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Marcum & Kliegman LLP
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Certified Public Accountants & Consultants
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
(A Specialized Small Business Investment Company Licensed by the SBA)
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
AND FOR THE YEAR ENDED JUNE 30, 1996
<PAGE>
Marcum & Kliegman LLP
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONTENTS
INDEPENDENT ACCOUNTANTS' REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets 2
Statements of Income 3
Statements of Shareholders' Equity 4
Statements of Cash Flows 5-6
Schedule of Loans 7
Notes to Consolidated Financial Statements 8-15
<PAGE>
Marcum & Kliegman LLP
655 Madison Avenue, 23rd Floor
New York, New York 10021
Telephone (212)486-4567
Facsimile (212)486-4568
Independent Accountants' Report
To the Board of Directors
and Shareholders of
Elk Associates Funding Corporation and Subsidiary
(A Specialized Small Business Investment Company Licensed by the SBA)
We have reviewed the accompanying consolidated balance sheet, including the
schedule of loans, of Elk Associates Funding Corporation and Subsidiary as of
December 31, 1996, and the related consolidated statements of income,
shareholders' equity and cash flows for the six months then ended, in
accordance with Statements on Standards for Accounting and Review Services
issued by the American Institute of Certified Public Accountants. All
information included in these consolidated financial statements is the
representation of the management of Elk Associates Funding Corporation and
Subsidiary.
A review consists principally of inquiries of Company personnel and analytical
procedures applied to financial data. It is substantially less in scope than
an audit in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the consolidated
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying consolidated financial statements in order
for them to be in conformity with generally accepted accounting principles.
As explained in Note 1, the financial statements include loans valued at
$29,452,983 as of December 31, 1996, 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.
The consolidated balance sheet of Elk Associates Funding Corporation and
Subsidiary as of June 30, 1996, and the related consolidated statements of
income, shareholders' equity, and cash flows for the year then ended were
audited by other auditors, whose report dated August 2, 1996 expressed an
unqualified opinion on those financial statements and included an explanatory
paragraph regarding the possible effect on the financial statements of the
valuation of loans determined by the Board Directors.
/s/ MARCUM & KLIEGMAN LLP
February 20, 1997, except for Note 13,
as to which the date is February 27, 1997
-1-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and June 30, 1996
ASSETS
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996
(Unaudited)
<S> <C> <C>
Loans receivable $ 29,765,983 $ 24,141,421
Less allowance for loan losses (313,000) (301,000)
29,452,983 23,840,421
Cash 1,100,994 1,072,783
Accrued interest receivable 396,976 294,087
Assets acquired in satisfaction of loans 421,922 426,922
Receivables from debtors on sales of
assets acquired in satisfaction of loans 504,740 525,290
Equity securities 375,560 234,900
Furniture, fixtures and leasehold
improvements - At cost, less accumulated
depreciation of $185,454 and $171,343,
respectively 97,040 101,948
Prepaid expenses and other assets 201,366 224,835
TOTAL ASSETS $ 32,551,581 $ 26,721,186
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Debentures payable to SBA $ 8,858,000 $ 8,858,000
Notes payable to banks 12,800,000 6,625,000
Accrued expenses and other liabilities 111,189 140,898
Accrued interest payable 196,089 196,453
TOTAL LIABILITIES 21,965,278 15,820,351
SHAREHOLDERS' EQUITY:
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 shares
issued and outstanding at December 31,
1996 and June 30, 1996 12,836 12,836
Additional paid-in-capital 8,535,267 8,179,545
Restricted capital 2,035,546 2,391,268
Retained earnings 2,654 317,186
TOTAL SHAREHOLDERS' EQUITY 10,586,303 10,900,835
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 32,551,581 $ 26,721,186
</TABLE>
See independent accountants' report and notes to the consolidated financial
statements
-2-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For the Six Months Ended December 31, 1996
and for the Year Ended June 30, 1996
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996
(Unaudited)
<S> <C> <C>
INVESTMENT INCOME
Interest on loans receivable $ 1,630,696 $ 2,751,196
Fees and other income 178,049 333,216
TOTAL INVESTMENT INCOME 1,808,745 3,084,412
EXPENSES
Interest 691,820 1,105,993
Management fees - 210,000
Salaries and employee benefits 225,534 220,476
Legal fees 152,132 186,023
Miscellaneous administrative expenses 311,218 474,551
