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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 31, 2003
OR
/ / Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transtition period from ____ to ____
COMMISION FILE NUMBER: 1-10104
------------------------------
UNITED CAPITAL CORP.
--------------------
(Exact name of registrant as specified in its charter)
DELAWARE 04-2294493
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.
9 PARK PLACE, GREAT NECK, NY 11021
---------------------------- -----
(Address of principal executive offices) (Zip Code)
516-466-6464
------------
(Registrant's telephone number, including area code)
================================================================================
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
COMMON STOCK (PAR VALUE $.10 AMERICAN STOCK EXCHANGE
PER SHARE)
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 and 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. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
Indicate by check mark whether the registrant is an accelerated filer. [ ] Yes
[X] No
The aggregate market value of the shares of the voting stock held by
nonaffiliates of the registrant as of June 30, 2003 was approximately
$40,762,000.
The number of shares of the registrant's $.10 par value common stock outstanding
as of February 27, 2004 was 9,092,142.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of Form 10-K will be incorporated by
reference to certain portions of a definitive proxy statement which is expected
to be filed by the registrant pursuant to Regulation 14A within 120 days after
the close of its fiscal year.
PART I
ITEM 1. BUSINESS
GENERAL
- -------
United Capital Corp. (the "Company"), incorporated in 1980 in the State of
Delaware, currently has two industry segments:
1. Real Estate Investment and Management.
2. Engineered Products.
The Company also invests excess available cash in marketable securities and
other financial instruments.
DESCRIPTION OF BUSINESS
- -----------------------
Real Estate Investment and Management
-------------------------------------
The Company is engaged in the business of investing in and managing real estate
properties and the making of high-yield, short-term loans secured by desirable
properties. Most real estate properties owned by the Company are leased under
net leases whereby the tenants are responsible for all expenses relating to the
leased premises, including taxes, utilities, insurance and maintenance. The
Company also owns properties that it manages which are operated by the City of
New York as day-care centers and offices and other properties leased as
department stores, hotels and shopping centers around the country. In addition,
the Company owns properties available for sale and lease with the assistance of
a consultant or realtor working in the locale of the premises.
The majority of properties are leased to single tenants. Exclusive of a South
Plainfield, New Jersey property, 93.5% of the total square footage of the
Company's properties was leased as of December 31, 2003.
Engineered Products
-------------------
The Company's engineered products are manufactured through Metex Mfg.
Corporation ("Metex") and AFP Transformers, LLC ("AFP Transformers"),
wholly-owned subsidiaries of the Company. The knitted wire products and
components manufactured by Metex must function in adverse environments and meet
rigid performance requirements. The principal areas in which these products have
application are as high temperature gaskets, seals, components for use in
airbags, shock and vibration isolators, noise reduction elements and air, liquid
and solid filtering devices.
Metex has been an original equipment manufacturer for the automobile industry
since 1974 and presently supplies many automobile manufacturers with exhaust
seals and components for use in exhaust emission control devices.
The Company also manufactures transformer products marketed under several brand
names including AFP Transformers, Field Transformer, ISOREG and EPOXYCAST(TM)
for a wide variety of industrial and research applications including machine
power transformers, rectifier and inverter transformers and transformers for
heating.
For the year ended December 31, 2003, sales by the engineered products segment
to its largest customer (in excess of 10% of the segment's net sales) accounted
for 20.9% of the segment's sales. For the year ended December 31, 2002, sales by
the engineered products segment to its two largest customers (each in excess of
10% of the segment's net sales) accounted for 20.0% and 10.1%, respectively, of
the segment's sales. For the year ended December 31, 2001, sales by the
engineered products segment to its largest customer (in excess of 10.0% of the
segment's net sales) accounted for 14.0% of the segment's sales.
Approximately 14.1%, 11.3% and 8.3% of 2003, 2002, and 2001 total sales
generated from the engineered products segment were from foreign customers.
Substantially all assets held by the Company's engineered products segment are
located within the United States or its leased warehouse in Tijuana, Mexico.
Summary Financial Information
-----------------------------
The following table sets forth the revenues, operating income and identifiable
assets of each business segment of the Company.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
(In Thousands) 2003 2002 2001
---------------------- ----------------------- --------------------
REAL ESTATE INVESTMENT AND MANAGEMENT
- -------------------------------------
Rental Revenues $ 23,268 $ 22,741 $ 24,601
Operating Income $ 10,797 $ 10,990 $ 11,442
Identifiable assets including corporate assets $ 177,944 $ 166,433 $ 165,536
ENGINEERED PRODUCTS
- -------------------
Net sales $ 34,019 $ 33,513 $ 33,792
Operating Income $ 3,342 $ 2,256 $ 1,912
Identifiable assets $ 11,770 $ 10,114 $ 12,429
Distribution
------------
The Company's manufactured products are distributed by a direct sales force and
through distributors to industrial consumers and original equipment
manufacturers.
Product Methods and Sources of Raw Materials
--------------------------------------------
The Company's products are manufactured at its own facilities and a leased
facility in Mexico. Raw materials are purchased from a wide range of suppliers.
Most raw materials purchased by the Company are available from several
suppliers. Certain imported raw materials used by the Company have been the
subject of international trade disputes and may become subject to new or
additional tariffs which could also affect the cost of domestic supplies.
Although management does not expect such matters to adversely effect the
Company's financial position, it is uncertain what effect, if any, such events
will have on the cost of such materials. The Company has not had and does not
expect to have any problems fulfilling its raw material requirements during
2004.
Patents and Trademarks
----------------------
The Company owns several patents, patent licenses and trademarks. While the
Company considers that in the aggregate its patents, patent licenses, and
trademarks used in the engineered products operations are significant to this
segment, it does not believe that any of them are of such importance that the
loss of one or more of them would materially affect its consolidated financial
condition or results of operations.
Employees
---------
At February 27, 2004, the Company employed approximately 220 persons,
approximately 150 of which were covered by a collective bargaining agreement
that expired in February 2004. A new collective bargaining agreement has been
agreed to which expires in February 2011. The Company believes that its
relationship with its employees is good.
Competition
-----------
The Company competes with at least 21 other companies in the sale of engineered
products. The Company emphasizes product performance and service in connection
with the sale of these products. The principal competition faced by the Company
results from the sales price of the products sold by its competitors.
The Company has established close relationships with a large number of major
national and regional real estate brokers and maintains a broad network of
industry contacts. There are numerous regional and local commercial developers,
2
real estate companies, financial institutions and other investors who compete
with the Company for the acquisition of properties and tenants.
Backlog
-------
The dollar value of unfilled orders of the Company's engineered products segment
was approximately $2.0 million at December 31, 2003 and $1.7 million at December
31, 2002. The increase in backlog is principally due to growth in Company's
automotive products offset by weakened demand for the Company's engineered
component and transformer product lines. It is anticipated that substantially
all such 2003 backlog will be filled in 2004. Substantially all of the 2002
backlog was filled in 2003. The order backlog referred to above does not include
any order backlog with respect to sales of knitted wire mesh components for
exhaust emission control devices, exhaust seals or airbag components because of
the manner in which customer orders are received.
Environmental Regulations
-------------------------
Federal, state and local requirements regulating the discharge of materials into
the environment or otherwise relating to the protection of the environment have
had and will continue to have a significant impact upon the operations of the
Company. It is the policy of the Company to manage, operate and maintain its
facilities in compliance, in all material respects, with applicable standards
for the prevention, control and abatement of environmental pollution to prevent
damage to the quality of air, land and resources.
The Company has undertaken the completion of environmental studies and/or
remedial action at Metex' two New Jersey facilities and has recorded a liability
for the estimated investigation, remediation and administrative costs associated
therewith.
The process of remediation has begun at one facility pursuant to a plan filed
with the New Jersey Department of Environmental Protection ("NJDEP").
Environmental experts engaged by the Company estimate that, under the most
probable remediation scenario, the remediation of this site is anticipated to
require initial expenditures of $860,000 including the cost of capital
equipment, and $86,000 in annual operating and maintenance costs over a 15 year
period.
Environmental studies at the second facility indicate that remediation may be
necessary. Based upon the facts presently available, environmental experts have
advised the Company that, under the most probable remediation scenario, the
estimated cost to remediate this site is anticipated to require $2.3 million in
initial costs, including capital equipment expenditures, and $258,000 in annual
operating and maintenance costs over a 10 year period. These estimated costs of
future expenses for remediation obligations are not discounted to their present
value.
The Company may revise such estimates in the future due to the uncertainty
regarding the nature, timing and extent of any remediation efforts that may be
required at this site, should an appropriate regulatory agency deem such efforts
to be necessary. The foregoing estimates may also be revised by the Company as
new or additional information in these matters become available or should the
NJDEP or other regulatory agencies require additional or alternative remediation
efforts in the future. Although it is not currently possible to estimate the
range or amount of the ultimate liability, the Company has approximately $11
million recorded in other long-term liabilities as of December 31, 2003 and 2002
to cover such matters. In the opinion of management, this amount should be
sufficient to address these matters and amounts needed in excess, if any, will
be paid gradually over a period of years. Accordingly, they should not have a
material adverse effect upon the business, liquidity or financial position of
the Company. However, adverse decisions or events, particularly as to the merits
of the Company's factual and legal basis could cause the Company to change its
estimate of liability with respect to such matters in the future.
3
AVAILABLE INFORMATION
- ---------------------
The Company's filings with the Securities and Exchange Commission ("SEC") may be
read and copied at the SEC's Public Reference Room at 450 Fifth Street, NW,
Washington DC 20549. Information on the operation of the Public Reference Room
may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC
maintains an Internet site that contains reports, proxy and information
statements, and other information regarding issuers that file electronically
with the SEC. The SEC's internet address is http://www.sec.gov.
A copy of the Company's annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, if any, and amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange
Act as soon as reasonably practicable after the Company electronically files
such material with, or furnishes it to, the SEC may be obtained without charge
by writing to Anthony J. Miceli, Chief Financial Officer and Secretary of the
Company at its executive offices, United Capital Building, 9 Park Place, Great
Neck, NY 11021.
ITEM 2. PROPERTIES
REAL PROPERTY HELD FOR RENTAL OR SALE
- -------------------------------------
As of February 27, 2004, the Company owned 171 properties strategically located
throughout the United States. The properties are primarily leased under
long-term net leases. Since December 31, 2003, the Company divested itself of a
commercial property located in the Midwest. The Company's classification and
gross carrying value of its properties, inclusive of those held for sale and
classified as discontinued operations in the Company's Consolidated Financial
Statements (see Note 2 of Notes to Consolidated Financial Statements) at
December 31, 2003 are as follows (Dollars in Thousands):
GROSS CARRYING NUMBER OF
DESCRIPTION VALUE PERCENTAGE PROPERTIES
- ------------------------------------------- -------------------------- -------------------- ---------------------
Shopping centers and retail outlets $ 60,990 54.0% 22
Commercial properties 36,682 32.4% 100
Day-care centers and offices 6,473 5.7% 10
Hotel properties 4,628 4.1% 2
Other 4,324 3.8% 38
-------------- ---------- -------
Total $ 113,097 100.0% 172
============== ========== =======
The following summarizes the Company's properties by geographic area at December
31, 2003.
GROSS NUMBER
CARRYING OF
(Dollars In Thousands) VALUE PROPERTIES
-------------- ------------
Northeast $ 40,319 100
Southeast 23,043 24
Midwest 23,475 29
Southwest 5,665 5
Pacific Coast 17,461 7
Pacific Northwest 861 4
Rocky Mountain 2,273 3
-------------- ------------
$ 113,097 172
============== ============
Shopping Centers and Retail Outlets
-----------------------------------
Shopping centers and retail outlets include 17 department stores and other
properties primarily leased under net leases. The tenants are responsible for
taxes, maintenance and all other expenses of the properties. The leases for
certain shopping centers and retail outlets provide for additional rents based
on sales volume and renewal options at higher rents. The department stores
include eight properties leased to Kmart Corporation ("Kmart") and two Macy's
4
stores, with a total of approximately 777,000 and 364,000 square feet,
respectively. The Kmart stores are primarily located in the Midwest region of
the United States. The Macy's stores are located in the Pacific Coast and
Southwest regions of the United States.
Included in shopping centers and retail outlets is one shopping center which is
currently held for sale and classified as discontinued operations in the
Consolidated Financial Statements.
Commercial Properties
---------------------
Commercial properties consist of properties leased as 53 restaurants, 12 Midas
Muffler Shops, two convenience stores, six office buildings and miscellaneous
other properties. These properties are primarily leased under net leases which
in certain cases have renewal options at higher rents. Certain of these leases
also provide for additional rents based on sales volume. The restaurants,
located throughout the United States, include properties leased as McDonalds,
Burger King, Dunkin' Donuts, Pizza Hut, Hardee's, Wendy's, Kentucky Fried
Chicken and Boston Market.
Included in commercial properties are two properties currently held for sale and
classified as discontinued operations in the Consolidated Financial Statements.
These two properties consist of one office building and one miscellaneous other
property.
Day-Care Centers and Offices
----------------------------
The Company has nine day-care centers and one office building, located in New
York City, leased to the City of New York. The tenant is responsible for real
estate taxes and certain maintenance costs while the Company maintains insurance
and certain other maintenance obligations. All such leases provide for the
reimbursement of operating costs above base year levels and certain leases
include rental increases and renewal options.
Hotel Properties
----------------
The Company's two hotel properties, located in Georgia and California, as well
as the hotels located in New Jersey and Quebec for which the Company has a 40%
interest, are managed through a national hotel company with local on-site
management responsible for all day-to-day operations of the hotels. The
Company's Board Chairman is an executive officer and director and another
Director of the Company is a director of this publicly-traded hotel company. See
"Related Party Transactions" in Item 7 and Note 12 of Notes to Consolidated
Financial Statements.
MANUFACTURING FACILITIES
- ------------------------
The Company's engineered products are manufactured at 970 New Durham Road,
Edison, New Jersey, in a one-story building having approximately 55,000 square
feet of floor space and also in a second facility at 206 Talmadge Road, Edison,
New Jersey which has approximately 55,000 square feet of floor space. The
Company owns these facilities together with the sites. Metex also leases a
manufacturing facility in Tijuana, Mexico with approximately 24,000 square feet
of floor space.
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
The Company currently and from time to time is involved in litigation arising in
the ordinary course of its business. The Company does not believe that it is
involved in any litigation that is likely, individually or in the aggregate, to
have a material adverse effect on its financial condition or results of
operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
None
5
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's Common Stock, $.10 par value (the "Common Stock"), is traded on
the American Stock Exchange under the symbol AFP. The table below shows the high
and low sales prices as reported in the composite transactions for the American
Stock Exchange. All stock prices have been restated to reflect the Company's
two-for-one stock split in August 2003.
HIGH LOW
----------------- -----------------
2003
---- First Quarter $ 18.70 $ 16.40
Second Quarter 25.30 17.10
Third Quarter 23.80 16.75
Fourth Quarter 21.25 15.85
2002
---- First Quarter $ 12.42 $ 10.70
Second Quarter 13.00 11.70
Third Quarter 12.53 10.85
Fourth Quarter 17.73 12.50
On June 10, 2003, the Board of Directors of the Company declared a special
one-time cash dividend of $2.00 per common share on a pre-split basis to all
stockholders of record as of June 20, 2003. While the Company does not currently
expect to pay additional dividends in the future, the Board of Directors could
reevaluate this position in the future.
As of February 27, 2004, there were approximately 310 record holders of the
Company's Common Stock. The closing sales price for the Company's Common Stock
on such date was $22.65.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below should be read in
conjunction with, and is qualified in its entirety by reference to, the
Consolidated Financial Statements and the Notes thereto.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
(In Thousands, Except Per Share Data)
2003 2002 2001 2000 1999
----------------- ------------- --------------- ---------------- ------------
Total revenues $ 57,287 $ 56,254 $ 58,393 $ 59,239 $ 56,641
Income from continuing operations $ 10,927 $ 21,641 $ 17,464 $ 16,873 $ 12,049
Income from continuing operations
per share: Basic $ 1.21 $ 2.36 $ 1.87 $ 1.78 $ 1.21
Dividends paid per share $ 2.00 $ - $ - $ - $ -
Total assets $ 189,714 $ 176,547 $ 177,965 $ 147,996 $ 133,732
Total liabilities $ 65,497 $ 64,913 $ 81,624 $ 70,877 $ 74,676
Total stockholders' equity $ 124,217 $ 111,634 $ 96,341 $ 77,119 $ 59,056
Certain reclassifications have been reflected in the above financial data to
conform prior years' data to the current classifications. These
reclassifications primarily relate to the adoption of Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," in January 2002 (see Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations"). Per share amounts,
except dividends paid, have been retroactively adjusted to reflect the
two-for-one stock split in August 2003.
6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
- -------
The following discussion of the Company's financial condition and results of
operations should be read in conjunction with the description of the Company's
business and properties contained in Items 1 and 2 of Part I and the
Consolidated Financial Statements and Notes thereto, included elsewhere in this
report.
On June 10, 2003, the Company's Board of Directors unanimously adopted an
amendment to the Company's Articles of Incorporation to increase the number of
authorized shares of the Company's Common Stock from 7.5 million to 17.5 million
shares, subject to stockholder approval. A majority of the outstanding shares of
the Company voted to approve this proposal and the Company declared a
two-for-one stock split during August 2003. Unless otherwise indicated, all
references to the number of shares of Common Stock, per share prices and
earnings per share amounts in the accompanying Consolidated Financial Statements
and notes included in the Annual Report on Form 10-K have been adjusted to
reflect the increase in authorized capital and stock split on a retroactive
basis, except dividends per share.
