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, 1998
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 $207,820
The aggregate market value of voting stock held by nonaffiliates of the
Registrant is approximately $836,595 as of March 5, 1999
1,673,190
(Number of shares of common stock outstanding as of March 30, 1999)
Total number of pages in this document is: 42
The exhibit index is on page 39
<PAGE>
PART I
Item 1 - Description of Business
Introduction
National Capital Management Corporation ("NCMC") is a holding company that
previously 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 prior 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.
In August 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.
In September 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.
However, NASDAQ immediately 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, and had decided to deny the Company's
request.
The decision 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 would not guarantee
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 would 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 would 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 Segment
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 insured individuals projected to have a 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
$663,082 of preferred stock for cash through December 31, 1996.
In addition, NCBC had a revolving line of credit ("The Facility") up to
$15 million, which originally expired December 31, 1998 (see below),
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. 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. The outstanding balance as of December
31, 1998 was approximately $3.7 million.
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, 1998. The note was due
December 31, 1998 and is secured by NCBC's purchased insurance policies,
subject to the security interest granted to the Facility lender (see
below). 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. In April 1997, the
Warrant Agreement was amended to reflect an increased interest rate of
14 3/4% on the Note. In exchange for agreeing to this increase in the
interest rate, NCBC, or its assigns, shall have the option to repurchase
the Warrant for the sum of $1.00.
As of December 31, 1998, the Company entered into a commitment to extend
the Facility and the Note for a two year period ending December 31, 2000.
NCBC paid a $50,000 commitment fee in relation thereto. No formal
extension has been executed as of March 30, 1999, and the bank reserves the
right to not extend the Facilty due to lack of performance by NCBC. The
Company anticipates the execution of documents shortly, although there can
be no assurance that the execution will take place.
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. As of
December 31, 1998, the face value of NCBC's purchased insurance policies
remaining in its portfolio was approximately $17.4 million. During 1998,
approximately $1.8 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 Settlements Segment
The viatical settlements segment 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 would closely approximate actual
experience, given the inherent scientific uncertainty of such estimates,
including the 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, and as adjusted during the year ended December 31,
1998, as stated on the balance sheet (see footnote 3 to the financial
statements). During the fourth quarter ended December 31, 1997, the
Company increased its original reserve by $350,000. 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 more years (see footnote 3).
-4-
<PAGE>
Management has reevaluated the expected costs of operations and has
accordingly increased the reserve by $522,000 as of December 31, 1998.
The amount is reflected as a charge to continuing operations on the
Consolidated Statements of Operations.
In accordance with the discontinuance of this business segment, NCBC has
restructured its organization and reduced its office staff to one person.
Discontinued Operation - Real Estate Segment
In November 1995, the Company elected to discontinue operations of the
Real Estate Segment to concentrate its efforts on its Viatical Settlements
Segment. The following is a description of the Company's recent disposal
activities:
Colony Ridge Apartments: Colony Ridge Apartments was an apartment complex
in Decatur, Georgia which was constructed in 1968 and consisted of 23 two-
story buildings containing a total of 212 apartment units. On May 6,
1998, the Company sold the Colony Ridge Apartments for $3,650,000. The
Company received net proceeds of approximately $2,500,000. The difference
between the sales price and the net proceeds received is due to the
repayment of the mortgage, state taxes, and miscellaneous expenses. The
Company reported a net gain of $695,270.
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 were
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 ending December 8, 1997. No loans were made during
1997.
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 1998 and 1997. The Company is entitled to a 2%
management fee from the partnerships. In 1998 and 1997 the Company
received management fees of approximately $44,000 and $40,000,
respectively.
-5-
<PAGE>
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 was secured by Jensens stock, accounts
receivable and inventory. The $1,311,000 note was guaranteed in its
entirety by AMKO International B.V., and the sole shareholder of AMKO
International B.V. guaranteed, as amended May 16, 1997, $500,000 of
payments of all notes.
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 were secured by the assets of Jensen. The first $765,000
of principal payments under these notes were guaranteed by AMKO
International B.V.
The $1,311,000 note as amended May 16, 1997 bore interest at 8.5% per
annum and was payable in varying installments with the balance due in
April 1998, unless extended as indicated below. The $765,000 note was
amended May 16, 1997, bore interest at 8.5% per annum and was payable in
varying installments with the balance due in April 1998, unless extended
as indicated below. The $337,650 note was amended May 16, 1997 bore
interest at 8.5% per annum and was payable in varying installments with
the balance due in April 1998, unless extended as indicated below.
The Company advanced $198,000 to AMKO during February and March 1997, of
which $82,500 was repaid. The balance was a Demand Note which bore
interest at 12% per annum. This note was also guaranteed by AMKO
International. As of December 31, 1997, this note was paid in full.
In accordance with the May 16, 1997 amendment, the notes could be extended
until April 1999, if AMKO prepaid $500,000 on or before April 1, 1998. If
extended, the interest rate on all of the notes would increase to 12%.
The Company charged AMKO a fee of $200,000 in conjunction with the
amendment. The fee was paid on May 16, 1997.
The Company loaned Jensen an additional $200,000 in conjunction with the
May 16, 1997 modification, and an additional $36,000 in October 1997.
These notes bore interest at 8.5% and mature simultaneously with the other
notes.
