ITEM 1. BUSINESS
GENERAL
United Capital Corp. (the "Registrant"), 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 Registrant also invests excess available cash in marketable securities and other financial instruments.
On November 20, 1997, the Registrant signed a definitive agreement to sell the stock of its Dorne & Margolin, Inc. ("D&M") subsidiary to AIL Systems Inc. ("AIL") for $16 million in cash. On January 2, 1998 the sale was completed and will result in a pretax gain of approximately $9 million and have an estimated $.92 per share effect on earnings on an after tax basis in the first quarter of 1998. The net assets and operating results of D&M are presented in the accompanying consolidated financial statement as a discontinued operation. (See Note 2 to Consolidated Financial Statements "Disposal of Operating Companies".)
DESCRIPTION OF BUSINESS
REAL ESTATE INVESTMENT AND MANAGEMENT
The Registrant 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 Registrant 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 Registrant 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 Registrant 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. Approximately 97% of the total square footage of the Registrant's properties are currently leased.
ENGINEERED PRODUCTS
The Registrant's engineered products are manufactured through the Technical Products Division of Metex Corporation ("Metex") and AFP Transformers, Inc. ("AFP Transformers"), wholly-owned subsidiaries of the Registrant. 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.
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 Registrant 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 39% of the segment's sales for 1997. During 1996 sales to its three largest customers accounted for approximately 40% 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 Registrant for 1997, 1996 and 1995.
DISTRIBUTION
The Registrant'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 Registrant's products are manufactured at its own facilities. The Registrant purchases raw materials from a wide range of suppliers of such materials. Most raw materials purchased by the Registrant are available from several suppliers. The Registrant has not had and does not expect to have any problems fulfilling its raw material requirements during 1998.
PATENTS AND TRADEMARKS
The Registrant owns several patents, patent licenses and trademarks. While the Registrant 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 March 5, 1998, the Registrant employed approximately 319 persons. Certain of the Registrant's employees are represented by unions. The Registrant believes that its relationships with its employees are good.
COMPETITION
The Registrant competes with at least 21 other companies in the sale of engineered products. The Registrant stresses product performance and service in connection with the sale of these products. The principal competition faced by the Registrant results from the sales price of the products sold by its competitors.
BACKLOG
The dollar value of unfilled orders of the Registrant's engineered products segment was approximately $2.2 million at December 31, 1997 and 1996. It is anticipated that substantially all such 1997 backlog will be filled in 1998. 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 Registrant. It is the policy of the Registrant 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 Registrant has undertaken the completion of environmental studies and/or remedial action at Metex' two New Jersey facilities.
The process of remediation has begun at one facility pursuant to a plan filed with the New Jersey Department of Environmental Protection and Energy ("NJDEPE"). Environmental experts engaged by the Registrant estimate that under the most probable remediation scenario the remediation of this site is anticipated to require initial expenditures of $860,000 including the cost of capital equipment, and $86,000 in annual operating and maintenance costs over a 15-year period.
Environmental studies at the second facility indicate that remediation may be necessary. Based upon the facts presently available, environmental experts have advised the Registrant that under the most probable remediation scenario, the estimated cost to remediate this site is anticipated to require
$2.3 million in initial costs, including capital equipment expenditures, and $258,000 in annual operating and maintenance costs over a 10-year period. The Registrant may revise such estimates in the future due to the uncertainty regarding the nature, timing and extent of any remediation efforts that may be required at this site, should an appropriate regulatory agency deem such efforts to be necessary.
The foregoing estimates may also be revised by the Registrant as new or additional information in these matters 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 Registrant believes that it is entitled to full defense and indemnification with respect to environmental investigation and remediation costs under its insurance policies, the Registrant's insurers have denied such coverage. Accordingly, the Registrant has filed an action against certain insurance carriers seeking defense and indemnification with respect to all prior and future costs incurred in the investigation and remediation of these sites (see Item 3, "Legal Proceedings"). Upon the advice of counsel, the Registrant believes that based upon a present understanding of the facts and the present state of the law in New Jersey, it is probable that the Registrant will prevail in the pending litigation and thereby access all or a very substantial portion of the insurance coverage it claims; however, the ultimate outcome of litigation cannot be predicted.
At December 31, 1997 and 1996 a total of $2.9 million in anticipated insurance recoveries is recorded in the accompanying consolidated financial statements, and is included in other assets. Additionally, in 1995 the Company received $4.1 million of insurance recoveries. The remaining balance of $2.9 million at December 31, 1997 (from a total of $7 million) is in dispute with the Registrant's insurance carriers as more fully discussed in Item 3 "Legal Proceedings" and Note 19 to Consolidated Financial Statements, "Contingencies." Management believes that recoveries in excess of the amounts reflected in the accompanying Consolidated Financial Statements are available under the insurance policies but have not been recorded. There can be no assurance, however, that the Registrant will prevail in its efforts to obtain amounts at or in excess of the estimated recoveries.
In the opinion of management, these matters will be resolved favorably and such amounts, if any, not recovered under the Registrant's insurance policies will be paid gradually over a period of years and, accordingly, should not have a material adverse effect upon the business, liquidity or financial position of the Registrant. However, adverse decisions or events, particularly as to the merits of the Registrant's factual and legal basis could cause the Registrant to change its estimate of liability with respect to such matters in the future.
ITEM 2.
ITEM 2. PROPERTIES
REAL PROPERTY HELD FOR RENTAL
As of March 5, 1998 the Registrant owned 224 properties strategically located throughout the United States. The properties are primarily leased under long-term net leases. The Registrant's classification and gross carrying value of its properties at December 31, 1997 are as follows (in thousands, except number of property amounts):
SHOPPING CENTERS AND RETAIL OUTLETS
Shopping centers and retail outlets include 21 department stores and other properties which are primarily leased under net leases. Taxes, maintenance of the properties and all other expenses 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, three Macy's stores, one IKEA store and one Office Depot with a total of approximately 1,064,000, 538,000, 160,000 and 111,000 square feet, respectively. The K-Mart stores are primarily located in the Midwest region of the United States. The Macy's and IKEA stores are primarily located in the Pacific Coast and Southwest regions of the United States.
COMMERCIAL PROPERTIES
Commercial properties consist of properties leased as 93 restaurants, 27 Midas Muffler Shops, three convenience stores, seven 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 93 restaurants, located throughout the United States, include properties leased as Boston Market, 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 Registrant's D&M business. This facility was retained by the Registrant and transferred to real property held for rental.
DAY-CARE CENTERS AND OFFICES
The 10 day-care centers and two offices, which are located in New York City, are leased to the City of New York. The Registrant has negotiated with the City of New York to extend, on a long-term basis, all 12 of these leases.
