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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 SEPTEMBER 30, 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 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 9,130,142 shares of common stock, $.10 par value, outstanding
as of November 8, 2004.
UNITED CAPITAL CORP. AND SUBSIDIARIES
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as
of September 30, 2004 (Unaudited) and December 31, 2003...............3
Consolidated Statements of Income for the
Three and Nine Months Ended September 30, 2004 and 2003 (Unaudited)...4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2004 and 2003 (Unaudited)...........5-6
Notes to Consolidated Financial Statements (Unaudited).............7-15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.....................15-19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF
MARKET RISK..........................................................19
ITEM 4. CONTROLS AND PROCEDURES..............................................20
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.....................................20
SIGNATURES....................................................................20
2
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 87,133 $ 59,210
Marketable securities 59,472 49,612
Notes and accounts receivable, net 7,152 6,434
Inventories 3,902 4,155
Prepaid expenses and other current assets 657 961
Current assets of discontinued operations -- 86
-------- --------
TOTAL CURRENT ASSETS 158,316 120,458
-------- --------
Property, plant and equipment, net 2,553 3,098
Real property held for rental, net 32,204 33,120
Investments in joint ventures 19,341 19,819
Noncurrent notes receivable 4,538 2,862
Other assets 1,946 3,194
Noncurrent assets of discontinued operations 950 7,163
-------- --------
TOTAL ASSETS $219,848 $189,714
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 2,616 $ 2,938
Accounts payable and accrued liabilities 12,719 9,178
Income taxes payable 9,411 7,270
Deferred income taxes 6,272 3,947
Current liabilities of discontinued operations 11 1,074
-------- --------
TOTAL CURRENT LIABILITIES 31,029 24,407
-------- --------
Long-term debt 6,461 8,459
Other long-term liabilities 30,491 30,848
Deferred income taxes 1,443 1,783
-------- --------
TOTAL LIABILITIES 69,424 65,497
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock $.10 par value, authorized 17,500 shares;
issued and outstanding 9,120 and 9,092 shares, respectively 912 909
Retained earnings 136,039 114,436
Accumulated other comprehensive income, net of tax 13,473 8,872
-------- --------
TOTAL STOCKHOLDERS' EQUITY 150,424 124,217
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $219,848 $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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2004 2003 2004 2003
-------- -------- -------- --------
REVENUES:
Net sales $ 9,285 $ 8,599 $ 28,753 $ 25,081
Rental revenues from real estate operations 5,673 5,401 16,348 16,726
-------- -------- -------- --------
Total revenues 14,958 14,000 45,101 41,807
-------- -------- -------- --------
COSTS AND EXPENSES:
Cost of sales 6,393 5,849 20,177 17,729
Real estate operations:
Mortgage interest expense 155 228 518 721
Depreciation expense 657 708 1,852 2,094
Other operating expenses 2,021 1,989 5,550 5,832
General and administrative expenses 1,472 1,588 4,420 4,753
Selling expenses 1,001 913 2,962 2,653
-------- -------- -------- --------
Total costs and expenses 11,699 11,275 35,479 33,782
-------- -------- -------- --------
Operating income 3,259 2,725 9,622 8,025
-------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest and dividend income 492 445 1,276 1,360
Interest expense (111) (110) (340) (329)
Other income and expense, net 27 572 2,081 2,046
-------- -------- -------- --------
Total other income 408 907 3,017 3,077
-------- -------- -------- --------
Income from continuing operations before income taxes 3,667 3,632 12,639 11,102
Provision for income taxes 501 1,140 2,498 3,764
-------- -------- -------- --------
INCOME FROM CONTINUING OPERATIONS 3,166 2,492 10,141 7,338
-------- -------- -------- --------
DISCONTINUED OPERATIONS:
Income from discontinued operations, net of income
taxes of $35, $88, $92 and $486, respectively 51 132 137 730
Net gain on disposal of discontinued operations, net of
income taxes of $3,251, $225, $7,407 and $1,231,
respectively 4,877 336 11,110 1,845
