SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Quarterly Period Ended December 31, 1998
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____________ to
____________
Commission File Number 0-22153
-------------------------
ELK ASSOCIATES FUNDING CORPORATION
(Exact name of registrant as specified in its charter)
New York 11-2502336
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
747 Third Avenue
Fourth Floor
New York, New York 10017
(Address of Registrant's (Zip Code)
principal executive office)
Registrant's telephone number, including area code: (800) 214-1047
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
The number of shares of Common Stock, par value $.01 per share,
outstanding as of February 16, 1999: 1,745,600
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION
FORM 10-Q
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I FINANCIAL INFORMATION ........................................................... 1
ITEM 1. FINANCIAL STATEMENTS ................................................. 1
CONSOLIDATED BALANCE SHEETS December 31, 1998 (Unaudited) and June 30,
1998 ............................................................. 2
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) For the Three
Months and Six Months Ended December 31, 1998 and 1997 ........... 4
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Six
Months Ended December 31, 1998 and 1997 .......................... 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ........................... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .................................. 13
PART II OTHER INFORMATION .............................................................. 16
ITEM 5. OTHER INFORMATION .................................................... 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ..................................... 17
SIGNATURES .................................................................... 18
</TABLE>
-i-
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The consolidated balance sheet of the Company as of December 31, 1998, the
related statements of operations, and cash flows for the six months ended
December 31, 1998 and 1997 and the three months ended December 31, 1998 and
December 31, 1997 included in Item 1 have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management, the accompanying consolidated financial statements include all
adjustments (consisting of normal, recurring adjustments) necessary to summarize
fairly the Company's financial position and results of operations. The results
of operations for the six months ended December 31, 1998 are not necessarily
indicative of the results of operations for the full year or any other interim
period. These financial statements should be read in conjunction with the
audited financial statements and notes thereto included in the Company's Annual
Report on Form N-30D for the fiscal year ended June 30, 1998 as filed with the
Commission.
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1998 (Unaudited) and June 30, 1998
ASSETS
<TABLE>
December 31, 1998 June 30, 1998
----------------- -------------
<S> <C> <C>
Loans receivable ................................... $ 47,673,884 $ 41,590,000
Less: allowance for loan losses .................... (305,000) (295,000)
------------ ------------
47,368,884 41,295,000
Cash and cash equivalents .......................... 743,481 1,755,429
Accrued interest receivable ........................ 598,564 516,110
Assets acquired in satisfaction of loans ........... 634,426 400,470
Receivables from debtors on sales of assets acquired
in satisfaction of loans .......................... 430,316 451,222
Equity securities .................................. 855,862 629,179
Furniture, fixtures and leasehold improvements, net 95,006 102,247
Prepaid expenses and other assets .................. 386,796 250,081
------------ ------------
TOTAL ASSETS $ 51,113,335 $ 45,399,738
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-2-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1998 (Unaudited) and June 30, 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, 1998 June 30, 1998
----------------- -------------
<S> <C> <C>
LIABILITIES
Debentures payable to SBA $ 8,880,000 $ 8,880,000
Notes payable, banks 27,650,000 22,085,000
Accrued expenses and other liabilities 263,371 204,099
Accrued interest payable 296,817 221,704
Dividends payable 314,208 314,208
----------- -----------
TOTAL LIABILITIES 37,404,396 31,705,011
COMMITMENTS AND CONTINGENCIES
Common stock, $.01 par value:2,000,000 shares authorized;
1,745,600 shares issued and outstanding 17,456 17,456
Additional paid-in-capital 12,841,553 12,485,825
Restricted capital 612,640 968,368
Retained earnings 7,765 24,289
Unrealized gain on equity securities 229,525 198,789
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 13,708,939 13,694,727
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $51,113,335 $45,399,738
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months and Six Months Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
December 31, 1998 December 31, 1997 December 31, 1998 December 31, 1997
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Interest on loans receivable $ 1,258,639 $ 936,221 $ 2,475,744 $ 1,929,831
