10-Q 1 c87133e10vq.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number 001-13777 GETTY REALTY CORP. ------------------ (Exact name of registrant as specified in its charter) MARYLAND 11-3412575 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 125 JERICHO TURNPIKE, SUITE 103 JERICHO, NEW YORK 11753 ---------------------------------------- (Address of principal executive offices) (Zip Code) (516) 478 - 5400 ---------------- (Registrant's telephone number, including area code) -------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ] Registrant had outstanding 24,679,662 shares of Common Stock, par value $.01 per share, as of June 30, 2004. GETTY REALTY CORP. INDEX
Page Number ----------- Part I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003 1 Consolidated Statements of Operations for the three and six months ended June 30, 2004 and 2003 2 Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003 3 Notes to Consolidated Financial Statements 4 - 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 - 18 Item 3. Quantitative and Qualitative Disclosures about Market Risk 19 Item 4. Controls and Procedures 19 Part II. OTHER INFORMATION Item 1. Legal Proceedings 20 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 20 Item 4. Submission of Matters to a Vote of Security Holders 20 Item 6. Exhibits and Reports on Form 8-K 21 Signatures 22
Part I. FINANCIAL INFORMATION Item 1. Financial Statements GETTY REALTY CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data) (unaudited)
June 30, December 31, 2004 2003 ----------- ------------ Assets: Real Estate: Land $ 144,357 $ 142,724 Buildings and improvements 176,312 175,498 ----------- ---------- 320,669 318,222 Less -- accumulated depreciation (103,200) (100,488) ----------- ---------- Real estate, net 217,469 217,734 Cash and equivalents 17,333 19,905 Deferred rent receivable 22,884 20,653 Recoveries from state underground storage tank funds, net 6,205 7,454 Mortgages and accounts receivable, net 4,039 5,565 Prepaid expenses and other assets 590 692 ----------- ---------- Total assets $ 268,520 $ 272,003 =========== ========== Liabilities and Shareholders' Equity: Environmental remediation costs $ 22,588 $ 23,551 Dividends payable 10,489 10,483 Accounts payable and accrued expenses 8,946 9,100 Mortgages payable 864 844 ----------- ---------- Total liabilities 42,887 43,978 ----------- ---------- Commitments and contingencies (Notes 6 and 7) Shareholders' equity: Common stock, par value $.01 per share; authorized 50,000,000 shares; issued 24,679,662 at June 30, 2004 and 24,664,384 at December 31, 2003 247 247 Paid-in capital 257,268 257,206 Dividends paid in excess of earnings (31,882) (29,428) ----------- ---------- Total shareholders' equity 225,633 228,025 ----------- ---------- Total liabilities and shareholders' equity $ 268,520 $ 272,003 =========== ==========
The accompanying notes are an integral part of these financial statements. 1 GETTY REALTY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (unaudited)
Three months ended June 30, Six months ended June 30, -------------------------- ------------------------- 2004 2003 2004 2003 ------- ------- ------- -------- Revenues: Revenues from rental properties $16,443 $16,672 $32,954 $ 33,349 Other income, net 296 409 429 763 ------- ------- ------- -------- Total revenues 16,739 17,081 33,383 34,112 ------- ------- ------- -------- Expenses: Rental property expenses 2,487 2,672 5,008 5,584 Environmental expenses, net 1,783 2,166 3,515 3,713 General and administrative expenses 1,255 607 2,632 1,900 Depreciation expense 1,828 2,172 3,664 4,311 Interest expense 19 33 40 66 ------- ------- ------- -------- Total expenses 7,372 7,650 14,859 15,574 ------- ------- ------- -------- Net earnings before cumulative effect of accounting change 9,367 9,431 18,524 18,538 Cumulative effect of accounting change - - - (550) ------- ------- ------- -------- Net earnings 9,367 9,431 18,524 17,988 Less preferred stock dividends - 1,253 - 2,525 ------- ------- ------- -------- Net earnings applicable to common shareholders $ 9,367 $ 8,178 $18,524 $ 15,463 ======= ======= ======= ======== Net earnings per common share: Basic $ .38 $ .38 $ .75 $ .72 Diluted $ .38 $ .38 $ .75 $ .72 Weighted average common shares outstanding: Basic 24,680 21,498 24,675 21,470 Diluted 24,692 21,508 24,690 21,482 Dividends declared per share: Common $.42500 $.41250 $.85000 $ .82500 Preferred - $.44375 - $ .88750
The accompanying notes are an integral part of these financial statements. 2 GETTY REALTY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Six months ended June 30, ---------------------------- 2004 2003 --------- -------- Cash flows from operating activities: Net earnings $ 18,524 $ 17,988 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation expense 3,664 4,311 Deferred rental revenue (2,231) (2,816) Gain on dispositions of real estate (146) (294) Accretion expense 462 496 Cumulative effect of accounting change - 550 Changes in assets and liabilities: Recoveries from state underground storage tank funds, net 1,483 2,746 Mortgages and accounts receivable, net 679 776 Prepaid expenses and other assets 102 350 Environmental remediation costs (1,659) (2,823) Accounts payable and accrued expenses (154) (507) --------- -------- Net cash provided by operating activities 20,724 20,777 --------- -------- Cash flows from investing activities: Collections of mortgages receivable, net 847 547 Property acquisitions and capital expenditures (3,643) (13,631) Proceeds from dispositions of real estate 390 715 --------- -------- Net cash used in investing activities (2,406) (12,369) --------- -------- Cash flows from financing activities: Cash dividends paid (20,972) (20,496) Proceeds from (repayment of) mortgages payable, net 20 (37) Proceeds from issuance of common stock 62 285 --------- -------- Net cash used in financing activities (20,890) (20,248) --------- -------- Net decrease in cash and equivalents (2,572) (11,840) Cash and equivalents at beginning of period 19,905 33,726 --------- -------- Cash and equivalents at end of period $ 17,333 $ 21,886 ========= ======== Supplemental disclosures of cash flow information Cash paid (refunded) during the period for: Interest $ 40 $ 66 Income taxes, net 188 671 Recoveries from state underground storage tank funds (987) (908) Environmental remediation costs 2,710 3,020
