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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee
required)
For the fiscal year ended December 31, 1996
Commission File Number 0-23484
STANDARD FUNDING CORP.
(Name of Small Business Issuer in Its Charter)
New York 11-2523559
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
335 Crossways Park Drive, Woodbury, New York 11797
(Address of Principal Executive Offices) (Zip Code)
(516) 364-0200
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
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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 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: $5,670,276.
State the aggregate market value of voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days. $6,983,288 based on the price at which the stock was sold on March 24,
1997.
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 2,760,000 shares of Common
Stock, $.001 par value per share, were outstanding at March 27, 1997.
Transitional Small Business Disclosure Format (check one): Yes ______ No X
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III, Items 9, 10, 11 and 12 is
incorporated herein by reference from Standard Funding Corp.'s definitive Proxy
Statement for the Annual Meeting of Shareholders to be held on April 25, 1997
which will be filed on or before April 4, 1997.
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<PAGE>
STANDARD FUNDING CORP.
1996 ANNUAL REPORT ON FORM 10-KSB
Item Page
Number Number
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PART I
1. Description of Business 1
2. Description of Property 5
3. Legal Proceedings 5
4. Submission of Matters to a Vote of Security-Holders 5
PART II
5. Market for the Company's Common Equity and
Related Shareholder Matters 6
6. Management's Discussion and Analysis or Plan of Operation 6
7. Financial Statements 10
8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 10
PART III
9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act. 11
10. Executive Compensation 11
11. Security Ownership of Certain Beneficial Owners and Management 11
12. Certain Relationships and Related Transactions 11
Index to Financial Statements F-1
<PAGE>
PART I
Item 1. Description of Business.
General
Standard Funding Corp. (the "Company"), incorporated in New York in
1978, is a financial services company engaged in the business of financing the
payment of insurance premiums. The Company offers financing of approximately 75
to 85% of an insurance premium to individual and commercial purchasers of
property, casualty and liability insurance who wish to pay their insurance
premiums on an installment basis. Whereas many insurance carriers require
advance payment of a full year's premium, the Company allows the insured to
spread the cost of the insurance policy over time.
The Company finances insurance premiums without assuming the risk of
loss borne by insurance carriers. When the insured buys an insurance policy from
an independent insurance agent or broker who offers financing through the
Company, the insured generally pays a down payment of approximately 15% to 25%
of the total premium and signs a premium finance agreement for the balance.
Under the terms of the Company's standard form of financing contract, the
Company is given the power to cancel the insurance policy if there is a default
in the payment on the finance contract and to collect the unearned portion of
the premium from the insurance carrier. The down payment is set at a level
designed, in the event of cancellation of a policy, such that the return premium
from the insurance carrier is sufficient to cover the loan balance plus interest
and other charges due to the Company. To finance its insurance premium loans,
the Company relies primarily on proceeds of short-term lines of credit,
subordinated debt, the issuance of commercial paper and the sale of equity. The
Company derives profit to the extent that interest earned and fees charged
generate income exceeding the interest expense for borrowed funds and the
Company's operating and selling expenses and provision for possible credit
losses.
The Company is licensed as an insurance premium finance company in the
States of New York, New Jersey, Connecticut, Commonwealth of Pennsylvania,
Massachusetts, District of Columbia and in Maryland. Management believes that
95% of the total premiums financed by the Company as of December 31, 1996
originated in New York. Management estimates that approximately 87% of the
Company's outstanding receivables are commercial accounts and approximately 13%
are personal lines. At December 31, 1996, the Company had approximately 16,800
active accounts.
The Company's marketing strategy is based on establishing and
maintaining relationships with insurance agents by offering a high degree of
service. Senior management is directly involved in the Company's marketing
efforts which currently focus on commercial accounts. The Company believes that
these accounts provide higher returns at lower risk than other sectors of the
marketplace. The Company has three marketing sales executives.
Industry Background
Premium finance companies are licensed to finance property, casualty
and liability insurance premiums for corporate and individual insured's that are
unable to or do not wish to pay an entire insurance premium in one lump sum. The
insured may be able to finance a premium with an affiliated company of the
insurance carrier, if any, an independent premium finance company such as the
Company, a bank or other lending institution. Customarily, insurance agents
utilize the services of premium finance companies to assist in the sale of an
insurance policy to their customers. Upon the execution of a finance agreement
with the insured, the agent forwards the completed documents to a premium
finance company. The premium finance company then pays the premium in full to
the insurance carrier, agent, or broker. The premium finance company collects
principal and interest from the insured (borrower) in the form of an installment
payment. In the event the insured (borrower) defaults, the Company has the right
to cancel the insurance policy by mailing a notice of cancellation to the
insurance carrier. The insurance carrier is then required by state law to refund
the gross unearned premium in full to the finance company for the benefit of the
insured.
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Insurance Premium Financing Services
The Company offers financing to qualified purchasers of various types
of insurance policies including coverage for property, casualty and liability
insurance, of up to approximately 75% to 85% of the entire premium for such
policies. The Company's standard form of premium finance agreement discloses to
the insured, among other things, the price of the total premium; the amount of
the cash down payment made; the amount financed; the amount of the finance
charge; the amount which will be paid after the insured has made all payments as
scheduled; the applicable annual percentage rate charged; a late charge is due
in the event a payment is late; the insured's are entitled to a refund of part
of the finance charge in the event of prepayment by the insured; the giving of a
security interest in any and all unearned return premiums which may become
payable under the policy; and the insured's appointment of the Company as his
attorney-in-fact with all authority to cancel the policy and to receive from the
insurance carrier the unearned portion of the premium. The Company's agreements
generally provide for monthly payments over a period of between seven to nine
months on a one-year policy.
Each insurance broker in the Company's referral network is provided
with financing kits. When an insured seeks premium financing, the broker
completes (and has the insured sign) the Company's form of premium finance
agreement and collects a down payment of approximately 15% to 25% of the total
premium. The broker also signs the contract to certify that the insurance policy
has been issued and delivered and warrants to the correctness of the information
in the premuim finance agreement. The broker submits the original and one copy
of the executed premium finance agreement to the Company, along with its check
or the insured's certified check or money order for the down payment. Upon
acceptance of the finance contract, the Company issues a check payable to the
insurance carrier, agent, or broker for the total premium. The Company inputs
all information into its computer system and sends a payment book to the insured
with the first payment due approximately 30 days from the effective date of
coverage. The Company gives notice to the carrier of its interest in the policy
and informs the carrier that any return premium must be sent to the Company in
the event of cancellation of the policy.
If the insured is in the New York Automobile Insurance Plan ("NYAIP"),
this procedure varies with respect to payment procedure. For NYAIP accounts, the
vast majority of which are personnel lines, the broker submits to the insurance
company the insurance application, a copy of the finance contract and a draft
written on the Company's account payable to NYAIP or the assigned carrier. The
Broker simultaneously sends the Company its check or the insured's certified
check or money order for the down payment along with the original and one copy
of the finance agreement. Due to competitive pressures, agents also have
drafting authority in certain instances with respect to non-NYAIP business,
which is largely commercial.
Although the insured is primarily liable on his finance contract, the
Company does not look solely to his creditworthiness for payment. Rather, the
insured assigns to the Company his interest in any unearned premium he may
attain in the financed insurance policy as security for his loan and grants to
the Company the power to cancel the insurance policy, and collect the unearned
premium, if there is a default in payment on the finance contract. Thus, the
unearned premiums held by the insurance company provide a collateral source of
payment on a delinquent finance contract.
The Company endeavors to increase revenues by using its resources to
finance as many premiums as is practicable. From the inception of the Company's
operations through December 31, 1996, the Company has financed the premiums on
over 150,000 insurance policies. The Company currently does business with over
700 insurance brokers, over 500 insurance companies and had, during the year
ended December 31, 1996, average amounts originally financed of approximately
$3,420 per finance contract.
In order to minimize losses, the Company will not finance premiums
unless the insurance policy provides for the return of unearned premiums
connected therewith upon cancellation. The Company generally requires
policyholders to make a loan payment sufficient to insure that at all times the
unearned premium available for refund will pay the loan balance plus interest
and other charges. Advance payment of approximately 15% to 25% of the premium
generally ensures such margin.
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Any monies paid for insurance coverage for time extending after the
cancellation date constitute "unearned premiums" and must, under applicable
state statutes, be refunded to the insured. The Company's form of premium
finance agreement provides that all such refunds be remitted by the insurance
carrier to the Company on behalf of the insured. Before it forwards the refund
to the insured (or to the broker on behalf of the insured where state
regulations require), the Company deducts all interest, service and late charges
due it. In the Company's experience, the time periods between the cancellation
date and receipt of the refund of unearned premiums has averaged between 60 and
120 days. There can be no assurances, however, that the Company will not
experience increasing delays in collecting, or inability to collect, such
refunds in the future.
Upon receipt of the gross return premium from the insurance carrier,
and the crediting of this return to the insured's account, debit balances might
still be reflected in certain instances. The causes of such a situation include
improper disclosure of information to insurance agents on the insured's
application for insurance or clerical errors by Company personnel. The Company
uses its in-house collection department in an attempt to collect such balances.
If in-house efforts are unsuccessful, the use of external collection attorneys
is initiated. Certain transactions are written with recourse against the
producing agent, broker or agency and/or offsetting reserves to a few selected
insurance producers.
The Company charges against income a general provision for possible
losses on finance receivables in such amounts as management deems appropriate.
Case-by-case direct write-offs, net of recoveries on finance receivables, are
charged to the Company's allowance for possible losses. The amount of such
allowance is reviewed periodically in light of economic conditions, the status
of the outstanding finance receivables and other factors. The following table
sets forth information concerning the Company's allowance for possible credit
losses on finance receivables and its loss experience for the year ended
December 31, 1996.
Year Ended
December 31, 1996
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(Dollars in Thousands)
Allowance for possible losses at beginning of period $ 208
Provision for possible losses during period 583
Charge offs during period (538)
Amounts recovered during period 47
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Allowance for possible losses at end of period $ 300
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Percentage of allowance for possible losses to
finance receivables outstanding at end of period .91%
Percentage of net losses to finance
receivables liquidated during period .62%
The Company bears the credit risk of collections from insurance
carriers. Upon a carrier becoming insolvent and unable to pay claims to an
insured or refund unearned premiums upon cancellation of a policy to a finance
company, each state provides a state guaranty fund that will pay such refund,
less a per claim deductible in certain states. The Company seeks to diversify
its financing activities among a wide range of brokers and insurance carriers.
The Company experienced the insolvency of five insurance carriers in New York
and one in New Jersey. The Company filed its claims with the appropriate
liquidation departments and received its return premiums from the respective
guaranty funds.
Sales and Marketing
The Company generates business through referrals from independent
insurance agents and brokers, and through its own sales efforts. Such brokers
are associated with various insurance companies. Insurance brokers may refer
financing business to an insurance premium financing company because such
companies can assist them in servicing their clients, particularly where the
insurance carrier does not offer an installment payment option. Since the
Company has no contracts with any brokers to continue to refer business to the
Company, there can be no assurance that brokers presently directing financing
business to the Company will continue to do so or that the Company will be able
to locate and establish relationships with additional brokers.