Fees and other income 87,642 130,432 219,204 217,544
----------- ----------- ----------- -----------
TOTAL INVESTMENT INCOME 1,346,281 1,066,653 2,694,948 2,147,375
----------- ----------- ----------- -----------
OPERATING EXPENSES
Interest 617,983 461,095 1,192,115 950,719
Salaries and employee benefits 136,030 111,949 274,483 245,507
Legal fees 51,926 68,994 144,261 135,871
Miscellaneous administrative expenses 216,485 212,817 410,007 353,319
Loss (recovery) on assets acquired in
satisfaction of loans, net (1,547) 2,603 268 1,505
Directors' fee 4,500 8,350 13,250 28,550
Bad debt expense 19,890 149,998 48,965 149,998
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES 1,045,267 1,015,806 2,083,349 1,865,469
----------- ----------- ----------- -----------
OPERATING INCOME 301,014 50,847 611,599 281,906
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 301,014 50,847 611,599 281,906
INCOME TAXES (Benefit) (5,656) (6,675) (293) (3,087)
----------- ----------- ----------- -----------
NET INCOME $ 306,670 $ 57,522 $ 611,892 $ 284,993
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 1,745,600 1,255,068 1,745,600 1,299,068
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE $ .1757 $ .04 $ .3505 $ .2194
=========== =========== =========== ===========
</TABLE>
-4-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Six Months Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 611,892 $ 284,993
----------- -----------
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 18,375 24,181
Increase in accrued interest receivable (82,454) (11,080)
(Increase) decrease in prepaid expenses and other assets (136,715) (13,180)
Increase in accrued expenses and other liabilities 59,272 97,116
Increase (decrease) in accrued interest payable 75,113 19,075
----------- -----------
TOTAL ADJUSTMENTS (66,409) 116,112
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 545,483 401,105
----------- -----------
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 (6,286,934) (909,603)
Purchases of equity securities (195,947) (21,959)
Acquisition of furniture, fixtures and leasehold
improvements (11,134) -0-
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (6,494,015) (931,562)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from reductions of notes payable, banks, net 5,565,000 (3,035,000)
Dividends paid (628,416) (603,292)
Net proceeds from sale of common stock -0- 2,844,517
----------- -----------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES $ 4,936,584 $ (793,775)
----------- -----------
</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
(UNAUDITED), Continued
For the Six Months Ended December 31, 1998 and 1997
December 31, 1998 December 31, 1997
----------------- -----------------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS $(1,011,948) $(1,324,232)
CASH AND CASH EQUIVALENTS - Beginning 1,755,429 1,853,032
----------- -----------
CASH AND CASH EQUIVALENTS - Ending $ 743,481 $ 528,800
=========== ===========
The accompanying notes are an integral part of these financial statements.
-6-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
NOTES TO THE FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- Organization and Summary of Significant Accounting Policies
Organization and Principal Business Activity
Elk Associates Funding Corporation (the "Company"), a New York corporation,
is licensed by the Small Business Administration ("SBA") to operate as a Small
Business Investment Company ("SBIC") under the Small Business Investment Act of
1958, as amended. The Company has also registered as an investment company under
the Investment Company Act of 1940.
The Company primarily makes loans and investments to persons who qualify
under SBA regulations as socially or economically disadvantaged and loans and
investments to entities which are at least 50 percent owned by such persons.
Effective February 21, 1997, the SBA approved the Company's election to
provide nondisadvantaged business financing to small business concerns pursuant
to SBA regulations and letter of agreement with the Company (see Note 8).
Loans and the Allowance for Loan 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 December 31, 1998 and June 30, 1998,
approximately 81% and 87%, respectively, of all loans are collateralized by New
York City, Boston, Chicago, and Miami taxicab medallions.
Accounting Standard for Impairment of Loans
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 114 as
amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan --
Income Recognition and Disclosure", a loan is determined to be impaired if it is
probable that the contractual amounts due will not be collected in accordance
with the terms of the loan. The SFAS generally requires that impaired loans be
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. As virtually all of the Company's loans are collateral
dependent, impairment is measured based on the fair value of the collateral. If
the fair value of the impaired loan is less than the recorded investment in the
loan (including accrued interest, net of deferred loan fees or costs, and
unamortized premium or discount) the Company recognized an impairment by
creating a valuation allowance with a corresponding charge to the provision for
loan losses. The Company individually evaluates all loans for impairment.
