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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ending June 30, 2002
-------------------------------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission File Number: 1-10104
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United Capital Corp.
- --------------------------------------------------------------------------------
(Exact name of Company as specified in its charter)
Delaware 04-2294493
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9 Park Place, Great Neck, New York 11021
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
516-466-6464
- --------------------------------------------------------------------------------
(Company's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the Company (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, $.10 par value 4,568,105 shares outstanding
as of August 9, 2002.
Page 1 of 21
UNITED CAPITAL CORP. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION
PAGE
----
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as
of June 30, 2002 (Unaudited) and December 31, 2001 3
Consolidated Statements of Income for the
Three Months Ended June 30, 2002 and 2001 (Unaudited) 4
Consolidated Statements of Income for the
Six Months Ended June 30, 2002 and 2001 (Unaudited) 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2002 and 2001 (Unaudited) 6 - 7
Notes to Consolidated Financial Statements 8 - 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13 - 20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF
MARKET RISK 20
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
SIGNATURES 21
Page 2 of 21
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2002 (UNAUDITED) AND DECEMBER 31, 2001
(In Thousands)
2002 2001
---------- ---------
Assets
Current assets:
Cash and cash equivalents $ 72,126 $ 68,170
Marketable securities 34,565 28,633
Notes and accounts receivable, net 6,871 6,385
Inventories 4,040 4,953
Prepaid expenses and other current assets 850 871
-------- --------
Total current assets 118,452 109,012
-------- --------
Property, plant and equipment, net 4,026 4,525
Real property held for rental, net 50,590 52,870
Noncurrent notes receivable 3,151 250
Other assets 11,677 11,308
Deferred income taxes -- 1,026
-------- --------
Total assets $187,896 $178,991
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt $ 5,044 $ 5,047
Borrowings under credit facilities 175 525
Accounts payable and accrued liabilities 18,632 17,937
Income taxes payable 5,537 7,585
Deferred income taxes 3,232 1,481
-------- --------
Total current liabilities 32,620 32,575
-------- --------
Long-term debt 14,217 16,738
Other long-term liabilities 34,350 33,337
Deferred income taxes 1,140 --
-------- --------
Total liabilities 82,327 82,650
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock $.10 per value, authorized 7,500 shares;
issued and outstanding 4,588 and 4,641 shares, respectively 459 464
Retained earnings 95,909 90,000
Accumulated other comprehensive income, net of tax 9,201 5,877
-------- --------
Total stockholders' equity 105,569 96,341
-------- --------
Total liabilities and stockholders' equity $187,896 $178,991
======== ========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
Page 3 of 21
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
(In Thousands, Except Per Share Data)
2002 2001
--------- ----------
Revenues:
Net sales $ 9,021 $ 8,719
Rental revenues from real estate operations 6,649 6,927
-------- --------
Total revenues 15,670 15,646
-------- --------
Costs and expenses:
Cost of sales 6,458 6,603
Real estate operations:
Mortgage interest expense 382 461
Depreciation expense 829 1,057
Other operating expenses 1,912 2,099
General and administrative expenses 1,427 1,475
Selling expenses 931 952
-------- --------
Total costs and expenses 11,939 12,647
-------- --------
Operating income 3,731 2,999
-------- --------
Other income (expense):
Interest and dividend income 324 426
Interest expense (76) (104)
Other income and expense, net 1,892 (43)
-------- --------
Total other income 2,140 279
-------- --------
Income before income taxes 5,871 3,278
Provision for income taxes 2,342 1,270
-------- --------
Net income $ 3,529 $ 2,008
======== ========
Earnings per share:
Basic $ .77 $ .43
======== ========
Diluted $ .71 $ .41
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
Page 4 of 21
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
(In Thousands, Except Per Share Data)
2002 2001
-------- --------
Revenues:
Net sales $ 17,261 $ 17,977
Rental revenues from real estate operations 13,023 14,635
-------- --------
Total revenues 30,284 32,612
-------- --------
Costs and expenses:
Cost of sales 12,761 13,329
Real estate operations:
Mortgage interest expense 766 948
Depreciation expense 1,670 2,102
