-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U6Z4u7OjXFgU02lfYooZFk0mt9XtD7uH5cxzqherFH+yUXFiAk1PwU5hN1thitVF oXHse0JGNmMB/13YNG8uXw== 0000891554-98-001191.txt : 19980923 0000891554-98-001191.hdr.sgml : 19980923 ACCESSION NUMBER: 0000891554-98-001191 CONFORMED SUBMISSION TYPE: N-14 PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19980922 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERITRANS CAPITAL CORP CENTRAL INDEX KEY: 0001064015 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 522102424 FILING VALUES: FORM TYPE: N-14 SEC ACT: SEC FILE NUMBER: 333-63951 FILM NUMBER: 98712708 BUSINESS ADDRESS: STREET 1: 747 THIRD AVENUE STREET 2: 4TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2123552449 MAIL ADDRESS: STREET 1: 747 THIRD AVENUE STREET 2: 4TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10017 N-14 1 REGISTRATION STATEMENT As filed with the Securities and Exchange Commission on September 22, 1998 - -------------------------------------------------------------------------------- Registration No.______ Investment Company Act File No. 811-8847 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-14 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Ameritrans Capital Corporation (Exact Name of Registrant as Specified in Charter) (800) 214-1047 (Area Code and Telephone Number) 747 Third Avenue, 4th Floor, New York, New York 10017 (Address of Principal Executive Offices: Number, Street, City, State, Zip Code) Gary C. Granoff, Ameritrans Capital Corporation 747 Third Avenue, 4th Floor, New York, New York 10017 with a copy to: Walter Stursberg, Esq., Stursberg & Veith 405 Lexington Avenue, Suite 4949, New York, New York 10174-4902 (Name and Address of Agent for Service) Approximate Date of Proposed Public Offering: As soon as practicable after the effectiveness of this Registration Statement and after the satisfaction or waiver of all other conditions to the share exchange between the Registrant and Elk Associates Funding Corporation pursuant to the Agreement and Plan of Share Exchange described in the Proxy Statement/Prospectus included as part of this Registration Statement.
Calculation of Registration Fee under the Securities Act of 1933 Title of Securities Amount Being Proposed Maximum Offering Proposed Maximum Amount of Being Registered Registered(1) Price Per Share(2) Aggregate Offering Price(2) Registration Fee(2) - ------------------------------------------------------------------------------------------------------------------------------------ Common Stock, $.0001 par value per share 1,745,600 $9.125 $15,928,600.00 $4,698.94 - ------------------------------------------------------------------------------------------------------------------------------------
(1) Based upon an estimate of the maximum number of shares of common stock of the Registrant that will be issuable in the share exchange. (2) Calculated pursuant to Rule 457(f)(2) under the Securities Act of 1933. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file further amendment which specifically states that this Registration Statement shall become effective on such date as the Commission, acting pursuant to said section 3(a) may determine. AMERITRANS CAPITAL CORPORATION Registration Statement on Form N-14 Cross-Reference Sheet Required by Rule 481(a) under the Securities Act of 1933 Showing the Location in the Proxy Statement/Prospectus of the Information Required by Part A of Form N-14 -------------------------------------------------------------------------
Location or Section in Proxy Statement/ Form N-14 Item Prospectus - -------------- ------------------- 1. Beginning of Registration Statement and Outside Front Cover Page of Prospectus............................................................. Cross-Reference Sheet; Cover Page of Proxy Statement/Prospectus 2. Beginning and Outside Back Cover Page of Prospectus.......................................................... Table of Contents 3. Synopsis Information and Risk Factors.................................. SUMMARY 4. Information About the Transaction...................................... THE SHARE EXCHANGE 5. Information About the Registrant....................................... INFORMATION CONCERNING AMERITRANS CAPITAL CORPORATION 6. Information About the Company Being Acquired............................................................... INFORMATION CONCERNING ELK ASSOCIATES FUNDING CORPORATION 7. Voting Information..................................................... INFORMATION CONCERNING THE SPECIAL MEETING 8. Interest of Certain Persons and Experts............................................................ EXPERTS 9. Additional Information Required for Reoffering by Persons Deemed to be Underwriters........................................................... Not Applicable
ELK ASSOCIATES FUNDING CORPORATION 747 Third Avenue 4th Floor New York, New York 10017 Notice of Special Meeting of Shareholders to be held on , 1998 A Special Meeting of Shareholders of Elk Associates Funding Corporation, a New York corporation ("Elk"), will be held in _________________, on ___________, 1998, at 10:00 a.m. (New York Time) to consider and act upon the following matters: 1. To consider and vote upon the adoption of an Agreement and Plan of Share Exchange (the "Share Exchange Plan") dated _______ ___, 1998, between Ameritrans Capital Corporation, a newly-formed Delaware corporation ("Ameritrans"), and Elk, pursuant to which each outstanding share of common stock of Elk would be exchanged for one share of common stock of Ameritrans. Pursuant to this share exchange (the "Share Exchange"), the ownership of each outstanding share of Elk common stock would automatically vest in Ameritrans (making Ameritrans the holder of all outstanding shares of Elk common stock), and the holders of the outstanding shares of Elk common stock would automatically become entitled to receive one share of Ameritrans common stock for each share of Elk common stock held by them (making the former holders of Elk common stock the holders of all of the shares of capital stock of Ameritrans then outstanding). A more complete description of the Share Exchange is contained in the enclosed Proxy Statement/Prospectus, and a copy of the Share Exchange Plan is attached as Exhibit A to the Proxy Statement/Prospectus. 2. To transact such other business as may properly come before the meeting or any adjournment or adjournments of the meeting. Holders of record of Elk common stock at the close of business on ____________, 1998, are entitled to notice of and to vote at the meeting. The stock transfer books of Elk will remain open. If the Share Exchange Plan is approved by Elk stockholders at the meeting and effected by Elk, any stockholder who (i) files with Elk, before the vote on the adoption of the Share Exchange Plan, a written objection to the proposed Share Exchange Plan that includes notice of his election to dissent, his name and address, the number of shares of Elk common stock held, and a demand for payment of the fair value of his shares if the Share Exchange is effected; (ii) does not vote his shares in favor of the Share Exchange Plan; and (iii) otherwise complies with the terms of Section 623 of New York Business Corporation Law, will have the right to receive payment of the fair value of his or her shares in lieu of receiving Ameritrans common stock pursuant to the Share Exchange. Elk and any such stockholder shall in such cases have the rights and duties and shall follow the procedure set forth in Section 623 of New York Business Corporation Law. See "APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS" in the accompanying Proxy Statement/Prospectus for a more complete description of the rights of dissenting stockholders. All stockholders are cordially invited to attend the meeting. By Order of the Board of Directors Margaret Chance, Secretary ___________, 1998 WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE ENCLOSED ENVELOPE IN ORDER TO ENSURE REPRESENTATION OF YOUR SHARES. PROXY STATEMENT/PROSPECTUS September , 1998 ----------------------------------------------------------- PROXY STATEMENT ELK ASSOCIATES FUNDING CORPORATION 747 Third Avenue, 4th Floor New York, New York 10017 (212) 355-2449 ----------------------------------------------------------- PROSPECTUS AMERITRANS CAPITAL CORPORATION 747 Third Avenue, 4th Floor New York, New York 10017 (800) 214-1047 1,745,600 Shares of Common Stock, $.0001 par value per share ----------------------------------------------------------- This Proxy Statement/Prospectus is being furnished to stockholders of Elk Associates Funding Corporation, a New York corporation ("Elk"), in connection with the proposed share exchange (the "Share Exchange") between Ameritrans Capital Corporation, a newly-formed Delaware corporation ("Ameritrans"), and Elk, in accordance with an Agreement and Plan of Share Exchange between Ameritrans and Elk, dated ___________, 1998 (the "Share Exchange Plan"). Both Ameritrans and Elk are closed-end management investment companies registered under the Investment Company Act of 1940, and Elk is a small business investment company ("SBIC") registered under the Small Business Investment Company Act of 1958, as amended (the "1958 Act"). Pursuant to the terms of the Share Exchange Plan, each outstanding share of common stock, par value $.01 per share, of Elk ("Elk Common Stock") would be exchanged for one (1) share of common stock, $.0001 par value per share, of Ameritrans ("Ameritrans Common Stock"), making Ameritrans the holder of all outstanding shares of Elk Common Stock and the parent corporation of Elk. The former holders of Elk Common Stock would become the holders of all of the shares of capital stock of Ameritrans then outstanding. Ameritrans would serve as the parent corporation of Elk. It is contemplated that Ameritrans will engage in broader and more diversified investment and lending business activities directly, as well as through a newly formed subsidiary ("Elk Capital"), which business activities Elk, as an SBIC, is not permitted to transact under the 1958 Act. This Proxy Statement/Prospectus is being furnished to Elk stockholders for the purposes of (1) the solicitation of proxies by the Board of Directors of Elk for use at the Special Meeting of Stockholders of Elk to be held on , 1998, at 10:00 a.m. (New York Time) at the offices of Stursberg & Veith, 405 Lexington Avenue, New York, New York, and at any adjournment thereof, at which Elk stockholders will be asked to consider and vote upon the adoption of the Share Exchange Plan, and (2) the offer and issuance of up to 1,745,600 shares of Ameritrans Common Stock issuable to holders of Elk Common Stock pursuant to the terms of the Share Exchange Plan. Since June 22, 1998, Elk's Common Stock has been listed on the Nasdaq SmallCap Market under the symbol EKFG. If the Share Exchange is completed, Ameritrans' Common Stock will be listed on the Nasdaq SmallCap Market under the symbol ___________, and the listing of Elk's Common Stock will be terminated. ----------------------------------------------------------- This Proxy Statement/Prospectus sets forth concisely the information about Ameritrans that a prospective investor should know before investing and should be retained for future reference. Additional information about Ameritrans is included in a Statement of Additional Information, also dated _________ , 1998, which has been filed with the Securities and Exchange Commission and has been distributed to Elk stockholders along with this Proxy Statement/Prospectus. Copies of such Statement of Additional Information are available upon oral or written request without charge from Ameritrans Capital Corporation, Attn: Secretary, 747 Third Avenue, 4th Floor, New York, New York 10017, (800) 214-1047. ----------------------------------------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. TABLE OF CONTENTS Page ---- SUMMARY .................................................................... 1 INFORMATION CONCERNING THE SPECIAL MEETING................................... 4 Date, Time, Place and Purpose....................................... 4 Voting and Revocation of Proxies.................................... 4 Record Date and Shares entitled to Vote............................. 5 Vote Required....................................................... 5 THE SHARE EXCHANGE........................................................... 5 Background.......................................................... 5 Effect of the Share Exchange........................................ 6 Effective Date...................................................... 6 Conditions to the Share Exchange.................................... 6 Federal Income Tax Consequences..................................... 7 Accounting Treatment................................................ 8 Unaudited Pro Forma Capitalization.................................. 8 INFORMATION CONCERNING ELK................................................... 10 General ........................................................... 10 Selected Financial Information...................................... 14 Loan Portfolio; Valuation........................................... 16 The New York City Taxi Medallion Industry and Market................ 18 Marketing Strategy for Medallion Financing.......................... 19 Competition......................................................... 19 Investment Policies................................................. 19 The Small Business Investment Act of 1958........................... 21 The Investment Company Act of 1940.................................. 24 Election to Become a BDC............................................ 25 Security Ownership of Principal Stockholders and Management......... 26 Management.......................................................... 28 Description of Capital Stock........................................ 35 Market Information.................................................. 36 Tax Considerations.................................................. 37 INFORMATION CONCERNING AMERITRANS............................................ 39 General ........................................................... 39 Investment Policies................................................. 39 Corporate Organizational Matters.................................... 41 Federal Regulation.................................................. 48 Management and Principal Stockholders............................... 48 Description of Capital Stock........................................ 49 Market Information.................................................. 49 Tax Considerations.................................................. 49 Elk Capital Corporation............................................. 51 APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS.................................. 51 EXPERTS .................................................................... 52 OTHER MATTERS................................................................ 52 ADDITIONAL INFORMATION....................................................... 52 EXHIBITS PROXY AMERITRANS STATEMENT OF ADDITIONAL INFORMATION FINANICAL STATEMENTS SUMMARY This Proxy Statement/Prospectus is being furnished to stockholders of Elk Associates Funding Corporation, a New York corporation ("Elk"), in connection with the proposed share exchange (the "Share Exchange") between Ameritrans Capital Corporation, a Delaware corporation ("Ameritrans"), and Elk, in accordance with an Agreement and Plan of Share Exchange between Ameritrans and Elk dated _________ ____, 1998, a copy of which is attached hereto as Exhibit A (the "Share Exchange Plan"). A Special Meeting of Stockholders of Elk (the "Special Meeting") has been called for , 1998 at 10:00 a.m. (New York Time) at the offices of Stursberg & Veith, 405 Lexington Avenue, New York, New York, for the purposes of voting on the adoption of the Share Exchange Plan. Elk Elk was formed on July 9, 1979 for the purpose of operating as a Specialized Small Business Investment Company ("SSBIC"), licensed under the Small Business Investment Act of 1958, (the "1958 Act"), and regulated and financed in part by the U.S. Small Business Administration (the "SBA"). Elk was granted a license to operate as an SSBIC by the SBA on July 24, 1980, is registered as a closed-end, non-diversified management investment company under the Investment Company Act of 1940 (the "1940 Act"), and has elected to be taxed as a "regulated investment company" under the Internal Revenue Code of 1954, as amended (the "Code") since the fiscal year ended June 30, 1984. Elk intends to elect to be taxed as a regulated investment company for the fiscal year ending June 30, 1999. Elk's business has historically been to provide financing to persons who qualify under SBA regulations as socially or economically disadvantaged persons or to entities which are at least 50% owned by such persons ("Disadvantaged Concerns"). The 1958 Act was amended on September 30, 1996, and in connection therewith, Elk entered into an agreement with the SBA in March, 1997, and amended its Certificate of Incorporation, the effect of which was to convert Elk from an SSBIC to a Small Business Investment Company ("SBIC"). As such, Elk may now lend to persons who are not "disadvantaged" so long as Elk's aggregate loans to Disadvantaged Concerns are at least equal to the sum of (i) the remaining amount of Elk's subsidized SBA debentures outstanding, which was $1,500,000 at June 30, 1998 (but which will no longer have a subsidized rate of interest as of September 30, 1998, and will therefore be excluded from this computation), and (ii) the remaining amount of Elk's unamortized Restricted Capital Account (as hereinafter defined) resulting from the repurchase by Elk of its 3% Preferred Stock from the SBA, which Restricted Capital Account was $968,368 at June 30, 1998. The remaining outstanding (i) principal balance of SBA subordinated debentures and (ii) Restricted Capital Account as of June 30, 1998, aggregating $2,468,368, represented less than 10% of Elk's loan portfolio of $41,295,000 as of that date. As of June 30, 1998, more than 95% of Elk's loans and investments qualified as loans to Disadvantaged Concerns. As a result of Elk's conversion to an SBIC, Elk is only required to maintain approximately 10% of its portfolio as loans to such persons. Accordingly, while Elk intends to continue to make loans to Disadvantaged Concerns, particularly in connection with the ownership of taxicabs and related assets in the New York City, Chicago, Boston, and Miami markets, where many of the borrowers may qualify as Disadvantaged Concerns, Elk intends to diversify its activities by lending and investing in a broader range of businesses eligible for investments by SBICs under the 1958 Act ("Small Business Concerns"), many of which, it is anticipated, may not be Disadvantaged Concerns. In addition, Ameritrans, the new parent company, would have the ability to acquire or engage directly in businesses other than that of Elk, either directly or through Elk Capital. To the best of its knowledge, Elk has never experienced any losses of principal during its 18 year history of making loans in connection with the ownership of New York City taxicab medallions, taxicabs and related assets, and its approximately 40 months of making taxi medallion loans in Boston, Chicago and Miami. Elk will continue to make loans in these markets without the historical restriction of lending solely to Disadvantaged Concerns. Loans made by Elk for the purpose of financing the purchase or continued ownership of taxicab medallions, taxicabs and related assets, represented approximately 84.5% of Elk's loan portfolio as of June 30, 1998. Loans made to finance the acquisition and/or operation of other Small Business Concerns constitute the balance of Elk's current loan portfolio, and it intends to continue to make such loans. By Agreement dated November 10, 1994, Elk repurchased all of the 547,271 outstanding shares of its 3% preferred stock from the SBA for an aggregate price of $1,915,449, representing a discount of 65.0% from the original aggregate issuance price of $10 per share. As a condition precedent to the repurchase, Elk granted the SBA a liquidating interest in a newly established restricted capital surplus account (the "Restricted Capital Account"). The Restricted Capital Account is equal to the amount of the net repurchase discount in which the SBA received a liquidating interest amortized over 60 months commencing November 10, 1994. However, if Elk is liquidated or if a material violation of SBA regulations occurs during the amortization period, the SBA would receive the remaining unamortized amount of the Restricted Capital Account prior to the stockholders of Elk receiving any amounts on their Common Stock. The unamortized balance of the SBA's liquidating interest at June 30, 1998 was $968,368. Elk has elected, effective September 28, 1998, to become a business development company ("BDC") under the 1940 Act. See "INFORMATION CONCERNING ELK - -- Election to Become a BDC." Ameritrans Ameritrans was formed as a Delaware corporation on February 12, 1998, for the purposes of (1) acquiring and owning all of the outstanding Elk Common Stock pursuant to the Share Exchange, and (2) engaging in broader and more diversified investment and lending business activities directly, as well as through a newly-formed subsidiary, Elk Capital, which business activities Elk, as an SBIC, is not permitted to transact under the 1958 Act. Any such activities or operations would conform to the investment policies of Ameritrans described below. Ameritrans is registered under the 1940 Act as a closed-end, non-diversified management investment company. Ameritrans will also elect to become a BDC pursuant to the 1940 Act prior to the completion of the Share Exchange. See "INFORMATION CONCERNING ELK -- Election to Become a BDC." Following the consummation of the Share Exchange, Ameritrans plans to engage in broader and more diversified investment and lending activities directly and, if it is in the best interests of its shareholders, through Elk Capital. It is anticipated that Elk Capital will also make investments and/or loans and engage in businesses Elk is not permitted to make under the 1958 Act. As a result, stockholders should realize that, in approving the Share Exchange Plan, they are giving broad discretion to the management of Ameritrans. In addition to serving as the parent corporation of both Elk and Elk Capital, Ameritrans intends to engage in certain investment or other activities directly (and indirectly through Elk Capital and/or other subsidiaries). The investment policies of Ameritrans will allow greater flexibility in its investment and lending business activities than the investment policies of Elk. Because Ameritrans will not be licensed under the 1958 Act, it will not issue any debt or equity securities to the SBA. In addition, because it is anticipated that Ameritrans will engage as described above in a broader range of investment activities than does Elk, the ownership of Ameritrans Common Stock may be subject to a higher degree of risk than is the ownership of Elk Common Stock. See "INFORMATION CONCERNING AMERITRANS -- Investment Policies." In addition, Ameritrans intends to make application to the Securities and Exchange Commission ("SEC") for an increase in the limitations imposed by the 1940 Act with respect to the asset coverage ratios set forth in the 1940 Act. It is expected that the funds necessary to finance the capitalization of Ameritrans and Elk Capital will be provided by Elk to Ameritrans from the approximately $3.0 million of gross proceeds from the private placement -2- of 462,000 shares of common stock of Elk completed in January, 1998 (up to a maximum of $963,000), or through borrowings by Ameritrans. The directors and officers of Ameritrans are the same individuals who serve as the directors and officers of Elk. It is expected that following the consummation of the Share Exchange, such officers and directors will initially receive the same compensation, but such compensation will be allocated between Elk and Ameritrans, based upon factors determined by their respective Boards of Directors. Such officers and directors may also receive increases in compensation from time to time as determined by the Boards of Directors. Ameritrans and/or Elk may also hire additional personnel as such personnel are needed in connection with the expansion and diversification of their lending and/or investment activities. See "INFORMATION CONCERNING AMERITRANS -- Management and Principal Stockholders." The rights of the holders of Ameritrans Common Stock will be substantially the same as the rights of holders of Elk Common Stock. See "INFORMATION CONCERNING AMERITRANS -- Description of Capital Stock." The Certificate of Incorporation and By-laws of Ameritrans will differ in certain respects from the Certificate of Incorporation and By-laws of Elk and, whereas Elk is governed by New York Business Corporation Law, Ameritrans is governed by Delaware General Corporation Law. For a description of the significant differences, see "INFORMATION CONCERNING AMERITRANS -- Corporate Organizational Matters." The Share Exchange Pursuant to the terms of the Share Exchange Plan, each share of Elk Common Stock would be exchanged for one share of Ameritrans Common Stock. As a result of the Share Exchange, (i) Ameritrans would be the sole holder of all of the outstanding Elk Common Stock, and (ii) the former holders of the outstanding shares of Elk Common Stock (other than those dissenting stockholders who exercise appraisal rights, as described below) would be the sole holders of outstanding Ameritrans Common Stock (which would represent the only capital stock of Ameritrans outstanding at the time of the Share Exchange), and would hold the Ameritrans Common Stock in the same relative proportions as they hold Elk Common Stock at the time of the Share Exchange. See "THE SHARE EXCHANGE." As an SBIC, Elk is allowed to make investments only to Small Business Concerns, and a portion of its loans (which is expected to be $790,505 as of September 30, 1998) must be made to Disadvantaged Concerns. The purpose of the Share Exchange is to secure to the holders of Elk Common Stock the benefit of a more diversified investment strategy, which the Board of Directors of Elk believes would be in the best interests of Elk's stockholders. After consideration of the relevant business and legal issues, Elk's Board of Directors has concluded that the best way to establish an entity that may pursue a strategy that includes, but is not limited to, investments in Disadvantaged and Small Business Concerns, and the investment activities of which would accrue to the benefit of the current holders of Elk Common Stock, is to effect the Share Exchange, which would create a parent corporation (Ameritrans) that would be owned by the current holders of Elk Common Stock and that would own all of the outstanding Elk Common Stock. Ameritrans could then engage in broader and more diversified lending business activities directly or indirectly through its newly-formed subsidiary, Elk Capital, which business activities would be free from the restrictions imposed by the 1958 Act. Because Elk and Elk Capital would be subsidiaries of Ameritrans, the income derived from the activities of Elk and Elk Capital, as well as from any activities of Ameritrans (either directly or through other subsidiaries), would benefit the current holders of Elk Common Stock (who, by virtue of the Share Exchange, would be the holders of Ameritrans Common Stock). The Share Exchange is intended to constitute a tax-free transfer under Section 351 of the Code, in which case (1) no gain or loss would be recognized by either Ameritrans or Elk, and (2) no gain or loss would be recognized by Elk stockholders (except with respect to any cash received by holders of Elk Common Stock exercising appraisal rights). See "THE SHARE EXCHANGE -- Federal Income Tax Consequences." The adoption of the Share Exchange Plan requires the affirmative vote of the holders of two-thirds (66.67%) of the outstanding shares of Elk Common Stock. As of June 30, 1998, Elk had 1,745,600 shares -3- of Common Stock outstanding. Certain directors and officers of Elk owning an aggregate of approximately 56% of the outstanding shares of Elk Common Stock have expressed an intention to vote in favor of the adoption of the Share Exchange Plan. The Share Exchange is also subject to the approval of the SBA. Holders of Elk Common Stock who object to the Share Exchange may elect to receive payment of the fair value of their shares of Elk Common Stock (as determined by agreement with Elk or by a court) in lieu of the Ameritrans Common Stock they would otherwise receive pursuant to the Share Exchange. In order to enforce his or her right to receive such payment, a dissenting stockholder must (1) file with Elk, before the stockholder vote on the Share Exchange Plan is taken, a written objection to the Share Exchange that includes a notice of his or her election to dissent, his or her name and address, the number of shares of Elk Common Stock held by him and a demand for payment of the fair value of such shares if the Share Exchange is consummated, (2) not vote in favor of the adoption of the Share Exchange Plan, and (3) otherwise comply with the requirements of Section 623 of New York Business Corporation Law, the full text of which is set forth as Exhibit B hereto. Any deviation from such requirements may result in the forfeiture of appraisal rights. Failure to vote against the Share Exchange Plan will not constitute a waiver of appraisal rights; however, since a proxy left blank will be voted FOR the adoption of the Share Exchange Plan, any Elk stockholder who wishes to exercise his or her appraisal rights with respect to the Share Exchange must either vote AGAINST the Share Exchange Plan or abstain. See "APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS." The Board of Directors of Elk has determined that if the holders of more than 2% of the outstanding shares exercise their appraisal rights, Elk may determine not to proceed with the Share Exchange. THE BOARD OF DIRECTORS OF ELK BELIEVES THAT THE SHARE EXCHANGE IS IN THE BEST INTERESTS OF ELK STOCKHOLDERS, HAS UNANIMOUSLY APPROVED THE SHARE EXCHANGE PLAN, AND UNANIMOUSLY RECOMMENDS THAT ELK STOCKHOLDERS VOTE FOR THE ADOPTION OF THE SHARE EXCHANGE PLAN. INFORMATION CONCERNING THE SPECIAL MEETING Date, Time, Place and Purpose The Special Meeting will be held on , 1998 at 10:00 a.m. (New York Time) at the offices of Stursberg & Veith, 405 Lexington Avenue, New York, New York. The purpose of the Special Meeting is to consider and vote on the adoption of the Share Exchange Plan, pursuant to which the Share Exchange would be effected. Voting and Revocation of Proxies The proxy accompanying this Proxy Statement/Prospectus is solicited by the Board of Directors of Elk for use at the Special Meeting. Holders of Elk Common Stock are requested to complete, date and sign the accompanying proxy and return it promptly in the enclosed envelope. All shares of Elk Common Stock represented at the Special Meeting by properly executed proxies will, unless such proxies have been previously revoked, be voted at the Special Meeting in accordance with the instructions indicated thereon. In the absence of such instructions, the shares represented by such proxies will be voted in favor of the adoption of the Share Exchange Plan. Management of Elk does not know of any other matters which will be brought before the Special Meeting. If, however, other matters are presented to the Special Meeting, all duly executed proxies will be voted in the discretion of the proxy holders. -4- Any stockholder has the power to revoke his proxy at any time before it is voted by (i) delivering written notice of such revocation to the Secretary of Elk, (ii) filing a duly executed proxy bearing a later date, or (iii) appearing at the Special Meeting and electing to vote in person. In addition to solicitation by mail, directors, officers and employees of Elk may solicit proxies from holders of Elk Common Stock personally or by telephone. The expense, if any, of such solicitation shall be borne by Elk. Record Date and Shares entitled to Vote Holders of record of Elk Common Stock as of the close of business on _______ ___, 1998 (the "Record Date") will be entitled to notice of and to vote at the Special Meeting. At the close of business on the Record Date, there were issued and outstanding and entitled to vote a total of 1,745,600 shares of Elk Common Stock. Vote Required Under the law of the State of New York and the Certificate of Incorporation of Elk, the adoption of the Share Exchange Plan must be approved by the affirmative vote of the holders of two-thirds (66.67%) of the shares of Elk Common Stock outstanding on the Record Date, with each share entitled to one (1) vote. Certain directors and officers of Elk owning an aggregate of approximately 56% of the outstanding shares of Elk Common Stock have expressed an intention to vote in favor of the adoption of the Share Exchange Plan. THE SHARE EXCHANGE Set forth below is a description of the principal aspects of the Share Exchange. This description does not purport to be complete and is qualified in its entirety by reference to the Share Exchange Plan, a copy of which is attached as Exhibit A. Background Elk is licensed as an SBIC under Section 301(c) of the 1958 Act, and as such, it may invest only in Small Business Concerns that qualify under applicable rules and regulations of the SBA. The majority of such investments by Elk has consisted of loans for the purchase of taxicab medallions and related taxicab assets. The Board of Directors of Elk believes that a more diversified investment strategy would be in the best interests of Elk and its stockholders. Elk's Board of Directors has further concluded that such diversification would be best accomplished by the organization or acquisition of a company which would be able to invest in other business concerns without regard to their social or economic status or to other limitations imposed by the 1958 Act and the rules and regulations promulgated thereunder, thus enabling the Elk stockholders to reap the economic benefits from such business diversification. Accordingly, after analysis of the legal and regulatory issues involved, Elk's Board of Directors approved a reorganization of Elk, consisting of the following steps: (1) the organization of Ameritrans, and its registration, for tax reasons, as an investment company under the 1940 Act; (2) the acquisition by Ameritrans of all of the outstanding Elk Common Stock from the current Elk stockholders in exchange for Ameritrans Common Stock. An exchange ratio of one (1) share of Elk Common Stock for each share of Ameritrans Common Stock was chosen in order to produce the same number of outstanding shares of Ameritrans Common Stock as there were Elk Common Stock; and (3) the acquisition by Ameritrans of Elk Capital. As a result of this reorganization, the current holders of Ameritrans Common Stock would own all of the shares of capital stock of Elk then outstanding. Ameritrans would be the parent corporation of both Elk and Elk Capital. The first part of this reorganization, the organization of Ameritrans, its registration as an investment company, its election to become a BDC and the acquisition of Elk Capital has been completed. The purpose of the Share -5- Exchange is to effect the second step. The consummation of the Share Exchange will accomplish the final part of this reorganization. Effect of the Share Exchange On the Effective Date of this Share Exchange, as defined below, each outstanding share of Elk Common Stock (other than shares as to which appraisal rights have been exercised) will be exchanged for one (1) share of Ameritrans Common Stock with the ownership of each share of Elk Common Stock automatically vesting in Ameritrans and the holders of the outstanding shares of Elk Common Stock automatically becoming entitled to receive one (1) share of Ameritrans Common Stock for each share of Elk Common Stock held by them. As a result, as of the Effective Date, (1) Ameritrans will be the sole holder of all of the outstanding Elk Common Stock, and (2) the persons holding Elk Common Stock as of the Effective Date will be the sole holders of the shares of Ameritrans Common Stock then outstanding (which will comprise all of the capital stock of Ameritrans then outstanding) in the same relative proportions as they held Elk Common Stock (subject to any changes resulting from the exercise of appraisal rights). As of the date of this Proxy Statement/Prospectus, there were issued and outstanding 1,745,600 shares of Elk Common Stock and one (1) share of Ameritrans Common Stock (which share will be redeemed by Ameritrans upon completion of the Share Exchange). The status of Elk as a licensed SBIC under the 1958 Act and as registered under the 1940 Act will be unaffected by the Share Exchange. As of the Effective Date, Ameritrans will automatically become the sole holder of Elk Common Stock, and the holders of Elk Common Stock will automatically become entitled to receive one (1) share of Ameritrans Common Stock for each share of Elk Common Stock, despite the fact that new stock certificates representing Elk Common Stock and Ameritrans Common Stock will not have been issued to Ameritrans or the holders of Elk Common Stock, respectively. As soon as practicable following the Effective Date, Elk will issue to Ameritrans a stock certificate representing such number of shares of Elk Common Stock as are issued and outstanding as of the Effective Date, and Ameritrans will send to the former holders of Elk Common Stock written instructions on how to exchange their Elk Common Stock certificates for certificates representing shares of Ameritrans Common Stock. Effective Date The Share Exchange will become effective on the date (the "Effective Date") of the filing of a Certificate of Exchange regarding the Share Exchange with the New York Department of State, in accordance with Section 913 of New York's Business Corporation Law. Such filing will be made as soon as practicable following the satisfaction or waiver of all conditions to the Share Exchange (described below), including the adoption of the Share Exchange Plan by the holders of Elk Common Stock. It is currently anticipated that the Effective Date will be on or about ______ ___, 1998. Conditions to the Share Exchange The Share Exchange Plan specifically provides that the obligation of Ameritrans and Elk to consummate the Share Exchange is subject to the fulfillment (or waiver) on or prior to the Effective Date of certain conditions, including the following: (1) the approval of the Share Exchange Plan by the holders of at least two-thirds (66.67%) of the outstanding shares of Elk Common Stock; (2) the approval of the Share Exchange by the SBA, in accordance with the requirements of the 1958 Act; (3) the registration (or the availability of an exemption therefrom) under the Securities Act of 1933 (the "1933 Act"), of the shares of Ameritrans Common Stock to be issued to the former holders of Elk Common Stock pursuant to the Share Exchange, and the compliance with all applicable state securities laws in connection with the issuance of such Ameritrans Common Stock; (4) the exercise of appraisal rights by the holders of not more than 2% of the shares of Elk Common Stock entitled to vote at the Special Meeting; and (5) the absence of any governmental order or action prohibiting the Share Exchange. -6- In addition, Elk has or will represent to the SBA that it will not consummate the Share Exchange if the number of stockholders exercising appraisal rights would result in a violation of the prohibition under the 1958 Act of stock repurchases which reduce its paid-in capital and paid-in surplus by more than 2% in a single fiscal year. Elk anticipates utilizing up to $963,000 of the proceeds raised in its January, 1998, private placement to purchase the shares of stockholders who exercise their appraisal rights. In addition, in order for Ameritrans and Elk to operate in the manner contemplated by this Proxy Statement/Prospectus following the Share Exchange, exemptions from certain provisions under the 1940 Act are required. The SEC has issued an exemptive order to Elk and Ameritrans dated , 1998, granting such exemptions (the "Exemptive Order"). Federal Income Tax Consequences The Share Exchange is intended to constitute a tax-free transfer under Section 351 of the Code. If Section 351 of the Code is applicable, (1) no gain or loss for federal income tax purposes will be recognized by Ameritrans or Elk as a result of the Share Exchange; (2) no gain or loss will be recognized by holders of Elk Common Stock upon the receipt of Ameritrans Common Stock in exchange for their Elk Common Stock pursuant to the Share Exchange; (3) the basis of the Ameritrans Common Stock received by each holder of Elk Common Stock pursuant to the Share Exchange will be equal to the basis of the Elk Common Stock which was converted into such Ameritrans Common Stock pursuant to the Share Exchange; (4) the holding period for tax purposes of the Ameritrans Common Stock received by each holder of Elk Common Stock will include the period for which such stockholder held the Elk Common Stock that was converted into such Ameritrans Common Stock, provided that such Elk Common Stock was held as a capital asset at the time of the Share Exchange; and (5) a holder of Elk Common Stock who exercises appraisal rights with respect to his or her Elk Common Stock and who receives payment for such shares in cash will recognize a capital gain or ordinary loss for federal income tax purposes (provided such stock was held as a capital asset at the time of the Share Exchange), in an amount equal to the excess (if any) of the amount of cash received over such stockholder's tax basis in his or her Elk Common Stock. Management of Elk has been advised by its independent public accountants that although there can be no assurance that the Internal Revenue Service (the "IRS") will not take a different position, they believe that Section 351 should be applicable to the Share Exchange. The belief that the foregoing tax consequences will apply is based upon certain assumptions and subject to certain qualifications, including the assumption that (i) Elk is not under the jurisdiction of a court in a Title 11 or similar case, (ii) the current holders of Elk Common Stock will not, pursuant to a plan or intent existing on or prior to the Effective Date, dispose of as much as 20% of the Ameritrans Common Stock received pursuant to the Share Exchange, (iii) there is no other class of Ameritrans stock outstanding which would represent as much as 20% of the voting stock or 20% of the number of shares of non-voting stock (if any) outstanding, and (iv) the investment company exception to Section 351 of the Code (351(e)) does not apply since the transfer will not result in a diversification of the Elk stockholders' interests. If the IRS were to challenge successfully the tax-free status of the Share Exchange, each holder of Elk Common Stock would have to recognize a gain or loss with respect to his or her Elk Common Stock exchanged for Ameritrans Common Stock pursuant to the Share Exchange in an amount equal to the difference (if any) between (a) the fair market value of the Elk Common Stock exchanged by such stockholder pursuant to the Share Exchange over (b) such stockholder's basis in the Ameritrans Common Stock converted pursuant to the Share Exchange. In such event, an Elk stockholder's tax basis in the Ameritrans Common Stock received pursuant to the Share Exchange would be equal to the fair market value of such Ameritrans Common Stock, and his or her tax holding period for such Ameritrans Common Stock would not include the period for which he held his or her Elk Common Stock. The foregoing discussion of federal income tax consequences is intended only as a general summary and does not deal with all aspects of federal taxation that may be relevant in connection with the Share Exchange. In addition, state, local or foreign income tax consequences to Elk stockholders may be different from the federal income tax consequences described above. Accordingly, each Elk stockholder -7- is urged to consult his or her own tax advisor as to the federal, state, local or foreign income tax effects of the Share Exchange. Accounting Treatment The Share Exchange which represents a recapitalization of Elk will be accounted for on a historical cost basis. The assets and liabilities of Elk and Ameritrans will be recorded at their combined bases as of the Effective Date of the Share Exchange. Unaudited Pro Forma Capitalization Set forth below is a table showing the pro forma capitalization of Ameritrans and Elk as of June 30, 1998. The Share Exchange is accounted for on a historical cost basis, and therefore the total net assets of Ameritrans immediately after the Share Exchange are the same as the total net assets of Elk (comprised of Common Stock plus accumulated undistributed investment income less unrealized loss in value of investments) immediately before the Share Exchange (see the footnotes to this table). This financial information has been derived in part from and should be read in conjunction with the financial statements and the related notes together with the opinion of Marcum & Kliegman, LLP dated August 12, 1998, included in the Statement of Additional Information, which has been filed with the SEC and has been distributed to Elk stockholders along with this Proxy Statement/Prospectus. -8- Net Assets as of June 30, 1998 Immediately Before Acquisition:
Ameritrans Elk Adjustments Combined ---------- --- ----------- -------- Common Stock (Ameritrans 5,000,000 shares of $17,456 $17,456 $.0001 par value stock authorized, 1 share outstanding; Elk 2,000,000 shares of $.01 par value stock authorized, 1,745,600 shares outstanding) Preferred Stock (Ameritrans 1,000,000 shares of -- $.01 par value stock authorized, none outstanding; Elk 1,300,000 shares of $10.00 par value stock authorized, no shares outstanding) Additional paid-in capital 12,485,825 12,485,825 Restricted capital 968,368 968,368 Accumulated undistributed investment 319,289 319,289 income, net Unrealized gain on equity securities 198,789 198,789 Unrealized loss in value of investments (loan loss reserve) (295,000) (295,000) --------- --------- Total Net Assets: 13,694,727 13,694,727 ========== ==========