During 2002, the Company adopted Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144") which requires that the operating results, as well as gains or losses on
the real estate assets sold or to be disposed of, as defined, be reflected in
the Consolidated Statements of Income as income from discontinued operations,
net of tax, for all periods presented. As of December 31, 2003, the Company
considered three properties from its real estate investment and management
segment to be held for sale. The results of operations of these properties, plus
those sold during 2003 and 2002 since the implementation of SFAS No. 144, have
been reported as discontinued operations, on a net of tax basis. Sales of
properties occurring prior to the implementation of SFAS No. 144 have not been
reclassified.
RESULTS OF OPERATIONS: 2003 AND 2002
- -------------------------------------
Revenues for the year ended December 31, 2003 were $57.3 million compared to
2002 revenues of $56.3 million. Operating income during this period increased
10.4% to $11.3 million from $10.3 million for the comparable 2002 period. Net
income for the year ended December 31, 2003 was $15.0 million or $1.65 in basic
earnings per share compared to net income of $23.4 million or $2.55 in basic
earnings per share for the year ended December 31, 2002. The results of the 2002
period include $8.0 million in gains on derivative instruments,
available-for-sale securities and sales of real estate, including those
accounted for as discontinued operations, above those recognized in the current
year.
Real Estate Operations
----------------------
Rental revenues from real estate operations remained relatively consistent with
prior years, totaling $23.3 million for the year ended December 31, 2003
compared to $22.7 million in 2002. The increase in rental revenues was primarily
due to the recognition of a non-recurring amount for back-rent and rent
escalations offset by a decrease in hotel operating revenue and income from
leverage leasing. Rental revenues from real estate operations does not include
revenues from properties classified as held for sale or those sold during 2003
and 2002 since the implementation of SFAS No. 144, as such results have been
classified as discontinued operations in accordance with SFAS No. 144.
Mortgage interest expense continues to decrease as a result of continuing
mortgage amortization. Such expense totaled $1.0 million for the year ended
December 31, 2003 compared to $1.3 million for the corresponding 2002 period, a
decline of $0.3 million or 21.7%.
Depreciation expense associated with real properties held for rental decreased
by $0.1 million or 4.7% to $3.0 million for the year ended December 31, 2003
compared to $3.1 million for the same period in 2002. This decrease was
primarily attributable to reduced depreciation expense associated with fully
depreciated building improvements. Depreciation expense from property sales and
7
properties held for sale in 2003 has been reclassified as discontinued
operations in accordance with SFAS No. 144.
Other operating expenses associated with the management of real properties
increased approximately $1.2 million or 15.7% to $8.5 million during 2003 versus
such expenses incurred of $7.3 million in 2002. These increases are primarily
the result of increased property maintenance, insurance, payroll and hotel
operating expenses.
Engineered Products
-------------------
The Company's engineered products segment includes Metex and AFP Transformers.
The operating results of the engineered products segment are as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------------
(In Thousands) 2003 2002
--------------------- ---------------------
Net sales $ 34,019 $ 33,513
Cost of sales 23,895 24,500
Selling, general and administrative expenses 6,782 6,757
-------------- --------------
Operating Income $ 3,342 $ 2,256
============== ==============
Net sales of the engineered products segment increased $0.5 million or 1.5% for
the year ended December 31, 2003 compared to net sales in the preceding year.
Demand for the Company's automotive products continued to increase, however,
these increases were partially offset by weakened demand for the Company's
engineered component and transformer product lines especially in the first six
months of 2003. Net sales also increased in the current year due to the
favorable currency effects on sales denominated in foreign currency.
Cost of sales as a percentage of net sales decreased 2.9% for the year ended
2003 compared to the corresponding 2002 year, principally due to the continued
implementation of cost containment measures and favorable currency effects on
sales denominated in foreign currency.
Selling, general and administrative expenses of the engineered products segment
increased less than one percent for the year ended December 31, 2003 versus the
comparable 2002 period.
General and Administrative Expenses
-----------------------------------
General and administrative expenses not associated with the manufacturing
operations decreased $0.2 million or 5.7% during 2003, compared to such expenses
incurred in the preceding year. The decrease is principally due to a reduction
in pension related expenses and salary and salary related expenses offset by an
increase in professional fees and franchise taxes.
Other Income and Expense, Net
-----------------------------
Other income and expense, net decreased $11.0 million from $16.0 million in 2002
to $5.0 million in 2003. The decrease is principally due to lower net realized
and unrealized gains on derivative instruments and available-for-sale securities
of $7.5 million and lower net gains on sales of real estate assets of $5.6
million and not accounted for as discontinued operations. These decreases were
offset by equity in earnings of the hotel ventures of $1.0 million and a deposit
forfeiture of $0.7 million.
Discontinued Operations
-----------------------
Operating income from properties sold or held for sale and accounted for as
discontinued operations was $0.5 million on a net of tax basis for 2003 versus
$1.3 million in 2002 which includes a full year of operating results for
properties sold in 2003. During 2003, the Company sold 17 properties with
proceeds totaling $8.7 million excluding proceeds of $3.2 million received
during 2003 from properties sold in prior years and accounted for under the
installment method. Net gains on the sale of real estate accounted for as
discontinued operations were $3.5 million on a net of tax basis for the year
ended December 31, 2003 which includes a $1.8 million gain, on a net of tax
basis, relating to a property sold in 2002 and recognized under the installment
method in accordance with accounting principles generally accepted in the United
States of America offset by a $0.9 million write-down, on a net of tax basis,
8
for a property sold in January 2004 for a sale price below its carrying value.
During 2002, since the adoption of SFAS No. 144, the Company sold three
properties with proceeds of $0.8 million. Net gains on the sale of real estate
accounted for as discontinued operations were $0.5 million for the year ended
December 31, 2002.
RESULTS OF OPERATIONS: 2002 AND 2001
- -------------------------------------
Revenues for the year ended December 31, 2002 were $56.3 million compared to
2001 revenues of $58.4 million. Operating income during this period was $10.3
million versus $11.1 million for the comparable 2001 period. Net income for the
year ended December 31, 2002 was $23.4 million or $2.55 in basic earnings per
share compared to net income of $19.0 million or $2.03 in basic earnings per
share for the year ended December 31, 2001, a 25.6% increase in basic earnings
per share.
Real Estate Operations
----------------------
Rental revenues from real estate operations decreased $1.9 million or 7.6% to
$22.7 million for the year ended December 31, 2002 compared to $24.6 million in
2001. The decrease is primarily attributable to decreased rental revenues
resulting from the sale of properties in 2001 not accounted for under SFAS No.
144 and decreased hotel revenues due to the continued weakness in the economy.
Rental revenues from 2002 property sales which occurred after the implementation
of SFAS No. 144 have been classified as discontinued operations in accordance
with SFAS No. 144.
Mortgage interest expense decreased $0.3 million or 19.4% to $1.3 million for
the year ended December 31, 2002 compared to $1.6 million for the corresponding
2001 period, due to continued mortgage amortization which approximated $3.8
million during the year ended December 31, 2002.
Depreciation expense associated with real properties held for rental decreased
by $0.7 million or 18.7% to $3.1 million for the year ended December 31, 2002
compared to $3.8 million for the same period in 2001. This decrease was
primarily attributable to reduced depreciation expense associated with fully
depreciated properties and properties sold in 2001. Depreciation expense from
property sales in 2002 has been classified as discontinued operations in
accordance with SFAS No. 144. Such expenses on property sales prior to the
implementation of SFAS No. 144 have not been similarly reclassified to
discontinued operations.
Other operating expenses associated with the management of real properties
decreased $0.4 million or 4.9% to $7.3 million during 2002 versus such expenses
incurred of $7.7 million in 2001. This decrease is mainly attributable to the
decrease in hotel operating expenses due to the decrease in hotel revenues as
noted above.
Engineered Products
-------------------
The Company's engineered products segment includes Metex and AFP Transformers.
The operating results of the engineered products segment for the years ended
December 31, 2002 and 2001 are as follows:
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------
(In Thousands) 2002 2001
-------------------- ----------------------
Net sales $ 33,513 $ 33,792
Cost of sales 24,500 25,083
Selling, general and administrative expenses 6,757 6,797
-------------- --------------
Operating Income $ 2,256 $ 1,912
============== ==============
Net sales of the engineered products segment decreased $0.3 million or less than
1% for the year ended December 31, 2002 compared to net sales in the preceding
year. The decrease reflects lower sales in the Company's transformer product
line principally due to decreased demand for these products as well as price
competitiveness for such products. This decrease was offset by higher sales in
the Company's automotive product line mainly due to improved product offerings.
Cost of sales as a percentage of net sales decreased approximately 1.1% between
2001 and 2002, principally due to the mix of products sold as noted above and
the implementation of cost containment measures.
9
Selling, general and administrative expenses of the engineered products segment
decreased less than one percent for the year ended December 31, 2002 versus the
comparable 2001 period.
General and Administrative Expenses
-----------------------------------
General and administrative expenses not associated with the manufacturing
operations increased approximately $0.7 million or 32.7% during 2002, compared
to such expenses incurred in the preceding year. The increase is principally due
to higher salary and salary related expenses as well as an increase in pension
related expenses.
Other Income and Expense, Net
-----------------------------
Other income and expense, net decreased approximately $1.0 million from $17.0
million in 2001 to $16.0 million in 2002. The decrease is principally due to
lower net gains on the sale of real estate assets of $5.3 million, which
excludes pre-tax gains of $0.8 million reflected as discontinued operations in
the Company's Consolidated Statements of Income, and lower realized and
unrealized gains on available-for-sale and trading securities of $1.3 million.
These decreases were offset by higher net realized and unrealized gains on
derivative instruments of $5.8 million.
Discontinued Operations
-----------------------
Operating income from properties sold or held for sale and accounted for as
discontinued operations was $1.3 million on a net of tax basis for 2002 versus
$1.5 million in 2001. Prior year amounts have been reclassified to reflect
results of operations of real properties held for sale as of December 31, 2003
or sold during 2003 or 2002 since the implementation of SFAS No. 144 as
discontinued operations. Gains on the sale of real estate accounted for as
discontinued operations were $0.5 million on a net of tax basis for the year
ended December 31, 2002. Prior to the implementation of SFAS No. 144 in 2002,
gains or losses on sales of real estate assets were not accounted for as a
component of discontinued operations.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company experienced a net cash inflow from operations of approximately $10.6
million, $10.3 million and $11.9 million during 2003, 2002 and 2001,
respectively. The $0.3 million increase in operating cash flow from 2002 to 2003
primarily results from increases in net proceeds from the sale of trading
securities and income from operations offset by changes in working capital. The
$1.6 million decline in operating cash flow from 2001 to 2002 primarily results
from a reduction in the proceeds of trading securities and changes in working
capital offset by a decline in income taxes.
In 2003, cash provided by investing activities was $14.3 million which consisted
primarily of a $13.3 million net distribution from joint ventures and $11.9
million of proceeds from the sale of real estate assets offset by net purchases
of available-for-sale securities of $11.6 million. The net distribution from
joint ventures of $13.3 million consists of $12.0 million in proceeds from
financing of the joint venture hotels and $1.3 million from capital
distributions. In addition, during the year the Company purchased an interest in
a full-service hotel for $6.1 million and received proceeds of $5.9 million from
the sale of interests in the joint ventures hotels.
In 2002, $22.0 million was used in investing activities which consisted
primarily of a $23.1 million investment in a 50% interest in a joint venture
hotel, net purchases of available-for-sale securities and derivative instruments
of $3.5 million and a $3.0 million purchase of a note receivable. These were
partially offset by proceeds from the sale of real estate assets of $7.3
million.
In 2001, $45.7 million was provided by investing activities consisting primarily
of $31.7 million in net proceeds from available-for-sale securities and
derivative instruments, $12.9 million in proceeds from the sale of real estate
assets and the repayment of a $3.5 million note receivable. These investing
activities were offset by $3.1 million from the acquisition of and/or additions
to real estate assets and property, plant and equipment.
10
Net cash used in financing activities was approximately $14.6 million, $7.6
million and $6.6 million during 2003, 2002 and 2001, respectively. These uses of
cash were primarily attributable to debt reduction, the purchase and retirement
of the Company's Common Stock and offset by cash proceeds from the exercise of
stock options. In addition, during the current year, the Company paid a special
one-time cash dividend of $2.00 per common share on a pre-split basis amounting
to $9.1 million.
At December 31, 2003, the Company's cash and marketable securities were $108.8
million and working capital was $96.1 million compared to cash and marketable
securities of $74.8 million and working capital of $67.0 million at December 31,
2002. Management continues to believe that the real estate market is overvalued
and accordingly acquisitions have been limited to those select properties that
meet the Company's stringent financial requirements. Management believes that
the available working capital along with the $80.0 million of availability on
the revolving credit facility, discussed below, puts the Company in an opportune
position to fund acquisitions and grow the portfolio if and when attractive
long-term opportunities become available.
On June 10, 2003, the Board of Directors of the Company declared a special
one-time cash dividend of $2.00 per common share on a pre-split basis to all
stockholders of record as of June 20, 2003. While the Company does not currently
expect to pay additional dividends in the future, the Board of Directors could
reevaluate this position in the future. This dividend, totaling $9.1 million,
was paid on July 10, 2003.
The cash needs of the Company have been satisfied from funds generated by
current operations. It is expected that future operational cash needs will also
be satisfied from existing cash balances, marketable securities, ongoing
operations and borrowings under the Revolver (as hereinafter defined). The
primary source of capital to fund additional real estate acquisitions and to
make additional high-yield mortgage loans may come from existing funds,
borrowings under the Revolver, the sale, financing and refinancing of the
Company's properties and from third party mortgages and purchase money notes
obtained in connection with specific acquisitions.
In addition to the acquisition of properties for consideration consisting of
cash and mortgage financing proceeds, the Company may acquire real properties in
exchange for the issuance of the Company's equity securities. The Company may
also finance acquisitions of other companies in the future with borrowings from
institutional lenders and/or the public or private offerings of debt or equity
securities. The Company currently has no agreements, commitments or
understandings with respect to the acquisition of other companies or the
acquisition of real properties in exchange for equity securities.
Funds of the Company in excess of that needed for working capital, purchasing
real estate and arranging financing for real estate acquisitions are invested by
the Company in corporate equity securities, corporate notes, certificates of
deposit, government securities and other financial instruments. Changes in U.S.
interest rates affect the interest earned on the Company's cash and cash
equivalent balances and other interest bearing investments. Given the level of
cash and other interest bearing investments currently held by the Company and
the decline in U.S. interest rates over the past several years, the Company's
earnings have been negatively impacted.
Effective December 10, 2002, the Company entered into a credit agreement with
five banks which provides for an $80.0 million revolving credit facility
("Revolver"). The Revolver may be increased under certain circumstances and
expires on December 31, 2005.
Under the Revolver, the Company will be provided with eligibility based upon the
sum of (i) 60.0% of the aggregate annualized and normalized year-to-date net
operating income of unencumbered eligible properties, as defined, capitalized at
10.0%, (ii) 60.0% of the aggregate annualized and normalized year-to-date net
operating income of unencumbered eligible hotel properties, as defined,
capitalized at 10.5%, not to exceed the lesser of $10.0 million or 10% of total
eligibility, (iii) the lesser of $20.0 million or 50.0% of the aggregate
annualized and normalized year-to-date net operating income of encumbered
eligible properties, as defined, capitalized at 12.0%, (iv) the sum of 75.0% of
eligible accounts receivable, 50.0% of eligible inventory, and 50% of eligible
loans, as defined, (v) cash and cash equivalents in excess of working capital,
as defined, and (vi) 50% of marketable securities, as defined. At December 31,
2003, eligibility under the Revolver was $80.0 million based upon the above
terms and there were no amounts outstanding under the Revolver. The credit
agreement contains certain financial and restrictive covenants, including
minimum consolidated equity, interest coverage, debt service coverage and
capital expenditures (other than for real estate), and limitations on
indebtedness. The Company was in compliance with all covenants at December 31,
2003. The credit agreement also contains provisions which allow the banks to
11
perfect a security interest in certain operating and real estate assets in the
event of a default, as defined in the credit agreement. Borrowings under the
Revolver, at the Company's option, bear interest at the bank's prime lending
rate or at the London Interbank Offered Rate ("LIBOR") (1.12% at December 31,
2003) plus 2.0% for non-cash collateralized borrowings and 1.0% for cash
collateralized borrowings.
In strategies designed to hedge overall market risk, the Company may sell common
stock short or participate in put and/or call options. These instruments do not
qualify for hedge accounting and therefore changes in such derivatives fair
value are recognized in earnings. These derivatives are recorded as a component
of accounts payable and accrued liabilities in the Consolidated Balance Sheets.
The Company has undertaken the completion of environmental studies and/or
remedial action at Metex' two New Jersey facilities. See Item 1 of Part I and
Note 18, "Commitments and Contingencies" of Notes to Consolidated Financial
Statements for further discussion on this matter.
