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, 2005 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 9,160,142 shares of common stock, $.10 par value, outstanding as of May 12, 2005UNITED CAPITAL CORP. AND SUBSIDIARIES INDEX PAGE ---- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets as of March 31, 2005 (Unaudited) and December 31, 2004................3 Consolidated Statements of Income for the Three Months Ended March 31, 2005 and 2004 (Unaudited).............4 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2005 and 2004 (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..................15-20 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK.......................................................20 ITEM 4. CONTROLS AND PROCEDURES...........................................20 PART II - OTHER INFORMATION ITEM 6. EXHIBITS..........................................................21 SIGNATURES ..................................................................21 2 UNITED CAPITAL CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands) March 31, December 31, 2005 2004 --------------- --------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 86,409 $ 84,783 Marketable securities 52,719 54,456 Notes and accounts receivable, net 7,393 7,350 Inventories 4,537 4,132 Prepaid expenses and other current assets 1,026 892 Deferred income taxes 1,314 354 --------- --------- TOTAL CURRENT ASSETS 153,398 151,967 --------- --------- Property, plant and equipment, net 3,235 2,337 Real property held for rental, net 31,731 31,545 Investments in joint ventures 18,938 19,398 Noncurrent notes receivable 1,814 4,462 Other assets 2,016 2,051 Noncurrent assets of discontinued operations 946 964 --------- --------- TOTAL ASSETS $ 212,078 $ 212,724 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ 2,171 $ 2,394 Accounts payable and accrued liabilities 9,074 10,144 Income taxes payable 6,604 7,014 Current liabilities of discontinued operations 11 7 --------- --------- TOTAL CURRENT LIABILITIES 17,860 19,559 --------- --------- Long-term debt 5,610 6,041 Other long-term liabilities 30,173 30,316 Deferred income taxes 2,917 2,739 --------- --------- TOTAL LIABILITIES 56,560 58,655 --------- --------- Commitments and contingencies Stockholders' equity: Common stock $.10 par value, authorized 17,500 shares; issued and outstanding 9,160 and 9,130 shares, respectively 916 913 Retained earnings 155,309 152,266 Accumulated other comprehensive income, net of tax (707) 890 --------- --------- TOTAL STOCKHOLDERS' EQUITY 155,518 154,069 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 212,078 $ 212,724 ========= ========= 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, --------------------------- 2005 2004 ---- ---- REVENUES: Net sales $ 10,093 $ 9,290 Rental revenues from real estate operations 5,229 5,307 -------- -------- Total revenues 15,322 14,597 -------- -------- COSTS AND EXPENSES: Cost of sales 7,454 6,681 Real estate operations: Mortgage interest expense 133 192 Depreciation expense 473 597 Other operating expenses 2,071 1,746 General and administrative expenses 1,654 1,519 Selling expenses 972 1,016 -------- -------- Total costs and expenses 12,757 11,751 -------- -------- Operating income 2,565 2,846 -------- -------- OTHER INCOME (EXPENSE): Interest and dividend income 1,144 386 Interest expense (133) (120) Other income and expense, net 789 1,635 -------- -------- Total other income 1,800 1,901 -------- -------- Income from continuing operations before income taxes 4,365 4,747 Provision for income taxes 1,519 1,268 -------- -------- INCOME FROM CONTINUING OPERATIONS 2,846 3,479 -------- -------- DISCONTINUED OPERATIONS: (Loss) income from discontinued operations, net of tax (benefit) provision of ($7) and $34, respectively (11) 49 Net gain (loss) on disposal of discontinued operations, net of provision (benefit) of $20 and ($56), respectively 30 (83) -------- -------- INCOME (LOSS) FROM DISCONTINUED OPERATIONS 19 (34) -------- -------- NET INCOME $ 2,865 $ 3,445 ======== ======== BASIC EARNINGS PER SHARE: Income from continuing operations $ .31 $ .38 Income from discontinued operations -- -- -------- -------- NET INCOME PER SHARE $ .31 $ .38 ======== ======== DILUTED EARNINGS PER SHARE: Income from continuing operations $ .26 $ .32 Income from discontinued operations -- -- -------- -------- NET INCOME PER SHARE ASSUMING DILUTION $ .26 $ .32 ======== ======== 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, --------------------------- 2005 2004 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,865 $ 3,445 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 705 845 Net gain on sale of available-for-sale securities (445) (594) Gain on sale of other assets -- (363) Equity in losses of joint ventures 266 34 Net (gain) loss on disposal of discontinued operations, net of tax (30) 83 Net realized and unrealized (gain) loss on derivative instruments (605) 3 