ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
(A Small Business Investment Company Licensed by the SBA)
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended June 30, 1998 and 1997
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONTENTS
Page
----
INDEPENDENT AUDITORS' REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets 2-3
Statements of Income 4
Statements of Stockholders' Equity 5
Statements of Cash Flows 6-7
Schedule of Loans as of June 30, 1998 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9-18
<PAGE>
[MARCUM & KLIEGMAN LLP LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Elk Associates Funding Corporation and Subsidiary
(A Small Business Investment Company Licensed by the SBA)
We have audited the accompanying consolidated balance sheets of Elk Associates
Funding Corporation and Subsidiary as of June 30, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for the
years then ended and the schedule of loans as of June 30, 1998. These
consolidated financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements and schedule referred to
above present fairly, in all material respects, the financial position of Elk
Associates Funding Corporation and Subsidiary as of June 30, 1998 and 1997, and
the results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
As explained in Note 1, the consolidated financial statements include loans
valued at $41,295,000 and $32,924,206 as of June 30, 1998 and 1997,
respectively, whose values have been estimated by the Board of Directors in the
absence of readily ascertainable market values. We have reviewed the procedures
used by the Board of Directors in arriving at their estimate of the value of
such loans and have inspected underlying documentation and, in the
circumstances, we believe the procedures are reasonable and the documentation is
appropriate. However, because of the inherent uncertainty of valuation, those
estimated values may differ significantly from the values that would have been
used had a ready market for such loans existed, and the differences could be
material.
/s/ Marcum & Kliegman LLP
August 12, 1998
-1-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, 1998 and 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Loans receivable $ 41,590,000 $ 33,249,206
Less: allowance for loan losses (295,000) (325,000)
------------ ------------
41,295,000 32,924,206
Cash and cash equivalents 1,755,429 1,853,032
Accrued interest receivable 516,110 408,165
Assets acquired in satisfaction of loans 400,470 581,810
Receivables from debtors on sales of assets acquired
in satisfaction of loans 451,222 488,493
Equity securities 629,179 436,181
Furniture, fixtures and leasehold improvements, net 102,247 90,214
Prepaid expenses and other assets 250,081 243,920
------------ ------------
TOTAL ASSETS $ 45,399,738 $ 37,026,021
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-2-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, 1998 and 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
LIABILITIES
Debentures payable to SBA $ 8,880,000 $ 8,880,000
Notes payable, banks 22,085,000 16,820,000
Accrued expenses and other liabilities 204,099 112,005
Accrued interest payable 221,704 181,248
Dividends payable 314,208 -0-
----------- -----------
TOTAL LIABILITIES 31,705,011 25,993,253
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Series A, 3 percent cumulative preferred stock, $10 par
value, 547,271 shares authorized, none outstanding -0- -0-
Series B, 4 percent cumulative preferred stock, $10 par
value, 752,729 shares authorized, none outstanding -0- -0-
Common stock, $.01 par value: 2,000,000 shares
authorized; 1,745,600 and 1,283,600 shares issued and
outstanding, respectively 17,456 12,836
Additional paid-in-capital 12,485,825 8,890,993
Restricted capital 968,368 1,679,820
Retained earnings 24,289 365,878
Restricted retained earnings -0- 25,000
Unrealized gain on equity securities 198,789 58,241
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 13,694,727 11,032,768
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $45,399,738 $37,026,021
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
INVESTMENT INCOME
Interest on loans receivable $ 4,108,727 $ 3,660,825
Fees and other income 497,729 362,970
----------- -----------
TOTAL INVESTMENT INCOME 4,606,456 4,023,795
----------- -----------
OPERATING EXPENSES
Interest 1,840,731 1,582,700
Salaries and employee benefits 495,889 469,060
Legal fees 336,700 307,127
Miscellaneous administrative expenses 739,875 604,347
Loss on assets acquired in satisfaction of loans, net 14,649 8,923
Directors' fee 52,050 27,500
Bad debt expense 227,748 -0-
----------- -----------
TOTAL OPERATING EXPENSES 3,707,642 2,999,657
----------- -----------
OPERATING INCOME 898,814 1,024,138
----------- -----------
OTHER INCOME (EXPENSES)
(Write-off) gain of noncash receivable (25,000) 25,000
Net gain (loss) from rental activities 6,125 (11,233)
Recoveries 57,673 11,118
----------- -----------
TOTAL OTHER INCOME 38,798 24,885
----------- -----------
NET INCOME BEFORE INCOME TAXES 937,612 1,049,023
INCOME TAXES 3,271 28,676
----------- -----------
NET INCOME $ 934,341 $ 1,020,347
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 1,518,969 1,283,600
=========== ===========
NET INCOME PER COMMON SHARE $0.62 $0.79
===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended June 30, 1998 and 1997
<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 $0.01 Par Paid-In
Outstanding $10 Par $10 Par Outstanding Value Capital
----------- ------- ------- ----------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, July 1, 1996 -0- $ -0- $ -0- 1,283,600 $12,836 $ 8,179,545
Transfer of restricted capital -0- -0- -0- -0- -0- 711,448
Dividends paid -0- -0- -0- -0- -0- -0-
Net income -0- -0- -0- -0- -0- -0-
Unrealized gain on equity
securities -0- -0- -0- -0- -0- -0-
----- ----- ----- ---------- ------- -----------
BALANCE, June 30, 1997 -0- -0- -0- 1,283,600 12,836 8,890,993
