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 June 30, 1998
-------------------------------------------------
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________ to _______________
Commission File Number: 1-10104
--------------------------------------
United Capital Corp.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-2294493
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9 Park Place, Great Neck, New York 11021
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
516-466-6464
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities 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 5,203,447 shares outstanding
as of July 29, 1998.
Page 1 of 21
<PAGE>
UNITED CAPITAL CORP. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION
PAGE
----
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as
of June 30, 1998 and December 31, 1997 3
Consolidated Statements of Income for
the Three Months Ended June 30, 1998 and
1997 4-5
Consolidated Statements of Income for the Six
Months Ended June 30, 1998 and 1997 6-7
Consolidated Statements of Cash Flows for
the Six Months Ended June 30, 1998 and
1997 8-9
Notes to Consolidated Financial Statements 10-14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 14-19
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 20
ITEM 5. OTHER INFORMATION 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21
SIGNATURES 21
Page 2 of 21
<PAGE>
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 1998 AND DECEMBER 31, 1997
(In Thousands) (UNAUDITED)
<TABLE>
<CAPTION>
ASSETS 1998 1997
------ ---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 14,455 $ 5,250
Marketable securities 338 355
Notes and accounts receivable, net 8,426 11,319
Inventories 3,531 3,693
Prepaid expenses and other current assets 323 292
Deferred income taxes 1,225 1,219
Net current assets of discontinued operations 0 4,492
------- -------
Total current assets 28,298 26,620
------- -------
PROPERTY, PLANT & EQUIPMENT, net 4,028 4,299
REAL PROPERTY HELD FOR RENTAL, net 61,476 58,578
NONCURRENT NOTES RECEIVABLE 7,427 7,356
OTHER ASSETS 11,525 11,185
DEFERRED INCOME TAXES 2,620 2,966
NET NONCURRENT ASSETS OF
DISCONTINUED OPERATIONS 0 2,349
-------- --------
Total assets $115,374 $113,353
======== ========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
- ------------------------------------ ---- ----
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt $ 4,675 $ 5,232
Current portion of borrowings under credit facilities 1,400 6,000
Accounts payable and accrued liabilities 11,451 14,129
Income taxes payable 10,178 5,872
-------- -------
Total current liabilities 27,704 31,233
-------- -------
LONG-TERM LIABILITIES:
Borrowings under credit facilities 4,550 5,250
Long-term debt 24,172 26,560
Other long-term liabilities 12,764 12,830
-------- -------
Total liabilities 69,190 75,873
-------- -------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock 520 528
Additional paid-in capital 4,856 6,819
Retained earnings 40,683 29,997
Net unrealized gain on marketable securities, net of tax 125 136
-------- -------
Total stockholders' equity 46,184 37,480
-------- -------
Total liabilities and stockholders' equity $115,374 $113,353
======== ========
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE BALANCE SHEETS.
Page 3 of 21
<PAGE>
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
REVENUES:
Net sales $8,634 $9,630
Rental revenues from real estate operations 6,362 6,462
------ ------
Total Revenues 14,996 16,092
------ ------
COSTS AND EXPENSES:
Cost of sales 5,997 6,929
Real estate operations -
Mortgage interest expense 661 778
Depreciation expense 1,396 1,457
Other operating expenses 1,667 1,624
General and administrative expenses 2,052 1,414
Selling expenses 961 1,072
------ ------
Total costs and expenses 12,734 13,274
------ ------
Operating income 2,262 2,818
------ ------
OTHER INCOME:
Interest income 352 837
Interest expense (206) (436)
Other income and expense, net 3,607 122
------ ------
Total other income 3,753 523
------ ------
Income from continuing operations before income taxes 6,015 3,341
Provision for income taxes 2,592 1,455
------ ------
Income from continuing operations 3,423 1,886
------ ------
</TABLE>
Page 4 of 21
<PAGE>
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997 (Continued)
(UNAUDITED)
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
1998 1997
----- ----
<S> <C> <C>
DISCONTINUED OPERATIONS:
Operating income, net of tax provision of $121 $0 $104
------ ------
Income from discontinued operations, net of tax 0 104
------ ------
Net Income $3,423 $1,990
====== ======
BASIC EARNINGS PER COMMON SHARE:
Income from continuing operations $.66 $ .36
Discontinued operations .00 .02
------ ------
Net income per common share $.66 $ .38
====== ======
DILUTED EARNINGS PER COMMON SHARE:
Income from continuing operations $.64 $ .35
Discontinued operations .00 .02
------ ------
Net income per common share-assuming dilution $.64 $ .37
====== ======
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE STATEMENTS
Page 5 of 21
<PAGE>
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
REVENUES:
