U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
/x/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ________ to ________
Commission File No. 0-28910
GENERAL CREDIT CORPORATION
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(Name of Small Business Issuer in Its Charter)
New York 13-3895072
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
370 Lexington Avenue, Suite 2000
New York, New York 10017
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(Address of principal executive offices)
(212) 697-4441
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(Issuer's Telephone Number)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
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Title of each class Name of each exchange on which registered
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Common Stock, Par Value $.001 per Share OTC Electronic Bulletin Board
Redeemable Common Stock Purchase Warrants OTC Electronic Bulletin Board
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Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 is not contained in this form, and no disclosure will 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]
State issuer's revenues for its most recent fiscal year: $4,082,871.
The aggregate market value of the voting stock held by non-affiliates of the
issuer based on the closing sales price of $0.17 of such common stock as of
March 22, 1999, is $469,200 based upon 2,760,000 shares of common stock held by
non-affiliates. As of March 22, 1999, the Company had a total of 3,615,000
shares of Common Stock, par value $.001 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None.
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GENERAL CREDIT CORPORATION
FORM 10-KSB
FISCAL YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
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PART I............................................................................................................1
Item 1. Description of Business.........................................................................1
Item 2. Description of Property .....................................................................4
Item 3. Legal Proceedings...............................................................................5
Item 4. Submission of Matters to a Vote of Security Holders.............................................5
PART II...........................................................................................................6
Item 5. Market for Common Equity and Related Stockholder Matters........................................6
Item 6. Management's Discussion and Analysis or Plan of Operation.......................................7
Item 7. Financial Statements...........................................................................11
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.......................................................................11
PART III.........................................................................................................12
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of The Exchange Act .............................................12
Item 10. Executive Compensation.........................................................................14
Item 11. Security Ownership of Certain Beneficial Owners and Management.................................17
Item 12. Certain Relationships and Related Transactions.................................................18
Item 13. Exhibits And Reports on Form 8-K...............................................................19
SIGNATURES.......................................................................................................20
FINANCIAL STATEMENTS............................................................................................F-1
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PART I
Item 1. Description of Business
GENERAL
General Credit Corporation (the "Company") is a New York corporation
organized in February 1995. From its inception through May 2, 1997, the
Company's operations were limited to administrative activities. On May 2, 1997,
the Company acquired substantially all of the assets of New York Payroll
Factors, Inc. ("NYPF") concurrently with the closing (the "Closing") of the
Company's initial public offering of securities (the "IPO") and commenced
operations. For approximately seven years, NYPF had been engaged in providing
working capital financing to its customers through the discounted purchase of
checks (commonly referred to as "Check Factoring"). Since May 3, 1997 the
Company has provided check factoring services to its customers, generally on a
non-recourse basis with respect to its customers except to the extent of forged
signatures on and stop payments of the purchased checks. In September 1997 the
Company commenced purchasing credit card sales slips on a discounted
non-recourse basis. To date, the purchase of credit card sales slips ("Credit
Card Sales Slips") has not been a material part of the Company's business. Upon
the Closing of the IPO, the Company received net proceeds of approximately
$7,200,000 in consideration for the issuance of 900,000 Units, each Unit
consisting of three shares of the Company's Common Stock, par value $.001 per
share (the "Common Stock") and six warrants, each warrant entitling the holder
thereof to purchase one share of Common Stock at any time and from time to time
through April 24, 2002 at an exercise price of $3.375 per share. Pursuant to the
acquisition of substantially all of the assets of NYPF (the "NYPF Business
Combination") in connection with the Closing, the Company delivered the
remaining balance to close the NYPF Business Combination of $4,275,000 and
issued a total of 125,000 shares of the Company's Common Stock to Gerald
Nimberg, a former affiliate of NYPF and currently the Company's President and
Chief Financial Officer in consideration for the business assets of NYPF.
The information relating to NYPF herein is based solely upon
information provided to the Company and its accountants by NYPF's management and
accountants. From January 1992 until May 2, 1997, NYPF provided working capital
financing to its customers through the discounted purchase of checks (commonly
referred to as "check factoring"), generally on a non-recourse basis except to
the extent of forged signatures on and stop payments of the purchased checks.
NYPF's former customers, many of which are currently the Company's customers as
a result of the NYPF Business Combination, are small- and medium-sized
independent contracting firms located in the New York City metropolitan area and
northern New Jersey area. Included among such customers are sewing contractors,
wholesale distributors, independent trucking companies, printing companies,
converters, healthcare providers, retailers, insurers and commercial real estate
owners. The makers of the checks are manufacturers, construction firms and other
businesses paying for goods or services purchased from customers.
Occasionally, the Company purchases checks directly from the
manufacturers, construction firms and other businesses themselves. The Company's
customers, typical of garment industry contractors and other small-and
medium-sized vendors, generally face extraordinary periodic short-term cash
requirements. By factoring checks, customers can realize cash more quickly.
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INDUSTRY OVERVIEW
Factoring, including check factoring, has been a method of working
capital financing in the United States for over 200 years. The factoring
industry has undergone considerable consolidation over the past several years;
as a result, the industry is characterized by a small number of very large
factors operating nationally, with a multitude of small companies generally
operating on a local or regional basis.
OPERATING PROCEDURES
Management estimates that the Company typically purchases checks for
between 98% and 99% of the face amount of the check, depending on the amount of
the check, the historical volume of checks purchased by the Company, or formerly
NYPF, from that particular customer, whether the checks are presented directly
by the customer or through a broker, whether the checks actually have been
presented to the Company at the time of the Company's payment to the customer,
and whether the checks are post-dated. Management believes that the dollar
amount of checks purchased before they are presented to the Company, and
post-dated checks, is not material. During 1998, the weighted average discounted
purchase price is 98.9% of the face amount of the check. The difference between
the face amount of the check and the Company's purchase price for the check is
known as the "discount." The discount is negotiated on a case by case basis. The
Company believes that its customers prefer the Company as opposed to more
conventional financial institution financing as a source of funds because (i)
the Company does not require complex credit agreements, credit evaluation of
customers, guarantees or other credit enhancement, financial statements,
collateral or a minimum borrowing base of receivables or inventory, all or some
of which would typically be required by a financial institution prior to
establishing an accounts receivable or asset based line of credit, and (ii) the
Company provides liquidity virtually upon demand of its customers, in larger
amounts daily than most financial institutions are able to supply. In an attempt
to limit its exposure arising from a purchased check not being collectible, the
Company's policy is rarely to purchase any check with a face amount in excess of
$50,000.
The Company's procedures include its entering into a Purchase and Sale
Agreement with each customer stating the amount of the discount on checks to be
purchased by the Company from the customer, and providing, among other things,
that (i) the Company is not required to purchase any check having a face amount
less than $2,500, or not made payable to the order of the customer, or drawn on
an account of anyone other than a check maker approved by the Company, (ii) the
customer is responsible for losses resulting from forged or unauthorized
signatures of makers of checks or stop payments of checks, (iii) the customer
represents to the Company that, among other things, it owns the checks to be
sold, each check represents payment for merchandise or services actually
delivered or performed for a customer of the customer in a business and not a
consumer transaction, and each check is genuine and not subject to offsets or
defenses. The Company offers a door-to-door armed guard delivery service upon
the request of customers. Pursuant to banking resolutions and powers of attorney
in favor of the Company provided by each customer, the Company endorses each
purchased check beneath the endorsement of the customer before depositing it in
the Company's bank account.
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SOURCES OF BUSINESS; COMMISSIONED REPRESENTATIVES
During 1998, management estimates that the Company obtained, as a
percentage of its fee income, approximately 10% of its fee income from
commissioned sales representatives at a weighted average commission of
approximately 1 % of fee income. On September 30, 1997, the Company acquired Ace
Venture, Inc., formerly a commissioned agent, for a total purchase price of
$480,000, plus closing costs of $9,500 paid by the Company, consisting of
$100,000 cash and the delivery of two promissory notes in the aggregate
principal amount of $230,000 and $150,000, respectively, subject to adjustment
in the event certain sales are not generated as a result of the acquisition. As
a result of the acquisition by the Company of Ace, Dong Hyun Kang, the former
owner of Ace entered into an employment agreement with the Company providing for
a base salary of $130,000 per year and a bonus conditioned on certain sales
activities.
COMPETITION
The Company competes in the check factoring business with firms that
provide working capital financing to small- and medium-sized businesses. Those
competing firms include banks, financial institutions, commercial finance
companies and factoring companies, some of which may have substantially greater
financial and other resources than the Company. The Company believes, based on
an informal study, that, including the Company, there are approximately 15
check factoring firms operating in the same area in which its customers are
located. The Company also competes with other regional factoring companies that
target clients similar to the clients of the Company, some of which have
operated in the markets serviced by the Company for a longer period of time than
the Company or NYPF. There can be no assurance that the Company can continue to
compete successfully with its competitors.
SECURITY
All Company employees work behind bullet-resistant plexiglass and steel
partitions, and security measures for each office include safes, alarm systems
and security cameras, control over entry to cash processing areas, detection of
entry through perimeter openings, walls and ceilings, checking all movement in
and out of secured areas, wireless phones, security guards and telephone battery
back-up.
Since the Company's business requires it to maintain a significant
supply of cash in its stores, the Company is subject to the risk of cash
shortages resulting from theft and employee errors. Although the Company has
implemented various programs to reduce these risks and to provide security for
its facilities and employees, there can be no assurance that these problems will
be eliminated. Daily transportation of currency and checks is provided by
Company-owned armored carriers.
EMPLOYEES
The Company's employees consist of its two executive officers, Irwin
Zellermaier and Gerald Nimberg, 33 additional full-time and eight additional
part-time employees. Messrs. Nimberg and
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Zellermaier devote their full business time to the Company's business. David
Bader was the Chief Financial Officer of the Company until his resignation in
November 1998.
REGULATION
Under the Bank Secrecy Act and the Financial Recordkeeping and Currency
and Foreign Transactions Reporting Act regulations of the U.S. Department of the
Treasury, each financial institution, including check cashers such as the
Company, must file a Currency Transaction Report ("CTR") for each deposit,
withdrawal, exchange of currency, or other payment or transfer, by, through, or
to the financial institution which involves a transaction in currency of more
than $10,000. Any series of transactions within any calendar day that total more
than $10,000, and that the Company has knowledge were effected by or on behalf
of the same person, must also be reported. In addition, the Company is required
to report any "suspicious or unusual activity" to its Bank Secrecy Act examiner
and the Internal Revenue Service. The civil penalty imposed upon the Company and
any director, officer or employee of NYPF willfully violating these requirements
is not more than the greater of the amount (not to exceed $100,000) involved in
the transaction (if any) or $25,000. Criminal penalties for intentional
violations include fines of up to $500,000, and up to ten years imprisonment, or
both.
During a typical week, approximately 1% of the Company's transactions
require the filing of a CTR. The Company believes its computerized daily
transaction reports, its staff training and supervision and its diligence and
persistence in obtaining from its customers the information required to be
reported assist the Company in complying with these reporting requirements, but
there can be no assurance that all information reported by the Company is
accurate, complete, and in accordance with such statute and regulations.
