SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Quarterly Period Ended September 30, 1998
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to_________
Commission File Number 0-22153
----------
ELK ASSOCIATES FUNDING CORPORATION
(Exact name of registrant as specified in its charter)
New York 11-2502336
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
747 Third Avenue
Fourth Floor
New York, New York 10017
(Address of Registrant's (Zip Code)
principal executive office)
Registrant's telephone number, including area code: (800) 214-1047
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
The number of shares of Common Stock, par value $.01 per share, outstanding
as of November 16, 1998: 1,745,600
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION
FORM 10-Q Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.............................................. 3
Consolidated Balance Sheets as of September 30, 1998
(unaudited) and June 30, 1998..................................... 4
Consolidated Statements of Operations -- For the Three
Months Ended September 30, 1998 and 1997 (unaudited).............. 6
Consolidated Statements of Cash Flows -- For the Three
Months Ended September 30, 1998 and 1997 (unaudited).............. 7
Notes to Consolidated Financial Statements........................ 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 17
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders............... 18
Item 5. Other Information................................................. 19*
Item 6. Exhibits and Reports on Form 8-K.................................. 20
Signatures........................................................ 22
- ----------
* Only need to be included if there is a response for the period.
-2-
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The consolidated balance sheet of the Company as of September 30, 1998, the
related statements of operations, and cash flows for the three months ended
September 30, 1998 and 1997 included in Item 1 have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. In the
opinion of management, the accompanying consolidated financial statements
include all adjustments (consisting of normal, recurring adjustments) necessary
to summarize fairly the Company's financial position and results of operations.
The results of operations for the three months ended September 30, 1998 are not
necessarily indicative of the results of operations for the full year or any
other interim period. These financial statements should be read in conjunction
with the audited financial statements and notes thereto included in the
Company's Annual Report on Form N-30D for the fiscal year ended June 30, 1998 as
filed with the Commission.
-3-
<PAGE>
<TABLE>
<CAPTION>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, 1998 (Unaudited) and June 30, 1998
ASSETS
September 30, 1998 June 30, 1998
------------------ -------------
<S> <C> <C>
Loans receivable $ 45,491,059 $ 41,590,000
Less: allowance for loan losses (295,000) (295,000)
------------- -------------
45,196,059 41,295,000
Cash and cash equivalents 575,146 1,755,429
Accrued interest receivable 591,422 516,110
Assets acquired in satisfaction of loans 336,809 400,470
Receivables from debtors on sales of assets acquired
in satisfaction of loans 440,869 451,222
Equity securities 750,126 629,179
Furniture, fixtures and leasehold improvements, net 101,691 102,247
Prepaid expenses and other assets 297,217 250,081
------------- -------------
TOTAL ASSETS $ 48,289,339 $ 45,399,738
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE>
<TABLE>
<CAPTION>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, 1998 (Unaudited) and June 30, 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, 1998 June 30, 1998
------------------ -------------
<S> <C> <C>
LIABILITIES
Debentures payable to SBA $ 8,880,000 $ 8,880,000
Notes payable, banks 24,895,000 22,085,000
Accrued expenses and other liabilities 292,054 204,099
Accrued interest payable 222,336 221,704
Dividends payable 314,208 314,208
------------- -------------
TOTAL LIABILITIES 34,603,598 31,705,011
------------- -------------
COMMITMENTS AND CONTINGENCIES
Common stock, $.01 par value:2,000,000 shares
authorized; 1,745,600 shares issued and outstanding, 17,456 17,456
Additional paid-in-capital 12,663,690 12,485,825
Restricted capital 790,504 968,368
Retained earnings 15,302 24,289
Unrealized gain on equity securities 198,789 198,789
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 13,685,741 13,694,727
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 48,289,339 $45,399,738
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE>
<TABLE>
<CAPTION>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended September 30, 1998 and 1997
Three Months Ended Three Months Ended
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
INVESTMENT INCOME
Interest on loans receivable $ 1,217,105 $ 993,610
Fees and other income 131,562 87,112
------------ ------------
TOTAL INVESTMENT INCOME 1,348,667 1,080,722
------------ ------------
OPERATING EXPENSES
Interest 574,132 489,624
Salaries and employee benefits 138,453 133,558
Legal fees 92,335 66,877
Miscellaneous administrative expenses 193,522 140,502
Loss (recovery) on assets acquired in satisfaction of loans, net 1,815 (1,098)
Directors' fee 8,750 20,200
Bad debt expense 29,075 -0-
------------ ------------
TOTAL OPERATING EXPENSES 1,038,082 849,663
------------ ------------
OPERATING INCOME 310,585 231,059
------------ ------------
NET INCOME BEFORE INCOME TAXES 310,585 231,059
INCOME TAXES 5,363 3,588
------------ ------------
NET INCOME $ 305,222 $ 227,471
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 1,745,600 1,283,600
============ ============
