ELK ASSOCIATES
FUNDING CORPORATION AND SUBSIDIARY
Consolidated Financial Statements for the
Years Ended June 30, 1996, 1995 and 1994, and
Independent Auditors' Report
ELK ASSOCIATES
FUNDING CORPORATION AND SUBSIDIARY
TABLE OF CONTENTS
Page
INDEPENDENT AUDITORS' REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED JUNE 30, 1996, 1995 AND 1994:
Consolidated Balance Sheets 2
Consolidated Statements of Income 3
Consolidated Statements of Shareholders' Equity 4
Consolidated Statements of Cash Flows 5
Consolidated Schedule of Loans 6
Notes to Consolidated Financial Statements 7-13
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Elk Associates Funding Corporation and Subsidiary
(A Specialized Small Business Investment
Company Licensed by the SBA)
We have audited the accompanying consolidated balance sheets of Elk
Associates Funding Corporation and Subsidiary as of June 30, 1996 and 1995,
including the schedule of loans as of June 30, 1996, and the related
consolidated statements of income, shareholders' equity and cash flows for
each of the three years in the period ended June 30, 1996. These financial
statements and schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these 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 audit to
obtain reasonable assurance about whether the financial statements and
schedule are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and schedule present fairly, in
all material respects, the financial position of Elk Associates Funding
Corporation and Subsidiary as of June 30, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the
period ended June 30, 1996 in conformity with generally accepted accounting
principles.
As explained in Note 1, the financial statements include loans valued at
$23,840,421 and $22,762,462 as of June 30, 1996 and 1995, 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 appropriate.
However, because of the inherent uncertainty of valuation, those estimated
values may differ significantly from the values that would have been used
had a ready market for such loans existed, and the differences could be
material.
As explained in Note 1, on December 19, 1994 the shareholders of Elk
Associates Funding Corporation approved a quasi-reorganization of the
Company. The quasi-reorganization resulted in the elimination of the
retained earnings deficit effective July 1, 1994.
August 2, 1996
<TABLE>
<CAPTION>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND 1995
<S> <C> <C> <S> <C> <C> <C>
ASSETS 1996 1995
Loans (Notes 1, 3 and 5) $24,141,421 $23,039,462
Less allowance for loan losses (301,000) (277,000)
23,840,421 22,762,462
Cash 1,072,783 1,139,501
Accrued interest receivable (Notes 1 and 3) 294,087 240,221
Assets acquired in satisfaction of loans
(Notes 1 and 2) 426,922 865,216
Receivables from debtors on sales of assets
acquired in satisfaction of loans
(Notes 1 and 2) 525,290 389,374
Equity securities 234,900 -
Furniture, fixtures and leasehold improve-
ments - At cost, less accumulated depreci-
ation of $171,343 and $145,860, 101,948 111,231
respectively (Note 1)
Prepaid expenses and other assets 224,835 194,595
TOTAL ASSETS $26,721,186 $25,702,600
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Debentures payable to SBA (Note 4) $8,858,000 $ 8,804,000
Notes payable to banks (Note 5) 6,625,000 4,950,000
Accrued expenses and other liabilities 140,898 147,718
Accrued interest payable 196,453 183,934
Total liabilities 15,820,351 14,085,652
SHAREHOLDERS' EQUITY (Notes 1, 6 and 7):
Series A, 3 percent cumulative preferred
stock, $10 par value - 547,271 shares
authorized, issued and outstanding at
June 30, 1995 - 5,472,710
Series B, 4 percent cumulative preferred
stock, $10 par value, 752,729 shares
authorized, none outstanding - -
Common stock, $.01 par value - 2,000,000
shares authorized; 1,283,600 issued and
outstanding at June 30, 1996;1,033,683
outstanding at June 30, 1995 12,836 10,337
Additional paid-in capital 8,179,545 5,480,948
Restricted capital 2,391,268 -
Retained earnings 317,186 652,953
Total shareholders' equity 10,900,835 11,616,948
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $26,721,186 $25,702,600
See notes to consolidated financial statements.