Other operating expenses 3,636 4,111
General and administrative expenses 2,801 2,879
Selling expenses 1,840 1,972
-------- --------
Total costs and expenses 23,474 25,341
-------- --------
Operating income 6,810 7,271
-------- --------
Other income (expense):
Interest and dividend income 881 950
Interest expense (242) (234)
Other income and expense, net 4,389 3,886
-------- --------
Total other income 5,028 4,602
-------- --------
Income before income taxes 11,838 11,873
Provision for income taxes 4,551 4,750
-------- --------
Net income $ 7,287 $ 7,123
======== ========
Earnings per share:
Basic $ 1.58 $ 1.52
======== ========
Diluted $ 1.47 $ 1.46
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
Page 5 of 21
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
(In Thousands)
2002 2001
---------- ---------
Cash flows from operating activities:
Net income $ 7,287 $ 7,123
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 2,318 2,835
Net loss (gain) on sale of available-for-sale securities 1,005 (128)
Net gain on sale of trading securities -- (461)
Net gain on sale of real estate assets (5,674) (3,035)
Gain from equity investments (337) (434)
Net gain on sale of derivative instruments (220) (521)
Purchase of trading securities -- (54)
Proceeds from sale of trading securities -- 2,287
Net unrealized loss on derivative instruments 475 304
Changes in assets and liabilities (A) 3,510 (595)
-------- --------
Net cash provided by operating activities 8,364 7,321
-------- --------
Cash flows from investing activities:
Purchase of available-for-sale securities (2,100) (1,853)
Proceeds from sale of available-for-sale securities 268 577
Proceeds from sale of real estate assets 6,410 3,091
Proceeds from sale of derivative instruments -- 1,606
Purchase of derivative instruments (1,930) --
Acquisition of property, plant and equipment (112) (979)
Purchase of note receivable (2,955) --
Principal payments on note receivable 3 --
Acquisition of/additions to real estate assets (124) (862)
Distributions from equity investments 389 391
-------- --------
Net cash (used in) provided by investing activities (151) 1,971
-------- --------
Cash flows from financing activities:
Principal payments on mortgage commitments, notes
and loans (2,524) (2,820)
Net repayments under credit facilities (350) (350)
Purchase and retirement of common shares (1,720) (695)
Proceeds from exercise of stock options 337 72
-------- --------
Net cash used in financing activities (4,257) (3,793)
-------- --------
Net increase in cash and cash equivalents 3,956 5,499
Cash and cash equivalents, beginning of period 68,170 17,134
-------- --------
Cash and cash equivalents, end of period $ 72,126 $ 22,633
======== ========
Page 6 of 21
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (CONTINUED)
(UNAUDITED)
(A) Changes in assets and liabilities for the six months ended June
30, 2002 and 2001 are as follows:
2002 2001
----------- --------
Notes and accounts receivable, net ($ 446) ($1,264)
Inventories 913 (817)
Prepaid expenses and other current assets 21 (90)
Deferred income taxes 2,136 216
Noncurrent notes receivable 11 (18)
Other assets (460) 34
Accounts payable and accrued liabilities 2,370 211
Income taxes payable (2,048) (653)
Other long-term liabilities 1,013 1,786
------- -------
Total $ 3,510 ($ 595)
======= =======
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
Page 7 of 21
UNITED CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
(UNAUDITED)
BASIS OF PRESENTATION
The accompanying unaudited Consolidated Financial Statements have
been prepared in accordance with the instructions to Form 10-Q used for
quarterly reports under Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, and therefore, do not include all information and footnotes
necessary for a fair presentation of financial position, results of operations
and cash flows in conformity with accounting principles generally accepted in
the United States of America.
The consolidated financial information included in this report has
been prepared in conformity with the accounting principles and methods of
applying those accounting principles, reflected in the Consolidated Financial
Statements included in the Annual Report on Form 10-K filed with the Securities
and Exchange Commission for the year ended December 31, 2001.
All adjustments necessary for a fair statement of the results for
the interim periods presented have been recorded.
The results of operations for the periods presented are not
necessarily indicative of the results to be expected for the full year.
MARKETABLE SECURITIES
The aggregate market value of marketable securities was $34,565 and
$28,633 at June 30, 2002 and December 31, 2001, respectively, while the
aggregate cost of such securities was $20,408 and $19,582, respectively.
