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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 MARCH 31, 2004
COMMISSION 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
incorporation or organization) Identification No.)
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 9,112,142 shares of common stock, $.10 par value, outstanding
as of May 12, 2004.
UNITED CAPITAL CORP. AND SUBSIDIARIES
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as
of March 31, 2004 (Unaudited) and December 31, 2003...............3
Consolidated Statements of Income for the
Three Months Ended March 31, 2004 and 2003 (Unaudited)............4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2004 and 2003 (Unaudited)..........5-6
Notes to Consolidated Financial Statements (Unaudited).........7-14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................14-18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF
MARKET RISK......................................................18
ITEM 4. CONTROLS AND PROCEDURES..........................................18
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................19
SIGNATURES...................................................................19
2
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
2004 2003
----------- ------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 57,694 $ 59,210
Marketable securities 56,131 49,612
Notes and accounts receivable, net 7,289 6,434
Inventories 4,210 4,155
Prepaid expenses and other current assets 1,007 961
Current assets of discontinued operations 32 86
-------- --------
Total current assets 126,363 120,458
-------- --------
Property, plant and equipment, net 2,895 3,098
Real property held for rental, net 37,027 37,421
Investments in joint ventures 19,590 19,819
Noncurrent notes receivable 3,927 2,862
Other assets 2,085 3,194
Noncurrent assets of discontinued operations 2,517 2,862
-------- --------
Total assets $194,404 $189,714
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt $ 2,728 $ 2,938
Accounts payable and accrued liabilities 8,770 9,196
Income taxes payable 8,271 7,270
Deferred income taxes 5,175 3,947
Current liabilities of discontinued operations 33 1,033
-------- --------
Total current liabilities 24,977 24,384
-------- --------
Long-term debt 7,805 8,459
Other long-term liabilities 30,937 30,871
Deferred income taxes 266 1,783
-------- --------
Total liabilities 63,985 65,497
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock $.10 par value, authorized 17,500 shares;
issued and outstanding 9,112 and 9,092 shares, respectively 911 909
Retained earnings 118,000 114,436
Accumulated other comprehensive income, net of tax 11,508 8,872
-------- --------
Total stockholders' equity 130,419 124,217
-------- --------
Total liabilities and stockholders' equity $194,404 $189,714
======== ========
The accompanying Notes to Consolidated Financial
Statements are an integral part of these statements.
3
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)
Three Months Ended
March 31,
------------------------
2004 2003
--------- ----------
Revenues:
Net sales $ 9,290 $ 8,156
Rental revenues from real estate operations 5,479 5,657
-------- --------
Total revenues 14,769 13,813
-------- --------
Costs and expenses:
Cost of sales 6,681 6,060
Real estate operations:
Mortgage interest expense 192 255
Depreciation expense 630 727
Other operating expenses 1,886 2,022
General and administrative expenses 1,519 1,437
Selling expenses 1,016 866
-------- --------
Total costs and expenses 11,924 11,367
-------- --------
Operating income 2,845 2,446
-------- --------
Other income (expense):
Interest and dividend income 386 333
Interest expense (120) (108)
Other income and expense, net 1,635 629
-------- --------
Total other income 1,901 854
-------- --------
Income from continuing operations before income taxes 4,746 3,300
Provision for income taxes 1,269 1,253
-------- --------
Income from continuing operations 3,477 2,047
-------- --------
Discontinued operations:
Income from discontinued operations, net of income
taxes of $33 and $209, respectively 51 314
Net (loss) gain on disposal of discontinued operations, net of
income taxes (benefit) provision of ($56) and $757, respectively (83) 1,135
-------- --------
(Loss) income from discontinued operations (32) 1,449
-------- --------
Net income $ 3,445 $ 3,496
======== ========
Basic earnings per share:
Income from continuing operations $ .38 $ .23
Income from discontinued operations -- .16
-------- --------
Net income per share $ .38 $ .39
======== ========
Diluted earnings per share:
Income from continuing operations $ .32 $ .19
Income from discontinued operations -- .14
-------- --------
Net income per share assuming dilution $ .32 $ .33
======== ========
The accompanying Notes to Consolidated Financial
Statements are an integral part of these statements.