The accompanying notes are an integral part of these financial statements. 3 GETTY REALTY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. General: The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"). The consolidated financial statements include the accounts of Getty Realty Corp. and its wholly-owned subsidiaries (the "Company"). The Company is a real estate investment trust ("REIT") specializing in the ownership and leasing of retail motor fuel and convenience store properties as well as petroleum distribution terminals. The Company manages and evaluates its operations as a single segment. All significant intercompany accounts and transactions have been eliminated. The financial statements have been prepared in conformity with GAAP, which requires management to make its best estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the period reported. While all available information has been considered, actual results could differ from those estimates, judgments and assumptions. Estimates, judgments and assumptions underlying the accompanying consolidated financial statements include, but are not limited to, deferred rent receivable, recoveries from state underground storage tank funds, net, environmental remediation costs, depreciation, impairment of long-lived assets, litigation, accrued expenses and income taxes. The consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation. These statements should be read in conjunction with the consolidated financial statements and related notes, which appear in the Company's Annual Report on Form 10-K for the year ended December 31, 2003. 2. 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 period. Diluted earnings per common share also gives effect to the potential dilution from the exercise of stock options and issuance of common shares in settlement of restricted stock unit awards in the amount of 12,000 and 15,000 shares for the three and six months ended June 30, 2004 and 10,000 and 12,000 shares for the three and six months ended June 30, 2003, respectively. For the three and six months ended June 30, 2003, conversion of the Series A Participating Convertible Redeemable Preferred stock into common stock utilizing the two class method would have been antidilutive and therefore conversion was not assumed for purposes of computing either basic or diluted earnings per common share. There were no preferred shares outstanding during the three and six months ended June 30, 2004 (see note 5). 4 3. Stock-Based Compensation: In December 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Standard No. ("SFAS") 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure -- an amendment of SFAS 123." SFAS 148 provides alternative transition methods for a voluntary change to the fair value basis of accounting for stock-based employee compensation. SFAS 148 requires disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation, a description of the transition method utilized and the effect of the method used on reported results. The Company adopted SFAS 148 effective December 31, 2002. The Company voluntarily changed to the fair value basis of accounting for stock-based employee compensation for awards granted subsequent to January 1, 2003. On June 1, 2004, the Company granted 10,800 restricted stock units under its 2004 Omnibus Incentive Compensation Plan (the "2004 Plan") following shareholder approval of the 2004 Plan at the Annual Meeting of Shareholders on May 20, 2004 (see note 8). There were no stock options granted under the Stock Option Plan subsequent to January 1, 2003. The Company will continue to account for options granted under its stock option plan prior to January 1, 2003 using the intrinsic value method. Had compensation cost for the Company's stock option plan been accounted for using the fair value method for all grants, the Company's total stock-based employee compensation expense using the fair value method, pro-forma net earnings and pro-forma net earnings per share on a basic and diluted basis would have been as follows (in thousands, except per share amounts):
Three months ended Six months ended June 30, June 30, ---------------------- ---------------------- 2004 2003 2004 2003 ------ ------ ------- ------- Net earnings, as reported $9,367 $9,431 $18,524 $17,988 Add: Stock-based employee compensation expense included in reported net earnings 4 - 4 - Deduct: Total stock-based employee compensation expense using the fair value method 27 33 50 66 ------ ------ ------- ------- Pro-forma net earnings $9,344 $9,398 $18,478 $17,922 ====== ====== ======= ======= Net earnings per common share: As reported $ .38 $ .38 $ .75 $ .72 Pro-forma $ .38 $ .38 $ .75 $ .72
4. Cumulative Effect of Accounting Change: In June 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement Obligations." SFAS 143 requires that obligations associated with the retirement of tangible long-lived assets be recognized at their fair value in the period when incurred if the asset retirement obligation 5 results from the normal operation of those assets and a reasonable estimate of fair value can be made. Due to the adoption of SFAS 143 effective January 1, 2003, accrued environmental remediation costs and recoveries from state underground storage tank funds were adjusted to their estimated fair value resulting in a one-time cumulative effect of change in accounting charge of $550,000 in the six months ended June 30, 2003. Environmental liabilities and related assets are currently measured based on their expected future cash flows which have been adjusted for inflation and discounted to present value. Prior to the adoption of SFAS 143, generally accepted accounting principles required that if the best estimate of cost for a component of the liability could only be identified as a range, and no amount within the range was a better estimate than any other amount, the minimum of the range was accrued for that cost component. Historically, such accruals were not adjusted for inflation or discounted to present value. 5. Shareholders' Equity: A summary of the changes in shareholders' equity for the six months ended June 30, 2004 is as follows (in thousands):
Dividends Common Stock Paid In ----------------- Paid-in Excess Of Shares Amount Capital Earnings Total ------ ------ -------- -------- -------- Balance, December 31, 2003 24,664 $247 $257,206 $(29,428) $228,025 Net earnings 18,524 18,524 Common dividends (20,978) (20,978) Restricted stock unit expense 4 4 Common stock issued 16 58 58 ------ ---- -------- -------- -------- Balance, June 30, 2004 24,680 $247 $257,268 $(31,882) $225,633 ====== ==== ======== ========= ========
