ITEM 1 BUSINESS
Abrams Industries, Inc. engages in (i) construction of retail and commercial projects; (ii) investment in income-producing properties, including acquisition, development, re-development and sale; and (iii) energy management. As used herein, the term “Company” refers to Abrams Industries, Inc. and its subsidiaries and predecessors, unless the context indicates otherwise, and the term “Parent” or “Parent Company” refers solely to Abrams Industries, Inc. Prior to fiscal year 2001, the Company engaged in the asset and property management of properties in which it had an ownership or leasehold interest.
In May 2001, the Company created a third operating segment by acquiring the operating assets of another company. Abrams Power, Inc., through its subsidiary, Servidyne Systems, LLC, offers its U.S. and international institutional customers an array of state-of-the-art strategies to reduce energy consumption, labor, equipment maintenance, and capital costs in commercial buildings, using a comprehensive approach that combines its suite of specialized services, sophisticated energy efficiency products and engineering services.
The Company was organized under Delaware law in 1960 to succeed to the business of A. R. Abrams, Inc., which was founded in 1925 by Alfred R. Abrams as a sole proprietorship. In 1984, the Company changed its state of incorporation from Delaware to Georgia.
Financial information for the operating segments is set forth in Note 14 to the Consolidated Financial Statements of the Company.
CONSTRUCTION SEGMENT
The Company, through its wholly owned subsidiary, Abrams Construction, Inc., has engaged in the construction business since 1925. Although the Company does work throughout much of the United States, it concentrates its activities principally in the southern and midwestern states. Construction activities consist primarily of new construction, expansion, and remodeling of retail store buildings, banks, shopping centers, warehouses, distribution centers, and other commercial buildings.
Construction contracts are obtained by competitive bid and by negotiation. Generally, the Company purchases materials and services for its construction operations on a project-by-project basis.
REAL ESTATE SEGMENT
The Company, through its wholly owned subsidiary, Abrams Properties, Inc., has engaged in real estate activities since 1960. Historically, these activities involved the acquisition, development, redevelopment, leasing, management, ownership, and sale of shopping centers, industrial facilities, and office buildings in the Southeast and Midwest. During fiscal 2001, the Company outsourced to third parties the asset and property management functions related to its real estate portfolio.
The Company currently owns six shopping centers, four that the Company developed and two that it acquired. In June 2002, the Company sold its shopping center located in Englewood, Florida. This center was classified as Property held for sale as of April 30, 2002. See Notes 5 and 19 to the Consolidated Financial Statements of the Company. The remaining centers are held as long-term investments. See “ITEM 2.
ITEM 2 PROPERTIES
The Company, through its Real Estate Segment, owns its corporate headquarters building, which contains approximately 66,000 square feet of office space. The building is located in the North X Northwest Office Park, 1945 The Exchange, in suburban Atlanta, Georgia. The Parent Company, Real Estate Segment, and Construction Segment are located in this building. In addition to the 23,750 square feet of offices occupied by Abrams entities, another 37,863 square feet is leased to unrelated tenants, and 4,267 square feet is currently available for lease.
In fiscal 2000, the Company sold its shopping center located in Newnan, Georgia. The sale was structured as a tax-deferred, like-kind exchange pursuant to Internal Revenue Code Section 1031, which allows a deferral of the tax gain if the Company utilizes the proceeds of the sale to purchase other real estate. The Company subsequently acquired a shopping center in Jacksonville, Florida, as the replacement property. See “ITEM 7. LIQUIDITY AND CAPITAL RESOURCES” for discussion regarding the transactions.
The Company received notice in fiscal 2000 from the Georgia State Properties Commission that the Georgia World Congress Center Authority had made the determination to acquire the Company’s former wood manufacturing facility in Atlanta, Georgia. A Special Master appointed by the court awarded the Company $4.5 million for the property, which amount was paid to the Company. Both the State and the Company appealed the award amount. At April 30, 2001, the deferred pre-tax gain of approximately $2.8 million related to the sale of the facility was included in Net liabilities of discontinued operations. In October 2001, a settlement was reached and the Company recognized Earnings from discontinued operations, net of taxes, of approximately $1.7 million on the transaction.
In April 2000, the Company’s former manufacturing plant located in Lithia Springs, Georgia, which was developed and owned by the Real Estate Segment, was sold at a gain. The Company continues to own a vacant former metal manufacturing facility located in Atlanta, Georgia.
In May 2001, the Company, through its Energy Management Segment, assumed a lease for 7,418 square feet of office space located at 1350 Spring Street, NW, in midtown Atlanta, Georgia, as part of its acquisition of the assets of Servidyne Systems, Inc.
In January 2002, Kmart Corporation filed for protection under Chapter 11 of the U.S. Bankruptcy Code. At that time, four of the Company’s seven owned retail properties contained stores leased to Kmart, two of which were freestanding stores. In June 2002, the Company sold at a gain its Englewood shopping center, which is co-anchored by Kmart. See Note 19 to the Consolidated Financial Statements. The remaining three Kmart locations owned by the Company are currently open and operating. Seven freestanding Kmart stores that the Company developed, sold, leased back, and then subleased to Kmart, are currently open and operating. Kmart, pursuant to its rights under Chapter 11, terminated its subleases of the Company’s two former leaseback properties in Louisville, Kentucky, and West St. Paul, Minnesota, and the Company subsequently terminated its leasehold interests for both properties.
In March 2002, Kmart published a list of stores that it would close. None of the open stores leased or subleased to Kmart by the Company was on the list. The Bankruptcy Court has not provided the Company any further information as to whether any additional Kmart stores might be closed or which leases will be rejected or affirmed. Prior to publishing its store-closing list, Kmart contacted the Company to request a reduction in rent for one leaseback location. The Company denied the request, Kmart has continued to pay full rent, and the store remains open. This location generated approximately $46,000 in pre-tax earnings in fiscal 2002, and the Company has no capitalized costs related to this location. In April 2002, Kmart exercised a five-year option to extend its sublease on another one of the Company’s leaseback locations. This location produced approximately $26,000 in pre- tax earnings in fiscal 2002.
The Company owns, or has an interest in, the following properties:
OWNED SHOPPING CENTERS
As of April 30, 2002, the Company’s Real Estate Segment owned five shopping centers that it developed and two that it acquired. The following chart provides relevant information relating to the owned shopping centers:
(1)
Cash flow is defined as net operating income before the following: depreciation, amortization of loan and lease costs, interest and principal payments on mortgage notes or other debt.
(2)
Includes principal and interest.
(3)
Exculpatory provisions limit the Company’s liability for repayment to the respective mortgaged properties, except for the loan in North Ft. Myers, Florida, which has been guaranteed by Abrams Properties, Inc. See Notes 8 and 9 to the Consolidated Financial Statements of the Company.
(4)
Land is leased, not owned.
(5)
The center in Columbus, Georgia, is owned by Abrams-Columbus Limited Partnership, in which Abrams Properties, Inc. serves as general partner and owns an 80% interest.
(6)
Property was sold in June 2002 at a gain.
(7)
Originally completed by others in 1982.
(8)
Originally completed by others in 1985.
The two centers located in Morton, Illinois, and Columbus, Georgia, are leased exclusively to Kmart. The Kmart lease in Columbus, Georgia, expires in 2008 and has ten five-year renewal options, and the Kmart lease in Morton, Illinois, expires in 2016 and has eight five-year renewal options. Anchor lease terms for other centers are shown in the following table:
(1)
A tenant is considered to be an “Anchor Tenant” if it leases 12,000 square feet or more of space, and has an initial lease term in excess of five years.
(2)
Tenant has vacated the premises, but remains responsible for lease payments until the expiration date.
With the exception of the Kmart lease in Columbus, Georgia, and the Harbor Freight Tools lease in Cincinnati, Ohio, all of the anchor tenant and many of the small shop leases provide for contingent rentals if sales exceed specified amounts. In fiscal 2002, the Company received $78,808 in contingent rentals, net of offsets, which amounts are included in the aggregate rentals set forth above. The Company also is owed $61,140 in additional contingent rent in relation to the Kmart in Morton, Illinois. Kmart is treating this amount as a pre-bankruptcy petition amount and has therefore not made payment. The Company is making a claim for payment to the Bankruptcy Court, and has set up a reserve for the entire disputed amount as of April 30, 2002.
Typically, tenants are responsible for their pro rata share of ad valorem taxes, insurance and common area maintenance (subject to the right of offset mentioned above). Kmart has total maintenance responsibility for the centers in Morton, Illinois, and Columbus, Georgia.