Although some states, including New York, have established limits on
check-cashing fees, management believes that the Company's discount of the face
amount of checks that it purchases is within these limits. The Company is
subject to all local laws and ordinances relating to weapons carried by its
security guards, messengers and other employees. There can be no assurance that
the Company will not be materially adversely affected by legislation or
regulations enacted in the future.
Item 2. Description of Property
The Company is currently obligated under seven separate noncancellable
real property operating lease agreements with unaffiliated third parties as
follows:
1. Lease agreement through January 31, 2002 for office space of
approximately 500 square feet located 201 Allen Street (lower east
side of Manhattan);
2. Lease agreement through June 29, 2006 for office space of
approximately 500 square feet located at 201-A Allen Street (lower
east side of Manhattan);
3. Lease agreement through January 31, 2001 for office space of
approximately 2,000 square feet located at 499 Seventh Avenue
(midtown Manhattan near the "garment district");
4. Lease agreement through February 28, 2003 for office space of
approximately 600 square feet located at 1430 Broadway (garment
district);
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5. Lease agreement through February 28, 2003 for office space of
approximately 1,400 square feet located at 669 Kent Avenue
(Brooklyn);
6. Lease Agreement through February 28, 2003 for office space of
approximately 1,500 square feet located at 45-10 Skillman Avenue
(Sunnyside, Queens); and
7. Lease agreement through August 31, 2000 for office space of
approximately 2,500 square feet located at 370 Lexington Avenue,
the Company's midtown Manhattan headquarters.
The Company's annual rental obligation in the aggregate for 1999 under
the seven leases listed above is approximately $184,000, exclusive of real
estate taxes, common area maintenance charges and other pass thru items.
Item 3. Legal Proceedings
The Company is currently a defendant in a lawsuit brought by an
unaffiliated third party individual who seeks to have a parcel of improved real
property located in Brooklyn, New York currently owned by the Company
transferred back to the unaffiliated third party individual on the basis of
fraud committed by the Company (the "Real Property Suit"). The improved real
property was initially transferred to the Company in consideration for amounts
owed to the Company. The unaffiliated third party individual's claim also seeks
damages for "over reaching" against the Company in the amount of $1,000,000. The
Company is vigorously defending the lawsuit and based on advice of its counsel,
believes the action is without merit or legal basis.
In March 1998, the Company received a demand letter from an
unaffiliated third party individual regarding certain allegations advanced by
this unaffiliated third party individual against the Company (the "Letter").
According to the Letter, the unaffiliated third party individual alleges he is
entitled to have the Company transfer to him 750,000 shares of the Company's
Common Stock due to certain breaches of agreements by the Company. The Company
has received no further correspondence from this unaffiliated third party
individual. If pursued, the Company intends to vigorously defend against these
allegations.
The Company is engaged from time to time as plaintiff in litigation
relating to collection of returned checks. Such litigation has not historically
had any material effect on its financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of the fiscal year ended December 31, 1998,
no matters were submitted to a vote of security holders of the Company.
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's Common Stock and Warrants were quoted on The Nasdaq
SmallCap Market ("Nasdaq") from April 28, 1997 through September 28, 1998 under
the symbols "LOAN" and "LOANW". Effective at the close of business on September
28, 1998, the Company's Common Stock and Warrants were delisted from the Nasdaq
SmallCap Market System due to, among other things, Nasdaq's determination that
the Company could not sustain compliance with all of the requirements for
continued Nasdaq listing and commenced quotation on the OTC Electronic Bulletin
Board under the symbols "LOAN" and "LOANW."
The following table sets forth the range of high and low closing sales
prices of the Common Stock and Warrants as reported by Nasdaq (through September
28, 1998) and the high and low bid quotations for the Common Stock and Warrants
obtained from the OTC Electronic Bulletin Board (from September 29, 1998). The
quotations reflect interdealer prices, without retail mark-up, markdown or
commission, and may not reflect actual transactions.
COMMON STOCK
- ------------
Nasdaq SmallCap Market High Low
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April 28, 1997 through June 30, 1997..............$3.25 $1.56
Third Quarter, 1997...............................$2.56 $1.50
Fourth Quarter, 1997..............................$2.53 $1.50
First Quarter, 1998...............................$2.13 $1.13
Second Quarter, 1998..............................$2.00 $1.00
Third Quarter through September 28, 1998..........$1.250 $0.156
OTC Electronic Bulletin Board High Bid Low Bid
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September 29 and 30, 1998.........................$0.6875 $0.625
Fourth Quarter, 1998..............................$0.71875 $0.21
First Quarter, 1999...............................$0.40 $0.15
WARRANTS
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Nasdaq SmallCap Market High Low
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April 28, 1997 through June 30, 1997..............$0.69 $0.25
Third Quarter, 1997...............................$0.47 $0.25
Fourth Quarter, 1997..............................$0.50 $0.22
First Quarter, 1998...............................$0.34 $0.16
Second Quarter, 1998..............................$0.34 $0.16
Third Quarter through September 28, 1998..........$0.21875 $0.03125
OTC Electronic Bulletin Board High Bid Low Bid
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September 29 and 30, 1998.........................$0.125 $0.125
Fourth Quarter, 1998..............................$0.0675 $0.00001
First Quarter, 1999...............................$0.05 $0.00001
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The approximate number of holders of record of the Company's Common
Stock, as of March 24, 1999, amounts to 30, inclusive of those brokerage firms
and/or clearing houses holding the Company's shares of Common Stock for their
clientele (with each such brokerage house and/or clearing house being considered
as one holder).
The Company has not paid or declared any dividends upon its Common
Stock since its inception and, by reason of its present financial status and its
contemplated financial requirements, does not contemplate or anticipate paying
any dividends upon its Common Stock in the foreseeable future.
Item 6. Management's Discussion and Analysis or Plan of Operation
The following discussion of the financial condition or plan of
operation of the Company should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included elsewhere in this
Report.
The Company's independent auditors' report on the Company's
consolidated financial statements for the fiscal year ended December 31, 1998,
includes an explanatory paragraph stating that the Company has not complied with
certain financial covenants of the Long Term Loan which have not been waived by
the Affiliated Corporation. While management believes that if the Long Term Loan
is called by the Affiliated Corporation, there exists sufficient collateral to
repay the Long Term Loan, such an event would severely limit the Company's
ability to conduct normal operations, which raises substantial doubt about the
Company's ability to continue as a going concern. Notwithstanding the
non-compliance with certain technical covenants of the Long Term Loan, in April
1999, the Affiliated Corporation and the Company entered into a third amendment
to the Long Term Loan, which, among other things, extends the termination date
of the Long Term Loan. Management believes because of the extension, among other
things, that the Affiliated Corporation will continue to make funds available to
the Company under the Long Term Loan. Management is also seeking additional
sources of funding. No assurances can be given that the Company will be able to
obtain alternate sources of funding, on a timely basis, if at all, or that the
Affiliated Corporation will not call the Long Term Loan resulting in the Company
being required to pay all of the outstanding amounts owed under the Long Term
Loan.
RESULTS OF OPERATIONS
Information provided below for year ended December 31, 1997 reflect the
Company's check factoring operations from May 3, 1997 through December 31, 1997
(the "Operational Period") as well as the period from January 1, 1997 through
May 2, 1997 when the Company's operations were limited to administrative
activities (the "Administrative Period").
For the years ended December 31, 1997 (consisting solely of operations
during the Operational Period) and December 31, 1998, the Company derived fee
income of approximately $2,413,000 and $ 4,083,000, respectively, from the
purchase of checks and Credit Card Sales Slips. The face amount of checks
purchased during the periods ended December 31, 1997 (consisting solely of
operations during the Operational Period) and December 31, 1998 was
approximately $220,000,000 and $372,000,000, respectively, and the face amount
of Credit Card Sales Slips during the years ended December 31, 1997 and December
31, 1998 was approximately $835,000 and $6,500,000, respectively. For the year
ended December 31, 1998, the Company received other
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income of approximately $64,000 from an unaffiliated third party for the
assignment by the Company of a contract right to purchase a business.
Selling, general and administrative expenses, including, among other
expenses, amounts paid to sales representatives, payroll and related expenses
and office overhead costs (including rent) during the years ended December 31,
1997 and December 31, 1998 was approximately $1,977,000 (approximately
$1,928,000 of which were incurred during the Operational Period) and $3,535,000,
respectively. During the years ended December 31, 1997 and December 31, 1998,
selling, general and administrative expenses constituted approximately 82% and
87%, respectively, of fee income.
For the years ended December 31, 1997 and December 31, 1998, interest
expense was approximately $456,000, net of approximately $6,000 of interest
income (of which approximately $269,000 was incurred during the Operational
Period) and $828,000, net of approximately $98,000 of interest income,
respectively. The Company's interest expense increased during 1998 due to the
Company's increased borrowings to support expanded operations.
The Company recorded a one-time non-recurring charge in the fourth
quarter of 1998 of approximately $ 4.65 million, or ($ 1.32) per share. This
charge, which is non-cash in nature, reflects elimination of the remaining
balance of the goodwill and the covenant not to compete from the NYPF Business
Combination (the "Impairment Charge"). This charge was recorded due to the
Company's continuing losses since the closing of the NYPF Business Combination
and the changes that the Company believes it must employ to achieve
profitability. These changes include the location of additional and less
expensive financing sources. This charge includes the amortization of the costs
of goodwill and the covenant not to compete from the NYPF Business Combination
taken by the Company during the first three quarters of 1998. The amortization
of these costs has been reclassified as a charge of approximately $197,000 for
the year ended 1997, ($.08) per share, for comparative purposes.
For the years ended December 31, 1997 and December 31, 1998, the
Company incurred non-cash expenses of approximately $296,000 and $4.9 million
(inclusive of the Impairment Charge), respectively. In 1997 the Company incurred
a non-recurring one-time expense of approximately $154,000 ($.06 per share)
relating to the prepayment penalty on the early extinguishment of notes retired
(the "Extraordinary Item"). Net loss for the years ended December 31, 1997 and
December 31, 1998 was approximately ($395,000) and ($4,966,000), respectively,
or approximately ($.16) and ($1.41) per share, respectively.
Losses before taxes, depreciation, amortization and the Impairment
Charge ("EBTDA") during the year ended December 31, 1998 was approximately
$216,000, or approximately ($ .06) per share per the weighted average number of
shares outstanding. EBTDA is not presented as an alternative to operating
results or cash flow from operations as determined by generally accepted
accounting principles ("GAAP"), but rather to provide additional information
related to the ability of the Company to meet current trade obligations and debt
service requirements. EBTDA should not be considered in isolation from, or
construed as having greater importance than, GAAP operating income or cash flows
from operations as a measure of an entity's performance.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements generally increase proportionately
to the aggregate face amount of checks purchased, although more rapid collection
of purchased checks can mitigate the Company's cash needs.
