UNITED CAPITAL INVESTMENT CORP.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1999 AND 1998
<PAGE>
FINANCIAL STATEMENTS
Table of Contents Page
----------------- ----
Independent Auditor's Report ............................................ 1
Statements of Assets and Liabilities of United Capital
Investment Corp. as of December 31, 1999 and 1998 .................. 2
Statements of Operations for the years ended December 31, 1999,
1998 and 1997 ...................................................... 4
Statements of Cash Flows for the years ended December 31, 1999,
1998 and 1997.......................................................
Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997 .................................. 6
Notes to the Financial Statements ....................................... 7
Schedule of Portfolio Investments ....................................... 12
Selected Per Share Data and Ratios ...................................... 13
<PAGE>
Michael C. Finkelstein
Certified Public Accountant
704 Ginesi Drive - Suite 23 1370 Avenue of the Americas
Morganville, New Jersey 07751 New York, New York 10019
Tel. (732) 972-2700 Tel. (212) 689-4633
Fax. (732) 972-5001 Fax. (212) 664-1700
Board of Directors
United Capital Investment Corp.
Independent Auditors' Report
We have audited the accompanying statements of assets and liabilities of
United Capital Investment Corp. (the "Company"), including the schedule of
portfolio investments, as of December 31, 1999 and 1998 and the related
statements of operations, cash flows and stockholders' equity for the years then
ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
As described in Note 2, these financial statements were prepared in
conformity with the accounting practices prescribed by the Small Business
Administration, which provides for specific allocations of certain types of
income to specific capital accounts. As explained in Note 2, the financial
statements include securities valued at $2,371,060 and $3,134,471 (130% and 154%
of the net assets), whose values have been estimated by the Board of Directors
in the absence of readily ascertainable market values. We have reviewed the
procedures used by the Board of Directors in arriving at its estimate of value
of such securities and have inspected underlying documentation, and, in the
circumstances, we believe the procedures are reasonable and the documentation
appropriate. However, because of the inherent uncertainty of valuation, those
estimated values may differ significantly from values that would have been used
had a ready market for the securities existed, and the differences could be
material.
In our opinion, the financial statements referred to above, present fairly,
in all material respects, the Company's financial position as of December 31,
1999 and 1998 and the results of its operation and its cash flows for the years
then ended in conformity with generally accepted accounting principles.
February 16, 2000
Certified Public Accountants
New York, New York
<PAGE>
UNITED CAPITAL INVESTMENT CORP.
STATEMENTS OF ASSETS AND LIABILITIES
ASSETS
<TABLE>
<CAPTION>
December 31
1999 1998
---- ----
<S> <C> <C>
Loans Receivable - Long Term Portion (Note 2) $ 2,468,133 $ 3,172,951
Less: Unrealized Depreciation on Loans Receivable (97,073) (38,480)
----------- -----------
2,371,060 3,134,471
Less: Current Maturities - Loans Receivable 345,539 444,213
----------- -----------
Total Loans Receivable - Net of Current Maturities 2,025,521 2,690,258
----------- -----------
Current Assets:
Cash 2,304,175 1,719,810
Accrued Interest Receivable 34,915 22,381
Current Maturities - Loans Receivable (Note 2) 345,539 444,213
Other Assets 39,867 46,557
----------- -----------
Current Assets 2,724,496 2,232,961
----------- -----------
Total Assets $ 4,750,017 $ 4,923,219
=========== ===========
</TABLE>
See Notes to the Financial Statements
-2-
<PAGE>
UNITED CAPITAL INVESTMENT CORP.
