UNITED CAPITAL INVESTMENT CORP.
FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS
Table of Contents Page
<S> <C>
Accountants' Review Report ..................................................................... 1
Statements of Assets and Liabilities of United Capital
Investment Corp. as of June 30, 1999 and 1998 ............................................. 3
Statements of Operations for the six months ended June 30, 1999 and 1998
and the year ended December 31, 1998 ...................................................... 5
Statements of Cash Flows for the six months ended June 30, 1999 and 1998
and the year ended December 31, 1998 ...................................................... 6
Statements of Stockholders' Equity for the six months ended June 30, 1999 and 1998
and the year ended December 31, 1998 ...................................................... 7
Notes to the Financial Statements .............................................................. 8
Schedule of Portfolio Investments .............................................................. 13
Selected Per Share Data and Ratios ............................................................. 14
</TABLE>
<PAGE>
[LETTERHEAD of Michael C. Finkelstein & Co.]
Board of Directors
United Capital Investment Corp.
Accountant's Review Report
We have reviewed the accompanying statements of assets and liabilities of
United Capital Investment Corp. (the "Company"), as of June 30, 1999 and 1998
and the related statements of operations, cash flows and stockholders' equity
for the six month periods then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying reviewed financial statements in order for
them to be in conformity with generally accepted accounting principles.
Our review was made for the purpose of expressing limited assurance that
there are no material modifications that should be made to the financial
statements in order for them to be in conformity with generally accepted
accounting principles. The information included in the accompanying schedule of
portfolio investments and per share data and ratios is presented only for
supplementary analysis purposes. Such information has been subjected to the same
inquiry and analytical procedures applied in the review of the basic financial
statements and we are not aware of any material modifications that should be
made thereto.
/s/Michael C. Finkelstein
August 5, 1999
Certified Public Accountants
<PAGE>
UNITED CAPITAL INVESTMENT CORP.
STATEMENTS OF ASSETS AND LIABILITIES
ASSETS
<TABLE>
<CAPTION>
June 30,
1999 1998
----------- -----------
<S> <C> <C>
Portfolio Securities - Long Term Portion (Note 2) $ 2,796,423 $ 3,575,518
Less: Unrealized Depreciation on Loans Receivable (93,441) (60,660)
----------- -----------
2,702,982 3,514,858
Less: Current Maturities - Loans Receivable 363,535 469,401
----------- -----------
Total Loans Receivable - Net of Current Maturities 2,339,447 3,045,457
----------- -----------
Current Assets:
Cash 2,094,139 1,663,814
Accrued Interest 23,847 35,526
Current Maturities - Loans Receivable (Note 2) 363,535 469,401
Other Assets 43,212 50,019
----------- -----------
Current Assets 2,524,733 2,218,760
----------- -----------
Total Assets $ 4,864,180 $ 5,264,217
=========== ===========
</TABLE>
See Accountants' Review Report and Notes to the Financial Statements
-3-
<PAGE>
UNITED CAPITAL INVESTMENT CORP.
STATEMENTS OF ASSETS AND LIABILITIES
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30,
1999 1998
----------- -----------
<S> <C> <C>
Long Term Debt:
Debenture Payable to SBA (Note 4) $ 1,800,000 $ 1,800,000
Class B, 4% Cumulative, 15 Year Redeemable
Preferred Stock (Note 5) 900,000 900,000
----------- -----------
Total Long Term Debt 2,700,000 2,700,000
----------- -----------
Current Liabilities
Loans Payable - Credit Line (Note 3) -- 350,000
Accrued Interest 20,034 19,337
Other Current Liabilities 62,060 31,711
Accrued SBA Dividends 126,000 90,000
----------- -----------
Total Current Liabilities 208,094 491,048
----------- -----------
Total Liabilities 2,908,094 3,191,048
----------- -----------
Commitments and Contingencies -- --
Stockholders' Equity :(Notes 5, 6 and 8)
Class A, 3% Cumulative Preferred Stock, $1,000 Par Value;
1,000 Shares Authorized; 1,000 Shares Issued and
Outstanding, Respectively -- --
Class B, 4% Cumulative, 15 Year Redeemable Preferred Stock,
$1,000 Par Value; 3,000 Shares Authorized: 900 Shares
Issued and Outstanding (See Long Term Debt and Note 5) -- --
Restricted Capital -- 33,016
