ITEM 1. BUSINESS
General -------
United Capital Corp. (the "Company"), incorporated in 1980 in the State of Delaware, currently has two industry segments:
1. Real Estate Investment and Management.
2. Engineered Products.
The Company also invests excess available cash in marketable securities and other financial instruments.
Description of Business -----------------------
Real Estate Investment and Management -------------------------------------
The Company is engaged in the business of investing in and managing real estate properties and the making of high-yield, short-term loans secured by desirable properties. Most real estate properties owned by the Company are leased under net leases whereby the tenants are responsible for all expenses relating to the leased premises, including taxes, utilities, insurance and maintenance. The Company also owns properties that it manages which are operated by the City of New York as day-care centers and offices and other properties leased as department stores, hotels and shopping centers around the country. In addition, the Company owns properties available for sale and lease with the assistance of a consultant or realtor working in the locale of the premises.
The majority of properties are leased to single tenants. Exclusive of a South Plainfield, New Jersey property, 95.5% of the total square footage of the Company's properties was leased as of December 31, 2002.
Engineered Products -------------------
The Company's engineered products are manufactured through Metex Mfg. Corporation ("Metex") and AFP Transformers, LLC ("AFP Transformers"), wholly-owned subsidiaries of the Company. The knitted wire products and components manufactured by Metex must function in adverse environments and meet rigid performance requirements. The principal areas in which these products have application are as high temperature gaskets, seals, components for use in airbags, shock and vibration isolators, noise reduction elements and air, liquid and solid filtering devices.
Metex has been an original equipment manufacturer for the automobile industry since 1974 and presently supplies many automobile manufacturers with exhaust seals and components for use in exhaust emission control devices.
The Company also manufactures transformer products marketed under several brand names including AFP Transformers, Field Transformer, ISOREG and EPOXYCAST(TM) for a wide variety of industrial and research applications including machine power transformers, rectifier and inverter transformers and transformers for heating.
For the year ended December 31, 2002, sales by the engineered products segment to its two largest customers (each in excess of 10.0% of the segment's net sales) accounted for 20.0% and 10.1%, respectively, of the segment's sales. For the years ended December 31, 2001 and 2000, sales by the engineered products segment to its largest customer (in excess of 10.0% of the segment's net sales) accounted for 14.0% and 15.8%, respectively, of the segment's sales.
Approximately 11.3%, 8.3% and 13.1% of 2002, 2001, and 2000 total sales generated from the engineered products segment were from foreign customers. Substantially all assets held by the Company's engineered products segment are located within the United States or its leased warehouse in Tijuana, Mexico.
Summary Financial Information -----------------------------
The following table sets forth the revenues, operating income and identifiable assets of each business segment of the Company for 2002, 2001 and 2000.
(In Thousands) 2002 2001 2000 --------- -------- -------
Real Estate Investment and Management -------------------------------------
Rental revenues $ 24,498 $ 26,386 $ 26,957 ======== ======== ========
Operating income $ 12,411 $ 12,819 $ 13,126 ======== ======== ========
Identifiable assets, including corporate assets $166,433 $165,536 $136,189 ======== ======== ========
Engineered Products -------------------
Net sales $ 33,513 $ 33,792 $ 34,095 ======== ======== ========
Operating income $ 2,256 $ 1,912 $ 2,261 ======== ======== ========
Identifiable assets $ 10,114 $ 12,429 $ 11,807 ======== ======== ========
Distribution ------------
The Company's engineered products are distributed by a direct sales force and through distributors to industrial consumers and original equipment manufacturers.
Product Methods and Sources of Raw Materials --------------------------------------------
The Company's products are manufactured at its own facilities and a leased facility in Mexico. Raw materials are purchased from a wide range of suppliers. Most raw materials purchased by the Company are available from several suppliers. Certain imported raw materials used by the Company have been the subject of international trade disputes and may become subject to new or additional tariffs which could also affect the cost of domestic supplies. Although management does not expect such matters to adversely effect the
Company's financial position, it is uncertain at this time what effect, if any, such events will have on the cost of such materials. The Company has not had and does not expect to have any problems fulfilling its raw material requirements during 2003.
Patents and Trademarks ----------------------
The Company owns several patents, patent licenses and trademarks. While the Company considers that in the aggregate its patents, patent licenses, and trademarks used in the engineered products operations are significant to this segment, it does not believe that any of them are of such importance that the loss of one or more of them would materially affect its consolidated financial condition or results of operations.
Employees ---------
At February 28, 2003, the Company employed approximately 230 persons, approximately 150 of which were covered by a collective bargaining agreement that expires in February 2004. The Company believes that its relationship with its employees is good.
Competition -----------
The Company competes with at least 21 other companies in the sale of engineered products. The Company emphasizes product performance and service in connection with the sale of these products. The principal competition faced by the Company results from the sales price of the products sold by its competitors.
The Company has established close relationships with a large number of major national and regional real estate brokers and maintains a broad network of industry contacts. There are numerous regional and local commercial developers, real estate companies, financial institutions and other investors who compete with the Company for the acquisition of properties and tenants.
Backlog -------
The dollar value of unfilled orders of the Company's engineered products segment was approximately $1.7 million at December 31, 2002 and $2.2 million at December 31, 2001. The decrease in backlog is principally due to a slow-down in the demand for the Company's transformer and certain automotive product lines. It is anticipated that substantially all such 2002 backlog will be filled in 2003. Substantially all of the 2001 backlog was filled in 2002. 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. The Company has recorded a liability in the Consolidated Financial Statements for the estimated potential remediation costs at these facilities.
The process of remediation has begun at one facility pursuant to a plan filed with the New Jersey Department of Environmental Protection ("NJDEP"). Environmental experts engaged by the Company estimate that under the most probable remediation scenario the remediation of this site is anticipated to require initial expenditures of $860,000 including the cost of capital equipment, and $86,000 in annual operating and maintenance costs over a 15 year period.
Environmental studies at the second facility indicate that remediation may be necessary. Based upon the facts presently available, environmental experts have advised the Company that under the most probable remediation scenario, the estimated cost to remediate this site is anticipated to require $2.3 million in initial costs, including capital equipment expenditures, and $258,000 in annual operating and maintenance costs over a 10 year period. These estimated costs of future expenses for remediation obligations are not discounted to their present value.
The Company may revise such estimates in the future due to the uncertainty regarding the nature, timing and extent of any remediation efforts that may be required at this site, should an appropriate regulatory agency deem such efforts to be necessary. The foregoing estimates may also be revised by the Company as new or additional information in these matters become available or should the NJDEP or other regulatory agencies require additional or alternative remediation efforts in the future. It is not currently possible to estimate the range or amount of any such liability.
Although the Company believed that it was entitled to full defense and indemnification with respect to environmental investigation and remediation costs under its insurance policies, the Company's insurers denied such coverage. Accordingly, the Company filed an action against certain insurance carriers seeking defense and indemnification with respect to all prior and future costs incurred in the investigation and remediation of these sites. Settlements have been reached with all carriers in this matter.
In the opinion of management, amounts recovered from its insurance carriers under the terms of its settlement agreements should be sufficient to address these matters and amounts needed in excess, if any, will be paid gradually over a period of years. Accordingly, they should not have a material adverse effect upon the business, liquidity or financial position of the Company. However, adverse decisions or events, particularly as to the merits of the Company's factual and legal basis could cause the Company to change its estimate of liability with respect to such matters in the future.
Available Information ---------------------
The Company's filings with the Securities and Exchange Commission ("SEC") may be read and copied at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The SEC's internet address is http://www.sec.gov.
A copy of the Company's annual report on Form 10-K, quarterly reports on Form 10-Q, current reports to Form 8-K, if any, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC may be obtained without charge by writing to Anthony J. Miceli, Chief Financial Officer and Secretary of the Company at its executive offices, United Capital Building, 9 Park Place, Great Neck, NY 11021.
ITEM 2.
ITEM 2. PROPERTIES
Real Property Held for Rental or Sale -------------------------------------
As of February 28, 2003, the Company owned 184 properties strategically located 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, 2002 are as follows (Dollars in Thousands):
Gross Carrying Number of Description Value Percentage Properties ----------- -------------- ---------- ----------
Shopping centers and retail outlets $ 62,835 51.5% 24 Commercial properties 43,864 35.9% 114 Day-care centers and office 6,430 5.3% 10 Hotel properties 4,628 3.8% 2 Other 4,324 3.5% 38 -------- -------- ---------
Total $122,081 100.0% 188 ======== ======== =========
The following summarizes the Company's properties by geographic area at December 31, 2002 (Dollars in Thousands):
Gross Number Carrying of Value Properties -------- ----------
Northeast $ 40,431 102 Southeast 25,119 30 Midwest 29,140 33 Southwest 6,071 7 Pacific Coast 17,461 7 Pacific Northwest 980 5 Rocky Mountain 2,879 4 -------- --------
$122,081 188 ======== ========
Shopping Centers and Retail Outlets -----------------------------------
Shopping centers and retail outlets include 17 department stores and other properties primarily leased under net leases. The tenants are responsible for taxes, maintenance and all other expenses of the properties. The leases for certain shopping centers and retail outlets provide for additional rents based on sales volume and renewal options at higher rents. The department stores include eight properties leased to Kmart Corporation ("Kmart") and two Macy's 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.
Kmart filed for protection under Chapter 11 of the U.S. Bankruptcy Code on January 22, 2002. As part of its reorganization, Kmart announced the closure of approximately 600 of its stores during the past year, as well as its anticipated emergence from Chapter 11 protection as early as April 30, 2003. To date, Kmart has not rejected any leases with the Company; however the terms of one such lease have been renegotiated resulting in a temporary rent reduction. Although it is currently uncertain which remaining leases, if any, Kmart will reject or affirm as part of its reorganization, management believes that its leases with Kmart are at or below the fair market rent for comparable properties and as a result, the rejection of one or more leases is not expected to have a material adverse effect on the consolidated financial position and/or results of operations of the Company.
Included in shopping centers and retail outlets is one department store which is currently held for sale and classified as discontinued operations in the Consolidated Financial Statements.
Commercial Properties ---------------------
Commercial properties consist of properties leased as 60 restaurants, 16 Midas Muffler Shops, three 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 60 restaurants, located throughout the United States, include properties leased as McDonalds, Burger King, Dunkin' Donuts, Pizza Hut, Hardee's, Wendy's, Kentucky Fried Chicken and Boston Market.
Included in commercial properties are six properties which are currently held for sale and classified as discontinued operations in the Consolidated Financial Statements. These six properties consist of three restaurants, one Midas Muffler Shop, one office building and one miscellaneous other property.
Day-Care Centers and Office ---------------------------
The Company has nine day-care centers and one office building, located in New York City, which are leased to the City of New York. The tenant is responsible for real estate taxes and certain maintenance costs while the Company maintains insurance and certain other maintenance obligations. All such leases provide for the reimbursement of operating costs above base year levels and certain leases include rental increases and renewal options.
Hotel Properties ----------------
The Company's two hotel properties located in Georgia and California are managed through a national hotel company with local on-site management responsible for all day-to-day operations of the hotels. The Company's Board Chairman is the Chairman and President and another Company Director is a director of this publicly-traded hotel company. See "Related Party Transactions" in Item 7 and Note 13 of Notes to Consolidated Financial Statements.
Manufacturing Facilities ------------------------
The Company's engineered products are manufactured at 970 New Durham Road, Edison, New Jersey, in a one-story building having approximately 55,000 square feet of floor space and also in a second facility at 206 Talmadge Road, Edison, New Jersey which has approximately 55,000 square feet of floor space. The Company owns these facilities together with the sites. Metex also leases a manufacturing facility in Tijuana, Mexico with approximately 24,000 square feet of floor space.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Litigation ----------
The Company is involved in various litigation and legal matters which are being defended and handled in the ordinary course of business.
None of the foregoing is expected to result in a judgment having a material adverse effect on the Company's consolidated financial position or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5.
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The Company's 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.
High Low ----------- ----------
2002 First quarter $24.84 $21.40 Second quarter 25.99 23.40 Third quarter 25.05 21.70 Fourth quarter 35.45 25.00
2001 First quarter 18.40 14.50 Second quarter 25.50 17.90 Third quarter 24.45 18.70 Fourth quarter 21.35 18.90
As of February 28, 2003, there were approximately 330 record holders of the Company's Common Stock. The closing sales price for the Company's Common Stock on such date was $35.05. The Company has never paid any cash dividends on its Common Stock however, the payment of dividends is within the discretion of the Company's Board of Directors. In light of potential working capital needs, requirements to finance future growth and certain restrictions in the Company's credit agreement, the Company does not currently expect to pay any cash dividends on its Common Stock. However the Board of Directors could re-evaluate this position, particularly if recent federal income tax proposals regarding the tax exemption of dividends were implemented.
Equity Compensation Plan ------------------------
The information required by this item will be contained in the Proxy Statement of the Company for the 2003 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 6.
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, -----------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998 -------- -------- -------- ------- --------
Total revenues $ 58,011 $ 60,178 $ 61,052 $ 58,422 $ 57,246 ======== ======== ======== ======== ========
Income from continuing operations $ 22,493 $ 18,290 $ 17,665 $ 12,779 $ 10,000 ======== ======== ======== ======== ========
Income from continuing operations per share: Basic $ 4.91 $ 3.90 $ 3.73 $ 2.57 $ 1.92 ======== ======== ======== ======== ========
Total assets $176,547 $177,965 $147,996 $133,732 $124,732 Total liabilities 64,913 81,624 70,877 74,676 72,314 Total stockholders' equity 111,634 96,341 77,119 59,056 52,418 ======== ======== ======== ======== ========
Certain reclassifications have been reflected in the above financial data to conform prior years' data to the current classifications. These reclassifications primarily relate to the adoption of Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," in January 2002 (see Item 7
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: 2002 and 2001 ------------------------------------
Revenues for the year ended December 31, 2002 were $58.0 million compared to 2001 revenues of $60.2 million. Operating income during this period was $11.7 million versus $12.5 million for the comparable 2001 period. Net income for the year ended December 31, 2002 was $23.4 million or $5.10 in basic earnings per share compared to net income of $19.0 million or $4.05 in basic earnings per share for the year ended December 31, 2001, a 25.9% increase in basic earnings per share.
Included in the results for the year ended December 31, 2002 is income from discontinued operations, net of tax, resulting from the Company's adoption of Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 requires that the operating results, as well as gains or losses on the real estate assets sold or to be disposed of, as defined, be reflected in the Consolidated Statements of Income as discontinued operations. The results of operations for properties that have been reported as discontinued operations during the year ended December 31, 2002 have been reclassified to discontinued operations for the years ended December 31, 2001 and 2000 in accordance with SFAS No. 144. Sales of properties occurring in prior years have not been reclassified.