Changes in assets and liabilities: Notes and accounts receivable, net (261) (823) Inventories (405) (55) Prepaid expenses and other current assets (134) (46) Deferred income taxes 78 (1,708) Noncurrent notes receivable -- (110) Other assets 28 102 Accounts payable and accrued liabilities (489) (403) Income taxes payable (430) 862 Other long-term liabilities (143) 64 Discontinued operations - noncash charges and working capital changes 4 (725) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 1,004 611 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of available-for-sale securities (2,196) (10,264) Proceeds from sale of available-for-sale securities 1,921 8,394 Proceeds from sale of other assets -- 1,363 Proceeds from sale of real estate assets 68 202 Purchase of derivative instruments -- (13) Proceeds from sale of derivative instruments 24 -- Purchase of notes receivable -- (1,000) Acquisition of property, plant and equipment (1,122) (37) Principal payments on notes receivable 2,866 12 Acquisition of/additions to real estate assets (660) (236) Distributions from joint ventures 194 195 -------- -------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,095 (1,384) -------- -------- 5 UNITED CAPITAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (Unaudited) Three Months Ended March 31, --------------------------- 2005 2004 ---- ---- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on mortgage obligations (654) (864) Proceeds from exercise of stock options 181 121 -------- -------- NET CASH USED IN FINANCING ACTIVITIES (473) (743) -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,626 (1,516) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 84,783 59,210 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 86,409 $ 57,694 ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 213 $ 291 ======== ======== Taxes $ 1,862 $ 1,913 ======== ======== 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 Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") for the year ended December 31, 2004. 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. The Company did not purchase any shares of the Company's common stock during the three months ended March 31, 2005 or 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, 2005 and 2004, the Company received proceeds of $181 and $121 from the exercise of 30 and 20 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, ------------------------------- 2005 2004 ---- ---- Numerator: Income from continuing operations $ 2,846 $ 3,479 ======= ======= Denominator: Basic - weighted-average shares outstanding 9,142 9,097 Dilutive effect of employee stock options 1,868 1,858 ------- ------- Diluted - weighted-average shares outstanding 11,010 10,955 ======= ======= Basic earnings per share - continuing operations $ .31 $ .38 ======= ======= Diluted earnings per share - continuing operations $ .26 $ .32 ======= ======= 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 7 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. The Company has issued stock options with an exercise price equal to the market value of the underlying stock on the date of grant. 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," ("SFAS No. 123") to stock-based employee compensation. Three Months Ended March 31, ------------------------------- 2005 2004 ---- ---- Net income, as reported $ 2,865 $ 3,445 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (497) (726) -------- -------- Pro forma net income $ 2,368 $ 2,719 ======== ======== Earnings per share: Basic - as reported $ .31 $ .38 ======== ======== Basic - pro forma $ .26 $ .30 ======== ======== Diluted - as reported $ .26 $ .32 ======== ======== Diluted - pro forma $ .22 $ .25 ======== ======== 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. The Black-Scholes model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. As discussed in Note 15, "Recent Accounting Pronouncements," the Financial Accounting Standards Board ("FASB") issued SFAS No. 123 (revised 2004), "Share-Based Payment" in December 2004. The provisions of this statement are effective as of the beginning of the first annual period that begins after June 15, 2005, as amended by the SEC, which would be January 1, 2006 for the Company. 