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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, 2003
-------------------------------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
------------------------------------------
Commission File Number: 1-10104
---------------------------------------------------
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 by check mark whether the Company is an accelerated filer. [ ] Yes [X] 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 9,101,342 shares outstanding as of August 5, 2003.
(4,550,671 shares before adjustment for a two-for-one stock split
effective August 2003.
See Notes to Consolidated Financial Statements)
Page 1 of 27
UNITED CAPITAL CORP. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION
PAGE
----
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as
of June 30, 2003 (Unaudited) and December 31, 2002 3
Consolidated Statements of Income for the
Three Months Ended June 30, 2003 and 2002 (Unaudited) 4
Consolidated Statements of Income for the
Six Months Ended June 30, 2003 and 2002 (Unaudited) 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2003 and 2002 (Unaudited) 6 - 7
Notes to Consolidated Financial Statements 8 - 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 20 - 25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF
MARKET RISK 26
ITEM 4. CONTROLS AND PROCEDURES 26
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECUIRTY HOLDERS 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 27
SIGNATURES 27
Page 2 of 27
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2003 (UNAUDITED) AND DECEMBER 31, 2002
(In Thousands)
2003 2002
-------- ----------
Assets
Current assets:
Cash and cash equivalents $ 62,984 $ 48,893
Marketable securities 31,299 25,893
Notes and accounts receivable, net 7,541 5,715
Inventories 3,401 3,677
Prepaid expenses and other current assets 917 1,477
Deferred income taxes 628 207
Current assets of discontinued operations 26 73
-------- --------
Total current assets 106,796 85,935
-------- --------
Property, plant and equipment, net 3,365 3,569
Real property held for rental, net 43,104 44,539
Investments in joint ventures 21,926 31,389
Noncurrent notes receivable 2,948 2,994
Other assets 3,437 3,707
Noncurrent assets of discontinued operations 536 4,414
-------- --------
Total assets $182,112 $176,547
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt $ 6,466 $ 3,977
Accounts payable and accrued liabilities 8,902 9,262
Dividends payable 9,102 0
Income taxes payable 7,769 5,260
Current liabilities of discontinued operations 0 446
-------- --------
Total current liabilities 32,239 18,945
-------- --------
Long-term debt 7,750 12,347
Other long-term liabilities 31,142 31,016
Deferred income taxes 1,929 2,605
-------- --------
Total liabilities 73,060 64,913
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock $.10 par value, authorized 17,500 shares;
issued and outstanding 9,101 and 9,038 shares, respectively 910 904
Retained earnings 107,560 109,644
Accumulated other comprehensive income, net of tax 582 1,086
-------- --------
Total stockholders' equity 109,052 111,634
-------- --------
Total liabilities and stockholders' equity $182,112 $176,547
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements. Share amounts and common stock at par have been
retroactively adjusted to reflect the two-for-one stock split in August 2003.
Page 3 of 27
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
(In Thousands, Except Per Share Data)
2003 2002
--------- --------
Revenues:
Net sales $ 8,326 $ 9,021
Rental revenues from real estate operations 6,405 6,082
-------- --------
Total revenues 14,731 15,103
-------- --------
Costs and expenses:
Cost of sales 5,820 6,458
Real estate operations:
Mortgage interest expense 267 368
Depreciation expense 774 816
Other operating expenses 2,148 1,885
General and administrative expenses 1,728 1,427
Selling expenses 874 931
-------- --------
Total costs and expenses 11,611 11,885
-------- --------
Operating income 3,120 3,218
-------- --------
Other income (expense):
Interest and dividend income 582 324
Interest expense (111) (76)
Other income and expense, net 845 1,892
-------- --------
Total other income 1,316 2,140
-------- --------
Income from continuing operations before income taxes 4,436 5,358
Provision for income taxes 1,476 2,137
-------- --------
Income from continuing operations 2,960 3,221
-------- --------
Discontinued operations:
Income from discontinued operations, net of tax
provision of $81 and $205, respectively 122 308
Net gain on disposal of discontinued operations, net of tax
provision of $249 375 0
-------- --------
Income from discontinued operations 497 308
-------- --------
Net income $ 3,457 $ 3,529
======== ========
Basic earnings per share:
Income from continuing operations $ .33 $ .35
Income from discontinued operations .05 .03
-------- --------
Net income per share $ .38 $ .38
======== ========
Diluted earnings per share:
Income from continuing operations $ .27 $ .33
Income from discontinued operations .05 .03
-------- --------
Net income per share assuming dilution $ .32 $ .36
======== ========
Dividends declared per share $ 2.00 $ 0
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements. Per share amounts, except dividends declared, have been
retroactively adjusted to reflect the two-for-one stock split in August 2003.
Page 4 of 27
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
(In Thousands, Except Per Share Data)
2003 2002
-------- ---------
Revenues:
Net sales $ 16,482 $ 17,261
Rental revenues from real estate operations 12,482 11,879
-------- --------
Total revenues 28,964 29,140
-------- --------
Costs and expenses:
Cost of sales 11,880 12,761
Real estate operations:
Mortgage interest expense 553 735
Depreciation expense 1,554 1,645
Other operating expenses 4,213 3,577
General and administrative expenses 3,165 2,801
Selling expenses 1,740 1,840
-------- --------
Total costs and expenses 23,105 23,359
-------- --------
Operating income 5,859 5,781
-------- --------
Other income (expense):
Interest and dividend income 915 881
Interest expense (219) (242)
Other income and expense, net 1,474 4,389
-------- --------
Total other income 2,170 5,028
-------- --------
Income before income taxes 8,029 10,809
Provision for income taxes 2,847 4,139
-------- --------
Income from continuing operations 5,182 6,670
-------- --------
Discontinued operations:
Income from discontinued operations,
net of tax provision of $175 and $412, respectively 262 617
Net gain on disposal of discontinued operations, net of tax
provision of $1,006 1,509 0
-------- --------
Income from discontinued operations 1,771 617
-------- --------
Net income $ 6,953 $ 7,287
======== ========
Basic earnings per share:
Income from continuing operations $ .57 $ .72
Income from discontinued operations .20 .07
-------- --------
Net income per share $ .77 $ .79
======== ========
Diluted earnings per share:
Income from continuing operations $ .49 $ .67
Income from discontinued operations .16 .06
-------- --------
Net income per share assuming dilution $ .65 $ .73
======== ========
Dividends declared per share $ 2.00 $ 0
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements. Per share amounts, except dividends declared, have been
retroactively adjusted to reflect the two-for-one stock split in August 2003.
