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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 2002
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
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Commission file number 1-10104
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UNITED CAPITAL CORP.
- --------------------------------------------------------------------------------
(Exact name of Company as specified in its charter)
Delaware 04-2294493
- -------------------------------------- ---------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9 Park Place, Great Neck, New York 11021
- -------------------------------------------- -------------------------------
(Address of principal executive offices) (Zip code)
Company's telephone number, including area code: (516) 466-6464
--------------------------------
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 whether the Company (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company 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 Company'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 Company is an accelerated filer. Yes / / No /X/
The aggregate market value of the shares of the voting stock held by
nonaffiliates of the Company as of June 30, 2002 was approximately $26,924,000.
The number of shares of the Company's $.10 par value common stock outstanding as
of February 28, 2003 was 4,514,205.
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 Company pursuant to Regulation 14A within 120 days after the
close of its fiscal year.
PART I
ITEM 1. BUSINESS
General
- -------
United Capital Corp. (the "Company"), incorporated in 1980 in the State of
Delaware, currently has two industry segments:
1. Real Estate Investment and Management.
2. Engineered Products.
The Company also invests excess available cash in marketable securities and
other financial instruments.
Description of Business
- -----------------------
Real Estate Investment and Management
-------------------------------------
The Company is engaged in the business of investing in and managing real estate
properties and the making of high-yield, short-term loans secured by desirable
properties. Most real estate properties owned by the Company are leased under
net leases whereby the tenants are responsible for all expenses relating to the
leased premises, including taxes, utilities, insurance and maintenance. The
Company also owns properties that it manages which are operated by the City of
New York as day-care centers and offices and other properties leased as
department stores, hotels and shopping centers around the country. In addition,
the Company owns properties available for sale and lease with the assistance of
a consultant or realtor working in the locale of the premises.
The majority of properties are leased to single tenants. Exclusive of a South
Plainfield, New Jersey property, 95.5% of the total square footage of the
Company's properties was leased as of December 31, 2002.
Engineered Products
-------------------
The Company's engineered products are manufactured through Metex Mfg.
Corporation ("Metex") and AFP Transformers, LLC ("AFP Transformers"),
wholly-owned subsidiaries of the Company. The knitted wire products and
components manufactured by Metex must function in adverse environments and meet
rigid performance requirements. The principal areas in which these products have
application are as high temperature gaskets, seals, components for use in
airbags, shock and vibration isolators, noise reduction elements and air, liquid
and solid filtering devices.
Metex has been an original equipment manufacturer for the automobile industry
since 1974 and presently supplies many automobile manufacturers with exhaust
seals and components for use in exhaust emission control devices.
1
The Company also manufactures transformer products marketed under several brand
names including AFP Transformers, Field Transformer, ISOREG and EPOXYCAST(TM)
for a wide variety of industrial and research applications including machine
power transformers, rectifier and inverter transformers and transformers for
heating.
For the year ended December 31, 2002, sales by the engineered products segment
to its two largest customers (each in excess of 10.0% of the segment's net
sales) accounted for 20.0% and 10.1%, respectively, of the segment's sales. For
the years ended December 31, 2001 and 2000, sales by the engineered products
segment to its largest customer (in excess of 10.0% of the segment's net sales)
accounted for 14.0% and 15.8%, respectively, of the segment's sales.
Approximately 11.3%, 8.3% and 13.1% of 2002, 2001, and 2000 total sales
generated from the engineered products segment were from foreign customers.
Substantially all assets held by the Company's engineered products segment are
located within the United States or its leased warehouse in Tijuana, Mexico.
Summary Financial Information
-----------------------------
The following table sets forth the revenues, operating income and identifiable
assets of each business segment of the Company for 2002, 2001 and 2000.
(In Thousands) 2002 2001 2000
--------- -------- -------
Real Estate Investment and Management
- -------------------------------------
Rental revenues $ 24,498 $ 26,386 $ 26,957
======== ======== ========
Operating income $ 12,411 $ 12,819 $ 13,126
======== ======== ========
Identifiable assets, including corporate
assets $166,433 $165,536 $136,189
======== ======== ========
Engineered Products
- -------------------
Net sales $ 33,513 $ 33,792 $ 34,095
======== ======== ========
Operating income $ 2,256 $ 1,912 $ 2,261
======== ======== ========
Identifiable assets $ 10,114 $ 12,429 $ 11,807
======== ======== ========
Distribution
------------
The Company's engineered products are distributed by a direct sales force and
through distributors to industrial consumers and original equipment
manufacturers.
Product Methods and Sources of Raw Materials
--------------------------------------------
The Company's products are manufactured at its own facilities and a leased
facility in Mexico. Raw materials are purchased from a wide range of suppliers.
Most raw materials purchased by the Company are available from several
suppliers. Certain imported raw materials used by the Company have been the
subject of international trade disputes and may become subject to new or
additional tariffs which could also affect the cost of domestic supplies.
Although management does not expect such matters to adversely effect the
2
Company's financial position, it is uncertain at this time what effect, if any,
such events will have on the cost of such materials. The Company has not had and
does not expect to have any problems fulfilling its raw material requirements
during 2003.
Patents and Trademarks
----------------------
The Company owns several patents, patent licenses and trademarks. While the
Company considers that in the aggregate its patents, patent licenses, and
trademarks used in the engineered products operations are significant to this
segment, it does not believe that any of them are of such importance that the
loss of one or more of them would materially affect its consolidated financial
condition or results of operations.
Employees
---------
At February 28, 2003, the Company employed approximately 230 persons,
approximately 150 of which were covered by a collective bargaining agreement
that expires in February 2004. The Company believes that its relationship with
its employees is good.
Competition
-----------
The Company competes with at least 21 other companies in the sale of engineered
products. The Company emphasizes product performance and service in connection
with the sale of these products. The principal competition faced by the Company
results from the sales price of the products sold by its competitors.
The Company has established close relationships with a large number of major
national and regional real estate brokers and maintains a broad network of
industry contacts. There are numerous regional and local commercial developers,
real estate companies, financial institutions and other investors who compete
with the Company for the acquisition of properties and tenants.
Backlog
-------
The dollar value of unfilled orders of the Company's engineered products segment
was approximately $1.7 million at December 31, 2002 and $2.2 million at December
31, 2001. The decrease in backlog is principally due to a slow-down in the
demand for the Company's transformer and certain automotive product lines. It is
anticipated that substantially all such 2002 backlog will be filled in 2003.
Substantially all of the 2001 backlog was filled in 2002. The order backlog
referred to above does not include any order backlog with respect to sales of
knitted wire mesh components for exhaust emission control devices, exhaust seals
or airbag components because of the manner in which customer orders are
received.
Environmental Regulations
-------------------------
Federal, state and local requirements regulating the discharge of materials into
the environment or otherwise relating to the protection of the environment have
had and will continue to have a significant impact upon the operations of the
Company. It is the policy of the Company to manage, operate and maintain its
facilities in compliance, in all material respects, with applicable standards
for the prevention, control and abatement of environmental pollution to prevent
damage to the quality of air, land and resources.
3
The Company has undertaken the completion of environmental studies and/or
remedial action at Metex' two New Jersey facilities. The Company has recorded a
liability in the Consolidated Financial Statements for the estimated potential
remediation costs at these facilities.
The process of remediation has begun at one facility pursuant to a plan filed
with the New Jersey Department of Environmental Protection ("NJDEP").
Environmental experts engaged by the Company estimate that under the most
probable remediation scenario the remediation of this site is anticipated to
require initial expenditures of $860,000 including the cost of capital
equipment, and $86,000 in annual operating and maintenance costs over a 15 year
period.
Environmental studies at the second facility indicate that remediation may be
necessary. Based upon the facts presently available, environmental experts have
advised the Company that under the most probable remediation scenario, the
estimated cost to remediate this site is anticipated to require $2.3 million in
initial costs, including capital equipment expenditures, and $258,000 in annual
operating and maintenance costs over a 10 year period. These estimated costs of
future expenses for remediation obligations are not discounted to their present
value.
The Company may revise such estimates in the future due to the uncertainty
regarding the nature, timing and extent of any remediation efforts that may be
required at this site, should an appropriate regulatory agency deem such efforts
to be necessary. The foregoing estimates may also be revised by the Company as
new or additional information in these matters become available or should the
NJDEP or other regulatory agencies require additional or alternative remediation
efforts in the future. It is not currently possible to estimate the range or
amount of any such liability.
Although the Company believed that it was entitled to full defense and
indemnification with respect to environmental investigation and remediation
costs under its insurance policies, the Company's insurers denied such coverage.
Accordingly, the Company filed an action against certain insurance carriers
seeking defense and indemnification with respect to all prior and future costs
incurred in the investigation and remediation of these sites. Settlements have
been reached with all carriers in this matter.
In the opinion of management, amounts recovered from its insurance carriers
under the terms of its settlement agreements should be sufficient to address
these matters and amounts needed in excess, if any, will be paid gradually over
a period of years. Accordingly, they should not have a material adverse effect
upon the business, liquidity or financial position of the Company. However,
adverse decisions or events, particularly as to the merits of the Company's
factual and legal basis could cause the Company to change its estimate of
liability with respect to such matters in the future.