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, 2005: --------------- Available-for-sale: Equity securities $ 48,801 $ 2,629 $ (3,716) $ 47,714 Bonds 5,005 -- -- 5,005 -------- -------- -------- -------- $ 53,806 $ 2,629 $ (3,716) $ 52,719 ======== ======== ======== ======== 8 Gross Gross Fair Unrealized Unrealized Market Cost Gains Losses Value -------- -------- -------- -------- December 31, 2004: ------------------ Available-for-sale: Equity securities $ 48,081 $ 4,371 $ (3,001) $ 49,451 Bonds 5,005 -- -- 5,005 -------- -------- -------- -------- $ 53,086 $ 4,371 $ (3,001) $ 54,456 ======== ======== ======== ======== Proceeds from the sale of available-for-sale securities and the resulting gross realized gains included in the determination of net income are as follows: Three Months Ended March 31, ------------------------------- 2005 2004 ---- ---- Available-for-sale securities: Proceeds $ 1,921 $ 8,394 Gross realized gains 445 594 6. INVENTORIES The components of inventories are as follows: March 31, December 31, 2005 2004 -------- -------- Raw materials $ 1,997 $ 1,985 Work in process 467 361 Finished goods 2,073 1,786 -------- -------- $ 4,537 $ 4,132 ======== ======== 7. REAL ESTATE PROPERTY SALES During the three months ended March 31, 2005, the Company divested itself of a commercial property which had a net book value of $18 from its real estate investment and management segment. The proceeds from this transaction were $68 resulting in a gain of $30, on a net of tax basis. This property had no operating costs during the three months ended March 31, 2005. 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 result of operations for these properties for the three months ended March 31, 2005 and 2004 have been reclassified to discontinued operations, on a net of tax basis. In addition, the assets and liabilities associated with these properties have been reclassified to discontinued operations in the accompanying Consolidated Balance Sheet at December 31, 2004. 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 for the three months ended March 31, 2004 is as follows: 2004 ---------------- Rental revenues from real estate operations $ 300 Mortgage interest expense (19) Depreciation expense (23) Other operating expenses (211) ---------- Income from operations $ 47 ========== PROPERTIES HELD FOR SALE As of March 31, 2005, the Company considered two commercial properties from its real estate and investment management segment to be held for sale and reported as discontinued operations. The results of operations of these properties 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, 2005 and 2004. 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 accompanying Consolidated Balance Sheets at March 31, 2005 and December 31, 2004. One of the Company's properties, previously classified as held for sale, was reclassified to continuing operations as the Company no longer expects to sell this property, but expects to negotiate a favorable lease. Summarized financial information for properties held for sale and accounted for as discontinued operations is as follows: Three Months Ended March 31, ------------------------------- 2005 2004 ---- ---- Rental revenues from real estate operations $ 13 $ 46 Depreciation expense -- (10) Other operating expenses (31) -- -------- -------- (Loss) income from operations $ (18) $ 36 ======== ======== 8. INVESTMENTS IN JOINT VENTURES Investments in joint ventures consist of the following: March 31, December 31, 2005 2004 -------- -------- Investment in hotel ventures $ 11,416 $ 11,771 Lease financing 7,522 7,627 -------- -------- $ 18,938 $ 19,398 ======== ======== INVESTMENTS IN HOTEL VENTURES The Company has a 40% interest in two joint ventures which each own and operate a hotel. The hotels are located in New Jersey (the "Hotel Venture") and Quebec, Canada (the "Quebec Venture"). The New Jersey hotel secures a $25,000 mortgage loan (the "Mortgage") with a bank. In connection with the Mortgage, the Company and another joint venture partner entered into a direct guaranty agreement with the bank whereby they, 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 10 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. The equity method of accounting is used for investments in 20% to 50% owned joint ventures in which the Company has the ability to exercise significant influence, but not control. Under the operating agreements of the Hotel Venture and Quebec Venture, all significant operating and capital decisions are made jointly and operating profits are allocated based on ownership interests. These investments were initially recorded at cost and are subsequently adjusted for equity in earnings (losses) and cash contributions and distributions. The Company's equity in losses of these hotel ventures was ($355) and ($141) for the three months ended March 31, 2005 and 2004, respectively. 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. Summarized financial information of the Hotel Venture and Quebec Venture are as follows: March 31, December 31, Balance Sheets: 2005 2004 ---------------------- ---------------------- Current assets $ 3,296 $ 4,073 ============== ============== Property, plant and equipment, net $ 59,751 $ 60,778 ============== ============== Other non-current assets $ 145 $ 179 ============== ============== Current liabilities $ 2,798 $ 2,807 ============== ============== Long-term liabilities $ 29,233 $ 29,766 ============== ============== Equity $ 31,161 $ 32,457 ============== ============== Three Months Ended March 31, ------------------------------- Operating results: 2005 2004 ---- ---- Revenues $ 5,527 $ 5,573 ======== ======== Operating profit $ 358 $ 730 ======== ======== Net loss $ (887) $ (353) ======== ======== LEASE FINANCING 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 $89 and $107 for the three months ended March 31, 2005 and 2004, 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 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 11 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 March 31, 2005 and December 31, 2004, the fair value of such derivatives was ($1) and ($581), 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 $605 and ($3) in net realized and unrealized gains (losses) from derivative instruments for the three months ended March 31, 2005 and 2004, 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 the Quebec Venture, are managed by BREP IV Hotel L.L.C. ("BREP"), the successor to Prime Hospitality Corp. ("Prime"). The Company's Board Chairman and another Director were directors and/or an executive officer of Prime prior to its sale to BREP in October 2004. Fees paid for the management of the Company's two hotel properties are based upon a percentage of revenue and were approximately $18 for the three months ended March 31, 2004. 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 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 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 such events are not expected to change these estimates, adverse decisions or events, particularly as to the merits of the Company's factual and 12 legal basis, could cause the Company to change its estimate of liability with respect to such matters in the future. The Company had approximately $10,000 and $10,200 recorded in accounts payable and accrued liabilities and other long-term liabilities at March 31, 2005 and December 31, 2004, respectively, to cover such matters. 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, 2005 and December 31, 2004, 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. 12. COMPREHENSIVE INCOME The components of comprehensive income are as follows: Three Months Ended March 31, ------------------------------- 2005 2004 ---- ---- Net income $ 2,865 $ 3,445 Other comprehensive income, net of tax: Change in net unrealized (loss) gain on available for sale securities, net of tax effect of $704 and ($1,627), respectively (1,308) 3,022 Reclassification adjustment for net gains realized in net income, net of tax effect of $156 and $208, respectively (289) (386) ------- ------- Comprehensive income $ 1,268 $ 6,081 ======= ======= Accumulated other comprehensive income included as a component of stockholders' equity at March 31, 2005 and December 31, 2004 consists of net unrealized (losses) gains on available-for-sale securities of ($707) and $890, which is net of ($381) and $479 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, ------------------------------- 2005 2004 ---- ---- Net revenues and sales: Real estate investment and management $ 5,229 $ 5,307 Engineered products 10,093 9,290 ------- ------- $15,322 $14,597 ======= ======= 13 Three Months Ended March 31, ------------------------------- 2005 2004 ---- ---- Operating income: Real estate investment and management $ 2,552 $ 2,772 Engineered products 902 839 General corporate expenses (889) (765) ------- ------- 2,565 2,846 Other income, net 1,800 1,901 ------- ------- Income from continuing operations before income taxes $ 4,365 $ 4,747 ======= ======= 14. 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 March 31, ------------------------------- 2005 2004 ---- ---- Service cost $ (74) $ (71) Interest cost (165) (163) Actual return on plan assets (204) 165 Net amortization and deferral 394 (21) ----- ----- Net periodic pension expense $ (49) $ (90) ===== ===== The Company did not contribute to the pension plan during the three months ended March 31, 2005 as the plan is overfunded. 15. RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS No. 123R"), which replaces SFAS No. 123 and supercedes APB No. 25. SFAS No. 123R requires that the compensation cost relating to share-based payment transactions be recognized in financial statements based on alternative fair value models. The share-based compensation cost will be measured based on the fair value of the equity or liability instruments issued. Per APB No. 25, compensation expense was recognized only to the extent the fair value of common stock exceeded the stock option exercise price at the measurement date. In addition, the pro forma disclosures previously permitted under SFAS No. 123 no longer will be an alternative to financial statement recognition. SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow rather than as an operating cash flow as required under current literature. Under the effective date provisions included in SFAS No. 123R, the Company would have been required to implement SFAS No. 123R as of the first interim or annual period that begins after June 15, 2005. On April 14, 2005, the SEC delayed the effective date which allows companies to implement SFAS No. 123R at the beginning of the first fiscal year after June 15, 2005, which would be January 1, 2006 for the Company. The Company is evaluating the requirements of SFAS No. 123R and expects that the adoption will have a material impact on the consolidated results of operations and earnings per share similar to the current pro-forma disclosures under SFAS No. 123 (see Note 4). 