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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
COMMISION FILE NUMBER: 1-10104
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UNITED CAPITAL CORP.
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(Exact name of registrant as specified in its charter)
DELAWARE 04-2294493
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9 PARK PLACE, GREAT NECK, NY 11021
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(Address of principal executive offices) (Zip Code)
516-466-6464
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(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ---------------------------------------- ------------------------------
COMMON STOCK (PAR VALUE $.10 PER SHARE) AMERICAN STOCK EXCHANGE
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, 2004 was approximately
$40,449,000.
The number of shares of the registrant's $.10 par value common stock outstanding
as of March 1, 2005 was 9,155,142.
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. As of December 31,
2004, 97.1% of the total square footage of the Company's properties was leased.
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 years ended December 31, 2004, 2003 and 2002, sales by the engineered
products segment to General Motors, its largest customer, accounted for 18.7%,
20.9% and 20.0% of the segment's sales, respectively. Sales to ArvinMeritor in
2002 of 10.1% represented the only other customer whose sales exceeded 10% of
this segment's net sales in each of the three years ended December 31, 2004.
Approximately 16.6%, 14.1% and 11.3% of 2004, 2003 and 2002 total sales
generated from the engineered products segment were to 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.
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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) 2004 2003 2002
------------ ------------ -----------
REAL ESTATE INVESTMENT AND MANAGEMENT
Rental revenues $ 20,726 $ 20,749 $ 19,895
Operating income (1) $ 9,801 $ 9,610 $ 9,180
Identifiable assets including corporate assets $ 200,524 $ 177,944 $ 166,433
ENGINEERED PRODUCTS
Net sales $ 38,335 $ 34,019 $ 33,513
Operating income $ 4,187 $ 3,342 $ 2,256
Identifiable assets $ 12,200 $ 11,770 $ 10,114
(1) Does not include net gains on the sale of real estate assets of $153
and $5,708 for the years ended December 31, 2003 and 2002,
respectively.
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 used in the Company's engineered products
segment, which consist primarily of stainless steel wire and steel-related
products, are typically purchased from multiple suppliers throughout the world.
The price and availability of raw materials can be volatile due to numerous
factors beyond the Company's control, including general domestic and
international economic conditions, labor costs, supply and demand, competition,
import duties and tariffs and currency exchange rates. Although these factors
could significantly affect the availability and cost of the Company's raw
materials, they are generally purchased at levels that the Company believes will
satisfy the anticipated needs of the Company's customers based upon contractual
commitments, historical buying practices and market conditions. To date the
Company has been able to mitigate any significant effects that have arisen from
these factors by various methods including finding alternate sources or by
having suppliers and/or customers absorb any additional related costs. Although
management does not expect such matters to adversely effect the Company's
financial position in the future, it is uncertain what effect, if any, such
factors could have on the cost of such materials. An interruption in the supply,
or a significant increase in the cost, of the Company's raw materials could have
a material adverse effect on the Company's revenues, results of operations or
cash flows. The Company has not had and does not expect to have any problems
fulfilling its raw material requirements during 2005.
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. The Company is not currently involved in any
litigation regarding infringement upon its intellectual property or of the
Company's infringement upon the intellectual property of others.
WORKING CAPITAL PRACTICES
The Company believes its practices regarding inventories, receivables or other
items of working capital to be typical for the industries involved. There are no
special practices or conditions affecting working capital items that are
significant to an understanding of the Company's businesses. Its inventory
levels, payment terms and return policies are in accordance with general
practices associated with the industries in which it operates and standard
business procedures.
3
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. For additional information on
working capital, see Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources," which is
incorporated by reference herein.
EMPLOYEES
At March 1, 2005, the Company employed approximately 240 persons, approximately
150 of which are covered by a collective bargaining agreement that expires in
February 2011. The Company believes that its relationship with its employees is
good.
COMPETITION
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,
real estate companies, financial institutions and other investors who compete
with the Company for the acquisition of properties and tenants.
The Company competes with at least 23 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.
BACKLOG
The dollar value of unfilled orders of the Company's engineered products segment
was approximately $4.6 million at December 31, 2004 and $2.0 million at December
31, 2003. The increase in backlog is principally due to growth in Company's
engineered component and transformer product lines. It is anticipated that
substantially all such 2004 backlog will be filled in 2005. Substantially all of
the 2003 backlog was filled in 2004. 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 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.
4
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 becomes available or should the NJDEP or other
regulatory agencies require additional or alternative remediation efforts in the
future. Although such events are not expected to change these estimates, 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 had approximately $10.2
million and $10.5 million recorded in accounts payable and accrued liabilities
and other long-term liabilities as of December 31, 2004 and 2003, respectively,
to cover such matters.
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, N.W.,
Washington, D.C. 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. The Company's SEC
filing number is 1-10104.
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 Exchange Act
of 1934, as amended, may be obtained as soon as reasonably practicable after the
Company electronically files such material with, or furnishes it to, the SEC
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 March 1, 2005, the Company owned 162 properties throughout the United
States. The properties are primarily leased under long-term net leases. 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, 2004 are as follows (dollars in
thousands):
GROSS CARRYING NUMBER OF
DESCRIPTION VALUE PERCENTAGE PROPERTIES
- ----------------------------------- -------------- ---------- ----------
Shopping centers and retail outlets $ 53,063 53.3% 19
Commercial properties 30,780 31.0% 93
Day-care centers and offices 6,644 6.7% 10
Hotel properties 4,628 4.7% 2
Other 4,324 4.3% 38
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Total $ 99,439 100.0% 162
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5
The following summarizes the Company's properties by geographic area at December
31, 2004.
GROSS NUMBER
CARRYING OF
(Dollars in thousands) VALUE PROPERTIES
-------------- ----------------
Northeast $ 36,987 97
Southeast 20,782 22
Midwest 20,713 25
Southwest 5,665 5
Pacific Coast 12,158 6
Pacific Northwest 861 4
Rocky Mountain 2,273 3
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$ 99,439 162
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SHOPPING CENTERS AND RETAIL OUTLETS
Shopping centers and retail outlets include 12 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
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.
COMMERCIAL PROPERTIES
Commercial properties consist of properties leased as 55 restaurants, 11 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 McDonald's,
Burger King, Dunkin' Donuts, Pizza Hut, Hardee's, Wendy's, Kentucky Fried
Chicken and Boston Market.
Included in commercial properties are three properties, consisting of a
restaurant and two miscellaneous other properties, currently held for sale and
classified as discontinued operations in the Consolidated Financial Statements.
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.
The office building is currently held for sale and classified as discontinued
operations in the Consolidated Financial Statements.
HOTEL PROPERTIES
The Company's two hotel properties, located in Georgia and California, as well
as the hotels located in New Jersey and Quebec in 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 (see "Related
Party Transactions" under Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations").
6
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
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 references to the Company's Common Stock prices and
dividends have been restated to reflect the Company's two-for-one stock split in
August 2003.
2004 2003
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HIGH LOW HIGH LOW
------- ------- ------- -------
FIRST QUARTER .................. $ 25.38 $ 20.50 $ 18.70 $ 16.40
SECOND QUARTER ................. $ 22.74 $ 16.71 $ 25.30 $ 17.10
THIRD QUARTER .................. $ 22.91 $ 17.00 $ 23.80 $ 16.75
FOURTH QUARTER ................. $ 25.75 $ 21.77 $ 21.25 $ 15.85
On June 10, 2003, the Board of Directors of the Company declared a special
one-time cash dividend of $1.00 per common share to all stockholders of record
as of June 20, 2003. While the Company does not currently expect to pay
additional dividends, the Board of Directors could reevaluate this position in
the future.
As of March 1, 2005, there were approximately 288 record holders of the
Company's Common Stock. The closing sales price for the Company's Common Stock
on such date was $25.15.
7
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.
(In thousands, except per share data) YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- -----------
Total revenues $ 59,061 $ 54,768 $ 53,408 $ 55,581 $ 56,538
Income from continuing operations $ 25,149 $ 10,216 $ 20,554 $ 16,806 $ 16,262
Income from continuing operations
per share: Basic $ 2.76 $ 1.13 $ 2.24 $ 1.80 $ 1.72
Dividends paid per share $ - $ 1.00 $ - $ - $ -
Total assets $ 212,724 $ 189,714 $ 176,547 $ 177,965 $ 147,996
Long-term debt, less current portion $ 6,041 $ 8,459 $ 11,397 $ 14,635 $ 18,488
Total stockholders' equity $ 154,069 $ 124,217 $ 111,634 $ 96,341 $ 77,119
Certain reclassifications have been reflected in the above financial data to
conform prior years' data to the current classifications, which primarily relate
to the reclassification of certain properties to discontinued operations in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144"). Per share amounts have been retroactively adjusted to reflect the
two-for-one stock split in August 2003.
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.
RESULTS OF OPERATIONS: 2004 AND 2003
Net income for the year ended December 31, 2004 was $37.3 million or $4.10 per
basic share, an increase of 150% over net income of $15.0 million or $1.65 per
basic share for the year ended December 31, 2003. Income from continuing
operations increased 146% to $25.1 million or $2.76 per basic share for the
current year versus $10.2 million or $1.13 per basic share for 2003. Total
revenues were $59.1 million for the year ended December 31, 2004, an increase of
$4.3 million or 7.8% from the previous year. The results of 2004 include $19.4
million in pre-tax gains on the sale of available-for-sale securities and $7.8
million in gains on the sale of real estate, net of tax, and accounted for as
discontinued operations, above those recognized in the prior year. The Company
is unable to predict whether these trends will continue, as it is dependent upon
future economic conditions and the sale of additional marketable securities and
real estate assets.
REAL ESTATE OPERATIONS
Rental revenues from real estate operations remained relatively consistent with
those of the prior year, totaling $20.7 million in each of the years ended
December 31, 2004 and 2003. There were, however, changes in the components of
rental revenues as follows: a decrease in hotel operating revenue ($273,000)
partially offset by the recognition of non-recurring transactions ($177,000) in
2004. In general, rental revenues do not fluctuate significantly due to the
long-term nature of the Company's leases. However, future rental revenues could
be affected by changes in hotel operating revenues, which are generally
influenced by local and other economic conditions, as well as by lease renewals,
terminations, step-ups and escalations and by the purchase or sale of additional
properties.
Mortgage interest expense decreased $271,000 or 29% to $662,000 for the year
ended December 31, 2004, compared to $933,000 for the year ended December 31,
2003. This decrease is the result of continuing mortgage amortization. At
December 31, 2004, the outstanding mortgage balance on the Company's real estate
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properties was reduced to $8.5 million. Mortgage interest expense on existing
obligations will continue to decline with scheduled principle reductions.
Depreciation expense associated with real properties held for rental decreased
by $157,000 or 5.8% to $2.6 million for the year ended December 31, 2004,
compared to $2.7 million for 2003. This decrease was primarily attributable to
reduced depreciation expense associated with certain properties or improvements
becoming fully depreciated in the current and prior years.
Other operating expenses associated with the management of real properties
increased approximately $214,000 or 2.9% to $7.7 million during 2004, versus
such expenses incurred of $7.5 million in 2003. The increase is primarily the
result of increased real estate taxes ($115,000), professional fees ($97,000)
and property maintenance expense ($77,000) partially offset by a decrease in
hotel operating expense ($125,000).