Marketable securities consist of the following:
June 30, 2002 December 31, 2001
------------- -----------------
Available-for-sale securities:
Corporate equities $34,010 $28,198
Corporate bonds 555 435
------- -------
$34,565 $28,633
======= =======
INVENTORIES
The components of inventory are as follows:
June 30, 2002 December 31, 2001
------------- -----------------
Raw materials $2,116 $2,388
Work in process 482 782
Finished goods 1,442 1,783
------ ------
$4,040 $4,953
====== ======
Page 8 of 21
DERIVATIVE FINANCIAL INSTRUMENTS
- --------------------------------
As of January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"), as amended. As a result of adopting SFAS No. 133,
the Company recognizes all derivative financial instruments, such as its
interest rate swap contract, short stock sales and 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 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 other comprehensive income net of deferred taxes.
Changes in fair values of derivatives not qualifying as hedges are reported in
income.
In strategies designed to hedge overall market risks and manage its
interest rate exposure, the Company may sell common stock short, participate in
put and/or call options and enter into interest rate swap agreements.
The Company has entered into an interest rate swap agreement (the
"Swap") to modify the interest characteristics of a particular term loan by
effectively converting its floating rate to a fixed rate, thus reducing the
impact of interest rate changes on future expense. The Swap is designated with
the principal balance and term of the term loan and qualifies as an effective
hedge under SFAS No. 133. Since the Swap is classified as a cash flow hedge, the
fair value of ($2) and ($11) at June 30, 2002 and December 31, 2001,
respectively, is recorded as a component of accounts payable and accrued
liabilities in the accompanying Consolidated Balance Sheets and other
comprehensive income has been reduced by exactly the same amount as the
derivative, with no impact on earnings. The amount paid or received on the Swap
is accrued and recognized as an adjustment of interest expense related to the
debt.
Management maintains a diversified and well-balanced 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. The Company is highly
selective when participating in such transactions. At June 30, 2002 and December
31, 2001, the fair value of such derivatives was ($8,481), and ($10,155),
respectively, which is recorded as a component of accounts payable and accrued
liabilities in the accompanying Consolidated Balance Sheets. These instruments
do not qualify for hedge accounting and therefore changes in the derivatives
fair value are recognized in earnings. For the six months ended June 30, 2002
and 2001, the Company recognized $475 and $304 in net unrealized losses,
respectively, and $220 and $521 in net realized gains, respectively, from
derivative instruments, which are included in other income and expense, net in
the accompanying Consolidated Statements of Income.
CONTINGENCIES
- -------------
The Company is a lessor of eight (8) department stores that are
currently leased to K-Mart Corporation ("K-Mart"), which filed for protection
under Chapter 11 of the U.S. Bankruptcy code on January 22, 2002. In addition,
the Company holds a 50% interest in a joint venture that owns two distribution
centers that are also leased to K-Mart. Although it is currently uncertain which
leases, if any, K-Mart will reject or affirm as part of its reorganization,
management believes that its leases and the leases of the joint venture with
Page 9 of 21
K-Mart are at or below the fair market rent for comparable properties and as a
result, the rejection of one or more leases is not expected to have a material
adverse effect on the consolidated financial position of the Company.
The Company has undertaken the completion of environmental studies
and/or remedial action at Metex' two New Jersey facilities. The Company has
previously recorded liabilities in the Consolidated Financial Statements for the
estimated potential remediation costs at these facilities.
The process of remediation has begun at one facility pursuant to a
plan filed with the New Jersey Department of Environmental Protection ("NJDEP").
Environmental experts engaged by the Company estimate that under the most
probable remediation scenario the remediation of this site is anticipated to
require initial expenditures of $860 including the cost of capital equipment,
and $86 in annual operating and maintenance costs over a 15 year period.
Environmental studies at the second facility indicate that
remediation may be necessary. Based upon the facts presently available,
environmental experts have advised the Company that under the most probable
remediation scenario, the estimated cost to remediate this site is anticipated
to require $2,300 in initial costs, including capital equipment expenditures,
and $258 in annual operating and maintenance costs over a 10 year period. These
estimated costs of future expenses for environmental remediation obligations are
not discounted to their present value. The Company may revise such estimates in
the future due to the uncertainty regarding the nature, timing and extent of any
remediation efforts that may be required at this site, should an appropriate
regulatory agency deem such efforts to be necessary.
The foregoing estimates may also be revised by the Company as new or
additional information in these matters becomes available or should the NJDEP or
other regulatory agencies require additional or alternative remediation efforts
in the future. It is not currently possible to estimate the range or amount of
any such liability.
Although the Company believed that it was entitled to full defense
and indemnification with respect to environmental investigation and remediation
costs under its insurance policies, the Company's insurers denied such coverage.