Available Information
- ---------------------
The Company's filings with the Securities and Exchange Commission ("SEC") may be
read and copied at the SEC's Public Reference Room at 450 Fifth Street, NW,
Washington DC 20549. Information on the operation of the Public Reference Room
may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC
maintains an Internet site that contains reports, proxy and information
statements, and other information regarding issuers that file electronically
with the SEC. The SEC's internet address is http://www.sec.gov.
4
A copy of the Company's annual report on Form 10-K, quarterly reports on Form
10-Q, current reports to Form 8-K, if any, and amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange
Act as soon as reasonably practicable after the Company electronically files
such material with, or furnishes it to, the SEC may be obtained without charge
by writing to Anthony J. Miceli, Chief Financial Officer and Secretary of the
Company at its executive offices, United Capital Building, 9 Park Place, Great
Neck, NY 11021.
ITEM 2. PROPERTIES
Real Property Held for Rental or Sale
- -------------------------------------
As of February 28, 2003, the Company owned 184 properties strategically located
throughout the United States. The properties are primarily leased under
long-term net leases. The Company's classification and gross carrying value of
its properties, inclusive of those held for sale and classified as discontinued
operations in the Company's Consolidated Financial Statements (see Note 2 of
Notes to Consolidated Financial Statements) at December 31, 2002 are as follows
(Dollars in Thousands):
Gross Carrying Number of
Description Value Percentage Properties
----------- -------------- ---------- ----------
Shopping centers and retail outlets $ 62,835 51.5% 24
Commercial properties 43,864 35.9% 114
Day-care centers and office 6,430 5.3% 10
Hotel properties 4,628 3.8% 2
Other 4,324 3.5% 38
-------- -------- ---------
Total $122,081 100.0% 188
======== ======== =========
The following summarizes the Company's properties by geographic area at December
31, 2002 (Dollars in Thousands):
Gross Number
Carrying of
Value Properties
-------- ----------
Northeast $ 40,431 102
Southeast 25,119 30
Midwest 29,140 33
Southwest 6,071 7
Pacific Coast 17,461 7
Pacific Northwest 980 5
Rocky Mountain 2,879 4
-------- --------
$122,081 188
======== ========
5
Shopping Centers and Retail Outlets
-----------------------------------
Shopping centers and retail outlets include 17 department stores and other
properties primarily leased under net leases. The tenants are responsible for
taxes, maintenance and all other expenses of the properties. The leases for
certain shopping centers and retail outlets provide for additional rents based
on sales volume and renewal options at higher rents. The department stores
include eight properties leased to Kmart Corporation ("Kmart") and two Macy's
stores, with a total of approximately 777,000 and 364,000 square feet,
respectively. The Kmart stores are primarily located in the Midwest region of
the United States. The Macy's stores are located in the Pacific Coast and
Southwest regions of the United States.
Kmart filed for protection under Chapter 11 of the U.S. Bankruptcy Code on
January 22, 2002. As part of its reorganization, Kmart announced the closure of
approximately 600 of its stores during the past year, as well as its anticipated
emergence from Chapter 11 protection as early as April 30, 2003. To date, Kmart
has not rejected any leases with the Company; however the terms of one such
lease have been renegotiated resulting in a temporary rent reduction. Although
it is currently uncertain which remaining leases, if any, Kmart will reject or
affirm as part of its reorganization, management believes that its leases with
Kmart are at or below the fair market rent for comparable properties and as a
result, the rejection of one or more leases is not expected to have a material
adverse effect on the consolidated financial position and/or results of
operations of the Company.
Included in shopping centers and retail outlets is one department store which is
currently held for sale and classified as discontinued operations in the
Consolidated Financial Statements.
Commercial Properties
---------------------
Commercial properties consist of properties leased as 60 restaurants, 16 Midas
Muffler Shops, three convenience stores, six office buildings and miscellaneous
other properties. These properties are primarily leased under net leases which
in certain cases have renewal options at higher rents. Certain of these leases
also provide for additional rents based on sales volume. The 60 restaurants,
located throughout the United States, include properties leased as McDonalds,
Burger King, Dunkin' Donuts, Pizza Hut, Hardee's, Wendy's, Kentucky Fried
Chicken and Boston Market.
Included in commercial properties are six properties which are currently held
for sale and classified as discontinued operations in the Consolidated Financial
Statements. These six properties consist of three restaurants, one Midas Muffler
Shop, one office building and one miscellaneous other property.
Day-Care Centers and Office
---------------------------
The Company has nine day-care centers and one office building, located in New
York City, which are leased to the City of New York. The tenant is responsible
for real estate taxes and certain maintenance costs while the Company maintains
insurance and certain other maintenance obligations. All such leases provide for
the reimbursement of operating costs above base year levels and certain leases
include rental increases and renewal options.
6
Hotel Properties
----------------
The Company's two hotel properties located in Georgia and California are managed
through a national hotel company with local on-site management responsible for
all day-to-day operations of the hotels. The Company's Board Chairman is the
Chairman and President and another Company Director is a director of this
publicly-traded hotel company. See "Related Party Transactions" in Item 7 and
Note 13 of Notes to Consolidated Financial Statements.
Manufacturing Facilities
- ------------------------
The Company's engineered products are manufactured at 970 New Durham Road,
Edison, New Jersey, in a one-story building having approximately 55,000 square
feet of floor space and also in a second facility at 206 Talmadge Road, Edison,
New Jersey which has approximately 55,000 square feet of floor space. The
Company owns these facilities together with the sites. Metex also leases a
manufacturing facility in Tijuana, Mexico with approximately 24,000 square feet
of floor space.
ITEM 3. LEGAL PROCEEDINGS
Litigation
- ----------
The Company is involved in various litigation and legal matters which are being
defended and handled in the ordinary course of business.
None of the foregoing is expected to result in a judgment having a material
adverse effect on the Company's consolidated financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS
The Company's Common Stock is traded on the American Stock Exchange under the
symbol AFP. The table below shows the high and low sales prices as reported in
the composite transactions for the American Stock Exchange.
High Low
----------- ----------
2002 First quarter $24.84 $21.40
Second quarter 25.99 23.40
Third quarter 25.05 21.70
Fourth quarter 35.45 25.00
2001 First quarter 18.40 14.50
Second quarter 25.50 17.90
Third quarter 24.45 18.70
Fourth quarter 21.35 18.90
7
As of February 28, 2003, there were approximately 330 record holders of the
Company's Common Stock. The closing sales price for the Company's Common Stock
on such date was $35.05. The Company has never paid any cash dividends on its
Common Stock however, the payment of dividends is within the discretion of the
Company's Board of Directors. In light of potential working capital needs,
requirements to finance future growth and certain restrictions in the Company's
credit agreement, the Company does not currently expect to pay any cash
dividends on its Common Stock. However the Board of Directors could re-evaluate
this position, particularly if recent federal income tax proposals regarding the
tax exemption of dividends were implemented.
Equity Compensation Plan
- ------------------------
The information required by this item will be contained in the Proxy Statement
of the Company for the 2003 Annual Meeting of Stockholders and is incorporated
herein by reference.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below should be read in
conjunction with, and is qualified in its entirety by reference to, the
Consolidated Financial Statements and the Notes thereto.
(In Thousands, Except Per Share Data) Year Ended December 31,
- -----------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- ------- --------
Total revenues $ 58,011 $ 60,178 $ 61,052 $ 58,422 $ 57,246
======== ======== ======== ======== ========
Income from continuing
operations $ 22,493 $ 18,290 $ 17,665 $ 12,779 $ 10,000
======== ======== ======== ======== ========
Income from continuing
operations per share: Basic $ 4.91 $ 3.90 $ 3.73 $ 2.57 $ 1.92
======== ======== ======== ======== ========
Total assets $176,547 $177,965 $147,996 $133,732 $124,732
Total liabilities 64,913 81,624 70,877 74,676 72,314
Total stockholders' equity 111,634 96,341 77,119 59,056 52,418
======== ======== ======== ======== ========
Certain reclassifications have been reflected in the above financial data to
conform prior years' data to the current classifications. These
reclassifications primarily relate to the adoption of Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," in January 2002 (see Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations").
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.
8
Results of Operations: 2002 and 2001
- ------------------------------------
Revenues for the year ended December 31, 2002 were $58.0 million compared to
2001 revenues of $60.2 million. Operating income during this period was $11.7
million versus $12.5 million for the comparable 2001 period. Net income for the
year ended December 31, 2002 was $23.4 million or $5.10 in basic earnings per
share compared to net income of $19.0 million or $4.05 in basic earnings per
share for the year ended December 31, 2001, a 25.9% increase in basic earnings
per share.