As of October, 1997, Jensen stopped making payments as required by the
terms of the May 16, 1997 amendment. On November 11, 1997, Jensen filed
for Chapter 7 bankruptcy. On March 26, 1998, an auction sale was held,
the proceeds of which are either to be distributed pursuant to an
evidentiary hearing or a prior court approved agreement with the trustee.
In March 1999, a settlement was reached with the trustee, in which a
payment of $75,000 would be made to NCMC, as a result of the sale of
Jensen's inventory, in exchange for which NCMC would assert no further
claims against the debtor. Such final settlement is subject to court
approval.
As a result of the bankruptcy filing, the Company reduced the value of its
notes receivable to $150,000 as of December 31, 1997. The Company has
received approximately $73,000 during 1998 and anticipates receipt of an
additional $75,000, (as discussed above), as a result of its efforts. The
remaining balance has been written off as of December 31, 1998.
AMKO International filed for and was discharged from the bankruptcy in the
Netherlands between January and April 1998.
-6-
<PAGE>
The Company has pursued a remedy in judicial proceedings in the
Netherlands with a procedural result that would allow the Company to
pursue AMKO International in the United States courts. As of February
1999, the Company released both AMKO International and its successor in
interest from any claims. In addition, the Company and FNM Bank (a
Netherlands bank) agreed to settle all lender liability claims. As a
result of the foregoing, the Company is free to pursue the former owner of
AMKO International on his personal guarantee, and will allocate any
proceeds received on the basis of 75% to the Company and 25% to FNM
Holding, N.V., after all expenses have been paid. The Company cannot
predict the outcome of this litigation.
Item 2 - Description of Property
The Company maintains an office in New York for use by its executive
officers and consultants 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 1999. 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.
Item 3 - Legal Proceedings
Not applicable.
Item 4 - Submission of Matters to a Vote of Security Holders
The Company anticipates holding the 1998 annual meeting during 1999.
-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, 1998 and 1997, are
as follows:
<TABLE>
<CAPTION)
Bid Price
High Low
<S> <C> <C>
For the Quarter Ended
December 31, 1998............................ .5000 .3000
September 30, 1998........................... .5000 .3900
June 30, 1998................................ .6250 .4375
March 31, 1998............................... .7500 .5625
December 31, 1997............................ .6313 .4625
September 30, 1997........................... .6563 .4063
June 30, 1997 ............................... .5625 .3875
March 31, 1997............................... .5625 .3438
</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 5, 1999 was $.50.
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 8, 1999,the approximate number of holders of record of shares
of common stock of the Company was 1,623.
c. Dividends on Common Stock
The Company has not declared any dividends on its common stock during
the two year period ended December 31, 1998, and does not anticipate
paying any dividends in the near future.
Item 6 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
During 1996, the Company initially expanded its viatical settlements
segment 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 increased from $56,035 at December 31, 1997, to
$2,058,674 at December 31, 1998, principally as a result of the sale of
the Colony Ridge Apartments, the recovery of approximately $73,000 of
receivables from AMKO, and proceeds of approximately $53,000 from a
lawsuit settlement.
Other than in its Viatical Settlements Segment, the Company does not have
any existing general credit facilities to fund its ongoing working capital
requirements. These lending facilities were amended in 1997 in light of
management's decision to discontinue the Viatical Settlements Segment and
liquidate the portfolio.
VIATICAL SETTLEMENTS SEGMENT
Effective as of December 29, 1995, NCBC entered into a revolving credit
facility ("Facility") with a credit limit of up to $15 million, which
originally expired December 31, 1998 (see below). 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% at December 31, 1998 and 1997). 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, 1998. The note was due
December 31, 1998, and is secured by NCBC's purchased insurance
policies, subject to the security interest granted to the Facility
lender (see below). 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. In April
1997, the Warrant Agreement was amended to reflect an increased
interest rate of 14 3/4% on the Note. In exchange for agreeing to this
increase in the interest rate, NCBC, or its assigns, shall have the
option to repurchase the Warrant for the sum of $1.00.
-9-
<PAGE>
As of December 31, 1998, the Company entered into a commitment to extend
the Facility and the Note for a two year period ending December 31, 2000.
NCBC paid a $50,000 commitment fee in relation thereto. No formal
extension has been executed as of March 30, 1999, and the bank reserves the
right to not extend the Facility due to lack of performance by NCBC. The
Company anticipates the execution of documents shortly, although there can
be no assurance that the execution will take place.
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 settlements segment was discontinued in December 1996.
REAL ESTATE SEGMENT
In November 1995, the Company elected to discontinue operations of the
Real Estate Segment to concentrate its efforts on its viatical settlements
segment. The following is a description of the Company's recent disposal
activities:
Colony Ridge Apartments: Colony Ridge Apartments was an apartment complex
in Decatur, Georgia which was constructed in 1968 and consisted of 23 two-
story buildings containing a total of 212 apartment units. On May 16,
1998, the Company sold the Colony Ridge Apartments for $3,650,000. The
Company received net proceeds of approximately $2,500,000. The difference
between the sales price and the net proceeds received is due to the
repayment of the mortgage, state taxes, and miscellaneous expenses. The
Company reported a net gain of $695,270.
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 were
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 ending December 8, 1997. No loans were made during
1997.
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
-10-
<PAGE>
capital (minus prior cash payments). Should the Company choose not to
exercise such rights 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 did not fund any operating deficits and has not received any
excess cash flows during 1998 and 1997. The Company is entitled to a 2%
management fee from the partnerships. In 1998 and 1997 the Company
received management fees of approximately $44,000 and $40,000,
respectively.