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The Company believes that it offers more flexibility with regard to
late payments and policy cancellations than affiliated companies of insurance
carriers, banks and other lending institutions which generally subject a policy
to automatic cancellation on a designated date if a premium payment is late. It
is the Company's general policy to notify the broker immediately when any
payment is past due, thereby allowing the broker to arrange with the insured for
payment and to prevent cancellation of the policy. Under certain circumstances
the grace period can be extended, thereby avoiding cancellation of the policy
and the loss of part of the broker's commission which may result from such
cancellation. No assurances can be given that the affiliated companies of the
insurance carriers, banks and other lending institutions will not add greater
flexibility to their insurance financing business practices and, in the event
this should occur, there may be a material adverse effect on the Company's
business operations.
Regulation
The Company's operations are regulated by state statutes, and
regulations promulgated thereunder, which provide for the licensing,
administration and supervision of premium finance companies. Such statutes and
regulations impose significant restrictions on the operation of the Company's
business.
The Company is currently licensed to do business in New York, New
Jersey, Connecticut, Commonwealth of Pennsylvania, Massachusetts, District of
Columbia, and Maryland. The Company must renew its license to operate as a
premium finance company each year in New York, Connecticut, Pennsylvania,
Massachusetts, District of Columbia, Maryland and once every two years in New
Jersey. The Company is also subject to periodic examinations and investigations
by state regulators. The licensing agency for insurance premium finance
companies is the Banking Department in New York and New Jersey, the Insurance
Department in Connecticut and Pennsylvania, the Division of Banks in
Massachusetts and the Insurance Administration in the District of Columbia and
Maryland.
State statutes and regulations impose minimum capital requirements,
govern the form and content of financing agreements and limit the interest and
service charges the Company may impose. The Commonwealth of Pennsylvania
requires a minimum net worth of $50,000. The State of New York requires that
equity capital be equal to at least 10% of outstandings and, in any event, not
less than $1,500.
State statutes also prescribe notice periods prior to the cancellation
of policies for non-payment, limit delinquency and collection charges and govern
the procedure for cancellation of policies and collection of unearned premiums.
Changes in the regulation of the Company's activities, such as
increased rate regulation, could have an adverse effect on the Company's
operations. The statutes do not provide for automatic adjustments in the rates a
premium finance company may charge. Consequently, during periods of high
prevailing interest rates on institutional indebtedness and fixed statutory
ceilings on rates the Company may charge its insured's, the Company's ability to
operate profitably could be adversely affected.
Competition
The Company encounters intense competition from numerous other firms,
including companies affiliated with insurance carriers, independent insurance
brokers who offer premium finance services, banks and other lending
institutions. Some of the Company's competitors are larger and have greater
financial and other resources and are better known to consumers than the
Company. In addition, there are few, if any, barriers to entry in the event
other firms, particularly insurance carriers and their affiliates, seek to
compete in this market.
The market for premium finance companies is two-tiered. The first tier
is that of national companies that are owned by insurance companies, banks, and
commercial finance companies. In this group are five companies that on a
combined basis finance over $9 billion per annum of premium finance agreements.
Management believes that one of these companies financed over $3 billion in
insurance premiums in 1996 and is a major competitor of the Company. The second
tier is comprised of smaller local companies and is highly fragmented.
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The Company believes that it offers better service and more flexibility
with regard to late payments and policy cancellations than affiliates of
insurance carriers, banks and other lending institutions. The Company competes
with these entities by emphasizing a high level of knowledge of the insurance
industry, flexibility in structuring financing transactions and the timely
purchase of qualifying contracts. The Company believes that its commitment to
account service also distinguishes it from its competitors. It is the Company's
general policy to notify the insurance agent when an insured is in default and
to assist in collection, if requested by the agent. To the extent that
affiliates of insurance carriers, banks, and other lending institutions add
greater service and flexibility to their financing practices in the future, the
Company's operations could be adversely affected. There can be no assurance that
the Company will be able to continue to compete successfully in its markets.
Personnel
The Company's staff consists of 31 employees (all of whom are full-time
employees), including three executive officers, three sales and marketing
representatives and 25 clerical and administrative employees.
Item 2. Description of Property.
The Company's offices are located at 335 Crossways Park Drive,
Woodbury, New York 11797. The Company leases (from a non-affiliated person)
approximately 5,676 square feet of office space at a cost of $8,967 per month
under a five-year lease expiring on the 31st day of May 2001.
Item 3. Legal Proceedings.
The Company is not a party to any pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
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<PAGE>
PART II
Item 5. Market for the Company's Common Equity and Related Shareholder Matters.
The Company's Common Stock has been listed on the Nasdaq SmallCap
Market under the symbol "SFUN" and traded publicly since August 9, 1994. The
table below sets forth, for the periods indicated, the high and low bid prices
per share of Common Stock, as reported on the Nasdaq SmallCap Market.
1995 Period High Low
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First Quarter $ 3 7/8 $ 3 3/8
Second Quarter $ 4 1/8 $ 3 3/4
Third Quarter $ 4 3/8 $ 3 1/4
Fourth Quarter $ 5 11/16 $ 3 7/8
1995 Period High Low
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First Quarter $ 6 1/16 $ 4 3/4
Second Quarter $ 5 $ 4 7/16
Third Quarter $ 4 7/16 $ 3 3/4
Fourth Quarter $ 4 3/4 $ 3 3/4
There were 463 shareholders of record of the Company's Common Stock as
of December 31, 1996. The Company has not declared or paid any dividends on its
Common Stock since its inception. It is the present intention of the Company to
retain any future earnings to provide funds for the operation and expansion of
its business. Future payment of dividends, if any, will be at the discretion of
the Board of Directors and will be dependent upon the Company's financial
condition, results of operations, capital requirements and such other factors as
the Board of Directors may deem relevant. The Company is prohibited from
declaring or paying any dividends on its capital stock (other than dividends
payable solely in shares of its Common stock) pursuant to one of the Company's
subordinated debt arrangements which matures on December 27, 2000.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
The Company derives profits to the extent that finance rates and fees
charged generate income exceeding the Company's cost of funds, operating and
selling expenses and provision for possible credit losses. The Company borrows
funds from various financial institutions in the wholesale market and from other
sources and lends such funds on a secured basis to individual and commercial
purchasers of property and casualty insurance. The cost of borrowed funds
(interest expense) constitutes by far the largest expense of the Company and to
a large degree is beyond the control of the Company. The difference between
finance charge income and the Company's cost of funds is sometimes referred to
as net interest income or "spread." The Company's "spread" is affected by
changes in market interest rates, competitive conditions and other factors.
Presently, all of the Company's lines of credit are on a variable rate basis and
all of its commercial paper and subordinated debt is on a fixed rate basis. See
"Liquidity and Capital Resources." While the Company's installment loans
receivable are all on a fixed rate basis, the rapid rate of turnover of the
Company's total loan portfolio, 3.1 times in both 1996 and 1995, and the short
term to maturity of its outstanding installment loans, with an average maturity
of approximately four months at December 31, 1996, help to reduce the Company's
exposure to interest rate fluctuations.
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The following table sets forth the spread that the Company has
maintained for the last two fiscal years, based upon average receivables at year
end:
Year Ended December 31,
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1996 1995
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(Dollars in Thousands)
Average Installment Loans Receivable - net $27,578 $20,980
Net Interest Income (Spread) 3,743 3,185
% of Spread to Average Loans Receivable 13.6 15.2
The Company is presently licensed to do business in the States of New
York, New Jersey, Connecticut, Commonwealth of Pennsylvania, Massachusetts,
District of Columbia and Maryland. At December 31, 1996, management estimates
that in excess of 95% of premium finance receivables were with New York
insured's.
The following table sets forth certain income statement items as a
percentage of total finance charge income:
Year Ended December 31,
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1996 1995
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NET INTEREST INCOME:
Finance charge income and other 100.00% 100.00%
Less: Interest and other expenses on borrowings 33.99 31.21
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Net interest income 66.01 68.79
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OTHER EXPENSES:
Operating expenses 30.15 35.38
Selling expenses 9.96 10.02
Provision for possible credit losses 10.29 6.58
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Total 50.40 51.98
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INCOME BEFORE PROVISION FOR INCOME TAXES 15.61 16.81
PROVISION FOR INCOME TAXES 5.99 7.54
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NET INCOME 9.62% 9.27%
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Finance charge income increased by 22.4% to $5,670,276 in the year
ended December 31, 1996 from $4,630,812 for the year ended December 31, 1995
primarily because of an increase in total installment loans financed. Total
installment loans financed increased 31.3% to $84,900,735 from $64,685,837 and
the number of contracts representing these loans decreased 4.5% to 24,897 from
26,075. The Company's average receivables for the year ended December 31, 1996
increased 31.4% to $27,578,317 from $20,980,258 for the year ended December 31,
1995. Interest expense for the year ended December 31, 1996 increased 33.3% to
$1,927,372 from $1,445,375 for the year ended December 31, 1995, an increase of
$481,997. This increase in interest expense is due primarily to the increase in
average receivables. Operating and selling expenses increased by 8.2% to
$2,274,630 in the year ended December 31, 1996 from $2,102,601 in the year ended
December 31, 1995. Due to the $1,039,464 increase in finance charge income,
compared to only an $481,997 increase in interest expense, there was a 17.5%
increase in the "spread" to $3,742,904 for the year ended December 31, 1996 from
$3,185,437 for the year ended December 31, 1995.
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The provision for possible credit losses increased by 91.4% to $583,398
for the year ended December 31, 1996 from $304,740 for the year ended December
31, 1995. This increase of $278,658 is due to the increase in finance
receivables, including an increase in the balance of allowance for possible
credit losses. Past due amounts represent policies that the Company has
cancelled and is waiting to receive return premiums, and include policies where
the insurance carrier has credited the return premium to the broker or agent who
originated the policy and who subsequently is required to forward such amount to
the Company. For the year ended December 31, 1996, the percentage of past due
finance receivables to total finance receivables outstanding decreased to 4.05%
from 4.26% for the year ended December 31, 1995.
Liquidity and Capital Resources
The Company's operations are dependent upon the continued availability
of funds on satisfactory terms and rates. The Company uses such funds
principally to finance the origination of installment loans under premium
finance agreements. The Company obtains required funds from a variety of
sources, including internal generation of funds, unsecured borrowings under
lines of credit, direct issuance of commercial paper, placement of subordinated
debt and the sale of common equity.
As the Company increases the size of its business, it originates more
installment loans receivable than it collects, resulting in a larger outstanding
balance of installment loans receivable. For the years ended December 31, 1996
and 1995, the Company originated installment loans receivable of $84,900,735 and
$64,685,837 respectively, compared to installment loans collected for each
period of $75,021,501 and $59,724,820 respectively. The result was an increase
in net outstanding installment loan receivables of $31,828,236 from $23,308,397
respectively, at December 31, 1996 and 1995.