Accordingly, the Company filed an action against certain insurance carriers
seeking defense and indemnification with respect to all prior and future costs
incurred in the investigation and remediation of these sites. Settlements have
been reached with all carriers in this matter.
In the opinion of management, amounts recovered from its insurance
carriers under the terms of its settlement agreements should be sufficient to
address these matters and amounts needed in excess, if any, will be paid
gradually over a period of years. Accordingly, they should not have a material
adverse effect upon the business, liquidity or financial position of the
Company. However, adverse decisions or events, particularly as to the merits of
the Company's factual and legal basis, could cause the Company to change its
estimate of liability with respect to such matters in the future.
The Company is subject to various other litigation, legal and
regulatory matters that arise in the ordinary course of business activities.
When management believes it is probable that a liability has been incurred and
such amounts are reasonably estimable the Company provides for amounts that
include judgments and penalties that may be assessed. These liabilities are
usually included in accounts payable and accrued liabilities or other long-term
liabilities in the accompanying Consolidated Financial Statements, depending on
the anticipated payment date. None of these matters are expected to result in a
material adverse effect on the Company's consolidated financial position or
results of operations.
Page 10 of 21
EARNINGS PER SHARE
- ------------------
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
2002 2001 2002 2001
------- ------- ------- ------
Numerator:
Net income $3,529 $2,008 $7,287 $7,123
====== ====== ====== ======
Denominator:
Denominator for basic earnings per
share--weighted-average shares 4,587 4,689 4,605 4,698
Effect of dilutive securities:
Employee stock options 373 251 352 194
------ ------ ------ ------
Denominator for diluted earnings per
share--adjusted weighted-average shares
and assumed conversions 4,960 4,940 4,957 4,892
====== ====== ====== ======
Basic earnings per share $ .77 $ .43 $ 1.58 $ 1.52
====== ====== ====== ======
Diluted earnings per share $ .71 $ .41 $ 1.47 $ 1.46
====== ====== ====== ======
COMPREHENSIVE INCOME
- --------------------
The components of comprehensive income are as follows:
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
2002 2001 2002 2001
--------- --------- --------- ---------
Net income $ 3,529 $ 2,008 $ 7,287 $ 7,123
Other comprehensive income, net of tax:
Change in net unrealized gain on
available-for-sale securities, net of tax
(provision) benefit of $127, ($2,726),
($1,787), and ($3,752), respectively (237) 5,066 3,319 6,970
Change in fair value of cash flow hedge, net
of tax (provision) benefit of ($1), ($0), ($4),
and $5, respectively 2 1 5 (10)
-------- -------- -------- --------
Comprehensive income $ 3,294 $ 7,075 $ 10,611 $ 14,083
======== ======== ======== ========
Page 11 of 21
The components of accumulated other comprehensive income are as follows:
June 30, 2002 December 31, 2001
------------- -----------------
Net unrealized gain on available-
for-sale securities, net of tax provision
of $4,955 and $3,168, respectively $ 9,202 $ 5,883
Unrealized loss on interest
rate swap agreement, net
of tax benefit of $1 and $5, respectively (1) (6)
------- -------
$ 9,201 $ 5,877
======= =======
BUSINESS SEGMENTS
- -----------------
The Company operates through two business segments: real estate
investment and management and engineered products. The real estate investment
and management segment is engaged in the business of investing in and managing
real estate properties and the making of high-yield, short-term loans secured by
desirable properties. Engineered products are manufactured through wholly-owned
subsidiaries of the Company and primarily consist of knitted wire products and
components and transformer products.
Operating results of the Company's business segments are as follows:
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
2002 2001 2002 2001
-------- --------- --------- ---------
Net revenues and sales:
Real estate investment and management $ 6,649 $ 6,927 $ 13,023 $ 14,635
Engineered products 9,021 8,719 17,261 17,977
-------- -------- -------- --------
$ 15,670 $ 15,646 $ 30,284 $ 32,612
======== ======== ======== ========
Operating income:
Real estate investment and management $ 3,526 $ 3,310 $ 6,951 $ 7,474
Engineered products 853 417 1,074 1,124
General corporate expenses (648) (728) (1,215) (1,327)
-------- -------- -------- --------
3,731 2,999 6,810 7,271
Other income, net 2,140 279 5,028 4,602
-------- -------- -------- --------
Income before income taxes $ 5,871 $ 3,278 $ 11,838 $ 11,873
======== ======== ======== ========
Identifiable assets of the Company's business segments are as follows:
June 30, 2002 December 31, 2001
------------- -----------------
Real estate investment and management and
corporate assets $175,296 $166,562
Engineered products 12,600 12,429
-------- --------
$187,896 $178,991
======== ========
Page 12 of 21
USE OF ESTIMATES
- ----------------
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(In Thousands, Except Per Share Data)
The following discussion should be read in conjunction with the
accompanying Consolidated Financial Statements of United Capital Corp. (the
"Company") and related notes thereto.