14 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 (In thousands, except as otherwise noted) 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, 2005 AND 2004 Total revenues for the quarter ended March 31, 2005 were $15,322, an increase of $725 or 5% from the comparable 2004 period. Income from continuing operations during the current period was $2,846 versus $3,479 during the three months ended March 31, 2004. Net income for the first quarter of 2005 was $2,865 or $.31 per basic share compared to net income of $3,445 or $.38 per basic share for the first quarter of 2004. REAL ESTATE INVESTMENT AND MANAGEMENT Rental revenues from real estate operations decreased slightly to $5,229 for the three months ended March 31, 2005 from $5,307 for the three months ended March 31, 2004. This decrease was primarily attributable to a decrease in percentage rents ($191) and the receipt of a non-recurring amount ($165) in 2004 partially offset by an increase in hotel operating revenue ($190). In general, rental revenues do not fluctuate significantly due to the long-term nature of the Company's leases. However, future rental revenues could be affected by changes in hotel operating revenues, which are generally influenced by local and other economic conditions, as well as by lease renewals, terminations, step-ups and escalations and by the purchase or sale of additional properties. Mortgage interest expense decreased $59 or 30.7% to $133 for the quarter ended March 31, 2005, as compared to $192 for the first quarter of 2004. This decrease was the result of continuing mortgage amortization. At March 31, 2005, the outstanding mortgage balance on the Company's real estate properties was reduced to $7.8 million. Mortgage interest expense on existing obligations will continue to decline with scheduled principle reductions. Depreciation expense associated with real properties held for rental decreased $124 or 20.8% to $473 for the three months ended March 31, 2005, compared to $597 for the same period in 2004. This decrease was primarily attributable to reduced depreciation expense associated with certain properties or improvements becoming fully depreciated in the current and prior year. Other operating expenses associated with the management of real properties increased $325 or 18.6% for the three months ended March 31, 2005, compared to the same period in 2004. The increase was primarily the result of increased hotel operating expenses ($210) and an increase in reported real estate tax expense ($177) which was primarily the result of non-recurring tenant reimbursements received in the prior year. These increases were partially offset 15 by a decrease in insurance expense ($101) primarily due to non-recurring tenant reimbursements received in the current year. 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, ------------------------------- 2005 2004 ---- ---- Net sales $10,093 $ 9,290 Cost of sales 7,454 6,681 Selling, general and administrative expenses 1,737 1,770 ------- ------- Operating income $ 902 $ 839 ======= ======= Net sales of the engineered products segment increased $803 or 8.6% for the three months ended March 31, 2005, compared with the results of the corresponding 2004 period. This increase was primarily due to increased demand in the Company's transformer and engineered product lines offset by a slight decrease in the automotive products which is a result of softening in the automotive industry. Although management believes that sales of its engineered products segment are directly influenced by general economic conditions, worldwide automotive demand and industrial capital spending, future sales of this segment could also be affected by changes in technology, competitive forces or challenges to its intellectual property. Cost of sales as a percentage of sales increased slightly for the three months ended March 31, 2005, compared to the corresponding period in 2004. This increase is primarily due to the change in product sales noted above and increases in material purchase costs, primarily associated with steel which is experiencing a higher then usual worldwide demand. Continued increases in the price of raw materials could effect the gross margin and operating profit of the engineered products segment. Selling, general and administrative expenses of the engineered products segment remained relatively consistent, decreasing $33 or 1.9% for the three months ended March 31, 2005, from the comparable 2004 period. This decrease was primarily due to decreases in payroll and payroll related expenses ($85) and freight costs ($36) partially offset by increases in professional fees ($38) and travel expenses ($32). GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses not associated with the manufacturing operations increased $124 or 16.2% for the three months ended March 31, 2005, compared to such expenses incurred for the comparable 2004 period. This increase was primarily the result of increased compensation and benefit ($83) and travel expenses ($62) partially offset by a decrease in pension related expenses ($41). 