ITEM 1. BUSINESS
General Development of Business
In this 10-K, “we”, “us’, “our”, or “the Company”, refers to Monmouth Capital Corporation, together with its predecessors and subsidiaries, unless the context requires otherwise.
Monmouth Capital Corporation is a corporation organized in the State of New Jersey in 1961. The Company operates as a qualified real estate investment trust (REIT) under Sections 856-860 of the Internal Revenue Code (the Code) and intends to maintain its qualification as a REIT in the future. As a qualified REIT, with limited exceptions, the Company will not be taxed under federal and certain state income tax laws at the corporate level on taxable income that it distributes to its shareholders. For special tax provisions applicable to REITS, refer to Sections 856-860 of the Code.
Prior to 1994 the Company operated as a small business investment company. During 1994, the Company formed a wholly-owned subsidiary, The Mobile Home Store, Inc. (MHS), to finance and sell manufactured homes. The sales operation was conducted at manufactured home communities owned by United Mobile Homes (United), a related REIT. The Company also invested in real estate and securities. In March 2001, the Company sold the existing inventory of manufactured homes to United at the Company’s carrying value and the Company exited the manufactured home sales business since it proved to be unprofitable. MHS was merged into the Company on December 6, 2001.
On September 26, 2001, the Company adopted a change from a fiscal year end of March 31 to a calendar year end, effective for the short year ended December 31, 2001. The Company elected to be taxed as a real estate investment trust for the transition period ended December 31, 2001.
The Company has made the following property acquisitions in the last four years:
Date of
Square
Property
Acquisition
Location
Feet
Type
Ownership
Tenant
7/20/2001
Carlstadt, NJ
59,400
warehouse
51%
Macy’s
12/20/2001
White Bear Lake, MN
59,425
warehouse
100%
Federal Express
9/18/2002
Cheektowaga, NY
62,986
warehouse
100%
Federal Express
8/14/2003
Wheeling, IL
107,160
warehouse
63%
Federal Express Ground
7/9/2004
Richmond, VA
60,000
warehouse
100%
Carrier Sales & Dist
12/2/2004
Quakertown, PA
37,660
warehouse
100%
MagiKitch’n
12/27/2004
Montgomery, Il
171,200
warehouse
100%
Home Depot
The Company is currently operating as a diversified REIT investing in real estate equities, mortgages, mortgage-backed securities, and other REIT securities. The Company’s capital is limited and there is no assurance the Company can or will continue to operate as a diversified REIT. The Company will consider alternative plans or proposals.
Narrative Description of the Business
Currently the Company derives its income primarily through real estate rental operations and from dividend and interest income. The Company also derives some revenues from the sales of manufactured homes which the Company has repossessed and returned to inventory. These manufactured homes were originally sold prior to March 30, 2001, when the Company was in the manufactured home sales business. Rental income and reimbursements were $2,835,614, $1,734,583, and $1,016,513 for the years ended December 31, 2004, 2003 and 2002, respectively. Interest and dividend income were $1,247,988, $1,091,924 and $1,247,379, for the years ended December 31, 2004, 2003 and 2002 respectively. Sales of manufactured homes were $165,324, $269,690, $394,500, for the years ended December 31, 2004, 2003 and 2002 respectively. Total assets were $54,149,086, $41,569,008 and $27,101,532, at December 31, 2004, 2003, and 2002, respectively.
The Company has approximately 558,000 square feet of property, of which approximately 230,000 square feet, or 41% is leased to Federal Express Corporation and subsidiaries. During 2004, 2003 and 2002, rental income and reimbursements from properties leased to Federal Express Corporation and subsidiaries approximated 77%, 75% and 58%, respectively of total rental and reimbursement income.
At December 31, 2004, the Company had investments in seven industrial warehouse properties (see item 2
ITEM 2. DETAILED DESCRIPTION OF PROPERTIES
On July 20, 2001, Palmer Terrace Realty Associates, LLC (Palmer Terrace), a 51% owned subsidiary of the Company, purchased a 59,400 square foot warehouse facility in Carlstadt, New Jersey from WXIII/MWL Real Estate Limited Partnership, an unrelated entity. This warehouse facility is 100% net leased to Macy’s East, Inc., an Ohio corporation. The purchase price was approximately $3,100,000. The average monthly rental over the term of the lease is $29,082. This lease expires on April 5, 2009. The mortgage balance was $2,150,177 at December 31, 2004, at an interest rate of 7.75%. The mortgage matures August 15, 2021.
On December 20, 2001, the Company purchased a 59,425 square foot warehouse facility in White Bear Lake, Minnesota from Jones Development Company, LLC, an unrelated entity. This warehouse facility is 100% net leased to Federal Express Corporation. The purchase price was approximately $4,800,000. The monthly rental over the term of the lease is $36,100. This lease expires on April 1, 2011. The mortgage balance was $2,986,089 at December 31, 2004, at an interest rate of 7.04%. The mortgage matures January 1, 2012.
On September 18, 2002, the Company purchased a leasehold interest in a 62,986 square foot warehouse facility in Cheektowaga, New York from FedJones Cheektowaga, LLC (FedJones), an unrelated entity. This lease was between FedJones and the Erie County Industrial Development Agency (ECIDA). This warehouse facility is 100% subleased to FedEx Ground Package System, Inc. under a net lease. The purchase price was approximately $4,200,000. The monthly rental over the term of the lease is $33,800. The lease expires July 31, 2011. The mortgage balance was $2,809,872 at December 31, 2004, at an interest rate of 6.78%. The mortgage matures October 1, 2017.
On August 14, 2003, Wheeling Partners, LLC, a 63% owned subsidiary of the Company, purchased a 107,160 square foot industrial building in Wheeling, Illinois, from Jones Elgin I, LLC, an Illinois limited liability company (Jones Elgin). This warehouse facility is 100% subleased to FedEx Ground Package System, Inc. under a net lease for 12 years. The purchase price, including closing costs, was approximately $11,985,000. The average monthly rental over the term of the lease is $84,900. The lease expires June 30, 2015. The mortgage payable balance was $7,352,494 at December 31, 2004, at an interest rate of 5.68%. The mortgage matures March 1, 2021.
On July 9, 2004, the Company purchased a 60,000 square foot industrial building in Richmond, Virginia. This warehouse facility is 100% net leased to Carrier Sales and Distribution, LLC for 7 years. The lease expires May 31, 2011. The purchase price, including closing costs, was approximately $4,100,000. The average monthly rental over the term of the lease is $31,700. The Company borrowed approximately $3,100,000 against its securities portfolio and drew down $1,000,000 on its line of credit. In December 2004, the Company pledged this property as collateral for the $2,500,000 short-term loan with Two River Community Bank (Two River).
On December 2, 2004, the Company purchased a 37,660 square foot industrial building in Quakertown, Pennsylvania. This warehouse facility is 100% net leased to MagiKitchn’ for 11 years. The lease expires March 31, 2015. The average monthly rental over the term of the lease is $20,500. MagiKitchin subleased the space to Rotoflex Technology, Inc. The purchase price, including closing costs, was approximately $2,400,000. There is no mortgage on this property.
On December 29, 2004, the Company purchased a 171,200 square foot industrial building in Montgomery, Illinois. This warehouse facility is 100% net leased to Home Deport USA, Inc. for 10 years. The lease expires June 30, 2010. The average monthly rental over the term of the lease is $71,600. The purchase price, including closing costs, was approximately $10,000,000. The Company assumed the existing mortgage with a balance of $6,364,723 at a rate of 6.5%. The mortgage matures November 1, 2012. In addition, the Company obtained a short-term loan from Two River for $2,500,000 at a rate of 6.00%. The short-term loan matures on September 16, 2005.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 2004.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES
The Company's shares were traded on the National Association of Securities Dealers Automatic Quotations (NASDAQ) Small Capitalization market under the symbol "MONM" through February 8, 2005. As of February 9, 2005, the Company’s shares were transferred to the NASDAQ National Market. The per share range of high and low market during each quarter of the last three fiscal years were as follows:
The over-the-counter market quotations reflect the inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions.
As of December 31, 2004, there were approximately 417 holders of the Company's common stock based on the number of record owners.
The Company has paid dividends as follows:
Long-term
Dividends
Per
Capital
Ordinary
Period
Paid
Share
Gain
Income
$1,734,172
$.50
$.2230
$.2770
1,178,504
.40
.0635
.3365
748,497
.35
.2309
.1191
On January 13, 2005, the Company declared a dividend of $ .25 per share to be paid on June 15, 2005 to shareholders of record May 16, 2005.
Future dividend policy will depend on the Company's earnings, capital requirements, financial condition, availability and cost of bank financing and other factors considered relevant by the Board of Directors.
Equity Compensation Plan Information
The following table summarizes information, as of December 31, 2004, relating to equity compensation plans of the Company (including individual compensation arrangements) pursuant to which equity securities of the Company are authorized for issuance.
Plan Category
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights
(a)
Weighted-average Exercise Price of Outstanding Options, Warrants and Rights
(b)
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding Securities reflected in column (a) (c)
Equity
Compensation Plans
Approved by
Security Holders
80,000
$3.08
750,000
Equity
Compensation Plans
not Approved by
Security Holders
N/A
N/A
N/A
Total
80,000
$3.08
750,000
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
* Funds from operations (FFO), is defined as net income, excluding gains (or losses) from sales of depreciable assets, plus depreciation. FFO should be considered as a supplemental measure of operating performance used by real estate investment trusts (REITs). FFO excludes historical cost depreciation as an expense and may facilitate the comparison of REITs which have different cost basis. The items excluded from FFO are significant components in understanding the Company's financial performance. FFO (1) does not represent cash flow from operations as defined by generally accepted accounting principles; (2) should not be considered as an alternative to net income as a measure of operating performance or to cash flows from operating, investing and financing activities; and (3) is not an alternative to cash flow as a measure of liquidity. FFO, as calculated by the Company, may not be comparable to similarly entitled measures reported by other REITs.
The Company’s FFO is calculated as follows:
Short
Year Ended
Year Ended
Year Ended
Year Ended
Year Ended
December 31,
December 31,
December 31,
December 31,
March 31,
Net Income (Loss)
$1,237,361
$1,283,432
$ 554,638
$ 398,205
$ (74,700)
Depreciation Expense
786,065
327,898
208,521
80,000
50,519
FFO
$2,023,426
$1,611,330
$ 763,159
$ 478,205
$ (24,181)
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
Overview
The following discussion and analysis of the consolidated financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and notes thereto elsewhere herein.