Page 5 of 27
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
(In Thousands)
2003 2002
------- --------
Cash flows from operating activities:
Net income $ 6,953 $ 7,287
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 1,945 2,282
Net loss on sale of available-for-sale securities 0 1,005
Net loss (gain) on sale of real estate assets 152 (5,674)
Equity in earnings of joint ventures (533) (337)
Net gain on disposal of discontinued operations (2,515) 0
Net realized and unrealized (gain) loss on derivative instruments (982) 255
Proceeds from sale of trading securities 884 0
Net realized and unrealized gain on trading securities (57) 0
Changes in assets and liabilities (A) (213) 3,116
-------- --------
Net cash provided by operating activities 5,332 7,934
-------- --------
Cash flows from investing activities:
Purchase of available-for-sale securities (6,490) (2,099)
Proceeds from sale of available-for-sale securities 0 268
Proceeds from sale of real estate assets 6,541 6,419
Proceeds from sale of derivative instruments 954 0
Purchase of derivative instruments 0 (1,930)
Purchase of note receivable 0 (2,955)
Acquisition of property, plant and equipment (132) (112)
Principal payments on notes receivable 59 3
Acquisition of/additions to real estate assets (132) (124)
Distributions from joint ventures, net of capital contributions 9,996 389
-------- --------
Net cash provided by (used in) investing activities 10,796 (141)
-------- --------
Cash flows from financing activities:
Principal payments on mortgage commitments, notes
and loans (2,108) (2,104)
Net repayments under credit facilities 0 (350)
Purchase and retirement of common shares (771) (1,720)
Proceeds from exercise of stock options 842 337
-------- --------
Net cash used in financing activities (2,037) (3,837)
-------- --------
Net increase in cash and cash equivalents 14,091 3,956
Cash and cash equivalents, beginning of period 48,893 68,170
-------- --------
Cash and cash equivalents, end of period $ 62,984 $ 72,126
======== ========
Page 6 of 27
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (CONTINUED)
(UNAUDITED)
2003 2002
--------- ---------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $658 $889
====== ======
Taxes $3,542 $3,651
====== ======
(A) Changes in assets and liabilities for the six months ended June 30,
2003 and 2002 are as follows:
2003 2002
--------- ---------
Accounts receivable, net ($1,839) ($ 356)
Inventories 276 913
Prepaid expenses and other current assets 40 21
Deferred income taxes (826) 2,135
Other assets 232 (460)
Accounts payable and accrued liabilities (332) 2,347
Income taxes payable 2,509 (2,460)
Other long-term liabilities 126 1,015
Discontinued operations - noncash charges and working capital
changes (399) (39)
------- -------
Total ($ 213) $ 3,116
======= =======
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
Page 7 of 27
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, 2002.
All adjustments, all of which are normal and recurring in the
opinion of management, 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.
DIVIDENDS
On June 10, 2003, the Board of Directors of the Company declared a
special one-time cash dividend of $2.00 per common share to all stockholders of
record as of June 20, 2003. The declaration of such dividend is within the
discretion of the Board of Directors. While the Company does not currently
expect to pay additional dividends in the future, the Board of Directors could
re-evaluate this position in the future. This dividend, totaling $9,102, was
paid on July 10, 2003.
STOCK SPLIT
On June 10, 2003, the Company's Board of Directors unanimously
adopted an amendment to the Company's Articles of Incorporation to increase the
number of authorized shares of the Company's Common Stock from 7,500 to 17,500
shares, subject to stockholder approval. The Company received the approval of
this amendment by a majority of it's stockholders on August 4, 2003 and, on that
date, declared a two-for-one stock split to stockholders of record as of the
close of business on August 15, 2003 payable on or about August 29, 2003. All
references to the number of shares of common stock, per share prices and
earnings per share amounts in the accompanying Consolidated Financial Statements
and notes included in the Quarterly Report on Form 10-Q for the current and
prior periods have been adjusted to reflect the split on a retroactive basis.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections" ("SFAS No. 145"). This
statement eliminates the requirement to report gains and losses from
extinguishment of debt as extraordinary unless they meet the criteria of APB
Opinion 30. SFAS No. 145 also requires sale-leaseback accounting for certain
lease modifications that have economic effects that are similar to
sale-leaseback transactions. The changes related to lease accounting are
effective for transactions occurring after May 15, 2002 and the changes related
Page 8 of 27
to debt extinguishment are effective for fiscal years beginning after May 15,
2002. The adoption of SFAS No. 145 did not have a material impact on the
Company's financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146
nullifies Emerging Issues Task Force Issue No. 94-3 and requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. This statement also establishes that fair value
is the objective for initial measurement of the liability. SFAS No. 146 is
effective for exit or disposal activities that are initiated after December 31,
2002. The adoption of SFAS No. 146 did not have a material impact on the
Company's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123" ("SFAS No. 148"). SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for stock-based employee compensation. It also amends the
disclosure provisions of that Statement to require prominent disclosure about
the effects on reported net income of an entity's accounting policy decisions
with respect to stock-based employee compensation. The Company has chosen to
continue to account for stock-based compensation using the intrinsic value
method prescribed in APB Opinion No. 25 and related interpretations as provided
for under SFAS No. 148. Accordingly, compensation expense is only recognized
when the market value of the Company's stock at the date of grant exceeds the
amount an employee must pay to acquire the stock. The Company adopted the
interim disclosure provisions of SFAS No. 148 in its financial reports for the
quarter ended March 31, 2003. The adoption of SFAS No. 148 did not have a
material impact on the Company's financial position or results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that
upon issuance of a guarantee, a guarantor must recognize a liability for the
fair value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 are effective for any guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. As a result of adopting the disclosure provisions of FIN 45, the Company
has provided additional disclosures herein as required (See "Investments in
Joint Ventures").
In January 2003, the FASB issued FASB Interpretation No. 46
"Consolidation of Variable Interest Entities" ("FIN 46"). In general, a variable
interest entity is a corporation, partnership, trust, or any other legal
structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. A
variable interest entity often holds financial assets, including loans or
receivables, real estate or other property. A variable interest entity may be
essentially passive or it may engage in activities on behalf of another company.