</TABLE>
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<TABLE>
<CAPTION>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
<S> <C> <C> <C>
1996 1995 1994
INVESTMENT INCOME (Note 3):
Interest on loans $2,751,196 $2,398,616 $2,600,225
Fees and other income 333,216 231,285 224,656
Total investment income 3,084,412 2,629,901 2,824,881
EXPENSES:
Interest 1,105,993 1,002,959 1,136,458
Management fees (Note 8) 210,000 384,000 396,000
Salaries and employee benefits (Note 8) 220,476 - -
Legal fees (Note 8) 186,023 223,651 206,850
Miscellaneous administrative expenses
(Note 8) 474,551 343,823 317,198
(Credit) provision for loan losses,
net (Note 3) - (24,351) 79,192
(Gains) losses on assets acquired in
satisfaction of loans, net (Note 2)
(44,292) 37,866 394,125
Directors' fees 23,400 9,000 6,750
Total expenses 2,176,151 1,976,948 2,536,573
NET INCOME $908,261 $652,953 $288,308
WEIGHTED AVERAGE SHARES OUTSTANDING 1,247,120 988,953 943,683
NET INCOME PER COMMON SHARE
(Note 1) $.73 $.66 $.13
See notes to consolidated financial statements.
</TABLE>
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<TABLE>
<CAPTION>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (NOTES 1, 6, AND 7)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
<S> <C> <C> <C> <C> <C> <S> <C>
<C> <C> <C> <S>
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
BALANCE, JULY 1, 1993 547,271 $ 5,472,710 $ -
943,683 $9,437 $ 5,480,948 $ -
Net income - - -
- - - -
BALANCE, JUNE 30, 1994 547,271 $ 5,472,710 $ -
943,683 $9,437 $ 5,480,948 $ -
Proceeds from issuance of
common stock (Note 7) - - -
90,000 900 372,655
Quasi-reorganization effective
July 1, 1994 (Note 1) - - -
- - - (372,655) -
BALANCE, EFFECTIVE
JULY 1, 1994, after
quasi-reorganization 547,271 5,472,710 -
1,033,683 10,337 5,480,948
Net income - - -
- - - -
BALANCE, JUNE 30, 1995 547,271 5,472,710 -
1,033,683 10,337 5,480,948 -
Proceeds from issuance of
common stock (Note 7) - - -
249,917 2,499 1,225,604 -
Redemption of preferred
stock (Note 6) (547,271) (5,472,710) -
- - - - 3,557,261
Capitalization of retained
earnings (Note 7) - - -
- - - 307,000 -
Transfer of restricted capital - - -
- - - 1,165,993 (1,165,993)
(Note 6)
Dividends paid - - -
- - - - -
Net income - - -
- - - - -
BALANCE, JUNE 30, 1996 - $ - $ -
1,283,600 $12,836 $8,179,545 $2,391,268
Retained
Earnings
(Deficit) Total
BALANCE, JULY 1, 1993 $(660,963) $10,302,132
Net income 288,308 288,308
BALANCE, JUNE 30, 1994 (372,655) 10,590,440
Proceeds from issuance of
common stock (Note 7) - 373,555
Quasi-reorganization effective
July 1, 1994 (Note 1) 372,655 -
BALANCE, EFFECTIVE
JULY 1, 1994, after
quasi-reorganization - 10,963,995
Net income 652,953 652,953
BALANCE, JUNE 30, 1995 652,953 11,616,948
Proceeds from issuance of
common stock (Note 7) - 1,228,103
Redemption of preferred
stock (Note 6) - (1,915,449)
Capitalization of retained
earnings (Note 7) (307,000) -
Transfer of restricted capital
(Note 6) - -
Dividends paid (937,028) (937,028)
Net income 908,261 908,261
BALANCE, JUNE 30, 1996 $ 317,186 $10,900,835
See notes to consolidated financial statements.