Real Estate Operations ----------------------
Rental revenues from real estate operations decreased $1.9 million or 7.2% to $24.5 million for the year ended December 31, 2002 compared to $26.4 million in 2001. The decrease is primarily attributable to decreased rental revenues resulting from the sale of properties in 2001 and decreased hotel revenues due to the continued weakness in the economy. Rental revenues from 2002 property sales have been classified as discontinued operations in accordance with SFAS No. 144. Property sales prior to the implementation of SFAS No. 144 have not been similarly reclassified to discontinued operations.
Mortgage interest expense decreased $0.4 million or 22.6% to $1.4 million for the year ended December 31, 2002 compared to $1.8 million for the corresponding 2001 period, due to continued mortgage amortization which approximated $5.0 million during the year ended December 31, 2002.
Depreciation expense associated with real properties held for rental decreased by $0.7 million or 18.2% to $3.3 million for the year ended December 31, 2002 compared to $4.0 million for the same period in 2001. This decrease was primarily attributable to reduced depreciation expense associated with fully depreciated properties and properties sold in 2001. Depreciation expense from property sales in 2002 has been classified as discontinued operations in accordance with SFAS No. 144. Such expenses on property sales prior to the implementation of SFAS No. 144 have not been similarly reclassified to discontinued operations.
Other operating expenses associated with the management of real properties decreased approximately $0.4 million or 4.5% to $7.4 million during 2002 versus such expenses incurred of $7.8 million in 2001. This decrease is mainly attributable to the decrease in hotel operating expenses due to the decrease in hotel revenues as noted above.
Engineered Products -------------------
The Company's engineered products segment includes Metex and AFP Transformers. The operating results of the engineered products segment for the years ended December 31, 2002 and 2001 are as follows:
(In Thousands) 2002 2001 ------- -------
Net sales $33,513 $33,792 ======= =======
Cost of sales $24,500 $25,083 ======= =======
Selling, general and administrative expenses $ 6,757 $ 6,797 ======= =======
Operating income $ 2,256 $ 1,912 ======= =======
Net sales of the engineered products segment decreased $0.3 million or less than 1% for the year ended December 31, 2002 compared to net sales in the preceding year. The decrease reflects lower sales in the Company's transformer product line principally due to decreased demand for these products as well as price competitiveness for such products. This decrease was offset by higher sales in the Company's automotive product line mainly due to improved product offerings.
Cost of sales as a percentage of net sales decreased approximately 1.5% between 2001 and 2002, principally due to the mix of products sold as noted above and the implementation of cost containment measures.
Selling, general and administrative expenses of the engineered products segment decreased less than one percent for the year ended December 31, 2002 versus the comparable 2001 period.
General and Administrative Expenses -----------------------------------
General and administrative expenses not associated with the manufacturing operations increased approximately $0.7 million or 32.7% during 2002, compared to such expenses incurred in the preceding year. The increase is principally due to higher salary and salary related expenses as well as an increase in pension related expenses.
Other Income and Expense, Net -----------------------------
Other income and expense, net decreased approximately $1.0 million from $17.0 million in 2001 to $16.0 million in 2002. The decrease is principally due to lower net gains on the sale of real estate assets of $5.3 million, which excludes pre-tax gains of $0.8 million reflected as discontinued operations in the Company's Consolidated Statements of Income, and lower net gains on the sale of available-for-sale and trading securities of $1.3 million. This decrease was offset by higher net realized and unrealized gains on derivative instruments of $5.8 million.
Discontinued Operations -----------------------
Operating income from properties sold or held for sale and accounted for as discontinued operations was $0.4 million on a net of tax basis for 2002 versus $0.7 million in 2001. Prior year amounts have been reclassified to reflect results of operations of real properties sold in 2002 or held for sale as of December 31, 2002 as discontinued operations. Gains on the sale of real estate accounted for as discontinued operations were $0.5 million on a net of tax basis for the year ended December 31, 2002. Prior to the adoption of SFAS No. 144 in 2002, gains on sales of real estate assets were not accounted for as discontinued operations.
Results of Operations: 2001 and 2000 ------------------------------------
Total revenues generated by the Company during 2001 were $60.2 million versus revenues of $61.1 million during 2000. Operating income during 2001 was $12.5 million versus $13.2 million for 2000. Net income was $19.0 million or $4.05 in basic earnings per share in 2001 versus $18.3 million or $3.86 in basic earnings per share in 2000.
Real Estate Operations ----------------------
Rental revenues from real estate operations during 2001 decreased $0.6 million or 2.1% compared to 2000. The decrease is primarily attributable to decreased hotel revenues, offset by certain retroactive lease adjustments in 2001.
Mortgage interest expense decreased $0.4 million or 19.5% for the year ended December 31, 2001 compared to the corresponding 2000 period, due to continuing mortgage amortization.
Depreciation expense associated with real properties held for rental decreased by $0.8 million or 16.6% for the year ended December 31, 2001 compared to the same period in 2000. This decrease was primarily attributable to reduced depreciation expense associated with fully depreciated properties and properties sold in 2001 and 2000.
Other operating expenses associated with the management of real properties increased approximately $1.0 million or 14.3% during 2001 versus such expenses incurred in 2000. This increase is primarily attributable to increased real estate taxes, insurance, property maintenance expenses and hotel operating expenses.
Engineered Products -------------------
The Company's engineered products segment includes Metex and AFP Transformers. The operating results of the engineered products segment for the years ended December 31, 2001 and 2000 are as follows:
(In Thousands) 2001 2000 --------- -------
Net sales $33,792 $34,095 ======= =======
Cost of sales $25,083 $24,738 ======= =======
Selling, general and administrative expenses $ 6,797 $ 7,096 ======= =======
Operating income $ 1,912 $ 2,261 ======= =======
Net sales of the engineered products segment decreased $0.3 million or less than 1% for the year ended December 31, 2001 compared to net sales in the preceding year. The decrease reflects lower sales in the Company's engineered component product line, offset by higher sales in the Company's automotive and transformer product lines. These declines were due to the slowing economy and compounded by the tragic events of September 11th.
Cost of sales as a percentage of net sales increased approximately 2.2% between 2001 and 2000, principally due to the decline in sales noted above.
Selling, general and administrative expenses of the engineered products segment decreased $0.3 million or 4.2% for the year ended December 31, 2001 versus the comparable 2000 period. The decrease is primarily due to the decline in sales noted above and cost containment efforts implemented by management.
General and Administrative Expenses -----------------------------------
General and administrative expenses not associated with the manufacturing operations increased approximately $0.1 million or 4.8% during 2001, compared to such expenses incurred in the preceding year. The increase is principally due to higher salary and salary related expenses and an increase in professional fees.
Other Income and Expense, Net -----------------------------
Other income and expense, net increased approximately $7.2 million from $9.8 million in 2000 to $17.0 million in 2001. The increase is principally due to increased net gains on the sale of real estate assets of $5.7 million and increased net realized and unrealized gains on available-for-sale securities, derivative instruments and trading securities of $1.3 million.
Liquidity and Capital Resources -------------------------------
The Company experienced a net cash inflow from operations of approximately $11.6 million, $13.1 million and $14.5 million during 2002, 2001 and 2000, respectively. The $1.5 million decline in operating cash flow from 2001 to 2002 primarily results from changes in working capital and a reduction in the proceeds of trading securities offset by a decline in income taxes. The $1.4 million decline in operating cash flow from 2000 to 2001 primarily results from working capital changes and income taxes offset by $1.8 million of trading security purchases in 2000 versus $2.3 million in proceeds from such securities in 2001. The components of the working capital changes are set forth in detail in the Consolidated Statements of Cash Flows.
In 2002, $22.0 million was used for investing activities which consisted primarily of a $23.1 million investment in a joint venture in exchange for a 50% ownership interest in a full service 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. This was partially offset by proceeds from the sale of real estate assets of $7.3 million.
In 2001, $45.7 million was provided by investing activities consisting primarily of $31.7 million in net proceeds from available-for-sale securities and derivative instruments, $12.9 million in proceeds from the sale of real estate assets and the repayment of a $3.5 million note receivable. This was offset by $3.1 million from the acquisition of and/or additions to real estate assets and property, plant and equipment.
In 2000, $4.1 million was used for investing activities which consisted primarily of $9.7 million of net purchases of available-for-sale securities, a $3.5 million purchase of a note receivable and $0.8 million of capital expenditures, primarily offset by $9.9 million of proceeds from the sale of real estate assets.
Net cash used in financing activities was approximately $8.9 million, $7.8 million and $6.8 million during 2002, 2001 and 2000, respectively. This use of cash flow was primarily attributable to debt reduction and the purchase and retirement of the Company's common stock.
At December 31, 2002, the Company's cash and marketable securities were $74.8 million and working capital was $67.0 million as compared to cash and marketable securities of $96.8 million and working capital of $76.4 million at December 31, 2001. The causes of these declines are discussed in the preceding paragraphs. Management continues to believe that the real estate market is overvalued and accordingly recent 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 cash needs of the Company have been satisfied from funds generated by current operations. It is expected that future operational cash needs and the cash required to repurchase the Company's common stock 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 will 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 real properties or other companies in exchange for equity securities.
Funds of the Company in excess of that needed for working capital, purchasing real estate and arranging financing for real estate acquisitions are invested by the Company in corporate equity securities, corporate notes, certificates of deposit, government securities and other financial instruments.
The Company is the lessor of eight department stores that are currently leased to Kmart, which filed for protection under Chapter 11 of the U.S. Bankruptcy Code on January 22, 2002. In addition, the Company holds a 50% interest in a joint venture (which is accounted for by the Company on the equity basis) that owns two distribution centers that are also leased to Kmart. As part of its reorganization, Kmart announced the closure of approximately 600 of its stores during the past year, as well as its anticipated emergence from Chapter 11 protection as early as April 30, 2003. To date, Kmart has not rejected any leases with the Company; however the terms of one such lease have been renegotiated resulting in a temporary rent reduction. Although it is currently uncertain which remaining leases, if any, Kmart will reject or affirm as part of its reorganization, management believes that its leases and the leases of the
joint venture with Kmart are at or below the fair market rent for comparable properties and as a result, the rejection of one or more leases is not expected to have a material adverse effect on the consolidated financial position and/or results of operations of the Company.
Effective December 10, 2002, the Company entered into a credit agreement with five banks which provides for an $80.0 million revolving credit facility ("Revolver"). The Revolver may be increased under certain circumstances and expires on December 31, 2005.
Under the Revolver, the Company will be provided with eligibility based upon the sum of (i) 60.0% of the aggregate annualized and normalized year-to-date net operating income of unencumbered eligible properties, as defined, capitalized at 10.0%, (ii) 60.0% of the aggregate annualized and normalized year-to-date net operating income of unencumbered eligible hotel properties, as defined, capitalized at 10.5%, not to exceed the lesser of $10.0 million or 10% of total eligibility, (iii) the lesser of $20.0 million or 50.0% of the aggregate annualized and normalized year-to-date net operating income of encumbered eligible properties, as defined, capitalized at 12.0%, (iv) the sum of 75.0% of eligible accounts receivable, 50.0% of eligible inventory, and 50% of eligible loans, as defined, (v) cash and cash equivalents in excess of working capital, as defined, and (vi) 50% of marketable securities, as defined. At December 31, 2002, eligibility under the Revolver was $80.0 million, based upon the above terms and there were no amounts outstanding under the Revolver. The credit agreement contains certain financial and restrictive covenants, including minimum consolidated equity, interest coverage, debt service coverage and capital expenditures (other than for real estate), and limitations on indebtedness. The Company was in compliance with all covenants at December 31, 2002. The credit agreement also contains provisions which allow the banks to perfect a security interest in certain operating and real estate assets in the event of a default, as defined in the credit agreement. Borrowings under the Revolver, at the Company's option, bear interest at the bank's prime lending rate or at the London Interbank Offered Rate ("LIBOR") (1.38% at December 31, 2002) plus 2.0% for non cash collateralized borrowings and 1.0% for cash collateralized borrowings.
Prior to obtaining the Revolver, the Company maintained a credit agreement with three banks which provided for both a $60.0 million revolving credit facility and a $1.9 million term loan. This credit agreement was terminated effective December 10, 2002 in conjunction with the execution of the Revolver. The term loan matured and was fully satisfied as of September 30, 2002. At December 31, 2001, there were no amounts outstanding under the revolving credit facility and $525,000 outstanding on the term loan.
As of September 30, 2002, the Company's interest rate swap agreement ("the Swap") expired together with the satisfaction of the underlying term loan. The Swap was classified as a cash flow hedge and was recorded as a component of accounts payable and accrued liabilities in the Consolidated Balance Sheet at December 31, 2001 and accumulated other comprehensive income was reduced by the same amount, net of tax, with no impact on earnings. The differential paid or received on the Swap was recognized as an adjustment to interest expense over the term of the agreement.
In strategies designed to hedge overall market risk, the Company may sell common stock short and participate in put and/or call options. These instruments do not qualify for hedge accounting and therefore changes in such derivatives fair value are recognized in earnings. These derivatives are recorded as a component of accounts payable and accrued liabilities in the Consolidated Balance Sheets.
The Company has undertaken the completion of environmental studies and/or remedial action at Metex' two New Jersey facilities and filed an action against certain insurance carriers seeking recovery of costs incurred and to be incurred in these matters. Settlements have been reached with all carriers in this matter. See Note 19, "Commitments and Contingencies" of Notes to Consolidated Financial Statements for further discussion on this matter.
The Company is subject to various litigation, legal and regulatory matters that arise in the ordinary course of business activities. When management believes it is probable that a liability has been incurred and such amounts are reasonably estimable the Company provides for amounts that include judgments and penalties that may be assessed. These liabilities are usually included in accounts payable and accrued liabilities or other long-term liabilities in the Consolidated Financial Statements, depending on the anticipated payment date. None of these matters are expected to result in a material adverse effect on the Company's consolidated financial position or results of operations.
The current liabilities of the Company have at times in the past exceeded its current assets principally due to the financing of long-term assets utilizing short-term borrowings and from the classification of current mortgage obligations without the corresponding current asset for such properties. Future financial statements may reflect current liabilities in excess of current assets. Management is confident that through cash flow generated from operations, together with borrowings available under the Revolver and the sale of select assets, all obligations will be satisfied as they come due.
Previous purchases of the Company's common stock have reduced the Company's additional paid-in capital to zero and accordingly current year purchases in excess of par value have reduced retained earnings. During 2002, the Company purchased and retired 148,257 shares of the Company's common stock for approximately $3.8 million. Future repurchases of the Company's common stock will also reduce retained earnings by amounts in excess of the par value. Repurchases of the Company's common stock will be made from time to time in the open market at prevailing market prices and may be made in privately negotiated transactions, subject to available resources.