STATEMENTS OF ASSETS AND LIABILITIES
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31
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
Accrued Interest Payable 20,060 20,500
Other Current Liabilities 66,714 61,742
Accrued SBA Dividends 144,000 108,000
----------- -----------
Total Current Liabilities 230,774 190,242
----------- -----------
Total Liabilities 2,930,774 2,890,242
----------- -----------
Commitments and Contingencies -- --
Stockholders' Equity :(Notes 5, 6 and 8)
Class A, 3% Cumulative Preferred Stock, $1,000 Par Value;
1,000 Shares Authorized -- --
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 -- --
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 2,066,493
Retained Earnings (249,240) (35,506)
----------- -----------
Total Stockholders' Equity 1,819,243 2,032,977
----------- -----------
Total Liabilities and Stockholders' Equity $ 4,750,017 $ 4,923,219
=========== ===========
</TABLE>
See Notes to the Financial Statement
-3-
<PAGE>
UNITED CAPITAL INVESTMENT CORP.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Revenue:
Interest Earned on Outstanding Receivables $ 273,992 $ 402,694 $ 409,898
Interest Income on Idle Funds 89,499 72,110 82,833
Other Income 9,499 11,067 15,527
--------- --------- ---------
Total Revenue 372,990 485,871 508,258
--------- --------- ---------
Expenses:
Interest 146,000 165,081 164,292
Officers Salaries 147,000 154,000 140,004
Professional Fees 46,215 39,833 30,393
Insurance Expense 7,104 5,550 21,644
Pension Expense 15,075 15,700 14,000
Payroll and Other Taxes 10,904 11,348 10,469
Depreciation and Amortization 6,690 6,920 6,921
Other Operating Expenses 40,206 41,119 40,404
--------- --------- ---------
Total Expenses 419,194 439,551 428,127
--------- --------- ---------
Net Investment Income (46,204) 46,320 80,131
Unrealized Depreciation in Value of
Investments and Bad Debt Write-Off 130,850 57,547 77,704
--------- --------- ---------
Net (Loss) Income Before Taxes (177,054) (11,227) 2,427
Provision for Taxes 680 625 688
--------- --------- ---------
Net (Loss) Income $(177,734) $ (11,852) $ 1,739
========= ========= =========
(Loss) Earnings Per Common Share (Note 2) $ (.89) $ (.06) $ .01
========= ========= =========
Actual Dividends Paid Per Common Share $ -- $ -- $ --
========= ========= =========
Common Stock Outstanding 199,000 199,000 199,000
========= ========= =========
</TABLE>
See Notes to the Financial Statements
-4-
<PAGE>
UNITED CAPITAL INVESTMENT CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flow from Operating Activities:
Net Income (Loss) $ (177,734) $ (11,852) $ 1,739
Depreciation and Amortization 6,690 6,920 6,921
(Increase) Decrease in Accrued Interest (12,533) 8,319 (3,013)
Increase in Accrued Liabilities 4,531 58,643 22,252
Unrealized Depreciation in Value of Investments 130,850 21,548 77,704
Dividends Paid and Accrued (36,000) (36,000) (36,000)
----------- ----------- -----------
Net Cash Provided (Used) by Operating Activities (84,196) 47,578 69,603
----------- ----------- -----------
Cash Flows from Investing Activities:
Loans Receivable Originated (330,000) (544,524) (1,458,280)
Repayment of Loans Receivable 962,561 972,343 1,423,736
----------- ----------- -----------
Net Cash Provided (Used) by Investing Activities 632,561 427,819 (34,544)
----------- ----------- -----------
Cash Flow From Financing Activities:
Amortization of Restricted Capital -- (96,791) (127,548)
Increase in Additional Paid in Capital -- 96,791 127,548
Increase (Decrease) in Accrued SBA Dividends .. 36,000 36,000 36,000
Decrease in Loans Payable - Bank -- (350,000) --
----------- ----------- -----------
Net Cash (Used) Provided by Financing Activities 36,000 (314,000) 36,000
----------- ----------- -----------
Net Increase in Cash 584,365 161,397 71,059
Cash Balance - Beginning of Year 1,719,810 1,558,413 1,487,354
----------- ----------- -----------
Cash Balance - End of Period $ 2,304,175 $ 1,719,810 $ 1,558,413
=========== =========== ===========
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Year For:
Interest ...................................... $ 146,440 $ 168,309 $ 158,471
=========== =========== ===========
Taxes ......................................... $ 680 $ 625 $ 688
=========== =========== ===========
</TABLE>
See Notes to the Financial Statement
-5-
<PAGE>
UNITED CAPITAL INVESTMENT CORP.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years Ended December 31
1999 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Class A - See Balance Sheet $ -- $ -- $ --
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 1,969,702 1,842,154
Amortization of Restricted Capital -- 96,791 127,548
----------- ----------- -----------
Additional Paid in Capital - End of Period 2,066,493 2,066,493 1,969,702
----------- ----------- -----------
Restricted Capital
Balance - Beginning of Period -- 96,791 224,339
Amortization of Restricted Capital -- (96,791) (127,548)
----------- ----------- -----------
Balance - End of Period -- -- 96,791
----------- ----------- -----------
Retained Earnings
Balance, Beginning of Period (35,506) 12,346 46,607
Net Income (Loss) (177,734) (11,852) 1,739
Less: Dividends Paid and Accrued to the SBA (36,000) (36,000) (36,000)
----------- ----------- -----------
Balance End of Period (249,240) (35,506) 12,346
----------- ----------- -----------
Total Stockholders' Equity $ 1,819,243 $ 2,032,977 $ 2,080,829
=========== =========== ===========
</TABLE>
See Notes to The Financial Statements
-6-
<PAGE>
UNITED CAPITAL INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 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 December 31, 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 $97,073 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 December 31, 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.
-7-
<PAGE>
UNITED CAPITAL INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 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 $15,075 and $15,700 was included for the
years ended December 31, 1999 and 1998, respectively.