</TABLE>
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<TABLE>
<CAPTION>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
<S> <C> <C> <C>
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $908,261 $652,953 $288,308
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 25,483 24,015 12,232
Losses and expenses of assets
acquired in satisfaction of loans
- 37,866 179,695
(Credit) provision for loan losses - (24,351) 79,192
(Increase) decrease in accrued
interest receivable (53,866) 65,430 (50,893)
Increase in prepaid expenses and
other assets (30,240) (1,743) (125,170)
Decrease in accrued expenses and
other liabilities (6,820) (36,282) (26,838)
Increase in accrued interest
payable 12,519 9,850 35,270
Net cash provided by
operating activities 855,337 727,738 391,79
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in loans, assets acquired
in satisfaction of loans, and
receivables from debtors on sales
of assets acquired in satisfaction
of loans (775,581) (889,825) 534,690
Purchases of equity securities (234,900) - -
Acquisition of fixed assets (16,200) (30,656) (98,750)
Net cash (used in)
provided by investing
activities (1,026,681) (920,481) 435,940
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings 1,975,000 1,400,000 1,050,000
Repayments of bank borrowings (300,000) (2,145,000) (2,355,000)
Proceeds from SBA debentures 2,040,000 2,690,000 3,720,000
Repayments of SBA debentures (1,986,000) (2,610,430) (2,175,000)
Proceeds from sale of common stock 1,228,103 373,555 -
Repurchase of preferred stock (1,915,449) - -
Dividends paid (937,028) - -
Net cash provided by (used
in) financing activities 104,626 (291,875) 240,000
NET (DECREASE) INCREASE IN CASH (66,718) (484,618) 1,067,736
CASH, BEGINNING OF YEAR 1,139,501 1,624,119 556,383
CASH, END OF YEAR $1,072,783 $1,139,501 $ 1,624,119
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for
interest $1,093,474 $1,009,593 $ 1,171,728
Noncash conversion of loans to
assets acquired in satisfaction
of loans and assets acquired in
satisfaction of loans to
receivables from debtors $9,000 $103,000 $23,662
See notes to consolidated financial statements.
</TABLE>
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<TABLE>
<CAPTION>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF LOANS
JUNE 30, 1996
<S> <C> <C> <C> <C>
Maturity
Number Interest Dates Balance
Type of Loan of Loans Rates (In Months) Outstanding
New York City:
Taxi medallion 118 8-12% 1-119 $16,586,681
Radio car service 74 6-15% 1-59 589,155
Chicago:
Taxi medallion 136 13-14% 33-48 3,723,756
Boston:
Taxi medallion 15 12.75-13.5% 45-72 883,323
Other loans:
Restaurant 1 12% 1 148,588
Gas station/auto repair 5 11-14.5% 1-45 194,481
Management taxi fleet/car
service 1 13% 1 24,141
Hairdresser 2 12% 22 163,745
Car wash 2 15.25% 21 204,215
Ambulance service 1 10.5% 30 21,885
Liquor store 1 16.25% 15 41,830
Antique store 3 12% 6-59 400,500
Dry cleaner 3 10-13.5% 41-111 482,960
Laundromat 1 15% 15 45,844
Grocery/deli 2 12.5-13% 35-51 71,686
Financial services 1 14% 1 100,000
Black car service (real property) 1 12% 119 313,631
Auto sales 2 10.25-12% 48-120 130,000
Registered investment advisor 1 14% 120 15,000
Total portfolio 370 6-15.25% 1-120 $24,141,421
</TABLE>
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ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - Elk Associates Funding Corporation (the "Company"), a New
York corporation, is licensed by the Small Business Administration
("SBA") to operate as a Specialized Small Business Investment Company
("SSBIC") under the Small Business Investment Act of 1958, as amended.
The Company has also registered as an investment company under the
Investment Company Act of 1940.
The Company makes loans to persons who qualify under SBA regulations as
socially or economically disadvantaged and loans to entities which are
at least 50 percent owned by such persons.
On December 19, 1994, the Company's shareholders approved a quasi-
reorganization of the Company effective July 1, 1994. On December 30,
1994, the Company completed the sale of 90,000 shares of common stock to
its shareholders, which was a precondition of the quasi-reorganization.
The quasi-reorganization resulted in the elimination of a deficit of
$372,655 in retained earnings effective July 1, 1994. The quasi-
reorganization was also approved by the SBA.
