ITEM 1. BUSINESS
GENERAL
United Capital Corp., incorporated in 1980 in the State of Delaware, currently has three industry segments:
1. Real Estate Investment and Management. 2. Hotel Operations. 3. Engineered Products.
The Company also invests excess available cash in marketable securities and other financial instruments.
DESCRIPTION OF BUSINESS
REAL ESTATE INVESTMENT AND MANAGEMENT
The Company is engaged in the business of investing in and managing real estate properties and the making of high-yield, short-term loans secured by desirable properties. Most real estate properties owned by the Company are leased under net leases whereby the tenants are responsible for all expenses relating to the leased premises, including taxes, utilities, insurance and maintenance. The Company owns properties that it manages which are leased primarily as department stores, shopping centers, restaurants and office buildings around the country. The Company also owns day-care centers located in New York City, which are primarily operated by the City of New York. In addition, the Company owns properties available for sale and lease with the assistance of a consultant or realtor working in the locale of the premises.
The majority of properties are leased to single tenants. As of December 31, 2006, 95.6% of the total square footage of the Company's real estate properties was leased.
HOTEL OPERATIONS
The Company's hotel operations segment consists of three hotels located in the United States. Each are managed through a regional hotel management company with local on-site management responsible for all day-to-day operations of the hotels.
The hotel industry is seasonal in nature. However, the periods during which the Company's properties experience higher or lower levels of demand vary from property to property and depend principally upon location. Two of the Company's hotels are located in the vicinity of airports which, during extreme weather conditions, may be favorably impacted from transient guests.
ENGINEERED PRODUCTS
The Company's engineered products are manufactured through Metex Mfg. Corporation ("Metex") and AFP Transformers, LLC ("AFP Transformers"), wholly-owned subsidiaries of the Company. The knitted wire products and components manufactured by Metex must function in adverse environments and meet rigid performance requirements. The principal areas in which these products have application are as high temperature gaskets, seals, components for use in airbags, shock and vibration isolators, noise reduction elements and air, liquid and solid filtering devices serving the automotive, aerospace and general industrial markets.
Metex has been an original equipment manufacturer for the automobile industry since 1974 and presently supplies many automobile manufacturers with exhaust seals and components for use in exhaust emission control devices. Our manufacturing facilities are ISO/TS 16949 certified, an essential qualification for supplying the automotive industry.
The Company also manufactures transformer products marketed under several brand names, including AFP Transformers, Field Transformer, ISOREG and EPOXYCAST(TM), for a wide variety of industrial and research applications including machine power transformers, rectifier and inverter transformers and transformers for heating.
For the years ended December 31, 2006, sales by the engineered products segment to General Motors and Autoliv, its largest customers, accounted for 15.6% and 10.5% of the segment's sales, respectively. For the years ended December 31, 2005 and 2004, sales by the engineered products segment to General Motors accounted for 17.0% and 18.7% of the segment's sales, respectively. No other customer exceeded 10% of the segment's sales during the last three years.
Approximately 14.2%, 18.0% and 16.6% of 2006, 2005 and 2004 total sales generated from the engineered products segment were to foreign customers. Substantially all assets held by the Company's engineered products segment are located within the United States or its leased warehouse in Tijuana, Mexico.
SUMMARY FINANCIAL INFORMATION
The following table sets forth the revenues, operating income (loss) and identifiable assets of each business segment of the Company.
Year Ended December 31, -------------------------------------- 2006 2005 2004 --------- --------- --------- (In thousands) NET REVENUES AND SALES: Real estate investment and management ..............$ 19,403 $ 17,962 $ 18,448 ========= ========= ========= Hotel operations ...................................$ 8,807 $ 3,944 $ 3,156 ========= ========= ========= Engineered products ................................$ 37,158 $ 38,201 $ 38,335 ========= ========= =========
OPERATING INCOME (LOSS): Real estate investment and management ..............$ 12,025 $ 10,627 $ 10,956 ========= ========= ========= Hotel operations ...................................$ 418 $ 333 $ (216) ========= ========= ========= Engineered products ................................$ 2,784 $ 3,175 $ 4,187 ========= ========= =========
IDENTIFIABLE ASSETS Real estate investment and management and corporate assets ...................................$ 196,685 $ 191,761 $ 197,952 ========= ========= ========= Hotel operations ...................................$ 14,841 $ 13,227 $ 2,572 ========= ========= ========= Engineered products ................................$ 12,074 $ 11,697 $ 12,200 ========= ========= =========
DISTRIBUTION
The Company's manufactured products are distributed by a direct sales force and through distributors to industrial consumers and original equipment manufacturers.
PRODUCT METHODS AND SOURCES OF RAW MATERIALS
The Company's products are manufactured at its own facilities and a leased facility in Mexico. Raw materials used in the Company's engineered products segment, which consist primarily of stainless steel wire and steel-related products, are typically purchased from multiple suppliers throughout the world. The price and availability of raw materials can be volatile due to numerous factors beyond the Company's control, including general domestic and international economic conditions, labor costs, supply and demand, competition, import duties and tariffs and currency exchange rates. Although these factors could significantly affect the availability and cost of the Company's raw materials, they are generally purchased at levels that the Company believes will satisfy the anticipated needs of the Company's customers based upon contractual commitments, historical buying practices and market conditions. To date, the Company has limited their exposure related to the effects that have arisen from these factors by various methods including finding alternate sources or by having suppliers and/or customers absorb any additional related costs. Although management does not expect such matters to adversely effect the Company's financial position in the future, it is uncertain what effect, if any, such factors could have on the cost of such materials. An interruption in the supply, or a significant increase in the cost, of the Company's raw materials could have a material adverse effect on the Company's revenues, results of operations or cash flows. The Company has not had and does not expect to have any problems fulfilling its raw material requirements during 2007.
PATENTS AND TRADEMARKS
The Company owns several patents, patent licenses and trademarks. While the Company considers that in the aggregate its patents, patent licenses and trademarks used in the engineered products operations are significant to this segment, it does not believe that any of them are of such importance that the loss of one or more of them would materially affect its consolidated financial condition or results of operations. The Company is not currently involved in any litigation regarding infringement upon its intellectual property or of the Company's infringement upon the intellectual property of others.
WORKING CAPITAL PRACTICES
The Company believes its practices regarding inventories, receivables or other items of working capital to be typical for the industries involved. There are no special practices or conditions affecting working capital items that are significant to an understanding of the Company's businesses. Its inventory levels, payment terms and return policies are in accordance with general practices associated with the industries in which it operates and standard business procedures.
The cash needs of the Company have been satisfied from funds generated by current operations. It is expected that future operational cash needs will also be satisfied from existing cash balances, marketable securities, ongoing operations or borrowings. The primary source of capital to fund additional real estate acquisitions and to make additional high-yield mortgage loans may come from existing funds, the sale, financing and refinancing of the Company's properties and from third party mortgages and purchase money notes obtained in connection with specific acquisitions. For additional information on working capital, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources," which is incorporated by reference herein.
EMPLOYEES
At March 16, 2007, the Company employed approximately 230 persons, approximately 140 of which are covered by a collective bargaining agreement that expires in February 2011. The Company believes that its relationship with its employees is good.
COMPETITION
The Company has established close relationships with a large number of major national and regional real estate brokers and maintains a broad network of industry contacts. There are numerous regional and local commercial developers, real estate companies, financial institutions and other investors who compete with the Company for the acquisition of properties and tenants.
The Company's hotels compete with national, regional and local hotels in each of their geographic markets. Competition is based on a number of factors, most notably convenience of location, brand affiliation, price, range of services and guest amenities offered, quality of customer service and the overall condition of the property.
The Company competes with at least 20 other companies in the sale of engineered products. The Company emphasizes product performance and service in connection with the sale of these products. The principal competition faced by the Company results from the sales price of the products sold by its competitors.
BACKLOG
The dollar value of unfilled orders of the Company's engineered products segment was approximately $3.1 million and $2.4 million at December 31, 2006 and December 31, 2005, respectively. The increase in backlog is principally due to growth in the Company's transformer product line. It is anticipated that substantially all of the 2006 backlog will be filled in 2007. Substantially all of the 2005 backlog was filled in 2006. The order backlog referred to above does not include any order backlog with respect to sales of knitted wire mesh components for exhaust emission control devices, exhaust seals or airbag components because of the manner in which customer orders are received.
ENVIRONMENTAL REGULATIONS
Federal, state and local requirements regulating the discharge of materials into the environment or otherwise relating to the protection of the environment have had and will continue to have a significant impact upon the operations of the Company. It is the policy of the Company to manage, operate and maintain its facilities in compliance, in all material respects, with applicable standards for the prevention, control and abatement of environmental pollution to prevent damage to the quality of air, land and resources.
The Company has undertaken the completion of environmental studies and/or remedial action at Metex' two New Jersey facilities and has recorded a liability for the estimated investigation, remediation and administrative costs associated therewith.
The process of remediation has begun at one facility pursuant to a plan filed with the New Jersey Department of Environmental Protection ("NJDEP"). Environmental experts engaged by the Company estimate that, under the most probable scenario, the remediation of this site is anticipated to require initial expenditures of $860,000, including the cost of capital equipment, and $86,000 in annual operating and maintenance costs over a 15 year period.
Environmental studies at the second facility indicate that remediation may be necessary. Based upon the facts presently available, environmental experts have advised the Company that, under the most probable remediation scenario, the estimated cost to remediate this site is anticipated to require $2.3 million in initial costs, including capital equipment expenditures, and $258,000 in annual operating and maintenance costs over a 10 year period. These estimated costs of future expenses for remediation obligations are not discounted to their present value. The Company may revise such estimates in the future due to the uncertainty regarding the nature, timing and extent of any remediation efforts that may be required at this site, should an appropriate regulatory agency deem such efforts to be necessary.
The foregoing estimates may also be revised by the Company as new or additional information in these matters becomes available or should the NJDEP or other regulatory agencies require additional or alternative remediation efforts in the future. Although such events are not expected to change these estimates, adverse decisions or events, particularly as to the merits of the Company's factual and legal basis, could cause the Company to change its estimate of liability with respect to such matters in the future. The Company had approximately $9.7 million and $9.9 million recorded in accounts payable and accrued liabilities and other long-term liabilities as of December 31, 2006 and 2005, respectively, to cover such matters.
AVAILABLE INFORMATION
The Company's filings with the Securities and Exchange Commission ("SEC") may be read and copied at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The SEC's Internet address is http://www.sec.gov. The Company's SEC filing number is 1-10104.
A copy of the Company's annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, if any, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, may be obtained as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC without charge by writing to Anthony J. Miceli, Chief Financial Officer and Secretary of the Company, at its executive offices, United Capital Building, 9 Park Place, Great Neck, NY 11021.
ITEM 1A.
ITEM 1A. RISK FACTORS
The following are some of the risks that could cause actual results to differ significantly from those expressed or implied by such statements:
OUR PERFORMANCE IS SUBJECT TO RISKS ASSOCIATED WITH THE REAL ESTATE INDUSTRY.
Although the Company's leases are generally long-term and may be below market, real property investments are subject to varying degrees of risk and are relatively illiquid. Among the factors that may impact our real estate property values or the revenues derived from our portfolio are changes in the national, regional and local economic climate, the attractiveness of our properties to tenants, competition from other available property owners and changes in market rental rates. Our performance also depends on the financial condition of our tenants and our ability to collect rent from tenants and to pay for adequate maintenance, insurance and other operating costs, including real estate taxes, which could increase over time. Also, the expenses of owning and operating a property are not necessarily reduced when circumstances such as market factors and competition cause a reduction in income from the property.
OUR RESULTS COULD BE NEGATIVELY AFFECTED BY DELINQUENCIES IN OUR MORTGAGE OR HIGH-YIELD LOAN RECEIVABLES.
On a limited basis we provide high-yield, short-term mortgage loans that we believe are collateralized by desirable properties at substantial value-to-loan ratios. In addition, we have provided purchase money notes to buyers of certain real estate properties. Although we believe that the collateral for these loans is sufficient to recover its carrying value, changes in the real estate market in the locale in which the property is located or delinquencies by the borrower could negatively affect our carrying value for these loans and, ultimately, our results of operations and cash flows.
OFF-BALANCE SHEET OBLIGATIONS COULD DEPLETE OUR LIQUIDITY AND CAPITAL RESOURCES.
We do not have any off-balance sheet arrangements that we believe are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. The debt of the joint venture in which we currently have an ownership interest is a non-recourse obligation and is collateralized by the entity's real property. We believe that with each arrangement the value of the underlying property and its operating cash flows are sufficient to satisfy its obligations. In addition, we are not obligated for the debts of the joint venture. However, we could decide to satisfy the debts of the joint venture to protect our investment. In such event, our capital resources and financial condition would be reduced and, in certain instances, the carrying value of our investment and our results of operations would be negatively impacted.
OPERATING RESULTS OF OUR HOTEL OPERATIONS ARE SUBJECT TO CONDITIONS COMMON IN THE LODGING INDUSTRY.
Changes in certain factors could adversely impact hotel room demand and pricing and result in reduced occupancy or could otherwise adversely affect our results of operations and financial condition. These factors include:
o local conditions such as an oversupply of, or a reduction in demand for, hotel rooms;
o the attractiveness of our hotels to consumers and competition from other hotels;
o the quality, philosophy and performance of the managers of our hotels;
o increases in operating costs due to inflation and other factors such as increases in the price of energy, healthcare or insurance;
o changes in travel patterns, extreme weather conditions and cancellation of or changes in events scheduled to occur in our markets; and
o other unpredictable external factors, such as acts of god, war, terrorist attacks, epidemics, airline strikes, transportation and fuel price increases and severe weather, may reduce business and leisure travel.
OUR ENGINEERED PRODUCTS SEGMENT RELIES ON SIGNIFICANT CUSTOMERS.
The Company sells its engineered products to many customers throughout the world. Historically, a small number of customers have accounted for significant portions of these sales. For the year ended December 31, 2006, sales by the engineered products segment to General Motors and Autoliv, its largest customers, accounted for 15.6% and 10.5% of the segment's sales, respectively. Since our engineered products segment accounted for 56.8% of our consolidated revenues in 2006, the loss of either of these customers would adversely affect our revenues, cash flows and results of operations.
OUR MARKETS ARE HIGHLY COMPETITIVE.
The markets for our engineered products are highly competitive. We cannot assure that we will be able to successfully compete or that our competitors will not develop new technologies and products that are more commercially effective than our own. Some of our competitors have financial, technical, marketing, sales and distribution resources greater than ours.
AN INTERRUPTION IN THE SUPPLY, OR A SIGNIFICANT INCREASE IN THE COST, OF OUR RAW MATERIALS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR REVENUES, RESULTS OF OPERATIONS AND CASH FLOWS.
The principal raw materials used in the Company's engineered products business are stainless steel wire and steel-related products, which are typically purchased from multiple suppliers throughout the world. The price and availability of raw materials can be volatile due to numerous factors beyond our control, including general domestic and international economic conditions, labor costs, supply and demand, competition, import duties and tariffs and currency exchange rates. These factors could significantly affect the availability and cost of our raw materials which are generally purchased at levels that we believe will satisfy the anticipated needs of our customers based upon contractual commitments, historical buying practices and market conditions. We may be unable to recover raw material cost increases due to contractual or competitive conditions. Conversely, reductions in raw material prices could result in lower sales prices for our products and lower margins as we utilize existing inventories. Therefore, changing raw material costs could significantly impact our revenues, gross margins, operating and net income. If, in the future, we are unable to obtain sufficient amounts of stainless steel wire or other critical raw materials on a timely basis and at competitive prices, we may be unable to fulfill our customers' requirements, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
PROTECTION OF OUR INTELLECTUAL PROPERTY IS LIMITED; WE ARE SUBJECT TO THE RISK OF THIRD PARTY CLAIMS OF INFRINGEMENT.
Our engineered products business relies in large part upon our proprietary scientific and engineering "know-how" and production techniques. Historically, patents have not been an important part of our protection of our intellectual property rights. We rely upon the laws regarding unfair competition, restrictions in licensing agreements and confidentiality agreements to protect our intellectual property. We limit access to and distribution of our proprietary information.
Our ability to compete successfully and achieve future revenue growth will depend, in part, on our ability to protect our proprietary technology and operate without infringing upon the rights of others. We are not currently involved in any litigation regarding the infringement upon our intellectual property or regarding our infringement upon the intellectual property of others.
OUR OPERATIONS ARE SUBJECT TO ENVIRONMENTAL REGULATION AND ENVIRONMENTAL PROBLEMS WHICH ARE POSSIBLE AND CAN BE COSTLY.
Our engineered products segment is subject to a variety of federal, state and local governmental regulations relating to the storage, discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous substances used to manufacture our products. We believe that we are currently in compliance in all material respects with such regulations and that we have obtained all necessary environmental permits to conduct our business. Nevertheless, the failure to comply with current or future regulations could result in the imposition of fines, suspension of production, alteration of our manufacturing processes or cessation of operations.
Federal, state and local laws and regulations relating to the protection of the environment require a current or previous owner or operator of real estate to investigate and clean up hazardous or toxic substances at such property.
We have undertaken the completion of environmental studies and/or remedial action at Metex' two New Jersey facilities and have recorded a liability for the estimated investigation, remediation and administrative costs associated therewith (See "Environmental Regulations" in Item 1 of Part I and Note 17, "Commitments and Contingencies" of Notes to Consolidated Financial Statements).