Included in the results for the year ended December 31, 2002 is income from
discontinued operations, net of tax, resulting from the Company's adoption of
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144
requires that the operating results, as well as gains or losses on the real
estate assets sold or to be disposed of, as defined, be reflected in the
Consolidated Statements of Income as discontinued operations. The results of
operations for properties that have been reported as discontinued operations
during the year ended December 31, 2002 have been reclassified to discontinued
operations for the years ended December 31, 2001 and 2000 in accordance with
SFAS No. 144. Sales of properties occurring in prior years have not been
reclassified.
Real Estate Operations
----------------------
Rental revenues from real estate operations decreased $1.9 million or 7.2% to
$24.5 million for the year ended December 31, 2002 compared to $26.4 million in
2001. The decrease is primarily attributable to decreased rental revenues
resulting from the sale of properties in 2001 and decreased hotel revenues due
to the continued weakness in the economy. Rental revenues from 2002 property
sales have been classified as discontinued operations in accordance with SFAS
No. 144. Property sales prior to the implementation of SFAS No. 144 have not
been similarly reclassified to discontinued operations.
Mortgage interest expense decreased $0.4 million or 22.6% to $1.4 million for
the year ended December 31, 2002 compared to $1.8 million for the corresponding
2001 period, due to continued mortgage amortization which approximated $5.0
million during the year ended December 31, 2002.
Depreciation expense associated with real properties held for rental decreased
by $0.7 million or 18.2% to $3.3 million for the year ended December 31, 2002
compared to $4.0 million for the same period in 2001. This decrease was
primarily attributable to reduced depreciation expense associated with fully
depreciated properties and properties sold in 2001. Depreciation expense from
property sales in 2002 has been classified as discontinued operations in
accordance with SFAS No. 144. Such expenses on property sales prior to the
implementation of SFAS No. 144 have not been similarly reclassified to
discontinued operations.
Other operating expenses associated with the management of real properties
decreased approximately $0.4 million or 4.5% to $7.4 million during 2002 versus
such expenses incurred of $7.8 million in 2001. This decrease is mainly
attributable to the decrease in hotel operating expenses due to the decrease in
hotel revenues as noted above.
9
Engineered Products
-------------------
The Company's engineered products segment includes Metex and AFP Transformers.
The operating results of the engineered products segment for the years ended
December 31, 2002 and 2001 are as follows:
(In Thousands) 2002 2001
------- -------
Net sales $33,513 $33,792
======= =======
Cost of sales $24,500 $25,083
======= =======
Selling, general and administrative expenses $ 6,757 $ 6,797
======= =======
Operating income $ 2,256 $ 1,912
======= =======
Net sales of the engineered products segment decreased $0.3 million or less than
1% for the year ended December 31, 2002 compared to net sales in the preceding
year. The decrease reflects lower sales in the Company's transformer product
line principally due to decreased demand for these products as well as price
competitiveness for such products. This decrease was offset by higher sales in
the Company's automotive product line mainly due to improved product offerings.
Cost of sales as a percentage of net sales decreased approximately 1.5% between
2001 and 2002, principally due to the mix of products sold as noted above and
the implementation of cost containment measures.
Selling, general and administrative expenses of the engineered products segment
decreased less than one percent for the year ended December 31, 2002 versus the
comparable 2001 period.
General and Administrative Expenses
-----------------------------------
General and administrative expenses not associated with the manufacturing
operations increased approximately $0.7 million or 32.7% during 2002, compared
to such expenses incurred in the preceding year. The increase is principally due
to higher salary and salary related expenses as well as an increase in pension
related expenses.
Other Income and Expense, Net
-----------------------------
Other income and expense, net decreased approximately $1.0 million from $17.0
million in 2001 to $16.0 million in 2002. The decrease is principally due to
lower net gains on the sale of real estate assets of $5.3 million, which
excludes pre-tax gains of $0.8 million reflected as discontinued operations in
the Company's Consolidated Statements of Income, and lower net gains on the sale
of available-for-sale and trading securities of $1.3 million. This decrease was
offset by higher net realized and unrealized gains on derivative instruments of
$5.8 million.
10
Discontinued Operations
-----------------------
Operating income from properties sold or held for sale and accounted for as
discontinued operations was $0.4 million on a net of tax basis for 2002 versus
$0.7 million in 2001. Prior year amounts have been reclassified to reflect
results of operations of real properties sold in 2002 or held for sale as of
December 31, 2002 as discontinued operations. Gains on the sale of real estate
accounted for as discontinued operations were $0.5 million on a net of tax basis
for the year ended December 31, 2002. Prior to the adoption of SFAS No. 144 in
2002, gains on sales of real estate assets were not accounted for as
discontinued operations.
Results of Operations: 2001 and 2000
- ------------------------------------
Total revenues generated by the Company during 2001 were $60.2 million versus
revenues of $61.1 million during 2000. Operating income during 2001 was $12.5
million versus $13.2 million for 2000. Net income was $19.0 million or $4.05 in
basic earnings per share in 2001 versus $18.3 million or $3.86 in basic earnings
per share in 2000.
Real Estate Operations
----------------------
Rental revenues from real estate operations during 2001 decreased $0.6 million
or 2.1% compared to 2000. The decrease is primarily attributable to decreased
hotel revenues, offset by certain retroactive lease adjustments in 2001.
Mortgage interest expense decreased $0.4 million or 19.5% for the year ended
December 31, 2001 compared to the corresponding 2000 period, due to continuing
mortgage amortization.
Depreciation expense associated with real properties held for rental decreased
by $0.8 million or 16.6% for the year ended December 31, 2001 compared to the
same period in 2000. This decrease was primarily attributable to reduced
depreciation expense associated with fully depreciated properties and properties
sold in 2001 and 2000.
Other operating expenses associated with the management of real properties
increased approximately $1.0 million or 14.3% during 2001 versus such expenses
incurred in 2000. This increase is primarily attributable to increased real
estate taxes, insurance, property maintenance expenses and hotel operating
expenses.
Engineered Products
-------------------
The Company's engineered products segment includes Metex and AFP Transformers.
The operating results of the engineered products segment for the years ended
December 31, 2001 and 2000 are as follows:
(In Thousands) 2001 2000
--------- -------
Net sales $33,792 $34,095
======= =======
Cost of sales $25,083 $24,738
======= =======
Selling, general and administrative expenses $ 6,797 $ 7,096
======= =======
Operating income $ 1,912 $ 2,261
======= =======
11
Net sales of the engineered products segment decreased $0.3 million or less than
1% for the year ended December 31, 2001 compared to net sales in the preceding
year. The decrease reflects lower sales in the Company's engineered component
product line, offset by higher sales in the Company's automotive and transformer
product lines. These declines were due to the slowing economy and compounded by
the tragic events of September 11th.
Cost of sales as a percentage of net sales increased approximately 2.2% between
2001 and 2000, principally due to the decline in sales noted above.
Selling, general and administrative expenses of the engineered products segment
decreased $0.3 million or 4.2% for the year ended December 31, 2001 versus the
comparable 2000 period. The decrease is primarily due to the decline in sales
noted above and cost containment efforts implemented by management.
General and Administrative Expenses
-----------------------------------
General and administrative expenses not associated with the manufacturing
operations increased approximately $0.1 million or 4.8% during 2001, compared to
such expenses incurred in the preceding year. The increase is principally due to
higher salary and salary related expenses and an increase in professional fees.
Other Income and Expense, Net
-----------------------------
Other income and expense, net increased approximately $7.2 million from $9.8
million in 2000 to $17.0 million in 2001. The increase is principally due to
increased net gains on the sale of real estate assets of $5.7 million and
increased net realized and unrealized gains on available-for-sale securities,
derivative instruments and trading securities of $1.3 million.
Liquidity and Capital Resources
-------------------------------
The Company experienced a net cash inflow from operations of approximately $11.6
million, $13.1 million and $14.5 million during 2002, 2001 and 2000,
respectively. The $1.5 million decline in operating cash flow from 2001 to 2002
primarily results from changes in working capital and a reduction in the
proceeds of trading securities offset by a decline in income taxes. The $1.4
million decline in operating cash flow from 2000 to 2001 primarily results from
working capital changes and income taxes offset by $1.8 million of trading
security purchases in 2000 versus $2.3 million in proceeds from such securities
in 2001. The components of the working capital changes are set forth in detail
in the Consolidated Statements of Cash Flows.
In 2002, $22.0 million was used for investing activities which consisted
primarily of a $23.1 million investment in a joint venture in exchange for a 50%
ownership interest in a full service hotel, net purchases of available-for-sale
securities and derivative instruments of $3.5 million and a $3.0 million
purchase of a note receivable. This was partially offset by proceeds from the
sale of real estate assets of $7.3 million.
In 2001, $45.7 million was provided by investing activities consisting primarily
of $31.7 million in net proceeds from available-for-sale securities and
derivative instruments, $12.9 million in proceeds from the sale of real estate
assets and the repayment of a $3.5 million note receivable. This was offset by
$3.1 million from the acquisition of and/or additions to real estate assets and
property, plant and equipment.
