SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ending March 31, 1998
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or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
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Commission File Number: 1-10104
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United Capital Corp.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-2294493
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9 Park Place, Great Neck, New York 11021
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
516-466-6464
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, $.10 par value 5,202,447 shares outstanding
as of May 8, 1998.
Page 1 of 18
<PAGE>
UNITED CAPITAL CORP. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION
PAGE
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as
of March 31, 1998 and December 31, 1997 3
Consolidated Statements of Income for
the Three Months Ended March 31, 1998 and 1997 4 - 5
Consolidated Statements of Cash Flows for
the Three Months Ended March 31, 1998 and 1997 6 - 7
Notes to Consolidated Financial Statements 8 - 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12 - 17
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 17 - 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURES 18
Page 2 of 18
<PAGE>
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1998 (UNAUDITED) AND
DECEMBER 31, 1997
(In Thousands)
<TABLE>
<CAPTION>
ASSETS 1998 1997
------ ---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 12,598 $ 5,250
Marketable securities 350 355
Notes and accounts receivable, net 10,612 11,319
Inventories 3,289 3,693
Prepaid expenses and other current assets 426 292
Deferred income taxes 1,220 1,219
Net current assets of discontinued operations 0 4,492
-------- --------
Total current assets 28,495 26,620
-------- --------
PROPERTY, PLANT AND EQUIPMENT, net 4,077 4,299
REAL PROPERTY HELD FOR RENTAL, net 59,508 58,578
NONCURRENT NOTES RECEIVABLE 7,337 7,356
OTHER ASSETS 11,267 11,185
DEFERRED INCOME TAXES 2,980 2,966
NET NONCURRENT ASSETS OF DISCONTINUED OPERATIONS
0 2,349
-------- --------
Total assets $113,664 $113,353
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
- ------------------------------------ ---- ----
CURRENT LIABILITIES:
Current maturities of long-term debt $ 5,237 $ 5,232
Current portion of borrowings under credit facilities 1,400 6,000
Accounts payable and accrued liabilities 11,048 14,129
Income taxes payable 10,011 5,872
-------- --------
Total current liabilities 27,696 31,233
-------- --------
LONG-TERM LIABILITIES:
Borrowings under credit facilities 4,900 5,250
Long-term debt 25,298 26,560
Other long-term liabilities 12,769 12,830
-------- --------
Total liabilities 70,663 75,873
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock 521 528
Additional paid-in capital 5,087 6,819
Retained earnings 37,260 29,997
Net unrealized gain on marketable securities, net of tax 133 136
-------- --------
Total stockholders' equity 43,001 37,480
-------- --------
Total liabilities and stockholders' equity $113,664 $113,353
======== ========
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE BALANCE SHEETS.
Page 3 of 18
<PAGE>
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended
------------------
1998 1997
---- ----
<S> <C> <C>
REVENUES:
Net sales $ 8,306 $ 9,574
Rental revenues from real estate operations 6,242 5,626
-------- --------
Total revenues 14,548 15,200
-------- --------
COSTS AND EXPENSES:
Costs of sales 5,884 6,970
Real estate operations -
Mortgage interest expense 693 811
Depreciation expense 1,399 1,491
Other operating expenses 711 1,586
General and administrative expenses 1,123 1,702
Selling expenses 937 1,080
-------- --------
Total costs and expenses 10,747 13,640
-------- --------
Operating income 3,801 1,560
-------- --------
OTHER INCOME:
Interest income 395 644
Interest expense (223) (378)
Other income and expense, net 177 2,523
-------- --------
Total other income 349 2,789
-------- --------
Income from continuing operations before income taxes 4,150 4,349
Provision for income taxes 1,736 1,963
-------- --------
Income from continuing operations 2,414 2,386
-------- --------
</TABLE>
Page 4 of 18
<PAGE>
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (Continued)
(UNAUDITED)
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended
------------------
1998 1997
---- ----
<S> <C> <C>
DISCONTINUED OPERATIONS:
Operating income, net of tax provision of ($191) $ 0 $ 249
Gain on disposal of discontinued operations, net of
tax provision of ($3,700) 4,849 0
--------- ---------
Income from discontinued operations, net of tax 4,849 249
--------- ---------
Net Income $ 7,263 $ 2,635
========= =========
BASIC EARNINGS PER COMMON SHARE:
Income from continuing operations $ .46 $ .45
Discontinued operations .92 .05
--------- ---------