-------- -------- -------- --------
INCOME FROM DISCONTINUED OPERATIONS 4,928 468 11,247 2,575
-------- -------- -------- --------
NET INCOME $ 8,094 $ 2,960 $ 21,388 $ 9,913
======== ======== ======== ========
BASIC EARNINGS PER SHARE:
Income from continuing operations $ .35 $ .28 $ 1.11 $ .81
Income from discontinued operations .54 .05 1.24 .28
-------- -------- -------- --------
NET INCOME PER SHARE $ .89 $ .33 $ 2.35 $ 1.09
======== ======== ======== ========
DILUTED EARNINGS PER SHARE:
Income from continuing operations $ .30 $ .23 $ .94 $ .69
Income from discontinued operations .46 .04 1.05 .24
-------- -------- -------- --------
NET INCOME PER SHARE ASSUMING DILUTION $ .76 $ .27 $ 1.99 $ .93
======== ======== ======== ========
CASH DIVIDENDS PER SHARE $ -- $ -- $ -- $ 1.00
======== ======== ======== ========
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)
NINE MONTHS ENDED
September 30,
----------------------
2004 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 21,388 $ 9,913
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 2,563 2,723
Net gain on sale of available-for-sale securities (850) (36)
Gain on sale of other assets (363) --
Net gain on sale of real estate assets (2) (152)
Equity in earnings of joint ventures (105) (1,088)
Net gain on disposal of discontinued operations, net of tax (11,110) (1,845)
Net realized and unrealized gain on derivative instruments (146) (1,096)
Proceeds from sale of trading securities -- 884
Net realized gain on trading securities -- (57)
Changes in assets and liabilities:
Notes and accounts receivable, net (674) (1,368)
Inventories 253 (237)
Prepaid expenses and other current assets 304 321
Deferred income taxes (493) (809)
Other assets 228 354
Accounts payable and accrued liabilities 2,911 644
Income taxes payable (5,266) 1,074
Other long-term liabilities (357) 401
Discontinued operations - noncash charges and
working capital changes (898) (726)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,383 8,900
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale securities (19,342) (7,062)
Proceeds from sale of available-for-sale securities 17,411 179
Proceeds from sale of other assets 1,363 --
Proceeds from sale of real estate assets 23,855 7,523
Purchase of derivative instruments (13) --
Proceeds from sale of derivative instruments 789 1,584
Purchase of notes receivable (1,000) --
Acquisition of property, plant and equipment (146) (229)
Principal payments on notes receivable 78 70
Acquisition of/additions to real estate assets (936) (200)
Investments in joint ventures, net -- (256)
Distributions from joint ventures 583 12,724
-------- --------
NET CASH PROVIDED BY INVESTING ACTIVITIES 22,642 14,333
-------- --------
5
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2004 2003
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on mortgage commitments, notes and loans (2,320) (2,419)
Purchase and retirement of common shares -- (1,189)
Proceeds from exercise of stock options 218 841
Dividends paid -- (9,102)
-------- --------
NET CASH USED IN FINANCING ACTIVITIES (2,102) (11,869)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 27,923 11,364
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 59,210 48,893
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 87,133 $ 60,257
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 777 $ 1,008
======== ========
Taxes $ 8,377 $ 3,372
======== ========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of note receivable in connection with sale of real property $ 800 $ --
======== ========
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. Future proceeds from the
issuance of common stock in excess of par value will be credited to retained
earnings until such time that previously recorded reductions have been
recovered. During the nine months ended September 30, 2003, the Company
purchased and retired 66 shares of the Company's common stock for $1,189. 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 nine months ended
September 30, 2004 and 2003, the Company received proceeds of $218 and $841 from
the exercise of 28 and 107 stock options, respectively.
3. DIVIDENDS
On June 10, 2003, the Board of Directors of the Company declared a special
one-time cash dividend of $1.00 per common share to all stockholders of record
as of June 20, 2003. The declaration of such dividend was 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.
