U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[ 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, 1996
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
Commission file number 0-16819
National Capital Management Corporation
(Name of small business issuer in its charter)
Delaware 94-3054267
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
520 Madison Avenue, New York NY 10022
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (212) 980-3883
Securities registered pursuant to Section 12(b) of the Exchange Act:
NONE
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $0.01 Par
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or
any amendment to this Form 10-KSB. [X]
Issuer s revenues for its most recent fiscal year $10,331,081.
The aggregate market value of voting stock held by nonaffiliates of the
Registrant is approximately $568,885 as of March 21, 1997.
1,673,190
(Number of shares of common stock outstanding as of March 21, 1997)
Total number of pages in this document is: 39
The exhibit index is on page 36
-1-
<PAGE>
PART I
Item 1 - Description of Business
Introduction
National Capital Management Corporation ("NCMC") is a holding company that
until recently operated through its primary subsidiary, National Capital
Benefits Corp. (collectively with NCMC, the "Company"), which purchased
life insurance policies for cash, on a discounted basis, from individuals
having life threatening illnesses, a transaction which is otherwise known
as viatical settlements. In December 1996 the Company made a
determination to discontinue this operation.
In the prior two years, the Company had been comprised of two additional
distinctly different operating businesses, the Real Estate Segment and the
Industrial Products Segment. However, these segments were discontinued
during 1995 through the sale of principally all of their assets and/or
stock.
On August 20, 1996 the Company was notified by NASDAQ that the Company no
longer appeared to meet certain requirements for continued listing on
NASDAQ's National Market System. In particular, NASDAQ noted that (i) the
closing bid price for the Company's common stock on August 12, 1996 was
$.875 per share and therefore below NASDAQ's $1 minimum bid price and (ii)
because of the bid price, the market value of the public float no longer
appeared to meet the requirement for a $1 million public float.
On September 17, 1996, in response to the foregoing two concerns raised by
NASDAQ, the Company proposed a stock repurchase program pursuant to which
the Company would purchase up to 80,000 shares of the Company's common
stock in the open market from time-to-time as market conditions permitted.
On September 27, 1996, NASDAQ notified the Company that it had completed
its review of the Company's proposal and request for continued listing on
NASDAQ's National Market System. Based on that review, NASDAQ determined
to deny the Company's request.
The determination was based on several factors. The NASDAQ staff noted
that the Company was in the hearings process in 1995 for a minimum bid
price deficiency. At that time, the Company was successful in maintaining
compliance by implementing a one-for-three reverse stock split. NASDAQ
stated that the Company's proposed repurchase program would further reduce
the already limited shares of public float and is not guaranteed of
achieving compliance with the minimum bid price and/or the market value of
public float criteria. NASDAQ further noted that the Company has had a
history of financial losses. In conclusion, as a result of the Company's
inability to provide a plan which will ensure continual compliance, and
that the Company was in the hearings process in 1995 for a bid price
deficiency, the NASDAQ staff determined that continued listing on NASDAQ's
National Market System was no longer warranted and informed the Company
that the common stock was scheduled to be deleted from the National Market
System, effective with the opening of business on October 31, 1996. The
Company is eligible to trade on the OTC Bulletin Board.
-2-
<PAGE>
Discontinued Operation - Viatical Settlements
On March 17, 1994, the Company formed National Capital Benefits Corp.
("NCBC") to engage in the business of purchasing life insurance policies
which insure the lives of individuals with life threatening illnesses.
NCBC purchased policies which insure individuals having a projected life
expectancy of 36 months or less. In March 1994, the Company funded NCBC
with initial cash investments of $1,490,000, consisting of $1,450,000 of
preferred stock and $40,000 of common stock, and purchased an additional
$3,210,000 of preferred stock for cash through December 31, 1995 and an
additional $663,082 through December 31, 1996.
In addition, NCBC had a revolving line of credit ("The Facility") up to $15
million, based on a formula of eligible policies purchased, from an
institutional lender which was to be used to provide working capital and
funds for the purchase of such policies. The facility is secured by all
of the assets of NCBC, including purchased insurance policies, bears
interest at 1/2% over the lender s prime rate or 2-7/8% over the 90 day
London Inter-Bank Offer Rate ("Libor") at the option of NCBC, is subject
to a commitment fee of 1/4% on the average daily unused amount of the line
and expires in December 1998. NCBC had drawn approximately $12,131,000 on
this line of credit as of March 21, 1997. The Facility was amended on
November 30, 1996, and can no longer be utilized to finance the purchase
of policies. However, the facility does provide for the use of maturity
and reinsurance claim proceeds (see below) for debt service and certain
operating expenses.
In addition, as of December 29, 1995, NCBC issued a $2,000,000
subordinated note (the "Note") bearing interest at a rate of 14% with
interest payable monthly in arrears. The interest rate on the Note is
consistent with a market rate at which a similar borrowing could be
obtained by the Company. Therefore, the fair value of the Note
approximates the carrying value at December 31, 1996. The note is due
December 31, 1998, and is secured by NCBC s purchased insurance policies,
subject to the security interest granted to the Facility lender. The
purchaser of the Note was granted a warrant to acquire 12% of the common
stock of NCBC (68 shares) at a price of $1.47 per share. The holder of
the warrant can exercise a put of the stock to NCBC under certain
conditions, which would guarantee the holder a minimum additional 4%
interest on the outstanding balance. This additional liability has not
been reflected in the financial statements at December 31, 1996 as
management is negotiating a modification to the warrant agreement, which
is expected to result in minimal additional cost to the Company on a
prospective basis only. The warrant expires December 31, 2000.
NCBC insured 90% of the net death benefit of the acquired policies through
a wholly-owned Bermuda insurance company which, in turn, has reinsured the
risk with a consortium of large international insurance companies. At
December 31, 1996, there was $120,000 of cash restricted to the Bermuda
insurance company. As of December 31, 1996, the face value of NCBC s
purchased insurance policies remaining in its portfolio was approximately
$20.5 million. During 1996, approximately $4.3 million of policies
matured.
A trust whose sole trustee was an executive officer of NCBC ("the Minority
Owner") originally owned 14-1/2% of the common stock of NCBC. Effective
November 30, 1996, the Company acquired this minority interest and all
agreements with the minority owner were terminated.
-3-
<PAGE>
On July 29, 1994, NCBC entered into an agreement and acquired certain
assets of CAPX Corporation ("CAPX"), including the rights to certain
service marks, trade names and proprietary computer software. The
purchase price of the assets was $125,000 and the issuance of 33,333
shares of the $.01 par value of NCMC s common stock, which was valued at
$5.25 per share, adjusted to reflect the reverse stock split. As part of
the agreement, as amended in September 1996, NCBC was required to
immediately pay CAPX $25,000, and an additional $150,000 by January 1997
to repurchase all of the CAPX shares. The agreement was further modified
in February 1997 at which time the Company paid $100,000 and the agreement
was terminated.
Nature of Recently Discontinued Viatical Settlement Business
The viatical settlement business made it possible for people facing life
threatening illnesses to sell their life insurance policies for cash at a
discount from the policies' stated death benefit. The sales proceeds gave
them choices that they might not otherwise have, such as selecting quality
health care, retaining ownership of a residence, retiring indebtedness or
sharing funds with family, friends or favorite charities.
A prospective seller's medical records were reviewed by physicians
retained by NCBC as consultants who specialized in treatment of the
individual's particular illness or disorder. A prognosis was then made by
each physician of the life expectancy of that person, which is an
essential element in determining NCBC's purchasing of the policy and the
terms of such purchase. Other factors considered when purchasing policies
was the financial strength of the insurance company writing the policy,
the amount of coverage provided by the policy, assignment restrictions
contained in the policy, the amount of any loans against the policies,
prior assignments, the beneficiary, the cost of policy premiums, issue
date and type of policy.
NCBC is required 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 revenue and expenses during the reporting period.
Actual results could differ significantly from these estimates.
The recognition of earned discount and the ultimate profitability
associated with purchased insurance policies is directly related to NCBC s
assumptions regarding the remaining life expectancy of terminally ill
individuals. Such estimates were made when the insurance policy was
purchased based upon facts and circumstances then known, and are adjusted
periodically, but not more than annually, based upon actual experience.
While NCBC believes that its estimate of life expectancy, and the related
recognition of earned discount will closely approximate actual experience,
given the inherent scientific uncertainty of such estimates, including the
potential impact of recently announced medical treatments that might
extend life expectancies, there can be no assurance that these policies
will mature in accordance with management s estimates. Therefore, the
Company established a $1,500,000 valuation reserve against purchase policy
costs, as stated on the balance sheet, during 1996 (see footnote 3 to the
financial statements). The amount of the reserve was determined based on
projections of expected cash inflows from maturity and reinsurance claims,
and cash outflows for debt service and operating costs during the
portfolio administration process which is expected to take several years
(see footnote 3).
-4-
<PAGE>
In accordance with the discontinuance of this business segment, NCBC has
restructured its organization and reduced its office staff to two persons.
Discontinued Operation - Real Estate Segment
In November 1995, the Company elected to discontinue operations of the
Real Estate Segment. The following is the status of the Company s disposal
activities:
The Mart Shopping Center: On July 28, 1995, the Company sold The Mart
Shopping Center ("the Mart") located on nine acres in the high technology
business area of Hillsboro, Oregon, a suburb of Portland, to an individual
affiliated with NCM Management Ltd., a company which provides management
services to the Company. The sales proceeds included $960,000 in cash, an
eighteen month note secured by a second deed of trust on the property in
the amount of $910,000 and the buyer s assumption of the $1,232,501 first
deed of trust secured by the property for a total purchase price of
$3,102,501. The Company renegotiated payment of the note with the
purchaser whereby it received a total of $800,000 in exchange for an early
payoff on September 30, 1995, reducing the sale proceeds by $110,000. A
gain of $1,029,894 was recognized on this transaction in 1995.
Appletree Townhouses: The Company s wholly-owned subsidiary, Georgia
Properties, Inc. ("GPI"), received advances of $650,000 on December 21,
1995 and an additional $500,000 on February 1, 1996 from the same
individual that purchased The Mart Shopping Center, in exchange for an
option to purchase Appletree Townhouses for $3,500,000, which was
exercised on March 31, 1996.
The sales price of $3,500,000 consisted of the aforementioned advances by
the buyer totaling $1,150,000, assumption of the existing first deed loan
by the buyer in the amount of $1,048,795 and a purchase money note for the
balance equal to $1,301,205. The purchase money note paid interest on the
balance due from the date of sale at 8% per annum until it was paid in
December 1996. In addition, the buyer was required to prepay $250,000 of
this note on May 1, 1996, which was paid in April 1996. A gain of
$327,735, related to the sale of this property and the liquidation of the
Appletree subsidiary, was reported in 1996.
Florida land: The Company owned undeveloped land in Ft. Lauderdale,
Florida which is zoned for commercial/industrial use. This parcel was
sold for $216,000 in August 1996, and the Company reported a gain of
$190,489.
