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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 entity recognize
all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments
at fair value. The statement requires that changes in the
derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the
income statement. This statement is effective for fiscal years
beginning after June 15, 1999 and cannot be applied
retroactively to financial statements of prior periods. The
Company is in the process of evaluating the accounting and
reporting requirements and believes that SFAS No. 133 will not
have a material impact on the consolidated results of
operations, financial position or cash flows.
(2) DISPOSAL OF OPERATING COMPANY:
------------------------------
On January 2, 1998, the Company completed the sale of the
stock of its Dorne & Margolin, Inc. ("D&M") subsidiary to AIL
Systems, Inc. for $16 million in cash, resulting in a pretax
gain from discontinued operations of approximately $8.6
million. The net assets and operating results of D&M are
presented as a discontinued operation in the accompanying
consolidated financial statements for periods prior to the
sale. Net current assets of discontinued operations consisted
primarily of inventory and accounts receivable, partially
offset by accounts payable and accrued expenses. Net
noncurrent assets of discontinued operations consisted
primarily of machinery and equipment. The Company retained
D&M's 90,000 square foot manufacturing facility in Bohemia,
New York, which has been reclassified to real property held
for rental in the accompanying consolidated financial
statements.
Revenues applicable to discontinued operations, were $19,985
in 1997 and $18,883 in 1996.
F-11
(3) REAL PROPERTY HELD FOR RENTAL:
------------------------------
The Company 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 31-
1998 1997
--------- ---------
Land $ 19,732 $ 14,075
Buildings 120,370 110,271
--------- ---------
140,102 124,346
Less- Accumulated depreciation (68,665) (65,768)
--------- ---------
$ 71,437 $ 58,578
========= =========
As of December 31, 1998, 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-
1999 $20,607
2000 18,823
2001 17,045
2002 15,095
2003 13,191
Thereafter 45,944
------------
Total Minimum Future Rentals $130,705
============
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 1998, 1997 and 1996 were approximately $1,018, $1,603 and
$1,045, respectively.
(4) PROPERTY, PLANT AND EQUIPMENT:
------------------------------
Property, plant and equipment is principally used in the
Company's manufacturing operations and consists of the
following at December 31-
1998 1997
------- -------
Land $ 37 $ 37
Buildings and improvements 1,010 963
Machinery and equipment 8,556 7,193
------- -------
9,603 8,193
Less- Accumulated depreciation (4,917) (3,894)
------- -------
$ 4,686 $ 4,299
======= =======
F-12
(5) MARKETABLE SECURITIES:
----------------------
The aggregate market value of marketable securities, which are
all equity securities and classified as available-for-sale,
was $14,290 and $355 at December 31, 1998 and 1997,
respectively, while unrealized holding gains were $2,938 and
$136 on a net of tax basis, respectively.
There were no sales of marketable securities in 1997 or 1996.
Proceeds from the sale of trading securities and the resulting
gross realized gains and losses included in the determination
of net income for the year ended December 31, 1998 are as
follows-
1998
----------
Proceeds $5,966
==========
Realized gains $75
==========
Realized losses $0
==========
(6) NOTES RECEIVABLE:
-----------------
Notes receivable consist of the following at December 31-
1998 1997
---------- ----------
High yield mortgage loans (a) $1,963 $3,226
Mortgage note receivable (b) 0 3,355
Mortgage note receivable (c) 0 3,249
Mortgage participation (d) 0 1,147
Mortgage notes receivable (e) 526 633
Due from related party (Note 14) 0 398
Other 225 255
---------- ----------
2,714 12,263
Less- Current portion included in
and accounts receivable 2,121 4,907
---------- ----------
$593 $7,356
========== ==========
(a) In 1998, the Company participated in high yield mortgage
loans which in certain instances, may include related
party participants (see Note 14). At December 31, 1998
there are three notes outstanding with balances ranging
from $400 to $863, with varying terms maturing from
January 1999 to August 1999. The notes are generally
secured by a first or second mortgage lien on property
which is generally fully leased with a substantial
value-to-loan ratio or other appropriate collateral.
Management believes that sufficient collateral exists to
satisfy the obligations. The notes are interest bearing
and in most cases, the Company receives a commitment fee
of 4%. The effective yields on these notes are
approximately 18%. High yield mortgage loans at December
31, 1997 consisted of four notes. Three of these notes
were fully satisfied in 1998 and one was satisfied in
January 1999.