The Company received the net proceeds from the IPO in May 1997. During
1998 the Company financed its operations principally through (i) cash flow
generated from operations; (ii) a long term working capital credit facility in
the aggregate principal amount of up to $2,333,335 (the "Long Term Loan")
provided by a corporation (the "Affiliated Corporation"), in part owned by
Gerald Schultz, the former owner of NYPF and Ann Nimberg, the wife of Gerald
Nimberg, the President of the Company; (iii) a $500,000 working capital loan
(the "500,000 Loan") provided by the wife of a sales representative of the
Company; and (iv) undocumented short term working capital loan arrangements with
various banks and lenders, unaffiliated with the Company, who extend credit to
the Company based upon uncollected checks purchased by the Company and deposited
for payment. This credit has, from time to time, reached approximately $5.5
million and is typically repaid with interest or uncollected bank charges daily
or every few days (the "Uncollected Check Loans"). Ann Nimberg has informed the
Company that she owns approximately 8% of the Affiliated Corporation.
Pursuant to the terms of the Long Term Loan, as amended (last amended
in April 1999), the Affiliated Corporation has established a credit facility in
favor of the Company in the aggregate principal amount of $2,333,335. The
Company has the right to borrow from the Affiliated Corporation an amount based
upon funds derived from the purchase of checks by the Company. Borrowings under
the Long Term Loan, as amended, bear interest at the rate of 24% per annum.
Interest is payable monthly by the Company under the Long Term Loan, as amended,
on the outstanding principal amount borrowed. All accrued but unpaid interest as
well as all principal amount owed under the Long Term Loan, as amended, is due
in April 2001. The Company may not prepay all or any part of the principal
amount owed under the Long Term Loan, as amended until the Company has delivered
twelve months of interest payments. Subsequent to the Company's payment of the
twelve months interest, on three days prior written notice, the Company may
prepay all principal amount owed under the Long Term Loan subject to a
prepayment penalty of three months' interest. The Company's repayment
obligations under the Long Term Loan are secured by, among other things, all of
the Company's accounts receivable and certain fixtures and equipment at the
Company's leased premises. The Long Term Loan requires that the Company maintain
collateral in the form of uncollected purchased checks or cash in the amount of
$2,333.335 (the "Collateral Requirement"). Pursuant to the Long Term Loan, the
full amount of the Long Term Loan is due and payable, in the event, among other
things: (i) the Company's losses (before non-cash charges) are greater than
$50,000 per year or in any two consecutive quarters in a fiscal year; (ii) the
Company's cash balances are less than $1.1 million (which amounts are exclusive
of the Collateral Requirement); or (iii) the Company does not deliver to the
Affiliated Corporation its audited financial statements before the date which is
90 days from December 31. An event of default exists under the Long Term Loan
due to the Company's losses (before non-cash items) being greater than $50,000
during 1998 and the Company not delivering audited financial statements to the
Affiliated Corporation prior to March 31, 1999. Although the Affiliated
Corporation has not exercised any of its rights under the Long Term Loan
(including its right to accelerate payment of all amounts owed by the Company
under the Long Term Loan), the Affiliated Corporation has not waived its rights
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under the Long Term Loan. Notwithstanding these events of default, the
Affiliated Corporation entered into an amendment to the Long Term Loan in April
1999 without waiving the prior defaults.
Pursuant to the $500,000 Loan, the Company is obligated to pay, on a
monthly basis, interest only at 21% per annum on the outstanding principal
amount under the $500,000 Loan. All accrued but unpaid interest together with
the principal amount outstanding under the $500,000 Loan is due to be repaid by
the Company in November 2001. The Company may prepay the $500,000 Loan without
premium or penalty.
During the first quarter of 1999, Irwin Zellermaier, the Company's
Chief Executive Officer and Chairman of the Board of Directors and Gerald
Nimberg, the Company's President, Chief Operating Officer and acting Chief
Financial Officer provided unsecured short term working capital loans to the
Company in the principal amount of $ 210,000 and approximately $15,000
(collectively the "Zellermaier and Nimberg Loans"). The principal amount of the
Zellermaier and Nimberg Loans are repayable by the Company to Mr. Zellermaier
and Mr. Nimberg on Mr. Zellermaier's and Mr. Nimberg's respective demand.
Interest at 24% per annum is payable monthly by the Company on the Zellermaier
and Nimberg Loans.
As of December 31, 1998, the Company is obligated under several notes
and advances payable in the aggregate amount of approximately $3.9 million.
In order for the Company to grow and purchase checks, it requires
capital. To date, the Company has not had adequate cash resources to satisfy the
demand it perceives for its check purchasing services. The Company is currently
seeking additional debt or equity financing to fund expansion of the Company's
business. There can be no assurances that additional financing will be available
on terms favorable to the Company, or at all. If adequate funds are not
available or are not available on acceptable terms, the Company may not be able
to achieve profitability, fund growth, take advantage of certain acquisition
opportunities or respond to competitive pressures.
As of December 31, 1998 the Company had available cash and cash
equivalents of approximately $1,336,000.
EFFECTS OF INFLATION
The Company believes that the results of its operations could be
materially impacted by inflation, including increases in interest rates
generally, if inflation materially adversely affected the operations of the
Company's customers and their customers, and if inflation materially increased
the Company's costs of obtaining working capital (e.g., if the Company entered
into larger lines of credit in lieu of its maintaining some of the current bank
deposits against which it negotiates checks purchased by it).
YEAR 2000 COMPLIANCE
The Commission has issued Staff Legal Bulletin No.5 (CF/IM) stating
that public operating companies should consider whether they will suffer any
anticipated costs, problems or uncertainties as a result of the "Year 2000"
issue, which affects existing computer programs that use only two
10
<PAGE>
digits to identify a year in the date field. The Company anticipates that its
business operations will electronically interact with third parties very
minimally, and the issues raised by Staff Legal Bulletin No. 5 are not
applicable in any material way to its contemplated business or operations.
Additionally, the Company intends that any computer systems that it will
purchase or lease will have already addressed the "Year 2000" issue.
FORWARD LOOKING INFORMATION MAY PROVE INACCURATE
This Annual Report on Form 10-KSB contains certain forward-looking
statements and information relating to the Company that are based on the beliefs
of management, as well as assumptions made by and information currently
available to the Company. When used in this document, the word "anticipate,"
"believe," "estimate," "expect" and "intends" and similar expressions, as they
relate to the Company, are intended to identify forward-looking statements. Such
statements reflect the current views of the Company with respect to future
events and are subject to certain risks, uncertainties and assumptions,
including the uncertainty associated with the Company's acquisition of
additional financing, and those described in this Annual Report on Form 10-KSB
and the Company's Registration Statement on Form SB-2 (SEC File No. 333- 09831)
declared effective by the Securities and Exchange Commission on April 25, 1997.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated or expected. The
Company does not intend to update these forward-looking statements.
Item 7. Financial Statements
The financial statements included herein, commencing at page F-1, have
been prepared in accordance with the requirements of Regulation S-B and
supplementary financial information included herein, if any, has been prepared
in accordance with Item 310(a) of Regulation S-B.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On September 5, 1997, the Company dismissed Coopers & Lybrand LLP
("Coopers & Lybrand") as the Company's independent auditors and retained
Cornick, Garber & Sandler, LLP as the Company's independent auditors for the
fiscal year ended December 31, 1997. The Company's decision to retain Cornick,
Garber & Sandler, LLP was approved by the Company's Board of Directors and the
Company's Audit Committee. In connection with the services rendered by Coopers &
Lybrand, the Company reported that for the fiscal years ended December 31, 1995,
December 31, 1996 and for the subsequent interim periods there were no
disagreements between the Company and Coopers & Lybrand on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which disagreement, if not resolved to the satisfaction of
Coopers & Lybrand, would have caused Coopers & Lybrand to make reference to the
subject matter of the disagreement. Further, the Company believes there are no
reportable events as defined by Item 304(a)(1)(iv)(B) of Regulation S-B.
Coopers & Lybrand's reports on the Company's financial statements for
the years ended December 31, 1996 and 1995 contained an explanatory paragraph to
the effect that the Company's ability to commence operations was dependent on
the Company obtaining adequate financial
11
<PAGE>
resources through a contemplated public offering, or otherwise, which raised
substantial doubts about its ability to continue as a going concern.
A copy of Coopers & Lybrand's letter addressed to the U.S. Securities
and Exchange Commission was filed as an exhibit to the Company's Form 8-K filed
with the Commission on September 11, 1997.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of The Exchange Act
DIRECTORS AND EXECUTIVE OFFICERS
The current directors and executive officers of the Company are as
follows:
<TABLE>
<CAPTION>
Name Age Title
- ---- --- -----
<S> <C> <C>
Irwin Zellermaier(1) 74 Chairman, Chief Executive Officer, Director
Gerald Nimberg 55 President, Chief Operating Officer, Acting Chief
Financial Officer, Secretary, Treasurer, Director
Vincent J. Putignano(1)(2) 53 Director
Brien G. Reidy(1)(2) 47 Director
Melvyn Dobrichovsky, CPA 52 Director
Gregory E. Ronan, Esq. 50 Director
</TABLE>
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
IRWIN ZELLERMAIER, Chairman, Chief Executive Officer and Director of
the Company since February 1995, and President of the Company from February 1995
until May 2, 1997, has been engaged in investment banking and management
consulting as a sole proprietorship for more than five years. Since January 1,
1990, he has been associated as an independent contractor with Eagle Funding, a
mortgage broker with respect to commercial properties.
GERALD NIMBERG, President, Chief Operating Officer, and Director of the
Company since May 2, 1997, Acting Chief Financial Officer of the Company since
November 1998 and Vice President and Chief Operating Officer of NYPF since May
1993 until the Closing. From May 1992 until May 1993, he was Regional Manager of
Exchange Mortgage, Inc., a residential mortgage lending firm, and from May 1991
until May 1992, he was Regional Manager of Gelt Funding, also a residential
mortgage lending firm. Previously, he was a manager of various divisions of Sun
Oil.
VINCENT J. PUTIGNANO, Director of the Company since July 1996, has
operated a securities brokerage and investment banking and consulting business
in New York State since 1978. Before March 1991, he was President and Chief
Executive Officer of United States Business Products, Inc., a business equipment
firm. Since March 1991, he has engaged in sales administration and consulting
with Minor & Casey, a commercial real estate firm.
12
<PAGE>
BRIEN G. REIDY, Director of the Company since July 1996, has been
engaged in financial consulting and public relations in California and New York
since 1987.
MELVYN DOBRICHOVSKY, CPA, Director of the Company since November 1998,
is a certified public accountant licensed in the state of New York since 1973.
Prior to 1991 he was a partner in Deloitte & Touche LLP. He currently is
associated with Salibello & Broder, an accounting firm based in New York, New
York. Mr. Dobrichovsky provides accounting, consulting and tax services to the
Company for which he received fees in 1998 totalling approximately $40,000.
GREGORY E. RONAN, ESQ., Director of the Company since November, 1998,
has been a partner at the law firm of Goddard, Ronan & Dineen since 1982. Mr.
Ronan served as a trial attorney with the U.S. government until 1982. He is a
1971 cum laude graduate of Fordham University and a 1974 graduate of St. John's
University Law School. Mr. Ronan was the 1976 Distinguished Graduate at U.S.