NET INCOME PER COMMON SHARE $ .1749 $ .1772
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-6-
<PAGE>
<TABLE>
<CAPTION>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended September 30, 1998 and 1997
Three Months Ended Three Months Ended
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 305,222 $ 227,471
------------- -------------
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 8,645 5,977
Increase in accrued interest receivable (75,312) (23,559)
(Increase) decrease in prepaid expenses and other assets (47,136) 13,119
Increase in accrued expenses and other liabilities 87,955 69,345
Increase (decrease) in accrued interest payable 632 (61,271)
------------- -------------
TOTAL ADJUSTMENTS (25,216) 3,611
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 280,006 231,082
------------- -------------
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 (3,827,045) 43,051
Purchases of equity securities (120,947) (16,693)
Acquisition of furniture, fixtures and leasehold
improvements (8,089) -0-
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (3,956,081) 26,358
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable, banks, net 2,810,000 350,000
Dividends paid (314,208) (603,291)
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 2,495,792 $ (253,291)
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
-7-
<PAGE>
<TABLE>
<CAPTION>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED), Continued
For the Three Months Ended September 30, 1998 and 1997
For the For the
Three Months Ended Three Months Ended
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS $(1,180,283) $ 4,149
CASH AND CASH EQUIVALENTS - Beginning 1,755,429 1,853,032
----------- -----------
CASH AND CASH EQUIVALENTS - Ending $ 575,146 $ 1,857,181
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-8-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
NOTES TO THE FINANCIAL STATEMENTS
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 September 30, 1998 and June 30, 1998,
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 virtually
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.
-9-
<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 September 30, 1998 and June 30, 1998.
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.
-10-
<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 September 30, 1998 and June 30, 1998, loan costs amounted to $147,672
and $153,786, respectively, net of accumulated amortization of $96,309 and
$90,195, 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.
-11-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 -- Debentures Payable to SBA
At September 30, 1998 and June 30, 1998 debentures payable to the SBA
consist of subordinated debentures with interest payable semiannually, as
follows:
Current
Effective Principal
Issue Date Due Date Interest Rate Amount
---------- -------- ------------- ----------
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
March 1997 March 2007 7.38(2) 430,000
----------
$8,880,000
==========
(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 3 -- Notes Payable to Banks
At September 30, 1998 and June 30, 1998, the Company had loan agreements
with four banks for lines of credit aggregating $35,000,000 and $33,500,000. At
September 30, 1998 and June 30, 1998, the Company had $24,895,000 and
$22,085,000, 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.
-12-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 -- 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%.
During September, 1998 the Company eliminated the compensating balance
requirement with its banks. Prior to January 1998, the Company was
required to maintain 10% compensating balances with each bank. At September
30, 1998 and June 30, 1998, average compensating balances of nil and
$1,104,250, respectively, were maintained by the Company in accordance with
these agreements.
NOTE 4 -- 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 September 30, 1998 and June 30,
1998 was approximately $790,504 and $968,368, respectively.
-13-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 -- 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. In September 1998 the shareholders of the
Company approved, subject to the approval of the Small Business
Administration, which approval is currently pending, an amendment to the
certificate of incorporation of the Comapny eliminating all of the
authorized Series A and Series B preferred stock of the Company.
NOTE 5 -- Common Stock
On October 6, 1998, the Company declared a cash dividend of $0.18 per
common share, or a total of $314,208, payable October 14, 1998.
During December 1997 and January 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 6 -- Income Taxes
The provision for income taxes for the three months ended September 30,
1998 and 1997 consists of the following:
September 30, 1998 September 30, 1997
------------------ ------------------
Federal $ 2,396 $ -0-
State and city 2,967 3,588
------- -------
$ 5,363 $ 3,588
======= =======
-14-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 -- Commitments
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. Since the
Company presently borrows at 150 basis points above 30, 60 or 90 day LIBOR,
its effective fixed rate of interest on the $10,000,000 rotating amount was
fixed at 7.36% due to that transaction. This transaction expires on June 8,
2001. On October 13, 1998 the Company entered into an additional Swap
transaction with the same bank for $5,000,000. This Swap transaction calls
for a fixed rate of interest of 4.95% for the Company. Since the Company
borrows at 150 basis points above 30, 60 or 90 day LIBOR, its effective
fixed rate of interest on the $5,000,000 is 6.45%. This second Swap
transaction expires on October 8, 2001.