4
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
March 31,
------------------------
2004 2003
--------- ---------
Cash flows from operating activities:
Net income $ 3,445 $ 3,496
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 877 1,043
Net gain on sale of available-for-sale securities (594) --
Gain on sale of other assets (363) --
Net gain on sale of real estate assets (1) (141)
Equity in losses (earnings) of joint ventures 35 (235)
Net loss (gain) on disposal of discontinued operations, net of tax 83 (1,135)
Net realized and unrealized loss (gain) on derivative instruments 3 (315)
Proceeds from sale of trading securities -- 884
Net realized gain on trading securities -- (57)
Changes in assets and liabilities (A) (2,874) (636)
-------- --------
Net cash provided by operating activities 611 2,904
-------- --------
Cash flows from investing activities:
Purchase of available-for-sale securities (10,264) (550)
Proceeds from sale of available-for-sale securities 8,394 --
Proceeds from sale of other assets 1,363 --
Proceeds from sale of real estate assets 203 3,947
Purchase of derivative instruments (13) --
Proceeds from sale of derivative instruments -- 461
Purchase of note receivable (1,000) --
Acquisition of property, plant and equipment (37) (245)
Principal payments on notes receivable 12 18
Acquisition of/additions to real estate assets (236) (27)
Investments in joint ventures, net -- (256)
Distributions from joint ventures 194 194
-------- --------
Net cash (used in) provided by investing activities (1,384) 3,542
-------- --------
Cash flows from financing activities:
Principal payments on mortgage commitments, notes and loans (864) (815)
Purchase and retirement of common shares -- (420)
Proceeds from exercise of stock options 121 146
-------- --------
Net cash used in financing activities (743) (1,089)
-------- --------
Net (decrease) increase in cash and cash equivalents (1,516) 5,357
Cash and cash equivalents, beginning of period 59,210 48,893
-------- --------
Cash and cash equivalents, end of period $ 57,694 $ 54,250
======== ========
5
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
Three Months Ended
March 31,
-------------------
2004 2003
------- -------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 291 $ 311
====== ======
Taxes $1,913 $2,585
====== ======
(A) Changes in assets and liabilities are as follows:
Three Months Ended
March 31,
-------------------
2004 2003
------- -------
Notes and accounts receivable, net $ (822) $ (970)
Inventories (55) 518
Prepaid expenses and other current assets (46) 12
Deferred income taxes (1,708) (831)
Non current notes receivables (110) --
Other assets 102 118
Accounts payable and accrued liabilities (416) (1,072)
Income taxes payable 862 1,758
Other long-term liabilities 66 171
Discontinued operations - noncash charges and
working capital changes (747) (340)
------- -------
Total $(2,874) $ (636)
======= =======
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, 2003.
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. STOCKHOLDERS' EQUITY
Previous purchases of the Company's common stock have reduced the Company's
additional paid-in-capital to zero and, accordingly, any future purchases in
excess of par value will also reduce retained earnings. During the three months
ended March 31, 2003, the Company purchased and retired 24 shares of the
Company's common stock for $420. The Company has not purchased any shares of the
Company's common stock during 2004. Repurchases of the Company's common stock
may be made from time to time in the open market at prevailing market prices and
may be made in privately negotiated transactions, subject to available
resources. During the three months ended March 31, 2004 and 2003, the Company
received proceeds of $121 and $146 from the exercise of 20 and 14 stock options,
respectively.
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share from continuing operations:
Three Months Ended
March 31,
------------------
2004 2003
------- ---------
Numerator:
Income from continuing operations $ 3,477 $ 2,047
======= =======
Denominator:
Basic - weighted-average shares outstanding 9,097 9,029
Dilutive effect of employee stock options 1,858 1,496
------- -------
Diluted - weighted average shares outstanding 10,955 10,525
======= =======
Basic earnings per share - continuing operations $ .38 $ .23
======= =======
Diluted earnings per share - continuing operations $ .32 $ .19
======= =======
7
4. 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
March 31,
-----------------------------
2004 2003
--------- ---------
Net income, as reported $ 3,445 $ 3,496
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects (726) (550)
--------- ---------
Pro forma net income $ 2,719 $ 2,946
========= =========
Earnings per share:
Basic - as reported $ .38 $ .39
========= =========
Basic - pro forma $ .30 $ .33
========= =========
Diluted - as reported $ .32 $ .33
========= =========
Diluted - pro forma $ .25 $ .29
========= =========
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.