INDUSTRIAL PRODUCTS SEGMENT
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 was secured by Jensen's stock, accounts receivable and
inventory. The $1,311,000 note was guaranteed in its entirety by AMKO
International B.V., and the sole shareholder of AMKO International B.V.
guaranteed, as amended May 16, 1997, the first $500,000 of payments of all
notes.
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 were secured by the assets of Jensen. The first $765,000
of principal payments under these notes were guaranteed by AMKO
International B.V.
The $1,311,000 note, as amended May 16, 1997, bore interest at 8.5% per
annum and was payable in varying installments with the balance due in
April 1998, unless extended as indicated below. The $765,000 note, as
amended May 16, 1997, bore interest at 8.5% per annum and was payable in
varying installments with the balance due in April 1998, unless extended
as indicated below. The $337,650 note, was amended May 16, 1997, bore
interest at 8.5% per annum, and was payable in varying installments with
the balance due in April 1998, unless extended as indicated below.
The Company advanced $198,000 to AMKO during February and March 1997, of
which $82,500 was repaid. The balance was a Demand Note which bore
interest at 12% per annum. This note was also guaranteed by AMKO
International B.V. As of December 31, 1997, this note was paid in full.
In accordance with the May 16, 1997 amendment, the notes could be extended
until April 1999, if AMKO prepaid $500,000 on or before April 1, 1998. If
extended, the interest rate on all of the notes would increase to 12%.
The Company charged AMKO a fee of $200,000 in conjunction with the
amendment. The fee was paid on May 16, 1997.
The Company loaned Jensen an additional $200,000 in conjunction with the
May 16, 1997 modification, and an additional $36,000 in October 1997.
These notes bore interest at 8.5% and mature simultaneously with the other
notes.
-11-
<PAGE>
As of October, 1997, Jensen stopped making payments as required by the
terms of the May 16, 1997 amendment. On November 11, 1997, Jensen filed
for Chapter 7 bankruptcy. On March 26, 1998, an auction sale was held,
the proceeds of which are either to be distributed pursuant to an
evidentiary hearing or a prior court approved agreement with the trustee.
In March 1999, a settlement was reached with the trustee, in which a
payment of $75,000 would be made to NCMC, as a result of the sale of
Jensen's inventory, in exchange for which NCMC would assert no further
claims against the debtor. Such final settlement is subject to court
approval.
As a result of the bankruptcy filing, the Company reduced the value of its
notes receivable to $150,000 as of December 31, 1997. The Company has
received approximately $73,000 during 1998 and anticipates receipt of an
additional $75,000, (as discussed above), as a result of its efforts.
The remaining balance has been written off as of December 31, 1998.
AMKO International filed for and was discharged from the bankruptcy in the
Netherlands between January and April 1998.
The Company has pursued a remedy in judicial proceedings in the
Netherlands with a procedural result that would allow the Company
to pursue AMKO International in the United States courts. As of February
1999, the Company released both AMKO International and its successor
in interest from any claims. In addition, the Company and FNM Bank
(a Netherlands bank), agreed to settle all lender liability claims. As a
result of the foregoing, the Company is free to pursue the former owner
of AMKO International on his personal guarantee, and will allocate any
proceeds received on the basis of 75% to the Company and 25% to FNM
Holding, N.V., after all expenses have been paid. The Company cannot
predict the outcome of this litigation.
RESULTS OF OPERATIONS FOR 1998 COMPARED TO 1997
National Capital Benefits Corp. ("NCBC") commenced operations on March 17,
1994. During 1998 and 1997, approximately $1.8 million and $1.4 million
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 believed that its estimate of life expectancy, and the related
recognition of earned discount would 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 during 1996, and as adjusted during the year ended
December 31, 1998, as stated on the balance sheet. During the fourth
quarter ended December 31, 1997, the Company increased its original
reserve by $350,000. The amount of the reserve was determined based on
projections of expected cash inflows from maturities and reinsurance
claims, and cash outflows for debt service and operating costs during the
portfolio administration process, which is expected to take several more
years (see footnote 3). As of December 31, 1998, the Company increased
the reserve by $522,000, as a result of management's reevaluation of the
expected costs of operations. The amount is reflected as a charge to
continuing operations on the Consolidated Statements of Operations.
-12-
<PAGE>
The Company previously announced that certain existing medications
presently under development may, when used in combination, significantly
prolong the life expectancy of persons previously diagnosed with AIDS.
These medical treatments 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.
The Company decided to discontinue its viatical settlements segment in
December 1996. As a result, NCBC restructured its organization and
reduced its office staff to one person. Management anticipates that this
person, as well as NCMC management, will manage NCBC's existing portfolio
of approximately $17.4 million of insurance policies. Management
estimates that the administration of these policies will take several more
years.
Year 2000
The Year 2000 problem is the result of computer programs being written with
two digits instead of four digits to define the applicable year. The
Company believes based upon its internal reviews and other factors, that
future external and internal costs to be incurred relating to the
modifications of internal-use software for the Year 2000 will not have a
material adverse effect on the Company's results of operations or
financial position. The Company, due to the fact that it is in the
process of orderly liquidating its discontinued operations, only makes
minimal use of computers in operating its business. In addition, the
Company believes that its internal computer systems, facilitites and
equipment will be upgraded, where required, for Year 2000. However,
there is no assurance that all of the upgrades will be completed in time
or function as intended. In such an event, The Company may experience
significant disruptions, the cost of which the Company is unable to
estimate at this time. The Company, also, cannot assure that its
failure or failure of third parties to address adequately Year 2000
issues will not have a material effect on the Company.