The Company may revise such estimates in the future due to the uncertainty regarding the nature, timing and extent of any remediation efforts that may be required at these sites, should an appropriate regulatory agency deem such efforts to be necessary. The estimates may also be revised as new or additional information in these matters becomes available or should the NJDEP or other regulatory agencies require additional or alternative remediation efforts in the future. Although we do not expect such events to significantly change our estimates, adverse decisions or events, particularly as to the merits of our factual and legal basis, could cause us to change our estimate of liability with respect to such matters in the future. Accordingly, we are unable to predict whether our estimate of future remediation costs will materially increase in the future.
OUR STOCK PRICE MAY BE VOLATILE.
The market price of our common stock has been volatile in the past and may be volatile in the future. For example, during the twelve months ended December 31, 2006, the closing sales price of our common stock fluctuated between $20.75 and $30.30 per share and subsequent to December 31, 2006 the market price had a high of $35.15 per share.
The stock market has experienced extreme volatility that often has been unrelated to the performance of particular companies. These market fluctuations may cause our stock price to fall regardless of our performance.
MR. A.F. PETROCELLI CAN CONTROL THE OUTCOME OF ALL MATTERS REQUIRING STOCKHOLDER APPROVAL.
As of the date of this Annual Report on Form 10-K, Mr. A.F. Petrocelli, the Company's Chairman, President and Chief Executive Officer, beneficially owns, in the aggregate, approximately 66.6% of the Company's outstanding common stock (exclusive of options). Such amount includes shares held by his wife but does not include shares held by the adult children or grandchildren of Mr. Petrocelli. Accordingly, Mr. Petrocelli is therefore able to exercise considerable influence over the outcome of all matters requiring stockholder approval, including the election of directors and the approval of significant corporate transactions, such as mergers or other business combinations.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2.
ITEM 2. PROPERTIES
REAL PROPERTY HELD FOR RENTAL OR SALE
As of March 16, 2007, the Company owned 155 properties throughout the United States. The properties are primarily leased under long-term net leases. The Company's classification and gross carrying value of its properties, inclusive of those held for sale and classified as discontinued operations in the Company's Consolidated Financial Statements (see Note 2 of Notes to Consolidated Financial Statements), at December 31, 2006 are as follows:
Gross Carrying Number of (Dollars in thousands) Value Percentage Properties -------- --------- ---------- Shopping centers and retail outlets ...... $ 54,779 45.7% 19 Commercial properties .................... 42,019 35.1% 89 Day-care centers ......................... 5,728 4.8% 9 Hotel properties ......................... 12,977 10.8% 3 Other .................................... 4,324 3.6% 38 -------- ----- --- $119,827 100.0% 158 ======== ===== ===
The following summarizes the Company's properties by geographic area at December 31, 2006:
Gross Number Carrying of Value Properties -------- ---------- (Dollars in thousands) Northeast ................................ $ 56,067 96 Southeast ................................ 21,401 20 Midwest .................................. 21,395 24 Southwest ................................ 5,665 5 Pacific Coast ............................ 12,165 6 Pacific Northwest ........................ 861 4 Rocky Mountain ........................... 2,273 3 -------- --- $119,827 158 ======== ===
SHOPPING CENTERS AND RETAIL OUTLETS
Shopping centers and retail outlets include 12 department stores and other properties, primarily leased under net leases. The tenants are responsible for taxes, maintenance and all other expenses of the properties. The leases for certain shopping centers and retail outlets provide for additional rents based on sales volume and renewal options at higher rents. The department stores include eight properties leased to Kmart Corporation ("Kmart") and two Macy's stores, with a total of approximately 747,000 and 364,000 square feet, respectively. The Kmart stores are primarily located in the Midwest region of the United States. The Macy's stores are located in the Pacific Coast and Southwest regions of the United States.
COMMERCIAL PROPERTIES
Commercial properties consist of properties leased as 54 restaurants, 11 Midas Muffler Shops, two convenience stores, seven office buildings and miscellaneous other properties. These properties are primarily leased under net leases, which in certain cases have renewal options at higher rents. Certain of these leases also provide for additional rents based on sales volume. The restaurants, located throughout the United States, include properties leased as McDonald's, Burger King, Dunkin' Donuts, Pizza Hut, Hardee's, Wendy's, Kentucky Fried Chicken and Boston Market.
Included in commercial properties is one miscellaneous other property currently held for sale and classified as discontinued operations in the Consolidated Financial Statements.
DAY-CARE CENTERS
The Company has nine day-care centers located in New York City, eight of which are leased to the City of New York. The City of New York is responsible for real estate taxes and certain maintenance costs on those properties they lease, while the Company maintains insurance and certain other maintenance obligations. All such leases provide for the reimbursement of operating costs above base year levels, and certain leases include rental increases and renewal options.
HOTEL PROPERTIES
The Company's three hotel properties, located in California, Connecticut and Georgia, are each managed through a regional hotel management company with local on-site management responsible for all day-to-day operations of the hotels.
MANUFACTURING FACILITIES
The Company's engineered products are manufactured at 970 New Durham Road, Edison, New Jersey, in a one-story building having approximately 55,000 square feet of floor space, and also in a second facility at 206 Talmadge Road, Edison, New Jersey, which has approximately 55,000 square feet of floor space. The Company owns these facilities together with the sites. Metex also leases a manufacturing facility in Tijuana, Mexico, with approximately 24,000 square feet of floor space.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company currently and from time to time is involved in litigation arising in the ordinary course of its business. The Company does not believe that it is involved in any litigation that is likely, individually or in the aggregate, to have a material adverse effect on its financial condition or results of operations or cash flows.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company's Common Stock, $.10 par value (the "Common Stock"), is traded on the American Stock Exchange under the symbol AFP. The table below shows the high and low sales prices as reported in the composite transactions for the American Stock Exchange.
2006 2005 ------------------ ------------------ High Low High Low ------- ------- ------- -------
FIRST QUARTER ...................... $ 27.13 $ 23.90 $ 26.01 $ 22.26 SECOND QUARTER ..................... $ 26.50 $ 20.75 $ 29.49 $ 21.02 THIRD QUARTER ...................... $ 27.80 $ 25.07 $ 26.24 $ 23.20 FOURTH QUARTER ..................... $ 30.30 $ 25.85 $ 25.69 $ 21.15
As of March 16, 2007, there were approximately 244 record holders of the Company's Common Stock. The closing sales price for the Company's Common Stock on such date was $34.40. The Company has not declared a dividend during the past two years. While the Company does not currently expect to pay additional dividends, the Board of Directors could reevaluate this position in the future.
EQUITY COMPENSATION PLAN INFORMATION
The Company maintains two stock option plans. Both plans provide for the granting of incentive or non-qualified stock options. The Company has no outstanding warrants or rights or plans which provide for the grant or issuance of warrants or rights. The following table gives information about stock option awards under these plans as of December 31, 2006. See Note 9 of Notes to Consolidated Financial Statements for further discussion on these plans.
Number of securities remaining Number of available for securities to future issuance be issued Weighted-average under equity upon exercise exercise compensation of price of plans outstanding outstanding (excluding options, options, securities warrants and warrants reflected in rights and rights column (a)) Plan Category (a) (b) (c) -------------------------------------- ------------- ---------------- --------------- Equity compensation plans approved by security holders ....... 5,299,136 $ 11.61 -- Equity compensation plans not approved by security holders ...... -- -- -- --------- --------- ------ Total ................................ 5,299,136 $ 11.61 -- ========= ========= ======
COMMON STOCK PERFORMANCE
Set forth below is a graph comparing the total shareholder returns (assuming reinvestment of dividends, if any) of the Company, American Stock Exchange ("AMEX") Composite Index and a peer group (the "Peer Group") compiled by the Company consisting of publicly traded companies in industry segments corresponding to those in which the Company competes. The Peer Group, which includes the Company, consists of the following companies: National Retail Properties, Inc. (formerly Commercial Net Lease Realty Inc.), Lexington Realty Trust (formerly Lexington Corp. Properties Trust), Realty Income Corp., One Liberty Properties, Inc., Ramco-Gershenson Properties Trust, DURA Automotive Systems, Inc., Peerless Mfg. Co., Proliance International, Inc., and Lodgian, Inc. Lodgian, Inc., which is not reflected for the period of December 20, 2001 through December 16, 2002 due to bankruptcy proceedings, was added to the Peer Group in the current year as the result of the change in reportable operating segments.
The Peer Group consolidation was completed on a weighted average basis (market capitalization basis, adjusted at the end of each year). The graph assumes $100 invested on December 31, 2001, with all dividends reinvested, in the Company and each of the other indices.
COMPARISON OF 5 YEARS CUMULATIVE TOTAL RETURN [GRAPHIC OMITTED]
Base Period Company Name/index Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 ----------------------------- ---------- ---------- ---------- ---------- ---------- ---------- United Capital Corp. ........ $ 100.00 $ 166.20 $ 203.08 $ 221.99 $ 241.79 $ 289.42 AMEX Composite Index ........ $ 100.00 $ 100.08 $ 144.57 $ 178.46 $ 220.35 $ 262.17 Peer Group .................. $ 100.00 $ 122.77 $ 144.07 $ 176.98 $ 165.36 $ 210.53
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below should be read in conjunction with, and is qualified in its entirety by reference to, the Consolidated Financial Statements and the Notes thereto.
Year Ended December 31, (In thousands, except per share data) ------------------------------------------------------------------------ 2006 2005 2004 2003 2002 -------- -------- -------- -------- -------- Total revenues ............................ $ 65,368 $ 60,107 $ 59,939 $ 55,468 $ 54,361 Income from continuing operations ......... $ 30,051 $ 13,276 $ 25,712 $ 10,611 $ 21,156 Income from continuing operations per share: Basic ....................... $ 3.62 $ 1.49 $ 2.82 $ 1.17 $ 2.31 Dividends paid per share .................. $ -- $ -- $ -- $ 1.00 $ --
Total assets .............................. $223,600 $216,685 $212,724 $189,714 $176,547 Long-term debt, less current portion ................................. $ 11,669 $ 12,140 $ 4,929 $ 7,321 $ 10,235 Total stockholders' equity ................ $179,473 $155,650 $154,069 $124,217 $111,634
Certain reclassifications have been reflected in the above financial data to conform prior years' data to the current classifications, which primarily relate to the reclassification of certain properties to discontinued operations in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). Per share amounts have been retroactively adjusted to reflect the two-for-one stock split in August 2003.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion of the Company's financial condition and results of operations should be read in conjunction with the description of the Company's business and properties contained in Items 1 and 2 of Part I and the Consolidated Financial Statements and Notes thereto, included elsewhere in this report.
RESULTS OF OPERATIONS: 2006 AND 2005
Total revenues increased $5.3 million or 8.8% for the twelve months ended December 31, 2006 to $65.4 million, compared to $60.1 million for the twelve months ended December 31, 2005, primarily due to the acquisition of a hotel in November 2005. Income from continuing operations for the current year was $30.1 million or $3.62 per basic share versus $13.3 million or $1.49 per basic share for the 2005 calendar year. Net income for the year ended December 31, 2006 was $30.6 million or $3.68 per basic share compared to $14.6 million or $1.64 per basic share for the year ended December 31, 2005.
The 2006 results were favorably impacted by the reversal of $17.3 million in long-term and deferred income tax liabilities related to certain tax matters for which the statue of limitations has expired.
The Company's historical results have been significantly affected by the timing of events including the sale of marketable securities and real estate assets, which were dependent upon economic conditions at the time of the sale. The Company is unable to predict if or when such events will recur.
REAL ESTATE OPERATIONS
The Company's real estate operations consist of the real estate investment and management and hotel operations segments. The operating results for these segments are as follows:
Year Ended Year Ended (In thousands) December 31, 2006 December 31, 2005 ------------------------------ ------------------------------ Real Hotel Real Hotel Estate Operations Total Estate Operations Total ------- ---------- ------- ------- ---------- ------- Revenues ........................... $19,403 $ 8,807 $28,210 $17,962 $ 3,944 $21,906 Mortgage interest expense .......................... 268 529 797 373 22 395 Depreciation expense ............... 1,563 782 2,345 1,916 251 2,167 Other operating expenses ......................... 5,547 7,078 12,625 5,046 3,338 8,384 ------- ------- ------- ------- ------- ------- Operating income ................... $12,025 $ 418 $12,443 $10,627 $ 333 $10,960 ======= ======= ======= ======= ======= =======
REAL ESTATE INVESTMENT AND MANAGEMENT
Revenues from the real estate investment and management segment increased $1.4 million or 8.0% to $19.4 million for the year ended December 31, 2006, compared to $18.0 million in 2005. The increase is primarily the result of lease renewals at higher rents ($1.8 million) partially offset by recurring tenant turnover ($1.1 million). In addition, during the first quarter of 2006, the Company recognized additional revenue from a non-recurring transaction ($.5 million). In general, rental revenues from the Company's real estate properties do not fluctuate significantly due to the long-term nature of the Company's leases. However, future rental revenues could be affected by lease renewals, terminations, step-ups and escalations and by the purchase or sale of additional properties.
Mortgage interest expense amounted to $268,000 for the year ended December 31, 2006, a decrease of $105,000 or 28.2%, compared to 2005, as a result of continuing mortgage amortization. At December 31, 2006, the outstanding mortgage balance on the Company's real estate investment properties was reduced to $4.3 million. Mortgage interest expense on existing obligations of the Company's real estate investment and management segment will continue to decline with scheduled principle reductions.
Depreciation expense associated with real properties held for rental decreased $353,000 or 18.4% for the year ended December 31, 2006, compared to 2005. The decrease was primarily attributable to reduced depreciation expense associated with certain properties or improvements becoming fully depreciated in the current and prior year ($592,000), partially offset by depreciation from current year additions ($268,000). Due to the May 2006 purchase of a commercial property and other expenditures for capital improvements incurred during the current year, depreciation expense on the Company's properties should increase in future years.
Other operating expenses associated with the management of real properties increased $501,000 or 9.9% for the year ended December 31, 2006, compared to such expenses incurred in 2005. The increase is primarily related to a property converted from a triple net lease ($372,000) in 2005 and the receipt of non-recurring tenant reimbursements ($107,000) in 2005.
HOTEL OPERATIONS
The hotel operations segment consists of three hotels. The Company acquired a hotel in November 2005, located in Windsor Locks, Connecticut (the "Connecticut Hotel"). The increases in hotel operating revenues and related mortgage interest, depreciation and other operating expenses for the year ended December 31, 2006, compared to the year ended December 31, 2005 are primarily the result of the acquisition of the Connecticut Hotel. Mortgage interest expense for the year ended December 31, 2006 amounted to $529,000 which is related to the Connecticut Hotel mortgage. At December 31, 2006, the outstanding mortgage balance was $7.9 million. Future hotel operating revenues and expenses will vary based on demand and desirability of these properties compared to others in their immediate proximity and may be influenced by local and other economic conditions, including the room rate of the hotels.
ENGINEERED PRODUCTS
The Company's engineered products segment includes Metex and AFP Transformers. The operating results of the engineered products segment are as follows:
Year Ended December 31, (In thousands) ------------------------ 2006 2005 --------- ---------- Net sales ....................................... $37,158 $38,201 Cost of sales ................................... 27,522 28,003 Selling, general and administrative expenses .... 6,852 7,023 ------- ------- Operating income ................................ $ 2,784 $ 3,175 ======= =======
Net sales of the engineered products segment decreased 2.7% for the year ended December 31, 2006 to $37.2 million from $38.2 million for the year ended December 31, 2005. This is primarily due to decreased demand in the Company's automotive product line which is a result of continued softening of sales in the automotive industry, as well as competitive price pressures, offset by an increase in the Company's transformer product line. Although management believes that sales of its engineered products segment are directly influenced by general economic conditions, worldwide automotive demand and industrial capital spending, future sales of this segment could also be affected by changes in technology, competitive forces or challenges to its intellectual property.
Cost of sales as a percentage of sales increased less than 1% for the year ended December 31, 2006, compared to 2005, primarily related to an increase in the cost of raw materials, principally copper components, which, where possible, have been passed along to customers. In addition, the mix of products sold, discussed above, also contributed to the increase. Continued increases in the price of raw materials could effect the gross margin and operating profit of the engineered products segment.
Selling, general and administrative expenses of the engineered products segment decreased $171,000 or 2.4% for the year ended December 31, 2006, compared to 2005. The decrease is primarily due to decreases in travel and related expenses ($88,000) and professional fees ($54,000).
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses not associated with the manufacturing operations increased $1.2 million or 41.4% for the year ended December 31, 2006, compared to such expenses incurred in 2005. This increase primarily relates to compensation expense associated with unvested stock options resulting from the adoption of SFAS No. 123R effective January 1, 2006 ($807,000) (see Note 1 of Notes to Consolidated Financial Statements), an increase in compensation and benefits ($115,000) and a non-recurring transaction ($89,000) in 2005. As of December 31, 2006, there were no unrecognized compensation costs relating to share-based payments.
OTHER INCOME AND EXPENSE, NET
Other income and expense, net was $2.0 million in 2006 as compared to $5.6 million in 2005. The decrease is primarily due to gains in 2005 on the sale of the Company's interest in a joint venture which owns and operates a hotel located in Quebec, Canada ($626,000) as well as the sale by a joint venture which owned and operated a hotel located in New Jersey of its underlying assets ($3,327,000).
