectively, the "Initial Lenders"
and, together with any other Lenders from time to time party hereto, the
"Lenders"). Pursuant to the terms of the Loan Agreement, the Lenders will
provide multiple loan facilities in the amounts and on the terms and conditions
set forth in such Loan Agreement. The aggregate of all loan facilities under the
Loan Agreement shall not exceed $72,500,000. On July 2, 2007, the Initial
Lenders made an initial $17,000,000 term loan. In addition to the initial term
loan, the Lenders collectively made a mortgage loan of $1,000,000 to the
Borrowers. Interest on the loans shall be paid monthly. The interest on both
loans aggregates to 6.59% per annum. The principal shall be paid on the maturity
date pursuant to the terms set forth in the Loan Agreement, namely July 1, 2010,
unless otherwise extended or renewed.
The loan facilities are collateralized by: (1) an Assignment of Leases and
Rents on four bus depot properties (the "Depots") owned by certain of the
Borrowers and leased to the City of New York, namely (a) 49-19 Rockaway Beach
Boulevard; (b) 165-25 147th Avenue; (c) 85-01 24th Avenue and (d) 114-15 Guy
Brewer Boulevard; (2) Pledge Agreements under which (i) the Registrant pledged
its 100% stock ownership in each of: (a) Green Acquisition, Inc.; (b) Triboro
Acquisition, Inc. and (c) Jamaica Acquisition, Inc. (ii) Green Acquisition, Inc.
pledged its 100% membership interest in each of (a) 49-19Rockaway Beach
Boulevard, LLC and (b) 165-25 147th Avenue, LLC, (iii) Triboro Acquisition
pledged its 100% membership interest in 85-01 24th Avenue, LLC, and (d) Jamaica
Acquisition pledged its 100% membership interest in 114-15 Guy Brewer Boulevard,
LLC, and (3) a LIBOR Cap Security Agreement under which GTJ Rate Cap LLC, a
wholly owned subsidiary of the Registrant, pledged its interest in an interest
rate cap transaction evidenced by the Confirmation and ISDA Master Agreement,
dated as of December 13, 2006, with SMBC Derivative Products Limited. The
Registrant had assigned its interest in the interest rate cap transaction to GTJ
Rate Cap LLC prior to entering into the Loan Agreement. $1,000,000 of the loan
is secured by a mortgage in the amount of $1,000,000 on the Depots collectively
($250,000 for each Depot).
In addition to customary non-financial covenants, the Borrowers are
obligated to comply with the following financial covenants (1) the Borrowers
will not permit the ratio of (a) Consolidated Net Operating Income for any
period of four consecutive Fiscal Quarters to (b) Consolidated Debt Service for
such period, to be less than 1.3 to 1.0; (2) the Borrowers will not permit the
ratio of (a) Consolidated Net Operating Income from Unencumbered Assets for any
period of four consecutive Fiscal Quarters to (b) Consolidated Unsecured Debt
Service for such period, to be less than 1.3 to 1.0; (3) the Borrowers will not
permit the ratio of (a) Consolidated Debt at any time to (b) Total Assets Value
at such time, to be greater than 0.6 to 1.0; and (4) the Borrowers will not
permit the ratio of (a) Total Unencumbered Assets Value at any time to (b)
Consolidated Unsecured Debt at such time, to be less than 1.5 to 1.0.
As of December 31, 2007, $20,000,000 was outstanding under this line of
credit.
32
Possible acquisitions
The Board of Directors of GTJ REIT intends to expand its real property
holdings. This would be done through cash purchases of properties that the Board
of Directors determines to be consistent with the investment policies of GTJ
REIT which would be funded from the revolving credit. It is anticipated that
once these properties are purchased using the revolving credit, permanent
mortgage financing will be placed on the real properties and the revolving
credit will be paid down accordingly. It is also possible that GTJ and its
subsidiaries will desire to make an acquisition, some of which may need to be
funded by GTJ REIT. GTJ REIT would, in that case, and subject to the direction
of the Board of Directors, provide such financing, which again is expected to be
obtained from the $72,500,000 revolving credit.
Cash payments for financing
Payment of interest under the $72,500,000 revolving credit, and under
permanent mortgages, will consume a portion of the cash flow of GTJ REIT,
reducing net income and the resulting distributions to be made to the
stockholders of GTJ REIT.
Trend in financial resources
Other than the revolving credit discussed above under ING Financing
Agreement, GTJ REIT can expect to receive additional rent payments over time due
to scheduled increases in rent set forth in the leases on its real properties.
It should be noted, however, that the additional rent payments are expected to
result in an approximately equal obligation to make additional distributions to
stockholders, and will therefore not result in a material increase in working
capital.
33
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to the impact of interest rate changes and changes in the
market values of our investments. Interest Rate Risk. Our exposure to market
rate risk for changes in interest rates relates primarily to our investment
portfolio. We invest excess cash in marketable debt instruments of the United
States Government and its agencies, and in high-quality corporate issuers and,
by policy, limit the amount of credit exposure to any one issuer.