Contractual Obligations, Commitments and Contingencies ------------------------------------------------------
The following table summarizes the Company's contractual cash obligations and other commitments at December 31, 2002:
(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) $ 4,391 $ 8,204 $ 932 $ 3,211 $16,738
Operating Leases (2) 522 626 462 4,326 5,936
Employment Contract (3) 750 0 0 0 750 ------- ------- ------- ------- -------
Total Contractual Cash Obligations $ 5,663 $ 8,830 $ 1,394 $ 7,537 $23,424 ======= ======= ======= ======= =======
(1) See Note 8 to Notes to Consolidated Financial Statements. (2) See Note 18 to Notes to Consolidated Financial Statements. (3) The Company has an employment contract with its Chairman, President and Chief Executive Officer which provides for a base salary of $750,000 per annum plus a discretionary bonus as determined by the Board of Directors. In the event of termination or a change in control, as defined in the employment agreement, the Company is required to pay the Chairman, President and Chief Executive Officer a lump sum severance payment equal to three years salary and purchase outstanding options. The employment agreement provides for successive one year terms unless either the Company or the Chairman, President and Chief Executive Officer gives the other written notice that the employment agreement is terminated.
Related Party Transactions --------------------------
The Company has a 50.0% interest in an unconsolidated limited liability corporation, whose principal assets are two distribution centers leased to Kmart. A group that includes the wife of the Board Chairman, two Directors of the Company and the wife of one of the Directors have an 8.0% interest in this entity. The Company's share of income arising from this investment, accounted for as a leveraged lease, was $673,000, $868,000 and $1.2 million for the years ended December 31, 2002, 2001 and 2000, respectively.
During December 2002, the Company purchased a 50% interest in a joint venture (the "Hotel Venture") for $23.1 million together with a publicly-traded company for which the Board Chairman and another Director of the Company are directors. The Hotel Venture owns and operates a hotel in New Jersey. The equity method of accounting is used to account for this investment since the Company has a 50% interest in the joint venture and the ability to exercise significant influence, but not control. Under the operating agreement all significant capital decisions are made jointly and operating profits are divided evenly. The investment is initially recorded at cost and subsequently adjusted for equity in earnings and cash contributions and distributions.
The Company's two hotel properties, as well as the hotel owned by the Hotel Venture, are managed by a publicly-traded company for which the Board Chairman and another Director of the Company are directors. Fees paid for the management of the Company's two hotel properties are based upon a percentage of revenue and were approximately $117,000, $121,000, and $165,000 for 2002, 2001 and 2000, respectively. Included in marketable securities at December 31, 2002 and 2001 was $20.4 million and $27.7 million, respectively, of common stock in this company which represents approximately 5.6% of such company's outstanding shares in both years.
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.
Revenue Recognition and Accounts Receivable - Real Estate Investment -------------------------------------------------------------------- and Management --------------
The Company leases substantially all of its properties to tenants under net leases which are accounted for as operating leases. Under this type of lease, the tenant is obligated to pay all operating costs of the property including real estate taxes, insurance and repairs and maintenance. Revenue is recognized as it is earned and deemed collectible. Gains on the sale of real estate assets and equity investments are recorded when the gain recognition criteria under generally accepted accounting principles in the United States of America have been met.
Certain lease agreements provide for additional rent based on a percentage of tenants' sales. These percentage rents are recorded once the required sales levels are achieved.
Income on leveraged leases is recognized by a method that produces a constant rate of return on the outstanding investment in the lease, net of the related deferred tax liability in the years in which the net investment is positive.
Accounts receivable are recorded at the outstanding amounts net of the allowance for doubtful accounts. The Company makes estimates of the uncollectibility of its accounts receivable related to base rents, tenant escalations, expense reimbursements and other revenues. The Company analyzes accounts receivable and historical bad debt levels, customer credit worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. In addition, tenants in bankruptcy are analyzed and estimates are made in connection with the expected recovery of pre-petition and post-petition claims. The Company's net income is directly affected by management's estimate of the collectibility of accounts receivable.
Revenue Recognition and Accounts Receivable - Engineered Products -----------------------------------------------------------------
In general, sales are recorded when products are shipped 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, 2002 and 2001, all marketable securities held by the Company have been classified as either available-for-sale or trading and, as a result, are stated at fair value. Unrealized gains and losses on available-for-sale securities are recorded as a separate component of stockholders' equity. Realized gains and losses on the sale of securities as well as unrealized holding gains and losses on trading securities, as determined on a first-in, first-out basis, are included in the Consolidated Statements of Income.
The Company reviews its investments on a regular basis to evaluate whether or not each security has experienced an other-than-temporary decline in fair value. If it is believed that an other-than-temporary decline exists, the Company will write down the investment to market value and record the related write-down as a loss on investments in the Consolidated Statements of Income.
The Company's net income is directly affected by management's classification of marketable securities as well as its determination of whether an other-than-temporary decline in the value of its investments exist.
Inventories -----------
The Company values inventory at the lower of cost or market, cost being determined on a first-in, first-out basis. The Company regularly reviews inventory quantities on hand and records a provision for excess and obsolete inventory based primarily on existing and anticipated design and engineering changes to its products as well as forecasts of future product demand. The Company's net income is directly affected by management's estimate of the realizability of inventories.
Real Estate -----------
Land, buildings and improvements and equipment are recorded at cost, less accumulated depreciation and amortization. Expenditures for maintenance and repairs are charged to operations as incurred. Significant renovations and replacements, which improve the life of the asset, are capitalized and depreciated over their estimated useful lives.
Depreciation is computed utilizing the straight-line method over the estimated useful lives of five to thirty-nine years for buildings and improvements and five to seven years for equipment.
Assets held for sale are reported at the lower of the carrying amount or fair value less costs to sell and depreciation is discontinued. Property sales or dispositions are recorded when title transfers. Upon disposition, the related costs and accumulated depreciation are removed from the respective accounts. Any gain or loss on sale or disposition is recognized in accordance with accounting principles generally accepted in the United States of America. In the normal course of business, the Company receives offers for the sale of properties, either solicited or unsolicited. For those offers that are accepted, the prospective buyer usually
requires a due diligence period before consummation of the transaction. It is not unusual for matters to arise that result in the withdrawal or rejection of the offer during this process. If circumstances arise that previously were considered unlikely and, as a result, management decides not to sell a property classified as held for sale, the property is reclassified as held for rental. A property that is reclassified is measured and recorded individually at the lower of its carrying amount before being classified as held for sale, adjusted for any depreciation expense that would have been recognized had the property been continuously classified as held for rental or its fair market value at the date of the subsequent decision not to sell.
The Company is required to make subjective assessments as to the useful lives of its properties for purposes of determining the amount of depreciation to reflect on an annual basis with respect to those properties. These assessments have a direct impact on the Company's net income. Should the Company adjust the expected useful life of a particular asset, it would be depreciated over the adjusted years, and result in a revised depreciation expense and net income.
Discontinued Operations -----------------------
The Company is required to make certain subjective assessments utilizing the provisions of SFAS No. 144 in determining whether a long-lived asset to be disposed of should be reclassified as discontinued operations. Commencing in 2002, the Company considers real property to be held for sale and reported as discontinued operations if management has committed to a plan to sell the asset under usual and customary terms and believes such sale will be completed within one year. In such event, the financial results associated with these assets are reclassified as discontinued operations for all periods presented. Although operating income, income from continuing operations and income from discontinued operations is directly affected by management's assessments, the reclassification has no impact on net income.
Long-Lived Assets -----------------
On a periodic basis, management assesses whether there are any indicators that the value of its long-lived assets may be impaired. An asset's value is considered impaired only if management's estimate of current and projected operating cash flows (undiscounted and without interest charges) of the asset over its remaining useful life is less than the net carrying value of the asset. Such cash flow projections consider factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other factors. To the extent impairment has occurred, the carrying amount of the asset would be written down to an amount to reflect the fair value of the asset.
The Company is required to make subjective assessments as to whether there are impairments in the value of its long-lived assets and other investments. The Company's net income is directly affected by management's estimate of impairments. In determining impairment, if any, the Company has adopted SFAS No. 144.
Pension Plan ------------
Pension plans can be a significant cost of doing business, but represent obligations that will ultimately be settled far in the future and therefore are subject to estimates. Pension accounting is intended to reflect the recognition of future benefit costs over the employee's approximate service period based on the terms of the plan and the investment and funding decisions made by the Company. The Company is required to make assumptions regarding such variables as the expected long-term rate of return on assets and the discount rate applied to determine service cost and interest cost to arrive at pension income or expense for the year.
The Company accounts for its defined benefit pension plan in accordance with SFAS No. 87, "Employers' Accounting for Pensions" ("SFAS No. 87"), which requires that amounts recognized in financial statements be determined on an actuarial basis. SFAS No. 87 generally reduces the volatility of future income (expense) from changes in pension liability discount rates and the performance of the pension plan's assets.
The most significant element in determining the Company's pension income (expense) in accordance with SFAS No. 87 is the expected return on plan assets. The Company has assumed that the expected long-term rate of return on plan assets will be 8.0% for 2002 as compared to 9.0% for 2001. Based on the Company's existing and forecasted asset allocation and related long-term investment performance results, the Company believes that its assumption of future returns of 8.0% is reasonable. The assumed long-term rate of return on assets is applied to a calculated value of plan assets, which recognizes changes in the fair value of plan assets in a systematic manner. This produces the expected return on plan assets that is included in pension income (expense). The difference between this expected return and the actual return on plan assets is deferred. The net deferral of past asset gains (losses) affects the calculated value of plan assets and, ultimately, future pension income (expense). The plan assets have earned a rate of return less than 8.0% in the last two years. Should this trend continue, future pension expense and required contributions could increase. A 100 basis point change in the expected long-term rate of return on plan assets would have changed fiscal 2002 pension expense by $88,000.
ITEM 7A.
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.
The Company's interest income is most sensitive to changes in the general levels of U.S. interest rates. Changes in U.S. interest rates affect the interest earned on the Company's cash and cash equivalents. 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's term loan, which matured on September 30, 2002, had a variable rate but was effectively hedged by the Swap, whose notional amount matched the principal balance of the variable rate debt it hedged.
The Company manufactures its products in the United States and Mexico and sells its products in those markets as well as Europe, South America and Asia. As a result, the Company's operating results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which the Company distributes its products. Most of the Company's sales are denominated in U.S. dollars. A portion of the Company's receivables are denominated in Euros and are exposed to changes in exchange rates with the U.S. dollar. When the U.S. dollar strengthens against the Euro, the value of the nonfunctional currency sales decreases. When the U.S. dollar weakens against the Euro, the functional currency amount of sales increases. Overall, the Company is a net receiver of Euros and, as such, benefits from a weaker dollar, but is adversely affected by a stronger dollar relative to the Euro.
The Company's manufacturing operations utilize various metal commodities (principally stainless steel) in the manufacturing process. While key metals purchased from foreign entities are generally denominated in U.S. dollars, fluctuations in the suppliers' local currencies may impact pricing. The Company is unable to quantify the effects of such fluctuations, however, it does enter into purchase commitments for certain key metals that generally do not exceed twelve months which tend to minimize short-term currency fluctuations. The Company's financial results, however, could be significantly affected by fluctuations in metals pricing.
The following is a tabular presentation of quantitative market risks at December 31, 2002:
Principal (Notional) Amount by Expected Maturity ----------------------------------------------------------------------- Fair There- Value (Dollars in Thousands) 2003 2004 2005 2006 2007 after Total 12/31/02 ---------------------------------------------------------------------------------------------------------------------------------
Assets
Available-for-sale securities $25,066 $ 0 $ 0 $ 0 $ 0 $ 0 $25,066 $25,066 Trading securities $ 827 $ 0 $ 0 $ 0 $ 0 $ 0 $ 827 $ 827 Notes receivable (1) $ 65 $ 70 $ 59 $ 2,802 $ 2 $ 61 $ 3,059 $ 7,724 Average interest rate 11.4% 11.9% 12.9% 12.2% 12.0% 14.8%
Liabilities
Long-term debt, including current portion Fixed rate $ 4,391 $ 5,866 $ 2,338 $ 629 $ 303 $ 3,211 $16,738 $17,036 Average interest rate 7.2% 7.0% 6.9% 7.0% 7.0% 6.8%
Derivative instruments (2) $ 122 $ 0 $ 0 $ 0 $ 0 $ 0 $ 122 $ 122
(1) Expected maturities are net of deferred gains which are recognized under the installment method of accounting. (2) Consisting of put and/or call options.
Recent Accounting Pronouncements --------------------------------
In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS No. 145"). This statement eliminates the requirement to report gains and losses from extinguishment of debt as extraordinary unless they meet the criteria of APB Opinion 30. SFAS No. 145 also requires sale-leaseback accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The changes related to lease accounting are effective for transactions occurring after May 15, 2002 and the changes related to debt extinguishment are effective for fiscal years beginning after May 15, 2002. The impact of adopting the provisions related to lease accounting did not have a material impact on the Company's financial position or results of operations. The impact of adopting the provisions related to debt extinguishment is not expected to have a material impact on the Company's financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146 nullifies Emerging Issues Task Force Issue No. 94-3 and requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. This statement also establishes that fair value is the objective for initial measurement of the liability. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The impact of the adoption of SFAS No. 146 is not expected to have a material impact on the Company's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123" ("SFAS No. 148"). SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25 and related interpretations as provided for under SFAS No. 148. Accordingly, compensation expense is only recognized when the market value of the Company's stock at the date of grant exceeds the amount an employee must pay to acquire the stock. The Company has adopted the annual disclosure provisions of SFAS No. 148 in its financial reports for the year ended December 31, 2002 and will adopt the interim disclosure provisions for its financial reports for the quarter ending March 31, 2003. The adoption of SFAS No. 148 has not had and is not expected to have a material impact on the Company's financial position or results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with guarantees issued. The recognition provisions of FIN 45 are effective for any guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of the disclosure requirements of FIN 45 did not have a
material impact on the Company's financial position or results of operations. The Company is currently evaluating the effects of the recognition provision of FIN 45, but does not expect the adoption to have a material impact on the Company's financial position or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46 "Consolidation of Variable Interest Entities" ("FIN 46"). In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. A variable interest entity often holds financial assets, including loans or receivables, real estate or other property. A variable interest entity may be essentially passive or it may engage in activities on behalf of another company. Until now, a company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46 changes that by requiring a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. FIN 46's consolidation requirements apply immediately to variable interest entities created or acquired after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company adopted FIN 46 effective January 31, 2003. The adoption of FIN 46 did not have a material impact on the Company's consolidated financial condition or results of operations taken as a whole.