Net sales $16,940 $19,204
Rental revenues from real estate operations 12,604 12,088
------- -------
Total Revenues 29,544 31,292
------- -------
COSTS AND EXPENSES:
Cost of sales 11,881 13,899
Real estate operations -
Mortgage interest expense 1,354 1,589
Depreciation expense 2,795 2,948
Other operating expenses 2,378 3,210
General and administrative expenses 3,175 3,116
Selling expenses 1,898 2,152
------- -------
Total costs and expenses 23,481 26,914
------- -------
Operating income 6,063 4,378
------- -------
OTHER INCOME:
Interest income 747 1,481
Interest expense (429) (814)
Other income and expense, net 3,784 2,645
------- -------
Total other income 4,102 3,312
------- -------
Income from continuing operations before income taxes 10,165 7,690
Provision for income taxes 4,328 3,418
------- -------
Income from continuing operations 5,837 4,272
------- -------
</TABLE>
Page 6 of 21
<PAGE>
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (Continued)
(UNAUDITED)
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
DISCONTINUED OPERATIONS:
Operating income, net of tax provision of $312 $0 $353
Gain on disposal of discontinued operations, net of tax provision of
$3,700 4,849 0
------ ----
Income from discontinued operations, net of tax 4,849 353
------- ------
Net Income $10,686 $4,625
======= ======
BASIC EARNINGS PER COMMON SHARE:
Income from continuing operations $1.12 $ .81
Discontinued operations .92 .07
------- ------
Net income per common share $2.04 $ .88
======= ======
DILUTED EARNINGS PER COMMON SHARE:
Income from continuing operations $1.09 $ .80
Discontinued operations .91 .07
------- ------
Net income per common share-assuming dilution $2.00 $ .87
======= ======
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE STATEMENTS
Page 7 of 21
<PAGE>
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
(In Thousands)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 10,686 $ 4,625
-------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of discontinued operations, net of tax (4,849) 0
Purchase of trading securities (5,891) 0
Proceeds from sale of trading securities 5,966 0
Depreciation and amortization 3,237 3,348
Loss from equity investments 176 212
Net realized gains on trading securities (75) 0
Changes in assets and liabilities, net of effects from business disposals (A) (4,880) 7,503
-------- --------
Total adjustments (6,316) 11,063
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,370 15,688
-------- --------
Cash Flows from Investing Activities:
Proceeds from sale of discontinued operations 16,000 0
Acquisition of property, plant and equipment (589) (545)
Investment in and advances to affiliates (359) (5,578)
Investing activities of discontinued operations 0 (218)
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 15,052 (6,341)
-------- --------
Cash Flows from Financing Activities:
Principal payments on mortgage commitments, notes and loans (2,945) (3,301)
Net borrowings under credit facilities (5,300) (1,650)
Purchase and retirement of common shares (1,990) (657)
Proceeds from exercise of stock options 18 58
Financing activities of discontinued operations 0 (1,385)
-------- --------
NET CASH USED IN FINANCING ACTIVITIES (10,217) (6,935)
-------- --------
Net increase in cash and cash equivalents 9,205 2,412
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD 5,250 2,579
-------- --------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 14,455 $ 4,991
======== =========
</TABLE>
Page 8 of 21
<PAGE>
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 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 $1,746 $2,525
Taxes 3,534 1,258
====== ======
</TABLE>
Supplemental Schedule of Noncash Investing
and Financing Activities:
See Notes to Consolidated Financial Statements
(A) Changes in assets and liabilities for the six months ended June 30, 1998 and
1997, net of effects from business disposals, are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Decrease in notes and accounts receivable, net $2,892 $ 419
Decrease in inventories 163 751
Decrease (increase) in prepaid expenses and other current assets (31) 1
Decrease (increase) in deferred income taxes 346 (367)
Decrease (increase) in real property held for rental, net (5,275) 3,085
Decrease (increase) in noncurrent notes receivable (70) 70
Increase in other assets (157) (139)
Increase (decrease) in accounts payable and accrued liabilities (3,288) 1,563
Increase in income taxes payable 606 1,756
Decrease in other long-term liabilities (66) (187)
Discontinued operations - noncash charges and working capital changes 0 551
------- ------
Total ($4,880) $7,503
======= ======
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE
AN INTEGRAL PART OF THESE STATEMENTS
Page 9 of 21
<PAGE>
UNITED CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q used for
quarterly reports under Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, and therefore, do not include all information and footnotes
necessary for a fair presentation of financial position, results of operations
and cash flows in conformity with 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.
