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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(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)
DELAWARE 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
<PAGE>
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].
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
Portions of the Registrant's Definitive Proxy Statement for its 1999
Annual Meeting of Shareholders to be held on November 18, 1999, which Definitive
Proxy Statement will be filed with the Securities and Exchange Commission not
later than 120 days after the Registrant's fiscal year-end of June 30, 1999, are
incorporated by reference into Part III of this Form 10-K.
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ELK ASSOCIATES FUNDING CORPORATION
1999 FORM 10-K ANNUAL REPORT
Table of Contents
Page
----
PART I ..................................................................... 1
ITEM 1. BUSINESS OF ELK.............................................. 1
ITEM 2. PROPERTIES................................................... 21
ITEM 3. LEGAL PROCEEDINGS............................................ 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 21
PART II .................................................................... 23
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS................................. 23
ITEM 6. SELECTED FINANCIAL DATA...................................... 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.......................... 24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.................................................. 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................. 28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES......................... 28
PART III ................................................................... 29
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........... 29
ITEM 11. EXECUTIVE COMPENSATION....................................... 29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................... 29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............... 29
PART IV .................................................................... 29
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K..................................................... 29
IMPORTANT FACTORS RELATING TO FORWARD-LOOKING STATEMENTS.................... 30
SIGNATURES.................................................................. 31
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PART I
ITEM 1. BUSINESS OF ELK
General
Elk Associates Funding Corporation ("Elk") was formed on July 9, 1979
for the purpose of operating as a Specialized Small Business Investment Company
("SSBIC"), licensed under the Small Business Investment Act of 1958, (the "1958
Act"), and regulated and financed in part by the U.S. Small Business
Administration (the "SBA"). Elk was granted a license to operate as an SSBIC by
the SBA on July 24, 1980, is registered as a closed-end, non-diversified
management investment company under the Investment Company Act of 1940 (the
"1940 Act"), and has elected to be taxed as a "regulated investment company"
under the Internal Revenue Code of 1954, as amended (the "Code") since the
fiscal year ended June 30, 1984. Elk's business has historically been to provide
financing to persons who qualify under SBA regulations as socially or
economically disadvantaged persons or to entities which are at least 50% owned
by such persons ("Disadvantaged Concerns").
The 1958 Act was amended on September 30, 1996, and in connection
therewith, Elk entered into an agreement with the SBA in February 1997, and
amended its Certificate of Incorporation, the effect of which was to convert Elk
from an SSBIC to a Small Business Investment Company ("SBIC"). As such, Elk may
now lend to persons who are not "disadvantaged" so long as Elk's aggregate loans
to Disadvantaged Concerns are at least equal to the remaining amount of Elk's
unamortized Restricted Capital Account (as hereinafter defined) resulting from
the repurchase by Elk of its 3% Preferred Stock from the SBA. The Restricted
Capital Account was $256,916 at June 30, 1999, representing less than 1% of
Elk's loan portfolio of approximately $51,100,000 as of that date.
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As of June 30, 1999, almost 95% of Elk's loans and investments
qualified as loans to Disadvantaged Concerns. As a result of Elk's conversion to
an SBIC, Elk is only required to maintain approximately 1% of its portfolio as
loans to such persons. Accordingly, while Elk intends to continue to make loans
to Disadvantaged Concerns, particularly in connection with the ownership of
taxicabs and related assets in the New York City, Chicago, Boston, and Miami
markets, where many of the borrowers may qualify as Disadvantaged Concerns, Elk
intends to diversify its activities by lending and investing in a broader range
of businesses eligible for investments by SBICs under the 1958 Act ("Small
Business Concerns"), many of which, it is anticipated, may not be Disadvantaged
Concerns.
To the best of its knowledge, Elk has never experienced any material
losses of principal in connection with taxi financings since it began making
loans to the owners of New York City taxicab medallions, taxicabs and related
assets in 1980, nor since it began making taxi medallion loans in Boston,
Chicago and Miami in 1995. Elk will continue to make loans in these markets
without the historical restriction of lending solely to Disadvantaged Concerns.
Loans made by Elk for the purpose of financing the purchase or continued
ownership of taxicab medallions, taxicabs and related assets, represented
approximately 79% of Elk's loan portfolio as of June 30, 1999. Loans made to
finance the acquisition and/or operation of other Small Business Concerns
constitute the balance of Elk's current loan portfolio, and it intends to
continue to make such loans.
By Agreement dated November 10, 1994, Elk repurchased all of the
547,271 outstanding shares of its 3% preferred stock from the SBA for an
aggregate price of $1,915,449, representing a
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discount of 65% from the original aggregate issuance price of $10 per share. As
a condition precedent to the repurchase, Elk granted the SBA a liquidating
interest in a newly established restricted capital surplus account (the
"Restricted Capital Account"). The Restricted Capital Account is equal to the
amount of the net repurchase discount in which the SBA received a liquidating
interest amortized over 60 months commencing November 10, 1994. However, if Elk
is liquidated or if a material violation of SBA regulations occurs during the
amortization period, the SBA would receive the remaining unamortized amount of
the Restricted Capital Account prior to the stockholders of Elk receiving any
amounts on their Common Stock. The unamortized balance of the SBA's liquidating
interest at June 30, 1999 was $256,916.
Elk elected, effective September 28, 1998, to become a business
development company ("BDC") under the 1940 Act. See "Investment Company Act of
1940; Election to Become a BDC."
Proposed Share Exchange
Elk proposes to enter into a one-for-one share exchange (the "Share
Exchange") with Ameritrans Capital Corporation, a newly-formed Delaware
corporation ("Ameritrans"), in accordance with an Agreement and Plan of Share
Exchange between Ameritrans and Elk (the "Share Exchange Plan") to be submitted
to the shareholders of Elk for their approval at a Special Meeting, prior to
which a Proxy Statement/Prospectus describing the Share Exchange Plan will be
distributed to the shareholders of Elk. Ameritrans has filed a Registration
Statement/Proxy Statement on Form N-14 with the SEC (File No. 333-63951)
relating to the proposed Share Exchange.
Elk is licensed as an SBIC under Section 301(c) of the 1958 Act, and as
such, it may invest only in Small Business Concerns that qualify under
applicable rules and regulations of the SBA. The majority of such investments by
Elk has consisted of loans for the purchase of taxicab medallions and related
taxicab assets. The Board of Directors of Elk believes that a more diversified
investment strategy would be in the best interests of Elk and its stockholders.
Elk's Board of Directors has further concluded that such diversification would
be best accomplished by the organization or acquisition of a company which would
be able to invest in other business concerns without regard to their social or
economic status or to other limitations imposed by the 1958 Act and the rules
and regulations promulgated thereunder, thus enabling the Elk stockholders to
reap the economic benefits from such business diversification. Accordingly,
after analysis of the legal and regulatory issues involved, Elk's Board of
Directors approved a reorganization of Elk, consisting of the following steps:
(1) the organization of Ameritrans, and its registration, for tax reasons, as an
investment company under the 1940 Act; (2) the acquisition by Ameritrans of all
of the outstanding Elk Common Stock from the current Elk stockholders in
exchange for Ameritrans Common Stock.
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The adoption of the Share Exchange Plan requires the affirmative vote
of the holders of two-thirds (66.67%) of the outstanding shares of Elk Common
Stock. As of June 30, 1999, Elk had 1,745,600 shares of Common Stock
outstanding. The directors, officers, and principal stockholders of Elk, owning
an aggregate of approximately 60% of the outstanding shares of Elk Common Stock,
have expressed an intention to vote in favor of the adoption of the Share
Exchange Plan. Holders of Elk Common Stock who object to the Share Exchange may
elect to receive payment of the fair value of their shares of Elk Common Stock
(as determined by agreement with Elk or by a court) in lieu of the Ameritrans
Common Stock they would otherwise receive pursuant to the Share Exchange. The
Board of Directors of Elk has determined that if the holders of more than 3% of
the outstanding shares exercise their appraisal rights, Elk may determine not to
proceed with the Share Exchange.
Ameritrans was formed as a Delaware corporation on February 12, 1998,
for the purposes of (1) acquiring and owning all of the outstanding Elk Common
Stock pursuant to the Share Exchange, and (2) engaging in broader and more
diversified investment and lending business activities directly, as well as
through a newly-formed subsidiary, Elk Capital Corporation, which business
activities Elk, as an SBIC, is not permitted to transact under the 1958 Act.
Ameritrans is registered under the 1940 Act as a closed-end, non-diversified
management investment company. Ameritrans has also elected to become a BDC
pursuant to the 1940 Act.
On July 12, 1999, Ameritrans filed a Registration Statement on Form N-2
with the SEC (File No. 333-82693) relating to the proposed sale of 1,100,000
shares (1,265,000 shares if the underwriters' over-allotment option is
exercised) of its common stock after completion of the Share Exchange. It is
anticipated that approximately half the net proceeds of such offering will be
allocated to the operations of Ameritrans and Elk Capital and half to the
operations of Elk. There is no assurance that this offering will be completed on
the proposed terms or at all.
Elk's Loans
Elk obtained a license to operate as an SSBIC from the SBA on July 24,
1980. Until February 1997, as an SSBIC, Elk's primary business was to provide
long-term loan funds at commercially competitive rates of interest (which at
June 30, 1999, ranged from 8.25% to 18% per annum) to persons defined by SBA
regulations as socially or economically disadvantaged persons (or entities which
are at least 50% owned by persons so defined), in connection with the financing
of diversified businesses. In February 1997, Elk entered into an agreement with
the SBA (the "SBA Agreement") and amended its certificate of incorporation, the
effect of both of which steps converted Elk into an SBIC. As an SBIC, Elk is
permitted to lend to persons who are not "disadvantaged" provided Elk maintains
a level of loans to disadvantaged persons equal to the SBA's liquidating
interest resulting from the 3% Preferred Stock repurchase. This limitation will
terminate upon full amortization of the 3% Preferred Stock repurchase discount,
which is scheduled to occur in November 1999. Although Elk, as of June 30, 1999,
was only required to have $256,916 of its total loan portfolio invested with
"disadvantaged" persons, almost 95%, or in excess of $48,000,000 of the
portfolio, was so invested. Elk anticipates that its present ability to pursue
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investments and loans with persons who are not "disadvantaged" will afford it
greater opportunities to make investments that enhance Elk's profitability.
SBA regulations set forth a ceiling on the interest rate that an SBIC
may charge its borrowers. Currently, this ceiling is the higher of 19% for loans
and 14% for debt securities or, alternatively, rates calculated with reference
to the weighted average cost of the SBIC's qualified borrowings, as determined
pursuant to SBA Regulations, or the SBA's current debenture rate. The maximum
rate of interest that Elk was permitted to charge under the SBA regulations as
of June 30, 1999 was 19% for loans and 14% for debt securities. See "The Small
Business Act of 1958."
To date, the large majority of Elk's loans have been made to purchasers
or owners of New York City taxicab medallions (as described in greater detail
below). Since Elk commenced operations it has made over $175,000,000 in loans to
New York City taxicab medallion owners. As of June 30, 1999, approximately
$19,800,000, or 39%, of the aggregate principal amount of its outstanding loans
of $51,100,000 represented loans made to finance the purchase or continued
ownership of New York City taxicab medallions and related assets. An aggregate
of approximately $15,800,000, or 31%, consisted of loans to finance the purchase
or refinancing of taxi medallions in Chicago and the balance of approximately
$15,500,000, or 30%, consisted of loans to various commercial borrowers, of
which approximately $2,700,000 was invested in Boston taxi medallion financing
and $1,950,000 was invested in Miami taxi medallion financing. See "Loan
Portfolio; Valuation" below. Elk has agreed with the SBA that it must maintain a
non-taxi investment/loan portfolio (included with the combination of its assets
acquired and receivables on assets acquired in the future) in an amount not less
than its outstanding SBA guaranteed leverage (i.e., debentures) issued since
1995, which amount is currently $2,470,000. See "Investment Policies --
Concentration of Investments."
Although Elk has historically directed a significant portion of its
financing operations toward purchasers or owners of taxicab medallions in New
York, the New York market has become increasingly more competitive, affording
Elk more limited opportunities to make profitable loans. Commencing in 1995, Elk
has been expanding its taxicab lending business into the Chicago, Boston, and
Miami markets, where its taxi lending business has increased and continued to be
profitable.
Elk intends to continue to expand into new markets in the taxi
industry, as well as into other industries determined by management to offer
investment opportunities. The loans that Elk plans to pursue will be made to a
variety of businesses of all types, provided that the loans made are in a
majority of cases secured by real estate, business assets, equipment or other
collateral deemed adequate by management.
In connection with its lending to owners of taxicabs, Elk will,
however, only make loans to borrowers who meet the standards required to operate
these vehicles by the New York City Taxi and Limousine Commission or other
regulatory agencies having jurisdiction in those markets where Elk engages in
business. Elk may revise the nature of its loan portfolio at such time as its
Board of Directors determines, in its sole discretion, that such revision is in
the best interests of Elk in light of then existing business and financial
conditions. Elk does not currently anticipate that its loan portfolio will
realize an annual turnover in excess of 50%. Elk will not lend to, or otherwise
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invest more than the lesser of (i) 10% of its total assets, or (ii) 30% of its
paid-in capital attributable to its Common Stock in any one small business
concern. Elk has not made, and is prohibited by applicable SBA regulations from
making, loans to officers, directors or principal stockholders of Elk or
"associates" of Elk, as such term is defined in applicable SBA regulations.
