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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1998
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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
- ---------------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9 Park Place, Great Neck, New York 11021
- ---------------------------------------- -------------------------------------
(Address of principal executive offices) (Zip code)
Company's telephone number, including area code: (516) 466-6464
--------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
- ---------------------------------- -----------------------------------------
Common Stock American Stock Exchange
(Par Value $.10 Per Share)
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. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
The aggregate market value of the shares of the voting stock held by
nonaffiliates of the Company as of February 24, 1999 was approximately
$27,932,000.
The number of shares of the Company's $.10 par value common stock outstanding as
of February 24, 1999 was 5,047,147.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of Form 10-K will be incorporated by
reference to certain portions of a definitive proxy statement which is expected
to be filed by the Company pursuant to Regulation 14A within 120 days after the
close of its fiscal year.
PART I
ITEM 1. BUSINESS
General
- -------
United Capital Corp. (the "Company"), incorporated in 1980 in the State of
Delaware, currently has two industry segments:
1. Real Estate Investment and Management.
2. Manufacture and Sale of Engineered Products.
The Company also invests excess available cash in marketable securities and
other financial instruments.
On January 2, 1998, the Company completed the sale of the stock of its Dorne &
Margolin, Inc. ("D&M") subsidiary to AIL Systems Inc. ("AIL") for $16 million in
cash, resulting in a pretax gain from discontinued operations of approximately
$8.6 million. 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. (See Note 2, "Disposal of Operating Company" of Notes
to Consolidated Financial Statements.)
Description of Business
- -----------------------
Real Estate Investment and Management
-------------------------------------
The Company is engaged in the business of investing in and managing real estate
properties and the making of high-yield, short-term loans secured by desirable
properties. Most real estate properties owned by the Company are leased under
net leases pursuant to which the tenants are responsible for all expenses
relating to the leased premises, including taxes, utilities, insurance and
maintenance. The Company also owns properties that it manages which are operated
by the City of New York as day-care centers and offices and other properties
leased as department stores, hotels and shopping centers around the country. In
addition, the Company owns properties available for sale and lease with the
assistance of a consultant or a realtor working in the locale of the premises.
The majority of properties are leased to single tenants. Exclusive of the former
D&M facility and the South Plainfield property reclassified to real property
held for rental on December 20, 1998 (See Note 6, "Notes Receivable" of Notes to
Consolidated Financial Statements), approximately 96% of the total square
footage of the Company's properties are currently leased.
Engineered Products
-------------------
The Company's engineered products are manufactured through Metex Mfg. Corp.
("Metex") and AFP Transformers, Inc. ("AFP Transformers"), wholly-owned
subsidiaries of the Company. The knitted wire products and components
manufactured by Metex must function in adverse environments and meet rigid
performance requirements. The principal areas in which these products have
application are as high temperature gaskets, seals, components for use in
airbags, shock and vibration isolators, noise reduction elements and air, liquid
and solid filtering devices.
1
Metex has been an original equipment manufacturer for the automobile industry
since 1974 and presently supplies many automobile manufacturers with exhaust
seals and components for use in exhaust emission control devices.
The Company also manufactures transformer products which are marketed under
several brand names including AFP Transformers, Field Transformer, ISOREG and
EPOXYCAST for a wide variety of industrial and research applications including
machine power transformers, rectifier and inverter transformers and transformers
for heating.
Sales by the engineered products segment to its three largest customers (each in
excess of 10% of the segment's net sales) accounted for approximately 35% of the
segment's sales for 1998. During 1997 sales to its three largest customers
accounted for approximately 39% of the segment's sales.
Summary Financial Information
-----------------------------
The following table sets forth the revenues, operating income and identifiable
assets of each continuing business segment of the Company for 1998, 1997 and
1996.
1998 1997 1996
---- ---- ----
(in thousands)
Real Estate Investment and Management-
- --------------------------------------
Rental revenues $ 26,349 $24,042 $23,936
======== ======= =======
Operating income $ 12,133 $ 7,718 $ 6,195
======== ======= =======
Identifiable assets, including corporate assets $114,406 $95,080 $99,292
======== ======= =======
Engineered Products-
- --------------------
Net sales $ 32,170 $36,204 $42,055
======== ======= =======
Operating income $ 3,239 $ 3,419 $ 3,792
======== ======= =======
Identifiable assets $ 11,706 $11,432 $12,174
======== ======= =======
Distribution
------------
The Company's manufactured products are distributed by a direct sales force and
through distributors to industrial consumers and original equipment
manufacturers.
Product Methods and Sources of Raw Materials
--------------------------------------------
The Company's products are manufactured at its own facilities and a leased
facility in Mexico. The Company purchases raw materials from a wide range of
suppliers of such materials. Most raw materials purchased by the Company are
available from several suppliers. The Company has not had and does not expect to
have any problems fulfilling its raw material requirements during 1999.
2
Patents and Trademarks
----------------------
The Company owns several patents, patent licenses and trademarks. While the
Company considers that in the aggregate its patents and trademarks used in the
engineered products operations are significant to this segment, it does not
believe that any of these patents or trademarks are of such importance that the
loss of one or more of such patents or trademarks would materially affect its
consolidated financial condition or results of operations.
Employees
---------
At February 24, 1999, the Company employed approximately 300 persons. At
December 31, 1998, approximately 185 of the Company's employees were covered by
a collective bargaining agreement that expires in February 1999. While the
Company believes that its relationship with its employees is good, it is
currently negotiating a renewal to its labor contract. There can be no assurance
that the labor contract will be renewed or the terms of any such renewal.
Failure to renew this contract can result in a strike or other work stoppage
that could have a material adverse effect on the Company's results of
operations.
Competition
-----------
The Company competes with at least 20 other companies in the sale of engineered
products. The Company emphasizes product performance and service in connection
with the sale of these products. The principal competition faced by the Company
results from the sales price of the products sold by its competitors.
Backlog
-------
The dollar value of unfilled orders of the Company's engineered products segment
was approximately $2.1 million at December 31, 1998 and $2.2 million at December
31, 1997. It is anticipated that substantially all such 1998 backlog will be
filled in 1999. The order backlog referred to above does not include any order
backlog with respect to sales of knitted wire mesh components for exhaust
emission control devices or exhaust seals because of the manner in which
customer orders are received.