HOTEL PROPERTIES
The Registrant'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, 1997 (in thousands, except number of property amounts):
MANUFACTURING FACILITIES
The Registrant'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 space. The Registrant owns these facilities together with the sites.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
ROSATELLI VS. UNITED CAPITAL CORP.
In August 1996, Dennis Rosatelli, the Registrant's former Chief Financial Officer commenced an action in Superior Court of New Jersey, Law Division, Bergen County, 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 Registrant believes that as a result of Mr. Rosatelli's gross negligence, recklessness and/or willful disregard of his duties and responsibilities, Mr. Rosatelli is not entitled to the recoveries he seeks. Mr. Rosatelli's employment was terminated by the Registrant in May 1996 for cause. The matter has been removed to the United States District Court, District of New Jersey. This action is in the early stages of pretrial discovery. The Registrant intends to vigorously defend this action and has asserted counterclaims against Mr. Rosatelli for, among other things, the set off of amounts by which he has damaged the Registrant against his claims under his employment contract.
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 Registrant 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 Registrant 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 not yet complete. The Registrant intends to continue to vigorously pursue this action.
OTHER LITIGATION
The Registrant 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 Registrant's consolidated financial position or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The Registrant'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 ------------- -------------
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
1996 First quarter $7-3/8 $6-1/2 - ---- Second quarter 8-3/4 7-1/8 Third quarter 10 7-1/2 Fourth quarter 9-5/8 8-1/2
As of March 5, 1998, there were approximately 527 record holders of the Registrant's Common Stock. The closing sales price for the Registrant's Common Stock on such date was $23 5/8. The Registrant has never paid any cash dividends on its Common Stock. The payment of dividends is within the discretion of the Registrant'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 Registrant's Credit Agreement, it is unlikely that the Registrant will pay any cash dividends on its Common Stock in the near future.
ITEM 6.
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.
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.
(2) The 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 Notes To Consolidated Financial Statements beginning on page.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS 1997 AND 1996
GENERAL
The following discussion of the Registrant's financial condition and results of operations should be read in conjunction with the description of the Registrant'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.
Total revenues generated by the Registrant 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 share as compared to income from continuing operations of $6.6 million or $1.21 per share for 1996. Income from discontinued operations for 1997 was $1 million or $.19 per share
versus a loss of ($797,000) or ($.15) per share in 1996. Net income increased to $8.5 million or $1.60 per share in 1997 versus $5.8 million or $1.06 per share in 1996.
REAL ESTATE OPERATIONS
Rental revenues from real estate operations during 1997 increased $106,000 or less than 1% over those of the prior year. 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 approximately 8% from such expense incurred in the preceding year. 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 to certain cost reductions and capital improvements implemented in 1996.
ENGINEERED PRODUCTS
The Registrant's engineered products segment includes Metex Corporation and AFP Transformers, Inc. The operating results of the engineered products segment for the years ended December 31 follows-
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. This group is continuing to 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 2% between 1997 and 1996. 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 selling, general and administrative expenses reflects management's commitment to increasing sales in this segment.
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 the preceding year. 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 non-recurring 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.
RESULTS OF OPERATIONS 1996 AND 1995
Total revenues generated by the Registrant during 1996 were $66 million, an increase of $1.7 million from total 1995 revenues of $64.3 million. Income from continuing operations for the period was $6.6 million or $1.21 per share as compared to income from continuing operations of $3.9 million or $.67 per share for 1995. Net loss in 1995 was ($1.9 million) or ($.33) per share as this period included losses from the Registrant's discontinued resilient vinyl flooring operations, the write-off of its investment in Kentile, Inc. and losses from the Registrant's discontinued Antenna Systems segment. See Note 2 to Consolidated Financial Statements, "Disposal of Operating Companies."
REAL ESTATE OPERATIONS
Rental revenues from real estate operations during 1996 increased $1.3 million or 6% over those of the prior year primarily as a result of additional revenues related to existing real estate properties and 1995 property acquisitions.
Mortgage interest expense for 1996 decreased by $747,000 as compared to such expense incurred during 1995. This decrease of 17% results from the continuing amortization of mortgages which approximated $9.4 million during 1996, including repayments associated with properties sold.
Depreciation expense associated with real properties held for rental decreased approximately $74,000 or approximately 1% from such expense incurred in 1995. This decrease is primarily attributable to properties sold in 1996 and 1995.
Other operating expenses associated with the management of real properties increased approximately $1.6 million during 1996 versus such expenses incurred in 1995. This increase primarily results from the operating costs of additional properties added by the Registrant in 1996, the reclassification of prior manufacturing facilities to real property held for rental and operating costs associated with existing real estate properties.
ENGINEERED PRODUCTS
The Registrant's engineered products segment includes Metex Corporation and AFP Transformers, Inc. The operating results of the engineered products segment for the years ended December 31, 1996 and 1995 are as follows-
Net sales of the engineered products segment were $42.1 million, an increase of $367,000 versus such sales in 1995. This growth resulted primarily from increased transformer sales as sales of knitted wire products were consistent with 1995 levels.
Cost of sales as a percentage of net sales decreased approximately 1% between 1996 and 1995. This decline is primarily a result of the mix of product sales.
SG&A of the engineered products segment increased $701,000 or 11% during 1996, as compared to such costs in 1995. This increase primarily results from additional selling related expenses, principally salary and travel related expenses, associated with new product development and business development.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses not associated with the manufacturing operations decreased approximately $158,000 during 1996 as compared to such expenses incurred in 1995. This decrease is primarily due to the reclassification, in the current year, of costs associated with prior manufacturing facilities to real estate operations. Such costs were included in general and administrative expenses during 1995.
OTHER INCOME AND EXPENSE, NET
Other income and expense, net for 1996 of approximately $4.8 million is comprised of approximately $3.9 million in gains from the sales of real estate assets and approximately $1.4 million in settlement of all claims from an investment that was principally written off in 1990. These amounts were partially offset by $561,000 of miscellaneous other expense.
The 1995 components of other income and expense, net were as follows: $865,000 in gains from the sale of real estate assets, $230,000 from realized gains on the sale of marketable securities and approximately $550,000 in miscellaneous other income.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Registrant's current liabilities exceeded current assets by approximately $4.6 million. This shortfall in working capital results from financing the purchase of long-term assets utilizing short-term borrowings and from the classification of current mortgage obligations without the benefit of a corresponding current asset for such properties.