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.
-7-
<PAGE>
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 December 31, 1998 and June 30, 1998.
Income Taxes
The Company has elected to be taxed as a Regulated Investment Company under
the Internal Revenue Code. A Regulated Investment Company will generally not be
taxed at the corporate level to the extent its income is distributed to its
shareholders. In order to be taxed as a Regulated Investment Company, the
Company must pay at least 90 percent of its net investment company taxable
income to its shareholders as well as meet other requirements under the Code. In
order to preserve this election for fiscal 1998, the Company intends to make the
required distributions to its stockholders in accordance with applicable tax
rules.
Depreciation and Amortization
Depreciation and amortization of furniture, fixtures and leasehold
improvements is computed on the straight-line method at rates adequate to
allocate the cost of applicable assets over their expected useful lives.
Net Income per Share
During the year ended June 30, 1998, the Company adopted the provision of
Statements of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS
No. 128"). SFAS No. 128 eliminates the presentation of primary and fully
dilutive earnings per share ("EPS") and requires presentation of basic and
diluted EPS. Basic EPS is computed by dividing income (loss) available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted EPS is based on the weighted-average number of shares of common
stock and common stock equivalents outstanding at year end. Common stock
equivalents have been excluded from the weighted-average shares for 1998 and
1997, as inclusion is anti-dilutive. All prior period EPS data has been restated
to conform to the new pronouncement.
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
December 31, 1998 and June 30, 1998, loan costs amounted to $141,558 and
$153,786, respectively, net of accumulated amortization of $102,423 and $90,195,
respectively.
Assets Acquired in Satisfaction of Loans
Assets acquired in satisfaction of loans are carried at estimated fair
value less selling costs. Losses incurred at the time of foreclosure are charged
to the allowance for loan losses. Subsequent reductions in estimated net
realizable value are recorded as losses on assets acquired in satisfaction of
loans.
Interest Rate Cap
At March 20, 1997, the Company was a party to one $5 million notional
interest rate cap. This cap, which expires on March 20, 1999, was purchased by
the Company to protect it from the impact of upward movements in interest rates
related to its outstanding bank debt. The cap provided interest rate protection
in the event that the three month LIBOR rate exceeded 6.75 percent. The premium
paid for the purchase of this cap was amortized over its life as an adjustment
of interest expense. Payments received under this cap would be credited to
interest expense.
-8-
<PAGE>
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.
NOTE 2 -- Debentures Payable to SBA
At December 31, 1998 and June 30, 1998 debentures payable to the SBA
consist of subordinated debentures with interest payable semiannually, as
follows:
Current
Effective Principal
Issue Date Due Date Interest Rate Amount
---------- -------- ------------- ------
September 1993 September 2003 6.12(1) $1,500,000
September 1993 September 2003 6.12 2,220,000
September 1994 September 2004 8.20 2,690,000
December 1995 December 2005 6.54 1,020,000
June 1996 June 2006 7.71 1,020,000
March 1997 March 2007 7.38(2) 430,000
----------
$8,880,000
==========
(1) Interest rate increased to 6.12% from 3.12% effective September 30, 1998.
(2) The Company is also required to pay an additional annual user fee of 1% on
this debenture.
Under the terms of the subordinated debentures, the Company may not
repurchase or retire any of its common stock or make any distributions to its
stockholders other than dividends out of retained earnings (as computed in
accordance with SBA regulations) without the prior written approval of the SBA.
NOTE 3 -- Notes Payable to Banks
At December 31, 1998 and June 30, 1998, the Company had loan agreements
with four banks for lines of credit aggregating $35,000,000 and $33,500,000. At
December 31, 1998 and June 30, 1998, the Company had $27,650,000 and
$22,085,000, respectively outstanding under these lines. The loans which mature
at various dates through October 1999 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 less 1/2%. Certain additional fees for certain
of the lines of credit are also paid by the Company equal to 1/8 of 1% as an
annual fee. Upon maturity, the Company anticipates extending the lines of credit
for another year as has been the practice in previous years.