5. 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
--------- -------- ---------- --------
March 31, 2004:
Available-for-sale:
Equity securities $ 29,996 $ 17,854 $ (149) $ 47,701
Bonds 8,430 -- -- 8,430
-------- -------- -------- --------
$ 38,426 $ 17,854 $ (149) $ 56,131
======== ======== ======== ========
December 31, 2003:
Available-for-sale:
Equity securities $ 28,957 $ 13,763 $ (113) $ 42,607
Bonds 7,005 -- -- 7,005
-------- -------- -------- --------
$ 35,962 $ 13,763 $ (113) $ 49,612
======== ======== ======== ========
Included in marketable securities at March 31, 2004 and December 31, 2003 was
$40,282 and $36,105, 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.
8
Proceeds from the sale of available-for-sale and trading securities and the
resulting gross realized gains included in the determination of net income are
as follows:
Three Months Ended
March 31,
-------------------
2004 2003
-------- ---------
Available-for-sale securities:
Proceeds $8,394 $ --
Gross realized gains 594 --
Trading securities:
Proceeds $ -- $ 884
Gross realized gains -- 57
6. INVENTORIES
The components of inventories are as follows:
March 31, December 31,
2004 2003
--------- ------------
Raw materials $1,739 $1,601
Work in process 436 411
Finished goods 2,035 2,143
------ -------
$4,210 $4,155
====== =======
7. 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, be reclassified as discontinued operations for
all periods presented.
During the three months ended March 31, 2004, the Company contributed for a
nominal amount two commercial properties from its real estate investment and
management segment which had a total net book value of $341. Net of proceeds
received, the Company recorded a loss of $83 on a net of tax basis.
The results of operations for these properties for the three months ended March
31, 2004 and 2003 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, 2003.
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
March 31,
---------------------
2004 2003
------- -------
Rental revenues from real estate $ -- $ 398
operations
Mortgage interest expense -- (5)
Depreciation expense -- (3)
Other operating expenses (32) (57)
----- -----
(Loss) income from operations $ (32) $ 333
===== =====
9
PROPERTIES HELD FOR SALE:
- ------------------------
As of March 31, 2004, in accordance with the provisions of SFAS No. 144, the
Company considered a total of five 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,
plus those properties disposed of during 2004 and 2003, have been reclassified
to discontinued operations, on a net of tax basis, in the Consolidated
Statements of Income for the three months ended March 31, 2004 and 2003. 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 March 31, 2004 and December 31, 2003.
Summarized financial information for properties held for sale and accounted for
as discontinued operations, is as follows:
Three Months Ended
March 31,
------------------
2004 2003
------ ------
Rental revenues from real estate operations $ 174 $ 277
Mortgage interest (19) (29)
Depreciation expense -- (50)
Other operating expenses (39) (8)
----- -----
Income from operations $ 116 $ 190
===== =====
8. INVESTMENTS IN JOINT VENTURES
Investments in joint ventures consist of:
March 31, December 31,
2004 2003
---------- ---------
Investment in hotel ventures (a) $11,702 $11,843
Lease financing (b) 7,888 7,976
------- -------
$19,590 $19,819
======= =======
(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.
10
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 (losses) earnings and cash contributions and distributions. The
Company's equity in (losses) earnings of these hotel ventures was ($141) and
$113 for the three months ended March 31, 2004 and 2003, respectively.
Summarized financial information of the Hotel Venture and Quebec Venture are as
follows:
March 31, December 31,
2004 2003
--------- ------------
Balance Sheets:
---------------
Current assets $ 3,540 $ 3,728
======= =======
Property, plant and equipment, net $59,872 $61,008
======= =======
Other non-current assets $ 274 $ 304
======= =======
Current liabilities $ 3,014 $ 3,267
======= =======
Long-term liabilities $29,521 $29,971
======= =======
Equity $31,151 $31,802
======= =======
Three Months Ended
March 31,
----------------------
2004 2003
--------- ----------
Statements of Income:
---------------------
Revenues $ 5,573 $ 2,859
Expenses (5,926) (2,633)
------- -------
Operating (loss) income $ (353) $ 226
======= =======
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.
Currency 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% 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 $107 and $122 for the three months ended
March 31, 2004 and 2003, respectively, and is included in rental income in the
Consolidated Statements of Income.
9. 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, participate in put
and/or call options and enter into interest rate swap agreements.