The Company is subject to various litigation, legal, regulatory and tax matters
that arise in the ordinary course of business activities. When management
believes it is probable that a liability has been incurred and such amounts are
reasonably estimable the Company provides for amounts that include judgments and
penalties that may be assessed. These liabilities are usually included in
accounts payable and accrued liabilities or other long-term liabilities in the
Consolidated Financial Statements, depending on the anticipated payment date. At
December 31, 2003 and 2002, the Company had approximately $20 million recorded
in other long-term liabilities relating to such matters. None of these matters
are expected to result in a material adverse effect on the Company's
consolidated financial position or results of operations.
Previous purchases of the Company's Common Stock have reduced the Company's
additional paid-in capital to zero and accordingly current year purchases in
excess of par value have reduced retained earnings. During 2003, the Company
purchased and retired 166,000 shares of the Company's Common Stock for
approximately $3.2 million. Future repurchases of the Company's Common Stock
will also reduce retained earnings by amounts in excess of the par value.
Repurchases of the Company's Common Stock may be made from time to time in the
open market at prevailing market prices or in privately negotiated transactions,
subject to available resources.
CONTRACTUAL OBLIGATIONS, COMMITMENTS AND CONTINGENCIES
- ------------------------------------------------------
The following table summarizes the Company's contractual cash obligations and
other commitments at December 31, 2003:
(In Thousands) PAYMENTS DUE BY PERIOD
----------------------
Less
than 1-3 4-5 After
Contractual Obligations 1 year years years 5 years Total
------------------------- -------- ---------- ---------- -------- ----------
Long-Term Debt (1) $ 3,888 $ 3,091 $ 778 $ 4,590 $ 12,347
Operating Leases (2) 424 706 596 2,677 4,403
Employment Contract (3) 750 - - - 750
-------- ---------- ---------- -------- ----------
Total Contractual Cash
Obligations $ 5,062 $ 3,797 $ 1,374 $ 7,267 $ 17,500
======== ========== ========== ======== ==========
(1) See Note 7 of Notes to Consolidated Financial Statements.
(2) See Note 17 of Notes to Consolidated Financial Statements.
(3) See Note 18 of Notes to Consolidated Financial Statements.
12
RELATED PARTY TRANSACTIONS
- --------------------------
The Company has a 50.0% interest in an unconsolidated limited liability
corporation, whose principal assets are two distribution centers leased to
Kmart. A group that includes the wife of the Company's Board Chairman, two
Directors of the Company and the wife of one of the Directors has an 8.0%
interest in this entity. The Company's share of income arising from this
investment, accounted for as a leveraged lease, was $491,000, $673,000 and
$868,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
In December 2002, the Company purchased a 50% interest in a joint venture (the
"Hotel Venture") for $23 million together with Prime Hospitality Corp.
("Prime"), a publicly-traded company for which the Company's Board Chairman is
an executive officer and director and another Director of the Company is a
director. The Hotel Venture owns and operates a hotel in New Jersey. In March
2003, the Company and Prime each sold a 10% interest in the Hotel Venture to an
unrelated third party, at cost.
In April 2003, the Hotel Venture entered into a $25 million mortgage loan (the
"Mortgage") with a bank, secured by the underlying hotel. The proceeds of the
loan were distributed to the partners of the Hotel Venture based on their
ownership interest, thereby reducing their respective investment. In connection
with the Mortgage, the Company and Prime entered into a direct guaranty
agreement with the bank whereby the Company and Prime, jointly and severally,
guaranteed not more than $4 million of the Mortgage. Amounts due under the
guaranty are reduced by the scheduled principal payments under the Mortgage. The
guaranty is enforceable upon the occurrence of certain events, including a
default as defined in the Mortgage and expires upon satisfaction of the loan in
April 2006. Pursuant to the operating agreement, any payments made under the
guaranty would increase the guarantors' ownership interest. The Company believes
that the collateral of the underlying hotel is sufficient to repay the Mortgage
without requiring enforcement of the guaranty. Accordingly, the fair value of
the guarantee was determined to be insignificant and, therefore, no liability
has been recorded.
In January 2003, the Company purchased a 50% interest in a joint venture (the
"Quebec Venture") for $6 million together with Prime. The Quebec Venture owns
and operates a hotel in Quebec, Canada. In March 2003, the Company and Prime
each sold a 10% interest in the Quebec Venture to an unrelated third party, at
cost. In July 2003, the Quebec Venture entered into an $8.2 million (Canadian)
mortgage loan with a Canadian Bank, secured by the underlying hotel. The
proceeds of the loan were distributed to the partners of the Quebec Venture
based on their ownership interest, thereby reducing their respective investment.
The equity method of accounting is used for investments in 20% to 50% owned
joint ventures in which the Company has the ability to exercise significant
influence, but not control. Under the operating agreements of the Hotel Venture
and Quebec Venture, all significant operating and capital decisions are made
jointly and operating profits are allocated based on ownership interests. These
investments were initially recorded at cost and are subsequently adjusted for
equity in earnings (losses) and cash contributions and distributions. The
Company's equity in earnings of these hotel ventures was $987,000 for the year
ended December 31, 2003.
The Company's two hotel properties, as well as the hotels owned by the Hotel
Venture and Quebec Venture, are managed by Prime. Fees paid for the management
of the Company's two hotel properties are based upon a percentage of revenue and
were approximately $97,000, $117,000, and $121,000 for the years ended December
31, 2003, 2002 and 2001, respectively. Included in marketable securities at
December 31, 2003 and 2002 was $36.1 million and $20.4 million, respectively, of
common stock in Prime which represents approximately 7.9% and 5.6% of Prime's
outstanding shares, respectively. During the year ended December 31, 2003, the
Company purchased 1,036,000 shares of the common stock of Prime for $5.9
million.
CRITICAL ACCOUNTING POLICIES AND MANAGEMENT ESTIMATES
- -----------------------------------------------------
The preparation of consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America
requires management to use judgment in making estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. Certain of the
estimates and assumptions required to be made relate to matters that are
inherently uncertain as they pertain to future events. While management believes
that the estimates and assumptions used were the most appropriate, actual
results could differ significantly from those estimates under different
13
assumptions and conditions. The following is a description of those accounting
policies believed by management to require subjective and complex judgments
which could potentially affect reported results.
Revenue Recognition and Accounts Receivable - Real Estate Investment
and Management
----------------------------------------------------------------------
The Company leases substantially all of its properties to tenants under net
leases which are accounted for as operating leases. Under this type of lease,
the tenant is obligated to pay all operating costs of the property including
real estate taxes, insurance and repairs and maintenance. Revenue is recognized
as it is earned and deemed collectible. Gains on the sale of real estate assets
and equity investments are recorded when the gain recognition criteria under
generally accepted accounting principles in the United States of America have
been met.
Certain lease agreements provide for additional rent based on a percentage of
tenants' sales. These percentage rents are recorded once the required sales
levels are achieved.
Income on leveraged leases is recognized by a method that produces a constant
rate of return on the outstanding investment in the lease, net of the related
deferred tax liability in the years in which the net investment is positive.
Accounts receivable are recorded at the outstanding amounts net of the allowance
for doubtful accounts. The Company makes estimates of the uncollectibility of
its accounts receivable related to base rents, tenant escalations, expense
reimbursements and other revenues. The Company analyzes accounts receivable and
historical bad debt levels, customer credit worthiness and current economic
trends when evaluating the adequacy of the allowance for doubtful accounts. In
addition, tenants in bankruptcy are analyzed and estimates are made in
connection with the expected recovery of pre-petition and post-petition claims.
The Company's net income is directly affected by management's estimate of the
collectibility of accounts receivable.
Revenue Recognition and Accounts Receivable - Engineered Products
-----------------------------------------------------------------
In general, sales are recorded when products are shipped, title has passed and
collection is reasonably assured. Management believes that adequate controls are
in place to ensure compliance with contractual product specifications, a
substantial history of such performance has been established and historical
returns and allowances have not been significant. If actual sales returns and
allowances exceed historical amounts, the Company's sales would be adversely
affected.
Accounts receivable are recorded at the outstanding amounts net of the allowance
for doubtful accounts. Estimates are used in determining the Company's allowance
for doubtful accounts based on historical collections experience, current
economic trends and a percentage of its accounts receivable by aging category.
In determining these percentages, the Company looks at historical write-offs of
its receivables. The Company also looks at the credit quality of its customer
base as well as changes in its credit policies. The Company continuously
monitors collections and payments from its customers. While credit losses have
historically been within expectations and the provisions established, the
Company cannot guarantee that it will continue to experience the same credit
loss rates that it has in the past. The Company's net income is directly
affected by management's estimate of the collectibility of accounts receivable.
Marketable Securities
---------------------
The Company determines the appropriate classification of marketable securities
at the time of purchase and reassesses the appropriateness of the classification
at each reporting date. At December 31, 2003 and 2002, all marketable securities
held by the Company have been classified as either available-for-sale or trading
and, as a result, are stated at fair value. Unrealized gains and losses on
available-for-sale securities are recorded as a separate component of
stockholders' equity. Realized gains and losses on the sale of securities as
well as unrealized holding gains and losses on trading securities, as determined
on a first-in, first-out basis, are included in the Consolidated Statements of
Income.
The Company reviews its investments on a regular basis to evaluate whether or
not each security has experienced an other-than-temporary decline in fair value.
If it is believed that an other-than-temporary decline exists, the Company will
14
write down the investment to market value and record the related write-down as a
loss on investments in the Consolidated Statements of Income.
The Company's net income is directly affected by management's classification of
marketable securities as well as its determination of whether an
other-than-temporary decline in the value of its investments exist.
Inventories
-----------
The Company values inventory at the lower of cost or market, cost being
determined on a first-in, first-out basis. The Company regularly reviews
inventory quantities on hand and records a provision for excess and obsolete
inventory based primarily on existing and anticipated design and engineering
changes to its products as well as forecasts of future product demand. The
Company's net income is directly affected by management's estimate of the
realizability of inventories.
Real Estate
-----------
Land, buildings and improvements and equipment are recorded at cost, less
accumulated depreciation and amortization. Expenditures for maintenance and
repairs are charged to operations as incurred. Significant renovations and
replacements, which improve the life of the asset, are capitalized and
depreciated over their estimated useful lives.
Depreciation is computed utilizing the straight-line method over the estimated
useful lives of five to thirty-nine years for buildings and improvements and
five to seven years for equipment.
Assets held for sale are reported at the lower of the carrying amount or fair
value less costs to sell and depreciation is discontinued. Property sales or
dispositions are recorded when title transfers. Upon disposition, the related
costs and accumulated depreciation are removed from the respective accounts. Any
gain or loss on sale or disposition is recognized in accordance with accounting
principles generally accepted in the United States of America. In the normal
course of business, the Company receives offers for the sale of properties,
either solicited or unsolicited. For those offers that are accepted, the
prospective buyer usually requires a due diligence period before consummation of
the transaction. It is not unusual for matters to arise that result in the
withdrawal or rejection of the offer during this process. If circumstances arise
that previously were considered unlikely and, as a result, management decides
not to sell a property classified as held for sale, the property is reclassified
as held for rental. A property that is reclassified is measured and recorded
individually at the lower of its carrying amount before being classified as held
for sale, adjusted for any depreciation expense that would have been recognized
had the property been continuously classified as held for rental or its fair
market value at the date of the subsequent decision not to sell.
The Company is required to make subjective assessments as to the useful lives of
its properties for purposes of determining the amount of depreciation to reflect
on an annual basis with respect to those properties. These assessments have a
direct impact on the Company's net income. Should the Company adjust the
expected useful life of a particular asset, it would be depreciated over the
adjusted years, and result in a revised depreciation expense and net income.
Discontinued Operations
-----------------------
The Company is required to make certain subjective assessments utilizing the
provisions of SFAS No. 144 in determining whether a long-lived asset to be
disposed of should be reclassified as discontinued operations. Commencing in
2002, the Company considered real property to be held for sale and reported as
discontinued operations if management committed to a plan to sell the asset
under usual and customary terms and believes such sale will be completed within
one year. In such event, the financial results associated with these assets are
reclassified as discontinued operations for all periods presented. Although
operating income, income from continuing operations and income from discontinued
operations is directly affected by management's assessments, the
reclassification has no impact on net income.
15
Long-Lived Assets
-----------------
On a periodic basis, management assesses whether there are any indicators that
the value of its long-lived assets may be impaired. An asset's value is
considered impaired only if management's estimate of current and projected
operating cash flows (undiscounted and without interest charges) of the asset
over its remaining useful life is less than the net carrying value of the asset.
Such cash flow projections consider factors such as expected future operating
income, trends and prospects, as well as the effects of demand, competition and
other factors. To the extent impairment has occurred, the carrying amount of the
asset would be written down to an amount to reflect the fair value of the asset.
The Company is required to make subjective assessments as to whether there are
impairments in the value of its long-lived assets and other investments. The
Company's net income is directly affected by management's estimate of
impairments. In determining impairment, if any, the Company has adopted SFAS No.
144.
Pension Plan
------------
Pension plans can be a significant cost of doing business, but represent
obligations that will ultimately be settled far in the future and therefore are
subject to estimates. Pension accounting is intended to reflect the recognition
of future benefit costs over the employee's approximate service period based on
the terms of the plan and the investment and funding decisions made by the
Company. The Company is required to make assumptions regarding such variables as
the expected long-term rate of return on assets and the discount rate applied to
determine service cost and interest cost to arrive at pension income or expense
for the year.
The Company accounts for its defined benefit pension plan in accordance with
SFAS No. 87, "Employers' Accounting for Pensions" ("SFAS No. 87"), which
requires that amounts recognized in financial statements be determined on an
actuarial basis. SFAS No. 87 generally reduces the volatility of future income
(expense) from changes in pension liability discount rates and the performance
of the pension plan's assets.
The most significant element in determining the Company's pension income
(expense) in accordance with SFAS No. 87 is the expected return on plan assets.
The Company has assumed that the expected long-term rate of return on plan
assets will be 8.0% for 2003 and 2002 as compared to 9.0% for 2001. Based on the
Company's existing and forecasted asset allocation and related long-term
investment performance results, the Company believes that its assumption of
future returns of 8.0% is reasonable. The assumed long-term rate of return on
assets is applied to a calculated value of plan assets, which recognizes changes
in the fair value of plan assets in a systematic manner. This produces the
expected return on plan assets that is included in pension income (expense). The
difference between this expected return and the actual return on plan assets is
deferred. The net deferral of past asset gains (losses) affects the calculated
value of plan assets and, ultimately, future pension income (expense). During
2002 and 2001, the plan assets have earned a rate of return less than 8.0%. This
decline was due, in large part, to general declines in the market value of
investments. During 2003, the Company's pension plan investments experienced an
approximate 20% rate of return. A 100 basis point change in the expected
long-term rate of return on plan assets would have changed fiscal 2003 pension
expense by $84,000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk generally represents the risk of loss that may result from the
potential change in the value of a financial instrument as a result of
fluctuations in interest and currency exchange rates and in equity and commodity
prices. Derivative financial instruments are used by the Company principally in
the hedging of overall market risks and the management of its interest rate
exposure.
The primary objective of the Company's investment activities is to preserve
principal and maximize yields without significantly increasing market risk. To
achieve this, management maintains a portfolio of cash equivalents and
investments in a variety of securities, primarily U.S. investments in both
common and preferred equity issues.
16
Funds of the Company in excess of that needed for working capital, purchasing
real estate and arranging financing for real estate acquisitions are invested by
the Company in corporate equity securities, corporate notes, certificates of
deposit, government securities and other financial instruments. Changes in U.S.
Interest rates affect the interest earned on the Company's cash and cash
equivalent balances and other interest bearing investments. Given the level of
cash currently held by the Company and the decline in U.S. interest rates over
the past several years, the Company's earnings have been negatively impacted.
The Company's marketable securities consist of U.S. investments in both common
and preferred equity issues and are subject to the fluctuations in U.S. stock
markets. Most of the Company's mortgages payable are fixed rate and self
amortizing from the net cash flow of the underlying properties. The Company's
derivative instruments primarily consist of put and/or call options. Such
derivatives are subject to the fluctuations in U.S. stock markets.
The Company manufactures its products in the United States and Mexico and sells
its products in those markets as well as Europe, South America and Asia. As a
result, the Company's operating results could be affected by factors such as
changes in foreign currency exchange rates or weak economic conditions in the
foreign markets in which the Company distributes its products. Most of the
Company's sales are denominated in U.S. dollars. A portion of the Company's
receivables are denominated in Euros and are exposed to changes in exchange
rates with the U.S. dollar. When the U.S. dollar strengthens against the Euro,
the value of the nonfunctional currency sales decreases. When the U.S. dollar
weakens against the Euro, the functional currency amount of sales increases.
Overall, the Company is a net receiver of Euros and, as such, benefits from a
weaker dollar, but is adversely affected by a stronger dollar relative to the
Euro.
The Company's manufacturing operations utilize various metal commodities
(principally stainless steel) in the manufacturing process. While key metals
purchased from foreign entities are generally denominated in U.S. dollars,
fluctuations in the suppliers' local currencies may impact pricing. The Company
is unable to quantify the effects of such fluctuations, however, it does enter
into purchase commitments for certain key metals that generally do not exceed
twelve months which tend to minimize short-term currency fluctuations. The
Company's financial results, however, could be significantly affected by
fluctuations in metals pricing.