The Company is a diversified REIT. Currently, the Company’s primary business is the ownership of seven industrial properties subject to medium term leases and investing in marketable securities. These securities include securities of other REITS and mortgage backed securities. The Company also has loans receivable and inventory related to the sales of manufactured homes. Prior to March 31, 2001, the Company was engaged in the manufactured home sales and finance business.
The Company’s revenue primarily consists of rental and related income from the ownership of the industrial properties, interest and dividend income, and gains on sale of securities. Sales of manufactured homes relates to the sale of inventory which had been repossessed and resold.
Although the Company currently owns seven industrial properties, management would consider other types of real estate acquisitions. Management anticipates that the Company will acquire approximately $24,000,000 in properties during 2005. The current acquisitions environment is competitive and management may not be able to locate suitable properties for acquisition. Rental income and reimbursements increased $1,101,031 or 63% for the year ended December 31, 2004 as compared to the year ended December 31, 2003. This increase is due mainly to the rent and reimbursements related to the three new property acquisitions. Net income decreased $46,071 or 4% for the year ended December 31, 2004 as compared to the year ended December 31, 2003. This decrease is mainly due to increases in real estate taxes, interest and depreciation, partially offset by increases in rental income and reimbursements, interest and dividend income, gains on securities transactions and other income.
The Company has financed acquisitions through capital raised through the Company’s Dividend Reinvestment and Stock Purchase Plan, by obtaining mortgages, and from private placement offerings, including the Convertible Subordinated Debentures. If suitable acquisitions cannot be found during 2005, the Company will invest additional capital raised in REIT securities or pay down outstanding debt. The Company also invests in debt and equity securities of other REITs for liquidity and additional income. The Company from time to time may purchase these securities on margin when there is an adequate yield spread.
See PART I, Item 1. Business for a more complete discussion of the economic and industry-wide factors relevant to the Company, the Company's lines of business and principal products and services, and the opportunities, challenges and risks on which the Company is focused.
Significant Accounting Policies & Estimates
The discussion and analysis of the Company’s financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the Company’s financial statements. Actual results may differ from these estimates under different assumptions or conditions.
Significant accounting policies are defined as those that involve significant judgment and potentially could result in materially different results under different assumptions and conditions. Management believes the following significant accounting policies are affected by our more significant judgments and estimates used in the preparation of the Company’s financial statements. For a detailed description of these and other accounting policies, see Note 1 in the notes to the Company’s financial statements included in this Form 10-K. Management has discussed each of these significant accounting policies with the audit committee of the Board of Directors.
Real Estate Investments
The Company applies Financial Accounting Standards Board Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, to measure impairment in real estate investments. Rental properties are individually evaluated for impairment when conditions exist which may indicate that it is probable that the sum of expected future cash flows (on an undiscounted basis without interest) from a rental property is less than its historical net cost basis. These expected future cash flows consider factors such as future operating income, trends and prospects as well as the effects of leasing demand, competition and other factors. Upon determination that a permanent impairment has occurred, rental properties are reduced to their fair value. For properties to be disposed of, an impairment loss is recognized when the fair value of the property, less the estimated cost to sell, is less than the carrying amount of the property measured at the time there is a commitment to sell the property and/or it is actively being marketed for sale. A property to be disposed of is reported at the lower of its carrying amount or its estimated fair value, less its cost to sell. Subsequent to the date that a property is held for disposition, depreciation expense is not recorded.
Securities Available for Sale
Investments in liquid real estate assets consist primarily of marketable equity REIT securities. Management reviews our marketable securities for impairment on an annual basis, or when events or circumstances occur. If a decline in fair value is determined to be other than temporary, an impairment charge is recognized in earnings and the cost basis of the individual
security shall be written down to fair value as the new cost basis. Management’s evaluation includes consideration of events that may be attributable to the unrealized loss, including among other things, the credit-worthiness of the issuer, length of time that a security had a continuous unrealized loss, and the financial position of the issuing company.
Estimates and Revenue Recognition
Estimates are used to establish amounts receivable from tenants for such things as annualized rents, real estate taxes and other cost recoveries. In addition, an estimate is made with respect to whether a provision for allowance for doubtful accounts receivable and loans
receivable is necessary. The allowance for doubtful accounts reflects management’s estimate of the amounts of the recorded accounts receivable and loans receivable at the balance sheet date that will not be realized from cash receipts in subsequent periods. If cash receipts in subsequent periods vary from our estimates, or if the Company’s tenants’ financial condition deteriorates as a result of operating difficulties, additional changes to the allowance may be required.
Year Ended December 31, 2004 vs. Year Ended December 31, 2003
Income is comprised primarily of rental income and reimbursements, interest and dividend income and gain on securities transactions. On March 30, 2001, the Company exited the manufactured home sales business since it proved to be unprofitable. During 2004 and 2003, sales of manufactured homes, cost of sales of manufactured homes, and selling expense are directly attributable to the sale of repossessed manufactured homes.
Rental income and reimbursements increased $1,101,031 or 63% for the year ended December 31, 2004 as compared to the year ended December 31, 2003. The increase is due to the additional rent and reimbursement income related to the property acquisitions made in 2004 in Richmond, Virginia, Quakertown, Pennsylvania, and Montgomery, Illinois and also a full year of rent and reimbursement income from the Wheeling, Illinois property purchased in August 2003.
Interest and dividend income increased $156,064 or 14% for the year ended December 31, 2004 as compared to the year ended December 31, 2003. The increase was due mainly to a higher average balance of securities available for sale held during 2004 as compared to 2003 partially offset by a decrease in the weighted average yield of the securities portfolio in 2004 as compared to 2003. The average balance of securities was approximately $14,831,273 and $11,035,892 for the years ended December 31, 2004 and 2003, respectively. Weighted average yield of the securities portfolio was 7.25% and 8.38% for the years ended December 31, 2004 and 2003, respectively. The balance of securities available for sale at December 31, 2004 and 2003 was $12,130,692 and $15,443,909, respectively.
Gain on securities transactions, net increased $105,353 or 15% for the year ended December 31, 2004 as compared to the year ended December 31, 2003. The increase in gain on sale is due to the Company taking advantage of the unrealized gains experienced in the portfolio during 2004. The Company invests in securities as proxy for real property until suitable acquisitions are available and for additional income. The Company does not expect that it would
be recording the same level of gain on sale of securities available for sale in future years that it recorded in 2004 due to the reduction in the securities portfolio occurring in 2004.
The net gain on sale of securities of $958,743 was partially offset by the realized losses on futures contracts for the year ended December 31, 2004 of $147,586. During 2004, the Company began investing in futures contracts of ten-year treasury notes as a way to mitigate the impact of rising interest rates on the Company’s preferred equity and debt securities portfolios. At December 31, 2004, the Company had unrealized gains on open futures contracts of $4,687 which is also included in gain on securities transactions, net.
Other income increased $243,129 for the year ended December 31, 2004 as compared to the year ended December 31, 2003. The increase relates to the proceeds received from the lawsuit against the former owner of the Carlstadt, New Jersey property and the engineering firm used for due diligence. Professional fees increased for the year ended three December 31, 2004 as compared to the year ended December 31, 2003 due mainly to increased legal fees related to this settlement.
Real estate taxes increased $265,202 for the year ended December 31, 2004 as compared to the year ended December 31, 2003. The increase relates to the real estate taxes related to the acquisitions, mainly the Wheeling, Illinois property. Since the properties are subject to net leases, real estate taxes are reimbursed by the tenants.
Salaries and benefits increased $62,053 or 35% for the year ended December 31, 2004 as compared to the year ended December 31, 2003. The increase is due mainly to salary increases, salaries related to employees who were hired during 2003, and minor changes in allocations of employee related costs from the related company MREIC.
Professional fees increased $91,543 or 127% for the year ended December 31, 2004 as compared to the year ended December 31, 2003. The increase is due mainly to legal fees related to the lawsuit against the former owner of the Carlstadt, New Jersey property and the engineering firm used for due diligence and from potential acquisitions which were abandoned.
Interest expense increased $658,480 or 67% for the year ended December 31, 2004 as compared to the year ended December 31, 2003. The increase is due mainly to the interest related to the Debentures issued in October 2003 and mortgages related to the new acquisitions in 2003 and 2004.
Depreciation expense increased $458,167 or 140% for the year ended December 31, 2004 as compared to the year ended December 31, 2003 and other expenses increased $78,818 or 16% for the year ended December 31, 2004 as compared to the year ended December 31, 2003. The increases are due mainly to the new acquisitions in 2003 and 2004.
Year Ended December 31, 2003 vs. Year Ended December 31, 2002
Income is comprised primarily of interest and dividend income and rental income. On March 30, 2001, the Company exited the manufactured home sales business since it proved to be unprofitable. During 2003 and 2002, sales of manufactured homes, cost of sales of manufactured homes, and selling expenses are directly attributable to the sale of repossessed manufactured homes.
Rental income and reimbursements increased $718,070 or 71% for the year ended December 31, 2003 as compared to the year ended December 31, 2002. This increase is due primarily to the addition of the rental and reimbursement revenue from the Wheeling, Illinois acquisition made in August 2003. Annual rent for this new property is $642,003. In addition, rental income includes a full year of rental and reimbursement revenue from the Cheektowaga, New York property, which was purchased in September 2002.
Interest and dividend income decreased $155,455 or 12% for the year ended December 31, 2003 as compared to the year ended December 31, 2002. The decrease is due to increased redemptions in 2003 of higher yielding preferred stocks held during 2002 and lower average balance of securities during 2003 as compared to 2002. The average balance of securities available for sale was $11,128,557 and $12,614,666 for the years ended December 31, 2003 and 2002, respectively. Weighted average yield of the securities portfolio was 8.38% and 9.88% for the years ended December 31, 2003 and 2002, respectively. The balance of securities available for sale at December 31, 2003 and 2002 was $15,443,909 and $12,844,937, respectively.
