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, 1999
-------------------------------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
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Commission File Number: 1-10104
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United Capital Corp.
- --------------------------------------------------------------------------------
(Exact name of Company as specified in its charter)
Delaware 04-2294493
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9 Park Place, Great Neck, New York 11021
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
516-466-6464
- --------------------------------------------------------------------------------
(Company'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 Company (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 Company 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 5,013,647 shares outstanding
as of August 10, 1999.
Page 1 of 20
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UNITED CAPITAL CORP. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION
PAGE
----
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as
of June 30, 1999 and December 31, 1998 3
Consolidated Statements of Income for
the Three Months Ended June 30, 1999 and
1998 4
Consolidated Statements of Income for the Six
Months Ended June 30, 1999 and 1998 5 - 6
Consolidated Statements of Cash Flows for
the Six Months Ended June 30, 1999 and
1998 7 - 8
Notes to Consolidated Financial Statements 9 - 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13 - 19
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19 - 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
SIGNATURES 20
Page 2 of 20
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UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 1999 (UNAUDITED)
AND DECEMBER 31, 1998
(In Thousands)
ASSETS 1999 1998
------ ---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 16,115 $ 8,154
Marketable securities 20,756 14,290
Notes and accounts receivable, net 7,837 7,819
Inventories 4,232 4,339
Prepaid expenses and other current assets 393 209
-------- --------
Total current assets 49,333 34,811
-------- --------
PROPERTY, PLANT & EQUIPMENT, net 4,699 4,686
REAL PROPERTY HELD FOR RENTAL, net 67,740 71,437
NONCURRENT NOTES RECEIVABLE 217 593
OTHER ASSETS 8,678 11,296
DEFERRED INCOME TAXES 2,398 3,289
-------- --------
Total assets $133,065 $126,112
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
- ------------------------------------ ---- ----
CURRENT LIABILITIES:
Current maturities of long-term debt $ 5,976 $ 5,875
Current portion of borrowings under credit facilities 1,400 1,400
Accounts payable and accrued liabilities 9,642 10,821
Income taxes payable 7,135 6,355
Deferred income taxes 638 152
-------- --------
Total current liabilities 24,791 24,603
-------- --------
LONG-TERM LIABILITIES:
Borrowings under credit facilities 3,150 3,850
Long-term debt 30,265 26,929
Other long-term liabilities 18,306 18,312
-------- --------
Total liabilities 76,512 73,694
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock 501 515
Additional paid-in capital 748 3,536
Retained earnings 51,591 45,429
Accumulated other comprehensive income, net of tax 3,713 2,938
-------- --------
Total stockholders' equity 56,553 52,418
-------- --------
Total liabilities and stockholders' equity $133,065 $126,112
======== ========
THE ACCOMPANYING NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
Page 3 of 20
<PAGE>
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1999 1998
---- ----
REVENUES:
Net sales $ 7,912 $ 8,634
Rental revenues from real estate operations 6,801 6,362
-------- --------
Total revenues 14,713 14,996
-------- --------
COSTS AND EXPENSES:
Cost of sales 5,478 5,997
Real estate operations -
Mortgage interest expense 753 661
Depreciation expense 1,380 1,396
Other operating expenses 1,653 1,667
General and administrative expenses 1,438 2,052
Selling expenses 993 961
-------- --------
Total costs and expenses 11,695 12,734
-------- --------
Operating income 3,018 2,262
-------- --------
OTHER INCOME (EXPENSE):
Interest and dividend income 455 352
Interest expense (165) (206)
Other income and expense, net 1,183 3,607
-------- --------
Total other income 1,473 3,753
-------- --------
Income before income taxes 4,491 6,015
Provision for income taxes 1,915 2,592
-------- --------
Net income $ 2,576 $ 3,423
======== ========
EARNINGS PER COMMON SHARE:
Basic $ .51 $ .66
Diluted $ .51 $ .64
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE STATEMENTS
Page 4 of 20
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UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1999 1998
