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 September 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 5,170,147 shares outstanding
as of October 30, 1998.
<PAGE>
UNITED CAPITAL CORP. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION
PAGE
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as
of September 30, 1998 and December 31, 1997 3
Consolidated Statements of Income for
the Three Months Ended September 30, 1998 and
1997 4 - 5
Consolidated Statements of Income for the Nine
Months Ended September 30, 1998 and 1997 6 - 7
Consolidated Statements of Cash Flows for
the Nine Months Ended September 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 - 20
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 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 SEPTEMBER 30, 1998
(UNAUDITED) AND DECEMBER 31, 1997
(In Thousands)
<TABLE>
<CAPTION>
ASSETS 1998 1997
------ ---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 17,714 $ 5,250
Marketable securities 4,192 355
Notes and accounts receivable, net 8,582 11,319
Inventories 3,979 3,693
Prepaid expenses and other current assets 280 292
Deferred income taxes 1,403 1,219
Net current assets of discontinued operations 0 4,492
-------- ------
Total current assets 36,150 26,620
-------- ------
PROPERTY, PLANT & EQUIPMENT, net 4,118 4,299
REAL PROPERTY HELD FOR RENTAL, net 60,246 58,578
NONCURRENT NOTES RECEIVABLE 7,412 7,356
OTHER ASSETS 10,993 11,185
DEFERRED INCOME TAXES 2,814 2,966
NET NONCURRENT ASSETS OF
DISCONTINUED OPERATIONS 0 2,349
-------- --------
Total assets $121,733 $113,353
======== ========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
------------------------------------ ---- ----
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt $ 5,684 $ 5,232
Current portion of borrowings under credit facilities 1,400 6,000
Accounts payable and accrued liabilities 12,549 14,129
Income taxes payable 10,197 5,872
-------- --------
Total current liabilities 29,830 31,233
-------- --------
LONG-TERM LIABILITIES:
Borrowings under credit facilities 4,200 5,250
Long-term debt 27,277 26,560
Other long-term liabilities 12,771 12,830
-------- --------
Total liabilities 74,078 75,873
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock 520 528
Additional paid-in capital 4,856 6,819
Retained earnings 42,644 29,997
Net unrealized (loss)gain on marketable (365) 136
securities, net of tax --------- --------
Total stockholders' equity 47,655 37,480
--------- --------
Total liabilities and stockholders' equity $121,733 $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 SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
REVENUES:
Net sales $7,487 $8,488
Rental revenues from real estate operations 6,396 5,891
------ ------
Total revenues 13,883 14,379
------ ------
COSTS AND EXPENSES:
Cost of sales 5,084 6,020
Real estate operations -
Mortgage interest expense 664 747
Depreciation expense 1,348 1,455
Other operating expenses 1,574 1,887
General and administrative expenses 1,218 1,396
Selling expenses 926 1,018
------ ------
Total costs and expenses 10,814 12,523
------ ------
Operating income 3,069 1,856
------ ------
OTHER INCOME:
Interest income 390 400
Interest expense (202) (288)
Other income and expense, net 212 121
------ ------
Total other income 400 233
------ ------
Income from continuing operations
before income taxes 3,469 2,089
Provision for income taxes 1,508 1,018
------ -------
Income from continuing operations 1,961 1,071
------ -------
</TABLE>
Page 4 of 21
<PAGE>
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 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 $278 $0 $448
------ -----
Income from discontinued operations, net of tax 0 448
------ -----
Net income $1,961 $1,519
====== ======
BASIC EARNINGS PER COMMON SHARE:
Income from continuing operations $.38 $.20
Discontinued operations .00 .09
------- ------
Net income per common share $.38 $.29
======= ======
DILUTED EARNINGS PER COMMON SHARE:
Income from continuing operations $.37 $.20
Discontinued operations .00 .08
------- ------
Net income per common share-assuming dilution $.37 $.28
======= ======
</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 NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
REVENUES:
Net sales $24,427 $27,692
Rental revenues from real estate operations 19,000 17,979
------- -------
Total revenues 43,427 45,671
------- -------
COSTS AND EXPENSES:
Cost of sales 16,965 19,919
Real estate operations -
Mortgage interest expense 2,018 2,336
Depreciation expense 4,143 4,403
Other operating expenses 3,952 5,097
General and administrative expenses 4,393 4,512
Selling expenses 2,824 3,170
------- -------
Total costs and expenses 34,295 39,437
------- -------
Operating income 9,132 6,234
------- -------
OTHER INCOME:
Interest income 1,137 1,881
Interest expense (631) (1,102)
Other income and expense, net 3,996 2,766
------- --------
Total other income 4,502 3,545
------- --------
Income from continuing operations
before income taxes 13,634 9,779
Provision for income taxes 5,836 4,436
-------- -------
Income from continuing operations 7,798 5,343
-------- -------
</TABLE>
Page 6 of 21
<PAGE>
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 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 $590 $0 $801
Gain on disposal of discontinued operations, net
of tax provision of $3,700 4,849 0
------- ------
Income from discontinued operations, net of tax 4,849 801
------- ------
Net income $12,647 $6,144
======= ======
BASIC EARNINGS PER COMMON SHARE:
Income from continuing operations $1.49 $1.01
Discontinued operations .93 .15