Net Assets as of June 30, 1998 Immediately After Acquisition:
Ameritrans Elk Adjustments Combined ---------- --- ----------- -------- Common Stock (Ameritrans 5,000,000 shares of $.0001 par value stock authorized, 1,745,600 shares outstanding; Elk 2,000,000 shares of $.01 par value stock authorized, 1,745,600 outstanding) $175(1) $175 Elk Common Stock (2,000,000 shares of $.01 par value stock authorized, 1,745,600 outstanding) $17,456 ($17,456)(2) Elk Preferred Stock (1,300,000 shares of $10.00 par value stock authorized, none outstanding) Additional paid-in capital 13,694,552 12,485,825 (13,677,271) 12,503,106 Restricted capital 968,368 968,368 Accumulated undistributed investment income, net 319,289 319,289 Unrealized gain on equity securities 198,789 198,789 Unrealized loss in value of investments (loan loss reserve) (295,000) (295,000) ----------- ----------- ------------ ----------- Total Net Assets: $13,694,727 $13,694,727 ($13,694,727) $13,694,727 =========== =========== ============= ===========
- -------- 1 To record shares of Ameritrans issued for net assets (Common Stock plus accumulated undistributed investment income less unrealized loss in value of investments) of Elk. 2 To eliminate equity of subsidiary (Elk) in consolidation. -9- INFORMATION CONCERNING ELK General Elk was formed on July 9, 1979, as a New York corporation for the purpose of operating as a Specialized Small Business Investment Company ("SSBIC"), licensed under the Small Business Investment Act of 1958 (the "1958 Act"), and regulated and financed in part by the U.S. Small Business Administration (the "SBA"). Elk was granted a license to operate as an SSBIC by the SBA on July 24, 1980, is registered as a closed-end, non-diversified management investment company under the Investment Company Act of 1940 (the "1940 Act"), and has elected to be taxed as a "regulated investment company" under the Internal Revenue Code of 1954, as amended (the "Code") since the fiscal year ended June 30, 1984. Elk, which elected on September 28, 1998 to become a business development company ("BDC") under the 1940 Act, intends to elect to be taxed as a regulated investment company for the fiscal year ending June 30, 1999. Elk's business has historically been to provide financing to persons who qualify under SBA regulations as socially or economically disadvantaged persons or to entities which are at least 50% owned by such persons ("Disadvantaged Concerns"). The 1958 Act was amended on September 30, 1996, and in connection therewith, Elk entered into an agreement with the SBA in March, 1997, and amended its Certificate of Incorporation the effect of which was to convert Elk from an SSBIC to a Small Business Investment Company ("SBIC"). As such, Elk may now lend to persons who are not "disadvantaged" so long as Elk's aggregate loans to Disadvantaged Concerns are at least equal to the sum of (i) the remaining amount of Elk's subsidized SBA debentures outstanding which was $1,500,000 at June 30, 1998 (but which will no longer have a subsidized rate of interest as of September 30, 1998, and therefore be excluded from this computation), and (ii) the remaining amount of Elk's unamortized restricted capital account (the "Restricted Capital Account") resulting from the repurchase by Elk of its 3% Preferred Stock from the SBA, which Restricted Capital Account was $968,368 at June 30, 1998. The remaining outstanding (i) principal balance of SBA subordinated debentures and (ii) Restricted Capital Account as of June 30, 1998, aggregating $2,468,368, represented less than 10% of Elk's loan portfolio of $41,295,000 as of that date. As of June 30, 1998, more than 95% of Elk's loans and investments qualified as loans to Disadvantaged Concerns. As a result of Elk's conversion to an SBIC, and as of September 30, 1998, Elk is only required to maintain less than $968,368 of its portfolio as loans to such persons. Accordingly, while Elk intends to continue to make loans to disadvantaged persons, particularly in connection with the ownership of taxicabs and related assets especially in the New York City and Chicago markets, where many of the borrowers may qualify as Disadvantaged Concerns, Elk intends to diversify its activities by lending and investing in a broader range of businesses eligible for investments by SBICs under the 1958 Act ("Small Business Concerns"), many of which, it is anticipated, may not be Disadvantaged Concerns. In addition, Ameritrans, the new parent company, would have the ability to acquire or engage directly in businesses other than that of Elk, either directly or through Elk Capital. See "INFORMATION CONCERNING AMERITRANS." To the best of its knowledge, Elk has never experienced any losses of principal during its 18 year history of making loans in connection with the ownership of New York City taxicab medallions, taxicabs and related assets, and its 40 months of making taxi medallion loans in Boston, Chicago, and Miami. Elk will continue to make loans in these markets without the historical restriction of lending solely to Disadvantaged Concerns. Loans made by Elk for the purpose of financing the purchase or continued ownership of taxicab medallions, taxicabs and related assets represented approximately 84.5% of Elk's loan portfolio as of June 30, 1998. Loans made to finance the acquisition and/or operation of other small businesses constitute the balance of Elk's loan portfolio, and it intends to continue to make such loans. By Agreement dated November 10, 1994, Elk repurchased all of the 547,271 outstanding shares of its 3% preferred stock from the SBA for an aggregate price of $1,915,449, representing a discount of 65.0% from the original aggregate issuance price of $10 per share. As a condition precedent to the repurchase, Elk granted the SBA a liquidating interest in a newly established restricted capital surplus account (the "Restricted Capital Account"). The Restricted Capital Account is equal to the amount of the -10- net repurchase discount in which the SBA received a liquidating interest amortized over 60 months commencing November 10, 1994. However, if Elk is liquidated or if a material violation of SBA regulations occurs during the amortization period, the SBA would receive the remaining unamortized amount of the Restricted Capital Account prior to the stockholders of Elk receiving any amounts on their Common Stock. The unamortized balance of the SBA's liquidating interest at June 30, 1998, was $968,368. Elk, as a BDC, is required to file certain reports and other information pursuant to the 1940 Act and the Securities Exchange Act of 1934 (including annual and quarterly reports, and certain stockholder reports and proxy statements), with the SEC. Copies of such reports and information may be inspected and copied at the Public Reference Room of the SEC, 450 Fifth Street, N.W., Washington, D.C., 20549, as well as at the following regional offices: 55 Federal Plaza, New York, New York 10278; Everett McKinley Dirksen Building, 219 South Dearborn Street, Chicago, Illinois, 60604; and Suite 500, East 5757 Wilshire Boulevard, Los Angeles, California, 90036-3648. Copies of such material, or any portion thereof, may be obtained from the Public Reference Branch, Office of Consumer Affairs and Information Services, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C., 20549, at prescribed rates, or on the EDGAR web page of the Securities and Exchange Commission on the Internet at www.sec.gov. Elk registered under the 1940 Act for the fiscal year commencing July 1, 1983, and has declared and paid dividends to holders of Common Stock in the aggregate amounts of $1.08, $1.31, $1.39, $1.51, $1.37, $1.24, $.43, $.33 and $.22 per share for the fiscal years ended June 30, 1984 through June 30, 1992. Elk did not pay dividends during the fiscal years ended June 30, 1993, 1994 and 1995. Elk recommenced paying dividends for the fiscal year beginning July 1, 1995 and ending June 30, 1996 and since that time, has paid dividends per share for the fiscal years commencing July 1, 1995, 1996, and 1997 of $.73, $.74 and $.57, respectively. 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 held by the SBA pursuant to a preferred stock repurchase agreement. In connection with the purchase, all dividends in arrears on the 3% Preferred Stock were extinguished. In addition, 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 were 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, and its subsidiary Elk Capital. Elk's Loans -- Elk obtained a license to operate as an SSBIC from the SBA on July 24, 1980. Until March 1997, as an SSBIC, Elk's primary business has been to provide long-term loan funds at commercially competitive rates of interest (which at June 30, 1998, ranged from 8.25% to 16.5% per annum) to persons defined by SBA regulations as socially or economically disadvantaged persons (or entities which are at least 50% owned by persons so defined), in connection with the financing of diversified businesses. In March 1997, Elk entered into an agreement with the SBA (the "SBA Agreement") and amended its certificate of incorporation, the effect of both of which steps converted the Company into an SBIC. As an SBIC, Elk is permitted to lend to persons who are not "disadvantaged" provided Elk maintains a level of loans to disadvantaged persons equal to the sum of its outstanding SBA subsidized debentures and the SBA's liquidating interest resulting from the 3% Preferred Stock repurchase. Such limitation as to the SBA subsidized debentures in the principal amount of $1,500,000 will terminate as of September 30, 1998, when the debentures are no longer subsidized, and the limitation as to the SBA's liquidating interest terminates upon full amortization of the 3% Preferred Stock repurchase discount is scheduled to occur in November, 1999. Although Elk, as of June 30, 1998, was only required to have $2,468,368 of its total loan portfolio invested with "disadvantaged" persons, more than 95%, or in excess of $37,800,000 of the portfolio, was so invested. Elk anticipates that its present ability to pursue investments and loans with persons who are not "disadvantaged" will afford it greater opportunities to make investments that enhance Elk's profitability. -11- Under current SBA regulations the rate of interest which Elk may charge on loans may not exceed the higher of either Elk's weighted average cost of qualified borrowings, as determined pursuant to SBA regulations without regard to subsidized interest rates, or the current debenture rate, plus, in either case, seven (7) percentage points, rounded off to the next lower eighth of one percent; provided, however, that if the current debenture rate is 8% per annum or lower, Elk is permitted to charge up to 15%. The maximum rate of interest on debt financings allowed to be charged by SBICs to their borrowers for loans originated during August 1998 was 19%. Over the Company's 18 year history, the large majority of Elk's loans were made to purchasers or owners of New York City taxicab medallions (as described in greater detail below). Since Elk commenced operations it has made over $175,000,000 in loans to New York City taxicab medallion owners. As of June 30, 1998, approximately $18,862,618, or 46%, of the aggregate principal amount of its outstanding loans of $41,295,000 represented loans made to finance the purchase or continued ownership of New York City taxicab medallions and related assets. An aggregate of $13,557,342, or 33%, consisted of loans to finance the purchase or refinancing of taxi medallions in Chicago and the balance of $8,871,064, or 21%, consisted of loans to various commercial borrowers, of which $990,086 was invested in Boston taxi medallion financing and $1,480,459 was invested in Miami taxi medallion financing. See "Loan Portfolio; Valuation" below. Pursuant to the SBA Agreement, Elk is not required to maintain any level of non-taxicab medallion secured loans. However, Elk has agreed that subject to the SBA rolling over two (2) debentures, each in the principal amount of $2,040,000, Elk will maintain a non-taxi investment/loan portfolio (included with the combination of its assets acquired and receivables on assets acquired in the future) in the minimum amount of $1,020,000. See "INVESTMENT POLICIES - --Concentration of Investments." Although Elk has historically directed a significant portion of its financing operations toward purchasers or owners of taxicab medallions in New York, the New York market has become increasingly more competitive, affording Elk more limited opportunities to make profitable loans. During the past approximately 40 months, Elk has expanded its taxicab lending business into the Chicago, Boston, and Miami markets, where its taxi lending business has increased and continued to be profitable. Elk intends to continue to expand into new markets both in the taxi industry as well as into other industries determined by management to offer investment opportunities. The loans that Elk plans to pursue will be made to a variety of businesses of all types provided that the loans made are in a majority of cases secured by real estate, business assets, equipment or other collateral deemed adequate by management. In connection with its lending to owners of taxicabs, Elk will, however, only make loans to borrowers who meet the standards required to operate these vehicles by the New York City Taxi and Limousine Commission or other regulatory agencies having jurisdiction in those markets where Elk engages in business. Elk may revise the nature of its loan portfolio at such time as its Board of Directors determines, in its sole discretion, that such revision is in the best interests of Elk in light of then existing business and financial conditions. Elk does not currently anticipate that its loan portfolio will realize an annual turnover in excess of 50%. Elk will not lend to, or otherwise invest more than the lesser of (i) 10% of its total assets, or (ii) 30% of its paid-in capital attributable to its Common Stock in any one small business concern. Elk has not made, and is prohibited by applicable SBA regulations from making, loans to officers, directors or principal shareholders of Elk or "associates" of Elk, as such term is defined in applicable SBA regulations. Short-Term Borrowings -- Elk is authorized to borrow money and issue debentures, promissory notes and other obligations, subject to SBA regulatory limitations. Other than the subordinated debentures issued to the SBA, Elk has to date borrowed funds only from banks. As of June 30, 1998, Elk maintained four (4) lines of credit totaling $33,500,000 with an overall lending limit of $25,000,000. At June 30, 1998, Elk had $22,085,000 outstanding under these lines. The loans, which mature through November 1998, bear interest based on an effective rate of interest equal to approximately 150 basis points above Libor plus certain fees. Upon maturity, Elk anticipates extending the lines of credit for another year as has been the practice in previous years. Pursuant to the terms of the loan agreements, Elk is required to -12- comply with certain terms, covenants and conditions. Elk has pledged its loans receivable and other assets as collateral for the above lines of credit and is required to maintain certain compensating balances. At June 30, 1998, compensating balances of approximately $1,104,250 were maintained by the Company in accordance with these agreements. As of September 1, 1998 Elk has increased its lines of credit and overall lending limit to $35,000,000 and its banks have now eliminated the requirement for compensating balances. Pursuant to the SBA Agreement, Elk agreed to limit the aggregate of its indebtedness based on a computation of a borrowing base each quarter. The borrowing base computation is calculated to determine that the total amount of debt due on the senior bank debt and SBA debentures does not exceed approximately 80% of the value of performing loans and investments in Elk's portfolio. Loans that are more than 90 days in arrears are valued at a lower amount in computing the borrowing base. In connection with the SBA Agreement, Elk has also entered into an intercreditor agreement (the "Intercreditor Agreement") and a custodian agreement (the "Custodian Agreement") with its banks and the SBA. Pursuant to the Custodian Agreement, the banks and the SBA appointed Israel Discount Bank of New York as the custodian to hold certain notes, security agreements, financing statements, assignments of financing statements, and other instruments and securities as part of the collateral for Elk's indebtedness to the banks and the SBA. The Intercreditor Agreement sets forth the respective rights and priorities of the banks and the SBA with respect to the repayment of indebtedness to the banks and the SBA and as to their respective interests in the collateral. Pursuant to the Intercreditor Agreement, the banks consented to the grant by Elk to the SBA of a security interest in the collateral, which security interest ranks junior in priority to the security interests of the banks. Scope of Business Activities -- Elk has not purchased, and does not intend to purchase, commodities or commodity contracts and it has not engaged, nor does it intend to engage, in the business of underwriting the securities of other issuers. In addition, Elk does not intend to purchase any small business except as may be necessary in the event of a foreclosure on the security for a particular loan. Elk does not intend to engage in the purchase or sale of real estate (except to the extent necessary with respect to any defaulted loans, or disposing of assets acquired) or in investments in the securities of other investment companies. As described above, Elk has been organized primarily to provide long-term loan funds to Small Business Concerns. While Elk has made, and intends to continue to make loans for financing the purchase or continued ownership of taxicab medallions, taxicabs and related assets, Elk intends to diversify its investments into other businesses to the extent permitted by the 1958 Act and the rules and regulations promulgated thereunder. If the Share Exchange Plan is approved, Ameritrans intends to invest in businesses which would not qualify for investment by Elk under the 1958 Act. Although Elk's certificate of incorporation provides Elk with the authority to invest in the equity capital of Small Business Concerns, Elk makes equity investments in Small Business Concerns on a selective basis, and only to a limited extent. Equity securities in Elk's investment portfolio at June 30, 1998 totaled $629,179 or 1.4% of total assets. Elk reserves the right, however, to make additional equity investments if determined by Elk's Board of Directors to be in the best interest of Elk. Unless necessary to protect a prior investment of Elk which is at risk, such equity investments shall not exceed 20% of Elk's total assets. Elk has one (1) wholly-owned subsidiary, EAF Holding Corporation, formed in 1992, the sole activities of which are to own and operate certain real estate assets acquired in satisfaction of loans. SBIC Benefits General. As an SBIC, Elk is eligible to receive certain financing from the SBA on favorable terms, and Elk and its shareholders are entitled to certain tax benefits, both described below. The SBA has a certain amount of discretion in determining the type and amount of financing that will be made available to an SBIC. Therefore, there can be no assurance as to the nature and amount of SBA financing that may -13- actually be obtained by Elk. Furthermore, there are certain restrictions and requirements to which Elk is subject by virtue of its being an SBIC. Background. Small Business Investment Companies ("SBICs") were created under the 1958 Act as a vehicle for providing equity capital, long-term loan funds and management assistance to small businesses. In general, the SBA considers a business to be "small," and therefore eligible to receive loans from an SBIC, only if (i) its net worth does not exceed $18,000,000 and if the average of its net annual income after taxes for the preceding two years was not more than $6,000,000 or (ii) it meets the size standard for the industry in which it is primarily engaged, pursuant to SBA regulations. In addition, an SBIC is required to allocate a portion of its portfolio to the financing of concerns that (i) together with their affiliates do not have net worth in excess of $6 million and do not have an average net income after taxes for the preceding two years in excess of $2 million or (ii) meet the size standard for the industry in which they are primarily engaged. SBICs are licensed, regulated and sometimes financed in part by the SBA. Benefits. The principal benefits to Elk as a result of its being licensed as an SBIC are as follows: The SBA is authorized to guaranty full repayment of all principal and interest on debentures issued by an SBIC that loans funds to, but does not invest in the equity of, small businesses to the extent of 300% of such SBIC's Leverageable Capital, as defined in the applicable SBIC regulations. The term of such debentures is typically 10 years. The SBA will guarantee such debentures only after such an SBIC has demonstrated a need for such debentures as evidenced by the SBIC's investment activity and its lack of sufficient funds available for investments; provided, however, that an SBIC that has invested at least 50% percent of its Leverageable Capital and outstanding leverage shall be presumed to lack sufficient funds available for investment. Generally, such debentures will bear interest at a fixed rate that is based on the rate which is set by the underwriters of the pooled debentures sold through SBIC Funding Corp. After maturity, debentures may be refinanced by the SBA by new debentures with 10 year terms. The aggregate amount of debentures with an interest rate subsidy of an SBIC may not exceed 200% of an SBIC's Leverageable Capital or $35,000,000, whichever is less. An SBIC applying for leverage in excess of $35,000,000 is subject to SBA leverage formulas and limitations applicable to SBICs. The subsidized debentures most recently purchased by the SBA from Elk during September 1993 bear interest at the rate of 3.12% per annum for the first five (5) years of their terms and 6.12% per annum for the remaining five (5) years of their terms. As described above, subsequent to a change in the law, Elk converted to an SBIC in March 1997. In addition, in March 1997, Elk refinanced $408,000 of maturing debentures plus accrued interest and a user fee, an aggregate of $430,000, at an unsubsidized fixed rate of 7.38% per annum, plus an annual 1% user fee for a 10 year term. With respect to debentures guaranteed after July 1, 1991, the SBA's claim against an SBIC is subordinated, in the event of such SBIC's insolvency, only in favor of present and future indebtedness outstanding to lenders and only to the extent that the aggregate amount of such indebtedness does not exceed the lesser of 200% of such SBIC's paid-in capital and paid-in surplus (as adjusted pursuant to SBA regulations), or $10,000,000. However, the SBA may agree to a subordination in favor of one or more loans from certain lenders, in its sole discretion. Pursuant to the SBA Agreement and the Intercreditor Agreement, the SBA agreed to a subordination in favor of Elk's banks; provided, however, that Elk is required to keep its overall debt to certain levels based upon the performance of its portfolio. Selected Financial Information The following financial information has been derived in part from and should be read in conjunction with, Elk's financial statements and the related notes included in the Statement of Additional Information, which has been filed with the SEC and has been distributed to Elk shareholders along with this Proxy Statement/Prospectus. -14- Elk Associates Funding Corporation and Subsidiary For the Years Ended June 30, 1994, 1995, 1996, 1997 and 1998
------------------------------------------------------------------------------- 1994 1995 1996 1997 1998 ----------- ----------- ----------- ----------- ----------- Investment Income $ 2,824,881 $ 2,629,901 $ 3,084,412 $ 4,023,795 $ 4,606,456 ----------- ----------- ----------- ----------- ----------- Interest Expense 1,136,458 1,002,959 1,105,993 1,582,700 1,840,731 Other Expenses 926,798 960,474 1,108,505 1,408,034 1,852,262 ----------- ----------- ----------- ----------- ----------- Total Expenses 2,063,256 1,963,433 2,214,498 2,990,734 3,692,993 ----------- ----------- ----------- ----------- ----------- Investment Income Before Taxes, Credit (Provision) for Loan Gains (Losses) and Gains (Losses) on Assets Acquired and Income Taxes 761,625 666,468 869,914 1,033,061 913,463 Credit (Provision) for Loan Gains (Losses) and Gains (Losses) on Assets Acquired(1) (473,317) (13,515) 44,292 (8,923) (14,649) Other Income -- -- -- 24,885 38,798 (Provision) for Income Taxes (State and Federal)(2) -- -- (5,945) (28,676) (3,271) ----------- ----------- ----------- ----------- ----------- Net Income $ 288,308 $ 652,953 $ 908,261 $ 1,020,347 $ 934,341 =========== =========== =========== =========== =========== Net Income Per Common Share $ .31 $ .66 $ .73 $ .79 $ .62 =========== =========== =========== =========== =========== Common Stock Dividends Paid $ -- $ -- $ 937,028 $ 946,655 $ 986,724 =========== =========== =========== =========== =========== Weighted average Shares of Common Stock Outstanding 943,683 988,953 1,247,120 1,283,600 1,518,969 =========== =========== =========== =========== ===========
- ---------- (1) Reference is made to Elk's Statements of Income for information on annual provisions for loan loss reserves and losses on assets acquired. It should be noted that the provision for loan losses and losses on assets acquired reflects the amounts taken in accordance with generally accepted accounting principles. The actual amount of loans written off or (recoveries) for income tax purposes were $351,454, $78,000, ($24,000), ($24,000) and $222,748 for years ended June 30, 1994, 1995, 1996, 1997, and 1998, respectively. See "LOAN PORTFOLIO; VALUATION -- Collection Experience". (2) Elk, since the fiscal year ended June 30, 1984, has elected and qualified to be taxed as a regulated investment company and substantially all taxable income was required to be distributed to shareholders. Therefore, only minimal taxes were required to be paid. -15- Loan Portfolio; Valuation The following table sets forth a classification of Elk's outstanding loans as of June 30, 1998:
Maturity Balance Number Interest Date (in Outstanding TYPE OF LOAN of Loans Rate months) June 30, 1998 - ------------ -------- ------ --------- ------------- New York City: Taxi medallion 99 8.25-12% 1-119 $18,862,618 Radio car service 49 1-15% 1-59 298,976 Chicago: Taxi medallion 415 12-16.5% 21-48 13,557,342 Boston: Taxi medallion 16 10-14% 33-89 990,086 Miami: Taxi medallion 30 13-16.5% 112-120 1,480,459 Other loans: Restaurant 2 10-12% 1-66 260,329 Embroidery manufacturer 1 12% 59 96,000 Retirement home 1 15% 84 300,000 Theater 1 16% 59 174,452 Hairdresser 2 12% 7 122,461 Car wash 1 11.5% 36 220,292 Ambulance service 1 10.5% 6 9,952 Bagel store 1 14% 43 29,614 Dry cleaner 13 10-14.5% 43-121 1,382,032 Laundromat 11 9-15% 24-72 1,751,619 Grocery/deli 3 12.5-13% 31-64 794,019
-16-
Maturity Balance Number Interest Date (in Outstanding TYPE OF LOAN of Loans Rate months) June 30, 1998 - ------------ -------- ------ --------- ------------- Financial services 1 14% 1 9,980 Black car service (real property) 1 12% 5 223,815 Auto sales 4 10.5-13% 1-49 856,942 Registered investment advisor 1 14% 97 169,012 ------- ----------- Total Loans Receivable 653 $41,590,000 ===========
Loans made by Elk to finance the purchase or continued ownership of taxi medallions, taxicabs and related assets are typically secured by such medallions, taxicabs and related assets. Loans made by Elk to finance the acquisition and/or operation of retail or manufacturing businesses are typically secured by real estate and other assets. In the case of loans to corporate owners, the loans are almost always personally guaranteed by the shareholders of the borrower. Elk generally obtains first mortgages, but occasionally has participated in certain financings where it has obtained a second mortgage on collateral. Elk has obtained a relatively higher rate of interest in connection with these subordinated financings. Elk has not committed more than 5% of its assets to any one business concern in Elk's portfolio. The interest rate charged by Elk on its currently outstanding loans ranges from 8.25% to 16.5% per annum. As of June, 1998, the average annual weighted rate per loan was approximately 11.2%. The average term of Elk's currently outstanding loans is approximately 48 months. Valuation -- As an SBIC, Elk is required by applicable SBA regulations to submit to the SBA semi-annual valuations of its investment portfolio, as determined by its Board of Directors, which considers numerous factors including but not limited to the financial strength of its borrowers to determine "good" or "bad" status, and fluctuations in interest rates to determine marketability of loans. Reference is made to Footnotes 1, 2, and 3 of Notes to Financial Statements for the year ended June 30, 1998, for a discussion of Elk's method of valuation of its current portfolio of loans. In the event Elk invests in the future in securities for which price quotations are readily available, Elk will value such investments at their fair market value, based on such quoted prices. With respect to securities for which price quotations are not readily available, such securities will be valued at fair market value as determined by the Board of Directors. Collection Experience -- Elk has historically had a greater success with taxi medallion financings than financings made in the radio car service business or in its diversified (non-taxi) loan portfolio. Substantially all of Elk's provisions for loan losses and losses on assets acquired that occurred during the period of 1991 through 1994 were related to business loans secured by real estate and radio car loans. In addition, during the period 1991 through 1995, Elk had difficulty selling off real estate acquired on defaulted loans as a result of a depressed real estate market. To its knowledge, Elk has never had a loss of principal in any taxi medallion loan during Elk's 18 years of operation. -17- The New York City Taxi Medallion Industry and Market As presently provided by law, the number of medallions for New York City taxicabs that may be issued by New York City is limited to 12,187. There are two types of medallions: (1) corporate and (2) individual owner-driver. Of the total supply of 12,187 medallions, 7,058 are corporate medallions and 5,129 are for individually owned cabs. A corporate medallion is issued with respect to a cab owned by a corporation with a minimum of two (2) cabs and two (2) corporate medallions (i.e., one (1) corporate medallion per cab). An individual owner-driver may not own more than one (1) cab and one (1) medallion. Corporate medallions are used by large fleet concerns with many taxicabs and many drivers or by small corporations owning two (2) medallions and two (2) taxicabs driven by two (2) owner-drivers (the so-called "minifleet"). Until August 1995, only 11,787 medallions were permitted to be issued. On August 8, 1995, a bill permitting the City of New York to issue up to 400 additional taxi medallions over a three-year period was signed by the Governor of the State of New York and approved by the New York City Council. The New York City Taxi and Limousine Commission (the "TLC") conducted the sale of 133 medallions in May 1996, 133 medallions in October 1996, and 134 medallions on October 1, 1997. Of these new medallions, 160 were sold to individuals and the balance to minifleets in lots of two. At the present time, most medallion sales are handled through brokers. As a result, an active marketplace has developed for the purchase and resale of medallions. The price of a medallion varies with supply and demand. Elk's most recent experience, in August, 1998, was that individually owned medallions currently sold for approximately $220,000 and corporate medallions sold for approximately $275,000 each. In addition, a 5% New York city transfer tax and various brokerage commissions are additional expenses incurred in the acquisition and sale of a medallion. Based upon statistics obtained from the TLC, from 1989 through 1998, the number of issued corporate medallions that were sold by the holders thereof varied each year from approximately 245 to 440, which suggests that there were a maximum of between 122 and 220 minifleet corporations in need of financing each year (taking into consideration the fact that each taxicab minifleet needs at least two (2) medallions), while the number of individual owner medallions sold each year varied from 250 to 415. Assuming that a typical minifleet financing for purchases of medallions might involve a sum of approximately $400,000, the dollar volume of New York City minifleet financings might range from $49 million up to $88 million a year. Assuming that a typical individual medallion financing for a purchase of a medallion involves a sum of approximately $180,000, the dollar volume of New York City individual medallion financing might range from $45 million up to $75 million a year. In addition to purchases and sales of medallions, a substantial market exists for refinancing the indebtedness of existing minifleet or individual medallions. Management estimates this market to exceed that of the market for financing transfers or in excess of $100,000,000 per year. A prospective medallion owner must meet the requirements of the TLC, which approves all sales and transfers. In general, the requirements are that the prospective owner have no criminal record, that the purchase funds be derived from legitimate sources, and that the taxi vehicle and meter meet specifications set by the TLC. Also required is a clearance from prior insurers of the seller in the form of letters stating that there are no outstanding claims for personal injuries in excess of insurance coverage. -18- Marketing Strategy for Medallion Financing Medallion transfers in the New York City market are usually handled through medallion brokers who have frequent contact with taxicab owners and drivers. Medallion brokers locate buyers for sellers of medallions and sellers for buyers of medallions, and then typically employ a financing broker to arrange for the financing of the medallion purchases. In many cases the medallion broker and the financing broker may be the same party or related parties. Presently, to the knowledge of Elk, there are approximately 35 medallion and financing brokers in New York City. Medallion brokers customarily receive a brokerage fee of approximately $3,000 to $5,000 per medallion transfer, the cost of which fee is typically split between the buyer and seller. The financing broker, who assists in securing any needed financing for the buyer, generally receives a commission of from 1% to 4% from the borrower on the entire financed portion of the transaction. Elk has in the past received a significant number of referrals from certain medallion brokers in New York. Elk also receives referrals from financing brokers and its current borrowers. In addition, Elk occasionally places advertisements in local industry newspapers and magazines. Elk also uses brokers, advertising and referrals in connection with its taxicab lending business in the Chicago, Boston, and Miami markets. Elk does not plan to make any significant increases in the amount of its radio car loans in the future. Competition Banks, credit unions, and other finance companies, some of which are SSBICs and SBICs, compete with Elk in the origination of medallion loans and commercial installment loans. Finance subsidiaries of equipment manufacturers also compete with Elk. Many of these competitors have greater resources than Elk and certain competitors are subject to less restrictive regulations than Elk. As a result, Elk expects to continue to encounter substantial competition from such lenders, many of which are well-established. Therefore, there can be no assurance that Elk will be able to identify and complete financing transactions that will permit it to compete successfully. Investment Policies The investment policies set forth herein constitute fundamental policies of Elk pursuant to the 1940 Act, which may be changed only by the vote of the lesser of (i) a majority of its outstanding Common Stock, or (ii) 67% of the number of shares of Common Stock present in person or by proxy at a duly held shareholder meeting at which at least 50% of the outstanding shares of Common Stock are present. (a) Issuance of Senior Securities. Elk may issue preferred stock and subordinated debentures to the SBA in the maximum amounts permissible under the 1958 Act and the applicable regulations. (b) Borrowing of Money. Elk has the power to borrow funds from banks, trust companies, other financial institutions, the SBA or any successor agency and/or other private or governmental sources, if determined by Elk's Board of Directors to be in its best interests. (c) Underwriting. Elk has not engaged, and does not intend to engage, in the business of underwriting the securities of other issuers. -19- (d) Concentration of Investments. Elk may not concentrate 25% or more of its total assets in securities of issuers in any industry group except the taxicab industry. Elk will make at least 25% of its investments for financing the purchase or continued ownership of taxicab medallions, taxicabs and related assets. The balance of its investments includes, and Elk intends to continue to finance, the acquisition and/or operation of other small businesses. (e) Real Estate. Elk has not engaged, and does not intend to engage, in the purchase and sale of real estate. However, Elk may elect to purchase and sell real estate in order to protect any of its prior investments which it considers at risk. (f) Commodities Contracts. Elk has not engaged, and does not intend to engage, in the purchase and sale of commodities or commodities contracts. (g) Loans. Elk has made, and will continue to make, loans to Small Business Concerns in accordance with the provisions of the 1958 Act and the regulations issued by the SBA thereunder. (h) Writing Options. Elk has not engaged, and does not intend to engage, in the writing of options. (i) Short Sales. Elk has not engaged, and does not intend to engage, in short sales of securities. (j) Purchasing Securities on Margin. Elk has not engaged, and does not intend to engage, in the purchase of securities on margin. (k) Futures Contracts. Elk has not engaged, and does not intend to engage, in the purchase or sale of futures contracts. (l) Restricted Securities. Elk may invest up to 100% of its assets in restricted securities. (m) Types of Investments. Although Elk was organized primarily to provide long term loan funds to Small Business Concerns, Elk's certificate of incorporation provides Elk with the authority to invest in the equity capital of Small Business Concerns. Accordingly, Elk may make equity investments in Small Business Concerns if determined by its Board of Directors to be in the best interests of Elk. Further, except as otherwise provided by applicable regulations, there shall be no limitation on the amount of equity investments Elk may make. (n) Maximum Investment. Elk will not lend or otherwise invest more than the lesser of (i) 10% of its total assets or (ii) 30% of its paid-in capital attributable to its Common Stock with respect to any one Small Business Concern. (o) Percentage of Voting Securities. The percentage of voting securities of any one Small Business Concern which Elk may acquire may not exceed 49% of the outstanding voting equities of such Small Business Concern. -20- (p) Management Control. Elk does not intend to invest in any company for the purpose of exercising control of management. However, Elk may elect to acquire control in order to protect any of its prior investments which it considers at risk. (q) Investment Companies. Elk has not invested, and does not intend to invest, in the securities of other investment companies. (r) Portfolio Turnover. Elk intends to make changes in its portfolio when, in the judgment of its Board of Directors, such changes will be in the best interest of Elk's stockholders in light of the then existing business and financial conditions. Elk does not anticipate that its loan portfolio will realize an annual turnover in excess of 50%, although there can be no assurance with respect thereto. The Small Business Investment Act of 1958 As the holder of a license from the SBA to operate as an SBIC, Elk qualifies for certain financing from the SBA on favorable terms as described above under the heading "Certain Financial Information," but is subject to certain restrictions and requirements under the 1958 Act and regulations promulgated by the SBA under such act (the "SBA Regulations"). These restrictions and requirements include, but are not limited to, the following: (i) The interest rate charged by an SBIC on loans to small businesses may not exceed the higher of either an SBIC's certified weighted average cost of qualified borrowings, computed in accordance with SBA Regulations, or the current debenture rate, plus, in either case, seven (7) percentage points, rounded off to the next lower eighth of one percent; provided, however, that if the current debenture rate is 8% per annum or lower, an SBIC is permitted to charge up to 15%. (ii) The aggregate commitments by an SBIC to any single small business enterprise may not exceed 30% of the aggregate paid-in capital and paid-in surplus of the SBIC. (iii) Management and advisory services must be performed by an SBIC in accordance with a written contract and certain record-keeping requirements must be satisfied. (iv) The term of SBIC loans to small businesses may not exceed 20 years. (v) Prior written consent of the SBA is required in the event of any proposed transfer of control of an SBIC and any proposed transfer of 10% or more of any class of an SBIC's stock ownership by any person or group of persons acting in concert owning 10% or more of any class of an SBIC's stock. (vi) Limitations are imposed on the ability of the officers, directors, managers or 10% stockholders of an SBIC to become an officer, director, manager or 10% stockholder of another SBIC. (vii) Prior written consent of the SBA is required in the event of a merger, consolidation or reorganization of an SBIC. (viii) SBIC funds in excess of $2,000 not invested or loaned to small businesses and not applied to the conduct of its operations are required to be deposited in, or invested in time deposits of, federally-insured banks. -21- (ix) Corporate SBICs issuing debentures after April 25, 1994 are required to amend their articles of incorporation to indicate that they have consented, in advance, to the SBA's right to require the removal of officers or directors and to the appointment of the SBA or its designee as receiver of the SBIC for the purpose of continuing to operate the company upon the occurrence of certain events of default. The regulations divide the events of default into three categories. The first category consists of three events that automatically accelerate all outstanding debentures without notice or demand to the SBIC, and allow the SBA to apply for receivership of the SBIC without the SBIC's objection. The events are insolvency, a voluntary assignment for the benefit of creditors, and the filing of a voluntary or involuntary petition for relief under the Bankruptcy Code. Under the second category, upon written notice, the SBA may demand immediate repayment or redemption of all outstanding debentures or take any other action permitted under the 1958 Act, specifically including institution of proceedings for the appointment of the SBA or its designees as a receiver of the SBIC. Nine (9) violations are included in this category, and no opportunities to cure the default are afforded the SBIC. This category of violations includes: fraud; fraudulent transfers; willful conflicts of interest; willful non-compliance of one or more of the substantive provisions of the 1958 Act or of a substantive regulation; repeated events of default; transfer of control; non-cooperation with remedial steps that the SBA may prescribe; non-notification of events of default; and non-notification of events of default to others. For the first six (6) violations listed above the SBIC will have consented to the SBA's right to require the SBIC to replace officers or directors, with persons approved by the SBA, and to the SBA's appointment as receiver for the purpose of continuing operations. Under the third category, which includes nine (9) violations, the SBA affords the SBIC the opportunity to cure its violations. If the SBIC fails to cure to the SBA's satisfaction, the SBA may declare the SBIC's entire indebtedness evidenced by the debentures to be immediately due and payable. The violations in this category include: excessive compensation; improper distributions; failure to make a timely payment of an SBA obligation; failure to maintain minimum regulatory capital; capital impairment; failure to pay any amount when due on any obligation greater than $100,000; nonperformance or violation of the terms and conditions of any note, debenture, or other obligation of the SBIC issued to, held or guaranteed by the SBA, or of any agreement with, or conditions imposed by, the SBA; failure to comply with one or more of the substantive provisions of the 1958 Act or regulations thereunder; and failure to maintain certain investment ratios for leverage in excess of 300% of Leverageable Capital, as defined in the 1958 Act. For the first three violations listed above, if an SBIC fails to cure such violations the SBA can require the removal of officers and directors and/or the appointment of its designee as receiver of the SBIC. In addition, if an SBIC repeatedly fails to comply with one or more "non-substantive" provisions of the 1958 Act or the regulations thereunder, the SBA, after written notification and until such condition is cured, may deny additional leverage to such SBIC and/or require such SBIC to take such actions as the SBA may determine to be appropriate under the circumstances. If the SBA requires