Colony Ridge Apartments: Colony Ridge Apartments is an apartment complex
in Decatur, Georgia which was constructed in 1968 and consists of 23
two-story buildings containing a total of 212 apartment units. This
property is currently being marketed and is expected to be sold during
1997.
Redbird Trails Apartments and North Oak Apartments: On June 13, 1994 and
December 8, 1994, in accordance with previous agreements dated December
30, 1993, the Company sold limited partnership interests in Redbird Trails
Associates, L.P. ("Redbird") and Signature Midwest, L.P. ("Signature"),
respectively, to two unrelated entities. The Company retained a .9%
interest in each partnership through two wholly-owned subsidiaries serving
as the operating general partners. Such operating general partners are
obligated to provide loans of up to $150,000 and $75,000 to Redbird and
Signature, respectively, to fund any operating deficits, as defined, for
a three year period commencing December 8, 1994.
-5-
<PAGE>
The Company retained a contingent interest in the cash flows of these
partnerships. It will receive any cash available from property
operations, to the extent it exceeds approximately $61,000 annually, and
any refinancing proceeds up to a total of approximately $4.5 million, plus
interest at 9.25% per annum on the outstanding balance of this amount.
Any proceeds of sale will be allocated, first, 99.1% to the new partners
until they have received 135% of their investment, less any prior
distributions. Any remaining proceeds from a sale will be allocated to
the Company up to $6 million, less any distributions from operations or
refinancings as described above. These arrangements have not been
reflected in the Company s financial statements since their ultimate
realization cannot reasonably be determined. In addition, at such time as
the tax benefits have been utilized, the Company has the right to purchase
the interests of the newly admitted partners for 135% of their contributed
capital (minus prior cash payments). Should the Company choose not to
exercise such right to purchase the partners interests, the newly
admitted administrative general partner has the right to require the
Company to sell all of the assets and liquidate the partnerships. The
Company has not funded any operating deficits and has not received any
excess cash flows during 1996 and 1995.
Discontinued Operation - Industrial Products Segment
The Industrial Products Segment consisted of the Company s wholly-owned
subsidiary, Jensen Corporation ("Jensen"), which manufactured and
distributed machinery used primarily by commercial laundries, large
institutions and hotels as well as commercial compactor products for waste
disposal. On November 10, 1995, the Company sold 100% of the common stock
of Jensen, located in Fort Lauderdale, Florida to AMKO USA, Inc. ("AMKO"),
an affiliate of AMKO International B.V., which is based in The
Netherlands, for $1,726,000. The sale proceeds included cash of $415,000
and a promissory note receivable in the amount of $1,311,000, which is
secured by Jensen s stock, accounts receivable and inventory. The
$1,311,000 note is guaranteed in its entirety by AMKO International B.V.,
and the sole shareholder of AMKO International B.V. guaranteed the first
$585,000 of principal payments.
AMKO also agreed to cause Jensen to pay to the Company a $765,000
obligation in the form of a note, which was loaned to Jensen, $500,000
which was prior to the sale and $265,000 which was simultaneous with the
sale, and an intercompany balance payable by Jensen to the Company of
$337,650, which are secured by the assets of Jensen. The first $765,000
of principal payments under these notes are guaranteed by AMKO
International B.V.
The $1,311,000 note as amended in August and October 1996, and again in
February 1997 bears interest at 8.5% per annum and is payable in varying
installments with the balance due in October, 1997. The $765,000 note as
amended in August and October 1996, and again in February 1997 bears
interest at 8.5% per annum and is payable in varying installments with the
balance due in March, 1998. The $337,650 note as amended in August and
October 1996, and again in February 1997 bears interest at 8.5% per annum
and is payable in varying installments with the balance due in March 1998.
-6-
<PAGE>
The Company believes that the assets securing the three notes, and the
operations of Jensen as they now exist, may not be sufficient to provide
for payment of the notes. The Company has limited financial information
concerning AMKO and the guarantors of the notes. Consequently, no
assurance can be given that the principal or interest due on the notes
will be realized in full. As of December 1996, AMKO had paid principal of
$400,000, and the Company agreed to a $50,000 reduction in the face amount
of the $1,311,000 Note to settle certain Contract disputes. The Company
is currently in discussion with AMKO to assure that AMKO will pay all
future payments on a timely basis. The Company recorded a reserve of
$1,150,000 for these notes as of December 31, 1996. Based upon the
guarantees and estimated liquidation value of Jensen s assets which were
pledged as collateral for these notes, the Company believes that this
reserve is adequate.
Item 2 - Description of Property
The Company maintains an office in New York for use by its executive
officers at the premises of Resource Holdings, Ltd. ("Resource"). The
Company is not a party to a lease, but there is an understanding that NCMC
will pay rent for the offices in New York until the end of 1997. In
addition, in accordance with its agreement with Resource, the Company has
deposited with Resource s landlord the amount of $37,746 which will be
returned, plus interest, to the Company on termination of Resource's lease
(see Item 12 - Certain Relationships and Related Transactions).
Mr. Shaw, a director of the Company, is a managing director and
significant shareholder of Resource, and therefore may be deemed to have
an interest in any payments to Resource.
The Company considers this property to be suitable and adequate for its
present needs. The property is being fully utilized. See Item 1
"Business" for discussion of real properties owned in connection with the
discontinued operations of the Real Estate Segment.
Item 3 - Legal Proceedings
The Company was a named defendant in a product liability lawsuit related
to Jensen Corporation. In August 1996, the lawsuit was settled at no cost
to the Company.
Item 4 - Submission of Matters to a Vote of Security Holders
The Company held its annual meeting on October 29, 1996 in Dallas, Texas.
The Company solicited proxies and filed definitive proxy statements with
the commission pursuant to Regulation 14A. The matters voted upon at that
meeting and the votes cast were as follows.
<TABLE>
<CAPTION>
Proposal Vote
For Against Abstain
<S> <C> <C> <C>
(1) The election of the following
people to the Board of Directors: 823,645 11,668 -
James J. Pinto
John C. Shaw
Herbert J. Jaffe
David Faulkner
(2) Ratification of the appointment
of Arthur Andersen, LLP as the
Company's independent auditors
for fiscal year ending
December 31, 1996 823,645 11,668 -
</TABLE>
-7-
<PAGE>
PART II
Item 5 - Market for Common Equity and Related Stockholder Matters
a. Market Information
The Company's common stock trades on the OTC Bulletin Board
under the symbol NCMC.
The high and low bid prices of shares of common stock of the Company
for each quarter during the years ended December 31, 1996 and 1995, are
as follows:
<TABLE>
<CAPTION>
Bid Price
High Low
<S> <C> <C>
For the Quarter Ended
December 31, 1996............................ .5620 .3750
September 30, 1996........................... 1.0000 .8750
June 30, 1996................................ 1.0000 1.7500
March 31, 1996............................... 2.3750 2.3750
December 31, 1995............................ 1.5833 1.1667
September 30, 1995........................... 1.9167 1.5000
June 30, 1995 *.............................. 1.0208 .7500
March 31, 1995*.............................. .9375 .8229
</TABLE>
The quotations represent inter dealer quotations without retail mark-up,
mark-down or commission, and do not necessarily represent actual
transactions. The last reported sales price of the Company's common
stock on March 21, 1997 was $.34.
* Does not reflect stock split
Reverse Stock Split
Pursuant to the approval of the stockholders on June 28, 1995, the
Company implemented a reverse stock split which was effective July 11,
1995, whereby each three shares of common stock was converted into one
share of common stock. As a result of the reverse stock split, the
Registrant has 6,666,666 shares of authorized common stock, of which
1,673,190 are issued and outstanding. All such shares are of the par
value of $.01.
b. Number of Holders of Common Stock
At March 21, 1997, the approximate number of holders of record of
shares of common stock of the Company was 973.
c. Dividends on Common Stock
The Company has not declared any dividends on its common stock during
the two year period ended December 31, 1996.
Item 6 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
During 1996, the Company initially expanded its viatical settlement
business until it discontinued this operation at the end of the year.
-8-
<PAGE>
While the Company is managing the administration of the collection of the
portfolio of life insurance policies and the orderly liquidation of its
real estate, management intends to seek other acquisitions.
FINANCIAL CONDITION AND LIQUIDITY
The Company's cash was approximately $651,000 at December 31, 1996. During
1996, cash used to finance operating activities and the viatical
settlement business was offset by the receipt of $1,347,000 from the sale
of Appletree Townhouses and the Florida land. The Company s cash position
decreased to $400,000 as of March 21, 1997, as a result of operating
expenses and the CAPX settlement (see below).
Other than in its Viatical Settlement Subsidiary, the Company does not
have any existing general credit facilities to fund its ongoing working
capital requirements. The Company may seek additional financing through
the issuance of securities on a private or public basis, or through long
or short-term borrowings.
VIATICAL SETTLEMENT BUSINESS
Effective as of December 29, 1995, NCBC entered into a revolving credit
facility ("Facility") with a credit limit of up to $15 million, which
expires December 1998. The closing of the transaction was January 8, 1996.
The Facility is secured by all the assets of NCBC, including purchased
insurance policies. The Facility bears interest at 1/2% over the lender s
prime rate or 2-7/8% over the 90 day London Inter-Bank Offer Rate ("Libor")
at the option of NCBC (Libor rate + 2-7/8 and 8-3/8% at December 31, 1996
and 1995), and is subject to a commitment fee of 1/4% on the average daily
unused amount of the Facility. Because the interest rate on the Facility
adjusts quarterly based on Libor, the fair value of the borrowings under
the Facility approximates the carrying amount.
Under the terms of the Facility, the lender initially loaned NCBC a
specified percentage of the cost of the insurance policies purchased, and
the insurance policies purchased by NCBC had to meet certain underwriting
criteria as established in the Facility. Repayment of outstanding
principal is required as insurance proceeds from matured policies are
collected.
NCBC negotiated a modification to the Facility, as of November 30, 1996,
and can no longer use the Facility to purchase additional policies.
However, the Facility does provide for the drawdown of a specified
percentage of the policy portfolio and the use of proceeds from maturity
and reinsurance claims for debt service and certain operating expenses.
In addition, as of December 29, 1995, NCBC issued a $2,000,000
subordinated note (the "Note") bearing interest at a rate of 14% with
interest payable monthly in arrears. The interest rate on the Note is
consistent with a market rate at which a similar borrowing could be
obtained by the Company. Therefore, the fair value of the Note
approximates the carrying value at December 31, 1996. The note is due
December 31, 1998, and is secured by NCBC s purchased insurance policies,
subject to the security interest granted to the Facility lender. The
purchaser of the Note was granted a warrant to acquire 12% of the common
stock of NCBC (68 shares) at a price of $1.47 per share. The holder of
the warrant can exercise a put of the stock to NCBC under certain
conditions, which would guarantee the holder a minimum additional 4%
interest on the outstanding balance. This additional liability has not
been reflected in the financial statements at December 31, 1996 as
management is negotiating a modification to the warrant agreement, which
is expected to result in minimal additional cost to the Company on a
prospective basis only. The warrant expires December 31, 2000.