At September 30, 1998 and June 30, 1998, the Company had commitments to
make loans totaling $1,626,000 and $2,568,000, respectively, at interest
rates ranging from 9.5% to 16%.
NOTE 8 -- 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 9 -- 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.
-15-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 -- 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%).
Debentures Payable to Small Business Administration -- The fair value of
debentures as of September 30, 1998 and 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.
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
-16-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information contained in this section should be used in conjunction with the
consolidated Financial Statements and Notes therewith appearing in this report
Form 10Q and the Company's Annual Report for the year ended June 30, 1998.
General
The Company 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 regulation as socially or economically disadvantaged and loans and
investments to entities which are at least 50% owned by such persons. The
Company also makes loans and investments to persons who qualify under SBA
regulation as "non-disadvantaged". The Company's primary lending activity is to
originate and service loans collateralized by New York City, Boston, Chicago and
Miami Taxicab Medallions. The Company also makes loans and investments in other
diversified businesses.
Results of Operations
For the Three Months ended September 30, 1998 and 1997.
Total investment income. Elk's investment income for the three months ended
September 30, 1998 increased to $1,349,000 from $1,081,000 or (24.6%) for the
three month period ended September 30, 1998 and September 30, 1997. This
increase was mainly due to an increase in the loan portfolio during the fiscal
year. The portfolio increased from $33,354,000 as of September 30, 1997 to
$45,196,000 as of September 30, 1998, as part of the Company's strategy to
maximize shareholder rate of return by use of bank debt.
Operating Expenses
Interest expense for the three month period ended September 30, 1998
increased $84,000 ($574,000 from $490,000) over the similar quarter ended
September 30, 1997. This increase was mainly due to increased bank borrowings
for the period offset by lower interest rates for the three months ended
September 30,1998.
Other operating expenses increased $104,000 when compared with the similar
three month period ended September 30, 1997. This increase was mainly due to
increases in non-related legal fees and other fees which were part of the
Company's new listing on NASDAQ. In addition, bad debt expense for the three
month period ended September 30, 1998 was $29,000, versus -0- for the similar
period ended September 30, 1997.
Balance Sheet and Reserves
Total assets increased $2,889,000 as of September 30, 1998 when compared
with the balance sheet as of June 30, 1998. This increase was due to
management's decision to expand its portfolio in the Chicago Medallion Market
plus increase its diversified loan portfolio. This expansion was financed by
additional bank debt, $2,810,000, during the three month period.
-17-
<PAGE>
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on September 28, 1998 (the
"Annual Meeting").
The Company's shareholders were asked to take the following actions at the
meeting:
1. Elect eight (8) Directors to serve until the 1999 annual meeting of
shareholders or until their successors shall otherwise be elected (the
"Board Proposal");
2. Approve the amendment of the Company's Restated Certificate of
Incorporation to (i) increase the number of authorized shares of Common
Stock therein from 2,000,000 to 3,000,000 shares and (ii) delete the
1,300,000 authorized shares of Preferred Stock, subject to the approval of
the U.S. Small Business Association (the "Charter Proposal");
3. Ratify and approve the Board of Directors' selection of Marcum & Kliegman,
LLP to serve as the Company's independent auditors for the fiscal year
ending June 30, 1998 (the "Auditors Proposal");
4. Ratify and approve the election to become a Business Development Company
under Section 54 of the Investment Company Act of 1940 (the "BDC
Proposal");
5. Adopt an incentive stock option plan for employees of the Company (the
"Incentive Plan Proposal"); and
6. Adopt a stock option plan for non-employee directors of the Company,
subject to the approval of the Securities and Exchange Commission (the
"Director Plan Proposal"); and
With respect to the Board Proposal, the eight (8) individuals nominated for
director were elected by the affirmative vote of a majority of shares of common
stock present at the Annual Meeting. The nominees and votes each received are as
follows:
Votes cast for Withheld
-------------- --------
Gary C. Granoff 1,115,310 0
Ellen M. Walker 1,115,310 0
Lee A. Forlenza 1,115,310 0
-18-
<PAGE>
Votes cast for Withheld
-------------- --------
Marvin Sabesan 1,115,310 0
Steven Etra 1,115,310 0
Paul Creditor 1,115,310 0
Allen Kaplan 1,115,310 0
John L. Acierno 1,114,110 1,200
The Charter Proposal, Auditors Proposal, BDC Proposal, Incentive Plan Proposal
and Director Plan Proposal were also approved by affirmative vote of a majority
of shares of Common Stock present at the Annual Meeting. Each of the proposals
received the following votes:
<TABLE>
<CAPTION>
Votes cast for Against Abstentions
-------------- ------- -----------
<S> <C> <C> <C>
Charter Proposal 1,065,005 0 625
Auditors Proposal 1,115,310 0 0
BDC Proposal 1,051,355 0 17,125
Incentive Plan Proposal 969,720 95,285 625
Director Plan Proposal 963,360 102,995 2,125
</TABLE>
ITEM 5. OTHER INFORMATION
The Company plans to enter into an Agreement and Plan of Share Exchange
(the "Share Exchange Plan") with Ameritrans Capital Corporation, a newly-formed
Delaware corporation ("Ameritrans") that will also elect to become a BDC.