F-13
(b) In September 1997, the Company 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 bore interest at approximately 10% per
annum. The Company foreclosured and took title to the
property in October 1998. At December 31, 1998, this
property has been included in real property held for
rental on the Company's Consolidated Balance Sheet.
There was no gain or loss recorded on this transaction.
(c) In February 1994, the Company acquired the underlying
mortgage secured by Kentile Floors Inc.'s ("KFI"), 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 had 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 th underlying property
for rental. In December 1998, KFI reorganized pursuant
to a plan submitted and approved by the Bankruptcy
Court, which included the issuance of a 100% equity
interest in KFI to the Company. Accordingly, at December
31, 1998 such amounts have been reclassified to real
property held for rental. There was no gain or loss
recorded on this transaction.
(d) In October 1997, the Company, 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 Company held a 78%
interest, was purchased for $2 million, subordinate to
the interest of a bank who was the holder of the
remaining balance of the portfolio, which had been
acquired at a 4% discount to face value. In exchange for
a 50% interest in the discount, upon collection, the
holders of the Participation agreed, in the event of
default, on certain indemnities to the bank. At December
31, 1998, all underlying mortgages have been satisfied
and the Company's obligations under this arrangement
have ceased.
(e) As partial consideration in the sale of several
properties, the Company received mortgage notes in the
aggregate amount of $1.88 million. The notes, which are
secured by the properties sold, bore interest in 1998
and 1997 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 $664 and $799 at December 31,
1998 and 1997, respectively. The deferred gains are
being recognized as income as payments are received
under the note.
F-14
(7) OTHER ASSETS:
-------------
Other assets consist of the following at December 31-
1998 1997
------- -------
Anticipated insurance recoveries (a) $ 2,893 $ 2,893
Deposits 644 638
Pension (Note 17) 840 722
Cash surrender value of life insurance policies, net 248 245
Patents, net of accumulated amortization 138 140
Investments in and advances to affiliates (b) 461 1,510
Lease financing (c) 5,792 4,907
Other 489 422
------- -------
11,505 11,477
Less- Amounts included in prepaid expenses and
other current assets 209 292
------- -------
Total other assets $11,296 $11,185
======= =======
(a) The Company 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 Company owned a 50%
partnership interest in a Miami, Florida hotel operated
as a Holiday Inn. The hotel began operations in January
1997 and the Company's share of losses incurred in 1998
and 1997 were $423 and $340, respectively, 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 a limited
partnership, whose principal assets are two leveraged
leases with Kmart Corporation. The components of the net
investment in the leveraged leases at December 31
consists of the following-
1998 1997
---- ----
Rentals receivable $ 93,601 $ 97,630
Residual values 10,000 10,000
Non recourse debt service (72,252) (75,470)
Unearned income (25,557) (27,253)
-------- --------
5,792 4,907
Less- Deferred taxes arising from leveraged leases 503 268
-------- --------
$ 5,289 $ 4,639
======== ========
F-15
(8) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
-----------------------------------------
Accounts payable and accrued liabilities consist of the following
at December 31-
1998 1997
------- -------
Accounts payable $ 2,822 $ 3,768
Accrued wages and benefits 1,946 2,056
Liabilities for discontinued operations 2,758 2,792
Other accrued expenses 3,295 5,513
------- -------
$10,821 $14,129
======= =======
(9) LONG-TERM DEBT:
---------------
Long-term debt consists of the following at December 31-
1998 1997
------- -------
Mortgages on real property (a) $31,339 $29,605
Loan payable to bank (b) 1,102 1,733
Capital lease obligation 363 454
------- -------
32,804 31,792
Less- Current maturities 5,875 5,232
------- -------
$26,929 $26,560
======= =======
(a) First mortgages bearing interest at rates ranging from
4% to 10.25% per annum are collateralized by the related
real property. Such amounts are scheduled to mature at
various dates from January 1999 through February 2010.
In 1998, the Company refinanced three mortgages with a
total outstanding principal value of approximately $12.3
million and interest rates ranging from 10% to 10.5%.
The new mortgages bear interest ranging from 6.5% to
6.68% and have maturities similar to the original
obligations.
(b) The Company has a fixed rate note bearing interest at
7.94% per annum, which 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
Company was in compliance with all covenants.
F-16
The approximate aggregate maturities of these obligations at
December 31, 1998 are as follows-
Long-Term Capital Lease
Debt Obligation
--------- -------------
1999 $ 5,776 $124
2000 5,781 124
2001 5,251 124
2002 4,823 43
2003 4,195 0
Thereafter 6,615 0
------- ----
Total minimum payments $32,441 415
=======
Less- Amount representing interest 52
----
Total present value of minimum lease payments 363
Less- Current portion 99
----
Total noncurrent portion $264
====
(10) CREDIT FACILITIES:
------------------
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 ("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 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.