------- ------
Net income per common share $2.42 $1.16
======= ======
DILUTED EARNINGS PER COMMON SHARE:
Income from continuing operations $1.46 $1.01
Discontinued operations .91 .15
------- ------
Net income per common share-assuming dilution $2.37 $1.16
======= ======
</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 NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
(In Thousands)
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $12,647 $6,144
------- ------
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 4,678 5,012
Loss from equity investments 392 238
Gain on sale of trading securities (75) 0
Changes in assets and liabilities, net of effects from business disposals (A) (4,399) 8,919
------- ------
Total adjustments (4,178) 14,169
------- ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,469 20,313
------- ------
Cash Flows from Investing Activities:
Proceeds from sale of discontinued operations 16,000 0
Purchase of available for sale securities (4,596) 0
Acquisition of property, plant and equipment (930) (451)
Investment in and advances to affiliates (26) (5,527)
Investing activities of discontinued operations 0 (97)
------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 10,448 (6,075)
------- -------
Cash Flows from Financing Activities:
Principal payments on mortgage commitments, notes and loans (3,969) (5,169)
Proceeds from mortgage commitments, notes and loans 5,138 0
Net borrowings under credit facilities (5,650) (7,320)
Purchase and retirement of common shares (1,990) (666)
Proceeds from exercise of stock options 18 60
Financing activities of discontinued operations 0 (1,385)
------- --------
NET CASH USED IN FINANCING ACTIVITIES (6,453) (14,480)
------- --------
Net increase (decrease) in cash and cash equivalents 12,464 (242)
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD 5,250 2,579
------- -------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD $17,714 $2,337
======= =======
</TABLE>
Page 8 of 21
<PAGE>
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 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 $2,641 $3,731
Taxes 5,202 2,300
====== ======
Supplemental Schedule of Noncash Investing
and Financing Activities:
Noncash Investing Activities:
Capital lease obligations $0 $511
== ====
</TABLE>
(A) Changes in assets and liabilities for the nine months ended September 30,
1998 and 1997, net of effects from business disposal, are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Decrease in notes and accounts receivable, net $2,736 $4,687
Decrease (increase) in inventories (285) 617
Decrease in prepaid expenses and other current assets 12 46
Decrease (increase) in deferred income taxes 226 (915)
Decrease (increase) in real property held for rental,
net (5,234) 3,067
Increase in noncurrent notes receivable (55) (1,510)
Increase in other assets (175) (39)
Decrease in accounts payable and accrued liabilities (2,190) (403)
Increase in income taxes payable 625 3,526
Decrease in other long-term liabilities (59) (272)
Discontinued operations - noncash charges and
working capital changes 0 115
------- -------
Total ($4,399) $8,919
======== =======
</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) September 30, 1998 December 31, 1997
------------------ -----------------
Raw materials $1,936 $1,959
Work in process 318 265
Finished goods 1,725 1,469
------ ------
$3,979 $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 September 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 September 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
Page 11 of 21
<PAGE>
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 a discussion of
Rosatelli vs. United Capital Corp., et al. 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 Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
(In thousands, except per share data) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator-
Income from continuing operations $1,961 $1,071 $7,798 $5,343
------ ------ ------ ------
Denominator-
Denominator for basic earnings per
share -weighted-average shares outstanding 5,203 5,285 5,219 5,289
Effect of dilutive securities-
Employee stock options 103 52 120 15
------ ------ ------ ------
Denominator for diluted earnings per
share-adjusted weighted-average shares
and assumed conversions 5,306 5,337 5,339 5,304
------ ------ ------ ------
Basic earnings per share $.38 $.20 $1.49 $1.01
==== ==== ===== =====
Diluted earnings per share $.37 $.20 $1.46 $1.01
==== ==== ===== =====
</TABLE>
Page 12 of 21
<PAGE>
COMPREHENSIVE INCOME
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," which is effective for
fiscal years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods is required. The Registrant's comprehensive
income consists of unrealized gains and losses from investments in
available-for-sale securities.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
(In thousands) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $1,961 $1,519 $12,647 $6,144
Other comprehensive income, net of tax:
Unrealized holding gains (losses),
net of tax benefit (provision) of
$252, ($18), $258 and ($22),
respectively (490) 35 (501) 43
------ ------- ------- ------
$1,471 $1,554 $12,146 $6,187
====== ====== ======= ======
</TABLE>
The Registrant's portfolio of available for sale securities experienced
a significant decline in market value at September 30, 1998, which management
believed was temporary. As of October 30, 1998, the Registrant's portfolio of
available for sale securities had fully recovered from this loss and reflected
an unrealized gain of approximately $1 million.
