<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 1999
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 of Incorporation) (IRS Employer Identification No.)
747 THIRD AVENUE, NEW YORK, NEW YORK 10017
(Address of principal executive offices) (Zip Code)
(212) 355-2449
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X].
<PAGE>
The approximate aggregate market value of common equity held by
non-affiliates of the Registrant as of September 27, 1999 was approximately
$10,872,434, based on the last sale price of the Registrant's Common Stock on
the Nasdaq SmallCap Market as of the close of business on September 27, 1999.
There were 1,745,600 shares of the Registrant's Common Stock outstanding as of
September 27, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of the Registrant's Annual Report on Form 10-K for the fiscal
year ended June 30, 1999, as filed on September 28, 1999 (the "Elk Form 10-K")
incorporated by reference certain portions of the Registrant's Definitive Proxy
Statement for its 1999 Annual Meeting of Shareholders originally scheduled to be
held on November 18, 1999, which Definitive Proxy Statement was expected to be
filed with the Securities and Exchange Commission not later than 120 days after
the Registrant's fiscal year-end of June 30, 1999. Such Annual Meeting having
been tentatively rescheduled for December 10, 1999 and such Definitive Proxy
Statement not having been filed, the information required by Part III of Form
10-K is included in this Form 10-K/A.
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<PAGE>
This amendment on Form 10-K/A to the Elk Form 10-K contains (i) a correction of
Elk's state of incorporation on the Cover page; (ii) the information required by
Part III of Form 10-K; and (iii) a replacement of the Consolidated Financial
Statements, revised to correct typographical errors in the first paragraph of
Note 6 -- Notes Payable to Banks and paragraph (b) of Note 15 - Subsequent
Events.
FORM 10-K/A -- TABLE OF CONTENTS
Page
----
PART III ................................................................ 4
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..... 4
ITEM 11. EXECUTIVE COMPENSATION................................. 7
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT............................................. 12
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......... 15
CONSOLIDATED FINANCIAL STATEMENTS........................................ 16
SIGNATURE................................................................ 17
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<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the
directors and executive officers of Elk:
Name Position
- ---- --------
Gary C. Granoff(1)(2) President and Chairman of Board of Directors
Ellen M. Walker(1)(2) Vice President, General Counsel and Director
Lee A. Forlenza(1)(2) Vice President and Director
Steven Etra Vice President and Director
Margaret Chance(2) Secretary
Silvia M. Mullens(2) Vice President
Marvin Sabesan Director
Paul Creditor Director
Allen Kaplan Director
John L. Acierno Director
John R. Laird Director
Howard F. Sommer Director
- -------------
(1) Ellen M. Walker, Gary C. Granoff and Lee A. Forlenza are officers and
shareholders in the law firm of Granoff, Walker & Forlenza, P.C. See
"Item 13. Certain Relationships and Related Transactions."
(2) Gary C. Granoff, Ellen M. Walker, Lee A. Forlenza, Margaret Chance, and
Silvia Mullens are each "interested persons" with respect to Elk, as
such term is defined in the 1940 Act.
Gary C. Granoff, age 51, has been President and a director of Elk since
its formation in July 1979 and Chairman of the Board of Directors since December
1995, and he has been President and a director of Ameritrans since its
formation. Mr. Granoff has been a practicing attorney for the past twenty-six
years and is presently an officer and stockholder in the law firm of Granoff,
Walker & Forlenza, P.C. Mr. Granoff is a member of the bar of the State of New
York and the State of Florida and is admitted to the United States District
Court of the Southern District of New York. Mr. Granoff is also President and
the sole stockholder of GCG Associates, Inc. ("GCG"), Elk's former investment
adviser. He has served as President and the sole stockholder of Seacrest
Associates, Inc., a hotel operator, since August 1994. Mr. Granoff has also been
President and a director since June 1996 of Gemini Capital Corporation
("Gemini"), a company primarily engaged in the business of making consumer
loans, and he has been a director of Enviro-Clean of America, Inc. since
September 1999. In February 1998, Mr. Granoff was elected to and is presently
serving as a trustee on the Board of Trustees of The George Washington
University. Mr. Granoff holds a
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<PAGE>
Bachelor of Business Administration degree in Accounting and a Juris Doctor
degree (with honors) from The George Washington University.
Ellen M. Walker, age 44, has been a Vice President, General Counsel and
a director of Elk since July 1983 and of Ameritrans since its formation. She was
a director of Elk from July 1983 to August 1994, and has been a director of Elk
since 1995. Ms. Walker has been a practicing attorney for more than 17 years and
she is presently an officer and stockholder in the law firm of Granoff, Walker &
Forlenza, P.C. Ms. Walker is a member of the Bar of the State of New York and
she is admitted to the United States District Court of the Southern District of
New York. Since August 1983 Ms. Walker has been Vice President of GCG. Ms.
Walker has been a director, Vice President and General Counsel of Gemini since
June 1996. Ms. Walker received a Bachelor of Arts degree from Queens College and
obtained her Juris Doctor degree with honors from Brooklyn Law School.
Lee A. Forlenza, age 42, has been a Vice President of Elk since March
1992 and a director of Elk since January 1995, and he has been a Vice President
and a director of Ameritrans since its formation. Mr. Forlenza has been a
practicing attorney since February 1983 and is presently an officer and
stockholder in the law firm of Granoff, Walker & Forlenza, P.C. Since March 1992
Mr. Forlenza has been an investment analyst for GCG. Mr. Forlenza has also been
Vice President, Secretary and a director of Gemini since June 1996. Mr. Forlenza
was Vice President of True Type Printing, Inc. from 1976-1995 and has been
President since May 1995. From 1983 through 1986 Mr. Forlenza was an attorney
with the SBA. Mr. Forlenza graduated Phi Beta Kappa from New York University and
obtained his Juris Doctor degree from Fordham University School of Law.
Steven Etra, age 50, has been a Vice President of Elk since January
1999 and a director of Elk since November 1995, and he has been a Vice President
and a director of Ameritrans since its inception. Mr. Etra has been Sales
Manager since 1975 of Manufacturers Corrugated Box Company, a company owned by
Mr. Etra's family for more than 75 years. Mr. Etra has also been a director of
Gemini since June 1996 and has been a director of Enviro-Clean of America, Inc.
since January 1999. Mr. Etra has extensive business experience in investing in
emerging companies.
Silvia Maria Mullens, age 48, has been a Vice President of Elk since
1996 and the Loan Administrator of Elk since February 1994, and she has been a
Vice President of Ameritrans since its inception. Prior to joining Elk, she was
the Legal Coordinator for Castle Oil Corporation from September 1991 through
June 1993 and from June 1993 through January 1994, a legal assistant
specializing in foreclosures in the law firm of Greenberg & Posner. Ms. Mullens
received a B.A. from Fordham University and an M.B.A. from The Leonard Stern
School of Business Administration of New York University.
Margaret Chance, age 45, has been Secretary of Elk and involved in loan
administration since November 1980, and she has been Secretary of Ameritrans
since its inception. Ms. Chance is the office manager of Granoff, Walker &
Forlenza, P.C. and has served as the Secretary of GCG Associates Inc., since
January 1982. Ms. Chance holds a paralegal certificate.
Marvin Sabesan, age 70, has been a director of Elk since July 1982, and
he has been a director of Ameritrans since its inception. Mr. Sabesan has been
employed by Pearl River Textiles, Inc. as an executive since 1990. He was an
Executive Vice President of N.O.L. Inc., a lingerie company, from 1988 to 1990.
Mr. Sabesan was an Executive Vice President of A.J. Schneierson & Son, a
clothing manufacturer from 1971 to 1987.