FORWARD-LOOKING STATEMENTS --------------------------
Certain statements in this Report on Form 10-K and other statements made by the Company or its representatives that are not strictly historical facts are "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995 that should be considered as subject to the many risks and uncertainties that exist in the Company's operations and business environment. The forward-looking statements are based on current expectations and involve a number of known and unknown risks and uncertainties that could cause the actual results, performance and/or achievements of the Company to differ materially from any future results, performance or achievements, expressed or implied, by the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, and that in light of the significant uncertainties inherent in forward-looking statements; the inclusion of such statements should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved. The Company also assumes no obligation to publicly update or revise its forward-looking statements or to advise of changes in the assumptions and factors on which they are based. The following are some of the risks that could cause actual results to differ significantly from those expressed or implied by such statements:
A SLOWING ECONOMY AND CONTINUED REDUCTION IN ENGINEERED PRODUCTS SPENDING MAY NEGATIVELY AFFECT OUR REVENUES AND PROFITABILITY.
If the economy continues to slow, some of our current and prospective customers may decrease spending on engineered products and accordingly may postpone, reduce or even forego the purchase of our products. If forecasted orders are not received, we may have large inventories of slow moving or unusable parts. This could result in an adverse effect on our business, results of operations, liquidity and financial position.
OUR MARKETS ARE HIGHLY COMPETITIVE.
The markets for our engineered products are highly competitive. We cannot assure that we will be able to successfully compete or that our competitors will not develop new technologies and products that are more commercially effective than our own. Some of our competitors have financial, technical, marketing, sales and distribution resources greater than ours.
RELIANCE ON SIGNIFICANT CUSTOMERS.
The Company sells its engineered products to many customers throughout the world. Historically a small number of customers have accounted for significant portions of these sales. The loss of one or more of these significant customers could adversely affect the Company's results of operations.
PROTECTION OF OUR INTELLECTUAL PROPERTY IS LIMITED; WE ARE SUBJECT TO THE RISK OF THIRD PARTY CLAIMS OF INFRINGEMENT.
Our engineering business relies in large part upon our proprietary scientific and engineering "know-how" and production techniques. Historically, patents have not been an important part of our protection of our intellectual property rights. We rely upon the laws of unfair competition, restrictions in licensing agreements and confidentiality agreements to protect our intellectual property. We limit access to and distribution of our proprietary information.
Our ability to compete successfully and achieve future revenue growth will depend, in part, on our ability to protect our proprietary technology and operate without infringing upon the rights of others.
OUR OPERATIONS ARE SUBJECT TO ENVIRONMENTAL REGULATION AND ENVIRONMENTAL PROBLEMS WHICH ARE POSSIBLE AND CAN BE COSTLY.
Our engineered products segment is subject to a variety of local, state and federal governmental regulations relating to the storage, discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous substances used to manufacture our products. We believe that we are currently in compliance in all material respects with such regulations and that we have obtained all necessary environmental permits to conduct our business. Nevertheless, the failure to comply with current or future regulations could result in the imposition of fines, suspension of production, alteration of our manufacturing processes or cessation of operations.
Federal, state and local laws and regulations relating to the protection of the environment require a current or previous owner or operator of real estate to investigate and clean up hazardous or toxic substances at such property. The Company has undertaken the completion of environmental studies and/or remedial action at Metex' two New Jersey facilities (see "Environmental Regulations" in Item 1 of Part I and Note 19, "Commitments and Contingencies" of Notes to Consolidated Financial Statements).
OUR PERFORMANCE IS SUBJECT TO RISKS ASSOCIATED WITH THE REAL ESTATE INDUSTRY.
Although the Company's leases are generally long-term and may be below market, real property investments are subject to varying degrees of risk and are relatively illiquid. Several factors may adversely affect the economic performance and value of our properties. These factors include changes in the national, regional and local economic climate, the attractiveness of our properties to tenants, competition from other available property owners and changes in market rental rates. Our performance also depends on the financial condition of our tenants and our ability to collect rent from tenants and to pay for adequate maintenance, insurance and other operating costs, including real estate taxes, which could increase over time. Also, the expenses of owning and operating a property are not necessarily reduced when circumstances such as market factors and competition cause a reduction in income from the property.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary information filed as part of this Item 8 are listed under Item 15, "Exhibits, Financial Statements and Schedules and Reports on Form 8-K" and are contained in this Form 10-K, beginning on page 32.
ITEM 9.
ITEM 9. CHANGES IN THE COMPANY'S CERTIFYING ACCOUNTANT
The information required herein has been previously reported in the Company's report on Form 10-K for the fiscal year ended December 31, 2001.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
This information will be contained in the Proxy Statement of the Company for the 2003 Annual Meeting of Stockholders under the caption "Election of Directors" and is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
This information will be contained in the Proxy Statement of the Company for the 2003 Annual Meeting of Stockholders under the caption "Executive Compensation" and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information will be contained in the Proxy Statement of the Company for the 2003 Annual Meeting of Stockholders under the caption "Security Ownership" and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information will be contained in the Proxy Statement of the Company for the 2003 Annual Meeting of Stockholders under the caption "Certain Relationships and Related Transactions" and is incorporated herein by reference. Also see Note 13, "Transactions with Related Parties," of Notes to Consolidated Financial Statements, contained elsewhere in this report.
ITEM 14.
ITEM 14. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic reports. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) CONSOLIDATED FINANCIAL STATEMENTS. The following Consolidated Financial Statements and Consolidated Financial Statement Schedules of the Company are included in this Form 10-K at the pages indicated:
Index to Consolidated Financial Statements ------------------------------------------ Page ----
Report of Independent Certified Public Accountants - Grant Thornton LLP 32 Report of Independent Auditors - Ernst & Young LLP 33 Consolidated Balance Sheets as of December 31, 2002 and 2001 34 Consolidated Statements of Income for the Years Ended December 31, 2002, 2001, and 2000 35 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2002, 2001, and 2000 36 Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001, and 2000 37-38 Notes to Consolidated Financial Statements 39-63
(2) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Schedule II -- Allowance for Doubtful Accounts 64 Schedule III -- Real Property and Accumulated Depreciation 65 Schedule IV -- Mortgage Loans on Real Estate 66
(3) SUPPLEMENTARY DATA
Quarterly Financial Data (Unaudited) 67
Schedules not listed above are omitted as not applicable or the information is presented in the financial statements or related notes.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the last quarter of fiscal 2002.
(c) Exhibits
3.1. Amended and restated Certificate of Incorporation of the Company (incorporated by reference to exhibit 3.1 filed with the Company's report on Form 10-K for the fiscal year ended December 31, 1993).
3.2. By-laws of the Company (incorporated by reference to exhibit 3 filed with the Company's report on Form 10-K for the fiscal year ended December 31, 1980).
10.1. Incentive and Non-Qualified Stock Option Plan of the Company, as amended (incorporated by reference to exhibit 10.1 filed with the Company's report on Form 10-K for the fiscal year ended December 31, 2000).
10.2. Additional amendment to Incentive and Non-Qualified Stock Option Plan of the Company (incorporated by reference to exhibit 4.2 filed with the Company's report on Form S-8 dated August 23, 2002).
10.3. 1988 Joint Incentive and Non-Qualified Stock Option Plan, as amended (incorporated by reference to exhibit 10.2 filed with the Company's report on Form 10-K for the fiscal year ended December 31, 1998).
10.4. Employment Agreement dated as of January 1, 1990 by and between the Company and A. F. Petrocelli (incorporated by reference to exhibit 10.9 filed with the Company's report on Form 10-K for the fiscal year ended December 31, 1989).
10.5. Amendment dated as of December 3, 1990 to Employment Agreement dated as of January 1, 1990, by and between the Company and A. F. Petrocelli (incorporated by reference to exhibit 10.10 filed with the Company's report on Form 10-K for the fiscal year ended December 31, 1990).
10.6. Amendment dated as of June 8, 1993 to Employment Agreement dated as of January 1, 1990 by and between the Company and A. F. Petrocelli (incorporated by reference to exhibit 10.5 filed with the Company's report on Form 10-K for the fiscal year ended December 31, 1993).
*10.7 Revolving Credit Agreement dated as of December 10, 2002, with the financial parties thereto.
*21. Subsidiaries of the Company.
*23a. Auditors' consent to the incorporation by reference in the Company's Registration Statements on Form S-8 as of and for the two years ended December 31, 2002 from Grant Thornton LLP of the Report of Independent Certified Public Accountants included herein.
*23b. Auditors' consent to the incorporation by reference in the Company's Registration Statements on Form S-8 for the year ended December 31, 2000 from Ernst & Young LLP of the Report of Independent Auditors included herein.
*99.1. Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*99.2. Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
-----------------
* Filed herewith
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 27, 2003 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 and in the capacities and on the date indicated.
Dated: March 27, 2003 By: /s/ A. F. Petrocelli ----------------- ---------------------------- A. F. Petrocelli Chairman, President and Chief Executive Officer
Dated: March 27, 2003 By: /s/ Howard M. Lorber ----------------- ----------------------------- Howard M. Lorber Director
Dated: March 27, 2003 By: /s/ Robert M. Mann ----------------- ----------------------------- Robert M. Mann Director
Dated: March 27, 2003 By: /s/ Anthony J. Miceli ----------------- ----------------------------- Anthony J. Miceli Chief Financial Officer, Chief Accountant, Secretary and Director
Dated: March 27, 2003 By: /s/ Arnold S. Penner ----------------- ----------------------------- Arnold S. Penner Director
CERTIFICATION PURSUANT TO SECURITIES EXCHANGE ACT RULE 13A-14
I, A. F. Petrocelli, certify that:
1. I have reviewed this annual report on Form 10-K of United Capital Corp.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors:
a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 27, 2003 /s/ A. F. Petrocelli -------------------------------------- A. F. Petrocelli Chairman, President and Chief Executive Officer
CERTIFICATION PURSUANT TO SECURITIES EXCHANGE ACT RULE 13A-14
I, Anthony J. Miceli, certify that:
1. I have reviewed this annual report on Form 10-K of United Capital Corp.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors:
a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 27, 2003 /s/ Anthony J. Miceli ---------------------------------------- Anthony J. Miceli Chief Financial Officer
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of United Capital Corp.
We have audited the accompanying consolidated balance sheets of United Capital Corp. and Subsidiaries (the "Company") as of December 31, 2002 and 2001, and the related consolidated statements of income, stockholders' equity and cash flows for each of the two years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of United Capital Corp. and Subsidiaries as of December 31, 2002 and 2001, and the consolidated results of their operations and their consolidated cash flows for each of the two years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.
We have also audited the consolidated financial statement schedules for each of the two years in the period ended December 31, 2002, 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 set forth therein.
As described in Note 2 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," on January 1, 2002.
\s\ GRANT THORNTON LLP ------------------------ GRANT THORNTON LLP
Melville, New York February 7, 2003
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of United Capital Corp.:
We have audited the accompanying consolidated statements of income, stockholders' equity and cash flows of United Capital Corp. and subsidiaries (the "Company") for the year ended December 31, 2000. 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 auditing standards generally accepted in the 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 results of operations, stockholders' equity and cash flows of United Capital Corp. and subsidiaries for the year ended December 31, 2000, in conformity with accounting principles generally accepted in the United States.
