<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 12, 1999
Registration No. 333-____
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
[x] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] PRE-EFFECTIVE AMENDMENT NO. _____
[ ] POST-EFFECTIVE AMENDMENT NO. _____
AMERITRANS CAPITAL CORPORATION
(Exact Name of Registrant as Specified in Charter)
747 Third Avenue, 4th Floor, New York, New York 10017
(Address of Principal Executive Offices:
Number, Street, City, State, Zip Code)
(212) 355-2449
(Registrant's Telephone Number, Including Area Code)
Gary C. Granoff, Ameritrans Capital Corporation
747 Third Avenue, 4th Floor, New York, New York 10017
Tel. (212) 355-2449
Fax. (212) 759-3338
(Name and Address of Agent for Service)
with a copy to:
C. Walter Stursberg, Jr., Esq. Stephen T. Burdumy, Esq.
Stursberg & Veith Klehr Harrison Harvey Branzberg
405 Lexington Avenue, Suite 4949 & Ellers LLP
New York, New York 10174-4902 1401 Walnut Street
Tel. (212) 922-1177 Philadelphia, Pennsylvania 19102
Fax. (212) 922-0995 Tel. (215) 568-6060
Fax. (215) 568-6603
Approximate Date of Proposed Public Offering: As soon as practicable after the
effectiveness of this Registration Statement
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act of
1933, other than securities offered in connection with a dividend reinvestment
plan, check the following box: | |
<PAGE>
Calculation of Registration Fee Under the Securities Act of 1933
----------------------------------------------------------------
<TABLE>
<CAPTION>
Title of Securities Amount Being Proposed Maximum Offering Proposed Maximum Amount of
Being Registered Registered(1) Price Per Share(2) Aggregate Offering Price Registration Fee
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock,
$.0001 par value per
share 1,265,000 $11.00 $13,915,000 $3,868.37
- ------------------------------------------------------------------------------------------------------------------------------
Total $13,915,000 $3,868.37
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 165,000 shares included in the Underwriters' Over-Allotment
Option.
(2) Estimated solely for purposes of calculating registration fee pursuant
to Rule 457 under the Securities Act of 1933 (the "Act").
It is proposed that this filing will become effective
[x] when declared effective pursuant to Section 8(c).
The registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
AMERITRANS CAPITAL CORPORATION
CROSS-REFERENCE SHEET
PARTS A AND B OF PROSPECTUS*
<TABLE>
<CAPTION>
ITEMS IN PARTS A AND B
ITEM NO. OF FORM N-2 LOCATION IN PROSPECTUS
- ------------------- ------------------------------------------- ---------------------------------------------------
<S> <C> <C>
1. Outside Front Cover.................... Front Cover Page
2. Inside Front and Outside Front Cover Page and Outside
Back Cover Page........................ Back Cover Page
3. Fee Table and Synopsis................. Prospectus Summary--Fees and
Expenses; Additional Information
4. Financial Highlights................... Prospectus Summary--Summary
Consolidated Financial Data; Selected
Financial Information; Management's
Discussion and Analysis of Financial
Condition and Results of Operations
5. Plan of Distribution................... Cover Page; Prospectus Summary;
Underwriting
6. Selling Stockholders................... Not Applicable
7. Use of Proceeds........................ Use of Proceeds
8. General Description of the
Registrant............................. Cover Page; Prospectus Summary; Risk
Factors; Distributions; Price Range of
Common Stock; Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Business; Investment Policies; Financial
Statements
9. Management............................. Management; Investment Policies
10. Capital Stock, Long Term Debt,
and Other Securities................... Distributions; Price Range of Common
Stock; Business; Federal Income Tax
Considerations; Description of Capital
Stock
11. Defaults and Arrears on Senior
Securities............................. Not Applicable
12. Legal Proceedings...................... Not Applicable
</TABLE>
- -----------------------
* Pursuant to the General Instructions to Form N-2, all information
required to be set forth in Part B: Statement of Additional Information has been
included in Part A: The Prospectus. All items required to be set forth in
Part C are set forth in Part C.
<PAGE>
<TABLE>
<CAPTION>
ITEMS IN PARTS A AND B
ITEM NO. OF FORM N-2 LOCATION IN PROSPECTUS
- ------------------- ------------------------------------------- ---------------------------------------------------
<S> <C> <C>
13. Table of Contents of the
Statement of Additional
Information............................ Not Applicable
14. Cover Page............................. Not Applicable
15. Table of Contents...................... Not Applicable
16. General Information and
History................................ Business
17. Investment Objective and
Policies............................... Business; Investment Policies
18. Management............................. Management; Principal Stockholders
19. Control Persons and Principal
Holders of Securities.................. Principal Stockholders
20. Investment Advisory and Other
Services............................... Management; Experts; Investment
Policies
21. Brokerage Allocation and Other
Practices.............................. Not Applicable
22. Tax Status............................. Federal Income Tax Considerations
23. Financial Statements................... Index to Financial Statements; Financial
Statements
</TABLE>
<PAGE>
We will amend and complete the information in this Prospectus. Although we are
permitted by US federal securities laws to offer to sell these securities using
this Prospectus, we may not sell them or accept your offer to buy them until the
documentation filed with the SEC relating to these securities has been declared
effective by the SEC. This Prospectus is not an offer to sell these securities
and it is not soliciting your offer to buy these securities in any state where
that would not be permitted or legal.
Subject to Completion -- July 12, 1999
AMERITRANS CAPITAL CORPORATION
1,100,000 Shares of Common Stock
We are a specialty finance company that, through our subsidiary, Elk Associates
Funding Corporation, makes loans to the owners of medallion taxi businesses in
the New York City, Chicago, Miami, and Boston markets and to other small
businesses. Ameritrans has the same management as Elk and was formed as a
holding company in 1998 to acquire and operate Elk and to engage in other
specialty finance business. Elk began operating in 1980 and was acquired by
Ameritrans on _______________, 1999. Both Ameritrans and Elk are closed-end,
non-diversified management investment companies that have elected to be treated
as business development companies under the Investment Company Act of 1940.
We are selling 1,100,000 shares of Common Stock, and the underwriters have an
option to purchase an additional 165,000 shares from us to cover
over-allotments.
Our Common Stock is currently traded on the NASDAQ SmallCap Market under the
symbol "_______." After the offering, it is anticipated that our Common Stock
will trade on the NASDAQ National Market. Our proposed NASDAQ National Market
symbol is "____." On _____ __, 1999, the last reported sale price of the Common
Stock was $____ per share.
PER SHARE TOTAL
Public Offering Price $ $
Sales Load (Underwriting Discount) $ $
Proceeds before expenses to Ameritrans $ $
-----------------------------------------------------
This Prospectus sets forth the information about our company that you
should know before purchasing Common Stock. You are advised to read this
Prospectus and retain it for future reference.
This investment involves certain risks. See "Risk Factors," starting on
page 8.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
FIRST COLONIAL SECURITIES GROUP, INC. AUERBACH, POLLAK & RICHARDSON, INC.
Prospectus dated __________ __, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY.............................................................................................. 1
RISK FACTORS.................................................................................................... 8
USE OF PROCEEDS................................................................................................. 19
DILUTION ....................................................................................................... 20
DISTRIBUTIONS................................................................................................... 21
PRICE RANGE OF COMMON STOCK..................................................................................... 22
CAPITALIZATION.................................................................................................. 24
SELECTED FINANCIAL INFORMATION.................................................................................. 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................................................. 27
BUSINESS ....................................................................................................... 32
INVESTMENT POLICIES............................................................................................. 46
MANAGEMENT...................................................................................................... 49
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT..................................................... 56
CERTAIN TRANSACTIONS............................................................................................ 58
REGULATION...................................................................................................... 60
FEDERAL INCOME TAX CONSIDERATIONS............................................................................... 62
DESCRIPTION OF CAPITAL STOCK.................................................................................... 66
SHARES ELIGIBLE FOR FUTURE SALE................................................................................. 67
UNDERWRITING.................................................................................................... 68
EXPERTS ....................................................................................................... 70
LEGAL MATTERS................................................................................................... 70
ADDITIONAL INFORMATION.......................................................................................... 70
INDEX TO FINANCIAL STATEMENTS...................................................................................F-1
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS CERTAIN INFORMATION CONTAINED IN OTHER
PARTS OF THIS PROSPECTUS. THIS SUMMARY IS NOT COMPLETE AND DOES NOT CONTAIN ALL
OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN THE COMMON
STOCK. IN THIS PROSPECTUS, UNLESS THE CONTEXT INDICATES OTHERWISE, "WE" MEANS
AMERITRANS, ELK, AND ANY OTHER SUBSIDIARIES AMERITRANS MAY ESTABLISH OR ACQUIRE,
COLLECTIVELY. "AMERITRANS" OR "ELK" MEANS EACH COMPANY ALONE. YOU SHOULD READ
THE ENTIRE PROSPECTUS CAREFULLY, ESPECIALLY THE RISKS OF INVESTING IN THE COMMON
STOCK DISCUSSED UNDER "RISK FACTORS." UNLESS OTHERWISE INDICATED, ALL THE
INFORMATION IN THIS PROSPECTUS:
o GIVES EFFECT TO AMERITRANS' ACQUISITION OF ELK IN A ONE-FOR-ONE
SHARE EXCHANGE ON, ___________ 1999.
o ASSUMES THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED.
THE COMPANY
Ameritrans is a specialty finance company that, through its subsidiary,
Elk Associates Funding Corporation, makes loans to the owners of medallion taxi
businesses in the New York City, Chicago, Miami, and Boston markets and to other
small businesses. Ameritrans has the same management as Elk and was formed in
1998 to acquire and operate Elk and to engage in other specialty finance
business, directly or through other subsidiaries. To date, our only business
activities have been the operation of Elk. Our investment objectives are to
achieve a high level of distributable income, consistent with preservation of
capital, as well as long-term growth of net asset value.
Ameritrans and Elk have both elected to be treated as "regulated
investment companies," or "RICs," for tax purposes. A RIC will generally not be
subject to U.S. federal corporate income tax on its investment income if it
makes qualifying distributions of its income to stockholders. A RIC qualifies
for this treatment as long as it distributes at least 90% of its investment
company taxable income to stockholders as dividends. Ameritrans has organized
another subsidiary, Elk Capital Corporation ("Elk Capital"), which will engage
in similar lending and investment activities, although Elk Capital has elected
not to be treated as a RIC. As a result, Elk Capital will not be required to
make distributions to its stockholder(s), and we intend to use any after-tax
earnings of Elk Capital to internally finance growth.
Our management has successfully operated Elk since it began its taxi
medallion finance business in 1980. Taxi loans represented approximately 80% of
Elk's loan portfolio as of March 31, 1999. Elk has historically had a very low
delinquency rate with these loans and has never suffered a material loss in
connection with taxi financings. The balance of Elk's loans have been made to
other small businesses, such as laundromats, dry cleaners, and automobile
dealers, primarily in the New York City metropolitan area. The principal amounts
of Elk's loans typically range from $50,000 to $1,000,000. Elk's loan portfolio
has increased from $22,137,343 as of June 30, 1994 to $49,303,758 as of March
31, 1999.
Our business niche is small businesses that are often overlooked by
banks and other lenders and investors who have lengthy approval processes and
frequently will not consider making small loans. In contrast, we can quickly
evaluate, and make funds available to, small business borrowers. Further,
because funding resources accessible to such borrowers are limited, we can make
loans at rates that are favorable to us. As of March 31, 1999, the interest
rates on Elk's outstanding loans ranged from 8.25% to 16.5%, and the weighted
average rate on Elk's outstanding loans was 11.2%.
<PAGE>
We intend to continue to make taxi loans. Because the taxi financing
industry is highly fragmented, we may seek to expand in this area through
acquisitions of existing taxi finance companies or loan portfolios. We also
intend to further diversify our activities by lending to and investing in a
broader range of small businesses, directly, and indirectly through Elk, Elk
Capital and other subsidiaries that we may form or acquire. Elk is a "small
business investment company," or "SBIC," subject to certain restrictions under
U.S. Small Business Administration ("SBA") regulations. These restrictions
include limitations on the size of borrowers, the size of loans and the term of
loans. Ameritrans is not an SBIC, so its direct activities and other
subsidiaries will not be subject to these restrictions.
We also intend to build our business by using the Internet to increase
our market visibility, to accept and process loan applications, and to expand
our market by making ourselves more accessible to prospective borrowers through
our websites and via e-mail.
Both Ameritrans and Elk are closed-end, non-diversified management
investment companies that have elected to be treated as business development
companies under the Investment Company Act of 1940 (the "1940 Act").
Ameritrans was incorporated in Delaware on February 12, 1998. Our
principal offices are located at 747 Third Avenue, 4th Floor, New York, New York
10017 and our telephone number is (212) 355-2449. The Ameritrans website address
will be www.ameritranscapital.com, and the site is expected to be operational in
August 1999. The website address for Elk is www.elkassociates.com. The
information contained at our websites is not incorporated into this Prospectus.
-2-
<PAGE>
THE OFFERING
Common Stock offered 1,100,000 shares
Common Stock Outstanding(1)
Before the Offering 1,745,600 shares
After the Offering 2,845,600 shares(2)
Current Trading Symbol:
NASDAQ SmallCap Market ____
Proposed Trading Symbol:
NASDAQ National Market ____
Risk Factors For a discussion of risks that you
should consider before buying shares of
the Common Stock, see "Risk Factors."
Use of Proceeds To temporarily reduce our indebtedness;
to fund our loan and investment
activities, including Elk's SBIC
investment portfolio and our expanded
specialty finance lending business to
be conducted directly by Ameritrans or
through other subsidiaries; and for
working capital. See "Use of Proceeds."
Distributions Ameritrans pays quarterly cash
dividends to our stockholders of at
least 90% of our investment company
taxable income. See "Distributions."
- -------------------------------
(1) The number of shares outstanding and to be outstanding after the
Offering does not include 125,000 shares reserved for future issuance
under our 1999 Employee Incentive Stock Option Plan, including 100,000
shares issuable upon the exercise of options that have been granted
under this plan to date. It also does not include 75,000 shares
reserved for future issuance under our Non-employee Director Stock
Option Plan. See -- "Management -- Stock Option Plans."
(2) Does not include 165,000 shares issuable upon the exercise of the
Underwriters' over-allotment option.
-3-
<PAGE>
Fees and Expenses
Because Ameritrans is a closed-end management investment company, we
are required to include the following table in this Prospectus. The purpose of
the table is to assist stockholders in understanding the various costs and
expenses that stockholders of Ameritrans bear, directly or indirectly.
Fee Table(1)
<TABLE>
<CAPTION>
<S> <C>
STOCKHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of offering price)..............................................................(2)
ANNUAL EXPENSES (as a percentage of net assets attributable
to Common Stock)............................................................................................(3)
Interest Payments on Borrowed Funds.........................................................................(4)
Operating Expenses..........................................................................................(5)
Total Annual Expenses......................................................................................... %
</TABLE>
- -------------------------
(1) Based on estimated amounts for the current fiscal year.
(2) The Sales Load, which represents underwriting discounts and
commissions, is a one-time fee that we are paying to the Underwriters
in connection with the Offering, and is the only sales load paid in
connection with the Offering. See "Underwriting."
(3) Assumes a net asset value of $__________, which will be our estimated
stockholders' equity upon completion of the Offering. Operating
expenses, interest payments on borrowed funds, and other expenses are
calculated on an annualized basis based on our operations for the
period beginning July 1, 1998, and ended March 31, 1999.
(4) Interest payments on borrowed funds consist primarily of interest
payable under credit agreements with banks and on subordinated SBA
debentures. See "Business -- Sources of Funds."
(5) Operating expenses consist primarily of general and administrative
expenses, including compensation and employee benefits, professional
fees, rent, travel and other marketing expenses, and various costs
associated with collections. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Results of
Operations, Operating Expenses."
Example:
The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect to
a hypothetical investment in Ameritrans. These amounts assume no increase or
decrease in leverage and are based upon payment by an investor of an 8.75% sales
load (the underwriting discounts and commissions we are paying in connection
with the Offering) and payment by us of operating expenses at the levels set
forth in the table above.
-4-
<PAGE>
An Ameritrans stockholder would pay the following expenses on a $1,000
investment, assuming a 5% annual return:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
$ $ $ $
This example, as well as the information set forth in the table above,
should not be considered a representation of our future expenses. Actual
expenses may be greater or less than those shown. Moreover, while the example
assumes (as required by the Securities and Exchange Commission) a 5% annual
return, our performance will vary and may result in a return greater or less
than 5%. In addition, the example assumes reinvestment of all dividends and
distributions at net asset value.
-5-
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
On __________, 1999, Ameritrans acquired Elk in a share-for-share
exchange. Prior to the acquisition, Elk had been operating independently and
Ameritrans had no operations.
The tables below contain certain summary historical financial
information of Elk. The data at March 31, 1999 and for the nine months
ended March 31, 1998 and 1999 are derived from Elk's unaudited financial
statements and include all adjustments, consisting only of normal recurring
adjustments, that we consider necessary to fairly present such data. The results
for the nine months ended March 31, 1999 do not necessarily indicate the results
to be expected for the full year ending June 30, 1999. You should read these
tables in conjunction with the consolidated financial statements of Elk (the
"Financial Statements") included elsewhere in this Prospectus and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
STATEMENT OF
OPERATIONS FISCAL YEAR ENDED NINE MONTHS ENDED
DATA JUNE 30, MARCH 31,
----------------------------------------------------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Investment
Income $2,824,881 $2,629,901 $3,084,412 $4,023,795 $4,606,456 $3,319,946 $4,100,969
========== ========== ========== ========== ========== ========== ==========
Interest Expense 1,136,458 1,002,959 1,105,993 1,582,700 1,840,731 1,360,703 1,804,597
Other Expenses 926,798 960,474 1,108,505 1,408,034 1,852,262 1,354,784 1,364,241
======= ======= ========= ========= ========= ========= =========
Total Expenses 2,063,256 1,963,433 2,214,498 2,990,734 3,692,993 2,715,487 3,168,838
========= ========= ========= ========= ========= ========= =========
Investment
Income Before
Credit
(provision) for
Loan Gains
(losses) and
Gains (Losses)
on Assets
Acquired and
Income Taxes 761,625 666,468 869,914 1,033,061 913,463 604,459 932,131
======= ======= ======= ========= ======= ======= =======
Credit
(provision) for
Loan Gains
(losses) and
Gains (Losses)
on Assets
Acquired (473,317) (13,515) 44,292 (8,923) (14,649) (4,097) (5,432)
Other Income 24,885 38,798
Benefit of
(Provision for)
Income Taxes(1) -- -- (5,945) (28,676) (3,271) 2,716 69
=========== =========== ========== ======== ========== ======== ========
Net Income $288,308 $652,953 $908,261 $1,020,347 $934,341 $603,078 $926,768
======== ======== ======== ========== ======== ======== ========
Net Income Per
Common Share $ .13 $ .66 $ .73 $ .79 $ .62 $ .42 $ .53
========== ========== ========== ========== =========== ========= =========
Common Stock
Dividends Paid $ -- $ -- $937,028 $946,655 $986,724 $986,722 $942,624
========= ========= ======== ======== ======== ======== ========
</TABLE>
-6-
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF
OPERATIONS FISCAL YEAR ENDED NINE MONTHS ENDED
DATA JUNE 30, MARCH 31,
----------------------------------------------------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Weighted
Average
Shares of
Common Stock
Outstanding 943,683 988,953 1,247,120 1,283,600 1,518,969 1,432,726 1,745,600
======= ======= ========= ========= ========= ========= =========
Unrealized
appreciation of
equity securities
not included in
net income $ - $ - $ - $ 58,241 $140,548 $58,241 $30,737
============ ============ ============ ======== ======== ======= =======
BALANCE SHEET DATA MARCH 31,
JUNE 30, 1998 1999 1999
------------- ---- ----
(unaudited) as adjusted(2)
Loans Receivable.................. $41,590,000 $49,303,758 $
Unrealized depreciation of
investments....................... (295,000) (335,000)
Net of unrealized
depreciation of investments....... 41,295,000 48,968,758
Total assets...................... 45,399,738 52,750,279
Notes payable and demand
notes............................. 22,085,000 29,350,000
Subordinated SBA
debentures........................ 8,880,000 8,880,000
Total liabilities................. 31,705,011 39,040,671
Total stockholders' equity........ 13,694,727 13,709,608
</TABLE>
- ------------------------------------
(1) Elk, since the fiscal year ended June 30, 1984, has elected and
qualified to be taxed as a regulated investment company, and
substantially all taxable income was required to be distributed to
stockholders. Therefore, only minimal taxes were required to be paid.
(2) This column shows the effect of the sale of 1,100,000 shares of Common
Stock in this Offering at the offering price of $_____ and our
application of the net proceeds of the Offering. See "Use of Proceeds"
and "Capitalization."
-7-
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE COMMON STOCK INVOLVES A SIGNIFICANT DEGREE OF
RISK. YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING INFORMATION ABOUT THESE RISKS,
TOGETHER WITH THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, BEFORE BUYING
SHARES OF THE COMMON STOCK.
OUR BUSINESS IS AFFECTED BY TAXI INDUSTRY CONDITIONS AND REGULATIONS.
As of March 31, 1999, approximately 80% of Elk's outstanding loans were
to finance the ownership of taxi medallions, taxis and related assets. The taxi
industry, and the ability of taxi owners to qualify for and repay loans may be
subject to factors that we cannot predict or control, such as the following:
o Taxi medallions are the main component of the collateral for the loans
that we make to taxi owners. Local governments in New York City and
other cities have traditionally issued a limited number of taxi
medallions. This generally has had the effect of increasing the value
of the existing medallions, although there have been periods when the
value of medallions has remained stable or declined. If the number of
medallions available in any city is significantly increased, the value
of both the new and outstanding medallions may decrease which, in turn,
would decrease the value of the collateral for our loans.
o Taxi fare rates and regulations are generally set by local government
agencies, and rates may remain fixed at a time when operating expenses
are increasing. As a consequence, in the short term, taxi operators may
find it more difficult to cover their expenses and to service their
loans from us. This could adversely affect the collectibility of our
loans and the value of our collateral.
WE MAY BE NEGATIVELY AFFECTED BY ANY DOWNTURN IN LOCAL ECONOMIC CONDITIONS.
Any downturn in local economic conditions in our geographic markets
could decrease the demand for taxi services. If that happens, taxi owners who
currently have loans from Elk could find it more difficult to repay their loans
and the value of the medallions, the taxis and the other assets securing those
loans could be diminished.
As of March 31, 1999, approximately 54% of our currently outstanding
loans were to taxi operators and other small businesses in New York City. We
cannot be sure that we will be able to sufficiently diversify our operations
geographically or that an economic downturn in New York City would not adversely
affect our business. See "Business."
WE OPERATE IN A HIGHLY COMPETITIVE INDUSTRY.
We compete with many other lenders, such as banks, credit unions,
finance companies and other SBICs, that offer loans to owners of taxi medallions
and other small businesses. Many of our competitors, including certain other
lenders that specialize in making loans to the taxi industry, are significantly
larger than we are and may, as a result, be able to obtain more favorable terms
from their financing sources than we can obtain from our banks. If our
competitors can lend at rates lower than we can, we will be at a competitive
disadvantage. We also will be competing with lenders who may have significantly
more expertise in evaluating small businesses in other industries and providing
managerial assistance to borrowers, which may make them more attractive to
potential small business
-8-
<PAGE>
borrowers. In addition, some of our competitors are subject to different and in
some cases less stringent regulation than we are.
THE CONTINUATION AND EXPANSION OF OUR BUSINESS IS DEPENDENT UPON THE
AVAILABILITY OF BANK FINANCING.
We have a continuing need for capital to finance our lending
activities. We fund our operations through credit facilities with bank
syndicates and, to a lesser degree, through subordinated SBA debentures. Our
business is dependent on our ability to continue to borrow funds from banks or
the SBA on favorable terms. Because we distribute to our stockholders at least
90% of our investment company taxable income, these earnings are not available
to us to fund loans to our customers.
As its operations have expanded, Elk has increasingly relied upon bank
financing for the funds it uses to make loans. Elk currently has three bank
lines of credit aggregating $35,000,000. Under these lines of credit, Elk may
borrow up to $35,000,000 at varying interest rates. As of March 31, 1999, Elk
had approximately $29,350,000 of bank loans outstanding. See "Selected Financial
Information."
Under a 1993 agreement with the SBA (the "SBA Agreement"), Elk is
permitted to borrow from its lenders, which include banks and the SBA, up to 80%
of its "working assets," which are computed quarterly under a formula that takes
into account Elk's capital and the value of Elk's loans and investments. As of
March 31, 1999, Elk's aggregate indebtedness was $38,230,000, representing
approximately 73% of its working assets as of that date. However, we cannot
predict whether our lenders would agree to increase Elk's credit lines on
favorable terms, or at all.
Because Ameritrans is not an SBIC, it will not be able to obtain any
funding from the SBA. We expect to fund the activities we propose to undertake
directly or through subsidiaries other than Elk by using a portion of the
proceeds of this Offering and establishing bank lines of credit. We do not
currently have commitments from any banks for any additional lines of credit,
and we cannot predict whether we will be able to arrange lines of credit on
acceptable terms or if the funds available to us will be sufficient to make
acquisitions or otherwise expand our operations or to engage in activities at a
level that will enable us to continue to operate profitably. See "Business --
Sources of Funds."
OUR PROFITABILITY MAY DECREASE IF THE DIFFERENCE BETWEEN THE INTEREST RATES WE
PAY AND THE INTEREST RATES WE CHARGE DECREASES.
We can achieve a profit on borrowed funds only if there is a sufficient
spread between the interest rates we are charged for the funds we borrow and the
interest rates we charge our borrowers. If the interest rates we pay rise, our
cost of funds will increase while the rates our borrowers pay remain fixed, and
our profitability could decrease. To partially contain this risk, we have
purchased interest rate caps and swaps. While these limit our exposure to rising
interest rates, they initially increase the effective interest rates that we pay
on loans subject to the caps or swaps.
Furthermore, the loans we make typically may be prepaid by the borrower
upon payment of certain prepayment charges. A borrower is likely to exercise
prepayment rights at a time when the interest rate payable on the borrower's
loan is higher than prevailing interest rates. If lower interest rates are
available, we may have difficulty re-lending any prepaid funds at comparable
rates. If borrowers elect to refinance loans previously made at higher interest
rates and our interest costs are not correspondingly reduced, our profits from
the refinanced rates would be lower.
-9-
<PAGE>
At March 31, 1999, our outstanding debt was as follows:
o Elk had $29,350,000 outstanding under credit lines from its
banks, secured by all of its assets and bearing interest at
various floating rates. The current rates of interest ranged
from 6.43% to 6.48%; however, as a result of interest rate
swap agreements, the effective (capped) rate as to $10,000,000
was 7.36%. The revolving lines of credit mature in November
1999.
o Elk had $8,880,000 outstanding under subordinated SBA
debentures, with interest at fixed annual rates ranging from
6.12% to 8.20% and maturities ranging from September 2003, to
March 2007.
The weighted average annual rate of interest on all of our borrowings
was 6.95%. Based upon that rate, we must achieve annual returns on investments
of at least 5.42% to cover our total annual interest payments. See "Business --
Source of Funds."
LEVERAGE MAY INCREASE THE VOLATILITY OF OUR NET ASSET VALUE AND THE MARKET PRICE
OF OUR COMMON STOCK.
Leverage poses certain risks for our stockholders, including possible
higher volatility of both our net asset value and the market price of the Common
Stock, due to the following factors, among others:
o Since we must pay interest to our lenders before we can distribute any
income to our stockholders, fluctuations in the interest rates payable
to the lenders affect the yield to our stockholders. Income we earn
from operations and from lending the proceeds of the funds we borrow
must exceed the interest we must pay on such borrowed funds in order
for there to be income available for distribution to stockholders.
o The high rate of distribution of investment company taxable income
required to maintain our tax status as a RIC limits the funds that can
be retained in the business to cover periods of loss, provide for
future growth and pay for extraordinary items.
o In the event of a liquidation, our lenders and other creditors would
have to be paid before any distribution could be made to our
stockholders.
The following table illustrates the effect of leverage to a
stockholder, assuming our cost of funds at March 31, 1999, as described above
and various annual rates of return, net of expenses. The calculations set forth
in the table are hypothetical and actual returns may be greater or less than
those appearing below:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Assumed return on investments (net of
expenses)(1)....................................... -10% -5% 0% 5% 10%
Corresponding net income to common
stockholders(1).................................... -52% -35% -17% 1% 18%
</TABLE>
- ------------------------------------
(1) Assumes (i) $49 million in average assets, (ii) an average
cost of funds of 6.95%, (iii) $35 million in average debt
outstanding and (iv) $14 million of average stockholders
equity.
-10-
<PAGE>
WE MAY EXPERIENCE LOSSES IN CONNECTION WITH FORECLOSURES OF TAXI LOANS.
We believe that the collateral securing our loans is adequate, and we
have never experienced a material loss of principal in connection with a taxi
medallion financing. However, in the event of a foreclosure, we cannot be sure
that we will be able to recoup all or a portion of a loan, and the costs of
foreclosure proceedings could also reduce our recovery.
OUR BORROWERS FOR NON-TAXI, DIVERSIFIED LOANS ARE SMALL BUSINESSES THAT HAVE
LIMITED FINANCIAL AND PERSONNEL RESOURCES.
Elk's non-taxi, diversified loans are not guaranteed by the SBA, and
its borrower base consists primarily of small business owners who have limited
resources. There is generally no publicly available information about such small
business owners, and these small businesses are unlikely to have audited
financial statements. Consequently, we must base our credit decisions on the
information our employees and agents are able to obtain. Typically, the success
of small businesses and their ability to repay our loans are dependent upon the
management talents and efforts of one person or a small group of persons, and
the death, disability or resignation of one or more of these persons could have
a serious effect on their business and make it more difficult for them to repay
our loans. Moreover, small businesses may be more vulnerable to economic
downturns and often need substantial additional capital to expand or compete.
Such companies may also experience substantial variations in operating results.
WE HAVE EXPERIENCED LOSSES IN CONNECTION WITH OUR DIVERSIFIED LOANS, AND WE MAY
BE REQUIRED TO INCREASE OUR RESERVES IN THE FUTURE.
Elk has in the past realized losses of principal on its diversified
loans. These loans typically carry more risk than taxi loans because the loan
collateral is generally not as valuable or liquid as the medallions and taxis
that are the collateral for taxi loans. Consequently, as we increase our
non-taxi diversified loans, our risk of losses of principal may increase. We
must continuously review our loan portfolio to assess the performance of all our
loans. Losses in connection with any type of loan might require us to adjust the
market valuation of our loan portfolio and increase our reserves.
THE RISKS OF LOANS AND INVESTMENTS IN OTHER SMALL BUSINESS BORROWERS MAY BE
GREATER THAN THE RISKS OF TAXI LOANS.
Elk has historically made only a small percentage of its loans to small
businesses other than taxi operators, and we intend to increase Elk's loans to
other types of small businesses. In addition, Ameritrans will make loans to
other types of businesses, directly, through Elk Capital, or through other
subsidiaries. The risks affecting the collectibility of loans to taxi operators
in major cities are unlikely to dramatically change in the foreseeable future or
to vary substantially from region to region. However, factors affecting the
potential for success of other types of small businesses and the risks of making
loans to such businesses are likely to be very different from those that affect
the operation of a taxi business and may vary significantly from industry to
industry and from region to region.
Our non-taxi, diversified loans are secured by collateral which
typically includes personal guarantees, mortgages on real estate, and/or a
security interests in personal property. Although we make substantial efforts to
collateralize our non-taxi, diversified loans to the extent possible, the
collateral on these loans is, in our experience, not as liquid as our security
interest in the taxi medallions we acquire in connection with our financing of
loans to taxi owners. Furthermore, the
-11-
<PAGE>
collateral often does not fully cover the amount of the underlying indebtedness.
Any portion of the loan not recovered by the enforcement of personal guarantees
or through the sale of the underlying collateral would be a loss and would
result in a charge to our earnings. Further, foreclosures on real estate
mortgages or proceedings to enforce our rights under loan guarantees invariably
require more time and are more costly than foreclosing on taxi medallions.
In addition to the risks related to the value of the collateral
securing these loans, such risks may include:
o The location of the potential borrower.
o The business experience of the borrower's management.
o The competition faced by the borrower.
o The effect of local, national and international economic conditions on the
business prospects of the borrower.
o The short-term and long-term capital and personnel requirements of the
borrower's business.
o The potential effect of changes in technology on the borrower's business.
Consequently, if we commit a significant portion of our available funds to
businesses in other industries, our profitability may be decreased if the risks
affecting the operations of our borrowers are greater than we anticipated.
VARIOUS FACTORS MAY NEGATIVELY AFFECT OUR PORTFOLIO VALUATION.
Under the 1940 Act, our loan portfolio must be recorded at fair market
value or "marked to market." Unlike certain lending institutions, we are not
permitted to establish reserves for loan losses, but adjust quarterly the
valuation of our portfolio to reflect our estimate of the current realizable
value of the loan portfolio. Since no ready market exists for this portfolio,
fair market value is subject to the good faith determination of our management
and the approval of our Board of Directors. In determining such value, the
directors may take into consideration various factors such as the financial
condition of the borrower, the adequacy of the collateral and interest rates.
For example, in a period of sustained increases in market rates of interest, the
Board of Directors could decrease its valuation of the portfolio because the
portfolio consists primarily of fixed-rate loans. These fair valuation
procedures are designed to approximate the value that would have been
established by market forces and are therefore subject to uncertainties and
variations from reported results. Based on the foregoing criteria, we determine
net unrealized depreciation or appreciation of investments, or the amount by
which our estimate of the current realizable value of our portfolio is above or
below its cost basis. As of March 31, 1999, our loan portfolio was recorded on
the balance sheet at fair market value, which included $335,000 of net
unrealized depreciation, as estimated in accordance with the 1940 Act and the
purchase method of accounting. At March 31, 1999, our net unrealized
appreciation was approximately $230,000.
Based upon current market conditions and current loan to value ratios, the
Board of Directors believes that the net unrealized depreciation of investments
is adequate to reflect the fair market value of the portfolio. However, if
interest rates increase, net unrealized depreciation of investments could
increase, and net increase in net assets resulting from operations could
decline. Because of the
-12-
<PAGE>
subjectivity of these estimates, there can be no assurance that in the event of
a foreclosure or in the sale of portfolio loans, we would be able to recover the
amounts reflected on our balance sheet. Further, costs associated with
foreclosure proceedings, such as a 5% New York City transfer tax assessed in
connection with every medallion transfer, may reduce our expected net proceeds.
See "Business -- Loan Portfolio; Valuation."
WE MAY ENCOUNTER DIFFICULTIES IN MAKING ACQUISITIONS ON FAVORABLE TERMS AND IN
INTEGRATING ACQUISITIONS INTO OUR OPERATIONS.
We intend to expand our business in part by acquiring other
taxi-related businesses or other finance companies or loan portfolios in our
existing as well as in new geographic markets. We will have to identify
companies that we believe will add value to our operations and negotiate the
terms on which we can acquire these companies. It is likely that potential
acquisition targets may also be attractive to others, who may be able to offer
more favorable terms than we can. We may use Common Stock (which could result in
dilution to purchasers of Common Stock) or debt (which may be long-term), or use
any combination of Common Stock and debt to make acquisitions. There can be no
assurance that we will successfully identify and acquire other companies or that
any acquisitions we make will ultimately add to our profitability. While we
regularly evaluate potential acquisition opportunities, we currently have no
commitments, agreements or understandings with respect to any material
acquisition.
We have had no prior experience in making acquisitions and integrating
other companies into our operations. Corporate acquisitions entail risks that
may include the following, among others:
o We may encounter undisclosed liabilities in acquired entities.
o We may have to deal with issues associated with entry into markets that
are new to us, such as reliance on new personnel.
o Difficulties may arise in integrating the acquired operations or
managing problems due to sudden increases in the size of our loan
portfolio, and we may be required to modify our operating systems and
procedures, hire additional staff, obtain and integrate new equipment
and complete other tasks to assimilate new and increased business
activities.
WE RELY, IN PART, ON SBA FINANCING.
At March 31, 1999, approximately $8,880,000, or 23%, of Elk's
outstanding debt consisted of subordinated SBA debentures, and we intend to
continue to seek to finance a portion of Elk's business through SBA funding
programs. The continued availability of funds from the SBA will be subject to
various factors beyond our control, including the following:
o The financing that the SBA makes available to SBICs is limited. The
amount of financing we have received from the SBA has not changed
significantly over the last five years, and we have not relied on SBA
funds to finance Elk's growth. Although funds are presently available
to qualified applicants, if Elk seeks additional SBA financing in the
future, it will compete with many other SBICs for these funds.
o The amount of financing Elk would be eligible to receive from the SBA
is calculated using a formula that nets certain expenses and
adjustments from Elk's capital.
-13-
<PAGE>
o SBA financing may be restricted in its application. The SBA has
determined that due to its concerns regarding the concentration of SBIC
loans in the taxi industry and the availability of private capital to
finance taxi related businesses, additional SBA financing may not be
made available to certain SBICs for such loans.
WE WILL BE DEPENDENT ON DIVIDENDS FROM ELK AND ANY FUTURE SUBSIDIARIES FOR OUR
OPERATING INCOME AND CASH FLOW.
We are a holding company and we derive and will derive most of our
operating income and cash flow from our subsidiaries. Currently, we derive all
of our income from Elk. While we intend to commence other operations, either
directly or through other subsidiaries we establish or acquire, we do not
currently have any other such operations. As a result, we rely entirely upon
distributions from Elk to generate the funds necessary to make dividend payments
and other distributions to our stockholders. Funds are provided to us through
dividends, but there can be no assurance that Elk or any other subsidiaries will
be in a position to continue to make such dividend payments. See "Business" and
"Distributions."
WE WILL CONTINUE TO QUALIFY FOR TAX TREATMENT AS A REGULATED INVESTMENT COMPANY
ONLY IF OUR ACTIVITIES COMPLY WITH CERTAIN PROVISIONS OF THE TAX LAW.
RISKS ASSOCIATED WITH DISTRIBUTION REQUIREMENTS AND LEVERAGE
Ameritrans and Elk have each qualified as a regulated investment
company (a "RIC") under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Internal Revenue Code"). In any year in which these companies
qualify under Subchapter M, they generally will not be subject to federal income
tax on investment company taxable income (which includes, among other things,
dividends and interest reduced by deductible expenses) that they distribute to
stockholders, provided they distribute at least 90% of the investment company
taxable income to their stockholders. In addition to the distribution
requirement, to qualify as RICs, Elk and Ameritrans must also meet certain
income and diversification requirements.
However, the 1940 Act contains certain asset coverage ratio
requirements applicable to investment companies that use leverage, as Elk does
and Ameritrans intends to do. Because Elk is an SBIC, it is exempt from these
requirements, but Ameritrans will be subject to them. These asset coverage
requirements could, under certain circumstances, prohibit Ameritrans from making
distributions that are necessary to maintain RIC status. In addition, the asset
coverage and distribution requirements limit our ability to retain earnings,
establish loss reserves, provide for future growth, and pay for extraordinary
items, such as the repayment of debt principal. Qualification as a RIC under
Subchapter M is determined on an annual basis and, although Ameritrans and Elk
are currently qualified as RICs, we cannot be sure that they will each continue
to qualify for such treatment. If they were to elect not to be treated as RICs,
or were to fail to qualify for RIC status for any reason, their respective
incomes would become fully taxable, and a substantial reduction in the amount of
income available for distribution to Ameritrans and its stockholders would
result. See "Investment Policies -- Ameritrans Investment Policies," "Federal
Income Tax Considerations," and "Regulation."
The Small Business Investment Act of 1958 (the "1958 Act") and
regulations thereunder (the "SBA Regulations") govern the activities of SBICs
and under certain circumstances may have the effect of restricting distributions
by SBICs, such as Elk. The SBA has made loans to Elk, and Elk has issued
debentures in the amount of those loans to the SBA. Under the SBA Regulations,
Elk is required to pay any interest due to the SBA on a timely basis.
Historically, Elk has made timely
-14-
<PAGE>
payment of interest due to the SBA. However, if Elk were unable to do so in the
future for any reason at a time when it had investment company taxable income,
it could be prohibited by SBA Regulations from making the distributions
necessary to maintain its qualification as a RIC. Under such circumstances, in
order to comply with the SBA Regulations and the RIC distribution requirements,
Elk would have to request and receive a waiver of the SBA's restrictions. In the
absence of a waiver, compliance with the SBA Regulations could result in loss of
RIC status by both Elk and Ameritrans, and the consequent imposition of
corporate tax on both companies.
In addition, Elk must comply with certain covenants contained in its
loan agreements with its banks. If we do not comply with these covenants and do
not obtain waivers from the banks should a default occur and remain continuing,
Elk could be prohibited from paying dividends. If Elk were unable to remedy the
default and distribute its income to its stockholder, Ameritrans, both Elk and
Ameritrans would lose their RIC status and be subject to corporate taxes.
RISKS ASSOCIATED WITH DIVERSIFICATION REQUIREMENTS
We intend to continue to pursue an expansion and diversification
strategy in our loan and investment business, and believe that there are growth
opportunities in the areas of small and medium-sized businesses. However, the
asset diversification requirements under the Internal Revenue Code could
restrict such expansion. These requirements provide, in part, that not more than
25% of the value of a RIC's total assets may be invested in the securities
(other than U.S. Government securities or securities of other RICs) of any one
issuer or two or more issuers controlled by such RIC that are engaged in similar
or related trades or businesses. Our investment in Elk will not be subject to
this diversification test so long as Elk is a RIC. However, our investment in
Elk Capital and any other subsidiaries may be subject to this test. The test is
initially calculated at the time the assets are acquired; however, subsequent
growth of a non-RIC subsidiary, if internally generated (as opposed to growth
via acquisitions), will not violate the diversification requirement even if it
represents in excess of 25% of Ameritrans' total assets. If Ameritrans fails the
diversification test at any time in the future, it would lose its RIC status,
with the consequences described above. Accordingly, our maintenance of RIC
status could limit our ability to expand and diversify our business. Our
principal focus will be to expand our business through internally generated
growth and only to consider an acquisition if, giving effect to the acquisition,
the Internal Revenue Code's diversification requirements would be met. See
"Federal Income Tax Consequences."
OUR SUCCESS IS DEPENDENT UPON OUR MANAGEMENT, PARTICULARLY GARY C. GRANOFF.
Our ability to maintain our competitive position depends on retaining
the services of our senior management. The loss of the services of one or more
members of senior management could have a material adverse effect on us. In
particular, we are largely dependent on the continued efforts of Gary C.
Granoff, who is our President and Chairman of our Board of Directors, Ellen M.
Walker, Vice President and a director, and Lee A. Forlenza, Vice President and a
director. We are the beneficiary of a "key person" life insurance policy on the
life of Mr. Granoff. The proceeds of this policy have been assigned to our banks
as additional collateral for our loans. See "Management."
We intend to hire, upon completion of the Offering, at least two
additional loan officers. If we are unable to recruit and hire qualified
individuals to fill these positions, our ability to expand our business
operations may be restricted. See "Business -- Employees."
-15-
<PAGE>
WE ARE CONTROLLED BY OUR PRINCIPAL STOCKHOLDERS, INCLUDING MANAGEMENT
STOCKHOLDERS.
At the conclusion of the Offering, our management and principal
stockholders will own a substantial percentage of our Common Stock
(approximately 37% of the outstanding shares). Stockholders do not have
cumulative voting rights. As a result, management and our principal stockholders
will continue to be able to exercise substantial influence over any matters
requiring the vote of stockholders, including the election of Directors, which
could delay or prevent a change in control of Ameritrans. See "Security
Ownership of Principal Stockholders" and "Management."
OUR COMPUTER SYSTEMS, AND THOSE OF OTHERS ON WHOM WE RELY, MAY NOT ACHIEVE YEAR
2000 READINESS.
We are working to resolve the potential impact of the year 2000 on the
ability of our computer systems to accurately process information with dates
later than December 31, 1999, or to process date-sensitive information
accurately beyond the year 1999 (referred to as the "Year 2000" issue). We are
in the process of modifying or replacing all affected systems for compliance
with the Year 2000 issue and are also monitoring the adequacy of the processes
and progress of vendors of systems and applications that may be affected by the
Year 2000 issue. We are dependent in part on computer systems and applications
owned and operated by others, particularly with respect to such critical tasks
as accounting and billing, as well as on our own computer systems. While we
believe our systems modifications will be successful, because of the complexity
of the Year 2000 issue and the interdependence of organizations using computer
systems, we may not satisfactorily complete our Year 2000 program in a timely
fashion. In addition, others with whom we interact and on whom we rely, such as
our banks, may not satisfactorily complete their own Year 2000 programs in a
timely fashion. Failure to satisfactorily address the Year 2000 issue could have
a material adverse effect on our prospects, business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Conditions and Results of Operations -- Year 2000 Compliance."
THE MARKET PRICE OF THE COMMON STOCK WILL FLUCTUATE, AND COULD FLUCTUATE
SIGNIFICANTLY.
The Ameritrans Common Stock is listed on the NASDAQ SmallCap Market
under the symbol "____", and prior to our acquisition of Elk, its Common Stock
was listed under the symbol "EKFG." Historically, there has been a low trading
volume in the Elk Common Stock. Upon completion of this Offering, we anticipate
the Ameritrans Common Stock will be listed on the NASDAQ National Market System.
See "Price Range of Common Stock."
The market price of the Common Stock will fluctuate, and could
fluctuate significantly, in response to various factors and events, including
the following:
o the liquidity of the market for the Common Stock;
o differences between our actual financial or operating results and those
expected by investors and analysts;
o changes in analysts' recommendations or projections;
o new statutes or regulations or changes in interpretations of existing
statutes and regulations affecting our business;
o changes in general economic or market conditions; and
-16-
<PAGE>
o broad market fluctuations.
PURCHASERS OF COMMON STOCK IN THIS OFFERING WILL EXPERIENCE IMMEDIATE AND
SUBSTANTIAL DILUTION IN THE NET TANGIBLE BOOK VALUE OF THEIR SHARES.
Immediately upon the closing of the Offering, the purchasers of the
Common Stock will experience dilution in the net tangible book value of their
shares of $2.56 per share ($2.49 if the Underwriters' over-allotment option is
exercised in full). See "Dilution." In addition, such purchasers will incur
further dilution to the extent we issue options under the 1999 Employee Stock
Option Plan (the "1999 Employee Plan") and the Non-interested Director Stock
Option Plan (the "Director Plan") and such options are exercised at a time when
the exercise price is less than the market price for the Common Stock. See
"Management -- Stock Option Plans."
THE MARKET PRICE OF THE COMMON STOCK MAY DECLINE DUE TO SHARES ELIGIBLE FOR
FUTURE SALE.
Future sales of substantial amounts of Common Stock in the public
market, or the perception that such sales could occur, could adversely affect
prevailing market prices from time to time. In addition, several of our
principal stockholders and entities affiliated with them hold a significant
portion of our outstanding Common Stock, and a decision by one or more of these
stockholders to sell their shares could adversely affect the market price of the
Common Stock.
Upon completion of the Offering, we will have outstanding 2,845,600
shares of Common Stock (3,010,600 if the Underwriters' over-allotment option is
exercised in full). Except for the shares currently owned or subsequently
acquired by our affiliates, in this Offering or otherwise, the outstanding
shares and the 1,100,000 shares to be sold in this Offering (1,265,000 if the
Underwriters' over-allotment option is exercised in full), will be freely
tradable without restriction under the Securities Act of 1933 (the "Securities
Act").
The shares owned by our affiliates may be sold in accordance with the
conditions of Rule 144 of the Securities Act. In general, under Rule 144, an
affiliate would be entitled to sell in brokers' transactions or to market makers
within any three-month period a number of shares that does not exceed the
greater of 1% of the then outstanding shares of the Common Stock (approximately
28,450 shares, based on the number of shares outstanding after the Offering,
assuming no exercise of the Underwriters' over-allotment option) or the average
weekly trading volume of the Common Stock on the Nasdaq National Market during
the four calendar weeks preceding the date on which notice of the sale is filed
with the Securities and Exchange Commission (the "SEC"). Sales under Rule 144
are also subject to certain manner of sale provisions, notice requirements and
the availability of current public information about the company.
Pursuant to lock-up agreements with the Underwriters, our officers and
directors will not, directly or indirectly, offer for sale, sell, contract to
sell, grant an option to purchase or otherwise dispose of any shares of the
Ameritrans Common Stock, (except 40,000 shares owned by one director and his
wife, which may be sold at the rate of 10,000 shares during any three-month
period) until 13 months after the completion of the Offering without the prior
written consent of the Underwriters. See "Underwriting."
We have reserved a total of 125,000 shares of Common Stock for issuance
with respect to the grants of options under the 1999 Employee Plan. To date, we
have granted options to purchase 100,000 shares of Common Stock, leaving 25,000
shares of Common Stock for future grants under the 1999 Employee Plan. In
addition, a total of 75,000 additional shares of Common Stock have been
-17-
<PAGE>
reserved for issuance with respect to the grant of options under the Director
Plan. We intend to file a registration statement under the Securities Act to
register the shares reserved for issuance under the 1999 Employee Plan and the
Director Plan. Shares issued upon exercise of outstanding stock options after
the effective date of such registration statement generally will be tradable
without restriction under the Securities Act.
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR FORECAST IN THE
FORWARD-LOOKING STATEMENTS CONTAINED IN THIS PROSPECTUS.
This Prospectus contains forward-looking statements that have been made
under the provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are not historical facts, but, rather, are
based on current expectations, estimates, and projections about our industry,
our beliefs, and assumptions. Words such as "anticipates," "expects," "intends,"
"plans," "believes," "seeks," "estimates," and variations of these words and
similar expressions are intended to identify forward-looking statements. These
statements are not guarantees of future performance, and are subject to certain
risks, uncertainties, and other factors, some of which are beyond our control,
are difficult to predict, and could cause actual results to differ materially
from those expressed or forecast in the forward-looking statements. These risks
and uncertainties include those described in "Risk Factors" and elsewhere in
this Prospectus. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect our management's view only as of the
date of this Prospectus. We undertake no obligation to update these statements
or publicly release the result of any revisions to the forward-looking
statements that we may make to reflect events or circumstances after the date of
this Prospectus or to reflect the occurrence of unanticipated events.
-18-
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds to us from the Offering, after
deducting underwriting discounts and commissions and other offering expenses
that we must pay, will be approximately $10,300,000 (approximately $11,906,275
if the Underwriters' over-allotment option is exercised in full), based upon a
public offering price of $11.00 per share.
We intend to use the net proceeds as follows:
o $5,000,000 to fund Elk's loan and investment portfolio.
o $5,000,000 to fund our expanded and diversified non-SBIC business,
which may be conducted directly by Ameritrans or through other
subsidiaries. We anticipate that approximately one-half of this amount
will be used to fund the activities of Elk Capital, which will not be a
RIC and will, therefore, not be required to make distributions to its
stockholders. This will enable us to use any after-tax earnings of Elk
Capital to internally finance growth.
o the balance for working capital.
Until we apply the proceeds to the purposes described above, we intend
to temporarily reduce the aggregate amounts outstanding under Elk's revolving
credit facilities by temporarily repaying debt in the aggregate amount of up to
$10,300,000, with interest rates ranging from 6.43% to 6.48% and maturing in
November, 1999. To the extent we have paid down our lines of credit, we will
reborrow from time to time amounts available under Elk's existing revolving
credit facilities and any similar facilities we may be able to arrange for
Ameritrans. See "Business -- Source of Funds."
The allocation of net proceeds set forth above represents our best
estimates of their use. Because Ameritrans has not commenced significant
operations other than through Elk, we cannot determine with certainty how much
of our expanded and diversified business we will do directly in Ameritrans and
how much through Elk Capital or other new specialized subsidiaries, although we
initially anticipate an approximately equal split. We also may acquire other
related businesses. We have entered into discussions from time to time with
potential acquisition candidates; however, any discussions are preliminary and
we have not entered into any definitive agreements with respect to such
acquisitions at this time.
The net proceeds actually allocated to the operations of Elk and our
proposed new operations may vary based on numerous factors, such as the nature
of the investment and lending opportunities that become available to us, changes
in the regulatory environment affecting taxi ownership and operations in various
cities and changes in SBA regulations. We therefore reserve the right to
reallocate net proceeds of this offering among our various investing and lending
operations as our management, in its sole discretion, deems advisable.
Any portion of the proceeds that we do not use to temporarily pay down
our indebtedness will be temporarily invested in time deposits, income-producing
securities with maturities of 15 months or less that are issued or guaranteed by
the federal government or agencies thereof, and high quality debt securities
maturing in one year or less from the time of investment.
We expect that the net proceeds will be applied as set forth above
within 12 months of the Offering. Any proceeds received upon the exercise of the
Underwriters' over-allotment option will be
-19-
<PAGE>
added to the funds available for investment and to working capital. See
"Business -- Sources of Funds."
DILUTION
The PRO FORMA consolidated net tangible book value of Ameritrans at
March 31, 1999 was $13,709,608 or $7.85 per share. "Net tangible book value per
share" is the tangible net worth (total tangible assets less total liabilities)
of Ameritrans divided by the number of shares of Common Stock outstanding. Based
upon an assumed public offering price per share of $11.00 and after giving
effect to the sale of the Common Stock offered hereby (after deducting the
underwriting discounts and commissions and estimated offering expenses), the PRO
FORMA net tangible book value of Ameritrans at March 31, 1999 would have been
$24,009,608 or $8.44 per share, representing an immediate increase in net
tangible book value of $.59 per share to existing stockholders and an immediate
dilution of $2.56 per share to the investors purchasing the shares of Common
Stock in the Offering ("New Investors").
The following table illustrates this dilution to New Investors:
<TABLE>
<CAPTION>
<S> <C>
Public offering price per share ................................ $11.00
------
Net tangible book value per share before the Offering........... $7.85
Increase per share attributable to the sale of shares to New
Investors..................................................... .59
---
Net tangible book value per share after the Offering............ $8.44
-----
Dilution to New Investors....................................... $2.56
=====
</TABLE>
If the Underwriters' over-allotment option is exercised in full, the
PRO FORMA net tangible book value per share of Common Stock after this Offering
would be $8.51, which would result in dilution to New Investors in this Offering
of $2.49 per share.
-20-
<PAGE>
DISTRIBUTIONS
Before Ameritrans acquired Elk, its stockholders were the stockholders
of Elk and received dividends directly from Elk. Elk registered under the 1940
Act for the fiscal year ended June 30, 1984, and declared and paid dividends to
holders of Common Stock for the fiscal years ended June 30, 1984, through June
30, 1992. Thereafter, Elk paid dividends per share for the fiscal years ended
June 30, 1996, 1997 and 1998, and for fiscal 1999 through the date of this
Prospectus as follows: 1996 -- $.73, 1997 -- $.74, 1998 -- $.57, and 1999 (to
date) -- $.72. Ameritrans intends to distribute at least 90% of its investment
company taxable income on a quarterly basis to its stockholders.
Elk and Ameritrans have elected to be treated for tax purposes as RICs
under the Internal Revenue Code. As RICs, neither Ameritrans nor Elk is subject
to federal income tax on any investment company taxable income that it
distributes to its stockholders, if at least 90% of its investment company
taxable income is distributed to its stockholders. Investment company taxable
income includes, among other things, dividends and interest reduced by interest
and operating expenses. Initially, substantially all of Ameritrans' investment
company taxable income is expected to be comprised of cash dividends paid to it
by Elk. Substantially all of Elk's net income is investment company taxable
income and is derived from interest received on outstanding loans. See "Federal
Income Tax Considerations."
We do not currently expect Ameritrans to have any material capital
gains; however, to the extent that it does, it may either distribute them
annually or retain them, pay the capital gains tax and apply any after-tax
amounts to retained earnings for corporate use. Our ability to make dividend
payments is restricted by certain asset coverage requirements under the 1940 Act
and is dependent upon maintenance of our status as a RIC under the Internal
Revenue Code. The ability of Elk and, therefore, of Ameritrans, to make dividend
payments is further restricted by certain financial covenants contained in the
credit agreements with Elk's banks, by SBA rules and under the terms of the SBA
subordinated debentures. See "Regulation" and "Federal Income Tax
Considerations."
Elk Capital is not a RIC, and Ameritrans may establish other
subsidiaries that are not RICs. Non-RIC subsidiaries would not be required to
make distributions to Ameritrans. In such cases, unless Ameritrans required
distributions from such non-RIC subsidiaries to fund the distributions it is
required to make as a RIC, these subsidiaries would use income, if any, to fund
their operations.
-21-
<PAGE>
PRICE RANGE OF COMMON STOCK
The Elk Common Stock was listed on the Nasdaq SmallCap Market on June
22, 1998, under the symbol EKFG, prior to which it had traded in the "pink
sheets." Since ________ __, 1999, when Ameritrans acquired Elk, its Common Stock
has been listed on the Nasdaq SmallCap Market under the symbol ____. Upon
completion of the Offering it is anticipated that the Ameritrans Common Stock
will be traded on the Nasdaq National Market under the symbol ____.
The following tables show the closing high and low bid prices per share
of Common Stock as reported by the National Quotation Bureau, Inc. or directly
by dealers maintaining a market in the Common Stock (through June 22, 1998) and
the high and low sale prices per share of Common Stock as reported by Nasdaq
(from June 23, 1998), for the fiscal years ended June 30, 1997 and 1998 and for
the current fiscal year to date.
The tables also show, for the same periods, the net asset value per
share, the premium of high sale price to net asset value, and the premium of low
sale price to net asset value. Net asset value per share is determined as of the
last day in the relevant quarter and therefore may not reflect the net asset
value per share on the date of the high and low sale price. The net asset values
are based on outstanding shares at the end of each period. Due to the limited
number of transactions involving the Common Stock during the periods presented
below, the public trading market with respect to our securities has been
limited. The Common Stock traded at less than net asset value during fiscal 1997
and through the third quarter of fiscal 1998, which we believe was primarily a
consequence of the limited trading market. Since the fourth quarter of fiscal
1998, the Common Stock has generally traded at a premium to net asset value per
share. There can be no assurance, however, that such premium will be maintained.
<TABLE>
<CAPTION>
NET ASSET PREMIUM OF HIGH PREMIUM OF LOW
VALUE PER SALES PRICE TO SALES PRICE TO NET
ELK BID SHARE NET ASSET VALUE% ASSET VALUE %
------------------------ --------- ---------------- -----------------
HIGH LOW
---- ---
<S> <C> <C> <C> <C> <C>
FISCAL 1997
1st Quarter..................... $4.75 $4.625 $8.23 -73% -78%
2nd Quarter..................... 4.75 4.75 8.25 -74% -74%
3rd Quarter..................... 5.125 4.75 8.42 -64% -77%
4th Quarter..................... 5.125 5.125 8.60 -68% -68%
FISCAL 1998
1st Quarter..................... 6.25 5.125 8.30 -33% -62%
2nd Quarter..................... 6.625 6.25 7.83 -18% -20%
3rd Quarter..................... 7.125 6.625 7.76 -9% -17%
4th Quarter (to June 22, 1998).. 9.75 7.125 7.85 19% -10%
</TABLE>
-22-
<PAGE>
<TABLE>
<CAPTION>
NET ASSET PREMIUM OF HIGH PREMIUM OF LOW
VALUE PER SALES PRICE TO SALES PRICE TO NET
ELK SALE SHARE NET ASSET VALUE% ASSET VALUE %
- --- ------------------- --------- ---------------- ------------------
HIGH LOW
---- ---
<S> <C> <C> <C> <C> <C>
FISCAL 1998
4th Quarter (from June 23, 1998)..... $9.50 $9.50 $7.85 10% 10%
FISCAL 1999
1st Quarter.......................... 11.25 7.75 7.84 30% -1%
2nd Quarter.......................... 11.00 9.125 7.83 29% 14%
3rd Quarter.......................... 10.625 8.875 7.83 26% 12%
4th Quarter (to June 18, 1999)....... 10.00 8.6815 7.83 22% 10%
AMERITRANS
- ----------
FISCAL 2000
1st Quarter
</TABLE>
On ______________ ____, 1999, the closing sale price for a share of our
Common Stock was __________, as reported by Nasdaq.
-23-
<PAGE>
CAPITALIZATION
The following table sets forth (i) the PRO FORMA consolidated
capitalization (giving effect to the acquisition of Elk on ___________ __, 1999)
of Ameritrans at March 31, 1999 and (ii) the PRO FORMA capitalization of
Ameritrans at March 31, 1999, as adjusted to reflect the effects of the sale of
1,100,000 shares of Common Stock in this Offering, after deducting the sales
load (underwriting discounts and commissions) and estimated offering expenses,
at an assumed public offering price of $11.00 per share and the application of
the estimated net proceeds as described in this Prospectus. See "Use of
Proceeds" and "Business." This table should be read together with the Selected
Financial Information included in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1999
--------------
(unaudited)
ACTUAL AS ADJUSTED
----------------------------------
Debt:
<S> <C> <C>
Subordinated SBA debentures of subsidiary (Elk).......... $ 8,880,000 $ 8,880,000
Notes payable to bank(1)................................. 29,350,000 19,050,000
---------- ----------
Total long-term debt and bank debt....................... 38,230,000 27,930,000
Stockholders' equity:
Preferred Stock, $.01 par value;
1,000,000 shares authorized;
none issued and outstanding...........................