Management maintains a diversified portfolio of cash equivalents and investments
in a variety of securities, primarily U.S. investments in both common and
preferred equity issues, and participates on a limited basis in transactions
involving derivative financial instruments, including short stock sales and put
11
and/or call options. At December 31, 2003, the fair value of such derivatives
was ($10) which is recorded as a component of accounts payable and accrued
liabilities in the Consolidated Balance Sheets. At March 31, 2004, the fair
value of derivatives held was zero. These instruments do not qualify for hedge
accounting and therefore changes in the derivatives fair value are recognized in
income. The Company recognized ($3) and $315 in net realized and unrealized
(losses) gains from derivative instruments for the three months ended March 31,
2004 and 2003, respectively, which are included in other income and expense, net
in the Consolidated Statements of Income.
10. RELATED PARTY TRANSACTIONS
The Company has a 50% interest in an unconsolidated limited liability
corporation, whose principal assets are two distribution centers leased to
Kmart. A group that includes the wife of the Company's Board Chairman, two
Directors of the Company and the wife of one of the Directors has an 8% interest
in this entity (See Note 8).
The Company's two hotel properties, as well as the hotels owned by the Hotel
Venture and Quebec Venture, are managed by Prime (See Note 8). Fees paid for the
management of the Company's two hotel properties are based upon a percentage of
revenue and were approximately $18 and $26 for the three months ended March 31,
2004 and 2003, respectively. Included in marketable securities at March 31, 2004
and December 31, 2003 was $40,282 and $36,105, respectively, of common stock in
Prime which represents approximately 7.9% of Prime's outstanding shares at both
periods.
11. 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 and
has recorded a liability for the estimated investigation, remediation and
administrative costs associated therewith.
The process of remediation has begun at one facility pursuant to a plan filed
with the New Jersey Department of Environmental Protection ("NJDEP").
Environmental experts engaged by the Company estimate that under the most
probable 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. Although it is not currently possible to estimate the range or amount of
the ultimate liability, the Company has approximately $11,000 recorded in other
long-term liabilities as of March 31, 2004 and December 31, 2003 to cover such
matters. In the opinion of management, this amount 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, regulatory and tax
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. At March 31, 2004 and December 31, 2003, the Company
had approximately $20,000 recorded in other long-term liabilities relating to
12
such matters. None of these matters are expected to result in a material adverse
effect on the Company's consolidated financial position or results of
operations.
12. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) are as follows:
Three Months Ended
March 31,
------- --------
2004 2003
------- --------
Net income $ 3,445 $ 3,496
Other comprehensive income (loss), net of tax:
Change in net unrealized gain (loss) on available for
sale securities, net of tax (provision) benefit of
($1,627) and $2,460, respectively 3,022 (4,568)
Reclassification adjustment for net gains realized in net
income, net of tax provision of $208 (386) --
------- -------
Comprehensive income (loss) $ 6,081 $(1,072)
======= =======
Accumulated other comprehensive income as of March 31, 2004 and December 31,
2003 consists of net unrealized gains on available-for-sale securities of
$11,508 and $8,872, which is net of $6,197 and $4,777 of taxes, respectively.
13. 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 which are located throughout the United States. Engineered products
are manufactured through wholly-owned subsidiaries of the Company and primarily
consist of knitted wire products and components and transformer products which
are sold worldwide.
Operating results of the Company's business segments are as follows:
Three Months Ended
March 31,
------- --------
2004 2003
------- --------
Net revenues and sales:
Real estate investment and management $ 5,479 $ 5,657
Engineered products 9,290 8,156
-------- --------
$ 14,769 $ 13,813
======== ========
Operating income:
Real estate investment and management $ 2,771 $ 2,653
Engineered products 839 479
General corporate expenses (765) (686)
-------- --------
2,845 2,446
Other income, net 1,901 854
-------- --------
Income from continuing operations before
income taxes $ 4,746 $ 3,300
======== ========
14. PENSION PLAN
The Company accounts for its defined benefit pension plan in accordance with
Statement of Financial Accounting Standard No. 87, "Employees' Accounting for
Pensions" ("SFAS No. 87"), which requires that amounts recognized in the
financial statements be determined on an actuarial basis. SFAS No. 87 generally
reduces the volatility of future income (expense) from changes in pension
liability discount rates and the performance of the pension plan's assets. The
Company uses December 31 as the measurement date for its pension plan.
