<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Quarterly Period Ended September 30, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from __________ to
___________
Commission File Number 0-22153
----------
ELK ASSOCIATES FUNDING CORPORATION
(Exact name of registrant as specified in its charter)
New York 11-2502336
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
747 Third Avenue
Fourth Floor
New York, New York 10017
(Address of Registrant's (Zip Code)
principal executive office)
Registrant's telephone number, including area code: (800) 214-1047
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of Common Stock, par value $.01 per share,
outstanding as of November 12, 1999: 1,745,600
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION
FORM 10-Q
Table of Contents
Page
----
PART I FINANCIAL INFORMATION..................................................1
ITEM 1. FINANCIAL STATEMENTS............................................1
CONSOLIDATED BALANCE SHEETS September 30, 1999
(Unaudited) and June 30, 1999..............................2
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three Months Ended September 30, 1999 and 1998.....4
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three Months Ended September 30, 1999 and 1998.....5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS......................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.......................15
PART II OTHER INFORMATION....................................................19
ITEM 5. OTHER INFORMATION..............................................19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...............................19
SIGNATURES..............................................................21
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The consolidated balance sheet of Elk Associates Funding Corporation ("Elk") as
of September 30, 1999, the related statements of operations, and cash flows for
the three months ended September 30, 1999 and September 30, 1998 included in
Item 1 have been prepared by Elk, without audit, pursuant to the rules and
regulations of the Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. In the opinion of management, the accompanying
consolidated financial statements include all adjustments (consisting of normal,
recurring adjustments) necessary to summarize fairly Elk's financial position
and results of operations. The results of operations for the three months ended
September 30, 1999 are not necessarily indicative of the results of operations
for the full year or any other interim period. These financial statements should
be read in conjunction with the audited financial statements and notes thereto
included in Elk's Annual Report on Form 10-K/A for the fiscal year ended June
30, 1999 as filed with the Commission.
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, 1999 (Unaudited) and June 30, 1999
ASSETS
<TABLE>
<CAPTION>
September 30, 1999 June 30, 1999
------------------ ------------
<S> <C> <C>
Loans receivable ................................... $ 53,719,005 $ 51,103,932
Less: allowance for loan losses .................... (380,000) (380,000)
------------ ------------
53,339,005 50,723,932
Cash and cash equivalents .......................... 925 542,290
Accrued interest receivable ........................ 783,050 714,626
Assets acquired in satisfaction of loans ........... 612,491 612,491
Receivables from debtors on sales of assets acquired
in satisfaction of loans ....................... 401,646 409,939
Equity securities .................................. 939,386 909,386
Furniture, fixtures and leasehold improvements, net 137,692 105,440
Prepaid expenses and other assets .................. 688,244 492,697
------------ ------------
TOTAL ASSETS ................... $ 56,902,439 $ 54,510,801
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-2-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, 1999 (Unaudited) and June 30, 1999
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, 1999 June 30, 1999
------------------ -------------
LIABILITIES
<S> <C> <C>
Debentures payable to SBA .......................... $ 8,880,000 $ 8,880,000
Notes payable, banks ............................... 33,350,000 31,000,000
Accrued expenses and other liabilities ............. 293,807 223,458
Accrued interest payable ........................... 303,689 354,918
Dividends payable .................................. 314,208 314,208
----------- -----------
TOTAL LIABILITIES ............................. 43,141,704 40,772,584
----------- -----------
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 ......................... 13,375,144 13,197,277
Restricted capital ................................. 79,049 256,916
Retained earnings .................................. 27,332 4,815
Accumulated other comprehensive income ............. 261,754 261,753
----------- -----------
TOTAL STOCKHOLDERS' EQUITY .................... 13,760,735 13,738,217
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .... $56,902,439 $54,510,801
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
For the For the
Three Months Ended Three Months Ended
September 30, 1999 September 30, 1998
------------------ ------------------
INVESTMENT INCOME
<S> <C> <C>
Interest on loans receivable $1,404,270 $1,217,105
Fees and other income 114,561 131,562
---------- ----------
TOTAL INVESTMENT INCOME 1,518,831 1,348,667
---------- ----------
OPERATING EXPENSES
Interest 727,184 574,132
Salaries and employee benefits 145,009 138,453
Legal fees 94,968 92,335
Miscellaneous administrative expenses 196,676 193,522
Loss on assets acquired in
satisfaction of loans, net 59 1,815
