sec document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
COMMISION FILE NUMBER: 1-10104
------------------------------
--------------------------------------------------------------------------------
UNITED CAPITAL CORP.
--------------------
(Exact name of registrant as specified in its charter)
Delaware 04-2294493
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9 Park Place, Great Neck, NY 11021
---------------------------- -----
(Address of principal executive offices) (Zip Code)
516-466-6464
------------
(Registrant's telephone number, including area code)
--------------------------------------------------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock (Par Value $.10 Per Share) American Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes | | No|X|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act. Yes | | No|X|
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes |X| No| |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K |X|.
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | | Accelerated filer | | Non-accelerated filer |X|
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes | | No|X|
The aggregate market value of the shares of the voting stock held by
nonaffiliates of the registrant as of June 30, 2006 was approximately
$50,948,000.
The number of shares of the registrant's $.10 par value common stock outstanding
as of March 16, 2007 was 8,278,543.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of Form 10-K will be incorporated by
reference to certain portions of a definitive proxy statement which is expected
to be filed by the registrant pursuant to Regulation 14A within 120 days after
the close of its fiscal year.
PART I
FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-K AND OTHER STATEMENTS MADE
BY UNITED CAPITAL CORP. ("WE," "OUR" OR 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.
ITEM 1. BUSINESS
GENERAL
United Capital Corp., incorporated in 1980 in the State of Delaware,
currently has three industry segments:
1. Real Estate Investment and Management.
2. Hotel Operations.
3. 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 owns properties that it manages which are leased primarily as department
stores, shopping centers, restaurants and office buildings around the country.
The Company also owns day-care centers located in New York City, which are
primarily operated by the City of New York. In addition, the Company owns
properties available for sale and lease with the assistance of a consultant or
realtor working in the locale of the premises.
The majority of properties are leased to single tenants. As of December 31,
2006, 95.6% of the total square footage of the Company's real estate properties
was leased.
HOTEL OPERATIONS
The Company's hotel operations segment consists of three hotels located in the
United States. Each are managed through a regional hotel management company with
local on-site management responsible for all day-to-day operations of the
hotels.
The hotel industry is seasonal in nature. However, the periods during which the
Company's properties experience higher or lower levels of demand vary from
property to property and depend principally upon location. Two of the Company's
hotels are located in the vicinity of airports which, during extreme weather
conditions, may be favorably impacted from transient guests.
1
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 serving the automotive, aerospace and general
industrial markets.
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. Our
manufacturing facilities are ISO/TS 16949 certified, an essential qualification
for supplying the automotive industry.
The Company also manufactures transformer products marketed under several brand
names, including AFP Transformers, Field Transformer, ISOREG and EPOXYCAST(TM),
for a wide variety of industrial and research applications including machine
power transformers, rectifier and inverter transformers and transformers for
heating.
For the years ended December 31, 2006, sales by the engineered products segment
to General Motors and Autoliv, its largest customers, accounted for 15.6% and
10.5% of the segment's sales, respectively. For the years ended December 31,
2005 and 2004, sales by the engineered products segment to General Motors
accounted for 17.0% and 18.7% of the segment's sales, respectively. No other
customer exceeded 10% of the segment's sales during the last three years.
Approximately 14.2%, 18.0% and 16.6% of 2006, 2005 and 2004 total sales
generated from the engineered products segment were to foreign customers.
Substantially all assets held by the Company's engineered products segment are
located within the United States or its leased warehouse in Tijuana, Mexico.
SUMMARY FINANCIAL INFORMATION
The following table sets forth the revenues, operating income (loss) and
identifiable assets of each business segment of the Company.
Year Ended December 31,
--------------------------------------
2006 2005 2004
--------- --------- ---------
(In thousands)
NET REVENUES AND SALES:
Real estate investment and management ..............$ 19,403 $ 17,962 $ 18,448
========= ========= =========
Hotel operations ...................................$ 8,807 $ 3,944 $ 3,156
========= ========= =========
Engineered products ................................$ 37,158 $ 38,201 $ 38,335
========= ========= =========
OPERATING INCOME (LOSS):
Real estate investment and management ..............$ 12,025 $ 10,627 $ 10,956
========= ========= =========
Hotel operations ...................................$ 418 $ 333 $ (216)
========= ========= =========
Engineered products ................................$ 2,784 $ 3,175 $ 4,187
========= ========= =========
IDENTIFIABLE ASSETS
Real estate investment and management and
corporate assets ...................................$ 196,685 $ 191,761 $ 197,952
========= ========= =========
Hotel operations ...................................$ 14,841 $ 13,227 $ 2,572
========= ========= =========
Engineered products ................................$ 12,074 $ 11,697 $ 12,200
========= ========= =========
DISTRIBUTION
The Company's manufactured products are distributed by a direct sales force and
through distributors to industrial consumers and original equipment
manufacturers.
2
PRODUCT METHODS AND SOURCES OF RAW MATERIALS
The Company's products are manufactured at its own facilities and a leased
facility in Mexico. Raw materials used in the Company's engineered products
segment, which consist primarily of stainless steel wire and steel-related
products, are typically purchased from multiple suppliers throughout the world.
The price and availability of raw materials can be volatile due to numerous
factors beyond the Company's control, including general domestic and
international economic conditions, labor costs, supply and demand, competition,
import duties and tariffs and currency exchange rates. Although these factors
could significantly affect the availability and cost of the Company's raw
materials, they are generally purchased at levels that the Company believes will
satisfy the anticipated needs of the Company's customers based upon contractual
commitments, historical buying practices and market conditions. To date, the
Company has limited their exposure related to the effects that have arisen from
these factors by various methods including finding alternate sources or by
having suppliers and/or customers absorb any additional related costs. Although
management does not expect such matters to adversely effect the Company's
financial position in the future, it is uncertain what effect, if any, such
factors could have on the cost of such materials. An interruption in the supply,
or a significant increase in the cost, of the Company's raw materials could have
a material adverse effect on the Company's revenues, results of operations or
cash flows. The Company has not had and does not expect to have any problems
fulfilling its raw material requirements during 2007.
PATENTS AND TRADEMARKS
The Company owns several patents, patent licenses and trademarks. While the
Company considers that in the aggregate its patents, patent licenses and
trademarks used in the engineered products operations are significant to this
segment, it does not believe that any of them are of such importance that the
loss of one or more of them would materially affect its consolidated financial
condition or results of operations. The Company is not currently involved in any
litigation regarding infringement upon its intellectual property or of the
Company's infringement upon the intellectual property of others.
WORKING CAPITAL PRACTICES
The Company believes its practices regarding inventories, receivables or other
items of working capital to be typical for the industries involved. There are no
special practices or conditions affecting working capital items that are
significant to an understanding of the Company's businesses. Its inventory
levels, payment terms and return policies are in accordance with general
practices associated with the industries in which it operates and standard
business procedures.
The cash needs of the Company have been satisfied from funds generated by
current operations. It is expected that future operational cash needs will also
be satisfied from existing cash balances, marketable securities, ongoing
operations or borrowings. The primary source of capital to fund additional real
estate acquisitions and to make additional high-yield mortgage loans may come
from existing funds, the sale, financing and refinancing of the Company's
properties and from third party mortgages and purchase money notes obtained in
connection with specific acquisitions. For additional information on working
capital, see Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources," which is
incorporated by reference herein.
EMPLOYEES
At March 16, 2007, the Company employed approximately 230 persons, approximately
140 of which are covered by a collective bargaining agreement that expires in
February 2011. The Company believes that its relationship with its employees is
good.
COMPETITION
The Company has established close relationships with a large number of major
national and regional real estate brokers and maintains a broad network of
industry contacts. There are numerous regional and local commercial developers,
real estate companies, financial institutions and other investors who compete
with the Company for the acquisition of properties and tenants.
3
The Company's hotels compete with national, regional and local hotels in each of
their geographic markets. Competition is based on a number of factors, most
notably convenience of location, brand affiliation, price, range of services and
guest amenities offered, quality of customer service and the overall condition
of the property.
The Company competes with at least 20 other companies in the sale of engineered
products. The Company emphasizes product performance and service in connection
with the sale of these products. The principal competition faced by the Company
results from the sales price of the products sold by its competitors.
BACKLOG
The dollar value of unfilled orders of the Company's engineered products segment
was approximately $3.1 million and $2.4 million at December 31, 2006 and
December 31, 2005, respectively. The increase in backlog is principally due to
growth in the Company's transformer product line. It is anticipated that
substantially all of the 2006 backlog will be filled in 2007. Substantially all
of the 2005 backlog was filled in 2006. The order backlog referred to above does
not include any order backlog with respect to sales of knitted wire mesh
components for exhaust emission control devices, exhaust seals or airbag
components because of the manner in which customer orders are received.
ENVIRONMENTAL REGULATIONS
Federal, state and local requirements regulating the discharge of materials into
the environment or otherwise relating to the protection of the environment have
had and will continue to have a significant impact upon the operations of the
Company. It is the policy of the Company to manage, operate and maintain its
facilities in compliance, in all material respects, with applicable standards
for the prevention, control and abatement of environmental pollution to prevent
damage to the quality of air, land and resources.
The Company has undertaken the completion of environmental studies and/or
remedial action at Metex' two New Jersey facilities and has recorded a liability
for the estimated investigation, remediation and administrative costs associated
therewith.
The process of remediation has begun at one facility pursuant to a plan filed
with the New Jersey Department of Environmental Protection ("NJDEP").
Environmental experts engaged by the Company estimate that, under the most
probable scenario, the remediation of this site is anticipated to require
initial expenditures of $860,000, including the cost of capital equipment, and
$86,000 in annual operating and maintenance costs over a 15 year period.
Environmental studies at the second facility indicate that remediation may be
necessary. Based upon the facts presently available, environmental experts have
advised the Company that, under the most probable remediation scenario, the
estimated cost to remediate this site is anticipated to require $2.3 million in
initial costs, including capital equipment expenditures, and $258,000 in annual
operating and maintenance costs over a 10 year period. These estimated costs of
future expenses for remediation obligations are not discounted to their present
value. The Company may revise such estimates in the future due to the
uncertainty regarding the nature, timing and extent of any remediation efforts
that may be required at this site, should an appropriate regulatory agency deem
such efforts to be necessary.
The foregoing estimates may also be revised by the Company as new or additional
information in these matters becomes available or should the NJDEP or other
regulatory agencies require additional or alternative remediation efforts in the
future. Although such events are not expected to change these estimates, adverse
decisions or events, particularly as to the merits of the Company's factual and
legal basis, could cause the Company to change its estimate of liability with
respect to such matters in the future. The Company had approximately $9.7
million and $9.9 million recorded in accounts payable and accrued liabilities
and other long-term liabilities as of December 31, 2006 and 2005, respectively,
to cover such matters.
4
AVAILABLE INFORMATION
The Company's filings with the Securities and Exchange Commission ("SEC") may be
read and copied at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Information on the operation of the Public Reference
Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC
maintains an Internet site that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the SEC. The SEC's Internet address is http://www.sec.gov. The Company's SEC
filing number is 1-10104.
A copy of the Company's annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, if any, and amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934, as amended, may be obtained as soon as reasonably practicable after the
Company electronically files such material with, or furnishes it to, the SEC
without charge by writing to Anthony J. Miceli, Chief Financial Officer and
Secretary of the Company, at its executive offices, United Capital Building, 9
Park Place, Great Neck, NY 11021.
ITEM 1A. RISK FACTORS
The following are some of the risks that could cause actual results to differ
significantly from those expressed or implied by such statements:
OUR PERFORMANCE IS SUBJECT TO RISKS ASSOCIATED WITH THE REAL ESTATE INDUSTRY.
Although the Company's leases are generally long-term and may be below market,
real property investments are subject to varying degrees of risk and are
relatively illiquid. Among the factors that may impact our real estate property
values or the revenues derived from our portfolio are changes in the national,
regional and local economic climate, the attractiveness of our properties to
tenants, competition from other available property owners and changes in market
rental rates. Our performance also depends on the financial condition of our
tenants and our ability to collect rent from tenants and to pay for adequate
maintenance, insurance and other operating costs, including real estate taxes,
which could increase over time. Also, the expenses of owning and operating a
property are not necessarily reduced when circumstances such as market factors
and competition cause a reduction in income from the property.
OUR RESULTS COULD BE NEGATIVELY AFFECTED BY DELINQUENCIES IN OUR MORTGAGE OR
HIGH-YIELD LOAN RECEIVABLES.
On a limited basis we provide high-yield, short-term mortgage loans that we
believe are collateralized by desirable properties at substantial value-to-loan
ratios. In addition, we have provided purchase money notes to buyers of certain
real estate properties. Although we believe that the collateral for these loans
is sufficient to recover its carrying value, changes in the real estate market
in the locale in which the property is located or delinquencies by the borrower
could negatively affect our carrying value for these loans and, ultimately, our
results of operations and cash flows.
OFF-BALANCE SHEET OBLIGATIONS COULD DEPLETE OUR LIQUIDITY AND CAPITAL
RESOURCES.
We do not have any off-balance sheet arrangements that we believe are reasonably
likely to have a material current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources. The debt of the joint
venture in which we currently have an ownership interest is a non-recourse
obligation and is collateralized by the entity's real property. We believe that
with each arrangement the value of the underlying property and its operating
cash flows are sufficient to satisfy its obligations. In addition, we are not
obligated for the debts of the joint venture. However, we could decide to
satisfy the debts of the joint venture to protect our investment. In such event,
our capital resources and financial condition would be reduced and, in certain
instances, the carrying value of our investment and our results of operations
would be negatively impacted.
5
OPERATING RESULTS OF OUR HOTEL OPERATIONS ARE SUBJECT TO CONDITIONS COMMON IN
THE LODGING INDUSTRY.
Changes in certain factors could adversely impact hotel room demand and pricing
and result in reduced occupancy or could otherwise adversely affect our results
of operations and financial condition. These factors include:
o local conditions such as an oversupply of, or a reduction in demand for,
hotel rooms;
o the attractiveness of our hotels to consumers and competition from other
hotels;
o the quality, philosophy and performance of the managers of our hotels;
o increases in operating costs due to inflation and other factors such as
increases in the price of energy, healthcare or insurance;
o changes in travel patterns, extreme weather conditions and cancellation of
or changes in events scheduled to occur in our markets; and
o other unpredictable external factors, such as acts of god, war, terrorist
attacks, epidemics, airline strikes, transportation and fuel price
increases and severe weather, may reduce business and leisure travel.
OUR ENGINEERED PRODUCTS SEGMENT RELIES ON SIGNIFICANT CUSTOMERS.
The Company sells its engineered products to many customers throughout the
world. Historically, a small number of customers have accounted for significant
portions of these sales. For the year ended December 31, 2006, sales by the
engineered products segment to General Motors and Autoliv, its largest
customers, accounted for 15.6% and 10.5% of the segment's sales, respectively.
Since our engineered products segment accounted for 56.8% of our consolidated
revenues in 2006, the loss of either of these customers would adversely affect
our revenues, cash flows and results of operations.
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.
AN INTERRUPTION IN THE SUPPLY, OR A SIGNIFICANT INCREASE IN THE COST, OF OUR
RAW MATERIALS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR REVENUES, RESULTS
OF OPERATIONS AND CASH FLOWS.
The principal raw materials used in the Company's engineered products business
are stainless steel wire and steel-related products, which are typically
purchased from multiple suppliers throughout the world. The price and
availability of raw materials can be volatile due to numerous factors beyond our
control, including general domestic and international economic conditions, labor
costs, supply and demand, competition, import duties and tariffs and currency
exchange rates. These factors could significantly affect the availability and
cost of our raw materials which are generally purchased at levels that we
believe will satisfy the anticipated needs of our customers based upon
contractual commitments, historical buying practices and market conditions. We
may be unable to recover raw material cost increases due to contractual or
competitive conditions. Conversely, reductions in raw material prices could
result in lower sales prices for our products and lower margins as we utilize
existing inventories. Therefore, changing raw material costs could significantly
impact our revenues, gross margins, operating and net income. If, in the future,
we are unable to obtain sufficient amounts of stainless steel wire or other
critical raw materials on a timely basis and at competitive prices, we may be
unable to fulfill our customers' requirements, which could have a material
adverse effect on our business, financial condition, results of operations and
cash flows.
PROTECTION OF OUR INTELLECTUAL PROPERTY IS LIMITED; WE ARE SUBJECT TO THE
RISK OF THIRD PARTY CLAIMS OF INFRINGEMENT.
Our engineered products business relies in large part upon our proprietary
scientific and engineering "know-how" and production techniques. Historically,
patents have not been an important part of our protection of our intellectual
property rights. We rely upon the laws regarding unfair competition,
restrictions in licensing agreements and confidentiality agreements to protect
our intellectual property. We limit access to and distribution of our
proprietary information.
Our ability to compete successfully and achieve future revenue growth will
depend, in part, on our ability to protect our proprietary technology and
operate without infringing upon the rights of others. We are not currently
involved in any litigation regarding the infringement upon our intellectual
property or regarding our infringement upon the intellectual property of others.