12
In 2000, $4.1 million was used for investing activities which consisted
primarily of $9.7 million of net purchases of available-for-sale securities, a
$3.5 million purchase of a note receivable and $0.8 million of capital
expenditures, primarily offset by $9.9 million of proceeds from the sale of real
estate assets.
Net cash used in financing activities was approximately $8.9 million, $7.8
million and $6.8 million during 2002, 2001 and 2000, respectively. This use of
cash flow was primarily attributable to debt reduction and the purchase and
retirement of the Company's common stock.
At December 31, 2002, the Company's cash and marketable securities were $74.8
million and working capital was $67.0 million as compared to cash and marketable
securities of $96.8 million and working capital of $76.4 million at December 31,
2001. The causes of these declines are discussed in the preceding paragraphs.
Management continues to believe that the real estate market is overvalued and
accordingly recent acquisitions have been limited to those select properties
that meet the Company's stringent financial requirements. Management believes
that the available working capital along with the $80.0 million of availability
on the revolving credit facility, discussed below, puts the Company in an
opportune position to fund acquisitions and grow the portfolio if and when
attractive long-term opportunities become available.
The cash needs of the Company have been satisfied from funds generated by
current operations. It is expected that future operational cash needs and the
cash required to repurchase the Company's common stock will also be satisfied
from existing cash balances, marketable securities, ongoing operations and
borrowings under the Revolver (as hereinafter defined). The primary source of
capital to fund additional real estate acquisitions and to make additional
high-yield mortgage loans will come from existing funds, borrowings under the
Revolver, the sale, financing and refinancing of the Company's properties and
from third party mortgages and purchase money notes obtained in connection with
specific acquisitions.
In addition to the acquisition of properties for consideration consisting of
cash and mortgage financing proceeds, the Company may acquire real properties in
exchange for the issuance of the Company's equity securities. The Company may
also finance acquisitions of other companies in the future with borrowings from
institutional lenders and/or the public or private offerings of debt or equity
securities. The Company currently has no agreements, commitments or
understandings with respect to the acquisition of real properties or other
companies in exchange for equity securities.
Funds of the Company in excess of that needed for working capital, purchasing
real estate and arranging financing for real estate acquisitions are invested by
the Company in corporate equity securities, corporate notes, certificates of
deposit, government securities and other financial instruments.
The Company is the lessor of eight department stores that are currently leased
to Kmart, which filed for protection under Chapter 11 of the U.S. Bankruptcy
Code on January 22, 2002. In addition, the Company holds a 50% interest in a
joint venture (which is accounted for by the Company on the equity basis) that
owns two distribution centers that are also leased to Kmart. As part of its
reorganization, Kmart announced the closure of approximately 600 of its stores
during the past year, as well as its anticipated emergence from Chapter 11
protection as early as April 30, 2003. To date, Kmart has not rejected any
leases with the Company; however the terms of one such lease have been
renegotiated resulting in a temporary rent reduction. Although it is currently
uncertain which remaining leases, if any, Kmart will reject or affirm as part of
its reorganization, management believes that its leases and the leases of the
13
joint venture with Kmart are at or below the fair market rent for comparable
properties and as a result, the rejection of one or more leases is not expected
to have a material adverse effect on the consolidated financial position and/or
results of operations of the Company.
Effective December 10, 2002, the Company entered into a credit agreement with
five banks which provides for an $80.0 million revolving credit facility
("Revolver"). The Revolver may be increased under certain circumstances and
expires on December 31, 2005.
Under the Revolver, the Company will be provided with eligibility based upon the
sum of (i) 60.0% of the aggregate annualized and normalized year-to-date net
operating income of unencumbered eligible properties, as defined, capitalized at
10.0%, (ii) 60.0% of the aggregate annualized and normalized year-to-date net
operating income of unencumbered eligible hotel properties, as defined,
capitalized at 10.5%, not to exceed the lesser of $10.0 million or 10% of total
eligibility, (iii) the lesser of $20.0 million or 50.0% of the aggregate
annualized and normalized year-to-date net operating income of encumbered
eligible properties, as defined, capitalized at 12.0%, (iv) the sum of 75.0% of
eligible accounts receivable, 50.0% of eligible inventory, and 50% of eligible
loans, as defined, (v) cash and cash equivalents in excess of working capital,
as defined, and (vi) 50% of marketable securities, as defined. At December 31,
2002, eligibility under the Revolver was $80.0 million, based upon the above
terms and there were no amounts outstanding under the Revolver. The credit
agreement contains certain financial and restrictive covenants, including
minimum consolidated equity, interest coverage, debt service coverage and
capital expenditures (other than for real estate), and limitations on
indebtedness. The Company was in compliance with all covenants at December 31,
2002. The credit agreement also contains provisions which allow the banks to
perfect a security interest in certain operating and real estate assets in the
event of a default, as defined in the credit agreement. Borrowings under the
Revolver, at the Company's option, bear interest at the bank's prime lending
rate or at the London Interbank Offered Rate ("LIBOR") (1.38% at December 31,
2002) plus 2.0% for non cash collateralized borrowings and 1.0% for cash
collateralized borrowings.
Prior to obtaining the Revolver, the Company maintained a credit agreement with
three banks which provided for both a $60.0 million revolving credit facility
and a $1.9 million term loan. This credit agreement was terminated effective
December 10, 2002 in conjunction with the execution of the Revolver. The term
loan matured and was fully satisfied as of September 30, 2002. At December 31,
2001, there were no amounts outstanding under the revolving credit facility and
$525,000 outstanding on the term loan.
As of September 30, 2002, the Company's interest rate swap agreement ("the
Swap") expired together with the satisfaction of the underlying term loan. The
Swap was classified as a cash flow hedge and was recorded as a component of
accounts payable and accrued liabilities in the Consolidated Balance Sheet at
December 31, 2001 and accumulated other comprehensive income was reduced by the
same amount, net of tax, with no impact on earnings. The differential paid or
received on the Swap was recognized as an adjustment to interest expense over
the term of the agreement.
In strategies designed to hedge overall market risk, the Company may sell common
stock short and participate in put and/or call options. These instruments do not
qualify for hedge accounting and therefore changes in such derivatives fair
value are recognized in earnings. These derivatives are recorded as a component
of accounts payable and accrued liabilities in the Consolidated Balance Sheets.
14
The Company has undertaken the completion of environmental studies and/or
remedial action at Metex' two New Jersey facilities and filed an action against
certain insurance carriers seeking recovery of costs incurred and to be incurred
in these matters. Settlements have been reached with all carriers in this
matter. See Note 19, "Commitments and Contingencies" of Notes to Consolidated
Financial Statements for further discussion on this matter.
The Company is subject to various litigation, legal and regulatory matters that
arise in the ordinary course of business activities. When management believes it
is probable that a liability has been incurred and such amounts are reasonably
estimable the Company provides for amounts that include judgments and penalties
that may be assessed. These liabilities are usually included in accounts payable
and accrued liabilities or other long-term liabilities in the Consolidated
Financial Statements, depending on the anticipated payment date. None of these
matters are expected to result in a material adverse effect on the Company's
consolidated financial position or results of operations.
The current liabilities of the Company have at times in the past exceeded its
current assets principally due to the financing of long-term assets utilizing
short-term borrowings and from the classification of current mortgage
obligations without the corresponding current asset for such properties. Future
financial statements may reflect current liabilities in excess of current
assets. Management is confident that through cash flow generated from
operations, together with borrowings available under the Revolver and the sale
of select assets, all obligations will be satisfied as they come due.
Previous purchases of the Company's common stock have reduced the Company's
additional paid-in capital to zero and accordingly current year purchases in
excess of par value have reduced retained earnings. During 2002, the Company
purchased and retired 148,257 shares of the Company's common stock for
approximately $3.8 million. Future repurchases of the Company's common stock
will also reduce retained earnings by amounts in excess of the par value.
Repurchases of the Company's common stock will be made from time to time in the
open market at prevailing market prices and may be made in privately negotiated
transactions, subject to available resources.
Contractual Obligations, Commitments and Contingencies
- ------------------------------------------------------
The following table summarizes the Company's contractual cash obligations and
other commitments at December 31, 2002:
(In Thousands) Payments Due By Period
----------------------
Less
than 1-3 4-5 After
Contractual Obligations 1 year years years 5 years Total
- --------------------------- -------- -------- --------- ---------- ----------
Long-Term Debt (1) $ 4,391 $ 8,204 $ 932 $ 3,211 $16,738
Operating Leases (2) 522 626 462 4,326 5,936
Employment Contract (3) 750 0 0 0 750
------- ------- ------- ------- -------
Total Contractual Cash
Obligations $ 5,663 $ 8,830 $ 1,394 $ 7,537 $23,424
======= ======= ======= ======= =======
15
(1) See Note 8 to Notes to Consolidated Financial Statements.
(2) See Note 18 to Notes to Consolidated Financial Statements.