Loss (gain) on assets acquired in
satisfaction of loans, net 12,716 (44,292)
Directors' fee 14,250 23,400
TOTAL EXPENSES 1,407,670 2,176,151
NET INCOME $ 401,075 $ 908,261
WEIGHTED AVERAGE SHARES OUTSTANDING 1,283,600 1,247,120
NET INCOME PER COMMON SHARE $ .31 $ .73
</TABLE>
See independent accountants' report and notes to the consolidated financial
statements
-3-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Six Months Ended December 31, 1996 (Unaudited)
and for the Year Ended June 30, 1996
<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 Retained
Outstanding $10 Par $10 Par Outstanding Value Capital Capital Earnings Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
JULY 1, 1995 547,271 $5,472,710 $ -- 1,033,683 $10,337 $5,480,948 $ -- $652,953 $11,616,948
Proceeds from
issuance of
common stock -- -- -- 249,917 2,499 1,225,604 -- -- 1,228,103
Redemption of
preferred
stock (547,271) (5,472,710) -- -- -- -- 3,557,261 -- (1,915,449)
Capitalization
of retained
earnings -- -- -- -- -- 307,000 -- (307,000) --
Transfer of
restricted
capital -- -- -- -- -- 1,165,993 (1,165,993) -- --
Dividends paid -- -- -- -- -- -- -- (937,028) (937,028)
Net income -- -- -- -- -- -- -- 908,261 908,261
BALANCE,
JUNE 30, 1996 -- -- -- 1,283,600 12,836 8,179,545 2,391,268 317,186 10,900,835
Transfer of
restricted
capital -- -- -- -- -- 355,722 (355,722) -- --
Dividend paid -- -- -- -- -- -- -- (715,607) (715,607)
Net income -- -- -- -- -- -- -- 401,075 401,075
BALANCE,
DECEMBER
31, 1996 -0- $ -0- $ -0- 1,283,600 $12,836 $8,535,267 $2,035,546 $2,654 $10,586,303
</TABLE>
See independent accountants' report and notes to the consolidated financial
statements
-4-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended December 31, 1996
and for the Year Ended June 30, 1996
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 401,075 $ 908,261
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 14,111 25,483
Increase in accrued interest receivable (102,889) (53,866)
Decrease (increase) in prepaid expenses
and other assets 23,469 (30,240)
Decrease in accrued expenses and other
liabilities (29,709) (6,820)
(Decrease) increase in accrued interest
payable (364) 12,519
TOTAL ADJUSTMENTS (95,382) (52,924)
NET CASH PROVIDED BY OPERATING ACTIVITIES 305,693 855,337
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 (5,587,012) (775,581)
Purchases of equity securities (140,660) (234,900)
Acquisition of fixed assets (9,203) (16,200)
NET CASH USED IN INVESTING ACTIVITIES (5,736,875) (1,026,681)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank borrowings 12,850,000 1,975,000
Repayments of bank borrowings (6,675,000) (300,000)
Proceeds from SBA debentures - 2,040,000
Repayment of SBA debentures - (1,986,000)
Proceeds from sale of common stock - 1,228,103
Repurchase of preferred stock - (1,915,449)
Dividends paid (715,607) (937,028)
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,459,393 104,626
NET INCREASE (DECREASE) IN CASH 28,211 (66,718)
CASH - Beginning of period 1,072,783 1,139,501
CASH - End of period $ 1,100,994 $ 1,072,783
</TABLE>
See independent accountants' report and notes to the consolidated financial
statements
-5-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS Continued
For the Six Months Ended December 31, 1996
and for the Year Ended June 30, 1996
<TABLE>
<CAPTION>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
<S> <C> <C>
Cash paid during the period for interest $674,184 $1,093,474
Cash paid during the period for income
taxes $ 12,988 $ --
Noncash conversion of loans to assets
acquired in satisfaction of loans and
assets acquired in satisfaction of loans
to receivables from debtors $ -- $ 9,000
</TABLE>
See independent accountants' report and notes to the consolidated financial
statements
-6-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
SCHEDULE OF LOANS
December 31, 1996 (Unaudited)
<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 107 9.25%-14% 1-119 $ 17,699,819
Radio car service 73 1-15% 1-59 499,000
Chicago:
Taxi medallion 244 12-16% 27-48 6,908,925
Boston:
Taxi medallion 22 11-14% 39-72 1,163,860
Miami:
Taxi medallion 15 13.75% 117-120 759,370
Other loans:
Restaurant 2 10.5-12% 1-84 278,501
Gas station/auto repair 4 11-14.5% 1-39 180,545
Management taxi fleet/car
service 1 13% 1 13,197
Hairdresser 2 12% 16 154,337
Car wash 2 15.25% 16 204,151
Ambulance service 1 10.5% 24 19,355
Liquor store 1 16.25% 9 39,296
Bagel store 1 14% 60 39,066
Dry cleaner 6 10-13% 72 647,182
Laundromat 1 15% 9 43,407
Grocery/deli 4 12.50-14% 42-60 136,158
Financial services 1 14% 1 50,000
Black car service
(real property) 1 12% 113 305,122
Auto sales 3 10.50-13% 1-48 562,192
Registered investment
advisor 1 14% 114 62,500
$ 29,765,983
</TABLE>
See independent accountants' report and notes to the consolidated financial
statements
-7-
<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 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.