Investments in both fixed rate and floating rate interest earning
instruments carry a degree of interest rate risk. Fixed rate securities may have
their fair market value adversely impacted due to a rise in interest rates,
while floating rate securities may produce less income than expected if interest
rates fall. Due in part to these factors, our future investment income may fall
short of expectations due to changes in interest rates or we may suffer losses
in principal if forced to sell securities which have declined in market value
due to changes in interest rates.
Investment Risk. The primary objective of our investment activities is to
preserve principal while at the same time maximizing yields without
significantly increasing risk. To achieve this objective, we maintain our
portfolio of cash equivalents and current and long-term investments in a variety
of securities, including both government and corporate obligations and money
market funds.
We are exposed to market risk as it relates to changes in the market value
of our investments. We have realized gains and losses from the sale of
investments.
Item 4. Controls and Procedures
Disclosure Controls and Procedures. The Registrant's management, with the
participation of the Registrant's Chief Executive Officer and Chief Accounting
Officer, has evaluated the effectiveness of the Registrant's disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the
end of the period covered by this report. Based on such evaluation, the
Registrant's Chief Executive Officer and Chief Accounting Officer have concluded
that, as of the end of such period, the Registrant's disclosure controls and
procedures were not fully effective. The Registrant has recently begun reporting
as a public company and is in the process of obtaining the assistance needed to
generate financial statements and reports to be filed with the Securities and
Exchange Commission which fully comply as to required contents and which can be
provided on a timely basis.
Internal Control Over Financial Reporting. There have not been any changes
in the Registrant's internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most
recent fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Registrant's internal control over financial reporting,
other than the addition of assistance needed to generate financial statements
and reports to be filed with the Securities and Exchange Commission which fully
comply as to required contents and which can be provided on a timely basis.
34
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
On March 26, 2007, there was a joint special meeting of the shareholders of
the Bus Companies. The business considered at the meeting was the merger of:
Green with and into Green Acquisition, Inc.; Triboro with and into Triboro
Acquisition, Inc.; and Jamaica with and into Jamaica Acquisition, Inc. Appraisal
rights were perfected by shareholders of the Bus Companies who would have
received approximately 366,133 shares of the Registrant's common stock to be
issued following the mergers. The mergers were carried out on March 29, 2007.
Consequently, the Registrant made good faith offers to such shareholders based
on the value of the Registrant's common share of $7.00 per share, eighty percent
(80%) of which was advanced to them. On May 25, 2007, Green Acquisition, Triboro
Acquisition and Jamaica Acquisition, commenced appraisal proceedings in Nassau
County Supreme Court, as required by the New York Business Corporation Law.
Eight of the shareholders (the "Claimants") who sought appraisal rights (the
others had either settled or withdrawn their demands) have answered the petition
filed in connection with the appraisal proceeding and moved for pre-trial
discovery. Collectively, the Claimants have been paid $1,351,120 pursuant to the
Registrant's good faith offer. The Claimants would have received approximately
241,272 shares of the Registrant's common stock following the mergers of the Bus
Companies. The Registrant's ultimate liability cannot presently be determined.
The Registrant is vigorously defending the action.
In addition, two shareholders have been paid an aggregate of $435,457
pursuant to the Registrant's good faith offer. These shareholders would have
received approximately 62,208 shares.
The Registrant is involved in several lawsuits and other disputes which
arose in the ordinary course of business; however, management believes that
these matters will not have a material adverse effect, individually or in the
aggregate, on the Registrant's financial position or results of operations.
ITEM 1A. Risk Factors
The following include the material risks known to us at this time, other
than those which are generic and applicable to a variety of businesses.
Transaction risks
In the following section, the Registrant is referred to as the "Company".
Our company is newly formed which makes our future performance and the
performance of your investment difficult to predict.
Our company was incorporated on June 26, 2006. We have no prior operating
history as a REIT. Therefore, our future performance and the performance of your
investment can not be predicted at this time.
Our failure to qualify as a REIT would subject us to corporate income tax,
which would materially impact funds available for distribution.
We intend to operate in a manner so as to qualify as a REIT for federal
income tax purposes beginning with the tax year ending December 31, 2007.
Qualifying as a REIT will require us to meet several tests regarding the nature
of our assets and income on an ongoing basis. A number of the tests established
to qualify as a REIT for tax purposes are factually dependent. Therefore, you
should be aware that while we intend to qualify as a REIT, it is not possible at
this early stage to assess our ability to satisfy these various tests on a
continuing basis. Therefore, we cannot assure you that our company will in fact
qualify as a REIT or remain qualified as a REIT.
35
If we fail to qualify as a REIT in any year, we would pay federal income
tax on our net income. We might need to borrow money or sell assets to pay that
tax. Our payment of income tax would substantially decrease the amount of cash
available to be distributed to our stockholders. In addition, we no longer would
be required to distribute substantially all of our taxable income to our
stockholders. Unless our failure to qualify as a REIT is excused under relief
provisions of the federal income tax laws, we could not re-elect REIT status
until the fifth calendar year following the year in which we failed to qualify.