Until now, a company generally has included another entity in its consolidated
financial statements only if it controlled the entity through voting interests.
FIN 46 changes that by requiring a variable interest entity to be consolidated
by a company if that company is subject to a majority of the risk of loss from
the variable interest entity's activities or entitled to receive a majority of
the entity's residual returns or both. FIN 46's consolidation requirements apply
immediately to variable interest entities created or acquired after January 31,
2003. The consolidation requirements apply to older entities in the first fiscal
year or interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. The Company
Page 9 of 27
adopted FIN 46 effective January 31, 2003. The adoption of FIN 46 has not had
and is not expected to have a material impact on the Company's financial
position or results of operations.
In April 2003, the FASB released SFAS No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149
clarifies under what circumstances a contract with an initial net investment
meets the characteristics of a derivative, amends the definition of an
underlying contract, and clarifies when a derivative contains a financing
component in order to increase the comparability of accounting practices under
SFAS No. 133. The statement is effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,
2003. The adoption of SFAS No. 149 is not expected to have a material impact on
the Company's financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS No. 150"). SFAS No. 150 establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). SFAS No. 150 is effective for financial instruments entered into
or modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003, except for mandatorily
redeemable financial instruments of nonpublic entities. The adoption of SFAS No.
150 is not expected to have a material impact on the Company's financial
position or results of operations.
MARKETABLE SECURITIES
The cost, gross unrealized gains, gross unrealized losses and fair
market value of marketable securities by type at June 30, 2003 and December 31,
2002 are as follows:
Gross Gross Fair
unrealized unrealized market
June 30, 2003: Cost gains losses value
-------- ---------- ---------- ---------
Available-for-sale:
Equity securities $30,399 $1,658 ($763) $31,294
Bonds 5 0 0 5
------- ------ ------- -------
$30,404 $1,658 ($763) $31,299
======= ====== ======= =======
Gross Gross Fair
unrealized unrealized market
December 31, 2002: Cost gains losses value
-------- ---------- ---------- ---------
Available-for-sale:
Equity securities $23,389 $2,119 ($447) $25,061
Bonds 5 0 0 5
------- ------ ------ -------
23,394 2,119 (447) 25,066
Trading:
Equity securities 792 35 0 827
------- ------ ------- -------
$24,186 $2,154 ($447) $25,893
======= ====== ======= =======
Included in marketable securities at June 30, 2003 and December 31,
2002 was $23,751 and $20,402, respectively, of common stock at fair value, in a
publicly-traded company for which the Board Chairman and another Director of the
Company are directors.
Page 10 of 27
Proceeds from the sale of available-for-sale and trading securities
and the resulting gross realized gains and losses included in the determination
of net income for the six months ended June 30, 2003 and 2002 are as follows:
2003 2002
---- ----
Available-for-sale securities:
Proceeds $ 0 $ 268
Gross realized losses 0 (1,005)
Trading securities:
Proceeds $ 884 $ 0
Gross realized gains 57 0
INVENTORIES
The components of inventories are as follows:
June 30, 2003 December 31, 2002
------------- -----------------
Raw materials $1,657 $1,765
Work in process 457 367
Finished goods 1,287 1,545
------ ------
$3,401 $3,677
====== ======
REAL ESTATE
Property sales:
- ---------------
The Company adopted the provisions of Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS No. 144") in 2002. SFAS No. 144 requires that the
operating results through the date of sale, as well as the gains on sales
generated on properties sold or held for sale, that meet the criteria of being a
component of an entity, shall be reclassified as discontinued operations for all
periods presented. As the statement requires implementation on a prospective
basis, properties which were identified as held for sale prior to implementation
are presented in the Consolidated Financial Statements in a manner consistent
with the prior periods' presentation.
During the six months ended June 30, 2003, the Company sold six
commercial properties from its real estate investment and management segment
which had a total net book value of $3,676. The properties were sold for an
aggregate sales price of $3,369, resulting in losses of ($185) on a net of tax
basis. The Company also sold a shopping center from its real estate investment
and management segment which had a total net book value of $136. The property
was sold for an aggregate sales price of $3,020, resulting in gains of $1,730 on
a net of tax basis. One shopping center from the Company's real estate
investment and management segment was donated during the first quarter of 2003
which had a total net book value of $60. The Company received no proceeds from
the donation and recorded a loss of ($36) on a net of tax basis.
The results of operations for these properties for the three and six
months ended June 30, 2003 and 2002 have been reclassified to discontinued
operations, on a net of tax basis, in accordance with SFAS No. 144. In addition,
the assets and liabilities associated with these properties have been
reclassified to discontinued operations in the Consolidated Balance Sheet at
December 31, 2002. These amounts primarily consist of real property, net of
accumulated depreciation, rents receivable, prepaid or accrued charges, and
mortgage obligations, if any.
Page 11 of 27
Summarized financial information for properties sold and accounted
for as discontinued operations for the three and six months ended June 30, 2003
and 2002, respectively, is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2003 2002 2003 2002
---- ---- ---- ----
Rental revenues from real estate operations $ 214 $ 529 $ 468 $ 1,068
Mortgage interest expense 0 (14) (4) (31)
Depreciation expense 0 (5) 0 (11)
Other operating expenses (18) (24) (30) (47)
------- ------- ------- -------
Income from operations $ 196 $ 486 $ 434 $ 979
======= ======= ======= =======
Properties held for sale:
- ------------------------
As of June 30, 2003, in accordance with the provisions of SFAS No.
144, the Company considered a total of six commercial properties from its real
estate and investment management segment to be held for sale and reported as
discontinued operations.
In accordance with SFAS No. 144, the results of operations for these
properties for the three and six months ended June 30, 2003 and 2002 have been
reclassified to discontinued operations, on a net of tax basis, in the
Consolidated Statements of Income. In addition, the assets and liabilities
associated with these properties, which primarily consist of real property, net
of accumulated depreciation, rents receivable, prepaid or accrued charges, and
mortgage obligations, if any, have been reclassified to discontinued operations
in the Consolidated Balance Sheets at June 30, 2003 and December 31, 2002.