Common Stock, $.0001 par value; 5,000,000 shares
authorized; 1,745,600 shares issued and outstanding,
(2,845,600 issued and outstanding as adjusted)(2)..... 175 285
Additional paid-in capital............................... 13,036,698 23,336,588
Restricted capital....................................... 434,777 434,777
Accumulated undistributed income......................... 8,433 8,433
Other comprehensive income............................... 229,525 229,525
------------ -----------
Total stockholders' equity............................... 13,709,608 24,009,608
------------ -----------
Total capitalization......................................... $51,939,608 $51,939,608
=========== ===========
</TABLE>
- ------------------------------------
(1) We intend to temporarily repay up to $10,300,000 of indebtedness with
the proceeds of this Offering. See "Use of Proceeds."
(2) Excludes an aggregate of (i) 100,000 shares issuable pursuant to
immediately exercisable options outstanding at March 31, 1999, and (ii)
100,000 shares reserved for issuance upon the exercise of additional
options that may be granted under our existing option plans. See
"Management -- Stock Option Plans" and "Shares Eligible for Future
Sale."
-24-
<PAGE>
SELECTED FINANCIAL INFORMATION
On __________, 1999, Ameritrans acquired Elk in a share-for-share
exchange. Prior to the acquisition, Elk had been operating independently and
Ameritrans had no operations.
The tables below contain certain summary historical financial
information of Elk. The data at March 31, 1999 and for the nine months ended
March 31, 1998 and 1999 are derived from the company's unaudited financial
statements and include all adjustments, consisting only of normal recurring
adjustments, that we consider necessary to fairly present such data. The results
for the nine months ended March 31, 1999 do not necessarily indicate the results
to be expected for the full year ending June 30, 1999. You should read these
tables in conjunction with the consolidated financial statements of Elk (the
"Financial Statements") included elsewhere in this Prospectus and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
STATEMENT OF
OPERATIONS FISCAL YEAR ENDED NINE MONTHS ENDED
DATA JUNE 30, MARCH 31,
---------------------------------------------------------------------- ----------------------
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Investment
Income $2,824,881 $2,629,901 $3,084,412 $4,023,795 $4,606,456 $3,319,946 $4,100,969
========== ========== ========== ========== ========== ========== ==========
Interest Expense 1,136,458 1,002,959 1,105,993 1,582,700 1,840,731 1,360,703 1,804,597
Other Expenses 926,798 960,474 1,108,505 1,408,034 1,852,262 1,354,784 1,364,241
======= ======= ========= ========= ========= ========= =========
Total Expenses 2,063,256 1,963,433 2,214,498 2,990,734 3,692,993 2,715,487 3,168,838
========= ========= ========= ========= ========= ========= =========
Investment
Income Before
Credit
(provision) for
Loan Gains
(losses) and
Gains (Losses)
on Assets
Acquired and
Income Taxes 761,625 666,468 869,914 1,033,061 913,463 604,459 932,131
======= ======= ======= ========= ======= ======= =======
Credit
(provision) for
Loan Gains
(losses) and
Gains (Losses)
on Assets
Acquired (473,317) (13,515) 44,292 (8,923) (14,649) (4,097) (5,432)
Other Income 24,885 38,798
Benefit of
(Provision for)
Income Taxes(1) -- -- (5,945) (28,676) (3,271) 2,716 69
=========== =========== ========== ======== ========== ======== ========
Net Income $288,308 $652,953 $908,261 $1,020,347 $934,341 $603,078 $926,768
======== ======== ======== ========== ======== ======== ========
Net Income Per
Common Share $ .13 $ .66 $ .73 $ .79 $ .62 $ .42 $ .53
========== ========== ========== ========== =========== ========= =========
Common Stock
Dividends Paid $ -- $ -- $937,028 $946,655 $986,724 $986,722 $942,624
========= ========= ======== ======== ======== ======== ========
</TABLE>
-25-
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF
OPERATIONS FISCAL YEAR ENDED NINE MONTHS ENDED
DATA JUNE 30, MARCH 31,
---------------------------------------------------------------------- ----------------------
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Weighted
Average
Shares of
Common Stock
Outstanding 943,683 988,953 1,247,120 1,283,600 1,518,969 1,432,726 1,745,600
======= ======= ========= ========= ========= ========= =========
Unrealized
appreciation of
equity securities
not included in
net income $ $ $ $ 58,241 $140,548 $58,241 $30,737
=========== =========== =========== ======== ======== ======= =======
BALANCE
SHEET DATA JUNE 30, MARCH 31,
---------------------------------------------------------------------------------------
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
(unaudited)
Loans
Receivable $22,137,343 $23,039,462 $24,141,421 $33,249,206 $41,590,000 $34,862,680 $49,303,758
Unrealized
depreciation
of
investments (355,000) (277,000) (301,000) (325,000) (295,000) (295,000) (335,000)
========= ========= ========= ========= ========= ========= =========
Net of
unrealized
depreciation
of
investments $21,782,343 $22,762,462 $23,840,421 $32,924,206 $41,295,000 $34,567,680 $48,968,758
Total assets $25,367,954 $25,702,600 $26,721,186 $37,026,021 $45,399,738 $37,936,313 $52,750,279
=========== =========== =========== =========== =========== =========== ===========
Notes payable
and demand
notes $5,695,000 $4,950,000 $6,625,000 $16,820,000 $22,085,000 $15,085,000 $29,350,000
Subordinated
SBA
debentures $8,724,430 $8,804,000 $8,858,000 $8,880,000 $8,880,000 $8,880,000 $8,880,000
Total
liabilities $14,777,514 $14,085,652 $15,820,351 $25,993,253 $31,705,011 $24,384,166 $39,040,671
=========== =========== =========== =========== =========== =========== ===========
Total
stockholders'
equity $10,590,440 $11,616,948 $10,900,835 $11,032,768 $13,694,727 $13,552,147 $13,709,608
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
- ------------------------------------
(1) Elk, since the fiscal year ended June 30, 1984, has elected and
qualified to be taxed as a regulated investment company and
substantially all taxable income was required to be distributed to
stockholders. Therefore, only minimal taxes were required to be paid.
-26-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion in conjunction with the
financial statements and notes to financial statements. The results described
below are not necessarily indicative of the results to be expected in any future
period. Certain statements in this discussion and analysis, including statements
regarding our strategy, financial performance, and revenue sources, are
forward-looking statements based on current expectations and entail various
risks and uncertainties that could cause actual results to differ materially
from those expressed in the forward-looking statements, including those
described in "risk factors" and elsewhere in this prospectus.
GENERAL
Ameritrans acquired Elk in ___________ 1999, and to date we have had no
activities other than the acquisition and operation of Elk. Elk is an SBIC that
has been operating since 1980, making loans to (and, to a limited extent,
investments in) small businesses, primarily businesses that are majority-owned
by persons who qualify under SBA Regulations as socially or economically
disadvantaged. Most of Elk's business has consisted of originating and servicing
loans collateralized by New York City, Boston, Chicago and Miami taxi
medallions, but Elk also makes loans to and investments in other diversified
businesses and to persons who qualify under SBA Regulations as
"non-disadvantaged."
Historically, Elk's earnings derived primarily from net interest
income, which is the difference between interest earned on interest-earning
assets (consisting of business loans), and the interest paid on interest-bearing
liabilities (consisting of indebtedness to Elk's banks and subordinated
debentures issued to the SBA). Net interest income is a function of the net
interest rate spread, which is the difference between the average yield earned
on interest-earning assets and the average interest rate paid on
interest-bearing liabilities, as well as the average balance of interest-earning
assets as compared to interest-bearing liabilities. Unrealized depreciation on
loans and investments is recorded when Elk adjusts the value of a loan to
reflect management's estimate of the fair value, as approved by the Board of
Directors. See Note 1 of "Notes to the Consolidated Financial Statements."
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998
TOTAL INVESTMENT INCOME
Elk's investment income for the nine months ended March 31, 1999,
increased to $4,100,969 from $3,319,946, or 23.5%, for the nine month period
ended March 31, 1998. This increase was mainly due to an increase in the loan
portfolio during the fiscal year. The portfolio increased from $34,862,680 as of
March 31, 1998, to $49,303,758 as of March 31, 1999, as part of our strategy to
maximize stockholder rate of return primarily through the utilization of bank
financing.
OPERATING EXPENSES
Interest expense for the nine month period ended March 31, 1999,
increased to $1,804,597 from $1,360,703 for the prior period ended March 31,
1998. This increase was mainly due to increased bank borrowings for the period
offset by lower interest rates for the period ended March 31, 1999.
-27-
<PAGE>
Other operating expenses decreased $10,793 when compared with the
similar period ended March 31, 1998. This decrease was mainly due to a decrease
of $73,533 in bad debt expense, offset by an increase in administrative fees and
payroll costs.
NET INCOME
Net income for the nine months ended March 31, 1999, increased
$323,690, as compared to the nine months ended March 31, 1998, reflecting the
positive impact of the growth of Elk's loan portfolio and decreases in the
interest rates payable to Elk's banks.
RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
TOTAL INVESTMENT INCOME
Elk's investment income for the fiscal year ended June 30, 1998
increased to $4,606,456 from $4,023,795, or 14.5%, when compared with the year
ended June 30, 1997. This increase was mainly due to an increase in its loan
portfolio. The portfolio increased from $33,249,206, as of June 30, 1997 to
$41,590,000 as of June 30, 1998, as part of our strategy to maximize stockholder
rate of return primarily through the utilization of bank financing.
OPERATING EXPENSES
Interest expense for the year ended June 30, 1998 increased $258,031 to
$1,840,731 as compared to $1,582,700 for the similar period ended June 30, 1997.
This increase was mainly due to increased bank borrowings of $22,085,000 as of
June 30, 1998, compared to $16,820,000 as of June 30, 1997.
Other operating expenses increased $449,954 when compared with the year
ended June 30, 1997. This increase was mainly due to a $227,748 increase in bad
debt expense, in addition to various increases in the administrative fees.
NET INCOME
Net income for the year ended June 30, 1998, decreased $86,006, as
compared to the year ended June 30, 1997. This decrease was mainly caused by an
increase in the bad debt expense of $227,748.
RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
TOTAL INVESTMENT INCOME
Elk's investment income for the year ended June 30, 1997 increased to
$4,023,795 from $3,084,412, or 30.5%, when compared with the year ended June 30,
1996. This increase was mainly due to an increase in the loan portfolio. The
portfolio increased from $24,141,421, as of June 30, 1996 to $33,249,206 as of
June 30, 1997, as part of our strategy to maximize stockholder rate of return,
primarily through the use of bank borrowings.
OPERATING EXPENSES
Interest expense for the year ended June 30, 1997 increased to
$1,582,700 from $1,105,993 for the year ended June 30, 1996. This increase was
mainly due to increased bank borrowings of $16,820,000 as of June 30, 1997,
compared to $6,625,000 as of June 30, 1996.
-28-
<PAGE>
Other operating expenses increased $352,744 when compared with the
similar period ended June 30, 1996. This increase was mainly due to an increase
in legal fees of $121,104 attributable to the increase of business in the
Chicago market, in addition to increases in administrative fees, due to our
decision to change our method of payment of management fees.
NET INCOME
Net income for the year ended June 30, 1997, increased $112,086, as
compared with the year ended June 30, 1996. This increase was mainly due to an
increase in Elk's loan portfolio.
BALANCE SHEET AND RESERVES
Total assets increased by $7,350,541 as of March 31, 1999 as compared
to June 30, 1998. This increase was due to management's decision to expand its
portfolio in the Chicago taxi medallion market plus increases in the diversified
loan portfolio. This expansion was financed by additional bank debt, $7,265,000,
during the nine month period.
LIQUIDITY AND CAPITAL RESOURCES
Prior to this Offering, Elk funded its operations through private
placements of its securities, bank financing, and the issuance to the SBA of its
subordinated debentures.
In 1994, Elk agreed to repurchase all of the 547,271 outstanding shares
of its 3% preferred stock from the SBA for an aggregate price of $1,915,449,
representing a discount of 65% from the original issue price of $10 per share.
As a condition of the repurchase, Elk granted the SBA a liquidating interest in
a newly established restricted capital surplus account (the "Restricted Capital
Account"). The Restricted Capital Account is equal to the amount of the net
repurchase discount in which the SBA received a liquidating interest, amortized
over 60 months ending November 10, 1999. However, if Elk is liquidated or if a
material violation of SBA Regulations occurs during the amortization period, the
SBA would receive the remaining unamortized amount of the Restricted Capital
Account prior to the stockholders of Elk receiving any amounts on their Common
Stock. The unamortized balance of the SBA's liquidating interest at March 31,
1999 was $434,777.
In December 1994 and September 1995 Elk raised additional capital of
$450,000 and $1,249,585, respectively, less private placement costs of $76,445
and $21,482, respectively. These proceeds were used to repurchase Elk's 3%
preferred stock from the SBA. In connection with the purchase, all dividends in
arrears on the preferred stock were extinguished.
During January 1998, Elk completed a private placement of 462,000
shares of common stock at $6.50 per share for aggregate gross proceeds of
$3,003,000, less offering expenses of $115,000. The net proceeds were utilized
to repay bank indebtedness and for working capital. A portion of the proceeds
temporarily used to reduce bank indebtedness, up to a maximum of $963,000, was
allocated by Elk toward the organization and capitalization of its new parent
company, Ameritrans.
At March 31, 1999, 77% of Elk's indebtedness was represented by
indebtedness to its banks and 23% by the debentures issued to the SBA with fixed
rates of interest ranging from 6.12 to 8.20%. Elk currently may borrow up to
$35,000,000 under its existing lines of credit, subject to the limitations
imposed by its borrowing base agreement with its banks and the SBA, the
statutory and regulatory limitations imposed by the SBA, and the availability of
funds. In addition, Elk is presently eligible to apply for additional leverage
from the SBA if it is determined by the Board of Directors to be in the best
interests of the company. No assurance can be given that, if applied for, such
additional financing will be approved by the SBA.
-29-
<PAGE>
Loan amortization and prepayments also provide a source of funding for
Elk. Prepayments on loans are influenced significantly by general interest
rates, economic conditions and competition.
Like Elk, Ameritrans will distribute at least 90% of its investment
company taxable income and, accordingly, we will continue to rely upon external
sources of funds to finance growth. In order to provide the funds necessary for
our expansion strategy, we expect to raise additional capital and to incur, from
time to time, additional bank indebtedness and (if deemed necessary by
management) to obtain SBA loans. There can be no assurances that such additional
financing will be available on acceptable terms.
YEAR 2000 COMPLIANCE
We have been taking steps to address and prevent problems in connection
with the year 2000 ("Year 2000"). Such problems are expected to occur due to the
inability of computer systems to properly recognize and process date-sensitive
information relating to the Year 2000 and beyond. Year 2000 issues may affect
our information technology systems ("IT") and non-information technology systems
("Non-IT"). The following are the IT systems that we use:
o We use a computer program to track our receivable loans ("Loan Track").
To address Year 2000, approximately one year ago we engaged the
consultant who originally developed Loan Track for us, to test, upgrade
and certify Loan Track as Year 2000-compliant. The consultant completed
all of such tasks and the Year 2000-compliant Loan Track program is now
in use in our regular operations. We also use the standard
Peachtree(TM) accounting system for general in-house accounting
functions. The version of Peachtree we currently use has been upgraded
to be Year 2000-compliant.
o We also use other industry-wide programs such as Windows 95 and Word
Perfect. It is expected that either the current versions are Year
2000-compliant or that Year 2000-compliant upgrade versions will be
obtained in the near future. In addition, during the past 12 months and
at present, we have been replacing or upgrading our computer hardware
with equipment that will be Year 2000-compliant.
Non-IT systems have been defined as embedded technology, such as
micro-controllers, that may be included in elevators and other equipment and
machinery. Most of our Non-IT systems consist of office equipment. We have
inventoried our Non-IT systems, and we are in the process of contacting our
office equipment and telecommunications suppliers and landlord to determine the
status of their Year 2000 readiness. We do not believe that we face material
Year 2000 issues with respect to our Non-IT systems.
Costs in connection with Year 2000 compliance have been (i) to review
and upgrade existing IT systems; (ii) to analyze Year 2000 readiness of our
banks and customers and (iii) to analyze Non-IT Year 2000 compliance. To date,
such costs have aggregated approximately $10,000 and, for the most part, have
been for IT review and upgrades. Such costs are being treated as expenses. We
expect to spend approximately $55,000 to replace certain hardware and purchase
additional software and communications systems during the fiscal year ending
June 30, 1999 and that the cost of such replacements will be capitalized and
depreciated over a five year period. We do not believe that other costs
associated with Year 2000 compliance will be material or that they will have a
material effect on our financial condition.
We are dependent on banks for financing and for normal banking
operations. In surveying Year 2000 readiness, we have received oral, and we are
in the process of obtaining written, assurances from our banks that they are
taking the actions necessary to be Year 2000-compliant so that neither the
banks' nor their customers' business will be interrupted due to Year 2000
difficulties.
-30-
<PAGE>
Our portfolio companies are taxi and taxi-medallion owners and other
small businesses, which, to the best of our knowledge, use computer equipment
and software only to a limited extent in the operation of their businesses. We
are in the process of surveying certain of our vendors to assess their potential
Year 2000 exposure and to confirm that they are making arrangements for their
own Year 2000 compliance.
To date we have attempted to comply fully with Year 2000 compliance
requirements, and we are in the process of determining the compliance of our
banks and customers. Our failure, or the failure of third parties, to adequately
address Year 2000 issues could have a material adverse effect on our financial
condition or results of operations. However, given the nature of our portfolio
companies and the industries in which they operate, we anticipate that few of
our customers would actually suffer material adverse effects from Year 2000. We
believe that our reasonably likely maximum risk is (i) a material increase in
our credit losses due to Year 2000 problems affecting our portfolio companies
and our banks and (ii) disruption in financial markets, causing us liquidity
stress.
At this point, our management is unable to quantify the amount of
potential losses and disruptions due to Year 2000 issues, but is in the process
of developing a contingency plan.
-31-
<PAGE>
BUSINESS
GENERAL
Ameritrans was formed in 1998 to engage in lending and investment
activities, primarily with small and medium-sized businesses, directly and
through subsidiaries. On _________, 1999, Ameritrans acquired Elk Associates
Funding Corporation ("Elk") in a one-for-one share exchange in which Elk
stockholders received shares of Common Stock of Ameritrans, and Elk became a
wholly-owned subsidiary. Elk is a "small business investment company," or
"SBIC," formed in 1979 and licensed by the U.S. Small Business Administration
("SBA") in 1980.
Elk makes loans to the owners of taxi medallion businesses in the New
York City, Chicago, Miami and Boston markets and to other small businesses. Elk
has never experienced any material losses of principal in connection with taxi
financings. Loans made to finance the purchase or continued ownership of taxi
medallions, taxis and related assets represented approximately 80% of Elk's loan
portfolio as of March 31, 1999. Loans made to finance the acquisition and/or
operation of other small businesses constitute the balance of Elk's loan
portfolio.
To date, our only activities have been the operation of Elk. We intend
to engage in broader and more diversified investment and lending activities
directly and through Elk and other subsidiaries that we may form or acquire. Our
investment objectives are to provide a high level of distributable income,
consistent with preservation of capital, as well as long-term growth of net
asset value.
Both Ameritrans and Elk are registered as business development
companies, or "BDCs," under the Investment Company Act of 1940 (the "1940 Act").
Accordingly, Ameritrans and Elk are subject to the provisions of the 1940 Act
governing the operations of BDCs. Both companies are managed by their executive
officers under the supervision of their Boards of Directors, and the same
individuals are the executive officers and directors of both companies.
In addition, both Ameritrans and Elk have elected to be treated as
"regulated investment companies," or "RICs," for tax purposes. Under the
Internal Revenue Code, as RICs, we will generally not be subject to U.S. federal
corporate income tax on our investment income, if we make qualifying
distributions of our income to stockholders. As RIC's we qualify for this
treatment as long as we distribute at least 90% of our investment company
taxable income to our stockholders as dividends. Elk paid qualifying dividends
from July 1983 through June 1992 and continuously since June 1996. Since
_________ 1999, when we acquired Elk, these dividends have been, or will be,
payable to Ameritrans as Elk's sole stockholder. We intend to pay dividends as
long as funds are legally available for distribution from Elk's earnings and
from our own future earnings, if any. However, we may operate our specialty
finance business, including our proposed consumer lending operations and other
new operations through subsidiaries that are not RICs, in which event after-tax
earnings, if any, would be retained in those subsidiaries, except to the extent
those subsidiaries must pay dividends to Ameritrans in order to enable
Ameritrans, as a RIC, to pay the required dividends to its stockholders.
Because it is an SBIC, Elk's operations are subject to other
restrictions, and all loans and investments must comply with applicable SBA
Regulations. For example, the interest rate that Elk can charge, the percentage
of any other company it can own, the size of the businesses to which it can make
loans, and the length of time to the maturity date are limited by SBA rules.
Elk's business is funded by loans from banks and, to a lesser extent, by the
proceeds of subordinated debentures issued to the SBA. Ameritrans is not an SBIC
and is not subject to SBA regulation. See "Elk's Loans" and "Regulation -- The
Small Business Act of 1958."
-32-
<PAGE>
SCOPE OF BUSINESS ACTIVITIES AND GROWTH STRATEGY
CURRENT AND PROPOSED BUSINESS ACTIVITIES
ELK. Elk was organized primarily to provide long-term loans to
businesses eligible for investments by SBICs under the 1958 Act ("Small Business
Concerns"). While Elk has made, and intends to continue to make, loans for
financing the purchase or continued ownership of taxi medallions, taxis and
related assets, Elk intends to continue to diversify its investments into other
businesses to the extent permitted by the 1958 Act and the SBA Regulations. We
anticipate that its present ability to pursue investments and loans with persons
who are not "disadvantaged" will afford Elk greater opportunities to make
investments that enhance Elk's profitability.
Although Elk's certificate of incorporation provides Elk with the
authority to invest in the equity capital of Small Business Concerns, Elk makes
equity investments in Small Business Concerns on a selective basis, and only to
a limited extent. Equity securities in Elk's investment portfolio at March 31,
1999, totaled $927,000 or 1.8% of total assets. Elk may make additional equity
investments. However, unless necessary to protect a prior investment of Elk that
is at risk, equity investments shall not exceed 20% of Elk's total assets. Elk
has one (1) wholly-owned subsidiary, EAF Holding Corporation, formed in 1992,
the sole activities of which are to own and operate certain real estate assets
acquired in satisfaction of loans.
AMERITRANS. Ameritrans is not licensed as an SBIC. Consequently, it is
neither eligible to raise funds from the SBA nor subject to the restrictions and
obligations imposed by the 1958 Act (except as they relate to Elk or any SBIC
that may be owned or acquired by Ameritrans).
Ameritrans currently intends to engage in a broad range of investment
and financial services directly and indirectly through subsidiaries. Ameritrans
plans to make a variety of loans and investments similar to those made by Elk.
However, its activities may include financial services and investments not
permitted to Elk, as an SBIC, under the 1958 Act and the SBA Regulations. For
example, Ameritrans may make loans that are for terms shorter than the terms
required by SBA Regulations or make equity investments that Elk, as an SBIC,
could not make. Further, Ameritrans intends to lend to borrowers that are not
Small Business Concerns, as defined in the SBA Regulations, and may engage in
certain specialty finance businesses other than loans to small businesses.
ELK CAPITAL. Elk Capital, a newly formed, wholly-owned subsidiary of
Ameritrans, is not a RIC and is therefore subject to corporate tax on its
earnings. Elk Capital will also engage in the specialty financing business. Elk
Capital will engage in activities similar to those of Elk and Ameritrans, but
since Elk Capital will be neither an SBIC or a RIC, it will have an added degree
of flexibility in the loans and equity investments that it may make. Elk Capital
may also engage in certain other specialty finance businesses, which may include
consumer lending. Also, to the extent its operations are profitable, Elk Capital
will be able to retain any after tax earnings to internally finance growth, and
thereby provide Ameritrans with the ability to increase stockholder value while
engaging in our company's core business areas. The extent to which Elk Capital
can accumulate earnings may be subject to certain limitations. See "Federal
Income Tax Considerations."
GROWTH STRATEGY
We intend to continue to expand into new markets both in the taxi
industry and in other industries we identify as offering investment
opportunities. We intend to expand our business in part by acquiring other
taxi-related businesses or other finance companies or loan portfolios in our
existing as well as in new geographic markets. The loans and investments that we
plan to pursue directly by Ameritrans or through Elk, Elk Capital, or newly
formed or acquired subsidiaries, will be made in a variety of businesses,
provided that the loans made are in a majority of cases secured by real estate,
-33-
<PAGE>
business assets, equipment or other collateral deemed adequate by management. We
intend to apply to other industries the same methodology and risk evaluation
techniques that Elk has successfully used since 1980 in the taxi industry.
Consequently, we are seeking opportunities in those industries that offer the
same fundamental characteristics as the taxi industry and that also provide
repetitive business. We have commenced our expansion of this diversified
investment/lending business outside the New York metropolitan area into new
industries as well as into new geographical markets.
INTERNET
We have recently created an Elk website (www.elkassociates.com), and an
Ameritrans website (www.ameritranscapital.com) is expected to be operational in
August 1999. We intend to build our business by using the Internet to increase
our market visibility, to accept and process loan applications, and to expand
our market by making ourselves more accessible to prospective borrowers through
our websites and via e-mail.
TAXI MEDALLION FINANCE INDUSTRY AND MARKET OVERVIEW
THE NEW YORK CITY TAXI MEDALLION INDUSTRY AND MARKET. Under current
law, the number of taxi medallions that may be issued by New York City is
limited to 12,187. There are two types of medallions: corporate and individual
owner-driver. Of the total of 12,187 medallions, 7,058 are corporate medallions
and 5,129 are for individually owned cabs. A corporate medallion is issued for a
cab owned by a corporation that owns a minimum of two cabs and two corporate
medallions (i.e., one corporate medallion per cab). An individual owner-driver
may not own more than one cab and one medallion. Corporate medallions are used
by large fleet concerns with many taxis and many drivers or by small
corporations owning at least two medallions and two taxis driven by two
owner-drivers (the so-called "minifleet").
Only 11,787 medallions could be issued until August 8, 1995, when a law
permitting the issuance of up to 400 additional taxi medallions over a
three-year period went into effect. The New York City Taxi and Limousine
Commission (the "TLC") conducted the sale of 133 medallions in May 1996, 133
medallions in October 1996, and 134 medallions on October 1, 1997. Of these new
medallions, 160 were sold to individuals and the balance to minifleets in lots
of two.
At the present time, most medallion sales are handled through brokers.
As a result, an active marketplace has developed for the purchase and resale of
medallions. The price of a medallion varies with supply and demand. Elk's most
recent experience, in June 1999, was that individually owned medallions sold for
approximately $210,000 and corporate medallions sold for approximately $260,000
each. In addition, a 5% New York City transfer tax and various brokerage
commissions are additional expenses incurred in the acquisition and sale of a
medallion.
Based upon statistics obtained from the TLC, from 1989 through 1998,
the number of corporate medallions that were resold by their holders varied each
year from approximately 245 to 440, which suggests that there were between 122
and 220 minifleet corporations in need of financing each year, while the number
of individual owner medallions sold each year varied from 250 to 415. Assuming
that a typical minifleet financing for purchases of medallions might involve a
sum of approximately $450,000, the dollar volume of New York City minifleet
financings might range from $49 million to $88 million a year. Assuming that a
typical individual medallion financing for a purchase of a medallion involves a
sum of approximately $180,000, the dollar volume of New York City individual
medallion financing might range from $45 million to $75 million a year.
In addition to financings for purchases and sales of medallions, a
substantial market exists for refinancing the indebtedness of existing minifleet
or individual medallions. Management estimates this market to exceed that of the
market for financing transfers, and to be in excess of $100,000,000 per year.
-34-
<PAGE>
A prospective medallion owner must meet the requirements of the TLC,
which approves all sales and transfers. In general, the requirements are that
the prospective owner have no criminal record, that the purchase funds be
derived from legitimate sources, and that the taxi vehicle and meter meet
specifications set by the TLC. Also required is a clearance from prior insurers
of the seller in the form of letters stating that there are no outstanding
claims for personal injuries in excess of insurance coverage.
NEW YORK MARKETING STRATEGY FOR MEDALLION FINANCING. Medallion
transfers in the New York City market are usually handled through medallion
brokers, who have frequent contact with taxi owners and drivers. Medallion
brokers locate buyers for sellers of medallions and sellers for buyers of
medallions, and then typically employ a financing broker to arrange for the
financing of the medallion purchases. In many cases the medallion broker and the
financing broker are the same party or related parties.
Elk has received a significant number of referrals from certain
medallion brokers in New York. Elk also receives referrals from financing
brokers and its borrowers. In addition, Elk occasionally places advertisements
in local industry newspapers and magazines. Elk also uses brokers, advertising
and referrals in connection with its taxi lending business in the Chicago,
Boston, and Miami markets.
CHICAGO TAXI MEDALLION INDUSTRY AND MARKET. As part of its geographic
diversification strategy, Elk studied the Chicago taxi medallion market in 1994,
and began making loans in Chicago in April, 1995. The taxi market and medallion
system in Chicago is regulated by the City of Chicago Department of Consumer
Services, Public Vehicle Operations Division. The number of taxi medallions is
limited by city ordinances, and until 1988, these ordinances gave control of 80%
of the medallions to the two largest taxi operators in Chicago, Yellow Cab Co.,
and Checker Taxi Co., Inc.
Since 1988, the taxi industry in Chicago has shifted toward more
individual ownership. Over the succeeding 10 years, the Yellow Cab Co. and
Checker Taxi Co., Inc., pursuant to a new ordinance, gave 1,300 medallions back
to the City, and the City added 100 medallions each year. These medallions were
distributed in a lottery system to taxi drivers who had never owned a medallion.
By July, 1997, there were a total of 5,700 medallions issued in Chicago, of
which Yellow Cab Co. owned approximately 2,071, and the remaining 3,629 were
owned by individual owner drivers, or by individual operators who had purchased
multiple medallions.
In December, 1997, the City Council increased the number of medallions
by 1,000 additional medallions, to be issued over a period of the succeeding
three years. Of these medallions, 500 will be issued in lotteries to taxi
drivers who never owned a medallion, and the other 500 will be auctioned to the
highest bidder. In the November 1998 auction of 150 medallions, there were 499
bids to purchase medallions. The winning bid prices ranged from $57,000 to
$63,000 per medallion, which was approximately the same as open market prices
for taxi medallions that were sold in Chicago at that time.
On January 21, 1999, the Yellow Cab Co. auctioned 175 medallions in a
sealed bid auction at prices equal to the current open market value price for
medallions. It is likely that the Yellow Cab Co. will continue to auction off
its medallions in the future, in order to become a medallion service business
serving the individual owner drivers who acquire the medallions.
It has been our experience that as the Chicago market has expanded, it
has also become more competitive. In addition, as the City of Chicago and now
Yellow Cab Co. supply medallions to the market place, we expect that the taxi
medallion market will continue to grow, with more and more
-35-
<PAGE>
owner-drivers and individual owner-operators of multiple medallions. To the
extent that there are more owner-operators and individual owner-operators of
multiple medallions in the market, we believe that there will be increased
opportunities for us to serve this market.
Chicago city regulations set forth certain qualifications that all
owners of taxi medallions must meet, and require that all security interests in
medallions be registered with the Department of Consumer Services. The
Department of Consumer Services also is involved (along with the City Council)
in setting taxi fares, and in setting maximum lease rates that may be charged by
owners to lessees of taxis, who drive them on a daily, weekly, or monthly basis.
CHICAGO MARKETING STRATEGY FOR MEDALLION FINANCING. At the present
time, most medallion sales in Chicago are handled through brokers or attorneys.
An active market place has developed in Chicago for the purchase and resale of
medallions. Elk's most recent experience, in April 1999, was that medallions
were selling for between $60,000 and $65,000 per medallion. In addition, the
City of Chicago imposes a 5% transfer tax on a medallion held for two years or
more, a 10% transfer tax on a medallion held for between one and two years, and
a 25% transfer tax on a medallion held less than one year. The recent imposition
of the transfer taxes, in addition to being a source of revenue to the City, was
also scaled in order to inhibit speculation in the purchase and resale of taxi
medallions without the intent of actually operating taxis.
We believe that as many as 1,000 medallions are bought each year by
purchasers, and at today's market value, this would give gross potential volume
of approximately $65,000,000. If 80% of these purchases were financed, the
annual market for loans to purchase medallions would be $52,000,000 per annum.
In addition to purchases and sales of medallions, a substantial market exists
for refinancing the indebtedness of existing owners. Based on the number of
medallions currently issued and to be issued, we believe the market for
financing transfers could exceed $60,000,000 per year.
BOSTON TAXI MEDALLION INDUSTRY AND MARKET. Elk began to review the
Boston taxi market in the fall of 1994 and began making loans in this market in
1995. Since 1930, the Boston Police Commissioner has had exclusive jurisdiction
over the regulation of taxi operations, including the issuance and transfer of
medallions. The Hackney Carriage Unit of the Boston Police Department deals with
taxi regulatory issues.
By statute, the number of medallions issued in the City of Boston may
not exceed 1,525, subject to increase or decrease in the Police Commissioner's
discretion. The number of medallions remained essentially unchanged from the
late 1940's until January 1999, when the City sold 75 additional medallions at
auction. Prices at this auction exceeded $140,000 per medallion. The City of
Boston has announced that it will auction another 75 medallions in September
1999.
Under the applicable statutes and rules, Boston taxi medallions are
assignable, subject to the approval of the Police Commissioner. In practice,
transfer applications are submitted to the Hackney Carriage Unit, which has
issued guidelines and forms for transfers. Loans by financial institutions or
individuals are secured by taxi medallions and assets are routinely allowed in
accordance with the Hackney Carriage Unit's "Procedures for Recording Secured
Party Interest."
BOSTON MARKETING STRATEGY FOR MEDALLION FINANCING. The Boston taxi
market services the City of Boston, which includes Logan Airport. Elk's
marketing efforts have included retention of a local attorney, advertising in
the CARRIAGE NEWS, a local trade newspaper, and the use of forwarding brokers.
Our efforts have resulted a loan portfolio of approximately $2,800,000 as of
March 31, 1999.
-36-
<PAGE>
MEDALLION INDUSTRY IN METRO-DADE COUNTY, (MIAMI AREA), FLORIDA. Elk
began to investigate the Miami area taxi market in 1995, and began making loans
in 1996. The Miami taxi industry has been regulated on a county-wide basis in
Metro-Dade County, Florida since 1981. The Passenger Transportation Regulatory
Division (the "PTRD") of the Metro-Dade County Consumer Services Division
oversees taxi operations and licenses in accordance with the Metro-Dade County
Code.
Until April 1999, each taxi operator in Metro-Dade County was required
to obtain a "For-Hire" license. The number of licenses was limited to one
license for each 1,000 of population in the county. With approximately 2,100,000
residents in the county, 2,100 licenses could have been issued; however, only
1,827 licenses are currently authorized, of which 1,824 have been issued. In
1991, a For-Hire license loan program was approved, authorizing the use of loans
to purchase (but not to refinance) licenses and taxis. Any lender must be a
licensed lending institution authorized to do business in Florida. Elk is
currently one of only two lending institutions that are authorized to make loans
to the taxi industry in Metro-Dade County. Transfers of licenses and financing
arrangements are subject to prior approval by the PTRD and the County Board of
Commissioners.
For-Hire licenses were considered a privilege, not a property right.
However, since licenses were limited in number, the marketplace created a
"market price" or value in connection with the transfer of the license right to
a purchaser. As of April 1999, the Metro-Dade County Code was amended to create
a "medallion," or property right, system with a view to attracting traditional
financing providers to provide the taxi industry with additional funding
sources. Existing For-Hire licenses were automatically converted into
medallions.
According to official Metro-Dade County publications, approximately
one-third of the currently outstanding licenses are owned by individuals or
corporations that own and operate only one license. Other than 106 licenses held
by one owner, the balance of the licenses are owned mainly by holders of from
two to five licenses. The number of license transfers has been generally
increasing in recent years, with a high of 197 transfers in 1997, with an
average reported price of $51,658. However, we believe that the present market
price of licenses/medallions in Metro-Dade County is between $65,000 to $70,000
per medallion.
MIAMI AREA MARKETING STRATEGY FOR MEDALLION FINANCING. We believe that
the recent change to a medallion system and an emphasis on individual
operator-ownership of medallions for the future will open a large new market for
taxi medallion financing in the Miami area. Since this is an emerging market, we
are currently developing strategies to develop contacts and market our financing
to potential purchasers of medallions, and in the event refinancing is
permitted, to those owners who may wish to refinance their medallions in the
future. As of March 31, 1999, the total principal amount of our outstanding taxi
loans in the Miami area was approximately $2,000,000.
COMMERCIAL (NON-TAXI) LOANS -- OVERVIEW
Elk began making loans to diversified (non-taxi) small businesses
("Commercial Loans") in the New York City metropolitan area in 1985, in order to
diversify its loan portfolio, which until that time had consisted almost
entirely of loans to owners of New York City taxi medallions. After a period of
losses in its Commercial Loan portfolio from 1991 to 1994, Elk has been
increasing this portfolio on a selective basis since 1995, with a concentration
on loans to operators of retail dry cleaners and laundromats. Recently, Elk has
also begun geographically expanding its Commercial Loan portfolio, with loans in
South Florida, Massachusetts, and North Carolina.
Elk has chosen to concentrate its Commercial Loan portfolio in loans
secured by retail dry cleaning and coin-operated laundromat equipment because of
certain characteristics similar to taxi
-37-
<PAGE>
medallion lending that make these industries attractive candidates for
profitable lending. These factors include: (i) relatively high fixed rates of
interest ranging from approximately 325 to 700 basis points over the prevailing
Prime Rate at the time of origination, (ii) low historical repossession rates,
(iii) vendor recourse in many cases, (iv) significant equity investments by
borrowers, (v) an active market for repossessed equipment, and for resale of
businesses as going concerns through transfers of the leasehold and business
equipment to new operators, and (vi) a collateral service life that is
frequently twice as long as the term of the loans. We estimate that there are
approximately 4,000 retail dry cleaners and approximately 3,000 laundromats in
the New York City metropolitan area. In addition, we believe that specialization
in the dry cleaning and laundromat industries will permit relatively low
administrative costs because documentation and terms of credit are standardized,
and the consistency among the loans has simplified credit review and portfolio
analysis.
We further believe that other niche industries with similar
characteristics will provide additional loan portfolio growth opportunities.
Elk's other Commercial Loans are currently spread among other industries,
including auto sales, retirement home, garden center, commercial construction,
car wash, theater, restaurant, and financial services.
Elk's Commercial Loans finance either the purchase of the equipment and
related assets necessary to open a new business or the purchase or improvement
of an existing business, and Elk has originated Commercial Loans in principal
amounts up to $1,000,000. Elk generally retains these loans, although from time
to time it sells participation interests in its loans to diversify risk, or
purchases participation interests in loans generated by other SBICs.
ELK'S LOANS
Elk's primary business has been to provide long-term business loans at
commercially competitive interest rates (which at March 31, 1999, ranged from
8.25% to 16.5% per annum). From 1979 through March 1997, Elk was a "Specialized
Small Business Investment Company" ("SSBIC") under the rules of the SBA. All of
its loans were required to be made to small businesses that were majority-owned
by socially or economically disadvantaged persons, known as "Disadvantaged
Concerns." In September 1996, the 1958 Act was amended to provide, among other
things, that no further subsidized funding would be made available to SSBICs.
Consequently, Elk amended its Certificate of Incorporation and entered into an
agreement with the SBA in February 1997 in order to convert Elk from an SSBIC to
an SBIC. As such, Elk may now lend to persons who are not Disadvantaged
Concerns. As of March 31, 1999, more than 95% of Elk's loans and investments
were to Disadvantaged Concerns.
Elk intends to continue to make loans to Disadvantaged Concerns,
particularly in connection with the ownership of taxis and related assets in the
New York City and Chicago markets. Elk also intends to diversify its activities
by lending and investing in a broader range of Small Business Concerns.
SBA Regulations set forth a ceiling on the interest rates that an SBIC
may charge its borrowers. Under the current SBA Regulations, the basic maximum
rate of interest that an SBIC may charge is 19%. However, if either the weighted
average cost of the SBIC's qualified borrowings, as determined pursuant to SBA
Regulations, or the SBA's current debenture interest rate, plus, in either case,
11% and rounded off to the next lower eighth of 1%, is higher, the SBIC may
charge the higher rate. The maximum rate of interest that Elk was allowed to
charge its borrowers for loans originated during June 1999 was 19%. See
"Regulation -- The Small Business Act of 1958."
-38-
<PAGE>
Elk has agreed with the SBA that it must maintain a non-taxi
investment/loan portfolio (included with the combination of its assets acquired
and receivables on assets acquired in the future) in an amount not less than its
outstanding SBA guaranteed leverage (I.E., debentures) issued since 1995, which
amount is currently $2,470,000. See "Investment Policies -- Elk's Investment
Policies -- Concentration of Investments."
Elk may revise the nature of its loan portfolio at such time as its
Board of Directors determines that such revision is in the best interests of
Elk. Elk does not currently anticipate that its loan portfolio will realize an
annual turnover in excess of 50%. Elk will not lend to, or otherwise invest more
than the lesser of (i) 10% of its total assets, or (ii) 30% of its paid-in
capital attributable to its Common Stock in any one Small Business Concern. Elk
has not made, and is prohibited by applicable SBA Regulations from making, loans
to officers, directors or principal stockholders of Elk or "associates" of Elk,
as such term is defined in applicable SBA Regulations.
TAXI MEDALLION FINANCING LOANS
The large majority of Elk's loans have been made to purchasers or
owners of New York City taxi medallions. Since Elk commenced operations it has
made over $175,000,000 of such loans. However, the New York market has become
increasingly more competitive, and the value of medallions has remained
essentially unchanged for the last few years. This has limited Elk's
opportunities to make profitable loans or expand its activities in this market.
Consequently, in 1995 and 1996, Elk began expanding its taxi lending business
into the Chicago, Boston, and Miami markets, where its taxi lending business has
increased and continued to be profitable. During the time Elk has been making
taxi loans in these markets, the market prices of medallions have been
increasing. Since April 1995 when Elk began making loans in the Chicago taxi
medallion market, the market value of a medallion has increased from
approximately $32,000 to approximately $65,000. During the time Elk has been
making taxi loans in Boston and the Miami area, the market price of medallions
has increased from approximately $90,000 to $150,000 in Boston and from
approximately $55,000 to $70,000 in Miami.
As of March 31, 1999, $19,397,771, or 39.5%, of the aggregate principal
amount of its outstanding loans of $49,303,758, represented loans made to
finance the purchase or continued ownership of New York City taxi medallions and
related assets; an aggregate of $15,016,103, or 30.5%, consisted of loans to
finance the purchase or refinancing of taxi medallions in Chicago, and the
balance of $14,581,596, or 30% consisted of loans to various commercial
borrowers, of which $2,776,869, or 5.6%, was invested in Boston taxi medallion
financing and $1,947,207, or 4%, was invested in Miami taxi medallion financing.
See " -- Loan Portfolio; Valuation," below.
Due to increasing competition, annual interest rates for new loans in
the New York market are currently averaging 8.5%. Interest rates on Chicago taxi
loans generally have ranged from 12% to 14% per year. With additional
competition presently in the market place, it is expected that rates will range
in the near term from 11% to 13% per year on new loans, depending upon the size
of the loan, the repayment schedule, the balloon dates, the loan-to-value ratio,
and the credit history of the borrower. In addition, most loans that Elk has
made have been for four to six year terms and are self-amortizing. With
increased competition in the market, the term of the loan may be expected to
increase to periods longer than six years. Interest rates on loans in the Boston
market currently range from 10-12%, and in the Miami market currently range from
12-13%.
COMMERCIAL LOAN PORTFOLIO
Elk began making non-taxi Commercial Loans in 1985. Due to the effects
of the nationwide recession of the early 1990's on the New York City
metropolitan area economy, between 1990 and
-39-
<PAGE>
1994 Elk suffered significant losses in its Commercial Loan portfolio. These
losses were primarily written off against income earned by Elk on its taxi loan
portfolio. By 1995, the local economy had improved and Elk again began making
selective Commercial Loans, and its activities in this area has been increasing
steadily. At June 30, 1995, Commercial Loans totaled $1,275,654, or 5.5%, of
Elk's total loan portfolio, while at March 31, 1999, Commercial Loans totaled
$9,857,610, or 20%, of Elk's total loan portfolio.
At March 31, 1999, Elk's Commercial Loan portfolio consisted of 60
loans, of which 20 loans totaling $2,701,640 were to dry-cleaning businesses, 20
loans totaling $4,373,155 were to laundromat businesses, and 20 loans totaling
$2,782,815 were to a variety of other small businesses. Loans to dry cleaners
and laundromats represented 72% of the aggregate principal amount of Commercial
Loans outstanding at March 31, 1999.
Elk generally originates Commercial Loans by financing the cost of dry
cleaning, laundromat or other business-specific equipment, while the borrower is
making an equity investment to finance the cost of installation, building of
appropriate infrastructure to support the equipment, installation of other
equipment necessary for the business operations, other decorations and working
capital. Substantially all Commercial Loans are collateralized by first security
interests in the assets being financed by the borrower, or by real estate
mortgages. In addition, Elk generally requires personal guaranties from the
principals of the borrower and in limited cases obtains recourse guaranties from
the equipment vendors.
Elk's Commercial Loans typically require equal monthly payments
covering accrued interest and amortization of principal over a four to eight
year term and generally can be prepaid with a fee of 60 to 90 days of interest
during the first several years of the loan. The term of, and interest rate
charged on, Elk's Commercial Loans are subject to SBA Regulations.
Elk generally obtains interest rates on its Commercial Loans that are
higher than it can obtain on New York City taxi medallion loans. The Company
believes that the increased yield on Commercial Loans compensate for their
higher risk relative to medallion loans and that it will benefit from the
diversification of its portfolio. Interest rates on currently outstanding
Commercial Loans range from 9% to 16%.
-40-
<PAGE>
LOAN PORTFOLIO; VALUATION
The following table sets forth a classification of Elk's outstanding
loans as of March 31, 1999 (unaudited):
<TABLE>
<CAPTION>
BALANCE
MATURITY OUTSTANDING
NUMBER INTEREST DATE (IN MARCH 31,
TYPE OF LOAN OF LOANS RATE MONTHS) 1999
------------ -------- ---- ------- ----
<S> <C> <C> <C> <C> <C>
(unaudited)
New York City: Taxi medallion 118 8.25-14% 1-119 $19,397,771
Radio car service 41 1-15% 1-59 308,288
Chicago Taxi medallion 381 12-16.5% 18-48 15,016,103
Boston Taxi medallion 25 11-14% 30-89 2,776,869
Miami Taxi medallion 39 13-16.5% 109-120 1,947,207
Other loans:
Restaurant 2 10-12% 1-63 244,571
Embroidery manufacturer 1 12% 58 89,543
Retirement home 1 15% 84 300,000
Theater 1 16% 59 168,571
Hairdresser 2 12% 4 104,271
Car wash 1 11.5% 33 216,155
Ambulance service 1 10.5% 3 5,437
Bagel store 1 14% 40 24,095
Dry cleaner 20 10-14.5% 40-120 2,701,640
Laundromat 20 9-15% 21-72 4,373,155
Grocery/deli 1 12.5% 2 2,441
Financial services 1 14% 1 4,980
Black car service 1 12% 5 203,366
(real property)
Auto sales 3 10.5-13% 1-49 493,248
Registered investment 1 14% 97 169,012
advisor
Garden Center 1 14% 93 431,250
Auto Center 1 12% 81 125,785
Commercial Construction 1 16% 84 200,000
--- ===========
Total Loans Receivable 664 $49,303,758
=== ===========
</TABLE>
-41-
<PAGE>
Loans made by Elk to finance the purchase or continued ownership of
taxi medallions, taxis and related assets are typically secured by such
medallions, taxis and related assets. Loans made by Elk to finance the
acquisition and/or operation of retail, service or manufacturing businesses are
typically secured by real estate and other assets. In the case of loans to
corporate owners, the loans are usually personally guaranteed by the
stockholders of the borrower. Elk generally obtains first mortgages, but
occasionally has participated in certain financings where it has obtained a
second mortgage on collateral. Elk has obtained a relatively higher rate of
interest in connection with these subordinated financings. Elk has not, to date,
committed more than 5% of its assets to any one business concern in its
portfolio. The interest rates charged by Elk on its currently outstanding loans
range from 8.25% to 16.5% per annum. As of March 31, 1999, the annual weighted
average interest rate on Elk's loans was approximately 11.2%. The average term
of Elk's currently outstanding loans is approximately 48 months.
VALUATION -- As an SBIC, Elk is required by applicable SBA Regulations
to submit to the SBA semi-annual valuations of its investment portfolio, as
determined by its Board of Directors, which considers numerous factors including
but not limited to the financial strength of its borrowers to determine "good"
or "bad" status, and fluctuations in interest rates to determine marketability
of loans. Reference is made to Footnotes 1, 2, and 3 of Notes to Financial
Statements for the year ended June 30, 1998, for a discussion of Elk's method of
valuation of its current portfolio of loans. In the event Elk invests in
securities for which price quotations are readily available, Elk will value such
investments at their fair market value, based on such quoted prices. With
respect to securities for which price quotations are not readily available, such
securities will be valued at fair market value as determined by the Board of
Directors.
COLLECTION EXPERIENCE -- Elk has not, to date, had a material loss of
principal in any taxi medallion loan, although it has experienced some losses of
principal in its diversified (non-taxi) loan portfolio. Likewise, its collection
experience (timely payments, collections on foreclosure, etc.) with taxi
medallion financings has historically been better than with its non-taxi loans.
From 1991 through 1994, substantially all of Elk's provisions for loan losses
and losses on assets acquired were related to business loans secured by real
estate and to radio car loans. In addition, from 1991 through 1995, Elk had
difficulty selling off real estate acquired on defaulted loans as a result of a
depressed real estate market. Since 1995, Elk has substantially increased its
diversified loan portfolio, and its overall collection experience with these
loans has improved.
SOURCES OF FUNDS
Elk is authorized to borrow money and issue debentures, promissory
notes and other obligations, subject to SBA regulatory limitations. Other than
the subordinated debentures issued to the SBA, Elk has to date borrowed funds
only from banks. As of March 31, 1999, Elk maintained three lines of credit
totaling $35,000,000 with an overall lending limit of $35,000,000. At March 31,
1999, Elk had $29,350,000 outstanding under these lines. The loans, which mature
through November 1999, bear interest based on an effective rate of interest
equal to approximately 150 basis points above LIBOR plus certain fees. Upon
maturity, Elk anticipates extending the lines of credit for another year as has
been the practice in previous years. Pursuant to the terms of the loan
agreements, Elk is required to comply with certain terms, covenants and
conditions, and has pledged its loans receivable and other assets as collateral
for the above lines of credit.
If interest rates rise, our cost of funds would increase while the
rates on our outstanding loans to our borrowers remained fixed, and our
profitability could decrease. In order to partially contain this risk, we have
purchased interest rate caps and interest rate swaps. While these limit our
exposure to
-42-
<PAGE>
upward movement in interest rates on our bank loans, they initially increase the
effective interest rates that we pay on loans subject to these agreements.
However, general rises in interest rates will reduce our interest rate spread in
the short term on the floating portion of our bank debt that is not covered by
interest rate caps or interest rate swaps. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations -- Interest Expense" and Note 1 of Notes to Consolidated
Financial Statements.
Pursuant to the SBA Agreement, Elk agreed to limit the aggregate of its
indebtedness based on a computation of a borrowing base each quarter. The
borrowing base computation is calculated to determine that the total amount of
debt due on the senior bank debt and SBA debentures does not exceed
approximately 80% of the value of performing loans and investments in Elk's
portfolio. Loans that are more than 90 days in arrears are valued at a lower
amount in computing the borrowing base.
In connection with the SBA Agreement, Elk has also entered into an
intercreditor agreement (the "Intercreditor Agreement") and a custodian
agreement (the "Custodian Agreement") with its banks and the SBA. Pursuant to
the Custodian Agreement, the banks and the SBA-appointed Israel Discount Bank of
New York as the custodian to hold certain notes, security agreements, financing
statements, assignments of financing statements, and other instruments and
securities as part of the collateral for Elk's indebtedness to the banks and the
SBA. The Intercreditor Agreement sets forth the respective rights and priorities
of the banks and the SBA with respect to the repayment of indebtedness to the
banks and the SBA and as to their respective interests in the collateral.
Pursuant to the Intercreditor Agreement, the banks consented to the grant by Elk
to the SBA of a security interest in the collateral, which security interest
ranks junior in priority to the security interests of the banks.
The net proceeds of this Offering will be used primarily to fund the
expansion and diversification of our investing activities. However, we will need
significant additional sources of financing to significantly expand our
activities. We are currently discussing with Elk's banks and certain additional
banks credit lines for Ameritrans, Elk and Elk Capital contingent upon, among
other conditions, completion of this Offering. To date, we have not received
commitments for any additional credit lines. See "Use of Proceeds."
SBIC BENEFITS
GENERAL. As an SBIC, Elk is eligible to receive certain financing from
the SBA on favorable terms, and Elk and its stockholder are entitled to certain
tax benefits, both described below. The SBA has a certain amount of discretion
in determining the type and amount of financing that will be made available to
an SBIC. Therefore, there can be no assurance as to the nature and amount of SBA
financing that may actually be obtained by Elk. Furthermore, there are certain
restrictions and requirements to which Elk is subject by virtue of its being an
SBIC.
BACKGROUND. SBICs were created under the 1958 Act as vehicles for
providing equity capital, long-term loan funds and management assistance to
small businesses. In general, the SBA considers a business to be "small," and
therefore eligible to receive loans from an SBIC, only if (i) its net worth does
not exceed $18,000,000 and if the average of its net annual income after taxes
for the preceding two years was not more than $6,000,000 or (ii) it meets the
size standard for the industry in which it is primarily engaged, pursuant to SBA
Regulations. In addition, an SBIC is required to allocate a portion of its
portfolio to the financing of concerns that (i) together with their affiliates
do not have net worth in excess of $6 million and do not have an average net
income after taxes for the preceding two years in excess of $2 million or (ii)
meet the size standard for the industry in which they are primarily engaged.
SBICs are licensed, regulated, and sometimes partially financed, by the SBA.
-43-
<PAGE>
BENEFITS. The principal benefits to Elk of being licensed as an SBIC
are as follows:
The SBA is authorized to guaranty full repayment of all principal and
interest on debentures issued by an SBIC to the extent of 300% of the SBIC's
"Leverageable Capital," as defined in the applicable SBA Regulations. However,
the percentage of allowable leverage decreases if the SBIC's Leverageable
Capital exceeds $15,000,000. The term of such debentures is typically 10 years.
The SBA will guarantee such debentures only after such an SBIC has demonstrated
a need for such debentures as evidenced by the SBIC's investment activity and
its lack of sufficient funds available for investments; provided, however, that
an SBIC that has invested at least 50% of its Leverageable Capital and
outstanding leverage shall be presumed to lack sufficient funds available for
investment. Generally, such debentures will bear interest at a fixed rate that
is based on the rate which is set by the underwriters of the pooled debentures
sold through SBIC Funding Corp.
With respect to debentures guaranteed after July 1, 1991, the SBA's
claim against an SBIC is subordinated, in the event of such SBIC's insolvency,
only in favor of present and future indebtedness outstanding to lenders and only
to the extent that the aggregate amount of such indebtedness does not exceed the
lesser of 200% of such SBIC's paid-in capital and paid-in surplus (as adjusted
pursuant to SBA Regulations), or $10,000,000. However, the SBA may agree to a
subordination in favor of one or more loans from certain lenders, in its sole
discretion. Pursuant to the SBA Agreement and the Intercreditor Agreement, the
SBA agreed to a subordination in favor of Elk's banks; provided, however, that
Elk is required to keep its overall debt to certain levels based upon the
performance of its portfolio.
COMPETITION
Banks, credit unions, other finance companies, some of which are SBICs,
and other private lenders compete with Elk in the origination of taxi medallion
loans and commercial installment loans. Finance subsidiaries of equipment
manufacturers also compete with Elk. Many of these competitors have greater
resources than Elk and certain competitors are subject to less restrictive
regulations than Elk. As a result, Elk expects to continue to encounter
substantial competition from such lenders. Therefore, there can be no assurance
that Elk will be able to identify and complete financing transactions that will
permit it to compete successfully.
EMPLOYEES
As of March 31, 1999, we employed a total of six employees. After the
Offering, we intend to hire at least two additional loan officers. We may hire
other additional personnel as they are needed in connection with the expansion
and diversification of our lending and investment activities. We believe that
our relations with our employees are good, but that our future success will
depend, in part, on our ability to continue to recruit, retain and motivate
qualified personnel at all levels.
FACILITIES
We rent office space from a law firm, the principals of which are
officers and directors of Ameritrans and Elk, and we share certain office
expenses with that firm. The law firm, at our request, rented an additional
1,800 square feet of office space contiguous with our offices at a below market
rent (the "Additional Space"). Until we require the Additional Space, the law
firm sublets the Additional Space to outside tenants. In the event all or a
portion of the Additional Space is vacant, Elk has agreed to reimburse the law
firm for any additional rent due. At present, the Additional Space is fully
occupied pursuant to short-term arrangements. In the event our operations
expand, the Additional Space could be made available to us on relatively short
notice. We believe our current
-44-
<PAGE>
space, together with the Additional Space, will be sufficient for our currently
anticipated needs. See "Certain Transactions."
-45-
<PAGE>
INVESTMENT POLICIES
ELK INVESTMENT POLICIES
The investment policies described below are the fundamental policies of
Elk. Under the 1940 Act, these policies may be changed only by the vote of the
lesser of (i) a majority of Elk's outstanding Common Stock, or (ii) 67% of the
number of shares of Common Stock present in person or by proxy at a stockholder
meeting at which at least 50% of the outstanding shares of Common Stock are
present. Because Ameritrans is the only stockholder of Elk, we have agreed with
the SEC that Elk's fundamental investment policies will be changed only by the
vote of the Ameritrans stockholders.
(a) ISSUANCE OF SENIOR SECURITIES. Elk may issue subordinated
debentures to the SBA in the maximum amounts permissible under the 1958 Act and
the applicable regulations. Elk currently does not have any preferred stock
authorized.
(b) BORROWING OF MONEY. Elk has the power to borrow funds from banks,
trust companies, other financial institutions, the SBA or any successor agency
and/or other private or governmental sources, if determined by Elk's Board of
Directors to be in its best interests.
(c) UNDERWRITING. Elk has not engaged, and does not intend to engage,
in the business of underwriting the securities of other issuers.
(d) CONCENTRATION OF INVESTMENTS. Elk may not concentrate 25% or more
of its total assets in securities of issuers in any industry group except the
taxi industry. Elk will make at least 25% of its investments for financing the
purchase or continued ownership of taxi medallions, taxis and related assets.
The balance of its investments includes, and Elk intends to continue to finance,
the acquisition and/or operation of other small businesses.
(e) REAL ESTATE. Elk has not engaged, and does not intend to engage, in
the purchase and sale of real estate. However, Elk may elect to purchase and
sell real estate in order to protect any of its prior investments which it
considers at risk.
(f) COMMODITIES CONTRACTS. Elk has not engaged, and does not intend to
engage, in the purchase and sale of commodities or commodities contracts.
(g) LOANS. Elk has made, and will continue to make, loans to Small
Business Concerns in accordance with the provisions of the 1958 Act and the SBA
Regulations.
(h) WRITING OPTIONS. Elk has not engaged, and does not intend to
engage, in the writing of options.
(i) SHORT SALES. Elk has not engaged, and does not intend to engage, in
short sales of securities.
(j) PURCHASING SECURITIES ON MARGIN. Elk has not engaged, and does not
intend to engage, in the purchase of securities on margin.
(k) FUTURES CONTRACTS. Elk has not engaged, and does not intend to
engage, in the purchase or sale of futures contracts.
-46-
<PAGE>
(l) RESTRICTED SECURITIES. Elk may invest up to 100% of its assets in
restricted securities.