-------- --------
REVENUES:
Net sales $ 15,565 $ 16,940
Rental revenues from real estate operations 13,323 12,604
-------- --------
Total revenues 28,888 29,544
-------- --------
COSTS AND EXPENSES:
Cost of sales 11,138 11,881
Real estate operations -
Mortgage interest expense 1,356 1,354
Depreciation expense 2,747 2,795
Other operating expenses 3,661 2,378
General and administrative expenses 2,976 3,175
Selling expenses 1,984 1,898
-------- --------
Total costs and expenses 23,862 23,481
-------- --------
Operating income 5,026 6,063
-------- --------
OTHER INCOME (EXPENSE):
Interest and dividend income 765 747
Interest expense (328) (429)
Other income and expense, net 5,184 3,784
-------- --------
Total other income 5,621 4,102
-------- --------
Income from continuing operations before income taxes 10,647 10,165
Provision for income taxes 4,485 4,328
-------- --------
Income from continuing operations 6,162 5,837
-------- --------
Page 5 of 20
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UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (CONTINUED)
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1999 1998
--------- ----------
DISCONTINUED OPERATIONS:
Gain on disposal of discontinued operations,
net of tax provision of $3,700 0 4,849
--------- ----------
Income from discontinued operations, net of tax 0 4,849
--------- ----------
Net income $ 6,162 $ 10,686
========= ==========
EARNINGS PER COMMON SHARE:
Basic- continuing operations $ 1.22 $ 1.12
Basic- discontinued operations .00 .92
--------- ----------
Net income per basic common share $ 1.22 $ 2.04
========= ==========
Diluted- continuing operations $ 1.21 $ 1.09
Diluted- discontinued operations .00 .91
--------- ----------
Net income per diluted common share $ 1.21 $ 2.00
========= ==========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE STATEMENTS
Page 6 of 20
<PAGE>
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
-------- ------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 6,162 $ 10,686
-------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on disposal of investments in affiliates (1,989) 0
Gain on sale of discontinued operations, net of tax 0 (4,849)
Purchase of trading securities 0 (5,891)
Proceeds from sale of trading securities 0 5,966
Depreciation and amortization 3,333 3,237
Loss from equity investments 0 176
Gain on sale of trading securities 0 (75)
Changes in assets and liabilities (A) 4,020 (4,880)
-------- --------
Total adjustments 5,364 (6,316)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 11,526 4,370
-------- --------
Cash Flows From Investing Activities:
Purchase of available-for-sale securities (5,205) 0
Proceeds from disposal of investments in affiliates 2,450 0
Proceeds from sale of discontinued operations 0 16,000
Acquisition of property, plant and equipment (689) (589)
Investment in and advances to affiliates (57) (359)
-------- --------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (3,501) 15,052
-------- --------
Cash Flows From Financing Activities:
Principal payments on mortgage commitments, notes and loans (3,123) (2,945)
Proceeds from mortgage commitments, notes and loans 6,560 0
Net borrowings under credit facilities (700) (5,300)
Purchase and retirement of common shares (2,943) (1,990)
Proceeds from exercise of stock options 142 18
-------- --------
NET CASH USED IN FINANCING ACTIVITIES (64) (10,217)
-------- --------
Net increase in cash and cash equivalents 7,961 9,205
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD 8,154 5,250
-------- --------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 16,115 $ 14,455
======== ========
</TABLE>
Page 7 of 20
<PAGE>
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
1999 1998
------------ ------------
Supplemental Disclosures of Cash Flow
Information:
Cash Paid During the Period For:
Interest $1,622 $1,746
Taxes 2,811 3,534
===== =====
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, 1999 and
1998, are as follows:
Notes and accounts receivable, net ($18) $2,892
Inventories 107 163
Prepaid expenses and other current assets (184) (31)
Deferred income taxes 891 346
Real property held for rental, net 1,038 (5,275)
Noncurrent notes receivable 376 (70)
Other assets 2,214 (157)
Accounts payable and accrued liabilities (1,179) (3,288)
Income taxes payable 780 606
Other long-term liabilities (5) (66)
------ --------
Total $4,020 ($4,880)
====== ========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE STATEMENTS
Page 8 of 20
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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, 1998.
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.