Gain on sale of securities available for sale increased $529,489 for the year ended December 31, 2003 as compared to the year ended December 31, 2002. The increase in gain on sale is due to the Company taking advantage of the unrealized gains experienced in the portfolio during 2003 and the increased redemptions of the preferred stock holdings by the issuers. The Company invests in securities as proxy for real property until suitable acquisitions are available and for additional income. If the market value of REIT stocks begins to decline, the Company does not expect that it would be recording the same level of gain on sale of securities available for sale in future years that it recorded in 2003.
Real estate taxes increased $11,484 or 11% for the year ended December 31, 2003 as compared to the year ended December 31, 2002. Depreciation expense increased $119,377 or 57% for the year ended December 31, 2003 as compared to the year ended December 31, 2002. The increase in these expenses is due primarily to the purchase of the Wheeling, Illinois property during 2003.
Interest expense increased $184,537 or 23% for the year ended December 31, 2003 as compared to the year ended December 31, 2002. The increase is due primarily to the interest related to the mortgage for the purchase of the Wheeling, Illinois property during 2003 and interest related to the Debentures which were issued in October 2003.
Off-Balance Sheet Arrangements and Contractual Obligations
The Company has not executed any off-balance sheet arrangements.
The following is a summary of the Company’s contractual obligations as of December 31, 2004:
Contractual Obligations
Total
Less than 1 year
1-3 years
3-5 years
More than 5 years
Mortgages Payable
$21,663,355
$768,827
$1,695,241
$1,929,698
$17,269,589
8% Convertible Subordinated Debentures (1)
5,370,000
5,370,000
Notes Payable (2)
3,500,000
2,500,000
1,000,000
Retirement Benefits
25,000
5,000
10,000
10,000
Total (3)
$30,558,355
$3,273,827
$1,705,241
$1,939,698
$23,639,589
(1)
The Convertible Subordinated Debentures are due 2013, however, the principal amount is convertible at any time by the holder prior to redemption or maturity to common stock of the Company. See Note 5 in the Consolidated Financial Statements for additional disclosure.
(2)
The Company has a $1,000,000 line of credit expiring in 2011 and a $2,500,000 loan due September 16, 2005.
(3)
The above table does not include the Company’s margin loan which is due on demand as described in Note 6 to The Consolidated Financial Statements.
Liquidity and Capital Resources and Changes in Financial Condition
The Company’s ability to generate cash adequate to meet its needs is dependent primarily on income from its real estate investments and its securities portfolio, the sale of real estate investments and securities, refinancing of mortgage debt, leveraging of real estate investments, availability of bank borrowings, proceeds from the Dividend Reinvestment and Stock Purchase Plan, proceeds from the Subordinated Convertible Debenture, and access to the capital markets. Purchases of new properties, purchases of securities, payments of expenses related to real estate operations, capital improvements programs, debt service, management and professional fees, and dividend requirements place demands on the Company’s liquidity.
The Company intends to operate its existing properties from the cash flows generated by the properties. However, the Company’s expenses are affected by various factors, including inflation. Increases in operating expenses raise the breakeven point for a property and, to the extent that they cannot be passed on through higher rents, reduce the amount of available cash flow which can adversely affect the market value of the property.
Net cash provided by operating activities for the year ended December 31, 2004, 2003, and 2002 was $1,433,289, $898,188 and $1,401,577, respectively. The increase is due primarily to profitable and expanded operations.
Cash flows used in investing activities were $13,090,198, $13,190,104, and $5,018,312 for the years ended December 31, 2004, 2003 and 2002, respectively.
The Company intends to grow its real estate investment portfolio. During the past four years, the Company purchased seven warehouse facilities at an aggregate cost of approximately $40,585,000. The Company financed these purchases primarily through mortgages on its acquisitions and short term bank loans. The Company expects to make additional real estate acquisitions from time to time. During 2005 the Company plans to acquire approximately $24,000,000 in properties. The funds for these acquisitions may come from mortgages secured for the acquisitions, other bank borrowings, proceeds from the Dividend Reinvestment and Stock Purchase Plan, proceeds from private placements, or proceeds from sales of the Company’s investment securities. To the extend funds or appropriate properties are not available, fewer acquisitions will be made. Funds generated are expected to be sufficient to meet debt service requirements and capital expenditures of the Company.
Total real estate investments, net of accumulated depreciation, increased by $15,966,324 during the year ended December 31, 2004. This was due primarily to the purchase of three warehouse facilities located in Richmond, Virginia, Quakertown, Pennsylvania, and Montgomery, Illinois, partially offset by depreciation for the year.
The Company also invests in debt and equity securities of other REIT’s as a proxy for real estate when suitable acquisitions are not available, for liquidity, and for additional income. The Company from time to time may purchase these securities on margin when there is adequate yield spread. At December 31, 2004, the securities portfolio balance was $12,130,692
encumbered by margin loans of $5,575,154. During 2004, the Company’s security portfolio decreased by $3,313,217 due to sale, redemptions and returns of principal of $6,928,641 partially offset by a decrease in the unrealized gain of $598,449 and purchases of $4,211,798. During 2004, the Company sold or redeemed $6,928,641 in securities to recognize a portion of the unrealized gains in the portfolio, recognizing a gain on securities transactions, net of $958,743. The Company anticipates that it may make additional investments in REIT securities if funds are available and suitable acquisitions of properties are not available.
Loans receivable relate to the financing of manufactured home sales when the Company was engaged in the manufactured mobile home sales business. Loans receivable decreased by $369,703 during the year ended December 31, 2004. This decrease was primarily due to collections of $134,191. The Company also repossessed the collateral for loans receivable of $235,512 and placed it into inventory.
Cash flows from financing activities were $11,876,504, $12,431,908 and $3,183,391 for the years ended December 31, 2004, 2003 and 2002, respectively.
Mortgages payable increased $5,774,116 due mainly to the mortgage related to the new acquisition of the industrial property in Montgomery, Illinois, offset by principal payments on mortgages of $590,607. Loans payable increased by $3,933,330 due mainly to the $2,500,000 short term loan originated with Two River, the draw of $1,000,000 on the Company’s line of credit with Two River, and net proceeds from the Company’s margin loan. Financing costs and leasing costs increased by $72,076 primarily as a result of the purchase of the three industrial buildings during 2004.
Shareholders’ equity increased from $12,371,005 at December 31, 2003 to $15,446,093 at December 31, 2004. The Company has a Dividend Reinvestment and Stock Purchase Plan (the DRIP) in which participants purchase stock from the Company at a discount of approximately 5% of market price. During 2004, a total of $4,168,273 in additional capital was raised through the DRIP. The success of the DRIP has resulted in substantial improvement in the Company’s liquidity and capital resources in 2004. It is anticipated, although no assurances can be given, that a comparable level of participation will continue in the DRIP in 2004. No stock options were exercised during 2004 and no Debentures were converted to common stock.
Recent Accounting Pronouncements
EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.”
The guidance in EITF 03-1 was effective for other-than-temporary impairment evaluations made in reporting periods beginning after June 15, 2004. However, the guidance contained in paragraphs 10-20 of the Issue has been delayed by FSP EITF Issue 03-1-1, “The Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, ‘The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,’” posted on September 30, 2004. The disclosure requirements continue to be effective in annual financial statements for fiscal years ending after December 15, 2003. The Company will evaluate the impact on its consolidated financial statements, if any, when the recognition and measurement requirements for other-than temporary impairment are finalized.
Safe Harbor Statement
This Form 10-K contains various “forward-looking statements” within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, and the Company intends that such forward-looking statements be subject to the safe harbors created thereby. The words “may”, “will”, “expect”, “believe”, “anticipate”, “should”, “estimate”, and similar expressions identify forward-looking statements. These forward looking statements reflect the Company’s current views with respect to future events and financial performance, but are based upon current assumptions regarding the Company’s operations, future results and prospects, and are subject to many uncertainties and factors relating to the Company’s operations and business environment which may cause the actual results of the Company to be materially different from any future results expressed or implied by such forward-looking statements.
Such factors include, but are not limited to, the following: (i) changes in the general economic climate, including interest rates; (ii) increased competition in the geographic areas in which the Company operates; and (iii) changes in government laws. The Company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events, or otherwise.
ITEM 7A
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate changes primarily as a result of its long-term debt used to maintain liquidity and fund capital expenditures and expansion of the Company’s real estate investment portfolio and operations. The Company’s interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives, the Company borrows primarily at fixed rates.
Below is the information as of December 31, 2004, concerning the Company’s fixed-rate debt obligations, including principal cash flow by scheduled maturity, weighted average interest rates, and estimated fair value:
Long -Term Debt
Fixed Rate
Scheduled
Maturity
Carrying Value
Average Interest Rate
Fair Value
2011-2021
$21,663,355
6.46%
$22,230,848
In addition to the mortgages, the Company has $1,000,000 carrying value in a line of credit and a $2,500,000 short-term loan with Two River. The line of credit is at a variable rate, currently at 6.25% at December 31, 2004, and expires in 2011. The short term loan is at a fixed rate of 6% and matures September 16, 2005.
The Company also has $5,575,154 million in variable rate debt due on demand. This debt is margin loans secured by marketable securities. The interest rate on these margin loans ranged from 3.0% to 4.0% during 2004. The carrying value of the Company’s variable rate debt approximates fair value at December 31, 2004.
The Company also invests in both debt and equity securities of other REITs and is primarily exposed to equity price risk from adverse changes in market rates and conditions. All securities are classified as available for sale and are carried at fair value. The Company has no significant interest rate risk relating to debt securities as they are short-term in nature.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data listed in Part IV, Item 15 (a)(1) are incorporated herein by reference and filed as a part of this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A
ITEM 9A - CONTROLS AND PROCEDURES
The Company’s President and Chief Financial Officer, with the assistance of other members of the Company’s management, have evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, the Company’s President and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective.
The Company’s President and Chief Financial Officer have also concluded that there have not been any changes in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B
ITEM 9B OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND AFFILIATED ENTITY OF THE REGISTRANT
The following are the Directors and Executive Officers of the Company as of December 31, 2004. Several of the Directors and Officers of the Company also serve as directors of MREIC and United, both publicly-owned real estate investment trusts.
Name
Age
Present Position with the Company; Business
Experience During Past Five Years; Other
Directorships
Director
Since
Michael Landy
Executive Vice President and Director; Vice President - Investments (2001 to present) of United Mobile Homes, Inc. and Monmouth Real Estate Investment Corporation, affiliated companies, President (1998 to 2001) of Siam Records, LLC; Chief Engineer and Technical Director (1987 to 1998) of the GRP Recording Company, a division of Universal.
