-----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, U9XvLxqs1sogDNmvaWMWnsgWPdG59UbRj85gAB4dC/Rn3Dzrb6D0XvJh7GFgxKvr 66BDHRFgiymSAqLBVXBP6g== 0000950116-99-001363.txt : 19990713 0000950116-99-001363.hdr.sgml : 19990713 ACCESSION NUMBER: 0000950116-99-001363 CONFORMED SUBMISSION TYPE: N-2 PUBLIC DOCUMENT COUNT: 19 FILED AS OF DATE: 19990712 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERITRANS CAPITAL CORP CENTRAL INDEX KEY: 0001064015 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 522102424 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-2 SEC ACT: SEC FILE NUMBER: 333-82693 FILM NUMBER: 99663027 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-2 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 12, 1999 Registration No. 333-____ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-2 [x] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ] PRE-EFFECTIVE AMENDMENT NO. _____ [ ] POST-EFFECTIVE AMENDMENT NO. _____ AMERITRANS CAPITAL CORPORATION (Exact Name of Registrant as Specified in Charter) 747 Third Avenue, 4th Floor, New York, New York 10017 (Address of Principal Executive Offices: Number, Street, City, State, Zip Code) (212) 355-2449 (Registrant's Telephone Number, Including Area Code) Gary C. Granoff, Ameritrans Capital Corporation 747 Third Avenue, 4th Floor, New York, New York 10017 Tel. (212) 355-2449 Fax. (212) 759-3338 (Name and Address of Agent for Service) with a copy to: C. Walter Stursberg, Jr., Esq. Stephen T. Burdumy, Esq. Stursberg & Veith Klehr Harrison Harvey Branzberg 405 Lexington Avenue, Suite 4949 & Ellers LLP New York, New York 10174-4902 1401 Walnut Street Tel. (212) 922-1177 Philadelphia, Pennsylvania 19102 Fax. (212) 922-0995 Tel. (215) 568-6060 Fax. (215) 568-6603 Approximate Date of Proposed Public Offering: As soon as practicable after the effectiveness of this Registration Statement If any of the securities being registered on this Form are to be offered on a delayed or continuous basis in reliance on Rule 415 under the Securities Act of 1933, other than securities offered in connection with a dividend reinvestment plan, check the following box: | | 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 Registration Fee - ------------------------------------------------------------------------------------------------------------------------------ Common Stock, $.0001 par value per share 1,265,000 $11.00 $13,915,000 $3,868.37 - ------------------------------------------------------------------------------------------------------------------------------ Total $13,915,000 $3,868.37 - ------------------------------------------------------------------------------------------------------------------------------
(1) Includes 165,000 shares included in the Underwriters' Over-Allotment Option. (2) Estimated solely for purposes of calculating registration fee pursuant to Rule 457 under the Securities Act of 1933 (the "Act"). It is proposed that this filing will become effective [x] when declared effective pursuant to Section 8(c). 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 a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. AMERITRANS CAPITAL CORPORATION CROSS-REFERENCE SHEET PARTS A AND B OF PROSPECTUS*
ITEMS IN PARTS A AND B ITEM NO. OF FORM N-2 LOCATION IN PROSPECTUS - ------------------- ------------------------------------------- --------------------------------------------------- 1. Outside Front Cover.................... Front Cover Page 2. Inside Front and Outside Front Cover Page and Outside Back Cover Page........................ Back Cover Page 3. Fee Table and Synopsis................. Prospectus Summary--Fees and Expenses; Additional Information 4. Financial Highlights................... Prospectus Summary--Summary Consolidated Financial Data; Selected Financial Information; Management's Discussion and Analysis of Financial Condition and Results of Operations 5. Plan of Distribution................... Cover Page; Prospectus Summary; Underwriting 6. Selling Stockholders................... Not Applicable 7. Use of Proceeds........................ Use of Proceeds 8. General Description of the Registrant............................. Cover Page; Prospectus Summary; Risk Factors; Distributions; Price Range of Common Stock; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Investment Policies; Financial Statements 9. Management............................. Management; Investment Policies 10. Capital Stock, Long Term Debt, and Other Securities................... Distributions; Price Range of Common Stock; Business; Federal Income Tax Considerations; Description of Capital Stock 11. Defaults and Arrears on Senior Securities............................. Not Applicable 12. Legal Proceedings...................... Not Applicable
- ----------------------- * Pursuant to the General Instructions to Form N-2, all information required to be set forth in Part B: Statement of Additional Information has been included in Part A: The Prospectus. All items required to be set forth in Part C are set forth in Part C.
ITEMS IN PARTS A AND B ITEM NO. OF FORM N-2 LOCATION IN PROSPECTUS - ------------------- ------------------------------------------- --------------------------------------------------- 13. Table of Contents of the Statement of Additional Information............................ Not Applicable 14. Cover Page............................. Not Applicable 15. Table of Contents...................... Not Applicable 16. General Information and History................................ Business 17. Investment Objective and Policies............................... Business; Investment Policies 18. Management............................. Management; Principal Stockholders 19. Control Persons and Principal Holders of Securities.................. Principal Stockholders 20. Investment Advisory and Other Services............................... Management; Experts; Investment Policies 21. Brokerage Allocation and Other Practices.............................. Not Applicable 22. Tax Status............................. Federal Income Tax Considerations 23. Financial Statements................... Index to Financial Statements; Financial Statements
We will amend and complete the information in this Prospectus. Although we are permitted by US federal securities laws to offer to sell these securities using this Prospectus, we may not sell them or accept your offer to buy them until the documentation filed with the SEC relating to these securities has been declared effective by the SEC. This Prospectus is not an offer to sell these securities and it is not soliciting your offer to buy these securities in any state where that would not be permitted or legal. Subject to Completion -- July 12, 1999 AMERITRANS CAPITAL CORPORATION 1,100,000 Shares of Common Stock We are a specialty finance company that, through our subsidiary, Elk Associates Funding Corporation, makes loans to the owners of medallion taxi businesses in the New York City, Chicago, Miami, and Boston markets and to other small businesses. Ameritrans has the same management as Elk and was formed as a holding company in 1998 to acquire and operate Elk and to engage in other specialty finance business. Elk began operating in 1980 and was acquired by Ameritrans on _______________, 1999. Both Ameritrans and Elk are closed-end, non-diversified management investment companies that have elected to be treated as business development companies under the Investment Company Act of 1940. We are selling 1,100,000 shares of Common Stock, and the underwriters have an option to purchase an additional 165,000 shares from us to cover over-allotments. Our Common Stock is currently traded on the NASDAQ SmallCap Market under the symbol "_______." After the offering, it is anticipated that our Common Stock will trade on the NASDAQ National Market. Our proposed NASDAQ National Market symbol is "____." On _____ __, 1999, the last reported sale price of the Common Stock was $____ per share. PER SHARE TOTAL Public Offering Price $ $ Sales Load (Underwriting Discount) $ $ Proceeds before expenses to Ameritrans $ $ ----------------------------------------------------- This Prospectus sets forth the information about our company that you should know before purchasing Common Stock. You are advised to read this Prospectus and retain it for future reference. This investment involves certain risks. See "Risk Factors," starting on page 8. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. FIRST COLONIAL SECURITIES GROUP, INC. AUERBACH, POLLAK & RICHARDSON, INC. Prospectus dated __________ __, 1999 TABLE OF CONTENTS
PAGE ---- PROSPECTUS SUMMARY.............................................................................................. 1 RISK FACTORS.................................................................................................... 8 USE OF PROCEEDS................................................................................................. 19 DILUTION ....................................................................................................... 20 DISTRIBUTIONS................................................................................................... 21 PRICE RANGE OF COMMON STOCK..................................................................................... 22 CAPITALIZATION.................................................................................................. 24 SELECTED FINANCIAL INFORMATION.................................................................................. 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................................................................. 27 BUSINESS ....................................................................................................... 32 INVESTMENT POLICIES............................................................................................. 46 MANAGEMENT...................................................................................................... 49 SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT..................................................... 56 CERTAIN TRANSACTIONS............................................................................................ 58 REGULATION...................................................................................................... 60 FEDERAL INCOME TAX CONSIDERATIONS............................................................................... 62 DESCRIPTION OF CAPITAL STOCK.................................................................................... 66 SHARES ELIGIBLE FOR FUTURE SALE................................................................................. 67 UNDERWRITING.................................................................................................... 68 EXPERTS ....................................................................................................... 70 LEGAL MATTERS................................................................................................... 70 ADDITIONAL INFORMATION.......................................................................................... 70 INDEX TO FINANCIAL STATEMENTS...................................................................................F-1
PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS CERTAIN INFORMATION CONTAINED IN OTHER PARTS OF THIS PROSPECTUS. THIS SUMMARY IS NOT COMPLETE AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN THE COMMON STOCK. IN THIS PROSPECTUS, UNLESS THE CONTEXT INDICATES OTHERWISE, "WE" MEANS AMERITRANS, ELK, AND ANY OTHER SUBSIDIARIES AMERITRANS MAY ESTABLISH OR ACQUIRE, COLLECTIVELY. "AMERITRANS" OR "ELK" MEANS EACH COMPANY ALONE. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, ESPECIALLY THE RISKS OF INVESTING IN THE COMMON STOCK DISCUSSED UNDER "RISK FACTORS." UNLESS OTHERWISE INDICATED, ALL THE INFORMATION IN THIS PROSPECTUS: o GIVES EFFECT TO AMERITRANS' ACQUISITION OF ELK IN A ONE-FOR-ONE SHARE EXCHANGE ON, ___________ 1999. o ASSUMES THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED. THE COMPANY Ameritrans is a specialty finance company that, through its subsidiary, Elk Associates Funding Corporation, makes loans to the owners of medallion taxi businesses in the New York City, Chicago, Miami, and Boston markets and to other small businesses. Ameritrans has the same management as Elk and was formed in 1998 to acquire and operate Elk and to engage in other specialty finance business, directly or through other subsidiaries. To date, our only business activities have been the operation of Elk. Our investment objectives are to achieve a high level of distributable income, consistent with preservation of capital, as well as long-term growth of net asset value. Ameritrans and Elk have both elected to be treated as "regulated investment companies," or "RICs," for tax purposes. A RIC will generally not be subject to U.S. federal corporate income tax on its investment income if it makes qualifying distributions of its income to stockholders. A RIC qualifies for this treatment as long as it distributes at least 90% of its investment company taxable income to stockholders as dividends. Ameritrans has organized another subsidiary, Elk Capital Corporation ("Elk Capital"), which will engage in similar lending and investment activities, although Elk Capital has elected not to be treated as a RIC. As a result, Elk Capital will not be required to make distributions to its stockholder(s), and we intend to use any after-tax earnings of Elk Capital to internally finance growth. Our management has successfully operated Elk since it began its taxi medallion finance business in 1980. Taxi loans represented approximately 80% of Elk's loan portfolio as of March 31, 1999. Elk has historically had a very low delinquency rate with these loans and has never suffered a material loss in connection with taxi financings. The balance of Elk's loans have been made to other small businesses, such as laundromats, dry cleaners, and automobile dealers, primarily in the New York City metropolitan area. The principal amounts of Elk's loans typically range from $50,000 to $1,000,000. Elk's loan portfolio has increased from $22,137,343 as of June 30, 1994 to $49,303,758 as of March 31, 1999. Our business niche is small businesses that are often overlooked by banks and other lenders and investors who have lengthy approval processes and frequently will not consider making small loans. In contrast, we can quickly evaluate, and make funds available to, small business borrowers. Further, because funding resources accessible to such borrowers are limited, we can make loans at rates that are favorable to us. As of March 31, 1999, the interest rates on Elk's outstanding loans ranged from 8.25% to 16.5%, and the weighted average rate on Elk's outstanding loans was 11.2%. We intend to continue to make taxi loans. Because the taxi financing industry is highly fragmented, we may seek to expand in this area through acquisitions of existing taxi finance companies or loan portfolios. We also intend to further diversify our activities by lending to and investing in a broader range of small businesses, directly, and indirectly through Elk, Elk Capital and other subsidiaries that we may form or acquire. Elk is a "small business investment company," or "SBIC," subject to certain restrictions under U.S. Small Business Administration ("SBA") regulations. These restrictions include limitations on the size of borrowers, the size of loans and the term of loans. Ameritrans is not an SBIC, so its direct activities and other subsidiaries will not be subject to these restrictions. We also intend to build our business by using the Internet to increase our market visibility, to accept and process loan applications, and to expand our market by making ourselves more accessible to prospective borrowers through our websites and via e-mail. Both Ameritrans and Elk are closed-end, non-diversified management investment companies that have elected to be treated as business development companies under the Investment Company Act of 1940 (the "1940 Act"). Ameritrans was incorporated in Delaware on February 12, 1998. Our principal offices are located at 747 Third Avenue, 4th Floor, New York, New York 10017 and our telephone number is (212) 355-2449. The Ameritrans website address will be www.ameritranscapital.com, and the site is expected to be operational in August 1999. The website address for Elk is www.elkassociates.com. The information contained at our websites is not incorporated into this Prospectus. -2- THE OFFERING Common Stock offered 1,100,000 shares Common Stock Outstanding(1) Before the Offering 1,745,600 shares After the Offering 2,845,600 shares(2) Current Trading Symbol: NASDAQ SmallCap Market ____ Proposed Trading Symbol: NASDAQ National Market ____ Risk Factors For a discussion of risks that you should consider before buying shares of the Common Stock, see "Risk Factors." Use of Proceeds To temporarily reduce our indebtedness; to fund our loan and investment activities, including Elk's SBIC investment portfolio and our expanded specialty finance lending business to be conducted directly by Ameritrans or through other subsidiaries; and for working capital. See "Use of Proceeds." Distributions Ameritrans pays quarterly cash dividends to our stockholders of at least 90% of our investment company taxable income. See "Distributions." - ------------------------------- (1) The number of shares outstanding and to be outstanding after the Offering does not include 125,000 shares reserved for future issuance under our 1999 Employee Incentive Stock Option Plan, including 100,000 shares issuable upon the exercise of options that have been granted under this plan to date. It also does not include 75,000 shares reserved for future issuance under our Non-employee Director Stock Option Plan. See -- "Management -- Stock Option Plans." (2) Does not include 165,000 shares issuable upon the exercise of the Underwriters' over-allotment option. -3- Fees and Expenses Because Ameritrans is a closed-end management investment company, we are required to include the following table in this Prospectus. The purpose of the table is to assist stockholders in understanding the various costs and expenses that stockholders of Ameritrans bear, directly or indirectly. Fee Table(1)
STOCKHOLDER TRANSACTION EXPENSES Sales Load (as a percentage of offering price)..............................................................(2) ANNUAL EXPENSES (as a percentage of net assets attributable to Common Stock)............................................................................................(3) Interest Payments on Borrowed Funds.........................................................................(4) Operating Expenses..........................................................................................(5) Total Annual Expenses......................................................................................... %
- ------------------------- (1) Based on estimated amounts for the current fiscal year. (2) The Sales Load, which represents underwriting discounts and commissions, is a one-time fee that we are paying to the Underwriters in connection with the Offering, and is the only sales load paid in connection with the Offering. See "Underwriting." (3) Assumes a net asset value of $__________, which will be our estimated stockholders' equity upon completion of the Offering. Operating expenses, interest payments on borrowed funds, and other expenses are calculated on an annualized basis based on our operations for the period beginning July 1, 1998, and ended March 31, 1999. (4) Interest payments on borrowed funds consist primarily of interest payable under credit agreements with banks and on subordinated SBA debentures. See "Business -- Sources of Funds." (5) Operating expenses consist primarily of general and administrative expenses, including compensation and employee benefits, professional fees, rent, travel and other marketing expenses, and various costs associated with collections. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations, Operating Expenses." Example: The following example demonstrates the projected dollar amount of total cumulative expenses that would be incurred over various periods with respect to a hypothetical investment in Ameritrans. These amounts assume no increase or decrease in leverage and are based upon payment by an investor of an 8.75% sales load (the underwriting discounts and commissions we are paying in connection with the Offering) and payment by us of operating expenses at the levels set forth in the table above. -4- An Ameritrans stockholder would pay the following expenses on a $1,000 investment, assuming a 5% annual return: 1 YEAR 3 YEARS 5 YEARS 10 YEARS ------ ------- ------- -------- $ $ $ $ This example, as well as the information set forth in the table above, should not be considered a representation of our future expenses. Actual expenses may be greater or less than those shown. Moreover, while the example assumes (as required by the Securities and Exchange Commission) a 5% annual return, our performance will vary and may result in a return greater or less than 5%. In addition, the example assumes reinvestment of all dividends and distributions at net asset value. -5- SUMMARY CONSOLIDATED FINANCIAL DATA On __________, 1999, Ameritrans acquired Elk in a share-for-share exchange. Prior to the acquisition, Elk had been operating independently and Ameritrans had no operations. The tables below contain certain summary historical financial information of Elk. The data at March 31, 1999 and for the nine months ended March 31, 1998 and 1999 are derived from Elk's unaudited financial statements and include all adjustments, consisting only of normal recurring adjustments, that we consider necessary to fairly present such data. The results for the nine months ended March 31, 1999 do not necessarily indicate the results to be expected for the full year ending June 30, 1999. You should read these tables in conjunction with the consolidated financial statements of Elk (the "Financial Statements") included elsewhere in this Prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
STATEMENT OF OPERATIONS FISCAL YEAR ENDED NINE MONTHS ENDED DATA JUNE 30, MARCH 31, ----------------------------------------------------------------------------------- ----------------- 1994 1995 1996 1997 1998 1998 1999 ---- ---- ---- ---- ---- ---- ---- (unaudited) Investment Income $2,824,881 $2,629,901 $3,084,412 $4,023,795 $4,606,456 $3,319,946 $4,100,969 ========== ========== ========== ========== ========== ========== ========== Interest Expense 1,136,458 1,002,959 1,105,993 1,582,700 1,840,731 1,360,703 1,804,597 Other Expenses 926,798 960,474 1,108,505 1,408,034 1,852,262 1,354,784 1,364,241 ======= ======= ========= ========= ========= ========= ========= Total Expenses 2,063,256 1,963,433 2,214,498 2,990,734 3,692,993 2,715,487 3,168,838 ========= ========= ========= ========= ========= ========= ========= Investment Income Before Credit (provision) for Loan Gains (losses) and Gains (Losses) on Assets Acquired and Income Taxes 761,625 666,468 869,914 1,033,061 913,463 604,459 932,131 ======= ======= ======= ========= ======= ======= ======= Credit (provision) for Loan Gains (losses) and Gains (Losses) on Assets Acquired (473,317) (13,515) 44,292 (8,923) (14,649) (4,097) (5,432) Other Income 24,885 38,798 Benefit of (Provision for) Income Taxes(1) -- -- (5,945) (28,676) (3,271) 2,716 69 =========== =========== ========== ======== ========== ======== ======== Net Income $288,308 $652,953 $908,261 $1,020,347 $934,341 $603,078 $926,768 ======== ======== ======== ========== ======== ======== ======== Net Income Per Common Share $ .13 $ .66 $ .73 $ .79 $ .62 $ .42 $ .53 ========== ========== ========== ========== =========== ========= ========= Common Stock Dividends Paid $ -- $ -- $937,028 $946,655 $986,724 $986,722 $942,624 ========= ========= ======== ======== ======== ======== ========
-6-
STATEMENT OF OPERATIONS FISCAL YEAR ENDED NINE MONTHS ENDED DATA JUNE 30, MARCH 31, ----------------------------------------------------------------------------------- ----------------- 1994 1995 1996 1997 1998 1998 1999 ---- ---- ---- ---- ---- ---- ---- (unaudited) Weighted Average Shares of Common Stock Outstanding 943,683 988,953 1,247,120 1,283,600 1,518,969 1,432,726 1,745,600 ======= ======= ========= ========= ========= ========= ========= Unrealized appreciation of equity securities not included in net income $ - $ - $ - $ 58,241 $140,548 $58,241 $30,737 ============ ============ ============ ======== ======== ======= ======= BALANCE SHEET DATA MARCH 31, JUNE 30, 1998 1999 1999 ------------- ---- ---- (unaudited) as adjusted(2) Loans Receivable.................. $41,590,000 $49,303,758 $ Unrealized depreciation of investments....................... (295,000) (335,000) Net of unrealized depreciation of investments....... 41,295,000 48,968,758 Total assets...................... 45,399,738 52,750,279 Notes payable and demand notes............................. 22,085,000 29,350,000 Subordinated SBA debentures........................ 8,880,000 8,880,000 Total liabilities................. 31,705,011 39,040,671 Total stockholders' equity........ 13,694,727 13,709,608