Loans and the Allowance for Loans Losses - Loans are stated at cost, net
of participations with other lenders, less an allowance for possible
losses. This amount represents the fair value of such loans as
determined in good faith by the Board of Directors. The allowance for
loans losses is maintained at a level that, in the Board of Directors'
judgment, is adequate to absorb losses inherent in the portfolio. The
allowance for loan losses is reviewed and adjusted periodically by the
Board of Directors on the basis of available information, including the
fair value of the collateral held, existing risk of individual credits,
past loss experience, the volume, composition and growth of the
portfolio, and current and projected economic conditions. Because of
the inherent uncertainty in the estimation process, the estimated fair
values of the loans may differ significantly from the values that would
have been used had a ready market existed for such loans. Approximately
90 percent of all loans are collateralized by New York City, Boston and
Chicago taxicab medallions and group franchises in car services located
in New York City.
The Company adopted Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS 114") on July
1, 1995. Pursuant to this statement, a loan is determined to be
impaired if it is probable that the contractual amounts due will not be
collected in accordance with the terms of the loan. SFAS 114 generally
requires that impaired loans be measured based on the present value of
expected future cash flows discounted at the loan's effective interest
rate or, as a practical expedient, at the loan's observable market price
or the fair value of the collateral if the loan is collateral dependent.
As all of the Company's loans are collateral dependent, impairment is
measured based on the fair value of the collateral. If the fair value
of the impaired loan is less than the recorded investment in the loan
(including accrued interest, net of deferred loan fees or costs, and
unamortized premium or discount) the Company 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.
The adoption of SFAS 114 had no effect on the Company's financial
condition or results of operations. See Note 3 for further discussion.
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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 judgment of management, the ultimate collectibility
of interest and principal is doubtful.
Income Taxes - The Company has elected to be taxed as a Regulated
Investment Company under the Internal Revenue Code. A Regulated
Investment Company will generally not be taxed at the corporate level to
the extent its income is distributed to its shareholders. In order to
be taxed as a Regulated Investment Company, the Company must pay at
least 90 percent of its net investment company taxable income to its
shareholders as well as meet other requirements under the Code. In
order to preserve this election for fiscal 1996, the Company intends to
make the required distributions to its shareholders prior to June 30,
1997.
Depreciation and Amortization - Depreciation and amortization of
furniture, fixtures and leasehold improvements is computed on the
straight-line method at rates adequate to allocate the cost of
applicable assets over their expected useful lives.
Net Income per Share - Net income per share is determined by dividing
net income by the weighted average number of shares outstanding during
the period. All net income per share amounts have been restated to give
effect to the extinguishment of all cumulative preferred stock dividends
in arrears as a result of the preferred stock repurchase discussed in
Note 6.
Assets Acquired in Satisfaction of Loans - Assets acquired in
satisfaction of loans are carried at estimated fair value less selling
costs. Losses incurred at the time of foreclosure are charged to the
allowance for loan losses. Subsequent reductions in estimated net
realizable value are recorded as losses on assets acquired in
satisfaction of loans.
Interest Rate Cap - At June 30, 1995, the Company was a party to one $5
million notional interest rate cap. This cap was purchased by the
Company to protect it from the impact of upward movements in interest
rates related to its outstanding bank debt. The cap provided interest
rate protection in the event that three month LIBOR rate exceeded 5.75
percent. The premium paid for the purchase of this cap was amortized
over its life as an adjustment of interest expense. Payments received
under this cap were credited to interest expense. At June 30, 1996,
this contract had expired.
Consolidation - The consolidated financial statements include the
accounts of EAF Holding Corporation ("EAF"), a wholly-owned subsidiary
of the Company. All intercompany transactions have been eliminated.
EAF was formed in June 1992 and began operations in December 1993. The
purpose of EAF is to own and operate certain real estate assets acquired
in satisfaction of loans. As of June 30, 1995, EAF owned one real
estate asset with a carrying value of approximately $200,000. This real
estate asset was sold during the year ended June 30, 1996.
Use of Estimates in the Preparation of 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 1994 and 1995 information has been
reclassified to conform its presentation with the 1996 financial
statements.
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2. ASSETS ACQUIRED IN SATISFACTION OF LOANS
During the fiscal years ended June 30, 1996 and 1995, the carrying value
of Assets Acquired in Satisfaction of Loans increased by additions of
approximately $9,000 and $103,000, and decreased by sales and cash
payments of approximately $424,000 and $367,000 and write-offs of
approximately $23,000 and $29,000, respectively.