Pursuant to the Share Exchange Plan, each outstanding share of the Company's
Common Stock would vest in Ameritrans, whereby the Company would become a
wholly-owned subsidiary of Ameritrans, and the holders of all the outstanding
shares of Common Stock of the Company would become the stockholders of
Ameritrans and receive one share of Ameritrans for each share of the Company
owned. Ameritrans has filed a Registration Statement on Form N-14 (File No.
333-63951) in connection with a proposed share exchange between Ameritrans and
Elk.
The Share Exchange Plan will require approval by the Company's stockholders
at a special meeting of stockholders. In addition, the Share Exchange Plan and
certain related transactions must be approved by the Securities and Exchange
Commission (the "Commission") and the U.S. Small Business Administration. In
connection with the proposed Share Exchange Plan, Ameritrans and Elk plan to
file with the Commission an application for an exemptive order approving the
Share Exchange Plan and certain related transactions. As part of the approvals,
the Company has obtained SBA approval of the capitalization of Ameritrans by the
Company to the extent of $963,000.
-19-
<PAGE>
The reason for the proposed Share Exchange Plan is to enable the Company to
expand its present business and to engage in broader and more diversified
investment and lending activities. At the present time, the Company, as an SBIC,
may only lend to and/or invest in small businesses as permitted under the 1958
Act. If the Share Exchange Plan is approved by the Commission, then Ameritrans,
which plans to elect to be treated for tax purposes as a regulated investment
company, will engage in the lending/investment activities not subject to the
restrictions of the 1958 Act. The Company would continue to operate as an SBIC,
making loans to or investments in small business concerns as permitted by the
1958 Act. The Company may also expand and diversify its operations through the
acquisition of companies that are consistent with the Company's business.
It is presently expected that the officers and directors of the Company
will be the same individuals who will serve as officers and directors of
Ameritrans. It is further anticipated that following the consummation of the
Share Exchange Plan, such officers and directors would initially receive the
same compensation, but such compensation would be allocated between the Company
and Ameritrans, based upon factors determined by the Company's Board of
Directors. Such officers and directors may also receive increases in
compensation from time to time as determined by the Board of Directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1(a) Certificate of Incorporation, as amended through February 27,
1997. Filed as Exhibit 4.1 to the Company's Registration
Statement on Form 8-A and incorporated by reference herein.
3.1(b) Form Certificate of Amendment of Certificate of Incorporation, as
approved by the shareholders of the Company at the Annual Meeting
of Shareholders on September 28, 1998 to be filed in New York
State upon receipt of approval by the U.S. Small Business
Administration. Filed as Exhibit 1 to the 1998 Proxy Statement of
the Company and incorporated by reference herein.
3.2 By-Laws. Filed as Exhibit 4.2 to the Company's Registration
Statement on Form 8-A and incorporated by reference herein.
10.1 1998 Incentive Stock Option Plan. Filed as Exhibit 2 to the 1998
Proxy Statement of the Company and incorporated by reference
herein.
10.2 Non-Employee Director Plan. Filed as Exhibit 3 to the 1998 Proxy
Statement of the Company and incorporated by reference herein.
27 Financial Data Schedule.
-20-
<PAGE>
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the fiscal quarter
ended September 30, 1998.
-21-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ELK ASSOCIATES FUNDING CORPORATION
Date: November 16, 1998 By: /s/ Gary C. Granoff
--------------------------------------
Gary C. Granoff
Chief Financial Officer
(Principal Financial Officer and Chief
Accounting Officer)
-22-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 575,146
<SECURITIES> 0
<RECEIVABLES> 45,491,059
<ALLOWANCES> (295,000)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 337,377
<DEPRECIATION> 235,686
<TOTAL-ASSETS> 48,289,339
<CURRENT-LIABILITIES> 34,603,598
<BONDS> 0
0
0
<COMMON> 13,685,741
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 48,289,339
<SALES> 0
<TOTAL-REVENUES> 1,348,667
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 463,950
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 574,132
<INCOME-PRETAX> 310,585
<INCOME-TAX> (5,363)
<INCOME-CONTINUING> 305,222
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 305,222
<EPS-PRIMARY> .175
<EPS-DILUTED> .175
</TABLE>
