SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 March 31, 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
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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 May 13, 1999: 1,745,600
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION
FORM 10-Q
Table of Contents
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements................................................................... 1
Consolidated Balance Sheets as of March 31, 1999
(unaudited) and June 30, 1998.................................................... 2
Consolidated Statements of Operations --For the three months ended March 31,
1999 and March 31, 1998 and For the Nine Months Ended March 31, 1999 and
1998 (unaudited)................................................................. 4
Consolidated Statements of Cash Flows -- For the Nine
Months Ended March 31, 1999 and 1998 (unaudited)................................. 5
Notes to Consolidated Financial Statements......................................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................ 14
PART II. OTHER INFORMATION
Item 5. Other Information...................................................................... 16*
Item 6. Exhibits and Reports on Form 8-K....................................................... 17
Signatures........................................................................... 18
</TABLE>
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* Only need to be included if there is a response for the period.
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<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The consolidated balance sheets of the Company as of March 31, 1999, the related
statements of operations, and cash flows for the nine months ended March 31,
1999 and 1998 and the three months ended March 31, 1999 and March 31, 1998
included in Item 1 have been prepared by the Company, without audit, pursuant to
the rules and regulations of the Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of management, the
accompanying consolidated financial statements include all adjustments
(consisting of normal, recurring adjustments) necessary to summarize fairly the
Company's financial position and results of operations. The results of
operations for the nine months ended March 31, 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 the Company's Annual
Report on Form N-30D for the fiscal year ended June 30, 1998 as filed with the
Commission.
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<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
March 31, 1999 (Unaudited) and June 30, 1998
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<CAPTION>
ASSETS
March 31, 1999 June 30, 1998
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Loans receivable ................................................... $ 49,303,758 $ 41,590,000
Less: allowance for loan losses .................................... (335,000) (295,000)
------------ ------------
48,968,758 41,295,000
Cash and cash equivalents .......................................... 673,296 1,755,429
Accrued interest receivable ........................................ 655,210 516,110
Assets acquired in satisfaction of loans ........................... 619,308 400,470
Receivables from debtors on sales of assets acquired
in satisfaction of loans ....................................... 420,287 451,222
Equity securities .................................................. 927,157 629,179
Furniture, fixtures and leasehold improvements, net ................ 88,642 102,247
Prepaid expenses and other assets .................................. 397,621 250,081
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TOTAL ASSETS ................................... $ 52,750,279 $ 45,399,738
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</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
March 31, 1999 (Unaudited) and June 30, 1998
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, 1999 June 30, 1998
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LIABILITIES
Debentures payable to SBA ................................... $ 8,880,000 $ 8,880,000
Notes payable, banks ........................................ 29,350,000 22,085,000
Accrued expenses and other liabilities ...................... 277,631 204,099
Accrued interest payable .................................... 218,832 221,704
Dividends payable ........................................... 314,208 314,208
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TOTAL LIABILITIES ...................................... 39,040,671 31,705,011
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value: 2,000,000 and
3,000,000 shares, respectively
authorized; 1,745,600 shares issued and outstanding, ........ 17,456 17,456
Additional paid-in-capital .................................. 13,019,417 12,485,825
Restricted capital .......................................... 434,777 968,368
Retained earnings ........................................... 8,433 24,289
Unrealized gain on equity securities ........................ 229,525 198,789
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TOTAL STOCKHOLDERS' EQUITY ............................. 13,709,608 13,694,727
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............. $52,750,279 $45,399,738
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</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months and Nine Months Ended March 31, 1999 and 1998
<TABLE>
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Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
March 31, 1999 March 31, 1998 March 31, 1999 March 31, 1998
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INVESTMENT INCOME
Interest on loans receivable ...................... $ 1,328,597 $ 1,007,563 $ 3,804,341 $ 2,937,394
Fees and other income ............................. 77,424 165,008 296,628 382,552
----------- ----------- ----------- -----------
TOTAL INVESTMENT INCOME ........................ 1,406,021 1,172,571 4,100,969 3,319,946
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OPERATING EXPENSES
Interest .......................................... 612,482 409,984 1,804,597 1,360,703