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 loans losses is maintained at a
level that, in the Board of Director's 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. Approximately 89 percent of
all loans are collateralized by New York City, Boston, Chicago, and Miami
taxicab medallions.
New Accounting Standard - 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.
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.
-8-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Summary of Significant Accounting Policies, continued
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 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 - 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 the three month LIBOR rate exceeded 5.75 percent. The premium paid
for the purchase of this cap was amortized over its life as an adjustment of
interest expense. Payments received under this cap were credited to interest
expense. 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 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.
-9-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Assets Acquired in Satisfaction of Loans
During the six months ended December 31, 1996 and for the year ended June 30,
1996, the carrying value of Assets Acquired in Satisfaction of Loans increased
by additions of approximately $0 and $9,000, and decreased by sales and cash
payments of approximately $ 0 and $424,000 and write-offs of approximately
$5,000 and $23,000, respectively.
Sales of assets acquired in satisfaction of loans for the six months ended
December 31, 1996 and for the year ended June 30, 1996, included approximately
$0 and $388,000 of real estate and $0 and $36,000 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 sheet.
Note 3. Loans Receivable
Loans on nonaccrual status or accruing at reduced rates as of December 31,
1996 and June 30, 1996 were approximately $0 and $102,000, respectively.
Interest income recognized on such loans for the six months ended December 31,
1996 and for the year ended June 30, 1996 totaled approximately $0 and $5,000,
respectively.
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 $227,831 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 December 31, 1996,
approximately $197,459 of these loans were fully collateralized as to principal
and interest. Interest income recorded during the six months ended December 31,
1996 totaled approximately $44,250 for such loans. The following table sets
forth certain information concerning impaired loans as of December 31, 1996:
<TABLE>
<S> <C>
Impaired loans with an allowance $ 227,831
Impaired loans without an allowance 388,600
Total impaired loans $ 616,431
Allowance for impaired loans $ 114,000
Average balance of impaired loans during
the six months ended December 31, 1996 $ 655,059
</TABLE>
-10-
<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
Recoveries - net 12,000
Balance, December 31, 1996 $ 313,000
At December 31, 1996, the Company had commitments to make loans totaling
$951,000 at interest rates ranging from 10 percent to 15.5 percent.
Note 4. Debentures Payable to Small Business Administration
At December 31, 1996 debentures payable to the Small Business Administration
consist 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 2003 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
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.
Note 5. Notes Payable to Banks
The Company has loan agreements with four banks for lines of credit
aggregating $20,000,000. At December 31, 1996, the Company had $12,800,000
outstanding under these lines. The loans, which mature through November 30,
1997, 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
-11-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Notes Payable to Banks, continued
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 equal to 10% of the loan balance
outstanding with each individual bank. At December 31, 1996, average
compensating balances of $1,280,000 were required to be maintained by the
Company in accordance with these agreements.
Note 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 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 December 31, 1996
and June 30, 1996 was approximately $2,035,000 and $2,391,000, respectively.
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.
-12-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 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.
During September 1995, the Company completed the sale of 249,917 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 together with other capital raised in 1994
were used to repurchase the Company's preferred stock held by the SBA (See
Note 6).