-9-
<PAGE>
On July 29, 1994, NCBC entered into an agreement and acquired certain
assets of CAPX Corporation ("CAPX"), including the rights to certain
service marks, trade names and proprietary computer software. The
purchase price of the assets was $125,000 and the issuance of 33,333
shares of the $.01 par value of NCMC s common stock, which was valued at
$5.25 per share, adjusted to reflect the reverse stock split. As part of
the agreement, as amended in September 1996, NCMC was required by CAPX to
repurchase all of its shares at $5.25 per share on or before January 1997.
In conjunction with the September 1996 amendment NCBC paid CAPX $25,000
and the balance of $150,000 was due January 1997. The agreement was
further modified in February 1997, at which time the Company paid $100,000
and the agreement was terminated.
The viatical settlement business was discontinued in December 1996.
REAL ESTATE BUSINESS
On November 27, 1995, the Company elected to discontinue operations of the
Real Estate Segment to concentrate its efforts on its viatical settlements
business. The following is a description of Company s disposal
activities:
The Mart Shopping Center: On July 28, 1995, the Company sold The Mart
Shopping Center ("the Mart") located on nine acres in the high technology
business area of Hillsboro, Oregon, a suburb of Portland, to an individual
affiliated with NCM Management Ltd., a company which provides management
services to the Company. The sales proceeds included $960,000 in cash, an
eighteen month note secured by a second deed of trust on the property in
the amount of $910,000 and the buyer s assumption of the $1,232,501 first
deed of trust secured by the property for a total purchase price of
$3,102,501. The Company renegotiated payment of the note with the
purchaser whereby it received a total of $800,000 in exchange for an early
payoff on September 30, 1995, reducing the sale proceeds by $110,000. A
gain of $1,029,894 was recognized on this transaction in 1995.
Appletree Townhouses: The Company s wholly-owned subsidiary, Georgia
Properties, Inc. ("GPI"), received advances of $650,000 on December 21,
1995 and an additional $500,000 on February 1, 1996 from the same
individual that purchased The Mart Shopping Center, in exchange for an
option to purchase Appletree Townhouses for $3,500,000, which was
exercised on March 31, 1996.
The sales price of $3,500,000 consisted of the aforementioned advances by
the buyer totaling $1,150,000, assumption of the existing first deed loan
by the buyer in the amount of $1,048,795 and a purchase money note for the
balance equal to $1,301,205. The purchase money paid interest from the
date of sale at 8% per annum until it was paid in December 1996. In
addition, the buyer was required to prepay $250,000 of this note on May 1,
1996, which was paid in April 1996. A gain of $327,735, related to the
sale of this property and the liquidation of the Appletree subsidiary, was
reported in 1996.
Florida land: The Company owned undeveloped land in Ft. Lauderdale,
Florida which is zoned for commercial/industrial use. This parcel was
sold for $216,000 in August 1996, and the Company reported a gain of
$190,489.
Colony Ridge Apartments: Colony Ridge Apartments is an apartment complex
in Decatur, Georgia which was constructed in 1968 and consists of 23
two-story buildings containing a total of 212 apartment units. This
property is currently being marketed and is expected to be sold
during 1997.
-10-
<PAGE>
Redbird Trails Apartments and North Oak Apartments: On June 13, 1994 and
December 8, 1994, in accordance with previous agreements dated December
30, 1993, the Company sold limited partnership interests in Redbird Trails
Associates, L.P. ("Redbird") and Signature Midwest, L.P. ("Signature"),
respectively, to two unrelated entities. The Company retained a .9%
interest in each partnership through two wholly-owned subsidiaries serving
as the operating general partners. Such operating general partners are
obligated to provide loans of up to $150,000 and $75,000 to Redbird and
Signature, respectively, to fund any operating deficits, as defined, for
a three year period commencing December 8, 1994.
The Company retained a contingent interest in the cash flows of these
partnerships. It will receive any cash available from property
operations, to the extent it exceeds approximately $61,000 annually, and
any refinancing proceeds up to a total of approximately $4.5 million, plus
interest at 9.25% per annum on the outstanding balance of this amount.
Any proceeds of sale will be allocated, first, 99.1% to the new partners
until they have received 135% of their investment, less any prior
distributions. Any remaining proceeds from a sale will be allocated to
the Company up to $6 million, less any distributions from operations or
refinancings as described above. These arrangements have not been
reflected in the Company s financial statements since their ultimate
realization cannot reasonably be determined. In addition, at such time as
the tax benefits have been utilized, the Company has the right to purchase
the interests of the newly admitted partners for 135% of their contributed
capital (minus prior cash payments). Should the Company choose not to
exercise such right to purchase the partners interests, the newly
admitted administrative general partner has the right to require the
Company to sell all of the assets and liquidate the partnerships. The
Company has not funded any operating deficits and has not received any
excess cash flows during 1996 and 1995.
INDUSTRIAL PRODUCTS BUSINESS
The Industrial Products Segment was also discontinued during 1995. It
consisted of the Company s wholly-owned subsidiary, Jensen Corporation
("Jensen"), which manufactured and distributed machinery used primarily by
commercial laundries, large institutions and hotels as well as commercial
compactor products for waste disposal. On November 10, 1995, the Company
sold 100% of the common stock of Jensen, located in Fort Lauderdale,
Florida to AMKO USA, Inc. ("AMKO"), an affiliate of AMKO International B.V.
which is based in The Netherlands, for $1,726,000. The sale proceeds
included cash of $415,000 and a promissory note receivable in the amount
of $1,311,000 which is secured by Jensen s stock, accounts receivable and
inventory. The $1,311,000 note is guaranteed in its entirety by AMKO
International B.V., and the sole shareholder of AMKO International B.V.
guaranteed the first $585,000 of principal payments.
AMKO also agreed to cause Jensen to pay to the Company a $765,000
obligation in the form of a note, which was loaned to Jensen, $500,000 of
which was prior to the sale and $265,000 which was simultaneous with the
sale, and an intercompany balance payable by Jensen to the Company of
$337,650, which are secured by the assets of Jensen. The first $765,000
of principal payments under these notes are guaranteed by AMKO
International B.V.
-11-
<PAGE>
The $1,311,000 note as amended in August and October 1996 and again in
February 1997 bears interest at 8.5% per annum and is payable in varying
installments with the balance due in October 1997. The $765,000 note as
amended in August and October 1996 and again in February 1997 bears
interest at 8.5% per annum and is payable in varying installments with the
balance due in March 1998. The $337,650 note as amended in August and
October 1996 and again in February 1997 bears interest at 8.5% per annum
and is payable in varying installments with the balance due in March 1998.
The Company believes that the assets securing the three notes, and the
operations of Jensen as they now exist, may not be sufficient to provide
for payment of the notes. The Company has limited financial information
concerning AMKO and the guarantors of the notes. Consequently, no
assurance can be given that the principal or interest due on the notes
will be realized in full. As of December 1996, AMKO had paid principal of
$400,000, and the Company agreed to a $50,000 reduction in the face amount
of the $1,311,000 Note to settle certain Contract disputes. The Company
is currently in discussion with AMKO to assure that AMKO will pay all
future payments on a timely basis. The Company recorded a reserve of
$1,150,000 for these notes as of December 31, 1996. Based upon the
guarantees and estimated liquidation value of Jensen s assets which were
pledged as collateral for these notes, the Company believes that this
reserve is adequate.
RESULTS OF OPERATIONS FOR 1996 COMPARED TO 1995
National Capital Benefits Corp. ("NCBC") commenced operations on March 17,
1994. During the periods ended December 31, 1996 and 1995, NCBC had
purchased at face value (including those in escrow) approximately $10.5
million and $12.9 million of policies, respectively. During 1996 and
1995, approximately $4,300,000 and $1,871,000, respectively, of policies
matured.
The recognition of earned discount and the ultimate profitability
associated with purchased insurance policies is directly related to NCBC s
assumptions regarding the remaining life expectancy of terminally ill
individuals. Such estimates were made when the insurance policy was
purchased based upon facts and circumstances then known, and are adjusted
periodically, but not more than annually, based upon actual experience.
While NCBC believes that its estimate of life expectancy, and the related
recognition of earned discount will closely approximate actual experience,
given the inherent scientific uncertainty of such estimates, including the
potential impact of recently announced medical treatments that might
extend life expectancies, there can be no assurance that these policies
will mature in accordance with management s estimates. Therefore, the
Company established a $1,500,000 valuation reserve against purchase policy
costs, as stated on the balance sheet, during 1996. The amount of the
reserve was determined based on projections of expected cash inflow from
maturity and reinsurance claims, and cash outflows for debt service and
operating costs during the portfolio administration process which is
expected to take several years (see footnote 3).
-12-
<PAGE>
The Company previously announced that certain existing medications and
medications presently under development may, when used in combination,
significantly prolong the life expectancy of persons previously diagnosed
with AIDS. These studies and a July 1996 AIDS conference have had a
significant impact on this segment of the viatical settlement industry.
The Company previously indicated that a large percentage of its portfolio
involves individuals with terminal illnesses related to AIDS and that the
development of a treatment for AIDS which extends the life expectancy of
such persons could materially reduce the Company's future actual yield on
its portfolio and materially adversely affect the Company's future
performance. From November 30, 1996 through the date of this report, the
Company did not process new applications for policies but engaged in an
evaluation of the effect of the research results from the AIDS conference,
and in particular, purchases by the Company of policies, and the estimated
collection date of these policies.
The Company decided to discontinue its viatical settlement business in
December 1996.
In light of the foregoing, the Company ceased purchasing insurance
policies from individuals. The Company may, however, seek the purchase of
a portfolio of life insurance policies in bulk to the extent each of the
policies in such bulk purchase is within the guidelines set forth in the
reinsurance agreements with NCBC. As previously announced, NCBC has
restructured its organization and reduced its office staff to two persons.
Management anticipates that these persons, as well as NCMC management,
will manage NCBC's existing portfolio of approximately $20.5 million of
insurance policies. Management estimates that the administration of these
policies will take several years.
-13-
<PAGE>
Item 7 - Financial Statements and Supplementary Data
NATIONAL CAPITAL MANAGEMENT CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants 15
Consolidated Balance Sheet at December 31, 1996 16
Consolidated Statements of Operations for the years ended
December 31, 1996 and 1995 17
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1996 and 1995 18
Consolidated Statements of Cash Flows for the years ended
December 31, 1996 and 1995 19
Notes to Consolidated Financial Statements 20-31
-14-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders of
National Capital Management Corporation:
We have audited the accompanying consolidated balance sheet of
National Capital Management Corporation (a Delaware corporation) as of
December 31, 1996, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the two years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements 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.