On January 2, 1998, the Registrant sold its antenna business for $16 million in cash, resulting in a pretax gain of approximately $9 million or $.92 per share in the first quarter of 1998. Substantially all of the cash proceeds of this transaction are available for general corporate purposes. Additionally, effective September 30, 1997, the Registrant amended its January 15, 1997 Credit Agreement with two banks to provide for both a $7 million term loan ("Term Loan") and a $40 million revolving credit facility ("Revolver") and converted $7 million of amounts outstanding under the Revolver to borrowings under the Term Loan. Under the terms of the Credit Agreement, the Registrant will be provided with eligibility based upon the sum of (i) 50% of the aggregate annualized and normalized year-to-date net operating income of eligible properties, as defined, capitalized at 11.5% and (ii) the lesser of $12 million or the sum of 75% of eligible accounts receivable and 50% of eligible inventory, as defined. Eligibility is also limited by amounts outstanding under the Term Loan. At December 31, 1997 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 then for real estate). The Credit Agreement also contains provisions which allow the lenders to perfect a security interest in certain operating and real estate assets in the event of a default, as defined under the terms of the Credit Agreement. Borrowings under the Revolver, at the Registrant's option, bear interest at the bank's prime lending rate ("Prime") or at the London Interbank Offered Rate ("LIBOR") plus 1.75% while borrowings under the Term Loan bear interest at 90 day LIBOR plus 1.4%. The Term Loan is payable in quarterly principal installments of $350,000, with a final payment on September 30, 2002. The Revolver expires on January 15, 2000. At December 31, 1997, approximately $4.6 million was outstanding under this facility, which was repaid on January 2, 1998. The Registrant was in compliance with all covenants.
Also, effective September 30, 1997, the Registrant 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 Registrant agreed to exchange with the counterparty (a commercial bank ) the difference between the fixed and floating rate interest amounts. The differential to be paid or received on the interest rate swap is recognized over the term of the agreement as an adjustment to interest expense. The fair value of the swap agreement is not recognized in the financial statements. At December 31, 1997 approximately $40 million was available to be borrowed under the Revolver.
Management is confident that with the available cash resources discussed above and cash generated by operations, all obligations will be satisfied as they become due.
The Registrant has undertaken the completion of environmental studies and remedial action at Metex' two New Jersey facilities and has filed an action against certain insurance carriers seeking recovery of costs incurred and to be incurred in these matters. Based upon the advice of counsel, management believes such recovery is probable and therefore should not have a material effect on the liquidity or capital resources of the Registrant. However, the ultimate outcome of litigation cannot be predicted. To date settlements have been reached with several carriers in this matter.
At December 31, 1997 and 1996 a total of $2.9 million in anticipated insurance recoveries is recorded in the accompanying Consolidated Financial Statements, and is included in other assets. Additionally, in 1995 the Company received approximately $4.1 million of insurance proceeds. The remaining balance of $2.9 million at December 31, 1997 (from a total of $7 million) is in dispute with the Registrant's insurance carriers as more fully discussed in Item 3 "Legal Proceedings" and Note 19 to Consolidated
Financial Statements "Contingencies." Management believes that recoveries in excess of the amounts reflected in the accompanying Consolidated Financial Statements are available under the insurance policies but have not been recorded. There can be no assurance, however, that the Registrant will prevail in its efforts to obtain amounts at or in excess of the estimated recoveries.
The cash needs of the Registrant have been satisfied from funds generated by current operations and additional borrowings. It is expected that future operational cash needs will also be satisfied from ongoing operations, additional borrowings on the Revolver and the proceeds from the sale of the antenna business. The primary source of capital to fund additional real estate acquisitions and to make additional high yield mortgage loans will come from the sale, financing and refinancing of the Registrant's properties and from third party mortgages and purchase money notes obtained in connection with specific acquisitions.
In addition to the acquisition of properties for consideration consisting of cash and mortgage financing proceeds, the Registrant may acquire real properties in exchange for the issuance of the Registrant's equity securities. The Registrant may also finance acquisitions of other companies in the future with borrowings from institutional lenders and/or the public or private offerings of debt or equity securities.
Funds of the Registrant in excess of that needed for working capital, purchasing real estate and arranging financing for real estate acquisitions are invested by the Registrant in corporate equity securities, other financial instruments, certificates of deposit and government securities.
BUSINESS TRENDS
Total 1997 revenues of the Registrant decreased approximately $5.8 million from 1996 levels to $60.2 million. The reduction in revenues is attributable to revenue reductions in the engineered products segment as real estate operations posted an increase in revenues. Income from continuing operations increased to $7.5 million in 1997 from $6.6 million in 1996 principally due to an increase in operating profit of the Registrant's real estate operations and a reduction in general corporate expenses, partially offset by reduced operating profit in the engineered products segment resulting from the reduction in revenues, as well as a reduction in other income, net.
The results of the Registrant's real estate operations reflect an increase in operating profit of $1.5 million on a revenue increase of only $106,000. Continuing lease renewals and mortgage amortization will continue to have a positive effect upon the revenues and operating profit of this segment.
Sales in the Registrant's engineered products segment decreased 14% in 1997 from 1996 record levels. These reductions are principally due to continued price competition and declining worldwide automotive sales. Sales in 1998 are anticipated to approximate 1997 levels due to increased competition in a number of markets for knitted wire product sales. Management continues to invest in new product development and in new markets for its products and believes there is future opportunity for growth in this segment.
YEAR 2000 CONVERSION
The Registrant currently believes that its essential processes, systems and business functions will be ready for the millennium transition and is taking the necessary steps to accomplish this objective. The Year 2000 issue is not anticipated to have a material impact on the Registrant's results of operations, financial position or its cash flows.
FORWARD LOOKING STATEMENTS
This Form 10-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" above. Although the Registrant believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements included in this Form 10-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 Registrant or any other person that the objectives and plans of the Registrant will be achieved.
ITEM 8.
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 at page.
ITEM 9.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This information will be contained in the Proxy Statement of the Registrant for the 1998 Annual Meeting of Stockholders under the captions "Election of Directors" and "Executive Officers" and is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
This information will be contained in the Proxy Statement of the Registrant for the 1998 Annual Meeting of Stockholders under the caption "Executive Compensation and Compensation of Directors" and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information will be contained in the Proxy Statement of the Registrant for the 1998 Annual Meeting of Stockholders under the captions "Security Ownership" and "Election of Directors" and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information will be contained in the Proxy Statement of the Registrant for the 1998 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.
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 Registrant are included in this Form 10-K at the pages indicated:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
Report of Independent Public Accountants Consolidated Balance Sheets as of December 31, 1997 and 1996 Consolidated Statements of Operations for the Years Ended December 31, 1997, 1996 and 1995 to Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 to Notes to Consolidated Financial Statements to (2) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Schedule II -- Allowance for Doubtful Accounts Schedule III -- Real Property Held for Rental and Accumulated Depreciation Schedule IV -- Mortgage Loans on Real Estate
(3) SUPPLEMENTARY DATA
Quarterly Financial Data (Unaudited) to
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 Registrant during the last quarter of fiscal 1997.
(c) Exhibits
3.1. Amended and restated Certificate of Incorporation of the Registrant (incorporated by reference to exhibit 3.1 filed with the Registrant's report on Form 10-K for the fiscal year ended December 31, 1993).