(3) The Company has an employment contract with its Chairman, President
and Chief Executive Officer which provides for a base salary of
$750,000 per annum plus a discretionary bonus as determined by the
Board of Directors. In the event of termination or a change in
control, as defined in the employment agreement, the Company is
required to pay the Chairman, President and Chief Executive Officer
a lump sum severance payment equal to three years salary and
purchase outstanding options. The employment agreement provides for
successive one year terms unless either the Company or the Chairman,
President and Chief Executive Officer gives the other written notice
that the employment agreement is terminated.
Related Party Transactions
- --------------------------
The Company has a 50.0% interest in an unconsolidated limited liability
corporation, whose principal assets are two distribution centers leased to
Kmart. A group that includes the wife of the Board Chairman, two Directors of
the Company and the wife of one of the Directors have an 8.0% interest in this
entity. The Company's share of income arising from this investment, accounted
for as a leveraged lease, was $673,000, $868,000 and $1.2 million for the years
ended December 31, 2002, 2001 and 2000, respectively.
During December 2002, the Company purchased a 50% interest in a joint venture
(the "Hotel Venture") for $23.1 million together with a publicly-traded company
for which the Board Chairman and another Director of the Company are directors.
The Hotel Venture owns and operates a hotel in New Jersey. The equity method of
accounting is used to account for this investment since the Company has a 50%
interest in the joint venture and the ability to exercise significant influence,
but not control. Under the operating agreement all significant capital decisions
are made jointly and operating profits are divided evenly. The investment is
initially recorded at cost and subsequently adjusted for equity in earnings and
cash contributions and distributions.
The Company's two hotel properties, as well as the hotel owned by the Hotel
Venture, are managed by a publicly-traded company for which the Board Chairman
and another Director of the Company are directors. Fees paid for the management
of the Company's two hotel properties are based upon a percentage of revenue and
were approximately $117,000, $121,000, and $165,000 for 2002, 2001 and 2000,
respectively. Included in marketable securities at December 31, 2002 and 2001
was $20.4 million and $27.7 million, respectively, of common stock in this
company which represents approximately 5.6% of such company's outstanding shares
in both years.
CRITICAL ACCOUNTING POLICIES AND MANAGEMENT ESTIMATES
- -----------------------------------------------------
The preparation of consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America
requires management to use judgment in making estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. Certain of the
estimates and assumptions required to be made relate to matters that are
inherently uncertain as they pertain to future events. While management believes
that the estimates and assumptions used were the most appropriate, actual
results could differ significantly from those estimates under different
assumptions and conditions. The following is a description of those accounting
16
policies believed by management to require subjective and complex judgments
which could potentially affect reported results.
Revenue Recognition and Accounts Receivable - Real Estate Investment
--------------------------------------------------------------------
and Management
--------------
The Company leases substantially all of its properties to tenants
under net leases which are accounted for as operating leases. Under
this type of lease, the tenant is obligated to pay all operating
costs of the property including real estate taxes, insurance and
repairs and maintenance. Revenue is recognized as it is earned and
deemed collectible. Gains on the sale of real estate assets and
equity investments are recorded when the gain recognition criteria
under generally accepted accounting principles in the United States
of America have been met.
Certain lease agreements provide for additional rent based on a
percentage of tenants' sales. These percentage rents are recorded
once the required sales levels are achieved.
Income on leveraged leases is recognized by a method that produces a
constant rate of return on the outstanding investment in the lease,
net of the related deferred tax liability in the years in which the
net investment is positive.
Accounts receivable are recorded at the outstanding amounts net of
the allowance for doubtful accounts. The Company makes estimates of
the uncollectibility of its accounts receivable related to base
rents, tenant escalations, expense reimbursements and other
revenues. The Company analyzes accounts receivable and historical
bad debt levels, customer credit worthiness and current economic
trends when evaluating the adequacy of the allowance for doubtful
accounts. In addition, tenants in bankruptcy are analyzed and
estimates are made in connection with the expected recovery of
pre-petition and post-petition claims. The Company's net income is
directly affected by management's estimate of the collectibility of
accounts receivable.
Revenue Recognition and Accounts Receivable - Engineered Products
-----------------------------------------------------------------
In general, sales are recorded when products are shipped and
collection is reasonably assured. Management believes that adequate
controls are in place to ensure compliance with contractual product
specifications, a substantial history of such performance has been
established and historical returns and allowances have not been
significant. If actual sales returns and allowances exceed
historical amounts, the Company's sales would be adversely affected.
Accounts receivable are recorded at the outstanding amounts net of
the allowance for doubtful accounts. Estimates are used in
determining the Company's allowance for doubtful accounts based on
historical collections experience, current economic trends and a
percentage of its accounts receivable by aging category. In
determining these percentages, the Company looks at historical
write-offs of its receivables. The Company also looks at the credit
quality of its customer base as well as changes in its credit
policies. The Company continuously monitors collections and payments
from its customers. While credit losses have historically been
within expectations and the provisions established, the Company
cannot guarantee that it will continue to experience the same credit
loss rates that it has in the past. The Company's net income is
directly affected by management's estimate of the collectibility of
accounts receivable.
17
Marketable Securities
---------------------
The Company determines the appropriate classification of marketable
securities at the time of purchase and reassesses the
appropriateness of the classification at each reporting date. At
December 31, 2002 and 2001, all marketable securities held by the
Company have been classified as either available-for-sale or trading
and, as a result, are stated at fair value. Unrealized gains and
losses on available-for-sale securities are recorded as a separate
component of stockholders' equity. Realized gains and losses on the
sale of securities as well as unrealized holding gains and losses on
trading securities, as determined on a first-in, first-out basis,
are included in the Consolidated Statements of Income.
The Company reviews its investments on a regular basis to evaluate
whether or not each security has experienced an other-than-temporary
decline in fair value. If it is believed that an
other-than-temporary decline exists, the Company will write down the
investment to market value and record the related write-down as a
loss on investments in the Consolidated Statements of Income.
The Company's net income is directly affected by management's
classification of marketable securities as well as its determination
of whether an other-than-temporary decline in the value of its
investments exist.
Inventories
-----------
The Company values inventory at the lower of cost or market, cost
being determined on a first-in, first-out basis. The Company
regularly reviews inventory quantities on hand and records a
provision for excess and obsolete inventory based primarily on
existing and anticipated design and engineering changes to its
products as well as forecasts of future product demand. The
Company's net income is directly affected by management's estimate
of the realizability of inventories.
Real Estate
-----------
Land, buildings and improvements and equipment are recorded at cost,
less accumulated depreciation and amortization. Expenditures for
maintenance and repairs are charged to operations as incurred.
Significant renovations and replacements, which improve the life of
the asset, are capitalized and depreciated over their estimated
useful lives.
Depreciation is computed utilizing the straight-line method over the
estimated useful lives of five to thirty-nine years for buildings
and improvements and five to seven years for equipment.
Assets held for sale are reported at the lower of the carrying
amount or fair value less costs to sell and depreciation is
discontinued. Property sales or dispositions are recorded when title
transfers. Upon disposition, the related costs and accumulated
depreciation are removed from the respective accounts. Any gain or
loss on sale or disposition is recognized in accordance with
accounting principles generally accepted in the United States of
America. In the normal course of business, the Company receives
offers for the sale of properties, either solicited or unsolicited.
For those offers that are accepted, the prospective buyer usually
18
requires a due diligence period before consummation of the
transaction. It is not unusual for matters to arise that result in
the withdrawal or rejection of the offer during this process. If
circumstances arise that previously were considered unlikely and, as
a result, management decides not to sell a property classified as
held for sale, the property is reclassified as held for rental. A
property that is reclassified is measured and recorded individually
at the lower of its carrying amount before being classified as held
for sale, adjusted for any depreciation expense that would have been
recognized had the property been continuously classified as held for
rental or its fair market value at the date of the subsequent
decision not to sell.
The Company is required to make subjective assessments as to the
useful lives of its properties for purposes of determining the
amount of depreciation to reflect on an annual basis with respect to
those properties. These assessments have a direct impact on the
Company's net income. Should the Company adjust the expected useful
life of a particular asset, it would be depreciated over the
adjusted years, and result in a revised depreciation expense and net
income.
Discontinued Operations
-----------------------
The Company is required to make certain subjective assessments
utilizing the provisions of SFAS No. 144 in determining whether a
long-lived asset to be disposed of should be reclassified as
discontinued operations. Commencing in 2002, the Company considers
real property to be held for sale and reported as discontinued
operations if management has committed to a plan to sell the asset
under usual and customary terms and believes such sale will be
completed within one year. In such event, the financial results
associated with these assets are reclassified as discontinued
operations for all periods presented. Although operating income,
income from continuing operations and income from discontinued
operations is directly affected by management's assessments, the
reclassification has no impact on net income.
Long-Lived Assets
-----------------
On a periodic basis, management assesses whether there are any
indicators that the value of its long-lived assets may be impaired.
An asset's value is considered impaired only if management's
estimate of current and projected operating cash flows (undiscounted
and without interest charges) of the asset over its remaining useful
life is less than the net carrying value of the asset. Such cash
flow projections consider factors such as expected future operating
income, trends and prospects, as well as the effects of demand,
competition and other factors. To the extent impairment has
occurred, the carrying amount of the asset would be written down to
an amount to reflect the fair value of the asset.