Net income per common share $ 1.38 $ .50
========= =========
DILUTED EARNINGS PER COMMON SHARE:
Income from continuing operations $ .45 $ .45
Discontinued operations .90 .05
--------- ---------
Net income per common share-assuming dilution $ 1.35 $ .50
========= =========
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE STATEMENTS
Page 5 of 18
<PAGE>
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
(In Thousands)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 7,263 $ 2,635
-------- -------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Gain on sale of discontinued operations (4,849) 0
Purchase of trading securities (5,891) 0
Proceeds from sale of trading securities 5,966 0
Depreciation and amortization 1,604 1,699
Loss from equity investments 126 61
Net realized gains on trading securities (75) 0
Changes in assets and liabilities (A) (4,217) 3,079
-------- -------
Total adjustments (7,336) 4,839
-------- -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (73) 7,474
-------- -------
Cash Flows from Investing Activities:
Proceeds from sale of discontinued operations 16,000 0
Acquisition of property, plant and equipment (401) (524)
Investment in and advances to affiliates (231) (5,407)
Investing activities of discontinued operations 0 (115)
-------- -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 15,368 (6,046)
-------- -------
Cash Flows from Financing Activities:
Principal payments on mortgage commitments, notes and loans (1,257) (1,792)
Net borrowings under credit facilities (4,950) 1,300
Purchase and retirement of common shares (1,740) (657)
Financing activities of discontinued operations 0 (139)
-------- -------
NET CASH USED IN FINANCING ACTIVITIES (7,947) (1,288)
-------- -------
Net increase in cash and cash equivalents 7,348 140
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD 5,250 2,579
-------- -------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 12,598 $ 2,719
======== =======
</TABLE>
Page 6 of 18
<PAGE>
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (Continued)
(UNAUDITED)
(In Thousands)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Supplemental Disclosures of Cash Flow
Information:
Cash Paid During the Period For:
Interest $ 908 $ 1,406
Taxes 828 97
======= =======
Supplemental Schedule of Noncash Investing
and Financing Activities:
See Notes to Consolidated Financial Statements
(A) Changes in assets and liabilities for the three
months ended March 31, 1998 and 1997, net of
effects from business disposals, are as follows:
Decrease (increase) in notes and accounts receivable, net $ 707 ($ 476)
Decrease in inventories 404 433
Decrease (increase) in prepaid expenses
and other current assets (134) 111
Increase in deferred income taxes (13) (752)
Decrease (increase) in real property held for rental, net (1,911) 3,212
Decrease in noncurrent notes receivable 19 21
Decrease (increase) in other assets 23 (138)
Decrease in accounts payable and
accrued liabilities (3,690) (1,145)
Increase in income taxes payable 439 1,269
Decrease in other long-term liabilities (61) (28)
Discontinued operations - noncash charges and working
capital changes 0 572
------- -------
Total ($4,217) $ 3,079
======= =======
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE
AN INTEGRAL PART OF THESE STATEMENTS
Page 7 of 18
<PAGE>
UNITED CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(In Thousands, Except Share And Per Share Data)
BASIS OF PRESENTATION
- ---------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q used for quarterly
reports under Section 13 or 15(d) of the Securities Exchange Act of 1934, and
therefore, do not include all information and footnotes necessary for a fair
presentation of financial position, results of operations and cash flows in
conformity with generally accepted accounting principles.
The consolidated financial information included in this report has been
prepared in conformity with the accounting principles and methods of applying
those accounting principles, reflected in the consolidated financial statements
included in the Annual Report on Form 10-K filed with the Securities and
Exchange Commission for the year ended December 31, 1997.
All adjustments necessary for a fair statement of the results for the
interim periods presented have been recorded.
The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the full year.
DISPOSAL OF OPERATING COMPANY
- -----------------------------
On January 2, 1998, the Registrant completed the sale of the stock of
its Dorne & Margolin, Inc. ("D&M") subsidiary to AIL Systems, Inc. for $16
million in cash, resulting in a pretax gain from discontinued operations of
approximately $8.6 million for the quarter ended March 31, 1998. The net assets
and operating results of D&M are presented as a discontinued operation in the
accompanying consolidated financial statements for periods prior to the sale.
