ITEM 1. BUSINESS
General -------
United Capital Corp. (the "Company"), incorporated in 1980 in the State of Delaware, currently has two industry segments:
1. Real Estate Investment and Management.
2. Manufacture and Sale of Engineered Products.
The Company also invests excess available cash in marketable securities and other financial instruments.
Description of Business -----------------------
Real Estate Investment and Management -------------------------------------
The Company is engaged in the business of investing in and managing real estate properties and the making of high-yield, short-term loans secured by desirable properties. Most real estate properties owned by the Company are leased under net leases whereby the tenants are responsible for all expenses relating to the leased premises, including taxes, utilities, insurance and maintenance. The Company also owns properties that it manages which are operated by the City of New York as day-care centers and offices and other properties leased as department stores, hotels and shopping centers around the country. In addition, the Company owns properties available for sale and lease with the assistance of a consultant or realtor working in the locale of the premises.
The majority of properties are leased to single tenants. Exclusive of a South Plainfield, New Jersey property, 95.5% of the total square footage of the Company's properties were leased as of December 31, 2001.
Engineered Products -------------------
The Company's engineered products are manufactured through Metex Mfg. Corporation ("Metex") and AFP Transformers, LLC ("AFP Transformers"), wholly-owned subsidiaries of the Company. The knitted wire products and components manufactured by Metex must function in adverse environments and meet rigid performance requirements. The principal areas in which these products have application are as high temperature gaskets, seals, components for use in airbags, shock and vibration isolators, noise reduction elements and air, liquid and solid filtering devices.
Metex has been an original equipment manufacturer for the automobile industry since 1974 and presently supplies many automobile manufacturers with exhaust seals and components for use in exhaust emission control devices.
The Company also manufactures transformer products marketed under several brand names including AFP Transformers, Field Transformer, ISOREG and EPOXYCAST(TM) for a wide variety of industrial and research applications including machine power transformers, rectifier and inverter transformers and transformers for heating.
Sales by the engineered products segment to its largest customer (in excess of 10.0% of the segment's net sales) accounted for 14.0%, 15.8%, and 17.0% of the segment's sales for 2001, 2000, and 1999, respectively.
Summary Financial Information -----------------------------
The following table sets forth the revenues, operating income and identifiable assets of each business segment of the Company for 2001, 2000, and 1999.
(In Thousands) 2001 2000 1999 --------------- --------------- --------------
Real Estate Investment and Management -------------------------------------
Rental revenues $27,804 $28,237 $29,202 =============== =============== ==============
Operating income $13,970 $14,147 $14,079 =============== =============== ==============
Identifiable assets, including corporate assets $166,562 $136,189 $122,112 =============== =============== ==============
Engineered Products -------------------
Net sales $33,792 $34,095 $30,500 =============== =============== ==============
Operating income $1,912 $2,261 $1,855 =============== =============== ==============
Identifiable assets $12,429 $11,807 $11,620 =============== =============== ==============
Distribution ------------
The Company's manufactured products are distributed by a direct sales force and through distributors to industrial consumers and original equipment manufacturers.
Product Methods and Sources of Raw Materials --------------------------------------------
The Company's products are manufactured at its own facilities and a leased facility in Mexico. Raw materials are purchased from a wide range of suppliers. Most raw materials purchased by the Company are available from several suppliers. Certain imported raw materials used by the Company have been the subject of international trade disputes and may become subject to new or additional tariffs which could also affect the cost of domestic supplies. Although management does not expect such matters to adversely effect the Company's financial position, it is uncertain at this time what effect, if any, such events will have on the cost of such materials. The Company has not had and does not expect to have any problems fulfilling its raw material requirements during 2002.
Patents and Trademarks ----------------------
The Company owns several patents, patent licenses and trademarks. While the Company considers that in the aggregate its patents, patent licenses, and trademarks used in the engineered products operations are significant to this segment, it does not believe that any of them are of such importance that the loss of one or more of them would materially affect its consolidated financial condition or results of operations.
Employees ---------
At February 25, 2002, the Company employed approximately 240 persons, approximately 150 of which were covered by a collective bargaining agreement that expires in February 2004. The Company believes that its relationship with its employees is good.
Competition -----------
The Company competes with at least 20 other companies in the sale of engineered products. The Company emphasizes product performance and service in connection with the sale of these products. The principal competition faced by the Company results from the sales price of the products sold by its competitors.
Backlog -------
The dollar value of unfilled orders of the Company's engineered products segment was approximately $2.2 million at December 31, 2001 and $3.8 million at December 31, 2000. The decrease in backlog is principally due to a slow-down in the growth in the Company's transformer product line. It is anticipated that substantially all such 2001 backlog will be filled in 2002. Substantially all of the 2000 backlog was filled in 2001. The order backlog referred to above does not include any order backlog with respect to sales of knitted wire mesh components for exhaust emission control devices, exhaust seals or airbag components because of the manner in which customer orders are received.
Environmental Regulations -------------------------
Federal, state and local requirements regulating the discharge of materials into the environment or otherwise relating to the protection of the environment, have had and will continue to have a significant impact upon the operations of the Company. It is the policy of the Company to manage, operate and maintain its facilities in compliance, in all material respects, with applicable standards for the prevention, control and abatement of environmental pollution to prevent damage to the quality of air, land and resources.
The Company has undertaken the completion of environmental studies and/or remedial action at Metex' two New Jersey facilities. The Company has recorded a liability in the Consolidated Financial Statements for the estimated potential remediation costs at these facilities.
The process of remediation has begun at one facility pursuant to a plan filed with the New Jersey Department of Environmental Protection ("NJDEP"). Environmental experts engaged by the Company estimate that under the most probable remediation scenario the remediation of this site is anticipated to require initial expenditures of $860,000 including the cost of capital equipment, and $86,000 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 $2.3 million in initial costs, including capital equipment expenditures, and $258,000 in annual operating and maintenance costs over a 10 year period. These estimated costs of future expenses for remediation obligations are not discounted to their present value.
The Company may revise such estimates in the future due to the uncertainty regarding the nature, timing and extent of any remediation efforts that may be required at this site, should an appropriate regulatory agency deem such efforts to be necessary. The foregoing estimates may also be revised by the Company as new or additional information in these matters become available or should the NJDEP or other regulatory agencies require additional or alternative remediation efforts in the future. It is not currently possible to estimate the range or amount of any such liability.
Although the Company believed that it was entitled to full defense and indemnification with respect to environmental investigation and remediation costs under its insurance policies, the Company's insurers denied such coverage. Accordingly, the Company filed an action against certain insurance carriers seeking defense and indemnification with respect to all prior and future costs incurred in the investigation and remediation of these sites. Settlements have been reached with all carriers in this matter.
In the opinion of management, amounts recovered from its insurance carriers under the terms of its settlement agreements should be sufficient to address these matters and amounts needed in excess, if any, will be paid gradually over a period of years. Accordingly, they should not have a material adverse effect upon the business, liquidity or financial position of the Company. However, adverse decisions or events, particularly as to the merits of the Company's factual and legal basis could cause the Company to change its estimate of liability with respect to such matters in the future.
ITEM 2.
ITEM 2. PROPERTIES
Real Property Held for Rental -----------------------------
As of February 25, 2002, the Company owned 194 properties strategically located throughout the United States. The properties are primarily leased under long-term net leases. The Company's classification and gross carrying value of its properties at December 31, 2001 are as follows (Dollars in Thousands):
Gross Carrying Number of Description Value Percentage Properties ----------- ------------------- --------------- ----------
Shopping centers and retail outlets $62,813 50.5% 24 Commercial properties 44,767 36.0% 118 Day-care centers and offices 7,867 6.3% 12 Hotel properties 4,628 3.7% 2 Other 4,332 3.5% 38 ------------------- --------------- -----------
Total $124,407 100.0% 194 =================== =============== ===========
The following summarizes real property held for rental by geographic area at December 31, 2001 (Dollars in Thousands):
Gross Number Carrying of Value Properties ------------- ------------------
Northeast $42,349 104 Southeast 25,265 32 Midwest 29,402 35 Southwest 6,071 7 Pacific Coast 17,461 7 Pacific Northwest 980 5 Rocky Mountain 2,879 4 ------------- ------------------
$124,407 194 ============= ==================
Shopping Centers and Retail Outlets -----------------------------------
Shopping centers and retail outlets include 17 department stores and other properties primarily leased under net leases. The tenants are responsible for taxes, maintenance and all other expenses of the properties. The leases for certain shopping centers and retail outlets provide for additional rents based on sales volume and renewal options at higher rents. The department stores include 11 properties leased or sub-leased to K-Mart and two Macy's stores, with a total of approximately 884,000, and 364,000, square feet, respectively. The K-Mart stores are primarily located in the Midwest region of the United States. The Macy's stores are located in the Pacific Coast and Southwest regions of the United States.
K-Mart filed for protection under Chapter 11 of the U.S. Bankruptcy Code on January 22, 2002. Although it is currently uncertain which leases, if any, K-Mart will reject or affirm as part of its reorganization, management believes that its leases with K-Mart are at or below the fair market rent for comparable properties and as a result, the rejection of one or more leases is not expected to have a material adverse effect on the consolidated financial position of the Company.
Commercial Properties ---------------------
Commercial properties consist of properties leased as 60 restaurants, 18 Midas Muffler Shops, three convenience stores, eight office buildings and miscellaneous other properties. Commercial properties are primarily leased under net leases which in certain cases, have renewal options at higher rents. Certain of these leases also provide for additional rents based on sales volume. The 60 restaurants, located throughout the United States, include properties leased as McDonalds, Burger King, Dunkin' Donuts, Pizza Hut, Hardee's, Wendy's, Kentucky Fried Chicken and Boston Market.
Day-Care Centers and Offices ----------------------------
The ten day-care centers and two offices are located in New York City, and leased to the City of New York.
Hotel Properties ----------------
The Company's two hotel properties are located in Georgia and California and are managed through a national hotel company with local on-site management responsible for all day-to-day operations of the hotels. The Board Chairman is the Chairman and President and another Director of the Company is a director of this publicly traded hotel company.
Manufacturing Facilities ------------------------
The Company's engineered products are manufactured at 970 New Durham Road, Edison, New Jersey, in a one-story building having approximately 55,000 square feet of floor space and also in a second facility at 206 Talmadge Road, Edison, New Jersey which has approximately 55,000 square feet of floor space. The Company owns these facilities together with the sites. Metex also leases a manufacturing facility in Tijuana, Mexico with approximately 24,000 square feet of floor space.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Litigation ----------
The Company is involved in various litigation and legal matters which are being defended and handled in the ordinary course of business.
None of the foregoing is expected to result in a judgment having a material adverse effect on the Company's consolidated financial position or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The Company's Common Stock is traded on the American Stock Exchange under the symbol AFP. The table below shows the high and low sales prices as reported in the composite transactions for the American Stock Exchange.