-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, 1998 16
Consolidated Statements of Operations for the years ended
December 31, 1998 and 1997 17
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1998 and 1997 18
Consolidated Statements of Cash Flows for the years ended
December 31, 1998 and 1997 19
Notes to Consolidated Financial Statements 20-32
-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,
1998, and the related consolidated statements of operations, shareholders'
equity and cash flows for the years ended December 31, 1998 and 1997.
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, 1998,
and the consolidated results of its operations and its cash flows for the
years ended December 31, 1998 and 1997, in conformity with generally
accepted accounting principles.
/s/ JANOVER RUBINROIT, LLC
Garden City, New York
March 30, 1999
-15-
<PAGE>
NATIONAL CAPITAL MANAGEMENT CORPORATION
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
ASSETS
<S> <C>
Cash and cash equivalents $ 2,058,674
Notes receivable 75,000
Accounts receivable 3,711
Property and equipment, less accumulated depreciation
of $80,718 24,113
Net assets of discontinued operations -
Real Estate Segment (Note 5) 11,426
Other assets 39,960
Total assets $ 2,212,884
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<S> <C>
Net liabilities of discounted operations -
Viatical Settlements Segment (Note 3) $ 493,015
Accrued liabilities 71,007
Total current liabilites 564,022
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 (21,318,776)
Treasury stock, 139,866 shares (174,217)
Total shareholders' equity 1,648,862
Total liabilities and shareholders' equity $ 2,212,884
The accompanying notes are an integral part of this statement.
-16-
</TABLE>
<PAGE>
NATIONAL CAPITAL MANAGEMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION
Years ended December 31,
1998 1997
<S> <C> <C>
Income (expense):
Other income $207,820 $ 584,876
Corporate administrative expense (643,446) (1,589,053)
Change in accounting estimate - increase
in estimated cost on disposal of Viatical
Settlements Segment (Note 3) (522,000) -
Net loss from continuing operations before tax (957,626) (1,004,177)
Provision for income taxes - -
Net loss from continuing operations after tax (957,626) (1,004,177)
Discontinued operations:
Net operating loss:
Viatical Settlements Segment (Note 3) (58,039) (374,413)
Real Estate Segment (Note 5) (23,135) (46,568)
Net gain on disposal of Real Estate
Segment, net of taxes (Note 5) 695,270 -
Net income (loss) from discontinued operations 614,096 (420,981)
Net loss $ (343,530) $(1,425,158)
Net loss from continuing operations
per share $(.57) $(.60)
Net income (loss) from discontinued operations
per share .37 (.25)
Net loss per share $(.20) $(.85)
Average number of shares outstanding 1,673,190 1,673,190
</TABLE>
The accompanying notes are an integral part of this statement.
-17-
<PAGE>
NATIONAL CAPITAL MANAGEMENT CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 and 1997
<TABLE>
<CAPTION>
Additional Total
Common Paid-in Accumulated Treasury Shareholders'
Stock Capital Deficit Stock Equity
<S> <C> <C> <C> <C> <C>
Balances at
December 31, 1996 $16,732 $23,125,123 $(19,550,088) $(174,217) $3,417,550
Net loss - - (1,425,158) - (1,425,158)
Balances at
December 31, 1997 16,732 3,125,123 (20,975,246) (174,217) 1,992,392
Net loss - - (343,530) - (343,530)
Balances at
December 31, 1998 $16,732 $23,125,123 $(21,318,776) $(174,217) $1,648,862
</TABLE>
The accompanying notes are an integral part of this statement.
-18-
<PAGE>
NATIONAL CAPITAL MANAGEMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net loss $(343,530) $(1,425,158)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 8,760 8,760
Gain on sale of real estate segment (695,270) -
Reduction in value of Viatical Settlements
Segment 522,000 -
Reduction in value of notes receivable 2,005 979,408
Changes in operating assets and liabilities:
Increase in accounts receivable (3,711) (61,483)
Decrease in accrued liabilities (32,292) (165,070)
Increase in other assets (3,736) -
Net cash used in operating activities (545,774) (663,543)
Change in net assets of discontinued operations (23,683) 304,267
Cash flows from investing activities:
Additional loan to Jensen - (236,035)
Collections on notes receivable 72,995 -
Proceeds from sale of real estate segment 2,499,101 -
Net cash provided by (used in) financing
activities 2,572,096 (236,035)
Increase (decrease) in cash and cash equivalents 2,002,639 (595,311)
Cash and cash equivalents at beginning of period 56,035 651,346
Cash and cash equivalents at end of period $2,058,674 $ 56,035
</TABLE>
The accompanying notes are an integral part of this statement.
-19-
<PAGE>
NATIONAL CAPITAL MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
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 Settlements 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 Settlements Segment was discontinued
in 1996. (Notes 3, 5 and 6).
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.
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, and the realizability of net
deferred tax assets. See Notes 3 and 8.
