- --------------------------------------------------------------------------------
ELK ASSOCIATES FUNDING CORPORATION 747 Third Avenue
New York, New York 10017
212-355-2449 800-214-1047
Fax 212-759-3338
A FEDERAL LICENSEE UNDER THE SMALL BUSINESS INVESTMENT ACT OF 1958
- --------------------------------------------------------------------------------
February 25, 1998
Dear Stockholders:
Enclosed you will find our consolidated financial statements for the six
months ended December 31, 1997 and the year ended June 30, 1997.
During the six months ended December 31, 1997, the Company has continued to
grow its loan portfolio and at the end of December we reduced our debt by over
$3,000,000 primarily due to the increase in capital from our successful private
placement and sale of additional common stock.
During December, 1997, the Company was able to renegotiate the interest
rate paid to three of its banks by 50 to 75 basis points to a lower level of 150
basis points above LIBOR. In addition, we were able to have our compensating
balance requirements reduced from 10% of outstanding loan amounts to 5% of
outstanding loan amounts. Our fourth bank agreed to these terms in January,
1998. Overall, we now have approved bank lines of credit of $33,500,000 with a
maximum draw down authorized of $25,000,000. This is an increase from our prior
bank credit lines of $20,000,000 with a maximum drawdown of $20,000,000.
The combined effect of the lower interest rates and compensating balances
from our banks and the increase in our capital from the completion of the recent
private placement will first be felt in our third fiscal quarter (January 1,
1998 to March 31, 1998) and thereafter.
As we previously announced, the Company's earnings for the six months ended
December 31, 1997 were negatively impacted by the partial writeoff of one loan
to a grocery store, which reduced our earnings for the second quarter by
$175,000.
The Company is presently working on plans to expand and diversify a portion
of its portfolio into additional areas of asset based commercial loans, in an
industry that will allow us to do repetitive financings. Other lenders in this
industry have successfully developed loan portfolios with excellent collateral,
low default rates, and attractive interest rate spreads. The Company expects
that a substantial deal flow will commence in March, 1998, which should result
in a higher growth rate in our loan portfolio.
<PAGE>
- --------------------------------------------------------------------------------
ELK ASSOCIATES FUNDING CORPORATION 747 Third Avenue
New York, New York 10017
212-355-2449 800-214-1047
Fax 212-759-3338
A FEDERAL LICENSEE UNDER THE SMALL BUSINESS INVESTMENT ACT OF 1958
- --------------------------------------------------------------------------------
The Company is also presently working on the formation of a holding company
which will be subject to shareholder approval. The necessary documentation to
effectuate the creation of the holding company and an exchange of shares is
being prepared and we expect it will be filed and forwarded to shareholders in
the near future.
Once again, we should like to welcome our new shareholders who purchased
shares in the Company's recent private placement. Management intends to continue
our efforts to expand the Company's loan and investment portfolio, its business
prospects, and to enhance our shareholder value.
Sincerely yours,
/s/ Gary C. Granoff
Gary C. Granoff, President
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
(A Small Business Investment Company Licensed by the SBA)
CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended December 31, 1997 and
the Year Ended June 30, 1997
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONTENTS
Page
----
INDEPENDENT ACCOUNTANTS' REPORT 1-2
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets 3-4
Statements of Income 5
Statements of Stockholders' Equity 6
Statements of Cash Flows 7-8
Schedule of Loans as of December 31, 1997 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10-20
<PAGE>
INDEPENDENT ACCOUNTANTS' 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 reviewed the accompanying consolidated balance sheet of Elk Associates
Funding Corporation and Subsidiary as of December 31, 1997, including the
schedule of loans, and the related consolidated statements of income,
stockholders' equity and cash flows for the six months then ended, in accordance
with Statements on Standards for Accounting and Review Services issued by the
American Institute of Certified Public Accountants. All information included in
these financial statements is the representation of the management of Elk
Associates Funding Corporation and Subsidiary.
A review consists principally of inquiries of company personnel and analytical
procedures applied to financial data. It is substantially less in scope than an
audit in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying combined financial statements in order for them to
be in conformity with generally accepted accounting principles.
As explained in Note 1, the consolidated financial statements include loans
valued at $33,834,389 as of December 31, 1997, 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.