INCOME TAXES
The effective tax rate from continuing operations for the year ended December 31, 2006 was favorably impacted by the reversal of $17.3 million in long-term and deferred income tax liabilities related to certain tax matters for which the statue of limitations has expired. Excluding this reversal, the effective tax rate from continuing operations for the years ended December 31, 2006 and 2005 was 35.3% and 36.9%, respectively.
DISCONTINUED OPERATIONS
Loss from operations on properties sold or held for sale and accounted for as discontinued operations was $39,000, on a net of tax basis, for the year ended December 31, 2006. Income from operations on properties sold or held for sale and accounted for as discontinued operations was $22,000, on a net of tax basis, for the year ended December 31, 2005. Prior year amounts have been reclassified to reflect results of operations of real properties held for sale as of December 31, 2006, or disposed of during 2006 and 2005, as discontinued operations.
During 2006, the Company divested itself of two properties which had a net book value of $936,000. The aggregate proceeds from these transactions were $1,849,000 resulting in a gain of $548,000, on a net of tax basis.
During 2005, the Company divested itself of four properties which had a net book value of $1.0 million. The aggregate proceeds from these transactions were $3.2 million, resulting in a gain of $1.3 million, on a net of tax basis.
RESULTS OF OPERATIONS: 2005 AND 2004
Total revenues for the year ended December 31, 2005 were $60.1 million, generating income from continuing operations and net income of $13.3 million and $14.6 million, respectively. For the year ended December 31, 2004, total revenues were $60.0 million, generating income from continuing operations and net income of $25.7 million and $37.4 million, respectively. The Company recognized $4.6 million of interest and dividend income during 2005, an increase of $2.4 million or 115.6% over 2004, primarily as the result of higher interest rates and the increased investment in dividend paying securities.
The 2004 results include $19.4 million in gains on the sale of available-for-sale securities and $10.1 million in gains on the sale of real estate, on a net of tax basis, above those recognized in 2005. In addition, the 2004 results include the tax benefit from several charitable donations of real estate made by the Company during that year.
REAL ESTATE OPERATIONS
The Company's real estate operations consist of the real estate investment and management and hotel operations segments. The operating results for these segments are as follows:
Year Ended Year Ended (In Thousands) December 31, 2005 December 31, 2004 ------------------------------- ------------------------------- Real Hotel Real Hotel Estate Operations Total Estate Operations Total ------- ---------- -------- ------- ---------- -------- Revenues ................... $17,962 $ 3,944 $21,906 $18,448 $ 3,156 $21,604 Mortgage interest expense .................. 373 22 395 572 -- 572 Depreciation expense ....... 1,916 251 2,167 2,558 467 3,025 Other operating expenses ................. 5,046 3,338 8,384 4,362 2,905 7,267 ------- ------- ------- ------- ------- ------- Operating income ........... $10,627 $ 333 $10,960 $10,956 $ (216) $10,740 ======= ======= ======= ======= ======= =======
REAL ESTATE INVESTMENT AND MANAGEMENT
Revenues from the real estate investment and management segment decreased $486,000 or 2.6% to $18.0 million for the year ended December 31, 2005, compared to $18.4 million in 2004, primarily the result of a reduction in rental revenues resulting from certain mid-year vacancies in the Company's portfolio during 2005 ($353,000).
Mortgage interest expense continued to decrease as a result of continuing mortgage amortization. Such expense totaled $373,000 for the year ended December 31, 2005, compared to $572,000 for 2004, a decline of $199,000 or 34.8%.
Depreciation expense associated with real properties held for rental decreased $642,000 or 25.1% for the year ended December 31, 2005, compared to 2004. The decrease is primarily attributable to reduced depreciation expense associated with certain properties or improvements becoming fully depreciated in 2005 and 2004 ($779,000), partially offset by depreciation from 2005 additions ($100,000).
Other operating expenses associated with the management of real properties increased $684,000 or 15.7% for the year ended December 31, 2005, compared to such expenses incurred in 2004. This increase is primarily the result of real estate tax expense ($337,000), property maintenance ($233,000) and compensation expense ($214,000).
HOTEL OPERATIONS
Hotel operating revenues increased $788,000 or 25.0% to $3.9 million for the year ended December 31, 2005, compared to $3.2 million in 2004, primarily as the result of improved lodging demand due to a stronger U.S. economy and the acquisition of the Connecticut Hotel. Total operating expenses of the Company's hotel segment increased $239,000 or 7.1% to $3.6 million in 2005, compared to $3.4 million in 2004, primarily due to the acquisition of the Connecticut Hotel.
ENGINEERED PRODUCTS
The Company's engineered products segment includes Metex and AFP Transformers. The operating results of the engineered products segment are as follows:
(In thousands) Year Ended December 31, ----------------------- 2005 2004 ------- ------- Net sales ........................................ $38,201 $38,335 Cost of sales .................................... 28,003 27,026 Selling, general and administrative expenses ..... 7,023 7,122 ------- ------- Operating income ................................. $ 3,175 $ 4,187 ======= =======
Net sales of the engineered products segment decreased slightly for the year ended December 31, 2005 to $38.2 million from $38.3 million for the year ended December 31, 2004. This is primarily due to decreased demand in the Company's
engineered and automotive product lines, partially offset by an increase in transformer products, which occurred in the first half of 2005. The decrease in the automotive product line is primarily a result of a softening of sales in the automotive industry.
Cost of sales as a percentage of sales increased 2.8% for the year ended December 31, 2005, compared to 2004, primarily related to the shift in segment sales, as noted above, and increases in the cost of raw materials, primarily steel components. In addition, the Company incurred rework and nonconformance costs associated with a new product line, primarily during the first six months of 2005.
Selling, general and administrative expenses of the engineered products segment remained relatively consistent, decreasing $99,000 or 1.4% for the year ended December 31, 2005, compared to 2004. The decrease was primarily due to decreases in payroll and payroll related expenses ($190,000) and freight costs ($182,000), partially offset by an increase in professional fees ($253,000).
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses not associated with the manufacturing operations increased $185,000 or 6.8% for the year ended December 31, 2005, compared to such expenses incurred in 2004, primarily attributable to an increase in travel expenses ($369,000) partially offset by a non-recurring transaction ($89,000) in 2005.
OTHER INCOME AND EXPENSE, NET
Other income and expense, net decreased $16.8 million from $22.4 million in 2004 to $5.6 million in 2005. The decrease is primarily due to the 2004 sale of the Company's interest in Prime Hospitality Corp. which resulted in a gain of $19.0 million in that year and is partially offset by gains on the sale of the Company's interest in a joint venture which owns and operates a hotel located in Quebec, Canada ($626,000) as well as the sale by a joint venture which owned and operated a hotel located in New Jersey of its underlying assets in 2005 ($3,327,000).
INCOME TAXES
The effective tax rate from continuing operations for the year ended December 31, 2004 reflects the benefits of the donation of certain properties to qualified charitable organizations in that year.
DISCONTINUED OPERATIONS
Income from operations on properties sold or held for sale and accounted for as discontinued operations was $22,000, on a net of tax basis, for the year ended December 31, 2005, versus $282,000 for 2004. Prior year amounts have been reclassified to reflect results of operations of real properties held for sale as of December 31, 2006, or disposed of during 2006 and 2005, as discontinued operations.
During 2005, the Company divested itself of four properties which had a net book value of $1.0 million. The aggregate proceeds from these transactions were $3.2 million, resulting in a gain of $1.3 million, on a net of tax basis.
During 2004, the Company divested itself of ten properties which had a net book value of $6.2 million. The cash proceeds from these transactions were $24.3 million. In addition, the Company received an $800,000 purchase money mortgage in connection with the sale of one of these properties. Two of the properties disposed of were contributed to charitable organizations. Net gains on the disposal of real estate assets accounted for as discontinued operations were $11.4 million, on a net of tax basis, for the year ended December 31, 2004.
LIQUIDITY AND CAPITAL RESOURCES
The Company experienced a net cash inflow from operations of approximately $15.1 million, $4.9 million and $.3 million for the years ended December 31, 2006, 2005 and 2004, respectively. The $10.2 million increase in operating cash flows from 2005 to 2006 principally results from a decrease in notes and accounts receivables, net ($2.8 million) and increases in income taxes payable ($2.5 million), interest and dividend income ($1.9 million) and accounts payable and accrued liabilities ($1.1 million).
Cash flows provided by operating activities in 2005 exceeded 2004 by $ 4.6 million. Additional interest and dividend income of $2.4 million earned in 2005 is the primary cause of this increase. The increase in interest rates and the Company's increased holdings in dividend paying securities resulted in a 115% increase in interest and dividend income over that earned in 2004. Changes in operating assets and liabilities during 2005 consumed $5.4 million in cash. The most significant of which were income taxes ($2.7 million) and notes and accounts receivable ($1.8 million). The latter of which was caused by the delay in the receipt of a portion of the proceeds in connection with the sale of the Company's interest in a joint venture which owns and operates a hotel located in Quebec, Canada, which was received in early 2006.
Net cash used in investing activities was $25.2 million for 2006 versus net cash provided by investing activities of $23.4 million in 2005. This change primarily results from the timing of the purchase or sale of available for sale securities ($26.4 million), lower distributions from joint ventures ($15.6 million) which included sale proceeds and distributions related to the Company's interest in certain hotel ventures, and the acquisition of/additions to real estate assets ($7.2 million) which included the May 2006 purchase of a commercial property located in Long Island City, New York for approximately $8.5 million.
Net cash provided by investing activities in 2005 was lower than that of 2004 by $5.5 million. The timing of certain events is the primary cause of this fluctuation. Proceeds from the sale of real estate assets were $21.1 million lower in 2005 while cash used for the acquisition of real estate and other fixed assets was $5.6 million higher in 2005 than the respective amounts in 2004, including those accounted for as discontinued operations. The increase in acquisition costs includes the purchase of the Connecticut Hotel in November 2005, net of the related mortgage. Offsetting these reductions in 2005 cash flows from investing activities are $15.4 million less in sale proceeds and distributions related to the Company's interest in certain joint ventures and $6.6 million in additional net proceeds from the available-for-sale security transactions in 2005 versus the respective amounts in 2004.
During November 2005, the Company acquired the Connecticut Hotel for approximately $10.2 million, including $3.0 million which was allocated to furniture, fixtures and equipment. The purchase was partially financed by an $8.0 million mortgage which bears interest at 6.7% per annum, is payable monthly based on a 25 year amortization and matures in December 2015. The total cost of the acquisition, less the proceeds of the mortgage, is reflected in acquisition of/additions to real estate assets in the Consolidated Statements of Cash Flows for 2005.
Net cash used in financing activities was approximately $12.8 million, $13.4 million and $3.6 million during 2006, 2005 and 2004, respectively. The 2006 amount is primarily attributable to the January 2006 purchase and retirement of 544,000 shares of common stock for an aggregate price of $13.3 million or $24.50 per share related to a "Dutch Auction" self-tender offer. In addition, the Company used cash for the purchase and retirement of an additional $.3 million and $10.0 million of the Company's Common Stock during 2006 and 2005, respectively. The Company also used $.7 million, $3.6 million and $3.9 million of cash for principal payments on mortgage obligations, including those associated with discontinued operations, during 2006, 2005 and 2004, respectively. These uses of cash were offset by proceeds from the exercises of stock options during 2006, 2005 and 2004 of $.8 million, $.2 million and $.3 million, respectively, and from tax benefits related to the exercise of stock options of $.7 million during 2006.
Previous purchases of the Company's Common Stock have reduced the Company's additional paid-in capital to zero and have also reduced retained earnings by amounts in excess of par value. Any future purchases in excess of par value will also reduce retained earnings. Repurchases of the Company's Common Stock may be made from time to time in the open market at prevailing market prices and may be made in privately negotiated transactions, subject to available resources. Future proceeds from the issuance of Common Stock in excess of par value will be credited to retained earnings until such time that previously recorded reductions have been recovered.
At December 31, 2006, the Company's cash and marketable securities were $139.6 million and working capital was $140.2 million, compared to cash and marketable securities of $140.0 million and working capital of $142.4 million at December 31, 2005. Management continues to believe that the real estate market is overvalued and accordingly acquisitions have been limited to those select properties that meet the Company's stringent financial requirements. Management believes that the available working capital puts the Company in an opportune position to fund acquisitions and grow the portfolio, if and when attractive long-term opportunities become available.
The equity method of accounting is used for investments in 20% to 50% owned joint ventures in which the Company has the ability to exercise significant influence, but not control. These investments are recorded initially at cost and subsequently adjusted for equity in earnings and cash contributions and distributions. The debt of the joint venture in which the Company currently has an ownership interest is a non-recourse obligation and is collateralized by the entity's real property. The Company believes that the value of the underlying property and its operating cash flows are sufficient to satisfy its obligations. The Company is not obligated for the debts of the joint venture, but could decide to satisfy them in order to protect its investment. In such event, the Company's capital resources and financial condition would be reduced and, in certain instances, the carrying value of the Company's investment and its results of operations would be negatively impacted.
The cash needs of the Company have been satisfied from funds generated by current operations. It is expected that future operational cash needs will also be satisfied from existing cash balances, marketable securities, ongoing operations or borrowings. The primary source of capital to fund additional real estate acquisitions and to make additional high-yield mortgage loans may come from existing funds, the sale, financing and refinancing of the Company's properties and from third party mortgages and purchase money notes obtained in connection with specific acquisitions.
In addition to the acquisition of properties for consideration consisting of cash and mortgage financing proceeds, the Company may acquire real properties in exchange for the issuance of the Company's equity securities. The Company may also finance acquisitions of other companies in the future with borrowings from institutional lenders and/or the public or private offerings of debt or equity securities. The Company currently has no agreements, commitments or understandings with respect to the acquisition of other companies or the acquisition of real properties in exchange for equity or debt securities.
Funds of the Company in excess of those needed for working capital, purchasing real estate and arranging financing for real estate acquisitions are invested by the Company in corporate equity securities, corporate notes, certificates of deposit, government securities and other financial instruments. Changes in U.S. interest rates affect the interest earned on the Company's cash and cash equivalent balances and other interest bearing investments. Given the level of cash and other interest bearing investments held by the Company and the increase in U.S. interest rates, the Company's earnings have been favorably impacted.
In strategies designed to hedge overall market risk, the Company may sell common stock short or participate in put and/or call options. These instruments do not qualify for hedge accounting and therefore changes in such derivatives' fair value are recognized in earnings. These derivatives are recorded as a component of accounts payable and accrued liabilities in the Consolidated Balance Sheets.
The Company sells its engineered products to many customers throughout the world. Historically, a small number of customers have accounted for significant portions of these sales. For the year ended December 31, 2006, sales by the engineered products segment to General Motors and Autoliv, its largest customers, accounted for 15.6% and 10.5% of the segment's sales, respectively. Since our engineered products segment accounted for 56.8% of our consolidated revenues in 2006, the loss of either of these customers would adversely affect the Company's revenues, cash flows and results of operations.
The Company manufactures its products in the United States and Mexico and sells its products in those markets as well as in Europe, South America and Asia. As a result, the Company's operating results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which the Company distributes its products. Most of the Company's sales are denominated in U.S. dollars. For the years ended December 31, 2006, 2005 and 2004, 5.9%, 7.5% and 9.5% of the net sales of the Company's engineered products segment were denominated in Euros, respectively. As such, a portion of the Company's receivables are exposed to fluctuations with the U.S. dollar. However, the Company does not believe this risk to be material to its overall financial position. Since the Euro has historically been relatively stable in relation to the U.S. dollar, the Company's results have not been significantly impacted by foreign exchange gains or losses in the past. Accordingly, the Company has not entered into forward exchange contracts to hedge this exposure. If such exposure were to increase in the future, the Company may reexamine this practice to minimize the associated risks.
The Company has undertaken the completion of environmental studies and/or remedial action at Metex' two New Jersey facilities and has recorded a liability for the estimated investigation, remediation and administrative costs associated
therewith. See "Environmental Regulations" in Item 1 of Part I and Note 17, "Commitments and Contingencies" of Notes to Consolidated Financial Statements for further discussion on this matter.
The Company is subject to various other litigation, legal, regulatory and tax matters that arise in the ordinary course of business activities. When management believes it is probable that liabilities have been incurred and such amounts are reasonably estimable, the Company provides for amounts that include judgments and penalties that may be assessed. These liabilities are usually included in accounts payable and accrued liabilities or other long-term liabilities in the Consolidated Financial Statements, depending on the anticipated payment date. During 2006, the Company reversed $17.3 million in long-term and deferred income tax liabilities relating to certain tax matters for which the statue of limitations has expired. None of the remaining matters are expected to result in a material adverse effect on the Company's consolidated financial position or results of operations.
CONTRACTUAL OBLIGATIONS, COMMITMENTS AND CONTINGENCIES
The following table summarizes the Company's contractual cash obligations and other commitments at December 31, 2006:
(In Thousands) Payments Due by Period ----------------------------------------------- Less Than 1-3 4-5 After Contractual Obligations 1 Year Years Years 5 Years Total --------------------------------------- ------- ------- ------- ------- ------- Long-term debt (1) .................... $ 471 $ 2,688 $ 872 $ 8,109 $12,140 Interest on long-term debt (1) ........ 768 1,387 1,133 1,912 5,200 Operating leases (2) .................. 576 942 255 1,636 3,409 Employment contract (3) ............... 800 -- -- -- 800 Estimated environmental related costs (3) ........................... 250 1,146 372 7,923 9,691 ------- ------- ------- ------- ------- Total contractual cash obligations .... $ 2,865 $ 6,163 $ 2,632 $19,580 $31,240 ======= ======= ======= ======= =======
(1) See Note 7 of Notes to Consolidated Financial Statements. (2) See Note 16 of Notes to Consolidated Financial Statements. (3) See Note 17 of Notes to Consolidated Financial Statements.