the licensee to bring itself into full compliance and it fails to do so, the SBA may accelerate its leverage and take other remedies, including a receivership. (x) As with debentures, corporate SBICs issuing preferred stock after April 25, 1994 are required to amend their articles of incorporation to indicate that they have consented, in advance, to the SBA's right to require the removal of officers or directors and to the appointment of the SBA or its designees as receiver of the SBIC for the purpose of continuing to operate the SBIC upon the occurrence of certain events of default. The regulations divide the events of default into four (4) categories. -22- The first category consists of six (6) events, the occurrence of any of which will permit SBA, upon notice to the SBIC, to require the SBIC to replace, with individuals approved by the SBA, one or more of its officers and/or directors. In addition, the SBA can apply for the institution of an operating receivership, with the SBA or its designee as receiver. The events are: equitable or legal insolvency, or a capital impairment percentage of 100% or more and such capital impairment is not cured within the time limits set by the SBA in writing; a voluntary assignment for the benefit of creditors; the filing of a voluntary or involuntary petition for relief under the bankruptcy code; transfer of control; fraud; and fraudulent transfers. The second category consists of willful conflicts of interest; willful or repeated non-compliance with one or more of the substantive provisions of the 1958 Act or any substantive regulation promulgated thereunder; and failure to comply with a restriction imposed on the SBIC pursuant to the third category. Upon the occurrence of any such event, and only if the SBIC fails to remove the person(s) the SBA identifies as responsible for such occurrence and/or cure such occurrence to the SBA's satisfaction within a time period determined by the SBA, upon written notice, the SBA may replace one or more of the SBIC's officers and/or directors or obtain the appointment of the SBA or its designee as receiver of the SBIC. The third category lists eleven (11) events, the occurrence of any of which will allow the SBA, on written notice to the SBIC, to prohibit the SBIC from making any additional investments except for investments pursuant to legally binding commitments entered into by the SBIC prior to such notice and, subject to the SBA's prior written approval, investments that are necessary to protect the SBIC's investment; to prohibit distributions by the SBIC to any party other than the SBA, its agent or trustee, until all leverage is redeemed and amounts due are paid; to require all commitments to the SBIC to be funded at the earliest time(s) permitted in accordance with the SBIC's articles of organization; and to review and re-determine the SBIC's approved management compensation. This category of events includes the occurrence of any event listed in the first two categories; the SBIC's failure to maintain its minimum regulatory capital; capital or liquidity impairment and failure to cure the impairment within time limits set by SBA in writing; improper distributions; excessive compensation; failure to pay any amounts due under preferred securities, unless otherwise permitted by the SBA; noncompliance with one or more of the substantive provisions of the 1958 Act, or any substantive regulation promulgated thereunder; failure to maintain diversity between management and ownership, if applicable to such SBIC; failure to maintain investment ratios for leverage in excess of 300% of Leverageable Capital or preferred securities in excess of 100% of Leverageable Capital, if applicable to such SBIC, as of the end of each fiscal year; nonperformance of one or more of the terms and conditions of any preferred security or of any agreement with or conditions imposed by SBA in its administration of the 1958 Act and the regulations promulgated thereunder; and failure to take appropriate steps to accomplish such actions as the SBA may have required for repeated non-substantive violations of the 1958 Act or the regulations promulgated thereunder. Under the fourth category if an SBIC repeatedly fails to comply with any one or more of the non-substantive provisions of the 1958 Act or any non-substantive regulation promulgated thereunder, the SBA, after written notification to the SBIC and until such condition is cured to the SBA's satisfaction, can deny additional leverage to such SBIC and/or require such SBIC to take such actions as the SBA may determine to be appropriate under the circumstances. (xi) An SBIC may not control (as such term is defined under applicable SBA Regulations) its investee companies except to the extent temporarily required to protect its investment. Additionally, SBA Regulations require SBICs to conduct active operations. An SBIC is inactive and thus violates SBA Regulations if at the close of any fiscal year it has more than 25% of its assets in idle funds -23- and if it has failed to provide financing aggregating 25% of the average amount of its idle funds during the past eighteen months. The SBA requires the SBIC to submit written justification of such inactivity. (xii) As part of the regulatory framework, SBICs are subject to examinations by SBA agents at least bi-annually and are required to pay examination fees and maintain certain records, files, internal control programs and reports. Moreover, the SBA is authorized to suspend an SBIC's license, issue cease and desist orders, remove officers and directors of an SBIC, subpoena witnesses and records, apply for injunctions to the appropriate district court, and apply for further acts of enforcement to the appropriate U.S. Circuit Court of Appeals. The foregoing summary of certain requirements under the 1958 Act and regulations thereunder does not purport to be complete and investors are urged to consult the 1958 Act and regulations thereunder for more detailed information. See below under the heading "Tax Considerations" for a discussion of the taxation of SBICs. The Investment Company Act of 1940 Elk registered as an investment company under the 1940 Act on July 8, 1983. Prior to such date, Elk was exempt from regulation under the 1940 Act. The 1940 Act imposes various substantive requirements upon registered investment companies, and compliance with these requirements can in many cases be time consuming, burdensome and expensive. These requirements include, but are not limited to, the following: (i) The Board of Directors of Elk must be composed of at least 40% of persons who are not "interested persons" as that term is defined in the 1940 Act (e.g., persons who are not affiliates, counsel, accountants, investment advisors of or to Elk). (ii) Any arrangement which provides for joint participation by Elk and any affiliate (as that term is defined in the 1940 Act) of Elk in any transaction, and Company loans to, purchases from, or sales to, any such affiliate must be approved in advance by the Commission. (iii) Any management advisory contract between Elk and an investment adviser must be (a) in writing, (b) initially approved by shareholders holding a "majority of the outstanding voting stock" (as defined in the 1940 Act) of Elk and annually thereafter by either Elk's Board of Directors or a majority of its outstanding voting stock, (c) non-assignable by the adviser, and (d) terminable by the directors or a majority of the voting shareholders upon 60 days' notice. (iv) Elk is required to prepare and file various annual and periodic reports and proxy materials with the Commission. (v) Elk's fundamental investment policies may not be changed without the approval of a "majority of the outstanding voting stock" (as defined in the 1940 Act). See "Investment Policies." (vi) Elk is required to comply with special journal and ledger accounting rules and record-keeping requirements relating to all business transactions, and will be subject to inspections by representatives of the Commission without warning. -24- (vii) Elk may not (i) issue more than one (1) class of stock senior to the Common Stock or (ii) issue warrants or rights unless they expire in 120 days or less and are issued ratably to all members of a class of voting securities. (viii) Elk must adopt a Code of Ethics which is designed to prevent insiders from competing with Elk for investments. The Code of Ethics must require that Elk maintain records of all security transactions of directors, officers and employees with information relating to Elk's investments. See "Management -- Conflicts of Interest Policies." (ix) Holders of 10% or more of any class of Elk's voting securities and its directors and officers are subject to short-swing profit liability under Section 16(b) of the Securities Exchange Act of 1934, for purchases and sales of securities of Elk within a six-month period of each other. (x) Elk may not issue any of its securities for services or property other than cash (except as a dividend or distribution to its shareholders or in connection with a reorganization). (xi) Elk may not sell any of its Common Stock for less than the current net asset value of such stock except (a) with the consent of a majority of the holders of its Common Stock, (b) in connection with an offering to all holders of the Common Stock, (c) upon the exercise of an outstanding warrant or (d) upon the conversion of a convertible security in accordance with its terms. The foregoing summary of certain requirements of the 1940 Act does not purport to be complete, and investors are urged to consult the 1940 Act for more detailed information. Election to Become a BDC Elk elected to become a BDC effective September 28, 1998. Ameritrans has also elected to be treated as a BDC, which also subjects each company to continuing regulation under the 1940 Act. The 1940 Act contains prohibitions and restrictions relating to transactions between BDCs and their affiliates, principal underwriters, and affiliates of those affiliates or underwriters. In addition, the 1940 Act provides that a company may not change the nature of its business so as to cease to be, or to withdraw its election as, a BDC unless so authorized by the vote of a "majority of the company's outstanding voting securities," as defined under the 1940 Act. A BDC is permitted, under specified conditions, to issue multiple classes of indebtedness and one class of stock (collectively, "senior securities," as defined under the 1940 Act) senior to the shares of its common stock if the company's asset coverage of such indebtedness and all senior securities is at least 200% immediately after each such issuance. Subordinated debentures and preferred stock guaranteed by or issued to the SBA, are not subject to this asset coverage test. In addition, while senior securities are outstanding, provision must be made to prohibit the declaration of any dividend or other distribution to stockholders (except stock dividends) or the repurchase of such securities or shares unless the BDC meets the applicable asset coverage ratios at the time of the declaration of the dividend or distribution or repurchase. The Exemptive Order grants, among other things, certain relief from the asset coverage ratios applicable to BDCs. Under the 1940 Act, a BDC may not acquire any asset other than assets of the type listed in Section 55(a) of the 1940 Act ("Qualifying Assets") unless, at the time the acquisition is made, certain Qualifying -25- Assets represent at least 70% of the value of the company's total assets. The principal categories of Qualifying Assets relevant to the proposed business of Ameritrans are the following: (1) Securities purchased in transactions not involving a public offering from the issuer of such securities, which issuer is an eligible portfolio company. An "eligible portfolio company" is defined in the 1940 Act as any issuer which: (a) is organized under the laws of, and has its principal place of business in, the United States; (b) is not an investment company other than an SBIC or SSBIC wholly-owned by the business development company; and (c) does not have any class of securities with respect to which a broker or dealer may extend margin credit. (2) Securities of any eligible portfolio company which is controlled by the business development company. (3) Securities received in exchange for or distributed on or with respect to securities described in (1) or (2) above, or pursuant to the exercise of options, warrants, or rights relating to such securities. (4) Cash, cash items, government securities, or high quality debt securities maturing in one year or less from the time of investment. In addition, a BDC must have been organized (and have its principal place of business) in the United States for the purpose of making investments in the types of securities described in (1) or (2) above. In order to count securities as Qualifying Assets for the purpose of the 70% test, the BDC must either control the issuer of the securities or must make available to the issuer of the securities significant managerial assistance; except that, where the BDC purchases such securities in conjunction with one or more other persons acting together, one of the other persons in the group may make available the required managerial assistance. In addition, at least 50% of the members of a BDC's Board of Directors must be persons who are "disinterested" as that term is defined in the 1940 Act. Security Ownership of Principal Stockholders and Management The following table sets forth certain information as to those persons who, to the knowledge of Elk, owned 5% or more of the outstanding Common Stock of Elk as of June 30, 1998, and as to the officers and directors of Elk as a group: Number of Shares of Percentage of outstanding Elk Name Common Stock Owned Common Stock owned - ---- ------------------ ------------------ *Gary C. Granoff 320,708(1) 18.4% *Ellen M. Walker 37,374(2) 2.1% *Lee A. Forlenza 30,435 1.7% -26- Number of Shares of Percentage of outstanding Elk Name Common Stock Owned Common Stock owned - ---- ------------------ ------------------ *Margaret Chance 3,400(3) .2%(5) *Silvia Mullens -- None Marvin Sabesan 78,861(4) 4.5% Steven Etra 115,516(6) 6.6% Paul Creditor 2,000 .1%(5) Allen Kaplan 5,000 .3%(5) Dan M. Granoff 145,979(7) 8.4% Alexander Nash 96,600(8) 5.5% John L. Acierno -- None Paul D. Granoff 143,179(9) 8.2% ------- ---- Officers, Directors and 5% 979,052 56.0% stockholders as a group (13 persons) - ---------- * Gary C. Granoff, Ellen Walker, Lee A. Forlenza, Margaret Chance and Silvia Mullens are each "interested persons" with respect to Elk, as such term is defined in the 1940 Act. (1) Excludes 24,933 shares owned directly or indirectly by Mr. Granoff's wife, as to which he disclaims beneficial ownership. Also excludes 10,500 shares owned by one of Mr. Granoff's sons, as to which shares he does not exercise any control and disclaims beneficial ownership. Includes 10,900 shares owned by The Granoff Family Foundation, a charitable foundation of which Mr. Granoff and his father, mother, and brother, Dan M. Granoff, are trustees. Also includes 35,321 shares held by Mr. Granoff as trustee for his children and other family members. Also includes 261 shares held by GCG Associates Inc., a corporation owned by Mr. Granoff. Also includes 76,084 shares owned by DAPARY Management Corp., a corporation controlled by Mr. Granoff. (2) Includes 200 shares held by Ms. Walker as custodian for her son. Includes 22,800 shares held by various trusts of which Ms. Walker is a trustee and as to which she disclaims benefical ownership. Mr. Granoff retains a reversionary interest in 21,000 of such shares. (3) Includes 200 shares held by Ms. Chance as custodian for her daughter. (4) Includes 21,387 shares held by Mr. Sabesan and his wife as joint tenants and 28,551 shares held by his wife. Mr. Sabesan disclaims beneficial ownership of the 28,551 shares held by his wife. (5) Less than 1%. (6) Includes 29,022 shares held by Mr. Etra and his wife as joint tenants, 27,000 shares held by his wife and 1,500 shares held by Mr. Etra's son. Also includes 10,000 shares held by SRK Associates LLC, a limited liability company controlled by Mr. Etra. Also includes 10,000 shares held by Lance's Property Development Corp. Pension Plan, of which pension plan Mr. Etra is a trustee. -27- (7) Excludes 10,900 shares owned by a charitable foundation, of which N. Henry Granoff, his wife, Jeannette Granoff, Gary C. Granoff and Dan M. Granoff are the trustees. Includes 2,800 shares held in an IRA rollover account for the benefit of Dr. Granoff. (8) Includes 6,500 shares held by Dr. Nash as custodian for his daughter. Also includes 52,900 shares held by his wife, as to which shares Dr. Nash disclaims beneficial ownership. (9) Includes 40,049 shares held by Dr. Paul Granoff directly, 77,630 held by Granoff Family Partners Ltd., of which Dr. Granoff is a general partner, and 25,500 shares held by the Granoff Pediatric Associates Profit Sharing Plan. Excludes 14,127 shares held by Dr. Granoff's wife, of which shares he disclaims beneficial ownership. Except as otherwise indicated above, the persons listed in the above table have sole voting and investment power, and are both the owners of record and the beneficial owners, with respect to their respective shares. All of the persons listed above, for as long as they continue to hold 5% percent or more of Elk's outstanding Common Stock, will be deemed "affiliated persons" of Elk, as such term is defined in the 1940 Act. Management Directors and Executive Officers The following table sets forth certain information concerning the directors and executive officers of Elk:
Name Address Position - ---- ------- -------- Gary C. Granoff(1)(2) c/o Elk Associates President and Chairman of Funding Corporation Board of Directors 747 Third Avenue New York, New York Ellen M. Walker(1)(2) c/o Elk Associates Vice President, General Funding Corporation Counsel and Director 747 Third Avenue New York, New York Lee A. Forlenza(1)(2) c/o Elk Associates Vice President and Funding Corporation Director 747 Third Avenue New York, New York Margaret Chance(2) c/o Elk Associates Secretary Funding Corporation 747 Third Avenue New York, New York
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Name Address Position - ---- ------- -------- Silvia Mullens(2) c/o Elk Associates Vice President Funding Corporation 747 Third Avenue New York, New York Marvin Sabesan c/o Pearl River Textiles, Inc. Director 990 Sixth Avenue New York, New York Steven Etra 55-25 58th Street Director Maspeth, New York Paul Creditor 747 Third Avenue, Ste. 4C Director New York, New York Allen Kaplan c/o Team Systems Director 30-17 40th Avenue Long Island City, New York John L. Acierno c/o Executive Charge, Inc. Director 1440 39th Street Brooklyn, New York
- ---------- (1) Ellen M. Walker, Gary C. Granoff and Lee A. Forlenza are officers and shareholders in the law firm of Granoff, Walker & Forlenza, P.C. and in Gemini Capital Corporation. (2) Gary C. Granoff, Ellen M. Walker, Lee A. Forlenza, Margaret Chance and Silvia Mullens are each "interested persons" with respect to Elk, as such term is defined in the 1940 Act. Gary C. Granoff, age 50, has been President and a director of the Company since its formation in July 1979 and Chairman of the Board of Directors since December 1995. Mr. Granoff has been a practicing attorney for the past twenty-five years and is presently an officer and shareholder in the law firm of Granoff, Walker & Forlenza, P.C. Mr. Granoff is a member of the bar of the State of New York and the State of Florida and is admitted to the United States District Court of the Southern District of New York. Mr. Granoff is also President and the sole stockholder of GCG Associates, Inc. ("GCG"), the Company's former investment adviser. He has served as President and the sole stockholder of Seacrest Associates, Inc., a hotel operator, since August 1994. Mr. Granoff has also been President and a director since June 1996 of Gemini Capital Corporation ("Gemini"), a company primarily engaged in the business of making consumer loans. In February 1998, Mr. Granoff was elected to and is presently serving as a trustee on the Board of Trustees of The George Washington University. Mr. Granoff holds a Bachelor of Business Administration degree in Accounting, and a Juris Doctor degree with honors, both of which degrees were obtained at The George Washington University. Ellen M. Walker, age 42, has been a Vice President and General Counsel of the Company since July 1983 and a director of the Company from July 1983 to August 1994. She again became a director of the Company in 1995. Ms. Walker has been a practicing attorney for more than seventeen years and she is presently an officer and shareholder in the law firm of Granoff, Walker & Forlenza, P.C. Ms. Walker is a member of the Bar of the State of New York and she is admitted to the United States District Court of the Southern District of New York. Since August 1983 Ms. Walker has been Vice President of -29- GCG. Ms. Walker has been a director, Vice President and General Counsel of Gemini since June 1996. Ms. Walker received a Bachelor of Arts degree from Queens College and obtained her Juris Doctor degree with honors from Brooklyn Law School. Lee A. Forlenza, age 40, has been a Vice President of the Company since March 1992. Mr. Forlenza has been a practicing attorney since February 1983 and is presently an officer and shareholder in the law firm of Granoff, Walker & Forlenza, P.C. Since March 1992 Mr. Forlenza has been an investment analyst for GCG. Mr. Forlenza has also been Vice President, Secretary and a director of Gemini since June 1996. Mr. Forlenza was Vice President of True Type Printing, Inc. from 1976-1995 and President since May 1995. From 1983 through 1986 Mr. Forlenza was an attorney with the SBA. Mr. Forlenza graduated Phi Beta Kappa from New York University and obtained his Juris Doctor degree from Fordham University School of Law. Silvia Mullens, age 45, has been the Loan Administrator of the Company since February 1994. She was elected a Vice President of the Company in 1996. Prior to joining the Company, she was the Legal Coordinator for Castle Oil Corporation from September 1991 through June 1993 and from June 1993 through January 1994, a legal assistant specializing in foreclosures in the law firm of Greenberg & Posner. Ms. Mullens received a B.A. from Fordham University and an M.B.A. from The Leonard Stern School of Business Administration of New York University. Margaret Chance, age 42, has been Secretary of the Company and involved in loan administration since November 1980. Ms. Chance is the office manager of Granoff, Walker & Forlenza, P.C. and has served as the Secretary of GCG Associates Inc., since January 1982. Ms. Chance holds a paralegal certificate. Marvin Sabesan, age 69, has been a director of the Company since July 1982. Mr. Sabesan has been employed by Pearl River Textiles, Inc. as an executive since 1990. He was an Executive Vice President of N.O.L. Inc., a lingerie company, from 1988 to 1990. Mr. Sabesan was an Executive Vice President of A.J. Schneierson & Son, a clothing manufacturer from 1971 to 1987. Steven Etra, age 49, has been Sales Manager since 1975 of Manufacturers Corrugated Box Company, a company owned by Mr. Etra's family for more than seventy-five years. Mr. Etra has also been a director of Gemini since June 1996. Mr. Etra has extensive business experience in investing in emerging companies. Paul Creditor, age 61, has been a practicing attorney since 1961, engaging in the general practice of law and specializing in corporate law. From 1974 through 1979 he served as an elected Judge in Suffolk County, New York. He also served as counsel to the New York State Constitutional Convention and various State Agencies and Commissions. Allen Kaplan, age 47, is Vice President and Chief Operating Officer of Team Systems, Inc., a company which manages and operates more than 200 New York City Medallion taxicabs. Mr. Kaplan is currently Vice President of the Metropolitan Taxicab Board of Trade, a trade association consisting of 22 member fleets representing 1,200 New York City medallions. John L. Acierno, age 39, has served as president of Executive Charge Inc. and its affiliated companies for the last ten years. During that time, Executive Charge Inc. has become the largest executive sedan operation in the United States with over 1,100 vehicles servicing the greater New York Metropolitan -30- area. His background includes practicing law as a labor attorney for Proskauer Rose and serving as counsel for R.H. Macy & Co. Mr. Acierno was founder and immediate past president for the last six years of the Black Car Assistance Corporation, the organization which serves as the New York black car industry association. He was named International Taxicab and Limousine Association Premium Service Operator of the Year for 1996. Mr. Acierno graduated Phi Beta Kappa from Tufts University, and Cum Laude from Cornell Law School. Elk's directors are actively involved in the oversight of its affairs, including financial and operational issues, credit and loan policies, asset valuation, and strategic direction. Committees of the Board Elk has a standing Audit Committee and a standing Holding Company Committee. The Audit Committee is comprised of Paul Creditor, John Acierno and Gary Granoff. The function of the Audit Committee is to review the internal accounting control procedures of the Company, review the consolidated financial statements of the Company and review with the independent public accountants the results of their audit. The Holding Company Committee consists of Steven Etra and Lee Forlenza. The purpose of the Holding Company Committee is to oversee the formation and capitalization of, and the transactions with, Ameritrans. Executive Compensation The following table sets forth all remuneration for services rendered to Elk during the periods indicated to (i) each of the executive officers and (ii) all executive officers as a group. The following individuals were paid the cash compensation set forth opposite their names for the period July 1, 1997, through June 30, 1998:
Name of Individual or Number of Capacities in Persons in Group Which Served Cash Compensation(1) ---------------- ------------ -------------------- Gary C. Granoff President $215,712 plus simplified employee pension plan ("SEP") contributions of $24,000 and $20,000 of reimbursable expenses. Ellen M. Walker Vice President $103,917 plus $15,588 in SEP contributions. Counsel Lee A. Forlenza Vice President $45,673 plus $6,851 in SEP contributions. Silvia Mullens Vice President $59,063 plus $8,859 in SEP contributions. Margaret Chance Secretary $53,160 plus $7,974 in SEP contributions. All executive officers $560,797 as a group (5 persons)
- ---------- (1) Officers' salaries constitute a major portion of Elk's total "management fee compensation," which must be approved by the SBA. The SBA has approved total officer and employee compensation of $648,000 for Elk. This amount includes officers' salaries, other salaries and employee benefits. -31- The Company is currently paying the foregoing individuals compensation at the same rate as was paid during the fiscal year ended June 30, 1998. The Board of Directors may increase such compensation and/or award bonuses for the 1998 fiscal year during the current fiscal year, but has not done so to date. Elk has a policy of paying its directors who are not employees fees of $750 for each meeting attended. Commencing July 1, 1996, Elk paid each non-affiliated director a minimum fee of $2,000 per year in addition to the fees paid for each meeting attended. For the years ended June 30, 1997, and June 30, 1998, respectively, fees and expenses paid to non-affiliated directors were approximately $27,500 and $52,050, respectively, in the aggregate. For the year ended June 30, 1998, the members of the Holding Company Committee were paid an aggregate of $8,000 for work performed in connection with the proposed Share Exchange. Stock Option Plan Elk's Board of Directors, including a majority of the non-interested directors, has adopted, subject to shareholder approval, an employees stock option plan (the "1998 Employee Plan") in order to link the personal interests of key employees to the long-term financial success of Elk and the growth of shareholder value. The 1998 Plan will be submitted for approval of stockholders at the Annual Meeting of Shareholders scheduled for September 28, 1998. The 1998 Employee Plan authorizes the grant of incentive stock options within the meaning of Section 422 of the Internal Revenue Code for the purchase of an aggregate of 125,000 shares (subject to adjustment for stock splits and similar capital changes) of Common Stock to employees of Elk. By adopting the 1998 Employee Plan, the Board believes that Elk will be better able to attract, motivate and retain as employees people upon whose judgment and special skills the success of Elk in large measure depends. As of the date of this Proxy Statement/Prospectus, no options to purchase shares of Common Stock have been granted under the 1998 Employee Plan. Accordingly, 125,000 shares of Common Stock were available for future awards under the 1998 Employee Plan. The 1998 Employee Plan will be administered by the 1998 Employee Plan Committee of the Board of Directors, which will be comprised solely of non-employee directors (who are "outside directors" within the meaning of Section 152(m) of the Internal Revenue Code of 1986, as amended (the "Code") and "disinterested persons" within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934 (the "1934 Act") (the "Committee")). The Committee can make such rules and regulations and establish such procedures for the administration of the 1998 Employee Plan as it deems appropriate. The exercise price of an incentive stock option must be at the fair market value of Elk's Common Stock on the date of grant (110% of the fair market value for shareholders who, at the time the option is granted, own more than 10% of the total combined classes of stock of Elk or any subsidiary). No employees may exercise more than $100,000 in options held by them in any year. No option may have a term of more than ten years (five years for 10% or greater shareholders). Options generally may be exercised only if the option holder remains continuously associated with Elk or a subsidiary from the date of grant to the date of exercise. However, options may be exercised upon termination of employment or upon death or disability of any employee within certain specified periods. The following is a general summary of the federal income tax consequences under current tax law of incentive stock options ("ISOs"). It does not purport to cover all of the special rules, including special rules relating to persons subject to the reporting requirements of Section 16 under the 1934 Act who do not hold the shares acquired upon the exercise of an option for at least six months after the date of grant -32- of the option and special rules relating to the exercise of an option with previously-acquired shares, or the state or local income or other tax consequences inherent in the ownership and exercise of stock options and the ownership and disposition of the underlying shares. An optionee will not recognize taxable income for federal income tax purposes upon the grant of an ISO. Upon the exercise of an ISO, the optionee will not recognize taxable income. If the optionee disposes of the shares acquired pursuant to the exercise of an ISO more than two years after the date of grant and more than one year after the transfer of the shares to him or her, the optionee will recognize long-term capital gain or loss and Elk will not be entitled to a deduction. However, if the optionee disposes of such shares within the required holding period, all or a portion of the gain will be treated as ordinary income and Elk will generally be entitled to deduct such amount. In addition to the federal income tax consequences described above, an optionee may be subject to the alternative minimum tax. Elk's Board of Directors has adopted subject to shareholder approval, a stock option plan for non-employee directors (the "Director Plan") in order to link the personal interests of such non-employee directors to the long-term financial success of Elk and the growth of shareholder value. The Director Plan will be submitted for approval of stockholders at the Annual Meeting of Shareholders scheduled for September 28, 1998. Elk will also submit an application for an exemptive order relating to this plan to the Commission if it is approved by the stockholders. The Director Plan provides for the automatic grant of options to directors of Elk who are not employees, officers or interested persons of Elk (an "Eligible Director"). By adopting the Director Plan, the Board believes that Elk will be better able to attract, motivate and retain as directors people upon whose judgment and special skills the success of Elk in large measure depends. In accordance with the provisions of the 1940 Act, the automatic grant of options under the Director Plan will not occur until after the date of the approval (the "Approval Date") of the Director Plan by the Commission. There can be no assurance that the Commission will approve the Director Plan. The total number of shares for which options may be granted from time to time under the Director Plan is 75,000 shares. The Director Plan provides that an Eligible Director serving on Elk's Board of Directors who has served as a director for at least one year prior to the Approval Date will automatically receive on the Approval Date the grant of an option to purchase the number of shares of Common Stock determined by dividing $50,000 by the fair market value of the Common Stock on the Approval Date. With respect to any Eligible Director who is elected or reelected as a director of Elk after the Approval Date such elected director will automatically receive on the date such director has served as a director of Elk for one year of such election or reelection an option to purchase the number of shares of Common Stock determined by dividing $50,000 by the fair market value of the Common Stock on the date of the first anniversary such director became a director of Elk. The Director Plan will be administered by a committee of directors who are not eligible to participate in the Directors Plan (the "Committee"). Options become exercisable with respect to such shares granted on the date on which the option was granted, so long as the optionee remains an Eligible Director. No option may be exercised more than five years after the date on which it is granted. The number of shares available for options, the number of shares subject to outstanding options and their -33- exercise prices will be adjusted for changes in outstanding shares such as stock splits and combinations of shares. Shares purchased upon exercise of options, in whole or in part, must be paid for in cash or by means of unrestricted shares of Common Stock or any combination thereof. The following is a general summary of the federal income tax consequences under current tax law of non-qualified stock options ("NQSOs"). It does not purport to cover all of the special rules, including special rules relating to persons subject to the reporting requirements of Section 16 under the 1934 Act who do not hold the shares acquired upon the exercise of an option for at least six months after the date of grant of the option and special rules relating to the exercise of an option with previously-acquired shares, or the state or local income or other tax consequences inherent in the ownership and exercise of stock options and the ownership and disposition of the underlying shares. Upon the exercise of a NQSO, the optionee will recognize ordinary income in an amount equal to the excess, if any, of the fair market value of the shares acquired on the date of exercise over the exercise price thereof, and Elk will generally be entitled to a deduction for such amount at that time. If the optionee later sells shares acquired pursuant to the exercise of a NQSO, he or she will recognize long-term or short-term capital gain or loss, depending on the period for which the shares were held. Long-term capital gain is generally subject to more favorable tax treatment than ordinary income or short-term capital gains. If the option does not have a readily ascertainable fair market value, an optionee will not recognize taxable income for federal income tax purposes upon the grant of an NQSO. Options granted under the Director Plan will not be transferable other than by the laws of descent and during the optionee's life may be exercised only by the optionee. All rights to exercise options will terminate after the optionee ceases to be an Eligible Director. If the optionee dies before expiration of the option, his legal successors may have the right to exercise the option in whole or in part within one year of death. The Director Plan may be terminated at any time by the Board of Directors, and will terminate ten years after the effective date of the Director Plan. The Board of Directors may not materially increase the number of shares authorized under the plan or materially increase the benefits accruing to participants under the plan without the approval of the shareholders of Elk. The exercise or conversion price of the options issued pursuant to the Director Plan shall be not less than current market value at the date of issuance, or if no such market value exists, the current net asset value of such voting securities. The descriptions of the 1998 Employee Plan and the Director Plan set forth herein are qualified in their entirety by reference to the text of the plans. Certain Transactions Prior to January 1, 1996, Elk paid an annual legal retainer fee for the purposes of providing loan closing services to a firm, certain of whose officers are officers and directors of Elk. Effective January 1, 1996, the legal fee retainer being paid to such law firm was terminated, and legal services related to New York taxi and radio car loan closings are being provided by the officers and employees of Elk. Closing fees related to all other loans are paid by Elk based on a fixed or hourly fee. Elk paid $43,231 to the law firm for legal services during the year ended June 30, 1998. Elk generally charges its borrowers -34- loan origination fees to generate income to offset expenses incurred by Elk for legal fees paid by Elk for loan closing services. Elk also rents office space from the above-mentioned law firm and shares certain office expenses with that firm. For the fiscal year ended June 30, 1998, Elk paid $39,600 in rent and $59,400 in shared overhead expense and $21,908 of other reimbursable shared overhead expense. For the year ending June 30, 1999, Elk has agreed to pay $39,600 in rent and a minimum of $59,400 in expenses, which amount is subject to adjustment if actual expenses vary. During the fiscal year ended June 30, 1998, Granoff, Walker & Forlenza, P.C. exercised an option in its lease, at the request of Elk, and rented an additional 1,800 square feet of office space contiguous with the offices of Elk at a below market rent (the "Additional Space"). The law firm intends to sublet the Additional Space to outside tenants. In the event all or a portion of the Additional Space is vacant, Elk's Board of Directors has agreed to reimburse the law firm for the additional rent due. The estimated maximum amount of rent for which Elk would be responsible is $58,000 per year, less any sublet rental income received from the outside tenants. At present, the Additional Space is fully occupied thus requiring no reimbursement payment from Elk, although some liability under the reimbursement obligation may occur in the future. In the event Elk's operations expand, Elk could occupy the contiguous space for its own use without the inconvenience and expense of Elk having to relocate to larger office space. Conflicts of Interest Policies The Board of Directors of Elk has adopted policies governing potential conflicts of interest between Elk and its directors and officers. Together, these policies comprise Elk's "Code of Ethics" as required under the 1940 Act. These policies generally provide that no officer, director or employee of Elk will make any loan which might be deemed to be appropriate for Elk, unless and until such transaction is first approved by a majority of the directors of Elk who are not "interested persons" of Elk within the meaning of the 1940 Act and who have no financial or other material interest in the transaction. A loan would not be deemed to be appropriate for Elk if in any manner such loan (or investment) would in any way violate SBA Regulations in effect at the time of making such loan or investment. In reviewing any such transaction, the directors will examine, among other factors, whether the transaction would deprive Elk of an opportunity or whether it would otherwise conflict with the best interests of Elk and its shareholders. A complete record of any such review and the results of the review will be maintained by Elk as part of its permanent records. Description of Capital Stock As of ____________, 1998, there were approximately 375 holders of record of Elk Common Stock. The authorized capital stock of Elk consists of 2,000,000 shares of Common Stock, par value $.01 per share, of which 1,745,600 shares are issued and outstanding, and 1,300,000 shares of Preferred Stock, none of which are issued and outstanding. The Board of Directors of Elk has approved an amendment to the Certificate of Incorporation increasing the authorized number of shares of Common Stock to 3,000,000 and deleting the 1,300,000 authorized shares of Preferred Stock subject to the approval of (i) the shareholders at the Annual Meeting of Shareholders scheduled for September 28, 1998, and (ii) the SBA. -35- If the Share Exchange is completed, Ameritrans' Common Stock will be listed on the Nasdaq SmallCap Market under the symbol ___________, and the listing of Elk's Common Stock will be terminated. Elk Common Stock The holders of Elk Common Stock are entitled to one (1) vote per share on all matters submitted to a vote of stockholders. Holders of Elk Common Stock have neither cumulative voting rights (which means that the holders of a majority of the outstanding shares of Elk Common Stock may elect all of the directors of Elk) nor any preemptive rights. Holders of Elk Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor. In order to qualify as a "regulated investment company" under the Code, Elk is required to distribute as dividends to its stockholders, for each fiscal year, at least 90% of its investment company taxable income and 90% of the excess of its tax-exempt income over certain disallowed deductions. In addition, in order to avoid a non-deductible 4% excise tax on any undistributed income of Elk, Elk is required to distribute as dividends, within each calendar year, at least 97% of its ordinary income for such calendar year and 98% of its capital gain net income for the one-year period ending on October 31 of such calendar year. See "Tax Considerations." In the event of a liquidation, dissolution or winding up of Elk, holders of Elk Common Stock will be entitled to receive, subject to the prior right of the SBA to receive any amounts due to it on account of its remaining liquidating interest in the repurchased shares of Elk Preferred Stock, a ratable portion of the assets of Elk remaining after provision for payment of creditors. All of the outstanding shares of Elk Common Stock are fully paid and non-assessable. The transfer agent for Elk Common Stock is Continental Stock Transfer & Trust Company, 2 Broadway, New York, New York 10004. Preferred Stock Elk Preferred Stock may be issued only to the SBA. As of the date hereof, Elk has no shares of Preferred Stock outstanding. However, the Board of Directors of Elk has approved an amendment to the Certificate of Incorporation deleting the 1,300,000 authorized shares of Preferred Stock subject to the approval of (i) the shareholders at the Annual Meeting of Shareholders scheduled for September 28, 1998, and (ii) the SBA. Market Information The Elk Common Stock is traded in the over-the-counter market on a limited basis. The Elk Common Stock was listed on the Nasdaq SmallCap Market on June 22, 1998, under the symbol EKFG. Due to the limited number of transactions involving the Elk Common Stock during the periods presented below, it does not appear that an established public trading market has developed with respect to these securities. The following table shows the closing high and low bid prices for a share of Elk Common Stock as reported by Nasdaq, the National Quotation Bureau, Inc., or directly by dealers maintaining a market in the Elk Common Stock for the fiscal years ended June 30, 1997 and 1998 and for the current fiscal year to date. -36- Bid ----------------------- High Low 1997 1st Quarter......................................... 4.75 4.625 2nd Quarter......................................... 4.75 4.75 3rd Quarter......................................... 5.125 4.75 4th Quarter......................................... 5.125 5.125 1998 1st Quarter......................................... 6.25 5.125 2nd Quarter......................................... 6.625 6.25 3rd Quarter......................................... 7.125 6.625 4th Quarter......................................... 9.75 7.125 1999 1st Quarter......................................... 