As discussed in the Notes to Consolidated Financial Statements, the
Company had been comprised of three distinctly different operating
businesses. The real estate and the industrial products segments were
discontinued in 1995. The viatical settlements segment was discontinued
in 1996. As discussed in Notes 1 and 3, the Company expects to administer
an orderly liquidation of its existing viatical settlements portfolio and
expects the process will take several years.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of National Capital Management Corporation at December 31, 1996,
and the consolidated results of its operations and its cash flows for each
of the two years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
April 11, 1997
-15-
<PAGE>
<TABLE>
NATIONAL CAPITAL MANAGEMENT CORPORATION
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
ASSETS
<S> <C>
Cash and cash equivalents $ 651,346
Accounts receivable 18,240
Notes receivable (Note 4) 813,650
Property and equipment, less accumulated depreciation
of $63,198 41,633
Net assets of discontinued operations -
Viatical Settlements Segment (Note 3) 375,529
Real Estate Segment (Note 6) 1,849,296
Other assets 36,225
Total assets $ 3,785,919
</TABLE>
<TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C>
Accounts payable and accrued expenses $ 268,369
Common stock repurchase obligation (Note 9) 100,000
Total liabilities 368,369
Shareholders' equity (Notes 9 and 10):
Preferred stock, $0.01 par value, 3,000,000 shares
authorized, no shares issued or outstanding -
Common stock, $0.01 par value, 6,666,666 shares
authorized, 1,813,056 shares issued,
1,673,190 outstanding 16,732
Additional paid-in capital 23,125,123
Accumulated deficit (19,550,088)
Treasury stock, 139,866 shares (174,217)
Total shareholders' equity 3,417,550
Total liabilities and shareholders' equity $ 3,785,919
The accompanying notes are an integral part of this statement.
-16-
</TABLE>
<PAGE>
<TABLE>
NATIONAL CAPITAL MANAGEMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Years ended December 31,
1996 1995
<S> <C> <C>
Income (expense):
Other income $ 134,041 $ 61,333
Corporate administrative expense (665,717) (416,890)
Net loss from continuing operations before tax (531,676) (355,557)
Provision for income taxes - -
Net loss from continuing operations after tax (531,676) (355,557)
Discontinued operations:
Net operating loss:
Viatical settlements (Note 3) (3,603,572) (1,170,525)
Real estate segment (Note 6) (193,307) (538,181)
Industrial products segment (Note 7) - (1,192,209)
Net gain on disposal of:
Real estate segment (Note 6) 518,224 1,029,894
Industrial products segment - 91,045
Net loss from discontinued operations (3,278,655) (1,779,976)
Net loss $(3,810,331) $(2,135,533)
Net loss from continuing operations per share $(0.32) $(0.22)
Net loss from discontinued operations per share (1.96) $(1.07)
Net loss per share $(2.28) $(1.29)
Average number of shares outstanding 1,673,190 1,651,711
The accompanying notes are an integral part of this statement.
-17-
</TABLE>
<PAGE>
<TABLE>
NATIONAL CAPITAL MANAGEMENT CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 and 1995
<CAPTION>
Additional Total
Common Paid-in Accumulated Treasury Shareholders'
Stock Capital Deficit Stock Equity
<S> <C> <C> <C> <C> <C>
Balances at
December 31, 1994 $54,289 $23,516,649 $(13,604,224) $(643,625) $9,323,089
Acquisition of
treasury stock - - - (9,675) (9,675)
Reverse stock
split (36,385) (392,698) - 429,083 -
Net loss - - (2,135,533) - (2,135,533)
Balances at
December 31, 1995 17,904 23,123,951 (15,739,757) (224,217) 7,177,881
Adjustment to
Common Stock (1,172) 1,172 - - -
Reduction in cost
due to CAPX
settlement
(Note 9) - - - 50,000 50,000
Net loss - - (3,810,331) - (3,810,331)
Balances at
December 31, 1996 $16,732 $23,125,123 $(19,550,088) $(174,217) $3,417,550
The accompanying notes are an integral part of this statement.
-18-
</TABLE>
<PAGE>
<TABLE>
NATIONAL CAPITAL MANAGEMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net loss (3,810,331) $(2,135,533)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 8,760 8,663
Reserves and allowances on notes receivable 200,000 -
Changes in operating assets and liabilities:
Decease in accounts receivable 21,490 1,251,461
Increase (decrease) in accounts payable and
accrued liabilities (529,024) 523,469
Net cash used in operating activities (4,109,105) (351,940)
Change in net assets of discontinued operations 3,736,443 344,278
Cash flows provided by investing activities:
Collections on notes receivable 400,000 -
Additions to property and equipment - (11,340)
Increase in other assets 15,223 62,005
Net cash provided by investing activities 415,223 50,665
Cash flows used in financing activities:
Acquisition of treasury stock - (9,675)
Increase in cash and cash equivalents 42,561 33,328
Cash and cash equivalents at beginning of period 608,785 575,457
Cash and cash equivalents at end of period $ 651,346 $ 608,785
Supplemental schedule of non-cash operating
and financing activities:
Reduction of accrued liability for
treasury stock $ 50,000 $ -
The accompanying notes are an integral part of this statement.
-19-
</TABLE>
<PAGE>
NATIONAL CAPITAL MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION
National Capital Management Corporation ("NCMC"or the "Company") is a
holding company that currently is completing the orderly liquidation of
its discontinued operations, while seeking other acquisitions.
Prior to 1995, the Company had been comprised of three distinctly
different operating businesses, the Viatical Settlement Segment, which was
operated through National Capital Benefits Corporation ("NCBC"), a wholly
owned subsidiary, the Real Estate Segment and the Industrial Products
Segment. The Industrial Products Segment and Real Estate Segment were
discontinued in 1995. The Viatical Settlement Segment was discontinued in
1996. (Notes 3, 6 and 7).
Consolidation Principles
The consolidated financial statements include the accounts of the Company
and all of its majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Reclassifications
Certain amounts as presented in prior year financial statements have been
reclassified to conform with the current year presentation.
-20-
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Property and Equipment - Property and equipment is stated at amortized
cost net of accumulated depreciation. Depreciation is computed using the
straight-line and accelerated methods over the estimated useful lives of
the assets.
Income Taxes - Income taxes are accounted for in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes". As required under SFAS No. 109, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to temporary differences between the financial statement
carrying amounts of assets and liabilities and the respective tax basis
amounts. Deferred tax assets and liabilities are measured under tax rates
that are expected to apply to taxable income in the years in which these
differences are expected to be settled. The effect of a change in tax
rates on deferred tax assets and liabilities is recognized in the period
of the tax change.
Estimates - The preparation of financial statements in conformity with
generally accepted accounting principals requires the Company 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 revenue and
expenses during the reporting period. Actual results could differ
significantly from those estimates.
Material estimates that are particularly susceptible to significant change
in the near term relate to the determination of the valuation reserve
against the cost of purchased policies, the collectibility of notes
receivable, and the realizability of net deferred tax assets. See Notes
3, 4 and 8.
-21-
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounting for long-lived assets
For the calendar year ended December 31, 1996, the Company has adopted
SFAS 121, "Accounting for the Impairment of Long-lived assets and for
Long-Lived Assets to Be Disposed Of", and determined that certain
adjustments for impairment were required. In addition to the write down
of several assets of the Company, a $1.5 million valuation reserve was
established against the cost of purchased policy costs in order to reflect
management's estimate of the fair market value of the net assets (Note 3).
The accuracy of the valuation reserve established by the Company (Note 3)
is directly related to NCBC s assumptions regarding the remaining life
expectancy of terminally ill individuals. While NCBC believes that its
estimate of life expectancy, and the related valuation reserve will
approximate actual experience, given the inherent scientific uncertainty
of such estimates, including the potential impact of recently announced
medical treatments that might extend life expectancies, there can be no
assurance that these policies will mature in accordance with management's
estimates. Therefore, the Company established a $1,500,000 valuation
reserve against purchase policy costs during 1996. The amount of the
reserve was determined based on projections of expected cash inflows from
maturity and reinsurance claims, and cash outflows for debt service and
operating costs during the portfolio administration process which is
expected to take several years (Note 3).
Statement of Cash Flows
The Company considers all short-term highly liquid investments purchased
with a maturity of three months or less to be cash and cash equivalents
for purposes of the Consolidated Statement of Cash Flows.
Cash paid for interest was $1,054,400 and $913,447, for 1996 and 1995,
respectively. The Company paid no material amounts for income taxes
during these years.
During 1996, the Company sold two real estate properties in transactions
in which one purchaser assumed a first mortgage obligation of the Company
in the amount of $1,048,795 and recognized gains of $518,224 in connection
with the sales.
During 1995, the Company sold one real estate property in a transaction in
which the purchaser assumed a first mortgage obligation of the Company in
the amount of $1,232,501 and recognized a gain of $1,029,894.
Per Share Amounts
Per share information has been computed based on the weighted average
number of common shares outstanding. Outstanding warrants to purchase
common shares have not been included in the computation because their
effect would be antidilutive. All per share amounts have been adjusted to
reflect the reverse stock split on a retroactive basis (Note 10).
NOTE 3 - DISCONTINUED OPERATIONS - VIATICAL SETTLEMENTS
The results of the Viatical Settlements have been reported separately as
discontinued operations in these consolidated statements of operations.
Prior period financial statements have been restated to present the
Viatical Settlements as a discontinued operation.
-22-
<PAGE>
NOTE 3 - DISCONTINUED OPERATIONS - VIATICAL SETTLEMENTS (CONTINUED)
In December 1996, the Company decided to discontinue the operations of the
viatical settlement business. The Company reduced its staff and expects
that the remaining personnel will administer the orderly liquidation of
its existing portfolio. It is expected that this process will take
several years. The Company established a $1,500,000 valuation reserve
against purchased policy costs which represents the estimated expected
loss on holding the remaining policies to maturity in order to reflect
management's estimate of the fair market value of the net assets. The
amount of the reserve was determined based on projections of expected cash
inflows from maturity and reinsurance claims, and cash outflows for debt
service and operating costs during the portfolio administration process
which is expected to take several years.
NCBC has an insurance contract with NCB Insurance Ltd. ("NCB"), a
wholly-owned subsidiary of NCBC, which automatically provides for payment
of 90% of the face value of the policies purchased at a specified period of
time after the expected maturity date, in accordance with the contract.
NCB, in turn, has reinsured this risk with several large, non-affiliated
international reinsurance companies. NCBC, through NCB, maintains a
participation in the residual 10%.
The anticipated reinsurance recoveries represent a substantial element of
the cash flow projections used to determine the valuation reserve. While
management expects full collection of reinsurance recoveries, these
recoveries from the sole reinsurance facility represent a significant
concentration or risk.