Transfer of restricted
capital -0- -0- -0- -0- -0- 711,452
Dividends declared -0- -0- -0- -0- -0- -0-
Net income -0- -0- -0- -0- -0- -0-
Unrealized gain on equity
securities -0- -0- -0- -0- -0- -0-
Proceeds from sale of
common stock, net of
direct costs -0- -0- -0- 462,000 4,620 2,883,380
----- ----- ----- --------- ------- -----------
BALANCE, June 30, 1998 -0- $ -0- $ -0- 1,745,600 $17,456 $12,485,825
===== ===== ===== ========= ======= ===========
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Restricted Gain on
Restricted Retained Retained Equity
Capital Earnings Earnings Securities Total
------- -------- -------- ---------- -----
<S> <C> <C> <C> <C> <C>
BALANCE, July 1, 1996 $2,391,268 $ 317,186 $ -0- $ -0- $10,900,835
Transfer of restricted capital (711,448) -0- -0- -0- -0-
Dividends paid -0- (946,655) -0- -0- (946,655)
Net income -0- 995,347 25,000 -0- 1,020,347
Unrealized gain on equity
securities -0- -0- -0- 58,241 58,241
---------- ----------- -------- -------- -----------
BALANCE, June 30, 1997 1,679,820 365,878 25,000 58,241 11,032,768
Transfer of restricted
capital (711,452) -0- -0- -0- -0-
Dividends declared -0- (1,300,930) -0- -0- (1,300,930)
Net income -0- 959,341 (25,000) -0- 934,341
Unrealized gain on equity
securities -0- -0- -0- 140,548 140,548
Proceeds from sale of
common stock, net of
direct costs -0- -0- -0- -0- 2,888,000
---------- ----------- -------- -------- -----------
BALANCE, June 30, 1998 $ 968,368 $ 24,289 $ -0- $198,789 $13,694,727
========== =========== ======== ======== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 934,341 $ 1,020,347
------------ ------------
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 49,890 53,546
Write-off (gain) on noncash receivable 25,000 (25,000)
Increase in accrued interest receivable (107,945) (114,078)
Increase in prepaid expenses and other assets (30,616) (27,318)
Decrease (increase) in accrued expenses and other liabilities 92,096 (28,893)
Increase (decrease) in accrued interest payable 40,456 (15,204)
------------ ------------
TOTAL ADJUSTMENTS 68,881 (156,947)
------------ ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 1,003,222 863,400
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in loans receivable, assets acquired in
satisfaction of loans and receivables from debtors
on sales of assets acquired in satisfaction of loans (8,177,183) (9,062,902)
Payments for building improvements on assets
acquired in satisfaction of loans -0- (13,974)
Purchases of equity securities (52,450) (243,040)
Acquisition of furniture, fixtures and leasehold
improvements (37,468) (18,530)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (8,267,101) (9,338,446)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable, banks, net 5,265,000 10,195,000
Payments for loan costs -0- (15,050)
Proceeds from debentures payable to SBA -0- 430,000
Repayment of debentures payable to SBA -0- (408,000)
Net proceeds from sale of common stock 2,888,000 -0-
Dividends paid (986,724) (946,655)
------------ ------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES $ 7,166,276 $ 9,255,295
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
-6-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
For the Years Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS $ (97,603) $ 780,249
CASH AND CASH EQUIVALENTS - Beginning 1,853,032 1,072,783
----------- -----------
CASH AND CASH EQUIVALENTS - Ending $ 1,755,429 $ 1,853,032
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the years for:
Interest $ 1,840,276 $ 1,597,904
Income taxes $ 8,048 31,260
Noncash investing and financing activities:
Conversion of loans to assets acquired in
satisfaction of loans $ 26,090 $ 140,914
Exchange of preferred stock for a note resulting in
a noncash gain of $25,000 $-0- $ 125,000
Unrealized gain on equity securities $ 140,548 $ 58,241
Transfer of restricted capital $ 711,452 $ 711,448
On June 22, 1998, the Company declared a cash dividend of
$0.18 per common share which was paid on July 7, 1998 $ 314,208 $ -0-
</TABLE>
The accompanying notes are an integral part of these financial statements.
-7-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
SCHEDULE OF LOANS
June 30, 1998
<TABLE>
<CAPTION>
Maturity
Number Interest Dates Balance
Type of Loan of Loans Rates (In Months) Outstanding
- ------------ -------- ----- ----------- -----------
<S> <C> <C> <C> <C>
New York City:
Taxi medallion 99 8.25 - 12% 1 - 119 $18,862,618
Radio car service 49 1 - 15% 1 - 59 298,976
Chicago:
Taxi medallion 415 12 - 16.5% 21 - 48 13,557,342
Boston:
Taxi medallion 16 10 - 14% 33 - 89 990,086
Miami:
Taxi medallion 30 13 - 16.5% 112 - 120 1,480,459
Other loans:
Restaurant 2 10 - 12% 1 - 66 260,329
Hairdresser 2 12% 7 122,461
Car wash 1 11.5% 36 220,292
Ambulance service 1 10.5% 6 9,952
Bagel store 1 14% 43 29,614
Dry cleaner 13 10 - 14.5% 43 - 121 1,382,032
Laundromat 11 9 - 15% 24 - 72 1,751,619
Grocery/deli 3 12.5 - 13% 31 - 64 794,019
Financial services 1 14% 1 9,980
Black car service (real property) 1 12% 5 223,815
Auto sales 4 10.5 - 13% 1 - 49 856,942
Registered investment advisor 1 14% 97 169,012
Embroidery manufacturer 1 12% 59 96,000
Theater 1 16% 59 174,452
Retirement home 1 15% 84 300,000
--- -----------
Total Loans Receivable 653 41,590,000
===
Less: Allowance for Loan
Losses (295,000)
-----------
Loans Receivable, Net $41,295,000
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-8-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Organization and Summary of Significant Accounting Policies
Organization and Principal Business Activity
Elk Associates Funding Corporation (the "Company"), a New York corporation,
is licensed by the Small Business Administration ("SBA") to operate as a
Small Business Investment Company ("SBIC") under the Small Business
Investment Act of 1958, as amended. The Company has also registered as an
investment company under the Investment Company Act of 1940.