Army JAGC School, in Charlottesville, Virginia. Goddard, Ronan & Dineen provides
legal services to the Company for which the firm received fees in 1998 of
approximately $147,000 and 105,000 shares of the Company's Common Stock..
Each director serves until the next annual meeting of shareholders and
until his successor is elected and qualified. Each officer is appointed to serve
until the next annual meeting of the Board of Directors and until his successor
has been appointed and qualified. David Bader served as the Company's Vice
President and Chief Financial Officer from June 1996 through November 19, 1998.
See "Executive Compensation; Employment Contracts, Termination of Employment and
Change in Control Arrangements."
CONFLICTS OF INTEREST
None.
SIGNIFICANT EMPLOYEES
None.
FAMILY RELATIONSHIPS
None.
OTHER: INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
There have been no events under any bankruptcy act, no criminal
proceedings and no judgments or injunctions material to the evaluation of the
ability and integrity of any executive officer during the past five years.
COMPLIANCE WITH SECTION 16(a)
To the Company's knowledge, for the fiscal year ended December 31,
1998, and for the period ended March 24, 1999, no person who was a director,
officer or beneficial owner of more
13
<PAGE>
than ten percent of the Company's outstanding Common Stock or any other person
subject to Section 16 of the Securities Exchange Act of 1934 (the "Exchange
Act") failed to file on a timely basis, reports required by Section 16(a) of the
Exchange Act.
Item 10. Executive Compensation
DIRECTOR COMPENSATION
No amounts have been paid to directors for attendance at meetings.
EXECUTIVE OFFICER COMPENSATION
Other than Mr. Zellermaier, who received total cash compensation of
$135,678 in 1998 and $101, 298 in 1997 and Mr. Nimberg who received total cash
compensation of $125,731 in 1998, no officer or director employed by the Company
received salary and bonus exceeding in the aggregate $100,000 in the fiscal
years 1998, 1997 or 1996. The following Summary Compensation Table sets forth
the information concerning compensation for services in all capacities awarded
to, earned by or paid to Mr. Zellermaier and Mr. Nimberg.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation Awards
- -------------------------------------------------------------------------------------------------------------------
Securities
Name and Principal Other Annual Underlying All Other
Position Year Salary Bonus Compensation (1) Options/SARs Compensation
===================================================================================================================
<S> <C> <C> <C> <C> <C>
Irwin Zellermaier, 1998 $135,678 -- $50,941 100,000/0 --
Chairman, Chief
Executive Officer and ---------------------------------------------------------------------------------------
Director of the 1997 $101,298 -- $31,466 75,000/0 --
Company since February
1995. ---------------------------------------------------------------------------------------
President from February 1996 -- -- -- -- --
1995 until May 1997.
- -------------------------------------------------------------------------------------------------------------------
Gerald Nimberg, 1998 $125,731 -- $11,532 100,000/0 --
President and Chief
Operating Officer of the ---------------------------------------------------------------------------------------
Company since May 1997 $75,374 -- -- 65,000/0 --
1997 and Chief Financial ---------------------------------------------------------------------------------------
Officer of the Company 1996 -- -- -- -- --
since November 1998.
===================================================================================================================
</TABLE>
(1) Represents payments made for Mr. Zellermaier's and Mr. Nimberg's and their
dependents' medical insurance, Mr. Zellermaier's and Mr. Nimberg's
automobile expense allowance and insurance covering Mr. Zellermaier's life,
the beneficiary of which is not the Company.
14
<PAGE>
STOCK OPTION GRANTS IN FISCAL YEAR 1998
The following table sets forth information concerning stock option grants
made during 1998 to Messrs. Zellermaier and Nimberg.
<TABLE>
<CAPTION>
Number of
Securities Percent of Total Market
Underlying Options Granted to Price on Exercise or
Options Employees Date of Base Price Expiration
Name Granted(1) In Fiscal Year Grant ($) ($) Date
- ---- ---------- -------------- --------- --- ----
<S> <C> <C> <C> <C> <C>
Irwin Zellermaier 100,000 44.4% $1.625 $1.625 May 11,2001
Gerald Nimberg 100,000 44.4% $1.625 $1.625 May 11,2001
TOTAL 200,000 88.8%
</TABLE>
1) All options are non-qualified options.
STOCK OPTION EXERCISES IN FISCAL YEAR 1998
AND FISCAL YEAR END OPTION VALUES
The following table sets forth certain summary information concerning
exercised and unexercised options to purchase the Company's Common Stock as of
December 31, 1998 held by Messrs. Zellermaier and Nimberg. Neither Mr.
Zellermaier nor Mr. Nimberg exercised any options during the year ended December
31, 1998.
<TABLE>
<CAPTION>
Value of Unexercised
Shares Number of Unexercised In-the-money Options
Acquired Value Options at FY-end at FY-end
Name on Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ----------- -------- ------------------------- -------------------------
<S> <C> <C>
Irwin Zellermaier -- -- 175,000 / 0 $0 / $0
Gerald Nimberg -- -- 165,000 / 0 $0 / $0
TOTAL 340,000 / 0 $0 / $0
</TABLE>
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-
CONTROL ARRANGEMENTS
In June 1996, Irwin Zellermaier entered into a ten-year employment
agreement with the Company. Under the terms of the agreement, Mr. Zellermaier
serves as the Chairman and Chief Executive Officer of the Company and receives
an annual base salary of $160,000 per annum. The employment agreement with Mr.
Zellermaier further provides that Mr. Zellermaier shall receive bonuses and such
other fringe benefits as are paid to other executive officers of the Company.
Such fringe benefits take the form of medical coverage, life insurance benefits
and an automobile expense allowance.. Further pursuant to the terms of his
employment agreement, Mr. Zellermaier has agreed not to compete with the Company
during the term of his employment with the Company and for a three-year period
thereafter. In May 1998, Mr. Zellermaier's employment agreement was amended to
provide that, if his employment is terminated by the Company for cause (as
defined in the
15
<PAGE>
agreement) or by voluntary unilateral decision by the employee without cause,
then Mr. Zellermaier is entitled to his base salary under the agreement earned,
accrued vacation, and reimbursements of expenses, through the date of
termination. In addition, the amended employment agreement with Mr. Zellermaier
provides that, if his employment is otherwise terminated, Mr. Zellermaier is
entitled to receive, in one lump sum payment, three times his compensation (base
salary plus bonus) paid by the Company to Mr. Zellermaier for the fiscal year
prior to termination and all applicable allowances and reimbursements to the
date of termination. Furthermore, the amended agreement provides that, in the
event Mr. Zellermaier exercises his right to terminate due to a change of
control (as defined in the agreement), Mr. Zellermaier agrees to consult with
the Company for a period of at least two years.
Effective May 2, 1997, the date of the closing of the Company's initial
public offering of securities (the "Closing"), Gerald Nimberg and the Company
entered into a ten-year employment agreement which will terminate on May 2,
2007, pursuant to which Mr. Nimberg is to serve as the President and Chief
Operating Officer of the Company. The employment agreement with Mr. Nimberg
provides that Mr. Nimberg shall receive an annual base salary of $120,000 per
annum, commencing on May 2, 1997, with annual adjustments for increases in the
Consumer Price Index. The employment agreement with Mr. Nimberg further provides
for payment of bonuses and for such other fringe benefits as are paid to other
executive officers of the Company. Such fringe benefits take the form of medical
insurance coverage and an automobile expense allowance. Pursuant to the
employment agreement with Mr. Nimberg, on the date of the Closing, the Company
became obligated to loan to Mr. Nimberg the sum of $250,000 (which amount has
been amended to $60,000). To date, the Company has loaned to Mr. Nimberg the
$60,000 amount, which sum, with simple interest calculated on the basis of the
annual rate of 9%, which annual rate was amended from 24% per annum, is to be
repaid by Mr. Nimberg to the Company through payroll deductions over a period of
time no longer than ten years, interest only being payable during the first two
years. Further pursuant to the terms of his employment agreement, Mr. Nimberg
has agreed not to compete with the Company during the term of his employment
with the Company and for a three-year period thereafter. In May 1998, Mr.
Nimberg's employment agreement was amended to provide that, if his employment is
terminated by the Company for cause (as defined in the agreement) or by
voluntary unilateral decision by Mr. Nimberg without cause, then Mr. Nimberg is
entitled to his base salary under the agreement earned, accrued vacation, and
reimbursements of expenses, through the date of termination. In addition, the
amended employment agreement with Mr. Nimberg provides that, if his employment
is otherwise terminated, Mr. Nimberg is entitled to receive, in one lump sum
payment, three times his total compensation (base salary plus bonus) paid by the
Company to Mr. Nimberg for the fiscal year prior to termination and all
applicable allowances and reimbursements to the date of termination.
Furthermore, the amended agreement provides that, in the event Mr. Nimberg
exercises his right to terminate due to a change of control (as defined in the
agreement), Mr. Nimberg agrees to consult with the Company for a period of at
least two years.
From June 1996 until November 19, 1998, David Bader served as the Vice
President and Chief Financial Officer of the Company pursuant to the terms of an
employment agreement which was terminated on November 19, 1998. Pursuant to the
agreement, Mr. Bader was entitled to receive an annual base salary of $85,000
per annum effective May 2, 1997. The employment agreement with Mr. Bader further
provided for payment of bonuses and for such other fringe benefits as are paid
to other executive officers of the Company, in the form of medical coverage and
an automobile expense
16
<PAGE>
allowance of $150 per month, the aggregate value of which was approximately
$7,240 per annum. Further pursuant to the terms of his employment agreement, Mr.
Bader agreed not to compete with the Company during the term of his employment
with the Company and for a three-year period thereafter. Effective November 19,
1998, David Bader and the Company mutually agreed that in consideration for Mr.
Bader's resignation as the Company's Vice President, Chief Financial Officer and
member of the Company's Board of Directors, the Company paid to Mr. Bader a lump
sum amount of $68,274. Contemporaneous with Mr. Bader's resignation, the Company
entered into a consulting agreement with Mr. Bader which provides, among other
things, for the payment to Mr. Bader of $1,801 per week for a period of 40
weeks, commencing January 1, 1999. Mr. Nimberg, the Company's President and
Chief Operating Officer, assumed the position of Acting Chief Financial Officer
pending the identification by the Company of a replacement for David Bader.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of March 24, 1999, based
on information obtained from the persons named below, with respect to the
beneficial ownership of shares of Common Stock by (i) each person known by the
Company to be the owner of more than 5% of the outstanding shares of Common
Stock; (ii) each director; and (iii) Messrs. Zellermaier and Nimberg, the only
persons named in the Summary Compensation Table; and (iv) officers and directors
as a group:
PRINCIPAL SHAREHOLDERS
Name and Address Shares of Common Stock Percent
of Beneficial Owner Beneficially Owned(1)(2) Owned
- ------------------- ------------------------ -----
Irwin Zellermaier 555,000 (3) 14.64%
211 East 70th Street
New York, NY 10021
Gerald Nimberg 280,000 (4) 7.41%
1009 Owl Place
Cherry Hill, NJ 08003
Vincent J. Putignano 10,000 (5) 0.28%
907 Palmer Avenue
Mamaroneck, NY 10543
Brien G. Reidy 10,000 (6) 0.28%
Seven Miller Lane West
East Hampton, NY 11937
Melvyn Dobrichovsky 0 0%
Salibello & Broder, CPA's
810 7th Avenue, 27th Floor
New York, New York 10019
Gregory Ronan 0 (7) 0%
Goddard, Ronan & Dineen, P.C.