4. 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,
------------------- -------------------
2004 2003 2004 2003
------- ------- ------- -------
Numerator:
Income from continuing operations $ 3,166 $ 2,492 $10,141 $ 7,338
======= ======= ======= =======
Denominator:
Basic - weighted-average shares outstanding 9,118 9,096 9,109 9,050
Dilutive effect of employee stock options 1,558 1,685 1,654 1,649
------- ------- ------- -------
Diluted - weighted-average shares outstanding 10,676 10,781 10,763 10,699
======= ======= ======= =======
Basic earnings per share - continuing operations $ .35 $ .28 $ 1.11 $ .81
======= ======= ======= =======
Diluted earnings per share - continuing operations $ .30 $ .23 $ .94 $ .69
======= ======= ======= =======
7
Employee stock options to purchase 756 shares of the Company's common stock for
each of the three and nine months ended September 30, 2004 and 758 shares for
each of the three and nine months ended September 30, 2003, were not included in
the computation of diluted earnings per share in the respective periods
presented because their effect would have been anti-dilutive.
5. 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,
--------------------------------------- ---------------------------------------
2004 2003 2004 2003
----------------- ----------------- ----------------- -------------
Net income, as reported $ 8,094 $ 2,960 $ 21,388 $ 9,913
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects (497) (726) (1,899) (1,860)
----------------- ----------------- ----------------- ---------
Pro forma net income $ 7,597 $ 2,234 $ 19,489 $ 8,053
================= ================= ================= =========
Earnings per share:
Basic - as reported $ .89 $ .33 $ 2.35 $ 1.09
================= ================= ================= =========
Basic - pro forma $ .83 $ .25 $ 2.14 $ .89
================= ================= ================= =========
Diluted - as reported $ .76 $ .27 $ 1.99 $ .93
================= ================= ================= =========
Diluted - pro forma $ .73 $ .22 $ 1.85 $ .78
================= ================= ================= =========
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.
6. 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, 2004:
- -------------------
Available-for-sale:
Equity securities $ 38,738 $ 21,085 $ (356) $ 59,467
Bonds 5 -- -- 5
-------- -------- -------- --------
$ 38,743 $ 21,085 $ (356) $ 59,472
======== ======== ======== ========
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
======== ======== ======== ========
8
Included in marketable securities at September 30, 2004 and December 31, 2003
was $43,078 and $36,105, respectively, of common stock at fair value, in a
publicly-traded company for which the Board Chairman was an executive officer
and director and another Director of the Company was a director (See Notes 11
and 16).
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:
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2004 2003
------- -------
Available-for-sale securities:
Proceeds $17,411 $ 179
Gross realized gains 850 36
Trading securities:
Proceeds $ -- $ 884
Gross realized gains -- 57
7. INVENTORIES
The components of inventories are as follows:
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
Raw materials $2,218 $1,601
Work in process 419 411
Finished goods 1,265 2,143
------ ------
$3,902 $4,155
====== ======
8. 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 nine months ended September 30, 2004, the Company divested itself of
five commercial properties which had a net book value of $5,274 from its real
estate investment and management segment. The cash proceeds from these
transactions were $8,712. In addition, the Company received an $800 purchase
money mortgage in connection with the sale of one of these properties. This
resulted in a gain of $2,542 on a net of tax basis. Two of the commercial
properties were contributed to charitable organizations in the first quarter for
a nominal amount. In addition, the Company sold three of its shopping centers
and retail outlets which had a net book value of $860. The aggregate proceeds
from these transactions were $15,139, resulting in a gain of $8,568 on a net of
tax basis.
The results of operations for these properties for the three and nine months
ended September 30, 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.
9
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,
-------------------- --------------------
2004 2003 2004 2003
------- ------- ------- -------
Rental revenues from real estate operations $ 148 $ 492 $ 747 $ 2,055
Mortgage interest expense -- (23) (19) (84)
Depreciation expense -- (73) (46) (225)
Other operating expenses (55) (205) (507) (621)
------- ------- ------- -------
Income from operations $ 93 $ 191 $ 175 $ 1,125
======= ======= ======= =======
PROPERTIES HELD FOR SALE:
As of September 30, 2004, in accordance with the provisions of SFAS No. 144, the
Company considered a total of three 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 of 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 and nine months ended September 30, 2004 and
2003. In addition, the assets and liabilities associated with these properties,
primarily consisting 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, 2004 and December 31, 2003.
