EX-13 2 c61261ex13.txt ANNUAL REPORT TO STOCKHOLDERS 1 SELECTED FINANCIAL DATA EXHIBIT 13 GETTY REALTY CORP. AND SUBSIDIARIES Consolidated Financial Data
------------------------------------------------------------------------------------------------------------------------------------ FOR THE ELEVEN MONTHS ENDED For the years ended January 31, (in thousands, except DECEMBER 31, ------------------------------------------------------------------------------ per share amounts) 2000 (a) 2000 1999 1998 (b) 1997 (b) 1996 (b) ------------------------------------------------------------------------------------------------------------------------------------ Total revenues $ 54,294 $ 63,859 $ 61,341 $ 62,817 $ 892,456 $ 798,967 Earnings (loss) from continuing operations before income taxes and cumulative effect of accounting change 18,950 26,105 12,838 13,546 (c) (14,395) (d) 21,058 Net earnings (loss) 11,075 15,014 10,056 7,944 (9,176) 12,634 (e) Diluted earnings (loss) per common share: Continuing operations .47 .73 .17 .59 (.74) .97 (e) Discontinued operations -- -- .19 .01 .01 .02 Net earnings (loss) .47 .73 .36 .60 (.72) 1.00 (e) Cash dividends per share: Preferred 1.775 1.775 1.775 -- -- -- Common .60 .40 .40 .12 .12 .06 Total assets 255,725 260,752 261,084 265,661 290,664 275,006 Total debt 49,969 43,993 39,742 40,526 41,592 51,586 Stockholders' equity 128,099 141,811 138,031 138,593 100,472 110,574
(a) The Company's Board of Directors approved a change in the fiscal year end to December 31 from January 31. (b) Includes financial results of the petroleum marketing business prior to its spin-off to the Company's stockholders on March 21, 1997. (c) Includes $7,918 of aggregate pre-tax charges consisting of $8,683 of stock compensation expense and $2,166 of change of control charges, net of $2,931 of equity in earnings of petroleum marketing business for the period from February 1, 1997 to March 21, 1997. (d) Includes pre-tax charges aggregating $28,677 consisting of $21,182 related to revision of estimate of future environmental remediation costs, $5,802 related to the settlement of a dispute involving the Company's former construction company subsidiary and $1,693 of expenses related to the spin-off transaction. (e) Includes after-tax charge of $794 or $.06 per share from the cumulative effect of adopting Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Pro Forma Supplemental Financial Highlights and Selected Data (unaudited)
--------------------------------------------------------------------------------------------------------------------------------- FOR THE ELEVEN MONTHS ENDED For the years ended January 31, (in thousands, except DECEMBER 31, -------------------------------------------------------------------------- number of properties) 2000 (a) 2000 1999 1998 (f) 1997 (f) 1996 (f) --------------------------------------------------------------------------------------------------------------------------------- Revenues from rental properties $ 53,916 $ 58,889 $ 58,869 $ 59,449 $ 58,653 $ 57,177 Other income 378 4,970 2,472 3,368 1,570 5,726 --------------------------------------------------------------------------------------------------------------------------------- Total revenues 54,294 63,859 61,341 62,817 60,223 62,903 Adjusted EBITDA (g) 40,184 41,519 39,874 41,516 45,259 41,048 Net earnings 11,075 15,014 10,056 6,213 6,049 8,970 (e) Capital expenditures 1,288 14,979 25,222 11,259 6,913 6,260 Real estate before accumulated depreciation 313,037 316,002 307,793 284,092 190,524 183,621 Total assets 255,725 260,752 261,084 265,661 155,164 150,508 Capitalization: Total debt 49,969 43,993 39,742 40,526 41,592 51,586 Stockholders' equity 128,099 141,811 138,031 138,593 45,931 60,263 --------------------------------------------------------------------------------------------------------------------------------- Total capitalization 178,068 185,804 177,773 179,119 87,523 111,849 NUMBER OF PROPERTIES: Owned 753 757 740 736 441 439 Leased 344 361 379 404 732 734 --------------------------------------------------------------------------------------------------------------------------------- Total properties 1,097 1,118 1,119 1,140 1,173 1,173
(f) Excludes the petroleum marketing business which was spun-off on March 21, 1997. This data is presented for informational purposes only and is not necessarily indicative of the financial results that would have occurred had Realty been operated as separate, stand-alone entity during such periods nor is the information presented necessarily indicative of future results. (g) Adjusted EBITDA is defined as earnings from continuing operations before interest expense, income taxes, depreciation and amortization, adjusted to exclude environmental expense, stock option, change of control and litigation items and other income (except mortgage receivable interest income). Adjusted EBITDA provides additional information for evaluating financial results and is presented solely as a supplemental measure. Adjusted EBITDA is not intended to represent cash flow and should not be construed as an alternative to either cash flow, net income, or any other measure of financial performance presented in accordance with generally accepted accounting principles. -6- 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GETTY REALTY CORP. AND SUBSIDIARIES GENERAL Prior to the spin-off of its petroleum marketing business to its stockholders on March 21, 1997, Getty Realty Corp. was principally engaged in the ownership and leasing of real estate as well as the marketing and distribution of petroleum products. In December 1998, we sold our Pennsylvania and Maryland heating oil business. The results of operations of the heating oil business have been reclassified as discontinued in the accompanying financial statements for the years ended January 31, 1999 and 1998. We are now a real estate company specializing in service stations, convenience stores and petroleum marketing terminals. We lease 998 of our 1,097 properties on a long-term net basis to the spun-off company, Getty Petroleum Marketing Inc. ("Marketing"). On December 8, 2000, a subsidiary of OAO Lukoil ("Lukoil"), Russia's largest vertically integrated oil company, acquired approximately 72% of the outstanding common stock of Marketing in a tender offer and acquired the remaining equity of Marketing through a merger on January 25, 2001. In connection with Lukoil's acquisition of Marketing, we amended several of our agreements with Marketing and a related lease between two of our subsidiaries, which one of our lenders alleges caused a default under a loan agreement of one of those subsidiaries. See "Liquidity and Capital Resources." On December 12, 2000, our Board of Directors approved a change in our fiscal year end to December 31 from January 31. The change resulted in an eleven-month accounting period ended December 31, 2000. The Board of Directors also indicated that it would continue to evaluate the merits of converting to a Real Estate Investment Trust ("REIT") in 2001. If Getty were to elect REIT status, we would not be subject to federal corporate income tax on the net income we distribute to our stockholders. As a REIT, we would be required to distribute at least 90% of our taxable income to stockholders each year. In order to qualify for REIT status, however, Getty would be required to make a distribution to its stockholders in an amount at least equal to its accumulated "earnings and profits" (as defined in the Internal Revenue Code) from the years it has operated as a taxable corporation. Getty's accumulated "earnings and profits" were approximately $55.0 million (or approximately $3.48 per common share and $3.94 per preferred share) as of December 31, 2000. The entire amount of the distribution would be taxable to the recipient as dividend income in the year it is made, even though the distribution may take the form of cash, securities or a combination of cash and securities. In addition, we will need to finance all or a portion of the distribution to be paid in cash. We cannot assure the recipient that any portion of the distribution will be payable in cash or that the recipient will be able to sell or otherwise monetize any securities we may distribute in order to pay any tax the recipient may owe. The Board of Directors has not made any determination regarding electing REIT status for 2001 or for future years, and we cannot assure you that Getty will elect or be able to qualify for REIT status or as to the amount or timing of any "earnings and profits" distribution. In order to make the following discussion of our results of operations more meaningful, the results of operations for the eleven months ended December 31, 2000 have been compared to the unaudited results of operations for the eleven months ended December 31, 1999. In addition, the financial results of the spun-off petroleum marketing business, and the sold heating oil business which is shown as a discontinued operation, have been excluded from the narrative presented below. The net earnings of Marketing included in the accompanying consolidated statement of operations for the period prior to its spin-off, February 1, 1997 to March 21, 1997, was $1.7 million. The net earnings of the discontinued heating oil business were $2.6 million and $0.1 million for the fiscal years ended January 31, 1999 and 1998, respectively. See Notes 2 and 3 to the consolidated financial statements for separate financial information relating to the spun-off petroleum marketing business and the discontinued heating oil business. Our financial results largely depend on rental income from Marketing and other tenants. Our financial results are materially dependent upon the ability of Marketing to meet its obligations under the master lease entered into on February 1, 1997 and amended effective December 9, 2000 (the "Master Lease"); however, based on the information currently available to us, we do not anticipate that Marketing will have difficulty in making required rental payments under the Master Lease in the foreseeable future. RESULTS OF OPERATIONS Eleven months ended December 31, 2000 compared to eleven months ended December 31, 1999 (unaudited) Revenues from rental properties for the eleven months ended December 31, 2000 ("fiscal December 2000") and 1999 ("fiscal December 1999") were $53.9 million and $54.0 million, respectively. Approximately $51.5 million and $51.7 million of these rentals for fiscal December 2000 and fiscal December 1999, respectively, were from properties leased to Marketing under the Master Lease. -7- 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GETTY REALTY CORP. AND SUBSIDIARIES Other income was $0.4 million for fiscal December 2000 as compared with $5.0 million for fiscal December 1999. The $4.6 million decrease was due to lower gains on