The Company primarily makes loans and investments to persons who qualify
under SBA regulations as socially or economically disadvantaged and loans
and investments to entities which are at least 50 percent owned by such
persons.
Effective February 21, 1997, the SBA approved the Company's election to
provide nondisadvantaged business financing to small business concerns
pursuant to SBA regulations and letter of agreement with the Company (see
Note 12).
Loans and the Allowance for Loans Losses
Loans are stated at cost, net of participation with other lenders, less an
allowance for possible losses. This amount represents the fair value of
such loans as determined in good faith by the Board of Directors. The
allowance for loan losses is maintained at a level that, in the Board of
Directors' judgement, is adequate to absorb losses inherent in the
portfolio. The allowance for loan losses is reviewed and adjusted
periodically by the Board of Directors on the basis of available
information, including the fair value of the collateral held, existing risk
of individual credits, past loss experience, the volume, composition and
growth of the portfolio, and current and projected economic conditions.
Because of the inherent uncertainty in the estimation process, the
estimated fair values of the loans may differ significantly from the values
that would have been used had a ready market existed for such loans and the
differences could be material. As of June 30, 1998 and 1997, approximately
85% and 87%, respectively, of all loans are collateralized by New York
City, Boston, Chicago, and Miami taxicab medallions.
Accounting Standard for Impairment of Loans
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 114 as
amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan
- Income Recognition and Disclosure", a loan is determined to be impaired
if it is probable that the contractual amounts due will not be collected in
accordance with the terms of the loan. The SFAS generally requires that
impaired loans be measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent. As all of the
Company's loans are collateral dependent, impairment is measured based on
the fair value of the collateral. If the fair value of the impaired loan is
less than the recorded investment in the loan (including accrued interest,
net of deferred loan fees or costs, and unamortized premium or discount)
the Company recognized an impairment by creating a valuation allowance with
a corresponding charge to the provision for loan losses. The Company
-9-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Organization and Summary of Significant Accounting Policies, continued
Accounting Standard for Impairment of Loans, continued
individually evaluates all loans for impairment. 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.
Cash and Cash Equivalents
For the purposes of the statement of cash flows, the Company considers all
short-term investments with an original maturity of three months or less to
be cash equivalents.
The Company has cash balances in banks in excess of the maximum amount
insured by the FDIC as of June 30, 1998 and 1997.
Income Taxes
The Company has elected to be taxed as a Regulated Investment Company under
the Internal Revenue Code. A Regulated Investment Company will generally
not be taxed at the corporate level to the extent its income is distributed
to its shareholders. In order to be taxed as a Regulated Investment
Company, the Company must pay at least 90 percent of its net investment
company taxable income to its shareholders as well as meet other
requirements under the Code. In order to preserve this election for fiscal
1998, the Company intends to make the required distributions to its
stockholders in accordance with applicable tax rules.
Depreciation and Amortization
Depreciation and amortization of furniture, fixtures and leasehold
improvements is computed on the straight-line method at rates adequate to
allocate the cost of applicable assets over their expected useful lives.
Net Income per Share
During the year ended June 30, 1998, the Company adopted the provision of
Statements of Financial Accounting Standards No. 128 "Earnings per Share"
("SFAS No. 128"). SFAS No. 128 eliminates the presentation of primary and
fully dilutive earnings per share ("EPS") and requires presentation of
basic and diluted EPS. Basic EPS is computed by dividing income (loss)
available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS is based on the
weighted-average number of shares of common stock and common stock
equivalents outstanding at year end. Common stock equivalents have been
excluded from the weighted-average shares for 1998 and 1997, as inclusion
is anti-dilutive. All prior period EPS data has been restated to conform to
the new pronouncement.
-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 June 30, 1998 and 1997, loan costs amounted to $153,786 and $178,241,
respectively, net of accumulated amortization of $90,195 and $65,750,
respectively. Amortization expense for the year ended June 30, 1998 and
1997 was $24,455 and $23,283, 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 - Assets Acquired in Satisfaction of Loans
During the years ended June 30, 1998 and 1997, the carrying value of Assets
Acquired in Satisfaction of Loans increased by additions of approximately
$26,000 and $141,000, respectively, and recoup on sales of assets
previously sold of approximately $43,000 and -0-, respectively, and
decreased by sales and cash payments of approximately $238,000 and $-0- and
write-offs of approximately $13,000 and $-0-, respectively.
Sales of assets acquired in satisfaction of loans for the years ended June
30, 1998 and 1997, included approximately $193,000 and $-0- of real estate
and $45,000 and $-0- of radio car rights, respectively.
Receivables from Debtors on Sales of Assets Acquired in Satisfaction of
Loans represent loans to borrowers arising out of the sales of defaulted
assets. Pursuant to an SBA regulation, these loans are presented separately
in the accompanying consolidated balance sheets.
