ELK ASSOCIATES
FUNDING CORPORATION AND SUBSIDIARY
Consolidated Financial Statements for the
Six Months Ended December 31, 1995 and for the
Year Ended June 30, 1995, and
Independent Accountants' Report
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
TABLE OF CONTENTS
Page
INDEPENDENT ACCOUNTANTS' REPORT 1
FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED
DECEMBER 31, 1995 AND FOR THE YEAR ENDED JUNE 30, 1995:
Consolidated Balance Sheets 2
Consolidated Statements of Income 3
Consolidated Statements of Shareholders' Equity 4
Consolidated Statements of Cash Flows 5
Consolidated Schedule of Loans 6
Notes to Consolidated Financial Statements 7-12
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Shareholders of
Elk Associates Funding Corporation and Subsidiary
(A Specialized Small Business Investment Company Licensed by the SBA)
We have reviewed the accompanying consolidated balance sheet, including the
schedule of loans, of Elk Associates Funding Corporation and Subsidiary as
of December 31, 1995, and the related consolidated statements of income,
shareholders' equity and cash flows for the six months then ended. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and of making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we do not express
such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements for them to be in
conformity with generally accepted accounting principles.
As explained in Note 1, the financial statements include loans valued at
$23,353,812 as of December 31, 1995, whose values have been estimated by
the Board of Directors in the absence of readily ascertainable market
values. We have reviewed the procedures used by the Board of Directors in
arriving at their estimate of the value of such loans and have inspected
underlying documentation and, in the circumstances, we believe the
procedures are reasonable and the documentation appropriate. However,
because of the inherent uncertainty of valuation, those estimated values
may differ significantly from the values that would have been used had a
ready market for such loans existed, and the differences could be material.
As explained in Note 1, on December 19, 1994 the shareholders of Elk
Associates Funding Corporation approved a quasi-reorganization of the
company. The quasi-reorganization resulted in the elimination of the
retained earnings deficit effective July 1, 1994.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of Elk Associates Funding Corporation as of
June 30, 1995, and the related statements of income, shareholders' equity,
and cash flows for the year then ended; and in our report dated August 1,
1995, we expressed an unqualified opinion on those financial statements and
included an explanatory paragraph regarding the possible effect on the
financial statements of the valuation of loans determined by the Board of
Directors.
February 12, 1996
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
<S> <C> <C> <S> <C> <C>
<C>
December
31, June 30,
ASSETS 1995
1995
(Unaudited)
Loans (Notes 1, 3 and 5) $23,642,812
$23,039,462
Less allowance for loan losses
(289,000) (277,000)
23,353,812
22,762,462
Cash 1,065,755
1,139,501
Accrued interest receivable (Notes 1 and 3) 313,402
240,221
Assets acquired in satisfaction of loans (Notes 1 and 2) 536,972
865,216
Receivables from debtors on sales of assets acquired in
satisfaction of loans (Notes 1 and 2) 638,358
389,374
Equity securities 24,045
-
Furniture, fixtures and leasehold improvements - At cost,
less accumulated depreciation of $158,460 and $145,860, 109,373
111,231
respectively (Note 1)
Prepaid expenses and other assets 194,910
194,595
TOTAL ASSETS $26,236,627
$25,702,600
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Debentures payable to SBA (Note 4) $8,831,000
$ 8,804,000
Notes payable to banks (Note 5) 6,425,000
4,950,000
Accrued expenses and other liabilities 199,827
147,718
Accrued interest payable 195,473
183,934
Total liabilities 15,651,300
14,085,652
SHAREHOLDERS' EQUITY (Notes 1, 6 and 7):
Series A, 3 percent cumulative preferred stock, $10 par value -
547,271 shares authorized, issued and outstanding at June 30, 1995 -
5,472,710
Series B, 4 percent cumulative preferred stock, $10 par value,
752,729 shares authorized, none outstanding -
-
Common stock, $.01 par value - 1,500,000 shares
authorized; 1,283,600 issued and outstanding at December 31, 1995;
1,033,683 outstanding at June 30, 1995 12,836
10,337
Additional paid-in capital 7,804,054
5,480,948
Restricted capital 2,766,759
-
Retained earnings since July 1, 1994 1,678
652,953
Total shareholders' equity 10,585,327
11,616,948
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $26,236,627
$25,702,600
See independent accountants' report and notes to
consolidated financial statements.