Net current assets of discontinued operations consisted primarily of inventory
and accounts receivable, partially offset by accounts payable and accrued
expenses. Net noncurrent assets of discontinued operations consisted primarily
of machinery and equipment. The Registrant retained D&M's 90,000 square foot
manufacturing facility in Bohemia, New York, which has been reclassified to real
property held for rental in the accompanying consolidated financial statements.
Page 8 of 18
<PAGE>
INVENTORIES
- -----------
The components of inventory are as follows:
March 31, 1998 December 31, 1997
-------------- -----------------
Raw materials $1,348 $1,959
Work in process 346 265
Finished goods 1,595 1,469
------ ------
$3,289 $3,693
====== ======
CONTINGENCIES
- -------------
The Registrant has undertaken the completion of environmental studies
and/or remedial action at Metex' two New Jersey facilities.
The process of remediation has begun at one facility pursuant to a plan
filed with the New Jersey Department of Environmental Protection and Energy
("NJDEPE"). Environmental experts engaged by the Registrant 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 Registrant 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, in annual operating and maintenance costs over a 10-year period. The
Registrant 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 Registrant as new or
additional information in these matters becomes available or should the NJDEPE
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 Registrant believes that it is entitled to full defense
and indemnification with respect to environmental investigation and remediation
costs under its insurance policies, the Registrant's insurers have denied such
coverage. Accordingly, the Registrant has 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.
Upon the advice of counsel, the Registrant believes that based upon a present
understanding of the facts and the present state of the law in New Jersey, it is
probable that the Registrant will prevail in the pending litigation and thereby
access all or a very substantial portion of the insurance coverage it claims;
however, the ultimate outcome of litigation cannot be predicted.
Page 9 of 18
<PAGE>
At March 31, 1998 and December 31, 1997, a total of $2.9 million in
anticipated insurance recoveries is recorded in the accompanying consolidated
financial statements and is included in other assets. Additionally, in 1995 the
Company received approximately $4.1 million of insurance recoveries. The
remaining balance of $2.9 million at March 31, 1998 (from a total of $7 million)
is in dispute with the Registrant's insurance carriers. Management believes that
recoveries in excess of the amounts reflected in the accompanying consolidated
financial statements, are available under the insurance policies but have not
been recorded. There can be no assurance, however, that the Registrant will
prevail in its efforts to obtain amounts at or in excess of the estimated
recoveries.
In the opinion of management, these matters will be resolved favorably
and such amounts, if any, not recovered under the Registrant's insurance
policies will be paid gradually over a period of years and, accordingly, should
not have a material adverse effect upon the business, liquidity or financial
position of the Registrant. However, adverse decisions or events, particularly
as to the merits of the Registrant's factual and legal basis could cause the
Registrant to change its estimate of liability with respect to such matters in
the future.
The Registrant is involved in various other litigation and legal
matters which are being defended and handled in the ordinary course of business.
See Part II Other Information - Item 1. Legal Proceedings for discussion of
Rosatelli vs. United Capital Corp. None of these matters are expected to result
in a judgment having a material adverse effect on the Registrant's consolidated
financial position or results of operations.
EARNINGS PER SHARE
- ------------------
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share" ("SFAS No. 128"). SFAS No. 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share gives effect to all potentially dilutive common shares that were
outstanding during the period. Earnings per share amounts have been presented,
and where appropriate, restated to conform to the SFAS No. 128 requirements.
Page 10 of 18
<PAGE>
The following table sets forth the computation of basic and diluted earnings
per share-
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997
------ ------
<S> <C> <C>
Numerator-
Income from continuing operations $2,414 $2,386
------ ------
Denominator-
Denominator for basic earnings per
share -weighted-average share 5,250 5,299
Effect of dilutive securities-
Employee stock options 139 17
------ ------
Denominator for diluted earnings per
share-adjusted weighted-average
shares and assumed conversions
5,389 5,316
------ ------
Basic earnings per share $ .46 $ .45
====== ======
Diluted earnings per share $ .45 $ .45
====== ======
</TABLE>
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), which
establishes standards for reporting comprehensive income and its components. The
provisions of SFAS No. 130 are not material to the Registrant and accordingly, a
statement of comprehensive income has not been included in the consolidated
financial statements.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"), which establishes standards for the way that
companies report information about operating segments in annual financial
statements and requires that companies report selected information about
operating segments in interim financial reports, based on the approach that
management utilizes to organize the segments within the Registrant for
management reporting and decision making. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. SFAS No. 131 is effective for financial statements for fiscal years
beginning after December 15, 1997. Financial statement disclosures for prior
periods are required to be restated. The Registrant is in the process of
evaluating the disclosure requirements. The adoption of SFAS No. 131 will have
no impact on the Registrant's consolidated results of operations, financial
position or cash flows.