Summarized below are the operations of the Company s Viatical Settlements
for the years ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
For the year ended
December 31,
1996 1995
<S> <C> <C>
Revenue accrued and received $ 8,915,792 $ 6,836,196
Cost of insurance policies 7,781,846 5,506,685
Valuation reserve expense 1,500,000 -
Earned discount (366,054) 1,329,511
Interest expense 1,294,648 568,551
Earned discount after interest expense (1,660,702) 760,960
Selling and administrative expenses 1,404,365 1,539,151
Depreciation and amortization 538,505 392,334
Net loss $(3,603,572) $(1,170,525)
</TABLE>
The components of the Viatical Settlements net assets from discontinued
operations in the consolidated balance sheet as of December 31, 1996 are
as follows:
<TABLE>
<S> <C>
Purchased policy costs, less amortized
policy costs of $13,847,695 $ 8,381,600
Valuation reserve (1,500,000)
Accrued policy revenues, less matured
revenues valuation of $6,446,841 9,893,007
Revolving credit facility (12,806,701)
Subordinated note payable (2,000,000)
Reinsurance liability (1,307,940)
Other, net (284,437)
$ 375,529
</TABLE>
-23-
<PAGE>
NOTE 3 - DISCONTINUED OPERATIONS - VIATICAL SETTLEMENTS (CONTINUED)
Restricted Cash - Certain cash held by NCBC is restricted as to use under
the terms of certain escrow agreements and Bermuda insurance laws.
Purchased Policy Costs - NCBC purchased life insurance policies from
terminally ill individuals at a discount from the policy's net face value
(amount paid by the insurance carrier upon the death of the insured). The
amount of the discount was determined by the life expectancy of the
insured. The majority of the policies purchased by NCBC were from
insureds with an estimated remaining life of less than 24 months.
Purchased insurance policies are stated at amortized cost. Costs
capitalized include the purchase price paid to the insured (or "viator"),
and certain direct and indirect costs related to the acquisition of such
policies. The insurance policies purchased by the Company have been
issued by various credit worthy insurance carriers, none of which
represent a significant concentration of risk.
Accrued Policy Revenues - Accrued policy revenues represent the accrued
portion of insurance proceeds receivable on purchased policies that have
not yet matured and amounts due on matured policies not yet received.
Reinsurance Liability - As policies migrate to reinsurance and funds are
collected by the Company, a corresponding liability is recorded for the
amount that may be returned to the reinsurer upon collection of the policy
proceeds.
According to the terms of the reinsurance agreement this liability may be
reduced if the policy proceeds are not collected within a specified time
frame.
Revenue and Cost Recognition - Revenue related to expected insurance
proceeds is recognized by accreting the face value of purchased policies
ratably over the period from the policy purchase date to the estimated
maturity date ("accrual period"). Costs related to the purchase of
insurance policies are also recognized through the amortization of such
capitalized costs ratably over the accrual period. The difference between
revenue and costs recognized each period represents NCBC's earned discount
on purchased insurance policies.
The length of the accrual period is determined by NCBC based upon its best
estimate of the maturity date (i.e. date on which it will collect the face
value of the policy). Such life expectancy estimates are based upon a
review of the insured's medical records by NCBC's panel of medical
specialists, as adjusted for actual collection experience on policies that
have matured to date. Should the policy mature earlier than expected, the
entire proceeds and costs will be recognized at that time, less any
amounts previously accrued or amortized.
NCBC periodically, but not more than annually, adjusts the accrual period
based upon actual collection experience on matured policies. Adjustments
to such estimates, if required, are recognized in the period determined.
Additionally, as noted above, the Company established a $1,500,000
valuation reserve against purchased policy costs which reflects the
estimated expected loss on holding the remaining policies to maturity.
At December 31, 1996 the face value of purchased insurance policies
remaining in NCBC s portfolio was approximately $20.5 million. During
1996, NCBC purchased policies with a face value of approximately $10.5
million and approximately $4.3 million face value of policies matured.
-24-
<PAGE>
NOTE 3 - DISCONTINUED OPERATIONS - VIATICAL SETTLEMENTS (CONTINUED)
Revolving Credit Facility and Subordinated Note Payable
Effective as of December 29, 1995, NCBC entered into a revolving credit
facility ("Facility") with a credit limit of up to $15,000,000, which
expires December 1998. The closing of the transaction was January 8,
1996. The Facility is secured by all the assets of NCBC, including
purchased insurance policies. The Facility bears interest at 1/2% over
the lender s prime rate or 2-7/8% over the 90 day London Inter-Bank Offer
Rate ("Libor") at the option of NCBC (8 1/2% at December 31, 1996), and is
subject to a commitment fee of 1/4% on the average daily unused amount of
the line. Because the interest rate on the Facility adjusts quarterly
based on Libor, the fair value of the borrowings under the Facility
approximates the carrying amount.
Under the terms of the Facility, the lender initially loaned NCBC a
specified percentage of the cost of the insurance policies purchased, and
the insurance policies purchased by NCBC had to meet certain underwriting
criteria as established in the Facility. Repayment of outstanding
principal is required as insurance proceeds from matured policies are
collected.
NCBC negotiated a modification to the Facility, as of November 30, 1996,
and can no longer use the Facility to purchase additional policies.
However, the Facility does provide for the drawdown of a specified
percentage of the policy portfolio and the use of proceeds from maturity
and reinsurance claims for debt service and certain operating expenses.
In addition, as of December 29, 1995, NCBC issued a $2,000,000
subordinated note (the "Note") bearing interest at a rate of 14% with
interest payable monthly in arrears. The interest rate on the Note is
consistent with a market rate at which a similar borrowing could be
obtained by the Company. Therefore, the fair value of the Note
approximates the carrying value at December 31, 1996. The note is due
December 31, 1998, and is secured by NCBC s purchased insurance policies,
subject to the security interest granted to the Facility lender. The
purchaser of the Note was granted a warrant to acquire 12% of the common
stock of NCBC (68 shares) at a price of $1.47 per share. The holder of
the warrant can exercise a put of the stock to NCBC under certain
conditions, which would guarantee the holder a minimum additional 4%
interest on the outstanding balance. This additional liability has not
been reflected in the financial statements at December 31, 1996 as
management is negotiating a modification to the warrant agreement, which
is expected to result in minimal additional cost to the Company on a
prospective basis only. The warrant expires December 31, 2000.
The proceeds from issuing the Note were received on January 8, 1996, and
used to reduce the outstanding balance of the Facility. The interest rate
on the Note is consistent with a market rate at which a similar borrowing
could be obtained by the Company. Therefore, the fair value of the Note
approximates the carrying value at December 31, 1996.
NOTE 4 - NOTES RECEIVABLE
Notes receivable consists of the following at December 31, 1996:
<TABLE>
<S> <C>
Notes receivable from AMKO USA, Inc. (Note 7) $1,963,650
Less reserve (Note 7) 1,150,000
$ 813,650
</TABLE>
-25-
<PAGE>
NOTE 5 - TRANSACTIONS WITH AFFILIATES
For the two-year period ended December 31, 1996, the Company had
agreements with NCM Management Ltd., a company affiliated with Mr. Herbert
J. Jaffe, a director of the Company, to provide management services to the
Company. The Company also provided compensation and benefits to Mr.
Jaffe. Costs incurred under these agreements amounted to $146,500 and
$307,322 for 1996 and 1995, respectively.
Pursuant to an employment agreement entered into in 1990, and subsequently
modified effective January 1, 1994, Mr. Pinto served as Chairman of the
Board of Directors. Pursuant to a Consulting Agreement dated as of January
1, 1992, Mr. Shaw, Chief Executive Officer, provided services as a
consultant to the Company on a nonexclusive basis through December 31,
1993. This agreement was amended effective January 1, 1994 whereby Mr.
Shaw became Chief Executive Officer.
Effective April 1, 1995, Messrs. Pinto and Shaw entered into new
agreements with the Company to act in the same capacities through March
31, 1997, with options to extend these agreements for one year if certain
conditions are met. They are entitled to annual compensation of $125,000
each plus Mandatory Incentive Bonuses which are based on achieving certain
Company operating objectives, plus Discretionary Bonuses which may be
granted at the option of the Board of Directors. If these agreements are
terminated by the Company other than for cause, disability or death,
Messrs. Pinto and Shaw are entitled to receive their base compensation
through the existing term. Messrs. Pinto and Shaw are continuing to work
on a month to month basis and are currently discussing extensions of their
respective agreements with the Company.
Messrs. Pinto and Shaw were each compensated $125,000 and $142,500 for
1996 and 1995, respectively, pursuant to these agreements, plus $91,120
and $108,659, respectively, was paid to them or their assigns for other
costs, certain office expenses, including rent for the offices in New
York, and related services incurred for Company business.
The Company obtained cash from an officer and a member of the Board of the
Company to continue operations, including advances totaling $500,000 on
October 26, 1995 bearing interest at 12% per annum, payable in monthly
installments of interest only until due on January 31, 1996 and on demand
thereafter. The advances were repaid on February 1, 1996.
NOTE 6 - DISCONTINUED OPERATIONS - REAL ESTATE SEGMENT
On November 27, 1995, the Company elected to discontinue operations of the
Real Estate Segment to concentrate its efforts on its viatical settlements
business. The following is a description of Company s disposal
activities:
The Mart Shopping Center: On July 28, 1995, the Company sold The Mart
Shopping Center ("the Mart") located on nine acres in the high technology
business area of Hillsboro, Oregon, a suburb of Portland, to an individual
affiliated with NCM Management Ltd., a company which provides management
services to the Company. The sales proceeds included $960,000 in cash, an
eighteen month note secured by a second deed of trust on the property in
the amount of $910,000 and the buyer s assumption of the $1,232,501 first
deed of trust secured by the property for a total purchase price of
$3,102,501. The Company renegotiated payment of the note with the
purchaser whereby it received a total of $800,000 in exchange for an early
payoff on September 30, 1995, reducing the sale proceeds by $110,000. A
gain of $1,029,894 was recognized on this transaction in 1995.
-26-
<PAGE>
NOTE 6 - DISCONTINUED OPERATIONS - REAL ESTATE SEGMENT (CONTINUED)
Appletree Townhouses: The Company s wholly-owned subsidiary, Georgia
Properties, Inc. ("GPI"), received advances of $650,000 on December 21,
1995 and an additional $500,000 on February 1, 1996 from the same
individual that purchased The Mart Shopping Center, in exchange for an
option to purchase Appletree Townhouses for $3,500,000, which was
exercised on March 31, 1996.
The sales price of $3,500,000 consisted of the aforementioned advances by
the buyer totaling $1,150,000, assumption of the existing first deed loan
by the buyer in the amount of $1,048,795 and a purchase money note for the
balance equal to $1,301,205. The purchase money note paid interest from
the date of sale at 8% per annum until it was paid in December 1996. In
addition, the buyer was required to prepay $250,000 of this note on May 1,
1996, which was paid in April 1996. A gain of $327,735, related to the
sale of this property and the liquidation of the Appletree Subsidiary, was
reported in 1996.