(m) TYPES OF INVESTMENTS. Although Elk was organized primarily to
provide long term loan funds to Small Business Concerns, Elk's certificate of
incorporation provides Elk with the authority to invest in the equity capital of
Small Business Concerns. Accordingly, Elk may make equity investments in Small
Business Concerns if determined by its Board of Directors to be in the best
interests of Elk.
(n) MAXIMUM INVESTMENT. Elk will not lend or otherwise invest more than
the lesser of (i) 10% of its total assets or (ii) 30% of its paid-in capital
attributable to its Common Stock with respect to any one Small Business Concern.
(o) PERCENTAGE OF VOTING SECURITIES. The percentage of voting
securities of any one Small Business Concern which Elk may acquire may not
exceed 49% of the outstanding voting equities of such Small Business Concern.
(p) MANAGEMENT CONTROL. Elk does not intend to invest in any company
for the purpose of exercising control of management. However, Elk may elect to
acquire control in order to protect any of its prior investments which it
considers at risk.
(q) INVESTMENT COMPANIES. Elk has not invested, and does not intend to
invest, in the securities of other investment companies.
(r) PORTFOLIO TURNOVER. Elk intends to make changes in its portfolio
when, in the judgment of its Board of Directors, such changes will be in the
best interest of our stockholders in light of the then existing business and
financial conditions. We do not anticipate that Elk's loan portfolio will
realize an annual turnover in excess of 50%, although there can be no assurance
with respect thereto.
AMERITRANS INVESTMENT POLICIES
Ameritrans' investment objectives will be to provide a high level of
current income for its stockholders through quarterly distributions, consistent
with preservation of capital, as well as long term growth of net asset value.
Ameritrans will seek to achieve its investment objectives by maximizing net
interest income and income from operations and expanding operations. There can
be no assurance that Ameritrans will achieve its investment objectives.
Ameritrans' only fundamental policies, that is, policies that cannot be
changed without the approval of the holders of a majority of Ameritrans'
outstanding voting securities, as defined under the 1940 Act, are the
restrictions described below. A "majority of Ameritrans' outstanding voting
securities" as defined under the 1940 Act means the lesser of (i) 67% of the
shares represented at a meeting at which more than 50% of the outstanding shares
are represented or (ii) more than 50% of the outstanding shares. The other
policies and investment restrictions referred to in this Prospectus, including
Ameritrans' investment objectives, are not fundamental policies of Ameritrans
and may be changed by Ameritrans' Board of Directors without stockholder
approval. Unless otherwise noted, whenever an investment policy or limitation
states a maximum percentage of Ameritrans' assets that may be invested in any
security or other asset, or sets forth a policy regarding quality standards,
such standard or percentage limitation will be determined immediately after and
as a result of Ameritrans' acquisition of such security or other asset.
Accordingly, any subsequent change in values, assets, or
-47-
<PAGE>
other circumstances will not be considered when determining whether the
investment complies with Ameritrans' investment policies and limitations.
Ameritrans' fundamental policies are as follows:
(a) Ameritrans will at all times conduct its business so as to retain
its status as a BDC under the 1940 Act. In order to retain that status,
Ameritrans may not acquire any assets (other than non-investment assets
necessary and appropriate to its operations as a BDC) if, after giving effect to
such acquisition, the value of its "Qualifying Assets," amount to less than 70%
of the value of its total assets. Ameritrans believes that the securities it
proposes to acquire in connection with the acquisition of Elk, as well as
temporary investments it makes with its funds, will generally be Qualifying
Assets. See "Regulation."
(b) Ameritrans may borrow funds and issue "senior securities" to the
maximum extent permitted under the 1940 Act. As a BDC, Ameritrans may issue
senior securities if, immediately after such issuance, the senior securities
will have an asset coverage of at least 200%. Under the 1940 Act, subordinated
debentures issued to or guaranteed by the SBA, the preferred stock issued to the
SBA by Elk and Elk's bank borrowings may be considered senior securities issued
by Ameritrans requiring asset coverage of 200%; however, pursuant to an
Exemptive Order issued by the SEC in _________, 1999, such debentures, preferred
stock and bank borrowings are exempt from the asset coverage requirements of the
1940 Act.
(c) Ameritrans will not (i) underwrite securities issued by others
(except to the extent that it may be considered an "underwriter" within the
meaning of the Securities Act in the disposition of restricted securities), (ii)
engage in short sales of securities, (iii) purchase securities on margin (except
to the extent that it may purchase securities with borrowed money), (iv) write
or buy put or call options, or (v) engage in the purchase or sale of commodities
or commodity contracts, including futures contracts (except where necessary in
working out distressed loan or investment situations). Ameritrans and Elk may
purchase interest rate caps and swaps covering up to 100% of their variable rate
debt. In addition, Ameritrans may sponsor the securitization of loan portfolios.
(d) Ameritrans and Elk may originate loans and loans with equity
features. To the extent permitted under the 1940 Act and the regulations
promulgated thereunder, Ameritrans may also make loans as permitted (i) under
its existing stock option plans, (ii) under plans providing for options for
disinterested directors that might be adopted by Ameritrans in the future, and
(iii) to officers and directors for the purchase of Ameritrans Common Stock.
(e) Ameritrans will hold all of the outstanding common stock of Elk and
Elk Capital and may organize additional subsidiaries in the future. Ameritrans
may acquire restricted securities of small businesses.
Elk Capital will engage in activities similar to those of Elk and
Ameritrans, but since Elk Capital will be neither an SBIC or a RIC, it will have
an added degree of flexibility in the loans and equity investments that it may
make.
-48-
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors and executive officers of Ameritrans and Elk are
identical. The following table sets forth certain information concerning our
directors and executive officers:
<TABLE>
<CAPTION>
NAME POSITION
---- --------
<S> <C>
Gary C. Granoff(1) President and Chairman of Board of Directors
Ellen M. Walker(1) Vice President, General Counsel and Director
Lee A. Forlenza(1) Vice President and Director
Steven Etra Vice President and Director
Silvia Mullens(1) Vice President
Margaret Chance(1) Secretary
Marvin Sabesan Director
Paul Creditor Director
Allen Kaplan Director
John L. Acierno Director
John R. Laird Director
Howard F. Sommer Director
</TABLE>
- ------------------------------------
(1) As BDCs under the 1940 Act, a majority of the directors of both Ameritrans
and Elk are required to be individuals who are not "interested persons" of
the company. Gary C. Granoff, Ellen M. Walker, Lee A. Forlenza, Steven
Etra, Margaret Chance and Silvia Mullens are each "interested persons"
with respect to both Ameritrans and Elk, as such term is defined in the
1940 Act.
Gary C. Granoff, age 51, has been President and a director of
Ameritrans since its formation and of Elk since its formation in July 1979 and
Chairman of the Board of Directors since December 1995. Mr. Granoff has been a
practicing attorney for the past 26 years and is presently an
-49-
<PAGE>
officer and stockholder in the law firm of Granoff, Walker & Forlenza, P.C. Mr.
Granoff is a member of the bar of the State of New York and the State of Florida
and is admitted to the United States District Court of the Southern District of
New York. Mr. Granoff is also President and the sole stockholder of GCG
Associates, Inc. ("GCG"), Elk's former investment adviser. He has served as
President and the sole stockholder of Seacrest Associates, Inc., a hotel
operator, since August 1994. Mr. Granoff has also been President and a director
since June 1996 of Gemini Capital Corporation ("Gemini"), a company primarily
engaged in the business of making consumer loans. In February 1998, Mr. Granoff
was elected to and is presently serving as a trustee on the Board of Trustees of
The George Washington University. Mr. Granoff holds a Bachelor of Business
Administration degree in Accounting and a Juris Doctor degree (with honors) from
The George Washington University.
Ellen M. Walker, age 43, has been a Vice President, General Counsel and
a director of Ameritrans since its formation and a Vice President and General
Counsel of Elk since July 1983. She was a director of Elk from July 1983 to
August 1994, and has been a director of Elk since 1995. Ms. Walker has been a
practicing attorney for more than seventeen years and she is presently an
officer and stockholder in the law firm of Granoff, Walker & Forlenza, P.C. Ms.
Walker is a member of the Bar of the State of New York and she is admitted to
the United States District Court of the Southern District of New York. Since
August 1983 Ms. Walker has been Vice President of GCG. Ms. Walker has been a
director, Vice President and General Counsel of Gemini since June 1996. Ms.
Walker received a Bachelor of Arts degree from Queens College and obtained her
Juris Doctor degree with honors from Brooklyn Law School.
Lee A. Forlenza, age 41, has been a Vice President and a director of
Ameritrans since its formation, a Vice President of Elk since March 1992, and a
director of Elk since January 1995. Mr. Forlenza has been a practicing attorney
since February 1983 and is presently an officer and stockholder in the law firm
of Granoff, Walker & Forlenza, P.C. Since March 1992 Mr. Forlenza has been an
investment analyst for GCG. Mr. Forlenza has also been Vice President, Secretary
and a director of Gemini since June 1996. Mr. Forlenza was Vice President of
True Type Printing, Inc. from 1976-1995 and has been President since May 1995.
From 1983 through 1986 Mr. Forlenza was an attorney with the SBA. Mr. Forlenza
graduated Phi Beta Kappa from New York University and obtained his Juris Doctor
degree from Fordham University School of Law.
Steven Etra, age 49, has been a Vice President and a director of
Ameritrans since its inception, a Vice President of Elk since January 1999, and
a director of Elk since November 1995. Mr. Etra has been Sales Manager since
1975 of Manufacturers Corrugated Box Company, a company owned by Mr. Etra's
family for more than seventy-five years. Mr. Etra has also been a director of
Gemini since June 1996. Mr. Etra has extensive business experience in investing
in emerging companies.
Silvia Maria Mullens, age 45, has been a Vice President of Ameritrans
since its inception, a Vice President of Elk since 1996, and the Loan
Administrator of Elk since February 1994. Prior to joining Elk, she was the
Legal Coordinator for Castle Oil Corporation from September 1991 through June
1993 and from June 1993 through January 1994, a legal assistant specializing in
foreclosures in the law firm of Greenberg & Posner. Ms. Mullens received a B.A.
from Fordham University and an M.B.A. from The Leonard Stern School of Business
Administration of New York University.
Margaret Chance, age 42, has been Secretary of Ameritrans since its
inception and Secretary of Elk and involved in loan administration since
November 1980. Ms. Chance is the office manager of Granoff, Walker & Forlenza,
P.C. and has served as the Secretary of GCG, since January 1982. Ms. Chance
holds a paralegal certificate.
-50-
<PAGE>
Marvin Sabesan, age 69, has been a director of Ameritrans since its
inception and a director of Elk since July 1982. Mr. Sabesan has been employed
by Pearl River Textiles, Inc. as an executive since 1990. He was an Executive
Vice President of N.O.L. Inc., a lingerie company, from 1988 to 1990. Mr.
Sabesan was an Executive Vice President of A.J. Schneierson & Son, a clothing
manufacturer from 1971 to 1987.
Paul Creditor, age 61, has been a director of Ameritrans since its
inception and a director of Elk since November 1995. Mr. Creditor has been a
practicing attorney since 1961, engaging in the general practice of law and
specializing in corporate law. From 1974 through 1979 he served as an elected
Judge in Suffolk County, New York. He also served as counsel to the New York
State Constitutional Convention and various State Agencies and Commissions.
Allen Kaplan, age 47, has been a director of Ameritrans since its
inception and a director of Elk since November 1995. Mr. Kaplan has been since
November 1986, Vice President and Chief Operating Officer of Team Systems, Inc.,
a company which manages and operates more than 200 New York City medallion
taxis. Mr. Kaplan is currently Vice President of the Metropolitan Taxicab Board
of Trade, a trade association consisting of 22 member fleets representing 1,200
New York City medallions.
John L. Acierno, age 39, has been a director of Ameritrans since its
inception and a director of Elk since October 1997. Mr. Acierno has served as
president of Executive Charge Inc. and its affiliated companies for the last ten
years. During that time, Executive Charge Inc. has become the largest executive
sedan operation in the United States with over 1,300 vehicles servicing the
greater New York Metropolitan area. His background includes practicing law as a
labor attorney for Proskauer Rose and serving as counsel for R.H. Macy & Co. Mr.
Acierno was founder and immediate past president for the last six years of the
Black Car Assistance Corporation, the organization which serves as the New York
black car industry association. He was named International Taxicab and Limousine
Association Premium Service Operator of the Year for 1996. Mr. Acierno graduated
Phi Beta Kappa from Tufts University, and Cum Laude from Cornell Law School.
John R. Laird, age 56, has been a director of Ameritrans and of Elk
since January 1999. Mr. Laird has been a private investor since 1994, when he
retired from Shearson Lehman Brothers Inc. ("Shearson"). Mr. Laird served as
President and Chief Executive Officer of the Shearson Lehman Brothers Division
of Shearson and as a member of the Shearson Executive Committee from 1992 to
1994. Mr. Laird was also Chairman and Chief Executive Officer of The Boston
Company, a subsidiary of Shearson, from 1990 until its sale by Shearson in 1993.
From 1977 to 1989 Mr. Laird was employed by American Express in various
capacities including Senior Vice President and Treasurer. He also is and has
been a member of boards of various cultural and philanthropic organizations,
including but not limited to, the Corporate Advisory Committee of the Boston
Museum of Fine Arts and the Board of Overseers for the Boston Symphony
Orchestra. Mr. Laird received a B.S. in finance and an M.B.A. from Syracuse
University and attended the Advanced Management Program at Harvard Business
School.
Howard F. Sommer, age 58, has been a director of Ameritrans and of Elk
since January 1999. Mr. Sommer has been President and Chief Executive Officer of
New York Community Investment Company L.L.C., an equity investment fund
providing long-term capital to small businesses throughout the State of New
York, since 1995. Mr. Sommer was President of Fundex Capital Corporation from
1978 to 1995, President of U.S. Capital Corporation from 1973 to 1995, worked in
management consulting from 1971 to 1973 and held various positions at IBM and
Xerox Corporations
-51-
<PAGE>
from 1962 to 1971. Mr. Sommer was also a member of the Board of Directors for
the National Association of Small Business Investment Companies, serving on its
executive committee from 1989 to 1993 and as Chairman of the Board in 1994. He
received a B.S. in electrical engineering from City College of New York and
attended the Graduate School of Business at New York University.
Our directors are actively involved in the oversight of our affairs,
including financial and operational issues, credit and loan policies, asset
valuation, and strategic direction.
COMMITTEES OF THE AMERITRANS BOARD
Ameritrans has a standing Audit Committee and a standing 1999 Employee
Plan Committee.
The Audit Committee is comprised of Paul Creditor, John Acierno and
Gary Granoff. The function of the Audit Committee is to review our internal
accounting control procedures, review our consolidated financial statements and
review with the independent public accountants the results of their audit.
The 1999 Employee Plan Committee administers our 1999 Employee Plan.
See " -- Stock Option Plans -- The 1999 Employee Plan," below.
EXECUTIVE COMPENSATION
Prior to the Share Exchange, our directors and officers were
compensated as directors and officers of Elk and received no compensation from
Ameritrans. The following table sets forth all remuneration for services
rendered to Elk to (i) each of the executive officers and (ii) all executive
officers as a group during the fiscal year ended June 30, 1998. No non-employee
director received compensation in excess of $60,000 during that period.
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION CASH COMPENSATION(1) SEP BENEFIT(2)
- --------------------------- -------------------- --------------
<S> <C> <C>
Gary C. Granoff, President $215,712(3) $24,000
Ellen M. Walker, Vice President and General $103,917 $15,588
Counsel
Lee A. Forlenza, Vice President $45,673 $6,851
Silvia Mullens, Vice President $59,063 $8,859
Margaret Chance, Secretary $53,160 $7,974
All executive officers as a group (5 persons) $497,525 $63,272
</TABLE>
- ------------------------------------
(1) Officers' salaries constitute a major portion of Elk's total
"management fee compensation," which must be approved by the SBA. The
SBA has approved total officer and employee compensation of $648,000
for Elk. This amount includes officers' salaries, other salaries and
employee benefits.
(2) Simplified Employee Pension Plan.
(3) Does not include $20,000 of reimbursable expenses.
-52-
<PAGE>
During the fiscal year ended June 30, 1999, increases in compensation
were given to Silvia Mullens and Margaret Chance, and Steven Etra became a Vice
President. In addition, increases were authorized for Gary C. Granoff, Ellen M.
Walker, and Lee A. Forlenza, effective July 1, 1999. Our other officers are
receiving, in the aggregate from Ameritrans and/or Elk, the same compensation as
was paid by Elk during the fiscal year ended June 30, 1999. However, we expect
future compensation to be allocated between Elk and Ameritrans, based upon
factors determined by their respective Boards of Directors. The Boards of
Directors may increase such compensation for the fiscal year ending June 30,
2000.
Ameritrans and Elk have a policy of paying their directors who are not
employees fees of $750 for each meeting attended. Since July 1, 1996,
non-employee directors have been paid annual fees of $2,000 per year in addition
to the fees paid for each meeting attended. Fees and expenses paid to
non-affiliated directors were, in the aggregate, approximately $27,500 for the
year ended June 30, 1997, and $52,050 for the year ended June 30, 1998. For the
year ended June 30, 1998, Messrs. Etra and Forlenza, the members of Elk's
Holding Company Committee, which oversaw the formation and capitalization of
Ameritrans and its acquisition of Elk, were paid an aggregate of $8,000 for work
performed in connection with the Share Exchange.
No options were granted to any officers or directors in the fiscal year
ended June 30, 1998. However, in January 1999, an aggregate of 100,000 options
were granted to certain officers. See " -- Stock Option Plans -- The 1999
Employee Plan."
STOCK OPTION PLANS
The descriptions of the 1999 Employee Plan and the Director Plan set
forth below are qualified in their entirety by reference to the text of the
plans.
1999 EMPLOYEE PLAN
An employee stock option plan (the "1999 Employee Plan") was adopted by
the Ameritrans Board of Directors, including a majority of the non-interested
directors, and approved by a stockholder vote, in order to link the personal
interests of key employees to our long-term financial success and the growth of
stockholder value. The 1999 Employee Plan is substantially identical to, and the
successor to, an employee stock option plan adopted by the Board of Directors of
Elk and approved by it stockholders in September 1998 (the "1998 Elk Employee
Plan").
The 1999 Employee Plan authorizes the grant of incentive stock options
within the meaning of Section 422 of the Internal Revenue Code for the purchase
of an aggregate of 125,000 shares (subject to adjustment for stock splits and
similar capital changes) of Common Stock to our employees. By adopting the 1999
Employee Plan, the Board believes that we will be better able to attract,
motivate and retain as employees people upon whose judgment and special skills
our success in large measure depends. As of June 1, 1999, options to purchase an
aggregate of 100,000 shares of Common Stock had been granted to various
officers. These options were originally granted under the Elk 1998 Employee
Plan. Options for 70,000 shares are exercisable for 10 years from the date of
grant at a price of $8.88 per share (the fair market value of the Common Stock
on the date of grant), and options for 30,000 shares are exercisable for five
(5) years from the date of grant at a price of $9.77
-53-
<PAGE>
per share. Accordingly, 25,000 shares of Common Stock are available for future
awards under the 1999 Employee Plan.
The 1999 Employee Plan is administered by the 1999 Employee Plan
Committee of the Board of Directors, which is comprised solely of non-employee
directors (who are "outside directors" within the meaning of Section 152(m) of
the Internal Revenue Code and "disinterested persons" within the meaning of Rule
16b-3 under the Securities Exchange Act of 1934 (the "1934 Act")). The
committee can make such rules and regulations and establish such procedures for
the administration of the 1999 Employee Plan as it deems appropriate.
The exercise price of an incentive stock option must be at the fair
market value of our Common Stock on the date of grant (110% of the fair market
value for stockholders who, at the time the option is granted, own more than 10%
of the total combined classes of stock of Ameritrans or any subsidiary). No
employees may exercise more than $100,000 in options held by them in any year.
No option may have a term of more than 10 years (five (5) years for 10%
or greater stockholders). Options generally may be exercised only if the option
holder remains continuously associated with us or a subsidiary from the date of
grant to the date of exercise. However, options may be exercised upon
termination of employment or upon death or disability of any employee within
certain specified periods.
The following is a general summary of the federal income tax
consequences under current tax law of incentive stock options ("ISOs"). It does
not purport to cover all of the special rules, including special rules relating
to persons subject to the reporting requirements of Section 16 under the 1934
Act who do not hold the shares acquired upon the exercise of an option for at
least six months after the date of grant of the option and special rules
relating to the exercise of an option with previously-acquired shares, or the
state or local income or other tax consequences inherent in the ownership and
exercise of stock options and the ownership and disposition of the underlying
shares.
An optionee will not recognize taxable income for federal income tax
purposes upon the grant of an ISO.
Upon the exercise of an ISO, the optionee will not recognize taxable
income. If the optionee disposes of the shares acquired pursuant to the exercise
of an ISO more than two years after the date of grant and more than one year
after the transfer of the shares to him or her, the optionee will recognize
long-term capital gain or loss, and we will not be entitled to a deduction.
However, if the optionee disposes of such shares within the required holding
period, all or a portion of the gain will be treated as ordinary income, and we
will generally be entitled to deduct such amount.
In addition to the federal income tax consequences described above, an
optionee may be subject to the alternative minimum tax.
NON-EMPLOYEE DIRECTOR PLAN
A stock option plan for non-employee directors (the "Director Plan")
was adopted by the Ameritrans Board of Directors and approved by a stockholder
vote, in order to link the personal
-54-
<PAGE>
interests of non-employee directors to our long-term financial success and the
growth of stockholder value. The Director Plan is substantially identical to,
and the successor to, an employee stock option plan adopted by the Board of
Directors of Elk and approved by it stockholders in September 1998 (the "Elk
Director Plan"). Ameritrans and Elk submitted an application for, and received
on ________, 1999, an exemptive order relating to these plans from the SEC.
The Director Plan provides for the automatic grant of options to
directors who are not our employees, officers or interested persons (an
"Eligible Director"). By adopting the Director Plan, the Board believes that we
will be better able to attract, motivate and retain as directors people upon
whose judgment and special skills our success in large measure depends. The
total number of shares for which options may be granted from time to time under
the Director Plan is 75,000 shares.
The Director Plan provides that an Eligible Director serving on our
Board of Directors who has served as a director for at least one year prior to
the Approval Date will automatically receive on the Approval Date the grant of
an option to purchase the number of shares of Common Stock determined by
dividing $50,000 by the fair market value of the Common Stock on the Approval
Date. With respect to any Eligible Director who is elected or reelected as a
director after the Approval Date such elected director will automatically
receive on the date such director has served as a director for one year of such
election or reelection an option to purchase the number of shares of Common
Stock determined by dividing $50,000 by the fair market value of the Common
Stock on the date of the first anniversary such director became a director.
The Director Plan is administered by a committee of directors who are
not eligible to participate in the Directors Plan. Options become exercisable
with respect to such shares granted on the date on which the option was granted,
so long as the optionee remains an Eligible Director. No option may be exercised
more than five years after the date on which it is granted. The number of shares
available for options, the number of shares subject to outstanding options and
their exercise prices will be adjusted for changes in outstanding shares such as
stock splits and combinations of shares. Shares purchased upon exercise of
options, in whole or in part, must be paid for in cash or by means of
unrestricted shares of Common Stock or any combination thereof.
The following is a general summary of the federal income tax
consequences under current tax law of non-qualified stock options ("NQSOs"). It
does not purport to cover all of the special rules, including special rules
relating to persons subject to the reporting requirements of Section 16 under
the 1934 Act who do not hold the shares acquired upon the exercise of an option
for at least six months after the date of grant of the option and special rules
relating to the exercise of an option with previously-acquired shares, or the
state or local income or other tax consequences inherent in the ownership and
exercise of stock options and the ownership and disposition of the underlying
shares.
Upon the exercise of a NQSO, the optionee will recognize ordinary
income in an amount equal to the excess, if any, of the fair market value of the
shares acquired on the date of exercise over the exercise price thereof, and Elk
will generally be entitled to a deduction for such amount at that time. If the
optionee later sells shares acquired pursuant to the exercise of a NQSO, he or
she will recognize long-term or short-term capital gain or loss, depending on
the period for which the shares were held. Long-term capital gain is generally
subject to more favorable tax treatment than ordinary income or short-term
capital gains.
-55-
<PAGE>
If the option does not have a readily ascertainable fair market value,
an optionee will not recognize taxable income for federal income tax purposes
upon the grant of an NQSO.
Options granted under the Director Plan will not be transferable other
than by the laws of descent and during the optionee's life may be exercised only
by the optionee. All rights to exercise options will terminate after the
optionee ceases to be an Eligible Director. If the optionee dies before
expiration of the option, his legal successors may have the right to exercise
the option in whole or in part within one year of death.
The Director Plan may be terminated at any time by the Board of
Directors, and will terminate 10 years after the effective date of the Director
Plan. The Board of Directors may not materially increase the number of shares
authorized under the plan or materially increase the benefits accruing to
participants under the plan without the approval of our stockholders.
The exercise or conversion price of the options issued pursuant to the
Director Plan shall be not less than current market value at the date of
issuance, or if no such market value exists, the current net asset value of such
voting securities.
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth certain information as to (i) those
persons who, to our knowledge, owned 5% or more of our outstanding Common Stock
as of June 30, 1999, (ii) each of our directors and (iii) all of our officers
and directors as a group. Except as set forth below, the address of each person
listed below is the address of Ameritrans. See "Prospectus Summary."
<TABLE>
<CAPTION>
NUMBER OF SHARES OF PERCENTAGE OF OUTSTANDING COMMON STOCK
NAME COMMON STOCK OWNED PRIOR TO OFFERING AFTER OFFERING
- ---- ------------------ --------------------------------
<S> <C> <C> <C>
*Gary C. Granoff 350,708(1) 19.0% 11.9%
*Ellen M. Walker 57,374(2) 3.1% 1.9%
*Lee A. Forlenza 48,095(3) 2.6% 1.6%
*Steven Etra 133,016(4) 7.2% 4.5%
Marvin Sabesan 78,861(5) 4.3% 2.6%
c/o Pearl River Textiles, Inc.
990 Sixth Avenue
New York, NY
Paul Creditor 2,000 ** **
747 Third Avenue, Ste. 4C
New York, NY
Allen Kaplan 5,000 ** **
c/o Executive Charge, Inc.
1440 39th Street
Brooklyn, NY
</TABLE>
-56-
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES OF PERCENTAGE OF OUTSTANDING COMMON STOCK
NAME COMMON STOCK OWNED PRIOR TO OFFERING AFTER OFFERING
- ---- ------------------ --------------------------------
<S> <C> <C> <C>
John L. Acierno -- ** **
c/o Executive Charge, Inc.
1440 39th Street
Brooklyn, NY
John R. Laird 100 ** **
481 Canoe Hill Road
New Canaan, CT
Howard F. Sommer -- ** **
c/o New York Community
Investment Co., LLC
120 Broadway
New York, NY
Dan M. Granoff 155,979(6) 8.9% 5.5%
Children's Hospital
Oakland Research Institute
747 52nd Street
Oakland, CA
Alexander Nash 96,600(7) 5.5% 3.3%
20 W. Lincoln Avenue
Valley Stream, NY
Paul D. Granoff 143,179(8) 8.2% 4.9%
c/o Rush-Copley Medical Center
1900 Ogden Avenue
Aurora, IL 60504
All Officers and Directors as a 693,554 37.6% 23.5%
group (12 persons)
</TABLE>
- ------------------------------------
* Gary C. Granoff, Ellen M. Walker, Lee A. Forlenza, and Steven Etra are each
"interested persons" with respect to Ameritrans and Elk, as such term is
defined in the 1940 Act.
** Less than 1%.
1. Excludes (i) 24,933 shares owned directly or indirectly by Mr. Granoff's
wife, as to which he disclaims beneficial ownership and (ii) 10,500 shares
owned by one of Mr. Granoff's sons, as to which shares he does not exercise
any control and disclaims beneficial ownership. Includes (i) 10,900 shares
owned by the Granoff family foundation, a charitable foundation of which
Mr. Granoff and his father, mother, and brother, Dan M. Granoff, are
trustees; (ii) 35,321 shares held by Mr. Granoff as trustee for his
children and other family members; (iii) 261 shares held by GCG Associates
Inc., a corporation owned by Mr. Granoff; (iv) 76,084 shares owned by
Dapary Management Corp., a corporation controlled by Mr. Granoff and (v)
30,000 shares issuable upon the exercise of five-year options issued under
the 1999 Employee Plan. See "Management-- Stock Option Plans-- 1999
Employee Plan."
2. Includes (i) 200 shares held by Ms. Walker as custodian for her son; (ii)
22,800 shares held by various trusts of which Ms. Walker is a trustee and
as to which she disclaims beneficial ownership (Mr. Granoff retains a
reversionary interest in 21,000 of such shares), and (iii) 20,000 shares
issuable upon the exercise of ten-year options issued under the 1999
Employee Plan. See "Management -- Stock Option Plans -- 1999 Employee
Plan."
-57-
<PAGE>
3. Includes 17,500 shares issuable upon the exercise of ten-year options
issued to under the 1999 Employee Plan. See "Management -- Stock Option
Plans -- 1999 Employee Plan."
4. Includes (i) 29,022 shares held by Mr. Etra and his wife as joint tenants;
(ii) 27,000 shares held by Mr. Etra's wife; (iii) 1,500 shares held by Mr.
Etra's son; (iv) 10,000 shares held by SRK Associates LLC, a limited
liability company controlled by Mr. Etra, (v) 10,000 shares held by Lance's
Property Development Corp. Pension Plan, of which Mr. Etra is a trustee and
(vi) 17,500 shares issuable upon the exercise of ten-year options issued
under the 1999 Employee Plan. See "Management -- Stock Option Plans -- 1999
Employee Plan."
5. Includes 21,387 shares held by Mr. Sabesan and his wife as joint tenants
and 28,551 shares held by his wife. Mr. Sabesan disclaims beneficial
ownership of the 28,551 shares held by his wife.
6. Includes (i) 10,900 shares owned by a charitable foundation, of which
N. Henry Granoff, his wife, Jeannette Granoff, Gary C. Granoff and Dr. Dan
M. Granoff are the trustees, and (ii) 2,800 shares held in an IRA Rollover
Account for the benefit of Dr. Granoff.
7. Includes (i) 6,500 shares held by Dr. Nash as custodian for his daughter
and (ii) 52,900 shares held by his wife, as to which shares Dr. Nash
disclaims beneficial ownership.
8. Includes 40,049 shares held by Dr. Paul Granoff directly, 77,630 held by
Granoff Family Partners Ltd., of which Dr. Granoff is a general partner,
and 25,500 shares held by the Granoff Pediatric Associates Profit Sharing
Plan. Excludes 14,127 shares held by Dr. Granoff's wife, of which shares he
disclaims beneficial ownership.
Except pursuant to applicable community property laws or as described
above, each person listed in the table above has sole voting and investment
power, and is both the owner of record and the beneficial owner of his or her
respective shares.
CERTAIN TRANSACTIONS
Elk pays legal fees, on a fixed or hourly basis, for loan closing
services relating to loans other than New York taxi and radio car loan closings
to Granoff, Walker & Forlenza, P.C. ("Granoff, Walker") whose stockholders are
officers and directors of Elk and Ameritrans. Such services related to New York
taxi and radio car loans are provided by the officers and employees of Elk. Elk
paid Granoff, Walker fees of $43,234 during the fiscal year ended June 30, 1998
and $46,866 during the period from July 1, 1998 through March 31, 1999. Elk
generally charges its borrowers loan origination fees to generate income to
offset the legal fees paid by Elk for loan closing services.
We also rent office space from Granoff, Walker and share certain office
expenses with that firm. For the fiscal year ended June 30, 1998, we paid
$39,600 in rent, $59,400 in shared overhead expense, and $21,908 of other
reimbursable shared overhead expense. For the year ending June 30, 1999, we have
agreed to pay $39,600 in rent and a minimum of $59,400 in expenses, which amount
is subject to adjustment if actual expenses vary. As of March 31, 1999, Elk's
share of overhead expenses for the fiscal year to date was $62,941.
During the fiscal year ended June 30, 1998, Granoff, Walker exercised
an option in its lease, at our request, and rented an additional 1,800 square
feet of office space contiguous with our offices at a below market rent (the
"Additional Space"). Until we require the Additional Space, the law firm sublets
the Additional Space to outside tenants under short-term arrangements. In the
event all or a portion of the Additional Space is vacant, Elk's Board of
Directors has agreed to reimburse the law
-58-
<PAGE>
firm for the additional rent due. The estimated maximum amount of rent for which
we would be responsible is $58,000 per year, less any sublet rental income
received from the outside tenants. At present, the Additional Space is fully
occupied, thus requiring no reimbursement payment from us, although some
liability under the reimbursement obligation may occur in the future. In the
event our operations expand, we could occupy all or part of the Additional Space
without the inconvenience and expense of having to relocate our offices.
CONFLICTS OF INTEREST POLICIES
The Boards of Directors of Ameritrans and Elk have adopted policies
governing potential conflicts of interest between the companies and their
directors and officers. Together, these policies comprise our "Codes of Ethics"
as required under the 1940 Act.
These policies generally provide that no officer, director or employee
of the respective company will make any loan which might be deemed to be
appropriate for that company, unless and until such transaction is first
approved by a majority of the directors of that company who are not "interested
persons" of that company within the meaning of the 1940 Act and who have no
financial or other material interest in the transaction. A loan would not be
deemed to be appropriate for Elk if in any manner such loan (or investment)
would in any way violate SBA Regulations in effect at the time of making such
loan or investment. In reviewing any such transaction, the directors will
examine, among other factors, whether the transaction would deprive the company
of an opportunity or whether it would otherwise conflict with our best interests
and those of our stockholders. A complete record of any such review and the
results of the review will be maintained by the respective company as part of
its permanent records.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Ameritrans Certificate of Incorporation limits the liability of our
directors for monetary damages arising from a breach of their fiduciary duty as
directors, except to the extent otherwise required by the Delaware General
Corporation Law. This limitation of liability does not affect the availability
of equitable remedies such as injunctive relief or recision.
The Ameritrans by-laws provide that Ameritrans shall indemnify its
officers and directors to the fullest extent permitted by Delaware law,
including in circumstances in which indemnification is otherwise discretionary
under Delaware law. We have entered into indemnification agreements with our
officers and directors containing provisions that may require Ameritrans, among
other things, to indemnify its officers and directors against certain
liabilities that may arise by reason of their status as directors or officers
(other than liabilities arising from willful misconduct of a culpable nature)
and to advance their expenses incurred as a result of any proceeding against
them as to which they could be indemnified.
Ameritrans has directors' and officers' liability insurance. This
policy was previously held by Elk for the benefit of its officers and directors
and was assumed by Ameritrans upon the completion of the Share Exchange.
-59-
<PAGE>
REGULATION
THE INVESTMENT COMPANY ACT OF 1940
Ameritrans and Elk are closed-end, non-diversified management
investment companies that have elected to be treated as BDCs and, as such, are
subject to regulation under the 1940 Act. The 1940 Act contains prohibitions and
restrictions relating to transactions between investment companies and their
affiliates, principal underwriters and affiliates of those affiliates or
underwriters. In addition, the 1940 Act provides that a BDC may not change the
nature of its business so as to cease to be, or to withdraw its election as, a
BDC unless so authorized by the vote of a "majority of its outstanding voting
securities," as defined under the 1940 Act.
BDCs are permitted, under specified conditions, to issue multiple
classes of indebtedness and one class of stock (collectively, "senior
securities," as defined under the 1940 Act) senior to the shares of Common Stock
offered hereby if their asset coverage of such indebtedness and all senior
securities is at least 200% immediately after each such issuance. Subordinated
SBA debentures, preferred stock guaranteed by or issued to the SBA by Elk, and
Elk bank borrowings are not subject to this asset coverage test. In addition,
while senior securities are outstanding, provision must be made to prohibit the
declaration of any dividend or other distribution to stockholders (except stock
dividends) or the repurchase of such securities or shares unless we meet the
applicable asset coverage ratios at the time of the declaration of the dividend
or distribution or repurchase. The Exemptive Order issued by the SEC grants
certain relief from the asset coverage ratios applicable to BDCs.
Under the 1940 Act, a BDC may not acquire any asset other than
Qualifying Assets unless, at the time the acquisition is made, certain
Qualifying Assets represent at least 70% of the value of the company's total
assets. The principal categories of Qualifying Assets relevant to our proposed
business are the following:
(1) Securities purchased in transactions not involving a public
offering from the issuer of such securities, which issuer is an eligible
portfolio company. An "eligible portfolio company" is defined in the 1940 Act as
any issuer which:
(a) is organized under the laws of, and has its principal
place of business in, the United States;
(b) is not an investment company other than an SBIC
wholly-owned by the BDC; and
(c) satisfies one or more of the following requirements:
(i) the issuer does not have a class of securities
with respect to which a broker or dealer may extend margin
credit; or
(ii) the issuer is controlled by a BDC and the BDC
has an affiliated person serving as a director of issuer;
-60-
<PAGE>
(iii) the issuer has total assets of not more than
$4,000,000 and capital and surplus (stockholders' equity less
retained earnings) of not less than $2,000,000, or such other
amounts as the SEC may establish by rule or regulation; or
(iv) the issuer meets such requirements as the SEC
may establish from time to time by rule or regulation.
(2) Securities for which there is no public market and which are
purchased in transactions not involving a public offering from the issuer of
such securities where the issuer is an eligible portfolio company which is
controlled by the BDC.
(3) Securities received in exchange for or distributed on or with
respect to securities described in (1) or (2) above, or pursuant to the exercise
of options, warrants or rights relating to such securities.
(4) Cash, cash items, government securities, or high quality debt
securities maturing in one year or less from the time of investment.
In addition, a BDC must have been organized (and have its principal
place of business) in the United States for the purpose of making investments in
the types of securities described in (1) or (2) above. In order to count
securities as Qualifying Assets for the purpose of the 70% test, the BDC must
either control the issuer of the securities or must make available to the issuer
of the securities significant managerial assistance; except that, where the BDC
purchases such securities in conjunction with one or more other persons acting
together, one of the other persons in the group may make available the required
managerial assistance. We believe that the common stock of Elk held by
Ameritrans are Qualifying Assets.
THE SMALL BUSINESS INVESTMENT ACT OF 1958
Elk was formerly an SSBIC and, as explained in further detail below,
was converted to an SBIC in February 1997 in accordance with an agreement with
the SBA. The 1958 Act authorizes the organization of SBICs as vehicles for
providing equity capital, long term financing and management assistance to Small
Business Concerns. A Small Business Concern, as defined in the 1958 Act and the
SBA Regulations, is a business that is independently owned and operated and
which is not dominant in its field of operation. In addition, at the end of each
fiscal year, at least 20% of the total amount of loans made since April 25, 1994
by each SBIC must be made to a subclass of Small Business Concerns that (i) have
a net worth, together with any affiliates, of $6 million or less and average
annual net income after U.S. federal income taxes for the preceding two (2)
years of $2 million or less (average annual net income is computed without the
benefit of any carryover loss), or (ii) satisfy alternative criteria under SBA
Regulations that focus on the industry in which the business is engaged and the
number of persons employed by the business or its gross revenues. SBA
Regulations also prohibit an SBIC from providing funds to a Small Business
Concern for certain purposes, such as relending and reinvestment.
The 1958 Act authorized the organization of SSBICs to provide
assistance to Disadvantaged Concerns, i.e., businesses that are at least 50%
owned and managed by persons whose participation in the free enterprise system
is hampered because of social or economic disadvantages. Certain 1996
-61-
<PAGE>
amendment to the 1958 Act provided, among other things, that no further
subsidized funding would be made available to SSBICs. Thereafter, pursuant to an
agreement with the SBA, Elk was converted to an SBIC, subject to certain
conditions imposed by the SBA. Under this agreement, Elk may now lend to persons
who are not Disadvantaged Concerns. As of March 31, 1999, more than 95% of Elk's
portfolio of loans and investments were to Disadvantaged Concerns.
Under current SBA Regulations and subject to local usury laws, the
maximum rate of interest that Elk may charge may not exceed the higher of (i)
19% or (ii) a rate calculated with reference to Elk's weighted average cost of
qualified borrowings, as determined under SBA Regulations or the SBA's current
debenture interest rate. The current maximum rate of interest permitted on loans
originated by Elk is 19%. At June 30, 1999, Elk's outstanding loans had a
weighted average rate of interest of 11.2%. SBA Regulations also require that
each loan originated by SBICs have a term of between five years and 20 years.
The SBA restricts the ability of SBICs to repurchase their capital
stock, to retire their subordinated SBA debentures and to lend money to their
officers, directors and employees or invest in affiliates thereof. The SBA also
prohibits, without prior SBA approval, a "change of control" or transfers which
would result in any person (or group of persons acting in concert) owning 10% or
more of any class of capital stock of an SBIC. A "change of control" is any
event which would result in the transfer of the power, direct or indirect, to
direct the management and policies of an SBIC, whether through ownership,
contractual arrangements or otherwise.
Under SBA Regulations, without prior SBA approval, loans by licensees
with outstanding SBA leverage to any single Small Business Concern may not
exceed 20% of an SBIC's Leveragable Capital. Under the terms of the SBA
Agreement, however, Elk is authorized to make loans to Disadvantaged Concerns in
amounts not exceeding 30% of its respective Leveragable Capital.
SBICs must invest funds that are not being used to make loans in
investments permitted under SBA Regulations. These permitted investments include
direct obligations of, or obligations guaranteed as to principal and interest
by, the government of the United States with a term of 15 months or less and
deposits maturing in one year or less issued by an institution insured by the
FDIC. The percentage of an SBIC's assets so invested will depend on, among other
things, loan demand, timing of equity infusions and SBA funding and availability
of funds under credit facilities.
SBICs may purchase voting securities of Small Business Concerns in
accordance with SBA Regulations. SBA Regulations prohibit SBICs from controlling
a Small Business Concern except where necessary to protect an investment. SBA
Regulations presume control when SBICs purchase (i) 50% or more of the voting
securities of a Small Business Concern if the Small Business Concern has less
than 50 stockholders or (ii) more than 20% (and in certain situations up to 25%)
of the voting securities of a Small Business Concern if the Small Business
Concern has 50 or more stockholders.
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a general summary of the federal income tax
principles applicable to Ameritrans, based on the currently existing provisions
of the Internal Revenue Code and the regulations thereunder. This summary does
not purport to be a complete description of the tax
-62-
<PAGE>
considerations applicable to Ameritrans or to the holders of its Common Stock.
These principles, in general, also apply to Elk, but the sole direct stockholder
of Elk is Ameritrans.
Ameritrans has elected to be treated as a "regulated investment
company" (a "RIC") under Section 851 of the Internal Revenue Code, and Elk has
elected to be treated as a RIC since 1984. A regulated investment company may
deduct, for federal income tax purposes, most dividends paid to stockholders,
thereby avoiding federal income taxation at the corporate level on stockholder
dividends. In addition, because Elk currently qualifies for treatment as a RIC,
Ameritrans anticipates that the dividends it receives from Elk will not be
subject to corporate taxation at the level of Elk. Elk Capital will not be
treated as a RIC and therefore it is contemplated its earnings will not be
distributed to stockholders.
TAXATION OF REGULATED INVESTMENT COMPANIES
In order to qualify as a RIC for a given fiscal year, a company must
meet each of the following conditions for that fiscal year:
a) The company must be registered as an investment company
under the 1940 Act at all times during the year.
b) At least 90% of the company's gross income for the year
must be derived from interest, gains on the sale or other disposition of stock
or other securities, dividends and payment with respect to securities loans.
c) Less than 30% of the company's gross income must be derived
from the sale or other disposition of securities held for less than three
months.
d) At the close of each quarter, at least 50% of the value of
the company's total assets must be represented by cash, cash items (including
receivables), securities of other RICs and securities of other issuers, except
that the investment in a single issuer of securities may not exceed 5% of the
value of the RIC's assets, or 10% of the outstanding voting securities of the
issuer.
e) At the close of each quarter, and with the exception of
government securities or securities of other RICs, no more than 25% of the value
of a RIC's assets may be made up of investments in the securities of a single
issuer or in the securities of two or more issuers controlled by the RIC and
engaged in the same or a related trade or business. However, if a non-RIC entity
controlled by the RIC subsequently sustains internally generated growth (as
opposed to growth via acquisitions), the diversification requirement will not be
violated even if the non-RIC subsidiary represents in excess of 25% of the RIC's
assets.
f) The company must distribute as dividends at least 90% of
its investment company taxable income (as defined in Section 852 of the Internal
Revenue Code), as well as 90% of the excess of its tax-exempt income over
certain disallowed tax-exempt interest deductions. This treatment substantially
eliminates the "double taxation" (i.e., taxation at both the corporate and
stockholder levels) that generally results from the use of corporate investment
vehicles. A RIC is,
-63-
<PAGE>
however, generally subject to federal income tax at regular corporate rates on
undistributed investment company taxable income.
In order to avoid the imposition of a non-deductible 4% excise tax on
its undistributed income, a company is required, under Section 4982 of the
Internal Revenue Code, to distribute within each calendar year at least 98% of
its ordinary income for such calendar year and 98% of its capital gain net
income (reduced by the RIC's net ordinary loss for the calendar year, but not
below its net capital gain) for the one-year period ending on October 31 of such
calendar year.
The tax benefits available to a qualified RIC are prospective,
commencing with the fiscal year in which all the conditions listed above are
met, and would not permit Ameritrans to avoid income tax at the corporate level
on income earned during prior taxable years. If Ameritrans fails to qualify as a
RIC for a given fiscal year, Ameritrans will not be entitled to a federal income
tax deduction for dividends distributed, and amounts distributed as stockholder
dividends by Ameritrans will therefore be subject to federal income tax at both
the corporate level and the individual level.
Dividends distributed by Elk to Ameritrans will constitute ordinary
income to Ameritrans to the extent derived from non-capital gain income of Elk,
and will ordinarily constitute capital gain income to Ameritrans to the extent
derived from capital gains of Elk. However, since Ameritrans is also a RIC,
Ameritrans will, in general, not be subject to a corporate level tax on its
income to the extent that it makes distributions to its stockholders. If Elk
does not qualify as a RIC for any reason in any fiscal year, it will not be
entitled to a federal income tax deduction for dividends distributed, and will
instead be liable to pay corporate level tax on its earnings. Further, if Elk
does not qualify as a RIC, such failure will cause Ameritrans to fail to qualify
for RIC status as well, as long as Elk stock held by Ameritrans represents more
than 25% of Ameritrans' assets. In such a case, Ameritrans will be taxed on
dividends received from Elk, subject to the deduction for corporate dividends
received, which is currently 70%. Thus, if Elk fails to qualify as a RIC for any
reason, its earnings would be taxed at three levels: to Elk, in part to
Ameritrans, and finally, when they are distributed by Ameritrans, to our
stockholders.
Elk Capital will not be a RIC, so it will be subject to corporate tax
on its earnings. Elk Capital does not currently represent more than 25% of
Ameritrans' assets, but it is a non-RIC entity controlled by Ameritrans and
engaged in the same or a related trade or business as Ameritrans. If Elk Capital
subsequently sustains internally generated growth (as opposed to growth via
acquisitions), the diversification requirement discussed above should not be
violated even if Elk Capital represents in excess of 25% of Ameritrans' assets.
However, if the diversification requirement is not complied with, such failure
will cause Ameritrans to fail to qualify for RIC status.
As long as Ameritrans qualifies as a RIC, dividends distributed by
Ameritrans to its stockholders out of current or accumulated earnings and
profits constitute ordinary income to such stockholders to the extent derived
from ordinary income and short-term capital gains of Ameritrans (such as
interest from loans by Ameritrans). Any long-term capital gain dividends
distributed by Ameritrans would constitute capital gain income to Ameritrans
stockholders. To the extent Ameritrans makes distributions in excess of current
and accumulated earnings and profits, these distributions are treated first as a
tax-free return of capital to the stockholder, reducing the tax basis of the
stockholder's stock by the amount of such distribution, but not below zero, with
distributions in excess of the stockholder's basis taxable as capital gains if
the stock is held as a capital asset.
-64-
<PAGE>
TAXATION OF SBICS
As a result of Elk's status as a licensed SBIC under the 1958 Act, Elk
and its stockholders qualify for the following tax benefits:
(i) Under Section 243 of the Internal Revenue Code, Elk may
deduct 100% of the dividends received by it from domestic corporations in which
it has made equity investments, regardless of whether such corporations are
subsidiaries of Elk (in contrast to the generally applicable 70% deduction under
the Code). Because Elk generally makes long-term loans rather than equity
investments, this potential benefit is not likely to be of practical
significance to Elk or its stockholder.
(ii) Under Section 1243 of the Internal Revenue Code, losses
sustained on Elk's investments in the convertible debentures, or stock derived
from convertible debentures, of Small Business Concerns are treated as ordinary
losses rather than capital losses to Elk. Because Elk does not presently intend
to purchase convertible debentures, however, this potential benefit is not
likely to be of practical significance to Elk or its stockholder.
(iii) Under Section 1242 of the Internal Revenue Code, Elk's
stockholders are entitled to take an ordinary rather than a capital loss
deduction on losses resulting from the worthlessness or the sale or exchange of
Elk Common Stock.
STATE AND OTHER TAXES
The foregoing discussion relates only to federal income tax matters.
Ameritrans is also subject to state and local taxation. The state, local and
foreign tax treatment may not conform to the federal tax treatment discussed
above. Stockholders should consult with their own tax advisors with respect to
the state and local tax considerations pertaining to Ameritrans.
-65-
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of Ameritrans consists of 5,000,000
shares, $.0001 par value, of Common Stock, of which 1,745,600 shares are issued
and outstanding, and 1,000,000 shares of "blank check" preferred stock, none of
which are issued and outstanding. As of June 30, 1999, there were approximately
274 holders of record of the Elk Common Stock.
COMMON STOCK
The holders of Common Stock are entitled to one (1) vote per share on
all matters submitted to a vote of stockholders. Holders of Common Stock have
neither cumulative voting rights (which means that the holders of a majority of
the outstanding shares of Common Stock may elect all of our directors) nor any
preemptive rights. Holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor.
In order to qualify as a "regulated investment company" under the
Internal Revenue Code, we are required to distribute as dividends to our
stockholders, for each fiscal year, at least 90% of our taxable income and 90%
of the excess of our tax-exempt income over certain disallowed deductions. In
addition, in order to avoid a non-deductible 4% excise tax on any undistributed
income, we are required to distribute as dividends, within each calendar year,
at least 98% of our ordinary income for such calendar year and 98% of our
capital gain net income for the one-year period ending on October 31 of such
calendar year. See "Federal Income Tax Considerations." In the event of a
liquidation, dissolution or winding up of Ameritrans, holders of Common Stock
will be entitled to receive a ratable portion of the assets of Ameritrans
remaining after provision for payment of creditors. All of the outstanding
shares of Common Stock are fully paid and non-assessable.
PREFERRED STOCK
Subject to the asset coverage requirements of the 1940 Act, Preferred
Stock may be issued from time to time by the Board of Directors as shares of one
or more classes or series. Subject to the provisions of the our Certificate and
limitations prescribed by law, the Board of Directors is expressly authorized to
adopt resolutions to issue the shares, to fix the number of shares and to change
the number of shares constituting any series, and to provide for or change the
voting powers, designations, preferences and relative, participating, optional
or other special rights, qualifications, limitations or restrictions thereof,
including dividend rights (including whether dividends are cumulative), dividend
rates, terms of redemption (including sinking fund provisions), redemption
prices, conversion rights and liquidation preferences of the shares constituting
any class or series of the Preferred Stock, in each case without any further
action or vote by the stockholders. We have no current plans to issue any shares
of Preferred Stock of any class or series.
The Board of Directors could issue classes or series of the
undesignated Preferred Stock to make more difficult or to discourage an
outsider's attempt to obtain control of Ameritrans by means of a tender offer,
proxy contest, merger or otherwise, and thereby to protect the continuity of our
management. The issuance of shares of the Preferred Stock by the Board of
Directors could have a negative effect on the rights of the holders of Common
Stock. For example, holders of Preferred Stock may be entitled to receive
dividends and distributions on liquidation before the holders of the Common
Stock, and the Preferred Stock could have full or limited voting rights and may
be
-66-
<PAGE>
convertible into shares of Common Stock. As a result, the issuance of shares of
Preferred Stock may discourage bids for the Common Stock or may cause the market
price of the Common Stock to go down.
TRANSFER AGENT
The transfer agent for our Common Stock is Continental Stock Transfer &
Trust Company, 2 Broadway, New York, New York 10004.
BUSINESS COMBINATION PROVISIONS
Delaware Corporation Law Section 203 is entitled "Business Combinations
with Interested Stockholders." Subject to certain exceptions, Section 203
generally prohibits any Delaware corporation covered by Section 203 from
engaging in any "business combination" with a person who is an "interested
stockholder" for a period of three (3) years following the date such person
became an interested stockholder, unless (i) the Board of Directors approved
either the interested stockholder or business combination in question prior to
the date such person became an interested stockholder, (ii) upon consummation of
the transaction which resulted in such person becoming an interested
stockholder, such interested stockholder owned at least 85% of the voting stock
of the corporation, excluding (for purposes of determining the number of shares
outstanding) stock held by persons who are both directors and officers of the
corporation or by certain employee stock plans, or (iii) the business
combination is approved by both the Board of Directors of the corporation and at
a stockholders' meeting, by two-thirds of the outstanding voting stock not owned
by such interested stockholder.
Companies may choose not to be governed by Section 203, and the
Ameritrans Certificate of Incorporation provides that Ameritrans shall not be
governed by Section 203.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of Common Stock in the public
market, or the perception that such sales could occur, could adversely affect
market prices prevailing from time to time. In addition, several of our
principal stockholders and entities affiliated with them hold a significant
portion of our outstanding Common Stock, and a decision by one or more of these
stockholders to sell their shares could adversely affect the market price of the
Common Stock.
Upon completion of the Offering, we will have outstanding 2,845,600
shares of Common Stock (3,010,600 if the Underwriters' over-allotment option is
exercised in full). Except for the shares currently owned or subsequently
acquired by our affiliates, in this Offering or otherwise, the outstanding
shares and the 1,100,000 shares to be sold in this Offering (1,265,000 if the
Underwriters' over-allotment option is exercised in full), will be freely
tradable without restriction under the Securities Act.
The shares owned by our affiliates may be sold in accordance with the
conditions of Rule 144 of the Securities Act. In general, under Rule 144, an
affiliate would be entitled to sell in brokers'
-67-
<PAGE>
transactions or to market makers within any three-month period a number of
shares that does not exceed the greater of 1% of the then outstanding shares of
the Common Stock (approximately 28,450 shares, based on the number of shares
outstanding after the Offering, assuming no exercise of the Underwriters'
over-allotment option) or the average weekly trading volume of the Common Stock
on the Nasdaq National Market during the four (4) calendar weeks preceding the
date on which notice of the sale is filed with the SEC. Sales under Rule 144 are
also subject to certain manner of sale provisions, notice requirements and the
availability of current public information about the company.
Pursuant to lock-up agreements with the Underwriters, our officers and
directors will not, directly or indirectly, offer for sale, sell, contract to
sell, grant an option to purchase or otherwise dispose of any shares of the
Ameritrans Common Stock, (except 40,000 shares owned by one director and his
wife, which may be sold at the rate of 10,000 shares during any three-month
period) until 13 months after the completion of the Offering without the prior
written consent of the Underwriters. See "Underwriting."
We have reserved a total of 125,000 shares of Common Stock for issuance
with respect to the grants of options under the 1999 Employee Plan. To date, we
have granted options to purchase 100,000 shares of Common Stock, leaving 25,000
shares of Common Stock for future grants under the 1999 Employee Plan. In
addition, a total of 75,000 additional shares of Common Stock have been reserved
for issuance with respect to the grant of options under the Director Plan. We
intend to file a registration statement under the Securities Act to register the
shares reserved for issuance under the 1999 Employee Plan and the Director Plan.
Shares issued upon exercise of outstanding stock options after the effective
date of such registration statement generally will be tradable without
restriction under the Securities Act.
UNDERWRITING
We have entered into an underwriting agreement with the underwriters
named below, for whom First Colonial Securities Group, Inc. ("First Colonial")
and Auerbach, Pollak & Richardson, Inc. are acting as representatives (the
"Representatives"). We are obligated to sell, and the Underwriters are obligated
to purchase, all of the shares of Common Stock offered on the cover page of this
prospectus, if any are purchased. Subject to certain conditions of the
underwriting agreement, each Underwriter has severally agreed to purchase the
shares of Common Stock indicated opposite its name.
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
First Colonial Securities Group, Inc..................
Auerbach, Pollak & Richardson, Inc....................
[Name]................................................
[Name]................................................
Total.................................................
The Underwriters may sell more shares than the total number of shares
of Common Stock offered on the cover page of this prospectus, and they have, for
a period of 45 days from the effective
-68-
<PAGE>
date of this prospectus, an over-allotment option to purchase up to 165,000
additional shares from us. If any additional shares are purchased, the
Underwriters will severally purchase the shares in the same proportion as per
the table above.
The Representatives have advised us that the shares will be offered to
the public at the offering price indicated on the cover page of this prospectus.
The Underwriters may allow, to selected dealers, a concession not in excess of
$________ per share and such dealers may re-allow a concession not in excess of
$______ per share to certain other dealers. After the Common Stock is released
for sale to the public, the Representatives may change the offering price and
the concessions. The Representatives have informed us that the Underwriters do
not intend to sell shares to any investor who has granted them discretionary
authority.
The public offering price of the Common Stock, negotiated between us
and the Representatives, is based upon various factors such as the current
market price of the Common Stock, our expected performance, estimates of our
future earnings prospects as a whole, and the prevailing market conditions.
The Common Stock is quoted on the Nasdaq SmallCap Market under the
symbol "________." Upon completion of the Offering, the Common Stock will be
quoted on the Nasdaq National Market under the symbol "_______."
We will pay to the Representatives a non-accountable expense allowance
of 2.75% of the offering proceeds to reimburse the Underwriters for costs and
expenses in connection with this Offering. We have agreed to indemnify the
Underwriters or contribute to losses against certain liabilities, including
liabilities under the Securities Act.
First Colonial has agreed to perform financial advisory services for us
for a period of two years for a fee of $3,000 per month payable in full at the
closing of this Offering.
We and, (with the exception of one director) our directors and officers
have entered into lockup agreements, pursuant to which we and our directors and
officers have agreed not to offer or sell any shares of common stock or
securities convertible into or exchangeable or exercisable for shares of common
stock for a period of 13 months from the effective date of this Prospectus. The
Representatives may, at any time and without notice, waive the terms of these
lock-up agreements as specified in the underwriting agreement.
The Representatives, on behalf of the Underwriters, may engage in the
following activities in accordance with the securities rules:
o Over-allotments involving sales in excess of the offering size,
creating a short position. The Representatives may elect to reduce this
short position by exercising some or all of the over-allotment option.
o Stabilizing and short covering. Stabilizing bids to purchase the shares
are permitted if they do not exceed a specified maximum price. After
the distribution of shares has been completed, short covering purchase
in the open market may also reduce the short position. These
-69-
<PAGE>
activities may cause the price of the shares to be higher than would
otherwise exist in the open market.
o Penalty bids to permit the Representatives to reclaim commissions from
a syndicate member for the shares purchased in the stabilizing or short
covering transactions.
Such activities, which may be commenced and discontinued at any time,
may be effected on NASDAQ in the over-the-counter market or otherwise.
The principal address of First Colonial Securities Group, Inc. is 1499
West Palmetto, Suit 312, Boca Raton, Florida 33486; the principal address of
Auerbach, Pollak & Richardson, Inc. is 450 Park Avenue, 8th Floor, New York, New
York 10022.
EXPERTS
The consolidated financial statements of Elk for the years ended June
30, 1998 and 1997 included in this Prospectus have been audited by Marcum &
Kliegman LLP, independent public accountants, as indicated in their report dated
August 12, 1998 with respect thereto and are incorporated herein in reliance
upon the authority of said firm as experts in accounting and auditing in giving
said report.
The consolidated financial statements of Elk for the year ended June
30, 1996 included in this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report dated August 2, 1996 appearing
herein, and are included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters in connection with the Offering will be passed upon for
Ameritrans by Stursberg & Veith, New York, New York. The validity of the shares
of Common Stock will be passed upon for the Underwriters by Klehr Harrison
Harvey Branzberg & Ellers LLP, Philadelphia, Pennsylvania.
ADDITIONAL INFORMATION
We have filed with the SEC a Registration Statement on Form N-2 under
the Securities Act with respect to the Common Stock offered by this Prospectus.
This Prospectus, filed as part of the Registration Statement, does not contain
all of the information set forth in the Registration Statement and the exhibits
and schedules thereto. For further information with respect to Ameritrans and
the Common Stock, you should refer to the Registration Statement, including its
exhibits and schedules. Statements contained in this Prospectus as to the
contents of any contract or any other document are not necessarily complete. In
each instance, we refer you to the copy of such contract or document filed as an
exhibit to the Registration Statement, and each such statement is qualified in
all respects by such reference to the complete document.