\s\ ERNST & YOUNG LLP --------------------------- ERNST & YOUNG LLP
New York, New York February 14, 2001, except Notes 2, 12, 14 and 17, as to which the date is March 14, 2003
UNITED CAPITAL CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2002 AND 2001 (In Thousands, Except Per Share Data)
2002 2001 -------- ----------- ASSETS
Current assets: Cash and cash equivalents $ 48,893 $ 68,170 Marketable securities 25,893 28,633 Notes and accounts receivable, net 5,715 6,345 Inventories 3,677 4,953 Prepaid expenses and other current assets 1,477 871 Deferred income taxes 207 0 Current assets of discontinued operations 73 39 -------- --------
Total current assets 85,935 109,011 -------- --------
Property, plant and equipment, net 3,569 4,525 Real property held for rental, net 48,470 52,291 Investments in joint ventures 31,389 8,364 Noncurrent notes receivable 2,994 66 Other assets 3,707 3,129 Noncurrent assets of discontinued operations 483 579 -------- -------- TOTAL ASSETS $176,547 $177,965 ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities: Current maturities of long-term debt $ 4,391 $ 5,047 Borrowings under credit facilities 0 525 Accounts payable and accrued liabilities 9,270 17,886 Income taxes payable 5,260 7,585 Deferred income taxes 0 1,481 Current liabilities of discontinued operations 24 51 -------- -------- Total current liabilities 18,945 32,575 -------- --------
Long-term debt 12,347 16,738 Other long-term liabilities 31,016 30,966 Deferred income taxes 2,605 1,345 -------- -------- TOTAL LIABILITIES 64,913 81,624 -------- --------
Commitments and contingencies
Stockholders' equity: Common stock, $.10 par value, authorized 7,500 shares; issued and outstanding 4,519 and 4,641 shares, respectively 452 464 Retained earnings 110,096 90,000 Accumulated other comprehensive income, net of tax 1,086 5,877 -------- -------- TOTAL STOCKHOLDERS' EQUITY 111,634 96,341 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $176,547 $177,965 ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
UNITED CAPITAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000 (In Thousands, Except Per Share Data)
2002 2001 2000 -------- -------- ---------
REVENUES: Net sales $ 33,513 $ 33,792 $ 34,095 Rental revenues from real estate operations 24,498 26,386 26,957 -------- -------- -------- Total revenues 58,011 60,178 61,052 -------- -------- --------
COSTS AND EXPENSES: Cost of sales 24,500 25,083 24,738 Real estate operations: Mortgage interest expense 1,390 1,796 2,232 Depreciation expense 3,278 4,006 4,805 Other operating expenses 7,419 7,765 6,794 General and administrative expenses 6,246 5,310 5,295 Selling expenses 3,504 3,743 3,954 -------- -------- -------- Total costs and expenses 46,337 47,703 47,818 -------- -------- --------
Operating income 11,674 12,475 13,234 -------- -------- --------
OTHER INCOME (EXPENSE): Interest and dividend income 1,934 1,828 2,230 Interest expense (532) (436) (564) Other income and expense, net 16,021 16,970 9,797 -------- -------- -------- Total other income 17,423 18,362 11,463 -------- -------- --------
Income from continuing operations before income taxes 29,097 30,837 24,697
Provision for income taxes 6,604 12,547 7,032 -------- -------- -------- INCOME FROM CONTINUING OPERATIONS 22,493 18,290 17,665 -------- -------- --------
DISCONTINUED OPERATIONS: Income from discontinued operations, net of tax provision of $273, $454 and $408, respectively 410 682 613 Gain on disposal of discontinued operations, net of tax provision of $316 474 0 0 -------- -------- -------- INCOME FROM DISCONTINUED OPERATIONS 884 682 613 -------- -------- --------
NET INCOME $ 23,377 $ 18,972 $ 18,278 ======== ======== ========
BASIC EARNINGS PER SHARE: Income from continuing operations $ 4.91 $ 3.90 $ 3.73 Income from discontinued operations .19 .15 .13 -------- -------- -------- NET INCOME PER SHARE $ 5.10 $ 4.05 $ 3.86 ======== ======== ========
DILUTED EARNINGS PER SHARE: Income from continuing operations $ 4.50 $ 3.72 $ 3.70 Income from discontinued operations .18 .14 .13 -------- -------- -------- NET INCOME PER SHARE ASSUMING DILUTION $ 4.68 $ 3.86 $ 3.83 ======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
UNITED CAPITAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000 (In Thousands)
Accumulated Other Common Stock Issued Comprehensive Total --------------------- Retained Income, Stockholders' Comprehensive Shares Amount Earnings Net of Tax Equity Income --------- ------- --------- ------------- ------------- -------------
BALANCE - JANUARY 1, 2000 4,736 $ 474 $ 54,671 $ 3,911 $ 59,056
Purchase and retirement of common shares (16) (2) (232) 0 (234) Net income 0 0 18,278 0 18,278 $ 18,278 Other comprehensive income, net of tax: Change in net unrealized gain on available-for-sale securities, net of tax provision of $10 0 0 0 19 19 19 --------- Comprehensive income $ 18,297 --------- --------- --------- --------- --------- =========
BALANCE - DECEMBER 31, 2000 4,720 472 72,717 3,930 77,119 --------- --------- --------- --------- ---------
Purchase and retirement of common shares (84) (8) (1,761) 0 (1,769) Proceeds from the exercise of stock options 5 0 72 0 72 Net income 0 0 18,972 0 18,972 $ 18,972 Other comprehensive income, net of tax: Change in net unrealized gain on available-for-sale securities, net of tax provision of $2,909 0 0 0 5,404 5,404 5,404 Reclassification adjustment for net gains realized in net income, net of tax provision of $1,862 0 0 0 (3,457) (3,457) (3,457) --------- Comprehensive income $ 20,919 --------- --------- --------- --------- --------- =========
BALANCE - DECEMBER 31, 2001 4,641 464 90,000 5,877 96,341 --------- --------- --------- --------- ---------
Purchase and retirement of common shares (148) (15) (3,755) 0 (3,770) Proceeds from the exercise of stock options 26 3 474 0 477 Net income 0 0 23,377 0 23,377 $ 23,377 Other comprehensive income, net of tax: Change in net unrealized gain on available-for-sale securities, net of tax benefit of $2,579 0 0 0 (4,791) (4,791) (4,791) --------- Comprehensive income $ 18,586 --------- --------- --------- --------- --------- =========
BALANCE - DECEMBER 31, 2002 4,519 $ 452 $ 110,096 $ 1,086 $ 111,634 ========= ========= ========= ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
UNITED CAPITAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000 (In Thousands)
2002 2001 2000 -------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 23,377 $ 18,972 $ 18,278 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,533 5,436 6,140 Net gain on sale of available-for-sale securities (4,038) (4,911) (4,513) Net gain on sale of trading securities 0 (461) 0 Net gain on sale of real estate assets (5,708) (10,995) (5,269) Gain from equity investments (673) (868) (1,227) Gain on disposal of discontinued operations, net of tax (474) 0 0 Net realized and unrealized gain on derivative instruments (6,283) (482) 0 Purchase of trading securities (791) (54) (1,772) Proceeds from sale of trading securities 0 2,287 0 Unrealized (gain) loss on trading securities (35) 0 7 Changes in operating assets and liabilities (A) 1,652 4,139 2,819 -------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 11,560 13,063 14,463 -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of available-for-sale securities (11,477) (4,488) (25,024) Proceeds from sale of available-for-sale securities 11,701 25,259 15,372 Proceeds from sale of real estate assets 7,258 12,858 9,890 Proceeds from sale of derivative instruments 5,093 10,939 0 Purchase of derivative instruments (8,843) 0 0 Purchase of note receivable (2,955) 0 (3,500) Acquisition of property, plant and equipment (227) (1,327) (798) Principal payments on note receivable 22 3,500 0 Acquisition of/additions to real estate assets (192) (1,774) (767) Investment in joint venture (23,128) 0 0 Distributions from equity investments, net 776 776 767 -------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (21,972) 45,743 (4,060) -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on mortgage commitments, notes and loans (5,047) (5,373) (5,910) Net repayments under credit facilities (525) (700) (700) Purchase and retirement of common shares (3,770) (1,769) (234) Proceeds from the exercise of stock options 477 72 0 -------- -------- --------
NET CASH USED IN FINANCING ACTIVITIES (8,865) (7,770) (6,844) -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (19,277) 51,036 3,559
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 68,170 17,134 13,575 -------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 48,893 $ 68,170 $ 17,134 ======== ======== ========
UNITED CAPITAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000 (CONTINUED) (In Thousands)
2002 2001 2000 ------- ------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for:
Interest $ 1,652 $ 2,265 $ 2,726 ======= ======= =======
Taxes $ 7,349 $ 5,722 $ 4,114 ======= ======= =======
NON-CASH INVESTING AND FINANCING ACTIVITIES: Issuance of note receivable in connection with sale of real property, net of deferred gain $ 46 $ 0 $ 0 ======= ======= =======
(A) Changes in operating assets and liabilities for the years ended December 31, 2002, 2001 and 2000 are as follows:
2002 2001 2000 ---- ---- ----
Notes and accounts receivable, net $ 671 ($ 842) $ 12 Inventories 1,276 (340) (406) Prepaid expenses and other current assets (606) (219) (398) Deferred income taxes 2,161 (2,182) 613 Noncurrent notes receivable 9 177 27 Other assets (650) (118) (475) Accounts payable and accrued liabilities 1,417 (1,710) (640) Income taxes payable (2,641) 1,492 1,093 Other long-term liabilities 50 7,825 2,864 Discontinued operations-noncash charges and working capital changes (35) 56 129 ------- ------- -------
Total $ 1,652 $ 4,139 $ 2,819 ======= ======= =======
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
UNITED CAPITAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001, AND 2000 (In Thousands, Except Share And Per Share Data)
(1) Nature of Business and Summary of Significant Accounting Policies: -----------------------------------------------------------------
Nature of Business: -------------------
United Capital Corp. (the "Company") and its subsidiaries are engaged in the investment and management of real estate and in the manufacture and sale of engineered products. The Company also invests excess available cash in marketable securities and other financial instruments.
Principles of Consolidation: ----------------------------
The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The equity method of accounting is used for investments in 20% to 50% owned joint ventures in which the Company has the ability to exercise significant influence, but not control. These investments are recorded initially at cost and subsequently adjusted for equity in earnings and cash contributions and distributions.
Revenue Recognition and Accounts Receivable - Real Estate Investment -------------------------------------------------------------------- and Management: ---------------
The Company leases substantially all of its properties to tenants under net leases which are accounted for as operating leases. Under this type of lease, the tenant is obligated to pay all operating costs of the property including real estate taxes, insurance and repairs and maintenance. Revenue is recognized as earned and deemed collectible. Gains on sales of real estate assets and equity investments are recorded when the gain recognition criteria under generally accepted accounting principles in the United States of America have been met.
Certain lease agreements provide for additional rent based on a percentage of tenants' sales. These percentage rents are recorded once the required sales levels are achieved.
Income on leveraged leases is recognized by a method which produces a constant rate of return on the outstanding investment in the lease, net of the related deferred tax liability in the years in which the net investment is positive.
Accounts receivable are recorded at the outstanding amounts net of the allowance for doubtful accounts. The Company makes estimates of the uncollectibility of its accounts receivable related to base rents, tenant escalations, expense reimbursements and other revenues. The Company analyzes accounts receivable and historical bad debt levels, customer credit worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. In addition, tenants in bankruptcy are analyzed and estimates are made in connection with the expected recovery of pre-petition and post-petition claims.
Revenue Recognition and Accounts Receivable - Engineered Components: --------------------------------------------------------------------
In general, sales are recorded when products are shipped 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.
Cash and Cash Equivalents: --------------------------
Cash equivalents of $9,061 and $14,773 at December 31, 2002 and 2001, respectively, consist of overnight repurchase agreements and certificates of deposit. The Company considers all highly liquid investments with a maturity, at the purchase date, of three months or less to be cash equivalents.
Marketable Securities: ----------------------
The Company determines the appropriate classification of securities at the time of purchase and reassesses the appropriateness of the classification at each reporting date. At December 31, 2002 and 2001, all marketable securities held by the Company have been classified as either available-for-sale or trading and, as a result, are stated at fair value. Unrealized gains and losses on available-for-sale securities are recorded as a separate component of stockholders' equity. Realized gains and losses on the sale of securities as well as unrealized holding gains and losses on trading securities, as determined on a first-in, first-out basis, are included in the Consolidated Statements of Income.
The Company reviews its investments on a regular basis to evaluate whether or not each security has experienced an other-than-temporary decline in fair value. If it is believed that an other-than-temporary decline exists, the Company will write down the investment to market value and record the related write-down as a loss on investments in the Consolidated Statements of Income.
Notes and Accounts Receivable, Net: -----------------------------------
Notes and accounts receivable, net consist of the following components at December 31:
2002 2001 -------- -------
Trade receivables $ 4,061 $ 5,143 Rental receivables 505 801 Other receivables 1,408 459 Current portion of notes receivable 65 270 ------- ------- Total 6,039 6,673
Less: Allowance for doubtful accounts (324) (328) ------- ------- $ 5,715 $ 6,345 ======= =======
Changes in the Company's allowance for doubtful accounts are as follows:
2002 2001 ------- -------
Beginning balance $ 328 $ 328 Recoveries of accounts previously written off (4) 0 ----- ----- Ending balance $ 324 $ 328 ===== =====
Inventories: ------------
Inventories are stated at the lower of cost or market and include material, labor and manufacturing overhead. The first-in, first-out (FIFO) method is used to determine the cost of inventories.
Inventory consists of the following components at December 31:
2002 2001 ---- ----
Raw materials $1,765 $2,388 Work in process 367 782 Finished goods 1,545 1,783 ------ ------ $3,677 $4,953 ====== ======
Depreciation and Amortization: ------------------------------
Depreciation and amortization are provided on a straight-line basis over the estimated useful lives of the related assets as follows:
Real property held for rental: Buildings and improvements 5 to 39 years Equipment 5 to 7 years
Property, plant and equipment: Buildings and improvements 18 to 39 years Machinery and equipment 3 to 8 years
Intangible assets with definite lives: Patents and other intellectual property 5 to 20 years
Real Estate: ------------
Land, buildings and improvements and equipment are recorded at cost, less accumulated depreciation and amortization. Expenditures for maintenance and repairs are charged to operations as incurred. Significant renovations and replacements, which improve the life of the asset, are capitalized and depreciated over their estimated useful lives.
Assets held for sale are reported at the lower of the carrying amount or fair value less costs to sell and depreciation is discontinued. Property sales or dispositions are recorded when title transfers. Upon disposition, the related costs and accumulated depreciation are removed from the respective accounts. Any gain or loss on sale or disposition is recognized in accordance with accounting principles generally accepted in the United States of America.
Commencing in 2002, the Company considers real property to be held for sale and reported as discontinued operations if management has committed to a plan to sell the asset under usual and customary terms and believes such sale will be completed within one year. In such event, the financial results associated with these assets are reclassified as discontinued operations for all periods presented. In the normal course of business, the Company receives offers for the sale of properties, either solicited or unsolicited. For those offers that are accepted, the prospective buyer usually requires a due diligence period before consummation of the transaction. It is not unusual for matters to arise that result in the withdrawal or rejection of the offer during this process. If circumstances arise that previously were considered unlikely and, as a result, management decides not to sell a property classified as held for sale, the property is reclassified as held for rental. A property that is reclassified is measured and recorded individually at the lower of its carrying amount before being classified as held for sale, adjusted for any depreciation expense that would have been recognized had the property been continuously classified as held for rental or its fair market value at the date of the subsequent decision not to sell.
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 SFAS No. 87, "Employers' Accounting for Pensions" ("SFAS No. 87"), which requires that amounts recognized in financial statements be determined on an actuarial basis. SFAS No. 87 generally reduces the volatility of future income (expense) from changes in pension liability discount rates and the performance of the pension plan's assets.
The most significant element in determining the Company's pension income (expense) in accordance with SFAS No. 87 is the expected return on plan assets. The Company has assumed that the expected long-term rate of return on plan assets will be 8.0% for 2002 as compared to 9.0% for 2001. Based on the Company's existing and forecasted asset allocation and related long-term investment performance results, the Company believes that its assumption of future returns of 8.0% is reasonable. The assumed long-term rate of return on assets is applied to a calculated value of plan assets, which recognizes changes in the fair value of plan assets in a systematic manner. This produces the expected return on plan assets that is included in pension income (expense). The difference between this expected return and the actual return on plan assets is deferred. The net deferral of past asset gains (losses) affects the calculated value of plan assets and, ultimately, future pension income (expense). The plan assets have earned a rate of return less than 8.0% in the last three years. Should this trend continue, future pension expense and required contributions could increase. A 100 basis point change in the expected long-term rate of return on plan assets would have changed fiscal 2002 pension expense by $88.
Research and Development: -------------------------
The Company expenses research, development and product engineering costs as incurred. Approximately $58, $77, and $52 of such costs were incurred by the Company in 2002, 2001 and 2000, respectively.
Shipping and Handling Costs: ----------------------------
Pursuant to EITF 00-10, "Accounting for Shipping and Handling Fees and Costs," the Company includes fees billed to a customer relating to shipping and handling costs in net sales. Shipping and handling costs incurred by the Company are included in cost of sales and selling expenses. For the years ended December 31, 2002, 2001 and 2000, shipping and handling costs included in selling expenses were $293, $316 and $319, respectively.
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 Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123" ("SFAS No. 148"). Under APB No. 25, compensation expense is only recognized when the market value of the underlying stock at the date of grant exceeds the amount an employee must pay to acquire the stock. 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 Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" to stock-based employee compensation.