Short-Term Borrowings
Elk is authorized to borrow money and issue debentures, promissory
notes and other obligations, subject to SBA regulatory limitations. Other than
the subordinated debentures issued to the SBA, Elk has to date borrowed funds
only from banks. As of June 30, 1999, Elk maintained three (3) lines of credit
totaling $35,000,000. In September 1999, Elk's banks approved an increase in its
credit lines to an aggregate of $40,000,000. At June 30, 1999, Elk had
$31,000,000 outstanding under these lines. The loans, which mature through
December 31, 1999, bear interest based on an effective rate of interest equal to
approximately 150 basis points above LIBOR plus certain fees. Upon maturity, Elk
anticipates extending the lines of credit for another year, as has been the
practice in previous years. Pursuant to the terms of the loan agreements, Elk is
required to comply with certain terms, covenants and conditions, and has pledged
its loans receivable and other assets as collateral for the lines of credit.
Pursuant to the SBA Agreement, Elk agreed to limit the aggregate of its
indebtedness based on a computation of a borrowing base each quarter. The
borrowing base computation is calculated to determine that the total amount of
debt due on the senior bank debt and SBA debentures does not exceed
approximately 80% of the value of performing loans and investments in Elk's
portfolio. Loans that are more than 90 days in arrears are valued at a lower
amount in computing the borrowing base.
In connection with the SBA Agreement, Elk has also entered into an
intercreditor agreement (the "Intercreditor Agreement") and a custodian
agreement (the "Custodian Agreement") with its banks and the SBA. Pursuant to
the Custodian Agreement, the banks and the SBA appointed Israel Discount Bank of
New York as the custodian to hold certain notes, security agreements, financing
statements, assignments of financing statements, and other instruments and
securities as part of the collateral for Elk's indebtedness to the banks and the
SBA. The Intercreditor Agreement sets forth the respective rights and priorities
of the banks and the SBA with respect to the repayment of indebtedness to the
banks and the SBA and as to their respective interests in the collateral.
Pursuant to the Intercreditor Agreement, the banks consented to the grant by Elk
to the SBA of a security interest in the collateral, which security interest
ranks junior in priority to the security interests of the banks.
Scope of Business Activities
Elk has not purchased, and does not intend to purchase, commodities or
commodity contracts and it has not engaged, nor does it intend to engage, in the
business of underwriting the securities of other issuers. In addition, Elk does
not intend to purchase any small business except as may be necessary in the
event of a foreclosure on the security for a particular loan. Elk does not
intend to engage in the purchase or sale of real estate (except to the extent
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necessary with respect to any defaulted loans, or disposing of assets acquired)
or in investments in the securities of other investment companies.
As described above, Elk has been organized primarily to provide
long-term loan funds to Small Business Concerns. While Elk has made, and intends
to continue to make loans for financing the purchase or continued ownership of
taxicab medallions, taxicabs and related assets, Elk intends to diversify its
investments into other businesses to the extent permitted by the 1958 Act and
the rules and regulations promulgated thereunder. If the Share Exchange Plan is
approved, Ameritrans intends to invest in businesses which would not qualify for
investment by Elk under the 1958 Act.
Although Elk's certificate of incorporation provides Elk with the
authority to invest in the equity capital of Small Business Concerns, Elk makes
equity investments in Small Business Concerns on a selective basis, and only to
a limited extent. Equity securities in Elk's investment portfolio at June 30,
1999 totaled approximately $910,000, or 1.8%, of total assets. Elk reserves the
right, however, to make additional equity investments if determined by Elk's
Board of Directors to be in the best interest of Elk. Unless necessary to
protect a prior investment of Elk that is at risk, such equity investments shall
not exceed 20% of Elk's total assets. Elk has one (1) wholly-owned subsidiary,
EAF Holding Corporation, formed in 1992, the sole activities of which are to own
and operate certain real estate assets acquired in satisfaction of loans.
SBIC Benefits
General. As an SBIC, Elk is eligible to receive certain financing from
the SBA on favorable terms, and Elk and its stockholders are entitled to certain
tax benefits, both described below. The SBA has a certain amount of discretion
in determining the type and amount of financing that will be made available to
an SBIC. Therefore, there can be no assurance as to the nature and amount of SBA
financing that may actually be obtained by Elk. Furthermore, there are certain
restrictions and requirements to which Elk is subject by virtue of its being an
SBIC.
Background. Small Business Investment Companies ("SBICs") were created
under the 1958 Act as a vehicle for providing equity capital, long-term loan
funds and management assistance to small businesses. In general, the SBA
considers a business to be "small," and therefore eligible to receive loans from
an SBIC, only if (i) its net worth does not exceed $18,000,000 and if the
average of its net annual income after taxes for the preceding two years was not
more than $6,000,000 or (ii) it meets the size standard for the industry in
which it is primarily engaged, pursuant to SBA regulations. In addition, an SBIC
is required to allocate a portion of its portfolio to the financing of concerns
that (i) together with their affiliates do not have net worth in excess of $6
million and do not have an average net income after taxes for the preceding two
years in excess of $2 million or (ii) meet the size standard for the industry in
which they are primarily engaged. SBICs are licensed, regulated and sometimes
financed in part by the SBA.
Benefits. The principal benefits to Elk as a result of its being
licensed as an SBIC are as follows:
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The SBA is authorized to guaranty full repayment of all principal and
interest on debentures issued by an SBIC that makes loans to, or investments in,
small businesses, to the extent of 300% of the SBIC's "Leverageable Capital," as
defined in the applicable SBA Regulations. However, the percentage of allowable
leverage decreases if the SBIC's Leverageable Capital exceeds $15,000,000. The
term of such debentures is typically 10 years. The SBA will guarantee such
debentures only after such an SBIC has demonstrated a need for such debentures
as evidenced by the SBIC's investment activity and its lack of sufficient funds
available for investments; provided, however, that an SBIC that has invested at
least 50% of its Leverageable Capital and outstanding leverage shall be presumed
to lack sufficient funds available for investment. Generally, such debentures
will bear interest at a fixed rate that is based on the rate which is set by the
underwriters of the pooled debentures sold through SBIC Funding Corp.
With respect to debentures guaranteed after July 1, 1991, the SBA's
claim against an SBIC is subordinated, in the event of such SBIC's insolvency,
only in favor of present and future indebtedness outstanding to lenders and only
to the extent that the aggregate amount of such indebtedness does not exceed the
lesser of 200% of such SBIC's paid-in capital and paid-in surplus (as adjusted
pursuant to SBA regulations), or $10,000,000. However, the SBA may agree to a
subordination in favor of one or more loans from certain lenders, in its sole
discretion. Pursuant to the SBA Agreement and the Intercreditor Agreement, the
SBA agreed to a subordination in favor of Elk's banks; provided, however, that
Elk is required to keep its overall debt to certain levels based upon the
performance of its portfolio.
Loan Portfolio; Valuation
The following table sets forth a classification of Elk's outstanding
loans as of June 30, 1999:
<TABLE>
<CAPTION>
Maturity Balance
Number Interest Date (in Outstanding
TYPE OF LOAN of Loans Rate months) June 30, 1999
------------ -------- ---- ------- -------------
New York City:
<S> <C> <C> <C> <C> <C>
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
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Bagel store 1 14% 37 22,123
Dry cleaner 25 9-18% 31-120 3,657,590
Laundromat 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
Commercial Construction 1 16% 80 197,371
--- -----------
Total Loans Receivable 701 $51,103,932
=== ===========
</TABLE>
Loans made by Elk to finance the purchase or continued ownership of
taxi medallions, taxicabs and related assets are typically secured by such
medallions, taxicabs and related assets. Loans made by Elk to finance the
acquisition and/or operation of retail or manufacturing businesses are typically
secured by real estate and other assets. In the case of loans to corporate
owners, the loans are almost always personally guaranteed by the stockholders of
the borrower. Elk generally obtains first mortgages, but occasionally has
participated in certain financings where it has obtained a second mortgage on
collateral. Elk has obtained a relatively higher rate of interest in connection
with these subordinated financings. Elk has not committed more than 5% of its
assets to any one business concern in Elk's portfolio. The interest rate charged
by Elk on its currently outstanding loans ranges from 8.25% to 18% per annum. As
of June 30, 1999, the average annual weighted rate per loan was approximately
11.0%. The average term of Elk's currently outstanding loans is approximately 48
months.
Valuation -- As an SBIC, Elk is required by applicable SBA regulations
to submit to the SBA semi-annual valuations of its investment portfolio, as
determined by its Board of Directors, which considers numerous factors including
but not limited to the financial strength of its borrowers to determine "good"
or "bad" status, and fluctuations in interest rates to determine marketability
of loans. Reference is made to Footnotes 1, 2, and 3 of Notes to Financial
Statements for the year ended June 30, 1999, for a discussion of Elk's method of
valuation of its current portfolio of loans. In the event Elk invests in the
future in securities for which price quotations are readily available, Elk will
value such investments at their fair market value, based on such quoted prices.
With respect to securities for which price quotations are not readily available,
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such securities will be valued at fair market value as determined by the Board
of Directors.
Collection Experience -- Elk has historically had a greater success
with taxi medallion financings than financings made in the radio car service
business or in its diversified (non-taxi) loan portfolio. Substantially all of
Elk's provisions for loan losses and losses on assets acquired that occurred
during the period of 1991 through 1994 were related to business loans secured by
real estate and radio car loans. In addition, during the period 1991 through
1995, Elk had difficulty selling off real estate acquired on defaulted loans as
a result of a depressed real estate market. To its knowledge, Elk has never had
a material loss of principal in any taxi medallion loan.
Taxi Medallion Finance Industry and Market Overview
The New York City Taxi Medallion industry and Market. Under current
law, the number of taxi medallions that may be issued by New York City is
limited to 12,187. There are two types of medallions: corporate and individual
owner-driver. Of the total of 12,187 medallions, 7,058 are corporate medallions
and 5,129 are for individually owned cabs. A corporate medallion is issued for a
cab owned by a corporation that owns a minimum of two cabs and two corporate
medallions (i.e., one corporate medallion per cab). An individual owner-driver
may not own more than one cab and one medallion. Corporate medallions are used
by large fleet concerns with many taxis and many drivers or by small
corporations owning at least two medallions and two taxis driven by two
owner-drivers (the so-called "minifleet").
Only 11,787 medallions could be issued until August 8, 1995, when a law
permitting the issuance of up to 400 additional taxi medallions over a
three-year period went into effect. The New York City Taxi and Limousine
Commission (the "TLC") conducted the sale of 133 medallions in May 1996, 133
medallions in October 1996, and 134 medallions on October 1, 1997. Of these new
medallions, 160 were sold to individuals and the balance to minifleets in lots
of two.
At the present time, most medallion sales are handled through brokers.
As a result, an active marketplace has developed for the purchase and resale of
medallions. The price of a medallion varies with supply and demand. Elk's most
recent experience, in June 1999, was that individually owned medallions sold for
approximately $210,000 and corporate medallions sold for approximately $260,000
each. In addition, a 5% New York City transfer tax and various brokerage
commissions are additional expenses incurred in the acquisition and sale of a
medallion.
Based upon statistics obtained from the TLC, from 1989 through 1998,
the number of corporate medallions that were resold by their holders varied each
year from approximately 245 to 440, which suggests that there were between 122
and 220 minifleet corporations in need of financing each year, while the number
of individual owner medallions sold each year varied from 250 to 415. Assuming
that a typical minifleet financing for purchases of medallions might involve a
sum of approximately $450,000, the dollar volume of New York City minifleet
financings might range from $49 million to $88 million a year. Assuming that a
typical individual medallion financing for a purchase of a medallion involves a
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sum of approximately $180,000, the dollar volume of New York City individual
medallion financing might range from $45 million to $75 million a year.
In addition to financings for purchases and sales of medallions, a
substantial market exists for refinancing the indebtedness of existing minifleet
or individual medallions. Management estimates this market to exceed that of the
market for financing transfers, and to be in excess of $100,000,000 per year.
A prospective medallion owner must meet the requirements of the TLC,
which approves all sales and transfers. In general, the requirements are that
the prospective owner have no criminal record, that the purchase funds be
derived from legitimate sources, and that the taxi vehicle and meter meet
specifications set by the TLC. Also required is a clearance from prior insurers
of the seller in the form of letters stating that there are no outstanding
claims for personal injuries in excess of insurance coverage.
New York Marketing Strategy for Medallion Financing. Medallion
transfers in the New York City market are usually handled through medallion
brokers, who have frequent contact with taxi owners and drivers. Medallion
brokers locate buyers for sellers of medallions and sellers for buyers of
medallions, and then typically employ a financing broker to arrange for the
financing of the medallion purchases. In many cases the medallion broker and the
financing broker are the same party or related parties.
Elk has received a significant number of referrals from certain
medallion brokers in New York. Elk also receives referrals from financing
brokers and its borrowers. In addition, Elk occasionally places advertisements
in local industry newspapers and magazines. Elk also uses brokers, advertising
and referrals in connection with its taxi lending business in the Chicago,
Boston, and Miami markets.