3.2. By-laws of the Registrant (incorporated by reference to exhibit 3 filed with the Registrant's report on Form 10-K for the fiscal year ended December 31, 1980).
10.1. 1988 Incentive Stock Option Plan of the Registrant, as amended (incorporated by reference to exhibit 10.1 filed with the Registrant's report on Form 10-K for the fiscal year ended December 31, 1994).
10.2. 1988 Joint Incentive and Non-Qualified Stock Option Plan, as amended (incorporated by reference to exhibit 10.2 filed with the Registrant's report on Form 10-K for the fiscal year ended December 31, 1994).
10.3. Employment Agreement dated as of January 1, 1990 by and between the Registrant and A. F. Petrocelli (incorporated by reference to exhibit 10.9 filed with the Registrant'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 Registrant and A. F. Petrocelli (incorporated by reference to exhibit 10.10 filed with the Registrant'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 Registrant and A. F. Petrocelli (incorporated by reference to exhibit 10.5 filed with the Registrant'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.
*10.7 Stock Purchase Agreement, dated as of November 20, 1997 by and among AIL Systems Inc., United Capital Corp. and Metex Corporation.
*21. Subsidiaries of the Registrant
*23. Accountants' consent to the incorporation by reference in Registrant's Registration Statements on Form S-8 of the Report of Independent Public Accountants included herein.
*27. Financial Data Schedule
- -----------------
* Filed herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
UNITED CAPITAL CORP.
Dated: MARCH 5, 1998 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 Registrant and in the capacities and on the date indicated.
Dated: MARCH 5, 1998 By: /S/ A.F. PETROCELLI ------------- ------------------- A. F. Petrocelli Chairman, President and Chief Executive Officer
Dated: MARCH 5, 1998 By: /S/ HOWARD M. LORBER ------------- -------------------- Howard M. Lorber Director
Dated: MARCH 5, 1998 By: /S/ ANTHONY J. MICELI ------------- --------------------- Anthony J. Miceli Chief Financial Officer, Chief Accountant, Secretary and Director
Dated: MARCH 5, 1998 By: /S/ ARNOLD S. PENNER ------------- -------------------- Arnold S. Penner Director
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, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, 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.
ARTHUR ANDERSEN LLP
Roseland, New Jersey February 17, 1998
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying notes to consolidated financial statements are an integral part of these statements.
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
The accompanying notes to consolidated financial statements are an integral part of these statements.
UNITED CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
(A) Changes in assets and liabilities for the years ended December 31, 1997, 1996 and 1995, net of effects from business disposals are as follows-
The accompanying notes to consolidated financial statements are an integral part of these statements.
UNITED CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS-
United Capital Corp. (the "Registrant") 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 Registrant 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 Registrant has the ability to exercise significant influence.
Income Recognition -- REAL ESTATE OPERATIONS-
The Registrant 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, 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.
Revenue Recognition -- MANUFACTURING OPERATIONS-
Sales are recorded when products are shipped to the customer.
CASH AND CASH EQUIVALENTS-
The Registrant considers all highly liquid investments with a maturity, at the purchase date, of three months or less to be cash equivalents.
MARKETABLE SECURITIES-
All marketable debt and equity securities have been classified as available-for-sale and, as a result, are stated at fair value. Unrealized gains and losses on securities available-for-sale are recorded net, as a separate component of stockholders' equity until realized. Management determines the appropriate classification of securities at the time of purchase and reassesses the appropriateness of the classification at each reporting date.
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-
1997 1996 ----------- ------------
Raw materials $1,959 $2,542 Work in process 265 397 Finished goods 1,469 1,413 ----------- ------------
$3,693 $4,352 =========== ============
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
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 Registrant contain provisions whereby the mortgage holder may acquire, under certain conditions, an interest in the properties securing the obligation, for a nominal amount. The Registrant 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 Registrant expenses research, development and product engineering costs as incurred. Approximately $77, $112 and $85 of such costs were incurred by the Registrant in 1997, 1996 and 1995, respectively.
COMMON STOCK-BASED COMPENSATION-
The Registrant 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.
NET INCOME (LOSS) PER COMMON SHARE-
In 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share" ("SFAS No. 128"). SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share gives effect to all potentially dilutive common shares that were outstanding during the period. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the SFAS No. 128 requirements.
PRIOR YEAR FINANCIAL STATEMENTS-
Certain amounts have been reclassified in the December 31, 1996 and 1995 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.
IMPAIRMENT OF LONG-LIVED ASSETS-
During 1996, the Registrant adopted Statement of Financial Accounting Standards No. 121-"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of," which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. The adoption thereof had no material effect on the Registrant's financial position or operating results.
CHANGES IN ACCOUNTING POLICIES-
In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), which establishes standards for reporting comprehensive income and its components in annual and interim financial statements. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. The Registrant is in the process of determining its preferred format. The adoption of SFAS No. 130 will have no impact on the Registrant's consolidated results of operations, financial position or cash flows.
In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"), which establishes standards for the way that companies report information about operating segments in annual financial statements and requires that companies report selected information about operating segments in interim financial reports, based on the approach that management utilizes to organize the segments within the Registrant for management reporting and decision making. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. SFAS No. 131 is effective for financial statements for fiscal years beginning after December 15, 1997. Financial statement disclosures for prior periods are required to be restated. The Registrant is in the process of evaluating the disclosure requirements. The adoption of SFAS No. 131 will have no impact on the Registrant's consolidated results of operations, financial position or cash flows.
(2) DISPOSAL OF OPERATING COMPANIES:
On November 20, 1997, the Registrant signed a definitive agreement to sell the stock of its Dorne & Margolin, Inc. ("D&M") subsidiary to AIL Systems Inc. ("AIL") for $16 million in cash. On January 2, 1998 the sale was completed and will result in a pretax gain of approximately $9 million in the first quarter of 1998. The net assets and operating results of D&M are presented in the accompanying consolidated financial statements as a discontinued operation. At December 31, 1997, net current assets of discontinued operations consist primarily of inventory and accounts receivable, partially offset by accounts payable and accrued expenses. Net noncurrent assets of discontinued operations consists primarily of machinery and equipment. The Registrant retained D&M's 90,000 square foot manufacturing facility in Bohemia, New York, which has been reclassified to real property held for rental in the accompanying financial statements.
In August 1995, the operations of the Registrant's Kentile Inc. ("Kentile") subsidiary ceased when its raw material stocks were exhausted resulting from an unwillingness of major trade suppliers of Kentile to extend further credit. In December 1995, the assets of Kentile were assigned for the benefit of creditors and are currently being liquidated. In connection with the write-off of the Registrant's investment in Kentile, a pretax charge of approximately $6 million, including estimated costs of disposition was recorded in 1995. Additional costs could be incurred by the Registrant as a result of this matter. Management will continue to monitor this situation closely, including the values received upon the disposition of the Kentile assets.