-70-
<PAGE>
As a BDC, we comply with the informational requirements of the 1934
Act, and, in accordance therewith, we are required to file reports, proxy
statements, and other information with the SEC.
You may inspect the Registration Statement, including all exhibits and
schedules, filed with the SEC, as well as the reports, proxy statements, and
other information we file under the 1934 Act, without charge, at the Public
Reference Room maintained by the SEC at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the SEC's Regional Offices located
at Seven World Trade Center, 13th Floor, New York, New York 10048, and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You can obtain information
on the operation of the Public Reference room by calling the SEC at (800)
SEC-0330. The SEC also maintains a web site that contains reports, proxy
statements, and other information. The address of the SEC's web site is
http://www.sec.gov. Copies of such material may also be obtained from the Public
Reference Branch, Office of Consumer Affairs and Information Services of the SEC
at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Our
Common Stock is listed on the Nasdaq SmallCap Market and, after the Offering,
will be listed on the Nasdaq National Market, and our reports, proxy statements
and other information can also be inspected at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006.
-71-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF MARCUM & KLEIGMAN, LLP,
INDEPENDENT PUBLIC ACCOUNTANTS REPORT F - 2
REPORT OF DELOITTE & TOUCHE, LLP,
INDEPENDENT AUDITORS' REPORT F - 3
Consolidated Balance Sheets as of June 30, 1998, June 30, 1999 and
March 31, 1999 (unaudited) F - 4 + 5
Consolidated Statements of Income for the Years Ended June 30, 1998,
June 30, 1997 and June 30, 1996 and for the Nine Months Ended
March 31, 1999 and March 31, 1998 (unaudited) F - 6
Consolidated Statements of Stockholders' Equity for the Years Ended
June 30, 1998, June 30, 1997 and June 30, 1996 F - 7
Consolidated Statements of Cash Flows for the Years Ended June 30, 1998,
June 30, 1997 and June 30, 1996, and for the Nine Months Ended
March 31, 1999 and March 31, 1998 (unaudited) F - 9
Schedule of Loans F - 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F - 11 - 20
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Elk Associates Funding Corporation and Subsidiary
(A Small Business Investment Company Licensed by the SBA)
We have audited the accompanying consolidated balance sheets of Elk Associates
Funding Corporation and Subsidiary as of June 30, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for the
years then ended and the schedule of loans as of June 30, 1998. These
consolidated financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements and schedule referred to
above present fairly, in all material respects, the financial position of Elk
Associates Funding Corporation and Subsidiary as of June 30, 1998 and 1997, and
the results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
As explained in Note 1, the consolidated financial statements include loans
valued at $41,295,000 and $32,924,206 as of June 30, 1998 and 1997,
respectively, whose values have been estimated by the Board of Directors in the
absence of readily ascertainable market values. We have reviewed the procedures
used by the Board of Directors in arriving at their estimate of the value of
such loans and have inspected underlying documentation and, in the
circumstances, we believe the procedures are reasonable and the documentation is
appropriate. However, because of the inherent uncertainty of valuation, those
estimated values may differ significantly from the values that would have been
used had a ready market for such loans existed, and the differences could be
material.
Marcum & Kliegman LLP
August 12, 1998
New York, New York
F - 2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Elk Associated Funding Corporation and Subsidiary
(A Specialized Small Business Investment Company Licensed by SBA)
We have audited the accompanying consolidated statement of income of Elk
Associates Funding Corporation and Subsidiary and the related consolidated
statements of shareholders' equity and cash flows for the year ended June 30,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the results of operations and cash flows of Elk Associates Funding
Corporation and Subsidiary for the year ended June 30, 1996 in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
August 2, 1996
F - 3
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
------
March 31,
June 30, June 30, 1999
1998 1997 (Unaudited)
----------- ------------ ------------
<S> <C> <C> <C>
Loans receivable $41,590,000 $33,249,206 $49,303,758
Less: allowance for loan losses (295,000) (325,000) (335,000)
----------- ----------- -----------
41,295,000 32,924,206 48,968,758
Cash and cash equivalents 1,755,429 1,853,032 673,296
Accrued interest receivable 516,110 408,165 655,210
Assets acquired in satisfaction of
loans 400,470 581,810 619,308
Receivables from debtors on sales
of assets acquired in satisfaction
of loans 451,222 488,493 420,287
Equity securities 629,179 436,181 927,157
Furniture, fixtures and leasehold
improvements, net 102,247 90,214 88,642
Prepaid expenses and other assets 250,081 243,920 397,621
----------- ----------- -----------
TOTAL ASSETS $45,399,738 $37,026,021 $52,750,279
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F - 4
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
March 31,
June 30, June 30, 1999
1998 1997 (Unaudited)
----------- ----------- -----------
<S> <C> <C> <C>
LIABILITIES
Debentures payable to SBA $ 8,880,000 $ 8,880,000 $ 8,880,000
Notes payable, banks 22,085,000 16,820,000 29,350,000
Accrued expenses and other liabilities 204,099 112,005 277,631
Accrued interest payable 221,704 181,248 218,832
Dividends payable 314,208 -0- 314,208
----------- ----------- -----------
TOTAL LIABILITIES 31,705,011 25,993,253 39,040,671
----------- ----------- -----------
COMMITMENTS AND
CONTINGENCIES
STOCKHOLDERS' EQUITY
Series A, 3 percent cumulative preferred
stock, $10 par value, 547,271 shares
authorized, none outstanding -0- -0- -0-
Series B, 4 percent cumulative preferred
stock, $10 par value, 752,729 shares
authorized, none outstanding -0- -0- -0-
Common stock, $.01 par value: 2,000,000
shares authorized; 1,745,600 and 1,283,600
shares issued and outstanding, respectively 17,456 12,836 17,456
Additional paid-in-capital 12,485,825 8,890,993 13,019,417
Restricted capital 968,368 1,679,820 434,777
Retained earnings 24,289 365,878 8,433
Restricted retained earnings -0- 25,000 -0-
Unrealized gain on equity securities 198,789 58,241 229,525
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY 13,694,727 11,032,768 13,709,608
----------- ----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $45,399,738 $37,026,021 $52,750,279
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F - 5
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Nine For the Nine
For the For the For the Months Ended Months Ended
Year Ended Year Ended Year Ended March 31, March 31,
June 30, June 30, June 30, 1999 1998
1998 1997 1996 (Unaudited) (Unaudited)
---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Interest on loans receivable $4,108,727 $3,660,825 $2,751,196 $3,804,341 $2,937,394
Fees and other income 497,729 362,970 333,216 296,628 382,552
---------- ---------- ---------- ---------- ----------
TOTAL INVESTMENT
INCOME 4,606,456 4,023,795 3,084,412 4,100,969 3,319,946
---------- ---------- ---------- ---------- ----------
OPERATING EXPENSES
Interest 1,840,731 1,582,700 1,105,993 1,804,597 1,360,703
Management fees -0- -0- 210,000 -0- -0-
Salaries and employee benefits 495,889 469,060 220,476 431,701 406,164
Legal fees 336,700 307,127 186,023 222,135 222,334
Miscellaneous administrative
expenses 739,875 604,347 474,551 582,690 506,199
(Gains) losses on assets acquired in
satisfaction of loans, net 14,649 8,923 (44,292) 5,432 4,097
Directors' fee 52,050 27,500 23,400 26,250 45,089
Bad debt expense 227,748 -0- -0- 101,465 174,998
---------- ---------- ---------- ---------- ----------
TOTAL OPERATING
EXPENSES 3,707,642 2,999,657 2,176,151 3,174,270 2,719,584
---------- ---------- ---------- ---------- ----------
OPERATING INCOME 898,814 1,024,138 908,261 926,699 600,362
---------- ---------- ---------- ---------- ----------
OTHER INCOME (EXPENSES)
(Write-off) gain of noncash
receivable (25,000) 25,000 -0- -0- -0-
Net gain (loss) from rental activities 6,125 (11,233) -0- -0- -0-
Recoveries 57,673 11,118 -0- -0- -0-
---------- ---------- ---------- ---------- ----------
TOTAL OTHER INCOME 38,798 24,885 -0- -0- -0-
---------- ---------- ---------- ---------- ----------
NET INCOME BEFORE
INCOME TAXES 937,612 1,049,023 908,261 926,699 600,362
INCOME TAXES 3,271 28,676 -0- (69) (2,716)
---------- ---------- ----------- ---------- ----------
NET INCOME $ 934,341 $1,020,347 $ 908,261 $ 926,768 $ 603,078
========== ========== ========== ========== ==========
WEIGHTED AVERAGE SHARES
OUTSTANDING 1,518,969 1,283,600 1,247,120 1,745,600 1,432,726
========== ========== ---------- ========== ==========
NET INCOME PER COMMON
SHARE $0.62 $0.79 $0.73 $0.53 $0.42
===== ===== ===== ===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F - 6
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Series A Series B
Shares of Preferred Preferred Shares of Common
Preferred Stock - 3% Stock - 4% Common Stock Additional
Stock Cumulative Cumulative Stock $.01 Par Paid-In Restricted
Outstanding $10 Par $10 Par Outstanding Value Capital Capital
----------- ----------- ---------- ----------- ------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, July 1, 1995 547,271 $5,472,710 -0- 1,033,683 $10,337 $ 5,480,948 -0-
- -------
Proceeds from issuance of
common stock -0- -0- -0- 249,917 2,499 1,225,604 -0-
Redemption of preferred
stock (547,271) ($5,472,710) -0- -0- -0- -0- 3,557,261
Capitalization of retained
earnings -0- -0- -0- -0- -0- 307,000 -0-
Transfer of restricted capital -0- -0- -0- -0- -0- 1,165,993 (1,165,993)
Dividends paid -0- -0- -0- -0- -0- -0- -0-
Net income -0- -0- -0- -0- -0- -0- -0-
-------- ----------- --------- --------- ------- ----------- ----------
BALANCE, June 30, 1996 -0- $ -0- $ -0- 1,283,600 $12,836 $ 8,179,545 $2,391,268
- -------
Transfer of restricted capital -0- -0- -0- -0- -0- 711,448 (711,448)
Dividends paid -0- -0- -0- -0- -0- -0- -0-
Net income -0- -0- -0- -0- -0- -0- -0-
Unrealized gain on equity
securities -0- -0- -0- -0- -0- -0- -0-
-------- ----------- --------- --------- ------- ----------- ----------
BALANCE, June 30, 1997 -0- -0- -0- 1,283,600 12,836 8,890,993 1,679,820
- -------
Transfer of restricted
capital -0- -0- -0- -0- -0- 711,452 (711,452)
Dividends declared -0- -0- -0- -0- -0- -0- -0-
Net income -0- -0- -0- -0- -0- -0- -0-
Unrealized gain on equity
securities -0- -0- -0- -0- -0- -0- -0-
Proceeds from sale of
common stock, net of
direct costs -0- -0- -0- 462,000 4,620 2,883,380 -0-
-------- ----------- --------- --------- ------- ----------- ----------
BALANCE, June 30, 1998 -0- $ -0- $ -0- 1,745,600 $17,456 $12,485,825 $ 968,368
- ------- ======== =========== ========= ========= ======= =========== ==========
</TABLE>
<PAGE>
[RESTUB]
<TABLE>
<CAPTION>
Unrealized
Restricted Gain on
Retained Retained Equity
Earnings Earnings Securities Total
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
BALANCE, July 1, 1995 $ 652,953 -0- -0- $11,616,948
- -------
Proceeds from issuance of
common stock -0- -0- -0- 1,228,103
Redemption of preferred
stock -0- -0- -0- (1,915,449)
Capitalization of retained
earnings (307,000) -0- -0- -0-
Transfer of restricted capital -0- -0- -0- -0-
Dividends paid (937,028) -0- -0- (937,028)
Net income 908,261 -0- -0- 908,261
----------- ------- --------- -----------
BALANCE, June 30, 1996 $ 317,186 $ -0- $ -0- $10,900,835
- -------
Transfer of restricted capital -0- -0- -0- -0-
Dividends paid (946,655) -0- -0- (946,655)
Net income 995,347 25,000 -0- 1,020,347
Unrealized gain on equity
securities -0- -0- 58,241 58,241
----------- ------- --------- -----------
BALANCE, June 30, 1997 365,878 25,000 58,241 11,032,768
- -------
Transfer of restricted
capital -0- -0- -0- -0-
Dividends declared (1,300,930) -0- -0- (1,300,930)
Net income 959,341 (25,000) -0- 934,341
Unrealized gain on equity
securities -0- -0- 140,548 140,548
Proceeds from sale of
common stock, net of
direct costs -0- -0- -0- 2,888,000
----------- ------- --------- -----------
BALANCE, June 30, 1998 $ 24,289 $ -0- $ 198,789 $13,694,727
- ------- =========== ======= ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F - 7
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the For the For the For the Nine For the Nine
Year Ended Year Ended Year Ended Months Ended Months Ended
June 30, June 30, June 30 March 31, 1999 March 31, 1998
1998 1997 1996 (Unaudited) (Unaudited)
------------ ------------ ---------- -------------- --------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income $ 934,341 $ 1,020,347 $ 908,261 $ 926,768 $ 603,078
----------- ----------- ----------- ----------- -----------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 49,890 53,546 25,483 28,194 18,931
Write-off (gain) on noncash receivable 25,000 (25,000) -0- -0- -0-
Increase in accrued interest receivable (107,945) (114,078) (53,866) (139,100) (27,627)
Increase in prepaid expenses and other
assets (30,616) (27,318) (30,240) (147,540) 14,267
Increase (decrease) in accrued expenses
and other liabilities 92,096 (28,893) (6,820) 73,532 146,557
Increase (decrease) in accrued interest
payable 40,456 (15,204) 12,519 (2,872) (20,644)
----------- ----------- ----------- ----------- -----------
TOTAL ADJUSTMENTS 68,881 (156,947) (52,924) (187,786) 131,484
----------- ----------- ----------- ----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,003,222 863,400 855,337 738,982 734,562
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES
Net change in loans receivable, assets
acquired in satisfaction of loans and
receivables from debtors on sales of assets
acquired in satisfaction of loans (8,177,183) (9,062,902) (775,581) (7,861,661) (1,536,603)
Payments for building improvements on
assets acquired in satisfaction of loans -0- (13,974) -0- -0- -0-
Purchases of equity securities (52,450) (243,040) (234,900) (267,241) (65,946)
Acquisition of furniture, fixtures and
leasehold improvements (37,468) (18,530) (16,200) (14,589) (15,256)
----------- ----------- ----------- ----------- -----------
NET CASH USED IN INVESTING
ACTIVITIES (8,267,101) (9,338,446) (1,026,681) (8,143,491) (1,617,805)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from notes payable, banks, net 5,265,000 10,195,000 1,675,000 7,265,000 (1,735,000)
Payments for loan costs -0- (15,050) -0- -0- -0-
Proceeds from debentures payable to
SBA -0- 430,000 2,040,000 -0- -0-
Repayment of debentures payable to
SBA -0- (408,000) (1,986,000) -0- -0-
Net proceeds from sale of common stock 2,888,000 -0- 1,228,103 -0- 2,888,000
Repurchase of preferred stock -0- -0- (1,915,449) -0- -0-
Dividends paid (986,724) (946,655) (937,028) (942,624) (986,722)
----------- ----------- ----------- ----------- -----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES $ 7,166,276 $ 9,255,295 $ 104,626 $ 6,322,376 $ 166,278
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F - 8
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
<TABLE>
<CAPTION>
For the For the For the For the Nine For the Nine
Year Ended Year Ended Year Ended Months Ended Months Ended
June 30, June 30, June 30 March 31, 1999 March 31, 1998
1998 1997 1996 (Unaudited) (Unaudited)
---------- ---------- ---------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Net (decrease) increase in
cash and cash equivalents (97,603) 780,249 (66,718) (1,082,133) (716,965)
CASH AND CASH
EQUIVALENTS - Beginning $1,853,032 $1,072,783 $1,139,501 $1,755,429 $1,853,032
---------- ---------- ---------- ---------- ----------
CASH AND CASH
EQUIVALENTS - Ending $1,755,429 $1,853,032 $1,072,783 $ 673,296 $1,136,067
========== ========== ========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the years for:
Interest $1,840,276 $1,597,904 $1,093,474 $1,785,933 $1,408,214
Income taxes $ 8,048 $ 31,260 $ -0- $ 8,185 $ 13,260
Noncash investing and financing activities:
Conversion of loans to assets
acquired in satisfaction of loans $ 26,090 $ 140,914 $ 9,000 $ 369,000 -0-
Exchange of preferred stock for
a note resulting in a noncash gain
of $25,000 $ -0- $ 125,000 $ -0- $ -0- $ -0-
Unrealized gain on equity
securities $ 140,548 $ 58,241 $ -0- $ 30,737 $ 15,025
Transfer of restricted capital $ 711,452 $ 711,448 $ -0- $ 533,591 $ 533,591
On June 22, 1998, the Company
declared a cash dividend of $0.18
per common share which was
paid on July 7, 1998. $ 314,208 $ -0- $ -0- $ -0- $ -0-
</TABLE>
The accompanying notes are an integral part of these financial statements.
F - 9
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
SCHEDULE OF LOANS
June 30, 1998
<TABLE>
<CAPTION>
Maturity
Number Interest Dates Balance
Type of Loan of Loans Rates (In Months) Outstanding
- ------------ -------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
New York City:
Taxi medallion 99 8.25 - 12% 1 - 119 $18,862,618
Radio car service 49 1 - 15% 1 - 59 298,976
Chicago:
Taxi medallion 415 12 - 16.5% 21 - 48 13,557,342
Boston:
Taxi medallion 16 10 - 14% 33 - 89 990,086
Miami:
Taxi medallion 30 13 - 16.5% 112 - 120 1,480,459
Other loans:
Restaurant 2 10 - 12% 1 - 66 260,329
Hairdresser 2 12% 7 122,461
Car wash 1 11.5% 36 220,292
Ambulance service 1 10.5% 6 9,952
Bagel store 1 14% 43 29,614
Dry cleaner 13 10 - 14.5% 43 - 121 1,382,032
Laundromat 11 9 - 15% 24 - 72 1,751,619
Grocery/deli 3 12.5 - 13% 31 - 64 794,019
Financial services 1 14% 1 9,980
Black car service (real property) 1 12% 5 223,815
Auto sales 4 10.5 - 13% 1 - 49 856,942
Registered investment advisor 1 14% 97 169,012
Embroidery manufacturer 1 12% 59 96,000
Theater 1 16% 59 174,452
Retirement home 1 15% 84 300,000
--- -----------
Total Loans Receivable 653 41,590,000
===
Less: Allowance for Loan Losses (295,000)
-----------
Loans Receivable, Net $41,295,000
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F - 10
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND PRINCIPAL BUSINESS ACTIVITY
Elk Associates Funding Corporation (the "Company"), a New York
corporation, is licensed by the Small Business Administration ("SBA") to
operate as a Small Business Investment Company ("SBIC") under the Small
Business Investment Act of 1958, as amended. The Company has also
registered as an investment company under the Investment Company Act of
1940.
The Company primarily makes loans and investments to persons who qualify
under SBA regulations as socially or economically disadvantaged and loans
and investments to entities which are at least 50 percent owned by such
persons.
Effective February 21, 1997, the SBA approved the Company's election to
provide nondisadvantaged business financing to small business concerns
pursuant to SBA regulations and letter of agreement with the Company (see
Note 12).
LOANS AND THE ALLOWANCE FOR LOANS LOSSES
Loans are stated at cost, net of participation with other lenders, less
an allowance for possible losses. This amount represents the fair value
of such loans as determined in good faith by the Board of Directors. The
allowance for loan losses is maintained at a level that, in the Board of
Directors' judgement, is adequate to absorb losses inherent in the
portfolio. The allowance for loan losses is reviewed and adjusted
periodically by the Board of Directors on the basis of available
information, including the fair value of the collateral held, existing
risk of individual credits, past loss experience, the volume, composition
and growth of the portfolio, and current and projected economic
conditions. Because of the inherent uncertainty in the estimation
process, the estimated fair values of the loans may differ significantly
from the values that would have been used had a ready market existed for
such loans and the differences could be material. As of June 30, 1998 and
1997, approximately 85% and 87%, respectively, of all loans are
collateralized by New York City, Boston, Chicago, and Miami taxicab
medallions.
ACCOUNTING STANDARD FOR IMPAIRMENT OF LOANS
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 114
as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosure", a loan is determined to be
impaired if it is probable that the contractual amounts due will not be
collected in accordance with the terms of the loan. The SFAS generally
requires that impaired loans be measured based on the present value of
expected future cash flows discounted at the loan's effective interest
rate or, as a practical expedient, at the loan's observable market price
or the fair value of the collateral if the loan is collateral dependent.
As all of the Company's loans are collateral dependent, impairment is
measured based on the fair value of the collateral. If the fair value of
the impaired loan is less than the recorded investment in the loan
(including accrued interest, net of deferred loan fees or costs, and
unamortized premium or discount) the Company recognized an impairment by
creating a valuation allowance with a corresponding charge to the
provision for loan losses. The Company individually evaluates all loans
for impairment. See Note 3 for further discussion.
F - 11
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
LOANS RECEIVABLE
Loans are placed on nonaccrual status once they become 180 days past due
as to principal or interest. In addition, loans that are not fully
collateralized and in the process of collection are placed on nonaccrual
status when, in the judgement of management, the ultimate collectibility
of interest and principal is doubtful.
CASH AND CASH EQUIVALENTS
For the purposes of the statement of cash flows, the Company considers
all short-term investments with an original maturity of three months or
less to be cash equivalents.
The Company has cash balances in banks in excess of the maximum amount
insured by the FDIC as of June 30, 1998 and 1997.
INCOME TAXES
The Company has elected to be taxed as a Regulated Investment Company
under the Internal Revenue Code. A Regulated Investment Company will
generally not be taxed at the corporate level to the extent its income is
distributed to its shareholders. In order to be taxed as a Regulated
Investment Company, the Company must pay at least 90 percent of its net
investment company taxable income to its shareholders as well as meet
other requirements under the Code. In order to preserve this election for
fiscal 1998, the Company intends to make the required distributions to
its stockholders in accordance with applicable tax rules.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization of furniture, fixtures and leasehold
improvements is computed on the straight-line method at rates adequate to
allocate the cost of applicable assets over their expected useful lives.
NET INCOME PER SHARE
During the year ended June 30, 1998, the Company adopted the provision of
Statements of Financial Accounting Standards No. 128 "Earnings per Share"
("SFAS No. 128"). SFAS No. 128 eliminates the presentation of primary and
fully dilutive earnings per share ("EPS") and requires presentation of
basic and diluted EPS. Basic EPS is computed by dividing income (loss)
available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS is based on the
weighted-average number of shares of common stock and common stock
equivalents outstanding at year end. Common stock equivalents have been
excluded from the weighted-average shares for 1998 and 1997, as inclusion
is anti-dilutive. All prior period EPS data has been restated to conform
to the new pronouncement.
F - 12
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
LOAN COSTS
Loan costs are included in prepaid expenses and other assets.
Amortization of loan costs is computed on the straight-line method over
ten (10) years. At June 30, 1998, 1997 and 1996, loan costs amounted to
$153,786, $178,241 and $186,474 respectively, net of accumulated
amortization of $90,195, $65,750 and $42,457 respectively. Amortization
expense for the year ended June 30, 1998, 1997 and 1996 was $24,455,
$23,283 and $18,866 respectively.
ASSETS ACQUIRED IN SATISFACTION OF LOANS
Assets acquired in satisfaction of loans are carried at estimated fair
value less selling costs. Losses incurred at the time of foreclosure are
charged to the allowance for loan losses. Subsequent reductions in
estimated net realizable value are recorded as losses on assets acquired
in satisfaction of loans.
INTEREST RATE CAP
At March 20, 1997, the Company was a party to one $5 million notional
interest rate cap. This cap, which expires on March 20, 1999, was
purchased by the Company to protect it from the impact of upward
movements in interest rates related to its outstanding bank debt. The cap
provided interest rate protection in the event that the three month LIBOR
rate exceeded 6.75 percent. The premium paid for the purchase of this cap
was amortized over its life as an adjustment of interest expense.
Payments received under this cap would be credited to interest expense.
CONSOLIDATION
The consolidated financial statements include the accounts of EAF Holding
Corporation ("EAF"), a wholly-owned subsidiary of the Company. All
intercompany transactions have been eliminated. EAF was formed in June
1992 and began operations in December 1993. The purpose of EAF is to own
and operate certain real estate assets acquired in satisfaction of loans.
USE OF ESTIMATES IN THE FINANCIAL STATEMENTS
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 period. Actual results could differ
from those estimates. Estimates that are particularly susceptible to
change relate to the determination of the allowance for loan losses and
the fair value of financial instruments.
RECLASSIFICATION
Certain accounts in the prior year financial statements have been
reclassified for comparative purposes to conform with the presentation in
the current year financial statements. These reclassifications have no
effect on previously reported income.
F - 13
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - ASSETS ACQUIRED IN SATISFACTION OF LOANS
During the years ended June 30, 1998 and 1997, the carrying value of
Assets Acquired in Satisfaction of Loans increased by additions of
approximately $26,000 and $141,000, respectively, and recoup on sales of
assets previously sold of approximately $43,000 and -0-, respectively,
and decreased by sales and cash payments of approximately $238,000 and
$-0- and write-offs of approximately $13,000 and $-0-, respectively.
Sales of assets acquired in satisfaction of loans for the years ended
June 30, 1998 and 1997, included approximately $193,000 and $-0- of real
estate and $45,000 and $-0- of radio car rights, respectively.
Receivables from Debtors on Sales of Assets Acquired in Satisfaction of
Loans represent loans to borrowers arising out of the sales of defaulted
assets. Pursuant to an SBA regulation, these loans are presented
separately in the accompanying consolidated balance sheets.
NOTE 3 - LOANS RECEIVABLE
All loans on nonaccrual status have been classified as impaired. The
Company recognizes interest income on a cash basis on these loans if the
principal is fully secured. However, where there is doubt regarding the
ultimate collectibility of the loan principal, cash receipts, whether
designated as principal or interest, are applied to reduce the carrying
value of the loan. The Company has loans totaling approximately $569,000
and $87,000 at June 30, 1998 and 1997, respectively, which are still
accruing interest but are not performing according to the terms of the
contract and accordingly these loans are impaired under SFAS 114 as
amended by SFAS 118. At June 30, 1998 and 1997, approximately $546,000
and $41,000, respectively, of these loans were fully collateralized as to
principal and interest. Interest income recorded during the years ended
June 30, 1998, 1997 and 1996 totaled approximately $35,000, $3,000, and
$83,000 respectively, for such loans.
The following table sets forth certain information concerning impaired
loans as of June 30, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Impaired loans with an allowance $174,952 $260,127 $250,543
Impaired loans without an allowance 571,896 41,227 443,143
-------- -------- --------
Total impaired loans $746,848 $301,354 $693,686
======== ======== ========
Allowance for impaired loans $150,626 $178,000 $154,000
======== ======== ========
Average balance of impaired loans $524,101 $497,521 $484,332
======== ======== ========
</TABLE>
F - 14
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS RECEIVABLE, continued
Transactions in the allowance for loan losses are summarized as follows:
Balance, July 1, 1995 $277,000
Recoveries, net 24,000
--------
Balance, June 30, 1996 301,000
Additions, net 24,000
--------
Balance, June 30, 1997 325,000
Write-off, net (30,000)
--------
Balance, June 30, 1998 $295,000
========
NOTE 4 - EQUITY SECURITIES
Equity securities consisted of the following as of June 30, 1998:
<TABLE>
<CAPTION>
Chicago Miami Investment Dry Grocery
Taxicab Taxicab Advisory Cleaner and
Medallions Medallions Firm Company Market Total
---------- ---------- ---------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1996 $200,900 $ -0- $20,000 $14,000 $ -0- $ 234,900
Purchase of securities 121,825 21,215 -0- -0- 100,000 243,040
Sale of securities -0- -0- -0- -0- (100,000) (100,000)
Unrealized gain 58,241 -0- -0- -0- -0- 58,241
-------- ------- ------- ------- --------- ---------
Balance, June 30, 1997 380,966 21,215 20,000 14,000 -0- 436,181
Purchase of securities 39,100 5,265 50,000 14,000 -0- 108,365
Sale of securities (50,936) (4,979) -0- -0- -0- (55,915)
Unrealized gain 75,297 65,251 -0- -0- -0- 140,548
-------- ------- ------- ------- --------- ---------
Balance, June 30, 1998 $444,427 $86,752 $70,000 $28,000 $ -0- $ 629,179
======== ======= ======= ======= ========= =========
</TABLE>
F - 15
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - EQUITY SECURITIES, continued
At June 30, 1998, the fair value of the Chicago Taxicab Medallions and
the Miami Taxicab Medallions was increased resulting in an unrealized
gain. The fair value of the other equity securities approximated cost. At
June 30, 1997, the fair value of the Chicago Taxicab Medallions was
increased resulting in an unrealized gain. The fair value of the other
equity securities approximated cost.
NOTE 5 - DEBENTURES PAYABLE TO SBA
At June 30, 1998 and 1997 debentures payable to the SBA consist of
subordinated debentures with interest payable semiannually, as follows:
<TABLE>
<CAPTION>
Current 1998 1997
Effective Principal Principal
Issue Date Due Date Interest Rate Amount Amount
--------------- --------------- ------------- ---------- --------
<S> <C> <C> <C> <C>
September 1993 September 2003 3.12(1) $1,500,000 $1,500,000
September 1993 September 2003 6.12 2,220,000 2,220,000
September 1994 September 2004 8.20 2,690,000 2,690,000
December 1995 December 2005 6.54 1,020,000 1,020,000
June 1996 June 2006 7.71 1,020,000 1,020,000
March 1997 March 2007 7.38(2) 430,000 430,000
---------- ----------
$8,880,000 $8,880,000
========== ==========
</TABLE>
(1) Interest rate increases to 6.12% on September 30, 1998
(2) The Company is also required to pay an additional annual user fee of
1% on this debenture
Under the terms of the subordinated debentures, the Company may not
repurchase or retire any of its common stock or make any distributions to
its stockholders other than dividends out of retained earnings (as
computed in accordance with SBA regulations) without the prior written
approval of the SBA.
NOTE 6 - NOTES PAYABLE TO BANKS
At June 30, 1998 and 1997, the Company had loan agreements with four
banks for lines of credit aggregating $33,500,000 and $20,000,000,
respectively. At June 30, 1998 and 1997, the Company had $22,085,000 and
$16,820,000, respectively outstanding under these lines. The loans which
mature at various dates through November 30, 1998 bear interest based on
the Company's choice of the lower of either the reserve adjusted LIBOR
rate plus 150 basis points or the bank's prime rates including certain
fees which make the effective rates range from approximately prime minus
1/4% to prime minus 1/2%. Upon maturity, the Company anticipates
extending the lines of credit for another year as has been the practice
in previous years.
F - 16
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - NOTES PAYABLE TO BANKS, continued
Pursuant to the terms of the agreements the Company is required to comply
with certain terms, covenants and conditions. The Company pledged its
loans receivable and other assets as collateral for the above lines of
credit and since January, 1998 is required to maintain compensating
balances of 5%. Prior to January, 1998 and for 1997, the Company was
required to maintain 10% compensating balances with each bank. At June
30, 1998 and 1997, average compensating balances of $1,104,250 and
$1,682,000, respectively, were maintained by the Company in accordance
with these agreements.
NOTE 7 - PREFERRED STOCK
At June 30, 1995, the Company had 547,271 shares of 3 percent preferred
stock issued to the SBA. Cumulative dividends not declared or paid as of
June 30, 1995 were approximately $533,000. During August 1995, the
Company completed the repurchase of all such shares of preferred stock
from the SBA pursuant to a preferred stock repurchase agreement dated
November 10, 1994. Pursuant to this agreement, the Company repurchased
all 547,271 shares of 3 percent cumulative preferred stock from the SBA
for $3.50 per share, or an aggregate of $1,915,449. The repurchase price
was at a substantial discount to the original issuance price of $10 per
share. In connection with the repurchase, all dividends in arrears on the
preferred shares were extinguished.
As a condition precedent to the repurchase, the Company granted the SBA a
liquidating interest in a newly established restricted capital surplus
account. The surplus account is equal to the amount of the net repurchase
discount. The initial value of the liquidating interest was $3,557,261
which is being amortized over a 60-month period on a straight-line basis.
Should the Company be in default under the repurchase agreement at any
time, the liquidating interest will become fixed at the level immediately
preceding the event of default and will not decline further until such
time as the default is cured or waived. The liquidating interest shall
expire on (i) sixty months from the date of the repurchase agreement, or
(ii) if any event of default has occurred and such default has been cured
or waived, such later date on which the liquidating interest is fully
amortized. Should the Company voluntarily or involuntarily liquidate
prior to the amortization of the liquidating interest, any assets which
are available, after the payment of all debts of the Company, shall be
distributed first to the SBA until the fair market value of such assets
is equal to the amount of the liquidating interest. Such payment, if any,
would be prior in right to any payments made to the Company's
shareholders. The remaining amount restricted under this agreement at
June 30, 1998 and 1997 was approximately $968,000 and $1,680,000,
respectively.
F - 17
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - PREFERRED STOCK, continued
During 1992, the Company authorized the issuance of 752,729 shares of a
new Series B cumulative preferred stock with a 4 percent dividend and a
$10 par value. All preferred shares are restricted solely for issuance to
the SBA. No sales of the Series B preferred shares have occurred to date.
On September 30, 1996, Congress passed a law that in effect prevents the
SBA from making any further purchase of 4% preferred stock from any
specialized small business investment company. Accordingly, the Company
does not anticipate being able to sell any of its authorized Series B
Cumulative Preferred Stock in the future.
NOTE 8 - COMMON STOCK
On June 22, 1998, the Company declared a cash dividend of $0.18 per
common share, or a total of $314,208, and paid July 7, 1998.
During 1998, the Company completed the sale, as part of a private
placement offering, of 462,000 shares of common stock. Total proceeds
from the sale of common stock amounted to $2,888,000 net of directly
related expenses of $115,000.
NOTE 9 - INCOME TAXES
The provision for income taxes for the years ended June 30, 1998, 1997
and 1996 consists of the following:
1998 1997 1996
-------- ------ --------
Federal (benefit) $(1,014) $ 4,568 --
State and city 4,285 24,108 --
------- ------- --------
$ 3,271 $28,676 --
======= ======= ========
NOTE 10 - RELATED PARTY TRANSACTIONS
The Company paid $43,234 and $43,645 to a related law firm for the years
ended June 30, 1998 and 1997, respectively, for the services provided.
The Company generally charges its borrowers loan origination fees to
generate income to offset expenses incurred by the Company for legal fees
paid by the company for loan closing costs.
Prior to January 1, 1996, the Company was a party to a management
agreement with GCG Associates, Inc. ("GCG"), a company that is
wholly-owned by the president of the Company, to engage GCG as its
investment advisor. The agreement which was approved by the SBA, required
that GCG, as advisor, maintain sufficient personnel and pay certain
expenses necessary to operate the Company's business, maintain an office
on behalf of the Company, collect all loans receivable due from
recipients of loans and comply with all official orders of government
agencies, including the SBA.
Under the management agreement, the monthly compensation to the advisor
was computed as one-twelfth of 2 percent of the total assets of the
Company as of the last day of the month immediately preceding such
computation, provided that the amount computed thereby shall not in any
event exceed one-twelfth of the Company's private invested capital and
capitalized retained earnings multiplied by 8 percent (as those terms are
defined by SBA regulations) plus one-twelfth of 1 percent of any
third-party bank financing outstanding on such date, not to exceed the
maximum management fees previously approved by the SBA.
For the year ended June 30, 1996, $210,000 in management fees were paid
in accordance with this agreement.
The managment agreement with GCG was terminated on December 31, 1995.
Effective January 1, 1996, all salary and employee benefit, occupancy and
administrative expenses are paid directly by the Company. These expenses
are included in salaries and benefits expense and miscellaneous
administrative expenses in the statement of income for the year ended
June 30, 1996.
In addition, prior to January 1, 1996, the Company paid an annual legal
retainer fee of $108,000 for the purpose of providing loan closing
services to a firm, certain of whose officers are officers and directors
of the Company. During the year ended June 30, 1996 the Company paid
additional legal fees of $48,902, to the same law firm.
The Company rents office space on a month-to-month basis from an
affiliated entity without a formal lease agreement. Rent expense amounted
to $39,600 for the years ended June 30, 1998, 1997 and 1996.
F - 18
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - COMMITMENTS AND CONTINGENCIES
On June 8, 1998, the Company entered into a $10,000,000 interest rate
Swap transaction with a bank. This Swap transaction was entered into to
protect the Company from an upward movement in interest rates relating to
outstanding bank debt. The Swap transaction calls for a fixed rate of
5.86% for the Company and if the floating one month LIBOR rate is below
the fixed rate then the Company is obligated to pay the bank for the
difference in rates. When the one month LIBOR rate is above the fixed
rate then the bank is obligated to pay the Company for the differences in
rates. This transaction expires on June 8, 2001.
At June 30, 1998 and 1997, the Company had commitments to make loans
totaling $2,568,000 and $1,190,282, respectively, at interest rates
ranging from 9.5% to 16%.
NOTE 12 - REGULATORY MATTERS
The Company entered into an agreement with the SBA, subject to certain
regulatory limitations, on September 9, 1993. As part of the agreement,
the Company agreed to limit the aggregate amount of its senior
indebtedness, consisting of bank debt and the SBA debentures, to certain
specific levels based upon performing assets; the Company agreed to grant
the SBA a subordinate lien on the Company's assets and to have the
Company's notes maintained by a separate custodian; and the Company
agreed to provide periodic financial reports to the SBA on a quarterly
basis.
Effective February 21, 1997, the SBA approved the Company's election to
provide non-disadvantaged business financing to small business concerns
pursuant to SBA regulations and letter of agreement with the Company,
subject to amending the Company's certificate of incorporation to make
such financings. The Company's stockholders approved the amendment to the
certificate of incorporation, which amendment was filed on February 27,
1997 (see Note 1).
NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures represent the Company's best estimate of the
fair value of financial instruments, determined on a basis consistent
with requirements of Statement of Financial Accounting Standards No. 107,
"Disclosure about Fair Value of Financial Instruments".
The estimated fair values of the Company's financial instruments are
derived using estimation techniques based on various subjective factors
including discount rates. Such estimates may not necessarily be
indicative of the net realizable or liquidation values of these
instruments. Fair values typically fluctuate in response to changes in
market or credit conditions. Additionally, valuations are presented as of
a specific point in time and may not be relevant in relation to the
future earnings potential of the Company. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts the
Company will realize in a current market exchange.
F - 19
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS, continued
The use of different market assumptions and/or estimation methodologies
may have a material effect on the estimated fair value amounts.
Loans Receivable - The fair value of loans is estimated at cost net of
the allowance for loan losses. The Company believes that the rates of
these loans approximate current market rates (see Note 3).
Equity Securities - The Company's equity securities consist of
investments in corporations who own and operate Chicago Taxicab
Medallions (71%), two investment advisory firms (11%), a dry cleaner
(4%), and Miami Taxicab Medallions (14%) (see Note 4).
Debentures Payable to Small Business Administration - The fair value of
debentures as of June 30, 1998 was approximately $9,035,000 and was
estimated by discounting the expected future cash flows using the current
rate at which the SBA has extended similar debentures to the Company (see
Note 5).
The fair value of financial instruments that are short-term or reprice
frequently and have a history of negligible credit losses is considered
to approximate their carrying value. Those instruments include balances
recorded in the following captions:
ASSETS LIABILITIES
----------------------------------------- ------------------------
Cash Notes payable, banks
Accrued interest receivable Accrued interest payable
Assets acquired in satisfaction of loans
Receivables from debtors on sales of
assets acquired in satisfaction of loans
NOTE 14 - DEFINED CONTRIBUTION PLAN
On April 15, 1996 the Company adopted a simplified employee pension plan
covering all eligible employees of the Company. Contributions to the plan
are at the discretion of the Board of Directors. During the years ended
June 30, 1998 and 1997, contributions amounted to $63,435 and $58,805,
respectively.
F - 20
<PAGE>
AMERITRANS CAPITAL CORPORATION
1,100,000 SHARE OF COMMON STOCK
-------------------
PROSPECTUS
-------------------
FIRST COLONIAL SECURITIES GROUP, INC. AUERBACH POLLAK & RICHARDSON, INC.
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE YOU
WRITTEN INFORMATION OTHER THAN THIS PROSPECTUS OR TO MAKE REPRESENTATIONS AS TO
MATTERS NOT STATED IN THIS PROSPECTUS. YOU MUST NOT RELY ON UNAUTHORIZED
INFORMATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES OR OUR
SOLICITATION OF YOUR OFFER TO BUY THE SECURITIES IN ANY JURISDICTION WHERE THAT
WOULD NOT BE PERMITTED OR LEGAL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALES MADE HEREUNDER AFTER THE DATE OF THIS PROSPECTUS SHALL CREATE AN
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN OR THE AFFAIRS OF THE COMPANY
HAVE NOT CHANGED SINCE THE DATE HEREOF.
<PAGE>
PART C -- OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
1. Financial Statements.
The following financial statements are included in the Prospectus on
the identified pages.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF MARCUM & KLEIGMAN, LLP,
INDEPENDENT PUBLIC ACCOUNTANTS REPORT F - 2
REPORT OF DELOITTE & TOUCHE, LLP, F - 3
Consolidated Balance Sheets as of June 30, 1998, June 30, 1999 and
March 31, 1999 F - 5
Consolidated Statements of Income for the Years Ended June 30, 1998,
June 30, 1997 and June 30, 1996 and for the Nine Months Ended
March 31, 1999 and March 31, 1998 F - 6
Consolidated Statements of Stockholders' Equity for the Years Ended
June 30, 1998, June 30, 1997 and June 30, 1996 F - 7
Consolidated Statements of Cash Flows for the Years Ended June 30, 1998,
June 30, 1997 and June 30, 1996, and for the Nine Months Ended
March 31, 1999 and March 31, 1998 F - 9
Schedule of Loans F - 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F - 11 - 20
</TABLE>
2. Exhibits
a. Certificate of Incorporation*
b. By-laws*
f.1 Form of subordinated debentures issued to the U. S. Small
Business Administration ("SBA") by Elk Associates Funding
Corporation ("Elk") -- Debenture issued March 26, 1997 -
principal amount -- $430,000; Maturity Date -- March 1, 2007;
Stated Interest Rate -- 7.38%.
The following debentures are omitted pursuant to Rule 483:
a. Debenture issued September 22, 1993 - principal
amount -- $1,500,000; Maturity Date -- September 1,
2003; Stated Interest Rate -- 6.12%.
b. Debenture issued September 22, 1993 - principal
amount -- $2,220,000; Maturity Date -- September 1,
2003; Stated Interest Rate -- 6.12%.
c. Debenture issued September 28, 1994 - principal
amount -- $2,690,000; Maturity Date -- September 1,
2004; Stated Interest Rate -- 8.20%.
d. Debenture issued December 14, 1995 - principal amount
-- $1,020,000; Maturity Date -- December 1, 2005;
Stated Interest Rate -- 6.54%.
e. Debenture issued June 26, 1996 - principal amount --
$1,020,000; Maturity Date -- June 1, 2006; Stated
Interest Rate -- 7.71%.
f.2 Security Agreement between Elk and the SBA, dated September
9, 1993.
f.3 Custodian Agreement, Intercreditor Agreement and amendments
thereto -- See Exhibits j.1, k.2, k.3, and k.4, below.
h.1. Form of Underwriting Agreement
h.2. Form of Agreement among Underwriters**
i.1. 1999 Employee Stock Option Plan*
C-1
<PAGE>
i.2. Non-Employee Director Stock Option Plan
j.1 Custodian Agreement among Elk; Bank Leumi Trust Company of New
York ("Leumi"), Israel Discount Bank of New York ("IDB"), Bank
Hapoalim B.M. ("Hapoalim") and Extebank; the SBA, and IDB as
Custodian; dated September 9, 1993 (the "Custodian
Agreement").
k.1 Agreements between Elk and the SBA.
a. Agreement dated September 9, 1993.
b. Agreement dated February 7, 1997.
k.2 Intercreditor Agreement among Elk, Leumi, IDB, Hapoalim,
Extebank and the SBA, dated September 9,1993 (the
"Intercreditor Agreement").
k.3 Amendments to the Custodian and Intercreditor Agreements.
a. Amendment removing Hapoalim and Extebank and adding
European American Bank ("EAB"), dated September 28,
1994.
b. Form of Amendment adding bank:
i. Amendment adding United Mizrahi Bank and
Trust Company ("UMB"), dated June , 1995.
ii. Amendment adding Sterling National Bank and
Trust Company of New York ("Sterling"),
dated April , 1996 -- omitted pursuant to
Rule 483.
k.4 Bank Intercreditor Agreement among Elk, Leumi, IDB, Hapoalim
and Extebank, dated September 9,1993 (the "Bank Intercreditor
Agreement").
k.5 Amendments to the Bank Intercreditor Agreement.
a. Amendment removing Hapoalim and Extebank and adding
European American Bank ("EAB"), dated September 28,
1994.
b. Form of Amendment adding bank:
i. Amendment adding UMB, dated June , 1995.
ii. Amendment adding Sterling, dated April ,
1996 -- omitted pursuant to Rule 483.
k.6 Grid Demand Promissory Note from Elk to IDB in the principal
amount of $14,000,000, dated July 28, 1998.
k.7 Letter Agreement between Elk and EAB regarding $14,000,000
line of credit, dated September 2, 1998, together with Master
Note in the principal amount of $14,000,000, dated September ,
1998.
C-2
<PAGE>
k.8 Promissory Note (Grid) from Elk to Leumi in the principal
amount of $7,000,000, dated January 4, 1999, together with
side letter dated January 4, 1999.
k.9 Form of indemnity agreement between Ameritrans and each of
its directors and officers.*
l. Opinion and consent of Stursberg & Veith.**
n.1 Consent of Marcum & Kliegman LLP.
n.2 Consent of Deloitte & Touche LLP.
r. Power of attorney authorizing Gary C. Granoff to execute and
file Registration Statement and amendments -- see signature
page of Registration Statement.
- ------------------------------------
* Incorporated by reference from the Registrant's Registration Statement
on Form N-14 (File No. 333-63951), initially filed September 22, 1998.
** To be filed by amendment.
ITEM 25. MARKETING ARRANGEMENTS
See Section 3 of the Underwriting Agreement, which is attached as
Exhibit h.1. hereto, and Section ____ of the Agreement Among Underwriters, which
is attached as Exhibit h.2. hereof.
In connection with the Offering, the Underwriters may over-allot or
effect transactions that stabilize or maintain the market price of the Common
Stock at a level that might otherwise prevail in the open market. Such
stabilizing, if commenced, may be discontinued at any time.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be incurred in
connection with the Offering:
SEC registration fee.........................................$3,869
NASD fees.....................................................1,891
Nasdaq National Market initial listing fee...................48,750
Blue Sky fees and expenses...................................50,000
Accounting fees and expenses.................................50,000
Legal fees and expenses.....................................150,000
Printing and engraving fees..................................60,000
Registrar and transfer agent's fees...........................3,000
Miscellaneous fees and expenses.......................... 32,490
--------
Total.............................................$400,000
C-3
<PAGE>
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
Elk Associates Funding Corporation, a New York corporation, is 100%
owned by the Registrant.
Elk Capital Corporation, a New York corporation, is 100% owned by the
Registrant.
EAF Holding Corporation, a New York corporation, is 100% owned by Elk
Associates Funding Corporation.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
NAME OF CLASS NUMBER OF RECORD HOLDERS
- ------------- ------------------------
Common Stock, par value $.0001 per share 274
ITEM 29. INDEMNIFICATION.
The Certificate of Incorporation of Ameritrans Capital Corporation
("Ameritrans") includes a provision (the "Liability Provision"), authorized
under Section 102(b)(7) of the Delaware General Corporation Law, which
eliminates, to the extent permitted by the Delaware General Corporation Law and
the Investment Company Act of 1940 (the "1940 Act"), the personal liability of a
director to Ameritrans or its stockholders for monetary damages resulting from
the breach of his fiduciary duty as a director. Under the Delaware General
Corporation Law, this provision may not be construed to eliminate or limit a
director's liability for any of the following: breaches of the director's duty
of loyalty to the corporation or its stockholders; acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law;
payment of a dividend or approval of a stock repurchase which is unlawful under
Section 174 of the Delaware General Corporation Law; and transactions from which
the director derives an improper personal benefit. In addition, under the 1940
Act, this provision may not be construed to protect a director against liability
to the corporation or its stockholders for acts or omissions involving willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
The Liability Provision precludes actions for monetary damages against
directors of Ameritrans only with respect to certain violations of a director's
duty of care. Under the Delaware General Corporation Law, absent this provision,
directors could be held liable for negligence in the performance of their duty
of care. The Liability Provision absolves directors of Ameritrans of monetary
liability to Ameritrans and its stockholders for negligence in exercising their
business judgment. A stockholder can prosecute an action against a director for
monetary damages only if he can show a breach of the duty of loyalty, gross
negligence or reckless disregard of his duties, a failure to act in good faith,
intentional misconduct or willful misfeasance, a knowing violation of the law,
an unlawful dividend or stock repurchase, or an improper personal benefit. The
Liability Provision does not affect the ability of Ameritrans or its
stockholders to seek equitable remedies (such as an injunction or rescission)
against a director for breach of his fiduciary duty and does not limit the
liability of directors under other laws, such as the federal securities laws.
The Liability Provision also
C-4
<PAGE>
does not limit the liability of officers or employees of Ameritrans or any
director acting in his capacity as an officer or employee of Ameritrans.
In addition, Ameritrans' By-Laws also includes a provision (the
"Indemnification Provision") that requires Ameritrans to indemnify its directors
and officers, to the maximum extent permitted by the Delaware General
Corporation Law and by the 1940 Act, against liabilities and damages incurred in
their capacity as directors or officers of Ameritrans. Under the Delaware
General Corporation Law, a director or officer of a corporation (i) shall be
indemnified by the corporation for all expenses of litigation or other legal
proceedings brought against him by virtue of his position as a director or
officer to the extent he is successful, on the merits or otherwise, in such
litigation or proceeding, (ii) may be indemnified by the corporation for the
expenses, judgments, fines, and amounts paid in settlement of such litigation or
proceedings (other than an action by or in the right of a corporation, which is
hereinafter referred to as a "derivative action"), even if he is not successful,
if he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation (and, in the case of a criminal
proceeding, had no reason to believe that his conduct was unlawful), (iii) may
be indemnified by the corporation for expenses of a derivative action, even if
he is not successful, if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation,
provided that indemnification may not be made in the case of a derivative action
if the director or officer is adjudged to be liable to the corporation, unless a
court determines that, despite such adjudication but in view of all the
circumstances, he is entitled to indemnification of such expenses, only upon the
determination, by (a) a majority of directors who are not a party to the action
(even though less than a quorum), (b) by a committee of such directors
designated by a majority of such disinterested directors, (c) under certain
circumstances, independent legal counsel in a written opinion, or (d) the
stockholders, that indemnification is proper because the applicable standard of
conduct has been met. Expenses incurred by a director or officer in defending an
action may be advanced by the corporation prior to the final disposition of such
action upon receipt of an undertaking by such director or officer to repay such
expenses if it is ultimately determined that he is not entitled to be
indemnified in connection with the proceeding to which the expenses relate.
These provisions of the Delaware General Corporation Law, by their terms, are
not exclusive of any other rights to which those seeking indemnification or
advances of expenses may be entitled under any by-law, agreement, vote of
stockholders or disinterested directors, or otherwise.
The 1940 Act prohibits the inclusion in Ameritrans' Certificate of
Incorporation or certain other organizational instruments of Ameritrans of a
provision which purports to protect any director or officer of Ameritrans
against liability to Ameritrans or its stockholders for willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in the
conduct of his office. Accordingly, the Indemnification Provision specifically
provides that indemnification shall only be made to the extent permitted by the
1940 Act.
Ameritrans has entered into an indemnity agreement (the "Indemnity
Agreement") with each of its directors and officers. The Indemnity Agreement
clarifies or modifies the indemnification provisions of the Delaware General
Corporation Law as follows: (i) the Indemnity Agreement establishes the
presumption that the director or officer has met the applicable standard of
conduct required for indemnification and provides that prompt indemnification
shall be made unless a determination is made by a majority of Ameritrans
disinterested directors, independent counsel, or a majority of Ameritrans'
stockholders that the director or officer has not met the applicable standard of
conduct; (ii) if the disinterested directors determine that the director or
officer has not met the applicable standard of conduct, the Indemnity Agreement
permits the director or officer to petition a
C-5
<PAGE>
court for an independent determination of whether such officer or director is
entitled to indemnification under the Indemnity Agreement; (iii) the Indemnity
Agreement provides that expenses shall be promptly advanced to a director or
officer upon receipt of an undertaking by him to repay amounts so advanced if it
is ultimately determined that indemnification of such expenses is not
permissible, provided that either (a) such director or officer shall have
provided appropriate security for such undertaking, (b) Ameritrans shall be
insured against losses arising from any such advance payments, or (c) either a
majority of the disinterested directors (even though less than a quorum), a
committee of such directors designated by such disinterested directors, or
independent legal counsel in a written opinion shall have determined, based upon
a review of readily available facts, that there is reason to believe that such
director or officer will be found entitled to indemnification; (iv) the
Indemnity Agreement specifically provides that the indemnification provisions
applicable to a derivative suit cover amounts paid in settlement; and (v) the
Indemnity Agreement specifically permits partial indemnification to be made in
the event that the director or officer is not entitled to full indemnification.
Ameritrans may in the future elect to purchase directors' and officers'
liability insurance, as is permitted by the Delaware General Corporation Law.
Insofar as indemnification for liability arising under the Securities
Act of 1933 (the "1933 Act") may be permitted to directors, officers, and
controlling persons of the registrant pursuant to the foregoing provisions or,
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR.
Not applicable.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
The Registrant maintains at its principal office physical possession of
each account, book or other document required to be maintained by Section 31(a)
of the 1940 Act, as applicable, pursuant to Section 64 of the 1940 Act.
ITEM 32. MANAGEMENT SERVICES
Not applicable.
ITEM 33. UNDERTAKINGS.
C-6
<PAGE>
1. The Registrant hereby undertakes:
(a) to suspend the Offering until the Prospectus is amended if (1)
subsequent to the effective date of this Registration Statement, the
net asset value declines more than ten percent from its net asset value
as of the effective date of the registration statement or (2) the net
asset value increases to an amount greater than its net proceeds as
stated in the Prospectus.
(b) that, for the purpose of determining any liability under the 1933
Act, the information omitted from the form of Prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained
in a form of Prospectus filed by the Registrant under Rule 497(h) under
the 1933 Act shall be deemed to be part of this registration statement
as of the time it was declared effective; and
(c) for the purpose of determining any liability under the 1933 Act,
each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of the securities at that time shall
be deemed to be the initial BONA FIDE offering thereof.
2. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the Company pursuant to the provisions of the Certificate of
Incorporation and By-Laws, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities
Act of 1933 and is, therefore unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by
the Company of expenses incurred or paid by a director, officer or
controlling person of the Company in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered,
the Company will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication for such issue.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement has been signed on its
behalf by the undersigned thereunto duly authorized, in the City of New York and
State of New York on the 12th day of July, 1999.
AMERITRANS CAPITAL CORPORATION
By: /s/ GARY C. GRANOFF
-------------------------------------
Gary C. Granoff, President
As required by the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities and on the dates
indicated.
Know all men by these presents, that each of the undersigned
constitutes and appoints Gary C. Granoff, as his true and lawful
attorney-in-fact and agent, with full power of substitution, for him, and in his
name, place, and stead, in any and all capacities, to sign any and all
amendments, including post-effective amendments, to this registration statement
or any registration statement relating to the offering to which this
registration statement relates that is effective upon filing pursuant to Rule
462(b) under the Securities Act of 1933 and any post-effective amendments
thereto, and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute, may lawfully do or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ GARY C. GRANOFF President, Chairman of the July 12, 1999
- --------------------------------------- Board of Directors
Gary C. Granoff Financial and Accounting Officer)
/s/ ELLEN M. WALKER Vice President, General Counsel July 12, 1999
- --------------------------------------- and Director
Ellen M. Walker
/s/ LEE A. FORLENZA Vice President and Director July 12, 1999
- ---------------------------------------
Lee A. Forlenza
/s/ STEVEN ETRA Vice President and Director July 12, 1999
- ---------------------------------------
Steven Etra
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ MARVIN SABESAN Director July 12, 1999
- ---------------------------------------
Marvin Sabesan
/s/ PAUL CREDITOR Director July 12, 1999
- ---------------------------------------
Paul Creditor
/s/ ALLEN KAPLAN Director July 12, 1999
- ---------------------------------------
Allen Kaplan
/s/ JOHN L. ACIERNO Director July 12, 1999
- ---------------------------------------
John L. Acierno
Director ____ __, 1999
- ---------------------------------------
Howard F. Sommer
/s/ JOHN R. LAIRD Director July 12, 1999
- ---------------------------------------
John R. Laird
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit
- ------- -------
a. Certificate of Incorporation*
b. By-laws*
f.1 Form of subordinated debentures issued to the U.S. Small Business
Administration ("SBA") by Elk Associates Funding Corporation ("Elk") -
Debenture issued March 26, 1997 - principal amount - $430,000;
Maturity Date - March 1, 2007; Stated Interest Rate - 7.38%.
The following debentures are omitted pursuant to Rule 483:
a. Debenture issued September 22, 1993 - principal amount -
$1,500,000; Maturity Date - September 1, 2003;
Stated Interest Rate - 6.12%.
b. Debenture issued September 22, 1993 - principal amount -
$2,220,000; Maturity Date - September 1, 2003;
Stated Interest Rate - 6.12%.
c. Debenture issued September 28, 1994 - principal amount -
$2,690,000; Maturity Date - September 1, 2004;
Stated Interest Rate - 8.20%.
d. Debenture issued December 14, 1995 - principal amount - $1,020,000;
Maturity Date - December 1, 2005; Stated Interest Rate - 6.54%.
e. Debenture issued June 26, 1996 - principal amount - $1,020,000;
Maturity Date - June 1, 2006; Stated Interest Rate - 7.71%.
f.2 Security Agreement between Elk and the SBA, dated September 9, 1993.
f.3 Custodian Agreement, Intercreditor Agreement and amendments thereto -
See Exhibits j.1, k.2, k.3, and k.4, below.
h.1 Form of Underwriting Agreement
h.2. Form of Agreement among Underwriters**
i.1. 1999 Employee Stock Option Plan*
i.2. Non-Employee Director Stock Option Plan
j.1 Custodian Agreement among Elk; Bank Leumi Trust Company of New York
("Leumi"), Israel Discount Bank of New York ("IDB"), Bank Hapoalim
B.M. ("Hapoalim") and Extebank; the SBA, and IDB as Custodian; dated
September 9, 1993 (the "Custodian Agreement").
k.1 Agreements between Elk and the SBA.
a. Agreement dated September 9, 1993.
b. Agreement dated February 7, 1997.
k.2 Intercreditor Agreement among Elk, Leumi, IDB, Hapoalim, Extebank and
the SBA, dated September 9,1993 (the "Intercreditor Agreement").
<PAGE>
k.3 Amendments to the Custodian and Intercreditor Agreements.
a. Amendment removing Hapoalim and Extebank and adding European
American Bank ("EAB"), dated September 28, 1994.
b. Form of Amendment adding bank:
i. Amendment adding United Mizrahi Bank and Trust Company
("UMB"), dated June __, 1995.
ii. Amendment adding Sterling National Bank and Trust Company of
New York ("Sterling"), dated April __, 1996 - omitted pursuant
to Rule 483.
k.4 Bank Intercreditor Agreement among Elk, Leumi, IDB, Hapoalim and
Extebank, dated September 9, 1993 (the "Bank Intercreditor
Agreement").
k.5 Amendments to the Bank Intercreditor Agreement.
a. Amendment removing Hapoalim and Extebank and adding European
American Bank ("EAB"), dated September 28, 1994.
b. Form of Amendment adding bank:
i. Amendment adding UMB, dated June __, 1995.
ii. Amendment adding Sterling, dated April __, 1996 - omitted
pursuant to Rule 483.
k.6 Grid Demand Promissory Note from Elk to IDB in the principal amount of
$14,000,000, dated July 28, 1998.
k.7 Letter Agreement between Elk and EAB regarding $14,000,000 line of
credit, dated September 2, 1998, together with Master Note in the
principal amount of $14,000,000, dated September, 1998.
k.8 Promissory Note (Grid) from Elk to Leumi in the principal amount of
$7,000,000, dated January 4, 1999, together with side letter dated
January 4, 1999.
k.9 Form of indemnity agreement between Ameritrans and each of its
directors and officers.*
l. Opinion and consent of Stursberg & Veith.**
n.1 Consent of Marcum & Kliegman LLP.
n.2 Consent of Deloitte & Touche LLP.
r. Power of attorney authorizing Gary C. Granoff to execute and file
Registration Statement and amendments - see signature page of
Registration Statement.