The Company is required to make subjective assessments as to whether
there are impairments in the value of its long-lived assets and
other investments. The Company's net income is directly affected by
management's estimate of impairments. In determining impairment, if
any, the Company has adopted SFAS No. 144.
19
Pension Plan
------------
Pension plans can be a significant cost of doing business, but
represent obligations that will ultimately be settled far in the
future and therefore are subject to estimates. Pension accounting is
intended to reflect the recognition of future benefit costs over the
employee's approximate service period based on the terms of the plan
and the investment and funding decisions made by the Company. The
Company is required to make assumptions regarding such variables as
the expected long-term rate of return on assets and the discount
rate applied to determine service cost and interest cost to arrive
at pension income or expense for the year.
The Company accounts for its defined benefit pension plan in
accordance with SFAS No. 87, "Employers' Accounting for Pensions"
("SFAS No. 87"), which requires that amounts recognized in financial
statements be determined on an actuarial basis. SFAS No. 87
generally reduces the volatility of future income (expense) from
changes in pension liability discount rates and the performance of
the pension plan's assets.
The most significant element in determining the Company's pension
income (expense) in accordance with SFAS No. 87 is the expected
return on plan assets. The Company has assumed that the expected
long-term rate of return on plan assets will be 8.0% for 2002 as
compared to 9.0% for 2001. Based on the Company's existing and
forecasted asset allocation and related long-term investment
performance results, the Company believes that its assumption of
future returns of 8.0% is reasonable. The assumed long-term rate of
return on assets is applied to a calculated value of plan assets,
which recognizes changes in the fair value of plan assets in a
systematic manner. This produces the expected return on plan assets
that is included in pension income (expense). The difference between
this expected return and the actual return on plan assets is
deferred. The net deferral of past asset gains (losses) affects the
calculated value of plan assets and, ultimately, future pension
income (expense). The plan assets have earned a rate of return less
than 8.0% in the last two years. Should this trend continue, future
pension expense and required contributions could increase. A 100
basis point change in the expected long-term rate of return on plan
assets would have changed fiscal 2002 pension expense by $88,000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk generally represents the risk of loss that may result from the
potential change in the value of a financial instrument as a result of
fluctuations in interest and currency exchange rates and in equity and commodity
prices. Derivative financial instruments are used by the Company principally in
the hedging of overall market risks and the management of its interest rate
exposure.
The primary objective of the Company's investment activities is to preserve
principal and maximize yields without significantly increasing market risk. To
achieve this, management maintains a portfolio of cash equivalents and
investments in a variety of securities, primarily U.S. investments in both
common and preferred equity issues.
The Company's interest income is most sensitive to changes in the general levels
of U.S. interest rates. Changes in U.S. interest rates affect the interest
earned on the Company's cash and cash equivalents. The Company's marketable
securities consist of U.S. investments in both common and preferred equity
issues and are subject to the fluctuations in U.S. stock markets. Most of the
20
Company's mortgages payable are fixed rate and self amortizing from the net cash
flow of the underlying properties. The Company's derivative instruments
primarily consist of put and/or call options. Such derivatives are subject to
the fluctuations in U.S. stock markets. The Company's term loan, which matured
on September 30, 2002, had a variable rate but was effectively hedged by the
Swap, whose notional amount matched the principal balance of the variable rate
debt it hedged.
The Company manufactures its products in the United States and Mexico and sells
its products in those markets as well as Europe, South America and Asia. As a
result, the Company's operating results could be affected by factors such as
changes in foreign currency exchange rates or weak economic conditions in the
foreign markets in which the Company distributes its products. Most of the
Company's sales are denominated in U.S. dollars. A portion of the Company's
receivables are denominated in Euros and are exposed to changes in exchange
rates with the U.S. dollar. When the U.S. dollar strengthens against the Euro,
the value of the nonfunctional currency sales decreases. When the U.S. dollar
weakens against the Euro, the functional currency amount of sales increases.
Overall, the Company is a net receiver of Euros and, as such, benefits from a
weaker dollar, but is adversely affected by a stronger dollar relative to the
Euro.
The Company's manufacturing operations utilize various metal commodities
(principally stainless steel) in the manufacturing process. While key metals
purchased from foreign entities are generally denominated in U.S. dollars,
fluctuations in the suppliers' local currencies may impact pricing. The Company
is unable to quantify the effects of such fluctuations, however, it does enter
into purchase commitments for certain key metals that generally do not exceed
twelve months which tend to minimize short-term currency fluctuations. The
Company's financial results, however, could be significantly affected by
fluctuations in metals pricing.
The following is a tabular presentation of quantitative market risks at December
31, 2002:
Principal (Notional) Amount by Expected Maturity
----------------------------------------------------------------------- Fair
There- Value
(Dollars in Thousands) 2003 2004 2005 2006 2007 after Total 12/31/02
- ---------------------------------------------------------------------------------------------------------------------------------
Assets
Available-for-sale
securities $25,066 $ 0 $ 0 $ 0 $ 0 $ 0 $25,066 $25,066
Trading securities $ 827 $ 0 $ 0 $ 0 $ 0 $ 0 $ 827 $ 827
Notes receivable (1) $ 65 $ 70 $ 59 $ 2,802 $ 2 $ 61 $ 3,059 $ 7,724
Average interest rate 11.4% 11.9% 12.9% 12.2% 12.0% 14.8%
Liabilities
Long-term debt, including current portion
Fixed rate $ 4,391 $ 5,866 $ 2,338 $ 629 $ 303 $ 3,211 $16,738 $17,036
Average interest rate 7.2% 7.0% 6.9% 7.0% 7.0% 6.8%
Derivative instruments (2) $ 122 $ 0 $ 0 $ 0 $ 0 $ 0 $ 122 $ 122
(1) Expected maturities are net of deferred gains which are recognized
under the installment method of accounting.
(2) Consisting of put and/or call options.
21
Recent Accounting Pronouncements
- --------------------------------
In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" ("SFAS No. 145"). This statement
eliminates the requirement to report gains and losses from extinguishment of
debt as extraordinary unless they meet the criteria of APB Opinion 30. SFAS No.
145 also requires sale-leaseback accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. The
changes related to lease accounting are effective for transactions occurring
after May 15, 2002 and the changes related to debt extinguishment are effective
for fiscal years beginning after May 15, 2002. The impact of adopting the
provisions related to lease accounting did not have a material impact on the
Company's financial position or results of operations. The impact of adopting
the provisions related to debt extinguishment is not expected to have a material
impact on the Company's financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146 nullifies
Emerging Issues Task Force Issue No. 94-3 and requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred. This statement also establishes that fair value is the
objective for initial measurement of the liability. SFAS No. 146 is effective
for exit or disposal activities that are initiated after December 31, 2002. The
impact of the adoption of SFAS No. 146 is not expected to have a material impact
on the Company's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123" ("SFAS No. 148"). SFAS No. 148 amends SFAS No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for an
entity that voluntarily changes to the fair value based method of accounting for
stock-based employee compensation. It also amends the disclosure provisions of
SFAS No. 123 to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to stock-based
employee compensation. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in APB
Opinion No. 25 and related interpretations as provided for under SFAS No. 148.
Accordingly, compensation expense is only recognized when the market value of
the Company's stock at the date of grant exceeds the amount an employee must pay
to acquire the stock. The Company has adopted the annual disclosure provisions
of SFAS No. 148 in its financial reports for the year ended December 31, 2002
and will adopt the interim disclosure provisions for its financial reports for
the quarter ending March 31, 2003. The adoption of SFAS No. 148 has not had and
is not expected to have a material impact on the Company's financial position or
results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 are effective for any guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. The adoption of the disclosure requirements of FIN 45 did not have a
22
material impact on the Company's financial position or results of operations.
The Company is currently evaluating the effects of the recognition provision of
FIN 45, but does not expect the adoption to have a material impact on the
Company's financial position or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46 "Consolidation of
Variable Interest Entities" ("FIN 46"). In general, a variable interest entity
is a corporation, partnership, trust, or any other legal structure used for
business purposes that either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. A variable interest entity
often holds financial assets, including loans or receivables, real estate or
other property. A variable interest entity may be essentially passive or it may
engage in activities on behalf of another company. Until now, a company
generally has included another entity in its consolidated financial statements
only if it controlled the entity through voting interests. FIN 46 changes that
by requiring a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's residual
returns or both. FIN 46's consolidation requirements apply immediately to
variable interest entities created or acquired after January 31, 2003. The
consolidation requirements apply to older entities in the first fiscal year or
interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. The Company
adopted FIN 46 effective January 31, 2003. The adoption of FIN 46 did not have a
material impact on the Company's consolidated financial condition or results of
operations taken as a whole.