At December 31, 1997, approximately $4.6 million was
outstanding under the Revolver at Prime (8.5%) and
approximately $6.7 million was outstanding on the Term Loan.
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS:
------------------------------------
The Company has limited involvement with financial instruments
and has not used them for trading purposes. The following
methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments-
F-17
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 available-for-sale, which are 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 credit facilities
approximate their fair value. The fair value of long-term debt
was calculated based on interest rates available for debt with
terms and due dates similar to the Company's existing debt
arrangements. The fair value of long-term debt at December 31,
1998 and 1997 was approximately $32.7 million and $32.2
million respectively, while the carrying value was $32.8
million and $31.8 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,
1998 and 1997, the fair values of the swap were estimated at
($125) and ($63), respectively.
(12) STOCKHOLDERS' EQUITY:
---------------------
Stock Options-
--------------
The Company has two stock option plans under which qualified
and nonqualified options may be granted to key employees to
purchase the Company's common stock at the fair market value
on 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 and the 1988 Joint Incentive and
Non-Qualified Stock Option Plan (the "Joint Plan") provides
for the granting of incentive or nonqualified stock options.
On June 9, 1998 the Company's shareholders approved an
amendment to the Company's Incentive Plan and Joint Plan to
increase the number of authorized shares reserved for issuance
pursuant to each plan, from 325,000 shares to 1,325,000
shares, respectively. In December 1998, the Board of Directors
approved a proposal, subject to stockholder approval, to
extend the term of the Incentive Plan and Joint Plan to 2008.
At December 31, 1998, there were 647,630 and 224,251 options
outstanding under the Joint Plan and Incentive Plan,
respectively. At December 31, 1997, there were 262,130 and
216,751 options outstanding under the Joint Plan and Incentive
Plan, respectively.
A summary of the Company's stock options as of December 31,
1998, 1997 and 1996, and changes during the years then ended
are summarized below-
F-18
Weighted-
Average
Exercise
Shares Price
-------------- ----------
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
Granted 444,000 $23.08
Exercised (51,000) $11.13
-------------
Outstanding at December 31, 1998 871,881 $19.16
============= =========
The following table summarizes information about options
outstanding and exercisable at December 31, 1998-
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------- ----------------------------------
Weighted-
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
- ---------------- -------------- ----------- ------------- ------------------------------------
$5.00 - $7.25 49,500 3.18 years $ 5.91 49,500 $ 5.91
$11.00 60,000 4.96 years $ 11.00 60,000 $ 11.00
$17.00 - $18.75 318,381 8.47 years $ 17.31 105,461 $ 17.30
$22.88 - $25.16 444,000 9.44 years $ 23.08 0 $ 0
------- -------
$5.00 - $25.16 871,881 8.42 years $ 19.16 214,961 $ 12.92
======= ======
The Company 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, 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 basic share for 1998
and 1997 would have been approximately $14,234 or $2.74 and
$8,091 or $1.53 pe share, respectively. Proforma compensation
costs for the Company'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. 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 Company utilized the Black-Scholes option pricing model
with the following assumptions
F-19
for 1998, 1997 and 1996; risk free interest rates of 5.60%,
6.27% and 5.84%, respectively; no dividend yield; weighted
average expected option lives of 5, 5 and 3 years,
respectively, and, expected volatility of 33%, 39% and 40%,
respectively.
(13) EARNINGS PER SHARE:
-------------------
The following table sets forth the computation of basic and
diluted earnings per share-
1998 1997 1996
------- ------ ------
Numerator-
Income from continuing operations $10,583 $7,465 $6,634
------- ------ ------
Denominator-
Denominator for basic earnings per
share--weighted-average shares 5,203 5,288 5,497
Effect of dilutive securities-
Employee stock options 85 51 10
Denominator for diluted earnings per ------- ------ ------
share-adjusted weighted-average shares
and assumed conversions 5,288 5,339 5,507
------- ------ ------
Basic earnings per share $ 2.03 $ 1.41 $ 1.21
======= ====== ======
Diluted earnings per share $ 2.00 $ 1.40 $ 1.20
======= ====== ======
(14) TRANSACTIONS WITH RELATED PARTIES:
----------------------------------
The Company 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 Company and the wife
of one of the Directors have an 8% interest in this entity
(see Note 7).