-20-
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounting for long-lived assets
For the calendar year ended December 31, 1996, the Company 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 impairments were required. In addition to the write down of several
assets of the Company, a $1.5 million valuation reserve was established
during 1996, as adjusted during the year ended December 31, 1998, 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 impact of recent 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 and as adjusted during the year ended
December 31, 1998. During the fourth quarter ended December 31, 1997, the
Company increased its original reserve by $350,000. The amount of the
reserve was determined based on projections of expected cash inflows from
maturities and reinsurance claims, and cash outflows for debt service and
operating costs during the portfolio administration process, which is
expected to take several more years (Note 3).
Management has reevaluated the expected costs of operations and has
accordingly increased the reserve by $522,000 as of December 31, 1998.
The amount is reflected as a charge to continuing operations on the
Consolidated Statements of Operations.
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 approximately $1,022,000 and $1,087,000, for
1998 and 1997, respectively. The Company paid approximately $55,000 for
state income taxes as a result of the gain on the sale of the real estate
segment during 1998, and no material amounts for income taxes during 1997.
In April 1998, the Company sold its remaining real estate property in
which the Company received cash of approximately $2,500,000, and
recognized a net gain of $695,270 in connection with the sale.
Earnings per share
Effective December 15, 1997, the Financial Accounting Standards Board
issued Statement No. 128, "Earnings per Share". Statement No. 128
replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Under the new
requirements for calculating earnings per share, the dilutive effect of
stock options will be excluded from basic earnings per share but included
in the computation of diluted earnings per share. All earnings per share
amounts have been restated so as to comply with Statement No. 128.
-21-
<PAGE>
NOTE 3 - DISCONTINUED OPERATIONS - VIATICAL SETTLEMENTS SEGMENT
The results of the Viatical Settlements Segment have been reported
separately as discontinued operations in these consolidated statements of
operations.
In December 1996, the Company decided to discontinue the operations of the
Viatical Settlements Segment. 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 more years. The Company established a $1,500,000 valuation
reserve during 1996, and as adjusted during the year ended December 31,
1998, 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.
During the fourth quarter ended December 31, 1997, the Company increased
its original reserve by $350,000. The amount of the reserve was
determined based on projections of expected cash inflows from maturities
and reinsurance claims, and cash outflows for debt service and operating
costs during the portfolio administration process, which is expected to
take several more years. Management has reevaluated the expected costs
of operations and has accordingly increased the reserve by $522,000 as
of December 31, 1998. The amount is reflected as a charge to continuing
operations on the Consolidated Statements of Operations.
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
Segment for the years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
For the year ended
December 31,
1998 1997
<S> <C> <C>
Revenue accrued and received $3,274,069 $5,203,919
Cost of insurance policies (2,617,045) (4,203,385)
Write-off against valuation reserve 903,278 801,823
Increase in valuation reserve - (350,000)
Earned discount 1,560,302 1,452,357
Interest expense (1,061,743) (1,275,111)
Earned discount after interest expense 498,559 177,246
Selling and administrative expenses (555,510) (550,571)
Depreciation and amortization (1,088) (1,088)
Net loss $ (58,039) $ (374,413)
</TABLE>
-22-
<PAGE>
NOTE 3 - DISCONTINUED OPERATIONS - VIATICAL SETTLEMENTS SEGMENT
(CONTINUED)
The components of the Viatical Settlements Segment net liabilities from
discontinued operations in the consolidated balance sheet as of December
31, 1998 are as follows:
<TABLE>
<S> <C>
Purchased policy costs, less amortized
policy costs of $20,668,126 $1,583,337
Valuation reserve (666,899)
Accrued policy revenues, less matured
revenues valuation of $9,586,769 15,266,332
Revolving credit facility (3,660,216)
Subordinated note payable (2,000,000)
Reinsurance liability (10,522,723)
Other, net (492,846)
$ (493,015)
</TABLE>
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, at the time of purchase, 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.
-23-
<PAGE>
NOTE 3 - DISCONTINUED OPERATIONS - VIATICAL SETTLEMENTS SEGMENT
(CONTINUED)
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 were 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 during 1996, and as
adjusted during the year ended December 31, 1998, which reflects the
estimated expected loss on holding the remaining policies to maturity.
During the fourth quarter ended December 31, 1997, the Company increased
its original reserve by $350,000. As of December 31, 1998, the Company
increased the reserve by $522,000 as a result of management's reevaluation
of the expected costs of operations. The amount is reflected as a charge
to continuing operations on the Consolidated Statements of Operations.
At December 31, 1998 the face value of purchased insurance policies
remaining in NCBC's portfolio was approximately $17.4 million. NCBC did
not purchase any new policies during 1998. During 1998 and 1997,
approximately $1.8 million and $1.4 million face value of policies
matured, respectively.
Since the Viatical Settlement Segment is discontinued, these amounts, as
well as the interest expense and most selling and administrative expenses,
are written off against the valuation reserve.
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
originally expired December 31, 1998 (see below). 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
(5.213% at December 31, 1998).
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.
The balance outstanding at December 31, 1998 was approximately $3.7
million.
-24-
<PAGE>
NOTE 3 - DISCONTINUED OPERATIONS - VIATICAL SETTLEMENTS SEGMENT
(CONTINUED)
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, 1998. The note was
due December 31, 1998 and is secured by NCBC's purchased insurance
policies, subject to the security interest granted to the Facility
lender (see below). 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. In
April 1997, the Warrant Agreement was amended to reflect an increased
interest rate of 14 3/4% on the Note. In exchange for agreeing to this
increase in the interest rate, NCBC, or its assignees, shall have the
option to repurchase the Warrant for the sum of $1.00.