Salaries and employee benefits .................... 157,218 160,657 431,701 406,164
Legal fees ........................................ 77,874 86,463 222,135 222,334
Miscellaneous administrative expenses ............. 172,683 152,880 582,690 506,199
Loss (recovery) on assets acquired in
satisfaction of loans, net ..................... 5,164 2,592 5,432 4,097
Directors' fee .................................... 13,000 16,539 26,250 45,089
Bad debt expense/provision for losses ............. 52,500 25,000 101,465 174,998
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES ................................ 1,090,921 854,115 3,174,270 2,719,584
----------- ----------- ----------- -----------
OPERATING INCOME ........................................ 315,100 318,456 926,699 600,362
----------- ----------- ----------- -----------
NET INCOME BEFORE INCOME TAXES ................. 315,100 318,456 926,699 600,362
INCOME TAXES (Benefit) .................................. 224 371 (69) (2,716)
----------- ----------- ----------- -----------
NET INCOME ..................................... $ 314,876 $ 318,085 $ 926,768 $ 603,078
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING ..................... 1,745,600 1,745,600 1,745,600 1,432,726
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE ............................. $ .1803 $ .1822 $ .5309 $ .4209
=========== =========== =========== ===========
</TABLE>
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<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................................. $ 926,768 $ 603,078
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Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization .......................................... 28,194 18,931
Increase in accrued interest receivable ................................ (139,100) (27,627)
(Increase) decrease in prepaid expenses and other assets ............... (147,540) 14,267
Increase in accrued expenses and other liabilities ..................... 73,532 146,557
Increase (decrease) in accrued interest payable ........................ (2,872) (20,644)
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TOTAL ADJUSTMENTS ................................................. (187,786) 131,484
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NET CASH PROVIDED BY OPERATING ACTIVITIES ......................... 738,982 734,562
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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 ................... (7,861,661) (1,536,603)
Purchases (sales) of equity securities ..................................... (267,241) (65,946)
Acquisition of furniture, fixtures and leasehold
improvements ........................................................... (14,589) (15,256)
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NET CASH USED IN INVESTING ACTIVITIES ............................. (8,143,491) (1,617,805)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable, banks, net .................................... 7,265,000 (1,735,000)
Dividends paid ............................................................. (942,624) (986,722)
Net proceeds from sale of common stock ..................................... -0- 2,888,000
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NET CASH PROVIDED BY FINANCING ACTIVITIES ......................... $ 6,322,376 $ 166,278
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</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED), Continued
For the Nine Months Ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998
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NET (DECREASE) IN CASH AND CASH
EQUIVALENTS .................................. $(1,082,133) $ (716,965)
CASH AND CASH EQUIVALENTS - Beginning .................... 1,755,429 1,853,032
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CASH AND CASH EQUIVALENTS - Ending ....................... $ 673,296 $ 1,136,067
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</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY
NOTES TO THE FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- Organization and Summary of Significant Accounting Policies
Organization and Principal Business Activity
Elk Associates Funding Corporation (the "Company"), a New York corporation,
is licensed by the Small Business Administration ("SBA") to operate as a Small
Business Investment Company ("SBIC") under the Small Business Investment Act of
1958, as amended. The Company has also registered as an investment company under
the Investment Company Act of 1940.
The Company primarily makes loans and investments to persons who qualify
under SBA regulations as socially or economically disadvantaged and loans and
investments to entities which are at least 50 percent owned by such persons.
Effective February 21, 1997, the SBA approved the Company's election to
provide nondisadvantaged business financing to small business concerns pursuant
to SBA regulations and letter of agreement with the Company (see Note 4).
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 March 31, 1999 and June 30, 1998,
approximately 80% and 87%, respectively, of all loans are collateralized by New
York City, Boston, Chicago, and Miami taxicab medallions.
Accounting Standard for Impairment of Loans
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 114 as
amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan --
Income Recognition and Disclosure", a loan is determined to be impaired if it is
probable that the contractual amounts due will not be collected in accordance
with the terms of the loan. The SFAS generally requires that impaired loans be
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. As virtually all of the Company's loans are collateral
dependent, impairment is measured based on the fair value of the collateral. If
the fair value of the impaired loan is less than the recorded investment in the
loan (including accrued interest, net of deferred loan fees or costs, and
unamortized premium or discount) the Company recognized an impairment by
creating a valuation allowance with a corresponding charge to the provision for
loan losses. The Company individually evaluates all loans for impairment.