-1-
<PAGE>
The consolidated balance sheet of Elk Associates Funding Corporation and
Subsidiary as of June 30, 1997, and the related consolidated statements of
income, stockholders' equity, and cash flows for the year then ended were
audited by us, our report dated August 15, 1997 expressed an unqualified opinion
on these financial statements and included an explanatory paragraph regarding
the possible effect on the financial statements of the valuation of the loans
determined by the Board of Directors. [GRAPHIC OMITTED]
/s/ Marcum & Kliegman LLP
February 13, 1998
-2-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and June 30, 1997
ASSETS
------
<TABLE>
<CAPTION>
December 31,
1997
(Unaudited) June 30, 1997
----------- -------------
<S> <C> <C>
Loans receivable $ 34,129,389 $ 33,249,206
Less: allowance for loan losses (295,000) (325,000)
------------ ------------
33,834,389 32,924,206
Cash 528,800 1,853,032
Accrued interest receivable 419,243 408,165
Assets acquired in satisfaction of loans 599,326 581,810
Receivables from debtors on sales of assets acquired
in satisfaction of loans 470,397 488,493
Equity securities 473,165 436,181
Furniture, fixtures and leasehold improvements --
At cost, less accumulated depreciation of $213,560 and
$201,606, respectively 78,260 90,214
Prepaid expenses and other assets 244,873 243,920
------------ ------------
TOTAL ASSETS $ 36,648,453 $ 37,026,021
============ ============
</TABLE>
See independent accountants' report and notes to the consolidated financial
statements.
-3-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and June 30, 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
December 31,
1997
(Unaudited) June 30, 1997
----------- -------------
<S> <C> <C>
LIABILITIES
Debentures payable to SBA $ 8,880,000 $ 8,880,000
Notes payable to banks 13,785,000 16,820,000
Accrued expenses and other liabilities 209,121 112,005
Accrued interest payable 200,324 181,248
----------- -----------
TOTAL LIABILITIES 23,074,445 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; 1,733,550 and 1,283,600 shares issued and
outstanding, respectively 17,336 12,836
Additional paid-in-capital 12,086,737 8,890,993
Restricted capital 1,324,093 1,679,820
Retained earnings 72,576 365,878
Restricted retained earnings -0- 25,000
Unrealized gain on equity securities 73,266 58,241
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 13,574,008 11,032,768
=========== ===========
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $36,648,453 $37,026,021
=========== ===========
</TABLE>
See independent accountants' report and notes to the consolidated financial
statements.
-4-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For the Six Months Ended December 31, 1997 and the
Year Ended June 30, 1997
<TABLE>
<CAPTION>
December 31,
1997
(Unaudited) June 30, 1997
------------ -------------
<S> <C> <C>
INVESTMENT INCOME
Interest on loans receivable $ 1,929,831 $ 3,660,825
Fees and other income 208,769 374,088
----------- -----------
TOTAL INVESTMENT INCOME 2,138,600 4,034,913
----------- -----------
OPERATING EXPENSES
Interest 950,719 1,582,700
Salaries and employee benefits 245,507 469,060
Legal fees 135,871 307,127
Miscellaneous administrative expenses 328,319 604,347
Loss on assets acquired in satisfaction of loans, net 1,505 8,923
Directors' fee 28,550 27,500
Bad debt expense 149,998 -0-
----------- -----------
TOTAL OPERATING EXPENSES 1,840,469 2,999,657
----------- -----------
OPERATING INCOME 298,131 1,035,256
----------- -----------
OTHER INCOME (EXPENSES)
Write-off of uncollectible receivable (25,000) -0-
Gain on sale of security 432 25,000
Net income (loss) from rental activities 8,343 (11,233)
----------- -----------
TOTAL OTHER (EXPENSES) INCOME (16,225) 13,767
NET INCOME BEFORE INCOME TAXES (BENEFIT) 281,906 1,049,023
INCOME TAXES (BENEFIT) (3,087) 28,676
----------- -----------
NET INCOME $ 284,993 $ 1,020,347
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 1,299,068 1,283,600
=========== ===========
NET INCOME PER COMMON SHARE $ 0.22 $ 0.79
=========== ===========
</TABLE>
See independent accountants' report and notes to the consolidated financial
statements.