The following is a tabular presentation of quantitative market risks at December
31, 2003:
Principal (Notional) Amount by Expected Maturity
------------------------------------------------------------------------- Fair
There- Value
(Dollars in Thousands) 2004 2005 2006 2007 2008 after Total 12/31/03
ASSETS
Available-for-sale
securities $49,612 $ - $ - $ - $ - $ - $49,612 $49,612
Notes receivable (1) $ 55 $ 57 $ 2,802 $ 1 $ 2 $ - $ 2,917 $ 3,450
Average interest rates 15.0% 15.0% 15.0% 9.0% 9.0% -
LIABILITIES
Long-term debt, including
current portion
Fixed rate $ 3,888 $ 2,398 $ 693 $ 368 $ 410 $ 4,590 $12,347 $12,285
Average interest rate 6.9% 6.5% 6.5% 6.5% 6.4% 6.5%
Derivative instruments (2) $ 10 $ - $ - $ - $ - $ - $ 10 $ 10
(1) Expected maturities are net of deferred gains which are recognized under
the installment method of accounting.
(2) Consisting of put and/or call options.
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
See Note 1 of Notes to Consolidated Financial Statements for a full description
of recent accounting pronouncements including the respective dates of adoption
and effects on results of operations and financial conditions.
17
FORWARD-LOOKING STATEMENTS
- --------------------------
Certain statements in this Report on Form 10-K and other statements made by the
Company or its representatives that are not strictly historical facts are
"forward-looking" statements within the meaning of the Private Securities
Litigation Reform Act of 1995 that should be considered as subject to the many
risks and uncertainties that exist in the Company's operations and business
environment. The forward-looking statements are based on current expectations
and involve a number of known and unknown risks and uncertainties that could
cause the actual results, performance and/or achievements of the Company to
differ materially from any future results, performance or achievements,
expressed or implied, by the forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements, and that in
light of the significant uncertainties inherent in forward-looking statements
the inclusion of such statements should not be regarded as a representation by
the Company or any other person that the objectives or plans of the Company will
be achieved. The Company also assumes no obligation to publicly update or revise
its forward-looking statements or to advise of changes in the assumptions and
factors on which they are based. The following are some of the risks that could
cause actual results to differ significantly from those expressed or implied by
such statements:
REVENUES AND PROFITABILITY OF OUR ENGINEERED PRODUCTS SEGMENT MAY BE NEGATIVELY
AFFECTED IN A SLOWING ECONOMY.
The success of our engineered products segment depends in large part on general
business conditions of our customers and general economic conditions. If the
economy slows either in the United States or in foreign countries in which we
sell our products, some of our current and prospective customers may decrease
spending on engineered products and accordingly may postpone, reduce or even
forego the purchase of our products. If forecasted orders are not received, we
may have large inventories of slow moving or unusable parts. This could result
in an adverse effect on our business, results of operations, liquidity and
financial position.
OUR MARKETS ARE HIGHLY COMPETITIVE.
The markets for our engineered products are highly competitive. We cannot assure
that we will be able to successfully compete or that our competitors will not
develop new technologies and products that are more commercially effective than
our own. Some of our competitors have financial, technical, marketing, sales and
distribution resources greater than ours.
RELIANCE ON SIGNIFICANT CUSTOMERS.
The Company sells its engineered products to many customers throughout the
world. Historically, a small number of customers accounted for significant
portions of these sales. For the year ended December 31, 2003, sales by the
engineered products to its largest customer accounted for 20.9% of the segment's
sales. The loss of this customer or one or more of other significant customers
could adversely affect the Company's results of operations.
PROTECTION OF OUR INTELLECTUAL PROPERTY IS LIMITED; WE ARE SUBJECT TO THE RISK
OF THIRD PARTY CLAIMS OF INFRINGEMENT.
Our engineering business relies in large part upon our proprietary scientific
and engineering "know-how" and production techniques. Historically, patents have
not been an important part of our protection of our intellectual property
rights. We rely upon the laws of unfair competition, restrictions in licensing
agreements and confidentiality agreements to protect our intellectual property.
We limit access to and distribution of our proprietary information.
Our ability to compete successfully and achieve future revenue growth will
depend, in part, on our ability to protect our proprietary technology and
operate without infringing upon the rights of others.
OUR OPERATIONS ARE SUBJECT TO ENVIRONMENTAL REGULATION AND ENVIRONMENTAL
PROBLEMS WHICH ARE POSSIBLE AND CAN BE COSTLY.
Our engineered products segment is subject to a variety of local, state and
federal governmental regulations relating to the storage, discharge, handling,
emission, generation, manufacture and disposal of toxic or other hazardous
substances used to manufacture our products. We believe that we are currently in
compliance in all material respects with such regulations and that we have
18
obtained all necessary environmental permits to conduct our business.
Nevertheless, the failure to comply with current or future regulations could
result in the imposition of fines, suspension of production, alteration of our
manufacturing processes or cessation of operations.
Federal, state and local laws and regulations relating to the protection of the
environment require a current or previous owner or operator of real estate to
investigate and clean up hazardous or toxic substances at such property. The
Company has undertaken the completion of environmental studies and/or remedial
action at Metex' two New Jersey facilities (see "Environmental Regulations" in
Item 1 of Part I and Note 18, "Commitments and Contingencies" of Notes to
Consolidated Financial Statements).
OUR PERFORMANCE IS SUBJECT TO RISKS ASSOCIATED WITH THE REAL ESTATE INDUSTRY.
Although the Company's leases are generally long-term and may be below market,
real property investments are subject to varying degrees of risk and are
relatively illiquid. Several factors may adversely affect the economic
performance and value of our properties. These factors include changes in the
national, regional and local economic climate, the attractiveness of our
properties to tenants, competition from other available property owners and
changes in market rental rates. Our performance also depends on the financial
condition of our tenants and our ability to collect rent from tenants and to pay
for adequate maintenance, insurance and other operating costs, including real
estate taxes, which could increase over time. Also, the expenses of owning and
operating a property are not necessarily reduced when circumstances such as
market factors and competition cause a reduction in income from the property.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary information filed as part of this
Item 8 are listed under Item 15, "Exhibits, Financial Statements Schedules and
Reports on Form 8-K" and are contained in this Form 10-K, beginning on page 23.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company (including
its consolidated subsidiaries) required to be included in the Company's periodic
reports. There have been no significant changes in the Company's internal
controls over financial reporting or in other factors that could significantly
affect these controls subsequent to the date of their evaluation.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
This information will be contained in the Proxy Statement of the Company for the
2004 Annual Meeting of Stockholders under the caption "Election of Directors"
and is incorporated herein by reference.
19
CODE OF ETHICS
Our Board of Directors intends on adopting a code of ethics prior to April 29,
2004 which will apply to all of our directors, officers and employees, including
our Chief Executive Officer, Chief Financial Officer, Corporate Controller and
other people performing similar functions.
ITEM 11. EXECUTIVE COMPENSATION
This information will be contained in the Proxy Statement of the Company for the
2004 Annual Meeting of Stockholders under the caption "Executive Compensation"
and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information will be contained in the Proxy Statement of the Company for the
2004 Annual Meeting of Stockholders under the caption "Security Ownership" and
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information will be contained in the Proxy Statement of the Company for the
2004 Annual Meeting of Stockholders under the caption "Certain Relationships and
Related Transactions" and is incorporated herein by reference. Also see "Related
Party Transactions" in Item 7 and Note 12, "Transactions with Related Parties,"
of Notes to Consolidated Financial Statements, contained elsewhere in this
report.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
This information will be contained in the Proxy Statement of the Company for the
2004 Annual Meeting of Stockholders under the caption "Independent Auditors" and
is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) CONSOLIDATED FINANCIAL STATEMENTS. The following Consolidated Financial
Statements and Consolidated Financial Statement Schedules of the Company
are included in this Form 10-K at the pages indicated:
Index to Consolidated Financial Statements
------------------------------------------
Page
Report of Independent Certified Public Accountants - Grant Thornton LLP ...............................23
Consolidated Balance Sheets as of December 31, 2003 and 2002 ..........................................24
Consolidated Statements of Income for the Years Ended
December 31, 2003, 2002, and 2001 .................................................................25
Consolidated Statements of Stockholders' Equity and Comprehensive Income
for the Years Ended December 31, 2003, 2002, and 2001 .............................................26
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003, 2002, and 2001 ..............................................................27-28
Notes to Consolidated Financial Statements .........................................................29-49
(2) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Schedule II -- Allowance for Doubtful Accounts ......................................50
Schedule III -- Real Property and Accumulated Depreciation ...........................51
Schedule IV -- Mortgage Loans on Real Estate ........................................52
20
(3) SUPPLEMENTARY DATA
Quarterly Financial Data (Unaudited)...................................................................53
Schedules not listed above are omitted as not applicable or the
information is presented in the financial statements or related notes.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the last quarter
of fiscal 2003.
(c) Exhibits
3.1. Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to exhibit 3.1 filed with the
Company's report on Form 10-K for the fiscal year ended December
31, 1993).
* 3.2. Amendment to the Amended and Restated Certificate of
Incorporation of the Company.
3.3. By-laws of the Company (incorporated by reference to exhibit 3
filed with the Company's report on Form 10-K for the fiscal year
ended December 31, 1980).
10.1. Incentive and Non-Qualified Stock Option Plan of the Company, as
amended (incorporated by reference to exhibit 10.1 filed with the
Company's report on Form 10-K for the fiscal year ended December
31, 2000).
10.2. Additional amendment to Incentive and Non-Qualified Stock Option
Plan of the Company (incorporated by reference to exhibit 4.2
filed with the Company's report on Form S-8 dated August 23,
2002).
10.3. 1988 Joint Incentive and Non-Qualified Stock Option Plan, as
amended (incorporated by reference to exhibit 10.2 filed with the
Company's report on Form 10-K for the fiscal year ended December
31, 1998).
* 10.4. Amended and Restated Employment Agreement dated as of November
17, 2003 by and between the Company and A. F. Petrocelli.
10.5. Revolving Credit Agreement dated as of December 10, 2002, with
the financial parties thereto (incorporated by reference to
exhibit 10.7 filed with the Company's report on Form 10-K for the
fiscal year ended December 31, 2002).
* 21. Subsidiaries of the Company.
* 23. Auditors' consent to the incorporation by reference in the
Company's Registration Statements on Form S-8 as of and for the
three years ended December 31, 2003 from Grant Thornton LLP of
the Report of Independent Certified Public Accountants included
herein.
* 31.1. Certification of the Chief Executive Officer pursuant to Rule
13a-14.
* 31.2. Certification of the Chief Financial Officer pursuant to Rule
13a-14.
* 32.1. Certification of the Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
* 32.2. Certification of the Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
* Filed herewith
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
UNITED CAPITAL CORP.
Dated: March 22, 2004 By: /s/ A. F. Petrocelli
--------------------------------
A. F. Petrocelli
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company in the
capacities and on the date indicated.
Dated: March 22, 2004 By: /s/ A. F. Petrocelli
--------------------------------
A. F. Petrocelli
Chairman, President and
Chief Executive Officer
Dated: March 22, 2004 By: /s/ Howard M. Lorber
--------------------------------
Howard M. Lorber
Director
Dated: March 22, 2004 By: /s/ Robert M. Mann
--------------------------------
Robert M. Mann
Director
Dated: March 22, 2004 By: /s/ Anthony J. Miceli
--------------------------------
Anthony J. Miceli
Chief Financial Officer,
Chief Accountant, Secretary
and Director
Dated: March 22, 2004 By: /s/ Arnold S. Penner
--------------------------------
Arnold S. Penner
Director
22
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
and Stockholders of
United Capital Corp.
We have audited the accompanying consolidated balance sheets of United Capital
Corp. and Subsidiaries (the "Company") as of December 31, 2003 and 2002, and the
related consolidated statements of income, stockholders' equity and
comprehensive income and cash flows for each of the three years in the period
ended December 31, 2003. 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 in accordance with auditing standards generally accepted
in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of United Capital
Corp. and Subsidiaries as of December 31, 2003 and 2002, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
We have also audited the consolidated financial statement schedules for each of
the three years in the period ended December 31, 2003, listed in the Index at
Item 15(a)(2). In our opinion, these schedules, when considered in relation to
the basic consolidated financial statements taken as a whole, present fairly, in
all material respects, the information required to be set forth therein.
/s/ GRANT THORNTON LLP
Melville, New York
February 13, 2004
23
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Per Share Data)
AS OF DECEMBER 31,
-------------------
2003 2002
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 59,210 $ 48,893
Marketable securities 49,612 25,893
Notes and accounts receivable, net 6,506 5,651
Inventories 4,155 3,677
Prepaid expenses and other current assets 961 1,477
Deferred income taxes - 207
Current assets of discontinued operations 14 137
-------- --------
TOTAL CURRENT ASSETS 120,458 85,935
-------- --------
Property, plant and equipment, net 3,098 3,569
Real property held for rental, net 39,636 42,251
Investments in joint ventures 19,819 31,389
Noncurrent notes receivable 2,862 2,994
Other assets 3,197 3,707
Noncurrent assets of discontinued operations 644 6,702
-------- --------
TOTAL ASSETS $189,714 $176,547
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 3,888 $ 3,770
Accounts payable and accrued liabilities 9,267 9,190
Income taxes payable 7,270 5,260
Deferred income taxes 3,947 -
Current liabilities of discontinued operations 12 725
-------- --------
Total current liabilities 24,384 18,945
-------- --------
Long-term debt 8,459 12,347
Other long-term liabilities 30,871 31,016
Deferred income taxes 1,783 2,605
-------- --------
TOTAL LIABILITIES 65,497 64,913
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, $.10 par value, authorized 17,500 shares; issued and
outstanding 9,092 and 9,039 shares, respectively 909 904
Retained earnings 114,436 109,644
Accumulated other comprehensive income, net of tax 8,872 1,086
-------- --------
TOTAL STOCKHOLDERS' EQUITY 124,217 111,634
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $189,714 $176,547
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
24
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2003 2002 2001
-------- -------- --------
REVENUES:
Net sales $ 34,019 $ 33,513 $ 33,792
Rental revenues from real estate operations 23,268 22,741 24,601
-------- -------- --------
Total revenues 57,287 56,254 58,393
-------- -------- --------
COSTS AND EXPENSES:
Cost of sales 23,895 24,500 25,083
Real estate operations:
Mortgage interest expense 1,032 1,318 1,636
Depreciation expense 2,955 3,102 3,814
Other operating expenses 8,484 7,331 7,709
General and administrative expenses 6,016 6,246 5,310
Selling expenses 3,589 3,504 3,743
-------- -------- --------
Total costs and expenses 45,971 46,001 47,295
-------- -------- --------
Operating income 11,316 10,253 11,098
-------- -------- --------
OTHER INCOME (EXPENSE):
Interest and dividend income 1,696 1,934 1,828
Interest expense (443) (532) (436)
Other income and expense, net 5,038 16,021 16,970
-------- -------- --------
Total other income 6,291 17,423 18,362
-------- -------- --------
Income From Continuing Operations Before Income Taxes 17,607 27,676 29,460
Provision for income taxes 6,680 6,035 11,996
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS 10,927 21,641 17,464
-------- -------- --------
DISCONTINUED OPERATIONS:
Income from discontinued operations, net of tax provision
of $335, $842 and $1,005, respectively 502 1,262 1,508
Net gain on disposal of discontinued operations, net of tax
provision of $2,357 and $316, respectively 3,535 474 -
-------- -------- --------
INCOME FROM DISCONTINUED OPERATIONS 4,037 1,736 1,508
-------- -------- --------
NET INCOME $ 14,964 $ 23,377 $ 18,972
======== ======== ========
BASIC EARNINGS PER SHARE:
Income from continuing operations $ 1.21 $ 2.36 $ 1.87
Income from discontinued operations .44 .19 .16
-------- -------- --------
NET INCOME PER SHARE $ 1.65 $ 2.55 $ 2.03
======== ======== ========
DILUTED EARNINGS PER SHARE:
Income from continuing operations $ 1.02 $ 2.17 $ 1.78
Income from discontinued operations .38 .17 .15
-------- -------- --------
Net income per share assuming dilution $ 1.40 $ 2.34 $ 1.93
======== ======== ========
DIVIDENDS PAID PER SHARE $ 2.00 $ - $ -
======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements. Per share amounts, except dividends paid, have been
retroactively adjusted to reflect the two-for-one stock split in August 2003.