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) 2004 2003
---------- -------------
Net sales $ 38,335 $ 34,019
Cost of sales 27,026 23,895
Selling, general and administrative expenses 7,122 6,782
------------- -------------
Operating income $ 4,187 $ 3,342
============= =============
Net sales of the engineered products segment increased $4.3 million or 12.7% for
the year ended December 31, 2004, compared to net sales in the preceding year.
This increase is primarily due to increased demand, primarily in the Company's
transformer and engineered product lines, as well as a slight increase in the
automotive product line, which was brought about by a general improvement in the
U.S. economy and an increase in capital spending, which had declined over the
last several years. Although management believes that sales of its engineered
products segment are directly influenced by general economic conditions,
worldwide automotive demand and industrial capital spending, future sales of the
Company's engineered products segment could also be affected by changes in
technology, competitive forces or challenges to its intellectual property.
Cost of sales as a percentage of net sales remained relatively consistent for
the year ended December 31, 2004 as compared to the prior year, fluctuating by
less then 1%.
Selling, general and administrative expenses of the engineered products segment
increased $340,000 or 5.0% for the year ended December 31, 2004 over the
previous year. The increase is primarily due to increased freight costs
($204,000) as well as from higher payroll and payroll related costs ($148,000)
and commissions ($138,000), which also fluctuated with the change in sales noted
above. These increases are partially offset by a reduction in professional fees
($131,000), license fees associated with an agreement that expired in 2003
($80,000) and a decrease in amortization expenses ($82,000).
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses not associated with the manufacturing
operations decreased $117,000 or 4.1% during 2004, compared to such expenses
incurred in the preceding year. The decrease is principally due to lower
professional fees ($171,000) and pension related expenses ($123,000), offset by
higher insurance costs ($93,000) and depreciation expenses ($79,000).
OTHER INCOME AND EXPENSE, NET
Other income and expense, net increased $17.6 million or 359% to $22.4 million
for the year ended December 31, 2004, compared to 2003. The increase is
principally due to higher net gains on available-for-sale securities ($19.4
million), which primarily relates to the $19.0 million gain recognized upon the
sale of the Company's interest in Prime Hospitality Corp., the receipt of
$831,000 in casualty insurance proceeds and a $363,000 gain on the sale of other
9
assets. These increases are partially offset by lower net realized and
unrealized gains on derivative instruments ($1.1 million), lower equity in
earnings of the hotel ventures ($903,000), a non-recurring deposit forfeiture
($694,000) which occurred in 2003, and lower net realized and unrealized gains
on trading securities ($411,000) during the current year. The Company is unable
to predict whether these trends will continue, as it is dependent upon future
economic conditions and the sale of additional marketable securities.
INCOME TAXES
The effective tax rate from continuing operations was 28.9% for the year ended
December 31, 2004, versus 37.8% for the year ended December 31, 2003. The
reduction in the effective tax rate is primarily the result of tax benefits from
the donation of certain properties to qualified organizations during the current
year.
DISCONTINUED OPERATIONS
Income from operations on properties sold or held for sale and accounted for as
discontinued was $845,000 on a net of tax basis for the year ended December 31,
2004, versus $1.2 million for the comparable period of 2003, which includes a
full year of operating results for those properties sold in 2004. Prior year
amounts have been reclassified to reflect results of operations of real
properties currently classified as held for sale or disposed of during 2004 or
2003.
During 2004, the Company divested itself of ten properties which had a net book
value of $6.2 million. The cash proceeds from these transactions were $24.3
million. In addition, the Company received an $800,000 purchase money mortgage
in connection with the sale of one of these properties. Two of the properties
disposed of were contributed to charitable organizations. Net gains on the
disposal of real estate assets accounted for as discontinued operations were
$11.4 million, on a net of tax basis, for the year ended December 31, 2004.
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
$867,000 write-down, on a net of tax basis, for a property disposed of in
January 2004 for a sale price below its carrying value.
RESULTS OF OPERATIONS: 2003 AND 2002
Revenues for the year ended December 31, 2003 were $54.8 million, compared to
2002 revenues of $53.4 million. Operating income during this period decreased
27.3% to $10.2 million from $14.2 million for the comparable 2002 period.
Included in operating income are gains on the sale of real estate assets of
$153,000 and $5.7 million for the years ended December 31, 2003 and 2002,
respectively, which did not meet the criteria of a "component" or the disposal
activities were initiated prior to the initial application of SFAS No. 144 and
therefore have not been included in discontinued operations. 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 increased $854,000 or 4.3% to $20.7
million for the year ended December 31, 2003, compared to $19.9 million in 2002.
The increase in rental revenues was primarily due to the execution of new leases
and rent escalations ($982,000) and the recognition of a non-recurring amount
for back rent ($347,000) in 2003 offset by a decrease in hotel operating revenue
($286,000) and income from leverage leases ($184,000).
10
Mortgage interest expense continued to decrease as a result of continuing
mortgage amortization. Such expense totaled $933,000 for the year ended December
31, 2003, compared to $1.2 million for the corresponding 2002 period, a decline
of $243,000 or 20.7%.
Depreciation expense associated with real properties held for rental decreased
by $115,000 or 4.0% to $2.7 million for the year ended December 31, 2003,
compared to $2.8 million for the same period in 2002. This decrease was
primarily attributable to reduced depreciation expense associated with fully
depreciated building improvements.
Other operating expenses associated with the management of real properties
increased approximately $782,000 or 11.7% to $7.5 million during 2003 versus
such expenses incurred of $6.7 million in 2002. The increase was primarily the
result of increased property maintenance ($207,000), hotel operating ($202,000),
payroll ($148,000) and insurance expenses ($121,000).
ENGINEERED PRODUCTS
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 $506,000 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 during 2003 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 2002, 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 $170,000 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 ($155,000) and salary and salary related expenses
($151,000) offset by an increase in professional fees ($170,000) and franchise
taxes ($45,000).
OTHER INCOME AND EXPENSE, NET
Other income and expense, net decreased $5.4 million from $10.3 million in 2002
to $4.9 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 offset by equity in earnings of the hotel ventures of $987,000
and a deposit forfeiture of $694,000.
DISCONTINUED OPERATIONS
Income from operations on properties sold or held for sale and accounted for as
discontinued was $1.2 million on a net of tax basis for 2003 versus $2.3 million
in 2002. Prior year amounts have been reclassified to reflect the results of
real properties currently classified as held for sale or disposed of during the
11
last three years. 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 $867,000 write-down, on a net of tax basis, for a property
disposed of 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 $814,000. Net gains on the sale of real estate accounted for as
discontinued operations were $474,000 for the year ended December 31, 2002.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $641,000 for the year ended December
31, 2004. The Company experienced a net cash inflow from operations of
approximately $10.1 million and $9.8 million during the years ended December 31,
2003 and 2002, respectively. The change in operating cash flow from 2003 to 2004
primarily results from an increase in net income partially offset by additional
gains from available-for-sale securities ($19.4 million) and net gains on the
sale of real estate accounted for as discontinued operations ($7.8 million, net
of tax), changes in working capital ($5.7 million), primarily income taxes
payable, and lower net proceeds from the sale of trading securities ($1.7
million). The $290,000 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.
Net cash provided by investing activities increased $14.6 million for the year
ended December 31, 2004, compared with the year ended December 31, 2003. This
increase primarily results from the timing of the purchase or sale of
available-for-sale securities and derivative instruments ($14.3 million) and an
additional $13.7 million in proceeds from the sale of real estate and other
assets offset by a decrease in distributions from the Company's investments in
joint ventures ($12.4 million).
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 venture hotels.
In 2002, $21.9 million was used in investing activities, which consisted
primarily of a $23.1 million investment 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.
Net cash used in financing activities was approximately $2.7 million, $14.1
million and $7.1 million during 2004, 2003 and 2002, respectively. The reduction
in cash used for financing activities primarily results from the payment of
dividends of $9.1 million during 2003 and the purchase and retirement of $3.2
million and $3.8 million of the Company's Common Stock during 2003 and 2002,
respectively. Such transactions did not occur in 2004.
At December 31, 2004, the Company's cash and marketable securities were $139.2
million and working capital was $132.4 million, compared to cash and marketable
securities of $108.8 million and working capital of $96.1 million at December
31, 2003. 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.
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
12
distributions. The debt of the joint ventures in which the Company has an
ownership interest are non-recourse obligations and are collateralized by the
entity's real property. In one instance, the Company and another party have
jointly and severally guaranteed not more than $4 million of the joint venture's
mortgage obligation. The Company believes, in each case, that the value of the
underlying property and its operating cash flows are sufficient to satisfy its
obligations. Except for this guarantee, the Company is not obligated for the
debts of the joint ventures, but could decide to satisfy them in order to
protect its investment. In such event, the Company's capital resources and
financial condition would be reduced and, in certain instances, the carrying
value of the Company's investment and its results of operations would be
negatively impacted.
On June 10, 2003, the Board of Directors of the Company declared a special
one-time cash dividend of $1.00 per common share (split-adjusted) to all
stockholders of record as of June 20, 2003. This dividend, totaling $9.1
million, was paid on July 10, 2003. While the Company does not currently expect
to pay additional dividends, the Board of Directors could reevaluate this
position in the future.
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 those 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. Although interest
rates have begun to rise, 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% of the aggregate annualized and normalized year-to-date net
operating income of unencumbered eligible properties, as defined, capitalized at
10%, (ii) 60% 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 million or 10% of total
eligibility, (iii) the lesser of $20 million or 50% of the aggregate annualized
and normalized year-to-date net operating income of encumbered eligible
properties, as defined, capitalized at 12%, (iv) the sum of 75% of eligible
accounts receivable, 50% 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, 2004,
eligibility under the Revolver was $80 million based upon the above terms and
there were no amounts outstanding under the Revolver.
The credit agreement contains certain financial and restrictive covenants, as
follows: (i) total debt cannot exceed 50% of capitalization value, as defined,
(ii) equity value, as defined, must be at least $150 million, (iii) interest
coverage, as defined, must not be less than 2.25:1.00, (iv) debt service
coverage, as defined, must not be less than 1.35:1.00, (v) eligible properties
debt service coverage, as defined, must be not less than 1.50:1.00, (vi) capital
expenditures, exclusive of real estate, must not exceed $3 million annually,
(vii) capitalization value, as defined, must not be less than $200 million and
(viii) operating lease obligations must not exceed $1 million annually. The
13
Company was in compliance with all covenants at December 31, 2004. 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") (2.4% at December 31, 2004) plus 2% for
non-cash collateralized borrowings and 1% 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 manufactures its products in the United States and Mexico and sells
its products in those markets as well as in 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. For the years ended December
31, 2004, 2003 and 2002, 9.5%, 8.2% and 6.0% of the net sales of the Company's
engineered products segment were denominated in Euros, respectively. As such, a
portion of the Company's receivables are exposed to fluctuations with the U.S.
dollar. However, the Company does not believe this risk to be material to its
overall financial position. Since the Euro has been relatively stable in
relation to the U.S. dollar, the Company's results have not been significantly
impacted by foreign exchange gains or losses in the past. Accordingly, the
Company has not entered into forward exchange contracts to hedge this exposure.