In August 2003, the Company notified holders of its Series A Participating Convertible Redeemable Preferred Stock that the preferred stock would be redeemed on September 24, 2003 for $25.00 per share plus a mandatory redemption dividend of $0.27118 per share. Prior to the redemption date, shareholders with 98% of the preferred stock exercised their right to convert 2,816,919 shares of preferred stock into 3,186,355 shares of common stock at the conversion rate of 1.1312 shares of common stock for each share of preferred stock so converted, and received cash in lieu of fractional shares of common stock. The remaining 48,849 shares of the outstanding preferred stock were redeemed for an aggregate amount, including accrued dividends through the call date, of approximately $1,234,000. 6. Commitments and Contingencies: In order to qualify as a REIT, among other items, the Company paid a special one-time "earnings and profits" (as defined in the Internal Revenue Code) cash distribution to shareholders aggregating $64.2 million in August 2001. Determination of accumulated earnings and profits for federal income tax purposes is extremely complex. Should the Internal Revenue Service successfully assert that the Company's accumulated earnings and profits were greater than the amount distributed, the Company may fail to qualify as a REIT; however, the Company may 6 avoid losing its REIT status by paying a deficiency dividend to eliminate any remaining accumulated earnings and profits. The Company may have to borrow money or sell assets to pay such a deficiency dividend. 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. Temporary cash investments are held in an institutional money market fund and federal agency discount notes. The Company leases substantially all of its properties on a long-term net basis to Getty Petroleum Marketing Inc. ("Marketing") under a Master Lease. Marketing operated substantially all of the Company's petroleum marketing businesses when it was spun-off to the Company's shareholders as a separate publicly held company in March 1997. In December 2000, Marketing was acquired by a subsidiary of OAO Lukoil, one of Russia's largest oil companies. 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 petroleum marketing margins and rental income from its dealers. The petroleum marketing industry has been and continues to be volatile and highly competitive. Marketing has made all required monthly rental payments under the Master Lease when due. The Master Lease is a "triple-net" lease, with Marketing directly responsible for the cost of all taxes, maintenance, repair, insurance, environmental remediation and other operating expenses. The Company has agreed to reimburse Marketing for one-half of certain capital expenditures for work required to comply with local zoning requirements up to a maximum amount designated for each property and an aggregate maximum reimbursement of $875,000, of which $147,000 was reimbursed to Marketing and capitalized in the six months ended June 30, 2004. The Company expects to reimburse Marketing and capitalize the balance of these costs during 2004 and 2005. The Company has also agreed to provide limited environmental indemnification, capped at $4.25 million and expiring in 2010, to Marketing for certain pre-existing conditions at the six terminals owned by the Company. Under the indemnification agreement, Marketing will pay the first $1.5 million of costs and expenses incurred in connection with remediating any such pre-existing conditions, Marketing and the Company will share equally the next $8.5 million of those costs and expenses and Marketing will pay all additional costs and expenses over $10.0 million. The Company has not accrued a liability in connection with this indemnification agreement since it is uncertain that any significant amounts will be required to be paid under the agreement. 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 the petroleum marketing business. These matters are not expected to have a material adverse effect on the Company's financial condition or results of operations. In September 2003, the Company was notified by the State of New Jersey Department of Environmental Protection that the Company is one of approximately 60 potentially responsible 7 parties for natural resource damages resulting from discharges of hazardous substances into the Lower Passaic River. The definitive list of potentially responsible parties and their actual responsibility for the alleged damages, the aggregate cost to remediate the Lower Passaic River, the amount of natural resource damages and the method of allocating such amounts among the potentially responsible parties have not been determined. Additionally, the Company believes that ChevronTexaco is contractually obligated to indemnify the Company for most of the conditions at the property identified by the New Jersey Department of Environmental Protection. Accordingly, the ultimate legal and financial liability of the Company, if any, cannot be estimated with any certainty at this time. From October 2003 through April 2004, the Company was notified that it had been made party to 36 cases in Connecticut, Florida, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Vermont, Virginia and West Virginia brought by local water providers or governmental agencies. These cases allege various theories of liability due to contamination of groundwater with MTBE as the basis for claims seeking compensatory and punitive damages. Each case names as defendants approximately 50 petroleum refiners, manufacturers, distributors and retailers of MTBE, or gasoline containing MTBE. The accuracy of the allegations as they relate to the Company, its defenses to such claims, the aggregate amount of damages, the definitive list of defendants and the method of allocating such amounts among the defendants have not been determined. Accordingly, the ultimate legal and financial liability of the Company, if any, cannot be estimated with any certainty at this time. Prior to the spin-off of the Marketing business, the Company was self-insured for workers' compensation, general liability and vehicle liability up to predetermined amounts above which third-party insurance applies. As of June 30, 2004 and December 31, 2003, the Company's consolidated balance sheets included, in accounts payable and accrued expenses, $819,000 and $833,000, respectively, relating to insurance obligations that may be deemed to have arisen prior to the spin-off. Since the spin-off, the Company has maintained insurance coverage subject to certain deductibles. 