-9-
<PAGE>
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
between January 1998 and September 1998 is required to maintain compensating
balances of 5%. During September 1998 the Company eliminated the compensating
balance requirement with its banks. Prior to January 1998, the Company was
required to maintain 10% compensating balances with each bank. At December 31,
1998 and June 30, 1998, average compensating balances of nil and $1,104,250,
respectively, were maintained by the Company in accordance with these
agreements.
NOTE 4 -- Preferred Stock
At June 30, 1995, the Company had 547,271 shares of 3 percent preferred
stock issued to the SBA. Cumulative dividends not declared or paid as of June
30, 1995 were approximately $533,000. During August 1995, the Company completed
the repurchase of all such shares of preferred stock from the SBA pursuant to a
preferred stock repurchase agreement dated November 10, 1994. Pursuant to this
agreement, the Company repurchased all 547,271 shares of 3 percent cumulative
preferred stock from the SBA for $3.50 per share, or an aggregate of $1,915,449.
The repurchase price was at a substantial discount to the original issuance
price of $10 per share. In connection with the repurchase, all dividends in
arrears on the preferred shares were extinguished.
As a condition precedent to the repurchase, the Company granted the SBA a
liquidating interest in a newly established restricted capital surplus account.
The surplus account is equal to the amount of the net repurchase discount. The
initial value of the liquidating interest was $3,557,261 which is being
amortized over a 60-month period on a straight-line basis. Should the Company be
in default under the repurchase agreement at any time, the liquidating interest
will become fixed at the level immediately preceding the event of default and
will not decline further until such time as the default is cured or waived. The
liquidating interest shall expire on (i) sixty months from the date of the
repurchase agreement, or (ii) if any event of default has occurred and such
default has been cured or waived, such later date on which the liquidating
interest is fully amortized. Should the Company voluntarily or involuntarily
liquidate prior to the amortization of the liquidating interest, any assets
which are available, after the payment of all debts of the Company, shall be
distributed first to the SBA until the fair market value of such assets is equal
to the amount of the liquidating interest. Such payment, if any, would be prior
in right to any payments made to the Company's shareholders. The remaining
amount restricted under this agreement at December 31, 1998 and June 30, 1998
was approximately $612,640 and $968,368, respectively.
During 1992, the Company authorized the issuance of 752,729 shares of a new
Series B cumulative preferred stock with a 4 percent dividend and a $10 par
value. All preferred shares are restricted solely for issuance to the SBA. No
sales of the Series B preferred shares have occurred to date. On December 31,
1996, Congress passed a law that in effect prevents the SBA from making any
further purchase of 4% preferred stock from any specialized small business
investment company. Accordingly, the Company does not anticipate being able to
sell any of its authorized Series B Cumulative Preferred Stock in the future. In
September 1998 the shareholders of the Company approved, subject to the approval
of the Small Business Administration, which approval is currently pending, an
amendment to the certificate of incorporation of the Company eliminating all of
the authorized Series A and Series B preferred stock of the Company.
NOTE 5 -- Common Stock
On January 12, 1999, the Company declared a cash dividend of $0.18 per
common share, or a total of $314,208, payable January 22, 1999.
During December 1997 and January 1998, the Company completed the sale, as
part of a private placement offering, of 462,000 shares of common stock. Total
proceeds from the sale of common stock amounted to $2,888,000 net of directly
related expenses of $115,000.
-10-
<PAGE>
NOTE 6 -- Income Taxes
The provision for income taxes (benefit) for the six months ended December
31, 1998 and 1997 consists of the following:
December 31, 1998 December 31, 1997
----------------- -----------------
Federal $ 2,396 $ -0-
State and city (2,689) (3,087)
------- -------
$ (293) $(3,087)
======= =======
NOTE 7 -- Commitments
On June 8, 1998, the Company entered into a $10,000,000 interest rate Swap
transaction with a bank. This Swap transaction was entered into to protect the
Company from an upward movement in interest rates relating to outstanding bank
debt. The Swap transaction calls for a fixed rate of 5.86% for the Company and
if the floating one month LIBOR rate is below the fixed rate then the Company is
obligated to pay the bank for the difference in rates. When the one month LIBOR
rate is above the fixed rate then the bank is obligated to pay the Company for
the differences in rates. Since the Company presently borrows at 150 basis
points above 30, 60 or 90 day LIBOR, its effective fixed rate of interest on the
$10,000,000 rotating amount was fixed at 7.36% due to that transaction. This
transaction expires on June 8, 2001. On October 13, 1998 the Company entered
into an additional Swap transaction with the same bank for $5,000,000. This Swap
transaction calls for a fixed rate of interest of 4.95% for the Company. Since
the Company borrows at 150 basis points above 30, 60 or 90 day LIBOR, its
effective fixed rate of interest on the $5,000,000 is 6.45%. This second Swap
transaction expires on October 8, 2001.