Environmental Regulations
-------------------------
Federal, state and local requirements regulating the discharge of materials into
the environment or otherwise relating to the protection of the environment, have
had and will continue to have a significant impact upon the operations of the
Company. It is the policy of the Company to manage, operate and maintain its
facilities in compliance, in all material respects, with applicable standards
for the prevention, control and abatement of environmental pollution to prevent
damage to the quality of air, land and resources.
The Company has undertaken the completion of environmental studies and/or
remedial action at Metex' two New Jersey facilities.
The 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.
3
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 become 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 (see
Item 3, "Legal Proceedings"). 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.
At December 31, 1998 and 1997, a total of $2.9 million in anticipated insurance
recoveries was recorded in the accompanying Consolidated Financial Statements,
and included in other assets. Additionally, in 1995 the Company received $4.1
million of insurance recoveries. The remaining balance of $2.9 million at
December 31, 1998 (from a total of $7 million) is in dispute with the Company's
insurance carriers as more fully discussed in Item 3 "Legal Proceedings" and
Note 19, "Contingencies" of Notes to Consolidated Financial Statements.
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.
4
ITEM 2. PROPERTIES
Real Property Held for Rental
- -----------------------------
As of February 24, 1999 the Company owned 223 properties strategically located
throughout the United States. The properties are primarily leased under
long-term net leases. The Company's classification and gross carrying value of
its properties at December 31, 1998 are as follows (dollars in thousands):
Gross
Carrying Number of
Description Value Percentage Properties
--------- ---------- ----------
Shopping centers and retail outlets $ 72,331 51.6% 30
Commercial properties 52,822 37.7% 142
Day-care centers and offices 8,056 5.8% 12
Hotel properties 2,916 2.1% 2
Other 3,977 2.8% 40
-------- --------- ---
Total $140,102 100.0% 226
======== ========= ===
Shopping Centers and Retail Outlets
-----------------------------------
Shopping centers and retail outlets include 20 department stores and other
properties which are primarily leased under net leases. Taxes, maintenance and
all other expenses of the properties are the responsibility of the tenants. The
leases for certain shopping centers and retail outlets provide for additional
rents based on sales volume and renewal options at higher rents. The department
stores include 11 K-Mart stores and three Macy's stores, with a total of
approximately 1,064,000, and 538,000, square feet, respectively. The K-Mart
stores are primarily located in the Midwest region of the United States. The
Macy's stores are located in the Pacific Coast region of the United States.
Commercial Properties
---------------------
Commercial properties consist of properties leased as 90 restaurants, 26 Midas
Muffler Shops, three convenience stores, nine office buildings and miscellaneous
other properties. Commercial properties are primarily leased under net leases
which in certain cases, have renewal options at higher rents. Certain of these
leases also provide for additional rents based on sales volume. The 90
restaurants, located throughout the United States, include properties leased as
Roy Rogers, Pizza Hut, Hardee's, Wendy's and Kentucky Fried Chicken. Included in
commercial properties is the 90,000 square foot facility previously utilized in
the Company's D&M business. This facility was retained by the Company and
transferred to real property held for rental.
Day-Care Centers and Offices
----------------------------
The ten day-care centers and two offices, which are located in New York City,
are leased on a long-term basis, to the City of New York.
5
Hotel Properties
----------------
The Company's two hotel properties are located in Georgia and California which
are managed through a local on-site management company that is responsible for
all day-to-day operations of the hotels.
The following summarizes real property held for rental by geographic area at
December 31, 1998 (dollars in thousands):
Number Gross
of Carrying
Properties Value
----------------- ----------------
Northeast 119 $47,855
Southeast 37 24,196
Midwest 41 30,371
Southwest 9 9,811
Pacific Coast 10 23,607
Pacific Northwest 5 981
Rocky Mountain 5 3,281
----------------- ----------------
226 $140,102
================= ================
Manufacturing Facilities
- ------------------------
The Company's engineered products are manufactured at 970 New Durham Road,
Edison, New Jersey, in a one-story building having approximately 53,000 square
feet of floor space and also in a second facility at 206 Talmadge Road in
Edison, New Jersey which has approximately 54,500 square feet of floor space.
The Company owns these facilities together with the sites. In December 1998,
Metex leased a manufacturing facility in Tijuana, Mexico with approximately
10,000 square feet of floor space. Production at this facility began in February
1999.
ITEM 3. 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 complaint 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 the 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 Company intends to vigorously defend this
action and
6
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.
Metex Corporation vs. Affiliated FM Insurance Co., et al.
- ---------------------------------------------------------
On June 27, 1990, Metex filed an action in the Superior Court of New Jersey,
Chancery Division, Middlesex County, against several insurance companies that
provided Metex with liability insurance between 1967 and 1986. To date, Metex
has reached settlements with several carriers. The action seeks both declaratory
relief and monetary damages in connection with reimbursement of the costs
incurred and to be incurred by Metex in connection with the completion of
environmental studies and remedial action required at its two Edison, New Jersey
facilities. The declaratory relief sought is a determination that the terms of
the liability insurance policies at issue obligate the defendants to defend and
indemnify Metex with respect to all costs and expenses related to these
environmental matters. Metex also seeks monetary damages in an unspecified
amount for breach of the defendants' duty to indemnify Metex.
In June 1995, the court dismissed, without prejudice, the New Durham site from
this action. The court ruled that without a governmental directive to remediate
the site no third-party liability exists and accordingly no coverage is
available under the policies. The Company appealed the decision to the New
Jersey Appellate Division which heard the case in February 1996. In April 1996,
the Appellate Division issued a published ruling in favor of the Company
reinstating the action as to the general liability insurance policies regarding
both sites and remanded to the trial court to determine whether the umbrella and
excess insurance policies should be similarly reinstated as to the New Durham
Road site. In November 1996, the umbrella and excess insurance companies once
again moved to dismiss the New Durham site. The motion to dismiss was argued and
denied by the trial court on January 24, 1997. Pretrial discovery is nearing
completion and a trial is expected later this year. The Company intends to
continue to vigorously pursue this action.
Other Litigation
- ----------------
The Company is involved in various other litigation and legal matters which are
being defended and handled in the ordinary course of business.
None of the foregoing is expected to result in a judgment having a material
adverse effect on the Company's consolidated financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
7
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK
AND RELATED SECURITY HOLDER MATTERS
The Company's Common Stock is traded on the American Stock Exchange under the
symbol AFP. The table below shows the high and low sales prices as reported in
the composite transactions for the American Stock Exchange.