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 March 31, ------------------------------- 2005 2004 ---- ---- Net gain on sale of available-for sale securities $ 445 $ 594 Net realized and unrealized gain (loss) on derivative instruments 605 (3) Gain on sale of other assets -- 363 Equity in losses of hotel ventures (355) (141) Casualty insurance settlement -- 831 Other, net 94 (9) ------ ------- $ 789 $ 1,635 ====== ======= INCOME TAXES The effective tax rate from continuing operations for the three months ended March 31, 2004 reflects the benefits of the donation of certain properties to qualified organizations in 2004. DISCONTINUED OPERATIONS (Loss) income from operations on properties sold or held for sale and accounted for as discontinued operations was ($11), on a net of tax basis, for the three months ended March 31, 2005, versus $49 for the comparable 2004 period. Prior year amounts have been reclassified to reflect results of operations of real properties held for sale as of March 31, 2005, or disposed of during 2005 and 2004, as discontinued operations. Net gains (losses) on the disposal of real estate assets accounted for as discontinued operations were $30 and ($83) for the three months ended March 31, 2005 and 2004, respectively, on a net of tax basis. LIQUIDITY AND CAPITAL RESOURCES The Company experienced a net cash inflow from operations of $1,004 for the three months ended March 31, 2005 versus $611 for the three months ended March 31, 2004. The change in operating cash flow during these periods is the result of current and deferred income tax fluctuations associated with unrealized marketable securities gains and property donations during the first quarter of 2004 and are offset by other working capital changes and a decline in income from operations. Net cash provided by investing activities increased $2,479 for the three months ended March 31, 2005, compared with the same period of 2004. This increase primarily results from additional proceeds received from principal payments on notes receivables ($2,854), the timing of the purchase or sale of marketable securities ($1,632) and from the purchase of a notes receivable in 2004 ($1,000) partially offset by proceeds received in 2004 from the sale of other assets ($1,363) and additional purchases of property, plant and equipment and real property ($1,509). Net cash used in financing activities was $473 and $743 during the three months ended March 31, 2005 and 2004, respectively. These uses of cash were attributable to debt reduction partially offset by cash proceeds from the exercise of stock options. At March 31, 2005, the Company's cash and marketable securities totaled $139.1 million and working capital was $135.5 million compared to cash and marketable securities of $139.2 million and working capital of $132.4 million at December 31, 2004. 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 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. 17 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. These investments are recorded initially at cost and subsequently adjusted for equity in earnings and cash contributions and distributions. The debt of the joint ventures in which the Company has an ownership interest are non-recourse obligations and are collateralized by the entity's real property. In one instance, the Company and another party have jointly and severally guaranteed not more than $4 million of the joint venture's mortgage obligation. The Company believes, in each case, that the value of the underlying property and its operating cash flows are sufficient to satisfy its obligations. Except for this guarantee, the Company is not obligated for the debts of the joint ventures, but could decide to satisfy them in order to protect its investment. In such event, the Company's capital resources and financial condition would be reduced and, in certain instances, the carrying value of the Company's investment and its results of operations would be negatively impacted. 