At December 31, 1998 and June 30, 1998, the Company had commitments to make
loans totaling $2,890,500 and $2,568,000, respectively, at interest rates
ranging from 8.65% to 16%.
NOTE 8 -- Regulatory Matters
The Company entered into an agreement with the SBA, subject to certain
regulatory limitations, on September 9, 1993. As part of the agreement, the
Company agreed to limit the aggregate amount of its senior indebtedness,
consisting of bank debt and the SBA debentures, to certain specific levels based
upon performing assets; the Company agreed to grant the SBA a subordinate lien
on the Company's assets and to have the Company's notes maintained by a separate
custodian; and the Company agreed to provide periodic financial reports to the
SBA on a quarterly basis.
Effective February 21, 1997, the SBA approved the Company's election to
provide non-disadvantaged business financing to small business concerns pursuant
to SBA regulations and letter of agreement with the Company, subject to amending
the Company's certificate of incorporation to make such financings. The
Company's stockholders approved the amendment to the certificate of
incorporation, which amendment was filed on February 27, 1997 (see Note 1).
NOTE 9 -- Fair Value of Financial Instruments
The following disclosures represent the Company's best estimate of the fair
value of financial instruments, determined on a basis consistent with
requirements of Statement of Financial Accounting Standards No. 107, "Disclosure
about Fair Value of Financial Instruments".
The estimated fair values of the Company's financial instruments are
derived using estimation techniques based on various subjective factors
including discount rates. Such estimates may not necessarily be indicative of
the net realizable or liquidation values of these instruments. Fair values
typically fluctuate in response to changes in market or credit conditions.
Additionally, valuations are presented as of a specific point in time and may
not be relevant in relation to the future earnings potential of the Company.
Accordingly, the
-11-
<PAGE>
estimates presented herein are not necessarily indicative of the amounts the
Company will realize in a current market exchange.
The use of different market assumptions and/or estimation methodologies may
have a material effect on the estimated fair value amounts.
Loans Receivable -- The fair value of loans is estimated at cost net of the
allowance for loan losses. The Company believes that the rates of these loans
approximate current market rates.
Equity Securities -- The Company's equity securities consist of investments
in corporations who own and operate Chicago Taxicab Medallions (69%), two
investment advisory firms (8%), a dry cleaner (3%), Miami Taxicab Medallions
(11%), and a telecommunications company (9%).
Debentures Payable to Small Business Administration -- The fair value of
debentures as of December 31, 1998 and June 30, 1998 was approximately
$9,035,000 and was estimated by discounting the expected future cash flows using
the current rate at which the SBA has extended similar debentures to the
Company.
The fair value of financial instruments that are short-term or reprice
frequently and have a history of negligible credit losses is considered to
approximate their carrying value. Those instruments include balances recorded in
the following captions:
ASSETS LIABILITIES
Cash Notes payable, banks
Accrued interest receivable Accrued interest payable
Assets acquired in satisfaction of loans
Receivables from debtors on sales of
assets acquired in satisfaction of loans
-12-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information contained in this section should be used in conjunction with the
consolidated Financial Statements and Notes therewith appearing in this report
Form 10Q and the Company's Annual Report for the year ended June 30, 1998.
General
The Company is licensed by the Small Business Administration (SBA) to
operate as a Small Business Investment Company (SBIC) under the Small Business
Investment Act of 1958, as amended. The Company has also registered as an
investment company under the Investment Company Act of 1940.