Common Stock, $.01 Par Value; 300,000 Shares Authorized:
199,000 Shares Issued and Outstanding 1,990 1,990
Additional Paid in Capital 2,066,493 2,033,477
Retained Earnings (Deficit) (112,397) 4,686
----------- -----------
Total Stockholders' Equity 1,956,086 2,073,169
----------- -----------
Total Liabilities and Stockholders' Equity $ 4,864,180 $ 5,264,217
=========== ===========
</TABLE>
See Accountants' Review Report and Notes to the Financial Statement
-4-
<PAGE>
UNITED CAPITAL INVESTMENT CORP.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
1999 1998 1998
--------- --------- ---------
<S> <C> <C> <C>
Revenue:
Interest Earned on Outstanding Receivables $ 149,955 $ 224,970 $ 402,694
Interest Income on Idle Funds 45,176 32,053 72,110
Other Income 4,949 4,404 11,067
--------- --------- ---------
Total Revenue 200,080 261,427 485,871
--------- --------- ---------
Expenses:
Interest 72,462 80,434 165,081
Officers Salaries 77,022 76,998 154,000
Professional Fees 14,306 21,648 39,833
Insurance Expense 2,945 2,865 5,550
Pension Expense 7,700 7,700 15,700
Payroll and Other Taxes 6,105 3,030 11,348
Depreciation and Amortization 3,345 3,460 6,920
Other Operating Expenses 19,418 20,948 41,119
--------- --------- ---------
Total Expenses 203,303 217,083 439551
--------- --------- ---------
Net Investment Income (Loss) (3,223) 44,344 46,320
Unrealized Depreciation in Value of
Investments and Bad Debt Write-Off 54,961 33,244 57,547
--------- --------- ---------
Net Income Before Taxes (58,184) 11,100 (11,227)
Provision for Taxes 707 760 625
--------- --------- ---------
Net (Loss) Income $ (58,891) $ 10,340 $ (11,852)
========= ========= =========
Earnings (Loss)
Per Common Share, Net of Preferred Dividends (Note 2) $ (.30) $ -- $ (.06)
========= ========= =========
Actual Dividends Paid Per Common Share $ -- $ -- $ --
========= ========= =========
</TABLE>
See Accountants' Review Report and Notes to the Financial Statements
-5-
<PAGE>
UNITED CAPITAL INVESTMENT CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
----------- -----------
<S> <C> <C>
Cash Flow from Operating Activities:
Net (Loss) Income $ (58,891) $ 10,340
Depreciation and Amortization 3,345 3,460
(Increase) in Accrued Interest (1,466) (4,826)
(Decrease) in Accrued Liabilities (148) (8,553)
Dividends Paid and Accrued to the SBA (18,000) (18,000)
Unrealized Depreciation in Value of Investments 54,961 33,244
----------- -----------
Net Cash Provided (Used) by Operating Activities (20,199) 15,665
----------- -----------
Cash Flow from Investing Activities:
Loans Receivable Originated (130,000) (322,000)
Repayment of Loans Receivable 506,528 393,736
----------- -----------
Net Cash Provided by Investing Activities 376,528 71,736
----------- -----------
Cash Flow From Financing Activities:
Amortization of Restricted Capital -- (63,774)
Increase in Additional Paid in Capital -- 63,774
(Increase) in Accrued SBA Dividends 18,000 18,000
----------- -----------
Net Cash Provided by Financing Activities 18,000 18,000
----------- -----------
Net Increase in Cash 374,329 105,401
Cash Balance - Beginning of Period 1,719,810 1,558,413
----------- -----------
Cash Balance - End of Period $ 2,094,139 $ 1,663,814
=========== ===========
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Year For:
Interest $ 72,928 $ 84,825
=========== ===========
Taxes $ 707 $ 760
=========== ===========
</TABLE>
See Accountants' Review Report and Notes to the Financial Statements
-6-
<PAGE>
UNITED CAPITAL INVESTMENT CORP.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
1999 1998 1998
----------- ----------- -----------
<S> <C> <C> <C>
Class A, 3% Cumulative Preferred Stock, $1,000 Par Value,
1,000 Shares Authorized; No Shares
Issued and Outstanding $ -- $ -- $ --
----------- ----------- -----------
Class B, 4% Cumulative, 15 Year Redeemable Preferred Stock,
$1,000 Par Value; 3,000 Shares Authorized: 900 Shares
Issued and Outstanding (See Long Term Debt and Note 5) -- -- --
----------- ----------- -----------
Common Stock, $.01 Par Value, 300,000 Shares Authorized;
199,000 Shares Issued and Outstanding 1,990 1,990 1,990
----------- ----------- -----------
Additional Paid in Capital - Beginning of Period 2,066,493 1,969,703 1,842,154
Amortization of Restricted Capital -- 63,774 127,548
----------- ----------- -----------
Additional Paid in Capital - End of Period 2,066,493 2,033,477 1,969,702
----------- ----------- -----------
Restricted Capital
Balance - Beginning of Period -- 96,790 224,339