In July 1998, the Company participated in a $3 million loan
transaction secured by stock in a corporation whose principal
assets were leased equipment and stock in a cooperative
apartment. The Company advanced approximately $1.8 million in
connection with this loan. The remaining amounts were advanced
by the Board Chairman of the Company, $250; and the balance by
the wife of the Board Chairman. The note, which matures in
August 1999, bears interest at 14% per annum payable monthly.
The participants also received a commitment fee of 4% in
connection with the loan. In September 1998, the corporation
sold its stock in the cooperative apartment and the Company
received $800 in addition to its normally scheduled payment.
In September 1996, the Company purchased a 50% interest in a
limited partnership that owns and operates a hotel in Miami
Beach, Florida. At the time of the acquisition, the Company
participated in a $2.5 million loan transaction to the limited
partnership secured by a mortgage lien against the property.
The Company advanced approximately $683 in connection with
this note. The remaining amounts were advanced by the
following: a Director of the Company, $250; the wife of the
Board Chairman, $1 million; an officer of the Company $100;
and the balance by unrelated parties. The note bore interest
at 14% per annum payable monthly and the participants also
received a commitment fee of 4%. This note matured in
September 1997
F-20
and was extended in accordance with original terms of the
note, for one year, in consideration of a 4% commitment fee.
The limited partnership repaid the full amount outstanding
together with accrued interest in July 1998. All amounts
invested in and advanced to the partnership by the Company
have been classified as investments in and advances to
affiliate and are included in other assets in the Consolidated
Financial Statements.
In 1996 and 1997, in order to effectively manage the cost to
the Company of the remediation efforts at Metex Corporation's
("Metex") two New Jersey facilities (see Note 19), the Company
sold, in total, approximately a 4% interest for $40 in a
subsidiary that manages the Company's environmental
remediation efforts to an Officer and Director of the Company
and other employees, as well as an interest to the Company'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.
The Company's two hotel properties are managed by a publicly
traded company for which the Board Chairman and another
Director of the Company are directors. In addition, during
1998 the Company's Board Chairman was also named Chairman and
President of this company. Fees paid for the management of
these properties are based upon a percentage of revenue and
were approximately $139, $143 and $159 for 1998, 1997 and
1996, respectively. Included in marketable securities at
December 31, 1998 was approximately $9.4 million of common
stock in this company which represents less than 2% of the
company's outstanding shares.
During 1997 the Company advanced, in the aggregate $398 to the
Board Chairman and $375 to a Director and Officer of the
Company. Such advances bore interest at the Company's
borrowing rate under its revolving credit facility which was
8.5% at December 31, 1997. Amounts outstanding at December 31,
1997 of $398 together with accrued interest thereon were
repaid in January 1998. No such advances were made by the
Company in 1998.
(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 No.109"). Under
SFAS No.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 Company's historical and
projected levels of pretax income, management believes it is
more likely than not that the Company will realize such
benefits in the future and, accordingly, no valuation reserve
has been recorded.
F-21
The components of the net deferred tax asset (liability) at
December 31, follows-
1998 1997
------- -------
Realization allowances related to
accounts receivable and inventories $ 276 $ 259
Net unrealized gain on marketable securities (1,514) (70)
Basis differences relating to real
property held for rental 3,239 3,990
Anticipated insurance proceeds (983) (2,380)
Accrued expenses, deductible when paid 5,112 4,856
Deferred revenue and profit (for tax purposes) 61 112
Basis differences relating to business acquisitions (1,859) (1,859)
Leveraged lease (503) (268)
Property, plant and equipment (582) (606)
Pensions (81) (49)
Other, net (29) 200
------- -------
Net deferred tax asset 3,137 4,185
Current portion (152) 1,219
------- -------
Noncurrent portion $ 3,289 $ 2,966
======= =======
Income tax provision (benefit) reflected in the accompanying
Consolidated Statements of Income for the years ended December
31, follows-
1998 1997 1996
------ ------ ------
Current-
Federal $ 6,325 $ 4,823 $ 4,589
State 1,900 1,860 1,838
Deferred (500) (873) (1,018)
------- ------- -------
$ 7,725 $ 5,810 $ 5,409
======= ======= =======
A reconciliation of the tax provision computed at statutory
rates to the amounts shown in the accompanying Consolidated
Statements of Income for the years ended December 31, follows-
Computed Federal income
tax provision at statutory rates $6,408 $4,513 $4,094
State income taxes, net of
Federal income tax benefit 1,293 1,272 1,266
Other, net 24 25 49
------ ------ ------
$7,725 $5,810 $5,409
====== ====== ======
F-22
(16) OTHER INCOME AND EXPENSE, NET:
------------------------------
The components of other income and expense, net in the
accompanying Consolidated Statements of Income for the years
ended December 31, follows-
1998 1997 1996
---- ---- ----
Gain on sales of real estate assets $5,444 $3,481 $3,919
Gain on sale of trading securities (Note 5) 75 0 0
Loss from equity investments (a) (402) (263) 0
Settlement income (b) 0 0 1,443
Other, net (c) (82) 44 (561)
---------- ------------ ------------
$5,035 $3,262 $4,801
========== ============ ============
(a) Loss from equity investments principally represents the
Company's share of losses in a Miami Beach hotel. (See
Note 7), partially offset by nonrecurring cash
distributions received by the Company 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 Company 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 Company 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 Company settled this matter in April
1996 for approximately $425, after taxes.