High Low
------- --------
1998 First quarter $26-1/2 $23-1/8
- ----
Second quarter 23-3/4 20-1/2
Third quarter 24-1/4 17
Fourth quarter 18-7/8 14
1997 First quarter $12-7/8 $8-3/8
- ----
Second quarter 20-1/2 12-5/8
Third quarter 17-5/8 15
Fourth quarter 29 17-1/8
As of February 24, 1999, there were approximately 500 record holders of the
Company's Common Stock. The closing sales price for the Company's Common Stock
on such date was $18 1/8. The Company has never paid any cash dividends on its
Common Stock. The payment of dividends is within the discretion of the Company's
Board of Directors, however in view of potential working capital needs and in
order to finance future growth and as a result of certain restrictions in the
Company's Credit Agreement, it is unlikely that the Company will pay any cash
dividends on its Common Stock in the near future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below should be read in
conjunction with, and is qualified in its entirety by reference to, the
Consolidated Financial Statements and the Notes thereto.
1998 1997 1996 1995 1994
-------- -------- -------- -------- ---------
(in thousands except per share amounts)
Total revenues (1) $ 58,519 $ 60,246 $ 65,991 $ 64,340 $ 57,499
======== ======== ======== ======== ========
Income from continuing operations $ 10,583 $ 7,465 $ 6,634 $ 3,910 $ 4,158
======== ======== ======== ======== ========
Income from continuing operations
per basic common share (2) $ 2.03 $ 1.41 $ 1.21 $ .67 $ .68
======== ======== ======== ======== ========
Total assets, end of year $126,112 $113,353 $116,761 $110,366 $120,404
Total liabilities, end of year 73,694 75,873 87,186 84,137 87,623
Stockholders' equity, end of year 52,418 37,480 29,575 26,229 32,781
======== ======== ======== ======== ========
Notes to Selected Consolidated Financial Data
- ---------------------------------------------
(1) Certain reclassifications have been reflected in the financial
data to conform prior years' data to the current
classifications.
8
(2) Earnings per share amounts prior to 1997 have been restated as
required to comply with Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). For
further discussion of earnings per share and the impact of
SFAS No. 128, see Note 1, "Summary of Significant Accounting
Policies" of Notes to Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations 1998 and 1997
- -----------------------------------
General
-------
The following discussion of the Company's financial condition and results of
operations should be read in conjunction with the description of the Company's
business and properties contained in Items 1 and 2 of Part I and the
Consolidated Financial Statements and Notes thereto, included elsewhere in this
report.
The total revenues generated by the Company during 1998 were $58.5 million
versus $60.2 million in 1997. Income from continuing operations for 1998 was
$10.6 million or $2.03 per basic share, a 44% increase over 1997 earnings per
basic share of $1.41. Income from continuing operations during 1997 was $7.5
million. Income from the disposal of discontinued operations, net of tax for
1998, was $4.8 million or $.93 per basic share versus income from discontinued
operations of $1 million or $.19 per basic share in 1997. Net income increased
to $15.4 million or $2.96 per basic share in 1998 versus $8.5 million or $1.60
per basic share in 1997, an 85% increase in earnings per share.
Real Estate Operations
----------------------
Rental revenues from real estate operations during 1998 increased $2.3 million
or 10% over those of the prior year. This increase is primarily due to revenues
associated with properties acquired in the current and prior year.
Mortgage interest expense for 1998 decreased by $397,000 as compared to such
expense incurred during 1997. This decrease of 13% results from the continuing
amortization of mortgages during the current year, including repayments
associated with properties sold. Additionally, the Company refinanced three
mortgages in 1998 with a total principal value of approximately $12.3 million,
reducing the weighted average interest rate on these three mortgages from 10.26%
to 6.56%.
Depreciation expense associated with real properties held for rental decreased
approximately $308,000 or 5% from such expense incurred in the preceding year.
This decrease is primarily attributable to properties sold, partially offset by
depreciation expense on acquisitions.
Other operating expenses associated with the management of real properties
decreased approximately $1.4 million during 1998 versus such expenses incurred
in 1997. This decrease is principally due to a one time adjustment in 1998
associated with real estate tax abatements.
9
Engineered Products
-------------------
The Company's engineered products segment includes Metex Mfg. Corp. and AFP
Transformers, Inc. The operating results of the engineered products segment for
the years ended December 31 follows-
1998 1997
------- --------
(in thousands)
Net sales $32,170 $36,204
======= =======
Cost of sales $22,260 $25,972
======= =======
Selling, general and administrative expenses $ 6,671 $ 6,813
======= =======
Income from operations $ 3,239 $ 3,419
======= =======
Net sales of the engineered products segment were $32.2 million, an 11% decrease
from prior year's revenues. This decrease resulted primarily from continued
price competition and declining worldwide automotive sales. Management has
continued to aggressively pursue new revenue opportunities including new
geographical markets for its existing products as well as new applications for
its core technologies.
Cost of sales as a percentage of net sales decreased approximately 3% between
1997 and 1998. This decline is primarily 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 $142,000 or 2% during 1998, as compared to such costs in 1997. This
reduction is principally due to reduced selling expenses, primarily salary and
salary related expenses.
General and Administrative Expenses
-----------------------------------
General and administrative expenses not associated with the manufacturing
operations increased approximately $768,000 during 1998 as compared to such
expenses incurred in the preceding year primarily due to an increase in
professional fees.
Other Income and Expense, Net
-----------------------------
Other income and expense, net for 1998 increased approximately $1.8 million from
$3.2 million in 1997 to $5.0 million in 1998. The increase is principally due to
an increase in gain on the sale of real estate properties of approximately $2.0
million partially offset by increases in other net expenses.
Results of Operations 1997 and 1996
- -----------------------------------
Total revenues generated by the Company during 1997 were $60.2 million, a
decrease of $5.8 million from total 1996 revenues of $66 million. Income from
continuing operations for the period was $7.5 million or $1.41 per basic share
as compared to income from continuing operations of $6.6 million or $1.21 per
basic share for 1996. Income from discontinued operations for 1997 was $1
million or $.19 per basic share versus a loss of ($797,000) or ($.15) per basic
share in 1996. Net income increased to $8.5 million or $1.60 per basic share in
1997 versus $5.8 million or $1.06 per basic share in 1996.
10
Real Estate Operations
----------------------
Rental revenues from real estate operations during 1997 increased $106,000 or
less than 1% over those of 1996. Revenues from new property additions and a
one-time adjustment for percentage rents on certain properties offset the
reduction in revenues resulting from properties sold.