Amortization of Restricted Capital -- (63,774) (127,548)
----------- ----------- -----------
Balance - End of Period -- 33,016 96,791
----------- ----------- -----------
Retained Earnings (Deficit)
Balance, Beginning of Period (35,506) 12,346 46,607
Net Income (Loss) (58,891) 10,340 1,739
Less: Dividends Paid and Accrued to the SBA (18,000) (18,000) (36,000)
----------- ----------- -----------
Balance End of Period (112,397) 4,686 12,346
----------- ----------- -----------
Total Stockholders' Equity $ 1,956,086 $ 2,073,169 $ 2,080,829
=========== =========== ===========
</TABLE>
See Accountants' Review Report and Notes to the Financial Statements
-7-
<PAGE>
UNITED CAPITAL INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE 1 ORGANIZATION
United Capital Investment Corp. (The "Company") was formed on May 11, 1984, for
the purpose of operating as a specialized small business investment company
(SSBIC), licensed under the Small Business Investment Act of 1958 and regulated
and financed in part by the Small Business Administration (SBA). The Company's
business is to provide financing to persons who qualify as disadvantaged persons
under applicable SBA regulations.
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies applied by the
Company in the preparation of its financial statements. The Company maintains
its accounts and prepares its financial statements on the accrual method of
accounting in conformity with generally accepted accounting principles for
investment companies.
Valuation of Loans and Investments
As of June 30, 1999, all investments made by the Company have been in the form
of loans to closely held corporations. The Board of Directors has valued the
investment portfolio based upon the cost of such investments, less a provision
for loan losses. However, because of the inherent uncertainty of the valuation,
the estimated values might otherwise be significantly higher or lower than the
values that would exist in a ready market for such loans which market has not
and does not exist. The provision for loan losses of $149,854 represents a good
faith determination by the Board of Directors. Substantially, all loans are
collateralized by business assets and real estate. See schedule for analysis of
loan portfolio.
Recognition of Interest Income
It is the Company's policy to record interest on loans and debt securities only
to the extent that management and the Board of Directors anticipate such amounts
may be collected. As of June 30, 1999, the Board of Directors elected to accrue
interest on substantially all outstanding loans.
Gains or Losses on Securities
Cost of securities sold is reported on the average cost basis. Amounts reported
as realized gains and losses are measured by the difference between the proceeds
of sale and the cost basis of the investment without regard to unrealized gain
or loss reported in prior years.
No gain is recognized on the exchange of one investment security for another, or
on the exchange of an equity or debt investment for other tangible or intangible
assets.
-8-
<PAGE>
UNITED CAPITAL INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Furniture, Fixtures and Equipment
Fixed assets are recorded at cost. Depreciation is computed on the straight line
basis.
Pension Plan
The Company maintains a defined contribution money purchase plan covering all
qualifying employees. A provision of $7,700 was included for the six months
ended June 30, 1999 and 1998, respectively.
Income Taxes
Tax provisions for the various periods were as follows:
June 30, 1999 $ 707
June 30, 1998 $ 760
December 31, 1998 $ 625
The Company has registered as an investment company under the Investment Company
Act of 1940 for the first year ended December 31, 1989 and intends to make the
election for the current period ending December 31, 1999. A regulated investment
company can generally avoid taxation at the corporate level to the extent 90% of
the income is distributed to its stockholders.
Earnings Per Share
Earnings per share of common stock are based on a weighted average number of
shares outstanding during the period, less preferred stock dividend.
NOTE 3 LOANS PAYABLE - LINE OF CREDIT
Effective February 25, 1993, the Company renewed a $500,000 line of credit with
the Hong Kong Shanghai Banking Corp., at the New York prime rate, secured by a
blanket lien on all assets and guaranteed personally for the first $150,000 by
Mr. Paul Lee, President of the Company.
During December, 1998 the Company paid off the entire balance of the line of
credit totaling $350,000.