LEASEBACK SHOPPING CENTERS
The Company, through its Real Estate Segment, has a leasehold interest in seven shopping centers that it developed, sold, and leased back under leases expiring from years 2003 to 2014. The centers are subleased by the Company to Kmart Corporation, and the Company has the ability to lease the properties for periods corresponding with the Kmart subleases. (See previous discussion regarding Kmart in this “ITEM 2.” above.) The Kmart subleases provide for contingent rentals if sales exceed specified amounts, and contain ten five-year renewal options, except Jacksonville, Florida, which has eight five-year renewal options and Davenport, Iowa, which has nine five-year renewal options remaining after Kmart exercised one five-year option in fiscal 2002. The Company’s leases with the fee owners contain renewal options coextensive with Kmart’s renewal options.
Kmart is responsible for insurance and ad valorem taxes, but has the right to offset against contingent rentals any such taxes paid in excess of specified amounts. In fiscal 2002, the Company received $95,495 in contingent rentals, net of offsets, which amounts are included in the aggregate annual rentals set forth below. The Company has responsibility for structural and roof maintenance of the buildings. The Company also has responsibility for parking lots and driveways, except routine upkeep, which is the responsibility of the subtenant, Kmart. The Company’s leases contain exculpatory provisions, which limit the Company’s liability for payment to its interest in the respective leases.
The following chart provides certain information relating to the leaseback shopping centers:
OFFICE BUILDINGS
The Company, through its Real Estate Segment, owns two office properties: the corporate headquarters building located at 1945 The Exchange, Atlanta, Georgia, and an office park in northwest suburban Atlanta, Georgia. The following chart provides pertinent information relating to the office buildings:
LAND LEASED OR HELD FOR FUTURE DEVELOPMENT OR SALE
The Company, through its Real Estate Segment, owns or has an interest in the following land leased or held for future development or sale:
(1)
“Outlot” as used herein refers to a small parcel of land reserved from the shopping center parcel and is generally sold for, leased for, or developed as a fast-food operation, bank or similar use.
(2)
Leased under leases terminating in years 2005 and 2010 with a right to extend for three additional five-year periods. Both outlots are subleased for terms coextensive with the Company’s lease.
(3)
One outlot, not included above, was sold at a gain during fiscal 2002.
There is no debt on any of the above properties, except for the North Ft. Myers, Florida, anchor pad and retail shop land. See Note 9 to the Consolidated Financial Statements of the Company. The Company will either develop the properties described above or will continue to hold them for sale or lease to others.
ITEM 3
ITEM 3 LEGAL PROCEEDINGS
The Company is not a party to, nor is any of its property the subject of, any pending legal proceedings which are likely, in the opinion of management, to have a material, adverse effect on the Company’s operations or financial condition.
ITEM 4
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5
ITEM 5 MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The common stock of Abrams Industries, Inc. is traded on the NASDAQ National Market System (Symbol: ABRI). The approximate number of holders of common stock was 455 (including shareholders of record and shares held in street name) at May 31, 2002.
The information contained under the heading “Equity Compensation Plan” in the Company’s definitive proxy materials for its 2002 Annual Meeting of Shareholders will be filed with the Securities and Exchange Commission under a separate filing, and is hereby incorporated by reference.
ITEM 6
ITEM 6 SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the Company and should be read in conjunction with the Consolidated Financial Statements and the notes thereto:
(1)
Includes continuing operations, discontinued operations, and extraordinary item, if any.
(2)
Does not include Property held for sale or Real estate held for future development or sale.
ITEM 7
ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR FISCAL YEARS ENDED APRIL 30, 2002, 2001, AND 2000
RESULTS OF OPERATIONS
REVENUES
Revenues from continuing operations for 2002 were $117,597,687 compared to $154,606,987 and $174,579,492 for 2001 and 2000, respectively. This represents decreases in Revenues of 24% in 2002 and 12% in 2001. Revenues include Interest income of $181,255, $480,771, and $372,524, for 2002, 2001, and 2000, respectively, and Other income of $90,418, $51,030, and $73,882, for 2002, 2001, and 2000, respectively. The figures in Chart A below, however, do not include Interest income, Other income or Intersegment revenues. When more than one segment is involved, Revenues are reported by the segment that sells the product or service to an unaffiliated purchaser.
REVENUES FROM CONTINUING OPERATIONS SUMMARY BY SEGMENT
CHART A
(Dollars in Thousands)
NOTES:
COST AND EXPENSES: APPLICABLE TO REVENUES
As a percentage of total Segment Revenues (See Chart A), the applicable total Segment Costs and Expenses (See Chart B) of $107,183,006 for 2002, $139,075,402 for 2001, and $155,731,989 for 2000, were 91%, 90%, and 89%, respectively.
COSTS AND EXPENSES: APPLICABLE TO REVENUES FROM CONTINUING OPERATIONS SUMMARY BY SEGMENT
CHART B
(Dollars in Thousands)
NOTES:
(1)
The increase in the percentage of COSTS AND EXPENSES: Applicable to REVENUES from Continuing Operations for 2002 compared to 2001 is primarily attributable to an oversupply of contractors in our marketplace and the resulting competitive pressure on margins, which is a result of a significant decrease in demand due to the reduction in the number of available construction jobs because of ongoing weakness in capital spending in the retail industry. The Company also has exposure to increased costs for many reasons beyond its immediate control, including, but not limited to, unexpected costs, delays due to weather, or an individual customer’s scheduling adjustments. Therefore, the Company cannot predict whether or how long the percentages reflected above will continue at the current levels.
(2)
The increase in the dollar amount and percentage of COSTS AND EXPENSES: Applicable to REVENUES from Continuing Operations for 2002 compared to 2001 is primarily attributable to: (1) the cost of real estate sold in 2002; (2) management fees paid to an outside asset manager that only served for a partial year in 2001; and (3) depreciation expense on the Company’s North Ft. Myers shopping center, which was not depreciated during the fourth quarter 2001 as it was held for sale. During the fourth quarter 2002, the center was removed from the market and reclassified to Income-producing property, resulting in recapture of the depreciation not taken in fiscal 2001. The decrease in the dollar amount and percentage for 2001 compared to 2000 is primarily attributable to the cost of real estate sold in 2000.
(3)
The Energy Management Segment was formed in May 2001. See Note 16 to the Consolidated Financial Statements.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
For the years 2002, 2001, and 2000, Selling, general and administrative expenses (See Chart C) were $7,543,170, $9,860,037, and $9,597,295, respectively. As a percentage of Consolidated REVENUES from Continuing Operations, these expenses were 6% in each of the years. In reviewing Chart C, the reader should recognize that the volume of revenues generally would affect these amounts. The percentages in Chart C are based on expenses as they relate to segment Revenues in Chart A, with the exception that Parent expenses and Total expenses relate to Consolidated Revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES FROM CONTINUING OPERATIONS SUMMARY BY SEGMENT
CHART C
(Dollars in Thousands)
NOTES:
INTEREST COSTS
Most of the Interest costs expensed of $4,396,729, $5,050,510, and $5,386,257, in 2002, 2001, and 2000, respectively, is related to debt on real estate. Interest costs decreased in 2002 primarily due to a decrease in interest rates on the Company’s variable rate debt. Interest costs decreased in 2001 primarily due to the sale by the Real Estate Segment of the manufacturing facility in Lithia Springs, Georgia, in fiscal 2000 when the Company discontinued its manufacturing operations. See “Discontinued Operations.” There was no capitalized interest in any of the years presented.
FINANCIAL CONDITION AND CHANGES IN FINANCIAL CONDITION
Property held for sale increased by $12,502,037 in 2002, primarily due to the reclassification of the book value of the Company’s shopping center in Englewood, Florida, from Real estate held for future development or sale, as the property was under contract to be sold at April 30, 2002. The sale of this center was closed in June 2002. Income-producing properties increased by $17,833,226 in 2002, primarily due to the reclassification of the book value of the Company’s shopping center located in North Ft. Myers, Florida, from Real estate held for future development or sale, when the Company decided to suspend efforts to sell the center until overall market conditions improve. See “ITEM 2. PROPERTIES.”
LIQUIDITY AND CAPITAL RESOURCES
Except for certain real estate construction loans and occasional short-term operating loans, the Company has been able to finance its working capital needs through funds generated internally. If adequate funds are not generated through normal operations, the Company has available bank lines of credit. See Note 9 to the Consolidated Financial Statements. Working capital was $10,028,188 at April 30, 2002, compared to $11,442,348 at April 30, 2001. Operating activities provided cash of $2,497,276. Investing activities used cash of $3,320,993, primarily for the acquisition of the assets of the new Energy Management Segment. Financing activities used cash of $2,713,828, primarily for scheduled debt repayments.