Page 11 of 18
<PAGE>
USE OF ESTIMATES
- ----------------
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
RECLASSIFICATIONS
- -----------------
Certain amounts have been reclassified in the prior year consolidated
financial statements to present them on a basis consistent with the current
year.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
- ------------------------------------------
Revenues for the three month period ended March 31, 1998 were $14.5
million, a $652,000 or 4% decrease from comparable 1997 revenues. Income from
continuing operations during this period was $2.4 million or $.46 per share
versus $2.4 million or $.45 per share during the comparable period in 1997. On
January 2, 1998, the Registrant completed the sale of its antenna business to
AIL Systems Inc. for $16 million in cash, resulting in a pretax gain from
discontinued operations of approximately $8.6 million or $.92 per share on an
after tax basis. Net income for the period was $7.3 million or $1.38 per share
as compared to net income of $2.6 million or $.50 per share for the same period
in 1997.
REAL ESTATE OPERATIONS
- ----------------------
Rental revenues from real estate operations increased by $616,000 for
the three months ended March 31, 1998 compared to the same period in 1997. The
increase is primarily attributable to revenues associated with properties
acquired in 1997.
Mortgage interest expense decreased $118,000 or 15% for the three
months ended March 31, 1998, versus such expense of the corresponding period in
1997. This decrease is due to continuing mortgage amortization which
approximated $5 million during the last twelve months, including repayments
associated with properties sold.
Depreciation expense associated with rental properties decreased
$92,000 for the three months ended March 31, 1998 versus the corresponding
period in 1997. This decrease is primarily due to reduced depreciation expense
associated with properties sold in 1997, partially offset by depreciation
expense on acquisitions.
Page 12 of 18
<PAGE>
Operating expenses associated with the management of real properties
decreased $875,000 for the quarter ended March 31, 1998 as compared to the same
period in 1997 principally due to a one time adjustment associated with real
estate tax abatements.
ENGINEERED PRODUCTS
- -------------------
The Registrant's engineered products segment includes Metex Corporation
and AFP Transformers, Inc. The operating results of the engineered products
segment are as follows:
Three Months
(In Thousands) Ended March 31,
-----------------------
1998 1997
------ ------
Net Sales $8,306 $9,574
====== ======
Cost of Sales $5,884 $6,970
====== ======
Selling, General and
Administrative Expenses $1,622 $1,798
====== ======
Income from Operations $ 800 $ 806
====== ======
Net sales of the engineered products segment decreased $1.3 million or
13% for the three month period ended March 31, 1998 as compared to the same
period in 1997. The decrease is primarily attributable to continued price
competition and declining worldwide automotive sales for knitted wire products.
Cost of sales as a percentage of net sales decreased by approximately
2% in the three month period ended March 31, 1998, as compared to the
corresponding period in 1997. This decrease is principally due to an emphasis on
cost containment, productivity improvements and product mix.
Selling, general and administrative expenses of the engineered products
segment decreased $176,000 or 10% during the quarter ended March 31, 1998 versus
the comparable 1997 period. This decrease is due to reduced selling expenses,
primarily salary and salary related expenses.
Page 13 of 18
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES
- -----------------------------------
General and administrative ("G&A") expenses not associated with the
manufacturing operations decreased by $546,000 for the three month period ended
March 31, 1998, versus the same period in 1997. These reductions are principally
due to a nonrecurring charge recorded in the 1997 period as well as a one time
expense reduction in 1998. Absent these two items, general and administrative
expenses not associated with manufacturing operations approximated prior year
amounts.