Chicago Taxi Medallion Industry and Market. As part of its geographic
diversification strategy, Elk studied the Chicago taxi medallion market in 1994,
and began making loans in Chicago in April, 1995. The taxi market and medallion
system in Chicago is regulated by the City of Chicago Department of Consumer
Services, Public Vehicle Operations Division. The number of taxi medallions is
limited by city ordinances, and until 1988, these ordinances gave control of 80%
of the medallions to the two largest taxi operators in Chicago, Yellow Cab Co.,
and Checker Taxi Co., Inc.
Since 1988, the taxi industry in Chicago has shifted toward more
individual ownership. Over the succeeding 10 years, the Yellow Cab Co. and
Checker Taxi Co., Inc., pursuant to a new ordinance, gave 1,300 medallions back
to the City, and the City added 100 medallions each year. These medallions were
distributed in a lottery system to taxi drivers who had never owned a medallion.
By July, 1997, there were a total of 5,700 medallions issued in Chicago, of
which Yellow Cab Co. owned approximately 2,071, and the remaining 3,629 were
owned by individual owner drivers, or by individual operators who had purchased
multiple medallions.
In December, 1997, the City Council increased the number of medallions
by 1,000 additional medallions, to be issued over a period of the succeeding
three years. Of these medallions, 500 will be issued in lotteries to taxi
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drivers who never owned a medallion, and the other 500 will be auctioned to the
highest bidder. In the November 1998 auction of 150 medallions, there were 499
bids to purchase medallions, and the winning bid prices ranged from $57,000 to
$63,000 per medallion. In August 1999, 150 medallions were auctioned, there were
more than 1,400 bids, and the winning prices ranged from $67,000 to $71,000. The
prices at these auctions were approximately the same as open market prices for
taxi medallions that were sold in Chicago at the same times.
On January 21, 1999, the Yellow Cab Co. auctioned 175 medallions in a
sealed bid auction at prices equal to the current open market value price for
medallions. The Yellow Cab Co. is continuing to sell a limited number of
medallions at current open market prices, in order to become a medallion service
business serving the individual owner drivers who acquire the medallions.
It has been Elk's experience that as the Chicago market has expanded,
it has also become more competitive. In addition, as the City of Chicago and now
Yellow Cab Co. supply medallions to the market place, Elk expects that the taxi
medallion market will continue to grow, with more and more owner-drivers and
individual owner-operators of multiple medallions. To the extent that there are
more owner-operators and individual owner-operators of multiple medallions in
the market, Elk believes that there will be increased opportunities for us to
serve this market.
Chicago city regulations set forth certain qualifications that all
owners of taxi medallions must meet, and require that all security interests in
medallions be registered with the Department of Consumer Services. The
Department of Consumer Services also is involved (along with the City Council)
in setting taxi fares, and in setting maximum lease rates that may be charged by
owners to lessees of taxis, who drive them on a daily, weekly, or monthly basis.
Chicago Marketing Strategy for Medallion Financing. At the present
time, most medallion sales in Chicago are handled through brokers or attorneys.
An active market place has developed in Chicago for the purchase and resale of
medallions. Elk's most recent experience, in April 1999, was that medallions
were selling for between $60,000 and $65,000 per medallion. In addition, the
City of Chicago imposes a 5% transfer tax on a medallion held for two years or
more, a 10% transfer tax on a medallion held for between one and two years, and
a 25% transfer tax on a medallion held less than one year. The recent imposition
of the transfer taxes, in addition to being a source of revenue to the City, was
also scaled in order to inhibit speculation in the purchase and resale of taxi
medallions without the intent of actually operating taxis.
Elk believes that as many as 1,000 medallions are bought each year by
purchasers, and at today's market value, this would give gross potential volume
of approximately $65,000,000. If 80% of these purchases were financed, the
annual market for loans to purchase medallions would be $52,000,000 per annum.
In addition to purchases and sales of medallions, a substantial market exists
for refinancing the indebtedness of existing owners. Based on the number of
medallions currently issued and to be issued, Elk believes the market for
financing transfers could exceed $60,000,000 per year.
Boston Taxi Medallion Industry and Market. Elk began to review the
Boston taxi market in the fall of 1994 and began making loans in this market in
1995. Since 1930, the Boston Police Commissioner has had exclusive jurisdiction
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over the regulation of taxi operations, including the issuance and transfer of
medallions. The Hackney Carriage Unit of the Boston Police Department deals with
taxi regulatory issues.
By statute, the number of medallions issued in the City of Boston may
not exceed 1,525, subject to increase or decrease in the Police Commissioner's
discretion. The number of medallions remained essentially unchanged from the
late 1940's until January 1999, when the City sold 75 additional medallions at
auction. Prices at this auction exceeded $140,000 per medallion. The City of
Boston auctioned another 75 medallions in September 1999.
Under the applicable statutes and rules, Boston taxi medallions are
assignable, subject to the approval of the Police Commissioner. In practice,
transfer applications are submitted to the Hackney Carriage Unit, which has
issued guidelines and forms for transfers. Loans by financial institutions or
individuals are secured by taxi medallions and assets are routinely allowed in
accordance with the Hackney Carriage Unit's "Procedures for Recording Secured
Party Interest."
Boston Marketing Strategy for Medallion Financing. The Boston taxi
market services the City of Boston, which includes Logan Airport. Elk's
marketing efforts have included retention of a local attorney, advertising in
the CARRIAGE NEWS, a local trade newspaper, and the use of forwarding brokers.
Elk's efforts have resulted in a loan portfolio of approximately $2,700,000 as
of June 30, 1999.
Medallion Industry in Metro-Dade County, (Miami Area), Florida. Elk
began to investigate the Miami area taxi market in 1995, and began making loans
in 1996. The Miami taxi industry has been regulated on a county-wide basis in
Metro-Dade County, Florida since 1981. The Passenger Transportation Regulatory
Division (the "PTRD") of the Metro-Dade County Consumer Services Division
oversees taxi operations and licenses in accordance with the Metro-Dade County
Code.
Until April 1999, each taxi operator in Metro-Dade County was required
to obtain a "For- Hire" license. The number of licenses was limited to one
license for each 1,000 of population in the county. With approximately 2,100,000
residents in the county, 2,100 licenses could have been issued; however, only
1,827 licenses are currently authorized, of which 1,824 have been issued. In
1991, a For-Hire license loan program was approved, authorizing the use of loans
to purchase (but not to refinance) licenses and taxis. Any lender must be a
licensed lending institution authorized to do business in Florida. Elk is
currently one of only two lending institutions that are authorized to make loans
to the taxi industry in Metro-Dade County. Transfers of licenses and financing
arrangements are subject to prior approval by the PTRD and the County Board of
Commissioners.
For-Hire licenses were considered a privilege, not a property right.
However, since licenses were limited in number, the marketplace created a
"market price" or value in connection with the transfer of the license right to
a purchaser. As of April 1999, the Metro-Dade County Code was amended to create
a "medallion," or property right, system with a view to attracting traditional
financing providers to provide the taxi industry with additional funding
sources. Existing For-Hire licenses were automatically converted into
medallions.
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According to official Metro-Dade County publications, approximately
one-third of the currently outstanding licenses are owned by individuals or
corporations that own and operate only one license. Other than 106 licenses held
by one owner, the balance of the licenses are owned mainly by holders of from
two to five licenses. The number of license transfers has been generally
increasing in recent years, with a high of 197 transfers in 1997, with an
average reported price of $51,658. However, Elk believes that the present market
price of licenses/medallions in Metro-Dade County is between $65,000 to $70,000
per medallion.
Miami Area Marketing Strategy for Medallion Financing. Elk believes
that the recent change to a medallion system and an emphasis on individual
operator-ownership of medallions for the future will open a large new market for
taxi medallion financing in the Miami area. Since this is an emerging market,
Elk is currently developing strategies to develop contacts and market Elk's
financing to potential purchasers of medallions, and in the event refinancing is
permitted, to those owners who may wish to refinance their medallions in the
future. As of June 30, 1999, the total principal amount of Elk's outstanding
taxi loans in the Miami area was approximately $1,950,000.
Commercial (Non-Taxi) Loans
Elk began making loans to diversified (non-taxi) small businesses
("Commercial Loans") in the New York City metropolitan area in 1985, in order to
diversify its loan portfolio, which until that time had consisted almost
entirely of loans to owners of New York City taxi medallions. After a period of
losses in its Commercial Loan portfolio from 1991 to 1994, Elk has been
increasing this portfolio on a selective basis since 1995, with a concentration
on loans to operators of retail dry cleaners and laundromats. Recently, Elk has
also begun geographically expanding its Commercial Loan portfolio, with loans in
South Florida, Massachusetts, and North Carolina.
Elk has chosen to concentrate its Commercial Loan portfolio in loans
secured by retail dry cleaning and coin-operated laundromat equipment because of
certain characteristics similar to taxi medallion lending that make these
industries attractive candidates for profitable lending. These factors include:
(i) relatively high fixed rates of interest ranging from approximately 325 to
700 basis points over the prevailing Prime Rate at the time of origination, (ii)
low historical repossession rates, (iii) vendor recourse in many cases, (iv)
significant equity investments by borrowers, (v) an active market for
repossessed equipment, and for resale of businesses as going concerns through
transfers of the leasehold and business equipment to new operators, and (vi) a
collateral service life that is frequently twice as long as the term of the
loans. Elk estimates that there are approximately 4,000 retail dry cleaners and
approximately 3,000 laundromats in the New York City metropolitan area. In
addition, Elk believes that specialization in the dry cleaning and laundromat
industries will permit relatively low administrative costs because documentation
and terms of credit are standardized, and the consistency among the loans has
simplified credit review and portfolio analysis.
Elk further believes that other niche industries with similar
characteristics will provide additional loan portfolio growth opportunities.
Elk's other Commercial Loans are currently spread among other industries,
including auto sales, retirement home, garden center, commercial construction,
car wash, theater, restaurant, and financial services.
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Elk's Commercial Loans finance either the purchase of the equipment and
related assets necessary to open a new business or the purchase or improvement
of an existing business, and Elk has originated Commercial Loans in principal
amounts up to $1,000,000. Elk generally retains these loans, although from time
to time it sells participation interests in its loans to diversify risk, or
purchases participation interests in loans generated by other SBICs.
Competition
Banks, credit unions, and other finance companies, some of which are
SSBICs and SBICs, compete with Elk in the origination of medallion loans and
commercial (non-taxi) loans. Finance subsidiaries of equipment manufacturers
also compete with Elk. Many of these competitors have greater resources than Elk
and certain competitors are subject to less restrictive regulations than Elk. As
a result, Elk expects to continue to encounter substantial competition from such
lenders, many of which are well-established. Therefore, there can be no
assurance that Elk will be able to identify and complete financing transactions
that will permit it to compete successfully.
Investment Policies
The investment policies set forth herein constitute fundamental
policies of Elk pursuant to the 1940 Act, which may be changed only by the vote
of the lesser of (i) a majority of its outstanding Common Stock, or (ii) 67% of
the number of shares of Common Stock present in person or by proxy at a duly
held stockholder meeting at which at least 50% of the outstanding shares of
Common Stock are present.
(a) Issuance of Senior Securities. Elk may issue subordinated
debentures to the SBA in the maximum amounts permissible under the 1958 Act and
the applicable regulations.
(b) Borrowing of Money. Elk has the power to borrow funds from banks,
trust companies, other financial institutions, the SBA or any successor agency
and/or other private or governmental sources, if determined by Elk's Board of
Directors to be in its best interests.
(c) Underwriting. Elk has not engaged, and does not intend to engage,
in the business of underwriting the securities of other issuers.
(d) Concentration of Investments. Elk may not concentrate 25% or more
of its total assets in securities of issuers in any industry group except the
taxicab industry. Elk will make at least 25% of its investments for financing
the purchase or continued ownership of taxicab medallions, taxicabs and related
assets. The balance of its investments includes, and Elk intends to continue to
finance, the acquisition and/or operation of other small businesses.
(e) Real Estate. Elk has not engaged, and does not intend to engage, in
the purchase and sale of real estate. However, Elk may elect to purchase and
sell real estate in order to protect any of its prior investments which it
considers at risk.
(f) Commodities Contracts. Elk has not engaged, and does not intend to
engage, in the purchase and sale of commodities or commodities contracts.
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(g) Loans. Elk has made, and will continue to make, loans to Small
Business Concerns in accordance with the provisions of the 1958 Act and the
regulations issued by the SBA thereunder.
(h) Writing Options. Elk has not engaged, and does not intend to
engage, in the writing of options.
(i) Short Sales. Elk has not engaged, and does not intend to engage, in
short sales of securities.
(j) Purchasing Securities on Margin. Elk has not engaged, and does not
intend to engage, in the purchase of securities on margin.
(k) Futures Contracts. Elk has not engaged, and does not intend to
engage, in the purchase or sale of futures contracts.
(l) Restricted Securities. Elk may invest up to 100% of its assets in
restricted securities.
(m) Types of Investments. Although Elk was organized primarily to
provide long term loan funds to Small Business Concerns, Elk's certificate of
incorporation provides Elk with the authority to invest in the equity capital of
Small Business Concerns. Accordingly, Elk may make equity investments in Small
Business Concerns if determined by its Board of Directors to be in the best
interests of Elk. Further, except as otherwise provided by applicable
regulations, there shall be no limitation on the amount of equity investments
Elk may make.