RELATED PARTY TRANSACTIONS
The Company has a 50% interest in an unconsolidated limited liability corporation, whose principal assets are two distribution centers leased to Kmart. A group that includes the wife of the Company's Board Chairman, two Directors of the Company and the wife of one of the Directors has an 8% interest in this entity. The Company's share of income arising from this investment, accounted for as a leveraged lease, was $279,000, $357,000 and $428,000 for the years ended December 31, 2006, 2005 and 2004, respectively.
CRITICAL ACCOUNTING POLICIES AND MANAGEMENT ESTIMATES
The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires management to use judgment in making estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Certain of the estimates and assumptions required to be made relate to matters that are inherently uncertain as they pertain to future events. While management believes that the estimates and assumptions used were the most appropriate, actual results could differ significantly from those estimates under different assumptions and conditions. The following is a description of those accounting policies believed by management to require subjective and complex judgments which could potentially affect reported results.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE - REAL ESTATE INVESTMENT AND MANAGEMENT
The Company leases substantially all of its properties to tenants under net leases which are accounted for as operating leases. Under this type of lease, the tenant is obligated to pay all operating costs of the property including real estate taxes, insurance and repairs and maintenance. Revenue is recognized as earned and deemed collectible. The effect of stepped-rent increases on significant leases are recorded, net of allowances, on a straight-line basis.
Gains on sales of real estate assets and equity investments are recorded when the gain recognition criteria under generally accepted accounting principles in the United States of America have been met.
The Company does not have leases that include significant rent concessions or provisions that require the lessee to fund capital improvements or to pay the lessor any revenues based upon indexes or rates that are not explicitly stated in the lease.
Reimbursements of certain costs received from tenants are recognized as tenant reimbursement revenues.
Certain lease agreements provide for additional rent based on a percentage of tenants' sales. These percentage rents are recorded once the required sales levels are achieved.
Income on leveraged leases is recognized by a method that produces a constant rate of return on the outstanding investment in the lease, net of the related deferred tax liability, in the years in which the net investment is positive.
Accounts receivable are recorded at the outstanding amounts, net of allowances for doubtful accounts. The Company makes estimates of the uncollectibility of its accounts receivable related to base rents, tenant escalations, expense reimbursements and other revenues. The Company analyzes accounts receivable, historical bad debt levels, customer credit worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. In addition, tenants in bankruptcy are analyzed and estimates are made in connection with the expected recovery of pre-petition and post-petition claims. The Company's net income is directly affected by management's estimate of the collectibility of accounts receivable.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE - HOTEL OPERATIONS
Revenues from the Company's hotel operations are generally recognized when earned. Hotel revenues primarily represent room rental and food and beverage sales and are recognized at the time of the hotel stay or sale of restaurant services.
Accounts receivable are recorded at the outstanding amounts, net of allowances for doubtful accounts. The Company determines the allowance for doubtful accounts based on an assessment of the collectibility of specific customer accounts which include the length of time the receivables are past due, the financial health of the customer and historical experience. The Company's net income is directly affected by management's assessment of the collectibility of accounts receivable.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE - ENGINEERED PRODUCTS
In general, sales are recorded when products are shipped, title has passed and collection is reasonably assured. Management believes that adequate controls are in place to ensure compliance with contractual product specifications, a substantial history of such performance has been established and historical returns and allowances have not been significant. If actual sales returns and allowances exceed historical amounts, the Company's sales would be adversely affected.
Accounts receivable are recorded at the outstanding amounts, net of allowances for doubtful accounts. Estimates are used in determining the Company's allowance for doubtful accounts based on historical collections experience, current economic trends and a percentage of its accounts receivable by aging category. In determining these percentages, the Company looks at historical write-offs of its receivables. The Company also looks at the credit quality of its customer base as well as changes in its credit policies. The Company continuously monitors collections and payments from its customers. While credit losses have historically been within expectations and the provisions established, the Company cannot guarantee that it will continue to experience the same credit loss rates that it has in the past. The Company's net income is directly affected by management's estimate of the collectibility of accounts receivable.
MARKETABLE SECURITIES
The Company determines the appropriate classification of marketable securities at the time of purchase and reassesses the appropriateness of such classification at each reporting date. At December 31, 2006 and 2005, all marketable securities held by the Company have been classified as available-for-sale and, as a result, are stated at fair value, based on quoted
market prices. Unrealized gains and losses on available-for-sale securities are recorded as a separate component of stockholders' equity. Realized gains and losses on the sale of securities, as determined on a first-in, first-out basis, are included in the Consolidated Statements of Income.
The Company reviews its investments on a regular basis to evaluate whether or not each security has experienced an other-than-temporary decline in fair value. If it is believed that an other-than-temporary decline exists, the Company will write down the investment to market value and record the related write-down as a loss in the Consolidated Statements of Income.
The Company's net income is directly affected by management's classification of marketable securities, as well as its determination of whether an other-than-temporary decline in the value of its investments exists.
INVENTORIES
The Company values inventory at the lower of cost or market, cost being determined on a first-in, first-out basis. The Company regularly reviews inventory quantities on hand and records a provision for excess and obsolete inventory based primarily on existing and anticipated design and engineering changes to its products as well as forecasts of future product demand. The Company's net income is directly affected by management's estimate of the realizability of inventories.
REAL ESTATE
Land, buildings and improvements and equipment are recorded at cost, less accumulated depreciation and amortization. Expenditures for maintenance and repairs are charged to operations as incurred. Significant renovations and replacements, which improve the life of the asset, are capitalized and depreciated over their estimated useful lives.
Depreciation is computed utilizing the straight-line method over the estimated useful lives of 18 to 39 years for buildings, seven to 39 years for renovations and improvements and five to 15 years for equipment and fixtures.
Assets held for sale are reported at the lower of the carrying amount or fair value less costs to sell and depreciation is discontinued. Property sales or dispositions are recorded when title transfers. Upon disposition, the related costs and accumulated depreciation are removed from the respective accounts. Any gain or loss on sale or disposition is recognized in accordance with accounting principles generally accepted in the United States of America. In the normal course of business, the Company receives offers for the sale of properties, either solicited or unsolicited. For those offers that are accepted, the prospective buyer usually requires a due diligence period before consummation of the transaction. It is not unusual for matters to arise that result in the withdrawal or rejection of the offer during this process. If circumstances arise that previously were considered unlikely and, as a result, management decides not to sell a property classified as held for sale, the property is reclassified as held for rental. A property that is reclassified is measured and recorded individually at the lower of its carrying amount before being classified as held for sale, adjusted for any depreciation expense that would have been recognized had the property been continuously classified as held for rental or its fair market value at the date of the subsequent decision not to sell.
The Company is required to make subjective assessments as to the useful lives of its properties for purposes of determining the amount of depreciation to reflect on an annual basis with respect to those properties. These assessments have a direct impact on the Company's net income. Should the Company adjust the expected useful life of a particular asset, it would be depreciated over the adjusted years, and result in a revised depreciation expense and net income.
DISCONTINUED OPERATIONS
The Company is required to make certain subjective assessments utilizing the provisions of SFAS No. 144 in determining whether a long-lived asset to be disposed of should be reclassified as discontinued operations. The Company considers real property to be held for sale and reported as discontinued operations if management commits to a plan to sell the asset under usual and customary terms and believes such sale will be completed within one year. In such event, the financial results associated with these assets are reclassified as discontinued operations for all periods presented. Although operating income, income from continuing operations and income from discontinued operations are directly affected by management's assessments, the reclassification has no impact on net income.
LONG-LIVED ASSETS
On a periodic basis, management assesses whether there are any indicators that the value of its long-lived assets may be impaired. An asset's value is considered impaired only if management's estimate of current and projected operating cash flows (undiscounted and without interest charges) of the asset over its remaining useful life is less than the net carrying value of the asset. Such cash flow projections consider factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other factors. To the extent impairment has occurred, the carrying amount of the asset would be written down to an amount to reflect the fair value of the asset.
The Company is required to make subjective assessments as to whether there are impairments in the value of its long-lived assets and other investments. The Company's net income is directly affected by management's estimate of impairments. In determining impairment, if any, the Company has adopted SFAS No. 144.
PENSION PLAN
Pension plans can be a significant cost of doing business, but represent obligations that will ultimately be settled far in the future and therefore are subject to estimates. Pension accounting is intended to reflect the recognition of future benefit costs over the employee's approximate service period based on the terms of the plan and the investment and funding decisions made by the Company. The Company is required to make assumptions regarding such variables as the expected long-term rate of return on assets and the discount rate applied to determine service cost and interest cost to arrive at pension income or expense for the year. These assumptions are used in actuarial calculations to estimate pension costs as well as pension assets or liabilities included in the Company's Consolidated Financial Statements. While the Company believes that the assumptions used are appropriate, significant differences in actual experience or significant changes in assumptions would affect the Company's pension costs and obligations.
The Company has assumed the expected long-term rate of return on plan assets to be 8% in each of the last three years. Based on the Company's existing and forecasted asset allocation and related long-term investment performance results, the Company believes that its assumption of future returns of 8% is reasonable. The assumed long-term rate of return on assets is applied to a calculated value of plan assets, which recognizes changes in the fair value of plan assets in a systematic manner. This produces the expected return on plan assets that is included in net periodic pension income (expense). The difference between this expected return and the actual return on plan assets is deferred. The net deferral of past asset gains (losses) affects the calculated value of plan assets and, ultimately, future net periodic pension income (expense). A 100 basis point change in the expected long-term rate of return on plan assets would have changed fiscal 2006 net periodic pension expense by $88,000.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk generally represents the risk of loss that may result from the potential change in the value of a financial instrument as a result of fluctuations in interest and currency exchange rates and in equity and commodity prices. Derivative financial instruments are used by the Company principally in the hedging of overall market risks and the management of its interest rate exposure.
The primary objective of the Company's investment activities is to preserve principal and maximize yields without significantly increasing market risk. To achieve this, management maintains a portfolio of cash equivalents and investments in a variety of securities, primarily U.S. investments in both common and preferred equity issues.
Funds of the Company in excess of those needed for working capital, purchasing real estate and arranging financing for real estate acquisitions are invested by the Company in corporate equity securities, corporate notes, certificates of deposit, government securities and other financial instruments. Changes in U.S. interest rates affect the interest earned on the Company's cash and cash equivalent balances and other interest bearing investments. Given the level of cash and other interest bearing investments held by the Company and the increase in U.S. interest rates, the Company's earnings have been favorably impacted.
The Company's marketable securities consist of U.S. investments in both common and preferred equity issues and are subject to the fluctuations in U.S. stock markets. Most of the Company's mortgages payable are fixed rate and self-amortizing from the net cash flow of the underlying properties. The Company's derivative instruments primarily consist of put and/or call options. Such derivatives are subject to the fluctuations in U.S. stock markets.
The Company manufactures its products in the United States and Mexico and sells its products in those markets as well as in Europe, South America and Asia. As a result, the Company's operating results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which the Company distributes its products. Most of the Company's sales are denominated in U.S. dollars. For the years ended December 31, 2006, 2005 and 2004, 5.9%, 7.5% and 9.5% of the net sales of the Company's engineered products segment were denominated in Euros, respectively. As such, a portion of the Company's receivables are exposed to fluctuations with the U.S. dollar. However, the Company does not believe this risk to be material to its overall financial position. Since the Euro has historically been relatively stable in relation to the U.S. dollar, the Company's results have not been significantly impacted by foreign exchange gains or losses in the past. Accordingly, the Company has not entered into forward exchange contracts to hedge this exposure. If such exposure were to increase in the future, the Company may reexamine this practice to minimize the associated risks.
The Company's manufacturing operations utilize various metal commodities (principally stainless steel) in the manufacturing process. While key metals purchased from foreign entities are generally denominated in U.S. dollars, fluctuations in the suppliers' local currencies may impact pricing. The Company is unable to quantify the effects of such fluctuations; however, it does enter into purchase commitments for certain key metals that generally do not exceed twelve months which tends to minimize short-term currency fluctuations. The Company's financial results, however, could be significantly affected by fluctuations in metals pricing.
The following is a tabular presentation of quantitative market risks at December 31, 2006:
Principal (Notional) Amount by Expected Maturity ------------------------------------------------------------------------------------- Fair There- Value (Dollars in Thousands) 2007 2008 2009 2010 2011 After Total 12/31/06 --------- ------- -------- ------- ------- -------- ------- -------- ASSETS Available-for-sale securities ................ $ 62,917 $ -- $-- $-- $-- $ -- $62,917 $62,917 Notes receivable ............ $ 836 $ 725 $ 84 $ 88 $ 91 $ 706 $ 2,530 $ 2,763 Average interest rates ...... 12.6% 10.8% 10.2% 10.9% 11.7% 13.0% LIABILITIES Long-term debt, including current portion Fixed rate ............... $ 471 $ 518 $ 2,170 $ 455 $ 417 $ 8,109 $12,140 $11,142 Average interest rate .... 6.4% 6.4% 6.5% 6.6% 6.6% 6.6%
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1 of Notes to Consolidated Financial Statements for a full description of recent accounting pronouncements including the respective dates of adoption and effects on results of operations and financial condition.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary information filed as part of this Item 8 are listed under Item 15, "Exhibits and Financial Statement Schedules" and are contained in this Form 10-K, beginning on page 28.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) and 15d-15(e). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic reports. There have been no significant changes in the Company's internal controls over financial reporting or in other factors that could significantly affect these controls subsequent to the date of their evaluation.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
The salary of A.F. Petrocelli, the Company's Chairman, President and Chief Executive Officer, is set forth in his employment agreement, as amended from time to time by the Company's Compensation and Stock Option Committee (the "Committee"). The employment agreement was filed as an exhibit to the Company's Form 10-K for the fiscal year ended December 31, 2003. Per Mr. Petrocelli's employment agreement, the Committee determines the amount of salary and bonus paid to him annually. The Committee, in consultation with Mr. Petrocelli, determines the salaries and bonuses of Michael T. Lamoretti and Michael J. Weinbaum, who are both Vice Presidents of the Company's real estate operations, and Anthony J. Miceli, the Company's Vice President and Chief Financial Officer. Messrs. Lamoretti, Weinbaum and Miceli do not have written employment agreements with the Company. Effective January 2007, Messrs. Lamoretti, Weinbaum and Miceli received salary increases. In January 2007, the Committee approved bonuses for Messrs. Petrocelli, Lamoretti, Weinbaum and Miceli payable in 2007. Such bonuses were consistent with the bonuses paid in prior years and the Company does not believe the salary increases constitute a material change from the disclosure in the Company's Proxy Statement for its 2006 Annual Meeting of Stockholders.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This information will be contained in the Proxy Statement of the Company for the 2007 Annual Meeting of Stockholders under the caption "Election of Directors" and is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
This information will be contained in the Proxy Statement of the Company for the 2007 Annual Meeting of Stockholders under the caption "Executive Compensation" and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
This information will be contained in the Proxy Statement of the Company for the 2007 Annual Meeting of Stockholders under the caption "Security Ownership" and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information will be contained in the Proxy Statement of the Company for the 2007 Annual Meeting of Stockholders under the caption "Certain Relationships and Related Transactions" and is incorporated herein by reference. Also see "Related Party Transactions" in Item 7 and Note 11, "Transactions with Related Parties," of Notes to Consolidated Financial Statements, contained elsewhere in this report.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
This information will be contained in the Proxy Statement of the Company for the 2007 Annual Meeting of Stockholders under the caption "Independent Auditors" and is incorporated herein by reference.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) CONSOLIDATED FINANCIAL STATEMENTS. The following Consolidated Financial Statements and Consolidated Financial Statement Schedules of the Company are included in this Form 10-K on the pages indicated:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
Report of Independent Registered Public Accounting Firm - Goldstein Golub Kessler LLP ...........................28 Consolidated Balance Sheets as of December 31, 2006 and 2005 .................................................... 29 Consolidated Statements of Income for the Years Ended December 31, 2006, 2005 and 2004 ............................ 30 Consolidated Statements of Stockholders' Equity and Comprehensive Income for the Years Ended December 31, 2006, 2005 and 2004 ......................................... 31 Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004 .....................32-33 Notes to Consolidated Financial Statements .................34-51
(2) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Schedule III -- Real Property and Accumulated Depreciation ................................................ 52 Schedule IV -- Mortgage Loans on Real Estate .................. 53
(3) SUPPLEMENTARY DATA
Quarterly Financial Data (Unaudited) .......................... 54
Schedules not listed above are omitted as not applicable or the information is presented in the Consolidated Financial Statements or Notes thereto.
(b) EXHIBITS
3.1. Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to exhibit 3.1 filed with the Company's report on Form 10-K for the fiscal year ended December 31, 1993).
3.2. Amendment to the Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to exhibit 3.2 filed with the Company's report on Form 10-K for the fiscal year ended December 31, 2003).
3.3. By-laws of the Company (incorporated by reference to exhibit 3 filed with the Company's report on Form 10-K for the fiscal year ended December 31, 1980).