The growth in the Company's loan portfolio has been the single largest
factor influencing the Company's cash flow from operations. The determining
factor influencing the growth in the loan portfolio has been the extent to which
the Company has been able to leverage its capital into subordinated debt and
then into short-term senior debt. For years ended December 31, 1996 and 1995,
net cash provided by operating activities was $1,701,219 and $26,021
respectively, which amounts were comprised primarily of net earnings, loss
provisions, depreciation and amortization and other changes in assets and
liabilities. For the years ended December 31, 1996 and 1995, net cash provided
by financing activities was $7,526,440 and $5,808,410 respectively, comprised
primarily of proceeds from bank notes and repayment of bank notes, proceeds from
sales and repayments of commercial paper, net proceeds of subordinated debt and
the sale of accounts receivable participation program.
The Company has no present plans related to significant capital
expenditures but does intend to add marketing locations in order to increase its
volume of new business. The Company does not expect that such additional
marketing locations will require any significant capital expenditures. The
Company is not aware of any pending legislation that would have a material
effect on its capital requirements or business prospects.
The Company is subject to minimum capital requirements imposed by
certain of the states in which it is licensed. In addition, the Company is
prohibited from declaring or paying any dividends on its capital stock (other
than dividends payable solely in shares of Common Stock) pursuant to one of the
Company's subordinated debt arrangements which matures on December 27, 2000.
The sources of funds (other than internal generation of funds) which
are presently available or have been utilized by the Company are described
below. Management believes that the sources of funds presently available to the
Company are adequate for the conduct of its business at its present level. To
the extent that the Company in the future expands its business and increases its
total installment receivables outstanding beyond its present levels of funding,
which may not be available or, if available, may not be on terms acceptable to
the Company.
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<PAGE>
Lines of Credit. At December 31, 1996, the Company had unsecured short
term lines of credit aggregating $31,500,000 available through six commercial
banks, under which $17,600,000 was outstanding. Amounts outstanding under these
lines bear interest at prime or a certain percentage over LIBOR. The Company
pays commitment fees to some of these banks in connection with these lines.
These lines expire on various dates through June 30, 1997, although there can be
no assurance that these lines will not be revoked, suspended or reduced at any
time. No bank is contractually obligated to renew any such line. During the
years ended December 31, 1996 and 1995, the maximum aggregate amount outstanding
under these lines at any time was $17,600,000 and $11,200,000, respectively.
Commercial Paper. The Company directly issues its own commercial paper
with maturities of up to 270 days, which is unsecured and is unrated by
commercial paper rating agencies. Commercial paper outstanding at December 31,
1996 bore interest at fixed annual rates ranging from 5.8% to 6.8%. During the
years ended December 31, 1996 and 1995, the maximum outstanding commercial paper
at any month end was $2,649,355 and $5,045,123, respectively. Such commercial
paper is generally sold to officers of the Company and their affiliates and to
non-affiliated investors. The Company has obtained no commitments from any
purchaser of its commercial paper regarding additional or future purchases. It
is the Company's policy to maintain unused short-term bank lines of credit in an
amount in excess of the amount of commercial paper outstanding. The interest
rate on the Company's commercial paper has been and will continue to be
determined by reference to prevailing interest rates in the commercial paper
market. The Company does not anticipate any change in the level of financing
provided by affiliates of the Company or any changes in the costs of financing
provided by such affiliates. There can be no assurance, however, that such
levels of financing will be maintained in the future.
Subordinated Debt. The Company has obtained unsecured senior
subordinated debt in the amount of $4,010,000 from outside investors. The notes
bear interest at fixed rates from 12.50% to 14% and are due from November 1,
2000 to March 31, 2001. The notes restrict the Company's ability, among other
things, to merge, pay dividends and permit its business to be heavily
concentrated with a single broker or agency. Several of the underlying
agreements also contain various covenants requiring the Company to meet certain
financial ratios and other restrictions on acquisitions and investments. The
Company may, at its option, prepay the loans in whole or in part. However, with
respect to several of the notes, the Company must reimburse the investors for
any loss of margin on reemployment of the funds so repaid. The Company does not
currently anticipate prepaying or otherwise refinancing its existing senior
subordinated debt prior to its maturity. In addition, the Company has obtained
unsecured subordinated debt from various investors. The interest rates are fixed
and vary in term. The following table indicates amounts, rates and maturity
dates as at December 31, 1996.
Rate Due Date Amount
---- -------- ------
14.25% 06/30/2001 $ 810,000
14.00% 11/01/2000 500,000
14.00% 12/27/2000 3,000,000
12.50% 03/31/2001 510,000
12.00% 02/16/2001 50,000
11.25% 09/30/2001 43,000
------------
$ 4,913,000
============
-9-
<PAGE>
Subordinated debt is generally sold to officers and directors of the
Company and their affiliates and to non-affiliated investors. The Company has
obtained no commitments from any holder of its subordinated debt regarding
additional or future purchases.
Other Sources. In addition to the sources of funds described above, the
Company has sold to a bank a participating interest in certain receivables. The
interest in these receivables have been sold on a pari passu basis without any
recourse to the Company.
The Company continually engages in discussions with both current and
prospective lenders regarding obtaining increases in, extensions of or additions
to, both its short-term lines of credit, its subordinated borrowings and its
participation program. The Company is currently engaged in such discussions with
several lenders, but can give no assurance as to whether or when such
discussions will be favorably consummated.
Item 7. Financial Statements.
The Company's financial statements begin on page F-3. Reference is made
to the Index to Financial Statements on page F-1 herein.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
-10-
<PAGE>
PART III
The Proxy Statement for the Annual Meeting of Shareholders to be held
on April 25, 1997, which, when filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934, will be incorporated by reference in this
Annual Report on Form 10-KSB pursuant to General Instruction E(3) of Form
10-KSB, will provide the information required under Part III (Items 9, 10, 11
and 12).
Item 13. Exhibits, List and Reports on Form 8-K.
(a) Exhibits
*3.1 Restated Certificate of Incorporation of the Company.
*3.2 By-laws of the Company.
*4.1 Specimen certificate for shares of Common Stock of the Company.
*4.2 Form of Representatives' Warrants.
*4.3 Form of Registration Rights Agreement between the Company and
Bernard G. Palitz.
*10.1 Equity Incentive Plan of the Registrant, as amended.
*10.2 Form of Financial Consulting Agreement between the Registrant
and the Representatives.
*10.3 Promissory Note in the amount of $3,000,000 payable to
National Westminster Bank USA.
*10.4 Grid Promissory Note in the amount of $2,500,000 payable to
Atlantic Bank of New York.
*10.5 Promissory Note in the amount of $3,000,000 payable to the
Bank of New York.
*10.6 Grid Demand Promissory Note in the amount of $3,000,000
payable to The Chase Manhattan Bank, N.A.
*10.7 Demand Grid Note in the amount of $2,000,000 payable to Marine
Midland Bank, N.A.
*10.8 Fixed Rate Senior Subordinated Note in the amount of
$2,000,000 payable to National Westminster Bank USA, together
with a Loan Agreement between the Registrant and National
Westminster Bank USA with respect thereto.
*10.9 Lease for premises at 335 Crossways Park Drive, Woodbury, New
York.
*10.10 Consulting Agreement between the Company and American Credit
Management Inc.
*10.11 Employment Agreement between the Company and Alan J. Karp.
*10.12 Employment Agreement between the Company and David E. Fisher.
**10.13 Promissory Note in the amount of $3,000,000 payable to
Chemical Bank.
**10.14 Promissory Note in the amount of $4,000,000 payable to the
Bank of New York.
**10.15 Letter agreement dated May 9, 1995 increasing demand Grid Note
payable to Marine Midland Bank, N.A. previously filed as
Exhibit 10.7 herein, to $3,000,000.
**10.16 Note agreement in the amount of $3,000,000 payable to Bernard G.
Palitz, members of Mr. Palitz's family and persons affiliated
with Mr. Palitz, together with form of 14% Senior Subordinated
Note due December 27, 2000 with respect thereto.
**10.17 Form of 12.50% Senior Subordinated Notes due March 31, 2001
payable to various non-affiliated investors in the aggregate
amount of $485,000.
-11-
<PAGE>
**10.18 14% Senior Subordinated Note due November 1, 2000 payable to
Claire Cohn in the amount of $500,000.
**10.19 14.25% Junior Subordinated Notes due June 30, 2001 payable to
David Fisher in the aggregate amount of $490,000.
**10.20 14.25% Junior Subordinated Notes due June 30, 2001 payable to
U.S. Clearing Corp. - Alan Karp -Ira Rollover in the aggregate
amount of $110,000.
**10.21 Form of 14.25% Junior Subordinated Notes due June 30, 2001
payable to Sharon Goldaber in the amount of $80,000.
**10.22 12% Junior Subordinated Note due February 16, 2001 payable to
J.C.F. Consulting Corp. in the amount of $50,000.
**10.23 14.25% Junior Subordinated Note due June 30, 2001 payable to
Herb and Judi Pitch in the amount of $50,000.
10.24 Form of 11.25% Junior Subordinated Note due September 30, 2001
payable to Kathleen Belz in the amount of $43,000.00.
10.25 Promissory Note in the amount of $6,000,000 payable to
European American Bank.
10.26 Form of agreement of accounts receivable participation program
with Atlantic Bank of New York.
24 Power of attorney (included on signature page).
- ----------
* Filed as same numbered exhibit to the Company's Registration Statement on
Form SB-2 (Reg. No. 33-75130) and incorporated herein by reference.
** Previously filed.
(b) Reports on Form 8-K
The Company filed Form 8-K on January 11, 1996 with respect to its financing
activities completed in 1995 to and including January 11, 1996.
-12-
<PAGE>
STANDARD FUNDING CORP.
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report F-2
Balance Sheet at December 31, 1996 F-3
Statements of Income for the years ended December 31, 1996 and 1995 F-4
Statements of Shareholders' Equity for the years ended
December 31, 1996 and 1995 F-5
Statements of Cash Flows for the years ended December 31, 1996 and 1995 F-6
Notes to Financial Statements F-7
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Standard Funding Corp.
Woodbury, New York
We have audited the accompanying balance sheet of Standard Funding
Corp. (the "Company") as of December 31, 1996 and the related statements of
income, shareholders' equity and cash flows for each of the two years in the
period then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects the financial position of Standard Funding Corp. at December
31, 1996 and the results of its operations and its cash flows for each of the
two years in the period then ended in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Jericho, New York
February 14, 1997
F-2
<PAGE>
STANDARD FUNDING CORP.