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<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
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 March 31, 1999 and June 30, 1998.
Income Taxes
The Company has elected to be taxed as a Regulated Investment Company under
the Internal Revenue Code. A Regulated Investment Company will generally not be
taxed at the corporate level to the extent its income is distributed to its
shareholders. In order to be taxed as a Regulated Investment Company, the
Company must pay at least 90 percent of its net investment company taxable
income to its shareholders as well as meet other requirements under the Code. In
order to preserve this election for fiscal 1998, the Company intends to make the
required distributions to its stockholders in accordance with applicable tax
rules.
Depreciation and Amortization
Depreciation and amortization of furniture, fixtures and leasehold
improvements is computed on the straight-line method at rates adequate to
allocate the cost of applicable assets over their expected useful lives.
Net Income per Share
During the year ended June 30, 1998, the Company adopted the provision of
Statements of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS
No. 128"). SFAS No. 128 eliminates the presentation of primary and fully
dilutive earnings per share ("EPS") and requires presentation of basic and
diluted EPS. Basic EPS is computed by dividing income (loss) available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted EPS is based on the weighted-average number of shares of common
stock and common stock equivalents outstanding at year end. Common stock
equivalents have been excluded from the weighted-average shares as of March 31,
1999 and June 30, 1998, as inclusion is anti-dilutive. All prior period EPS data
has been restated to conform to the new pronouncement.
Loan Costs
Loan costs are included in prepaid expenses and other assets. Amortization
of loan costs is computed on the straight-line method over ten (10) years. At
March 31, 1999 and June 30, 1998, loan costs amounted to $135,445 and $153,786,
respectively, net of accumulated amortization of $108,536 and $90,195,
respectively.
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<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.
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 as an adjustment
of interest expense. Payments received under this cap would be credited to
interest expense.
Consolidation
The consolidated financial statements include the accounts of EAF Holding
Corporation ("EAF"), a wholly-owned subsidiary of the Company. All intercompany
transactions have been eliminated. EAF was formed in June 1992 and began
operations in December 1993. The purpose of EAF is to own and operate certain
real estate assets acquired in satisfaction of loans.
Use of Estimates in the Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Estimates that are particularly susceptible to change relate to the
determination of the allowance for loan losses and the fair value of financial
instruments.
Reclassification
Certain accounts in the prior year financial statements have been
reclassified for comparative purposes to conform with the presentation in the
current year financial statements. These reclassifications have no effect on
previously reported income.
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<PAGE>
NOTE 2 -- Debentures Payable to SBA
At March 31, 1999 and June 30, 1998 debentures payable to the SBA consist
of subordinated debentures with interest payable semiannually, as follows:
Current
Effective Principal
Issue Date Due Date Interest Rate Amount
---------- -------- ------------- ------
September 1993 ....... September 2003 6.12(1) $1,500,000
September 1993 ....... September 2003 6.12 2,220,000
September 1994 ....... September 2004 8.20 2,690,000
December 1995 ........ December 2005 6.54 1,020,000
June 1996 ............ June 2006 7.71 1,020,000
March 1997 ........... March 2007 7.38(2) 430,000
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$8,880,000
==========
(1) Interest rate increases to 6.12% on December 31, 1998, it was formerly
3.12%
(2) The Company is also required to pay an additional annual user fee of 1% on
this debenture
Under the terms of the subordinated debentures, the Company may not
repurchase or retire any of its common stock or make any distributions to its
stockholders other than dividends out of retained earnings (as computed in
accordance with SBA regulations) without the prior written approval of the SBA.
NOTE 3 -- Notes Payable to Banks
At March 31, 1999 and June 30, 1998, the Company had loan agreements with
three banks and four banks, respectively, for lines of credit aggregating
$35,000,000 and $33,500,000. At March 31, 1999 and June 30, 1998, the Company
had $29,350,000 and $22,085,000, respectively outstanding under these lines. The
loans which mature at various dates through December 1999 bear interest based on
the Company's choice of the lower of either the reserve adjusted LIBOR rate plus
150 basis points or 1/2% below 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
since January, 1998 was required to maintain compensating balances of 5%. During
September, 1998 the Company eliminated the compensating balance requirement with
its banks. Prior to January 1998, the Company was required to maintain 10%
compensating balances with each bank. At March 31, 1999 and June 30, 1998,
average compensating balances of nil and $1,104,250, respectively, were
maintained by the Company in accordance with these agreements.