- -----------------------------------
* Incorporated by reference from the Registrant's Registration Statement
on Form N-14 (File No. 333-63951), initially filed September 22,
1998.
** To be filed by amendment.
<PAGE>
OMB Approval No.: 3245-0081
Expiration Date: 04-30-99
Page 1 of 3
SBIC License No. 02/02-5377 Loan No. 04646751-00
---------- -----------
DEBENTURE
*****************
$430,000 Date of Issuance March 26, 1997
- -------------------------------------- ----------------
ELK ASSOCIATES FUNDING CORPORATION (the "Company")
- --------------------------------------------------------------
(Name of Licensee)
747 Third Avenue, New York, New York 10017
- -------------------------------------------------------------------------------
(Street) (City) (State) (Zip)
For value received, the Company hereby promises to pay to the order of Chase
Manhattan Bank, as Trustee (the "Trustee") under that certain Amended and
Restated Trust Agreement dated as of December 1, 1996, as same may be amended
from time to time, by and among the Trustee, the U.S. Small Business
Administration ("SBA") and SBIC Funding Corporation, and as the Holder hereof
the principal sum of FOUR HUNDRED THIRTY THOUSAND dollars ($430,000) (the
"Original Principal Amount") on March 1, 2007 (the "Maturity Date") at such
location as SBA, as guarantor of this debenture, may direct and to pay interest
semiannually on March 1st and September 1st (the "Payment Dates") of each year,
as herein provided, at the rate of 7.38% per annum (the "Stated Interest Rate"),
and to pay a 1% per annum fee to SBA on the above dates, on the basis of a year
of 365 days, for the actual number of days (including the first day but
excluding the last day) elapsed, on said principal sum from the date of the
issuance hereof until payment of such principal sum has been made or duly
provided for. The Company shall deposit all payments with respect to this
debenture not later than 12:00 noon (Washington, D.C. time) on the applicable
Payment Date or the next business day if the Payment Date is not a business day,
all as directed by SBA.
This debenture is issued by the Company and guaranteed by SBA, pursuant and
subject to Section 303 of the Small Business Investment Act of 1958, as amended
(the "Act") (15 U.S.C. Section 683). This debenture is subject to all of the
regulations promulgated under the Act, as amended from time to time, provided,
however, that 13 C.F.R. Sections 107.1810 and 107.1830 through 107.1850 as in
effect on the date of this debenture are incorporated herein as if fully set
forth.
<PAGE>
Page 2 of 3
The Company may elect to prepay this debenture, as a whole and not in part, on
any Payment Date, in the manner and at the price as next described. The
prepayment price (the "Prepayment Price") shall be an amount equal to the
outstanding principal balance of this debenture, plus interest accrued and
unpaid thereon to the Payment Date selected for prepayment, plus a prepayment
premium (the "Prepayment Premium"). The Prepayment Premium amount is calculated
as a declining percentage (the "Applicable Percentage"). multiplied by the
Original Principal Amount of this debenture in accordance with the following
table:
Consecutive Payment Dates Applicable Percentage
1st or 2nd 5%
3rd or 4th 4%
5th or 6th 3%
7th or 8th 2%
9th or (10th-If Not also Maturity Date) 1%
No Prepayment Premium is required to repay this debenture on its Maturity Date.
No Prepayment Premium is required when the prepayment occurs on a Payment Date
that is on or after the 11th consecutive Payment Date of this debenture, if this
debenture has a 20 consecutive Payment Date term.
The amount of the Prepayment Price shall be sent to SBA or such agent as SBA
shall direct, by wire payment in immediately available funds, not less than
three business days prior to the regular payment date. Until the Company is
notified otherwise in writing by SBA, any Prepayment Price shall be paid to the
account maintained by the Trustee, entitled the SBA Prepayment Subaccount and
shall include an identification of the Company by name and SBA-assigned license
number, the loan number appearing on the face hereof, and such other information
as SBA or its agent may specify.
This debenture shall be deemed issued in the District of Columbia as of the day,
month, and year first stated above. The terms and conditions of this debenture
shall be construed in accordance with, and its validity and enforcement governed
by, federal law.
The warranties, representations, or certifications made to SBA on the SBA Form
1022 or the Company's application letter for an SBA commitment related to this
debenture are incorporated herein as if fully set forth.
<PAGE>
Page 3 of 3
Should any provision of this debenture or any of the documents incorporated by
reference herein be declared illegal or unenforceable by a court of competent
jurisdiction, the remaining provisions shall remain in full force and effect and
this debenture shall be construed as if said provisions were not contained
herein.
All notices to Company which are required or may be given under this debenture
shall be sufficient in all respects if sent to the above-noted address of the
Company. For the purposes of this debenture, the Company may change this address
only upon written approval of SBA.
COMPANY ORGANIZED AS CORPORATION
IN WITNESS WHEREOF, the Company has caused this debenture to be signed by its
duly authorized officer and its corporate seal to be hereunto affixed and
attested by its Secretary or Assistant Secretary as of the date of issuance
stated above.
CORPORATE SEAL
ELK ASSOCIATES FUNDING CORPORATION
----------------------------------
(Name of. Licensee)
By: /s/ Gary C. Granoff
-------------------------------
Gary C. Granoff, President
----------------------------------
(Typed Name and Title)
ATTEST:
/s/ Margaret Chance
- ------------------------------
(Secretary)
Margaret Chance
<PAGE>
SECURITY AGREEMENT
------------------
AGREEMENT made as of the 9th day of September, 1993, by and between the
United States Small Business Administration, 409 3rd Street, S.W., Washington,
D.C. 20416 ("Secured Party") and Elk Associates Funding Corporation, a New York
corporation, having its offices at 600 Third Avenue, Suite 3810, New York, New
York 10016 ("Debtor").
W I T N E S S E T H:
--------------------
WHEREAS, Debtor is licensed by Secured Party as a Specialized Small
Business Investment Company ("SSBIC") pursuant to the Small Business Investment
Act of 1958, as amended (the "Act") and the Regulations promulgated thereunder
(the "Regulations"); and
WHEREAS, Debtor has previously issued to Secured Party, or Secured Party
has guaranteed certain debentures issued pursuant to the Act and Regulations, a
schedule of which is annexed hereto as Exhibit "A" (the "Debentures"); and
WHEREAS, from time to time, Debtor may issue new or additional Debentures
to Secured Party or Secured Party may guarantee repayment of such Debentures as
may be authorized by the Act and the Regulations; and
WHEREAS, Debtor and Secured Party have entered into a certain Agreement
dated as of the date hereof (the "Agreement"), under the terms of which Debtor
agreed to enter into a Security Agreement and grant Secured Party a security
interest in all of Debtor's assets, including its portfolio assets of loans
receivable and securities owned as a result of Debtor's business operations as
an SSBIC, to secure obligations now or hereafter owed or contingently owed by
Debtor to Secured Party; and
WHEREAS, the Debtor has agreed to execute this Security Agreement granting
Secured Party a security interest in the Collateral hereinafter described;
NOW, THEREFORE, in consideration of the premises and the mutual promises
contained herein, it is hereby agreed as follows:
<PAGE>
1. Creation of Security Interest
The Debtor hereby grants and mortgages to the Secured Party and the Secured
Party hereby accepts, a security interest in the Collateral described in
Paragraph 2 herein to secure the payment of the Debentures by Debtor in
accordance with the terms set forth in each Debenture, and any "Obligations"
referred to in Paragraph 2 of this Security Agreement. Debtor agrees to execute
and deliver UCC-1 Financing Statements in favor of Secured Party and to deliver
possession of its instruments and certain other personal property in order to
perfect the security interests herein created in the Collateral hereinafter
described. The security interest granted herein by Debtor to Secured Party shall
be deemed subject to any senior security interest in favor of any bank(s) that
presently have a security interest against Debtor's Collateral (as defined in
Paragraph 2 hereof) and any bank(s) that may hereafter be substituted for
Debtor's existing bank(s) or which may obtain a security interest in addition to
Debtor's existing senior bank(s), but only to the extent of the maximum amount
of allowable senior secured debt that Debtor may be permitted to maintain, as
has previously been agreed to pursuant to any separate written agreement between
Debtor and Secured Party.
2. Collateral
To secure the payment of the Debentures set forth on Exhibit "A" with
interest and any other amounts owing thereon payable in accordance with the
terms of such Debentures, and also to secure any other indebtedness or liability
of the Debtor to the Secured Party (but not including any preferred stock issued
now or hereafter by Debtor to Secured Party), direct or indirect, absolute or
contingent, due or to become due, now existing or hereafter arising, including
all future Debentures which may be issued to or guaranteed by Secured Party at
the option of the Secured Party (all hereinafter called the "Obligations"),
Debtor does hereby grant and convey to Secured Party, a security interest and
does hereby assign as collateral security to Secured Party, the following
Collateral (as such term is used in Article 9 of the New York Uniform Commercial
Code) now owned or hereafter acquired by Debtor or in which Debtor now has or at
any time in the future may acquire any right, title or interest (collectively,
the "Collateral"):
a. Debtor's portfolio of loans receivable from parties who have borrowed
monies from Debtor together with any guarantees thereon, and all other
obligations owing to the Debtor;
b. Investment securities acquired by Debtor as a result of making any
investment in a small concern arising out of Debtor's operations as a
Specialized Small Business Investment Company, including stocks, bonds,
debentures, notes receivable, options, warrants and all other similar investment
2
<PAGE>
securities, instruments and participation agreements/interests carried as assets
by Debtor;
c. All of Debtor's furniture, fixtures, machinery, contract rights,
accounts receivable, and all tangible and intangible assets, including but not
limited to all computer software and any New York City taxi medallion rights,
now owned or later acquired; and
d. All security interests of Debtor in any New York City taxi medallion
acquired as collateral for Debtor's loans to its borrowers. Debtor and Secured
Party further agree that Debtor shall have thirty (30) days from the date hereof
to assign to the Custodian (as hereinafter defined) on behalf of the Senior
Lenders (as hereinafter defined) and the Secured Party fifty (50%) percent of
all security interests of Debtor in any New York City Taxi medallion which
secures a loan made by Debtor and an additional thirty (30) days to assign the
balance of such security interests; provided, however, Secured Party agrees that
Debtor shall have a reasonable period of time beyond such sixty (60) day period
to assign those security interests which collateralize loans with respect to
which Debtor has not, as of the date hereof, received a copy of the recorded
UCC-1 Financing Statement from the applicable recorder's office.
e. All proceeds and products from all Collateral covered by this Security
Agreement, together with all substitutions and replacements of such Collateral
and all proceeds therefrom, and whether or not such Collateral is maintained at
Debtor"s offices at 600 Third Avenue, Suite 3810, New York, New York 10016, or
elsewhere.
To the extent that the same may be necessary, Debtor does hereby assign
to Secured Party all of its rights in and to the Collateral as collateral
security for the Obligations.
3. Debtor warrants, covenants and agrees as follows:
a. Debtor agrees to pay and perform all of the Obligations secured by this
Agreement according to their terms and defend the title to the Collateral
against all persons and against all claims and demands whatsoever, which
Collateral is lawfully owned by the Debtor and is now free and clear of any and
all liens, security interests, claims, charges, encumbrances, taxes and
assessments except for the security interests and collateral assignments granted
hereby and the senior security interests and collateral assignments previously
granted to Israel Discount Bank of New York, Bank Leumi Trust Company of New
York, Extebank and Bank Hapoalim (hereinafter sometimes collectively referred to
as the "Senior Lenders"), subject to the rights of third party participants
pursuant to applicable
3
<PAGE>
bona fide participation agreements and/or participation interests ("Third Party
Participants").
b. Upon the request of the Secured Party, Debtor will furnish further
assurance of title, and do any other acts reasonably necessary to effectuate the
purposes and provisions of this Agreement, including execution of any instrument
or statement required by law or otherwise in order to perfect, continue, modify,
assign, or terminate the security interest of the Secured Party in the
Collateral and pay all costs or filing fees in connection therewith, including
reasonable fees of counsel.
c. Debtor agrees to deliver possession of all original promissory notes and
other instruments (as defined in the New York Uniform Commercial Code), security
agreements and mortgages to Israel Discount Bank of New York (the "Custodian")
to be held by the Custodian for the benefit of the Senior Lenders and Secured
Party pursuant to the terms of the custodian agreement between Debtor, the
Senior Lenders, Secured Party and the Custodian (the "Custodian Agreement").
Subsequent promissory notes, security agreements, mortgages and other
instruments held by Debtor shall also be delivered to the Custodian to be held
in accordance with the terms of the Custodian Agreement.
d. Debtor will not create, incur or permit to exist any liens, charges,
encumbrances, taxes or assessments on the Collateral, except in favor of the
Senior Lenders, and if for bona fide consideration, to Third Party Participants.
e. Debtor agrees to notify the Secured Party in writing of any change in or
discontinuance of Debtor's place of business as required by SBA Regulations.
f. Except for any financing statement filed in favor of the Secured Party
and the Senior Lenders, and except for financing statements evidencing the
interest of Third Party Participants (as set forth in Schedule 1 hereto), no
financing statement covering any of the Collateral is on file in any public
office. Debtor has not granted or given, and shall not grant or give, a security
interest in or financing statement covering the Collateral, or any part thereof,
to anyone other than the Senior Lenders and the Secured Party, without the
Secured Party's prior written consent, provided however that Debtor shall have
the right in its sole discretion to substitute senior institutional bank
lender(s) for Debtor's existing Senior Lenders, and in such event, Secured Party
agrees to amend the Intercreditor Agreement to allow for the substitution of the
new lender provided the aggregate amount of senior bank indebtedness does not
exceed the amount of senior bank indebtedness that Debtor may be entitled to
have in accordance with applicable SBA Regulations or the Agreement or such
lower or higher amount that may have been agreed to pursuant to any subsequent
written agreement in effect from time to time between
4
<PAGE>
Debtor and Secured Party. Notwithstanding the foregoing, Debtor shall be
entitled to sell, assign or transfer any interest in any of the Collateral in
the ordinary course of business, for bona fide consideration, subject to any
restrictions or limitations set forth in the Custodian Agreement.
g. Debtor shall notify Secured Party immediately in writing, of any events
which at any time may cause the representations and warranties or agreements
herein to cease to be true.
4. General Provisions
a. The waiver of or acquiescence in any default by the Debtor, or failure
of the Secured Party to insist upon strict performance by the Debtor of any
warranties or agreements in this Security Agreement, shall not constitute a
waiver of any subsequent or other default or failure.
b. Notices to either party shall be in writing and shall be delivered
personally or by certified mail return receipt requested addressed to the party
at the address herein set forth or otherwise designated in writing.
c. The Uniform Commercial Code in effect in the State of New York shall
govern the rights, duties and. remedies of the parties with respect to the
granting, perfection and enforcement of the security interest set forth in this
Security Agreement and any provisions herein declared invalid under any law
shall not invalidate any other provision of this agreement. The parties agree
that the laws of the United States of America as set forth in the United States
Code, and the Regulations promulgated thereunder, shall be applied to Debtor and
Secured Party with respect to any matter of interpretation of the rights of
either party arising out of their relationship of Debtor holding a license from
Secured Party as a Specialized Small Business Investment Company and Debtor's
and Secured Party's obligations to each other as a result of that relationship.
In any case or controversy resulting from this Security Agreement, the parties
agree that the United States District Court for the Southern District of New
York shall have exclusive jurisdiction with respect to litigation of any claim.
d. The Debtor agrees to execute the necessary financing statements in order
that such financing statements may be filed by or on behalf of the Secured Party
to perfect the Secured Party's interest in the Collateral, subject to the rights
of the Senior Lenders.
5. Events of Default
The following shall constitute an event of default ("Event of Default") by
Debtor:
5
<PAGE>
a. In the event Debtor is in default in the payment of any senior
indebtedness beyond any applicable grace periods and provided that the senior
secured bank(s) have "accelerated" their indebtedness (as that term is commonly
used under the Uniform Commercial Code); or
b. Debtor is in default under any Obligation beyond any applicable grace
periods, and Secured Party has elected to accelerate the payment of the
obligation(s) as provided for pursuant to SBA Regulations, or Secured Party has
transferred the Debtor to "liquidation status", as provided for pursuant to SBA
Regulations.
6. Remedies on Default
Upon any Event of Default of the Debtor and at the option of the Secured
Party, the Obligations secured by this agreement may be "accelerated", in which
event they shall immediately become due and payable in full, and the Secured
Party shall have all the rights, remedies, and privileges as are accorded to a
Secured Party by the Uniform Commercial Code or as may be available to Secured
Party under the Act or Regulations. The Secured Party may exercise such rights,
remedies and privileges either concurrently or in such order as Secured Party
may determine, it being expressly agreed that any such action will not be
considered an election of remedies nor bar Secured Party from any further
remedies provided for by agreement or by law. Nothing contained. in this
paragraph shall be interpreted as restricting in any way SBA's ability to
exercise the rights and remedies available to it under the Act or Regulations.
7. Successors and Assigns
All terms and provisions of this agreement shall be binding upon and shall
inure to the benefit of, and be enforceable by the parties hereto and their
respective legal representatives, successors and assigns.
8. Notices
All communications and notices hereunder shall be in writing and shall be
deemed to have been duly given if sent by United States mail, postage prepaid,
to the parties at the address first above written, or at such other place or
places as the party addressed may have designated by written notice to the
other.
9. Headings
The headings of the paragraph and sections of this agreement are inserted
for convenience only and shall not be deemed to constitute a part hereof.
6
<PAGE>
10. Severability
In the event that any word, sentence, paragraph or article of this
agreement is found to be void or voidable, the balance of this agreement shall
nevertheless be legal and binding with the same force and effect as though the
void or voidable parts were deleted.
11. Entire Agreement
This writing and the documents referred to herein contain the entire
agreement of the parties with respect to its subject material and no
modifications, alterations or waiver of all or any part shall be valid unless
made by a writing and signed by all the parties hereto.
12. Counterparts
This agreement may be executed in two counterparts each of which is an
original, but both of which together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
the day and year first above written.
DEBTOR:
ELK ASSOCIATES FUNDING
CORPORATION
By: /s/ Gary C. Granoff
----------------------------------------
Gary C. Granoff, President
SECURED PARTY:
UNITED STATES SMALL BUSINESS
ADMINISTRATION
By: /s/ Wayne S. Foren
----------------------------------------
Wayne S. Foren Associate
Administrator for Investment
7
<PAGE>
EXHIBITS AND SCHEDULES OMITTED
<PAGE>
1,265,000 Shares
AMERITRANS CAPITAL CORPORATION
Common Stock
(Par Value $.0001 Per Share)
UNDERWRITING AGREEMENT
_____________, 1999
First Colonial Securities Group, Inc.
Auerbach, Pollak & Richardson, Inc.
As Representatives of the several Underwriters
named on Schedule I hereto
c/o First Colonial Securities Group, Inc.
1499 West Palmetto, Suite 312
Boca Raton, Florida 33486
Dear Sirs:
1. Introductory. Ameritrans Capital Corporation, a Delaware corporation
(the "Company"), proposes to sell, pursuant to the terms of this Agreement, to
the several underwriters named on Schedule I hereto (the "Underwriters," or
each, an "Underwriter," which term shall also include any underwriter
substituted as hereinafter provided in Section 12), an aggregate of 1,100,000
shares of the Company's common stock, par value $.0001 per share (the "Common
Stock"). The 1,100,000 shares so proposed to be sold are hereinafter referred to
as the "Firm Shares." The Company also proposes to sell to the Underwriters,
upon the terms and conditions set forth in Section 3 hereof, up to an additional
165,000 shares of Common Stock (the "Option Shares"). The Firm Shares and the
Option Shares are hereinafter referred to collectively as the "Shares." First
Colonial Securities Group, Inc. and Auerbach, Pollak & Richardson, Inc. are
acting as representatives of the several Underwriters and in such capacity are
hereinafter referred to collectively as the "Representatives." Capitalized terms
used in this Agreement without definition have the meanings specified in the
Prospectus (as hereinafter defined).
2. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, the several Underwriters that:
(a) A registration statement on Form N-2 (File No. 333-______)
with respect to the Shares has been prepared in conformity in all material
respects with the requirements of the Securities Act of 1933, as amended (the
"Securities Act"), and the rules and regulations (the "Securities Act Rules and
Regulations") of the Securities and Exchange Commission (the "Commission")
thereunder, and the Investment Company Act of 1940, as amended (the "Investment
<PAGE>
Company Act" and, together with the Securities Act, the "Acts"), and the rules
and regulations thereunder (the "Investment Company Act Rules and Regulations"
and, together with the Securities Act Rules and Regulations, the "Rules and
Regulations"); such registration statement has been filed with the Commission
under the Securities Act and has been declared effective by the Commission under
the Securities Act and no post-effective amendment to such registration
statement has been filed as of the date of this Agreement; one or more
amendments to such registration statement, including in each case an amended
preliminary prospectus, copies of which amendments have heretofore been
delivered to you, have been so prepared and filed. The term "Registration
Statement" means such registration statement, as amended, at the time it was
declared effective by the Commission and shall be deemed to include all
information omitted therefrom in reliance upon Rule 430A and contained in the
Prospectus referred to below. If it is contemplated, at the time this Agreement
is executed, that a post-effective amendment to the registration statement will
be filed and must be declared effective before the offering of the Shares may
commence the term "Registration Statement" as used in this Agreement means the
registration statement as amended by said post effective amendment. The term
"Registration Statement" as used in this Agreement shall also include any
registration statement relating to the Shares that is filed and declared
effective pursuant to Rule 462(b) under the Securities Act. The term
"Prospectus" as used in this Agreement means the prospectus as first filed
pursuant to Rule 497(b), (c) or (h) under the Securities Act, except that if any
revised prospectus shall be provided to the Underwriters by the Company in
conformity with this Agreement for use in connection with the offering of the
Shares which differs from the Prospectus on file at the Commission at the time
the Registration Statement becomes effective (whether or not such revised
prospectus is required to be filed by the Company pursuant to Rule 497(b), (c)
or (h) under the Securities Act), the term "Prospectus" shall refer to such
revised prospectus from and after the time it is first provided to the
Underwriters for such use. The term "Preliminary Prospectus" as used in this
Agreement means the prospectus subject to completion in the form included in the
Registration Statement at the time of the initial filing of the Registration
Statement with the Commission, and as such prospectus shall have been amended
from time to time prior to the date of the Prospectus and any prospectus filed
by the Company with the consent of the Representatives pursuant to Rule 497(a)
under the Securities Act. No document has been or will be prepared or
distributed in reliance on Rule 434 under the Securities Act. For purposes of
the following representations and warranties, to the extent reference is made to
the Prospectus and at the relevant time the Prospectus is not yet in existence,
such reference shall be deemed to be to the most recent Preliminary Prospectus.
(b) Neither the Commission nor any state regulatory authority
has issued or, to the Company's knowledge, threatened to issue any order
preventing or suspending the use of any Preliminary Prospectus, and, at its date
of issue, each Preliminary Prospectus conformed in all material respects with
the requirements of the Acts and did not include any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading; and, when the Registration Statement
became effective and at all times subsequent thereto up to and including the
Closing Dates (as defined in Section 3 hereof) the Registration Statement and
the Prospectus at the time the Registration Statement became effective (unless
the term "Prospectus"
2
<PAGE>
refers to a prospectus which has been provided to the Underwriters by the
Company for use in connection with the offering of the Shares which differs from
the Prospectus on file at the Commission at the time the Registration Statement
became effective, in which case at the time it is first provided to the
Underwriters for such use) and at the Closing Dates, conformed or will conform,
as the case may be, in all material respects to the requirements of the Acts and
the Registration Statement and the Prospectus at such times did not or will not,
as the case may be, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; provided, however, that the foregoing representations,
warranties and agreements shall not apply to information contained in or omitted
from any Preliminary Prospectus or the Registration Statement or the Prospectus
or any amendment thereto in reliance upon, and in conformity with, written
information furnished to the Company by or on behalf of any Underwriter,
directly or through the Representatives, specifically for use in the preparation
thereof; there is no franchise, lease, contract, agreement or other document
required to be described in the Registration Statement or Prospectus or to be
filed as an exhibit to the Registration Statement which is not described or
filed therein as required and the exhibits that have been filed are complete and
correct copies of the documents of which they purport to be copies; and all
descriptions of any such franchises, leases, contracts, agreements or other
documents contained in the Registration Statement are accurate and complete
descriptions of such documents in all material respects and fairly present the
information required to be shown with respect thereto by Form N-2 under the
Acts.
(c) The Company and each of Elk Associates Funding Corporation
("Elk") and Elk Capital Corporation (together, the "Subsidiaries") have been
duly organized and are validly existing and in good standing as corporations
under the laws of their respective jurisdictions of organization, and have the
corporate power and authority to own or lease their properties and to conduct
their respective businesses as described in the Prospectus; the Company and each
of the Subsidiaries are in possession of and operating in compliance in all
material respects with all franchises, grants, registrations, qualifications,
authorizations, licenses, permits, easements, consents, certificates and orders
required for the conduct of their respective businesses as now being conducted
and as described in the Registration Statement and the Prospectus, or for the
ownership, leasing and operation of their respective properties, all of which
are valid and in full force and effect and no such franchise, grant,
registration, consent, certificate or order contains a materially burdensome
restriction not adequately disclosed in the Registration Statement or the
Prospectus; and the Company and each of the Subsidiaries are duly qualified to
do business and are in good standing as foreign corporations in all
jurisdictions where their respective ownership or leasing of properties or the
conduct of their respective businesses requires such qualification and in which
the failure to so qualify would have a Material Adverse Effect (as defined in
subsection 2(i)).
(d) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, (i) neither the
Company nor any of the Subsidiaries has incurred any material liabilities or
obligations, direct or contingent, or entered into any other transactions not in
the ordinary course of business, (ii) there has not been any material adverse
change or development involving a material prospective change in the condition
(financial or otherwise),
3
<PAGE>
properties, business, management, prospects, net worth, capital stock,
investment objectives, investment policies or results of operations of the
Company and the Subsidiaries taken as a whole, or any change in the capital
stock, or material change in the short-term or long-term debt, of the Company
and the Subsidiaries taken as a whole and (iii) there has been no dividend or
distribution of any kind declared, paid or made by the Company or the
Subsidiaries on any class of their respective capital stock.
(e) The pro forma combined financial statements of the Company
and the historical financial statements of Elk (including, in each case, the
notes thereto) set forth in the Prospectus and elsewhere in the Registration
Statement fairly present, on the basis stated in the Registration Statement, the
pro forma combined or historical financial position, as the case may be, of the
Company and the results of operations and changes in financial position of the
Company at the respective dates or for the respective periods therein specified.
Such statements and related notes and schedules have been prepared in accordance
with generally accepted accounting principles applied on a consistent basis
throughout the periods involved (except as otherwise noted therein). The
selected financial and statistical data set forth in the Prospectus under the
caption "Summary Consolidated Financial Data" fairly present, on the basis
stated in the Prospectus, the information set forth therein and have been
compiled on a basis consistent with that of the audited financial statements
included in the registration statement and have been prepared in conformity with
the requirements of the Securities Act and the Securities Act Rules and
Regulations. The unaudited pro forma financial information included in the
Registration Statement and the Prospectus present fairly the information shown
therein, have been prepared in accordance with the Commission's rules and
guidelines with respect to pro forma financial statements, have been properly
compiled on the pro forma bases described therein, and, in the opinion of the
Company, the assumptions used in the preparation thereof are reasonable and the
adjustments used therein are appropriate to give effect to the transactions or
circumstances referred to therein.
(f) Marcum & Kliegman LLP, who have expressed an opinion on
the audited financial statements and related schedules included in the
Registration Statement and the Prospectus are independent certified public
accountants as required by the Securities Act and the Securities Act Rules and
Regulations.
(g) The Company's capital stock conforms to the description
thereof in the Prospectus and has been duly authorized and validly issued and is
fully paid and nonassessable and has been issued in compliance with all federal
and state securities laws and was not issued in violation of or subject to any
preemptive rights or similar rights to subscribe for or purchase securities.
Except as disclosed in or contemplated by the Prospectus and the financial
statements of the Company and related notes thereto included in the Prospectus,
neither the Company nor the Subsidiaries has outstanding any options or warrants
to purchase, or any preemptive rights or other rights to subscribe for or to
purchase any securities or obligations convertible into, or any contracts or
commitments to issue or sell, shares of their respective capital stock or any
such options, rights, convertible securities or obligations. The description of
the Company's stock option and other stock plans or arrangements, and the
options or other rights granted thereunder, as set forth in the Prospectus,
accurately and fairly
4
<PAGE>
presents in all material respects the information required to be shown with
respect to such plans, arrangements, options and rights. All shares of capital
stock of each Subsidiary are owned, directly or indirectly, by the Company free
and clear of any liens, encumbrances, equities or claims.
(h) The Shares to be issued and sold by the Company to the
Underwriters hereunder have been duly and validly authorized and, when issued
and delivered against payment therefor as provided herein, will be duly and
validly issued, fully paid and nonassessable, free of any preemptive or similar
rights and will conform to the description thereof in the Prospectus, and good
and marketable title to the Shares will pass to the Underwriters on the Closing
Dates free and clear of any lien, encumbrance, security interest, claim or
restriction whatsoever except for (a) those restrictions imposed under the
Company's credit agreements filed as exhibits to the Registration Statement and
(b) those restrictions imposed generally under the Investment Company Act, the
Investment Company Act Rules and Regulations, the Small Business Investment Act
of 1958, as amended (the "1958 Act") and the Regulations of the Small Business
Administration ("SBA").
(i) There are no legal or governmental proceedings pending to
which the Company or any of the Subsidiaries or any of their affiliated persons,
as defined under the Investment Company Act, is a party or of which any property
of the Company or any Subsidiary or any of their affiliated persons is subject,
which, if determined adversely to the Company or any Subsidiary or any of their
affiliated persons, might individually or in the aggregate (i) prevent or
materially and adversely affect the transactions contemplated by this Agreement,
(ii) suspend the effectiveness of the Registration Statement, (iii) prevent or
suspend the use of the Preliminary Prospectus in any jurisdiction or (iv) result
in a Material Adverse Effect (as defined below); and to the Company's knowledge
no such proceedings are threatened or contemplated against the Company or any
Subsidiary or any of their affiliated persons by governmental authorities or
others. Except as disclosed in the Prospectus, the Company is not a party nor
subject to the provisions of any material injunction, judgment, decree or order
of any court, regulatory body or other governmental agency or body. "Material
Adverse Effect" means, when used in connection with the Company and the
Subsidiaries, any development, change or effect that could reasonably be
expected to have a material adverse effect on the condition (financial or
otherwise), properties, business, management, prospects, net worth or results of
operations of the Company and the Subsidiaries taken as a whole.
(j) Neither the Company nor any of the Subsidiaries is in
violation of its respective charter, by-laws or other organizational documents
or in default in the performance of any note or other evidence of indebtedness
or any indenture, mortgage, deed of trust, note agreement or other contract,
lease or other instrument to which it is a party or by which it is bound, or to
which any of its property or assets is subject other than defaults which would
not, individually or in the aggregate, result in a Material Adverse Effect and,
as of the Closing Dates, no condition or event shall have occurred which, with
notice or a lapse of time or both, would constitute a default under such
instruments or agreements or result in the imposition of any penalty or
acceleration of any indebtedness other than such defaults, penalties or
acceleration which would not, individually or in the aggregate, result in a
Material Adverse Effect.
5
<PAGE>
(k) The execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated herein will not result in
a breach or violation of any of the terms or provisions of or constitute a
default under any note or other evidence of indebtedness or any indenture,
mortgage, deed of trust, note agreement or other contract, lease or instrument
to which the Company or any of the Subsidiaries is a party or by which any of
them or any of their properties is or may be bound, the certificate of
incorporation, by-laws or other organizational documents of the Company or any
of the Subsidiaries, or any law, order, rule or regulation of any court or
governmental agency or body having jurisdiction over the Company or any of the
Subsidiaries or any of their properties and will not result in the creation of
any lien, charge or encumbrance upon the assets of the Company or the
Subsidiaries.
(l) Other than those obtained prior to the date hereof, no
consent, approval, authorization or order of any court or governmental agency or
body is required for the consummation by the Company of the transactions
contemplated by this Agreement, except such as may be required by the SBA, the
National Association of Securities Dealers, Inc. (the "NASD") or the securities
or "Blue Sky" laws of any jurisdiction in connection with the purchase and
distribution of the Shares by the Underwriters.
(m) The Company and Elk have each duly elected to be treated
by the Commission under the Investment Company Act as a business development
company and all required action has been taken by the Company and Elk under
Section 54 of the Investment Company Act to qualify the Company and Elk as
business development companies and under the Acts to make the public offering
and consummate the sale of the Shares as provided in this Agreement.
(n) Elk is licensed as a Small Business Investment Company
("SBIC") by the SBA under the 1958 Act, and Elk is operating in full compliance
with the 1958 Act and all SBA Regulations applicable to SBICs.
(o) The Company intends to direct the investment of the
proceeds of the Offering (as defined in the Prospectus) in such a manner as to
comply with the requirements of Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"), and, immediately after the Closing Date, the
Company and Elk will each be eligible to qualify as regulated investment
companies under Subchapter M of the Code.
(p) The Company has the full corporate power and authority to
enter into this Agreement and to perform its obligations hereunder (including to
issue, sell and deliver the Shares), and this Agreement has been duly and
validly authorized, executed and delivered by the Company.
(q) The Company and the Subsidiaries are in compliance with,
and conduct their respective businesses in conformity with, all applicable
federal, state, local and foreign laws, rules and regulations of any court or
governmental agency or body except non-compliance which would not result in a
Material Adverse Effect; to the knowledge of the Company, other than as set
forth in the Registration Statement and the Prospectus, no prospective change in
any of such federal, state, local
6
<PAGE>
or foreign laws, rules or regulations has been adopted which, when made
effective, would have a Material Adverse Effect.
(r) The Company and the Subsidiaries have filed all necessary
federal, state, local and foreign income, payroll, franchise and other tax
returns and have paid all taxes shown as due thereon or with respect to any of
their properties, and there is no tax deficiency that has been, or to the
knowledge of the Company is likely to be, asserted against the Company or any of
the Subsidiaries or any of their respective properties or assets that would have
a Material Adverse Effect.
(s) No person or entity has the right to require registration
of shares of Common Stock or other securities of the Company because of the
filing or effectiveness of the Registration Statement or otherwise.
(t) Neither the Company nor the Subsidiaries nor any of their
respective officers, directors or any of their affiliated persons has taken or
will take, directly or indirectly, any action designed or intended to stabilize
or manipulate the price of any security of the Company, or which caused or
resulted in, or which might in the future reasonably be expected to cause or
result in, stabilization or manipulation of the price of any security of the
Company.
(u) The Company and the Subsidiaries own or possess all
patents, trademarks, trademark registrations, service marks, service mark
registrations, tradenames, copyrights, licenses, inventions, trade secrets and
rights described in the Prospectus as being owned by them or any of them or
necessary for the conduct of their respective businesses, and the Company is not
aware of any claim to the contrary or any challenge by any other person to the
rights of the Company and the Subsidiaries with respect to the foregoing. The
Company's and the Subsidiaries' businesses as now conducted and as proposed to
be conducted do not and will not infringe or conflict with in any material
respect any patents, trademarks, service marks, tradenames, copyrights, trade
secrets, licenses or any other intellectual property or franchise right of any
person. No claim has been made against the Company or any Subsidiary alleging
the infringement by the Company or any Subsidiary of any patent, trademark,
servicemark, tradename, copyright, trade secret, license in or other
intellectual property right or franchise right of any person.
(v) The Company and the Subsidiaries have performed all
material obligations required to be performed by them under all contracts
required by Item 24 of Form N-2 under the Securities Act to be filed as exhibits
to the Registration Statement, and neither the Company, any of the Subsidiaries
nor any other party to such contract is in default under or in breach of any
such obligations except such as would not result in a Material Adverse Effect.
Neither the Company nor any of the Subsidiaries has received any notice of such
default or breach.
(w) Neither the Company or any of the Subsidiaries is involved
in any labor dispute which would result in the Material Adverse Effect nor, to
the Company's knowledge, is any such dispute threatened. Neither the Company nor
any of the Subsidiaries is aware that (i) any executive, key employee or
significant group of employees of the Company or any of the Subsidiaries plans
to
7
<PAGE>
terminate employment with the Company or any of the Subsidiaries or (ii) any
such executive or key employee is subject to any noncompete, nondisclosure,
confidentiality, employment, consulting or similar agreement that would be
violated by the present or proposed business activities of the Company or the
Subsidiaries. Neither the Company nor any Subsidiary has or expects to have any
liability for any prohibited transaction or funding deficiency or any complete
or partial withdrawal liability with respect to any pension, profit sharing or
other plan which is subject to the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), to which the Company or any Subsidiary makes or ever
has made a contribution and in which any employee of the Company or any
Subsidiary is or has ever been a participant. With respect to such plans, the
Company and each Subsidiary are in compliance in all material respects with all
applicable provisions of ERISA.
(x) The Company has obtained the written agreement described
in Section 8(j) of this Agreement from each of its officers, directors and
holders of Common Stock listed on Schedule II hereto.
(y) The Company and the Subsidiaries have, and the Company and
the Subsidiaries as of the Closing Dates will have, good and marketable title in
fee simple to all real property and good and marketable title to all personal
property owned or proposed to be owned by them, in each case free and clear of
all liens, charges, encumbrances and defects except as disclosed in the
Prospectus or such as would not have a Material Adverse Effect, and any real
property and buildings held under lease by the Company and the Subsidiaries or
proposed to be held after giving effect to the transactions described in the
Prospectus are, or will be as of the Closing Dates, held by them under valid,
subsisting and enforceable leases with such exceptions as would not have a
Material Adverse Effect, in each case except as described in or contemplated by
the Prospectus.
(z) The Company and the Subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and in such
amounts as are customary in the businesses in which they are engaged or propose
to engage after giving effect to the transactions described in the Prospectus;
and neither the Company nor any Subsidiary has any reason to believe that it
will not be able to renew such insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers as may be necessary
to continue their business at a cost that would not have a Material Adverse
Effect.
(aa) Other than as contemplated by this Agreement or as
disclosed in the Prospectus, there is no broker, finder or other party that is
entitled to receive from the Company or the Subsidiaries any brokerage or
finders' fee or other fee or commission as a result of any of the transactions
contemplated by this Agreement.
(bb) Neither the Company or any of the Subsidiaries, nor any
director, officer, agent or employee acting on behalf of the Company or the
Subsidiaries has (i) used any corporate funds for any unlawful contribution,
gift, entertainment or other unlawful expense relating to political activity,
(ii) made any direct or indirect unlawful payment to any foreign or domestic
government official or employee from corporate funds, (iii) violated or is in
violation of any provision of the Foreign Corrupt
8
<PAGE>
Practices Act of 1977 or (iv) made any bribe, rebate, payoff, influence payment,
kickback or other unlawful payment.
(cc) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets, (iii) access to assets is permitted only in
accordance with management's general or specific authorization and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(dd) To the Company's knowledge, neither the Company, any of
the Subsidiaries nor any employee or agent of the Company or any of the
Subsidiaries has made any payment of funds of the Company or any of the
Subsidiaries or received or retained any funds in violation of any law, rule or
regulation, which payment, receipt or retention of funds is of a character
required to be disclosed in the Prospectus.
(ee) Each certificate signed by any officer of the Company and
delivered to the Underwriters or counsel for the Underwriters in connection with
this Agreement or the transactions contemplated hereby shall be deemed to be a
representation and warranty by the Company as to the matters covered thereby.
(ff) To the Company's knowledge, all hardware and software
products used by the Company in the administration and the business operations
of the Company will be able to accurately process date data (including, but not
limited to calculating, comparing and sequencing) from, into and between the
twentieth century (through 1999), the year 2000 and the twenty-first century,
including leap year calculations, when used in accordance with the product
documentation accompanying such hardware and software products.
3. Purchase by, and Sale and Delivery to, the Underwriters; Closing
Dates.
(a) On the basis of the representations, warranties, covenants
and agreements herein contained, but subject to the terms and conditions herein
set forth, the Company agrees to sell to the several Underwriters the Firm
Shares and the Underwriters agree, severally and not jointly, to purchase the
Firm Shares from the Company, the number of Firm Shares to be purchased by each
Underwriter being set opposite its name on Schedule I, subject to adjustment in
accordance with Section 12 hereof.
(b) The purchase price per share to be paid by the
Underwriters to the Company will be $________ per share (the "Purchase Price")
which represents the offering price set forth in the Prospectus less an
underwriting discount of 8.75%.
9
<PAGE>
(c) The Company will deliver the Firm Shares to the
Representatives for the respective accounts of the several Underwriters [(in the
form of definitive certificates) issued in such names and in such denominations]
as the Representatives may direct by notice in writing to the Company given at
or prior to 12:00 noon, New York City time, on the second full business day
preceding the Closing Date or, if no such direction is received, in the names of
the respective Underwriters or in such other names as First Colonial may
designate (solely for the purpose of administrative convenience) and in such
denominations as First Colonial may determine, against payment of the aggregate
Purchase Price therefor by federal funds wire transfer (same day funds) to an
account or accounts previously designated in writing by the Company, all at the
offices of ______________ ______________________________________________. The
time and date of the delivery and closing shall be at 10:00 a.m., New York City
time, on ________________, 1999, in accordance with Rule 15c6-1 of the Exchange
Act. [The Company will bear the one-day cost of funds of First Colonial in
providing the aggregate Purchase Price in same day funds, rather than next day
funds.] The time and date of such payment and delivery are herein referred to as
the "Closing Date." The Closing Date and the location of delivery of, and the
form of payment for, the Firm Shares may be varied by agreement between the
Company and First Colonial. The Closing Date may be postponed pursuant to the
provisions of Section 12.
(d) The Company shall make the certificates for the Firm
Shares available to the Representatives for examination on behalf of the
Underwriters not later than 10:00 a.m., New York City time, on the business day
preceding the Closing Date at the offices of _______________________________
______________________________________.
(e) It is understood that First Colonial, may (but shall not
be obligated to) make payment to the Company on behalf of any Underwriter or
Underwriters, for the Shares to be purchased by such Underwriter or
Underwriters. Any such payment by First Colonial or Auerbach shall not relieve
such Underwriter or Underwriters from any of its or their other obligations
hereunder.
(f) The several Underwriters propose to make a public offering
of the Firm Shares (other than to residents of or in any jurisdiction in which
qualification of the Firm Shares is required and has not become effective) at
the public offering price and upon the other terms set forth in the Prospectus
as soon after the effectiveness of the Registration Statement as in their
judgment is advisable. The Representatives shall promptly advise the Company of
the making of the public offering.
(g) For the purpose of covering any over-allotments in
connection with the distribution and sale of the Firm Shares as contemplated by
the Prospectus, the Company hereby grants to the Underwriters an option to
purchase, severally and not jointly, up to the aggregate number of shares of
Option Shares. The price per share to be paid for the Option Shares shall be the
Purchase Price. The option granted hereby may be exercised as to all or any part
of the Option Shares at any time, but only once, not more than 30 days
subsequent to the effective date of this Agreement. No Option Shares shall be
sold and delivered unless the Firm Shares previously have been, or
10
<PAGE>
simultaneously are, sold and delivered. The right to purchase the Option Shares
or any portion thereof may be surrendered and terminated at any time prior to
exercise upon notice by the Underwriters to the Company. The option granted
hereby may be exercised by the Underwriters by giving written notice from First
Colonial to the Company setting forth the number of Option Shares to be
purchased by them and the date and time for delivery of and payment for the
Option Shares. Each date and time for delivery of and payment for the Option
Shares (which may be the Closing Date, but not earlier) is herein called the
"Option Closing Date" and shall in no event be earlier than two business days
nor later than five business days after written notice is given. The Option
Closing Date and the Closing Date are herein collectively called the "Closing
Dates." All purchases of Option Shares from the Company shall be made on a pro
rata basis. Option Shares shall be purchased for the account of each Underwriter
in the same proportion as the number of Firm Shares set forth opposite such
Underwriter's name on Schedule I hereto bears to the total number of Firm Shares
(subject to adjustment by the Underwriters to eliminate odd lots). Upon exercise
of the option by the Underwriters, the Company agrees to sell to the
Underwriters the number of Option Shares set forth in the written notice of
exercise and the Underwriters agree, severally and not jointly and subject to
the terms and conditions herein set forth, to purchase the number of such shares
determined as aforesaid. The Company will deliver the Option Shares to the
Underwriters (in the form of definitive certificates, issued in such names and
in such denominations as the Representatives may direct by notice in writing to
the Company given at or prior to 12:00 noon, New York City time, on the second
full business day preceding the Option Closing Date or, if no such direction is
received, in the names of the respective Underwriters or in such other names as
First Colonial may designate (solely for the purpose of administrative
convenience) and in such denominations as First Colonial may determine, against
payment of the aggregate Purchase Price therefor by certified or official bank
check or checks in New York Clearing House funds (next day funds), payable to
the order of the Company all at the offices of ____________________________. The
Company shall make the certificates for the Option Shares available to the
Underwriters for examination not later than 10:00 a.m., New York City time, on
the business day preceding the Option Closing Date at the offices of
_____________________________________________. The Option Closing Date and the
location of delivery of, and the form of payment for, the Option Shares may be
varied by agreement between the Company and First Colonial. The Option Closing
Date may be postponed pursuant to the provisions of Section 12.
4. Covenants and Agreements of the Company. The Company covenants and
agrees with the several Underwriters that:
(a) The Company will (i) if the Company and the
Representatives have determined not to proceed pursuant to Rule 430A, use its
best efforts to cause the Registration Statement to become effective, (ii) if
the Company and the Representatives have determined to proceed pursuant to Rule
430A, use its best efforts to comply with the provisions of and make all
requisite filings with the Commission pursuant to Rule 430A and Rule 497 of the
Securities Act Rules and Regulations and (iii) if the Company and the
Representatives have determined to deliver Prospectuses pursuant to Rule 434 of
the Securities Act Rules and Regulations, to use its best efforts to comply with
all the applicable provisions thereof. The Company will advise the
Representatives promptly as to the time
11
<PAGE>
at which the Registration Statement becomes effective, will advise the
Representatives promptly of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of the institution
of any proceedings for such purposes, and will use its best efforts to prevent
the issuance of any such stop order, and to obtain as soon as possible the
lifting thereof, if issued. The Company will advise the Representatives promptly
of the receipt of any comments of the Commission or any request by the
Commission for any amendment of or supplement to the Registration Statement or
the Prospectus or for additional information and will not at any time file any
amendment to the Registration Statement or supplement to the Prospectus which
shall not previously have been submitted to the Representatives a reasonable
time prior to the proposed filing thereof or to which the Representatives shall
reasonably object in writing or which is not in compliance with the Acts. The
Company will advise the Representatives promptly of receipt by the Company or
any representative or attorney of the Company of any other communication from
the Commission relating to (i) the Company, if received during the time a
Prospectus relating to the Shares is required to be delivered under the
Securities Act, or (ii) the Registration Statement, any Preliminary Prospectus,
the Prospectus or the transactions contemplated by this Agreement.
(b) The Company will promptly prepare and file with the
Commission any amendments or supplements to the Registration Statement or the
Prospectus which in the judgment of the Company or in the reasonable opinion of
the Representatives may be necessary to enable the several Underwriters to
continue the distribution of the Shares and will use its best efforts to cause
the same to become effective as promptly as possible.
(c) If at any time after the effective date of the
Registration Statement when a prospectus relating to the Shares is required to
be delivered under the Securities Act any event relating to or affecting the
Company or any of the Subsidiaries occurs as a result of which the Prospectus or
any other prospectus as then in effect would include an untrue statement of a
material fact, or omit to state any material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, or if it is necessary at any time to amend the Prospectus to
comply with the Acts, the Company will promptly notify the Representatives
thereof and will prepare an amended or supplemented prospectus which will
correct such statement or omission.
(d) The Company will deliver to the Representatives, at or
before the Closing Dates, copies of the Registration Statement as originally
filed with the Commission, and all amendments thereto including all financial
statements and exhibits thereto, and will deliver to the Representatives such
number of copies of the Registration Statement, including such financial
statements but without exhibits, and all amendments thereto, as the
Representatives may reasonably request. The Company will deliver or mail to or
upon the order of the Representatives, from time to time until the effective
date of the Registration Statement, as many copies of the Preliminary Prospectus
as the Representatives may reasonably request. The Company will deliver or mail
to or upon the order of the Representatives on the date of the public offering,
and thereafter from time to time during the period when delivery of a prospectus
relating to the Shares is required under the
12
<PAGE>
Securities Act, as many copies of the Prospectus, in final form or as thereafter
amended or supplemented as the Representatives may reasonably request.
(e) The Company will make generally available to its
shareholders not later than 45 days after the end of the period covered thereby,
an earnings statement of the Company (which need not be audited) that shall
comply with Section 11(a) of the Act and cover a period of at least 12
consecutive months beginning not later than the first day of the Company's
fiscal quarter next following the Effective Date.
(f) The Company will furnish to its shareholders annual
reports containing financial statements audited by independent certified public
accountants and with quarterly summary financial information in reasonable
detail which may be unaudited. During the period of five years from the date
hereof, the Company will deliver to the Representatives and, upon request, to
each of the other Underwriters, as soon as they are available, copies of each
annual report of the Company and each other report furnished by the Company to
its shareholders and will deliver to the Representatives, (i) as soon as they
are available, copies of any other reports (financial or other) which the
Company shall publish or otherwise make available to its shareholders as such,
(ii) as soon as they are available, copies of any reports and financial
statements furnished to or filed with the Commission or any national securities
exchange or the Nasdaq National Market and (iii) from time to time such other
information concerning the Company as the Representatives may reasonably
request. So long as the Company has active subsidiaries, such financial
statements will be on a consolidated basis to the extent the accounts of the
Company and the Subsidiaries are consolidated in reports furnished to its
shareholders generally. Separate financial statements shall be furnished for
Subsidiaries whose accounts are not consolidated but which at the time are
significant subsidiaries as defined in the Securities Act Rules and Regulations.
(g) The Company will use its best efforts to cause the Shares
to be duly appropriate for quotation on the Nasdaq National Market prior to the
Closing Date.
(h) The Company will maintain a transfer agent and registrar
for its Common Stock.
(i) The Company will not, without the prior written consent of
First Colonial, offer, sell, assign, transfer, encumber, contract to sell, grant
an option to purchase or otherwise dispose of any shares of Common Stock or
securities convertible into or exercisable or exchangeable for Common Stock
(including, without limitation, Common Stock of the Company which may be deemed
to be beneficially owned by the Company in accordance with the Securities Act
Rules and Regulations) during the 180 days following the date of the Prospectus
first filed pursuant to Rule 497(b), (c) or (h), other than (i) the Company's
sale of Shares hereunder and the Company's issuance of Common Stock upon the
exercise of stock options which are outstanding on the Closing Date or described
in the Prospectus and (ii) the Company's issuance of stock options which are
described in the Prospectus.
13
<PAGE>
(j) The Company will apply the net proceeds from the sale of
the Shares as set forth in the description under the caption "Use of Proceeds"
in the Prospectus.
(k) The Company will supply the Representatives with copies of
all written correspondence to and from, and all documents issued to and by, the
commission in connection with the registration of the Shares under the
Securities Act and the Nasdaq National Market.
(l) Prior to the Closing Dates, the Company will furnish to
the Representatives, as soon as they have been prepared, copies of any unaudited
interim consolidated financial statements of the Company and its subsidiaries
for any periods subsequent to the periods covered by the financial statements
appearing in the Registration Statement and the Prospectus.
(m) Prior to the Closing Dates, unless required under the Acts
or the Rules and Regulations, the Company will issue no press release or other
communications directly or indirectly and hold no press conference with respect
to the Company or any of its subsidiaries, the financial condition, results of
operation, business, prospects, assets or liabilities of any of them, or the
offering of the Shares, without the prior written consent of the
Representatives, which shall not be unreasonably withheld. For a period of 12
months following the Closing Date, the Company will use its best efforts to
provide to the Representatives copies of each press release or other public
communications with respect to the financial condition, results of operations,
business, prospects, assets or liabilities of the Company at least 24 hours
prior to the public issuance thereof or such longer advance period as may
reasonably be practicable.
(n) During the period of five years hereafter, the Company
will furnish to the Representatives, and upon request of the Representatives, to
each of the Underwriters, (i) as soon as practicable after the end of each
fiscal year, copies of the annual report of the Company containing the balance
sheet of the Company as of the close of such fiscal year and statements of
income, shareholders' equity and cash flows for the year then ended and the
opinion thereon of the Company's independent certified public accountants, (ii)
as soon as practicable after the filing thereof, copies of each proxy statement,
Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Report on Form 8-K or
other report filed by the Company with the Commission, or the Nasdaq National
Market or any national securities exchange, (iii) as soon as available, copies
of any report or communication of the Company mailed generally to holders of its
Common Stock and (iv) all public reports and all reports and financial
statements furnished by the Company to the Commission pursuant to the Investment
Company Act and the Investment Company Act Rules and Regulations thereunder.
(o) The Company agrees to retain First Colonial as a financial
advisor for the Company for a period of two (2) years from and after the date of
the Prospectus, at a fee of $3,000 per month, plus out-of-pocket expenses; such
fee, aggregating $72,000, shall be due and payable in full at the closing of the
Shares.
14
<PAGE>
5. Payment of Expenses
(a) The Company will pay or cause to be paid (directly or by
reimbursement) all costs, fees and expenses incurred in connection with and
expenses incident to the performance of the obligations of the Company under
this Agreement, as follows: (i) all expenses and taxes incident to the issuance
and delivery of the Shares to the Representatives, (ii) all expenses incident to
the registration of the Shares under the Securities Act, (iii) the costs of
preparing stock certificates (including printing and engraving costs), (iv) all
fees and expenses of the registrar and transfer agent of the Shares, (v) all
necessary issue, transfer and other stamp taxes in connection with the issuance
and sale of the Shares to the Underwriters, (vi) all fees and expenses of the
Company's counsel and the Company's independent certified public accountants,
(vii) all costs and expenses incurred in connection with the preparation,
printing, filing, shipping and distribution of the Registration Statement, each
Preliminary Prospectus and the Prospectus (including all exhibits and financial
statements) and all amendments and supplements provided for herein, the Master
Agreement Among Underwriters between the Representatives and the Underwriters,
if any, the Master Selected Dealer Agreement, if any, the Blue Sky memoranda and
this Agreement, (viii) all filing fees, reasonable attorneys' fees and expenses
incurred by the Company or the Underwriters in connection with exemptions from
qualifying or registering (or obtaining qualification or registration of) all or
any part of the Shares for offer and sale and determination of its eligibility
for investment under the Blue Sky or other securities laws of such jurisdictions
as the Representatives may designate, (ix) all fees and expenses paid or
incurred in connection with filings made with the NASD, (x) all fees and
expenses paid or incurred in connection with the listing of the Shares on the
Nasdaq National Market and (xi) all other costs, fees and expenses incurred by
the Company incident to the performance of the Company's obligations hereunder
which are not otherwise specifically provided for in this Section.
(b) In addition to the foregoing, the Company agrees to pay to
the Underwriters at the closing a non-accountable expense allowance in the
amount of 2.75% of the gross dollar amount of the offering to the public
(including the Over-Allotment Option, if exercised), out of which a forty-five
thousand ($45,000) dollar advance payment has been made. The Underwriters shall
pay their own costs and expenses, including the costs and expenses of their
counsel, any transfer taxes on the Shares which they may sell, and the expenses
of advertising any offering of the Shares made by the Underwriters.
6. Indemnification and Contribution.
(a) The Company shall indemnify and hold harmless each
Underwriter, its officers, directors, employees, advisors and attorneys and each
person, if any, who controls each Underwriter within the meaning of the Act,
against any and all loss, liability, claim, damage and expense whatsoever,
including, but not limited to, any and all reasonable expenses whatsoever
incurred in investigating, preparing or defending against any litigation,
commenced or threatened, or any claim whatsoever or in connection with any
investigation or inquiry of, or action or proceeding that may be brought
against, the respective indemnified parties, arising out of or based upon any
breach of the
15
<PAGE>
Company's representations and warranties made in this Agreement and any untrue
statements or alleged untrue statements of a material fact contained in any
Preliminary Prospectus, the Registration Statement or the Prospectus, any
application or other document (in this Section 6 collectively called
"application") executed by the Company and based upon written information
furnished by or on behalf of the Company filed in any jurisdiction in order to
qualify all or any part of the Shares under the securities laws thereof or filed
with the SEC or the NASD, or the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the statements
therein not misleading; provided, however, that the foregoing indemnity:
(x) shall not apply to statements in or omissions
from any Preliminary Prospectus, the Registration Statement or the Prospectus,
or in any application or in any communication to the SEC, as the case may be,
made in reliance upon and in conformity with information supplied to the Company
in writing by or on behalf of any Underwriter through the Representatives
concerning such Underwriters (unless expressly for use therein); and
(y) with respect to any Preliminary Prospectus,
shall not inure to the benefit of any Underwriter from whom the person asserting
any such losses, claims, damages, liabilities or expenses purchased the Shares
if, at or prior to the written confirmation of the sale of such Shares, a copy
of an amended Preliminary Prospectus or the Prospectus (or the Prospectus as
amended or supplemented) was delivered to such Underwriter but was not sent, or
delivered to such person and the untrue statement or omission of a material fact
contained in such Preliminary Prospectus was corrected in the amended
Preliminary Prospectus or Prospectus (or the Prospectus as amended or
supplemented).
This indemnity agreement will be in addition to any liability the Company may
otherwise have.
(b) Each Underwriter, severally and not jointly, shall
indemnify and hold harmless the Company, each of the directors of the Company,
each of the officers of the Company who shall have signed the Registration
Statement, and each other person, if any, who controls the Company within the
meaning of the Act to the same extent as the foregoing indemnities from the
Company to the several Underwriters as set forth in Section 8(a) hereof, but
only with respect to any loss, liability, claim, damage or expense resulting
from statements or omissions, or alleged statements or omissions, if any, made
in any Preliminary Prospectus, the Registration Statement or the Prospectus, or
in any application or in any communication to the SEC, as the case may be, made
in reliance upon and in conformity with information supplied to the Company in
writing by or on behalf of any Underwriter through the Representatives
concerning such Underwriter expressly for use therein. This indemnity agreement
will be in addition to any liability which such Underwriter may otherwise have.
(c) If any action, inquiry, investigation or proceeding is
brought against any person in respect of which indemnity may be sought pursuant
to any of the two preceding paragraphs, such person (hereinafter called the
"indemnified party") shall, promptly after notification of, or receipt of
service of process for, such action, inquiry, investigation or proceeding,
notify in writing the party or parties against whom indemnification is to be
sought (hereinafter called the "indemnifying party")
16
<PAGE>
of the institution of such action, inquiry, investigation or proceeding and the
indemnifying party, upon the request of the indemnified party, shall assume the
defense of such action, inquiry, investigation or proceeding, including the
employment of counsel (reasonably satisfactory to such indemnified party) and
payment of reasonable expenses. No indemnification provided for in this Section
6 shall be available to any indemnified party who shall fail to give such notice
if the indemnifying party does not otherwise have knowledge of such action,
inquiry, investigation or proceeding, to the extent that such indemnifying party
has been materially prejudiced by the failure to give such notice, but the
omission to so notify the indemnifying party shall not relieve the indemnifying
party otherwise than under this Section 6. Such indemnified party or controlling
person shall have the right to employ its or their own counsel in any such case,
but the fees and expenses of such counsel shall be at the expense of such
indemnified party unless the employment of such counsel shall have been
authorized in writing by the indemnifying party in connection with the defense
of such action. If such indemnified party or parties shall have been advised by
counsel that there may be a conflict between the positions of the indemnifying
party or parties and of the indemnified party or parties or that there may be
legal defenses available to such indemnified party or parties different from or
in addition to those available to the indemnifying party or parties, the
indemnified party or parties shall be entitled to select counsel (such counsel,
"Separate Counsel") to conduct the defense to the extent determined by such
counsel to be necessary to protect the interests of the indemnified party or
parties and the reasonable fees and expenses of such Separate Counsel shall be
borne by the indemnifying party.