BALANCE SHEET
December 31, 1996
ASSETS
Cash $ 132,563
-----------
Installment loans receivable under premium
finance agreements 33,772,533
Less: Participation Program (Note 2) (775,997)
Unearned interest (868,300)
Allowance for possible credit losses (300,000)
Installment loans receivable under premium -----------
finance agreements--net (Note 2) 31,828,236
Due from officers (Note 3) 149,274
Property and equipment--net (Note 4) 263,800
Other assets 260,729
-----------
Total $32,634,602
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Notes payable to financial institutions (Note 5) $17,600,000
Commercial paper issued (Note 5) 2,253,668
Amounts due to insurance companies 535,390
Accrued expenses and other 96,132
Funds Due-Participation Program 219,981
Deferred income taxes (Note 7) 287,728
-----------
Total, exclusive of subordinated debt 20,992,899
Subordinated debt (Note 6) 4,913,000
-----------
Total Liabilities 25,905,899
-----------
COMMITMENTS AND CONTINGENCIES (Notes 9 and 10)
SHAREHOLDERS' EQUITY (Note 8):
Preferred Stock, par value $.001 per share; --
1,000,000 authorized, none issued
Common Stock, par value $.001 per share;
4,000,000 authorized, 2,760,000 shares
issued and outstanding 2,760
Additional paid-in capital 3,991,501
Retained earnings 2,734,442
-----------
Total Shareholders' Equity 6,728,703
-----------
Total $32,634,602
===========
See notes to financial statements.
F-3
<PAGE>
STANDARD FUNDING CORP.
STATEMENTS OF INCOME
Year Ended December 31,
1996 1995
---- ----
NET INTEREST INCOME:
Finance charge income and other $5,670,276 $4,630,812
Less: Interest and other expenses on borrowings 1,927,372 1,445,375
---------- ----------
Net Interest Income 3,742,904 3,185,437
---------- ----------
OTHER EXPENSES:
Operating expenses (Note 10) 1,709,674 1,638,429
Selling expenses 564,956 464,172
Provision for possible credit losses (Note 2) 583,398 304,740
---------- ----------
Total 2,858,028 2,407,341
---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES 884,876 778,096
PROVISION FOR INCOME TAXES (Note 7) 339,800 349,000
---------- ----------
NET INCOME $ 545,076 $ 429,096
========== ==========
NET INCOME PER SHARE $ 0.20 0.16
========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 2,760,000 2,760,000
========== ==========
See notes to financial statements.
F-4
<PAGE>
STANDARD FUNDING CORP.
STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
----------------- -------------- Paid in Retained
Shares Amount Shares Amount Capital Earnings
------- ------ -------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 -- -- 2,760,000 $2,760 $3,991,501 $1,760,270
Net Income -- -- -- -- -- 429,096
Balance, December 31, 1995 -- -- 2,760,000 $2,760 $3,991,501 $2,189,366
Net Income -- -- -- -- -- 545,076
Balance, December 31, 1996 -- -- 2,760,000 $2,760 $3,991,501 $2,734,442
</TABLE>
See notes to financial statements.
F-5
<PAGE>
STANDARD FUNDING CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 545,076 $ 429,096
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible credit losses 583,398 304,740
Deferred income taxes 102,000 30,000
Depreciation and amortization 88,767 41,879
Changes in assets and liabilities:
Due from officers and other assets (54,059) (194,134)
Accrued expenses and other amounts
due to insurance companies 216,056 (585,560)
Funds due-accounts receivable
participation program 219,981 --
------------ ------------
Net cash provided by operating activities 1,701,219 26,021
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Installment loans receivable originated (84,900,735) (64,685,837)
Collections of installment loans receivable 75,021,501 59,724,820
Purchase of equipment (155,731) (117,104)
------------ ------------
Net cash (used in) investing activities (10,034,965) (5,078,121)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from accounts receivable participation program 1,240,044 --
Payment of accounts receivable participation program (464,047) --
Proceeds from bank notes--net 7,300,000 3,500,000
Proceeds (Repayment) of commercial paper issued--net (697,557) 183,410
Proceeds of subordinated debt 148,000 4,225,000
Repayment of subordinated debt -- (2,100,000)
------------ ------------
Net cash provided by financing activities 7,526,440 5,808,410
------------ ------------
INCREASE (DECREASE) IN CASH (807,306) 756,310
CASH AT BEGINNING OF YEAR 939,869 183,559
------------ ------------
CASH AT END OF YEAR $ 132,563 $ 939,869
============ ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOWS INFORMATION:
Income taxes paid $ 413,313 $ 291,610
============ ============
Interest paid $ 1,853,680 $ 1,419,086
============ ============
</TABLE>
See notes to financial statements.
F-6
<PAGE>
STANDARD FUNDING CORP.
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 1996 and 1995
1. SIGNIFICANT ACCOUNTING POLICIES
Business - Standard Funding Corp. (the "Company") is a financial
service Company engaged in the business of financing the payment of
insurance premiums. The Company finances substantially all forms of
insurance premiums on policies which are written through independent
insurance agents and brokers.
Revenue Recognition - Unearned interest on installment loans receivable
under premium finance agreements is recognized as income using a method
which approximates the results which would be obtained using the
interest method.
The Company has entered into an agreement to sell, on a non-recourse
basis, interests in its installment loans receivable under premium
finance agreements to a financial institution. The differential of
stated interest to be recorded over the course of the finance period
and interest to be paid to the financial institution is recognized as
interest income at the time of sale.
Loan processing costs incurred are deferred and amortized on the
straight-line method over the term of the related installment loans
receivable under premium finance agreements. Cancellation fees and late
charges are recognized as income when received.
Allowance for Possible Credit Losses - The balance in the allowance for
possible credit losses is based on management's assessment of risk in
the installment loan portfolio. The Company writes off receivables upon
determination that no further collections are probable.
Property and Equipment - net - Property and equipment are stated at
cost. Depreciation is provided on the straight-line basis over such
assets' estimated useful service lives which range from three to five
years. Leasehold improvements are amortized over the shorter of their
estimated useful lives or the remaining term of the lease.
Revenue and Credit Concentration - The Company receives substantially
all of its revenues from financing arrangements made within New York,
New Jersey, Connecticut and Pennsylvania. Accordingly, as of December
31, 1996, substantially all of the Company's installment loans
outstanding were from this geographic region.
Income Taxes - The Company accounts for income taxes pursuant to
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS No. 109"). SFAS No. 109 requires recognition of
deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the Company's
financial statements or tax returns. Under this method, deferred tax
assets and liabilities are determined based on the differences between
the financial accounting and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are
expected to reverse.
Net Income Per Share - Net income per share is based on the weighted
average number of shares outstanding during the respective years.
Stock-based Compensation - The Company accounts for stock-based awards
to employees using the intrinsic value method in accordance with APB
No. 25, "Accounting for Stock Issued to Employees" ("APB 25").
F-7
<PAGE>
STANDARD FUNDING CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Fair Value of Financial Instruments - The following methods and
assumptions were used to estimate the fair value of each class of
financial instruments:
a. Cash and Notes Payable to Financial Institutions - The
carrying amount approximates fair value because of the short
maturity of these instruments.
b. Installment Loans Receivable Under Premium Finance Agreements
and Commercial Paper - It is management's belief that it is
not practicable to estimate the fair value for these
instruments for which there are no quoted market prices. A
reasonable estimate of fair value could not be made without
incurring excessive costs.
Pervasiveness 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 and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Impairment of Long-Lived Assets - In accordance with Statement of
Financial Acccounting Standards No. 121, "Accounting For the Impairment
of Long-Lived Assets and For Long-Lived Assets To Be Disposed Of"
("SFAS 121"), the Company reviews its long-lived assets, including
property, plant and equipment, identifiable intangibles and purchased
technologies, for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not
be fully recoverable. To determine recoverability of its long-lived
assets, the Company evaluates the probability that future undiscounted
net cash flows, without interest charges, will be less than the
carrying amount of the assets. Impairment is measured at fair value.
SFAS 121 had no effect on the Company's financial statements.
2. INSTALLMENT LOANS RECEIVABLE UNDER PREMIUM FINANCE AGREEMENTS
Substantially all installment loans receivable under premium finance
agreements are repayable in less than one year. In the event of default
by a borrower, the Company is entitled to cancel the underlining
insurance policy financed and receive a refund for the unused term of
such policy from the insurance carrier.
In October 1996, the Company entered into an agreement with a
financial institution to sell, on a non- recourse basis, a fifty
percent interest in certain designated installment loans receivable,
not to exceed $1,000,000 at any one point. This agreement extends the
limit to $2,000,000 commencing April 1997. At December 31, 1996
approximately $776,000 remained outstanding and was reflected as a
reduction of installment loans receivable.
Under terms of this agreement, the Company remits the financial
institution's share in monthly installment loans receivable
collections. Interest is payable monthly based upon the average
outstanding balance under this agreement at LIBOR (at the time of
purchase) plus 200 basis points. Interest income equal to the
differential of stated interest to be recorded over the course of the
finance period and the interest to be paid to the financial institution
is recognized at the point of sale. Installment loans receivable sold
under this agreement were approximately $1,240,000 for the year ended
December 31, 1996.
F-8
<PAGE>
STANDARD FUNDING CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
A summary of activity in the allowance for possible credit losses is as
follows:
December 31,
------------------------
1996 1995
--------- ---------
Balance, beginning of period $ 208,000 $ 150,000
Provision 583,398 304,740
Charge-offs--net of recoveries of $47,913
and $38,205, respectively (491,398) (246,740)
--------- ---------
Balance, end of period $ 300,000 $ 208,000
========= =========
3. DUE FROM OFFICERS
Amounts due from officers bear interest at the prime lending rate (8.25%
at December 31, 1996) and have no specified maturity dates.
4. PROPERTY AND EQUIPMENT--net
Property and equipment--net consisted of the following:
December 31, 1996
-----------------
Equipment including computer hardware and software $ 386,376
Office furniture and fixtures 154,513
Leasehold improvements 43,281
---------
584,170
Less accumulated depreciation and amortization (320,370)
---------
Property and equipment--net $ 263,800
=========
5. LIABILITIES
Included in liabilities is the following short-term debt at December 31,
1996:
Notes Payable to Financial Institutions--At December 31, 1996, the Company
had line of credit agreements with several banks which aggregated
$31,500,000. Borrowings under the agreements bear interest at prime or the
LIBOR rate (5.69% at December 31, 1996) plus 1.50 to 1.90% points above
such rate and may contain certain commitment fees. The outstanding
borrowings are unsecured and there are no compensating balance
arrangements. These lines of credit expire over various dates through June
1997. It is management's belief that the Company will renew such lines or
negotiate different lines with other financial institutions.
F-9
<PAGE>
STANDARD FUNDING CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Commercial Paper Issued--The Commercial paper issued is privately
placed by the Company. The weighted average interest rate in effect for
outstanding obligations at December 31, 1996 was 6.51%. At December 31,
1996, commercial paper outstanding held by the principals of the
Company and other related parties aggregated approximately $1,746,846.