INVENTORIES
- -----------
The components of inventory are as follows:
(In Thousands) June 30, 1999 December 31, 1998
------------- -----------------
Raw materials $2,266 $1,851
Work in process 401 403
Finished goods 1,565 2,085
----- -----
$4,232 $4,339
====== ======
CONTINGENCIES
- -------------
The Company 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 Company estimate that under the
most probable remediation scenario the remediation of this site is anticipated
to require initial expenditures of $860,000 including the cost of capital
equipment, and $86,000 in annual operating and maintenance costs over a 15-year
period.
Page 9 of 20
<PAGE>
Environmental studies at the second facility indicate that remediation
may be necessary. Based upon the facts presently available, environmental
experts have advised the Company that under the most probable remediation
scenario, the estimated cost to remediate this site is anticipated to require
$2.3 million in initial costs, including capital equipment expenditures, and
$258,000 in annual operating and maintenance costs over a 10-year period. The
Company may revise such estimates in the future due to the uncertainty regarding
the nature, timing and extent of any remediation efforts that may be required at
this site, should an appropriate regulatory agency deem such efforts to be
necessary.
The foregoing estimates may also be revised by the Company as new or
additional information in these matters 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 Company believes that it is entitled to full defense and
indemnification with respect to environmental investigation and remediation
costs under its insurance policies, the Company's insurers have denied such
coverage. Accordingly, the Company 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 Company 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 Company 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.
Amounts recorded as anticipated insurance recoveries in the
accompanying Consolidated Financial Statements are in dispute with the Company'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 Company 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 Company's insurance policies
will be paid gradually over a period of years and, accordingly, should not have
a material adverse effect upon the business, liquidity or financial position of
the Company. However, adverse decisions or events, particularly as to the merits
of the Company's factual and legal basis could cause the Company to change its
estimate of liability with respect to such matters in the future.
The Company 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 Company's
consolidated financial position or results of operations.
Page 10 of 20
<PAGE>
EARNINGS PER SHARE
- ------------------
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,
-------------- --------------
<S> <C> <C> <C> <C>
(In Thousands, Except Per Share Data) 1999 1998 1999 1998
---- ---- ---- ----
Numerator:
Income from continuing operations $2,576 $3,423 $6,162 $5,837
------ ------ ------ ------
Denominator:
Denominator for basic earnings per
share -weighted-average shares outstanding 5,011 5,204 5,053 5,227
Effect of dilutive securities:
Employee stock options 20 116 23 128
------ ------ ------ ------
Denominator for diluted earnings per
share-adjusted weighted-average shares and
assumed conversions 5,031 5,320 5,076 5,355
----- ----- ----- -----
Basic earnings per share - continuing operations $.51 $.66 $1.22 $1.12
==== ==== ===== =====
Diluted earnings per share - continuing operations $.51 $.64 $1.21 $1.09
==== ==== ===== =====
</TABLE>
COMPREHENSIVE INCOME
- --------------------
The Company's comprehensive income consists of unrealized gains and
losses from investments in available-for-sale securities. The components of
other comprehensive income are as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- ----------------
(In Thousands) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $2,576 $3,423 $6,162 $10,686
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on
available-for-sale securities, net of tax
(provision) benefit of ($896) and $4, and ($486)
and $6, respectively 1,572 (8) 775 (11)
------ ------ ------ -------
Comprehensive income $4,148 $3,415 $6,937 $10,675
====== ====== ====== =======
</TABLE>
Page 11 of 20
<PAGE>
BUSINESS SEGMENTS
- -----------------
The Company operates through two business segments: real estate
investment and management and engineered products. The real estate investment
and management segment is engaged in the business of investing in and managing
real estate properties and the making of high-yield, short-term loans secured by
desirable properties. Engineered products are manufactured through wholly-owned
subsidiaries of the Company and primarily consist of knitted wire products and
components and transformer products.
