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TO THE STOCKHOLDERS:
As of September 1997, the Company made meaningful progress towards implementing its long term corporate strategy, the Master Plan Development of the Flowerfield property in St. James, New York. Adhering to the Plan's basic land lease premise, the Company has received letters of intent from substantial developers for several aspects of the Flowerfield project. In some cases, as these proposals become more clearly delineated, verbal negotiations are being reduced to contract form.
The Master Plan strategy is a flexible customer driven development plan that provides for a mixture of industrial, office, service, captive retail and residential living-units. Final densities will be determined by the municipal authorities of the respective townships based on contributing factors such as traffic, effluent discharge, noise and air pollution and community input.
The Company is currently in various stages of negotiation with well-regarded developers representing the living-unit components envisioned in the Master Plan Development. Additionally, a major industrial developer has expressed interest in the nonresidential sectors of the plan. Although substantial agreement has been reached in many instances, the final outcome of any specific negotiation cannot be guaranteed.
In addition to the active pursuit of end users, Management is currently developing infrastructure cost estimates required for project allocation and financing purposes. The execution of any final agreements is dependent on the completion of these studies. It is anticipated that working estimates will be available during the second fiscal quarter of 1998.
The time frame anticipated for pre-submittal conferences with all the respective governmental agencies is approximately twelve months. Where applicable, in order to accommodate governmental recommendations, changes will be negotiated with prospective developers. Likewise, zoning matters and environmental impact evaluations may consume up to thirty months. Therefore, project completion from lease signing to "bricks and mortar" could require approximately three to four years.
The Company intends to fast track certain projects that may be considered separately due to the restricted nature of the uses and the modest land footprint required. It is anticipated these projects should have a twelve to eighteen month time horizon for completion.
Although each project has unique funding aspects attributable to the financing of the project and specific types of occupancy, the Company anticipates that two primary methods of land lease rental payments to the Company will be utilized: the first, entails a substantial rental prepayment at the onset of the lease, and the latter, a more traditional monthly, quarterly or annual payment schedule. Coupled with allocated recoverable expenses, the net result of having these various rental payment scenarios should allow the Company to adequately finance a substantial portion of the necessary infrastructure improvements.
It is likely that any development plan might meet with some opposition before completion. The Company is addressing this possibility with an active public outreach program in an effort to inform the community and mitigate the dissemination of misinformation that usually galvanizes opposition. If they develop, protracted disagreements emanating from divergent community interests could result in a major disruption of the Company's preliminary development schedule. To date, initial response to the Company's public presentations has been quite receptive. In addition, pre-submittal conferences with town and county officials have revalidated the mixed use approach to development of the Flowerfield property.
The Company continues to show progress in improving the results from current operations. The upswing in the local economy is being reflected in the bellwether Class A office rental market. Rates have risen from a low of less than $21 per square foot in 1993 to the $24 to $28 range today. This firming trend has trickled down to the industrial sector as reflected on the adjoining charts.
In order to attract quality tenants and set a baseline for negotiations, expenses have continued to rise as additional effort is placed on improving the overall aesthetics and level of maintenance of Flowerfield. Providing a tangible example of the quality of landscaping and ambiance the development at Flowerfield should represent to prospective tenants and the community at large is an essential part of the Company's plan to maintain and enhance credibility. Predictability and credibility will be the keys to ultimate success.
The results from Callery-Judge Grove continue to be mixed. Operating losses over the past three years, stiffer capital requirements from lenders and costs related to future commercial development have prompted the Grove to seek additional equity. As detailed further on, the Company is not subscribing to any portion of the offering. Hence, this second call for additional equity will result in further dilution of the Company's current 14.9% Grove ownership. The exact percentage of dilution will be determined based on the completion of the equity offering which is still in progress. Reflecting poor operating results, the equity is being offered at a 30% discount from the net appraised value of the Grove which represents a five percent deeper discount than the initial offering three years ago.
Numerous factors have contributed to the malaise in earnings. The addressable issues are targets of new management initiatives. Environmental factors such as precipitation, broad market conditions including supply and consumer purchasing patterns are beyond the control of management; however, efforts to better gauge uncontrollable factors and mitigate any negative impact are underway.
Grove results have yielded two strong sectors. Results of packing operations, after initial startup difficulties, are at or exceed targeted levels. State of the art equipment supported by a responsive marketing effort have helped the Grove develop a market niche for customers needing fast product changeover and innovative packaging. Excelling in this area, the packing plant has attracted additional outside customers bolstering its operating margin.
Preliminary indications are that the Grove's real estate development efforts are yielding excellent results. Acreage sold to the county has resulted in the construction and, in September, the opening of two large secondary schools for which the Seminole Water Control District (SWCD) provides water and sewage. SWCD is a nonprofit corporation run by the management of the Grove. A new sewage treatment plant will also provide service to a shopping center now under construction. The Grove is a joint venture partner in the strip mall project. Approximately sixty percent of the funds from the latest equity offering are earmarked to cover the cost associated with the completion of a comprehensive environmental impact statement that will encompass a master plan for development. It is anticipated that this process will take two to three years.
The Company continues to consider the Grove a viable long term prospect. Uncertainty related to future funding requirements, possible additional dilution, the absence of managerial input due to the legal construct of limited partnerships and continued short term losses greatly temper any short term enthusiasm. Favorable demographic trends surrounding the Grove, a westward push away from the coast by developers and pragmatic initial planning by the Grove should yield positive long term results. The decision not to participate in the Grove's equity offering was based on a desire by the Company to conserve cash and allocate all available resources to the development of Flowerfield where the potential to create shareholder value is greater.
During the past year, the Company elected to become more aggressive with respect to the utilization of its aerospace assets. In July, the Company negotiated a new Technology Transfer Agreement (TTA) with Dornier GmbH of Germany. The new accord maintains the spirit of the initial agreement while accommodating Dornier's customer, the German Ministry of Defense, establishing a new time line for performance and addressing Gyrodyne's concerns. Additionally, Israel Aircraft renewed its TTA for an additional year.
In a separate development, the Company established two newly incorporated wholly owned subsidiaries to divide its helicopter assets into two categories: single-manned aircraft and larger than single-manned aircraft. A limited liability company, Rotorcycle 2000 LLC, which is a 50-50 joint venture with Aviodyne Company was established and all the assets of the single-manned aircraft company have been conveyed as the Company's contribution to the new venture. Rotorcycle 2000 becomes the Company's first major effort to not only maintain the existing technology but further develop and market it. To date, two one-manned platforms have been sold with additional interest being received from several customers.
The Company's businesses: real estate and aerospace are approaching critical mass and are poised for considerable future growth. The Company's investments: Callery-Judge Grove and the Ackerly-Dean oil interest, discussed later in this report, remain viable investment vehicles with the Grove reflecting some future potential. Management and the Board of Directors are clearly focused on a single goal: to create, in the most timely manner, the greatest shareholder value possible.
For your convenience, as in previous years, this Annual Report together with the enclosed proxy statement comprise a complete Form 10-KSB as filed with the Securities and Exchange Commission. The Company files all Forms 10-KSB and Forms 10-QSB on the EDGAR (Electronic Data Gathering, Analysis and Retrieval) system. The Company's financial data and information are available electronically from commercial on-line services and Internet providers that subscribe to or have access to EDGAR. Additional information on the Company will be available shortly at http://www.gyrodyne.com.
The Directors and Officers wish to express their appreciation for the effort and dedication of all the people associated with Gyrodyne.
Sincerely,
Dimitri P. Papadakos
President
September 22, 1997