-5-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Six Months Ended December 31, 1997 and the
Year Ended June 30, 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 $0.1 Par Paid-In
Outstanding $10 Par $10 Par Outstanding Value Capital
----------- --------- --------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, June 30, 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- 355,727
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-
Net proceeds from sale of 449,950
shares of common stock -0- -0- -0- 449,950 4,500 2,840,017
----- ----- ----- --------- -------- -----------
BALANCE, December 31,
1997 (unaudited) -0- -0- -0- 1,733,550 $ 17,336 $12,086,737
=== === === ========= ======== ===========
<CAPTION>
Unrealized
Restricted Gain on
Restricted Retained Retained Equity
Capital Earnings Earnings Securities Total
--------- --------- -------- ---------- ------
<S> <C> <C> <C> <C> <C>
BALANCE, June 30, 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 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 (355,727) -0- -0- -0- -0-
Dividends paid -0- (603,295) -0- -0- (603,295)
Net income -0- 309,993 (25,000) -0- 284,993
Unrealized gain on equity
securities -0- -0- -0- 15,025 15,025
Net proceeds from sale of 449,950
shares of common stock -0- -0- -0- -0- 2,844,517
---------- ---------- ---------- ---------- ------------
BALANCE, December 31,
1997 (unaudited) $1,324,093 $ 72,576 $ -0- $ 73,266 $ 13,574,008
========== ========== ========== ========== ============
</TABLE>
See independent accountants' report and notes to the consolidated financial
statements.
-6-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended December 31, 1997 and the
Year Ended June 30, 1997
<TABLE>
<CAPTION>
December 31,
1997
(Unaudited) June 30, 1997
----------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 284,993 $ 1,020,347
----------- -----------
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 24,181 53,546
Gain on sale of security -0- (25,000)
Write-off of uncollectible receivable 25,000 -0-
Increase in accrued interest receivable (11,080) (114,078)
Increase in prepaid expenses and other assets (13,180) (27,318)
Increase (decrease) in accrued expenses and other liabilities 97,116 (28,893)
Increase (decrease) in accrued interest payable 19,075 (15,204)
----------- -----------
TOTAL ADJUSTMENTS 141,112 (156,947)
----------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 426,105 863,400
----------- -----------
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 (934,603) (9,062,902)
Payments for building improvements on assets
acquired in satisfaction of loans -0- (13,974)
Purchases of equity securities (38,765) (243,040)
Sale of equity securities 16,806 -0-
Acquisition of furniture, fixtures and leasehold
improvements -0- (18,530)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES
(Forward) (956,562) $(9,338,446)
----------- -----------
</TABLE>
See independent accountants' report and notes to the consolidated
financial statements.
-7-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
For the Six Months Ended December 31, 1997 and the
Year Ended June 30, 1997
<TABLE>
<CAPTION>
December 31,
1997
(Unaudited) June 30, 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable to banks $ 18,250,000 $ 25,295,000
Repayments of notes payable to banks (21,285,000) (15,100,000)
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 2,844,517 -0-
Dividends paid (603,292) (946,655)
------------ ------------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES (793,775) 9,255,295
------------ ------------
NET (DECREASE) INCREASE IN CASH (1,324,232) 780,249
CASH - Beginning 1,853,032 1,072,783
------------ ------------
CASH - Ending $ 528,800 $ 1,853,032
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the periods for:
Interest $ 931,644 $ 1,597,904
Income taxes $ 13,260 $ 31,260
Noncash investing and financing activities:
Conversion of loans to assets acquired in satisfaction of
loans $ -0- $ 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 $ 15,025 $ 58,241
Transfer of restricted capital $ 355,727 $ 711,448
</TABLE>
See independent accountants' report and notes to the consolidated financial
statements.
-8-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
SCHEDULE OF LOANS (Unaudited)
December 31, 1997
<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 110 8.25%-14% 1-119 $16,222,748
Radio car service 62 1-15% 1-59 374,241
Chicago:
Taxi medallion 404 12-16.5% 27-48 11,494,624
Boston:
Taxi medallion 15 11-14% 39-94 713,060
Miami:
Taxi medallion 29 13.75% 117-120 1,494,054
Other loans:
Restaurant 2 10.5-12% 1-72 266,207
Gas station/auto repair 1 12% 1-42 96,047
Hairdresser 2 12% 12 113,714
Car wash 1 11.5% 42 222,766
Ambulance service 1 10.5% 12 13,386
Bagel store 1 14% 48 32,986
Dry cleaner 8 10-13% 48-126 924,772
Laundromat 2 15% 29 65,695
Grocery/deli 4 12.50-14% 36-69 903,727
Financial services 1 14% 1 50,000
Black car service (real property) 1 12% 10 261,311
Auto sales 3 10.50-13% 1-54 700,051
Registered investment advisor 1 14% 102 180,000
---- -----------
Total Loans Receivable 648 34,129,389
====
Less: allowance for loan losses (295,000)
-----------
Loans Receivable, net $33,834,389
===========
</TABLE>
See independent accountants' report and notes to the consolidated financial
statements.
-9-
<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 non-disadvantaged business financing to small business concerns
pursuant to SBA regulations and letter of agreement with the Company (see
Note 11).