Operating results of the Company's business segments are as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
(In Thousands)
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues and sales-
Real estate investment and management $6,801 $6,362 $13,323 $12,604
Engineered products 7,912 8,634 15,565 16,940
------- ------- ------- -------
$14,713 $14,996 $28,888 $29,544
======= ======= ======= =======
Operating income-
Real estate investment and management $3,015 $2,638 $5,560 $6,077
Engineered products 686 936 972 1,736
------- ------- ------- -------
3,701 3,574 6,532 7,813
General corporate expenses (683) (1,312) (1,506) (1,750)
Other income, net 1,473 3,753 5,621 4,102
------- ------- ------- -------
Income from continuing
operations before income taxes $4,491 $6,015 $10,647 $10,165
======= ======= ======= =======
</TABLE>
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
In June 1998, the Financial Accounting Standards Board ("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. In June 1999, FASB issued Statement of Financial Accounting Standards
No. 137 "Accounting for Derivative Instruments and Hedging Activities- Deferral
of the Effective Date of FASB Statement No. 133," which changes the effective
date to all fiscal quarters of all fiscal years beginning after June 15, 2000.
SFAS No. 133
Page 12 of 20
<PAGE>
cannot be applied retroactively to financial statements of prior periods. The
Company 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
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
- ---------------------------------------
Revenues for the three month period ended June 30, 1999 were $14.7
million which resulted in operating income of $3.0 million versus revenues of
$15.0 million and operating income of $2.3 million during the comparable period
in 1998. Net income during this period was $2.6 million or $.51 per basic share
versus $3.4 million or $.66 per basic share during the comparable period in
1998.
Revenues for the six month period ended June 30, 1999 were $28.9
million resulting in income from continuing operations of $6.2 million or $1.22
per basic share versus revenues of $29.5 million and income from continuing
operations of $5.8 million or $1.12 per basic share during the comparable 1998
period. In 1998, the Company sold its antenna business, resulting in a pretax
gain from discontinued operations of approximately $8.6 million or $.92 per
basic share on an after tax basis. Net income was $6.2 million or $1.22 per
basic share in 1999 versus $10.7 million or $2.04 per basic share for the same
period in 1998.
REAL ESTATE OPERATIONS
- ----------------------
Rental revenues from real estate operations increased $439,000 or 7%
for the three months and $719,000 or 6% for the six months ended June 30, 1999
when compared to the corresponding periods in 1998. These increases are
primarily attributable to revenues generated from properties acquired in 1998.
Mortgage interest expense increased $92,000 during the current quarter
and less than 1% for the six month period ended June 30 1999, compared to the
corresponding periods in 1998. These increases are due to mortgages obtained in
connection with 1998 property acquisitions offset by lower
Page 13 of 20
<PAGE>
interest expense on mortgages refinanced in 1998 and 1999 and continuing
mortgage amortization, including repayments associated with properties sold.
Depreciation expense associated with rental properties decreased
$16,000 or 1% during the three month period ended June 30, 1999 and $48,000 or
2%, during the six month period ended June 30, 1999 compared to the
corresponding periods of 1998. These decreases are primarily due to reduced
depreciation expense associated with properties sold in 1999 and 1998.
Operating expenses associated with the management of real properties
decreased $14,000 for the current quarter and increased $1.3 million for the
first six months of 1999 compared to the corresponding periods in 1998. The
increase for the six month period was principally due to 1998 expenses having
been reduced by a non-recurring real estate tax abatement of approximately $1
million. The remainder of the increase was principally due to expenses incurred
for the maintenance of properties acquired in 1998.
ENGINEERED PRODUCTS
- -------------------
The Company's engineered products segment includes Metex Mfg.
Corporation and AFP Transformers, LLC. 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) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $7,912 $8,634 $15,565 $16,940
====== ====== ======= =======
Cost of Sales $5,478 $5,997 $11,138 $11,881
====== ====== ======= =======
Selling, General and Administrative
Expenses $1,748 $1,701 $ 3,455 $ 3,323
====== ====== ======= =======
Income from Operations $ 686 $ 936 $ 972 $ 1,736
====== ====== ======= =======
</TABLE>
Net sales of the engineered products segment decreased 8% for each of
the current quarter and six month period ended June 30, 1999 compared to the
same periods in 1998. These decreases are primarily attributable to continued
price competition and weakened demand for certain of the Company's products.