(n) Maximum Investment. Elk will not lend or otherwise invest more than
the lesser of (i) 10% of its total assets or (ii) 30% of its paid-in capital
attributable to its Common Stock with respect to any one Small Business Concern.
(o) Percentage of Voting Securities. The percentage of voting
securities of any one Small Business Concern which Elk may acquire may not
exceed 49% of the outstanding voting equities of such Small Business Concern.
(p) Management Control. Elk does not intend to invest in any company
for the purpose of exercising control of management. However, Elk may elect to
acquire control in order to protect any of its prior investments which it
considers at risk.
(q) Investment Companies. Elk has not invested, and does not intend to
invest, in the securities of other investment companies.
(r) Portfolio Turnover. Elk intends to make changes in its portfolio
when, in the judgment of its Board of Directors, such changes will be in the
best interest of Elk's stockholders in light of the then existing business and
financial conditions. Elk does not anticipate that its loan portfolio will
realize an annual turnover in excess of 50%, although there can be no assurance
with respect thereto.
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The Small Business Investment Act of 1958
As the holder of a license from the SBA to operate as an SBIC, Elk
qualifies for certain financing from the SBA on favorable terms as described
above under the heading "Certain Financial Information," but is subject to
certain restrictions and requirements under the 1958 Act and regulations
promulgated by the SBA under such act (the "SBA Regulations"). These
restrictions and requirements include, but are not limited to, the following:
(i) The interest rate charged by an SBIC on loans to small businesses
may not exceed the higher of either an SBIC's certified weighted
average cost of qualified borrowings, computed in accordance with SBA
Regulations, or the current debenture rate, plus, in either case, seven
(7) percentage points, rounded off to the next lower eighth of one
percent; provided, however, that if the current debenture rate is 8%
per annum or lower, an SBIC is permitted to charge up to 15%.
(ii) The aggregate commitments by an SBIC to any single small business
enterprise may not exceed 30% of the aggregate paid-in capital and
paid-in surplus of the SBIC.
(iii) Management and advisory services must be performed by an SBIC in
accordance with a written contract and certain record-keeping
requirements must be satisfied.
(iv) The term of SBIC loans to small businesses may not exceed 20
years.
(v) Prior written consent of the SBA is required in the event of any
proposed transfer of control of an SBIC and any proposed transfer of
10% or more of any class of an SBIC's stock ownership by any person or
group of persons acting in concert owning 10% or more of any class of
an SBIC's stock.
(vi) Limitations are imposed on the ability of the officers, directors,
managers or 10% stockholders of an SBIC to become an officer, director,
manager or 10% stockholder of another SBIC.
(vii) Prior written consent of the SBA is required in the event of a
merger, consolidation or reorganization of an SBIC.
(viii) SBIC funds in excess of $2,000 not invested or loaned to small
businesses and not applied to the conduct of its operations are
required to be deposited in, or invested in time deposits of,
federally-insured banks.
(ix) Corporate SBICs issuing debentures after April 25, 1994 are
required to amend their articles of incorporation to indicate that they
have consented, in advance, to the SBA's right to require the removal
of officers or directors and to the appointment of the SBA or its
designee as receiver of the SBIC for the purpose of continuing to
operate the SBIC upon the occurrence of certain events of default. The
regulations divide the events of default into three categories.
The first category consists of three events that automatically
accelerate all outstanding debentures without notice or demand to the SBIC, and
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allow the SBA to apply for receivership of the SBIC without the SBIC's
objection. The events are insolvency, a voluntary assignment for the benefit of
creditors, and the filing of a voluntary or involuntary petition for relief
under the Bankruptcy Code.
Under the second category, upon written notice, the SBA may demand
immediate repayment or redemption of all outstanding debentures or take any
other action permitted under the 1958 Act, specifically including institution of
proceedings for the appointment of the SBA or its designees as a receiver of the
SBIC. Nine (9) violations are included in this category, and no opportunities to
cure the default are afforded the SBIC. This category of violations includes:
fraud; fraudulent transfers; willful conflicts of interest; willful
non-compliance of one or more of the substantive provisions of the 1958 Act or
of a substantive regulation; repeated events of default; transfer of control;
non-cooperation with remedial steps that the SBA may prescribe; non-notification
of events of default; and non-notification of events of default to others. For
the first six (6) violations listed above the SBIC will have consented to the
SBA's right to require the SBIC to replace officers or directors, with persons
approved by the SBA, and to the SBA's appointment as receiver for the purpose of
continuing operations.
Under the third category, which includes nine (9) violations, the SBA
affords the SBIC the opportunity to cure its violations. If the SBIC fails to
cure to the SBA's satisfaction, the SBA may declare the SBIC's entire
indebtedness evidenced by the debentures to be immediately due and payable. The
violations in this category include: excessive compensation; improper
distributions; failure to make a timely payment of an SBA obligation; failure to
maintain minimum regulatory capital; capital impairment; failure to pay any
amount when due on any obligation greater than $100,000; nonperformance or
violation of the terms and conditions of any note, debenture, or other
obligation of the SBIC issued to, held or guaranteed by the SBA, or of any
agreement with, or conditions imposed by, the SBA; failure to comply with one or
more of the substantive provisions of the 1958 Act or regulations thereunder;
and failure to maintain certain investment ratios for leverage in excess of 300%
of Leverageable Capital, as defined in the 1958 Act. For the first three
violations listed above, if an SBIC fails to cure such violations the SBA can
require the removal of officers and directors and/or the appointment of its
designee as receiver of the SBIC.
In addition, if an SBIC repeatedly fails to comply with one or more
"non-substantive" provisions of the 1958 Act or the regulations thereunder, the
SBA, after written notification and until such condition is cured, may deny
additional leverage to such SBIC and/or require such SBIC to take such actions
as the SBA may determine to be appropriate under the circumstances. If the SBA
requires the licensee to bring itself into full compliance and it fails to do
so, the SBA may accelerate its leverage and take other remedies, including a
receivership.
(x) As with debentures, corporate SBICs issuing preferred stock after
April 25, 1994 are required to amend their articles of incorporation to
indicate that they have consented, in advance, to the SBA's right to
require the removal of officers or directors and to the appointment of
the SBA or its designees as receiver of the SBIC for the purpose of
continuing to operate the SBIC upon the occurrence of certain events of
default. The regulations divide the events of default into four (4)
categories.
The first category consists of six (6) events, the occurrence of any of
which will permit SBA, upon notice to the SBIC, to require the SBIC to replace,
with individuals approved by the SBA, one or more of its officers and/or
directors. In addition, the SBA can apply for the institution of an operating
receivership, with the SBA or its designee as receiver. The events are:
equitable or legal insolvency, or a capital impairment percentage of 100% or
more and such capital impairment is not cured within the time limits set by the
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SBA in writing; a voluntary assignment for the benefit of creditors; the filing
of a voluntary or involuntary petition for relief under the bankruptcy code;
transfer of control; fraud; and fraudulent transfers.
The second category consists of willful conflicts of interest; willful
or repeated non-compliance with one or more of the substantive provisions of the
1958 Act or any substantive regulation promulgated thereunder; and failure to
comply with a restriction imposed on the SBIC pursuant to the third category.
Upon the occurrence of any such event, and only if the SBIC fails to remove the
person(s) the SBA identifies as responsible for such occurrence and/or cure such
occurrence to the SBA's satisfaction within a time period determined by the SBA,
upon written notice, the SBA may replace one or more of the SBIC's officers
and/or directors or obtain the appointment of the SBA or its designee as
receiver of the SBIC.
The third category lists eleven (11) events, the occurrence of any of
which will allow the SBA, on written notice to the SBIC, to prohibit the SBIC
from making any additional investments except for investments pursuant to
legally binding commitments entered into by the SBIC prior to such notice and,
subject to the SBA's prior written approval, investments that are necessary to
protect the SBIC's investment; to prohibit distributions by the SBIC to any
party other than the SBA, its agent or trustee, until all leverage is redeemed
and amounts due are paid; to require all commitments to the SBIC to be funded at
the earliest time(s) permitted in accordance with the SBIC's articles of
organization; and to review and re-determine the SBIC's approved management
compensation. This category of events includes the occurrence of any event
listed in the first two categories; the SBIC's failure to maintain its minimum
regulatory capital; capital or liquidity impairment and failure to cure the
impairment within time limits set by SBA in writing; improper distributions;
excessive compensation; failure to pay any amounts due under preferred
securities, unless otherwise permitted by the SBA; noncompliance with one or
more of the substantive provisions of the 1958 Act, or any substantive
regulation promulgated thereunder; failure to maintain diversity between
management and ownership, if applicable to such SBIC; failure to maintain
investment ratios for leverage in excess of 300% of Leverageable Capital or
preferred securities in excess of 100% of Leverageable Capital, if applicable to
such SBIC, as of the end of each fiscal year; nonperformance of one or more of
the terms and conditions of any preferred security or of any agreement with or
conditions imposed by SBA in its administration of the 1958 Act and the
regulations promulgated thereunder; and failure to take appropriate steps to
accomplish such actions as the SBA may have required for repeated non-
substantive violations of the 1958 Act or the regulations promulgated
thereunder.
Under the fourth category if an SBIC repeatedly fails to comply with
any one or more of the non-substantive provisions of the 1958 Act or any
non-substantive regulation promulgated thereunder, the SBA, after written
notification to the SBIC and until such condition is cured to the SBA's
satisfaction, can deny additional leverage to such SBIC and/or require such SBIC
to take such actions as the SBA may determine to be appropriate under the
circumstances.
(xi) An SBIC may not control (as such term is defined under applicable
SBA Regulations) its investee companies except to the extent
temporarily required to protect its investment. Additionally, SBA
Regulations require SBICs to conduct active operations. An SBIC is
inactive and thus violates SBA Regulations if at the close of any
fiscal year it has more than 25% of its assets in idle funds and if it
has failed to provide financing aggregating 25% of the average amount
of its idle funds during the past eighteen months. The SBA requires the
SBIC to submit written justification of such inactivity.
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(xii) As part of the regulatory framework, SBICs are subject to
examinations by SBA agents at least bi-annually and are required to pay
examination fees and maintain certain records, files, internal control
programs and reports. Moreover, the SBA is authorized to suspend an
SBIC's license, issue cease and desist orders, remove officers and
directors of an SBIC, subpoena witnesses and records, apply for
injunctions to the appropriate district court, and apply for further
acts of enforcement to the appropriate U.S. Circuit Court of Appeals.
The foregoing summary of certain requirements under the 1958 Act and
regulations thereunder does not purport to be complete and investors are urged
to consult the 1958 Act and regulations thereunder for more detailed
information.
Tax Considerations
The following discussion is a general summary of the federal income tax
principles applicable to Elk, based on the currently existing provisions of the
Code and the regulations thereunder. This summary does not purport to be a
complete description of the tax considerations applicable to Elk or to the
holders of Elk Common Stock.
Taxation of a Regulated Investment Company
Elk has elected for each taxable year since fiscal 1984, and expects to
continue to elect, to be treated as a "regulated investment company" under
Section 851 of the Code. A regulated investment company may deduct, for federal
income tax purposes, most dividends paid to stockholders, thereby avoiding
federal income taxation at the corporate level on amounts distributed to
stockholders as dividends. In order for Elk to qualify as a regulated investment
company for a given fiscal year, it must meet each of the following conditions
for that fiscal year:
(1) Elk must be registered as an investment company under the 1940 Act
at all times during the year.
(2) At least 90% of Elk's gross income for the year must be derived
from interest, gains on the sale or other disposition of stock or other
securities, dividends and payment with respect to securities loans.
(3) Less than 30% of Elk's gross income must be derived from the sale
or other disposition of securities held for less than three months.
(4) At the close of each quarter, at least 50% of the value of Elk's
total assets must be represented by cash, cash items (including receivables),
and securities. There are also limitations on the extent to which Elk's holdings
may be concentrated in the securities of a single issuer.
(5) Elk must distribute as dividends at least 90% of its investment
company taxable income (as defined in Section 852 of the Code), as well as 90%
of the excess of its tax-exempt income over certain disallowed tax-exempt
interest deductions.
In order to avoid the imposition of a non-deductible 4% excise tax on
undistributed income of Elk, Elk is required, under the terms of the Revenue Act
of 1987 as embodied in Section 4982 of the Code, to distribute within each
calendar year at least 97% of its ordinary income for such calendar year and 98%
of its capital gain net income for the one-year period ending on October 31 of
such calendar year.
Dividends distributed by Elk to its shareholders constitute ordinary
income to the shareholders to the extent derived from non-capital gain income of
Elk, and will ordinarily constitute capital gain income to shareholders to the
extent derived from capital gains of Elk. If Elk fails to continue to qualify as
a regulated investment company for any reason in any fiscal year, it will not be
entitled to a federal income tax deduction for dividends distributed, and will
instead be liable to pay corporate level tax on its earnings. Thus, if Elk fails
to qualify as a regulated investment company for any reason, its earnings would
be taxed at two levels: to Elk, and when they are distributed to its
stockholders.
Taxation of SBICs
As a result of Elk's status as a licensed SBIC under the 1958 Act, Elk
and its stockholders qualify for the following tax benefits:
(1) Under Section 243 of the Code, Elk may deduct 100% of the dividends
received by it from domestic corporations in which it has made equity
investments, regardless of whether such corporations are subsidiaries of Elk (in
contrast to the generally applicable 70% deduction under the Code). Because Elk
generally makes long-term loans rather than equity investments, this potential
benefit is not likely to be of practical significance to Elk or its
stockholders.