INVENTORIES
The components of inventory are as follows:
(In thousands) June 30, 1998 December 31, 1997
------------- -----------------
Raw materials $1,479 $1,959
Work in process 326 265
Finished goods 1,726 1,469
------ -----
$3,531 $3,693
====== ======
Page 10 of 21
<PAGE>
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 $860,000 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 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 $258,000 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.
At June 30, 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 June 30, 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
Page 11 of 21
<PAGE>
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 ("FASB") 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.
The following table sets forth the computation of basic and diluted earnings per
share-
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
(In thousands, except per share data) 1998 1997 1998 1997
---- ---- ---- ----
Numerator-
<S> <C> <C> <C> <C>
Income from continuing operations $3,423 $1,886 $5,837 $4,272
------ ------ ------ ------
Denominator-
Denominator for basic earnings per
share -weighted-average shares outstanding 5,204 5,283 5,227 5,291
Effect of dilutive securities-
Employee stock options 116 51 128 37
----- ------ ------ ------
Denominator for diluted earnings per
share-adjusted weighted-average shares and assumed
conversions 5,320 5,334 5,355 5,328
----- ------ ------ ------
Basic earnings per share $.66 $.36 $1.12 $.81
==== ==== ===== ====
Diluted earnings per share $.64 $.35 $1.09 $.80
==== ==== ===== ====
</TABLE>
Page 12 of 21
<PAGE>
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.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employer's Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS No. 132"), which standardizes the disclosure
requirements for pensions and other postretirement benefits to provide
information that is more comparable, understandable, and concise and that would
better serve users' needs. SFAS No. 132 is effective for fiscal years beginning
after December 15, 1997. Financial statement disclosures for prior periods are
required to be restated. The adoption of SFAS No. 132 will have no impact on the
Registrant's consolidated results of operations, financial position or cash
flows.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities"
("SFAS No. 133"), which establishes accounting and reporting standards for
derivative instruments. SFAS No. 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The statement requires
that changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement. This statement is effective
for fiscal years beginning after June 15, 1999 and cannot be applied
retroactively to financial statements of prior periods. The Registrant is in the
process of evaluating the accounting and reporting requirements and believes
that SFAS No. 133 will not have a material impact on the consolidated results of
operations, financial position or cash flows.
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
Page 13 of 21
<PAGE>
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
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Revenues for the three month period ended June 30, 1998 were $15.0
million versus $16.1 million during the comparable period in 1997. Income from
continuing operations for the second quarter of 1998 was $3.4 million or $.66
per share versus $1.9 million or $.36 per share during the comparable 1997
period.
Revenues for the six month period ended June 30, 1998 were $29.5
million resulting in income from continuing operations of $5.8 million or $1.12
per share versus revenues of $31.3 million and income from continuing operations
of $4.3 million or $.81 per share during the comparable 1997 period. On January
2, 1998, the Registrant completed the stock sale of D&M 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 six month period was $10.7 million or $2.04 per share as compared to net
income of $4.6 million or $.88 per share for the same period in 1997.
REAL ESTATE OPERATIONS
Rental revenue from real estate operations decreased $100,000 or 2%,
for the three month period ended June 30, 1998 as compared to the same period in
1997. This decrease is primarily attributable to a nonrecurring retroactive
adjustment recorded in the second quarter of 1997 for percentage rents on
certain properties. Rental revenues for the six month period ended June 30, 1998
were $12.6 million, an increase of $516,000 or 4% versus such revenues of the
comparable 1997 period. This increase is due to revenues associated with
properties acquired in the current and prior year.
Mortgage interest expense decreased $117,000 during the current
quarter and $235,000 for the six month period ended June 30, 1998, or a 15%
reduction from such expense of the corresponding periods in 1997. These
decreases result from continuing mortgage amortization which approximated $5.0
million during the last 12 months, including repayments associated with
properties sold during the period.
Depreciation expense associated with rental properties decreased
$61,000 or 4% during the three month period ended June 30, 1998 and $153,000 or
5%, during the first six months of 1998
Page 14 of 21
<PAGE>
compared to the corresponding periods of 1997. These decreases are primarily due
to reduced depreciation expense associated with properties sold, partially
offset by depreciation expense on acquisitions.