201 East 42nd Street
New York, New York 10017
All Officers and Directors as a Group (6) 855,000 21.51%
Total number of shares outstanding 3,615,000
as of March 25, 1999
17
<PAGE>
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of Common Stock subject to options or warrants held by that person that
are currently exercisable or will become exercisable within 60 days after March
24, 1999 are deemed outstanding, while such shares are not deemed outstanding
for purposes of computing percentage ownership of any other person. Unless
otherwise indicated in the footnotes below, the persons and entities named in
the table have sole voting and investment power with respect to all shares
beneficially owned, subject to community property laws where applicable.
(2) Assumes no exercise of the 5,400,000 Common Stock Purchase Warrants
currently outstanding.
(3) Includes 175,000 shares of Common Stock to be issued upon exercise of
currently exercisable stock options held by Mr. Zellermaier.
(4) Includes 165,000 shares of Common Stock to be issued upon exercise of
currently exercisable stock options held by Mr. Nimberg. Does not include 20,100
shares or 3,000 Warrants owned by Ann Nimberg, Gerald Nimberg's wife, over which
Gerald Nimberg disclaims beneficial ownership. Does not include 10,000 shares
owned by Richard Nimberg, Gerald Nimberg's adult brother, over which Gerald
Nimberg disclaims beneficial ownership.
(5) Includes 10,000 shares of Common Stock to be issued upon exercise of
currently exercisable stock options held by Mr. Putignano.
(6) Includes 10,000 shares of Common Stock to be issued upon exercise of
currently exercisable stock options held by Mr. Reidy.
(7) Does not include 105,000 shares of the Company's Common Stock owned by
Goddard, Ronan & Dineen, with whom Mr. Ronan is a partner, but over which Mr.
Ronan disclaims beneficial ownership.
Item 12. Certain Relationships and Related Transactions
Pursuant to the employment agreement between Gerald Nimberg and the
Company, at the Closing, the Company became obligated to loan to Mr. Nimberg the
sum of $250,000 (amended to $60,000), $60,000 of which has been loaned to date
(the "Closing Loan") which sum, with simple interest calculated on the basis of
the annual rate of 9% is to be repaid by Mr. Nimberg to the Company through
payroll deductions over a period of time no longer than ten years, interest only
being payable during the first two years. Mr. Nimberg is current with respect to
his repayment obligations under the Closing Loan.
Ann Nimberg has informed the Company that she owns approximately 8% of
the Affiliated Corporation. Pursuant to the terms of the Long Term Loan, the
Affiliated Corporation has established a credit facility in favor of the Company
in the aggregate principal amount of approximately $2.3 million. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION."
During the first quarter of 1999, Irwin Zellermaier, the Company's
Chief Executive Officer and Chairman of the Board of Directors and Gerald
Nimberg, the Company's President, Chief Operating Officer and acting Chief
Financial Officer provided unsecured short term working capital loans to the
Company in the principal amount of $ 210,000 and approximately $15,000
(collectively the "Zellermaier and Nimberg Loans"). The principal amount of the
Zellermaier and Nimberg Loans are repayable by the Company to Mr. Zellermaier
and Mr. Nimberg on Mr. Zellermaier's and Mr. Nimberg's respective demand.
Interest at 24% per annum is payable monthly by the Company on the Zellermaier
and Nimberg Loans.
During 1998, Mel Dobrichovsky, CPA, a director of the Company since
November, 1998, was paid an aggregate sum of approximately $40,000 for
accounting services provided to the Company. The Company intends to engage Mel
Dobrichovsky to continue to provide services to the Company during 1999.
18
<PAGE>
During 1998 the law firm of Goddard Ronan & Dineen, P.C. (the "Goddard
Firm") provided legal services to the Company and was paid an aggregate sum of
approximately $147,000 for such services. Gregory E. Ronan, a director of the
Company since November, 1998, is a partner with the Goddard Firm. The Company
intends to continue to engage the Goddard Firm to provide services to the
Company during 1999. In July 1998, the Company sold 105,000 shares of its Common
Stock to the Goddard Firm in exchange for $105,000 in cash which the Company
returned to the Goddard Firm as a retainer for legal services and in exchange
for an agreement with the Goddard Firm whereby the Goddard Firm has agreed to
render legal services to the Company at a 10% discount to its standard hourly
rates.
Item 13. Exhibits And Reports on Form 8-K
(a) Documents filed as part of this report
1. Financial Statements
See Financial Statements commencing at page F-1.
2. Exhibits:
See Exhibit Index. The Exhibits listed in the accompanying
Exhibits Index are filed or incorporated by reference as part of
this report.
(b) Reports on Form 8-K:
1. Current Report on Form 8-K dated November 19, 1998 regarding the
resignation of David Bader and the appointment to the Board of
Directors of Melvyn Dobrichovsky and Gregory E. Ronan.
19
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
GENERAL CREDIT CORPORATION
Date: April 14, 1999 By: /s/ Irwin Zellermaier
--------------------------------------
Irwin Zellermaier, Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Irwin Zellermaier Chairman, Chief Executive April 14, 1999
- ---------------------
Irwin Zellermaier Officer, Director
/s/ Gerald Nimberg President, Chief Operating April 14, 1999
- ------------------ Officer, Secretary, Treasurer, Chief
Gerald Nimberg Financial Officer, Chief
Accounting Officer, Director
/s/ Vincent J. Putignano Director April 14, 1999
- -------------------------
Vincent J. Putignano
/s/ Brien G. Reidy Director April 14, 1999
- -------------------
Brien G. Reidy
/s/ Melvyn Dobrichovsky Director April 14, 1999
Melvyn Dobrichovsky
/s/ Gregory E. Ronan Director April 14, 1999
- --------------------
Gregory E. Ronan
</TABLE>
20
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
- ------ -------------------
<S> <C>
2.1* Amended and Restated Asset Purchase Agreement dated as of February 19, 1996 among New York
Payroll Factors, Inc., Gerald Schultz, Gerald Nimberg, and the Company.
2.2* Amendment to Amended and Restated Asset Purchase Agreement dated as of September 6, 1996
among New York Payroll Factors, Inc. and the Company.
2.3* Second Amendment to Amended and Restated Asset Purchase Agreement dated as of January 30,
1997 among New York Payroll Factors, Inc. and the Company.
2.4(2) Contract for Sale of Business between the Company and Ace dated September 30, 1997.
3.1* Certificate of Incorporation of the Company.
3.2* Certificate of Amendment of Certificate of Incorporation of the Company.
3.3* Amended and Restated By Laws of the Company.
10.1*(1) Employment Agreement dated as of June 1, 1996 between the Company and Irwin Zellermaier.
10.2*(1) Employment Agreement dated as of June 1, 1996 between the Company and David Bader.
10.3* Lease Agreement dated January 13, 1992 between 201 Allen Street Associates, as Landlord, and
Mersa Corp., as Tenant.
10.4* Lease Agreement dated as of January 31, 1996 between Benjamin P. Feldman as Receiver for 491-
499 Seventh Avenue, as Owner, and G.S. Capital Corp., as Tenant.
10.5* Lease Agreement dated as of May 4, 1995 between Millinery Syndicate, Inc., as Owner, and Meryka,
Inc., as Tenant.
10.6* Agreement dated as of February 1, 1996 between New York Payroll Factors, Inc. and Ace Venture,
Inc.
10.7* Promissory note and option grant agreement dated February 7, 1996 made by the Company to David
A. Viets.
10.8* Promissory note and option grant agreement dated February 7, 1996 made by the Company to M. S.
Chen.
10.9* Promissory note and option grant agreement dated February 19, 1996 made by the Company to Dr.
Isreal Kazew.
10.10* Promissory note and option grant agreement dated February 22, 1996 made by the Company to John
G. Watson.
10.11* Promissory note and option grant agreement dated February 29, 1996 made by the Company to
Dominic Ricci.
10.12* Promissory note and option grant agreement dated March 4, 1996 made by the Registrant to Anthony
Fazio.
10.13* Promissory note and option grant agreement dated April 2, 1996 made by the Registrant to Regis
Ferguson.
10.14* Promissory note and option grant agreement dated May 14, 1996 made by the Registrant to
Christopher J. Wetzel.
10.15* Form of Agreement regarding Restriction on Transferability of Shares.
10.16*(1) Form of Employment Agreement between the Company and Gerald Nimberg.
10.17* Promissory note and option grant agreement dated April 23, 1996 made by the Registrant to Yung
I. Park, M.D.
10.18* Promissory Note dated September 23, 1996 made by the Company to Walter G. Romano, Jr.
10.19* Promissory Note dated September 30, 1996 made by the Company to Nick Balson.
10.20* Promissory Note dated February 28, 1997 made by the Company to Ronald M. Stein.
10.21* Promissory Note dated February 28, 1997 made by the Company to Robert Stein.
10.22* Promissory Note dated February 28, 1997 made by the Company to Eric Stein.
10.23* Promissory Note dated February 28, 1997 made by the Company to Kinserd Limited Partnership.
21
<PAGE>
RESTUBED TABLE
10.24* Promissory Note dated February 28, 1997 made by the Company to S.J. Workman.
10.25* Promissory Note dated February 28, 1997 made by the Company to Dan Cohen.
10.26* Promissory Note dated February 28, 1997 made by the Company to Jeffrey D. Greenhawt.
10.27* Promissory Note dated February 28, 1997 made by the Company to Jack S. Greenman.
10.28* Promissory Note dated February 28, 1997 made by the Company to Thomas Zotos.
10.29* Promissory Note dated February 28, 1997 made by the Company to Reynaldo Martinez.
10.30* Redemption Agreement dated as of February 15, 1997 by and among the Registrant, Irwin
Zellermaier, David Bader and D.P. Morton & Associates LLC.
10.31* Common Stock Redemption Agreement dated as of December 30, 1996 by and among the Company,
JMB Holding Inc. and Wall Street Equities, Inc.
10.32* Extension of Lease dated as of January 17, 1997 between Allen House, Inc., as agent for Landlord
and Mersa Corp., as Tenant.
10.33(2) Promissory Note made by the Company to Dong Hyun Kang dated September 30, 1997 in the
principal amount of $230,000.00
10.34(2) Promissory Note made by the Company to Sue Yi dated September 30,1997 in the principal amount
of $150,000.00.
10.35 Reserved.
10.36(3) Lease Agreement dated April 30, 1997 between 370 Lex, L.L.C., as Landlord, and Carly Holdings,
Inc., as Tenant.
10.37(3) Lease Agreement dated December 31, 1997 between Realties 1430, as Landlord, and Carly Holdings,
Inc., as Tenant.