NOTE 3 - Loans Receivable
All loans on nonaccrual status have been classified as impaired. The
Company recognizes interest income on a cash basis on these loans if the
principal is fully secured. However, where there is doubt regarding the
ultimate collectibility of the loan principal, cash receipts, whether
designated as principal or interest, are applied to reduce the carrying
value of the loan. The Company has loans totaling approximately $569,000
and $87,000 at June 30, 1998 and 1997, respectively, which are still
accruing interest but are not performing according to the terms of the
contract and accordingly these loans are impaired under SFAS 114 as amended
by SFAS 118. At June 30, 1998 and 1997, approximately $546,000 and $41,000,
respectively, of these loans were fully collateralized as to principal and
interest. Interest income recorded during the years ended June 30, 1998 and
1997 totaled approximately $35,000 and $3,000, respectively, for such
loans.
The following table sets forth certain information concerning impaired
loans as of June 30, 1998 and 1997:
1998 1997
-------- --------
Impaired loans with an allowance $174,952 $260,127
Impaired loans without an allowance 571,896 41,227
-------- --------
Total impaired loans $746,848 $301,354
======== ========
Allowance for impaired loans $150,626 $178,000
======== ========
Average balance of impaired loans $524,101 $497,521
======== ========
-12-
<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, 1996 $ 301,000
Additions - net 24,000
---------
Balance, June 30, 1997 325,000
Write-off, net (30,000)
---------
Balance, June 30, 1998 $ 295,000
=========
NOTE 4 - Equity Securities
Equity securities consisted of the following as of June 30, 1998:
<TABLE>
<CAPTION>
Chicago Miami Investment Dry Grocery
Taxicab Taxicab Advisory Cleaner and
Medallions Medallions Firm Company Market Total
---------- ---------- ---- ------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1996 $200,900 $ -0- $20,000 $14,000 $ -0- $234,900
Purchase of securities 121,825 21,215 -0- -0- 100,000 243,040
Sale of securities -0- -0- -0- -0- (100,000) (100,000)
Unrealized gain 58,241 -0- -0- -0- -0- 58,241
-------- ------- ------- ------- --------- --------
Balance, June 30, 1997 380,966 21,215 20,000 14,000 -0- 436,181
Purchase of securities 39,100 5,265 50,000 14,000 -0- 108,365
Sale of securities (50,936) (4,979) -0- -0- -0- (55,915)
Unrealized gain 75,297 65,251 -0- -0- -0- 140,548
-------- ------- ------- ------- --------- --------
Balance, June 30, 1998 $444,427 $86,752 $70,000 $28,000 $ -0- $629,179
======== ======= ======= ======= ========= ========
</TABLE>
-13-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - Equity Securities, continued
At June 30, 1998, the fair value of the Chicago Taxicab Medallions and the
Miami Taxicab Medallions was increased resulting in an unrealized gain. The
fair value of the other equity securities approximated cost. At June 30,
1997, the fair value of the Chicago Taxicab Medallions was increased
resulting in an unrealized gain. The fair value of the other equity
securities approximated cost.
NOTE 5 - Debentures Payable to SBA
At June 30, 1998 and 1997 debentures payable to the SBA consist of
subordinated debentures with interest payable semiannually, as follows:
<TABLE>
<CAPTION>
Current 1998 1997
Effective Principal Principal
Issue Date Due Date Interest Rate Amount Amount
-------------- -------------- ------------- --------- ----------
<S> <C> <C> <C> <C>
September 1993 September 2003 3.12(1) $1,500,000 $1,500,000
September 1993 September 2003 6.12 2,220,000 2,220,000
September 1994 September 2003 8.20 2,690,000 2,690,000
December 1995 December 2005 6.54 1,020,000 1,020,000
June 1996 June 2006 7.71 1,020,000 1,020,000
March 1997 March 2007 7.38(2) 430,000 430,000
---------- ----------
$8,880,000 $8,880,000
========== ==========
</TABLE>
(1) Interest rate increases to 6.12% on September 30, 1998
(2) The Company is also required to pay an additional annual user fee of
1% on this debenture
Under the terms of the subordinated debentures, the Company may not
repurchase or retire any of its common stock or make any distributions to
its stockholders other than dividends out of retained earnings (as computed
in accordance with SBA regulations) without the prior written approval of
the SBA.
NOTE 6 - Notes Payable to Banks
At June 30, 1998 and 1997, the Company had loan agreements with four banks
for lines of credit aggregating $33,500,000 and $20,000,000, respectively.
At June 30, 1998 and 1997, the Company had $22,085,000 and $16,820,000,
respectively outstanding under these lines. The loans which mature at
various dates through November 30, 1998 bear interest based on the
Company's choice of the lower of either the reserve adjusted LIBOR rate
plus 150 basis points or the bank's prime rates including certain fees
which make the effective rates range from approximately prime minus 1/4% to
prime minus 1/2%. Upon maturity, the Company anticipates extending the
lines of credit for another year as has been the practice in previous
years.
-14-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - Notes Payable to Banks, continued
Pursuant to the terms of the agreements the Company is required to comply
with certain terms, covenants and conditions. The Company pledged its loans
receivable and other assets as collateral for the above lines of credit and
since January, 1998 is required to maintain compensating balances of 5%.
Prior to January, 1998 and for 1997, the Company was required to maintain
10% compensating balances with each bank. At June 30, 1998 and 1997,
average compensating balances of $1,104,250 and $1,682,000, respectively,
were maintained by the Company in accordance with these agreements.
NOTE 7 - Preferred Stock
At June 30, 1995, the Company had 547,271 shares of 3 percent preferred
stock issued to the SBA. Cumulative dividends not declared or paid as of
June 30, 1995 were approximately $533,000. During August 1995, the Company
completed the repurchase of all such shares of preferred stock from the SBA
pursuant to a preferred stock repurchase agreement dated November 10, 1994.