10.1. Incentive and Non-Qualified Stock Option Plan of the Company, as amended (incorporated by reference to exhibit 10.1 filed with the Company's report on Form 10-K for the fiscal year ended December 31, 2000).
10.2. Additional amendment to Incentive and Non-Qualified Stock Option Plan of the Company (incorporated by reference to exhibit 4.2 filed with the Company's report on Form S-8 dated August 23, 2002).
10.3. 1988 Joint Incentive and Non-Qualified Stock Option Plan, as amended (incorporated by reference to exhibit 10.2 filed with the Company's report on Form 10-K for the fiscal year ended December 31, 1998).
10.4. Amended and Restated Employment Agreement dated as of November 17, 2003 by and between the Company and A. F. Petrocelli (incorporated by reference to exhibit 10.4 filed with the Company's report on Form 10-K for the fiscal year ended December 31, 2003).
14. Code of Business Conduct and Ethics (incorporated by reference to exhibit 14 filed with the Company's report on Form 10-Q for the quarter ended June 30, 2006).
*21. Subsidiaries of the Company.
*23.1. Consent of Independent Registered Public Accounting Firm - Goldstein Golub Kessler LLP.
*31.1. Certification of the Chief Executive Officer pursuant to Rule 13a-15(e) and 15d-15(e).
*31.2. Certification of the Chief Financial Officer pursuant to Rule 13a-15(e) and 15d-15(e).
*32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*32.2. Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Filed herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
UNITED CAPITAL CORP.
Dated: March 26, 2007 By: /s/ A. F. Petrocelli --------------------------------------- A. F. Petrocelli Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company in the capacities and on the date indicated.
Dated: March 26, 2007 By: /s/ A. F. Petrocelli --------------------------------------- A. F. Petrocelli Chairman, President and Chief Executive Officer
Dated: March 26, 2007 By: /s/ Michael T. Lamoretti --------------------------------------- Michael T. Lamoretti Vice President - Real Estate Operations and Director
Dated: March 26, 2007 By: /s/ Howard M. Lorber --------------------------------------- Howard M. Lorber Director
Dated: March 26, 2007 By: /s/ Robert M. Mann --------------------------------------- Robert M. Mann Director
Dated: March 26, 2007 By: /s/ Anthony J. Miceli --------------------------------------- Anthony J. Miceli Chief Financial Officer, Chief Accountant, Secretary and Director
Dated: March 26, 2007 By: /s/ Arnold S. Penner --------------------------------------- Arnold S. Penner Director
Dated: March 26, 2007 By: /s/ Michael J. Weinbaum --------------------------------------- Michael J. Weinbaum Vice President - Real Estate Operations and Director
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of United Capital Corp.
We have audited the accompanying consolidated balance sheets of United Capital Corp. and Subsidiaries (the "Company") as of December 31, 2006 and 2005 and the related consolidated statements of income, stockholders' equity and comprehensive income and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of United Capital Corp. and Subsidiaries as of December 31, 2006 and 2005 and the consolidated results of its operations and its consolidated cash flows for each of the three years in the period ended December 31, 2006 in conformity with United States generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 123(R), "Share-Based Payment," as of January 1, 2006, which changed its method of accounting for stock-based compensation. Also, as discussed in Note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans," as of December 31, 2006, which changed its method of accounting for pension benefits.
We have also audited the consolidated financial statement schedules for the year ended December 31, 2006, listed in the Index at Item 15(a)(2). In our opinion, these schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information required to be set forth therein.
/s/ Goldstein Golub Kessler LLP ------------------------------- GOLDSTEIN GOLUB KESSLER LLP
New York, New York March 26, 2007
UNITED CAPITAL CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except per share data)
As of December 31, ----------------------- 2006 2005 --------- --------- ASSETS Current assets: Cash and cash equivalents $ 76,688 $ 99,628 Marketable securities 62,917 40,419 Notes and accounts receivable, net 8,825 8,954 Inventories 4,894 4,426 Prepaid expenses and other current assets 1,659 1,401 Deferred income taxes 583 2,389 Current assets of discontinued operations 21 6 --------- --------- TOTAL CURRENT ASSETS 155,587 157,223 --------- --------- Property, plant and equipment, net 6,250 5,943 Real property held for rental, net 49,472 38,318 Investment in joint venture 6,711 7,208 Noncurrent notes receivable 1,694 3,790 Other assets 2,976 2,321 Noncurrent assets of discontinued operations 910 1,882 --------- --------- TOTAL ASSETS $ 223,600 $ 216,685 ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ 471 $ 652 Accounts payable and accrued liabilities 9,606 9,000 Income taxes payable 5,253 5,142 Current liabilities of discontinued operations 58 59 --------- --------- TOTAL CURRENT LIABILITIES 15,388 14,853 --------- ---------
Long-term debt 11,669 12,140 Other long-term liabilities 14,277 30,546 Deferred income taxes 2,793 3,496 --------- --------- TOTAL LIABILITIES 44,127 61,035 --------- --------- Commitments and contingencies
Stockholders' equity: Common stock, $.10 par value, authorized 17,500 shares; issued and outstanding 8,278 and 8,737 shares, respectively 828 874 Retained earnings 176,520 157,235 Accumulated other comprehensive income (loss), net of tax 2,125 (2,459) --------- --------- TOTAL STOCKHOLDERS' EQUITY 179,473 155,650 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 223,600 $ 216,685 ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
UNITED CAPITAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data)
For the years ended December 31, ------------------------------------ 2006 2005 2004 -------- -------- -------- REVENUES: Net sales $ 37,158 $ 38,201 $ 38,335 Revenues from real estate operations 28,210 21,906 21,604 -------- -------- -------- Total revenues 65,368 60,107 59,939 -------- -------- -------- COSTS AND EXPENSES: Cost of sales 27,522 28,003 27,026 Real estate operations: Mortgage interest expense 797 395 572 Depreciation expense 2,345 2,167 3,025 Other operating expenses 12,625 8,384 7,267 General and administrative expenses 7,320 6,170 5,843 Selling expenses 3,621 3,744 3,985 -------- -------- -------- Total costs and expenses 54,230 48,863 47,718 -------- -------- -------- Operating income 11,138 11,244 12,221 -------- -------- -------- OTHER INCOME (EXPENSE): Interest and dividend income 6,498 4,557 2,114 Interest expense -- (335) (450) Other income and expense, net 2,040 5,580 22,435 -------- -------- -------- Total other income 8,538 9,802 24,099 -------- -------- -------- Income from continuing operations before income taxes 19,676 21,046 36,320
(Benefit) provision for income taxes (10,375) 7,770 10,608 -------- -------- -------- INCOME FROM CONTINUING OPERATIONS 30,051 13,276 25,712 -------- -------- -------- DISCONTINUED OPERATIONS: (Loss) income from discontinued operations, net of tax (benefit) provision of ($26), $14 and $187, respectively (39) 22 282 Net gain on disposal of discontinued operations, net of tax provision of $365, $865 and $7,575, respectively 548 1,298 11,363 -------- -------- -------- INCOME FROM DISCONTINUED OPERATIONS 509 1,320 11,645 -------- -------- -------- NET INCOME $ 30,560 $ 14,596 $ 37,357 ======== ======== ======== BASIC EARNINGS PER SHARE: Income from continuing operations $ 3.62 $ 1.49 $ 2.82 Income from discontinued operations .06 .15 1.28 -------- -------- -------- NET INCOME PER SHARE $ 3.68 $ 1.64 $ 4.10 ======== ======== ======== DILUTED EARNINGS PER SHARE: Income from continuing operations $ 2.94 $ 1.23 $ 2.37 Income from discontinued operations .05 .12 1.08 -------- -------- -------- NET INCOME PER SHARE ASSUMING DILUTION $ 2.99 $ 1.35 $ 3.45 ======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
UNITED CAPITAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (In thousands)
Accumulated Other Common Stock Issued Comprehensive Total ---------------------- Retained Income (Loss), Stockholders' Comprehensive Shares Amount Earnings Net of Tax Equity Income ------ --------- --------- -------------- ------------ ------------- BALANCE - JANUARY 1, 2004 9,092 $ 909 $ 114,436 $ 8,872 $ 124,217 Proceeds from the exercise of stock options 38 4 302 -- 306 Tax benefit from employee stock options -- -- 171 -- 171 Net income -- -- 37,357 -- 37,357 $37,357 Other comprehensive income, net of tax: Change in net unrealized gain on available-for-sale securities, net of tax effect of $2,812 -- -- -- 5,223 5,223 5,223 Reclassification adjustment for net gains realized in net income, net of tax effect of $7,111 -- -- -- (13,205) (13,205) (13,205) ------- Comprehensive income $29,375 ----- --------- --------- --------- --------- =======
BALANCE - DECEMBER 31, 2004 9,130 913 152,266 890 154,069 ----- --------- --------- --------- ---------
Purchase and retirement of common shares (425) (42) (9,909) -- (9,951) Proceeds from the exercise of stock options 32 3 202 -- 205 Tax benefit from employee stock options -- -- 80 -- 80 Net income -- -- 14,596 -- 14,596 $14,596 Other comprehensive income, net of tax: Change in net unrealized loss on available-for-sale securities, net of tax effect of $1,638 -- -- -- (3,042) (3,042) (3,042) Reclassification adjustment for net gains realized in net income, net of tax effect of $166 -- -- -- (307) (307) (307) ------- Comprehensive income $11,247 ----- --------- --------- --------- --------- =======
BALANCE - DECEMBER 31, 2005 8,737 874 157,235 (2,459) 155,650 ----- --------- --------- --------- ---------
Purchase and retirement of common shares (558) (56) (13,570) -- (13,626) Proceeds from the exercise of stock options 99 10 787 -- 797 Tax benefit from employee stock options -- -- 701 -- 701 Stock-based compensation -- -- 807 -- 807 Adjustment to initially apply SFAS No. 158, net tax effect of $417 -- -- -- 775 775 Net income -- -- 30,560 -- 30,560 $30,560 Other comprehensive income, net of tax: Change in net unrealized gain on available-for-sale securities, net of tax effect of $2,005 -- -- -- 3,723 3,723 3,723 Reclassification adjustment for net loss realized in net income, net of tax effect of $47 -- -- -- 86 86 86 ------- Comprehensive income $34,369 ----- --------- --------- --------- --------- ======= BALANCE - DECEMBER 31, 2006 8,278 $ 828 $ 176,520 $ 2,125 $ 179,473 ===== ========= ========= ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
UNITED CAPITAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
For the years ended December 31, ------------------------------------------------ 2006 2005 2004 -------- -------- -------- (Revised - See Note 1) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 30,560 $ 14,596 $ 37,357 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,784 2,604 3,577 Non-cash stock based compensation 807 -- -- Net gain on sale of available-for-sale securities (73) (932) (20,316) Gain on sale of other assets -- -- (363) Gain on disposal of discontinued operations, net of tax (548) (1,298) (11,363) Gain on sale of investment in joint venture -- (626) -- Net realized and unrealized gain on derivative instruments (1,584) (684) (728) Net periodic pension expense 265 196 180 Income from equity investments (279) (3,511) (512) Tax benefit from employee stock options -- 80 171 Changes in assets and liabilities: Notes and accounts receivable, net 907 (1,847) (819) Inventories (468) (294) 23 Prepaid expenses and other current assets (258) (509) 69 Deferred income taxes (1,366) 526 953 Other assets (132) (478) (70) Accounts payable and accrued liabilities 587 (523) 379 Income taxes payable (254) (2,737) (7,831) Other long-term liabilities (15,893) 230 (532) -------- -------- -------- Net cash provided by operating activities of continuing operations 15,055 4,793 175 Operating activities of discontinued operations 24 79 134 -------- -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 15,079 4,872 309 -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of available-for-sale securities (33,303) (5,361) (62,442) Proceeds from sale of available-for-sale securities 16,739 15,177 65,634 Proceeds from sale of real estate assets 1,849 3,164 24,302 Proceeds from sale of other assets -- -- 1,363 Proceeds from sale of derivative instruments 1,603 103 1,312 Purchase of derivative instruments -- -- (13) Purchase/issuance of notes receivable (1,118) (3,000) (1,000) Principal payments on notes receivable 2,436 3,908 104 Acquisition of property, plant and equipment (1,341) (1,277) (226) Acquisition of/additions to real estate assets (12,876) (5,665) (958) Distributions from joint ventures 776 16,327 933 -------- -------- -------- Net cash (used in) provided by investing activities of continuing operations (25,235) 23,376 29,009 Investing activities of discontinued operations (4) (14) (139) -------- -------- -------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (25,239) 23,362 28,870 -------- -------- --------
UNITED CAPITAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (In thousands)
For the years ended December 31, ------------------------------------------------ 2006 2005 2004 -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on mortgage obligations (652) (2,505) (2,938) Purchase and retirement of common shares (13,626) (9,951) -- Proceeds from the exercise of stock options 797 205 306 Tax benefit from employee stock options 701 -- -- -------- -------- -------- Net cash used in financing activities of continuing operations (12,780) (12,251) (2,632) Financing activities of discontinued operations -- (1,138) (974) -------- -------- -------- NET CASH USED IN FINANCING ACTIVITIES (12,780) (13,389) (3,606) -------- -------- -------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (22,940) 14,845 25,573 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 99,628 84,783 59,210 -------- -------- -------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 76,688 $ 99,628 $ 84,783 ======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 799 $ 723 $ 1,001 ======== ======== ======== Taxes $ 6,205 $ 9,827 $ 17,517 ======== ======== ========
NON-CASH INVESTING AND FINANCING ACTIVITIES: Issuance of note receivable in connection with sale of real property $ -- $ -- $ 800 ======== ======== ======== Mortgage obligation assumed in connection with acquisition of hotel property (see Note 2) $ -- $ 8,000 $ -- ======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
UNITED CAPITAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2006, 2005 AND 2004 (In thousands, except per share data)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
United Capital Corp. (the "Company") and its subsidiaries are engaged in the investment and management of real estate, including the operations of full and limited-service hotels, and in the manufacture and sale of engineered products. The Company also invests excess available cash in marketable securities and other financial instruments.
PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The equity method of accounting is used for investments in 20% to 50% owned joint ventures in which the Company has the ability to exercise significant influence, but not control. These investments are recorded initially at cost and subsequently adjusted for equity in earnings and cash contributions and distributions.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE - REAL ESTATE INVESTMENT AND MANAGEMENT
The Company leases substantially all of its properties to tenants under net leases which are accounted for as operating leases. Under this type of lease, the tenant is obligated to pay all operating costs of the property including real estate taxes, insurance and repairs and maintenance. Revenue is recognized as earned and deemed collectible. The effect of stepped-rent increases on significant leases are recorded, net of allowances, on a straight-line basis. Gains on sales of real estate assets and equity investments are recorded when the gain recognition criteria under generally accepted accounting principles in the United States of America have been met.
The Company does not have leases that include significant rent concessions or provisions that require the lessee to fund capital improvements or to pay the lessor any revenues based upon indexes or rates that are not explicitly stated in the lease.
Reimbursements of certain costs received from tenants are recognized as tenant reimbursement revenues.
Certain lease agreements provide for additional rent based on a percentage of tenants' sales. These percentage rents are recorded once the required sales levels are achieved.
Income on leveraged leases is recognized by a method that produces a constant rate of return on the outstanding investment in the lease, net of the related deferred tax liability, in the years in which the net investment is positive.
Accounts receivable are recorded at the outstanding amounts, net of allowances for doubtful accounts. The Company makes estimates of the uncollectibility of its accounts receivable related to base rents, tenant escalations, expense reimbursements and other revenues. The Company analyzes accounts receivable, historical bad debt levels, customer credit worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. In addition, tenants in bankruptcy are analyzed and estimates are made in connection with the expected recovery of pre-petition and post-petition claims.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE - HOTEL OPERATIONS
Revenues from the Company's hotel operations are generally recognized when earned. Hotel revenues primarily represent room rental and food and beverage sales and are recognized at the time of the hotel stay or sale of restaurant services.
Accounts receivable are recorded at the outstanding amounts, net of allowances for doubtful accounts. The Company determines the allowance for doubtful accounts based on an assessment of the collectibility of specific customer accounts which include the length of time the receivables are past due, the financial health of the customer and historical experience.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE - ENGINEERED PRODUCTS
In general, sales are recorded when products are shipped, title has passed and collection is reasonably assured. Management believes that adequate controls are in place to ensure compliance with contractual product specifications, a substantial history of such performance has been established and historical returns and allowances have not been significant. If actual sales returns and allowances exceed historical amounts, the Company's sales would be adversely affected.
Accounts receivable are recorded at the outstanding amounts, net of allowances for doubtful accounts. Estimates are used in determining the Company's allowance for doubtful accounts based on historical collections experience, current economic trends and a percentage of its accounts receivable by aging category. In determining these percentages, the Company looks at historical write-offs of its receivables. The Company also looks at the credit quality of its customer base as well as changes in its credit policies. The Company continuously monitors collections and payments from its customers. While credit losses have historically been within expectations and the provisions established, the Company cannot guarantee that it will continue to experience the same credit loss rates that it has in the past.
CASH AND CASH EQUIVALENTS
Cash equivalents of $43,428 and $77,932 at December 31, 2006 and 2005, respectively, consisted of commercial paper, overnight repurchase agreements and certificates of deposit. The Company considers all highly liquid investments with a maturity, at the purchase date, of three months or less to be cash equivalents. The Company maintains balances with various financial institutions which, at times, exceed federally insured limits.