</TABLE>
- 2 -
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
<S> <C>
<C>
Six Months
Year
Ended
Ended
December 31,
June 30,
1995
1995
(Unaudited)
INVESTMENT INCOME (Note 3):
Interest on loans $1,346,804
$2,398,616
Fees and other income 177,826
231,285
Total investment income 1,524,630
2,629,901
EXPENSES:
Interest 558,366
1,002,959
Management fees (Note 8) 210,000
384,000
Legal fees (Note 8) 110,587
223,651
Miscellaneous administrative expenses 220,300
343,823
Credit for loan losses - net (Note 3) -
(24,351)
Losses on assets acquired in satisfaction of loans (Note 2) 1,829
37,866
Directors' fees 10,500
9,000
Total expenses 1,111,582
1,976,948
NET INCOME $413,048
$ 652,953
WEIGHTED AVERAGE SHARES OUTSTANDING 1,211,235
988,953
NET INCOME PER COMMON SHARE (Note 1) $.34
$.66
See independent accountants' report and notes to
consolidated financial statements.
</TABLE>
- 3 -
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (NOTES 1, 6 AND 7)
SIX MONTHS ENDED DECEMBER 31, 1995 (UNAUDITED) AND YEAR ENDED JUNE 30, 1995
<S> <C> <C> <C> <C> <C> <C> <C>
<C> <C> <C> <C> <C>
Series A Series B
Shares of Preferred Preferred Shares of
Common
Preferred Stock - 3% Stock - 4% Common
Stock Additional Retained
Stock Cumulative Cumulative Stock
$.01 Par Paid-in Restricted Earnings
Outstanding $10 Par $10 Par Outstanding
Value Capital Capital (Deficit) Total
BALANCE, JUNE 30, 1994 547,271 $5,472,710 $ - 943,683 $
9,437 $5,480,948 $ - $(372,655) $10,590,440
Proceeds from issuance of
common stock (Note 7) - - 90,000
900 372,655 - - 373,555
Quasi-reorganization effective
July 1, 1994 (Note 1) - - - -
- - - (372,655) - 372,655 -
BALANCE, EFFECTIVE JULY 1, 1994,
after quasi-reorganization 547,271 5,472,710 - 1,033,683
10,337 5,480,948 - - 10,963,995
Net income - - - -
- - - - - 652,953 652,953
BALANCE, JUNE 30, 1995 547,271 5,472,710 - 1,033,683
10,337 5,480,948 - 652,953 11,616,948
Proceeds from issuance of common
stock (Note 7) - - - 249,917
2,499 1,225,604 - - 1,228,103
Redemption of preferred stock
(Note 6) (547,271) (5,472,710) - -
- - - - 3,557,261 - (1,915,449)
Capitalization of retained
earnings (Note 7) - - - -
- - - 307,000 - (307,000) -
Transfer of restricted capital
(Note 6) - - - -
- - - 790,502 (790,502) - -
Dividends paid - - - -
- - - - - (757,324) (757,324)
Net income - - - -
- - - - - 413,049 413,049
BALANCE, DECEMBER 31, 1995 - $ - $ - 1,283,600
$12,836 $7,804,054 $2,766,759 $ 1,678 $10,585,327
See independent accountants' report and notes to
consolidated financial statements.
</TABLE>
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ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<S> <C>
<C>
Six Months
Year
Ended
Ended
December 31,
June 30,
1995
1995
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 413,048 $
652,953
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 12,600
24,015
Losses and expenses of assets acquired in
satisfaction of loans -
37,866
Credit for loan losses -
(24,351)
(Increase) decrease in accrued interest receivable (73,181)
65,430
Increase in prepaid expenses and other assets (315)
(1,743)
Increase (decrease) in accrued expenses and other liabilities 52,109
(36,282)
Increase in accrued interest payable 11,539
9,850
Net cash provided by operating activities 415,800
727,738
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in loans, assets acquired in
satisfaction of loans, and receivables from debtors
on sales of assets acquired in satisfaction of loans (512,090)
(889,825)
Purchases of equity securities (24,045)
-
Acquisition of fixed assets (10,742)
(30,656)
Net cash used in investing activities (546,877)
(920,481)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings 12,575,000
1,400,000
Repayments of bank borrowings (11,100,000)
(2,145,000)
Proceeds from SBA debentures 1,020,000
2,690,000
Repayments of SBA debentures (993,000)
(2,610,430)
Proceeds from sale of common stock 1,228,104
373,555
Repurchase of Preferred Stock (1,915,449)
-
Dividends paid (757,324)
-
Net cash provided by (used in) financing activities 57,331
(291,875)
NET DECREASE IN CASH (73,746)
(484,618)
CASH, BEGINNING OF PERIOD 1,139,501
1,624,119
CASH, END OF PERIOD $ 1,065,755
$1,139,501
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for interest $ 546,827
1,009,593
Noncash conversion of loans to assets acquired
in satisfaction of loans and assets acquired in
satisfaction of loans to receivables from debtors $ 270,000 $
103,000
See independent accountants' report and notes to
consolidated financial statements.