NEW ACCOUNTING PRONOUNCEMENTS
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 and is not required to be applied to interim
financial statements in the initial year of adoption. 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
Page 13 of 21
<PAGE>
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
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
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
- ---------------------------------------------
Revenues for the three month period ended September 30, 1998 were $13.9
million versus $14.4 million during the comparable period in 1997. Income from
continuing operations for the third quarter of 1998 was $2.0 million or $.38 per
share versus $1.1 million or $.20 per share during the comparable 1997 period.
Revenues for the nine month period ended September 30, 1998 were $43.4
million resulting in income from continuing operations of $7.8 million or $1.49
per share versus revenues of $45.7 million and income from continuing operations
of $5.3 million or $1.01 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
Page 14 of 21
<PAGE>
$16 million in cash, resulting in a pretax gain from discontinued operations of
approximately $8.6 million or $.93 per share on an after tax basis. Net income
for the nine month period was $12.6 million or $2.42 per share in 1998 compared
to net income of $6.1 million or $1.16 per share for the same period in 1997.
REAL ESTATE OPERATIONS
Rental revenues from real estate operations increased $505,000 or 9%
and $1.0 million or 6% respectively, for the three and nine month periods ended
September 30, 1998 as compared to the comparable periods in 1997. These
increases are due primarily to revenues associated with properties acquired in
the current and prior year.
Mortgage interest expense decreased $83,000 or 11% during the current
quarter and $318,000 or 14% for the nine month period ended September 30, 1998,
when compared to the corresponding periods in 1997. These decreases result from
continuing mortgage amortization which approximated $4.8 million during the last
12 months, including repayments associated with properties sold during the
period.
Depreciation expense associated with rental properties decreased
$107,000 or 7% during the three month period ended September 30, 1998 and
$260,000 or 6%, during the first nine months of 1998 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 decreased $313,000 or 17% during the current quarter as compared with
the prior year quarter principally due to reductions in real estate taxes and
utility expenses. For the nine months ended September 30, 1998 operating
expenses associated with the management of real estate properties decreased $1.1
million 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 and reduced real estate taxes and utility expenses.
Page 15 of 21
<PAGE>
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 Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
(In thousands) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $7,487 $8,488 $24,427 $27,692
====== ====== ======= =======
Cost of Sales $5,084 $6,020 $16,965 $19,919
====== ====== ======= =======
Selling, General and Administrative
Expenses $1,611 $1,695 $4,934 $5,271
====== ====== ======= =======
Income from Operations $792 $773 $2,528 $2,502
====== ====== ======= =======
</TABLE>
Net sales of the engineered products segment decreased $1.0 million or
12% for the current quarter and $3.3 million or 12% for the nine month period
ended September 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.
Cost of sales as a percentage of net sales decreased by approximately
3% and 2% respectively, for the three and nine month periods ended September 30,
1998 versus the corresponding periods in 1997. These decreases were due to a
favorable market for stainless steel purchases, and a continued emphasis on cost
reductions, productivity improvements and product mix.
Selling, general and administrative expenses of the engineered products
segment decreased $84,000 or 5% and $337,000 or 6%, respectively, during the
quarter and nine month periods ended September 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.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses not associated with manufacturing
operations decreased by $185,000 and $127,000 respectively, for the three month
and nine month periods ended September 30, 1998, versus the same periods in
1997. The decrease in the current quarter is due to nonrecurring items in the
prior and current year. Absent the nonrecurring items, general and
administrative expenses not associated with manufacturing operations
approximated prior year amounts for the three months ended September 30, 1998.
For the nine 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 $99,000 primarily due to lower
salary and salary related expenses.
Page 16 of 21
<PAGE>
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 Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
(In thousands) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gain on sale of real estate assets $546 $145 $4,420 $2,966
Loss from equity investments (216) (26) (392) (238)
Gain on sale of trading securities 0 0 75 0
Other (118) 2 (107) 38
----- ---- ------ ------
$212 $121 $3,996 $2,766
===== ==== ====== ======
</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 September 30, 1998, the Registrant had positive working capital
of approximately $6.3 million 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 $9.6 million, to purchase and retire common shares of
approximately $2.0 million and for acquisitions of real property held for rental
of approximately $7.4 million. It is anticipated that the remaining cash
balances will be reinvested into the Registrant's businesses during 1998 and
1999; 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.