Summarized financial information for properties held for sale and
accounted for as discontinued operations for the three and six months ended June
30, 2003 and 2002, respectively, is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2003 2002 2003 2002
---- ---- ---- ----
Rental revenues from real estate operations $ 13 $ 38 $ 19 $ 75
Depreciation expense (3) (7) (5) (15)
Other operating expenses (3) (4) (11) (10)
---- ---- ---- ----
Income from operations $ 7 $ 27 $ 3 $ 50
==== ==== ==== ====
Page 12 of 27
INVESTMENTS IN JOINT VENTURES
Investments in joint ventures consist of the following at June 30,
2003 and December 31, 2002:
2003 2002
---- ----
Investment in hotel ventures (a) $13,808 $23,128
Lease financing (b) 8,118 8,261
------- -------
$21,926 $31,389
======= =======
(a) In December 2002, the Company purchased a 50% interest in a joint
venture (the "Hotel Venture") for $23,128 together with Prime
Hospitality, Corp. ("Prime"), a publicly-traded company for which
the Company's Board Chairman and another Director of the Company are
directors. The Hotel Venture owns and operates a hotel in New
Jersey. In March 2003, the Company and Prime each sold a 10%
interest in the Hotel Venture to an unrelated third party, at cost.
In April 2003, the Hotel Venture entered into a $25,000 mortgage
loan (the "Mortgage") with a bank, secured by the underlying hotel.
The proceeds of the loan were distributed to the partners of the
Hotel Venture based on their ownership interest, thereby reducing
their respective investment. In connection with the Mortgage, the
Company and Prime entered into a direct guaranty agreement with the
bank whereby the Company and Prime, jointly and severally,
guaranteed not more than $4,000 of the Mortgage. Amounts due under
the guaranty are reduced by the scheduled principal payments under
the Mortgage. The guaranty is enforceable upon the occurrence of
certain events, including a default as defined in the Mortgage and
expires upon satisfaction of the loan in April 2006. Pursuant to the
operating agreement, any payments made under the guaranty would
increase the guarantors' ownership interest. The Company believes
that the collateral of the underlying hotel is sufficient to repay
the Mortgage without requiring enforcement of the guaranty.
Accordingly, the fair value of this guarantee was determined to be
insignificant and, therefore, no liability has been recorded.
In January 2003, the Company purchased a 50% interest in a joint
venture (the "Quebec Venture") for $6,114 together with Prime. The
Quebec Venture owns and operates a hotel in Quebec, Canada. In March
2003, the Company and Prime each sold a 10% interest in the Quebec
Venture to an unrelated third party, at cost. In July 2003, the
Quebec Venture entered into an $8.2 (Canadian) mortgage loan with a
Canadian Bank, secured by the underlying hotel. The proceeds of the
loan were distributed to the partners of the Quebec Venture based on
their ownership interest, thereby reducing their respective
investment.
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. Under the operating
agreements of the Hotel Venture and Quebec Venture, all significant
operating and capital decisions are made jointly and operating
profits are allocated based on ownership interests. These
investments were initially recorded at cost and are subsequently
adjusted for equity in earnings (losses) and cash contributions and
distributions. The Company's equity in earnings of these hotel
ventures was $113 and $288 for the three and six months ended June
30, 2003, respectively.
Page 13 of 27
Summarized financial information of the hotel ventures is as
follows:
June 30, 2003 December 31, 2002
------------- -----------------
Balance Sheet:
Property, plant and equipment, net $60,205 $46,397
======= =======
Current assets $3,637 $347
======= =======
Current liabilities $3,083 $500
======= =======
Long-term liabilities $24,410 $0
======= =======
Three Months Ended Six Months Ended
June 30, 2003 June 30, 2003
------------- -------------
Statement of Operations:
Revenues $6,010 $8,869
Expenses (5,615) (8,248)
------ -------
Operating income $395 $621
====== ======
The accounts of the Quebec Venture are recorded in Canadian dollars
and are translated into U.S. dollars, the reporting currency of the
Quebec Venture. Translation adjustments relating to results of
operations are generally included in the equity in earnings reported
by the Company while the translation of balance sheet accounts do
not generally affect the Company's investment in joint venture.
(b) Lease financing consists of a 50.0% interest in a limited
partnership whose principal assets are two distribution centers
leased to Kmart Corporation ("Kmart"), which are accounted for as
leveraged leases. The Company's share of income arising from this
investment was $245 and $337 for the six months ended June 30, 2003
and 2002, respectively, and is included in rental income in the
Consolidated Statements of Income.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company recognizes all derivative financial instruments, such as
its 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 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 deferred taxes.
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 and participate
in put and/or call options.
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 June 30, 2003 and December 31, 2002, the
Page 14 of 27
fair value of such derivatives was ($94) and ($122), respectively, which is
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 $982 and ($255) in net realized and unrealized
gains (losses) from derivative instruments for the six months ended June 30,
2003 and 2002, respectively, which are included in other income and expense, net
in the Consolidated Statements of Income.
RELATED PARTY TRANSACTIONS
The Company has a 50.0% interest in an unconsolidated limited
liability corporation, whose principal assets are two distribution centers
leased to Kmart. A group that includes the wife of the Company's Board Chairman,
two Directors of the Company and the wife of one of the Directors has an 8.0%
interest in this entity (see "Investments in Joint Ventures").
The Company's two hotel properties, as well as the hotels owned by
the Hotel Venture and Quebec Venture, are managed by Prime, a publicly-traded
company for which the Board Chairman and another Director of the Company are
directors. Fees paid for the management of the Company's two hotel properties
are based upon a percentage of revenue and were approximately $32 and $48 for
the six months ended June 30, 2003 and 2002, respectively. See "Investments in
Joint Ventures." Included in marketable securities at June 30, 2003 and December
31, 2002 was $23,751 and $20,402, respectively, of common stock in Prime which
represents approximately 7.9% and 5.6% of Prime's outstanding shares,
respectively. During the first six months of 2003, the Company purchased an
additional 1,036 shares of the common stock of Prime for $5,941.
Two son-in-laws of the Board Chairman are employed by the Company.
Each serves as a Vice President in the Company's real estate operations with
responsibilities for management of the Company's real estate portfolio. Each
received a total salary and bonus of $210 for 2002.