- ------------------------------------ (1) 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 stockholders. Therefore, only minimal taxes were required to be paid. (2) This column shows the effect of the sale of 1,100,000 shares of Common Stock in this Offering at the offering price of $_____ and our application of the net proceeds of the Offering. See "Use of Proceeds" and "Capitalization." -7- RISK FACTORS AN INVESTMENT IN THE COMMON STOCK INVOLVES A SIGNIFICANT DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING INFORMATION ABOUT THESE RISKS, TOGETHER WITH THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, BEFORE BUYING SHARES OF THE COMMON STOCK. OUR BUSINESS IS AFFECTED BY TAXI INDUSTRY CONDITIONS AND REGULATIONS. As of March 31, 1999, approximately 80% of Elk's outstanding loans were to finance the ownership of taxi medallions, taxis and related assets. The taxi industry, and the ability of taxi owners to qualify for and repay loans may be subject to factors that we cannot predict or control, such as the following: o Taxi medallions are the main component of the collateral for the loans that we make to taxi owners. Local governments in New York City and other cities have traditionally issued a limited number of taxi medallions. This generally has had the effect of increasing the value of the existing medallions, although there have been periods when the value of medallions has remained stable or declined. If the number of medallions available in any city is significantly increased, the value of both the new and outstanding medallions may decrease which, in turn, would decrease the value of the collateral for our loans. o Taxi fare rates and regulations are generally set by local government agencies, and rates may remain fixed at a time when operating expenses are increasing. As a consequence, in the short term, taxi operators may find it more difficult to cover their expenses and to service their loans from us. This could adversely affect the collectibility of our loans and the value of our collateral. WE MAY BE NEGATIVELY AFFECTED BY ANY DOWNTURN IN LOCAL ECONOMIC CONDITIONS. Any downturn in local economic conditions in our geographic markets could decrease the demand for taxi services. If that happens, taxi owners who currently have loans from Elk could find it more difficult to repay their loans and the value of the medallions, the taxis and the other assets securing those loans could be diminished. As of March 31, 1999, approximately 54% of our currently outstanding loans were to taxi operators and other small businesses in New York City. We cannot be sure that we will be able to sufficiently diversify our operations geographically or that an economic downturn in New York City would not adversely affect our business. See "Business." WE OPERATE IN A HIGHLY COMPETITIVE INDUSTRY. We compete with many other lenders, such as banks, credit unions, finance companies and other SBICs, that offer loans to owners of taxi medallions and other small businesses. Many of our competitors, including certain other lenders that specialize in making loans to the taxi industry, are significantly larger than we are and may, as a result, be able to obtain more favorable terms from their financing sources than we can obtain from our banks. If our competitors can lend at rates lower than we can, we will be at a competitive disadvantage. We also will be competing with lenders who may have significantly more expertise in evaluating small businesses in other industries and providing managerial assistance to borrowers, which may make them more attractive to potential small business -8- borrowers. In addition, some of our competitors are subject to different and in some cases less stringent regulation than we are. THE CONTINUATION AND EXPANSION OF OUR BUSINESS IS DEPENDENT UPON THE AVAILABILITY OF BANK FINANCING. We have a continuing need for capital to finance our lending activities. We fund our operations through credit facilities with bank syndicates and, to a lesser degree, through subordinated SBA debentures. Our business is dependent on our ability to continue to borrow funds from banks or the SBA on favorable terms. Because we distribute to our stockholders at least 90% of our investment company taxable income, these earnings are not available to us to fund loans to our customers. As its operations have expanded, Elk has increasingly relied upon bank financing for the funds it uses to make loans. Elk currently has three bank lines of credit aggregating $35,000,000. Under these lines of credit, Elk may borrow up to $35,000,000 at varying interest rates. As of March 31, 1999, Elk had approximately $29,350,000 of bank loans outstanding. See "Selected Financial Information." Under a 1993 agreement with the SBA (the "SBA Agreement"), Elk is permitted to borrow from its lenders, which include banks and the SBA, up to 80% of its "working assets," which are computed quarterly under a formula that takes into account Elk's capital and the value of Elk's loans and investments. As of March 31, 1999, Elk's aggregate indebtedness was $38,230,000, representing approximately 73% of its working assets as of that date. However, we cannot predict whether our lenders would agree to increase Elk's credit lines on favorable terms, or at all. Because Ameritrans is not an SBIC, it will not be able to obtain any funding from the SBA. We expect to fund the activities we propose to undertake directly or through subsidiaries other than Elk by using a portion of the proceeds of this Offering and establishing bank lines of credit. We do not currently have commitments from any banks for any additional lines of credit, and we cannot predict whether we will be able to arrange lines of credit on acceptable terms or if the funds available to us will be sufficient to make acquisitions or otherwise expand our operations or to engage in activities at a level that will enable us to continue to operate profitably. See "Business -- Sources of Funds." OUR PROFITABILITY MAY DECREASE IF THE DIFFERENCE BETWEEN THE INTEREST RATES WE PAY AND THE INTEREST RATES WE CHARGE DECREASES. We can achieve a profit on borrowed funds only if there is a sufficient spread between the interest rates we are charged for the funds we borrow and the interest rates we charge our borrowers. If the interest rates we pay rise, our cost of funds will increase while the rates our borrowers pay remain fixed, and our profitability could decrease. To partially contain this risk, we have purchased interest rate caps and swaps. While these limit our exposure to rising interest rates, they initially increase the effective interest rates that we pay on loans subject to the caps or swaps. Furthermore, the loans we make typically may be prepaid by the borrower upon payment of certain prepayment charges. A borrower is likely to exercise prepayment rights at a time when the interest rate payable on the borrower's loan is higher than prevailing interest rates. If lower interest rates are available, we may have difficulty re-lending any prepaid funds at comparable rates. If borrowers elect to refinance loans previously made at higher interest rates and our interest costs are not correspondingly reduced, our profits from the refinanced rates would be lower. -9- At March 31, 1999, our outstanding debt was as follows: o Elk had $29,350,000 outstanding under credit lines from its banks, secured by all of its assets and bearing interest at various floating rates. The current rates of interest ranged from 6.43% to 6.48%; however, as a result of interest rate swap agreements, the effective (capped) rate as to $10,000,000 was 7.36%. The revolving lines of credit mature in November 1999. o Elk had $8,880,000 outstanding under subordinated SBA debentures, with interest at fixed annual rates ranging from 6.12% to 8.20% and maturities ranging from September 2003, to March 2007. The weighted average annual rate of interest on all of our borrowings was 6.95%. Based upon that rate, we must achieve annual returns on investments of at least 5.42% to cover our total annual interest payments. See "Business -- Source of Funds." LEVERAGE MAY INCREASE THE VOLATILITY OF OUR NET ASSET VALUE AND THE MARKET PRICE OF OUR COMMON STOCK. Leverage poses certain risks for our stockholders, including possible higher volatility of both our net asset value and the market price of the Common Stock, due to the following factors, among others: o Since we must pay interest to our lenders before we can distribute any income to our stockholders, fluctuations in the interest rates payable to the lenders affect the yield to our stockholders. Income we earn from operations and from lending the proceeds of the funds we borrow must exceed the interest we must pay on such borrowed funds in order for there to be income available for distribution to stockholders. o The high rate of distribution of investment company taxable income required to maintain our tax status as a RIC limits the funds that can be retained in the business to cover periods of loss, provide for future growth and pay for extraordinary items. o In the event of a liquidation, our lenders and other creditors would have to be paid before any distribution could be made to our stockholders. The following table illustrates the effect of leverage to a stockholder, assuming our cost of funds at March 31, 1999, as described above and various annual rates of return, net of expenses. The calculations set forth in the table are hypothetical and actual returns may be greater or less than those appearing below:
Assumed return on investments (net of expenses)(1)....................................... -10% -5% 0% 5% 10% Corresponding net income to common stockholders(1).................................... -52% -35% -17% 1% 18%
- ------------------------------------ (1) Assumes (i) $49 million in average assets, (ii) an average cost of funds of 6.95%, (iii) $35 million in average debt outstanding and (iv) $14 million of average stockholders equity. -10- WE MAY EXPERIENCE LOSSES IN CONNECTION WITH FORECLOSURES OF TAXI LOANS. We believe that the collateral securing our loans is adequate, and we have never experienced a material loss of principal in connection with a taxi medallion financing. However, in the event of a foreclosure, we cannot be sure that we will be able to recoup all or a portion of a loan, and the costs of foreclosure proceedings could also reduce our recovery. OUR BORROWERS FOR NON-TAXI, DIVERSIFIED LOANS ARE SMALL BUSINESSES THAT HAVE LIMITED FINANCIAL AND PERSONNEL RESOURCES. Elk's non-taxi, diversified loans are not guaranteed by the SBA, and its borrower base consists primarily of small business owners who have limited resources. There is generally no publicly available information about such small business owners, and these small businesses are unlikely to have audited financial statements. Consequently, we must base our credit decisions on the information our employees and agents are able to obtain. Typically, the success of small businesses and their ability to repay our loans are dependent upon the management talents and efforts of one person or a small group of persons, and the death, disability or resignation of one or more of these persons could have a serious effect on their business and make it more difficult for them to repay our loans. Moreover, small businesses may be more vulnerable to economic downturns and often need substantial additional capital to expand or compete. Such companies may also experience substantial variations in operating results. WE HAVE EXPERIENCED LOSSES IN CONNECTION WITH OUR DIVERSIFIED LOANS, AND WE MAY BE REQUIRED TO INCREASE OUR RESERVES IN THE FUTURE. Elk has in the past realized losses of principal on its diversified loans. These loans typically carry more risk than taxi loans because the loan collateral is generally not as valuable or liquid as the medallions and taxis that are the collateral for taxi loans. Consequently, as we increase our non-taxi diversified loans, our risk of losses of principal may increase. We must continuously review our loan portfolio to assess the performance of all our loans. Losses in connection with any type of loan might require us to adjust the market valuation of our loan portfolio and increase our reserves. THE RISKS OF LOANS AND INVESTMENTS IN OTHER SMALL BUSINESS BORROWERS MAY BE GREATER THAN THE RISKS OF TAXI LOANS. Elk has historically made only a small percentage of its loans to small businesses other than taxi operators, and we intend to increase Elk's loans to other types of small businesses. In addition, Ameritrans will make loans to other types of businesses, directly, through Elk Capital, or through other subsidiaries. The risks affecting the collectibility of loans to taxi operators in major cities are unlikely to dramatically change in the foreseeable future or to vary substantially from region to region. However, factors affecting the potential for success of other types of small businesses and the risks of making loans to such businesses are likely to be very different from those that affect the operation of a taxi business and may vary significantly from industry to industry and from region to region. Our non-taxi, diversified loans are secured by collateral which typically includes personal guarantees, mortgages on real estate, and/or a security interests in personal property. Although we make substantial efforts to collateralize our non-taxi, diversified loans to the extent possible, the collateral on these loans is, in our experience, not as liquid as our security interest in the taxi medallions we acquire in connection with our financing of loans to taxi owners. Furthermore, the -11- collateral often does not fully cover the amount of the underlying indebtedness. Any portion of the loan not recovered by the enforcement of personal guarantees or through the sale of the underlying collateral would be a loss and would result in a charge to our earnings. Further, foreclosures on real estate mortgages or proceedings to enforce our rights under loan guarantees invariably require more time and are more costly than foreclosing on taxi medallions. In addition to the risks related to the value of the collateral securing these loans, such risks may include: o The location of the potential borrower. o The business experience of the borrower's management. o The competition faced by the borrower. o The effect of local, national and international economic conditions on the business prospects of the borrower. o The short-term and long-term capital and personnel requirements of the borrower's business. o The potential effect of changes in technology on the borrower's business. Consequently, if we commit a significant portion of our available funds to businesses in other industries, our profitability may be decreased if the risks affecting the operations of our borrowers are greater than we anticipated. VARIOUS FACTORS MAY NEGATIVELY AFFECT OUR PORTFOLIO VALUATION. Under the 1940 Act, our loan portfolio must be recorded at fair market value or "marked to market." Unlike certain lending institutions, we are not permitted to establish reserves for loan losses, but adjust quarterly the valuation of our portfolio to reflect our estimate of the current realizable value of the loan portfolio. Since no ready market exists for this portfolio, fair market value is subject to the good faith determination of our management and the approval of our Board of Directors. In determining such value, the directors may take into consideration various factors such as the financial condition of the borrower, the adequacy of the collateral and interest rates. For example, in a period of sustained increases in market rates of interest, the Board of Directors could decrease its valuation of the portfolio because the portfolio consists primarily of fixed-rate loans. These fair valuation procedures are designed to approximate the value that would have been established by market forces and are therefore subject to uncertainties and variations from reported results. Based on the foregoing criteria, we determine net unrealized depreciation or appreciation of investments, or the amount by which our estimate of the current realizable value of our portfolio is above or below its cost basis. As of March 31, 1999, our loan portfolio was recorded on the balance sheet at fair market value, which included $335,000 of net unrealized depreciation, as estimated in accordance with the 1940 Act and the purchase method of accounting. At March 31, 1999, our net unrealized appreciation was approximately $230,000. Based upon current market conditions and current loan to value ratios, the Board of Directors believes that the net unrealized depreciation of investments is adequate to reflect the fair market value of the portfolio. However, if interest rates increase, net unrealized depreciation of investments could increase, and net increase in net assets resulting from operations could decline. Because of the -12- subjectivity of these estimates, there can be no assurance that in the event of a foreclosure or in the sale of portfolio loans, we would be able to recover the amounts reflected on our balance sheet. Further, costs associated with foreclosure proceedings, such as a 5% New York City transfer tax assessed in connection with every medallion transfer, may reduce our expected net proceeds. See "Business -- Loan Portfolio; Valuation." WE MAY ENCOUNTER DIFFICULTIES IN MAKING ACQUISITIONS ON FAVORABLE TERMS AND IN INTEGRATING ACQUISITIONS INTO OUR OPERATIONS. We intend to expand our business in part by acquiring other taxi-related businesses or other finance companies or loan portfolios in our existing as well as in new geographic markets. We will have to identify companies that we believe will add value to our operations and negotiate the terms on which we can acquire these companies. It is likely that potential acquisition targets may also be attractive to others, who may be able to offer more favorable terms than we can. We may use Common Stock (which could result in dilution to purchasers of Common Stock) or debt (which may be long-term), or use any combination of Common Stock and debt to make acquisitions. There can be no assurance that we will successfully identify and acquire other companies or that any acquisitions we make will ultimately add to our profitability. While we regularly evaluate potential acquisition opportunities, we currently have no commitments, agreements or understandings with respect to any material acquisition. We have had no prior experience in making acquisitions and integrating other companies into our operations. Corporate acquisitions entail risks that may include the following, among others: o We may encounter undisclosed liabilities in acquired entities. o We may have to deal with issues associated with entry into markets that are new to us, such as reliance on new personnel. o Difficulties may arise in integrating the acquired operations or managing problems due to sudden increases in the size of our loan portfolio, and we may be required to modify our operating systems and procedures, hire additional staff, obtain and integrate new equipment and complete other tasks to assimilate new and increased business activities. WE RELY, IN PART, ON SBA FINANCING. At March 31, 1999, approximately $8,880,000, or 23%, of Elk's outstanding debt consisted of subordinated SBA debentures, and we intend to continue to seek to finance a portion of Elk's business through SBA funding programs. The continued availability of funds from the SBA will be subject to various factors beyond our control, including the following: o The financing that the SBA makes available to SBICs is limited. The amount of financing we have received from the SBA has not changed significantly over the last five years, and we have not relied on SBA funds to finance Elk's growth. Although funds are presently available to qualified applicants, if Elk seeks additional SBA financing in the future, it will compete with many other SBICs for these funds. o The amount of financing Elk would be eligible to receive from the SBA is calculated using a formula that nets certain expenses and adjustments from Elk's capital. -13- o SBA financing may be restricted in its application. The SBA has determined that due to its concerns regarding the concentration of SBIC loans in the taxi industry and the availability of private capital to finance taxi related businesses, additional SBA financing may not be made available to certain SBICs for such loans. WE WILL BE DEPENDENT ON DIVIDENDS FROM ELK AND ANY FUTURE SUBSIDIARIES FOR OUR OPERATING INCOME AND CASH FLOW. We are a holding company and we derive and will derive most of our operating income and cash flow from our subsidiaries. Currently, we derive all of our income from Elk. While we intend to commence other operations, either directly or through other subsidiaries we establish or acquire, we do not currently have any other such operations. As a result, we rely entirely upon distributions from Elk to generate the funds necessary to make dividend payments and other distributions to our stockholders. Funds are provided to us through dividends, but there can be no assurance that Elk or any other subsidiaries will be in a position to continue to make such dividend payments. See "Business" and "Distributions." WE WILL CONTINUE TO QUALIFY FOR TAX TREATMENT AS A REGULATED INVESTMENT COMPANY ONLY IF OUR ACTIVITIES COMPLY WITH CERTAIN PROVISIONS OF THE TAX LAW. RISKS ASSOCIATED WITH DISTRIBUTION REQUIREMENTS AND LEVERAGE Ameritrans and Elk have each qualified as a regulated investment company (a "RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"). In any year in which these companies qualify under Subchapter M, they generally will not be subject to federal income tax on investment company taxable income (which includes, among other things, dividends and interest reduced by deductible expenses) that they distribute to stockholders, provided they distribute at least 90% of the investment company taxable income to their stockholders. In addition to the distribution requirement, to qualify as RICs, Elk and Ameritrans must also meet certain income and diversification requirements. However, the 1940 Act contains certain asset coverage ratio requirements applicable to investment companies that use leverage, as Elk does and Ameritrans intends to do. Because Elk is an SBIC, it is exempt from these requirements, but Ameritrans will be subject to them. These asset coverage requirements could, under certain circumstances, prohibit Ameritrans from making distributions that are necessary to maintain RIC status. In addition, the asset coverage and distribution requirements limit our ability to retain earnings, establish loss reserves, provide for future growth, and pay for extraordinary items, such as the repayment of debt principal. Qualification as a RIC under Subchapter M is determined on an annual basis and, although Ameritrans and Elk are currently qualified as RICs, we cannot be sure that they will each continue to qualify for such treatment. If they were to elect not to be treated as RICs, or were to fail to qualify for RIC status for any reason, their respective incomes would become fully taxable, and a substantial reduction in the amount of income available for distribution to Ameritrans and its stockholders would result. See "Investment Policies -- Ameritrans Investment Policies," "Federal Income Tax Considerations," and "Regulation." The Small Business Investment Act of 1958 (the "1958 Act") and regulations thereunder (the "SBA Regulations") govern the activities of SBICs and under certain circumstances may have the effect of restricting distributions by SBICs, such as Elk. The SBA has made loans to Elk, and Elk has issued debentures in the amount of those loans to the SBA. Under the SBA Regulations, Elk is required to pay any interest due to the SBA on a timely basis. Historically, Elk has made timely -14- payment of interest due to the SBA. However, if Elk were unable to do so in the future for any reason at a time when it had investment company taxable income, it could be prohibited by SBA Regulations from making the distributions necessary to maintain its qualification as a RIC. Under such circumstances, in order to comply with the SBA Regulations and the RIC distribution requirements, Elk would have to request and receive a waiver of the SBA's restrictions. In the absence of a waiver, compliance with the SBA Regulations could result in loss of RIC status by both Elk and Ameritrans, and the consequent imposition of corporate tax on both companies. In addition, Elk must comply with certain covenants contained in its loan agreements with its banks. If we do not comply with these covenants and do not obtain waivers from the banks should a default occur and remain continuing, Elk could be prohibited from paying dividends. If Elk were unable to remedy the default and distribute its income to its stockholder, Ameritrans, both Elk and Ameritrans would lose their RIC status and be subject to corporate taxes. RISKS ASSOCIATED WITH DIVERSIFICATION REQUIREMENTS We intend to continue to pursue an expansion and diversification strategy in our loan and investment business, and believe that there are growth opportunities in the areas of small and medium-sized businesses. However, the asset diversification requirements under the Internal Revenue Code could restrict such expansion. These requirements provide, in part, that not more than 25% of the value of a RIC's total assets may be invested in the securities (other than U.S. Government securities or securities of other RICs) of any one issuer or two or more issuers controlled by such RIC that are engaged in similar or related trades or businesses. Our investment in Elk will not be subject to this diversification test so long as Elk is a RIC. However, our investment in Elk Capital and any other subsidiaries may be subject to this test. The test is initially calculated at the time the assets are acquired; however, subsequent growth of a non-RIC subsidiary, if internally generated (as opposed to growth via acquisitions), will not violate the diversification requirement even if it represents in excess of 25% of Ameritrans' total assets. If Ameritrans fails the diversification test at any time in the future, it would lose its RIC status, with the consequences described above. Accordingly, our maintenance of RIC status could limit our ability to expand and diversify our business. Our principal focus will be to expand our business through internally generated growth and only to consider an acquisition if, giving effect to the acquisition, the Internal Revenue Code's diversification requirements would be met. See "Federal Income Tax Consequences." OUR SUCCESS IS DEPENDENT UPON OUR MANAGEMENT, PARTICULARLY GARY C. GRANOFF. Our ability to maintain our competitive position depends on retaining the services of our senior management. The loss of the services of one or more members of senior management could have a material adverse effect on us. In particular, we are largely dependent on the continued efforts of Gary C. Granoff, who is our President and Chairman of our Board of Directors, Ellen M. Walker, Vice President and a director, and Lee A. Forlenza, Vice President and a director. We are the beneficiary of a "key