High Low ------------- --------------
2001 First quarter $18.40 $14.50 Second quarter 25.50 17.90 Third quarter 24.45 18.70 Fourth quarter 21.35 18.90
2000 First quarter $18.38 $11.75 Second quarter 13.75 11.88 Third quarter 17.50 13.38 Fourth quarter 17.00 14.00
As of February 25, 2002, there were approximately 350 record holders of the Company's Common Stock. The closing sales price for the Company's Common Stock on such date was $24.20. The Company has never paid any cash dividends on its Common Stock. The payment of dividends is within the discretion of the Company's Board of Directors, however, in view of potential working capital needs and to finance future growth and as a result of certain restrictions in the Company's credit agreement, it is unlikely that the Company will pay any cash dividends on its Common Stock in the near future.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below should be read in conjunction with, and is qualified in its entirety by reference to, the Consolidated Financial Statements and the Notes thereto.
(In Thousands, Except Per Share Data) Year Ended December 31, --------------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997 ----------- ----------- ----------- ------------ ----------
Total revenues $61,596 $62,332 $59,702 $58,519 $60,246 =========== =========== =========== ============ ==========
Net income $18,972 $18,278 $13,326 $10,583 $7,465 =========== =========== =========== ============ ==========
Earnings per common share: Basic $4.05 $3.86 $2.68 $2.03 $1.41 =========== =========== =========== ============ ==========
Total assets $178,991 $147,996 $133,732 $126,112 $113,353 Total liabilities 82,650 70,877 74,676 73,694 75,873 Total stockholders' equity 96,341 77,119 59,056 52,418 37,480 =========== =========== =========== ============ ==========
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations 2001 and 2000 -----------------------------------
General -------
The following discussion of the Company's financial condition and results of operations should be read in conjunction with the description of the Company's business and properties contained in Items 1 and 2 of Part I and the Consolidated Financial Statements and Notes thereto, included elsewhere in this report.
Total revenues generated by the Company during 2001 were $61.6 million versus revenues of $62.3 million during 2000. Operating income during 2001 was $13.6 million versus $14.3 million for 2000. Net income was $19.0 million or $4.05 per basic share in 2001 versus $18.3 million or $3.86 per basic share in 2000.
Real Estate Operations ----------------------
Rental revenues from real estate operations during 2001 decreased $433,000 or 1.5% compared to 2000. The decrease is primarily attributable to decreased hotel revenues, offset by certain retroactive lease adjustments in the current year.
Mortgage interest expense decreased $436,000 or 19.5% for the year ended December 31, 2001 compared to the corresponding 2000 period, due to continuing mortgage amortization.
Depreciation expense associated with real properties held for rental decreased by $818,000 or 16.4% for the year ended December 31, 2001 compared to the same period in 2000. This
decrease was primarily attributable to reduced depreciation expense associated with fully depreciated properties and properties sold in 2001 and 2000.
Other operating expenses associated with the management of real properties increased approximately $998,000 or 14.5% during 2001 versus such expenses incurred in 2000. This increase is primarily attributable to increased real estate taxes, insurance, property maintenance expenses and hotel operating expenses.
Engineered Products -------------------
The Company's engineered products segment includes Metex and AFP Transformers. The operating results of the engineered products segment for the years ended December 31, 2001 and 2000 are as follows:
(In Thousands) 2001 2000 ------- -------
Net sales $33,792 $34,095 ======= =======
Cost of sales $25,083 $24,738 ======= =======
Selling, general and administrative expenses $ 6,797 $ 7,096 ======= =======
Operating income $ 1,912 $ 2,261 ======= =======
Net sales of the engineered products segment decreased $303,000 or less than 1% for the year ended December 31, 2001 compared to net sales in the preceding year. The decrease reflects lower sales in the Company's engineered component product line, offset by higher sales in the Company's automotive and transformer product lines. These declines were due to the slowing economy and compounded by the tragic events of September 11th.
Cost of sales as a percentage of net sales increased approximately 2.2% between 2000 and 2001, principally due to the decline in sales noted above.
Selling, general and administrative expenses of the engineered products segment decreased $299,000 or 4.2% for the year ended December 31, 2001 versus the comparable 2000 period. The decrease is primarily due to the decline in sales noted above and cost containment efforts implemented by management.
General and Administrative Expenses -----------------------------------
General and administrative expenses not associated with the manufacturing operations increased approximately $103,000 or 4.8% during 2001, compared to such expenses incurred in the preceding year. The increase is principally due to higher salary and salary related expenses and an increase in professional fees.
Other Income and Expense, Net -----------------------------
Other income and expense, net increased approximately $7.2 million from $9.8 million in 2000 to $17.0 million in 2001. The increase is principally due to increased net gains on the sale of real estate assets of $5.7 million and increased net gains on the sale of available-for-sale securities, derivative instruments and trading securities of $2.7 million. Such increases were offset by net unrealized losses on derivative instruments of $1.4 million.
Results of Operations 2000 and 1999 -----------------------------------
Total revenues generated by the Company during 2000 were $62.3 million versus revenues of $59.7 million during 1999. Operating income during this period was $14.3 million versus $13.1 million in 1999, an increase of $1.2 million or 8.9%. Net income was $18.3 million or $3.86 per basic share in 2000 versus $13.3 million or $2.68 per basic share in 1999.
Real Estate Operations ----------------------
Rental revenues from real estate operations during 2000 decreased $965,000 or 3.3% compared to 1999. This decrease is primarily attributable to increased revenues in 1999 from the accounting treatment of certain property leases resulting in the recognition of non-recurring revenues in the fourth quarter. Absent this item, rental revenues increased $983,000 or 3.6% primarily from an increase in the Company's hotel revenues.
Mortgage interest expense for 2000 decreased by $388,000 as compared to such expense incurred during 1999. This decrease of 14.8% results from the continuing amortization of mortgages during 2000, including repayments associated with properties sold.
Depreciation expense associated with real properties held for rental decreased approximately $217,000 or 4.2% from such expense incurred in 1999. This decrease is primarily attributable to properties sold in 2000 and 1999.
Other operating expenses associated with the management of real properties decreased approximately $428,000 or 5.9% during 2000 versus such expenses incurred in 1999. This decrease is primarily due to reduced expenses incurred for the maintenance of properties acquired in prior years.
Engineered Products -------------------
The Company's engineered products segment includes Metex and AFP Transformers. The operating results of the engineered products segment for the years ended December 31, 2000 and 1999 are as follows:
(In Thousands) 2000 1999 ------- -------
Net sales $34,095 $30,500 ======= =======
Cost of sales $24,738 $21,808 ======= =======
Selling, general and administrative expenses $ 7,096 $ 6,837 ======= =======
Operating income $ 2,261 $ 1,855 ======= =======
Net sales of the engineered products segment were $34.1 million, an 11.8% increase from 1999 revenues. This increase is primarily the result of higher sales in 2000 of transformer products as well as in the engineered products and European automotive markets of knitted wire products.
Cost of sales as a percentage of net sales increased approximately 1.5% between 1999 and 2000. This increase is primarily due to the mix of products sold, primarily from the increase in transformer sales, noted above.
Selling, general and administrative expenses of the engineered products segment increased $259,000 or 3.8% during 2000, compared to such costs in 1999. This increase is principally related to the increase in sales volume and represents a 1.6% decline as a percentage of net sales from 1999.
General and Administrative Expenses -----------------------------------
General and administrative expenses not associated with the manufacturing operations decreased approximately $695,000 or 24.4% during 2000 compared to such expenses incurred in 1999. This decrease is primarily due to a reduction in professional fees.
Other Income and Expense, Net -----------------------------
Other income and expense, net for 2000 increased approximately $1.5 million from $8.3 million in 1999 to $9.8 million in 2000. The increase is principally due to increased gains on the sale of marketable securities of $4.4 million offset by a $1.7 million decrease in gain on the sale of real estate assets and a $838,000 decrease in gain from equity investments resulting from the 1999 sale of a 50.0% partnership interest in a Miami Beach hotel.
Liquidity and Capital Resources -------------------------------
At December 31, 2001, the Company's cash and marketable securities were $96.8 million and working capital was approximately $76.4 million. Management continues to believe that the real estate market is overvalued and accordingly recent acquisitions have been limited to those select properties that meet the Company's stringent financial requirements. Management believes that
the available working capital along with the $60.0 million of availability on the revolving credit facility discussed below, puts the Company in an opportune position to fund acquisitions and grow the portfolio if and when attractive long-term opportunities become available.
The Company's portfolio of available-for-sale securities had a fair market value of approximately $28.6 million at December 31, 2001, reflecting pretax unrealized holding gains of approximately $9.1 million. Included in these marketable securities was approximately $27.7 million of common stock in a publicly traded company for which the Board Chairman is the Chairman and President and another Director of the Company is a director.
The Company is the lessor of 11 department stores that are currently leased or sub-leased to K-Mart Corporation ("K-Mart"), which filed for protection under Chapter 11 of the U.S. Bankruptcy Code on January 22, 2002. In addition, the Company holds a 50% interest in a joint venture (which is accounted for by the Company on the equity basis) that owns two distribution centers that are also leased to K-Mart. Although it is currently uncertain which leases, if any, K-Mart will reject or affirm as part of its reorganization, management believes that its leases and the leases of the joint venture with K-Mart are at or below the fair market rent for comparable properties and as a result, the rejection of one or more leases is not expected to have a material adverse effect on the consolidated financial position of the Company.
Effective December 31, 1999, the Company entered into a credit agreement with three banks which provides for both a $60.0 million revolving credit facility ("Revolver") and a $1.9 million term loan ("Term Loan"). Each of the three banks participates in the Revolver while only one bank participates in the Term Loan.
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 10.5%, (ii) the lesser of $6.0 million or 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%, (iii) the lesser of $10.0 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% and (iv) the lesser of $10.0 million or the sum of 75.0% of eligible accounts receivable and 50.0% of eligible inventory, as defined. At December 31, 2001, eligibility under the Revolver was $60.0 million, based upon the above terms. 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). The Company was in compliance with all covenants at December 31, 2001. 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") plus 2.0%. The Revolver expires on December 31, 2002. At December 31, 2001, there were no amounts outstanding under the Revolver.
The Term Loan bears interest at 90 day LIBOR plus 1.4% (3.3% at December 31, 2001) and is payable in quarterly installments of $175,000, with the final payment due on September 30, 2002. At December 31, 2001, $525,000 was outstanding on the Term Loan.
The Company has an interest-rate swap agreement (the "Swap") to effectively convert its floating rate Term Loan to a fixed rate basis, thus reducing the impact of interest rate changes on future expense. Under the Swap, the Company agreed to exchange with the counterparty (a commercial bank) the difference between the fixed and floating rate interest amounts. The Swap is classified as a cash flow hedge and is recorded as a component of accounts payable and accrued liabilities in the accompanying Consolidated Balance Sheets and other comprehensive income has been reduced by the same amount, with no impact on earnings. The differential to be paid or received on the Swap is recognized over the term of the agreement as an adjustment to interest expense.