MARKETABLE SECURITIES
The Company determines the appropriate classification of securities at the time of purchase and reassesses the appropriateness of such classification at each reporting date. At December 31, 2006 and 2005, all marketable securities held by the Company have been classified as available-for-sale and, as a result, are stated at fair value, based on quoted market prices. Unrealized gains and losses on available-for-sale securities are recorded as a separate component of stockholders' equity. Realized gains and losses on the sale of securities, as determined on a first-in, first-out basis, are included in the Consolidated Statements of Income.
The Company reviews its investments on a regular basis to evaluate whether or not each security has experienced an other-than-temporary decline in fair value. If it is believed that an other-than-temporary decline exists, the Company will write down the investment to market value and record the related write-down in the Consolidated Statements of Income.
NOTES AND ACCOUNTS RECEIVABLE, NET
Notes and accounts receivable, net consist of the following:
December 31, ----------------- 2006 2005 ------ ------ Trade receivables $5,835 $5,899 Rental receivables 1,729 1,520 Other receivables 749 1,800 Current portion of notes receivable 836 59 ------ ------ Total 9,149 9,278 Less: Allowance for doubtful accounts 324 324 ------ ------ $8,825 $8,954 ====== ======
There were no changes in the Company's allowance for doubtful accounts during the years ended December 31, 2006, 2005 and 2004.
INVENTORIES
Inventories are stated at the lower of cost or market and include material, labor and manufacturing overhead. The first-in, first-out (FIFO) method is used to determine the cost of inventories. Inventories consist of the following:
December 31, ----------------- 2006 2005 ------ ------ Raw materials $2,197 $2,142 Work in process 506 462 Finished goods 2,191 1,822 ------ ------ $4,894 $4,426 ====== ======
DEPRECIATION AND AMORTIZATION
Depreciation and amortization are provided on a straight-line basis over the estimated useful lives of the related assets as follows:
Real property held for rental: Buildings .....................................................18 to 39 years Building renovations and improvements ..........................7 to 39 years Equipment and fixtures .........................................5 to 15 years
Property, plant and equipment: Buildings and improvements ....................................10 to 39 years Furniture, fixtures and equipment ...............................3 to 8 years
Intangible assets with definite lives: Patents, trademarks and other intellectual property ............5 to 20 years
REAL ESTATE
Land, buildings and improvements, and equipment and fixtures are recorded at cost, less accumulated depreciation. Expenditures for maintenance and repairs are charged to operations as incurred. Significant renovations and replacements, which improve the life of the asset, are capitalized and depreciated over their estimated useful lives.
Assets held for sale are reported at the lower of the carrying amount or fair value less costs to sell and depreciation is discontinued. Property sales or dispositions are recorded when title transfers. Upon disposition, the related costs and accumulated depreciation are removed from the respective accounts. Any gain or loss on sale or disposition is recognized in accordance with accounting principles generally accepted in the United States of America.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost, less accumulated depreciation. Major improvements are capitalized and maintenance and repairs are expensed as incurred.
LONG-LIVED ASSETS
On a periodic basis, management assesses whether there are any indicators that the value of its long-lived assets may be impaired. An asset's value is considered impaired only if management's estimate of current and projected operating cash flows (undiscounted and without interest charges) of the asset over its remaining useful life is less than the net carrying value of the asset. Such cash flow projections consider factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other factors. To the extent impairment has occurred, the carrying amount of the asset would be written down to an amount to reflect the fair value of the asset.
PENSION PLAN
Pension plans can be a significant cost of doing business, but represent obligations that will ultimately be settled far in the future and therefore are subject to estimates. Pension accounting is intended to reflect the recognition of future benefit costs over the employee's approximate service period based on the terms of the plan and the investment and funding decisions made by the Company. The Company is required to make assumptions regarding such variables as the expected long-term rate of return on assets and the discount rate applied to determine service cost and interest cost to arrive at net periodic pension income or expense for the year. These assumptions are used in actuarial calculations to estimate net periodic pension costs as well as pension assets or liabilities included in the Company's Consolidated Financial Statements. While the Company believes that the assumptions used are appropriate, significant differences in actual experience or significant changes in assumptions would affect the Company's pension costs and obligations.
RESEARCH AND DEVELOPMENT
The Company expenses research, development and product engineering costs as incurred. Approximately $53, $53 and $69 of such costs were incurred by the Company in 2006, 2005 and 2004, respectively.
SHIPPING AND HANDLING COSTS
Shipping and handling costs billed to a customer are included in net sales and the related costs are included in cost of sales or selling expenses. For the years ended December 31, 2006, 2005 and 2004, shipping and handling costs included in selling expenses were $350, $369 and $477, respectively.
EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income by the weighted-average number of shares outstanding and excludes any dilutive effects of stock options. Diluted earnings per share gives effect to all potentially dilutive shares that were outstanding during the period. Dilutive shares used in the computation of diluted earnings per share result from the assumed exercise of stock options, using the treasury stock method.
STOCK-BASED COMPENSATION
On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (Revised 2004) - "Share-Based Payment" ("SFAS No. 123R"), which required the Company to measure all employee stock-based compensation awards using a fair value method and record the related expense in the financial statements. The Company elected to use the modified prospective transition method, which requires that compensation cost be recognized in the financial statements for all awards granted after the date of adoption as well as for existing rewards for which the requisite service has not been rendered as of the date of adoption and requires that prior periods not be restated. All periods presented prior to January 1, 2006 were accounted for in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). Accordingly, no compensation cost was recognized for stock options prior to January 1, 2006 because the exercise price of the option grants equaled the market value of the Company's common stock at the date of grant, which was the measurement date. The Company has used the Black-Scholes model to estimate the value of options granted. The Company did not grant any options during 2006, 2005 or 2004.
The Black-Scholes model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company's employee stock options.
The adoption of SFAS No. 123R reduced income from continuing operations before income taxes and net income by $807 and $518, respectively, for the year ended December 31, 2006. The impact on net income per basic and diluted share for this period was $.06 and $.05 per share, respectively. Prior to the adoption of SFAS No. 123R, the Company presented the tax benefit from the exercise of stock options as an operating cash flow in the Consolidated Statements of Cash Flows.
Upon adoption of SFAS No. 123R, tax benefits resulting from deductions in excess of compensation cost recognized for those options are classified as a financing cash flow.
As of December 31, 2006, there were no unrecognized compensation costs relating to share-based payments.
The following table illustrates the effect on net income and earnings per share for the years ended December 31, 2005 and 2004 had the Company applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") to stock-based employee compensation for these periods.
For the Years Ended December 31, ----------------------- 2005 2004 -------- ---------- Net income, as reported $ 14,596 $ 37,357 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects 1,513 2,396 -------- ---------- Pro forma net income $ 13,083 $ 34,961 ======== ========== Earnings per share: Basic - as reported $ 1.64 $ 4.10 ======== ========== Basic - pro forma $ 1.47 $ 3.84 ======== ========== Diluted - as reported $ 1.35 $ 3.45 ======== ========== Diluted - pro forma $ 1.22 $ 3.26 ======== ==========
DERIVATIVE FINANCIAL INSTRUMENTS
The Company recognizes all derivative financial instruments, such as put and/or call options, in the Consolidated Financial Statements at fair value regardless of the purpose or intent for holding the instrument. Changes in the fair value of derivative financial instruments are either recognized periodically in income or in stockholders' equity as a component of accumulated other comprehensive income depending on whether the derivative financial instrument qualifies for hedge accounting and, if so, whether it qualifies as a fair value or cash flow hedge. Generally, changes in the fair value of derivatives accounted for as fair value hedges are recorded in income along with the portions of the changes in the fair values of the hedged items that relate to the hedged risks. Changes in the fair value of derivatives accounted for as cash flow hedges, to the extent they are effective as hedges, are recorded in accumulated other comprehensive income, net of tax. Changes in the fair value of derivatives not qualifying as hedges are reported in income.
In strategies designed to hedge overall market risks and manage its interest rate exposure, the Company may sell common stock short, participate in put and/or call options or enter into interest rate swap agreements.
Management maintains a diversified portfolio of cash equivalents and investments in a variety of securities, primarily U.S. investments in both common and preferred equity issues, and participates on a limited basis in transactions involving derivative financial instruments, including short stock sales and put and/or call options. At December 31, 2006 and 2005, the fair value of such derivatives was ($20) and ($1), respectively, which are recorded as a component of accounts payable and accrued liabilities in the Consolidated Balance Sheets. These instruments do not qualify for hedge accounting, and therefore changes in the derivatives' fair value are recognized in earnings. The Company recognized $1,584, $684 and $728 in net realized and unrealized gains from derivative instruments for the years ended December 31, 2006, 2005 and 2004, respectively, which are included in other income and expense, net in the Consolidated Statements of Income.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to present them on a basis consistent with the current year. During 2006, the Company restated its prior period segment disclosures to be consistent with the new segment classifications (see Note 15). The Company separately disclosed the operating, investing and financing portions of cash flows attributable to discontinued operations in 2006 and 2005, which in 2004 were reported on a combined basis as a single amount.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to use judgment in making estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. Certain of the estimates and assumptions required to be made relate to matters that are inherently uncertain as they pertain to future events. While management believes that the estimates and assumptions used were the most appropriate, actual results could differ significantly from those estimates under different assumptions and conditions.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company's financial statements in accordance with SFAS No. 109, "Accounting for Income Taxes." FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006, which would be the first quarter of 2007 for the Company. The Company is currently evaluating the effects, if any, that FIN 48 will have on its consolidated financial position or results of operations. However, the Company does not expect the adoption of FIN 48 to have a material effect on its financial position or results of operations.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and, accordingly, does not require any new fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, which would be the first quarter of 2008 for the Company. The Company is currently evaluating the effect, if any, that SFAS No. 157 will have on its consolidated financial position or results of operations. However, the Company does not expect the adoption of SFAS No. 157 to have a material effect on the Company's financial position or results of operations.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108 "Considering the Effects of Prior Year Misstatements when Qualifying Misstatements in Current Year Financial Statements" ("SAB No. 108"). SAB No. 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of determining whether the current year's financial statements are materially misstated. SAB No. 108 was effective as of the end of the Company's 2006 fiscal year, allowing a one-time transitional cumulative effect adjustment to beginning retained earnings as of January 1, 2006, for errors that were not previously deemed material, but are material under the guidance in SAB No. 108. The adoption of SAB No. 108 did not have a material impact on the Company's consolidated financial position or results of operations.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132(R)" ("SFAS No. 158"). Among other items, SFAS No. 158 requires recognition of the over-funded or under-funded status of an entity's defined benefit postretirement plans as an asset or liability in the financial statements, requires the measurement of defined benefit postretirement plan assets and obligations as of the end of the employer's fiscal year and actuarial gains and losses, prior service costs or credits, and any remaining transition assets or obligations that have not been recognized under previous accounting standards be recognized in accumulated other comprehensive income, net of tax, until they are amortized as a component of net period pension expense. The Company adopted SFAS No. 158 as of December 31, 2006.
The adoption of SFAS No. 158 had no effect on the Company's consolidated results of operations for the year ended December 31, 2006, or for any prior period presented, and it will not effect the Company's operating results in future periods.
The incremental effects of adopting the provisions of SFAS No. 158 on the Company's balance sheet at December 31, 2006 are as follows:
Before Effect of After Application Adopting Application of SFAS SFAS of SFAS No. 158 No. 158 No. 158 ------- -------- ------- ASSETS: Other assets $ 2,425 $ 551 $ 2,976 ======= ======= ======= LIABILITIES: Other long-term liabilities $13,636 $ (641) $14,277 ======= ======= ======= Deferred income taxes (non-current) $ 2,376 $ 417 $ 2,793 ======= ======= ======= STOCKHOLDERS' EQUITY: Accumulated other comprehensive income, net of tax $ 1,350 $ 775 $ 2,125 ======= ======= =======
2. REAL ESTATE
The Company is the lessor of real estate under operating leases which expire in various years through 2078. The following is a summary of real property held for rental: December 31, --------------------- 2006 2005 -------- -------- Land $ 14,769 $ 13,919 Buildings 90,121 82,440 Building renovations and improvements 10,407 5,809 Equipment and fixtures 3,000 3,253 -------- -------- 118,297 105,421 Less: Accumulated depreciation 68,825 67,103 -------- -------- $ 49,472 $ 38,318 ======== ========
As of December 31, 2006, total minimum future rentals to be received under noncancelable leases for each of the next five years and thereafter are as follows:
Years Ending December 31, -------------------------------------------------------------------------- There- 2007 2008 2009 2010 2011 after Total -------- -------- -------- -------- -------- -------- -------- Minimum future rentals $ 17,785 $ 15,702 $ 14,892 $ 13,223 $ 8,425 $ 54,523 $124,550 ======== ======== ======== ======== ======== ======== ========
Minimum future rentals do not include amounts for renewals, tenant reimbursement or additional rentals that may be received under certain leases which provide for such rentals based upon a percentage of lessees' sales. Percentage rents included in net income from real properties held for rental for 2006, 2005 and 2004 were approximately $384, $512 and $777, respectively.
PROPERTY ACQUISITIONS
During 2006, the Company purchased, for cash, a commercial property located in Long Island City, New York for approximately $8,531.
In 2005, the Company purchased a hotel located in Windsor Locks, Connecticut (the "Connecticut Hotel") for approximately $10,190, including $3,000 which was allocated to furniture, fixtures and equipment and is included in property, plant and equipment in the Consolidated Balance Sheet. The purchase was partially financed by an $8,000 mortgage which bears interest at 6.7% per annum, is payable monthly based on a 25 year amortization and matures in December 2015. The total cost of the acquisition, less the proceeds of the mortgage, is reflected in acquisition of/additions to real estate assets in the Consolidated Statement of Cash Flows.
PROPERTY SALES
During 2006, the Company divested itself of two commercial properties which had a net book value of $936 from its real estate investment and management segment. The aggregate proceeds from these transactions were $1,849 resulting in a gain of $548, on a net of tax basis.
During 2005, the Company divested itself of four commercial properties which had a net book value of $1,001 from its real estate investment and management segment. The aggregate proceeds from these transactions were $3,164, resulting in a gain of $1,298, on a net of tax basis.
During 2004, the Company divested itself of seven commercial properties which had a net book value of $5,265 from its real estate investment and management segment. The cash proceeds from these transactions were $9,327. In addition, the Company received an $800 purchase money mortgage in connection with the sale of one of these properties. This resulted in a gain of $2,917, on a net of tax basis. In addition, the Company sold three of its shopping centers and retail outlets which had a net book value of $899. The aggregate proceeds from these transactions were $14,975, resulting in a gain of $8,446, on a net of tax basis. Two of the properties, one commercial and one shopping center and retail outlet, were contributed to charitable organizations in the first quarter of 2004 for a nominal amount. The net book value of these properties and their fair market value, determined by appraisals, were $341 and $4,590, respectively.
The results of operations for properties sold have been reclassified to discontinued operations, on a net of tax basis, for each of the years presented. In addition, the assets and liabilities associated with those properties sold in 2006 have been reclassified to discontinued operations in the Consolidated Balance Sheet at December 31, 2005. These amounts primarily consist of real property, net of accumulated depreciation, rents receivable, prepaid or accrued charges and mortgage obligations, if any.
Summarized financial information for properties sold and accounted for as discontinued operations is as follows:
For the Years Ended December 31, -------------------------------- 2006 2005 2004 ------ ------ ------ Revenues from real estate operations $ -- $ 232 $1,339 Mortgage interest expense -- 55 109 Depreciation expense -- 12 103 Other operating expenses 38 116 589 ------ ------ ------ Operating (loss) income $ (38) $ 49 $ 538 ====== ====== ======
PROPERTIES HELD FOR SALE
As of December 31, 2006, the Company considered one commercial property from its real estate and investment management segment to be held for sale and reported as discontinued operations. The results of operations of this property have been reclassified to discontinued operations, on a net of tax basis, in the Consolidated Statements of Income for the years ended December 31, 2006, 2005 and 2004. In addition, the assets and liabilities associated with this property, which primarily consist of real property, net of accumulated depreciation, and accrued charges have been reclassified to discontinued operations in the Consolidated Balance Sheets at December 31, 2006 and 2005.