The Company primarily makes loans and investments to persons who qualify
under SBA regulation as socially or economically disadvantaged and loans and
investments to entities which are at least 50% owned by such persons. The
Company also makes loans and investments to persons who qualify under SBA
regulation as "non-disadvantaged". The Company's primary lending activity is to
originate and service loans collateralized by New York City, Boston, Chicago and
Miami Taxicab Medallions. The Company also makes loans and investments in other
diversified businesses.
Results of Operations
For the Six Months ended December 31, 1998 and 1997.
Total investment income. Elk's investment income for the six months ended
December 31, 1998 increased to $2,695,000 from $2,147,000 or (25.5%) for the six
month periods ended December 31, 1998 and December 31, 1997, respectively. This
increase was mainly due to an increase in the loan portfolio during the fiscal
year. The portfolio increased from $34,130,000 as of December 31, 1997 to
$47,674,000 as of December 31, 1998, as part of the Company's strategy to
maximize shareholder rate of return by use of bank debt.
Operating Expenses
Interest expense for the six month period ended December 31, 1998 increased
$241,000 ($1,192,000 from $951,000) over the similar period ended December 31,
1997. This increase was mainly due to increased bank borrowings for the period
offset by lower interest rates during the period ended December 31, 1998.
Other operating expenses increased $23,000 when compared with the similar
period ended December 31, 1997. This increase was mainly due to increases in
non-related legal fees and other fees which were part of the Company's new
listing on NASDAQ, offset by a decrease ($101,000) in bad debt expense.
Results of Operations
For the Three Months ended December 31, 1998 and 1997.
Total investment income. Elk's investment income for the three months ended
December 31, 1998 increased to $1,347,000 from $1,067,000 or (26%) for the three
month period ended December 31, 1998 and December 31, 1997. This increase was
mainly due to an increase in the loan portfolio during the fiscal year. The
portfolio increased from $34,130,000 as of December 31, 1997 to $47,674,000 as
of December 31, 1998, as part of the Company's strategy to maximize shareholder
rate of return by use of bank debt.
Operating Expenses
Interest expense for the three month period ended December 31, 1998
increased $157,000 ($618,000 from $461,000) over the similar period ended
December 31, 1997. This increase was mainly due to increased bank borrowings for
the period offset by lower interest rates during the period ended December 31,
1998.
-13-
<PAGE>
Other operating expenses decreased $128,000 when compared with the similar
period ended December 31, 1997. This decrease was mainly due to a decrease in
bad debt expenses which was $20,000 as of December 31, 1998 versus $150,000 for
the similar period ended December 31, 1997.
Balance Sheet and Reserves
Total assets increased $5,713,000 as of December 31, 1998 when compared
with the balance sheet as of June 30, 1998. This increase was due to
management's decision to expand its portfolio in the Chicago Medallion Market
plus increases in the diversified loan portfolio. This expansion was financed by
additional bank debt, $5,565,000, in this six month period.
Year 2000 Compliance
The Company has been taking steps to address and prevent problems in
connection with the year 2000 ("Y2K"). Such problems are expected to occur due
to the inability of systems to properly recognize and process date-sensitive
information relating to the Y2K and beyond. Y2K issues may affect the Company's
information technology systems ("IT") and non-information technology systems
("Non-IT").
The Company is a Small Business Investment Company licensed by the Small
Business Administration and as such, most of its business is making loans and
investments to small business concerns. The following are the IT systems that
the Company utilizes:
The Company uses a computer program to track its receivable loans
("Loan Track"). To address Y2K, approximately one year ago, the Company
engaged the consultant who originally developed Loan Track for the Company,
to test, upgrade and certify Loan Track as Y2K- compliant. The consultant
completed all of such tasks and the Y2K-compliant Loan Track program is now
in use in the Company's regular operations. The Company also utilizes the
standard Peachtree accounting system for general in-house accounting
functions. The version of Peachtree, currently in use by the Company, has
been upgraded to be Y2K-compliant.
The Company also utilizes other industry-wide programs such as Windows
95 and Word Perfect. It is expected that either the current versions are
Y2K-compliant or that Y2K-compliant upgrade versions will be obtained in
the near future. In addition, during the past twelve months and at present,
the Company has been replacing or upgrading its computer hardware with
equipment that will be Y2K-compliant.
