Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2003
COMMISION FILE NUMBER: 1-10104
------------------------------
- --------------------------------------------------------------------------------
UNITED CAPITAL CORP.
--------------------
(Exact name of registrant 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, NY 11021
---------------------------- -----
(Address of principal executive offices) (Zip Code)
516-466-6464
------------
(Registrant'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 registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
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 registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
The registrant had 9,079,342 shares of common stock, $.10 par value, outstanding
as of November 10, 2003.
UNITED CAPITAL CORP. AND SUBSIDIARIES
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as
of September 30, 2003 (Unaudited) and December 31, 2002....................3
Consolidated Statements of Income for the
Three and Nine Months Ended September 30, 2003 and 2002 (Unaudited)........4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2003 and 2002 (Unaudited)................5-6
Notes to Consolidated Financial Statements..............................7-16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........................16-21
ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURE OF
MARKET RISK...............................................................21
ITEM 4. CONTROLS AND PROCEDURES...................................................21
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..........................................22
SIGNATURES ..........................................................................22
2
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
2003 2002
------------ ------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 60,257 $ 48,893
Marketable securities 39,664 25,893
Notes and accounts receivable, net 7,010 5,667
Inventories 3,914 3,677
Prepaid expenses and other current assets 636 1,477
Deferred income taxes -- 207
Current assets of discontinued operations 11 121
-------- --------
Total current assets 111,492 85,935
-------- --------
Property, plant and equipment, net 3,209 3,569
Real property held for rental, net 42,372 44,515
Investments in joint ventures 20,009 31,389
Noncurrent notes receivable 2,935 2,994
Other assets 3,300 3,707
Noncurrent assets of discontinued operations 139 4,438
-------- --------
Total assets $183,456 $176,547
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt $ 6,157 $ 3,977
Accounts payable and accrued liabilities 10,346 9,253
Income taxes payable 7,565 5,260
Deferred income taxes 2,017 --
Current liabilities of discontinued operations 12 455
-------- --------
Total current liabilities 26,097 18,945
-------- --------
Long-term debt 7,111 12,347
Other long-term liabilities 31,420 31,016
Deferred income taxes 2,077 2,605
-------- --------
Total liabilities 66,705 64,913
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock $.10 par value, authorized 17,500 shares;
issued and outstanding 9,079 and 9,038 shares, respectively 908 904
Retained earnings 110,103 109,644
Accumulated other comprehensive income, net of tax 5,740 1,086
-------- --------
Total stockholders' equity 116,751 111,634
-------- --------
Total liabilities and stockholders' equity $183,456 $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.
3
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2003 2002 2003 2002
-------- -------- --------- ---------
Revenues:
Net sales $ 8,599 $ 8,439 $ 25,081 $ 25,700
Rental revenues from real estate operations 5,886 5,864 18,346 17,723
-------- -------- -------- --------
Total revenues 14,485 14,303 43,427 43,423
-------- -------- -------- --------
Costs and expenses:
Cost of sales 5,849 6,010 17,729 18,771
Real estate operations:
Mortgage interest expense 252 299 802 1,034
Depreciation expense 791 806 2,344 2,451
Other operating expenses 2,155 1,871 6,370 5,448
General and administrative expenses 1,588 1,351 4,753 4,152
Selling expenses 913 866 2,653 2,706
-------- -------- -------- --------
Total costs and expenses 11,548 11,203 34,651 34,562
-------- -------- -------- --------
Operating income 2,937 3,100 8,776 8,861
-------- -------- -------- --------
Other income (expense):
Interest and dividend income 445 545 1,360 1,426
Interest expense (110) (112) (329) (354)
Other income and expense, net 572 3,875 2,046 8,264
-------- -------- -------- --------
Total other income 907 4,308 3,077 9,336
-------- -------- -------- --------