25
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(In Thousands)
Accumulated
Other
Common Stock Issued Comprehensive Total
---------------------- Retained Income, Stockholders' Comprehensive
Shares Amount Earnings Net of Tax Equity Income
--------- --------- --------- --------- --------- ---------
BALANCE - JANUARY 1, 2001 9,440 $ 944 $ 72,245 $ 3,930 $ 77,119
Purchase and retirement of common shares (168) (17) (1,752) - (1,769)
Proceeds from the exercise of stock options 10 1 71 - 72
Net income - - 18,972 - 18,972 $ 18,972
Other comprehensive income, net of tax:
Change in net unrealized gain on
available-for-sale securities, net
of tax provision of $2,909 - - - 5,404 5,404 5,404
Reclassification adjustment for net
gains realized in net income, net of
tax provision of $1,862 - - - (3,457) (3,457) (3,457)
---------
Comprehensive income $ 20,919
--------- --------- --------- --------- --------- =========
BALANCE - DECEMBER 31, 2001 9,282 928 89,536 5,877 96,341
--------- --------- --------- --------- ---------
Purchase and retirement of common shares (296) (29) (3,741) - (3,770)
Proceeds from the exercise of stock options 53 5 472 - 477
Net income - - 23,377 - 23,377 $ 23,377
Other comprehensive income, net of tax:
Change in net unrealized gain on
available-for-sale securities, net
of tax benefit of $1,165 - - - (2,167) (2,167) (2,167)
Reclassification adjustment for net
gains realized in net income, net of
tax provision of $1,414 - - - (2,624) (2,624) (2,624)
---------
Comprehensive income $ 18,586
--------- --------- --------- --------- --------- =========
BALANCE - DECEMBER 31, 2002 9,039 904 109,644 1,086 111,634
--------- --------- --------- --------- ---------
Dividends paid - - (9,102) - (9,102)
Purchase and retirement of common shares (166) (17) (3,172) - (3,189)
Proceeds from the exercise of stock options 219 22 1,440 - 1,462
Tax benefit from employee stock options - - 662 - 662
Net income - - 14,964 - 14,964 $ 14,964
Other comprehensive income, net of tax:
Change in net unrealized gain on
available-for-sale securities, net
of tax benefit of $3,879 - - - 8,405 8,405 8,405
Reclassification adjustment for net
gains realized in net income, net of
tax provision of $313 - - - (619) (619) (619)
---------
Comprehensive income $ 22,750
--------- --------- --------- --------- --------- =========
BALANCE - DECEMBER 31, 2003 9,092 $ 909 $ 114,436 $ 8,872 $ 124,217
========= ========= ========= ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
26
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
2003 2002 2001
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 14,964 $ 23,377 $ 18,972
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 4,080 4,358 5,244
Tax benefit from employee stock options 662 - -
Net gain on sale of available-for-sale securities (952) (4,038) (4,911)
Net gain on sale of real estate assets (153) (5,708) (10,995)
Equity in earnings of joint ventures (1,478) (673) (868)
Net gain on disposal of discontinued operations, net of tax (3,535) (474) -
Net realized and unrealized gain on derivative instruments (1,851) (6,283) (482)
Purchase of trading securities (961) (791) (54)
Proceeds from sale of trading securities 2,673 - 2,287
Net realized and unrealized gain on trading securities (411) (35) (461)
Changes in assets and liabilities (A) (2,451) 611 3,187
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 10,587 10,344 11,919
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale securities (19,008) (11,477) (4,488)
Proceeds from sale of available-for-sale securities 7,438 11,701 25,259
Proceeds from sale of real estate assets 11,942 7,258 12,858
Proceeds from sale of derivative instruments 1,739 5,093 10,939
Purchase of derivative instruments - (8,843) -
Purchase of note receivable - (2,955) -
Acquisition of property, plant and equipment (574) (227) (1,327)
Principal payments on note receivable 81 22 3,500
Acquisition of/additions to real estate assets (337) (192) (1,774)
Investments in joint ventures, net (256) (23,128) -
Distributions from joint ventures, net 13,304 776 776
-------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 14,329 (21,972) 45,743
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on mortgage commitments, notes and loans (3,770) (3,831) (4,229)
Net repayments under credit facilities - (525) (700)
Purchase and retirement of common shares (3,189) (3,770) (1,769)
Proceeds from the exercise of stock options 1,462 477 72
Dividends paid (9,102) - -
-------- -------- --------
NET CASH USED IN FINANCING ACTIVITIES (14,599) (7,649) (6,626)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 10,317 (19,277) 51,036
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 48,893 68,170 17,134
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 59,210 $ 48,893 $ 68,170
======== ======== ========
27
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
(In Thousands)
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
2003 2002 2001
---------- -------- -------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 1,329 $1,652 $2,265
========== ====== ======
Taxes $ 7,418 $7,349 $5,722
========== ====== ======
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of note receivable in connection with sale
of real property, net of deferred gain $ - $ 46 $ -
========== ====== ======
(A) Changes in assets and liabilities are as follows:
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------
2003 2002 2001
----------- ------------- --------------
Notes and accounts receivable, net $ (865) $ 734 $ (864)
Inventories (478) 1,276 (340)
Prepaid expenses and other current assets (4) (606) (219)
Deferred income taxes (860) 2,161 (362)
Noncurrent notes receivable 106 9 (9)
Other assets 427 (650) 68
Accounts payable and accrued liabilities 189 1,348 (1,668)
Income taxes payable (346) (2,641) 1,492
Other long-term liabilities (145) 50 6,005
Discontinued operations - noncash charges and
working capital changes (475) (1,070) (916)
----------- ------------- --------------
Total $ (2,451) $ 611 $ 3,187
=========== ============= ==============
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
28
UNITED CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002, AND 2001
(In Thousands, Except Per Share Data)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
------------------
United Capital Corp. (the "Company") and its subsidiaries are engaged
in the investment and management of real estate and in the manufacture
and sale of engineered products. The Company also invests excess
available cash in marketable securities and other financial
instruments.
Principles of Consolidation
---------------------------
The Consolidated Financial Statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. The
equity method of accounting is used for investments in 20% to 50%
owned joint ventures in which the Company has the ability to exercise
significant influence, but not control. These investments are recorded
initially at cost and subsequently adjusted for equity in earnings and
cash contributions and distributions.
Revenue Recognition and Accounts Receivable - Real Estate Investment
and Management
-----------------------------------------------------------------------
The Company leases substantially all of its properties to tenants
under net leases which are accounted for as operating leases. Under
this type of lease, the tenant is obligated to pay all operating costs
of the property including real estate taxes, insurance and repairs and
maintenance. Revenue is recognized as earned and deemed collectible.
Gains on sales of real estate assets and equity investments are
recorded when the gain recognition criteria under generally accepted
accounting principles in the United States of America have been met.
Certain lease agreements provide for additional rent based on a
percentage of tenants' sales. These percentage rents are recorded once
the required sales levels are achieved.
Income on leveraged leases is recognized by a method which produces a
constant rate of return on the outstanding investment in the lease,
net of the related deferred tax liability in the years in which the
net investment is positive.
Accounts receivable are recorded at the outstanding amounts net of the
allowance for doubtful accounts. The Company makes estimates of the
uncollectibility of its accounts receivable related to base rents,
tenant escalations, expense reimbursements and other revenues. The
Company analyzes accounts receivable and historical bad debt levels,
customer credit worthiness and current economic trends when evaluating
the adequacy of the allowance for doubtful accounts. In addition,
tenants in bankruptcy are analyzed and estimates are made in
connection with the expected recovery of pre-petition and
post-petition claims.
Revenue Recognition and Accounts Receivable - Engineered Components
-------------------------------------------------------------------
In general, sales are recorded when products are shipped, title has
passed and collection is reasonably assured. Management believes that
adequate controls are in place to ensure compliance with contractual
product specifications, a substantial history of such performance has
been established and historical returns and allowances have not been
significant. If actual sales returns and allowances exceed historical
amounts, the Company's sales would be adversely affected.
Accounts receivable are recorded at the outstanding amounts net of the
allowance for doubtful accounts. Estimates are used in determining the
Company's allowance for doubtful accounts based on historical
collections experience, current economic trends and a percentage of
its accounts receivable by aging category. In determining these
percentages, the Company looks at historical write-offs of its
receivables.
29
The Company also looks at the credit quality of its customer base as
well as changes in its credit policies. The Company continuously
monitors collections and payments from its customers. While credit
losses have historically been within expectations and the provisions
established, the Company cannot guarantee that it will continue to
experience the same credit loss rates that it has in the past.
Cash and Cash Equivalents
-------------------------
Cash equivalents of $36,818 and $9,061 at December 31, 2003 and 2002,
respectively, consist of commercial paper, overnight repurchase
agreements and certificates of deposit. The Company considers all
highly liquid investments with a maturity, at the purchase date, of
three months or less to be cash equivalents.
Marketable Securities
---------------------
The Company determines the appropriate classification of securities at
the time of purchase and reassesses the appropriateness of the
classification at each reporting date. At December 31, 2003 and 2002,
all marketable securities held by the Company have been classified as
either available-for-sale or trading and, as a result, are stated at
fair value. Unrealized gains and losses on available-for-sale
securities are recorded as a separate component of stockholders'
equity. Realized gains and losses on the sale of securities as well as
unrealized holding gains and losses on trading securities, as
determined on a first-in, first-out basis, are included in the
Consolidated Statements of Income.
The Company reviews its investments on a regular basis to evaluate
whether or not each security has experienced an other-than-temporary
decline in fair value. If it is believed that an other-than-temporary
decline exists, the Company will write down the investment to market
value and record the related write-down as a loss on investments in
the Consolidated Statements of Income.
Notes and Accounts Receivable, Net
----------------------------------
Notes and accounts receivable, net consist of the following components
at:
DECEMBER 31,
--------------------
2003 2002
------ ------
Trade receivables $5,463 $4,061
Rental receivables 338 441
Other receivables 974 1,408
Current portion of notes receivable 55 65
------ ------
Total 6,830 5,975
Less: Allowance for doubtful accounts 324 324
------ ------
$6,506 $5,651
====== ======
Changes in the Company's allowance for doubtful accounts are as
follows:
2003 2002
----- -----
Beginning balance $ 324 $ 328
Recoveries of accounts previously written off,
net of write-offs - (4)
----- -----
Ending balance $ 324 $ 324
===== =====
30
Inventories
-----------
Inventories are stated at the lower of cost or market and include
material, labor and manufacturing overhead. The first-in, first-out
(FIFO) method is used to determine the cost of inventories. Inventory
consists of the following:
DECEMBER 31,
----------------------------------
2003 2002
-------------- --------------
Raw materials $ 1,601 $ 1,765
Work in process 411 367
Finished goods 2,143 1,545
-------------- --------------
$ 4,155 $ 3,677
============== ==============
Depreciation and Amortization
-----------------------------
Depreciation and amortization are provided on a straight-line basis
over the estimated useful lives of the related assets as follows:
Real property held for rental:
Buildings and improvements 5 to 39 years
Equipment 5 to 7 years
Property, plant and equipment:
Buildings and improvements 18 to 39 years
Machinery and equipment 3 to 8 years
Intangible assets with definite lives:
Patents, trademarks and other intellectual property 5 to 20 years
Real Estate
-----------
Land, buildings and improvements and equipment are recorded at cost,
less accumulated depreciation and amortization. Expenditures for
maintenance and repairs are charged to operations as incurred.
Significant renovations and replacements, which improve the life of
the asset, are capitalized and depreciated over their estimated useful
lives.
Assets held for sale are reported at the lower of the carrying amount
or fair value less costs to sell and depreciation is discontinued.
Property sales or dispositions are recorded when title transfers. Upon
disposition, the related costs and accumulated depreciation are
removed from the respective accounts. Any gain or loss on sale or
disposition is recognized in accordance with accounting principles
generally accepted in the United States of America.
Commencing in 2002, the Company considered real property to be held
for sale and reported as discontinued operations if management has
committed to a plan to sell the asset under usual and customary terms
and believes such sale will be completed within one year. In such
event, the financial results associated with these assets are
reclassified as discontinued operations for all periods presented. In
the normal course of business, the Company receives offers for the
sale of properties, either solicited or unsolicited. For those offers
that are accepted, the prospective buyer usually requires a due
diligence period before consummation of the transaction. It is not
unusual for matters to arise that result in the withdrawal or
rejection of the offer during this process. If circumstances arise
that previously were considered unlikely and, as a result, management
decides not to sell a property classified as held for sale, the
property is reclassified as held for rental. A property that is
reclassified is measured and recorded individually at the lower of its
carrying amount before being classified as held for sale, adjusted for
any depreciation expense that would have been recognized had the
property been continuously classified as held for rental or its fair
market value at the date of the subsequent decision not to sell.
31
Property, Plant and Equipment
-----------------------------
Property, plant and equipment is recorded at cost, less accumulated
depreciation and amortization. Major improvements are capitalized and
maintenance and repairs are expensed as incurred.
Long-Lived Assets
-----------------
On a periodic basis, management assesses whether there are any
indicators that the value of its long-lived assets may be impaired. An
asset's value is considered impaired only if management's estimate of
current and projected operating cash flows (undiscounted and without
interest charges) of the asset over its remaining useful life is less
than the net carrying value of the asset. Such cash flow projections
consider factors such as expected future operating income, trends and
prospects, as well as the effects of demand, competition and other
factors. To the extent impairment has occurred, the carrying amount of
the asset would be written down to an amount to reflect the fair value
of the asset.
Pension Plan
------------
Pension plans can be a significant cost of doing business, but
represent obligations that will ultimately be settled far in the
future and therefore are subject to estimates. Pension accounting is
intended to reflect the recognition of future benefit costs over the
employee's approximate service period based on the terms of the plan
and the investment and funding decisions made by the Company. The
Company is required to make assumptions regarding such variables as
the expected long-term rate of return on assets and the discount rate
applied to determine service cost and interest cost to arrive at
pension income or expense for the year.
The Company accounts for its defined benefit pension plan in
accordance with Statement of Financial Accounting Standards ("SFAS")
No. 87, "Employers' Accounting for Pensions" ("SFAS No. 87"), which
requires that amounts recognized in financial statements be determined
on an actuarial basis. SFAS No. 87 generally reduces the volatility of
future income (expense) from changes in pension liability discount
rates and the performance of the pension plan's assets.
The most significant element in determining the Company's pension
income (expense) in accordance with SFAS No. 87 is the expected return
on plan assets. The Company has assumed that the expected long-term
rate of return on plan assets will be 8.0% for 2003 and 2002. Based on
the Company's existing and forecasted asset allocation and related
long-term investment performance results, the Company believes that
its assumption of future returns of 8.0% is reasonable. The assumed
long-term rate of return on assets is applied to a calculated value of
plan assets, which recognizes changes in the fair value of plan assets
in a systematic manner. This produces the expected return on plan
assets that is included in pension income (expense). The difference
between this expected return and the actual return on plan assets is
deferred. The net deferral of past asset gains (losses) affects the
calculated value of plan assets and, ultimately, future pension income
(expense). During 2002 and 2001, the plan assets earned a rate of
return less than 8.0%. This decline was due, in large part, to general
declines in the market value of investments. During 2003, the
Company's pension plan investments experienced an approximate 20% rate
of return. A 100 basis point change in the expected long-term rate of
return on plan assets would have changed fiscal 2003 pension expense
by $84.
Research and Development
------------------------
The Company expenses research, development and product engineering
costs as incurred. Approximately $63, $58 and $77 of such costs were
incurred by the Company in 2003, 2002 and 2001, respectively.
Shipping and Handling Costs
---------------------------
Shipping and handling costs billed to a customer are included in net
sales and the related costs are included in cost of sales and selling
expenses. For the years ended December 31, 2003, 2002, and 2001,
shipping and handling costs included in selling expenses were $325,
$293 and $316, respectively.
32
Dividends
---------
On June 10, 2003, the Board of Directors of the Company declared a
special one-time cash dividend of $2.00 per common share on a
pre-split basis to all stockholders of record as of June 20, 2003. The
declaration of such dividend is within the discretion of the Board of
Directors. While the Company does not currently expect to pay
additional dividends in the future, the Board of Directors could
reevaluate this position in the future. This dividend, totaling
$9,102, was paid on July 10, 2003.
Stock Split
-----------
On June 10, 2003, the Company's Board of Directors unanimously adopted
an amendment to the Company's Articles of Incorporation to increase
the number of authorized shares of the Company's Common Stock from
7,500 to 17,500 shares, subject to stockholder approval. A majority of
the outstanding shares of the Company voted to approve this proposal
and the Company declared a two-for-one stock split during August 2003.
Unless otherwise indicated, all references to the number of shares of
common stock, per share prices and earnings per share amounts have
been adjusted to reflect the increase in authorized capital and stock
split on a retroactive basis, except dividends per share.
Earnings Per Common Share
-------------------------
Basic earnings per common share is calculated by dividing net income
by the weighted-average number of common shares outstanding and
excludes any dilutive effects of stock options. Diluted earnings per
common share gives effect to all potentially dilutive common shares
that were outstanding during the period. Dilutive common shares used
in the computation of diluted earnings per common share result from
the assumed exercise of stock options, using the treasury stock
method.
Stock-Based Compensation
------------------------
The Company accounts for stock-based compensation using the intrinsic
value method in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations ("APB No. 25") and has adopted the disclosure
provisions of SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure, an amendment of FASB Statement No. 123"
("SFAS No. 148"). Under APB No. 25, compensation expense is only
recognized when the market value of the underlying stock at the date
of grant exceeds the amount an employee must pay to acquire the stock.
The Company has issued stock options with an exercise price equal to
the market value of the underling stock on the date of grant.
Accordingly, no compensation expense has been recognized in the
Consolidated Financial Statements in connection with employee stock
option grants.
The following table illustrates the effect on net income and earnings
per share had the Company applied the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation"
to stock-based employee compensation.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
2003 2002 2001
--------------- --------------- ---------------
Net income, as reported $ 14,964 $ 23,377 $ 18,972
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects (2,586) (2,068) (1,750)
--------------- --------------- ---------------
Pro forma net income $ 12,378 $ 21,309 $ 17,222
=============== =============== ===============
Earnings per share:
Basic - as reported $ 1.65 $ 2.55 $ 2.03
=============== =============== ===============
Basic - pro forma $ 1.37 $ 2.33 $ 1.84
=============== =============== ===============
Diluted - as reported $ 1.40 $ 2.34 $ 1.93
=============== =============== ===============
Diluted - pro forma $ 1.18 $ 2.21 $ 1.81
=============== =============== ===============
Pro forma compensation expense may not be indicative of pro forma
expense in future years. For purposes of estimating the fair value of
each option on the date of grant, the Company utilized the
Black-Scholes option pricing model.