During the quarter ended June 30, 2004, two of the Company's properties
previously classified as held for sale were reclassified to continuing
operations after the Company was able to negotiate favorable leases. In
accordance with SFAS 144, prior periods have been restated to include these
properties in continuing operations.
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,
------------------ -----------------
2004 2003 2004 2003
---- ---- ---- ----
Rental revenues from real estate $ 18 $ 44 $ 105 $ 126
operations
Mortgage interest -- -- -- --
Depreciation expense (10) (10) (30) (30)
Other operating expenses (15) (4) (21) (5)
----- ----- ----- -----
(Loss) income from operations $ (7) $ 30 $ 54 $ 91
===== ===== ===== =====
9. INVESTMENTS IN JOINT VENTURES
Investments in joint ventures consist of:
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------ --------------
Investment in hotel ventures (a) $ 11,627 $ 11,843
Lease financing (b) 7,714 7,976
------------ --------------
$ 19,341 $ 19,819
============ ==============
10
(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 was
an executive officer and director and another Director of the Company was a
director (See Note 16). 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 $8,200 (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 and cash contributions and distributions. The Company's
equity in (losses) earnings of these hotel ventures was ($226) and ($216) for
the three and nine months ended September 30, 2004 and $433 and $720 for the
three and nine months ended September 30, 2003, respectively.
Summarized financial information of the Hotel Venture and Quebec Venture are as
follows:
SEPTEMBER 30, DECEMBER 31,
BALANCE SHEETS: 2004 2003
- --------------- ------------ -----------
Current assets $ 3,337 $ 3,728
======= =======
Property, plant and equipment, net $59,681 $61,008
======= =======
Other non-current assets $ 206 $ 304
======= =======
Current liabilities $ 2,768 $ 3,267
======= =======
Long-term liabilities $29,334 $29,971
======= =======
Equity $31,122 $31,802
======= =======
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
OPERATING RESULTS: 2004 2003 2004 2003
- ------------------ -------- -------- -------- --------
Revenues $ 6,264 $ 7,062 $ 18,182 $ 15,931
Expenses (6,827) (5,979) (18,721) (14,227)
-------- -------- -------- --------
Operating (loss) income $ (563) $ 1,083 $ (539) $ 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.
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.
11
(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 $321 for the three and nine
months ended September 30, 2004 and $123 and $368 for the three and nine months
ended September 30, 2003, respectively, and is included in rental income in the
Consolidated Statements of Income.
10. DERIVATIVE FINANCIAL INSTRUMENTS
The Company recognizes all derivative financial instruments, such as put and/or
call options, in the Consolidated Financial Statements at fair value regardless
of the purpose or intent for holding the instrument. Changes in the fair value
of derivative financial instruments are either recognized periodically in income
or in stockholders' equity as a component of accumulated other comprehensive
income depending on whether the derivative financial instrument qualifies for
hedge accounting, and if so, whether it qualifies as a fair value or cash flow
hedge. Generally, changes in the fair value of derivatives accounted for as fair
value hedges are recorded in income along with the portions of the changes in
the fair value 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
and/or call options. At September 30, 2004 and December 31, 2003, the fair value
of such derivatives was ($651) and ($10), 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 income. The
Company recognized $146 and $1,096 in net realized and unrealized gains from
derivative instruments for the nine months ended September 30, 2004 and 2003,
respectively, which are included in other income and expense, net in the
Consolidated Statements of Income.
11. 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 9).
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 9). Fees paid for the
management of the Company's two hotel properties are based upon a percentage of
revenue and were approximately $68 and $78 for the nine months ended September
30, 2004 and 2003, respectively. Included in marketable securities at September
30, 2004 and December 31, 2003 was $43,078 and $36,105, respectively, of common
stock in Prime which represents approximately 7.9% of Prime's outstanding shares
at both periods. In October 2004, the shareholders of Prime approved a merger
with an affiliate of The Blackstone Group whereby the affiliate acquired all of
the outstanding shares of Prime in exchange for $12.25 per common share.