Cost of sales as a percentage of sales for the three month period ended
June 30, 1999 remained virtually unchanged when compared to the same period in
1998 principally due to efficient material purchases and a commitment to cost
reductions. For the six month period ended June 30, 1999, cost of sales as a
percentage of sales increased to 71.6% from 70.1% in 1998. This increase is
principally due to non-recurring costs associated with a labor strike and
subsequent union settlement, start up operations in Mexico and the mix of
products sold.
Page 14 of 20
<PAGE>
Selling, general and administrative expenses ("SG&A") of the engineered
products segment increased $47,000 or 3% and $132,000 or 4%, respectively,
during the quarter and six month period ended June 30, 1999 versus such costs of
the comparable 1998 periods. Savings from cost containment efforts in this area
were offset by amounts invested to expand the Company's product offerings and
improve competitiveness including costs associated with the start up of
operations in Mexico.
GENERAL AND ADMINISTRATIVE EXPENSES
- -----------------------------------
General and administrative ("G&A") expenses not associated with
manufacturing operations decreased by $629,000 and $244,000 for the three month
and six month period ended June 30, 1999, respectively, versus the same periods
in 1998. The decrease in the current quarter is principally due to non-recurring
charges recorded in the corresponding prior year period. Absent these items, G&A
expenses not associated with manufacturing operations approximated prior year
amounts for the three months ended June 30, 1999. For the six month periods,
after adjusting for non-recurring items in 1998, G&A expenses not associated
with manufacturing operations increased $134,000 due to an increase in
professional fees.
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) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gain on disposal of investment in
affiliates $0 $0 $1,989 $0
Gain on sale of real estate assets 835 3,653 2,806 3,874
Loss from investment in affiliates 0 (50) 0 (176)
Gain on sale of marketable securities 0 0 0 75
Other, net 348 4 389 11
------ ------ ------ ------
$1,183 $3,607 $5,184 $3,784
====== ====== ====== ======
</TABLE>
Page 15 of 20
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At June 30, 1999, the Company's cash and marketable securities were
$36.9 million and working capital was approximately $25 million. Management
believes that the real estate market continues to be overvalued and the
Company's recent acquisitions have been limited to those select properties that
meet its financial requirements. Management believes that the available working
capital along with the $40 million of availability on the revolving credit
facility discussed below, puts it in an opportune position to fund acquisitions
and grow the portfolio as attractive long-term opportunities become available.
The current liabilities of the Company have historically exceeded its current
assets principally due to the financing of the purchase of long-term assets
utilizing short-term borrowings and from the classification of current mortgage
obligations without the corresponding current asset for such properties. Future
financial statements may reflect current liabilities in excess of current
assets. Management is confident that through cash flow generated from
operations, together with borrowings available under the revolving credit
facility discussed below and the sale of select assets, all obligations will be
satisfied as they come due.
The Company's portfolio of available-for-sale securities had a fair
market value of $20.8 million at June 30, 1999, reflecting pretax unrealized
holding gains of approximately $5.7 million.
The Company'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 Company 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, 1999, 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
Company was in compliance with all covenants at June 30, 1999. 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
Company's option, bear interest at the bank's prime lending rate 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. At June 30, 1999,
there were no amounts outstanding under the Revolver and approximately $4.6
million was outstanding on the Term Loan.
The Company has an interest-rate swap agreement to effectively convert
its floating rate Term Loan to a fixed rate basis, thus reducing the impact of
interest rate changes on future expense. Under the swap agreement, the Company
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.
Page 16 of 20
<PAGE>
The Company 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 Company. 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 -- Contingencies.
Amounts recorded as anticipated insurance recoveries in the
accompanying Consolidated Financial Statements are in dispute with the Company'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 Company will prevail in its efforts to obtain
amounts at or in excess of the estimated recoveries.
The cash needs of the Company have been satisfied from funds generated
by current operations and additional borrowings. It is expected that future
operational cash needs and the cash required to repurchase the Company's common
stock will also be satisfied from existing cash balances, 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
Company's properties and from third party mortgages and purchase money notes
obtained in connection with specific acquisitions.
In addition to the acquisition of properties for consideration
consisting of cash and mortgage financing proceeds, the Company may acquire real
properties in exchange for the issuance of the Company's equity securities. The
Company may also finance acquisitions of other companies in the future with
borrowings from institutional lenders and/or the public or private offerings of
debt or equity securities.