In 1992, the Company secured a construction loan for the property in North Ft. Myers, Florida, from SunTrust Bank. The primary term of the construction financing was five years, and the loan most recently was extended to August 2003, in accordance with the loan agreement, as amended. The loan carries a floating interest rate of prime plus .375%. As of April 30, 2002, the principal amount outstanding was $12,319,969. The Company is currently seeking to refinance the debt on the property. Although the Company has regularly received extensions of the SunTrust loan, there can be no assurance it will be able to continue to do so; and, there can be no assurance that sufficient proceeds from any refinancing or sale of the property will be available to pay off the loan on or before its maturity.
In 1997, the Company obtained a permanent mortgage loan of $3,500,000 on its shopping center in Jackson, Michigan. The loan had an original term of 22 years and bears interest at 8.625%. Certain provisions of the loan, as most recently amended in August 2001, require the establishment of a $500,000 letter of credit, which is to be used to pay down the loan in August 2002, if certain leasing requirements are not met. As these requirements had not yet been met as of April 30, 2002, the Company reclassified $500,000 to Current maturities of long-term debt from Mortgage notes payable, less current maturities.
In 1999, in connection with the financing of the purchase of the Company’s shopping center in Jacksonville, Florida, the Company obtained a permanent mortgage loan in the amount of $9,500,000, which is secured by the center. The loan bears interest at 7.375% and is scheduled to be fully amortized over twenty years. The loan matures in 2019, but the lender may call the loan at any time after September 1, 2002. If the loan were called at any time after that date, the Company would have up to thirteen months to repay the principal amount of the loan without penalty. In conjunction with the loan, an Additional Interest Agreement was executed which entitles the lender to be paid additional interest equal to fifty percent of the quarterly net cash flow and fifty percent of the appreciation in the property upon sale or refinance. The liability related to the lender’s fifty percent share of the appreciation in the property was $2,384,945 at April 30, 2002.
In fiscal 2000, the Company’s Board of Directors authorized the repurchase of up to 200,000 shares of Common Stock during the twelve-month period beginning February 25, 2000, and ending February 24, 2001. In 2001 and 2002, the Company’s Board authorized additional repurchases of up to 200,000 shares of Common Stock in each of the subsequent twelve-month periods, the latest to end on February 25, 2003. Any such purchases, if made, could be in the open market at prevailing prices or in privately negotiated transactions. During fiscal 2002, the Company repurchased a total of 44,524 shares at a cost of $171,073, of which 1,100 shares at a cost of $4,356 were bought subsequent to February 25, 2002, under the currently authorized plan. The Company financed the purchases with available cash and expects any future purchases would be made with available cash. The Company did not purchase any shares in the period between May 1, 2002, and June 30, 2002.
In May 2001, the Company acquired substantially all of the assets of an energy management and engineering services company, Servidyne Systems, Inc., and some intellectual and other intangible property assets of its affiliated company, Servidyne, Incorporated. The Company used available cash to purchase the assets for approximately $3.1 million, including the costs associated with completing the transaction.
In January 2002, Kmart Corporation filed for protection under Chapter 11 of the U.S. Bankruptcy Code. At that time, four of the Company’s seven owned retail properties contained stores leased to Kmart, two of which were freestanding stores. The Company sold at a gain its Englewood shopping center, which had a Kmart store, on June 28, 2002. See Note 19 to the Consolidated Financial Statements. The remaining three Kmart locations owned by the Company are currently open and operating. The Company’s seven freestanding leaseback Kmart stores are currently open and operating. Kmart, pursuant to its rights under Chapter 11, terminated its subleases to the Company’s two former leaseback properties in Louisville, Kentucky, and West St. Paul, Minnesota,
and the Company subsequently terminated its leases for both properties.
In March 2002, Kmart published a list of stores that it would close. None of the properties leased or subleased to Kmart by the Company was on the list. The Bankruptcy Court has not provided the Company any further information as to whether any additional Kmart stores might be closed or which leases will be rejected or affirmed. Kmart contacted the Company to request a reduction in rent for one leaseback location that is currently open. The Company denied the request, Kmart continues to pay full rent, and the store remains open.
On June 28, 2002, the Company sold its shopping center located in Englewood, Florida, at a gain. The Company plans to use the excess cash remaining, after repaying the debt and selling expenses, for operating cash requirements, capital improvements to owned real estate, or to pursue investment in other growth opportunities.
Excluding the Englewood shopping center rental revenues and the revenues from the two leaseback centers that were terminated, Kmart represented approximately $3.9 million of fiscal 2002 rental revenues.
In July 2002, the Company refinanced the acquisition and construction loan on the corporate headquarters building in Atlanta, Georgia, which had a balance of $4,596,683 as of April 30, 2002. The new permanent loan, in the original principal amount of $4,900,000, bears interest at 7.75%, is due in ten years, and is to be amortized on a twenty-five year schedule. Proceeds from the new loan remaining after repayment of the original loan and refinancing costs are expected to be used for operating cash needs.
EFFECTS OF INFLATION ON REVENUES AND OPERATING PROFITS
The effects of inflation upon the Company’s operating results are varied. Inflation in recent years has been modest and has had minimal effect on the Company. The Construction Segment subcontracts most of its work at fixed prices, which normally will help that segment protect its profit margin from any erosion due to inflation.
In the Real Estate Segment, many of the anchor leases are long-term (original terms over 20 years), with fixed rents, except for contingent rent provisions by which the Company may earn additional rent as a result of increases in tenants’ sales. In many cases, however, the contingent rent provisions permit the anchor tenant to offset against contingent rents any increases in ad valorem taxes over a specified amount. If inflation were to rise, ad valorem taxes would probably increase as well, which, in turn, could cause a decrease in the contingent rents. Furthermore, the Company has certain repair obligations, and the costs of repairs increase with inflation.
The Energy Management Segment generally has contracts that renew on an annual basis. At the time of renewal, contract fees may be adjusted, subject to customer approval. As inflation impacts the Company’s costs, primarily labor, the Company could seek a price increase for its contracts in order to protect its profit margin.
Inflation causes interest rates to rise, which has a positive effect on investment income, but could have a negative effect on profit margins because of the increased costs of contracts and the increase in interest expense on variable rate loans. Overall, inflation could tend to limit the Company’s markets and, in turn, could reduce revenues as well as operating profits and earnings.
CRITICAL ACCOUNTING POLICIES
A critical accounting policy is one which is both important to the portrayal of a Company’s financial position and results of operations, and requires the Company to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related notes. In preparing these financial statements, the Company has made its best estimates and judgments regarding certain amounts included in the financials statements, giving due consideration to materiality. The application of these accounting policies involves the exercise of judgment and use of assumptions regarding future uncertainties, and as a result, actual results could differ from those estimates. Management believes that the Company’s most critical accounting policies are discussed and described in Note 2 to the Consolidated Financial Statements, which include:
Principles of consolidation and basis of presentation
The consolidated financial statements include the accounts of Abrams Industries, Inc., its wholly owned subsidiaries, and its 80% investment in Abrams-Columbus Limited Partnership. All significant intercompany balances and transactions have been eliminated in consolidation.
Revenue recognition
Construction revenues are reported on the percentage-of-completion method, using costs incurred to date in relation to estimated total costs of the contracts to measure the stage of completion. The cumulative effects of changes in estimated total contract costs and revenues are recorded in the period in which the facts requiring the revisions become known. At the time it is determined that a contract will result in a loss, the entire estimated loss is recorded.
The Company leases space in its income-producing properties to tenants, and recognizes minimum base rentals as revenue on a straight-line basis over the lease terms. Tenants may also be required to pay additional rental amounts based on property operating expenses. In addition, certain tenants are required to pay incremental rental amounts based on store sales. These percentage rents are recognized only as earned.
Revenues from the sale of real estate are recognized at the time of closing. Costs of sales related to real estate are based on the specific property sold. When a portion or unit of a development property is sold, a proportionate share of the total cost of the development is charged to cost of sales.
Generally, revenues from the sale of manufactured goods were recognized on the date products were shipped to the customer. Revenues from certain sales, on which delivery was delayed at the customer’s explicit request, were recognized when conditions for revenue recognition were met.