(d) If the indemnification provided for in this Section 6 is
unavailable to, or insufficient to hold harmless an indemnified party under
Sections 6(a) or (b) hereof in respect of any losses, liabilities, claims,
damages or expenses (or actions, inquiries, investigations or proceedings in
respect thereof) referred to therein, except by reason of the provisos set forth
in Section 6(a) hereof or the failure to give notice as required in Section 6(c)
hereof (provided that the indemnifying party does not have knowledge of the
action, inquiry, investigation or proceeding and to the extent such party has
been materially prejudiced by the failure to give such notice), then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, liabilities, claims, damages or
expenses (or actions, inquiries, investigations or proceedings in respect
thereof) in such proportion as is appropriate to reflect the relative benefits
received by the Company on the one hand and the Underwriters on the other from
the offering of the Shares. If, however, the allocation provided by the
immediately preceding sentence is not permitted by applicable law, then each
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company on the one hand and
the Underwriters on the other in connection with the statements or omissions
which resulted in such losses, liabilities, claims or reasonable expenses (or
actions, inquiries, investigations or proceedings in respect thereof), as well
as any other relevant equitable considerations. The relative benefits received
by the Company on the one hand and the Underwriters on the other shall be deemed
to be in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company bears to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover page of the Prospectus. The relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
17
<PAGE>
a material fact relates to information supplied by the Company on the one hand
or the Underwriters on the other hand and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section 6(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to above in this Section 6(d). The amount paid
or payable by an indemnified party as a result of the losses, liabilities,
claims, damages or reasonable expenses (or actions, inquiries, investigations or
proceedings in respect thereof) referred to above in this Section 6(d) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this Section 6(d), (i) the
provisions of the Agreement Among Underwriters shall govern contribution among
Underwriters, (ii) no Underwriter (except as provided in the Agreement Among
Underwriters) shall be required to contribute any amount in excess of the
underwriting discounts and commissions applicable to the Shares purchased by
such Underwriter, and (iii) no person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this Section 6(d) to
contribute are several in proportion to their individual underwriting
obligations and not joint.
7. Survival of Indemnities, Representations, Warranties, etc. The
respective indemnities, covenants, agreements, representations, warranties and
other statements of the Company and the several Underwriters, as set forth in
this Agreement or made by them respectively, pursuant to this Agreement, shall
remain in full force and effect, regardless of any termination or cancellation
of this Agreement or any investigation made by or on behalf of any Underwriter,
the Company or any of its officers or directors or any controlling person, and
shall survive delivery of and payment for the Shares.
8. Conditions of Underwriters' Obligations. The respective obligations
of the several Underwriters hereunder shall be subject to the accuracy, at and
(except as otherwise stated herein) as of the date hereof and at and as of the
Closing Dates, of the representations and warranties made herein by the Company,
to compliance at and as of the Closing Dates by the Company with its covenants
and agreements herein contained and other provisions hereof to be satisfied at
or prior to the Closing Dates, and to the following additional conditions:
(a) The Registration Statement shall have become effective and
no stop order suspending the effectiveness thereof shall have been issued and no
proceedings for that purpose shall have been initiated or, to the knowledge of
the Company or the Representatives, shall be threatened by the Commission, and
any request for additional information on the part of the Commission (to be
included in the Registration Statement or the Prospectus or otherwise) shall
have been complied with to the reasonable satisfaction of the Representatives.
Any filings of the Prospectus, or any supplement thereto, required pursuant to
Rule 497 or Rule 434 of the Securities Act Rules and Regulations, shall
18
<PAGE>
have been made in the manner and within the time period required by Rule 497 and
Rule 434 of the Securities Act Rules and Regulations, as the case may be.
(b) There shall not have occurred any Material Adverse Effect
or any change in the investment objectives, investment policies, capital stock,
short-term or long-term debt of the Company and the Subsidiaries taken as a
whole, such that (i) the Registration Statement or the Prospectus, or any
amendment or supplement thereto, contains an untrue statement of fact which, in
the opinion of the Representatives, is material, or omits to state a fact which,
in the opinion of the Representatives, is required to be stated therein or is
necessary to make the statements therein not misleading in any material respect
or (ii) it is inadvisable in the sole judgment of the Representatives to proceed
with the public offering or purchase the Shares as contemplated hereby.
(c) No legal or governmental action, suit or proceeding
affecting the Company which is material and adverse to the Company or which
affects or may affect the Company's ability to perform its obligations under
this Agreement shall have been instituted or threatened and there shall have
occurred no material adverse development in any existing such action, suit or
proceeding.
(d) At the time of execution of this Agreement, the
Representatives shall have received from Marcum & Kliegman LLP, independent
certified public accountants, a "cold comfort" letter, dated the date hereof, in
form and substance satisfactory to the Underwriters.
(e) The Representatives shall have received from Marcum &
Kliegman LLP, independent certified public accountants, letters, dated the
Closing Dates, to the effect that such accountants reaffirm, as of the Closing
Dates, and as though made on the Closing Dates, the statements made in the
letter furnished by such accountants pursuant to paragraph (d) of this Section
6.
(f) The Representatives shall have received from Stursburg &
Veith, counsel for the Company, an opinion, dated the Closing Dates, addressed
to the Underwriters (and stating that it may be relied upon by counsel to the
Underwriters) to the effect that:
(i) The Company and each of the Subsidiaries has been
duly incorporated and are validly existing and in good standing as
corporations under the laws of their respective jurisdictions of
incorporation and have the corporate power and authority to own or
lease their properties and to conduct their respective businesses as
described in the Prospectus. The Company and each of the Subsidiaries
are duly qualified to do business and are in good standing as foreign
corporations in all jurisdictions where their respective ownership or
leasing of properties or the conduct of their respective businesses
requires such qualification, except where the failure to be so
qualified would not have a Material Adverse Effect.
19
<PAGE>
(ii) The Company has full corporate power and
authority to enter into this Agreement and to issue, sell and deliver
to the Underwriters the Shares to be issued and sold hereunder.
(iii) The Company has the corporate power and
authority to enter into the Underwriting Agreement, and the
Underwriting Agreement has been duly authorized, executed and delivered
by the Company and constitutes a valid and binding obligation of the
Company enforceable in accordance with its terms, except as such
enforceablility may be limited by applicable bankruptcy, insolvency,
reorganization, fraudulent transfer, moratorium or similar laws
affecting creditors' rights generally and to equitable principles
(including, without limitation, concepts of materiality,
reasonableness, good faith and fair dealing), regardless of whether
considered in a proceeding in equity or at law, and except insofar as
rights to indemnity or contribution may be limited by applicable
securities laws.
(iv) The Company has authorized and outstanding
capital stock as set forth under the caption "Capitalization" in the
Prospectus; the authorized shares of the Company's Common Stock have
been duly authorized; the outstanding shares of the Company's Common
Stock have been duly authorized and validly issued and are fully paid
and nonassessable; all of the Shares conform to the description thereof
contained in the Prospectus; the certificates for the Shares are in due
and proper form; the Shares have been duly authorized and will be
validly issued, fully paid and nonassessable when issued and paid for
as contemplated by this Agreement; and no preemptive rights of
stockholders exist with respect to any of the Shares or the issue or
sale thereof. The holders of Shares are not and will not be subject to
personal liability solely by reason of being such holders. The
description of the Shares contained in the Registration Statement and
the Prospectus conforms to the rights set forth in the instruments or
certificates defining the same and is in conformity with the
requirements of the Acts and the Rules and Regulations.
(v) there are no outstanding securities of the
Company or the Subsidiaries convertible or exchangeable into or
evidencing the right to purchase or subscribe for any shares of capital
stock of the Company or the Subsidiaries and except as disclosed in the
Prospectus, there are no outstanding or authorized options, warrants or
rights of any character obligating the Company or the Subsidiaries to
issue any shares of its capital stock or any securities convertible or
exchangeable into or evidencing the right to purchase or subscribe for
any shares of such stock; and there is no holder of any securities of
the Company or the Subsidiaries or any other person who has the right,
contractual or otherwise, to cause the Company to sell or otherwise
issue to them, or to permit them to underwrite the sale of, any of the
Shares or the right to have any Common Stock or other securities of the
Company included in the Registration Statement or the right, as a
result of the filing of the Registration Statement, to require
registration under the Securities Act of any Common Stock or other
securities of the Company.
20
<PAGE>
(vi) The Registration Statement and all
post-effective amendments thereto, if any, have become effective under
the Securities Act; any and all filings, if any, required by Rules 497,
434 and 430A of the Securities Act Rules and Regulations have been
made; and, to the knowledge of such counsel, no stop order proceedings
with respect thereto have been instituted or are pending or threatened
under the Securities Act; any required filing of the Prospectus and any
supplement thereto pursuant to Rule 497 of the Securities Act Rules and
Regulations has been made in the manner and within the time period
required by Rule 497.
(vii) The Registration Statement and the Prospectus,
and each amendment or supplement thereto, comply as to form in all
material respects with the requirements of the Acts and the applicable
rules and regulations thereunder (except that such counsel need express
no opinion as to the financial statements and related schedules or
financial and statistical data included therein).
(viii) In connection with the Registration Statement,
such counsel has participated in discussions and conferences with
certain of the officers and representatives of the Company,
representatives of the Underwriters, counsel to the Underwriters, and
the independent accountants for the Company at which the contents of
the Registration Statement and the Prospectus were discussed. While
such counsel does not assume any responsibility for the accuracy,
completeness or fairness of the statements made in the Registration
Statement and the Prospectus, nothing has come to such counsel's
attention which lead them to believe that either the Registration
Statement or the Prospectus, or any amendment or supplement thereto, as
of their respective effective or issue dates, or as of the date hereof,
contained any untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances under which
they were made, not misleading. The descriptions in the Registration
Statement and Prospectus of statutes and legal and governmental
proceedings are accurate and fairly present the information required to
be shown. There are no legal proceedings pending or, to such counsel's
knowledge, threatened against the Company which are required to be
disclosed in the Registration Statement and Prospectus, except as
described therein. Such counsel expresses no opinion as to the
financial statements or other financial or statistical data contained
in the Registration Statement or the Prospectus.
(ix) Such counsel has read all contracts and other
documents specifically enumerated in the Registration Statement and the
Prospectus, and such contracts and other documents are fairly
summarized or described therein, fairly present the information
required to be shown; conform in all material respects to the
descriptions thereof contained therein, and are filed as exhibits
thereto, if required, and to such counsel's knowledge, there are no
contracts or documents required to be so summarized or disclosed or so
filed which have not been so summarized or disclosed or so filed.
(x) Such counsel knows of no material legal or
governmental proceedings pending or threatened against the Company or
any of the Subsidiaries.
21
<PAGE>
(xi) The execution and delivery of this Agreement by
the Company and the consummation by the Company of the transactions
herein contemplated, and the compliance with the terms of this
Agreement do not and will not conflict with or result in a breach of
any of the terms or provisions of or violate or constitute a default
under the Certificate of Incorporation or Bylaws or other constituent
documents of the Company or the Subsidiaries or, (i) any indenture,
mortgage or other agreement or instrument to which the Company or any
of the Subsidiaries is a party or by which the Company or any of the
Subsidiaries or any material portion of its properties is bound, or
(ii) to such counsel's knowledge, after due inquiry, any judgment,
order or decree of any government, governmental instrumentality or
court having jurisdiction over the Company or any of the Subsidiaries
or any material portion of its properties, or (iii) any existing
statute, rule or regulation applicable to the Company or the
Subsidiaries, where, with respect to clauses (i), (ii) and (iii) of
this paragraph, such violation or default could reasonably be expected
to have a Material Adverse Effect on the general affairs, properties,
condition (financial or otherwise), results of operations,
stockholders' equity, business or prospects of the Company and the
Subsidiaries taken as a whole.
(xii) No authorization, approval, consent or license
of any governmental or regulatory body, domestic or foreign, except as
may be required by the SBA, the NASD or as required under the
securities (blue sky) laws of the various jurisdictions, is required in
connection with the (i) authorization, issuance, transfer, sale or
delivery of the Shares to be sold by the Company; (ii) execution,
delivery and performance of this Agreement by the Company or (iii)
taking of any action contemplated in this Agreement or in the
Registration Statement or the Prospectus, or, if so required, all such
authorizations, approvals, consents and licenses have been obtained and
are in full force and effect.
(xiii) The Company has duly elected to be treated
under the Investment Company Act as a business development company and
all required action has been taken by the Company under the Acts to
make the public offering and consummate the sale of the Shares as
provided in this Agreement; the provisions of the corporate charter and
by-laws of the Company and the Subsidiaries and the investment policies
and restrictions described in the Prospectus comply with the
requirements of the Investment Company Act.
(xiv) The Shares are duly approved, subject to
official notice of issuance, for quotation on the Nasdaq National
Market and a registration statement has been filed pursuant to Section
12 of the Exchange Act for the Shares and has been declared effective.
(xv) To such counsel's knowledge, except as
described in the Prospectus, neither the company nor any of the Subsidiaries
owns any interest in any corporation, partnership, joint venture, trust or other
business entity.
In rendering such opinions, such counsel may set forth that as to
certain matters of fact, where appropriate, such counsel is relying on one or
more certificates of public officials, governmental
22
<PAGE>
agencies or officers of the Company. In addition, as to matters of law, counsel
for the Company may rely as to matters involving the application of laws other
than the laws of the United States (except for laws dealing with matters within
the jurisdiction of the laws of New York, the laws of Delaware and jurisdictions
in which they are admitted, to the extent such counsel deems proper and to the
extent specified in such opinion, if at all, upon an opinion or opinions (in
form and substance satisfactory to the Underwriters' counsel) of other counsel
reasonably acceptable to the Underwriters' counsel, familiar with the applicable
laws.
Unless the context clearly indicates otherwise, the term "Company" as
used in this Section 6(f) shall include the Subsidiaries.
(g) The Representatives shall have received from Klehr,
Harrison, Harvey, Branzburg & Ellers, LLP, counsel for the Underwriters, their
opinion or opinions dated the Closing Date with respect to the incorporation of
the Company, the validity of the Shares, the Registration Statement and the
Prospectus and such other related matters as they may reasonably request, and
the Company shall have furnished to such counsel such documents as they may
request for the purpose of enabling them to pass upon such matters. In addition
to the matters set forth above, such opinion shall also include a statement to
the effect that nothing has come to the attention of such counsel that leads
them to believe that (i) the Registration Statement, or any amendment thereto
(except as to the financial statements and related schedules or financial data
included therein, with respect to which such counsel need express no belief), as
of the time it became effective under the Securities Act, as of the Closing Date
or the Option Closing Date, as applicable, contained or contains an untrue
statement of a material fact or omitted or omits to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and (ii) the Prospectus, or any supplement thereto, on the date it
was filed pursuant to the Securities Act Rules and Regulations and as of the
Closing Date or the Option Closing Date, as applicable, contained or contains,
an untrue statement of a material fact or omitted or omits to state a material
fact necessary in order to make the statements, in the light of the
circumstances under which they are made, not misleading (except that such
counsel need express no belief as to financial statements and related schedules
or financial data included therein). With respect to such statement, Klehr,
Harrison, Harvey, Branzburg & Ellers, LLP may state that their belief is based
upon the procedures set forth therein, but is without independent check and
verification. In rendering such opinion, such counsel may rely upon certificates
of any officer of the Company or public officials as to matters of fact; and may
rely as to matters of law, to the extent necessary, upon the opinion or opinions
of Stursburg & Veith.
(h) The Representatives shall have received a certificate,
dated the Closing Dates, of the chief executive officer or the President and the
chief financial or accounting officer of the Company to the effect that:
(i) No stop order suspending the effectiveness of the
Registration Statement has been issued, and, to the best of the
knowledge of the signers, no proceedings for that purpose have been
instituted or are pending or contemplated under the Securities Act;
23
<PAGE>
(ii) Neither any Preliminary Prospectus, as of its
date, nor the Registration Statement nor the Prospectus, nor any
amendment or supplement thereto, as of the respective times when the
Registration Statement became effective and at all times subsequent
thereto up to the delivery of such certificate, included any untrue
statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading;
(iii) The representations and warranties of the
company in this Agreement are true and correct at and as of the Closing
Dates, and the Company has complied with all the agreements and
performed or satisfied all the conditions on its part to be performed
or satisfied at or prior to the Closing Dates; and
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus,
(i) neither the Company nor any of the Subsidiaries has incurred any
material liabilities or obligations, direct or contingent, or entered
into any other transactions not in the ordinary course of business,
(ii) there has not been any material adverse change in the condition
(financial or otherwise), properties, business, management, prospects,
net worth, capital stock, investment objectives, investment policies or
results of operations of the Company and the Subsidiaries taken as a
whole, or any change in the capital stock, or material change in the
short-term or long-term debt, of the Company and the Subsidiaries taken
as a whole and (iii) there has been no dividend or distribution of any
kind declared, paid or made by the Company or the Subsidiaries on any
class of their respective capital stock.
(i) The Company shall have furnished to the Representatives
such additional certificates as the Representatives may have reasonably
requested as to the accuracy, at and as of the Closing Dates, of the
representations and warranties made herein by it and as to compliance at and as
of the Closing Dates by it with its covenants and agreements herein contained
and other provisions hereof to be satisfied at or prior to the Closing Dates,
and as to satisfaction of the other conditions to the obligations of the
Underwriters hereunder.
(j) The Representatives shall have received the written
agreements of the officers, directors and holders of Common Stock listed on
Schedule II that each will not, except as stated therein, offer, sell, assign,
transfer, encumber, contract to sell, grant an option to purchase or otherwise
dispose of any shares of Common Stock (including, without limitation, Common
Stock of the Company which may be deemed to be beneficially owned by such
persons in accordance with the Securities Act Rules and Regulations) during the
period of time specified in Schedule II following the date of the Prospectus
first filed pursuant to Rule 497(b), (c) or (h), without the prior written
consent of First Colonial.
All opinions, certificates, letters and other documents will
be in compliance with the provisions hereunder only if they are reasonably
satisfactory in form and substance to the Representatives and their counsel. The
Company will furnish to the Representatives conformed copies
24
<PAGE>
of such opinions, certificates, letters and other documents as the
Representatives shall reasonably request. if any of the conditions hereinabove
provided for in this Section shall not have been satisfied when and as required
by this Agreement, this Agreement may be terminated by the Representatives by
notifying the Company of such termination in writing at or prior to the Closing
Dates, but First Colonial shall be entitled to waive any of such conditions on
behalf of the Underwriters.
9. Effective Date. This Agreement shall become effective immediately as
to Sections 5, 6, 7, 9, 10, 11, 13, 14, 15, 16 and 17 and, as to all other
provisions, at 11:00 a.m. New York City time on the first full business day
following the effectiveness of the Registration Statement or at such earlier
time after the Registration Statement becomes effective as the Representatives
may determine on and by notice to the Company or by release of any of the Shares
for sale to the public. For the purposes of this Section 9, the Shares shall be
deemed to have been so released upon the release for publication of any
newspaper advertisement relating to the Shares or upon written notice from the
Representatives (i) advising Underwriters that the Shares are released for
public offering or (ii) offering the Shares for sale to securities dealers,
whichever may occur first.
10. Termination. This Agreement (except for the provisions of Section
5) may be terminated by the Company at any time before it becomes effective in
accordance with Section 9 by notice to the Representatives and may be terminated
by the Representatives at any time before it becomes effective in accordance
with Section 9 by notice to the Company. In the event of any termination of this
Agreement under this or any other provision of this Agreement, there shall be no
liability of any party to this Agreement to any other party, other than as
provided in Sections 5, 6 and 11 and other than as provided in Section 12 as to
the liability of defaulting Underwriters.
This Agreement may be terminated after it becomes effective by
the Representatives by notice to the Company (i) if at or prior to the Closing
Date or, as relates to the Option Shares only, prior to any Option Closing Date
trading in securities generally or on the Nasdaq National Market shall have been
suspended or minimum prices shall have been established on such market, or a
banking moratorium shall have been declared by New York or United States
authorities, (ii) if at or prior to the Closing Date or any Option Closing Date
there shall have been (A) a major outbreak or significant escalation of
hostilities between the United States and any foreign power or any other
insurrection or armed conflict involving the United States or (B) any change in
financial markets or any calamity or crisis which, in the sole judgment of the
Representatives, makes it impractical or inadvisable to offer or sell the Firm
Shares or Option Shares, as applicable, on the terms contemplated by the
Prospectus, (iii) if there shall be any litigation or proceeding, pending or
threatened to which the Company is a party, which in the reasonable judgment of
the Representatives, makes it impracticable to offer or deliver the Firm Shares
or Option Shares, as applicable, on the terms contemplated by the Prospectus or
(iv) if there shall have occurred any of the events specified in the immediately
preceding clauses (i) - (iii) together with any other such event that makes it,
in the judgment of the Representatives, impracticable to offer or deliver the
Firm Shares or Option Shares, as applicable, on the terms contemplated by the
Prospectus.
25
<PAGE>
11. Reimbursement of Underwriters. Notwithstanding any other provisions
hereof, if this Agreement shall not become effective by reason of any election
of the Company pursuant to Section 10 or shall be terminated by the
Representatives under Section 8 or Section 10, the Company will bear and pay the
expenses specified in Section 5(a) hereof and, in addition to its obligations
pursuant to Section 8 hereof, the Company will reimburse the reasonable
out-of-pocket expenses of the several Underwriters (including reasonable fees
and disbursements of counsel for the Underwriters) incurred in connection with
this Agreement and the proposed purchase of the Shares to a maximum of $75,000,
and promptly upon demand the Company will pay such amounts to you as
Representatives.
12. Substitution of Underwriters. If any Underwriter or Underwriters
shall default in its or their obligations to purchase Shares hereunder and the
aggregate number of Shares which such defaulting Underwriter or Underwriters
agreed but failed to purchase does not exceed 10% of the total number of Shares
underwritten, the other Underwriters shall be obligated severally, in proportion
to their respective commitments hereunder, to purchase the Shares which such
defaulting Underwriter or Underwriters agreed but failed to purchase. If any
Underwriter or Underwriters shall so default and the aggregate number of Shares
with respect to which such default or defaults occur is more than 10% of the
total number of Shares underwritten and arrangements satisfactory to the
Representatives and the Company for the purchase of such Shares by other persons
are not made within 48 hours after such default, this Agreement shall terminate.
If the remaining Underwriters or substituted Underwriters are
required hereby or agree to take up all or part of the Shares of a defaulting
Underwriter or Underwriters as provided in this Section 12, (i) the Company
shall have the right to postpone the Closing Dates for a period of not more than
five full business days in order that the Company may effect whatever changes
may thereby be made necessary in the Registration Statement or the Prospectus,
or in any other documents or arrangements, and the Company agrees promptly to
file any amendments to the Registration Statement or supplements to the
Prospectus which may thereby be made necessary, and (ii) the respective numbers
of Shares to be purchased by the remaining Underwriters or substituted
Underwriters shall be taken as the basis of their underwriting obligation for
all purposes of this Agreement. Nothing herein contained shall relieve any
defaulting Underwriter of its liability to the Company or the other Underwriters
for damages occasioned by its default hereunder. Any termination of this
Agreement pursuant to this Section 12 shall be without liability on the part of
any non-defaulting Underwriter or the Company, except for expenses to be paid or
reimbursed pursuant to Section 5 and except for the provisions of Section 6.
13. Notices. All communications hereunder shall be in writing and, if
sent to the Underwriters shall be mailed, delivered or telecopied and confirmed
to the Representatives c/o First Colonial Securities Group, Inc., 1499 West
Palmetto, Suite 312, Boca Raton, FL 33486 (telecopier no.: (561) 750-3342),
Attention: Ben Lichtenberg, Director of Investment Banking, with a copy to
Klehr, Harrison, Harvey, Branzburg & Ellers LLP, 1401 Walnut Street,
Philadelphia, PA 19102 (telecopier no. (215) 568-6603), Attention: Stephen T.
Burdumy, Esquire, except that notices given to an Underwriter pursuant to
Section 6 hereof shall be sent to such Underwriter at the address furnished by
the Representatives or, if sent to the Company, shall be mailed, delivered or
telecopied
26
<PAGE>
and confirmed at 747 Third Avenue, 3rd Floor, New York, NY 10017 (telecopier
no.: (212) 759-3338), Attention: Gary C. Granoff, Esquire, with a copy to
Stursburg & Veith, 405 Lexington Avenue, 49th Floor, New York, NY 10174-4902
(telecopier no.: (212) 922-0995), Attention: Walter Stursburg, Esquire.
14. Successors. This Agreement shall inure to the benefit of and be
binding upon the several Underwriters, the Company and their respective
successors and legal representatives. Nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any person other than the
persons mentioned in the preceding sentence any legal or equitable right, remedy
or claim under or in respect of this Agreement, or any provisions herein
contained, this Agreement and all conditions and provisions hereof being
intended to be and being for the sole and exclusive benefit of such persons and
for the benefit of no other person; except that the representations, warranties,
covenants, agreements and indemnities of the Company contained in this Agreement
shall also be for the benefit of the person or persons, if any, who control any
Underwriter or Underwriters within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act, including its officers, directors,
employees, advisors and attorneys and the indemnities of the several
Underwriters shall also be for the benefit of each director of the Company, each
of its officers who has signed the Registration Statement and the person or
persons, if any, who control the Company within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act.
15. Applicable Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware.
16. Authority of the Representatives. In connection with this
Agreement, the Representatives will act for and on behalf of the several
Underwriters, and hereby represent that they are authorized so to act, and any
action taken under this Agreement by the Representatives, will be binding on all
the Underwriters.
17. Partial Unenforceability. The invalidity or unenforceability of any
Section, paragraph or provision of this Agreement shall not affect the validity
or enforceability of any other Section, paragraph or provision hereof. If any
Section, paragraph or provision of this Agreement is for any reason determined
to be invalid or unenforceable, there shall be deemed to be made such minor
changes (and only such minor changes) as are necessary to make it valid and
enforceable.
18. General. This Agreement constitutes the entire agreement of the
parties to this Agreement and supersedes all prior written or oral and all
contemporaneous oral agreements, understandings and negotiations with respect to
the subject matter hereof.
In this Agreement, the masculine, feminine and neuter genders
and the singular and the plural include one another. The section headings in
this Agreement are for the convenience of the parties only and will not affect
the construction or interpretation of this Agreement. This Agreement may be
amended or modified, and the observance of any term of this Agreement may be
waived, only by a writing signed by the Company and the Representatives.
27
<PAGE>
19. Counterparts. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
If the foregoing correctly sets forth our understanding, please
indicate your acceptance thereof in the space provided below for that purpose,
whereupon this letter and your acceptance shall constitute a binding agreement
between us.
Very truly yours,
AMERITRANS CAPITAL CORPORATION
By:____________________________
Name:
Title:
Accepted and delivered as of the date first above written:
FIRST COLONIAL SECURITIES GROUP, INC.
AUERBACH, POLLAK & RICHARDSON
Acting on their own behalf
and as Representatives of the several
Underwriters referred to in the
foregoing Agreement.
By: First Colonial Securities Group, Inc.
By:_______________________
Name:
Title:
28
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Number of Number of
Firm Shares to Option Shares to
Name be Purchased be Purchased
- ---- ------------ ------------
<S> <C> <C>
First Colonial Securities Group, Inc.
Auerbach, Pollak & Richardson, Inc.
- -----------------------------
------------- --------------
Total................................
</TABLE>
<PAGE>
SCHEDULE II
Party to Lock-up Agreement Period
<PAGE>
AMERITRANS CAPITAL CORPORATION
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
This Non-Employee Director Stock Option Plan dated _________, 1999 (the
"Plan") governs options to purchase Common Stock, $0.001 par value (the "Common
Stock"), of Ameritrans Capital Corporation (the "Company") granted on or after
the date hereof by the Company to members of the Board of Directors (the
"Board") of the Company who are not also employees, officers or interested
persons (as defined in Section 2 below) of the Company. The purpose of the Plan
is to attract and retain qualified persons to serve as Directors of the Company
and to encourage ownership of stock of the Company by such Directors so as to
provide additional incentives to promote the success of the Company.
1. Administration of the Plan.
Grants of stock options (individually referred to herein as an "Option"
and collectively as "Options") under the Plan shall be automatic as provided in
Section 6 hereof. However, all questions of interpretation with respect to the
Plan and Options granted under it shall be determined by a committee (the
"Committee") consisting of the Directors of the Company who are not eligible to
participate in the Plan, and such determination shall be final and binding upon
all persons having an interest in the Plan.
2. Persons Eligible to Participate in the Plan.
Members of the Board who are not also officers or employees of the
Company shall be eligible to participate in the Plan ("Eligible Directors").
3. Shares Subject to the Plan.
(a) Number of Shares. The aggregate number of shares of Common
Stock of the Company which may be optioned under this Plan is 75,000 shares. In
the event of a stock dividend, split-up, combination or reclassification of
shares, recapitalization or similar capital change relating to the Common Stock,
the maximum aggregate number and kind of shares or securities of the Company as
to which Options may be granted under this Plan and as to which Options then
outstanding shall be exercisable, and the exercise price of such Options, shall
be appropriately adjusted by the Committee (whose determination shall be
conclusive) so as to preserve the value of the Option.
(b) Effect of Certain Transactions. In order to preserve an
Eligible Director's rights under an Option in the event of a change in control
of the Company, the Committee in its discretion may, on the Date of Grant (as
defined in Section 6(b) below) or at any time thereafter, take one or more of
the following actions: (i) provide for the acceleration of any time period
relating to the exercise or payment of the Option, (ii) provide for payment to
the Eligible Director of cash or other property with a fair market value equal
to the amount that would have been received upon the exercise or payment of the
Option had the Option been exercised or paid upon the change in control, (iii)
adjust the terms of the Option in a manner determined by the Committee to
reflect the change in control, (iv) cause the Option to be assumed, or new
rights substituted therefor, by another entity, or (v) make such other provision
as the Committee may consider equitable to the Eligible Director and in the best
interest of the Company.
(c) Restoration of Shares. If any Option expires or is
terminated unexercised or is forfeited for any reason, the shares subject to
such Option, to the extent of such expiration, termination or forfeiture, shall
again be available for granting pursuant to Options under the Plan.
<PAGE>
(d) Reservation of Shares. The Company shall at all times
while the Plan is in force reserve such number of shares of Common Stock as will
be sufficient to satisfy the requirements of the Plan. Shares issued under the
Plan may consist in whole or in part of authorized but unissued shares or
treasury shares.
4. Types of Options.
All Options granted under this Plan shall be non-statutory options not
entitled to special tax treatment under Section 422 of the Internal Revenue Code
of 1986, as amended.
5. Form of Options.
Options granted hereunder shall be evidenced by a writing delivered to
the optionee specifying the terms and conditions thereof and containing such
other terms and conditions not inconsistent with the provisions of the Plan as
the Committee considers necessary or advisable to achieve the purposes of the
Plan or comply with applicable tax and regulatory laws and accounting
principles.
6. Grant of Options and Option Terms.
(a) Initial Grant of Options. On the later of (i) date of the
approval of the Plan (the "Approval Date") by the Securities and Exchange
Commission in accordance with the 1940 Act, or (ii) the first anniversary of the
election or appointment of such Director to the Board (the "First Anniversary
Date"), providing such Director is then serving, each of the following Directors
shall automatically be granted Options to purchase the number of shares of
Common Stock determined by dividing $50,000 by the Current Market Value (as
defined in Section 6(c) below) on the date indicated opposite each Director's
name (the "Initial Grants") provided each such Director is serving on the
Company's Board as an Eligible Director on the Approval Date or the First
Anniversary Date, as the case may be:
Name of Director Automatic Grant Date
---------------- --------------------
Paul Creditor Approval Date
John Acierno Approval Date
Alan Kaplan Approval Date
Marvin Sabesan Approval Date
(b) Automatic Grant of Options. At each annual meeting of the
stockholders of the Company after the Approval Date, each new Eligible Director
elected at such meeting shall automatically be granted on such new Eligible
Director's First Anniversary Date of such election an Option to purchase the
number of shares of Common Stock determined by dividing $50,000 by the Current
Market Value of the Common Stock on such First Anniversary Date of such
election. In addition, upon the election of an Eligible Director other than at
an annual meeting of stockholders (whether by the Board or the stockholders and
whether to fill a vacancy or otherwise), each such Eligible Director shall
automatically be granted an Option on the First Anniversary Date of the election
of an Eligible Director other than at an annual meeting of stockholders to
purchase that number of shares that is determined by dividing $50,000 by the
Current Market Value of the Common Stock on the First Anniversary Date of such
election. After the Initial Grants have been made, all subsequent grants of
Options to Eligible Directors upon the First Anniversary Date of their election
to the Board shall be referred to as "Automatic Grants." The "Date of Grant" for
the Initial Grants shall be the Approval Date and the Date of Grant for the
Automatic Grants shall be the First Anniversary Date of the election as a new
Eligible Director, whether at an annual meeting or otherwise, as the case may
be. No Options shall be granted hereunder after ten years from the date on which
this Plan was initially approved and adopted by the Board.
<PAGE>
(c) Exercise Price. The price at which shares may from time to
time be optioned shall be determined by the Committee, provided that such price
shall not be less than the current market value (the "Current Market Value") of
the Common Stock on the date of grant, or if no such market value exists, then
the current net asset value of the Common Stock of the Company or such other
lawful consideration as the Committee may determine.
(d) Term of Option. The term of each Option granted under this
Plan shall be five years from the Date of Grant.
(e) Period of Exercise. Options granted under this Plan shall
become exercisable commencing 12 months after the Date of Grant. Directors
holding exercisable Options under this Plan who cease to be Eligible Directors
for any reason, other than death, may exercise the rights they had under such
Options at the time they ceased to be an Eligible Director; provided, however,
no additional Options held by such Directors shall be exercisable thereafter.
Upon the death of a Director, those entitled to do so under the Director's will
or the laws of descent and distribution shall have the right, at any time within
twelve months after the date of death, to exercise in whole or in part any
rights that were available to the Director at the time of his or her death.
Options granted under the Plan shall terminate, and no rights thereunder may be
exercised, after the expiration of five years from their Date of Grant.
(f) Method of Exercise and Payment. Options may be exercised
only by written notice of the Company at its executive offices accompanied by
payment of the full exercise price for the shares of Common Stock as to which
they are exercised. The exercise price shall be paid in cash or by check or by
the surrender of unrestricted shares of Common Stock or by any combination of
the foregoing. Upon receipt of such notice and payment, the Company shall
promptly issue and deliver to the optionee (or other person entitled to exercise
the Option) a certificate or certificates for the number of shares as to which
the exercise is made.
(g) Non-transferability. Options granted under this Plan shall
not be transferable by the holder thereof otherwise than by will or the laws of
descent and distribution, and shall be exercisable, during the holder's
lifetime, only by him or her.
(h) Withholding. The optionee shall pay to the Company, or
make provisions satisfactory to the Company for payment of, any taxes required
by law to be withheld in respect of any Options under the Plan no later than the
date of the event creating the tax liability. The Company and any parent
corporation or subsidiary corporation of the Company (as defined in Sections
424(e) and (f), respectively, of the Code) may, to the extent permitted by law,
deduct any such tax obligations from any payment of any kind otherwise due to
the optionee.
<PAGE>
7. Limitation of Rights.
(a) No Right to Continue as a Director. Neither the Plan nor
the granting of an Option or any other action taken pursuant to the Plan, shall
constitute an agreement or understanding, express or implied that the Company
will retain an optionee as a Director for any period of time or at any
particular rate of compensation.
(b) No Stockholders' Rights for Options. No Director shall
have any rights as a stockholder with respect to the shares covered by his or
her Option until the date he or she exercises such Option and pays the Option
price to the Company, and no adjustment will be made for dividends or other
rights for which the record date is prior to the date such Option is exercised
and paid for.
8. Amendment or Termination.
The Board may amend, suspend or terminate the Plan or any portion
thereof at any time, subject to any stockholder approval that the Board
determines to be necessary or advisable, provided that the Participant's consent
will be required for any amendment, suspension or termination that would
adversely affect the rights of the Participant under any outstanding Options.
9. No Fractional Shares. All grants of Options shall be rounded to the
nearest whole share and no Options representing fractional shares shall be
issued.
10. Governing Law. The provisions of the Plan shall be governed by and
interpreted in accordance with the laws of the State of New York.
11. Successor to Elk Associates Funding Corporation Non-Employee
Director Stock Option Plan.
(a) Notwithstanding anything herein, this Plan shall be
effective only upon the consummation of a Share Exchange Plan with Elk
Associates Funding Corporation ("Elk") pursuant to which each outstanding share
of the common stock, par value $0.01 per share of Elk (the "Elk Common Stock"),
would vest in the Company, Elk would become a wholly-owned subsidiary of
Ameritrans, and the holders of all the outstanding shares of Elk Common Stock
would become the stockholders of the Company and receive one share of the
Company for each share of Elk owned (the "Share Exchange").
(b) Upon completion of the Share Exchange, and without any
further action on the part of the Company or of Elk, this Plan will be deemed to
be the successor plan to the Elk Associates Funding Corporation Non-Employee
Director Stock Option Plan (the "Elk Director Plan"), election or appointment as
a director of Elk will be deemed to be election or appointment as a director of
the Company for purposes of Sections 6(a) and (b) hereof, and options issued
under Section 6(a) (Initial Grant of Options) of the Elk Director Plan will be
deemed to have been issued pursuant to this Plan, and (iii) upon consummation of
the Share Exchange, options, if any, granted under the Elk Director Plan would
be treated as options granted under this Plan and will be exercisable only to
purchase shares of the Company's Common Stock.
THIS PLAN WAS APPROVED BY THE BOARD OF DIRECTORS ON ________ __, 1999. THIS PLAN
WAS APPROVED BY THE STOCKHOLDERS ON ____________ __, 1999. THIS PLAN WAS
APPROVED BY THE SECURITIES AND EXCHANGE COMMISSION ON ___________ __, 199__.
<PAGE>
CUSTODIAN AGREEMENT
This CUSTODIAN AGREEMENT is dated as of September 9, 1993, and made
among ELK ASSOCIATES FUNDING CORPORATION, a New York corporation ("Borrower"),
and BANK LEUMI TRUST COMPANY OF NEW YORK, ISRAEL DISCOUNT BANK OF NEW YORK, BANK
HAPOALIM B.M. AND EXTEBANK (collectively, the "Banks"), and the U.S. SMALL
BUSINESS ADMINISTRATION ("SBA") (the Banks and the SBA, collectively, the
"Lenders"), and ISRAEL DISCOUNT BANK OF NEW YORK, as Custodian for the Banks and
SBA (in such capacity, the "Custodian").
RECITALS
WHEREAS, the Banks and SBA have entered into an Intercreditor Agreement
dated as of the date hereof with Borrower (as hereafter amended or otherwise
modified from time to time, the "Intercreditor Agreement");
WHEREAS, Borrower has granted a security interest in its assets to the
Banks and SBA, including but not limited to all notes, security agreements,
financing statements, assignments of financing statements, and other instruments
and securities from time to time hereafter delivered to or otherwise held by the
Custodian for or on behalf of the Banks and SBA (all such assets to be held by
the Custodian, collectively, the "Custodian Collateral"), as collateral security
for the prompt payment in full when due, whether at stated maturity, by
acceleration or otherwise, of certain obligations; and
WHEREAS, the parties hereto intend that Borrower deliver to the
Custodian the Custodian Collateral and the Custodian accept and hold the
Custodian Collateral in accordance with the terms of this Custodian Agreement;
NOW, THEREFORE, in consideration of the foregoing and the agreements,
provisions and covenants contained herein, Borrower, the Custodian, SBA and each
of the Banks hereby agree as follows:
1. Definitions. The terms in this Custodian Agreement unless otherwise
specified shall have the same meaning as in the Intercreditor Agreement.
2. Appointment of Custodian. The Custodian is hereby appointed to act
as agent for the Banks and SBA hereunder and agrees to accept, hold and deliver
the Custodian Collateral in accordance with the terms hereof. Each Lender hereby
designates and appoints Custodian to act as agent and (and each Bank hereby
designates and appoints the Custodian to act as attorney-in-fact) for and on
behalf of each of the Lenders to take such action on behalf of the Lenders under
those provisions of the Loan
-1-
<PAGE>
Agreements and the SBA Security Agreement, as the case may be, which relate
solely to the Custodian Collateral, and to exercise such powers and to perform
such duties, with respect to the management, supervision, servicing,
administration and disbursement of the Custodian Collateral (including, without
limitation, perfecting such Lender's security interest in the Custodian
Collateral by filing financing statements, holding physical possession of
instruments or otherwise) and the payments or amounts realized or recovered from
the Custodian Collateral as are specifically delegated to or required of
Custodian by the terms of this Agreement, together with such other powers as are
incidental thereto, with, subject to approval by all Lenders, (1) full power of
substitution and (2) the power to select one or more sub-agents or designees to
carry out certain specific powers and obligations of Custodian pursuant hereto.
The power of attorney granted hereby being coupled with an interest is
irrevocable while this Agreement remains in effect.
3. Delivery of Custodian Collateral to Custodia. All notes, security
agreements, financing statements, assignments of financing statements,
participation agreements/interests and other instruments and securities
presently held or hereafter acquired by Borrower shall be assigned to the
Custodian, contain the endorsement set forth on Exhibit C attached hereto, and
be delivered to and held by the Custodian pursuant hereto. Custodian
acknowledges that each Lender has been granted a security interest in the
Custodian Collateral and agrees to hold any portion of the Custodian Collateral
in possession of the Custodian as bailee for the benefit of each Lender.
4. General Powers of Custodian. Lenders agree that Custodian shall have
the right to and shall exercise the following powers as long as this Agreement
remains in effect:
(a) maintain, in accordance with its customary business practices,
records reflecting the status of the Custodian Collateral;
(b) subject to the terms of the Loan Agreements and the SBA
Agreement, execute and/or file in its name as Custodian for the benefit of the
Lenders any and all financing or similar statements or notices, amendments,
renewals, supplements, documents, instruments, proofs of claim for the Banks,
notices and other written agreements with respect to the Custodian Collateral
and hold and maintain physical possession of the instruments constituting
Custodian Collateral;
(c) upon notice to Borrower (unless the giving of such notice would
create a delay which would impair the Custodian Collateral), incur and pay such
reasonable expenses as Custodian may deem necessary or appropriate for the
performance and fulfillment of its functions and powers pursuant to this
Agreement.
-2-
<PAGE>
5. Release of Custodian Collateral to Borrower: Loan Information.
(a) Borrower shall be entitled to remove and the Custodian shall be
required to deliver to Borrower, or allow Borrower access to any of the
Custodian Collateral, in connection with any payment, refinancing, satisfaction
or amendment, provided that (i) Borrower provides the Custodian with a written
certification specifying for which type of event the removal is being requested,
and (ii) no Event of Default has been declared under the Intercreditor
Agreement, or if any Event of Default under the Intercreditor Agreement has been
declared, such Event of Default has been cured. In the event Borrower intends to
sell all or a portion of Borrower's interest in any note or other evidence of
indebtedness, including but not limited to any participation interest proposed
to be sold by Borrower, such sale may be made by Borrower in its sole discretion
and the Custodian shall deliver to Borrower, or allow Borrower access to the
related Custodian Collateral, so long as Borrower provides the Custodian with a
written certification that the net proceeds from such sale will be utilized
immediately to reduce Borrower's Senior Indebtedness and the proceeds are so
utilized; provided further, however, in the event Borrower does not intend to
utilize the proceeds to repay the Senior Indebtedness, it will notify the SBA,
the Banks and the Custodian in writing, which may be done by facsimile, of the
proposed sale (i) at least five (5) business days prior to the date of the
proposed transaction if the transaction involves proceeds of not more than
$500,000, which proceeds will be utilized for purposes other than reducing the
Senior Indebtedness and (ii) at least six (6) business days prior to the date of
the proposed transaction if the transaction involves proceeds of more than
$500,000, which proceeds will be utilized for purposes other than reducing the
Senior Indebtedness. If the SBA and the Banks do not object to the proposed
transaction within the applicable time period, the Borrower shall be entitled to
proceed with the transaction and the Custodian shall deliver to Borrower, or
allow Borrower access to the related Custodian Collateral. If the SBA or the
Banks object within the time period specified, the grounds of which objection
shall not be unreasonable, they shall do so in writing to the Borrower and the
Custodian, stating in reasonable detail the basis for such objections. Written
notice from the Borrower to the SBA, the Banks and the Custodian, as required
above shall set forth (i) the identity of the Borrower, (ii) the date the loan
was entered into, (iii) the current loan balance as carried on the Borrower's
books, (iv) the collateral securing the loan and the value thereof as estimated
by Borrower, (v) the consideration to be received by Borrower and (vi) the use
of the proceeds arising from the sale of the loan or interest in such loan.
-3-
<PAGE>
(b) Notwithstanding the foregoing, upon the occurrence of an Event
of Default as defined in the Intercreditor Agreement, the Borrower shall be
entitled to remove the Custodian Collateral only (i) upon substitution of
collateral of equal value, such valuation to be subject to the reasonable
confirmation by the SBA and the Banks, or (ii) by payment of cash in an amount
equal to the gross proceeds resulting from the sale of the collateral or from
routine loan repayments. Any such payment in cash shall either, at the election
of Borrower in its sole discretion, (A) be utilized to repay the Senior
Indebtedness or (B) be held by the Custodian as part of the Custodian
Collateral, provided that if the Borrower cures each Event of Default and no
Event of Default exists and is continuing, Borrower may remove such cash, but
only if it notifies SBA and the Banks in writing at least six (6) business days
prior to such proposed removal and SBA and the Banks do not reasonably object
within such time period.
(c) Prior to the occurrence of an Event of Default, Borrower shall
have the sole right to issue pay-off letters and/or to furnish any pay-off or
other information to third parties regarding the status of any loan which is
secured by any of the Custodian Collateral. Custodian shall direct to Borrower's
attention any inquiry from any person relating to pay-off information,
collection and/or payment or any other matter relating to any loan made by
Borrower. In connection therewith, Custodian shall issue in respect of any
such inquiry a letter substantially in the form of Exhibit A attached hereto. In
addition, upon written certification from Borrower that a loan has been repaid
in full, Custodian shall promptly deliver to Borrower an executed UCC-3
Termination Statement with respect to such loan.
6. Representations and Warranties. Borrower represents and warrants
that the following statements are true, correct and complete:
a) Borrower has full power and authority to enter in this Custodian
Agreement and Borrower shall be bound to its terms;
b) Borrower is the legal and beneficial owner of the Custodian
Collateral free and clear of any lien except for the liens and security
interests created by (i) the Security Agreement between Borrower and
SBA, (ii) the respective security agreements between Borrower and the
Banks and (iii) any security agreements between Borrower and Third
Party Participants (as defined in the Security Agreement) with respect
to any specific Custodian Collateral in which such participant is
assigned an interest; and
-4-
<PAGE>
c) the Custodian Collateral delivered to the Custodian pursuant to
this Custodian Agreement consists of all the notes, security
agreements, copies of financing statements, assignments of financing
statements, participation agreements/interests and other instruments
and securities presently owned or held by Borrower.
d) Each obligation owed to the Borrower evidenced by notes and
documents delivered to the Custodian is a valid, binding, and
unconditional obligation owed to the Borrower, payable in accordance
with the terms of each such note or document and to the best of
Borrower's knowledge, information and belief, there is no defense,
counterclaim or offset to the payment of such obligation.
7. Further Assurances. Borrower agrees that at any time and from time
to time, at its expense, it will promptly deliver to the Custodian any further
instruments and documents, and take any further actions, that may be necessary
or that SBA or the Custodian may reasonably request, in order to carry out the
intent of this Custodian Agreement or the Intercreditor Agreement.
8. Other Liens. In connection with the sale of a portion of Borrower's
interest as provided in Section 5 hereof, Borrower may create or permit to exist
any lien upon or with respect to any of the Custodian Collateral which does not
violate any agreement with any Bank or with the SBA and which does not require
the release of the Custodian Collateral. Nothing contained in this Section 8 or
elsewhere in this Agreement shall affect Borrower's right to substitute a new
secured party or add one or more additional secured parties at any time, or from
time to time, in its sole discretion, provided such substitute or additional
secured parties became parties to the Intercreditor Agreement and this Custodian
Agreement and such substitution or addition is in compliance with the Agreement
dated the date hereof between the Borrower and the SEA.
9. Standard of Care: No Responsibility for Certain Matters.
(a) In dealing with the Custodian Collateral in its possession,
Custodian shall exercise such care as a fiduciary exercises with respect to
property in its care. The Custodian shall have no right to exercise any of
Borrower's rights with respect to the Custodian Collateral, including but not
limited to collection of any proceeds from any of Borrower's underlying obligors
prior to the occurrence of an Event of Default.
(b) Neither Custodian nor any of its officers, directors, employees
or agents shall be liable to the Lenders or
-5-
<PAGE>
Borrower for any action taken or omitted to be taken under or in connection with
this Agreement, (whether or not such action taken or omitted is within or
without Custodian's responsibilities and duties expressly set forth in this
Agreement), except as a result of gross negligence or willful misconduct on the
part of Custodian or such other persons. Custodian does not assume any
responsibility for any failure or delay in performance or breach by Borrower or
any Lender of its obligations in this Agreement.
(c) Custodian shall be entitled to act, and shall be fully protected
in acting upon, any written communication believed by Custodian, in good faith,
to be genuine and correct and to have been signed by a proper person or persons
or entity. Custodian may consult counsel (other than any counsel affiliated with
the Borrower) and shall be entitled to act, and shall be fully protected in any
action taken in good faith in accordance with advice given by counsel. Custodian
may employ agents and attorneys-in-fact satisfactory to Lenders and reasonably
satisfactory to Elk and shall not be liable for the default or misconduct of any
such agents or attorneys-in-fact selected by Custodian with reasonable care.
(d) The Banks and the SBA expressly acknowledge that neither the
Custodian nor any of its officers, directors, employees, or agents have made
any representations or warranties or assume any responsibility to the Banks and
the SBA with respect to the validity, authenticity, or accuracy of any documents
delivered to the Custodian by the Borrower in connection with the Custodian
Collateral or with respect to the perfection or enforceability of any security
interest in the Custodian Collateral. Upon reasonable request of any Bank or the
SBA, the Custodian will provide copies of any documents delivered into its
custody by the Borrower to such Bank or the SBA, as the case may be.
(e) Each Bank and the SBA represent that it has made and will
continue to make, independently and without reliance upon any act, omission,
statement, information or representation made or furnished by the Custodian, and
based on such documents and information as it has deemed appropriate, its own
appraisal of or an investigation into the business, operations, property,
financial and other condition and creditworthiness of the Borrower and will
continue to do so with regard to any extensions of credit to the Borrower.
10. Certain Rights of Custodian. If Custodian shall request
instructions from Lenders with respect to any act or action (including failure
to act) in connection with the Custodian Collateral, Custodian shall be entitled
to refrain from such act or taking such action unless and until Custodian shall
have received instructions from the Lenders and Custodian shall not incur
liability to any Lender by reason of so refraining. Custodian shall be entitled
to act or refrain from acting, and in
-6-
<PAGE>
all cases shall not be liable to any other Lender in acting or refraining from
acting under this Agreement, in accordance with any instructions from Lenders.
11. Remedies upon Default. If any Event of Default shall have occurred
and be continuing, the Custodian shall continue to hold the Custodian Collateral
subject to the rights of the parties. The Banks shall further have the right if
any Event of Default shall have occurred and be continuing to commence
foreclosure proceedings with respect to the Custodian Collateral and upon thirty
(30) days prior written notice to both the Borrower and the Custodian, the Banks
and the SBA shall have all rights accorded secured creditors as provided in
Article 9 of the New York Uniform Commercial Code, including the right to sell
the Custodian Collateral, subject to the terms of the Intercreditor Agreement.
Nothing contained in this paragraph shall be interpreted as restricting in any
way the SBA's ability to exercise the rights and remedies available to it under
the Act or applicable regulation.
12. Resignation and Removal; Appointment of Successor Custodian. The
Custodian shall at all times have the right to resign as Custodian without the
consent of the Lenders upon fifteen (15) business days prior written notice to
each of the Lenders. Upon the resignation of the Custodian and subject to the
approval of SBA and the Banks (which approval shall not be unreasonably
withheld), and provided no Event of Default exists and is continuing, Borrower
may appoint a successor Custodian provided such successor Custodian is a bank or
trust company licensed to operate in New York State. The Custodian may be
removed by Borrower, the Banks or SBA at any time upon thirty (30) days prior
written notice provided Borrower has appointed a successor Custodian approved by
SBA and the Banks (which approval shall not be unreasonably withheld) which has
agreed to serve in such capacity and such successor Custodian is a bank or
trust company licensed to operate in New York State. Upon its appointment, the
successor Custodian shall succeed to and become vested with all the rights,
powers, privileges and duties of the retiring Custodian under this Custodian
Agreement, and the retiring Custodian under this Custodian Agreement shall
promptly deliver to such successor Custodian all Custodian Collateral held
hereunder, together with all records and other documents necessary or
appropriate in connection with the performance of the duties of the successor
Custodian as depository under this Custodian Agreement, whereupon such retiring
Custodian shall be discharged from its duties and obligations under this
Custodian Agreement.
13. Reports by Custodian. The Custodian shall deliver to the respective
parties to this Agreement at the addresses and in the manner set forth in the
Intercreditor Agreement within thirty (30) days of the end of each three month
period, commencing with the period ending December 31, 1993, a report in
-7-
<PAGE>
the form of Exhibit B, attached hereto itemizing the Custodian Collateral
maintained by the Custodian as of the last business day of such three month
period.
14. Custodian Fee. The fee charged by the Custodian for its services in
connection with the performance of its duties hereunder shall be payable by
Borrower. In the event of a resignation by the Custodian, any unearned and
prepaid fees shall be refunded to Borrower. Custodian may incur and pay
reasonable costs and expenses to the extent it deems reasonably necessary or
appropriate for the performance and fulfillment of its functions, powers and
obligations pursuant to this Agreement including without limiting the generality
of the foregoing, court costs, attorneys' fees, and insurance premiums paid to
maintain the Custodian Collateral, whether or not Borrower is obligated to
reimburse Custodian or Lenders for such expenses pursuant to the Loan Agreements
or otherwise. Lenders shall be responsible for reimbursing Custodian for their
pro rata share of such costs and expenses.
15. No Waiver. No failure on the part of the Custodian to exercise, and
no course of dealing with respect to, and no delay in exercising, any right,
power or remedy hereunder shall operate as a waiver thereof;. nor shall any
single or partial exercise by the Custodian of any right, power or remedy
hereunder preclude any other or further exercise thereof or the exercise of any
other right, power or remedy. The remedies herein provided are to the fullest
extent permitted by law cumulative and are not exclusive of any remedies
provided by law.
16. Amendments Etc. No amendment, modification, termination or waiver
of any provision of this Custodian Agreement shall in any event be effective
without the written agreement of the parties. Any amendment, modification,
termination or waiver of any provisions of this Agreement or any other agreement
respecting only the Lenders' relationship among themselves shall not require the
concurrence of Borrower. Any waiver or consent shall be effective only in the
specific instance and for the specific purpose for which it was given. Any
provision of this Section respecting Lenders' relationship among themselves are
solely for the benefit of Custodian and Lenders and neither the Borrower nor any
other person shall have any rights to rely on, inquire into, or enforce any of
such provisions. No course of dealing between Borrower (or other person at any
time liable on or in respect of the Obligations) and either Custodian or Lenders
nor any delay in exercising any rights hereunder or under the Loan Agreements or
the SBA Security Agreement shall operate as a waiver of any rights of Custodian
or Lenders.
17. Notices. Except as otherwise specifically provided herein, all
notices shall be given in accordance with the Intercreditor Agreement.
-8-
<PAGE>
18. Governing Law; Terms. This Custodian Agreement shall be governed
by, and shall be construed and enforced in accordance with, the laws of the
State of New York.
19. Term. This Agreement shall become effective upon the date hereof
and shall continue in full force and effect until the indefeasible payment and
satisfaction in full of all obligations of the Borrower to the Lenders and the
irrevocable termination of the Loan Agreements and the SBA Agreement, as the
case may be. Termination of this Agreement shall not affect the respective
rights or obligations hereunder incurred prior to the effective date of such
termination.
20. No Benefit to Third Parties. The terms and provisions of this
Agreement shall be for the sole benefit of the Banks, the SBA and the Custodian
and their permitted successors and assigns and no other person, firm, entity
or corporation, including, but not limited to, the Borrower, shall have any
right, benefit, priority or interest under, or because of the existence of this
Agreement.
21. Consent to Jurisdiction; Service of Process. Each of the parties
other than the SBA consent to the jurisdiction of the Supreme Court of the State
of New York and each of the parties consent to the jurisdiction of the United
States District Court for the Southern District of New York for all purposes in
connection with this Agreement. Each party further consents that any process or
notice of motion or other application to either of said courts or a Judge
thereof, or any notice in connection with any proceedings hereunder, may be
served inside or outside the State of New York or Southern District of New York
by registered or certified mail, return receipt requested, or by personal
service provided a reasonable time for appearance is allowed, or in such other
manner as may be permissible under the Rules of said Courts.
22. Further Assurances. Each party hereby agrees to execute and/or
deliver any and all further documents, instruments or agreements reasonably
requested by the other party in order to give effect to, and more fully carry
out the terms and provisions of this Agreement.
23. WAIVER OF JURY TRIAL. THE PARTIES HERETO HEREBY WAIVE TRIAL BY JURY
IN ANY LITIGATION IN ANY COURT WITH RESPECT TO, IN CONNECTION WITH, OR ARISING
OUT OF THIS AGREEMENT, OR ANY INSTRUMENT OR DOCUMENT DELIVERED PURSUANT HERETO,
OR THE VALIDITY, PROTECTION, INTERPRETATION, ADMINISTRATION HEREOF OR ANY OTHER
CLAIM OR DISPUTE HEREUNDER.
24. Counterparts. This Custodian Agreement may be executed by one or
more of the parties on any number of separate counterparts and all of said
counterparts taken together shall be deemed to constitute one and the same
agreement.
-9-
<PAGE>
IN WITNESS WHEREOF, Borrower, the Banks, SBA and the
Custodian have caused this Custodian Agreement to be duly executed and delivered
by their respective officers thereunto duly authorized as of the date first
above written.
ELK ASSOCIATES FUNDING CORPORATION
By: /s/ Gary C. Granoff
-----------------------------------------------
Name: Gary C. Granoff
Title: President
BANK LEUMI TRUST COMPANY
OF NEW YORK
By: /s/ Melvyn F. Plotzker
-------------------------------------------------
Name: Melvyn F. Plotzek
Title: S.P.
By: /s/ Iris Schechter
-------------------------------------------------
Name: Iris Schechter
Title: Assistant Vice-President
ISRAEL DISCOUNT BANK OF NEW YORK
By: /s/ Robert J. Fainelli
-------------------------------------------------
Name: Robert J. Fainelli
Title: Vice-President
By: /s/ Gary M. Solomon
-------------------------------------------------
Name: Gary M. Solomon
Title: Vice-President
-10-
<PAGE>
BANK HAPOALIM B.M.
By: /s/ Barry Shivak
-------------------------------------------------
Name: Barry Shivak
Title: Vice-President
By: /s/ Laura Ann Raffa
-------------------------------------------------
Name: Laura Ann Raffa
Title: Vice-President
EXTEBANK
By: /s/ Walter H. Wright
-------------------------------------------------
Name: Walter H. Wright
Title: Assistant Vice-Pesident
U.S. SMALL BUSINESS ADMINISTRATION
By: /s/ Wayne S. Foren
-------------------------------------------------
Name: Wayne S. Foren
Title:
ISRAEL DISCOUNT BANK OF NEW YORK,
As Custodian
By: /s/ Robert J. Fainelli
-------------------------------------------------
Name: Robert J. Fainelli
Title: Vice-President
By: /s/ Gary M. Solomon
-------------------------------------------------
Name: Gary M. Solomon
Tit1e: Vice-President
-11-
<PAGE>
EXHIBITS OMITTED
<PAGE>
AGREEMENT
THIS AGREEMENT made as of September 9, 1993 between ELK ASSOCIATES
FUNDING CORPORATION, a New York Corporation (the "Company"), with offices
located at 600 Third Avenue, New York, New York 10016 AND THE UNITED STATES
SMALL BUSINESS ADMINISTRATION, located at 409 Third Street, SW, Washington, DC
20416 (the "SBA")
W I T N E S S E T H:
WHEREAS, the Company is a Specialized Small Business Investment
Company ("SSBIC") licensed by the SBA under the Small Business Investment Act
of 1958, as amended (the "Act"); and
WHEREAS, the Company and the SBA have entered into a letter of intent
dated October 1, 1992 (the "Letter of Intent"); and
WHEREAS, the parties desire to carry out their intentions as set forth
in the Letter of Intent by entering into a definitive agreement with respect to
the provisions thereof;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
I. Financial Statement Adjustments.
1.1 The SBA acknowledges that the Company has made certain adjustments
to the Company's financial statements for the year ended June 30, 1992, a copy
of which financial statements have been delivered to the SBA. The SBA further
acknowledges that it has no objection to such financial statements.