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 or any debt 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 held by the Company and the recent increase in U.S. interest rates, the Company's earnings have been favorably impacted. Effective December 10, 2002, the Company entered into a credit agreement with five banks which provides for an $80 million revolving credit facility ("Revolver"). The Revolver may be increased under certain circumstances and expires on December 31, 2005. The Company expects to renegotiate a similar facility prior to the expiration of the Revolver. Under the Revolver, the Company will be provided with eligibility based upon the sum of (i) 60% of the aggregate annualized and normalized year-to-date net operating income of unencumbered eligible properties, as defined, capitalized at 10%, (ii) 60% 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 million or 10% of total eligibility, (iii) the lesser of $20 million or 50% of the aggregate annualized and normalized year-to-date net operating income of encumbered eligible properties, as defined, capitalized at 12%, (iv) the sum of 75% of eligible accounts receivable, 50% 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, 2005 eligibility under the Revolver was $80 million, based upon the above terms and there were no amounts outstanding under the Revolver. The credit agreement contains certain financial and restrictive covenants, as follows: (i) total debt cannot exceed 50% of capitalization value, as defined, (ii) equity value, as defined, must be at least $150 million, (iii) interest coverage, as defined, must not be less than 2.25:1.00, (iv) debt service 18 coverage, as defined, must not be less than 1.35:1.00, (v) eligible properties debt service coverage, as defined, must not be less than 1.50:1.00, (vi) capital expenditures, exclusive of real estate, must not exceed $3 million annually, (vii) capitalization value, as defined, must not be less than $200 million and (viii) operating lease obligations must not exceed $1 million annually. The Company was in compliance with all covenants at March 31, 2005. 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") (2.9% at March 31, 2005) plus 2% for non-cash collateralized borrowings and 1% 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 manufactures its products in the United States and Mexico and sells its products in those markets as well as in Europe, South America and Asia. As a result, the Company's operating results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which the Company distributes its products. Most of the Company's sales are denominated in U.S. dollars. For the three months ended March 31, 2005 and 2004, 9.3% and 9.0% of the net sales of the Company's engineered products segment were denominated in Euros, respectively. As such, a portion of the Company's receivables are exposed to fluctuations with the U.S. dollar. However, the Company does not believe this risk to be material to its overall financial position. Since the Euro has been relatively stable in relation to the U.S. dollar, the Company's results have not been significantly impacted by foreign exchange gains or losses in the past. Accordingly, the Company has not entered into forward exchange contracts to hedge this exposure. If such exposure were to increase in the future, the Company may reexamine this practice to minimize the associated risks. 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 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 liabilities have 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, 2005 and December 31, 2004, the Company had approximately $20 million 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. 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. The Company did not purchase any shares of the Company's common stock during the three months ended March 31, 2005 or 2004. Repurchases of the Company's common stock may be made from time to time in the open market at prevailing market prices or in privately negotiated transactions, subject to available resources. RELATED PARTY TRANSACTIONS Refer to Notes to Consolidated Financial Statements for a discussion of related party transactions. 19 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 2004 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, 2005, 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 2004 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 a discussion of derivative financial activity since December 31, 2004. 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, 2004, which is incorporated herein by reference. 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-15(e) and 15d-15(e). 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. 20 PART II - OTHER INFORMATION ITEM 6. EXHIBITS 31.1 Certification of the Chief Executive Officer pursuant to Rule 13a-15(e) and 15d-15(e). 31.2 Certification of the Chief Financial Officer Pursuant to Rule 13a-15(e) and 15d-15(e). 32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002. 32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted 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. Date: May 12, 2005 By: /s/ Anthony J. Miceli --------------------------------------- Anthony J. Miceli Vice President, Chief Financial Officer and Secretary of the Company 21