Accordingly, the Company's shares in Prime were sold, resulting in proceeds of
approximately $43.4 million and a gain of approximately $19 million which will
be included in the Company's results for the fourth quarter of 2004. Effective
with the merger, the Board Chairman and the other Director resigned their
positions with Prime (See Note 16).
12. 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.
12
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 had approximately $11,000 recorded in other
long-term liabilities as of September 30, 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 September 30, 2004 and December 31, 2003, the
Company had approximately $20,000 recorded in other long-term liabilities
relating to 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.
13. COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net income $ 8,094 $ 2,960 $ 21,388 $ 9,913
Other comprehensive income, net of tax:
Change in net unrealized gain (loss) on available for sale
securities, net of tax provision of $2,027, $2,790, $2,773
and $2,518, respectively 3,766 5,181 5,153 4,677
Reclassification adjustment for net gains realized in net
income, net of tax provision of $2, $13, $297 and $13,
respectively (3) (23) (551) (23)
-------- -------- -------- --------
Comprehensive income $ 11,857 $ 8,118 $ 25,990 $ 14,567
======== ======== ======== ========
Accumulated other comprehensive income included as a component of stockholders'
equity at September 30, 2004 and December 31, 2003 consists of net unrealized
gains on available-for-sale securities of $13,473 and $8,872, which is net of
$7,255 and $4,777 of taxes, respectively.
13
14. 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net revenues and sales:
Real estate investment and management $ 5,673 $ 5,401 $ 16,348 $ 16,726
Engineered products 9,285 8,599 28,753 25,081
-------- -------- -------- --------
$ 14,958 $ 14,000 $ 45,101 $ 41,807
======== ======== ======== ========
Operating income:
Real estate investment and management $ 2,840 $ 2,476 $ 8,428 $ 8,079
Engineered products 1,098 1,009 3,287 2,323
General corporate expenses (679) (760) (2,093) (2,377)
-------- -------- -------- --------
3,259 2,725 9,622 8,025
Other income, net 408 907 3,017 3,077
-------- -------- -------- --------
Income from continuing operations before
income taxes $ 3,667 $ 3,632 $ 12,639 $ 11,102
======== ======== ======== ========
15. PENSION PLAN
The Company accounts for its defined benefit pension plan in accordance with
Statement of Financial Accounting Standards No. 87, "Employers' 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.
Net periodic pension expense consists of the following:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2004 2003 2004 2003
------- ------- ------- -------
Service cost $ (71) $ (66) $ (213) $ (199)
Interest cost (163) (162) (488) (485)
Actual return on plan assets (118) 157 1 1,061
Net amortization and deferral 322 (19) 550 (647)
------- ------- ------- -------
Net periodic pension expense $ (30) $ (90) $ (150) $ (270)
======= ======= ======= =======
The Company did not contribute to the pension plan during the nine months ended
September 30, 2004 as the plan is overfunded. The Company does not anticipate
contributing to the plan during the remainder of 2004.
16. SUBSEQUENT EVENTS
In October 2004, the shareholders of Prime approved a merger with an affiliate
of The Blackstone Group whereby the affiliate acquired all of the outstanding
shares of Prime in exchange for $12.25 per common share. Accordingly, the
Company's shares in Prime were sold, resulting in proceeds of approximately
$43.4 million and a gain of approximately $19 million which will be included in
the Company's results for the fourth quarter of 2004.
14
17. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB issued SFAS No.132 (Revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits" ("FAS 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.
18. 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.
19. 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 AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
Net income for the quarter ended September 30, 2004 was $8,094 or $.89 per basic
share, an increase of 173% over net income of $2,960 or $.33 per basic share for
the comparable quarter of 2003. Income from continuing operations increased 27%
to $3,166 or $.35 per basic share for the third quarter of 2004 versus $2,492 or
$.28 per basic share for the same period of 2003. Total revenues were $14,958
for the three months ended September 30, 2004, an increase of $958 or 6.8% from
the comparable 2003 period.