Income from continuing operations before income taxes 3,844 7,408 11,853 18,197
Provision for income taxes 1,225 1,867 4,064 5,998
-------- -------- -------- --------
Income from continuing operations 2,619 5,541 7,789 12,199
-------- -------- -------- --------
Discontinued operations:
Income from discontinued operations, net of income
taxes of $4, $111, $186 and $530, respectively 5 167 279 796
Net gain on disposal of discontinued operations, net of
income taxes of $224, $118, $1,231 and $118,
respectively 336 176 1,845 176
-------- -------- -------- --------
Income from discontinued operations 341 343 2,124 972
-------- -------- -------- --------
Net income $ 2,960 $ 5,884 $ 9,913 $ 13,171
======== ======== ======== ========
Basic earnings per share:
Income from continuing operations $ .29 $ .61 $ .86 $ 1.33
Income from discontinued operations .04 .04 .23 .10
-------- -------- -------- --------
Net income per share $ .33 $ .65 $ 1.09 $ 1.43
======== ======== ======== ========
Diluted earnings per share:
Income from continuing operations $ .24 $ .57 $ .73 $ 1.23
Income from discontinued operations .03 .03 .20 .10
-------- -------- -------- --------
Net income per share assuming dilution $ .27 $ .60 $ .93 $ 1.33
======== ======== ======== ========
Dividends paid per share $ -- $ -- $ 2.00 $ --
======== ======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements. Per share amounts, except dividends paid, have been
retroactively adjusted to reflect the two-for-one stock split in August 2003.
4
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
September 30,
------------------------
2003 2002
--------- ----------
Cash flows from operating activities:
Net income $ 9,913 $ 13,171
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 2,995 3,432
Net (gain) loss on sale of available-for-sale securities (36) 1,005
Net gain on sale of real estate assets (152) (5,674)
Equity in earnings of joint ventures (1,088) (506)
Net gain on disposal of discontinued operations, net of tax (1,845) (176)
Net realized and unrealized gain on derivative instruments (1,096) (3,629)
Proceeds from sale of trading securities 884 --
Net realized gain on trading securities (57) --
Changes in assets and liabilities (A) 19 3,371
-------- --------
Net cash provided by operating activities 9,537 10,994
-------- --------
Cash flows from investing activities:
Purchase of available-for-sale securities (7,062) (10,641)
Proceeds from sale of available-for-sale securities 179 268
Proceeds from sale of real estate assets 7,523 6,710
Proceeds from sale of derivative instruments 1,584 3,912
Purchase of derivative instruments -- (8,843)
Purchase of note receivable -- (2,955)
Acquisition of property, plant and equipment (229) (153)
Principal payments on notes receivable 70 12
Acquisition of/additions to real estate assets (200) (193)
Distributions from joint ventures, net of capital contributions 12,468 209
-------- --------
Net cash provided by (used in) investing activities 14,333 (11,674)
-------- --------
Cash flows from financing activities:
Principal payments on mortgage commitments, notes
and loans (3,056) (3,165)
Net repayments under credit facilities -- (525)
Purchase and retirement of common shares (1,189) (2,555)
Proceeds from exercise of stock options 841 418
Dividends paid (9,102) --
-------- --------
Net cash used in financing activities (12,506) (5,827)
-------- --------
Net increase (decrease) in cash and cash equivalents 11,364 (6,507)
Cash and cash equivalents, beginning of period 48,893 68,170
-------- --------
Cash and cash equivalents, end of period $ 60,257 $ 61,663
======== ========
5
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
Nine Months Ended
September 30,
---------------------
2003 2002
-------- --------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $1,008 $1,307
====== ======
Taxes $3,372 $4,097
====== ======
(A) Changes in assets and liabilities are as follows:
Nine Months Ended
September 30,
---------------------
2003 2002
-------- --------
Accounts receivable, net $(1,356) $ 131
Inventories (237) 1,346
Prepaid expenses and other current assets 321 177
Deferred income taxes (809) 1,258
Other assets 350 (435)
Accounts payable and accrued liabilities 605 531
Income taxes payable 1,074 (1,278)
Other long-term liabilities 404 2,251
Discontinued operations - noncash charges and
working capital changes (333) (610)
------- -------
Total $ 19 $ 3,371
======= =======
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements
6
UNITED CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
1. 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.