FORWARD-LOOKING STATEMENTS
- --------------------------
This Form 10-Q contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which are
intended to be covered by the safe harbors created thereby. All forward-looking
statements involve risks and uncertainties, including without limitation,
general economic conditions, interest rates, competition, potential technology
changes and potential changes in customer spending and purchasing policies and
procedures. Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements included in this Form 10-Q will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
The Consolidated Financial Statements of the Company include the
accounts of the Company and its wholly-owned subsidiaries. The preparation of
the financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates
and assumptions in certain circumstances that affect amounts reported in the
Consolidated Financial Statements and related notes. In preparing these
financial statements, management has made its best estimates and assumptions
that affect the reported amounts of assets and liabilities. These estimates are
based on, but not limited to, historical results, industry standards and current
economic conditions, giving due consideration to materiality. It is possible
that the ultimate outcome as anticipated by management in formulating its
estimates inherent in these financial statements might not materialize. However,
application of the critical accounting policies below involves the exercise of
judgment and use of assumptions as to future uncertainties and, as a result,
actual results could differ from these estimates. In addition, other companies
may utilize different estimates, which may impact the comparability of the
Company's results of operations to those of companies in similar businesses.
Revenue Recognition and Accounts Receivable - Manufacturing Operations
----------------------------------------------------------------------
Sales are recorded when the products are shipped to the customer.
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
Page 13 of 21
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.
Revenue Recognition and Accounts Receivable - Real Estate Operations
--------------------------------------------------------------------
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. Gains on the sale of real estate assets and equity
investments are recorded when the gain recognition criteria under
generally accepted accounting principles in the United States of America
have been met.
Certain lease agreements provide for additional rent based on a
percentage of tenants' sales. These percentage rents are recorded once the
required sales levels are achieved.
Income on leveraged leases is recognized by a method that produces a
constant rate of return on the outstanding investment in the lease, net of
the related deferred tax liability in the years in which the net
investment is positive.
The Company makes estimates of the uncollectibility of its accounts
receivable related to base rents, tenant escalations, expense
reimbursements and other revenues. The Company analyzes accounts
receivable and historical bad debt levels, customer credit worthiness and
current economic trends when evaluating the adequacy of the allowance for
doubtful accounts. In addition, tenants in bankruptcy are analyzed and
estimates are made in connection with the expected recovery of
pre-petition and post-petition claims. The Company's net income is
directly affected by management's estimate of the collectibility of
accounts receivable.
Real Estate
-----------
Land, buildings and improvements and equipment are recorded at cost,
less accumulated depreciation and amortization. Expenditures for
maintenance and repairs are charged to operations as incurred. Significant
renovations and replacements, which improve the life of the asset, are
capitalized and depreciated over their estimated useful lives.
Depreciation is computed utilizing the straight-line method over the
estimated useful lives of five to thirty-nine years for buildings and
improvements and five to seven years for equipment.
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 lengthen the expected useful life of a
particular asset, it would be depreciated over more years, and result in
less depreciation expense and higher annual income.
Page 14 of 21
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, particularly
finished goods, and records a provision for excess and obsolete
inventory based primarily on existing and anticipated design and
engineering changes to our 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.
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 reported net income is
directly affected by management's estimate of impairments.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
- ---------------------------------------
Revenues for the three months ended June 30, 2002 were $15,670
compared to $15,646 for the three months ended June 30, 2001. Operating income
during this period was $3,731 versus $2,999 for the comparable 2001 period, an
increase of $732 or 24%. Net income for the second quarter of 2002 was $3,529 or
$.77 per basic share compared to net income of $2,008 or $.43 per basic share
for the same period in 2001, an increase of 79% in basic earnings per share.
Total revenues for the first six months of 2002 were $30,284
resulting in operating income of $6,810 versus total revenues of $32,612 and
operating income of $7,271 during the comparable 2001 period. Net income for the
six month period was $7,287 or $1.58 per basic share in 2002 versus $7,123 or
$1.52 per basic share in 2001.