COMMITMENTS AND CONTINGENCIES
The Company is a lessor of eight department stores that are
currently leased to Kmart, which filed for protection under Chapter 11 of the
U.S. Bankruptcy Code on January 22, 2002. In addition, the Company holds a 50%
interest in a joint venture that owns two distribution centers that are also
leased to Kmart. As part of its reorganization, Kmart announced the closure of
approximately 600 of its stores during the past year. Kmart's plan of
reorganization was approved and became effective in May 2003 with no significant
adverse effects to the Company.
The Company has undertaken the completion of environmental studies
and/or remedial action at Metex' (as hereafter defined) two New Jersey
facilities. The Company has recorded a liability, which is included in other
long-term 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
Page 15 of 27
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 become available or should the NJDEP or
other regulatory agencies require additional or alternative remediation efforts
in the future. It is not currently possible to estimate the range or amount of
any such liability.
Although the Company believed that it was entitled to full defense
and indemnification with respect to environmental investigation and remediation
costs under its insurance policies, the Company's insurers denied such coverage.
Accordingly, the Company filed an action against certain insurance carriers
seeking defense and indemnification with respect to all prior and future costs
incurred in the investigation and remediation of these sites. Settlements have
been reached with all carriers in this matter.
In the opinion of management, amounts recovered from its insurance
carriers under the terms of its settlement agreements should be sufficient to
address these matters and amounts needed in excess, if any, will be paid
gradually over a period of years. Accordingly, they should not have a material
adverse effect upon the business, liquidity or financial position of the
Company. However, adverse decisions or events, particularly as to the merits of
the Company's factual and legal basis could cause the Company to change its
estimate of liability with respect to such matters in the future.
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 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.
STOCKHOLDERS' EQUITY
The Board of Directors declared a special one-time cash dividend of
$2.00 per common share to all stockholders of record as of June 20, 2003,
payable on July 10, 2003. The Company has not paid cash dividends in the past.
The declaration of such dividends is within the discretion of the Board of
Directors. While the Company does not currently expect to pay additional
dividends in the future, the Board of Directors could re-evaluate this position
in the future.
On June 10, 2003, the Company's Board of Directors unanimously
adopted an amendment to the Company's Articles of Incorporation to increase the
number of authorized shares of the Company's Common Stock from 7,500 to 17,500
shares, subject to stockholder approval. The Company received the approval of
this amendment by a majority of it's stockholders on August 4, 2003 and, on that
date, declared a two-for-one stock split to stockholders of record as of the
close of business on August 15, 2003 payable on or about August 29, 2003. All
references to the number of shares of common stock, per share prices and
earnings per share amounts in the accompanying Consolidated Financial Statements
and notes included in the Quarterly Report on Form 10-Q for the current and
prior periods have been adjusted to reflect the split on a retroactive basis.
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 six
months ended June 30, 2003 and 2002, the Company purchased and retired 44 and
Page 16 of 27
142 shares of the Company's common stock for $771 and $1,720, respectively.
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.
EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share from continuing operations:
Three Months Ended Six Months
June 30, Ended June 30,
-------- --------------
2003 2002 2003 2002
---- ---- ---- ----
Numerator:
Income from continuing operations $2,960 $3,221 $5,182 $6,670
====== ====== ====== ======
Denominator:
Denominator for basic earnings per
share - weighted-average shares 9,023 9,174 9,026 9,209
Effect of dilutive securities:
Employee stock options 1,768 746 1,632 706
------ ------ ------ ------
Denominator for diluted earnings per
share - adjusted weighted-average shares
and assumed conversions 10,791 9,920 10,658 9,915
====== ====== ====== ======
Basic earnings per share - continuing operations $ .33 $ .35 $ .57 $ .72
====== ====== ====== ======
Diluted earnings per share - continuing operations $ .27 $ .33 $ .49 $ .67
====== ====== ====== ======
Earnings per share and weighted average shares outstanding have been
adjusted to reflect the two-for-one stock split effective in August 2003.
Employee stock options to purchase 758 and 58 shares of the
Company's common stock that were outstanding at June 30, 2003 and 2002,
respectively, were not included in the computation of diluted earnings per share
in all periods presented because their effect would have been anti-dilutive.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the
intrinsic value method in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," and related Interpretations
("APB No. 25") and has adopted the disclosure provisions of Statement of
Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation
- - Transition and Disclosure, an amendment of FASB Statement No. 123" ("SFAS No.
148"). Under APB No. 25, compensation expense is only recognized when the market
value of the underlying stock at the date of grant exceeds the amount an
employee must pay to acquire the stock. Accordingly, no compensation expense has
been recognized in the Consolidated Financial Statements in connection with
employee stock option grants.
Page 17 of 27
The following table illustrates the effect on net income and
earnings per share had the Company applied the fair value recognition provisions
of Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," to stock-based employee compensation.
Three Months Six Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
---- ---- ---- ----
Net income, as reported $3,457 $3,529 $6,953 $ 7,287
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects (586) (500) (1,134) (952)
------ ------ ------ ---------
Pro forma net income $2,871 $3,029 $5,819 $ 6,335
====== ====== ====== =========
Earnings per share:
Basic - as reported $.38 $.38 $.77 $.79
====== ====== ====== =========
Basic - pro forma $.32 $.33 $.64 $.69
====== ====== ====== =========
Diluted - as reported $.32 $.36 $.65 $.73
====== ====== ====== =========
Diluted - pro forma $.27 $.32 $.56 $.66
====== ====== ====== =========
Earnings per share and weighted shares outstanding have been
adjusted to reflect the two-for-one stock split effective in August 2003.
Pro forma compensation expense may not be indicative of pro forma
expense in future periods. For purposes of estimating the fair value of each
option on the date of grant, the Company utilized the Black-Scholes option
pricing model.
The Black-Scholes option valuation 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 its employee stock options.