dispositions of real estate of $2.2 million, a severance charge of $0.9 million and expenses related to the amendment of the Master Lease of $0.6 million. In addition, fiscal December 1999 included the settlement of a lawsuit resulting in the elimination of a $1.2 million reserve. Rental property expenses, which are principally comprised of rent expense and real estate taxes, decreased from fiscal December 1999 by $0.1 million to $11.0 million for fiscal December 2000 due to a reduction in the number of properties leased. Environmental expenses for fiscal December 2000 increased by $2.4 million from the prior period. The current period included an environmental charge of $8.5 million, of which $6.8 million represented a change in estimated remediation costs associated with contamination discovered at sites where we retain responsibility for environmental remediation and revisions to estimates at other sites where remediation is ongoing. The prior period included an environmental charge of $6.1 million, of which $4.4 million represented a change in estimated remediation costs or revisions to prior estimates. Fiscal December 2000 also included $1.2 million of charges related to environmental litigation compared to $0.7 million for the prior period. General and administrative expenses for fiscal December 2000 were $3.3 million, a decrease of $2.0 million from the prior period. The decrease was principally due to a reduction in employee related expenses, legal fees, and retrospective insurance charges relating to the spun-off petroleum marketing business. Included in general and administrative expenses for fiscal December 2000 and fiscal December 1999 are $582,000 and $696,000, respectively, of net fees paid to Marketing for certain administrative and technical services performed by Marketing under a services agreement. Depreciation and amortization for fiscal December 2000 was $9.2 million, a decrease of $0.4 million over the prior period as a result of certain assets becoming fully depreciated and dispositions of real estate. Interest expense was $3.4 million and $2.5 million for fiscal December 2000 and fiscal December 1999, respectively. The increase was due to higher average borrowings outstanding and higher interest rates. Fiscal year ended January 31, 2000 compared to fiscal year ended January 31, 1999 Revenues from rental properties for each of the years ended January 31, 2000 ("fiscal 2000") and 1999 ("fiscal 1999") were $58.9 million. Approximately $56.4 million of these rentals for each fiscal year were from properties leased to Marketing under the Master Lease. Other income was $5.0 million for fiscal 2000 as compared with $2.5 million for fiscal 1999. The $2.5 million increase was primarily due to higher gains on dispositions of real estate of $1.8 million and settlement of a lawsuit resulting in the elimination of a $1.2 million reserve, partially offset by lower investment income. Rental property expenses, which are principally comprised of rent expense and real estate taxes, decreased from fiscal 1999 by $0.8 million (6.1%) to $12.1 million for fiscal 2000 due to a reduction in the number of properties leased. Environmental expenses for fiscal 2000 were $6.8 million, a decrease of $10.5 million from fiscal 1999. Fiscal 2000 included an environmental charge of $6.6 million, of which $4.4 million represented a change in estimated remediation costs associated with contamination discovered at sites where we retain responsibility for environmental remediation and revisions to estimates at other sites where remediation is ongoing. Fiscal 1999 included an environmental charge of $16.9 million, of which $14.8 million represented a change in estimated remediation costs or revisions to prior estimates. General and administrative expenses for fiscal 2000 were $5.6 million, a decrease of $0.5 million from fiscal 1999. The decrease was principally due to lower legal and professional fees, partially offset by a higher retrospective insurance charge relating to the spun-off petroleum marketing business. Included in general and administrative expenses for fiscal 2000 and 1999 are $749,000 and $960,000, respectively, of net fees paid to Marketing for certain administrative and technical services performed by Marketing under a services agreement. Depreciation and amortization for fiscal 2000 amounted to $10.4 million, an increase of $1.0 million over fiscal 1999 as a result of capital expenditures and property acquisitions. Interest expense for fiscal 2000 amounted to $2.7 million, comparable to fiscal 1999. Fiscal year ended January 31, 1999 compared to fiscal year ended January 31, 1998 Revenues from rental properties for fiscal 1999 were $58.9 million, a 1.0% decrease from the $59.4 million realized for the year ended January 31, 1998 ("fiscal 1998"). Approximately $56.4 million and $57.0 million of these rentals for fiscal 1999 and 1998, respectively, were from properties leased to Marketing under the Master Lease. -8- 4 continued GETTY REALTY CORP. AND SUBSIDIARIES Other income was $2.5 million for fiscal 1999 as compared with $3.4 million for fiscal 1998. The $0.9 million decrease was primarily due to $0.7 million of management fees for administrative and other services provided to Power Test Investors Limited Partnership ("PTI") in fiscal 1998, which fees were eliminated as a result of the merger of PTI into Getty on January 30, 1998. Rental property expenses, which are principally comprised of rent expense and real estate taxes, decreased from fiscal 1998 by $0.7 million (5.0%) to $12.9 million for fiscal 1999 due to a decrease in the number of properties leased. Environmental expenses for fiscal 1999 amounted to $17.3 million, an increase of $8.7 million from fiscal 1998. Fiscal 1999 included an environmental charge of $16.9 million, of which $14.8 million represented a change in estimated remediation costs associated with contamination discovered primarily during work performed to meet the federal underground storage tank standards and revisions to estimates on previously identified sites where remediation is ongoing. Fiscal 1998 included an environmental charge of $8.3 million, of which $6.2 million represented a change in estimated remediation costs or revisions to prior estimates. General and administrative expenses for fiscal 1999 were $6.1 million, a decrease of $7.2 million from fiscal 1998. The decrease was principally due to a charge of $8.7 million recorded during fiscal 1998 for stock compensation resulting from a change in our stock price, partially offset by higher insurance costs, legal and other professional fees for fiscal 1999. Depreciation and amortization for fiscal 1999 was $9.4 million, comparable to fiscal 1998. Interest expense for fiscal 1999 was $2.7 million, a decrease of $2.3 million from fiscal 1998. The decrease was principally due to the elimination of the capitalized lease obligations as a result of the merger of PTI into Getty on January 30, 1998. During fiscal 1998, we recorded a charge of $2.2 million related to change of control agreements in connection with the spin-off. LIQUIDITY AND CAPITAL RESOURCES On November 2, 2000, we amended the Master Lease with Marketing, which became effective on December 9, 2000 upon the acquisition of a controlling interest in Marketing by Lukoil. The amendment of the Master Lease and a related amendment of a lease between two of our subsidiaries (together, the "Amended Lease Agreements") are alleged by Fleet National Bank ("Fleet") to have caused a non-monetary default under a loan agreement between one of those subsidiaries, Power Test Realty Company Limited Partnership ("PTR"), and Fleet (the "Loan Agreement"). The Loan Agreement was originally entered into by PTR in December 1986 for $45.0 million. As of December 31, 2000, the remaining balance was $21.0 million. The loan is collateralized by primary and secondary mortgage liens on 265 service station properties with a net book value of $122.3 million. Prior to our executing the Amended Lease Agreements, Fleet and the other lender under the Loan Agreement (the "Lenders") agreed to a 90-day waiver (through January 31, 2001) of any potential default arising from the Amended Lease Agreements (the "Waiver"). It was agreed that the Lenders, prior to the expiration of the Waiver, would draft an amendment to the Loan Agreement to accelerate the loan maturity date (which had been extended from November 1, 2000 to March 1, 2005 earlier in the year) to January 31, 2002. During November and December 2000, while Lukoil's tender offer for Marketing was pending, we initiated several discussions with Fleet. On December 7, 2000, we were advised by the Lenders that they would not approve the Amended Lease Agreements prior to the expiration of the Waiver, and that we would be in default under the Loan Agreement at that time unless the Lenders agreed to an extension of the Waiver. During December 2000 and January 2001, we continued to initiate discussions with Fleet. We met with Fleet on January 10, 2001, and were told by Fleet representatives that they would send us a waiver proposal shortly. On February 8, 2001, the Lenders advised us by letter that we were in default of certain non-monetary covenants under the Loan Agreement. On February 23, 2001, the Lenders informed us that under the terms of the Loan Agreement the loan would convert to a Prime Rate loan from a LIBOR-based loan, effective retroactive to February 1, 2001. This conversion effectively increased our interest rate by 1.625%. A Prime Rate loan currently bears interest at 8.0% per annum. On that date, the Lenders offered us a waiver through July 30, 2001 based on conditions that are unacceptable to us (including, among other things, increased loan pricing and fees, restrictions on payment of regular dividends, cash segregation and additional financial covenants). On March 8, 2001, we advised the Lenders by letter that we reserved all of our rights to take any and all actions permitted at law or in equity to protect our interests. -9- 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GETTY REALTY CORP. AND SUBSIDIARIES The Company and PTR have always made all required payments under the Loan Agreement, including principal and interest payments when due. While reserving our rights against the Lenders, we have continued to make all required payments on the loan since February 1, 2001 on the basis of a Prime Rate loan. Nonetheless, if the Lenders under the Loan Agreement should seek to enforce any remedies that they believe they may be entitled to, they could attempt to accelerate the remaining principal balance of the loan and seek to institute foreclosure proceedings on the mortgaged properties. While we would vigorously oppose and defend against any potential actions initiated by the Lenders, we cannot assure you that the Lenders