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. In recent years, environmental expenses were principally attributable to remediation, monitoring, and governmental agency reporting incurred in connection with contaminated properties. In prior periods a larger portion of the expenses also included soil disposal and the replacement or upgrading of USTs to meet federal, state and local environmental standards. For the three and six months ended June 30, 2004, net environmental expenses included in the Company's consolidated statements of operations were $1,783,000 and $3,515,000, respectively, and $2,166,000 and $3,713,000, respectively, for the comparable prior year periods, which amounts were net of estimated recoveries from state UST remediation funds. Under the Master Lease with Marketing, and in accordance with leases with other tenants, the Company agreed to bring the leased properties with known environmental contamination to within applicable standards and to regulatory or contractual closure ("Closure") in an efficient and economical manner. Generally, upon achieving Closure at each individual property, the Company's environmental liability under the lease for that property will be satisfied and future 8 remediation obligations will be the responsibility of the tenant. The Company has agreed to pay all costs relating to, and to indemnify Marketing for, environmental liabilities and obligations scheduled in the Master Lease. The Company will continue to seek reimbursement from state UST remediation funds related to these environmental expenditures where available. The estimated future costs for known environmental remediation requirements are accrued when it is probable that a liability has been incurred and a reasonable estimate of fair value can be made. The environmental remediation liability is estimated based on the level and impact of contamination at each property. The accrued liability is the aggregate of the best estimate of the fair value of cost for each component of the liability. Recoveries of environmental costs from state UST remediation funds, with respect to both past and future environmental spending, are accrued at fair value as income, net of allowance for collection risk, based on estimated recovery rates developed from prior experience with the funds when such recoveries are considered probable. Prior to the adoption of SFAS 143, effective January 1, 2003, if the best estimate of cost for a component of the liability could only be identified as a range, and no amount within the range was a better estimate than any other amount, the minimum of the range had been accrued for that cost component rather than the estimated fair value currently required under SFAS 143. 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 the Company's liability for probable and reasonably estimable environmental remediation costs, on a property by property basis, the Company considers among other things, enacted laws and regulations, assessments of contamination and surrounding geology, quality of information available, currently available technologies for treatment, alternative methods of remediation and prior experience. These accrual estimates are subject to significant change, and are adjusted as the remediation treatment progresses, as circumstances change and as these contingencies become more clearly defined and reasonably estimable. As of June 30, 2004, the Company has remediation action plans in place for 329 (91%) of the 361 properties for which it retained environmental responsibility and the remaining 32 properties (9%) remain in the assessment phase. As of June 30, 2004, December 31, 2003 and January 1, 2003, the Company had accrued $22,588,000, $23,551,000, and $29,426,000, respectively, as management's best estimate of the fair value of reasonably estimable environmental remediation costs. As of June 30, 2004, December 31, 2003 and January 1, 2003, the Company had also recorded $6,205,000, $7,454,000 and $14,348,000, respectively, as management's best estimate for recoveries from state UST remediation funds, net of allowance, related to environmental obligations and liabilities. The net environmental liabilities of $16,097,000 and $15,078,000 as of December 31, 2003 and January 1, 2003, respectively, have been accreted for the change in present value due to the passage of time and, accordingly, $462,000 and $496,000, respectively, of accretion expense is included in environmental expenses for the six months ended June 30, 2004 and 2003. Environmental expenditures were $2,710,000 and recoveries from underground storage tank funds were $987,000 for the six months ended June 30, 2004. In view of the uncertainties associated with environmental expenditures, however, the Company believes it is possible that the fair value of future actual net expenditures could be 9 substantially higher than these estimates. Adjustments to accrued liabilities for environmental remediation costs will be reflected in the Company's financial statements as they become probable and a reasonable estimate of fair value can be made. Although future environmental expenses 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 long-term financial position. 8. Employee Benefit Plans The Getty Realty Corp. 2004 Omnibus Incentive Compensation Plan (the "2004 Plan") became effective upon its approval at the Annual Meeting of Shareholders held May 20, 2004. The 2004 Plan provides for the grant of restricted stock, restricted stock units, performance awards, dividend equivalents, stock payments and stock awards to all employees and members of the Board of Directors. The 2004 Plan authorizes the Company to grant an aggregate of 1,000,000 shares of common stock through 2014. The aggregate maximum number of shares of common stock that may be subject to awards granted under the 2004 Plan during any calendar year is 80,000. On June 1, 2004 the Company awarded 10,800 restricted stock units ("RSUs") and dividend equivalents to employees. On the settlement date the RSUs have a value equal to one share of common stock and may be settled, in the sole discretion of the Compensation Committee, in cash or by the issuance of such share. The RSUs do not provide voting or other shareholder rights unless and until the RSU is settled for a share of common stock at termination of employment. The RSUs vest starting one year from the date of grant, on a cumulative basis at the annual rate of twenty percent of the total number of RSUs covered by the award. The dividend equivalents represent the value of the dividend paid per common share paid multiplied by the number of RSUs vested as of the dividend payment date assuming that the RSUs vest starting three months from the date of grant, on a cumulative basis at the quarterly rate of five percent of the total number of RSUs covered by the award. The fair value of the RSUs granted on June 1, 2004 was estimated at $19.91 per unit on the date of grant. The fair value of the grant, aggregating approximately $215,000, will be recognized as compensation expense ratably over the five year vesting period of the RSUs. Dividend equivalents will be charged against retained earnings when common stock dividends are declared. 