Energy management revenues primarily consist of services performed and product sales. Revenues are recognized as services are completed, and product sales are recognized when goods are shipped.
Income-producing properties and property and equipment
Income-producing properties are stated at cost, and are depreciated for financial reporting purposes using the straight-line method over the estimated useful lives of the properties and related assets.
Property and equipment is recorded at cost, and is depreciated for financial reporting purposes using the straight-line method over the estimated useful lives of the assets. Significant additions, which extend asset lives, are capitalized. Normal maintenance and repair costs are expensed as incurred.
Interest and other carrying costs related to real estate assets under construction are capitalized. Costs of development and construction are also capitalized. Capitalization of interest and other carrying costs is discontinued when a project is substantially completed or if active development ceases.
Impairment of long-lived assets and assets to be disposed of
The Company reviews its long-lived assets and certain intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to future net cash flows expected to be generated by the asset. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the asset’s fair value. Assets to be disposed of are reported at the lower of their carrying amount or fair value less cost to sell. Depreciation is suspended during the marketing period.
Income taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
New accounting pronouncements
During June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS 141, Business Combinations. Under the provisions of SFAS 141, all business combinations initiated after June 30, 2001, must be accounted for using the purchase method of accounting. The adoption of SFAS 141 did not have a material impact on the Company’s financial statements.
Also during June 2001, the FASB issued SFAS 142, Goodwill and Other Intangible Assets. Under the provisions of SFAS 142, there will be no amortization of goodwill and other intangible assets that have indefinite useful lives. Instead, these assets must be tested for impairment annually and when events or changes in circumstances indicate that impairment may have occurred. The Company elected to adopt SFAS 142 as of May 1, 2001, and therefore goodwill and a trademark with an indefinite useful life acquired in the transaction described in Note 16 to the Consolidated Financial Statements have not been amortized.
During August 2001, the FASB issued SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 supercedes FASB 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. In addition, SFAS 144 supercedes the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions for segments of a business to be disposed of. SFAS 144 addresses the treatment of assets held for sale or to be otherwise disposed of, the evaluation of impairment for long-lived assets, and the reporting of discontinued operations. The provisions of SFAS 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001. The adoption of SFAS 144 is not expected to have a significant impact on the Company’s financial position or cash flows; however, under SFAS 144, beginning May 1, 2002, the Company will report any gains or losses recognized on any sale of its income-producing real estate properties in discontinued operations, and the results of operations of an operating property classified as held for sale will be reported in discontinued operations.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION AND RISKS
Certain statements contained or incorporated by reference in this Annual Report on Form 10-K, including without limitation, statements containing the words “believes,” “anticipates,” “expects,” and words of similar import, are forward-looking statements within the meaning of the federal securities laws. Such forward-looking statements involve known and unknown risks, uncertainties and other matters which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or uncertainties expressed or implied by such forward-looking statements.
Factors relating to general global, national, regional and local economic conditions, including international political stability, national security, employment levels, wage and salary levels, consumer confidence, availability of credit, taxation policies, interest rates, and inflation could negatively impact the Company’s customers, suppliers and sources of capital. Any significant negative impact on these parties could result in material adverse effects on the Company’s results of operations and financial condition.
The Company is at risk for many other matters beyond its control. They include, but are not limited to: the impact of the Kmart Corporation bankruptcy on the Company’s rental revenues; co-tenancy provisions in other anchor leases; the Company’s ability to sell or refinance its real estate; the possibility of not achieving projected backlog revenues or not realizing earnings from such revenues; continuing competitive pressures on the availability and pricing of construction projects; changes in laws and regulations, including changes in accounting standards and generally accepted accounting principles; the timing and amount of earnings recognition related to the possible sale of real estate properties held for
sale; delays in customer orders; the availability, timing and amount of possible refinancings related to real estate properties; the level and volatility of interest rates; the potential loss of a significant customer; and the deterioration in the financial stability of an anchor tenant, significant subcontractor or other significant customer.
CONSIDERATION OF STRATEGIC ALTERNATIVES
The Company announced in the first quarter of fiscal 2000 that the Board of Directors had decided to investigate a wide range of possible strategic and financial alternatives available to maximize shareholder value. The investigation, which was completed in fiscal 2000, resulted in the discontinuance of the Company’s manufacturing operations. See “Discontinued Operations.”
Also as a result of the investigation, the Company decided to outsource the asset and property management of the Company’s commercial real estate assets to third parties. During fiscal 2001, the asset management activities were outsourced to a company newly formed by former executives of the Real Estate Segment. The property management activities were also outsourced in fiscal 2001, primarily to independent, third-party managers. The Company plans to continue to own and invest in real estate.
DISCONTINUED OPERATIONS
During the quarter ended January 31, 2000, the Board of Directors of the Company decided to discontinue the operations of its Manufacturing Segment. The financial statements reflect the operating results of this business as a discontinued operation, and prior year financial information has been appropriately restated. See Note 3 to the Consolidated Financial Statements. In fiscal 2000, the Company sold the Manufacturing Segment’s machinery, equipment, furniture, and raw materials inventory for $2.2 million.
As of April 30, 2000, the Manufacturing Segment had ceased all operations and disposed of substantially all of its assets. As of April 30, 2001, the $2.76 million deferred gain from discontinued operations resulting from the eminent domain taking of the Company’s former manufacturing facility in Atlanta, Georgia, was included in Net liabilities of discontinued operations on the Consolidated Balance Sheet. The amount of the condemnation award was settled in October 2001, and Earnings from discontinued operations for 2002 represent the recognition of the deferred gain related to this transaction.
ITEM 7A
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company’s major market risk exposure arises from changes in interest rates and its impact on variable rate debt instruments. In addition, the Company has interest rate risk associated with fixed rate debt. The Company’s objectives in interest rate risk management are to limit the negative impact of interest rates on earnings and cash flows and to lower overall borrowing costs. To achieve its objectives, the Company borrows at fixed rates when it believes it is in its best interests to do so, and may enter into derivative financial instruments, such as interest rate swaps and caps, in order to limit its exposure to interest rate fluctuations. The Company does not enter into derivative or interest rate transactions for speculative purposes. There were no derivative contracts in effect at April 30, 2001, or 2002.
The following table summarizes information related to the Company’s market risk sensitive debt instruments as of April 30, 2002:
ITEM 8
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors’ Report and Report of Independent Accountants
Consolidated Balance Sheets - April 30, 2002, and 2001
Consolidated Statements of Operations - For the years ended April 30, 2002, 2001, and 2000
Consolidated Statements of Shareholders’ Equity - For the years ended April 30, 2002, 2001, and 2000
Consolidated Statements of Cash Flows - For the years ended April 30, 2002, 2001, and 2000
Notes to Consolidated Financial Statements - For the years ended April 30, 2002, 2001, and 2000
Schedules:
Schedule Number
II Valuation and Qualifying Accounts
III Real Estate and Accumulated Depreciation
INDEPENDENT AUDITORS’ REPORT
The Board of Directors and Shareholders
Abrams Industries, Inc.:
We have audited the accompanying consolidated balance sheet of Abrams Industries, Inc. and subsidiaries (the “Company”) as of April 30, 2002, and the related consolidated statement of operations, shareholders’ equity, and cash flows for the year then ended. Our audit also included the financial statement schedules listed in the Index at Item 8. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Abrams Industries, Inc. and subsidiaries as of April 30, 2002, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as whole, present fairly, in all material respects the information set forth herein.
Atlanta, Georgia
June 12, 2002
(July 17, 2002, as to Notes 8 and 19)
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Shareholders
Abrams Industries, Inc.:
In our opinion, the consolidated balance sheet as of April 30, 2001 and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the two years in the period ended April 30, 2001 present fairly, in all material respects, the financial position, results of operations and cash flows of Abrams Industries, Inc. and its subsidiaries at April 30, 2001 and for each of the two years in the period ended April 30, 2001, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules as of April 30, 2001, present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements as of April 30, 2001 and each of the two years in the period ended April 30, 2001. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. We have not audited the consolidated financial statements of Abrams Industries, Inc. for any period subsequent to April 30, 2001.