Net income for the nine months ended September 30, 2004 was $21,388 or $2.35 per
basic share versus $9,913 or $1.09 per basic share for the same period in 2003,
a 116% increase. Income from continuing operations during this period was
$10,141 or $1.11 per basic share, an increase of $2,803 or 38% over the
comparable prior year period. Total revenues for the nine months ended September
30, 2004 were $45,101, an increase of $3,294 or 7.9% from the comparable 2003
period.
REAL ESTATE INVESTMENT AND MANAGEMENT
Rental revenues from real estate operations increased $272 or 5.0% to $5,673 for
the quarter ended September 30, 2004 and decreased $378 or 2.3% to $16,348 for
the nine month period ended September 30, 2004 compared to the corresponding
periods in 2003. The increase for the quarter is primarily due to the
recognition of non-recurring transactions, scheduled rent increases and an
increase in hotel operating revenue. For the nine month period ended September
30, 2004, the decrease is primarily attributable to a decrease in hotel
operating revenue and reduced recognition of non-recurring transactions,
partially offset by scheduled rent increases. 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 reclassified as
discontinued operations in accordance with SFAS No.144.
15
Mortgage interest expense decreased $73 or 32.0% to $155 for the quarter ended
September 30, 2004, and $203 or 28.2% to $518 for the nine months ended
September 30, 2004, compared to the corresponding periods in 2003. These
decreases are a result of continuing mortgage amortization. At September 30,
2004, the outstanding mortgage balance on the Company's real estate properties
was reduced to $9.1 million.
Depreciation expense associated with real properties held for rental decreased
$51 or 7.2% for the three months ended September 30, 2004 and $242 or 11.6% for
the nine months ended September 30, 2004 compared to the same periods in 2003.
These decreases are primarily due to reduced depreciation expense associated
with certain properties becoming fully depreciated in the current and prior
year. 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
increased $32 or 1.6% for the three months ended September 30, 2004 and
decreased $282 or 4.8% for the nine months ended June 30, 2004 compared to the
same periods in 2003. The increase for the three months ended September 30, 2004
is primarily due to increases in hotel operating and legal expenses partially
offset by decreases in broker and property maintenance expenses. For the nine
month period ended September 30, 2004, the decrease is principally due to
decreases in hotel operating and property maintenance 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,
---------------------- ----------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net sales $ 9,285 $ 8,599 $ 28,753 $ 25,081
Cost of sales (6,393) (5,849) (20,177) (17,729)
Selling, general and administrative
expenses (1,794) (1,741) (5,289) (5,029)
-------- -------- -------- --------
Operating income $ 1,098 $ 1,009 $ 3,287 $ 2,323
======== ======== ======== ========
Net sales of the engineered products segment increased $686 or 8.0% for the
three months ended September 30, 2004, compared with the same period in 2003
primarily as a result of increased demand for the Company's transformer product
line. On a year-to-date basis, sales from this segment rose $3.7 million or
14.6% from that of the first nine months of 2003. During this period, sales
improved in virtually all markets aided by the general improvement in the U.S.
economy and an increase in capital spending, which had declined over the last
several years.
Cost of sales as a percentage of sales remained relatively consistent for both
the three and nine month period ended September 30, 2004, compared to the
corresponding periods in 2003; fluctuating by less then 1% in each period.
Selling, general and administrative expenses of the engineered products segment
increased $53 or 3.0% and $260 or 5.2% for the three and nine months ended
September 30, respectively, over the comparable 2003 periods. These increases
are primarily due to increased freight costs as well as from higher commissions
and related costs which also fluctuate with the change in sales. Cost
containment efforts in administrative spending helped offset these increases.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses not associated with the manufacturing
operations for the three and nine months ended September 30, 2004 decreased $81
or 10.7% and $284 or 11.9%, respectively, compared to such expenses incurred for
the comparable 2003 periods. These decreases are primarily due to lower
compensation costs, pension related expenses and professional fees and are
offset by higher insurance costs.