Sales of assets acquired in satisfaction of loans during fiscal 1996 and
1995, included approximately $388,000 and $360,400 of real estate and
$36,000 and $6,600 of radio car rights, respectively.
Receivables from Debtors on Sales of Assets Acquired in Satisfaction of
Loans represent loans to borrowers arising out of the sale of defaulted
assets. Pursuant to an SBA regulation, these loans are presented
separately in the accompanying consolidated balance sheet.
<TABLE>
<CAPTION>
3. LOANS RECEIVABLE
<S> <C>
Loans on nonaccrual status or accruing at reduced rates as of June 30,
1996 and June 30, 1995 were approximately $102,000 and $264,000,
respectively. Interest income recognized on such loans for the year
ended June 30, 1996 totaled approximately $5,000. If interest on such
nonaccrual or reduced rates loans had been accrued at the contractual
amount, interest income would have been increased by approximately
$12,000 for the year ended June 30, 1996.
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
$592,000 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. At June 30, 1996, approximately $443,000 of
these loans were fully collateralized as to principal and interest.
Interest income recorded during 1996 totaled approximately $83,000 for
such loans. The following table sets forth certain information
concerning impaired loans as of June 30, 1996:
Impaired loans with an allowance $ 250,543
Impaired loans without an allowance 443,143
Total impaired loans $ 693,686
Allowance for impaired loans $ 154,000
Average balance of impaired loans during the year
ended June 30, 1996 $484,332
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Transactions in the allowance for loan losses are summarized as follows:
Balance, June 30, 1994 $ 355,000
Charge-offs (53,649)
Credit, net (24,351)
Balance, June 30, 1995 277,000
Recoveries - net 24,000
</TABLE>
At June 30, 1996, the Company had commitments to make loans totaling
$1,987,050 at interest rates ranging from 9.25 percent to 15 percent.
<TABLE>
<CAPTION>
4. DEBENTURES PAYABLE TO SMALL BUSINESS ADMINISTRATION
<C> <C> <C> <C> <C> <C>
At June 30, 1996, debentures payable to the Small Business
Administration consisted of subordinated debentures with interest
payable semiannually, as follows:
Current
Effective
Interest Principal
Issue Date Due Date Rate Amount
March 1987 March 1997 7.125 $408,000
September 1993 September 2003 3.12(1) 1,500,000
September 1993 September 2003 6.12 2,220,000
September 1994 September 2004 8.20 2,690,000
December 1995 December 2005 6.54 1,020,000
June 1996 June 2006 7.71 1,020,000
$8,858,000
(1) Interest rate increases to 6.12% on September 30, 1998
</TABLE>
Under the terms of the subordinated debentures, the Company may not
repurchase or retire any of its capital stock or make any distributions
to its shareholders other than dividends out of retained earnings (as
computed in accordance with SBA regulations) without the prior written
approval of the SBA.
5. NOTES PAYABLE TO BANKS
The Company has loan agreements with four banks for lines of credit
aggregating $14,000,000. At June 30, 1996, the Company had $6,625,000
outstanding under these lines. The loans, which mature through November
30, 1996, bear interest based on the banks' prime rates and include
certain fees which make the effective rates range from prime to prime
minus one-half percent. Upon maturity, the Company anticipates
extending the lines of credit for another year as has been the practice
in previous years.
Pursuant to the terms of the agreements the Company is required to
comply with certain terms, covenants and conditions. The Company
pledged its loans receivable and other assets as collateral for the
above lines of credit and is required to maintain compensating balances.
At June 30, 1996,
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compensating balances of $662,500 were maintained by the Company in
accordance with these agreements.
6. PREFERRED STOCK
At June 30, 1995, the Company had 547,271 shares of 3 percent preferred
stock issued to the SBA. Cumulative dividends not declared or paid as
of June 30, 1995 were approximately $533,000. During August 1995, the
Company completed the repurchase of all such shares of preferred stock
from the SBA pursuant to a preferred stock repurchase agreement dated
November 10, 1994. Pursuant to this agreement, the Company repurchased
all 547,271 shares of its 3 percent cumulative preferred stock from the
SBA for $3.50 per share, or an aggregate of $1,915,449. The repurchase
price was at a substantial discount to the original issuance price of
$10 per share. In connection with the repurchase, all dividends in
arrears on the preferred shares were extinguished.