2nd Quarter (to ___________, 1998).................. On ___________, 1998, the closing "bid" and "ask" prices for a share of Elk Common Stock were ____ and ____ respectively, as reported by Nasdaq. Tax Considerations The following discussion is a general summary of the federal income tax principles applicable to Elk, based on the currently existing provisions of the Code and the regulations thereunder. This summary does not purport to be a complete description of the tax considerations applicable to Elk or to the holders of Elk Common Stock. After the Share Exchange, these principles will, in general, continue to apply to Elk, but the sole direct holder of Elk Common Stock will be Ameritrans. Taxation of a Regulated Investment Company Elk has elected for each taxable year since fiscal 1984, and expects to continue to elect, to be treated as a "regulated investment company" under Section 851 of the Code. A regulated investment company may deduct, for federal income tax purposes, most dividends paid to stockholders, thereby avoiding federal income taxation at the corporate level on amounts distributed to stockholders as dividends. In order for Elk to qualify as a regulated investment company for a given fiscal year, it must meet each of the following conditions for that fiscal year: (1) Elk must be registered as an investment company under the 1940 Act at all times during the year. -37- (2) At least 90% of Elk's gross income for the year must be derived from interest, gains on the sale or other disposition of stock or other securities, dividends and payment with respect to securities loans. (3) Less than 30% of Elk's gross income must be derived from the sale or other disposition of securities held for less than three months. (4) At the close of each quarter, at least 50% of the value of Elk's total assets must be represented by cash, cash items (including receivables), and securities. There are also limitations on the extent to which Elk's holdings may be concentrated in the securities of a single issuer. (5) Elk must distribute as dividends at least 90% of its investment company taxable income (as defined in Section 852 of the Code), as well as 90% of the excess of its tax-exempt income over certain disallowed tax-exempt interest deductions. In order to avoid the imposition of a non-deductible 4% excise tax on undistributed income of Elk, Elk is required, under the terms of the Revenue Act of 1987 as embodied in Section 4982 of the Code, to distribute within each calendar year at least 97% of its ordinary income for such calendar year and 98% of its capital gain net income for the one-year period ending on October 31 of such calendar year. Dividends distributed by Elk to Ameritrans will constitute ordinary income to Ameritrans to the extent derived from non-capital gain income of Elk, and will ordinarily constitute capital gain income to Ameritrans to the extent derived from capital gains of Elk. However, since Ameritrans also intends to qualify as a regulated investment company, Ameritrans will, in general, not be subject to a corporate level tax on its income to the extent that it makes distributions to its stockholders. See "INFORMATION CONCERNING AMERITRANS -- Tax Considerations." If Elk fails to continue to qualify as a regulated investment company for any reason in any fiscal year, it will not be entitled to a federal income tax deduction for dividends distributed, and will instead be liable to pay corporate level tax on its earnings. Further, if Elk fails to qualify as a regulated investment company, such failure will cause Ameritrans to fail to qualify for regulated investment company status as well, as long as Elk stock held by Ameritrans represents more than 25% of Ameritrans' assets. In such a case, Ameritrans will be taxed on dividends received from Elk, subject to the deduction for corporate dividends received, which is currently 70%. Thus, if Elk fails to qualify as a regulated investment company for any reason, its earnings would be taxed at three levels: to Elk, in part to Ameritrans, and finally, when they are distributed by Ameritrans, to its stockholders. Taxation of SBICs As a result of Elk's status as a licensed SBIC under the 1958 Act, Elk and its stockholders qualify for the following tax benefits: (1) Under Section 243 of the Code, Elk may deduct 100% of the dividends received by it from domestic corporations in which it has made equity investments, regardless of whether such corporations are subsidiaries of Elk (in contrast to the generally applicable 70% deduction under the Code). Because Elk generally makes long-term loans rather than equity investments, this potential benefit is not likely to be of practical significance to Elk or its stockholders. (2) Under Section 1243 of the Code, losses sustained on Elk's investments in the convertible debentures, or stock derived from convertible debentures, of Small Business Concerns are treated as ordinary -38- losses rather than capital losses to Elk. Because Elk does not presently intend to purchase convertible debentures, however, this potential benefit is not likely to be of practical significance to Elk or its stockholders. (3) Under Section 1242 of the Code, Elk's stockholders are entitled to take an ordinary rather than a capital loss deduction on losses resulting from the worthlessness or the sale or exchange of Elk Common Stock. State Taxes The foregoing discussion relates only to federal income tax matters. Elk is also subject to state and local taxation. Stockholders should consult with their own tax advisors with respect to the state and local tax considerations pertaining to Elk and to Ameritrans. INFORMATION CONCERNING AMERITRANS General Ameritrans was formed as a Delaware corporation on February 12, 1998, for the purposes of (1) acquiring and owning all of the outstanding Elk Common Stock pursuant to the Share Exchange, and (2) engaging in broader and more diversified investment and lending business activities directly, as well as through a newly-formed subsidiary, Elk Capital, which business activities Elk, as an SBIC, is not permitted to transact under the 1958 Act. Ameritrans has no current plans to engage in any such other investment activities or operations, and any such activities or operations would conform to the investment policies of Ameritrans described below. Ameritrans is registered under the 1940 Act as a closed-end, non-diversified management investment company. Ameritrans will also elect to become a BDC pursuant to the 1940 Act upon the completion of the Share Exchange or as soon thereafter as practicable. See "The Investment Company Act of 1940 -- Election to Become a BDC." Ameritrans, as a BDC, will be required to file certain reports pursuant to the 1940 Act and the Securities Exchange Act of 1934 and other information (including annual and quarterly reports and certain stockholder reports and proxy statements) with the SEC. Copies of such reports and information may be inspected and copied at the Public Reference Room of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as at the following regional offices: 25 Federal Plaza, New York, New York 10278; Everett McKinley Dirksen Building 219 South Dearborn Street, Chicago, Illinois 60604; and Suite 500, East 5757 Wilshire Boulevard, Los Angeles, California 90036-3648. Copies of such material, or any portion thereof, may be obtained from the Public Reference Branch, Office of Consumer Affairs and Information Services, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates, or on the EDGAR web page of the Securities and Exchange Commission on the Internet at www.sec.gov. Investment Policies Ameritrans' investment objectives will be to provide a high level of current income for its stockholders through quarterly distributions, consistent with preservation of capital, as well as long term growth of net asset value. Ameritrans will seek to achieve its investment objectives by maximizing net interest income and income from operations and expanding operations. There can be no assurance that Ameritrans will achieve its investment objectives. -39- Ameritrans' only fundamental policies, that is, policies that cannot be changed without the approval of the holders of a majority of Ameritrans' outstanding voting securities, as defined under the 1940 Act, are the restrictions described below. A "majority of Ameritrans' outstanding voting securities" as defined under the 1940 Act means the lesser of (i) 67% of the shares represented at a meeting at which more than 50% of the outstanding shares are represented or (ii) more than 50% of the outstanding shares. The other policies and investment restrictions referred to in this Prospectus, including Ameritrans' investment objectives, are not fundamental policies of Ameritrans and may be changed by Ameritrans' Board of Directors without stockholder approval. Unless otherwise noted, whenever an investment policy or limitation states a maximum percentage of Ameritrans' assets that may be invested in any security or other asset, or sets forth a policy regarding quality standards, such standard or percentage limitation will be determined immediately after and as a result of Ameritrans' acquisition of such security or other asset. Accordingly, any subsequent change in values, assets, or other circumstances will not be considered when determining whether the investment complies with Ameritrans' investment policies and limitations. Ameritrans' fundamental policies are as follows: 1. Ameritrans will at all times conduct its business so as to retain its status as a BDC under the 1940 Act. In order to retain that status, Ameritrans may not acquire any assets (other than non-investment assets necessary and appropriate to its operations as a BDC) if, after giving effect to such acquisition, the value of its "Qualifying Assets," amount to less than 70% of the value of its total assets. Ameritrans believes that the securities it proposes to acquire in connection with the acquisition of the Elk, as well as temporary investments it makes with its funds, will generally by Qualifying Assets. See "INFORMATION CONCERNING ELK -- Election to Become a BDC." 2. Ameritrans may borrow funds and issue "senior securities" to the maximum extent permitted under the 1940 Act. As a BDC, Ameritrans may issue senior securities if, immediately after such issuance, the senior securities will have an asset coverage of at least 200%. Under the 1940 Act, subordinated debentures issued to or guaranteed by the SBA and preferred stock issued to the SBA by Elk may be considered senior securities issued by Ameritrans requiring asset coverage of 200%; however, pursuant to the Exemptive Order, such debentures and preferred stock are exempt from the asset coverage requirements of the 1940 Act. 3. Ameritrans will not (i) underwrite securities issued by others (except to the extent that it may be considered an "underwriter" within the meaning of the Securities Act of 1933 in the disposition of restricted securities), (ii) engage in short sales of securities, (iii) purchase securities on margin (except to the extent that it may purchase securities with borrowed money), (iv) write or buy put or call options, or (v) engage in the purchase or sale of commodities or commodity contracts, including futures contracts (except where necessary in working out distressed loan or investment situations). Ameritrans and Elk may purchase interest rate caps and swaps covering up to 100% of their variable rate debt. In addition, Ameritrans may sponsor the securitization of loan portfolios. 4. Ameritrans and Elk may originate loans and loans with equity features. To the extent permitted under SBA Regulations, Ameritrans may also make loans as permitted (i) under its existing stock option plans, (ii) under plans providing for options for disinterested directors that might be adopted by Ameritrans in the future, and (iii) to officers and directors for the purchase of Ameritrans Common Stock. -40- Ameritrans will hold all of the outstanding common stock of Elk and may organize additional subsidiaries in the future. Ameritrans may acquire restricted securities of small businesses. Corporate Organizational Matters If the holders of Elk Common Stock approve the adoption of the Share Exchange Plan and the Share Exchange is consummated, they will no longer be stockholders of Elk, but will instead become stockholders of Ameritrans. Ameritrans is governed by its own Certificate of Incorporation and By-laws, which are different from the Certificate of Incorporation and By-laws of Elk in certain material respects, and, as a Delaware corporation, is governed by the Delaware General Corporation Law ("Delaware Corporation Law"), which differs from the New York Business Corporation Law ("New York Corporation Law"), under which Elk is incorporated, in certain material respects. Set forth below is a summary of the significant differences between the Certificates of Incorporation of Elk and Ameritrans, the By-laws of Elk and Ameritrans, and New York Corporation Law and Delaware Corporation Law. Certificate of Incorporation In addition to differences in the corporate name, corporate purpose (see "INFORMATION CONCERNING ELK -- Investment Policies" and "Investment Policies," above) and authorized capital stock (see "INFORMATION CONCERNING ELK -- Description of Capital Stock," above, and "Description of Capital Stock," below), Ameritrans' Certificate of Incorporation differs from Elk's Certificate of Incorporation in the following significant respects: (1) Liability of Directors -- Ameritrans' Certificate of Incorporation includes a provision (the "Liability Provision"), authorized under Section 102(b)(7) of Delaware Corporation Law and the 1940 Act, the personal liability of a director to Ameritrans or its stockholders for monetary damages resulting from the breach of his fiduciary duty as a director. Under Delaware Corporation Law, this provision may not be construed to eliminate or limit a director's liability for any of the following: breaches of the director's duty of loyalty to the corporation or its stockholders; acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; payment of a dividend or approval of stock repurchase which is illegal under Section 174 of Delaware Corporation Law; and transactions from which the director derives an improper personal benefit. In addition, under the 1940 Act, this provision may not be construed to protect a director against liability to the corporation or its stockholders for acts or omissions involving willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. The Liability Provision precludes actions for monetary damages against directors of Ameritrans only with respect to certain violations of a director's duty of care. Under Delaware Corporation Law, absent this provision, directors could be held liable for negligence in the performance of their duty of care. The Liability Provision absolves directors of Ameritrans of monetary liability to Ameritrans and its stockholders for negligence in exercising their business judgment. A stockholder can prosecute an action against a director for monetary damages only if he can show a breach of the duty of loyalty, gross negligence or reckless disregard of his duties, a failure to act in good faith, intentional misconduct or willful misfeasance, a knowing violation of the law, an illegal dividend or stock repurchase or an improper personal benefit. The Liability Provision does not affect the ability of Ameritrans or its stockholders to seek equitable remedies (such as an injunction or rescission) against a director for breach of his fiduciary duty and does not limit the liability of directors under other laws such as the federal securities laws. The Liability Provision also does -41- not limit the liability of officers or employees of Ameritrans or any director acting in his capacity as an officer or employee of Ameritrans. Elk's Certificate of Incorporation has no provision corresponding to the Liability Provision. However, a section was added to New York Corporation Law in 1987 which authorizes a New York corporation to eliminate or limit the personal liability of directors to a corporation or its stockholders for monetary damages in substantially the same manner and to substantially the same extent as is authorized under Delaware Corporation Law; and, were it not for the reorganization of Elk contemplated by the Share Exchange Plan, Elk's Board of Directors would submit for stockholder approval at the next meeting of stockholders a proposal to amend Elk's Certificate of Incorporation to include a limitation of liability provision virtually identical to the Liability Provision included in Ameritrans' Certificate of Incorporation. The provisions of the Delaware and New York Corporation Law authorizing the Liability Provision are part of a nationwide legislative response to an increase in the extent to which directors have been subjected to personal liability and to recent changes in the market for directors' liability insurance. In recent years, directors of public companies have increasingly become subject to substantial personal liability for actions taken or omitted by them as directors, as well as to significant expenses in defending their conduct. The proliferation of these suits has in large part made it difficult to obtain directors' liability insurance. This unavailability or significantly increased cost of directors' liability insurance has been perceived as a threat to the quality and stability of the governance of corporations because directors have become unwilling, in many instances, to serve without the protection provided by such insurance and, in other cases, have become inhibited in making business decisions that would be in the best interest of the corporations. The Board of Directors of both Elk and Ameritrans (which are comprised of the same eight (8) persons) believe that the Liability Provision included in Ameritrans' Certificate of Incorporation is in the best interests of Ameritrans and its stockholders and that it will enhance Ameritrans' ability to attract and retain individuals to serve as directors and allow such individuals to exercise their independent business judgment on behalf of Ameritrans. Although the Liability Provision limits the exposure of a director to monetary liability for his actions as a director, the Boards of Directors of Elk and Ameritrans believe that the diligence exercised by directors stems primarily from their desire to act in the best interest of the corporation and its stockholders and not from a fear of monetary damage awards, and that the level of scrutiny and care exercised by directors will not be lessened by this limitation. (2) Written Actions of Stockholders -- Under Delaware Corporation Law, unless otherwise provided in the Certificate of Incorporation, any action required or permitted to be taken at an annual or special meeting of stockholders may be taken by the execution of a written consent setting forth the action to be taken and signed by the holders of the requisite number of shares of outstanding voting stock necessary to take such action. Elk's Certificate of Incorporation does not have a similar provision because New York Corporation Law provides that stockholders may take an action by written consent without a meeting only if such written action is signed by all stockholders who would be entitled to vote at a meeting held for such purpose. (3) Amendments to Certificate of Incorporation -- Elk's Certificate of Incorporation expressly provides that it may not be amended without the prior written approval of the SBA (which is required under the 1958 Act). Because Ameritrans will not be licensed under the 1958 Act, no similar provision is required or included in Ameritrans' Certificate of Incorporation. -42- By-Laws Ameritrans' By-laws differ from Elk's By-laws in the following significant respects: (1) Special Meetings of Stockholders -- Ameritrans' By-laws provide that special meetings of stockholders may be called by the President or the Board of Directors or the holders of at least 20% of the outstanding shares of voting stock. (2) Amendments to By-Laws -- Ameritrans' By-laws provide that they may be amended by either the directors of Ameritrans or by the stockholders of Ameritrans. Elk's By-laws provide that they may be amended only by the Board of Directors or the stockholders of Elk. (3) Indemnification of Directors and Officers -- See "Indemnification of Directors and Officers." Indemnification of Directors and Officers While the Liability Provision in its Certificate of Incorporation eliminates the liability of its directors to Ameritrans or its stockholders for monetary damages with respect to certain actions, the Liability Provision (i) is inapplicable to certain types of claims or actions by Ameritrans or its stockholders, (ii) is inapplicable to claims or actions brought by parties other than Ameritrans or its stockholders, (iii) does not protect a director against the substantial legal and other expenses he may incur in defending himself against a claim or action (even one against which he is protected by the Liability Provision) and (iv) affords no protection to officers of Ameritrans. Accordingly, Ameritrans' Bylaws include a provision (the "Indemnification Provision") which requires Ameritrans to indemnify its directors and officers, to the maximum extent permitted by Delaware Corporation Law and by the 1940 Act, against liabilities and damages incurred in their capacity as directors or officers of Ameritrans. Under Delaware Corporation Law, a director or officer of a corporation (i) shall be indemnified by the corporation for all expenses of litigation or other legal proceedings brought against him by virtue of his position as a director or an officer to the extent he is successful, on the merits or otherwise, in such litigation or proceeding, (ii) may be indemnified by the corporation for the expenses, judgments, fines and amounts paid in settlement of such litigation or proceedings (other than an action by or in the rights of a corporation, which is hereinafter referred to as a "derivative action"), even if he is not successful, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation (and, in the case of a criminal proceeding, had no reason to believe that his conduct was unlawful), and (iii) may be indemnified by the corporation for expenses of a derivative action, even if he is not successful, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, provided that indemnification may not be made in the case of a derivative action if the director or officer is adjudged to be liable to the corporation, unless a court determines that, despite such adjudication but in view of all the circumstances, he is entitled to indemnification of such expenses. The indemnification described in (ii) and (iii) above may be made only upon the determination, by (a) a majority of disinterested directors, (b) a committee of such directors designated by a majority of such directors, (c) under certain circumstances, independent legal counsel in a written opinion, or (d) the stockholders, that indemnification because the applicable standard of conduct has been met. Expenses incurred by a director or officer in defending an action may be advanced by the corporation prior to the final disposition of such action upon receipt of an undertaking by such director or officer to repay such expenses if it is ultimately determined that he is not entitled to be indemnified in connection with the proceeding to which the expenses relate. These provisions or Delaware Corporation Law, by their terms, are not exclusive of any other rights -43- to which those seeking indemnification or advances of expenses may be entitled under any by-law, agreement, vote of stockholders or disinterested directors or otherwise. The 1940 Act prohibits the inclusion in Ameritrans' Certificate of Incorporation or certain other organizational instruments of Ameritrans of a provision which purports to protect any director or officer of Ameritrans against liability to Ameritrans or its stockholders for willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. The Indemnification Provision therefore specifically provides that indemnification shall only be made to the extent permitted by the 1940 Act. This limitation would prohibit indemnification in certain situations in which it may have been permitted under Delaware Corporation Law, such as a situation in which a director or officer has been guilty of gross negligence but not bad faith or willful misconduct, or a situation in which the stockholders (but not the disinterested directors or independent legal counsel) determine that indemnification is proper because the director or officer met the applicable standard of conduct. Because the Board of Directors of Ameritrans believes that the provisions of Delaware Corporation Law concerning the indemnification of directors and officers, which substantially define the substantive and procedural content of the Liability Provision, are vague or inadequate in certain respects, Ameritrans' Board of Directors has entered into an indemnity agreement (the "Indemnity Agreement") with each of its directors and officers. Such Indemnity Agreement was approved by the written consent of the shareholders of Ameritrans prior to the Share Exchange. The Indemnity Agreement clarifies or modifies the indemnification provisions of Delaware Corporation Law as follows: (i) the Indemnity Agreement establishes the presumption that the director or officer has met the applicable standard of conduct required for indemnification, and provides that prompt indemnification shall be made unless a determination is made by a majority of Ameritrans' disinterested directors or independent counsel that the director or officer has not met the applicable standard of conduct; (ii) if the disinterested directors determine that the director or officer has not met the applicable standard of conduct, the Indemnity Agreement permits the director or officer to petition a court for an independent determination of whether such officer or director is entitled to indemnification under the Indemnity Agreement; (iii) the Indemnity Agreement provides that expenses shall be promptly advanced to a director or officer upon receipt of an undertaking by him to repay amounts so advanced if it is ultimately determined that indemnification of such expenses is not permissible, provided that either (a) such director or officer shall have provided appropriate security for such undertaking, (b) Ameritrans shall be insured against losses arising from any such advance payments or (c) either a majority of the disinterested directors or independent legal counsel in a written opinion shall have determined, based upon a review of readily available facts, that there is reason to believe that such director or officer will be found entitled to indemnification; (iv) the Indemnity Agreement specifically provides that the indemnification provisions applicable to a derivative suit cover amounts paid in settlement; and (v) the Indemnity Agreement specifically permits partial indemnification to be made in the event that the director or officer is not entitled to full indemnification. Ameritrans may in the future elect to purchase directors' or officers' liability insurance, as is permitted by Delaware Corporation Law. However, the coverage of such insurance is limited, and the premiums on such insurance are becoming increasingly expensive. The Board of Directors of both Elk and Ameritrans believe that the Indemnification Provision and the Indemnity Agreement are in the best interests of Ameritrans and its stockholders and that they will help Ameritrans to attract and retain qualified persons to serve as directors and officers and to enable them to exercise their independent business judgment without excessive concern for the costs and liabilities associated with possible litigation. -44- New York Corporation Law vs. Delaware Corporation Law Set forth below is a summary of certain significant differences between New York Corporation Law and Delaware Corporation Law which may affect the interests of stockholders. (1) Dividends -- Under both New York Corporation Law and Delaware Corporation Law, a corporation may generally pay dividends out of surplus. In addition, Delaware Corporation Law permits a corporation, under certain circumstances, to pay dividends, if there is no surplus, out of its net profits for the fiscal year in which the dividend is declared and for the preceding fiscal year. (2) Loans to Directors -- New York Corporation Law prohibits loans to corporate directors unless authorized by stockholder vote. Delaware Corporation Law permits the Board of Directors, without stockholder approval, to authorize loans to corporate directors who are also officers. Ameritrans does not presently intend to make any loans to its directors. (3) Rights and Options -- New York Corporation Law requires stockholder approval of any incentive plan pursuant to which rights or options are to be granted to directors, officers or employees. Delaware Corporation Law does not require stockholder approval of such incentive plans (although various other legal requirements may make such stockholder approval necessary or desirable, i.e., Internal Revenue Code requirements). (4) Consideration for Shares -- New York Corporation Law provides that neither obligations of the subscriber for future payments nor future services shall constitute payment or part payment for shares of a corporation. Furthermore, certificates for shares may not be issued until the full amount of the consideration therefor has been paid. Delaware Corporation Law provides that a corporation may issue partly paid shares of stock, and shares of stock may be deemed to be fully paid if the corporation receives consideration having a value not less than the par value of such shares and a binding obligation of the subscriber to pay the balance of the subscription price. (5) Dissenter's Rights -- New York Corporation Law provides that, upon compliance with the applicable requirements and procedures, a dissenting stockholder has the right to receive the fair value of his shares if he objects to (i) certain mergers, (ii) a consolidation, (iii) a share exchange, (iv) certain dispositions of substantially all of the assets of the corporation, or (v) certain amendments to the certificate of incorporation which adversely affect the rights of such stockholder. While Delaware Corporation Law also provides appraisal rights to dissenting stockholders in the case of certain mergers or a consolidation, such appraisal rights do not apply (a) in a merger, to stockholders of the surviving corporation if stockholder approval of the merger is not required, or (b) in a merger or a consolidation, to any class of stock which is either listed on a national securities exchange or held of record by more than 2,000 holders (unless stockholders are required to accept for their shares in the merger or consolidation anything other than common stock of the surviving corporation, common stock of another corporation that is so listed or held, or cash in lieu of fractional shares of any such corporation). In addition, Delaware Corporation Law provides that a corporation may provide in its certificate of incorporation for appraisal rights in the event of (i) an amendment to its certificate of incorporation, (ii) any merger or consolidation in which the corporation is a constituent corporation, or (iii) for dispositions of assets (there are no provisions for share exchanges under Delaware Corporation Law). (6) Indemnification of Officers and Directors -- New York Corporation Law and Delaware Corporation Law each provide that indemnification of its directors and officers may not be made by a -45- corporation in connection with derivative actions where the director or officer is adjudged to be liable to the corporation, unless and only to the extent that, in view of all the circumstances, such director or officer is fairly and reasonably entitled to such indemnification. New York Corporation Law additionally provides that indemnification may not be made in connection with derivative actions where a claim is settled or otherwise disposed of. New York Corporation Law and Delaware Corporation Law also provide that the indemnification and advancements of expenses granted pursuant to, or provided by, such laws are not exclusive of any other rights to which a director or officer may be entitled. New York Corporation Law additionally provides that no indemnification may be made to or on behalf of any director or officer for liability arising from actions taken in bad faith, intentional wrongdoing, or where an improper personal benefit was derived. Delaware Corporation Law contains no such express limitation. (7) Vote Required for Mergers and Share Exchanges -- New York Corporation Law requires the affirmative vote of two-thirds of a corporation's outstanding shares of voting stock to authorize a merger, consolidation, or disposition of substantially all of its assets or a share exchange. Dissolution also requires the affirmative vote of two-thirds of the outstanding shares of voting stock for corporations incorporated before February 23, 1998, unless the certificate of incorporation or an amendment thereto provides for a lesser number, which may not be less than a majority of the voting stock. Elk's certificate of incorporation has not been so amended. Delaware Corporation Law requires the affirmative vote of a majority of the outstanding shares of voting stock to authorize a merger, consolidation, dissolution, or disposition of substantially all of its assets, or a share exchange. Also, Delaware Corporation Law permits a merger without approval of the stockholders of the surviving corporation if, among other things, no charter amendment is involved, the stock of the surviving corporation is unaffected by the merger and the merger results in no more than a 20% increase in outstanding shares of common stock of such corporation. No such provision is contained in New York Corporation Law. (8) Written Actions of Stockholders -- New York Corporation Law provides that any action by stockholders may be taken without a meeting with the written consent of all stockholders who would be entitled to vote at a meeting held for such purposes or, if the certificate of incorporation so provides, of the stockholders of the requisite number of shares of outstanding voting stock necessary to take such action at a meeting at which all shares entitled to vote thereon were present and voted. Elk's Certificate of Incorporation does not contain such a provision. Under Delaware Corporation Law, unless the corporation's certificate of incorporation provides otherwise, any action that could be taken at an annual or special meeting of stockholders may be taken by a consent in writing setting forth the action to be taken which is signed by the holders of the requisite number of shares of outstanding voting stock necessary to take such action at a meeting at which all shares entitled to vote thereon were present and voted. This difference between New York Corporation Law and Delaware Corporation Law will not immediately affect the interests of stockholders because Ameritrans' Certificate of Incorporation and By-laws provide that stockholders may act without a meeting only with the written consent of all stockholders who would be entitled to vote at a meeting held for such purpose. (9) Business Combinations with Interested Stockholders -- Delaware Corporation Law Section 203 is entitled "Business Combinations with Interested Stockholders." Set forth below is a summary of the principal provisions of Section 203. This summary does not purport to be complete, and Elk stockholders are encouraged to read Section 203 for more detailed information. Section 203 generally prohibits any -46- Delaware corporation covered by Section 203 from engaging in any "business combination" with a person who is an "interested stockholder" for a period of three (3) years following the date such person became an interested stockholder, unless (i) the Board of Directors approved either the interested stockholder or business combination in question prior to the date such person became an interested stockholder, (ii) upon consummation of the transaction which resulted in such person becoming an interested stockholder, such interested stockholder owned at least 85% of the voting stock of the corporation, excluding (for purposes of determining the number of shares outstanding) stock held by persons who are both directors and officers of the corporation or by certain employee stock plans, or (iii) the business combination is approved by both the Board of Directors of the corporation and at a shareholders' meeting, by two-thirds of the outstanding voting stock not owned by such interested stockholder. This prohibition is inapplicable to a business combination which is proposed subsequent to the announcement, but prior to the consummation, of a transaction which is a merger, asset transfer of 50% or more of the corporation's assets, or tender or exchange offer for 50% or more of the corporation's outstanding voting stock involving the corporation and certain affiliated third parties, and which is approved or not opposed by a majority of directors who were directors prior to any person becoming an interested shareholder during the previous three (3) years or who were recommended for election or elected to succeed such directors by a majority of such directors. For purposes of Section 203, an "interested stockholder" means (a) any person who is the owner of 15% or more of the outstanding voting stock of the corporation, (b) any person who is an "affiliate" or "associate" (as defined in Section 203) of the corporation and was the owner of 15% or more of outstanding voting stock of the corporation at any time within the previous three (3) years and (c) affiliates and associates of such persons. A "business combination," as used in Section 203, encompasses a broad variety of transactions, including (i) a merger or consolidation of the corporation with the interested stockholder, (ii) the sale, lease, exchange, mortgage, pledge, transfer or other disposition of significant assets by the corporation to or with the interested stockholder, (iii) various stock issuances by the corporation to the interested stockholder, (iv) transaction involving the corporation which have the effect of increasing the proportionate stock ownership of the interested stockholder and (v) the receipt by the interested stockholder of any loans, advances, guarantees, pledges or other financial benefits by or through the corporation (for purposes of this definition, references to the corporation generally include any majority-owned subsidiaries). Section 203 generally applies to (a) any "public" corporation (i.e., one with a class of voting stock which is either listed or authorized for quotation on NASDAQ or with a national securities association, or held of record by more than 2,000 persons), unless such corporation elects (in the manner prescribed by Section 203) not to be governed by Section 203, and (b) any non-"public" corporation which elects by a provision in its certificate of incorporation to be governed by Section 203. Ameritrans' Certificate of Incorporation expressly provides that Ameritrans shall be governed by this Section 203. New York Corporation Law contains a provision somewhat comparable to Section 203 of Delaware Corporation Law. Section 912 of New York Corporation Law generally prohibits a corporation for profit formed under the laws of New York (a "domestic corporation") that is covered by Section 912 (as described below) from engaging in any "business combination" with any "interested shareholder" for a period of five (5) years following the date such person became an interested shareholder, unless the Board of Directors approved either the interested shareholder or the business combination in question prior to the date such person became an interested shareholder. In addition, under Section 912, a domestic corporation covered by Section 912 generally may not engage in a business combination with an interested shareholder at any time, unless (i) the Board of Directors approves either the interested shareholder or the business combination in question prior to the date such person became an interested shareholder, (ii) the business combination is approved by the disinterested stockholders of the corporation at least five (5) years following the date such person became an interested shareholder, or (iii) the business combination satisfies certain criteria relating to the amount and nature of the consideration received in the business combination by the stockholders of -47- the domestic corporation. For purposes of Section 912, an "interested shareholder" is any person who beneficially owns 20% or more of the outstanding voting stock of the corporation, or who is an "affiliate" or "associate" (as defined in Section 912) of the corporation and beneficially owned 20% or more of the outstanding voting stock of the corporation at any time within the previous five (5) years. The definition of "business combination" under Section 912 is substantially similar to the definition of "business combination" under Section 203 of Delaware Corporation Law. Section 912 applies only to a domestic corporation that either (1) has a class of stock registered under the 1934 Act (unless such corporation has elected by means of a provision in its certificate of incorporation not to be governed by this Section) or (2) has elected by a provision in its certificate of incorporation to be governed by Section 912. Elk is not currently covered by Section 912. Federal Regulation Ameritrans will be registered as a closed-end, non-diversified management investment company under the 1940 Act. This status as a registered investment company entitles Ameritrans to elect to be treated as a "regulated investment company" under the Code, which entitles Ameritrans and its stockholders to certain tax benefits. See "Tax Considerations," below. However, Ameritrans' status as a registered investment company also subjects Ameritrans to the same restrictions and obligations under the 1940 Act to which Elk is subject (as modified by the Exemptive Order). For a summary of such restrictions and obligations, see "INFORMATION CONCERNING ELK -- The Investment Company Act of 1940." Ameritrans has also elected to become a BDC. See "INFORMATION CONCERNING ELK -- Election to Become a BDC." Ameritrans is not licensed as an SBIC under the 1958 Act, and thus is neither eligible to raise funds from the SBA on relatively favorable terms, nor subject to the restrictions and obligations imposed by the 1958 Act (except as they relate to Elk or any other licensee under the 1958 Act that may be owned or acquired by Ameritrans). Management and Principal Stockholders The directors and officers of Ameritrans are identical to the current directors and officers of Elk. Ameritrans' directors and officers are currently receiving no compensation from Ameritrans. It is currently anticipated that if the Share Exchange is consummated, the directors and officers of Ameritrans will initially receive in the aggregate from Ameritrans and/or Elk the same compensation in the aggregate that Elk officers and directors receive, but such compensation would be allocated between Elk and Ameritrans, based upon factors determined by their respective Boards of Directors. Such officers and directors may also receive increases in compensation from time to time as determined by their respective Boards of Directors. Ameritrans and/or Elk may also hire additional personnel as such personnel are needed in connection with the expansion and diversification of Elk's lending and/or investment activities. See "INFORMATION CONCERNING ELK -- Management." There is currently one (1) outstanding share of capital stock of Ameritrans, which is owned by Gary C. Granoff. If the Share Exchange is completed, this share will be redeemed by Ameritrans. It is anticipated that the outstanding capital stock of Ameritrans immediately following the Share Exchange will consist of 1,745,600 shares of Ameritrans Common Stock in the same relative proportions as they hold Elk Common Stock as of the Effective Date of the Share Exchange (subject to any changes resulting from the exercise of -48- appraisal rights by holders of Elk Common Stock). See "INFORMATION CONCERNING ELK -- Security Ownership of Principal Stockholders and Management." Description of Capital Stock The authorized capital stock of Ameritrans consists of 5,000,000 shares, $.0001 par value, of Ameritrans Common Stock and 1,000,000 shares of "blank check" preferred stock. One (1) share of Ameritrans Common Stock is issued and outstanding, which share will be returned to Ameritrans upon completion of the Share Exchange. No preferred stock is currently issued or outstanding. The holders of Ameritrans Common Stock are entitled to one (1) vote per share on all matters submitted to a vote of stockholders. Holders of Ameritrans Common Stock have neither cumulative voting rights (which means that the holders of a majority of the outstanding shares of Ameritrans Common Stock may elect all of the directors of Ameritrans) nor any preemptive rights. Holders of Ameritrans Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor. In order to qualify as a "regulated investment company" under the Code, Ameritrans is required to distribute as dividends to its stockholders, for each fiscal year, at least 90% of its taxable income and 90% of the excess of its tax-exempt income over certain disallowed deductions. In addition, in order to avoid a non-deductible 4% excise tax on any undistributed income of Ameritrans, Ameritrans is required to distribute as dividends, within each calendar year, at least 97% of its ordinary income for such calendar year and 98% of its capital gain net income for the one-year period ending on October 31 of such calendar year. See "INFORMATION CONCERNING AMERITRANS -- Tax Considerations." In the event of a liquidation, dissolution or winding up of Ameritrans, holders of Ameritrans Common Stock will be entitled to receive a ratable portion of the assets of Ameritrans remaining after provision for payment of creditors. All of the shares of Ameritrans Common Stock issuable pursuant to the Share Exchange will be fully paid and non-assessable. The transfer agent for Ameritrans Common Stock is Continental Stock Transfer & Trust Company, 2 Broadway, New York, New York 10004. Market Information There is currently no public market for Ameritrans Common Stock. If the Share Exchange is completed, Ameritrans' Common Stock will be listed on the Nasdaq SmallCap Market under the symbol ___________, and the listing of Elk's Common Stock will be terminated. See "INFORMATION CONCERNING ELK -- Market Information." Tax Considerations The following discussion is a general summary of the federal income tax principles applicable to Ameritrans, based on the currently existing provisions of the Code and the regulations thereunder. This summary does not purport to be a complete description of the tax considerations applicable to Ameritrans or to the holders of Ameritrans Common Stock. Persons currently holding Elk Common Stock are urged to consult with their own tax advisors concerning the tax considerations pertaining to Ameritrans. Ameritrans has elected to be treated as a "regulated investment company" under Section 851 of the Code. A