In the opinion of management, all adjustments, consisting only of normal and
recurring adjustments, necessary for a fair presentation 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.
2. 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 on a pre-split basis to all
stockholders of record as of June 20, 2003. The Company has not paid cash
dividends in the past. 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 reevaluate this
position in the future. This dividend, totaling $9,102, was paid on July 10,
2003.
3. 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 and declared a two-for-one stock
split during August 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
increase in authorized capital and stock split on a retroactive basis, except
for dividends per share.
4. STOCKHOLDERS' EQUITY
- ----------------------------
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 nine months ended
September 30, 2003 and 2002, the Company purchased and retired 66 and 209 shares
of the Company's common stock for $1,189 and $2,555, 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
may be made from time to time in the open market at prevailing market prices and
may be made in privately negotiated transactions, subject to available
resources.
7
5. EARNINGS PER SHARE
- --------------------------
The following table sets forth the computation of basic and diluted earnings per
share from continuing operations:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2003 2002 2003 2002
-------- ------- ------- --------
Numerator:
Income from continuing operations $ 2,619 $ 5,541 $ 7,789 $12,199
======= ======= ======= =======
Denominator:
Basic - weighted-average shares outstanding 9,096 9,141 9,050 9,186
Dilutive effect of employee stock options 1,685 640 1,649 701
------- ------- ------- -------
Diluted - weighted-average shares outstanding 10,781 9,781 10,699 9,887
======= ======= ======= =======
Basic earnings per share - continuing operations $ .29 $ .61 $ .86 $ 1.33
======= ======= ======= =======
Diluted earnings per share - continuing operations $ .24 $ .57 $ .73 $ 1.23
======= ======= ======= =======
Employee stock options to purchase 758 shares for each of the three and nine
months ended September 30, 2003 and 1,902 and 966 shares for the three and nine
months ended September 30, 2002, respectively, were not included in the
computation of diluted earnings per share because their effect would have been
anti-dilutive.
6. 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.
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 Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2003 2002 2003 2002
--------- --------- -------- ----------
Net income, as reported $ 2,960 $ 5,884 $ 9,913 $ 13,171
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects (726) (565) (1,860) (1,517)
--------- --------- --------- ----------
Pro forma net income $ 2,234 $ 5,319 $ 8,053 $ 11,654
========= ========= ========= ==========
Earnings per share:
Basic - as reported $ .33 $ .65 $ 1.09 $ 1.43
========= ========= ========= ==========
Basic - pro forma $ .25 $ .58 $ .89 $ 1.27
========= ========= ========= ==========
Diluted - as reported $ .27 $ .60 $ .93 $ 1.33
========= ========= ========= ==========
Diluted - pro forma $ .22 $ .58 $ .78 $ 1.23
========= ========= ========= ==========
8
Pro forma compensation expense may not be indicative of pro forma expenses in
future periods. For purposes of estimating the fair value of each option on the
grant date, the Company utilized the Black-Scholes option pricing model.
7. MARKETABLE SECURITIES
- -----------------------------
The cost, gross unrealized gains, gross unrealized losses and fair market value
of marketable securities by type are as follows:
Gross Gross Fair
unrealized unrealized market
Cost gains losses value
-------- ------------ ---------- -----------
September 30, 2003:
-------------------
Available-for-sale:
Equity securities $ 30,829 $ 8,957 $ (127) $ 39,659
Bonds 5 -- -- 5
-------- -------- -------- --------
$ 30,834 $ 8,957 $ (127) $ 39,664
======== ======== ======== ========
December 31, 2002:
------------------
Available-for-sale:
Equity securities $ 23,389 $ 2,119 $ (447) $ 25,061
Bonds 5 -- -- 5
-------- -------- -------- --------
23,394 2,119 (447) 25,066
Trading:
Equity securities 792 35 -- 827
-------- -------- -------- --------
$ 24,186 $ 2,154 $ (447) $ 25,893
======== ======== ======== ========
Included in marketable securities at September 30, 2003 and December 31, 2002
was $30,760 and $20,402, respectively, of common stock at fair value, in a
publicly-traded company for which the Board Chairman is an executive officer and
director and another Director of the Company is a director.