In addition, the accompanying consolidated statements of operations include operating losses of Kentile during 1995, incurred prior to its closure, of approximately $2.3 million, on a pre-tax basis.
Revenues applicable to discontinued operations, which includes $19,613 for Kentile in 1995, were $19,985 in 1997, $18,883 in 1996 and $39,920 in 1995.
(3) REAL PROPERTY HELD FOR RENTAL:
The Registrant is the lessor of real estate under operating leases which expire in various years through 2078.
The following is a summary of real property held for rental at December
1997 1996 ------------ -------------
Land $14,075 $12,462 Buildings 110,271 114,414 ------------ -------------
124,346 126,876
Less- Accumulated depreciation (65,768) (61,187) ------------ -------------
$58,578 $65,689 ============ =============
As of December 31, 1997, total minimum future rentals to be received under noncancellable leases for each of the next five years and thereafter are as follows-
Year Ended December 31- 1998 $17,276 1999 16,209 2000 14,566 2001 12,873 2002 11,226 Thereafter 54,822 -------------
Total Minimum Future Rentals $126,972 =============
Minimum future rentals do not include additional rentals that may be received under certain leases which provide for such rentals based upon a percentage of lessees' sales. Percentage rents included in the determination of income from operations in 1997, 1996 and 1995 were approximately $1,603, $1,045 and $1,029, respectively.
(4) PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment is principally used in the Registrant's manufacturing operations and consists of the following at December 31-
1997 1996 ----------- -----------
Land $37 $37 Buildings and improvements 963 894 Machinery and equipment 7,193 6,236 ----------- -----------
8,193 7,167
Less- Accumulated depreciation (3,894) (3,053) ----------- -----------
$4,299 $4,114 =========== ===========
(5) MARKETABLE SECURITIES:
The aggregate market value of marketable securities, which are all equity securities and available-for-sale, was $355 and $313 at December 31, 1997 and 1996, respectively, while gross unrealized holding gains were $136 and $109 on a net of tax basis, respectively.
There were no sales of marketable securities in 1997 or 1996. Proceeds from the sales of securities, which were designated as available-for-sale in all years presented and the resulting gross realized gains and losses included in the determination of net income for the year ended December 31, 1995 are as follows-
---------
Proceeds $729 =========
Realized gains $230 =========
Realized losses $0 =========
(6) NOTES RECEIVABLE:
Notes receivable consist of the following at December 31- 1997 1996 ----------- -----------
High yield mortgage loans (a) $3,226 $13,499 Mortgage note receivable (b) 3,355 0 Mortgage note receivable (c) 3,249 3,249 Mortgage participation (d) 1,147 0 Mortgage notes receivable (e) 633 665 Due from related party (Note 14) 398 468 Other 255 299 ----------- -----------
12,263 18,180 Less- Current portion included in notes and accounts receivable 4,907 12,248 ----------- -----------
$7,356 $5,932 =========== ===========
(a) In 1997, the Registrant participated in several high yield mortgage loans which in certain instances, may include related party participants (see Note 14). At December 31, 1997 there are four notes outstanding with balances ranging from $250 to $1,851, with varying terms maturing from March 1998 to December 1998. The notes are secured by a first or second mortgage lien on property which is generally fully leased with a substantial value-to-loan ratio. Management believes that sufficient collateral exists to satisfy the obligations. The notes are interest bearing and in most cases, the Registrant receives a commitment fee of 4%. The effective yields on these notes are approximately 18%. High yield mortgage loans at December 31, 1996 consisted of nine notes (see Note 14). Seven of these notes were fully satisfied in 1997 and two were extended to 1998.
(b) In September 1997, the Registrant purchased a non performing mortgage secured by an office building in Great Neck, New York for $3.4 million. The mortgage note had a face amount outstanding of approximately $4.8 million and bears interest at approximately 10% per annum. Management believes that the fair value of the property exceeds the purchase price of the mortgage note. The Registrant has commenced foreclosure proceedings and expects to take title to the property unless the mortgage is fully satisfied.
(c) In February 1994, the Registrant acquired the underlying mortgage secured by Kentile Floors Inc.'s South Plainfield, New Jersey facility for $2.25 million plus the assumption of certain liabilities in connection with operating and maintaining the property. The mortgage note has a face amount outstanding of approximately $6.5 million plus delinquent accrued interest. Included in the carrying value of the mortgage note receivable are costs associated with readying the underlying property for rental. Management believes that the fair value of the property exceeds the carrying value of the mortgage note.
(d) In October 1997, the Registrant, together with two unrelated participants, purchased an 8.5% interest ("the Participation") in a portfolio of mortgage loans secured by first liens on 17 multi-tenanted residential properties. At the time of the acquisition the portfolio had outstanding approximately $24.4 million in principal and stated interest rates ranging between 6.82% and 9.4%. The Participation, in which the Registrant holds a 78% interest, was purchased for $2 million and is subordinate to the interest of a bank who is the holder of the remaining balance of the portfolio, which had been recently acquired at a 4% discount to face value. In exchange for a 50% interest in the discount, upon collection, the holders of the Participation have agreed, in the event of default, to indemnify the bank for payments that come due on the underlying mortgages, as well as costs incurred in the event of foreclosure, up to a limit of $5 million. The underlying mortgages, which had an outstanding balance of approximately $18.1 million at December 31, 1997, are scheduled to mature at varying dates through November 1998 and are all expected to be satisfied through refinancings by such time.
(e) As partial consideration in the sale of several properties, the Registrant received mortgage notes in the aggregate amount of $1.88 million. The notes, which are secured by the properties sold, bore interest in 1997 and 1996 at various rates ranging between 9% and 10.25% and bear interest in future periods at rates ranging between 9% and 11%. Interest under the notes is due monthly. Principal repayment terms vary with periodic installments through December 2008.
In accordance with generally accepted accounting principles, the gains from the sales of certain of these properties are being recognized under the installment method, and accordingly, the carrying value of noncurrent notes receivable has been reduced by deferred gains of approximately $799 and $849 at December 31, 1997 and 1996, respectively. The deferred gains are being recognized as income as payments are received under the note.
(7) OTHER ASSETS:
Other assets consist of the following at December 31-
(a) The Registrant has recorded the anticipated recoveries from its insurance carriers in connection with the environmental investigation and remediation costs to be incurred at two of its manufacturing sites in New Jersey. ( See Note 19, "Contingencies.")
(b) Through its subsidiaries, the Registrant owns a 50% interest in Indian Creek Hotel, LLP, a Miami, Florida hotel operated as a Holiday Inn. The hotel began operations in January 1997 and the Registrant's share of losses incurred through December 31, 1997 was approximately $340, which have been recorded under the equity method of accounting in other income and expense (See Notes 14 and 16).