regulated investment company may deduct, for federal income tax purposes, most dividends paid to stockholders, thereby avoiding federal income taxation at the corporate level on stockholder dividends. In addition, because Elk currently qualifies for treatment as a regulated investment company, Ameritrans -49- anticipates that the dividends it receives from Elk will not be subject to corporate taxation at the level of Elk. Elk Capital will not be treated as a "regulated investment company" and therefore it is contemplated its earnings will not be distributed to shareholders. In order for Ameritrans to qualify as an regulated investment company for a given fiscal year, it must meet each of the following conditions for that fiscal year: (1) Ameritrans must be registered as an investment company under the 1940 Act at all times during the year. (2) At least 90% of Ameritrans' gross income for the year must be derived from interest, gains on the sale or other disposition of stock or other securities, dividends and payments with respect to securities loans. (3) Less than 30% of Ameritrans gross income must be derived from the sale of other disposition of securities held for less than three months. (4) At the close of each quarter, at least 50% of the value of Ameritrans' total assets must be represented by cash, cash items (including receivables), and securities. There are also limitations on the extent to which Ameritrans' holdings may be concentrated in the securities of a single issuer. However, these concentration limitations are not applicable to investments in other regulated investment companies. If Elk or Elk Capital fail to qualify as regulated investment companies in any fiscal year, the concentration prohibitions will likely be violated. (5) Ameritrans must distribute as dividends at least 90% of its investment company taxable income (as defined in Section 852 of the Code) as well as 90% of the excess of its tax-exempt income over certain disallowed tax-exempt interest deductions in order to be allowed a tax deduction for dividends. In order to avoid the imposition of a non-deductible 4% excise tax on undistributed income of Ameritrans, Ameritrans is required, under the terms of the Revenue Act of 1987 as embodied in Section 4982 of the Code, to distribute within each calendar year at least 97% of its ordinary income for such calendar year and 98% of its capital gain net income for the one-year period ending on October 31 of such calendar year. Dividends distributed by Ameritrans to its stockholders constitute ordinary income to such stockholders to the extent derived from ordinary income and short-term capital gains of Ameritrans (such as interest from loans by Ameritrans). Any long-term capital gain dividends distributed by Ameritrans would constitute capital gain income to Ameritrans stockholders. The tax benefits available to a qualified regulated investment company are prospective, commencing with the fiscal year in which all the conditions listed above are met, and would not permit Ameritrans to avoid income tax at the corporate level on income earned during prior taxable years. If Ameritrans fails to qualify as a regulated investment company for a given fiscal year, Ameritrans will not be entitled to a federal income tax deduction for dividends distributed, and amounts distributed as stockholder dividends by Ameritrans will therefore be subject to federal income tax at both the corporate level and the individual level. In addition, if Elk fails to qualify as a regulated investment company, such failure may cause Ameritrans to fail to qualify for regulated investment company status as well. See "INFORMATION CONCERNING ELK -- Tax Considerations." -50- Elk Capital Corporation Ameritrans currently intends to engage in a broad range of investment and financial services business, not permitted under the 1958 Act, directly and indirectly through Elk Capital and/or other subsidiaries. Ameritrans has not yet formulated any definitive plans concerning the business or operations of Elk Capital. Consequently, stockholders should realize that, in approving the Share Exchange Plan, they are giving broad discretion to the management of Ameritrans with respect to the acquisition and the operations of Elk Capital. The funds necessary to finance the organization and capitalization and/or acquisition of Elk Capital will be provided from Elk from the proceeds from Elk's January 1998 private placement that may be transferred to Ameritrans or through borrowings by Ameritrans from an institutional lender. Elk may allocate up to $963,000 of the proceeds of such private placement for operating capital to be used by Ameritrans and/or Elk Capital. APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS Pursuant to Section 910 of New York Corporation Law, holders of Elk Common Stock at the close of business on the Record Date have the right to dissent from the Share Exchange and, if the Share Exchange Plan is approved and the Share Exchange is consummated, receive payment of the fair value of their Elk Common Stock (in lieu of Ameritrans Common Stock they would otherwise receive pursuant to the Share Exchange) by complying with the requirements of Section 623 of New York Corporation Law (the full text of which is set forth as Exhibit B to this Proxy Statement/Prospectus). Section 623 requires that any such stockholder who wishes to exercise such appraisal rights must not vote in favor of the adoption of the Share Exchange Plan, and must file with Elk, before stockholders vote on the Share Exchange Plan, a written objection including a notice of election to dissent, his name and residence address, the number of shares as to which he dissents (stockholders may not dissent as to less than all of their shares) and a demand for payment for his shares if the Share Exchange is effected. Such objection is not required from any stockholder to whom Elk did not give proper notice of the Special Meeting. Within ten days after the vote of stockholders authorizing the Share Exchange, Elk must give written notice of such authorization to each dissenting stockholder who filed written objection or from whom written objection was not required. Any stockholder from whom written objection was not required and who elects to dissent from the Share Exchange must file with Elk, within 20 days after the giving of such notice to him, a written notice of such election, stating his name and residence address, the number of shares as to which he dissents and a demand for payment of the fair value for his shares. At the time of filing the notice of election to dissent or within one month thereafter, the stockholder must submit the certificates representing his shares to Elk or its transfer agent for notation thereon of the election to dissent, after which such certificates will be returned to the stockholder. Failure to submit the certificates for such notation may result in the loss of appraisal rights. Within 15 days after the expiration of the period within which stockholders may file their notices of election to dissent or within 15 days after consummation of the Share Exchange, whichever is later (but not later than 90 days after the stockholders' vote authorizing the Share Exchange Plan), Elk must make a written offer (which if the Share Exchange has not been consummated, may be conditioned upon such consummation) to each stockholder who has filed such notice of election to pay for his shares at a specified price which Elk considers to be their fair value. If Elk fails to make the offer within such 15-day period, or if any dissenting stockholder fails to agree to it within 30 days after it is made, Elk shall institute a judicial proceeding within 20 days after the expiration of the applicable period to determine the rights of dissenting stockholders and to fix the fair market value of their shares of Elk Common Stock. If Elk fails to institute such proceeding, a dissenting stockholder may institute the same. A negative vote on the Share -51- Exchange Plan does not constitute a "written objection" required to be filed by a dissenting stockholder. Failure to vote against the Share Exchange Plan will not constitute a waiver of appraisal rights; however, since a proxy left blank will be voted FOR the Share Exchange Plan, any Elk stockholder who wishes to exercise his appraisal rights must either vote AGAINST the Share Exchange Plan or abstain. The foregoing summary does not purport to be a complete statement of the provisions of Section 623 of New York Corporation Law, and is qualified in its entirety by reference to the attached Exhibit B. EXPERTS The financial statements of Elk for the years ended June 30, 1998 and June 30, 1997, contained in the Statement of Additional Information of Ameritrans have been audited by Marcum & Kliegman LLP, independent public accountants, as indicated in their report dated August 12, 1998 with respect thereto and are incorporated herein. Such financial statements have been incorporated in reliance upon such reports given upon the authority of said firm as experts in accounting and auditing. The legality of the shares of Ameritrans Common Stock to be issued pursuant to the Share Exchange will be passed upon for Ameritrans by Stursberg & Veith, which is counsel to both Ameritrans and Elk. OTHER MATTERS The Board of Directors of Elk does not know of any other matters which may come before the Special Meeting, other than those specified in the Notice of Special Meeting of Shareholders dated _____________, 1998 and this Proxy Statement/Prospectus. However, if any other matters are properly presented to the Special Meeting, the persons named in the accompanying proxy intend to exercise the discretion conferred by any duly executed proxies to vote, or otherwise to act, in accordance with their judgment on such matters. If the Share Exchange is not consummated, any proposal which a Elk stockholder intends to present at the 1998 Annual Meeting of Stockholders of Elk must be received by Elk at its principal executive offices a reasonable time before the management of Elk commences solicitation of proxies for such meeting, for such proposal to be included in the Proxy Statement for such meeting. ADDITIONAL INFORMATION Ameritrans has filed with the Securities and Exchange Commission, Washington, D.C., a Registration Statement on Form N-14 under both the 1933 Act and the 1940 Act which relates to Ameritrans, Elk and the shares of Ameritrans Common Stock being offered hereby. For further information pertaining to Ameritrans, Elk and the Ameritrans Common Stock being offered hereby, reference is hereby made to such Registration Statement, including the exhibits and financial statements filed therewith. -52- Exhibit A AGREEMENT AND PLAN OF SHARE EXCHANGE between AMERITRANS CAPITAL CORPORATION and ELK ASSOCIATES FUNDING CORPORATION THIS AGREEMENT AND PLAN OF SHARE EXCHANGE (this "Plan") is made as of this _____ day of __________, 1998 by and between Ameritrans Capital Corporation, a Delaware corporation ("Ameritrans") and Elk Associates Funding Corporation, a New York corporation ("Elk"). WHEREAS, the respective Boards of Directors of Ameritrans and Elk deem it advisable and in the best interests of their respective stockholders that Ameritrans and Elk engage in a share exchange (the "Share Exchange") pursuant to this Plan and Section 913 of the Business Corporation Law of the State of New York ("New York BCL") pursuant to which Ameritrans would acquire all of the outstanding shares of common stock of Elk in exchange for shares of common stock of Ameritrans; NOW, THEREFORE, in consideration of the mutual covenants set forth herein, Elk and Ameritrans hereby agree as follows: ARTICLE I SHARE EXCHANGE 1.1. Acquiring Corporation. Ameritrans shall be the acquiring corporation, within the meaning of Section 913 of New York BCL, in the Share Exchange. 1.2. Subject Corporation. Elk shall be the subject corporation, within the meaning of Section 913 of New York BCL, in the Share Exchange. 1.3. Share Exchange. Pursuant to the terms of this Plan and Section 913 of New York BCL, Ameritrans and Elk shall participate in the Share Exchange, pursuant to which each share of common stock, par value $.01 per share, of Elk ("Elk Common Stock") issued and outstanding on the Effective Date of the Share Exchange (as defined in Section 1.7 below) shall be exchanged for 1,745,600 shares of common stock, $.0001 par value per share, of Ameritrans ("Ameritrans Common Stock"). As of the Effective Date of the Share Exchange, (i) the ownership of each issued and outstanding share of Elk Common Stock shall automatically vest in Ameritrans, whether or not the certificates representing such shares have been surrendered for exchange by the holders thereof; and (ii) the holders of issued and outstanding shares of Elk Common Stock shall automatically become entitled to receive one (1) share of Ameritrans Common Stock for each share of Elk Common Stock held, and the certificates representing such shares of Elk Common Stock shall represent only the right to receive such shares of Ameritrans Common Stock and shall cease to represent shares of Elk Common Stock. 1.4. Treasury Shares. Notwithstanding the provisions of Section 1.3, any shares of Elk Common Stock held by Elk as treasury shares as of the Effective Date ("Treasury Shares") shall not be exchanged for shares of Ameritrans Common Stock, but shall be cancelled as of the Effective Date. 1.5. Dissenting Stockholders. Notwithstanding the provisions of Section 1.3, any holder of shares of Elk Common Stock who is entitled to dissenter's rights pursuant to Section 910 of New York BCL and who filed a written objection to this Plan in accordance with Section 623(a) of New York BCL and did not vote in favor of the Share Exchange shall not become entitled to receive one (1) share of Ameritrans Common Stock for each share of Elk Common Stock held by such holder on the Effective Date (with such shares of Elk Common Stock referred to herein as "Dissenting Shares") pursuant to the Share Exchange, but shall instead have the rights provided for in Section 623 of New York BCL; and as of the Effective Date, the certificates representing the Dissenting Shares shall represent only the rights provided for in Section 623 of New York BCL and shall cease to represent shares of Elk Common Stock. 1.6. Preferred Stock. Each share of preferred stock, $10. par value per share, of Elk ("Elk Preferred Stock") issued and outstanding as of the Effective Date, if any (all of which will be held by the United States Small Business Administration), shall be unaffected by the Share Exchange. No shares are presently outstanding. 1.7. Effective Date. The Effective Date of the Share Exchange shall be the date on which a certificate of exchange for the Share Exchange is executed and filed with the New York Department of State in accordance with Section 913 of New York BCL. Such execution and filing shall occur on ________, 1998, or if all conditions (set forth in Article V hereof) to the obligation of Ameritrans or Elk to consummate the Share Exchange have not been satisfied or waived as of such date, as soon as practicable following the satisfaction or waiver of all conditions to the obligation of Ameritrans or Elk to consummate the Share Exchange. 1.8. Exchange of Elk Common Stock Certificates. From and after the Effective Date, each holder of a certificate representing shares of Elk Common Stock which were issued and outstanding as of the Effective Date (excluding Treasury Shares and Dissenting Shares) shall have the right to surrender such certificate to Ameritrans in exchange for a certificate representing such number of shares of Ameritrans Common Stock as is determined by multiplying the number of shares of Elk Common Stock formerly represented by the surrendered certificate by one. Such exchange shall be made in accordance with written instruction which will be sent by Ameritrans, as soon as practicable following the Effective Date. Between the Effective Date and the time of such certificate exchange, each certificate representing shares of Elk Common Stock that were issued and outstanding as of the Effective Date (excluding Treasury Shares and Dissenting Shares) shall be deemed for all corporate purposes to represent such number of shares of Ameritrans Common Stock as is determined by multiplying the number of shares of Elk Common Stock formerly represented by such certificate by one. No transfers of the shares of Elk Common Stock issued and outstanding as of the Effective Date shall be recognized by, or recorded on the books of, either Elk or Ameritrans between the Effective Date and the date of such certificate exchange. Holders of shares of Elk Common Stock issued and outstanding as of the Effective Date (excluding Treasury Shares and Dissenting Shares) shall be considered to be stockholders of record of Ameritrans for purposes of any dividends or distributions declared by Ameritrans to be payable to stockholders of record of Ameritrans as of the date between the Effective Date and the date of such certificate exchange. 1.9. Issuance to Ameritrans of Elk Common Stock Certificate. From and after the Effective Date, Ameritrans, as the sole holder of shares of Elk Common Stock, shall be entitled to receive a certificate -2- from Elk representing such number of shares of Elk Common Stock as is equal to the number of shares of Elk Common Stock issued and outstanding as of the Effective Date (excluding Treasury Shares); and Elk shall promptly issue such stock certificate to Ameritrans. Between the Effective Date and the date of issuance of such stock certificate, Ameritrans shall be deemed for all corporate purposes to be the sole holder of Elk Common Stock. ARTICLE II CAPITALIZATION 2.1. Capitalization of Ameritrans. The authorized capital stock of Ameritrans consists of 5,000,000 shares of Ameritrans Common Stock, $.0001 par value, one (1) of which, as of the date hereof, is issued and outstanding and entitled to vote on the Plan. The number of authorized shares of Ameritrans Common Stock may be changed prior to the Effective Date by an amendment to the Certificate of Incorporation of Ameritrans, upon a vote of the Board of Directors and stockholders (if any) of Ameritrans; and shares of Ameritrans Common Stock may be issued prior to the Effective Date, upon a vote of the Board of Directors of Ameritrans. 2.2. Capitalization of Elk. The authorized capital stock of Elk consists of (i) 3,000,000 shares of Elk Common Stock, $.01 par value, of which, as of the date hereof, 1,745,600 shares are issued and outstanding. The outstanding shares of Elk Common Stock are entitled to vote on this Plan. The number of authorized shares of Elk Common Stock or Elk Preferred Stock may be changed prior to the Effective Date by an amendment to the Certificate of Incorporation of Elk, upon a vote of the Board of Directors and stockholders (if any) of Elk. The number of outstanding shares of Elk Common Stock or Elk Preferred Stock may be changed prior to the Effective Date by the issuance of additional shares of Elk Common Stock or Elk Preferred Stock, upon a vote of the Board of Directors of Elk. ARTICLE III REPRESENTATIONS AND WARRANTIES OF AMERITRANS Ameritrans represents and warrants to Elk as follows: 3.1. Corporate Status of Ameritrans. Ameritrans is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Ameritrans is a registered management investment company under the Investment Company Act of 1940, as amended (the "1940 Act"). 3.2. Authority for Plan. Ameritrans has the corporate power to enter into this Plan and to carry out its obligations hereunder. The execution and delivery of this Plan and the consummation of the Share Exchange have been duly authorized by the Board of Directors of Ameritrans, and no other corporate proceedings on the part of Ameritrans are necessary to authorize the execution and delivery of this Plan and the consummation of the Share Exchange. The execution and delivery of this Plan and the consummation of the Share Exchange will not (i) conflict with or result in a violation of any provision of the Certificate of Incorporation or By-laws of Ameritrans or (ii) with or without the giving of notice or the lapse of time, or both, conflict with, or result in any violation of or default under, or in any right to accelerate or the creation of any lien, charge or encumbrance pursuant to, or right of termination under, any provision of any mortgage, indenture, lease, agreement or other instrument, permit, concession, grant, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Ameritrans or any of its -3- properties. Other than in connection with or in compliance with the provision of Section 913 of New York BCL, and applicable federal and state securities laws, no authorization, consent or approval of, or declaration of, filing for the execution and delivery of this Plan to Ameritrans or the consummation by Ameritrans of the Share Exchange. This Plan has been duly executed and delivered by Ameritrans and is a valid and binding obligation of Ameritrans enforceable in accordance with its terms. 3.3. Prior Activities. Ameritrans has not engaged in any business or other activity prior to the date of this Plan, other than matters relating to corporate organization, capitalization and financing and matters incidental to this Plan. 3.4. Best Efforts. Ameritrans shall use its best efforts, to the extent reasonable, to satisfy all conditions to the obligation of Ameritrans or Elk to consummate the Share Exchange. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF ELK Elk represents and warrants to Ameritrans as follows: 4.1. Corporate Status of Elk. Elk (i) is a corporation duly organized, validly existing and in good standing under the laws of the State of New York, and (ii) has all requisite corporate power and authority to own, lease and operate its properties and to conduct its business as it is now being conducted. Elk is a registered management investment company under the 1940 Act. Elk is licensed to operate as a small business investment company under Section 301(d) of the Small Business Investment Act of 1958, as amended (the "1958 Act"). 4.2. Subsidiaries and Other Ownership Interests. Except as listed on Schedule 1 attached hereto or its financial statements, Elk does not own, directly or indirectly, any capital stock or other equity interest in any corporation, partnership, firm, association or other business organization, entity or enterprise. 4.3. Authority for Plan. Elk has the corporate power to enter into this Plan and to carry out its obligations hereunder. The execution and delivery of this Plan and the consummation of the Share Exchange have been duly authorized by Elk's Board of Directors and, except for the approval of this Plan by its stockholders as required by Section 913 of the New York BCL, no other corporate proceedings on the part of Elk are necessary to authorize the execution and delivery of this Plan and the consummation of the Share Exchange. The execution and delivery of this Plan and the consummation of the Share Exchange will not (i) conflict with or result in a violation of any provision of the Certificate of Incorporation or Bylaws of Elk or (ii) with or without the giving of notice or the lapse of time, or both, conflict with, or result in any violation of or default under, or in any right to accelerate or the creation of any lien, charge or encumbrance pursuant to, or right of termination under, any provision of any mortgage, indenture, lease, agreement or other instrument, permit, concession, grant, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Elk or any of its properties, except for such conflicts, violations or defaults as have been consented to or waived by the appropriate party. Other than in connection with or in compliance with the provision of Section 913 of New York BCL, and applicable federal and state securities laws, and for the approval of the Small Business Administration (the "SBA") required under the 1958 Act, no authorization, consent or approval of, or declaration of, or filing with or notice to any governmental body or authority is necessary for the execution and delivery of this Plan by Elk -4- or the consummation by Elk of the Share Exchange. This Plan has been duly executed and delivered by Elk and is a valid and binding obligation of Elk enforceable in accordance with its terms. 4.4. Financial Statements. Elk has furnished to Ameritrans true and complete copies of (i) Elk's consolidated balance sheet as of June 30, 1998 and 1997 and the related statement of income, stockholders' equity, cash flows and operations for the years then ended, statement of changes in net assets for the fiscal year then ended, accompanied by the report of Marcum & Kliegman LLP, the independent accountants of Elk. Such financial statements (i) are in accordance with the books and records of Elk, (ii) present fairly the financial position and results of operations and cash flow of Elk for the periods indicated, and (iii) have been prepared in accordance with generally accepted accounting principles consistently applied (except as otherwise stated therein). 4.5. Assets. Elk has good and clear record and marketable title to, or a valid leasehold interest in, all of the assets and property shown on its balance sheet as of June 30, 1998, except as to assets and property disposed of since June 30, 1998 in the ordinary course of business and in a manner consistent with past practice. None of such assets or properties is subject to any mortgage, pledge, lien security interest, lease or other encumbrance, except for those incurred or made in the ordinary course of business which do not materially impair the usefulness of such assets or properties in the conduct of the business of Elk. 4.6. Absence of Changes. Since June 30, 1998, and except as otherwise contemplated by this Plan, Elk has not undergone any material adverse change of any nature in its financial condition, business, operations, properties or prospects. 4.7. Compliance with Applicable Laws. The business of Elk is not being conducted in violation of any applicable law, ordinance, regulation, decree or order of any governmental entity, except for violations which either singly or in the aggregate do not and are not expected to have a material adverse effect on the financial condition, business, operations, properties or prospects of Elk. 4.8. Litigation. There is no material investigation or review by a governmental entity with respect to Elk pending or, to the best of Elk's knowledge, threatened; there is no claim, action, suit or proceeding pending, or to the best of Elk's knowledge, threatened against or affecting Elk or any of its assets at law or in equity, which either singly or in the aggregate may have any material adverse effect on the financial condition, business, operations, properties or prospects of Elk; and there is no basis or grounds, to the best of Elk's knowledge, for any such claim, action, suit, proceeding, investigation or review. 4.9. Tax Matters. Elk has timely and appropriately filed all federal, state, local and foreign tax returns required to be filed by it or on its behalf. All taxes shown by such returns to be due and payable have been fully paid or are reflected as a liability in Elk's financial statements, and in Elk's opinion it has no material liability for such taxes in excess of the amount so paid or accrued. 4.10. Best Efforts. Elk shall use its best efforts, to the extent reasonable, to satisfy all conditions to the obligation of Ameritrans or Elk to consummate the Share Exchange. -5- ARTICLE V CONDITIONS PRECEDENT 5.1. General Conditions. The obligations of Ameritrans and Elk to consummate the Share Exchange shall be subject to the fulfillment on or prior to the Effective Date of the following conditions: (a) Stockholder Approval. This Plan shall have been approved by the holders of at least two-thirds of the outstanding shares of Elk Common Stock, as required by Section 913 of New York BCL. (b) SBA Approval. The Plan shall have been approved by the SBA in accordance with the requirements of the 1958 Act. (c) Compliance with Securities Laws. The shares of Ameritrans Common Stock to be issued to the holders of Elk Common Stock issued and outstanding as of the Effective Date pursuant to the terms of this Plan shall have been duly registered under the Securities Act of 1933, or an exemption from such registration shall be available. The issuance of such shares of Ameritrans Common Stock pursuant to the terms of this Plan shall be permissible under all applicable state securities laws, and all actions or filings required under such state securities laws in connection with the issuance of such Ameritrans Common Stock shall have been effected. (d) Appraisal Rights. Holders of not more than (two) 2% of the shares of Elk Common Stock entitled to vote at the meeting of Elk stockholders at which the Plan is approved shall have exercised their right to receive payment for their shares of Elk Common Stock pursuant to Section 623 of New York BCL by (i) filing with Elk a written objection to this Plan before the stockholder vote on this Plan is taken and (ii) not voting in favor of this Plan. (e) No Governmental Proceedings. No injunction or restraining or other order issued by a court of competent jurisdiction which prohibits the consummation of the Share Exchange shall be in effect, and no governmental action or proceeding shall have been commenced or threatened in writing seeking any injunction or restraining or other order which seeks to prohibit, restrain, invalidate or set aside consummation of the Plan. 5.2. Conditions Precedent to Obligation of Ameritrans. The obligation of Ameritrans to consummate the Share Exchange shall be subject to the fulfillment prior to the Effective Date of the following conditions: (a) Accuracy of Representations and Warranties. The representations and warranties of Elk set forth in Article IV shall be true and correct in all material respects as of the Effective Date, except as contemplated by this Plan. (b) No Adverse Change. There shall not have occurred any material adverse change in the financial condition, business, operations, properties or prospects of Elk between the date of this Plan and the Effective Date. 5.3. Conditions Precedent to Obligation of Elk. The obligation of Elk to consummate the Share Exchange shall be subject to the fulfillment prior to the Effective Date of the following condition: -6- (a) Accuracy of Representations and Warranties. The representations and warranties of Ameritrans set forth in Article III shall be true and correct in all material respects as of the Effective Date, except as contemplated by this Plan. ARTICLE VI TERMINATION 6.1. Termination. This Plan shall terminate and the shall not become effective, and no party to this Plan shall have any obligation to proceed with the Share Exchange, upon mutual agreement of the Board of Directors of Ameritrans and Elk. 6.2. Effect of Termination. In the event this Plan terminates pursuant to Section 6.1, all further obligations of the parties hereto under this Plan shall terminate without further liability to the other party hereto. ARTICLE VII MISCELLANEOUS 7.1. Amendments. This Plan may be amended at any time before the Effective Date by a written instrument signed by each party hereto, except that following approval of this plan by the stockholders of Elk, no amendment shall be made which adversely affects the consideration payable to such stockholders pursuant to the Share Exchange. 7.2. Assignment. No party to this Plan may assign any of its rights or delegate any of its duties under this Plan without the written consent of the other party to this Plan. 7.3. Non-survival of Representations and Warranties. The respective representations and warranties of the parties to this Plan set forth in Articles III and IV shall expire and be terminated as of the Effective Date. 7.4. Notices. All notices and other communications under this Plan shall be in writing and shall be deemed given if delivered by hand, sent via a reputable nationwide courier service or deposited in the United States mail (postage prepaid), in each case to the applicable party at the following address: Ameritrans Capital Corporation 747 Third Avenue, 4th Floor New York, New York 10017 -7- 7.5. Governing Law. This Plan shall be governed by and construed in accordance with the laws of the State of New York. IN WITNESS WHEREOF, the parties hereto have executed this Plan as of the date first written above. AMERITRANS CAPITAL CORPORATION By: -------------------------------- Gary C. Granoff President ELK ASSOCIATES FUNDING CORPORATION By: ------------------------------- Gary C. Granoff President -8- EXHIBIT B 623 Procedure to Enforce Shareholders' Right to Receive Payment for Shares. (a) A shareholder intending to enforce his right under a section of this chapter to receive payment for his shares if the proposed corporate action referred to therein is taken shall file with the corporation before the vote, written objection to the action. The objection shall include a notice of his election to dissent, his name and residence address, the number of classes of shares as to which he dissents and a demand for payment of the fair value of his shares if the action is taken. Such objection is not required from any shareholder to whom the corporation did not give notice of such meeting in accordance with this chapter or where the proposed action is authorized by written consent of shareholders without a meeting. (b) Within ten days after the shareholders' authorization date, which term as used in this section means the date on which the shareholders' vote authorizing such action was taken, or the date on which such consent without a meeting was obtained from the requisite shareholders, the corporation shall give written notice of such authorization or consent by registered mail to each shareholder who filed written objection or from whom written objection was not required, excepting any shareholder who voted for or consented in writing to the proposed action and who thereby is deemed to have elected not to enforce his right to receive payment for his shares. (c) Within twenty days after the giving of notice to him, any shareholder from whom written objection was not required and who elects to dissent shall file with the corporation a written notice of such election, stating his name and residence address, the number of classes of shares as to which he dissents and a demand for payment of the fair value of his shares. Any shareholder who elects to dissent from a merger under section 905 (Merger of subsidiary corporation) or paragraph (c) of section 907 (Merger or consolidation of domestic and foreign corporations) or from a share exchange under paragraph (g) of section 913 (Share exchanges) shall file a written notice of such election to dissent within twenty days after the giving to him of a copy of the plan of merger or exchange or an outline of the material features thereof under section 905 or 913. (d) A shareholder may not dissent as to less than all of the shares, as to which he has a right to dissent, held by him of record, that he owns beneficially. A nominee or fiduciary may not dissent on behalf of any beneficial owner as to less than all of the shares of such owner, as to which such nominee or fiduciary has a right to dissent, held of record by such nominee or fiduciary. (e) Upon consummation of the corporate action, the shareholder shall cease to have any of the rights of a shareholder except the right to be paid the fair value of his shares and any other rights under this section. A notice of election may be withdrawn by the shareholder at any time prior to his acceptance in writing of an offer made by the corporation, as provided in paragraph (g), but in no case later than sixty days from the date of consummation of the corporate action except that if the corporation fails to make a timely offer, as provided in paragraph (g), the time for withdrawing a notice of election shall be extended until sixty days from the date an offer is made. Upon expiration of such time, withdrawal of a notice of election shall require the written consent of the corporation. In order to be effective, withdrawal of a notice of election must be accompanied by the return to the corporation of any advance payment made to the shareholder as provided in paragraph (g). If a notice of election is withdrawn, or the corporate action is rescinded, or a court shall determine that the shareholder is not entitled to receive payment for his shares, or the shareholder shall otherwise lose his dissenter's rights, he shall not have the right to receive payment for his shares and he shall be reinstated to all his rights as a shareholder as of the consummation of the corporate action, including any intervening preemptive rights and the right to payment of any intervening dividend or other distribution or, if any such rights have expired or any such dividend or distribution other than in cash has been completed, in lieu thereof, at the election of the corporation, the fair value thereof in cash as determined by the board as of the time of such expiration or completion, but without prejudice otherwise to any corporate proceedings that may have been taken in the interim. (f) At the time of filing the notice of election to dissent or within one month thereafter the shareholder of shares represented by certificates shall submit the certificates representing his shares to the corporation, or to its transfer agent, which shall forthwith note conspicuously thereon that a notice of election has been filed and shall return the certificates to the shareholder or other person who submitted them on his behalf. Any shareholder of shares represented by certificates who fails to submit his certificates for such notation as herein specified shall, at the option of the corporation exercised by written notice to him within forty-five days from the date of filing of such notice of election to dissent, lose his dissenter's rights unless a court, for good cause shown, shall otherwise direct. Upon transfer of a certificate bearing such notation, each new certificate issued therefor shall bear a similar notation together with the name of the original dissenting holder of the shares and a transferee shall acquire no rights in the corporation except those which the original dissenting shareholder had at the time of the transfer. (g) Within fifteen days after the expiration of the period within which shareholders may file their notices of election to dissent, or within fifteen days after the proposed corporate action is consummated, whichever is later (but in no case later than ninety days from the shareholders' authorization date), the corporation or, in the case of a merger or consolidation, the surviving or new corporation shall make a written offer by registered mail to each shareholder who has filed such notice of election to pay for his shares at a specified price which the corporation considers to be their fair value. Such offer shall be accompanied by a statement setting forth the aggregate number of shares with respect to which notices of election to dissent have been received from the aggregate number of holders of such shares. If the corporate action has been consummated, such offer shall also be accompanied by (1) advance payment to each such shareholder who has submitted the certificates representing his shares to the corporation, as provided in paragraph (f), of an amount equal to eighty percent of the amount of such offer, or (2) as to each shareholder who has not yet submitted his certificates a statement that advance payment to him of an amount equal to eighty percent of the amount of such offer will be made by the corporation promptly upon submission of his certificates. If the corporate action has not been consummated at the time of this making of the offer, such advance payment or statement as to advance payment shall be sent to each shareholder entitled thereto forthwith upon consummation of the corporate action. Every advance payment or statement as to advance payment shall include advice to the shareholder to the effect that acceptance of such payment does not constitute a waiver of any dissenters' rights. If the corporate action has not been consummated upon the expiration of the ninety day period after the shareholders' authorization date, the offer may be conditioned upon the consummation of such action. Such offer shall be made at the same price per share to all dissenting shareholders of the same class, or if divided into series, of the same series and shall be accompanied by a balance sheet of the corporation whose shares the dissenting shareholder holds as of the latest available date, which shall not be earlier than twelve months before the making of such offer, and a profit and loss statement or statements for not less than a twelve month period ended on the date of such balance sheet or, if the corporation was not in existence throughout such twelve month period, for the portion thereof during which it was in existence. Notwithstanding the foregoing, the corporation shall not be required to furnish a balance sheet or profit and loss statement or statements to any shareholder to whom such balance sheet or profit and loss statement or statements were previously furnished, nor if in connection with obtaining the shareholders' authorization for or consent to the proposed corporate action the shareholders were furnished with a proxy or information statement, which included financial statements, pursuant to Regulation 14A or -2- Regulation 14C of the United States the Securities and Exchange Commission. If within thirty days after the making of such offer, the corporation making the offer and any shareholder agree upon the price to be paid for his shares, payment therefor shall be made within sixty days after the making of such offer or the consummation of the proposed corporate action, whichever is later, upon the surrender of the certificates for any such shares represented by certificates. (h) The following procedure shall apply if the corporation fails to make such offer within such period of fifteen days, or if it makes the offer and any dissenting shareholder or shareholders fail to agree with it within the period of thirty days thereafter upon the price to be paid for their shares: (1) The corporation shall, within twenty days after the expiration of whichever is applicable of the two periods last mentioned, institute a special proceeding in the supreme court in the judicial district in which the office of the corporation is located to determine the rights of dissenting shareholders and to fix the fair value of their shares. If, in the case of merger or consolidation, the surviving or new corporation is a foreign corporation without an office in this state, such proceeding shall be brought in the county where the office of the domestic corporation, whose shares are to be valued, was located. (2) If the corporation fails to institute such proceeding within such period of twenty days , any dissenting shareholder may institute such proceeding for the same purpose not later than thirty days after the expiration of such twenty day period. If such proceeding is not instituted within such thirty day period, all dissenter's rights shall be lost unless the supreme court, for good cause shown, shall otherwise direct. (3) All dissenting shareholders, excepting those who, as provided in paragraph (g), have agreed with the corporation upon the price to be paid for their shares, shall be made parties to such proceeding, which shall have the effect of an action quasi in rem against their shares. The corporation shall serve a copy of the petition in such proceeding upon each dissenting shareholder who is a resident of this state in the manner provided by law for the service of a summons, and upon each nonresident dissenting shareholder either by registered mail and publication, or in such other manner as is permitted by law. The jurisdiction of the court shall be plenary and exclusive. (4) The court shall determine whether each dissenting shareholder, as to whom the corporation requests the court to make such determination, is entitled to receive payment for his shares. If the corporation does not request any such determination or if the court finds that any dissenting shareholder is so entitled, it shall proceed to fix the value of the shares which, for the purposes of this section, shall be the fair value as of the close of business on the day prior to the shareholders' authorization date. In fixing the fair value of the shares, the court shall consider the nature of the transaction giving rise to the shareholder's right to receive payment for shares and its effects on the corporation and its shareholders, the concepts and methods then customary in the relevant securities and financial markets for determining fair value of shares of a corporation engaging in a similar transaction under comparable circumstances and all other relevant factors. The court shall determine the fair value of the shares without a jury and without referral to an appraiser or referee. Upon application by the corporation or by any shareholder who is a party to the proceeding, the court may, in its discretion, permit pretrial disclosure, including, but not limited to, disclosure of any expert's reports relating to the fair value of the shares whether or not intended for use at the trial in the proceeding and notwithstanding subdivision (d) of section 3101 of the civil practice law and rules. -3- (5) The final order in the proceeding shall be entered against the corporation in favor of each dissenting shareholder who is a party to the proceeding and is entitled thereto for the value of his shares so determined. (6) The final order shall include an allowance for interest at such rate as the court finds to be equitable, from the date the corporate action was consummated to the date of payment. In determining the rate of interest, the court shall consider all relevant factors, including the rate of interest which the corporation would have had to pay to borrow money during the pendency of the proceeding. If the court finds that the refusal of any shareholder to accept the corporate offer of payment for his shares was arbitrary, vexatious or otherwise not in good faith, no interest shall be allowed to him. (7) Each party to each proceeding shall bear its own costs and expenses, including the fees and expenses of its counsel and of any experts employed by it. Notwithstanding the foregoing, the court may, in its discretion, apportion and assess all or any part of the costs, expenses and fees incurred by the corporation against any or all of the dissenting shareholders who are parties to the proceeding, including any who have withdrawn their notices of election as provided in paragraph (e), if the court finds that their refusal to accept the corporate offer was arbitrary, vexatious or otherwise not in good faith. The court may, in its discretion, apportion and assess all or any part of the costs, expenses and fees incurred by any or all dissenting shareholders who are parties to the proceeding against the corporation if the court find any of the following: (A) that the fair value of the shares as determined materially exceeds the amount which the corporation offered to pay; (B) that no offer or required advanced payment was made by the corporation; (C) that the corporation failed to institute the special proceeding within the period specified therefor; or (D) that the action of the corporation in complying with its obligations as provided in clause (A), the court may consider the dollar amount or the percentage, or both, by which the fair value of the shares as determined exceeds the corporate offer. (8) Within sixty days after final determination of the proceedings, the corporation shall pay to each dissenting shareholder the amount found to be due him, upon surrender of the certificate for any such shares represented by certificates. (i) Shares acquired by the corporation upon the payment of the agreed value therefor or of the amount due under the final order, as provided in this section, shall become treasury shares or be cancelled as provided in section 515 (Reacquired shares), except that, in the case of a merger or consolidation, they may be held and disposed of as the plan of merger or consolidation may otherwise provide. (j) No payment shall be made to a dissenting shareholder under this section at a time when the corporation is insolvent or when such payment would make it insolvent. In such event, the dissenting shareholder shall, at his option: (1) Withdraw his notice of election, which shall in such event be deemed withdrawn with the written consent of the corporation; or (2) Retain his status as a claimant against the corporation and, if it is liquidated, be subordinated to the rights of creditors of the corporation, but have rights superior to the non-dissenting shareholders, and if it is not liquidated, retain his right to be paid for his shares, which right the corporation shall be obliged to satisfy when the restrictions of this paragraph do not apply. -4- (3) The dissenting shareholder shall exercise such option under subparagraph (1) or (2) by written notice filed with the corporation within thirty days after the corporation has given him written notice that payment for his shares cannot be made because of the restrictions of this paragraph. If the dissenting shareholder fails to exercise such option as provided, the corporation shall exercise the option by written notice given to him within twenty days after the expiration of such period of thirty days. (k) The enforcement by a shareholder of his right to receive payment for his shares in the manner provided herein shall exclude the enforcement by such shareholder of any other right to which he might otherwise be entitled by virtue of share ownership, except as provided in paragraph (e), and except that this section shall not exclude the right of such shareholder to bring or maintain an appropriate action to obtain relief on the ground that such corporate action will be or is unlawful or fraudulent as to him. (l) Except as otherwise expressly provided in this section, any notice to be given by a corporation to a shareholder under this section shall be given in the manner provided in section 605 (Notice of meetings of shareholders). (m) This section shall not apply to foreign corporations except as provided in subparagraph (e)(2) of section 907 (Merger or consolidation of domestic and foreign corporations). 