</TABLE>
- 5 -
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED SCHEDULE OF LOANS
DECEMBER 31, 1995 (Unaudited)
<S> <C> <C> <C> <C>
Number Interest Maturity Balance
Type of Loan of Loans Rates Dates Outstanding
(In Months)
New York City:
Taxi medallion 124 8-12% 1-119 $17,532,245
Radio car service 70 6-15% 1-59 560,788
Chicago:
Taxi medallion 103 13-14% 39-48 2,722,099
Boston:
Taxi medallion 13 12.75-13.5% 51-78 834,962
Other loans:
Restaurant 1 12% 1 148,669
Gas station/auto repair 4 11-14.5% 1-51 221,084
Management taxi fleet/car
service 1 13% 1 34,401
Hairdresser 2 12% 28 179,089
Car wash 2 15.25% 27 211,998
Ambulance service 1 10.5% 36 23,725
Liquor store 1 16.25% 21 58,647
Antique store 2 12% 12-65 368,420
Dry cleaner 3 10-13.5% 47-117 493,420
Laundromat 1 15% 21 49,887
Grocery/deli 3 12.5-16.625% 41-57 103,378
Financial services 1 14% 1 100,000
TOTAL PORTFOLIO 332 6-16.625% 1-119 $23,642,812
See independent accountants' report and notes to
consolidated financial statements.
</TABLE>
- 6 -
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 1995 (UNAUDITED)
AND YEAR ENDED JUNE 30, 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - Elk Associates Funding Corporation (the "Company"), a New York
corporation, is licensed by the Small Business Administration ("SBA") to
operate as a Specialized Small Business Investment Company ("SSBIC") under
the Small Business Investment Act of 1958, as amended. The Company has also
registered as an investment company under the Investment Company Act of 1940.
The Company makes loans to persons who qualify under SBA regulations as
socially or economically disadvantaged and loans to entities which are at
least 50 percent owned by such persons.
On December 19, 1994, the Company's shareholders approved a quasi-
reorganization of the Company effective July 1, 1994. On December 30, 1994,
the Company completed the sale of 90,000 shares of common stock to its
shareholders, which was a precondition of the quasi-reorganization. The
quasi-reorganization resulted in the elimination of a deficit of $372,655 in
retained earnings effective July 1, 1994. The quasi-reorganization was also
approved by the SBA.
Loans and the Allowance for Loans Losses - Loans are stated at cost, net of
participations with other lenders, less an allowance for possible losses.
This amount represents the fair value of such loans as determined in good
faith by the Board of Directors. The allowance for loan losses is maintained
at a level that, in the Board of Directors' judgment, is adequate to absorb
losses inherent in the portfolio. The allowance for loan losses is reviewed
and adjusted periodically by the Board of Directors on the basis of available
information, including the fair value of the collateral held, existing risk
of individual credits, past loss experience, the volume, composition and
growth of the portfolio, and current and projected economic conditions.
Because of the inherent uncertainty in the estimation process, the estimated
fair values of the loans may differ significantly from the values that would
have been used had a ready market existed for such loans. Approximately 90
percent of all loans are collateralized by New York City, Boston and Chicago
taxicab medallions and group franchises in car services located in New York
City.
The Company adopted Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS 114") on July 1,
1995. Pursuant to this statement, a loan is determined to be impaired if it
is probable that the contractual amounts due will not be collected in
accordance with the terms of the loan. SFAS 114 generally requires that
impaired loans be measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. As all of the Company's
loans are collateral dependent, impairment is measured based on the fair
value of the collateral. If the fair value of the impaired loan is less than
the recorded investment in the loan (including accrued interest, net of
deferred loan fees or costs, and unamortized premium or discount) the Company
recognizes an impairment by creating a valuation allowance with a
corresponding charge to the provision for loan losses. The Company
individually evaluates all loans for impairment.
The adoption of SFAS 114 had no effect on the Company's financial condition
or results of operations. See Note 3 for further discussion.