REAL ESTATE OPERATIONS
- ----------------------
Rental revenues from real estate operations decreased by $278 or
4.0% for the three months ended June 30, 2002 and decreased $1,612 or 11.0% for
the six months ended June 30, 2002 compared to the corresponding periods in
2001. These decreases are primarily attributable to decreased rental revenues
due to the sale of properties and decreased hotel revenues due to the slowing
economy.
Mortgage interest expense decreased $79 or 17.1% for the three
months ended June 30, 2002, and $182 or 19.2% for the six months ended June 30,
2002, compared to the corresponding 2001 periods, due to continuing mortgage
amortization which approximated $5,100 during the last 12 months.
Page 15 of 21
Depreciation expense associated with rental properties decreased
$228 or 21.6% for the three months ended June 30, 2002, and $432 or 20.6% for
the six months ended June 30, 2002 compared to the same periods in 2001. These
decreases are primarily due to reduced depreciation expense associated with
fully depreciated properties and properties sold in 2002 and 2001.
Operating expenses associated with the management of real properties
decreased $187 or 8.9% for the three months ended June 30, 2002, and $475 or
11.6% for the six months ended June 30, 2002 compared to the corresponding
periods in 2001, principally due to the decrease in hotel revenues noted above.
ENGINEERED PRODUCTS
- -------------------
The Company's engineered products segment includes Metex Mfg.
Corporation and AFP Transformers, LLC. The operating results of the engineered
products segment are as follows:
Three Months Six Months
(In Thousands) Ended June 30, Ended June 30,
-------------- --------------
2002 2001 2002 2001
------ ------- ------- -------
Net Sales $9,021 $ 8,719 $17,261 $17,977
====== ======= ======= =======
Cost of Sales $6,458 $ 6,603 $12,761 $13,329
====== ======= ======= =======
Selling, General and
Administrative Expenses $1,710 $ 1,699 $ 3,426 $ 3,524
====== ======= ======= =======
Income from Operations $ 853 $ 417 $ 1,074 $ 1,124
====== ======= ======= =======
Net sales of the engineered products segment increased $302 or 3.5%
for the three months ended June 30, 2002 and decreased $716 or 4.0% for the six
months ended June 30, 2002 compared to the same periods in 2001. The increase
for the quarter reflects higher sales in the Company's automotive product line,
offset by lower sales in the Company's transformer and engineered component
product lines. The decrease for the six months ended June 30, 2002 results
primarily from lower sales in the Company's transformer and engineered component
product lines, offset by higher sales in the Company's automotive product line.
Cost of sales as a percentage of sales decreased 5.4% for the three
months ended June 30, 2002, compared to the corresponding period in 2001,
principally due to the mix of products sold, cost containment efforts and
improved pricing decisions. For the six months ended June 30, 2002, cost of
sales as a percentage of sales was comparable to the six months ended June 30,
2001.
Selling, general and administrative expenses of the engineered
products segment increased less than 1% for the three months ended June 30, 2002
and decreased $98 or 2.8% for the six months ended June 30, 2002 versus the
comparable 2001 periods. The changes are mainly due to changes in sales volume
noted above, as well as cost containment efforts.
Page 16 of 21
GENERAL AND ADMINISTRATIVE EXPENSES
- -----------------------------------
General and administrative expenses not associated with the
manufacturing operations decreased by $80 for the three months ended June 30,
2002 and $112 for the six months ended June 30, 2002, versus the same periods in
2001, principally due to a decrease in salary and salary related expenses and
professional fees.
OTHER INCOME AND EXPENSE, NET
- -----------------------------
The components of other income and expense, net in the accompanying
Consolidated Statements of Income are as follows:
Three Months Six Months
(In Thousands) Ended June 30, Ended June 30,
-------------- --------------
2002 2001 2002 2001
-------- -------- ------- --------
Net gain on sale of real estate assets $ 296 $ 94 $ 5,674 $ 3,035
Net gain on sale of trading securities -- -- -- 461
Net gain (loss) on sale of available-for-sale securities -- 128 (1,005) 128
Net gain on sale of derivative instruments 100 521 220 521
Net unrealized gain (loss) on derivative
instruments 1,507 (770) (475) (304)
Other, net (11) (16) (25) 45
------- ------- ------- -------
$ 1,892 ($ 43) $ 4,389 $ 3,886
======= ======= ======= =======
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At June 30, 2002, the Company's cash and marketable securities were
over $106,000 and working capital was approximately $86,000. Management
continues to believe the real estate market is overvalued and accordingly recent
acquisitions have been limited to select properties that meet the Company's
stringent financial requirements. Management believes the available working
capital along with the $60,000 of availability on the revolving credit facility
discussed below, puts the Company in an opportune position to fund acquisitions
and grow the portfolio if and when attractive long-term opportunities become
available.