Eugene Rothenberg
Director. Investor; Director (1977 to present) of United Mobile Homes, Inc. an affiliated company.
Robert R. Sampson
Director. Investor; Director (1968 to 2001) of Monmouth Real Estate Investment Corporation; Director (1969 to present) of United Mobile Homes, Inc., an affiliated company; General Partner (1983 to present) of Sampco, Ltd., an investment group.
Maureen E. Vecere
Controller (2003 to present) and Treasurer (2004 to present). Certified Public Accountant; Audit Manager (1996-2003), KPMG LLP. Controller (2003 to present) and Treasurer (2004 to present) of Monmouth Real Estate Investment Corporation, an affiliated company.
N/A
Stephen B. Wolgin
Director. Principal of U.S. Real Estate Advisors, Inc (2000 to present), a real estate advisory services group based in New York: Director (2003 to present) of Monmouth Real Estate Investment Corporation, an affiliated company; Principal (2000 to 2003) of the Wolgin Group; prior affiliations with J.P Morgan, Odyssey Associates, The Prudential Realty Group, Standard & Poor’s Corporation, and Grubb and Ellis.
Family Relationships
There are no family relationships between any of the Directors or executive officers, except that Michael P. Landy is the son of Eugene W. Landy, the President and a Director of the Company.
Audit Committee
The Company has a separately-designated standing audit committee established in accordance with section 3 (a)(58)(A) of the Exchange Act (15 U.S.C. 78c(a)(58)(A)). The members of the audit committee are Stephen B. Wolgin (Chairman), Neal Herstik and Eugene Rothenberg. The Company’s Board of Directors has determined that at least one member of the Audit Committee is a financial expert.
Delinquent Filers
There have been no delinquent filers pursuant to Item 405 of regulation S-K, to the best of management’s knowledge
Code of Ethics
The Company has adopted the Code of Business Conduct and Ethics (the Code of Ethics). The Code of Ethics can be found at the Company’s website at www.monmouthcapital.com, as well as attached to this filing at Exhibit 14.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following Summary Compensation Table shows compensation paid by the Company to its Chief Executive officer for services rendered during the years ended December 31, 2004, 2003 and 2002. Because no executive officers received total annual salary and bonus exceeding $100,000 which was allocated to the Company, only the compensation paid to the Chief Executive officer is to be disclosed under the Securities and Exchange Commission disclosure requirements.
(1)
Represents directors’ fees.
(2)
Represents directors’ fees and legal fees of $17,500.
Stock Option Plan
The following table sets forth for the executive officer named in the Summary Compensation Table, information regarding stock options outstanding at December 31, 2004:
Value of
Number of Unexercised
Unexercised Options
Shares
Value Options at Year-End
at Year-End
Name
Exercised
Realized Exercisable/Unexercisable Exercisable/Unexercisable
Eugene W. Landy
N/A
50,000/
$155,500/
$ -0-
Compensation of Directors
The Directors receive a fee of $800 for each Board meeting attended. Directors appointed to house committees receive $150 for each meeting attended. Those specific committees are Compensation Committee, Audit Committee and Stock Option Committee.
Report of the Compensation Committee
Overview and Philosophy
The Company has a Compensation Committee consisting of three independent outside Directors. This Committee is responsible for making recommendations to the Board of Directors concerning executive compensation. The Compensation Committee takes into consideration three major factors in setting compensation.
The first consideration is the overall performance of the Company. The Committee believes that the financial interests of the executive officers should be aligned with the success of the Company and the financial interests of its shareholders.
The second consideration is the individual achievements made by each officer. The Company is relatively small. The Committee is aware of the contributions made by each officer and makes an evaluation of individual performance based on the Committee’s own familiarity with the officer.
The final criteria in setting compensation are comparable wages in the industry. In this regard, the REIT industry maintains excellent statistics.
Evaluation
The Committee reviewed the progress made by Eugene W. Landy, Chief Executive Officer, in locating alternative business and investment opportunities. The Committee decided to continue Mr. Landy's annual compensation of $50,000.
Compensation Committee:
Eugene D. Rothenberg
Robert G. Sampson
Other Information
Except for specific agreements, the Company has no retirement plan in effect for officers, directors or employees and, at present, has no intention of instituting such a plan.
Comparative Performance
The following line graph compares the total return of the Company's Common Stock for the last five fiscal years to the NASDAQ Total Return Index and the NASDAQ Financial Stocks Total Return Index. The total return reflects stock price appreciation and dividend reinvestment for all three comparative indices. The information herein has been obtained from sources believed to be reliable, but neither its accuracy nor its completeness is guaranteed.
Monmouth
Year Ended
Capital
NASDAQ
NASDAQ
December 31,
Corporation
Total
Financial
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table lists information with respect to the beneficial ownership of the Company’s Common Stock as of December 31, 2004 by:
·
each person known by the Company to beneficially own more than five percent of the Company’s outstanding shares;
·
the Company’s directors;
·
the Company’s executive officers; and
·
all of the Company’s executive officers and directors as a group.
Unless otherwise indicated, the person or persons named below have sole voting and investment power and that person’s address is c/o Monmouth Capital Corporation, Juniper Business Plaza, 3499 Route 9 North, Suite 3-C, Freehold, New Jersey 07728. In determining the number and percentage of shares beneficially owned by each person, shares that may be acquired by that person under options exercisable within 60 days of December 31, 2004 are deemed beneficially owned by that person and are deemed outstanding for purposes of determining the total number of outstanding shares for that person and are not deemed outstanding for that purpose for all other shareholders.
Name and Address
of Beneficial Owner
Amount and Nature
of Beneficial Ownership (1)
Percentage
of Shares
Outstanding (2)
Albert D. Mason, Inc.
50 Congress Street Suite 843
Boston, MA 02109
450,671 (3)
12.21%
Anna T. Chew
19,024 (4)
.51%
Neal Herstik
.01%
Eugene W. Landy
300,733 (5)
7.91%
Michael Landy
44,047 (6)
1.17%
Eugene Rothenberg
5,578
.15%
Robert G. Sampson
16,986
.45%
Name and Address
of Beneficial Owner
Amount and Nature
of Beneficial Ownership (1)
Percentage
of Shares
Outstanding (2)
Maureen E. Vecere
.002%
Stephen B. Wolgin
5,206
.14%
Directors and Officers as a Group (7)
528,538
13.91%
(1)
Except as indicated in the footnotes to this table and pursuant to applicable community property laws, the Company believes that the persons named in the table have sole voting and investment power with respect to all shares listed.
(2)
Based on the number of shares outstanding on December 31, 2004 which was 3,750,481.
(3)
Based on Personal Holdings Letter as of 12/31/2004, received from Albert D. Mason, dated January 1, 2005.
(4)
Held jointly with Ms. Chew's husband.
(5)
Includes (a) 10,382 shares held by Mr. Landy's wife; (b) 32,835 shares held in the Landy & Landy Employees' Pension Plan, of which Mr. Landy is a Trustee with power to vote; (c) 69,051 shares held in the Landy & Landy Employees' Profit Sharing Plan, of which Mr. Landy is Trustee with power to vote; and (d) 15,825 shares held by Landy Investments, Ltd. of which Mr. Landy has power to vote; and (e) 40,000 shares held in the Eugene W. and Gloria Landy Family Foundation, a charitable trust, of which Mr. Landy has power to vote. Also includes 50,000 shares issuable upon exercise of a stock option.
(6)
Includes 12,497 shares in custodial accounts for Mr. Landy's children under the Uniform Gift to Minor's Act in which he disclaims any beneficial interest, but has power to vote.
(7)
Excludes 41,499 shares owned by MREIC and 85,692 shares owned by United. Eugene W. Landy owns beneficially approximately 4.23% of MREIC and 10.06% of United. Also excludes MREIC’s $500,000 investment in the Monmouth Capital Debenture Offering convertible into 83,333 shares and United’s $1,000,000 investment in the Monmouth Capital Debenture Offering convertible into 166,666 shares
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain relationships and related party transactions are incorporated herein by reference to part IV, Item 15(a)(1)(vi), Note 10 of the Notes to Consolidated Financial Statements-Payments to Affiliated Persons and Related Party Transactions.
ITEM 14
ITEM 14 - PRINCIPAL ACCOUNTING FEES AND SERVICES
Cowan, Gunteski & Co., P.A. (Cowan Gunteski) served as the Company’s independent registered public accounting firm for the years ended December 31, 2004 and 2003. The following are the fees billed by Cowan Gunteski in connection with services rendered:
Audit Fees
$26,730
$21,162
Audit Related Fees
Tax Fees
15,000
11,000
All Other Fees
Total Fees
$41,730
$32,162
Audit fees include professional services rendered by Cowan Gunteski for the audit of the Company’s annual financial statements and reviews of financial statements included in the Company’s quarterly reports on Form 10-Q. Audit fees also include services that are normally provided by the Company’s independent registered public accounting firm in connection with statutory and regulatory filings, such as consents and assistance with and review of documents filed with the Securities and Exchange Commission.
Tax fees include professional services rendered by Cowan Gunteski for the preparation of the Company’s federal and state corporate tax returns and supporting schedules as may be required by the Internal Revenue Service and applicable state taxing authorities. Tax fees also include other work directly affecting or supporting the payment of taxes, including planning and research of various tax issues.
Audit Committee Pre-Approval Policy
The Audit Committee has adopted a policy for the pre-approval of audit and permitted non-audit services provided by the Company’s principal independent accountants. The policy requires that all services provided by Cowan Gunteski to the Company, including audit services, audit-related services, tax services and other services, must be pre-approved by the Committee. The pre-approval requirements do not prohibit day-to-day normal tax consulting services, which matters will not exceed $5,000 in the aggregate.
The Audit Committee has determined that the provision of the non-audit services described above is compatible with maintaining Cowan Gunteski’s independence.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES
(a) (1)
The following Financial Statements are filed as part of this report:
Page
(i)
Report of Independent Registered Public Accounting Firm
(ii)
Consolidated Balance Sheets
40-41
(iii)
Consolidated Statements of Income
(iv)
Consolidated Statements of Shareholders' Equity
(v)
Consolidated Statements of Cash Flows
(vi)
Notes to Consolidated Financial Statements
45-65
(a) (2)
Financial Statement schedules are omitted for the reason that they are not required, are not applicable, or the required information is set forth in the financial statements or notes thereto.