In addition, even if we qualify as a REIT in any year, we would still be
subject to federal taxation on certain types of income. For example, we would be
subject to federal income taxation on the net income earned by our "taxable REIT
subsidiaries", that is, our corporate subsidiaries with respect to which
elections are made to treat the same as separate, taxable subsidiaries,
presently including our outdoor maintenance and para transit businesses.
The distribution of undistributed historical earnings and profits to the
Bus Company shareholders, consisting of cash and/or common stock, will be
taxable to them as a dividend, resulting in tax liability to such
shareholders.
The earnings and profits distribution is taxable to the Bus Company
shareholders as a dividend. The federal tax rate will be 15%, based on present
tax law, and the state taxes will vary from state to state. Any shareholder
electing cash of less than the tax on the distribution to such shareholder will
be required to pay taxes on some or all of such distribution from a source other
than the distribution.
We may have to spinoff our taxable REIT subsidiaries, which would reduce
our value.
On a going forward basis, at least 75% of our assets must be those which
may be held by REITs. Our outdoor maintenance and para transit business assets,
and any other assets we may add to that group, are not qualified to be held
directly by a REIT. Accordingly, we may be required, in the future, to spinoff
these businesses in order to protect our status as a REIT. If we do so, we may
be distributing a significant portion of our assets, which could materially and
adversely affect the value of our common stock. It should be noted, however,
that such distribution would be made to the then holders of our common stock.
Real property business risks
Our real property portfolio is derived from the Bus Companies and we may
not grow or diversify our real estate portfolio in the foreseeable future,
leaving us vulnerable to New York area problems.
We own six income producing real properties which are presently owned,
collectively, by the Bus Companies. Presently, we are raising no funds. Without
a sale of an existing real property, which is not contemplated for at least 10
years, the raising of funds by the sale of debt or equity securities or
significant mortgage financing, our real property portfolio will not grow or be
diversified.
We have not determined what other kinds of real property may be the subject
of a future investment, which may create uncertainty.
The formation of the Company and the Reorganization are based on the Bus
Companies' real property and outdoor maintenance businesses and a paratransit
business. We have formulated no plans with respect to future real property
investments. Therefore, we can not predict the future business direction of the
Company.
Adverse financial conditions in New York City will adversely affect all of
our initial portfolio of real properties.
All of our real property is commercial and is located in Queens and
Brooklyn, New York and New York City is the sole tenant of four of the
properties. The lack of diversity in the properties which we own, and their
principal tenant, New York City, should we not diversify after the
Reorganization, could increase your risk of owning our shares. We are presently
not raising any funds for diversification. Adverse conditions at that limited
number of properties or in the location in which the properties exist would have
a direct negative impact on your return as a stockholder.
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Negative characteristics of real property investments
Financing of our real property could lead to loss of the same if there is a
default.
The growth and diversification of our real property business is expected to
be financed, in substantial part, by mortgage financing. We may borrow sums up
to 75% of the value of our real property portfolio. Such loans may result in
substantial interest charges which can materially reduce distributions to our
stockholders. The documentation related to such loans is expected to contain
covenants regulating the manner in which we may conduct our businesses and may
restrict us from pursuing opportunities which could be beneficial to our
stockholders. In addition, if we are unable to meet our payment or other
obligations to our lenders, we risk loss of some or all of our real property
portfolio.
We depend upon our tenants to pay rent, and their inability or refusal to
pay rent will substantially reduce our collections and payment of our
indebtedness, leading to possible defaults, and reduce cash available for
distribution to our stockholders.
Our real property, particularly those we may purchase after the
Reorganization, will be subject to varying degrees of risk that generally arise
from such ownership. The underlying value of our properties and the ability to
make distributions to you depend upon the ability of the tenants of our
properties to generate enough income to pay their rents in a timely manner.
Their inability or unwillingness to do so may be impacted by employment and
other constraints on their finances, including debts, purchases and other
factors. Additionally, the ability of commercial tenants of commercial
properties would depend upon their ability to generate income in excess of their
operating expenses to make their lease payments to us. Changes beyond our
control may adversely affect our tenants' ability to make lease payments and
consequently would substantially reduce both our income from operations and our
ability to make distributions to you. These changes include, among others, the
following:
o changes in national, regional or local economic conditions;
o changes in local market conditions; and
o changes in federal, state or local regulations and controls affecting
rents, prices of goods, interest rates, fuel and energy consumption.
Due to these changes or others, tenants may be unable to make their lease
payments. A default by a tenant, the failure of a tenant's guarantor to fulfill
its obligations or other premature termination of a lease could, depending upon
the size of the leased premises and our ability to successfully find a
substitute tenant, have a materially adverse effect on our revenues and the
value of our common stock or our cash available for distribution to our
stockholders.
If we are unable to find tenants for our properties, particularly those we
may purchase after the Reorganization, or find replacement tenants when leases
expire and are not renewed by the tenants, our revenues and cash available for
distribution to our stockholders will be substantially reduced.
Lack of diversification and liquidity of real estate will make it difficult
for us to sell underperforming properties or recover our investment in one
or more properties.
Our business will be subject to risks associated with investment primarily
in real property. Real property investments are relatively illiquid. Our ability
to vary our portfolio in response to changes in economic and other conditions
will be limited. We cannot assure you that we will be able to dispose of a
property when we want or need to. Consequently, the sale price for any property
we may purchase of the Reorganization may not recoup or exceed the amount of our
investment.