If such exposure were to increase in the future, the Company may reexamine this
practice to minimize the associated risks
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. See "Environmental Regulations" in 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 other litigation, legal, regulatory and tax
matters that arise in the ordinary course of business activities. When
management believes it is probable that liabilities have 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, 2004 and 2003, 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, any future purchases in
excess of par value will also reduce retained earnings. Future proceeds from the
issuance of Common Stock in excess of par value will be credited to retained
earnings until such time that previously recorded reductions have been
recovered. The Company has not purchased any shares of the Company's Common
Stock during 2004. 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.
14
CONTRACTUAL OBLIGATIONS, COMMITMENTS AND CONTINGENCIES
The following table summarizes the Company's contractual cash obligations and
other commitments at December 31, 2004:
(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) $ 2,394 $ 1,052 $ 3,437 $ 1,552 $ 8,435
Interest on long-term debt (1) 480 694 491 297 1,962
Operating leases (2) 539 803 556 2,425 4,323
Employment contract (3) 750 - - - 750
Estimated environmental related
costs (3) 250 1,146 372 8,389 10,157
---------- ---------- ---------- ---------- -----------
Total contractual cash obligations $ 4,413 $ 3,695 $ 4,856 $ 12,663 $ 25,627
========== ========== ========== ========== ===========
(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.
RELATED PARTY TRANSACTIONS
The Company has a 50% 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% interest
in this entity. The Company's share of income arising from this investment,
accounted for as a leveraged lease, was $428,000, $491,000 and $673,000 for the
years ended December 31, 2004, 2003 and 2002, respectively.
The Company's two hotel properties, as well as the hotels owned by the Hotel
Venture and Quebec Venture (as hereinafter defined), are managed by BREP IV
Hotel L.L.C. ("BREP"), the successor to Prime Hospitality Corp. ("Prime"). The
Company's Board Chairman and another Director were directors and/or an executive
officer of Prime prior to its sale to BREP. Fees paid for the management of the
Company's two hotel properties are based upon a percentage of revenue and were
approximately $91,000, $97,000 and $117,000 for the years ended December 31,
2004, 2003 and 2002, respectively.
The Company has a 40% interest in two joint ventures which each own and operate
a hotel. The hotels are located in New Jersey (the "Hotel Venture") and Quebec,
Canada (the "Quebec Venture"). The New Jersey hotel secures a $25 million
mortgage loan (the "Mortgage") with a bank. In connection with the Mortgage, the
Company and Prime, who also holds a 40% interest in each of the joint ventures,
entered into a direct guaranty agreement with the bank whereby they, 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.
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
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.
15
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. The effect of stepped-rent increases on
significant leases are recorded, net of allowances, on a straight-line basis.
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.
The Company does not have leases that include significant rent concessions or
provisions that require the lessee to fund capital improvements or to pay the
lessor any revenues based upon indexes or rates that are not explicitly stated
in the lease.
Reimbursements of certain costs received from tenants are recognized as tenant
reimbursement revenues.
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, 2004 and 2003, all marketable securities
held by the Company have been classified as available-for-sale and, as a result,
are stated at fair value, based on quoted market prices. 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
determined on a first-in, first-out basis, are included in the Consolidated
Statements of Income.
16
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 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 exists.
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 18 to 39 years for buildings, ten to 39 years for renovations
and improvements and five to 15 years for equipment and fixtures.
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. The Company
considers real property to be held for sale and reported as discontinued
operations if management commits 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 are
directly affected by management's assessments, the reclassification has no
impact on net income.
17
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 to be 8% in each of the last three years. 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% 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). A 100 basis point
change in the expected long-term rate of return on plan assets would have
changed fiscal 2004 pension expense by $94,000.
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.
Funds of the Company in excess of those 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.
18
interest rates affect the interest earned on the Company's cash and cash
equivalent balances and other interest bearing investments. Although interest
rates have begun to rise, 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.
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 in 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. For the years ended December
31, 2004, 2003 and 2002, 9.5%, 8.2% and 6.0% of the net sales of the Company's
engineered products segment were denominated in Euros, respectively. As such, a
portion of the Company's receivables are exposed to fluctuations with the U.S.
dollar. However, the Company does not believe this risk to be material to its
overall financial position. Since the Euro has been relatively stable in
relation to the U.S. dollar, the Company's results have not been significantly
impacted by foreign exchange gains or losses in the past. Accordingly, the
Company has not entered into forward exchange contracts to hedge this exposure.
If such exposure were to increase in the future, the Company may reexamine this
practice to minimize the associated risks.
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 tends 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, 2004:
PRINCIPAL (NOTIONAL) AMOUNT BY EXPECTED MATURITY
----------------------------------------------------------------------
FAIR
THERE- VALUE
(Dollars in thousands) 2005 2006 2007 2008 2009 AFTER TOTAL 12/31/04
----------------------------------------------------------------------
ASSETS
Available-for-sale securities $54,456 $ -- $ -- $ -- $ -- $ -- $54,456 $54,456
Notes receivable $ 280 $ 3,081 $ 321 $ 360 $ 80 $ 620 $ 4,742 $ 5,415
Average interest rates 13.8% 13.5% 12.1% 11.7% 11.3% 14.0%
LIABILITIES
Long-term debt, including current
portion
Fixed rate $ 2,394 $ 688 $ 364 $ 404 $ 3,033 $ 1,552 $ 8,435 $ 8,329
Average interest rate 6.5% 6.4% 6.4% 6.4% 6.4% 6.5%
Derivative instruments (1) $ 581 $ -- $ -- $ -- $ -- $ -- $ 581 $ 581
(1) 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 condition.
FORWARD-LOOKING STATEMENTS
Certain statements in this annual 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
19
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:
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. Among the factors that may impact our real estate property
values or the revenues derived from our portfolio are 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.
OUR RESULTS COULD BE NEGATIVELY AFFECTED BY DELINQUENCIES IN OUR MORTGAGE OR
HIGH-YIELD LOAN RECEIVABLES.
On a limited basis we provide high-yield, short-term mortgage loans that we
believe are collateralized by desirable properties at substantial value-to-loan
ratios. In addition, we have provided purchase money notes to buyers of certain
real estate properties. Although we believe that the collateral for these loans
is sufficient to recover its carrying value, changes in the real estate market
in the locale in which the property is located or delinquencies by the borrower
could negatively affect our carrying value for these loans and, ultimately, our
results of operations and cash flows.
OFF-BALANCE SHEET OBLIGATIONS COULD DEPLETE OUR LIQUIDITY AND CAPITAL RESOURCES.
We do not have any off-balance sheet arrangements that we believe are reasonably
likely to have a material current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources. The debt of the joint
ventures in which we have an ownership interest are non-recourse obligations and
are collateralized by the entity's real property. In one instance, we and
another partner have jointly and severally guaranteed not more than $4 million
of the joint venture's mortgage obligation. We believe that with each
arrangement the value of the underlying property and its operating cash flows
are sufficient to satisfy its obligations. In addition, except for the
guarantee, we are not obligated for the debts of the joint ventures. However, we
could decide to satisfy the debts of the joint venture to protect our
investment. In such event, our capital resources and financial condition would
be reduced and, in certain instances, the carrying value of our investment and
our results of operations would be negatively impacted.
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.
OUR ENGINEERED PRODUCTS SEGMENT RELIES 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, 2004, sales by the
engineered products segment to General Motors, its largest customer, accounted
20
for 18.7% of the segment's sales. Since our engineered products segment
accounted for 64.9% of our consolidated revenues for 2004, the loss of General
Motors as a customer would adversely affect our revenues and results of
operations.
AN INTERRUPTION IN THE SUPPLY, OR A SIGNIFICANT INCREASE IN THE COST, OF OUR RAW
MATERIALS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR REVENUES, RESULTS OF
OPERATIONS AND CASH FLOWS.
The principal raw materials used in the Company's engineered products business
are stainless steel wire and steel-related products, which are typically
purchased from multiple suppliers throughout the world. The price and
availability of raw materials can be volatile due to numerous factors beyond our
control, including general domestic and international economic conditions, labor
costs, supply and demand, competition, import duties and tariffs and currency
exchange rates. These factors could significantly affect the availability and
cost of our raw materials which are generally purchased at levels that we
believe will satisfy the anticipated needs of our customers based upon
contractual commitments, historical buying practices and market conditions. We
may be unable to recover raw material cost increases due to contractual or
competitive conditions. Conversely, reductions in raw material prices could
result in lower sales prices for our products and lower margins as we utilize
existing inventories. Therefore, changing raw material costs could significantly
impact our revenues, gross margins, operating and net income. If, in the future,
we are unable to obtain sufficient amounts of stainless steel wire or other
critical raw materials on a timely basis and at competitive prices, we may be
unable to fulfill our customers' requirements, which could have a material
adverse effect on our business, financial condition, results of operations and
cash flows.
PROTECTION OF OUR INTELLECTUAL PROPERTY IS LIMITED; WE ARE SUBJECT TO THE RISK
OF THIRD PARTY CLAIMS OF INFRINGEMENT.
Our engineered products 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 regarding 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. We are not currently
involved in any litigation regarding the infringement upon our intellectual
property or regarding our infringement upon the intellectual property 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 federal, state and
local 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
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.
We have undertaken the completion of environmental studies and/or remedial
action at Metex' two New Jersey facilities and have recorded a liability for the
estimated investigation, remediation and administrative costs associate
therewith (See "Environment Regulations" in Item 1 of Part I and Note 18,
"Commitments and Contingences" of Notes to Consolidated Financial Statements).
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 these sites, should an appropriate regulatory agency deem such
efforts to be necessary. The estimates may also be revised as new or additional
21
information in these matters becomes available or should the NJDEP or other
regulatory agencies require additional or alternative remediation efforts in the
future. Although we do not expect such events to significantly change our
estimates, adverse decisions or events, particularly as to the merits of our
factual and legal basis, could cause us to change our estimate of liability with
respect to such matters in the future. Accordingly, we are unable to predict
whether our estimate of future remediation costs will materially increase in the
future.
MR. A.F. PETROCELLI CAN CONTROL THE OUTCOME OF ALL MATTERS REQUIRING STOCKHOLDER
APPROVAL.
As of the date of this annual report on Form 10-K, Mr. A.F. Petrocelli, the
Company's Chairman, President and Chief Executive Officer, beneficially owns, in
the aggregate, approximately 64% of the Company's outstanding Common Stock
(exclusive of options). Such amount includes shares held by his wife and the
Attilio and Beverly Petrocelli Foundation, a not for profit charitable
organization. Such amount does not include shares held by the adult children or
the grandchildren of Mr. Petrocelli. Accordingly, Mr. Petrocelli is therefore
able to exercise considerable influence over the outcome of all matters
requiring stockholder approval, including the election of directors and the
approval of significant corporate transactions, such as mergers or other
business combinations.