16
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,
-------------------- --------------------
2004 2003 2004 2003
------- ------- ------- -------
Net gain on sale of available-for sale
securities $ 5 $ 36 $ 850 $ 36
Net realized and unrealized gain on
derivative instruments 153 114 146 1,096
Net realized gain on trading securities -- -- -- 57
Gain on sale of other assets -- -- 363 --
Equity in (losses) earnings of hotel
ventures (226) 433 (216) 720
Net gain on sale of real estate assets 1 -- 2 152
Casualty insurance settlement -- -- 831 --
Other, net 94 (11) 105 (15)
------- ------- ------- -------
$ 27 $ 572 $ 2,081 $ 2,046
======= ======= ======= =======
INCOME TAXES
The effective tax rate from continuing operations has been reduced for the three
and nine months ended September 30, 2004 from that of the comparable periods in
2003 as a result of tax benefits from the donation of certain properties to
qualified organizations which are being recognized ratably over the current
year.
DISCONTINUED OPERATIONS
Operating income from properties sold or held for sale and accounted for as
discontinued operations was $51 and $137 on a net of tax basis for the three and
nine months ended September 30, 2004, respectively, versus $132 and $730 for the
comparable 2003 periods. Prior year amounts have been reclassified to reflect
results of operations of real properties held for sale as of September 30, 2004,
or disposed of during 2004 and 2003, as discontinued operations. Net gains on
the disposal of real estate assets accounted for as discontinued operations were
$4,877 and $11,110 for the three and nine months ended September 30, 2004 and
$336 and $1,845 for the three and nine months ended September 30, 2003, on a net
of tax basis.
LIQUIDITY AND CAPITAL RESOURCES
The Company experienced a net cash inflow from operations of $7,383 for the nine
months ended September 30, 2004 versus $8,900 for the nine months ended
September 30, 2003. The $1,517 decrease in operating cash flow primarily
resulted from changes in working capital, primarily income taxes payable,
partially offset by an increase in income from operations and lower proceeds
from the sale of trading securities.
Net cash provided by investing activities increased $8,309 for the nine months
ended September 30, 2004 compared with the same period in 2003. This increase
primarily results from an additional $16,332 in proceeds from the sale of real
estate assets and from the timing of the purchase or sale of marketable
securities and other assets offset by a decrease in distributions from the
Company's investments in joint ventures.
Net cash used in financing activities was $2.1 million and $11.9 million during
the nine months ended September 30, 2004 and 2003, respectively. The reduction
in cash used for financing activities primarily results from the payment of
dividends of $9.1 million and the purchase and retirement of $1.2 million of the
Company's common stock during the nine months ended September 30, 2003. Such
transactions did not occur in 2004.
At September 30, 2004, the Company's cash and marketable securities totaled
$146.6 million and working capital was $127.3 million compared to cash and
marketable securities of $108.8 million and working capital of $96.1 million at
17
December 31, 2003. Management continues to believe that the real estate market
is overvalued and accordingly acquisitions have been limited to those select
properties that meet the Company's stringent financial requirements. Management
believes that the available working capital 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. Although interest
rates have begun to rise over the past couple of months, given the level of cash
and other interest bearing investments 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 September 30,
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 September 30,
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") (1.84% at September 30,
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.
18
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 12 of Notes to Consolidated Financial Statements for further
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 nine
months ended September 30, 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 10 of Notes to Consolidated Financial Statements for a discussion of
derivative financial activity since December 31, 2003. There have been no other
material changes in quantitative and qualitative market risks 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.
19
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 over financial reporting 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 August 23, 2004, the Company filed a report on Form 8-K under Items 1 and
9 announcing that, on August 18, 2004, the Company entered into a Voting
Agreement with BREP IV Hotels Holding L.L.C., an affiliate of The Blackstone
Group, and A. F. Petrocelli, the Company's Chairman and Chief Executive
Officer, regarding the Company's holdings in Prime Hospitality Corp.
(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 8, 2004 By: /s/ Anthony J. Miceli
----------------------------
Anthony J. Miceli
Vice President, Chief Financial Officer
and Secretary of the Company
20