Atlanta, Georgia
May 23, 2001
CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
APRIL 30, 2002, 2001, AND 2000
1 ORGANIZATION AND BUSINESS
Abrams Industries, Inc. and subsidiaries (the “Company”) was organized under Delaware law in 1960. In 1984, the Company changed its state of incorporation from Delaware to Georgia. The Company engages in (i) construction of retail and commercial projects, (ii) acquisition, investment, sale, development, and redevelopment of income-producing properties, and (iii) energy management. The Company’s wholly owned subsidiaries include Abrams Construction, Inc., the “Construction Segment,” Abrams Properties, Inc. and subsidiaries, the “Real Estate Segment,” and Abrams Power, Inc. and its subsidiary, Servidyne Systems, LLC, the “Energy Management Segment.” Abrams Fixture Corporation, another wholly owned subsidiary, that manufactured store fixtures, bank fixtures and display units for retail outlets, ceased operations during fiscal year 2000 (Note 3). Previously the Company engaged in asset and property management of real estate. In fiscal 2001, the Company outsourced all of the asset and property management of the Company’s properties owned or controlled by the Real Estate Segment to third parties.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of consolidation and basis of presentation
The consolidated financial statements include the accounts of Abrams Industries, Inc., its wholly owned subsidiaries, and its 80% investment in Abrams-Columbus Limited Partnership. All significant intercompany balances and transactions have been eliminated in consolidation.
(b) Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.
(c) Revenue recognition
Construction revenues are reported on the percentage-of-completion method, using costs incurred to date in relation to estimated total costs of the contracts to measure the stage of completion. The cumulative effects of changes in estimated total contract costs and revenues are recorded in the period in which the facts requiring the revisions become known. At the time it is determined that a contract will result in a loss, the entire estimated loss is recorded.
The Company leases space in its income-producing properties to tenants, and recognizes minimum base rentals as revenue on a straight-line basis over the lease terms. Tenants may also be required to pay additional rental amounts based on property operating expenses. In addition, certain tenants are required to pay incremental rental amounts based on store sales. These percentage rents are recognized as earned.
Revenues from the sale of real estate are recognized at the time of closing. Costs of sales related to real estate are based on the specific property sold. When a portion or unit of a development property is sold, a proportionate share of the total cost of the development is charged to cost of sales.
Energy management revenues primarily consist of services performed and product sales. Revenues are recognized as services are completed, and product sales are recognized when goods are shipped.
Generally, revenues from the sale of manufactured goods were recognized on the date products were shipped to the customer. Revenues from certain sales, on which delivery was delayed at the customer’s explicit request, were recognized when conditions for revenue recognition were met.
(d) Cash and cash equivalents
Cash and cash equivalents include money market funds and other financial instruments. The Company considers all highly liquid financial instruments with original maturities of three months or less to be cash equivalents.
(e) Property held for sale
Property held for sale is expected to be sold in the near term and is carried at the lower of cost or fair value less costs to sell. Depreciation is suspended during the marketing period.
(f) Income-producing properties and property and equipment
Income-producing properties are stated at cost, and are depreciated for financial reporting purposes using the straight-line method over the estimated useful lives of the properties and related assets.
Property and equipment is recorded at cost and is depreciated for financial reporting purposes using the straight-line method over the estimated useful lives of the assets. Significant additions, which extend asset lives, are capitalized. Normal maintenance and repair costs are expensed as incurred.
Interest and other carrying costs related to assets under construction are capitalized. Costs of development and construction are also capitalized. Capitalization of interest and other carrying costs is discontinued when a project is substantially completed or if active development ceases.
(g) Real estate held for future development or sale
Real estate held for future development or sale is carried at the lower of cost or fair value less costs to sell. Depreciation is suspended during the marketing period.
(h) Deferred loan costs
Costs incurred to obtain loans have been deferred and are being amortized over the terms of the related loans.
(i) Impairment of long-lived assets and assets to be disposed of
The Company reviews its long-lived assets and certain intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to future net cash flows expected to be generated by the asset. If an asset is considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the asset exceeds the asset’s fair value. Assets to be disposed of are reported at the lower of their carrying amount or fair value less cost to sell. Depreciation is suspended during the marketing period.
(j) Income taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
(k) Fair value of financial instruments
Management believes that the carrying amounts of cash and cash equivalents, receivables, other assets, accounts payable, accrued expenses, and the current portion of debt instruments are reasonable approximations of their fair value, because of the short-term nature of these instruments.
The fair value of the Company’s noncurrent portions of debt instruments is estimated by discounting the future cash flows of each instrument at rates currently offered to the Company for similar debt instruments of comparable maturities by the Company’s bankers. Based on this valuation methodology, management believes that the carrying amount of the noncurrent portions of debt instruments is a reasonable estimation of their fair value.
(l) Intangible assets
Intangible assets primarily consist of a trademark, computer software, computer-based work management products, lease costs, and deferred loan costs. The trademark is an unamortized intangible as it has an indefinite life, however, the computer software, computer-based work management products, lease costs and deferred loan costs are amortized using the straight-line method over the following estimated useful lives:
Computer software
3 years
Computer-based work management products
3 years
Lease costs
Over the term of the lease
Loan costs
Over the term of the loan
(m) Derivative instruments and hedging activities
The Company accounts for derivative and hedging activities in accordance with Statement of Financial Accounting Standards (“SFAS”) 133, Accounting for Derivative Instruments and Hedging Activities, as amended, which was adopted by the Company on May 1, 2001. Under SFAS 133, derivative instruments are recognized in the balance sheet at fair value, and changes in the fair value of such instruments are recognized currently in earnings unless specific hedge accounting criteria are met. At April 30, 2002, and 2001, the Company had no derivative instruments.
(n) Reclassifications
Certain reclassifications have been made to the 2001 and 2000 consolidated financial statements to conform to classifications adopted in 2002.
3 DISCONTINUED OPERATIONS
During the quarter ended January 31, 2000, the Board of Directors of the Company decided to discontinue the operations of Abrams Fixture Corporation, the “Manufacturing Segment.” For the years ended April 30, 2001, and 2000, the Company reported net earnings (loss) from discontinued operations of $299,847 and $(1,636,233), respectively, net of applicable income taxes, related to the Manufacturing Segment in the Consolidated Statements of Operations. In addition, for the year ended April 30, 2000, the Company recorded a loss on the sale of assets of discontinued operations, net of applicable taxes, of $976,099. The loss on the sale of assets consisted of the disposal of the Manufacturing Segment’s machinery, equipment, furniture, raw materials inventory, and other related assets. At April 30, 2000, the Manufacturing Segment had ceased all operations and disposed of substantially all of its assets. The remaining assets and liabilities of the Manufacturing Segment have been consolidated and presented as Net liabilities of discontinued operations in the Consolidated Balance Sheet at April 30, 2001.
In June 1999, the Company received notice from the Georgia State Properties Commission that the Georgia World Congress Center Authority had made the determination to acquire the Manufacturing Segment’s former wood manufacturing facility in Atlanta, Georgia. In October 1999, a Special Master appointed by the court awarded the Company $4.5 million for the property, which was paid to the Manufacturing Segment. Both the State and the Company appealed the award amount. The Company recorded a before-tax deferred gain of $2.76 million, included in Net liabilities of discontinued operations at April 30, 2001. During the year ended April 30, 2002, the Company reached a settlement with the State and recognized an after-tax gain of $1,720,749 on the transaction.
4 CONTRACTS IN PROGRESS
Assets and liabilities related to contracts in progress, including contracts receivable, are included in current assets and current liabilities as they will be liquidated in the normal course of contract completion, which is expected to occur within one year. Amounts billed and costs and earnings recognized on contracts in progress at April 30 were:
5 PROPERTY HELD FOR SALE
As of April 30, 2002, the Company had one shopping center held for sale located in Englewood, Florida. The net carrying amount of this property at April 30, 2002, was $12,502,037. In fiscal 2001, the shopping center was classified as Real estate held for future development or sale, and was reclassified during fiscal 2002 as Property held for sale when the shopping center was under contract. The property was sold at a gain on June 28, 2002 (Note 19). The results of operations for this property are as follows for the fiscal years ended April 30:
The Company sold its shopping center in Newnan, Georgia, in fiscal 2000, and recognized a pre-tax gain of approximately $2.9 million on this sale. The sale was structured as a tax-deferred, like-kind exchange pursuant to Internal Revenue Code Section 1031, which allows a deferral of the tax gain if the Company utilizes the proceeds of the sale to purchase other real estate. The proceeds were used to purchase an approximately 174,000 square foot shopping center located in Jacksonville, Florida, for $9 million (Note 8).
6 INCOME-PRODUCING PROPERTIES
Income-producing properties and their estimated useful lives at April 30 were as follows:
Depreciation expense for the years ended April 30, 2002, 2001, and 2000, was $1,808,125, $1,712,171, and $2,099,113, respectively.