As of December 31, 1998, the Company entered into a commitment to extend
the Facility and the Note for a two year period ending December 31, 2000.
NCBC paid a $50,000 commitment fee in relation thereto. No formal
extension has been executed as of March 30, 1999, and the bank reserves
the right to not extend the Facility due to lack of performance by NCBC.
The Company anticipates the execution of documents shortly, although there
can be no assurance that the execution will take place.
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, 1998.
NOTE 4 - TRANSACTIONS WITH AFFILIATES
For the two-year period ended December 31, 1997, the Company had
agreements with NCM Management Ltd., a real estate 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
approximately $97,000 for 1997.
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. Effective April 1, 1997, Messrs. Pinto and Shaw agreed
to work for the Company for a monthly fee of $7,500 at the discretion of
the Board. Mr. Shaw and Mr. Pinto continue in the same capacities on a
month to month basis.
-25-
<PAGE>
NOTE 4 - TRANSACTIONS WITH AFFILIATES (CONTINUED)
Messrs. Pinto and Shaw were each compensated $90,000 for 1998, and $98,942
and $100,290, respectively, for 1997, pursuant to these agreements, plus
$120,000 and $102,000 during 1998 and 1997, 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.
NOTE 5 - 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
Segment. The following is a description of the Company's disposal
activities:
Colony Ridge Apartments: Colony Ridge Apartments was an apartment complex
in Decatur, Georgia which was constructed in 1968 and consisted of 23 two-
story buildings containing a total of 212 apartment units. On May 6,
1998, the Company sold the Colony Ridge Apartments for $3,650,000. The
Company received net proceeds of approximately $2,500,000. The difference
between the sales price and the net proceeds received is due to the
repayment of the mortgage, state taxes, and miscellaneous expenses. The
Company reported a net gain of $695,270.
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 were
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 ending December 8, 1997. No loans were made during
1997.
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
-26-
<PAGE>
NOTE 5 - DISCONTINUED OPERATIONS - REAL ESTATE SEGMENT (CONTINUED)
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 did
not fund any operating deficits and has not received any excess cash flows
during 1998 and 1997. The Company is entitled to a 2% management fee from
the partnerships. In 1998 and 1997 the Company received management fees
of approximately $44,000 and $40,000, respectively.
The results of the Real Estate Segment have been reported separately as
discontinued operations in these consolidated statements of operations.
Summarized below are the operations of the Company's Real Estate Segment
for the years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
For the year ended
December 31,
1998 1997
<S> <C> <C>
Total revenues $393,727 $1,083,537
Costs and expenses:
Operations and maintenance 213,140 598,103
Property taxes and insurance 18,782 72,714
Depreciation and amortization 100,000 294,708
Net interest 41,095 102,475
Prepayment penalty 10,717 -
Corporate administrative expenses 33,128 62,105
Total costs and expenses 416,862 1,130,105
Net loss $(23,135) $ (46,568)
</TABLE>
The components of the Real Estate Segment net assets from discontinued
operations in the consolidated balance sheet as of December 31, 1998
are as follows:
Cash $11,426
NOTE 6 - 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 was secured by Jensen's stock, accounts receivable and
inventory. The $1,311,000 note was guaranteed in its entirety by AMKO
International B.V., and the sole shareholder of AMKO International B.V.
guaranteed, as amended May 16, 1997, the first $500,000 of payments of all
notes.
-27-
<PAGE>
NOTE 6 - DISCONTINUED OPERATION - INDUSTRIAL PRODUCTS SEGMENT (CONTINUED)
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 were secured by the assets of Jensen. The first $765,000
of principal payments under these notes were guaranteed by AMKO
International B.V.
The $1,311,000 note was amended May 16, 1997, bore interest at 8.5% per
annum and was payable in varying installments with the balance due in
April 1998, unless extended as indicated below. The $765,000 note as
amended May 16, 1997 bore interest at 8.5% per annum and was payable in
varying installments with the balance due in April 1998, unless extended
as indicated below. The $337,650 note as amended May 16, 1997 bore
interest at 8.5% per annum and was payable in varying installments with
the balance due in April 1998, unless extended as indicated below.
The Company advanced $198,000 to AMKO during February and March 1997, of
which $82,500 was repaid. The balance was a Demand Note which bore
interest at 12% per annum. This note was also guaranteed by AMKO
International B.V. As of December 31, 1997, this note was paid in full.
In accordance with the May 16, 1997 amendment, the notes could be extended
until April 1999, if AMKO prepaid $500,000 on or before April 1, 1998. If
extended, the interest rate on all of the notes would increase to 12%.
The Company charged AMKO a fee of $200,000 in conjunction with the
amendment. The fee was paid on May 16, 1997.
The Company loaned Jensen an additional $200,000 in conjunction with the
May 16, 1997 modification and an additional $36,000 in October 1997.
These notes bore interest at 8.5% and mature simultaneously with the other
notes.
As of October, 1997, Jensen stopped making payments as required by the
terms of the May 16, 1997 amendment. On November 11, 1997, Jensen filed
for Chapter 7 bankruptcy. On March 26, 1998, an auction sale was held,
the proceeds of which are either to be distributed pursuant to an
evidentiary hearing or a prior court approved agreement with the trustee.