Year Ended December 31, 2002 2001 2000 --------- ------- ---------- Net income, as reported $23,377 $18,972 $18,278 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (2,068) (1,750) (1,746) ------- ------- ---------- Pro forma net income $21,309 $17,222 $16,532 ======= ======= ==========
Earnings per share: Basic - as reported $ 5.10 $ 4.08 $ 3.86 ======= ======= ========== Basic - pro forma $ 4.65 $ 3.68 $ 3.49 ======= ======= ==========
Diluted - as reported $ 4.68 $ 3.86 $ 3.83 ======= ======= ========== Diluted - pro forma $ 4.41 $ 3.62 $ 3.49 ======= ======= ==========
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 option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
The weighted-average option fair values and the assumptions used to estimate these values are as follows:
Grants Issued During --------------------
2002 2001 2000 ---- ---- ----
Expected life (years) 5 5 5 Risk free interest rate 4.4% 5.0% 6.1% Expected volatility 34.2% 36.9% 35.3% Dividend yield 0.0% 0.0% 0.0% Weighted-average option fair value $ 9.17 $ 9.67 $ 5.40
Derivative Financial Instruments: ---------------------------------
The Company recognizes all derivative financial instruments, such as its short stock sales, put and/or call options and interest rate swap agreements, in the Consolidated Financial Statements at fair value regardless of the purpose or intent for holding the instrument. Changes in the fair value of derivative financial instruments are either recognized periodically in income or in stockholders' equity as a component of accumulated other comprehensive income depending on whether the derivative financial instrument qualifies for hedge accounting, and if so, whether it qualifies as a fair value or cash flow hedge. Generally, changes in the fair value of derivatives accounted for as fair value hedges are recorded in income along with the portions of the changes in the fair values of the hedged items that relate to the hedged risks. Changes in the fair value of derivatives accounted for as cash flow hedges, to the extent they are effective as hedges, are recorded in accumulated other comprehensive income net of deferred taxes. Changes in the fair value of derivatives not qualifying as hedges are reported in income.
In strategies designed to hedge overall market risks and manage its interest rate exposure, the Company may sell common stock short, participate in put and/or call options and enter into interest rate swap agreements.
Management maintains a diversified portfolio of cash equivalents and investments in a variety of securities, primarily U.S. investments in both common and preferred equity issues and participates on a limited basis in transactions involving derivative financial instruments, including short stock sales and put and/or call options. At December 31, 2002 and 2001, the fair value of such derivatives was ($122) and ($10,155), respectively, which is recorded as a component of accounts payable and accrued liabilities in the Consolidated Balance Sheets. These instruments do not qualify for hedge accounting and therefore changes in the derivatives fair value are recognized in earnings. The Company recognized $6,283 and $482 in net realized and unrealized gains from derivative instruments for the years ended December 31, 2002 and 2001, respectively, which are included in other income and expense, net in the Consolidated Statements of Income. No such gains were recognized during 2000.
As of September 30, 2002, the Company's interest rate swap agreement (the "Swap") expired together with the satisfaction of the underlying term loan. The Swap modified the interest characteristics of a particular term loan by effectively converting its floating rate to a fixed rate, thus reducing the impact of rate changes on interest expense. The Swap was designated with the principal balance and term of the term loan and qualified as an effective hedge under Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." Since the Swap was classified as a cash flow hedge, the fair value of ($11) at December 31, 2001 was recorded as a component of accounts payable and accrued liabilities in the Consolidated Balance Sheet and accumulated other comprehensive income was reduced by exactly the same amount, net of tax, with no impact on earnings. The amount paid or received on the Swap was accrued and recognized as an adjustment of interest expense over the term of the agreement.
Prior Year Financial Statements: --------------------------------
Certain amounts have been reclassified in the December 31, 2001 and 2000 Consolidated Financial Statements and Notes thereto to present them on a basis consistent with the current year.
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, 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.
Recent Accounting Pronouncements: ---------------------------------
In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS No. 145"). This statement eliminates the requirement to report gains and losses from extinguishment of debt as extraordinary unless they meet the criteria of APB Opinion 30. SFAS No. 145 also requires sale-leaseback accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The changes related to lease accounting are effective for transactions occurring after May 15, 2002 and the changes related to debt extinguishment are effective for fiscal years beginning after May 15, 2002. The impact of adopting the provisions related to lease accounting did not have a material impact on the Company's financial position or results of operations. The impact of adopting the provisions related to debt extinguishment is not expected to have a material impact on the Company's financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146 nullifies Emerging Issues Task Force Issue No. 94-3 and requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. This statement also establishes that fair value is the objective for initial measurement of the liability. SFAS No. 146 is effective for exit or
disposal activities that are initiated after December 31, 2002. The impact of the adoption of SFAS No. 146 is not expected to have a material impact on the Company's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123" ("SFAS No. 148"). SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of that Statement to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25 and related interpretations as provided for under SFAS No. 148. Accordingly, compensation expense is only recognized when the market value of the Company's stock at the date of grant exceeds the amount an employee must pay to acquire the stock. The Company has adopted the annual disclosure provisions of SFAS No. 148 in its financial reports for the year ended December 31, 2002 and will adopt the interim disclosure provisions for its financial reports for the quarter ending March 31, 2003. The adoption of SFAS No. 148 has not had and is not expected to have a material impact on the Company's financial position or results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with guarantees issued. The recognition provisions of FIN 45 are effective for any guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of the disclosure requirements of FIN 45 did not have a material impact on the Company's financial position or results of operations. The Company is currently evaluating the effects of the recognition provision of FIN 45, but does not expect the adoption to have a material impact on the Company's financial position or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46 "Consolidation of Variable Interest Entities" ("FIN 46"). In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. A variable interest entity often holds financial assets, including loans or receivables, real estate or other property. A variable interest entity may be essentially passive or it may engage in activities on behalf of another company. Until now, a company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46 changes that by requiring a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. FIN 46's consolidation requirements apply immediately to variable interest entities created or acquired after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003.
Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company adopted FIN 46 effective January 31, 2003. The adoption of FIN 46 did not have a material impact on the Company's consolidated financial condition or results of operations taken as a whole.
(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 at December 31:
2002 2001 ---- ----
Land $ 18,973 $ 19,634 Buildings 100,697 101,773 --------- ---------
119,670 121,407
Less: Accumulated depreciation (71,200) (69,116) ---------- ---------
$ 48,470 $ 52,291 ========= =========
As of December 31, 2002, total minimum future rentals to be received under noncancelable leases for each of the next five years and thereafter are as follows:
Year Ended December 31, 2003 $14,641 2004 12,549 2005 10,981 2006 6,893 2007 5,303 Thereafter 50,898 -------- Total minimum future rentals $101,265 ========
Minimum future rentals do not include additional rentals that may be received under certain leases which provide for such rentals based upon a percentage of lessees' sales. Percentage rents included in the determination of net income for 2002, 2001, and 2000 were approximately $657, $860, and $527, respectively.
Property sales: ---------------
The Company adopted the provisions of Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), in 2002. SFAS No. 144 requires that the operating results through the date of sale, as well as the gains on sales generated on properties sold or held for sale be reclassified as discontinued operations for all periods presented. As the statement requires implementation on a prospective basis, properties which were identified as held for sale prior to implementation are presented in the Consolidated Financial Statements in a manner consistent with the prior years' presentation.
During 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 is being recognized under the installment method and, accordingly, the carrying value of noncurrent notes receivable has been reduced by the deferred gain. The deferred gain will be recognized as income as payments are received under the mortgage note. For the year ended December 31, 2002, gains of $176 on a net of tax basis have been recognized from this sale.
During 2002, the Company sold two commercial properties from its real estate investment and management segment which had a total net book value of $18. The properties were sold for an aggregate sales price of approximately $514, resulting in gains of $298 on a net of tax basis.
The results of operations for these properties for the years ended December 31, 2002, 2001 and 2000 have been reclassified to discontinued operations in accordance with SFAS No. 144. In addition, the assets and liabilities associated with these properties have been reclassified to discontinued operations in the Consolidated Balance Sheet at December 31, 2001. 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 for the years ended December 31, 2002, 2001 and 2000, respectively, is as follows:
2002 2001 2000 ---- ---- ----
Rental revenues from real estate operations $ 498 $ 1,047 $ 911 Depreciation expense (3) (49) (49) Other operating expenses (101) (84) (43) ------- ------- ------- Income from operations $ 394 $ 914 $ 819 ======= ======= =======
Properties held for sale: ------------------------
As of December 31, 2002, in accordance with the provisions of SFAS No. 144, the Company considered a total of six commercial properties and one shopping center from its real estate and investment management segment to be held for sale and reported as discontinued operations.
In accordance with SFAS No. 144, the results of operations for these properties for the years ended December 31, 2002, 2001, and 2000 have been reclassified to discontinued operations, on a net of tax basis, in the Consolidated Statements of Income. In addition, the assets and liabilities associated with these properties, which primarily consist of real property, net of accumulated depreciation, rents receivable, prepaid or accrued charges, and mortgage obligations, if any, have been reclassified to discontinued operations in the Consolidated Balance Sheets at December 31, 2002 and 2001.
Summarized financial information for properties held for sale and accounted for as discontinued operations for the years ended December 31, 2002, 2001 and 2000, respectively, is as follows:
2002 2001 2000 ---- ---- ----
Rental revenues from real estate operations $ 354 $ 371 $ 369 Depreciation expense (23) (120) (139) Other operating expenses (42) (29) (28) ----- ----- ----- Income from operations $ 289 $ 222 $ 202 ===== ===== =====
(3) Property, Plant, and Equipment: -------------------------------
Property, plant, and equipment is principally used in the Company's manufacturing operations and consists of the following at December 31:
2002 2001 --------- ---------
Land $ 28 $ 28 Buildings and improvements 1,471 1,428 Machinery and equipment 12,104 11,920 -------- --------
13,603 13,376
Less: Accumulated depreciation (10,034) (8,851) -------- --------
$ 3,569 $ 4,525 ======== ========
(4) Marketable Securities: ----------------------
The cost, gross unrealized gains, gross unrealized losses and fair market value for marketable securities by type at December 31, 2002 and 2001 are as follows:
Gross Gross Fair unrealized unrealized market 2002: Cost gains losses value -------------- ---------------- --------------- ---------------
Available-for-sale: Equity securities $23,389 $2,119 ($447) $25,061 Bonds 5 0 0 5 -------------- ---------------- --------------- --------------- 23,394 2,119 (447) 25,066
Trading: Equity securities 792 35 0 827 -------------- ---------------- --------------- ---------------
$24,186 $2,154 ($447) $25,893 ============== ================ =============== ===============
Gross Gross Fair unrealized unrealized market 2001: Cost gains losses value -------------- ---------------- --------------- ---------------
Available-for-sale: Equity securities $18,877 $9,321 $ 0 $28,198 Bonds 705 0 (270) 435 -------------- ---------------- --------------- ---------------
$19,582 $9,321 ($270) $28,633 ============== ================ =============== ===============
Included in marketable securities at December 31, 2002 and 2001 is $20,402 and $27,661, respectively, of common stock in a publicly-traded company for which the Board Chairman and another Director of the Company are directors.
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:
2002 2001 2000 ---- ---- ----
Available-for-sale securities: Proceeds $ 11,701 $ 25,259 $ 15,372 Gross realized gains 5,043 5,462 4,513 Gross realized losses (1,005) (551) 0 Trading securities: Proceeds $ 0 $ 2,287 $ 0 Gross realized gains 0 478 0 Gross realized losses 0 (17) 0
(5) Notes Receivable: -----------------
Notes receivable consist of the following at December 31:
2002 2001 ---- ----
Mortgage note receivable (a) $2,933 $0 Other (b) 126 336 -------- ------- 3,059 336 Less: Current portion included in notes and accounts receivable 65 270 ------- ------- $2,994 $66 ======= ======= (a) In May 2002, the Company purchased a 6.3% interest ("the Participation") in a mortgage loan for $2,955. At the time of the acquisition the mortgage loan had outstanding approximately $47,462 in principal and a 7.9% stated interest rate. The underlying mortgage loan, which had an outstanding balance of approximately $47,113 at December 31, 2002, is scheduled to mature in May 2006.
(b) Included in this amount is a mortgage note receivable of $3,100 from the sale of an office property during 2002. In accordance with accounting principles generally accepted in the United States of America, the gain from the sale of this property is being recognized under the installment method and, accordingly, the carrying value of noncurrent notes receivable has been reduced by the deferred gain of $3,041 at December 31, 2002. The deferred gain will be recognized in income as payments are received under the mortgage note. For the year ended December 31, 2002, gains of $294, before tax, have been recognized from this sale.
(6) Investments in Joint Ventures: ------------------------------
Investments in joint ventures consist of the following at December 31:
2002 2001 ---- ----
Investment in Hotel Venture (a) $23,128 $0 Lease financing (b) 8,261 8,364 -------- ------ $31,389 $8,364 ======== ======
(a) During December 2002, the Company purchased a 50% interest in a joint venture (the "Hotel Venture") together with a publicly-traded company for which the Company's Board Chairman and another Director of the Company are directors (see Note 13). The Hotel Venture owns and operates a hotel in New Jersey. The equity method of accounting is used to account for this investment since the Company has a 50% interest and the ability to exercise significant influence, but not control. Under the operating agreement all significant capital decisions are made jointly and operating profits are divided evenly. The investment is initially recorded at cost and subsequently adjusted for equity in earnings and cash contributions and distributions.
Summarized financial information of the Hotel Venture at December 31, 2002 is as follows:
Property, plant and equipment, net $46,397 ======= Current assets $347 ======= Current liabilities $500 =======
(b) Lease financing consists of a 50.0% interest in a limited partnership whose principal assets are two distribution centers leased to Kmart Corporation, which are accounted for as leveraged leases (see Notes 13 and 19). The following represents the components of the net investment in the leveraged leases at December 31:
2002 2001 ---- ----
Rents receivable $77,553 $81,583 Residual values 10,000 10,000 Non recourse debt service (61,607) (64,859) Unearned income (17,685) (18,360) ---------- --------- 8,261 8,364
Less: Deferred taxes arising from leveraged leases 6,860 6,254 --------- -------- $1,401 $2,110 ========= ========
The Company's share of income arising from this investment was $673, $868, and $1,227 in 2002, 2001, and 2000, respectively, and is included in rental income in the Consolidated Statements of Income.
(7) Accounts Payable and Accrued Liabilities: -----------------------------------------
Accounts payable and accrued liabilities consist of the following at December 31:
2002 2001 ------- -------- Accounts payable $ 3,543 $ 3,085 Fair market value of derivatives 122 10,155 Accrued wages and benefits 1,985 1,300 Liabilities associated with discontinued manufacturing operations 1,184 1,434 Other accrued expenses 2,436 1,912 ------- ------- $ 9,270 $17,886 ======= =======
(8) Long-term Debt: ---------------
Long-term debt consists of the following at December 31:
2002 2001 ---- ----
Mortgages on real property (a) $16,738 $21,744 Other 0 41 ------- ------- 16,738 21,785 Less: Current maturities 4,391 5,047 ------- -------
$12,347 $16,738 ======= =======
(a) First mortgages bearing interest at rates ranging from 4.0% to 10.3% per annum are collateralized by the related real property. The related real property has a net carrying value of $24,283 at December 31, 2002 and is included in real property held for rental in the Consolidated Balance Sheets. Such amounts are scheduled to mature at various dates from April 2003 through October 2015.