As a condition precedent to the repurchase, the Company granted the SBA
a liquidating interest in a newly established restricted capital surplus
account. The surplus account is equal to the amount of the net
repurchase discount. The initial value of the liquidating interest was
$3,557,261 which is being amortized over a 60-month period on a
straight-line basis. Should the Company be in default under the
repurchase agreement at any time, the liquidating interest will become
fixed at the level immediately preceding the event of default and will
not decline further until such time as the default is cured or waived.
The liquidating interest shall expire on (i) sixty months from the date
of the repurchase agreement, or (ii) if any event of default has
occurred and such default has been cured or waived, such later date on
which the liquidating interest is fully amortized. Should the Company
voluntarily or involuntarily liquidate prior to the amortization of the
liquidating interest, any assets which are available, after the payment
of all debts of the Company, shall be distributed first to the SBA until
the fair market value of such assets is equal to the amount of the
liquidating interest. Such payment, if any, would be prior in right to
any payments made to the Company's shareholders. The amount restricted
under this agreement at June 30, 1996 was approximately $2,391,000.
During 1992, the Company authorized the issuance of 752,729 shares of a
new Series B cumulative preferred stock with a 4 percent dividend and a
$10 par value. All preferred shares are restricted solely for issuance
to the SBA. No sales of the Series B preferred shares have occurred to
date.
7. COMMON STOCK
On July 2, 1996, the Company declared a cash dividend of $0.18 per
common share, or a total of $231,048, payable on July 15, 1996 to
shareholders of record on July 3, 1996.
On August 20, 1996, the Company declared an additional cash dividend of
fiscal 1996 earnings of $0.0675 per common share, or a total of $86,643,
payable on September 26, 1996 to shareholders of record on September 16,
1996.
On December 30, 1994, the Company completed the sale of 90,000 shares of
its common stock to existing shareholders. Total capital raised from
this sale was $450,000 less private placement costs of $76,445. The
completion of this sale was a precondition for SBA approval of the
quasi-reorganization discussed in Note 1. During September 1995, the
Company completed the sale of 249,917 additional shares of common stock
and restricted $307,000 of its 1995 earnings in order to qualify for
participation in the SBA's 3 percent Preferred Stock Repurchase Program.
Total capital raised during this sale was $1,249,585 less private
placement costs of $21,482. These proceeds were used to repurchase the
Company's preferred stock held by the SBA (See Note 6).
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8. RELATED PARTY TRANSACTIONS
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.
Subject to the overall control and supervision of the Board of Directors
of the Company, the advisor is also responsible for reviewing all loan
applications, implementing the lending policies decided upon by the
Board of Directors of the Company and investing excess liquid assets of
the Company.
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 years ended June 30, 1996, 1995 and 1994, $210,000, $384,000 and
$396,000 in management fees, respectively, were paid in accordance with
this agreement.
The management 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 years ended June 30, 1996, 1995 and 1994,
the Company paid additional legal fees of $48,902, $41,705 and $41,759,
respectively, to the same law firm. The Company generally charges its
borrowers loan origination fees to generate income to offset the
expenses incurred by the Company for the legal fee retainer.
Effective January 1, 1996, the legal fee retainer being paid to the
above referenced law firm was terminated, and legal services related to
New York taxi and black car loan closings are being provided by the
officers and employees of the Company. Closing fees related to all
other loans are paid by the Company based on a fixed or hourly fee.
During the year ended June 30, 1994, the Company moved to new facilities
which were leased by the firm referred to above. In connection with
this move, the Company was allocated approximately $98,000 for the
purchase of various equipment and leasehold improvements.
9. REGULATORY MATTERS
In accordance with a Stipulation of Compliance dated January 25, 1993
between the Company and the SBA, the Company has appointed an Audit and
Compliance Committee, consisting of officers and directors of the
Company, which is responsible for monitoring and coordinating the
Company's adherence with SBA regulations.
- 12 -
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.
10. 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 the requirements of Statement of Financial Accounting Standards No.
107, "Disclosures 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. 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.
Equity Securities - The Company's equity securities consist primarily of
investments in corporations who own and operate Chicago taxicab
medallions. At June 30, 1996, the fair value of the equity securities
approximates cost.