Mortgage interest expense for 1997 decreased by $613,000 as compared to such
expense incurred during 1996. This decrease of 17% results from the continuing
amortization of mortgages which approximated $5.1 million during the current
year, including repayments associated with properties sold.
Depreciation expense associated with real properties held for rental decreased
approximately $521,000 or 8% from such expense incurred in 1996. This decrease
is primarily attributable to properties sold in 1997 and 1996.
Other operating expenses associated with the management of real properties
decreased approximately $283,000 during 1997 versus such expenses incurred in
1996. This decrease is primarily attributable to costs associated with
properties sold, reductions in legal expenses from the prior year, and certain
cost reductions and capital improvements implemented in 1996.
Engineered Products
-------------------
The Company's engineered products segment includes Metex Mfg. Corporation and
AFP Transformers, Inc. The operating results of the engineered products segment
for the years ended December 31 follows-
1997 1996
------- -------
(in thousands)
Net sales $36,204 $42,055
======= =======
Cost of sales $25,972 $30,891
======= =======
Selling, general and administrative expenses $ 6,813 $ 7,372
======= =======
Income from operations $ 3,419 $ 3,792
======= =======
Net sales of the engineered products segment were $36.2 million, a decrease of
$5.9 million versus such sales in 1996. This decrease resulted primarily from
increased price competition and declining worldwide automotive sales.
Cost of sales as a percentage of net sales decreased approximately 2% between
1996 and 1997. This decline is primarily due to continued management focus on
cost containment as well as product mix.
Selling, general and administrative expenses ("SG&A") of the engineered products
segment decreased $559,000 or 8% during 1997, as compared to such costs in 1996.
While sales decreased approximately 14% in 1997 as compared to 1996, the 8%
decline in SG&A expenses reflects management's commitment to increasing sales in
this segment.
11
General and Administrative Expenses
-----------------------------------
General and administrative expenses not associated with the manufacturing
operations decreased approximately $595,000 during 1997 as compared to such
expenses incurred in 1996. This decrease is primarily due to lower compensation
and related expenses.
Other Income and Expense, Net
-----------------------------
Other income and expense, net for 1997 decreased approximately $1.5 million from
$4.8 million in 1996 to $3.3 million in 1997. The decrease is principally due to
a nonrecurring gain of $1.4 million in 1996 resulting from the settlement of all
claims from an investment that was principally written off in 1990 and a
reduction in gains on the sale of real estate properties of approximately
$438,000 partially offset by a reduction of other net expenses.
Liquidity and Capital Resources
- -------------------------------
At December 31, 1998, the Company had positive working capital of approximately
$10.2 million principally due to the sale of D&M on January 2, 1998 for $16
million in cash. (See Note 2, "Disposal of Operating Company" of Notes to
Consolidated Financial Statements.) A portion of these proceeds along with
existing cash balances were utilized for general corporate purposes and to pay
down debt of approximately $5.0 million, to purchase and retire common shares of
approximately $3.9 million and for acquisitions of real property held for rental
of approximately $15.9 million. It is anticipated that the remaining cash
balances will be reinvested into the Company's businesses during 1999. 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 approximately $14.3 million at December 31, 1998, reflecting pretax
unrealized holding gains of approximately $4.5 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 December 31, 1998, eligibility under the Revolver was $40 million,
based upon the above terms. The Credit Agreement contains certain financial and
restrictive covenants, including minimum consolidated equity, interest coverage,
debt service coverage and capital expenditures (other than for real estate). The
Company was in compliance with all covenants at December 31, 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
Company's option, bear interest at the bank's prime lending rate or at the
12
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 December 31,
1998, there were no amounts outstanding under the Revolver and $5.3 million was
outstanding on the Term Loan.
The Company entered into 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.
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.
At December 31, 1998 and December 31, 1997 a total of $2.9 million in
anticipated insurance recoveries has been recorded in the accompanying
Consolidated Financial Statements and is included in other assets. Additionally,
in 1995 the Company received approximately $4.1 million of insurance proceeds.
The remaining balance of $2.9 million at December 31, 1998 (from a total of $7
million) is in dispute with the Company's insurance carriers as more fully
discussed in Item 3 "Legal Proceedings" and Note 19, "Contingencies" of Notes to
Consolidated Financial Statements. 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 October 1998, the Company's Board of Directors authorized the repurchase of
up to an additional $5 million of the Company'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.
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.
13
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.
Market Risk
- -----------
The Company's interest income and expense are most sensitive to changes in the
general levels of U.S. interest rates. Changes in U.S. interest rates affect the
interest earned on the Company's cash and cash equivalents. The Company's
available-for-sale securities consist of U.S. investments in both common and
preferred equity issues and are subject to the fluctuations in U.S. stock
markets. All of the Company's mortgages payable are fixed rate and self
amortizing from the net cash flow on the underlying properties. The Company's
term loan debt is variable rate but is effectively hedged by an interest-rate
swap agreement, whose notional amount matches the principal balance of the
variable rate debt it hedges.
The Company manufactures its products in the United States and Mexico and sells
its products in those markets as well as the European, South American and Asian
markets. Substantially all of the Company's sales are denominated in U.S.