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(2) Under Section 1243 of the Code, losses sustained on Elk's
investments in the convertible debentures, or stock derived from convertible
debentures, of Small Business Concerns are treated as ordinary losses rather
than capital losses to Elk. Because Elk does not presently intend to purchase
convertible debentures, however, this potential benefit is not likely to be of
practical significance to Elk or its stockholders.
(3) Under Section 1242 of the Code, Elk's stockholders are entitled to
take an ordinary rather than a capital loss deduction on losses resulting from
the worthlessness or the sale or exchange of Elk Common Stock.
State Taxes
The foregoing discussion relates only to federal income tax matters.
Elk is also subject to state and local taxation. Stockholders should consult
with their own tax advisors with respect to the state and local tax
considerations pertaining to Elk.
The Investment Company Act of 1940; Election to Become a BDC
Elk is a closed-end, non-diversified management investment company that
has elected to be treated as a BDC and, as such, is subject to regulation under
the 1940 Act. The 1940 Act contains prohibitions and restrictions relating to
transactions between investment companies and their affiliates, principal
underwriters and affiliates of those affiliates or underwriters. In addition,
the 1940 Act provides that a BDC may not change the nature of its business so as
to cease to be, or to withdraw its election as, a BDC unless so authorized by
the vote of a "majority of its outstanding voting securities," as defined under
the 1940 Act.
BDCs are permitted, under specified conditions, to issue multiple
classes of indebtedness and one class of stock (collectively, "senior
securities," as defined under the 1940 Act) senior to the shares of Common Stock
offered hereby if their asset coverage of such indebtedness and all senior
securities is at least 200% immediately after each such issuance. Subordinated
SBA debentures, preferred stock guaranteed by or issued to the SBA by Elk, and
Elk bank borrowings are not subject to this asset coverage test. In addition,
while senior securities are outstanding, provision must be made to prohibit the
declaration of any dividend or other distribution to stockholders (except stock
dividends) or the repurchase of such securities or shares unless Elk meets the
applicable asset coverage ratios at the time of the declaration of the dividend
or distribution or repurchase.
Under the 1940 Act, a BDC may not acquire any asset other than
Qualifying Assets unless, at the time the acquisition is made, certain
Qualifying Assets represent at least 70% of the value of Elk's total assets. The
principal categories of Qualifying Assets relevant to Elk's proposed business
are the following:
(1) Securities purchased in transactions not involving a public
offering from the issuer of such securities, which issuer is an eligible
portfolio company. An "eligible portfolio company" is defined in the 1940 Act as
any issuer which:
(a) is organized under the laws of, and has its principal place of
business in, the United States;
(b) is not an investment company other than an SBIC wholly-owned by the
BDC; and
(c) satisfies one or more of the following requirements:
(i) the issuer does not have a class of securities with respect to
which a broker or dealer may extend margin credit; or
(ii) the issuer is controlled by a BDC and the BDC has an affiliated
person serving as a director of issuer;
(iii) the issuer has total assets of not more than $4,000,000 and
capital and surplus (stockholders' equity less retained earnings) of
not less than $2,000,000, or such other amounts as the SEC may
establish by rule or regulation; or
(iv) the issuer meets such requirements as the SEC may establish from
time to time by rule or regulation.
(2) Securities for which there is no public market and which are
purchased in transactions not involving a public offering from the issuer of
such securities where the issuer is an eligible portfolio company which is
controlled by the BDC.
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(3) Securities received in exchange for or distributed on or with
respect to securities described in (1) or (2) above, or pursuant to the exercise
of options, warrants or rights relating to such securities.
(4) Cash, cash items, government securities, or high quality debt
securities maturing in one year or less from the time of investment.
In addition, a BDC must have been organized (and have its principal
place of business) in the United States for the purpose of making investments in
the types of securities described in (1) or (2) above. In order to count
securities as Qualifying Assets for the purpose of the 70% test, the BDC must
either control the issuer of the securities or must make available to the issuer
of the securities significant managerial assistance; except that, where the BDC
purchases such securities in conjunction with one or more other persons acting
together, one of the other persons in the group may make available the required
managerial assistance.
ITEM 2. PROPERTIES
We rent office space from a law firm, the principals of which are
officers and directors of Elk, and we share certain office expenses with that
firm. The law firm, at our request, rented an additional 1,800 square feet of
office space contiguous with our offices at a below market rent (the "Additional
Space"). Until we require the Additional Space, the law firm sublets the
Additional Space to outside tenants. In the event all or a portion of the
Additional Space is vacant, Elk has agreed to reimburse the law firm for any
additional rent due. At present, the Additional Space is fully occupied pursuant
to short-term arrangements. In the event our operations expand, the Additional
Space could be made available to us on relatively short notice. We believe our
current space, together with the Additional Space, will be sufficient for our
currently anticipated needs.
ITEM 3. LEGAL PROCEEDINGS
Elk is not currently a party to any material legal proceeding. From
time to time, Elk is engaged in various legal proceedings incident to the
ordinary course of its business. In the opinion of Elk's management and based
upon the advice of legal counsel, there is no proceeding pending, or to the
knowledge of management threatened, which in the event of an adverse decision
would result in a material adverse effect on Elk's results of operations or
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of Elk's 1999 fiscal year.
EXECUTIVE OFFICERS OF THE REGISTRANT
The current executive officers of Elk are as follows:
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
Silvia M. Mullens(2) Vice President
Margaret Chance(2) Secretary
- ----------
(1) Ellen M. Walker, Gary C. Granoff and Lee A. Forlenza are officers and
stockholders in the law firm of Granoff, Walker & Forlenza, P.C.
(2) Gary C. Granoff, Ellen M. Walker, Lee A. Forlenza, Steven Etra, Margaret
Chance and Silvia Mullens are each an "interested person," 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 Chairman of the Board 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
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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 Bachelor of Business Administration degree in
Accounting and a Juris Doctor degree (with honors) from The George Washington
University.
Ellen M. Walker, age 43, has been a Vice President and General Counsel
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 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 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.
Each officer's term extends until the first meeting of the Board of
Directors following the next annual meeting of stockholders and until his or her
successor is elected and qualified.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Elk Common Stock is traded in the over-the-counter market on a
limited basis. The Elk Common Stock was listed on the Nasdaq SmallCap Market on
June 22, 1998, under the symbol EKFG. Due to the limited number of transactions
involving the Elk Common Stock during the periods presented below, it does not
appear that an established public trading market has developed with respect to
these securities.
The following tables show the closing high and low bid prices per share
of Common Stock as reported by the National Quotation Bureau, Inc. or directly
by dealers maintaining a market in the Common Stock (through June 22, 1998) and
the high and low sale prices per share of Common Stock as reported by Nasdaq
(from June 23, 1998), for the fiscal years ended June 30, 1998 and 1999.
Elk Bid
- --- ------------------------
High Low
---- ---
Fiscal 1998
1st Quarter...................................... 6.25 5.125
2nd Quarter...................................... 6.625 6.25
3rd Quarter...................................... 7.125 6.625
4th Quarter (to June 22, 1998)................... 9.75 7.125
Elk Sale
- --- ------------------------
High Low
---- ---
Fiscal 1998
4th Quarter (from June 23, 1998)................. $ 9.50 $9.50
Fiscal 1999
1st Quarter...................................... 11.25 7.75
2nd Quarter...................................... 11.00 9.125
3rd Quarter...................................... 10.625 8.875
4th Quarter ..................................... 14.00 8.6815
Elk registered under the 1940 Act for the fiscal year commencing July
1, 1983, and declared and paid dividends to holders of Common Stock for the
fiscal years ended June 30, 1984 through June 30, 1992. Elk did not pay
dividends during the fiscal years ended June 30, 1993, 1994 and 1995. Elk
recommenced paying dividends for the fiscal year beginning July 1, 1995, has
paid dividends quarterly dividends since that time, and currently anticipates
that it will continue to pay quarterly dividends on its Common Stock. There can
be no assurance, however, that Elk will have sufficient earnings to pay such
dividends in the future.
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ITEM 6. SELECTED FINANCIAL DATA
The table below contains certain summary historical financial
information of Elk. You should read these tables in conjunction with the
consolidated financial statements of Elk and the related notes for the years
ended June 30, 1999, 1998 and 1997 and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Statement of Operations Fiscal Year Ended
Data June 30,
- -------------------------- --------------------------------------------------------------------------------
1995 1996 1997 1998 1999
==== ==== ==== ==== ====
<S> <C> <C> <C> <C> <C>
Investment Income $2,629,901 $3,084,412 $4,023,795 $4,606,456 $5,583,894
---------- ---------- ---------- ---------- ----------
Interest Expense 1,002,959 1,105,993 1,582,700 1,840,731 2,440,051
Other Expenses 960,474 1,108,505 1,408,034 1,852,262 1,903,182
---------- ---------- ---------- ---------- ----------
Total Expenses 1,963,433 2,214,498 2,990,734 3,692,993 4,343,233
---------- ---------- ---------- ---------- ----------
Investment Income Before
Credit (provision) for Loan
Gains (losses) and Gains
(Losses) on Assets Acquired
and Income Taxes 666,468 869,914 1,033,061 913,463 1,240,661
---------- ---------- ---------- ---------- ----------
Credit (provision) for Loan
Gains (losses) and Gains
(Losses) on Assets Acquired (13,515) 44,292 (8,923) (14,649) (11,272)
Other Income 24,885 38,798 7,200
Benefit of (Provision for)
Income Taxes(1) -- (5,945) (28,676) (3,271) 769
---------- ---------- ---------- ---------- ----------
Net Income 652,953 908,261 1,020,347 934,341 1,237,358
Other Comprehensive Income -- -- 58,241 140,548 62,964
---------- ---------- ---------- ---------- ----------
Total Comprehensive Income $652,953 $908,261 $1,078,588 $1,074,889 $1,300,322
========== ========== ========== ========== ==========
Net Income Per Common
Share (Basic and Diluted) $ .66 $ .73 $ .79 $ .62 $ .71
========== ========== ========== ========== ==========
Common Stock Dividends
Paid $ -- $ 937,028 $ 946,655 $ 986,724 $1,256,832
========== ========== ========== ========== ==========
Weighted Average Shares of
Common Stock Outstanding 988,953 1,247,120 1,283,600 1,518,969 1,745,600
========== ========== ========== ========== ==========
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
Elk's principal activity is making small and medium sized business loans as
permitted under the 1958 Act. Historically, Elk's earnings have been derived
primarily from net interest income, which is the difference between interest
earned on interest-earning assets consisting of small and medium size business
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loans, and the interest paid on interest-bearing liabilities consisting of
indebtedness to Elk's banks and subordinated debentures issued to the SBA. Net
interest income is a function of the net interest rate spread, which is the
difference between the average yield earned on interest-earning assets and the
average interest rate paid on interest-bearing liabilities, as well as the
average balance of interest-earning assets as compared to interest-bearing
liabilities. Unrealized depreciation on loans and investments is recorded when
Elk adjusts the value of a loan to reflect management's estimate of the fair
value, as approved by the Board of Directors. See Note 1 of "Notes to the
Financial Statements."
Results of Operations
Results of Operations For the Years ended June 30, 1999 and 1998
Total Investment Income
Elk's investment income increased $977,438 to $5,583,894 for the year
ended June 30, 1999, when compared with the year ended June 30, 1998. The
increase was due to an increase in interest earned on the loan portfolio
($1,088,940) off-set by a decrease in other fees and income ($111,502). This
reflects Elk's decision to maximize stockholders' return by maximizing the use
of bank financing.
Operating Expenses
Interest expenses increased $599,320 to $2,440,051 when compared with
the prior year due to Elk's strategy to maximize bank financing which rose to
$31,000,000 as of June 30, 1999, as compared to $22,085,000 at June 30, 1998.
Other operating expenses increased to $1,767,989 for the year ended June 30,
1999, as compared with $1,639,163 in the prior year. Bad debt expense decreased
$81,283 to $146,465 during the year ended June 30, 1999, as compared with the
year ended June 30, 1998.
Net Income
Net income for the year ended June 30, 1999, increased $303,014 to
$1,237,358 when compared with the year ended June 30, 1998. The increase
reflects the benefit of Elk's decision to maximize the use of leverage on bank
financing.
Results of Operations For the Years ended June 30, 1998 and 1997
Total Investment Income
Elk's investment income for the fiscal year ended June 30, 1998
increased to $4,606,456 from $4,023,795, or 14.5%, when compared with the year
ended June 30, 1997. This increase was mainly due to an increase in its loan
portfolio. The portfolio increased from $33,249,206, as of June 30, 1997 to
$41,590,000 as of June 30, 1998, as part of our strategy to maximize stockholder
rate of return primarily through the utilization of bank financing.
Operating Expenses
Interest expense for the year ended June 30, 1998 increased to
$1,840,731 as compared to $1,582,700 for the similar period ended June 30, 1997.
This increase was mainly due to increased bank borrowings of $22,085,000 as of
June 30, 1998, compared to $16,820,000 as of June 30, 1997.
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Other operating expenses increased $449,954 when compared with the year
ended June 30, 1997. This increase was mainly due to a $227,748 increase in bad
debt expense, in addition to various increases in the administrative fees.