Debentures Payable to Small Business Administration - The fair value of
debentures as of June 30, 1996 was approximately $8,223,000 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.
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 to 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
******
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September 4, 1996
Dear Stockholders:
We are pleased to enclose with this letter a copy of our
annual audited financial statements for the fiscal year ended
June 30, 1996, together with a Press Release dated September 4,
1996 that was released today. The Press Release summarizes some
of the highlights set forth in the enclosed financial statements
and further discusses some important recent developments.
The Board of Directors and Management believe that during
the fiscal year ended June 30, 1996, the company has continued to
make substantial progress toward our goals. We have continued to
expand our loan and investment portfolio by diversifying the
locations in which we are doing business. We have expanded our
taxi finance operations into Chicago and Boston, and we are about
to make our first taxi loans in Miami, Florida. We have also
continued our policy of increasing our diversified business loan
and investment portfolio by being selective in the decision
making process as to which investments are appropriate for our
portfolio. During the fiscal year ended June 30, 1996, we also
made certain equity investments into small concerns that own and
operate Chicago taxi medallions, as well as into a substantial
dry-cleaning operation in Miami, Florida. We also intend to
continue to try and make investments for a portion of our
diversified portfolio that will combine loans with equity
features, such as the purchase of warrants or stock, in those
businesses that have above average prospects for future growth.
As the enclosed Press Release indicates, by September 25,
1996, the Company will have paid out $1,254,719 of cash dividends
between September 1995 and September 1996, representing the
balance of undistributed earnings at June 30, 1995 of $345,953,
and the earnings from fiscal year ended June 30, 1996 of
$908,261. In addition, during the fiscal year ended June 30,
1996 the Company's private stockholder net worth was also
increased by a total of $1,165,993 as a result of the
amortization of the Restricted Capital account arising out of the
Preferred Stock repurchase transaction with SBA that was
completed during September, 1995.
We are pleased to be able to report the above results.
Sincerely yours,
Gary C. Granoff, President
PRESS RELEASE
New York, New York
September 4, 1996
Elk Associates Funding Corporation announced today that
its financial results for the fiscal year ending June 30, 1996
have been filed with the U. S. Securities and Exchange Commission
on Form NSAR, and that its full financial statements are being
filed with the SEC this week.
The Company announced that it has continued to make
substantial progress in its business operations, financial
standing, and profitability. During the fiscal year ended June
30, 1996, the Company completed the sale of an additional
$1,228,103 of common stock at $5.00 per share, and capitalized
$307,000 of retained earnings in order to participate in the buy
back program offered by the US Small Business Administration,
which allowed the Company to repurchase $5,472,710 of 3%
cumulative preferred stock at a discounted price of .35 cents on
the dollar. Although the discount is amortized according to SBA
Regulations at the rate of 1/60th per month, by June 30, 1996,
the Company reported its total shareholder' equity at
$10,900,835. This consisted of 1,283,600 shares of .01 cent par
value, or $12,836., $8,179,545., of Additional Paid in Capital,
$2,391,268., of Restricted Capital (which will amortize into the
Additional Paid in Capital Account over the period from July,
1996 through November, 1999), and $317,186 of Retained Earnings.
As part of the preferred stock buy back program, the Company was
able to eliminate the necessity to pay cumulative but unpaid
preferred stock dividends of approximately $533,000.
As a result of the completion of the preferred stock
repurchase with SBA during September, 1995, the Company was again
in a position to pay its common stockholders dividends from
retained earnings. Accordingly, the Company paid out cash
dividends to common stockholders between September, 1995 and June
30, 1996 of $937,028.
In addition, on July 2, 1996, the Board of Directors
declared a cash dividend of .18 cents per share or $231,048 to
stockholders of record on July 3, 1996, which was paid on July
15, 1996. As a final distribution for the fiscal year ended June
30, 1996, on August 20, 1996 the Board of Directors declared a
cash dividend of $0.0675 per common share, or a total of $86,643
to stockholders of record on September 16, 1996 payable on
September 26, 1996. These cash dividends which totaled
$1,254,719 were or are to be paid out of the unrestricted
retained earnings at June 30, 1995 of $345,953, and out of
earnings for the fiscal year ended June 30, 1996 of $908,261.