The weighted-average option fair values and the assumptions used to
estimate these values for grants issued during 2003 and 2002 are as follows:
2003 2002
---- ----
Expected life (years) 5 5
Risk free interest rate 2.2% 4.4%
Expected volatility 33.7% 34.2%
Dividend yield 0.0% 0.0%
Weighted-average option fair value $7.26 $4.59
Page 18 of 27
COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) are as follows:
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
2003 2002 2003 2002
---- ---- ---- ----
Net income $ 3,457 $ 3,529 $ 6,953 $ 7,287
Other comprehensive income (loss), net of tax:
Change in net unrealized gain (loss) on available-for
sale securities, net of tax (provision) benefit of ($2,188),
$127, $272 and ($1,787), respectively 4,064 (237) (504) 3,319
Change in fair value of cash flow hedge, net of tax
provision of $0, ($1), $0 and ($4), respectively 0 2 0 5
------- ------- ------- -------
Comprehensive income $ 7,521 $ 3,294 $ 6,449 $10,611
======= ======= ======= =======
Accumulated other comprehensive income as of June 30, 2003 and
December 31, 2002 consists of a net unrealized gain on available-for-sale
securities of $582 and $1,086, net of tax provision of $313 and $586,
respectively.
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,
-------------- --------------
2003 2002 2003 2002
---- ---- ---- ----
Net revenues and sales:
Real estate investment and management $ 6,405 $ 6,082 $ 12,482 $ 11,879
Engineered products 8,326 9,021 16,482 17,261
-------- -------- -------- --------
$ 14,731 $ 15,103 $ 28,964 $ 29,141
======== ======== ======== ========
Operating income:
Real estate investment and management $ 3,216 $ 3,013 $ 6,162 $ 5,922
Engineered products 834 851 1,312 1,074
General corporate expenses (930) (646) (1,615) (1,215)
-------- -------- -------- --------
3,120 3,218 5,859 5,781
Other income, net 1,316 2,140 2,170 5,028
-------- -------- -------- --------
Income from continuing operations before
income taxes $ 4,436 $ 5,358 $ 8,029 $ 10,809
======== ======== ======== ========
Page 19 of 27
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, 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.
RECLASSIFICATIONS
Certain amounts have been reclassified in the prior year
Consolidated Financial Statements to present them on a basis consistent with the
current year.
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 Consolidated
Financial Statements of United Capital Corp. (the "Company") and related notes
thereto.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
Total revenues for the quarter ended June 30, 2003 were $14,731
resulting in operating income of $3,120 versus total revenues of $15,103 and
operating income of $3,218 during the comparable 2002 period. Net income for the
three month period ended June 30, 2003 was $3,457 or $.38 per basic share versus
$3,529 or $.38 per basic share for the same period in 2002.
Revenues for the six months ended June 30, 2003 were $28,964
compared to comparable 2002 revenues of $29,140. Operating income for the six
months ended June 30, 2003 was $5,859 versus $5,781 for the comparable 2002
period. Net income for the six months ended June 30, 2003 was $6,953 or $.77 per
basic share compared to net income of $7,287 or $.79 per basic share for the
same period in 2002.
REAL ESTATE INVESTMENT AND MANAGEMENT
Rental revenues from real estate operations remained relatively
consistent with the prior year, totaling $6,405 for the three month period ended
June 30, 2003 versus $6,082 in the same 2002 period and $12,482 for the six
months ended June 30, 2003, compared to $11,879 in 2002. Rental revenues from
2003 property sales and properties held for sale have been classified as
discontinued operations in accordance with SFAS No. 144. The results of
operations of properties that have been sold and properties held for sale prior
to the implementation of SFAS No. 144 have not been similarly reclassified to
discontinued operations.
Mortgage interest expense continues to decrease as a result of
continuing mortgage amortization. Such expense totaled $267 during the three
month period ended June 30, 2003 a decline of 27.4% from $368 incurred in the
Page 20 of 27
second quarter of 2002. For the six months ended June 30, 2003, mortgage
interest expense was $553 compared to $735 for the corresponding 2002 period, a
decline of 24.8% or $182.
Depreciation expense associated with real properties held for rental
decreased $42 or 5.1% and $91 or 5.5%, respectively, for the three and six month
periods ended June 30, 2003 compared to the same periods in 2002. Such decline
was primarily due to reduced depreciation expense associated with fully
depreciated properties and properties sold in 2002 and not accounted for as
discontinued operations. Depreciation expense from property sales and properties
held for sale in 2003 has been reclassified as discontinued operations in
accordance with SFAS No. 144. Such expense on property sales and properties held
for sale prior to the implementation of SFAS No. 144 have not been similarly
reclassified to discontinued operations.
Other operating expenses associated with the management of real
properties increased $263 or 14.0% for the three month period ended June 30,
2003 and $636 or 17.8% for the six month period ended June 30, 2003, compared to
the comparable periods in 2002. These increases are primarily the result of
increased hotel operating expenses and increased payroll and property
maintenance expenses, including insurance and real estate taxes.
ENGINEERED PRODUCTS
The Company's engineered products segment includes Metex Mfg.
Corporation ("Metex") and AFP Transformers, LLC ("AFP Transformers"). The
operating results of the engineered products segment are as follows:
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
2003 2002 2003 2002
---- ---- ---- ----
Net sales $8,326 $9,021 $16,482 $17,261
====== ====== ======= =======
Cost of sales $5,820 $6,458 $11,880 $12,761
====== ====== ======= =======
Selling, general and administrative expenses $1,672 $1,712 $ 3,290 $ 3,426
====== ====== ======= =======
Operating income $ 834 $ 851 $ 1,312 $ 1,074
====== ====== ======= =======
Net sales of the engineered products segment for the three and six
months ended June 30, 2003 decreased 7.7% or $695 and 4.5% or $779,
respectively, compared with the results of the corresponding 2002 period. These
declines primarily result from weakened demand for the Company's engineered
component and transformer product lines which continue to suffer from the
effects of the struggling economy.
Cost of sales as a percentage of sales decreased 1.7% and 1.8%,
respectively, for the three and six months ended June 30, 2003, compared to the
corresponding period in 2002, principally due to the implementation of cost
containment measures and the mix of products sold.
Selling, general and administrative expenses of the engineered
products segment for the three and six months ended June 30, 2003 decreased $40
or 2.3% and $136 or 4.0%, respectively, versus the comparable 2002 periods.
These decreases are primarily the result of lower selling expenses which are the
result of lower net sales, as noted above.
Page 21 of 27
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses not associated with the
manufacturing operations for the three and six months ended June 30, 2003
increased $284 or 43.9% and $400 or 32.9%, respectively, compared to such
expenses incurred for the comparable 2002 period. These increases are mainly due
to higher pension related expenses and salary and salary related expenses.