(a) (3)
The Exhibits set forth in the following index of Exhibits are filed as part of this report.
Exhibit No.
Description
(3)
Articles of Incorporation and By-Laws - Reference is hereby made to that filed with the Securities and Exchange Commission with the Company’s Form 10-KA No. 2 for the year ended March 31, 1994.
(14)
Code of Business Conduct and Ethics
(21)
Subsidiaries of the Registrant - During fiscal 1994, the Registrant formed a wholly-owned subsidiary, The Mobile Home Store, Inc., to finance and sell manufactured homes. This subsidiary merged into the Registrant during 2001. During 2001, the Registrant formed a subsidiary, Palmer Terrace Realty Associates, LLC, to purchase a warehouse facility in Carlstadt, New Jersey. During 2003, the Registrant formed a subsidiary, Wheeling Partners, LLC, to purchase a warehouse facility in Wheeling, Illinois.
(23)
Consent of Cowan, Gunteski & Co., P.A.
(99)
Audit Committee Charter
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Monmouth Capital Corporation
Freehold, New Jersey
We have audited the accompanying consolidated balance sheets of Monmouth Capital Corporation as of December 31, 2004 and 2003, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Monmouth Capital Corporation as of December 31, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.
/s/ Cowan, Gunteski & Co., P.A.
Toms River, New Jersey
February 25, 2005
MONMOUTH CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, 2004
December 31,
Real Estate Investments:
Land
$9,915,003
$5,838,603
Buildings, Improvements and Equipment, net of accumulated depreciation of $1,399,815 and $613,750, respectively
29,139,568
17,249,644
Total Real Estate Investments
39,054,571
23,088,247
Loans Receivable, net of allowance for losses of $54,736 and $86,934, respectively
1,145,922
1,515,625
Cash and Cash Equivalents
533,686
314,091
Accounts Receivable
59,188
15,097
Securities Available for Sale, at Fair Value:
Federal National Mortgage Association
449,275
546,697
Government National Mortgage
Association
39,352
69,298
Other Securities Available for Sale
11,642,065
14,827,914
Inventory
99,870
50,590
Prepaid Expenses and Other Current Assets
117,181
111,553
Financing Costs, net of accumulated amortization of $104,032 and $42,796, respectively
659,928
649,088
Leasing Costs, net of accumulated amortization of $45,037 and $12,277, respectively
348,048
380,808
TOTAL ASSETS
$54,149,086
$41,569,008
See Accompanying Report of Independent Registered Public Accounting Firm and
Notes to Consolidated Financial Statements
MONMOUTH CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS (CONT.)
December 31,
December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgages Payable
$21,663,355
$15,889,239
Convertible Subordinated Debentures
5,370,000
5,370,000
Loans Payable
9,510,154
5,576,824
Accounts Payable and Accrued Expenses
229,078
249,854
Other Liabilities
74,401
197,844
Total Liabilities
36,846,988
27,283,761
Minority Interest
1,856,005
1,914,242
Shareholders' Equity:
Common Stock (par value $1.00 per share;
Authorized 10,000,000 shares; issued
and outstanding 3,750,481 and 3,081,463
shares respectively)
3,750,481
3,081,463
Additional Paid-In Capital
10,479,189
7,266,839
Accumulated Other Comprehensive
Income
1,216,423
1,812,797
Retained Earnings
209,906
Total Shareholders' Equity
15,446,093
12,371,005
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY
$54,149,086
$41,569,008
See Accompanying Report of Independent Registered Public Accounting Firm Report and
Notes to Consolidated Financial Statements
MONMOUTH CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the
Year Ended
December 31, 2004
For the
Year Ended
December 31, 2003
For the
Year Ended
December 31, 2002
Income:
Rental Income & Reimbursements
$2,835,614
$ 1,734,583
$1,016,513
Interest and Dividend Income
1,247,988
1,091,924
1,247,379
Sales of Manufactured Homes
165,324
269,690
$394,500
Gain on Securities Transactions, net
815,844
710,491
181,002
Other Income
244,170
1,041
Total Income
5,308,940
3,807,729
2,840,077
Expenses:
Cost of Sales of Manufactured Homes
166,911
257,502
390,003
Selling Expense
13,025
5,066
Real Estate Taxes
379,641
114,439
102,955
Salaries and Employee Benefits
239,310
177,257
178,586
Professional Fees
163,368
71,825
81,554
Interest Expense
1,635,684
977,204
792,667
Depreciation
786,065
327,898
208,521
Other Expenses
565,136
486,318
480,580
Total Expenses
3,936,849
2,425,468
2,239,932
Income Before Minority Interest
1,372,091
1,382,261
600,145
Minority Interest
134,730
98,829
45,507
NET INCOME
$1,237,361
$ 1,283,432
$ 554,638
NET INCOME PER
SHARE-BASIC AND DILUTED
Basic
$.37
$ .45
$ .29
Diluted
$.36
$ .34
$ .29
WEIGHTED AVERAGE
SHARES OUTSTANDING:
BASIC
3,362,018
2,824,809
1,924,860
DILUTED
3,404,950
3,747,584
1,941,477
See Accompanying Report of Independent Registered Public Accounting Firm and
Notes to Consolidated Financial Statements
MONMOUTH CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
*Dividend Reinvestment and Stock Purchase Plan
See Accompanying Report of Independent Registered Public Accounting Firm and
Notes to Consolidated Financial Statements
MONMOUTH CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
See Accompanying Report of Independent Registered Public Accounting Firm and
Notes to Consolidated Financial Statements
MONMOUTH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Monmouth Capital Corporation is a corporation organized in the State of New Jersey, in 1961. The Company operates as a qualified real estate investment trust (REIT) under Sections 856-860 of the Internal Revenue Code (the Code) and intends to maintain its qualification as a REIT in the future. As a qualified REIT, with limited exceptions, the Company will not be taxed under federal and certain state income tax laws at the corporate level on taxable income that its distributes to its shareholders. For special tax provisions applicable to REITS, refer to Sections 856-860 of the Code.
Prior to 1994 the Company operated as a small business investment company. During 1994, the Company formed a wholly-owned subsidiary, The Mobile Home Store, Inc. (MHS), to finance and sell manufactured homes. The sales operation was conducted at manufactured home communities owned by United Mobile Homes, Inc. (United), a related REIT. The Company also invested in real estate and securities.
In March 2001, the Company sold the existing inventory to United at the Company’s carrying value and the Company exited the manufactured home sales business since it proved to be unprofitable. On September 26, 2001, the Company adopted a change from a fiscal year end of March 31 to a calendar year end, effective for the short year ended December 31, 2001. The Company elected to be taxed as a real estate investment trust for the transition period ended December 31, 2001. MHS was merged into the Company on December 6, 2001.
The Company has made the following property acquisitions since January 1, 2001:
Date of
Square
Property
Acquisition
Location
Feet
Type
Ownership
Tenant
7/20/2001
Carlstadt, NJ
59,400
warehouse
51%
Macy’s
12/20/2001
White Bear Lake, MN
59,425
warehouse
100%
Federal Express
9/18/2002
Cheektowaga, NY
62,986
warehouse
100%
Federal Express
8/14/2003
Wheeling, IL
107,160
warehouse
63%
FedEx Ground
7/9/2004
Richmond, VA
60,000
warehouse
100%
Carrier Sales & Dist
12/2/2004
Quakertown, PA
37,660
warehouse
100%
MagiKitch’n
12/27/2004
Montgomery, IL
171,200
warehouse
100%
Home Depot
The Company is currently operating as a diversified REIT investing in real estate equities, mortgages, mortgage-backed securities, and other REIT securities.
Principals of Consolidation and Minority Interests
The consolidated financial statements of the Company at December 31, 2004, 2003, and 2002 and for each of the years ended December 31, 2004, 2003, and 2002 include the accounts and operating results of the Company and its subsidiaries. The Company consolidates the results of operations that have minority interests. Such consolidated financial statements present the Company’s minority interests under the equity method of accounting. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the financial statements in conformity with generally accepted accounting principles accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Buildings, Improvements and Equipment
Buildings, Improvements and Equipment are stated at the lower of depreciated cost or net realizable value. Depreciation is computed using accelerated depreciation methods acceptable for tax reporting purposes over the estimated useful life of the assets (ranging from 5 to 39 years). This departure from GAAP does not create a material difference to the Company’s operating income based on its REIT election. See Note 9 for a discussion of the Company’s REIT status.
Loans Receivable
Interest income on loans receivable is accrued until, in the opinion of management, the collection of such interest appears doubtful. An allowance is recorded when it appears doubtful that the Company will not collect the full principal amount.
Cash Equivalents
Cash equivalents consist of money market funds.
Lease Costs and Financing Costs
Costs incurred in connection with the execution of leases are deferred and are amortized over the term of the respective leases. Unamortized lease costs are charged to expense upon cancellation of leases prior to the expiration of lease terms. Costs incurred in connection with obtaining mortgages and other financings and refinancings are deferred and are amortized over the term of the related obligations. Unamortized costs are charged to expense upon prepayment of the obligation. Costs incurred in connection with the Convertible Subordinated Debentures (the Debentures) are deferred and are amortized over the term of the Debentures. Unamortized costs are charged pro-rata to Additional Paid-In Capital upon conversion by the Debenture holders or redemption by the Company.
Securities Available for Sale
The Company's securities consist primarily of debt, and common and preferred equities of other REITs, as well as mortgaged backed securities issued by the Federal National Mortgage Association and the Government National Mortgage Association. These securities are all publicly traded and purchased on the open market. These securities are classified as Available-for-Sale, and are carried at fair value. Gains or losses on the sale of securities are calculated on the average cost method and are accounted for on a trade date basis. Unrealized holding gains and losses are excluded from earnings and reported as a separate component of Shareholders' Equity until realized. A decline in the market value of any security below cost that is deemed to be other than temporary results in a reduction in the carrying amount to fair value. Any impairment is charged to earnings and a new cost basis for the security is established.