(17) RETIREMENT PLAN:
----------------
The Company has a noncontributory defined benefit pension plan
that covers substantially all full-time employees and the
former employees of the Company's discontinued resilient vinyl
flooring segment.
The following table sets forth the change in benefit
obligation, the change in plan assets and the funded status of
the plan as of December 31-
F-23
1998 1997
---- ----
Change in benefit obligation:
Benefit obligation, beginning of year $ 9,052 $ 8,983
Service cost 308 325
Interest cost 640 626
Actuarial gain 326 392
Benefits paid (1,036) (1,274)
-------- --------
Benefit obligation, end of year 9,290 9,052
-------- --------
Change in plan assets:
Fair value of plan assets, beginning of year 12,643 12,904
Actual return on plan assets 610 1,013
Benefits paid (1,036) (1,274)
-------- --------
Fair value of plan assets, end of year 12,217 12,643
-------- --------
Funded status 2,927 3,591
-------- --------
Unrecognized prior service cost 587 665
Unrecognized net actuarial loss 1,724 929
Unrecognized net transition asset (954) (1,189)
Unrecognized net gain (3,444) (3,274)
-------- --------
Prepaid benefit obligation $ 840 $ 722
======== ========
Net periodic pension income for the years ended December 31 includes the
following components-
1998 1997 1996
---- ---- ----
Service cost ($308) ($ 325) ($230)
Interest cost (640) (626) (643)
Actual return on plan assets 610 1,013 883
Net amortization and deferral 456 87 102
----- ------- -----
Net periodic pension income $ 118 $ 149 $ 112
===== ======= =====
In determining the projected benefit obligation for 1998 and 1997, the weighted
average assumed discount rate was 7% and 7.5%, respectively, while the rate of
expected increases in future salary levels was 3.5% for both years. 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 1998 or 1997
as the plan is overfunded. Plan assets consist primarily of U.S. bonds,
government backed mortgage obligations, equity securities and mutual funds.
F-24
(18) BUSINESS SEGMENTS:
------------------
During 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of
an Enterprise and Related Information," which establishes
standards for the way that companies report information about
operating segments, based on the approach that management
utilizes to organize the segments for management reporting and
decision making.
The Company operates through two business segments: real
estate investment and management and engineered products. The
real estate investment and management segment is engaged in
the business of investing in and managing real estate
properties and the making of high-yield, short-term loans
secured by desirable properties. Engineered products are
manufactured through wholly-owned subsidiaries of the Company
and primarily consist of knitted wire products and components
and transformer products.