OTHER INCOME AND EXPENSE, NET
The components of other income and expense, net in the Consolidated
Statements of Income are as follows:
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
2003 2002 2003 2002
---- ---- ---- ----
Net gain on sale of real estate assets $ 11 $ 296 $ 152 $ 5,674
Net loss on sale of available-for-sale securities 0 0 0 (1,005)
Net realized and unrealized gain on trading
securities 0 0 57 0
Net realized and unrealized gain (loss) on derivative
instruments 667 1,607 982 (255)
Other, net 167 (11) 283 (25)
------- ------- ------- -------
$ 845 $ 1,892 $ 1,474 $ 4,389
======= ======= ======= =======
DISCONTINUED OPERATIONS
Operating income from properties sold or held for sale and accounted
for as discontinued operations was $122 and $262 on a net of tax basis for the
three and six months ended June 30, 2003, versus $308 and $617, respectively,
for the comparable 2002 periods. Prior year amounts have been reclassified to
reflect results of operations of real properties sold or held for sale as of
June 30, 2003 as discontinued operations. Net gains on the sale of real estate
assets accounted for as discontinued operations were $375 and $1,509,
respectively on a net of tax basis for the three and six months ended June 30,
2003. Prior to the adoption of SFAS No. 144, gains or losses on sales of real
estate assets were not accounted for as a component of discontinued operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company experienced a net cash inflow from operations of $5,332
for the six months ended June 30, 2003 versus $7,934 for the six months ended
June 30, 2002. The $2,602 decrease in operating cash flow primarily results from
lower net gains on the sale of real estate assets and is offset by changes in
working capital. The components of the working capital changes are set forth in
detail in the Consolidated Statements of Cash Flows.
Page 22 of 27
For the six months ended June 30, 2003, $10,796 was provided by
investing activities which consisted primarily of net distributions from
investments in joint ventures of $9,996, proceeds from the sale of real estate
assets of $6,541, as well as proceeds from the sale of derivative instruments of
$954. This was offset by purchases of available for-sale securities of $6,490.
For the six months ended June 30, 2002, $141 was used in investing
activities which consisted primarily of $1,831 in net purchases of
available-for-sale securities, $1,930 of purchases of derivative instruments and
$2,995 to purchase a note receivable. This was offset by proceeds from the sale
of real estate assets of $6,419.
Net cash used in financing activities was $2,037 and $3,837 during
the six months ended June 30, 2003 and 2002, respectively. This use of cash flow
was primarily attributable to debt reduction and the purchase and retirement of
the Company's common stock, partially offset by cash proceeds from the exercise
of stock options.
At June 30, 2003, the Company's cash and marketable securities were
$94.3 million and working capital was $74.6 million compared to cash and
marketable securities of $74.8 million and working capital of $67.0 million at
December 31, 2002. Management continues to believe that the real estate market
is overvalued and accordingly recent acquisitions have been limited to those
select properties that meet the Company's stringent financial requirements.
Management believes that the available working capital along with the $80.0
million of availability on the revolving credit facility, discussed below, puts
the Company in an opportune position to fund acquisitions and grow its portfolio
of real estate properties if and when attractive long-term opportunities become
available.
On June 10, 2003, the Board of Directors of the Company declared a
special one-time cash dividend of $2.00 per common share to all stockholders of
record as of June 20, 2003. The declaration of such dividend is within the
discretion of the Board of Directors. While the Company does not currently
expect to pay additional dividends in the future, the Board of Directors could
re-evaluate this position in the future. This dividend, totaling $9,102, was
paid on July 10, 2003.
On June 10, 2003, the Company's Board of Directors unanimously
adopted an amendment to the Company's Articles of Incorporation to increase the
number of authorized shares of the Company's Common Stock from 7,500 to 17,500
shares, subject to stockholder approval. The Company received the approval of
this amendment by a majority of it's stockholders on August 4, 2003 and, on that
date, declared a two-for-one stock split to stockholders of record as of the
close of business on August 15, 2003 payable on or about August 29, 2003. All
references to the number of shares of common stock, per share prices and
earnings per share amounts in the accompanying Consolidated Financial Statements
and notes included in the Quarterly Report on Form 10-Q for the current and
prior periods have been adjusted to reflect the split on a retroactive basis.
The cash needs of the Company have been satisfied from funds
generated by current operations. It is expected that future operational cash
needs and the cash required to repurchase the Company's common stock will also
be satisfied from existing cash balances, marketable securities, ongoing
operations and borrowings under the Revolver (as hereinafter defined). The
primary source of capital to fund additional real estate acquisitions and to
make additional high-yield mortgage loans will come from existing funds,
borrowings under the Revolver, the sale, financing and refinancing of the
Company's properties and from third party mortgages and purchase money notes
obtained in connection with specific acquisitions.
In addition to the acquisition of properties for consideration
consisting of cash and mortgage financing proceeds, the Company may acquire real
properties in exchange for the issuance of the Company's equity securities. The
Company may also finance acquisitions of other companies in the future with
borrowings from institutional lenders and/or the public or private offerings of
Page 23 of 27
debt or equity securities. The Company currently has no agreements, commitments
or understandings with respect to the acquisition of real properties or other
companies in exchange for equity securities.
Funds of the Company in excess of that needed for working capital,
purchasing real estate and arranging financing for real estate acquisitions are
invested by the Company in corporate equity securities, corporate notes,
certificates of deposit, government securities and other financial instruments.
The Company is a lessor of eight department stores that are
currently leased to Kmart Corporation ("Kmart"), which filed for protection
under Chapter 11 of the U.S. Bankruptcy Code on January 22, 2002. In addition,
the Company holds a 50% interest in a joint venture that owns two distribution
centers that are also leased to Kmart. Kmart's plan of reorganization was
approved and became effective in May 2003 with no significant adverse effects to
the Company.
Effective December 10, 2002, the Company entered into a credit
agreement with five banks which provides for an $80.0 million revolving credit
facility ("Revolver"). The Revolver may be increased under certain circumstances
and expires on December 31, 2005.