6
OUR OPERATIONS ARE SUBJECT TO ENVIRONMENTAL REGULATION AND ENVIRONMENTAL
PROBLEMS WHICH ARE POSSIBLE AND CAN BE COSTLY.
Our engineered products segment is subject to a variety of federal, state and
local governmental regulations relating to the storage, discharge, handling,
emission, generation, manufacture and disposal of toxic or other hazardous
substances used to manufacture our products. We believe that we are currently in
compliance in all material respects with such regulations and that we have
obtained all necessary environmental permits to conduct our business.
Nevertheless, the failure to comply with current or future regulations could
result in the imposition of fines, suspension of production, alteration of our
manufacturing processes or cessation of operations.
Federal, state and local laws and regulations relating to the protection of the
environment require a current or previous owner or operator of real estate to
investigate and clean up hazardous or toxic substances at such property.
We have undertaken the completion of environmental studies and/or remedial
action at Metex' two New Jersey facilities and have recorded a liability for the
estimated investigation, remediation and administrative costs associated
therewith (See "Environmental Regulations" in Item 1 of Part I and Note 17,
"Commitments and Contingencies" of Notes to Consolidated Financial Statements).
The Company may revise such estimates in the future due to the uncertainty
regarding the nature, timing and extent of any remediation efforts that may be
required at these sites, should an appropriate regulatory agency deem such
efforts to be necessary. The estimates may also be revised as new or additional
information in these matters becomes available or should the NJDEP or other
regulatory agencies require additional or alternative remediation efforts in the
future. Although we do not expect such events to significantly change our
estimates, adverse decisions or events, particularly as to the merits of our
factual and legal basis, could cause us to change our estimate of liability with
respect to such matters in the future. Accordingly, we are unable to predict
whether our estimate of future remediation costs will materially increase in the
future.
OUR STOCK PRICE MAY BE VOLATILE.
The market price of our common stock has been volatile in the past and may be
volatile in the future. For example, during the twelve months ended December 31,
2006, the closing sales price of our common stock fluctuated between $20.75 and
$30.30 per share and subsequent to December 31, 2006 the market price had a high
of $35.15 per share.
The stock market has experienced extreme volatility that often has been
unrelated to the performance of particular companies. These market fluctuations
may cause our stock price to fall regardless of our performance.
MR. A.F. PETROCELLI CAN CONTROL THE OUTCOME OF ALL MATTERS REQUIRING STOCKHOLDER
APPROVAL.
As of the date of this Annual Report on Form 10-K, Mr. A.F. Petrocelli, the
Company's Chairman, President and Chief Executive Officer, beneficially owns, in
the aggregate, approximately 66.6% of the Company's outstanding common stock
(exclusive of options). Such amount includes shares held by his wife but does
not include shares held by the adult children or grandchildren of Mr.
Petrocelli. Accordingly, Mr. Petrocelli is therefore able to exercise
considerable influence over the outcome of all matters requiring stockholder
approval, including the election of directors and the approval of significant
corporate transactions, such as mergers or other business combinations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
7
ITEM 2. PROPERTIES
REAL PROPERTY HELD FOR RENTAL OR SALE
As of March 16, 2007, the Company owned 155 properties throughout the United
States. The properties are primarily leased under long-term net leases. The
Company's classification and gross carrying value of its properties, inclusive
of those held for sale and classified as discontinued operations in the
Company's Consolidated Financial Statements (see Note 2 of Notes to Consolidated
Financial Statements), at December 31, 2006 are as follows:
Gross
Carrying Number of
(Dollars in thousands) Value Percentage Properties
-------- --------- ----------
Shopping centers and retail outlets ...... $ 54,779 45.7% 19
Commercial properties .................... 42,019 35.1% 89
Day-care centers ......................... 5,728 4.8% 9
Hotel properties ......................... 12,977 10.8% 3
Other .................................... 4,324 3.6% 38
-------- ----- ---
$119,827 100.0% 158
======== ===== ===
The following summarizes the Company's properties by geographic area at December
31, 2006:
Gross Number
Carrying of
Value Properties
-------- ----------
(Dollars in thousands)
Northeast ................................ $ 56,067 96
Southeast ................................ 21,401 20
Midwest .................................. 21,395 24
Southwest ................................ 5,665 5
Pacific Coast ............................ 12,165 6
Pacific Northwest ........................ 861 4
Rocky Mountain ........................... 2,273 3
-------- ---
$119,827 158
======== ===
SHOPPING CENTERS AND RETAIL OUTLETS
Shopping centers and retail outlets include 12 department stores and other
properties, primarily leased under net leases. The tenants are responsible for
taxes, maintenance and all other expenses of the properties. The leases for
certain shopping centers and retail outlets provide for additional rents based
on sales volume and renewal options at higher rents. The department stores
include eight properties leased to Kmart Corporation ("Kmart") and two Macy's
stores, with a total of approximately 747,000 and 364,000 square feet,
respectively. The Kmart stores are primarily located in the Midwest region of
the United States. The Macy's stores are located in the Pacific Coast and
Southwest regions of the United States.
COMMERCIAL PROPERTIES
Commercial properties consist of properties leased as 54 restaurants, 11 Midas
Muffler Shops, two convenience stores, seven office buildings and miscellaneous
other properties. These properties are primarily leased under net leases, which
in certain cases have renewal options at higher rents. Certain of these leases
also provide for additional rents based on sales volume. The restaurants,
located throughout the United States, include properties leased as McDonald's,
Burger King, Dunkin' Donuts, Pizza Hut, Hardee's, Wendy's, Kentucky Fried
Chicken and Boston Market.
Included in commercial properties is one miscellaneous other property currently
held for sale and classified as discontinued operations in the Consolidated
Financial Statements.
8
DAY-CARE CENTERS
The Company has nine day-care centers located in New York City, eight of which
are leased to the City of New York. The City of New York is responsible for real
estate taxes and certain maintenance costs on those properties they lease, 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 three hotel properties, located in California, Connecticut and
Georgia, are each managed through a regional hotel management company with local
on-site management responsible for all day-to-day operations of the hotels.
MANUFACTURING FACILITIES
The Company's engineered products are manufactured at 970 New Durham Road,
Edison, New Jersey, in a one-story building having approximately 55,000 square
feet of floor space, and also in a second facility at 206 Talmadge Road, Edison,
New Jersey, which has approximately 55,000 square feet of floor space. The
Company owns these facilities together with the sites. Metex also leases a
manufacturing facility in Tijuana, Mexico, with approximately 24,000 square feet
of floor space.
ITEM 3. LEGAL PROCEEDINGS
The Company currently and from time to time is involved in litigation arising in
the ordinary course of its business. The Company does not believe that it is
involved in any litigation that is likely, individually or in the aggregate, to
have a material adverse effect on its financial condition or results of
operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company's Common Stock, $.10 par value (the "Common Stock"), is traded on
the American Stock Exchange under the symbol AFP. The table below shows the high
and low sales prices as reported in the composite transactions for the American
Stock Exchange.
2006 2005
------------------ ------------------
High Low High Low
------- ------- ------- -------
FIRST QUARTER ...................... $ 27.13 $ 23.90 $ 26.01 $ 22.26
SECOND QUARTER ..................... $ 26.50 $ 20.75 $ 29.49 $ 21.02
THIRD QUARTER ...................... $ 27.80 $ 25.07 $ 26.24 $ 23.20
FOURTH QUARTER ..................... $ 30.30 $ 25.85 $ 25.69 $ 21.15
As of March 16, 2007, there were approximately 244 record holders of the
Company's Common Stock. The closing sales price for the Company's Common Stock
on such date was $34.40. The Company has not declared a dividend during the past
two years. While the Company does not currently expect to pay additional
dividends, the Board of Directors could reevaluate this position in the future.
EQUITY COMPENSATION PLAN INFORMATION
The Company maintains two stock option plans. Both plans provide for the
granting of incentive or non-qualified stock options. The Company has no
outstanding warrants or rights or plans which provide for the grant or issuance
of warrants or rights. The following table gives information about stock option
awards under these plans as of December 31, 2006. See Note 9 of Notes to
Consolidated Financial Statements for further discussion on these plans.
Number of
securities
remaining
Number of available for
securities to future issuance
be issued Weighted-average under equity
upon exercise exercise compensation
of price of plans
outstanding outstanding (excluding
options, options, securities
warrants and warrants reflected in
rights and rights column (a))
Plan Category (a) (b) (c)
-------------------------------------- ------------- ---------------- ---------------
Equity compensation plans
approved by security holders ....... 5,299,136 $ 11.61 --
Equity compensation plans not
approved by security holders ...... -- -- --
--------- --------- ------
Total ................................ 5,299,136 $ 11.61 --
========= ========= ======
COMMON STOCK PERFORMANCE
Set forth below is a graph comparing the total shareholder returns (assuming
reinvestment of dividends, if any) of the Company, American Stock Exchange
("AMEX") Composite Index and a peer group (the "Peer Group") compiled by the
Company consisting of publicly traded companies in industry segments
corresponding to those in which the Company competes. The Peer Group, which
includes the Company, consists of the following companies: National Retail
Properties, Inc. (formerly Commercial Net Lease Realty Inc.), Lexington
Realty Trust (formerly Lexington Corp. Properties Trust), Realty Income
Corp., One Liberty Properties, Inc., Ramco-Gershenson Properties Trust, DURA
Automotive Systems, Inc., Peerless Mfg. Co., Proliance International, Inc.,
and Lodgian, Inc. Lodgian, Inc., which is not reflected for the period of
December 20, 2001 through December 16, 2002 due to bankruptcy proceedings,
was added to the Peer Group in the current year as the result of the change
in reportable operating segments.
10
The Peer Group consolidation was completed on a weighted average basis (market
capitalization basis, adjusted at the end of each year). The graph assumes $100
invested on December 31, 2001, with all dividends reinvested, in the Company and
each of the other indices.
COMPARISON OF 5 YEARS CUMULATIVE TOTAL RETURN
[GRAPHIC OMITTED]
Base
Period
Company Name/index Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06
----------------------------- ---------- ---------- ---------- ---------- ---------- ----------
United Capital Corp. ........ $ 100.00 $ 166.20 $ 203.08 $ 221.99 $ 241.79 $ 289.42
AMEX Composite Index ........ $ 100.00 $ 100.08 $ 144.57 $ 178.46 $ 220.35 $ 262.17
Peer Group .................. $ 100.00 $ 122.77 $ 144.07 $ 176.98 $ 165.36 $ 210.53
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below should be read in
conjunction with, and is qualified in its entirety by reference to, the
Consolidated Financial Statements and the Notes thereto.
Year Ended December 31,
(In thousands, except per share data) ------------------------------------------------------------------------
2006 2005 2004 2003 2002
-------- -------- -------- -------- --------
Total revenues ............................ $ 65,368 $ 60,107 $ 59,939 $ 55,468 $ 54,361
Income from continuing operations ......... $ 30,051 $ 13,276 $ 25,712 $ 10,611 $ 21,156
Income from continuing operations
per share: Basic ....................... $ 3.62 $ 1.49 $ 2.82 $ 1.17 $ 2.31
Dividends paid per share .................. $ -- $ -- $ -- $ 1.00 $ --
Total assets .............................. $223,600 $216,685 $212,724 $189,714 $176,547
Long-term debt, less current
portion ................................. $ 11,669 $ 12,140 $ 4,929 $ 7,321 $ 10,235
Total stockholders' equity ................ $179,473 $155,650 $154,069 $124,217 $111,634
Certain reclassifications have been reflected in the above financial data to
conform prior years' data to the current classifications, which primarily relate
to the reclassification of certain properties to discontinued operations in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144"). Per share amounts have been retroactively adjusted to reflect the
two-for-one stock split in August 2003.
11
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: 2006 AND 2005
Total revenues increased $5.3 million or 8.8% for the twelve months ended
December 31, 2006 to $65.4 million, compared to $60.1 million for the twelve
months ended December 31, 2005, primarily due to the acquisition of a hotel in
November 2005. Income from continuing operations for the current year was $30.1
million or $3.62 per basic share versus $13.3 million or $1.49 per basic share
for the 2005 calendar year. Net income for the year ended December 31, 2006 was
$30.6 million or $3.68 per basic share compared to $14.6 million or $1.64 per
basic share for the year ended December 31, 2005.
The 2006 results were favorably impacted by the reversal of $17.3 million in
long-term and deferred income tax liabilities related to certain tax matters for
which the statue of limitations has expired.
The Company's historical results have been significantly affected by the timing
of events including the sale of marketable securities and real estate assets,
which were dependent upon economic conditions at the time of the sale. The
Company is unable to predict if or when such events will recur.
REAL ESTATE OPERATIONS
The Company's real estate operations consist of the real estate investment and
management and hotel operations segments. The operating results for these
segments are as follows:
Year Ended Year Ended
(In thousands) December 31, 2006 December 31, 2005
------------------------------ ------------------------------
Real Hotel Real Hotel
Estate Operations Total Estate Operations Total
------- ---------- ------- ------- ---------- -------
Revenues ........................... $19,403 $ 8,807 $28,210 $17,962 $ 3,944 $21,906
Mortgage interest
expense .......................... 268 529 797 373 22 395
Depreciation expense ............... 1,563 782 2,345 1,916 251 2,167
Other operating
expenses ......................... 5,547 7,078 12,625 5,046 3,338 8,384
------- ------- ------- ------- ------- -------
Operating income ................... $12,025 $ 418 $12,443 $10,627 $ 333 $10,960
======= ======= ======= ======= ======= =======
REAL ESTATE INVESTMENT AND MANAGEMENT
Revenues from the real estate investment and management segment increased $1.4
million or 8.0% to $19.4 million for the year ended December 31, 2006, compared
to $18.0 million in 2005. The increase is primarily the result of lease renewals
at higher rents ($1.8 million) partially offset by recurring tenant turnover
($1.1 million). In addition, during the first quarter of 2006, the Company
recognized additional revenue from a non-recurring transaction ($.5 million). In
general, rental revenues from the Company's real estate properties do not
fluctuate significantly due to the long-term nature of the Company's leases.
However, future rental revenues could be affected by lease renewals,
terminations, step-ups and escalations and by the purchase or sale of additional
properties.
Mortgage interest expense amounted to $268,000 for the year ended December 31,
2006, a decrease of $105,000 or 28.2%, compared to 2005, as a result of
continuing mortgage amortization. At December 31, 2006, the outstanding mortgage
balance on the Company's real estate investment properties was reduced to $4.3
million. Mortgage interest expense on existing obligations of the Company's real
estate investment and management segment will continue to decline with scheduled
principle reductions.
12
Depreciation expense associated with real properties held for rental decreased
$353,000 or 18.4% for the year ended December 31, 2006, compared to 2005. The
decrease was primarily attributable to reduced depreciation expense associated
with certain properties or improvements becoming fully depreciated in the
current and prior year ($592,000), partially offset by depreciation from current
year additions ($268,000). Due to the May 2006 purchase of a commercial property
and other expenditures for capital improvements incurred during the current
year, depreciation expense on the Company's properties should increase in future
years.
Other operating expenses associated with the management of real properties
increased $501,000 or 9.9% for the year ended December 31, 2006, compared to
such expenses incurred in 2005. The increase is primarily related to a property
converted from a triple net lease ($372,000) in 2005 and the receipt of
non-recurring tenant reimbursements ($107,000) in 2005.
HOTEL OPERATIONS
The hotel operations segment consists of three hotels. The Company acquired a
hotel in November 2005, located in Windsor Locks, Connecticut (the "Connecticut
Hotel"). The increases in hotel operating revenues and related mortgage
interest, depreciation and other operating expenses for the year ended December
31, 2006, compared to the year ended December 31, 2005 are primarily the result
of the acquisition of the Connecticut Hotel. Mortgage interest expense for the
year ended December 31, 2006 amounted to $529,000 which is related to the
Connecticut Hotel mortgage. At December 31, 2006, the outstanding mortgage
balance was $7.9 million. Future hotel operating revenues and expenses will vary
based on demand and desirability of these properties compared to others in their
immediate proximity and may be influenced by local and other economic
conditions, including the room rate of the hotels.
ENGINEERED PRODUCTS
The Company's engineered products segment includes Metex and AFP Transformers.
The operating results of the engineered products segment are as follows:
Year Ended December 31,
(In thousands) ------------------------
2006 2005
--------- ----------
Net sales ....................................... $37,158 $38,201
Cost of sales ................................... 27,522 28,003
Selling, general and administrative expenses .... 6,852 7,023
------- -------
Operating income ................................ $ 2,784 $ 3,175
======= =======
Net sales of the engineered products segment decreased 2.7% for the year ended
December 31, 2006 to $37.2 million from $38.2 million for the year ended
December 31, 2005. This is primarily due to decreased demand in the Company's
automotive product line which is a result of continued softening of sales in the
automotive industry, as well as competitive price pressures, offset by an
increase in the Company's transformer product line. Although management believes
that sales of its engineered products segment are directly influenced by general
economic conditions, worldwide automotive demand and industrial capital
spending, future sales of this segment could also be affected by changes in
technology, competitive forces or challenges to its intellectual property.