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 and Financial Statement Schedules"
and are contained in this Form 10-K, beginning on page 27.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company's auditors for the year ended December 31, 2003 were Grant Thornton
LLP ("Grant Thornton"). As stated in the Company's proxy statement dated May 7,
2004, the Company annually reviews the selection of its independent auditors and
has solicited bids from independent accountants to audit the Company's
consolidated financial statements for the year ended December 31, 2004. As a
result of financial and other considerations, the Audit Committee voted on
October 6, 2004 to appoint Goldstein Golub Kessler LLP as the Company's new
independent accountants.
Pursuant to item 304(a) of Regulation S-K, the Company reports the following:
(a) Previous Independent Accountants
(i) On October 6, 2004, the Company retained Goldstein Golub Kessler LLP
as its independent certified public accountants in place of Grant
Thornton, who were dismissed as independent auditors of the Company
effective October 6, 2004.
(ii) The reports of Grant Thornton on the Company's consolidated
financial statements for the past two fiscal years did not contain
an adverse opinion or a disclaimer of opinion and were not qualified
or modified as to uncertainty, audit scope or accounting principles.
(iii) The decision to change accountants was approved by the Audit
Committee of the Board of Directors.
(iv) In connection with the audits of the Company's consolidated
financial statements for each of the two most recent fiscal years
ended December 31, 2003 and through October 6, 2004, there were no
disagreements with Grant Thornton on any matter of accounting
principles or practices, financial statement disclosure or auditing
scope and procedure which, if not resolved to the satisfaction of
Grant Thornton, would have caused it to make reference to the matter
in their report.
(v) There were no "reportable events" as that term is described in Item
304(a)(1)(v) of Regulation S-K.
(vi) The Company requested Grant Thornton to furnish a letter addressed
to the Securities and Exchange Commission stating whether it agreed
with the above statements. A copy of that letter, dated October 11,
2004, was filed with the Securities and Exchange Commission.
(b) New Independent Accountants
22
(i) The Company engaged Goldstein Golub Kessler LLP as its new
independent accountants effective October 6, 2004. During the two
most recent fiscal years and through October 6, 2004, the Company
has not consulted with Goldstein Golub Kessler LLP concerning the
Company's consolidated financial statements, including the
application of accounting principles to a specified transaction
(proposed or completed) or the type of audit opinion that might be
rendered on the Company's consolidated financial statements or any
matter that was either the subject of a "disagreement" or
"reportable event" (as such terms are defined in Item 304 of
Regulation S-K) with the previous independent accountants.
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-15(e) and
15d-15(e). 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.
ITEM 9B. OTHER INFORMATION
The salary of A.F. Petrocelli, the Company's Chairman, President and Chief
Executive Officer, is set forth in his employment agreement with the Company,
which was filed as an exhibit to the Company's Form 10-K for the fiscal year
ended December 31, 2003. Per Mr. Petrocelli's employment agreement, the
Company's Compensation and Stock Option Committee (the "Committee") determines
the amount of bonus paid to him annually. The Committee, in consultation with
Mr. Petrocelli, determines the salary of Anthony J. Miceli, the Company's Vice
President and Chief Financial Officer, who does not have a written employment
agreement with the Company. Effective January 2005, Mr. Miceli received a salary
increase. In December 2004, the Committee approved bonuses for Messrs.
Petrocelli and Miceli payable in 2005. Such bonuses were consistent with the
bonuses paid to Messrs. Petrocelli and Miceli in prior years and the Company
does not believe the salary increase for Mr. Miceli constitutes a material
change from the disclosure in the Company's Proxy Statement for its 2004 Annual
Meeting of Stockholders.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
This information will be contained in the Proxy Statement of the Company for the
2005 Annual Meeting of Stockholders under the caption "Election of Directors"
and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
This information will be contained in the Proxy Statement of the Company for the
2005 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
2005 Annual Meeting of Stockholders under the caption "Security Ownership" and
is incorporated herein by reference.
23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information will be contained in the Proxy Statement of the Company for the
2005 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
2005 Annual Meeting of Stockholders under the caption "Independent Auditors" and
is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(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 on the pages indicated:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
Report of Independent Registered Public Accounting Firm
- Goldstein Golub Kessler LLP ......................................................27
Report of Independent Registered Public Accounting Firm - Grant Thornton LLP .........28
Consolidated Balance Sheets as of December 31, 2004 and 2003 .........................29
Consolidated Statements of Income for the Years Ended
December 31, 2004, 2003 and 2002 ...................................................30
Consolidated Statements of Stockholders' Equity and Comprehensive Income
for the Years Ended December 31, 2004, 2003 and 2002 ...............................31
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2004, 2003 and 2002 ................................................32-33
Notes to Consolidated Financial Statements ........................................34-53
(2) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Schedule II -- Allowance for Doubtful Accounts ....................................54
Schedule III -- Real Property and Accumulated Depreciation .........................55
Schedule IV -- Mortgage Loans on Real Estate ......................................56
(3) SUPPLEMENTARY DATA
Quarterly Financial Data (Unaudited)..................................................57
Schedules not listed above are omitted as not applicable or the
information is presented in the financial statements or related notes.
(b) 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 (incorporated by reference to exhibit 3.2 filed with the
Company's report on Form 10-K for the fiscal year ended December 31,
2003).
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).
24
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 (incorporated by
reference to exhibit 10.4 filed with the Company's report on Form
10-K for the fiscal year ended December 31, 2003).
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.
* 23.1. Consent of Independent Registered Public Accounting Firm - Goldstein
Golub Kessler LLP.
* 23.2. Consent of Independent Registered Public Accounting Firm - Grant
Thornton LLP.
* 31.1. Certification of the Chief Executive Officer pursuant to Rule
13a-15(e) and 15d-15(e).
* 31.2. Certification of the Chief Financial Officer pursuant to Rule
13a-15(e) and 15d-15(e).
* 32.1. Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
* 32.2. Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
* Filed herewith
25
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 21, 2005 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 21, 2005 By:/s/ A. F. Petrocelli
-----------------------------------
A. F. Petrocelli
Chairman, President and
Chief Executive Officer
Dated: March 21, 2005 By:/s/ Howard M. Lorber
-----------------------------------
Howard M. Lorber
Director
Dated: March 21, 2005 By:/s/ Robert M. Mann
-----------------------------------
Robert M. Mann
Director
Dated: March 21, 2005 By:/s/ Anthony J. Miceli
-----------------------------------
Anthony J. Miceli
Chief Financial Officer,
Chief Accountant, Secretary
and Director
Dated: March 21, 2005 By:/s/ Arnold S. Penner
-----------------------------------
Arnold S. Penner
Director
26
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
and Stockholders of
United Capital Corp.
We have audited the accompanying consolidated balance sheet of United Capital
Corp. and Subsidiaries (the "Company") as of December 31, 2004 and the related
consolidated statements of income, stockholders' equity and comprehensive income
and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 audit provides 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, 2004 and the consolidated results of
its operations and its consolidated cash flows for the year then ended in
conformity with United States generally accepted accounting principles.
We have also audited the consolidated financial statement schedules for the year
ended December 31, 2004, 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/ GOLDSTEIN GOLUB KESSLER LLP
New York, New York
February 4, 2005
27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
and Stockholders of
United Capital Corp.
We have audited the accompanying consolidated balance sheet of United Capital
Corp. and Subsidiaries (the "Company") as of December 31, 2003, and the related
consolidated statements of income, stockholders' equity and comprehensive income
and cash flows for each of the two 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, 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 the consolidated results of
their operations and their consolidated cash flows for each of the two years in
the period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America.
As described in Note 2 to the consolidated financial statements, the Company has
reclassified the 2003 and 2002 consolidated financial statements to reflect
certain discontinued operations.
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the Index at Item
15(a)(2) for each of the two years in the period ended December 31, 2003 are
presented for purposes of additional analysis and are not part of the basic
financial statements. These schedules have been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion are fairly stated in all material respects in relation to the basic
financial statements as a whole.
/s/ GRANT THORNTON LLP
Melville, New York
February 13, 2004, except for the reclassification of certain discontinued
operations described in Note 2 as to which the date is February 25, 2005
28
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
AS OF DECEMBER 31,
----------------------------------------------------
2004 2003
----------------------- ----------------------
ASSETS
Current assets:
Cash and cash equivalents $ 84,783 $ 59,210
Marketable securities 54,456 49,612
Notes and accounts receivable, net 7,350 6,433
Inventories 4,132 4,155
Prepaid expenses and other current assets 892 961
Deferred income taxes 354 -
Current assets of discontinued operations - 87
-------------- --------------
TOTAL CURRENT ASSETS 151,967 120,458
-------------- --------------
Property, plant and equipment, net 2,337 3,098
Real property held for rental, net 31,377 32,850
Investments in joint ventures 19,398 19,819
Noncurrent notes receivable 4,462 2,862
Other assets 2,051 3,194
Noncurrent assets of discontinued operations 1,132 7,433
-------------- --------------
TOTAL ASSETS $ 212,724 $ 189,714
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 2,394 $ 2,938
Accounts payable and accrued liabilities 10,106 9,138
Income taxes payable 7,014 7,270
Deferred income taxes - 3,947
Current liabilities of discontinued operations 45 1,114
-------------- --------------
TOTAL CURRENT LIABILITIES 19,559 24,407
-------------- --------------
Long-term debt 6,041 8,459
Other long-term liabilities 30,316 30,848
Deferred income taxes 2,739 1,783
-------------- --------------
TOTAL LIABILITIES 58,655 65,497
-------------- --------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.10 par value, authorized 17,500 shares; issued and
outstanding 9,130 and 9,092 shares, respectively 913 909
Retained earnings 152,266 114,436
Accumulated other comprehensive income, net of tax 890 8,872
-------------- --------------
TOTAL STOCKHOLDERS' EQUITY 154,069 124,217
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 212,724 $ 189,714
============== ==============
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
29
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------
2004 2003 2002
------------ ------------ --------------
REVENUES:
Net sales $ 38,335 $ 34,019 $ 33,513
Rental revenues from real estate operations 20,726 20,749 19,895
-------- -------- --------
Total revenues 59,061 54,768 53,408
-------- -------- --------
OPERATING EXPENSES (INCOME):
Cost of sales 27,026 23,895 24,500
Real estate operations:
Mortgage interest expense 662 933 1,176
Depreciation expense 2,570 2,727 2,842
Other operating expenses 7,693 7,479 6,697
General and administrative expenses 5,843 6,016 6,246
Selling expenses 3,985 3,589 3,504
Net gains on the sale of real estate assets -- (153) (5,708)
-------- -------- --------
Operating income 11,282 10,282 14,151
-------- -------- --------
OTHER INCOME (EXPENSE):
Interest and dividend income 2,114 1,696 1,934
Interest expense (450) (443) (532)
Other income and expense, net 22,435 4,885 10,313
-------- -------- --------
Total other income 24,099 6,138 11,715
-------- -------- --------
Income from continuing operations before income taxes 35,381 16,420 25,866
Provision for income taxes 10,232 6,204 5,312
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS 25,149 10,216 20,554
-------- -------- --------
DISCONTINUED OPERATIONS:
Income from discontinued operations, net of tax provision