-5-
<PAGE>
Paul Creditor, age 63, has been a director of Elk since November 1995,
and he has been a director of Ameritrans since its inception. Mr. Creditor has
been a practicing attorney since 1961, engaging in the general practice of law
and specializing in corporate law. From 1974 through 1979 he served as an
elected Judge in Suffolk County, New York. He also served as counsel to the New
York State Constitutional Convention and various State Agencies and Commissions.
Allen Kaplan, age 49, has been a director of Elk since November 1995,
and he has been a director of Ameritrans since its inception. Mr. Kaplan has
been, since November 1987, Vice President and Chief Operating Officer of Team
Systems, Inc., a company which manages and operates more than 200 New York City
Medallion taxicabs. Mr. Kaplan is currently Vice President of the Metropolitan
Taxicab Board of Trade, a trade association consisting of 22 member fleets
representing 1,200 New York City medallions.
John L. Acierno, age 41, has been a director of Elk since October 1997,
and he has been a director of Ameritrans since its inception. Mr. Acierno has
served as president of Executive Charge Inc. and its affiliated companies for
the last ten years. During that time, Executive Charge Inc. has become the
largest executive sedan operation in the United States with over 1,100 vehicles
servicing the greater New York Metropolitan area. His background includes
practicing law as a labor attorney for Proskauer Rose and serving as counsel for
R.H. Macy & Co. Mr. Acierno was the founder, and served as president for six
years, of the Black Car Assistance Corporation, the organization which serves as
the New York black car industry association. He was named International Taxicab
and Limousine Association Premium Service Operator of the Year for 1996. Mr.
Acierno graduated Phi Beta Kappa from Tufts University, and Cum Laude from
Cornell Law School.
John R. Laird, age 57, has been a director of Elk since January 1999,
and he has been a director of Ameritrans since its inception. Mr. Laird has been
a private investor since 1994, when he retired from Shearson Lehman Brothers
Inc. ("Shearson"). Mr. Laird served as President and Chief Executive Officer of
Shearson Lehman Brothers Division of Shearson and as a member of the Shearson
Executive Committee from 1992 to 1994. Mr. Laird was also Chairman and Chief
Executive Officer of The Boston Company, a subsidiary of Shearson, from 1990
until its sale by Shearson in 1993. From 1977 to 1989, Mr. Laird was employed by
American Express in various capacities including Senior Vice President and
Treasurer. He also is and has been a member of boards of various cultural and
philanthropic organizations, including, but not limited to, the Corporate
Advisory Committee of the Boston Museum of Fine Arts and the Board of Overseers
for the Boston Symphony Orchestra. Mr. Laird received a B.S. in finance and an
M.B.A. from Syracuse University and attended the Advanced Management Program at
Harvard Business School.
Howard F. Sommer, age 59, has been a director of Elk since January
1999, and he has been a director of Ameritrans since its inception. Mr. Sommer
has been President and Chief Executive Officer of New York Community Investment
Company L.L.C., an equity investment fund providing long-term capital to small
business throughout the State of New York, since 1995. He has also been a
director of York Research Corp. since September 1997. Mr. Sommer was President
of Fundex Capital Corporation from 1978 to 1995, and Executive Vice President of
U.S. Capital Corporation from 1973 to 1995 and of Liberty Financial Corp. from
May 1994 through September 1995. He worked in management consulting from 1971
to 1973, and held various positions at IBM and Xerox Corporations.
-6-
<PAGE>
Compliance with Section 16(a) of the 1934 Act
Section 16(a) of the Securities Exchange Act of 1934 (the "1934 Act")
requires Elk's officers and directors, and persons who own more than 10% of
Elk's Common Stock, to file initial reports of beneficial ownership and changes
in beneficial ownership with the SEC and to furnish Elk with copies of all
reports filed.
Based solely on a review of the forms furnished to Elk, or written
representations from certain reporting persons, Elk believes that all persons
who were subject to Section 16(a) in fiscal 1999 complied with the filing
requirements.
Committees of the Board and Meeting Attendance.
The Audit Committee is comprised of Paul Creditor, John Acierno, and
Gary Granoff. The function of the Audit Committee is to review the internal
accounting control procedures of Elk, review the consolidated financial
statements of Elk and review with the independent public accountants the results
of their audit.
The 1998 Employee Plan Committee consists of Messrs. Sabesan, Kaplan,
Creditor, and Acierno. The function of the 1998 Employee Plan Committee is to
administer Elk's 1998 Employee Plan.
The Holding Company Committee consists of Steven Etra and Lee Forlenza.
The purpose of the Holding Company Committee is to oversee the formation and
capitalization of, and the transactions with, Ameritrans.
The Board of Directors does not have standing nominating or
compensation committees. The Board of Directors held four formal meetings during
fiscal 1999. Mr. Acierno attended 25% of the Board meetings and all committee
meetings, Mr. Kaplan attended 50% of the Board meetings and all committee
meetings, and each other director attended 100% of the meetings of the Board of
Directors and all committees of the Board on which he or she served.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain compensation information for the
fiscal year ended June 30, 1999 for Elk's (i) Chief Executive Officer and (ii)
Elk's four most highly compensated executive officers, other than the Company's
Chief Executive Officer, whose total annual salary and bonus exceed $100,000
(the "Named Executive Officers").
Officers' salaries constitute a major portion of Elk's total
"management fee compensation," which must be approved by the SBA. The SBA has
approved total officer and employee compensation of $648,000 for Elk for fiscal
1999. This amount includes officers' salaries, other salaries, and employee
benefits.
-7-
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
(Shares of Common
Other Annual Stock issuable upon
Name and Principal Position Salary($) Bonus($) Compensation($) exercise of options)
- --------------------------- --------- -------- --------------- --------------------
<S> <C> <C> <C> <C>
Gary C. Granoff, President and 225,712 44,000(1) 30,000(3)
Chairman of the Board of Directors
Ellen M. Walker, Vice President, 103,917 15,000(2) 20,000(3)
General Counsel and Director
Long Term
Compensation
(Shares of Common
Stock issuable upon
Directors Fees($) exercise of options)
----------------- --------------------
Lee A. Forlenza, Vice President and 51,750(4) 17,500(3)
Director
Steven Etra, Vice President and 5,000(5) 17,500(3)
Director
Marvin Sabesan, Director 5,000 5,556(6)
Paul Creditor, Director 5,000 5,556(6)
Allen Kaplan, Director 5,000 5,556(6)
John L. Acierno, Director 3,500 5,556(6)
John R. Laird, Director 3,250
Howard F. Sommer 3,250
</TABLE>
- -----------
(1) Consists of $20,000 of reimbursed expenses and a $24,000 contribution
to Elk's Simplified Employee Pension Plan ("SEP").
(2) Consists of a $15,000 contribution to the SEP.
(3) Consists of shares issuable upon the exercise of options granted under
Elk's 1998 Employee Incentive Stock Option Plan (the "1998 Employee
Plan").
(4) Includes $45,000 of salary and a $6,750 contribution to the SEP paid to
Mr. Forlenza in his capacity as an officer of Elk.
(5) Includes $2,500 of salary paid to Mr. Etra in his capacity as an
officer of Elk and $2,500 of director's fees paid to Mr. Etra prior to
his appointment as an officer of Elk
(6) Consists of shares issuable upon the exercise of options granted under
Elk's 1998 Non-Employee Director Stock Option Plan (the "1998 Director
Plan").
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<PAGE>
No cash bonuses were paid to any officers in fiscal 1999. Salary
increases were authorized for Gary C. Granoff ($15,000), Ellen M. Walker
($10,000) and Lee A. Forlenza ($5,000), effective July 1, 1999. The other
officers are receiving, in the aggregate, the same compensation from Elk and/or
Ameritrans as was paid by Elk as of the end of the fiscal year ended June 30,
1999. However, if the Share Exchange is completed, it is anticipated that future
compensation will be allocated between Elk and Ameritrans, based upon factors
determined by their respective Boards of Directors. The Boards of Directors may
increase such compensation, in the form of salary increases or bonuses, for the
fiscal year ending June 30, 2000.