Information on the Company's business segments for the years
ended December 31 follows-
1998 1997 1996
---- ---- ----
Net revenues and sales-
Real estate investment and management $ 26,349 $ 24,042 $ 23,936
Engineered products 32,170 36,204 42,055
--------- --------- ---------
$ 58,519 $ 60,246 $ 65,991
========= ========= =========
Operating income-
Real estate investment and management $ 12,133 $ 7,718 $ 6,195
Engineered products 3,239 3,419 3,792
--------- --------- ---------
15,372 11,137 9,987
General corporate expenses (3,097) (2,329) (2,924)
Other income, net 6,033 4,467 4,980
--------- --------- ---------
Income from continuing
operations before income taxes $ 18,308 $ 13,275 $ 12,043
========= ========= =========
Identifiable assets-
Real estate investment and management
and corporate assets $ 114,406 $ 95,080 $ 99,292
Engineered products 11,706 11,432 12,174
Discontinued operations 0 6,841 5,295
--------- --------- ---------
$ 126,112 $ 113,353 $ 116,761
========= ========= =========
Depreciation and amortization expense-
Real estate investment and management $ 5,530 $ 5,838 $ 6,359
Engineered products 662 577 481
General corporate expenses 374 242 406
--------- --------- ---------
$ 6,566 $ 6,657 $ 7,246
========= ========= =========
Mortgage interest expense-
Real estate investment and management $ 2,661 $ 3,058 $ 3,671
========= ========= =========
F-25
1998 1997 1996
---- ---- ----
Additions to long-lived assets-
Real estate investment and management $22,043 $3,188 $3,500
Engineered products 510 1,077 721
------- ------ ------
$22,553 $4,265 $4,221
======= ====== ======
Sales by the Company's engineered products segment to
automobile original equipment manufacturers accounted for
approximately 25%, 31% and 32% of 1998, 1997 and 1996
consolidated revenues, respectively. Approximately 13%, 13%
and 14% of 1998, 1997 and 1996 total sales generated from the
engineered products segment were from foreign customers.
Substantially all assets held by the Company's engineered
products segment are located within the United States.
Included in the identifiable assets of the real estate
investment and management segment for 1998, 1997 and 1996 are
approximately $2.0, $5.1 and $13.5 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 1998, 1997 and
1996 is approximately $1.8 million related to the former
manufacturing facility of the Company's antenna segment.
(19) CONTINGENCIES:
--------------
The Company has undertaken the completion of environmental
studies and/or remedial action at Metex' two New Jersey
facilities.
The process of remediation has begun at one facility pursuant
to a plan filed with the New Jersey Department of
Environmental Protection and Energy ("NJDEPE"). Environmental
experts engaged by the Company estimate that under the most
probable remediation scenario the remediation of this site is
anticipated to require initial expenditures of $860, 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 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 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
F-26
against certain insurance carriers seeking defense and
indemnification with respect to all prior and future costs
incurred in the investigation and remediation of these sites.
Upon the advice of counsel, the Company believes that based
upon a present understanding of the facts and the present
state of the law in New Jersey, it is probable that the
Company will prevail in the pending litigation and thereby
access all or a very substantial portion of the insurance
coverage it claims; however, the ultimate outcome of
litigation cannot be predicted.
At December 31, 1998 and 1997, a total of $2.9 million in
anticipated insurance recoveries is recorded in the
accompanying consolidated financial statements and is included
in other assets. Additionally, in 1995 the Company received
approximately $4.1 million of insurance recoveries. The
remaining balance of $2.9 million at December 31, 1998 (from a
total of $7 million) is in dispute with the Company's
insurance carriers. Management believes that recoveries in
excess of the amounts reflected in the accompanying
consolidated financial statements are available under the
insurance policies but have not been recorded. There can be no
assurances, however, that the Company will prevail in its
efforts to obtain amounts at or in excess of the estimated
recoveries.
In the opinion of management, these matters will be resolved
favorably and such amounts, if any, not recovered under the
Company's insurance policies will be paid gradually over a
period of years and, accordingly, should not have a material
adverse effect upon the business, liquidity or financial
position of the Company. However, adverse decisions or events,
particularly as to the merits of the Company's factual and
legal basis could cause the Company to change its estimate of
liability with respect to such matters in the future.
The Company is involved in various other litigation and legal
matters which are being defended and handled in the ordinary
course of business. None of these matters are expected to
result in a judgment having a material adverse effect on the
Company's consolidated financial position or results of
operations.
F-27
SCHEDULE II
UNITED CAPITAL CORP. AND SUBSIDIARIES
-------------------------------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
-------------------------------
(In Thousands)
--------------
Write-offs
Net of
Recoveries
Balance Charged of Accounts Balance
at to Previously at
Beginning Costs and Written End of
of Period Expenses Off Period
--------- --------- ----------- -------
Allowance for doubtful accounts:
Year ended December 31, 1998 $326 $70 $6 $390
Year ended December 31, 1997 377 0 51 326
Year ended December 31, 1996 332 46 1 377
The accompanying notes to consolidated financial statements are
an integral part of these schedules.