In strategies designed to hedge overall market risk, the Company may sell common stock short and participate in put and/or call options. The Company is highly selective when participating in such transactions. 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 accompanying Consolidated Balance Sheets.
The Company has undertaken the completion of environmental studies and/or remedial action at Metex' two New Jersey facilities and filed an action against certain insurance carriers seeking recovery of costs incurred and to be incurred in these matters. Settlements have been reached with all carriers in this matter. See Note 18, "Commitments and Contingencies" of Notes to Consolidated Financial Statements for further discussion on this matter.
The current liabilities of the Company have historically exceeded its current assets principally due to the financing of the purchase of long-term assets utilizing short-term borrowings and from the classification of current mortgage obligations without the corresponding current asset for such properties. Future financial statements may reflect current liabilities in excess of current assets. Management is confident that through cash flow generated from operations, together with borrowings available under the Revolver and the sale of select assets, all obligations will be satisfied as they come due.
Previous purchases of the Company's common stock have reduced the Company's additional paid-in capital to zero and accordingly current year purchases in excess of par value have reduced retained earnings. During 2001, the Company purchased and retired 83,900 shares of the Company's common stock for approximately $1.8 million. Future repurchases of the Company's common stock will also reduce retained earnings by amounts in excess of the par value. Repurchases of the Company's common stock will be made from time to time in the open market at prevailing market prices and may be made in privately negotiated transactions, subject to available resources.
The cash needs of the Company have been satisfied from funds generated by current operations and additional borrowings. It is expected that future operational cash needs and the cash required to repurchase the Company's common stock will also be satisfied from existing cash balances, equity securities, ongoing operations and borrowings under the Revolver. 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.
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.
Quantitative and Qualitative Disclosures About Market Risk ----------------------------------------------------------
Market risk generally represents the risk of loss that may result from the potential change in the value of a financial instrument as a result of fluctuations in interest and currency exchange rates and in equity and commodity prices. Derivative financial instruments are used by the Company principally in the hedging of overall market risks and the management of its interest rate exposure.
The primary objective of the Company's investment activities is to preserve principal and maximize yields without significantly increasing market risk. To achieve this, management maintains a portfolio of cash equivalents and investments in a variety of securities, primarily U.S. investments in both common and preferred equity issues.
The Company's interest income is most sensitive to changes in the general levels of U.S. interest rates. Changes in U.S. interest rates affect the interest earned on the Company's cash and cash equivalents. The Company's available-for-sale and trading securities consist of U.S. investments in both common and preferred equity issues and are subject to the fluctuations in U.S. stock markets. Most of the Company's mortgages payable are fixed rate and self amortizing from the net cash flow of the underlying properties. The Company's derivative instruments consist of short stock sales, put and/or call options and the Swap. Such derivatives are subject to the fluctuations in U.S. stock markets. The Company's Term Loan has a variable rate but is effectively hedged by the Swap, whose notional amount matches the principal balance of the variable rate debt it hedges.
The Company manufactures its products in the United States and Mexico and sells its products in those markets as well as the European, South American and Asian markets. 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. A portion of the Company's receivables are denominated in French Francs or Euro dollars and are exposed
to changes in exchange rates with the U.S. dollar. When the U.S. dollar strengthens against the French Franc or Euro dollar, the value of the nonfunctional currency sales decreases. When the U.S. dollar weakens the functional currency amount of sales increases. Overall, the Company is a net receiver of French Francs or Euro dollars and, as such, benefits from a weaker dollar but is adversely affected by a stronger dollar relative to the French Franc or Euro dollar. Beginning in 2002, all of the Company's European receivables will be denominated in Euro dollars.
The Company's manufacturing operations utilize various metal commodities (principally stainless steel) in the manufacturing process. While key metals purchased from foreign entities are generally denominated in U.S. dollars, fluctuations in the suppliers' local currencies may impact materials pricing. The Company is unable to quantify the effects of such fluctuations, however, it does enter into purchase commitments for certain key metals that generally do not exceed twelve months which tend to minimize short-term currency fluctuations. The Company's financial results, however, could be significantly affected by fluctuations in metals pricing.
The following is a tabular presentation of quantitative market risks at December 31, 2001:
Principal (Notional) Amount by Expected Maturity ----------------------------------------------------------------------- Fair There- Value (Dollars in Thousands) 2002 2003 2004 2005 2006 after Total 12/31/01 ------------------------------------------------------------------------------------------------------------------------------------
Assets
Available-for-sale securities $28,633 $ 0 $ 0 $ 0 $ 0 $ 0 $ 28,633 $ 28,633 Notes receivable $ 271 $ 37 $ 43 $ 30 $ 28 $ 112 $ 521 $ 575 Average interest rate 13.8% 11.1% 11.2% 10.9% 10.3% 10.0%
Liabilities
Long-term debt, including current portion Fixed rate $ 5,047 $4,391 $5,866 $2,338 $ 629 $3,514 $ 21,785 $ 20,372 Average interest rate 7.2% 7.1% 7.0% 6.9% 7.0% 6.8%
Variable rate $ 525 $ 0 $ 0 $ 0 $ 0 $ 0 $ 525 $ 495 Average interest rate 3.3% LIBOR +1.40%
Derivative instruments(1) $10,155 $ 0 $ 0 $ 0 $ 0 $ 0 $ 10,155 $ 10,155
Interest Rate Derivative Financial Instruments Related to Variable Rate Debt
Interest rate swaps Pay fixed/receive variable $ 525 $ 0 $ 0 $ 0 $ 0 $ 0 $ 525 ($ 11) Average pay rate 3.3% Average receive rate 7.7%
(1) Consisting of short stock sales and put options.
Business Trends ---------------
Total 2001 revenues were $61.6 million versus $62.3 million during 2000, primarily due to decreased hotel revenues and a decrease in net sales from the engineered products segment. Operating income during this period was $13.6 million versus $14.3 million in 2000. Net income was $19.0 million or $4.05 per basic share in 2001 versus $18.3 million or $3.86 per
basic share in 2000. Included in the results for the year ended 2001 are net gains from the sale of real estate assets of $11.0 million and net realized and unrealized gains from the sale of available-for-sale securities, derivative instruments and trading securities of $5.9 million.
Real estate operations continue to generate substantial cash flow for reinvestment into our lines of business. Operating income generated from this segment during 2001 was $14.0 million on revenues of $27.8 million. The long-term nature of the Company's property leases as well as continued mortgage amortization continues to provide a solid financial base for the results of this segment.
Operating income from the Company's engineered products segment decreased $349,000 compared to the 2000 period, primarily due to lower net sales brought on by the slowing economy and compounded by the tragic events of September 11th. Management remains committed to growing the business and has continued to aggressively pursue new sales opportunities, including new geographical markets for its existing products and new applications for its core technologies.
Forward Looking Statements --------------------------
This Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. All forward-looking statements involve risks and uncertainties. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements included in this Form 10-K will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved.
Recent Accounting Pronouncements --------------------------------
In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 modifies the rules for accounting for the impairment or disposal of long-lived assets. The new rules are effective for the Company on January 1, 2002. Management does not believe that the impact of adopting SFAS No. 144 will have a material effect on the Company's consolidated financial statements.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary information filed as part of this Item 8 are listed under Item 14, "Exhibits, Financial Statements and Schedules and Reports on Form 8-K" and are contained in this Form 10-K, beginning on page 22.
ITEM 9.
ITEM 9. CHANGES IN THE COMPANY'S CERTIFYING ACCOUNTANT
The Company's auditors for the year ended December 31, 2000 were Ernst & Young LLP ("Ernst & Young"). As stated in the Company's proxy statement dated May 11, 2001, the Company annually reviews the selection of its independent auditors and has solicited bids from independent accountants to audit the Company's financial statements for the year ended December 31, 2001. As a result of financial and other considerations the Audit Committee voted to appoint Grant Thornton LLP as its new independent accountants on July 6, 2001.
Pursuant to item 304(a) of Regulation S-K, the Company reports the following:
(a) Previous Independent Accountants
(i) On July 6, 2001, the Company retained Grant Thornton LLP as its independent certified public accountants in place of Ernst & Young, who were dismissed as auditors of the Company effective July 6, 2001.
(ii) The reports of Ernst & Young on the Company's financial statements for the past two fiscal years did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles.
(iii) The decision to change accountants was recommended by the Company's management and separately approved by the Audit Committee of the Board of Directors.
(iv) In connection with the audits of the Company's financial statements for each of the two most recent fiscal years ended December 31, 2000 and through July 6, 2001, there were no disagreements with Ernst & Young on any matter of accounting principles or practices, financial statement disclosure, or auditing scope and procedure which, if not resolved to the satisfaction of Ernst & Young, would have caused it to make reference to the matter in their report.
(v) There were no "reportable events" as that term is described in Item 304 (a) (1) (v) of Regulation S-K.
(vi) The Company has requested Ernst & Young furnish it a letter addressed to the Securities and Exchange Commission stating whether it agrees with the above statements. A copy of that letter, dated July 12, 2001 is filed as Exhibit 16 under Item 14, "Exhibits, Financial Statements and Schedules and Reports on Form 8-K" in this Form 10-K.
(b) New Independent Accountants
(i) The Company engaged Grant Thornton LLP as its new independent accountants effective July 6, 2001. During the two most recent fiscal years and through July
6, 2001, the Company has not consulted with Grant Thornton LLP concerning the Company's financial statements, including the application of accounting principles to a specified transaction (proposed or completed) or the type of audit opinion that might be rendered on the Company's financial statements or any matter that was either the subject of a "disagreement" or "reportable event" (as such terms are defined in Item 304 of Regulation S-K) with the previous independent accountants.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
This information will be contained in the Proxy Statement of the Company for the 2002 Annual Meeting of Stockholders under the caption "Election of Directors" and is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
This information will be contained in the Proxy Statement of the Company for the 2002 Annual Meeting of Stockholders under the caption "Executive Compensation" and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information will be contained in the Proxy Statement of the Company for the 2002 Annual Meeting of Stockholders under the caption "Security Ownership" and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information will be contained in the Proxy Statement of the Company for the 2002 Annual Meeting of Stockholders under the caption "Certain Relationships and Related Transactions" and is incorporated herein by reference. Also see Note 13, "Transactions with Related Parties," of Notes to Consolidated Financial Statements, contained elsewhere in this report.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Consolidated Financial Statements. The following Consolidated Financial Statements and Consolidated Financial Statement Schedules of the Company are included in this Form 10-K at the pages indicated:
Index to Consolidated Financial Statements ------------------------------------------
Page ----
Report of Independent Certified Public Accountants - Grant Thornton LLP 22 Report of Independent Auditors - Ernst & Young LLP 23 Consolidated Balance Sheets as of December 31, 2001 and 2000 24 Consolidated Statements of Income for the Years Ended December 31, 2001, 2000, and 1999 25 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2001, 2000, and 1999 26 Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000, and 1999 27-28 Notes to Consolidated Financial Statements 29-46
(2) Consolidated Financial Statement Schedules
Schedule II -- Allowance for Doubtful Accounts 47 Schedule III -- Real Property Held for Rental and Accumulated Depreciation 48 Schedule IV -- Mortgage Loans on Real Estate 49
(3) Supplementary Data
Quarterly Financial Data (Unaudited) 50
Schedules not listed above are omitted as not applicable or the information is presented in the financial statements or related notes.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the last quarter of fiscal 2001.