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 are as follows:
Nine Months Ended
September 30,
----------------------
2003 2002
------- --------
Available-for-sale securities:
Proceeds $ 179 $ 268
Gross realized gains (losses) 36 (1,005)
Trading securities:
Proceeds $ 884 $ --
Gross realized gains 57 --
8. INVENTORIES
- -------------------
The components of inventories are as follows:
September 30, December 31,
2003 2002
------------- ------------
Raw materials $1,738 $1,765
Work in process 488 367
Finished goods 1,688 1,545
------ ------
$3,914 $3,677
====== ======
9
9. 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 nine months ended September 30, 2003, the Company sold ten commercial
properties from its real estate investment and management segment which had a
total net book value of $4,097. The properties were sold for an aggregate sales
price of $4,349, resulting in gains of $151 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 nine months
ended September 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.
Summarized financial information for properties sold and accounted for as
discontinued operations, is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------------
2003 2002 2003 2002
-------- -------- -------- ----------
Rental revenues from real estate
operations $ 13 $ 315 $ 502 $ 1,435
Mortgage interest expense -- (9) (4) (41)
Depreciation expense -- (9) (3) (31)
Other operating expenses (34) (44) (73) (92)
------- ------- ------- -------
Income (loss) from operations $ (21) $ 253 $ 422 $ 1,271
======= ======= ======= =======
Properties held for sale:
- ------------------------
As of September 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 nine months ended September 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 September 30, 2003 and December 31, 2002.
10
Summarized financial information for properties held for sale and accounted for
as discontinued operations, is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -----------------------
2003 2002 2003 2002
-------- -------- --------- --------
Rental revenues from real estate
operations $ 38 $ 41 $ 59 $ 85
Depreciation expense -- (1) (2) (5)
Other operating expenses (8) (15) (14) (25)
---- ---- ---- ----
Income from operations $ 30 $ 25 $ 43 $ 55
==== ==== ==== ====
10. INVESTMENTS IN JOINT VENTURES
- -------------------------------------
Investments in joint ventures consist of:
September 30, December 31,
2003 2002
------------- ------------
Investment in hotel ventures (a) $11,962 $23,128
Lease financing (b) 8,047 8,261
------- -------
$20,009 $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 is
an executive officer and director and another Director of the Company is a
director. 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 the
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 $433 and $720 for the
three and nine months ended September 30, 2003, respectively.
11
Summarized financial information of the Hotel Venture and Quebec Venture are as
follows:
September 30, 2003 December 31, 2002
------------------- -----------------
Balance Sheets:
Property, plant and equipment, net $60,207 $46,397
======= =======
Current assets $ 4,398 $ 347
======= =======
Current liabilities $ 2,740 $ 500
======= =======
Long-term liabilities $30,729 $ --
======= =======
Three Months Ended Nine months Ended
September 30, 2003 September 30, 2003
----------------------------------------
Statements of Income:
Revenues $ 7,062 $ 15,931
Expenses (5,979) (14,227)
-------- --------
Operating income $ 1,083 $ 1,704
======== ========
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 $368 and $506 for the nine months ended
September 30, 2003 and 2002, respectively, and is included in rental income in
the Consolidated Statements of Income.
11. 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 September 30, 2003 and December 31, 2002, the fair value
of such derivatives was ($610) 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 $1,096 and $3,629 in net realized and unrealized gains
from derivative instruments for the nine months ended September 30, 2003 and
2002, respectively, which are included in other income and expense, net in the
Consolidated Statements of Income.
12
12. 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 (See "Investments in Joint
Ventures"). Fees paid for the management of the Company's two hotel properties
are based upon a percentage of revenue and were approximately $78 and $81 for
the nine months ended September 30, 2003 and 2002, respectively. Included in
marketable securities at September 30, 2003 and December 31, 2002 was $30,760
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 nine months of 2003, the Company purchased an additional 1,036 shares
of the common stock of Prime for $5,941.