of $563, $810 and $1,565, respectively 845 1,213 2,349
Net gain on disposal of discontinued operations, net of tax
provision of $7,575, $2,357 and $316, respectively 11,363 3,535 474
-------- -------- --------
INCOME FROM DISCONTINUED OPERATIONS 12,208 4,748 2,823
-------- -------- --------
NET INCOME $ 37,357 $ 14,964 $ 23,377
======== ======== ========
BASIC EARNINGS PER SHARE:
Income from continuing operations $ 2.76 $ 1.13 $ 2.24
Income from discontinued operations 1.34 .52 .31
-------- -------- --------
NET INCOME PER SHARE $ 4.10 $ 1.65 $ 2.55
======== ======== ========
DILUTED EARNINGS PER SHARE:
Income from continuing operations $ 2.32 $ .96 $ 2.06
Income from discontinued operations 1.13 .44 .28
-------- -------- --------
NET INCOME PER SHARE ASSUMING DILUTION $ 3.45 $ 1.40 $ 2.34
======== ======== ========
DIVIDENDS PAID PER SHARE $ -- $ 1.00 $ --
======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
30
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In thousands)
ACCUMULATED
OTHER
COMMON STOCK ISSUED COMPREHENSIVE TOTAL
-------------------- RETAINED INCOME, STOCKHOLDERS' COMPREHENSIVE
SHARES AMOUNT EARNINGS NET OF TAX EQUITY INCOME
--------- --------- ----------- --------------- ------------ -------------
BALANCE - JANUARY 1, 2002 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 effect of $1,165 -- -- -- (2,167) (2,167) (2,167)
Reclassification adjustment for net
gains realized in net income, net of
tax effect 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 effect of $3,879 -- -- -- 8,405 8,405 8,405
Reclassification adjustment for net
gains realized in net income, net of
tax effect of $313 -- -- -- (619) (619) (619)
---------
Comprehensive income $ 22,750
------- ------ -------- ------- -------- =========
BALANCE - DECEMBER 31, 2003 9,092 909 114,436 8,872 124,217
------- ------ -------- ------- --------
Proceeds from the exercise of stock options 38 4 302 -- 306
Tax benefit from employee stock options -- -- 171 -- 171
Net income -- -- 37,357 -- 37,357 $ 37,357
Other comprehensive income, net of tax:
Change in net unrealized gain on
available-for-sale securities, net of
tax effect of $2,812 -- -- -- 5,223 5,223 5,223
Reclassification adjustment for net
gains realized in net income, net of
tax effect of $7,111 -- -- -- (13,205) (13,205) (13,205)
---------
Comprehensive income $ 29,375
------- ------ -------- ------- -------- =========
BALANCE - DECEMBER 31, 2004 9,130 $ 913 $ 152,266 $ 890 $ 154,069
======= ====== ======== ======= ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
31
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
2004 2003 2002
--------- ---------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 37,357 $ 14,964 $ 23,377
Adjustments to reconcile net income
to net cash (used in) provided by operating activities:
Depreciation and amortization 3,590 3,852 4,098
Net gain on sale of available-for-sale securities (20,316) (952) (4,038)
Net gain on sale of real estate assets -- (153) (5,708)
Net gain on sale of other assets (363) -- --
Net gain on disposal of discontinued operations, net of tax (11,363) (3,535) (474)
Net realized and unrealized gain on derivative instruments (728) (1,851) (6,283)
Net realized and unrealized gain on trading securities -- (411) (35)
Purchase of trading securities -- (961) (791)
Proceeds from sale of trading securities -- 2,673 --
Equity in earnings of joint ventures (512) (1,478) (673)
Tax benefit from employee stock options 171 662 --
Changes in assets and liabilities:
Notes and accounts receivable, net (821) (896) 420
Inventories 23 (478) 1,276
Prepaid expenses and other current assets 69 (4) (606)
Deferred income taxes 953 (860) 2,161
Noncurrent notes receivable -- 106 9
Other assets 110 430 (650)
Accounts payable and accrued liabilities 397 147 1,385
Income taxes payable (7,831) (346) (2,641)
Other long-term liabilities (532) (120) 98
Discontinued operations - noncash charges and
working capital changes (845) (712) (1,138)
--------- ---------- --------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (641) 10,077 9,787
--------- ---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale securities (62,442) (19,008) (11,477)
Proceeds from sale of available-for-sale securities 65,634 7,438 11,701
Proceeds from sale of real estate assets 24,302 11,942 7,258
Proceeds from sale of other assets 1,363 -- --
Proceeds from sale of derivative instruments 1,312 1,739 5,093
Purchase of derivative instruments (13) -- (8,843)
Purchase of note receivable (1,000) -- (2,955)
Acquisition of property, plant and equipment (226) (574) (227)
Principal payments on note receivable 104 81 22
Acquisition of/additions to real estate assets (1,097) (359) (169)
Investments in joint ventures, net -- (256) (23,128)
Distributions from joint ventures 933 13,304 776
--------- ---------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 28,870 14,307 (21,949)
--------- ---------- --------
32
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
(In thousands)
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------
2004 2003 2002
---------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on mortgage obligations (2,962) (3,238) (3,297)
Net repayments under credit facilities -- -- (525)
Purchase and retirement of common shares -- (3,189) (3,770)
Proceeds from the exercise of stock options 306 1,462 477
Dividends paid -- (9,102) --
---------- ------------ -----------
NET CASH USED IN FINANCING ACTIVITIES (2,656) (14,067) (7,115)
---------- ------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 25,573 10,317 (19,277)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 59,210 48,893 68,170
---------- ------------ -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 84,783 $ 59,210 $ 48,893
========== ============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 1,001 $ 1,329 $ 1,652
========== ============ ===========
Taxes $ 17,517 $ 7,418 $ 7,349
========== ============ ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of note receivable in connection with sale
of real property (net of deferred gain in 2002) $ 800 $ -- $ 46
========== ============ ===========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
33
UNITED CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
(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. The effect of stepped-rent increases on
significant leases are recorded, net of allowances, on a straight-line basis.
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.
The Company does not have leases that include significant rent concessions or
provisions that require the lessee to fund capital improvements or to pay the
lessor any revenues based upon indexes or rates that are not explicitly stated
in the lease.
Reimbursements of certain costs received from tenants are recognized as tenant
reimbursement revenues.
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.
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.
34
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.
CASH AND CASH EQUIVALENTS
Cash equivalents of $56,381 and $36,818 at December 31, 2004 and 2003,
respectively, consisted 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. The Company maintains balances with various financial institutions
which, at times, exceed federally insured limits.
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, 2004 and 2003, all marketable securities held by
the Company have been classified as available-for-sale and, as a result, are
stated at fair value, based on quoted market prices. 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
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 in
the Consolidated Statements of Income.
NOTES AND ACCOUNTS RECEIVABLE, NET
Notes and accounts receivable, net consist of the following:
DECEMBER 31,
-------------------------
2004 2003
----------- ---------
Trade receivables $6,389 $5,463
Rental receivables 608 265
Other receivables 397 974
Current portion of notes receivable 280 55
----------- ---------
Total 7,674 6,757
Less: Allowance for doubtful accounts 324 324
----------- ---------
$7,350 $6,433
=========== =========
There were no changes in the Company's allowance for doubtful accounts during
the years ended December 31, 2004 and 2003.
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. Inventories consist of the following:
DECEMBER 31,
--------------------------------
2004 2003
------------- --------------
Raw materials $1,985 $1,601
Work in process 361 411
Finished goods 1,786 2,143
------------- --------------
$4,132 $4,155
============= ==============
35
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 18 to 39 years
Building renovations and improvements 10 to 39 years
Equipment and fixtures 5 to 15 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.
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
36
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 to be 8% for 2004 and 2003. 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% 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). A 100 basis point
change in the expected long-term rate of return on plan assets would have
changed fiscal 2004 pension expense by $94.
RESEARCH AND DEVELOPMENT
The Company expenses research, development and product engineering costs as
incurred. Approximately $69, $63 and $58 of such costs were incurred by the
Company in 2004, 2003 and 2002, 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 or selling expenses. For the
years ended December 31, 2004, 2003 and 2002, shipping and handling costs
included in selling expenses were $477, $325 and $293, respectively.
DIVIDENDS
On June 10, 2003, the Board of Directors of the Company declared a special
one-time cash dividend of $1.00 per common share (split-adjusted) 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, 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. 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.
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
37
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
underlying 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" ("SFAS No. 123") to stock-based
employee compensation.
YEARS ENDED DECEMBER 31,
------------------------------------------------------
2004 2003 2002
--------------- --------------- -----------------
Net income, as reported $ 37,357 $ 14,964 $ 23,377
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects (2,396) (2,586) (2,068)
---------- ---------- ----------
Pro forma net income $ 34,961 $ 12,378 $ 21,309
========== ========== ==========
Earnings per share:
Basic - as reported $ 4.10 $ 1.65 $ 2.55
========== ========== ==========
Basic - pro forma $ 3.84 $ 1.37 $ 2.33
========== ========== ==========
Diluted - as reported $ 3.45 $ 1.40 $ 2.34
========== ========== ==========
Diluted - pro forma $ 3.26 $ 1.18 $ 2.21
========== ========== ==========
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.
The Black-Scholes 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 (no options were granted during 2004):
OPTIONS GRANTED DURING:
-----------------------
2003 2002
-----------------------
Expected life (years) 5 5
Risk free interest rate 2.2% 4.4%
Expected volatility 33.7% 34.2%
Dividend yield 0.0% 0.0%
Weighted-average option fair value $7.26 $4.59
As discussed below under "Recent Accounting Pronouncements," the Financial
Accounting Standards Board ("FASB") issued SFAS No. 123 (revised 2004),
"Share-Based Payment" in December 2004. The provisions of this statement are
effective as of the first interim or annual period that begins after June 15,
2005.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company recognizes all derivative financial instruments, such as put and/or
call options, 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
38
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 or 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, 2004 and 2003, the fair value of such
derivatives was ($581) and ($10), respectively, which are 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 $728, $1,851 and $6,283 in net realized and unrealized gains
from derivative instruments for the years ended December 31, 2004, 2003 and
2002, respectively, which are included in other income and expense, net in the
Consolidated Statements of Income.
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 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 and interim 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 Company has adopted the disclosures required by SFAS No.
132R (see Note 15).
In March 2004, the FASB issued Emerging Issues Task Force Issue No. 03-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments" ("EITF No. 03-1"), which provides guidance for assessing impairment
losses on debt and equity investments. Additionally, EITF No. 03-1 includes new
disclosure requirements for investments that are deemed to be temporarily
impaired. In September 2004, the FASB delayed the accounting provisions of EITF
No. 03-1; however, the disclosure requirements remain effective and have been
adopted by the Company. The Company will evaluate the effect, if any, of
implementing EITF No. 03-1 when final guidance is released.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an amendment
of ARB No. 43, Charter 4" ("SFAS No. 151"). This standard clarifies the
accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage) and requires that those items be
recognized as current-period charges regardless of whether they meet the
criterion of "so abnormal." In addition, SFAS No. 151 requires allocation of
fixed production overhead to the costs of conversion be based on the normal
capacity of the production facilities. SFAS No. 151 is effective for inventory
39
costs incurred during fiscal years beginning after June 15, 2005. The adoption
of SFAS No. 151 is not expected to have a material impact on the Company's
financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS No. 123R"), which replaces SFAS No. 123 and supercedes APB No.