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. Approximately 89% 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 No.114, "Accounting
by Creditors for Impairment of a Loan" ("SFAS 114"), a loan is determined
to be impaired if it is probable that the contractual amounts due will not
be collected in accordance with the terms of the loan. SFAS 114 generally
requires that impaired loans be measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate
or, as a practical expedient, at the loan's observable market price or the
fair value of the collateral if the loan is collateral dependent. As all of
the Company's loans are collateral dependent, impairment is measured based
on the fair value of the collateral. If the fair value of the impaired loan
is less than the recorded investment in the loan (including accrued
interest, net of deferred loan fees or costs, and unamortized premium or
discount) the Company recognized an impairment
-10-
<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
by creating a valuation allowance with a corresponding charge to the
provision for loan losses. The Company individually evaluates all loans for
impairment, (see Note 3 for further discussion).
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.
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 stockholders. 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 stockholders as well as meet other
requirements under the Code. In order to preserve this election for fiscal
1997, 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
Net income per share is determined by dividing net income by the weighted
average number of shares outstanding during the period.
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.
Amortization expense for the six months ended December 31, 1997 and the
year ended June 30, 1997 was $12,217 (unaudited) and $23,283, respectively.
-11-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Organization and Summary of Significant Accounting Policies, continued
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 was purchased by the Company to protect it from
the impact of upward movements in interest rates related to its outstanding
bank debt, expiring March 20, 1999. 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.
NOTE 2 - Assets Acquired in Satisfaction of Loans
During the six months ended December 31, 1997 and for the year ended June
30, 1997, the carrying value of assets acquired in satisfaction of loans
increased by additions of approximately $-0- and $141,000, respectively,
and recoup on sale of assets previously sold of $43,376 (unaudited) and
$-0-, respectively, and decreased by sales and cash payments of $25,859
(unaudited) and $-0-, respectively, of radio cars.
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.
-12-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $146,000
(unaudited) and $87,000 at December 31, 1997 and June 30, 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. At December 31, 1997 and June 30, 1997,
approximately $104,000 (unaudited) and $41,000, respectively, of these
loans were fully collateralized as to principal and interest. Interest
receivable at December 31, 1997 and the year ended June 30, 1997 totaled
approximately $11,000 (unaudited) and $3,000, respectively, for such loans.
The following table sets forth certain information concerning impaired
loans as of December 31, 1997 and June 30, 1997:
December 31,
1997
(Unaudited) June 30, 1997
------------- -------------
Impaired loans with an allowance $256,782 $260,127
Impaired loans without an allowance 104,278 41,227
======== ========
Total impaired loans $361,060 $301,354
======== ========
Allowance for impaired loans $175,103 $178,000
======== ========
Average balance of impaired loans $331,207 $497,521
======== ========
-13-
<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
Recoveries - net 24,000
---------
Balance, June 30, 1997 325,000
Write-off - net (30,000)
---------
Balance, December 31, 1997 (unaudited) $295,000
=========
At December 31, 1997 and June 30, 1997, the Company had commitments to make
loans totaling $1,855,100 (unaudited) and $1,190,282, respectively, at
interest rates ranging from 8.5% to 16%.
NOTE 4 - Equity Securities
Equity securities consist of the following as of December 31, 1997 and June
30, 1997:
<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 19,500 5,265 -0- 14,000 -0- 38,765
Sale of securities (16,806) -0- -0- -0- -0- (16,806)
Unrealized gain 15,025 -0- -0- -0- -0- 15,025
------- ------ ------ ------- ---------- ---------
Balance, December 31,
1997 (unaudited) $398,685 $26,480 $20,000 $28,000 $ -0- $ 473,165
======== ======= ======= ======= ========== =========
</TABLE>
At December 31, 1997 and 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 approximates cost.
-14-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - Debentures Payable to SBA
At December 31, 1997 and June 30, 1997 debentures payable to the SBA
consist of subordinated debentures with interest payable semiannually, as
follows:
<TABLE>
<CAPTION>
Current December 31, 1997 June 30, 1997
Effective Principal Amount Principal
Issue Date Due Date Interest Rate (Unaudited) 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 capital 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 December 31, 1997 and June 30, 1997, the Company has loan agreements
with four banks for lines of credit aggregating $31,000,000 (unaudited) and
$20,000,000, respectively. At December 31, 1997 and June 30, 1997, the
Company had $13,785,000 (unaudited) and $16,820,000, respectively,
outstanding under these lines. The loans, which mature through November 30,
1998, bear interest based on either the reserve adjusted labor rate plus
150 basis points or the banks' 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.