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Lack of geographic diversity may expose us to regional economic downturns
that could adversely impact our real property operations or our ability to
recover our investment in one or more properties.
All of the properties we will initially own are located in the counties of
Queens and Brooklyn, New York City. Geographic concentration of properties will
expose us to economic downturns in New York City. A recession in this area could
adversely affect our ability to generate or increase operating revenues, attract
new tenants or dispose of unproductive properties.
Each of the Bus Company real properties has been, and continues to be, used
as a bus depot or automobile facility and has certain environmental
conditions resulting in continuing exposure to environmental liabilities.
Generally all the Bus Companies' real property have had activity regarding
removal and replacement of underground storage tanks and soil removal. Upon
removal of the old tanks, any soil found to be unacceptable was heated off site
to burn off contaminants. Fresh soil was brought in to replace earth which had
been removed. There are still some levels of contamination at the sites, and
groundwater monitoring programs have been put into place. Closures of existing
New York State Department of Environmental Control spill numbers may be
warranted if it can be shown that the remaining degree of impact is non
threatening and within acceptable levels. Each of the properties is in a
commercial zone and is still used as a transit depot including maintenance of
vehicles. We can not assess what further liability may arise from these sites.
Discovery of previously undetected environmentally hazardous conditions at
our real properties would result in additional expenses, resulting in a
decrease in our revenues and the return on your shares of common stock.
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous real property owner or operator may be liable
for the cost to remove or remediate hazardous or toxic substances on, under or
in such property. These costs could be substantial. Such laws often impose
liability whether or not the owner or operator knew of, or was responsible for,
the presence of such hazardous or toxic substances. Environmental laws also may
impose restrictions on the manner in which property may be used or businesses
may be operated, and these restrictions may require substantial expenditures or
prevent us from entering into leases with prospective tenants that may be
impacted by such laws. Environmental laws provide for sanctions for
noncompliance and may be enforced by governmental agencies or, in certain
circumstances, by private parties. Certain environmental laws and common law
principles could be used to impose liability for release of and exposure to
hazardous substances, including asbestos-containing materials into the air.
Third parties may seek recovery from real property owners or operators for
personal injury or property damage associated with exposure to released
hazardous substances. The cost of defending against claims of liability, of
complying with environmental regulatory requirements, of remediating any
contaminated property, or of paying personal injury claims could reduce the
amounts available for distribution to you.
A number of risks to which our real properties may be exposed may not be
covered by insurance, which could result in losses which are uninsured.
We could suffer a loss due to the cost to repair any damage to properties
that are not insured or are underinsured. There are types of losses, generally
of a catastrophic nature, such as losses due to terrorism, wars, earthquakes or
acts of God, that are either uninsurable or not economically insurable. We may
acquire properties that are located in areas where there exists a risk of
hurricanes, earthquakes, floods or other acts of God. Generally, we will not
obtain insurance for hurricanes, earthquakes, floods or other acts of God unless
required by a lender or we determine that such insurance is necessary and may be
obtained on a cost-effective basis. If such a catastrophic event were to occur,
or cause the destruction of one or more of our properties, we could lose both
our invested capital and anticipated profits from such property.
You may not receive any distributions from the sale of one of our
properties, or receive such distributions in a timely manner, because we
may have to provide financing to the purchaser of such property, resulting
in an inability or delay of distributions to stockholders.
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If we sell a property or our company, you may experience a delay before
receiving your share of the proceeds of such liquidation. In a forced or
voluntary liquidation, we may sell our properties either subject to or upon the
assumption of any then outstanding mortgage debt or, alternatively, may provide
financing to purchasers. We may take a purchase money obligation secured by a
mortgage as partial payment. To the extent we receive promissory notes or other
property instead of cash from sales, such proceeds, other than any interest
payable on those proceeds, will not be included in net sale proceeds until and
to the extent the promissory notes or other property are actually paid, sold,
refinanced or otherwise disposed of. In many cases, we will receive initial down
payments in the year of sale in an amount less than the selling price and
subsequent payments will be spread over a number of years. Therefore, you may
experience a delay in the distribution of the proceeds of a sale until such
time.
Our outdoor maintenance businesses and paratransit business depend on large
direct or indirect municipal contracts, which are subject to the conduct of
customers and municipalities and require substantial capital, which may be
difficult to obtain.
We will operate several outdoor maintenance businesses including bus
shelters, bill boards advertising displays and outdoor construction and
maintenance support. Much of this business is related to large customer
contracts with municipalities. The loss by customers of one or more of those
contracts could have a material adverse effect on our business. In addition,
these businesses have required significant capital and may require significant
additional capital in the future. In addition to the risk related to additional
investment, the capital may have to be funded by borrowing or asset sales in
order to have funds available for REIT mandated distributions to our
stockholders, increasing the cost of such capital. In addition, our paratransit
business depends on the continuance of one major agreement with the Metropolitan
Transit Authority.