Non-IT systems have been defined as embedded technology such as
micro-controllers which may be included in elevators and other equipment and
machinery. Most of the Company's Non-IT systems consist of office equipment. The
Company has inventoried its Non-IT systems and is in the process of contacting
its office equipment and telecommunications suppliers and landlord to determine
the status of their Y2K readiness. The Company does not believe that it faces
material Y2K issues with respect to its Non-IT systems.
Costs in connection with Y2K compliance have been (i) to review and upgrade
existing IT systems; (ii) to analyze Y2K readiness of its banks and customers
and (iii) to analyze Non-IT Y2K compliance. To date such costs, have aggregated
approximately $10,000 and for the most part have been for IT review and
upgrades. Such costs are being treated as expenses. The Company expects to spend
approximately $25,000 to replace certain hardware during the fiscal year ending
June 30, 1999 and that the cost of such replacements will be capitalized and
depreciated over a five year period. The Company also expects to spend an
additional $5,000 - $10,000 on a survey of its remaining miscellaneous software
to determine its Y2K compliance and that this expenditure will be treated as an
expense. The Company does not believe that other costs associated with Y2K
compliance will be material or that they will have a material effect on the
Company's financial condition.
The Company is dependent on banks for financing and for normal banking
operations. In surveying Y2K readiness, the Company has received oral and is in
the process of obtaining written assurances from its banks that
-14-
<PAGE>
they are taking the actions necessary to be Y2K-compliant so that neither the
banks' nor their customers' business will be interrupted due to Y2K
difficulties.
The Company's portfolio companies are taxi-cab and taxi-medallion owners
and other small businesses, which, to the best of the Company's knowledge, use
computer equipment and software only to a limited extent in the operation of
their businesses. The Company is in the process of surveying its customers to
assess their potential Y2K exposure and to confirm that they are making
arrangements for their own Y2K compliance.
To date the Company has attempted to comply fully with Y2K compliance
requirements and is in the process of determining the compliance of its banks
and customers. Failure of third parties or the Company to adequately address
their respective Y2K issues could have a material adverse effect on the
Company's financial condition or results of operations. However, given the
nature of its portfolio companies and the industries in which they operate the
Company anticipates that few of its customers would actually suffer material
adverse effects from Y2K. The Company believes that its reasonably likely worst
case scenario is (i) a material increase in the Company's credit losses due to
Y2K problems affecting the Company's portfolio companies and its banks and (ii)
disruption in financial markets causing liquidity stress to the Company.
At this point the Company's management is unable to quantify the amount of
potential losses and disruptions due to Y2K issues, but is in the process of
developing a contingency plan.
-15-
<PAGE>
PART II
OTHER INFORMATION
ITEM 5. OTHER INFORMATION
The Company plans to enter into an Agreement and Plan of Share Exchange
(the "Share Exchange Plan") with Ameritrans Capital Corporation, a newly-formed
Delaware corporation ("Ameritrans") that will also elect to become a BDC.
Pursuant to the Share Exchange Plan, each outstanding share of the Company's
Common Stock would vest in Ameritrans, whereby the Company would become a
wholly-owned subsidiary of Ameritrans, and the holders of all the outstanding
shares of Common Stock of the Company would become the stockholders of
Ameritrans and receive one share of Ameritrans for each share of the Company
owned. Ameritrans has filed a Registration Statement on Form N-14 (File No.
333-63951) in connection with a proposed share exchange between Ameritrans and
Elk. For additional information regarding the Share Exchange Plan, see the
Company's Report on Form 10-Q for the Quarterly Period Ended September 30, 1998.
On January 12, 1999 the Company's Board of Directors appointed two new
directors, John Laird and Howard Sommer, to serve until the 1999 annual meeting
of shareholders or until their successors are otherwise elected.