Pursuant to this agreement, the Company repurchased all 547,271 shares of 3
percent cumulative preferred stock from the SBA for $3.50 per share, or an
aggregate of $1,915,449. The repurchase price was at a substantial discount
to the original issuance price of $10 per share. In connection with the
repurchase, all dividends in arrears on the preferred shares were
extinguished.
As a condition precedent to the repurchase, the Company granted the SBA a
liquidating interest in a newly established restricted capital surplus
account. The surplus account is equal to the amount of the net repurchase
discount. The initial value of the liquidating interest was $3,557,261
which is being amortized over a 60-month period on a straight-line basis.
Should the Company be in default under the repurchase agreement at any
time, the liquidating interest will become fixed at the level immediately
preceding the event of default and will not decline further until such time
as the default is cured or waived. The liquidating interest shall expire on
(I) sixty months from the date of the repurchase agreement, or (ii) if any
event of default has occurred and such default has been cured or waived,
such later date on which the liquidating interest is fully amortized.
Should the Company voluntarily or involuntarily liquidate prior to the
amortization of the liquidating interest, any assets which are available,
after the payment of all debts of the Company, shall be distributed first
to the SBA until the fair market value of such assets is equal to the
amount of the liquidating interest. Such payment, if any, would be prior in
right to any payments made to the Company's shareholders. The remaining
amount restricted under this agreement at June 30, 1998 and 1997 was
approximately $968,000 and $1,680,000, respectively.
-15-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - Preferred Stock, continued
During 1992, the Company authorized the issuance of 752,729 shares of a new
Series B cumulative preferred stock with a 4 percent dividend and a $10 par
value. All preferred shares are restricted solely for issuance to the SBA.
No sales of the Series B preferred shares have occurred to date. On
September 30, 1996, Congress passed a law that in effect prevents the SBA
from making any further purchase of 4% preferred stock from any specialized
small business investment company. Accordingly, the Company does not
anticipate being able to sell any of its authorized Series B Cumulative
Preferred Stock in the future.
NOTE 8 - Common Stock
On June 22, 1998, the Company declared a cash dividend of $0.18 per common
share, or a total of $314,208, and paid July 7, 1998.
During 1998, the Company completed the sale, as part of a private placement
offering, of 462,000 shares of common stock. Total proceeds from the sale
of common stock amounted to $2,888,000 net of directly related expenses of
$115,000.
NOTE 9 - Income Taxes
The provision for income taxes for the years ended June 30, 1998 and 1997
consists of the following:
1998 1997
-------- --------
Federal (benefit) $ (1,014) $ 4,568
State and city 4,285 24,108
-------- --------
$ 3,271 $ 28,676
======== ========
NOTE 10 - Related Party Transactions
The Company paid $43,234 and $43,645 to a related law firm for the years
ended June 30, 1998 and 1997, respectively, for the services provided. The
Company generally charges its borrowers loan origination fees to generate
income to offset expenses incurred by the Company for legal fees paid by
the company for loan closing costs.
The Company rents office space on a month-to-month basis from an affiliated
entity without a formal lease agreement. Rent expense amounted to $39,600
for both the years ended June 30, 1998 and 1997.
-16-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - 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. This
transaction expires on June 8, 2001.
At June 30, 1998 and 1997, the Company had commitments to make loans
totaling $2,568,000 and $1,190,282, respectively, at interest rates ranging
from 9.5% to 16%.
NOTE 12 - Regulatory Matters
The Company entered into an agreement with the SBA, subject to certain
regulatory limitations, on September 9, 1993. As part of the agreement, the
Company agreed to limit the aggregate amount of its senior indebtedness,
consisting of bank debt and the SBA debentures, to certain specific levels
based upon performing assets; the Company agreed to grant the SBA a
subordinate lien on the Company's assets and to have the Company's notes
maintained by a separate custodian; and the Company agreed to provide
periodic financial reports to the SBA on a quarterly basis.
Effective February 21, 1997, the SBA approved the Company's election to
provide non-disadvantaged business financing to small business concerns
pursuant to SBA regulations and letter of agreement with the Company,
subject to amending the Company's certificate of incorporation to make such
financings. The Company's stockholders approved the amendment to the
certificate of incorporation, which amendment was filed on February 27,
1997 (see Note 1).
NOTE 13 - Fair Value of Financial Instruments
The following disclosures represent the Company's best estimate of the fair
value of financial instruments, determined on a basis consistent with
requirements of Statement of Financial Accounting Standards No. 107,
"Disclosure about Fair Value of Financial Instruments".
The estimated fair values of the Company's financial instruments are
derived using estimation techniques based on various subjective factors
including discount rates. Such estimates may not necessarily be indicative
of the net realizable or liquidation values of these instruments. Fair
values typically fluctuate in response to changes in market or credit
conditions. Additionally, valuations are presented as of a specific point
in time and may not be relevant in relation to the future earnings
potential of the Company. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts the Company will realize in a
current market exchange.
-17-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - Fair Value of Financial Instruments, continued
The use of different market assumptions and/or estimation methodologies may
have a material effect on the estimated fair value amounts.
Loans Receivable - The fair value of loans is estimated at cost net of the
allowance for loan losses. The Company believes that the rates of these
loans approximate current market rates (see Note 3).
Equity Securities - The Company's equity securities consist of investments
in corporations who own and operate Chicago Taxicab Medallions (71%), two
investment advisory firms (11%), a dry cleaner (4%), and Miami Taxicab
Medallions (14%) (see Note 4).