Elk has a policy of paying its directors who are not employees fees of
$750 for each meeting attended. Elk pays each non-affiliated director a minimum
fee of $2,000 per year in addition to the fees paid for each meeting attended.
Eligible non-employee directors are entitled to participate in Elk's 1998
Director Plan. The non-employee directors receive no other compensation for
their services to Elk.
Employee directors of Elk are eligible to participate in Elk's
Simplified Employee Pension Plan and its 1998 Employee Plan. Elk does not
provide any other pension or retirement plan with respect to its directors or
employees.
The following table sets forth certain information regarding options
granted during the fiscal year ended June 30, 1999 by Elk to the following Named
Executive Officers:
<TABLE>
<CAPTION>
Option Grants -- Individual Grants
Potential Realizable
Number of Percent of Value at Assumed
Securities Total Options Annual Rates of Stock
Underlying Granted to Exercise Price Appreciation for
Options Employees in Price Expiration Option Term(2)
Name Granted(#) Fiscal Year ($/share)(1) Date 5%($) 10%($)
- ---- ---------- ------------- ------------ ---------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Gary C. Granoff 30,000 30.0% 9.77 1/11/04 47,400 136,800
Ellen M. Walker 20,000 20.0% 8.88 1/11/09 112,400 284,400
Aggregated Option Exercises in the Last Fiscal Year and Year-End Option Values
Unexercised Value of In-The-
Shares Acquired Options at Year Money Options at
Name on Exercise End Year End(1)
- ---- --------------- --------------- -----------------
Gary C. Granoff 0 30,000 $51,000
Ellen M. Walker 0 20,000 $40,400
</TABLE>
- --------------
(1) All the options are currently exercisable.
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<PAGE>
Report of the Board of Directors as to Compensation Matters
The objectives of Elk's executive compensation program are to establish
compensation levels designed to enable Elk to attract, retain and reward
executive officers who contribute to the long-term success of Elk so as to
enhance stockholder value. The Board of Directors makes decisions each year
regarding executive compensation, including annual base salaries and bonus
awards, and the 1998 Employee Plan Committee, consisting of non-interested
directors, will make decisions each year regarding stock option grants. Option
grants are key components of the executive compensation program and are intended
to provide executives with an equity interest in Elk so as to link a meaningful
portion of the compensation of Elk's executives with the performance of Elk's
Common Stock. This report is submitted by the full Board of Directors and
addresses the compensation policies for fiscal 1999 as they affected Gary C.
Granoff, in his capacity as the Chief Executive Officer of the Company, as well
as each of Elk's other officers.
Compensation Philosophy
Elk's executive compensation philosophy is based on the belief that
competitive compensation is essential to attract, motivate and retain highly
qualified and industrious employees. Elk's policy is to provide total
compensation that is competitive for comparable work and comparable corporate
performance. The compensation program includes both motivational and
retention-related compensation components. Bonuses may be included to encourage
effective performance relative to current plans and objectives. Stock options
are included to help retain productive people and to more closely align their
interests with those of stockholders.
In executing its compensation policy, Elk seeks to relate compensation
with Elk's financial performance and business objectives, reward high levels of
individual performance and tie a significant portion of total executive
compensation to both the annual and long-term performance of Elk. While
compensation survey data are useful guides for comparative purposes, Elk
believes that a successful compensation program also requires the application of
judgment and subjective determinations of individual performance, and to that
extent the Board of Directors applies judgment in reconciling the program's
objectives with the realities of retaining valued employees.
Executive Compensation Program
Annual compensation for Elk's executives consists of two principal
elements: cash compensation, consisting of salaries and bonuses, and stock
options.
Cash Compensation
In setting the annual base salaries for Elk's executives, the Board of
Directors reviews the aggregate salary and bonus compensation for individuals in
comparable positions with other companies, including competitors of Elk, and
adjusts such amounts to reflect individual performance. Many of these companies
are specialty finance companies. Elk also regularly compares the salary levels
of its executive officers with other leading companies.
Increases in annual base salary are based on a review and evaluation of
the performance of the activity for which the executive has responsibility, the
impact of that activity on Elk and the skills
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<PAGE>
and experience required for the job, coupled with a comparison of these elements
with similar elements for other executives both inside and outside Elk.
Cash bonuses are tied directly to Elk's financial performance and the
contribution of the executive to such performance.
Equity Ownership
Executive officer compensation also includes long-term incentives
afforded by options to purchase shares of Common Stock. The purposes of Elk's
stock ownership program are to (i) highlight and reinforce the mutuality of
long-term interests between employees and the stockholders and (ii) to assist in
the attraction and retention of critically important key executives, managers
and individual contributors who are essential to Elk's growth and development.
Elk's stock option plans were adopted in 1998. The purpose of these
plans is to orient Elk's executive officers and non-employee directors to longer
term success. The options granted to date under the 1998 Employee Plan were
granted to persons who had been associated with Elk for at least five (5) years
and, consequently, were immediately vested in full. Options granted in the
future under the 1998 Employee Plan (or the Ameritrans 1999 Employee Plan, if
the Share Exchange is completed) may be immediately vesting or may vest of a
period of years after the date of grant. If employees leave Elk before then end
of these vesting periods, they would forfeit the unvested portions of these
awards.
The number of shares of Common Stock subject to option grants under the
1998 Employee Plan is generally intended to reflect the significance of the
executive's current and anticipated contributions to Elk. The exercise price of
options granted by the Company is required under the 1940 Act to equal not less
than 100% of the fair market value per share on the date of grant (110% for
options granted to any holder of 10% or more of Elk's outstanding Common Stock).
Prior to determining the 1999 option grants to Elk's executives, the Board of
Directors considered the equity compensation policies of competitors and other
companies, both privately held and publicly traded, with comparable
capitalizations. The value realizable from exercisable options is dependent upon
the extent to which Elk's performance is reflected in the price of Elk's Common
Stock at any particular point in time. However, the decision as to whether such
value will be realized through the exercise of an option in any particular year
is primarily determined by each individual within the limits of the vesting
schedule and not by the Board of Directors.
The grant of options under the 1998 Director Plan and the Ameritrans
1999 Director Plan is automatic.
Simplified Employee Pension Plan
In 1996, Elk adopted a simplified employee pension plan covering all
eligible employees of Elk. Contributions to the plan are at the discretion of
the Board of Directors. During the fiscal year ended June 30, 1999,
contributions amounted to $64,137.
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<PAGE>
Gary C. Granoff's Fiscal 1999 Compensation
The Board of Directors has set Gary C. Granoff's total annual
compensation at a level it believes to be competitive with the chief executive
officers of similarly capitalized specialty finance companies. Gary C. Granoff,
in his capacity as Chief Executive Officer, is eligible to participate in the
same executive compensation program available to Elk's other senior executives.
Interlocks and Insider Participation
Elk does not currently have a compensation committee, and the Board of
Directors as a whole considers executive compensation matters. Each of Messrs.
Granoff, Forlenza and Etra and Ms. Walker, all of whom are executive officers
and directors of Elk, is an "interested person" as such term is defined in
Section 2(a)(19) of the 1940 Act.
Stock Performance Graph
Although Elk's Common Stock is listed on the Nasdaq SmallCap Market
since June 1988 and traded in the over-the-counter market prior to that time,
trading in Elk's Common Stock has been extremely limited, making it difficult to
meaningfully compare the performance of Elk's Common Stock to that of other
similar companies or a broad market index. Therefore, Elk has not included a
stock performance graph.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information as to (i) those
persons who, to Elk's knowledge, owned 5% or more of its outstanding Common
Stock as of June 30, 1999, (ii) each of Elk's directors, and (iii) all of Elk's
officers and directors as a group. Except as set forth below, the address of
each person listed below is the address of Elk.