Directors' fee 15,000 8,750
Bad debt expense -0- 29,075
---------- ----------
TOTAL OPERATING EXPENSES 1,178,896 1,038,082
---------- ----------
OPERATING INCOME 339,935 310,585
---------- ----------
NET INCOME BEFORE INCOME TAXES 339,935 310,585
INCOME TAXES 3,211 5,363
---------- ----------
NET INCOME $ 336,724 $ 305,222
========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING
- Basic 1,745,600 1,745,600
========== ==========
- Diluted 1,749,894 1,745,600
========== ==========
NET INCOME PER COMMON SHARE
- Basic .1929 .1749
========== ==========
- Diluted .1924 .1749
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
For the For the
Three Months Ended Three Months Ended
September 30, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................. $ 336,724 $ 305,222
----------- -----------
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization .......................... 10,990 8,645
Increase in accrued interest receivable ................ (68,424) (75,312)
Increase in prepaid expenses and other assets .......... (195,547) (47,136)
Increase in accrued expenses and other liabilities ..... 70,349 87,955
Increase (decrease) in accrued interest payable ........ (51,229) 632
----------- -----------
TOTAL ADJUSTMENTS ................................. (233,861) (25,216)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES ......... 102,863 280,006
----------- -----------
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 (2,606,780) (3,827,045)
Purchases (sales) of equity securities ................. (30,000) (120,947)
Acquisition of furniture, fixtures and leasehold
improvements ....................................... (43,240) (8,089)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES ............. (2,680,020) (3,956,081)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable, banks, net ................ 2,350,000 2,810,000
Dividends paid ......................................... (314,208) (314,208)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES ......... $ 2,035,792 $ 2,495,792
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED), Continued
For the Three Months Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
For the For the
Three Months Ended Three Months Ended
September 30, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS ................ $ (541,365) ($1,180,283)
CASH AND CASH EQUIVALENTS - Beginning .. 542,290 1,755,429
---------- -----------
CASH AND CASH EQUIVALENTS - Ending ..... $ 925 $ 575,146
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-6-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- Organization and Summary of Significant Accounting Policies
Organization and Principal Business Activity
Elk Associates Funding Corporation (the "Company"), a New York corporation,
is licensed by the Small Business Administration ("SBA") to operate as a Small
Business Investment Company ("SBIC") under the Small Business Investment Act of
1958, as amended. The Company has also registered as an investment company under
the Investment Company Act of 1940 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 September 30, 1999 and June 30, 1999
approximately 79% 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.
-7-
<PAGE>
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
judgment 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 September 30, 1999 and June 30, 1999.
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 2000, the Company intends to make the
required distributions to its stockholders in accordance with applicable tax
rules.
Depreciation and Amortization
Depreciation and amortization of furniture, fixtures and leasehold
improvements is computed on the straight-line method at rates adequate to
allocate the cost of applicable assets over their expected useful lives.
Net Income per Share
During the year ended June 30, 1998, the Company adopted the provision of
Statements of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS
No. 128"). SFAS No. 128 eliminates the presentation of primary and fully
dilutive earnings per share ("EPS") and requires presentation of basic and
diluted EPS. Basic EPS is computed by dividing income (loss) available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted EPS is based on the weighted-average number of shares of common
stock and common stock equivalents outstanding at year end. Common stock
equivalents have been excluded from the weighted-average shares for 1998 and
1997, as inclusion is anti-dilutive. At September 30 , 1999 the Company had
122,224 options outstanding, of which 30,000 options are considered
anti-dilutive and 92,224 options are dilutive and resulted in common stock
equivalents of 4,294 shares. At June 30, 1999, the Company had 100,000 options
outstanding, of which 30,000 are considered anti-dilutive and 70,000 options are
dilutive and resulted in common stock equivalents of 5,084 shares.
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
September 30, 1999 and June 30, 1999, loan costs amounted to $123,217 and
$129,331, respectively, net of accumulated amortization of $120,764 and
$114,650, respectively.
-8-
<PAGE>
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 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" ("APB25") 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 the public
enterprises report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statement 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.
-9-
<PAGE>
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
finanical 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 interest 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.
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.