Debentures Payable to Small Business Administration - The fair value of
debentures as of June 30, 1998 was approximately $9,035,000 and was
estimated by discounting the expected future cash flows using the current
rate at which the SBA has extended similar debentures to the Company (see
Note 5).
The fair value of financial instruments that are short-term or reprice
frequently and have a history of negligible credit losses is considered to
approximate their carrying value. Those instruments include balances
recorded in the following captions:
ASSETS LIABILITIES
------ -----------
Cash Notes payable, banks
Accrued interest receivable Accrued interest payable
Assets acquired in satisfaction of loans
Receivables from debtors on sales of
assets acquired in satisfaction of loans
NOTE 14 - Defined Contribution Plan
On April 15, 1996 the Company adopted a simplified employee pension plan
covering all eligible employees of the Company. Contributions to the plan
are at the discretion of the Board of Directors. During the years ended
June 30, 1998 and 1997, contributions amounted to $63,435 and $58,805,
respectively.
-18-
September, 1998
Fellow Shareholders:
Fiscal 1998 was a successful year for Elk Associates Funding Corporation and its
shareholders.
A single figure from our most recent balance sheet in this annual report
highlights the company's success in fiscal 1998. Elk's total investment
portfolio, at approximately $42 million, is the largest in the company's
history, and represents an increase of 26% over the company's portfolio at the
close of fiscal 1997.
We believe the growth and health of this portfolio provides compelling evidence
regarding the underlying strength of our core lending business. That is, we are
able to attract capital, and successfully channel it into growing businesses
which are underserved by other financing sources.
There were a number of noteworthy achievements which contributed to the
company's overall success during the year. Briefly, some of these milestones and
achievements included:
Milestones
- - New trading venue. During June '98, our common stock began trading on the
Nasdaq SmallCap(TM) Market under the symbol EKFG. We believe this move will
increase the visibility and liquidity of our common stock. In addition, we feel
that trading on a higher
<PAGE>
tier of the Nasdaq stock market will improve our access to equity capital, which
is an important part of our strategic plan going forward.
- - Access to more debt capital. During the year we increased the lines of credit
available to us from our four commercial banking partners with which we have
had long-standing relationships. These partners are Israel Discount Bank of New
York, European American Bank (EAB), Bank Leumi Trust Company, and Sterling
National Bank. Our line of credit now totaled $33.5 million at June 30, 1998
with a $25,000,000 credit ceiling, and during the year we were able to bring the
rates down from as high as 2.25% over LIBOR, to the current rate of 1.5% over
LIBOR. After the close of our fiscal year we have been able to increase our
credit lines to $35 million and eliminate compensating balances, which will
further reduce our effective rate and increase the amount of funds available to
us for investment into loans.
- - Lower cost of capital. Overall lower rates during 1998 allowed Elk to execute
its first interest rate swap ever. Through this mechanism, in June 1998, we were
able to lock in a rate of 7.36% on $10 million in our loan portfolio. We will
continue to seek swap opportunities to lower the overall cost of capital
throughout our loan portfolio.
- - Continued success of equity portfolio. Our equity portfolio of $629,000,
though small in comparison to our loan portfolio of more than $42 million,
continues to demonstrate its importance to our bottom line. Specifically,
unrealized gains in the value of this portfolio of approximately $130,000 over
this past year represents almost 14% of Elk's net income but the unrealized
gains are not reflected on the June 30, 1998 Income Statement. This is an
additional value to Elks shareholder equity, even though it does not appear in
the Profit and Loss Statement until such time as it can be actually recognized
through a sale of the securities.
- - Expansion of diversified portfolio. We were able to successfully increase the
number and volume of loans made outside of our core taxi medallion portfolio. We
grew our loans in this area by more than 64%, from $3.9 million to $6.4 million
at June 30, 1998.
- - Completion of private placement. During fiscal 1998, Elk raised $3 million
through the issuance of common stock in a private placement. This transaction
increased our
<PAGE>
shareholder base by nearly 100 investors, and bolstered our equity capital by
approximately 29% to $13.5 million.
- - Continued momentum. We closed the books on fiscal 1998 with more than $2.6
million in approved loan commitments. We believe this volume of commitments
demonstrates the momentum we have been able to generate in our medallion, as
well as diversified investment portfolios.
Strategies
We have spent the past year exploring various options for increasing shareholder
value. During 1998, we will strive to carry out many of the strategies which we
identified during our planning process.
First, we will continue to focus on building our diversified portfolio. Second,
we will continue to expand the geographic scope of our medallion lending. Though
our largest medallion portfolio is in New York City, the most competitive
medallion market in the U.S., we have found larger spreads in Chicago, Boston
and Miami.
The third and most important change which we will be implementing during the
coming year is a diversification outside of our historical role as a Small
Business Investment Company (SBIC).
We value our status as a licensee of the Small Business Administration and we
will continue to pursue the many opportunities which we see in the growing SBIC
market. However, we also see excellent opportunities in asset based financing
for small business, in equity investing in small businesses as well as in
consumer automobile financing.
<PAGE>
Accordingly, we have formed a new company, Ameritrans Capital Corporation which
will act as a diversified holding company to pursue these new markets alongside
our traditional SBIC business.
Under this proposed arrangement which will be detailed fully in a proxy
statement which will be sent to you in the near future, you will be able to
exchange your shares of Elk for shares of Ameritrans on a share for share basis.