Mr. Laird has been a private investor since 1994, when he retired from
Shearson Lehman Brothers Inc. He has served as President and Chief Executive
Officer of the Shearson Lehman Brothers Division of Shearson Lehman Brothers
Inc., Chairman and Chief Executive Officer of The Boston Company, Inc. and as a
member of the Executive Committee for Shearson Lehman Brothers Inc. Prior to
joining The Boston Company, Mr. Laird spent 12 years with American Express in
various roles including Senior Vice President and Treasurer. He is also a member
of the Corporate Advisory Committee of the Museum of Fine Arts in Boston and the
Board of Overseers for the Boston Symphony Orchestra. Mr. Laird received his
B.S. in finance and M.B.A. from Syracuse University and attended the Advanced
Management Program at Harvard Business School.
Mr. Sommer has been President and Chief Executive Officer of New York
Community Investment Company L.L.C. (NYCIC), an equity investment fund providing
long-term capital to small businesses throughout the State of New York, since
1995. Prior to NYCIC, he was President of Fundex Capital Corporation, President
of U.S. Capital Corporation, worked in management consulting and held various
positions at IBM and Xerox Corporations. Mr. Sommer was also a member of the
Board of Directors for the National Association of the Small Business Investment
Company (NASBIC), serving on its executive committee and as Chairman of the
Board. He received his B.S. in electrical engineering from City College of New
York and attended the Graduate School of Business at New York University.
Also on January 12, 1999 the Company's Board of Directors granted options
for the purchase of a total of 100,000 shares of the common stock of the
Company, $.01 par value, as set forth below, to the following officers and
directors who are also employees of the Company pursuant to the 1998 Incentive
Stock Option Plan. Such plan is exhibit 10.1 to this form.
<TABLE>
<CAPTION>
Number of Purchase
Name Title Shares Price Total
- ---- ----- --------- -------- -----
<S> <C> <C> <C> <C>
Gary C. Granoff President, Director, 30,000 $9.76 5 years
Principal Stockholder
Ellen M. Walker Vice President, Director 20,000 $8.88 10 years
Lee A. Forlenza Vice President, Director 17,500 $8.88 10 years
Steven Etra Director 17,500 $8.88 10 years
Margaret Chance Secretary 10,000 $8.88 10 years
Silvia Mullens Vice Presient 5,000 $8.88 10 years
</TABLE>
-16-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1(a) Certificate of Incorporation, as amended through February 27,
1997. Filed as Exhibit 4.1 to the Company's Registration Statement
on Form 8-A and incorporated by reference herein.
3.1(b) Form Certificate of Amendment of Certificate of Incorporation, as
approved by the shareholders of the Company at the Annual Meeting
of Shareholders on September 28, 1998 to be filed in New York
State upon receipt of approval by the U.S. Small Business
Administration. Filed as Exhibit 1 to the 1998 Proxy Statement of
the Company and incorporated by reference herein.
3.2 By-Laws. Filed as Exhibit 4.2 to the Company's Registration
Statement on Form 8-A and incorporated by reference herein.
10.1 1998 Incentive Stock Option Plan. Filed as Exhibit 2 to the 1998
Proxy Statement of the Company and incorporated by reference
herein.
10.2 Non-Employee Director Plan. Filed as Exhibit 3 to the 1998 Proxy
Statement of the Company and incorporated by reference herein.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the fiscal quarter ended
December 31, 1998.
-17-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ELK ASSOCIATES FUNDING CORPORATION
Date: February 16, 1999 By:/s/ Gary C. Granoff
--------------------------------
Gary C. Granoff
Chief Financial Officer
(Principal Financial Officer and
Chief Accounting Officer)
-18-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 743,481
<SECURITIES> 0
<RECEIVABLES> 47,673,884
<ALLOWANCES> (305,000)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 340,422
<DEPRECIATION> 245,416
<TOTAL-ASSETS> 51,113,335
<CURRENT-LIABILITIES> 37,404,396
<BONDS> 0
0
0
<COMMON> 13,708,939
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 51,113,465
<SALES> 0
<TOTAL-REVENUES> 2,694,948
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 891,234
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,192,115
<INCOME-PRETAX> 611,599
<INCOME-TAX> (293)
<INCOME-CONTINUING> 611,892
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 611,892
<EPS-PRIMARY> .351
<EPS-DILUTED> .351
</TABLE>