Operating expenses associated with the management of real estate
properties increased $43,000 or 3% during the current quarter as compared with
the prior year quarter principally due to the timing of expenses. For the six
months ended June 30, 1998 operating expenses associated with the management of
real estate properties decreased $832,000 as compared to the same period in 1997
principally due to a one time adjustment in the first quarter of 1998 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:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
(In thousands) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $8,634 $9,630 $16,940 $19,204
====== ====== ======= =======
Cost of Sales $5,997 $6,929 $11,881 $13,899
====== ====== ======= =======
Selling, General and Administrative Expenses $1,701 $1,778 $ 3,323 $ 3,576
====== ====== ======== ========
Income from Operations $ 936 $ 923 $ 1,736 $ 1,729
====== ======= ======== ========
</TABLE>
Net sales of the engineered products segment decreased $996,000 or
10% for the current quarter and $2.3 million or 12% for the six month period
ended June 30, 1998 versus the corresponding prior year periods. The decrease in
net sales was primarily due to continuing price competition and declining
worldwide automotive sales, both of which were exacerbated by the General Motors
strike. However, the General Motors strike did not have a significant impact on
the results of operations for the six months ended June 30, 1998.
Cost of sales as a percentage of net sales decreased by
approximately 2% for the three and six month periods ended June 30, 1998 versus
the corresponding periods in 1997. These decreases were due to a continued
emphasis on cost reductions, productivity improvements and product mix.
Selling, general and administrative expenses of the engineered
products segment decreased $77,000 or 4% and $253,000 or 7%, respectively during
the quarter and six month periods ended June 30, 1998 versus such costs of the
comparable 1997 periods. These reductions are principally due to reduced selling
expenses, primarily salary and salary related expenses.
Page 15 of 21
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative ("G&A") expenses not associated with
manufacturing operations increased by $603,000 for the three month period ended
June 30, 1998 and $58,000 for the six month period ended June 30, 1998, versus
the same periods in 1997. The increase in the current quarter is principally due
to nonrecurring charges. Absent these items, general and administrative expenses
not associated with manufacturing operations approximated prior year amounts for
the three months ended June 30, 1998. For the six month periods, after adjusting
for nonrecurring items in both the 1998 and 1997 periods, general and
administrative expenses not associated with manufacturing operations decreased
approximately $97,000 due to lower salary and salary related expenses.
OTHER INCOME AND EXPENSE
The components of other income and expense in the accompanying
consolidated statements of income are as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
(In thousands) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gain on sale of real estate assets $3,653 $237 $3,874 $2,821
Loss from equity investments (50) (151) (176) (212)
Gain on sale of marketable securities
0 0 75 0
Other 4 36 11 36
------- ---- ------ ------
$3,607 $122 $3,784 $2,645
====== ==== ====== ======
</TABLE>
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 June 30, 1998, the Registrant had positive working capital of
approximately $594,000 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 for general corporate purposes and to pay down debt of
approximately $8.2 million, to purchase and retire common shares of
approximately $2.0 million and for acquisitions of real property held for rental
of approximately $7.0 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 obligations will be
satisfied as they come due.
Page 16 of 21
<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 June 30, 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). The
Registrant was in compliance with all covenants at June 30, 1998. 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 a 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 June 30, 1998, $5,950,000 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 June 30, 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 insurance
recoveries. The remaining balance of $2.9 million at June 30, 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
Page 17 of 21
<PAGE>
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 existing funds, 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 $1.8 million or 6% for
the first half 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 six months of
1998 was approximately $5.8 million or $1.12 per share versus $4.3 million or
$.81 per share during the same period in 1997.
The results of the Registrant's real estate operations reflect a
$1.7 million or 40% increase in operating profit for the first six months of
1998, due to real estate tax abatements and increased operating profit
associated with 1997 acquisitions. The real estate segment was also favorably
impacted by a 15% reduction in mortgage interest expense resulting from the
repayment of approximately $5.0 million in mortgage indebtedness during the last
twelve months. Mortgage amortization will continue to have a favorable impact on
this segment and will reduce current mortgage indebtedness to zero in less than
eight years.