1.2 The Company agrees that for the fiscal year ended June 30, 1993,
it will make adjustments to its reserve loss account to the extent necessary to
comply with the accounting policies and practices for small business investment
companies as set forth in Appendix II to Part 107 of Title 13 of the Code of
Federal Regulations.
II. Retained Earnings Deficit.
2.1 The SBA agrees to permit the Company to carry the retained
earnings deficit on its books, which retained earnings deficit results from the
adjustments described in Sections 1.1 and 1.2 above, without penalty or
violation, until such retained earnings deficit has been reduced to zero,
subject to the regulatory limitations relating to capital impairment as set
forth in Part 107 of Title 13 of the Code of Federal Regulations, as amended
from time to time.
<PAGE>
III. Indebtedness.
3.1 The company will limit the aggregate of its indebtedness,
consisting of senior bank debt and SBA debentures, notes or other borrowings
from the SBA, excluding any preferred stock previously or hereafter issued by
the Company to the SBA (the "Indebtedness"), to a level not to exceed:
(a) 80% of each of the Company's "acceptable" (as hereinafter
defined) loans which is secured by a New York City taxicab medallion;
and
(b) 80% of all other "acceptable" secured loans and
investments of the company.
An "acceptable" loan or investment is defined as follows:
(1) 100% of the principal amount of any loan not in
payment default 90 days or more (a "current loan") shall be
deemed to be "acceptable";
(2) For any non-current loan secured by a New York
City taxicab medallion, the entire principal balance of the
Company's ownership share of such non-current loan (a) up to
80% of the then current market value of such medallion
provided the Company has taken reasonable steps to exercise
its rights to foreclose upon and sell the collateral or to
the Company's knowledge a voluntary sale is pending at the
New York City Taxi and Limousine Commission or (b) up to 70%
of the then current market value of such medallion if the
Company has elected not to foreclose; provided, in each
case, that the Company is first lienholder and has not
released or transferred any rights as such lienholder.
Notwithstanding the foregoing, in the event the Company is a
second lienholder, an "acceptable" loan shall also include
any loan made by the Company which is non-current and which
is secured by a New York City taxicab medallion; provided,
however, any such loan together with the aggregate loan(s)
from first lienholder(s) shall not exceed 70% of the then
current market value of such medallion.
(3) For any non-current loan secured by real estate
or for any assets involved in "in substance foreclosures" in
process, 50% of the value of the collateral securing such
loan, marked to current market value, provided the Company is
the first mortgagee (30% if second or junior
2
<PAGE>
mortgagee) and provided the Company has an appraisal
acceptable to the SBA which is dated within the preceding 12
months (such acceptance not to be unreasonably withheld). For
purposes of obtaining appraisals, the Company agrees to have
its loan collateral with respect to non-current loans
re-evaluated or appraised each year at or about the time it
submits its Form 468; and the Company will submit once each
year with its Form 468 a schedule of loan valuations to be
utilized in computing the aggregate of acceptable loans; and
(4) For assets acquired as a result of the
foreclosure of any loan, 50% of the fair market value of the
Company's equity ownership in such acquired assets, unless
the asset is a New York City taxicab medallion, in which case
100% of the then fair market value of the Company's equity
ownership in such medallion.
Provided, however, in the event the Company's "Indebtedness" exceeds
the maximum permitted as provided herein, the Company will as soon as
practicable after it has exceeded such maximum, commence taking all reasonable
steps to reduce such "Indebtedness" to the maximum permitted level. Such
reduction shall in no event be completed later than December 31, 1996.
3.2 Either the SBA or the Company may request a review of the
percentages and terms utilized in calculating the amount of "acceptable" loans
set forth herein within 90 days of the end of the Company's fiscal year.
3.3 Subject to Section 8.1 hereof, the parties further agree that the
Banks (as defined in Article XII hereof) or other lenders now or hereafter may
loan on a senior secured basis, an amount which, when aggregated with the
Company's SBA debentures, notes or other SBA borrowings (excluding any preferred
stock previously or hereafter issued by the Company to the SBA) does not exceed
the maximum "Indebtedness" provided for in Section 3.1 above.
IV. Removal of Diversification Requirement.
4.1 The SBA agrees that the requirement that the Company maintain
certain non-taxicab medallion secured loans in the amount of $3,448,000 is
removed and, accordingly, the Company is no longer required to maintain any
level of non-taxicab medallion secured loans.
V. Refinancing.
5.1 The SBA agrees to rollover for ten years, subject to the terms of
a certain Intercreditor Agreement (as hereinafter defined) of even date, the
existing $1.925 million of demand debentures as of the date of the
SBA-guaranteed funding next ensuing the
3
<PAGE>
execution of this Agreement. In addition, the SBA agrees that the Company's
Private Capital (as defined in 13 CFR Sec. 107.3), $5,490,385 as of the date of
this Agreement, shall be calculated without giving effect to the retained
earnings deficit resulting from the adjustments described in Section 1.1. hereof
for purposes of
(a) "rolling over" any of the Company's debentures other
than those referred to above; and
(b) applying for new leverage from the SBA.
VI. Grant of Security Interest.
6.1 The SBA's performance under this Agreement is conditioned upon
the SBA's receipt of a perfected security interest in all of the Collateral (as
defined in the Security Agreement (defined below)), second only to the security
interest of the Banks. Contemporaneously with the execution of this Agreement,
the Company will execute a security agreement (the "Security Agreement") in
favor of the SBA and the Company agrees to execute Form UCC-1 Financing
Statements in the forms attached hereto as Exhibit A. Such grant of a security
interest will be subject to the rights of the Company's senior lenders, as may
exist from time to time, as provided under the Company's respective loan
agreements with each of such senior lenders, copies of which loan agreements are
attached hereto as Exhibits B1-B4. In connection therewith, the SBA will execute
an inter-creditor agreement with the Company's senior lenders (the
"Inter-Creditor Agreement") in the form attached hereto as Exhibit C,
acknowledging the SBA's secured position, which Inter-Creditor Agreement will,
among other things, contain cross-notice provisions among the parties in the
event of a default by the Company;
6.2 In order to allow the SBA to perfect its lien on Company assets,
the parties are simultaneously entering into a custodian agreement (the
"Custodian Agreement") with a third party (satisfactory to the SBA) and with the
Company's Banks, in the form attached hereto as Exhibit D, pursuant to which the
Company will immediately turn over to such third party all original notes,
mortgages, security agreements and other documents now held by the Company, the
possession of which is necessary to perfect a lien thereon. The Company agrees
to bear the expenses in connection therewith.
6.3 The SBA acknowledges that it has advised the Company that the
SBA's present policy is generally to obtain a security interest in collateral
owned by Small Business Investment Companies or Specialized Small Business
Investment Companies licensed under the Act which have secured indebtedness
senior to the indebtedness owed to the SBA by such licensees. In the event SBA
significantly changes this policy in the future, or if SBA fails to implement,
or
4
<PAGE>
take significant steps toward the implementation of this policy with other
licensees within eighteen months from the date hereof by having such licensees
enter into substantially similar agreements as the Company is executing on the
date hereof, SBA agrees to notify the Company of the change of such policy, or
that it has failed to implement, or take significant steps toward the
implementation of this policy with other licensees. In such event, the Company
shall request SBA to execute and deliver to the Company all necessary documents
to terminate the security interest granted by the Company to SBA, and SBA agrees
that consent to such request shall not be unreasonably withheld.
VII. SBA Acceptance of Application for New Leverage and Repurchase of
Preferred Stock.
7.1 The SBA agrees to accept for consideration the Company's
applications for the sale of additional debentures from time to time which the
Company is entitled to apply for based upon its capital, subject to the terms of
this Agreement.
7.2 The SBA agrees that none of the audits conducted by the SBA
Inspector General's office as of the date of this Agreement shall prevent the
Company from submitting an application for leverage in connection with the sale
of preferred stock or debentures or from taking any other action normally
permitted to be taken by SSBICs.
7.3 Subject to final rules and policies, the SBA agrees to permit the
Company to apply to participate in the first round (after the pilot round of
nine SSBICs) of SSBICs that repurchase from the SBA the 3% cumulative preferred
stock previously sold to the SBA.
7.4 The SBA makes no commitment to guarantee additional debentures, to
purchase preferred stock or to permit the Company to repurchase its 3%
cumulative preferred stock at a discount.
VIII. Payment of Dividends and Limitation of Senior Indebtedness.
8.1 The Company agrees (a) not to pay or declare any dividends in the
future and (b) not to incur senior debt, including the aggregate amount of its
credit lines, in excess of the current level of nine million ($9,000,000)
dollars principal amount (excluding interest, costs and legal fees whether or
not such items are ultimately included in principal), until such time as the
Company has achieved positive retained earnings or has received a capital
contribution of cash in an amount equal to its then negative retained earnings,
as determined in accordance with the accounting policies and practices for small
business investment companies as set forth in Appendix II to Part 107 of Title
13 of the Code of Federal Regulations.
5
<PAGE>
IX. Compliance with Investment Company Act of 1940.
9. 1 The SBA acknowledges that the Company is a registered investment
company, registered under the Investment Company Act of 1940 (the "'40 Act"),
and that the SBA will not require the Company to take any action or refrain from
taking any action necessary in the opinion of the Company's counsel to comply
with the 140 Act; provided, however, the company will not take any action, or
refrain from taking any action, if to do so would violate any SBA regulation.
X. Termination of Investigation.
10.1 On January 28, 1993, the SBA provided the Company with a formal
stipulation and resolution of the investigation of certain matters previously
referred to the Office of the Inspector General (the "Investigation"), a copy of
which stipulation has been furnished to the parties hereto (the "Stipulation")
and incorporated by reference herein. Except as otherwise set forth in the
Stipulation, the SBA further acknowledges and agrees, with respect to the
Investigation, the Company is not presently subject to any further inquiry,
investigation, regulatory review, restriction or penalty by SBA.
XI. Reporting.
11.1 The Company agrees to provide financial statements and financial
information to the SBA as follows:
(a) (i) for the first fiscal quarter ending September 30, a
financial statement (compilation statement) prepared internally by
management, (ii) for the six month period ending December 31, a review
statement prepared by the Company's independent certified public
accountants for such period, (iii) for the nine month period ending
March 31, a financial statement (compilation statement) prepared
internally by management, and (iv) for the twelve month period ending
June 30, the company will provide an audited financial statement;
(b) simultaneously with the delivery of the financial
information for each of the four periods set forth in (a) above, the
Company will provide a summary of the computation of the amount of
"acceptable" loans and total Indebtedness as described herein; and
(c) the Company will provide the information referred to in
subparagraphs (a) and (b) above within 60 days following the end of
each fiscal quarter ending September 30 and March 31 and within 90
days following the end of each of the periods ending December 31 and
June 30.
6
<PAGE>
XII. Consent of Senior Lenders.
12.1 The Company has entered into loan agreements with the following
banks: (i) Israel Discount Bank of New York, (ii) Bank Leumi Trust Company of
New York, (iii) Extebank and (iv) Bank Hapoalim (each of the foregoing banks
being individually referred to as a "Bank" and collectively, as the "Banks").
The Company has entered into an Intercreditor Agreement with the Banks and the
SBA as of the date hereof pursuant to which the Banks have consented to the
terms of this Agreement.
XIII. Representations and Warranties.
13.1 Company's Representations and Warranties. The Company represents
and warrants that:
(a) the Company is a corporation duly organized and validly
existing, in good standing, under the laws of the State of New York and has
the corporate power and authority to enter into and to carry out the terms
of this Agreement, including the Exhibits hereto.
(b) the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on behalf of the Company and, except as
otherwise described in this Agreement and the Exhibits hereto, the Company is
not subject to any charter, bylaw, lien, encumbrance of any kind, agreement,
instrument, order, or decree of any court or governmental body (other than any
governmental approval required) which would prevent consummation of the
transactions contemplated by this Agreement.
13.2 SBA's Representations and Warranties. The SBA represents and
warrants that:
(a) the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby to be performed by SBA
have been duly authorized by all necessary action by or on behalf of the SBA
and the SBA is not presently subject to any statute, regulation, agreement,
instrument, order or decree of any court or governmental body which would
prevent the consummation of the actions contemplated by this Agreement,
including the Exhibits hereto.
(b) the Investigation has been resolved and terminated
pursuant to the Stipulation and no further action will be taken by the SBA
with respect to the matters which were the subject of such Investigation so
long as the Company is in compliance with the Stipulation.
7
<PAGE>
XIV. Affect of Non-Performance.
14.1 Non-performance of any of the terms of this Agreement by the
Company may be deemed also to be a violation of 13 CFR Sec. 107.906(a).
XV. Press Release.
15.1 The SBA agrees and acknowledges that as soon as practicable after
the execution of this Agreement, the Company may issue a press release
announcing certain of the transactions contemplated in this Agreement.
XVI. Assignment.
16.1 This Agreement will not be assigned or transferred by either
party without the prior written consent of the other.
XVII. Notices.
17.1 Any notices required or permitted to be given under this
Agreement will be sufficient if in writing and if sent by registered mail, by
overnight courier, or telefacsimile, as follows:
A. To the Company:
ELK ASSOCIATES FUNDING CORPORATION
600 Third Avenue
Suite 3810
New York, New York 10016
Attn: Gary C. Granoff, Esq.
Telecopy: 212-983-0571
With a Copy to:
Stursberg & Veith
405 Lexington Avenue
Suite 4949
New York, New York 10174-4902
Attn: C. Walter Stursberg, Jr., Esq.
Telecopy: 212-922-0995
8
<PAGE>
B. To the SBA:
U.S. SMALL BUSINESS ADMINISTRATION
Office of Investment
409 Third Street SW
Washington, DC 20416
Attn: Director, Office of Investment
Telecopy: 202-205-6959
With a Copy to:
U.S. SMALL BUSINESS ADMINISTRATION
Office of General Counsel
409 Third Street SW, Suite 7200
Washington, DC 20416
Attn: Chief Counsel for Investment.
Telecopy: 202-205-6846
or to such other persons or addresses as may from time to time be designated by
either of the parties in writing. Any such notice shall be deemed given upon
receipt.
XVIII. Waiver.
18.1 Waiver by either party of the breach of any provisions of this
Agreement will not operate or be construed as a waiver of any subsequent such
breach by the offending party. No failure or delay in exercising any right,
remedy, power or privilege hereunder shall operate as a waiver thereof.
XIX. Entire Agreement.
19.1 All prior negotiations, discussions and agreements by and between
the parties and/or their representatives, concerning this Agreement, whether in
writing or by parol, are herein merged and engrossed, and there are and will be
no other such agreements and/or understandings by the parties other than may be
contained herein or in a subsequent amendment or rider to this Agreement
executed by the parties with all of the formalities hereto.
XX. Severability.
20.1 The invalidity or unenforceability of any provision hereof shall
in no way affect the validity or enforceability of any other provisions.
9
<PAGE>
XXI. Applicable Laws.
21.1 In any case or controversy resulting from this Agreement, the
parties agree to the exclusive jurisdiction of the United States District Court
for the Southern District of New York.
XXII. Effect of Headings.
22.1 The section and paragraph headings herein are for convenience
only and shall not affect the construction hereof.
XXIII. Counterparts.
23.1 This Agreement may be executed in one or more counterparts, all
of which together shall constitute a single agreement.
IN WITNESS WHEREOF, the parties have set their hands and seals.
ELK ASSOCIATES FUNDING CORPORATION, INC.
By: /s/ Gary C. Granoff
-------------------------------
Gary C. Granoff Esq., President
U.S. SMALL BUSINESS ADMINISTRATION
By: /s/ Wayne S. Foren
-------------------------------
Wayne S. Foren
Associate Administrator for Investment
10
<PAGE>
EXHIBITS OMITTED
<PAGE>
U.S. SMALL BUSINESS ADMINISTRATION
WASHINGTON, D.C. 20416
License No. 02/02-5377
JAN 23, 1997
Gary C. Granoff, President
Elk Associates Funding Corporation
747 Third Avenue
New York, New York 10017
Dear Mr. Granoff:
We have reviewed the request recently submitted by Elk Associates Funding
Corporation ("Licensee") for approval to amend Licensee's Articles of
Incorporation. The amendment would allow the Licensee to invest in small
businesses other than Disadvantaged Businesses (as defined in 13 CFR Section
107.50). It has been determined that the amendment is satisfactory as drafted
and hereby approved upon the Licensee's acceptance of the following terms and
conditions.
By countersigning this letter, which sets forth the terms and conditions of
SBA's approval, Licensee hereby agrees to each such term and condition. All
capitalized terms used but not defined herein shall have the meanings assigned
to such terms in 13 CFR Part 107.
1. Immediately prior to making any investment in a small business other
than a Disadvantaged Business (a "Non-Disadvantaged Business
Financing"), Licensee must have, in its portfolio, investments in
Disadvantaged Businesses with an aggregate cost basis at least equal
to the sum of the following, each measured at the time of the
Non-Disadvantaged Business Financing:
(i) the principal amount of Licensee's outstanding debentures on which
SBA is still paying a portion of the interest,
(ii) the value of SBA's remaining Liquidating Interest (as defined in
Licensee's 3% Preferred Stock Repurchase Agreement with SBA) measured
at the time of the Non-Disadvantaged Business Financing.
2. For each Non-Disadvantaged Business Financing, Licensee must prepare
and maintain in the portfolio concern financing files, a supplemental
worksheet demonstrating Licensee's compliance with Item #1 above.
3. Each Non-Disadvantaged Business Financing by Licensee will be subject
to the 20% overline limitation applicable to financings by Section
301(c) Licensees (as set forth in 13 CFR Section 107.740(a)(1)). Each
financing of a Disadvantaged Business by Licensee will be subject to
the 30% overline limitation applicable to financings by Section
301(d) Licensees (as set forth in 13 CFR Section 107.740(a)(2)).
<PAGE>
2
4. Licensee's maximum permitted capital impairment percentage will
continue to be 75% until Licensee issues new Leverage or "rolls over"
existing Leverage. For purposes of the new or rollover Leverage only,
Licensee's maximum permitted capital impairment percentage will be the
relevant percentage applicable to a Section 301(c) Licensee under 13
CFR Section 107.1830(c)(2).
5. Licensee may continue to treat the amount in its Restricted
Contributed Capital Surplus Account as Regulatory Capital for purposes
of computing its overline limitation under 13 CFR Section 107.740 and
its capital impairment under 13 CFR Section 107.1840.
This letter agreement, if countersigned by Licensee, will constitute a written
agreement with SBA and any failure to comply with any of the terms hereof will
constitute nonperformance of this agreement under 13 CFR Section 107.507(a).
Once executed by Licensee and SBA, this letter agreement shall be in full force
and effect until such time as both parties agree in writing to its termination
or modification.
Please indicate your approval and acceptance of this letter agreement by having
an authorized officer execute both copies of this letter, affix the corporate
seal, and return both copies to SBA. A signed copy will be returned to you. Upon
receipt of the signed copy, Licensee may file the amendment with the appropriate
State office and may begin making Non-Disadvantaged Business Financings in
accordance with this letter agreement. Licensee should submit a certified copy
of the filed amendment to SBA.
Sincerely,
/s/ Don A Christensen
- ----------------------------
Don A. Christensen
Associate Administrator
for Investment
<PAGE>
3
Approved and accepted this 7th day of February, 1997,
Elk Associates Funding Corporation
By: /s/ Gary C. Granoff
-----------------------------
Name: Gary C. Granoff
Title: President
Corporate Seal
Attested /s/ Margaret Chance
----------------------
Margaret Chance
Secretary
<PAGE>
INTERCREDITOR AGREEMENT
THIS INTERCREDITOR AGREEMENT made this 9th day of September, 1993 by
and among ISRAEL DISCOUNT BANK OF NEW YORK ("IDB"), EXTEBANK (("EB"), BANK
LEUMI TRUST COMPANY OF NEW YORK ("BL"), BANK HAPOALIM B.M. ("BH") (IDB, EB,
BL and BH being hereinafter each referred to as a "Senior Lender" or "Bank", or
collectively as the "Senior Lenders" or "Banks"), the U.S. SMALL BUSINESS
ADMINISTRATION (the "SBA") and ELK ASSOCIATES FUNDING CORPORATION (the
"Borrower").
W I T N E S S E T H:
WHEREAS, the Senior Lenders have entered into certain loan agreements
(collectively, the "Loan Agreements") with the Borrower pursuant to which the
Borrower has borrowed funds and from time to time may borrow additional funds as
provided in such Loan Agreements; and
WHEREAS, the obligations incurred by Borrower under said Loan
Agreements are or may be secured, either wholly or partially, by certain
collateral as defined in the Loan Agreements (the "Collateral"); and
WHEREAS, the security interest of each Senior Lender in the Collateral
ranks equally in priority with each other Senior Lender and is senior in right
to any other interest, whether secured or unsecured now or hereafter; and
WHEREAS, the Borrower is a licensed specialized small business
investment company, licensed by the SBA under the Small Business Investment Act
of 1958, as amended (the "Act"); and
WHEREAS, the Borrower has incurred certain indebtedness through the
sale to the SBA of debentures or through the sale of debentures guaranteed by
the SBA; and
WHEREAS, as of the date of this Agreement the Borrower and the SBA have
entered into a security agreement (the "SBA Security Agreement") pursuant to
which the Borrower has granted to the SBA a security interest in the Collateral
securing obligations which have been or hereafter may be incurred from time to
time through the sale to the SBA of debentures, through the sale of debentures
guaranteed by the SBA, or through other indebtedness or liability to SBA; and
WHEREAS, the security interest of the SBA will rank junior in priority
to the security interests of the Senior Lenders; and
WHEREAS, simultaneously with the execution of this agreement, the
Borrower, the Senior Lenders and the SBA are entering into a custodian agreement
(the "Custodian Agreement"),
<PAGE>
pursuant to which IDB, as custodian (such party and any and all successors
hereinafter referred to as the "Custodian") will hold certain collateral
(collectively, the "Escrow Collateral") solely for the benefit of the Senior
Lenders and the SBA; and
WHEREAS, simultaneously with the execution of this agreement, the
Borrower and the SBA are entering into an agreement (the "SBA Agreement")
relating to, among other things, the permitted amount of total indebtedness the
Borrower may incur from time to time; and
WHEREAS, it is contemplated that the Borrower may incur (i) additional
senior indebtedness either under the Loan Agreements or with other senior
lenders and (ii) additional indebtedness through the sale to the SBA of
debentures or through the sale of debentures guaranteed by the SBA, each such
occurrence of indebtedness to be made in accordance with the terms of the SBA
Agreement, SBA Security Agreement, Custodian Agreement and this Agreement; and
WHEREAS, the parties desire to set forth their respective rights and
priorities with respect to the repayment of indebtedness to the Banks and to the
SBA and as to their respective interests in the Collateral,
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto mutually agree as follows:
1. Certain Definitions.
1.1 Event of Default. The following shall constitute an Event of
Default:
a. In the event Borrower is in default (i) in the payment
of any Senior Indebtedness beyond any applicable grace periods or (ii) under
any provision of the Loan Agreements other than for the payment of money beyond
any applicable grace periods and provided that any of the Senior Lender(s) have
"accelerated" their indebtedness; and further as respects either (i) or (ii)
above, any Senior Lender has delivered to SBA and Borrower a Notice of Event of
Default; or
b. Borrower is in default under any Obligation (as defined in the SBA
Security Agreement) beyond any applicable grace periods, and the SBA has
elected to accelerate the payment of the Obligation(s) as provided for pursuant
to SBA Regulations, or the SBA has transferred the Borrower to "liquidation
status", as provided for pursuant to SBA Regulations.
2
<PAGE>
1.2 Notice of Event of Default. The term "Notice of Event of Default"
shall mean a written notice from any Senior Lender or the SBA that one or more
Events of Default (as defined in Section 1.1) in respect of Senior Indebtedness
and/or the Junior Indebtedness, as hereinafter defined, has occurred and is
continuing, describing such Event or Events of Default, which notice shall
constitute a notice of the Event or Events of Default described therein.
1.3 Senior Indebtedness and Junior Indebtedness. As used in this
Agreement, each of the obligations enumerated in Section 1.3.1 shall at all
times constitute "Senior Indebtedness" which indebtedness shall be senior and
have priority with respect to all obligations whatsoever enumerated in Section
1.3.2, which obligations shall constitute "Junior Indebtedness".
1.3.1 (Senior Indebtedness): Any and all indebtedness and
other obligations including, without limitation, all principal, interest
(including all interest accruing after commencement of any case, proceeding or
other action relating to the bankruptcy, insolvency or reorganization of the
Borrower) charges, expenses, fees and other sums owing by the Borrower under the
Loan Agreements from time to time in effect, new or replacement loan agreements
with other senior lenders and any refinancing or refinancings of the foregoing
including any agreement or agreements increasing the obligations under,
extending the maturity of, refinancing or restructuring any of the Loan
Agreements, new or replacement loan agreements with other senior lenders or any
successor agreement or agreements. The Company agrees that the Senior
Indebtedness shall not be increased so that the Company's total indebtedness
exceeds the limitations provided for in the SBA Agreement.
1.3.2 (Junior Indebtedness): Any and all indebtedness and other
obligations owing by the Borrower to the SBA, including any and all amounts
outstanding from time to time under any and all debentures sold to or guaranteed
by the SBA (the "Debentures") whether principal, interest or otherwise, plus all
fees, expenses, other amounts and other monetary obligations owing pursuant to
the Debentures and refinancings of the foregoing, but not including any
preferred stock sold to the SBA.
2. Terms of Priority.
2.1 Priority of Senior Indebtedness. Any payment in respect of or to
or for the benefit of any Junior Indebtedness is and shall be junior in right of
payment and the exercise of any remedy to the prior payment in full of Senior
Indebtedness to the extent and in the manner provided for herein. The Borrower
agrees to comply with the rights of the holders of Senior Indebtedness and the
rights of the SBA (or any holder of Junior Indebtedness), as embodied in the
terms and provisions of this
3
<PAGE>
Agreement. It is further agreed that Junior Indebtedness shall also be second in
priority as a claim against the Borrower or any of the assets of the Borrower to
the prior payment in full of Senior Indebtedness, regardless of whether any such
claim is made (i) in any distribution of the assets of the Borrower upon any
voluntary or involuntary dissolution, winding-up, total or partial liquidation
or reorganization, or bankruptcy, insolvency, receivership or other statutory or
common law proceedings or arrangements involving the Borrower or the
readjustment of the Borrower's liabilities or any assignment for the benefit of
creditors or any marshalling of the assets or liabilities of the Borrower
(hereinafter collectively referred to as a "Reorganization") or (ii) other than
in connection with a Reorganization.
2.2 Event of Default; Repayment of Junior Indebtedness.
No payment, direct or indirect, on account of principal or
premium, if any, interest or otherwise on or in respect of Junior Indebtedness
shall be made to the SBA (or any holder of Junior Indebtedness) if, at the time
of such payment, there exists or shall have occurred an Event of Default and the
Senior Indebtedness has not been paid in full.
2.3 Distributions in Reorganization.
2.3.1 In the event of any Reorganization, then all Senior
Indebtedness owing shall first be paid, before any payment or distribution
whatsoever is made upon or in respect of any Junior Indebtedness, and in any
such proceedings, any and all payments or distributions of any kind or
character, whether in cash, property, securities or otherwise (or any
combination of the foregoing), which is or may be payable or deliverable upon,
in respect of, or to or for the benefit of such Junior Indebtedness shall be
paid or delivered directly first to the Banks, in proportion to the extent they
hold Senior Indebtedness, until all such Senior Indebtedness has been paid and
satisfied in full. The SBA hereby authorizes the Banks, to the extent they hold
Senior Indebtedness, to the extent permitted by law, to accept, receive and
retain any and all payments or distributions, it being understood that any
monies or other assets so received shall be applied first to the payment in full
of the Senior Indebtedness (as set forth above) and any remainder shall be
transferred to the SBA (or upon written approval of the SBA to the holders of
any of the Junior Indebtedness). If, notwithstanding the foregoing, during any
such Reorganization, any payment or distribution of assets of the Borrower of
any kind or character, whether in cash, property, securities or otherwise, shall
be, directly or indirectly, received by (or the benefit of such payment or
distribution shall accrue, directly or indirectly, to) the SBA (or any holder of
Junior Indebtedness) before all Senior Indebtedness is paid in full, such
payment or
4
<PAGE>
distribution shall be immediately paid over first to the Banks, in proportion to
the Senior Indebtedness held by each Bank and to the extent they hold Senior
Indebtedness, provided all such Banks consent in writing to the proposed
distribution, and then, but in no event unless and until all such Senior
Indebtedness has been paid in full, to the SBA.
2.3.2 In the event that any Senior Indebtedness is paid in full
and subsequently, for whatever reason (including, but not limited to, an order
or judgment for disgorgement of a preference under any law regarding
reorganization, fraudulent conveyance or fraudulent transfer or the settlement
of any claim in respect thereof), former or satisfied Senior Indebtedness
becomes unpaid or unsatisfied, then the priorities provided in this Agreement
shall again be operative until all such Senior Indebtedness shall have been paid
in full.
2.3.3 The provisions of this Agreement shall continue to be
effective regardless of whether the Borrower shall have taken advantage of or
been subject to any bankruptcy, Reorganization or similar proceeding.
2.4 Effect of Provisions. The provisions hereof as to payment
priorities are solely for the purpose of defining the relative rights of holders
of Senior Indebtedness, on the one hand, and the SBA (or its assigns) as holders
of Junior Indebtedness, on the other hand, and, except to the extent otherwise
provided in this Agreement, none of such provisions shall impair, as between the
Borrower and the SBA (or any holder of Junior Indebtedness), the obligations of
the Borrower, which are unconditional and absolute, to pay the Junior
Indebtedness, nor shall any such provisions prevent the SBA from exercising all
remedies otherwise permitted by applicable law or under the terms of any
agreement governing Junior Indebtedness, as the case may be, upon a default
thereunder; provided, however, that to the extent that any terms or provisions
of any agreement governing Junior Indebtedness contradict or conflict with any
terms or provisions of this Agreement, the terms or provisions in this Agreement
shall prevail, except as hereinafter set forth in Section 3 hereof.
3. Escrow Collateral. The parties hereto have entered into the
Custodian Agreement pursuant to which the Custodian will hold the Escrow
Collateral as security for the Senior Indebtedness and the Junior Indebtedness.
If any conflicts arise between this Agreement and the Custodian Agreement with
respect to the Escrow Collateral, then the Custodian Agreement shall govern. As
provided in the Custodian Agreement, Borrower shall have the right to substitute
or add other senior lenders, subject to the limitations on indebtedness set
forth in the SBA Agreement and provided no Event of Default exists and is
continuing and to take all actions in respect of the Escrow Collateral as
provided
5
<PAGE>
in the Custodian Agreement; provided, however, the rights of any substitute or
additional senior lender shall be subject to such senior lender's execution of
this Agreement, the Custodian Agreement and such other agreements among the
parties as are in effect from time to time.
4. Requirement of Notice.
4.1 The SBA agrees to notify the Borrower and each of the Banks or
other senior lenders upon becoming aware of any of the following:
4.1.1 The occurrence of any payment default or Event of Default;
or
4.1.2 The curing by Borrower of any Event of Default.
4.1.3 The transfer of any Junior Indebtedness, specifying the name
and address of the transferee.
4.2 Each of the Senior Lenders agrees to notify the Borrower and SBA
and the other Senior Lenders upon becoming aware of any of the following:
4.2.1 The occurrence of any payment default or Event of Default;
4.2.2 The waiver by any Bank of any payment default under its Loan
Agreement or any other agreement governing Senior Indebtedness, as applicable;
or
4.2.3 The transfer of any Senior Indebtedness, specifying the name
and address of the transferee.
5. Consent to Grant of Junior Security Interest. The Banks hereby
consent to the grant by the Company to the SBA of a security interest in the
Escrow Collateral which security interest shall rank junior in priority to the
security interests of the Banks. The Banks further consent to the execution of
the SBA Agreement.
6. Rights of Action.
6.1 If any senior Lender has declared an acceleration of Senior
Indebtedness or if an Event of Default under 1.1b. hereof has occurred, the SBA
may declare, claim, permit or seek the benefit of an acceleration of the Junior
Indebtedness or avail itself of any other remedy available under the Small
Business Investment Act of 1958, as amended, or the regulations promulgated
thereunder, but the rights of the SBA (or any holder of Junior Indebtedness)
thereupon and any payments, distributions, redemptions, defeasance, purchases,
acquisitions
6
<PAGE>
or retirements, direct or indirect, whether in whole or in part, upon or in
respect thereof shall be subject to all other provisions of this Agreement.
7. Amendments.
7.1 (a) Each holder of Senior Indebtedness hereby reserves the right,
without the consent of the SBA (or any holder of Junior Indebtedness) but with
the required consent of the Borrower, if any, to modify, amend, waive or release
any of the terms of the Senior Indebtedness held by such holder of Senior
Indebtedness, or any other document executed in connection with such Senior
Indebtedness, or any other document relative thereto, and to exercise or refrain
from exercising any powers or rights, in whole or in part, which such holder of
Senior Indebtedness may have thereunder; and such modification, amendment,
waiver, release, exercise or failure to exercise shall not affect the rights of
any such holder of Senior Indebtedness under this Agreement.
(b) The SBA (or any holder of Junior Indebtedness) hereby reserves
the right, without the consent of the Banks (or any holder of Senior
Indebtedness) but with the required consent of the Borrower, if any, to modify,
amend, waive or release any of the terms of the Junior Indebtedness held by such
holder of Junior Indebtedness, or any other document executed in connection
with such Junior Indebtedness, or any other document relative thereto, and to
exercise or refrain from exercising any powers or rights, in whole or in part,
which such holder of Junior Indebtedness may have thereunder; and such
modification, amendment, waiver, release, exercise or failure to exercise shall
not affect the rights of the SBA or any such holder of Junior Indebtedness under
this Agreement.
7.2 The Borrower shall furnish each party hereto with a copy of any
amendment to any agreement relating to Senior Indebtedness or Junior
Indebtedness; provided, however, that the failure of the Borrower so to furnish
any such amendment shall in no way affect the enforceability of any amendment
effected in accordance with this Agreement or in any other way affect the
relative rights of the parties hereto.
8. Further Assurances. The SBA, as a holder of Junior Indebtedness,
covenants to execute and deliver to each other holder of Senior Indebtedness,
such further instruments and to take such further action as may be reasonably
necessary at any time or times in order to effectuate the priority provisions of
this Agreement.
9. Conflicts with Other Agreements. After giving effect to this
Agreement, there are no agreements between any Senior Lender and the Borrower as
a result of which Borrower is or will
7
<PAGE>
be in violation of any of the terms of any of the Loan Agreements, the related
notes or security documents.
10. Notices. Any notice or other communication in connection with this
Agreement shall be in writing addressed as provided below and delivered by
express delivery (including overnight courier) providing receipt of delivery or
mailed by certified or registered mail, postage prepaid, return receipt
requested, or transmitted by telex or facsimile transmission with a copy sent by
first class mail:
If to Israel Discount Bank, to it at the following address:
Israel Discount Bank of New York
511 Fifth Avenue
New York, New York 10017
Attention: Mr. Robert J. Fainelli
Telecopy: 212-986-4786
If to Bank Leumi Trust Company of New York, to it at the following
address:
Bank Leumi Trust Company of New York
562 Fifth Avenue
New York, New York 10036
Attention: Ms. Iris Schechter
Telecopy: 212-626-1329
If to Bank Hapoalim B.M., to it at the following address:
Bank Hapoalim B.M.
1177 Avenue of the Americas
New York, New York 10036
Attention: Mr. Barry Shivak
Telecopy: 212-782-2187
If to Extebank, to it at the following address:
Extebank
1001 Avenue of the Americas
New York, New York 10018
Attention: Mr. Walter Wright
Telecopy: 212-768-8785
8
<PAGE>
with a copy to:
Extebank
1001 Avenue of the Americas
New York, New York 10018
Attention: Mr. Charles D. Rothenberg,
Senior Vice President
Telecopy: 212-768-8785
If to the SBA, to it at the following address:
United States Small Business Administration
Office of Investment
409 Third Street SW
Washington, DC 20416
Attention: Director, Office of Investment
Telecopy: 202-205-6959
with a copy to:
United States Small Business Administration
Office of General Counsel
409 Third Street SW, Suite 7200
Washington, DC 20416
Attention: Chief Counsel for Investment
Telecopy: 202-205-6846
If to the Borrower, to it at the following address:
Elk Associates Funding Corporation
600 Third Avenue
New York, New York 10016
Attention: Gary C. Granoff, President
Telecopy: 212-983-0571
with a copy to:
Stursberg & Veith
405 Lexington Avenue
Suite 4949
New York, New York 10174
Attention: C. Walter Stursberg, Jr., Esq.
Telecopy: 212-922-0995
or at such other addresses as the addressee shall have specified by notice given
in compliance with this Section. Any such notice or communication, if given or
made by prepaid, registered or certified mail or by recorded express delivery,
shall be deemed to have been received on the earlier of when actually received
or five (5) business days after the same was posted or given to such express
delivery service (and in proving such it shall be sufficient to prove that the
envelope containing the same was
9
<PAGE>
properly addressed and posted or given to such service as aforesaid) and if
given or made by telex or facsimile transmission shall be deemed to have been
received at the time of dispatch.
11. Successors; Continuing Effect, etc. This Agreement is being
entered into for the benefit of, and is binding upon, the Borrower, the Banks,
any other holders of Senior Indebtedness and their respective successors and
assigns and the SBA and its respective successors and assigns. This Agreement
shall be a continuing agreement and shall be irrevocable and shall remain in
full force and effect so long as there is any Senior Indebtedness outstanding.
12. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE
STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED WHOLLY
THEREIN.
13. CONSENT TO JURISDICTION. ANY LEGAL ACTION OR PROCEEDING WITH
RESPECT TO THIS AGREEMENT MAY BE BROUGHT IN THE COURT OF THE UNITED STATES FOR
THE SOUTHERN DISTRICT OF NEW YORK, AND, BY EXECUTION AND DELIVERY OF THIS
AGREEMENT, EACH PARTY HERETO HEREBY IRREVOCABLY ACCEPTS FOR ITSELF AND IN
RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE
AFORESAID COURTS. EACH PARTY HERETO FURTHER IRREVOCABLY CONSENTS TO THE SERVICE
OF PROCESS OUT OF THE AFOREMENTIONED COURT IN ANY SUCH ACTION OR PROCEEDING BY
THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID,
TO THE RESPECTIVE PARTY HERETO AT ITS ADDRESS FOR NOTICES PURSUANT TO SECTION 10
HEREOF, SUCH SERVICE TO BECOME EFFECTIVE 30 DAYS AFTER SUCH MAILING. NOTHING
HEREIN SHALL AFFECT THE RIGHT OF ANY HOLDER OF SENIOR OR JUNIOR INDEBTEDNESS To
SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW.
14. The headings in this Agreement are for convenience of reference
only and shall not alter or otherwise affect the meaning hereof.
15. This Agreement may be executed in any number of counterparts and
by the different parties hereto on separate counterparts, each of which when so
executed and delivered shall be an original, but all of which shall together
constitute one and the same instrument.
10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first written above.
ELK ASSOCIATES FUNDING CORPORATION
By: /s/ Gary C. Granoff
------------------------------------
Name: Gary C. Granoff
Title: President
ISRAEL DISCOUNT BANK OF NEW YORK
By:/s/ Robert J. Fainelli
------------------------------------
Name: Robert J. Fainelli
Title: Vice President
By:/s/ Gary M. Solomon
------------------------------------
Name: Gary M. Solomon
Title: Vice President
BANK LEUMI TRUST COMPANY
OF NEW YORK
By:/s/ Melvyn F. Plotzker
------------------------------------
Name: Melvyn F. Plotzker
Title: Vice President
By:/s/ Iris Schechter
------------------------------------
Name: Iris Schechter
Title: Assistant Vice President
BANK HAPOALIM B.M.
By:/s/ Barry Shivak
------------------------------------
Name: Barry Shivak
Title: Vice President
By:/s/ Laura Anne Raffa
------------------------------------
Name: Laura Anne Raffa
Title: Vice President
11
<PAGE>
EXTEBANK
By:/s/ Walter H. Wright
------------------------------------
Name: Walter H. Wright
Title: Assistant Vice President
UNITED STATES SMALL BUSINESS
ADMINISTRATION
By:/s/ Wayne Foren
------------------------------------
Name: Wayne Foren
Title: Assoc. Admin. for Ins.
12
<PAGE>
AGREEMENT
THIS AGREEMENT made as of 28th day of September, 1994 by and among ISRAEL
DISCOUNT BANK OF NEW YORK ("IDB"), EXTEBANK ("EB"), BANK LEUMI TRUST COMPANY OF
NEW YORK ("BL"), BANK HAPOALIM B.M. ("BH"), EUROPEAN AMERICAN BANK ("EAB"), the
U.S. SMALL BUSINESS ADMINISTRATION (the "SBA") and ELK ASSOCIATES FUNDING
CORPORATION (the "Borrower").
W I T N E S S E T H:
WHEREAS, IDB, EB, BL, BH, the SBA and the Borrower previously entered into an
intercreditor agreement dated September 9, 1993 which is attached hereto as
Exhibit A (the "Intercreditor Agreement"); and
WHEREAS, IDB, EB, BL, BH, the SBA and the Borrower previously entered into a
custodian agreement dated September 9, 1993 which is attached hereto as Exhibit
B (the "Custodian Agreement"); and
WHEREAS, the Borrower has terminated its loan agreement with EB and is about
to terminate its loan agreement with BH (hereinafter EB and BH are sometimes
collectively referred to as the "Former Banks"); and
WHEREAS, the Borrower has entered into a loan agreement with EAB; and
WHEREAS, the parties desire to remove the Former Banks as parties to the
Custodian Agreement and the Intercreditor Agreement (collectively, the
"Agreements") and to make EAB a party to the Agreements;
NOW, THEREFORE, in consideration of the premises and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto mutually agree as follows:
1. Removal of Former Banks as Parties to the Agreements.
(a) Effective as of the date hereof, the Agreements are hereby amended in
order to remove EB as a party to the Agreements. Accordingly, EB is hereby
relieved of all obligations and shall no longer have any rights or be entitled
to any benefits as a Bank (as that term is defined in the Agreements) pursuant
to the terms of the Agreements.
(b) Effective upon the payment by Borrower to BH in an amount necessary
to satisfy in full all obligations due from Borrower to BH under Borrower's loan
agreement with BH, BH shall be removed as a party to the Agreements. BH shall
thereafter be relieved of all obligations and shall no longer have any rights or
<PAGE>
be entitled to any benefits as a Bank (as that term is defined in the
Agreements) pursuant to the terms of the Agreements. Upon the satisfaction of
Borrower's obligations to BH, BH shall execute a letter substantially in the
form set forth in Exhibit A hereto, copies of which shall be delivered to all
the parties hereto.
2. Admission of EAB as a Party to the Agreements. Effective as of the date
hereof, the Agreements are hereby amended in order to admit EAB as a party to
the Agreements. Accordingly, EAB shall be bound by the terms of the Agreements
and shall assume all of the obligations and be entitled to any and all rights
and benefits as a Bank (as that term is defined in the Agreements) pursuant to
the terms of the Agreements.
3. Continuation Agreements. The Agreements shall remain in full force and effect
as modified pursuant to the terms hereof.
4. Further Assurances. The parties agree to execute any and all documents
necessary to effectuate the withdrawal of the Former Banks as parties to the
Agreements and the admission of EAB as a party to the Agreements.
5. Notices.
(a) EAB's address for notice or other communication in connection with the
Agreements shall be:
European American Bank
335 Madison Avenue
New York, NY 10017
Attention: Zach Mayo, Vice President
Telecopy: 212-503-2667
(b) Borrower's new address for notice or other communication in connection
with the Agreements shall be:
Elk Associates Funding Corporation
747 Third Avenue- 4th Floor
New York, New York 10017
Attention: Gary C. Granoff, President
Telecopy: 212-421-3488
6. Governing Law. This agreement shall be governed by the laws of the state of
New York applicable to contracts made and to be performed wholly therein.
7. Headings. The headings in this Agreement are for convenience reference only
and shall not alter or otherwise affect the meaning hereof.
2
<PAGE>
8. Counterparts. This Agreement may be executed in any number of counterparts
and by the different parties hereto on separate counterparts, each of which when
so executed and delivered shall be an original, but all of which shall together
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first written above.
ELK ASSOCIATES FUNDING CORPORATION
By: /s/ Gary C. Granoff
-------------------------------
Name: Gary C. Granoff
Title: President
ISRAEL DISCOUNT BANK OF NEW YORK
By: /s/ Robert J. Fainelli
-------------------------------
Name: Robert J. Fainelli
Title: Vice President
By: /s/ Leslie Miller
-------------------------------
Name: Leslie Miller
Title: Vice President
BANK LEUMI TRUST COMPANY
OF NEW YORK
By: /s/ Melvyn F. Plotzker
-------------------------------
Name: Melvyn F. Plotzker
Title: Vice President
By: /s/ Iris Schechter
-------------------------------
Name: Iris Schechter
Title: Vice President
BANK HAPOALIM B.M.
By: /s/ Erik Vanderke
-------------------------------
Name: Erik Vanderke
Title: xxxxxxxxxxxxxxxxxxx
By: /s/ Lorin Alvarez
-------------------------------
Name: Lorin Alvarez
Title: Assistant Vice President
3
<PAGE>
EXTEBANK
By: /s/ Kenneth Lipke
-------------------------------
Name: Kenneth Lipke
Title: Vice President
EUROPEAN AMERICAN BANK
By: /s/ Dennis J. Nochowitz
-------------------------------
Name: Dennis J. Nochowitz
Title: Assistant Vice President
UNITED STATES SMALL BUSINESS
ADMINISTRATION
By: /s/ Don A. Christensen
-------------------------------
Name: Don A. Christensen
Title: Assoc. Admin/Invest.
<PAGE>
EXHIBIT A - filed as Exhibit k.2 to Registration Statement
EXHIBIT B - filed as Exhibit j.1 to Registration Statement
<PAGE>
AGREEMENT
---------
THIS AGREEMENT made as of the - day of June, 1995 by and among ISRAEL
DISCOUNT BANK OF NEW YORK ("IDB"), BANK LEUMI TRUST COMPANY OF NEW YORK
("BL"), EUROPEAN AMERICAN BANK ("EAB"), UNITED MIZRAHI BANK AND TRUST COMPANY
("UMB"), the U.S. SMALL BUSINESS ADMINISTRATION (the "SBA") and ELK ASSOCIATES
FUNDING CORPORATION (the "Borrower").
W I T N E S S E T H:
--------------------
WHEREAS, IDB, BL, EAB, the SBA and the Borrower are parties to an
intercreditor agreement dated September 9, 1993, as amended by agreement dated
September 28, 1994 (the "Intercreditor Agreement"); and
WHEREAS, IDB, EB, BL, the SBA and the Borrower are parties to a
custodian agreement dated September 9, 1993, as amended by agreement dated
September 28, 1994 (the "Custodian Agreement"); and
WHEREAS, the Borrower has entered into a loan agreement with UMB; and
WHEREAS, the parties desire to make UMB a party to the Custodian
Agreement and the Intercreditor Agreement (collectively, the "Agreements");
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto mutually agree as follows:
1. Admission of UMB as a Party to the Agreements. Effective as of the date
hereof, the Agreements are hereby amended in order to admit UMB as a party to
the Agreements. Accordingly, UMB shall be bound by the terms of the Agreements
and shall assume all of the obligations and be entitled to any and all rights
and benefits as a Bank (as that term is defined in the Agreements) pursuant to
the terms of the Agreements.
2. Continuation Agreements. The Agreements shall remain in full force and
effect as modified pursuant to the terms hereof.
3. Further Assurances. The parties agree to execute any and all documents
necessary to effectuate the admission of UMB as a party to the Agreements.
4. Notices.
UMB's address for notice or other communication in connection with the
Agreements shall be:
<PAGE>
United Mizrahi Bank and Trust Company
One Rockefeller Plaza
New York, NY 10020
Attention: Joseph C. LoMonaco, Vice President
Telecopy: 212-332-7466
5. Governing Law. This agreement shall be governed by the laws of the state of
New York applicable to contracts made and to be performed wholly therein.
6. Headings. The headings in this Agreement are for convenience reference only
and shall not alter or otherwise affect the meaning hereof.
7. Counterparts. This Agreement may be executed in any number of counterparts
and by the different parties hereto on separate counterparts, each of which when
so executed and delivered shall be an original, but all of which shall together
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first written above.
ELK ASSOCIATES FUNDING CORPORATION
By: Gary C. Granoff
-----------------------------------------
Name: Gary C. Granoff
Title: President
ISRAEL DISCOUNT BANK OF NEW YORK
By: Robert J. Fainelli
-----------------------------------------
Name: Robert J. Fainelli
Title: Vice President
By: Robert E. Stark
-----------------------------------------
Name: Robert E. Stark
Title: Sr. Vice President
BANK LEUMI TRUST COMPANY
OF NEW YORK
By: Iris Schechter
-----------------------------------------
Name: Iris Schechter
Title: Vice President
By: Joseph Eirel
-----------------------------------------
Name: Joseph Eirel
Title: Banking Officer
2
<PAGE>
EUROPEAN AMERICAN BANK
By: Dennis J. Nochowitz
-----------------------------------------
Name: Dennis J. Nochowitz
Title: Assistant Vice President
UNITED MIZRAHI BANK AND TRUST
COMPANY
By: Peter W. Blake
-----------------------------------------
Name: Peter W. Blake
Title: Vice President
By: David Barsion
-----------------------------------------
Name: David Barsion
Title: Vice President
UNITED STATES SMALL BUSINESS
ADMINISTRATION
By: Don A. Christensen
-----------------------------------------
Name: Don A. Christensen
Title: Assoc. Admin./Invest.
3
<PAGE>
BANK INTERCREDITOR AGREEMENT
ELK ASSOCIATES FUNDING CORPORATION (the "Debtor") from time
to time incurs obligations, direct, indirect and/or contingent including
principal, interest, charges relating thereto and fees and expenses in
connection therewith ("Obligations") to each of Bank Hapoalim, B.M., Bank Leumi
Trust Company of New York, Israel Discount Bank of New York and Extebank (each,
individually a "Creditor" and collectively, the "Creditors"), some or all of
which Obligations are or may be secured, either wholly or partially, by
Collateral (as hereinafter defined) granted to each Creditor by the Debtor under
various agreements. Each Creditor has filed or may file a financing statement
("Financing Statement") under the Uniform Commercial Code as adopted in the
State of New York. The Creditors desire to agree among themselves as to the
relative priority of their respective security interests in Collateral. It is
hereby agreed as follows:
1. "Collateral" means all personal property and fixtures of
the Debtor, whether now or hereafter existing or now owned or hereafter acquired
and wherever located, of every kind and description, tangible or intangible,
including, but not limited to, all goods, equipment, inventory, documents,
instruments, chattel paper, accounts, contract rights, general intangibles,
notes and other instruments and all other rights to the payment of money arising
out of the Debtor's providing financial services, any collateral securing
payment of the foregoing (including security interests in New York City tax
medallions) and including the products and proceeds thereof and accessions
thereto, constituting security for obligations of the Debtor, whether direct or
indirect, liquidated or contingent. Collateral shall also include any and all
deposits or other sums at any time credited by or due from a Creditor to the
Debtor and any monies or securities and other property of the Debtor held or
received by a Creditor.
2. Borrower hereby acknowledges and confirms by its execution
below that each and every Creditor is and has been granted a security interest
in all of the Collateral.
3. "General Security Interest" means any perfected and
enforceable security interest of a Creditor in any Collateral however arising,
including purchase money security interests.
4. The General Security Interest of each Creditor in any
Collateral ranks equally in priority with the General Security Interest of each
other Creditor in the same Collateral. Any Collateral, or proceeds thereof,
received at any time or from time to time by any of the Creditors shall be
shared by all of the Creditors, and applied to the payment of the then
outstanding Obligations, pro rata in accordance with the outstanding amounts of
Obligations owed by the Debtor to each Creditor. Without limiting the generality
of the foregoing, notes payable to Debtor and held by any Creditor shall be
deemed to be subject to a General Security Interest for the benefit of all the
Creditors to be shared on a pro rata basis. For the purposes of perfecting such
General Security Interest, the possession of notes by
<PAGE>
any Creditor shall be deemed to be possession of the notes by all of the
Creditors. Each Creditor agrees that any such note shall be endorsed as
collateral security to the order of the Creditor holding the note as Custodian
for itself and all Lenders party to a Custodian Agreement dated September 9,
1993 and be held pursuant to the terms thereof.
5. The priorities specified herein shall be applicable
irrespective of the time or order of attachment or perfection of any Creditor's
security interest or the time or order of filing of Financing Statements or the
giving or failure to give notice of the acquisition or expected acquisition of
purchase money or other security interests.
6. The priorities provided herein shall not be altered or
otherwise affected by any amendment, modification, supplement, extension,
renewal, restatement or refinancing of any Obligation of Debtor to any Creditor,
nor by any action or inaction which any Creditor may take or fail to take with
respect to any Collateral.
7. Subject to the provisions of paragraph 3 hereof, each
Creditor shall have the right to manage, perform and enforce the terms of its
respective agreements with Debtor with respect to Collateral and to exercise and
enforce all privileges and rights thereunder according to its discretion and the
exercise of its business judgment including, without limitation, the exclusive
right to take or retake control or possession of the Collateral and to hold,
prepare for sale, process, sell, lease, dispose of, or liquidate the Collateral.
8. All of the Creditors acknowledge that this Agreement shall
constitute notice of each of their respective security interests in the
Collateral as provided by Section 9-504 of the New York Uniform Conunercial
Code.
9. This Agreement shall terminate ten (10) days after the
date that all Creditors receive written notice at the address specified on the
signature page for such Creditor and in the manner set forth below of a
Creditor's intention to terminate. Termination shall not impair any General
Security Interest theretofore acquired by any Creditor or affect the priorities
thereof or the sharing of Collateral and any proceeds hereunder.
10. All notices permitted or required to be given or among
the Creditors under this Agreement shall be in writing and shall be deemed to be
duly given if given personally with receipt acknowledged or sent by registered
or certified mail, return receipt requested, or via facsimile, with a
confirmation sent by registered or certified mail, or by overnight courier for
next day delivery, addressed to the parties at their addresses or facsimile
numbers set forth below, unless notice in writing is given of a change of
address or telecopy number in the manner set forth herein, in which case notices
shall be sent to the new address or telecopy number as designated. Notice of
change of address or telecopy number shall be deemed given when actually
received
-2-
<PAGE>
or upon refusal to accept delivery thereof; all other notices shall be deemed
given and received on the earlier of (a) when actually received or upon refusal
to accept delivery thereof, or (b) on the date personally delivered, one day
after being sent by telecopy or overnight courier and four days after mailing,
as aforesaid.
11. This Agreement shall be governed by the laws of the
State of New York. Unless the context otherwise requires all terms used herein
and not otherwise defined herein which are defined in the Uniform Commercial
Code shall have the meanings therein stated.
12. This Agreement is solely for the benefit of the
Creditors and their successors or assigns and no other person or persons shall
have any right, benefit, priority or interest under, or because of the existence
of, this Agreement. This Agreement shall not be amended, nor any provisions
hereof waived without the prior written consent of all the parties hereto.
13. This Agreement may be executed in several counterparts,
each of which shall be deemed an original. All such counterparts shall together
constitute one and the same instrument.
14. Each Creditor agrees that it will give written notice to
each of the other Creditors at the respective addresses below and in the manner
set forth herein upon the declaration of an event of default under the security
agreements between each of the Creditors and the Debtor with respect to any
Obligation owed by the Debtor to it and before giving such Debtor any
instructions with respect to the Collateral or taking any actions with respect
to the Collateral.
IN WITNESS WHEREOF, each Creditor has caused this Agreement
to be duly executed the 9th day of September 1993.
<TABLE>
<S> <C>
ISRAEL DISCOUNT BANK OF NEW YORK BANK LEUMI TRUST COMPANY OF NEW YORX
Address: 511 Fifth Avenue Address: 535 Seventh Avenue
New York, NY 10017 New York, NY 10036
Fax No: 212/986-4786 Fax No:212/626-1329
By: /s/ Robert J. Fannell By: /s/ Melvyn F. Plotzker
---------------------------------- ------------------------------------
Title: Vice President Title: Vice President
By: /s/ Gary M. Solomon By: /s/ Thomas Scheckter
---------------------------------- ------------------------------------
Title: Vice President Title: Vice President
EXTEBANK BANK HAPOALIM, B.M.
Address: 1001 Avenue of the Americas Address: 75 Rockefeller Plaza
New York, NY 10016 New York, NY 10019
Fax No: 212/768-8785 Fax No: 212/782-2187
By: /s/ Walter H. Wright By: /s/ Roy XXXXXXXXXX
---------------------------------- ------------------------------------
Title: Assistant Vice President Title: Vice President
</TABLE>
-3-
<PAGE>
ACKNOWLEDGED AND AGREED:
ELK ASSOCIATES FUNDING CORPORATION
By: /s/ Gary C. Granoff
----------------------------------
-4-
<PAGE>
AGREEMENT
THIS AGREEMENT made as of 28th day of September, 1994 by and among ISRAEL
DISCOUNT BANK OF NEW YORK ("IDB"), EXTEBANK ("EB"), BANK LEUMI TRUST COMPANY OF
NEW YORK ("BL"), BANK HAPOALIM B.M. ("BH") and EUROPEAN AMERICAN BANK ("EAB").
W I T N E S S E T H:
WHEREAS, IDB, EB, BL and BH previously entered into a bank intercreditor
agreement dated September 9, 1993 which is attached hereto as Exhibit A (the
"Bank Intercreditor Agreement") relating to certain obligations of Elk
Associates Funding Corporation (the "Debtor"); and
WHEREAS, the Debtor has terminated its loan agreement with EB and is about to
terminate its loan agreement with BH (hereinafter EB and BH are sometimes
collectively referred to as the "Former Banks"); and
WHEREAS, the Debtor has entered into a loan agreement with EAB; and
WHEREAS, the parties desire to remove the Former Banks as parties to the
Bank Intercreditor Agreement and to make EAB a party to the Bank Intercreditor
Agreement;
NOW, THEREFORE, in consideration of the premises and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto mutually agree as follows:
1. Removal of Former Banks as Parties to the Bank Intercreditor Agreement.
(a) Effective as of the date hereof, the Bank Intercreditor Agreement is
hereby amended in order to remove EB as a party to the Bank Intercreditor
Agreement. Accordingly, EB is hereby relieved of all obligations and shall no
longer have any rights or be entitled to any benefits as a Creditor (as that
term is defined in the Bank Intercreditor Agreement) pursuant to the terms of
the Bank Intercreditor Agreement.
(b) Effective upon the payment by Debtor to BH in an amount necessary to
satisfy in full all obligations due from Debtor to BH under Debtor's loan
agreement with BH, BH shall be removed as a party to the Bank Intercreditor
Agreement. BH shall thereafter be relieved of all obligations and shall no
longer have any rights or be entitled to any benefits as a Creditor (as that
term is defined in the Bank Intercreditor Agreement) pursuant to the terms of
the Bank Intercreditor Agreement.
<PAGE>
2. Admission of EAB as a Party to the Bank Intercreditor Agreement. Effective as
of the date hereof, the Bank Intercreditor Agreement is hereby amended in order
to admit EAB as a party to the Bank Intercreditor Agreement. Accordingly, EAB
shall be bound by the terms of the Bank Intercreditor Agreement and shall assume
all of the obligations and be entitled to any and all rights and benefits as a
Creditor (as that term is defined in the Bank Intercreditor Agreement) pursuant
to the terms of the Bank Intercreditor Agreement.
3. Continuation Agreements. The Bank Intercreditor Agreement shall remain in
full force and effect as modified pursuant to the terms hereof.
4. Further Assurances. The parties agree to execute any and all documents
necessary to effectuate the withdrawal of the Former Banks as parties to the
Bank Intercreditor Agreement and the admission of EAB as a party to the Bank
Intercreditor Agreement.
5. Notices.
EAB's address for notice or other communication in connection with the Bank
Intercreditor Agreement shall be:
European American Bank
335 Madison Avenue
New York, NY 10017
Attention: Zach Mayo, Vice President
Telecopy: 212-503-2667
6. Governing Law. This agreement shall be governed by the laws of the state of
New York applicable to contracts made and to be performed wholly therein.
7. Headings. The headings in this Agreement are for convenience reference only
and shall not alter or otherwise affect the meaning hereof.
8. Counterparts. This Agreement may be executed in any number of counterparts
and by the different parties hereto on separate counterparts, each of which when
so executed and delivered shall be an original, but all of which shall together
constitute one and the same instrument.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first written above.