person" life insurance policy on the life of Mr. Granoff. The proceeds of this policy have been assigned to our banks as additional collateral for our loans. See "Management." We intend to hire, upon completion of the Offering, at least two additional loan officers. If we are unable to recruit and hire qualified individuals to fill these positions, our ability to expand our business operations may be restricted. See "Business -- Employees." -15- WE ARE CONTROLLED BY OUR PRINCIPAL STOCKHOLDERS, INCLUDING MANAGEMENT STOCKHOLDERS. At the conclusion of the Offering, our management and principal stockholders will own a substantial percentage of our Common Stock (approximately 37% of the outstanding shares). Stockholders do not have cumulative voting rights. As a result, management and our principal stockholders will continue to be able to exercise substantial influence over any matters requiring the vote of stockholders, including the election of Directors, which could delay or prevent a change in control of Ameritrans. See "Security Ownership of Principal Stockholders" and "Management." OUR COMPUTER SYSTEMS, AND THOSE OF OTHERS ON WHOM WE RELY, MAY NOT ACHIEVE YEAR 2000 READINESS. We are working to resolve the potential impact of the year 2000 on the ability of our computer systems to accurately process information with dates later than December 31, 1999, or to process date-sensitive information accurately beyond the year 1999 (referred to as the "Year 2000" issue). We are in the process of modifying or replacing all affected systems for compliance with the Year 2000 issue and are also monitoring the adequacy of the processes and progress of vendors of systems and applications that may be affected by the Year 2000 issue. We are dependent in part on computer systems and applications owned and operated by others, particularly with respect to such critical tasks as accounting and billing, as well as on our own computer systems. While we believe our systems modifications will be successful, because of the complexity of the Year 2000 issue and the interdependence of organizations using computer systems, we may not satisfactorily complete our Year 2000 program in a timely fashion. In addition, others with whom we interact and on whom we rely, such as our banks, may not satisfactorily complete their own Year 2000 programs in a timely fashion. Failure to satisfactorily address the Year 2000 issue could have a material adverse effect on our prospects, business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations -- Year 2000 Compliance." THE MARKET PRICE OF THE COMMON STOCK WILL FLUCTUATE, AND COULD FLUCTUATE SIGNIFICANTLY. The Ameritrans Common Stock is listed on the NASDAQ SmallCap Market under the symbol "____", and prior to our acquisition of Elk, its Common Stock was listed under the symbol "EKFG." Historically, there has been a low trading volume in the Elk Common Stock. Upon completion of this Offering, we anticipate the Ameritrans Common Stock will be listed on the NASDAQ National Market System. See "Price Range of Common Stock." The market price of the Common Stock will fluctuate, and could fluctuate significantly, in response to various factors and events, including the following: o the liquidity of the market for the Common Stock; o differences between our actual financial or operating results and those expected by investors and analysts; o changes in analysts' recommendations or projections; o new statutes or regulations or changes in interpretations of existing statutes and regulations affecting our business; o changes in general economic or market conditions; and -16- o broad market fluctuations. PURCHASERS OF COMMON STOCK IN THIS OFFERING WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE NET TANGIBLE BOOK VALUE OF THEIR SHARES. Immediately upon the closing of the Offering, the purchasers of the Common Stock will experience dilution in the net tangible book value of their shares of $2.56 per share ($2.49 if the Underwriters' over-allotment option is exercised in full). See "Dilution." In addition, such purchasers will incur further dilution to the extent we issue options under the 1999 Employee Stock Option Plan (the "1999 Employee Plan") and the Non-interested Director Stock Option Plan (the "Director Plan") and such options are exercised at a time when the exercise price is less than the market price for the Common Stock. See "Management -- Stock Option Plans." THE MARKET PRICE OF THE COMMON STOCK MAY DECLINE DUE TO SHARES ELIGIBLE FOR FUTURE SALE. Future sales of substantial amounts of Common Stock in the public market, or the perception that such sales could occur, could adversely affect prevailing market prices from time to time. In addition, several of our principal stockholders and entities affiliated with them hold a significant portion of our outstanding Common Stock, and a decision by one or more of these stockholders to sell their shares could adversely affect the market price of the Common Stock. Upon completion of the Offering, we will have outstanding 2,845,600 shares of Common Stock (3,010,600 if the Underwriters' over-allotment option is exercised in full). Except for the shares currently owned or subsequently acquired by our affiliates, in this Offering or otherwise, the outstanding shares and the 1,100,000 shares to be sold in this Offering (1,265,000 if the Underwriters' over-allotment option is exercised in full), will be freely tradable without restriction under the Securities Act of 1933 (the "Securities Act"). The shares owned by our affiliates may be sold in accordance with the conditions of Rule 144 of the Securities Act. In general, under Rule 144, an affiliate would be entitled to sell in brokers' transactions or to market makers within any three-month period a number of shares that does not exceed the greater of 1% of the then outstanding shares of the Common Stock (approximately 28,450 shares, based on the number of shares outstanding after the Offering, assuming no exercise of the Underwriters' over-allotment option) or the average weekly trading volume of the Common Stock on the Nasdaq National Market during the four calendar weeks preceding the date on which notice of the sale is filed with the Securities and Exchange Commission (the "SEC"). Sales under Rule 144 are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about the company. Pursuant to lock-up agreements with the Underwriters, our officers and directors will not, directly or indirectly, offer for sale, sell, contract to sell, grant an option to purchase or otherwise dispose of any shares of the Ameritrans Common Stock, (except 40,000 shares owned by one director and his wife, which may be sold at the rate of 10,000 shares during any three-month period) until 13 months after the completion of the Offering without the prior written consent of the Underwriters. See "Underwriting." We have reserved a total of 125,000 shares of Common Stock for issuance with respect to the grants of options under the 1999 Employee Plan. To date, we have granted options to purchase 100,000 shares of Common Stock, leaving 25,000 shares of Common Stock for future grants under the 1999 Employee Plan. In addition, a total of 75,000 additional shares of Common Stock have been -17- reserved for issuance with respect to the grant of options under the Director Plan. We intend to file a registration statement under the Securities Act to register the shares reserved for issuance under the 1999 Employee Plan and the Director Plan. Shares issued upon exercise of outstanding stock options after the effective date of such registration statement generally will be tradable without restriction under the Securities Act. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR FORECAST IN THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS PROSPECTUS. This Prospectus contains forward-looking statements that have been made under the provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not historical facts, but, rather, are based on current expectations, estimates, and projections about our industry, our beliefs, and assumptions. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance, and are subject to certain risks, uncertainties, and other factors, some of which are beyond our control, are difficult to predict, and could cause actual results to differ materially from those expressed or forecast in the forward-looking statements. These risks and uncertainties include those described in "Risk Factors" and elsewhere in this Prospectus. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect our management's view only as of the date of this Prospectus. We undertake no obligation to update these statements or publicly release the result of any revisions to the forward-looking statements that we may make to reflect events or circumstances after the date of this Prospectus or to reflect the occurrence of unanticipated events. -18- USE OF PROCEEDS We estimate that the net proceeds to us from the Offering, after deducting underwriting discounts and commissions and other offering expenses that we must pay, will be approximately $10,300,000 (approximately $11,906,275 if the Underwriters' over-allotment option is exercised in full), based upon a public offering price of $11.00 per share. We intend to use the net proceeds as follows: o $5,000,000 to fund Elk's loan and investment portfolio. o $5,000,000 to fund our expanded and diversified non-SBIC business, which may be conducted directly by Ameritrans or through other subsidiaries. We anticipate that approximately one-half of this amount will be used to fund the activities of Elk Capital, which will not be a RIC and will, therefore, not be required to make distributions to its stockholders. This will enable us to use any after-tax earnings of Elk Capital to internally finance growth. o the balance for working capital. Until we apply the proceeds to the purposes described above, we intend to temporarily reduce the aggregate amounts outstanding under Elk's revolving credit facilities by temporarily repaying debt in the aggregate amount of up to $10,300,000, with interest rates ranging from 6.43% to 6.48% and maturing in November, 1999. To the extent we have paid down our lines of credit, we will reborrow from time to time amounts available under Elk's existing revolving credit facilities and any similar facilities we may be able to arrange for Ameritrans. See "Business -- Source of Funds." The allocation of net proceeds set forth above represents our best estimates of their use. Because Ameritrans has not commenced significant operations other than through Elk, we cannot determine with certainty how much of our expanded and diversified business we will do directly in Ameritrans and how much through Elk Capital or other new specialized subsidiaries, although we initially anticipate an approximately equal split. We also may acquire other related businesses. We have entered into discussions from time to time with potential acquisition candidates; however, any discussions are preliminary and we have not entered into any definitive agreements with respect to such acquisitions at this time. The net proceeds actually allocated to the operations of Elk and our proposed new operations may vary based on numerous factors, such as the nature of the investment and lending opportunities that become available to us, changes in the regulatory environment affecting taxi ownership and operations in various cities and changes in SBA regulations. We therefore reserve the right to reallocate net proceeds of this offering among our various investing and lending operations as our management, in its sole discretion, deems advisable. Any portion of the proceeds that we do not use to temporarily pay down our indebtedness will be temporarily invested in time deposits, income-producing securities with maturities of 15 months or less that are issued or guaranteed by the federal government or agencies thereof, and high quality debt securities maturing in one year or less from the time of investment. We expect that the net proceeds will be applied as set forth above within 12 months of the Offering. Any proceeds received upon the exercise of the Underwriters' over-allotment option will be -19- added to the funds available for investment and to working capital. See "Business -- Sources of Funds." DILUTION The PRO FORMA consolidated net tangible book value of Ameritrans at March 31, 1999 was $13,709,608 or $7.85 per share. "Net tangible book value per share" is the tangible net worth (total tangible assets less total liabilities) of Ameritrans divided by the number of shares of Common Stock outstanding. Based upon an assumed public offering price per share of $11.00 and after giving effect to the sale of the Common Stock offered hereby (after deducting the underwriting discounts and commissions and estimated offering expenses), the PRO FORMA net tangible book value of Ameritrans at March 31, 1999 would have been $24,009,608 or $8.44 per share, representing an immediate increase in net tangible book value of $.59 per share to existing stockholders and an immediate dilution of $2.56 per share to the investors purchasing the shares of Common Stock in the Offering ("New Investors"). The following table illustrates this dilution to New Investors:
Public offering price per share ................................ $11.00 ------ Net tangible book value per share before the Offering........... $7.85 Increase per share attributable to the sale of shares to New Investors..................................................... .59 --- Net tangible book value per share after the Offering............ $8.44 ----- Dilution to New Investors....................................... $2.56 =====
If the Underwriters' over-allotment option is exercised in full, the PRO FORMA net tangible book value per share of Common Stock after this Offering would be $8.51, which would result in dilution to New Investors in this Offering of $2.49 per share. -20- DISTRIBUTIONS Before Ameritrans acquired Elk, its stockholders were the stockholders of Elk and received dividends directly from Elk. Elk registered under the 1940 Act for the fiscal year ended June 30, 1984, and declared and paid dividends to holders of Common Stock for the fiscal years ended June 30, 1984, through June 30, 1992. Thereafter, Elk paid dividends per share for the fiscal years ended June 30, 1996, 1997 and 1998, and for fiscal 1999 through the date of this Prospectus as follows: 1996 -- $.73, 1997 -- $.74, 1998 -- $.57, and 1999 (to date) -- $.72. Ameritrans intends to distribute at least 90% of its investment company taxable income on a quarterly basis to its stockholders. Elk and Ameritrans have elected to be treated for tax purposes as RICs under the Internal Revenue Code. As RICs, neither Ameritrans nor Elk is subject to federal income tax on any investment company taxable income that it distributes to its stockholders, if at least 90% of its investment company taxable income is distributed to its stockholders. Investment company taxable income includes, among other things, dividends and interest reduced by interest and operating expenses. Initially, substantially all of Ameritrans' investment company taxable income is expected to be comprised of cash dividends paid to it by Elk. Substantially all of Elk's net income is investment company taxable income and is derived from interest received on outstanding loans. See "Federal Income Tax Considerations." We do not currently expect Ameritrans to have any material capital gains; however, to the extent that it does, it may either distribute them annually or retain them, pay the capital gains tax and apply any after-tax amounts to retained earnings for corporate use. Our ability to make dividend payments is restricted by certain asset coverage requirements under the 1940 Act and is dependent upon maintenance of our status as a RIC under the Internal Revenue Code. The ability of Elk and, therefore, of Ameritrans, to make dividend payments is further restricted by certain financial covenants contained in the credit agreements with Elk's banks, by SBA rules and under the terms of the SBA subordinated debentures. See "Regulation" and "Federal Income Tax Considerations." Elk Capital is not a RIC, and Ameritrans may establish other subsidiaries that are not RICs. Non-RIC subsidiaries would not be required to make distributions to Ameritrans. In such cases, unless Ameritrans required distributions from such non-RIC subsidiaries to fund the distributions it is required to make as a RIC, these subsidiaries would use income, if any, to fund their operations. -21- PRICE RANGE OF COMMON STOCK The Elk Common Stock was listed on the Nasdaq SmallCap Market on June 22, 1998, under the symbol EKFG, prior to which it had traded in the "pink sheets." Since ________ __, 1999, when Ameritrans acquired Elk, its Common Stock has been listed on the Nasdaq SmallCap Market under the symbol ____. Upon completion of the Offering it is anticipated that the Ameritrans Common Stock will be traded on the Nasdaq National Market under the symbol ____. The following tables show the closing high and low bid prices per share of Common Stock as reported by the National Quotation Bureau, Inc. or directly by dealers maintaining a market in the Common Stock (through June 22, 1998) and the high and low sale prices per share of Common Stock as reported by Nasdaq (from June 23, 1998), for the fiscal years ended June 30, 1997 and 1998 and for the current fiscal year to date. The tables also show, for the same periods, the net asset value per share, the premium of high sale price to net asset value, and the premium of low sale price to net asset value. Net asset value per share is determined as of the last day in the relevant quarter and therefore may not reflect the net asset value per share on the date of the high and low sale price. The net asset values are based on outstanding shares at the end of each period. Due to the limited number of transactions involving the Common Stock during the periods presented below, the public trading market with respect to our securities has been limited. The Common Stock traded at less than net asset value during fiscal 1997 and through the third quarter of fiscal 1998, which we believe was primarily a consequence of the limited trading market. Since the fourth quarter of fiscal 1998, the Common Stock has generally traded at a premium to net asset value per share. There can be no assurance, however, that such premium will be maintained.
NET ASSET PREMIUM OF HIGH PREMIUM OF LOW VALUE PER SALES PRICE TO SALES PRICE TO NET ELK BID SHARE NET ASSET VALUE% ASSET VALUE % ------------------------ --------- ---------------- ----------------- HIGH LOW ---- --- FISCAL 1997 1st Quarter..................... $4.75 $4.625 $8.23 -73% -78% 2nd Quarter..................... 4.75 4.75 8.25 -74% -74% 3rd Quarter..................... 5.125 4.75 8.42 -64% -77% 4th Quarter..................... 5.125 5.125 8.60 -68% -68% FISCAL 1998 1st Quarter..................... 6.25 5.125 8.30 -33% -62% 2nd Quarter..................... 6.625 6.25 7.83 -18% -20% 3rd Quarter..................... 7.125 6.625 7.76 -9% -17% 4th Quarter (to June 22, 1998).. 9.75 7.125 7.85 19% -10%
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NET ASSET PREMIUM OF HIGH PREMIUM OF LOW VALUE PER SALES PRICE TO SALES PRICE TO NET ELK SALE SHARE NET ASSET VALUE% ASSET VALUE % - --- ------------------- --------- ---------------- ------------------ HIGH LOW ---- --- FISCAL 1998 4th Quarter (from June 23, 1998)..... $9.50 $9.50 $7.85 10% 10% FISCAL 1999 1st Quarter.......................... 11.25 7.75 7.84 30% -1% 2nd Quarter.......................... 11.00 9.125 7.83 29% 14% 3rd Quarter.......................... 10.625 8.875 7.83 26% 12% 4th Quarter (to June 18, 1999)....... 10.00 8.6815 7.83 22% 10% AMERITRANS - ---------- FISCAL 2000 1st Quarter
On ______________ ____, 1999, the closing sale price for a share of our Common Stock was __________, as reported by Nasdaq. -23- CAPITALIZATION The following table sets forth (i) the PRO FORMA consolidated capitalization (giving effect to the acquisition of Elk on ___________ __, 1999) of Ameritrans at March 31, 1999 and (ii) the PRO FORMA capitalization of Ameritrans at March 31, 1999, as adjusted to reflect the effects of the sale of 1,100,000 shares of Common Stock in this Offering, after deducting the sales load (underwriting discounts and commissions) and estimated offering expenses, at an assumed public offering price of $11.00 per share and the application of the estimated net proceeds as described in this Prospectus. See "Use of Proceeds" and "Business." This table should be read together with the Selected Financial Information included in this Prospectus.
MARCH 31, 1999 -------------- (unaudited) ACTUAL AS ADJUSTED ---------------------------------- Debt: Subordinated SBA debentures of subsidiary (Elk).......... $ 8,880,000 $ 8,880,000 Notes payable to bank(1)................................. 29,350,000 19,050,000 ---------- ---------- Total long-term debt and bank debt....................... 38,230,000 27,930,000 Stockholders' equity: Preferred Stock, $.01 par value; 1,000,000 shares authorized; none issued and outstanding........................... Common Stock, $.0001 par value; 5,000,000 shares authorized; 1,745,600 shares issued and outstanding, (2,845,600 issued and outstanding as adjusted)(2)..... 175 285 Additional paid-in capital............................... 13,036,698 23,336,588 Restricted capital....................................... 434,777 434,777 Accumulated undistributed income......................... 8,433 8,433 Other comprehensive income............................... 229,525 229,525 ------------ ----------- Total stockholders' equity............................... 13,709,608 24,009,608 ------------ ----------- Total capitalization......................................... $51,939,608 $51,939,608 =========== ===========
- ------------------------------------ (1) We intend to temporarily repay up to $10,300,000 of indebtedness with the proceeds of this Offering. See "Use of Proceeds." (2) Excludes an aggregate of (i) 100,000 shares issuable pursuant to immediately exercisable options outstanding at March 31, 1999, and (ii) 100,000 shares reserved for issuance upon the exercise of additional options that may be granted under our existing option plans. See "Management -- Stock Option Plans" and "Shares Eligible for Future Sale." -24- SELECTED FINANCIAL INFORMATION On __________, 1999, Ameritrans acquired Elk in a share-for-share exchange. Prior to the acquisition, Elk had been operating independently and Ameritrans had no operations. The tables below contain certain summary historical financial information of Elk. The data at March 31, 1999 and for the nine months ended March 31, 1998 and 1999 are derived from the company's unaudited financial statements and include all adjustments, consisting only of normal recurring adjustments, that we consider necessary to fairly present such data. The results for the nine months ended March 31, 1999 do not necessarily indicate the results to be expected for the full year ending June 30, 1999. You should read these tables in conjunction with the consolidated financial statements of Elk (the "Financial Statements") included elsewhere in this Prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
STATEMENT OF OPERATIONS FISCAL YEAR ENDED NINE MONTHS ENDED DATA JUNE 30, MARCH 31, ---------------------------------------------------------------------- ---------------------- 1994 1995 1996 1997 1998 1998 1999 ---- ---- ---- ---- ---- ---- ---- (unaudited) Investment Income $2,824,881 $2,629,901 $3,084,412 $4,023,795 $4,606,456 $3,319,946 $4,100,969 ========== ========== ========== ========== ========== ========== ========== Interest Expense 1,136,458 1,002,959 1,105,993 1,582,700 1,840,731 1,360,703 1,804,597 Other Expenses 926,798 960,474 1,108,505 1,408,034 1,852,262 1,354,784 1,364,241 ======= ======= ========= ========= ========= ========= ========= Total Expenses 2,063,256 1,963,433 2,214,498 2,990,734 3,692,993 2,715,487 3,168,838 ========= ========= ========= ========= ========= ========= ========= Investment Income Before Credit (provision) for Loan Gains (losses) and Gains (Losses) on Assets Acquired and Income Taxes 761,625 666,468 869,914 1,033,061 913,463 604,459 932,131 ======= ======= ======= ========= ======= ======= ======= Credit (provision) for Loan Gains (losses) and Gains (Losses) on Assets Acquired (473,317) (13,515) 44,292 (8,923) (14,649) (4,097) (5,432) Other Income 24,885 38,798 Benefit of (Provision for) Income Taxes(1) -- -- (5,945) (28,676) (3,271) 2,716 69 =========== =========== ========== ======== ========== ======== ======== Net Income $288,308 $652,953 $908,261 $1,020,347 $934,341 $603,078 $926,768 ======== ======== ======== ========== ======== ======== ======== Net Income Per Common Share $ .13 $ .66 $ .73 $ .79 $ .62 $ .42 $ .53 ========== ========== ========== ========== =========== ========= ========= Common Stock Dividends Paid $ -- $ -- $937,028 $946,655 $986,724 $986,722 $942,624 ========= ========= ======== ======== ======== ======== ========
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STATEMENT OF OPERATIONS FISCAL YEAR ENDED NINE MONTHS ENDED DATA JUNE 30, MARCH 31, ---------------------------------------------------------------------- ---------------------- 1994 1995 1996 1997 1998 1998 1999 ---- ---- ---- ---- ---- ---- ---- (unaudited) Weighted Average Shares of Common Stock Outstanding 943,683 988,953 1,247,120 1,283,600 1,518,969 1,432,726 1,745,600 ======= ======= ========= ========= ========= ========= ========= Unrealized appreciation of equity securities not included in net income $ $ $ $ 58,241 $140,548 $58,241 $30,737 =========== =========== =========== ======== ======== ======= ======= BALANCE SHEET DATA JUNE 30, MARCH 31, --------------------------------------------------------------------------------------- 1994 1995 1996 1997 1998 1998 1999 ---- ---- ---- ---- ---- ---- ---- (unaudited) Loans Receivable $22,137,343 $23,039,462 $24,141,421 $33,249,206 $41,590,000 $34,862,680 $49,303,758 Unrealized depreciation of investments (355,000) (277,000) (301,000) (325,000) (295,000) (295,000) (335,000) ========= ========= ========= ========= ========= ========= ========= Net of unrealized depreciation of investments $21,782,343 $22,762,462 $23,840,421 $32,924,206 $41,295,000 $34,567,680 $48,968,758 Total assets $25,367,954 $25,702,600 $26,721,186 $37,026,021 $45,399,738 $37,936,313 $52,750,279 =========== =========== =========== =========== =========== =========== =========== Notes payable and demand notes $5,695,000 $4,950,000 $6,625,000 $16,820,000 $22,085,000 $15,085,000 $29,350,000 Subordinated SBA debentures $8,724,430 $8,804,000 $8,858,000 $8,880,000 $8,880,000 $8,880,000 $8,880,000 Total liabilities $14,777,514 $14,085,652 $15,820,351 $25,993,253 $31,705,011 $24,384,166 $39,040,671 =========== =========== =========== =========== =========== =========== =========== Total stockholders' equity $10,590,440 $11,616,948 $10,900,835 $11,032,768 $13,694,727 $13,552,147 $13,709,608 =========== =========== =========== =========== =========== =========== ===========