<TABLE>
<CAPTION>
Shares of Common
Stock Beneficially Percentage of Outstanding
Name Owned Common Stock Owned
- ---- ------------------- --------------------------
<S> <C> <C>
*Gary C. Granoff 350,708(1) 19.0%
*Ellen M. Walker 57,374(2) 3.1%
*Lee A. Forlenza 48,095(3) 2.6%
Steven Etra 133,016(4) 7.2%
55-25 58th Street
Maspeth, NY
Marvin Sabesan 84,417(5) 4.8%
c/o Pearl River Textiles, Inc.
57 West 38th Street
New York, NY
</TABLE>
-12-
<PAGE>
<TABLE>
<CAPTION>
Shares of Common
Stock Beneficially Percentage of Outstanding
Name Owned Common Stock Owned
- ---- ------------------- --------------------------
<S> <C> <C>
Paul Creditor 7,556(6) **
747 Third Avenue, Suite 4C
New York, NY
Allen Kaplan 10,556(7) **
c/o Team Systems, Inc.
30-17 40th Avenue
Long Island City, NY
John L. Acierno 5,556(8) **
c/o Executive Charge, Inc.
1440 39th Street
Brooklyn, NY
John R. Laird 100 **
481 Canoe Hill Road
New Canaan, CT
Howard F. Sommer ---- **
New York Community Investment
Co., LLC
120 Broadway
New York, NY
Dan M. Granoff 155,979(9) 8.9%
Children's Hospital
Oakland Research Institute
747 52nd Street
Oakland, CA
Alexander Nash 103,750(10) 5.9%
20 West Lincoln Avenue
Valley Stream, NY
Paul D. Granoff 143,179(11) 8.2%
c/o Rush-Copley Medical Center
1900 Ogden Avenue
Aurora, IL
All Officers and Directors as a 726,890(12) 38.9%
group (12 persons)
</TABLE>
- -----------
* Gary C. Granoff, Ellen Walker, and Lee A. Forlenza are each "interested
persons" with respect to Elk, as such term is defined in the 1940 Act.
** Less than 1%.
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<PAGE>
(1) Excludes (i) 24,933 shares owned directly or indirectly by Mr.
Granoff's wife, as to which he disclaims beneficial ownership and (ii)
10,500 shares owned by one of Mr. Granoff's sons, as to which shares he
does not exercise any control and disclaims beneficial ownership.
Includes (i) 10,900 shares owned by The Granoff Family Foundation, a
charitable foundation of which Mr. Granoff and his father, mother, and
brother, Dan M. Granoff, are trustees; (ii) 35,321 shares held by Mr.
Granoff as trustee for his children and other family members; (iii) 261
shares held by GCG Associates Inc., a corporation owned by Mr. Granoff;
(iv) 76,084 shares owned by DAPARY Management Corp., a corporation
controlled by Mr. Granoff and (v) 30,000 shares issuable upon the
exercise of five-year options issued under the 1998 Employee Plan.
(2) Includes (i) 200 shares held by Ms. Walker as custodian for her son;
(ii) 22,800 shares held by various trusts of which Ms. Walker is a
trustee and as to which she disclaims beneficial ownership (Mr. Granoff
retains a reversionary interest in 21,000 of such shares), and (iii)
20,000 shares issuable upon the exercise of ten-year options issued
under the 1998 Employee Plan.
(3) Includes 17,500 shares issuable upon the exercise of ten year options
issued under the 1998 Employee Plan.
(4) Includes (i) 29,022 shares held by Mr. Etra and his wife as joint
tenants; (ii) 27,000 shares held by Mr. Etra's wife; (iii) 1,500 shares
held by Mr. Etra's son; (iv) 10,000 shares held by SRK Associates LLC,
a limited liability company controlled by Mr. Etra, (v) 10,000 shares
held by Lance's Property Development Corp. Pension Plan, of which Mr.
Etra is a trustee and (vi) 17,500 shares issuable upon the exercise of
ten-year options issued under the 1998 Employee Plan.
(5) Includes 21,387 shares held by Mr. Sabesan and his wife as joint
tenants and 28,551 shares held by his wife. Mr. Sabesan disclaims
beneficial ownership as to the 28,551 shares held by his wife. Also
includes 5,556 shares issuable upon the exercise of ten-year options
issued under the 1998 Director Plan.
(6) Includes 5,556 shares issuable upon the exercise of ten-year options
issued under the 1998 Director Plan.
(7) Includes 5,556 shares issuable upon the exercise of ten-year options
issued under the 1998 Director Plan.
(8) Consists of 5,556 shares issuable upon the exercise of ten-year options
issued under the 1998 Director Plan.
(9) Includes (i) 10,900 shares owned by a charitable foundation, of which
N. Henry Granoff, his wife, Jeannette Granoff, Gary C. Granoff and Dr.
Dan M. Granoff are the trustees, and (ii) 2,800 shares held in an IRA
rollover account for the benefit of Dr. Granoff.
(10) Includes (i) 6,500 shares held by Dr. Nash as custodian for his
daughter and (ii) 58,650 shares held by his wife, as to which shares
Dr. Nash disclaims beneficial ownership.
(11) Includes 40,049 shares held by Dr. Paul Granoff directly, 77,630 held
by Granoff Family Partners Ltd. of which Dr. Granoff is a general
partner, and 25,500 shares held by the Granoff Pediatric Associates
Profit Sharing Plan. Excludes 14,127 shares held by Dr. Granoff's wife
as to which shares he disclaims beneficial ownership.
(12) Includes 100,000 shares issuable upon the exercise of 30,000 five-year
and 70,000 ten-year options issued under the 1998 Employee Plan and
22,224 shares issuable upon the exercise of ten-year options issued
under the 1998 Director Plan.
Except pursuant to applicable community property laws or as described
above, each person listed in the table above has sole voting and investment
power, and is both the owner of record and the beneficial owner of his or her
respective shares.
Persons listed above, for as long as they continue to be officers
and/or directors of Elk or to hold 5% percent or more of Elk's outstanding
Common Stock, will be deemed "affiliated persons" of Elk, as such term is
defined in the 1940 Act.
-14-
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Elk pays legal fees, on a fixed or hourly basis, for loan closing
services relating to loans other than New York taxi and radio car loan closings
to Granoff, Walker & Forlenza, P.C. ("Granoff, Walker"), whose stockholders are
officers and directors of Elk. Such services related to New York taxi and radio
car loans are provided by the officers and employees of Elk. Elk paid Granoff,
Walker fees of $62,987 during the fiscal year ended June 30, 1999. Elk generally
charges its borrowers loan origination fees to generate income to offset the
legal fees paid by Elk for loan closing services.
Elk also rents office space from Granoff, Walker and share certain
office expenses with that firm. For the fiscal year ended June 30, 1999, Elk
paid $39,600 in rent and $85,138 in shared overhead expenses. For the year
ending June 30, 2000, Elk has agreed to pay $39,600 in rent and a minimum of
$59,400 in expenses and $22,000 for other shares expenses, which amount is
subject to adjustment if actual expenses vary.
During the fiscal year ended June 30, 1998, Granoff, Walker exercised
an option in its lease, at Elk's request, and rented an additional 1,800 square
feet of office space contiguous with its offices at a below market rent (the
"Additional Space"). Until Elk requires the Additional Space, the law firm
sublets the Additional Space to outside tenants under short-term arrangements.