OTHER INCOME AND EXPENSE
- ------------------------
The components of other income and expense in the accompanying
consolidated statements of income are as follows:
Three Months
(In Thousands) Ended March 31,
---------------
1998 1997
---- ----
Gain on sale of real estate assets $ 221 $ 2,584
Loss from equity investments (126) (61)
Gain on sale of marketable securities 75 0
Other 7 0
------- -------
$ 177 $ 2,523
======= =======
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The current liabilities of the Registrant 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. At March 31, 1998, the Registrant had positive working capital of
approximately $800,000 principally due to the sale of D&M on January 2, 1998 for
$16 million in cash. A portion of these proceeds along with existing cash
balances were utilized in the quarter ended March 31, 1998 for general corporate
purposes and to pay down debt of approximately $6 million, to purchase and
retire common shares of approximately $1.7 million and for acquisitions of real
property held for rental of approximately $1.9 million. It is anticipated that
the remaining cash balances will be reinvested into the Registrant's businesses
during 1998 and that 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
revolving credit facility discussed below and the sale of select assets, all
obligation will be satisfied as they come due.
Page 14 of 18
<PAGE>
The Registrant's Credit Agreement with two banks provides for both a $7
million term loan ("Term Loan") and a $40 million revolving credit facility
("Revolver"). Under the terms of the Credit Agreement, the Registrant will be
provided with eligibility based upon the sum of (i) 50% of the aggregate
annualized and normalized year-to-date net operating income of eligible
properties, as defined, capitalized at 11.5% and (ii) the lesser of $12 million
or the sum of 75% of eligible accounts receivable and 50% of eligible inventory,
as defined. Eligibility is also limited by amounts outstanding under the Term
Loan. At March 31, 1998 eligibility under the Revolver was $40 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). At
March 31, 1998, the Registrant was in compliance with all covenants. The Credit
Agreement also contains provisions which allow the lenders to perfect a security
interest in certain operating and real estate assets in the event of the
default, as defined under the terms of the Credit Agreement. Borrowings under
the Revolver, at the Registrant's option, bear interest at the bank's prime
lending rate ("Prime") or at the London Interbank Offered Rate ("LIBOR") plus
1.75% while borrowings under the Term Loan bear interest at 90 day LIBOR plus
1.4%. The Term Loan is payable in quarterly principal installments of $350,000
with the final payment due on September 30, 2002. The Revolver expires on
January 15, 2000. In January 1998, the Registrant paid all amounts outstanding
under the Revolver. At March 31, 1998, $6.3 million was outstanding on the Term
Loan.
Also, the Registrant has an interest-rate swap agreement that
effectively converts its floating rate Term Loan to a fixed rate basis, thus
reducing the impact of interest rate changes on future expense. Under the swap
agreement, the Registrant agreed to exchange with the counterparty (a commercial
bank) the difference between the fixed and floating rate interest amounts. The
differential to be paid or received on the interest rate swap is recognized over
the term of the agreement as an adjustment to interest expense. The fair value
of the swap agreement is not recognized in the financial statements.
Management is confident that with the available cash resources
discussed above and cash generated by operations, all obligations will be
satisfied as they become due.
The Registrant has undertaken the completion of environmental studies
and/or remedial action at Metex' two New Jersey facilities and has filed an
action against certain insurance carriers seeking recovery of costs incurred and
to be incurred in these matters. Based upon the advice of counsel, management
believes such recovery is probable and therefore should not have a material
effect on the liquidity or capital resources of the Registrant. However, the
ultimate outcome of litigation cannot be predicted. To date settlements have
been reached with several carriers in this matter. See Notes to consolidated
financial statements.
At March 31, 1998 and December 31, 1997 a total of $2.9 million in
anticipated insurance recoveries has been recorded in the accompanying
consolidated financial statements and is included in other assets. Additionally,
in 1995 the Registrant received approximately $4.1 million of
Page 15 of 18
<PAGE>
insurance recoveries. The remaining balance of $2.9 million at March 31, 1998
(from a total of $7 million) is in dispute with the Registrant's insurance
carriers. Management believes that recoveries in excess of the amounts reflected
in the accompanying consolidated financial statements, are available under the
insurance policies but have not been recorded. There can be no assurance,
however, that the Registrant will prevail in its efforts to obtain amounts at or
in excess of the estimated recoveries.
The cash needs of the Registrant have been satisfied from funds
generated by current operations and additional borrowings. It is expected that
future operational cash needs will also be satisfied from existing cash
balances, ongoing operations and additional borrowings on the Revolver. The
primary source of capital to fund additional real estate acquisitions and to
make additional high-yield mortgage loans will come from the sale, financing and
refinancing of the Registrant's properties and from the 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 Registrant may acquire
real properties in exchange for the issuance of the Registrant's equity
securities. The Registrant 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 Registrant in excess of that needed for working capital,
purchasing real estate and arranging financing for real estate acquisitions are
invested by the Registrant in corporate equity securities, corporate notes,
other financial instruments, certificates of deposit and government securities.