The Registrant's engineered products segment posted a 12% decrease
in revenues during the six month period ended June 30, 1998, from the comparable
1997 period while operating profits remained virtually unchanged. The decrease
in net sales was primarily due to continuing price competition and declining
worldwide automotive sales, both of which were exacerbated by the General Motors
strike. However, the General Motors strike did not have a significant impact on
the results of operations for the six months ended June 30, 1998. Management is
aggressively pursuing new sales opportunities. Operating profit as a percentage
of sales has continued to increase principally due to an ongoing emphasis on
cost reductions and productivity improvements. In addition, the results of this
Page 18 of 21
<PAGE>
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, interest rates, 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 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. In May 1998, Mr. Rosatelli amended his complaint to include
Kentile's assignee for the benefit of creditors as an additional defendant and
to remove the officer of Kentile previously named as a defendant from this
action. The material allegations of the complaint are unchanged. This action is
in the early stages of pretrial discovery. The Registrant intends to vigorously
defend this action and has
Page 19 of 21
<PAGE>
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 9, 1998, the Registrant held its Annual Meeting of Stockholders, whereby
the stockholders elected Directors and approved proposals to (i) provide
performance criteria for the payment of bonuses to the Chief Executive Officer
for the Registrant, (ii) amend the Registrants' stock option plans to increase
the number of shares available for issuance under the plans to 1,325,000 shares,
and (iii) ratify the appointment of Arthur Andersen LLP as the Company's
independent auditors for the year ending December 31, 1998. The vote on such
matters was as follows:
1. ELECTION OF DIRECTORS:
For Withheld
--- --------
A. F. Petrocelli 4,154,007 261,886
Howard M. Lorber 4,164,007 261,786
Anthony J. Miceli 4,164,007 261,786
Arnold S. Penner 4,154,007 261,886
2. CRITERIA FOR CHIEF EXECUTIVE OFFICER BONUS COMPENSATION PERFORMANCE: To
provide criteria for the compensation payable to the Chief Executive
Officer.
For Against Abstain
--- ------- -------
4,271,246 150,436 4,111
3. APPROVAL OF AMENDMENTS TO 1988 JOINT INCENTIVE AND NON-QUALIFIED STOCK
OPTION PLAN AND THE 1988 INCENTIVE STOCK OPTION PLAN: To adopt amendments
to the Joint Plan and the Incentive Plan to increase the number of shares
reserved for issuance pursuant to the exercise of options granted under
such plan.
For Against Abstain
--- ------- -------
3,596,122 423,308 1,966
Page 20 of 21
<PAGE>
4. RATIFICATION OF APPOINTMENT OF AUDITORS: To ratify the appointment of
Arthur Andersen LLP as the independent auditors of the Registrant for the
year ending December 31, 1998.
For Against Abstain
--- ------- -------
4,421,129 2,292 2,372
ITEM 5. OTHER INFORMATION
Pursuant to recent amendments to the proxy rules under the
Securities Exchange Act of 1934, as amended, the Registrant's stockholders are
notified that the deadline for providing the Registrant timely notice of any
stockholder proposal to be submitted outside of the Rule 14a-8 process for
consideration at the Registrant's 1999 Annual Meeting of Stockholders (the
"Annual Meeting") will be March 29, 1999. As to all such matters which the
Company does not have notice on or prior to March 29, 1999, discretionary
authority shall be granted to the designated persons in the Registrant's proxy
statement for the Annual Meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K. None.
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: August 5, 1998 By: /s/ Anthony J. Miceli
----------------------
Anthony J. Miceli
Vice President, Chief Financial Officer
and Secretary of the Registrant
Page 21 of 21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNITED
CAPITAL CORP.'S FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND NOTES, THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 14,455
<SECURITIES> 338
<RECEIVABLES> 9,272
<ALLOWANCES> 846
<INVENTORY> 3,531
<CURRENT-ASSETS> 28,298
<PP&E> 8,364
<DEPRECIATION> 4,336
<TOTAL-ASSETS> 115,374
<CURRENT-LIABILITIES> 27,704
<BONDS> 0
0
0
<COMMON> 520
<OTHER-SE> 45,664
<TOTAL-LIABILITY-AND-EQUITY> 115,374
<SALES> 8,634
<TOTAL-REVENUES> 14,996
<CGS> 5,997
<TOTAL-COSTS> 12,734
<OTHER-EXPENSES> (3,607)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 206
<INCOME-PRETAX> 6,015
<INCOME-TAX> 2,592
<INCOME-CONTINUING> 3,423
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,423
<EPS-PRIMARY> .66
<EPS-DILUTED> .64
</TABLE>