13. COMMITMENTS AND CONTINGENCIES
- -------------------------------------
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 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.
13
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.
14. COMPREHENSIVE INCOME (LOSS)
- -----------------------------------
The components of comprehensive income (loss) are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------------------
2003 2002 2003 2002
----------- -------- --------- ----------
Net income $ 2,960 $ 5,884 $ 9,913 $ 13,171
Other comprehensive income (loss), net of tax:
Change in net unrealized gain (loss) on available for
sale securities, net of tax (provision) benefit of ($2,777),
$2,820, ($2,505) and $1,033, respectively 5,158 (5,236) 4,654 (1,917)
Change in fair value of cash flow hedge, net of tax
provision of $0, ($1), $0 and ($5), respectively -- 1 -- 6
-------- -------- -------- --------
Comprehensive income $ 8,118 $ 649 $ 14,567 $ 11,260
======== ======== ======== ========
Accumulated other comprehensive income as of September 30, 2003 and December 31,
2002 consists of a net unrealized gain on available-for-sale securities of
$5,740 and $1,086, which is net of tax provision of $3,090 and $586,
respectively.
15. 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 Ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
2003 2002 2003 2002
--------- --------- -------- ---------
Net revenues and sales:
Real estate investment and management $ 5,886 $ 5,864 $ 18,346 $ 17,723
Engineered products 8,599 8,439 25,081 25,700
-------- -------- -------- --------
$ 14,485 $ 14,303 $ 43,427 $ 43,423
======== ======== ======== ========
Operating income:
Real estate investment and management $ 2,688 $ 2,888 $ 8,830 $ 8,790
Engineered products 1,009 807 2,323 1,881
General corporate expenses (760) (595) (2,377) (1,810)
-------- -------- -------- --------
2,937 3,100 8,776 8,861
Other income, net 907 4,308 3,077 9,336
-------- -------- -------- --------
Income from continuing operations before
income taxes $ 3,844 $ 7,408 $ 11,853 $ 18,197
======== ======== ======== ========
14
16. RECENT ACCOUNTING PRONOUNCEMENTS
- ----------------------------------------
In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" ("SFAS No. 145"). This statement
eliminates the requirement to report gains and losses from extinguishment of
debt as extraordinary unless they meet the criteria of APB Opinion 30. SFAS No.
145 also requires sale-leaseback accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. The
changes related to lease accounting are effective for transactions occurring
after May 15, 2002 and the changes related to debt extinguishment are effective
for fiscal years beginning after May 15, 2002. The 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 decision 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
15
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
September 30, 2003, and for hedging relationships designated after September 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 Company has adopted SFAS No.
150 and it did not have a material impact on the Company's financial position or
results of operations.
17. 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.
18. 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
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 NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
- -------------------------------------------------------
Total revenues for the quarter ended September 30, 2003 were $14,485 resulting
in operating income of $2,937 versus total revenues of $14,303 and operating
income of $3,100 during the comparable 2002 period. Net income for the three
month period ended September 30, 2003 was $2,960 or $.33 per basic share versus
$5,884 or $.65 per basic share for the same period in 2002. The results of the
three months ended September 30, 2002 include $3,770 in gains on derivative
instruments above those recognized in the current year period.
Revenues for the nine months ended September 30, 2003 were $43,427 compared to
comparable 2002 revenues of $43,423. Operating income for the nine months ended
September 30, 2003 was $8,776 versus $8,861 for the comparable 2002 period. Net
income for the nine months ended September 30, 2003 was $9,913 or $1.09 per
basic share compared to net income of $13,171 or $1.43 per basic share for the
same period in 2002. The results of the 2002 period include $5,273 in gains on
derivative instruments and sales of real estate, including those accounted for
as discontinued operations, above those recognized in the nine month period
ended September 30, 2003.