(c) Exhibits
3.1. Amended and restated Certificate of Incorporation of the Company (incorporated by reference to exhibit 3.1 filed with the Company's report on Form 10-K for the fiscal year ended December 31, 1993).
3.2. By-laws of the Company (incorporated by reference to exhibit 3 filed with the Company's report on Form 10-K for the fiscal year ended December 31, 1980).
10.1. 1988 Incentive and Non-Qualified Stock Option Plan of the Company, as amended (incorporated by reference to exhibit 10.1 filed with the Company's report on Form 10-K for the fiscal year ended December 31, 2000).
10.2. 1988 Joint Incentive and Non-Qualified Stock Option Plan, as amended (incorporated by reference to exhibit 10.2 filed with the Company's report on Form 10-K for the fiscal year ended December 31, 1998).
10.3. Employment Agreement dated as of January 1, 1990 by and between the Company and A. F. Petrocelli (incorporated by reference to exhibit 10.9 filed with the Company's report on Form 10-K for the fiscal year ended December 31, 1989).
10.4. Amendment dated as of December 3, 1990 to Employment Agreement dated as of January 1, 1990, by and between the Company and A. F. Petrocelli (incorporated by reference to exhibit 10.10 filed with the Company's report on Form 10-K for the fiscal year ended December 31, 1990).
10.5. Amendment dated as of June 8, 1993 to Employment Agreement dated as of January 1, 1990 by and between the Company and A. F. Petrocelli (incorporated by reference to exhibit 10.5 filed with the Company's report on Form 10-K for the fiscal year ended December 31, 1993).
10.6. Revolving Credit Agreement dated as of December 31, 1999, with the financial parties thereto (incorporated by reference to exhibit 10.6 filed with the Company's report on Form 10-K for the fiscal year ended December 31, 1999).
16. Letter dated July 12, 2001 from Ernst & Young LLP related to the change in certifying accountants (incorporated by reference to exhibit 16 filed with the Company's report on Form 8-K dated July 12, 2001).
*21. Subsidiaries of the Company.
*23a. Auditors' consent to the incorporation by reference in the Company's Registration Statements on Form S-8 as of and for the year ended December 31, 2001 from Grant Thornton LLP of the Report of Independent Certified Public Accountants included herein.
*23b. Auditors' consent to the incorporation by reference in the Company's Registration Statements on Form S-8 as of and for each of the two years in the period ended December 31, 2000 from Ernst & Young LLP of the Report of Independent Auditors included herein.
-----------------
* Filed herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: February 25, 2002 By: /s/ A. F. Petrocelli ----------------- ---------------------------------------- A. F. Petrocelli Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the date indicated.
Dated: February 25, 2002 By: /s/ A. F. Petrocelli ----------------- ---------------------------------------- A. F. Petrocelli Chairman, President and Chief Executive Officer
Dated: February 25, 2002 By: /s/ Howard M. Lorber ----------------- ---------------------------------------- Howard M. Lorber Director
Dated: February 25, 2002 By: /s/ Robert M. Mann ------------------ ---------------------------------------- Robert M. Mann Director
Dated: February 25, 2002 By: /s/ Anthony J. Miceli ----------------- ---------------------------------------- Anthony J. Miceli Chief Financial Officer, Chief Accountant, Secretary and Director
Dated: February 25, 2002 By: /s/ Arnold S. Penner ------------------ ---------------------------------------- Arnold S. Penner Director
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS --------------------------------------------------
To the Board of Directors and Stockholders of United Capital Corp.
We have audited the accompanying consolidated balance sheet of United Capital Corp. and Subsidiaries (the "Company") as of December 31, 2001, and the related consolidated statements of income, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of United Capital Corp. and Subsidiaries as of December 31, 2001, and the consolidated results of their operations and their consolidated cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
We have also audited the financial statement schedules listed in the Index at Item 14(a)(2). In our opinion, these schedules present fairly, in all material respects, the information required to be set forth therein.
\s\GRANT THORNTON LLP
Melville, New York February 8, 2002
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of United Capital Corp.:
We have audited the accompanying consolidated balance sheet of United Capital Corp. and subsidiaries (the "Company") as of December 31, 2000, and the related consolidated statements of income, stockholders' equity and cash flows for each of the two years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of United Capital Corp. and subsidiaries as of December 31, 2000, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States.
\s\ ERNST & YOUNG LLP
New York, New York February 14, 2001
UNITED CAPITAL CORP. AND SUBSIDIARIES ------------------------------------- CONSOLIDATED BALANCE SHEETS --------------------------- AS OF DECEMBER 31, 2001 AND 2000 -------------------------------- (In Thousands, Except Per Share Data) -------------------------------------
2001 2000 ------------- ----------- Assets
Current assets: Cash and cash equivalents $68,170 $17,134 Marketable securities 28,633 43,253 Notes and accounts receivable, net of allowance for doubtful accounts of $328 6,385 9,057 Inventories 4,953 4,613 Prepaid expenses and other current assets 871 652 ------------- -----------
Total current assets 109,012 74,709 ------------- -----------
Property, plant and equipment, net 4,525 4,557 Real property held for rental, net 52,870 57,133 Noncurrent notes receivable 250 243 Deferred income taxes 1,026 -- Other assets 11,308 11,354 ------------- -----------
Total assets $178,991 $147,996 ============= ===========
Liabilities and Stockholders' Equity
Current liabilities: Current maturities of long-term debt $5,047 $5,498 Borrowings under credit facilities 525 700 Accounts payable and accrued liabilities 17,937 9,193 Income taxes payable 7,585 6,093 Deferred income taxes 1,481 954 ------------- -----------
Total current liabilities 32,575 22,438 ------------- -----------
Borrowings under credit facilities - 525 Long-term debt 16,738 21,784 Other long-term liabilities 33,337 24,961 Deferred income taxes - 1,169 ------------- -----------
Total liabilities 82,650 70,877 ------------- -----------
Commitments and contingencies
Stockholders' equity: Common stock $.10 par value, authorized 7,500 shares; issued and outstanding 4,641 and 4,720 shares, respectively 464 472 Retained earnings 90,000 72,717 Accumulated other comprehensive income, net of tax 5,877 3,930 ------------- -----------
Total stockholders' equity 96,341 77,119 ------------- -----------
Total liabilities and stockholders' equity $178,991 $147,996 ============= ===========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
UNITED CAPITAL CORP. AND SUBSIDIARIES ------------------------------------- CONSOLIDATED STATEMENTS OF INCOME --------------------------------- FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999 ----------------------------------------------------- (In Thousands, Except Per Share Data) -------------------------------------
2001 2000 1999 ----------------- ---------------- ----------------
Revenues: Net sales $33,792 $34,095 $30,500 Rental revenues from real estate operations 27,804 28,237 29,202 ----------------- ---------------- ----------------
Total revenues 61,596 62,332 59,702 ----------------- ---------------- ----------------
Costs and expenses: Cost of sales 25,083 24,738 21,808 Real estate operations: Mortgage interest expense 1,796 2,232 2,620 Depreciation expense 4,175 4,993 5,210 Other operating expenses 7,863 6,865 7,293 General and administrative expenses 5,310 5,295 5,810 Selling expenses 3,743 3,954 3,875 ----------------- ---------------- ----------------
Total costs and expenses 47,970 48,077 46,616 ----------------- ---------------- ----------------
Operating income 13,626 14,255 13,086 ----------------- ---------------- ----------------
Other income (expense): Interest and dividend income 1,828 2,230 1,886 Interest expense (436) (564) (614) Other income and expense, net 16,955 9,797 8,266 ----------------- ---------------- ----------------
Total other income 18,347 11,463 9,538 ----------------- ---------------- ----------------
Income before income taxes 31,973 25,718 22,624
Provision for income taxes 13,001 7,440 9,298 ----------------- ---------------- ----------------
Net income $18,972 $18,278 $13,326 ================ ================ ================
Earnings per common share: Basic $4.05 $3.86 $2.68 ================ ================ ================
Diluted $3.86 $3.83 $2.66 ================ ================ ================
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
UNITED CAPITAL CORP. AND SUBSIDIARIES ------------------------------------- CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY ----------------------------------------------- FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999 ----------------------------------------------------- (In Thousands) --------------
Accumulated Other Common Stock Issued Additional Comprehensive Total ------------------- Paid-in Retained Income, Stockholders' Comprehensive Shares Amount Capital Earnings Net of Tax Equity Income --------- -------- --------- ---------- -------------- -------------- ------------
Balance - January 1, 1999 5,148 $515 $3,536 $45,429 $2,938 $52,418
Purchase and retirement of common shares (441) (44) (3,675) (4,084) 0 (7,803) Proceeds from the exercise of stock options 29 3 139 0 0 142 Net income 0 0 0 13,326 0 13,326 $13,326 Other comprehensive income, net of tax: Change in net unrealized gain on available-for-sale securities, net of tax provision of $593 0 0 0 0 973 973 973 ------------ Comprehensive income $14,299 --------- -------- -------- ---------- ------------- -------------- ============
Balance - December 31, 1999 4,736 474 0 54,671 3,911 59,056 --------- -------- -------- ---------- ------------- --------------
Purchase and retirement of common shares (16) (2) 0 (232) 0 (234) Net income 0 0 0 18,278 0 18,278 $18,278 Other comprehensive income, net of tax: Change in net unrealized gain on available-for-sale securities, net of tax provision of $10 0 0 0 0 19 19 19 ------------ Comprehensive income $18,297 --------- -------- -------- ---------- ------------- -------------- ============
Balance - December 31, 2000 4,720 472 0 72,717 3,930 77,119 --------- -------- -------- ---------- ------------- --------------
Purchase and retirement of common shares (84) (8) 0 (1,761) 0 (1,769) Proceeds from the exercise of stock options 5 0 0 72 0 72 Net income 0 0 0 18,972 0 18,972 $18,972 Other comprehensive income, net of tax: Change in net unrealized gain on available-for-sale securities, net of tax provision of $1,047 0 0 0 0 1,947 1,947 1,947 ------------ Comprehensive income $20,919 --------- -------- -------- ---------- ------------- -------------- ============
Balance - December 31, 2001 4,641 $464 $0 $90,000 $5,877 $96,341 ========= ======== ======== ========== ============= ==============
The accompanying Notes to Consolidated Financial Statements are an integral part of the these statements.