Income Taxes
Tax provisions for the various periods were as follows:
December 31, 1999 $680
December 31, 1998 $625
December 31, 1997 $688
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 and reduced the total available line of credit to
$150,000.
-8-
<PAGE>
UNITED CAPITAL INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 3 LOANS PAYABLE - LINE OF CREDIT
(Continued)
Maximum Average
Weighted Amount Amount
Balance Average Outstanding Outstanding
End of Interest During During
Date Period Rate Period Period
---- ------ ---- ------ ------
December 31, 1999 -- -- -- --
December 31, 1998 -- 4.875% 350,000 320,833
NOTE 4 LONG TERM DEBT - SBA SUBORDINATED DEBENTURES
As of December 31, 1998 and 1997, long term debt to the Small Business
Administration consisted of the following subordinated debentures:
First Second
Due Date Five Years Principal Amount
- -------- ---------- ----------------
September 1, 2001 5.33% 8.33% $ 400,000
December 18, 2006 7.08% 7.08% 1,400,000
----------
$1,800,000
----------
NOTE 5 REDEEMABLE PREFERRED STOCK
Effective November 21, 1989 Congress passes 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.
-9-
<PAGE>
UNITED CAPITAL INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 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 December 31, 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 December 31, 1998, 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 December 31, 1999, the Company was contingently liable to
the SBA on the 4 percent redeemable preferred stock from January 1, 1996 to
December 31, 1999 in the amount of $144,000.
NOTE 7 LEASE AGREEMENT
Minimum rental commitments under operating leases in effect as of December 31,
1998 are as follows:
Rental expense for the current period was $16,789. 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.
-10-
<PAGE>
UNITED CAPITAL INVESTMENT CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 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 December 31, 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 $147,000, $154,000 and $140,004 for 1999, 1998 and 1997,
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 $2,103,660 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 six percent (36%) of the Company's loan portfolio consists
of loans made for the financing and purchase of Dry Cleaners and related
equipment.
-11-
<PAGE>
UNITED CAPITAL INVESTMENT CORP.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 1999
Original
Outstanding Number Maturity Balance
Type of Loan of Loans Interest Rate Date Outstanding
- ------------ -------- ------------- ---- -----------
Dry Cleaners 11 10.00% - 15.00% 4 - 12 years $ 893,439
Restaurant 11 12.50% - 14.50% 4 - 10 years 635,378
Deli - Grocery 7 9.50% - 15.00% 4 - 10 years 302,597
Taxi Cabs 3 8.75% - 13.50% 4 - 15 years 111,576
Medical Clinic 4 11.50% - 14.00% 4 - 6 years 67,709
Beauty Salons 3 12.00% - 15.00% 4 - 15 years 133,267
Herb Store 2 9.00% - 14.00% 4 - 5 years 159,658
Clothing 1 13.50% - 15.00% 5 - 8 years 18,261
Sporting Goods 1 15.00% 4 years 17,143
Art Supplies 2 14.50% 4 - 6 years 19,662
Food & Bakery 1 9.00% 5 years 19,119
Manufacturing 1 Prime + 1.00% 15 years 58,308
Import - Export 1 12.00% 4 years 32,016
-- ----------
49 $2,468,133
== ==========
-12-
<PAGE>
UNITED CAPITAL INVESTMENT CORP.
SUPPLEMENTARY INFORMATION
PER SHARE DATA AND RATIOS
FOR THE FIVE YEARS ENDED
<TABLE>
<CAPTION>
December 31,
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Per Share Data
Investment Income $ 1.87 $ 2.45 $ 2.55 $ 2.15 $ 2.36
Investment Expenses (2.11) (2.22) (2.15) (1.91) (1.84)
-------- -------- -------- -------- --------
Net Investment Income (.24) .23 .40 .24 .52
Net Realized and Unrealized Gains
and Losses on Securities (.66) (.28) (.39) -- --
Dividends (.18) (.18) (.18) .44) (.17)
-------- -------- -------- -------- --------
Net Increase/Decrease in Net Asset Value (1.08) (.23) (.17) (.20) .35
Net Asset Value - Beginning of Period $ 10.22 $ 10.45 $ 10.62 $ 10.82 $ 10.47
-------- -------- -------- -------- --------
Net Asset Value - End of Year $ 9.14 $ 10.22 $ 10.45 $ 10.62 $ 10.82
======== ======== ======== ======== ========
Ratios
Ratio of Expenses to Average Net Assets 21.7% 21.8% 20.4% 17.9% 17.2%
======== ======== ======== ======== ========
Ratio of Net Investment Income to
Average Net Assets (2.4%) 2.3% 3.8% 2.2% 4.9%
======== ======== ======== ======== ========
</TABLE>
-13-