25. SFAS No. 123R requires that the compensation cost relating to share-based
payment transactions be recognized in financial statements based on alternative
fair value models. The share-based compensation cost will be measured based on
the fair value of the equity or liability instruments issued. Per APB No. 25,
compensation expense was recognized only to the extent the fair value of common
stock exceeded the stock option exercise price at the measurement date. In
addition, the pro forma disclosures previously permitted under SFAS No. 123 no
longer will be an alternative to financial statement recognition. SFAS No. 123R
also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow rather than as an
operating cash flow as required under current literature. SFAS No. 123R is
effective as of the first interim or annual period that begins after June 15,
2005. The Company is evaluating the requirements of SFAS No. 123R and expects
that the adoption will have a material impact on the consolidated results of
operations and earnings per share similar to the current pro-forma disclosures
under SFAS No. 123 (see "Stock-Based Compensation" above).
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,
------------------------
2004 2003
----------- ----------
Land $12,200 $12,200
Buildings 77,766 77,766
Building renovations and improvements 4,648 3,767
Equipment and fixtures 1,596 1,410
------- --------
96,210 95,143
Less: Accumulated depreciation 64,833 62,293
------- --------
$31,377 $32,850
======= ========
As of December 31, 2004, total minimum future rentals to be received under
noncancelable leases for each of the next five years and thereafter are as
follows:
YEARS ENDING DECEMBER 31,
2005 $ 15,999
2006 9,906
2007 8,459
2008 7,385
2009 6,722
Thereafter 50,983
----------
Total minimum future rentals $ 99,454
===========
Minimum future rentals do not include amounts for renewals, tenant reimbursement
or 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 net income from real properties held for rental for 2004, 2003 and
2002 were approximately $777, $758 and $631, respectively.
PROPERTY SALES
During 2004, the Company divested itself of seven commercial properties which
had a net book value of $5,265 from its real estate investment and management
segment. The cash proceeds from these transactions were $9,327. In addition, the
Company received an $800 purchase money mortgage in connection with the sale of
one of these properties. These transactions resulted in a gain of $2,917 on a
net of tax basis. In addition, the Company sold three of its shopping centers
which had a net book value of $899. The aggregate proceeds from these
40
transactions were $14,975, resulting in a gain of $8,446 on a net of tax basis.
Two of the properties, one commercial and one shopping center, were contributed
to charitable organizations in the first quarter of 2004 for a nominal amount.
The net book value of these properties and their fair market value, determined
by appraisals, were $341 and $4,590, respectively.
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.
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 a commercial property sold in January 2004 where the sales price
was below its carrying value.
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 recognized
under the installment method and, accordingly, the carrying value of noncurrent
notes receivable was reduced by the deferred gain. During 2003, the mortgage
note receivable was satisfied and the balance of the deferred gain was
recognized. For the years ended December 31, 2003 and 2002, gains of $1,824 and
$176 on a net of tax basis were recognized from this sale, respectively.
The results of operations for these properties for the years ended December 31,
2004, 2003 and 2002 have been reclassified to discontinued operations on a net
of tax basis. In addition, the assets and liabilities associated with these
properties have been reclassified to discontinued operations in the accompanying
Consolidated Balance Sheet at December 31, 2003. 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,
---------------------------------
2004 2003 2002
----------- ---------- --------
Rental revenues from real estate operations $ 792 $ 2,487 $ 4,027
Mortgage interest expense (19) (104) (214)
Depreciation expense (46) (298) (339)
Other operating expenses (524) (941) (736)
-------- --------- --------
Operating income $ 203 $ 1,144 $ 2,738
======== ========= ========
PROPERTIES HELD FOR SALE
As of December 31, 2004, the Company considered three commercial properties and
one property classified as a day-care center and offices from its real estate
and investment management segment to be held for sale and reported as
discontinued operations.
The results of operations for these properties have been reclassified to
discontinued operations on a net of tax basis in the Consolidated Statements of
Income for the years ended December 31, 2004, 2003 and 2002. 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 accompanying Consolidated Balance Sheets at
December 31, 2004 and 2003.
41
Summarized financial information for properties held for sale and accounted for
as discontinued operations at December 31, 2004 is as follows:
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2004 2003 2002
---------- --------- ---------
Rental revenues from real estate operations $ 1,500 $ 1,217 $ 1,429
Depreciation expense (89) (91) (123)
Other operating expenses (206) (247) (130)
---------- --------- ---------
Operating income $ 1,205 $ 879 $ 1,176
========== ========= =========
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,
--------------------------
2004 2003
------------ -----------
Land $ 28 $ 28
Buildings and improvements 1,428 1,428
Machinery and equipment 12,707 12,524
--------- --------
14,163 13,980
Less: Accumulated depreciation 11,826 10,882
--------- --------
$ 2,337 $ 3,098
========= ========
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
COST GAINS LOSSES VALUE
------------- ----------------- ------------------ --------------------
DECEMBER 31, 2004:
Available-for-sale:
Equity securities $ 48,081 $ 4,371 $ (3,001) $ 49,451
Bonds 5,005 -- -- 5,005
-------- -------- -------- --------
$ 53,086 $ 4,371 $ (3,001) $ 54,456
======== ======== ======== ========
DECEMBER 31, 2003:
Available-for-sale:
Equity securities $ 28,957 $ 13,763 $ (113) $ 42,607
Bonds 7,005 -- -- 7,005
-------- -------- -------- --------
$ 35,962 $ 13,763 $ (113) $ 49,612
======== ======== ======== ========
At December 31, 2004, the Company did not have any investments in individual
securities that have been in a continuous unrealized loss position for more than
12 months. The Company continuously reviews its investment portfolio to identify
and evaluate investments that have indications of possible impairment. The
Company does not believe that its investments in marketable securities with
unrealized losses at December 31, 2004 are other-then-temporary due to market
volatility of the security's fair value, analysts' expectations and the
Company's ability to hold the securities for a period of time sufficient to
allow for any anticipated recoveries in market value.
42
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,
----------------------------------------
2004 2003 2002
----------- ------------- ------------
Available-for-sale securities:
Proceeds $ 65,634 $ 7,438 $ 11,701
Gross realized gains 20,469 952 5,043
Gross realized losses (153) -- (1,005)
Trading securities:
Proceeds $ -- $ 2,673 $ --
Gross realized gains -- 456 --
Gross realized losses -- (45) --
5. INVESTMENTS IN JOINT VENTURES
Investments in joint ventures consist of the following:
DECEMBER 31,
----------------------------
2004 2003
------------ ------------
Investments in hotel ventures $11,771 $11,843
Lease financing 7,627 7,976
------- -------
$19,398 $19,819
======= =======
INVESTMENTS IN HOTEL VENTURES
The Company has a 40% interest in two joint ventures which each own and operate
a hotel. The hotels are located in New Jersey (the "Hotel Venture") and Quebec,
Canada (the "Quebec Venture"). The New Jersey hotel secures a $25,000 mortgage
loan (the "Mortgage") with a bank. In connection with the Mortgage, the Company
and Prime Hospitality Corp. ("Prime") entered into a direct guaranty agreement
with the bank whereby they, 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. Accordingly, the fair value of the guarantee was
determined to be insignificant and, therefore, no liability has been recorded.
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 $84 and $987 for the
years ended December 31, 2004 and 2003, respectively.
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.
43
Summarized financial information of the Hotel Venture and Quebec Venture are as
follows:
DECEMBER 31,
-----------------------------
BALANCE SHEETS: 2004 2003
------------- ------------
Current assets $ 4,073 $ 3,728
======= =======
Property, plant and equipment, net $60,778 $61,008
======= =======
Other noncurrent assets $ 179 $ 304
======= =======
Current liabilities $ 2,807 $ 3,267
======= =======
Long-term liabilities $29,766 $29,971
======= =======
Equity $32,457 $31,802
======= =======
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
OPERATING RESULTS: 2004 2003
------------- ------------
Revenues $25,903 $22,730
======= =======
Operating profit $ 5,966 $ 5,821
======= =======
Net income $ 210 $ 2,362
======= =======
The hotels are managed by BREP IV Hotel L.L.C. ("BREP"), the successor to Prime,
who also holds a 40% interest in each of the joint ventures. The Company's Board
Chairman and another Director were directors and/or an executive officer of
Prime prior to its sale to BREP (see Note 12).
LEASE FINANCING
Lease financing consists of a 50% 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,
-------------------------
2004 2003
------------- ----------
Rents receivable $ 69,496 $ 73,525
Residual values 10,000 10,000
Nonrecourse debt service (55,102) (58,354)
Unearned income (16,767) (17,195)
-------- --------
7,627 7,976
Less: Deferred taxes arising from leveraged leases 6,532 6,652
-------- --------
$ 1,095 $ 1,324
======== ========
The Company's share of income arising from this investment was $428, $491 and
$673 for the years ended December 31, 2004, 2003 and 2002, respectively, and is
included in rental revenues from real estate operations in the Consolidated
Statements of Income.
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
DECEMBER 31,
-----------------------------
2004 2003
------------- --------------
Accounts payable $ 4,587 $ 4,069
Accrued wages and benefits 2,132 2,051
Other accrued expenses 3,387 3,018
------- -------
$10,106 $ 9,138
======= =======
44
7. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
-----------------------------
2004 2003
------------- --------------
Mortgages on real property $ 8,435 $11,397
Less: Current maturities 2,394 2,938
------- -------
$ 6,041 $ 8,459
======= =======
First mortgages bearing interest at rates ranging from 4% to 9.8% per annum are
collateralized by the related real property which had a net carrying value of
$11,794 at December 31, 2004 and is included in real property held for rental in
the Consolidated Balance Sheets. Such amounts are scheduled to mature at various
dates from August 2005 through October 2015.
The approximate aggregate maturities of these obligations at December 31, 2004
are as follows:
LONG-TERM
DEBT
---------------
2005 $ 2,394
2006 688
2007 364
2008 404
2009 3,033
Thereafter 1,552
---------
$ 8,435
=========
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% of the aggregate annualized and normalized
year-to-date net operating income of unencumbered eligible properties, as
defined, capitalized at 10%, (ii) 60% 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
total eligibility, (iii) the lesser of $20,000 or 50% of the aggregate
annualized and normalized year-to-date net operating income of encumbered
eligible properties, as defined, capitalized at 12%, (iv) the sum of 75% of
eligible accounts receivable, 50% 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,
2004, 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, as
follows: (i) total debt cannot exceed 50% of capitalization value, as defined,
(ii) equity value, as defined, must be at least $150,000, (iii) interest
coverage, as defined, must not be less than 2.25:1.00, (iv) debt service
coverage, as defined, must not be less than 1.35:1.00, (v) eligible properties
debt service coverage, as defined, must be not less than 1.50:1.00, (vi) capital
expenditures, exclusive of real estate, must not exceed $3,000 annually, (vii)
capitalization value, as defined, must not be less than $200,000, and (viii)
operating lease obligations must not exceed $1,000 annually. The Company was in
compliance with all covenants at December 31, 2004. 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") (2.4% at December 31, 2004) plus 2% for non-cash
collateralized borrowings and 1% for cash collateralized borrowings.