Cost of sales as a percentage of sales increased less than 1% for the year ended
December 31, 2006, compared to 2005, primarily related to an increase in the
cost of raw materials, principally copper components, which, where possible,
have been passed along to customers. In addition, the mix of products sold,
discussed above, also contributed to the increase. Continued increases in the
price of raw materials could effect the gross margin and operating profit of the
engineered products segment.
Selling, general and administrative expenses of the engineered products segment
decreased $171,000 or 2.4% for the year ended December 31, 2006, compared to
2005. The decrease is primarily due to decreases in travel and related expenses
($88,000) and professional fees ($54,000).
13
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses not associated with the manufacturing
operations increased $1.2 million or 41.4% for the year ended December 31, 2006,
compared to such expenses incurred in 2005. This increase primarily relates to
compensation expense associated with unvested stock options resulting from the
adoption of SFAS No. 123R effective January 1, 2006 ($807,000) (see Note 1 of
Notes to Consolidated Financial Statements), an increase in compensation and
benefits ($115,000) and a non-recurring transaction ($89,000) in 2005. As of
December 31, 2006, there were no unrecognized compensation costs relating to
share-based payments.
OTHER INCOME AND EXPENSE, NET
Other income and expense, net was $2.0 million in 2006 as compared to $5.6
million in 2005. The decrease is primarily due to gains in 2005 on the sale of
the Company's interest in a joint venture which owns and operates a hotel
located in Quebec, Canada ($626,000) as well as the sale by a joint venture
which owned and operated a hotel located in New Jersey of its underlying assets
($3,327,000).
INCOME TAXES
The effective tax rate from continuing operations for the year ended December
31, 2006 was favorably impacted by the reversal of $17.3 million in long-term
and deferred income tax liabilities related to certain tax matters for which the
statue of limitations has expired. Excluding this reversal, the effective tax
rate from continuing operations for the years ended December 31, 2006 and 2005
was 35.3% and 36.9%, respectively.
DISCONTINUED OPERATIONS
Loss from operations on properties sold or held for sale and accounted for as
discontinued operations was $39,000, on a net of tax basis, for the year ended
December 31, 2006. Income from operations on properties sold or held for sale
and accounted for as discontinued operations was $22,000, on a net of tax basis,
for the year ended December 31, 2005. Prior year amounts have been reclassified
to reflect results of operations of real properties held for sale as of December
31, 2006, or disposed of during 2006 and 2005, as discontinued operations.
During 2006, the Company divested itself of two properties which had a net book
value of $936,000. The aggregate proceeds from these transactions were
$1,849,000 resulting in a gain of $548,000, on a net of tax basis.
During 2005, the Company divested itself of four properties which had a net book
value of $1.0 million. The aggregate proceeds from these transactions were $3.2
million, resulting in a gain of $1.3 million, on a net of tax basis.
RESULTS OF OPERATIONS: 2005 AND 2004
Total revenues for the year ended December 31, 2005 were $60.1 million,
generating income from continuing operations and net income of $13.3 million and
$14.6 million, respectively. For the year ended December 31, 2004, total
revenues were $60.0 million, generating income from continuing operations and
net income of $25.7 million and $37.4 million, respectively. The Company
recognized $4.6 million of interest and dividend income during 2005, an increase
of $2.4 million or 115.6% over 2004, primarily as the result of higher interest
rates and the increased investment in dividend paying securities.
The 2004 results include $19.4 million in gains on the sale of
available-for-sale securities and $10.1 million in gains on the sale of real
estate, on a net of tax basis, above those recognized in 2005. In addition, the
2004 results include the tax benefit from several charitable donations of real
estate made by the Company during that year.
14
REAL ESTATE OPERATIONS
The Company's real estate operations consist of the real estate investment and
management and hotel operations segments. The operating results for these
segments are as follows:
Year Ended Year Ended
(In Thousands) December 31, 2005 December 31, 2004
------------------------------- -------------------------------
Real Hotel Real Hotel
Estate Operations Total Estate Operations Total
------- ---------- -------- ------- ---------- --------
Revenues ................... $17,962 $ 3,944 $21,906 $18,448 $ 3,156 $21,604
Mortgage interest
expense .................. 373 22 395 572 -- 572
Depreciation expense ....... 1,916 251 2,167 2,558 467 3,025
Other operating
expenses ................. 5,046 3,338 8,384 4,362 2,905 7,267
------- ------- ------- ------- ------- -------
Operating income ........... $10,627 $ 333 $10,960 $10,956 $ (216) $10,740
======= ======= ======= ======= ======= =======
REAL ESTATE INVESTMENT AND MANAGEMENT
Revenues from the real estate investment and management segment decreased
$486,000 or 2.6% to $18.0 million for the year ended December 31, 2005, compared
to $18.4 million in 2004, primarily the result of a reduction in rental revenues
resulting from certain mid-year vacancies in the Company's portfolio during 2005
($353,000).
Mortgage interest expense continued to decrease as a result of continuing
mortgage amortization. Such expense totaled $373,000 for the year ended December
31, 2005, compared to $572,000 for 2004, a decline of $199,000 or 34.8%.
Depreciation expense associated with real properties held for rental decreased
$642,000 or 25.1% for the year ended December 31, 2005, compared to 2004. The
decrease is primarily attributable to reduced depreciation expense associated
with certain properties or improvements becoming fully depreciated in 2005 and
2004 ($779,000), partially offset by depreciation from 2005 additions
($100,000).
Other operating expenses associated with the management of real properties
increased $684,000 or 15.7% for the year ended December 31, 2005, compared to
such expenses incurred in 2004. This increase is primarily the result of real
estate tax expense ($337,000), property maintenance ($233,000) and compensation
expense ($214,000).
HOTEL OPERATIONS
Hotel operating revenues increased $788,000 or 25.0% to $3.9 million for the
year ended December 31, 2005, compared to $3.2 million in 2004, primarily as the
result of improved lodging demand due to a stronger U.S. economy and the
acquisition of the Connecticut Hotel. Total operating expenses of the Company's
hotel segment increased $239,000 or 7.1% to $3.6 million in 2005, compared to
$3.4 million in 2004, primarily due to the acquisition of the Connecticut Hotel.
ENGINEERED PRODUCTS
The Company's engineered products segment includes Metex and AFP Transformers.
The operating results of the engineered products segment are as follows:
(In thousands) Year Ended December 31,
-----------------------
2005 2004
------- -------
Net sales ........................................ $38,201 $38,335
Cost of sales .................................... 28,003 27,026
Selling, general and administrative expenses ..... 7,023 7,122
------- -------
Operating income ................................. $ 3,175 $ 4,187
======= =======
Net sales of the engineered products segment decreased slightly for the year
ended December 31, 2005 to $38.2 million from $38.3 million for the year ended
December 31, 2004. This is primarily due to decreased demand in the Company's
15
engineered and automotive product lines, partially offset by an increase in
transformer products, which occurred in the first half of 2005. The decrease in
the automotive product line is primarily a result of a softening of sales in the
automotive industry.
Cost of sales as a percentage of sales increased 2.8% for the year ended
December 31, 2005, compared to 2004, primarily related to the shift in segment
sales, as noted above, and increases in the cost of raw materials, primarily
steel components. In addition, the Company incurred rework and nonconformance
costs associated with a new product line, primarily during the first six months
of 2005.
Selling, general and administrative expenses of the engineered products segment
remained relatively consistent, decreasing $99,000 or 1.4% for the year ended
December 31, 2005, compared to 2004. The decrease was primarily due to decreases
in payroll and payroll related expenses ($190,000) and freight costs ($182,000),
partially offset by an increase in professional fees ($253,000).
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses not associated with the manufacturing
operations increased $185,000 or 6.8% for the year ended December 31, 2005,
compared to such expenses incurred in 2004, primarily attributable to an
increase in travel expenses ($369,000) partially offset by a non-recurring
transaction ($89,000) in 2005.
OTHER INCOME AND EXPENSE, NET
Other income and expense, net decreased $16.8 million from $22.4 million in 2004
to $5.6 million in 2005. The decrease is primarily due to the 2004 sale of the
Company's interest in Prime Hospitality Corp. which resulted in a gain of $19.0
million in that year and is partially offset by gains on the sale of the
Company's interest in a joint venture which owns and operates a hotel located in
Quebec, Canada ($626,000) as well as the sale by a joint venture which owned and
operated a hotel located in New Jersey of its underlying assets in 2005
($3,327,000).
INCOME TAXES
The effective tax rate from continuing operations for the year ended December
31, 2004 reflects the benefits of the donation of certain properties to
qualified charitable organizations in that year.
DISCONTINUED OPERATIONS
Income from operations on properties sold or held for sale and accounted for as
discontinued operations was $22,000, on a net of tax basis, for the year ended
December 31, 2005, versus $282,000 for 2004. Prior year amounts have been
reclassified to reflect results of operations of real properties held for sale
as of December 31, 2006, or disposed of during 2006 and 2005, as discontinued
operations.
During 2005, the Company divested itself of four properties which had a net book
value of $1.0 million. The aggregate proceeds from these transactions were $3.2
million, resulting in a gain of $1.3 million, on a net of tax basis.
During 2004, the Company divested itself of ten properties which had a net book
value of $6.2 million. The cash proceeds from these transactions were $24.3
million. In addition, the Company received an $800,000 purchase money mortgage
in connection with the sale of one of these properties. Two of the properties
disposed of were contributed to charitable organizations. Net gains on the
disposal of real estate assets accounted for as discontinued operations were
$11.4 million, on a net of tax basis, for the year ended December 31, 2004.
LIQUIDITY AND CAPITAL RESOURCES
The Company experienced a net cash inflow from operations of approximately $15.1
million, $4.9 million and $.3 million for the years ended December 31, 2006,
2005 and 2004, respectively. The $10.2 million increase in operating cash flows
from 2005 to 2006 principally results from a decrease in notes and accounts
receivables, net ($2.8 million) and increases in income taxes payable ($2.5
million), interest and dividend income ($1.9 million) and accounts payable and
accrued liabilities ($1.1 million).
16
Cash flows provided by operating activities in 2005 exceeded 2004 by $ 4.6
million. Additional interest and dividend income of $2.4 million earned in 2005
is the primary cause of this increase. The increase in interest rates and the
Company's increased holdings in dividend paying securities resulted in a 115%
increase in interest and dividend income over that earned in 2004. Changes in
operating assets and liabilities during 2005 consumed $5.4 million in cash. The
most significant of which were income taxes ($2.7 million) and notes and
accounts receivable ($1.8 million). The latter of which was caused by the delay
in the receipt of a portion of the proceeds in connection with the sale of the
Company's interest in a joint venture which owns and operates a hotel located in
Quebec, Canada, which was received in early 2006.
Net cash used in investing activities was $25.2 million for 2006 versus net cash
provided by investing activities of $23.4 million in 2005. This change primarily
results from the timing of the purchase or sale of available for sale securities
($26.4 million), lower distributions from joint ventures ($15.6 million) which
included sale proceeds and distributions related to the Company's interest in
certain hotel ventures, and the acquisition of/additions to real estate assets
($7.2 million) which included the May 2006 purchase of a commercial property
located in Long Island City, New York for approximately $8.5 million.
Net cash provided by investing activities in 2005 was lower than that of 2004 by
$5.5 million. The timing of certain events is the primary cause of this
fluctuation. Proceeds from the sale of real estate assets were $21.1 million
lower in 2005 while cash used for the acquisition of real estate and other fixed
assets was $5.6 million higher in 2005 than the respective amounts in 2004,
including those accounted for as discontinued operations. The increase in
acquisition costs includes the purchase of the Connecticut Hotel in November
2005, net of the related mortgage. Offsetting these reductions in 2005 cash
flows from investing activities are $15.4 million less in sale proceeds and
distributions related to the Company's interest in certain joint ventures and
$6.6 million in additional net proceeds from the available-for-sale security
transactions in 2005 versus the respective amounts in 2004.
During November 2005, the Company acquired the Connecticut Hotel for
approximately $10.2 million, including $3.0 million which was allocated to
furniture, fixtures and equipment. The purchase was partially financed by an
$8.0 million mortgage which bears interest at 6.7% per annum, is payable monthly
based on a 25 year amortization and matures in December 2015. The total cost of
the acquisition, less the proceeds of the mortgage, is reflected in acquisition
of/additions to real estate assets in the Consolidated Statements of Cash Flows
for 2005.
Net cash used in financing activities was approximately $12.8 million, $13.4
million and $3.6 million during 2006, 2005 and 2004, respectively. The 2006
amount is primarily attributable to the January 2006 purchase and retirement of
544,000 shares of common stock for an aggregate price of $13.3 million or $24.50
per share related to a "Dutch Auction" self-tender offer. In addition, the
Company used cash for the purchase and retirement of an additional $.3 million
and $10.0 million of the Company's Common Stock during 2006 and 2005,
respectively. The Company also used $.7 million, $3.6 million and $3.9 million
of cash for principal payments on mortgage obligations, including those
associated with discontinued operations, during 2006, 2005 and 2004,
respectively. These uses of cash were offset by proceeds from the exercises of
stock options during 2006, 2005 and 2004 of $.8 million, $.2 million and $.3
million, respectively, and from tax benefits related to the exercise of stock
options of $.7 million during 2006.
Previous purchases of the Company's Common Stock have reduced the Company's
additional paid-in capital to zero and have also reduced retained earnings by
amounts in excess of par value. Any future purchases in excess of par value will
also reduce retained earnings. Repurchases of the Company's Common Stock may be
made from time to time in the open market at prevailing market prices and may be
made in privately negotiated transactions, subject to available resources.
Future proceeds from the issuance of Common Stock in excess of par value will be
credited to retained earnings until such time that previously recorded
reductions have been recovered.
At December 31, 2006, the Company's cash and marketable securities were $139.6
million and working capital was $140.2 million, compared to cash and marketable
securities of $140.0 million and working capital of $142.4 million at December
31, 2005. Management continues to believe that the real estate market is
overvalued and accordingly acquisitions have been limited to those select
properties that meet the Company's stringent financial requirements. Management
believes that the available working capital puts the Company in an opportune
position to fund acquisitions and grow the portfolio, if and when attractive
long-term opportunities become available.
17
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. The debt of the joint venture in which the Company currently has
an ownership interest is a non-recourse obligation and is collateralized by the
entity's real property. The Company believes that the value of the underlying
property and its operating cash flows are sufficient to satisfy its obligations.
The Company is not obligated for the debts of the joint venture, but could
decide to satisfy them in order to protect its investment. In such event, the
Company's capital resources and financial condition would be reduced and, in
certain instances, the carrying value of the Company's investment and its
results of operations would be negatively impacted.
The cash needs of the Company have been satisfied from funds generated by
current operations. It is expected that future operational cash needs will also
be satisfied from existing cash balances, marketable securities, ongoing
operations or borrowings. The primary source of capital to fund additional real
estate acquisitions and to make additional high-yield mortgage loans may come
from existing funds, the sale, financing and refinancing of the Company's
properties and from third party mortgages and purchase money notes obtained in
connection with specific acquisitions.
In addition to the acquisition of properties for consideration consisting of
cash and mortgage financing proceeds, the Company may acquire real properties in
exchange for the issuance of the Company's equity securities. The Company may
also finance acquisitions of other companies in the future with borrowings from
institutional lenders and/or the public or private offerings of debt or equity
securities. The Company currently has no agreements, commitments or
understandings with respect to the acquisition of other companies or the
acquisition of real properties in exchange for equity or debt securities.
Funds of the Company in excess of those needed for working capital, purchasing
real estate and arranging financing for real estate acquisitions are invested by
the Company in corporate equity securities, corporate notes, certificates of
deposit, government securities and other financial instruments. Changes in U.S.
interest rates affect the interest earned on the Company's cash and cash
equivalent balances and other interest bearing investments. Given the level of
cash and other interest bearing investments held by the Company and the increase
in U.S. interest rates, the Company's earnings have been favorably impacted.
In strategies designed to hedge overall market risk, the Company may sell common
stock short or participate in put and/or call options. These instruments do not
qualify for hedge accounting and therefore changes in such derivatives' fair
value are recognized in earnings. These derivatives are recorded as a component
of accounts payable and accrued liabilities in the Consolidated Balance Sheets.
The Company sells its engineered products to many customers throughout the
world. Historically, a small number of customers have accounted for significant
portions of these sales. For the year ended December 31, 2006, sales by the
engineered products segment to General Motors and Autoliv, its largest
customers, accounted for 15.6% and 10.5% of the segment's sales, respectively.
Since our engineered products segment accounted for 56.8% of our consolidated
revenues in 2006, the loss of either of these customers would adversely affect
the Company's revenues, cash flows and results of operations.
The Company manufactures its products in the United States and Mexico and sells
its products in those markets as well as in Europe, South America and Asia. As a
result, the Company's operating results could be affected by factors such as
changes in foreign currency exchange rates or weak economic conditions in the
foreign markets in which the Company distributes its products. Most of the
Company's sales are denominated in U.S. dollars. For the years ended December
31, 2006, 2005 and 2004, 5.9%, 7.5% and 9.5% of the net sales of the Company's
engineered products segment were denominated in Euros, respectively. As such, a
portion of the Company's receivables are exposed to fluctuations with the U.S.
dollar. However, the Company does not believe this risk to be material to its
overall financial position. Since the Euro has historically been relatively
stable in relation to the U.S. dollar, the Company's results have not been
significantly impacted by foreign exchange gains or losses in the past.