Summarized financial information for the property held for sale and accounted for as discontinued operations at December 31, 2006 is as follows:
For the Years Ended December 31, -------------------------------- 2006 2005 2004 ------ ------ ------ Revenues from real estate operations $ 134 $ 132 $ 75 Depreciation expense 52 54 44 Other operating expenses 109 91 100 ----- ----- ----- Operating loss $ (27) $ (13) $ (69) ===== ===== =====
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including furniture, fixtures and equipment related to the Company's hotel operations segment, consists of the following:
December 31, --------------------- 2006 2005 ------- ------- Land $ 28 $ 28 Buildings and improvements 1,428 1,428 Furniture, fixtures and equipment 18,231 16,894 ------- ------- 19,687 18,350 Less: Accumulated depreciation 13,437 12,407 ------- ------- $ 6,250 $ 5,943 ======= =======
4. MARKETABLE SECURITIES
The cost, gross unrealized gains, gross unrealized losses and fair market value of available-for-sale securities are as follows:
Gross Gross Fair Unrealized Unrealized Market Cost Gains Losses Value ------- ------- ------- ------- DECEMBER 31, 2006: Equity securities $57,708 $ 4,778 $(2,741) $59,745 Bonds 3,131 43 (2) 3,172 ------- ------- ------- ------- $60,839 $ 4,821 $(2,743) $62,917 ======= ======= ======= =======
DECEMBER 31, 2005: Equity securities $44,074 $ 2,931 $(6,712) $40,293 Bonds 129 -- (3) 126 ------- ------- ------- ------- $44,203 $ 2,931 $(6,715) $40,419 ======= ======= ======= =======
The following table shows the fair value and unrealized losses, aggregated by investment type and length of time that individual securities have been in a continuous unrealized loss position:
Less Than 12 Months 12 Months or More Total ------------------- -------------------- -------------------- Fair Unrealized Fair Unrealized Fair Unrealized DECEMBER 31, 2006: Value Losses Value Losses Value Losses -------- ---------- -------- ---------- -------- ---------- Equity securities $ 32,226 $ (2,741) $ -- $ -- $ 32,226 $ (2,741) Bonds 91 (1) 123 (1) 214 (2) -------- -------- -------- -------- -------- -------- $ 32,317 $ (2,742) $ 123 $ (1) $ 32,440 $ (2,743) ======== ======== ======== ======== ======== ======== DECEMBER 31, 2005: Equity Securities $ 5,097 $ (338) $ 22,620 $ (6,374) $ 27,717 $ (6,712) Bonds 121 (3) -- -- 121 (3) -------- -------- -------- -------- -------- -------- $ 5,218 $ (341) $ 22,620 $ (6,374) $ 27,838 $ (6,715) ======== ======== ======== ======== ======== ========
The Company continuously reviews its investment portfolio to identify and evaluate investments that have indications of possible impairment. The Company does not believe that its investments in marketable securities with unrealized losses at December 31, 2006 are other-then-temporary due to market volatility of the security's fair value, analysts' expectations and the Company's ability to hold the securities for a period of time sufficient to allow for any anticipated recoveries in market value.
Proceeds from the sale of available-for-sale securities and the resulting gross realized gains and losses included in the determination of net income are as follows: For the Years Ended December 31, -------------------------------- 2006 2005 2004 ------- ------- ------- Proceeds $16,739 $15,177 $65,634 ======= ======= ======= Gross realized gains $ 1,559 $ 1,193 $20,469 ======= ======= ======= Gross realized losses $(1,486) $ (261) $ (153) ======= ======= =======
5. INVESTMENT IN JOINT VENTURES
LEASE FINANCING
Lease financing consists of a 50% interest in a limited partnership whose principal assets are two distribution centers leased to Kmart Corporation ("Kmart"), which are accounted for as leveraged leases (see Note 11).
The following represents the components of the net investment in the leveraged leases:
December 31, --------------------- 2006 2005 -------- -------- Rents receivable $ 61,439 $ 65,467 Residual values 10,000 10,000 Nonrecourse debt service (48,598) (51,850) Unearned income (16,130) (16,409) -------- -------- 6,711 7,208 Less: Deferred taxes arising from leveraged leases 6,127 6,335 -------- -------- $ 584 $ 873 ======== ========
The Company's share of income arising from this investment was $279, $357 and $428 for the years ended December 31, 2006, 2005 and 2004, respectively, and is included in revenues from real estate operations in the Consolidated Statements of Income.
HOTEL VENTURES
The Company had a 40% interest in two joint ventures which each owned and operated a hotel. The hotels were located in New Jersey (the "Hotel Venture") and Quebec, Canada (the "Quebec Venture"). In 2005, the Hotel Venture sold its underlying property. Distributions in excess of the Company's investment of $3,327 from the Hotel Venture and a gain on the sale of the Company's interest in the Quebec Venture of $626 are included in other income and expense, net in the Consolidated Statement of Income for 2005.
Summarized operating results of the Hotel Venture and Quebec Venture, through the date of their respective sale in 2005, are as follows:
For the Years Ended December 31, ---------------------- 2005 2004 -------- -------- Revenues $ 21,411 $ 25,903 ======== ======== Operating profit $ 4,026 $ 5,966 ======== ======== Net (loss) income $ (434) $ 210 ======== ========
The Company's equity in operating (losses) earnings of these ventures through the date of the respective sale was ($173) and $84 for the years ended December 31, 2005 and 2004, respectively.
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
December 31, --------------- 2006 2005 ------ ------ Accounts payable $3,999 $4,268 Accrued wages and benefits 1,821 1,803 Other accrued expenses 3,786 2,929 ------ ------ $9,606 $9,000 ====== ======
7. LONG-TERM DEBT
Long-term debt consists of the following:
December 31, ---------------- 2006 2005 ------- ------- Mortgages on real property $12,140 $12,792 Less: Current maturities 471 652 ------- ------- $11,669 $12,140 ======= =======
First mortgages bearing interest at rates ranging from 4% to 8% per annum are collateralized by the related real property which had a net carrying value at December 31, 2006 of $12,225, exclusive of hotel furniture, fixtures and equipment. Such amounts are scheduled to mature at various dates from December 2008 through December 2015.
The approximate aggregate maturities of these obligations at December 31, 2006 are as follows:
YEARS ENDING DECEMBER 31, ------------------------------------------------------------- THERE- 2007 2008 2009 2010 2011 AFTER TOTAL ------- ------- ------- ------- ------- ------- ------- Aggregate maturities $ 471 $ 518 $ 2,170 $ 455 $ 417 $ 8,109 $12,140 ======= ======= ======= ======= ======= ======= =======
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
The carrying amounts reported in the Consolidated Balance Sheets for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to the short maturity of such items.
The fair value of notes receivable are estimated using discounted cash flow analyses, with interest rates comparable to loans with similar terms and borrowers of similar credit quality. The fair value of notes receivable at December 31, 2006 and 2005 was approximately $2,763 and $4,429, respectively, while the carrying value was $2,530 and $3,849 for the same periods.
At December 31, 2006 and 2005, all marketable securities held by the Company have been classified as available-for-sale and, as a result, are carried at fair value based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
The fair value of long-term debt was calculated based on interest rates available for debt with terms and due dates similar to the Company's existing debt arrangements. The fair value of long-term debt at December 31, 2006 and 2005 was approximately $11,142 and $11,662, respectively, while the carrying value was $12,140 and $12,792 for the same periods.
The derivative instruments held by the Company, representing put and/or call options, are carried at fair value based on quoted market prices or dealer quotes. At December 31, 2006 and 2005, the fair value of these derivatives was ($20) and ($1), respectively.
9. STOCKHOLDERS' EQUITY
Previous purchases of the Company's common stock have reduced the Company's additional paid-in capital to zero and have also reduced retained earnings by amounts in excess of par value. Any future purchases in excess of par value will also reduce retained earnings.
In November 2005, the Board of Directors authorized a "Dutch Auction" self-tender offer for up to 1,000 shares of the Company's common stock resulting in the January 2006 repurchase and retirement of 544 shares of common stock for an aggregate price of $13,323 or $24.50 per share. In addition, during the years ended December 31, 2006 and 2005, the Company purchased and retired 14 and 425 shares of the Company's common stock for an aggregate price of $303 and $9,951, respectively. The Company did not purchase any shares of its common stock during 2004.
Repurchases of the Company's common stock may be made from time to time in the open market at prevailing market prices and may be made in privately negotiated transactions, subject to available resources. Future proceeds from the issuance of common stock in excess of par value will be credited to retained earnings until such time that previously recorded reductions have been recovered.
STOCK OPTIONS
The Company has two stock option plans, the Incentive and Non-Qualified Stock Option Plan (the "Incentive Plan") and the 1988 Joint Incentive and Non-Qualified Stock Option Plan (the "Joint Plan"), under which qualified and nonqualified options may be granted to key employees to purchase the Company's common stock at the fair market value on the date of grant. Under both plans, the options typically become exercisable in three equal installments, beginning one year from the date of grant. Stock options generally expire ten years from the date of grant. The number of authorized shares reserved for issuance is 3,650 under the Incentive Plan and 2,650 under the Joint Plan.
At December 31, 2006, there were 2,153 and 3,146 options outstanding under the Joint Plan and Incentive Plan, respectively. At December 31, 2005, there were 2,243 and 3,155 options outstanding under the Joint Plan and Incentive Plan, respectively.
Outstanding stock options as of December 31, 2006, 2005 and 2004, and changes during the years then ended are summarized below:
2006 2005 2004 ------------------ ------------------ ------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ----- --------- ----- --------- ------ --------- Outstanding - beginning of year 5,398 $ 11.54 5,430 $ 11.51 5,470 $ 11.49 Exercised (99) $ 8.05 (32) $ 6.42 (38) $ 8.06 Cancelled/Forfeited -- -- -- -- (2) $ 21.80 ----- ----- ----- Outstanding - end of year 5,299 $ 11.61 5,398 $ 11.54 5,430 $ 11.51 ===== ===== ===== Exercisable - end of year 5,299 $ 11.61 5,146 $ 11.04 4,627 $ 10.35 ===== ===== =====
The following table summarizes information about options outstanding and exercisable at December 31, 2006:
Options Outstanding and Exercisable ------------------------------------------------------------------ Number Weighted- Weighted- Outstanding Average Average Range of and Remaining Exercise Exercise Price Exercisable Contractual Life Price ----------------- ----------- ---------------- ---------- $ 6.53 - $ 9.38 1,930 2.3 years $ 7.26 $11.44 - $11.93 1,690 3.1 years $11.70 $12.20 - $21.80 1,679 5.8 years $16.51 ----- $ 6.53 - $21.80 5,299 3.7 years $11.61 =====
The aggregate intrinsic value of options outstanding and exercisable as of December 31, 2006 was $94,971, which represents the difference between the Company's closing stock price at the end of the year ($29.53) and the exercise price of each option, multiplied by the number of "in-the-money" options. This amount changes based upon the fair market value of the Company's stock. The total intrinsic value of options exercised during the year ended December 31, 2006 was $1,635.
10. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share from continuing operations:
For the Years Ended December 31, -------------------------------- 2006 2005 2004 -------- ------- --------- Numerator: Income from continuing operations $30,051 $13,276 $25,712 ======= ======= ======= Denominator: Basic - weighted-average shares outstanding 8,299 8,908 9,114 Dilutive effect of employee stock options 1,918 1,870 1,704 ------- ------- ------- Diluted - weighted-average shares outstanding 10,217 10,778 10,818 ======= ======= ======= Basic earnings per share - continuing operations $ 3.62 $ 1.49 $ 2.82 ======= ======= ======= Diluted earnings per share - continuing operations $ 2.94 $ 1.23 $ 2.37 ======= ======= =======
Employee stock options to purchase 756 shares of the Company's common stock at December 31, 2004, were not included in the computation of diluted earnings per share because their effect would have been anti-dilutive.
11. TRANSACTIONS WITH RELATED PARTIES
The Company has a 50% interest in an unconsolidated limited liability corporation, whose principal assets are two distribution centers leased to Kmart. A group that includes the wife of the Company's Board Chairman, two Directors of the Company and the wife of one of the Directors have an 8% interest in this entity (see Note 5).
12. INCOME TAXES
Deferred income taxes are determined on the liability method in accordance with SFAS No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). Under SFAS No. 109, deferred tax assets and liabilities are determined based on the difference between the tax basis of an asset or liability and its reported amount in the Consolidated Financial Statements using enacted tax rates. Future tax benefits attributable to these differences are recognized to the extent that realization of such benefits are more likely than not.
The components of the net deferred tax liability are as follows:
December 31, ------------------- 2006 2005 ------- ------- Realization allowances related to accounts receivable and inventories $ 421 $ 384 Net unrealized (gain) loss on available-for-sale securities (693) 1,374 Basis differences relating to real property 1,271 3,675 Accrued expenses, deductible when paid 4,554 4,402 Deferred profit (414) (2,229) Basis differences relating to business acquisitions (223) (1,863) Leveraged lease (6,127) (6,335) Property, plant and equipment (636) (495) Pensions (193) 132 Other, net (170) (152) ------- ------- Net deferred tax liability (2,210) (1,107) Less: Current portion - asset 583 2,389 ------- ------- Noncurrent portion $(2,793) $(3,496) ======= =======
The income tax provision (benefit) reflected in the Consolidated Statements of Income is as follows:
For the years ended December 31, -------------------------------- 2006 2005 2004 -------- -------- -------- Current: Federal $(10,108) $ 6,059 $ 10,205 State (984) 1,110 (314) Deferred 717 601 717 -------- -------- -------- $(10,375) $ 7,770 $ 10,608 ======== ======== ========
A reconciliation of the tax provision computed at statutory rates to the amounts shown in the Consolidated Statements of Income are as follows:
For the years ended December 31, -------------------------------- 2006 2005 2004 -------- -------- -------- Computed federal income tax provision at statutory rates $ 6,887 $ 7,366 $ 12,712 State (benefit) tax, net of federal tax effect (640) 722 (204) Reversal of long-term and deferred tax liabilities (17,330) -- -- Charitable contributions -- -- (1,745) Other, net 708 (318) (155) -------- -------- -------- $(10,375) $ 7,770 $ 10,608 ======== ======== ========
During 2006, the Company reversed $17,330 in long-term and deferred income tax liabilities relating to certain tax matters for which the statue of limitations had expired.
13. OTHER INCOME AND EXPENSE, NET
The components of other income and expense, net in the Consolidated Statements of Income are as follows:
For the years ended December 31, -------------------------------- 2006 2005 2004 -------- ------- ---------- Net realized and unrealized gain on derivative instruments $ 1,584 $ 684 $ 728 Net gain on the sale of available-for-sale securities 73 932 20,316 Litigation settlement 422 -- -- Equity in (losses) earnings of joint ventures (35) 3,154 84 Gain on sale of investment in joint venture -- 626 -- Casualty insurance settlement -- -- 831 Other, net (4) 184 476 ------- ------- ------- $ 2,040 $ 5,580 $22,435 ======= ======= =======
In October 2004, the stockholders of Prime Hospitality Corp. ("Prime") approved a merger whereby all of the outstanding shares of Prime were exchanged for $12.25 per common share. Accordingly, the Company's shares in Prime were sold, resulting in proceeds of approximately $43,400 and a gain of approximately $19,000.
14. PENSION PLAN
The Company has a noncontributory defined benefit pension plan that covers substantially all full-time employees and the former employees of one of the Company's discontinued manufacturing segments. The plan provides defined benefits based on years of service and compensation level.
Changes in benefit obligation, plan assets and funded status of the plan are as follows: December 31, --------------------- 2006 2005 ------- ------- Change in benefit obligation: Benefit obligation, beginning of year $ 8,559 $ 8,661 Service cost 306 273 Interest cost 654 661 Actuarial loss (gain) 148 (248) Benefits paid (761) (788) ------- ------- Benefit obligation, end of year 8,906 8,559 ------- ------- Change in plan assets: Fair value of plan assets, beginning of year 9,190 9,626 Actual return on plan assets 1,028 352 Benefits paid (761) (788) ------- ------- Fair value of plan assets, end of year 9,457 9,190 ------- ------- Funded status $ 551 631 ======= ------- Unrecognized net actuarial gain (988) Unrecognized net gain (19) ------- Accrued benefit obligation $ (376) =======
The funded status at December 31, 2006, is included in other assets, while the accrued benefit obligation at December 31, 2005 is included in other long-term liabilities in the Consolidated Balance Sheets. As of December 31, 2006 and 2005, the accumulated benefit obligation was $8,671 and $8,327, respectively.
Amounts recognized in accumulated other comprehensive income, before income taxes, consist of the following:
December 31, ------------ Unrecognized net actuarial gain $ 840 Unrecognized net gain 352 ------ $1,192 ======
Net periodic pension expense consists of the following:
For the years ended December 31, ------------------------------------ 2006 2005 2004 ------- ------- ------- Service cost $ (306) $ (273) $ (283) Interest cost (654) (661) (650) Actual return on plan assets 1,028 352 611 Net amortization and deferral (333) 386 142 ------- ------- ------- Net periodic pension expense $ (265) $ (196) $ (180) ======= ======= =======
In determining the projected benefit obligation and net periodic pension cost, the weighted-average assumed discount rate and expected long-term rate of return
on plan assets was 8%, while the rate of expected increases in future compensation was 3.5%, in all periods presented. A 100 basis point change in the expected long-term rate of return on plan assets would have changed fiscal 2006 pension expense by $88.
The expected long-term rate of return on plan assets is determined by considering historical rates of return, the current return trends, the mix of investments that comprise plan assets and forecasts of future long-term investment returns.
The Company does not expect any of the amounts in accumulated other comprehensive income to be recognized as a component of net periodic cost during 2007.
The allocations of plan assets by category are as follows:
December 31, ----------------- 2006 2005 ------- ------- Equity securities 77.2% 78.4% Debt securities 10.7 11.7 U.S. government securities 3.8 2.8 Cash and other investments 8.3 7.1 ----- ----- 100.0% 100.0% ===== =====
The Company's pension plan assets are managed by outside investment managers and the plan's trustees. The Company's investment strategy with respect to pension assets is to maximize return while protecting principal. The investment managers have the flexibility to adjust the asset allocations and move funds to the asset class that offers the most opportunity for investment returns.