In March 1999, a settlement was reached with the trustee, in which a
payment of $75,000 would be made to NCMC, as a result of the sale of
Jensen's inventory in exchange for which NCMC would assert no further
claims against the debtor. Such final settlement is subject to court
approval.
As a result of the bankruptcy filing, the Company reduced the value of its
notes receivable to $150,000 as of December 31, 1997. The Company has
received approximately $73,000 during 1998 and anticipates receipt of of an
additional $75,000, (as discussed above), as a result of its efforts.
The remaining balance has been written off as of December 31, 1998.
AMKO International filed for and was discharged from the bankruptcy in the
Netherlands between January and April 1998.
The Company has pursued a remedy in judicial proceedings in the
Netherlands with a procedural result that would allow the Company
to pursue AMKO International in the United States courts. As of February
1999, the Company released both AMKO International and its successor in
interest from any claims. In addition, the Company and FNM Bank, (a
Netherlands bank), agreed to settle all lender liability claims. As a
result of the foregoing, the Company is free to pursue the former owner
of AMKO International on his personal guarantee, and will allocate any
proceeds received on the basis of 75% to the Company and 25% to FNM
Holding, N.V., after all expenses have been paid. The Company cannot
predict the outcome of this litigation.
-28-
<PAGE>
NOTE 7 - 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, 1998, the Company had federal net operating loss
carryforwards of approximately $13.3 million. The net operating losses
will expire in the various years through December 31, 2012. The Company
had state net operating loss carryforwards of various amounts in the states
in which it operates.
At December 31, 1998, 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,
1998 1997
Amount Percent Amount Percent
<S> <C> <C> <C> <C>
Income tax benefit at federal
statutory rate $(116,800) (34.0)% $(484,554) (34.0)%
Valuation allowance 116,800 34.0 484,554 34.0
Other - - - -
$ - - % $ - - %
</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, 1998 and 1997 of approximately $4 million and
$3.4 million, 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 8 - SHAREHOLDERS' EQUITY
No warrants were exercised during 1997, and 863,094 warrants, which
represented all warrants outstanding, expired at December 31, 1997. No
warrants were issued during 1998.
-29-
<PAGE>
NOTE 8 - 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 in January 1997. The agreement was
further modified in February 1997, at which time the Company paid $100,000
and the agreement was terminated.
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
1998 and 1997.
NOTE 9 - 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.
NOTE 10 - SETTLEMENT OF LAWSUIT
The Company received $53,000 during August 1998, as a result of a lawsuit
settlement. The amount is included in other income from continuing
operations in the Consolidated Statements of Operations.
NOTE 11 - CONCENTRATION OF RISK
The Company has bank balances in excess of the $100,000 of depository
insurance provided by the Federal Deposit Insurance Corporation.
-30-
<PAGE>
NOTE 12 - INTERIM FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Calendar year ended
December 31, 1998:
Net loss from continuing
operations $(126,546) $(232,800) $(35,303)$(562,977)
Net income (loss) from
discontinued operations 12,959 586,241 (17,598) 32,494
Net loss per share from
continuing operations:
Basic and diluted (.08) (.14) (.02) (.33)
Net income (loss) per share
from discontinued operations:
Basic and diluted .01 .35 (.01) .02
Net income (loss) per share:
Basic and diluted (.07) .21 (.03) (.31)
Denominator for basic and
diluted income (loss) per
share - weighted average
shares 1,673,190 1,673,190 1,673,190 1,673,190
Calendar year ended
December 31, 1997:
Net income (loss) from
continuing operations $(312,852) $245,648 $(251,420) $(685,553)
Net income (loss) from
discontinued operations (60,545) 14,532 (33,224) (341,744)
Net income (loss) per share
from continuing operations:
Basic and diluted (.19) .15 (.15) (.41)
Net income (loss) per share
from discontinued operations:
Basic and diluted (.04) .01 (.02) (.20)
Net income (loss) per share:
Basic and diluted (.22) .16 (.17) (.61)
Denominator for basic and diluted
income (loss) per share -
weighted average shares 1,673,190 1,673,190 1,673,190 1,673,190
</TABLE>
-31-
<PAGE>
NOTE 13 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted income
(loss) per share:
<TABLE>
<CAPTION>
Years Ended
December 31, December 31,
<S> <C> <C>
Numerator:
Net loss from continuing operations (957,626) (1,004,177)
Net income (loss) discontinued operations 614,096 (420,981)
Net loss from continuing operations -
numerator for basic and diluted loss
per share (.57) (.60)
Net income (loss) from discontinued
operations - numerator for basic and
diluted loss per share .37 (.25)
Denominator:
Denominator for basic and diluted loss
per share - weighted average shares 1,673,190 1,673,190
Loss per share:
Basic and diluted (.20) (.85)
</TABLE>
In accordance with FASB No. 128, as a result of losses from continuing
operations, the inclusion of employee stock options were antidilutive and,
therefore, were not utilized in the computation of diluted earnings
per share.
-32-
<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 February
27, 1998.
PART III
Item 9 - Directors, Executive Officers, Promoters, and Control Persons;
Compliance With Section 16(a) of the Exchange Act
At March 11, 1999, 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 Bristol Hotels &
Age 48 Resorts
Director since 1988 (traveler
accommodations)
Director Anderson Group, Inc.