13
Net periodic pension expense consists of the following:
Three Months Ended
March 31,
-------------------
2004 2003
--------- -------
Service cost $ (71) $ (66)
Interest cost (163) (162)
Actual return on plan assets 165 (49)
Net amortization and deferral (21) 187
----- -----
Net periodic pension expense $ (90) $ (90)
===== =====
The Company did not contribute to the pension plan during the three months ended
March 31, 2004 as the plan is overfunded. The Company does not anticipate
contributing to the plan in 2004.
15. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB issued SFAS No.132 (Revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits" ("SFAS No. 132R").
This standard requires new annual and interim disclosures about the types of
plan assets, investment strategy, measurement date, plan obligations, and cash
flows as well as the components of the net periodic benefit cost recognized in
interim periods. The Company has adopted the disclosures required by SFAS No.
132R, except for the disclosure of expected future benefit payments, which must
be disclosed for fiscal years ending after June 15, 2004.
16. 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.
17. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to present them on a basis
consistent with the current year presentations.
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 MONTHS ENDED MARCH 31, 2004 AND 2003
Total revenues for the quarter ended March 31, 2004 were $14,769, an increase of
$956 or 6.9% from comparable 2003 revenues. Income from continuing operations
during this period was $3,477 or $.38 per basic share versus $2,047 or $.23 per
basic share during the comparable period in 2003. This represents a 69.9%
increase in income from continuing operations. Net income for the first quarter
of 2004 was $3,445 or $.38 per basic share compared to net income of $3,496 or
$.39 per basic share for the same period in 2003.
14
REAL ESTATE INVESTMENT AND MANAGEMENT
Rental revenues from real estate operations decreased $178 or 3.1% to $5,479 for
the three month period ended March 31, 2004, from $5,657 for the same period in
2003. This decrease is primarily attributable to a decrease in hotel operating
revenue partially offset by a slight increase in revenue from rental properties.
Rental revenues from real estate operations does not include revenue from
properties classified as held for sale or those sold during 2004 and 2003, as
such results have been classified as discontinued operations in accordance with
SFAS No.144.
Mortgage interest expense decreased $63 or 24.7% to $192 for the quarter ended
March 31, 2004 from $255 for the quarter ended March 31, 2003 as a result of
continuing mortgage amortization. At March 31, 2004, the outstanding mortgage
balance on the Company's real estate properties has been reduced to just over
$10 million.
Depreciation expense associated with real properties held for rental decreased
$97 or 13.3% for the three months ended March 31, 2004 compared to the same
period in 2003. This decrease is primarily due to reduced depreciation expense
associated with fully depreciated building improvements. Depreciation expense
from property sales and properties held for sale in 2004 and 2003 has been
reclassified as discontinued operations in accordance with SFAS No.144.
Other operating expenses associated with the management of real properties
decreased $136 or 6.7% for the three months ended March 31, 2004 compared to the
same period in 2003, primarily due to decreases in hotel operating expenses and
real estate taxes offset by increases in utilities and insurance expense.
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
March 31,
---------------------
2004 2003
-------- ----------
Net sales $9,290 $8,156
Cost of sales 6,681 6,060
Selling, general and administrative expenses 1,770 1,617
------ ------
Operating income $ 839 $ 479
====== ======
Net sales of the engineered products segment increased $1.1 million or 13.9% to
$9.3 million for the three months ended March 31, 2004 as compared with the
results of the corresponding 2003 period due to increased demand primarily in
the Company's engineered component and automotive products lines as well as a
slight increase in the transformer product line.
Cost of sales as a percentage of sales decreased 2.4% for the three months ended
March 31, 2004, compared to the corresponding period in 2003, principally due to
the mix of products sold including those from new value added applications of
its core technology.
Selling, general and administrative expenses of the engineered products segment
during the first quarter of 2004 increased $153 or 9.5% over the comparable 2003
period primarily due to the increase in sales as noted above.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses not associated with the manufacturing
operations for the three months ended March 31, 2004 increased $79 or 11.5%,
compared to such expenses incurred for the comparable 2003 period. These
increases are mainly due to higher salary and salary related expenses and
insurance expense partially offset by lower professional costs.
15
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
March 31,
----------------------
2004 2003
--------- ----------
Casualty insurance settlement $ 831 $ --
Net gain on sale of available-for-sale securities 594 --
Equity in (loss) earnings of hotel ventures (141) 113
Gain on sale of other assets 363 --
Net realized and unrealized (loss) gain on derivative instruments (3) 315
Net gain on sale of real estate assets 1 141
Net realized gain on trading securities -- 57
Other, net (10) 3
------- -------
$ 1,635 $ 629
======= =======
INCOME TAXES
The effective tax rate from continuing operations was 26.7% for the three months
ended March 31, 2004 versus 38.0% for the comparable quarter in 2003. The
effective tax rate for the current quarter reflects the tax benefits from the
donation of certain properties to qualified organizations.