UNITED CAPITAL CORP. AND SUBSIDIARIES ------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999 ----------------------------------------------------- (In Thousands) --------------
2001 2000 1999 --------- -------- ---------
Cash flows from operating activities: Net income $ 18,972 $ 18,278 $ 13,326 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,605 6,328 6,628 Net gain on sale of available-for-sale securities (4,911) (4,513) 0 Net gain on sale of trading securities (461) 0 (144) Net gain on sale of real estate assets (10,995) (5,269) (6,957) Gain from equity investments (868) (1,227) (3,601) Net gain on sale of derivative instruments (1,856) 0 0 Purchase of trading securities (54) (1,772) (700) Proceeds from sale of trading securities 2,287 0 844 Unrealized loss on trading securities 0 7 0 Net unrealized loss on derivative instruments 1,374 0 0 Changes in assets and liabilities (A) 7,594 (755) 10,920 -------- -------- --------
Net cash provided by operating activities 16,687 11,077 20,316 -------- -------- --------
Cash flows from investing activities: Purchase of available-for-sale securities (4,488) (25,024) (11,439) Proceeds from sale of available-for-sale securities 25,259 15,372 0 Proceeds from sale of real estate assets 12,858 9,890 9,064 Proceeds from sale of equity investments 0 0 1,300 Proceeds from sale of derivative instruments 10,939 0 0 Acquisition of property, plant and equipment (1,327) (798) (1,775) Acquisition of real estate assets (1,774) (767) (2,304) Distributions from equity investments, net 776 767 743 -------- -------- --------
Net cash provided by (used in) investing activities 42,243 (560) (4,411) -------- -------- --------
Cash flows from financing activities: Principal payments on mortgage commitments, notes and loans (5,497) (6,024) (6,058) Proceeds from mortgage commitments, notes and loans 0 0 6,560 Net repayments under credit facilities (700) (700) (3,325) Purchase and retirement of common shares (1,769) (234) (7,803) Proceeds from the exercise of stock options 72 0 142 -------- -------- --------
Net cash used in financing activities (7,894) (6,958) (10,484) -------- -------- --------
Net increase in cash and cash equivalents 51,036 3,559 5,421
Cash and cash equivalents, beginning of year 17,134 13,575 8,154 -------- -------- --------
Cash and cash equivalents, end of year $ 68,170 $ 17,134 $ 13,575 ======== ======== ========
UNITED CAPITAL CORP. AND SUBSIDIARIES ------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999 (CONTINUED) ----------------------------------------------------------------- (In Thousands) --------------
2001 2000 1999 --------- --------- ---------
Supplemental disclosures of cash flow information: Cash paid during the year for:
Interest $2,265 $2,726 $3,177 ====== ====== ======
Taxes $5,722 $4,114 $4,749 ====== ====== ======
(A) Changes in assets and liabilities for the years ended December 31, 2001, 2000, and 1999, are as follows:
2001 2000 1999 ------------ ------------- -------------
Notes and accounts receivable, net $ 2,672 ($ 3,431) $ 2,049 Inventories (340) (406) 132 Prepaid expenses and other current assets (219) (398) (45) Deferred income taxes (2,733) 420 4,236 Noncurrent notes receivable (8) 27 (49) Other assets 67 (475) 2,333 Accounts payable and accrued liabilities (1,713) (642) (986) Income taxes payable 1,492 1,093 (1,355) Other long-term liabilities 8,376 3,057 4,605 -------- -------- --------
Total $ 7,594 ($ 755) $ 10,920 ======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
UNITED CAPITAL CORP. AND SUBSIDIARIES ------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ DECEMBER 31, 2001, 2000, AND 1999 --------------------------------- (In Thousands, Except Share And Per Share Data) -----------------------------------------------
(1) Summary of Significant Accounting Policies: -------------------------------------------
Nature of Business: -------------------
United Capital Corp. (the "Company") and its subsidiaries are currently engaged in the investment and management of real estate and in the manufacture and sale of engineered products. The Company also invests excess available cash in marketable securities and other financial instruments.
Principles of Consolidation: ----------------------------
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The equity method of accounting is used for investments in 50% or less owned companies over which the Company has the ability to exercise significant influence.
Income Recognition - Real Estate Operations: --------------------------------------------
The Company leases substantially all of its properties to tenants under net leases which are accounted for as operating leases. Under this type of lease, the tenant is obligated to pay all operating costs of the property including real estate taxes, insurance and repairs and maintenance. Gains on sales of real estate assets and equity investments are recorded when the gain recognition criteria under generally accepted accounting principles in the United States of America have been met.
Certain lease agreements provide for additional rent based on a percentage of tenants' sales. In the fourth quarter of 2000, the Company adopted the Securities and Exchange Commission's Staff Accounting Bulletin No. 101 ("SAB No. 101") which provides, among other things, guidance as to the recognition of contingent rents. SAB No. 101 requires that such additional rent be recorded as income when the tenants' actual sales are known. The impact of adopting SAB No. 101 was not material to the Company's results of operations or the timing of revenue recognition.
Income on leveraged leases is recognized by a method which produces a constant rate of return on the outstanding investment in the lease, net of the related deferred tax liability in the years in which the net investment is positive.
Revenue Recognition - Manufacturing Operations: -----------------------------------------------
Sales are recorded when products are shipped to the customer.
Cash and Cash Equivalents: --------------------------
The Company considers all highly liquid investments with a maturity, at the purchase date, of three months or less to be cash equivalents.
Marketable Securities: ----------------------
The Company determines the appropriate classification of securities at the time of purchase and reassesses the appropriateness of the classification at each reporting date. At December 31, 2001, all marketable securities held by the Company have been classified as available-for-sale and, as a result, are stated at fair value. Unrealized gains and losses on available-for-sale securities are recorded as a separate component of stockholders' equity. Realized gains and losses on the sale of securities, as determined on a specific identification basis, as well as unrealized holding gains and losses on trading securities are included in the Consolidated Statements of Income.
Inventories: ------------
Inventories are stated at the lower of cost or market and include material, labor and manufacturing overhead. The first-in, first-out (FIFO) method is used to determine the cost of inventories.
Inventory consists of the following components at December 31:
2001 2000 ---------------- ----------------
Raw materials $2,388 $2,533 Work in process 782 402 Finished goods 1,783 1,678 ---------------- ----------------
$4,953 $4,613 ================ ================
Depreciation and Amortization: ------------------------------
Depreciation and amortization are provided on a straight-line basis over the estimated useful lives of the related assets as follows:
Real property held for rental: Buildings and improvements 5 to 39 years Equipment 5 to 7 years
Property, plant and equipment: Buildings and improvements 18 to 39 years Machinery and equipment 3 to 8 years
Intangible Assets: Patents, trademarks and other intellectual property 5 to 20 years
Real Property Held for Rental: ------------------------------
Real property held for rental is carried at cost less accumulated depreciation. Major renewals and betterments are capitalized. Maintenance and repairs are expensed as incurred.
Property, Plant and Equipment: ------------------------------
Property, plant and equipment is recorded at cost, less accumulated depreciation and amortization. Major improvements are capitalized and maintenance and repairs are expensed as incurred.
Research and Development: -------------------------
The Company expenses research, development and product engineering costs as incurred. Approximately $77, $52, and $95 of such costs were incurred by the Company in 2001, 2000, and 1999, respectively.
Earnings Per Common Share: --------------------------
Basic earnings per common share is calculated by dividing net income by the weighted-average number of common shares outstanding and excludes any dilutive effects of stock options. Diluted earnings per common share gives effect to all potentially dilutive common shares that were outstanding during the period. Dilutive common shares used in the computation of diluted earnings per common share result from the assumed exercise of stock options, using the treasury stock method.
Derivative Financial Instruments: ---------------------------------
As of January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), as amended. As a result of adopting SFAS No. 133, the Company recognizes all derivative financial instruments, such as its interest rate swap contract, short stock sales and put and/or call options, in the consolidated financial statements at fair value regardless of the purpose or intent for holding the instrument. Changes in the fair value of derivative financial instruments are either recognized periodically in income or in stockholders' equity as a component of other comprehensive income depending on whether the derivative financial instrument qualifies for hedge accounting, and if so, whether it qualifies as a fair value or cash flow hedge. Generally, changes in the fair value of derivatives accounted for as fair value hedges are recorded in income along with the portions of the changes in the fair values of the hedged items that relate to the hedged risks. Changes in the fair value of derivatives accounted for as cash flow hedges, to the extent they are effective as hedges, are recorded in other comprehensive income net of deferred taxes. Changes in the fair values for 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.
The Company has entered into an interest rate swap agreement (the "Swap") to modify the interest characteristics of a particular term loan by effectively converting its floating rate to a fixed rate thus reducing the impact of interest rate changes on future expense. The Swap is designated with the principal balance and term of the term loan and qualifies as an effective hedge under SFAS No. 133. Since the Swap is classified as a cash flow hedge, the fair value of ($11) at December 31, 2001 is recorded as a component of accounts payable and accrued liabilities in the accompanying Consolidated Balance Sheets and other comprehensive income has been reduced by exactly the same amount as the derivative, with no impact on earnings. The amount paid or received on the Swap is accrued and recognized as an adjustment of interest expense related to the debt. Since SFAS No. 133 was adopted by the Company as of January 1, 2001, the fair value of the Swap of ($6) at December 31, 2000 is not recorded in the consolidated financial statements at December 31, 2000.
Management maintains a diversified and well-balanced portfolio of cash equivalents and investments in a variety of securities, primarily U.S. investments in both common and preferred equity issues and participates in transactions involving bonds and other derivative financial instruments, including short stock sales and put and/or call options. The Company is highly selective when participating in such transactions. At December 31, 2001, the fair value of such derivatives was ($10,155), which is recorded as a component of accounts payable and accrued liabilities in the accompanying Consolidated Balance Sheets. These instruments do not qualify for hedge accounting and therefore changes in the derivatives fair value are recognized in earnings. For the year ended December 31, 2001, the Company recognized $1,374 in net unrealized losses and $1,856 in net realized gains from derivative instruments, which are included in other income and expense, net in the accompanying Consolidated Statements of Income.
Use of Estimates: -----------------
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Recent Pronouncements of the Financial Accounting Standards Board: -----------------------------------------------------------------
In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 modifies the rules for accounting for the impairment or disposal of long-lived assets. The new rules are effective for the Company on January 1, 2002. Management does not believe that the impact of adopting SFAS No. 144 will have a material effect on the Company's consolidated financial statements.
(2) Real Property Held for Rental: ------------------------------
The Company is the lessor of real estate under operating leases which expire in various years through 2078.
The following is a summary of real property held for rental at December 31:
2001 2000 -------------- ------------
Land $19,922 $20,710 Buildings 104,485 110,285 -------------- ------------
124,407 130,995
Less: Accumulated depreciation (71,537) (73,862) -------------- ------------
$52,870 $57,133 ============== ============
In 1998, the Company acquired a property subject to certain contingent liabilities which were estimated and capitalized at the time of acquisition. During 2000, these liabilities were resolved for approximately $1,000 less than originally estimated. As a result, real property held for rental was reduced accordingly.