(electronics
company)
Director Empire of Carolina,
Inc. (toys)
John C. Shaw Chief Executive Officer NCMC
Director and since 1994
Chief Executive Chief Financial Officer NCMC
Officer since 1997
Age 45 Managing Director since Resource Holdings,
Director since 1988 1983 Ltd.
(investment firm)
1989 to 1992 Co-Chairman NCMC
Herbert J. Jaffe President 1988-1996 NCMC
Director
Age 64 1983-95 Chairman NCM Management Ltd.
Director since 1987 (real estate
management company
of NCMC)
-33-
<PAGE>
David Faulkner 1989-1996 Vice Chairman/ Memorex Telex Inc.
Director CFO (computer industry)
Age 58
Director since July 1994
Jeffrey Goldstein Chief Financial Officer NCMC
Age 53 September 1996-June 1997
Chief Executive Officer NCBC
June 1995-June 1997
Trustee since October 1992 Wedgestone
President 1992-1997 Financial
(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 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Annual Compensation
Other Annual
Year Salary Bonus Compensation
<S> <C> <C> <C> <C>
John C. Shaw 1998 90,000 - -
Chief Executive Officer 1997 100,290 - -
Chief Financial Officer 1996 125,000 - -
James J. Pinto 1998 90,000 - -
Chairman 1997 98,942 - -
1996 125,000 - -
Jeffrey S. Goldstein (1) 1998 -
1997 - - -
1996 80,000 - -
Herbert J. Jaffe (2) 1998 - - -
1997 - - -
1996 86,664 - -
</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. Mr.
Goldstein resigned in June 1997 from NCMC and NCBC to pursue other
interests.
(2) Mr. Jaffe resigned as president in October 1996.
No stock options were granted to the individuals named in the summary
compensation table during 1998 and none of those individuals exercised a
stock option during 1998. All warrants expired on December 31, 1997.
-34-
<PAGE>
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. Effective April 1, 1997, Messrs. Pinto and Shaw agreed
to work for the Company for a monthly fee of $7,500 at the discretion of
the Board. Mr. Shaw and Mr. Pinto continue in the same capacities on a
month to month basis.
Messrs. Pinto and Shaw were each compensated $90,000 for 1998, and $98,942
and $100,290, respectively, for 1997 pursuant to these agreements, plus
approximately $120,000 and $102,000 during 1998 and 1997, 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 bylaws of the Company provide for indemnification by it of its
officers and directors to the fullest extent permitted by law. In order to
mitigate the cost of indemnification the Company has a policy for
directors and officers insurance.
During 1998, members of the Board of Directors, who are not either
employees, officers or consultants of the Company, received quarterly
compensation of $2,000 for each meeting attended. Directors are entitled
to be reimbursed for reasonable out of pocket expenses incurred with
respect to meetings of the Board.
-35-
<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 April 6, 1998, 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.
<TABLE>
<CAPTION>
Beneficial Owner of
NCMC Common Stock
Number of Percent of
Shares Class
<S> <C> <C>
Name and address of NCMC
Beneficial Owner (1)
RHEC, L.P. 388,681 23.2%
10 East 53rd Street
New York, NY 10022
Herbert J. Jaffe 11,512(2) *
James J. Pinto 309,748 18.5%
John C. Shaw 483,570 28.9%
David Faulkner - *
Jeffrey S. Goldstein - *
All executive officers and
directors as a group
(5 persons) 804,830(3) 48.1%
* less than 1%
</TABLE>
-36-
<PAGE>
NOTES TO TABLE OF BENEFICIAL OWNERS AND MANAGEMENT
1. 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.
2. 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.
3. Includes 400,060 shares of NCMC common stock owned by NCM Holdings and
RHEC, L.P.
-37-
<PAGE>
Item 12 - Certain Relationships and Related Transactions
The Company and NCM Management Ltd. ("NCM") agreed that NCM would
provide real estate management services through December 1998 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 1998, NCM did not receive any compensation.
The Company maintains an office in New York for use by its executive
officers and consultants 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 1999. 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 approximately
$109,000 to Resource for providing such office space and related services
in 1998. 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's 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, 1998.
-38-
<PAGE>
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).
-39-
<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.
-40-
<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 July 3, 1997 relating to the
resignation of Jeffrey S. Goldstein, the Company's former Chief Financial
Officer.
The Company filed a Form 8-K dated February 27, 1998 with the commission
stating the Company's change in certifying accountant retained to handle
the audit for the year ended December 31, 1997.
-41-
<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,
Principal Financial 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 30, 1999
By: /s/ JAMES PINTO
James Pinto, Director
March 30, 1999
By: /s/ JOHN C. SHAW
John C. Shaw, Director
March 30, 1999
By: /s/ DAVID FAULKNER
David Faulkner, Director
March 30, 1999
-42-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,058,674
<SECURITIES> 0
<RECEIVABLES> 78,711
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 104,831
<DEPRECIATION> 80,718
<TOTAL-ASSETS> 2,212,884
<CURRENT-LIABILITIES> 564,022
<BONDS> 0
0
0
<COMMON> 16,732
<OTHER-SE> 1,632,130
<TOTAL-LIABILITY-AND-EQUITY> 2,212,884
<SALES> 0
<TOTAL-REVENUES> 207,820
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 643,446
<LOSS-PROVISION> 522,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (957,626)
<INCOME-TAX> 0
<INCOME-CONTINUING> (957,626)
<DISCONTINUED> 614,096
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (343,530)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
</TABLE>