would not ultimately prevail. We have agreed to indemnify Marketing for any loss with respect to the properties on which there are mortgage liens as a result of actions taken by the Lenders under the Loan Agreement. As we have advised the Lenders under the Loan Agreement, we presently intend to refinance the outstanding loan as soon as practicable. However, there can be no assurance on the timing of the refinancing or that it can be accomplished on commercially reasonable terms. If we are unable to timely refinance the outstanding loan or if the Lenders were to initiate and ultimately prevail in foreclosure proceedings, the loss of some or all of the properties collateralizing the Loan Agreement could have a material adverse effect on our financial position, results of operations or cash flows. However, management believes that the ultimate resolution of the Loan Agreement matter will not have such a material adverse effect. Our principal sources of liquidity are cash flows from operations and short-term uncommitted lines of credit with two banks other than the Lenders discussed above. Management believes that cash requirements for operations, capital expenditures and debt service can be met by cash flows from operations, available cash and equivalents and credit lines. As of December 31, 2000, we had lines of credit amounting to $35.0 million, which may be utilized for working capital borrowings and letters of credit. As of December 31, 2000, we were utilizing $27.0 million of the lines of credit for short-term borrowings and $2.4 million in connection with outstanding letters of credit. Borrowings under these lines of credit are unsecured and bear interest at the prime rate or, at our option, LIBOR plus 1.0% or 1.1%. The lines of credit are subject to annual renewal at the discretion of the banks. Although we expect that the existing sources of liquidity will be sufficient to meet our expected business requirements, we will be required to obtain additional sources of capital in the future in order to refinance the Loan Agreement and in connection with any potential REIT conversion. We paid quarterly cash common stock dividends of $.15 per share during fiscal December 2000 and $.10 per share during fiscal 2000 and 1999. We also paid quarterly preferred stock dividends of $.44375 per share during each of these fiscal periods. These dividends aggregated $12.8 million for fiscal December 2000 and $10.6 million for each of fiscal 2000 and 1999. In December 1999, the Board of Directors authorized the purchase, from time to time, in the open market or in private transactions of up to an aggregate of 300,000 shares of Common Stock and Series A Participating Convertible Redeemable Preferred Stock. In March and June 2000, the Board approved the purchase of up to an aggregate of 500,000 and 300,000 additional shares of Common and Preferred Stock, respectively. As of January 31, 2000, we had repurchased 60,016 shares of Common Stock and 700 shares of Preferred Stock at an aggregate cost of $0.7 million. During the eleven months ended December 31, 2000, we repurchased 959,282 additional shares of Common Stock and 22,330 additional shares of Preferred Stock at an aggregate cost of $12.0 million. Capital expenditures, including acquisitions, for fiscal December 2000 and fiscal 2000, 1999 and 1998 amounted to $1.3 million, $15.0 million, $25.2 million and $11.3 million, respectively, which included $0.4 million, $4.7 million, $17.9 million and $8.0 million, respectively, for the replacement of underground storage tanks and vapor recovery facilities at gasoline stations. Expenditures with respect thereto and certain environmental liabilities and obligations have continued to be our responsibility after the spin-off. ENVIRONMENTAL MATTERS We are subject to numerous existing federal, state and local laws and regulations, including matters relating to the protection of the environment. Environmental expenses have been attributable to remediation, monitoring, soil disposal and governmental agency reporting incurred in connection with contaminated sites and the replacement or upgrading of underground storage tanks, related piping, underground pumps, wiring and monitoring devices (collectively, "USTs") to meet federal, state and local environmental standards, as well as routine monitoring and tank testing. Under the Master Lease with Marketing, we initiated a program to bring the leased properties with known environmental contamination to regulatory closure in an economical manner and, thereafter, transfer all future environmental risks to Marketing. Upon achieving closure of each individual site, our environmental liability -10- 6 continued GETTY REALTY CORP. AND SUBSIDIARIES under the Master Lease for that site will be satisfied, and future remediation obligations will be the responsibility of Marketing. We have also agreed to provide a limited environmental indemnification to Marketing with respect to six leased terminals and limited indemnification relating to compliance of properties with local laws. Our aggregate indemnification liability for these items is capped at a maximum of $5.6 million. We have agreed to pay all costs relating to, and to indemnify Marketing for, environmental liabilities and obligations scheduled in the Master Lease, as amended. We will also collect recoveries from state UST remediation funds related to these environmental liabilities. Environmental exposures are difficult to assess and estimate for numerous reasons, including the extent of contamination, alternative treatment methods that may be applied, location of the property which subjects it to differing local laws and regulations and their interpretations, as well as the time it takes to remediate contamination. In developing our liability for probable and reasonably estimable environmental remediation costs, on a site-by-site basis, we consider among other things, enacted laws and regulations, assessments of contamination including the quality of information available, currently available technologies for treatment, alternative methods of remediation and prior experience. These estimates are subject to significant change as the remediation treatment progresses and these contingencies become more clearly defined and reasonably estimable. For fiscal December 2000, fiscal 2000, 1999 and 1998, net environmental expenses included in our consolidated statements of operations amounted to $8.5 million, $6.6 million, $16.9 million and $8.3 million, respectively, which amounts were net of probable recoveries from state UST remediation funds. As of December 31, 2000, January 31, 2000 and 1999, we had accrued $23.4 million, $26.4 million and $34.3 million, respectively, as management's best estimate for probable and reasonably estimable environmental remediation costs. As of December 31, 2000, January 31, 2000 and 1999, we had also recorded $12.0 million, $9.9 million and $10.4 million, respectively, as management's best estimate for recoveries from state UST remediation funds related to environmental obligations and liabilities. In view of the uncertainties associated with environmental expenditures, however, we believe it is possible that such expenditures could be substantially higher. Any additional amounts will be reflected in our financial statements as they become probable and reasonably estimable. Although environmental costs may have a significant impact on results of operations for any single fiscal year or interim period, we believe that such costs will not have a material adverse effect on our financial position. We cannot predict what environmental legislation or regulations may be enacted in the future or how existing laws or regulations will be administered or interpreted with respect to products or activities to which they have not previously been applied. Compliance with more stringent laws or regulations, as well as more vigorous enforcement policies of the regulatory agencies or stricter interpretation of existing laws which may develop in the future, could have an adverse effect on our financial position or operations or our tenants and could require substantial additional expenditures for future remediation or the installation and operation of required environmental or pollution control systems and equipment. Certain statements in this Annual Report may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. When we use the words "believes", "expects", "plans", "estimates" and similar expressions, we intend to identify forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance and achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. These factors include, but are not limited to: risks associated with owning and leasing real estate generally; dependence on Marketing as a tenant and on rentals from companies engaged in the petroleum marketing and convenience store businesses; competition for locations and tenants; risk of tenant non-renewal; our need to refinance the Loan Agreement with Fleet; the effects of regulation; and our expectations as to the cost of completing environmental remediation. As a result of these and other factors, we may experience material fluctuations in future operating results on a quarterly or annual basis, which could materially and adversely affect our business, financial condition, operating results and stock price. An investment in our stock involves various risks, including those mentioned above and elsewhere in this report and those which are detailed from time to time in our other filings with the Securities and Exchange Commission. You should not place undue reliance on forward-looking statements, which reflect our view only as of the date hereof. We undertake no obligation to publicly release revisions to these forward-looking statements that reflect future events or circumstances or reflect the occurrence of unanticipated events. -11- 7 CONSOLIDATED STATEMENTS OF OPERATIONS GETTY REALTY CORP. AND SUBSIDIARIES