- ------------------------------------ (1) 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 stockholders. Therefore, only minimal taxes were required to be paid. -26- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion in conjunction with the financial statements and notes to financial statements. The results described below are not necessarily indicative of the results to be expected in any future period. Certain statements in this discussion and analysis, including statements regarding our strategy, financial performance, and revenue sources, are forward-looking statements based on current expectations and entail various risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements, including those described in "risk factors" and elsewhere in this prospectus. GENERAL Ameritrans acquired Elk in ___________ 1999, and to date we have had no activities other than the acquisition and operation of Elk. Elk is an SBIC that has been operating since 1980, making loans to (and, to a limited extent, investments in) small businesses, primarily businesses that are majority-owned by persons who qualify under SBA Regulations as socially or economically disadvantaged. Most of Elk's business has consisted of originating and servicing loans collateralized by New York City, Boston, Chicago and Miami taxi medallions, but Elk also makes loans to and investments in other diversified businesses and to persons who qualify under SBA Regulations as "non-disadvantaged." Historically, Elk's earnings derived primarily from net interest income, which is the difference between interest earned on interest-earning assets (consisting of 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 Consolidated Financial Statements." RESULTS OF OPERATIONS RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998 TOTAL INVESTMENT INCOME Elk's investment income for the nine months ended March 31, 1999, increased to $4,100,969 from $3,319,946, or 23.5%, for the nine month period ended March 31, 1998. This increase was mainly due to an increase in the loan portfolio during the fiscal year. The portfolio increased from $34,862,680 as of March 31, 1998, to $49,303,758 as of March 31, 1999, as part of our strategy to maximize stockholder rate of return primarily through the utilization of bank financing. OPERATING EXPENSES Interest expense for the nine month period ended March 31, 1999, increased to $1,804,597 from $1,360,703 for the prior period ended March 31, 1998. This increase was mainly due to increased bank borrowings for the period offset by lower interest rates for the period ended March 31, 1999. -27- Other operating expenses decreased $10,793 when compared with the similar period ended March 31, 1998. This decrease was mainly due to a decrease of $73,533 in bad debt expense, offset by an increase in administrative fees and payroll costs. NET INCOME Net income for the nine months ended March 31, 1999, increased $323,690, as compared to the nine months ended March 31, 1998, reflecting the positive impact of the growth of Elk's loan portfolio and decreases in the interest rates payable to Elk's banks. RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1998 AND 1997 TOTAL INVESTMENT INCOME Elk's investment income for the fiscal year ended June 30, 1998 increased to $4,606,456 from $4,023,795, or 14.5%, when compared with the year ended June 30, 1997. This increase was mainly due to an increase in its loan portfolio. The portfolio increased from $33,249,206, as of June 30, 1997 to $41,590,000 as of June 30, 1998, as part of our strategy to maximize stockholder rate of return primarily through the utilization of bank financing. OPERATING EXPENSES Interest expense for the year ended June 30, 1998 increased $258,031 to $1,840,731 as compared to $1,582,700 for the similar period ended June 30, 1997. This increase was mainly due to increased bank borrowings of $22,085,000 as of June 30, 1998, compared to $16,820,000 as of June 30, 1997. Other operating expenses increased $449,954 when compared with the year ended June 30, 1997. This increase was mainly due to a $227,748 increase in bad debt expense, in addition to various increases in the administrative fees. NET INCOME Net income for the year ended June 30, 1998, decreased $86,006, as compared to the year ended June 30, 1997. This decrease was mainly caused by an increase in the bad debt expense of $227,748. RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1997 AND 1996 TOTAL INVESTMENT INCOME Elk's investment income for the year ended June 30, 1997 increased to $4,023,795 from $3,084,412, or 30.5%, when compared with the year ended June 30, 1996. This increase was mainly due to an increase in the loan portfolio. The portfolio increased from $24,141,421, as of June 30, 1996 to $33,249,206 as of June 30, 1997, as part of our strategy to maximize stockholder rate of return, primarily through the use of bank borrowings. OPERATING EXPENSES Interest expense for the year ended June 30, 1997 increased to $1,582,700 from $1,105,993 for the year ended June 30, 1996. This increase was mainly due to increased bank borrowings of $16,820,000 as of June 30, 1997, compared to $6,625,000 as of June 30, 1996. -28- Other operating expenses increased $352,744 when compared with the similar period ended June 30, 1996. This increase was mainly due to an increase in legal fees of $121,104 attributable to the increase of business in the Chicago market, in addition to increases in administrative fees, due to our decision to change our method of payment of management fees. NET INCOME Net income for the year ended June 30, 1997, increased $112,086, as compared with the year ended June 30, 1996. This increase was mainly due to an increase in Elk's loan portfolio. BALANCE SHEET AND RESERVES Total assets increased by $7,350,541 as of March 31, 1999 as compared to June 30, 1998. This increase was due to management's decision to expand its portfolio in the Chicago taxi medallion market plus increases in the diversified loan portfolio. This expansion was financed by additional bank debt, $7,265,000, during the nine month period. LIQUIDITY AND CAPITAL RESOURCES Prior to this Offering, Elk funded its operations through private placements of its securities, bank financing, and the issuance to the SBA of its subordinated debentures. In 1994, Elk agreed to repurchase all of the 547,271 outstanding shares of its 3% preferred stock from the SBA for an aggregate price of $1,915,449, representing a discount of 65% from the original issue price of $10 per share. As a condition of the repurchase, Elk granted the SBA a liquidating interest in a newly established restricted capital surplus account (the "Restricted Capital Account"). The Restricted Capital Account is equal to the amount of the net repurchase discount in which the SBA received a liquidating interest, amortized over 60 months ending November 10, 1999. However, if Elk is liquidated or if a material violation of SBA Regulations occurs during the amortization period, the SBA would receive the remaining unamortized amount of the Restricted Capital Account prior to the stockholders of Elk receiving any amounts on their Common Stock. The unamortized balance of the SBA's liquidating interest at March 31, 1999 was $434,777. In December 1994 and September 1995 Elk raised additional capital of $450,000 and $1,249,585, respectively, less private placement costs of $76,445 and $21,482, respectively. These proceeds were used to repurchase Elk's 3% preferred stock from the SBA. In connection with the purchase, all dividends in arrears on the preferred stock were extinguished. During January 1998, Elk completed a private placement of 462,000 shares of common stock at $6.50 per share for aggregate gross proceeds of $3,003,000, less offering expenses of $115,000. The net proceeds were utilized to repay bank indebtedness and for working capital. A portion of the proceeds temporarily used to reduce bank indebtedness, up to a maximum of $963,000, was allocated by Elk toward the organization and capitalization of its new parent company, Ameritrans. At March 31, 1999, 77% of Elk's indebtedness was represented by indebtedness to its banks and 23% by the debentures issued to the SBA with fixed rates of interest ranging from 6.12 to 8.20%. Elk currently may borrow up to $35,000,000 under its existing lines of credit, subject to the limitations imposed by its borrowing base agreement with its banks and the SBA, the statutory and regulatory limitations imposed by the SBA, and the availability of funds. In addition, Elk is presently eligible to apply for additional leverage from the SBA if it is determined by the Board of Directors to be in the best interests of the company. No assurance can be given that, if applied for, such additional financing will be approved by the SBA. -29- 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. Like Elk, Ameritrans will distribute at least 90% of its investment company taxable income and, accordingly, we will continue to rely upon external sources of funds to finance growth. In order to provide the funds necessary for our expansion strategy, we expect to raise additional capital and to incur, from time to time, additional bank indebtedness and (if deemed necessary by management) to obtain SBA loans. There can be no assurances that such additional financing will be available on acceptable terms. YEAR 2000 COMPLIANCE We have been taking steps to address and prevent problems in connection with the year 2000 ("Year 2000"). Such problems are expected to occur due to the inability of computer systems to properly recognize and process date-sensitive information relating to the Year 2000 and beyond. Year 2000 issues may affect our information technology systems ("IT") and non-information technology systems ("Non-IT"). The following are the IT systems that we use: o We use a computer program to track our receivable loans ("Loan Track"). To address Year 2000, approximately one year ago we engaged the consultant who originally developed Loan Track for us, to test, upgrade and certify Loan Track as Year 2000-compliant. The consultant completed all of such tasks and the Year 2000-compliant Loan Track program is now in use in our regular operations. We also use the standard Peachtree(TM) accounting system for general in-house accounting functions. The version of Peachtree we currently use has been upgraded to be Year 2000-compliant. o We also use other industry-wide programs such as Windows 95 and Word Perfect. It is expected that either the current versions are Year 2000-compliant or that Year 2000-compliant upgrade versions will be obtained in the near future. In addition, during the past 12 months and at present, we have been replacing or upgrading our computer hardware with equipment that will be Year 2000-compliant. Non-IT systems have been defined as embedded technology, such as micro-controllers, that may be included in elevators and other equipment and machinery. Most of our Non-IT systems consist of office equipment. We have inventoried our Non-IT systems, and we are in the process of contacting our office equipment and telecommunications suppliers and landlord to determine the status of their Year 2000 readiness. We do not believe that we face material Year 2000 issues with respect to our Non-IT systems. Costs in connection with Year 2000 compliance have been (i) to review and upgrade existing IT systems; (ii) to analyze Year 2000 readiness of our banks and customers and (iii) to analyze Non-IT Year 2000 compliance. To date, such costs have aggregated approximately $10,000 and, for the most part, have been for IT review and upgrades. Such costs are being treated as expenses. We expect to spend approximately $55,000 to replace certain hardware and purchase additional software and communications systems during the fiscal year ending June 30, 1999 and that the cost of such replacements will be capitalized and depreciated over a five year period. We do not believe that other costs associated with Year 2000 compliance will be material or that they will have a material effect on our financial condition. We are dependent on banks for financing and for normal banking operations. In surveying Year 2000 readiness, we have received oral, and we are in the process of obtaining written, assurances from our banks that they are taking the actions necessary to be Year 2000-compliant so that neither the banks' nor their customers' business will be interrupted due to Year 2000 difficulties. -30- Our portfolio companies are taxi and taxi-medallion owners and other small businesses, which, to the best of our knowledge, use computer equipment and software only to a limited extent in the operation of their businesses. We are in the process of surveying certain of our vendors to assess their potential Year 2000 exposure and to confirm that they are making arrangements for their own Year 2000 compliance. To date we have attempted to comply fully with Year 2000 compliance requirements, and we are in the process of determining the compliance of our banks and customers. Our failure, or the failure of third parties, to adequately address Year 2000 issues could have a material adverse effect on our financial condition or results of operations. However, given the nature of our portfolio companies and the industries in which they operate, we anticipate that few of our customers would actually suffer material adverse effects from Year 2000. We believe that our reasonably likely maximum risk is (i) a material increase in our credit losses due to Year 2000 problems affecting our portfolio companies and our banks and (ii) disruption in financial markets, causing us liquidity stress. At this point, our management is unable to quantify the amount of potential losses and disruptions due to Year 2000 issues, but is in the process of developing a contingency plan. -31- BUSINESS GENERAL Ameritrans was formed in 1998 to engage in lending and investment activities, primarily with small and medium-sized businesses, directly and through subsidiaries. On _________, 1999, Ameritrans acquired Elk Associates Funding Corporation ("Elk") in a one-for-one share exchange in which Elk stockholders received shares of Common Stock of Ameritrans, and Elk became a wholly-owned subsidiary. Elk is a "small business investment company," or "SBIC," formed in 1979 and licensed by the U.S. Small Business Administration ("SBA") in 1980. Elk makes loans to the owners of taxi medallion businesses in the New York City, Chicago, Miami and Boston markets and to other small businesses. Elk has never experienced any material losses of principal in connection with taxi financings. Loans made to finance the purchase or continued ownership of taxi medallions, taxis and related assets represented approximately 80% of Elk's loan portfolio as of March 31, 1999. Loans made to finance the acquisition and/or operation of other small businesses constitute the balance of Elk's loan portfolio. To date, our only activities have been the operation of Elk. We intend to engage in broader and more diversified investment and lending activities directly and through Elk and other subsidiaries that we may form or acquire. Our investment objectives are to provide a high level of distributable income, consistent with preservation of capital, as well as long-term growth of net asset value. Both Ameritrans and Elk are registered as business development companies, or "BDCs," under the Investment Company Act of 1940 (the "1940 Act"). Accordingly, Ameritrans and Elk are subject to the provisions of the 1940 Act governing the operations of BDCs. Both companies are managed by their executive officers under the supervision of their Boards of Directors, and the same individuals are the executive officers and directors of both companies. In addition, both Ameritrans and Elk have elected to be treated as "regulated investment companies," or "RICs," for tax purposes. Under the Internal Revenue Code, as RICs, we will generally not be subject to U.S. federal corporate income tax on our investment income, if we make qualifying distributions of our income to stockholders. As RIC's we qualify for this treatment as long as we distribute at least 90% of our investment company taxable income to our stockholders as dividends. Elk paid qualifying dividends from July 1983 through June 1992 and continuously since June 1996. Since _________ 1999, when we acquired Elk, these dividends have been, or will be, payable to Ameritrans as Elk's sole stockholder. We intend to pay dividends as long as funds are legally available for distribution from Elk's earnings and from our own future earnings, if any. However, we may operate our specialty finance business, including our proposed consumer lending operations and other new operations through subsidiaries that are not RICs, in which event after-tax earnings, if any, would be retained in those subsidiaries, except to the extent those subsidiaries must pay dividends to Ameritrans in order to enable Ameritrans, as a RIC, to pay the required dividends to its stockholders. Because it is an SBIC, Elk's operations are subject to other restrictions, and all loans and investments must comply with applicable SBA Regulations. For example, the interest rate that Elk can charge, the percentage of any other company it can own, the size of the businesses to which it can make loans, and the length of time to the maturity date are limited by SBA rules. Elk's business is funded by loans from banks and, to a lesser extent, by the proceeds of subordinated debentures issued to the SBA. Ameritrans is not an SBIC and is not subject to SBA regulation. See "Elk's Loans" and "Regulation -- The Small Business Act of 1958." -32- SCOPE OF BUSINESS ACTIVITIES AND GROWTH STRATEGY CURRENT AND PROPOSED BUSINESS ACTIVITIES ELK. Elk was organized primarily to provide long-term loans to businesses eligible for investments by SBICs under the 1958 Act ("Small Business Concerns"). While Elk has made, and intends to continue to make, loans for financing the purchase or continued ownership of taxi medallions, taxis and related assets, Elk intends to continue to diversify its investments into other businesses to the extent permitted by the 1958 Act and the SBA Regulations. We anticipate that its present ability to pursue investments and loans with persons who are not "disadvantaged" will afford Elk greater opportunities to make investments that enhance Elk's profitability. 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 March 31, 1999, totaled $927,000 or 1.8% of total assets. Elk may make additional equity investments. However, unless necessary to protect a prior investment of Elk that is at risk, 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. AMERITRANS. Ameritrans is not licensed as an SBIC. Consequently, it is neither eligible to raise funds from the SBA nor subject to the restrictions and obligations imposed by the 1958 Act (except as they relate to Elk or any SBIC that may be owned or acquired by Ameritrans). Ameritrans currently intends to engage in a broad range of investment and financial services directly and indirectly through subsidiaries. Ameritrans plans to make a variety of loans and investments similar to those made by Elk. However, its activities may include financial services and investments not permitted to Elk, as an SBIC, under the 1958 Act and the SBA Regulations. For example, Ameritrans may make loans that are for terms shorter than the terms required by SBA Regulations or make equity investments that Elk, as an SBIC, could not make. Further, Ameritrans intends to lend to borrowers that are not Small Business Concerns, as defined in the SBA Regulations, and may engage in certain specialty finance businesses other than loans to small businesses. ELK CAPITAL. Elk Capital, a newly formed, wholly-owned subsidiary of Ameritrans, is not a RIC and is therefore subject to corporate tax on its earnings. Elk Capital will also engage in the specialty financing business. Elk Capital will engage in activities similar to those of Elk and Ameritrans, but since Elk Capital will be neither an SBIC or a RIC, it will have an added degree of flexibility in the loans and equity investments that it may make. Elk Capital may also engage in certain other specialty finance businesses, which may include consumer lending. Also, to the extent its operations are profitable, Elk Capital will be able to retain any after tax earnings to internally finance growth, and thereby provide Ameritrans with the ability to increase stockholder value while engaging in our company's core business areas. The extent to which Elk Capital can accumulate earnings may be subject to certain limitations. See "Federal Income Tax Considerations." GROWTH STRATEGY We intend to continue to expand into new markets both in the taxi industry and in other industries we identify as offering investment opportunities. We intend to expand our business in part by acquiring other taxi-related businesses or other finance companies or loan portfolios in our existing as well as in new geographic markets. The loans and investments that we plan to pursue directly by Ameritrans or through Elk, Elk Capital, or newly formed or acquired subsidiaries, will be made in a variety of businesses, provided that the loans made are in a majority of cases secured by real estate, -33- business assets, equipment or other collateral deemed adequate by management. We intend to apply to other industries the same methodology and risk evaluation techniques that Elk has successfully used since 1980 in the taxi industry. Consequently, we are seeking opportunities in those industries that offer the same fundamental characteristics as the taxi industry and that also provide repetitive business. We have commenced our expansion of this diversified investment/lending business outside the New York metropolitan area into new industries as well as into new geographical markets. INTERNET We have recently created an Elk website (www.elkassociates.com), and an Ameritrans website (www.ameritranscapital.com) is expected to be operational in August 1999. We intend to build our business by using the Internet to increase our market visibility, to accept and process loan applications, and to expand our market by making ourselves more accessible to prospective borrowers through our websites and via e-mail. TAXI MEDALLION FINANCE INDUSTRY AND MARKET OVERVIEW THE NEW YORK CITY TAXI MEDALLION INDUSTRY AND MARKET. Under current law, the number of taxi medallions that may be issued by New York City is limited to 12,187. There are two types of medallions: corporate and individual owner-driver. Of the total of 12,187 medallions, 7,058 are corporate medallions and 5,129 are for individually owned cabs. A corporate medallion is issued for a cab owned by a corporation that owns a minimum of two cabs and two corporate medallions (i.e., one corporate medallion per cab). An individual owner-driver may not own more than one cab and one medallion. Corporate medallions are used by large fleet concerns with many taxis and many drivers or by small corporations owning at least two medallions and two taxis driven by two owner-drivers (the so-called "minifleet"). Only 11,787 medallions could be issued until August 8, 1995, when a law permitting the issuance of up to 400 additional taxi medallions over a three-year period went into effect. The New York City Taxi and Limousine Commission (the "TLC") conducted the sale of 133 medallions in May 1996, 133 medallions in October 1996, and 134 medallions on October 1, 1997. Of these new medallions, 160 were sold to individuals and the balance to minifleets in lots of two. At the present time, most medallion sales are handled through brokers. As a result, an active marketplace has developed for the purchase and resale of medallions. The price of a medallion varies with supply and demand. Elk's most recent experience, in June 1999, was that individually owned medallions sold for approximately $210,000 and corporate medallions sold for approximately $260,000 each. In addition, a 5% New York City transfer tax and various brokerage commissions are additional expenses incurred in the acquisition and sale of a medallion. Based upon statistics obtained from the TLC, from 1989 through 1998, the number of corporate medallions that were resold by their holders varied each year from approximately 245 to 440, which suggests that there were between 122 and 220 minifleet corporations in need of financing each year, while the number of individual owner medallions sold each year varied from 250 to 415. Assuming that a typical minifleet financing for purchases of medallions might involve a sum of approximately $450,000, the dollar volume of New York City minifleet financings might range from $49 million to $88 million a year. Assuming that a typical individual medallion financing for a purchase of a medallion involves a sum of approximately $180,000, the dollar volume of New York City individual medallion financing might range from $45 million to $75 million a year. In addition to financings for purchases and sales of medallions, a substantial market exists for refinancing the indebtedness of existing minifleet or individual medallions. Management estimates this market to exceed that of the market for financing transfers, and to be in excess of $100,000,000 per year. -34- A prospective medallion owner must meet the requirements of the TLC, which approves all sales and