45
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 amounts 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 to loans with similar terms and
borrowers of similar credit quality. The fair value of notes receivable at
December 31, 2004 and 2003 was approximately $5,415 and $3,450,
respectively, while the carrying value was $4,742 and $2,917 for the same
periods.
At December 31, 2004 and 2003, all marketable securities held by the
Company have been classified as available-for-sale 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, 2004 and 2003 was approximately $8,329 and $11,327, respectively, while
the carrying value was $8,435 and $11,397 for the same periods.
The derivative instruments held by the Company, representing put and/or
call options, are carried at fair value based on quoted market prices or
dealer quotes. At December 31, 2004 and 2003, the fair value of these
derivatives was ($581) and ($10), 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, any future purchases in
excess of par value will also reduce retained earnings. Future proceeds from the
issuance of common stock in excess of par value will be credited to retained
earnings until such time that previously recorded reductions have been
recovered. During 2003 and 2002, the Company purchased and retired 166 and 296
shares of the Company's common stock for $3,189 and $3,770, respectively. The
Company did not purchase any shares of the Company's common stock during 2004.
Repurchases of the Company's common stock may 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.
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, 2004, there were 2,253 and 3,177 options outstanding under the
Joint Plan and Incentive Plan, respectively. At December 31, 2003, there were
2,279 and 3,191 options outstanding under the Joint Plan and Incentive Plan,
respectively.
46
The Company's stock options as of December 31, 2004, 2003 and 2002, and changes
during the years then ended are summarized below:
WEIGHTED-
AVERAGE
SHARES EXERCISE PRICE
-------- ---------------
Outstanding at January 1, 2002 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
Exercised (38) $ 8.06
Cancelled/Forfeited (2) $ 21.80
------
Outstanding at December 31, 2004 5,430 $ 11.51
======
The following table summarizes information about options outstanding and
exercisable at December 31, 2004:
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 - $6.53 690 5.4 Years $ 6.49 690 $ 6.49
$7.03 - $9.38 1,365 3.7 Years $ 7.64 1,365 $ 7.64
$11.44 - $11.93 1,690 5.1 Years $ 11.70 1,690 $ 11.70
$12.20 - $21.80 1,685 7.8 Years $ 16.52 882 $ 14.96
------ -----
$3.63 - $21.80 5,430 5.6 Years $ 11.51 4,627 $ 10.35
====== =====
11. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share from continuing operations:
YEARS ENDED DECEMBER 31,
---------------------------------------------------
2004 2003 2002
-------------- -------------- ---------------
Numerator:
Income from continuing operations $25,149 $10,216 $20,554
======= ======= =======
Denominator:
Basic - weighted-average shares outstanding 9,114 9,061 9,158
Dilutive effect of employee stock options 1,704 1,616 824
------- ------- -------
Diluted - weighted-average shares outstanding 10,818 10,677 9,982
======= ======= =======
Basic earnings per share - continuing operations $ 2.76 $ 1.13 $ 2.24
======= ======= =======
Diluted earnings per share - continuing operations $ 2.32 $ .96 $ 2.06
======= ======= =======
Employee stock options to purchase 756 and 758 shares of the Company's common
stock at December 31, 2004 and 2003, respectively, were not included in the
computation of diluted earnings per share because their effect would have been
anti-dilutive.
47
12. TRANSACTIONS WITH RELATED PARTIES
The Company has a 50% 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 have an 8%
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 BREP (see Note 5). The Company's
Board Chairman and another Director were directors and/or an executive officer
of Prime prior to its sale to BREP in October 2004. Fees paid for the management
of the Company's two hotel properties are based upon a percentage of revenue and
were approximately $91, $97 and $117 for 2004, 2003 and 2002, respectively.
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 are more likely than not.
The components of the net deferred tax liability are as follows:
DECEMBER 31,
----------------------
2004 2003
--------- -----------
Realization allowances related to accounts receivable and inventories $ 292 $ 344
Net unrealized gain on marketable securities (583) (4,932)
Basis differences relating to real property held for rental 4,019 4,492
Accrued expenses, deductible when paid 4,413 4,409
Deferred revenue and profit (2,096) (2,023)
Charitable contribution carryforward 745 731
Basis differences relating to business acquisitions (1,863) (1,863)
Leveraged lease (6,532) (6,652)
Property, plant and equipment (386) (377)
Pensions 63 206
Other, net (457) (65)
------- -------
Net deferred tax liability (2,385) (5,730)
Less: Current portion - asset (liability) 354 (3,947)
------- -------
Noncurrent portion $(2,739) $(1,783)
======= =======
The income tax provision (benefit) reflected in the Consolidated Statements of
Income is as follows:
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
2004 2003 2002
-------- -------- --------
Current:
Federal $ 10,370 $ 5,587 $ 2,374
State (855) 534 777
Deferred 717 83 2,161
-------- -------- --------
$ 10,232 $ 6,204 $ 5,312
======== ======== ========
48
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 YEARS ENDED DECEMBER 31,
-------------------------------
2004 2003 2002
-------- -------- --------
Computed federal income tax provision at statutory rates $ 12,383 $ 5,747 $ 9,053
State (benefit) tax, net of federal tax effect (556) 347 505
Realization of capital loss deductions -- -- (2,295)
Charitable contributions (1,745) -- (1,973)
Other, net 150 110 22
-------- -------- --------
$ 10,232 $ 6,204 $ 5,312
======== ======== ========
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,
--------------------------------
2004 2003 2002
-------- -------- --------
Net gain on the sale of available-for-sale securities $ 20,316 $ 952 $ 4,038
Net realized and unrealized gain on derivative instruments 728 1,851 6,283
Equity in earnings of hotel ventures 84 987 --
Deposit forfeiture -- 694 --
Net realized and unrealized gain on trading securities -- 411 35
Casualty insurance settlement 831 -- --
Other, net 476 (10) (43)
-------- -------- --------
$ 22,435 $ 4,885 $ 10,313
======== ======== ========
In October 2004, the stockholders of Prime approved a merger with BREP whereby
they acquired all of the outstanding shares of Prime in exchange for $12.25 per
common share. Accordingly, the Company's shares in Prime were sold, resulting in
proceeds of approximately $43.4 million and a gain of approximately $19 million.
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 its pension plan.
49
The following table sets forth the changes in benefit obligation, plan assets
and funded status of the plan:
DECEMBER 31,
-----------------------
2004 2003
------- ---------
Change in benefit obligation:
Benefit obligation, beginning of year $ 8,533 $ 8,478
Service cost 283 266
Interest cost 650 647
Actuarial loss (gain) 3 (63)
Benefits paid (808) (795)
------- -------
Benefit obligation, end of year 8,661 8,533
------- -------
Change in plan assets:
Fair value of plan assets, beginning of year 9,823 8,782
Actual return on plan assets 611 1,836
Benefits paid (808) (795)
------- -------
Fair value of plan assets, end of year 9,626 9,823
------- -------
Funded status 965 1,290
------- -------
Unrecognized net actuarial gain (740) (743)
Unrecognized net gain (405) (547)
------- -------
Accrued benefit obligation $ (180) $ --
======= =======
The accrued benefit obligation is included in other noncurrent liabilities in
the accompanying Consolidated Balance Sheet. As of December 31, 2004 and 2003,
the accumulated benefit obligation was $8,441 and $8,291, respectively.
Net periodic pension expense consists of the following:
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
2004 2003 2002
-------- -------- --------
Service cost $ (283) $ (266) $ (348)
Interest cost (650) (647) (656)
Actual return on plan assets 611 1,836 384
Net amortization and deferral 142 (1,226) 162
------- ------- -------
Net periodic pension expense $ (180) $ (303) $ (458)
======= ======= =======
In determining the projected benefit obligation and net periodic pension cost,
the weighted-average assumed discount rate and expected long-term rate of return
on plan assets was 8%, while the rate of expected increases in future
compensation was 3.5%, in all periods presented.
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 allocations of plan assets by category are as follows:
DECEMBER 31,
-------------------------
2004 2003
------------ -----------
Equity securities 58.5% 61.8%
Debt securities 20.3 22.4
U.S. government securities 11.4 13.5
Cash and other investments 9.8 2.3
----- -----
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
50
have the flexibility to adjust the asset allocations and move funds to the asset
class that offers the most opportunity for investment returns.
Benefit payments, which include the effects of expected future service, are
expected to be paid as follows:
BENEFIT
YEARS ENDED DECEMBER 31, PAYMENTS
--------
2005 $ 766
2006 751
2007 734
2008 799
2009 856
2010-2014 4,368
The Company has not contributed to the plan in more than the last three years as
the plan has been overfunded. The Company does not anticipate contributing to
the plan in 2005.
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,
-------------------------------------------------
2004 2003 2002
------------ ---------------- ---------------
NET REVENUES AND SALES:
Real estate investment and management $ 20,726 $ 20,749 $ 19,895
Engineered products 38,335 34,019 33,513
-------- -------- --------
$ 59,061 $ 54,768 $ 53,408
======== ======== ========
OPERATING INCOME:
Real estate investment and management $ 9,801 $ 9,610 $ 9,180
Net gains on the sale of real estate assets -- 153 5,708
Engineered products 4,187 3,342 2,256
General corporate expenses (2,706) (2,823) (2,993)
-------- -------- --------
11,282 10,282 14,151
OTHER INCOME, NET 24,099 6,138 11,715
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES $ 35,381 $ 16,420 $ 25,866
======== ======== ========
DEPRECIATION AND AMORTIZATION EXPENSE:
Real estate investment and management $ 2,570 $ 2,727 $ 2,842
Engineered products 405 592 692
General corporate expenses 615 533 564
-------- -------- --------
$ 3,590 $ 3,852 $ 4,098
======== ======== ========
MORTGAGE INTEREST EXPENSE:
Real estate investment and management $ 662 $ 933 $ 1,176
======== ======== ========
Sales by the Company's engineered products segment to automobile original
equipment manufacturers and their first tier suppliers accounted for
approximately 33.1%, 33.7% and 32.4% of 2004, 2003 and 2002 consolidated
revenues, respectively. For the year ended December 31, 2004, 2003 and 2002
sales by the engineered products segment to General Motors, its largest
customer, accounted for 18.7%, 20.9% and 20.0% of the segment's sales,
respectively. Sales to ArvinMeritor in 2002 of 10.1% represents the only other
customer whose sales exceeded 10% of this segment's net sales in each of the
three years ended December 31, 2004.
51
Approximately 16.6%, 14.1% and 11.3% of 2004, 2003 and 2002 total sales
generated from the engineered products segment were to 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,
--------------------------
2004 2003
----------- ------------
IDENTIFIABLE ASSETS:
Real estate investment and management and
corporate assets $200,524 $177,944
Engineered products 12,200 11,770
-------- --------
$212,724 $189,714
======== ========
ADDITIONS TO LONG-LIVED ASSETS:
Real estate investment and management and
corporate assets $ 1,133 $ 564
Engineered products 190 369
-------- --------
$ 1,323 $ 933
======== ========
17. LEASE OBLIGATIONS
At December 31, 2004, 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:
YEARS ENDING DECEMBER 31,
2005 $ 539
2006 453
2007 350
2008 303
2009 253
Thereafter 2,425
-------
$ 4,323
=======
Rental expense under operating leases was $482, $487 and $459 for 2004, 2003 and
2002, 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.