We believe this diversification will dramatically improve shareholder value. In
addition to income in the form of dividends which the company has historically
paid from its base SBIC business, Ameritrans will be able to add an element of
growth as well from its participation in the markets of asset based lending,
equity investing in small businesses and consumer auto financing. In summary,
this transaction, if approved, will metamorphasize an investment in Elk from an
almost pure income investment to a growth and income investment.
The formation of this holding company and the diversification of our areas of
lending and equity investing will become the core ingredient of our recipe for
future success. As managers and fellow shareholders, we believe that it will
give us the flexibility we need to capitalize on the many opportunities which
are now present in specialty finance.
Fiscal 1998 was a year to be proud of. However, we are committed to surpassing
these achievements in fiscal 1999 with a formula which relies upon the strength
of our traditional markets, but new ones as well. We appreciate the support and
loyalty from all of our shareholders and we will keep you abreast of our
progress.
Sincerely,
Gary C. Granoff
Chairman & Chief Executive Officer
<PAGE>
A Question & Answer Session with Gary Granoff
The future prospects for Elk Associates Funding Corporation rest on several
factors, some microeconomic, some macroeconomic. Will the economy continue its
robust growth and expansion? Will the company's management be adept at
capitalizing on adjacent markets? To answer these questions and others, Elk
chairman and chief executive officer Gary C. Granoff took a few moments to
address the following questions.
Q: Tell us why you had such dramatic growth in your loan portfolio?
Let me preface this by saying that fiscal 1998 was a record-breaking year at
Elk. We had the largest growth in assets in our company's history, and as a
result, the largest loan portfolio we've ever had -- more than $42 million at
fiscal year end.
But, in terms of what the future may look like, it may be helpful to look at the
components which contributed to this growth.
In the medallion market, we continued to expand geographically. For instance, in
Chicago we grew our loan balances by $4 million from $9.5 million at the end of
fiscal 1997 to $13.5 million, an increase of more than 42%. Moreover, the market
in Chicago offered opportunity: increasing medallion prices amid relatively
limited sources of financing provided the basis for more profitable loans than
those we were able to generate in New York City during most of the year. In
Miami, our medallion portfolio grew by approximately 36% to $1.5 million. And in
Boston, our portfolio was flat during the year at approximately $1 million, but
we ended the year with some $880,000 in loan commitments for that market.
<PAGE>
Obviously, these markets are smaller than New York City, where we have almost
$19 million in medallion loans. Still, their significance is undeniable because
they indicate our ability to successfully identify and penetrate new markets.
Though New York City will continue to offer medallion lending opportunities, the
spreads which Elk can enjoy in this market have narrowed over recent years.
Therefore our participation in other markets will help to improve the overall
returns on our medallion lending portfolio.
Q: What about loans outside of the medallion market?
A: Our so-called diversified portfolio, which represents loans to small
businesses such as laundromats, dry cleaners, gas stations, grocery stores and
restaurants was robust. We grew our loans in this area by more than 64%, from
$3.9 million to $6.4 million.
Like our medallion loans outside of New York, these diversified loans help
diversify our portfolio. However, they also offer significant growth potential
as well. Entrepreneurship is alive in America as never before. Dun & Bradstreet
reports that so far during the 1990s, there have been an average of 700,000 new
business incorporations each year. These capital hungry entrepreneurs represent
a huge pool of loan demand, and historically, this market has been underserved
by banks. Therefore we see plenty of potential stepping up to the demand in this
niche.
Q: Can you provide a little more insight about your core portfolio - New York
taxi loans?
The New York medallion portfolio, now at $18.9 million increased also, by $1.6
million in fiscal 1998. But due to low interest rates, uncertainty and
competitive pressures during the first half of fiscal 1998, the spreads on these
loans -- that is the interest we earn on
<PAGE>
them over and above our own interest costs -- narrowed to approximately half a
percent. Our goal is to maintain a spread of at least 1.5%, and in the second
half of the fiscal year since we were able to reduce our interest rates with our
banks, we were able to obtain spreads on New York taxi medallion financing of
1.25% to 1.75% which is adequate to allow us to compete in this market for new
business.
At the end of fiscal 1998, rates began moving up again, and our level of
activity in this market has increased, accounting in part for the $2.6 million
in loan commitments which were booked at the end of the year. However, we
believe this market will always fluctuate, which provided much of the impetus
for our diversification efforts over the past three years.
Q: Despite all of this growth it looks like your earnings took a dip. Tell us
why.
For fiscal 1998, Elk's net income was approximately $930,000, versus net income
of $1.02 million for fiscal 1997, a decrease of 9%. The primary reason for the
decline was a $250,000 loan loss in our diversified portfolio. Specifically, a
food retailer we financed, closed its business without our knowledge, and
removed all of its inventory. Although the loan was collateralized by real
property, and personal guarantees, a portion of the loan may not be recovered
because of the removal of the inventory. Naturally, Elk is vigorously pursuing
all legal remedies which are available to us.
Along with this loan loss, Elk incurred additional fees and expenses associated
with our Nasdaq listing and the expansion of our offices to accommodate the
growth we anticipate by entering new specialty finance markets.
Q: Can you give us a little more insight on how you fund the company.
<PAGE>
Like any other company we are financed with a combination of debt and equity.
On the debt side, we have access to SBA-guaranteed financing at favorable rates
because we are a Small Business Investment Company and a Small Business
Administration licensee. However, more recently, we have come to rely upon lines
of credit from commercial lenders. Our four primary lending partners that we
deal with are Israel Discount Bank of New York, European American Bank (EAB),
Bank Leumi Trust Company and Sterling National Bank. During August, 1998 our
banks have increased our lines of credit to $35 million in debt capital, our
ceiling has been increased to $35 million, and the banks have eliminated any
compensating balance requirements. This should serve to allow Elk to continue to
build our loan portfolio with an even more competitive cost of funds than in the
fiscal year ended June 30, 1998.