In the event all or a portion of the Additional Space is vacant, Elk's Board of
Directors has agreed to reimburse the law firm for the additional rent due. The
estimated maximum amount of rent for which Elk would be responsible is $58,000
per year, less any sublet rental income received from the outside tenants. At
present, the Additional Space is fully occupied, thus requiring no reimbursement
payment from Elk, although some liability under the reimbursement obligation may
occur in the future. In the event Elks's operations expand, Elk could occupy all
or part of the Additional Space without the inconvenience and expense of having
to relocate its offices.
-15-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION
INDEX TO FINANCIAL STATEMENTS
ELK ASSOCIATES FUNDING CORPORATION
AND SUBSIDIARY
CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
INDEPENDENT AUDITORS' REPORT ................................................................... F-1
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets at June 30, 1999 and June 30, 1998 .......................................... F-2-3
Statements of Income for the years ended June 30, 1999, 1998 and 1997 ...................... F-4
Statements of Comprehensive Income for the years ended June 30, 1999, 1998 and 1997 ........ F-5
Statements of Stockholders' Equity for the years ended June 30, 1999, 1998 and 1997 ........ F-6-7
Statements of Cash Flows for the years ended June 30, 1999, 1998 and 1997 .................. F-8-9
Schedule of Loans as of June 30, 1999 ...................................................... F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ..................................................... F-11-25
</TABLE>
Note: The Consolidated Financial Statements set forth below are in all
respects identical to the Consolidated Financial Statements contained
in the Elk Form 10-K, as filed September 28, 1999, except that the
first paragraph of "Note 6 -- Notes Payable to Banks" and paragraph (b)
of "Note 15 - Subsequent Events" have been revised to correct
typographical errors.
-16-
<PAGE>
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, 1999 and 1998, and the related
consolidated statements of income, comprehensive income, stockholders' equity
and cash flows for the years ended June 30, 1999, 1998 and 1997 and the schedule
of loans as of June 30, 1999. 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, 1999 and 1998, and
the results of their operations and their cash flows for the years ended June
30, 1999, 1998 and 1997 in conformity with generally accepted accounting
principles.
As explained in Note 1, the consolidated financial statements include loans
valued at $50,723,932 and $41,295,000 as of June 30, 1999 and 1998,
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.
MARCUM & KLIEGMAN LLP
New York, NY
August 11, 1999, except for Note 15(b) as to which is dated August 31, 1999
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
------
1999 1998
----------------------------------
<S> <C> <C>
Loans receivable $51,103,932 $41,590,000
Less: allowance for loan losses (380,000) (295,000)
------------ ------------
50,723,932 41,295,000
Cash and cash equivalents 542,290 1,755,429
Accrued interest receivable 714,626 516,110
Assets acquired in satisfaction of loans 612,491 400,470
Receivables from debtors on sales of assets acquired in
satisfaction of loans 409,939 451,222
Equity securities 909,386 629,179
Furniture, fixtures and leasehold improvements, net 105,440 102,247
Prepaid expenses and other assets 492,697 250,081
----------- -----------
TOTAL ASSETS $54,510,801 $45,399,738
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30,1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
1999 1998
---------------------------------
<S> <C> <C>
LIABILITIES
Debentures payable to SBA $ 8,880,000 $ 8,880,000
Notes payable, banks 31,000,000 22,085,000
Accrued expenses and other liabilities 223,458 204,099
Accrued interest payable 354,918 221,704
Dividends payable 314,208 314,208
----------- -----------
TOTAL LIABILITIES 40,772,584 31,705,011
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value: 3,000,000 shares
authorized; 1,745,600 shares issued and outstanding 17,456 17,456
Additional paid-in-capital 13,197,277 12,485,825
Restricted capital 256,916 968,368
Retained earnings 4,815 24,289
Accumulated other comprehensive income 261,753 198,789
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 13,738,217 13,694,727
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $54,510,801 $45,399,738
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Interest on loans receivable $5,197,667 $4,108,727 $3,660,825
Fees and other income 386,227 497,729 362,970
---------- ---------- ----------
TOTAL INVESTMENT INCOME 5,583,894 4,606,456 4,023,795
---------- ---------- ----------
OPERATING EXPENSES
Interest 2,440,051 1,840,731 1,582,700
Salaries and employee benefits 533,352 495,889 469,060
Legal fees 303,995 336,700 307,127
Miscellaneous administrative expenses 886,995 739,875 604,347
Loss on assets acquired in satisfaction of Loans,
net 11,272 14,649 8,923
Directors' fee 32,375 52,050 27,500
Bad debt expense 146,465 227,748 --
---------- ---------- ----------
TOTAL OPERATING EXPENSES 4,354,505 3,707,642 2,999,657
---------- ---------- ----------
OPERATING INCOME 1,229,389 898,814 1,024,138
---------- ---------- ----------
OTHER INCOME (EXPENSES)
(Write-off) gain of non-cash receivable -- (25,000) 25,000
Net gain (loss) from rental activities 7,200 6,125 (11,233)
Recoveries -- 57,673 11,118
---------- ---------- ----------
TOTAL OTHER INCOME 7,200 38,798 24,885
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 1,236,589 937,612 1,049,023
INCOME TAX (BENEFIT) EXPENSE (769) 3,271 28,676
---------- ---------- ----------
NET INCOME $1,237,358 $ 934,341 $1,020,347
========== =========== ==========
Weighted Average Shares Outstanding
- Basic 1,745,600 1,518,969 1,283,600
========== =========== ==========
- Diluted 1,750,684 1,518,969 1,283,600
========== =========== ==========
Net Income Per Common Share
- Basic $0.71 $0.62 $0.79
===== ===== =====
- Diluted $0.71 $0.62 $0.79
===== ===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------------
<S> <C> <C> <C>
NET INCOME $1,237,358 $ 934,341 $1,020,347
OTHER COMPREHENSIVE INCOME
Unrealized gain on equity securities 62,964 140,548 58,241
---------- ---------- ----------
TOTAL COMPREHENSIVE INCOME $1,300,322 $1,074,889 $1,078,588
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares of Common Additional
Common Stock Stock $0.01 Paid-In Restricted
Outstanding Par Value Capital Capital
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE - July 1, 1996 1,283,600 $12,836 $ 8,179,545 $2,391,268
Transfer of restricted capital -- -- 711,448 (711,448)
Dividends paid -- -- -- --
Net income -- -- -- --
Unrealized gain on equity
securities -- -- -- --
--------- ------- ----------- ----------
BALANCE - June 30, 1997 1,283,600 12,836 8,890,993 1,679,820
Transfer of restricted capital -- -- 711,452 (711,452)
Dividends paid -- -- -- --
Net income -- -- -- --
Unrealized gain on equity
securities -- -- -- --
Proceeds from sale of
common stock, net of direct
costs 462,000 4,620 2,883,380 --
--------- ------- ----------- ----------
BALANCE - June 30, 1998 1,745,600 17,456 12,485,825 968,368
Transfer of restricted capital -- -- 711,452 (711,452)
Dividends declared -- -- -- --
Net income -- -- -- --
Unrealized gain on equity
securities -- -- -- --
--------- ------- ----------- ----------
BALANCE - June 30, 1999 1,745,600 $17,456 $13,197,277 $ 256,916
========= ======= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
[RESTUBED TABLE FOR ABOVE]
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Restricted Other
Retained Retained Comprehensive
Earnings Earnings Income Total
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE - July 1, 1996 $ 317,186 $ -- $ -- $10,900,835
Transfer of restricted capital -- -- -- --
Dividends paid (946,655) -- -- (946,655)
Net income 995,347 25,000 -- 1,020,347
Unrealized gain on equity
securities -- -- 58,241 58,24
----------- -------- -------- -----------
BALANCE - June 30, 1997 365,878 25,000 58,241 11,032,768
Transfer of restricted capital -- -- -- --
Dividends paid (1,300,930) -- -- (1,300,930)
Net income 959,341 (25,000) -- 934,341
Unrealized gain on equity
securities -- -- 140,548 140,548
Proceeds from sale of
common stock, net of direct
costs -- -- -- 2,888,000
----------- -------- -------- -----------
BALANCE - June 30, 1998 24,289 -- 198,789 13,694,727