Benefit payments, which include the effects of expected future service, are expected to be paid as follows:
Years ending December 31, ---------------------------------------------------- 2007 2008 2009 2010 2011 2016 ------- ------- ------- ------- ------- ------- Expected benefit payments $ 717 $ 846 $ 840 $ 842 $ 866 $4,392 ====== ====== ====== ====== ====== ======
15. BUSINESS SEGMENTS
During 2006, the Company re-evaluated its reportable operating segments and has restated prior results to reflect three segments plus corporate, instead of two, as previously reported. These segments are real estate investment and management, hotel operations and engineered products. The real estate investment and management segment is engaged in the business of investing in and managing real estate properties which are located throughout the United States. The hotel operations segment owns and operates three hotels located in the United States. Engineered products are manufactured through wholly-owned subsidiaries of the Company and primarily consist of knitted wire products and components and transformer products which are sold worldwide.
Operating results of the Company's business segments are as follows:
For the years ended December 31, -------------------------------- 2006 2005 2004 -------- -------- -------- NET REVENUES AND SALES: Real estate investment and management $ 19,403 $ 17,962 $ 18,448 Hotel operations 8,807 3,944 3,156 Engineered products 37,158 38,201 38,335 -------- -------- -------- $ 65,368 $ 60,107 $ 59,939 ======== ======== ======== OPERATING INCOME (LOSS): Real estate investment and management $ 12,025 $ 10,627 $ 10,956 Hotel operations 418 333 (216) Engineered products 2,784 3,175 4,187 General corporate expenses (4,089) (2,891) (2,706) -------- -------- -------- 11,138 11,244 12,221 OTHER INCOME, NET 8,538 9,802 24,099 -------- -------- -------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES $ 19,676 $ 21,046 $ 36,320 ======== ======== ========
For the years ended December 31, -------------------------------- 2006 2005 2004 -------- -------- -------- DEPRECIATION AND AMORTIZATION EXPENSE: Real estate investment and management $ 1,563 $ 1,916 $ 2,558 Hotel operations 782 251 467 Engineered products 343 336 405 General corporate expenses 96 101 147 -------- -------- -------- 2,784 $ 2,604 $ 3,577 ======== ======== ======== MORTGAGE INTEREST EXPENSE: Real estate investment and management $ 268 $ 373 $ 572 Hotel operations 529 22 -- -------- -------- -------- $ 797 $ 395 $ 572 ======== ======== ========
Sales by the Company's engineered products segment to automobile original equipment manufacturers and their first tier suppliers accounted for approximately 27.7%, 32.9% and 32.6% of 2006, 2005 and 2004 consolidated revenues, respectively. For the year ended December 31, 2006, sales by the engineered products segment to General Motors and Autoliv, its largest customers, accounted for 15.6% and 10.5% of the segment's sales, respectively. For the years ended December 31, 2005 and 2004, sales by the engineered products segment to General Motors accounted for 17.0% and 18.7% of the segment's sales, respectively. No other customers exceeded 10% of the segments sales during the last three years.
Approximately 14.2%, 18.0% and 16.6% of 2006, 2005 and 2004 total sales generated from the engineered products segment were to foreign customers. Substantially all assets held by the Company's engineered products segment are located within the United States or its leased warehouse in Tijuana, Mexico.
Selected information on the Company's business segments is as follows:
December 31, ------------------- 2006 2005 -------- -------- IDENTIFIABLE ASSETS: Real estate investment and management and corporate assets $196,685 $191,761 Hotel operations 14,841 13,227 Engineered products 12,074 11,697 -------- -------- $223,600 $216,685 ======== ======== ADDITIONS TO LONG-LIVED ASSETS: Real estate investment and management and corporate assets $ 11,719 $ 4,519 Hotel operations 2,215 10,240 Engineered products 283 183 -------- -------- $ 14,217 $ 14,942 ======== ========
16. LEASE OBLIGATIONS
At December 31, 2006, the Company was obligated under various noncancelable operating leases which expire on various dates through 2040. These leases include certain facilities and equipment of the engineered products segment, as well as land leases of the real estate investment and management segment. Certain leases contain renewal options and/or increased rental amounts. The future minimum rental commitments under operating leases are as follows:
Years ending December 31, ------------------------------------------------------------ There- 2007 2008 2009 2010 2011 After Total ------ ------ ------ ------ ------ ------ ------ Minimum rental commitments $ 576 $ 506 $ 436 $ 141 $ 114 $1,636 $3,409 ====== ====== ====== ====== ====== ====== ======
Rental expense under operating leases was $635, $628 and $482 for 2006, 2005 and 2004, respectively.
17. COMMITMENTS AND CONTINGENCIES
The Company has undertaken the completion of environmental studies and/or remedial action at Metex' two New Jersey facilities and has recorded a liability for the estimated investigation, remediation and administrative costs associated therewith.
The process of remediation has begun at one facility pursuant to a plan filed with the New Jersey Department of Environmental Protection ("NJDEP"). Environmental experts engaged by the Company estimate that under the most probable scenario, the remediation of this site is anticipated to require initial expenditures of $860, including the cost of capital equipment, and $86 in annual operating and maintenance costs over a 15 year period.
Environmental studies at the second facility indicate that remediation may be necessary. Based upon the facts presently available, environmental experts have advised the Company that, under the most probable remediation scenario, the estimated cost to remediate this site is anticipated to require $2,300 in initial costs, including capital equipment expenditures, and $258 in annual operating and maintenance costs over a 10 year period. These estimated costs of future expenses for environmental remediation obligations are not discounted to their present value. The Company may revise such estimates in the future due to the uncertainty regarding the nature, timing and extent of any remediation efforts that may be required at this site, should an appropriate regulatory agency deem such efforts to be necessary.
The foregoing estimates may also be revised by the Company as new or additional information in these matters becomes available or should the NJDEP or other regulatory agencies require additional or alternative remediation efforts in the future. Although such events are not expected to change these estimates, adverse decisions or events, particularly as to the merits of the Company's factual and legal basis, could cause the Company to change its estimate of liability with respect to such matters in the future. The Company has approximately $9,700 and $9,900 recorded in accounts payable and accrued liabilities and other long-term liabilities as of December 31, 2006 and 2005, respectively, to cover such matters.
The Company has an employment agreement with its Chairman, President and Chief Executive Officer (the "Officer") which provides for a base salary of $800 per annum plus a discretionary bonus as determined by the Compensation Committee of the Board of Directors. In the event of termination or a change in control, as defined in the employment agreement, the Company is required to pay the Officer a lump sum severance payment equal to three years salary and purchase outstanding options. The employment agreement provides for successive one year terms unless either the Company or the Officer gives the other written notice that the employment agreement is terminated and also provides a death benefit which the Company secures through an insurance policy.
The Company is subject to various other litigation, legal, regulatory and tax matters that arise in the ordinary course of business activities. When management believes it is probable that liabilities have been incurred and such amounts are reasonably estimable, the Company provides for amounts that include judgments and penalties that may be assessed. These liabilities are usually included in accounts payable and accrued liabilities or other long-term liabilities in the Consolidated Financial Statements, depending on the anticipated payment date. During 2006, the Company reversed $17,330 in long-term and deferred income tax liabilities relating to certain tax matters for which the statue of limitations has expired. None of the remaining matters are expected to result in a material adverse effect on the Company's consolidated financial position or results of operations.
SCHEDULE III
UNITED CAPITAL CORP. AND SUBSIDIARIES REAL PROPERTY AND ACCUMULATED DEPRECIATION DECEMBER 31, 2006
(In thousands)
Gross Amount At Which Initial Cost to Company Costs Carried At Close of Period ----------------------- Capitalized ------------------------------------ Mortgage Buildings, Subsequent to Buildings, Loans Improvements Acquisition/ Improvements Total Description Payable Land & Equipment Improvements Land & Equipment (a),(c) ------------------------------------- ------- -------- ------------ ------------- -------- ------------- -------- REAL PROPERTY HELD FOR RENTAL: Shopping centers and retail outlets:
Culver, CA $ -- $ 842 $ 7,576 $ -- $ 842 $ 7,576 $ 8,418 Northbrook, IL -- 898 8,075 -- 898 8,075 8,973 Miscellaneous investments 2,076 4,517 29,504 3,367 4,517 32,871 37,388 -------- -------- -------- -------- -------- -------- -------- 2,076 6,257 45,155 3,367 6,257 48,522 54,779 -------- -------- -------- -------- -------- -------- --------
Commercial properties: Long Island City, NY -- 850 7,681 -- 850 7,681 8,531 Miscellaneous investments 2,163 1,853 22,338 7,767 1,948 30,010 31,958 -------- -------- -------- -------- -------- -------- -------- 2,163 2,703 30,019 7,767 2,798 37,691 40,489 -------- -------- -------- -------- -------- -------- -------- Day-care centers: Miscellaneous investments 30 384 3,453 1,891 384 5,344 5,728 -------- -------- -------- -------- -------- -------- --------
Hotel properties:
Windsor Locks, CT 7,871 1,000 6,190 1,152 1,000 7,342 8,342 Miscellaneous investments -- 1,712 2,868 55 1,712 2,923 4,635 -------- -------- -------- -------- -------- -------- -------- 7,871 2,712 9,058 1,207 2,712 10,265 12,977 -------- -------- -------- -------- -------- -------- -------- Other: Miscellaneous investments -- 2,618 1,578 128 2,618 1,706 4,324 -------- -------- -------- -------- -------- -------- -------- Total real property held for rental 12,140 14,674 89,263 14,360 14,769 103,528 118,297 -------- -------- -------- -------- -------- -------- --------
REAL PROPERTY HELD FOR SALE: Commercial properties: Miscellaneous investments -- 78 1,295 157 78 1,452 1,530 -------- -------- -------- -------- -------- -------- -------- Total real property held for sale -- 78 1,295 157 78 1,452 1,530 -------- -------- -------- -------- -------- -------- -------- TOTAL $ 12,140 $ 14,752 $ 90,558 $ 14,517 $ 14,847 $104,980 $119,827 ======== ======== ======== ======== ======== ======== ========
(a) Reconciliations of the carrying value of total real property for the three years ended December 31, 2006 are as follows:
2006 2005 2004 -------- -------- -------- Total real property at beginning of period $108,481 $ 99,439 $113,097 Additions during the period: Acquisitions and improvements 12,880 10,679 1,097 -------- -------- -------- 121,361 110,118 114,194 Deductions during the period: Cost of real estate sold 1,534 1,637 14,726 Other -- -- 29 -------- -------- -------- $119,827 $108,481 $ 99,439 ======== ======== ========
(b) Reconciliations of accumulated depreciation for the three years ended December 31, 2006 are as follows:
2006 2005 2004 ------- ------- ------- Accumulated depreciation at beginning of period $68,281 $66,930 $72,817 Additions during the period: Provision for depreciation 1,774 1,987 2,704 ------- ------- ------- 70,055 68,917 75,521 Deductions during the period: Accumulated depreciation of real estate sold 598 636 8,562 Other -- -- 29 ------- ------- ------- $69,457 $68,281 $66,930 ======= ======= =======
(c) The aggregate cost for federal income tax purposes is approximately $151,023.
The accompanying Notes to Consolidated Financial Statements are an integral part of these schedules.
52-A
SCHEDULE III
UNITED CAPITAL CORP. AND SUBSIDIARIES REAL PROPERTY AND ACCUMULATED DEPRECIATION DECEMBER 31, 2006
(In thousands)
Life On Which Depreciation in Latest Statement of Accumulated Date of Date Income is Description Depreciation (b) Construction Acquired Computed ---------------- ------------ -------- -------------- REAL PROPERTY HELD FOR RENTAL: Shopping centers and retail outlets:
Culver, CA $ 7,576 N/A 1986 18 Years Northbrook, IL 8,075 N/A 1987 18 Years Miscellaneous investments 25,883 N/A 1986-98 5-39 Years -------- 41,534 --------
Commercial properties: Long Island City, NY 131 N/A 2006 39 Years Miscellaneous investments 18,789 N/A 1986-94 5-39 Years -------- 18,920 -------- Day-care centers: Miscellaneous investments 4,041 N/A 1986-91 5-39 Years --------
Hotel properties:
Windsor Locks, CT 166 N/A 2005 7-39 Years Miscellaneous investments 2,916 N/A 1986-99 7 Years -------- 3,082 -------- Other: Miscellaneous investments 1,248 N/A 1986-97 15-39 Years -------- Total real property held for rental 68,825 --------
REAL PROPERTY HELD FOR SALE: Commercial properties: Miscellaneous investments 632 N/A 1992 10-32 Years -------- Total real property held for sale 632 -------- TOTAL $ 69,457 ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these schedules.
52-B
SCHEDULE IV
UNITED CAPITAL CORP. AND SUBSIDIARIES MORTGAGE LOANS ON REAL ESTATE DECEMBER 31, 2006 (In thousands)
Final Description Interest Rate Maturity Date Periodic Payment Terms Prior Liens ------------------------------ -------------------- ------------------- -------------------------------- ------------- Mortgage loans secured by commercial property:
Interest only due monthly, with Brooklyn, New York LIBOR plus 14.25% June 2007 balance due at maturity $79,000
Interest only due monthly, with Ridgefield Park, New Jersey 15.0% June 2008 balance due at maturity --
Principal and interest due Houston, Texas Varies from 7.0%- 16.0% May 2014 monthly --
Principal and interest due Other 9.0% December 2008 monthly -- -------
$79,000 =======
(a) A reconciliation of mortgage loans on real estate for the year ended December 31, 2006 is as follows:
Balance at beginning of period $3,737
Additions during the period: New mortgage loans 750
Deductions during the period: Collection of principal (2,402) ------
Balance at end of period $2,085 ======
(b) The carrying value for federal income tax purposes is substantially equal to the carrying amount for book purposes.
The accompanying Notes to Consolidated Financial Statements are an integral part of these schedules.
53-A
SCHEDULE IV
UNITED CAPITAL CORP. AND SUBSIDIARIES MORTGAGE LOANS ON REAL ESTATE DECEMBER 31, 2006 (In thousands)
Principal Amount of Loans Carrying Subject to Amount of Delinquent Face Amount Mortgages Principal or of Mortgages (a), (b) Interest ------------- ------------ -------------
$ 750 $ 750 $ --
2,000 639 --
800 693 --
45 3 -- ------ ------ --------
$3,595 $2,085 $ -- ====== ====== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these schedules.
53-B
UNITED CAPITAL CORP. AND SUBSIDIARIES QUARTERLY FINANCIAL DATA (Unaudited) (In thousands, except per share data)
The following unaudited quarterly results have been restated from amounts previously reported by the Company to reflect the sale or classification of certain properties "Held for Sale" as discontinued operations in accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
First Second Third Fourth Quarter Quarter Quarter Quarter -------- -------- -------- ---------- FOR THE YEAR 2006: Revenues $ 15,988 $ 17,157 $ 16,400 $ 15,823 ======== ======== ======== ========== Operating income $ 1,814 $ 3,268 $ 2,969 $ 3,087 ======== ======== ======== ========== Other income (1) $ 1,504 $ 954 $ 1,981 $ 4,099 ======== ======== ======== ========== Income from continuing operations (2) $ 2,108 $ 2,746 $ 20,620 $ 4,577 ======== ======== ======== ========== (Loss) income from discontinued operations $ (20) $ 455 $ 4 $ 70 ======== ======== ======== ========== Net income $ 2,088 $ 3,201 $ 20,624 $ 4,647 ======== ======== ======== ========== BASIC EARNINGS PER SHARE: Income from continuing operations $ .25 $ .33 $ 2.49 $ .55 Income from discontinued operations -- .06 -- .01 -------- -------- -------- ---------- Net income per share $ .25 $ .39 $ 2.49 $ .56 ======== ======== ======== ========== DILUTED EARNINGS PER SHARE: Income from continuing operations $ .20 $ .27 $ 2.01 $ .44 Income from discontinued operations -- .05 -- .01 -------- -------- -------- ---------- Net income per share assuming dilution $ .20 $ .32 $ 2.01 $ .45 ======== ======== ======== ==========
FOR THE YEAR 2005: Revenues $ 15,213 $ 15,850 $ 14,831 $ 14,213 ======== ======== ======== ========== Operating income $ 2,529 $ 3,140 $ 3,015 $ 2,560 ======== ======== ======== ========== Other income (3) $ 1,800 $ 1,536 $ 4,425 $ 2,041 ======== ======== ======== ========== Income from continuing operations $ 2,824 $ 3,038 $ 4,821 $ 2,593 ======== ======== ======== ========== Income from discontinued operations $ 41 $ 242 $ 856 $ 181 ======== ======== ======== ========== Net income $ 2,865 $ 3,280 $ 5,677 $ 2,774 ======== ======== ======== ========== BASIC EARNINGS PER SHARE: Income from continuing operations $ .31 $ .34 $ .55 $ .30 Income from discontinued operations -- .02 .10 .02 -------- -------- -------- ---------- Net income per share $ .31 $ .36 $ .65 $ .32 ======== ======== ======== ========== DILUTED EARNINGS PER SHARE: Income from continuing operations $ .26 $ .28 $ .45 $ .24 Income from discontinued operations -- .02 .08 .02 -------- -------- -------- ---------- Net income per share assuming dilution $ .26 $ .30 $ .53 $ .26 ======== ======== ======== ==========
(1) The fourth quarter results include $2,303 in net realized and unrealized gain on derivative instruments and net gain on the sale of available-for-sale securities.
(2) The third quarter results include the reversal of $17,330 in long-term and deferred income tax liabilities relating to certain tax matters for which the statue of limitations has expired.
(3) The third quarter results include $3,327 in distributions in excess of the Company's investment related to the sale of the hotel which was owned and operated by the Hotel Venture (see Note 5 of Notes to Consolidated Financial Statements).