The approximate annual maturities of these obligations at December 31, 2002 are as follows:
2003 $4,391 2004 5,866 2005 2,338 2006 629 2007 303 Thereafter 3,211 ------- Total minimum payments $16,738 =======
(9) Credit Facilities: ------------------
Effective December 10, 2002, the Company entered into a credit agreement with five banks which provides for an $80,000 revolving credit facility ("Revolver"). The Revolver may be increased under certain circumstances and expires on December 31, 2005.
Under the terms of the Revolver, the Company will be provided with eligibility based upon the sum of (i) 60.0% of the aggregate annualized and normalized year-to-date net operating income of unencumbered eligible properties, as defined, capitalized at 10.0%, (ii) 60.0% of the aggregate annualized and normalized year-to-date net operating income of unencumbered eligible hotel properties, as defined, capitalized at 10.5%, not to exceed the lesser of $10,000 or 10% of
eligibility, (iii) the lesser of $20,000 or 50.0% of the aggregate annualized and normalized year-to-date net operating income of encumbered eligible properties, as defined, capitalized at 12.0%, (iv) the sum of 75.0% of eligible accounts receivable, 50.0% of 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, 2002, eligibility under the Revolver was $80,000, based upon the above terms and there were no amounts outstanding. The credit agreement contains certain financial and restrictive covenants, including minimum consolidated equity, interest coverage, debt service coverage and capital expenditures (other than for real estate) and limitations on indebtedness. The Company was in compliance with all covenants at December 31, 2002. The credit agreement also contains provisions which allow the banks to perfect a security interest in certain operating and real estate assets in the event of a default, as defined in the credit agreement. Borrowings under the Revolver, at the Company's option, bear interest at the bank's prime lending rate or at the London Interbank Offered Rate ("LIBOR") (1.38% at December 31, 2002) plus 2.0% for non cash collateralized borrowings and 1.0% for cash collateralized borrowings.
Prior to obtaining the Revolver, the Company maintained a credit agreement with three banks which provided for both a $60,000 revolving credit facility and a $1,925 term loan. This credit agreement was terminated effective December 10, 2002 in conjunction with the execution of the Revolver. The term loan matured and was fully satisfied as of September 30, 2002. At December 31, 2001, there were no amounts outstanding under the revolving credit facility and $525 outstanding on the term loan.
(10) Fair Value of Financial Instruments: ------------------------------------
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
The carrying amount reported in the Consolidated Balance Sheets for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to the short maturity of such items.
The fair value of notes receivable are estimated using discounted cash flow analyses, with interest rates comparable on loans with similar terms and borrowers of similar credit quality. The fair value of notes receivable at December 31, 2002 and 2001 was approximately $7,724 and $350, respectively, while the carrying value was $3,059 and $336 for the same periods. The carrying value of notes receivable at December 31, 2002 is net of a deferred gain on a property sale of $3,041 which is being recognized under the installment method of accounting.
At December 31, 2002 and 2001, all marketable securities held by the Company have been classified as either available-for-sale or trading and, as a result, are carried at fair value based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
Carrying amounts of borrowings under the credit facilities approximated their fair value. 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, 2002 and 2001 was approximately $17,036
and $20,372, respectively, while the carrying value was $16,738 and $21,785 for the same periods.
The derivative instruments held by the Company, representing short stock sales and put and/or call options, are carried at fair value based on quoted market prices or dealer quotes. At December 31, 2002 and 2001, the fair value of these derivatives was ($122) and ($10,155), respectively.
The fair value of the Swap (used for hedging purposes) was the estimated amount that the bank would receive or pay to terminate the Swap at the reporting date, taking into account then current interest rates and the current credit worthiness of the Swap counterparties. As of September 30, 2002, the Swap expired together with the satisfaction of the underlying term loan. At December 31, 2001 the fair value of the Swap was estimated at ($11).
(11) Stockholders' Equity: ---------------------
Previous purchases of the Company's common stock have reduced the Company's additional paid-in capital to zero and accordingly current year purchases in excess of par value have reduced retained earnings. During 2002, the Company purchased and retired 148,257 shares of the Company's common stock for $3,770. Future repurchases of the Company's common stock will also reduce retained earnings by amounts in excess of the par value. Repurchases of the Company's common stock will be made from time to time in the open market at prevailing market prices and may be made in privately negotiated transactions, subject to available resources.
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 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 1,825,000 under the Incentive Plan and 1,325,000 under the Joint Plan.
At December 31, 2002, there were 1,181,380 and 1,287,354 options outstanding under the Joint Plan and Incentive Plan, respectively. At December 31, 2001, 1,183,880 and 866,001 options were outstanding under the Joint Plan and Incentive Plan, respectively.
A summary of the Company's stock options as of December 31, 2002, 2001, and 2000, and changes during the years then ended are summarized below:
Weighted- Average Shares Exercise Price --------- ---------
Outstanding at January 1, 2000 1,254,381 $ 17.69
Granted 371,000 $ 13.06 Cancelled/Forfeited (10,000) $ 18.57 ---------
Outstanding at December 31, 2000 1,615,381 $ 16.62
Granted 468,000 $ 23.85 Exercised (5,000) $ 14.45 Cancelled/Forfeited (28,500) $ 16.66 ---------
Outstanding at December 31, 2001 2,049,881 $ 18.28
Granted 454,000 $ 24.40 Exercised (26,647) $ 17.88 Cancelled/Forfeited (8,500) $ 23.01 ---------
Outstanding at December 31, 2002 2,468,734 $ 19.39 =========
The following table summarizes information about options outstanding and exercisable at December 31, 2002:
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 ----------------- ----------- ------------ ----------- ------------ ---------
$7.25 - $11.00 79,000 1.5 years $10.05 79,000 $10.05 $13.06 - $18.75 1,055,734 6.3 years $14.55 934,064 $14.75 $22.88 - $25.16 1,334,000 7.9 years $23.78 572,998 $23.25 ----------- --------- $7.25 - $25.16 2,468,734 7.0 years $19.39 1,586,062 $17.58 =========== =========
(12) Earnings Per Share: ------------------
The following table sets forth the computation of basic and diluted earnings per share from continuing operations:
(Share Data in Thousands) 2002 2001 2000 ------- ------- ------- Numerator: Income from continuing operations $22,493 $18,290 $17,665 ======= ======= =======
Denominator: Denominator for basic earnings per share--weighted-average shares 4,579 4,685 4,731 Effect of dilutive securities: Employee stock options 412 229 42 ------- ------- ------- Denominator for diluted earnings per share--adjusted weighted-average shares and assumed conversions 4,991 4,914 4,773 ======= ======= =======
Basic earnings per share - continuing operations $ 4.91 $ 3.90 $ 3.73 ======= ======= =======
Diluted earnings per share - continuing operations $ 4.50 $ 3.72 $ 3.70 ======= ======= =======
Employee stock options to purchase 890,000 and 733,381 shares of the Company's common stock at December 31, 2001 and 2000, respectively, were not included in the computation of diluted earnings per share because their effect would have been anti-dilutive.
(13) Transactions with Related Parties: ----------------------------------
The Company has a 50.0% interest in an unconsolidated limited liability corporation, whose principal assets are two distribution centers leased to Kmart Corporation, which are accounted for as leveraged leases. 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 8.0% interest in this entity (see Note 6).
The Company's two hotel properties, as well as the hotel owned by the Hotel Venture, are managed by a publicly-traded company for which the Board Chairman and another Director of the Company are directors. Fees paid for the management of the Company's two hotel properties are based upon a percentage of revenue and were approximately $117, $121 and $165 for 2002, 2001, and 2000, respectively. Included in marketable securities at December 31, 2002 and 2001 was $20,402 and $27,661, respectively, of common stock in this company which represents approximately 5.6% of such company's outstanding shares in both years.
(14) Income Taxes: -------------
Deferred income taxes are determined on the liability method in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). Under SFAS No. 109, deferred tax assets and liabilities are determined based on the difference between the tax basis of an asset or liability and its reported amount in the Consolidated Financial Statements using enacted tax rates. Future tax benefits attributable to these differences are recognized to the extent that realization of such benefits is more likely than not.
The components of the net deferred tax liability at December 31, 2002 and 2001 are as follows:
2002 2001 ------- ------- Realization allowances related to accounts receivable and inventories $ 323 $ 364 Net unrealized gain on marketable securities (945) (2,683) Basis differences relating to real property 3,288 3,459 Accrued expenses, deductible when paid, net 2,669 4,624 Charitable contribution carryforward 1,293 0 Basis differences relating to business acquisitions (1,863) (1,863) Leveraged lease (6,860) (6,254) Property, plant and equipment (377) (387) Pensions 101 (58) Other, net (27) (28) ------- -------
Net deferred tax liability (2,398) (2,826)
Less: Current portion - asset (liability) 207 (1,481) ------- -------
Noncurrent portion ($2,605) ($1,345) ======= =======
The income tax provision reflected in the Consolidated Statements of Income for each of the years presented herein is as follows:
2002 2001 2000 -------- -------- --------
Current: Federal $ 3,343 $ 10,101 $ 4,876 State 1,100 2,643 1,813 Deferred 2,161 (197) 343 -------- -------- --------
$ 6,604 $ 12,547 $ 7,032 ======== ======== ========
A reconciliation of the tax provision computed at statutory rates to the amounts shown in the Consolidated Statements of Income for the years ended December 31, 2002, 2001, and 2000 is as follows:
2002 2001 2000 -------- -------- --------
Computed federal income tax provision at statutory rates $ 10,184 $ 10,793 $ 8,644 State income taxes, net of federal income tax benefit 715 1,718 1,222 Realization of capital loss deductions (2,295) 0 (2,805) Charitable contribution (1,973) 0 0 Other, net (27) 36 (29) -------- -------- -------- $ 6,604 $ 12,547 $ 7,032 ======== ======== ========
(15) Other Income and Expense, Net: -----------------------------
The components of other income and expense, net in the Consolidated Statements of Income for the years ended December 31, 2002, 2001, and 2000 are as follows:
2002 2001 2000 -------- -------- --------
Net gain on the sale of real estate assets $ 5,708 $ 10,995 $ 5,269 Net gain on the sale of available-for-sale securities 4,038 4,911 4,513 Net realized and unrealized gain (loss) on trading securities 35 461 (7) Net realized and unrealized gain on derivative instruments 6,283 482 0 Other, net (43) 121 22 -------- -------- -------- $ 16,021 $ 16,970 $ 9,797 ======== ======== ========
(16) Pension Plan: ------------
The Company has a noncontributory defined benefit pension plan that covers substantially all full-time employees and the former employees of the Company's discontinued resilient vinyl flooring segment.
The Company accounts for its defined benefit pension plan in accordance with 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 following table sets forth the change in benefit obligation, the change in plan assets and the funded status of the plan as of December 31:
2002 2001 -------- -------- Change in benefit obligation:
Benefit obligation, beginning of year $ 8,621 $ 8,497 Service cost 348 279 Interest cost 656 640 Actuarial (gain) loss (314) 194 Benefits paid (833) (989) -------- -------- Benefit obligation, end of year 8,478 8,621 -------- --------
Change in plan assets:
Fair value of plan assets, beginning of year 9,231 10,453 Actual return on plan assets 384 (233) Benefits paid (833) (989) -------- -------- Fair value of plan assets, end of year 8,782 9,231 -------- --------
Funded status 304 610 -------- --------
Unrecognized net actuarial gain (680) (366) Unrecognized net loss 679 517 -------- --------
Prepaid benefit obligation $ 303 $ 761 ======== ========
Net periodic pension expense consists of the following components for the years ended December 31:
2002 2001 2000 -------- ------- -------
Service cost ($ 348) ($ 279) ($ 336) Interest cost (656) (640) (681) Actual return on plan assets 384 (233) 141 Net amortization and deferral 162 1,129 829 ------- ------- -------
Net periodic pension expense ($ 458) ($ 23) ($ 47) ======= ======= =======
In determining the projected benefit obligation the weighted average assumed discount rate was 8.0%, while the rate of expected increases in future salary levels was 3.5% for all years presented. The expected long-term rate of return on assets used in determining net periodic pension cost was 8.0% for 2002 and 9.0% for both 2001 and 2000. 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 is reasonable, although the plan has earned a rate of return less than 8.0% in the last three years. Should this trend continue, future pension expense and required contributions could increase. No contributions were made during 2002, 2001 and 2000 as the plan is overfunded. Plan assets consist primarily of U.S. bonds, government backed mortgage obligations, equity securities and mutual funds.
(17) 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 and the making of high-yield, short-term loans secured by desirable properties. Engineered products are manufactured through wholly-owned subsidiaries of the Company and primarily consist of knitted wire products and components and transformer products.
Operating results of the Company's business segments for the years ended December 31, 2002, 2001, and 2000 are as follows:
2002 2001 2000 -------- -------- -------- Net revenues and sales: Real estate investment and management $ 24,498 $ 26,386 $ 26,957 Engineered products 33,513 33,792 34,095 -------- -------- --------
$ 58,011 $ 60,178 $ 61,052 ======== ======== ======== Operating income: Real estate investment and management $ 12,411 $ 12,819 $ 13,126 Engineered products 2,256 1,912 2,261 General corporate expenses (2,993) (2,256) (2,153) -------- -------- -------- 11,674 12,475 13,234
Other income, net 17,423 18,362 11,463 -------- -------- -------- Income from continuing operations before income taxes $ 29,097 $ 30,837 $ 24,697 ======== ======== ========
2002 2001 2000 ------ ------ ------ Depreciation and amortization expense: Real estate investment and management $3,278 $4,006 $4,805 Engineered products 692 745 772 General corporate expenses 563 685 563 ------ ------ ------ $4,533 $5,436 $6,140 ====== ====== ======
Mortgage interest expense: Real estate investment and management $1,390 $1,796 $2,232 ====== ====== ======
Sales by the Company's engineered products segment to automobile original equipment manufacturers accounted for approximately 15.0%, 13.6% and 20.3% of 2002, 2001, and 2000 consolidated revenues, respectively. For the year ended December 31, 2002, sales by the engineered products segment to its two largest customers (each in excess of 10.0% of the segment's net sales) accounted for 20.0% and 10.1% of the segment's sales, respectively. For the years ended December 31, 2001 and 2000, sales by the engineered products segment to its largest customer (in excess of 10.0% of the segment's net sales) accounted for 14.0% and 15.8%, respectively, of the segment's sales.