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General We are a real estate investment trust specializing in the ownership and leasing of retail motor fuel and convenience store properties as well as petroleum distribution terminals. We lease 951 of our 1,018 properties on a long-term net basis under a master lease (the "Master Lease") to Getty Petroleum Marketing Inc. ("Marketing") which was spun-off to our shareholders as a separate publicly held company in March 1997. In December 2000, Marketing was acquired by a subsidiary of OAO Lukoil ("Lukoil"), one of Russia's largest integrated oil companies. Our financial results are materially dependent upon the ability of Marketing to meet its obligations under the Master Lease. Marketing has made all required monthly rental payments under the Master Lease when due. We manage our business to enhance the value of our real estate portfolio and, as a REIT, place particular emphasis on minimizing risk and generating cash sufficient to make required distributions to shareholders of at least 90% of our taxable income each year. In addition to measurements defined by generally accepted accounting principles ("GAAP"), our management also focuses on funds from operations ("FFO") and adjusted funds from operations ("AFFO") to measure our performance. FFO is generally considered to be an appropriate supplemental non-GAAP measure of performance of REITs. FFO is defined by the National Association of Real Estate Investment Trusts as net earnings applicable to common shareholders before depreciation and amortization, gains or losses on sales of real estate, discontinued operations, extraordinary, items and cumulative effect of accounting change. In our case, however, net earnings and FFO include the significant impact of straight-line rent on our recognition of revenues from rental properties, which largely results from 2% annual rental increases scheduled under the Master Lease. In accordance with generally accepted accounting principles, the aggregate minimum rent due over the initial 15-year term of the Master Lease is recognized on a straight-line basis rather than when due. As a result, management pays particular attention to AFFO, a supplemental non-GAAP performance measure that we define as FFO less straight line rent. In management's view, AFFO provides a more accurate depiction of the impact of the scheduled rent increases under the Master Lease than FFO. Neither FFO nor AFFO represent cash generated from operating activities in accordance with generally accepted accounting principles and therefore should not be considered an alternative for net earnings or as a measure of liquidity. FFO and AFFO are reconciled to net earnings in the financial table on page 15. Our discussion and analysis of financial condition and results of operations should be read in conjunction with Management's Discussion and Analysis which appears in the Company's Annual Report on Form 10-K for the year ended December 31, 2003 and the accompanying consolidated financial statements and related notes which appears in this Form 10-Q. 11 Results of Operations -- Quarter ended June 30, 2004 compared with the quarter ended June 30, 2003 Revenues from rental properties for the three months ended June 30, 2004 and 2003 were $16.4 million and $16.7 million, respectively. Approximately $14.7 million of these rentals received in each of the three months ended June 30, 2004 and 2003 were from properties leased to Marketing under the Master Lease. Revenues from rental properties include $1.1 million and $1.4 million of deferred rental revenue recognized in the three months ended June 30, 2004 and 2003, respectively. Other income was $0.3 million for the three months ended June 30, 2004, a decrease of $0.1 million as compared to the three months ended June 30, 2003. The decrease was due to lower gains on dispositions of properties. As a result, total revenues declined by approximately $0.4 million in the three months ended June 30, 2004 as compared to the three months ended June 30, 2003. Rental property expenses, which are principally comprised of rent expense and real estate and other state and local taxes, were $2.5 million for the three months ended June 30, 2004, a decrease of $0.2 million from the three months ended June 30, 2003. The decrease was primarily due to a reduction in rent expense as a result of the exercise of lease purchase options, including the purchase of 41 properties in May 2003. Environmental expenses for the three months ended June 30, 2004 were $1.8 million, a decrease of $0.4 million from the three months ended June 30, 2003, due to a decrease in net change in estimated environmental costs partially offset by $0.1 million of higher litigation expenses incurred in the current period. General and administrative expenses for the three months ended June 30, 2004 were $1.3 million, an increase of $0.6 million as compared to the three months ended June 30, 2003. The increase was primarily caused by a $0.5 million credit recorded in the three months ended June 30, 2003 to reduce insurance loss reserves that were established under the Company's self-insurance program that was terminated in 1997. Depreciation expense for the three months ended June 30, 2004 was $1.8 million, a decrease of $0.3 million from the three months ended June 30, 2003, as a result of certain assets becoming fully depreciated and dispositions of properties. As a result, total expenses declined by approximately $0.3 million in the three months ended June 30, 2004 as compared to the three months ended June 30, 2003. Our net earnings of $9.4 million for the three months ended June 30, 2004 were comparable to the prior year period. FFO increased $0.9 million, or 8.5%, to $11.0 million for the three months ended June 30, 2004, principally due to the elimination of $1.3 million in quarterly preferred stock dividends as a result of the conversion of 98% of our outstanding convertible preferred stock into 3.2 million common shares and the redemption of the remaining preferred shares in September 2003. AFFO increased $1.2 million, or 13.2%, to $9.9 million in the three months ended June 30, 2004. AFFO increased more than FFO on both a dollar and percentage basis due to $0.3 million in lower deferred rental revenues (which are included in FFO, but 12 excluded from AFFO) recorded for the three months ended June 30, 2004 as compared to June 30, 2003. Diluted earnings per common share of $0.38 for the three months ended June 30, 2004 were comparable to the prior year period. Diluted FFO per common share for the three months ended June 30, 2004 decreased to $0.45 per share, as compared to $0.46 per share for the three months ended June 30, 2003, while diluted AFFO per common share decreased to $0.40 per share compared to $0.41 per share in the 2003 period. FFO and AFFO increased, but decreased on a per share basis when compared to the prior year period since the diluted per share amounts for 2004 reflect the actual September 2003 conversion and redemption of our preferred stock discussed above and the 2003 per share amounts reflect the assumed conversion of our outstanding preferred stock using the two class method. Accordingly, preferred stock dividends were added back to FFO and AFFO in calculating FFO and AFFO per share amounts for the three months ended June 30, 2003. The