Transfer of restricted capital -- -- -- --
Dividends declared (1,256,832) -- -- (1,256,832)
Net income 1,237,358 -- -- 1,237,358
Unrealized gain on equity
securities -- -- 62,964 62,964
----------- -------- -------- -----------
BALANCE - June 30, 1999 $ 4,815 $ -- $261,753 $13,738,217
=========== ======== ======== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,237,358 $ 934,341 $ 1,020,347
------------ ------------ -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 63,649 49,890 53,546
Write-off (gain) on non-cash receivable -- 25,000 (25,000)
Increase in accrued interest receivable (198,516) (107,945) (114,078)
Increase in prepaid expenses and other assets (267,071) (30,616) (27,318)
Decrease (increase) in accrued expenses and other
liabilities 19,358 92,096 (28,893)
Increase (decrease) in accrued interest payable 133,214 40,456 (15,204)
------------ ----------- -----------
TOTAL ADJUSTMENTS (249,366) 68,881 (156,947)
------------ ----------- ============
NET CASH PROVIDED BY OPERATING
ACTIVITIES 987,992 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 (9,599,670) (8,177,183) (9,062,902)
Payments for building improvements on assets
acquired in satisfaction of loans -- -- (13,974)
Purchases of equity securities (217,242) (52,450) (243,040)
Acquisition of furniture, fixtures and leasehold
improvements (42,387) (37,468) (18,530)
------------ ----------- -----------
NET CASH USED IN INVESTING
ACTIVITIES (9,859,299) (8,267,101) (9,338,446)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable, banks, net 8,915,000 5,265,000 10,195,000
Payments for loan costs -- -- (15,050)
Proceeds from debentures payable to SBA -- -- 430,000
Repayment of debentures payable to SBA -- -- (408,000)
Net proceeds from sale of common stock -- 2,888,000 --
Dividends paid (1,256,832) (986,724) (946,655)
------------ ----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES $ 7,658,168 $ 7,166,276 $ 9,255,295
------------ ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
For the Years Ended June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------------
<S> <C> <C> <C>
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS $(1,213,139) $ (97,603) $ 780,249
CASH AND CASH EQUIVALENTS - Beginning 1,755,429 1,853,032 1,072,783
----------- ---------- ==========
CASH AND CASH EQUIVALENTS - Ending $ 542,290 $1,755,429 $1,853,032
=========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the years for:
Interest $ 2,306,837 $1,840,276 $1,597,904
Income taxes $ -- $ 8,048 $ 31,260
Noncash investing and financing activities:
Conversion of loans to assets acquired in $ 381,500 $ 26,090 $ 140,914
satisfaction of loans
Exchange of preferred stock for a note resulting $ -- $ -- $ 125,000
in a noncash gain of $25,000
Unrealized gain on equity securities $ 62,694 $ 140,548 $ 58,241
Transfer of restricted capital $ 711,452 $ 711,452 $ 711,448
Declaration of cash dividend $ 314,208 $ 314,208 $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION
AND SUBSIDIARY
SCHEDULE OF LOANS
June 30, 1999
- --------------------------------------------------------------------------------
<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 123 8.25 - 12% 1 - 240 $19,818,871
Radio car service 34 1 - 15% 1 - 59 285,562
Chicago:
Taxi medallion 417 11 - 15% 15 - 84 15,825,539
Boston:
Taxi medallion 25 9.25 - 14% 21 - 60 2,717,995
Miami:
Taxi medallion 38 12 - 18% 100 - 120 1,943,335
Other loans:
Restaurant 2 10 - 12% 1 - 66 243,629
Hairdresser 2 12% 7 97,836
Car wash 1 11.5% 36 214,234
Ambulance service 1 10.5% 6 4,907
Bagel store 1 14% 37 22,123
Dry cleaners 25 9 - 18% 31 - 120 3,657,590
Laundromats 19 10 - 17% 12 - 120 3,951,498
Laundry equipment 1 9.5% 51 170,333
Financial services 1 14% 3 4,980
Black car service (real property) 1 12% 23 196,132
Auto sales 3 10.5 - 13% 1 - 43 477,839
Registered investment advisor 1 14% 3 169,012
Embroidery manufacturer 1 12% 53 84,814
Theater 1 16% 53 166,492
Retirement home 1 15% 78 300,000
Garden center 1 14% 90 431,304
Auto center 1 12% 78 122,536
Construction 1 16% 80 197,371
-----------
Total Loans Receivable 51,103,932
Less: Allowance for loan losses (380,000)
-----------
Loans Receivable, net $50,723,932
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<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 to make business loans.
The Company makes loans to taxi owners, to finance the acquisition and
operation of the medallion taxi businesses and related assets, and to
other small businesses in the New York City, Chicago, Miami, and Boston
markets.
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, 1999 and 1998, approximately 79% and 85% 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
individually evaluates all loans for impairment. See Note 3 for further
discussion.
F-11
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 1 - Organization and Summary of Significant Accounting Policies, continued
Loans Receivable
Loans are placed on nonaccrual status once they become 180 days past
due as to principal or interest. In addition, loans that are not fully
collateralized and in the process of collection are placed on
nonaccrual status when, in the judgement of management, the ultimate
collectibility of interest and principal is doubtful.
Cash and Cash Equivalents
For the purposes of the statement of cash flows, the Company considers
all short-term investments with an original maturity of three months or
less to be cash equivalents.
The Company has cash balances in banks in excess of the maximum amount
insured by the FDIC as of June 30, 1999 and 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 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 1999, 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 SFAS No. 128, "Earnings per Share". 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. At June 30,
1999, the Company had 100,000 options outstanding, of which 30,000
options are considered antidilutive and the remaining 70,000 options
are dilutive and resulted in common stock equivalents of 5,084 shares.
F-12
<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, 1999 and 1998, loan costs amounted to
$129,331 and $153,786, respectively, net of accumulated amortization of
$114,650 and $90,195, respectively. Amortization expense for the years
ended June 30, 1999, 1998 and 1997 was $24,455, $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.
Basis of 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.
Comprehensive Income
During the year ended June 30, 1999, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income". SFAS 130 requires the reporting of
comprehensive income in addition to net income from operations.
Comprehensive income is a more inclusive financial reporting
methodology that includes disclosure of certain financial information
that historically has not been recognized in the calculation of net
income.
Stock-Based Compensation
In October 1995, SFAS No. 123, "Accounting for Stock-Based
Compensation" was issued. SFAS 123 prescribes accounting and reporting
standards for all stock-based compensation plans, including employee
stock options, restricted stock, employee stock purchase plans and
stock appreciation rights. SFAS 123 requires compensation expense
F-13
<PAGE>
- --------------------------------------------------------------------------------
ELK ASSOCIATES FUNDING CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 1 - Organization and Summary of Significant Accounting Policies, continued
Stock-Based Compensation, continued
to be recorded (i) using the new fair value method or (ii) using the
existing accounting rules prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25")
and related interpretations with pro forma disclosure of what net
income and earnings per share would have been had the Company adopted
the new fair value method The Company intends to continue to account
for its stock based compensation plans in accordance with the
provisions of APB 25.
Business Segment
During the year ended June 30, 1999, the Company adopted SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information",
which supersedes SFAS No. 14, "Financial Reporting for Segments of A
Business Enterprise". SFAS No. 131 establishes standards for the way
that public enterprises report information about operating segments in
annual financial statements and requires reporting of selected
information about operating segments in interim financial statements
regarding products and services, geographic areas and major customers.