Accordingly, the Company has not entered into forward exchange contracts to
hedge this exposure. If such exposure were to increase in the future, the
Company may reexamine this practice to minimize the associated risks.
The Company has undertaken the completion of environmental studies and/or
remedial action at Metex' two New Jersey facilities and has recorded a liability
for the estimated investigation, remediation and administrative costs associated
18
therewith. See "Environmental Regulations" in Item 1 of Part I and Note 17,
"Commitments and Contingencies" of Notes to Consolidated Financial Statements
for further discussion on this matter.
The Company is subject to various other litigation, legal, regulatory and tax
matters that arise in the ordinary course of business activities. When
management believes it is probable that liabilities have been incurred and such
amounts are reasonably estimable, the Company provides for amounts that include
judgments and penalties that may be assessed. These liabilities are usually
included in accounts payable and accrued liabilities or other long-term
liabilities in the Consolidated Financial Statements, depending on the
anticipated payment date. During 2006, the Company reversed $17.3 million in
long-term and deferred income tax liabilities relating to certain tax matters
for which the statue of limitations has expired. None of the remaining matters
are expected to result in a material adverse effect on the Company's
consolidated financial position or results of operations.
CONTRACTUAL OBLIGATIONS, COMMITMENTS AND CONTINGENCIES
The following table summarizes the Company's contractual cash obligations and
other commitments at December 31, 2006:
(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) .................... $ 471 $ 2,688 $ 872 $ 8,109 $12,140
Interest on long-term debt (1) ........ 768 1,387 1,133 1,912 5,200
Operating leases (2) .................. 576 942 255 1,636 3,409
Employment contract (3) ............... 800 -- -- -- 800
Estimated environmental related
costs (3) ........................... 250 1,146 372 7,923 9,691
------- ------- ------- ------- -------
Total contractual cash obligations .... $ 2,865 $ 6,163 $ 2,632 $19,580 $31,240
======= ======= ======= ======= =======
(1) See Note 7 of Notes to Consolidated Financial Statements.
(2) See Note 16 of Notes to Consolidated Financial Statements.
(3) See Note 17 of Notes to Consolidated Financial Statements.
RELATED PARTY TRANSACTIONS
The Company has a 50% interest in an unconsolidated limited liability
corporation, whose principal assets are two distribution centers leased to
Kmart. A group that includes the wife of the Company's Board Chairman, two
Directors of the Company and the wife of one of the Directors has an 8% interest
in this entity. The Company's share of income arising from this investment,
accounted for as a leveraged lease, was $279,000, $357,000 and $428,000 for the
years ended December 31, 2006, 2005 and 2004, respectively.
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 earned and deemed collectible. The effect of stepped-rent increases on
significant leases are recorded, net of allowances, on a straight-line basis.
19
Gains on sales of real estate assets and equity investments are recorded when
the gain recognition criteria under generally accepted accounting principles in
the United States of America have been met.
The Company does not have leases that include significant rent concessions or
provisions that require the lessee to fund capital improvements or to pay the
lessor any revenues based upon indexes or rates that are not explicitly stated
in the lease.
Reimbursements of certain costs received from tenants are recognized as tenant
reimbursement revenues.
Certain lease agreements provide for additional rent based on a percentage of
tenants' sales. These percentage rents are recorded once the required sales
levels are achieved.
Income on leveraged leases is recognized by a method that produces a constant
rate of return on the outstanding investment in the lease, net of the related
deferred tax liability, in the years in which the net investment is positive.
Accounts receivable are recorded at the outstanding amounts, net of allowances
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,
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 - HOTEL OPERATIONS
Revenues from the Company's hotel operations are generally recognized when
earned. Hotel revenues primarily represent room rental and food and beverage
sales and are recognized at the time of the hotel stay or sale of restaurant
services.
Accounts receivable are recorded at the outstanding amounts, net of allowances
for doubtful accounts. The Company determines the allowance for doubtful
accounts based on an assessment of the collectibility of specific customer
accounts which include the length of time the receivables are past due, the
financial health of the customer and historical experience. The Company's net
income is directly affected by management's assessment of the collectibility of
accounts receivable.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE - ENGINEERED PRODUCTS
In general, sales are recorded when products are shipped, title has passed and
collection is reasonably assured. Management believes that adequate controls are
in place to ensure compliance with contractual product specifications, a
substantial history of such performance has been established and historical
returns and allowances have not been significant. If actual sales returns and
allowances exceed historical amounts, the Company's sales would be adversely
affected.
Accounts receivable are recorded at the outstanding amounts, net of allowances
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 such
classification at each reporting date. At December 31, 2006 and 2005, all
marketable securities held by the Company have been classified as
available-for-sale and, as a result, are stated at fair value, based on quoted
20
market prices. Unrealized gains and losses on available-for-sale securities are
recorded as a separate component of stockholders' equity. Realized gains and
losses on the sale of securities, as determined on a first-in, first-out basis,
are included in the Consolidated Statements of Income.
The Company reviews its investments on a regular basis to evaluate whether or
not each security has experienced an other-than-temporary decline in fair value.
If it is believed that an other-than-temporary decline exists, the Company will
write down the investment to market value and record the related write-down as a
loss in the Consolidated Statements of Income.
The Company's net income is directly affected by management's classification of
marketable securities, as well as its determination of whether an
other-than-temporary decline in the value of its investments exists.
INVENTORIES
The Company values inventory at the lower of cost or market, cost being
determined on a first-in, first-out basis. The Company regularly reviews
inventory quantities on hand and records a provision for excess and obsolete
inventory based primarily on existing and anticipated design and engineering
changes to its products as well as forecasts of future product demand. The
Company's net income is directly affected by management's estimate of the
realizability of inventories.
REAL ESTATE
Land, buildings and improvements and equipment are recorded at cost, less
accumulated depreciation and amortization. Expenditures for maintenance and
repairs are charged to operations as incurred. Significant renovations and
replacements, which improve the life of the asset, are capitalized and
depreciated over their estimated useful lives.
Depreciation is computed utilizing the straight-line method over the estimated
useful lives of 18 to 39 years for buildings, seven to 39 years for renovations
and improvements and five to 15 years for equipment and fixtures.
Assets held for sale are reported at the lower of the carrying amount or fair
value less costs to sell and depreciation is discontinued. Property sales or
dispositions are recorded when title transfers. Upon disposition, the related
costs and accumulated depreciation are removed from the respective accounts. Any
gain or loss on sale or disposition is recognized in accordance with accounting
principles generally accepted in the United States of America. In the normal
course of business, the Company receives offers for the sale of properties,
either solicited or unsolicited. For those offers that are accepted, the
prospective buyer usually requires a due diligence period before consummation of
the transaction. It is not unusual for matters to arise that result in the
withdrawal or rejection of the offer during this process. If circumstances arise
that previously were considered unlikely and, as a result, management decides
not to sell a property classified as held for sale, the property is reclassified
as held for rental. A property that is reclassified is measured and recorded
individually at the lower of its carrying amount before being classified as held
for sale, adjusted for any depreciation expense that would have been recognized
had the property been continuously classified as held for rental or its fair
market value at the date of the subsequent decision not to sell.
The Company is required to make subjective assessments as to the useful lives of
its properties for purposes of determining the amount of depreciation to reflect
on an annual basis with respect to those properties. These assessments have a
direct impact on the Company's net income. Should the Company adjust the
expected useful life of a particular asset, it would be depreciated over the
adjusted years, and result in a revised depreciation expense and net income.
DISCONTINUED OPERATIONS
The Company is required to make certain subjective assessments utilizing the
provisions of SFAS No. 144 in determining whether a long-lived asset to be
disposed of should be reclassified as discontinued operations. The Company
considers real property to be held for sale and reported as discontinued
operations if management commits to a plan to sell the asset under usual and
customary terms and believes such sale will be completed within one year. In
such event, the financial results associated with these assets are reclassified
as discontinued operations for all periods presented. Although operating income,
income from continuing operations and income from discontinued operations are
directly affected by management's assessments, the reclassification has no
impact on net income.
21
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. These assumptions are used in actuarial calculations to estimate
pension costs as well as pension assets or liabilities included in the Company's
Consolidated Financial Statements. While the Company believes that the
assumptions used are appropriate, significant differences in actual experience
or significant changes in assumptions would affect the Company's pension costs
and obligations.
The Company has assumed the expected long-term rate of return on plan assets to
be 8% in each of the last three years. Based on the Company's existing and
forecasted asset allocation and related long-term investment performance
results, the Company believes that its assumption of future returns of 8% is
reasonable. The assumed long-term rate of return on assets is applied to a
calculated value of plan assets, which recognizes changes in the fair value of
plan assets in a systematic manner. This produces the expected return on plan
assets that is included in net periodic 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 net periodic pension income (expense). A 100
basis point change in the expected long-term rate of return on plan assets would
have changed fiscal 2006 net periodic pension expense by $88,000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk generally represents the risk of loss that may result from the
potential change in the value of a financial instrument as a result of
fluctuations in interest and currency exchange rates and in equity and commodity
prices. Derivative financial instruments are used by the Company principally in
the hedging of overall market risks and the management of its interest rate
exposure.
The primary objective of the Company's investment activities is to preserve
principal and maximize yields without significantly increasing market risk. To
achieve this, management maintains a portfolio of cash equivalents and
investments in a variety of securities, primarily U.S. investments in both
common and preferred equity issues.
Funds of the Company in excess of those needed for working capital, purchasing
real estate and arranging financing for real estate acquisitions are invested by
the Company in corporate equity securities, corporate notes, certificates of
deposit, government securities and other financial instruments. Changes in U.S.
interest rates affect the interest earned on the Company's cash and cash
equivalent balances and other interest bearing investments. Given the level of
cash and other interest bearing investments held by the Company and the increase
in U.S. interest rates, the Company's earnings have been favorably impacted.
22
The Company's marketable securities consist of U.S. investments in both common
and preferred equity issues and are subject to the fluctuations in U.S. stock
markets. Most of the Company's mortgages payable are fixed rate and
self-amortizing from the net cash flow of the underlying properties. The
Company's derivative instruments primarily consist of put and/or call options.
Such derivatives are subject to the fluctuations in U.S. stock markets.
The Company manufactures its products in the United States and Mexico and sells
its products in those markets as well as in Europe, South America and Asia. As a
result, the Company's operating results could be affected by factors such as
changes in foreign currency exchange rates or weak economic conditions in the
foreign markets in which the Company distributes its products. Most of the
Company's sales are denominated in U.S. dollars. For the years ended December
31, 2006, 2005 and 2004, 5.9%, 7.5% and 9.5% of the net sales of the Company's
engineered products segment were denominated in Euros, respectively. As such, a
portion of the Company's receivables are exposed to fluctuations with the U.S.
dollar. However, the Company does not believe this risk to be material to its
overall financial position. Since the Euro has historically been relatively
stable in relation to the U.S. dollar, the Company's results have not been
significantly impacted by foreign exchange gains or losses in the past.
Accordingly, the Company has not entered into forward exchange contracts to
hedge this exposure. If such exposure were to increase in the future, the
Company may reexamine this practice to minimize the associated risks.
The Company's manufacturing operations utilize various metal commodities
(principally stainless steel) in the manufacturing process. While key metals
purchased from foreign entities are generally denominated in U.S. dollars,
fluctuations in the suppliers' local currencies may impact pricing. The Company
is unable to quantify the effects of such fluctuations; however, it does enter
into purchase commitments for certain key metals that generally do not exceed
twelve months which tends to minimize short-term currency fluctuations. The
Company's financial results, however, could be significantly affected by
fluctuations in metals pricing.
The following is a tabular presentation of quantitative market risks at December
31, 2006:
Principal (Notional) Amount by Expected Maturity
------------------------------------------------------------------------------------- Fair
There- Value
(Dollars in Thousands) 2007 2008 2009 2010 2011 After Total 12/31/06
--------- ------- -------- ------- ------- -------- ------- --------
ASSETS
Available-for-sale
securities ................ $ 62,917 $ -- $-- $-- $-- $ -- $62,917 $62,917
Notes receivable ............ $ 836 $ 725 $ 84 $ 88 $ 91 $ 706 $ 2,530 $ 2,763
Average interest rates ...... 12.6% 10.8% 10.2% 10.9% 11.7% 13.0%
LIABILITIES
Long-term debt,
including current
portion
Fixed rate ............... $ 471 $ 518 $ 2,170 $ 455 $ 417 $ 8,109 $12,140 $11,142
Average interest rate .... 6.4% 6.4% 6.5% 6.6% 6.6% 6.6%
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1 of Notes to Consolidated Financial Statements for a full description
of recent accounting pronouncements including the respective dates of adoption
and effects on results of operations and financial condition.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary information filed as part of this
Item 8 are listed under Item 15, "Exhibits and Financial Statement Schedules"
and are contained in this Form 10-K, beginning on page 28.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
23
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) and
15d-15(e). Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in the Company's periodic reports. There have been no significant
changes in the Company's internal controls over financial reporting or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
ITEM 9B. OTHER INFORMATION
The salary of A.F. Petrocelli, the Company's Chairman, President and Chief
Executive Officer, is set forth in his employment agreement, as amended from
time to time by the Company's Compensation and Stock Option Committee (the
"Committee"). The employment agreement was filed as an exhibit to the Company's
Form 10-K for the fiscal year ended December 31, 2003. Per Mr. Petrocelli's
employment agreement, the Committee determines the amount of salary and bonus
paid to him annually. The Committee, in consultation with Mr. Petrocelli,
determines the salaries and bonuses of Michael T. Lamoretti and Michael J.
Weinbaum, who are both Vice Presidents of the Company's real estate operations,
and Anthony J. Miceli, the Company's Vice President and Chief Financial Officer.
Messrs. Lamoretti, Weinbaum and Miceli do not have written employment agreements
with the Company. Effective January 2007, Messrs. Lamoretti, Weinbaum and Miceli
received salary increases. In January 2007, the Committee approved bonuses for
Messrs. Petrocelli, Lamoretti, Weinbaum and Miceli payable in 2007. Such bonuses
were consistent with the bonuses paid in prior years and the Company does not
believe the salary increases constitute a material change from the disclosure in
the Company's Proxy Statement for its 2006 Annual Meeting of Stockholders.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This information will be contained in the Proxy Statement of the Company for the
2007 Annual Meeting of Stockholders under the caption "Election of Directors"
and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
This information will be contained in the Proxy Statement of the Company for the
2007 Annual Meeting of Stockholders under the caption "Executive Compensation"
and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
This information will be contained in the Proxy Statement of the Company for the
2007 Annual Meeting of Stockholders under the caption "Security Ownership" and
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information will be contained in the Proxy Statement of the Company for the
2007 Annual Meeting of Stockholders under the caption "Certain Relationships and
Related Transactions" and is incorporated herein by reference. Also see "Related
Party Transactions" in Item 7 and Note 11, "Transactions with Related Parties,"
of Notes to Consolidated Financial Statements, contained elsewhere in this
report.
24
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
This information will be contained in the Proxy Statement of the Company for the
2007 Annual Meeting of Stockholders under the caption "Independent Auditors" and
is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) CONSOLIDATED FINANCIAL STATEMENTS. The following Consolidated
Financial Statements and Consolidated Financial Statement Schedules
of the Company are included in this Form 10-K on the pages
indicated:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
Report of Independent Registered Public Accounting
Firm - Goldstein Golub Kessler LLP ...........................28
Consolidated Balance Sheets as of December 31, 2006
and 2005 .................................................... 29
Consolidated Statements of Income for the Years Ended
December 31, 2006, 2005 and 2004 ............................ 30
Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the Years Ended December 31,
2006, 2005 and 2004 ......................................... 31
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2006, 2005 and 2004 .....................32-33
Notes to Consolidated Financial Statements .................34-51
(2) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Schedule III -- Real Property and Accumulated
Depreciation ................................................ 52
Schedule IV -- Mortgage Loans on Real Estate .................. 53
(3) SUPPLEMENTARY DATA
Quarterly Financial Data (Unaudited) .......................... 54
Schedules not listed above are omitted as not applicable or the
information is presented in the Consolidated Financial Statements or
Notes thereto.
(b) EXHIBITS
3.1. Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to exhibit 3.1 filed with the Company's
report on Form 10-K for the fiscal year ended December 31, 1993).
3.2. Amendment to the Amended and Restated Certificate of Incorporation
of the Company (incorporated by reference to exhibit 3.2 filed with
the Company's report on Form 10-K for the fiscal year ended December
31, 2003).
3.3. By-laws of the Company (incorporated by reference to exhibit 3 filed
with the Company's report on Form 10-K for the fiscal year ended
December 31, 1980).
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).
25
10.3. 1988 Joint Incentive and Non-Qualified Stock Option Plan, as amended
(incorporated by reference to exhibit 10.2 filed with the Company's
report on Form 10-K for the fiscal year ended December 31, 1998).