The Company’s shopping center located in North Ft. Myers, Florida, was classified as Real estate held for future development or sale in fiscal 2001, and was reclassified to Income-producing properties in fiscal 2002 when management made the decision to suspend efforts to sell the real estate until overall market conditions improve. Depreciation expense of $833,872 was recognized in the fourth quarter of fiscal 2002. This amount included depreciation expense for fiscal 2002 and the fourth quarter of fiscal 2001, which was suspended during the marketing period, pursuant to FASB 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
7 PROPERTY AND EQUIPMENT
The major components of property and equipment and their estimated useful lives at April 30 were as follows:
In April 2000, the Company’s Real Estate Segment sold the manufacturing facility in Lithia Springs, Georgia, to an unrelated third party. The sales price was approximately $10.9 million, and the Company recognized a pre-tax gain on this sale of approximately $2.4 million, which is included in Earnings from continuing operations. In conjunction with this sale, the Company reported an extraordinary loss of $211,463, net of income taxes, from the early extinguishment of debt on the property.
The former metal manufacturing facility’s land and building were reclassified to Real estate held for future development or sale in fiscal 2002.
Depreciation expense for the years ended April 30, 2002, 2001, and 2000, was $366,739, $425,235, and $445,414, respectively.
8 LEASES AND MORTGAGE NOTES PAYABLE
As of April 30, 2002, the Company owned seven shopping centers, an office park, and an office building. Of the owned properties, five shopping centers and the office park were pledged as collateral on related mortgage notes payable. One of the pledged shopping centers was sold in June 2002, and the office building was pledged as collateral on a mortgage note in conjunction with its debt refinancing in July 2002. See Note 19. Exculpatory provisions on the mortgage notes limit the Company’s liability for repayment to the respective mortgaged property. The Company also leases seven shopping centers under leaseback arrangements expiring from 2003 to 2014, as of April 30, 2002. The Company’s leases contain exculpatory provisions that limit the Company’s liability for payment to its interest in the respective leases.
All of the leaseback centers are subleased to the Kmart Corporation, and, as of April 30, 2002, Kmart was a tenant in four of the seven Company-owned shopping centers. The owned shopping centers are leased to tenants for terms expiring from fiscal 2003 to 2021, while leases on the owned office properties expire from fiscal years 2003 to 2008. Subleases on the leaseback centers either are the same as, or may be extended to correspond to, the leaseback periods. All leases are operating leases. The shopping center leases typically require that the tenant make fixed rental payments over a five to twenty-five year period, and may provide for renewal options and for contingent rentals if the tenant’s sales volumes exceed predetermined amounts. In some cases, the shopping center leases provide that the tenant bear the cost of insurance, repairs, maintenance, and taxes. Base rental revenue received from owned shopping centers and office properties in 2002, 2001, and 2000, was approximately $9,007,000, $8,891,000, and $8,622,000, respectively. Base rental revenue received from leaseback centers in 2002, 2001, and 2000, was approximately $2,497,000, $2,620,000, and $2,620,000, respectively. Contingent rental revenue on all centers in 2002, 2001, and 2000, was approximately $174,000, $161,000, and $152,000, respectively.
The Company also is due approximately $61,000 in additional contingent rent in relation to the Kmart in Morton, Illinois, which is not included in the contingent rental revenue disclosed above. Kmart is treating this amount as a pre-bankruptcy petition amount and has therefore not made payment. The Company is making a claim for payment to the Bankruptcy Court, and has set up a reserve for the entire amount.
Approximate future minimum annual rental receipts expected from all rental properties are as follows:
The expected future minimum principal and interest payments on mortgage notes payable on the owned rental properties, and the approximate future minimum rentals expected to be paid on leaseback centers are as follows:
The mortgage notes payable are due at various dates between August 1, 2002, and September 1, 2019, and bear interest at rates ranging from 7.25% to 9.50%. At April 30, 2002, the weighted average rate for all outstanding debt was 7.2%, including Other long-term debt and credit facilities (See Note 9). See Note 19 for discussion regarding repayment of the mortgage debt due August 1, 2002, upon the sale of the shopping center on June 28, 2002.
In fiscal 2000, the Company purchased a shopping center in Jacksonville, Florida, for $9 million, using the proceeds from the sale of its shopping center in Newnan, Georgia (Note 5). This purchase was also financed with cash held by the Company, and by using the Company’s lines of credit. Subsequently, the Company closed on a permanent mortgage loan secured by the property, and used the proceeds to pay back the lines of credit. The permanent loan, in the amount of $9.5 million, bears interest at 7.375% and is scheduled to be fully amortized over twenty years. Loan proceeds received in excess of the purchase price were used to pay financing costs, and are available for use for tenant improvements and commissions on new leases, if any. The loan may be called at any time by the lender after September 1, 2002. If the loan were called at any time after that date, the Company would have up to 13 months to repay the principal amount of the loan without penalty.
In conjunction with the Jacksonville, Florida loan, an Additional Interest Agreement was executed which entitles the lender to participate in fifty percent of the quarterly net cash flow and fifty percent of the appreciation in the property upon sale or refinance, as defined in the Agreement. The appreciation participation liability, which is included in Other liabilities, was $2,384,945 and $2,331,705, at April 30, 2002, and 2001, respectively. The related unamortized loan discount was $1,651,276 and $1,889,140, at April 30, 2002, and 2001, respectively.
9 OTHER LONG-TERM DEBT AND CREDIT FACILITIES
Other long-term debt at April 30 was as follows:
The future minimum principal payments due on other long-term debt are as follows:
At April 30, 2002, the Company had commitments from a bank for unsecured lines of credit totaling $12 million of which $500,000 was restricted as it secures a letter of credit described below. These lines of credit bear interest at the prime rate or LIBOR plus 2%, and have a commitment fee of 0.375% on the unused portion. The lines of credit expire on October 31, 2002. At April 30, 2002, no amounts were outstanding under these lines of credit.
In conjunction with the origination of a mortgage on an income-producing property, the Company obtained an irrevocable, standby letter of credit in the amount of $500,000. The letter of credit was originally issued in July 1997, and matures on November 30, 2002. The mortgage lender is allowed to draw on the letter in order to reduce the related mortgage loan if certain leasing requirements are not met. The letter of credit is secured by a bank line of credit, discussed above.
In fiscal 1998, the Company entered into two interest rate swap agreements related to industrial development revenue bonds issued to finance the manufacturing facility in Lithia Springs, Georgia. The two interest rate swap agreements were terminated in April 2000 in connection with the sale of the manufacturing facility. As a result of the termination of the swap agreements, the Company recorded a gain of $157,000.
10 INCOME TAXES
The (benefit) provision for income taxes consists of the following:
In fiscal 2002, the Company recognized a deferred gain on discontinued operations, resulting in a deferred tax liability of $1,056,000 (Note 3).
Total income tax (benefit) expense recognized in the Consolidated Statements of Operations differs from the amounts computed by applying the Federal income tax rate of 34% to pretax (loss) earnings as a result of the following:
The tax effect of temporary differences that give rise to significant portions of the deferred income tax assets and deferred income tax liabilities at April 30 are presented below:
There was no valuation allowance against deferred tax assets at April 30, 2002, and 2001.
For the year ended April 30, 2001, $45,945 of net deferred tax liability was reclassified to Net liabilities of discontinued operations (Note 3). The income tax expense of $184,000 related to discontinued operations consisted of current tax benefit of $50,261, and deferred tax expense of $234,261.
For the year ended April 30, 2000, the income tax benefit of $1,555,626 related to discontinued operations consisted of current tax benefit of $1,710,421, and deferred tax expense of $154,795.
11 DEFERRED PROFIT-SHARING PLAN
The Company has a deferred profit-sharing plan (the “Plan”) which covers the majority of its employees. Funded employer contributions to the Plan for 2002, 2001, and 2000, were approximately $60,000, $634,000, and $678,000, respectively. The net assets in the Plan, which is administered by an independent trustee, were approximately $9,290,000, $13,234,000, and $17,132,000, at April 30, 2002, 2001, and 2000, respectively.
12 SHAREHOLDERS’ EQUITY
In August 2000, the shareholders approved the 2000 Stock Award Plan (the “Award Plan”). The Award Plan permits the grant of incentive and non-qualified stock options, non-restricted, restricted and performance stock awards, and stock appreciation rights to directors, employees, independent contractors, advisors, or consultants to the Company, as determined by the Compensation Committee of the Board of Directors. The term and vesting requirements for each award are determined by the Compensation Committee, but in no event may the term exceed ten years. Incentive Stock Options under the Award Plan provide for the purchase of the Company’s common stock at not less than fair market value on the date the option is issued. The total number of shares available for grant under the Award Plan is 1,000,000 shares.