dollars and the Company's operating results are not materially exposed to
changes in exchange rates. The Company's manufacturing operations utilize
various metal commodities (principally stainless steel) in the manufacturing
process. Global competition has stabilized or reduced prices in the key metals
used in the Company's manufacturing processes. While key metals purchased from
foreign entities are generally denominated in U.S. dollars, fluctuations in the
suppliers' local currencies may have some impact on materials pricing. The
Company is unable to quantify the effects of such fluctuations, however, it does
enter into purchase commitments for certain key metals that generally do not
exceed twelve months and tend to minimize short-term currency fluctuations. The
Company's financial results, however, could be significantly affected by
fluctuations in metals pricing. The following is a tabular presentation of
quantitative market risks at December 31, 1998:
Principal (Notional) Amount by Expected Maturity
------------------------------------------------------------------ Fair
There- Value
(dollars in thousands) 1999 2000 2001 2002 2003 after Total 12/31/98
- ------------------------------------------------------------------------------------------------------------------------------
Assets
Available-for-sale securities,
principally equity securities $14,290 0 0 0 0 0 $14,290 $14,290
Mortgage notes receivable $2,121 $34 $18 $364 $18 $159 $2,714 $2,763
Average Interest Rate 12.9% 10% 10% 10% 10% 10%
Liabilities
Long-term Debt, including Current Portion
Fixed Rate $5,875 $5,886 $5,365 $4,868 $4,195 $6,615 $32,804 $32,705
Average Interest Rate 7.76% 7.71% 7.60% 7.44% 7.43% 7.19%
Variable Rate $1,400 $1,400 $1,400 $1,050 0 0 $5,250 $5,250
Average Interest Rate-LIBOR
+1.40% 6.71% 6.71% 6.71% 6.71%
Interest Rate Derivative Financial
Instruments Related to Variable Rate Debt
Interest Rate Swaps
Pay Fixed/Receive Variable $1,400 $1,400 $1,400 $1,050 0 0 $5,250 ($125)
Average Pay Rate 7.75% 7.75% 7.75% 7.75%
Average Receive Rate 6.71% 6.71% 6.71% 6.71%
14
Business Trends
- ---------------
Total 1998 revenues of the Company decreased approximately $1.7 million or 3%
from 1997 levels to $58.5 million. The reduction in revenues is attributable to
revenue reductions in the engineered products segment as real estate operations
posted a 10% increase in revenues. Income from continuing operations increased
to $10.6 million in 1998 from $7.5 million in 1997 principally due to an
increase in operating profit of the Company's real estate operations partially
offset by reduced operating profit in the engineered products segment resulting
from the reduction in revenues and an increase in general corporate expenses.
The results of the Company's real estate operations reflect an increase in
operating profit of $4.4 million on a revenue increase of $2.3 million. The
increase in operating profits is primarily attributable to operating profits
associated with properties acquired in 1997 and 1998, a nonrecurring adjustment
for real estate tax abatements, reduced interest expense from continued
amortization of mortgage indebtedness, and lower depreciation expense associated
with properties sold in the prior year. Continuing lease renewals and mortgage
amortization will continue to have a positive effect upon the revenues and
operating profit of this segment.
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 Company borrowed $5.1 million secured by a
mortgage on two properties that the Company 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 Company's engineered products segment posted an 11% decrease in revenues
during the twelve months ended December 31, 1998, from the comparable 1997
period while operating profits decreased approximately 5%. The decrease in net
sales was primarily due to continuing price competition and declining worldwide
automotive sales. Operating profit as a percentage of sales decreased less than
the reduction in revenues principally due to a favorable market for stainless
steel purchases, as well as an ongoing emphasis on cost reductions and
productivity improvements. Sales in 1999 are anticipated to approximate 1998
levels; however, 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 have continued to reflect significant
improvements over the prior year and management is hopeful to continue this
trend.
At December 31, 1998, approximately 185 of the Company's employees were covered
by a collective bargaining agreement that expires in February 1999. While the
Company believes that its relationship with its employees is good it is
currently negotiating a renewal to its labor contract. There can be no assurance
that the labor contract will be renewed or the terms of any such agreement.
Failure to renew this contract can result in a strike or other work stoppage
that could have a material effect on the Company's results of operations.
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
15
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
conditions 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-K contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), which are
intended to be covered by the safe harbors created thereby. All forward-looking
statements involve risks and uncertainty including without limitation the
statements expressed under "Business Trends" and "Year 2000 Conversion" above.
Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements included in this Form 10-K will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary information filed as part of this
Item 8 are listed under Part IV, Item 14, "Exhibits, Financial Statements and
Schedules and Reports on Form 8-K" and are contained in this Form 10-K,
beginning on page F-1.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
This information will be contained in the Proxy Statement of the Company for the
1999 Annual Meeting of Stockholders under the captions "Election of Directors"
and "Executive Compensation" and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
This information will be contained in the Proxy Statement of the Company for the
1999 Annual Meeting of Stockholders under the caption "Executive Compensation"
and is incorporated herein by reference.
16
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
This information will be contained in the Proxy Statement of the Company for the
1999 Annual Meeting of Stockholders under the captions "Security Ownership" and
"Election of Directors" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information will be contained in the Proxy Statement of the Company for the
1999 Annual Meeting of Stockholders under the caption "Certain Relationships and
Related Transactions" and is incorporated herein by reference. Also see Note 14,
"Transactions with Related Parties," of Notes to Consolidated Financial
Statements, contained elsewhere in this report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES AND
REPORTS ON FORM 8-K
(a) (1) Consolidated Financial Statements. The following Consolidated
Financial Statements and Consolidated Financial Statement
Schedules of the Company are included in this Form 10-K at the
pages indicated:
Index to Consolidated Financial Statements
------------------------------------------
Page
----
Report of Independent Public Accountants F-1
Consolidated Balance Sheets as of December 31, 1998
and 1997 F-2
Consolidated Statements of Income for the Years F-3
Ended December 31, 1998, 1997 and 1996 to F-4
Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the Years Ended
December 31, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the F-6
Years Ended December 31, 1998, 1997 and 1996 to F-7
Notes to Consolidated Financial Statements F-8
to F-27
(2) Consolidated Financial Statement Schedules
Schedule II -- Allowance for Doubtful Accounts F-28
Schedule III -- Real Property Held for Rental and F-29
Accumulated Depreciation
Schedule IV -- Mortgage Loans on Real Estate F-30
(3) Supplementary Data
Quarterly Financial Data (Unaudited) F-31 to F-32
Schedules not listed above are omitted as not applicable or
the information is presented in the financial statements or
related notes.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the last quarter of
fiscal 1998.
17
(c) Exhibits
3.1. Amended and restated Certificate of Incorporation of the
Company (incorporated by reference to exhibit 3.1 filed with the Company's
report on Form 10-K for the fiscal year ended December 31, 1993).
3.2. By-laws of the Company (incorporated by reference to exhibit 3
filed with the Company's report on Form 10-K for the fiscal year ended December
31, 1980).
*10.1. 1988 Incentive Stock Option Plan of the Company, as amended.
*10.2. 1988 Joint Incentive and Non-Qualified Stock Option Plan, as
amended.
10.3. Employment Agreement dated as of January 1, 1990 by and
between the Company and A. F. Petrocelli (incorporated by reference to exhibit
10.9 filed with the Company's report on Form 10-K for the fiscal year ended
December 31, 1989).
10.4. Amendment dated as of December 3, 1990 to Employment Agreement
dated as of January 1, 1990, by and between the Company and A. F. Petrocelli
(incorporated by reference to exhibit 10.10 filed with the Company's report on
Form 10-K for the fiscal year ended December 31, 1990).