10.4. Amended and Restated Employment Agreement dated as of November 17,
2003 by and between the Company and A. F. Petrocelli (incorporated
by reference to exhibit 10.4 filed with the Company's report on Form
10-K for the fiscal year ended December 31, 2003).
14. Code of Business Conduct and Ethics (incorporated by reference to
exhibit 14 filed with the Company's report on Form 10-Q for the
quarter ended June 30, 2006).
*21. Subsidiaries of the Company.
*23.1. Consent of Independent Registered Public Accounting Firm - Goldstein
Golub Kessler LLP.
*31.1. Certification of the Chief Executive Officer pursuant to Rule
13a-15(e) and 15d-15(e).
*31.2. Certification of the Chief Financial Officer pursuant to Rule
13a-15(e) and 15d-15(e).
*32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
*32.2. Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Filed herewith
26
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 26, 2007 By: /s/ A. F. Petrocelli
---------------------------------------
A. F. Petrocelli
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company in the
capacities and on the date indicated.
Dated: March 26, 2007 By: /s/ A. F. Petrocelli
---------------------------------------
A. F. Petrocelli
Chairman, President and
Chief Executive Officer
Dated: March 26, 2007 By: /s/ Michael T. Lamoretti
---------------------------------------
Michael T. Lamoretti
Vice President - Real Estate Operations
and Director
Dated: March 26, 2007 By: /s/ Howard M. Lorber
---------------------------------------
Howard M. Lorber
Director
Dated: March 26, 2007 By: /s/ Robert M. Mann
---------------------------------------
Robert M. Mann
Director
Dated: March 26, 2007 By: /s/ Anthony J. Miceli
---------------------------------------
Anthony J. Miceli
Chief Financial Officer,
Chief Accountant, Secretary and Director
Dated: March 26, 2007 By: /s/ Arnold S. Penner
---------------------------------------
Arnold S. Penner
Director
Dated: March 26, 2007 By: /s/ Michael J. Weinbaum
---------------------------------------
Michael J. Weinbaum
Vice President - Real Estate Operations
and Director
27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
and Stockholders of
United Capital Corp.
We have audited the accompanying consolidated balance sheets of United Capital
Corp. and Subsidiaries (the "Company") as of December 31, 2006 and 2005 and the
related consolidated statements of income, stockholders' equity and
comprehensive income and cash flows for each of the three years in the period
ended December 31, 2006. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. 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, 2006 and 2005 and the consolidated
results of its operations and its consolidated cash flows for each of the three
years in the period ended December 31, 2006 in conformity with United States
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 123(R), "Share-Based
Payment," as of January 1, 2006, which changed its method of accounting for
stock-based compensation. Also, as discussed in Note 1 to the consolidated
financial statements, the Company adopted Statement of Financial Accounting
Standards No. 158, "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans," as of December 31, 2006, which changed its method of
accounting for pension benefits.
We have also audited the consolidated financial statement schedules for the year
ended December 31, 2006, listed in the Index at Item 15(a)(2). In our opinion,
these schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information required to be set forth therein.
/s/ Goldstein Golub Kessler LLP
-------------------------------
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
March 26, 2007
28
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
As of December 31,
-----------------------
2006 2005
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 76,688 $ 99,628
Marketable securities 62,917 40,419
Notes and accounts receivable, net 8,825 8,954
Inventories 4,894 4,426
Prepaid expenses and other current assets 1,659 1,401
Deferred income taxes 583 2,389
Current assets of discontinued operations 21 6
--------- ---------
TOTAL CURRENT ASSETS 155,587 157,223
--------- ---------
Property, plant and equipment, net 6,250 5,943
Real property held for rental, net 49,472 38,318
Investment in joint venture 6,711 7,208
Noncurrent notes receivable 1,694 3,790
Other assets 2,976 2,321
Noncurrent assets of discontinued operations 910 1,882
--------- ---------
TOTAL ASSETS $ 223,600 $ 216,685
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 471 $ 652
Accounts payable and accrued liabilities 9,606 9,000
Income taxes payable 5,253 5,142
Current liabilities of discontinued operations 58 59
--------- ---------
TOTAL CURRENT LIABILITIES 15,388 14,853
--------- ---------
Long-term debt 11,669 12,140
Other long-term liabilities 14,277 30,546
Deferred income taxes 2,793 3,496
--------- ---------
TOTAL LIABILITIES 44,127 61,035
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock, $.10 par value, authorized 17,500
shares; issued and outstanding 8,278 and 8,737
shares, respectively 828 874
Retained earnings 176,520 157,235
Accumulated other comprehensive income (loss), net
of tax 2,125 (2,459)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 179,473 155,650
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 223,600 $ 216,685
========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part of these
statements.
29
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
For the years ended December 31,
------------------------------------
2006 2005 2004
-------- -------- --------
REVENUES:
Net sales $ 37,158 $ 38,201 $ 38,335
Revenues from real estate operations 28,210 21,906 21,604
-------- -------- --------
Total revenues 65,368 60,107 59,939
-------- -------- --------
COSTS AND EXPENSES:
Cost of sales 27,522 28,003 27,026
Real estate operations:
Mortgage interest expense 797 395 572
Depreciation expense 2,345 2,167 3,025
Other operating expenses 12,625 8,384 7,267
General and administrative expenses 7,320 6,170 5,843
Selling expenses 3,621 3,744 3,985
-------- -------- --------
Total costs and expenses 54,230 48,863 47,718
-------- -------- --------
Operating income 11,138 11,244 12,221
-------- -------- --------
OTHER INCOME (EXPENSE):
Interest and dividend income 6,498 4,557 2,114
Interest expense -- (335) (450)
Other income and expense, net 2,040 5,580 22,435
-------- -------- --------
Total other income 8,538 9,802 24,099
-------- -------- --------
Income from continuing operations before
income taxes 19,676 21,046 36,320
(Benefit) provision for income taxes (10,375) 7,770 10,608
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS 30,051 13,276 25,712
-------- -------- --------
DISCONTINUED OPERATIONS:
(Loss) income from discontinued
operations, net of tax (benefit)
provision of ($26), $14 and $187,
respectively (39) 22 282
Net gain on disposal of discontinued
operations, net of tax provision of
$365, $865 and $7,575, respectively 548 1,298 11,363
-------- -------- --------
INCOME FROM DISCONTINUED OPERATIONS 509 1,320 11,645
-------- -------- --------
NET INCOME $ 30,560 $ 14,596 $ 37,357
======== ======== ========
BASIC EARNINGS PER SHARE:
Income from continuing operations $ 3.62 $ 1.49 $ 2.82
Income from discontinued operations .06 .15 1.28
-------- -------- --------
NET INCOME PER SHARE $ 3.68 $ 1.64 $ 4.10
======== ======== ========
DILUTED EARNINGS PER SHARE:
Income from continuing operations $ 2.94 $ 1.23 $ 2.37
Income from discontinued operations .05 .12 1.08
-------- -------- --------
NET INCOME PER SHARE ASSUMING DILUTION $ 2.99 $ 1.35 $ 3.45
======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
30
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(In thousands)
Accumulated
Other
Common Stock Issued Comprehensive Total
---------------------- Retained Income (Loss), Stockholders' Comprehensive
Shares Amount Earnings Net of Tax Equity Income
------ --------- --------- -------------- ------------ -------------
BALANCE - JANUARY 1, 2004 9,092 $ 909 $ 114,436 $ 8,872 $ 124,217
Proceeds from the exercise
of stock options 38 4 302 -- 306
Tax benefit from employee
stock options -- -- 171 -- 171
Net income -- -- 37,357 -- 37,357 $37,357
Other comprehensive
income, net of tax:
Change in net unrealized
gain on available-for-sale
securities, net of tax
effect of $2,812 -- -- -- 5,223 5,223 5,223
Reclassification
adjustment for net
gains realized in net
income, net of tax
effect of $7,111 -- -- -- (13,205) (13,205) (13,205)
-------
Comprehensive income $29,375
----- --------- --------- --------- --------- =======
BALANCE - DECEMBER 31, 2004 9,130 913 152,266 890 154,069
----- --------- --------- --------- ---------
Purchase and retirement of
common shares (425) (42) (9,909) -- (9,951)
Proceeds from the exercise
of stock options 32 3 202 -- 205
Tax benefit from employee
stock options -- -- 80 -- 80
Net income -- -- 14,596 -- 14,596 $14,596
Other comprehensive
income, net of tax:
Change in net unrealized
loss on available-for-sale
securities, net of tax
effect of $1,638 -- -- -- (3,042) (3,042) (3,042)
Reclassification
adjustment for net
gains realized in net
income, net of tax
effect of $166 -- -- -- (307) (307) (307)
-------
Comprehensive income $11,247
----- --------- --------- --------- --------- =======
BALANCE - DECEMBER 31, 2005 8,737 874 157,235 (2,459) 155,650
----- --------- --------- --------- ---------
Purchase and retirement of
common shares (558) (56) (13,570) -- (13,626)
Proceeds from the exercise
of stock options 99 10 787 -- 797
Tax benefit from employee
stock options -- -- 701 -- 701
Stock-based compensation -- -- 807 -- 807
Adjustment to initially
apply SFAS No. 158, net
tax effect of $417 -- -- -- 775 775
Net income -- -- 30,560 -- 30,560 $30,560
Other comprehensive
income, net of tax:
Change in net unrealized
gain on available-for-sale
securities, net of tax
effect of $2,005 -- -- -- 3,723 3,723 3,723
Reclassification
adjustment for net loss
realized in net income,
net of tax effect of $47 -- -- -- 86 86 86
-------
Comprehensive income $34,369
----- --------- --------- --------- --------- =======
BALANCE - DECEMBER 31, 2006 8,278 $ 828 $ 176,520 $ 2,125 $ 179,473
===== ========= ========= ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
31
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the years ended December 31,
------------------------------------------------
2006 2005 2004
-------- -------- --------
(Revised -
See Note 1)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 30,560 $ 14,596 $ 37,357
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,784 2,604 3,577
Non-cash stock based compensation 807 -- --
Net gain on sale of available-for-sale
securities (73) (932) (20,316)
Gain on sale of other assets -- -- (363)
Gain on disposal of discontinued operations,
net of tax (548) (1,298) (11,363)
Gain on sale of investment in joint venture -- (626) --
Net realized and unrealized gain on derivative
instruments (1,584) (684) (728)
Net periodic pension expense 265 196 180
Income from equity investments (279) (3,511) (512)
Tax benefit from employee stock options -- 80 171
Changes in assets and liabilities:
Notes and accounts receivable, net 907 (1,847) (819)
Inventories (468) (294) 23
Prepaid expenses and other current assets (258) (509) 69
Deferred income taxes (1,366) 526 953
Other assets (132) (478) (70)
Accounts payable and accrued liabilities 587 (523) 379
Income taxes payable (254) (2,737) (7,831)
Other long-term liabilities (15,893) 230 (532)
-------- -------- --------
Net cash provided by operating activities
of continuing operations 15,055 4,793 175
Operating activities of discontinued
operations 24 79 134
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 15,079 4,872 309
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale securities (33,303) (5,361) (62,442)
Proceeds from sale of available-for-sale
securities 16,739 15,177 65,634
Proceeds from sale of real estate assets 1,849 3,164 24,302
Proceeds from sale of other assets -- -- 1,363
Proceeds from sale of derivative instruments 1,603 103 1,312
Purchase of derivative instruments -- -- (13)
Purchase/issuance of notes receivable (1,118) (3,000) (1,000)
Principal payments on notes receivable 2,436 3,908 104
Acquisition of property, plant and equipment (1,341) (1,277) (226)
Acquisition of/additions to real estate assets (12,876) (5,665) (958)
Distributions from joint ventures 776 16,327 933
-------- -------- --------
Net cash (used in) provided by investing
activities of continuing operations (25,235) 23,376 29,009
Investing activities of discontinued
operations (4) (14) (139)
-------- -------- --------
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES (25,239) 23,362 28,870
-------- -------- --------
32
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
(In thousands)
For the years ended December 31,
------------------------------------------------
2006 2005 2004
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on mortgage obligations (652) (2,505) (2,938)
Purchase and retirement of common shares (13,626) (9,951) --
Proceeds from the exercise of stock options 797 205 306
Tax benefit from employee stock options 701 -- --
-------- -------- --------
Net cash used in financing activities
of continuing operations (12,780) (12,251) (2,632)
Financing activities of discontinued
operations -- (1,138) (974)
-------- -------- --------
NET CASH USED IN FINANCING ACTIVITIES (12,780) (13,389) (3,606)
-------- -------- --------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (22,940) 14,845 25,573
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 99,628 84,783 59,210
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 76,688 $ 99,628 $ 84,783
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 799 $ 723 $ 1,001
======== ======== ========
Taxes $ 6,205 $ 9,827 $ 17,517
======== ======== ========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of note receivable in connection
with sale of real property $ -- $ -- $ 800
======== ======== ========
Mortgage obligation assumed in connection
with acquisition of hotel property (see
Note 2) $ -- $ 8,000 $ --
======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
33
UNITED CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004
(In thousands, except per share data)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
United Capital Corp. (the "Company") and its subsidiaries are engaged in the
investment and management of real estate, including the operations of full and
limited-service hotels, and in the manufacture and sale of engineered products.
The Company also invests excess available cash in marketable securities and
other financial instruments.
PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. The equity method of accounting is used for
investments in 20% to 50% owned joint ventures in which the Company has the
ability to exercise significant influence, but not control. These investments
are recorded initially at cost and subsequently adjusted for equity in earnings
and cash contributions and distributions.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE - REAL ESTATE INVESTMENT AND
MANAGEMENT
The Company leases substantially all of its properties to tenants under net
leases which are accounted for as operating leases. Under this type of lease,
the tenant is obligated to pay all operating costs of the property including
real estate taxes, insurance and repairs and maintenance. Revenue is recognized
as earned and deemed collectible. The effect of stepped-rent increases on
significant leases are recorded, net of allowances, on a straight-line basis.
Gains on sales of real estate assets and equity investments are recorded when
the gain recognition criteria under generally accepted accounting principles in
the United States of America have been met.
The Company does not have leases that include significant rent concessions or
provisions that require the lessee to fund capital improvements or to pay the
lessor any revenues based upon indexes or rates that are not explicitly stated
in the lease.
Reimbursements of certain costs received from tenants are recognized as tenant
reimbursement revenues.
Certain lease agreements provide for additional rent based on a percentage of
tenants' sales. These percentage rents are recorded once the required sales
levels are achieved.
Income on leveraged leases is recognized by a method that produces a constant
rate of return on the outstanding investment in the lease, net of the related
deferred tax liability, in the years in which the net investment is positive.
Accounts receivable are recorded at the outstanding amounts, net of allowances
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,
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 - HOTEL OPERATIONS
Revenues from the Company's hotel operations are generally recognized when
earned. Hotel revenues primarily represent room rental and food and beverage
sales and are recognized at the time of the hotel stay or sale of restaurant
services.
Accounts receivable are recorded at the outstanding amounts, net of allowances
for doubtful accounts. The Company determines the allowance for doubtful
accounts based on an assessment of the collectibility of specific customer
accounts which include the length of time the receivables are past due, the
financial health of the customer and historical experience.
34
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE - ENGINEERED PRODUCTS
In general, sales are recorded when products are shipped, title has passed and
collection is reasonably assured. Management believes that adequate controls are
in place to ensure compliance with contractual product specifications, a
substantial history of such performance has been established and historical
returns and allowances have not been significant. If actual sales returns and
allowances exceed historical amounts, the Company's sales would be adversely
affected.
Accounts receivable are recorded at the outstanding amounts, net of allowances
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 $43,428 and $77,932 at December 31, 2006 and 2005,
respectively, consisted of commercial paper, overnight repurchase agreements and
certificates of deposit. The Company considers all highly liquid investments
with a maturity, at the purchase date, of three months or less to be cash
equivalents. The Company maintains balances with various financial institutions
which, at times, exceed federally insured limits.
MARKETABLE SECURITIES
The Company determines the appropriate classification of securities at the time
of purchase and reassesses the appropriateness of such classification at each
reporting date. At December 31, 2006 and 2005, all marketable securities held by
the Company have been classified as available-for-sale and, as a result, are
stated at fair value, based on quoted market prices. Unrealized gains and losses
on available-for-sale securities are recorded as a separate component of
stockholders' equity. Realized gains and losses on the sale of securities, as
determined on a first-in, first-out basis, are included in the Consolidated
Statements of Income.
The Company reviews its investments on a regular basis to evaluate whether or
not each security has experienced an other-than-temporary decline in fair value.
If it is believed that an other-than-temporary decline exists, the Company will
write down the investment to market value and record the related write-down in
the Consolidated Statements of Income.
NOTES AND ACCOUNTS RECEIVABLE, NET
Notes and accounts receivable, net consist of the following:
December 31,
-----------------
2006 2005
------ ------
Trade receivables $5,835 $5,899
Rental receivables 1,729 1,520
Other receivables 749 1,800
Current portion of notes receivable 836 59
------ ------
Total 9,149 9,278
Less: Allowance for doubtful accounts 324 324
------ ------
$8,825 $8,954
====== ======
There were no changes in the Company's allowance for doubtful accounts during
the years ended December 31, 2006, 2005 and 2004.