33
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including
the expected stock price volatility. Because the Company's employee
stock options have characteristics significantly different from those
of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock
options.
The weighted-average option fair values and the assumptions used to
estimate these values are as follows:
GRANTS ISSUED DURING
-------------------------------------------
2003 2002 2001
-------------------------------------------
Expected life (years) 5 5 5
Risk free interest rate 2.2% 4.4% 5.0%
Expected volatility 33.7% 34.2% 36.9%
Dividend yield 0.0% 0.0% 0.0%
Weighted-average option fair value $ 7.26 $ 4.59 $ 4.84
Derivative Financial Instruments
--------------------------------
The Company recognizes all derivative financial instruments, such as
its short stock sales, put and/or call options and interest rate swap
agreements, in the Consolidated Financial Statements at fair value
regardless of the purpose or intent for holding the instrument.
Changes in the fair value of derivative financial instruments are
either recognized periodically in income or in stockholders' equity as
a component of accumulated other comprehensive income depending on
whether the derivative financial instrument qualifies for hedge
accounting, and if so, whether it qualifies as a fair value or cash
flow hedge. Generally, changes in the fair value of derivatives
accounted for as fair value hedges are recorded in income along with
the portions of the changes in the fair values of the hedged items
that relate to the hedged risks. Changes in the fair value of
derivatives accounted for as cash flow hedges, to the extent they are
effective as hedges, are recorded in accumulated other comprehensive
income net of deferred taxes. Changes in the fair value of derivatives
not qualifying as hedges are reported in income.
In strategies designed to hedge overall market risks and manage its
interest rate exposure, the Company may sell common stock short,
participate in put and/or call options and enter into interest rate
swap agreements.
Management maintains a diversified portfolio of cash equivalents and
investments in a variety of securities, primarily U.S. investments in
both common and preferred equity issues and participates on a limited
basis in transactions involving derivative financial instruments,
including short stock sales and put and/or call options. At December
31, 2003 and 2002, the fair value of such derivatives was ($10) and
($122), respectively, which is recorded as a component of accounts
payable and accrued liabilities in the Consolidated Balance Sheets.
These instruments do not qualify for hedge accounting and therefore
changes in the derivatives fair value are recognized in earnings. The
Company recognized $1,851, $6,283 and $482 in net realized and
unrealized gains from derivative instruments for the years ended
December 31, 2003, 2002 and 2001, respectively, which are included in
other income and expense, net in the Consolidated Statements of
Income.
As of September 30, 2002, the Company's interest rate swap agreement
(the "Swap") expired together with the satisfaction of the underlying
term loan. The Swap modified the interest characteristics of a
34
particular term loan by effectively converting its floating rate to a
fixed rate, thus reducing the impact of rate changes on interest
expense. The Swap was designated with the principal balance and term
of the term loan and qualified as an effective hedge under SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities."
Since the Swap was classified as a cash flow hedge, the fair value of
($11) at December 31, 2001 was recorded as a component of accumulated
other comprehensive income, net of tax, with no impact on earnings.
The amount paid or received on the Swap was accrued and recognized as
an adjustment of interest expense over the term of the agreement.
Reclassifications
-----------------
Certain prior year amounts have been reclassified to present them on a
basis consistent with the current year presentations.
Use of Estimates
----------------
The preparation of consolidated financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to use judgment in making estimates and
assumptions that affect the reported amounts of assets, liabilities,
revenue and expenses and related disclosure of contingent assets and
liabilities. Certain of the estimates and assumptions required to be
made relate to matters that are inherently uncertain as they pertain
to future events. While management believes that the estimates and
assumptions used were the most appropriate, actual results could
differ significantly from those estimates under different assumptions
and conditions.
Recent Accounting Pronouncements
--------------------------------
In November 2002, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees
of Indebtedness of Others" ("FIN 45"). FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for
the fair value of an obligation assumed under a guarantee. FIN 45 also
requires additional disclosures by a guarantor in its interim and
annual financial statements about the obligations associated with
guarantees issued. The recognition provisions of FIN 45 are effective
for any guarantees issued or modified after December 31, 2002. The
disclosure requirements are effective for financial statements of
interim or annual periods ending after December 15, 2002. The adoption
of FIN 45 did not have a material impact on the Company's financial
position or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46
"Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46
addresses consolidation by business enterprises of variable interest
entities that possess certain characteristics. The interpretation
requires that if a business enterprise has a controlling financial
interest in a variable interest entity, the assets, liabilities and
results of operations of the variable interest entity must be included
in the consolidated financial statements with those of the business
enterprise. This interpretation applies immediately to variable
interest entities created after January 31, 2003 and to variable
interest entities in which an enterprise obtains an interest after
that date. In December 2003, the FASB issued FASB Interpretation No.
46R, "Consolidation of Variable Interest Entities - an interpretation
of ARB 51 (revised December 2003)" ("FIN 46R"), which includes
significant amendments to the previously issued FIN 46. Among other
provisions, FIN 46R includes revised transition dates based on the
nature as well as the creation date of the variable interest entity.
The Company is now required to adopt the provisions of FIN 46R no
later than the end of the first reporting period that ends after March
15, 2004. The adoption of these pronouncements has not and is not
expected to have a material impact on the Company's consolidated
financial condition or results of operations taken as a whole.
In April 2003, the FASB released SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities" ("SFAS No.
149"). SFAS No. 149 clarifies under what circumstances a contract with
an initial net investment meets the characteristics of a derivative,
amends the definition of an underlying contract, and clarifies when a
derivative contains a financing component in order to increase the
comparability of accounting practices under SFAS No. 133. The
statement is effective for contracts entered into or modified after
September 30, 2003, and for hedging relationships designated after
September 30, 2003. The adoption of SFAS No. 149 did not have a
material impact on the Company's financial position or results of
operations.
35
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity" ("SFAS No. 150"). SFAS No. 150 establishes standards for how
an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an
issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). SFAS No. 150 is
effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003, except for mandatorily
redeemable financial instruments of nonpublic entities. The Company
has adopted SFAS No. 150 and it did not have a material impact on the
Company's financial position or results of operations.
In December 2003, the FASB issued SFAS No.132 (Revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement
Benefits" ("SFAS No. 132R"). This standard requires new annual
disclosures about the types of plan assets, investment strategy,
measurement date, plan obligations, and cash flows as well as the
components of the net periodic benefit cost recognized in interim
periods. The new annual disclosure requirements apply to fiscal years
ending after December 15, 2003, except for the disclosure of expected
future benefit payments, which must be disclosed for fiscal years
ending after June 15, 2004. Interim period disclosures are generally
effective for interim periods beginning after December 15, 2003. The
Company has included the disclosures required by SFAS No. 132R in its
consolidated financial statements for the year ended December 31, 2003
(see Note 15).
In December 2003, the Securities and Exchange Commission ("SEC")
issued Staff Accountant Bulletin No. 104, "Revenue recognition" ("SAB
No. 104"), which codifies, revises and rescinds certain sections on
SAB No. 101, "Revenue Recognition," in order to make this interpretive
guidance consistent with current authoritative accounting and auditing
guidance and SEC rules and regulations. The changes noted in SAB No.
104 did not have a material effect on the Company's financial position
or results of operations.
2. REAL ESTATE
The Company is the lessor of real estate under operating leases which
expire in various years through 2078. The following is a summary of
real property held for rental:
DECEMBER 31,
-------------------------------
2003 2002
-------- --------
Land $ 13,525 $ 13,525
Buildings 96,388 96,075
-------- --------
109,913 109,600
Less: Accumulated depreciation 70,277 67,349
-------- --------
$ 39,636 $ 42,251
======== ========
As of December 31, 2003, total minimum future rentals to be received
under noncancelable leases for each of the next five years and
thereafter are as follows:
YEAR ENDED DECEMBER 31,
2004 $ 13,566
2005 12,054
2006 7,922
2007 6,205
2008 5,718
Thereafter 49,684
--------------
Total minimum future rentals $ 95,149
==============
Minimum future rentals do not include additional rentals that may be
received under certain leases which provide for such rentals based
upon a percentage of lessees' sales. Percentage rents included in the
determination of net income for 2003, 2002, and 2001 were
approximately $758, $631 and $826, respectively.
36
Property sales
--------------
The Company adopted the provisions of Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"), in 2002. SFAS No. 144
requires that the operating results through the date of sale, as well
as the gains on sales generated on properties sold or held for sale be
reclassified as discontinued operations for all periods presented. As
the statement requires implementation on a prospective basis,
properties which were identified as held for sale prior to
implementation are presented in the Consolidated Financial Statements
in a manner consistent with the prior years' presentation.
During 2003, the Company sold fourteen commercial properties from its
real estate investment and management segment which had a total net
book value of $4,250. The properties were sold for an aggregate sales
price of $5,514, resulting in net gains of $758 on a net of tax basis.
The Company also sold two shopping centers from its real estate
investment and management segment which had a total net book value of
$141. The properties were sold for an aggregate sales price of $3,234,
resulting in gains of $1,856 on a net of tax basis. One shopping
center from the Company's real estate investment and management
segment was donated during the first quarter of 2003 which had a total
net book value of $60. The Company received no proceeds from the
donation and recorded a loss of $36 on a net of tax basis.
During 2003, the Company entered into a contract to sell one of its
commercial properties with a sales price below its carrying value. The
sale was completed in January 2004. Included in net gain on disposal
of discontinued operations for the year ended December 31, 2003 is a
loss of $867, on a net of tax basis, related to the write-down of this
property. The adjusted carrying value of this property is classified
as held for sale and included in discontinued operations at December
31, 2003 and 2002.
During 2002, the Company sold an office property from its real estate
investment and management segment which had a net book value of $51.
The property was sold for a sales price of approximately $3,400,
including a mortgage note receivable of $3,100. In accordance with
accounting principles generally accepted in the United States of
America, the gain from the sale of this property was being recognized
under the installment method and, accordingly, the carrying value of
noncurrent notes receivable had been reduced by the deferred gain.
During 2003, the mortgage note receivable was satisfied and the
balance of the deferred gain was recognized. For the year ended
December 31, 2003 and 2002, gains of $1,824 and $176 on a net of tax
basis have been recognized from this sale, respectively.
The results of operations for these properties for the years ended
December 31, 2003, 2002 and 2001 have been reclassified to
discontinued operations, on a net of tax basis, in accordance with
SFAS No. 144. In addition, the assets and liabilities associated with
these properties have been reclassified to discontinued operations in
the Consolidated Balance Sheet at December 31, 2002. These amounts
primarily consist of real property, net of accumulated depreciation,
rents receivable, prepaid or accrued charges and mortgage obligations,
if any.
Summarized financial information for properties sold and accounted for
as discontinued operations is as follows:
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
2003 2002 2001
------- ------- -------
Rental revenues from real estate operations $ 610 $ 1,861 $ 2,465
Mortgage interest expense (4) (48) (111)
Depreciation expense (5) (46) (200)
Other operating expenses (92) (191) (151)
------- ------- -------
Income from operations $ 509 $ 1,576 $ 2,003
======= ======= =======
37
Properties held for sale
------------------------
As of December 31, 2003, in accordance with the provisions of SFAS No.
144, the Company considered three commercial properties from its real
estate and investment management segment to be held for sale and
reported as discontinued operations.
In accordance with SFAS No. 144, the results of operations for these
properties, plus those properties sold during 2003 and 2002 since the
implementation of SFAS No. 144, have been reclassified to discontinued
operations, on a net of tax basis, in the Consolidated Statements of
Income for the years ended December 31, 2003, 2002 and 2001. In
addition, the assets and liabilities associated with these properties,
which primarily consist of real property, net of accumulated
depreciation, rents receivable, prepaid or accrued charges, and
mortgage obligations, if any, have been reclassified to discontinued
operations in the Consolidated Balance Sheets at December 31, 2003 and
2002.
Summarized financial information for properties held for sale and
accounted for as discontinued operations is as follows:
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------
2003 2002 2001
-------------- -------------- --------------
Rental revenues from real estate operations $ 575 $ 749 $ 738
Mortgage interest expense (1) (24) (49)
Depreciation expense (156) (156) (161)
Other operating expenses (90) (41) (18)
-------------- -------------- --------------
Income from operations $ 328 $ 528 $ 510
============== ============== ==============
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is principally used in the Company's
manufacturing operations and consists of the following:
DECEMBER 31,
-------------------------------------------
2003 2002
-------------- --------------
Land $ 28 $ 28
Buildings and improvements 1,428 1,471
Machinery and equipment 12,524 12,104
-------------- --------------
13,980 13,603
Less: Accumulated depreciation 10,882 10,034
-------------- --------------
$ 3,098 $ 3,569
============== ==============
4. MARKETABLE SECURITIES
The cost, gross unrealized gains, gross unrealized losses and fair
market value of marketable securities by type are as follows:
GROSS GROSS FAIR
UNREALIZED UNREALIZED MARKET
DECEMBER 31, 2003: COST GAINS LOSSES VALUE
-------------- -------------- -------------- --------------
Available-for-sale:
Equity securities $ 28,957 $ 13,763 $ (113) $ 42,607
Bonds 7,005 - - 7,005
-------------- -------------- -------------- --------------
$ 35,962 $ 13,763 $ (113) $ 49,612
============== ============== ============== ==============
38
GROSS GROSS FAIR
UNREALIZED UNREALIZED MARKET
DECEMBER 31, 2002: COST GAINS LOSSES VALUE
-------------- -------------- -------------- --------------
Available-for-sale:
Equity securities $ 23,389 $ 2,119 $ (447) $ 25,061
Bonds 5 - - 5
-------------- -------------- -------------- --------------
23,394 2,119 (447) 25,066
Trading:
Equity securities 792 35 - 827
-------------- -------------- -------------- --------------
$ 24,186 $ 2,154 $ (447) $ 25,893
============== ============== ============== ==============
Included in marketable securities at December 31, 2003 and 2002 is
$36,105 and $20,402, respectively, of common stock in a publicly-traded
company for which the Board Chairman is an executive officer and
director and another Director of the Company is a director.
Proceeds from the sale of available-for-sale and trading securities and
the resulting gross realized gains and losses included in the
determination of net income are as follows:
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
2003 2002 2001
---------- ----------- ------------
Available-for-sale securities:
Proceeds $ 7,438 $ 11,701 $ 25,259
Gross realized gains 952 5,043 5,462
Gross realized losses - (1,005) (551)
Trading securities:
Proceeds $ 2,673 $ - $ 2,287
Gross realized gains 456 - 478
Gross realized losses (45) - (17)
5. INVESTMENTS IN JOINT VENTURES
Investments in joint ventures consist of the following:
DECEMBER 31,
------------------------------------------
2003 2002
-------------- --------------
Investments in hotel ventures (a) $ 11,843 $ 23,128
Lease financing (b) 7,976 8,261
-------------- --------------
$ 19,819 $ 31,389
============== ==============
(a) In December 2002, the Company purchased a 50% interest in a joint
venture (the "Hotel Venture") for $23,128 together with Prime
Hospitality Corp. ("Prime") a publicly-traded company for which the
Company's Board Chairman is an executive officer and director and
another Director of the Company is a director (see Note 12). The Hotel
Venture owns and operates a hotel in New Jersey. In March 2003, the
Company and Prime each sold a 10% interest on the Hotel Venture to an
unrelated third party, at cost.
In April 2003, the Hotel Venture entered into a $25,000 mortgage loan
(the "Mortgage") with a bank, secured by the underlying hotel. The
proceeds of the loan were distributed to the partners of the Hotel
Venture based on their ownership interest, thereby reducing their
respective investment. In connection with the Mortgage, the Company
and Prime entered into a direct guaranty agreement with the bank
whereby the Company and Prime, jointly and severally, guaranteed not
more than $4,000 of the Mortgage. Amounts due under the guaranty are
reduced by the scheduled principal payments under the Mortgage. The
guaranty is enforceable upon the occurrence of certain events,
including a default as defined in the Mortgage and expires upon
satisfaction of the loan in April 2006. Pursuant to the operating
agreement, any payments made under the guaranty would increase the
guarantors' ownership interest. The Company believes that the
collateral of the underlying hotel is sufficient to repay the Mortgage
without requiring enforcement of the guaranty.
39
Accordingly, the fair value of the guarantee was determined to be
insignificant and, therefore, no liability has been recorded.
In January 2003, the Company purchased a 50% interest in a joint
venture (the "Quebec Venture") for $6,114 together with Prime. The
Quebec Venture owns and operates a hotel in Quebec, Canada. In March
2003, the Company and Prime each sold a 10% interest in the Quebec
Venture to an unrelated third party, at cost. In July 2003, the Quebec
Venture entered into an $8.2 (Canadian) mortgage loan with a Canadian
Bank, secured by the underlying hotel. The proceeds of the loan were
distributed to the partners of the Quebec Venture based on their
ownership interest, thereby reducing their respective investment.
The equity method of accounting is used for investments in 20% to 50%
owned joint ventures in which the Company has the ability to exercise
significant influence, but not control. Under the operating agreements
of the Hotel Venture and Quebec Venture, all significant operating and
capital decisions are made jointly and operating profits are allocated
based on ownership interests. These investments were initially recorded
at cost and are subsequently adjusted for equity in earnings (losses)
and cash contributions and distributions. The Company's equity in
earnings of these hotel ventures was $987 for the year ended December
31, 2003.