- 7 -
Loans are placed on nonaccrual status once they become 180 days past due as
to principal or interest. In addition, impaired loans that are not fully
collateralized and in the process of collection are placed on nonaccrual
status when, in the judgment of management, the ultimate collectibility of
interest and principal is doubtful.
Income Taxes - The Company has elected to be taxed as a Regulated Investment
Company under the Internal Revenue Code. A Regulated Investment Company will
generally not be taxed at the corporate level to the extent its income is
distributed to its shareholders. In order to be taxed as a Regulated
Investment Company, the Company must pay at least 90 percent of its net
investment company taxable income to its shareholders as well as meet other
requirements under the Code. The Company intends to continue to qualify as a
regulated investment company.
Depreciation and Amortization - Depreciation and amortization of furniture,
fixtures and leasehold improvements is computed on the straight-line method
at rates adequate to allocate the cost of applicable assets over their
expected useful lives.
Net Income per Share - Net income per share is determined by dividing net
income by the weighted average number of shares outstanding during the
period. All net income per share amounts have been restated to give effect
to the extinguishment of all cumulative preferred stock dividends in arrears
as a result of the preferred stock repurchase discussed in Note 6.
Assets Acquired in Satisfaction of Loans - Assets acquired in satisfaction of
loans are carried at estimated fair value less selling costs. Losses
incurred at the time of foreclosure are charged to the allowance for loan
losses. Subsequent reductions in estimated net realizable value are recorded
as losses on assets acquired in satisfaction of loans.
Interest Rate Cap - At December 31, 1995 and June 30, 1995, the Company was a
party to one $5 million notional interest rate cap. This cap was purchased
by the Company to protect it from the impact of upward movements in interest
rates related to its outstanding bank debt. The cap provided interest rate
protection in the event that the three-month LIBOR rate exceeded 5.75
percent. The premium paid for the purchase of this cap was amortized over
its life as an adjustment of interest expense. Payments received under this
cap were credited to interest expense.
Consolidation - The consolidated financial statements include the accounts of
EAF Holding Corporation ("EAF"), a wholly-owned subsidiary of the Company.
All intercompany transactions have been eliminated. EAF was formed in June
1992 and began operations in December 1993. The purpose of EAF is to own and
operate certain real estate assets acquired in satisfaction of loans. As of
June 30, 1995, EAF owned one real estate asset with a carrying value of
approximately $200,000. This real estate asset was sold during the period
ended December 31, 1995.
Other - Certain amounts for the fiscal year ended June 30, 1995 have been
reclassified to conform its presentation with the financial statements for
the six months ended December 31, 1995.
2. ASSETS ACQUIRED IN SATISFACTION OF LOANS
During the six-month period from July 1, 1995 to December 31, 1995 and the
year ended June 30, 1995, the carrying value of Assets Acquired in
Satisfaction of Loans increased by additions of approximately $0 and
$103,000, and decreased by sales and cash payments of approximately $300,000
and $367,000 and write-offs of approximately $28,000 and $29,000,
respectively.
- 8 -
Sales of assets acquired in satisfaction of loans for the six months ended
December 31, 1995 and the year ended June 30, 1995 included approximately
$300,000 and $360,400 of real estate and $0 and $6,600 of radio car rights,
respectively.
Receivables from Debtors on Sales of Assets Acquired in Satisfaction of Loans
represent loans to borrowers arising out of the sale of defaulted assets.
Pursuant to an SBA regulation, these loans are presented separately in the
accompanying consolidated balance sheet.
<TABLE>
<CAPTION>
3. LOANS RECEIVABLE
<S> <C>
Loans on nonaccrual status or accruing at reduced rates as of December 31,
1995 and June 30, 1995 were approximately $264,000. If interest on such
nonaccrual or reduced rates loans had been accrued at the contractual amount,
interest income would have been increased by approximately $17,000 for the
six months ended December 31, 1995.
All impaired loans are placed on nonaccrual status. The Company recognizes
interest income on a cash basis on these loans if the principal is fully
secured. However, where there is doubt regarding the ultimate collectibility
of the loan principal, cash receipts, whether designated as principal or
interest, are applied to reduce the carrying value of the loan. The
following table sets forth certain information concerning impaired loans as
of December 31, 1995:
Impaired loans with an allowance $264,345
Impaired loans without an allowance -
Total impaired loans $264,345
Allowance for impaired loans $159,000
Average balance of impaired loans during the six months
ended December 31, 1995 $274,977
Interest income recognized on impaired loans during the
six months ended December 31, 1995 $2,323
Transactions in the allowance for loan losses are summarized as follows:
Balance, June 30, 1994 $355,000
Charge-offs (53,649)
Credit - net (24,351)
Balance, June 30, 1995 277,000
Recoveries - net 12,000
Balance, December 31, 1995 $289,000
At December 31, 1995, the Company had commitments to make loans totaling
$1,733,910 at interest rates ranging from 9.5 percent to 14 percent.