-9-
<PAGE>
UNITED CAPITAL INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE 3 LOANS PAYABLE - LINE OF CREDIT
(Continued)
<TABLE>
<CAPTION>
Maximum Average
Weighted Amount Amount
Balance Average Outstanding Outstanding
End of Interest During During
Date Period Rate Period Period
---- ------- -------- ----------- -----------
<S> <C> <C> <C> <C>
June 30,1998 350,000 4.875% 350,000 350,000
June 30,1999 -- 4.875% -- --
</TABLE>
NOTE 4 LONG TERM DEBT - SBA SUBORDINATED DEBENTURES
As of June 30, 1999 and 1998, long term debt to the Small Business
Administration consisted of the following subordinated debentures:
<TABLE>
<CAPTION>
First Second
Due Date Five Years Principal Amount
---------- ----------------
<S> <C> <C> <C>
September 1, 2001 5.33% 8.33% $ 400,000
December 18, 2006 7.08% 7.08% 1,400,000
----------
$1,800,000
==========
</TABLE>
NOTE 5 REDEEMABLE PREFERRED STOCK
Effective November 21, 1989 Congress passed legislation which alters the
preferred stock to a 4 percent cumulative dividend and a fifteen year call
provision for all preferred stock sold subsequent to the effective date. The
Company amended its certificate of incorporation to create a class A preferred
stock $1,000 par value which will consist of the 1,000 outstanding preferred
stock and to change the existing 3,000 authorized but unissued shares of
preferred stock into a new class B preferred stock $1,000 par value which will
carry a 4 percent cumulative dividend rate and a mandatory 15 year redemption.
-10-
<PAGE>
UNITED CAPITAL INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE 5 REDEEMABLE PREFERRED STOCK
(Continued)
Subsequent to the repurchase of the 3% preferred stock (see note 8), the Company
retired the class A preferred stock. On February 17, 1995 the Company sold 500
shares of its 15 year redeemable, 4% cumulative preferred stock to the SBA for
$500,000 and on September 20, 1991, the Company sold 400 shares of its 15 year
redeemable, 4 percent cumulative preferred stock to the SBA for $400,000. The
mandatory redemption provisions call for the preferred stock to be repurchased
by the Company at its face value. In accordance with Regulation S-X, the
Company's financial statements present the preferred stock as Long Term Debt.
NOTE 6 PREFERRED STOCK
As of June 30, 1999 the Company was authorized to issue 4,000 shares of
cumulative preferred stock, consisting of 1,000 shares of 3 percent cumulative
preferred stock and a second class of 4 percent cumulative, 15 year redeemable
preferred stock, $1,000 par value.
As of June 30, 1999, 900 shares of 4 percent preferred stock were issued to the
SBA. Each share is entitled to receive 4 percent per annum. Dividends are not
required to be paid to the SBA on an annual or other periodic basis, so long as
cumulative dividends are paid to the SBA before any other payments are made to
shareholders. Such dividends on the preferred stock will be deemed to be earned
at the time dividends on the Company's common stock are declared, and
accordingly will reduce the amounts available for distribution to the Company's
shareholders. As of June 30, 1999, the Company was contingently liable to the
SBA on the 4 percent redeemable preferred stock from January 1, 1996 to June 30,
1999 in the amount of $126,000.
NOTE 7 LEASE AGREEMENT
Minimum rental commitments under operating leases in effect as of June 30, 1999
are as follows:
Rental expense for the current period was $8,497. The lease expires on April 30,
2000, and calls for minimum annual rental costs of $13,860.
NOTE 8 REPURCHASE OF 3% PREFERRED STOCK
Effective August 23, 1993, the Company amended its certificate of incorporation
granting the SBA a liquidating interest in a newly created restricted capital
surplus account. The Company and the SBA entered into a repurchase agreement
dated October 5, 1993. Pursuant to the agreement, the Company repurchased all
1,000 shares of its 3% preferred stock, $1,000 par value, from the SBA for a
purchase price of $362.257 per share, or an aggregate of $362,257. The
repurchase price was at a substantial discount to the original sale price of
$1,000 per share. As a condition precedent to the repurchase, the Company
granted the SBA a liquidating interest in the restricted capital surplus
account.
-11-
<PAGE>
UNITED CAPITAL INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE 8 REPURCHASE OF 3% PREFERRED STOCK
(Continued)
The surplus account was equal to the amount of the repurchase discount less
expenses associated with the repurchase. The initial value of the liquidating
interest was equal to $637,743 the amount of the repurchase discount on the date
of repurchase, and is being amortized over a sixty (60) month period on a
straight-line basis. Should the Company be in default under the repurchase
agreement, at any time, the liquidating interest will become fixed at the level
immediately preceding the event of default and will not decline further until
such time as the default is cured or waived. The liquidating interest will
expire on the earlier of (I) sixty (60) months from the date of the repurchase
agreement, or (ii) if any event of default has occurred and such default has
been cured or waived, such later date on which the liquidating interest is full
amortized. As of June 30, 1999 the restricted capital account has been fully
amortized.