FORWARD-LOOKING STATEMENTS
- --------------------------
Certain statements in this Report on Form 10-K and other statements made by the
Company or its representatives that are not strictly historical facts are
"forward-looking" statements within the meaning of the Private Securities
Litigation Reform Act of 1995 that should be considered as subject to the many
risks and uncertainties that exist in the Company's operations and business
environment. The forward-looking statements are based on current expectations
and involve a number of known and unknown risks and uncertainties that could
cause the actual results, performance and/or achievements of the Company to
differ materially from any future results, performance or achievements,
expressed or implied, by the forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements, and that in
light of the significant uncertainties inherent in forward-looking statements;
the inclusion of such statements should not be regarded as a representation by
the Company or any other person that the objectives or plans of the Company will
be achieved. The Company also assumes no obligation to publicly update or revise
its forward-looking statements or to advise of changes in the assumptions and
factors on which they are based. The following are some of the risks that could
cause actual results to differ significantly from those expressed or implied by
such statements:
A SLOWING ECONOMY AND CONTINUED REDUCTION IN ENGINEERED PRODUCTS SPENDING MAY
NEGATIVELY AFFECT OUR REVENUES AND PROFITABILITY.
If the economy continues to slow, some of our current and prospective customers
may decrease spending on engineered products and accordingly may postpone,
reduce or even forego the purchase of our products. If forecasted orders are not
received, we may have large inventories of slow moving or unusable parts. This
could result in an adverse effect on our business, results of operations,
liquidity and financial position.
23
OUR MARKETS ARE HIGHLY COMPETITIVE.
The markets for our engineered products are highly competitive. We cannot assure
that we will be able to successfully compete or that our competitors will not
develop new technologies and products that are more commercially effective than
our own. Some of our competitors have financial, technical, marketing, sales and
distribution resources greater than ours.
RELIANCE ON SIGNIFICANT CUSTOMERS.
The Company sells its engineered products to many customers throughout the
world. Historically a small number of customers have accounted for significant
portions of these sales. The loss of one or more of these significant customers
could adversely affect the Company's results of operations.
PROTECTION OF OUR INTELLECTUAL PROPERTY IS LIMITED; WE ARE SUBJECT TO THE RISK
OF THIRD PARTY CLAIMS OF INFRINGEMENT.
Our engineering business relies in large part upon our proprietary scientific
and engineering "know-how" and production techniques. Historically, patents have
not been an important part of our protection of our intellectual property
rights. We rely upon the laws of unfair competition, restrictions in licensing
agreements and confidentiality agreements to protect our intellectual property.
We limit access to and distribution of our proprietary information.
Our ability to compete successfully and achieve future revenue growth will
depend, in part, on our ability to protect our proprietary technology and
operate without infringing upon the rights of others.
OUR OPERATIONS ARE SUBJECT TO ENVIRONMENTAL REGULATION AND ENVIRONMENTAL
PROBLEMS WHICH ARE POSSIBLE AND CAN BE COSTLY.
Our engineered products segment is subject to a variety of local, state and
federal governmental regulations relating to the storage, discharge, handling,
emission, generation, manufacture and disposal of toxic or other hazardous
substances used to manufacture our products. We believe that we are currently in
compliance in all material respects with such regulations and that we have
obtained all necessary environmental permits to conduct our business.
Nevertheless, the failure to comply with current or future regulations could
result in the imposition of fines, suspension of production, alteration of our
manufacturing processes or cessation of operations.
Federal, state and local laws and regulations relating to the protection of the
environment require a current or previous owner or operator of real estate to
investigate and clean up hazardous or toxic substances at such property. The
Company has undertaken the completion of environmental studies and/or remedial
action at Metex' two New Jersey facilities (see "Environmental Regulations" in
Item 1 of Part I and Note 19, "Commitments and Contingencies" of Notes to
Consolidated Financial Statements).
24
OUR PERFORMANCE IS SUBJECT TO RISKS ASSOCIATED WITH THE REAL ESTATE INDUSTRY.
Although the Company's leases are generally long-term and may be below market,
real property investments are subject to varying degrees of risk and are
relatively illiquid. Several factors may adversely affect the economic
performance and value of our properties. These factors include changes in the
national, regional and local economic climate, the attractiveness of our
properties to tenants, competition from other available property owners and
changes in market rental rates. Our performance also depends on the financial
condition of our tenants and our ability to collect rent from tenants and to pay
for adequate maintenance, insurance and other operating costs, including real
estate taxes, which could increase over time. Also, the expenses of owning and
operating a property are not necessarily reduced when circumstances such as
market factors and competition cause a reduction in income from the property.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary information filed as part of this
Item 8 are listed under Item 15, "Exhibits, Financial Statements and Schedules
and Reports on Form 8-K" and are contained in this Form 10-K, beginning on page
32.
ITEM 9. CHANGES IN THE COMPANY'S CERTIFYING ACCOUNTANT
The information required herein has been previously reported in the Company's
report on Form 10-K for the fiscal year ended December 31, 2001.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
This information will be contained in the Proxy Statement of the Company for the
2003 Annual Meeting of Stockholders under the caption "Election of Directors"
and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
This information will be contained in the Proxy Statement of the Company for the
2003 Annual Meeting of Stockholders under the caption "Executive Compensation"
and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
This information will be contained in the Proxy Statement of the Company for the
2003 Annual Meeting of Stockholders under the caption "Security Ownership" and
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information will be contained in the Proxy Statement of the Company for the
2003 Annual Meeting of Stockholders under the caption "Certain Relationships and
Related Transactions" and is incorporated herein by reference. Also see Note 13,
"Transactions with Related Parties," of Notes to Consolidated Financial
Statements, contained elsewhere in this report.
25
ITEM 14. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company (including
its consolidated subsidiaries) required to be included in the Company's periodic
reports. There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES AND
REPORTS ON FORM 8-K
(a) (1) CONSOLIDATED FINANCIAL STATEMENTS. The following Consolidated Financial
Statements and Consolidated Financial Statement Schedules of the
Company are included in this Form 10-K at the pages indicated:
Index to Consolidated Financial Statements
------------------------------------------
Page
----
Report of Independent Certified Public Accountants -
Grant Thornton LLP 32
Report of Independent Auditors - Ernst & Young LLP 33
Consolidated Balance Sheets as of December 31, 2002 and 2001 34
Consolidated Statements of Income for the Years
Ended December 31, 2002, 2001, and 2000 35
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 2002, 2001, and 2000 36
Consolidated Statements of Cash Flows for the
Years Ended December 31, 2002, 2001, and 2000 37-38
Notes to Consolidated Financial Statements 39-63
(2) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Schedule II -- Allowance for Doubtful Accounts 64
Schedule III -- Real Property and Accumulated Depreciation 65
Schedule IV -- Mortgage Loans on Real Estate 66
(3) SUPPLEMENTARY DATA
Quarterly Financial Data (Unaudited) 67
Schedules not listed above are omitted as not applicable or the
information is presented in the financial statements or related
notes.
26
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the last quarter of
fiscal 2002.
(c) Exhibits
3.1. Amended and restated Certificate of Incorporation of the
Company (incorporated by reference to exhibit 3.1 filed with the Company's
report on Form 10-K for the fiscal year ended December 31, 1993).
3.2. By-laws of the Company (incorporated by reference to exhibit 3
filed with the Company's report on Form 10-K for the fiscal year ended December
31, 1980).
10.1. Incentive and Non-Qualified Stock Option Plan of the Company,
as amended (incorporated by reference to exhibit 10.1 filed with the Company's
report on Form 10-K for the fiscal year ended December 31, 2000).
10.2. Additional amendment to Incentive and Non-Qualified Stock
Option Plan of the Company (incorporated by reference to exhibit 4.2 filed with
the Company's report on Form S-8 dated August 23, 2002).
10.3. 1988 Joint Incentive and Non-Qualified Stock Option Plan, as
amended (incorporated by reference to exhibit 10.2 filed with the Company's
report on Form 10-K for the fiscal year ended December 31, 1998).
10.4. Employment Agreement dated as of January 1, 1990 by and
between the Company and A. F. Petrocelli (incorporated by reference to exhibit
10.9 filed with the Company's report on Form 10-K for the fiscal year ended
December 31, 1989).
10.5. Amendment dated as of December 3, 1990 to Employment Agreement
dated as of January 1, 1990, by and between the Company and A. F. Petrocelli
(incorporated by reference to exhibit 10.10 filed with the Company's report on
Form 10-K for the fiscal year ended December 31, 1990).
10.6. Amendment dated as of June 8, 1993 to Employment Agreement
dated as of January 1, 1990 by and between the Company and A. F. Petrocelli
(incorporated by reference to exhibit 10.5 filed with the Company's report on
Form 10-K for the fiscal year ended December 31, 1993).
*10.7 Revolving Credit Agreement dated as of December 10, 2002, with
the financial parties thereto.
*21. Subsidiaries of the Company.
*23a. Auditors' consent to the incorporation by reference in the
Company's Registration Statements on Form S-8 as of and for the two years ended
December 31, 2002 from Grant Thornton LLP of the Report of Independent Certified
Public Accountants included herein.