910 Right of Shareholder to Receive Payment for Shares Upon Merger or Consolidation, or Sale, Lease, Exchange or Other Disposition of Assets, or Share Exchange. (a) A shareholder of a domestic corporation shall, subject to and by complying with section 623 (Procedure to enforce shareholder's right to receive payment for shares), have the right to receive payment of the fair value of his shares and the other rights and benefits provided by such section, in the following cases: (1) Any shareholder entitled to vote who does not assent to the taking of an action specified in subparagraphs (A), (B) or (C). (A) Any plan of merger or consolidation to which the corporation is a party; except that the right to receive payment of the fair value of his shares shall not be available. (i) To a shareholder of the surviving corporation in a merger authorized by section 905 (Merger of subsidiary corporation) or paragraph (c) of section 907 (Merger or consolidation of domestic and foreign corporations); and (ii) To a shareholder of the surviving corporation in a merger authorized by this article, other than a merger specified in subparagraph (i), unless such merger effects one or more of the changes specified in subparagraph (b)(6) of section 806 (Provisions as to certain proceedings) in the rights of the shares held by such shareholder. (B) Any sale, lease, exchange or other disposition of all or substantially all of the assets of a corporation which requires shareholder approval under section 909 (Sale, lease, exchange or other disposition of assets) other than a transaction wholly for cash where the shareholders' approval thereof is conditioned upon the dissolution of the corporation and the distribution of substantially all -5- its assets to the shareholders in accordance with their respective interests within one year after the date of such transaction. (C) Any share exchange authorized by section 913 in which the corporation is participating as a subject corporation; except that the right to receive payments of the fair value of his shares shall not be available to a shareholder whose shares have not been acquired in the exchange. (2) Any shareholder of the subsidiary corporation in a merger authorized by section 905 or paragraph (c) of section 907, or in a share exchange authorized by paragraph (g) of section 913, who files with the corporation a written notice of election to dissent as provided in paragraph (c) of section 623. -6- PROXY PROXY ELK ASSOCIATES FUNDING CORPORATION Proxy for Special Meeting of Shareholders on ____________, 1998 The undersigned, having received notice of a Special Meeting of Shareholders and revoking all prior proxies, hereby appoint(s) Gary C. Granoff, Ellen M. Walker and Margaret Chance with full power of substitution, as proxies to represent and vote as designated below, all shares of common stock of Elk Associates Funding Corporation ("Elk") which the undersigned would be entitled to vote if personally present at the Special Meeting of Shareholders of Elk to be held at the offices of Stursberg & Veith, 405 Lexington Avenue, Suite 4949, New York, New York on _______________, 1998, at 10:00 a.m. (New York Time) and any adjournment thereof. 1. To adopt an Agreement and Plan of Share Exchange dated _______________, 1998 between Elk and Ameritrans Corporation, as described in the accompanying Proxy Statement/ Prospectus. FOR |_| AGAINST |_| ABSTAIN |_| 2. To transact such other business as may properly come before the meeting or any adjournment of the meeting. FOR |_| AGAINST |_| ABSTAIN |_| The shares represented by this Proxy will be voted as directed by the undersigned. If NO DIRECTION IS GIVEN WITH RESPECT TO ANY PROPOSAL SPECIFIED ABOVE, THIS PROXY WILL BE VOTED FOR SUCH PROPOSAL If the undersigned hold(s) any of the shares of common stock of Elk in a fiduciary, custodial or joint capacity or capacities, this Proxy is signed by the undersigned in every such capacity as well as individually. Date: -------------------------------- ------------------------------------- ------------------------------------- Signature(s) When signed as an attorney, executor, administrator or other fiduciary, please give your full title as such. Joint owners should each sign. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF ELK Ameritrans Capital Corporation 4th Floor 747 Third Avenue New York, New York 10017 STATEMENT OF ADDITIONAL INFORMATION ____________ ____, 1998 This Statement of Additional Information is not a prospectus and should be read in conjunction with a Proxy Statement/Prospectus, also dated ____________ ____, 1998, which has been prepared and distributed to stockholders of Elk Associates Funding Corporation, a New York corporation ("Elk"), for the purposes of (1) the solicitation of proxies by the Board of Directors of Elk for use at a Special Meeting of Stockholders on ____________ ____, 1998, at which Elk stockholders will be asked to consider and vote upon the adoption of an Agreement and Plan of Share Exchange between Ameritrans Capital Corporation, a Delaware corporation ("Ameritrans"), and Elk, pursuant to which each outstanding share of common stock of Elk would be exchanged for one (1) share of common stock of Elk, and (2) the offer and issuance of up to 1,745,600 shares of common stock of Ameritrans to holders of common stock of Elk pursuant to the terms of such share exchange. A copy of the Proxy Statement/Prospectus may be obtained from the Secretary of Ameritrans, 4th Floor, 747 Third Avenue, New York, New York 10017, (800) 214-1047. The financial statements of Elk included in this Statement of Additional Information have been examined by Marcum & Kliegman, LLP, independent public accountants, as stated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in accounting and auditing. No financial statements for Ameritrans are included in this Statement of Additional Information because Ameritrans has not yet been capitalized nor has it engaged in any operations and will not do so until such time as the share exchange with Elk is consummated. THE SECURITIES DESCRIBED IN THE PROXY STATEMENT/PROSPECTUS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THE PROXY STATEMENT/PROSPECTUS OR THIS STATEMENT OF ADDITIONAL INFORMATION. Table of Contents Selected Financial Data......................................2 Management's Discussion and Analysis of Financial Condition and Results of Operations..................................4 Financial Statements.........................................6 Selected Financial Data The following financial information has been derived in part from and should be read in conjunction with, Elk's financial statements and the related notes included in the Statement of Additional Information, which has been filed with the SEC and has been distributed to Elk shareholders along with this Proxy Statement/Prospectus. -2- Elk Associates Funding Corporation and Subsidiary For the Years Ended June 30, 1994, 1995, 1996, 1997 and 1998
------------------------------------------------------------------------------- 1994 1995 1996 1997 1998 ----------- ----------- ----------- ----------- ----------- Investment Income $ 2,824,881 $ 2,629,901 $ 3,084,412 $ 4,023,795 $ 4,606,456 ----------- ----------- ----------- ----------- ----------- Interest Expense 1,136,458 1,002,959 1,105,993 1,582,700 1,840,731 Other Expenses 926,798 960,474 1,108,505 1,408,034 1,852,262 ----------- ----------- ----------- ----------- ----------- Total Expenses 2,063,256 1,963,433 2,214,498 2,990,734 3,692,993 ----------- ----------- ----------- ----------- ----------- Investment Income Before Taxes, Credit (Provision) for Loan Gains (Losses) and Gains (Losses) on Assets Acquired and Income Taxes 761,625 666,468 869,914 1,033,061 913,463 Credit (Provision) for Loan Gains (Losses) and Gains (Losses) on Assets Acquired(1) (473,317) (13,515) 44,292 (8,923) (14,649) Other Income -- -- -- 24,885 38,798 (Provision) for Income Taxes (State and Federal)(2) -- -- (5,945) (28,676) (3,271) ----------- ----------- ----------- ----------- ----------- Net Income $ 288,308 $ 652,953 $ 908,261 $ 1,020,347 $ 934,341 =========== =========== =========== =========== =========== Net Income Per Common Share $ .31 $ .66 $ .73 $ .79 $ .62 =========== =========== =========== =========== =========== Common Stock Dividends Paid $ -- $ -- $ 937,028 $ 946,655 $ 986,724 =========== =========== =========== =========== =========== Weighted Average Shares of Common Stock Outstanding 943,683 988,953 1,247,120 1,283,600 1,518,969 =========== =========== =========== =========== ===========
- ---------- (1) Reference is made to Elk's Statements of Income for information on annual provisions for loan loss reserves and losses on assets acquired. It should be noted that the provision for loan losses and losses on assets acquired reflects the amounts taken in accordance with generally accepted accounting principles. The actual amount of loans written off or (recoveries) for income tax purposes were $351,454, $78,000, ($24,000), ($24,000) and $222,748 for years ended June 30, 1994, 1995, 1996, 1997, and 1998, respectively. See "LOAN PORTFOLIO; VALUATION -- Collection Experience". (2) Elk, since the fiscal year ended June 30, 1984, has elected and qualified to be taxed as a regulated investment company and substantially all taxable income was required to be distributed to shareholders. Therefore, only minimal taxes were required to be paid. -3- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion is intended to assist in the analysis of the financial condition and results of operations of Elk. The information contained in this section should be read in conjunction with the summary financial information and the financial statements and notes thereto appearing in this Prospectus. 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 the Financial Statements." RESULTS OF OPERATIONS FISCAL YEARS ENDED JUNE 30, 1998 AND 1997 TOTAL INVESTMENT INCOME. Elk's gross investment income increased 30% from $3,084,412 for the fiscal year ended June 30, 1996, to $4,023,795 for the fiscal year ended June 30, 1997, and had an increase of 14.5% to $4,606,456 for the fiscal year ended June 30, 1998. The increases during the fiscal periods ended June 30, 1997 and 1998, were mainly attributable to increases in the loan portfolio from $24,141,421 at June 30, 1996, to $33,249,206 at June 30, 1997 and an increase to $41,590,000 at June 30, 1998. INTEREST EXPENSE. Interest expense increased from $1,582,700 for the fiscal year ended June 30, 1997, to $1,840,731 for the fiscal year ended June 30, 1998. These increases were chiefly attributable to increased interest costs of SBA subordinated debentures, as well as additional borrowings from Elk's banks. Elk's outstanding borrowings under its bank lines of credit and its outstanding debentures with the SBA increased from $25,700,000 at June 30, 1997, to $30,965,000 at June 30, 1998. OPERATING EXPENSES. Elk's operating expenses consist primarily of general and administrative expenses, including salaries, professional fees, rent, and various costs associated with collections. Operating expenses increased from $1,114,450 at June 30, 1996, to $1,416,957 at June 30, 1997. Operating expenses increased to $1,866,911 during the fiscal period ended June 30, 1998. These increases were mainly attributable to increased overhead which resulted from expanded operations, and with respect to the fiscal year ended June 30, 1998, Elk experienced a bad debt in the amount of $227,748, which was classified as an operating expense. UNREALIZED DEPRECIATION OF LOANS. Elk values its loan portfolio periodically to determine the fair value. Elk had $325,000 and $295,000 of unrealized depreciation on its loan portfolio for the years ended June 30, 1997 and 1998, respectively. Elk had a total of 7 and 17 loans aggregating $301,354 and $746,848, respectively, for the fiscal years ended June 30, 1997 and 1998, which were delinquent with unpaid accrued interest of $2,865 and $34,616. Based -4- upon recent appraisals, Elk anticipates that, as of June 30, 1998, a substantial portion of the principal amount of such loans would be collected upon foreclosure of such loans, if necessary. There can be no assurances, however, that the collateral securing such loans will be adequate in the event of foreclosure. 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 order to make loans, increase its leverageable capital, and pay its operating expenses. Elk distributes at least 90% of its investment company taxable income and, accordingly, Elk will continue to rely upon external sources of funds to finance growth. At June 30, 1998, 71% of Elk's indebtedness was represented by indebtedness to its banks and 29% by the debentures issued to the SBA with fixed rates of interest ranging from 3.12 to 8.20%. Elk currently may borrow up to $35,000,000 under its existing lines of credit, subject to the limitations imposed by its borrowing base agreement with its banks and the SBA, the statutory and regulatory limitations imposed by the SBA, and the availability of funds. In addition, Elk is presently eligible to apply for additional leverage from the SBA if it was determined by the Board of Directors to be in the best interests of the company. No assurance can be given that, if applied, 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. In addition, in order to provide the funds necessary for Elk's expansion strategy, Elk expects to raise additional capital (or obtain capital from Ameritrans through private and/or public sales of Ameritrans' securities) and to incur, from time to time, additional bank indebtedness and (if deemed necessary by its management) to obtain SBA loans. There can be no assurances that such additional financing will be available on terms acceptable to Elk. In January, 1998, Elk completed a private placement of a total of 462,000 shares of Common Stock and received net proceeds of approximately $2,888,000. The net proceeds received allowed Elk to obtain an increase in its bank line of credit and, if it deems appropriate, additional leverage with the SBA. -5- INDEX TO FINANCIAL STATEMENTS OF ELK ASSOCIATES FUNDING CORPORATION Page ---- Independent Auditors' Report F-1 Consolidated Balance Sheets at June 30, 1998 and 1997 F-2 Consolidated Statements of Income for the years ended June 30, 1998 and 1997 F-4 Consolidated Statements of Stockholders' Equity for the years ended June 30, 1998 and 1997 F-5 Consolidated Statements of Cash Flows for the years ended June 30, 1998 and 1997 F-6 Schedule of Loans F-8 Notes to Consolidated Financial Statements F-9 -6- INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Elk Associates Funding Corporation and Subsidiary (A Small Business Investment Company Licensed by the SBA) We have audited the accompanying consolidated balance sheets of Elk Associates Funding Corporation and Subsidiary as of June 30, 1998 and 1997, and the related consolidated statements of income, stockholders' equity and cash flows for the years then ended and the schedule of loans as of June 30, 1998. These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements and schedule referred to above present fairly, in all material respects, the financial position of Elk Associates Funding Corporation and Subsidiary as of June 30, 1998 and 1997, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. As explained in Note 1, the consolidated financial statements include loans valued at $41,295,000 and $32,924,206 as of June 30, 1998 and 1997, respectively, whose values have been estimated by the Board of Directors in the absence of readily ascertainable market values. We have reviewed the procedures used by the Board of Directors in arriving at their estimate of the value of such loans and have inspected underlying documentation and, in the circumstances, we believe the procedures are reasonable and the documentation is appropriate. However, because of the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a ready market for such loans existed, and the differences could be material. /s/ Marcum & Kliegman LLP August 12, 1998 New York, New York F-1 ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS June 30, 1998 and 1997 ASSETS
1998 1997 ------------ ------------ Loans receivable $ 41,590,000 $ 33,249,206 Less: allowance for loan losses (295,000) (325,000) ------------ ------------ 41,295,000 32,924,206 Cash and cash equivalents 1,755,429 1,853,032 Accrued interest receivable 516,110 408,165 Assets acquired in satisfaction of loans 400,470 581,810 Receivables from debtors on sales of assets acquired in satisfaction of loans 451,222 488,493 Equity securities 629,179 436,181 Furniture, fixtures and leasehold improvements, net 102,247 90,214 Prepaid expenses and other assets 250,081 243,920 ------------ ------------ TOTAL ASSETS $ 45,399,738 $ 37,026,021 ============ ============
The accompanying notes are an integral part of these financial statements. F-2 ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS June 30, 1998 and 1997 LIABILITIES AND STOCKHOLDERS' EQUITY
1998 1997 ----------- ----------- LIABILITIES Debentures payable to SBA $ 8,880,000 $ 8,880,000 Notes payable, banks 22,085,000 16,820,000 Accrued expenses and other liabilities 204,099 112,005 Accrued interest payable 221,704 181,248 Dividends payable 314,208 -0- ----------- ----------- TOTAL LIABILITIES 31,705,011 25,993,253 ----------- ----------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Series A, 3 percent cumulative preferred stock, $10 par value, 547,271 shares authorized, none outstanding -0- -0- Series B, 4 percent cumulative preferred stock, $10 par value, 752,729 shares authorized, none outstanding -0- -0- Common stock, $.01 par value: 2,000,000 shares authorized; 1,745,600 and 1,283,600 shares issued and outstanding, respectively 17,456 12,836 Additional paid-in-capital 12,485,825 8,890,993 Restricted capital 968,368 1,679,820 Retained earnings 24,289 365,878 Restricted retained earnings -0- 25,000 Unrealized gain on equity securities 198,789 58,241 ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 13,694,727 11,032,768 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $45,399,738 $37,026,021 =========== ===========
The accompanying notes are an integral part of these financial statements. F-3 ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME For the Years Ended June 30, 1998 and 1997
1998 1997 ----------- ----------- INVESTMENT INCOME Interest on loans receivable $ 4,108,727 $ 3,660,825 Fees and other income 497,729 362,970 ----------- ----------- TOTAL INVESTMENT INCOME 4,606,456 4,023,795 ----------- ----------- OPERATING EXPENSES Interest 1,840,731 1,582,700 Salaries and employee benefits 495,889 469,060 Legal fees 336,700 307,127 Miscellaneous administrative expenses 739,875 604,347 Loss on assets acquired in satisfaction of loans, net 14,649 8,923 Directors' fee 52,050 27,500 Bad debt expense 227,748 -0- ----------- ----------- TOTAL OPERATING EXPENSES 3,707,642 2,999,657 ----------- ----------- OPERATING INCOME 898,814 1,024,138 ----------- ----------- OTHER INCOME (EXPENSES) (Write-off) gain of noncash receivable (25,000) 25,000 Net gain (loss) from rental activities 6,125 (11,233) Recoveries 57,673 11,118 ----------- ----------- TOTAL OTHER INCOME 38,798 24,885 ----------- ----------- NET INCOME BEFORE INCOME TAXES 937,612 1,049,023 INCOME TAXES 3,271 28,676 ----------- ----------- NET INCOME $ 934,341 $ 1,020,347 =========== =========== WEIGHTED AVERAGE SHARES OUTSTANDING 1,518,969 1,283,600 =========== =========== NET INCOME PER COMMON SHARE $ 0.62 $ 0.79 =========== ===========
The accompanying notes are an integral part of these financial statements. F-4 ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Years Ended June 30, 1998 and 1997
Series A Series B Shares of Preferred Preferred Shares of Common Preferred Stock - 3% Stock - 4% Common Stock Additional Stock Cumulative Cumulative Stock $.01 Par Paid-In Outstanding $10 Par $10 Par Outstanding Value Capital ----------- --------- --------- ----------- -------- ---------- BALANCE, July 1, 1996 -0- $ -0- $ -0- 1,283,600 $12,836 $ 8,179,545 Transfer of restricted capital -0- -0- -0- -0- -0- 711,448 Dividends paid -0- -0- -0- -0- -0- -0- Net income -0- -0- -0- -0- -0- -0- Unrealized gain on equity securities -0- -0- -0- -0- -0- -0- ----- ----- ----- --------- ------- ----------- BALANCE, June 30, 1997 -0- -0- -0- 1,283,600 12,836 8,890,993 Transfer of restricted capital -0- -0- -0- -0- -0- 711,452 Dividends declared -0- -0- -0- -0- -0- -0- Net income -0- -0- -0- -0- -0- -0- Unrealized gain on equity securities -0- -0- -0- -0- -0- -0- Proceeds from sale of common stock, net of direct costs -0- -0- -0- 462,000 4,620 2,883,380 ----- ----- ----- --------- ------- ----------- BALANCE, June 30, 1998 -0- $ -0- $ -0- 1,745,600 $17,456 $12,485,825 ===== ===== ===== ========= ======= =========== Unrealized Restricted Gain on Restricted Retained Retained Equity Capital Earnings Earnings Securities Total ---------- ----------- -------- ---------- ------ BALANCE, July 1, 1996 $2,391,268 $ 317,186 $ -0- $ -0- $10,900,835 Transfer of restricted capital (711,448) -0- -0- -0- -0- Dividends paid -0- (946,655) -0- -0- (946,655) Net income -0- 995,347 25,000 -0- 1,020,347 Unrealized gain on equity securities -0- -0- -0- 58,241 58,241 ---------- ----------- ------- -------- ----------- BALANCE, June 30, 1997 1,679,820 365,878 25,000 58,241 11,032,768 Transfer of restricted capital (711,452) -0- -0- -0- -0- Dividends declared -0- (1,300,930) -0- -0- (1,300,930) Net income -0- 959,341 (25,000) -0- 934,341 Unrealized gain on equity securities -0- -0- -0- 140,548 140,548 Proceeds from sale of common stock, net of direct costs -0- -0- -0- -0- 2,888,000 ---------- ----------- ------- -------- ----------- BALANCE, June 30, 1998 $ 968,368 $ 24,289 $ -0- $198,789 $13,694,727 ========== =========== ======= ======== ===========
The accompanying notes are an integral part of these financial statements. F-5 ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended June 30, 1998 and 1997
1998 1997 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 934,341 $ 1,020,347 ------------ ------------ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 49,890 53,546 Write-off (gain) on noncash receivable 25,000 (25,000) Increase in accrued interest receivable (107,945) (114,078) Increase in prepaid expenses and other assets (30,616) (27,318) Decrease (increase) in accrued expenses and other liabilities 92,096 (28,893) Increase (decrease) in accrued interest payable 40,456 (15,204) ------------ ------------ TOTAL ADJUSTMENTS 68,881 (156,947) ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 1,003,222 863,400 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Net change in loans receivable, assets acquired in satisfaction of loans and receivables from debtors on sales of assets acquired in satisfaction of loans (8,177,183) (9,062,902) Payments for building improvements on assets acquired in satisfaction of loans -0- (13,974) Purchases of equity securities (52,450) (243,040) Acquisition of furniture, fixtures and leasehold improvements (37,468) (18,530) ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES (8,267,101) (9,338,446) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from notes payable, banks, net 5,265,000 10,195,000 Payments for loan costs -0- (15,050) Proceeds from debentures payable to SBA -0- 430,000 Repayment of debentures payable to SBA -0- (408,000) Net proceeds from sale of common stock 2,888,000 -0- Dividends paid (986,724) (946,655) ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES $ 7,166,276 $ 9,255,295 ------------ ------------
The accompanying notes are an integral part of these financial statements. F-6 ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued For the Years Ended June 30, 1998 and 1997
1998 1997 ----------- ----------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS $ (97,603) $ 780,249 CASH AND CASH EQUIVALENTS - Beginning 1,853,032 1,072,783 ----------- ----------- CASH AND CASH EQUIVALENTS - Ending $ 1,755,429 $ 1,853,032 =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the years for: Interest $ 1,840,276 $ 1,597,904 Income taxes $ 8,048 $ 31,260 Noncash investing and financing activities: Conversion of loans to assets acquired in satisfaction of loans $ 26,090 $ 140,914 Exchange of preferred stock for a note resulting in a noncash gain of $25,000 $ -0- $ 125,000 Unrealized gain on equity securities $ 140,548 $ 58,241 Transfer of restricted capital $ 711,452 $ 711,448 On June 22, 1998, the Company declared a cash dividend of $0.18 per common share which was paid on July 7, 1998 $ 314,208 $ -0-
The accompanying notes are an integral part of these financial statements. F-7 ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY SCHEDULE OF LOANS June 30, 1998
Maturity Number Interest Dates Balance Type of Loan of Loans Rates (In Months) Outstanding - ------------ -------- ----- ----------- ----------- New York City: Taxi medallion 99 8.25-12% 1 - 119 $18,862,618 Radio car service 49 1-15% 1 - 59 298,976 Chicago: Taxi medallion 415 12-16.5% 21 - 48 13,557,342 Boston: Taxi medallion 16 10-14% 33 - 89 990,086 Miami: Taxi medallion 30 13-16.5% 112 - 120 1,480,459 Other loans: Restaurant 2 10-12% 1 - 66 260,329 Hairdresser 2 12% 7 122,461 Car wash 1 11.5% 36 220,292 Ambulance service 1 10.5% 6 9,952 Bagel store 1 14% 43 29,614 Dry cleaner 13 10-14.5% 43 - 121 1,382,032 Laundromat 11 9-15% 24 - 72 1,751,619 Grocery/deli 3 12.5-13% 31 - 64 794,019 Financial services 1 14% 1 9,980 Black car service (real property) 1 12% 5 223,815 Auto sales 4 10.5-13% 1 - 49 856,942 Registered investment advisor 1 14% 97 169,012 Embroidery manufacturer 1 12% 59 96,000 Theater 1 16% 59 174,452 Retirement home 1 15% 84 300,000 ---- ----------- Total Loans Receivable 653 41,590,000 === Less: Allowance for Loan Losses (295,000) ----------- Loans Receivable, Net $41,295,000 ===========
The accompanying notes are an integral part of these financial statements. F-8 ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - Organization and Summary of Significant Accounting Policies Organization and Principal Business Activity Elk Associates Funding Corporation (the "Company"), a New York corporation, is licensed by the Small Business Administration ("SBA") to operate as a Small Business Investment Company ("SBIC") under the Small Business Investment Act of 1958, as amended. The Company has also registered as an investment company under the Investment Company Act of 1940. 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 12). Loans and the Allowance for Loans Losses Loans are stated at cost, net of participation with other lenders, less an allowance for possible losses. This amount represents the fair value of such loans as determined in good faith by the Board of Directors. The allowance for loan losses is maintained at a level that, in the Board of Directors' judgement, is adequate to absorb losses inherent in the portfolio. The allowance for loan losses is reviewed and adjusted periodically by the Board of Directors on the basis of available information, including the fair value of the collateral held, existing risk of individual credits, past loss experience, the volume, composition and growth of the portfolio, and current and projected economic conditions. Because of the inherent uncertainty in the estimation process, the estimated fair values of the loans may differ significantly from the values that would have been used had a ready market existed for such loans and the differences could be material. As of June 30, 1998 and 1997, approximately 85% 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 all of the Company's loans are collateral dependent, impairment is measured based on the fair value of the collateral. If the fair value of the impaired loan is less than the recorded investment in the loan (including accrued interest, net of deferred loan fees or costs, and unamortized premium or discount) the Company recognized an impairment by creating a valuation allowance with a corresponding charge to the provision for loan losses. The Company individually evaluates all loans for impairment. See Note 3 for further discussion. F-9 ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - Organization and Summary of Significant Accounting Policies, continued Loans Receivable Loans are placed on nonaccrual status once they become 180 days past due as to principal or interest. In addition, loans that are not fully collateralized and in the process of collection are placed on nonaccrual status when, in the judgement of management, the ultimate collectibility of interest and principal is doubtful. Cash and Cash Equivalents For the purposes of the statement of cash flows, the Company considers all short-term investments with an original maturity of three months or less to be cash equivalents. The Company has cash balances in banks in excess of the maximum amount insured by the FDIC as of June 30, 1998 and 1997. Income Taxes The Company has elected to be taxed as a Regulated Investment Company under the Internal Revenue Code. A Regulated Investment Company will generally not be taxed at the corporate level to the extent its income is distributed to its shareholders. In order to be taxed as a Regulated Investment Company, the Company must pay at least 90 percent of its net investment company taxable income to its shareholders as well as meet other requirements under the Code. In order to preserve this election for fiscal 1998, the Company intends to make the required distributions to its stockholders in accordance with applicable tax rules. Depreciation and Amortization Depreciation and amortization of furniture, fixtures and leasehold improvements is computed on the straight-line method at rates adequate to allocate the cost of applicable assets over their expected useful lives. Net Income per Share During the year ended June 30, 1998, the Company adopted the provision of Statements of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS No. 128"). SFAS No. 128 eliminates the presentation of primary and fully dilutive earnings per share ("EPS") and requires presentation of basic and diluted EPS. Basic EPS is computed by dividing income (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is based on the weighted-average number of shares of common stock and common stock equivalents outstanding at year end. Common stock equivalents have been excluded from the weighted-average shares for 1998 and 1997, as inclusion is anti-dilutive. All prior period EPS data has been restated to conform to the new pronouncement. F-10 ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - Organization and Summary of Significant Accounting Policies, continued Loan Costs Loan costs are included in prepaid expenses and other assets. Amortization of loan costs is computed on the straight-line method over ten (10) years. At June 30, 1998 and 1997, loan costs amounted to $153,786 and $178,241, respectively, net of accumulated amortization of $90,195 and $65,750, respectively. Amortization expense for the year ended June 30, 1998 and 1997 was $24,455 and $23,283, respectively. Assets Acquired in Satisfaction of Loans Assets acquired in satisfaction of loans are carried at estimated fair value less selling costs. Losses incurred at the time of foreclosure are charged to the allowance for loan losses. Subsequent reductions in estimated net realizable value are recorded as losses on assets acquired in satisfaction of loans. Interest Rate Cap At March 20, 1997, the Company was a party to one $5 million notional interest rate cap. This cap, which expires on March 20, 1999, was purchased by the Company to protect it from the impact of upward movements in interest rates related to its outstanding bank debt. The cap provided interest rate protection in the event that the three month LIBOR rate exceeded 6.75 percent. The premium paid for the purchase of this cap was amortized over its life as an adjustment of interest expense. Payments received under this cap would be credited to interest expense. 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. F-11 ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - Assets Acquired in Satisfaction of Loans During the years ended June 30, 1998 and 1997, the carrying value of Assets Acquired in Satisfaction of Loans increased by additions of approximately $26,000 and $141,000, respectively, and recoup on sales of assets previously sold of approximately $43,000 and -0-, respectively, and decreased by sales and cash payments of approximately $238,000 and $-0- and write-offs of approximately $13,000 and $-0-, respectively. Sales of assets acquired in satisfaction of loans for the years ended June 30, 1998 and 1997, included approximately $193,000 and $-0- of real estate and $45,000 and $-0- of radio car rights, respectively. Receivables from Debtors on Sales of Assets Acquired in Satisfaction of Loans represent loans to borrowers arising out of the sales of defaulted assets. Pursuant to an SBA regulation, these loans are presented separately in the accompanying consolidated balance sheets. NOTE 3 - Loans Receivable All loans on nonaccrual status have been classified as impaired. The Company recognizes interest income on a cash basis on these loans if the principal is fully secured. However, where there is doubt regarding the ultimate collectibility of the loan principal, cash receipts, whether designated as principal or interest, are applied to reduce the carrying value of the loan. The Company has loans totaling approximately $569,000 and $87,000 at June 30, 1998 and 1997, respectively, which are still accruing interest but are not performing according to the terms of the contract and accordingly these loans are impaired under SFAS 114 as amended by SFAS 118. At June 30, 1998 and 1997, approximately $546,000 and $41,000, respectively, of these loans were fully collateralized as to principal and interest. Interest income recorded during the years ended June 30, 1998 and 1997 totaled approximately $35,000 and $3,000, respectively, for such loans. The following table sets forth certain information concerning impaired loans as of June 30, 1998 and 1997: 1998 1997 -------- -------- Impaired loans with an allowance $174,952 $260,127 Impaired loans without an allowance 571,896 41,227 -------- -------- Total impaired loans $746,848 $301,354 ======== ======== Allowance for impaired loans $150,626 $178,000 ======== ======== Average balance of impaired loans $524,101 $497,521 ======== ======== F-12 ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - Loans Receivable, continued Transactions in the allowance for loan losses are summarized as follows: Balance, July 1, 1996 $301,000 Additions, net 24,000 -------- Balance, June 30, 1997 325,000 Write-off, net (30,000) -------- Balance, June 30, 1998 $295,000 ======== NOTE 4 - Equity Securities Equity securities consisted of the following as of June 30, 1998:
Chicago Miami Investment Dry Grocery Taxicab Taxicab Advisory Cleaner and Medallions Medallions Firm Company Market Total ---------- ---------- ---- ------- ------ ----- Balance, July 1, 1996 $200,900 -0- $20,000 $14,000 $ -0- $ 234,900 Purchase of securities 121,825 21,215 -0- -0- 100,000 243,040 Sale of securities -0- -0- -0- -0- (100,000) (100,000) Unrealized gain 58,241 -0- -0- -0- -0- 58,241 -------- ------- ------- ------- -------- --------- Balance, June 30, 1997 380,966 21,215 20,000 14,000 -0- 436,181 Purchase of securities 39,100 5,265 50,000 14,000 -0- 108,365 Sale of securities (50,936) (4,979) -0- -0- -0- (55,915) Unrealized gain 75,297 65,251 -0- -0- -0- 140,548 -------- ------- ------- ------- -------- -------- Balance, June 30, 1998 $444,427 $86,752 $70,000 $28,000 $ -0- $629,179 ======== ======= ======= ======= ======== ========
F-13 ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 - Equity Securities, continued At June 30, 1998, the fair value of the Chicago Taxicab Medallions and the Miami Taxicab Medallions was increased resulting in an unrealized gain. The fair value of the other equity securities approximated cost. At June 30, 1997, the fair value of the Chicago Taxicab Medallions was increased resulting in an unrealized gain. The fair value of the other equity securities approximated cost. NOTE 5 - Debentures Payable to SBA At June 30, 1998 and 1997 debentures payable to the SBA consist of subordinated debentures with interest payable semiannually, as follows:
Current 1998 1997 Effective Principal Principal Issue Date Due Date Interest Rate Amount Amount -------------- -------------- ------------- ---------- ---------- September 1993 September 2003 3.12(1) $1,500,000 $1,500,000 September 1993 September 2003 6.12 2,220,000 2,220,000 September 1994 September 2003 8.20 2,690,000 2,690,000 December 1995 December 2005 6.54 1,020,000 1,020,000 June 1996 June 2006 7.71 1,020,000 1,020,000 March 1997 March 2007 7.38(2) 430,000 430,000 ---------- ---------- $8,880,000 $8,880,000 ========== ==========