-10-
<PAGE>
NOTE 2 -- Debentures Payable to SBA
At September 30, 1999 and June 30, 1999 debentures payable to the SBA consist
of subordinated debentures with interest payable semiannually, as follows:
Current
Effective Principal
Issue Date Due Date Interest Rate Amount
- ---------- -------- ------------- ---------
September 1993 September 2003 6.12(1) $1,500,000
September 1993 September 2003 6.12 2,220,000
September 1994 September 2004 8.20 2,690,000
December 1995 December 2005 6.54 1,020,000
June 1996 June 2006 7.71 1,020,000
March 1997 March 2007 7.38(2) 430,000
---------
$8,880,000
=========
(1) Interest rate 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.
NOTE 3 -- Notes Payable to Banks
At September 30, 1999 and June 30, 1999, the Company had loan agreements with
three (3) banks for lines of credit aggregating $40,000,000 and $35,000,000
respectively. At September 30, 1999 and June 30, 1999, the Company had
$33,350,000 and $31,000,000, 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 bank's prime rates including certain fees which make the
effective rates range from approximately prime minus 1/4% to prime minus 1/2%.
Upon maturity, the Company anticipates extending the lines of credit for another
year, as has been the practice in previous years.
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 were
not required to maintain compensating balances.
NOTE 4 -- 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
-11-
<PAGE>
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
September 30, 1999 and June 30, 1999 was approximately $79,049 and $256,916,
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 Certification 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 5 -- 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.
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 October 14, 1999, the Company declared a cash dividend of $0.18 per common
share, for a total of $314,208 which was paid on October 20, 1999.
NOTE 6 -- Income Taxes
The provision for income taxes (benefit) for the periods ended September 30,
1999 and June 30, 1999, consists of the following:
September 30, 1999 June 30, 1999
------------------ -------------
Federal $ 986 $ 1,689
State and city 2,225 (2,458)
------- -------
$ 3,211 $ (769)
======= =======
The above provision represents income taxes incurred on undistributed income for
the respective periods.
NOTE 7 -- 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 transaction were
entered into to protect the Company from an upward movement in interest rates
relating to outstanding bank debt (see Note 3 for terms and effective interest
rates). These Swap transaction call for a fixed rate of 5.86% and 4.95%,
respectively for the Company 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.
-12-
<PAGE>
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
on 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 September 30, 1999 and June 30, 1999, the Company had commitments to make
loans totaling approximately $2,861,000 and $4,058,000, at interest rates
ranging from 8.25% to 18%.
NOTE 8 -- Fair Value of Financial Instruments
The following disclosures represent the Company's best estimate of the fair
value of financial instruments, determined on a basis consistent with
requirements of Statement of Financial Accounting Standards, "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.
Equity Securities -- The Company's equity securities consist of investments
in corporations who own and operate Chicago Taxicab Medallions (71%), two
investment advisory firms (2%), a dry cleaner (3%), and Miami Taxicab
Medallions (7%) and Telecommunications Company (17%).
-13-
<PAGE>
Debentures Payable to Small Business Administration -- The fair value of
debentures as of June 30, 1999 and 1998 was 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.
The fair value of financial instruments that are short-term or reprice
frequently and have a history of negligible credit losses is considered to
approximate their carrying value. Those instruments include balances recorded in
the following captions:
ASSETS LIABILITIES
Cash Notes payable, banks
Accrued interest receivable Accrued interest payable
Assets acquired in satisfaction of loans
Receivables from debtors on sales of
assets acquired in satisfaction of loans
NOTE 9 -- 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 1993 with the SEC and applied for certain
"exemptive" orders to permit Ameritrans to act as a holding company.
The SEC is currently reviewing these filings.
(b) Non-Employee Directors Stock Option Plan
On August 31, 1999, the SEC approved a Non-Employee Directors Stock Option
Plan with an aggregate of 75,000 options authorized for issuance. On this same
date, 22,224 options were granted to non-employee directors with an exercise
price to be determined by the Board of Directors.
-14-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in this section should be used in conjunction
with the consolidated Financial Statements and Notes therewith appearing in this
report Form 10-Q and the Company's Annual Report on Form 10-KSB for the year
ended June 30, 1999.
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 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
Consolidated Financial Statements."
Results of Operations For the Three Months ended September 30, 1999 and 1998.
Total Investment Income.
Elks investment income for the three months ended September 30, 1999
increased to $1,518,831 from $1,348,667 or (12.6%) as compared with the three
month period ended September 30, 1998. This increase was mainly due to an
increase in the loan portfolio. The portfolio increased from $45,491,059 as of
September 30, 1998 to $53,719,005 as of September 30, 1999, as part of the
Company's strategy to maximize shareholder rate of return by use of bank debt.