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
-15-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - Notes Payable to Banks, continued
collateral for the above lines of credit and is required to maintain
compensating balances ranging from 5% to 10% of loan balance outstanding
with each individual bank. At December 31, 1997 and June 30, 1997, average
compensating balances of $788,500 (unaudited) and $1,682,000, respectively,
were maintained by the Company in accordance with these agreements.
In January 1998, the aggregate maximum credit available under the loan
agreements is increased to $33,500,000 with similar terms as stated above.
In addition, the compensating balances required is reduced to 5% of loan
balances outstanding with each individual bank.
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 amount
restricted under this agreement at December 31, 1997 and June 30, 1997 was
approximately $1,324,000 and $1,680,000, respectively.
-16-
<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 December 15, 1997, the Company declared a cash dividend of $0.05 per
common share, or a total of $86,678 to stockholders of record as of
December 31, 1997 which was paid January 16, 1998.
On October 29, 1997, the Company offered to sell as part of a private
placement memorandum a minimum of 154,000 shares (the "Minimum Offering")
of common stock, $.01 par value (the "Common Stock"), and a maximum of
462,000 shares (the "Maximum Offering") of Common Stock at a price of $6.50
per share (the "Shares"), for an aggregate of up to $3,003,000.
As of December 31, 1997, 449,950 shares were sold and the remaining 12,050
shares were sold on January 9, 1998. Total proceeds from the sale of the
Common Stock at December 31, 1997 amounted to $2,844,516, net of directly
related expenses of $80,159, which was recorded as additional paid capital.
The Company plans to use one third of the net proceeds to capitalize a new
"Holding Company" and to make loans to small business concerns, as outlined
in the Offering Memorandum dated October 29, 1997.
NOTE 9 - Income Taxes
The provision for income taxes for the six month ended December 31, 1997
and the year ended June 30, 1997 consists of the following:
December 31,
1997
(Unaudited) June 30, 1997
----------- -------------
Federal $ 554 $ 4,568
State and city (3,641) 24,108
---------- ----------
$ (3,087) $28,676
=========== ==========
-17-
<PAGE>
NOTE 10 - Related Party Transactions/Commitments
The Company paid $10,414 (unaudited) and $43,645 to a related law firm for
the six months ended December 31, 1997 and for the year ended June 30,
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 services.
The Company rents office space on a month-to-month basis from an affiliated
entity without a formal lease agreement. Rent expense amounted to $19,800
(unaudited) for the six months ended December 31, 1997 and $39,600 for the
year ended June 30, 1997.
NOTE 11 - Regulatory Matters
In accordance with a Stipulation of Compliance dated January 25, 1993
between the Company and the SBA, the Company has appointed an Audit and
Compliance Committee, consisting of officers and directors of the Company,
which is responsible for monitoring and coordinating the Company's
adherence with SBA regulations.
The Company entered into an agreement with the SBA, subject to certain
regulatory limitations, on September 9, 1993. As part of the agreement, the
Company agreed to limit the aggregate amount of its senior indebtedness,
consisting of bank debt and the SBA debentures, to certain specific levels
based upon performing assets; the Company agreed to grant the SBA a
subordinate lien on the Company's assets and to have the Company's notes
maintained by a separate custodian; and the Company agreed to provide
periodic financial reports to the SBA on a quarterly basis.
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 stock holders approved the amendment to the
certificate of incorporation, which amendment was filed on February 27,
1997 (see Note 1).
NOTE 12 - 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".
-18-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - Fair Value of Financial Instruments, continued
The estimated fair values of the Company's financial instruments are
derived using estimation techniques based on various subjective factors
including discount rates. Such estimates may not necessarily be indicative
of the net realizable or liquidation values of these instruments. fair
values typically fluctuate in response to changes in market or credit
conditions. Additionally, valuations are presented as of a specific point
in time and may not be relevant in relation to the future earnings
potential of the Company. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts the Company will realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair
value amounts.
Loans Receivable - The fair value of loans is estimated at cost net of the
allowance for loan losses. The Company believes that the rates of these
loans approximate current market rates (see Note 3).
Equity Securities - The Company's equity securities consist of investments
in corporations who own and operate Chicago taxicab medallions (82%), an
investment advisory firm (5%), a dry cleaner (7%), and Miami taxicab
medallions (6%) (see Note 4).
Debentures Payable to Small Business Administration - The fair value of
debentures as of December 31, 1997 and June 30, 1997 were approximately
$9,073,000 (unaudited) and $9,110,000, respectively, and were 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
-19-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - 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 six months
ended December 31, 1997 and for the year ended June 30, 1997, contributions
amounted to $27,464 (unaudited) and $58,805, respectively.
-20-