Under the Revolver, the Company will be provided with eligibility
based upon the sum of (i) 60.0% of the aggregate annualized and normalized
year-to-date net operating income of unencumbered eligible properties, as
defined, capitalized at 10.0%, (ii) 60.0% of the aggregate annualized and
normalized year-to-date net operating income of unencumbered eligible hotel
properties, as defined, capitalized at 10.5%, not to exceed the lesser of $10.0
million or 10% of total eligibility, (iii) the lesser of $20.0 million or 50.0%
of the aggregate annualized and normalized year-to-date net operating income of
encumbered eligible properties, as defined, capitalized at 12.0%, (iv) the sum
of 75.0% of eligible accounts receivable, 50.0% of eligible inventory, and 50%
of eligible loans, as defined, (v) cash and cash equivalents in excess of
working capital, as defined, and (vi) 50% of marketable securities, as defined.
At June 30, 2003, eligibility under the Revolver was $80.0 million, based upon
the above terms and there were no amounts outstanding under the Revolver. The
credit agreement contains certain financial and restrictive covenants, including
minimum consolidated equity, interest coverage, debt service coverage and
capital expenditures (other than for real estate), and limitations on
indebtedness. The Company was in compliance with all covenants at June 30, 2003.
The credit agreement also contains provisions which allow the banks to perfect a
security interest in certain operating and real estate assets in the event of a
default, as defined in the credit agreement. Borrowings under the Revolver, at
the Company's option, bear interest at the bank's prime lending rate or at the
London Interbank Offered Rate ("LIBOR") (1.12% at June 30, 2003) plus 2.0% for
non cash collateralized borrowings and 1.0% for cash collateralized borrowings.
In strategies designed to hedge overall market risk, the Company may
sell common stock short and participate in put and/or call options. These
instruments do not qualify for hedge accounting and therefore changes in such
derivatives fair value are recognized in earnings. These derivatives are
recorded as a component of accounts payable and accrued liabilities in the
Consolidated Balance Sheets.
The Company has undertaken the completion of environmental studies
and/or remedial action at Metex' two New Jersey facilities and filed an action
against certain insurance carriers seeking recovery of costs incurred and to be
incurred in these matters. Settlements have been reached with all carriers in
this matter. See Notes to Consolidated Financial Statements for further
discussion of this matter.
The Company is subject to various litigation, legal and regulatory
matters that arise in the ordinary course of business activities. When
management believes it is probable that a liability has been incurred and such
Page 24 of 27
amounts are reasonably estimable the Company provides for amounts that include
judgments and penalties that may be assessed. These liabilities are usually
included in accounts payable and accrued liabilities or other long-term
liabilities in the Consolidated Financial Statements, depending on the
anticipated payment date. None of these matters are expected to result in a
material adverse effect on the Company's consolidated financial position or
results of operations.
The current liabilities of the Company have at times in the past
exceeded its current assets principally due to the financing of long-term assets
utilizing short-term borrowings and from the classification of current mortgage
obligations without the corresponding current asset for such properties. Future
financial statements may reflect current liabilities in excess of current
assets. Management is confident that through cash flow generated from
operations, together with borrowings available under the Revolver and the sale
of select assets, all obligations will be satisfied as they come due.
Related Party Transactions
- --------------------------
Refer to Notes to Consolidated Financial Statements for a discussion
of related party transactions.
CRITICAL ACCOUNTING POLICIES AND MANAGEMENT ESTIMATES
Refer to the Company's 2002 Annual Report on Form 10-K for a
discussion of the Company's critical accounting policies, which include revenue
recognition and accounts receivable, marketable securities, inventories, real
estate, discontinued operations, long-lived assets and pension plans. During the
first half of 2003, there were no material changes to these policies.
RECENT ACCOUNTING PRONOUNCEMENTS
Refer to Notes to Consolidated Financial Statements for a discussion
of recent accounting pronouncements.
FORWARD-LOOKING STATEMENTS
Certain statements in this Report on Form 10-Q and other statements
made by the Company or its representatives that are not strictly historical
facts are "forward-looking" statements within the meaning of the Private
Securities Litigation Reform Act of 1995 that should be considered as subject to
the many risks and uncertainties that exist in the Company's operations and
business environment. The forward-looking statements are based on current
expectations and involve a number of known and unknown risks and uncertainties
that could cause the actual results, performance and/or achievements of the
Company to differ materially from any future results, performance or
achievements, expressed or implied, by the forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking statements,
and that in light of the significant uncertainties inherent in forward-looking
statements, the inclusion of such statements should not be regarded as a
representation by the Company or any other person that the objectives or plans
of the Company will be achieved. The Company also assumes no obligation to
publicly update or revise its forward-looking statements or to advise of changes
in the assumptions and factors on which they are based. See the Company's 2002
Annual Report on Form 10-K for a discussion of risk factors that could impact
our future financial performance and/or cause actual results to differ
significantly from those expressed or implied by such statements.
Page 25 of 27
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.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in the Company's periodic reports. There have been no significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 10, 2003, the Company held its Annual Meeting of
Stockholders, whereby the stockholders elected Directors and approved
performance criteria for the payment of bonuses to the Company's Chief Executive
Officer. The vote on such matters was as follows:
1. ELECTION OF DIRECTORS:
For Withheld
--- --------
A.F. Petrocelli 4,104,708 128,497
Howard M. Lorber 4,104,708 128,497
Robert M. Mann 4,104,708 128,497
Anthony J. Miceli 4,104,708 128,497
Arnold S. Penner 4,104,708 128,497
2. APPROVAL OF PERFORMANCE CRITERIA FOR THE PAYMENT OF BONUSES TO THE
COMPANY'S CHIEF EXECUTIVE OFFICER:
FOR AGAINST ABSTAIN
--- ------- -------
4,177,991 42,896 9,018
Page 26 of 27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K.
On June 10, 2003, the Company filed a current report on Form 8-K, with
the Securities and Exchange Commission under Item 5.
(b) Exhibits
31.1 Certification of the Chief Executive Officer Pursuant to Rule
13a-14
31.2 Certification of the Chief Financial Officer Pursuant to Rule
13a-14
32.1 Certification of the Chief Executive Officer Pursuant to
Section 906 of Sarbanes-Oxley Act of 2002
32.2 Certification of the Chief Financial Officer Pursuant to
Section 906 of Sarbanes-Oxley Act of 2002
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 5, 2003 By: /s/Anthony J. Miceli
----------------------------------------
Anthony J. Miceli
Vice President, Chief Financial Officer
and Secretary of the Company