(c) Lease financing consists of a 50% interest in Net Lease Management Partners, L.L.C., whose principal assets are two leveraged leases with Kmart Corporation. 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 investment is positive. The components of the net investment in the leveraged leases at December 31 consists of the following-
------------
Rentals receivable $97,630 Residual values 10,000 Non recourse debt service (75,470) Unearned income (27,253) ---------- 4,907 Less- Deferred taxes arising from leveraged leases 268 ========== $4,639 ==========
(8) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities consist of the following at December 31-
1997 1996 ---------- ------------
Accounts payable $3,768 $4,296 Accrued wages and benefits 2,056 1,993 Liabilities for discontinued operations 2,792 2,816 Other accrued expenses 5,513 5,008 ---------- ------------
$14,129 $14,113 ========== ============
(9) LONG-TERM DEBT:
Long-term debt consists of the following at December 31-
1997 1996 -------- ----------
First mortgages on real property (a) $29,332 $34,366 Second mortgages on real property (b) 273 316 Loan payable to bank (c) 1,733 2,363 Capital lease obligation 454 0 Loan payable to bank at 6.2% 0 741 Loan payable to bank at 6.3% 0 208 Other 0 2 --------- ----------- 31,792 37,996
Less- Current maturities 5,232 6,326 --------- -----------
$26,560 $31,670 ========= ===========
(a) First mortgages bearing interest at rates ranging from 4% to 10.5% per annum are collateralized by the related real property. Such amounts are scheduled to mature at various dates from May 1998 through February 2010.
(b) Second mortgages bearing interest at rates of approximately 10.125% per annum are collateralized by the related real property. Such amounts are scheduled to mature at various dates from October 2001 through November 2002.
(c) In August 1995, the Registrant converted $3.15 million outstanding under its then existing revolving credit facility to a fixed rate note at 7.94% per annum. The note is due in 60 equal principal installments, together with accrued interest thereon, through September 2000. The loan agreement contains, among other things, several financial covenants regarding net worth and debt-to-equity ratios. The Registrant was in compliance with all covenants.
The approximate aggregate maturities of these obligations at December 31, 1997 are as follows-
(10) CREDIT FACILITIES:
Effective September 30, 1997, the Registrant amended its January 15, 1997 Credit Agreement with two banks to provide for both a $7 million term loan ("Term Loan") and a $40 million revolving credit facility ("Revolver") and converted $7 million of amounts outstanding under the Revolver to borrowings under the Term Loan. Under the terms of the Credit Agreement, the Registrant will be provided with eligibility based upon the sum of (i) 50% of the aggregate annualized and normalized year-to-date net operating income of eligible properties, as defined, capitalized at 11.5% and (ii) the lesser of $12 million or the sum of 75% of eligible accounts receivable and 50% of eligible inventory, as defined. Eligibility is also limited by amounts outstanding under the Term Loan. At December 31, 1997 the Registrant's 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 Credit Agreement also contains provisions which allow the lenders to perfect a security interest in certain operating and real estate assets in the event of a default, as defined under the terms of the Credit Agreement. Borrowings under the Revolver, at the registrant's option, bear interest at the bank's prime lending rate ("Prime") or at the London Interbank Offered Rate ("LIBOR") plus 1.75% while borrowings under the Term Loan bear interest at 90 day LIBOR plus 1.4%. The Term Loan is payable in quarterly principal installments of $350 with final payment on
September 30, 2002. The Revolver expires on January 15, 2000. At December 31, 1997 approximately $4.6 million was outstanding under the Revolver at Prime (8.5%) and $6,650 was outstanding on the Term Loan. Maturities under the Term Loan are $1.4 million per year for 1998 through 2001 and $1,050 in 2002. The Registrant was in compliance with all covenants. All amounts outstanding under the Revolver were paid in January 1998.
Effective September 30, 1997, the Registrant 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 Registrant agreed to exchange with the counterparty (a commercial bank) the difference between the fixed and floating rate interest amounts. The differential to be paid or received on the interest rate swap is recognized over the term of the agreement as an adjustment to interest expense.
At December 31, 1996, $19.8 million was outstanding at Prime (8.25%) under the Registrant's then existing unsecured line of credit arrangement with a bank. On January 15, 1997 borrowings under this facility were converted to borrowings under the Revolver portion of the Credit Agreement discussed above. At December 31, 1996, the Registrant classified approximately $9.8 million of borrowings under the Revolver portion of the Credit Agreement, discussed above, as long-term debt.
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Registrant has limited involvement with financial instruments and does not use them for trading purposes. The following methods and assumptions were used by the Registrant in estimating its fair value disclosures for financial instruments-
The carrying amount reported in the consolidated balance sheets for cash and cash equivalents and accounts receivable approximate their fair value.
The fair value of fixed rate notes receivable are estimated using discounted cash flow analyses, with interest rates comparable on loans with similar terms and borrowers of similar credit quality. The carrying amounts of notes receivable approximate fair value.
Marketable securities held for investment purposes are carried at fair value based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
Carrying amounts of borrowings under the revolving credit facilities approximate their fair value. The fair value of the long-term debt was calculated based on interest rates available for debt with terms and due dates similar to the Registrant's existing debt arrangements. The fair value of long-term debt at December 31, 1997 and 1996 was approximately $32.2 and $38.2 million respectively, while the carrying value was $31.8 and $37.9 million for the same periods.
The fair value of interest rate swaps (used for hedging purposes) is the estimated amount that the bank would receive or pay to terminate the swap agreements at the reporting date, taking into account current interest rates and the current creditworthiness of the swap counterparties. At December 31, 1997, the fair value of the swap was estimated at ($63).
(12) STOCKHOLDERS' EQUITY:
STOCK OPTIONS-
The Registrant has two stock option plans under which qualified and nonqualified options may be granted to key employees to purchase the Registrant's common stock at the fair market value at the date of grant. Under both plans, the options typically become exercisable in three equal installments, beginning one year from the date of grant. The 1988 Incentive Stock Option Plan (the "Incentive Plan") provides for the granting of incentive stock options not to exceed 325,000 options in the aggregate. The 1988 Joint Incentive and Non-Qualified Stock Option Plan (the "Joint Plan") provides for the granting of incentive or nonqualified stock options, also not to exceed 325,000 options in the aggregate.
At December 31, 1997, there were 262,130 and 216,751 options outstanding under the Joint Plan and Incentive Plan, respectively. At December 31, 1996, 118,367 and 51,061 options were outstanding under the Joint Plan and Incentive Plan, respectively.