transfers. In general, the requirements are that the prospective owner have no criminal record, that the purchase funds be derived from legitimate sources, and that the taxi vehicle and meter meet specifications set by the TLC. Also required is a clearance from prior insurers of the seller in the form of letters stating that there are no outstanding claims for personal injuries in excess of insurance coverage. NEW YORK MARKETING STRATEGY FOR MEDALLION FINANCING. Medallion transfers in the New York City market are usually handled through medallion brokers, who have frequent contact with taxi owners and drivers. Medallion brokers locate buyers for sellers of medallions and sellers for buyers of medallions, and then typically employ a financing broker to arrange for the financing of the medallion purchases. In many cases the medallion broker and the financing broker are the same party or related parties. Elk has received a significant number of referrals from certain medallion brokers in New York. Elk also receives referrals from financing brokers and its borrowers. In addition, Elk occasionally places advertisements in local industry newspapers and magazines. Elk also uses brokers, advertising and referrals in connection with its taxi lending business in the Chicago, Boston, and Miami markets. CHICAGO TAXI MEDALLION INDUSTRY AND MARKET. As part of its geographic diversification strategy, Elk studied the Chicago taxi medallion market in 1994, and began making loans in Chicago in April, 1995. The taxi market and medallion system in Chicago is regulated by the City of Chicago Department of Consumer Services, Public Vehicle Operations Division. The number of taxi medallions is limited by city ordinances, and until 1988, these ordinances gave control of 80% of the medallions to the two largest taxi operators in Chicago, Yellow Cab Co., and Checker Taxi Co., Inc. Since 1988, the taxi industry in Chicago has shifted toward more individual ownership. Over the succeeding 10 years, the Yellow Cab Co. and Checker Taxi Co., Inc., pursuant to a new ordinance, gave 1,300 medallions back to the City, and the City added 100 medallions each year. These medallions were distributed in a lottery system to taxi drivers who had never owned a medallion. By July, 1997, there were a total of 5,700 medallions issued in Chicago, of which Yellow Cab Co. owned approximately 2,071, and the remaining 3,629 were owned by individual owner drivers, or by individual operators who had purchased multiple medallions. In December, 1997, the City Council increased the number of medallions by 1,000 additional medallions, to be issued over a period of the succeeding three years. Of these medallions, 500 will be issued in lotteries to taxi drivers who never owned a medallion, and the other 500 will be auctioned to the highest bidder. In the November 1998 auction of 150 medallions, there were 499 bids to purchase medallions. The winning bid prices ranged from $57,000 to $63,000 per medallion, which was approximately the same as open market prices for taxi medallions that were sold in Chicago at that time. On January 21, 1999, the Yellow Cab Co. auctioned 175 medallions in a sealed bid auction at prices equal to the current open market value price for medallions. It is likely that the Yellow Cab Co. will continue to auction off its medallions in the future, in order to become a medallion service business serving the individual owner drivers who acquire the medallions. It has been our experience that as the Chicago market has expanded, it has also become more competitive. In addition, as the City of Chicago and now Yellow Cab Co. supply medallions to the market place, we expect that the taxi medallion market will continue to grow, with more and more -35- owner-drivers and individual owner-operators of multiple medallions. To the extent that there are more owner-operators and individual owner-operators of multiple medallions in the market, we believe that there will be increased opportunities for us to serve this market. Chicago city regulations set forth certain qualifications that all owners of taxi medallions must meet, and require that all security interests in medallions be registered with the Department of Consumer Services. The Department of Consumer Services also is involved (along with the City Council) in setting taxi fares, and in setting maximum lease rates that may be charged by owners to lessees of taxis, who drive them on a daily, weekly, or monthly basis. CHICAGO MARKETING STRATEGY FOR MEDALLION FINANCING. At the present time, most medallion sales in Chicago are handled through brokers or attorneys. An active market place has developed in Chicago for the purchase and resale of medallions. Elk's most recent experience, in April 1999, was that medallions were selling for between $60,000 and $65,000 per medallion. In addition, the City of Chicago imposes a 5% transfer tax on a medallion held for two years or more, a 10% transfer tax on a medallion held for between one and two years, and a 25% transfer tax on a medallion held less than one year. The recent imposition of the transfer taxes, in addition to being a source of revenue to the City, was also scaled in order to inhibit speculation in the purchase and resale of taxi medallions without the intent of actually operating taxis. We believe that as many as 1,000 medallions are bought each year by purchasers, and at today's market value, this would give gross potential volume of approximately $65,000,000. If 80% of these purchases were financed, the annual market for loans to purchase medallions would be $52,000,000 per annum. In addition to purchases and sales of medallions, a substantial market exists for refinancing the indebtedness of existing owners. Based on the number of medallions currently issued and to be issued, we believe the market for financing transfers could exceed $60,000,000 per year. BOSTON TAXI MEDALLION INDUSTRY AND MARKET. Elk began to review the Boston taxi market in the fall of 1994 and began making loans in this market in 1995. Since 1930, the Boston Police Commissioner has had exclusive jurisdiction over the regulation of taxi operations, including the issuance and transfer of medallions. The Hackney Carriage Unit of the Boston Police Department deals with taxi regulatory issues. By statute, the number of medallions issued in the City of Boston may not exceed 1,525, subject to increase or decrease in the Police Commissioner's discretion. The number of medallions remained essentially unchanged from the late 1940's until January 1999, when the City sold 75 additional medallions at auction. Prices at this auction exceeded $140,000 per medallion. The City of Boston has announced that it will auction another 75 medallions in September 1999. Under the applicable statutes and rules, Boston taxi medallions are assignable, subject to the approval of the Police Commissioner. In practice, transfer applications are submitted to the Hackney Carriage Unit, which has issued guidelines and forms for transfers. Loans by financial institutions or individuals are secured by taxi medallions and assets are routinely allowed in accordance with the Hackney Carriage Unit's "Procedures for Recording Secured Party Interest." BOSTON MARKETING STRATEGY FOR MEDALLION FINANCING. The Boston taxi market services the City of Boston, which includes Logan Airport. Elk's marketing efforts have included retention of a local attorney, advertising in the CARRIAGE NEWS, a local trade newspaper, and the use of forwarding brokers. Our efforts have resulted a loan portfolio of approximately $2,800,000 as of March 31, 1999. -36- MEDALLION INDUSTRY IN METRO-DADE COUNTY, (MIAMI AREA), FLORIDA. Elk began to investigate the Miami area taxi market in 1995, and began making loans in 1996. The Miami taxi industry has been regulated on a county-wide basis in Metro-Dade County, Florida since 1981. The Passenger Transportation Regulatory Division (the "PTRD") of the Metro-Dade County Consumer Services Division oversees taxi operations and licenses in accordance with the Metro-Dade County Code. Until April 1999, each taxi operator in Metro-Dade County was required to obtain a "For-Hire" license. The number of licenses was limited to one license for each 1,000 of population in the county. With approximately 2,100,000 residents in the county, 2,100 licenses could have been issued; however, only 1,827 licenses are currently authorized, of which 1,824 have been issued. In 1991, a For-Hire license loan program was approved, authorizing the use of loans to purchase (but not to refinance) licenses and taxis. Any lender must be a licensed lending institution authorized to do business in Florida. Elk is currently one of only two lending institutions that are authorized to make loans to the taxi industry in Metro-Dade County. Transfers of licenses and financing arrangements are subject to prior approval by the PTRD and the County Board of Commissioners. For-Hire licenses were considered a privilege, not a property right. However, since licenses were limited in number, the marketplace created a "market price" or value in connection with the transfer of the license right to a purchaser. As of April 1999, the Metro-Dade County Code was amended to create a "medallion," or property right, system with a view to attracting traditional financing providers to provide the taxi industry with additional funding sources. Existing For-Hire licenses were automatically converted into medallions. According to official Metro-Dade County publications, approximately one-third of the currently outstanding licenses are owned by individuals or corporations that own and operate only one license. Other than 106 licenses held by one owner, the balance of the licenses are owned mainly by holders of from two to five licenses. The number of license transfers has been generally increasing in recent years, with a high of 197 transfers in 1997, with an average reported price of $51,658. However, we believe that the present market price of licenses/medallions in Metro-Dade County is between $65,000 to $70,000 per medallion. MIAMI AREA MARKETING STRATEGY FOR MEDALLION FINANCING. We believe that the recent change to a medallion system and an emphasis on individual operator-ownership of medallions for the future will open a large new market for taxi medallion financing in the Miami area. Since this is an emerging market, we are currently developing strategies to develop contacts and market our financing to potential purchasers of medallions, and in the event refinancing is permitted, to those owners who may wish to refinance their medallions in the future. As of March 31, 1999, the total principal amount of our outstanding taxi loans in the Miami area was approximately $2,000,000. COMMERCIAL (NON-TAXI) LOANS -- OVERVIEW Elk began making loans to diversified (non-taxi) small businesses ("Commercial Loans") in the New York City metropolitan area in 1985, in order to diversify its loan portfolio, which until that time had consisted almost entirely of loans to owners of New York City taxi medallions. After a period of losses in its Commercial Loan portfolio from 1991 to 1994, Elk has been increasing this portfolio on a selective basis since 1995, with a concentration on loans to operators of retail dry cleaners and laundromats. Recently, Elk has also begun geographically expanding its Commercial Loan portfolio, with loans in South Florida, Massachusetts, and North Carolina. Elk has chosen to concentrate its Commercial Loan portfolio in loans secured by retail dry cleaning and coin-operated laundromat equipment because of certain characteristics similar to taxi -37- medallion lending that make these industries attractive candidates for profitable lending. These factors include: (i) relatively high fixed rates of interest ranging from approximately 325 to 700 basis points over the prevailing Prime Rate at the time of origination, (ii) low historical repossession rates, (iii) vendor recourse in many cases, (iv) significant equity investments by borrowers, (v) an active market for repossessed equipment, and for resale of businesses as going concerns through transfers of the leasehold and business equipment to new operators, and (vi) a collateral service life that is frequently twice as long as the term of the loans. We estimate that there are approximately 4,000 retail dry cleaners and approximately 3,000 laundromats in the New York City metropolitan area. In addition, we believe that specialization in the dry cleaning and laundromat industries will permit relatively low administrative costs because documentation and terms of credit are standardized, and the consistency among the loans has simplified credit review and portfolio analysis. We further believe that other niche industries with similar characteristics will provide additional loan portfolio growth opportunities. Elk's other Commercial Loans are currently spread among other industries, including auto sales, retirement home, garden center, commercial construction, car wash, theater, restaurant, and financial services. Elk's Commercial Loans finance either the purchase of the equipment and related assets necessary to open a new business or the purchase or improvement of an existing business, and Elk has originated Commercial Loans in principal amounts up to $1,000,000. Elk generally retains these loans, although from time to time it sells participation interests in its loans to diversify risk, or purchases participation interests in loans generated by other SBICs. ELK'S LOANS Elk's primary business has been to provide long-term business loans at commercially competitive interest rates (which at March 31, 1999, ranged from 8.25% to 16.5% per annum). From 1979 through March 1997, Elk was a "Specialized Small Business Investment Company" ("SSBIC") under the rules of the SBA. All of its loans were required to be made to small businesses that were majority-owned by socially or economically disadvantaged persons, known as "Disadvantaged Concerns." In September 1996, the 1958 Act was amended to provide, among other things, that no further subsidized funding would be made available to SSBICs. Consequently, Elk amended its Certificate of Incorporation and entered into an agreement with the SBA in February 1997 in order to convert Elk from an SSBIC to an SBIC. As such, Elk may now lend to persons who are not Disadvantaged Concerns. As of March 31, 1999, more than 95% of Elk's loans and investments were to Disadvantaged Concerns. Elk intends to continue to make loans to Disadvantaged Concerns, particularly in connection with the ownership of taxis and related assets in the New York City and Chicago markets. Elk also intends to diversify its activities by lending and investing in a broader range of Small Business Concerns. SBA Regulations set forth a ceiling on the interest rates that an SBIC may charge its borrowers. Under the current SBA Regulations, the basic maximum rate of interest that an SBIC may charge is 19%. However, if either the weighted average cost of the SBIC's qualified borrowings, as determined pursuant to SBA Regulations, or the SBA's current debenture interest rate, plus, in either case, 11% and rounded off to the next lower eighth of 1%, is higher, the SBIC may charge the higher rate. The maximum rate of interest that Elk was allowed to charge its borrowers for loans originated during June 1999 was 19%. See "Regulation -- The Small Business Act of 1958." -38- Elk has agreed with the SBA that it must maintain a non-taxi investment/loan portfolio (included with the combination of its assets acquired and receivables on assets acquired in the future) in an amount not less than its outstanding SBA guaranteed leverage (I.E., debentures) issued since 1995, which amount is currently $2,470,000. See "Investment Policies -- Elk's Investment Policies -- Concentration of Investments." Elk may revise the nature of its loan portfolio at such time as its Board of Directors determines that such revision is in the best interests of Elk. 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 stockholders of Elk or "associates" of Elk, as such term is defined in applicable SBA Regulations. TAXI MEDALLION FINANCING LOANS The large majority of Elk's loans have been made to purchasers or owners of New York City taxi medallions. Since Elk commenced operations it has made over $175,000,000 of such loans. However, the New York market has become increasingly more competitive, and the value of medallions has remained essentially unchanged for the last few years. This has limited Elk's opportunities to make profitable loans or expand its activities in this market. Consequently, in 1995 and 1996, Elk began expanding its taxi lending business into the Chicago, Boston, and Miami markets, where its taxi lending business has increased and continued to be profitable. During the time Elk has been making taxi loans in these markets, the market prices of medallions have been increasing. Since April 1995 when Elk began making loans in the Chicago taxi medallion market, the market value of a medallion has increased from approximately $32,000 to approximately $65,000. During the time Elk has been making taxi loans in Boston and the Miami area, the market price of medallions has increased from approximately $90,000 to $150,000 in Boston and from approximately $55,000 to $70,000 in Miami. As of March 31, 1999, $19,397,771, or 39.5%, of the aggregate principal amount of its outstanding loans of $49,303,758, represented loans made to finance the purchase or continued ownership of New York City taxi medallions and related assets; an aggregate of $15,016,103, or 30.5%, consisted of loans to finance the purchase or refinancing of taxi medallions in Chicago, and the balance of $14,581,596, or 30% consisted of loans to various commercial borrowers, of which $2,776,869, or 5.6%, was invested in Boston taxi medallion financing and $1,947,207, or 4%, was invested in Miami taxi medallion financing. See " -- Loan Portfolio; Valuation," below. Due to increasing competition, annual interest rates for new loans in the New York market are currently averaging 8.5%. Interest rates on Chicago taxi loans generally have ranged from 12% to 14% per year. With additional competition presently in the market place, it is expected that rates will range in the near term from 11% to 13% per year on new loans, depending upon the size of the loan, the repayment schedule, the balloon dates, the loan-to-value ratio, and the credit history of the borrower. In addition, most loans that Elk has made have been for four to six year terms and are self-amortizing. With increased competition in the market, the term of the loan may be expected to increase to periods longer than six years. Interest rates on loans in the Boston market currently range from 10-12%, and in the Miami market currently range from 12-13%. COMMERCIAL LOAN PORTFOLIO Elk began making non-taxi Commercial Loans in 1985. Due to the effects of the nationwide recession of the early 1990's on the New York City metropolitan area economy, between 1990 and -39- 1994 Elk suffered significant losses in its Commercial Loan portfolio. These losses were primarily written off against income earned by Elk on its taxi loan portfolio. By 1995, the local economy had improved and Elk again began making selective Commercial Loans, and its activities in this area has been increasing steadily. At June 30, 1995, Commercial Loans totaled $1,275,654, or 5.5%, of Elk's total loan portfolio, while at March 31, 1999, Commercial Loans totaled $9,857,610, or 20%, of Elk's total loan portfolio. At March 31, 1999, Elk's Commercial Loan portfolio consisted of 60 loans, of which 20 loans totaling $2,701,640 were to dry-cleaning businesses, 20 loans totaling $4,373,155 were to laundromat businesses, and 20 loans totaling $2,782,815 were to a variety of other small businesses. Loans to dry cleaners and laundromats represented 72% of the aggregate principal amount of Commercial Loans outstanding at March 31, 1999. Elk generally originates Commercial Loans by financing the cost of dry cleaning, laundromat or other business-specific equipment, while the borrower is making an equity investment to finance the cost of installation, building of appropriate infrastructure to support the equipment, installation of other equipment necessary for the business operations, other decorations and working capital. Substantially all Commercial Loans are collateralized by first security interests in the assets being financed by the borrower, or by real estate mortgages. In addition, Elk generally requires personal guaranties from the principals of the borrower and in limited cases obtains recourse guaranties from the equipment vendors. Elk's Commercial Loans typically require equal monthly payments covering accrued interest and amortization of principal over a four to eight year term and generally can be prepaid with a fee of 60 to 90 days of interest during the first several years of the loan. The term of, and interest rate charged on, Elk's Commercial Loans are subject to SBA Regulations. Elk generally obtains interest rates on its Commercial Loans that are higher than it can obtain on New York City taxi medallion loans. The Company believes that the increased yield on Commercial Loans compensate for their higher risk relative to medallion loans and that it will benefit from the diversification of its portfolio. Interest rates on currently outstanding Commercial Loans range from 9% to 16%. -40- LOAN PORTFOLIO; VALUATION The following table sets forth a classification of Elk's outstanding loans as of March 31, 1999 (unaudited):
BALANCE MATURITY OUTSTANDING NUMBER INTEREST DATE (IN MARCH 31, TYPE OF LOAN OF LOANS RATE MONTHS) 1999 ------------ -------- ---- ------- ---- (unaudited) New York City: Taxi medallion 118 8.25-14% 1-119 $19,397,771 Radio car service 41 1-15% 1-59 308,288 Chicago Taxi medallion 381 12-16.5% 18-48 15,016,103 Boston Taxi medallion 25 11-14% 30-89 2,776,869 Miami Taxi medallion 39 13-16.5% 109-120 1,947,207 Other loans: Restaurant 2 10-12% 1-63 244,571 Embroidery manufacturer 1 12% 58 89,543 Retirement home 1 15% 84 300,000 Theater 1 16% 59 168,571 Hairdresser 2 12% 4 104,271 Car wash 1 11.5% 33 216,155 Ambulance service 1 10.5% 3 5,437 Bagel store 1 14% 40 24,095 Dry cleaner 20 10-14.5% 40-120 2,701,640 Laundromat 20 9-15% 21-72 4,373,155 Grocery/deli 1 12.5% 2 2,441 Financial services 1 14% 1 4,980 Black car service 1 12% 5 203,366 (real property) Auto sales 3 10.5-13% 1-49 493,248 Registered investment 1 14% 97 169,012 advisor Garden Center 1 14% 93 431,250 Auto Center 1 12% 81 125,785 Commercial Construction 1 16% 84 200,000 --- =========== Total Loans Receivable 664 $49,303,758 === ===========