Derivative Financial Instruments
The Company invests in futures contracts of ten-year treasury notes to reduce exposure of the debt and preferred equities securities portfolios to interest rate fluctuations. These futures contracts do not qualify for hedge accounting under Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138 and No. 149. The open contracts are marked-to-market and the unrealized gain or loss is recorded in the income statement in gain on securities transactions, net with corresponding amounts recorded in other assets or other liabilities on the balance sheet. Gain or loss on settled futures contracts are also recorded as a component of gain on securities transactions, net.
Inventories
Inventories, consisting of manufactured homes for sale, are valued at the lower of cost, which includes costs associated with the repossession of a home, or market value and are determined by the specific identification method. All inventories were considered finished goods.
Revenue Recognition
Rental income is recognized on the straight-line basis over the term of the lease. Sale of manufactured homes is recognized on the full accrual basis when certain criteria are met. Interest income on loans receivable is not accrued when, in the opinion of management, the collection of such interest appears doubtful.
Income Taxes
The Company has elected to be taxed as a REIT under Sections 856-860 of the Internal Revenue Code. The Company will not be taxed on the portion of its income which is distributed to shareholders, provided it distributes at least 90% of its taxable income, has at least 75% of its assets in real estate investments and meets certain other requirements for qualification as a REIT.
Additionally, at April 1, 2001, the Company had certain assets with built-in gains. If these assets are sold within a ten-year period, any gain may be taxable.
Net Income Per Share
Basic net income per share is calculated by dividing net income by the weighted-average number of common shares outstanding during the period (3,362,018, 2,824,809, and 1,924,860 for the year ended December 31, 2004, 2003, and 2002, respectively). Diluted net income per share is calculated by dividing net income plus interest expense related to the Debentures by the weighted-average number of common shares outstanding plus the weighted-average number of net shares that would be issued upon exercise of stock options pursuant to the treasury stock method, plus the number of shares resulting from the possible conversion of the Debentures, (3,404,950, 3,747,584, and 1,941,477 for the years ended December 31, 2004, 2003, and 2002, respectively). (See Note 6). Options in the amount of 42,932, 27,775 and 16,617 are included in the diluted weighted average shares outstanding for the year ended December 31, 2004, 2003, and 2002, respectively. Common stock relating to the Company’s Debentures totaling 895,000 shares is also included in the diluted weighted average shares outstanding for the year ended December 31, 2003. Interest expense and common stock related to the Debentures are excluded, from the calculation of diluted net income per share for the year ended December 31, 2004, due to their antidilutive effect.
Stock Option Plan
The Company had elected to follow APB Opinion No. 25 in accounting for its stock option plan prior to January 1, 2003, and accordingly no compensation cost had been recognized prior to January 1, 2003. Had compensation cost been determined consistent with SFAS No. 123, the Company’s net income and earnings per share would have been reduced to the pro forma amounts as follows:
Year Ended
12/31/04
Year Ended
12/31/03
Year Ended
12/31/02
Net Income as Reported
$1,237,361
$1,283,432
$554,638
Compensation expense if the fair
value method had been applied
2,000
Net Income Pro forma
$1,237,361
$1,283,432
$552,638
Net Income per share -
Basic
As Reported
$ .37
$ .45
$ .29
Pro Forma
$ .37
$ .45
$ .29
Diluted
As Reported
$ .36
$ . 34
$ .29
Pro Forma
$ .36
$ .34
$ .29
The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 2002:
Dividend yield
10%
Expected volatility
25%
Risk-free interest rates
3.4%
Expected lives (years)
The Company adopted the fair value recognition provisions of SFAS No. 123, “Accounting for Stock Based Compensation” on January 1, 2003. Under the prospective method of adoption selected by the Company under the provisions of SFAS No. 148, “Accounting for Stock Based Compensation, Transition and Disclosure”, no compensation costs have been recognized in 2004 and 2003, as the Company did not grant stock-based employee compensation during the years ended December 31, 2004 and 2003.
Comprehensive Income
Comprehensive income consists of net income and net unrealized gains or losses on securities available for sale and is presented in the consolidated statements of shareholders’ equity.
Reclassifications
Certain amounts in the consolidated financial statements for the prior periods have been reclassified to conform to the statement presentation for the current year. These reclassifications have no effect on net income.
NOTE 2 - REAL ESTATE INVESTMENTS
On July 20, 2002, Palmer Terrace Realty Associates, LLC (Palmer Terrace), a 51% owned subsidiary of the Company, purchased a 59,400 square foot warehouse facility in Carlstadt, New Jersey from WXIII/MWL Real Estate Limited Partnership, an unrelated entity. This warehouse facility is 100% net leased to Macy’s East, Inc., an Ohio corporation, through April 5, 2009. The purchase price, including closing costs, was approximately $3,200,000. Palmer Terrace paid approximately $860,000 in cash and obtained a mortgage of approximately $2,340,000. This mortgage payable is at an interest rate of 7.75% and is due August 15, 2021.
On December 20, 2002, the Company purchased a 59,425 square foot warehouse facility in White Bear Lake, Minnesota from Jones Development Company, LLC, an unrelated entity. This warehouse facility is 100% net leased to Federal Express Corporation, through April 11, 2011. The purchase price, including closing costs, was approximately $4,800,000. The Company paid approximately $300,000 in cash, borrowed approximately $1,100,000 against its securities portfolio and obtained a mortgage of approximately $3,400,000. This mortgage is at an interest rate of 7.04% and is due January 1, 2012.
On September 18, 2002, the Company purchased a leasehold interest in a 62,986 square foot warehouse facility in Erie County, Cheektowaga, New York from FedJones Cheektowaga, LLC (FedJones), an unrelated entity. This lease was between FedJones and the Erie County Industrial Development Agency (ECIDA). This warehouse facility is 100% subleased to FedEx Ground Package System, Inc. under a net lease, through July 31, 2011. The purchase price was approximately $4,200,000. The Company borrowed approximately $1,100,000 against its security portfolio with Prudential Securities and obtained a mortgage of approximately $3,100,000. This mortgage payable is at an interest rate of 6.78% and is due October 1, 2017. At the end of the lease term, the Company may purchase the warehouse facility from ECIDA for $10.
On August 14, 2003, Wheeling Partners, LLC, a 63% owned subsidiary of the Company, purchased a 107,160 square foot industrial building in Wheeling, Illinois, from Jones Elgin I, LLC, an Illinois limited liability company (Jones Elgin). This warehouse facility is 100% subleased to FedEx Ground Package System, Inc. under a net lease through June 30, 2015. The purchase price, including closing costs, was approximately $11,985,000. The Company borrowed approximately $2,300,000 against its security portfolio, obtained a bank loan of $500,000 at an interest rate of 7.23% due August 30, 2004, and obtained a mortgage of approximately $7,670,000. This mortgage payable is at an interest rate of 5.68% and is due 2021.
On July 9, 2004, the Company purchased a 60,000 square foot industrial building in Richmond, Virginia. This warehouse facility is 100% net leased to Carrier Sales and Distribution, LLC for 7 years. The lease expires May 31, 2011. The purchase price, including closing costs, was approximately $4,100,000. The average monthly rental over the term of the lease is $31,700. The Company borrowed approximately $3,100,000 against its securities portfolio and drew down $1,000,000 on its line of credit. In December 2004, the Company pledged this property as collateral for the $2,500,000 short-term loan with Two River Bank.
On December 2, 2004, the Company purchased a 37,660 square foot industrial building in Quakertown, Pennsylvania. This warehouse facility is 100% net leased to MagiKitchn’ for 11 years. The lease expires March 31, 2015. The average monthly rental over the term of the lease is $20,500. MagiKitch’n subleased the space to Rotoflex Technology, Inc. The purchase price, including closing costs, was approximately $2,400,000. There is no mortgage on this property.
On December 29, 2004, the Company purchased a 171,200 square foot industrial building in Montgomery, Illinois. This warehouse facility is 100% net leased to Home Deport USA, Inc. for 10 years. The lease expires June 30, 2010. The average monthly rental over the term of the lease is $71,600. The purchase price, including closing costs, was approximately $10,000,000. The Company assumed the existing mortgage with a balance of $6,364,723 at a rate of 6.5%. The mortgage matures November 1, 2012. In addition, the Company obtained a short-term loan from Two River Community Bank for $2,500,000 at a rate of 6.00%. The short-term loan matures on September 16, 2005.
The following is a summary of the cost and accumulated depreciation of the Company’s
land, building, improvements and equipment at December 31, 2004 and 2003.
NJ
MN
NY
IL
VA
PA
Land
$634,065
$1,025,000
$440,000
$6,953,938
$459,000
$403,00
Building
2,574,700
3,744,000
3,800,000
14,074,225
3,729,589
2,115,800
Improvements
448,534
Equipment
52,535
Total
3,208,765
4,769,000
4,240,000
21,529,232
4,188,589
2,518,800
Accumulated
Depreciation
(209,188)
(336,000)
(243,483)
(563,582)
(47,562)
(-0-)
Net Real Estate
Investments
$2,999,577
$4,433,000
$3,996,517
$20,965,650
$4,141,027
$2,518,800
NJ
MN
NY
IL
VA
PA
Land
$634,065
$1,025,000
$440,000
$3,739,538
$-0-
$-0-
Building
2,574,700
3,744,000
3,800,000
7,243,625
Improvements
448,534
Equipment
52,535
Total
3,208,765
4,769,000
4,240,000
11,484,232
Accumulated
Depreciation
(153,226)
(240,000)
(146,055)
(74,469)
Net Real Estate
Investments
$3,055,539
$4,529,000
$4,093,945
$11,409,763
$ -0-
$ -0-
All properties consist of industrial buildings.
NOTE 3 - LOANS RECEIVABLE
The following is a summary of the loans held by the Company at December 31, 2004 and 2003:
From 1994 through March 2001, the Company sold and financed manufactured home units. At December 31, 2004 and 2003, financed manufactured homes consist of 57 and 74 loans, respectively. These loans range from approximately $1,000 to approximately $60,000. Loans receivable for financed manufactured homes are secured by the property financed. Generally, the terms of the loans do not exceed 20 years.
NOTE 4 - SECURITIES AVAILABLE FOR SALE
The Company’s securities available for sale consist primarily of debt securities and common and preferred stock of other REITs. The Company does not own more than 10% of the outstanding shares of any of these securities, nor does it have controlling financial interest.