Florida land: The Company owned undeveloped land in Ft. Lauderdale,
Florida which is zoned for commercial/industrial use. This parcel was
sold for $216,000 in August 1996, and the Company reported a gain of
$190,489.
Colony Ridge Apartments: Colony Ridge Apartments is an apartment complex
in Decatur, Georgia which was constructed in 1968 and consists of 23
two-story buildings containing a total of 212 apartment units. This
property is currently being marketed and is expected to be sold during
1997.
Redbird Trails Apartments and North Oak Apartments: On June 13, 1994 and
December 8, 1994, in accordance with previous agreements dated December
30, 1993, the Company sold limited partnership interests in Redbird Trails
Associates, L.P. ("Redbird") and Signature Midwest, L.P. ("Signature"),
respectively, to two unrelated entities. The Company retained a .9%
interest in each partnership through two wholly-owned subsidiaries serving
as the operating general partners. Such operating general partners are
obligated to provide loans of up to $150,000 and $75,000 to Redbird and
Signature, respectively, to fund any operating deficits, as defined, for
a three year period commencing December 8, 1994.
The Company retained a contingent interest in the cash flows of these
partnerships. It is entitled to receive any cash available from property
operations, to the extent it exceeds approximately $61,000 annually, and
any refinancing proceeds up to a total of approximately $4.5 million, plus
interest at 9.25% per annum on the outstanding balance of this amount.
Any proceeds of sale are to be allocated, first, 99.1% to the new partners
until they have received 135% of their investment, less any prior
distributions.
Any remaining proceeds from a sale are to be allocated to the Company up
to $6 million, less any distributions from operations or refinancings as
described above. These commitments have not been reflected in the
Company s financial statements since their ultimate realization cannot
reasonably be determined. In addition, at such time as any tax benefits
have been utilized, the Company has the right to purchase the interests of
the newly admitted partners for 135% of their contributed capital (minus
prior cash payments). Should the Company choose not to exercise such
right to purchase the partners interests, the newly admitted
administrative general partner has the right to require the Company to
sell all of the assets and liquidate the partnerships. The Company has
not funded any operating deficits and has not received any excess cash
flows during 1996 and 1995.
The results of the Real Estate Segment have been reported separately as
discontinued operations in these consolidated statements of operations.
-27-
<PAGE>
NOTE 6 - DISCONTINUED OPERATIONS - REAL ESTATE SEGMENT (CONTINUED)
Summarized below are the operations of the Company's Real Estate Segment
for the years ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
For the year ended
December 31,
1996 1995
<S> <C> <C>
Total revenues $1,281,248 $2,260,458
Costs and expenses:
Operations and maintenance 656,097 1,368,620
Property taxes and insurance 128,435 286,335
Depreciation and amortization 366,421 662,831
Net interest 145,917 323,478
Corporate administrative expenses 177,685 157,375
Total costs and expenses 1,474,555 2,798,639
Net loss $ (193,307) $ (538,181)
</TABLE>
The components of the Real Estate Segment net assets from discontinued
operations in the consolidated balance sheet as of December 31, 1996 are
as follows:
<TABLE>
<S> <C>
Rental properties, less accumulated depreciation
of $1,163,173 $3,116,778
Mortgage note payable (1,239,914)
Accounts payable (73,773)
Other, net 46,205
$1,849,296
</TABLE>
NOTE 7 - DISCONTINUED OPERATION - INDUSTRIAL PRODUCTS SEGMENT
The Industrial Products Segment was discontinued during 1995. It
consisted of the Company s wholly-owned subsidiary, Jensen Corporation
("Jensen"), which manufactured and distributed machinery used primarily by
commercial laundries, large institutions and hotels as well as commercial
compactor products for waste disposal. On November 10, 1995, the Company
sold 100% of the common stock of Jensen, located in Fort Lauderdale,
Florida to AMKO USA, Inc. ("AMKO"), an affiliate of AMKO International B.V.
which is based in The Netherlands, for $1,726,000. The sale proceeds
included cash of $415,000 and a promissory note receivable in the amount
of $1,311,000 which is secured by Jensen s stock, accounts receivable and
inventory. The $1,311,000 note is guaranteed in its entirety by AMKO
International B.V., and the sole shareholder of AMKO International B.V.
guaranteed the first $585,000 of principal payments.
AMKO also agreed to cause Jensen to pay to the Company a $765,000
obligation in the form of a note, which was loaned to Jensen, $500,000 of
which was prior to the sale and $265,000 which was simultaneous with the
sale, and an intercompany balance payable by Jensen to the Company of
$337,650, which are secured by the assets of Jensen. The first $765,000
of principal payments under these notes are guaranteed by AMKO
International B.V.
-28-
<PAGE>
NOTE 7 - DISCONTINUED OPERATION - INDUSTRIAL PRODUCTS SEGMENT (CONTINUED)
The $1,311,000 note as amended in August and October 1996 and again in
February 1997 bears interest at 8.5% per annum and is payable in varying
installments with the balance due in October 1997. The $765,000 note as
amended in August and October 1996 and again in February 1997 bears
interest at 8.5% per annum and is payable in varying installments with the
balance due in March 1998. The $337,650 note as amended in August and
October 1996 and again in February 1997 bears interest at 8.5% per annum
and is payable in varying installments with the balance due in March 1998.
The Company believes that the assets securing the three notes, and the
operations of Jensen as they now exist, may not be sufficient to provide
for payment of the notes. The Company has limited financial information
concerning AMKO and the guarantors of the notes. Consequently, no
assurance can be given that the principal or interest due on the notes
will be realized in full. As of December 1996, AMKO had paid principal of
$400,000, and the Company agreed to a $50,000 reduction in the face amount
of the $1,311,000 Note to settle certain Contract disputes. The Company is
currently in discussion with AMKO to assure that AMKO will pay all future
payments on a timely basis. The Company recorded a reserve of $1,150,000
for these notes as of December 31, 1996. Based upon the guarantees and
estimated liquidation value of Jensen s assets which were pledged as
collateral for these notes, the Company believes that this reserve is
adequate.
The results of the Industrial Products Segment have been reported
separately as discontinued operations in the consolidated statements of
operations.
Summarized below are the operations of the Company s Industrial Products
Segment for the year ended December 31, 1995.
<TABLE>
<S> <C>
Total revenues $3,920,718
Costs and expenses:
Cost of sales 3,073,708
Selling and administrative 935,908
Reserve for note receivable 1,000,000
Depreciation and amortization 15,493
Interest expense 4,956
Corporate administrative expenses 82,862
Total costs and expenses 5,112,927
Net loss $(1,192,209)
</TABLE>
NOTE 8 - INCOME TAXES
Effective January 1, 1993, the Company changed its method of accounting
for income taxes from the deferred method to the asset and liability
method required by FASB Statement No. 109, "Accounting for Income Taxes".
The implementation of Statement 109 did not have a material impact on the
Company s financial statements.
At December 31, 1996, the Company had federal net operating carryforwards
of approximately $9 million. The net operating losses will expire in the
various years through December 31, 2011. The Company had state net
operating loss carryforwards of various amounts in the states in which it
operates.
-29-
<PAGE>
NOTE 8 - INCOME TAXES (CONTINUED)
At December 31, 1996, the Company had federal alternative minimum tax
credits of approximately $13,000, which may be carried forward
indefinitely.
Federal and state laws impose limitations on the use of the net operating
losses and tax credits following certain changes in ownership. If such an
ownership change occurs, the limitation could reduce the amount of the
benefits of the net operating losses and credit that would be available to
offset future taxable income starting in the year of the ownership change.
A reconciliation of income tax computed at the federal statutory corporate
tax rate to income tax expense on the net loss from continuing and
discontinued operations is:
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995
Amount Percent Amount Percent
<S> <C> <C> <C> <C>
Income taxes at federal
statutory rate $(1,295,513) (34.0)% $(726,081) (34.0)%
Increase (decrease) in
income taxes resulting from:
Change in valuation allowance 1,295,513 34.0 717,221 33.6
Other - - 8,860 0.4
$ - - % $ - - %
</TABLE>
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
The Company has a net deferred tax asset related to discontinued
operations at December 31, 1996 and 1995 of approximately $3,609,000 and
$2,789,000, respectively. This amount consists primarily of net operating
losses and reserves recorded for book and not yet deducted for tax. A
valuation allowance has been established to reduce this net deferred asset
to zero based upon the uncertainty regarding realization of such tax
benefits given the Company s history of operating losses.
NOTE 9 - SHAREHOLDERS' EQUITY
Outstanding warrants to purchase shares of the Company's common stock,
adjusted to reflect the reverse stock split, together with the related
grant and expiration dates as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Expiration Date
Description Shares Price Grant Date December 31,
<S> <C> <C> <C> <C>
Investor Warrants 658,333 $ 9.00 1988 1997
Investor Warrants 71,428 10.50 1988 1997
Management Warrant 133,333 9.00 1988 1997
</TABLE>
All warrants were exercisable at December 31, 1996. During 1996 and 1995,
9,333 and 3,000 shares, adjusted to reflect the reverse stock split, of
director and consultant options expired, respectively. No other warrants
were exercised or expired during the two-year period ended December 31,
1996.
-30-
<PAGE>
NOTE 9 - SHAREHOLDERS' EQUITY (CONTINUED)
On July 29, 1994, NCBC entered into an agreement and acquired certain
assets of CAPX Corporation ("CAPX"), including the rights to certain
service marks, trade names and proprietary computer software. The
purchase price of the assets was $125,000 and the issuance of 33,333
shares of the $.01 par value of NCMC s common stock, which was valued at
$5.25 per share, adjusted to reflect the reverse stock split. As part of
the agreement, as amended in September 1996, NCMC was required by CAPX to
repurchase all of its shares at $5.25 per share on or before January 1997.
In conjunction with the September 1996 amendment NCBC paid CAPX $25,000
and the balance of $150,000 was due January 1997. The agreement was
further modified in February 1997, at which time the Company paid $100,000
and the agreement was terminated.
On May 11, 1995, the Company repurchased 3,333 shares of its common stock,
adjusted to reflect the reverse stock split, for treasury at a cost of
$9,675.
The Company continues to account for its stock-based warrants using the
intrinsic value method in accordance with APB 25, "Accounting for Stock
Issued to Employees" and its related interpretations. Accordingly, no
compensation expense has been recognized in the financial statements for
employee stock arrangements.
SFAS 123, "Accounting for Stock-Based Compensation", requires the
disclosure of pro forma net income and earnings per share had the Company
adopted the fair value method as of the beginning of fiscal 1996. Under
SFAS 123, the fair value of stock-based warrants to employees is
calculated through the use of option pricing models, even though such
models were developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly
differ from the Company's stock based warrants. These models also require
subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values.
The Company has determined that the effect of SFAS 123 was immaterial for
1996.