10.5. Amendment dated as of June 8, 1993 to Employment Agreement
dated as of January 1, 1990 by and between the Company and A. F. Petrocelli
(incorporated by reference to exhibit 10.5 filed with the Company's report on
Form 10-K for the fiscal year ended December 31, 1993).
10.6. Revolving Credit Agreement dated as of January 15, 1997 and as
amended September 29, 1997 and January 2, 1998, with the financial parties
thereto (incorporated by reference to exhibit 10.6 filed with the Company's
report on Form 10-K for the fiscal year ended December 31, 1997).
* 10.7. Amendments dated as of October 5, 1998 and December 31, 1998
to Revolving Credit Agreement.
10.8. Stock Purchase Agreement, dated as of November 20, 1997 by and
among AIL Systems Inc., United Capital Corp. and Metex Corporation (incorporated
by reference to exhibit 10.7 filed with the Company's report on Form 10-K for
the fiscal year ended December 31, 1997).
*21. Subsidiaries of the Company
*23. Accountants' consent to the incorporation by reference in
Company's Registration Statements on Form S-8 of the Report of Independent
Public Accountants included herein.
*27. Financial Data Schedule
- -----------------
* Filed herewith
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
UNITED CAPITAL CORP.
Dated: February 24, 1999 By: /s/ A.F. Petrocelli
----------------- -------------------
A. F. Petrocelli
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the date indicated.
Dated: February 24, 1999 By: /s/ A.F. Petrocelli
----------------- -----------------------------------
A. F. Petrocelli
Chairman, President and
Chief Executive Officer
Dated: February 24, 1999 By: /s/ Howard M. Lorber
----------------- -----------------------------------
Howard M. Lorber
Director
Dated: February 24, 1999 By: /s/ Anthony J. Miceli
----------------- -----------------------------------
Anthony J. Miceli
Chief Financial Officer,
Chief Accountant, Secretary
and Director
Dated: February 24, 1999 By: /s/ Arnold S. Penner
----------------- -----------------------------------
Arnold S. Penner
Director
19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
and Stockholders of
United Capital Corp.:
We have audited the accompanying consolidated balance sheets of United Capital
Corp. (a Delaware Corporation) and subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of income, stockholders' equity
and comprehensive income and cash flows for each of the three years in the
period ended December 31, 1998. These consolidated financial statements and the
schedules referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of United Capital Corp. and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the index to
consolidated financial statements and schedules are presented for purposes of
complying with the Securities and Exchange Commission's rules and are not part
of the basic financial statements. These schedules have been subjected to the
auditing procedures applied in the audits of the basic financial statements and,
in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
/S/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Roseland, New Jersey
February 11, 1999
F-1
UNITED CAPITAL CORP. AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1998 AND 1997
------------------------------------------------------------
(In Thousands)
--------------
ASSETS 1998 1997
------ ---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 8,154 $ 5,250
Marketable securities 14,290 355
Notes and accounts receivable, net of allowance for doubtful
accounts of $390 and $326, respectively 7,819 11,319
Inventories 4,339 3,693
Prepaid expenses and other current assets 209 292
Deferred income taxes 0 1,219
Net current assets of discontinued operations 0 4,492
-------- --------
Total current assets 34,811 26,620
-------- --------
PROPERTY, PLANT AND EQUIPMENT, net 4,686 4,299
REAL PROPERTY HELD FOR RENTAL, net 71,437 58,578
NONCURRENT NOTES RECEIVABLE 593 7,356
OTHER ASSETS 11,296 11,185
DEFERRED INCOME TAXES 3,289 2,966
NET NONCURRENT ASSETS OF DISCONTINUED OPERATIONS 0 2,349
-------- --------
Total assets $126,112 $113,353
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
------------------------------------ ---- ----
CURRENT LIABILITIES:
Current maturities of long-term debt $ 5,875 $ 5,232
Borrowings under credit facilities 1,400 6,000
Accounts payable and accrued liabilities 10,821 14,129
Income taxes payable 6,355 5,872
Deferred income taxes 152 0
-------- --------
Total current liabilities 24,603 31,233
LONG-TERM LIABILITIES:
Borrowings under credit facilities 3,850 5,250
Long-term debt 26,929 26,560
Other long-term liabilities 18,312 12,830
-------- --------
Total liabilities 73,694 75,873
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock $.10 par value, authorized 7,500 shares;
issued and outstanding 5,148 and 5,286 shares, respectively 515 528
Additional paid-in capital 3,536 6,819
Retained earnings 45,429 29,997
Accumulated other comprehensive income, net of tax 2,938 136
-------- --------
Total stockholders' equity 52,418 37,480
-------- --------
Total liabilities and stockholders' equity $126,112 $113,353
======== ========
The accompanying notes to consolidated financial statements are
an integral part of these balance sheets.
F-2
UNITED CAPITAL CORP. AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
----------------------------------------------------
(In Thousands, Except Per Share Data)
-------------------------------------
1998 1997 1996
---- ---- ----
REVENUES:
Net sales $ 32,170 $ 36,204 $ 42,055
Rental revenues from real estate operations 26,349 24,042 23,936
-------- -------- --------
Total revenues 58,519 60,246 65,991
-------- -------- --------
COSTS AND EXPENSES:
Cost of sales 22,260 25,972 30,891
Real estate operations-
Mortgage interest expense 2,661 3,058 3,671
Depreciation expense 5,530 5,838 6,359
Other operating expenses 6,025 7,428 7,711
General and administrative expenses 6,057 5,038 5,798
Selling expenses 3,712 4,104 4,498
-------- -------- --------
Total costs and expenses 46,245 51,438 58,928
-------- -------- --------
Operating income 12,274 8,808 7,063
-------- -------- --------
OTHER INCOME (EXPENSE):
Interest income 1,961 2,613 1,108
Interest expense (962) (1,408) (929)
Other income and expense, net 5,035 3,262 4,801
-------- -------- --------
Total other income 6,034 4,467 4,980
-------- -------- --------
Income from continuing operations before
income taxes 18,308 13,275 12,043
Provision for income taxes 7,725 5,810 5,409
-------- -------- --------
Income from continuing operations 10,583 7,465 6,634
-------- -------- --------
F-3
1998 1997 1996
---- ---- ----
DISCONTINUED OPERATIONS:
Operating income (loss), net of tax (provision)
benefit of ($635) in 1997 and $413 in 1996 $ 0 $ 1,016 ($ 797)
Gain on disposal of discontinued operations, net
of tax provision of $3,700 4,849 0 0
---------- --------- ---------
Income (loss) from discontinued operations 4,849 1,016 (797)
---------- --------- ---------
Net income $ 15,432 $ 8,481 $ 5,837
========== ========= =========
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Income from continuing operations $ 2.03 $ 1.41 $ 1.21
Discontinued operations .93 .19 (.15)
---------- --------- ---------
Net income per common share $ 2.96 $ 1.60 $ 1.06
========== ========= =========
DILUTED EARNINGS (LOSS) PER COMMON
SHARE:
Income from continuing operations $ 2.00 $ 1.40 $ 1.20
Discontinued operations .92 .19 (.14)
---------- --------- ---------
Net income per common share assuming dilution $ 2.92 $ 1.59 $ 1.06
========== ========= =========
The accompanying notes to consolidated financial statements are
an integral part of these statements.