Approximately 11.3%, 8.3% and 13.1% of 2002, 2001, and 2000 total sales generated from the engineered products segment were from foreign customers. Substantially all assets held by the Company's engineered products segment are located within the United States or its leased warehouse in Tijuana, Mexico.
Selected information on the Company's business segments as of December 31, 2002 and 2001 is as follows:
2002 2001 -------- -------- Identifiable assets: Real estate investment and management and corporate assets $166,433 $165,536 Engineered products 10,114 12,429 -------- -------- $176,547 $177,965 ======== ========
Additions to long-lived assets: Real estate investment and management $ 261 $ 2,537 Engineered products 158 564 -------- --------
$ 419 $ 3,101 ======== ========
(18) Lease Obligations: -----------------
At December 31, 2002, 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 at December 31, 2002 were:
2003 $ 522 2004 347 2005 279 2006 234 2007 228 Thereafter 4,326 ------- Total $5,936 ======
Rent expense under operating leases was $459, $457 and $367 for 2002, 2001 and 2000, respectively.
(19) Commitments and Contingencies: -----------------------------
The Company is a lessor of eight department stores that are currently leased to Kmart Corporation ("Kmart"), which filed for protection under Chapter 11 of the U.S. Bankruptcy Code on January 22, 2002. In addition, the Company holds a 50% interest in a joint venture that owns two distribution centers that are also leased to Kmart. As part of its reorganization, Kmart announced the closure of approximately 600 of its stores during the past year, as well as its anticipated emergence from Chapter 11 protection as early as April 30, 2003. To date, Kmart has not rejected any leases with the Company; however the terms of one such lease have been renegotiated resulting in a temporary rent reduction. Although it is currently uncertain which remaining leases, if any, Kmart will reject or affirm as part of its reorganization, management believes that its leases and the leases of the joint venture with Kmart are at or below the fair market rent for comparable properties and as a result, the rejection of one or more leases is not expected to have a material adverse effect on the consolidated financial position of the Company.
The Company has undertaken the completion of environmental studies and/or remedial action at Metex' two New Jersey facilities. The Company has recorded a liability, which is included in other long-term liabilities, in the Consolidated Financial Statements for the estimated potential remediation costs at these facilities.
The process of remediation has begun at one facility pursuant to a plan filed with the New Jersey Department of Environmental Protection ("NJDEP"). Environmental experts engaged by the Company estimate that under the most probable remediation scenario the remediation of this site is anticipated to require initial expenditures of $860, including the cost of capital equipment, and $86 in annual operating and maintenance costs over a 15 year period.
Environmental studies at the second facility indicate that remediation may be necessary. Based upon the facts presently available, environmental experts have advised the Company that under the most probable remediation scenario, the estimated cost to remediate this site is anticipated to require $2,300 in initial costs, including capital equipment expenditures, and $258 in annual operating and maintenance costs over a 10 year period. These estimated costs of future expenses for environmental remediation obligations are not discounted to their present value. The Company may revise such estimates in the future due to the uncertainty regarding the nature, timing and extent of any remediation efforts that may be required at this site, should an appropriate regulatory agency deem such efforts to be necessary.
The foregoing estimates may also be revised by the Company as new or additional information in these matters become available or should the NJDEP or other regulatory agencies require additional or alternative remediation efforts in the future. It is not currently possible to estimate the range or amount of any such liability.
Although the Company believed that it was entitled to full defense and indemnification with respect to environmental investigation and remediation costs under its insurance policies, the Company's insurers denied such coverage. Accordingly, the Company filed an action against certain insurance carriers seeking defense and indemnification with respect to all prior and future costs incurred in the investigation and remediation of these sites. Settlements have been reached with all carriers in this matter.
In the opinion of management, amounts recovered from its insurance carriers under the terms of its settlement agreements should be sufficient to address these matters and amounts needed in excess, if any, will be paid gradually over a period of years. Accordingly, they should not have a material adverse effect upon the business, liquidity or financial position of the Company. However, adverse decisions or events, particularly as to the merits of the Company's factual and legal basis could cause the Company to change its estimate of liability with respect to such matters in the future.
The Company is subject to various other litigation, legal and regulatory matters that arise in the ordinary course of business activities. When management believes it is probable that a liability has been incurred and such amounts are reasonably estimable the Company provides for amounts that include judgments and penalties that may be assessed. These liabilities are usually included in accounts payable and accrued liabilities or other long-term liabilities in the Consolidated Financial Statements, depending on the anticipated payment date. None of these matters are expected to result in a material adverse effect on the Company's consolidated financial position or results of operations.
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, 2002 $328 $0 $4 $324
Year ended December 31, 2001 328 0 0 328
Year ended December 31, 2000 390 0 62 328
The accompanying Notes to Consolidated Financial Statements are an integral part of these schedules.
SCHEDULE III
UNITED CAPITAL CORP. AND SUBSIDIARIES REAL PROPERTY AND ACCUMULATED DEPRECIATION DECEMBER 31, 2002 (In Thousands)
Costs Mortgage Initial Cost to Company Capitalized Loans -------------------------- Subsequent to Payable Building and Acquisition/ Deccription (Gross) Land Improvements Improvements ------------------------------------ ---------- ---------- -------------- -------------- Real Property Held for Rental: ------------------------------ Shopping Centers and Retail Outlets: Culver, CA $2,108 $842 $7,576 $0 Northbrook, IL 2,468 898 8,075 0 Miscellaneous Investments 7,443 4,328 37,822 1,932 ---------- ---------- -------------- -------------- 12,019 6,068 53,473 1,932 ---------- ---------- -------------- --------------
Commercial Properties: Miscellaneous Investments 4,628 8,080 33,973 762 Day Care Centers and Offices: Miscellaneous Investments 91 495 3,961 1,974 Hotel Properties: Miscellaneous Investments 0 1,712 2,868 48 Other: Miscellaneous Investments 0 2,618 630 1,076 ---------- ---------- -------------- -------------- Total Real Property Held for Rental 16,738 18,973 94,905 5,792 ---------- ---------- -------------- --------------
Real Property Held for Sale: ---------------------------- Shopping Centers and Retail Outlets: Miscellaneous Investments 0 136 1,226 0 Commercial Properties: Miscellaneous Investments 0 97 899 53 ---------- ---------- -------------- -------------- Total Real Property Held for Sale 0 233 2,125 53 ---------- ---------- -------------- --------------
Total Real Property $16,738 $19,206 $97,030 $5,845 ========== ========== ============== ==============
Gross Amount at Which Carried at Close of Period ----------------------------------- Building and Accumulated Date of Description Land Improvements Total(a), (c) Depreciation(b) Construction ------------------------------------ -------- ------------ ------------- --------------- ------------
Real Property Held for Rental: ------------------------------ Shopping Centers and Retail Outlets: Culver, CA $ 842 $ 7,576 $ 8,418 $ 6,708 N/A Northbrook, IL 898 8,075 8,973 7,010 N/A Miscellaneous Investments 4,328 39,754 44,082 30,347 N/A -------- -------- -------- --------
6,068 55,405 61,473 44,065 -------- -------- -------- --------
Commercial Properties: Miscellaneous Investments 8,080 34,735 42,815 18,471 N/A Day Care Centers and Offices: Miscellaneous Investments 495 5,935 6,430 4,686 N/A Hotel Properties: Miscellaneous Investments 1,712 2,916 4,628 2,896 N/A Other: Miscellaneous Investments 2,618 1,706 4,324 1,082 N/A -------- -------- -------- --------
Total Real Property Held for Rental 18,973 100,697 119,670 71,200 -------- -------- -------- --------
Real Property Held for Sale: ---------------------------- Shopping Centers and Retail Outlets: Miscellaneous Investments 136 1,226 1,362 1,226 N/A Commercial Properties: Miscellaneous Investments 97 952 1,049 702 N/A -------- -------- -------- --------
Total Real Property Held for Sale 233 2,178 2,411 1,928 -------- -------- -------- --------
Total Real Property $ 19,206 $102,875 $122,081 $ 73,128 ======== ======== ======== ========
Life on Which Depreciation in Latest Statement of Date Income is Description Acquired Computed (Years) ------------------------------------ ---------------- --------------------
Real Property Held for Rental: ------------------------------ Shopping Centers and Retail Outlets: Culver, CA 1986 18 Northbrook, IL 1987 18 Miscellaneous Investments 1986-98 12-39
Commercial Properties: Miscellaneous Investments 1986-98 5-39 Day Care Centers and Offices: Miscellaneous Investments 1986-91 5-39 Hotel Properties: Miscellaneous Investments 1986-99 7-10 Other: Miscellaneous Investments 1986-97 10-39
Total Real Property Held for Rental
Real Property Held for Sale: ---------------------------- Shopping Centers and Retail Outlets: Miscellaneous Investments 1986 15 Commercial Properties: Miscellaneous Investments 1986-89 12-29
Total Real Property Held for Sale
Total Real Property
Notes:
(a) Reconciliations of the carrying value of total real property for the three years ended December 31, 2002 are as follows:
2002 2001 2000 -------- -------- --------
Total real property at beginning of period $124,407 $130,995 $138,192 Additions during the period: Acquisitions and improvements 192 1,774 767 -------- -------- -------- 124,599 132,769 138,959 Deductions during the period: Cost of real estate sold 2,518 8,362 6,951 Other 0 0 1,013 (d) -------- -------- -------- $122,081 $124,407 $130,995 ======== ======== ========
(b) Reconciliations of accumulated depreciation for the three years ended December 31, 2002 are as follows:
2002 2001 2000 -------- -------- -------- Accumulated depreciation at beginning of period $ 71,537 $ 73,862 $ 71,253 Additions during the period: Provision for depreciation 3,304 4,175 4,993 -------- -------- -------- 74,841 78,037 76,246 Deductions during the period: Accumulated depreciation of real estate sold 1,713 6,500 2,384 -------- -------- -------- $ 73,128 $ 71,537 $ 73,862 ======== ======== ========
(c) The aggregate cost for federal income tax purposes is approximately $159,233.
(d) In 1998, the Company acquired a property subject to certain contingent liabilities which were estimated and capitalized at the time of acquisition. During 2000, these liabilities were resolved for approximately $1,013 less than originally estimated. As a result, real property held for rental was reduced accordingly.
The accompanying Notes to Consolidated Financial Statements are an integral part of these schedules.
SCHEDULE IV UNITED CAPITAL CORP. AND SUBSIDIARIES MORTGAGE LOANS ON REAL ESTATE DECEMBER 31, 2002 (In Thousands)
Final Description Interest Rate Maturity Date ------------------------------------------------------------ ----------------------------- -------------------------
Mortgage loans secured by commercial property:
New York, NY 15.0% May 2006
Other - four loans - Face amounts Varies from 8.0% -17.0% From January 2005 - $3,100 or less (b) August 2012
Prior Description Periodic Payment Terms Liens ------------------------------------------------------------ ---------------------------------------------- --------
Mortgage loans secured by commercial property:
New York, NY Principal and interest due monthly $0
Other - four loans - Face amounts Principal and interest due monthly $3,100 or less (b) on three loans; Interest only, monthly through September 2006 on one loan 0 ---- $0 ==== Principal Amount of Carrying Loans Subject Face Amount of to Delinquent Amount of Mortgages Principal Description Mortgages (a), (c) or Interest ------------------------------------------------------------ -------------- --------------- -------------------
Mortgage loans secured by commercial property:
New York, NY $3,000 $2,933 $0
Other - four loans - Face amounts $3,100 or less (b) 3,253 126 0 -------------- --------------- ------------------- $6,253 $3,059 $0 ============== =============== ===================
(a) A reconciliation of mortgage loans on real estate for the year ended December 31, 2002 is as follows:
Balance at beginning of period $ 86 Additions during the period: New mortgage loans 3,014 Deductions during the period: Collection of principal (41) ------------------------- Balance at end of period $3,059 =========================
(b) In accordance with generally accepted accounting principles the gains from the sale of two real properties are being recognized under the installment method and, accordingly, notes receivable have been reduced by $3,077 in deferred gains at December 31, 2002.
(c) 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.
UNITED CAPITAL CORP. AND SUBSIDIARIES QUARTERLY FINANCIAL DATA (Unaudited) (Dollars In Thousands, Except Per Share Data)
The following unaudited quarterly results for 2002 and 2001 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 2002: Revenues $14,280 $15,346 $14,545 $13,840 ======= ======= ======= =======
Costs and expenses $11,504 $11,905 $11,231 $11,697 ======= ======= ======= =======
Other income $ 2,888 $ 2,140 $ 4,308 $ 8,087 ======= ======= ======= =======
Income from continuing operations $ 3,576 $ 3,356 $ 5,669 $ 9,892 ======= ======= ======= =======
Income from discontinued operations $ 182 $ 173 $ 215 $ 314 ======= ======= ======= =======
Net income $ 3,758 $ 3,529 $ 5,884 $10,206 ======= ======= ======= =======
Basic earnings per share: Income from continuing operations $ .77 $ .73 $ 1.24 $ 2.18 Discontinued operations .04 .04 .05 .07 ------- ------- ------- ------- Net income per share $ .81 $ .77 $ 1.29 $ 2.25 ======= ======= ======= =======
Diluted earnings per share: Income from continuing operations $ .72 $ .68 $ 1.16 $ 1.93 Discontinued operations .04 .03 .04 .06 ------- ------- ------- ------- Net income per share assuming dilution $ .76 $ .71 $ 1.20 $ 1.99 ======= ======= ======= =======
For the year 2001: Revenues $16,645 $15,323 $14,584 $13,626 ======= ======= ======= =======
Costs and expenses $12,639 $12,587 $11,545 $10,932 ======= ======= ======= =======
Other income $ 4,323 $ 279 $ 5,375 $ 8,385 ======= ======= ======= =======
Income from continuing operations $ 4,955 $ 1,850 $ 5,050 $ 6,435 ======= ======= ======= =======
Income from discontinued operations $ 160 $ 158 $ 143 $ 221 ======= ======= ======= =======
Net income $ 5,115 $ 2,008 $ 5,193 $ 6,656 ======= ======= ======= =======
Basic earnings per share: Income from continuing operations $ 1.06 $ .40 $ 1.08 $ 1.38 Discontinued operations .03 .03 .03 .05 ------- ------- ------- ------- Net income per share $ 1.09 $ .43 $ 1.11 $ 1.43 ======= ======= ======= =======
Diluted earnings per share: Income from continuing operations $ 1.04 $ .38 $ 1.02 $ 1.31 Discontinued operations .02 .03 .03 .05 ------- ------- ------- ------- Net income per share assuming dilution $ 1.06 $ .41 $ 1.05 $ 1.36 ======= ======= ======= =======