Summarized financial information of the Hotel Venture and Quebec
Venture are as follows:
DECEMBER 31,
--------------------------
BALANCE SHEETS: 2003 2002
-------------- -------- ---------
Current assets $ 3,728 $ 347
Property, plant and equipment, net $ 61,008 $ 46,397
Other non-current assets $ 304 $ -
Current liabilities $ 3,267 $ 500
Long term liabilities $ 29,971 $ -
Equity $ 31,802 $ 46,244
FOR THE YEAR ENDED
STATEMENT OF INCOME: DECEMBER 31, 2003
-------------------- ------------------
Revenues $ 22,730
Expenses 20,368
---------
Operating Income $ 2,362
=========
The accounts of the Quebec Venture are recorded in Canadian dollars
and are translated into U.S. dollars, the reporting currency of the
Quebec Venture. Currency adjustments relating to results of operations
are generally included in the equity in earnings reported by the
Company while the translation of balance sheet accounts does not
generally affect the Company's investments in joint ventures.
(b) Lease financing consists of a 50.0% interest in a limited
partnership whose principal assets are two distribution centers leased
to Kmart Corporation ("Kmart"), which are accounted for as leveraged
leases (see Note 12).
The following represents the components of the net investment in the leveraged leases:
DECEMBER 31,
----------------------------------------------
2003 2002
---------------------- ------------------
Rents receivable $ 73,525 $ 77,553
Residual values 10,000 10,000
Non recourse debt service (58,354) (61,607)
Unearned income (17,195) (17,685)
-------------- --------------
7,976 8,261
Less: Deferred taxes arising from leveraged leases 6,652 6,860
-------------- --------------
$ 1,324 $ 1,401
============== ==============
40
The Company's share of income arising from this investment was $491,
$673 and $868 for the years ended December 31, 2003, 2002, and 2001,
respectively, and is included in rental income in the Consolidated
Statements of Income.
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
DECEMBER 31,
-------------------------------------------
2003 2002
-------------- --------------
Accounts payable $ 4,099 $ 3,543
Accrued wages and benefits 2,051 1,985
Liabilities associated with discontinued
manufacturing operations 993 1,184
Other accrued expenses 2,124 2,478
-------------- --------------
$ 9,267 $ 9,190
============== ==============
7. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
-------------------------------------------
2003 2002
-------------- --------------
Mortgages on real property $ 12,347 $ 16,117
Less: Current maturities 3,888 3,770
-------------- --------------
$ 8,459 $ 12,347
============== ==============
First mortgages bearing interest at rates ranging from 4.0% to 10.0%
per annum are collateralized by the related real property. The related
real property has a net carrying value of $16,107 at December 31, 2003
and is included in real property held for rental in the Consolidated
Balance Sheets. Such amounts are scheduled to mature at various dates
from January 2004 through October 2015.
The approximate aggregate maturities of these obligations at December
31, 2003 are as follows:
LONG-TERM
DEBT
--------------
2004 $ 3,888
2005 2,398
2006 693
2007 368
2008 410
Thereafter 4,590
--------------
$ 12,347
==============
8. CREDIT FACILITIES
Effective December 10, 2002, the Company entered into a credit
agreement with five banks which provides for an $80,000 revolving
credit facility ("Revolver"). The Revolver may be increased under
certain circumstances and expires on December 31, 2005.
Under the terms of the Revolver, the Company will be provided with
eligibility based upon the sum of (i) 60.0% of the aggregate
annualized and normalized year-to-date net operating income of
unencumbered eligible properties, as defined, capitalized at 10.0%,
(ii) 60.0% of the aggregate annualized and normalized year-to-date net
operating income of unencumbered eligible hotel properties, as
defined, capitalized at 10.5%, not to exceed the lesser of $10,000 or
10% of eligibility, (iii) the lesser of $20,000 or 50.0% of the
aggregate annualized and normalized year-to-date net operating income
of encumbered eligible properties, as defined, capitalized at 12.0%,
(iv) the sum of 75.0% of eligible accounts receivable, 50.0% of
41
eligible inventory, and 50% of eligible loans, as defined, (v) cash
and cash equivalents in excess of working capital, as defined, and
(vi) 50% of marketable securities, as defined.
At December 31, 2003, eligibility under the Revolver was $80,000 based
upon the above terms and there were no amounts outstanding. The credit
agreement contains certain financial and restrictive covenants,
including minimum consolidated equity, interest coverage, debt service
coverage and capital expenditures (other than for real estate) and
limitations on indebtedness. The Company was in compliance with all
covenants at December 31, 2003. The credit agreement also contains
provisions which allow the banks to perfect a security interest in
certain operating and real estate assets in the event of a default, as
defined in the credit agreement. Borrowings under the Revolver, at the
Company's option, bear interest at the bank's prime lending rate or at
the London Interbank Offered Rate ("LIBOR") (1.12% at December 31,
2003) plus 2.0% for non-cash collateralized borrowings and 1.0% for
cash collateralized borrowings.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
The carrying amount reported in the Consolidated Balance Sheets for
cash and cash equivalents, accounts receivable, accounts payable and
accrued liabilities approximate their fair value due to the short
maturity of such items.
The fair value of notes receivable are estimated using discounted cash
flow analyses, with interest rates comparable on loans with similar
terms and borrowers of similar credit quality. The fair value of notes
receivable at December 31, 2003 and 2002 was approximately $3,450 and
$7,724, respectively, while the carrying value was $2,917 and $3,059
for the same periods. The carrying value of notes receivable at
December 31, 2002 is net of a deferred gain on a property sale of
$3,041 which is being recognized under the installment method of
accounting. During 2003, the mortgage note receivable was satisfied
and the balance of the deferred gain was recognized.
At December 31, 2003 and 2002, all marketable securities held by the
Company have been classified as either available-for-sale or trading
and, as a result, are carried at fair value based on quoted market
prices or dealer quotes. If a quoted market price is not available,
fair value is estimated using quoted market prices for similar
securities.
The fair value of long-term debt was calculated based on interest
rates available for debt with terms and due dates similar to the
Company's existing debt arrangements. The fair value of long-term debt
at December 31, 2003 and 2002 was approximately $12,285 and $17,036
respectively, while the carrying value was $12,347 and $16,738 for the
same periods.
The derivative instruments held by the Company, representing short
stock sales and put and/or call options, are carried at fair value
based on quoted market prices or dealer quotes. At December 31, 2003
and 2002, the fair value of these derivatives was ($10) and ($122),
respectively.
10. STOCKHOLDERS' EQUITY
Previous purchases of the Company's common stock have reduced the
Company's additional paid-in capital to zero and accordingly current
year purchases in excess of par value have reduced retained earnings.
During 2003, the Company purchased and retired 166 shares of the
Company's common stock for $3,189. Future repurchases of the Company's
common stock will also reduce retained earnings by amounts in excess
of the par value. Repurchases of the Company's common stock will be
made from time to time in the open market at prevailing market prices
and may be made in privately negotiated transactions, subject to
available resources.
42
Stock Options
-------------
The Company has two stock option plans under which qualified and
nonqualified options may be granted to key employees to purchase the
Company's common stock at the fair market value on the date of grant.
Under both plans, the options typically become exercisable in three
equal installments, beginning one year from the date of grant. Stock
options generally expire ten years from the date of grant. The
Incentive and Non-Qualified Stock Option Plan (the "Incentive Plan")
and the 1988 Joint Incentive and Non-Qualified Stock Option Plan (the
"Joint Plan") both provide for the granting of incentive or
nonqualified stock options. The number of authorized shares reserved
for issuance is 3,650 under the Incentive Plan and 2,650 under the
Joint Plan.
At December 31, 2003, there were 2,279 and 3,191 options outstanding
under the Joint Plan and Incentive Plan, respectively. At December 31,
2002, there were 2,362 and 2,575 options outstanding under the Joint
Plan and Incentive Plan, respectively.
A summary of the Company's stock options as of December 31, 2003,
2002, and 2001, and changes during the years then ended are summarized
below:
WEIGHTED-
SHARES AVERAGE
EXERCISE PRICE
-------------- --------------
Outstanding at January 1, 2001 3,230 $ 8.31
Granted 936 $ 11.93
Exercised (10) $ 7.23
Cancelled/Forfeited (57) $ 8.33
--------------
Outstanding at December 31, 2001 4,099 $ 9.14
Granted 908 $ 12.20
Exercised (53) $ 8.94
Cancelled/Forfeited (17) $ 11.51
--------------
Outstanding at December 31, 2002 4,937 $ 9.70
Granted 758 $ 21.80
Exercised (219) $ 6.66
Cancelled/Forfeited (6) $ 12.20
--------------
Outstanding at December 31, 2003 5,470 $ 11.49
==============
The following table summarizes information about options outstanding
and exercisable at December 31, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------------------------------------------------------
WEIGHTED
-AVERAGE WEIGHTED WEIGHTED-
REMAINING -AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
---------------------- ----------------- --------------- ----------------- --------------- -------------
$3.63 - $6.53 702 6.3 Years $ 6.45 702 $ 6.45
$7.03 - $9.38 1,381 4.7 Years $ 7.65 1,381 $ 7.65
$11.44 - $11.93 1,694 6.1 Years $ 11.70 1,384 $ 11.65
$12.20 - $21.80 1,693 8.8 Years $ 16.51 338 $ 12.25
-------------- -------------
$3.63 - $21.80 5,470 6.6 Years $ 11.49 3,805 $ 9.29
============== =============
43
11. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share from continuing operations:
2003 2002 2001
-------------- -------------- --------------
Numerator:
Income from continuing operations $ 10,927 $ 21,641 $ 17,464
============== ============== ==============
Denominator:
Basic - weighted-average shares outstanding 9,061 9,158 9,370
Dilutive effect of employee stock options 1,616 824 458
-------------- -------------- --------------
Diluted - weighted-average shares outstanding 10,677 9,982 9,828
============== ============== ==============
Basic earnings per share - continuing operations $ 1.21 $ 2.36 $ 1.87
============== ============== ==============
Diluted earnings per share - continuing operations $ 1.02 $ 2.17 $ 1.78
============== ============== ==============
Employee stock options to purchase 758 and 1,780 shares of the
Company's common stock at December 31, 2003 and 2001, respectively,
were not included in the computation of diluted earnings per share
because their effect would have been anti-dilutive.
12. TRANSACTIONS WITH RELATED PARTIES
The Company has a 50.0% interest in an unconsolidated limited
liability corporation, whose principal assets are two distribution
centers leased to Kmart. A group that includes the wife of the
Company's Board Chairman, two Directors of the Company and the wife of
one of the Directors has an 8.0% interest in this entity (see Note 5).
The Company's two hotel properties, as well as the hotels owned by the
Hotel Venture and the Quebec Venture, are managed by Prime (see Note
5). Fees paid for the management of the Company's two hotel properties
are based upon a percentage of revenue and were approximately $97,
$117 and $121 for 2003, 2002, and 2001, respectively. Included in
marketable securities at December 31, 2003 and 2002 was $36,105 and
$20,402, respectively, of common stock in Prime which represents
approximately 7.9% and 5.6% of Prime's outstanding shares,
respectively. During 2003, the Company purchased 1,036 shares of
common stock of Prime for $5,941.
13. INCOME TAXES
Deferred income taxes are determined on the liability method in
accordance with SFAS No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). Under SFAS No. 109, deferred tax assets and liabilities are
determined based on the difference between the tax basis of an asset
or liability and its reported amount in the Consolidated Financial
Statements using enacted tax rates. Future tax benefits attributable
to these differences are recognized to the extent that realization of
such benefits is more likely than not.
44
The components of the net deferred tax liability are as follows:
DECEMBER 31,
-------------------------------------------
2003 2002
-------------- --------------
Realization allowances related to
accounts receivable and inventories $ 344 $ 323
Net unrealized gain on marketable securities (4,932) (945)
Basis differences relating to real
property held for rental 4,492 3,288
Accrued expenses, deductible when paid, net 2,386 2,669
Charitable contribution carryforward 731 1,293
Basis differences relating to business acquisitions (1,863) (1,863)
Leveraged lease (6,652) (6,860)
Property, plant and equipment (377) (377)
Pensions 206 101
Other, net (65) (27)
-------------- --------------
Net deferred tax liability (5,730) (2,398)
Less: Current portion - (liability) asset (3,947) 207
-------------- --------------
Noncurrent portion $ (1,783) $ (2,605)
============== ==============
The income tax provision reflected in the Consolidated Statements of Income is as follows:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
2003 2002 2001
-------------- -------------- --------------
Current:
Federal $ 5,944 $ 2,989 $ 9,744
State 653 885 2,449
Deferred 83 2,161 (197)
-------------- -------------- --------------
$ 6,680 $ 6,035 $ 11,996
============== ============== ==============
A reconciliation of the tax provision computed at statutory rates to
the amounts shown in the accompanying Consolidated Statements of
Income are as follows:
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2003 2002 2001
---------------------------------------------------------
Computed federal income
tax provision at statutory rates $ 6,162 $ 9,686 $ 10,311
State income taxes, net of federal income tax benefit 425 575 1,592
Realization of capital loss deductions - (2,295) -
Charitable contribution - (1,973) -
Other, net 93 42 93
-------------- -------------- --------------
$ 6,680 $ 6,035 $ 11,996
============== ============== ==============
14. OTHER INCOME AND EXPENSE, NET
The components of other income and expense, net in the Consolidated
Statements of Income are as follows:
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
2003 2002 2001
-------- --------- ---------
Net realized and unrealized gain on derivative instruments $ 1,851 $ 6,283 $ 482
Equity in earnings of hotel ventures 987 - -
Net gain on the sale of available-for-sale securities 952 4,038 4,911
Net gain on the sale of real estate assets 153 5,708 10,995
Forfeiture of deposit 694 - -
Net realized and unrealized gain on trading securities 411 35 461
Other, net (10) (43) 121
-------- --------- ---------
$ 5,038 $ 16,021 $ 16,970
======== ========= =========
45
15. PENSION PLAN
The Company has a noncontributory defined benefit pension plan that
covers substantially all full-time employees and the former employees
of one of the Company's discontinued manufacturing segments. The plan
provides defined benefits based on years of service and compensation
level.
The Company accounts for its defined benefit pension plan in
accordance with SFAS No. 87 which requires that amounts recognized in
the financial statements be determined on an actuarial basis. SFAS No.
87 generally reduces the volatility of future income (expense) from
changes in pension liability discount rates and the performance of the
pension plan's assets. The Company uses December 31 as the measurement
date for it's pension plan.
The following table sets forth the changes in benefit obligation, plan
assets and funded status of the plan:
DECEMBER 31,
------------------------------------------
2003 2002
-------------- --------------
Change in benefit obligation:
Benefit obligation, beginning of year $ 8,478 $ 8,621
Service cost 266 348
Interest cost 647 656
Actuarial gain (63) (314)
Benefits paid (795) (833)
-------------- --------------
Benefit obligation, end of year 8,533 8,478
-------------- --------------
Change in plan assets:
Fair value of plan assets, beginning of year 8,782 9,231
Actual return on plan assets 1,836 384
Benefits paid (795) (833)
-------------- --------------
Fair value of plan assets, end of year 9,823 8,782
-------------- --------------
Funded status 1,290 304
-------------- --------------
Unrecognized net actuarial gain (743) (680)
Unrecognized net (gain) loss (547) 679
-------------- --------------
Prepaid benefit obligation $ - $ 303
============== ==============
The prepaid benefit obligation is included in other non-current assets
in the accompanying balance sheets. As of December 31, 2003 and 2002,
the accumulated benefit obligation was $8,291 and $8,254,
respectively.
Net periodic pension expense consists of the following:
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------
2003 2002 2001
-------------- -------------- --------------
Service cost $ (266) $ (348) $ (279)
Interest cost (647) (656) (640)
Actual return on plan assets 1,836 384 (233)
Net amortization and deferral (1,226) 162 1,129
-------------- -------------- --------------
Net periodic pension expense $ (303) $ (458) $ (23)
============== ============== ==============
Weighted-average actuarial assumptions used to determine projected
benefit obligations and net periodic pension cost were as follows:
DECEMBER 31,
------------------------
2003 2002 2001
---- ---- ----
Discount rate 8.0% 8.0% 8.0%
Expected long-term rate of return on plan assets 8.0% 8.0% 9.0%
Rate of compensation increase 3.5% 3.5% 3.5%
46
The expected long-term rate of return on plan assets is determined by
considering historical rates of return, the current return trends, the
mix of investments that comprise plan assets and forecasts of future
long-term investment returns.
The allocation of plan assets by category are as follows:
DECEMBER 31,
-----------------------
2003 2002
------ -----
Equity securities 58.6% 50.9%
Debt securities 22.4% 8.2%
U.S. government securities 13.5% 26.0%
Cash and other investments 5.5% 14.9%
------ ------
100.0% 100.0%
====== ======
The Company's pension plan assets are managed by outside investment
managers and the plan's trustees. The Company's investment strategy
with respect to pension assets is to maximize return while protecting
principal. The investment managers have the flexibility to adjust the
asset allocations and move funds to the asset class that offers the
most opportunity for investment returns.