impact of the assumed conversion would have been anti-dilutive in calculating diluted earnings per common share for the three months ended June 30, 2003, and therefore was not assumed. Results of Operations -- Six months ended June 30, 2004 compared with the six months ended June 30, 2003 Revenues from rental properties for the six months ended June 30, 2004 and 2003 were $33.0 million and $33.3 million, respectively. Approximately $29.5 million and $29.4 million of these rentals received in the six months ended June 30, 2004 and 2003, respectively, were from properties leased to Marketing under the Master Lease. Revenues from rental properties include $2.2 million and $2.8 million of deferred rental revenue recognized in the six months ended June 30, 2004 and 2003, respectively. Other income was $0.4 million for the six months ended June 30, 2004, a decrease of $0.3 million compared to the six months ended June 30, 2003. The decrease was due to lower gains on dispositions of properties and lower interest income. As a result, total revenues declined by approximately $0.7 million in the six months ended June 30, 2004 as compared to the six months ended June 30, 2003. Rental property expenses, which are principally comprised of rent expense and real estate and other state and local taxes, were $5.0 million for the six months ended June 30, 2004, a decrease of $0.6 million from the six months ended June 30, 2003. The decrease was primarily due to a reduction in rent expense as a result of the exercise of lease purchase options, including the purchase of 41 properties in May 2003. Environmental expenses for the six months ended June 30, 2004 were $3.5 million, a decrease of $0.2 million from the six months ended June 30, 2003. The decrease was primarily due to a decrease in the net change in estimated environmental costs of $0.6 million partially offset by $0.4 million of higher litigation expenses incurred in the current period General and administrative expenses for the six months ended June 30, 2004 were $2.6 million, an increase of $0.7 million as compared to the six months ended June 30, 2003. The 13 increase was primarily caused by a $0.5 million credit recorded in the six months ended June 30, 2003 to reduce insurance loss reserves that were established under the Company's self-insurance program that was terminated in 1997. Depreciation expense for the six months ended June 30, 2004 was $3.7 million, a decrease of $0.6 million from the six months ended June 30, 2003, as a result of certain assets becoming fully depreciated and dispositions of properties. As a result, total expenses declined by approximately $0.7 million in the six months ended June 30, 2004 as compared to the six months ended June 30, 2003. The cumulative effect of accounting change recorded in the six months ended June 30, 2003 is due to the adoption of Statement of Financial Accounting Standard No. ("SFAS") 143, effective January 1, 2003. Accrued environmental remediation costs and the related recoveries from state underground storage tank funds were adjusted to their estimated fair value resulting in a one-time cumulative effect of change in accounting charge of $0.6 million (see "Environmental Matters"). Our net earnings of $18.5 million for the six months ended June 30, 2004 increased $0.5 million, or 3.0%, over the comparable period in 2003 due to the items discussed above and the impact of the $0.6 million one-time accounting charge recorded in the prior period. FFO increased $2.0 million, or 10.0%, to $22.0 million for the six months ended June 30, 2004, principally due to the elimination of $2.5 million in preferred stock dividends as a result of the conversion of 98% of our outstanding convertible preferred stock into 3.2 million common shares and the redemption of the remaining preferred shares in September 2003. AFFO increased $2.6 million, or 15.1%, to $19.8 million in the six months ended June 30, 2004. AFFO increased more than FFO on both a dollar and percentage basis due to $0.6 million in lower deferred rental revenues (which are included in FFO, but excluded from AFFO) recorded for the six months ended June 30, 2004 as compared to June 30, 2003. Diluted earnings per common share for the six months ended June 30, 2004 increased 4.2% to $0.75 per share, as compared to $0.72 per share for the six months ended June 30, 2003. Diluted FFO per common share for the six months ended June 30, 2004 decreased 2.2% to $0.89 per share, as compared to $0.91 per share for the six months ended June 30, 2003, while diluted AFFO per common share of $0.80 per share was comparable to the prior year period. FFO and AFFO increased, but decreased or was unchanged, respectively, on a per share basis when compared to the prior year period since the diluted per share amounts for 2004 reflect the actual September 2003 conversion and redemption of our preferred shares discussed above and the per share amounts for 2003 reflect the assumed conversion of our outstanding preferred stock using the two class method. Accordingly, preferred stock dividends were added back to FFO and AFFO in calculating FFO and AFFO per share amounts for the six months ended June 30, 2003. The impact of the assumed conversion would have been anti-dilutive in calculating diluted earnings per common share for the six months ended June 30, 2003, and therefore was not assumed. 14 A reconciliation of net earnings to FFO and AFFO for the three and six months ended June 30, 2004 and 2003 is as follows (in thousands, except per share amounts):
Three months ended June 30, Six months ended June 30, --------------------------- ------------------------- 2004 2003 2004 2003 -------- ------- ------- -------- Net earnings $ 9,367 $ 9,431 $18,524 $ 17,988 Preferred stock dividends - (1,253) - (2,525) -------- ------- ------- -------- Net earnings applicable to common shareholders 9,367 8,178 18,524 15,463 Depreciation expense 1,828 2,172 3,664 4,311 Gains on sales of real estate (146) (168) (146) (294) Cumulative effect of accounting change - - - 550 -------- ------- ------- -------- Funds from operations 11,049 10,182 22,042 20,030 Straight-line rent (1,115) (1,408) (2,231) (2,816) -------- ------- ------- -------- Adjusted funds from operations $ 9,934 $ 8,774 $19,811 $ 17,214 ======== ======= ======= ======== Diluted per common share amounts (a): Earnings per share $ .38 $ .38 $ .75 $ .72 FFO per share $ .45 $ .46 $ .89 $ .91 AFFO per share $ .40 $ .41 $ .80 $ .80 Diluted weighted average number of common share equivalents outstanding: Used to calculate net earnings per share 24,692 21,508 24,690 21,482 Assumed conversion of preferred shares - 3,194 - 3,218 -------- ------- ------- -------- Used to calculate FFO and AFFO per share 24,692 24,702 24,690 24,700 ======== ======= ======= ========