6. SUBORDINATED DEBT
Subordinated debt consists of the following:
December 31, 1996
-----------------
14% senior subordinated note (1) $ 3,000,000
14.25% junior subordinated note (2) 810,000
14% senior subordinated note (3) 500,000
12.50% senior subordinated note (3) 510,000
12% junior subordinated note (3) 50,000
11.25% junior subordinated note (3) 43,000
---------------
$ 4,913,000
===============
(1) The 14% senior subordinated note due in December 27, 2000 contains
certain covenants which restricts the Company's ability, among other
things, to merge, pay dividends and permit its business to be
heavily concentrated with a single broker or agency. In the event
the prime rate as defined increases to over 11%, the interest rate
will increase on a pari passu basis. The underlying agreement also
contains various covenants requiring the Company to meet certain
financial ratios. Interest on this note is due monthly.
(2) At December 31, 1996, subordinated debt with an aggregate principal
amount of $600,000 was held by the principal shareholders of the
Company. Interest on these notes is due semi-annually.
(3) Interest on these subordinated notes is payable either monthly, or
semi-annually, as designated under the terms of each specific note.
Subsequent to year end, the Company entered into agreements amounting to
$90,000 of subordinated debt. Interest under these agreements will be
payable semi-annually at 10%.
Subordinated debt outstanding at December 31, 1996 matures as follows:
Year Ending December 31, Amount
------------------------ ------
2000 $ 3,500,000
2001 1,413,000
------------
Total $ 4,913,000
============
F-10
<PAGE>
STANDARD FUNDING CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. INCOME TAXES
The Company's effective income tax rates for the years ended December 31,
1996 and 1995 were 38% and 45%, respectively. Such amounts vary from the
Federal statutory rate principally due to state income taxes, net of a
Federal income tax benefit.
The provision for income taxes consisted of the following components:
Years Ended December 31,
----------------------------
1996 1995
---- ----
Federal:
Current $ 216,900 $ 238,000
Deferred 71,000 13,000
---------- ----------
287,900 251,000
---------- ----------
State:
Current 20,900 81,000
Deferred 31,000 17,000
---------- ----------
51,900 98,000
---------- ----------
Total $ 339,800 $ 349,000
========== ==========
Deferred income taxes substantially consists of differences in the methods
in which the Company accounts for unearned interest and the allowance for
possible credit losses for income tax purposes compared with financial
reporting purposes.
The deferred tax assets and liabilities at December 31, 1996 consisted of
the following:
Assets:
Allowance for possible credit losses $ 123,300
-----------
Liabilities:
Unearned interest (384,300)
Other (26,728)
Total deferred tax liabilities (411,028)
-----------
Net deferred income tax liability $ (287,728)
===========
8. SHAREHOLDERS' EQUITY
(a) Initial Public Offering
During August and September 1994, the Company consummated an initial
public offering of its common stock by selling 1,060,000 shares at $4.25
per share. Cash proceeds to the Company from this offering aggregated
approximately $3,593,000, net of aggregate issuance costs of approximately
$912,000. In addition, the Company issued 100,000 warrants at a purchase
price of $.001 per warrant to purchase common stock at $6.17 per share to
the underwriters' representatives. These warrants are exercisable for a
period of four years, commencing on August 8, 1995. No warrants have been
exercised as of December 31, 1996.
F-11
<PAGE>
STANDARD FUNDING CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(b) Stock Option Plan
The Board of Directors of the Company adopted, and the shareholders of the
Company approved, an Equity Incentive Plan (the "Plan") on January 25,
1994 and February 7, 1994, respectively. This plan has been amended in
July 1994 with respect to the exercise price of the options. The Plan
covers 250,000 shares of Common Stock (subject to adjustments for stock
splits and similar capital changes) and is intended to strengthen the
Company's ability to attract and retain key employees, to provide an
incentive for such employees to achieve long-range performance goals and
to enable them to participate in the long-term growth of the Company.
The Plan provides for the grant of stock options (incentive and
nonstatutory), stock appreciation rights, performance shares, restricted
stock, stock units and other stock-based awards. Awards under the Plan can
be granted to employees, consultants and non-employee directors as
determined by a committee of at least two directors appointed by the Board
of Directors to administer the Plan (the "Committee") or, in the absence
of the appointment of such Committee, then by the Board of Directors. The
Committee selects the participants and establishes the terms and
conditions of each option or other equity right granted under the Plan,
including the exercise price, the number of shares subject to options or
other equity rights and the time at which such options become exercisable.
The exercise price of all "incentive stock options" within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended, granted
under the Plan must be at least equal to the fair market value of the
option shares on the date of grant. The term of any incentive stock option
granted under the Plan may not exceed ten years.
As discussed in Note 1, the Company continues to account for its
stock-based awards using the intrinsic value method in accordance with APB
25 and its related interpretations.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", ("SFAS 123") requires the disclosure of pro
forma net income and earnings per share had the Company adopted the fair
value method as of the beginning of fiscal 1996. Under SFAS 123, the fair
value of stock-based awards to employees is calculated through the use of
option pricing models, even though such models were developed to estimate
the fair value of freely tradable, fully transferable options without
vesting restrictions, which significantly differ from the Company's stock
option awards. There have been no awards under the plan for the years
ended December 31, 1996 and 1995.
In February 1997, the Company granted 58,525 stock options.
(c) Capital Requirements
The Company is subject to minimum capital requirements imposed by certain
of the states in which it is licensed. The Commonwealth of Pennsylvania
requires an insurance premium finance company to have and maintain a
minimum net worth of $50,000. The State of New York requires that
insurance premium finance companies have and maintain equity capital equal
to at least 10% of outstandings and, in any event, not less than $1,500.
In addition, the Company is prohibited from declaring or paying any
dividends on its capital stock (other than dividends payable solely in
shares of Common Stock) pursuant to a subordinated debt arrangement.
F-12
<PAGE>
STANDARD FUNDING CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
9. PENSION PLANS
The Company has a voluntary contribution pension plan which complies with
Section 401(k) of the Internal Revenue Code. The Plan permits employees to
make contributions to a pension trust, with a matching contribution by the
Company, at the rate of 20% for every dollar contributed. During each of
the years ended December 31, 1996 and 1995, the Company contributed
$37,000 to the plan.
10. COMMITMENTS AND CONTINGENCIES
Lease Commitments--The Company is obligated under operating lease
commitments for its office facility and automobiles. Future minimum lease
payments and other lease related costs are as follows:
Year Ending December 31, Amount
------------------------ ------
1997 $ 151,900
1998 141,672
1999 132,842
2000 107,604
2001 44,835
-----------
Total $ 578,853
===========
The facility lease requires payment of real estate taxes, insurance and
other related costs. Rent expense for the years ended December 31, 1996
and 1995 aggregated approximately $97,000 and $86,000, respectively.
Employment Agreements--In July 1994 the Company entered into employment
agreements with two officers/shareholders of the Company. Such agreements
as renewed in July 1996 provide for full-time employment to the Company
from the officers in return for aggregate officers' salary of $369,000 per
year plus bonus and other benefits. These contracts may be renewed on
their anniversary date for successive one-year terms. These agreements
also contain clauses on termination, severance and covenants not to
compete after the date of termination.
Consulting Agreement--As part of the underwriting arrangements for the
Company's initial public offering, the Company has retained the
underwriters' representatives as financial consultants to the Company for
a three-year period ending July 1997. Fees payable under these
arrangements aggregate $19,600 for the year ending December 31, 1997.
* * * * *
F-13
<PAGE>
STANDARD FUNDING CORP.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 27th day of March,
1997.
STANDARD FUNDING CORP.
/s/ Alan J. Karp
--------------------------
By: Alan J. Karp
Its: President and
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Alan J. Karp and David E. Fisher, and each
of them, his true and lawful proxies, attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to (i) act on, sign and file with the
Securities and Exchange Commission any and all amendments to this Annual Report
on Form 10-KSB, together with all exhibits thereto, (ii) act, sign and file such
certificates, instruments, agreements and other documents as may be necessary or
appropriate in connection therewith, and (iii) take any and all actions which
may be necessary or appropriate in connection therewith, granting unto such
agents, proxies and attorneys-in-fact, and each of them and his and their
substitute or substitutes, full power and authority to do and perform each and
every act and thing necessary or appropriate to be done in connection therewith,
as fully for all intents and purposes as he might or could do in person, hereby
approving, ratifying and confirming all that such agents, proxies and
attorneys-in-fact, any of them or any of his or their substitute or substitutes
may lawfully do or cause to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Alan J. Karp President, Chief Executive March 27, 1997
- -------------------------- Officer and Director
Alan J. Karp (principal executive officer)
/s/ David E. Fisher Director, Treasurer and March 27, 1997
- -------------------------- Chief Financial Officer
David E. Fisher (principal financial and
accounting officer)
/s/ James Faust Director March 27, 1997
- --------------------------
James Faust
/s/ Joyce Karp Director March 27, 1997
- --------------------------
Joyce Karp
/s/ Charles O'Rourke Director March 27, 1997
- --------------------------
Charles O'Rourke
/s/ Richard Belz Director March 27, 1997
- --------------------------
Richard Belz
Exhibit 10.24
<PAGE>
JUNIOR SUBORDINATED NOTE
$ 43,000.00 Woodbury, N.Y. Dated: 9/25/96
---------- -------
FOR VALUE RECEIVED, STANDARD FUNDING CORP. ("Company), a domestic
corporation, with its principal place of business at 335 Crossways Park Drive,
Woodbury, New York 11797, promises to pay to the order of Kathleen Belz, 23 Neel
Court, Sayville, N.Y. 11782 at the office of the Company, on the Thirtieth day
of September 2001 and pay interest on the unpaid principal of the Note at Eleven
& One Quarter (11 1/4) percent per annum, based on 365-day year, semi-annually
with the first interest payment being due on the 31st day of December 1996.
Maker shall have the right to prepay the indebtedness evidenced by this
Note, in whole or in part, without penalty, charge or notice.
The payment of the principal and interest on this Note is expressly
subordinated in the right of payment, subject and junior to any and all
indebtedness of the Company by virtue of funds borrowed by the Company ("Senior
Indebtedness"). Upon any receivership, insolvency proceedings, bankruptcy,
assignment for the benefit of creditors, reorganization, dissolution or
liquidation, no amount shall be paid in respect to this Note unless and until
the Senior Indebtedness shall have been paid in full, together with interest
thereon and all other amounts in respect of such Senior Indebtedness.
This Subordinated Note has been issued by the Company and is on a
parity and equality in all respects with other Junior Subordinated Notes issued
and hereafter issued, except with respect to maturity and rate of interest of
such Junior Subordinated Notes. The holder of this Note by accepting the same,
agrees that while any Senior Indebtedness, including Senior Subordinated Notes
is outstanding, he will not make any demands for payment of the principal of the
debt evidenced hereby, or bring or maintain any action to enforce payment of the
principal of this Note. However, nothing contained herein shall prevent the
Company from paying the principal on the Note at maturity hereto, provided the
Company is not in default in payment of Senior Indebtedness.
STANDARD FUNDING CORP.