Risks related to possible conflicts of interest
Our officers and directors may have other interests which may conflict with
their duties to us and our stockholders, and which may have adverse effects
on the interests of us and our stockholders
Our officers and directors may have other interests which could conflict
with their duties to us and our stockholders, and which may have adverse effects
on the interests of us and our stockholders. For example, certain of such
persons may have interests in other real estate related ventures and may have to
determine how to allocate an opportunity between us and such other ventures.
Also, such persons may have to decide on whether we should purchase or dispose
of real property from or to an entity with which they are related, or conduct
other transactions, and if so, the terms thereof. Such determinations may either
benefit us or be detrimental to us. Our officers and directors are expected to
behave in a fair manner toward us, and we require that potential conflicts be
brought to the attention of our board of directors and that determinations will
be made by a majority of directors who have no interest in the transaction. As
of this time, only one officer and director, Paul Cooper, conducts a real
property business apart from his activities with us.
Risks related to our common stock
The absence of a public market for our common stock will make it difficult
for you to sell your shares, which may have to be held for an indefinite
period.
Prospective stockholders should understand that our common stock, like that
of the Bus Companies, is illiquid, and they must be prepared to hold their
shares of common stock for an indefinite length of time. Before this offering,
there has been no public market for our common stock, and initially we do not
expect a market to develop. We have no current plans to cause our common stock
to be listed on any securities exchange or quoted on any market system or in any
established market either immediately or at any definite time in the future.
While our board of directors may attempt to cause our common stock to be listed
or quoted in the future, there can be no assurance that this event will occur.
Accordingly, stockholders will find it difficult to resell their shares of
common stock. Thus, our common stock should be considered a long-term
investment. In addition, there are restrictions on the transfer of our common
stock. In order to qualify as a REIT, our shares must be beneficially owned by
100 or more persons at all times and no more than 50% of the value of our issued
and outstanding shares may be owned directly or indirectly by five or fewer
individuals and certain entities at all times. Our charter provides that no
person may own more than 9.9% of the issued and outstanding shares of our common
stock. Any attempted ownership of our shares that would result in a violation of
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one or more of these limits will result in such shares being transferred to an
"excess share trust" so that such shares will be disposed of in a manner
consistent with the REIT ownership requirements. In addition, any attempted
transfer of our shares that would cause us to be beneficially owned by less than
100 persons will be void ab initio (i.e., the attempted transfer will be
considered to never have occurred).
The allocation of our common stock among the Bus Companies' shareholders
has been established by appraisals and a fairness opinion, rather than
market values, and could be deemed arbitrary.
We have allocated 10,000,000 shares, the initial amount of our outstanding
common stock, among the stockholders of the Bus Companies, as follows: 4,208,800
shares for the Green shareholders, 3,828,700 shares for the Triboro shareholders
and 1,962,500 shares for the Jamaica shareholders. These allocations are based
on appraisals of the Bus Companies' real property and outdoor maintenance
businesses' and a paratransit business's assets and liabilities, and a fairness
opinion provided by Ryan Beck & Co., Inc. There is no external reference for the
value of the Bus Companies and their holdings based on either a market
capitalization basis or a recent sale basis. While we do not consider the
allocation arbitrary, it is not referenced to actual trading or sale
transactions.
Our stockholders' interests may be diluted by the proposed earnings and
profits distribution, issuances under our Stock Option Plan, and other
common stock issuances, which could result in lower returns to our
stockholders.
Our board of directors is authorized, without stockholder approval, to
cause us to issue additional shares of our common stock, or shares of preferred
stock on which it can set the terms, and to raise capital through the issuance
of options, warrants and other rights, on terms and for consideration as the
board of directors in its sole discretion may determine, subject to certain
restrictions in our charter in the instance of options and warrants. Any such
issuance could result in dilution of the equity of the stockholders. The board
of directors may, in its sole discretion, authorize us to issue common stock or
other interests or our securities to persons from whom we purchase real property
or other assets, as part or all of the purchase price. The board of directors,
in its sole discretion, may determine the value of any common stock or other
equity or debt securities issued in consideration of property or services
provided, or to be provided, to us.
We have adopted the 2006 Incentive Stock Option Plan, under which 1,000,000
of common stock is reserved for issuance, and under which we may grant stock
options, restricted stock and other performance awards to our officers,
employees, consultants and independent directors. The effect of these grants,
including the subsequent exercise of stock options, could be to dilute the value
of the stockholders' investments.
In addition, we made available 5,564,454 shares of our common stock as part
of the distribution of a sum which approximated $62,000,000 of earnings and
profits which was a condition for our obtaining REIT status. Since all of the
$20,000,000 of cash was elected, only 3,769,122 of such shares were issued. This
issuance was dilutive.
Federal income tax requirements
The requirement to distribute at least 90% of our net income may require us
to incur debt, sell assets or issue additional securities for cash, which
would increase the risks associated with investments.
In order to qualify as a REIT, we must distribute annually to our
stockholders at least 90% of our net income, other than any net capital gains.