10.38(1)(3) Amendment No. 1 to Employment Contract between the Company and David Bader (1)
10.39(3) Loan Agreement dated February 10, 1998 between the Company and Links Court #1 Associates in
the principal amount of $2,600,000.00.
10.40(3) Promissory Note made by the Company to Links Court #1 Associates dated February 10, 1998 in the
principal amount of $2,600,000.00.
10.41(4) Loan and Security Agreement dated as of June 30, 1998 among Sterling National Bank, General
Credit Corporation and G.S. Capital Corporation.
10.42(5) Amendment No. 1 to Employment Contract dated May 13, 1998 between the Company and Irwin
Zellermaier.
10.43(5) Amendment No. 2 to Employment Contract dated May 13, 1998 between the Company and Gerald
Nimberg.
10.44(6) Amendment No. 2 to Employment Contract dated November 2, 1998 between the Company and
David Bader
21.1+ Subsidiaries of Registrant.
27.1+ Financial Data Schedule for the Company as of and for the Year Ended December 31, 1998.
- ------------
* Incorporated by reference to the Company's Registration Statement on Form
SB-2 declared effective on April 25, 1997 by the Securities and Exchange
Commission, SEC File NO. 333-09831.
(1) Contracts with executive officers.
(2) Incorporated by reference to the Company's Current Report on Form 8-K dated
October 10, 1998.
(3) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1997.
(4) Incorporated by reference to the Company's Current Report on Form 8-K dated
June 30, 1998.
(5) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1998.
(6) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the quarter ended September 30, 1998.
+ Filed herewith.
</TABLE>
22
<PAGE>
Independent Auditors' Report
Board of Directors
General Credit Corporation
We have audited the accompanying consolidated balance sheet of
GENERAL CREDIT CORPORATION AND SUBSIDIARIES as at 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 audits
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
General Credit Corporation and Subsidiaries as at December 31, 1998, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1998 and 1997 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the financial statements, the Company has not complied with certain
financial covenants of its loan agreement with its primary lender which have not
been waived. While there is sufficient collateral to repay the loan if it is
called by the lender, management believes that such an event would severely
limit the Company's ability to conduct normal check cashing and credit card
purchase operations. This factor raises substantial doubt about the Company's
ability to continue as a going concern. Management's plans regarding this matter
are also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Cornick, Garber & Sandler, LLP
------------------------------
CERTIFIED PUBLIC ACCOUNTANTS
New York, New York
March 26, 1999
(Except for Note 7, for which
the date is April 14, 1999)
F-1
<PAGE>
<TABLE>
<CAPTION>
GENERAL CREDIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS AT DECEMBER 31, 1998
ASSETS
------
(NOTE 7)
<S> <C>
Current assets:
Cash and cash equivalents $1,335,548
Certificates of deposit 212,819
Restricted cash and uncleared checks (Notes 2 and 7) 2,333,335
Receivables from customers and agents (Notes 8 and 12) $1,675,684
Less allowance for doubtful accounts 50,369 1,625,315
-------------
Prepaid expenses and other current assets 95,142
------------
Total current assets 5,602,159
Fixed assets, at cost, less accumulated depreciation
and amortization (Notes 3 and 7) 310,646
Notes receivable from officer (Note 5) 58,900
Goodwill and other intangibles, net (Notes 2 and 14) 393,916
Other assets (Note 6) 128,088
------------
Total $6,493,709
============
LIABILITIES
-----------
Current liabilities:
Notes and advances payable (Note 7) $3,114,615
Accounts payable and accrued expenses 527,442
------------
Total current liabilities 3,642,057
Long-term portion of notes and advances payable (Note 7) 768,074
Commitments and contingencies (Notes 5 and 11)
SHAREHOLDERS' EQUITY
--------------------
Shareholders' equity:
Common shares, $.001 par value, 20,000,000 shares
authorized, 3,615,000 shares issued and outstanding $ 3,615
Additional paid-in capital 7,953,938
Stock subscription receivable (Note 11) (99,778)
Deficit (5,774,197) 2,083,578
------------ ------------
Total $6,493,709
============
</TABLE>
The accompanying notes are an integral part of the
financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
GENERAL CREDIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
-----------------------
1998 1997*
---- -----
<S> <C> <C>
Fee income, net $ 4,082,871 $ 2,412,672
-------------- --------------
Selling, general and administrative expenses 3,534,662 1,976,743
Depreciation and amortization 99,400 24,296
-------------- --------------
3,634,062 2,001,039
-------------- --------------
Income from operations 448,809 411,633
Other income (expenses):
Interest expense (net of interest income of $98,194
in 1998 and $5,936 in 1997) (827,630) (456,013)
Other 63,750
-------------- --------------
Loss before write-off of goodwill and related
intangible asset and extraordinary item (315,071) (44,380)
Write-off of goodwill and related intangible asset (Note 14) (4,651,101) (196,590)
-------------- --------------
Loss before extraordinary item (4,966,172) (240,970)
Extraordinary item - early extinguishment
of debt (Note 7) -- (154,150)
-------------- --------------
Net loss $(4,966,172) $ (395,120)
============== ==============
Loss per share:
Before extraordinary item $ (1.41) $ (.10)
Extraordinary item -- (.06)
-------------- --------------
Net loss $ (1.41) $ (.16)
=============== ===============
Weighted average number of common
shares outstanding (Note 2) 3,530,423 2,474,041
=============== ===============
</TABLE>
* The Company began its financing operations on May 2, 1997 (see Note 1). The
1997 statement of operations has been reclassified to separately reflect the
amortization of certain intangible assets (see Note 14).
The accompanying notes are an integral part of the
financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
GENERAL CREDIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
Common Stock Additional Stock
----------------------- Paid-in Subscription
Shares Amount Capital Deficit Receivable
------ ------ ------- ------- ----------
<S> <C> <C> <C> <C>
Balance, January 1,1997 1,758,000 $ 1,758 $ 11,176 $ (412,905)
Redemption of common
shares (Note 9) (1,198,000) (1,198)
Units issued in public offering,
net of costs (Note 9) 2,700,000 2,700 7,156,567
Shares issued in connection
with acquisition (Note 4) 125,000 125 385,250
Shares issued in connection
with the prepayment of
debt (Note 7) 50,000 50 154,100
Options issued to consultants
(Note 9) 35,000
Net loss for the year ended
December 31, 1997 (395,120)
-------------- --------- -------------- ------------
Balance, December 31, 1997 3,435,000 3,435 7,742,093 (808,025)
Options issued to consultants
(Note 9) 24,900
Shares issued in connection
with the exercise of
warrants 75,000 75 82,050
Shares issued for prepaid
legal services (Note 11) 105,000 105 104,895
Stock subscription receivable
(Note 11) $(99,778)
Net loss for the year ended
December 31, 1998 (4,966,172)
-------------- -------- -------------- ------------ -----------
Balance, December 31, 1998 3,615,000 $3,615 $7,953,938 $(5,774,197) $(99,778)
============== ======== ============== ============ ===========
(RESTUBBED TABLE)
Total
Shareholders'
Equity
Deferred (Capital
Offering Costs Deficiency)
-------------- -----------
<C> <C>
Balance, January 1,1997 $(383,462) $ (783,433)
Redemption of common
shares (Note 9) (1,198)
Units issued in public offering,
net of costs (Note 9) 383,462 7,542,729
Shares issued in connection
with acquisition (Note 4) 385,375
Shares issued in connection
with the prepayment of
debt (Note 7) 154,150
Options issued to consultants
(Note 9) 35,000
Net loss for the year ended
December 31, 1997 (395,120)
------------- ------------
Balance, December 31, 1997 -- 6,937,503
Options issued to consultants
(Note 9) 24,900
Shares issued in connection
with the exercise of
warrants 82,125
Shares issued for prepaid
legal services (Note 11) 105,000
Stock subscription receivable
(Note 11) (99,778)
Net loss for the year ended
December 31, 1998 (4,966,172)
------------ ------------
Balance, December 31, 1998 $ -- $ 2,083,578
============ ============
</TABLE>
The accompanying notes are an integral part of the
financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
GENERAL CREDIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------
1998 1997*
---- -----
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
Cash flows from operating activities:
Net loss $(4,966,172) $ (395,120)
Adjustment to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 99,400 24,296
Issuance of stock options 24,900 35,000
Issuance of common stock relating to prepayment
of debt 154,150
Bad debt expense 100,000 40,000
Write-off of goodwill and related intangible asset
(Note 14) 4,651,101 196,590
Change in assets and liabilities, net of effects of
acquisition of businesses:
Receivables from customers and agents (1,033,587) (731,728)
Prepaid expenses (25,834) (69,308)
Other assets (43,062) (72,296)
Accounts payable and accrued expenses 126,854 129,743
------------- ---------------
Net cash used for operating activities (1,066,400) (688,673)
------------- ---------------
Cash flows from investing activities:
Investment in certificates of deposit (212,819)
Purchase of fixed assets (179,929) (123,891)
Payment for purchases of businesses (4,609,500)
Loans to officer (10,000) (50,000)
Collections of loans to officer 1,100
------------- ---------------
Net cash used for investing activities (401,648) (4,783,391)
------------- ---------------
Cash flows from financing activities:
Borrowings under long-term and short-term debt agreements 1,259,951 2,550,000
Repayments of long-term and short-term debt (299,483) (7,779)
Borrowings under bridge financing 366,390
Repayments of bridge financing (884,390)
Net proceeds from issuance of units in public offering
(less offering costs paid of $557,271 in 1997) 7,542,729
Redemption of common stock (1,198)
Proceeds from exercise of warrants 82,125
Cash restricted for debt payments (33,335) (2,300,000)
------------- ---------------
Net cash provided by financing activities 1,009,258 7,265,752
------------- ---------------
Net increase (decrease) in cash and cash equivalents (458,790) 1,793,688
Cash and cash equivalents, January 1 1,794,338 650
------------- ---------------
Cash and cash equivalents, December 31 $ 1,335,548 $ 1,794,338
============= ===============
Supplemental disclosure of interest paid during the year $ 956,906 $ 427,338
============= ===============
*Reclassified for comparative purposes.
</TABLE>
The accompanying notes are an integral part of the
financial statements.
F-5
<PAGE>
GENERAL CREDIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - The Company
- ---- -----------
General Credit Corporation (the "Company"), was incorporated in
February 1995, for the purposes of seeking out business
opportunities, including acquisitions. On May 2, 1997, the Company
emerged from the development stage by acquiring the operations of
New York Payroll Factors, Inc. ("NYPF") (see Notes 2 and 4). Prior
to May 2, 1997, the Company's activities were limited to
administrative activities.