As of December 31, 2001, total minimum future rentals to be received under noncancellable leases for each of the next five years and thereafter are as follows:
Year Ended December 31, 2002 $ 15,755 2003 14,457 2004 11,815 2005 10,312 2006 6,062 Thereafter 67,559 ---------------------
Total minimum future rentals $125,960 =====================
Minimum future rentals do not include additional rentals that may be received under certain leases which provide for such rentals based upon a percentage of lessees' sales. Percentage rents included in the determination of net income for 2001, 2000, and 1999 were approximately $860, $527, and $1,131, respectively.
(3) Property, Plant, and Equipment: -------------------------------
Property, plant, and equipment is principally used in the Company's manufacturing operations and consists of the following at December 31:
2001 2000 ------------- ---------------
Land $28 $28 Buildings and improvements 1,428 1,372 Machinery and equipment 11,920 10,630 ------------- ---------------
13,376 12,030
Less: Accumulated depreciation (8,851) (7,473) ------------- ---------------
$4,525 $4,557 ============= ===============
(4) Marketable Securities: ----------------------
At December 31, 2001 and 2000, the aggregate market value of marketable securities was $28,633 (of which $27,661 was in a publicly traded company for which the Board Chairman and another Director of the Company are directors), and $43,253, respectively, while the aggregate cost of such securities was $19,582 and $37,217, respectively. Unrealized holding gains at December 31, 2001 and 2000 were $5,883 and $3,930 on a net of tax basis, respectively. The Company held no trading securities at December 31, 2001. Unrealized holding losses on trading securities held at December 31, 2000, included in the determination of net income for 2000 were $7. Marketable securities consist of the following at December 31:
2001 2000 ------------ ------------ Available-for-sale securities: Corporate equities $28,198 $41,488 Corporate bonds 435 0 ------------ ------------ 28,633 41,488 ------------ ------------ Trading securities: Corporate equities 0 1,765 ------------ ------------ $28,633 $43,253 ============ ============
Proceeds from the sale of available-for-sale and trading securities and the resulting net realized gains included in the determination of net income are as follows:
2001 2000 1999 ---------------- ---------------- -------------- Available-for-sale securities: Proceeds $25,259 $15,372 $0
Net realized gains $4,911 $4,513 $0
Trading securities: Proceeds $2,287 $0 $844
Net realized gains $461 $0 $144
(5) Notes Receivable: -----------------
Notes receivable consist of the following at December 31:
2001 2000 ------------- -------------
High yield mortgage loan (a) $0 $3,500 Other 521 637 ------------- -------------
521 4,137 Less: Current portion included in notes and accounts receivable 271 3,894 ------------- -------------
$250 $243 ============= =============
(a) As of December 31, 2001, the Company's participation in a high yield mortgage loan with a related party participant was satisfied (see Note 13). This loan was secured by a first mortgage lien on the property. The loan bore interest at 14.0% and the Company received a commitment fee of 4.0%.
(6) Other Assets:
Other assets consist of the following at December 31:
2001 2000 ------------ ------------
Lease financing (a) $8,364 $8,272 Other 3,815 3,734 ------------ ------------
12,179 12,006 Less: Amounts included in prepaid expenses and other current assets 871 652 ------------ ------------
$11,308 $11,354 ============ ============
(a) Lease financing consists of a 50.0% interest in a limited partnership, whose principal assets are two leveraged leases with K-Mart Corporation (see Note 18). The following represents the components of the net investment in the leveraged leases at December 31:
2001 2000 --------------- ------------- Rentals receivable $81,583 $85,611 Residual values 10,000 10,000 Non recourse debt service (64,859) (68,111) Unearned income (18,360) (19,228) --------------- ------------- 8,364 8,272
Less: Deferred taxes arising from leveraged leases 6,254 5,561 --------------- ------------- $2,110 $2,711 =============== =============
The Company's share of income arising from this investment was $868, $1,227, and $3,601 in 2001, 2000, and 1999, respectively, and is included in rental income in the accompanying Consolidated Statements of Income.
(7) Accounts Payable and Accrued Liabilities: -----------------------------------------
Accounts payable and accrued liabilities consist of the following at December 31:
2001 2000 -------------- --------------
Accounts payable $3,085 $4,098 Fair market value of derivatives 10,155 0 Accrued wages and benefits 1,300 1,412 Liabilities for discontinued operations 1,434 1,613 Other accrued expenses 1,963 2,070 -------------- --------------
$17,937 $9,193 ============== ==============
(8) Long-term Debt: ---------------
Long-term debt consists of the following at December 31:
2001 2000 --------------- --------------
Mortgages on real property (a) $21,744 $27,126 Capital lease obligation 41 156 --------------- --------------
21,785 27,282
Less: Current maturities 5,047 5,498 --------------- --------------
$16,738 $21,784 =============== ==============
(a) First mortgages bearing interest at rates ranging from 4.0% to 10.3% per annum are collateralized by the related real property. Such amounts are scheduled to mature at various dates from January 2002 through October 2015.
The approximate aggregate maturities of these obligations at December 31, 2001 are as follows:
Long-term Capital Lease Debt Obligation ----------------- ----------------
2002 $5,006 $42 2003 4,391 0 2004 5,866 0 2005 2,338 0 2006 629 0 Thereafter 3,514 0 ---------------- ----------------
Total minimum payments $21,744 42 ================ Less: Amount representing interest 1 ----------------
Total present value of minimum lease payments 41
Less: Current portion 41 ----------------
Total noncurrent portion $0 ================
(9) Credit Facilities: ------------------
Effective December 31, 1999, the Company entered into a credit agreement with three banks which provides for both a $60,000 revolving credit facility ("Revolver") and a $1,925 term loan ("Term Loan"). Each of the three banks participates in the Revolver while only one bank participates in the Term Loan.
Under the terms of 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 10.5%, (ii) the lesser of $6,000 or 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%, (iii) the lesser of $10,000 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% and (iv) the lesser of $10,000 or the sum of 75.0% of eligible accounts receivable and 50.0% of eligible inventory, as defined. At December 31, 2001, eligibility under the Revolver was $60,000, based upon the above terms. 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). The Company was in compliance with all covenants at December 31, 2001. 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") plus 2.0%. The Revolver expires on December 31, 2002. At December 31, 2001, there were no amounts outstanding under the Revolver.
The Term Loan bears interest at 90 day LIBOR plus 1.4% (3.3% at December 31, 2001) and is payable in quarterly principal installments of $175, with the final payment due on September 30, 2002. At December 31, 2001, $525 was outstanding under the Term Loan.
(10) Fair Value of Financial Instruments: ------------------------------------
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
The carrying amount reported in the Consolidated Balance Sheets for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to the short maturity of such items.
The fair value of notes receivable are estimated using discounted cash flow analyses, with interest rates comparable on loans with similar terms and borrowers of similar credit quality. The fair value of notes receivable at December 31, 2001 and 2000 was approximately $575 and $4,174, respectively, while the carrying value was $521 and $4,137 for the same periods.
At December 31, 2001 and 2000, all marketable securities held by the Company have been classified as either available-for-sale or trading and, as a result, are carried at fair value based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
Carrying amounts of borrowings under the credit facilities approximate their fair value. The fair value of long-term debt was calculated based on interest rates available for debt with terms and due dates similar to the Company's existing debt arrangements. The fair value of long-term debt at December 31, 2001 and 2000 was approximately $20,372 and $25,500, respectively, while the carrying value was $21,785 and $27,282 for the same periods.
The derivative instruments held by the Company, representing short stock sales and put and/or call options, are carried at fair value based on quoted market prices or dealer quotes. At December 31, 2001, the fair value of these derivatives was estimated at ($10,155).
The fair value of the Swap (used for hedging purposes) is the estimated amount that the bank would receive or pay to terminate the Swap at the reporting date, taking into account then current interest
rates and the current creditworthiness of the Swap counterparties. At December 31, 2001 and 2000, the fair values of the Swap were estimated at ($11) and ($6), respectively.
(11) Stockholders' Equity: ---------------------
Previous purchases of the Company's common stock have reduced the Company's additional paid-in capital to zero and accordingly current year purchases in excess of par value have reduced retained earnings. During 2001, the Company purchased and retired 83,900 shares of the Company's common stock for approximately $1,769. Future repurchases of the Company's common stock will also reduce retained earnings by amounts in excess of the par value. Repurchases of the Company's common stock will be made from time to time in the open market at prevailing market prices and may be made in privately negotiated transactions, subject to available resources.
Stock Options: --------------
The Company has two stock option plans under which qualified and nonqualified options may be granted to key employees to purchase the Company's common stock at the fair market value on the date of grant. Under both plans, the options typically become exercisable in three equal installments, beginning one year from the date of grant. Stock options expire ten years from the date of grant. The 1988 Incentive and Non-Qualified Stock Option Plan (the "Incentive Plan") and the 1988 Joint Incentive and Non-Qualified Stock Option Plan (the "Joint Plan") both provide for the granting of incentive or nonqualified stock options. The number of authorized shares reserved for issuance pursuant to each plan is 1,325,000.
At December 31, 2001, there were 1,183,880 and 866,001 options outstanding under the Joint Plan and Incentive Plan, respectively. At December 31, 2000, 1,198,380 and 417,001 options were outstanding under the Joint Plan and Incentive Plan, respectively.