*23b. Auditors' consent to the incorporation by reference in the
Company's Registration Statements on Form S-8 for the year ended December 31,
2000 from Ernst & Young LLP of the Report of Independent Auditors included
herein.
27
*99.1. Certification of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
*99.2. Certification of the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
- -----------------
* Filed herewith
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
UNITED CAPITAL CORP.
Dated: March 27, 2003 By: /s/ A. F. Petrocelli
----------------- ----------------------------
A. F. Petrocelli
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the date indicated.
Dated: March 27, 2003 By: /s/ A. F. Petrocelli
----------------- ----------------------------
A. F. Petrocelli
Chairman, President and
Chief Executive Officer
Dated: March 27, 2003 By: /s/ Howard M. Lorber
----------------- -----------------------------
Howard M. Lorber
Director
Dated: March 27, 2003 By: /s/ Robert M. Mann
----------------- -----------------------------
Robert M. Mann
Director
Dated: March 27, 2003 By: /s/ Anthony J. Miceli
----------------- -----------------------------
Anthony J. Miceli
Chief Financial Officer,
Chief Accountant, Secretary
and Director
Dated: March 27, 2003 By: /s/ Arnold S. Penner
----------------- -----------------------------
Arnold S. Penner
Director
29
CERTIFICATION PURSUANT TO SECURITIES EXCHANGE ACT RULE 13A-14
I, A. F. Petrocelli, certify that:
1. I have reviewed this annual report on Form 10-K of United Capital Corp.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors:
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 27, 2003
/s/ A. F. Petrocelli
--------------------------------------
A. F. Petrocelli
Chairman, President and Chief Executive
Officer
30
CERTIFICATION PURSUANT TO SECURITIES EXCHANGE ACT RULE 13A-14
I, Anthony J. Miceli, certify that:
1. I have reviewed this annual report on Form 10-K of United Capital Corp.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors:
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 27, 2003
/s/ Anthony J. Miceli
----------------------------------------
Anthony J. Miceli
Chief Financial Officer
31
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
and Stockholders of
United Capital Corp.
We have audited the accompanying consolidated balance sheets of United Capital
Corp. and Subsidiaries (the "Company") as of December 31, 2002 and 2001, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the two years in the period ended December 31, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of United Capital
Corp. and Subsidiaries as of December 31, 2002 and 2001, and the consolidated
results of their operations and their consolidated cash flows for each of the
two years in the period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.
We have also audited the consolidated financial statement schedules for each of
the two years in the period ended December 31, 2002, listed in the Index at Item
15(a)(2). In our opinion, these schedules, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
As described in Note 2 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," on January 1, 2002.
\s\ GRANT THORNTON LLP
- ------------------------
GRANT THORNTON LLP
Melville, New York
February 7, 2003
32
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
and Stockholders of
United Capital Corp.:
We have audited the accompanying consolidated statements of income,
stockholders' equity and cash flows of United Capital Corp. and subsidiaries
(the "Company") for the year ended December 31, 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations, stockholders'
equity and cash flows of United Capital Corp. and subsidiaries for the year
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States.
\s\ ERNST & YOUNG LLP
- ---------------------------
ERNST & YOUNG LLP
New York, New York
February 14, 2001, except
Notes 2, 12, 14 and 17, as to
which the date is March 14, 2003
33
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2002 AND 2001
(In Thousands, Except Per Share Data)
2002 2001
-------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 48,893 $ 68,170
Marketable securities 25,893 28,633
Notes and accounts receivable, net 5,715 6,345
Inventories 3,677 4,953
Prepaid expenses and other current assets 1,477 871
Deferred income taxes 207 0
Current assets of discontinued operations 73 39
-------- --------
Total current assets 85,935 109,011
-------- --------
Property, plant and equipment, net 3,569 4,525
Real property held for rental, net 48,470 52,291
Investments in joint ventures 31,389 8,364
Noncurrent notes receivable 2,994 66
Other assets 3,707 3,129
Noncurrent assets of discontinued operations 483 579
-------- --------
TOTAL ASSETS $176,547 $177,965
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 4,391 $ 5,047
Borrowings under credit facilities 0 525
Accounts payable and accrued liabilities 9,270 17,886
Income taxes payable 5,260 7,585
Deferred income taxes 0 1,481
Current liabilities of discontinued operations 24 51
-------- --------
Total current liabilities 18,945 32,575
-------- --------
Long-term debt 12,347 16,738
Other long-term liabilities 31,016 30,966
Deferred income taxes 2,605 1,345
-------- --------
TOTAL LIABILITIES 64,913 81,624
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, $.10 par value, authorized 7,500
shares; issued and outstanding 4,519 and 4,641
shares, respectively 452 464
Retained earnings 110,096 90,000
Accumulated other comprehensive income, net of tax 1,086 5,877
-------- --------
TOTAL STOCKHOLDERS' EQUITY 111,634 96,341
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $176,547 $177,965
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
34
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
(In Thousands, Except Per Share Data)
2002 2001 2000
-------- -------- ---------
REVENUES:
Net sales $ 33,513 $ 33,792 $ 34,095
Rental revenues from real estate operations 24,498 26,386 26,957
-------- -------- --------
Total revenues 58,011 60,178 61,052
-------- -------- --------
COSTS AND EXPENSES:
Cost of sales 24,500 25,083 24,738
Real estate operations:
Mortgage interest expense 1,390 1,796 2,232
Depreciation expense 3,278 4,006 4,805
Other operating expenses 7,419 7,765 6,794
General and administrative expenses 6,246 5,310 5,295
Selling expenses 3,504 3,743 3,954
-------- -------- --------
Total costs and expenses 46,337 47,703 47,818
-------- -------- --------
Operating income 11,674 12,475 13,234
-------- -------- --------
OTHER INCOME (EXPENSE):
Interest and dividend income 1,934 1,828 2,230
Interest expense (532) (436) (564)
Other income and expense, net 16,021 16,970 9,797
-------- -------- --------
Total other income 17,423 18,362 11,463
-------- -------- --------
Income from continuing operations before income taxes 29,097 30,837 24,697
Provision for income taxes 6,604 12,547 7,032
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS 22,493 18,290 17,665
-------- -------- --------
DISCONTINUED OPERATIONS:
Income from discontinued operations, net of tax
provision of $273, $454 and $408, respectively 410 682 613
Gain on disposal of discontinued operations, net of tax
provision of $316 474 0 0
-------- -------- --------
INCOME FROM DISCONTINUED OPERATIONS 884 682 613
-------- -------- --------
NET INCOME $ 23,377 $ 18,972 $ 18,278
======== ======== ========
BASIC EARNINGS PER SHARE:
Income from continuing operations $ 4.91 $ 3.90 $ 3.73
Income from discontinued operations .19 .15 .13
-------- -------- --------
NET INCOME PER SHARE $ 5.10 $ 4.05 $ 3.86
======== ======== ========
DILUTED EARNINGS PER SHARE:
Income from continuing operations $ 4.50 $ 3.72 $ 3.70
Income from discontinued operations .18 .14 .13
-------- -------- --------
NET INCOME PER SHARE ASSUMING DILUTION $ 4.68 $ 3.86 $ 3.83
======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
35
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
(In Thousands)
Accumulated
Other
Common Stock Issued Comprehensive Total
--------------------- Retained Income, Stockholders' Comprehensive
Shares Amount Earnings Net of Tax Equity Income
--------- ------- --------- ------------- ------------- -------------
BALANCE - JANUARY 1, 2000 4,736 $ 474 $ 54,671 $ 3,911 $ 59,056
Purchase and retirement of common shares (16) (2) (232) 0 (234)
Net income 0 0 18,278 0 18,278 $ 18,278
Other comprehensive income, net of tax:
Change in net unrealized gain on
available-for-sale securities,
net of tax provision of $10 0 0 0 19 19 19
---------
Comprehensive income $ 18,297
--------- --------- --------- --------- --------- =========
BALANCE - DECEMBER 31, 2000 4,720 472 72,717 3,930 77,119
--------- --------- --------- --------- ---------
Purchase and retirement of common shares (84) (8) (1,761) 0 (1,769)
Proceeds from the exercise of stock options 5 0 72 0 72
Net income 0 0 18,972 0 18,972 $ 18,972
Other comprehensive income, net of tax:
Change in net unrealized gain on
available-for-sale securities,
net of tax provision of $2,909 0 0 0 5,404 5,404 5,404
Reclassification adjustment for net
gains realized in net income, net
of tax provision of $1,862 0 0 0 (3,457) (3,457) (3,457)
---------
Comprehensive income $ 20,919
--------- --------- --------- --------- --------- =========
BALANCE - DECEMBER 31, 2001 4,641 464 90,000 5,877 96,341
--------- --------- --------- --------- ---------
Purchase and retirement of common shares (148) (15) (3,755) 0 (3,770)
Proceeds from the exercise of stock options 26 3 474 0 477
Net income 0 0 23,377 0 23,377 $ 23,377
Other comprehensive income, net of tax:
Change in net unrealized gain on
available-for-sale securities,
net of tax benefit of $2,579