To the extent that we distribute at least 90% but less than 100% of our net
income in a calendar year, we will incur no federal corporate income tax on our
distributed net income, but will incur a federal corporate income tax on any
undistributed amounts. In addition, we will incur a 4% nondeductible excise tax
if the actual amount we distribute to our stockholders in a calendar year is
less than a minimum amount specified under federal income tax law. We intend to
distribute at least 90% of our net income to our stockholders each year so that
we will satisfy the distribution requirement and avoid the 4% excise tax.
However, we could be required to include earnings in our taxable income before
we actually receive the related cash. That timing difference could require us to
borrow funds or raise additional capital to meet the distribution requirement
and avoid corporate income tax and the 4% excise tax in a particular year. In
case we don't distribute 100% of our net income, we will be subject to taxation
at the REIT level on the amount of undistributed net income and to the extent we
distribute such amount, you will be subject to taxation on it at the stockholder
level.
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The minimum distribution requirements for REIT's may require us to borrow,
sell assets or issue additional securities for cash to make required
distributions, which would increase the risks associated with your investment in
our company.
Under existing tax law, we would be taxed at the corporate level if, within
10 years of our election to be taxed as a REIT, we sell any real property
acquired in the Reorganization in a taxable transaction. For that reason, we
presently intend to hold such real property for at least 10 years of our
election to be taxed as a REIT. This policy would eliminate a sale as a way to
obtain liquidity and would prevent a sale which would otherwise be made to take
advantage of favorable market conditions.
Distributions may include a return of capital, or an amount which would be
taxable as a capital gain to the Bus Companies' shareholders.
Corporation earnings and profits distributions payable to stockholders may
include a return of capital, as distinct from a return on capital. To the extent
that our distributions exceed our undistributed historical earnings and profits,
such amounts will constitute a return of capital for federal income tax
purposes, to the extent of a stockholder's basis in his stock, and thereafter
will constitute capital gain. GTJ REIT has borrowed monies to make a portion of
the $20 million cash payment which is part of the distribution of earnings and
profits. In addition, GTJ REIT may be required, in the future to borrow to make
all or a portion of the distribution of real property related income required to
retain its proposed status as a REIT, or in the alternative, to sell equity
securities to obtain funds for such purpose.
Acquisition risks
Our inability to identify or find funding for acquisitions could prevent us
from diversification or growth and could adversely impact the value of your
investment in our company.
We may not be able to identify or obtain financing to acquire additional
real properties. If we qualify as a REIT, we will be required to distribute at
least 90% of our net income, excluding net capital gains, to our stockholders in
each taxable year, and thus our ability to retain internally generated cash is
very limited. Also, acquisition capital may be required by our outdoor
maintenance and paratransit businesses. Accordingly, our ability to acquire
properties or to make capital improvements to or remodel properties will depend
on our ability to obtain debt or equity financing from third parties or the
sellers of properties.
If mortgage debt is unavailable at reasonable rates, we may not be able to
finance the purchase of additional properties. If we place mortgage debt on
properties we acquire in the Reorganization, which we plan to do, we will run
the risk of being unable to refinance the additional properties when the loans
become due, or of being unable to refinance on favorable terms. If interest
rates are higher when we refinance the properties, our income would be reduced.
We may be unable to refinance properties. If any of these events occurs, our
cash flow would be reduced. This, in turn, would reduce cash available for
distribution to our stockholders and may hinder our ability to raise more
capital.
We plan to incur mortgage and other indebtedness, which could result in
material damage to our business if there is a default.
Significant borrowings by us will increase the risks of owning shares of
our company. If there is a shortfall between the cash flow generated by our
properties and the cash flow needed to service our indebtedness, then the amount
available for distributions to our stockholders will be reduced or eliminated.
In addition, incurring mortgage debt increases the risk of loss since defaults
on indebtedness secured by a property may result in lenders initiating
foreclosure actions. In that case, we could lose the property securing the loan
that is in default, thus reducing the value of your investment. If any mortgages
or other indebtedness contain cross-collateralization or cross-default
provisions, a default on a single loan could affect multiple properties.
Additionally, when providing financing, a lender may impose restrictions on
us that affect our distribution and operating policies and our ability to incur
additional debt. Loan documents we enter into may contain covenants that limit
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our ability to further mortgage the property, merge with another company, or
discontinue insurance coverage. These or other limitations may limit our
flexibility and our ability to achieve our operating plans. In particular, we
are currently negotiating and anticipate entering into a revolving line of
credit with a bank to use for our future acquisitions, which we anticipate will
have significant restrictions and covenants. Our failure to meet such
restrictions and covenants could result in an event of default under our line of
credit and result in the foreclosure of some or all of our properties.
Investing in properties through joint ventures creates a risk of loss to us
as a result of the possible inaction or misconduct of a joint venture
partner.
Joint venture investments may involve risks not present in an acquisition,
including, for example:
o the risk that our co-venturer or partner in an investment might become
bankrupt;
o the risk that such co-venturer or partner may at any time have
economic or business interests or goals which are inconsistent with
our business interests or goals; or
o the risk that such co-venturer or partner may be in a position to take
action contrary to our instructions or requests or contrary to our
policies or objectives, such as selling a property at a time when it
would have adverse consequences for our stockholders.