(1) Interest rate increases to 6.12% on September 30, 1998 (2) The Company is also required to pay an additional annual user fee of 1% on this debenture Under the terms of the subordinated debentures, the Company may not repurchase or retire any of its common stock or make any distributions to its stockholders other than dividends out of retained earnings (as computed in accordance with SBA regulations) without the prior written approval of the SBA. NOTE 6 - Notes Payable to Banks At June 30, 1998 and 1997, the Company had loan agreements with four banks for lines of credit aggregating $33,500,000 and $20,000,000, respectively. At June 30, 1998 and 1997, the Company had $22,085,000 and $16,820,000, respectively outstanding under these lines. The loans which mature at various dates through November 30, 1998 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. F-14 ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 - Notes Payable to Banks, continued 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 is required to maintain compensating balances of 5%. Prior to January, 1998 and for 1997, the Company was required to maintain 10% compensating balances with each bank. At June 30, 1998 and 1997, average compensating balances of $1,104,250 and $1,682,000, respectively, were maintained by the Company in accordance with these agreements. NOTE 7 - Preferred Stock At June 30, 1995, the Company had 547,271 shares of 3 percent preferred stock issued to the SBA. Cumulative dividends not declared or paid as of June 30, 1995 were approximately $533,000. During August 1995, the Company completed the repurchase of all such shares of preferred stock from the SBA pursuant to a preferred stock repurchase agreement dated November 10, 1994. Pursuant to this agreement, the Company repurchased all 547,271 shares of 3 percent cumulative preferred stock from the SBA for $3.50 per share, or an aggregate of $1,915,449. The repurchase price was at a substantial discount to the original issuance price of $10 per share. In connection with the repurchase, all dividends in arrears on the preferred shares were extinguished. As a condition precedent to the repurchase, the Company granted the SBA a liquidating interest in a newly established restricted capital surplus account. The surplus account is equal to the amount of the net repurchase discount. The initial value of the liquidating interest was $3,557,261 which is being amortized over a 60-month period on a straight-line basis. Should the Company be in default under the repurchase agreement at any time, the liquidating interest will become fixed at the level immediately preceding the event of default and will not decline further until such time as the default is cured or waived. The liquidating interest shall expire on (i) sixty months from the date of the repurchase agreement, or (ii) if any event of default has occurred and such default has been cured or waived, such later date on which the liquidating interest is fully amortized. Should the Company voluntarily or involuntarily liquidate prior to the amortization of the liquidating interest, any assets which are available, after the payment of all debts of the Company, shall be distributed first to the SBA until the fair market value of such assets is equal to the amount of the liquidating interest. Such payment, if any, would be prior in right to any payments made to the Company's shareholders. The remaining amount restricted under this agreement at June 30, 1998 and 1997 was approximately $968,000 and $1,680,000, respectively. F-15 ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 - Preferred Stock, continued 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. Accordingly, the Company does not anticipate being able to sell any of its authorized Series B Cumulative Preferred Stock in the future. NOTE 8 - Common Stock On June 22, 1998, the Company declared a cash dividend of $0.18 per common share, or a total of $314,208, and paid July 7, 1998. During 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. NOTE 9 - Income Taxes The provision for income taxes for the years ended June 30, 1998 and 1997 consists of the following: 1998 1997 ------- ------ Federal (benefit) $(1,014) $ 4,568 State and city 4,285 24,108 ------- ------- $ 3,271 $28,676 ===== ======= NOTE 10 - Related Party Transactions The Company paid $43,234 and $43,645 to a related law firm for the years ended June 30, 1998 and 1997, respectively, for the services provided. The Company generally charges its borrowers loan origination fees to generate income to offset expenses incurred by the Company for legal fees paid by the company for loan closing costs. The Company rents office space on a month-to-month basis from an affiliated entity without a formal lease agreement. Rent expense amounted to $39,600 for both the years ended June 30, 1998 and 1997. F-16 ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11 - Commitments On June 8, 1998, the Company entered into a $10,000,000 interest rate Swap transaction with a bank. This Swap transaction was entered into to protect the Company from an upward movement in interest rates relating to outstanding bank debt. The Swap transaction calls for a fixed rate of 5.86% for the Company and if the floating one month LIBOR rate is below the fixed rate then the Company is obligated to pay the bank for the difference in rates. When the one month LIBOR rate is above the fixed rate then the bank is obligated to pay the Company for the differences in rates. This transaction expires on June 8, 2001. At June 30, 1998 and 1997, the Company had commitments to make loans totaling $2,568,000 and $1,190,282, respectively, at interest rates ranging from 9.5% to 16%. NOTE 12 - Regulatory Matters The Company entered into an agreement with the SBA, subject to certain regulatory limitations, on September 9, 1993. As part of the agreement, the Company agreed to limit the aggregate amount of its senior indebtedness, consisting of bank debt and the SBA debentures, to certain specific levels based upon performing assets; the Company agreed to grant the SBA a subordinate lien on the Company's assets and to have the Company's notes maintained by a separate custodian; and the Company agreed to provide periodic financial reports to the SBA on a quarterly basis. Effective February 21, 1997, the SBA approved the Company's election to provide non-disadvantaged business financing to small business concerns pursuant to SBA regulations and letter of agreement with the Company, subject to amending the Company's certificate of incorporation to make such financings. The Company's stockholders approved the amendment to the certificate of incorporation, which amendment was filed on February 27, 1997 (see Note 1). NOTE 13 - 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. F-17 ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13 - Fair Value of Financial Instruments, continued The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Loans Receivable - The fair value of loans is estimated at cost net of the allowance for loan losses. The Company believes that the rates of these loans approximate current market rates (see Note 3). Equity Securities - The Company's equity securities consist of investments in corporations who own and operate Chicago Taxicab Medallions (71%), two investment advisory firms (11%), a dry cleaner (4%), and Miami Taxicab Medallions (14%) (see Note 4). Debentures Payable to Small Business Administration - The fair value of debentures as of June 30, 1998 was approximately $9,035,000 and was estimated by discounting the expected future cash flows using the current rate at which the SBA has extended similar debentures to the Company (see Note 5). The fair value of financial instruments that are short-term or reprice frequently and have a history of negligible credit losses is considered to approximate their carrying value. Those instruments include balances recorded in the following captions: 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 14 - Defined Contribution Plan On April 15, 1996 the Company adopted a simplified employee pension plan covering all eligible employees of the Company. Contributions to the plan are at the discretion of the Board of Directors. During the years ended June 30, 1998 and 1997, contributions amounted to $63,435 and $58,805, respectively. F-18 AMERITRANS CAPITAL CORPORATION Form N-14 Part C. Other Information Item 15. Indemnification. The Certificate of Incorporation of Ameritrans Capital Corporation ("Ameritrans") includes a provision (the "Liability Provision"), authorized under Section 102(b)(7) of the Delaware General Corporation Law, which eliminates, to the extent permitted by the Delaware General Corporation Law and the Investment Company Act of 1940 (the "1940 Act"), the personal liability of a director to Ameritrans or its stockholders for monetary damages resulting from the breach of his fiduciary duty as a director. Under the Delaware General Corporation Law, this provision may not be construed to eliminate or limit a director's liability for any of the following: breaches of the director's duty of loyalty to the corporation or its stockholders; acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; payment of a dividend or approval of a stock repurchase which is unlawful under Section 174 of the Delaware General Corporation Law; and transactions from which the director derives an improper personal benefit. In addition, under the 1940 Act, this provision may not be construed to protect a director against liability to the corporation or its stockholders for acts or omissions involving willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. The Liability Provision precludes actions for monetary damages against directors of Ameritrans only with respect to certain violations of a director's duty of care. Under the Delaware General Corporation Law, absent this provision, directors could be held liable for negligence in the performance of their duty of care. The Liability Provision absolves directors of Ameritrans of monetary liability to Ameritrans and its stockholders for negligence in exercising their business judgment. A stockholder can prosecute an action against a director for monetary damages only if he can show a breach of the duty of loyalty, gross negligence or reckless disregard of his duties, a failure to act in good faith, intentional misconduct or willful misfeasance, a knowing violation of the law, an unlawful dividend or stock repurchase, or an improper personal benefit. The Liability Provision does not affect the ability of Ameritrans or its stockholders to seek equitable remedies (such as an injunction or rescission) against a director for breach of his fiduciary duty and does not limit the liability of directors under other laws, such as the federal securities laws. The Liability Provision also does not limit the liability of officers or employees of Ameritrans or any director acting in his capacity as an officer or employee of Ameritrans. In addition, Ameritrans' By-Laws also includes a provision (the "Indemnification Provision") that requires Ameritrans to indemnify its directors and officers, to the maximum extent permitted by the Delaware General Corporation Law and by the 1940 Act, against liabilities and damages incurred in their capacity as directors or officers of Ameritrans. Under the Delaware General Corporation Law, a director or officer of a corporation (i) shall be indemnified by the corporation for all expenses of litigation or other legal proceedings brought against him by virtue of his position as a director or officer to the extent he is successful, on the merits or otherwise, in such litigation or proceeding, (ii) may be indemnified by the corporation for the expenses, judgments, fines, and amounts paid in settlement of such litigation or proceedings (other than an action by or in the right of a corporation, which is hereinafter referred to as a "derivative action"), even if he is not successful, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation (and, in the case of a criminal proceeding, had no reason to believe that his conduct was unlawful), (iii) may be indemnified by the corporation for expenses of a derivative action, even if he is not successful, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, provided that indemnification may not be made in the case of a derivative action if the director or officer is adjudged to be liable to the corporation, unless a court determines that, despite such adjudication but in view of all the circumstances, he is entitled to indemnification of such expenses, only upon the determination, by (a) a majority of directors who are not a party to the action (even though less than a quorum), (b) by a committee of such directors designated by a majority of such disinterested directors, (c) under certain circumstances, independent legal counsel in a written opinion, or (d) the stockholders, that indemnification is proper because the applicable standard of conduct has been met. Expenses incurred by a director or officer in defending an action may be advanced by the corporation prior to the final disposition of such action upon receipt of an undertaking by such director or officer to repay such expenses if it is ultimately determined that he is not entitled to be indemnified in connection with the proceeding to which the expenses relate. These provisions of the Delaware General Corporation Law, by their terms, are not exclusive of any other rights to which those seeking indemnification or advances of expenses may be entitled under any by-law, agreement, vote of stockholders or disinterested directors, or otherwise. The 1940 Act prohibits the inclusion in Ameritrans' Certificate of Incorporation or certain other organizational instruments of Ameritrans of a provision which purports to protect any director or officer of Ameritrans against liability to Ameritrans or its stockholders for willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his office. Accordingly, the Indemnification Provision specifically provides that indemnification shall only be made to the extent permitted by the 1940 Act. Ameritrans has entered into an indemnity agreement (the "Indemnity Agreement") with each of its directors and officers. The Indemnity Agreement clarifies or modifies the indemnification provisions of the Delaware General Corporation Law as follows: (i) the Indemnity Agreement establishes the presumption that the director or officer has met the applicable standard of conduct required for indemnification and provides that prompt indemnification shall be made unless a determination is made by a majority of Ameritrans disinterested directors, independent counsel, or a majority of Ameritrans' stockholders that the director or officer has not met the applicable standard of conduct; (ii) if the disinterested directors determine that the director or officer has not met the applicable standard of conduct, the Indemnity Agreement permits the director or officer to petition a court for an independent determination of whether such officer or director is entitled to indemnification under the Indemnity Agreement; (iii) the Indemnity Agreement provides that expenses shall be promptly advanced to a director or officer upon receipt of an undertaking by him to repay amounts so advanced if it is ultimately determined that indemnification of such expenses is not permissible, provided that either (a) such director or officer shall have provided appropriate security for such undertaking, (b) Ameritrans shall be insured against losses arising from any such advance payments, or (c) either a majority of the disinterested directors (even though less than a quorum), a committee of such directors designated by such disinterested directors, or independent legal counsel in a written opinion shall have determined, based upon a review of readily available facts, that there is reason to believe that such director or officer will be found entitled to indemnification; (iv) the Indemnity Agreement specifically provides that the indemnification provisions applicable to a derivative suit cover amounts paid in settlement; and (v) the Indemnity Agreement specifically permits partial indemnification to be made in the event that the director or officer is not entitled to full indemnification. C-2 Ameritrans may in the future elect to purchase directors' and officers' liability insurance, as is permitted by the Delaware General Corporation Law. Insofar as indemnification for liability arising under the Securities Act of 1933 (the "1933 Act") may be permitted to directors, officers, and controlling persons of the registrant pursuant to the foregoing provisions or, otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit, or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the 1933 Act and will be governed by the final adjudication of such issue. Item 16. Exhibits. 1.1 Certificate of Incorporation of Ameritrans. 2.1 By-laws of Ameritrans. 4.1 Agreement and Plan of Share Exchange between Ameritrans and Elk Associates Funding Corporation (included as Exhibit A to the Proxy Statement/Prospectus included as a part of this Registration Statement). 5.1 Specimen certificate for shares of Ameritrans common stock.* 8.1 Employee Stock Option Plan. 8.2 Non-Employee Director Stock Option Plan. 11.1 Opinion of Stursberg & Veith.* 13.1 Form of indemnity agreement between Ameritrans and each of its directors and officers. 14.1 Consent of Marcum and Kliegman, LLP. 14.3 Consent of Stursberg & Veith -- contained in their opinion. 16 Power of Attorney -- contained on signature page. - ---------- * To be filed by amendment. Item 17. Undertakings. 1. The undersigned registrant agrees that prior to any public reoffering of the securities registered through the use of a prospectus which is a part of this registration statement by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c) of the 1933 Act, the reoffering prospectus will contain the information called for by the C-3 applicable registration form for reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. 2. The undersigned registrant agrees that every prospectus that is filed under paragraph (1) above will be filed as a part of an amendment to the registration statement and will not be used until the amendment is effective, and that, in determining any liability under the 1933 Act, each post-effective amendment shall be deemed to be a new registration statement for the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering of them. C-4 SIGNATURES As required by the Securities Act of 1933, this Registration Statement has been signed on behalf of the registrant in the City of New York and State of New York on the 22nd day of September, 1998. AMERITRANS CAPITAL CORPORATION By: Gary C. Granoff -------------------------------- Gary C. Granoff, President As required by the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. Know all men by these presents, that each of the undersigned constitutes and appoints Gary C. Granoff, as his true and lawful attorney-in-fact and agent, with full power of substitution, for him, and in his name, place, and stead, in any and all capacities, to sign any and all amendments, including post-effective amendments, to this registration statement or any registration statement relating to the offering to which this registration statement relates that is effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933 and any post-effective amendments thereto, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute, may lawfully do or cause to be done by virtue hereof.
Signature Title Date - --------- ----- ---- Gary C. Granoff President and Chairman of the September 22, 1998 - ----------------------------- Board of Directors Gary C. Granoff Ellen M. Walker Vice President, General Counsel September 22, 1998 - ----------------------------- and Director Ellen M. Walker Lee A. Forlenza Vice President and Director September 22, 1998 - ----------------------------- Lee A. Forlenza Marvin Sabesan Director September 22, 1998 - ----------------------------- Marvin Sabesan Director Steven Etra Director September 22, 1998 - ----------------------------- Steven Etra Paul Creditor Director September 22, 1998 - ----------------------------- Paul Creditor Allen Kaplan Director September 22, 1998 - ----------------------------- Allen Kaplan John L. Acierno Director September 22, 1998 - ----------------------------- John L. Acierno
C-5 EXHIBIT INDEX Exhibit Number Exhibit Page ------ ------- ---- 1.1 Certificate of Incorporation of Ameritrans. 2.1 By-laws of Ameritrans. 4.1 Agreement and Plan of Share Exchange between Ameritrans and Elk Associates Funding Corporation (included as Exhibit A to the Proxy Statement/Prospectus included as a part of this Registration Statement). 5.1 Specimen certificate for shares of Ameritrans common stock.* 8.1 Employee Stock Option Plan. 8.2 Non-Employee Director Stock Option Plan. 11.1 Opinion of Stursberg & Veith.* 13.1 Form of indemnity agreement between Ameritrans and each of its directors and officers. 14.1 Consent of Marcum and Kliegman, LLP. 14.3 Consent of Stursberg & Veith -- contained in their opinion. 16. Power of Attorney -- contained on signature page. - --------- * To be filed by amendment. EX-1.1 2 CERTIFICATE OF INCORPORATION Exhibit 1.1 Ameritrans Capital Corporation (a Delaware corporation) ARTICLE I NAME The name of the corporation (the "Corporation") shall be: Ameritrans Capital Corporation ARTICLE II DURATION The Corporation shall continue in existence perpetually unless sooner dissolved according to law. ARTICLE III PURPOSES The purposes for which the Corporation is organized are: To acquire, develop, or engage in any business venture or enterprise whatsoever; to own and operate any business venture or enterprise whatsoever; to acquire, hold, and dispose of real or personal property and property of any kind or nature, tangible or intangible; and generally to do any act convenient to the foregoing; To do all and everything necessary, suitable, convenient, or proper for the accomplishment of any of the purposes or the attainment of any one or more of the objects herein enumerated or incidental to the powers herein named or which shall at any time appear conducive or expedient for the protection or benefit of the Corporation, with all the powers hereafter conferred by the laws under which this Corporation is organized; and To engage in any and all other lawful purposes, activities, and pursuits, whether similar or dissimilar to the foregoing, for which corporations may be organized under the General Corporation Law of Delaware, and to exercise all powers allowed or permitted thereunder. ARTICLE IV AUTHORIZED SHARES The Corporation shall have authority to issue an aggregate of 6,000,000 shares, of which 5,000,000 shares shall be Common Stock par value $.0001 per share and 1,000,000 shall be Preferred Stock par value $.01 per share. No holder of shares of any class of the Corporation or of any security or obligation convertible into, or of any warrant, option, or right to purchase, subscribe for, or otherwise acquire shares of any class of the Corporation, whether now or hereafter authorized, shall, as such holder, have any preemptive right whatsoever to purchase, subscribe for, or otherwise acquire shares of any class of the Corporation, whether now or hereafter authorized. The following is a statement of the designations and the powers, preferences, and rights, and the relative participating, optional, or other special rights, and the qualifications, limitations, and restrictions of the shares of each class: i. Except as any provision of law, any provision herein or elsewhere in the Certificate of Incorporation may otherwise provide, each share of Common Stock of the Corporation shall have the same rights, privileges, interests and attributes, and shall be subject to the same limitations, as every other share of the Corporation and shall entitle the holder of record of any such issued and outstanding share to receive an equal proportion of any cash dividends which may be declared, set apart or paid, an equal proportion of any distributions of the authorized but unissued shares of the Corporation and/or its treasury shares, if any, which may be made, an equal proportion of the distribution of any bonds or property of the Corporation, including the shares or bonds of other corporations, which may be made, and an equal proportion of any distributions of the net assets of the Corporation (whether stated capital or surplus) which may be made upon the liquidation, dissolution, or winding up of the affairs of the Corporation, whether voluntary or involuntary; provided, that any distributions of the authorized but unissued shares of the Corporation and/or its treasury shares, if any, shall be made only in respect of shares of the same class, and, provided further, that no statement herein contained shall be deemed to limit, curtail, or divest the authority of the Board of Directors of the Corporation to make any proper distributions, including distributions of authorized but unissued shares, in relation to its treasury shares, if any. Each issued and outstanding share of Common Stock shall entitle the holder of record thereof to one vote per share. ii. Preferred Stock may be issued from time to time in one or more series, each of such series to have such designations, relative rights and limitations as may be fixed in the resolution or resolutions providing for the issue of such series adopted by the Board of Directors of the Corporation as hereinafter provided. Any shares of Preferred Stock which may be redeemed, purchased or acquired by the Corporation may be reissued except as otherwise provided herein or by law. Different series of Preferred Stock shall not be construed to constitute different classes of shares for the purposes of voting by classes unless expressly provided for in the resolutions creating such series or required by applicable law. Authority is hereby expressly granted to the Board of Directors from time to time to issue the Preferred Stock in one or more series, and in connection with the creation of any such series, by resolution or resolutions providing for the issuance of the shares thereof, to determine and fix such voting powers, full or limited, or no voting powers, and such designations, preferences and relative participating, optional or other special rights, and qualifications, limitations or restrictions thereof -2- including, without limitation, dividend rights, conversion rights, redemption privileges and liquidation preferences, as shall be stated and expressed in such resolutions, all to the fullest extent now or hereafter permitted by the General Corporation Law of the State of Delaware. Without limiting the generality of the foregoing, the resolutions providing for issuance of any series of Preferred Stock may provide that such series shall be superior or rank equally or be junior to the Preferred Stock of any other series to the extent permitted by law. ARTICLE V LIMITATION OF LIABILITY A director of the Corporation shall have no personal liability to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except (i) for any breach of a director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under section 174 of the General Corporation Law of Delaware, as it may from time to time be amended or any successor provision thereto, or (iv) for any transaction from which a director derived an improper personal benefit. ARTICLE VI REGISTERED OFFICE AND REGISTERED AGENT The name and address of the Corporation's registered agent and office in the state of Delaware is United Corporate Services, Inc., 15 East North Street, Dover, County of Kent, 19903. Either the registered office or the registered agent may be changed in the manner provided by law. ARTICLE VII AMENDMENT The Corporation reserves the right to amend, alter, change, or repeal all or any portion of the provisions contained in its Certificate of Incorporation from time to time in accordance with the laws of the state of Delaware, and all rights conferred on stockholders herein are granted subject to this reservation. ARTICLE VIII BUSINESS COMBINATIONS WITH INTERESTED STOCKHOLDERS The Corporation elects not to be governed by the provisions of section 203 of the General Corporation Law regarding business combinations with interested shareholders. ARTICLE IX ADOPTION AND AMENDMENT OF BYLAWS The initial bylaws of the Corporation shall be adopted by the board of directors. The power to alter, amend, or repeal the bylaws or adopt new bylaws shall be vested in the board of directors, but the -3- stockholders of the Corporation may also alter, amend, or repeal the bylaws or adopt new bylaws. The bylaws may contain any provisions for the regulation or management of the affairs of the Corporation not inconsistent with the laws of the state of Delaware now or hereafter existing. ARTICLE X DIRECTORS The governing board of the Corporation shall be known as the board of directors. The number of directors comprising the board of directors shall be fixed, and may be increased or decreased from time to time, in the manner provided in the bylaws of the Corporation. ARTICLE XI The name and address of the sole incorporator is as follows: Paula S. Zimmerman c/o Stursberg & Veith 405 Lexington Avenue Suite 4949 New York, New York 10174-4902 THE UNDERSIGNED, being the sole incorporator hereinbefore named, for the purpose of forming a corporation pursuant to the General Corporation Law of the State of Delaware does make this certificate, hereby declaring and certifying that this is her act and deed and the facts herein stated are true, and accordingly has hereunto set her hand this 12th day of February, 1998. /S/ Paula S. Zimmerman ------------------------------ Paula S. Zimmerman -4- EX-2.1 3 BY-LAWS OF AMERITRANS CAPITAL CORPORATION Exhibit 2.1 BY-LAWS of AMERITRANS CAPITAL CORPORATION ARTICLE I Offices 1. The corporation may have offices at such places within or without the State of Delaware as the board of directors may from time to time determine or as the business of the corporation may require. ARTICLE II Stockholders' Meetings 1. Place of all meetings. All meetings of stockholders shall be held at such place or places in or outside of the State of Delaware as the board of directors may from time to time determine or as may be designated in the notice of meeting or waiver of notice thereof, subject to any provisions of the laws of Delaware. 2. Annual meeting of stockholders. The annual meeting of stockholders shall be held each year on the first Friday in the fourth month following the close of the fiscal year commencing at some time between 10 a.m. and 3 p.m. if not a legal holiday, and if a legal holiday, then on the day following at the same time. In the event that such an annual meeting is not held as herein provided for, the annual meeting may be held as soon thereafter as convenient. Such subsequent meeting shall be called in the same manner as hereinafter provided for special meetings of stockholders. Written notice of the time and place of the annual meeting shall be given by mail to each stockholder entitled to vote at least ten days prior to the date thereof, unless waived as provided by Article IX of these By-laws. 3. Special meetings of stockholders. Special meetings of stockholders may be called at any time by order of the board of directors or the executive committee and shall be called by the president or secretary at the written request of the holders of 25% of the shares of stock then outstanding and entitled to vote, stating the purpose or purposes thereof. Notice of all such meetings of the stockholders, stating the time, place, and the purposes thereof shall be given by mail as soon as possible to each stockholder entitled to vote thereat at his last known address or by delivering the same personally at least ten days before the meeting. Meetings of the stockholders may be held at any time without notice when all the stockholders entitled to vote thereat are represented in person or by proxy. 4. Voting at stockholder's meetings. At all meetings of the stockholder's, each stockholder entitled to vote for each share of stock standing on record in his name, subject to any restrictions or qualifications set forth in the Certificate of Incorporation or any amendment thereto. 5. Quorum at stockholder's meetings. At any stockholders' meeting, a majority of the stock outstanding and entitled to vote thereat represented in person or by proxy shall constitute a quorum. Whether or not a quorum is present the meeting may be adjourned from time to time by a vote of the holders of a majority of the shares present. At any such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting if held at the time specified in the notice thereof. When a quorum is present at any meeting, a majority in interest of the stock entitled to vote represented thereat shall decide any question brought before such meeting unless the question is one upon which, by express provision of law or of the Certificate of Incorporation or of these By-laws, a different vote is required, in which case such express provision shall govern. 6. List of stockholders to be filed, etc. At least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the election, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder, shall be prepared by the secretary. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the City where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The original or duplicate stock ledger shall be the only evidence as to who are the stockholders entitled to examine such list or the books of this corporation or to vote in person or by proxy at such meeting. ARTICLE III Board of Directors 1. Number and qualification. A board of directors shall be elected at each annual meeting of stockholders, or at a special meeting held in lieu thereof as above provided. Each of the directors shall hold office until the annual meeting next after his election and until his successor shall be elected and shall qualify, or until his death in office or his earlier resignation or removal in the manner hereinafter provided. The number of directors shall be such as may be determined by the incorporators or from time to time by the stockholders or by the board of directors. In case of any increase in the number of directors between elections by the stockholders, the additional directorships shall be considered vacancies and shall be filled in the manner prescribed in Article V of these By-laws. Directors need not be stockholders. 2. Powers of directors. The business and affairs of the corporation shall be managed by or under the direction of the board of directors which may exercise all the powers possessed by the corporation itself and do all such lawful acts and things as are not inconsistent with the laws of the State of Delaware, with the Certificate of Incorporation, or with these By-laws. The board of directors shall have authority from time to time to set apart out of any assets of the corporation otherwise available for dividends a reserve or reserves of working capital, or for any such proper purpose or purposes, and to abolish or add to any such reserve or reserves from time to time as the board may deem to be in the interests of the corporation; and the board shall likewise have power, subject to the provisions of the Certificate of Incorporation, to determine in its discretion what part of the earned surplus and/or net assets of the corporation in excess of such reserve or reserves shall be declared in dividends and paid to the stockholders of the corporation. -2- 3. Compensation of directors. The board of directors may from time to time by resolution authorize the payment of fees or compensation, to the directors for services as such to the corporation, including, but not limited to, fees and traveling expenses for attendance at all meetings of the board or of the executive or other committees, and determine the amount of such fees and compensation. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity and receiving compensation therefor. 4. Directors' meetings. Meetings of the board of directors may be held either within or outside the State of Delaware. A quorum shall be a majority of directors. The board of directors elected at any stockholders' meeting shall at the close of that meeting, without further notice if a quorum of directors be then present, or as soon thereafter as may be convenient, hold a meeting for the election of officers and the transaction of any other business. At such meeting they shall elect a president, one or more vice presidents, a secretary and a treasurer, and such other officers as they may deem proper, none of whom except the president need be members of the board of directors. The board of directors may from time to time provide for the holding of regular meetings with or without notice and may fix the times and places at which such meetings are to be held. Meetings other than regular meetings may be called at any time by the president and must be called by the president or by the secretary upon the written request of any director or a majority of the executive committee. Notice of each meeting, other than a regular meeting (unless required by the board of directors), shall be given to each director by mailing the same to each director at his residence or business address at least two days before the meeting or by delivering the same to him personally or by telephone or telegraph to him at least one day before the meeting unless, in case of exigency, the president or secretary shall prescribe a shorter notice to be given personally or by telephone, telegraph, facsimile transmission, cable or wireless to all or any one or more of the directors at their respective residences or places of business. Notice of all meetings shall state the time and place of such meeting, but need not state the purposes thereof unless otherwise required by statute, the Certificate of Incorporation, the By-laws, of the board of directors. 5. Manner of Acting. Except as herein otherwise provided, and except as otherwise provided by the General Corporation Law, the act of the Board shall be the act by vote of a majority of the directors present at a meeting, a quorum being present. The quorum and voting provisions herein stated shall not be construed as conflicting with any provisions herein of the General Corporation Law and these By-Laws which govern a meeting of directors to be held to fill vacancies and newly created directorships in the Board. 6. Executive committee. The board of directors may provide for an executive committee of two or more directors and shall elect the members thereof to serve at the pleasure of the board and may designate one of such members to act as chairman. The board shall have the power at any time to change the membership of the committee, to fill vacancies in it, or to dissolve it. During the intervals between the meetings of the board of directors, the executive committee shall possess and may exercise any or all of the powers of the board of directors in the management of the -3- business and affairs of the corporation to the extent authorized by resolution adopted by a majority of the entire board of directors. The executive committee may determine its rules or procedure and notice to be given of its meetings, and it may appoint such committees and assistants as it shall from time to time deem necessary. A majority of the members of the committee shall constitute a quorum. 7. Other committees. The board of directors by resolution may provide for such other standing or special committees as it deems desirable and may discontinue the same at its pleasure. Each such committee shall have the powers and perform such duties, not inconsistent with law, as may be assigned to it by the board of directors. 8. Notice of Nominations. (a) Nominations for the election of directors may be made by the board of directors or by any stockholder entitled to vote for the election of directors. Such nominations shall be made by notice in writing, delivered or mailed by first class United States mail, postage prepaid, to the secretary of the corporation not less than 14 days nor more than 50 days prior to any meeting of the stockholders called for election of directors; provided, however, that if less than 21 days' notice of the meeting is given to stockholders, such written notice shall be delivered or mailed, as prescribed, to the secretary of the corporation not later than the close of the seventh day following the day on which notice of the meeting was mailed to the stockholders. Notice of nominations which are proposed by the board of directors shall be given by the Chairman on behalf of the board. (b) Each notice under subsection (a) shall set forth (i) the name, age, business address and, if known, residence address of each nominee proposed in such notice, (ii) the principal occupation or employment of each such nominee and (iii) the number of shares of stock of the corporation which are beneficially owned by each such nominee. (c) The Chairman of the meeting may, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure and if he shall so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. 9. Chairman of the Board. The Chairman of the Board (hereinafter sometimes called the "Chairman") if appointed by the board of directors, when present shall preside at all meetings of the stockholders, the board of directors and the Executive Committee. The Chairman shall perform such other duties as the board of directors or Executive Committee may prescribe from time to time. ARTICLE IV Officers 1. Titles and election. The officers of this corporation shall be a president, one or more vice presidents, a secretary and a treasurer who shall be elected at the annual meeting of the board of directors. Each of the officers shall hold office until the next annual meeting after his election and until his successor shall be elected and shall qualify, or until his death in office or earlier resignation or removal in the manner herein specified. Any person may hold more than one office if the duties thereof can be consistently performed by the same person, and to the extent permitted by law. The board of directors, in its discretion, may at any time elect or appoint a chairman of the board of directors, who shall be a director, and one or more vice presidents, assistant secretaries and assistant treasurers and such other officers or agents as it may deem advisable, all of whom shall hold office at -4- the pleasure of the board and shall have such authority and shall perform such duties as the board shall prescribe from time to time. The board of directors may require any officer, agent or employee to give bond for the faithful performance of this duties in such form and with such sureties as the board may require. 2. Duties. Subject to such extension, limitations, and other provisions as the board of directors or the By-laws may from time to time prescribe, the following officers shall have the following powers and duties: (a) President. The president shall be the chief executive officer of the corporation and shall have the general supervision of the business, affairs and property of the corporation and over its officers subject to the control of the board of directors and Executive Committee. In the absence or inability to act of the Chairman, the president shall preside at all meetings of the stockholders and the board of directors and shall have and perform all the powers and duties of the Chairman, subject to the control of the board of directors and Executive Committee. The president or a vice president, unless some other person is authorized by the board of directors or Executive Committee, shall sign all certificates representing shares of stock of the corporation and all bonds, deeds and contracts of the corporation. In general, the president shall exercise the powers and authority and perform all of the duties commonly incident to the office of president and shall have such other powers and perform such other duties as may be assigned to him from time to time by the board of directors or Executive Committee. The same individual may be elected or appointed Chairman of the Board and President. (b) Vice President. The vice president or vice presidents shall perform such duties as may be assigned to them by the board of directors and, in the absence or disability of the president, the vice presidents in order of seniority shall exercise all powers and duties pertaining to the office of the president. (c) Secretary. The secretary shall keep the minutes of all meetings of stockholders and of the board of directors, give and serve all notices, attend to such correspondence as may be assigned to him, keep in safe custody the seal of the corporation, and affix such seal to all such instruments properly executed as may require it, and shall have such other duties and powers as the board of directors shall prescribe from time to time. (d) Treasurer. Subject to the direction of the Vice President-Finance, if any, the treasurer, in all cases subject to the direction of the board of directors, shall have the care and custody of the monies, funds, valuable papers and documents of the corporation (other than his own bond, if any, which shall be in the custody of the president), and shall have and exercise, under the supervision of the board of directors, all the powers and duties commonly incident to his office. He shall deposit all funds of the corporation in such bank or banks, trust company or trust companies, or with such firm or firms doing a banking business as the board of directors shall designate. He may endorse for deposit of collection all checks, notes, etc. payable to the corporation or to its order. He shall keep accurate books of account of the corporation's transactions, which shall be the property of the corporation, and, together with all its property in his possession, shall be subject at all times to the inspection and control of the board of directors. He shall do and perform such other duties as may from time to time be assigned to him by the Vice President-Finance. The treasurer shall be subject in every way to the order of the board of directors and/or the president of the corporation, whenever they may require it, an account of all his transactions and of the financial condition of the corporation. -5- 3. Delegation of authority. The board of directors or the Executive Committee may at any time delegate the powers and duties of any officer for the time being to any other officer, director or employee. 4. Salaries. The salaries of all officers shall be fixed by the board of directors or the Executive Committee, and the fact that any officer is a director shall not preclude him from receiving a salary or from voting upon the resolution providing the same. ARTICLE V Resignation, Removals and Vacancies 1. Resignation. Any director, officer, or agent may resign at any time by giving written notice thereof to the board of directors, the president, or the secretary. Any such resignation shall take effect at the time specified therein or, if the time be not specified, upon receipt thereof; and unless otherwise specified therein, the acceptance of any resignation shall not be necessary to make it effective. 2. Removals. The holders of the Common and Preferred Stock, voting together as one class, at any meeting called for such purpose may, by vote of the majority of the issued and outstanding shares of the Common and Preferred Stock entitled to vote, remove from office, with or without cause, any director elected by such Stockholders, and elect his successor. Directors who are elected solely by the holders of a Class of Preferred Stock, by vote of the majority of the issued and outstanding shares of such class of Preferred Stock, remove from office, with or without cause, any such director, and elect his successor. The board of directors, by a majority vote of the total number of directors at a meeting called for such purpose, may remove from office any officer of the corporation with or without cause. The board may delegate the powers and duties for the time being of any officer to any other officer or to any director. 3. Vacancies. When the office of any director or officer becomes vacant, whether by reason of increase in the number of directors or otherwise, the remaining director or directors, although less than a quorum, may elect a successor for such office who shall hold the same for the unexpired term, or the directors may reduce their number by the number of such vacancies in the board provided such reduction shall not reduce the board to less than one. ARTICLE VI Capital Stock 1. Certificates of stock. Every stockholder shall be entitled to a certificate or certificates for shares of the capital stock of the corporation in such form as may be prescribed by the board of directors, duly numbered setting forth the number and kind of shares represented thereby. Such certificates shall be signed by the president or a vice president and by the treasurer or an assistant treasurer or by the secretary or an assistant secretary. Any of such signatures and the corporate seal affixed to any stock certificate may be in facsimile. In case any officer who has signed, or whose facsimile signature has been used on a certificate has ceased to be an officer before the certificate has been delivered, such certificate may nevertheless be adopted and issued and delivered by the corporation, or its transfer agent, as though the officer who -6- signed such certificate or certificates, or whose facsimile signature or signatures shall have been used thereon, had not ceased to be such officer of the corporation. 2. Transfer of stock. Shares of the capital stock of the corporation shall be transferable only upon the books of the corporation by the holder in person or by attorney duly authorized and upon the surrender of the certificate or certificates properly assigned and endorsed. If the corporation has a transfer agent or agents or transfer clerk and registrar of transfers acting on its behalf, the signature of any office or representative thereof may be in facsimile. The board of directors may appoint a transfer agent and one or more co-transfer agents and a registrar of transfer and may make all such rules and regulations as it deems expedient concerning the issue, transfer and registration of shares of stock. 3. Transfer books. The board of directors may fix a date, not exceeding sixty days preceding the date of any meeting of stockholders, or the date for the payment of any dividend, or the date for the allotment of rights, or the date when any change or conversion or exchange of capital stock shall come into effect,as a record date for the determination of the stockholders entitled to notice of and to vote at any such meeting, or entitled to receive payment of any such dividend, or any such allotment of rights, or to exercise the rights in respect to any such change, conversion or exchange of capital stock, and in such case only stockholders of record on the date so fixed shall be entitled to such notice of and vote at such meeting or to receive payment of such dividend, or allotment of rights, or exercise such rights, as the case ma be, notwithstanding any transfer of any stock on the books of the corporation after any such record date fixed as aforesaid. The record date shall not precede the date upon which the resolution fixing the record date is adopted. 4. Lost certificates. In case of loss or mutilation or theft or destruction of a certificate of stock of this corporation, a duplicate certificate may be issued upon such terms as the board of directors may determine. ARTICLE VII Fiscal Year, Bank Deposits, Checks, etc. 1. Fiscal year. The fiscal year of the corporation will commence on the first day of January of each year or at such other time as the board of directors may designate. 