On January 19, 2001, the Company granted a restricted stock award to certain eligible employees, directors, and certain consultants, which vested on January 19, 2002, as long as the grantee continued to be employed by the Company until the vesting date. On May 18, 2001, the Company granted a restricted stock award to certain eligible employees, which vested on May 18, 2002, as long as the grantee continued to be employed by the Company until the vesting date. On November 28, 2001, the Company granted a restricted stock award to an eligible employee which vests on November 28, 2002, as long as the grantee continues to be employed by the Company until the vesting date. During fiscal 2002 and 2001, forfeitures of restricted shares which did not vest totaled 2,300 and 800 shares, respectively.
The Company recognizes compensation expense ratably over the vesting period. Stock award compensation expense for the years ended April 30, 2002, and 2001, was $113,440 and $29,531, respectively. As of April 30, 2002, after forfeitures during the year, there were 12,300 shares outstanding under restricted stock award grants.
As allowed under Statement of Financial Accounting Standards (“SFAS”) 123, Accounting for Stock-Based Compensation, the Company will account for all options issued to employees under the Award Plan in accordance with Accounting Principles Board Opinion (“APB”) 25, Accounting for Stock Issued to Employees, and compensation expense, if any, will be recognized accordingly. All options issued to non-employees will be accounted for under SFAS 123, and compensation expense will be recognized accordingly. In May 2001, the Company issued 150,616 incentive stock options with an exercise price of $4.00 per share to certain employees, one-half of which vested in May 2002 and the remaining one-half will vest in May 2003, as long as the grantee continues to be employed by the Company until the vesting date. No options were outstanding in fiscal 2001 or 2000.
For purposes of the pro forma disclosures required by SFAS 123, the Company has computed the value of all stock and stock option awards granted during fiscal 2002 using the Black-Scholes option pricing model with the following weighted average assumptions and results as of April 30, 2002:
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions. In the Company’s opinion, because the Company’s stock-based compensation awards have characteristics significantly different from traded options, and because changes in the subjective assumptions can materially affect the fair value estimate, the results obtained from the valuation model do not necessarily provide a reliable single measure of the value of its stock-based compensation awards.
If the Company had accounted for its stock-based compensation awards in 2002 in accordance with SFAS 123, pro forma results would have been as follows for the year ended April 30, 2002:
In fiscal 2000, the Company’s Board of Director’s authorized the repurchase of up to 200,000 shares of Common Stock during the twelve-month period beginning February 25, 2000, and ending February 24, 2001. In 2001 and 2002, the Company’s Board authorized additional repurchases of up to 200,000 shares of Common Stock in each of the subsequent twelve-month periods, the latest to end on February 23, 2003. During fiscal 2002 and 2001, the Company repurchased 44,524 and 20,053, respectively, shares of Common Stock. No shares were repurchased in fiscal 2000.
13 NET EARNINGS (LOSS) PER SHARE
Earnings per share is calculated in accordance SFAS 128, Earnings Per Share, which requires dual presentation of basic and diluted earnings per share on the face of the income statement for all entities with complex capital structures. Basic and diluted weighted-average share differences result solely from dilutive common stock options. Dilutive potential common shares are calculated in accordance with the treasury stock method, which assumes that proceeds from the exercise of all options are used to repurchase common shares at market value. The number of shares remaining after the exercise proceeds are exhausted represents the potentially dilutive effect of the options. Options to purchase 150,616 shares were outstanding at April 30, 2002, but were not included in the computation of diluted net earnings (loss) per share for the first three quarters of the fiscal year because the exercise price of the options was greater than the average market price of the common shares, and therefore, the effect would be antidilutive. During the fourth quarter, the average market price exceeded the exercise price, however, the options did not have a dilutive effect on earnings per share.
The following tables set forth the computations of basic and diluted net earnings (loss) per share:
14 OPERATING SEGMENTS
The Company had three operating segments at April 30, 2002: Construction, Real Estate, and Energy Management. The Construction Segment activities consist primarily of new construction, expansion, and remodeling of retail store buildings, banks, shopping centers, warehouses, and distribution centers. The Real Estate Segment is involved in the investment in shopping centers and office properties in the Southeast and Midwest. During fiscal 2001, the Company entered into contracts with third parties for the asset and property management functions related to its real estate portfolio (Note 1). The Energy Management Segment, which began in fiscal 2002, assists its customers in reducing energy consumption and operating costs of existing commercial buildings by providing: (1) engineering services, (2) equipment maintenance and labor productivity management, and (3) utility cost management.
The operating segments are managed separately and maintain separate personnel due to the differing services offered by each segment. Management of each of the segments evaluates and monitors the performance of the segments based on the operating earnings or losses prior to income taxes. The significant accounting policies utilized by the operating segments are the same as those summarized in Note 2 to the accompanying financial statements of the Company.
As of April 30, 1999, the Company had another operating segment, which manufactured store fixtures for retail outlets, display fixtures for point-of-sale merchandising and other products. The Manufacturing Segment was discontinued during fiscal year 2000 (Note 3).
Total revenue by operating segment includes both revenues from unaffiliated customers, as reported in the Company’s consolidated statements of operations, and intersegment revenues, which are generally at prices negotiated between segments.
The Company had revenues from The Home Depot, Inc., primarily representing revenues in the Construction Segment, aggregating approximately 56%, 66%, and 49% of consolidated revenues in 2002, 2001, and 2000, respectively. Revenues from Academy Sports & Outdoor, generated entirely in the Construction Segment, totaled 18% in 2002, and were less than 10% in 2001 and 2000.
Operating earnings (loss) from continuing operations represents total revenue less operating expenses, including depreciation and interest. Selling, general and administrative and interest costs, deducted in the computation of operating earnings (loss) of each segment, represent the actual costs incurred by that segment. It excludes any extraordinary items. Parent expenses and income taxes have not been allocated to the other subsidiaries.
Segment assets are those that are used in the Company’s operations in each segment, including receivables due from other segments. The Parent Company’s assets are primarily cash and cash equivalents, cash surrender value of life insurance, receivables, and assets related to the deferred compensation plans. Assets attributable to discontinued operations are also included in the Parent Company’s assets in 2001 and 2000.
14 OPERATING SEGMENTS continued
15 NEW ACCOUNTING PRONOUNCEMENTS
During June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS 141, Business Combinations. Under the provisions of SFAS 141, all business combinations initiated after June 30, 2001, must be accounted for using the purchase method of accounting. The adoption of SFAS 141 did not have a material impact on the Company’s financial statements.
Also during June 2001, the FASB issued SFAS 142, Goodwill and Other Intangible Assets. Under the provisions of SFAS 142, there will be no amortization of goodwill and other intangible assets that have indefinite useful lives. Instead, these assets must be tested for impairment annually and when events or changes in circumstances indicate that impairment may have occurred. The Company elected to adopt SFAS 142 as of May 1, 2001, and therefore goodwill and a trademark with an indefinite useful life acquired in the transaction described in Note 16 to the Consolidated Financial Statements have not been amortized.
During August 2001, the FASB issued SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 supercedes FASB 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. In addition, SFAS 144 supercedes the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions for segments of a business to be disposed of. SFAS 144 addresses the treatment of assets held for sale or to be otherwise disposed of, the evaluation of impairment for long-lived assets, and the reporting of discontinued operations. The provisions of SFAS 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001. The adoption of SFAS 144 is not expected to have a significant impact on the Company’s financial position or cash flows; however, under SFAS 144, beginning May 1, 2002, the Company will report any gains or losses recognized on sales of its income-producing real estate properties in discontinued operations, and the results of operations of an operating property classified as held for sale will be reported in discontinued operations.
16 ACQUISITION
In May 2001, the Company acquired substantially all of the assets and employed all of the personnel of an energy management and engineering services company, Servidyne Systems, Inc., and acquired certain intellectual property from an affiliated company, Servidyne, Incorporated, for approximately $3.1 million, including the costs associated with completing the acquisition, in an all cash transaction (the “Servidyne transaction”). This acquisition was accounted for as a purchase, and accordingly, the purchase price was allocated to the underlying assets acquired and liabilities assumed, based upon their estimated fair market values as of the date of acquisition. The results of operations related to the acquired assets have been included in the Company’s financial statements since May 2001. Servidyne has offered its expertise, products, and services to its institutional customers for more than 28 years. In pursuit of growth and improved shareholder returns, the Company will seek opportunities to leverage Servidyne’s reservoir of knowledge in order to assist the now combined customer base in making building infrastructures more efficient.