NOTE 2 - Summary of Significant Accounting Policies
- ------ ------------------------------------------
Principles of Consolidation and Operations
------------------------------------------
The consolidated financial statements include the accounts of
General Credit Corporation and its subsidiaries, all of which are
wholly-owned. The Company is engaged in providing working capital
financing to its customers through the discounted purchase of
checks made payable to the Company's customers and, to a lesser
extent, the discounted purchase of credit card sales slips. Gross
proceeds from the purchase of these checks and credit card sales
slips during 1998 are estimated to be approximately $372 million in
checks and $6.5 million in credit card slips and for the period
from the acquisition of NYPF on May 2, 1997 to December 31, 1997
are estimated to be approximately $220 million in checks and
$835,000 in credit card slips. The Company's customers primarily
comprise numerous small and medium sized contracting firms located
in the New York metropolitan area and other northern New Jersey
areas. Revenues, which are comprised of the discounted portion of
checks and credit card sales slips purchased, are recognized when
payment for them is made to the Company.
Basis of Presentation
---------------------
The accompanying financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business.
As discussed in Note 7(b), the Company has not complied with
certain financial covenants of its loan agreement with its primary
lender which have not been waived. While there is sufficient
collateral to repay the loan if it is called by the lender,
management believes that such an event would severely limit the
Company's ability to conduct normal check cashing and credit card
purchase operations. This, in turn, raises substantial doubt about
the Company's ability to continue as a going concern. Management
believes that since the lender has amended the agreement in April
1999, with the collateral in the form of checks or cash equal to
the amount of the loan, the lender will continue to make funds
available to the Company. Management is also seeking alternative
sources of financing and/or capital. However, no assurances can be
given as to the lender's future actions or to the success of these
plans. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
F-6
<PAGE>
GENERAL CREDIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - Summary of Significant Accounting Policies (Continued)
- ------ -----------------------------------------------------
Fixed Assets
------------
Fixed assets are recorded at cost. Expenditures for additions and
betterments are capitalized and expenditures for maintenance and
repairs are charged to operations as incurred. Depreciation is
provided using the straight-line method over the estimated useful
lives of the related assets (vehicles, 3 years, equipment,
furniture and fixtures, 7 years leasehold improvements over the
remaining lives of the leases). Upon retirement or disposal, the
asset cost and related accumulated depreciation and amortization
are eliminated from the respective accounts and the resulting gain
or loss, if any, is included in the results of operations for the
period.
Intangible Assets
-----------------
The net assets of businesses acquired are recorded at their fair
value at the acquisition date and any excess of acquisition costs
over the value of identifiable net assets acquired is recorded as
goodwill which is being amortized on a straight-line basis over
twenty years. At December 31, 1998, goodwill was $217,983, net of
accumulated amortization of $14,017.
Amounts paid for covenants not-to-compete are stated at cost and
are amortized using the straight-line method over the non-compete
period of five years. At December 31, 1998, covenants
not-to-compete were $175,933, net of accumulated amortization of
$56,067.
The Company continually evaluates the existence of goodwill
impairment on the basis of whether the goodwill is fully
recoverable from projected, undiscounted net cash flows for each
related business. Based upon its most recent analysis, in the
fourth quarter of 1998 the Company wrote off the goodwill and
remaining covenant not-to-compete related to the NYPF acquisition
(see Note 14). The Company believes that no impairment of goodwill
exists at December 31, 1998 for the goodwill and covenant
not-to-compete related to the acquisition of Ace Venture, Inc.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid debt instruments, purchased
with original maturities of three months or less, to be cash
equivalents. At December 31, 1998, the Company had $2,333,335 in
restricted cash and uncleared checks which collateralize a portion
of the Company's indebtedness (see Note 7); these are not
considered cash equivalents.
F-7
<PAGE>
GENERAL CREDIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - Summary of Significant Accounting Policies (Continued)
- ------ -----------------------------------------------------
Concentration of Credit Risk
----------------------------
Financial instruments which potentially subject the Company to
concentration of credit risk consist of accounts receivable and
cash deposits. Cash balances are held principally at one financial
institution and usually exceed FDIC insured amounts.
The Company believes the concentration of credit risk with respect
to receivables from customers is limited due to the large number of
customers comprising the Company's customer base and the fact that
no single customer represents more than 5% of the total. The
Company performs ongoing informal background and financial
evaluations of its customers and does not require collateral. The
Company's agency agreements (see Note 8), have generated
approximately 30.0% and 21.2% of its fee income in 1998 and 1997,
respectively. The loss of these arrangements could have a
significant impact on the Company's financial position and results
of operations.
Fair Value of Financial Instruments
-----------------------------------
Cash and cash equivalents and receivables are reflected in the
accompanying balance sheets at amounts considered by management to
reasonably approximate fair value. It is not practicable to assess
the fair value of the Company's notes payable (see Note 7) because
management believes such debt is not readily marketable due to the
nature of its incurrence.
Uses of Estimates
-----------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets, liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and reported
amounts of revenues and expenses during the reporting period.
Actual results could differ those estimates.
Loss Per Share
--------------
Loss per share has been computed by dividing net losses by the
weighted average number of common shares outstanding. The effect of
outstanding stock options and warrants is not included in the per
share calculations as it would be anti-dilutive.
F-8
<PAGE>
GENERAL CREDIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - Fixed Assets
- ------ ------------
Fixed assets consist of the following at December 31, 1998:
Furniture, fixtures and office equipment $238,870
Leasehold improvements 96,078
Vehicles 26,871
----------
Total 361,819
Less accumulated depreciation and amortization (51,173)
----------
Net $310,646
==========
Depreciation expense for the year ended December 31, 1998 and 1997
was $41,186 and $9,987, respectively.
NOTE 4 - Acquisitions
- ------ ------------
NYPF
----
On January 13, 1997, the Company and NYPF entered into a definitive
agreement to acquire NYPF for $4,500,000 in cash and 125,000 shares
of common stock. The acquisition of NYPF was closed in May 1997
upon the conclusion of the public offering (Note 9). The value
assigned to the shares issued was $3.083 a share, which equals
their value in the public offering. This acquisition was treated as
a purchase for accounting purposes and the operations of NYPF have
been included in the consolidated statement of operations from May
2, 1997. The Company recorded goodwill of $4,497,691 and a covenant
not-to-compete of $350,000 relating to the NYPF acquisition, the
unamortized portion of which has been written off in 1998 (see Note
14).
Ace Venture, Inc. ("Ace")
------------------------
On September 30, 1997, the Company acquired the operations of Ace
(an exclusive sales agent of the Company) for $489,500 (which
includes legal costs of $9,500). The purchase price was paid for by
the Company by its issuance of notes totalling $380,000 and cash of
$109,500. The notes bear interest at 10% a year and are payable in
equal monthly installments of $7,040 for principal and interest
over 72 months to October 2003. This acquisition was treated as a
purchase for accounting purposes and the operations of Ace have
been included in the consolidated statement of operations from
October 1, 1997. The Company recorded goodwill of $232,000 and a
covenant not-to-compete of $232,000 relating to the Ace
acquisition.
F-9
<PAGE>
GENERAL CREDIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - Acquisitions (Continued)
- ------ -----------------------
Ace Venture, Inc. ("Ace") (Continued)
------------------------------------
In addition, the Company entered into a ten year employment
agreement with the president of Ace at a base annual salary of
$130,000, plus bonuses, if certain sales volume is achieved. The
base salary increases each year by 5% or the increase in the
consumer price index, whichever is greater.
NOTE 5 - Notes Receivable Officer
- ------ ------------------------
During 1998 and 1997, the Company advanced $10,000 and $50,000,
respectively, to one of its officers. The advances are evidenced by
unsecured notes due three years after issuance. These advances are
in connection with this officer's employment agreement under which
the Company had agreed to lend up to $250,000 to him. In April
1998, the agreement was amended and the loan commitment was reduced
to $60,000. For this concession, the interest rate charged was
reduced from 24% to 9%. Interest income on these notes was $5,335
in 1998 and $400 in 1997.
NOTE 6 - Other Assets
- ------ ------------
Other assets at December 31, 1998 are comprised of:
Security deposits $ 36,813
Prepaid consulting fee (see Note 9) 12,000
Noncurrent prepaid expenses and
other miscellaneous assets 79,275
----------
Total $128,088
==========
F-10
<PAGE>
GENERAL CREDIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - Notes and Advances Payable
- -------- --------------------------
<TABLE>
<CAPTION>
Notes payable are comprised of the following at December 31, 1998:
<S> <C>
Noninterest bearing advance(A) $ 636,616
24% notes payable to a corporation(B) 2,333,335
21% notes payable to an individual
due November 9, 2001 500,000
21% demand notes due to three
individuals 90,000
10% notes payable relating to the
acquisition of Ace (see Note 4) due
October 2003. Monthly payments
of principal and interest total $7,040 322,738
-------------
Total 3,882,689
Less current maturities 3,114,615
-------------
Noncurrent portion of long-term debt $ 768,074
=============
</TABLE>
Maturities of the noncurrent portion of long-term debt are as
follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Year Ending December 31:
2000 $ 60,389
2001 566,712
2002 73,696
2003 67,277
------------
Total $ 768,074
============
</TABLE>
(A) This amount was erroneously deposited by a lender into
the Company's account and was repaid without interest in
January 1999.
(B) The wife of one of the Company's officers is an 8%
shareholder in the lending corporation. The notes are
collateralized by receivables and certain fixed assets
and require the Company to maintain collateral in the
form of checks or cash equal to the amount of the loans.
Interest on these notes was approximately $545,000 and
$242,000 in 1998 and 1997, respectively.
F-11
<PAGE>
GENERAL CREDIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - Notes and Advances Payable (Continued)
- -------- --------------------------------------
The combined notes at December 31, 1998 of $2,333,335,
of which $1,833,335 was due in June 1999 and $500,000
was due in October 2001, were amended on April 14, 1999.
The amended note for $2,333,335 also bears interest at
24% a year, payable monthly and is due in October 2001.
The amended note contains the same covenants which
limits the losses before depreciation expense and
amortization of goodwill to an amount not greater than
$50,000 a year or in any two consecutive quarters in any
fiscal year. In addition, the Company must continue to
maintain cash balances (as defined) in excess of
$1,100,000. The amended note cannot be prepaid during
the first twelve months. Any prepayment thereafter
requires a "prepayment fee" of three months interest on
the principal balance outstanding.
At December 31, 1998, the Company was in default of
certain financial covenants of the note agreement, which
have not been waived. Until waivers are obtained or the
loan agreement is otherwise amended, the lender can call
the notes for repayment on demand. Accordingly, the
notes have been classified as a current liability in the
attached balance sheet.
During January and February 1997 and in 1996, the Company obtained
$66,390 and $518,000, respectively, of bridge financing to provide
interim working capital and pay for costs associated with the
public offering (see Note 9). These uncollateralized notes bore
interest at 12% a year and were paid upon closing of the public
offering. In addition, certain bridge lenders received options to
purchase a total of 198,000 shares of the Company's common stock at
$1 per share for a term of one year from the closing of the public
offering. The options issued in connection with the bridge
financing were valued at approximately $11,000.
In February 1997, the Company borrowed $300,000 through the
issuance of notes to ten unrelated parties. These unsecured notes
bore interest at 18% a year and were paid upon the closing of the
public offering. The Company issued 50,000 shares of its common
stock with a value (at the public offering price per share of
$3.083) totalling $154,150 to prepay the notes. The $154,150 has
been reflected in the consolidated statements of operations as an
extraordinary item from the early extinguishment of debt.