NOTE 4 -- Preferred Stock
At June 30, 1995, the Company had 547,271 shares of 3 percent preferred
stock issued to the SBA. Cumulative dividends not declared or paid as of June
30, 1995 were approximately $533,000. During August 1995, the Company completed
the repurchase of all such shares of preferred stock from the SBA pursuant to a
preferred stock repurchase agreement dated November 10, 1994. Pursuant to this
agreement, the Company repurchased all 547,271 shares of 3 percent cumulative
preferred stock from the SBA for $3.50 per share, or an aggregate of $1,915,449.
The repurchase price was at a substantial discount to the original issuance
price of $10 per share. In connection with the repurchase, all dividends in
arrears on the preferred shares were extinguished.
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<PAGE>
As a condition precedent to the repurchase, the Company granted the SBA a
liquidating interest in a newly established restricted capital surplus account.
The surplus account is equal to the amount of the net repurchase discount. The
initial value of the liquidating interest was $3,557,261 which is being
amortized over a 60-month period on a straight-line basis. Should the Company be
in default under the repurchase agreement at any time, the liquidating interest
will become fixed at the level immediately preceding the event of default and
will not decline further until such time as the default is cured or waived. The
liquidating interest shall expire on (i) sixty months from the date of the
repurchase agreement, or (ii) if any event of default has occurred and such
default has been cured or waived, such later date on which the liquidating
interest is fully amortized. Should the Company voluntarily or involuntarily
liquidate prior to the amortization of the liquidating interest, any assets
which are available, after the payment of all debts of the Company, shall be
distributed first to the SBA until the fair market value of such assets is equal
to the amount of the liquidating interest. Such payment, if any, would be prior
in right to any payments made to the Company's shareholders. The remaining
amount restricted under this agreement at March 31, 1999 and June 30, 1998 was
approximately $434,477 and $968,368, respectively.
During 1992, the Company authorized the issuance of 752,729 shares of a new
Series B cumulative preferred stock with a 4 percent dividend and a $10 par
value. All preferred shares are restricted solely for issuance to the SBA. No
sales of the Series B preferred shares have occurred to date. On December 31,
1996, Congress passed a law that in effect prevents the SBA from making any
further purchase of 4% preferred stock from any specialized small business
investment company. Accordingly, the Company does not anticipate being able to
sell any of its authorized Series B Cumulative Preferred Stock in the future. In
September 1998 the shareholders of the Company approved, subject to the approval
of the Small Business Administration, which approval has now been given, an
amendment to the certificate of incorporation of the Company eliminating all of
the authorized Series A and Series B preferred stock of the Company.
NOTE 5 -- Common Stock
On April 5, 1999, the Company declared a cash dividend of $0.18 per common
share, or a total of $314,208, payable April 16, 1999.
During December 1997 and January 1998, the Company completed the sale, as
part of a private placement offering, of 462,000 shares of common stock. Total
proceeds from the sale of common stock amounted to $2,888,000 net of directly
related expenses of $115,000.
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.
NOTE 6 -- Income Taxes
The provision for income taxes (benefit) for the three months ended March
31, 1999 and 1998 consists of the following:
March 31, 1999 March 31, 1998
-------------- --------------
Federal .......................... $ 4,085 $(1,702)
State and city ................... (4,154) (1,014)
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$ (69) $(2,716)
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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. On October
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<PAGE>
13, 1998, the Company entered into an additional interest rate swap transaction
with the same bank for $5,000,000 (unaudited). 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.
These swap transactions expire on June 8, 2001 and October 8, 2001,
respectively.
At March 31, 1999 and June 30, 1998, the Company had commitments to make
loans totaling $2,329,000 (unaudited) and $2,568,000, respectively, at interest
rates ranging from 9.5% to 16%.
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%. The premium paid
for the purchase of this cap was amortized over its life as an adjustment of
interest expense. Payments received under this cap would be credited to interest
expense.
NOTE 8 -- 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 nine months ended March 31,
1999 and 1998 contributions amounted to $46,644 (unaudited) and $46,496,
respectively.