(a) Diluted earnings, FFO and AFFO per common share are computed by dividing net earnings applicable to common shareholders, FFO and AFFO, respectively, by the diluted weighted average number of common share equivalents outstanding during the period. Diluted FFO and AFFO per share give effect, for the three and six months ended June 30, 2003, to the dilution from the conversion of Series A Participating Convertible Redeemable Preferred Stock into common stock utilizing the two class method. Accordingly, for the three and six months ended June 30, 2003, preferred stock dividends are added back to FFO and AFFO, which sums are then divided by the diluted weighted average number of common share equivalents outstanding for the period. There were no preferred shares outstanding during the three and six months ended June 30, 2004. 15 Liquidity and Capital Resources Our principal sources of liquidity are available cash and equivalents, the cash flows from our business and a short-term uncommitted line of credit with a bank. Management believes that dividend payments and cash requirements for our business, including environmental remediation expenditures, capital expenditures and debt service, can be met with cash flows from operations, available cash and equivalents and the credit line. As of June 30, 2004, we had a $25.0 million line of credit, of which $0.2 million was utilized for outstanding letters of credit. Borrowings under the line of credit are unsecured and bear interest at the prime rate or, at our option, LIBOR plus 1.25%. There were no borrowings under the line of credit during the six months ended June 30, 2004 or 2003. The line of credit is subject to annual renewal in June 2005 at the discretion of the bank. We elected to be taxed as a REIT under the federal income tax laws with the year beginning January 1, 2001. As a REIT, we are required, among other things, to distribute at least 90% of our taxable income to shareholders each year. We presently intend to pay common stock dividends of $0.4250 per quarter ($1.70 per share on an annual basis), and commenced doing so with the quarterly dividend declared in the quarter ended September 30, 2003. Payment of dividends is subject to market conditions, our financial condition and other factors, and therefore cannot be assured. Dividends paid to our common shareholders were $21.0 million for the six months ended June 30, 2004 compared to an aggregate amount of $20.5 million paid to our common and preferred shareholders during the prior year period. In August 2003, we called for redemption our outstanding preferred stock. Prior to the September 24, 2003 redemption date, shareholders with 98% of the preferred stock exercised their right to convert their shares of preferred stock into approximately 3.2 million shares of common stock. The remaining shares of outstanding preferred stock were redeemed for approximately $1.2 million. Property acquisitions and capital expenditures for the six months ended June 2004 include $3.5 million for the acquisition of eight properties as well as reimbursements of $147,000 to Marketing for one-half of certain capital expenditures for work required to comply with local zoning requirements. Critical Accounting Policies Our accompanying consolidated financial statements include the accounts of Getty Realty Corp. and our wholly-owned subsidiaries. The preparation of financial statements in accordance with GAAP requires management to make estimates, judgments and assumptions that affect amounts reported in its financial statements. We have made our best estimates, judgments and assumptions relating to certain amounts that are included in our financial statements, giving due consideration to the accounting policies selected and materiality. We do not believe that there is a great likelihood that materially different amounts would be reported related to the application of the accounting policies described below. Application of these accounting policies, however, 16 involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates, judgments and assumptions. Our accounting policies are described in note 1 to the consolidated financial statements which appear in our Annual Report on Form 10-K for the year ended December 31, 2003. Estimates, judgments and assumptions underlying the accompanying consolidated financial statements include, but are not limited to, deferred rent receivable, recoveries from state underground storage tank funds, environmental remediation costs, depreciation, impairment of long-lived assets, litigation, accrued expenses and income taxes. We believe that the more critical of our accounting policies relate to revenue recognition, impairment of long-lived assets, income taxes, environmental costs and recoveries from state underground storage tank funds and litigation, each of which is discussed in Management's Discussion and Analysis in our Annual Report on Form 10-K for the year ended December 31, 2003. Environmental Matters We are subject to numerous existing federal, state and local laws and regulations, including matters relating to the protection of the environment. Under the Master Lease with Marketing, and in accordance with leases with other tenants, we agreed to bring the leased properties with known environmental contamination to within applicable standards and to regulatory or contractual closure ("Closure") in an efficient and economical manner. Generally, upon achieving Closure at an individual property, our environmental liability under the lease for that property will be satisfied and future remediation obligations will be the responsibility of our tenant. As of June 30, 2004, we have remediation action plans in place for 329 (91%) of the 361 properties for which we retained environmental responsibility and the remaining 32 properties (9%) remain in the assessment phase. As of June 30, 2004, December 31, 2003 and January 1, 2003, we had accrued $22.6 million, $23.6 million, and $29.4 million, respectively, as management's best estimate of the fair value of reasonably estimable environmental remediation costs. As of June 30, 2004, December 31, 2003 and January 1, 2003, we had also recorded $6.2 million, $7.5 million and $14.3 million, respectively, as management's best estimate for recoveries from state UST remediation funds, net of allowance, related to environmental obligations and liabilities. The net environmental liabilities of $16.1 million and $15.1 million as of December 31, 2003 and January 1, 2003, respectively, have been accreted for the change in present value due to the passage of time and, accordingly, $0.5 million of accretion expense is included in environmental expenses for each of the six month periods ended June 30, 2004 and 2003. Environmental expenditures were $2.7 million and $3.0 million, respectively, and recoveries from underground storage tank funds were $1.0 