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 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.
52
The foregoing estimates may also be revised by the Company as new or additional
information in these matters becomes available or should the NJDEP or other
regulatory agencies require additional or alternative remediation efforts in the
future. Although such events are not expected to change these estimates, 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 approximately $10,200 and
$10,500 recorded in accounts payable and accrued liabilities and other long-term
liabilities as of December 31, 2004 and 2003, respectively, to cover such
matters.
The Company has an employment agreement with its Chairman, President and Chief
Executive Officer (the "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 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 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 liabilities have 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, 2004 and 2003, 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.
53
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, 2004 $324 $ -- $ -- $324
Year ended December 31, 2003 324 -- -- 324
Year ended December 31, 2002 328 -- 4 324
The accompanying Notes to Consolidated Financial Statements are an integral part
of these schedules.
54
SCHEDULE III
UNITED CAPITAL CORP. AND SUBSIDIARIES
REAL PROPERTY AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2004
(In thousands)
GROSS AMOUNT AT WHICH
INITIAL COST TO COMPANY COSTS CARRIED AT CLOSE AT PERIOD
MORTGAGE ------------------------- CAPITALIZED ---------------------------------
LOANS BUILDINGS, SUBSEQUENT TO BUILDINGS,
PAYABLE IMPROVEMENTS ACQUISITION/ IMPROVEMENTS & TOTAL
DESCRIPTION (GROSS) LAND & EQUIPMENT IMPROVEMENTS LAND EQUIPMENT (A),(C)
- --------------------------------------- ---------- --------- ------------- ------------- -------- --------------- --------
REAL PROPERTY HELD FOR RENTAL:
Shopping centers and retail outlets:
Culver, CA $ 614 $ 842 $ 7,576 $ -- $ 842 $ 7,576 $ 8,418
Northbrook, IL 1,012 898 8,075 -- 898 8,075 8,973
Miscellaneous investments 3,206 3,695 29,504 2,473 3,695 31,977 35,672
------- ------- ------- --------- ------- ------- -------
4,832 5,435 45,155 2,473 5,435 47,628 53,063
------- ------- ------- --------- ------- ------- -------
Commercial properties:
Miscellaneous investments 3,558 1,955 23,854 3,165 2,051 26,923 28,974
Day-care centers and offices:
Miscellaneous investments 45 384 3,453 1,384 384 4,837 5,221
Hotel properties:
Miscellaneous investments -- 1,712 2,868 48 1,712 2,916 4,628
Other:
Miscellaneous investments -- 2,618 1,578 128 2,618 1,706 4,324
------- ------- ------- --------- ------- ------- -------
Total real property held for rental 8,435 12,104 76,908 7,198 12,200 84,010 96,210
------- ------- ------- --------- ------- ------- -------
REAL PROPERTY HELD FOR SALE:
Commercial properties:
Miscellaneous investments -- 175 1,595 36 179 1,627 1,806
Day-care centers and offices:
Miscellaneous investments -- 111 1,003 309 111 1,312 1,423
------- ------- ------- --------- ------- ------- -------
Total real property held for sale -- 286 2,598 345 290 2,939 3,229
------- ------- ------- --------- ------- ------- -------
Total real property $ 8,435 $12,390 $79,506 $ 7,543 $12,490 $86,949 $99,439
======= ======= ======= ========= ======= ======= =======
LIFE ON WHICH
DEPRECIATION
IN LATEST
STATEMENT OF
ACCUMULATED DATE OF DATE INCOME IS
DESCRIPTION DEPRECIATION (B) CONSTRUCTION ACQUIRED COMPUTED
- --------------------------------------- ---------------- ------------- ----------- --------------
REAL PROPERTY HELD FOR RENTAL:
Shopping centers and retail outlets:
Culver, CA $ 7,550 N/A 1986 18 Years
Northbrook, IL 7,907 N/A 1987 18 Years
Miscellaneous investments 24,457 N/A 1986-98 5-39 Years
-------
39,914
-------
Commercial properties:
Miscellaneous investments 17,168 N/A 1986-98 5-39 Years
Day-care centers and offices:
Miscellaneous investments 3,671 N/A 1986-91 5-39 Years
Hotel properties:
Miscellaneous investments 2,916 N/A 1986-99 7 Years
Other:
Miscellaneous investments 1,164 N/A 1986-97 7-39 Years
-------
Total real property held for rental 64,833
-------
REAL PROPERTY HELD FOR SALE:
Commercial properties:
Miscellaneous investments 842 N/A 1986 31.5 Years
Day-care centers and offices:
Miscellaneous investments 1,255 N/A 1986-89 5-15 Years
-------
Total real property held for sale 2,097
-------
Total real property $66,930
=======
(a) Reconciliations of the carrying value of total real property for the three
years ended December 31, 2004 are as follows:
2004 2003 2002
-------- -------- --------
Total real property at beginning of period $113,097 $122,081 $124,407
Additions during the period:
Acquisitions and improvements 1,097 337 192
-------- -------- --------
114,194 122,418 124,599
Deductions during the period:
Cost of real estate sold 14,726 7,852 2,518
Write-down of property held for sale (see Note 2) -- 1,446 --
Other 29 23 --
-------- -------- --------
$ 99,439 $113,097 $122,081
======== ======== ========
(b) Reconciliations of accumulated depreciation for the three years ended
December 31, 2004 are as follows:
2004 2003 2002
------- ------- -------
Accumulated depreciation at beginning of period $72,817 $73,128 $71,537
Additions during the period:
Provision for depreciation 2,704 3,090 3,304
------- ------- -------
75,521 76,218 74,841
Deductions during the period:
Accumulated depreciation of real estate sold 8,562 3,401 1,713
Other 29 -- --
------- ------- -------
$66,930 $72,817 $73,128
======= ======= =======
(c) The aggregate cost for federal income tax purposes is approximately
$137,006
The accompanying Notes to Consolidated Financial Statements are an integral
part of these schedules
55
SCHEDULE IV
UNITED CAPITAL CORP. AND SUBSIDIARIES
MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 2004
(In thousands)
FINAL
DESCRIPTION INTEREST RATE MATURITY DATE PERIODIC PAYMENT TERMS
- ------------------------------------------- ------------------------- ------------------ -------------------------------------
Mortgage loans secured by commercial property:
New York, New York 7.9% May 2006 Principal and interest due monthly
Interest only through January 2005,
New York, New York LIBOR plus 13.9% January 2009 principal and interest due monthly,
thereafter
Houston, Texas Varies from 7.0% - 16.0% May 2014 Principal and interest due monthly
Other 9.0% December 2008 Principal and interest due monthly
PRINCIPAL
AMOUNT OF
LOANS
CARRYING SUBJECT TO
FACE AMOUNT OF DELINQUENT
PRIOR AMOUNT OF MORTGAGES PRINCIPAL OR
DESCRIPTION LIENS MORTGAGES (a), (b) INTEREST
- ------------------------------------------- --------- ----------- ------------- -------------
Mortgage loans secured by commercial property:
New York, New York $ - $ 3,000 $ 2,847 $ -
New York, New York
- 1,000 1,000 -
Houston, Texas - 800 773 -
Other - 45 6 -
---- -------- -------- -------
$ - $ 4,845 $ 4,626 $ -
==== ======== ======== =======
(a) A reconciliation of mortgage loans on real estate for the year ended
December 31, 2004 is as follows:
Balance at beginning of period $ 2,917
Additions during the period:
New mortgage loans 1,800
Deductions during the period:
Collection of principal (91)
--------
Balance at end of period $ 4,626
========
(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.
56
UNITED CAPITAL CORP. AND SUBSIDIARIES
QUARTERLY FINANCIAL DATA
(Unaudited)
(In thousands, except per share data)
The following unaudited quarterly results 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."
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
FOR THE YEAR 2004:
Revenues $ 14,318 $ 15,215 $ 14,581 $ 14,947
========== ========== ========== ==========
Operating income $ 2,602 $ 3,232 $ 2,966 $ 2,482
========== ========== ========== ==========
Other income(1) $ 1,901 $ 708 $ 408 $ 21,082
========== ========== ========== ==========
Income from continuing operations $ 3,333 $ 3,325 $ 2,990 $ 15,501
========== ========== ========== ==========
Income from discontinued operations(2) $ 112 $ 6,524 $ 5,104 $ 468
========== ========== ========== ==========
Net income $ 3,445 $ 9,849 $ 8,094 $ 15,969
========== ========== ========== ==========
BASIC EARNINGS PER SHARE:
Income from continuing operations $ .37 $ .36 $ .33 $ 1.70
Income from discontinued operations .01 .72 .56 .05
---------- ---------- ---------- ----------
Net income per share $ .38 $ 1.08 $ .89 $ 1.75
========== ========== ========== ==========
DILUTED EARNINGS PER SHARE:
Income from continuing operations $ .31 $ .31 $ .28 $ 1.41
Income from discontinued operations .01 .61 .48 .04
---------- ---------- ---------- ----------
Net income per share assuming dilution $ .32 $ .92 $ .76 $ 1.45
========== ========== ========== ==========
FOR THE YEAR 2003:
Revenues $ 13,310 $ 13,967 $ 13,724 $ 13,767
========== ========== ========== ==========
Operating income $ 2,299 $ 2,823 $ 2,437 $ 2,723
========== ========== ========== ==========
Other income(3) $ 713 $ 1,305 $ 907 $ 3,213
========== ========== ========== ==========
Income from continuing operations $ 1,875 $ 2,773 $ 2,319 $ 3,249
========== ========== ========== ==========
Income from discontinued operations $ 1,621 $ 684 $ 641 $ 1,802
========== ========== ========== ==========
Net income $ 3,496 $ 3,457 $ 2,960 $ 5,051
========== ========== ========== ==========
BASIC EARNINGS PER SHARE:
Income from continuing operations $ .21 $ .31 $ .26 $ .36
Income from discontinued operations .18 .07 .07 .20
---------- ---------- ---------- ----------
Net income per share $ .39 $ .38 $ .33 $ .56
========== ========== ========== ==========
DILUTED EARNINGS PER SHARE:
Income from continuing operations $ .18 $ .26 $ .21 $ .31
Income from discontinued operations .15 .06 .06 .17
---------- ---------- ---------- ----------
Net income per share assuming dilution $ .33 $ .32 $ .27 .48
========== ========== ========== ==========
DIVIDENDS PAID PER SHARE $ -- $ 1.00 $ -- $ --
========== ========== ========== ==========
(1) The fourth quarter results include a $19,000 gain from the sale of the
Company's shares in Prime Hospitality Corp. (see Note 14 of Notes to
Consolidated Financial Statements).
(2) The second and third quarter results include $6,316 and $4,877 in gains on
the sale of real estate assets, respectively, on a net of tax basis (see
Note 2 of Notes to Consolidated Financial Statements).
(3) The fourth quarter results include $2,025 in realized and unrealized gains
on available-for-sale securities, derivative instruments and trading
securities and a $694 deposit forfeiture.
57