The Company further announced that on August 20, 1996, the Board
of Directors declared a dividend of .14 cents per share or
$179,704. to stockholders of record on September 16, 1996 payable
on September 26, 1996, as an estimate of earnings for the first
quarter of the fiscal year ending June 30, 1997.
The Company's net income for the fiscal year ended June
30, 1996 was $908,261 or .73 cents per share as compared with
$652,953 or .66 cents per share at June 30, 1995, and $288,308 or
.13 cents per share at June 30, 1994. The Company's total
investment income increased 17% to $3,084,412 at June 30, 1996
over the investment income total of $2,629,901 at June 30, 1995.
The Company's gross income increased from year to year,
due to the increased revenues it has obtained on loans in the
Boston and Chicago taxi medallion markets, which markets the
Company has continued to develop during the fiscal year ending
June 30, 1996. The Company announced that at June 30, 1996 its
portfolio of taxi medallion loans in New York City was
$16,586,681, that its portfolio of Chicago taxi medallion loans
was $3,723,756, and that its Boston taxi medallion loans were
$883,323. The Company announced that it was also continuing to
increase its loan portfolio of loans outside of the taxi
medallion industry on a selective basis, and that its diversified
loan portfolio was $2,355,506 at June 30, 1996. The Company also
announced that it had made equity investments during the fiscal
year ended June 30, 1996 that totaled $234,900, which were made
primarily in corporations owning and operating taxi medallions in
Chicago, and in a dry-cleaning operation in Dade County, Florida.
The Company's assets acquired in satisfaction of loans decreased
significantly at June 30, 1996 to $426,922 from $865,216 at June
30, 1995, as a result of the Company successfully being able to
resell a substantial portion of its remaining defaulted assets.
The Company also announced that during the fiscal year
ended June 30, 1996 that it refinanced onto a long term (10 year)
basis, two debentures that had matured with SBA, one of which
matured in December, 1995, and the other of which matured in
April, 1996. Each debenture was in the amount of $993,000. The
new debentures sold with an SBA Guaranty are at a fixed rate for
10 years, and were each in the amount of $1,020,000. The
debenture sold in December, 1995 bears interest at 6.54%, and the
debenture sold in June, 1996 bears interest at 7.71%. The sale
of these two debentures, along with the other recent sales
through SBA in 1993, and 1994 almost completes the Company's
refinancing of all of its debentures due to SBA, with the
exception of one debenture in the amount of $408,000 that matures
in March, 1997. Total outstanding debentures due to SBA at June
30, 1996 were $8,858,000.
The Company also stated that at June 30, 1996, it had
short term lines of credit from various commercial banks in the
aggregate amount of $14,000,000., of which $6,625,000 were
outstanding. The rates of interest charged by the various banks
approximate one-half percent below the prime rate, plus certain
fees and compensating balance requirements. The Company expects
to renew these lines of credit as it has customarily done in
prior years.
The Company believes that its business prospects at the
present time are excellent and that it will continue to finance
New York City, Chicago, and Boston taxi medallion owners as its
principal source of loans. The Company has also made commitments
to finance taxi licenses in Dade County, Florida and expects to
fund loans there in the near future. The demand for the
Company's financing since July 1, 1996 has been exceptionally
strong. The Company announced that at the close of business on
September 3, 1996 it had increased its outstanding balances on
its bank lines of credit by $2,750,000 to meet the increased
demand for financing by customers. Accordingly, the Company's
outstanding bank loan balances increased from $6,625,000 at June
30, 1996 to $9,375,000 at September 3, 1996.
Elk Associates Funding Corporation is a Specialized Small
Business Investment Company licensed by the United States Small
Business Administration to make loans and investments in
companies that are at least 50% owned by socially or economically
disadvantaged individuals. The Company was licensed by the SBA
in 1980. The Company's shares are listed in the Pink Sheets
under the symbol "EKFG". The Company maintains its offices at
747 Third Avenue, 4th Floor, New York, New York 10017. The
contact person is Gary C. Granoff, President. The Company's
telephone number is 1-212-355-2449 or 1-800-214-1047. The
Company's fax number is 1-212- 759-3338.