FOR THE ELEVEN MONTHS ENDED For the years ended January 31, DECEMBER 31, ------------------------------------------- (in thousands, except per share amounts) 2000 2000 1999 1998(*) ------------------------------------------------------------------------------------------------------------------------- Revenues: Revenues from rental properties $ 53,916 $ 58,889 $ 58,869 $ 59,449 Other income 378 4,970 2,472 3,368 ------------------------------------------------------------------------------------------------------------------------- 54,294 63,859 61,341 62,817 Equity in earnings of Getty Petroleum Marketing Inc. -- -- -- 2,931 ------------------------------------------------------------------------------------------------------------------------- 54,294 63,859 61,341 65,748 ------------------------------------------------------------------------------------------------------------------------- Rental property expenses 10,980 12,126 12,910 13,583 Environmental expenses 8,498 6,813 17,320 8,634 General and administrative expenses 3,257 5,642 6,129 13,297 Depreciation and amortization 9,196 10,425 9,418 9,514 Interest expense 3,413 2,748 2,726 5,008 Change of control charge -- -- -- 2,166 ------------------------------------------------------------------------------------------------------------------------- 35,344 37,754 48,503 52,202 ------------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations before provision for income taxes 18,950 26,105 12,838 13,546 Provision for income taxes 7,875 11,091 5,337 5,697 ------------------------------------------------------------------------------------------------------------------------- Net earnings from continuing operations 11,075 15,014 7,501 7,849 ------------------------------------------------------------------------------------------------------------------------- Discontinued operations: Earnings (loss) from operations, net of income taxes -- -- (119) 95 Gain on disposal, net of income taxes -- -- 2,674 -- ------------------------------------------------------------------------------------------------------------------------- Net earnings from discontinued operations -- -- 2,555 95 ------------------------------------------------------------------------------------------------------------------------- Net earnings 11,075 15,014 10,056 7,944 Preferred stock dividends 5,098 5,128 5,128 -- ------------------------------------------------------------------------------------------------------------------------- Net earnings applicable to common stockholders $ 5,977 $ 9,886 $ 4,928 $ 7,944 ========================================================================================================================= Basic earnings per common share: Continuing operations $ .47 $ .73 $ .17 $ .60 Discontinued operations -- -- .19 .01 Net earnings .47 .73 .36 .60 Diluted earnings per common share: Continuing operations .47 .73 .17 .59 Discontinued operations -- -- .19 .01 Net earnings .47 .73 .36 .60 Weighted average common shares outstanding: Basic 12,818 13,563 13,566 13,152 Diluted 12,818 13,565 13,571 13,348
(*) Includes financial results of the petroleum marketing business prior to the spin-off to the Company's stockholders on March 21, 1997. See accompanying notes. -12- 8 CONSOLIDATED BALANCE SHEETS GETTY REALTY CORP. AND SUBSIDIARIES
January 31, DECEMBER 31, --------------------------- (in thousands, except share data) 2000 2000 1999 ---------------------------------------------------------------------------------------------------------------------------------- ASSETS: Real Estate: Land $ 135,349 $ 136,039 $ 131,976 Buildings and improvements 177,688 179,963 175,817 ---------------------------------------------------------------------------------------------------------------------------------- 313,037 316,002 307,793 Less -- accumulated depreciation and amortization 80,971 74,502 68,045 ---------------------------------------------------------------------------------------------------------------------------------- Real estate, net 232,066 241,500 239,748 Cash and equivalents 723 651 657 Mortgages and accounts receivable, net 5,472 6,024 6,975 Recoveries from state underground storage tank funds 11,957 9,883 10,369 Prepaid expenses and other assets 5,507 2,694 3,335 ---------------------------------------------------------------------------------------------------------------------------------- Total assets $ 255,725 $ 260,752 $ 261,084 ---------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY: Borrowings under credit lines $ 27,000 $ 14,800 $ 4,500 Mortgages payable 22,969 29,193 35,242 Accounts payable and accrued expenses 14,109 12,440 18,042 Environmental remediation costs 23,371 26,424 34,251 Deferred income taxes 40,177 36,084 30,210 Income taxes payable -- -- 808 ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities 127,626 118,941 123,053 ---------------------------------------------------------------------------------------------------------------------------------- Commitments and contingencies (Notes 4 and 5) Stockholders' equity: Preferred stock, par value $.01 per share; authorized 20,000,000 shares for issuance in series of which 3,000,000 shares are classified as Series A Participating Convertible Redeemable Preferred; issued 2,888,798 at December 31, 2000, January 31, 2000 and 1999 72,220 72,220 72,220 Common stock, par value $.01 per share; authorized 50,000,000 shares; issued 13,567,335 at December 31, 2000 and January 31, 2000, and 13,566,233 at January 31, 1999 136 136 136 Paid-in capital 67,036 67,036 67,021 Retained earnings (deficit) 1,419 3,114 (1,346) Preferred stock held in treasury, at cost (23,030 shares at December 31, 2000 and 700 shares at January 31, 2000) (430) (14) -- Common stock held in treasury, at cost (1,019,048 shares at December 31, 2000 and 59,916 shares at January 31, 2000) (12,282) (681) -- Total stockholders' equity 128,099 141,811 138,031 ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 255,725 $ 260,752 $ 261,084 ==================================================================================================================================
See accompanying notes. -13- 9 CONSOLIDATED STATEMENTS OF CASH FLOWS GETTY REALTY CORP. AND SUBSIDIARIES
FOR THE ELEVEN MONTHS ENDED For the years ended January 31, DECEMBER 31, ------------------------------------------ (in thousands, except per share amounts) 2000 2000 1999 1998 ---------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 11,075 $ 15,014 $ 10,056 $ 7,944 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 9,196 10,425 9,418 9,514 Deferred income taxes 4,093 5,874 491 (1,061) Gain on dispositions of real estate (1,106) (3,255) (1,495) (730) Net earnings from discontinued operations -- -- (2,555) (95) Stock option (credit) charge -- -- (110) 6,432 Equity in net earnings of Getty Petroleum Marketing Inc. -- -- -- (1,731) Change of control charge -- -- -- 2,166 Changes in assets and liabilities, net of effect of acquisitions and dispositions: Mortgages and accounts receivable 552 951 547 (940) Recoveries from state underground storage tank funds (2,074) 486 5,018 830 Prepaid expenses and other assets (3,060) 478 327 (1,184) Accounts payable and accrued expenses 1,669 (5,602) (484) (1,878) Environmental remediation costs (3,053) (7,827) (4,046) (7,837) Income taxes payable -- (808) 808 (1,426) ---------------------------------------------------------------------------------------------------------------------------------- Net cash provided by continuing operating activities 17,292 15,736 17,975 10,004 Net cash (used in) provided by discontinued operations -- -- (1,916) 1,636 ---------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 17,292 15,736 16,059 11,640 ---------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (1,133) (4,817) (18,860) (8,057) Property acquisitions (155) (10,162) (6,362) (3,202) Proceeds from dispositions of real estate 2,879 6,220 3,419 2,234 Proceeds from disposition of discontinued operations -- -- 7,661 -- Cash from acquisition of Power Test Investors Limited Partnership, net -- -- -- 1,757 ---------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 1,591 (8,759) (14,142) (7,268) ---------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under credit lines 12,200 10,300 4,500 -- Repayment of mortgages payable (6,224) (6,049) (5,284) (5,287) Cash dividends (12,770) (10,554) (10,554) (1,577) Stock options, common and treasury stock, net (12,017) (680) 46 7,208 Payments under capital lease obligations -- -- -- (6,373) Mortgage borrowings -- -- -- 306 ---------------------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (18,811) (6,983) (11,292) (5,723) ---------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and equivalents 72 (6) (9,375) (1,351) Cash and equivalents at beginning of period 651 657 10,032 11,383 ---------------------------------------------------------------------------------------------------------------------------------- Cash and equivalents at end of period $ 723 $ 651 $ 657 $ 10,032 ================================================================================================================================== Supplemental disclosures of cash flow information Cash paid during the period for: Interest $ 3,721 $ 2,438 $ 2,794 $ 5,009 Income taxes, net 6,988 6,628 4,653 3,834
See accompanying notes. -14- 10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GETTY REALTY CORP. AND SUBSIDIARIES 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation: The consolidated financial statements include the accounts of Getty Realty Corp. and its wholly-owned subsidiaries (the "Company"). The Company is a real estate company specializing in the ownership and leasing of service stations, convenience stores and petroleum marketing terminals. All significant intercompany accounts and transactions have been eliminated. Prior to the spin-off of its petroleum marketing business to its stockholders on March 21, 1997, the Company was principally engaged in the ownership and leasing of real estate as well as the marketing and distribution of petroleum products. In December 1998, the Company sold its heating oil business, Aero Oil Company. The Company now leases most of its properties on a long-term net basis to the spun-off company, Getty Petroleum Marketing Inc. ("Marketing"). The consolidated statement of operations of the Company for the year ended January 31, 1998 includes the financial results of the Marketing business under the caption "Equity in earnings of Getty Petroleum Marketing Inc." for the period from February 1, 1997 to March 21, 1997. For additional information regarding the spin-off, see Note 2. The results of operations of the heating oil business have been reclassified as discontinued in the accompanying financial statements for the years ended January 31, 1999 and 1998. For additional information regarding the sold heating oil business, see Note 3. Change in Year-End: On December 12, 2000, the Company's Board of Directors approved a change in the fiscal year end to December 31 from January 31. The change resulted in an eleven-month accounting period ended December 31, 2000. For additional information regarding the change in year-end, see Note 12. Use of Estimates: The financial statements have been prepared in conformity with generally accepted accounting principles and include amounts that are based on management's best estimates and judgments. While all available information has been considered, actual results could differ from those estimates. Cash and Equivalents: The Company considers highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Real Estate: Real estate assets are stated at cost less accumulated depreciation and