F-28
SCHEDULE III
UNITED CAPITAL CORP. AND SUBSIDIARIES
-------------------------------------
REAL PROPERTY HELD FOR RENTAL AND ACCUMULATED DEPRECIATION
----------------------------------------------------------
DECEMBER 31, 1998
-----------------
(In Thousands)
--------------
Mortgage Initial Cost to Registrant Costs Capitalized
Loans -------------------------- Subsequent to
Payable Building and Acquisition/
Description (Gross) Land Improvements Improvements
----------- -------- -------- ------------- -------------
Shopping Centers and Retail Outlets-
Culver, CA $ 4,564 $ 842 $ 7,576 $ 0
Northbrook, IL 4,872 898 8,075 0
Miscellaneous Investments 14,426 5,330 48,602 1,008
------- -------- -------- ------
23,862 7,070 64,253 1,008
------- -------- -------- ------
Commercial Properties-
Miscellaneous Investments 7,067 9,622 42,261 939
Day Care Centers and Offices-
Miscellaneous Investments 410 643 5,786 1,627
Hotel Properties-
Miscellaneous Investments 0 0 2,868 48
Other-
Miscellaneous Investments 0 2,397 999 581
------- -------- -------- ------
$31,339 $ 19,732 $116,167 $4,203
======= ======== ======== ======
Life on Which
Gross Amounted at Which Depreciation
Carried at Close at Period In Latest
--------------------------------------------------- Statement of
Building Accumulated Income is
and Total Depreciation Date of Date Computed
Description Land Improvements (a) (c) (b) Construction Acquired (Years)
----------- ---- ------------ ------- ------------- ------------ ---------- ------------
Shopping Centers and Retail Outlets-
Culver, CA $ 842 $ 7,576 $ 8,418 $ 5,034 N/A 1986 18
Northbrook, IL 898 8,075 8,973 5,220 N/A 1987 18
Miscellaneous Investments 5,330 49,610 54,940 31,648 N/A 1986-98 10-39
-------- -------- -------- -------
7,070 65,261 72,331 41,902
-------- -------- -------- -------
Commercial Properties-
Miscellaneous Investments 9,622 43,200 52,822 16,992 N/A 1986-98 12-39
Day Care Centers and Offices-
Miscellaneous Investments 643 7,413 8,056 5,957 N/A 1986-91 7-39
Hotel Properties-
Miscellaneous Investments 0 2,916 2,916 2,868 N/A 1986-96 10-39
Other-
Miscellaneous Investments 2,397 1,580 3,977 946 N/A 1986-97 10-39
-------- -------- -------- -------
$19,732 $120,370 $140,102 $68,665
======== ======== ======== =======
Notes:
(a) Reconciliations of the carrying value of real property held for rental for
the three years ended December 31, 1998 are as follows-
1998 1997 1996
-------- -------- --------
Real property held for rental at beginning of period $124,346 $126,876 $128,135
Additions during the period-
Acquisitions and improvements 12,958 2,276 3,480
Transfers from property, plant and equipment 0 0 2,195
Transfers from noncurrent notes receivable 8,165 0 0
-------- -------- --------
145,469 129,152 133,810
Deductions during period-
Cost of real estate sold 5,367 4,806 6,934
-------- -------- --------
$140,102 $124,346 $126,876
======== ======== ========
(b) Reconciliations of accumulated depreciation for the three years ended
December 31, 1998 are as follows-
1998 1997 1996
-------- -------- --------
Accumulated depreciation at beginning of period $ 65,768 $ 61,187 $58,122
Additions during the period-
Provision for depreciation 5,529 5,836 6,588
Transfers from property, plant and equipment 0 0 159
-------- -------- --------
71,297 67,023 64,869
Deductions during period-
Accumulated depreciation of real estate sold 2,632 1,255 3,682
-------- -------- --------
$ 68,665 $ 65,768 $ 61,187
======== ======== ========
(c) The aggregate cost for Federal income tax purposes is approximately $180,956
The accompanying notes to consolidated financial statements are an
integral part of these schedules.