16
REAL ESTATE INVESTMENT AND MANAGEMENT
- -------------------------------------
Rental revenues from real estate operations remained relatively consistent with
the prior year, totaling $5,886 for the three month period ended September 30,
2003 versus $5,864 in the same 2002 period and $18,346 for the nine months ended
September 30, 2003, compared to $17,723 in the same 2002 period. 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 $252 during the three months ended
September 30, 2003 a decline of $47 from $299 incurred in the third quarter of
2002. For the nine months ended September 30, 2003, mortgage interest expense
was $802 compared to $1,034 for the corresponding 2002 period, a decline of $232
or 22.4%.
Depreciation expense associated with real properties held for rental decreased
$15 or 1.9% and $107 or 4.4%, respectively, for the three and nine months ended
September 30, 2003 compared to the same periods in 2002 primarily due to reduced
depreciation expense associated with fully depreciated building improvements.
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 $284 or 15.2% for the three months ended September 30, 2003 and $922
or 16.9% for the nine months ended September 30, 2003, compared to the
comparable periods in 2002. These increases are primarily the result of
increased property maintenance, insurance, payroll and hotel operating expenses.
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 Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
2003 2002 2003 2002
------- ------- ------- --------
Net sales $ 8,599 $ 8,439 $25,081 $25,700
Cost of sales 5,849 6,010 17,729 18,771
Selling, general and administrative expenses 1,741 1,622 5,029 5,048
------- ------- ------- -------
Operating income $ 1,009 $ 807 $ 2,323 $ 1,881
======= ======= ======= =======
Net sales of the engineered products segment increased $160 or 1.9% for the
three months ended September 30, 2003 and decreased $619 or 2.4% for the nine
months ended September 30, 2003, compared with the results of the corresponding
2002 period. Demand for the Company's automotive products continued to increase
in the three and nine month period ended September 30, 2003, however, these
increases were offset by weakened demand for the Company's engineered component
and transformer product lines especially in the first six months of 2003.
Cost of sales as a percentage of sales decreased 3.2% and 2.3%, respectively,
for the three and nine months ended September 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
increased $119 or 7.3% for the three months ended September 30, 2003 versus the
comparable 2002 period primarily due to increases in professional fees, payroll
and payroll related items. For the nine months ended September 30, 2003,
selling, general and administrative expenses decreased less than one percent as
compared to the results of the corresponding 2002 period.
17
GENERAL AND ADMINISTRATIVE EXPENSES
- -----------------------------------
General and administrative expenses not associated with the manufacturing
operations for the three and nine months ended September 30, 2003 increased $165
or 27.7% and $567 or 31.3%, 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 Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2003 2002 2003 2002
-------- ------- --------- --------
Net realized and unrealized gain on derivative
instruments $ 114 $ 3,884 $ 1,096 $ 3,629
Equity in earnings of hotel ventures 433 -- 720 --
Net gain (loss) on sale of available-for-sale securities 36 -- 36 (1,005)
Net realized gain on trading securities -- -- 57 --
Net gain on sale of real estate assets -- -- 152 5,674
Other, net (11) (9) (15) (34)
------- ------- ------- -------
$ 572 $ 3,875 $ 2,046 $ 8,264
======= ======= ======= =======
DISCONTINUED OPERATIONS
- -----------------------
Operating income from properties sold or held for sale and accounted for as
discontinued operations was $5 and $279 on a net of tax basis for the three and
nine months ended September 30, 2003, versus $167 and $796, 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
September 30, 2003 as discontinued operations. Net gains on the sale of real
estate assets accounted for as discontinued operations were $336 and $1,845,
respectively, for the three and nine months ended September 30, 2003 and $176
for both the three and nine months ended September 30, 2002, on a net of tax
basis. 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 $9,537 for the nine
months ended September 30, 2003 versus $10,994 for the nine months ended
September 30, 2002. The $1,457 decrease in operating cash flow primarily results
from increases in accounts receivable and inventories and a decrease in other
liabilities offset by an increase in income taxes payable.