amortization. When real estate assets are sold or retired, the cost and related accumulated depreciation and amortization is eliminated from the respective accounts and any gain or loss is credited or charged to income. Expenditures for maintenance and repairs are charged to income when incurred. Depreciation and Amortization: Depreciation of real estate is computed on the straight-line method based upon the estimated useful lives of the assets which generally range from 16 to 25 years for buildings and improvements. Insurance: Prior to the spin-off, the Company was self-insured for workers' compensation, general liability and vehicle liability up to predetermined amounts above which third-party insurance applied. Since the spin-off, the Company has maintained insurance coverage subject to modest deductibles. Accruals are based on claims experience and actuarial assumptions followed in the insurance industry. Due to uncertainties inherent in the estimation process, actual losses could differ from accrued amounts. Environmental Costs: The estimated future costs for known environmental remediation requirements are accrued when it is probable that a liability has been incurred and the amount of remediation costs can be reasonably estimated. Recoveries of environmental costs, principally from state underground storage tank remediation funds, are accrued as income when such recoveries are considered probable. Accruals are adjusted as further information develops or circumstances change. Impairment of Long-lived Assets and Long-lived Assets to be Disposed Of: Assets are written down to fair value when events and circumstances indicate that the assets might be impaired and the projected undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. Assets held for disposal are written down to fair value less costs to sell. -15- 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GETTY REALTY CORP. AND SUBSIDIARIES Income Taxes: Deferred income taxes are provided for the effect of items which are reported for income tax purposes in years different from that in which they are recorded for financial statement purposes. Revenue Recognition: Revenue is recognized from rentals as earned. Earnings per Common Share: Basic earnings per common share is computed by dividing net earnings less preferred dividends by the weighted average number of common shares outstanding during the year. Diluted earnings per common share also gives effect to the potential dilution from the exercise of stock options in the amounts of 2,000 shares, 5,000 shares and 196,000 shares for the years ended January 31, 2000, 1999 and 1998, respectively. For the eleven months ended December 31, 2000 and the years ended January 31, 2000 and 1999, conversion of the Series A Participating Convertible Redeemable Preferred Stock (which was issued on January 30, 1998) into common stock utilizing the if-converted method would have been antidilutive, and therefore conversion was not assumed for purposes of computing diluted earnings per common share. 2. SPIN-OFF On March 21, 1997, the Company spun-off its petroleum marketing business to its stockholders. The Company retained its real estate business and leased most of its properties on a long-term net basis to Marketing. As part of the separation of the petroleum marketing business from the real estate business, the Company and Marketing entered into various agreements which addressed the allocation of assets and liabilities between them and govern future relationships. These agreements include a Reorganization and Distribution Agreement, Master Lease Agreement, Tax Sharing Agreement, Services Agreement and Trademark License Agreement. On November 2, 2000, Marketing agreed to be acquired by a subsidiary of OAO Lukoil ("Lukoil"), a Russian open joint stock company, and the Company entered into modifications to several of its agreements with Marketing. On December 8, 2000, the Lukoil subsidiary acquired in a tender offer approximately 72% of Marketing's common stock. On January 25, 2001, the Lukoil subsidiary acquired by merger the remaining common stock of Marketing. Under the Services Agreement, Marketing provides certain administrative and technical services to the Company and the Company provides certain limited services to Marketing. The net fees paid by the Company to Marketing for services performed (after deducting the fees paid by Marketing to the Company for services provided by the Company) were $582,000 for the eleven months ended December 31, 2000, $749,000 for the year ended January 31, 2000 and $960,000 for each of the years ended January 31, 1999 and 1998, and are included in general and administrative expenses in the consolidated statements of operations. The Company expects that substantially all of the services provided pursuant to the Services Agreement will be discontinued on or about April 1, 2001. The following is a summary of the financial results of the Marketing business included in the accompanying consolidated statement of operations for the fiscal 1998 period from February 1, 1997 to March 21, 1997. The financial information is presented for informational purposes only and is not necessarily indicative of the financial results that would have occurred had Marketing been operated as a separate, stand-alone entity during such period. (in thousands) Year ended January 31, 1998 --------------------------------------------------------------------------- Earnings before income taxes $2,931 Provision for income taxes 1,200 --------------------------------------------------------------------------- Net earnings $1,731 =========================================================================== -16- 12 continued GETTY REALTY CORP. AND SUBSIDIARIES 3. DISCONTINUED OPERATIONS In December 1998, the Company sold its heating oil and propane business, Aero Oil Company. Proceeds from the sale were $7,661,000 and resulted in a pre-tax gain of $4,576,000 ($2,674,000 after-tax). Summary operating results of the discontinued heating oil operations is as follows (in thousands): Years ended January 31, 1999 1998 -------------------------------------------------------------------------- Revenues $18,169 $27,022 ========================================================================== Earnings before income taxes $ 4,373 (a) $ 164 Provision for income taxes 1,818 69 -------------------------------------------------------------------------- Net earnings $ 2,555 $ 95 ========================================================================== (a) Includes pre-tax gain of $4,576 on disposal of the business. 4. LEASES The Company and Marketing entered into an amended and restated Master Lease Agreement (the "Master Lease") with respect to approximately 1,000 service station and convenience store properties and 9 distribution terminals and bulk plants, which became effective on December 9, 2000. The Master Lease has an extended initial term of fifteen years (or periods ranging from one to fifteen years with respect to approximately 335 properties leased by the Company from third parties), and generally provides Marketing with renewal options extending to 2048 (or with respect to such leased properties, such shorter period as the underlying lease may provide). The Master Lease now provides for a 4% rent increase effective December 9, 2000 and annual 2% escalations thereafter. In addition, the amended provisions now require that the exercise of renewal options be on an "all or nothing" basis. The Master Lease is a "triple-net" lease, therefore Marketing is responsible for the cost of all taxes, maintenance, repair, insurance and other operating expenses. The Company has agreed to provide limited environmental indemnification to Marketing with respect to six leased terminals, and limited indemnification relating to compliance of properties with local laws. The Company's aggregate indemnification liability for these items is capped at a maximum of $5.6 million. Under the Master Lease, the Company continues to have additional ongoing environmental remediation obligations for scheduled sites. In addition, the Company and Marketing entered into revised trademark license agreements providing for an exclusive license to Marketing for use of certain of the Company's trademarks, service marks and trade names (including the name "Getty") used in connection with Marketing's business within Marketing's current marketing territory and a non-exclusive license in the remaining United States subject to a gallonage-based royalty. The trademark agreements have the same termination date as the Master Lease. Revenues from rental properties for the eleven months ended December 31, 2000 and for the years ended January 31, 2000, 1999 and 1998 were $53,916,000, $58,889,000, $58,869,000 and $59,449,000, respectively, of which $51,524,000, $56,363,000, $56,411,000 and $57,001,000, respectively, was received from Marketing under the Master Lease. -17- 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GETTY REALTY CORP. AND SUBSIDIARIES Future minimum annual rentals receivable from Marketing under the Master Lease and from other tenants, which have terms in excess of one year as of December 31, 2000, are as follows (in thousands): Other Years ending December 31, Marketing Tenants Total ---------------------------------------------------------------------------- 2001 $ 57,490 $ 2,355 $ 59,845 2002 58,029 1,873 59,902 2003 58,459 1,550 60,009 2004 58,935 1,260 60,195 2005 59,737 1,107 60,844 Thereafter 605,378 4,216 609,594 ---------------------------------------------------------------------------- $898,028 $12,361 $910,389 ============================================================================ The Company has obligations to lessors under noncancelable operating leases which have terms (excluding options) in excess of one year, principally for gasoline stations. Substantially all of these leases contain renewal options and escalation clauses. Future minimum annual rentals payable under such leases are as follows (in thousands): Years ending December 31, ---------------------------------------------------------------- 2001 $10,576 2002 9,369 2003 8,068 2004 6,776 2005 5,225 Thereafter 11,943 ---------------------------------------------------------------- $51,957 ================================================================ 5. COMMITMENTS AND CONTINGENCIES On November 2, 2000, the Company entered into an amended Master Lease, which became effective on December 9, 2000 upon the acquisition of a controlling interest in Marketing by Lukoil. The amendment of the Master Lease and a related amendment of a lease between two of the Company's subsidiaries (together, the "Amended Lease Agreements") is alleged by Fleet National Bank ("Fleet" or the "Lenders") to have caused a non-monetary default under a loan agreement between one of those