2. Bank deposits, checks, etc. The funds of the corporation shall be deposited in the name of the corporation in such banks or trust companies as the board of directors may from time to time designate. All checks, drafts, notes or other obligations for the payment of money shall be signed by such persons as the board of directors may from time to time by resolution may direct or authorize. -7- ARTICLE VIII Books and Records 1. Place of keeping books. Unless otherwise expressly required by the laws of Delaware, the books and records of this corporation may be kept outside of the State of Delaware at such place or places as may be designated from time to time by the board of directors. 2. Examination of books. Except as otherwise provided in the Certificate of Incorporation or in these By-laws, the board of directors shall have the power to determine from time to time whether and to what extent and at what times and places and under what conditions and regulations the accounts, records and books of this corporation, or any of them, shall be open to the inspection of the stockholders, and no stockholder shall have any right to inspect any account or book or document of this corporation except as prescribed by statute or authorized by express resolution of the stockholders or of the board of directors. ARTICLE IX Notices 1. Requirements of notice. Whenever notice is required to be given by statute or by these By-laws, it shall not mean personal notice unless so specified, but such notice may be given in writing by depositing the same in a post office or letter box, postpaid and addressed to the person to whom such notice is directed at the address of such person on the records of the corporation, and such notice shall be deemed given at the time when the same shall be thus mailed. 2. Waivers. Any stockholder, director or officer may, in writing or by telegram or cable or facsimile transmission, or facsimile transmission at any time waive any notice or other formality required by statute or these By-laws. Such waiver of notice, whether given before or after any meeting, shall be deemed equivalent to notice. Presence of a stockholder either in person or by proxy at any stockholders' meeting and presence of any director at any meeting of the board of directors shall constitute a waiver of such notice as may be required by any statute or these By-laws. ARTICLE X Seal The corporate seal of the corporation shall be circular in form and shall contain the name of the corporation the year of its creation and the words "Corporate Seal, Delaware." ARTICLE XI Powers of Attorney The board of directors may authorize one or more of the officers of the corporation to execute powers of attorney delegating to named representatives or agents power to represent or act on behalf of the corporation, with or without power of substitution. -8- ARTICLE XII Indemnification of Directors and Officers 1. Definitions. As used in this article, the term "person" means any past, present or future director or officer of the corporation or a designated officer of an operating division of the corporation. 2. Indemnification granted. The corporation shall indemnify, to the full extent and under the circumstances permitted by the Delaware General Corporation Law in effect from time to time, any person as defined above, made or threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative by reason of the fact that he is or was a director, officer of the corporation, or is or was serving at the specific request of the corporation as a director, officer or employee or agent of another company or other enterprise in which the corporation should own, directly or indirectly, an equity interest or of which it may be a creditor. This right of indemnification shall not be deemed exclusive of any other rights to which a person indemnified herein may be entitled by By-law, agreement, vote of stockholders or disinterested directors or otherwise, and shall continue as to a person who has ceased to be a director, officer, designated officer, employee or agent and shall inure to the benefit of the heirs, executors, administrators and other legal representatives of such person. It is not intended that the provisions of this article be applicable to, and they are not to be construed as granting indemnity with respect to, matters as to which indemnification would be in contravention of the laws of Delaware or of the Unites States of America whether as a matter of public policy or pursuant to statutory provision. 3. Miscellaneous. The board of directors may also on behalf of the corporation grant indemnification to any individual other than a person defined herein to such extent and in such manner as the Board in its sole discretion from time to time and at any time determine. ARTICLE XIII Amendments These By-laws may be amended or repealed at any meeting of stockholders or at any meeting of the board of directors, as provided in Article II and Article III hereof, respectively, provided in the notice of such meeting thereof shall contain a statement of substance of the proposed amendment or repeal. -9- EX-8.1 4 1998 INCENTIVE STOCK OPTION PLAN Exhibit 8.1 ELK ASSOCIATES FUNDING CORPORATION 1998 INCENTIVE STOCK OPTION PLAN The purpose of the 1998 Incentive Stock Option Plan (the "Plan") is to attract and retain key employees of Elk Associates Funding Corporation (the "Company") and its affiliates, to provide an incentive for them to achieve long-range performance goals, and to enable them to participate in the long-term growth of the Company by the granting of Incentive Stock Options (individually referred to herein as an "Option" and collectively as "Options") to purchase the Company's common stock, par value $0.01 par value (the "Common Stock"). 1. Administration of the Plan. The administration of the Plan shall be under the general supervision of the 1998 Employee Plan Committee of the Board of Directors of the Company (the "1998 Employee Plan Committee"). Within the limits of the Plan, the 1998 Employee Plan Committee shall determine the individuals to whom, and the times at which, Options shall be granted, the type of Option to be granted, the duration of each Option, the price and method of payment for each Option, and the time or times within which (during its term) all or portions of each Option may be exercised. The 1998 Employee Plan Committee may establish such rules as it deems necessary for the proper administration of the Plan, make such determinations and interpretations with respect to the Plan and Options granted under it as may be necessary or desirable and include such further provisions or conditions in Options granted under the Plan as it deems advisable. To the extent permitted by law, the 1998 Employee Plan Committee may delegate its authority under the Plan to a sub-committee of the 1998 Employee Plan Committee. 2. Shares Subject to the Plan. (a) Number of Shares. The aggregate number of shares of Common Stock of the Company which may be optioned under the Plan is 125,000 shares. In the event that the 1998 Employee Plan Committee in its discretion determines that any stock dividend, split-up, combination or reclassification of shares, recapitalization or other similar capital change affects the Common Stock such that adjustment is required in order to preserve the benefits or potential benefits of the Plan or any Option granted under the Plan, the maximum aggregate number and kind of shares or securities of the Company as to which Options may be granted under the Plan and as to which Options then outstanding shall be exercisable, and the option price of such Options, shall be appropriately adjusted by the 1998 Employee Plan Committee (whose determination shall be conclusive) so that the proportionate number of shares or other securities as to which Options may be granted and the proportionate interest of holders of outstanding Options shall be maintained as before the occurrence of such event. (b) Effect of Certain Transactions. In order to preserve a Participant's (as defined below) rights under an Option in the event of a change in control of the Company, the 1998 Employee Plan Committee in its discretion may, at the time an Option is made or at any time thereafter, take one or more of the following actions: (i) provide for the acceleration of any time period relating to the exercise or payment of the Option, (ii) provide for payment to the Participant of cash or other property with a fair market value equal to the amount that would have been received upon the exercise or payment of the Option had the Option been exercised or paid upon the change in control, (iii) adjust the terms of the Option in a manner determined by the 1998 Employee Plan Committee to reflect the change in control, (iv) cause the Option to be assumed, or new rights substituted therefor, by another entity, or (v) make such other provision as the 1998 Employee Plan Committee may consider equitable to the Participant and in the best interests of the Company, provided such action shall comply with Section 424 of the Code and will not render any Incentive Stock Option granted hereunder to be other than an incentive stock option for purposes of Section 422 of the Code. (c) Restoration of Shares. If any Option expires or is terminated unexercised or is forfeited for any reason, the shares subject to such Option, to the extent of such expiration, termination or forfeiture, shall again be available for granting pursuant to Options under the Plan, subject, however, in the case of Incentive Stock Options, to any requirements under the Code (as defined below). (d) Reservation of Shares. The Company shall at all times while the Plan is in force reserve such number of shares of Common Stock as will be sufficient to satisfy the requirements of the Plan. Shares issued under the Plan may consist in whole or in part of authorized but unissued shares or treasury shares. 3. Grant of Options; Eligible Persons. (a) Types of Options. Options shall be granted under the Plan either as incentive stock options ("Incentive Stock Options"), as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or as Options that do not meet the requirements of Section 422 ("Nonstatutory Stock Options"). Options may be granted from time to time by the 1998 Employee Plan Committee, within the limits set forth in Sections 1 and 3 of the Plan, to all employees of the Company or of any parent corporation or subsidiary corporation of the Company (as defined in Sections 424(e) and (f), respectively, of the Code) (such individuals collectively referred to herein as "Participants"). (b) Date of Grant. The date of grant for each Option shall be the date on which it is approved by the 1998 Employee Plan Committee or such later date as the 1998 Employee Plan Committee may specify. No Incentive Stock Options shall be granted hereunder after ten years from the date on which the Plan was approved by the Board of Directors. 4. Form of Options. Options granted hereunder shall be evidenced by a writing delivered to the optionee specifying the terms and conditions thereof and containing such other terms and conditions not inconsistent with the provisions of the Plan as the 1998 Employee Plan Committee considers necessary or advisable to achieve the purposes of the Plan or comply with applicable tax and regulatory laws and accounting principles. The form of such Options may vary among optionees. 5. Option Price. The price at which shares may from time to time be optioned shall be determined by the 1998 Employee Plan Committee, provided that such price shall not be less than the current market value of the Common Stock on the date of grant, and provided further that no Incentive Stock Option shall be granted to any individual who is ineligible to be granted an Incentive Stock Option because his ownership of stock of the Company or its parent or subsidiary corporations exceeds the limitations set forth in Section 422(b)(6) of the Code unless such option price is at least 110% of the current market value of the Common Stock on the date of grant. -2- To the extent permitted by law, the 1998 Employee Plan Committee may in its discretion permit the option price to be paid in whole or in part by a note or in installments or with shares of Common Stock of the Company or such other lawful consideration as the 1998 Employee Plan Committee may determine. 6. Term of Option and Dates of Exercise. (a) Exercisability. The 1998 Employee Plan Committee shall determine the term of all Options, the time or times that Options are exercisable and whether they are exercisable in installments, provided that the term of each Option granted under the Plan shall not exceed a period of ten years from the date of its grant, and provided further that no Incentive Stock Option shall be granted to any individual who is ineligible to be granted such Option because his ownership of stock of the Company or its parent or subsidiary corporations exceeds the limitations set forth in Section 422(b)(6) of the Code unless the term of his Incentive Stock Option does not exceed a period of five years from the date of its grant. In the absence of such determination, the Option shall be exercisable at any time or from time to time, in whole or in part, during a period of ten years from the date of its grant or, in the case of an Incentive Stock Option, the maximum term of such Option. (b) Effect of Disability, Death or Termination of Employment. The 1998 Employee Plan Committee shall determine the effect on an Option of the disability, death, retirement or other termination of employment of an optionee and the extent to which, and during the period which, the optionee's estate, legal representative, guardian, or beneficiary on death may exercise rights thereunder. Any beneficiary on death shall be designated by the optionee, in the manner determined by the 1998 Employee Plan Committee, to exercise rights of the optionee in the case of the optionee's death. (c) Other Conditions. The 1998 Employee Plan Committee may impose such conditions with respect to the exercise of Options, including conditions relating to applicable federal or state securities laws, as it considers necessary or advisable. (d) Withholding. The optionee shall pay to the Company, or make provisions satisfactory to the 1998 Employee Plan Committee for payment of, any taxes required by law to be withheld in respect of any Options under the Plan no later than the date of the event creating the tax liability. The Company and any parent corporation or subsidiary corporation of the Company (as defined in Sections 424(e) and (f), respectively, of the Code) may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to the optionee. (e) Amendment of Options. The 1998 Employee Plan Committee may amend, modify or terminate any outstanding Option, including substituting therefor another Option of the same or different type, changing the date of exercise or realization and converting an Incentive Stock Option to a Nonstatutory Stock Option, provided that the optionee's consent to such action shall be required unless the 1998 Employee Plan Committee determines that the action, taking into account any related action, would not materially and adversely affect the optionee. 7. Non-transferability. Options granted under the Plan shall not be transferable by the holder thereof otherwise than by will or the laws of descent and distribution or, in the case of a Nonstatutory Stock Option, to the extent consistent with qualifying for the exemption provided by Rule 16b-3 under the Securities Exchange Act -3- of 1934 (the "Exchange Act"), pursuant to a qualified domestic relations order, and shall be exercisable, during the holder's lifetime, only by him or her or such permitted transferee. 8. No Right to Employment. No persons shall have any claim or right to be granted an Option, and the grant of an Option shall not be construed as giving an optionee the right to continued employment. The Company expressly reserves the right at any time to dismiss an optionee free from any liability or claim under the Plan, except as specifically provided in the applicable Option. 9. No Rights as a Shareholder. Subject to the provisions of the applicable Option, no optionee or any person claiming through an optionee shall have any rights as a shareholder with respect to any shares of Common Stock to be distributed under the plan until he or she becomes the holder thereof. 10. Amendment or Termination. The Board of Directors of the Company may amend, suspend or terminate the Plan or any portion thereof at any time, subject to any shareholder approval that the Board of Directors determines to be necessary or advisable, provided that the Participant's consent will be required for any amendment, suspension or termination that would adversely affect the rights of the Participant under any outstanding Options. 11. Adjustment of Shares; Merger or Consolidation, Etc. of the Company. (a) Recapitalization, Etc. In the event there is any change in the outstanding Common Stock of the Company by reason of any reorganization, recapitalization, stock split, stock dividend, combination of shares, or otherwise, there shall be substituted for or added to each share of Common Stock theretofore appropriated or thereafter subject, or which may become subject, to any Option, the number and kind of shares of stock or other securities into which each outstanding share of Common Stock shall be so changed or for which each such share shall be exchanged, or to which each such share shall be exchanged, or to which each such share shall be entitled, as the case may be, and the per share price thereof also shall be appropriately adjusted. Notwithstanding the foregoing, (i) each such adjustment with respect to an Incentive Stock Option shall comply with the rules of Section 424(a) of the Code and (ii) in no event shall any adjustment be made which would render any Incentive Stock Option granted hereunder to be other than an incentive stock option for purposes of Section 422 of the Code. (b) Merger, Consolidation, or Change in Control of Company. Upon (i) the merger or consolidation of the Company with or into another corporation (pursuant to which the stockholders of the Company immediately prior to such merger or consolidation will not, as of the date of such merger or consolidation, own a beneficial interest in shares of voting securities of the corporation surviving such merger or consolidation having at least a majority of the combined voting power of such corporation's then outstanding securities), if the agreement of merger or consolidation does not provide for (1) the continuance of the Options granted hereunder or (2) the substitution of new options for Options granted hereunder, or for the assumption of such Options by the surviving corporation, (ii) the dissolution, liquidation, or sale of all or substantially all the assets of the Company to a person unrelated to the Company or to a direct or indirect owner of a majority of the voting power of the Company's then outstanding voting securities (such sale of assets being referred to as an "Asset Sale") or (iii) the Change -4- in Control of the Company, then the holder of any such Option theretofore granted and still outstanding (and not otherwise expired) shall have the right immediately prior to the effective date of such merger, consolidation, dissolution, liquidation, Asset Sale, or Change in Control of the Company to exercise such Options(s) in whole or in part without regard to any installment provision that may have been made part of the terms and conditions of such Options(s); provided that all conditions precedent to the exercise of such Option(s), other than the passage of time, have occurred. The Company, to the extent practicable, shall give advance notice to affected Optionees of such merger, consolidation, dissolution, liquidation, Asset Sale, or Change in Control of the Company. Unless otherwise provided in the subject award agreement or merger, consolidation, or Asset Sale agreement, all such Options which are not so exercised shall be forfeited as of the effective time of such merger, consolidation, dissolution, liquidation, or Asset Sale (but not in the case of a Change in Control of the Company). In the event the Company becomes a subsidiary of another corporation (the "Parent Company") with respect to which the stockholders of the Company (as determined immediately before such transaction) own, immediately after such transaction, a beneficial interest in shares of voting securities of the Parent Company having at least a majority of the combined voting power of such Parent Company's then outstanding securities, there shall be substituted for Options granted hereunder, options to purchase common stock of the Parent Company. The substitution described in the immediately preceding sentence shall be effected in a manner such that any option granted by the Parent Company to replace an incentive stock option granted hereunder shall satisfy the requirements of Section 422 of the Code. Notwithstanding the foregoing, the holder of any such Option shall not have the right to exercise such Option if such exercise would render any Incentive Stock Options granted hereunder to be other than an incentive stock option for purposes of Section 422 of the Code. (c) Definition of Change in Control of the Company. As used herein, a "Change in Control of the Company" shall be deemed to have occurred if any person (including any individual, firm, partnership or other entity), together with all Affiliates and Associates (as defined under Rule 12b-2 of the General Rules and Regulations promulgated under the Exchange Act) of such person (but excluding (i) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, (ii) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the Company, (iii) the Company or any subsidiary of the Company, or (iv) only as provided in the immediately following sentence, a Participant together with all Affiliates and Associates of the Participant) who is not a stockholder or an Affiliate or Associate of a stockholder of the Company on the date of stockholder approval of the Plan is or becomes the beneficial Owner (as defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Company representing 40% or more of the combined voting power of the Company's then outstanding securities. The provisions of clause (iv) of the immediately preceding sentence shall apply only with respect to the Option(s) held by the Participant who, together with his Affiliates or Associates, if any, is or becomes the direct or indirect Beneficial Owner of the percentage of securities set forth in such clause. 12. Stockholder Approval. The Plan is subject to approval by the stockholders of the Company by the affirmative vote of the holders of a majority of the shares of capital stock of the Company entitled to vote thereon and present or represented at a meeting duly held in accordance with the laws of the State of New York, or by any other action that would be given the same effect under the laws of such jurisdiction, which action in either case shall be taken within twelve (12) months from the date the Plan was adopted by the Board of Directors. -5- In the event such approval is not obtained, all Options granted under the Plan shall be void and without effect. 13. Governing Law. The provisions of the plan shall be governed by and interpreted in accordance with the laws of the State of New York. This Plan was approved by the Board of Directors on _________, 1998. This Plan was approved by the Shareholders on September ___, 1998. -6- EX-8.2 5 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN Exhibit 8.2 ELK ASSOCIATES FUNDING CORPORATION Non-Employee Director Stock Option Plan This Non-Employee Director Stock Option Plan dated ___________ __, 1998 (the "Plan") governs options to purchase Common Stock, $0.01 par value (the "Common Stock"), of Elk Associates Funding Corporation (the "Company") granted on or after the date hereof by the Company to members of the Board of Directors (the "Board") of the Company who are not also employees, officers or interested persons (as defined in Section 2 below) of the Company. The purpose of the Plan is to attract and retain qualified persons to serve as Directors of the Company and to encourage ownership of stock of the Company by such Directors so as to provide additional incentives to promote the success of the Company. 1. Administration of the Plan. Grants of stock options (individually referred to herein as an "Option" and collectively as "Options") under the Plan shall be automatic as provided in Section 6 hereof. However, all questions of interpretation with respect to the Plan and Options granted under it shall be determined by a committee (the "Committee") consisting of the Directors of the Company who are not eligible to participate in the Plan, and such determination shall be final and binding upon all persons having an interest in the Plan. 2. Persons Eligible to Participate in the Plan. Members of the Board who are not also officers or employees of the Company shall be eligible to participate in the Plan ("Eligible Directors"). 3. Shares Subject to the Plan. (a) Number of Shares. The aggregate number of shares of Common Stock of the Company which may be optioned under this Plan is 75,000 shares. In the event of a stock dividend, split-up, combination or reclassification of shares, recapitalization or similar capital change relating to the Common Stock, the maximum aggregate number and kind of shares or securities of the Company as to which Options may be granted under this Plan and as to which Options then outstanding shall be exercisable, and the exercise price of such Options, shall be appropriately adjusted by the Committee (whose determination shall be conclusive) so as to preserve the value of the Option. (b) Effect of Certain Transactions. In order to preserve an Eligible Director's rights under an Option in the event of a change in control of the Company, the Committee in its discretion may, on the Date of Grant (as defined in Section 6(b) below) or at any time thereafter, take one or more of the following actions: (i) provide for the acceleration of any time period relating to the exercise or payment of the Option, (ii) provide for payment to the Eligible Director of cash or other property with a fair market value equal to the amount that would have been received upon the exercise or payment of the Option had the Option been exercised or paid upon the change in control, (iii) adjust the terms of the Option in a manner determined by the Committee to reflect the change in control, (iv) cause the Option to be assumed, or new rights substituted therefor, by another entity, or (v) make such other provision as the Committee may consider equitable to the Eligible Director and in the best interest of the Company. (c) Restoration of Shares. If any Option expires or is terminated unexercised or is forfeited for any reason, the shares subject to such Option, to the extent of such expiration, termination or forfeiture, shall again be available for granting pursuant to Options under the Plan. (d) Reservation of Shares. The Company shall at all times while the Plan is in force reserve such number of shares of Common Stock as will be sufficient to satisfy the requirements of the Plan. Shares issued under the Plan may consist in whole or in part of authorized but unissued shares or treasury shares. 4. Types of Options. All Options granted under this Plan shall be non-statutory options not entitled to special tax treatment under Section 422 of the Internal Revenue Code of 1986, as amended. 5. Form of Options. Options granted hereunder shall be evidenced by a writing delivered to the optionee specifying the terms and conditions thereof and containing such other terms and conditions not inconsistent with the provisions of the Plan as the Committee considers necessary or advisable to achieve the purposes of the Plan or comply with applicable tax and regulatory laws and accounting principles. 6. Grant of Options and Option Terms. (a) Initial Grant of Options. On the later of (i) date of the approval of the Plan (the "Approval Date") by the Securities and Exchange Commission in accordance with the 1940 Act, or (ii) the first anniversary of the election or appointment of such Director to the Board (the "First Anniversary Date"), providing such Director is then serving, each of the following Directors shall automatically be granted Options to purchase the number of shares of Common Stock determined by dividing $50,000 by the Current Market Value (as defined in Section 6(c) below) on the date indicated opposite each Director's name (the "Initial Grants") provided each such Director is serving on the Company's Board as an Eligible Director on the Approval Date or the First Anniversary Date, as the case may be: Name of Director Automatic Grant Date ---------------- -------------------- Paul Creditor Approval Date John Acierno Approval Date Alan Kaplan Approval Date Marvin Sabesan Approval Date (b) Automatic Grant of Options. At each annual meeting of the stockholders of the Company after the Approval Date, each new Eligible Director elected at such meeting shall automatically be granted on such new Eligible Director's First Anniversary Date of such election an Option to purchase the number of shares of Common Stock determined by dividing $50,000 by the Current Market Value of the Common Stock on such First Anniversary Date of such election. In addition, upon the election of an Eligible Director other than at an annual meeting of stockholders (whether by the Board or the stockholders and whether to fill a vacancy or otherwise), each such Eligible Director shall automatically be granted an Option on the First Anniversary Date of the election of an Eligible Director other than at an annual meeting of stockholders to purchase that number of shares that is determined by dividing -2- $50,000 by the Current Market Value of the Common Stock on the First Anniversary Date of such election. After the Initial Grants have been made, all subsequent grants of Options to Eligible Directors upon the First Anniversary Date of their election to the Board shall be referred to as "Automatic Grants." The "Date of Grant" for the Initial Grants shall be the Approval Date and the Date of Grant for the Automatic Grants shall be the First Anniversary Date of the election as a new Eligible Director, whether at an annual meeting or otherwise, as the case may be. No Options shall be granted hereunder after ten years from the date on which this Plan was initially approved and adopted by the Board. (c) Exercise Price. The price at which shares may from time to time be optioned shall be determined by the Committee, provided that such price shall not be less than the current market value (the "Current Market Value") of the Common Stock on the date of grant, or if no such market value exists, then the current net asset value of the Common Stock of the Company or such other lawful consideration as the Committee may determine. (d) Term of Option. The term of each Option granted under this Plan shall be five years from the Date of Grant. (e) Period of Exercise. Options granted under this Plan shall become exercisable commencing 12 months after the Date of Grant. Directors holding exercisable Options under this Plan who cease to be Eligible Directors for any reason, other than death, may exercise the rights they had under such Options at the time they ceased to be an Eligible Director; provided, however, no additional Options held by such Directors shall be exercisable thereafter. Upon the death of a Director, those entitled to do so under the Director's will or the laws of descent and distribution shall have the right, at any time within twelve months after the date of death, to exercise in whole or in part any rights that were available to the Director at the time of his or her death. Options granted under the Plan shall terminate, and no rights thereunder may be exercised, after the expiration of five years from their Date of Grant. (f) Method of Exercise and Payment. Options may be exercised only by written notice of the Company at its executive offices accompanied by payment of the full exercise price for the shares of Common Stock as to which they are exercised. The exercise price shall be paid in cash or by check or by the surrender of unrestricted shares of Common Stock or by any combination of the foregoing. Upon receipt of such notice and payment,the Company shall promptly issue and deliver to the optionee (or other person entitled to exercise the Option) a certificate or certificates for the number of shares as to which the exercise is made. (g) Non-transferability. Options granted under this Plan shall not be transferable by the holder thereof otherwise than by will or the laws of descent and distribution, and shall be exercisable, during the holder's lifetime, only by him or her. (h) Withholding. The optionee shall pay to the Company, or make provisions satisfactory to the Company for payment of, any taxes required by law to be withheld in respect of any Options under the Plan no later than the date of the event creating the tax liability. The Company and any parent corporation or subsidiary corporation of the Company (as defined in Sections 424(e) and (f), respectively, of the Code) may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to the optionee. 7. Limitation of Rights. -3- (a) No Right to Continue as a Director. Neither the Plan nor the granting of an Option or any other action taken pursuant to the Plan, shall constitute an agreement or understanding, express or implied that the Company will retain an optionee as a Director for any period of time or at any particular rate of compensation. (b) No Stockholders' Rights for Options. No Director shall have any rights as a stockholders with respect to the shares covered by his or her Option until the date he or she exercises such Option and pays the Option price to the Company, and no adjustment will be made for dividends or other rights for which the record date is prior to the date such Option is exercised and paid for. 8. Amendment or Termination. The Board may amend, suspend or terminate the Plan or any portion thereof at any time, subject to any shareholder approval that the Board determines to be necessary or advisable, provided that the Participant's consent will be required for any amendment, suspension or termination that would adversely affect the rights of the Participant under any outstanding Options. 9. No Fractional Shares. All grants of Options shall be rounded to the nearest whole share and no Options representing fractional shares shall be issued. 10. Governing Law. The provisions of the Plan shall be governed by and interpreted in accordance with the laws of the State of New York. This Plan was approved by the Board of Directors on ___________ __, 1998. This Plan was approved by the Shareholders on ___________ __, 1998. This Plan was approved by the Securities and Exchange Commission on ___________ __, 199__. -4- EX-13.1 6 INDEMNITY AGREEMENT Exhibit 13.1 INDEMNITY AGREEMENT This Agreement is made as of the ______ day of ______________, 19___ by Ameritrans Capital Corporation, a Delaware corporation (the "Corporation"), and ____________ ("Indemnitee"), a Director or Officer of the Corporation. WHEREAS, it is essential to the Corporation to retain and attract as Directors and Officers the most capable persons available, and WHEREAS, the substantial increase in corporate litigation subjects Directors and Officers to expensive litigation risks at the same time that the availability of Directors' and Officers' liability insurance has been severely limited, and WHEREAS, it is now and has always been the express policy of the Corporation to indemnify its Directors and Officers so as to provide them with the maximum possible protection permitted by law, and WHEREAS, Indemnitee is concerned about protection from expenses of litigation and may not be willing to serve or continue to serve as a Director or Officer without adequate protection, and the Corporation desires Indemnitee to serve in such capacity. NOW, THEREFORE, the Corporation and Indemnitee do hereby agree as follows: 1. Agreement to Serve. Indemnitee agrees to serve or continue to serve as a Director or Officer of the Corporation for so long as he is duly elected or appointed or until such time as he tenders his resignation in writing. 2. Definitions. As used in this Agreement: (a) The term "Proceeding" shall include any threatened, pending, or completed action, suit, or proceeding, whether brought by or in the right of the Corporation or otherwise and whether of a civil, criminal, administrative, or investigative nature, in which the Corporation may be or may have been involved as a party or otherwise, by reason of the fact that Indemnitee is or was a Director or Officer of the Corporation, by reason of any action taken by his or of any inaction on his part while acting as such a Director or Officer, or by reason of the fact that he is or was serving at the request of the Corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise; in each case whether or not he is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification or reimbursement can be provided under this Agreement. (b) The term "Expenses" shall include, without limitation, expenses of investigations, judicial or administrative proceedings or appeals, amounts paid in settlement by or on behalf of Indemnitee, attorneys' fees and disbursements, and any expenses of establishing a right to indemnification under Paragraph (7) of this Agreement, but shall not include the amount of judgments, fines, or penalties against Indemnitee. (c) References to "other enterprise" shall include employee benefit plans; references to "fines" shall include any excise tax assessed with respect to any employee benefit plan; references to "serving at the request of the Corporation" shall include any service as a Director, Officer, employee, or agent of the Corporation which imposes duties on, or involves services by, such Director, Officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interests of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Agreement. 3. Indemnity in Third-Party Proceedings. The Corporation shall indemnify Indemnitee in accordance with the provisions of this Paragraph 3 if Indemnitee is a party to or threatened to be made a party to or otherwise involved in any Proceeding (other than a Proceeding by or in the right of the Corporation to procure a judgment in its favor) by reason of the fact that Indemnitee is or was a Director or Officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against all Expenses, judgments, fines, and penalties, actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such Proceeding, but only if Indemnitee acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation and, in the case of a criminal proceeding, in addition, did not have reasonable cause to believe that his conduct was unlawful. The termination of any such Proceeding by judgment, order of court, settlement, conviction, or upon a plea of nolo contendere, or its equivalent, shall not, of itself, create a presumption that Indemnitee did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and with respect to any criminal proceeding, that such person had reasonable cause to believe that his conduct was unlawful. 4. Indemnity in Proceedings by or in the Right of the Corporation. The Corporation shall indemnify Indemnitee in accordance with the provisions of this Paragraph 4 if Indemnitee is a party to or threatened to be made a party to any Proceeding by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that Indemnitee is or was a Director or Officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against all Expenses actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such Proceeding, but only if he acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, except that no indemnification for Expenses shall be made under this Paragraph 4 in respect of any claim, issue, or matter as to which Indemnitee shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the Corporation, unless and only to the extent that any court in which such Proceeding was brought shall determine -2- upon application that, despite the adjudication of liability and in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such Expenses or such court shall otherwise deem proper the payment of such Expenses. 5. Indemnification of Expenses of Successful Party. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any Proceeding or in defense of any claim, issue, or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified against all Expenses incurred in connection therewith. 6. Advances of Expenses. Expenses incurred by the Indemnitee pursuant to Paragraphs 3 and 4 in any Proceeding shall be paid by the Corporation in advance of the final disposition of such Proceeding upon the written request of Indemnitee if Indemnitee shall undertake to repay such amount to the extent that it is ultimately determined that Indemnitee is not entitled to indemnification, provided that as a condition to any such advance, either (a) such Indemnitee provides a security for such undertaking, (b) the Corporation is insured against losses arising from any lawful advances, or (c) a majority of the disinterested directors of the Corporation or any independent legal counsel in a written opinion, determines, based on a review of readily available facts, that there is a reason to believe that such Indemnitee will be found entitled to indemnification hereunder. 7. Right of Indemnitee to Indemnification Upon Application; Procedure Upon Application. Any indemnification under Paragraphs 3 and 4 shall be made no later than 60 days after receipt by the Corporation of the written request of Indemnitee, unless a determination is made within said 60-day period by (1) the Board of Directors by a majority vote of directors who were not parties to such Proceeding, (2) by a committee of such directors designated by a majority of such directors, or (3) independent legal counsel in a written opinion (which counsel shall be appointed if such a quorum is not obtainable because of the absence of the requisite number of disinterested directors), that the Indemnitee has not met the relevant standards for indemnification set forth in Paragraphs 3 and 4. The right to indemnification or advances as provided by this Agreement shall be enforceable by Indemnitee in any court of competent jurisdiction. The burden of proving the indemnification is not appropriate shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors or independent legal counsel) to have made a determination prior to the commencement of such action that indemnification is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor an actual determination by the Corporation (including its Board of Directors or independent legal counsel) that Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that Indemnitee has not met the applicable standard of conduct. Indemnitee's expenses reasonably incurred in connection with successfully establishing his right to indemnification, in whole or in part, in any such Proceeding shall also be indemnified by the Corporation. 8. Indemnification Hereunder Not Exclusive. The indemnification provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may be entitled under the Corporation's Certificate of Incorporation, as amended, its By- -3- Laws, as amended, any agreement, any vote of shareholders or disinterested Directors, the General Corporation Law of the State of Delaware, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. The indemnification under this Agreement shall continue as to Indemnitee even though he may have ceased to be a Director or Officer of the Corporation and shall inure to the benefit of the heirs and personal representatives of Indemnitee. 9. Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Corporation for some or a portion of the Expenses, judgments, fines, or penalties actually and reasonably incurred by him in the investigation, defense, appeal, or settlement of any Proceeding but not, however, for the total amount thereof, the Corporation shall nevertheless indemnify Indemnitee for the portion of such Expenses, judgments, fines, or penalties to which Indemnitee is entitled. 10. Saving Clause. If this Agreement or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, the Corporation shall, nevertheless, indemnify Indemnitee as to Expenses, judgments, fines, and penalties with respect to any Proceeding to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated or by any other applicable law. 11. Notice. Indemnitee shall, as a condition precedent to his right to be indemnified under this Agreement, give to the Corporation notice in writing as soon as practicable of any claim made against him for which indemnity will or could be sought under this Agreement. Notice to the Corporation shall be directed to Ameritrans Capital Corporation, 4th Floor, 747 Third Avenue, New York, New York 10017, Attention: President (or such other address as the Corporation shall designate in writing to Indemnitee), together with a copy thereof to Walter Stursberg, Esq., Stursberg & Veith, 405 Lexington Avenue, New York, New York 10174. Notice delivered by mail, by hand, or by overnight delivery services shall be deemed received (i) three days after the date postmarked if sent by prepaid mail, properly addressed or (ii) upon delivery by hand or by overnight delivery service. In addition, Indemnitee shall give the Corporation such information and cooperation as it may reasonably require and shall be within Indemnitee's power. 12. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall constitute the original. 13. Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware. -4- 14. Successors and Assigns. This Agreement shall be binding upon the Corporation and its successors and assigns. IN WITNESS WHEREOF, the parties hereby have caused this Agreement to be duly executed and signed as of the day and year first above written. AMERITRANS CAPITAL CORPORATION By: --------------------------------- INDEMNITEE ------------------------------------ -5- EX-14.1 7 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 14.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Elk Associates Funding Corporation and Subsidiary We consent to the reference to our firm under the caption "Experts" in the Registration Statement (Form N-14) and the inclusion of our report dated August 12, 1998, with respect to the consolidated financial statements for the years ended June 30, 1998 and 1997. Marcum & Kliegman LLP New York, New York September 22, 1998 -----END PRIVACY-ENHANCED MESSAGE-----