NOTE 9 -- Incentive Stock Option Plan
During September 1998, the Company adopted an 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 range
from market value to at least 110% of market value of the common stock on the
grant date. As of December 31, 1998, no options have been issued by the Company.
In January, 1999, the Company granted 100,000 shares of options to certain
key employees at an exercise price ranging from $8.875 to $9.7625 per share.
NOTE 10 -- Fair Value of Financial Instruments
The following disclosures represent the Company's best estimate of the fair
value of financial instruments, determined on a basis consistent with
requirements of Statement of Financial Accounting Standards No. 107, "Disclosure
about Fair Value of Financial Instruments".
The estimated fair values of the Company's financial instruments are
derived using estimation techniques based on various subjective factors
including discount rates. Such estimates may not necessarily be indicative of
the net realizable or liquidation values of these instruments. Fair values
typically fluctuate in response to changes in market or credit conditions.
Additionally, valuations are presented as of a specific point in time and may
not be relevant in relation to the future earnings potential of the Company.
Accordingly, the 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.
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<PAGE>
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 1).
Equity Securities - The Company's equity securities consist of investments
in corporations who own and operate Chicago taxicab medallions (70%), an
investment advisory firm (8%), a dry cleaner (3%), Miami taxicab medallions
(10%) and a Telecommunications company (9%).
Debentures Payable to Small Business Administration - The fair value of
debentures as of March 31, 1999 and June 30, 1998 were approximately $9,004,000
(unaudited) 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 2).
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
Receivable from debtors on sales of
assets acquired in satisfaction of loans
-13-
<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
on Form 10-Q and the Company's Annual Report for the year ended June 30, 1998.
General
The Company is licensed by the Small Business Administration (SBA) to
operate as a Small Business Investment Company (SBIC) under the Small Business
Investment Act of 1958, as amended. The Company has also registered as an
investment company under the Investment Company Act of 1940.
The Company primarily makes loans and investments to persons who qualify
under SBA regulation as socially or economically disadvantaged and loans and
investments to entities which are at least 50% owned by such persons. The
Company also makes loans and investments to persons who qualify under SBA
regulation as "non-disadvantaged". The Company's primary lending activity is to
originate and service loans collateralized by New York City, Boston, Chicago and
Miami Taxicab Medallions. The Company also makes loans and investments in other
diversified businesses.
Results of Operations
For the Nine Months ended March 31, 1999 and 1998.
Total investment income. Elk's investment income for the nine months ended
March 31, 1999 increased to $4,101,000 from $3,320,000 (23.5%) for the nine
month period when compared with the nine months ended March 31, 1998. This
increase was mainly due to an increase in the loan portfolio over the previous
fiscal year. The portfolio increased from $34,863,000 as of March 31, 1998 to
$49,304,000 as of March 31, 1999 as part of the Company's strategy to maximize
shareholder rate of return by use of bank debt.
Operating Expenses
Interest expense for the nine month period ended March 31, 1999 increased
$444,000 ($1,805,000 from $1,361,000) over the similar period ended March 31,
1998. This increase was mainly due to increased bank borrowings for the period
offset by lower interest rates during the period ended March 31,1999.
Other operating expenses decreased $19,000 when compared with the similar
period ended March 31, 1998. This decrease was mainly due to a decrease in bad
debt expense ($74,000) offset by an increase in administrative fees and payroll
costs.
Results of Operations
For the Three Months ended March 31, 1999 and 1998.
Total investment income. Elk's investment income for the three months ended
March 31, 1999 increased to $1,406,000 from $1,173,000 (20%) when compared with
the three month period ending March 31, 1998. This increase was mainly due to an
increase in the loan portfolio during the fiscal year. The portfolio increased
from $34,863,000 as of March 31, 1998 to $49,304,000 as of March 31, 1999, as
part of the Company's strategy to maximize shareholder rate of return by use of
bank debt.
Operating Expenses
Interest expense for the three month period ended March 31, 1999 increased
$203,000 ($613,000 from $410,000) over the similar period ended March 31, 1998.
This increase was mainly due to increased bank borrowings for the period offset
by lower interest rates for the period ended March 31,1999.
-14-
<PAGE>
Other operating expenses increased $34,000 when compared with the similar
period ended March 31, 1998. This increase was mainly due to an increase in bad
debt expenses $25,000 as of March 31, 1998 versus $52,500 for the similar period
ended March 31, 1999.