F-4
UNITED CAPITAL CORP. AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
----------------------------------------------------
(In Thousands)
--------------
Common Stock Issued Additional
----------------------------- Paid-in
Shares Amount Capital
----------- ----------- -----------
BALANCE - December 31, 1995 5,606 $561 $10,100
Purchase and retirement of common shares (425) (43) (3,575)
Proceeds from the exercise of stock options 165 16 891
Net income 0 0 0
Other comprehensive income, net of tax-
Change in net unrealized gain on available-for-sale securities,
net of tax provision of $28 0 0 0
Change in minimum pension liability, net of tax provision of $85 0 0 0
Comprehensive income ----------- ----------- -----------
BALANCE--December 31, 1996 5,346 534 7,416
----------- ----------- -----------
Purchase and retirement of common shares (67) (7) (659)
Proceeds from the exercise of stock options 7 1 62
Net income 0 0 0
Other comprehensive income, net of tax-
Change in net unrealized gain on available-for-sale securities,
net of tax provision of $14 0 0 0
Comprehensive income ----------- ----------- -----------
BALANCE--December 31, 1997 5,286 528 6,819
----------- ----------- -----------
Purchase and retirement of common shares (189) (18) (3,846)
Proceeds from the exercise of stock options 51 5 563
Net income 0 0 0
Other comprehensive income, net of tax-
Change in net unrealized gain on available-for-sale securities,
net of tax provision of $1,444 0 0 0
Comprehensive income ----------- ----------- -----------
BALANCE--December 31, 1998 5,148 $515 $3,536
=========== =========== ===========
Accumulated
Other Total
Retained Comprehensive Stockholders' Comprehensive
Earnings Income Equity Income
------------ ------------- ------------- ------------
BALANCE - December 31, 1995 $15,679 ($111) $26,229
Purchase and retirement of common shares 0 0 (3,618)
Proceeds from the exercise of stock options 0 0 907
Net income 5,837 0 5,837 $5,837
Other comprehensive income, net of tax-
Change in net unrealized gain on available-for-sale securities,
net of tax provision of $28 0 54 54 54
Change in minimum pension liability, net of tax provision of $85 0 166 166 166
----------
$6,057
Comprehensive income ------------ ----------- ------------- ==========
BALANCE--December 31, 1996 21,516 109 29,575
------------ ----------- -------------
Purchase and retirement of common shares 0 0 (666)
Proceeds from the exercise of stock options 0 0 63
Net income 8,481 0 8,481 $8,481
Other comprehensive income, net of tax-
Change in net unrealized gain on available-for-sale securities,
net of tax provision of $14 0 27 27 27
----------
$8,508
Comprehensive income ------------ ----------- ------------- ==========
BALANCE--December 31, 1997 29,997 136 37,480
------------ ----------- -------------
Purchase and retirement of common shares 0 0 (3,864)
Proceeds from the exercise of stock options 0 0 568
Net income 15,432 0 15,432 $15,432
Other comprehensive income, net of tax-
Change in net unrealized gain on available-for-sale securities,
net of tax provision of $1,444 0 2,802 2,802 2,802
----------
$18,234
Comprehensive income ------------ ----------- ------------- ==========
BALANCE--December 31, 1998 $45,429 $2,938 $52,418
============ =========== =============
The accompanying notes to consolidated financial statements are
an integral part of these statements.
F-5
UNITED CAPITAL CORP. AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
----------------------------------------------------
(In Thousands)
--------------
1998 1997 1996
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 15,432 $ 8,481 $ 5,837
-------- -------- --------
Adjustments to reconcile net income
to net cash provided by operating activities-
Gain on sale of discontinued operations, net of tax (4,849) 0 0
Purchase of trading securities (5,891) 0 0
Proceeds from sale of trading securities 5,966 0 0
Depreciation and amortization 6,566 6,657 7,246
Loss from equity investments 402 263 0
Gain on sale of trading securities (75) 0 0
Changes in assets and liabilities, net of effects from
business disposals (A) (10,589) 11,313 (9,257)
-------- -------- --------
Total adjustments (8,470) 18,233 (2,011)
-------- -------- --------
Net cash provided by operating activities 6,962 26,714 3,826
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of discontinued operations 16,000 0 0
Investments in and advances to affiliates (237) (5,395) 0
Purchase of available-for-sale securities (9,690) 0 (147)
Acquisition of property, plant and equipment (1,846) (806) (735)
Investing activities of discontinued operations 0 (569) (261)
-------- -------- --------
Net cash provided by (used in) investing activities 4,227 (6,770) (1,143)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on mortgage commitments, notes
and loans (18,141) (6,715) (13,046)
Proceeds from mortgage commitments, notes and loans 19,153 0 1,025
Net (repayments) borrowings under credit facilities (6,000) (8,570) 12,035
Purchase and retirement of common shares (3,865) (666) (3,618)
Proceeds from the exercise of stock options 568 63 907
Financing activities of discontinued operations 0 (1,385) (582)
-------- -------- --------
Net cash used in financing activities (8,285) (17,273) (3,279)
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents 2,904 2,671 (596)
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR 5,250 2,579 3,175
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 8,154 $ 5,250 $ 2,579
======== ======== ========
F-6
1998 1997 1996
-------- -------- -------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for-
Interest $ 3,640 $ 4,832 $ 4,734
Taxes 7,874 3,655 2,876
======== ======== =======
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Noncash Investing Activities-
Capital Lease Obligations $ 0 $ 511 $ 0
======== ======== =======
(A) Changes in assets and liabilities for the
years ended December 31, 1998, 1997 and 1996,
net of effects from business disposal are as
follows-
1998 1997 1996
-------- -------- -------
Decrease (increase) in notes and accounts
receivable, net $ 3,500 $ 7,425 ($7,597)
Decrease (increase) in inventories (646) 659 (77)
Decrease (increase) in prepaid expenses and
other current assets 84 414 (173)
Increase in deferred income taxes (395) (958) (1,115)
Decrease (increase) in real property held for
rental, net (17,965) 1,275 (228)
Decrease (increase) in noncurrent notes receivable 6,763 (1,424) (2,308)
Increase in other assets (277) (257) (1,464)
Increase (decrease) in accounts payable and
accrued liabilities (3,918) 16 (665)
Increase (decrease) in income taxes payable (3,217) 1,635 557
Increase in other long-term liabilities 5,482 1,810 3,184
Discontinued operations - noncash charges and working capital changes 0 718 629
-------- -------- -------
Total ($10,589) $ 11,313 ($9,257)
======== ======== =======
The accompanying notes to consolidated financial statements are
an integral part of these statements.