35
INVENTORIES
Inventories are stated at the lower of cost or market and include material,
labor and manufacturing overhead. The first-in, first-out (FIFO) method is used
to determine the cost of inventories. Inventories consist of the following:
December 31,
-----------------
2006 2005
------ ------
Raw materials $2,197 $2,142
Work in process 506 462
Finished goods 2,191 1,822
------ ------
$4,894 $4,426
====== ======
DEPRECIATION AND AMORTIZATION
Depreciation and amortization are provided on a straight-line basis over the
estimated useful lives of the related assets as follows:
Real property held for rental:
Buildings .....................................................18 to 39 years
Building renovations and improvements ..........................7 to 39 years
Equipment and fixtures .........................................5 to 15 years
Property, plant and equipment:
Buildings and improvements ....................................10 to 39 years
Furniture, fixtures and equipment ...............................3 to 8 years
Intangible assets with definite lives:
Patents, trademarks and other intellectual property ............5 to 20 years
REAL ESTATE
Land, buildings and improvements, and equipment and fixtures are recorded at
cost, less accumulated depreciation. Expenditures for maintenance and repairs
are charged to operations as incurred. Significant renovations and replacements,
which improve the life of the asset, are capitalized and depreciated over their
estimated useful lives.
Assets held for sale are reported at the lower of the carrying amount or fair
value less costs to sell and depreciation is discontinued. Property sales or
dispositions are recorded when title transfers. Upon disposition, the related
costs and accumulated depreciation are removed from the respective accounts. Any
gain or loss on sale or disposition is recognized in accordance with accounting
principles generally accepted in the United States of America.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost, less accumulated
depreciation. 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.
36
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 net periodic pension
income or expense for the year. These assumptions are used in actuarial
calculations to estimate net periodic pension costs as well as pension assets or
liabilities included in the Company's Consolidated Financial Statements. While
the Company believes that the assumptions used are appropriate, significant
differences in actual experience or significant changes in assumptions would
affect the Company's pension costs and obligations.
RESEARCH AND DEVELOPMENT
The Company expenses research, development and product engineering costs as
incurred. Approximately $53, $53 and $69 of such costs were incurred by the
Company in 2006, 2005 and 2004, respectively.
SHIPPING AND HANDLING COSTS
Shipping and handling costs billed to a customer are included in net sales and
the related costs are included in cost of sales or selling expenses. For the
years ended December 31, 2006, 2005 and 2004, shipping and handling costs
included in selling expenses were $350, $369 and $477, respectively.
EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income by the
weighted-average number of shares outstanding and excludes any dilutive effects
of stock options. Diluted earnings per share gives effect to all potentially
dilutive shares that were outstanding during the period. Dilutive shares used in
the computation of diluted earnings per share result from the assumed exercise
of stock options, using the treasury stock method.
STOCK-BASED COMPENSATION
On January 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123 (Revised 2004) - "Share-Based Payment" ("SFAS No. 123R"),
which required the Company to measure all employee stock-based compensation
awards using a fair value method and record the related expense in the financial
statements. The Company elected to use the modified prospective transition
method, which requires that compensation cost be recognized in the financial
statements for all awards granted after the date of adoption as well as for
existing rewards for which the requisite service has not been rendered as of the
date of adoption and requires that prior periods not be restated. All periods
presented prior to January 1, 2006 were accounted for in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"). Accordingly, no compensation cost was recognized for
stock options prior to January 1, 2006 because the exercise price of the option
grants equaled the market value of the Company's common stock at the date of
grant, which was the measurement date. The Company has used the Black-Scholes
model to estimate the value of options granted. The Company did not grant any
options during 2006, 2005 or 2004.
The Black-Scholes model was developed for use in estimating the fair value of
traded options, which have no vesting restrictions and are fully transferable.
In addition, option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. Because the Company's
employee stock options have characteristics significantly different from those
of traded options and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
the Company's employee stock options.
The adoption of SFAS No. 123R reduced income from continuing operations before
income taxes and net income by $807 and $518, respectively, for the year ended
December 31, 2006. The impact on net income per basic and diluted share for this
period was $.06 and $.05 per share, respectively. Prior to the adoption of SFAS
No. 123R, the Company presented the tax benefit from the exercise of stock
options as an operating cash flow in the Consolidated Statements of Cash Flows.
37
Upon adoption of SFAS No. 123R, tax benefits resulting from deductions in excess
of compensation cost recognized for those options are classified as a financing
cash flow.
As of December 31, 2006, there were no unrecognized compensation costs relating
to share-based payments.
The following table illustrates the effect on net income and earnings per share
for the years ended December 31, 2005 and 2004 had the Company applied the fair
value recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123") to stock-based employee compensation for these
periods.
For the Years Ended
December 31,
-----------------------
2005 2004
-------- ----------
Net income, as reported $ 14,596 $ 37,357
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects 1,513 2,396
-------- ----------
Pro forma net income $ 13,083 $ 34,961
======== ==========
Earnings per share:
Basic - as reported $ 1.64 $ 4.10
======== ==========
Basic - pro forma $ 1.47 $ 3.84
======== ==========
Diluted - as reported $ 1.35 $ 3.45
======== ==========
Diluted - pro forma $ 1.22 $ 3.26
======== ==========
DERIVATIVE FINANCIAL INSTRUMENTS
The Company recognizes all derivative financial instruments, such as put and/or
call options, in the Consolidated Financial Statements at fair value regardless
of the purpose or intent for holding the instrument. Changes in the fair value
of derivative financial instruments are either recognized periodically in income
or in stockholders' equity as a component of accumulated other comprehensive
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 tax. Changes in the fair value of derivatives not qualifying as
hedges are reported in income.
In strategies designed to hedge overall market risks and manage its interest
rate exposure, the Company may sell common stock short, participate in put
and/or call options or enter into interest rate swap agreements.
Management maintains a diversified portfolio of cash equivalents and investments
in a variety of securities, primarily U.S. investments in both common and
preferred equity issues, and participates on a limited basis in transactions
involving derivative financial instruments, including short stock sales and put
and/or call options. At December 31, 2006 and 2005, the fair value of such
derivatives was ($20) and ($1), respectively, which are recorded as a component
of accounts payable and accrued liabilities in the Consolidated Balance Sheets.
These instruments do not qualify for hedge accounting, and therefore changes in
the derivatives' fair value are recognized in earnings. The Company recognized
$1,584, $684 and $728 in net realized and unrealized gains from derivative
instruments for the years ended December 31, 2006, 2005 and 2004, respectively,
which are included in other income and expense, net in the Consolidated
Statements of Income.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to present them on a basis
consistent with the current year. During 2006, the Company restated its prior
period segment disclosures to be consistent with the new segment classifications
(see Note 15). The Company separately disclosed the operating, investing and
financing portions of cash flows attributable to discontinued operations in 2006
and 2005, which in 2004 were reported on a combined basis as a single amount.
38
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to use judgment in making estimates and assumptions that
affect the reported amounts of assets, liabilities, revenue and expenses and
related disclosure of contingent assets and liabilities. Certain of the
estimates and assumptions required to be made relate to matters that are
inherently uncertain as they pertain to future events. While management believes
that the estimates and assumptions used were the most appropriate, actual
results could differ significantly from those estimates under different
assumptions and conditions.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in a company's financial
statements in accordance with SFAS No. 109, "Accounting for Income Taxes." FIN
48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 is effective for fiscal years
beginning after December 15, 2006, which would be the first quarter of 2007 for
the Company. The Company is currently evaluating the effects, if any, that FIN
48 will have on its consolidated financial position or results of operations.
However, the Company does not expect the adoption of FIN 48 to have a material
effect on its financial position or results of operations.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. SFAS No. 157 applies under other
accounting pronouncements that require or permit fair value measurements and,
accordingly, does not require any new fair value measurements. SFAS No. 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years, which would be
the first quarter of 2008 for the Company. The Company is currently evaluating
the effect, if any, that SFAS No. 157 will have on its consolidated financial
position or results of operations. However, the Company does not expect the
adoption of SFAS No. 157 to have a material effect on the Company's financial
position or results of operations.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108 "Considering
the Effects of Prior Year Misstatements when Qualifying Misstatements in Current
Year Financial Statements" ("SAB No. 108"). SAB No. 108 provides guidance on the
consideration of the effects of prior year misstatements in quantifying current
year misstatements for the purpose of determining whether the current year's
financial statements are materially misstated. SAB No. 108 was effective as of
the end of the Company's 2006 fiscal year, allowing a one-time transitional
cumulative effect adjustment to beginning retained earnings as of January 1,
2006, for errors that were not previously deemed material, but are material
under the guidance in SAB No. 108. The adoption of SAB No. 108 did not have a
material impact on the Company's consolidated financial position or results of
operations.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB
Statements No. 87, 88, 106, and 132(R)" ("SFAS No. 158"). Among other items,
SFAS No. 158 requires recognition of the over-funded or under-funded status of
an entity's defined benefit postretirement plans as an asset or liability in the
financial statements, requires the measurement of defined benefit postretirement
plan assets and obligations as of the end of the employer's fiscal year and
actuarial gains and losses, prior service costs or credits, and any remaining
transition assets or obligations that have not been recognized under previous
accounting standards be recognized in accumulated other comprehensive income,
net of tax, until they are amortized as a component of net period pension
expense. The Company adopted SFAS No. 158 as of December 31, 2006.
The adoption of SFAS No. 158 had no effect on the Company's consolidated results
of operations for the year ended December 31, 2006, or for any prior period
presented, and it will not effect the Company's operating results in future
periods.
39
The incremental effects of adopting the provisions of SFAS No. 158 on the
Company's balance sheet at December 31, 2006 are as follows:
Before Effect of After
Application Adopting Application
of SFAS SFAS of SFAS
No. 158 No. 158 No. 158
------- -------- -------
ASSETS:
Other assets $ 2,425 $ 551 $ 2,976
======= ======= =======
LIABILITIES:
Other long-term liabilities $13,636 $ (641) $14,277
======= ======= =======
Deferred income taxes (non-current) $ 2,376 $ 417 $ 2,793
======= ======= =======
STOCKHOLDERS' EQUITY:
Accumulated other comprehensive income,
net of tax $ 1,350 $ 775 $ 2,125
======= ======= =======
2. REAL ESTATE
The Company is the lessor of real estate under operating leases which expire in
various years through 2078. The following is a summary of real property held for
rental:
December 31,
---------------------
2006 2005
-------- --------
Land $ 14,769 $ 13,919
Buildings 90,121 82,440
Building renovations and improvements 10,407 5,809
Equipment and fixtures 3,000 3,253
-------- --------
118,297 105,421
Less: Accumulated depreciation 68,825 67,103
-------- --------
$ 49,472 $ 38,318
======== ========
As of December 31, 2006, total minimum future rentals to be received under
noncancelable leases for each of the next five years and thereafter are as
follows:
Years Ending December 31,
--------------------------------------------------------------------------
There-
2007 2008 2009 2010 2011 after Total
-------- -------- -------- -------- -------- -------- --------
Minimum future
rentals $ 17,785 $ 15,702 $ 14,892 $ 13,223 $ 8,425 $ 54,523 $124,550
======== ======== ======== ======== ======== ======== ========
Minimum future rentals do not include amounts for renewals, tenant reimbursement
or additional rentals that may be received under certain leases which provide
for such rentals based upon a percentage of lessees' sales. Percentage rents
included in net income from real properties held for rental for 2006, 2005 and
2004 were approximately $384, $512 and $777, respectively.
PROPERTY ACQUISITIONS
During 2006, the Company purchased, for cash, a commercial property located in
Long Island City, New York for approximately $8,531.
In 2005, the Company purchased a hotel located in Windsor Locks, Connecticut
(the "Connecticut Hotel") for approximately $10,190, including $3,000 which was
allocated to furniture, fixtures and equipment and is included in property,
plant and equipment in the Consolidated Balance Sheet. The purchase was
partially financed by an $8,000 mortgage which bears interest at 6.7% per annum,
is payable monthly based on a 25 year amortization and matures in December 2015.
The total cost of the acquisition, less the proceeds of the mortgage, is
reflected in acquisition of/additions to real estate assets in the Consolidated
Statement of Cash Flows.
40
PROPERTY SALES
During 2006, the Company divested itself of two commercial properties which had
a net book value of $936 from its real estate investment and management segment.
The aggregate proceeds from these transactions were $1,849 resulting in a gain
of $548, on a net of tax basis.
During 2005, the Company divested itself of four commercial properties which had
a net book value of $1,001 from its real estate investment and management
segment. The aggregate proceeds from these transactions were $3,164, resulting
in a gain of $1,298, on a net of tax basis.
During 2004, the Company divested itself of seven commercial properties which
had a net book value of $5,265 from its real estate investment and management
segment. The cash proceeds from these transactions were $9,327. In addition, the
Company received an $800 purchase money mortgage in connection with the sale of
one of these properties. This resulted in a gain of $2,917, on a net of tax
basis. In addition, the Company sold three of its shopping centers and retail
outlets which had a net book value of $899. The aggregate proceeds from these
transactions were $14,975, resulting in a gain of $8,446, on a net of tax basis.
Two of the properties, one commercial and one shopping center and retail outlet,
were contributed to charitable organizations in the first quarter of 2004 for a
nominal amount. The net book value of these properties and their fair market
value, determined by appraisals, were $341 and $4,590, respectively.
The results of operations for properties sold have been reclassified to
discontinued operations, on a net of tax basis, for each of the years presented.
In addition, the assets and liabilities associated with those properties sold in
2006 have been reclassified to discontinued operations in the Consolidated
Balance Sheet at December 31, 2005. These amounts primarily consist of real
property, net of accumulated depreciation, rents receivable, prepaid or accrued
charges and mortgage obligations, if any.
Summarized financial information for properties sold and accounted for as
discontinued operations is as follows:
For the Years Ended December 31,
--------------------------------
2006 2005 2004
------ ------ ------
Revenues from real estate operations $ -- $ 232 $1,339
Mortgage interest expense -- 55 109
Depreciation expense -- 12 103
Other operating expenses 38 116 589
------ ------ ------
Operating (loss) income $ (38) $ 49 $ 538
====== ====== ======
PROPERTIES HELD FOR SALE
As of December 31, 2006, the Company considered one commercial property from its
real estate and investment management segment to be held for sale and reported
as discontinued operations. The results of operations of this property have been
reclassified to discontinued operations, on a net of tax basis, in the
Consolidated Statements of Income for the years ended December 31, 2006, 2005
and 2004. In addition, the assets and liabilities associated with this property,
which primarily consist of real property, net of accumulated depreciation, and
accrued charges have been reclassified to discontinued operations in the
Consolidated Balance Sheets at December 31, 2006 and 2005.
Summarized financial information for the property held for sale and accounted
for as discontinued operations at December 31, 2006 is as follows:
For the Years Ended December 31,
--------------------------------
2006 2005 2004
------ ------ ------
Revenues from real estate operations $ 134 $ 132 $ 75
Depreciation expense 52 54 44
Other operating expenses 109 91 100
----- ----- -----
Operating loss $ (27) $ (13) $ (69)
===== ===== =====
41
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including furniture, fixtures and equipment
related to the Company's hotel operations segment, consists of the following:
December 31,
---------------------
2006 2005
------- -------
Land $ 28 $ 28
Buildings and improvements 1,428 1,428
Furniture, fixtures and equipment 18,231 16,894
------- -------
19,687 18,350
Less: Accumulated depreciation 13,437 12,407
------- -------
$ 6,250 $ 5,943
======= =======
4. MARKETABLE SECURITIES
The cost, gross unrealized gains, gross unrealized losses and fair market value
of available-for-sale securities are as follows:
Gross Gross Fair
Unrealized Unrealized Market
Cost Gains Losses Value
------- ------- ------- -------
DECEMBER 31, 2006:
Equity securities $57,708 $ 4,778 $(2,741) $59,745
Bonds 3,131 43 (2) 3,172
------- ------- ------- -------
$60,839 $ 4,821 $(2,743) $62,917
======= ======= ======= =======
DECEMBER 31, 2005:
Equity securities $44,074 $ 2,931 $(6,712) $40,293
Bonds 129 -- (3) 126
------- ------- ------- -------
$44,203 $ 2,931 $(6,715) $40,419
======= ======= ======= =======
The following table shows the fair value and unrealized losses, aggregated by
investment type and length of time that individual securities have been in a
continuous unrealized loss position:
Less Than 12 Months 12 Months or More Total
------------------- -------------------- --------------------
Fair Unrealized Fair Unrealized Fair Unrealized
DECEMBER 31, 2006: Value Losses Value Losses Value Losses
-------- ---------- -------- ---------- -------- ----------
Equity securities $ 32,226 $ (2,741) $ -- $ -- $ 32,226 $ (2,741)
Bonds 91 (1) 123 (1) 214 (2)
-------- -------- -------- -------- -------- --------
$ 32,317 $ (2,742) $ 123 $ (1) $ 32,440 $ (2,743)
======== ======== ======== ======== ======== ========
DECEMBER 31, 2005:
Equity Securities $ 5,097 $ (338) $ 22,620 $ (6,374) $ 27,717 $ (6,712)
Bonds 121 (3) -- -- 121 (3)
-------- -------- -------- -------- -------- --------
$ 5,218 $ (341) $ 22,620 $ (6,374) $ 27,838 $ (6,715)
======== ======== ======== ======== ======== ========
The Company continuously reviews its investment portfolio to identify and
evaluate investments that have indications of possible impairment. The Company
does not believe that its investments in marketable securities with unrealized
losses at December 31, 2006 are other-then-temporary due to market volatility of
the security's fair value, analysts' expectations and the Company's ability to
hold the securities for a period of time sufficient to allow for any anticipated
recoveries in market value.