By leveraging our long-standing relationships with these institutions, we were
able to reduce the cost of these funds in the middle of fiscal 1998 to 1.5% over
LIBOR. In addition, through an interest rate swap that was completed in June,
1998, Elk was able to lock in a rate of 7.36% for three years for $10 million of
our loan portfolio that was previously on short term thirty day, sixty day, or
ninety day rate locks. Moving forward, we will continue to streamline the cost
of our borrowing, by negotiating for favorable rates, and using interest rate
swaps and other hedging instruments.
On the equity side, we bolstered our capital position this year by raising
approximately $3 million in a private placement of common stock. This brings our
total equity capital to approximately $13.5 million. This additional equity will
provide Elk with still more borrowing capacity, and our Nasdaq listing should
offer easier access to more equity capital.
<PAGE>
Q: Strategically, how are you positioning the company for growth?
A: We have indicated in previous communications that we are forming a holding
company that will participate in other markets beyond Elk's core business of
SBIC lending and investment. Pending shareholder approval, through the holding
company called Ameritrans Capital Corporation, Elk shareholders may exchange
their shares of common stock for shares of Ameritrans on a one for one basis.
Q: What is the wisdom of doing this?
Within a holding company structure, we believe we can grow the business at a
much faster rate. Presently, Elk is a Small Business Investment Company, and we
are considered a Regulated Investment Company. This structure offers constraints
and opportunities.
The opportunities are well known, and account for our success over the last few
years. However some of the constraints we have as a Small Business Investment
Company, are that we cannot offer shorter term financing. In addition as a
Regulated Investment Company, we are required to pay 90% of our earnings to
shareholders in the form of current dividends.
Within a holding company structure, we can continue to enjoy the opportunities
and income associated with our traditional SBIC business, but also add a growth
component as well by participating in other specialty finance markets.
<PAGE>
Q: What are some of the new markets which you anticipate that Ameritrans will
pursue?
There are huge opportunities in asset based financing, which represent short
term loans based upon the value of a company's assets and inventory.
Historically, banks have not focused on asset based lending to small businesses.
However many commercial finance companies serve this market and make loans of
$100,000 to $1 million. Based on the high level of entrepreneurial activity,
this market is exploding with new demand. Moreover, our growing diversified
portfolio of longer term loans provides a ready and established customer to
which we can now offer shorter term, asset based financing.
Q: What other markets are you looking at?
Consumer auto finance looks very attractive to us and we anticipate that one of
Ameritrans' subsidiaries will participate in this market.
Q: Why auto finance?
The market for medallions is limited. In New York City for instance, there are
about 13,000 taxis. That's it. But the market for auto loans is several hundred
billion dollars. The opportunity for growth in this market, we feel, is
virtually unlimited. In addition, we want to pursue this market as a traditional
spread lender, whereby we will leverage our capital with bank financing and
other types of debt financing. We will not however securitize these loans as it
often creates profits which can be difficult to quantify and account for.
Instead, we intend to establish a viable finance company using traditional
finance company leverage to leverage our capital, and to make profits on the
spreads between the cost of funds, and the interest rates achieved on these
loans.
<PAGE>
Q: Why should I remain a shareholder?
A: We have carefully managed our growth over the past five years as an SBIC
lender and investor. We will continue to participate in this market, and enjoy
all of the opportunities it offers.
We feel however that access to new markets combined with easier access to
capital will allow us to significantly increase our overall growth rate and help
us achieve our next milestone of growing the company to $100 million in assets.
We think it's important for shareholders to keep in mind that the strategic
changes which we are asking them to consider are not mutually exclusive, but
additive to our core business.
Gary, thank you for taking time out to answer these questions.
My pleasure.
<PAGE>
Officers and Directors
Corporate Officers
Gary C. Granoff
Chairman of the Board, President
Ellen M. Walker
Vice President, General Counsel
Lee A. Forlenza
Vice President
Margaret Chance
Secretary
Silvia M. Mullens
Vice President
Internal Directors
Gary C. Granoff
Ellen M. Walker
Lee A. Forlenza
External Directors
John Acierno
President
Executive Charge Inc.
Paul Creditor, Esq.
Attorney
Former Elected Judge - Suffolk County, NY
Steve Etra
Sales Manager
Manufacturers Corrugated Box Company
Allen S. Kaplan
Vice President & Chief Operating Officer
Team Systems, Inc.
<PAGE>
Marvin Sabesan
Executive
Pearl River Textiles, Inc.
Common Stock
Elk Associates Funding Corporation common stock trades on Nasdaq SmallCap(TM)
Ticker Symbol: EKFG
Transfer Agent
Continental Stock Transfer & Trust Company
2 Broadway
New York, NY 10004
Independent Auditors
Marcum & Kliegman LLP
655 Third Avenue, 16th Floor
New York, NY 10017
Legal Counsel
Stursberg & Veith (Corporate & Securities Counsel)
405 Lexington Avenue, Suite 4949
New York, New York 10174
(212) 922-1177
Granoff, Walker & Forlenza P.C. (Loan and Investment Counsel)
747 Third Avenue
4th Floor
New York, NY 10017
(212) 421-2111
<PAGE>
Executive Offices
747 Third Avenue
4th Floor
New York, NY 10017
(212) 355-2449
(800) 214-1047
Fax: (212) 759-3338