ISRAEL DISCOUNT BANK OF NEW YORK
By: /s/ Robert J. Fainelli
-------------------------------
Name: Robert J. Fainelli
Title: Vice President
By: /s/ Leslie Miller
-------------------------------
Name: Leslie Miller
Title: Vice President
BANK LEUMI TRUST COMPANY
OF NEW YORK
By: /s/ Melvyn F. Plotzker
-------------------------------
Name: Melvyn F. Plotzker
Title: Vice President
By: /s/ Iris Schechter
-------------------------------
Name: Iris Schechter
Title: Vice President
BANK HAPOALIM B.M.
By: /s/ Lorin Alvarez
-------------------------------
Name: Lorin Alvarez
Title: Assistant Vice President
By: /s/ Erik Vanderke
-------------------------------
Name: Erik Vanderke
Title: Vice President
EXTEBANK
By: /s/ Kenneth Lipke
-------------------------------
Name: Kenneth Lipke
Title: Vice President
3
<PAGE>
EUROPEAN AMERICAN BANK
By: /s/ Dennis Nochowitz
-------------------------------
Name: Dennis Nochowitz
Title: Assistant Vice President
ACKNOWLEDGED AND AGREED:
ELK ASSOCIATES FUNDING CORPORATION
By: /s/ Gary C. Granoff
-------------------------------
Name: Gary C. Granoff
Title: President
4
<PAGE>
EXHIBIT A - filed as Exhibit k.5 to Registration Statement
<PAGE>
AGREEMENT
THIS AGREEMENT made as of the ______ day of June, 1995 by and among
ISRAEL DISCOUNT BANK OF NEW YORK ("IDB"), BANK LEUMI TRUST COMPANY OF NEW YORK
("BL"), EUROPEAN AMERICAN BANK ("EAB") and UNITED MIZRAHI BANK AND TRUST
COMPANY ("UMB").
W I T N E S S E T H:
WHEREAS, IDB, BL and EAB are parties to a bank intercreditor agreement
dated September 9, 1993, as amended by agreement dated September 28, 1994 (the
"Bank Intercreditor Agreement"), relating to certain obligations of Elk
Associates Funding Corporation (the "Debtor"); and
WHEREAS, the Debtor has entered into a loan agreement with UMB; and
WHEREAS, the parties desire to make UMB a party to the Bank
Intercreditor Agreement;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto mutually agree as follows:
1. Admission of UMB as a Party to the Bank Intercreditor Agreement. Effective as
of the date hereof, the Bank Intercreditor Agreement is hereby amended in order
to admit UMB as a party to the Bank Intercreditor Agreement. Accordingly, UMB
shall be bound by the terms of the Bank Intercreditor Agreement and shall assume
all of the obligations and be entitled to any and all rights and benefits as a
Creditor (as that term is defined in the Bank Intercreditor Agreement) pursuant
to the terms of the Bank Intercreditor Agreement.
2. Continuation Agreements. The Bank Intercreditor Agreement shall remain in
full force and effect as modified pursuant to the terms hereof.
3. Further Assurances. The parties agree to execute any and all documents
necessary to effectuate the admission of UMB as a party to the Bank
Intercreditor Agreement.
4. Notices.
EAB's address for notice or other communication in connection with the
Bank Intercreditor Agreement shall be:
United Mizrahi Bank and Trust Company
One Rockefeller Plaza
New York, NY 10020
Attention: Joseph C. LoMonaco, Vice President
Telecopy: 212-332-7466
<PAGE>
5. Governing Law. This agreement shall be governed by the laws of the state of
New York applicable to contracts made and to be performed wholly therein.
6. Headings. The headings in this Agreement are for convenience reference only
and shall not alter or otherwise affect the meaning hereof.
7. Counterparts. This Agreement may be executed in any number of counterparts
and by the different parties hereto on separate counterparts, each of which when
so executed and delivered shall be an original, but all of which shall together
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first written above.
ISRAEL DISCOUNT BANK OF NEW YORK
By:/s/ Robert J. Fainelli
------------------------------------
Name: Robert J. Fainelli
Title: Vice President
By:/s/ Robert E. Stark
------------------------------------
Name: Robert E. Stark
Title: Senior Vice President
BANK LEUMI TRUST COMPANY
OF NEW YORK
By:/s/ Iris Schechter
------------------------------------
Name: Iris Schechter
Title: Vice President
By:/s/ Joseph Euter
------------------------------------
Name: Joseph Euter
Title: Bank Officer
EUROPEAN AMERICAN BANK
By:/s/ Dennis J. Nochowitz
------------------------------------
Name: Dennis J. Nochowitz
Title: Assistant Vice President
2
<PAGE>
UNITED MIZRAHI BANK AND
TRUST COMPANY
BY:/s/ Peter W. Blake
------------------------------------
Name: Peter W. Blake
Title: Vice President
BY:/s/ David Barsion
------------------------------------
Name: David Barsion
Title: Vice President
ACKNOWLEDGED AND AGREED:
ELK ASSOCIATES FUNDING CORPORATION
By:/s/ Gary C. Granoff
------------------------------------
Name: Gary C. Granoff
Title: President
3
<PAGE>
GRID DEMAND PROMISSORY NOTE
(Eurodollar/Prime Rates)
$14,000,000.00 New York, July 28, 1998
FOR VALUE RECEIVED, the undersigned promises to pay to the order of
ISRAEL DISCOUNT BANK OF NEW YORK (hereinafter the "Bank") at its principal
office, located at 511 Fifth Avenue, New York, NY 10017, the principal sum of
FOURTEEN MILLION DOLLARS ($14,000,000), or, if less, the aggregate unpaid
principal amount of all advances made by the Bank (each an "Advance" and
collectively, the "Advances"), endorsed on the schedule attached hereto and made
a part of this Note, including additional pages, if any, attached hereto (the
"Schedule") on the maturity date of each such Advance as shown or at demand. The
undersigned shall also pay to the Bank interest as set forth herein.
Each Advance hereunder which is a Eurodollar Advance (as defined below)
shall bear interest on the unpaid principal amount thereof for the Interest
Period applicable thereto at a rate per annum equal to LIBOR (as defined below)
determined for each Interest Period therefor in accordance with the terms of
this Note plus a margin of 150 basis points on the unpaid amount of all
Advances. Each Advance which is a Prime Rate Advance (as defined below) shall
bear interest on the unpaid principal amount thereof from the date thereof until
payment of such Prime Rate Advance in full at a fluctuating rate per annum equal
to the Prime Rate minus a margin of 1/2% per annum.
The undersigned shall notify the Bank not later than 12 noon three (3)
Business Days prior to each Advance hereunder which the undersigned requests to
maintain at a rate of interest based on LIBOR (a "Eurodollar Advance"), and not
later than 12 noon on the date of each Advance which the undersigned requests to
maintain, at a rate of interest based on the Prime Rate (a "Prime Rate
Advance"). All requests for Advances shall be irrevocable and shall be in the
minimum amount of $100,000. Each request by the undersigned for an Advance
hereunder shall specify whether the requested Advance is a Eurodollar Advance or
a Prime Rate Advance, the proposed date to fund the Advance, and if a Eurodollar
Advance is requested, the Interest Period applicable thereto.
Any Eurodollar Advance may be continued as a Eurodollar Advance upon
expiration of an Interest Period with respect thereto by complying with the
notice provisions contained in the definition of Interest Period; provided,
however, that no Eurodollar Advance may be continued as such when any Event of
Default or event which upon notice, passage of time or both would constitute an
Event of Default has occurred and is continuing but shall be automatically
converted to a Prime Rate
<PAGE>
Advance on the last date of the Interest Period.
The undersigned may elect from time to time to convert outstanding
Eurodollar Advances to Prime Rate Advances by giving the Bank at least three (3)
Business Days prior irrevocable notice of such election; provided that any
conversion of a Eurodollar Advance may be made only on the last day of an
Interest Period with respect thereto. The undersigned may elect from time to
time to convert an outstanding Prime Rate Advance to a Eurodollar Advance by
giving the Bank irrevocable written notice of such election not later than 12
noon, three (3) Business Days prior to the date of the proposed conversion and
further provided that (i) the conversion shall be in the minimum principal
amount of $100,000 and (ii) no Event of Default or event upon notice, passage of
time or both would constitute an Event of Default shall have occurred and be
continuing.
The Bank may act without liability upon the basis of telephonic notice
believed by the Bank in good faith to be from the undersigned. The undersigned
shall immediately confirm to the Bank, in writing, each telephonic notice. All
Advances are made at the Bank's sole and absolute discretion and the Bank, at
its option and in its sole and absolute discretion and without notice to the
undersigned, may decline to make any Advance requested by the undersigned. The
undersigned hereby expressly authorizes the Bank to record on the attached
Schedule the amount and date of each Advance, the applicable rate of interest,
the applicable Interest Period, and each payment of principal and interest
thereon. In the event of any discrepancy between any such notation by the Bank
and any records of the undersigned, the records of the Bank shall be controlling
and conclusive. The failure to make any notation to the Schedule shall not limit
or otherwise affect the obligations of the undersigned to repay each Advance
made by the Bank, in accordance with the terms hereof.
Interest shall be calculated on the basis of a 360-day year for the
actual number of days elapsed and shall be payable on the first day of each
month commencing on the first such date to occur after the date the Advance is
made, and on demand. All payments hereunder shall be payable in immediately
available funds in lawful money of the United States. The undersigned authorizes
the Bank to charge any of the undersigned's accounts for payments of principal
or interest. Any payment of principal or interest payable hereunder which is not
paid when due, whether at maturity, on demand, by acceleration, or otherwise,
shall bear interest from the date due until paid in full at a rate per annum
equal to five percent (5%) above the interest rate in effect with respect
thereto.
2
<PAGE>
Subject to the terms and conditions hereof and the terms and conditions
set forth in any agreement in writing between the Bank and the undersigned, the
undersigned may borrow, repay in whole or in part, and reborrow on a revolving
basis, up to the maximum amount of this Note. Prime Rate Advances may be prepaid
without premium or penalty together with accrued interest thereon to and
including the date of prepayment. Eurodollar Advances may be prepaid without
premium or penalty (except as provided in the next succeeding paragraph)
together with accrued interest thereon to and including the date of prepayment,
provided such prepayment date must be the last day of the then current Interest
Period of such Advance.
The outstanding balance (principal and accrued interest) of any
Eurodollar Advance may be prepaid in full or in part, on any Business Day, upon
five (5) days' prior written notice to the Bank of such prepayment, subject to a
prepayment premium in the amount of one (1%) percent per annum of the principal
amount of the Eurodollar Advance being prepaid. The Bank shall not be obligated
to accept any prepayment of a Eurodollar Advance unless it is accompanied by the
prepayment premium.
The undersigned has pledged or deposited with or endorsed and/or
assigned or caused to be assigned to the order of the Bank and delivered to the
Bank as collateral security for the payment of this Note and all Liabilities (as
defined hereinbelow) of the undersigned to the Bank the following property:
Assignments of liens on various New York City taxi medallions.
The term "Security" shall include the property described above and
shall also include the following property: All personal property (exclusive of
inventory) now, owned or hereafter acquired and wherever located, including, but
not limited to, all furniture, fixtures, equipment, leasehold improvements,
instruments, accounts including, without limitation, accounts owing from credit
card servicing companies or other similar agencies, documents, contract rights,
chattel paper, rights and claims for the payment of monies arising from sales
made to customers through the use of credit cards, and general intangibles;
(including, without limitation, trademarks and trade names), together with all
replacements, additions, products and cash and non-cash proceeds of all the
foregoing, and the balance of every deposit account of the undersigned with the
Bank and any other claim of the undersigned against the Bank, now or hereafter
existing, and all money, instruments, securities, documents, chattel paper,
credits, claims, demands and any other property, rights and interests of the
undersigned which at any time shall come into the lawful possession or custody
or under the control of the Bank or any of its agents, associates or
correspondents, for any purpose, and shall include the proceeds of any thereof.
The Bank shall be deemed to have possession of any of the Security in transit to
or set apart for it or any of its agents, associates or correspondents.
3
<PAGE>
The term "Liabilities" shall include this Note and all other
indebtedness, obligations and liabilities of any kind of the undersigned to the
Bank and also to others to the extent of their participations granted to or
interests therein created or acquired for them by the Bank, now or hereafter
existing, arising directly between the undersigned and the Bank or acquired
outright, conditionally or as collateral security from another by the Bank,
absolute or contingent, joint and/or several, secured or unsecured, due or not
due, contractual or tortious, liquidated or unliquidated, arising by operation
of law or otherwise, or direct or indirect, including liabilities to the Bank of
the undersigned as a member of any partnership, syndicate, association or other
group, and whether incurred by the undersigned as principal, surety, indorser,
guarantor, accommodation party or otherwise.
As security for the payment of all the Liabilities, the undersigned
hereby grant to the Bank a security interest in, and a general lien upon and/or
right of set-off of, the Security.
The right is expressly granted to the Bank, at its discretion and
without notice to or containing the signature of the undersigned, to file one or
more financing statements under the Uniform Commercial Code naming the
undersigned as debtor and the Bank as secured party and indicating therein the
types or describing the items of Security herein specified and forwarding a copy
thereof, after filing, to the undersigned. Without the prior written consent of
the Bank the undersigned will not file or authorize or permit to be filed in any
jurisdiction any such financing or like statement in which the Bank is not named
as the sole secured party covering the Security set forth herein.
The Bank, at its discretion, whether any Liabilities be due may, in its
name or in the name of the undersigned or otherwise, demand, sue for, collect or
receive any money or property at any time payable or receivable on account of or
in exchange for, or make any compromise or settlement deemed desirable with
respect to, any of the Security, but shall be under no obligation so to do, or
the Bank may extend the time of payment, arrange for payment in installments, or
otherwise modify the terms of, or release, any of the Security, without thereby
incurring responsibility to, or discharging or otherwise affecting any liability
of, the undersigned. The Bank shall not be required to take any steps necessary
to preserve any rights of prior parties to any of the Security. Upon default
hereunder or in connection with any of the Liabilities (whether such default be
that of the undersigned or of any other party obligated thereon), the Bank shall
have the rights and remedies provided by law; and the Bank may sell or cause to
be sold in the Borough of Manhattan, New York City, or elsewhere, in one or more
sales or parcels, at such price as the Bank may deem best, and for cash or on
credit or for future delivery, without assumption of any credit risk, all or any
of the Security, at any brokers' board or at public or private sale, without
demand of performance or notice of intention to sell or of time or place of sale
(except such notice as is required by applicable statute and cannot be waived),
and the Bank or anyone else may be the
4
<PAGE>
purchaser of any or all of the Security so sold and thereafter hold the same,
absolutely free from any claim or right of whatsoever kind, including any equity
of redemption, of the undersigned, any such demand, notice or right and equity
being hereby waived and released. The undersigned will pay to the Bank all
reasonable out of pocket expenses (including reasonable expense for legal
services of every kind) of, or incidental to, the enforcement of any of the
provisions hereof or of any of the Liabilities, or any actual or attempted sale,
or any exchange, enforcement, collection, compromise or settlement of any of the
Security or receipt of the proceeds thereof, and for the care of the Security
and defending or asserting the rights and claims of the Bank in respect thereof,
by litigation or otherwise, including expense of insurance, and all such
expenses shall be indebtedness within the terms of this Note. The Bank, at any
time, at its option, may apply the net cash receipts from the Security to the
payment of principal of and/or interest on any of the Liabilities, whether or
not then due, making proper rebate of interest or discount. Notwithstanding that
the Bank, whether in its own behalf and/or in behalf of another and/or of
others, may continue to hold Security and regardless of the value thereof, the
undersigned shall be and remain liable for the payment in full, principal and
interest, of any balance of the Liabilities and expenses at any time unpaid.
Upon the occurrence of any of the following specified events of default
(each an "Event of Default"): (1) default by the undersigned in making any
payment of principal, interest, or any other amount payable under this note when
due; or (2) default by the undersigned in the due payment of any indebtedness
for borrowed money or in the observance or performance of any covenant or
condition contained in any agreement or instrument evidencing, securing, or
relating to any such indebtedness, and continuance of any such default for a
period sufficient to cause or permit the acceleration of the maturity thereof;
or (3) default in the observance or performance of any other agreement of the
undersigned set forth herein and continuance of any such default for thirty (30)
days after notice thereof to the undersigned; or (4) any representation or
warranty made by the undersigned herein or in any certificate furnished by the
undersigned pursuant to the provisions hereof, proves untrue in any material
respect; (5) the undersigned becomes insolvent or bankrupt, is generally not
paying its debts as they become due, or makes an assignment for the benefit of
creditors, or a trustee or receiver is appointed for the undersigned or for the
greater part of the properties of the undersigned with the consent of the
undersigned, or if appointed without the consent of the undersigned, such
Trustee or Receiver is not discharged within thirty (30) days, or bankruptcy,
reorganization, liquidation or similar proceedings are instituted by or against
the undersigned under the laws of any jurisdiction, and if instituted against
the undersigned are consented to by it or remain undismissed for thirty (30)
days, or a writ or warrant of attachment or similar process shall be issued
against a substantial part of the property of the undersigned and shall not be
released or bonded within thirty (30) days after levy; then, in any such event,
and at any time thereafter, if any Event of Default shall then be continuing,
the principal and the
5
<PAGE>
accrued interest in respect of each advance under this note shall become,
immediately due and payable without presentment, demand, protest or other notice
of any kind, all of which are expressly waived by the undersigned.
As used herein the following terms shall have the following meanings:
"Bank" shall be deemed to include the Bank, its successors and assigns
and any holder hereof.
"Business Day" means a day other than a Saturday, Sunday or other day
on which commercial banks in New York City are authorized or required by law to
close.
"Interest Period" with respect to any Eurodollar Advance means:
(a) initially, the period commencing on the date such Eurodollar
Advance is made and ending one, two or three months thereafter as
selected by the undersigned; and
(b) thereafter, each period commencing on the last day of the next
preceding Interest Period applicable to such Eurodollar Advance and
ending one, two or three months thereafter, as selected by the
undersigned by irrevocable written notice to the Bank not less than
three (3) Business Days prior to the last day of the then current
Interest Period with respect to such Eurodollar Advance. In the event
the undersigned fails to notify the Bank as provided above, then in
that event, the Bank has the option, in its sole discretion, to chose
on behalf of the undersigned an Interest Rate; and
(c) provided, however, that all of the foregoing provisions relating to
Interest Periods are subject to the following:
(i) if any Interest Period pertaining to a Eurodollar Advance would
otherwise end on a day which is not a Business Day, the Interest
Period shall be extended to the next succeeding Business Day unless
the result of such extension would be to carry such Interest Period
into another calendar month, in which event such Interest Period
shall end on the immediately preceding Business Day; and
(ii) if the undersigned shall fail to give notice as provided in
clause (b) above, the undersigned shall be deemed to have requested
conversion of the affected Eurodollar Advance to a Prime Rate
Advance on the last day of the
6
<PAGE>
then current Interest Period with respect thereto; and
(iii) any Interest Period that begins on the last Business Day of a
calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest
Period) shall end on the last Business Day of a calendar month.
"Prime Rate" shall mean a fluctuating rate per annum equal to the rate
of interest publicly announced by the Bank at its principal office from time to
time as its Prime Rate. Any change in the Prime Rate shall be effective on the
date such change is announced by the Bank.
"LIBOR" shall mean with respect to the Interest Period pertaining to a
Eurodollar Advance, the rate per annum as quoted on telerate page 3750 at 11:00
o'clock New York Time on the second Business Day prior to the beginning of such
Interest Period.
"Undersigned" shall mean if this Note is signed by more than one party,
unless otherwise stated herein, shall mean the "undersigned and each of them"
and each undertaking herein contained shall be their joint and several
undertaking. The Bank may proceed against one or more of the undersigned at one
time or from time to time as it elects in its sole and absolute discretion.
In the event that the Bank shall have determined (which determination
shall be conclusive and binding upon the undersigned) that, by reason of
circumstances affecting the London interbank market, adequate and reasonable
means do not exist for ascertaining LIBOR for any requested Interest Period or
with respect to the continuation of a Eurodollar Advance beyond the expiration
of the then current Interest Period with respect thereto, the Bank shall
forthwith give notice of such determination, confirmed in writing, to the
undersigned. If such notice is given, any outstanding Eurodollar Advance shall
be converted, on the last day of the then current Interest Period with respect
thereto, to a Prime Rate Advance. Such notice shll be withdrawn by the Bank when
the Bank shall determine that adequate and reasonable means exist for
ascertaining LIBOR.
Notwithstanding anything to the contrary contained elsewhere in this
Note, if any change after the date hereof in law, rule, regulation, guideline or
order or in the interpretation thereof by any governmental authority charged
with the administration thereof, shall make it unlawful for the Bank to make or
maintain any Advance as a Eurodollar Advance, then, by written notice to the
undersigned, the Bank may require that the Eurodollar Advance be converted to a
Prime Rate Advance, whereupon the Eurodollar Advance shall be automatically
converted to a Prime Rate Advance as of the date of such notice to the
undersigned.
7
<PAGE>
In the event that any change in applicable law or regulation, or in the
interpretation thereof by any governmental authority charged with the
administration thereof, shall impose on or deem applicable to the Bank any
reserve requirements against this Note or the Line or impose upon the Bank any
other costs or assessments, the undersigned shall pay to the Bank on demand an
amount sufficient to compensate the Bank for the additional cost resulting from
the maintenance or imposition of such reserves, costs or assessments.
Any consents, agreements, instructions or requests pertaining to any
matter in connection with this Note, signed by any one of the undersigned, shall
be binding upon all of the undersigned. This Note shall bind the respective
successors, heirs or representatives of the undersigned. This Note and the Line
shall not be assigned by the undersigned without the Bank's prior written
consent.
The undersigned in any litigation (whether or not arising out of or
relating to this Note or any other obligations or liability, of the undersigned
to the Bank) in which the Bank and the undersigned shall be adverse parties,
waives trial by jury and the right to interpose any defense, set-off or
counterclaim of any nature or description. The undersigned agrees to pay on
demand all of the Bank's reasonable out of pocket costs and expenses, including
reasonable counsel fees, in connection with collection of any amounts due to the
Bank and enforcement of its rights under this Note.
The undersigned agrees that the action, proceeding or claim against it
arising out of, or relating in any way to, this Note may be brought and enforced
in the courts of the State of New York or of the United States of America for
the Southern District of New York, and hereby irrevocably submits to each such
jurisdiction, which jurisdiction shall be non-exclusive. With respect to any
such action, proceeding or claim, the undersigned consents to accept service of
process and any legal summons to be served upon the undersigned and consents
that same may be served by mailing a copy by certified and/or regular mail
hereof to the undersigned at the last known address of the undersigned appearing
on the records of the Bank. Such mailing shall be deemed personal service and
shall be legal and binding upon the undersigned in any such action or claim.
Within thirty days after such mailing the undersigned shall appear, answer or
otherwise move in respect of such summons, complaint or other process. Should
the undersigned fail to appear, answer within said thirty day period, the
undersigned shall be deemed in default and judgment may be entered by the Bank
against the undersigned for the amount as demanded in any summons, complaint or
other process so served.
No modification or waiver of any provision of this note and no consent
by the Bank to any departure therefrom by the undersigned shall be effective
unless such modification or waiver shall be in writing and signed by a duly
authorized
8
<PAGE>
officer of the Bank, and the same shall then be effective only for the period
and on the conditions and for the specific instances specified in such writing.
No failure or delay by the Bank in exercising any right, power or privilege
hereunder shall operate as a waiver thereof; nor shall any single or partial
exercise thereof preclude any other or further exercise thereof or the exercise
of any rights, power or privilege.
In the event any one or more of the provisions in this Note should be
invalid, illegal or unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained herein shall not in any way
be affected or impaired thereby.
This Note shall be construed according to and governed by the laws of
the State of New York.
ELK ASSOCIATES FUNDING CORP.
[S E A L] By: Gary C. Granoff
---------------------------------
Name: Gary C. Granoff
Title: President
By: Marqaret Chance
---------------------------------
Name: Margaret Chance
Title: Secretary
9
<PAGE>
EAB
- --------------------------------------------------------------------------------
September 2, 1998
Elk Associates Funding Corp.
747 Third Avenue
New York, NY 10017
Re: $14,000,000 borrowing base line of credit
Gentlemen:
European American Bank ("EAB") is pleased to advise you it holds
available for Elk Associates Funding Corp. (the "Borrower"), a corporation
organized and in good standing under the laws of the State of New York, a
borrowing base line of credit (the "Line") in the amount of $14,000,000, subject
to the following terms and conditions:
1. 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. Each advance thereunder
shall bear interest at a rate to be elected by the Borrower at the time of each
request for an advance thereunder equal to either (i) a floating rate of
interest equal to 1/2% below 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) computed on the basis of actual days elapsed in a 360 day
year or (ii) a fixed rate of interest equal to the Reserve Adjusted LIBOR, as
such term is defined in the Note, plus a margin of 150 basis points for interest
periods not to exceed ninety (90) days.
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. Any advance
under the Line made by EAB in its discretion shall be in an amount not less than
$100,000 for both Prime Rate and LIBOR Rate advances.
In the event that an advance bears interest at the Prime Rate Option,
such advance may be prepaid, in whole or in part, in increments of not less than
$100,000, without premium or penalty.
Member FDIC
- --------------------------------------------------------------------------------
335 Madison Avenue Equal
New York, NY 10017 Housing
Tel: (212) 370-8535 Lender
Fax: (212) 503-2667
<PAGE>
- --------------------------------------------------------------------------------
The Borrower agrees to indemnify EAB and hold EAB harmless from any
loss or expense that EAB may sustain or incur, including, without limitation,
any interest or fees payable by EAB to lenders of funds obtained by it in order
to make or maintain an advance under the Note at the LIBOR Rate Option should
the Borrower make any prepayment of the principal of an advance hereunder
bearing interest at the LIBOR Rate or in the event of a default by the Borrower
in the payment or performance of any terms of the Note or this line letter.
Notwithstanding anything to the contrary contained herein,
availability under the Line shall be subject to such limitations as may be
imposed by the U.S. Small Business Administration (the "SBA") from time to time
pursuant to a borrowing base formula established and monitored by the SBA.
Notwithstanding any provisions herein to the contrary, availability
under the Line shall be reduced by a $400,000 assumed exposure under a
$10,000,000 three (3) year swap agreement between the Borrower and Lasalle
National Bank.
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 November 30, 1998.
2. Purpose of the Line:
The purpose of the Line shall be to support a portion of the loan
portfolio of the Borrower.
3. Security for the Line:
The Line shall be secured by a first priority security interest in all
assets and personal property of the Borrower pursuant to EAB's standard General
Security Agreement and duly filed UCC-1 Financing Statements. The priority of
EAB's security interest shall be ranked equally with the security interest of
Israel Discount Bank of New York ("IDB") and Bank Leumi Trust Company of New
York ("Bank Leumi") pursuant to an intercreditor agreement satisfactory to EAB.
2
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
4. Conditions Precedent:
Prior to the Borrower's initial request for an advance under the Line,
it shall have provided to EAB:
(i) A copy of the resolutions passed by the Borrower's Board of
Directors certified by its Secretary as being in full force and effect
authorizing the borrowing described herein and the execution of all documents
and agreements required by EAB to evidence and secure the Line; and
(ii) A certified copy of the certificate of incorporation of the
Borrower.
5. Financial Reporting:
The Borrower shall provide to EAB:
(i) As soon as available, but in any event within one hundred
twenty (120) days after the last day of its 1998 fiscal year, a balance sheet of
the Borrower, as of such last day of the fiscal year, and statements of income
and retained, earnings and cash flows for such fiscal year prepared in
accordance with generally accepted accounting principles consistently applied,
in reasonable detail, such statements to be audited by a firm of independent
certified public accountants satisfactory to EAB.
(ii) As soon as available, but in any event within ninety (90) days
after the last day of each semi-annual period prior to the expiration of the
Line, a balance sheet of the Borrower as of the last day of such semi-annual
period, and statements of income and retained earnings and cash flows for such
period, each prepared in accordance with generally accepted accounting
principles consistently applied, in reasonable detail, such statements to be
prepared on a review basis by a firm of independent certified public accountants
satisfactory to EAB.
(iii) As soon as available, but in any event within sixty (60) days
after the end of each fiscal quarter prior to the expiration of the Line, 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 on a
compilation basis in accordance with generally accepted accounting principles
consistently applied, in reasonable detail, by a firm of independent certified
public accountants satisfactory to EAB.
3
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Each of the financial statements specified in Sections (i), (ii)
and (iii) above shall be accompanied by a certificate signed by the president or
chief financial officer of the Borrower to the effect that such statements
fairly present the financial condition of the Borrower as of the balance sheet
date and results of the operations of the Borrower for the period(s) then ended
in accordance with generally accepted accounting principles consistently
applied.
(iv) As soon as available, but in any event within sixty (60) days
after the end of each calendar quarter, copies of the Borrowing Base
Certificates, submitted quarterly by the Borrower to the SBA demonstrating
compliance with the SBA borrowing formula.
(v) As soon as available, but in any event within sixty (60) days
after the end of each calendar quarter, copies of the Borrower's loan lists and
copies of custodian reports generated by IDB.
(vi) As soon as available but in any event within fifteen (15) days
after the end of each calendar quarter, copies of the Borrower's delinquency
reports.
(vii) Such other financial or additional information as EAB may
from time to time request.
6. 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 $10,500,000.
(iv) a maximum leverage ratio (the ratio of total unsubordinated
liabilities to capital base) of not greater than 1.0 to 1.0, capital base to be
defined as the sum of capital surplus, earned surplus, capital stock and such
other items as are allowable under generally accepted accounting principles and
subordinated liabilities minus deferred charges, intangibles, receivables due
from stockholders, officers or affiliates and treasury stock).
b. The Borrower covenants and agrees not to apply for or accept
credit facilities from institutional or other lenders of funds in an amount in
excess of $35,000,000 in the aggregate.
4
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
c. The Borrower agrees that, with the exception of medallion loans
which shall constitute not less than sixty-five (65%) of the Borrower's total
loan portfolio, loan concentrations in any other single industry shall not
exceed twenty-five (25%) of the Borrower's aggregate loan portfolio.
d. The Borrower agrees that any security interest in its personal
property it may grant to the SBA will rank junior to that of both EAB, IDB or
Bank Leumi pursuant to a subordination agreement satisfactory to EAB.
7. Acceptance:
If the foregoing is acceptable, please so indicate by signing and
returning this letter together with the administration fee before
September 15, 1998, the date this letter will otherwise expire, unless extended
in writing by EAB.
Very truly yours,
EUROPEAN AMERICAN BANK
By: /s/Dennis Nochowitz
-----------------------
Dennis Nochowitz
Vice President
Agreed and Accepted this
________ day of September, 1998
Elk Associates Funding Corp.
By: /s/Gary Granoff
-------------------------
Name: Gary Granoff
Title: President
5
- --------------------------------------------------------------------------------
<PAGE>
EAB
MASTER NOTE (Eurodollar/Prime RATE)
- --------------------------------------------------------------------------------
$14,000,000
DATE: , 1998
FOR VALUE RECEIVED, the undersigned, a New York corporation, promises
to pay to the order of EUROPEAN AMERICAN BANK (the "Bank"), on or before
November 30, 1998 (the "Maturity Date"), the sum of Fourteen Million Dollars
($14,000,000), or, if less, the aggregate unpaid principal amount of all
advances made by the Bank pursuant to the line of credit (each an "Advance" and
collectively, the "Advances"), not to exceed an aggregate amount at any one time
outstanding of Fourteen Million Dollars ($14,000,000), available to the
undersigned hereunder (the "Line") together with interest thereon as set forth
herein.
Each Advance hereunder which is a Eurodollar Advance (as defined below)
shall bear interest on the unpaid principal amount thereof for the Interest
Period applicable thereto at a rate per annum equal to the Reserve Adjusted
Libor determined for each Interest Period therefor in accordance with the terms
of this Note plus a margin of 1 1/2% per annum. Each Advance which is a Prime
Rate Advance (as refined below) shall bear interest on the unpaid principal
amount thereof from the date thereof until payment of such Prime Rate Advance in
full at a fluctuating rate per annum equal to the Prime Rate minus a margin of
1/2% per annum. The undersigned shall notify the Bank not later than 12 noon
three Business Days prior to each Advance hereunder which the undersigned
requests to maintain at a rate of interest based on Reserve Adjusted Libor (a
"Eurodollar Advance"), and not later than 12 noon on the date of each Advance
which the undersigned requests to maintain at a rate of interest based on the
Prime Rate (a "Prime Rate Advance"). All requests for Advances shall be
irrevocable and shall be in the minimum amount of $100,000. Each request by the
undersigned for an Advance hereunder shall specify whether the requested Advance
is a Eurodollar Advance or a Prime Rate Advance, the proposed date to fund the
Advance, and if a Eurodollar Advance is requested, the Interest Period
applicable thereto.
Any Eurodollar Advance may be continued as a Eurodollar Advance upon
expiration of an Interest Period with respect thereto by complying with the
notice provisions contained in the definition of Interest Period; provided,
however, that no Eurodollar Advance may be continued as such when any Event of
Default or event which upon notice, passage of time or both would constitute an
Event of Default has occurred and is continuing but shall be automatically
converted to a Prime Rate Advance on the last date of the Interest Period in
effect when he Bank is notified of such default or Event of Default.
The undersigned may elect from time to time to convert outstanding
Eurodollar Advances to Prime Rate Advances by giving the Bank at least three
Business Days prior irrevocable notice of such election; provided that any
conversion of a Eurodollar Advance may be made only on the last day of an
Interest Period with respect thereto. The undersigned may elect from time to
time to convert an outstanding Prime Rate Advance to a Eurodollar Advance by
giving the Bank irrevocable written notice of such election not later than 12
noon, three Business Days prior to the date of the proposed conversion and
further provided that (i) the conversion shall be in the minimum principal
amount of $100,000 and (ii) no Event of Default or event upon notice, passage of
time or both would constitute an Event of Default shall have occurred and be
continuing. Notwithstanding the foregoing, no Advance may be converted to or
continued as a Eurodollar Advance if the Interest Period would extend beyond the
Maturity Date.
Interest in respect of Prime Rate Advances shall be payable on the
first day of each month commencing on the first such date to occur after the
date the Advance is made, and on the Maturity Date. Interest in respect of
Eurodollar Advances shall be payable on the last lay of the Interest Period in
respect thereof. Interest shall be calculated on the basis of a 360-day year for
the actual number of days elapsed. All payments hereunder shall be payable in
immediately available funds in lawful money of the United States. The
undersigned authorizes the Bank to charge any of the undersigned's accounts for
payments of principal or interest. Any payment of principal of or interest
payable hereunder which is not paid when due, whether at maturity, by
acceleration, or otherwise, shall bear interest from the date due until paid in
full at a rate per annum equal to three percent (3%) above the rate otherwise
payable with respect thereto.
- ------------------------
This note provides that interest be paid monthly in respect of Prime
Rate Advances and on the last day of an Interest Period in respect of
Eurodollar Advances.
<PAGE>
Upon the occurrence and during the continuance of an Event of Default,
the Bank shall be entitled to setoff against and apply to the payment hereof the
balance of any account or accounts maintained with the Bank by the undersigned
and to exercise any other right or remedy granted hereunder. or under any
agreement between the undersigned and the Bank or available at law or in equity,
including, but not limited to, the rights and remedies of a secured party under
the New York Uniform Commercial Code. The failure by the Bank at any time to
exercise any such right shall not be deemed a waiver thereof, nor shall it bar
the exercise of any such right at a later date. Each and every right and remedy
granted to the Bank hereunder or under any agreement between the undersigned and
the Bank or available at law or in equity shall be cumulative and not exclusive
of any other rights, powers, privileges or remedies, and may be exercised by the
Bank from time to time and as often as may be necessary in the sole and absolute
discretion of the Bank.
The undersigned agrees to pay, on demand, all of the Bank's costs and
expenses, including reasonable counsel fees (whether inhouse or outside
counsel), in connection with the collection of any amounts due to the Bank
hereunder or in connection with the enforcement of the Bank's rights under this
Note.
This Note shall be governed by and construed in accordance with the
laws of the State of New York, without giving effect to principles of conflict
or choice of laws.
The undersigned covenants and represents that any reprogramming or
other corrective modifications required to permit the proper functioning, in and
following the year 2000, of (i) the undersigned's and its subsidiaries' computer
systems and (ii) equipment containing embedded microchips (including systems and
equipment supplied by others or with which undersigned's or its subsidiaries'
systems interface) and the testing of all such systems and equipment, as so
reprogrammed, will be, completed by January 1, 1999. The cost to the
undersigned and its subsidiaries of such reprogramming, modifications and
testing and of the reasonably foreseeable consequences of year 2000 to the
undersigned and its subsidiaries (including, without limitation, reprogramming
errors and the failure of others' systems or equipment) will not result in the
occurrence of an Event of Default or have a material adverse effect on the
business, properties or financial condition of the undersigned. Except for such
of the reprogramming and modifications referred to in the preceding sentence as
may be necessary, the computer and management information systems of the
undersigned and its subsidiaries are, and with ordinary course upgrading and
maintenance, will continue for the term of this Note to be, sufficient to permit
the undersigned to conduct its business without any material adverse effect
thereto.
THE UNDERSIGNED HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY
FEDERAL OR STATE COURT IN THE STATE OF NEW YORK IN ANY ACTION, SUIT OR
PROCEEDING BROUGHT AGAINST IT AND RELATED TO OR IN CONNECTION WITH THIS NOTE OR
ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY AND CONSENTS TO THE PLACING OF
VENUE IN THE COUNTY OF NASSAU OR OTHER COUNTY PERMITTED BY LAW. TO THE EXTENT
PERMITTED BY APPLICABLE LAW, THE UNDERSIGNED HEREBY WAIVES AND AGREES NOT TO
ASSERT BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE, IN ANY SUCH SUIT, ACTION OR
PROCEEDING ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF
SUCH COURTS, THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT
FORUM, THAT THE VENUE OF THE SUIT, ACTION OR PROCEEDING IS IMPROPER, OR THAT
THIS NOTE OR ANY OTHER DOCUMENT OR INSTRUMENT REFERRED TO HEREIN MAY NOT BE
LITIGATED IN OR BY SUCH COURTS. TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE
UNDERSIGNED AGREES NOT TO SEEK AND HEREBY WAIVES THE RIGHT TO ANY REVIEW OF THE
JUDGMENT OF ANY SUCH COURT BY ANY COURT OF ANY OTHER NATION OR JURISDICTION
WHICH MAY BE CALLED UPON TO GRANT AN ENFORCEMENT OF SUCH JUDGMENT. THE
UNDERSIGNED AGREES THAT SERVICE OF PROCESS MAY BE MADE UPON IT BY CERTIFIED OR
REGISTERED MAIL TO ITS ADDRESS SET FORTH BELOW OR SUCH OTHER ADDRESS THAT THE
UNDERSIGNED SHALL HAVE NOTIFIED THE BANK IN WRITING OR ANY METHOD AUTHORIZED BY
THE LAWS OF THE STATE OF NEW YORK. EXCEPT AS PROHIBITED BY LAW, THE UNDERSIGNED
HEREBY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY
LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH
THIS NOTE.
Neither the undersigned nor any affiliate of the undersigned shall use
any portion of the proceeds of the Loans, nor have any Letter of Credit issued,
either directly or indirectly, for the purpose of purchasing any securities
underwritten by ABN AMRO Chicago Corporation, an affiliate of the Bank.
3
<PAGE>
Any consents, agreements, instructions or requests pertaining to any
matter in connection with this Note, signed by any one of the undersigned, shall
be binding upon all of the undersigned. This Note shall bind the respective
successors, heirs or representatives of the undersigned. This Note and the Line
shall not be assigned by the undersigned without the Bank's prior written
consent.
IN WITNESS WHEREOF, the undersigned has duly executed this Note the day
and year first above written.
Witness: Elk Associates Funding Corp.
---------------------
EAB Officer By:
---------------------------------
Name:
Title:
Borrower's Address:
747 Third Avenue
New York, NY 10017
6
<PAGE>
"THIS NOTE SUPERSEDES AND REPLACES THAT CERTAIN PROMISSORY NOTE (GRID) DATED
OCTOBER 8, 1998 IN THE ORIGINAL PRINCIPAL AMOUNT OF $7,000,00000"
PROMISSORY NOTE (GRID)
New York, N.Y. January 4, 1999 $7,000,000
For Value Received, ELK ASSOCIATES FUNDING CORP. promises to pay to the
order of BANK LEUMI USA (the "Bank"), at its offices at 579 Fifth Avenue, New
York, New York, the principal sum of Seven Million Dollars ("Maximum Principal
Amount") or, if less, the aggregate unpaid principal sum of all loans made by
the Bank, in its sole discretion, to the maker of this Note from time to time.
The principal sum of each such loan shall be payable November 1, 1999.
Within the limits of the Maximum Principal Amount, the maker may borrow,
prepay, and reborrow in the manner provided herein.
Each loan shall bear interest (from the date of such loan), at the option of
the maker, at a rate per annum which shall be equal to (a) the rate of interest
designated by the Bank, and in effect from time to time, as its "Reference Rate"
minus 1/2% per annum, adjusted when said Reference Rate changes (the maker
acknowledges that the Reference Rate may not necessarily represent the lowest
rate of interest charged by the Bank to customers) or (b) 1 1/2% per annum
above the Libor Rate (Reserve Adjusted)* for a one, two or three month term, as
elected by the maker and calculated by the Bank, in the manner hereinafter
provided, but in no event in excess
- ----------------
* "Libor Rate" means, relative to any Interest Period (hereinafter defined)
for loans made pursuant to this Note and which bear interest at the "Libor
Rate (Reserve Adjusted)", the rate of interest per annum determined by the
Bank to be the arithmetic mean (rounded upward to the next 1/6th of 1%) of
the rates of interest per annum at which dollar deposits in the approximate
amount of the amount of the loan to be made or continued hereunder by the
Bank and having a maturity comparable to such Interest Period would be
offered to the Bank in the London Interbank market at its request at
approximately 11:00 a.m. (London time) two Business Days prior to the
commencement of such Interest Period.
"Libor Reserve Percentage" means, relative to any Interest Period for loans
hereunder, the percentage (expressed as a decimal, rounded upward to the
next 1/100th of 1%) in effect on such day (whether or not applicable to
the Bank) under regulations issued from time to time by the Federal Reserve
System Board for determining the maximum reserve requirement (including any
emergency, supplemental or other marginal reserve requirement) with respect
to Eurocurrency funding (currently referred to as "Eurocurrency Liabilities"
in Regulation D of the Federal Reserve System Board).
"Libor Rate (Reserve Adjusted)" means, relative to any loan to be made or
continued hereunder for any Interest Period, the rate of interest per annum
(rounded upwards to the next 1/16th of 1%) determined by the Bank as
follows:
Libor Rate Libor Rate
(Reserve Adjusted) = 1.00 - Libor Reserve Percentage
<PAGE>
of the maximum rate permitted by applicable law; provided, that in the event the
Bank shall have determined that by reason of circumstances affecting the Libor
Rate (Reserve Adjusted) adequate and reasonable means do not exist for
ascertaining the Libor Rate (Reserve Adjusted) for any Interest Period, the
applicable rate of interest during such Interest Period shall be equal to its
Reference Rate minus 1/2% per annum adjusted when said Reference Rate changes,
but in no event in excess of the maximum rate permitted by law; further provided
that if, at the end of any Interest Period, the maker has failed to timely
notify the Bank of its election of the choice of interest rate for or length of
the next Interest Period, then the interest rate in effect thereafter shall be
at the Libor Rate (Reserve Adjusted) plus 1 1/2% per annum for an Interest
Period the length of which shall be the same length as the immediately preceding
Interest Period unless such Interest Period would end after the stated maturity
date of this Note, in which case the Interest Period shall be of a duration
equal to the next longest Interest Period which would end prior to such
scheduled maturity date, provided further that no Libor Rate (Reserve
Adjusted)-based loan shall be made less than one month before the stated
maturity date of this Note or after the occurrence and continuance of an Event
of Default or an event which, upon notice, passage of time or both would
constitute an Event of Default. Interest hereunder shall be payable on the last
day of each Interest Period and at maturity (whether by acceleration or
otherwise). The term "Interest Period" as used in this Note shall mean a period
of one, two or three month(s), as elected by the maker by written or facsimile
notice to the Bank given not later than 12:00 noon three Business Days prior to
the commencement of an Interest Period. No Interest Period shall extend beyond
the stated maturity date of this Note. The initial Interest Period for this Note
shall begin on the day of the initial draw down under the Note, and each
subsequent Interest Period shall begin on the last day of the immediately
preceding Interest Period. The Bank shall give notice to the maker of the
interest rate determined for each Interest Period as provided herein, and such
notice shall be conclusive and binding upon the maker for all purposes absent
manifest error. The maker shall pay to the Bank to compensate it for any loss,
cost or expense that the Bank determines is attributable to any prepayment of a
loan made by the Bank to the maker using the Libor Rate (Reserve Adjusted). Such
compensation shall include an amount equal to the excess (if any) of (i) the
amount of interest that otherwise would have accrued on the principal amount so
prepaid for the period from the date of such prepayment to the last day of the
then current Interest Period for such loan at the applicable rate of interest
for such loan provided for herein over (ii) the amount of interest that
otherwise would have accrued on such principal amount at a rate per annum equal
to the interest component of the amount the Bank would have bid in The London
Interbank market for dollar deposits of leading banks in amounts comparable to
such principal amount and with maturities comparable to such period (as
reasonably determined by the Bank). The term "Business Day" shall mean any day
of the year on which the Bank is open for business (as required or permitted by
law or otherwise) and on which dealings in U.S. dollar deposits are carried on
in London, England.
If any law, treaty, rule, regulation or determination of a court or
governmental authority or any change therein or in the interpretation or
application thereof (each, a "Change in Law") shall make it unlawful for the
Bank to make Libor Rate (Reserve Adjusted)-based loans, or to maintain interest
rates based on Libor, then in the former event, any obligation of the Bank
contained herein or in any agreement of the Bank to make available such unlawful
Libor Rate (Reserve Adjusted)-based loans shall immediately be cancelled, and in
the
<PAGE>
latter event, any such unlawful Libor Rate (Reserve Adjusted)-based loans then
outstanding shall be converted, at the Bank's option, so that interest on the
outstanding principal balance subject hereto is determined in relation to the
Reference Rate as hereinabove provided; provided however, that if any such
Change in Law shall permit any Libor Rate (Reserve Adjusted)-based loans to
remain in effect until the expiration of the Interest Period applicable thereto,
then such permitted Libor Rate (Reserve Adjusted)-based loans shall continue in
effect until the expiration of such Interest Period. Upon the occurrence of any
of the foregoing events, maker shall pay to the Bank immediately upon demand
such amounts as may be necessary to compensate the Bank for any fines, fees,
charges, penalties or other costs incurred or payable by the Bank as a result
thereof and which are attributable to any Libor Rate (Reserve Adjusted) options
made available to maker hereunder, and any reasonable allocation made by the
Bank among its operations shall be conclusive and binding upon maker.
If any Change in Law or compliance by the Bank with any request or directive
(whether or not having the force of law) from any central bank or other
governmental authority shall:
(A) subject the Bank to any tax, duty or other charge with respect to any Libor
Rate (Reserve Adjusted) options, or change the basis of taxation of payments
to the Bank of principal, interest, fees or any other amount payable
hereunder (except for changes in the rate of tax on the overall net income
of the Bank); or
(B) impose, modify or hold applicable any reserve, special deposit, compulsory
loan or similar requirement against assets held by, deposits or other
liabilities in or for the account of, advances or loans by, or any other
acquisition of funds by any office of the Bank; or
(C) impose on the Bank any other condition;
and the result of any of the foregoing is to increase the cost to the Bank of
making, renewing or maintaining any Libor Rate (Reserve Adjusted)-based loan
hereunder and/or to reduce any amount receivable by the Bank in connection
therewith, then in any such case, maker shall pay to the Bank immediately upon
demand such amounts as may be necessary to compensate the Bank for any
additional costs incurred by the Bank and/or reductions in amounts received by
the Bank which are attributable to such Libor Rate (Reserve Adjusted)-based
loan. In determining which costs incurred by the Bank and/or reductions in
amounts received by the Bank are attributable to any Libor Rate (Reserve
Adjusted)-based loan made to maker hereunder, any reasonable allocation made by
the Bank among its operations shall be conclusive and binding upon maker.
The Bank is hereby authorized to enter on the schedule attached hereto the
amount of each loan and each payment of principal thereon, without any further
authorization on the part of the maker or any endorser or guarantor of this
Note, but the Bank's failure to make such entry shall not limit or otherwise
affect the obligations of the maker or any endorser or guarantor of this Note.
In the event that any other Liabilities (as hereinafter defined) of maker to the
Bank are due at any time that the Bank receives a payment from maker on account
3
<PAGE>
of this Note or any such other Liabilities of maker, the Bank may apply such
payments to amounts due under this Note or any such other Liabilities in such
manner as the Bank, in its discretion, elects, regardless of any instructions
from maker to the contrary.
The maker and each endorser and guarantor of this Note acknowledge and agree
that the use of this form of Note is for their convenience, and there is no
obligation on the part of the Bank to make loans to the maker whatsoever.
Interest shall be computed on the basis of a 360-day year.
Each maker or endorser authorizes (but shall not require) the Bank to debit
any account maintained by the maker or endorser with the Bank, at any date on
which the payment of principal or of interest on any of the Liabilities is due,
in an amount equal to any unpaid portion of such payment. If the time for
payment of principal of or interest on any of the Liabilities or any other money
payable hereunder or with respect to any of the Liabilities becomes due on a day
on which the Bank's offices are closed (as required or permitted by law or
otherwise), such payment shall be made on the next succeeding business day, and
such extension shall be included in computing interest in connection with such
payment. All payments by any maker or endorser of this Note on account of
principal, interest or fees hereunder shall be made in lawful money of the
United States of America, in immediately available funds.
All Property (as hereinafter defined) held by the Bank shall be subject to a
security interest in favor of the Bank or holder hereof as security for any and
all Liabilities. The term "Property" shall mean the balance of every deposit
account of the maker with the Bank or any of the Bank's nominees or agents and
all other obligations of the Bank or any of its nominees or agents to the maker,
whether now existing or hereafter arising, and all other personal property of
the maker (including without limitation all money, accounts, general
intangibles, goods, instruments, documents and chattel paper) which, or evidence
of which, are now or at any time in the future shall come into the possession or
under the control of or be in transit to the Bank or any of its nominees or
agents for any purpose, whether or not accepted for the purposes for which it
was delivered. The term "Liabilities" shall mean the indebtedness evidenced by
this Note and all other indebtedness, liabilities and obligations of any kind of
the maker (or any partnership or other group of which the maker is a member) to
(a) the Bank, (b) any group of which the Bank is a member, or (c) any other
person if the Bank has a participation or other interest in such indebtedness,
liabilities or obligations, whether (i) for the Bank's own account or as agent
for others, (ii) acquired directly or indirectly by the Bank from the maker or
others, (iii) absolute or contingent, joint or several, secured or unsecured,
liquidated or unliquidated, due or not due, contractual or tortious, now
existing or hereafter arising, or (iv) incurred by the maker as principal,
surety, endorser, guarantor or otherwise, and including without limitation all
expenses, including attorneys' fees, incurred by the Bank in connection with any
such indebtedness, liabilities or obligations or any of the Property (including
any sale or other disposition of the Property).
4
<PAGE>
Upon the happening, with respect to any maker, endorser or guarantor of this
Note or any assets of any such maker, endorser or guarantor, of any of the
following events (each an "Event of Default"): death of the maker, endorser or
guarantor or any member of the maker, endorser or guarantor (if a partnership);
the failure to furnish the Bank with any requested information or failing to
permit inspection of books or records by the Bank or any of its agents; the
making of any misrepresentation to the Bank in obtaining credit for any of them;
dissolution (if a corporation or partnership); the making of a mortgage or
pledge; the commencement of a foreclosure proceeding; default in the payment of
principal or interest on this Note or in the payment of any other obligation of
any said maker, endorser or guarantor held by the Bank or holder hereof or in
the performance or observance of any covenant or agreement contained in the
instrument evidencing such obligation; default in the payment of principal of or
interest on any indebtedness for borrowed money owed to any other person or
entity (including any such indebtedness in the nature of a lease) or default in
the performance or observance of the terms of any instrument pursuant to which
such indebtedness was created or is secured, the effect of which default is to
cause or permit any holder of any such indebtedness to cause the same to become,
due prior to its stated maturity (and whether or not such default is waived by
the holder thereof); a change in the financial condition or affairs of any of
them which in the opinion of the Bank or subsequent holder hereof materially
reduces his, their or its ability to pay all of his, their or its obligations;
the suspension of business; the making of an assignment for the benefit of
creditors, or the appointment of a trustee, receiver or liquidator for the
maker, endorser or guarantor or for any of his, its or their property, or the
commencement of any proceedings by the maker, endorser or guarantor under any
bankruptcy, reorganization, arrangement of debt, insolvency, readjustment of
debt, receivership, liquidation or dissolution law or statute (including, if the
maker, endorser or guarantor is a partnership, its dissolution pursuant to any
agreement or statute), or the commencement of any such proceedings without the
consent of the maker, endorser or guarantor, as the case may be, and such
proceedings shall continue undischarged for a period of 30 days; the sending of
notice of an intended bulk sale; the entry of judgments or any attachment, levy
or execution against any of his, their or its properties shall not be released,
discharged, dismissed, stayed or fully bonded for a period of 30 days or more
after its entry, issue or levy, as the case may be; or the issuance of a warrant
of distraint or assertion of a lien for unpaid taxes, this Note, if not then due
or payable on demand, shall become due and payable immediately without demand or
notice and all other debts or obligations of the makers and endorsers hereof to
the Bank or holder hereof, whether due or not due and whether direct or
contingent and howsoever evidenced, shall, at the option of the Bank or holder
hereof, also become due and payable immediately without demand or notice. After
this Note becomes due, at stated maturity or on acceleration, any unpaid balance
hereof shall bear interest from the date it becomes due until paid at a rate per
annum 3% above the rate borne by this Note when it becomes due or, if such rate
shall not be lawful with respect to the undersigned, then at the highest lawful
rate. The liability of any party to commercial paper held by the Bank or holder
hereof, other than the makers and endorsers hereof, shall remain unaffected
hereby and such parties shall remain liable thereon in accordance with the
original tenor thereof. Each maker and endorser agrees that if an attorney is
retained to enforce or collect this Note or any other obligations by reason of
non-payment of this Note when due or made due hereunder, a reasonable attorneys'
fee shall be paid in addition, which fees shall be computed as follows: 15% of
the principal, interest and all other sums due and owing to the payee or holder
or the reasonable value of the attorneys' services, whichever is greater.
5
<PAGE>
This Note shall be governed by the laws of the State of New York and shall
be binding upon the maker and each endorser and the maker's and each endorser's
heirs, administrators, successors and assigns. The maker and each endorser
hereby irrevocably consent to the jurisdiction of any New York State or Federal
court located in New York City over any action or proceeding arising out of any
dispute between the maker and each endorser and the Bank, and the maker further
irrevocably consents to the service of process in any such action or proceeding
by the mailing of a copy of such process to the maker at the address set forth
below. In the event of litigation between the Bank and the maker over any matter
connected with this Note or resulting from transactions hereunder, the right to
a trial by jury is hereby waived by the Bank and the maker. The maker also
waives the right to interpose any set-off or counterclaim of any nature. The
Bank or any holder may accept late payments, or partial payments, even though
marked "payment in full" or containing words of similar import or other
conditions, without waiving any of its rights. No amendment, modification or
waiver of any provision of this Note nor consent to any departure by maker
therefrom shall be effective, irrespective of any course of dealing, unless the
same shall be in writing and signed by the Bank, and then such waiver or consent
shall be effective only in the specific instance and for the specific purpose
for which given.
The rights and remedies of the Bank provided for hereunder (including but
not limited to the right to accelerate Liabilities of maker and to realize on
any security for any such Liabilities) are cumulative with the rights and
remedies of the Bank available under any other instrument or agreement or under
applicable law.
The undersigned, if more than one, shall be jointly and severally liable
hereunder.
ELK ASSOCIATES FUNDING CORP.
By: /s/ Gary Granoff
-------------------------
Gary Granoff, President
By: /s/ Margaret Chance
-------------------------
Margaret Chance, Secretary
(Address)
747 Third Avenue
New York, New York 10017
VALUE RECEIVED
6
<PAGE>
This Note shall be governed by the laws of the State of New York and shall
be binding upon the maker and each endorser and the maker's and each endorser's
heirs, administrators, successors and assigns. The maker and each endorser
hereby irrevocably consent to the jurisdiction of any New York State or Federal
court located in New York City over any action or proceeding arising out of any
dispute between the maker and each endorser and the Bank, and the maker further
irrevocably consents to the service of process in any such action or proceeding
by the mailing of a copy of such process to the maker at the address set forth
below. In the event of litigation between the Bank and the maker over any matter
connected with this Note or resulting from transactions hereunder, the right to
a trial by jury is hereby waived by the Bank and the maker. The maker also
waives the right to interpose any set-off or counterclaim of any nature. The
Bank or any holder may accept late payments, or partial payments, even though
marked "payment in full" or containing words of similar import or other
conditions, without waiving any of its rights. No amendment, modification or
waiver of any provision of this Note nor consent to any departure by maker
therefrom shall be effective, irrespective of any course of dealing, unless the
same shall be in writing and signed by the Bank, and then such waiver or consent
shall be effective only in the specific instance and for the specific purpose
for which given.
The rights and remedies of the Bank provided for hereunder (including but
not limited to the right to accelerate Liabilities of maker and to realize on
any security for any such Liabilities) are cumulative with the rights and
remedies of the Bank available under any other instrument or agreement or under
applicable law.
The undersigned, if more than one, shall be jointly and severally liable
hereunder.
ELK ASSOCIATES FUNDING CORP.
By: /s/
-------------------------
By: /s/
-------------------------
(Address)
747 Third Avenue
New York, New York 10017
VALUE RECEIVED
6
<PAGE>
bank leumi USA (Graphic Omitted)
================================================================================
Member FDIC
January 4, 1999
Elk Associates Funding Corporation ("Borrower")
747 Third Avenue
New York, NY 10017
Attn: Mr. Gary Granoff, President
Dear Mr. Granoff:
Reference is made to promissory note dated January 4, 1999 in the principal
amount of $7,000,000.
You have agreed that for good and valuable consideration including but not
limited to the extension and increase of credit accommodations to Borrower, in
the amount of $7,000,000, that letter agreement dated January 20, 1998 shall
continue to be in full force and effect with respect to credit accommodations
now or in the future outstanding to Borrower.
You have agreed that the first paragraph of such letter is modified to
provide as follows:
"In order to induce you to make and/or continue loans for the account of the
undersigned pursuant to Promissory Note (Grid) dated January 4, 1999, as
such note is hereafter modified, extended, renewed or replaced with other
notes, the Borrower will, and will cause each affiliate and subsidiary (to
the extent applicable) to:".
562 Fifth Avenue, New York, NY 10036
Commercial Banking - Private Banking - International Banking -
A Member of the Worldwide Bank Leumi le-Israel Group
<PAGE>
Elk Associates Funding Corporation
Page 2
January 4, 1999
Please confirm your agreement to the foregoing by signing and returning a
copy of this letter to the undersigned.
Very truly yours,
BANK LEUMI USA
By: /s/ Fran Davis
------------------------------
Fran Davis, Vice President
By: /s/ Iris Schechter
------------------------------
Iris Schechter, Vice President
Consented and Agreed to:
ELK ASSOCIATES FUNDING CORPORATION
By: /s/ Gary Granoff
---------------------------
Gary Granoff, President
By: /s/ Margaret Chance
---------------------------
Margaret Chance, Secretary
<PAGE>
Elk Associates Funding Corporation
Page 2
January 4, 1999
Please confirm your agreement to the foregoing by signing and returning a
copy of this letter to the undersigned.
Very truly yours,
BANK LEUMI USA
By: /s/
------------------------------
By: /s/
------------------------------
Consented and Agreed to:
ELK ASSOCIATES FUNDING CORPORATION
By: /s/
---------------------------
By: /s/
---------------------------
<PAGE>
Exhibit n.1
-----------
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Ameritrans Capital Corporation and
Subsidiaries
We consent to the reference to our firm under the caption "Experts" in
the Registration Statement on Form N-2 and the inclusion of our report dated
August 12, 1998, with respect to the consolidated financial statements for the
years ended June 30, 1998 and 1997.
MARCUM & KLIEGMAN LLP
New York, New York
July 12, 1999
<PAGE>
Exhibit n.2
-----------
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Shareholders of Ameritrans Capital Corporation and
Subsidiaries
We consent to the use in this Registration Statement of Ameritrans
Capital Corporation on Form N-2 of our report dated August 2, 1996 on the
financial statements of Elk Associates Funding Corporation and Subsidiary,
appearing in the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in
such Prospectus.
DELOITTE & TOUCHE LLP
New York, New York
July 8, 1999