For the nine months ended September 30, 2003, $14,333 was provided by investing
activities which consisted primarily of net distributions from investments in
joint ventures of $12,468, proceeds from the sale of real estate assets of
$7,523, as well as proceeds from the sale of derivative instruments of $1,584.
This amount was partially offset by purchases of available-for-sale securities
of $7,062.
For the nine months ended September 30, 2002, $11,674 was used in investing
activities which consisted primarily of $10,641 in net purchases of
available-for-sale securities, $8,843 of purchases of derivative instruments and
$2,995 to purchase a note receivable. This amount was offset by proceeds from
the sale of real estate assets of $6,710, as well as proceeds from the sale of
derivative instruments of $3,912.
Net cash used in financing activities was $12,506 during the nine months ended
September 30, 2003. This use of cash is primarily attributable to the payment of
dividends of $9,102 as well as debt reduction and the purchase and retirement of
the Company's common stock, partially offset by cash proceeds from the exercise
of stock options.
18
Net cash used in financing activities during the nine months ended September 30,
2002 was $5,827. This use of cash was primarily attributable to debt reduction
of $3,165 and the purchase and retirement of the Company's common stock,
partially offset by cash proceeds from the exercise of stock options.
At September 30, 2003, the Company's cash and marketable securities totaled
$99.9 million and working capital was $85.4 million compared to cash and
marketable securities of $74.8 million and working capital of $67.0 million at
December 31, 2002.
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. 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.
On June 10, 2003, the Board of Directors of the Company declared a special
one-time cash dividend of $2.00 per common share on a pre-split basis to all
stockholders of record as of June 20, 2003. While the Company does not currently
expect to pay additional dividends in the future, the Board of Directors could
reevaluate 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. A majority of the outstanding shares of the
Company voted to approve this proposal and the Company declared a two-for-one
stock split during August 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
increase in authorized capital and stock split on a retroactive basis, except
for dividends per share.
The cash needs of the Company have been satisfied from funds generated by
current operations. It is expected that future operational cash needs and the
cash required to repurchase the Company's common stock will also be satisfied
from existing cash balances, marketable securities, ongoing operations and
borrowings under the Revolver (as hereinafter defined). The primary source of
capital to fund additional real estate acquisitions and to make additional
high-yield mortgage loans will come from existing funds, borrowings under the
Revolver, the sale, financing and refinancing of the Company's properties and
from third party mortgages and purchase money notes obtained in connection with
specific acquisitions.
In addition to the acquisition of properties for consideration consisting of
cash and mortgage financing proceeds, the Company may acquire real properties in
exchange for the issuance of the Company's equity securities. The Company may
also finance acquisitions of other companies in the future with borrowings from
institutional lenders and/or the public or private offerings of debt or equity
securities. The Company currently has no agreements, commitments or
understandings with respect to the acquisition of real properties or other
companies in exchange for equity securities.
Funds of the Company in excess of that needed for working capital, purchasing
real estate and arranging financing for real estate acquisitions are invested by
the Company in corporate equity securities, corporate notes, certificates of
deposit, government securities and other financial instruments. Changes in U.S.
interest rates affect the interest earned on the Company's cash and cash
equivalent balances. Given the level of cash currently held by the Company and
the decline in U.S. interest rates over the past several years, the Company's
earnings have been negatively impacted.
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.
19
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 September 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 September 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 September 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 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 nine
months ended September 30, 2003, there were no material changes to these
policies.
20
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.
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
As of the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-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 August 4, 2003, by written consent, the stockholders approved the adoption of
an amendment to the Certificate of Incorporation of the Company to increase the
number of common shares, $.10 par value, which the Company has authority to
issue, from 7,500,000 to 17,500,000 shares. The vote on such matter was as
follows, on a pre-split basis:
FOR AGAINST ABSTAIN
------------- -------- ------------
4,116,370 168,237 26,357
21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K None
(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: November 10, 2003 By: /s/ Anthony J. Miceli
-------------------------------
Anthony J. Miceli
Vice President, Chief Financial
Officer and Secretary of the
Company
22