subsidiaries, Power Test Realty Company Limited Partnership, and Fleet (the "Loan Agreement"). Prior to the Company executing the Amended Lease Agreements, the Lenders issued a 90-day waiver of any potential default caused by the Amended Lease Agreements which expired on January 31, 2001. Fleet advised the Company that the Company was in default on February 8, 2001, and thereafter converted the loan from a LIBOR based loan to a prime rate loan retroactive to February 1, 2001. The Company has always made all required payments under the Loan Agreement, including principal and interest payments when due. While reserving its rights against Fleet to take any and all actions permitted at law or in equity to protect its interests, the Company has continued to make all required payments on the loan since February 1, 2001. Nonetheless, if the Lenders should seek to enforce any remedies that they believe that they may be entitled to, they could attempt to accelerate the remaining principal balance of the loan of approximately $21.0 million and seek to institute foreclosure proceedings on some or all of the 265 mortgaged properties. While the Company would vigorously oppose and defend against any potential actions initiated by the Lenders, there can be no assurance that the Lenders would not ultimately prevail. The Company has agreed to indemnify Marketing for any loss with respect to the properties on which there are mortgage liens as a result of actions taken by the Lenders. The Company has advised the Lenders that it presently intends to refinance the outstanding loan as soon as practicable. However, there can be no assurance on the timing of the refinancing or that it can be accomplished on commercially reasonable terms. If the Company is unable to timely refinance the outstanding loan or if the Lenders were to initiate and ultimately prevail in foreclosure proceedings, the loss of some or all of the properties collateralizing the Loan Agreement could have a material adverse effect on the Company's financial position, results of operations or cash flows. However, management believes that the ultimate resolution of this matter will not have such a material adverse effect. -18- 14 continued GETTY REALTY CORP. AND SUBSIDIARIES The Company is subject to various legal proceedings and claims which arise in the ordinary course of its business. In addition, the Company has retained responsibility for all pre-spin-off legal proceedings and claims relating to Marketing's business. These matters are not expected to have a material adverse effect on the Company's financial condition or results of operations. In order to minimize the Company's exposure to credit risk associated with financial instruments, the Company places its temporary cash investments with high credit quality institutions and, by policy, limits the amount invested with any one institution other than the U.S. Government. Prior to the spin-off, the Company was self-insured for workers' compensation, general liability and vehicle liability up to predetermined amounts above which third-party insurance applies. Since the spin-off, the Company has maintained insurance coverage subject to modest deductibles. The Company's consolidated statements of operations for the eleven months ended December 31, 2000 and for the fiscal years ended January 31, 2000, 1999 and 1998 included, in general and administrative expense, charges of $285,000, $1,362,000, $518,000 and $161,000, respectively, for insurance. As of December 31, 2000, January 31, 2000 and 1999, the Company's consolidated balance sheets included, in accounts payable and accrued expenses, $2,291,000, $2,269,000 and $4,361,000, respectively, relating to insurance obligations arising prior to the spin-off of the Marketing business. The Company's financial results depend largely on rental income from Marketing, and to a lesser extent on rental income from other tenants, and are therefore materially dependent upon the ability of Marketing to meet its obligations under the Master Lease. Marketing's financial results depend largely on retail marketing margins and rental income from its dealers. The petroleum marketing industry has been and continues to be volatile and highly competitive. However, based on the information currently available to the Company, it does not anticipate that Marketing will have difficulty in making required rental payments under the Master Lease for the foreseeable future. 6. DEBT Mortgages payable consists of (in thousands):
January 31, DECEMBER 31, ---------------------- 2000 2000 1999 ------------------------------------------------------------------------------------------------------------------------ Mortgage loan due through March 1, 2005 $21,045 $22,970 $24,730 Mortgage loan due through November 1, 2000 -- 4,184 8,344 Real estate mortgages, bearing interest at a weighted average interest rate of 8.10%, due in varying amounts through May 1, 2015 1,924 2,039 2,168 ------------------------------------------------------------------------------------------------------------------------ $22,969 $29,193 $35,242 ========================================================================================================================
The mortgage loan due March 1, 2005, as amended on March 1, 2000, provides for interest at LIBOR plus .75% to 1.75% per annum, depending on the ratio of Funded Debt, as defined. Based on such ratio as of December 31, 2000, the interest rate was LIBOR plus 1.25% which amounted to 8.07%. Principal payments are scheduled at $175,000 per month, or $2,100,000 per year, through February 1, 2005, with the balance of $12,295,000 due on March 1, 2005. The Company presently intends to refinance the outstanding loan as soon as practicable. On February 8, 2001, the Lenders informed the Company that it was in default of certain non- monetary covenants under the loan due to the amendment of the Master Lease and a related amendment of a lease between two of the Company's wholly-owned subsidiaries. The Lenders subsequently advised the Company that the loan would convert from a LIBOR-based loan to a prime rate loan, effective February 1, 2001, bearing interest at 8.0%. The loan is collateralized by primary and secondary mortgage liens on 265 fee owned service station properties with a net book value of approximately $122,306,000 at December 31, 2000. The Company's rental income from these properties was $14,822,000 for the eleven months ended December 31, 2000. See Note 5 for additional information regarding the loan. -19- 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GETTY REALTY CORP. AND SUBSIDIARIES Aggregate principal payments in subsequent years for real estate mortgages, excluding the mortgage loan discussed above, are as follows: 2001 -- $129,000; 2002 -- $582,000; 2003 -- $111,000; 2004 -- $188,000; 2005 -- $306,000 and $608,000 thereafter. These mortgages payable are collateralized by real estate having an aggregate net book value of approximately $3,026,000 as of December 31, 2000. As of December 31, 2000, the Company had uncommitted lines of credit with two banks other than the Lenders in the aggregate amount of $35,000,000, of which $27,000,000 was utilized for short-term borrowings and $2,354,000 was utilized in the form of outstanding letters of credit relating to insurance obligations. Borrowings under these lines of credit are unsecured and bear interest at the bank's prime rate or, at the Company's option, 1.0% to 1.1% above LIBOR. These lines of credit are subject to annual renewal at the discretion of each bank. 7. ENVIRONMENTAL REMEDIATION COSTS The Company is subject to numerous existing federal, state and local laws and regulations, including matters relating to the protection of the environment. Environmental expenses have been attributable to remediation, monitoring, soil disposal and governmental agency reporting incurred in connection with contaminated sites and the replacement or upgrading of underground storage tanks ("USTs") to meet federal, state and local environmental standards, as well as routine monitoring and tank testing. For the eleven months ended December 31, 2000 and for the years ended January 31, 2000, 1999 and 1998, net environmental expenses included in the Company's consolidated statements of operations were $8,498,000, $6,648,000, $16,905,000 and $8,255,000, respectively, which amounts were net of probable recoveries from state UST remediation funds. Under the Master Lease with Marketing, the Company initiated a program to bring the leased properties with known environmental contamination to regulatory closure in an economical manner, and thereafter, transfer all future environmental risks to Marketing. The Company has agreed to pay all costs relating to, and to indemnify Marketing for environmental liabilities and obligations scheduled in the Master Lease, as amended. The Company will also collect recoveries from state UST remediation funds related to these environmental obligations. The Company has also agreed to provide a limited environmental indemnification to Marketing with respect to six leased terminals and limited indemnification relating to compliance of properties with local laws. The Company's aggregate indemnification liability for these items is capped at a maximum of $5.6 million. As of December 31, 2000, January 31, 2000 and 1999, the Company had accrued $23,371,000, $26,424,000 and $34,251,000, respectively, as management's best estimate for probable and reasonably estimable environmental remediation costs. As of December 31, 2000, January 31, 2000 and 1999, the Company had also recorded $11,957,000, $9,883,000 and $10,369,000, respectively, as management's best estimate for recoveries from state UST remediation funds related to environmental obligations and liabilities. In view of the uncertainties associated with environmental expenditures, however, the Company believes it is possible that such expenditures could be substantially higher. Any additional amounts will be reflected in the Company's financial statements as they become probable and reasonably estimable. Although future environmental expenditures may have a significant impact on results of operations for any single fiscal year or interim period, the Company currently believes that such costs will not have a material adverse effect on the Company's financial position. -20- 16 continued GETTY REALTY CORP. AND SUBSIDIARIES 8. INCOME TAXES The provision for income taxes is summarized as follows (in thousands):
FOR THE ELEVEN For the years ended MONTHS ENDED January 31, DECEMBER 31, -------------------------------------- 2000 2000 1999 1998 --------------------------------------------------------------------------------------- Continuing operations $ 7,875 $11,091 $ 5,337 $ 5,697 Discontinued operations: Operations -- -- (84) 69 Disposal -- -- 1,902 -- --------------------------------------------------------------------------------------- -- -- 1,818 69 --------------------------------------------------------------------------------------- Provision for income taxes $ 7,875 $11,091 $ 7,155 $ 5,766 =======================================================================================