A summary of the Company's stock options as of December 31, 2001, 2000, and 1999, and changes during the years then ended are summarized below:
Weighted- Shares Average Exercise Price ----------------- ----------------
Outstanding at January 1, 1999 871,881 $19.16
Granted 434,000 $14.06 Exercised (28,500) $5.00 Cancelled/Forfeited (23,000) $20.52 -----------------
Outstanding at December 31, 1999 1,254,381 $17.69
Granted 371,000 $13.06 Cancelled/Forfeited (10,000) $18.57 -----------------
Outstanding at December 31, 2000 1,615,381 $16.62
Granted 468,000 $23.85 Exercised (5,000) $14.45 Cancelled/Forfeited (28,500) $16.66 -----------------
Outstanding at December 31, 2001 2,049,881 $18.28 =================
The following table summarizes information about options outstanding and exercisable at December 31, 2001:
Options Outstanding Options Exercisable -------------------------------------------------------------------------------- ------------------------------------ Weighted- Average Weighted- Weighted- Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Price Outstanding Life Price Exercisable Price ------------------- ---------------- ---------------- -------------- -------------- ---------------
$7.25 - $11.00 79,000 2.5 years $ 10.05 79,000 $ 10.05 $13.06 - $18.75 1,080,881 7.3 years $ 14.61 692,881 $ 15.27 $22.88 - $25.16 890,000 8.0 years $ 23.46 422,000 $ 23.04 --------- ---------
$7.25 - $25.16 2,049,881 7.4 years $ 18.28 1,193,881 $ 17.67 ========= =========
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations ("APB No. 25") in accounting for stock-based compensation plans. Under APB No. 25, when the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Accordingly, no compensation expense has been recognized in the consolidated financial statements in connection with employee stock option grants. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," requires the disclosure of pro forma net income and earnings per share had the Company adopted the fair value method of accounting for its stock-based compensation plans. If stock-based compensation costs had been recognized based on the estimated fair values at the dates of grant of options awarded during 2001, 2000, and 1999 pro forma net income and net income per basic share for 2001, 2000, and 1999 would have been $17,222 or $3.68, $16,532 or $3.49, and $11,758 or $2.37 per basic share, respectively. Pro forma compensation expense may not be indicative of pro forma expense in future years. For purposes of estimating the fair value of each option on the date of grant, the Company utilized the Black-Scholes option pricing model.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
The weighted-average option fair values and the assumptions used to estimate these values are as follows:
Grants Issued During --------------------
2001 2000 1999 ---- ---- ----
Expected life (years) 5 5 5 Risk free interest rate 5.0% 6.1% 5.6% Expected volatility 36.9% 35.3% 32.4% Dividend yield 0.0% 0.0% 0.0% Weighted-average option fair value $ 9.67 $ 5.40 $ 5.42
(12) Earnings Per Common Share: --------------------------
The following table sets forth the computation of basic and diluted earnings per common share:
(Share Data in Thousands) 2001 2000 1999 ----------- ---------- ---------- Numerator: Income from continuing operations $18,972 $18,278 $13,326 =========== ========== ==========
Denominator: Denominator for basic earnings per common share--weighted-average shares 4,685 4,731 4,968 Effect of dilutive securities: Employee stock options 229 42 45 ----------- ---------- ---------- Denominator for diluted earnings per common share--adjusted weighted-average shares and assumed conversions 4,914 4,773 5,013 ========== =========== ===========
Basic earnings per common share $4.05 $3.86 $2.68 ========== =========== ===========
Diluted earnings per common share $3.86 $3.83 $2.66 ========== =========== ===========
(13) Transactions with Related Parties: ----------------------------------
The Company has a 50.0% interest in an unconsolidated limited liability corporation, whose principal assets are two leveraged leases with K-Mart. A group that includes the wife of the Board Chairman, two Directors of the Company and the wife of one of the Directors have an 8.0% interest in this entity (see Notes 6 and 18).
In January 2000, the Company participated in a $4,500 loan transaction secured by mortgage liens against three properties in New York, New York. The Company advanced $3,500 in connection with this loan. The remaining $1,000 was advanced by the wife of the Board Chairman. The note bore interest at 14.0% per annum payable monthly. The participants also received a commitment fee of 4.0% in connection with the loan. The note, which was scheduled to mature in February 2002, was satisfied as of December 31, 2001.
The Company's two hotel properties are managed by a publicly traded company for which the Board Chairman and another Director of the Company are directors. In addition, during 1998 the Company's Board Chairman was also named Chairman and President of this company. Fees paid for the management of these properties are based upon a percentage of revenue and were
approximately $121, $165, and $134 for 2001, 2000, and 1999, respectively. Included in marketable securities at December 31, 2001 was $27,661 of common stock in this company which represents approximately 5.6% of such company's outstanding shares.
(14) Income Taxes: -------------
Deferred income taxes are determined on the liability method in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). Under SFAS No. 109, deferred tax assets and liabilities are determined based on the difference between the tax basis of an asset or liability and its reported amount in the Consolidated Financial Statements using enacted tax rates. Future tax benefits attributable to these differences are recognized to the extent that realization of such benefits is more likely than not.
The components of the net deferred tax liability at December 31, 2001 and 2000 are as follows:
2001 2000 ----------------- ----------------
Realization allowances related to accounts receivable and inventories $364 $282 Net unrealized gain on marketable securities (2,683) (2,113) Basis differences relating to real property held for rental 3,459 3,468 Accrued expenses, deductible when paid, net 6,995 4,190 Basis differences relating to business acquisitions (1,863) (1,863) Leveraged lease (6,254) (5,561) Property, plant and equipment (387) (431) Pensions (58) (65) Other, net (28) (30) ----------------- ----------------
Net deferred tax liability (455) (2,123)
Less: Current portion (1,481) (954) ----------------- ----------------
Noncurrent portion $1,026 ($1,169) ================= ================
The income tax provision reflected in the accompanying Consolidated Statements of Income for each of the years presented herein is as follows:
2001 2000 1999 ------------ ---------------- ----------------
Current: Federal $10,498 $5,233 $5,175 State 2,700 1,864 1,831 Deferred (197) 343 2,292 ------------ ---------------- ----------------
$13,001 $7,440 $9,298 ============ ================ ================
A reconciliation of the tax provision computed at statutory rates to the amounts shown in the accompanying Consolidated Statements of Income for the years ended December 31, 2001, 2000, and 1999 is as follows:
2001 2000 1999 -------------- --------------- ---------------
Computed federal income tax provision at statutory rates $11,190 $9,001 $7,918 State income taxes, net of federal income tax benefit 1,841 1,255 1,236 Realization of capital loss deductions 0 (2,805) 0 Other, net (30) (11) 144 -------------- --------------- --------------- $13,001 $7,440 $9,298 ============== =============== ===============
(15) Other Income and Expense, Net: ------------------------------
The components of other income and expense, net in the accompanying Consolidated Statements of Income for the years ended December 31, 2001, 2000, and 1999 are as follows:
2001 2000 1999 -------------- -------------- ---------------
Net gain on sale of real estate assets $10,995 $5,269 $6,957 Gain from equity investments (a) 0 0 838 Net gain on the sale of available-for-sale securities (Note 4) 4,911 4,513 0 Net gain on the sale of trading securities (Note 4) 461 0 144 Net gain on sale of derivative instruments 1,856 0 0 Net unrealized losses on derivative instruments (1,374) 0 0 Other, net 106 15 327 -------------- -------------- ---------------
$16,955 $9,797 $8,266 ============== ============== ===============
(a) In January 1999, the Company sold its 50.0% partnership interest in a Miami Beach hotel for $1,300 resulting in a pretax gain of $838.
(16) Retirement Plan: ----------------
The Company has a noncontributory defined benefit pension plan that covers substantially all full-time employees and the former employees of the Company's discontinued resilient vinyl flooring segment.
The following table sets forth the change in benefit obligation, the change in plan assets and the funded status of the plan as of December 31:
2001 2000 -------------- -------------- Change in benefit obligation:
Benefit obligation, beginning of year $8,497 $8,979 Service cost 279 336 Interest cost 640 681 Actuarial loss (gain) 194 (570) Benefits paid (989) (929) -------------- -------------- Benefit obligation, end of year 8,621 8,497 -------------- --------------
Change in plan assets:
Fair value of plan assets, beginning of year 10,453 11,241 Actual return on plan assets (233) 141 Benefits paid (989) (929) -------------- -------------- Fair value of plan assets, end of year 9,231 10,453 -------------- --------------
Funded status 610 1,956 -------------- --------------
Unrecognized net actuarial gain (366) (560) Unrecognized net loss (gain) 517 (612) -------------- --------------
Prepaid benefit obligation $761 $784 ============== ==============
Net periodic pension expense consists of the following components for the years ended December 31:
2001 2000 1999 ----------- ------------- --------------
Service cost ($279) ($336) ($332) Interest cost (640) (681) (730) Actual return on plan assets (233) 141 58 Net amortization and deferral 1,129 829 995 ----------- ------------- --------------
Net periodic pension expense ($23) ($47) ($9) =========== ============= ==============
In determining the projected benefit obligation for 2001 and 2000, the weighted average assumed discount rate was 8.0%, while the rate of expected increases in future salary levels was 3.5%. The expected long-term rate of return on assets used in determining net periodic pension cost for all years presented was 9.0%. No contributions were made during 2001 or 2000 as the plan is overfunded. Plan assets consist primarily of U.S. bonds, government backed mortgage obligations, equity securities and mutual funds.
(17) Business Segments: ------------------
The Company operates through two business segments: real estate investment and management and engineered products. The real estate investment and management segment is engaged in the business of investing in and managing real estate properties and the making of high-yield, short-
term loans secured by desirable properties. Engineered products are manufactured through wholly-owned subsidiaries of the Company and primarily consist of knitted wire products and components and transformer products.
Operating information on the Company's business segments for the years ended December 31, 2001, 2000, and 1999 is as follows:
2001 2000 1999 ---------------- --------------- -------------- Net revenues and sales: Real estate investment and management $27,804 $28,237 $29,202 Engineered products 33,792 34,095 30,500 ---------------- --------------- --------------
$61,596 $62,332 $59,702 ================ =============== ==============
Operating income: Real estate investment and management $13,970 $14,147 $14,079 Engineered products 1,912 2,261 1,855 ---------------- --------------- --------------
15,882 16,408 15,934
General corporate expenses (2,256) (2,153) (2,848) Other income, net 18,347 11,463 9,538 ---------------- --------------- --------------
Income before income taxes $31,973 $25,718 $22,624 ================ =============== ==============
2001 2000 1999 ---------------- --------------- -------------- Depreciation and amortization expense: Real estate investment and management $4,175 $4,993 $5,210 Engineered products 745 772 737 General corporate expenses 685 563 681 ---------------- --------------- -------------- $5,605 $6,328 $6,628 ================ =============== ==============
Mortgage interest expense: Real estate investment and management $1,796 $2,232 $2,620 ================ =============== ==============
Sales by the Company's engineered products segment to automobile original equipment manufacturers accounted for approximately 13.3%, 19.9%, and 19.4% of 2001, 2000, and 1999 consolidated revenues, respectively. Sales by this segment to its largest customer (in excess of 10.0% of the segment's net sales) accounted for 14.0%, 15.8%, and 17.0% of the segment's sales for 2001, 2000, and 1999, respectively.
Approximately 8.3%, 13.1%, and 14.5% of 2001, 2000, and 1999 total sales generated from the engineered products segment were from foreign customers. Substantially all assets held by the Company's engineered products segment are located within the United States. In 1999 manufacturing operations of this segment were commenced at a leased facility in Mexico.
Selected information on the Company's business segments as of December 31, 2001 and 2000 is as follows:
2001 2000 ------------- ------------ Identifiable assets: Real estate investment and management and corporate assets $166,562 $136,189 Engineered products 12,429 11,807 ------------- ------------ $178,991 $147,996 ============= ============
Additions to long-lived assets: Real estate investment and management $2,537 $1,244 Engineered products 564 321 ------------- ------------
$3,101 $1,565 ============= ============
Included in the identifiable assets of the real estate investment and management segment at December 31, 2001 and 2000 is approximately $0 and $3,500, respectively, of a high yield mortgage loan (see Note 5). Income generated by this loan receivable is included in interest income.