In addition to options outstanding under the Joint Plan and Incentive Plan, at December 31, 1995 there were 180,000 options outstanding at $5.50 per share. Such options were granted to Directors and certain officers of the Registrant at $5.50 per share, which price was equal to the market value per share on the date of grant. During 1996, all such options were exercised. Approximately $490 of compensation expense was recognized in 1996 resulting from the exercise and repurchase of such options by two Directors of the Registrant.
A summary of the Registrant's stock options as of December 31, 1997, 1996 and 1995, and changes during the years then ended are summarized below-
Weighted- Average Shares Exercise Price ----------- ---------------
Outstanding at December 31, 1994 349,110 $7.53
Exercised (700) $5.00 Forfeited (3,484) $10.51 ---------
Outstanding at December 31, 1995 344,926 $7.51
Granted 20,000 $7.25 Exercised (185,250) $5.48 Forfeited (10,248) $7.49 ---------
Outstanding at December 31, 1996 169,428 $9.45
Granted 319,381 $17.31 Exercised (6,700) $9.48 Forfeited (3,228) $10.88 ========= Outstanding at December 31, 1997 478,881 $14.68 =========
The following table summarizes information about options outstanding and exercisable at December 31, 1997-
The Registrant applies APB No. 25 in accounting for stock-based compensation plans. If stock-based compensation costs had been recognized based on the estimated fair values at the dates of grant of options awarded during 1997, as required by Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation to Employees" ("SFAS No. 123") proforma net income and net income per share (basic) would have been approximately $8,091 or $1.53 per share, respectively. Proforma compensation costs for the Registrant's stock option plans determined based on the fair value at the grant date for 1996 awards under those plans, consistent with the method of SFAS No. 123, were not material. There were no options granted in 1995. The SFAS No. 123 method of accounting has not been applied to periods prior to January 1, 1995 and the resulting proforma compensation expense may not be indicative of proforma expense in future years. For purposes of estimating the fair value of each option on the date of grant, the Registrant utilized the Black-Scholes option pricing model with the following assumptions for 1997 and 1996; risk free interest rates of 6.27% and 5.84%, respectively; no dividend yield; weighted average expected option lives of 5 years and 3 years, respectively, and expected volatility of 39% and 40%, respectively.
(13) EARNINGS PER SHARE:
The following table sets forth the computation of basic and diluted earnings per share-
(14) TRANSACTIONS WITH RELATED PARTIES:
The Registrant has a 50% interest in an unconsolidated limited liability corporation, whose principal assets are two leveraged leases with Kmart. A group that includes the wife of the Board Chairman, two Directors of the Registrant and the wife of one of the Directors have an 8% interest in this entity (see Note 7).
In September 1996, the Registrant purchased a 50% interest in a limited partnership that owns and operates a hotel in Miami Beach, Florida. Through December 31, 1997, the Registrant has invested approximately $1,168 for its equity interest. In September 1996, the Registrant participated in a $2.5 million loan transaction to the limited partnership secured by a mortgage lien against the property. The Registrant advanced approximately $683 in connection with this note. The remaining amounts were advanced by the following: a Director of the Registrant, $250; the wife of the Board Chairman, $1 million; an officer of the Registrant $100; and the balance by unrelated parties. All amounts invested in and advanced to the partnership by the Registrant have been classified as investments in and advances to affiliate and are included in other assets in the consolidated financial statements. The note bears interest at 14% per annum payable monthly and the participants also received a commitment fee of 4%. This note matured in September 1997 and was extended in accordance with original terms of the note, for one year, in consideration of a 4% commitment fee.
In 1996 and 1997, in order to effectively manage the cost to the Registrant of the remediation efforts at Metex Corporation's ("Metex") two New Jersey facilities (see Note 19), the Registrant sold, in total, approximately a 4% interest for $40 in a subsidiary that manages the Registrant's environmental remediation efforts to an Officer and Director of the Registrant and other employees, as well as an interest to the Registrant's environmental consulting company. These shares contain certain restrictions on transfer and, under certain circumstances, are redeemable at the net book value of the subsidiary.
In May 1995, the Registrant participated in a $4.5 million loan transaction secured by an assignment of a mortgage note covering a commercial office building in New York City. The Registrant advanced approximately $2.5 million in connection with this loan. The remaining amounts were advanced by the following: a Director of the Registrant, $500; the wife of the Board Chairman, $1.45 million; and the balance by unrelated parties. The note bore interest at 14% per annum, and was fully satisfied together with accrued interest in August 1996. The participants also received a commitment fee of 4% in connection with the loan. A Director of the Registrant was a shareholder of the borrower and also a guarantor under the note.
The Registrant's two hotel properties are managed by a publicly traded company for which the Board Chairman and another Director of the Registrant are directors. Fees paid for the management of these properties is based upon a percentage of revenue and were approximately $143, $159 and $120 for 1997, 1996 and 1995, respectively.
During 1997 and 1996 the Registrant advanced, in the aggregate, $398 and $468, respectively, to the Board Chairman and $375 in 1997 to a Director and Officer of the Registrant. Such advances bore interest at the Registrant's borrowing rate under its revolving credit facility which was 8.5% and 8.25% at December 31, 1997 and 1996, respectively. Amounts outstanding at December 31, 1997 and 1996 of $398 and $468, respectively, together with accrued interest thereon were repaid in January 1998 and 1997, respectively.
(15) INCOME TAXES:
Deferred income taxes are determined on the liability method in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109, deferred tax assets and liabilities are determined based on the difference between the tax basis of an asset or liability and its reported amount in the consolidated financial statements using enacted tax rates. Future tax benefits attributable to these differences are recognized to the extent that realization of such benefits is more likely than not.
Deferred tax assets primarily arose from basis differences of real properties held for rental for financial statement and income tax purposes. Based upon the Registrant's historical and projected levels of pretax income, management believes it is more likely than not that the Registrant will realize such benefits in the future and, accordingly, no valuation reserve has been recorded.
The components of the net deferred tax asset (liability) at December 31, follows-
Income tax provision (benefit) reflected in the accompanying consolidated statements of operations for the years ended December 31, follows-
A reconciliation of the tax provision computed at statutory rates to the amounts shown in the accompanying consolidated statements of operations for the years ended December 31, follows-
(16) OTHER INCOME AND EXPENSE, NET:
The components of other income and expense, net in the accompanying consolidated statements of operations for the years ended December 31, follows-
(a) Loss from equity investments principally represents the Registrant's share of losses incurred by Indian Creek Hotel, LLP (See Note 7), partially offset by nonrecurring cash distributions received by the Registrant in connection with interests held in certain real estate ventures which were acquired in the 1991 merger with BMG Equities Corp. Such investments were valued at historical cost at the date of acquisition.
(b) In December 1996, the Registrant received approximately $1.4 million in settlements of all claims from an investment that was principally written off in 1990.