</TABLE>
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<TABLE>
<CAPTION>
4. DEBENTURES PAYABLE TO SMALL BUSINESS ADMINISTRATION
<C> <C> <C> <C> <C> <C>
At December 31, 1995, debentures payable to the Small Business Administration
consisted of subordinated debentures with interest payable semiannually, as
follows:
Current
Effective
Interest Principal
Issue Date Due Date Rate Amount
April 1986 April 1996 8.0% $993,000
March 1987 March 1997 7.125 408,000
September 1993 September 2003 3.12(1) 1,500,000
September 1993 September 2003 6.12 2,220,000
September 1994 September 2004 8.2 2,690,000
December 1995 December 2005 6.54 1,020,000
$8,831,000
(1) Interest rate increases to 6.12% on September 30, 1998
Under the terms of the subordinated debentures, the Company may not
repurchase or retire any of its capital stock or make any distributions to
its shareholders other than dividends out of retained earnings (as computed
in accordance with SBA regulations) without the prior written approval of the
SBA.
</TABLE>
5. NOTES PAYABLE TO BANKS
The Company has loan agreements with four banks for lines of credit
aggregating $14,000,000. At December 31, 1995, the Company had $6,425,000
outstanding under these lines. The loans, which mature through October 31,
1996, bear interest based on the banks' prime rates and include certain fees
which make the effective rates range from prime to prime minus one-half
percent. Upon maturity, the Company anticipates extending the lines of
credit for another year as has been the practice in previous years.
Pursuant to the terms of the agreements the Company is required to comply
with certain terms, covenants and conditions. The Company pledged its loans
receivable and other assets as collateral for the above lines of credit and
is required to maintain compensating balances. At December 31, 1995,
compensating balances of $642,500 were maintained by the Company in
accordance with these agreements.
6. PREFERRED STOCK
At June 30, 1995, the Company had 547,271 shares of 3 percent preferred stock
issued to the SBA. Cumulative dividends not declared or paid as of June 30,
1995 were approximately $533,000. During August 1995, the Company completed
the repurchase of all such shares of preferred stock from the SBA pursuant to
a preferred stock repurchase agreement dated November 10, 1994. Pursuant to
this agreement, the Company repurchased all 547,271 shares of its 3 percent
cumulative preferred stock from the SBA for $3.50 per share, or an aggregate
of $1,915,449. The repurchase price was at a substantial discount to the
original issuance price of $10 per share. In connection with the repurchase,
all dividends in arrears on the preferred shares were extinguished.
As a condition precedent to the repurchase, the Company granted the SBA a
liquidating interest in a newly established restricted capital surplus
account. The surplus account is equal to the amount of the
- 10 -
net repurchase discount. The initial value of the liquidating interest was
$3,557,261 which is being amortized over a 60-month period on a straight-line
basis. Should the Company be in default under the repurchase agreement at
any time, the liquidating interest will become fixed at the level immediately
preceding the event of default and will not decline further until such time
as the default is cured or waived. The liquidating interest shall expire on
(i) sixty months from the date of the repurchase agreement, or (ii) if any
event of default has occurred and such default has been cured or waived, such
later date on which the liquidating interest is fully amortized. Should the
Company voluntarily or involuntarily liquidate prior to the amortization of
the liquidating interest, any assets which are available, after the payment
of all debts of the Company, shall be distributed first to the SBA until the
fair market value of such assets is equal to the amount of the liquidating
interest. Such payment, if any, would be prior in right to any payments made
to the Company's shareholders. The amount restricted under this agreement at
December 31, 1995 was approximately $2,767,000.
During 1992, the Company authorized the issuance of 752,729 shares of a new
Series B cumulative preferred stock with a 4 percent dividend and a $10 par
value. All preferred shares are restricted solely for issuance to the SBA.
No sales of the Series B preferred shares have occurred to date.
7. COMMON STOCK
On August 9, 1994, the Company amended its certificate of incorporation to
increase the number of authorized shares of common stock from 1,500,000 to
2,000,000 with the par value per share remaining unchanged at $.01.