Actions by such a co-venturer or partner might have the result of
subjecting the applicable property to liabilities in excess of those otherwise
contemplated and may have the effect of reducing our cash available for
distribution. It also may be difficult for us to sell our interest in any such
joint venture or partnership in such property.
Borrowings may increase our business risks
The $20 million cash distribution, and continuing income distributions will
cause us to borrow to meet our working capital requirements, resulting in
borrowing costs and risk of defaults.
We may not be able to fund our working capital needs. If we qualify as a
REIT, we will be required to distribute at least 90% of our net income,
excluding net capital gains to our stockholders in each taxable year. However,
depending on the size of our operations, we will require a minimum amount of
capital to fund our daily operations. In addition, we may require working
capital for our outdoor maintenance businesses and paratransit business. We may
have to obtain financing from either affiliated or unaffiliated sources to meet
such cash needs. This financing may not be available to us on acceptable terms
or at all, which could adversely affect our operations and decrease the value of
your investment in our company.
As we incur indebtedness which will be needed for operations, we increase
the expenses of our operations, which could result in a decrease in cash
available for distribution to our stockholders.
The risk associated with your ownership of our common stock depends upon,
among other factors, the amount of debt we incur. We intend to incur
indebtedness in connection with our acquisition of properties. We may also
borrow for the purpose of maintaining our operations or funding our working
capital needs. Lenders may require restrictions on future borrowings,
distributions and operating policies. We also may incur indebtedness if
necessary to satisfy the federal income tax requirement that we distribute at
least 90% of our net income, excluding net capital gains, to our stockholders in
each taxable year. Borrowing increases our business risks.
Debt service increases the expense of operations since we will be
responsible for retiring the debt and paying the attendant interest, which may
result in decreased cash available for distribution to you as a stockholder. In
the event the fair market value of our properties were to increase, we could
incur more debt without a commensurate increase in cash flow to service the
debt. In addition, our directors can change our policy relating to the
incurrence of debt at any time without stockholder approval.
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We will incur indebtedness secured by our properties, which may subject our
properties to foreclosure in the event of a default.
Incurring mortgage indebtedness increases the risk of possible loss. Most
of our borrowings to acquire properties would be secured by mortgages on our
properties. If we default on our secured indebtedness, the lender may foreclose
and we could lose our entire investment in the properties securing such loan
which would adversely affect distributions to stockholders. For federal tax
purposes, any such foreclosure would be treated as a sale of the property for a
purchase price equal to the outstanding balance of the debt secured by the
mortgage and, if the outstanding balance of the debt secured by the mortgage
exceeds the basis of the property to our company, there could be taxable income
upon a foreclosure. Such taxes would be payable by us if the sale was of Bus
Company properties and took place within 10 years after our REIT election. To
the extent lenders require our company to cross-collateralize our properties, or
our loan agreements contain cross-default provisions, a default under a single
loan agreement could subject multiple properties to foreclosure.
Increases in interest rates, which have been occurring for the past two
years, will increase the amount of our debt payments and increased interest
payments will adversely affect our ability to make cash distributions to
our stockholders.
A change in economic conditions could result in higher interest rates which
could increase debt service requirements on variable rate debt and could reduce
the amounts available for distribution to you as a stockholder. A change in
economic conditions could cause the terms on which borrowings become available
to be unfavorable. In such circumstances, if we are in need of capital to repay
indebtedness in accordance with its terms or otherwise, we could be required to
liquidate one or more of our investments in properties at times which may not
permit realization of the maximum return on such investments.
Our ability to change policies without a stockholder vote
Our policies, including the limits on debt, may be changed or eliminated by
our board of directors at any time without a vote of our stockholders.
Our policies, including policies intended to protect you as a stockholder
and the policies described in this prospectus with respect to acquisitions,
financing, limitations on debt and investment limitations, have been determined
by our board of directors and can be changed at any time without a vote of our
stockholders or notice to you as a stockholder if our board of directors so
determines in the exercise of its duties. Therefore, these policies and
limitations may not be meaningful to protect your interests as a stockholder.
Possible adverse consequences of limits on ownership and transfer of our shares
The limitation on ownership of our stock in our charter will prevent you
from acquiring more than 9.9% of our common stock and may force you to sell
common stock back to us.
Our charter limits the beneficial and constructive ownership of our capital
stock by any single stockholder to 9.9% of the number of outstanding shares of
each class or series of our stock including our common stock. We refer to these
limitations as the ownership limits. Our charter also prohibits the beneficial
or constructive ownership of our capital stock by any stockholder that would
result in (1) our capital stock being beneficially owned by fewer than 100
persons, (2) five or fewer individuals, including natural persons, private
foundations, specified employee benefit plans and trusts, and charitable trusts,
owning more than 50% of our capital stock, applying broad attribution rules
imposed by the federal tax laws, (3) our company otherwise failing to qualify as
a REIT for federal tax purposes. In addition, any attempted transfer of our
capital stock that would result in GTJ REIT being beneficially owned by less
than 100 persons will be void ab initio (i.e., such transfer will be considered
to never have happened). If you acquire shares in excess of the ownership limits
or in violation of the ownership limitations, we:
o will consider the transfer (in whole or part) to be null and void;
o will not reflect the transaction on our books;
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o may institute legal action to enjoin the transaction;
o will not pay dividends or other distributions to you with respect to
those excess shares;
o will not recognize your voting rights for those excess shares; and
o will consider the excess shares held in trust for the benefit of a
charitable beneficiary.