Net Income
Net income for the year ended June 30, 1998, decreased $86,006, as
compared to the year ended June 30, 1997. This decrease was mainly caused by an
increase in the bad debt expense of $227,748.
Balance Sheet and Reserves
Total assets increased by $9,111,063 as of June 30, 1999 as compared to
June 30, 1998. This increase was due to management's decision to expand its
portfolio in the Chicago taxi medallion market plus increases in the diversified
loan portfolio. This expansion was financed by an increase in bank debt of
$8,915,000 during the 1999 fiscal year.
Liquidity and Capital Resources
To date, Elk has funded its operations through private placements of
its securities, bank financing, and the issuance to the SBA of its subordinated
debentures.
In 1994, Elk agreed to repurchase all of the 547,271 outstanding shares
of its 3% preferred stock from the SBA for an aggregate price of $1,915,449,
representing a discount of 65% from the original issue price of $10 per share.
As a condition of the repurchase, Elk granted the SBA a liquidating interest in
a newly established restricted capital surplus account (the "Restricted Capital
Account"). The Restricted Capital Account is equal to the amount of the net
repurchase discount in which the SBA received a liquidating interest, amortized
over 60 months ending November 10, 1999. However, if Elk is liquidated or if a
material violation of SBA Regulations occurs during the amortization period, the
SBA would receive the remaining unamortized amount of the Restricted Capital
Account prior to the stockholders of Elk receiving any amounts on their Common
Stock. The unamortized balance of the SBA's liquidating interest at June 30,
1999 was $256,916.
In December 1994 and September 1995 Elk raised additional capital of
$450,000 and $1,249,585, respectively, less private placement costs of $76,445
and $21,482, respectively. These proceeds were used to repurchase Elk's 3%
preferred stock from the SBA. In connection with the purchase, all dividends in
arrears on the preferred stock were extinguished.
During January 1998, Elk completed a private placement of 462,000
shares of common stock at $6.50 per share for aggregate gross proceeds of
$3,003,000, less offering expenses of $115,000. The net proceeds were utilized
to repay bank indebtedness and for working capital. A portion of the proceeds
temporarily used to reduce bank indebtedness, up to a maximum of $963,000, were
allocated by Elk toward the organization and capitalization of its new parent
company, Ameritrans.
At June 30, 1999, 78% of Elk's indebtedness was represented by
indebtedness to its banks and 22% by the debentures issued to the SBA with fixed
rates of interest ranging from 6.12 to 8.20%. Elk currently may borrow up to
$35,000,000 under its existing lines of credit, subject to the limitations
imposed by its borrowing base agreement with its banks and the SBA, the
statutory and regulatory limitations imposed by the SBA, and the availability of
funds. During September 1999, Elk's banks collectively approved an increase of
the credit lines to an aggregate of $40,000,000. In addition, Elk is presently
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eligible to apply for additional leverage from the SBA if it is determined by
the Board of Directors to be in the best interests of Elk. No assurance can be
given that, if applied for, such additional financing will be approved by the
SBA.
Loan amortization and prepayments also provide a source of funding for
Elk. Prepayments on loans are influenced significantly by general interest
rates, economic conditions and competition.
Because Elk distributes at least 90% of its investment company taxable
income (and if the Share Exchange is completed, Ameritrans will do likewise),
we will continue to rely upon external sources of funds to finance growth. In
order to provide the funds necessary for our expansion strategy, we expect to
raise additional capital and to incur, from time to time, additional bank
indebtedness and (if deemed necessary by management) to obtain SBA loans. There
can be no assurances that such additional financing will be available on
acceptable terms.
Year 2000 Compliance
We have been taking steps to address and prevent problems in connection
with the year 2000 ("Year 2000"). Such problems are expected to occur due to the
inability of computer systems to properly recognize and process date-sensitive
information relating to the Year 2000 and beyond. Year 2000 issues may affect
our information technology systems ("IT") and non-information technology systems
("Non-IT"). The following are the IT systems that we use:
o We use a computer program to track our receivable loans ("Loan Track").
To address Year 2000, in February 1998 we engaged the consultant who
originally developed Loan Track for us, to test, upgrade and certify
Loan Track as Year 2000-compliant. The consultant completed all of such
tasks, and the Year 2000-compliant Loan Track program is now in use in
our regular operations. We also use the standard Peachtree(TM)
accounting system for general in-house accounting functions. The
version of Peachtree we currently use has been upgraded to be Year
2000-compliant.
o We also use other industry-wide programs such as Windows 95 and Word
Perfect. It is expected that either the current versions are Year
2000-compliant or that Year 2000-compliant upgrade versions have been
obtained or will be obtained prior to December 1999. In addition,
during the past 12 months and at present, we have been replacing or
upgrading our computer hardware with equipment that will be Year
2000-compliant.
Non-IT systems have been defined as embedded technology, such as
micro-controllers, that may be included in elevators and other equipment and
machinery. Most of our Non-IT systems consist of office equipment. We have
inventoried our Non-IT systems, and we are in the process of contacting our
office equipment and telecommunications suppliers and landlord to determine the
status of their Year 2000 readiness. We do not believe that we face material
Year 2000 issues with respect to our Non-IT systems.
Costs in connection with Year 2000 compliance have been (i) to review
and upgrade existing IT systems; (ii) to analyze Year 2000 readiness of our
banks and customers and (iii) to analyze Non- IT Year 2000 compliance. To date,
such costs have aggregated approximately $10,000 and, for the most part, have
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been for IT review and upgrades. Such costs are being treated as expenses.
During June and July 1999, we replaced certain hardware and purchased additional
software and communications systems at a cost of approximately $55,000, and the
cost of such replacements are being capitalized and depreciated over a five year
period. We do not believe that other costs associated with Year 2000 compliance
will be material or that they will have a material effect on our financial
condition.
We are dependent on banks for financing and for normal banking
operations. In surveying Year 2000 readiness, we have received oral, and we are
in the process of obtaining written, assurances from our banks that they are
taking the actions necessary to be Year 2000-compliant so that neither the
banks' nor their customers' business will be interrupted due to Year 2000
difficulties.
Our portfolio companies are taxi and taxi-medallion owners and other
small businesses, which, to the best of our knowledge, use computer equipment
and software only to a limited extent in the operation of their businesses. We
are in the process of surveying certain of our vendors to assess their potential
Year 2000 exposure and to confirm that they are making arrangements for their
own Year 2000 compliance.
To date we have attempted to comply fully with Year 2000 compliance
requirements, and we are in the process of determining the compliance of our
banks and customers. Our failure, or the failure of third parties, to adequately
address Year 2000 issues could have a material adverse effect on our financial
condition or results of operations. However, given the nature of our portfolio
companies and the industries in which they operate, we anticipate that few of
our customers would actually suffer material adverse effects from Year 2000. We
believe that our reasonably likely maximum risk is (i) a material increase in
our credit losses due to Year 2000 problems affecting our portfolio companies
and our banks and (ii) disruption in financial markets, causing us liquidity
stress.
At this point, our management is unable to quantify the amount of
potential losses and disruptions due to Year 2000 issues, but is in the process
of developing a contingency plan.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pursuant to the General Instructions to Rule 305 of Regulations S-K,
the quantitative and qualitative disclosures called for by this Item 7A and by
Rule 305 of Regulation S-K are inapplicable to Elk at this time.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted in the response found under Item
14(A)(1) in this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
-28-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this item is contained in part under the caption
"Executive Officers of the Registrant" in Part I hereof and the remainder is
incorporated herein by reference from the discussion responsive thereto under
the caption "Election of Directors" in Elk's Proxy Statement relating to its
Annual Meeting of Stockholders scheduled for November 18, 1999 (the "Proxy
Statement").
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is incorporated herein by reference from the
discussion responsive thereto under the caption "Executive Compensation" in the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is incorporated herein by reference from the
discussion responsive thereto under the caption "Stock Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is incorporated herein by reference from the
discussion responsive thereto under the caption "Certain Transactions" in the
Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a) 1. and 2. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The financial statements and financial statement schedules as listed
in the Index to Financial Statements are filed as part of this Annual Report on
Form 10-K.
b) REPORTS ON FORM 8-K
None.
c) EXHIBITS
The Exhibits filed as part of this Annual Report on Form 10-K are
listed on the Exhibit Index immediately preceding such Exhibits, which Exhibit
Index is incorporated herein by reference.
-29-
<PAGE>
IMPORTANT FACTORS RELATING TO FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in such statements. In connection with
certain forward-looking statements contained in this Form 10-K and those that
may be made in the future by or on behalf of Elk, Elk notes that there are
various factors that could cause actual results to differ materially from those
set forth in any such forward-looking statements. The forwardlooking statements
contained in this Form 10-K were prepared by management and are qualified by,
and subject to, significant business, economic, competitive, regulatory and
other uncertainties and contingencies, all of which are difficult or impossible
to predict and many of which are beyond the control of Elk. Accordingly, there
can be no assurance that the forward-looking statements contained in this Form
10-K will be realized or that actual results will not be significantly higher or
lower. The statements have not been audited by, examined by, compiled by or
subjected to agreed-upon procedures by independent accountants, and no
third-party has independently verified or reviewed such statements. Readers of
this Form 10-K should consider these facts in evaluating the information
contained herein. In addition, the business and operations of Elk are subject to
substantial risks which increase the uncertainty inherent in the forward-looking
statements contained in this Form 10-K. The inclusion of the forward-looking
statements contained in this Form 10-K should not be regarded as a
representation by Elk or any other person that the forward-looking statements
contained in this form 10-K will be achieved. In light of the foregoing, readers
of this Form 10-K are cautioned not to place undue reliance on the
forward-looking statements contained herein. These risks and others that are
detailed in this Form 10-K and other documents that Elk files from time to time
with the Securities and Exchange Commission, including quarterly reports on Form
10-Q and any current reports on Form 8-K must be considered by any investor or
potential investor in Elk.
-30-
<PAGE>
SIGNATURES
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
Date: September 28, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Gary C. Granoff President and Chairman of the Board September 28, 1999
- --------------------- of Directors
Gary C. Granoff
/s/ Ellen M. Walker Vice President, General Counsel and September 28, 1999
- --------------------- Director
Ellen M. Walker
/s/ Lee A. Forlenza Vice President and Director September 28, 1999
- ---------------------
Lee A. Forlenza
/s/ Steven Etra Vice President and Director September 28, 1999
- ---------------------
Steven Etra
/s/ Marvin Sabesan Director September 28, 1999
- ---------------------
Marvin Sabesan
/s/ Paul Creditor Director September 28, 1999
- ---------------------
Paul Creditor
/s/ Allen Kaplan Director September 28, 1999
- ---------------------
Allen Kaplan
/s/ John L. Acierno Director September 28, 1999
- ---------------------
John L. Acierno
/s/ John R. Laird Director September 28, 1999
- ---------------------
John R. Laird
/s/ Howard F. Sommer Director September 28, 1999
- ---------------------
Howard F. Sommer
</TABLE>
-31-
<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>
<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 3% to prime minus 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, 20,000 options were granted to
non-employee directors with an exercise price to be determined by the
Board of Directors.
F-25
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit
------ -------
2 Form of Agreement and Plan of Share Exchange with Ameritrans Capital
Corporation.*
3(i) Certificate of Incorporation*
3(ii) Bylaws*
4 Form of subordinated debentures issued to the U.S. Small Business
Administration ("SBA") by Elk Associates Funding Corporation ("Elk")
-- Debenture issued March 26, 1997 -- principal amount -- $430,000;
Maturity Date -- March 1, 2007; Stated Interest Rate -- 7.38%.**
The following debentures are omitted pursuant to Rule 483:
a. Debenture issued September 22, 1993 -- principal amount --
$1,500,000; Maturity Date -- September 1, 2003; Stated Interest
Rate -- 6.12%.
b. Debenture issued September 22, 1993 -- principal amount --
$2,220,000; Maturity Date -- September 1, 2003; Stated Interest
Rate -- 6.12%.
c. Debenture issued September 28, 1994 -- principal amount --
$2,690,000; Maturity Date -- September 1, 2004; Stated Interest
Rate -- 8.20%.
d. Debenture issued December 14, 1995 -- principal amount --
$1,020,000; Maturity Date -- December 1, 2005; Stated Interest
Rate -- 6.54%.
e. Debenture issued June 26, 1996 -- principal amount --
$1,020,000; Maturity Date -- June 1, 2006; Stated Interest Rate
-- 7.71%.
10.1 Security Agreement between Elk and the SBA, dated September 9,
1993.**
10.2 1999 Employee Stock Option Plan.
10.3 Non-Employee Director Stock Option Plan.
10.4 Custodian Agreement among Elk; Bank Leumi Trust Company of New York
("Leumi"), Israel Discount Bank of New York ("IDB"), Bank Hapoalim
B.M. ("Hapoalim") and Extebank; the SBA, and IDB as Custodian; dated
September 9, 1993 (the "Custodian Agreement").**
10.5 Agreements between Elk and the SBA.**
a. Agreement dated September 9, 1993.
b. Agreement dated February 7, 1997.