Repurchases of the Company's common stock will be made from time to
time in the open market at prevailing market prices and may be made in privately
negotiated transactions, subject to available resources. Funds of the Company in
excess of that needed for working capital, purchasing real estate and arranging
financing for real estate acquisitions are invested by the Company in corporate
equity securities, corporate notes, other financial instruments, certificates of
deposit and government securities.
BUSINESS TRENDS
- ---------------
Total revenues for the first six months of 1999 were $28.9 million, a
decrease of $656,000 or 2% from the comparable 1998 period principally due to a
decline in revenues from the Company's engineered products segment. Income from
continuing operations for this period was $6.2 million or $1.22 per basic share
versus $5.8 million or $1.12 per basic share during the same period in 1998.
Page 17 of 20
<PAGE>
The results of the Company's real estate operations reflect a 6%
increase in revenues for the first six months of 1999, primarily due to revenues
generated from properties acquired in 1998. Operating profit from real estate
operations for this period was $5.6 million, a decrease of $519,000 from the
corresponding 1998 period. Increased rental revenues of $719,000 were offset by
higher real estate operating expenses resulting from 1998 expenses having been
reduced by a non-recurring real estate tax abatement of approximately $1 million
and an increase in expenses incurred for the maintenance of properties acquired
in 1998.
Revenues for six month period ended June 30, 1999 from the engineered
products segment decreased 8% from the prior year principally due to continuing
price competition and weakened demand for certain of the Company's products.
Savings from cost containment efforts and efficient material purchases were
offset by amounts invested to expand the Company's product offerings and improve
competitiveness including costs associated with the start up of operations in
Mexico. Management remains committed to growing these businesses and is
aggressively pursuing new sales opportunities, including new geographical
markets for its existing products and new applications for its core
technologies.
YEAR 2000 CONVERSION
- --------------------
The Company 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 Company 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 than remediating the Year 2000 issue, the ERP
package is certified as Year 2000 compliant. As part of this implementation,
which was completed in December 1998, the Company also believes that it has
identified and addressed all its related Year 2000 hardware issues. The Company
believes that the costs, if any, directly associated with Year 2000 compliance
will not be material to its financial condition or results of operations. Year
2000 issues are not significant to the Company's real estate operations.
Substantially all third parties (banks, suppliers, customers) for which the
Company has a business relationship are among the largest and most sophisticated
companies in the country and the Company is providing the data necessary for
these companies to evaluate their Year 2000 issues.
The Company 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 a material 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 Company believes that the
Page 18 of 20
<PAGE>
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 Company or any
other person that the objectives and plans of the Company will be achieved.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ROSATELLI VS. UNItED CAPITAL CORP.
- ----------------------------------
In August 1996, Dennis Rosatelli, the Company'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 Company 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 Company 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. The Company 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 Company against his claims under his employment contract. The matter
is scheduled for trial in September, 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 15, 1999, the Company held its Annual Meeting of Stockholders,
whereby the stockholders elected Directors and approved a proposal to amend the
Company's stock option plans to extend the termination dates. The vote on such
matters was as follows:
1. ELECTION OF DIRECTORS:
For Withheld
--- --------
A. F. Petrocelli 4,400,272 144,294
Howard M. Lorber 4,400,272 144,294
Anthony J. Miceli 4,401,041 143,525
Arnold S. Penner 4,401,017 143,549
Page 19 of 20
<PAGE>
2. APPROVAL OF AMENDMENTS TO 1988 JOINT INCENTIVE AND NON-QUALIFIED STOCK
OPTION PLAN AND THE 1988 INCENTIVE STOCK OPTION PLAN: To adopt amendments
to extend the termination date of the Joint Plan and the Incentive Plan to
December 31, 2008.
For Against Abstain
--- ------- -------
3,817,221 338,702 2,904
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 Company
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
UNITED CAPITAL CORP.
By: /s/ Anthony J. Miceli
---------------------------
Anthony J. Miceli
Vice President, Chief Financial Officer
and Secretary of the Company
Dated: August 12, 1999
Page 20 of 20
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNITED
CAPITAL CORP.'S FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND NOTES, THERETO.
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