A director of the Company, together with her spouse, held directly or as trustees, approximately 53% of the outstanding common stock of Servidyne Systems, Inc. and approximately 70% of the outstanding common stock of Servidyne, Incorporated. This director was also a director and officer of both Servidyne Systems, Inc. and Servidyne, Incorporated.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
Of the $1,200,034 of acquired intangible assets, $315,261 was assigned to a registered trademark that is not subject to amortization. The remainder of the intangible assets consists of computer-based work management products (five-year weighted-average useful life) in the amount of $856,113, and other intangible assets of $28,660 (ten-year useful life). The weighted-average useful life of all acquired intangible assets subject to amortization is five years.
The goodwill amount has been assigned to the Energy Management Segment. For tax purposes, all of the goodwill is expected to be amortized and deductible.
The following table displays the consolidated current results for the year ended April 30, 2002, and the consolidated unaudited proforma results for the year ended April 30, 2001, as if the acquisition had been completed on May 1, 2000:
17 GOODWILL AND OTHER INTANGIBLE ASSETS
The following table illustrates the treatment of acquired intangible assets as of April 30, 2002:
The gross carrying amounts and accumulated amortization for all of the Company’s intangible assets as of April 30, 2002, are as follows:
As the acquisition, which resulted in the Company’s initial recording of goodwill, occurred during the current fiscal year, no goodwill or resulting amortization was recorded in the previous fiscal year. Therefore no proforma amounts are required to provide comparability.
18 KMART BANKRUPTCY
In January 2002, Kmart Corporation filed for protection under Chapter 11 of the U.S. Bankruptcy Code. At that time, four of the Company’s seven owned retail properties contained stores leased to Kmart, two of which are freestanding stores. The Company sold at a gain its Englewood shopping center, which had a Kmart store, on June 28, 2002. See Note 19 to the Consolidated Financial Statements. The remaining three Kmart locations owned by the Company are currently open and operating. Seven freestanding Kmart stores that the Company developed, sold, leased back, and then subleased to Kmart are currently open and operating. Kmart, pursuant to its rights under Chapter 11, terminated its subleases to the Company’s two former leaseback properties in Louisville, Kentucky, and West St. Paul, Minnesota, and the Company subsequently terminated its leases for both properties.
In March 2002, Kmart published a list of stores that it would close. None of the properties leased or subleased to Kmart by the Company was on the list. The Bankruptcy Court has not provided the Company any further information as to whether any additional Kmart stores might be closed or which leases will be rejected or affirmed. Kmart contacted the Company to request a reduction in rent for one leaseback location. The Company denied the request, Kmart continued to pay full rent, and the store remained open. This location generated approximately $46,000 in pre-tax earnings in fiscal 2002, and the Company has no capitalized costs related to this location.
19 SUBSEQUENT EVENT
On June 28, 2002, the Company sold its shopping center located in Englewood, Florida, at a gain. The property was classified as Property held for sale at April 30, 2002, in the accompanying Consolidated Balance Sheet. Most of the proceeds from the sale was used to repay the debt on the property that was originally due in August 2002, and for other selling costs.
On July 17, 2002, the Company refinanced the acquisition and construction loan on the corporate headquarters building in Atlanta, Georgia. Proceeds from the new $4.9 million loan were primarily used to repay the $4.5 million existing loan and for refinancing costs.
20 QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the fiscal years ended April 30, 2002, and 2001 (dollars in thousands, except per share amounts):
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(1)
Includes amounts related to discontinued operations. See Note 3 to the Consolidated Financial Statements.
(2)
Allowance for doubtful accounts deductions resulted from the subsequent write-off and/or recovery of the related receivable.
(3)
Inventory reserve deductions resulted from the subsequent sale and/or write-off of the related inventory. All inventory was disposed of as of April 30, 2000, in conjunction with the discontinuance of the Manufacturing Segment’s operations.
SCHEDULE III - Real Estate and Accumulated Depreciation, April 30, 2002
Reconciliations of total real estate carrying value and accumulated depreciation for the three years ended April 30, are as follows:
ITEM 9
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT AUDITORS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
See Current Reports on Form 8-K, filed October 30, 2001, and May 28, 2002, reporting changes in registrant’s certifying accountants.
PART III
ITEMS 10-13
The information contained under the headings “Nomination and Election of Directors,” “Related Party Transactions,” “Principal Holders of the Company’s Securities,” “Equity Compensation Plan,” and “Compensation of Executive Officers and Directors” in the Company’s definitive proxy materials for its 2002 Annual Meeting of Shareholders will be filed with the Securities and Exchange Commission under a separate filing, and is hereby incorporated by reference. Information related to Executive Officers of the Company is included in Item 1 of this report.
For purposes of determining the aggregate market value of the Company’s voting stock held by nonaffiliates, shares held directly or indirectly by all Directors and Executive Officers of the Company have been excluded. The exclusion of such shares is not intended to, and shall not, constitute a determination as to which persons or entities may be “affiliates” of the Company as defined by the Securities and Exchange Commission.
ITEM 14
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A)
The following documents are filed as part of this Annual Report on Form 10-K:
1. Financial Statements:
Independent Auditor’s Report and Report of Independent Accountants
Consolidated Balance Sheets at April 30, 2002, and 2001
Consolidated Statement of Operations for the Years Ended April 30, 2002, 2001, and 2000
Consolidated Statements of Shareholders’ Equity for the Years Ended April 30, 2002, 2001, and 2000
Consolidated Statements of Cash Flows for the Years Ended April 30, 2002, 2001, and 2000
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
Schedule III - Real Estate and Accumulated Depreciation
Explanation of Exhibits
(1)
These exhibits are incorporated by reference to the Company’s Form 10-K for the year ended April 30, 1985.
(2)
This exhibit is incorporated by reference to the Company’s Form 10-K for the year ended April 30, 1997.
(3)
This exhibit is incorporated by reference to the Company’s Form 10-K for the year ended April 30, 1991.
(4)
These exhibits are incorporated by reference to the Company’s Form 10-K for the year ended April 30, 1993.
(5)
This exhibit is incorporated by reference to the Company’s Form 10-K for the year ended April 30, 1998.
(6)
This exhibit is incorporated by reference to the Company’s Form 10-K for the year ended April 30, 1999.
(7)
This exhibit is incorporated by reference to the Company’s Form S-8 filed September 29, 2000.
(8)
This exhibit is incorporated by reference to the Company’s Form 10-K for the year ended April 30, 2001.
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Management compensatory plans or arrangement.
(B)
Reports on Form 8-K: None filed during the fourth quarter of fiscal 2002.
(C)
The Company hereby files as exhibits to this Annual Report on Form 10-K the exhibits set forth in Item 14(A)3 hereof.
(D)
The Company hereby files as financial statement schedules to this Annual Report on Form 10-K the financial statement schedules set forth in Item 14(A)2 hereof.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ABRAMS INDUSTRIES, INC.
Dated: July 19, 2002
By:
/s/ Alan R. Abrams
Alan R. Abrams
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 registrant and in the capacities and on the dates indicated.
Dated: July 19, 2002
/s/ Alan R. Abrams
Alan R. Abrams
Co-Chairman of the Board of Directors,
Chief Executive Officer
Dated: July 19, 2002
/s/ J. Andrew Abrams
J. Andrew Abrams
Co-Chairman of the Board of Directors
Dated: July 19, 2002
/s/ David L. Abrams
David L. Abrams
Director
Dated: July 19, 2002
/s/ Edward M. Abrams
Edward M. Abrams
Director
Dated: July 19, 2002
/s/ Paula Lawton Bevington
Paula Lawton Bevington
Director
Dated: July 19, 2002
/s/ Gilbert L. Danielson
Gilbert L. Danielson
Director
Dated: July 19, 2002
/s/ Melinda S. Garrett
Melinda S. Garrett
Director, Chief Financial Officer, and
Chief Accounting Officer
Dated: July 19, 2002
/s/ Robert T. McWhinney, Jr.
Robert T. McWhinney, Jr.
Director
Dated: July 19, 2002
/s/ B. Michael Merritt
B. Michael Merritt
Director
Dated: July 19, 2002
/s/ L. Anthony Montag
L. Anthony Montag
Director
Dated: July 19, 2002
/s/ Felker W. Ward, Jr.
Felker W. Ward, Jr.
Director