The Company's portfolio of marketable securities had a fair market
value of approximately $34,565 at June 30, 2002, reflecting pretax unrealized
holding gains of approximately $14,157. Included in marketable securities at
June 30, 2002 was $32,518 of common stock in a publicly-traded company for which
the Company's Chairman of the Board is the Chairman and President and another
Director of the Company is a director.
Page 17 of 21
The Company is a lessor of eight (8) department stores that are
currently leased to K-Mart Corporation ("K-Mart"), which filed for protection
under Chapter 11 of the U.S. Bankruptcy Code on January 22, 2002. In addition,
the Company holds a 50% interest in a joint venture that owns two distribution
centers that are also leased to K-Mart. Although it is currently uncertain which
leases, if any, K-Mart will reject or affirm as part of its reorganization,
management believes that its leases and the leases of the joint venture with
Kmart are at or below the fair market rent for comparable properties and as a
result, the rejection of one or more leases is not expected to have a material
adverse effect on the consolidated financial position of the Company.
Effective December 31, 1999, the Company entered into a credit
agreement with three banks which provides for both a $60,000 revolving credit
facility ("Revolver") and a $1,925 term loan ("Term Loan"). Each of the three
banks participates in the Revolver while only one bank participates in the Term
Loan.
Under the Revolver, the Company will be provided with eligibility
based upon the sum of (i) 60.0% of the aggregate annualized and normalized
year-to-date net operating income of unencumbered eligible properties, as
defined, capitalized at 10.5%, (ii) the lesser of $6,000 or 60.0% of the
aggregate annualized and normalized year-to-date net operating income of
unencumbered eligible hotel properties, as defined, capitalized at 10.5%, (iii)
the lesser of $10,000 or 50.0% of the aggregate annualized and normalized
year-to-date net operating income of encumbered eligible properties, as defined,
capitalized at 12.0% and (iv) the lesser of $10,000 or the sum of 75.0% of
eligible accounts receivable and 50.0% of eligible inventory, as defined. At
June 30, 2002, eligibility under the Revolver was $60,000, based upon the above
terms. The credit agreement contains certain financial and restrictive
covenants, including minimum consolidated equity, interest coverage, debt
service coverage and capital expenditures (other than for real estate). The
Company was in compliance with all covenants at June 30, 2002. The credit
agreement also contains provisions, which allow the banks to perfect a security
interest in certain operating and real estate assets in the event of default, as
defined in the credit agreement. Borrowings under the Revolver, at the Company's
option, bear interest at the bank's prime lending rate or at the London
Interbank Offered Rate ("LIBOR") plus 2.0%. The Revolver expires on December 31,
2002. At June 30, 2002, there were no amounts outstanding under the Revolver.
The Term Loan bears interest at 90 day LIBOR plus 1.4% and is
payable in quarterly principal installments of $175 with the final payment due
on September 30, 2002. At June 30, 2002, there was $175 outstanding on the Term
Loan.
The Company has an interest-rate swap agreement (the "Swap") to
effectively convert its floating rate Term Loan to a fixed rate basis, thus
reducing the impact of interest rate changes on future expense. Under the Swap,
the Company agreed to exchange with the counterparty (a commercial bank) the
difference between the fixed and floating rate interest amounts. The Swap is
classified as a cash flow hedge and is recorded as a component of accounts
payable and accrued liabilities in the accompanying Consolidated Balance Sheets
and other comprehensive income has been reduced by the same amount, with no
impact on earnings. The differential to be paid or received on the Swap is
recognized over the term of the agreement as an adjustment to interest expense.
The Company has undertaken the completion of environmental studies
and/or remedial action at Metex' two New Jersey facilities and had filed an
action against certain insurance carriers seeking recovery of costs incurred and
to be incurred in these matters. Settlements have been reached with all carriers
in this matter. See Notes to Consolidated Financial Statements for further
discussion on this matter.