NOTE 10 - REVERSE STOCK SPLIT
Pursuant to the approval of the stockholders on June 28, 1995, the Company
implemented a reverse stock split which was effective July 11, 1995,
whereby each three shares of common stock was converted into one share of
Common Stock. As a result of the reverse stock split, the Registrant has
6,666,666 shares of authorized common stock, of which 1,673,190 are issued
and outstanding. All such shares are of the par value of $.01.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
NCBC's lease was terminated during January 1997. The landlord retained
the $20,000 security deposit, and the Company paid an additional $20,000
for a release from all obligations under the lease. These liabilities
have been accrued in the financial statements as of December 31, 1996.
As of December 31, 1996, NCB Insurance Ltd., the Bermuda subsidiary of
NCBC, did not meet the minimum statutory capital requirement under Bermuda
insurance regulations. While the Company is currently in discussions with
the Bermuda regulators to satisfactorily resolve this situation,
management believes that this matter will have no significant impact on
the intent or the ability of the reinsurance facility to settle all
reinsurance recoverables.
NOTE 12 - LITIGATION
The Company was a named defendant in a product liability lawsuit related
to Jensen Corporation. In August 1996 the lawsuit was settled at no cost
to the Company.
-31-
<PAGE>
Item 8 - Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
Incorporated by reference from Form 8-K filed by the Company on November
17, 1995 and Form 8-K filed by the Company on February 20, 1996.
PART III
Item 9 - Directors, Executive Officers, Promoters, and Control Persons;
Compliance With Section 16(a) of the Exchange Act
At March 21, 1997, there were four directors on the Company's Board of
Directors, two of which are also executive officers of the Company. The
principal occupations and affiliations during the last five years of the
directors and executive officers are described in the following table.
Each director's term of office expires at the next meeting of shareholders
following his election and upon the election and qualification of his
successor. The executive officers serve at the pleasure of the Board of
Directors.
James Pinto Chairman since 1989 NCMC
Chairman of the Board Director Biscayne Holdings, Inc.
Age 46 (apparel
Director since 1988 manufacturer and
distributor)
Director Anderson Group, Inc.
(dental
and electronics)
Director Electro Star, Inc.
(printer circuit
board
manufacturer)
John C. Shaw Chief Executive
Officer NCMC
Director and since 1994
Chief Executive
Officer
Age 43 Managing Director Resource Holdings,
Director since 1988 since 1983 Ltd.
(investment firm)
1989 to 1992 NCMC
Co-Chairman
Trustee Wedgestone Financial
(diversified lender
and truck parts
manufacturer)
Herbert J. Jaffe President 1988-1996 NCMC
Director
Age 62 1983-95 Chairman NCM Management Ltd.
Director since 1987 (management company
of NCMC)
David Faulkner 1989-1996 Memorex Telex Inc.
Director Vice Chairman/CFO (computer industry)
Age 56
Director since
July 1994
-32-
<PAGE>
Jeffrey Goldstein Chief Financial NCMC
Officer
Age 51 since September 1996
Chief Executive NCBC
Officer
since June 1995
President and Trustee Wedgestone Financial
since October 1992 (diversified lender
and
truck parts
manufacturer)
Item 10 - Executive Compensation
The following table sets forth information in respect to the compensation
of the Chief Executive Officer and each of the other two most highly
compensated executive officers of NCMC, whose compensation exceeded
$70,000, for services in all capacities to the Corporation and its
subsidiaries in 1996, 1995 and 1994.
<TABLE>
<CAPTION>
Annual Compensation
Other Annual
Year Salary Bonus Compensation
<S> <C> <C> <C> <C>
John C. Shaw 1996 125,000 - -
Chief Executive Officer 1995 142,500 - -
1994 257,500 - 4,000
James J. Pinto 1996 125,000
Chairman 1995 142,500 - -
1994 257,500 - 4,000
Jeffrey S. Goldstein (1) 1996 80,000 - -
Chief Executive Officer 1995 70,000 - -
NCBC 1994 - - -
Herbert J. Jaffe (2) 1996 86,664 - -
President and 1995 100,000 - -
Chief Operating Officer 1994 100,000 10,000 4,000
Ken M. Klein (3) 1995 150,000 - -
President 1994 170,835 - 8,333
NCBC
</TABLE>
(1) Mr. Goldstein was hired as Chief Executive Officer of NCBC in June
1995 and as Chief Financial Officer of NCMC in September 1996.
(2) Mr. Jaffe resigned as president in October 1996.
(3) Mr. Klein left the Company in November 1996 to pursue other
interests.
The Company presently provides various non-cash benefits to its executive
officers, but it does not believe, except as noted, that such benefits
exceeds the lesser of $50,000 or 10% of the cash compensation set forth
for each of the executive officers of the preceding cash compensation
table.
No stock options were granted to the individuals named in the summary
compensation table during 1996 and none of those individuals exercised a
stock option during 1996. The following table sets forth for each of the
executive officers named in the summary compensation table above, the
year-end value of unexercised warrants.
-33-
<PAGE>
<TABLE>
<CAPTION>
Aggregated Warrant Exercised in 1996
And Year-End Warrant Values
Value of Unexercised
Number of Unexercised In-the-Money Warrants
Warrants at Year End (#) at Year-end ($)
Exercisable Unexercisable Exercisable Unexercisable
Name
<S> <C> <C> <C> <C>
John C. Shaw.......... 73,375 - - -
James J. Pinto........ 282,194 - - -
Herbert J. Jaffe...... 40,000 - - -
</TABLE>
James J. Pinto serves as Chairman of the Board of Directors. Pursuant to
an employment agreement entered into in 1990, and subsequently modified
effective January 1, 1994, Mr. Pinto has acted in the same capacity.
Pursuant to a Consulting Agreement dated as of January 1, 1992, Mr. Shaw
provided services as a consultant to the Company on a nonexclusive basis
through December 31, 1993. This agreement was amended effective January
1, 1994 whereby Mr. Shaw acted in the capacity of Chief Executive Officer
through March 31, 1995.
Effective April 1, 1995, Messrs. Pinto and Shaw entered into new
agreements with the Company to act in the same capacities through March
31, 1997, with options to extend these agreements for one year if certain
conditions are met. They will receive annual compensation of $125,000 each
plus Mandatory Incentive Bonuses which are based on achieving certain
Company operating objectives, plus Discretionary Bonuses which may be
granted at the option of the Board of Directors. If these agreements are
terminated by the Company other than for cause, disability or death,
Messrs. Pinto and Shaw shall be entitled to receive their base
compensation through the existing term. Messrs. Pinto and Shaw are
continuing to work on a month to month basis and are currently discussing
extensions of their respective agreements with the Company.
Messrs. Pinto and Shaw were each compensated $125,000 and $142,500 for
1996 and 1995, respectively, pursuant to these agreements. In addition,
in 1996 and 1995 the Company paid $91,120 and $108,659, respectively, for
other costs, certain office expenses, including rent for the Company's
offices in New York, and related services incurred for Company business.
The bylaws of the Company provide for indemnification by it of its
officers and directors to the fullest extent permitted by law.
During 1996, members of the Board of Directors, who are not either
employees, officers or consultants of the Company, received quarterly
compensation of $2,000 and $250 for each meeting attended. Directors are
entitled to be reimbursed for reasonable out of pocket expenses incurred
with respect to meetings of the Board.
-34-
<PAGE>
Item 11 - Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the
beneficial ownership of NCMC common stock as of March 21, 1997, by: (i)
each person known by the Company to own beneficially more than 5% of the
shares of NCMC common stock (ii) each person who is a director or
executive officer of the Company; and (iii) all directors and executive
officers of the Company as a group.
The Investor Warrants referred to below consist of warrants to acquire an
aggregate of 729,761 shares of NCMC common stock, at any time prior to
December 31, 1997. Of the aggregate Investor Warrants, 658,333 permit
acquisition of shares of NCMC common stock at an exercise price of $9.00
per share (the "$9.00 Investor Warrants") and 71,428 permit acquisition of
shares of NCMC common stock at an exercise price of $10.50 per share (the
"$10.50 Investor Warrants"). The Management Warrants, referred to below,
consist of warrants to acquire an aggregate of 133,333 shares of NCMC
common stock at any time prior to December 31, 1997 for an exercise price
of $9.00 per share. The Management Warrants and the Investor Warrants are
collectively referred to as the Warrants.
<TABLE>
<CAPTION>
Beneficial Owner of Beneficial Owner of
NCMC Common Stock (1) NCMC Common Stock (2)
Number of Percent of Number of Percent of
Shares Class Shares Class
<S> <C> <C> <C> <C> <C> <C>
Name and address of NCMC
Beneficial Owner (3)
RHEC, L.P. 388,681 23.2% 757,728 (4) 29.9%
10 East 53rd Street
New York, NY 10022
Herbert J. Jaffe 11,512 (5) * 51,512 (6) 2.0%
James J. Pinto 309,748 18.5% 591,942 (7) 23.3%
John C. Shaw 483,570 (8) 28.9% 925,992 (8) 36.5%
David Faulkner - * - *
Jeffrey S. Goldstein - * - *
All executive officers
and directors as a
group(5 persons) 804,830 (9) 48.1% 1,569,446 (10) 61.8%
</TABLE>
* less than 1%
-35-
<PAGE>
NOTES TO TABLE OF BENEFICIAL OWNERS AND MANAGEMENT
1. This column assumes that none of the Warrants have been
exercised.
2. This column assumes that all of the Warrants have been
exercised.
3. Unless otherwise indicated, each shareholder listed has the
sole power to vote and direct the disposition of the shares of
the Company beneficially owned by such shareholder.
4. Includes 369,047 shares of NCMC common stock which may be
issued upon the exercise of Investor Warrants. Mr. Shaw, a
director of the Company, is a managing director of Resource
Holdings, Ltd., the general partner of RHEC, L.P.
5. Includes 11,379 shares owned by NCM Holdings, a general
partnership of which Mr. Jaffe is a general partner, and 133
shares owned directly by Mr. Jaffe.
6. Includes 40,000 shares of NCMC common stock issuable on
exercise of Management Warrants, 11,379 shares owned by NCM
Holdings and 133 shares owned directly by Mr. Jaffe.
7. Includes 309,748 shares owned directly by Mr. Pinto and 282,194
shares upon exercise of Investor Warrants.
8. Mr. Shaw is a managing director of Resource Holdings, Ltd., the
general partner of RHEC, L.P. Except for 94,889 shares plus
73,375 shares issuable on exercise of Investor Warrants which
are owned directly by Mr. Shaw, the shares of NCMC common stock
shown as beneficially owned by Mr. Shaw are the same shares
shown as beneficially owned by RHEC, L.P.
9. Includes 400,060 shares of NCMC common stock owned by NCM
Holdings and RHEC, L.P.
10. Includes 400,060 shares of NCMC common stock owned by NCM
Holdings and RHEC, L.P., and 783,449 shares of NCMC common stock
issuable on exercise of all the Warrants and the Options.
