Computing your Earmarked Profit (Loss) is the first step in determining your obligations to pay Prioritized Payments, Adjustments and Charges under § 107.1520 and Profit Participation under § 107.1530.

1. (a) Requirement to compute your Earmarked Profit (Loss). While you have Participating Securities outstanding or have Earmarked Assets (as defined in paragraph (b) of this section), you must compute your Earmarked Profit (Loss) for:

   1. (1) Each full fiscal year.
   2. (2) Any interim period (consisting of one or more fiscal quarters) for which you want to make a Distribution.

2. (b) How to determine your Earmarked Assets. “Earmarked Assets” means all the Loans and Investments that you have when you issue Participating Securities or that you acquire while you have Participating Securities outstanding, and any non-cash assets that you receive in exchange for such Loans and Investments.

   1. (1) An Earmarked Asset remains earmarked until you dispose of it, even if you no longer have any outstanding Participating Securities.
   2. (2) Investments you make after redeeming all your Participating Securities are not Earmarked Assets. However, if you issue new Participating Securities, all of your Loans and Investments again become Earmarked Assets.
   3. (3) If you were licensed before March 31, 1993, you may be permitted to exclude Loans and Investments held at that date from Earmarked Assets under § 107.1590.

3. (c) How to compute your Earmarked Asset Ratio. You must determine your Earmarked Asset Ratio each time you compute Earmarked Profit (Loss). If all your Loans and Investments are Earmarked Assets, your Earmarked Asset Ratio equals 100 percent. Otherwise, compute your Earmarked Asset Ratio using the following formula:

   EAR = (EA ÷ LI) × 100

   where: EAR = Earmarked Asset Ratio. EA = Average Earmarked Assets (at cost) for the fiscal year or interim period. LI = Average Loans and Investments (at cost) for the fiscal year or interim period.

4. (d) How to compute your Earmarked Profit (Loss) if Earmarked Asset Ratio is 100 percent.

   1. (1) (i) If your Earmarked Asset Ratio from paragraph (b) of this section is 100 percent, use the following formula to compute your Earmarked Profit (Loss):

      EP = NI + IK + EME

      where: EP = Earmarked Profit (Loss) NI = Net Income (Loss), as reported on SBA Form 468 except as otherwise provided in this paragraph (d)(1) IK = Unrealized Appreciation (Depreciation) on Earmarked Assets that you are distributing as an In-Kind Distribution under § 107.1580 EME = Excess Management Expenses

   2. (ii) For the purpose of determining Net Income (Loss), leverage fees paid to SBA and partnership syndication costs that you incur must be capitalized and amortized on a straight-line basis over not less than five years.

   3. (2) “Excess Management Expenses” are those that exceed the following limit:

      1. (i) For a full fiscal year, the limit is the lower of:

         1. (A) 2.5 percent of your weighted average Combined Capital for the year, plus $125,000 if Combined Capital is below $20,000,000; or
         2. (B) Your Management Expenses approved by SBA.
      2. (ii) For less than a full fiscal year, you must prorate the annual amounts in paragraph (d)(2)(i) of this section to determine the limit.

5. (e) How to compute your Earmarked Profit (Loss) if Earmarked Asset Ratio is less than 100 percent. If your Earmarked Asset Ratio is less than 100 percent, compute your Earmarked Profit (Loss) as follows:

   1. (1) Do the Earmarked Profit (Loss) computation in paragraph (d) of this section.
   2. (2) Subtract your net realized gain (loss) (as reported on SBA Form 468) on Loans and Investments that are not Earmarked Assets.

   3. (3) Separate the result from paragraph (e)(2) of this section into:

      1. (i) Net realized gain (loss) (as reported on SBA Form 468) on Earmarked Assets (“EGL”); and
      2. (ii) The remainder (“R”).

   4. (4) Your Earmarked Profit (Loss) equals:

      EGL + (R × Earmarked Asset Ratio)

6. (f) How to compute your cumulative Earmarked Profit (Loss). Sum your Earmarked Profit (Loss) for all fiscal years and for any interim period following the end of your last fiscal year. The total is your cumulative Earmarked Profit (Loss), which you must use in the Prioritized Payment computations under § 107.1520.

[61 FR 3189, Jan. 31, 1996, as amended at 63 FR 5870, Feb. 5, 1998]