DISCONTINUED OPERATIONS
Operating income from properties sold or held for sale and accounted for as
discontinued operations was $51 on a net of tax basis for the three months ended
March 31, 2004, versus $314 for the comparable 2003 period. Prior year amounts
have been reclassified to reflect results of operations of real properties held
for sale as of March 31, 2004, or disposed of during 2004 and 2003, as
discontinued operations. Net (loss) gains on the disposal of real estate assets
accounted for as discontinued operations were ($83) for the three months ended
March 31, 2004 and $1,135 for the three months ended March 31, 2003, on a net of
tax basis.
LIQUIDITY AND CAPITAL RESOURCES
The Company experienced a net cash inflow from operations of $611 for the three
months ended March 31, 2004 versus $2,904 for the three months ended March 31,
2003. The $2,293 decrease in operating cash flow primarily resulted from changes
in working capital partially offset by a decrease in net proceeds from the sale
of trading securities and an increase in income from operations.
For the three months ended March 31, 2004, $1,384 was used in investing
activities which consisted primarily of net purchases of available-for-sale
securities of $1,870 and a purchase of a note receivable of $1,000 partially
offset by proceeds of $1,363 from the sale of other assets.
For the three months ended March 31, 2003, $3,542 was provided by investing
activities which consisted primarily of proceeds from the sale of real estate
assets of $3,947 and proceeds from the sale of derivative instruments of $461,
partially offset by purchases of available-for-sale securities of $550.
Net cash used in financing activities was $743 during the three months ended
March 31, 2004. This use of cash is primarily attributable to debt reduction
partially offset by cash proceeds from the exercise of stock options.
Net cash used in financing activities during the three months ended March 31,
2003 was $1,089. This use of cash 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 March 31, 2004, the Company's cash and marketable securities totaled $113.8
million and working capital was $101.4 million compared to cash and marketable
securities of $108.8 million and working capital of $96.1 million at December
31, 2003. Management continues to believe that the real estate market is
overvalued and accordingly acquisitions have been limited to those select
16
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, if and
when attractive long-term opportunities become available.
The cash needs of the Company have been satisfied from funds generated by
current operations. It is expected that future operational cash needs will also
be satisfied from existing cash balances, marketable securities, ongoing
operations 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 its 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 and other interest bearing investments. Given the level of
cash and other interest bearing investments 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.
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 March 31, 2004
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 March 31, 2004. 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") (1.09% at March 31, 2004) 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 has recorded a liability
for the estimated investigation, remediation and administrative cost associated
therewith. See Note 11 of Notes to Consolidated Financial Statements for further
17
discussion of this matter. The Company is subject to various other litigation,
legal regulatory and tax matters that arise in the ordinary course of business
activities. When management believes it is probable that 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.
RELATED PARTY TRANSACTIONS
Refer to Notes to Consolidated Financial Statements for a discussion of related
party transactions.
CRITICAL ACCOUNTING POLICIES AND MANAGEMENT ESTIMATES
The preparation of consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America
requires management to use judgment in making estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. Certain of the
estimates and assumptions required to be made relate to matters that are
inherently uncertain as they pertain to future events. While management believes
that the estimates and assumptions used were the most appropriate, actual
results could differ significantly from those estimates under different
assumptions and conditions.
Refer to the Company's 2003 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 three
months ended March 31 2004, 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 2003 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
See Note 9 of Notes to Consolidated Financial Statements for information about
activity of derivative financial instruments since December 31, 2003. There have
been no other material changes in our quantitative and qualitative disclosures
about market risk for the three-month period ended March 31, 2004 from those
disclosed in Item 7A of the Company's Annual Report on Form 10-K for the year
ended December 31, 2003, which is incorporated herein by reference.
18
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K
On February 23, 2004, the Company filed a report on Form 8-K under Items
5 and 12 announcing the Company's financial results for the fourth
quarter and year ended December 31, 2003.
(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: May 12, 2004 By: /s/ Anthony J. Miceli
------------------------
Anthony J. Miceli
Vice President, Chief Financial Officer
and Secretary of the Company
19