NOTE 9 MANAGEMENT FEES
Effective February 9, 1993, the SBA approved the Company's request for an
increase in total compensation to $160,200. Total compensation paid to officers
aggregated $77,022 and $76,998 for the six months ended June 30, 1999 and 1998,
respectively.
NOTE 10 RELATED PARTY TRANSACTION
Certain officers and directors of the Company are also shareholders of the
Company. Officers' salaries are set by the Board of Directors and are also
subject to maximum compensation by the SBA.
NOTE 11 FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISKS
The Company maintained an aggregate of approximately $1,801,249 in various banks
in excess of amounts that would be insured by the Federal Depository Insurance
Company.
NOTE 12 COMMITMENTS AND CONTINGENCIES
Pursuant to SBA regulations, all SSBIC's issuing debentures subsequent to April
25, 1994, were required to amend their certificates of incorporation to indicate
that they have consented, in advance, to the SBA's right to require the removal
of officers or directors and to the appointment of the SBA, or its designee, in
the event of certain default provisions. Effective November 1994, the Company
amended its certificate of incorporation in accordance with the current
provision of the SBA regulation.
NOTE 13 SIGNIFICANT CONCENTRATION OF CREDIT RISK
Approximately thirty seven percent (37%) of the Company's loan portfolio
consists of loans made for the financing and purchase of Dry Cleaners and
related equipment.
-12-
<PAGE>
UNITED CAPITAL INVESTMENT CORP.
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
Original
Outstanding Number Maturity Balance
Type of Loan of Loans Interest Rate Date Outstanding
------------ -------- --------------- ------------ -----------
<S> <C> <C> <C> <C>
Dry Cleaners 13 10.00% - 15.00% 5 - 15 years $1,041,294
Restaurant 7 12.50% - 16.00% 5 - 15 years 475,967
Deli - Grocery 6 9.50% - 15.00% 4 - 10 years 256,261
Taxi Cabs 3 8.75% - 13.50% 4 - 15 years 139,651
Medical Clinic 3 11.50% - 14.00% 4 - 6 years 83,572
Beauty Salons 3 12.00% - 15.00% 4 - 15 years 50,255
Herb Store 2 9.00% - 14.00% 4 - 5 years 185,176
Clothing 2 13.50% - 15.00% 5 - 8 years 65,733
Sporting Goods 2 14.00% - 15.00% 4 years 41,504
Art Supplies 2 13.50% - 15.00% 4 - 6 years 30,991
Food & Bakery 1 9.00% 5 years 27,435
Manufacturing 1 Prime + 1.00% 15 years 78,162
Import - Export 1 12.00% 4 years 38,122
Fruit & Vegetable 4 13.50% - 14.50% 4 years 164,215
Hair Salon 1 12.00% 4 years 118,085
-- ----------
51 $2,796,423
== ==========
-13-
</TABLE>
<PAGE>
UNITED CAPITAL INVESTMENT CORP.
SUPPLEMENTARY INFORMATION
PER SHARE DATA AND RATIOS
<TABLE>
<CAPTION>
June 30, December 31,
-------- ------------
1999 1998 1998 1997 1996 1995
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Per Share Data
Investment Income $ 1.00 $ 1.31 $ 2.45 $ 2.55 $ 2.15 $ 2.36
Investment Expenses (1.02) (1.09) (2.22) (2.15) (1.91) (1.84)
------ ------ ------ ------ ------ ------
Net Investment Income (.02) .22 .23 .40 .24 .52
Net Realized and Unrealized Gains
and Losses on Securities (.28) (.16) (.28) (.39) -- --
Dividends (.09) (.09) (.18) (.18) (.44) (.17)
------ ------ ------ ------ ------ ------
Net Increase/Decrease in Net Asset Value (.39) (.03) (.23) (.17) (.20) .35
Net Asset Value - Beginning of Period $10.22 $10.45 $10.45 $10.62 $10.82 $10.47
------ ------ ------ ------ ------ ------
Net Asset Value - End of Year $ 9.83 $10.42 $10.22 $10.45 $10.62 $10.82
====== ====== ====== ====== ====== ======
Ratios
Ratio of Expenses to Average Net Assets 10.4% 10.4% 21.8% 20.4% 17.9% 17.2%
====== ====== ====== ====== ====== ======
Ratio of Net Investment Income to
Average Net Assets (.03)% 2.1% 2.3% 3.8% 2.2% 4.9%
====== ====== ====== ====== ====== ======
</TABLE>
-14-