F-7
UNITED CAPITAL CORP. AND SUBSIDIARIES
-------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 1998, 1997 AND 1996
--------------------------------
(In Thousands, Except Share And Per Share Data)
-----------------------------------------------
(1) SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
--------------------
Nature of Business-
-------------------
United Capital Corp. (the "Company") and its subsidiaries are
currently engaged in the investment and management of real
estate and in the manufacture and sale of engineered products.
Principles of Consolidation-
----------------------------
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
The equity method of accounting is used for investments in 50%
or less owned companies over which the Company has the ability
to exercise significant influence.
Income Recognition --
Real Estate Operations-
-----------------------
The Company leases substantially all of its properties to
tenants under net leases. Under this type of lease, the tenant
is obligated to pay all operating costs of the property
including real estate taxes, insurance and repairs and
maintenance. Rental income is recognized based on the terms of
the leases. Certain lease agreements provide for additional
rent based on a percentage of tenants' sales. Such additional
rents are recorded as income when they can be reasonably
estimated. Gains on sales of real estate assets are recorded
when the gain recognition criteria under generally accepted
accounting principles have been met.
Income on leveraged leases is recognized by a method which
produces a constant rate of return on the outstanding
investment in the lease, net of the related deferred tax
liability in the years in which the net investment is
positive.
Revenue Recognition --
Manufacturing Operations-
-------------------------
Sales are recorded when products are shipped to the customer.
Cash and Cash Equivalents-
--------------------------
The Company considers all highly liquid investments with a
maturity, at the purchase date, of three months or less to be
cash equivalents.
F-8
Statements of Comprehensive Income-
-----------------------------------
In 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," ("SFAS
No. 130"), which requires companies to report all changes in
equity during a period, except those resulting from investment
by owners and distribution by owners, in a financial statement
for the period in which they are recognized. The Company has
chosen to disclose comprehensive income, which consists of net
income, change in net unrealized gain on available-for-sale
securities and minimum pension liability adjustments, in the
Consolidated Statements of Stockholders' Equity and
Comprehensive Income. Prior years have been restated to
conform to the SFAS No. 130 requirements.
Marketable Securities-
----------------------
The Company determines the appropriate classification of
securities at the time of purchase and reassesses the
appropriateness of the classification at each reporting date.
At December 31, 1998 and 1997, all marketable equity
securities have been classified as available-for-sale and, as
a result, are stated at fair value. Unrealized gains and
losses on available-for-sale securities are recorded as a
separate component of stockholders' equity. Marketable
securities defined as trading securities are stated at fair
value and unrealized holding gains and losses are reflected in
earnings. Realized gains and losses on the sale of securities,
as determined on a specific identification basis, are included
in the Consolidated Statements of Income.
Inventories-
------------
Inventories are stated at the lower of cost or market and
include material, labor and manufacturing overhead. The
first-in, first-out (FIFO) method is used to determine the
cost of inventories.
The components of inventory at December 31, are as follows-
1998 1997
--------- -----------
Raw materials $1,851 $1,959
Work in process 403 265
Finished goods 2,085 1,469
--------- -----------
$4,339 $3,693
========= ===========
Depreciation and Amortization-
------------------------------
Depreciation and amortization are provided on a straight-line
basis over the estimated useful lives of the related assets as
follows-
Real property held for rental-
Buildings 5 to 39 years
Equipment 5 to 7 years
Property, plant and equipment-
Buildings and improvements 18 to 20 years
Machinery and equipment 3 to 10 years
F-9
Real Property Held for Rental-
------------------------------
Real property held for rental is carried at cost less
accumulated depreciation. Major renewals and betterments are
capitalized. Maintenance and repairs are expensed as incurred.
Certain mortgage obligations assumed by the Company contain
provisions whereby the mortgage holder may acquire, under
certain conditions, an interest in the properties securing the
obligation, for a nominal amount. The Company considers any
costs incurred as a result of these provisions to be a cost of
acquisition and the basis in such properties is adjusted
accordingly.
Research and Development-
-------------------------
The Company expenses research, development and product
engineering costs as incurred. Approximately $63, $77 and $112
of such costs were incurred by the Company in 1998, 1997 and
1996, respectively.
Common Stock-Based Compensation-
--------------------------------
The Company accounts for stock-based compensation plans in
accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related
Interpretations ("APB No. 25"). Under APB No. 25, when the
exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant,
no compensation cost is recognized.
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. All earnings per share amounts for all
periods have been presented, and where appropriate, restated
to conform to the SFAS No. 128 requirements.
Derivative Financial Instruments-
---------------------------------
The Company has entered into an interest rate swap agreement
(the "Swap") to modify the interest characteristics of a
particular term loan by effectively converting its floating
rate to a fixed rate, thus reducing the impact of interest
rate changes on future expense. The Swap is designated with
the principal balance and term of the Company's Term Loan. The
amount paid or received on the interest rate Swap is accrued
and recognized as an adjustment of interest expense related to
the debt (the accrual accounting method). The fair value of
the Swap and changes in the fair value as a result of changes
in market interest rates are not recognized in the financial
statements. The Company has not traded in derivative financial
instruments.
F-10
Prior Year Financial Statements-
--------------------------------
Certain amounts have been reclassified in the December 31,
1997 and 1996 financial statements and notes thereto to
present them on a basis consistent with the current year.
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.
Changes in Accounting Policies-
-------------------------------
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 e