Note 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 six months ended December 31, 1996 and for the year ended June 30,
1996, $0 and $210,000 in management fees, respectively, were paid in
accordance with the 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.
-13-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Related Party Transactions, continued
In addition, prior to January 1, 1996, the Company paid an annual legal
retainer fee of $108,000 for the purposes of providing loan closing services
to a firm, certain of whose officers are officers and directors of the
Company. Only $54,000 of the retainer was paid during the year ended June 30,
1996 due to the discontinuance of the retainer agreement. An additional
$27,821 and $48,902 was paid to the same law firm during the six months ended
December 31, 1996 and for the year ended June 30, 1996, respectively, for the
other services concerning defaulted loans and for certain non-taxi loans. 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 services. During the six months ended, the Company
paid $105,644 for loan closing services in Chicago.
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.
Note 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.
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.
Note 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
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. The use of
different market assumptions and/or estimation methodologies may have a
-14-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Fair Value of Financial Instruments, continued
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 of investments in
corporations who own and operate Chicago taxicab medallions(61%), a grocery
and vegetable market (27%), an investment advisory firm (5%), a dry cleaner
(4%), and Miami taxicab medallions (3%). At December 31, 1996, the fair value
of the equity securities approximates cost.
Debentures Payable to Small Business Administration - The fair value of
debentures as of December 31, 1996 was approximately $8,858,000 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
Note 11. Defined Contribtion Plan
On April 15, 1996 the Company adoted 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 six months ended December 31,
1996 and for the year ended June 30, 1996, contributions amounted to $26,976 and
$24,551, respectively.
Note 12. Leasing Arrangements
The Company rents office space on a month - to - month basis from an affiliated
entity without a formal lease agreement. Rent expense and reimbursed office
expenses amounted ro $19,800 and $23,700. respectively, for the six months ended
December 31, 1996.
Note 13. Subequent Event
Effective February 21, 1997, the SBA approved the Company's election to provide
non-disadvantaged business financing to borrowers, subject to amending the
Company's certificate of incorporation to make such financings. The Company's
shareholders approved the amendment to the certificate of incorporation, which
amendment was filed on February 27, 1997.
<PAGE>
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ELK ASSOCIATES FUNDING CORPORATION
747 Third Avenue
New York, New York 10017
212-355-2449 800-214-1047
Fax 212-759-3338
A FEDERAL LICENSEE UNDER THE SMALL BUSINESS INVESTMENT ACT OF 1958
- --------------------------------------------------------------------------------
February 26, 1997
Dear Stockholders:
Enclosed with this letter are our Financial Statements for the six month
period ended December 31, 1996. These Financial Statements indicate that we are
continuing to make progress in our earnings growth from operations, and that our
asset base has continued to grow.
In our recent letter to stockholders dated December 26, 1996 we summarized
our portfolio growth in Chicago, Boston, Miami and New York between June 30th
and November 30th, 1996. As of this date, our portfolio continues to grow.
We are also pleased to report that at our annual stockholders meeting that
was held today, the stockholders reelected the board of directors, and we want
to welcome our two new additional directors, Dan M. Granoff, M.D. and Alexander
Nash, M.D. Dr. Granoff, and Dr. Nash are both trained and practice in the
medical and scientific fields, and they should add a new dimension to our loans
and investments in diversified businesses.
We also want to report that at the stockholders meeting today, the
stockholders voted favorably to amend the Certificate of Incorporation to allow
the corporation to make loans and investments in businesses that are not owned
by disadvantaged individuals. In effect we have converted our status with SBA to
be able to act as a regular Small Business Investment Company that will be
allowed to make loans to and investments in companies that are owned by any
individual, without regard to minority or disadvantaged status, so long as we
keep a level of investments which at the present time is approximately
$3,500,000 that qualify for disadvantaged status. This should not be a problem
as all of our existing investments presently qualify for disadvantaged status.
However, the new change in status should allow us significant future growth
potential with many small businesses that did not qualify for our funding in the
past. We believe this is a significant opportunity for the future of our
company.
Our next Board of Directors meeting will be held in early April, and we
anticipate that the next dividend will be paid at the end of April, 1996.
Sincerely Yours,
/s/ Gary C. Granoff
--------------------------
Gary C. Granoff, President