By /s/ Alan J. Karp
-----------------------
By /s/ [ILLEGIBLE]
-----------------------
Exhibit 10.25
<PAGE>
[Letterhead of EAB]
October 4, 1996
Standard Funding Corporation
335 Crossways Park Drive
Woodbury, NY 11797
Re: $6,000,000 line of credit
Gentlemen:
European American Bank ("EAB") is pleased to advise you it continues to
hold available for Standard Funding Corporation a line of credit (the "Line") in
the increased amount of $6,000,000, subject to the following terms and
conditions:
1. Borrower:
The Borrower shall be Standard Funding Corporation, a corporation
organized and in good standing under the laws of the State of New York.
2. Description of the Line:
Loans provided under the Line shall be evidenced by EAB's standard
Master Note (the "Note") in the amount of the Line, which Note shall bear
interest at a rate to be elected by the Borrower prior to the time an advance is
requested under the Line equal to either (i) EAB's Prime Rate (the rate of
interest stated by EAB to be its Prime Rate in effect from time to time and
adjusted when said Prime Rate changes) or (ii) the Reserve Adjusted Libor, as
such term is defined in the Note, for interest periods of 30, 60 or 90 days plus
a margin of 1.50% per annum computed on the basis of actual days elapsed in a
360 day year.
Interest on the unpaid principal balance of the Note from time to
time outstanding shall be payable monthly in arrears commencing on the first day
of the month following the date of the first advance under the Note if based on
the Prime Rate and payable at maturity if based on the Libor rate. Any advance
under the Line made by EAB in its discretion shall be in an amount not less than
$500,000. Availability under the Line shall be subject to the discretion of EAB
and nothing contained herein shall obligate EAB to fund a request for an
advance.
Notwithstanding any indications herein to the contrary, the maximum
availability under the Line shall not exceed the sum of eighty percent (80%) of
the Borrower's "Eligible Accounts Receivable" as such term is defined in the
"Borrowing Base Certificate identified herein.
<PAGE>
The Borrower acknowledges and agrees that the Line is uncommitted
and requests for advances or extensions of credit thereunder shall be approved
in the discretion of EAB, which may refuse to make an extension of credit under
the Line at any time without prior notice to the Borrower, and that the
performance or compliance by the Borrower of the agreements contained in this
letter, or in any other document or agreement evidencing or securing such
advances or extensions of credit, shall not obligate EAB to make an advance or
provide an extension of credit thereunder.
Subject to the terms and conditions hereof, the Line shall be
available until April 30, 1997.
3. Purpose of the Line:
The purpose of the Line shall be to finance the growth of the
Borrower's premium installment receivable portfolio.
4. Financial Reporting:
The Borrower shall provide to EAB:
(i) As soon as available, but in any event within sixty (60) days
after the end of each calendar quarter, S.E.C Form l0Q, which shall include a
balance sheet of the Borrower and statements of income and retained earnings and
cash flows of the Borrower for such quarter, and the portion of the fiscal year
through such date all in reasonable detail, such statements to be prepared in
accordance with generally accepted accounting principles;
(ii) As soon as available but in any event within 120 days after the
last day of the Borrower's fiscal year end, a copy of the annual 10K report, as
filed with the S.E.C. which shall include a balance sheet of the Borrower and
statements of income and retained earnings and cash flows of the Borrower, all
in reasonable detail, such statements to be prepared in accordance with
generally accepted accounting principles;
(iii) As soon as available, but in any event within twenty-one (21)
days after last day of each calendar month, a Borrowing Base Certificate
specifying total bank debt and commercial paper outstanding as a percentage of
accounts receivable and otherwise in form and substance satisfactory to EAB; and
(iv) As soon as available, but in any event within 21 days after the
end of each calendar month, a schedule of accounts receivable aged to show the
number of days each such account has been outstanding from its invoice date, in
form satisfactory to EAB and accompanied by a statement signed by the Borrower's
president or chief financial officer to the effect that such statement is true,
correct and complete.
2
- --------------------------------------------------------------------------------
<PAGE>
(v) Such other financial or other information as EAB may from time
to time request.
5. Special Requirements:
a. The Borrower agrees to maintain at all times:
(i) a tangible net worth (the sum of capital surplus, earned
surplus, capital stock and such other items as are allowable under generally
accepted accounting principles minus deferred charges, intangibles, receivables
due from stockholders, officers or affiliates and treasury stock) in an amount
not less than $5,500,000;
(ii) a maximum leverage ratio (the ratio of total
unsubordinated liabilities to capital base) of not greater than 4.0 to 1.0.
(iii) a minimum interest coverage ratio, the ratio of net
income before interest expense, taxes and loan loss provision (net of
charge-offs) for the most recently concluded fiscal year to interest expense, of
not less than 1.15 to 1.0;
(iv) a demand deposit account with EAB at all times having
average free deposit balances satisfactory at all times to EAB.
b. The Borrower covenants and agrees to limit the sum of all
indebtedness for borrowed money and commercial paper debt to an amount not to
exceed 80% of eligible installment loans receivable, that is, all installment
loans receivable not more than 60 days past due.
c. The Borrower shall advise EAB in writing, of any changes in the
Bank group, or changes in the amounts of credit lines offered by the Bank group,
within 7 days of this occurrence.
6. Events of Default:
The Line shall be "cross-defaulted" with all other now existing or
hereafter created senior and subordinated debt facilities (each, a "Debt
Facility") such that a default under any Debt Facility shall constitute an Event
of Default under the Note and the Line.
7. Facility Fee:
The Borrower shall pay to EAB a facility fee on the average daily
unused portion of the Line at the rate equal to 1/2 of one percent per annum
payable on the first day of each quarter during the term of the Line.
3
- --------------------------------------------------------------------------------
<PAGE>
[Letterhead of EAB]
8. Acceptance:
If the foregoing is acceptable, please so indicate by signing and
returning this letter by October 18, 1996, the date this letter will otherwise
expire, unless extended in writing by EAB.
Very truly yours,
EUROPEAN AMERICAN BANK
By: /s/ Mark J. Noto
-----------------
Mark J. Noto
Vice President
By: /s/ George Goodman
--------------------
George Goodman
Vice President
Agreed and Accepted this day of October, 1996
Standard Funding Corporation
By:________________________
4
- --------------------------------------------------------------------------------
Exhibit 10.26
<PAGE>
MASTER AGREEMENT FOR PURCHASE OF PARTICIPATIONS IN
PREMIUM FINANCE AGREEMENTS
This Agreement is entered into this 15th day of October, 1996 by and
between STANDARD FUNDING CORP. ("Seller"), a New York corporation with its
principal place of business at 335 Crossways Park Drive West, Woodbury, New York
11797, and ATLANTIC BANK OF NEW YORK ("Bank"), a New York banking corporation
with its principal place of business at 960 Avenue of the Americas, New York,
New York 10001.
WITNESSETH:
WHEREAS, Seller, in the regular course of its business has acquired,
entered into or shall enter into premium finance agreements for the financing of
insurance premiums and proposes, from time to time, to sell to the Bank an
undivided fifty percent (50%) pari passu participation interest in such
agreements; and
WHEREAS, the Bank is willing, but shall not be required to purchase
participations in such agreements upon the terms and conditions more fully set
forth herein;
NOW THEREFORE, in consideration of the mutual promises contained
herein, the parties agree as follows:
ARTICLE I. DEFINITIONS
"Agreement" means this Master Agreement for the Purchase of Premium
Finance Agreements and any exhibits, riders and schedules hereto and any
amendments to any of the foregoing.
"Business Day" means any day on which the Bank is open for business.
"Collections" means all amounts received or realized (including but not
limited to judgments, cash proceeds, refunds of unearned insurance premiums
under Policies, and proceeds of any other related security) in payment of any
amount owed from time to time (whether representing amounts financed, finance
charges, scheduled payments, other expenses or otherwise) by Obligors or any
other persons liable in connection with the Paper.
"Defaulted Paper" means Paper which has one or more installments (or
any portion thereof) due thereunder more than five (5) days past due.
"Eligible Paper" means Paper:
(a) the original maturity of which (prior to any renewal or
extension of the stated
<PAGE>
maturity on such Paper) does not exceed nine (9) months and as to which
at least 15% of the aggregate premiums for the Policies shall have been
paid by the Obligor in cash to the insurance companies issuing such
Policies, the insurance agent or broker or Seller;
(b) which at the time of purchase of the participation by the
Bank is not Defaulted Paper;
(c) which is denominated and payable only in United States
dollars in the United States and with respect to which the Obligor
liable thereunder is an individual who is a citizen or resident of the
United States or a entity operating and authorized to do business in
the United States;
(d) in respect of which the representations and warranties in
Section 5.1 hereof are true and correct;
(e) which is payable in substantially equal consecutive
monthly installment payments on the same day of each month and the
monthly payments due at any time is an amount not in excess of the
unearned insurance premiums under the Policies securing the payment of
the obligations under such Paper; and
(f) the insurance company or companies issuing the Policies
relating to such Paper shall be duly licensed by the insurance
authorities of the State of New York, the State of New Jersey or any
other state that Seller is licensed to do business in and shall (except
for Policies issued by Lloyd's of London) have a current rating of B+
or better from Best's Insurance Companies Ratings Book, as of the
Payment Date.
"Encumbrance" shall have the meaning ascribed to it in Section 5.3(e).
"Obligor" means one or more parties obligated (or intended by the terms
of the Paper to be obligated) to make payments pursuant to the terms and
conditions of the Paper.
"Obligor Default" means any breach or failure of an Obligor to promptly
fulfill any obligation under the related Paper on which such Obligor is named as
obligor or any other document executed in connection therewith.
"Outstanding Balance" means, with respect to Paper, the total unpaid
portion of the amount financed owing under such Paper by the Obligor thereunder.
"Paper" means premium finance agreements owned and held by Seller in
the form attached hereto as Exhibit "A," together with all related riders,
schedules, exhibits, amendments and other documents, including guarantees, if
any, evidencing the total transaction creating a payment obligation of an
Obligor.
<PAGE>
"Payment Date" means the day of the purchase of any Paper hereunder by
the Bank.
"Policies" shall mean all insurance policies and the unearned premiums
of which secure payment of the obligations of the Obligor under a Paper.
"Purchase Price" has the meaning ascribed to it in Section 4.2.
"Related Security" means with respect to Paper, (a) all of Seller's
interest with respect to such Paper, (b) all unearned insurance premiums under
the Policies securing payment of the obligations under such Paper, and (c) all
other collateral and security agreements and property purported to be subject
thereto held as security for such Paper, whether now or hereafter acquired, all
other guaranties, indemnities, warranties, insurance proceeds and premium
refunds, and other writings and property of whatever character at any time held
as security for such Paper.
"Service Fee" has the meaning ascribed to it in Section 6.1(b).
"Special Account" means the special (or existing) deposit account
maintained at the Bank for the deposit of Collections.