Balance Sheet and Reserves
Total assets increased $7,350,000 as of March 31, 1999 when compared with
the balance sheet as of June 30, 1998. This increase was due to management's
decision to expand its portfolio in the Chicago Medallion Market plus increases
in the diversified loan portfolio. This expansion was financed by additional
bank debt of $7,265,000, during the nine month period.
-15-
<PAGE>
PART II
OTHER INFORMATION
ITEM 5. OTHER INFORMATION
The Company plans to enter into an Agreement and Plan of Share Exchange
(the "Share Exchange Plan") with Ameritrans Capital Corporation, a newly-formed
Delaware corporation ("Ameritrans") that will also elect to become a BDC.
Pursuant to the Share Exchange Plan, each outstanding share of the Company's
Common Stock would vest in Ameritrans, whereby the Company would become a
wholly-owned subsidiary of Ameritrans, and the holders of all the outstanding
shares of Common Stock of the Company would become the stockholders of
Ameritrans and receive one share of Ameritrans for each share of the Company
owned. Ameritrans has filed a Registration Statement on Form N-14 (File No.
333-63951) in connection with a proposed share exchange between Ameritrans and
Elk.
The Share Exchange Plan will require approval by the Company's stockholders
at a special meeting of stockholders. In addition, the Share Exchange Plan and
certain related transactions must be approved by the Securities and Exchange
Commission (the "Commission") and the U.S. Small Business Administration. In
connection with the proposed Share Exchange Plan, Ameritrans and Elk have filed
with the Commission an application for an exemptive order approving the Share
Exchange Plan and certain related transactions. As part of the approvals, the
Company has obtained SBA approval of the capitalization of Ameritrans by the
Company to the extent of $963,000.
The reason for the proposed Share Exchange Plan is to enable the Company to
expand its present business and to engage in broader and more diversified
investment and lending activities. At the present time, the Company, as an SBIC,
may only lend to and/or invest in small businesses as permitted under the 1958
Act. If the Share Exchange Plan is approved by the Commission, then Ameritrans,
which plans to elect to be treated for tax purposes as a regulated investment
company, will engage in the lending/investment activities not subject to the
restrictions of the 1958 Act. The Company would continue to operate as an SBIC,
making loans to or investments in small business concerns as permitted by the
1958 Act. The Company may also expand and diversify its operations through the
acquisition of companies that are consistent with the Company's business.
It is presently expected that the officers and directors of the Company
will be the same individuals who will serve as officers and directors of
Ameritrans. It is further anticipated that following the consummation of the
Share Exchange Plan, such officers and directors would initially receive the
same compensation, but such compensation would be allocated between the Company
and Ameritrans, based upon factors determined by the Company's Board of
Directors. Such officers and directors may also receive increases in
compensation from time to time as determined by the Board of Directors.
-16-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1(a) Certificate of Incorporation, as amended through February 27,
1997. Filed as Exhibit 4.1 to the Company's Registration
Statement on Form 8-A and incorporated by reference herein.
3.1(b) Form Certificate of Amendment of Certificate of Incorporation, as
approved by the shareholders of the Company at the Annual Meeting
of Shareholders on September 28, 1998 to be filed in New York
State upon receipt of approval by the U.S. Small Business
Administration. Filed as Exhibit 1 to the 1998 Proxy Statement of
the Company and incorporated by reference herein.
3.2 By-Laws. Filed as Exhibit 4.2 to the Company's Registration
Statement on Form 8-A and incorporated by reference herein.
10.1 1998 Incentive Stock Option Plan. Filed as Exhibit 2 to the 1998
Proxy Statement of the Company and incorporated by reference
herein.
10.2 Non-Employee Director Plan. Filed as Exhibit 3 to the 1998 Proxy
Statement of the Company and incorporated by reference herein.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the fiscal quarter ended
March 31, 1999.
-17-
<PAGE>
ELK ASSOCIATES FUNDING CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ELK ASSOCIATES FUNDING CORPORATION
Date: May 13, 1999 By: /s/ Gary C. Granoff
-------------------
Gary C. Granoff
Chief Financial Officer
(Principal Financial Officer and
Chief Accounting Officer)
-18-
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