-41- Loans made by Elk to finance the purchase or continued ownership of taxi medallions, taxis and related assets are typically secured by such medallions, taxis and related assets. Loans made by Elk to finance the acquisition and/or operation of retail, service or manufacturing businesses are typically secured by real estate and other assets. In the case of loans to corporate owners, the loans are usually personally guaranteed by the stockholders of the borrower. Elk generally obtains first mortgages, but occasionally has participated in certain financings where it has obtained a second mortgage on collateral. Elk has obtained a relatively higher rate of interest in connection with these subordinated financings. Elk has not, to date, committed more than 5% of its assets to any one business concern in its portfolio. The interest rates charged by Elk on its currently outstanding loans range from 8.25% to 16.5% per annum. As of March 31, 1999, the annual weighted average interest rate on Elk's loans 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 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 not, to date, had a material loss of principal in any taxi medallion loan, although it has experienced some losses of principal in its diversified (non-taxi) loan portfolio. Likewise, its collection experience (timely payments, collections on foreclosure, etc.) with taxi medallion financings has historically been better than with its non-taxi loans. From 1991 through 1994, substantially all of Elk's provisions for loan losses and losses on assets acquired were related to business loans secured by real estate and to radio car loans. In addition, from 1991 through 1995, Elk had difficulty selling off real estate acquired on defaulted loans as a result of a depressed real estate market. Since 1995, Elk has substantially increased its diversified loan portfolio, and its overall collection experience with these loans has improved. SOURCES OF FUNDS 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 March 31, 1999, Elk maintained three lines of credit totaling $35,000,000 with an overall lending limit of $35,000,000. At March 31, 1999, Elk had $29,350,000 outstanding under these lines. The loans, which mature through November 1999, bear interest based on an effective rate of interest equal to approximately 150 basis points above LIBOR plus certain fees. Upon maturity, Elk anticipates extending the lines of credit for another year as has been the practice in previous years. Pursuant to the terms of the loan agreements, Elk is required to comply with certain terms, covenants and conditions, and has pledged its loans receivable and other assets as collateral for the above lines of credit. If interest rates rise, our cost of funds would increase while the rates on our outstanding loans to our borrowers remained fixed, and our profitability could decrease. In order to partially contain this risk, we have purchased interest rate caps and interest rate swaps. While these limit our exposure to -42- upward movement in interest rates on our bank loans, they initially increase the effective interest rates that we pay on loans subject to these agreements. However, general rises in interest rates will reduce our interest rate spread in the short term on the floating portion of our bank debt that is not covered by interest rate caps or interest rate swaps. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations -- Interest Expense" and Note 1 of Notes to Consolidated Financial Statements. 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. The net proceeds of this Offering will be used primarily to fund the expansion and diversification of our investing activities. However, we will need significant additional sources of financing to significantly expand our activities. We are currently discussing with Elk's banks and certain additional banks credit lines for Ameritrans, Elk and Elk Capital contingent upon, among other conditions, completion of this Offering. To date, we have not received commitments for any additional credit lines. See "Use of Proceeds." SBIC BENEFITS GENERAL. As an SBIC, Elk is eligible to receive certain financing from the SBA on favorable terms, and Elk and its stockholder are entitled to certain tax benefits, both described below. The SBA has a certain amount of discretion in determining the type and amount of financing that will be made available to an SBIC. Therefore, there can be no assurance as to the nature and amount of SBA financing that may actually be obtained by Elk. Furthermore, there are certain restrictions and requirements to which Elk is subject by virtue of its being an SBIC. BACKGROUND. SBICs were created under the 1958 Act as vehicles 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 partially financed, by the SBA. -43- BENEFITS. The principal benefits to Elk of 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 to the extent of 300% of the SBIC's "Leverageable Capital," as defined in the applicable SBA Regulations. However, the percentage of allowable leverage decreases if the SBIC's Leverageable Capital exceeds $15,000,000. The term of such debentures is typically 10 years. The SBA will guarantee such debentures only after such an SBIC has demonstrated a need for such debentures as evidenced by the SBIC's investment activity and its lack of sufficient funds available for investments; provided, however, that an SBIC that has invested at least 50% of its Leverageable Capital and outstanding leverage shall be presumed to lack sufficient funds available for investment. Generally, such debentures will bear interest at a fixed rate that is based on the rate which is set by the underwriters of the pooled debentures sold through SBIC Funding Corp. With respect to debentures guaranteed after July 1, 1991, the SBA's claim against an SBIC is subordinated, in the event of such SBIC's insolvency, only in favor of present and future indebtedness outstanding to lenders and only to the extent that the aggregate amount of such indebtedness does not exceed the lesser of 200% of such SBIC's paid-in capital and paid-in surplus (as adjusted pursuant to SBA Regulations), or $10,000,000. However, the SBA may agree to a subordination in favor of one or more loans from certain lenders, in its sole discretion. Pursuant to the SBA Agreement and the Intercreditor Agreement, the SBA agreed to a subordination in favor of Elk's banks; provided, however, that Elk is required to keep its overall debt to certain levels based upon the performance of its portfolio. COMPETITION Banks, credit unions, other finance companies, some of which are SBICs, and other private lenders compete with Elk in the origination of taxi 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. Therefore, there can be no assurance that Elk will be able to identify and complete financing transactions that will permit it to compete successfully. EMPLOYEES As of March 31, 1999, we employed a total of six employees. After the Offering, we intend to hire at least two additional loan officers. We may hire other additional personnel as they are needed in connection with the expansion and diversification of our lending and investment activities. We believe that our relations with our employees are good, but that our future success will depend, in part, on our ability to continue to recruit, retain and motivate qualified personnel at all levels. FACILITIES We rent office space from a law firm, the principals of which are officers and directors of Ameritrans and Elk, and we share certain office expenses with that firm. The law firm, at our request, rented an additional 1,800 square feet of office space contiguous with our offices at a below market rent (the "Additional Space"). Until we require the Additional Space, the law firm sublets the Additional Space to outside tenants. In the event all or a portion of the Additional Space is vacant, Elk has agreed to reimburse the law firm for any additional rent due. At present, the Additional Space is fully occupied pursuant to short-term arrangements. In the event our operations expand, the Additional Space could be made available to us on relatively short notice. We believe our current -44- space, together with the Additional Space, will be sufficient for our currently anticipated needs. See "Certain Transactions." -45- INVESTMENT POLICIES ELK INVESTMENT POLICIES The investment policies described below are the fundamental policies of Elk. Under the 1940 Act, these policies may be changed only by the vote of the lesser of (i) a majority of Elk's outstanding Common Stock, or (ii) 67% of the number of shares of Common Stock present in person or by proxy at a stockholder meeting at which at least 50% of the outstanding shares of Common Stock are present. Because Ameritrans is the only stockholder of Elk, we have agreed with the SEC that Elk's fundamental investment policies will be changed only by the vote of the Ameritrans stockholders. (a) ISSUANCE OF SENIOR SECURITIES. Elk may issue subordinated debentures to the SBA in the maximum amounts permissible under the 1958 Act and the applicable regulations. Elk currently does not have any preferred stock authorized. (b) BORROWING OF MONEY. Elk has the power to borrow funds from banks, trust companies, other financial institutions, the SBA or any successor agency and/or other private or governmental sources, if determined by Elk's Board of Directors to be in its best interests. (c) UNDERWRITING. Elk has not engaged, and does not intend to engage, in the business of underwriting the securities of other issuers. (d) CONCENTRATION OF INVESTMENTS. Elk may not concentrate 25% or more of its total assets in securities of issuers in any industry group except the taxi industry. Elk will make at least 25% of its investments for financing the purchase or continued ownership of taxi medallions, taxis 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 SBA Regulations. (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. -46- (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. (n) MAXIMUM INVESTMENT. Elk will not lend or otherwise invest more than the lesser of (i) 10% of its total assets or (ii) 30% of its paid-in capital attributable to its Common Stock with respect to any one Small Business Concern. (o) PERCENTAGE OF VOTING SECURITIES. The percentage of voting securities of any one Small Business Concern which Elk may acquire may not exceed 49% of the outstanding voting equities of such Small Business Concern. (p) MANAGEMENT CONTROL. Elk does not intend to invest in any company for the purpose of exercising control of management. However, Elk may elect to acquire control in order to protect any of its prior investments which it considers at risk. (q) INVESTMENT COMPANIES. Elk has not invested, and does not intend to invest, in the securities of other investment companies. (r) PORTFOLIO TURNOVER. Elk intends to make changes in its portfolio when, in the judgment of its Board of Directors, such changes will be in the best interest of our stockholders in light of the then existing business and financial conditions. We do not anticipate that Elk's loan portfolio will realize an annual turnover in excess of 50%, although there can be no assurance with respect thereto. AMERITRANS 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. 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 -47- other circumstances will not be considered when determining whether the investment complies with Ameritrans' investment policies and limitations. Ameritrans' fundamental policies are as follows: (a) 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 Elk, as well as temporary investments it makes with its funds, will generally be Qualifying Assets. See "Regulation." (b) 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, the preferred stock issued to the SBA by Elk and Elk's bank borrowings may be considered senior securities issued by Ameritrans requiring asset coverage of 200%; however, pursuant to an Exemptive Order issued by the SEC in _________, 1999, such debentures, preferred stock and bank borrowings are exempt from the asset coverage requirements of the 1940 Act. (c) 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 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. (d) Ameritrans and Elk may originate loans and loans with equity features. To the extent permitted under the 1940 Act and the regulations promulgated thereunder, 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. (e) Ameritrans will hold all of the outstanding common stock of Elk and Elk Capital and may organize additional subsidiaries in the future. Ameritrans may acquire restricted securities of small businesses. Elk Capital will engage in activities similar to those of Elk and Ameritrans, but since Elk Capital will be neither an SBIC or a RIC, it will have an added degree of flexibility in the loans and equity investments that it may make. -48- MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The Board of Directors and executive officers of Ameritrans and Elk are identical. The following table sets forth certain information concerning our directors and executive officers:
NAME POSITION ---- -------- Gary C. Granoff(1) President and Chairman of Board of Directors Ellen M. Walker(1) Vice President, General Counsel and Director Lee A. Forlenza(1) Vice President and Director Steven Etra Vice President and Director Silvia Mullens(1) Vice President Margaret Chance(1) Secretary Marvin Sabesan Director Paul Creditor Director Allen Kaplan Director John L. Acierno Director John R. Laird Director Howard F. Sommer Director
- ------------------------------------ (1) As BDCs under the 1940 Act, a majority of the directors of both Ameritrans and Elk are required to be individuals who are not "interested persons" of the company. Gary C. Granoff, Ellen M. Walker, Lee A. Forlenza, Steven Etra, Margaret Chance and Silvia Mullens are each "interested persons" with respect to both Ameritrans and Elk, as such term is defined in the 1940 Act. Gary C. Granoff, age 51, has been President and a director of Ameritrans since its formation and of Elk 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 26 years and is presently an -49- officer and stockholder in the law firm of Granoff, Walker & Forlenza, P.C. Mr. Granoff is a member of the bar of the State of New York and the State of Florida and is admitted to the United States District Court of the Southern District of New York. Mr. Granoff is also President and the sole stockholder of GCG Associates, Inc. ("GCG"), Elk's former investment adviser. He has served as President and the sole stockholder of Seacrest Associates, Inc., a hotel operator, since August 1994. Mr. Granoff has also been President and a director since June 1996 of Gemini Capital Corporation ("Gemini"), a company primarily engaged in the business of making consumer loans. In February 1998, Mr. Granoff was elected to and is presently serving as a trustee on the Board of Trustees of The George Washington University. Mr. Granoff holds a Bachelor of Business Administration degree in Accounting and a Juris Doctor degree (with honors) from The George Washington University. Ellen M. Walker, age 43, has been a Vice President, General Counsel and a director of Ameritrans since its formation and a Vice President and General Counsel of Elk since July 1983. She was a director of Elk from July 1983 to August 1994, and has been a director of Elk since 1995. Ms. Walker has been a practicing attorney for more than seventeen years and she is presently an officer and stockholder in the law firm of Granoff, Walker & Forlenza, P.C. Ms. Walker is a member of the Bar of the State of New York and she is admitted to the United States District Court of the Southern District of New York. Since August 1983 Ms. Walker has been Vice President of GCG. Ms. Walker has been a director, Vice President and General Counsel of Gemini since June 1996. Ms. Walker received a Bachelor of Arts degree from Queens College and obtained her Juris Doctor degree with honors from Brooklyn Law School. Lee A. Forlenza, age 41, has been a Vice President and a director of Ameritrans since its formation, a Vice President of Elk since March 1992, and a director of Elk since January 1995. Mr. Forlenza has been a practicing attorney since February 1983 and is presently an officer and stockholder in the law firm of Granoff, Walker & Forlenza, P.C. Since March 1992 Mr. Forlenza has been an investment analyst for GCG. Mr. Forlenza has also been Vice President, Secretary and a director of Gemini since June 1996. Mr. Forlenza was Vice President of True Type Printing, Inc. from 1976-1995 and has been President since May 1995. From 1983 through 1986 Mr. Forlenza was an attorney with the SBA. Mr. Forlenza graduated Phi Beta Kappa from New York University and obtained his Juris Doctor degree from Fordham University School of Law. Steven Etra, age 49, has been a Vice President and a director of Ameritrans since its inception, a Vice President of Elk since January 1999, and a director of Elk since November 1995. Mr. Etra 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. Silvia Maria Mullens, age 45, has been a Vice President of Ameritrans since its inception, a Vice President of Elk since 1996, and the Loan Administrator of Elk since February 1994. Prior to joining Elk, she was the Legal Coordinator for Castle Oil Corporation from September 1991 through June 1993 and from June 1993 through January 1994, a legal assistant specializing in foreclosures in the law firm of Greenberg & Posner. Ms. Mullens received a B.A. from Fordham University and an M.B.A. from The Leonard Stern School of Business Administration of New York University. Margaret Chance, age 42, has been Secretary of Ameritrans since its inception and Secretary of Elk 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, since January 1982. Ms. Chance holds a paralegal certificate. -50- Marvin Sabesan, age 69, has been a director of Ameritrans since its inception and a director of Elk 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. Paul Creditor, age 61, has been a director of Ameritrans since its inception and a director of Elk since November 1995. Mr. Creditor has been a practicing attorney since 1961, engaging in the general practice of law and specializing in corporate law. From 1974 through 1979 he served as an elected Judge in Suffolk County, New York. He also served as counsel to the New York State Constitutional Convention and various State Agencies and Commissions. Allen Kaplan, age 47, has been a director of Ameritrans since its inception and a director of Elk since November 1995. Mr. Kaplan has been since November 1986, Vice President and Chief Operating Officer of Team Systems, Inc., a company which manages and operates more than 200 New York City medallion taxis. 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 been a director of Ameritrans since its inception and a director of Elk since October 1997. Mr. Acierno has served as president of Executive Charge Inc. and its affiliated companies for the last ten years. During that time, Executive Charge Inc. has become the largest executive sedan operation in the United States with over 1,300 vehicles servicing the greater New York Metropolitan area. His background includes practicing law as a labor attorney for Proskauer Rose and serving as counsel for R.H. Macy & Co. Mr. Acierno was 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. John R. Laird, age 56, has been a director of Ameritrans and of Elk since January 1999. Mr. Laird has been a private investor since 1994, when he retired from Shearson Lehman Brothers Inc. ("Shearson"). Mr. Laird served as President and Chief Executive Officer of the Shearson Lehman Brothers Division of Shearson and as a member of the Shearson Executive Committee from 1992 to 1994. Mr. Laird was also Chairman and Chief Executive Officer of The Boston Company, a subsidiary of Shearson, from 1990 until its sale by Shearson in 1993. From 1977 to 1989 Mr. Laird was employed by American Express in various capacities including Senior Vice President and Treasurer. He also is and has been a member of boards of various cultural and philanthropic organizations, including but not limited to, the Corporate Advisory Committee of the Boston Museum of Fine Arts and the Board of Overseers for the Boston Symphony Orchestra. Mr. Laird received a B.S. in finance and an M.B.A. from Syracuse University and attended the Advanced Management Program at Harvard Business School. Howard F. Sommer, age 58, has been a director of Ameritrans and of Elk since January 1999. Mr. Sommer has been President and Chief Executive Officer of New York Community Investment Company L.L.C., an equity investment fund providing long-term capital to small businesses throughout the State of New York, since 1995. Mr. Sommer was President of Fundex Capital Corporation from 1978 to 1995, President of U.S. Capital Corporation from 1973 to 1995, worked in management consulting from 1971 to 1973 and held various positions at IBM and Xerox Corporations -51- from 1962 to 1971. Mr. Sommer was also a member of the Board of Directors for the National Association of Small Business Investment Companies, serving on its executive committee from 1989 to 1993 and as Chairman of the Board in 1994. He received a B.S. in electrical engineering from City College of New York and attended the Graduate School of Business at New York University. Our directors are actively involved in the oversight of our affairs, including financial and operational issues, credit and loan policies, asset valuation, and strategic direction. COMMITTEES OF THE AMERITRANS BOARD Ameritrans has a standing Audit Committee and a standing 1999 Employee Plan Committee. The Audit Committee is comprised of Paul Creditor, John Acierno and Gary Granoff. The function of the Audit Committee is to review our internal accounting control procedures, review our consolidated financial statements and review with the independent public accountants the results of their audit. The 1999 Employee Plan Committee administers our 1999 Employee Plan. See " -- Stock Option Plans -- The 1999 Employee Plan," below. EXECUTIVE COMPENSATION Prior to the Share Exchange, our directors and officers were compensated as directors and officers of Elk and received no compensation from Ameritrans. The following table sets forth all remuneration for services rendered to Elk to (i) each of the executive officers and (ii) all executive officers as a group during the fiscal year ended June 30, 1998. No non-employee director received compensation in excess of $60,000 during that period.
NAME AND PRINCIPAL POSITION CASH COMPENSATION(1) SEP BENEFIT(2) - --------------------------- -------------------- -------------- Gary C. Granoff, President $215,712(3) $24,000 Ellen M. Walker, Vice President and General $103,917 $15,588 Counsel Lee A. Forlenza, Vice President $45,673 $6,851 Silvia Mullens, Vice President $59,063 $8,859 Margaret Chance, Secretary $53,160 $7,974 All executive officers as a group (5 persons) $497,525 $63,272
- ------------------------------------ (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. (2) Simplified Employee Pension Plan. (3) Does not include $20,000 of reimbursable expenses. -52- During the fiscal year ended June 30, 1999, increases in compensation were given to Silvia Mullens and Margaret Chance, and Steven Etra became a Vice President. In addition, increases were authorized for Gary C. Granoff, Ellen M. Walker, and Lee A. Forlenza, effective July 1, 1999. Our other officers are receiving, in the aggregate from Ameritrans and/or Elk, the same compensation as was paid by Elk during the fiscal year ended June 30, 1999. However, we expect future compensation to be allocated between Elk and Ameritrans, based upon factors determined by their respective Boards of Directors. The Boards of Directors may increase such compensation for the fiscal year ending June 30, 2000. Ameritrans and Elk have a policy of paying their directors who are not employees fees of $750 for each meeting attended. Since July 1, 1996, non-employee directors have been paid annual fees of $2,000 per year in addition to the fees paid for each meeting attended. Fees and expenses paid to non-affiliated directors were, in the aggregate, approximately $27,500 for the year ended June 30, 1997, and $52,050 for the year ended June 30, 1998. For the year ended June 30, 1998, Messrs. Etra and Forlenza, the members of Elk's Holding Company Committee, which oversaw the formation and capitalization of Ameritrans and its acquisition of Elk, were paid an aggregate of $8,000 for work performed in connection with the Share Exchange. No options were granted to any officers or directors in the fiscal year ended June 30, 1998. However, in January 1999, an aggregate of 100,000 options were granted to certain officers. See " -- Stock Option Plans -- The 1999 Employee Plan." STOCK OPTION PLANS The descriptions of the 1999 Employee Plan and the Director Plan set forth below are qualified in their entirety by reference to the text of the plans. 1999 EMPLOYEE PLAN An employee stock option plan (the "1999 Employee Plan") was adopted by the Ameritrans Board of Directors, including a majority of the non-interested directors, and approved by a stockholder vote, in order to link the personal interests of key employees to our long-term financial success and the growth of stockholder value. The 1999 Employee Plan is substantially identical to, and the successor to, an employee stock option plan adopted by the Board of Directors of Elk and approved by it stockholders in September 1998 (the "1998 Elk Employee Plan"). The 1999 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 our employees. By adopting the 1999 Employee Plan, the Board believes that we will be better able to attract, motivate and retain as employees people upon whose judgment and special skills our success in large measure depends. As of June 1, 1999, options to purchase an aggregate of 100,000 shares of Common Stock had been granted to various officers. These options were originally granted under the Elk 1998 Employee Plan. Options for 70,000 shares are exercisable for 10 years from the date of grant at a price of $8.88 per share (the fair market value of the Common Stock on the date of grant), and options for 30,000 shares are exercisable for five (5) years from the date of grant at a price of $9.77 -53- per share. Accordingly, 25,000 shares of Common Stock are available for future awards under the 1999 Employee Plan. The 1999 Employee Plan is administered by the 1999 Employee Plan Committee of the Board of Directors, which is comprised solely of non-employee directors (who are "outside directors" within the meaning of Section 152(m) of the Internal Revenue Code and "disinterested persons" within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934 (the "1934 Act")). The committee can make such rules and regulations and establish such procedures for the administration of the 1999 Employee Plan as it deems appropriate. The exercise price of an incentive stock option must be at the fair market value of our Common Stock on the date of grant (110% of the fair market value for stockholders who, at the time the option is granted, own more than 10% of the total combined classes of stock of Ameritrans 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 10 years (five (5) years for 10% or greater stockholders). Options generally may be exercised only if the option holder remains continuously associated with us 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 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 we 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 we 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. NON-EMPLOYEE DIRECTOR PLAN A stock option plan for non-employee directors (the "Director Plan") was adopted by the Ameritrans Board of Directors and approved by a stockholder vote, in order to link the personal -54- interests of non-employee directors to our long-term financial success and the growth of stockholder value. The Director Plan is substantially identical to, and the successor to, an employee stock option plan adopted by the Board of Directors of Elk and approved by it stockholders in September 1998 (the "Elk Director Plan"). Ameritrans and Elk submitted an application for, and received on ________, 1999, an exemptive order relating to these plans from the SEC. The Director Plan provides for the automatic grant of options to directors who are not our employees, officers or interested persons (an "Eligible Director"). By adopting the Director Plan, the Board believes that we will be better able to attract, motivate and retain as directors people upon whose judgment and special skills our success in large measure depends. 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 our 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 after the Approval Date such elected director will automatically receive on the date such director has served as a director 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. The Director Plan is administered by a committee of directors who are not eligible to participate in the Directors Plan. 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 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. -55- 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 10 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 our stockholders. 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. SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT The following table sets forth certain information as to (i) those persons who, to our knowledge, owned 5% or more of our outstanding Common Stock as of June 30, 1999, (ii) each of our directors and (iii) all of our officers and directors as a group. Except as set forth below, the address of each person listed below is the address of Ameritrans. See "Prospectus Summary."