BUSINESS TRENDS
- ---------------
Total revenues of the Registrant decreased $652,000 or 4% for the first
three months of 1998 versus such results of the comparable 1997 period
principally due to a decline in revenues from the Registrant's engineered
products segment. Income from continuing operations for the first three months
of 1998 was approximately $2.4 million or $.46 per share versus $2.4 million or
$.45 per share during the same period in 1997.
The results of the Registrant's real estate operations reflect an
increase in revenues for the first three months of 1998, primarily as a result
of revenues associated with properties acquired in 1997. The real estate segment
was also favorably impacted by a 15% reduction in mortgage interest expense
resulting from the repayment of approximately $5 million in mortgage
indebtedness during the last twelve months. Mortgage amortization will continue
to have favorable impact on this segment and will reduce current mortgage
indebtedness to virtually zero in less than eight years.
Page 16 of 18
<PAGE>
The Registrant's engineered products segment posted a 13% decrease in
revenues during the first three months of 1998 versus comparable 1997 results.
With continued decreases in worldwide automobile sales, management is pursuing
new sales opportunities including new geographical markets for its existing
products and new applications for its core technologies. In addition, the
results of this segments' transformer operations reflect significant
improvements over the prior year and management is hopeful to continue this
trend.
YEAR 2000 CONVERSION
- --------------------
The Registrant currently believes that its essential processes, systems
and business functions will be ready for the millennium transition and is taking
the necessary steps to accomplish this objective. The Year 2000 issue is not
anticipated to have a material impact on the Registrant's results of operations,
financial position or its cash flows.
FORWARD-LOOKING STATEMENTS
- --------------------------
This Form 10-Q 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 uncertainty, including without limitation, general economic
conditions, competition, potential technology changes and potential changes in
customer spending and purchasing policies and procedures. Although the
Registrant 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-Q 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 Registrant or any other person that the objectives and
plans of the Registrant will be achieved.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Rosatelli vs. United Capital Corp.
- ----------------------------------
In August 1996, Dennis Rosatelli, the Registrant's former Chief
Financial Officer commenced an action in Superior Court of New Jersey, Law
Division, Bergen County ("Superior Court"), seeking, among other things, payment
under his employment contract, and indemnification for claims against him by the
Internal Revenue Service and other matters in connection with his tenure. In
March 1997, Mr. Rosatelli amended his compliant to include Bank of America
Illinois, Metex Corporation, Kentile Inc., A.F. Petrocelli and another officer
of Kentile as additional defendants. The Registrant believes that as a result of
Mr. Rosatelli's gross negligence, recklessness and/or willful disregard of his
duties and responsibilities, Mr. Rosatelli is not entitled to the
Page 17 of 18
<PAGE>
recoveries he seeks. Mr. Rosatelli's employment was terminated by the Registrant
in May, 1996 for cause. The matter was removed to United States District Court,
District of New Jersey in October 1996. In March 1998 the U.S. District Court
dismissed certain of Mr. Rosatelli's claims and remanded the remainder of the
action back to Superior Court. This action is in the early stages of pretrial
discovery. The Registrant intends to vigorously defend this action and has
asserted counterclaims against Mr. Rosatelli for, among other things, the set
off of amounts by which he has damaged the Registrant against his claims under
his employment contract.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K. The Registrant filed a report on Form 8-K with
the Securities and Exchange Commission on January 8, 1998 in response
to Item 7. Financial Statements, Proforma Financial Information and
Exhibits.
The Registrant filed a report on Form 8-K/A with the Securities and
Exchange Commission on March 16, 1998 in response to Item 7. Financial
Statements, Proforma Financial Information and Exhibits.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
UNITED CAPITAL CORP.
Dated: May 11, 1998 By: /s/ Anthony J. Miceli
---------------------
Anthony J. Miceli
Vice President, Chief Financial Officer
and Secretary of the Registrant
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNITED
CAPITAL CORP.'S FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND NOTES, THERETO.
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<RECEIVABLES> 10,932
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