The provision for income taxes is comprised as follows (in thousands):
FOR THE ELEVEN For the years ended MONTHS ENDED January 31, DECEMBER 31, -------------------------------------- 2000 2000 1999 1998 --------------------------------------------------------------------------------------- Federal: Current $ 2,435 $ 2,260 $ 5,314 $ 2,697 Deferred 3,638 5,817 (120) 1,557 State and local: Current 667 735 966 990 Deferred 1,135 2,279 995 522 --------------------------------------------------------------------------------------- Provision for income taxes $ 7,875 $11,091 $ 7,155 $ 5,766 =======================================================================================
The tax effects of temporary differences which comprise the deferred tax assets and liabilities are as follows (in thousands):
January 31, DECEMBER 31, -------------------------- 2000 2000 1999 --------------------------------------------------------------------------------------- Real estate $(46,891) $(46,893) $(44,028) Environmental remediation costs, net 6,784 11,080 13,257 Other accruals 3,024 2,723 1,576 Other (3,094) (2,994) (1,015) --------------------------------------------------------------------------------------- Net deferred tax liabilities $(40,177) $(36,084) $(30,210) =======================================================================================
The following is a reconciliation of the expected statutory federal income tax provision and the actual provision for income taxes (in thousands):
FOR THE ELEVEN For the years ended MONTHS ENDED January 31, DECEMBER 31, ------------------------------------------ 2000 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------- Expected provision at statutory federal income tax rate $ 6,594 $ 9,137 $ 5,910 $ 4,661 State and local income taxes, net of federal benefit 1,175 1,959 1,288 994 Other 106 (5) (43) 111 ------------------------------------------------------------------------------------------------------------------------- Provision for income taxes $ 7,875 $ 11,091 $ 7,155 $ 5,766 =========================================================================================================================
-21- 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GETTY REALTY CORP. AND SUBSIDIARIES 9. STOCKHOLDERS' EQUITY A summary of the changes in stockholders' equity for the eleven months ended December 31, 2000 and for the three years ended January 31, 2000 is as follows:
Preferred Stock Common Stock ------------------------ ------------------------ Paid-In (in thousands, except per share amounts) Shares Amount Shares Amount Capital ----------------------------------------------------------------------------------------------------------------------------------- Balance, February 1, 1997 -- $ -- 13,583 $ 1,358 $ 120,293 Net earnings Spin-off of Marketing (56,272) Cash dividends: Common -- $.12 per share Issuance of treasury stock, net (1) Stock options 863 87 15,679 Merger transaction 2,889 72,220 (883) (1,309) (12,614) ----------------------------------------------------------------------------------------------------------------------------------- Balance, January 31, 1998 2,889 72,220 13,563 136 67,085 Net earnings Cash dividends: Common -- $.40 per share Preferred -- $1.775 per share Issuance of common stock 2 33 Stock options 1 (97) ----------------------------------------------------------------------------------------------------------------------------------- Balance, January 31, 1999 2,889 72,220 13,566 136 67,021 Net earnings Cash dividends: Common -- $.40 per share Preferred -- $1.775 per share Purchase of preferred stock for treasury Purchase of common stock for treasury, net Stock options 1 15 ----------------------------------------------------------------------------------------------------------------------------------- Balance, January 31, 2000 2,889 72,220 13,567 136 67,036 Net earnings Cash dividends: Common -- $.60 per share Preferred -- $1.775 per share Purchase of preferred stock for treasury Purchase of common stock for treasury, net ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2000 2,889 $ 72,220 13,567 $ 136 $ 67,036 =================================================================================================================================== Preferred Stock Common Stock Held in Treasury, Held in Treasury, Retained at Cost at Cost Earnings ------------------------ -------------------- (in thousands, except per share amounts) (Deficit) Shares Amount Shares Amount Total --------------------------------------------------------------------------------------------------------------------------------- Balance, February 1, 1997 $ (7,215) -- $ -- (886) $ (13,964) $ 100,472 Net earnings 7,944 7,944 Spin-off of Marketing (56,272) Cash dividends: Common -- $.12 per share (1,577) (1,577) Issuance of treasury stock, net 3 41 40 Stock options 15,766 Merger transaction 883 13,923 72,220 --------------------------------------------------------------------------------------------------------------------------------- Balance, January 31, 1998 (848) -- -- -- -- 138,593 Net earnings 10,056 10,056 Cash dividends: Common -- $.40 per share (5,426) (5,426) Preferred -- $1.775 per share (5,128) (5,128) Issuance of common stock 33 Stock options (97) --------------------------------------------------------------------------------------------------------------------------------- Balance, January 31, 1999 (1,346) -- -- -- -- 138,031 Net earnings 15,014 15,014 Cash dividends: Common -- $.40 per share (5,426) (5,426) Preferred -- $1.775 per share (5,128) (5,128) Purchase of preferred stock for treasury (1) (14) (14) Purchase of common stock for treasury, net (60) (681) (681) Stock options 15 --------------------------------------------------------------------------------------------------------------------------------- Balance, January 31, 2000 3,114 (1) (14) (60) (681) 141,811 Net earnings 11,075 11,075 Cash dividends: Common -- $.60 per share (7,672) (7,672) Preferred -- $1.775 per share (5,098) (5,098) Purchase of preferred stock for treasury (22) (416) (416) Purchase of common stock for treasury, net (959) (11,601) (11,601) --------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2000 $ 1,419(a) (23) $ (430) (1,019) $ (12,282) $ 128,099 =================================================================================================================================
(a) Net of $103,803 transferred from retained earnings to common stock and paid-in capital as a result of accumulated stock dividends. On January 30, 1998, the Company and Power Test Investors Limited Partnership (the "Partnership"), a publicly traded real estate limited partnership, completed a merger transaction to combine their assets and operations. In connection with the merger, unitholders of the Partnership received 2,888,798 shares of Series A Participating Convertible Redeemable Preferred Stock of Getty Realty Corp. in exchange for their Partnership units. Each share of preferred stock has voting rights of and is convertible into 1.1312 shares of common stock of the Company and -22- 18 continued GETTY REALTY CORP. AND SUBSIDIARIES pays stated cumulative dividends of $1.775 per annum, or if greater, the per share dividends paid on common stock. Commencing February 1, 2001, the Company may redeem all or a portion of the preferred stock at a purchase price of $25.00 per share plus accumulated, accrued and unpaid dividends, if the closing price of the Company's common stock exceeds $22.10 per share for a period of ten cumulative trading days within 90 days prior to the date of notice of redemption. In the event of a liquidation, dissolution or winding up of the Company, holders of the preferred stock will have the right to liquidation preferences in the amount of $25.00 per share, plus accumulated, accrued and unpaid dividends, before any payment to holders of the Company's common stock. 10. EMPLOYEE BENEFIT PLANS The Company has a retirement and profit sharing plan with deferred 401(k) savings plan provisions (the "Retirement Plan") for employees meeting certain service requirements and a Supplemental Plan for executives. Under the terms of these plans, the annual discretionary contributions to the plans are determined by the Board of Directors. Also, under the Retirement Plan, employees may make voluntary contributions and the Company has elected to match an amount equal to 50% of such contributions but in no event more than 3% of the employee's eligible compensation. Under the Supplemental Plan, a participating executive may receive an amount equal to 10% of his compensation, reduced by the amount of any contributions allocated to such executive under the Retirement Plan. Contributions, net of forfeitures, under the plans approximated $87,000, $102,000, $126,000 and $89,000 for the eleven months ended December 31, 2000 and the years ended January 31, 2000, 1999 and 1998, respectively. These amounts are included in the accompanying consolidated statements of operations. The Company has a Stock Option Plan (the "Plan") which authorizes the Company to grant options to purchase shares of the Company's common stock. The aggregate number of shares of the Company's common stock which may be made the subject of options under the Plan shall not exceed 1,100,000 shares, subject to further adjustment for stock dividends and stock splits. The Plan provides that options are exercisable starting one year from the date of grant, on a cumulative basis at the annual rate of 25 percent of the total number of shares covered by the option. Immediately prior to the spin-off of its petroleum marketing business to its stockholders, each holder of an option to acquire shares of the Company's common stock received, in exchange therefor, two separately exercisable options: one to purchase shares of the Company's common stock (a "Realty Option") and one to purchase shares of Marketing common stock (a "Marketing Option"), each exercisable for the same number of shares and containing substantially equivalent terms as the pre-distribution option. The exercise price of each Realty Option and Marketing Option was set so as to preserve the Aggregate Spread (as defined below) in value attributed to the options currently held. The "Aggregate Spread" was an amount representing the difference between the exercise price of an option and the price of a share of Company common stock immediately prior to the spin-off multiplied by the number of shares underlying the option. Unexercisable options covering a total of 223,587 shares became immediately exercisable at the date of the spin-off for persons covered by change of control agreements. Accordingly, in the year ended January 31, 1998, the Company recognized a charge to earnings of $2,166,000 at the date of the spin-off equal to the product of the number of these options and the difference between their exercise price and the then market price. -23- 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GETTY REALTY CORP. AND SUBSIDIARIES The following is a schedule of stock option prices and activity relating to the Company's stock option plans:
FOR THE ELEVEN MONTHS ENDED For the years ended January 31, DECEMBER 31, ------------------------------------------------------------------------------ 2000 2000 1999 1998 --------------------------------------------------------------------------------------------------------------------------------- WEIGHTED Weighted Weighted Weighted NUMBER AVERAGE Number Average Number Average Number Average OF EXERCISE of Exercise of Exercise of Exercise SHARES PRICE Shares Price Shares Price Shares Price (a) --------------------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of period 373,740 $ 21.27 358,119 $ 22.63 363,553 $ 23.15 1,014,226 $ 10.28 Granted 53,750 14.50 41,750 11.13 --(b) -- 349,236 23.65 Exercised -- -- (1,102) 13.23 (1,215) 10.89 (864,535) 10.15 Cancelled (22,750) 23.64 (25,027) 24.06 (4,219) 22.43 (135,374) 11.06 ------------------------------------------------------------------------------------------------------------------------------- Outstanding at end of period 404,740 $ 20.24 373,740 $ 21.27 358,119 $ 22.63 363,553 $ 23.15 =============================================================================================================================== Exercisable at end of period 319,678 $ 21.96 287,336 $ 22.91 277,706 $ 23.14 242,779 $ 23.29 =============================================================================================================================== Available for grant at end of period 692,943 723,943 740,666 736,447 =================================================================================================================================
(a) In connection with the spin-off, each Realty Option was reformed into separate options for Realty common stock and Marketing common stock. The exercise price of each reformed Realty Option shown herein represents 77.29% of the original exercise price. (b) On December 14, 1998, the Company repriced 50,000 options granted in fiscal 1998 with an exercise price of $21.31 per share to $17.19 per share, as compared to the then market price of $13.06 per share. The following table summarizes information concerning options outstanding and exercisable at December 31, 2000:
Options Outstanding Options Exercisable --------------------------------------------------------------------------- -------------------------- Weighted Average Weighted Weighted Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life (Years) Price Exercisable Price ------------------------------------------------------------------------------------------------------------- $9.56-14.40 106,500 8 $12.76 28,938 $10.88 17.19 50,000 7 17.19 42,500 17.19 24.06 248,240 4 24.06 248,240 24.06 ------------------------------------------------------------------------------------------------------------ 404,740 319,678 ============================================================================================================
The Company accounts for its stock-based employee compensation plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The Company recorded a stock compensation charge (credit) of ($199,000) and $8,683,000 for the years ended January 31, 1999 and 1998, respectively, since certain options required variable plan accounting treatment. -24- 20 continued GETTY REALTY CORP. AND SUBSIDIARIES Had compensation cost for the Company's Plan been determined based upon the fair value methodology prescribed under SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net earnings and net earnings per share on a diluted basis would have been reduced as follows:
FOR THE ELEVEN MONTHS ENDED For the years ended January 31, DECEMBER 31, ----------------------------------------------------------------------------------- 2000 2000 1999 1998 ----------------------------------------------------------------------------------------------------------------------------------- AS REPORTED PRO FORMA As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma ----------------------------------------------------------------------------------------------------------------------------------- Net earnings (in thousands) $ 11,075 $ 10,963 $ 15,014 $ 14,190 $ 10,056 $ 9,054 $ 7,944 $ 7,513 Net earnings per common share .47(a) .46(a) .73(a) .67(a) .36(a) .29(a) .60 .56
(a) After giving effect to preferred stock dividends. The fair value of the options granted during the eleven months ended December 31, 2000 and the years ended January 31, 2000 and 1998 were estimated as $4.11, $3.57 and $10.32 per share, respectively, on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
For the years FOR THE ELEVEN ended MONTHS ENDED January 31, DECEMBER 31, ------------------- 2000 2000 1999 ------------------------------------------------------------------------------------- Expected dividend yield 4.1% 3.6% .5% Expected volatility 35% 34% 35% Risk-free interest rate 5.2% 6.7% 5.5% Expected life of options (years) 7 7 7
11. QUARTERLY FINANCIAL DATA The following is a summary of the interim results of operations for the eleven months ended December 31, 2000 and for the year ended January 31, 2000 (unaudited as to interim information):
Two Eleven Three months ended months months ---------------------------------------- ended ended Eleven months ended December 31, 2000: April 30, July 31, October 31, December 31, December 31, ---------------------------------------------------------------------------------------------------------------------- (in thousands, except per share amounts) Revenues from rental properties $14,725 $14,700 $14,580 $ 9,911 $53,916 Earnings before income taxes 6,003 5,574 5,397 1,976 18,950 Net earnings 3,455 3,257 3,125 1,238 11,075 Diluted earnings per common share (a) .16 .16 .15 -- .47
Three months ended ------------------------------------------------------- Year ended Year ended January 31, 2000: April 30, July 31, October 31, January 31, January 31, ---------------------------------------------------------------------------------------------------------------------- (in thousands, except per share amounts) Revenues from rental properties $14,760 $14,666 $14,628 $14,835 $58,889 Earnings before income taxes 5,759 6,350 7,710 6,286 26,105 Net earnings 3,343 3,686 4,460 3,525 15,014 Diluted earnings per common share (a) .15 .18 .23 .17 .73
(a) After giving effect to quarterly preferred stock dividends aggregating $5,098 and $5,128 for the eleven months ended December 31, 2000 and for the year ended January 31, 2000, respectively. -25- 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GETTY REALTY CORP. AND SUBSIDIARIES 12. TRANSITION PERIOD COMPARATIVE DATA The following table presents certain financial information for the eleven months ended December 31, 2000 and 1999, (in thousands, except per share data):
2000 1999 (unaudited) -------------------------------------------------------------------------------- Revenues from rental properties $53,916 $53,983 -------------------------------------------------------------------------------- Earnings before income taxes $18,950 $24,427 Provision for income taxes 7,875 10,378 -------------------------------------------------------------------------------- Net earnings 11,075 14,049 Preferred stock dividends 5,098 5,128 -------------------------------------------------------------------------------- Net earnings applicable to common stockholders $ 5,977 $ 8,921 ================================================================================ Net earnings per common share: Basic $ .47 $ .66 Diluted $ .47 $ .66 Weighted average common shares outstanding: Basic 12,818 13,567 Diluted 12,818 13,569
-26- 22 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Getty Realty Corp.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and cash flows present fairly, in all material respects, the financial position of Getty Realty Corp. and Subsidiaries (the "Company") at December 31, 2000, January 31, 2000 and 1999, and the results of their operations and their cash flows for the eleven months ended December 31, 2000 and for each of the three years in the period ended January 31, 2000, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As more fully discussed in Notes 5 and 6 to the consolidated financial statements, a subsidiary of the Company has received notice from one of its lenders that an amendment to the Master Lease has caused a non-monetary default under a loan agreement between the lender and the Company. /s/ PricewaterhouseCoopers LLP New York, New York March 16, 2001 -27- 23 CAPITAL STOCK GETTY REALTY CORP. AND SUBSIDIARIES Our common stock is traded on the New York Stock Exchange (symbol: "GTY"). At December 31, 2000, there were approximately 2,300 holders of record of our common stock. The price range of common stock and cash dividends paid with respect to each share of common stock during the eleven months ended December 31, 2000 and the fiscal year ended January 31, 2000 were as follows:
Price Range -------------------------- Cash Dividends Period Ending High Low Per Share ----------------------------------------------------------------------- December 31, 2000 $ 15 1/8 $ 10 $ .15 October 31, 2000 12 9 7/8 .15 July 31, 2000 12 5/16 10 5/16 .15 April 30, 2000 13 7/16 9 13/16 .15 January 31, 2000 $ 13 $ 10 13/16 $ .10 October 31, 1999 14 7/16 12 1/16 .10 July 31, 1999 14 7/8 13 5/16 .10 April 30, 1999 15 5/8 12 1/2 .10
Our Series A preferred stock commenced trading in February 1998 on the New York Stock Exchange (symbol: "GTY PrA"). At December 31, 2000, there were approximately 400 holders of record of our preferred stock. The price range of preferred stock and cash dividends paid with respect to each share of preferred stock during the eleven months ended December 31, 2000 and the fiscal year ended January 31, 2000 were as follows:
Price Range ---------------------- Cash Dividends Period Ending High Low Per Share -------------------------------------------------------------------- December 31, 2000 $20 1/4 $19 1/2 $.44375 October 31, 2000 19 3/4 19 .44375 July 31, 2000 18 3/4 18 1/8 .44375 April 30, 2000 19 3/4 18 1/8 .44375 January 31, 2000 $20 1/4 $19 1/16 $.44375 October 31, 1999 20 5/8 19 3/4 .44375 July 31, 1999 20 1/8 19 1/8 .44375 April 30, 1999 21 19 3/8 .44375
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