million for each of the six month periods ended June 30, 2004 and 2003. During 2004, we estimate that our net environmental remediation spending will be approximately $6.0 million. Our business plan for 2004 reflects a net change in estimated remediation costs and accretion expense of approximately $5.0 million. In view of the uncertainties associated with environmental expenditures, however, we believe it is possible that the fair value of future actual net expenditures could be substantially higher than these estimates. Adjustments to accrued liabilities for environmental remediation costs will be reflected in our financial statements as they become probable and a reasonable estimate of fair 17 value can be made. Net environmental expenses included in our consolidated statements of operations for the three and six months ended June 30, 2004, amounted to $1.8 million and $3.5 million, respectively, as compared to $2.2 million and $3.7 million, respectively, for the comparable prior year periods, which amounts were net of probable recoveries from state UST remediation funds. Although future 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 long-term financial position. Our discussion of environmental matters should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations which appear in the Company's Annual Report on Form 10-K for the year ended December 31, 2003 and the accompanying consolidated financial statements and related notes which appear in this Form 10-Q (including notes 4, 6 and 7). Forward Looking Statements Certain statements in this Quarterly 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", "projects", "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 our actual results, performance and achievements of to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. These factors are more fully detailed in our Annual Report on Form 10-K for the year ended December 31, 2003 and 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 properties and tenants; risk of tenant non-renewal; the effects of regulation; potential environmental litigation exposure; our expectations as to the cost of completing environmental remediation; and the impact of our electing to be taxed as a REIT, including subsequent failure to qualify as a REIT and future dependence on external sources of capital. 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. 18 Item 3. Quantitative and Qualitative Disclosures about Market Risk Information in response to this item is incorporated by reference from Note 6 of the Notes to Consolidated Financial Statements in this Form 10-Q. Item 4. Controls and Procedures The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As required by Rule 13a-15(b), the Company carries out regular quarterly evaluations, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2004. There has been no change in the Company's internal controls over financial reporting during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting. 19 PART II. OTHER INFORMATION Item 1. Legal Proceedings In 1995, Pennsauken Solid Waste Management Authority, its successor-in-interest, the Pollution Control Financing Authority of Camden County and the Township of Pennsauken, New Jersey commenced an action for unspecified amounts against certain defendants for all costs and damages claimed to have been incurred for the remediation of the Pennsauken Sanitary Landfill. The claims against us were settled in November 2003, in exchange for a payment of $5,000 made in June 2004. In 1997, the State of Rhode Island commenced an action against us to recover damages resulting from an accident which occurred in March 1994, regarding an oil tanker truck which tipped over and exploded in Providence, RI. The State alleged damages to the highway area as well as the surrounding area and nearby overpass. The case was dismissed in June 2004. In July 1999, the New Jersey Department of Environmental Protection ("NJDEP") issued a Directive and Notice to Insurers to several parties, including the Company regarding environmental contamination at a retail motor fuel property located in New Jersey. We signed an Administrative Consent Order and settlement agreement with our insurers in December 2003 that calls for the insurers paying the State, under a reservation of rights, for past costs and taking over responsibility for the completion of the remediation. The settlement agreement called for us to pay $70,000 to the State and $15,000 toward the settlement that the insurers reached with the State regarding natural resource damages. These payments were made in May 2004. In August 2000, the State of New York commenced an action against us in the New York State Supreme Court in Albany County, seeking reimbursement of costs claimed to have been incurred to clean up a gasoline release that occurred in 1987. The matter was settled in June 2004, in exchange for a payment of $580,000, made in July 2004. Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities None. Item 4. Submission of Matters to a Vote of Security Holders Reference is made to our May 21, 2004 filing on Form 8-K, described in item 6(b) below. 20 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits:
Designation of Exhibit in this Quarterly Report on Form 10-Q Description of Exhibit ------------ ---------------------- 10.1 2004 Omnibus Incentive Compensation Plan (filed as Appendix B to Company's 2004 Definitive Proxy Statement on Schedule 14A, filed on April 9, 2004 (File No. 001-13777) and incorporated herein by reference). 31 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002 32 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (*)
(*) These certifications are being furnished solely to accompany the Report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing. (b) Reports filed on Form 8-K: On April 22, 2004, the Company reported that it has implemented a Dividend Reinvestment/Stock Purchase Plan for Shareholders, which was filed under Item 5 "Other Matters" on Form 8-K. On April 27, 2004, the Company announced its earnings for the three months ended March 31, 2004, which was furnished under Item 12 "Results of Operations and Financial Condition" on Form 8-K. On May 21, 2004, the Company reported the declaration of a quarterly stock dividend, the results of the election of directors and officers and the approval of the Company's Omnibus Incentive Compensation Plan, which were filed under Item 5 "Other Matters" on Form 8-K. 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GETTY REALTY CORP. ------------------ (Registrant) Dated: August 3, 2004 BY: /s/ Thomas J. Stirnweis ----------------------- (Signature) THOMAS J. STIRNWEIS Vice President, Treasurer and Chief Financial Officer Dated: August 3, 2004 BY: /s/ Leo Liebowitz ----------------- (Signature) LEO LIEBOWITZ Chairman and Chief Executive Officer 22