On December 30, 1994, the Company completed the sale of 90,000 shares of its
common stock to existing shareholders. The completion of this sale was a
precondition for SBA approval of the quasi-reorganization discussed in Note
1. During September 1995, the Company completed the sale of 249,917
additional shares of common stock and restricted $307,000 of its 1995
earnings in order to qualify for participation in the SBA's 3 percent
Preferred Stock Repurchase Program. Total capital raised was $1,249,585 less
private placement costs of $21,482. These proceeds were used to repurchase
the Company's preferred stock held by the SBA (See Note 6).
8. RELATED PARTY TRANSACTIONS
The Company entered into a management agreement with GCG Associates, Inc.
("GCG"), a company that is wholly-owned by the president of the Company, to
engage GCG as its investment advisor. The agreement which was approved by
the SBA, requires that GCG, as advisor, maintain sufficient personnel and pay
certain expenses necessary to operate the Company's business, maintain an
office on behalf of the Company, collect all loans receivable due from
recipients of loans and comply with all official orders of government
agencies, including the SBA.
Subject to the overall control and supervision of the Board of Directors of
the Company, the advisor is also responsible for reviewing all loan
applications, implementing the lending policies decided upon by the Board of
Directors of the Company and investing excess liquid assets of the Company.
The monthly compensation to the advisor is one-twelfth of 2 percent of the
total assets of the Company as of the last day of the month immediately
preceding such computation, provided that the amount computed thereby shall
not in any event exceed one-twelfth of the Company's private invested capital
and capitalized retained earnings multiplied by 8 percent (as those terms are
defined by SBA regulations) plus one-twelfth of 1 percent of any third-party
bank financing outstanding on such date, not to exceed the maximum management
fees previously approved by the SBA.
- 11 -
For the six months ended December 31, 1995 and the year ended June 30, 1995,
$210,000 and $384,000 in management fees, respectively, were paid in
accordance with this agreement.
In addition, the Company pays an annual legal retainer fee of $108,000 for
the purpose of providing loan closing services to a firm certain of whose
officers are officers and directors of the Company. During the six months
ended December 31, 1995 and the year ended June 30, 1995, the Company paid
additional legal fees of $26,414 and $41,705, respectively, to the same law
firm. The Company generally charges its borrowers loan origination fees to
generate income to offset the expenses incurred by the Company for the legal
fee retainer.
During the year ended June 30, 1994, the Company moved to new facilities
which were leased by the firm referred to above. In connection with this
move, the Company was allocated approximately $98,000 for the purchase of
various equipment and leasehold improvements.
9. REGULATORY MATTERS
In accordance with a Stipulation of Compliance dated January 25, 1993 between
the Company and the SBA, the Company has appointed an Audit and Compliance
Committee, consisting of officers and directors of the Company, which is
responsible for monitoring and coordinating the Company's adherence with SBA
regulations.
On September 9, 1993, the Company entered into an agreement with the SBA,
subject to certain regulatory limitations, to permit the Company to carry on
its books, the retained earnings deficit. The SBA removed the requirement
that the Company maintain in its portfolio a certain amount of non-taxi cab
secured loans; the SBA agreed to rollover for ten years and subordinate the
Company's existing demand debentures; the SBA accepted for consideration the
Company's application for sale to the SBA of additional debentures; and the
SBA agreed to permit the Company to apply for participation in the three
percent Preferred Stock Repurchase Program, when such program was instituted
by the SBA. As part of the agreement, the Company agreed to limit the
aggregate amount of its senior indebtedness, consisting of bank debt and the
SBA debentures, to certain specific levels based upon performing assets; the
Company agreed to grant the SBA a subordinate lien on the Company's assets
and to have the Company's notes maintained by a separate custodian; the
Company agreed to provide periodic financial reports to the SBA on a
quarterly basis and the Company agreed (a) not to pay or declare any
dividends in the future and (b) not to incur senior debt including the
aggregate amount of its credit lines in excess of $9 million, until such time
as the Company has achieved positive retained earnings or has received a
capital contribution in an amount equal to its then negative retained
earnings as determined in accordance with GAAP. As discussed in Note 1,
effective July 1, 1994, the Company has eliminated its retained earnings
deficit as a result of a quasi-reorganization approved by the SBA.
Accordingly, since the Company has received the capital contribution and
restored its negative retained earnings, the Company is permitted to pay
dividends subject to applicable SBA regulations, and the $9 million
restriction as to the aggregate amount of its credit lines has been lifted.
The Company's maximum borrowing limits from its banks and the SBA are now
governed by a borrowing base formula based on its performing assets.
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