(18) Commitments and Contingencies: ------------------------------
The Company is a lessor of 11 department stores that are currently leased or sub-leased to K-Mart Corporation ("K-Mart"), which filed for protection under Chapter 11 of the U.S. Bankruptcy Code on January 22, 2002. In addition, the Company holds a 50% interest in a joint venture that owns two distribution centers that are also leased to K-Mart. Although it is currently uncertain which leases, if any, K-Mart will reject or affirm as part of its reorganization, management believes that its leases and the leases of the joint venture with K-Mart are at or below the fair market rent for comparable properties and as a result, the rejection of one or more leases is not expected to have a material adverse effect on the consolidated financial position of the Company.
The Company has undertaken the completion of environmental studies and/or remedial action at Metex' two New Jersey facilities. The Company has recorded a liability, which is included in other long-term liabilities, in the Consolidated Financial Statements for the estimated potential remediation costs at these facilities.
The process of remediation has begun at one facility pursuant to a plan filed with the New Jersey Department of Environmental Protection ("NJDEP"). Environmental experts engaged by the Company estimate that under the most probable remediation scenario the remediation of this site is anticipated to require initial expenditures of $860, including the cost of capital equipment, and $86 in annual operating and maintenance costs over a 15 year period.
Environmental studies at the second facility indicate that remediation may be necessary. Based upon the facts presently available, environmental experts have advised the Company that under the most probable remediation scenario, the estimated cost to remediate this site is anticipated to require $2,300 in initial costs, including capital equipment expenditures, and $258 in annual operating and maintenance costs over a 10 year period. These estimated costs of future expenses for environmental remediation obligations are not discounted to their present value. The Company may revise such estimates in the future due to the uncertainty regarding the nature, timing and extent of
any remediation efforts that may be required at this site, should an appropriate regulatory agency deem such efforts to be necessary.
The foregoing estimates may also be revised by the Company as new or additional information in these matters become available or should the NJDEP or other regulatory agencies require additional or alternative remediation efforts in the future. It is not currently possible to estimate the range or amount of any such liability.
Although the Company believed that it was entitled to full defense and indemnification with respect to environmental investigation and remediation costs under its insurance policies, the Company's insurers denied such coverage. Accordingly, the Company filed an action against certain insurance carriers seeking defense and indemnification with respect to all prior and future costs incurred in the investigation and remediation of these sites. Settlements have been reached with all carriers in this matter.
In the opinion of management, amounts recovered from its insurance carriers under the terms of its settlement agreements should be sufficient to address these matters and amounts needed in excess, if any, will be paid gradually over a period of years. Accordingly, they should not have a material adverse effect upon the business, liquidity or financial position of the Company. However, adverse decisions or events, particularly as to the merits of the Company's factual and legal basis could cause the Company to change its estimate of liability with respect to such matters in the future.
In 1998, the Company acquired a property subject to certain contingent liabilities which were estimated and capitalized at the time of acquisition. During 2000, these liabilities were resolved for approximately $1,000 less than originally estimated. As a result, real property held for rental and other long-term liabilities were reduced accordingly.
The Company is subject to various other litigation, legal and regulatory matters that arise in the ordinary course of business activities. When management believes it is probable that a liability has been incurred and such amounts are reasonably estimable the Company provides for amounts that include judgments and penalties that may be assessed. These liabilities are usually included in accounts payable and accrued liabilities or other long-term liabilities in the accompanying 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.
SCHEDULE II
UNITED CAPITAL CORP. AND SUBSIDIARIES ------------------------------------- ALLOWANCE FOR DOUBTFUL ACCOUNTS ------------------------------- (In Thousands) --------------
Write-offs Net of Charged Recoveries Balance to of Accounts Balance at Costs and Previously at Beginning Expenses Written End of of Period Off Period ---------------- ------------------ ---------------- -----------------
Allowance for doubtful accounts:
Year ended December 31, 2001 $328 $0 $0 $328
Year ended December 31, 2000 390 0 62 328
Year ended December 31, 1999 390 0 0 390
The accompanying Notes to Consolidated Financial Statements are an integral part of these schedules.
SCHEDULE III UNITED CAPITAL CORP. AND SUBSIDIARIES ------------------------------------- REAL PROPERTY HELD FOR RENTAL AND ACCUMULATED DEPRECIATION ---------------------------------------------------------- DECEMBER 31, 2001 ----------------- (In Thousands) --------------
Gross Amount at Which Initial Cost to Company Costs Carried at Close of Period Mortgage ------------------------ Capitalized ------------------------------------ Loans Subsequent to Payable Building and Acquisition/ Building and Description (Gross) Land Improvements Improvements Land Improvements Total(a),(c) ------------------------------------- ------------ ---------- ------------- ----------- -------- ----------- --------------
Shopping Centers and Retail Outlets: Culver, CA $2,784 $842 $7,576 $0 $842 $7,576 $8,418 Northbrook, IL 3,128 898 8,075 0 898 8,075 8,973 Miscellaneous Investments 9,622 4,464 38,995 1,963 4,464 40,958 45,422 ------------ ---------- ------------ ----------- --------- ----------- -------------
15,534 6,204 54,646 1,963 6,204 56,609 62,813 ------------ ---------- ------------ ----------- --------- ----------- -------------
Commercial Properties: Miscellaneous Investments 6,110 8,745 35,313 709 8,745 36,022 44,767 Day Care Centers and Offices: Miscellaneous Investments 100 643 5,292 1,932 643 7,224 7,867 Hotel Properties: Miscellaneous Investments 0 1,712 2,868 48 1,712 2,916 4,628 Other: Miscellaneous Investments 0 2,618 630 1,084 2,618 1,714 4,332 ------------ ---------- ------------ ----------- --------- ----------- -------------
$21,744 $19,922 $98,749 $5,736 $19,922 $104,485 $124,407 ============ ========== ============ =========== ========= =========== =============
Life on Which Depreciation in Latest Statement of Accumulated Date of Date Income is Description Depreciation (b) Construction Acquired Computed (Years) ------------------------------------- --------------------------------------------------------------------
Shopping Centers and Retail Outlets: Culver, CA $6,287 N/A 1986 18 Northbrook, IL 6,562 N/A 1987 18 Miscellaneous Investments 30,155 N/A 1986-98 12-39 ------------------
43,004 ------------------
Commercial Properties: Miscellaneous Investments 18,666 N/A 1986-98 5-39 Day Care Centers and Offices: Miscellaneous Investments 5,941 N/A 1986-91 5-39 Hotel Properties: Miscellaneous Investments 2,884 N/A 1986-99 7-10 Other: Miscellaneous Investments 1,042 N/A 1986-97 10-39 ------------------
$71,537 ==================
Notes:
(a) Reconciliations of the carrying value of real property held for rental for the three years ended December 31, 2001 are as follows:
2001 2000 1999 ------------- ------------- ------------------
Real property held for rental at beginning of period $130,995 $138,192 $140,102 Additions during the period: Acquisitions and improvements 1,774 767 2,304 ------------- ------------- ------------------
132,769 138,959 142,406 Deductions during the period: Cost of real estate sold 8,362 6,951 4,214 Other (see Note 2) 0 1,013 0 ------------- ------------- ------------------
$124,407 $130,995 $138,192 ============= ============= ==================
(b) Reconciliations of accumulated depreciation for the three years ended December 31, 2001 are as follows:
2001 2000 1999 ------------- ------------- ------------------
Accumulated depreciation at beginning of period $73,862 $71,253 $68,665 Additions during the period: Provision for depreciation 4,175 4,993 5,210 ------------- ------------- ------------------
78,037 76,246 73,875 Deductions during the period: Accumulated depreciation of real estate sold 6,500 2,384 2,622 ------------- ------------- ------------------
$71,537 $73,862 $71,253 ============= ============= ==================
(c) The aggregate cost for federal income tax purposes is approximately $170,075.
The accompanying Notes to Consolidated Financial Statements are an integral part of these schedules.
SCHEDULE IV UNITED CAPITAL CORP. AND SUBSIDIARIES ------------------------------------- MORTGAGE LOANS ON REAL ESTATE ----------------------------- DECEMBER 31, 2001 ----------------- (In Thousands) --------------
Final Description Interest Rate Maturity Date Periodic Payment Terms ----------------------------------------------- ----------------------- -------------- ----------------------------------
Mortgage loans secured by commercial property:
Augusta Georgia (b) 9.0% December 2008 Principal and interest due monthly Atlanta, Georgia Varies from 10.0%-14.0% April 2006 Principal and interest due monthly Philadelphia, Pennsylvania Varies from 9.0%-12.0% January 2005 Principal and interest due monthly
Principal Amount of Carrying Loans Subject Face Amount of to Delinquent Prior Amount of Mortgages Principal Description Liens Mortgages (a), (c) or Interest ----------------------------------------------- ---------- ---------- ----------- --------------
Mortgage loans secured by commercial property:
Augusta Georgia (b) $0 $45 $9 $0 Atlanta, Georgia 0 31 28 0 Philadelphia, Pennsylvania 0 77 49 0 --------- ---------- ----------- --------------
$0 $153 $86 $0 ========= ========== =========== ==============
(a) A reconciliation of mortgage loans on real estate for the year ended December 31, 2001 is as follows:
Balance at beginning of period $3,585 Additions during the period: New mortgage loans 31 Deductions during the period: Collection of principal (3,530) ------------- Balance at end of period $86 =============
(b) In accordance with generally accepted accounting principles the gain from the sale of real property is being recognized under the installment method and, accordingly, notes receivable have been reduced by $20 in deferred gains at December 31, 2001.
(c) The carrying value for federal income tax purposes is substantially equal to the carrying amount for book purposes.
The accompanying Notes to Consolidated Financial Statements are an integral part of these schedules.
UNITED CAPITAL CORP. AND SUBSIDIARIES ------------------------------------- QUARTERLY FINANCIAL DATA ------------------------ (Unaudited) ----------- (Dollars In Thousands, Except Per Share Data) ---------------------------------------------
First Second Third Fourth Quarter Quarter Quarter Quarter ------------------ ------------------ --------------- ------------------
For the year 2001: Revenues $16,966 $15,646 $14,909 $14,075 ================== ================== =============== ==================
Costs and expenses $12,694 $12,647 $11,630 $10,999 ================== ================== =============== ==================
Other income $4,323 $279 $5,374 $8,371 ================== ================== =============== ==================
Net income $5,115 $2,008 $5,193 $6,656 ================== ================== =============== ==================
Net income per common share: Basic $1.09 $.43 $1.11 $1.43 ================== ================== =============== ================== Diluted $1.06 $.41 $1.05 $1.36 ================== ================== =============== ==================
For the year 2000: Revenues $15,098 $16,070 $15,589 $15,575 ================== ================== =============== ==================
Costs and expenses $11,949 $12,346 $12,098 $11,684 ================== ================== =============== ==================
Other income $3,087 $2,932 $4,191 $1,253 ================== ================== =============== ==================
Net income $3,681 $3,821 $4,672 $6,104 ================== ================== =============== ==================
Net income per common share: Basic $.78 $.81 $.99 $1.29 ================== ================== =============== ================== Diluted $.77 $.81 $.97 $1.27 ================== ================== =============== ==================