-36-
<PAGE>
Item 12 - Certain Relationships and Related Transactions
The Company and NCM Management Ltd. ("NCM") have agreed that NCM will
provide management services through December 1997 and provide personnel,
equipment and facilities for the day to day management and operations of
the Company including supervision of its remaining real estate properties.
As compensation for its services, NCM received a monthly management fee of
4% of revenues from Colony Ridge Apartments, and 6% of revenues from
Redbird Trails Apartments and North Oak Apartments from January 1, 1996
until August 31, 1996 and 4% for all properties thereafter. Mr. Jaffe, a
director of the Company, is NCM's Chairman of the Board. He also owns
approximately 33% of the outstanding capital stock of NCM and may be
deemed to have a material interest in all payments to NCM. During 1996,
NCM received an aggregate of $146,500 for management services rendered to
the Company, included in which amount was Mr. Jaffe's compensation as an
officer of the Company.
The Company maintains an office in New York for use by its executive
officers at the premises of Resource Holdings, Ltd. ("Resource"). The
Company is not a party to a lease, but there is an understanding that NCMC
will pay rent for the offices in New York until the end of 1997. In
addition, in accordance with its agreement with Resource, the Company has
deposited with Resource s landlord the amount of $37,746 which will be
returned, plus interest, to the Company on termination of Resource's
lease. The Company reimbursed $86,120 to Resource for providing such
office space and related services in 1996. Mr. Shaw, a director of the
Company, is a managing director and significant shareholder of Resource,
and therefore may be deemed to have an interest in any payments to
Resource.
Stock Transaction Reports by Officers, Directors and 10% Stockholders
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors, executive officers and holders of more than 10%
of the Company' common stock to file with the Commission initial reports
of ownership and reports of changes in ownership of common stock and
other equity securities of the Company. Other than one late filing by
Mr. Shaw, to the Company's knowledge, based solely on copies of reports
furnished to the Company and information furnished by the reporting
persons, each officer, director and 10% stockholder of the Company was in
compliance with all reporting requirements under Section 16(a) for the
year ended December 31, 1996.
-37-
<PAGE>
PART IV
Item 13 - Exhibits and Reports on Form 8-K
The following documents are filed as part of this report:
(a) Exhibits:
3.1 Articles of Incorporation and By-Laws of National Capital
Management Corporation (the "Company" or "NCMC")
(incorporated by reference from Schedule 4 to the Prospectus
included in the Registration Statement on Form S-4 of the
Company (No. 33 19149) filed on December 18, 1987 (the
"Registration Statement")).
3.2 Certificate of Amendment of Certificate of Incorporation of
National Capital Management Corporation implementing one for
three reverse stock split dated June 29, 1995.
3.3 Resolution of Board of Directors amending NCMC By-Laws dated
April 12,1995 (incorporated by reference from Exhibit
3(ii).1 of the Annual Report on Form 10-K of the Company
filed on April 17, 1995).
4.1 Form of Warrant for 2,400,000 shares of NCMC common stock
(incorporated by reference from Exhibit 4.1 of the Annual
Report on Form 10-K of the Company filed on March 29, 1988).
4.2 Form of Warrant for 214,285 shares of NCMC common stock
(incorporated by reference from Exhibit 4.2 of the Annual
Report on Form 10-K of the Company filed on March 29, 1988).
10.1 Registration Agreement dated February 25, 1988 between NCMC
and certain other persons (incorporated by reference from
Exhibit 10.3 of the Annual Report on Form 10-K of the
Company filed on March 29, 1988).
10.2 Employment Agreement dated September 1, 1990 between James
J. Pinto and NCMC (incorporated by reference from Exhibit
10.4 of the Annual Report on Form 10-K of the Company filed
on April 1, 1991).
10.3 Amended and Restated Employment Agreement dated as of June
15, 1994 between James J. Pinto and NCMC (incorporated by
reference from Exhibit 10.3 of the Annual Report on Form 10-K of
the Company filed on April 17, 1995).
10.4 Agreement dated as of April 1, 1995 between James J. Pinto
and NCMC (incorporated by reference from Exhibit 10.4 of the
Annual Report on Form 10-K of the Company filed on April 17,
1995).
10.5 Consulting Agreement dated January 1, 1992 between John C.
Shaw and NCMC (incorporated by reference from Exhibit 10.5
of the Annual Report on Form 10-K of the Company filed on
April 15, 1992).
10.6 Amended and Restated Employment Agreement dated as of June
15, 1994 between John C. Shaw and NCMC (incorporated by
reference from Exhibit 10.6 of the Annual Report on Form 10-K
of the Company filed on April 17, 1995).
10.7 Agreement dated as of April 1, 1995 between John C. Shaw and
NCMC (incorporated by reference from Exhibit 10.7 of the
Annual Report on Form 10-K of the Company filed on April 17,
1995).
-38-
<PAGE>
10.8 Second Amended and Restated Agreement of Limited Partnership
of Redbird Trails Associates, L.P. by and among NCQ Redbird,
Inc. National Corporate Tax Credit Fund and National
Corporate Tax Credit, Inc. dated as of November 23, 1994
(incorporated by reference from Exhibit 10.3 of the Annual
Report on Form 10-K of the Company filed on April 17, 1995).
10.9 Operating Deficit and Rental Achievement Agreement among
Redbird Trails Associates, L.P., National Capital
Management Corp., National Corporate Tax Credit Fund and
National Corporate Tax Credit, Inc. dated as of June 6,
1994 (incorporated by reference from Exhibit 10.7 of the
Quarterly Report on Form 10-QSB of the Company filed on
August 15, 1994).
10.10 Second Amended and Restated Agreement of Limited
Partnership of Signature Midwest, L.P. by and among NCQ
North Oak, Inc. National Corporate Tax Credit Fund and
National Corporate Tax Credit, Inc. dated as of November
23, 1994 (incorporated by reference from Exhibit 10.3 of
the Annual Report on Form 10-K of the Company filed on
April 17, 1995).
10.11 Operating Deficit and Rental Achievement Agreement among
Signature Midwest, L.P., National Capital Management Corp.,
National Corporate Tax Credit Fund and National Corporate
Tax Credit, Inc. dated as of November 23, 1994
(incorporated by reference from Exhibit 10.3 of the Annual
Report on Form 10-K of the Company filed on April 17,
1995).
10.12 Employment Agreement dated as of March 1, 1994 between NCMC
and Kenneth M. Klein (incorporated by reference from
Exhibit 10.15 of the Annual Report on Form 10-KSB of the
Company filed on March 31, 1994).
10.13 Loan Agreement by and between Bank One and National Capital
Benefits Corp. dated December 29, 1995.
10.14 Security Agreement and Assignment by National Capital
Benefits Corp. for the benefit of Bank One dated December
28, 1995.
10.15 Senior Subordinated Note and Warrant Purchase Agreement by
and between National Capital Benefits Corp. and Banc One
Capital Partners V, Ltd. dated December 29, 1995.
10.16 Warrant Certificate from National Capital Benefits Corp. in
favor of Banc One Capital Partners V, Ltd. dated December
29, 1995.
10.17 Property Purchase Agreement by and between National Capital
Management Corporation and William R. Dixon, Jr. for sale
of The Mart Shopping Center dated July 26, 1995.
10.18 Option Agreement by and between Georgia Properties, Inc.
and William R. Dixon, Jr. for the sale of Appletree
Townhouses dated December 21, 1995.
10.19 Promissory Note from William R. Dixon, Jr. in favor of
Georgia Properties, Inc. dated March 29, 1996.
10.20 Agreement of Purchase and Sale of Stock among AMKO USA,
Inc., National Capital Management Corporation and Jensen
Corporation dated October 30, 1995.
10.21 Promissory Note from AMKO USA, Inc. in favor of National
Capital Management Corporation for $1,311,000 dated
November 1995.
-39-
<PAGE>
10.22 Guaranty of Note from AMKO International B.V. in favor of
National Capital Management Corporation dated November 1995
related to Promissory Note in amount of $1,311,000.
10.23 Promissory Note from Jensen Corporation in favor of
National Capital Management Corporation for $765,000 dated
November 1995.
10.24 Promissory Note from Jensen Corporation in favor of
National Capital Management Corporation for $337,650 dated
November 1995.
10.25 Guaranty of Note from AMKO International B.V. in favor of
National Capital Management Corporation dated November 1995
related to Promissory Note in amount of $765,000.
10.26 Guaranty of Note from Jan Oerlemans in favor of National
Capital Management Corporation dated November 1995 related
to Promissory Note in amount of $1,311,000.
10.27 Letter of revisions of the Asset Purchase Agreement between
National Capital Benefits Corp. and AutoLend Group, Inc.
dated October 6, 1995.
10.28 Promissory Note between National Capital Management
Corporation and Fifth Avenue Partners dated October 26,
1995.
10.29 Subsidiaries of NCMC (including controlled partnerships).
(b) Reports on Form 8-K.
The Company filed a Form 8-K dated October 30, 1996 with the commission
indicating that although the Company submitted a request for continued
listing on The NASDAQ Stock Market, the qualifications panel determined
that an exception would not be granted to the Company and that the
Company's common stock would not be traded on The NASDAQ Stock Market,
although eligible to trade on the OTC Bulletin Board.
The Company filed a Form 8-K dated December 16, 1996 with the commission
announcing that in light of medical advances with respect to AIDS
patients, the Company was reducing its office staff and focusing on the
management and administration of its existing portfolio of life insurance
policies.
-40-
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
NATIONAL CAPITAL MANAGEMENT CORPORATION
By: /s/ JOHN C. SHAW
John C. Shaw
Chief Executive Officer,
By: /s/ JEFFREY S. GOLDSTEIN
Jeffrey S. Goldstein
Principal Financial Officer
and Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
By: /s/ HERBERT J. JAFFE
Herbert J. Jaffe, Director
March 21, 1997
By: /s/ JAMES PINTO
James Pinto, Director
March 21, 1997
By: /s/ JOHN C. SHAW
John C. Shaw, Director
March 21, 1997
By: /s/ DAVID FAULKNER
David Faulkner, Director
March 21, 1997
-41-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 651,346
<SECURITIES> 0
<RECEIVABLES> 18,240
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 104,831
<DEPRECIATION> 63,198
<TOTAL-ASSETS> 3,785,919
<CURRENT-LIABILITIES> 368,369
<BONDS> 0
0
0
<COMMON> 16,732
<OTHER-SE> 3,400,818
<TOTAL-LIABILITY-AND-EQUITY> 3,785,919
<SALES> 0
<TOTAL-REVENUES> 134,041
<CGS> 0
<TOTAL-COSTS> 665,717
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (531,676)
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (531,676)
<INCOME-TAX> 0
<INCOME-CONTINUING> (531,676)
<DISCONTINUED> (3,278,655)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,810,331)
<EPS-PRIMARY> (2.28)
<EPS-DILUTED> (2.28)
</TABLE>