The Registrant's portfolio of available for sale securities experienced
a significant decline in market value at September 30, 1998, resulting in a
pretax unrealized holding loss of approximately $550,000. Management believed
that this decline was temporary and as of October 30, 1998, the Registrant's
portfolio of available for sale securities had fully recovered from this loss
and reflected an unrealized gain of approximately $1 million.
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
Page 17 of 21
<PAGE>
receivable and 50% of eligible inventory, as defined. Eligibility is also
limited by amounts outstanding under the Term Loan. At September 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 September 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
in 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 September 30,
1998, $5.6 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 exchanged 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 September 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 September 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 October 1998, the Registrant's Board of Directors authorized the
repurchase of up to $5 million of the Registrant's common stock. Purchases 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.
Page 18 of 21
<PAGE>
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 and the cash required to repurchase the
Registrant's common stock 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 $2.2 million or 5% for the
first nine 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 nine months of
1998 was approximately $7.8 million or $1.49 per share versus $5.3 million or
$1.01 per share during the same period in 1997.
The results of the Registrant's real estate operations reflect a $2.7
million or 45% increase in operating profit for the first nine months of 1998,
due to increased operating profit associated with 1997 and 1998 acquisitions and
real estate tax abatements. The real estate segment was also favorably impacted
by a 14% reduction in mortgage interest expense resulting from the repayment of
approximately $4.8 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.
Where appropriate, management may use permanent long-term financing
rather than its short-term revolving credit facility to finance its real estate
acquisitions. In September 1998, the Registrant borrowed $5.1 million secured by
a mortgage on two properties that the Registrant purchased in May 1998. These
properties are leased for five years with option periods and the mortgage is
self amortizing over the primary lease term, bearing interest at 6.66%. Future
acquisitions of real estate may also be financed with self amortizing mortgages.
The Registrant's engineered products segment posted a 12% decrease in
revenues during the nine month period ended September 30, 1998, from the
comparable 1997 period while operating profits increased slightly. The decrease
in net sales was primarily due to continuing price competition and
Page 19 of 21
<PAGE>
declining worldwide automotive sales. Operating profit as a percentage of sales
has continued to increase principally due to a favorable market for stainless
steel purchases, as well as an ongoing emphasis on cost reductions and
productivity improvements. Management is aggressively 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 continue to 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 Registrant has undertaken
the implementation in its manufacturing operations of a fully integrated
Enterprise Resource Planning (ERP) software package. Although the ERP package
was implemented for purposes other the remediating the Year 2000 issue, the ERP
package is certified as Year 2000 compliant. As part of this implementation,
which is on target for early 1999, the Registrant also believes that it has
identified and addressed all its related Year 2000 hardware issues. The costs,
if any, directly associated with Year 2000 compliance will not be material to
its financial conditions or results of operations. Year 2000 issues are not
significant to the Registrant's real estate operations. The Registrant believes
that the potential for disruption of its business from Year 2000 issues as a
result of significant third parties (banks, suppliers, customers) is minimal.
Substantially all of these third parties are among the largest and most
sophisticated companies in the country and the Registrant is providing the data
necessary for these companies to evaluate their Year 2000 issues.
The Registrant believes that it has taken reasonable steps in preparing
for the Year 2000 issue, but cannot ensure that all of its Year 2000 issues or
those of its significant third parties will be resolved or addressed
satisfactorily before the Year 2000 commences. Any resulting disruption could
have an adverse impact on its business.
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.
Page 20 of 21
<PAGE>
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 the 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 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. 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: October 30, 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 UNITED
CAPITAL CORP.'S FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 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> SEP-30-1998
<CASH> 17,714
<SECURITIES> 4,192
<RECEIVABLES> 9,397
<ALLOWANCES> 815
<INVENTORY> 3,979
<CURRENT-ASSETS> 36,150
<PP&E> 8,701
<DEPRECIATION> 4,583
<TOTAL-ASSETS> 121,733
<CURRENT-LIABILITIES> 29,830
<BONDS> 0
0
0
<COMMON> 520
<OTHER-SE> 47,135
<TOTAL-LIABILITY-AND-EQUITY> 121,733
<SALES> 7,487
<TOTAL-REVENUES> 13,883
<CGS> 5,084
<TOTAL-COSTS> 10,814
<OTHER-EXPENSES> (212)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 202
<INCOME-PRETAX> 3,469
<INCOME-TAX> 1,508
<INCOME-CONTINUING> 1,961
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,961
<EPS-PRIMARY> .38
<EPS-DILUTED> .37
</TABLE>