The following is a summary of investments in debt and equity securities at December 31, 2004:
Description
Shares
Cost
Fair Value
Equity Securities-Preferred Stock:
Apartment Inv & Mgt Co 8% Cl T
4,000
$100,000
$101,640
Brandywine Realty 7.375% Sr D
12,000
300,000
301,800
BRE Properties 6.75 Sr C
4,000
100,000
100,080
Carramerica Realty Corp 7.5% Sr E
4,000
100,000
106,240
Corporate Office Ppts 7.5% Sr H
16,000
400,000
408,000
Equity Inns Inc 8.75% Sr B
10,000
251,200
262,000
Felcor Lodging Trust 9% Sr B
10,000
202,692
254,600
Glimcher Realty Trust 8.125% Sr G
8,000
200,000
206,320
Healthcare REIT 7.625 Sr F
4,000
100,000
101,000
HRPT PP 8.75% Sr B
12,000
300,113
331,440
Health Care Property Invest 7.1% Sr F
9,000
225,000
227,790
Innkeepers USA Trust 8.0% Sr C
45,000
1,125,000
1,158,750
Kilroy Realty 7.8% Sr E
16,000
400,000
419,200
Kramont Realty Trust 8.25% Sr E
36,000
900,001
905,400
Lasalle Hotel Prop. 10.25% Sr A
8,000
202,400
219,200
LTC Properties 8% Sr F
8,000
200,000
210,800
McGuire Properties 7.625% Sr A
16,000
400,000
409,600
Omega Healthcare 8.375% Sr D
16,000
400,000
422,400
PS Business Parks 7% Sr H
6,000
150,000
148,740
Pennsylvania REIT 11% Sr A
15,100
546,150
913,550
Prologis Trust 6.75% Sr G
8,000
200,000
201,840
Saul Centers 8% Sr A
29,100
727,500
778,425
SL Green Realty 7.625% Sr C
20,000
500,000
512,000
Total Equity Securities - Preferred Stock
8,030,056
8,700,815
Equity Securities-Common Stock:
Mission West Properties
10,000
103,000
106,400
New Plan Excel Realty Trust Inc
20,000
498,302
541,600
Sizeler Property Investors Inc.
150,000
1,269,573
1,767,000
Total Equity Securities- Common Stock
1,870,875
2,415,000
Total Equity Securities
9,900,931
11,115,815
The following is a summary of investments in debt and equity securities at December 31, 2003:
Description
Shares
Cost
Fair Value
Equity Securities-Preferred Stock:
Apartment Inv and Mgt Co 10% Cl R
3,500
$ 94,820
$95,092
Apartment Inv & Mgt Co 8% Cl T
16,000
400,000
413,280
AMB Property Corp 8% Sr M
4,000
100,000
99,040
Carramerica Realty Corp 7.5% Sr E
8,000
200,000
212,800
CBL Assoc 8.75% Sr B
2,000
101,200
109,600
CBL Assoc 7.75% Sr C
5,000
127,750
135,500
Corporate Office Ppts
20,000
500,000
511,950
Developers Diversified Realty Corp Cl H
4,000
98,480
103,920
Duke Realty Corp 6.625% Sr J
4,000
100,000
102,520
Equity Inns Inc 8.75% Sr B
10,000
251,200
271,900
Felcor Lodging Trust 9% Sr B
30,000
608,092
751,800
Felcor Lodging Trust 1.95% Sr A
5,000
86,390
120,900
G&L Realty Corp 10.25% Sr A
1,000
15,683
25,580
Glenborough Realty Trust 7.75% Sr A
6,000
87,823
147,780
Glimcher Realty Trust 9.25% Sr B
4,000
62,418
101,400
HRPT PP 9.875% Sr A
4,000
107,680
111,760
HRPT PP 8.75% Sr B
17,000
425,160
473,450
Health Care Property Inves. 7.1% Sr F
11,000
275,000
280,001
Health Care Property Inves. 7.25% Sr E
6,000
150,000
156,000
Highwoods Properties Inc 8% Sr D
1,000
17,170
25,060
Hospitality Properties Trust 9.5% Sr A
8,400
180,389
217,560
Host Marriott Corp 10% Cl C
2,000
53,000
54,520
Innkeepers USA Trust 8.625% Sr A
12,900
256,170
323,790
Description
Shares
Cost
Fair Value
Innkeepers USA Trust 8.0% Sr C
39,000
975,000
975,000
Keystone Property Trust 9.125% Sr D
1,100
29,920
29,865
Kilroy Realty 7.8% Sr E
20,000
500,000
511,000
Kramont Realty Trust 9.5% Sr D
23,000
405,888
581,900
Kramont Realty Trust 8.25% Sr E
40,000
1,000,000
1,000,000
Lasalle Hotel Prop. 10.25% Sr A
8,000
202,400
228,400
Mills Corp 9% Sr C
3,000
81,960
82,500
Mills Corp 9% Sr B
2,000
50,600
54,880
Parkway Prop 8.0% Sr D
1,000
26,600
26,500
Pennsylvania REIT 11%
15,100
546,151
917,325
Prologis Trust 6.75%
16,000
400,000
411,520
Public Storage 6.5% Sr W
6,000
150,000
151,740
Sizeler Property Investors 9.75% Sr B
1,000
25,000
28,500
SL Green Realty 7.625% Sr C
24,000
600,000
618,000
Saul Centers Sr A
30,000
750,000
780,000
Shurguard Storage 8.75% Sr D
5,000
134,200
135,250
Shurguard Storage 8.70% Sr C
2,000
50,980
50,600
Sovran Self Storage Inc 9.85% Sr B
1,000
19,245
25,950
Total Equity Securities - Preferred Stock
10,246,369
11,454,133
Equity Securities-Common Stock:
HRPT Properties Trust
30,000
257,516
302,700
Monmouth Real Estate (a related entity)
1,000
7,160
8,690
New Plan Excel Realty Trust Inc
20,000
459,250
493,400
Pennsylvania REIT
3,589
89,600
130,281
Sizeler Properties Investors Inc
150,000
1,257,540
1,606,500
Tork Time Control Inc
1,500
10,125
15,000
Trizec PPTYS Inc
6,500
75,945
100,100
United Mobile Homes, Inc. (a related entity)
11,000
84,826
187,110
Total Equity Securities- Common Stock
2,241,962
2,843,781
Total Equity Securities
12,488,331
14,297,914
Description
Shares
Cost
Fair Value
Debt Securities:
Sizeler PPTY SubDeb CPN 9% Due 7/15/09
500,000
530,000
Federal National Mortgage Association
6.09% 7/1/39
571,368
546,697
Government National Mortgage
Association 6.5% 2/20/14
71,413
69,298
Total Debt Securities
1,142,781
1,145,995
Total Securities Available for Sale
$13,631,112
$15,443,909
The Company had three securities that were temporarily impaired investments at December 31, 2004. The individual unrealized losses were 9% or less of original cost. The following is a summary:
The Company has the ability and intent to hold the Federal agency mortgage backed securities to maturity.
The Company received proceeds of $7,739,798 $6,063,062 and $2,655,521 on sales or redemptions of securities during 2004, 2003 and 2002, respectively. The Company recorded the following gain on securities transactions, net.
Gross realized gains
$984,832
$736,722
$182,059
Gross realized losses
(26,089)
(26,231)
(1,057)
Net loss on closed futures contracts
(147,586)
Unrealized gain on open futures contracts
4,687
Gains on Securities Transactions, Net
$815,844
$710,491
$181,002
NOTE 5 - DEBT
Mortgages Payable
The following is a summary of mortgages payable at December 31, 2004 and 2003:
Property
Interest
Rate
Maturity
New Jersey
7.75%
$2,150,177
$2,211,111
Minnesota
7.04%
2,986,089
3,125,436
New York
6.78%
2,809,872
2,944,407
Illinois (Wheeling)
5.68%
7,352,494
7,608,285
Illinois (Montgomery)
6.50%
6,364,723
Total Mortgages
Payable
$21,663,355
$15,889,239
Principal on the foregoing debt is scheduled to be paid as follows:
$768,827
820,199
875,042
933,593
996,105
Thereafter
17,269,589
$21,663,355
Convertible Subordinated Debentures
On October 23, 2003, the Company completed a private placement offering of $5,370,000 (less approximately $374,000 in offering costs) of 8% Convertible Subordinated Debentures (the Debentures), due 2013. Interest is paid semi-annually in arrears on April 30 and October 31 of each year, commencing April 30, 2004. The Debentures are convertible into common stock of the Company at any time prior to redemption or maturity, at the conversion price of $6.00 per share (equivalent to a rate of 166.67 shares of common stock for each $1,000 principal amount), subject to adjustment under certain conditions.
The Company may redeem the Debentures, at its option, in whole or in part, at any time on and after October 31, 2004 at the redemption prices set below. The redemption price, expressed as a percentage of the principal amount, is as follows for the 12-month periods beginning on:
Period
Redemption Price
October 23, 2004
110%
October 23, 2005
110%
October 23, 2006
110%
October 23, 2007
105%
October 23, 2008 and
Thereafter
100%
No sinking fund is provided for the Debentures. The Company may redeem the debentures, at our option, in whole or in part, at any time prior to October 23, 2004, upon at least 30 and not more than 60 days’ notice by mail to the holders of the debentures, at a redemption price equal to 100% of the principal amount of the debentures to be redeemed, plus accrued and unpaid interest to the date fixed for redemption, if the closing price of our common stock has exceeded 150% of the conversion price for at least 20 trading days in the consecutive 30-day trading period ending on the trading day prior to the date we mail the notice of redemption.
No Debentures were converted during the year ended December 31, 2004.
Loans Payable
At December 31, 2003, the Company had the following loans from Two River:
Loan
Amount
Interest
Rate
Maturity
$75,000
7.23%
August 30, 2004
500,000
6.11%
August 15, 2004
500,000
6.33%
August 8, 2005
$1,075,000
The Company repaid these loans in full using funds from its margin loan on January 26, 2004.
On April 15, 2004, the Company closed on a $1,000,000 line of credit with Two River secured by the Company’s manufactured home loans. The interest rate is 5% for the first two years and changes to the five-year FHLB of NY Regular Fixed Rate plus 300bp for the remaining five years. The line of credit expires in 2011. The balance on the line of credit at December 31, 2004 was $1,000,000 and the interest rate was 6.25%.
On December 16, 2004, the Company closed on a $2,500,000 short term loan with Two River, secured by the property in Richmond, Virginia. The interest rate is 6.00%. The loan matures on September 16, 2005.