SFAS No. 131 defines operating segments as components of an enterprise
about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and in assessing performance. The Company has
determined that under SFAS No. 131, it operates in one segment of
financing services. The Company's customers and operations are within
the United States.
Loan Sales and Servicing Fee Receivable
SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" was issued in June 1996.
SFAS 125 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. This
statement also provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are
secured borrowings. It requires that liabilities and derivatives
incurred or obtained by transferors as part of a transfer of financial
assets be initially measured at fair value. SFAS 125 also requires that
servicing assets be measured by allocating the carrying amount between
the assets sold and retained interests based on their relative fair
values at the date of transfer. Additionally, this statement requires
that the servicing assets and liabilities be subsequently measured by
(a) amortization in proportion to and over the period of estimated net
servicing income or loss and (b) assessment for asset impairment or
increased obligation based on their fair values. SFAS 125 also requires
the Company's excess servicing rights be measured at fair market value
and reclassified as interest only receivables and accounted for in
accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". As required by SFAS 125, the Company
adopted in the new requirements effective January 1, 1997.
Implementation of SFAS 125 did not have any material impact on the
financial statements of the Company.
F-14
<PAGE>
- --------------------------------------------------------------------------------
ELK ASSOCIATES FUNDING CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 1 - Organization and Summary of Significant Accounting Policies, continued
New Accounting Pronouncements
In April 1998, Statement of Position ("SOP") 98-5, "Reporting on the
Costs of Start-Up Activities" was issued. This SOP provides guidance on
the financial reporting of start-up costs and organization costs. It
requires the costs of start-up activities and organization costs to be
expensed as incurred. The SOP is effective for financial statements for
fiscal year beginning after December 15, 1998. The Company does not
expect that the adoption of SOP No. 98-5 will have a material impact on
its financial statements.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued and is required to be adopted in years
beginning after June 15, 1999, which has been deferred to June 30,
2000. Management does not anticipate that the adoption of the new
statement will have a significant effect on results of operations or
the financial position of the Company.
NOTE 2 - Assets Acquired in Satisfaction of Loans
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.
<TABLE>
<CAPTION>
Assigned
Radio Mortgage
Real Estate Cars Artwork and Note Total
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance - July 1, 1997 $ 487,483 $ 41,077 $ 53,250 $ -- $ 581,810
Additions 26,090 -- -- -- 26,090
Recoup on sale of assets
previously sold -- 43,376 -- -- 43,376
Sales (192,560) (45,168) -- -- (237,728)
Write-offs (8,078) -- (5,000) -- (13,078)
--------- -------- -------- -------- ---------
Balance - June 30, 1998 312,935 39,285 48,250 -- 400,470
Additions -- -- -- 381,500 381,500
Sales (122,000) (8,044) -- -- (130,044)
Write-offs and payments -- (10,000) (10,000) (19,435) (39,435)
--------- -------- -------- -------- ---------
Balance - June 30, 1999 $ 190,935 $ 21,241 $ 38,250 $362,065 $ 612,491
========= ======== ======== ======== =========
</TABLE>
F-15
<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 $762,000 and $569,000 at June 1999 and 1998 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 June 30, 1999 and 1998 approximately $743,000 and
$546,000 respectively, of these loans were fully collateralized as to
principal and interest. Interest receivable at June 30, 1999 and 1998
totaled approximately $78,000 and $35,000 respectively, for such loans.
The following table sets forth certain information concerning impaired
loans as of June 30, 1999 and 1998:
1999 1998
---------------------------------
Impaired loans with an allowance $ 167,212 $174,952
Impaired loans without an allowance 1,512,456 571,896
---------- --------
Total impaired loans $1,679,668 $746,848
========== ========
Allowance for impaired loans $157,886 $150,626
======== ========
Average balance of impaired loans $1,213,258 $524,101
========== ========
Transactions in the allowance for loan losses are summarized as follows:
Balance - July 1, 1997 $325,000
Recoveries, net (30,000)
--------
Balance - June 30, 1998 295,000
Additions, net 85,000
--------
Balance - June 30, 1999 $380,000
========
F-16
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 4 - Equity Securities
Equity securities consist of the following as of June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Chicago Miami Investment Dry Telecom-
Taxicab Taxicab Advisory Cleaner munications
Medallions Medallions Firm Company Company Total
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance - July 1, 1997 $380,966 $21,215 $20,000 $14,000 $ -- $436,181
Purchase of securities 39,100 5,265 50,000 14,000 -- 108,365
Sale of securities (50,936) (4,979) -- -- -- (55,915)
Unrealized gain 75,297 65,251 -- -- -- 140,548
-------- ------- ------- ------- -------- --------
Balance - June 30, 1998 444,427 86,752 70,000 28,000 -- 629,179
Purchase of securities 128,754 4,102 -- -- 150,000 282,856
Sale of securities (15,613) -- (50,000) -- -- (65,613)
Unrealized gain (loss) 85,897 (22,933) -- -- -- 62,964
-------- ------- ------- ------- -------- --------
Balance - June 30, 1999 $643,465 $67,921 $20,000 $28,000 $150,000 $909,386
======== ======= ======= ======= ======== ========
</TABLE>
At June 30, 1999, the fair value of the Chicago Taxicab Medallions was
increased, resulting in an unrealized gain, and the fair value of the
Miami Taxicab Medallions was decreased resulting in a reduction in the
unrealized gain recorded in prior periods. The fair value of the other
equity securities approximated cost. At June 30, 1998, the fair value
of the Chicago Taxicab Medallions and Miami Taxicab Medallions was
increased resulting in an unrealized gain. The fair value of the other
equity securities approximated cost.
F-17
<PAGE>
Notes to Consolidated Financial Statements
NOTE 5 - Debentures Payable to SBA
At June 30, 1999 and 1998 debentures payable to the SBA consist of
subordinated debentures with interest payable semiannually, as follows:
<TABLE>
<CAPTION>
1999 1998
Current Effective Principal Principal
Issue Date Due Date Interest Rate Amount Amount
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
September 1993 September 2003 6.12 (1) $1,500,000 $1,500,000
September 1993 September 2003 6.12 2,220,000 2,220,000
---------- ----------
(Forward) $3,720,000 $3,720,000
---------- ----------
</TABLE>
F-18
<PAGE>
- --------------------------------------------------------------------------------
ELK ASSOCIATES FUNDING CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 5 - Debentures Payable to SBA, continued
<TABLE>
<CAPTION>
Current 1998
Effective 1999 Principal Principal
Issue Date Due Date Interest Rate Amount Amount
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(Forward) $3,720,000 $3,720,000
September 1994 September 2004 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 was 3.12% from inception through September 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. In addition, the SBA has a junior collateral
interest to the banks' debt. (See Note 6).
NOTE 6 - Notes Payable to Banks
At June 30, 1999 and 1998 the Company had loan agreements with three
(3) banks and four (4) banks for lines of credit aggregating
$35,000,000 and $33,500,000 respectively. At June 30, 1999 and 1998,
the Company had $31,000,000 and $22,085,000 respectively, outstanding
under these lines. The loans, which mature through December 31, 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 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 collateral for the
above lines of credit and was required to maintain compensating
balances of 5% of loan balance outstanding with each individual bank
for the year ended June 30, 1998. The compensating balance requirements
were eliminated during the year ended June 30, 1999.
F-19
<PAGE>
- --------------------------------------------------------------------------------
ELK ASSOCIATES FUNDING CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 7 - Preferred Stock
Pursuant to a preferred stock repurchase agreement dated November 10,
1994, the Company repurchased all cumulative preferred stock from the
SBA for $3.50 per share, or an aggregate $1,915,449. 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 stockholders. The amount restricted under this
agreement at June 30, 1999 and 1998 was approximately $256,000 and
$968,000, respectively.