42
Proceeds from the sale of available-for-sale securities and the resulting gross
realized gains and losses included in the determination of net income are as
follows:
For the Years Ended December 31,
--------------------------------
2006 2005 2004
------- ------- -------
Proceeds $16,739 $15,177 $65,634
======= ======= =======
Gross realized gains $ 1,559 $ 1,193 $20,469
======= ======= =======
Gross realized losses $(1,486) $ (261) $ (153)
======= ======= =======
5. INVESTMENT IN JOINT VENTURES
LEASE FINANCING
Lease financing consists of a 50% interest in a limited partnership whose
principal assets are two distribution centers leased to Kmart Corporation
("Kmart"), which are accounted for as leveraged leases (see Note 11).
The following represents the components of the net investment in the leveraged
leases:
December 31,
---------------------
2006 2005
-------- --------
Rents receivable $ 61,439 $ 65,467
Residual values 10,000 10,000
Nonrecourse debt service (48,598) (51,850)
Unearned income (16,130) (16,409)
-------- --------
6,711 7,208
Less: Deferred taxes arising from leveraged leases 6,127 6,335
-------- --------
$ 584 $ 873
======== ========
The Company's share of income arising from this investment was $279, $357 and
$428 for the years ended December 31, 2006, 2005 and 2004, respectively, and is
included in revenues from real estate operations in the Consolidated Statements
of Income.
HOTEL VENTURES
The Company had a 40% interest in two joint ventures which each owned and
operated a hotel. The hotels were located in New Jersey (the "Hotel Venture")
and Quebec, Canada (the "Quebec Venture"). In 2005, the Hotel Venture sold its
underlying property. Distributions in excess of the Company's investment of
$3,327 from the Hotel Venture and a gain on the sale of the Company's interest
in the Quebec Venture of $626 are included in other income and expense, net in
the Consolidated Statement of Income for 2005.
Summarized operating results of the Hotel Venture and Quebec Venture, through
the date of their respective sale in 2005, are as follows:
For the Years Ended
December 31,
----------------------
2005 2004
-------- --------
Revenues $ 21,411 $ 25,903
======== ========
Operating profit $ 4,026 $ 5,966
======== ========
Net (loss) income $ (434) $ 210
======== ========
The Company's equity in operating (losses) earnings of these ventures through
the date of the respective sale was ($173) and $84 for the years ended December
31, 2005 and 2004, respectively.
43
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
December 31,
---------------
2006 2005
------ ------
Accounts payable $3,999 $4,268
Accrued wages and benefits 1,821 1,803
Other accrued expenses 3,786 2,929
------ ------
$9,606 $9,000
====== ======
7. LONG-TERM DEBT
Long-term debt consists of the following:
December 31,
----------------
2006 2005
------- -------
Mortgages on real property $12,140 $12,792
Less: Current maturities 471 652
------- -------
$11,669 $12,140
======= =======
First mortgages bearing interest at rates ranging from 4% to 8% per annum are
collateralized by the related real property which had a net carrying value at
December 31, 2006 of $12,225, exclusive of hotel furniture, fixtures and
equipment. Such amounts are scheduled to mature at various dates from December
2008 through December 2015.
The approximate aggregate maturities of these obligations at December 31, 2006
are as follows:
YEARS ENDING DECEMBER 31,
-------------------------------------------------------------
THERE-
2007 2008 2009 2010 2011 AFTER TOTAL
------- ------- ------- ------- ------- ------- -------
Aggregate maturities $ 471 $ 518 $ 2,170 $ 455 $ 417 $ 8,109 $12,140
======= ======= ======= ======= ======= ======= =======
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
The carrying amounts reported in the Consolidated Balance Sheets for cash
and cash equivalents, accounts receivable, accounts payable and accrued
liabilities approximate their fair value due to the short maturity of such
items.
The fair value of notes receivable are estimated using discounted cash flow
analyses, with interest rates comparable to loans with similar terms and
borrowers of similar credit quality. The fair value of notes receivable at
December 31, 2006 and 2005 was approximately $2,763 and $4,429,
respectively, while the carrying value was $2,530 and $3,849 for the same
periods.
At December 31, 2006 and 2005, all marketable securities held by the Company
have been classified as available-for-sale and, as a result, are carried at
fair value based on quoted market prices or dealer quotes. If a quoted
market price is not available, fair value is estimated using quoted market
prices for similar securities.
The fair value of long-term debt was calculated based on interest rates
available for debt with terms and due dates similar to the Company's
existing debt arrangements. The fair value of long-term debt at December 31,
2006 and 2005 was approximately $11,142 and $11,662, respectively, while the
carrying value was $12,140 and $12,792 for the same periods.
44
The derivative instruments held by the Company, representing put and/or call
options, are carried at fair value based on quoted market prices or dealer
quotes. At December 31, 2006 and 2005, the fair value of these derivatives
was ($20) and ($1), respectively.
9. STOCKHOLDERS' EQUITY
Previous purchases of the Company's common stock have reduced the Company's
additional paid-in capital to zero and have also reduced retained earnings by
amounts in excess of par value. Any future purchases in excess of par value will
also reduce retained earnings.
In November 2005, the Board of Directors authorized a "Dutch Auction"
self-tender offer for up to 1,000 shares of the Company's common stock resulting
in the January 2006 repurchase and retirement of 544 shares of common stock for
an aggregate price of $13,323 or $24.50 per share. In addition, during the years
ended December 31, 2006 and 2005, the Company purchased and retired 14 and 425
shares of the Company's common stock for an aggregate price of $303 and $9,951,
respectively. The Company did not purchase any shares of its common stock during
2004.
Repurchases of the Company's common stock may be made from time to time in the
open market at prevailing market prices and may be made in privately negotiated
transactions, subject to available resources. Future proceeds from the issuance
of common stock in excess of par value will be credited to retained earnings
until such time that previously recorded reductions have been recovered.
STOCK OPTIONS
The Company has two stock option plans, 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"), under which qualified and
nonqualified options may be granted to key employees to purchase the Company's
common stock at the fair market value on the date of grant. Under both plans,
the options typically become exercisable in three equal installments, beginning
one year from the date of grant. Stock options generally expire ten years from
the date of grant. The number of authorized shares reserved for issuance is
3,650 under the Incentive Plan and 2,650 under the Joint Plan.
At December 31, 2006, there were 2,153 and 3,146 options outstanding under the
Joint Plan and Incentive Plan, respectively. At December 31, 2005, there were
2,243 and 3,155 options outstanding under the Joint Plan and Incentive Plan,
respectively.
Outstanding stock options as of December 31, 2006, 2005 and 2004, and changes
during the years then ended are summarized below:
2006 2005 2004
------------------ ------------------ -------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----- --------- ----- --------- ------ ---------
Outstanding - beginning of year 5,398 $ 11.54 5,430 $ 11.51 5,470 $ 11.49
Exercised (99) $ 8.05 (32) $ 6.42 (38) $ 8.06
Cancelled/Forfeited -- -- -- -- (2) $ 21.80
----- ----- -----
Outstanding - end of year 5,299 $ 11.61 5,398 $ 11.54 5,430 $ 11.51
===== ===== =====
Exercisable - end of year 5,299 $ 11.61 5,146 $ 11.04 4,627 $ 10.35
===== ===== =====
45
The following table summarizes information about options outstanding and
exercisable at December 31, 2006:
Options Outstanding and Exercisable
------------------------------------------------------------------
Number Weighted- Weighted-
Outstanding Average Average
Range of and Remaining Exercise
Exercise Price Exercisable Contractual Life Price
----------------- ----------- ---------------- ----------
$ 6.53 - $ 9.38 1,930 2.3 years $ 7.26
$11.44 - $11.93 1,690 3.1 years $11.70
$12.20 - $21.80 1,679 5.8 years $16.51
-----
$ 6.53 - $21.80 5,299 3.7 years $11.61
=====
The aggregate intrinsic value of options outstanding and exercisable as of
December 31, 2006 was $94,971, which represents the difference between the
Company's closing stock price at the end of the year ($29.53) and the exercise
price of each option, multiplied by the number of "in-the-money" options. This
amount changes based upon the fair market value of the Company's stock. The
total intrinsic value of options exercised during the year ended December 31,
2006 was $1,635.
10. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share from continuing operations:
For the Years Ended December 31,
--------------------------------
2006 2005 2004
-------- ------- ---------
Numerator:
Income from continuing operations $30,051 $13,276 $25,712
======= ======= =======
Denominator:
Basic - weighted-average shares outstanding 8,299 8,908 9,114
Dilutive effect of employee stock options 1,918 1,870 1,704
------- ------- -------
Diluted - weighted-average shares outstanding 10,217 10,778 10,818
======= ======= =======
Basic earnings per share - continuing operations $ 3.62 $ 1.49 $ 2.82
======= ======= =======
Diluted earnings per share - continuing operations $ 2.94 $ 1.23 $ 2.37
======= ======= =======
Employee stock options to purchase 756 shares of the Company's common stock at
December 31, 2004, were not included in the computation of diluted earnings per
share because their effect would have been anti-dilutive.
11. TRANSACTIONS WITH RELATED PARTIES
The Company has a 50% interest in an unconsolidated limited liability
corporation, whose principal assets are two distribution centers leased to
Kmart. A group that includes the wife of the Company's Board Chairman, two
Directors of the Company and the wife of one of the Directors have an 8%
interest in this entity (see Note 5).
12. INCOME TAXES
Deferred income taxes are determined on the liability method in accordance with
SFAS No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). Under SFAS No.
109, deferred tax assets and liabilities are determined based on the difference
between the tax basis of an asset or liability and its reported amount in the
Consolidated Financial Statements using enacted tax rates. Future tax benefits
attributable to these differences are recognized to the extent that realization
of such benefits are more likely than not.
46
The components of the net deferred tax liability are as follows:
December 31,
-------------------
2006 2005
------- -------
Realization allowances related to accounts receivable and
inventories $ 421 $ 384
Net unrealized (gain) loss on available-for-sale securities (693) 1,374
Basis differences relating to real property 1,271 3,675
Accrued expenses, deductible when paid 4,554 4,402
Deferred profit (414) (2,229)
Basis differences relating to business acquisitions (223) (1,863)
Leveraged lease (6,127) (6,335)
Property, plant and equipment (636) (495)
Pensions (193) 132
Other, net (170) (152)
------- -------
Net deferred tax liability (2,210) (1,107)
Less: Current portion - asset 583 2,389
------- -------
Noncurrent portion $(2,793) $(3,496)
======= =======
The income tax provision (benefit) reflected in the Consolidated Statements of
Income is as follows:
For the years ended December 31,
--------------------------------
2006 2005 2004
-------- -------- --------
Current:
Federal $(10,108) $ 6,059 $ 10,205
State (984) 1,110 (314)
Deferred 717 601 717
-------- -------- --------
$(10,375) $ 7,770 $ 10,608
======== ======== ========
A reconciliation of the tax provision computed at statutory rates to the amounts
shown in the Consolidated Statements of Income are as follows:
For the years ended December 31,
--------------------------------
2006 2005 2004
-------- -------- --------
Computed federal income tax provision at statutory
rates $ 6,887 $ 7,366 $ 12,712
State (benefit) tax, net of federal tax effect (640) 722 (204)
Reversal of long-term and deferred tax liabilities (17,330) -- --
Charitable contributions -- -- (1,745)
Other, net 708 (318) (155)
-------- -------- --------
$(10,375) $ 7,770 $ 10,608
======== ======== ========
During 2006, the Company reversed $17,330 in long-term and deferred income tax
liabilities relating to certain tax matters for which the statue of limitations
had expired.
13. OTHER INCOME AND EXPENSE, NET
The components of other income and expense, net in the Consolidated Statements
of Income are as follows:
For the years ended December 31,
--------------------------------
2006 2005 2004
-------- ------- ----------
Net realized and unrealized gain on derivative
instruments $ 1,584 $ 684 $ 728
Net gain on the sale of available-for-sale
securities 73 932 20,316
Litigation settlement 422 -- --
Equity in (losses) earnings of joint ventures (35) 3,154 84
Gain on sale of investment in joint venture -- 626 --
Casualty insurance settlement -- -- 831
Other, net (4) 184 476
------- ------- -------
$ 2,040 $ 5,580 $22,435
======= ======= =======
47
In October 2004, the stockholders of Prime Hospitality Corp. ("Prime") approved
a merger whereby all of the outstanding shares of Prime were exchanged for
$12.25 per common share. Accordingly, the Company's shares in Prime were sold,
resulting in proceeds of approximately $43,400 and a gain of approximately
$19,000.
14. PENSION PLAN
The Company has a noncontributory defined benefit pension plan that covers
substantially all full-time employees and the former employees of one of the
Company's discontinued manufacturing segments. The plan provides defined
benefits based on years of service and compensation level.
Changes in benefit obligation, plan assets and funded status of the plan are as
follows:
December 31,
---------------------
2006 2005
------- -------
Change in benefit obligation:
Benefit obligation, beginning of year $ 8,559 $ 8,661
Service cost 306 273
Interest cost 654 661
Actuarial loss (gain) 148 (248)
Benefits paid (761) (788)
------- -------
Benefit obligation, end of year 8,906 8,559
------- -------
Change in plan assets:
Fair value of plan assets, beginning of year 9,190 9,626
Actual return on plan assets 1,028 352
Benefits paid (761) (788)
------- -------
Fair value of plan assets, end of year 9,457 9,190
------- -------
Funded status $ 551 631
======= -------
Unrecognized net actuarial gain (988)
Unrecognized net gain (19)
-------
Accrued benefit obligation $ (376)
=======
The funded status at December 31, 2006, is included in other assets, while the
accrued benefit obligation at December 31, 2005 is included in other long-term
liabilities in the Consolidated Balance Sheets. As of December 31, 2006 and
2005, the accumulated benefit obligation was $8,671 and $8,327, respectively.
Amounts recognized in accumulated other comprehensive income, before income
taxes, consist of the following:
December 31,
2006
------------
Unrecognized net actuarial gain $ 840
Unrecognized net gain 352
------
$1,192
======
Net periodic pension expense consists of the following:
For the years ended December 31,
------------------------------------
2006 2005 2004
------- ------- -------
Service cost $ (306) $ (273) $ (283)
Interest cost (654) (661) (650)
Actual return on plan assets 1,028 352 611
Net amortization and deferral (333) 386 142
------- ------- -------
Net periodic pension expense $ (265) $ (196) $ (180)
======= ======= =======
In determining the projected benefit obligation and net periodic pension cost,
the weighted-average assumed discount rate and expected long-term rate of return
48
on plan assets was 8%, while the rate of expected increases in future
compensation was 3.5%, in all periods presented. A 100 basis point change in the
expected long-term rate of return on plan assets would have changed fiscal 2006
pension expense by $88.
The expected long-term rate of return on plan assets is determined by
considering historical rates of return, the current return trends, the mix of
investments that comprise plan assets and forecasts of future long-term
investment returns.
The Company does not expect any of the amounts in accumulated other
comprehensive income to be recognized as a component of net periodic cost during
2007.
The allocations of plan assets by category are as follows:
December 31,
-----------------
2006 2005
------- -------
Equity securities 77.2% 78.4%
Debt securities 10.7 11.7
U.S. government securities 3.8 2.8
Cash and other investments 8.3 7.1
----- -----
100.0% 100.0%
===== =====
The Company's pension plan assets are managed by outside investment managers and
the plan's trustees. The Company's investment strategy with respect to pension
assets is to maximize return while protecting principal. The investment managers
have the flexibility to adjust the asset allocations and move funds to the asset
class that offers the most opportunity for investment returns.
Benefit payments, which include the effects of expected future service, are
expected to be paid as follows:
Years ending December 31,
----------------------------------------------------
2012-
2007 2008 2009 2010 2011 2016
------- ------- ------- ------- ------- -------
Expected benefit payments $ 717 $ 846 $ 840 $ 842 $ 866 $4,392
====== ====== ====== ====== ====== ======
15. BUSINESS SEGMENTS
During 2006, the Company re-evaluated its reportable operating segments and has
restated prior results to reflect three segments plus corporate, instead of two,
as previously reported. These segments are real estate investment and
management, hotel operations and engineered products. The real estate investment
and management segment is engaged in the business of investing in and managing
real estate properties which are located throughout the United States. The hotel
operations segment owns and operates three hotels located in the United States.