F-29
SCHEDULE IV
UNITED CAPITAL CORP. AND SUBSIDIARIES
-------------------------------------
MORTGAGE LOANS ON REAL ESTATE
-----------------------------
DECEMBER 31, 1998
-----------------
(In Thousands)
--------------
Description Interest Rate Final Maturity Date
----------- ------------- -------------------
Mortgage loans secured by Commercial Property -
Other - Two loans - Face amounts $325 or less Varies from 9% - 10% From August 2000 - December 2008
Mortgage loans secured by Hotels-
Montgomery, AL Varies from 10.25% - 11% November 2001
Beaumont, TX Varies from 10% - 11% February 2002
Mortgage loans secured by Mortgage Notes
Long Beach, NY 14% January 1999
Principal Amount
Carrying of Loans Subject
Face Amount of to Delinquent
Prior Amount of Mortgages Principal or
Description Periodic Payment Terms Liens Mortgages (b) Interest
----------- --------------------------- ----------- --------- ---------- ----------------
Mortgage loans secured by
Commercial Property -
Other - Two loans -
Face amounts $325 or less Principal and interest
due monthly $0 $370 $44 $0
Mortgage loans secured by Hotels-
Montgomery, AL Principal and interest
due monthly, 0 610 121 0
Beaumont, TX Principal and interest
due monthly, additionally,
there is a principal
payment $773 due in
February 2002 0 900 361 0
----- ------ ------ ----
0 1,510 482 0
----- ------ ------ ----
Mortgage loans secured by Mortgage Notes
Long Beach, NY Interest due monthly, with
principal due at maturity 0 700 700 0
----- ------ ------ ----
$0 $2,580 $1,226 (a)(c) $0
===== ====== ====== ====
NOTES:
(a) A reconciliation of mortgage loans on real estate for the year ended
December 31, 1998 is a follows-
Balance at beginning of period $ 5,006
Additions during period-
New mortgage loans 100
Deductions during period-
Collection of principal (3,880)
-------
Balance at end of period $ 1,226
=======
(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, 1998:-
Mortgage note receivable in connection with sale of property in-
Montgomery, Alabama $132
Beaumont, Texas 442
Waterbury, Connecticut 66
Augusta, Georgia 24
----
$664
====
(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.
F-30
UNITED CAPITAL CORP. AND SUBSIDIARIES
-------------------------------------
QUARTERLY FINANCIAL DATA
------------------------
(Unaudited)
-----------
(Dollars In Thousands Except Per Share Data)
--------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
FOR THE YEAR 1998:
Revenues $14,548 $14,996 $13,883 $15,092
======= ======= ======= =======
Costs and expenses $10,747 $12,734 $10,814 $11,950
======= ======= ======= =======
Other income $ 349 $ 3,753 $ 400 $ 1,532
======= ======= ======= =======
Income from continuing operations $ 2,414 $ 3,423 $ 1,961 $ 2,785
======= ======= ======= =======
Income from discontinued operations,
net of tax $ 4,849 $ 0 $ 0 $ 0
------- ------- ------- -------
Net income $ 7,263 $ 3,423 $ 1,961 $ 2,785
======= ======= ======= =======
Per share data:
BASIC EARNINGS PER COMMON SHARE:
Income from continuing operations $ .46 $ .66 $ .38 $ .54
Discontinued operations, net of tax .92 .00 .00 .00
------- ------- ------- -------
Net income per common share $ 1.38 $ .66 $ .38 $ .54
======= ======= ======= =======
DILUTED EARNINGS PER COMMON SHARE:
Income from continuing operations $ .45 $ .64 $ .37 $ .54
Discontinued operations, net of tax .90 .00 .00 .00
------- ------- ------- -------
Net income per common share assuming
dilution $ 1.35 $ .64 $ .37 $ .54
======= ======= ======= =======
FOR THE YEAR 1997:
Revenues $15,200 $16,092 $14,379 $14,575
======= ======= ======= =======
Costs and expenses $13,640 $13,274 $12,523 $12,001
======= ======= ======= =======
Other income $ 2,789 $ 523 $ 233 $ 922
======= ======= ======= =======
Income from continuing operations $ 2,386 $ 1,886 $ 1,071 $ 2,122
======= ======= ======= =======
F-31
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
Income from discontinued operations,
net of tax $ 249 $ 104 $ 448 $ 215
========= ========= ========= =========
Net income $ 2,635 $ 1,990 $ 1,519 $ 2,337
========= ========= ========= =========
Per share data:
BASIC EARNINGS PER COMMON SHARE:
Income from continuing operations $ .45 $ .36 $ .20 $ .40
Discontinued operations, net of tax .05 .02 .09 .04
--------- --------- --------- ---------
Net income per common share $ .50 $ .38 $ .29 $ .44
========= ========= ========= =========
DILUTED EARNINGS PER COMMON SHARE:
Income from continuing operations $ .45 $ .35 $ .20 $ .39
Discontinued operations, net of tax .05 .02 .08 .04
--------- --------- --------- ---------
Net income per common share assuming dilution
$ .50 $ .37 $ .28 $ .43
========= ========= ========= =========
Notes to quarterly financial data
(1) The 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".
F-32