F-12
<PAGE>
GENERAL CREDIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - Commitments and Contingencies
- -------- -----------------------------
In addition to the employment contract discussed in Note 4, the
Company has ten year employment contracts with its two executive
officers that expire in 2006 and 2007. The aggregate salary
pursuant to these contracts aggregates $280,000 a year excluding
bonuses, fringe benefits and cost of living increases. One of the
officers is entitled to annual salary adjustments for increases in
the Consumer Price Index. In May 1998, these agreements were
amended to provide that if employment is otherwise terminated, the
officer will receive a lump sum payment equal to three times his
compensation (base salary plus bonuses) paid for the year prior to
termination.
In November 1998, another executive officer resigned. He was paid
approximately $68,000 in severance and entered into a consulting
agreement commencing January 1, 1999 for 40 weeks at $1,800 per
week.
The Company is obligated under noncancelable real property
operating lease agreements through June 2006. Minimum rents under
these obligations are as follows:
Year Ending December 31:
1999 $166,000
2000 156,000
2001 81,000
2002 59,000
2003 20,000
Thereafter 33,000
These leases also contain operating expense and real estate tax
escalation clauses. Rent expense was approximately $166,000 and
$57,000 in 1998 and 1997, respectively.
The Company is contractually obligated pursuant to two agency
agreements with unrelated entities. These agreements provide that
the entities will refer certain check factoring customers to the
Company for fees ranging from 40% to 50% of the net fee revenue
received. These agreements terminate in January 2001. The Company
makes noninterest bearing advances to these agents for use in their
check cashing activities. These advances are evidenced by notes and
are partially collateralized by personal assets of the agents; at
December 31, 1998, such advances totaled approximately $747,000
(see Note 12).
F-13
<PAGE>
GENERAL CREDIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - Shareholders' Equity
- -------- --------------------
Common Stock Redemption
-----------------------
In February 1997, the Company redeemed 1,198,000 common shares from
its shareholders for $1,198. The repurchased shares, which were
cancelled, are available for future issuance.
Public Offering
---------------
In April 1997, the Company sold 900,000 units to the public for $10
per unit. Each unit consists of three shares of common stock and
six redeemable common stock warrants. Each warrant entitles the
holder to purchase one additional share of common stock at an
exercise price of $3.375 from the effective date of the offering
through April 24, 2002. Upon certain conditions, the Company is
entitled to call all or a portion of the warrants for a redemption
price of $.25 per warrant upon 30 days prior written notice to the
holders.
In connection with the offering, the Company granted the
underwriter an option to purchase up to 90,000 units at $16.50 a
unit, exercisable during a five year period commencing on the
effective date.
As additional compensation for the underwriter's services in
connection with the offering, the Company paid the underwriter a
nonaccountable expense allowance of 3% of the total purchase price.
The Company also engaged the underwriter as a financial advisor for
a three year period from the closing of the offering at a total
cost of $108,000 which was paid at closing.
The net proceeds to the Company after deducting the expenses of the
offering was $7,159,267.
Nonqualified Stock Options
--------------------------
In May 1998, the Company issued to its three executive officers,
options to purchase a total of 225,000 shares of the Company's
common stock. These options are exercisable until May 2001 at
$1.625 per share.
In January 1998, the Company issued to two of its directors options
to purchase a total of 20,000 shares of the Company's stock. These
options are exercisable until January 7, 2001 at $1.50 per share.
F-14
<PAGE>
GENERAL CREDIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - Shareholders' Equity (Continued)
- -------- --------------------------------
Nonqualified Stock Options (Continued)
--------------------------------------
On November 4, 1997, the Company issued to its three executive
officers options to purchase a total of 190,000 shares of the
Company's stock. These options are exercisable until November 3,
2000 at $2.125 per share.
The Company may receive income tax benefits for the above options
when they are exercised. Such income tax benefits are credited to
additional paid-in capital when realized. None of the above options
have been exercised as of December 31, 1998.
The Company has adopted the disclosure only provisions of Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock Based Compensation," for stock options granted to employees,
officers and directors and, therefore, applies Accounting
Principles Board Opinion No. 25. Accordingly, no compensation cost
has been recognized for the stock options granted. If the Company
had elected to recognize compensation cost for the nonqualified
options granted based upon their fair values at the grant date
consistent with the method of SFAS No. 123, the net loss and loss
per share on a pro forma basis for the years ended December 31,
1998 and 1997 would be as follows:
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C>
Net loss:
As reported $(4,966,172) $(395,120)
Pro forma $(5,183,099) $(619,928)
Loss per share:
As reported $(1.41) $(.16)
Pro forma $(1.47) $(.25)
</TABLE>
The fair value of the Company's stock options used to compute the
pro forma net loss and net loss per share disclosures are their
estimated present values at grant date using the Black-Scholes
option pricing model with the following assumptions: expected
volatility of 79.23% in 1998 and 80.84% in 1997, risk free interest
of 5.56% in 1998 and 5.715% in 1997 and an expected holding period
of three years for both 1998 and 1997.
F-15
<PAGE>
GENERAL CREDIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - Shareholders' Equity (Continued)
- -------- --------------------------------
Nonqualified Stock Options (Continued)
--------------------------------------
In addition, options to purchase a total of 30,000 shares of stock,
exercisable until May 2001 at $1.625 per share, were issued to two
outside consultants. Options to purchase 30,000 shares of stock,
exercisable until January 2001 at $1.50 per share, were issued to
three outside consultants in 1997. The fair value of these options,
which was charged to operations in each year, was $24,900 in 1998
and $35,000 in 1997 using the Black-Scholes option pricing model
utilizing the same assumptions described above.
NOTE 10 - Income Taxes
- --------- ------------
At December 31, 1998, the Company has net operating loss
carryforwards of approximately $1,195,000 for federal income tax
purposes. These carryforwards expire between 2011 and 2018. As a
result of the public offering, in April 1996, the amount of loss
carryforwards which can be utilized to offset future taxable income
are limited to approximately $553,000 a year, plus the
approximately $582,000 of loss carryforwards incurred after April
25, 1997.
While generally accepted accounting principles permit the
recognition of a deferred tax asset for the benefit of net
operating loss carryforwards, they also require the recognition of
a valuation allowance against such asset when it is more likely
than not that such benefit will not be realized. As a result of the
Company's losses since inception and its relatively brief operating
history, it has recorded a valuation allowance equal to its net
deferred tax asset account.
Deferred taxes relate to the following carryforwards and temporary
differences at December 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards $ 550,000
Allowance for doubtful accounts 23,000
Write-off and amortization of intangible assets 1,997,000
Amortization of leasehold improvements 3,000
--------------
Total 2,573,000
Less valuation allowance 2,573,000
--------------
Net deferred income tax assets after valuation
allowance $ --
==============
</TABLE>
F-16
<PAGE>
GENERAL CREDIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - Related Party Transactions
- --------- --------------------------
The Company received accounting and legal services from two new
directors appointed in November 1998. One of the directors
performed accounting services for the Company and charged
approximately $40,000. The other director's firm, in which he is a
partner, charged approximately $147,000 for legal services. In
addition, the Company issued to this firm 105,000 shares of common
stock at $1 per share (the market price on the date issued)
initially for cash, which was returned, for prepaid legal
services. At December 31, 1998, the remaining balance of $99,778
has been shown as a stock subscription receivable and,
accordingly, the stockholders' equity of the Company has been
reduced by this amount.
NOTE 12 - Litigation
- --------- ----------
The Company received a deed for residential property as payment
for a $280,000 receivable from an agent. Subsequently, a lawsuit
was brought against the Company to have this deed stricken on the
basis of fraud. The plaintiff also seeks $1,000,000 in damages
against the Company for "over reaching." Based on the advice of
counsel, the Company believes that the action is without merit and
there is no legal basis to claim damages in a slander of title
case. However, until discovery and other pre-trial proceedings
have been completed, the attorneys cannot offer an opinion
regarding the likelihood of success. The $280,000 plus interest
and related expenses of approximately $35,000 have been included
in receivables from customers and agents on the balance sheet.
In March 1998, a former bridge loan lender to the Company claimed
that he is owed 750,000 shares of the Company's stock and
threatened a lawsuit if his claim is not satisfied. The Company
has received no further correspondence from this individual. In
management's opinion, this claim is without merit and if it is
pursued the Company intends to vigorously defend against the
allegations.
NOTE 13 - Retirement Plan
- --------- ---------------
Effective January 1998, the Company instituted a "S.I.M.P.L.E."
retirement plan. Eligible employees may make salary reduction
contributions of up to $6,000 in 1998 and adjusted for inflation
in future years. The Company is required to match, dollar for
dollar, up to 3% (but not below 1% in two of the last 5 years) of
the employees' compensation up to $160,000 in 1998 and adjusted
for inflation in future years. The Company made matching
contributions of approximately $22,000 in 1998.
F-17
<PAGE>
GENERAL CREDIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - Asset Write-Off
- --------- ---------------
In the fourth quarter of 1998, the Company recorded a write-off of
$4,513,600, representing the unamortized balance of goodwill and
covenant not-to-compete related to the NYPF acquisition. This
decision was based upon continued losses since the acquisition of
NYPF and the Company's inability to forecast future recovery of
the cost of its investment based on future cash flow analyses. The
amounts for the write-off in the consolidated statements of
operations includes the amortization of those costs for the first
three quarters of 1998 and for 1997.
NOTE 15 - Subsequent Events
- --------- -----------------
In January and February 1999, the Company borrowed, for working
capital purposes, approximately $217,500 from its two executive
officers. These loans are due on demand with interest at 24% a
year, payable monthly.
F-18
<PAGE>
LIST OF EXHIBITS
Exhibit
Number Exhibit Description
- ------ -------------------
21.1 Subsidiaries of Registrant.
27.1 Financial Data Schedule for the Company as of and for the Year
Ended December 31, 1998.
List of Subsidiaries
1. G. S. Capital Corp.
2. Carly Holdings, Inc.
3. Meryka, Inc.
4. Mersa Corp.
5. General Armored Corporation
6. General Debit Corporation
7. General Check Cashing Corporation
8. CCC Acquisition LLC
9. GCC of Williamsburg, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,335,548
<SECURITIES> 212,819
<RECEIVABLES> 1,675,684
<ALLOWANCES> 50,369
<INVENTORY> 0
<CURRENT-ASSETS> 95,142
<PP&E> 361,819
<DEPRECIATION> 51,173
<TOTAL-ASSETS> 6,493,709
<CURRENT-LIABILITIES> 3,642,057
<BONDS> 0
0
0
<COMMON> 3,615
<OTHER-SE> 2,079,963
<TOTAL-LIABILITY-AND-EQUITY> 6,493,709
<SALES> 4,082,871
<TOTAL-REVENUES> 4,082,071
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,121,413
<LOSS-PROVISION> 100,000
<INTEREST-EXPENSE> 827,630
<INCOME-PRETAX> (4,966,172)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,966,172)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,966,172)
<EPS-PRIMARY> (1.41)
<EPS-DILUTED> (1.41)
</TABLE>