During 1992, the Company authorized the issuance of 752,729 shares of a
new Series B cumulative preferred stock with a 4 percent dividend and a
$10 par value. All preferred shares are restricted solely for issuance
to the SBA. No sales of the Series B preferred shares have occurred to
date. On September 30, 1996, Congress passed a law that in effect
prevents the SBA from making any further purchase of 4% preferred stock
from any specialized small business investment company.
In September 1998, the stockholders of the Company approved and in
February 1999 the SBA approved 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. This amendment to the
Certificate of Incorporation was filed and became effective on May 21,
1999.
NOTE 8 - Common Stock
For the year ended June 30, 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 direct related expenses of $115,000.
F-20
<PAGE>
- --------------------------------------------------------------------------------
ELK ASSOCIATES FUNDING CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 8 - Common Stock, continued
In September 1998, the stockholders of the Company approved and in
February 1999, the SBA approved an amendment to the Certificate of
Incorporation increasing the total authorized shares of $0.01 par value
common stock to 3,000,000 shares authorized. This amendment to the
Certificate of Incorporation was filed and became effective on May 21,
1999.
On June 28, 1999, the Company declared a cash dividend of $0.18 per
common share, for a total of $314,208 which was paid on July 12, 1999.
NOTE 9 - Income Taxes
The provision for income tax expense (benefit) for the years ended June
30, 1999, 1998 and 1997 consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------------
<S> <C> <C> <C>
Federal $1,689 $(1,014) $ 4,568
State and City (2,458) 4,285 24,108
------- ------- -------
$ (769) $ 3,271 $28,676
======== ======= =======
</TABLE>
The above provision represents income taxes incurred on undistributed
income for the respective years.
NOTE 10 - Related Party Transactions/Commitments
Related Party Transactions
The Company paid $62,987, $43,234 and $43,645 to a related law firm for
the years June 30, 1999,1998 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 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 $39,600 each for the years ended June 30, 1999, 1998 and
1997, respectively. The Company also shares overhead costs and
reimburses for office and salary expenses from this affiliated entity.
Overhead costs and reimbursed office and salary expenses amounted to
$85,138, $81,308 and $51,513 for the years ended June 30, 1999, 1998
and 1997, respectively.
F-21
<PAGE>
- --------------------------------------------------------------------------------
ELK ASSOCIATES FUNDING CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 11 - Commitments and Contingencies
Interest Rate Swap
On June 8, 1998, the Company entered into a $10,000,000 interest rate
Swap transaction with a bank expiring on June 8, 2001. On October 13,
1998, the Company entered into an additional interest rate swap
transaction with the same bank for $5,000,000 expiring on October 8,
2001. These Swap transactions were entered into to protect the Company
from an upward movement in interest rates relating to outstanding bank
debt (see Note 6 for terms and effective interest rates). These Swap
transactions call for a fixed rate of 5.86% and 4.95%, respectively 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.
Interest Rate Cap
At March 20, 1997, the Company was a party to one $5 million notional
interest rate cap. This cap, which expired 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 and recorded as an adjustment to
interest expense. Payments received under this cap would be credited to
interest expense.
Loan commitments
At June 30, 1999 and 1998, the Company had commitments to make loans
totaling approximately $4,058,000 and $2,568,000 respectively, at
interest rates ranging from 8.25% to 18%.
NOTE 12 - 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, 1999, 1998 and 1997, contributions amounted to
$64,137, $63,435 and $58,805, respectively.
F-22
<PAGE>
- --------------------------------------------------------------------------------
ELK ASSOCIATES FUNDING CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 13 - Incentive Stock Option Plan
During September 1998, the Company adopted an employee incentive stock
option plan, an aggregate of 125,000 shares of common stock are
authorized for issuance under the plan. The plan provides that options
may be granted to attract and retain key employees of the Company.
Options granted under the plan are exercisable for periods ranging from
five to ten years. In addition, the option price will be at least
market value or at least 110% of market value of the common stock on
the grant date for employees and stockholders who own more than 5% of
the common stock, respectively. In January 1999, the Company granted
100,000 options to certain key employees at an exercise price ranging
from $8.875 to $9.7625 per share.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of
SFAS 123. The fair market value for these options was estimated at the
date of grant using a Black-Scholes option-pricing model with the
following weighted-average assumptions for the year ended June 30,
1999.
Assumptions
----------------------------------------------------------------------
Risk-free rate 4.68%
Dividend yield 7.5%
Volatility factor of the expected market
price of the Company's common stock 0.49
Average life 8.5 years
The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion,
the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of the options.
The Company's pro forma information for the year ended June 30, 1999 is
as follows:
Pro forma net income $1,035,958
==========
Pro forma net income per share
- basic $0.59
=====
- diluted $0.59
=====
F-23
<PAGE>
- --------------------------------------------------------------------------------
ELK ASSOCIATES FUNDING CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 13 - Incentive Stock Option Plan, continued
The weighted average fair value of options granted during the year
ended June 30, 1999 was $2.01 for shares. The weighted average
remaining contractual life of options exercisable at June 30, 1999 is
7.5 years.
NOTE 14 - 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 SFAS No. 107, "Disclosure about Fair Value of
Financial Instruments".
The estimated fair values of the Company's financial instruments are
derived using estimation techniques based on various subjective factors
including discount rates. Such estimates may not necessarily be
indicative of the net realizable or liquidation values of these
instruments. Fair values typically fluctuate in response to changes in
market or credit conditions. Additionally, valuations are presented as
of a specific point in time and may not be relevant in relation to the
future earnings potential of the Company. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts the
Company will realize in a current market exchange. The use of different
market assumptions and/or estimation methodologies may have a 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%), an investment advisory firm (2%), a dry cleaner (3%),
Miami taxicab medallions (7%) and a Telecommunications Company (17%)
(see Note 4).
Debentures Payable to Small Business Administration - The fair value of
debentures as of June 30, 1999 and 1998 were approximately $8,989,000
and $9,035,000, 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:
F-24
<PAGE>
- --------------------------------------------------------------------------------
ELK ASSOCIATES FUNDING CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 14 - Fair Value of Financial Instruments, continued
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 15 - Subsequent Events
(a) Agreement and Plan of Share Exchange
The Company entered into an Agreement and Plan of Share Exchange with
Ameritrans Capital Corporation, a newly-formed Delaware corporation
("Ameritrans") by the stockholders of the Company, pursuant to which
each outstanding share of common stock of the Company would be
exchanged for one share of common stock of Ameritrans. Pursuant to this
Share Exchange Agreement, the ownership of each outstanding share of
the Company's common stock would automatically vest in Ameritrans and
the holders of the outstanding shares of the Company's common stock
would automatically become entitled to receive one share of Ameritrans'
common stock. This agreement has been approved by the board of
directors of the Company and is subject to approval by the stockholders
of the Company. In addition, Ameritrans has filed Form N-14, a proxy
registration statement under the Securities Act of 1933 with the SEC
and applied for certain "exemptive" orders to permit Ameritrans to act
as a holding company. The SEC is currently reviewing these filings.
(b) Non-Employee Directors Stock Option Plan
On August 31, 1999, the SEC approved a Non-Employee Directors Stock
Option Plan with an aggregate of 75,000 options authorized for
issuance. On this same date, 22,224 options were granted to
non-employee directors with an exercise price to be determined by the
Board of Directors.
F-25
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ Gary C. Granoff
--------------------------------------------
Gary C. Granoff, President, Chief Executive,
Financial and Accounting Officer
Dated: October 28, 1999
-17-