(c) In March 1991, the Registrant was named as a defendant in a suit by certain investors and limited partners seeking actual, punitive and treble damages in a total unspecified amount. While management continued to believe that the allegations of the action were false and without merit, as a result of escalating defense costs and the continued likelihood of extended litigation, the Registrant settled this matter in April 1996 for approximately $425, after taxes.
(17) RETIREMENT PLAN:
The Registrant has a noncontributory defined benefit pension plan that covers substantially all full-time employees of the engineered products segment and the former employees of the Registrant's discontinued resilient vinyl flooring segment.
The following table sets forth the funded status of the plan and amounts recognized in the Registrant's consolidated financial statements as of December 31-
Net periodic pension (income) expense for the years ended December 31 includes the following components-
In determining the projected benefit obligation for 1997 and 1996, the weighted average assumed discount rate was 7.5%, while the rate of expected increases in future salary levels was 3.5%. The expected long-term rate of return on assets used in determining net periodic pension cost for all years presented was 9%. No contributions were made during 1997 or 1996.
(18) BUSINESS SEGMENTS:
At December 31, 1997, the Registrant had two business segments: real estate investment and management and the manufacture and sale of engineered products. Information on the Registrant's business segments for the years ended December 31 follows-
Sales by the Registrant's engineered products segment to automobile original equipment manufacturers accounted for approximately 31%, 32% and 31% of 1997, 1996 and 1995 consolidated revenues, respectively.
Included in the identifiable assets of the real estate investment and management segment for 1997, 1996 and 1995 are approximately $5.1, $13.5 and $3.0 million, respectively, of high yield mortgage notes receivable (see Note 6). Income generated by these notes receivable is included in interest income. Also included in the identifiable assets of the real estate investment and management segment for 1997, 1996 and 1995 are approximately $1.8, $1.8 and $1.9 million, respectively, related to the former manufacturing facility of the Registrant's antenna segment which has been reclassified to real property held for rental. Operating expenses associated with this facility have also been reclassified to this segment, but were not material to any of the years presented.
(19) CONTINGENCIES:
The Registrant has undertaken the completion of environmental studies and/or remedial action at Metex' two New Jersey facilities.
The process of remediation has begun at one facility pursuant to a plan filed with the New Jersey Department of Environmental Protection and Energy ("NJDEPE"). Environmental experts engaged by the Registrant estimate that under the most probable remediation scenario the remediation of this site is anticipated to require initial expenditures of $860, including the cost of capital equipment, and $86 in annual operating and maintenance costs over a 15-year period.
Environmental studies at the second facility indicate that remediation may be necessary. Based upon the facts presently available, environmental experts have advised the Registrant that under the most probable remediation scenario, the estimated cost to remediate this site is anticipated to require $2.3 million in initial costs, including capital equipment expenditures, and $258 in annual operating and maintenance costs over a 10-year period. The Registrant may revise such estimates in the future due to the uncertainty regarding the nature, timing and extent of any remediation efforts that may be required at this site, should an appropriate regulatory agency deem such efforts to be necessary.
The foregoing estimates may also be revised by the Registrant as new or additional information in these matters 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 Registrant believes that it is entitled to full defense and indemnification with respect to environmental investigation and remediation costs under its insurance policies, the Registrant's insurers have denied such coverage. Accordingly, the Registrant has filed an action against certain insurance carriers seeking defense and indemnification with respect to all prior and future costs incurred in the investigation and remediation of these sites. Upon the advice of counsel, the Registrant believes that based upon a present understanding of the facts and the present state of the law in New Jersey, it is probable that the Registrant will prevail in the pending litigation and thereby access all or a very substantial portion of the insurance coverage it claims; however, the ultimate outcome of litigation cannot be predicted.
At December 31, 1997 and 1996, a total of $2.9 million in anticipated insurance recoveries is recorded in the accompanying consolidated financial statements and is included in other assets. Additionally, in 1995 the Company received approximately $4.1 million of insurance recoveries. The remaining balance of $2.9 million at December 31, 1997 (from a total of $7 million) is in dispute with the Registrant's insurance carriers. Management believes that recoveries in excess of the amounts reflected in the accompanying consolidated financial statements are available under the insurance policies but have not been recorded. There can be no assurances, however, that the Registrant will prevail in its efforts to obtain amounts at or in excess of the estimated recoveries.
In the opinion of management, these matters will be resolved favorably and such amounts, if any, not recovered under the Registrant's insurance policies will be paid gradually over a period of years and, accordingly, should not have a material adverse effect upon the business, liquidity or financial position of the Registrant. However, adverse decisions or events, particularly as to the merits of the Registrant's factual and legal basis could cause the Registrant to change its estimate of liability with respect to such matters in the future.
The Registrant is involved in various other litigation and legal matters which are being defended and handled in the ordinary course of business. None of these matters are expected to result in a judgment having a material adverse effect on the Registrant's consolidated financial position or results of operations.
SCHEDULE II
UNITED CAPITAL CORP. AND SUBSIDIARIES
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(IN THOUSANDS)
The accompanying notes to consolidated financial statements are an integral part of these schedules.
SCHEDULE III UNITED CAPITAL CORP. AND SUBSIDIARIES REAL PROPERTY HELD FOR RENTAL AND ACCUMULATED DEPRECIATION (IN THOUSANDS)
Notes:
(a) Reconciliations of the carrying value of real property held for rental for the three years ended December 31, 1997 are as follows-
(b) Reconciliations of accumulated depreciation for the three years ended December 31, 1997 are as follows-
(c) The aggregate cost for Federal income tax purposes is approximately $175,000
The accompanying notes to consolidated financial statements are an integral part of these schedules.
SCHEDULE IV UNITED CAPITAL CORP. AND SUBSIDIARIES
MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1997
(IN THOUSANDS)
NOTES:
(a) A reconciliation of mortgage loans on real estate for the year ended December 31, 1997-
Balance at beginning of period $14,164 Additions during period- New mortgage loans 3,681 Deductions during period- Collection of principal (12,839) ----------
Balance at end of period $5,006 ==========
(b) In accordance with generally accepted accounting principles certain gains from the sale of real property are being recognized under the installment method and, accordingly, notes receivable have been reduced by the following deferred gains at December 31, 1997:
Mortgage note receivable in connection with sale of property in:
Montgomery, Alabama $227 Beaumont, Texas 447 Waterbury, Connecticut 101 Augusta, Georgia 24 ----------
$799 ==========
(c) The carrying value for Federal income tax purposes is substantially equal to the carrying amount for book purposes.
The accompanying notes to consolidated financial statements are an integral part of these schedules.
UNITED CAPITAL CORP. AND SUBSIDIARIES
QUARTERLY FINANCIAL DATA
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
Notes to quarterly financial data
(1) The 1996 and first three quarters of 1997 earnings per share amounts have been restated to comply with Statement of Financial Accounting Standards No. 128, "Earnings per Share".