The Company purchases securities on margin. At December 31, 2004 and 2003, the margin loan was $6,010,154 and $4,501,824, respectively. The interest rate ranged from 3.0% to 4.0% during the year ended December 31, 2004, and from 2.75% to 3.0% during the year ended December 31, 2003. These loans are secured by investment securities with a market value of $12,130,692 and $15,443,909 at December 31, 2004 and 2003, respectively. These margin loans are due on demand.
NOTE 6 - EMPLOYEE STOCK OPTION PLAN
The Company’s 1994 Stock Option Plan (the 1994 plan) expired on December 31, 2003. On September 28, 2004, the Company’s shareholders approved and ratified the 2004 Stock Option Plan (the 2004 plan) authorizing the grant to officers and key employees of options to purchase up to 750,000 shares of common stock. Options may be granted at any time through September 27, 2014. No option shall be available for exercise beyond ten years. All options are exercisable after one year from date of grant. The option price shall not be below the fair market value at date of grant. Cancelled or expired options are added back to the pool of shares available under the 2004 plan. No grants were made under the 2004 plan.
A summary of the status of the Company's stock option plans as of December 31, 2004, 2003 and 2002, and changes during the periods then ended are as follows:
The following is a summary of stock options outstanding as of December 31, 2004:
Date of
Grant
Number of Employees
Number of Shares
Option Price
Expiration Date
10/4/00
20,000
$2.625
10/4/05
10/4/01
50,000
3.30
10/4/09
1/16/02
10,000
2.90
1/16/07
80,000
As of December 31, 2004, there were 750,000 shares available for grant under the 2004 Plan.
NOTE 7 - DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
Effective August 28, 1995, the Company implemented a Dividend Reinvestment and Stock Purchase Plan (DRIP). Under the terms of the DRIP, shareholders who participate may reinvest all or part of their dividends in additional shares of the Company at approximately 95% of the market price.
Shareholders may also purchase additional shares at approximately 95% of its market price by making optional cash payments. For the year ended December 31, 2004, 2003 and 2002, the Company received $4,168,273, $2,872,459, and $1,933,092, respectively. There were 669,018, 733,926, and 580,523 new shares issued, respectively.
The Company paid the following dividends in the years 2004, 2003 and 2002:
Payment Date
Record Date
Amount
Per Share
12/15/2004
11/15/2004
$914,066
$.25
6/15/2004
5/17/2004
820,106
. 25
12/15/2003
11/17/2003
608,492
.20
6/16/2003
5/15/2003
570,012
.20
12/16/2002
11/15/2002
748,497
.35
On January 13, 2005, the Company declared a dividend of $.25 per share to be paid on June 15, 2005 to shareholders of record on May 16, 2005.
NOTE 8 - INCOME FROM LEASES
The Company derives income from operating leases on its commercial properties. In general, these leases are written for periods up to ten years with various provisions for renewal, In addition, these leases generally contain clauses for reimbursement (or direct payment) of real estate taxes, maintenance, insurance and certain operating expenses of the properties. Minimum rents due under noncancellable leases at December 31, 2004 are scheduled as follows:
Year Ending December 31,
$3,057,788
3,128,131
3,158,182
3,047,011
3,031,051
Thereafter
7,163,306
NOTE 9 - INCOME TAXES
The Company has elected to be taxed as a REIT. As the Company has not distributed all of its income currently, a provision for Federal excise and other taxes of $121,646, $107,370, and $50,000 has been made for the years ended December 31, 2004, 2003 and 2002 and 2002, respectively. Included in the 2004 and 2003 tax provision is a Federal liability for built-in gains on the sale of assets acquired by the Company before its REIT election.
NOTE 10 - PAYMENTS TO AFFILIATED PERSONS AND RELATED PARTY
TRANSACTIONS
Management currently operates two additional REITs, Monmouth Real Estate Investment Corporation and United Mobile Homes, Inc. Certain general and administrative expenses are shared among these companies based on use or service provided. Allocations of salaries and benefits are made based on the amount of employees and time dedicated to each affiliated Company.
Payments to Affiliated Persons
During 2004, 2003 and 2002, Eugene W. Landy, President of the Company, received $53,200, $70,700, and $70,700, respectively in salary, legal and director fees for these periods, respectively.
Transactions with United Mobile Homes, Inc. (United)
United owns and operates manufactured home communities. Four Directors of the Company are also Directors and shareholders of United.
During the years ended December 31, 2004, 2003, and 2002, the Company (MHS prior to December 6, 2001) sold 3, 4, and 2 manufactured homes, respectively, to United for total sales prices of $64,824, $78,195, and $43,181, respectively, at the Company’s cost. These sales represented 39%, 29%, and 11%, respectively, of the total sales made by the Company. These manufactured homes were available through the Company, but could have been acquired by United from a third party at approximately the same price.
United financed/refinanced certain loans made by the Company to third parties during 2004 and 2003. The total amount financed was $70,150 and $307,745, respectively.
The Company held common stock of United in its securities portfolio at December 31, 2003. See Note 4 for holdings. During 2004, the Company sold the common stock of United in the open market and recognized a gain of $103,705.
United holds $1,000,000 of the Convertible Subordinated Debentures at December 31, 2004.
Transactions with Monmouth Real Estate Investment Corporation (MREIC)
MREIC owns industrial properties on long-term net leases to credit tenants. Three Directors of the Company are also Directors of MREIC. The Company held common stock of MREIC in its securities portfolio at December 31, 2003. See Note 4 for holdings. During 2004, the Company sold the common stock of MREIC in the open market and recognized a gain of $1,626.
MREIC owns $500,000 of the Convertible Subordinated Debentures at December 31, 2004.
NOTE 11 - GROUP CONCENTRATIONS OF CREDIT RISK
The Company owns seven properties totaling 557,831 square feet of which three or 229,571 square feet or 41% are leased to Federal Express Corporation and subsidiaries (FedEx). Rental income and reimbursements from FedEx totaled approximately $2,180,000, $1,297,000, and $589,000 or 77%, 75%, and 58%, for the years ended December 31, 2004, 2003, and 2002, respectively.
The Company’s loan portfolio is diversified. Generally, loans are collateralized by the manufactured homes. At December 31, 2004, 2003 and 2002, all loans were secured.
NOTE 12- FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is required to disclose certain information about fair values of financial instruments, as defined in Statement of Financial Accounting Standards No. 107, “Disclosures About Fair Value of Financial Instruments”.
Limitations
Estimates of fair value are made at a specific point in time based upon where available, relevant market prices and information about the financial instrument. Such estimates do not include any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. All of the Company’s securities available for sale have quoted market values. However, for a portion of the Company’s financial instruments, no quoted market value exists. Therefore, estimates of fair value are necessarily based on a number of significant assumptions (many of which involve events outside the control of management). Such assumptions include assessments of current economic conditions, perceived risks associated with these financial instruments and their counterparties, future expected loss experience and other factors. Given the uncertainties surrounding these assumptions, the reported fair values represent estimates only, and, therefore, cannot be compared to the historical accounting model. Use of different assumptions or methodologies is likely to result in significantly different fair value estimates.
The fair value of cash and cash equivalents and loans receivable approximates their current carrying amounts since all such items are short-term in nature. The fair value of securities available for sale is based upon quoted market values (See Note 4). At December 31, 2004, the
fair and carrying value of mortgages payable amounted to $22,230,848 and $21,663,355, respectively. At December 31, 2003, the fair and carrying value of mortgages payable amounted to $16,287,506 and $15,889,239, respectively. The fair value of loans payable approximates their current carrying amounts since such amounts payable are at a current market rate of interest.
NOTE 13 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year ended December 31, 2004, 2003 and 2002, for interest and taxes are as follows:
12/31/04
12/31/03
12/31/02
Interest
$1,621,970
$945,058
$792,667
Taxes
151,489
113,242
58,535
During the years ended December 31, 2004, 2003 and 2002, the Company had dividend reinvestments of $417,409, $264,510, and $196,503, respectively, which required no cash transfers.
During the years ended December 31, 2004, 2003, and 2002, the collateral for loans receivable of $235,512, $185,768, and $254,608, respectively, was repossessed and placed in inventory.
NOTE 14 - SUBSEQUENT EVENTS
On February 24, 2005, the Company purchased a 68,385 square foot industrial building in Tampa, Florida. This warehouse facility is 100% net leased to Kellogg Sales Co. for 20 years. The lease expires December 31, 2009. The average monthly rental over the term of the lease is $37,000. The purchase price, including closing costs, was approximately $5,600,000. The Company obtained $4,000,000 in mortgages at an interest rate of 5.71% on $3,400,000 principal, due March 1, 2015 and 5.24% on $600,000 principal, due March 1, 2010. In addition, the Company obtained $1,500,000 from its margin loan.
During February 2005, the Company signed an agreement with an investment bank to sell a private placement of approximately $10,000,000 in new convertible subordinated debentures (new debentures). It is anticipated that the private placement will close in early 2005. It is anticipated that the proceeds will be used to pay off short term debt, to acquire properties, and for general corporate purposes.
In anticipation of the private placement, United has advanced the Company $5,000,000 for its subscription in the new debentures. The Company will pay United 8% interest on this advance. Currently, United owns $1,000,000 of the $5,370,000 Debentures currently outstanding at December 31, 2004 (see Note 10)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MONMOUTH CAPITAL CORPORATION
BY: /s/ Eugene W. Landy
EUGENE W. LANDY
President
BY: /s/ Anna T. Chew
ANNA T. CHEW
Chief Financial Officer
Dated: March 11, 2005
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been duly signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Title
Date
/s/ Eugene W. Landy
EUGENE W. LANDY
President and Director
March 11, 2005
/s/ Anna T. Chew
ANNA T. CHEW
Chief Financial Officer
and Director
March 11, 2005
/s/ Neal Herstik
NEAL HERSTIK
Director
March 11, 2005
/s/ Michael P. Landy
MICHAEL P. LANDY
Executive Vice President
and Director
March 11, 2005
/s/ Robert G. Sampson
ROBERT G. SAMPSON
Director
March 11, 2005
/s/ Eugene Rothenberg
EUGENE ROTHENBERG
Director
March 11, 2005
/s/ Stephen B. Wolgin
STEPHEN B. WOLGIN
Director
March 11, 2005