ARTICLE II. TERM
This Agreement shall be effective upon execution by the parties hereto
and shall remain in effect for an initial term of one (1) year after the date
first stated above.
ARTICLE III. CONDITIONS PRECEDENT AND APPROVAL PROCEDURE
3.1 Conditions Precedent. Prior to and as a condition precedent to each
purchase by the Bank of a participation in Paper hereunder, Seller shall, at the
request of the Bank, deliver to the Bank in form and substance satisfactory to
the Bank, the following:
(a) A duly certified copy of the resolutions of Seller's Board
of Directors authorizing Seller to enter into and be bound by this
Agreement, and the transactions contemplated herein.
(b) Certificates of the corporate secretary of Seller relating
to the incumbency and signatures of its officers authorized to execute
this Agreement.
3.2 Offer. Seller shall from time to time offer to sell to the Bank an
undivided fifty percent (50%) participation interest in Paper (which shall be
only Eligible Paper), and the Bank may, in its sole discretion, accept or reject
any such offer. The Bank is and shall be under no obligation to purchase an
undivided fractional interest in any Paper offered by Seller. All purchases of
such participation interests in Paper by the Bank hereunder shall be subject to
compliance with the conditions set forth in this Agreement.
<PAGE>
3.3 Submission of Documents. As soon as possible after Seller has
received the Bank's verbal notice of acceptance, Seller shall submit to the Bank
true photocopies of complete and properly executed sets of the Paper and Related
Security, including, if applicable, proof of payment of the premiums of the
Policy.
ARTICLE IV. PURCHASE BY THE BANK
4.1 Purchase. Upon the Bank's purchase of an undivided 50% percent
interest in any Paper offered by Seller, Seller shall acknowledge the Bank's
interest in the such Paper by delivering to the Bank an executed and completed
acknowledgment in the form annexed hereto as Exhibit "B."
4.2 Purchase Price. The Bank shall purchase an undivided 50%
participation interest in any such Paper by paying to Seller, on the Payment
Date, the "Purchase Price" (which shall equal one-half the aggregate Outstanding
Balance with respect to the Paper as of the Payment Date on which such Paper is
purchased). The Bank will pay to Seller the amount of the Purchase Price for the
Paper by crediting such amount to Seller's account with the Bank. If applicable,
Seller shall immediately issue checks from Seller's account with the Bank to the
insurance companies issuing the policy relating to such Paper, in the amounts
necessary to pay the full amount of the premiums for such Policy.
4.3 Participation in Monthly Payments Due. The Bank shall participate,
on a pari passu basis, in all Collections, benefits, recoveries and payments
received by Seller with respect to Paper in which the Bank has purchased an
undivided participation interest.
4.4 Additional Premiums. If an Obligor requests that Seller finance an
additional premium of an existing Policy in which the Bank has a participation
interest and the amount of the additional premium is less than or equal to 25%
of the existing premium for such Policy, then, without the prior written consent
of the Bank, Seller may increase the Obligor's outstanding balance by issuing a
check for the monies due to the insurance carrier to fund the additional
premiums. The Bank shall have an undivided 50% interest in such increased Paper
and shall reimburse the Seller for 50% of the monies funded by Seller upon
Seller's written request for such funds, together with proof of payment of the
premium increase and Related Security concerning the premium increase. If the
requested premium increase is more than 25% of the amount of the existing
premium of a Policy in which the Bank has an interest, then Seller must request
the Bank's prior written consent to fund the premium increase. If the Bank does
not consent to funding the increase, then Seller may purchase the Bank's
participation share of the Paper.
4.5. Facility Fee. Throughout the term of this Agreement, Seller agrees
to pay to the Bank a minimum facility fee of $5,000. The fee will be paid
quarterly at the end of each quarter commencing three (3) months from the date
of this Agreement (the "Fee"), calculated at .5% of the average outstanding loan
balance for each new transaction (annualized) or $1,250, whichever is greater.
The payment of the Fee is unconditional and non-refundable, in whole or in part,
for any reason whatsoever.
<PAGE>
ARTICLE V. REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLER
5.1 Warranties as to Paper. Seller hereby represents, warrants and
covenants that, as of the applicable date of each purchase of the Bank of a
participation pursuant hereunder:
(a) Seller has full right, title and interest in and to the
Paper and the Related Security and is free to sell and assign the Paper
and grant a participation interest in a first priority security
interest in the Related Security to the Bank; and
(b) all Paper in which the Bank purchases a participation
interest pursuant to this Agreement shall be Eligible Paper, shall be
genuine, shall be in conformity with all applicable Federal, state and
local laws, regulations, court and governmental agency decisions,
rulings and orders, including but not limited to applicable laws
related to usury, the New York State Banning Law (and regulations
thereunder), the New York State Insurance Law (and regulations
thereunder) and Regulation Z of the Federal Reserve Board, and shall
represent a valid, legally binding and enforceable payment obligation
of a bona fide Obligor for the amount evidenced therein; no default
shall have occurred under the Paper and Obligor shall be current in its
payments as of the date of sale and assignment to the Bank; and the
Paper shall be fully and legally enforceable by the Bank as the
assignee thereof; and
(c) all Paper shall have been executed by an Obligor (or, if
not an individual, by a duly authorized representative of the Obligor)
having the full legal capacity to sign, shall be the complete Paper
with respect to the transaction with the Obligor, and shall be the sole
original Paper; and
(d) all Paper shall be the sole and total agreement executed
with respect to the financing of the specific Policies described
therein; and is and shall continue to be free from set-off, defense,
counterclaim or abatement; and
(e) all charges imposed or received by Seller from the Obligor
are no greater than the maximum charges permitted by applicable law;
and
(f) the Bank and Seller shall have a valid, enforceable, pari
passu, first priority security interest in all Related Security.
5.2 Additional Warranty as to the Paper. With respect to Policies
issued currently with the Bank's purchase of a participation interest, Seller
additionally represents, warrants and covenants that, within five (5) Business
Days of the date of each purchase of a participation in Paper by the Bank
hereunder, the Policies underlying such Paper will be issued and in full force
and effect. With respect to the Policies issued prior to the Bank's purchase of
a participation interest, then Seller
<PAGE>
represents and warrants that the Policies are in full force and effect.
5.3 Seller's Representations. As of the date of this Agreement and as
of any Payment Date hereunder, Seller represents that:
(a) it is a corporation duly organized, validly existing and
in good standing under the laws of the State of New York and Seller has
all requisite power and authority to own its properties and to carry on
its business as now being conducted and is duly qualified and in good
standing as a foreign corporation, and authorized to do business, under
the laws of each jurisdiction where the character of the properties
owned or leased by Seller or the transaction of its business makes such
qualification or authorization necessary or appropriate, and Seller
holds a valid license issued by the Superintendent of Banks of the
State of New York authorizing Seller to engage in the business of a
premium finance agency and Seller holds all other licenses, approvals
and permits necessary to conduct its business; and
(b) it has full power, authority and legal right to execute,
deliver and perform this Agreement and all related documents, and ~o
consummate the transactions contemplated hereunder and the execution,
delivery and performance hereof have been duly authorized by all
necessary corporate action; and
(c) this Agreement has been duly executed and delivered by it
and constitutes its legal, valid and binding obligation, enforceable in
accordance with its terms; and
(d) the execution, delivery and performance of this Agreement
(i) do not require any stockholder approval or any approval or consent
of, or filing or registration with, any governmental body or regulatory
authority or agency or any approval or consent of any trustee or
holders of its indebtedness or obligations, and (ii) do not contravene
any law, regulation, order, decision, decree or judgment applicable to
it or its charter or by-laws; and
(e) as of the Payment Date of any Paper, Seller has no reason
to believe that any financial or credit information regarding Seller or
any Obligor, or any delinquency report regarding the Paper, which has
been furnished to the Bank, is untrue, incorrect or misleading or fails
to state additional information necessary to make such information not
untrue, incorrect or misleading; and since the end of the last fiscal
quarter for which Seller's financial information has been provided to
the Bank, there has been no material adverse change in its financial
condition or operations; and
(f) Seller is not in default with respect to any order, writ,
injunction or decree of any court, or of any Federal, state, municipal
or other governmental department, commission, board, bureau, agency or
authority, or in violation of any law, statute or regulation to which
it, or any of its property, is subject, except for such defaults or
violations which, in the aggregate, will not have material adverse
effect on the business, operations or condition, financial or
otherwise, of Seller.
<PAGE>
5.4 Seller's Covenants. Seller covenants and agrees that at all times
until all amounts now or hereafter owed to the Bank under or with respect to any
Paper are paid in full in accordance with the terms hereof:
(a) Seller shall deliver to the Bank monthly delinquency
reports with respect to the Paper owned hereunder by the Bank, in such
form and containing such detail as shall be satisfactory to the Bank;
(b) Seller shall take all steps necessary to obtain
Collections of any Paper, which steps shall include the sending of a
written notice of default to the Obligor with respect to any Paper that
is more than ten (10) days past due, and the exercise of Seller's right
to cancel each related Policy with respect to Paper that is more than
thirty (30) days past due;
(c) except as otherwise specifically permitted hereunder,
Seller shall not (i) create any lien, security interest or other charge
or encumbrance, or any other type of preferential arrangement
("Encumbrance"), upon or with respect to any Paper or Related Security
with respect thereto now or hereafter sold to the Bank, or assign any
right to receive income in respect thereof; or (ii) suffer to exist any
Encumbrance upon or with respect to any Related Security other than the
Policies and all collateral and property held as security for any of
such Paper;
(d) except as otherwise specifically permitted hereunder,
Seller shall not amend, modify or waive any term or condition of any
Paper or Related Security in which the Bank has participation interest
thereof; without the prior written consent of the Bank; provided
however, Seller may terminate or cancel any Paper in which the Bank has
an interest (or consent to the cancellation or termination thereof);
(e) Seller shall not sell, assign (by operation of law or
otherwise) or otherwise dispose of any Paper in which the Bank has a
participation interest (other than as herein provided);
(f) Seller shall not make any change in its collection policy
(except with respect to Paper not to be purchased hereunder);
(g) Seller shall not release the lien on any Related Security
without the prior consent of the Bank (such consent may be written or
verbal, confirmed immediately thereafter by telecopy or other writing);
(h) Seller shall maintain its corporate existence in good
standing and shall remain duly licensed by the Superintendent of Banks
of the State of New York as a premium finance agency, and shall
maintain all other licenses, approvals and permits necessary for it to
conduct its business as now conducted;
<PAGE>
(i) At Seller's own expense, Seller shall furnish to the Bank
promptly all financial information concerning Seller, including but not
limited to, (i) Seller's unaudited quarterly financial statements
certified by Seller's chief financial officer and supplied within 45
days after the end of each fiscal quarter, (ii) Seller's semi-annual
financial statements prepared on a review basis and certified by
Seller's chief financial officer and supplied within 60 days after the
end of each six (6) month period and (iii) Seller's annual audited
financial statements prepared and certified by independent public
accountants selected by Seller and satisfactory to the Bank, and
supplied within 90 days after the end of each fiscal year, all of which
financial statements shall be prepared in accordance with generally
accepted accounting principles in the United States as in effect from
time to time applied consistently with prior practices, and shall
include a balance sheet, a statement of operations, a statement of cash
flows and a statement of changes in shareholder's equity;
(j) Seller shall at all times retain an undivided
participation interest in all Paper in which the Bank has an interest
and shall not sell any further participations in such Paper.