Engineered products are manufactured through wholly-owned subsidiaries of the
Company and primarily consist of knitted wire products and components and
transformer products which are sold worldwide.
Operating results of the Company's business segments are as follows:
For the years ended December 31,
--------------------------------
2006 2005 2004
-------- -------- --------
NET REVENUES AND SALES:
Real estate investment and management $ 19,403 $ 17,962 $ 18,448
Hotel operations 8,807 3,944 3,156
Engineered products 37,158 38,201 38,335
-------- -------- --------
$ 65,368 $ 60,107 $ 59,939
======== ======== ========
OPERATING INCOME (LOSS):
Real estate investment and management $ 12,025 $ 10,627 $ 10,956
Hotel operations 418 333 (216)
Engineered products 2,784 3,175 4,187
General corporate expenses (4,089) (2,891) (2,706)
-------- -------- --------
11,138 11,244 12,221
OTHER INCOME, NET 8,538 9,802 24,099
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES $ 19,676 $ 21,046 $ 36,320
======== ======== ========
49
For the years ended December 31,
--------------------------------
2006 2005 2004
-------- -------- --------
DEPRECIATION AND AMORTIZATION EXPENSE:
Real estate investment and management $ 1,563 $ 1,916 $ 2,558
Hotel operations 782 251 467
Engineered products 343 336 405
General corporate expenses 96 101 147
-------- -------- --------
2,784 $ 2,604 $ 3,577
======== ======== ========
MORTGAGE INTEREST EXPENSE:
Real estate investment and management $ 268 $ 373 $ 572
Hotel operations 529 22 --
-------- -------- --------
$ 797 $ 395 $ 572
======== ======== ========
Sales by the Company's engineered products segment to automobile original
equipment manufacturers and their first tier suppliers accounted for
approximately 27.7%, 32.9% and 32.6% of 2006, 2005 and 2004 consolidated
revenues, respectively. For the year ended December 31, 2006, sales by the
engineered products segment to General Motors and Autoliv, its largest
customers, accounted for 15.6% and 10.5% of the segment's sales, respectively.
For the years ended December 31, 2005 and 2004, sales by the engineered products
segment to General Motors accounted for 17.0% and 18.7% of the segment's sales,
respectively. No other customers exceeded 10% of the segments sales during the
last three years.
Approximately 14.2%, 18.0% and 16.6% of 2006, 2005 and 2004 total sales
generated from the engineered products segment were to foreign customers.
Substantially all assets held by the Company's engineered products segment are
located within the United States or its leased warehouse in Tijuana, Mexico.
Selected information on the Company's business segments is as follows:
December 31,
-------------------
2006 2005
-------- --------
IDENTIFIABLE ASSETS:
Real estate investment and management and corporate assets $196,685 $191,761
Hotel operations 14,841 13,227
Engineered products 12,074 11,697
-------- --------
$223,600 $216,685
======== ========
ADDITIONS TO LONG-LIVED ASSETS:
Real estate investment and management and corporate assets $ 11,719 $ 4,519
Hotel operations 2,215 10,240
Engineered products 283 183
-------- --------
$ 14,217 $ 14,942
======== ========
16. LEASE OBLIGATIONS
At December 31, 2006, the Company was obligated under various noncancelable
operating leases which expire on various dates through 2040. These leases
include certain facilities and equipment of the engineered products segment, as
well as land leases of the real estate investment and management segment.
Certain leases contain renewal options and/or increased rental amounts. The
future minimum rental commitments under operating leases are as follows:
Years ending December 31,
------------------------------------------------------------
There-
2007 2008 2009 2010 2011 After Total
------ ------ ------ ------ ------ ------ ------
Minimum rental commitments $ 576 $ 506 $ 436 $ 141 $ 114 $1,636 $3,409
====== ====== ====== ====== ====== ====== ======
Rental expense under operating leases was $635, $628 and $482 for 2006, 2005 and
2004, respectively.
50
17. COMMITMENTS AND CONTINGENCIES
The Company has undertaken the completion of environmental studies and/or
remedial action at Metex' two New Jersey facilities and has recorded a liability
for the estimated investigation, remediation and administrative costs associated
therewith.
The process of remediation has begun at one facility pursuant to a plan filed
with the New Jersey Department of Environmental Protection ("NJDEP").
Environmental experts engaged by the Company estimate that under the most
probable scenario, the remediation of this site is anticipated to require
initial expenditures of $860, including the cost of capital equipment, and $86
in annual operating and maintenance costs over a 15 year period.
Environmental studies at the second facility indicate that remediation may be
necessary. Based upon the facts presently available, environmental experts have
advised the Company that, under the most probable remediation scenario, the
estimated cost to remediate this site is anticipated to require $2,300 in
initial costs, including capital equipment expenditures, and $258 in annual
operating and maintenance costs over a 10 year period. These estimated costs of
future expenses for environmental remediation obligations are not discounted to
their present value. The Company may revise such estimates in the future due to
the uncertainty regarding the nature, timing and extent of any remediation
efforts that may be required at this site, should an appropriate regulatory
agency deem such efforts to be necessary.
The foregoing estimates may also be revised by the Company as new or additional
information in these matters becomes available or should the NJDEP or other
regulatory agencies require additional or alternative remediation efforts in the
future. Although such events are not expected to change these estimates, adverse
decisions or events, particularly as to the merits of the Company's factual and
legal basis, could cause the Company to change its estimate of liability with
respect to such matters in the future. The Company has approximately $9,700 and
$9,900 recorded in accounts payable and accrued liabilities and other long-term
liabilities as of December 31, 2006 and 2005, respectively, to cover such
matters.
The Company has an employment agreement with its Chairman, President and Chief
Executive Officer (the "Officer") which provides for a base salary of $800 per
annum plus a discretionary bonus as determined by the Compensation Committee of
the Board of Directors. In the event of termination or a change in control, as
defined in the employment agreement, the Company is required to pay the Officer
a lump sum severance payment equal to three years salary and purchase
outstanding options. The employment agreement provides for successive one year
terms unless either the Company or the Officer gives the other written notice
that the employment agreement is terminated and also provides a death benefit
which the Company secures through an insurance policy.
The Company is subject to various other litigation, legal, regulatory and tax
matters that arise in the ordinary course of business activities. When
management believes it is probable that liabilities have been incurred and such
amounts are reasonably estimable, the Company provides for amounts that include
judgments and penalties that may be assessed. These liabilities are usually
included in accounts payable and accrued liabilities or other long-term
liabilities in the Consolidated Financial Statements, depending on the
anticipated payment date. During 2006, the Company reversed $17,330 in long-term
and deferred income tax liabilities relating to certain tax matters for which
the statue of limitations has expired. None of the remaining matters are
expected to result in a material adverse effect on the Company's consolidated
financial position or results of operations.
51
SCHEDULE III
UNITED CAPITAL CORP. AND SUBSIDIARIES
REAL PROPERTY AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2006
(In thousands)
Gross Amount At Which
Initial Cost to Company Costs Carried At Close of Period
----------------------- Capitalized ------------------------------------
Mortgage Buildings, Subsequent to Buildings,
Loans Improvements Acquisition/ Improvements Total
Description Payable Land & Equipment Improvements Land & Equipment (a),(c)
------------------------------------- ------- -------- ------------ ------------- -------- ------------- --------
REAL PROPERTY HELD FOR RENTAL:
Shopping centers and retail outlets:
Culver, CA $ -- $ 842 $ 7,576 $ -- $ 842 $ 7,576 $ 8,418
Northbrook, IL -- 898 8,075 -- 898 8,075 8,973
Miscellaneous investments 2,076 4,517 29,504 3,367 4,517 32,871 37,388
-------- -------- -------- -------- -------- -------- --------
2,076 6,257 45,155 3,367 6,257 48,522 54,779
-------- -------- -------- -------- -------- -------- --------
Commercial properties:
Long Island City, NY -- 850 7,681 -- 850 7,681 8,531
Miscellaneous investments 2,163 1,853 22,338 7,767 1,948 30,010 31,958
-------- -------- -------- -------- -------- -------- --------
2,163 2,703 30,019 7,767 2,798 37,691 40,489
-------- -------- -------- -------- -------- -------- --------
Day-care centers:
Miscellaneous investments 30 384 3,453 1,891 384 5,344 5,728
-------- -------- -------- -------- -------- -------- --------
Hotel properties:
Windsor Locks, CT 7,871 1,000 6,190 1,152 1,000 7,342 8,342
Miscellaneous investments -- 1,712 2,868 55 1,712 2,923 4,635
-------- -------- -------- -------- -------- -------- --------
7,871 2,712 9,058 1,207 2,712 10,265 12,977
-------- -------- -------- -------- -------- -------- --------
Other:
Miscellaneous investments -- 2,618 1,578 128 2,618 1,706 4,324
-------- -------- -------- -------- -------- -------- --------
Total real property held for rental 12,140 14,674 89,263 14,360 14,769 103,528 118,297
-------- -------- -------- -------- -------- -------- --------
REAL PROPERTY HELD FOR SALE:
Commercial properties:
Miscellaneous investments -- 78 1,295 157 78 1,452 1,530
-------- -------- -------- -------- -------- -------- --------
Total real property held for sale -- 78 1,295 157 78 1,452 1,530
-------- -------- -------- -------- -------- -------- --------
TOTAL $ 12,140 $ 14,752 $ 90,558 $ 14,517 $ 14,847 $104,980 $119,827
======== ======== ======== ======== ======== ======== ========
(a) Reconciliations of the carrying value of total real property for the three years ended December 31, 2006 are as follows:
2006 2005 2004
-------- -------- --------
Total real property at beginning of period $108,481 $ 99,439 $113,097
Additions during the period:
Acquisitions and improvements 12,880 10,679 1,097
-------- -------- --------
121,361 110,118 114,194
Deductions during the period:
Cost of real estate sold 1,534 1,637 14,726
Other -- -- 29
-------- -------- --------
$119,827 $108,481 $ 99,439
======== ======== ========
(b) Reconciliations of accumulated depreciation for the three years ended December 31, 2006 are as follows:
2006 2005 2004
------- ------- -------
Accumulated depreciation at beginning of period $68,281 $66,930 $72,817
Additions during the period:
Provision for depreciation 1,774 1,987 2,704
------- ------- -------
70,055 68,917 75,521
Deductions during the period:
Accumulated depreciation of real estate sold 598 636 8,562
Other -- -- 29
------- ------- -------
$69,457 $68,281 $66,930
======= ======= =======
(c) The aggregate cost for federal income tax purposes is approximately $151,023.
The accompanying Notes to Consolidated Financial Statements are an integral part of these schedules.
52-A
SCHEDULE III
UNITED CAPITAL CORP. AND SUBSIDIARIES
REAL PROPERTY AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2006
(In thousands)
Life On Which
Depreciation
in Latest
Statement of
Accumulated Date of Date Income is
Description Depreciation (b) Construction Acquired Computed
---------------- ------------ -------- --------------
REAL PROPERTY HELD FOR RENTAL:
Shopping centers and retail outlets:
Culver, CA $ 7,576 N/A 1986 18 Years
Northbrook, IL 8,075 N/A 1987 18 Years
Miscellaneous investments 25,883 N/A 1986-98 5-39 Years
--------
41,534
--------
Commercial properties:
Long Island City, NY 131 N/A 2006 39 Years
Miscellaneous investments 18,789 N/A 1986-94 5-39 Years
--------
18,920
--------
Day-care centers:
Miscellaneous investments 4,041 N/A 1986-91 5-39 Years
--------
Hotel properties:
Windsor Locks, CT 166 N/A 2005 7-39 Years
Miscellaneous investments 2,916 N/A 1986-99 7 Years
--------
3,082
--------
Other:
Miscellaneous investments 1,248 N/A 1986-97 15-39 Years
--------
Total real property held for rental 68,825
--------
REAL PROPERTY HELD FOR SALE:
Commercial properties:
Miscellaneous investments 632 N/A 1992 10-32 Years
--------
Total real property held for sale 632
--------
TOTAL $ 69,457
========
The accompanying Notes to Consolidated Financial Statements are an integral part of these schedules.
52-B
SCHEDULE IV
UNITED CAPITAL CORP. AND SUBSIDIARIES
MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 2006
(In thousands)
Final
Description Interest Rate Maturity Date Periodic Payment Terms Prior Liens
------------------------------ -------------------- ------------------- -------------------------------- -------------
Mortgage loans secured by commercial property:
Interest only due monthly, with
Brooklyn, New York LIBOR plus 14.25% June 2007 balance due at maturity $79,000
Interest only due monthly, with
Ridgefield Park, New Jersey 15.0% June 2008 balance due at maturity --
Principal and interest due
Houston, Texas Varies from 7.0%- 16.0% May 2014 monthly --
Principal and interest due
Other 9.0% December 2008 monthly --
-------
$79,000
=======
(a) A reconciliation of mortgage loans on real estate for the year ended December 31, 2006 is as follows:
Balance at beginning of period $3,737
Additions during the period:
New mortgage loans 750
Deductions during the period:
Collection of principal (2,402)
------
Balance at end of period $2,085
======
(b) The carrying value for federal income tax purposes is substantially equal to the carrying amount for book purposes.
The accompanying Notes to Consolidated Financial Statements are an integral part of these schedules.
53-A
SCHEDULE IV
UNITED CAPITAL CORP. AND SUBSIDIARIES
MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 2006
(In thousands)
Principal
Amount of
Loans
Carrying Subject to
Amount of Delinquent
Face Amount Mortgages Principal or
of Mortgages (a), (b) Interest
------------- ------------ -------------
$ 750 $ 750 $ --
2,000 639 --
800 693 --
45 3 --
------ ------ --------
$3,595 $2,085 $ --
====== ====== ========
The accompanying Notes to Consolidated Financial Statements are
an integral part of these schedules.
53-B
UNITED CAPITAL CORP. AND SUBSIDIARIES
QUARTERLY FINANCIAL DATA
(Unaudited)
(In thousands, except per share data)
The following unaudited quarterly results have been restated from amounts
previously reported by the Company to reflect the sale or classification of
certain properties "Held for Sale" as discontinued operations in accordance with
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets."
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- ----------
FOR THE YEAR 2006:
Revenues $ 15,988 $ 17,157 $ 16,400 $ 15,823
======== ======== ======== ==========
Operating income $ 1,814 $ 3,268 $ 2,969 $ 3,087
======== ======== ======== ==========
Other income (1) $ 1,504 $ 954 $ 1,981 $ 4,099
======== ======== ======== ==========
Income from continuing operations (2) $ 2,108 $ 2,746 $ 20,620 $ 4,577
======== ======== ======== ==========
(Loss) income from discontinued
operations $ (20) $ 455 $ 4 $ 70
======== ======== ======== ==========
Net income $ 2,088 $ 3,201 $ 20,624 $ 4,647
======== ======== ======== ==========
BASIC EARNINGS PER SHARE:
Income from continuing operations $ .25 $ .33 $ 2.49 $ .55
Income from discontinued operations -- .06 -- .01
-------- -------- -------- ----------
Net income per share $ .25 $ .39 $ 2.49 $ .56
======== ======== ======== ==========
DILUTED EARNINGS PER SHARE:
Income from continuing operations $ .20 $ .27 $ 2.01 $ .44
Income from discontinued operations -- .05 -- .01
-------- -------- -------- ----------
Net income per share assuming
dilution $ .20 $ .32 $ 2.01 $ .45
======== ======== ======== ==========
FOR THE YEAR 2005:
Revenues $ 15,213 $ 15,850 $ 14,831 $ 14,213
======== ======== ======== ==========
Operating income $ 2,529 $ 3,140 $ 3,015 $ 2,560
======== ======== ======== ==========
Other income (3) $ 1,800 $ 1,536 $ 4,425 $ 2,041
======== ======== ======== ==========
Income from continuing operations $ 2,824 $ 3,038 $ 4,821 $ 2,593
======== ======== ======== ==========
Income from discontinued operations $ 41 $ 242 $ 856 $ 181
======== ======== ======== ==========
Net income $ 2,865 $ 3,280 $ 5,677 $ 2,774
======== ======== ======== ==========
BASIC EARNINGS PER SHARE:
Income from continuing operations $ .31 $ .34 $ .55 $ .30
Income from discontinued operations -- .02 .10 .02
-------- -------- -------- ----------
Net income per share $ .31 $ .36 $ .65 $ .32
======== ======== ======== ==========
DILUTED EARNINGS PER SHARE:
Income from continuing operations $ .26 $ .28 $ .45 $ .24
Income from discontinued operations -- .02 .08 .02
-------- -------- -------- ----------
Net income per share assuming
dilution $ .26 $ .30 $ .53 $ .26
======== ======== ======== ==========
(1) The fourth quarter results include $2,303 in net realized and unrealized
gain on derivative instruments and net gain on the sale of
available-for-sale securities.
(2) The third quarter results include the reversal of $17,330 in long-term and
deferred income tax liabilities relating to certain tax matters for which
the statue of limitations has expired.
(3) The third quarter results include $3,327 in distributions in excess of the
Company's investment related to the sale of the hotel which was owned and
operated by the Hotel Venture (see Note 5 of Notes to Consolidated Financial
Statements).
54