Page 18 of 21
The current liabilities of the Company have historically exceeded
its current assets principally due to the financing of the purchase of long-term
assets utilizing short-term borrowings and the classification of current
mortgage obligations without the corresponding current asset for such
properties. Future financial statements may reflect current liabilities in
excess of current assets. Management is confident that through cash flow
generated from operations, together with borrowings available under the Revolver
and the sale of select assets, all obligations will be satisfied as they come
due.
Previous purchases of the Company's common stock have reduced the
Company's additional paid-in capital to zero and accordingly current year
purchases in excess of par value have reduced retained earnings. During the
first six months of 2002, the Company purchased and retired 70,947 shares of the
Company's common stock for approximately $1,720. Future repurchases of the
Company's common stock will also reduce retained earnings by amounts in excess
of the par value. Repurchases of the Company's common stock will be made from
time to time in the open market at prevailing market prices and may be made in
privately negotiated transactions, subject to available resources.
The cash needs of the Company have been satisfied from funds
generated by current operations and additional borrowings. It is expected that
future operational cash needs and the cash required to repurchase the Company's
common stock will also be satisfied from existing cash balances, ongoing
operations and borrowings under the Revolver. The primary source of capital to
fund additional real estate acquisitions and make additional high-yield mortgage
loans will come from existing funds, borrowings under the Revolver, the sale,
financing and refinancing of the Company's properties and from third party
mortgages and purchase money notes obtained in connection with specific
acquisitions.
In addition to the acquisition of properties for consideration
consisting of cash and mortgage financing proceeds, the Company may acquire real
properties in exchange for the issuance of the Company's equity securities. The
Company may also finance acquisitions of other companies in the future with
borrowings from institutional lenders and/or the public or private offerings of
debt or equity securities.
Funds of the Company in excess of that needed for working capital,
purchasing real estate and arranging financing for real estate acquisitions are
invested by the Company in corporate equity securities, certificates of deposit,
government securities and other financial instruments.
BUSINESS TRENDS
- ---------------
Total revenues of the Company were $30,284 for the six months ended
2002, a decrease of $2,328 or 7.1% from the comparable 2001 period, principally
due to decreased rental and hotel revenues and a decrease in net sales from the
engineered products segment. Net income during this period was $7,287 or $1.58
per basic share compared to net income of $7,123 or $1.52 per basic share for
the same period in 2001.
Revenues from the Company's real estate operations for the six
months ended June 30, 2002 were $13,023, generating operating income of $6,951.
The Company has continued to take advantage of the current economic environment
by divesting itself of certain assets. During the six months ended June 30,
2002, the Company sold four properties generating approximately $6,408 of cash
inflow and yielding $5,674 in property gains.
Page 19 of 21
Operating income from the engineered products segment during the
first six months of 2002 was $1,074 on revenues of $17,261. Despite the
downturns the economy has been experiencing in recent months, management's
continued focus on expanding product offerings, price competitiveness and cost
reductions have contributed to the overall success of this segment.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
The information called for by this item is provided under the
caption "Derivative Financial Instruments" under Item 1 - Notes to Consolidated
Financial Statements.
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 11, 2002, the Company held its Annual Meeting of Stockholders, whereby
the stockholders elected Directors and approved a proposal to amend the
Company's Incentive and Non-Qualified Stock Option Plan. The vote on such
matters was as follows:
1. ELECTION OF DIRECTORS:
For Withheld
--- --------
A.F. Petrocelli 4,112,308 10,053
Howard M. Lorber 4,111,808 10,553
Robert M. Mann 4,112,308 10,053
Anthony J. Miceli 4,112,308 10,053
Arnold S. Penner 4,112,308 10,053
2. APPROVAL OF AMENDMENT TO THE INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN:
To adopt an amendment to the plan to increase the number of shares of Common
Stock, $.10 par value per share, reserved for issuance under the plan from
1,325,000 to 1,825,000.
For Against Abstain None Voted
--- ------- ------- ----------
3,604,079 94,568 13,745 409,969
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K. None.
(b) Exhibits
99.1 Certification of the Chief Executive Officer
99.2 Certification of the Chief Financial Officer
Page 20 of 21
SIGNATURES
Pursuant to the requirements 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: August 9, 2002 By: /s/Anthony J. Miceli
------------------------------
Anthony J. Miceli
Vice President, Chief Financial Officer
and Secretary of the Company
Page 21 of 21