<PAGE>
10.6 Intercreditor Agreement among Elk, Leumi, IDB, Hapoalim, Extebank
and the SBA, dated September 9, 1993 (the "Intercreditor
Agreement").**
10.7 Amendments to the Custodian and Intercreditor Agreements.**
a. Amendment removing Hapoalim and Extebank and adding European
American Bank ("EAB"), dated September 28, 1994.
b. Form of Amendment adding bank:
i. Amendment adding United Mizrahi Bank and Trust Company
("UMB"), dated June __, 1995.
ii. Amendment adding Sterling National Bank and Trust Company
of New York ("Sterling"), dated April __, 1996 -- omitted
pursuant to Rule 483.
10.8 Bank Intercreditor Agreement among Elk, Leumi, IDB, Hapoalim and
Extebank, dated September 9, 1993 (the "Bank Intercreditor
Agreement").**
10.9 Amendments to the Bank Intercreditor Agreement.**
a. Amendment removing Hapoalim and Extebank and adding European
American Bank ("EAB"), dated September 28, 1994.
b. Form of Amendment adding bank:
i. Amendment adding UMB, dated June __, 1995.
ii. Amendment adding Sterling, dated April __, 1996 -- omitted
pursuant to Rule 483.
10.10 Grid Demand Promissory Note from Elk to IDB in the principal amount
of $14,000,000, dated July 28, 1998.**
10.11 Letter Agreement between Elk and EAB regarding $14,000,000 line of
credit, dated September 2, 1998, together with Master Note in the
principal amount of $14,000,000, dated September, 1998.**
10.12 Promissory Note (Grid) from Elk to Leumi in the principal amount of
$7,000,000, dated January 4, 1999, together with side letter dated
January 4, 1999.**
10.13 Form of indemnity agreement between Ameritrans and each of its
directors and officers.*
27 Elk Associates Funding Corporation Financial Data Schedule.
- ---------------
* Incorporated by reference from the Registrant's Registration
Statement on Form N14 (File No. 333-63951), initially filed
September 22, 1998.
** Incorporated by reference from the Registrant's Registration
Statement on Form N2 (File No. 333-82693), initially filed July 12,
1999.
<PAGE>
Exhibit 10.2
ELK ASSOCIATES FUNDING CORPORATION
1998 INCENTIVE STOCK OPTION PLAN
The purpose of the 1998 Incentive Stock Option Plan (the "Plan") is to
attract and retain key employees of Elk Associates Funding Corporation (the
"Company") and its affiliates, to provide an incentive for them to achieve
long-range performance goals, and to enable them to participate in the long-term
growth of the Company by the granting of Incentive Stock Options (individually
referred to herein as an "Option" and collectively as "Options") to purchase the
Company's common stock, par value $0.01 par value (the "Common Stock").
1. Administration of the Plan.
The administration of the Plan shall be under the general supervision
of the 1998 Employee Plan Committee of the Board of Directors of the Company
(the "1998 Employee Plan Committee"). Within the limits of the Plan, the 1998
Employee Plan Committee shall determine the individuals to whom, and the times
at which, Options shall be granted, the type of Option to be granted, the
duration of each Option, the price and method of payment for each Option, and
the time or times within which (during its term) all or portions of each Option
may be exercised. The 1998 Employee Plan Committee may establish such rules as
it deems necessary for the proper administration of the Plan, make such
determinations and interpretations with respect to the Plan and Options granted
under it as may be necessary or desirable and include such further provisions or
conditions in Options granted under the Plan as it deems advisable. To the
extent permitted by law, the 1998 Employee Plan Committee may delegate its
authority under the Plan to a sub-committee of the 1998 Employee Plan Committee.
2. Shares Subject to the Plan.
(a) Number of Shares. The aggregate number of shares of Common
Stock of the Company which may be optioned under the Plan is 125,000
shares. In the event that the 1998 Employee Plan Committee in its
discretion determines that any stock dividend, split-up, combination or
reclassification of shares, recapitalization or other similar capital
change affects the Common Stock such that adjustment is required in
order to preserve the benefits or potential benefits of the Plan or any
Option granted under the Plan, the maximum aggregate number and kind of
shares or securities of the Company as to which Options may be granted
under the Plan and as to which Options then outstanding shall be
exercisable, and the option price of such Options, shall be
appropriately adjusted by the 1998 Employee Plan Committee (whose
determination shall be conclusive) so that the proportionate number of
shares or other securities as to which Options may be granted and the
proportionate interest of holders of outstanding Options shall be
maintained as before the occurrence of such event.
(b) Effect of Certain Transactions. In order to preserve a
Participant's (as defined below) rights under an Option in the event of
a change in control of the Company, the 1998 Employee Plan Committee in
its discretion may, at the time an Option is made or at any time
thereafter, take one or more of the following actions: (i) provide for
the acceleration of any time period relating to the exercise or payment
of the Option, (ii) provide for payment to the Participant of cash or
other property with a fair market value equal to the amount that would
have been received upon the exercise or payment of the Option had the
Option been exercised or
<PAGE>
paid upon the change in control, (iii) adjust the terms of the Option
in a manner determined by the 1998 Employee Plan Committee to reflect
the change in control, (iv) cause the Option to be assumed, or new
rights substituted therefor, by another entity, or (v) make such other
provision as the 1998 Employee Plan Committee may consider equitable to
the Participant and in the best interests of the Company, provided such
action shall comply with Section 424 of the Code and will not render
any Incentive Stock Option granted hereunder to be other than an
incentive stock option for purposes of Section 422 of the Code.
(c) Restoration of Shares. If any Option expires or is
terminated unexercised or is forfeited for any reason, the shares
subject to such Option, to the extent of such expiration, termination
or forfeiture, shall again be available for granting pursuant to
Options under the Plan, subject, however, in the case of Incentive
Stock Options, to any requirements under the Code (as defined below).
(d) Reservation of Shares. The Company shall at all times
while the Plan is in force reserve such number of shares of Common
Stock as will be sufficient to satisfy the requirements of the Plan.
Shares issued under the Plan may consist in whole or in part of
authorized but unissued shares or treasury shares.
3. Grant of Options; Eligible Persons.
(a) Types of Options. Options shall be granted under the Plan
either as incentive stock options ("Incentive Stock Options"), as
defined in Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"), or as Options that do not meet the requirements of
Section 422 ("Nonstatutory Stock Options"). Options may be granted from
time to time by the 1998 Employee Plan Committee, within the limits set
forth in Sections 1 and 3 of the Plan, to all employees of the Company
or of any parent corporation or subsidiary corporation of the Company
(as defined in Sections 424(e) and (f), respectively, of the Code)
(such individuals collectively referred to herein as "Participants").
(b) Date of Grant. The date of grant for each Option shall be
the date on which it is approved by the 1998 Employee Plan Committee or
such later date as the 1998 Employee Plan Committee may specify. No
Incentive Stock Options shall be granted hereunder after ten years from
the date on which the Plan was approved by the Board of Directors.
4. Form of Options.
Options granted hereunder shall be evidenced by a writing delivered to
the optionee specifying the terms and conditions thereof and containing such
other terms and conditions not inconsistent with the provisions of the Plan as
the 1998 Employee Plan Committee considers necessary or advisable to achieve the
purposes of the Plan or comply with applicable tax and regulatory laws and
accounting principles. The form of such Options may vary among optionees.
5. Option Price.
The price at which shares may from time to time be optioned shall be
determined by the 1998 Employee Plan Committee, provided that such price shall
not be less than the current market value of the
2
<PAGE>
Common Stock on the date of grant, and provided further that no Incentive Stock
Option shall be granted to any individual who is ineligible to be granted an
Incentive Stock Option because his ownership of stock of the Company or its
parent or subsidiary corporations exceeds the limitations set forth in Section
422(b)(6) of the Code unless such option price is at least 110% of the current
market value of the Common Stock on the date of grant.
To the extent permitted by law, the 1998 Employee Plan Committee may in
its discretion permit the option price to be paid in whole or in part by a note
or in installments or with shares of Common Stock of the Company or such other
lawful consideration as the 1998 Employee Plan Committee may determine.
6. Term of Option and Dates of Exercise.
(a) Exercisability. The 1998 Employee Plan Committee shall
determine the term of all Options, the time or times that Options are
exercisable and whether they are exercisable in installments, provided
that the term of each Option granted under the Plan shall not exceed a
period of ten years from the date of its grant, and provided further
that no Incentive Stock Option shall be granted to any individual who
is ineligible to be granted such Option because his ownership of stock
of the Company or its parent or subsidiary corporations exceeds the
limitations set forth in Section 422(b)(6) of the Code unless the term
of his Incentive Stock Option does not exceed a period of five years
from the date of its grant. In the absence of such determination, the
Option shall be exercisable at any time or from time to time, in whole
or in part, during a period of ten years from the date of its grant or,
in the case of an Incentive Stock Option, the maximum term of such
Option.
(b) Effect of Disability, Death or Termination of Employment.
The 1998 Employee Plan Committee shall determine the effect on an
Option of the disability, death, retirement or other termination of
employment of an optionee and the extent to which, and during the
period which, the optionee's estate, legal representative, guardian, or
beneficiary on death may exercise rights thereunder. Any beneficiary on
death shall be designated by the optionee, in the manner determined by
the 1998 Employee Plan Committee, to exercise rights of the optionee in
the case of the optionee's death.
(c) Other Conditions. The 1998 Employee Plan Committee may
impose such conditions with respect to the exercise of Options,
including conditions relating to applicable federal or state securities
laws, as it considers necessary or advisable.
(d) Withholding. The optionee shall pay to the Company, or
make provisions satisfactory to the 1998 Employee Plan Committee for
payment of, any taxes required by law to be withheld in respect of any
Options under the Plan no later than the date of the event creating the
tax liability. The Company and any parent corporation or subsidiary
corporation of the Company (as defined in Sections 424(e) and (f),
respectively, of the Code) may, to the extent permitted by law, deduct
any such tax obligations from any payment of any kind otherwise due to
the optionee.
(e) Amendment of Options. The 1998 Employee Plan Committee may
amend, modify or terminate any outstanding Option, including
substituting therefor another Option of the same or different type,
changing the date of exercise or realization and converting an
Incentive Stock Option to a Nonstatutory Stock Option, provided that
the optionee's consent to such action shall be required unless the 1998
Employee Plan Committee determines that the action, taking into account
any
3
<PAGE>
related action, would not materially and adversely affect the optionee.
7. Non-transferability.
Options granted under the Plan shall not be transferable by the holder
thereof otherwise than by will or the laws of descent and distribution or, in
the case of a Nonstatutory Stock Option, to the extent consistent with
qualifying for the exemption provided by Rule 16b-3 under the Securities
Exchange Act of 1934 (the "Exchange Act"), pursuant to a qualified domestic
relations order, and shall be exercisable, during the holder's lifetime, only by
him or her or such permitted transferee.
8. No Right to Employment.
No persons shall have any claim or right to be granted an Option, and
the grant of an Option shall not be construed as giving an optionee the right to
continued employment. The Company expressly reserves the right at any time to
dismiss an optionee free from any liability or claim under the Plan, except as
specifically provided in the applicable Option.
9. No Rights as a Shareholder.
Subject to the provisions of the applicable Option, no optionee or any
person claiming through an optionee shall have any rights as a shareholder with
respect to any shares of Common Stock to be distributed under the plan until he
or she becomes the holder thereof.
10. Amendment or Termination.
The Board of Directors of the Company may amend, suspend or terminate
the Plan or any portion thereof at any time, subject to any shareholder approval
that the Board of Directors determines to be necessary or advisable, provided
that the Participant's consent will be required for any amendment, suspension or
termination that would adversely affect the rights of the Participant under any
outstanding Options.
11. Adjustment of Shares; Merger or Consolidation, Etc. of the Company.
(a) Recapitalization, Etc. In the event there is any change in
the outstanding Common Stock of the Company by reason of any
reorganization, recapitalization, stock split, stock dividend,
combination of shares, or otherwise, there shall be substituted for or
added to each share of Common Stock theretofore appropriated or
thereafter subject, or which may become subject, to any Option, the
number and kind of shares of stock or other securities into which each
outstanding share of Common Stock shall be so changed or for which each
such share shall be exchanged, or to which each such share shall be
exchanged, or to which each such share shall be entitled, as the case
may be, and the per share price thereof also shall be appropriately
adjusted. Notwithstanding the foregoing, (i) each such adjustment with
respect to an Incentive Stock Option shall comply with the rules of
Section 424(a) of the Code and (ii) in no event shall any adjustment be
made which would render any Incentive Stock Option granted hereunder to
be other than an incentive stock option for purposes of Section 422 of
the Code.
(b) Merger, Consolidation, or Change in Control of Company.