ARTICLE VI. ADMINISTRATION
6.1 Authorization.
(a) The Bank hereby authorizes Seller, and Seller hereby
agrees to service and administer all Paper and all Related Security
with respect thereto in which the Bank has a participation interest
pursuant hereto and to bill and collect all amounts due from Obligors
with respect to such Paper. Seller shall perform (or cause the
performance of) its responsibilities hereunder in compliance with all
applicable laws and regulations at its own expense, and shall take (or
cause to be taken) all steps with reasonable care and diligence to
collect all amounts due under such Paper and all Related Security with
respect thereto, all in accordance with the terms hereof.
(b) In consideration for administering and servicing the
financing arrangement with respect to a Paper, Seller shall be entitled
to receive, as monthly servicing fee, (the "Service Fee") the rate
differential calculated as the difference between (a) the rate of
return per annum the Bank, in its sole discretion, shall charge as a
condition to accepting an undivided participation interest in the Paper
and (b) the Annual Percentage Rate provided in the Paper. The Service
Fee will be paid to Seller pursuant to this Section 6.1.
(c) Seller covenants and agrees to remit all Collections due
to the Bank pursuant hereto to the Bank by depositing said amounts in
the Special Account on the 15th day of each month. All deposits of
Collections due to the Bank shall be accompanied by a Collection Report
in the form annexed hereto as Exhibit "C."
(d) The authorization, or any part thereof, granted by the
Bank to Seller and all rights of Seller under this Section with respect
to Paper owned by the Bank and all Related
<PAGE>
Security with respect thereto may be terminated at any time by the Bank
giving notice to Seller.
6.2 Responsibilities of Seller. Anything herein to the contrary
notwithstanding, (a) Seller shall remain responsible and liable under all Paper
and Related Security with respect thereto in which the Bank has a participation
interest pursuant hereto, to perform all of its duties and obligations
thereunder to the same extent as if the Bank does not have an interest in such
Paper and Related Security; (b)the exercise by the Bank of any of its rights
hereunder shall not release Seller from any of its duties or obligations under
such Paper or Related Security; and (c) the Bank shall not have (and Seller
hereby indemnifies and saves the Bank harmless from and against) any obligation
or liability under such Paper or Related Security, nor shall the Bank be
obligated to perform any of the obligations or duties of Seller thereunder.
6.3 Protection of Security Interest.
(a) If Seller's fails to perform its obligations hereunder,
then Seller agrees that upon the Bank's demand and at Seller's expense,
Seller shall promptly execute and deliver all further instruments and
documents, and take all further action (including without limitation
notifying the insurance companies that issued the Policies under Paper
in which the Bank has a participation interest) that may be necessary
or desirable or that the Bank may request, in order to perfect, protect
or more fully evidence the Bank's right, title and interest in and to
all Paper and Related Security or to enable the Bank to exercise or
enforce any such rights, including but not limited conspicuously
marking each such Paper and Related Security with a legend, acceptable
to the Bank.
(b) If Seller fails to perform any of its agreements or
obligations under this Agreement, the Bank may (but shall not be
required to) itself perform, or cause performance of, such agreement or
obligation, and the reasonable expenses of the Bank incurred in
connection therewith shall immediately be payable by Seller.
6.4 Audits. At any time and from time to time during regular business
hours, Seller shall permit the Bank or any of its agents or representatives (a)
to examine and make copies of and abstracts from all books, records and
documents in the possession or under the control of Seller relating to Paper and
all Related Security with respect thereto in which the Bank has an interest, and
(b) to visit the offices and properties of Seller and to discuss affairs,
finances and accounts of Seller with any of its officers or directors.
6.5 Keeping of Records and Books of Account. Seller shall maintain and
implement, or cause to be maintained or implemented, administrative and
operating procedures (including without limitation, an ability to recreate
records evidencing Paper and the Related Security with respect thereto in which
the Bank has an interest, in the event of the destruction of the originals
thereof), and keep and maintain, or cause to be kept and maintained, all
documents, books, records and other information reasonably necessary or
advisable for the collection of all such Paper.
<PAGE>
6.6 Location of Records. Seller shall keep its chief place of business
and chief executive office, and the office where it keeps its records concerning
the Paper and all Related Security with respect thereto (and all original
documents relating thereto), in which the Bank has an interest, at the address
of Seller referred to in the introductory paragraph of this Agreement, or upon
thirty (30) days' prior written notice to the Bank, at such other locations in a
jurisdiction where all action required by Section 6.4(a) shall have been taken
and completed.
ARTICLE VII. INDEMNITY
7.1 Indemnification. Seller hereby indemnifies the Bank, its successors
and assigns and saves the Bank harmless from and against any all suits, claims,
counterclaims, actions, damages, penalties, losses, expenses (including
attorneys' fees and court costs) and liabilities of any kind the Bank shall
suffer or incur as a result of or in connection with:
(a) any breach by Seller of any warranty, representation,
covenant or other agreement (i) contained herein or in any Paper or
other document executed in connection therewith, or (ii) with respect
to the Related Security whether arising by contract or by operation of
law;
(b) any failure or delay by Seller to remit to the Bank any of
the Bank's portion of the Collections received by Seller;
(c) the failure of Seller to comply with any applicable law,
rule or regulation with respect to Paper or Related Security in which
the Bank has an interest, or the non-conformity of such Paper or
Related Security with any such applicable law, rule or regulation;
(d) the failure to perfect first priority security interests
in the Policies or other collateral as may be required under applicable
laws with respect to any Paper or Related Security, whether at the time
of the purchase of a participation thereof or at any subsequent time;
or
(e) any failure of Seller to perform its obligations to
provide collection services in accordance with Article VI hereof.
7.2 Survival. This Article VII shall survive the expiration or
termination of the Agreement or the subject Paper.
ARTICLE VIII. MISCELLANEOUS
8.1 Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto and shall not be modified or amended except in
writing, signed by the parties hereto.
<PAGE>
8.2 Notices. Etc. All notices, requests and other communications
hereunder shall be in writing and shall be deemed to have been given when
delivered, if sent by messenger, or three (3) Business Days after mailing, if
sent by registered or certified, postage prepaid mail, return receipt requested,
to the respective addresses set forth above or to such other address as either
party hereto shall have furnished to the other by a notice pursuant to this
Section 8.2.
8.3 No Waiver. No failure on the part of either party to exercise, and
no delay in exercising, any right hereunder or under any Paper, shall operate as
a waiver thereof.
8.4 Headings. The headings in this Agreement are for convenience of
reference only and shall not be given substantive effect.
8.5 Successors. This Agreement shall be binding upon the parties hereto
and their respective successors and assigns, and shall inure to the benefit of
the Bank and its assigns. Seller shall not assign this Agreement or its
obligations hereunder without the prior written consent of the Bank.
8.6 Severability and Enforceability. If any provision of this Agreement
is in conflict with any applicable statute, regulation or rule of law, then such
provision shall be deemed null and void to the extent that it may be in conflict
therewith, but without invalidating the remaining provisions hereof.
8.7 Governing Law: Jurisdiction and Venue. This Agreement shall be
governed by the laws of the State of New York. Seller hereby irrevocably submits
to the jurisdiction of any New York State or Federal court located in New York
County over any action or proceeding arising out of any dispute between the Bank
and Seller hereunder, and Seller further irrevocably consents to the service of
any process in any such action or proceeding by the delivery or mailing of a
copy of such process in the manner provided in Section 8.2 hereof.
8.8 Counterparts. This Agreement may be executed by the parties hereto
in separate counterparts, each of which when so executed and delivered will be
an original, but all such counterparts will together constitute but one and the
same instrument.
8.9 Gender. Wherever reference herein is made to words in the female,
male or neuter gender, each such reference shall also be deemed to include the
female, male and neuter of such words.
8.10 WAIVER OF JURY TRIAL. ETC. SELLER AND THE BANK EACH HEREBY
KNOWINGLY AND INTENTIONALLY WAIVE ANY RIGHT EACH MAY HAVE TO A TRIAL BY JURY AND
ANY RIGHT TO OBJECT TO INCONVENIENT FORUM OR IMPROPER VENUE IN NEW YORK CITY IN
RESPECT OF ANY LITIGATION ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. SELLER HEREBY CERTIFIES THAT
NO
<PAGE>
REPRESENTATIVE OF THE BANK HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE
BANK WOULD, IN THE EVENT OF SUCH LITIGATION, NOT SEEK TO ENFORCE THE WAIVER OF
RIGHT TO JURY TRIAL PROVISION. SELLER ALSO ACKNOWLEDGES THAT THE BANK HAS BEEN
INDUCED TO ENTER INTO THIS AGREEMENT BY, INTER ALIA, THE FOREGOING WAIVER OF
TRIAL BY JURY.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
STANDARD FUNDING CORP.
By: /s/ Alan J. Karp
----------------------------------
Name: Alan J. Karp
Title: President
ATLANTIC BANK OF NEW YORK
By: /s/ Michael Goldrick
-------------------------
Name: Michael Goldrick
Title: Vice President
<PAGE>
February 20, 1997
Mr. Alan Karp, President
Standard Funding Corp
335 Crossways Park Drive
Woodbury, NY 11797
Dear Alan:
This letter will confirm that Atlantic Bank of New York (the Bank) provides
Standard Funding Corp. with a $2 Million Line of Credit for 50% participations,
at the Bank's option, in advances made by Standard Funding Corp. to its
customers. This line provided on a non-recourse basis and is renewable annually
each 6/30.
If you need further information, please feel free to contact me
Very truly yours,
cc: Michael Goldrick
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from 12-31-96 and
is qualified in it's entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Dec-31-1996
<CASH> 132,563
<SECURITIES> 0
<RECEIVABLES> 32,996,536
<ALLOWANCES> (300,000)
<INVENTORY> 0
<CURRENT-ASSETS> 32,370,802
<PP&E> 524,529
<DEPRECIATION> 320,370
<TOTAL-ASSETS> 32,634,602
<CURRENT-LIABILITIES> 25,905,899
<BONDS> 0
0
0
<COMMON> 2,760
<OTHER-SE> 6,725,943
<TOTAL-LIABILITY-AND-EQUITY> 32,634,602
<SALES> 0
<TOTAL-REVENUES> 5,670,276
<CGS> 0
<TOTAL-COSTS> 2,274,630
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 583,398
<INTEREST-EXPENSE> 1,927,372
<INCOME-PRETAX> 884,876
<INCOME-TAX> 339,800
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 545,076
<EPS-PRIMARY> .20
<EPS-DILUTED> 0
</TABLE>