The Company did not contribute to the plan in 2003, 2002 or 2001 as
the plan is over funded. The Company does not anticipate contributing
to the plan in 2004.
16. BUSINESS SEGMENTS
The Company operates through two business segments: real estate
investment and management and engineered products. The real estate
investment and management segment is engaged in the business of
investing in and managing real estate properties which are located
throughout the United States. Engineered products are manufactured
through wholly-owned subsidiaries of the Company and primarily consist
of knitted wire products and components and transformer products which
are sold worldwide.
Operating results of the Company's business segments are as follows:
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------
2003 2002 2001
-------------- -------------- --------------
Net revenues and sales:
Real estate investment and management $ 23,268 $ 22,741 $ 24,601
Engineered products 34,019 33,513 33,792
-------------- -------------- --------------
$ 57,287 $ 56,254 $ 58,393
============== ============== ==============
Operating income:
Real estate investment and management $ 10,797 $ 10,990 $ 11,442
Engineered products 3,342 2,256 1,912
General corporate expenses (2,823) (2,993) (2,256)
-------------- -------------- --------------
11,316 10,253 11,098
Other income, net 6,291 17,423 18,362
-------------- -------------- --------------
Income from continuing operations before income taxes $ 17,607 $ 27,676 $ 29,460
============== ============== ==============
Depreciation and amortization expense:
Real estate investment and management $ 2,955 $ 3,102 $ 3,814
Engineered products 592 692 745
General corporate expenses 533 564 685
-------------- -------------- --------------
$ 4,080 $ 4,358 $ 5,244
============== ============== ==============
Mortgage interest expense:
Real estate investment and management $ 1,032 $ 1,318 $ 1,636
============== ============== ==============
47
Sales by the Company's engineered products segment to automobile
original equipment manufacturers accounted for approximately 20.9%,
21.4% and 17.8% of 2003, 2002, and 2001 consolidated revenues,
respectively. For the year ended December 31, 2003, sales by the
engineered products segment to its largest customer (in excess of 10%
of the segment's net sales) accounted for 20.9% of the segment's
sales. For the year ended December 31, 2002, sales by the engineered
products segment to its two largest customers (each in excess of 10%
of the segment's net sales) accounted for 20.0% and 10.1%,
respectively, of the segment's sales. For the year ended December 31,
2001, sales by the engineered products segment to its largest customer
(in excess of 10.0% of the segment's net sales) accounted for 14.0% of
the segment's sales.
Approximately 14.1%, 11.3% and 8.3% of 2003, 2002, and 2001 total
sales generated from the engineered products segment were from foreign
customers. Substantially all assets held by the Company's engineered
products segment are located within the United States or its leased
warehouse in Tijuana, Mexico.
Selected information on the Company's business segments is as follows:
DECEMBER 31,
----------------------------------
2003 2002
-------------- --------------
Identifiable assets:
Real estate investment and management and
corporate assets $ 177,944 $ 166,433
Engineered products 11,770 10,114
-------------- --------------
$ 189,714 $ 176,547
============== ==============
Additions to long-lived assets:
Real estate investment and management $ 542 $ 261
Engineered products 369 158
-------------- --------------
$ 911 $ 419
============== ==============
17. LEASE OBLIGATIONS
At December 31, 2003, the Company was obligated under various
noncancelable operating leases which expire on various dates through
2040. These leases include certain facilities and equipment of the
engineered products segment as well as land leases of the real estate
investment and management segment. Certain leases contain renewal
options and/or increased rental amounts. The future minimum rental
commitments under operating leases are as follows:
YEAR ENDED DECEMBER 31,
2004 $ 424
2005 383
2006 323
2007 298
2008 298
Thereafter 2,677
----------
$ 4,403
==========
Rent expense under operating leases was $487, $459 and $457 for 2003,
2002 and 2001, respectively.
18. COMMITMENTS AND CONTINGENCIES
The Company has undertaken the completion of environmental studies
and/or remedial action at Metex' two New Jersey facilities and has
recorded a liability for the estimated investigation, remediation and
administrative costs associated therewith.
48
The process of remediation has begun at one facility pursuant to a
plan filed with the New Jersey Department of Environmental Protection
("NJDEP"). Environmental experts engaged by the Company estimate that
under the most probable remediation scenario the remediation of this
site is anticipated to require initial expenditures of $860, including
the cost of capital equipment, and $86 in annual operating and
maintenance costs over a 15 year period.
Environmental studies at the second facility indicate that remediation
may be necessary. Based upon the facts presently available,
environmental experts have advised the Company that under the most
probable remediation scenario, the estimated cost to remediate this
site is anticipated to require $2,300 in initial costs, including
capital equipment expenditures, and $258 in annual operating and
maintenance costs over a 10 year period. These estimated costs of
future expenses for environmental remediation obligations are not
discounted to their present value. The Company may revise such
estimates in the future due to the uncertainty regarding the nature,
timing and extent of any remediation efforts that may be required at
this site, should an appropriate regulatory agency deem such efforts
to be necessary.
The foregoing estimates may also be revised by the Company as new or
additional information in these matters become available or should the
NJDEP or other regulatory agencies require additional or alternative
remediation efforts in the future. Although it is not currently
possible to estimate the range or amount of the ultimate liability,
the Company has approximately $11,000 recorded in other long-term
liabilities as of December 31, 2003 and 2002 to cover such matters. In
the opinion of management, this amount should be sufficient to address
these matters and amounts needed in excess, if any, will be paid
gradually over a period of years. Accordingly, they should not have a
material adverse effect upon the business, liquidity or financial
position of the Company. However, adverse decisions or events,
particularly as to the merits of the Company's factual and legal basis
could cause the Company to change its estimate of liability with
respect to such matters in the future.
The Company has an employment contract with its Chairman, President
and Chief Executive Officer which provides for a base salary of $750
per annum plus a discretionary bonus as determined by the Compensation
Committee of the Board of Directors. In the event of termination or a
change in control, as defined in the employment agreement, the Company
is required to pay the Chairman, President and Chief Executive Officer
a lump sum severance payment equal to three years salary and purchase
outstanding options. The employment agreement provides for successive
one year terms unless either the Company or the Chairman, President
and Chief Executive Officer gives the other written notice that the
employment agreement is terminated.
The Company is subject to various other litigation, legal, regulatory
and tax matters that arise in the ordinary course of business
activities. When management believes it is probable that a liability
has been incurred and such amounts are reasonably estimable the
Company provides for amounts that include judgments and penalties that
may be assessed. These liabilities are usually included in accounts
payable and accrued liabilities or other long-term liabilities in the
Consolidated Financial Statements, depending on the anticipated
payment date. At December 31, 2003 and 2002, the Company had
approximately $20,000 recorded in other long-term liabilities relating
to such matters. None of these matters are expected to result in a
material adverse effect on the Company's consolidated financial
position or results of operations.
49
SCHEDULE II
UNITED CAPITAL CORP. AND SUBSIDIARIES
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(In Thousands)
WRITE-OFFS
NET OF
RECOVERIES
BALANCE CHARGED OF ACCOUNTS BALANCE
AT TO PREVIOUSLY AT
BEGINNING COSTS AND WRITTEN END OF
OF PERIOD EXPENSES OFF PERIOD
--------- -------- ----------- ------
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year ended December 31, 2003 $ 324 $ - $ - $ 324
Year ended December 31, 2002 328 - 4 324
Year ended December 31, 2001 328 - - 328
The accompanying Notes to Consolidated Financial Statements are an integral part
of these schedules.
50
SCHEDULE III
UNITED CAPITAL CORP. AND SUBSIDIARIES
REAL PROPERTY AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2003
(In Thousands)
Costs
Mortgage Initial Cost to Company Capitalized
Loans ------------------------ Subsequent to
Payable Building and Acquisition/
Description (Gross) Land Improvements Improvements
-------------------------------------- -------------------- ----------------------------------
Real Property Held for Rental:
Shopping Centers and Retail Outlets:
Culver, CA $ 1,385 $ 842 $ 7,576 $ -
Northbrook, IL 1,763 898 8,075 -
Miscellaneous Investments 5,389 4,267 34,667 1,940
---------- -------- -------------- --------------
8,537 6,007 50,318 1,940
---------- -------- -------------- --------------
Commercial Properties:
Miscellaneous Investments 3,730 2,693 32,598 932
Day Care Centers and Offices:
Miscellaneous Investments 80 495 3,961 2,017
Hotel Properties:
Miscellaneous Investments - 1,712 2,868 48
Other:
Miscellaneous Investments - 2,618 630 1,076
---------- -------- -------------- --------------
Total Real Property Held for Rental 12,347 13,525 90,375 6,013
---------- -------- -------------- --------------
Real Property Held for Sale:
Shopping Centers and Retail Outlets:
Miscellaneous Investments - - 2,587 138
Commercial Properties:
Miscellaneous Investments - 316 143 -
---------- -------- -------------- --------------
Total Real Property Held for Sale - 316 2,730 138
---------- -------- -------------- --------------
Total Real Property $12,347 $13,841 $93,105 $6,151
========== ======== ============== ==============
Gross Amount at Which
Carried at Close at Period
--------------------------------------
Building and Accumulated Date of
Description Land Improvements Total(a),(c) Depreciation(b) Construction
-------------------------------------- ----------- ----------------------------------------------------------------
Real Property Held for Rental:
Shopping Centers and Retail Outlets:
Culver, CA 842 7,576 8,418 7,129 N/A
Northbrook, IL 898 8,075 8,973 7,459 N/A
Miscellaneous Investments 4,267 36,607 40,874 28,715 N/A
---------- -------------- ----------- ----------------
6,007 52,258 58,265 43,303
---------- -------------- ----------- ----------------
Commercial Properties:
Miscellaneous Investments 2,693 33,530 36,223 18,176 N/A
Day Care Centers and Offices: .
Miscellaneous Investments 495 5,978 6,473 4,766 N/A
Hotel Properties:
Miscellaneous Investments 1,712 2,916 4,628 2,907 N/A
Other:
Miscellaneous Investments 2,618 1,706 4,324 1,125 N/A
---------- -------------- ----------- ----------------
Total Real Property Held for Rental 13,525 96,388 109,913 70,277
---------- -------------- ----------- ----------------
Real Property Held for Sale:
Shopping Centers and Retail Outlets:
Miscellaneous Investments - 2,725 2,725 2,396 N/A
Commercial Properties:
Miscellaneous Investments 316 143 459 144 N/A
---------- -------------- ----------- ----------------
Total Real Property Held for Sale 316 2,868 3,184 2,540
---------- -------------- ----------- ----------------
Total Real Property $13,841 $99,256 $113,097 $72,817
========== ============== =========== ================
Life on Which
Depreciation
in Latest
Statement of
Date Income is
Description Acquired Computed (Years)
-------------------------------------- ---------------------------
Real Property Held for Rental:
Shopping Centers and Retail Outlets:
Culver, CA 1986 18
Northbrook, IL 1987 18
Miscellaneous Investments 1986-98 12-39
Commercial Properties:
Miscellaneous Investments 1986-98 5-39
Day Care Centers and Offices:
Miscellaneous Investments 1986-91 5-39
Hotel Properties:
Miscellaneous Investments 1986-99 7-10
Other:
Miscellaneous Investments 1986-97 10-39
Total Real Property Held for Rental
Real Property Held for Sale:
Shopping Centers and Retail Outlets:
Miscellaneous Investments 1986 15
Commercial Properties:
Miscellaneous Investments 1986-89 12-29
Total Real Property Held for Sale
Total Real Property
Notes:
(a) Reconciliations of the carrying value of total real property for the
three years ended December 31, 2003 are as follows:
2003 2002 2001
----------- ----------- -------------
Total real property at beginning of period $122,081 $124,407 $130,995
Additions during the period:
Acquisitions and improvements 337 192 1,774
----------- ----------- -------------
122,418 124,599 132,769
Deductions during the period:
Cost of real estate sold 7,852 2,518 8,362
Write-down of property held for sale (see Note 2) 1,446 - -
Other 23 - -
----------- ----------- -------------
$113,097 $122,081 $124,407
=========== =========== =============
(b) Reconciliations of accumulated depreciation for the three years ended
December 31, 2003 are as follows:
2003 2002 2001
----------- ----------- -------------
Accumulated depreciation at beginning of period $73,128 $71,537 $73,862
Additions during the period:
Provision for depreciation 3,090 3,304 4,175
----------- ----------- -------------
76,218 74,841 78,037
Deductions during the period:
Accumulated depreciation of real estate sold 3,401 1,713 6,500
----------- ----------- -------------
$72,817 $73,128 $71,537
=========== =========== =============
(c) The aggregate cost for federal income tax purposes is approximately
$152,653
The accompanying Notes to Consolidated Financial Statements are an integral
part of these schedules.
51
SCHEDULE IV
UNITED CAPITAL CORP. AND SUBSIDIARIES
MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 2003
(In Thousands)
Final
Description Interest Rate Maturity Date
- ------------------------------------------- ------------------------------- ---------------------
Mortgage loans secured by commercial property:
New York, New York 7.9% May 2006
From April 2006 -
Other Varies from 9.0% - 14.0% December 2008
Prior Face Amount of
Description Periodic Payment Terms Liens Mortgages
- ------------------------------------------- ------------------------------------ ----------- ----------------
Mortgage loans secured by commercial property:
New York, New York Principal and interest due monthly $ - $ 3,000
Other Principal and interest due monthly - 76
---- --------
$ - $ 3,076
==== ========
Principal Amount
Carrying of Loans Subject
Amount of to Delinquent
Mortgages Principal or
Description (a), (b) Interest
- ------------------------------------------- -------------- ----------------
Mortgage loans secured by commercial property:
New York, New York $ 2,891 $ -
Other 26 -
-------- ----------
$ 2,917 $ -
======== ==========
(a) A reconciliation of mortgage loans on real estate for the year ended
December 31, 2003 is as follows:
Balance at beginning of period $ 3,059
Additions during the period:
Deferred gains recognized on properties
accounted for under the installment method 3,043
Deductions during the period:
Collection of principal (3,185)
-------------
Balance at end of period $ 2,917
=============
(b) The carrying value for federal income tax purposes is substantially equal to
the carrying amount for book purposes.
The accompanying Notes to Consolidated Financial Statements are an integral part
of these schedules.
52
UNITED CAPITAL CORP. AND SUBSIDIARIES
QUARTERLY FINANCIAL DATA
(Unaudited)
(In Thousands, Except Per Share Data)
The following unaudited quarterly results for have been restated from
amounts previously reported by the Company to reflect the sale or
classification of certain properties "Held for Sale" as discontinued
operations in accordance with Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." In addition, per share amounts, except dividends
paid, have been retroactively adjusted to reflect the two-for-one
stock split in August 2003.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------------- -------------- -------------- --------------
FOR THE YEAR 2003:
Revenues $ 14,009 $ 14,530 $ 14,372 $ 14,376
============== ============== ============== ==============
Costs and expenses $ 11,443 $ 11,506 $ 11,555 $ 11,467
============== ============== ============== ==============
Other Income $ 854 $ 1,316 $ 907 $ 3,214
============== ============== ============== ==============
Income from continuing operations $ 2,119 $ 2,901 $ 2,547 $ 3,360
============== ============== ============== ==============
Income from discontinued operations $ 1,377 $ 556 $ 413 $ 1,691
============== ============== ============== ==============
Net income $ 3,496 $ 3,457 $ 2,960 $ 5,051
============== ============== ============== ==============
BASIC EARNINGS PER SHARE:
Income from continuing operations $ .24 $ .32 $ .28 $ .37
Discontinued operations, net of tax .15 .06 .05 .19
------------- ------------- ------------- -------------
Net income per share $ .39 $ .38 $ .33 $ .56
============= ============= ============= =============
DILUTED EARNINGS PER SHARE:
Income from continuing operations $ .20 $ .27 $ .23 $ .32
Discontinued operations, net of tax .13 .05 .04 .16
------------- ------------- ------------- -------------
Net income per share assuming dilution $ .33 $ .32 $ .27 $ .48
============= ============= ============= =============
DIVIDENDS PAID PER SHARE $ - $ 2.00 $ - $ -
============== ============= ============== =============
FOR THE YEAR 2002:
Revenues $ 13,824 $ 14,891 $ 14,100 $ 13,439
============== ============== ============== ==============
Costs and expenses $ 11,421 $ 11,834 $ 11,153 $ 11,593
============== ============== ============== ==============
Other income $ 2,888 $ 2,140 $ 4,308 $ 8,087
============== ============== ============== ==============
Income from continuing operations $ 3,352 $ 3,125 $ 5,450 $ 9,714
============== ============== ============== ==============
Income from discontinued operations $ 406 $ 404 $ 434 $ 492
============== ============== ============== ==============
Net income $ 3,758 $ 3,529 $ 5,884 $ 10,206
============== ============== ============== ==============
BASIC EARNINGS PER SHARE:
Income from continuing operations $ .36 $ .34 $ .60 $ 1.07
Discontinued operations .05 .05 .05 .06
-------------- -------------- ------------- --------------
Net income per share $ .41 $ .39 $ .65 $ 1.13
============== ============== ============= ==============
DILUTED EARNINGS PER SHARE:
Income from continuing operations $ .34 $ .32 $ .56 $ .95
Discontinued operations .04 .04 .04 .05
-------------- -------------- ------------- --------------
Net income per share assuming dilution $ .38 $ .36 $ .60 $ 1.00
============== ============== ============= ==============
53