Operating Expenses
Interest expenses for the three month period ended September 30, 1999
increased $153,052 ($727,184 vs. $574,132) over the similar period ended
September 30, 1998. This increase was mainly due to increased bank borrowings
for the period, offset by lower interest rates during the period ended September
30, 1999.
Other operating expenses for the three months ended September 30, 1999
decreased $12,238 when compared with the similar period ended September 30,
1998. This decrease was mainly due to a decrease in bad debt expense($29,075)
offset by minor increases in various other operating expenses.
-15-
<PAGE>
Balance Sheet and Reserves
Total assets increased by $2,391,638 as of September 30, 1999, when
compared with the balance sheet as of June 30, 1999. This increase was due to
management's decision to expand its portfolio in the Chicago Medallion Market,
together with increases in the diversified loan portfolio. This expansion was
financed by additional bank debt of $2,350,000 incurred in the three month
period.
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 September
30, 1999 was $79,049.
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 September 30, 1999, 79% of Elk's indebtedness was represented by
indebtedness to its banks and 21% by the debentures issued to the SBA with fixed
rates of interest ranging from 6.12% to 8.2%. During September 1999, Elk's banks
collectively approved an increase in the amount Elk may borrow under its
existing lines of credit from $35,000,000 to $40,000,000, 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. In addition, Elk is presently 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.
-16-
<PAGE>
Because Elk distributes at least 90% of its investment company taxable
income, 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.
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-Q 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 forward-looking statements
contained in this Form 10-Q 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-Q 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-Q 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-Q. The inclusion of the forward-looking
statements contained in this Form 10-Q should not be regarded as a
representation by Elk or any other person that the forward-looking statements
contained in this form 10-Q will be achieved. In light of the foregoing, readers
of this Form 10-Q 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-Q and other documents that Elk files from time to time
with the Securities and Exchange Commission, including annual reports on Form
10-K, 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.
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.
-17-
<PAGE>
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
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.
-18-
<PAGE>
PART II
OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Elk has entered into an Agreement and Plan of Share Exchange (the
"Share Exchange Plan") with Ameritrans Capital Corporation, a newly-formed
Delaware corporation ("Ameritrans"), that has also elected to become a BDC.
Pursuant to the Share Exchange Plan, Elk would become a wholly-owned subsidiary
of Ameritrans, and the holders of the outstanding shares of Common Stock of Elk
would become the stockholders of Ameritrans and receive one share of Ameritrans
for each share of Elk owned. The Share Exchange Plan will be submitted to the
stockholders of Elk for their approval at the Elk Annual Meeting, scheduled to
be held on December 16, 1999. A Prospectus/Proxy Statement relating to the
proposed share exchange and other matters to be considered at the Annual Meeting
will be sent to the stockholders of Elk. For additional information regarding
the Share Exchange Plan, see Elk's Registration Statement/Proxy Statement on
Form N-14 (File No. 333-63951).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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%.
-19-
<PAGE>
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.
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.
-20-
<PAGE>
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 Elk's Registration Statement on
Form N-14 (File No. 333-63951), initially filed September 22,
1998.
** Incorporated by reference from Elk's Registration Statement on
Form N-2 (File No. 333-82693), initially filed July 12, 1999.
*** Incorporated by reference from the Elk's Annual Report on Form
10-K, filed September 28, 1999, amended on Form 10-K/A, filed
October 28, 1999.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the fiscal quarter ended
September 30, 1999.
-21-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Elk has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
ELK ASSOCIATES FUNDING CORPORATION
Date: November 15, 1999 By: /s/ Gary C. Granoff
-------------------------------
Gary C. Granoff
Chief Financial Officer
(Principal Financial Officer
and Chief Accounting Officer)
-22-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> (380,000)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 415,849
<DEPRECIATION> 278,157
<TOTAL-ASSETS> 56,902,439
<CURRENT-LIABILITIES> 43,141,704
<BONDS> 0
0
0
<COMMON> 13,760,735
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 56,902,439
<SALES> 0
<TOTAL-REVENUES> 1,518,831
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 451,712
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 727,184
<INCOME-PRETAX> 399,935
<INCOME-TAX> 3,211
<INCOME-CONTINUING> 336,724
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 336,724
<EPS-BASIC> .193
<EPS-DILUTED> .192
</TABLE>