Upon (i) the merger or
4
<PAGE>
consolidation of the Company with or into another corporation (pursuant
to which the stockholders of the Company immediately prior to such
merger or consolidation will not, as of the date of such merger or
consolidation, own a beneficial interest in shares of voting securities
of the corporation surviving such merger or consolidation having at
least a majority of the combined voting power of such corporation's
then outstanding securities), if the agreement of merger or
consolidation does not provide for (1) the continuance of the Options
granted hereunder or (2) the substitution of new options for Options
granted hereunder, or for the assumption of such Options by the
surviving corporation, (ii) the dissolution, liquidation, or sale of
all or substantially all the assets of the Company to a person
unrelated to the Company or to a direct or indirect owner of a majority
of the voting power of the Company's then outstanding voting securities
(such sale of assets being referred to as an "Asset Sale") or (iii) the
Change in Control of the Company, then the holder of any such Option
theretofore granted and still outstanding (and not otherwise expired)
shall have the right immediately prior to the effective date of such
merger, consolidation, dissolution, liquidation, Asset Sale, or Change
in Control of the Company to exercise such Option(s) in whole or in
part without regard to any installment provision that may have been
made part of the terms and conditions of such Option(s); provided that
all conditions precedent to the exercise of such Option(s), other than
the passage of time, have occurred. The Company, to the extent
practicable, shall give advance notice to affected Optionees of such
merger, consolidation, dissolution, liquidation, Asset Sale, or Change
in Control of the Company. Unless otherwise provided in the subject
award agreement or merger, consolidation, or Asset Sale agreement, all
such Options which are not so exercised shall be forfeited as of the
effective time of such merger, consolidation, dissolution, liquidation,
or Asset Sale (but not in the case of a Change in Control of the
Company). In the event the Company becomes a subsidiary of another
corporation (the "Parent Company") with respect to which the
stockholders of the Company (as determined immediately before such
transaction) own, immediately after such transaction, a beneficial
interest in shares of voting securities of the Parent Company having at
least a majority of the combined voting power of such Parent Company's
then outstanding securities, there shall be substituted for Options
granted hereunder, options to purchase common stock of the Parent
Company. The substitution described in the immediately preceding
sentence shall be effected in a manner such that any option granted by
the Parent Company to replace an incentive stock option granted
hereunder shall satisfy the requirements of Section 422 of the Code.
Notwithstanding the foregoing, the holder of any such Option shall not
have the right to exercise such Option if such exercise would render
any Incentive Stock Options granted hereunder to be other than an
incentive stock option for purposes of Section 422 of the Code.
(c) Definition of Change in Control of the Company. As used
herein, a "Change in Control of the Company" shall be deemed to have
occurred if any person (including any individual, firm, partnership or
other entity), together with all Affiliates and Associates (as defined
under Rule 12b-2 of the General Rules and Regulations promulgated under
the Exchange Act) of such person (but excluding (i) a trustee or other
fiduciary holding securities under an employee benefit plan of the
Company or any subsidiary of the Company, (ii) a corporation owned,
directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of the Company,
(iii) the Company or any subsidiary of the Company, or (iv) only as
provided in the immediately following sentence, a Participant together
with all Affiliates and Associates of the Participant) who is not a
stockholder or an Affiliate or Associate of a stockholder of the
Company on the date of stockholder approval of the Plan is or becomes
the beneficial Owner (as defined in Rule 13d-3 promulgated under the
Exchange Act), directly or indirectly, of securities of the Company
representing 40% or more of the combined voting power of the Company's
then
5
<PAGE>
outstanding securities. The provisions of clause (iv) of the
immediately preceding sentence shall apply only with respect to the
Option(s) held by the Participant who, together with his Affiliates or
Associates, if any, is or becomes the direct or indirect Beneficial
Owner of the percentage of securities set forth in such clause.
12. Stockholder Approval.
The Plan is subject to approval by the stockholders of the Company by
the affirmative vote of the holders of a majority of the shares of capital stock
of the Company entitled to vote thereon and present or represented at a meeting
duly held in accordance with the laws of the State of New York, or by any other
action that would be given the same effect under the laws of such jurisdiction,
which action in either case shall be taken within twelve (12) months from the
date the Plan was adopted by the Board of Directors.
In the event such approval is not obtained, all Options granted under
the Plan shall be void and without effect.
13. Governing Law.
The provisions of the plan shall be governed by and interpreted in
accordance with the laws of the State of New York.
This Plan was approved by the Board of Directors on August 21, 1998.
This Plan was approved by the Shareholders on September 28, 1998.
6
<PAGE>
Exhibit 10.3
ELK ASSOCIATES FUNDING CORPORATION
Non-Employee Director Stock Option Plan
This Non-Employee Director Stock Option Plan dated _________, 1998 (the
"Plan") governs options to purchase Common Stock, $0.01 par value (the "Common
Stock"), of Elk Associates Funding Corporation (the "Company") granted on or
after the date hereof by the Company to members of the Board of Directors (the
"Board") of the Company who are not also employees, officers or interested
persons (as defined in Section 2 below) of the Company. The purpose of the Plan
is to attract and retain qualified persons to serve as Directors of the Company
and to encourage ownership of stock of the Company by such Directors so as to
provide additional incentives to promote the success of the Company.
1. Administration of the Plan.
Grants of stock options (individually referred to herein as an "Option"
and collectively as "Options") under the Plan shall be automatic as provided in
Section 6 hereof. However, all questions of interpretation with respect to the
Plan and Options granted under it shall be determined by a committee (the
"Committee") consisting of the Directors of the Company who are not eligible to
participate in the Plan, and such determination shall be final and binding upon
all persons having an interest in the Plan.
2. Persons Eligible to Participate in the Plan.
Members of the Board who are not also officers or employees of the
Company shall be eligible to participate in the Plan ("Eligible Directors").
3. Shares Subject to the Plan.
(a) Number of Shares. The aggregate number of shares of Common Stock
of the Company which may be optioned under this Plan is 75,000 shares. In the
event of a stock dividend, split-up, combination or reclassification of shares,
recapitalization or similar capital change relating to the Common Stock, the
maximum aggregate number and kind of shares or securities of the Company as to
which Options may be granted under this Plan and as to which Options then
outstanding shall be exercisable, and the exercise price of such Options, shall
be appropriately adjusted by the Committee (whose determination shall be
conclusive) so as to preserve the value of the Option.
(b) Effect of Certain Transactions. In order to preserve an Eligible
Director's rights under an Option in the event of a change in control of the
Company, the Committee in its discretion may, on the Date of Grant (as defined
in Section 6(b) below) or at any time thereafter, take one or more of the
following actions: (i) provide for the acceleration of any time period relating
to the exercise or payment of the Option, (ii) provide for payment to the
Eligible Director of cash or other property with a fair market value equal to
the amount that would have been received upon the exercise or payment of the
Option had the Option been exercised or paid upon the change in control, (iii)
adjust the terms of the Option in a manner determined by the Committee to
reflect the change in control, (iv) cause the Option to be assumed, or new
rights substituted therefor, by another entity, or (v) make such other provision
as the Committee may consider equitable to the Eligible Director and in the best
interest of the Company.
<PAGE>
(c) Restoration of Shares. If any Option expires or is terminated
unexercised or is forfeited for any reason, the shares subject to such Option,
to the extent of such expiration, termination or forfeiture, shall again be
available for granting pursuant to Options under the Plan.
(d) Reservation of Shares. The Company shall at all times while the
Plan is in force reserve such number of shares of Common Stock as will be
sufficient to satisfy the requirements of the Plan. Shares issued under the Plan
may consist in whole or in part of authorized but unissued shares or treasury
shares.
4. Types of Options.
All Options granted under this Plan shall be non-statutory options not
entitled to special tax treatment under Section 422 of the Internal Revenue Code
of 1986, as amended.
5. Form of Options.
Options granted hereunder shall be evidenced by a writing delivered to
the optionee specifying the terms and conditions thereof and containing such
other terms and conditions not inconsistent with the provisions of the Plan as
the Committee considers necessary or advisable to achieve the purposes of the
Plan or comply with applicable tax and regulatory laws and accounting
principles.
6. Grant of Options and Option Terms.
(a) Initial Grant of Options. On the later of (i) date of the
approval of the Plan (the "Approval Date") by the Securities and Exchange
Commission in accordance with the 1940 Act, or (ii) the first anniversary of the
election or appointment of such Director to the Board (the "First Anniversary
Date"), providing such Director is then serving, each of the following Directors
shall automatically be granted Options to purchase the number of shares of
Common Stock determined by dividing $50,000 by the Current Market Value (as
defined in Section 6(c) below) on the date indicated opposite each Director's
name (the "Initial Grants") provided each such Director is serving on the
Company's Board as an Eligible Director on the Approval Date or the First
Anniversary Date, as the case may be:
Name of Director Automatic Grant Date
---------------- --------------------
Paul Creditor
Approval Date
John Acierno
Approval Date
Alan Kaplan
Approval Date
Marvin Sabesan Approval Date
(b) Automatic Grant of Options. At each annual meeting of the
stockholders of the Company after the Approval Date, each new Eligible Director
elected at such meeting shall automatically be granted on such new Eligible
Director's First Anniversary Date of such election an Option to purchase the
number of shares of Common Stock determined by dividing $50,000 by the Current
Market Value of the Common Stock on such First Anniversary Date of such
election. In addition, upon the election of an Eligible Director other than at
an annual meeting of stockholders (whether by the Board or the stockholders and
whether to fill a vacancy or otherwise), each such Eligible Director shall
automatically be granted an Option
-2-
<PAGE>
on the First Anniversary Date of the election of an Eligible Director other than
at an annual meeting of stockholders to purchase that number of shares that is
determined by dividing $50,000 by the Current Market Value of the Common Stock
on the First Anniversary Date of such election. After the Initial Grants have
been made, all subsequent grants of Options to Eligible Directors upon the First
Anniversary Date of their election to the Board shall be referred to as
"Automatic Grants." The "Date of Grant" for the Initial Grants shall be the
Approval Date and the Date of Grant for the Automatic Grants shall be the First
Anniversary Date of the election as a new Eligible Director, whether at an
annual meeting or otherwise, as the case may be. No Options shall be granted
hereunder after ten years from the date on which this Plan was initially
approved and adopted by the Board.
(c) Exercise Price. The price at which shares may from time to time
be optioned shall be determined by the Committee, provided that such price shall
not be less than the current market value (the "Current Market Value") of the
Common Stock on the date of grant, or if no such market value exists, then the
current net asset value of the Common Stock of the Company or such other lawful
consideration as the Committee may determine.
(d) Term of Option. The term of each Option granted under this Plan
shall be five years from the Date of Grant.
(e) Period of Exercise. Options granted under this Plan shall become
exercisable commencing 12 months after the Date of Grant. Directors holding
exercisable Options under this Plan who cease to be Eligible Directors for any
reason, other than death, may exercise the rights they had under such Options at
the time they ceased to be an Eligible Director; provided, however, no
additional Options held by such Directors shall be exercisable thereafter. Upon
the death of a Director, those entitled to do so under the Director's will or
the laws of descent and distribution shall have the right, at any time within
twelve months after the date of death, to exercise in whole or in part any
rights that were available to the Director at the time of his or her death.
Options granted under the Plan shall terminate, and no rights thereunder may be
exercised, after the expiration of five years from their Date of Grant.
(f) Method of Exercise and Payment. Options may be exercised only by
written notice of the Company at its executive offices accompanied by payment of
the full exercise price for the shares of Common Stock as to which they are
exercised. The exercise price shall be paid in cash or by check or by the
surrender of unrestricted shares of Common Stock or by any combination of the
foregoing. Upon receipt of such notice and payment, the Company shall promptly
issue and deliver to the optionee (or other person entitled to exercise the
Option) a certificate or certificates for the number of shares as to which the
exercise is made.
(g) Non-transferability. Options granted under this Plan shall not
be transferable by the holder thereof otherwise than by will or the laws of
descent and distribution, and shall be exercisable, during the holder's
lifetime, only by him or her.
(h) Withholding. The optionee shall pay to the Company, or make
provisions satisfactory to the Company for payment of, any taxes required by law
to be withheld in respect of any Options under the Plan no later than the date
of the event creating the tax liability. The Company and any parent corporation
or subsidiary corporation of the Company (as defined in Sections 424(e) and (f),
respectively, of the Code) may, to the extent permitted by law, deduct any such
tax obligations from any payment of any kind otherwise due to the optionee.
-3-
<PAGE>
7. Limitation of Rights.
(a) No Right to Continue as a Director. Neither the Plan nor the
granting of an Option or any other action taken pursuant to the Plan, shall
constitute an agreement or understanding, express or implied that the Company
will retain an optionee as a Director for any period of time or at any
particular rate of compensation.
(b) No Stockholders' Rights for Options. No Director shall have any
rights as a stockholder with respect to the shares covered by his or her Option
until the date he or she exercises such Option and pays the Option price to the
Company, and no adjustment will be made for dividends or other rights for which
the record date is prior to the date such Option is exercised and paid for.
8. Amendment or Termination.
The Board may amend, suspend or terminate the Plan or any portion
thereof at any time, subject to any stockholder approval that the Board
determines to be necessary or advisable, provided that the Participant's consent
will be required for any amendment, suspension or termination that would
adversely affect the rights of the Participant under any outstanding Options.
9. No Fractional Shares. All grants of Options shall be rounded to the
nearest whole share and no Options representing fractional shares shall be
issued.
10. Governing Law. The provisions of the Plan shall be governed by and
interpreted in accordance with the laws of the State of New York.
This Plan was approved by the Board of Directors on August 21, 1998.
This Plan was approved by the Stockholders on September 28, 1998. This Plan was
approved by the Securities and Exchange Commission on August 31, 1999.
-4-
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<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-1-1998
<PERIOD-END> JUN-30-1999
<CASH> 542,290
<SECURITIES> 0
<RECEIVABLES> 51,103,932
<ALLOWANCES> (380,000)
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<PP&E> 371,675
<DEPRECIATION> (266,235)
<TOTAL-ASSETS> 54,510,801
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0
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