If such shares are transferred to a trust for the benefit of a charitable
beneficiary, you will be paid for such excess shares a price per share equal to
the lesser of the price you paid or the "market price" of our stock. Unless
shares of our common stock are then traded on a national securities exchange or
quoted on a national market system, the market price of such shares will be a
price determined by our board of directors in good faith. If shares of our
common stock are traded on a national securities exchange or quoted on a
national market system, the market price will be the average of the last sales
prices or the average of the last bid and ask prices for the date of
determination.
If you acquire our common stock in violation of the ownership limits or the
restrictions on transfer described above:
o you may lose your power to dispose of the stock;
o you may not recognize profit from the sale of such stock if the
"market price" of the stock increases; and
o you may incur a loss from the sale of such stock if the "market price"
decreases.
Anti-takeover provisions related to us
Our proposed Stockholder Rights Agreement is designed to discourage
takeover attempts without approval of our Board of Directors, which could
discourage a potential takeover bid and the related payment to our
stockholders.
The Stockholder Rights Agreement we intend to enter into provides that a
right is deemed to be issued and outstanding in conjunction with each
outstanding share of our common stock. If any person or group, as defined in the
agreement, acquires more than 15% of our outstanding common stock without the
approval of our board of directors, each holder of a right, other than such 15%
or more holders, will be entitled to purchase 1000th of a share of our Series A
preferred stock for $50.00 which is convertible into our common stock at
one-half of the market value of our common stock, or to purchase, for each
right, $50.00 of our common stock at one-half of the market value. The effect of
this provision is to materially dilute the holdings of such 15% or more holders
and substantially increase the cost of acquiring a controlling interest in us.
These types of provisions generally inhibit tender offers or other purchases of
a controlling interest in a company such as ours.
Limitations on share ownership and transfer may deter a sale of our company
in which you could profit.
The limits on ownership and transfer of our equity securities in our
charter may have the effect of delaying, deferring or preventing a transaction
or a change in control of our company that might involve a premium price for
your common stock. The ownership limits and restrictions on transferability will
continue to apply until our board of directors determines that it is no longer
in our best interest to continue to qualify as a REIT.
Our ability to issue preferred stock may include a preference in
distributions superior to our common stock and also may deter or prevent a
sale of our company in which you could otherwise profit.
Our ability to issue preferred stock and other securities without your
approval also could deter or prevent someone from acquiring our company. Our
charter authorizes our board of directors to issue up to 10 million shares of
preferred stock. Our board of directors may establish the preferences and
rights, including a preference in distributions superior to our common
stockholders, of any issued preferred stock designed to prevent, or with the
effect of preventing, someone from acquiring control of our company.
44
Maryland anti-takeover statute restrictions may deter others from seeking
to acquire our company in a transaction in which you could profit.
Maryland law contains many provisions, such as the business combination
statute and the control share acquisition statute, that are designed to prevent,
or have the effect of preventing, someone from acquiring control of our company
without approval of our board of directors. Our bylaws exempt our company from
the control share acquisition statute (which eliminates voting rights for
certain levels of shares that could exercise control over us) and our board of
directors has adopted a resolution opting out of the business combination
statute (which prohibits a merger or consolidation of us and a 10% stockholder
for a period of time) with respect to affiliates of our company. However, if the
bylaw provisions exempting our company from the control share acquisition
statute or the board resolution opting out of the business combination statute
were repealed by the board of directors, in its sole discretion, these
provisions of Maryland Law could delay or prevent offers to acquire our company
and increase the difficulty of consummating any such offers.
Because of our staggered board of directors, opposition candidates would
have to be elected in two separate years to constitute a majority of the
Board of Directors, which may deter a change of control from which
stockholders could profit.
We presently have a seven person board of directors. Each director has or
will have a three year term, and only approximately one-third of the directors
will stand for election each year. Accordingly, in order to change a majority of
our board of directors, a third party would have to wage a successful proxy
contest in two successive years, which may deter proxy contests.
Certain provisions of our charter make stockholder action more difficult,
which could deter changes beneficial to our stockholders.
We have certain provisions in our charter and bylaws that require
super-majority voting and regulate the opportunity to nominate directors and to
bring proposals to a vote by the stockholders.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
45
GTJ REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Item 6. Exhibits
Exhibit Description
31.1 Certifications of Chief Executive Officer and Chief Accounting Officer
Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certifications of Chief Accounting Officer Pursuant to Rule 13a-14(a),
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certifications of Chief Executive Officer and Chief Accounting Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GTJ REIT, INC.
Dated: February 6, 2008 /s/Jerome Cooper
------------------------------
Jerome Cooper
President and Chief Executive
Officer and Chairman of the
Board of Directors
Dated: February 6, 2008 /s/ Michael I. Kessman
------------------------------
Michael Kessman
Chief Accounting Officer