NUMBER OF SHARES OF PERCENTAGE OF OUTSTANDING COMMON STOCK NAME COMMON STOCK OWNED PRIOR TO OFFERING AFTER OFFERING - ---- ------------------ -------------------------------- *Gary C. Granoff 350,708(1) 19.0% 11.9% *Ellen M. Walker 57,374(2) 3.1% 1.9% *Lee A. Forlenza 48,095(3) 2.6% 1.6% *Steven Etra 133,016(4) 7.2% 4.5% Marvin Sabesan 78,861(5) 4.3% 2.6% c/o Pearl River Textiles, Inc. 990 Sixth Avenue New York, NY Paul Creditor 2,000 ** ** 747 Third Avenue, Ste. 4C New York, NY Allen Kaplan 5,000 ** ** c/o Executive Charge, Inc. 1440 39th Street Brooklyn, NY
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NUMBER OF SHARES OF PERCENTAGE OF OUTSTANDING COMMON STOCK NAME COMMON STOCK OWNED PRIOR TO OFFERING AFTER OFFERING - ---- ------------------ -------------------------------- John L. Acierno -- ** ** c/o Executive Charge, Inc. 1440 39th Street Brooklyn, NY John R. Laird 100 ** ** 481 Canoe Hill Road New Canaan, CT Howard F. Sommer -- ** ** c/o New York Community Investment Co., LLC 120 Broadway New York, NY Dan M. Granoff 155,979(6) 8.9% 5.5% Children's Hospital Oakland Research Institute 747 52nd Street Oakland, CA Alexander Nash 96,600(7) 5.5% 3.3% 20 W. Lincoln Avenue Valley Stream, NY Paul D. Granoff 143,179(8) 8.2% 4.9% c/o Rush-Copley Medical Center 1900 Ogden Avenue Aurora, IL 60504 All Officers and Directors as a 693,554 37.6% 23.5% group (12 persons)
- ------------------------------------ * Gary C. Granoff, Ellen M. Walker, Lee A. Forlenza, and Steven Etra are each "interested persons" with respect to Ameritrans and Elk, as such term is defined in the 1940 Act. ** Less than 1%. 1. Excludes (i) 24,933 shares owned directly or indirectly by Mr. Granoff's wife, as to which he disclaims beneficial ownership and (ii) 10,500 shares owned by one of Mr. Granoff's sons, as to which shares he does not exercise any control and disclaims beneficial ownership. Includes (i) 10,900 shares owned by the Granoff family foundation, a charitable foundation of which Mr. Granoff and his father, mother, and brother, Dan M. Granoff, are trustees; (ii) 35,321 shares held by Mr. Granoff as trustee for his children and other family members; (iii) 261 shares held by GCG Associates Inc., a corporation owned by Mr. Granoff; (iv) 76,084 shares owned by Dapary Management Corp., a corporation controlled by Mr. Granoff and (v) 30,000 shares issuable upon the exercise of five-year options issued under the 1999 Employee Plan. See "Management-- Stock Option Plans-- 1999 Employee Plan." 2. Includes (i) 200 shares held by Ms. Walker as custodian for her son; (ii) 22,800 shares held by various trusts of which Ms. Walker is a trustee and as to which she disclaims beneficial ownership (Mr. Granoff retains a reversionary interest in 21,000 of such shares), and (iii) 20,000 shares issuable upon the exercise of ten-year options issued under the 1999 Employee Plan. See "Management -- Stock Option Plans -- 1999 Employee Plan." -57- 3. Includes 17,500 shares issuable upon the exercise of ten-year options issued to under the 1999 Employee Plan. See "Management -- Stock Option Plans -- 1999 Employee Plan." 4. Includes (i) 29,022 shares held by Mr. Etra and his wife as joint tenants; (ii) 27,000 shares held by Mr. Etra's wife; (iii) 1,500 shares held by Mr. Etra's son; (iv) 10,000 shares held by SRK Associates LLC, a limited liability company controlled by Mr. Etra, (v) 10,000 shares held by Lance's Property Development Corp. Pension Plan, of which Mr. Etra is a trustee and (vi) 17,500 shares issuable upon the exercise of ten-year options issued under the 1999 Employee Plan. See "Management -- Stock Option Plans -- 1999 Employee Plan." 5. Includes 21,387 shares held by Mr. Sabesan and his wife as joint tenants and 28,551 shares held by his wife. Mr. Sabesan disclaims beneficial ownership of the 28,551 shares held by his wife. 6. Includes (i) 10,900 shares owned by a charitable foundation, of which N. Henry Granoff, his wife, Jeannette Granoff, Gary C. Granoff and Dr. Dan M. Granoff are the trustees, and (ii) 2,800 shares held in an IRA Rollover Account for the benefit of Dr. Granoff. 7. Includes (i) 6,500 shares held by Dr. Nash as custodian for his daughter and (ii) 52,900 shares held by his wife, as to which shares Dr. Nash disclaims beneficial ownership. 8. 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 pursuant to applicable community property laws or as described above, each person listed in the table above has sole voting and investment power, and is both the owner of record and the beneficial owner of his or her respective shares. CERTAIN TRANSACTIONS Elk pays legal fees, on a fixed or hourly basis, for loan closing services relating to loans other than New York taxi and radio car loan closings to Granoff, Walker & Forlenza, P.C. ("Granoff, Walker") whose stockholders are officers and directors of Elk and Ameritrans. Such services related to New York taxi and radio car loans are provided by the officers and employees of Elk. Elk paid Granoff, Walker fees of $43,234 during the fiscal year ended June 30, 1998 and $46,866 during the period from July 1, 1998 through March 31, 1999. Elk generally charges its borrowers loan origination fees to generate income to offset the legal fees paid by Elk for loan closing services. We also rent office space from Granoff, Walker and share certain office expenses with that firm. For the fiscal year ended June 30, 1998, we paid $39,600 in rent, $59,400 in shared overhead expense, and $21,908 of other reimbursable shared overhead expense. For the year ending June 30, 1999, we have 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. As of March 31, 1999, Elk's share of overhead expenses for the fiscal year to date was $62,941. During the fiscal year ended June 30, 1998, Granoff, Walker exercised an option in its lease, at our request, and rented an additional 1,800 square feet of office space contiguous with our offices at a below market rent (the "Additional Space"). Until we require the Additional Space, the law firm sublets the Additional Space to outside tenants under short-term arrangements. In the event all or a portion of the Additional Space is vacant, Elk's Board of Directors has agreed to reimburse the law -58- firm for the additional rent due. The estimated maximum amount of rent for which we 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 us, although some liability under the reimbursement obligation may occur in the future. In the event our operations expand, we could occupy all or part of the Additional Space without the inconvenience and expense of having to relocate our offices. CONFLICTS OF INTEREST POLICIES The Boards of Directors of Ameritrans and Elk have adopted policies governing potential conflicts of interest between the companies and their directors and officers. Together, these policies comprise our "Codes of Ethics" as required under the 1940 Act. These policies generally provide that no officer, director or employee of the respective company will make any loan which might be deemed to be appropriate for that company, unless and until such transaction is first approved by a majority of the directors of that company who are not "interested persons" of that company 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 the company of an opportunity or whether it would otherwise conflict with our best interests and those of our stockholders. A complete record of any such review and the results of the review will be maintained by the respective company as part of its permanent records. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Ameritrans Certificate of Incorporation limits the liability of our directors for monetary damages arising from a breach of their fiduciary duty as directors, except to the extent otherwise required by the Delaware General Corporation Law. This limitation of liability does not affect the availability of equitable remedies such as injunctive relief or recision. The Ameritrans by-laws provide that Ameritrans shall indemnify its officers and directors to the fullest extent permitted by Delaware law, including in circumstances in which indemnification is otherwise discretionary under Delaware law. We have entered into indemnification agreements with our officers and directors containing provisions that may require Ameritrans, among other things, to indemnify its officers and directors against certain liabilities that may arise by reason of their status as directors or officers (other than liabilities arising from willful misconduct of a culpable nature) and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. Ameritrans has directors' and officers' liability insurance. This policy was previously held by Elk for the benefit of its officers and directors and was assumed by Ameritrans upon the completion of the Share Exchange. -59- REGULATION THE INVESTMENT COMPANY ACT OF 1940 Ameritrans and Elk are closed-end, non-diversified management investment companies that have elected to be treated as BDCs and, as such, are subject to regulation under the 1940 Act. The 1940 Act contains prohibitions and restrictions relating to transactions between investment companies and their affiliates, principal underwriters and affiliates of those affiliates or underwriters. In addition, the 1940 Act provides that a BDC may not change the nature of its business so as to cease to be, or to withdraw its election as, a BDC unless so authorized by the vote of a "majority of its outstanding voting securities," as defined under the 1940 Act. BDCs are permitted, under specified conditions, to issue multiple classes of indebtedness and one class of stock (collectively, "senior securities," as defined under the 1940 Act) senior to the shares of Common Stock offered hereby if their asset coverage of such indebtedness and all senior securities is at least 200% immediately after each such issuance. Subordinated SBA debentures, preferred stock guaranteed by or issued to the SBA by Elk, and Elk bank borrowings are not subject to this asset coverage test. In addition, while senior securities are outstanding, provision must be made to prohibit the declaration of any dividend or other distribution to stockholders (except stock dividends) or the repurchase of such securities or shares unless we meet the applicable asset coverage ratios at the time of the declaration of the dividend or distribution or repurchase. The Exemptive Order issued by the SEC grants certain relief from the asset coverage ratios applicable to BDCs. Under the 1940 Act, a BDC may not acquire any asset other than Qualifying Assets unless, at the time the acquisition is made, certain Qualifying Assets represent at least 70% of the value of the company's total assets. The principal categories of Qualifying Assets relevant to our proposed business are the following: (1) Securities purchased in transactions not involving a public offering from the issuer of such securities, which issuer is an eligible portfolio company. An "eligible portfolio company" is defined in the 1940 Act as any issuer which: (a) is organized under the laws of, and has its principal place of business in, the United States; (b) is not an investment company other than an SBIC wholly-owned by the BDC; and (c) satisfies one or more of the following requirements: (i) the issuer does not have a class of securities with respect to which a broker or dealer may extend margin credit; or (ii) the issuer is controlled by a BDC and the BDC has an affiliated person serving as a director of issuer; -60- (iii) the issuer has total assets of not more than $4,000,000 and capital and surplus (stockholders' equity less retained earnings) of not less than $2,000,000, or such other amounts as the SEC may establish by rule or regulation; or (iv) the issuer meets such requirements as the SEC may establish from time to time by rule or regulation. (2) Securities for which there is no public market and which are purchased in transactions not involving a public offering from the issuer of such securities where the issuer is an eligible portfolio company which is controlled by the BDC. (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. We believe that the common stock of Elk held by Ameritrans are Qualifying Assets. THE SMALL BUSINESS INVESTMENT ACT OF 1958 Elk was formerly an SSBIC and, as explained in further detail below, was converted to an SBIC in February 1997 in accordance with an agreement with the SBA. The 1958 Act authorizes the organization of SBICs as vehicles for providing equity capital, long term financing and management assistance to Small Business Concerns. A Small Business Concern, as defined in the 1958 Act and the SBA Regulations, is a business that is independently owned and operated and which is not dominant in its field of operation. In addition, at the end of each fiscal year, at least 20% of the total amount of loans made since April 25, 1994 by each SBIC must be made to a subclass of Small Business Concerns that (i) have a net worth, together with any affiliates, of $6 million or less and average annual net income after U.S. federal income taxes for the preceding two (2) years of $2 million or less (average annual net income is computed without the benefit of any carryover loss), or (ii) satisfy alternative criteria under SBA Regulations that focus on the industry in which the business is engaged and the number of persons employed by the business or its gross revenues. SBA Regulations also prohibit an SBIC from providing funds to a Small Business Concern for certain purposes, such as relending and reinvestment. The 1958 Act authorized the organization of SSBICs to provide assistance to Disadvantaged Concerns, i.e., businesses that are at least 50% owned and managed by persons whose participation in the free enterprise system is hampered because of social or economic disadvantages. Certain 1996 -61- amendment to the 1958 Act provided, among other things, that no further subsidized funding would be made available to SSBICs. Thereafter, pursuant to an agreement with the SBA, Elk was converted to an SBIC, subject to certain conditions imposed by the SBA. Under this agreement, Elk may now lend to persons who are not Disadvantaged Concerns. As of March 31, 1999, more than 95% of Elk's portfolio of loans and investments were to Disadvantaged Concerns. Under current SBA Regulations and subject to local usury laws, the maximum rate of interest that Elk may charge may not exceed the higher of (i) 19% or (ii) a rate calculated with reference to Elk's weighted average cost of qualified borrowings, as determined under SBA Regulations or the SBA's current debenture interest rate. The current maximum rate of interest permitted on loans originated by Elk is 19%. At June 30, 1999, Elk's outstanding loans had a weighted average rate of interest of 11.2%. SBA Regulations also require that each loan originated by SBICs have a term of between five years and 20 years. The SBA restricts the ability of SBICs to repurchase their capital stock, to retire their subordinated SBA debentures and to lend money to their officers, directors and employees or invest in affiliates thereof. The SBA also prohibits, without prior SBA approval, a "change of control" or transfers which would result in any person (or group of persons acting in concert) owning 10% or more of any class of capital stock of an SBIC. A "change of control" is any event which would result in the transfer of the power, direct or indirect, to direct the management and policies of an SBIC, whether through ownership, contractual arrangements or otherwise. Under SBA Regulations, without prior SBA approval, loans by licensees with outstanding SBA leverage to any single Small Business Concern may not exceed 20% of an SBIC's Leveragable Capital. Under the terms of the SBA Agreement, however, Elk is authorized to make loans to Disadvantaged Concerns in amounts not exceeding 30% of its respective Leveragable Capital. SBICs must invest funds that are not being used to make loans in investments permitted under SBA Regulations. These permitted investments include direct obligations of, or obligations guaranteed as to principal and interest by, the government of the United States with a term of 15 months or less and deposits maturing in one year or less issued by an institution insured by the FDIC. The percentage of an SBIC's assets so invested will depend on, among other things, loan demand, timing of equity infusions and SBA funding and availability of funds under credit facilities. SBICs may purchase voting securities of Small Business Concerns in accordance with SBA Regulations. SBA Regulations prohibit SBICs from controlling a Small Business Concern except where necessary to protect an investment. SBA Regulations presume control when SBICs purchase (i) 50% or more of the voting securities of a Small Business Concern if the Small Business Concern has less than 50 stockholders or (ii) more than 20% (and in certain situations up to 25%) of the voting securities of a Small Business Concern if the Small Business Concern has 50 or more stockholders. FEDERAL INCOME 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 Internal Revenue Code and the regulations thereunder. This summary does not purport to be a complete description of the tax -62- considerations applicable to Ameritrans or to the holders of its Common Stock. These principles, in general, also apply to Elk, but the sole direct stockholder of Elk is Ameritrans. Ameritrans has elected to be treated as a "regulated investment company" (a "RIC") under Section 851 of the Internal Revenue Code, and Elk has elected to be treated as a RIC since 1984. 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 RIC, Ameritrans 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 RIC and therefore it is contemplated its earnings will not be distributed to stockholders. TAXATION OF REGULATED INVESTMENT COMPANIES In order to qualify as a RIC for a given fiscal year, a company must meet each of the following conditions for that fiscal year: a) The company must be registered as an investment company under the 1940 Act at all times during the year. b) At least 90% of the company'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. c) Less than 30% of the company's gross income must be derived from the sale or other disposition of securities held for less than three months. d) At the close of each quarter, at least 50% of the value of the company's total assets must be represented by cash, cash items (including receivables), securities of other RICs and securities of other issuers, except that the investment in a single issuer of securities may not exceed 5% of the value of the RIC's assets, or 10% of the outstanding voting securities of the issuer. e) At the close of each quarter, and with the exception of government securities or securities of other RICs, no more than 25% of the value of a RIC's assets may be made up of investments in the securities of a single issuer or in the securities of two or more issuers controlled by the RIC and engaged in the same or a related trade or business. However, if a non-RIC entity controlled by the RIC subsequently sustains internally generated growth (as opposed to growth via acquisitions), the diversification requirement will not be violated even if the non-RIC subsidiary represents in excess of 25% of the RIC's assets. f) The company must distribute as dividends at least 90% of its investment company taxable income (as defined in Section 852 of the Internal Revenue Code), as well as 90% of the excess of its tax-exempt income over certain disallowed tax-exempt interest deductions. This treatment substantially eliminates the "double taxation" (i.e., taxation at both the corporate and stockholder levels) that generally results from the use of corporate investment vehicles. A RIC is, -63- however, generally subject to federal income tax at regular corporate rates on undistributed investment company taxable income. In order to avoid the imposition of a non-deductible 4% excise tax on its undistributed income, a company is required, under Section 4982 of the Internal Revenue Code, to distribute within each calendar year at least 98% of its ordinary income for such calendar year and 98% of its capital gain net income (reduced by the RIC's net ordinary loss for the calendar year, but not below its net capital gain) for the one-year period ending on October 31 of such calendar year. The tax benefits available to a qualified RIC 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 RIC 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. 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 is also a RIC, 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. If Elk does not qualify as a RIC 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 does not qualify as a RIC, such failure will cause Ameritrans to fail to qualify for RIC 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 RIC 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 our stockholders. Elk Capital will not be a RIC, so it will be subject to corporate tax on its earnings. Elk Capital does not currently represent more than 25% of Ameritrans' assets, but it is a non-RIC entity controlled by Ameritrans and engaged in the same or a related trade or business as Ameritrans. If Elk Capital subsequently sustains internally generated growth (as opposed to growth via acquisitions), the diversification requirement discussed above should not be violated even if Elk Capital represents in excess of 25% of Ameritrans' assets. However, if the diversification requirement is not complied with, such failure will cause Ameritrans to fail to qualify for RIC status. As long as Ameritrans qualifies as a RIC, dividends distributed by Ameritrans to its stockholders out of current or accumulated earnings and profits 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. To the extent Ameritrans makes distributions in excess of current and accumulated earnings and profits, these distributions are treated first as a tax-free return of capital to the stockholder, reducing the tax basis of the stockholder's stock by the amount of such distribution, but not below zero, with distributions in excess of the stockholder's basis taxable as capital gains if the stock is held as a capital asset. -64- 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: (i) Under Section 243 of the Internal Revenue 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 stockholder. (ii) Under Section 1243 of the Internal Revenue Code, losses sustained on Elk's investments in the convertible debentures, or stock derived from convertible debentures, of Small Business Concerns are treated as ordinary losses rather than capital losses to Elk. Because Elk does not presently intend to purchase convertible debentures, however, this potential benefit is not likely to be of practical significance to Elk or its stockholder. (iii) Under Section 1242 of the Internal Revenue 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 AND OTHER TAXES The foregoing discussion relates only to federal income tax matters. Ameritrans is also subject to state and local taxation. The state, local and foreign tax treatment may not conform to the federal tax treatment discussed above. Stockholders should consult with their own tax advisors with respect to the state and local tax considerations pertaining to Ameritrans. -65- DESCRIPTION OF CAPITAL STOCK The authorized capital stock of Ameritrans consists of 5,000,000 shares, $.0001 par value, of Common Stock, of which 1,745,600 shares are issued and outstanding, and 1,000,000 shares of "blank check" preferred stock, none of which are issued and outstanding. As of June 30, 1999, there were approximately 274 holders of record of the Elk Common Stock. COMMON STOCK The holders of Common Stock are entitled to one (1) vote per share on all matters submitted to a vote of stockholders. Holders of Common Stock have neither cumulative voting rights (which means that the holders of a majority of the outstanding shares of Common Stock may elect all of our directors) nor any preemptive rights. Holders of 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 Internal Revenue Code, we are required to distribute as dividends to our stockholders, for each fiscal year, at least 90% of our taxable income and 90% of the excess of our tax-exempt income over certain disallowed deductions. In addition, in order to avoid a non-deductible 4% excise tax on any undistributed income, we are required to distribute as dividends, within each calendar year, at least 98% of our ordinary income for such calendar year and 98% of our capital gain net income for the one-year period ending on October 31 of such calendar year. See "Federal Income Tax Considerations." In the event of a liquidation, dissolution or winding up of Ameritrans, holders of 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 outstanding shares of Common Stock are fully paid and non-assessable. PREFERRED STOCK Subject to the asset coverage requirements of the 1940 Act, Preferred Stock may be issued from time to time by the Board of Directors as shares of one or more classes or series. Subject to the provisions of the our Certificate and limitations prescribed by law, the Board of Directors is expressly authorized to adopt resolutions to issue the shares, to fix the number of shares and to change the number of shares constituting any series, and to provide for or change the voting powers, designations, preferences and relative, participating, optional or other special rights, qualifications, limitations or restrictions thereof, including dividend rights (including whether dividends are cumulative), dividend rates, terms of redemption (including sinking fund provisions), redemption prices, conversion rights and liquidation preferences of the shares constituting any class or series of the Preferred Stock, in each case without any further action or vote by the stockholders. We have no current plans to issue any shares of Preferred Stock of any class or series. The Board of Directors could issue classes or series of the undesignated Preferred Stock to make more difficult or to discourage an outsider's attempt to obtain control of Ameritrans by means of a tender offer, proxy contest, merger or otherwise, and thereby to protect the continuity of our management. The issuance of shares of the Preferred Stock by the Board of Directors could have a negative effect on the rights of the holders of Common Stock. For example, holders of Preferred Stock may be entitled to receive dividends and distributions on liquidation before the holders of the Common Stock, and the Preferred Stock could have full or limited voting rights and may be -66- convertible into shares of Common Stock. As a result, the issuance of shares of Preferred Stock may discourage bids for the Common Stock or may cause the market price of the Common Stock to go down. TRANSFER AGENT The transfer agent for our Common Stock is Continental Stock Transfer & Trust Company, 2 Broadway, New York, New York 10004. BUSINESS COMBINATION PROVISIONS Delaware Corporation Law Section 203 is entitled "Business Combinations with Interested Stockholders." Subject to certain exceptions, Section 203 generally prohibits any 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 stockholders' meeting, by two-thirds of the outstanding voting stock not owned by such interested stockholder. Companies may choose not to be governed by Section 203, and the Ameritrans Certificate of Incorporation provides that Ameritrans shall not be governed by Section 203. SHARES ELIGIBLE FOR FUTURE SALE Future sales of substantial amounts of Common Stock in the public market, or the perception that such sales could occur, could adversely affect market prices prevailing from time to time. In addition, several of our principal stockholders and entities affiliated with them hold a significant portion of our outstanding Common Stock, and a decision by one or more of these stockholders to sell their shares could adversely affect the market price of the Common Stock. Upon completion of the Offering, we will have outstanding 2,845,600 shares of Common Stock (3,010,600 if the Underwriters' over-allotment option is exercised in full). Except for the shares currently owned or subsequently acquired by our affiliates, in this Offering or otherwise, the outstanding shares and the 1,100,000 shares to be sold in this Offering (1,265,000 if the Underwriters' over-allotment option is exercised in full), will be freely tradable without restriction under the Securities Act. The shares owned by our affiliates may be sold in accordance with the conditions of Rule 144 of the Securities Act. In general, under Rule 144, an affiliate would be entitled to sell in brokers' -67- transactions or to market makers within any three-month period a number of shares that does not exceed the greater of 1% of the then outstanding shares of the Common Stock (approximately 28,450 shares, based on the number of shares outstanding after the Offering, assuming no exercise of the Underwriters' over-allotment option) or the average weekly trading volume of the Common Stock on the Nasdaq National Market during the four (4) calendar weeks preceding the date on which notice of the sale is filed with the SEC. Sales under Rule 144 are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about the company. Pursuant to lock-up agreements with the Underwriters, our officers and directors will not, directly or indirectly, offer for sale, sell, contract to sell, grant an option to purchase or otherwise dispose of any shares of the Ameritrans Common Stock, (except 40,000 shares owned by one director and his wife, which may be sold at the rate of 10,000 shares during any three-month period) until 13 months after the completion of the Offering without the prior written consent of the Underwriters. See "Underwriting." We have reserved a total of 125,000 shares of Common Stock for issuance with respect to the grants of options under the 1999 Employee Plan. To date, we have granted options to purchase 100,000 shares of Common Stock, leaving 25,000 shares of Common Stock for future grants under the 1999 Employee Plan. In addition, a total of 75,000 additional shares of Common Stock have been reserved for issuance with respect to the grant of options under the Director Plan. We intend to file a registration statement under the Securities Act to register the shares reserved for issuance under the 1999 Employee Plan and the Director Plan. Shares issued upon exercise of outstanding stock options after the effective date of such registration statement generally will be tradable without restriction under the Securities Act. UNDERWRITING We have entered into an underwriting agreement with the underwriters named below, for whom First Colonial Securities Group, Inc. ("First Colonial") and Auerbach, Pollak & Richardson, Inc. are acting as representatives (the "Representatives"). We are obligated to sell, and the Underwriters are obligated to purchase, all of the shares of Common Stock offered on the cover page of this prospectus, if any are purchased. Subject to certain conditions of the underwriting agreement, each Underwriter has severally agreed to purchase the shares of Common Stock indicated opposite its name. UNDERWRITERS NUMBER OF SHARES ------------ ---------------- First Colonial Securities Group, Inc.................. Auerbach, Pollak & Richardson, Inc.................... [Name]................................................ [Name]................................................ Total................................................. The Underwriters may sell more shares than the total number of shares of Common Stock offered on the cover page of this prospectus, and they have, for a period of 45 days from the effective -68- date of this prospectus, an over-allotment option to purchase up to 165,000 additional shares from us. If any additional shares are purchased, the Underwriters will severally purchase the shares in the same proportion as per the table above. The Representatives have advised us that the shares will be offered to the public at the offering price indicated on the cover page of this prospectus. The Underwriters may allow, to selected dealers, a concession not in excess of $________ per share and such dealers may re-allow a concession not in excess of $______ per share to certain other dealers. After the Common Stock is released for sale to the public, the Representatives may change the offering price and the concessions. The Representatives have informed us that the Underwriters do not intend to sell shares to any investor who has granted them discretionary authority. The public offering price of the Common Stock, negotiated between us and the Representatives, is based upon various factors such as the current market price of the Common Stock, our expected performance, estimates of our future earnings prospects as a whole, and the prevailing market conditions. The Common Stock is quoted on the Nasdaq SmallCap Market under the symbol "________." Upon completion of the Offering, the Common Stock will be quoted on the Nasdaq National Market under the symbol "_______." We will pay to the Representatives a non-accountable expense allowance of 2.75% of the offering proceeds to reimburse the Underwriters for costs and expenses in connection with this Offering. We have agreed to indemnify the Underwriters or contribute to losses against certain liabilities, including liabilities under the Securities Act. First Colonial has agreed to perform financial advisory services for us for a period of two years for a fee of $3,000 per month payable in full at the closing of this Offering. We and, (with the exception of one director) our directors and officers have entered into lockup agreements, pursuant to which we and our directors and officers have agreed not to offer or sell any shares of common stock or securities convertible into or exchangeable or exercisable for shares of common stock for a period of 13 months from the effective date of this Prospectus. The Representatives may, at any time and without notice, waive the terms of these lock-up agreements as specified in the underwriting agreement. The Representatives, on behalf of the Underwriters, may engage in the following activities in accordance with the securities rules: o Over-allotments involving sales in excess of the offering size, creating a short position. The Representatives may elect to reduce this short position by exercising some or all of the over-allotment option. o Stabilizing and short covering. Stabilizing bids to purchase the shares are permitted if they do not exceed a specified maximum price. After the distribution of shares has been completed, short covering purchase in the open market may also reduce the short position. These -69- activities may cause the price of the shares to be higher than would otherwise exist in the open market. o Penalty bids to permit the Representatives to reclaim commissions from a syndicate member for the shares purchased in the stabilizing or short covering transactions. Such activities, which may be commenced and discontinued at any time, may be effected on NASDAQ in the over-the-counter market or otherwise. The principal address of First Colonial Securities Group, Inc. is 1499 West Palmetto, Suit 312, Boca Raton, Florida 33486; the principal address of Auerbach, Pollak & Richardson, Inc. is 450 Park Avenue, 8th Floor, New York, New York 10022. EXPERTS The consolidated financial statements of Elk for the years ended June 30, 1998 and 1997 included in this Prospectus 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 in reliance upon the authority of said firm as experts in accounting and auditing in giving said report. The consolidated financial statements of Elk for the year ended June 30, 1996 included in this Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report dated August 2, 1996 appearing herein, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. LEGAL MATTERS Certain legal matters in connection with the Offering will be passed upon for Ameritrans by Stursberg & Veith, New York, New York. The validity of the shares of Common Stock will be passed upon for the Underwriters by Klehr Harrison Harvey Branzberg & Ellers LLP, Philadelphia, Pennsylvania. ADDITIONAL INFORMATION We have filed with the SEC a Registration Statement on Form N-2 under the Securities Act with respect to the Common Stock offered by this Prospectus. This Prospectus, filed as part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to Ameritrans and the Common Stock, you should refer to the Registration Statement, including its exhibits and schedules. Statements contained in this Prospectus as to the contents of any contract or any other document are not necessarily complete. In each instance, we refer you to the copy of such contract or document filed as an exhibit to the Registration Statement, and each such statement is qualified in all respects by such reference to the complete document. -70- As a BDC, we comply with the informational requirements of the 1934 Act, and, in accordance therewith, we are required to file reports, proxy statements, and other information with the SEC. You may inspect the Registration Statement, including all exhibits and schedules, filed with the SEC, as well as the reports, proxy statements, and other information we file under the 1934 Act, without charge, at the Public Reference Room maintained by the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's Regional Offices located at Seven World Trade Center, 13th Floor, New York, New York 10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You can obtain information on the operation of the Public Reference room by calling the SEC at (800) SEC-0330. The SEC also maintains a web site that contains reports, proxy statements, and other information. The address of the SEC's web site is http://www.sec.gov. Copies of such material may also be obtained from the Public Reference Branch, Office of Consumer Affairs and Information Services of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Our Common Stock is listed on the Nasdaq SmallCap Market and, after the Offering, will be listed on the Nasdaq National Market, and our reports, proxy statements and other information can also be inspected at the offices of the National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006. -71- INDEX TO FINANCIAL STATEMENTS
PAGE ---- REPORT OF MARCUM & KLEIGMAN, LLP, INDEPENDENT PUBLIC ACCOUNTANTS REPORT F - 2 REPORT OF DELOITTE & TOUCHE, LLP, INDEPENDENT AUDITORS' REPORT F - 3 Consolidated Balance Sheets as of June 30, 1998, June 30, 1999 and March 31, 1999 (unaudited) F - 4 + 5 Consolidated Statements of Income for the Years Ended June 30, 1998, June 30, 1997 and June 30, 1996 and for the Nine Months Ended March 31, 1999 and March 31, 1998 (unaudited) F - 6 Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 1998, June 30, 1997 and June 30, 1996 F - 7 Consolidated Statements of Cash Flows for the Years Ended June 30, 1998, June 30, 1997 and June 30, 1996, and for the Nine Months Ended March 31, 1999 and March 31, 1998 (unaudited) F - 9 Schedule of Loans F - 10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F - 11 - 20
F-1 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 statements 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. Marcum & Kliegman LLP August 12, 1998 New York, New York F - 2 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Elk Associated Funding Corporation and Subsidiary (A Specialized Small Business Investment Company Licensed by SBA) We have audited the accompanying consolidated statement of income of Elk Associates Funding Corporation and Subsidiary and the related consolidated statements of shareholders' equity and cash flows for the year ended June 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit 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 audit provides a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the results of operations and cash flows of Elk Associates Funding Corporation and Subsidiary for the year ended June 30, 1996 in conformity with generally accepted accounting principles. Deloitte & Touche LLP August 2, 1996 F - 3 ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
ASSETS ------ March 31, June 30, June 30, 1999 1998 1997 (Unaudited) ----------- ------------ ------------ Loans receivable $41,590,000 $33,249,206 $49,303,758 Less: allowance for loan losses (295,000) (325,000) (335,000) ----------- ----------- ----------- 41,295,000 32,924,206 48,968,758 Cash and cash equivalents 1,755,429 1,853,032 673,296 Accrued interest receivable 516,110 408,165 655,210 Assets acquired in satisfaction of loans 400,470 581,810 619,308 Receivables from debtors on sales of assets acquired in satisfaction of loans 451,222 488,493 420,287 Equity securities 629,179 436,181 927,157 Furniture, fixtures and leasehold improvements, net 102,247 90,214 88,642 Prepaid expenses and other assets 250,081 243,920 397,621 ----------- ----------- ----------- TOTAL ASSETS $45,399,738 $37,026,021 $52,750,279 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F - 4 ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ March 31, June 30, June 30, 1999 1998 1997 (Unaudited) ----------- ----------- ----------- LIABILITIES Debentures payable to SBA $ 8,880,000 $ 8,880,000 $ 8,880,000 Notes payable, banks 22,085,000 16,820,000 29,350,000 Accrued expenses and other liabilities 204,099 112,005 277,631 Accrued interest payable 221,704 181,248 218,832 Dividends payable 314,208 -0- 314,208 ----------- ----------- ----------- TOTAL LIABILITIES 31,705,011 25,993,253 39,040,671 ----------- ----------- ----------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Series A, 3 percent cumulative preferred stock, $10 par value, 547,271 shares authorized, none outstanding -0- -0- -0- Series B, 4 percent cumulative preferred stock, $10 par value, 752,729 shares authorized, none outstanding -0- -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 17,456 Additional paid-in-capital 12,485,825 8,890,993 13,019,417 Restricted capital 968,368 1,679,820 434,777 Retained earnings 24,289 365,878 8,433 Restricted retained earnings -0- 25,000 -0- Unrealized gain on equity securities 198,789 58,241 229,525 ----------- ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 13,694,727 11,032,768 13,709,608 ----------- ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $45,399,738 $37,026,021 $52,750,279 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F - 5 ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME
For the Nine For the Nine For the For the For the Months Ended Months Ended Year Ended Year Ended Year Ended March 31, March 31, June 30, June 30, June 30, 1999 1998 1998 1997 1996 (Unaudited) (Unaudited) ---------- ---------- ---------- ------------ ------------ INVESTMENT INCOME Interest on loans receivable $4,108,727 $3,660,825 $2,751,196 $3,804,341 $2,937,394 Fees and other income 497,729 362,970 333,216 296,628 382,552 ---------- ---------- ---------- ---------- ---------- TOTAL INVESTMENT INCOME 4,606,456 4,023,795 3,084,412 4,100,969 3,319,946 ---------- ---------- ---------- ---------- ---------- OPERATING EXPENSES Interest 1,840,731 1,582,700 1,105,993 1,804,597 1,360,703 Management fees -0- -0- 210,000 -0- -0- Salaries and employee benefits 495,889 469,060 220,476 431,701 406,164 Legal fees 336,700 307,127 186,023 222,135 222,334 Miscellaneous administrative expenses 739,875 604,347 474,551 582,690 506,199 (Gains) losses on assets acquired in satisfaction of loans, net 14,649 8,923 (44,292) 5,432 4,097 Directors' fee 52,050 27,500 23,400 26,250 45,089 Bad debt expense 227,748 -0- -0- 101,465 174,998 ---------- ---------- ---------- ---------- ---------- TOTAL OPERATING EXPENSES 3,707,642 2,999,657 2,176,151 3,174,270 2,719,584 ---------- ---------- ---------- ---------- ---------- OPERATING INCOME 898,814 1,024,138 908,261 926,699 600,362 ---------- ---------- ---------- ---------- ---------- OTHER INCOME (EXPENSES) (Write-off) gain of noncash receivable (25,000) 25,000 -0- -0- -0- Net gain (loss) from rental activities 6,125 (11,233) -0- -0- -0- Recoveries 57,673 11,118 -0- -0- -0- ---------- ---------- ---------- ---------- ---------- TOTAL OTHER INCOME 38,798 24,885 -0- -0- -0- ---------- ---------- ---------- ---------- ---------- NET INCOME BEFORE INCOME TAXES 937,612 1,049,023 908,261 926,699 600,362 INCOME TAXES 3,271 28,676 -0- (69) (2,716) ---------- ---------- ----------- ---------- ---------- NET INCOME $ 934,341 $1,020,347 $ 908,261 $ 926,768 $ 603,078 ========== ========== ========== ========== ========== WEIGHTED AVERAGE SHARES OUTSTANDING 1,518,969 1,283,600 1,247,120 1,745,600 1,432,726 ========== ========== ---------- ========== ========== NET INCOME PER COMMON SHARE $0.62 $0.79 $0.73 $0.53 $0.42 ===== ===== ===== ===== =====
The accompanying notes are an integral part of these financial statements. F - 6 ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
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 Restricted Outstanding $10 Par $10 Par Outstanding Value Capital Capital ----------- ----------- ---------- ----------- ------- ----------- ---------- BALANCE, July 1, 1995 547,271 $5,472,710 -0- 1,033,683 $10,337 $ 5,480,948 -0- - ------- Proceeds from issuance of common stock -0- -0- -0- 249,917 2,499 1,225,604 -0- Redemption of preferred stock (547,271) ($5,472,710) -0- -0- -0- -0- 3,557,261 Capitalization of retained earnings -0- -0- -0- -0- -0- 307,000 -0- Transfer of restricted capital -0- -0- -0- -0- -0- 1,165,993 (1,165,993) Dividends paid -0- -0- -0- -0- -0- -0- -0- Net income -0- -0- -0- -0- -0- -0- -0- -------- ----------- --------- --------- ------- ----------- ---------- BALANCE, June 30, 1996 -0- $ -0- $ -0- 1,283,600 $12,836 $ 8,179,545 $2,391,268 - ------- Transfer of restricted capital -0- -0- -0- -0- -0- 711,448 (711,448) Dividends paid -0- -0- -0- -0- -0- -0- -0- Net income -0- -0- -0- -0- -0- -0- -0- Unrealized gain on equity securities -0- -0- -0- -0- -0- -0- -0- -------- ----------- --------- --------- ------- ----------- ---------- BALANCE, June 30, 1997 -0- -0- -0- 1,283,600 12,836 8,890,993 1,679,820 - ------- Transfer of restricted capital -0- -0- -0- -0- -0- 711,452 (711,452) Dividends declared -0- -0- -0- -0- -0- -0- -0- Net income -0- -0- -0- -0- -0- -0- -0- Unrealized gain on equity securities -0- -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 -0- -------- ----------- --------- --------- ------- ----------- ---------- BALANCE, June 30, 1998 -0- $ -0- $ -0- 1,745,600 $17,456 $12,485,825 $ 968,368 - ------- ======== =========== ========= ========= ======= =========== ==========
[RESTUB]
Unrealized Restricted Gain on Retained Retained Equity Earnings Earnings Securities Total ---------- ---------- ---------- ----------- BALANCE, July 1, 1995 $ 652,953 -0- -0- $11,616,948 - ------- Proceeds from issuance of common stock -0- -0- -0- 1,228,103 Redemption of preferred stock -0- -0- -0- (1,915,449) Capitalization of retained earnings (307,000) -0- -0- -0- Transfer of restricted capital -0- -0- -0- -0- Dividends paid (937,028) -0- -0- (937,028) Net income 908,261 -0- -0- 908,261 ----------- ------- --------- ----------- BALANCE, June 30, 1996 $ 317,186 $ -0- $ -0- $10,900,835 - ------- Transfer of restricted capital -0- -0- -0- -0- Dividends paid (946,655) -0- -0- (946,655) Net income 995,347 25,000 -0- 1,020,347 Unrealized gain on equity securities -0- -0- 58,241 58,241 ----------- ------- --------- ----------- BALANCE, June 30, 1997 365,878 25,000 58,241 11,032,768 - ------- Transfer of restricted capital -0- -0- -0- -0- Dividends declared (1,300,930) -0- -0- (1,300,930) Net income 959,341 (25,000) -0- 934,341 Unrealized gain on equity securities -0- -0- 140,548 140,548 Proceeds from sale of common stock, net of direct costs -0- -0- -0- 2,888,000 ----------- ------- --------- ----------- BALANCE, June 30, 1998 $ 24,289 $ -0- $ 198,789 $13,694,727 - ------- =========== ======= ========= ===========
The accompanying notes are an integral part of these financial statements. F - 7 ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
For the For the For the For the Nine For the Nine Year Ended Year Ended Year Ended Months Ended Months Ended June 30, June 30, June 30 March 31, 1999 March 31, 1998 1998 1997 1996 (Unaudited) (Unaudited) ------------ ------------ ---------- -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 934,341 $ 1,020,347 $ 908,261 $ 926,768 $ 603,078 ----------- ----------- ----------- ----------- ----------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 49,890 53,546 25,483 28,194 18,931 Write-off (gain) on noncash receivable 25,000 (25,000) -0- -0- -0- Increase in accrued interest receivable (107,945) (114,078) (53,866) (139,100) (27,627) Increase in prepaid expenses and other assets (30,616) (27,318) (30,240) (147,540) 14,267 Increase (decrease) in accrued expenses and other liabilities 92,096 (28,893) (6,820) 73,532 146,557 Increase (decrease) in accrued interest payable 40,456 (15,204) 12,519 (2,872) (20,644) ----------- ----------- ----------- ----------- ----------- TOTAL ADJUSTMENTS 68,881 (156,947) (52,924) (187,786) 131,484 ----------- ----------- ----------- ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 1,003,222 863,400 855,337 738,982 734,562 ----------- ----------- ----------- ----------- ----------- 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) (775,581) (7,861,661) (1,536,603) Payments for building improvements on assets acquired in satisfaction of loans -0- (13,974) -0- -0- -0- Purchases of equity securities (52,450) (243,040) (234,900) (267,241) (65,946) Acquisition of furniture, fixtures and leasehold improvements (37,468) (18,530) (16,200) (14,589) (15,256) ----------- ----------- ----------- ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES (8,267,101) (9,338,446) (1,026,681) (8,143,491) (1,617,805) ----------- ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from notes payable, banks, net 5,265,000 10,195,000 1,675,000 7,265,000 (1,735,000) Payments for loan costs -0- (15,050) -0- -0- -0- Proceeds from debentures payable to SBA -0- 430,000 2,040,000 -0- -0- Repayment of debentures payable to SBA -0- (408,000) (1,986,000) -0- -0- Net proceeds from sale of common stock 2,888,000 -0- 1,228,103 -0- 2,888,000 Repurchase of preferred stock -0- -0- (1,915,449) -0- -0- Dividends paid (986,724) (946,655) (937,028) (942,624) (986,722) ----------- ----------- ----------- ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES $ 7,166,276 $ 9,255,295 $ 104,626 $ 6,322,376 $ 166,278 =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F - 8 ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
For the For the For the For the Nine For the Nine Year Ended Year Ended Year Ended Months Ended Months Ended June 30, June 30, June 30 March 31, 1999 March 31, 1998 1998 1997 1996 (Unaudited) (Unaudited) ---------- ---------- ---------- -------------- -------------- Net (decrease) increase in cash and cash equivalents (97,603) 780,249 (66,718) (1,082,133) (716,965) CASH AND CASH EQUIVALENTS - Beginning $1,853,032 $1,072,783 $1,139,501 $1,755,429 $1,853,032 ---------- ---------- ---------- ---------- ---------- CASH AND CASH EQUIVALENTS - Ending $1,755,429 $1,853,032 $1,072,783 $ 673,296 $1,136,067 ========== ========== ========== ========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the years for: Interest $1,840,276 $1,597,904 $1,093,474 $1,785,933 $1,408,214 Income taxes $ 8,048 $ 31,260 $ -0- $ 8,185 $ 13,260 Noncash investing and financing activities: Conversion of loans to assets acquired in satisfaction of loans $ 26,090 $ 140,914 $ 9,000 $ 369,000 -0- Exchange of preferred stock for a note resulting in a noncash gain of $25,000 $ -0- $ 125,000 $ -0- $ -0- $ -0- Unrealized gain on equity securities $ 140,548 $ 58,241 $ -0- $ 30,737 $ 15,025 Transfer of restricted capital $ 711,452 $ 711,448 $ -0- $ 533,591 $ 533,591 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- $ -0- $ -0- $ -0-
The accompanying notes are an integral part of these financial statements. F - 9 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 - 10 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 - 11 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 - 12 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, 1997 and 1996, loan costs amounted to $153,786, $178,241 and $186,474 respectively, net of accumulated amortization of $90,195, $65,750 and $42,457 respectively. Amortization expense for the year ended June 30, 1998, 1997 and 1996 was $24,455, $23,283 and $18,866 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 - 13 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, 1997 and 1996 totaled approximately $35,000, $3,000, and $83,000 respectively, for such loans. The following table sets forth certain information concerning impaired loans as of June 30, 1998, 1997 and 1996:
1998 1997 1996 -------- -------- -------- Impaired loans with an allowance $174,952 $260,127 $250,543 Impaired loans without an allowance 571,896 41,227 443,143 -------- -------- -------- Total impaired loans $746,848 $301,354 $693,686 ======== ======== ======== Allowance for impaired loans $150,626 $178,000 $154,000 ======== ======== ======== Average balance of impaired loans $524,101 $497,521 $484,332 ======== ======== ========
F - 14 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, 1995 $277,000 Recoveries, net 24,000 -------- Balance, June 30, 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 - 15 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 2004 8.20 2,690,000 2,690,000 December 1995 December 2005 6.54 1,020,000 1,020,000 June 1996 June 2006 7.71 1,020,000 1,020,000 March 1997 March 2007 7.38(2) 430,000 430,000 ---------- ---------- $8,880,000 $8,880,000 ========== ==========
(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 - 16 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 - 17 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, 1997 and 1996 consists of the following: 1998 1997 1996 -------- ------ -------- 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. Prior to January 1, 1996, the Company was a party to a management agreement with GCG Associates, Inc. ("GCG"), a company that is wholly-owned by the president of the Company, to engage GCG as its investment advisor. The agreement which was approved by the SBA, required that GCG, as advisor, maintain sufficient personnel and pay certain expenses necessary to operate the Company's business, maintain an office on behalf of the Company, collect all loans receivable due from recipients of loans and comply with all official orders of government agencies, including the SBA. Under the management agreement, the monthly compensation to the advisor was computed as one-twelfth of 2 percent of the total assets of the Company as of the last day of the month immediately preceding such computation, provided that the amount computed thereby shall not in any event exceed one-twelfth of the Company's private invested capital and capitalized retained earnings multiplied by 8 percent (as those terms are defined by SBA regulations) plus one-twelfth of 1 percent of any third-party bank financing outstanding on such date, not to exceed the maximum management fees previously approved by the SBA. For the year ended June 30, 1996, $210,000 in management fees were paid in accordance with this agreement. The managment agreement with GCG was terminated on December 31, 1995. Effective January 1, 1996, all salary and employee benefit, occupancy and administrative expenses are paid directly by the Company. These expenses are included in salaries and benefits expense and miscellaneous administrative expenses in the statement of income for the year ended June 30, 1996. In addition, prior to January 1, 1996, the Company paid an annual legal retainer fee of $108,000 for the purpose of providing loan closing services to a firm, certain of whose officers are officers and directors of the Company. During the year ended June 30, 1996 the Company paid additional legal fees of $48,902, to the same law firm. 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 the years ended June 30, 1998, 1997 and 1996. F - 18 ELK ASSOCIATES FUNDING CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11 - COMMITMENTS AND CONTINGENCIES 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 - 19 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 - 20 AMERITRANS CAPITAL CORPORATION 1,100,000 SHARE OF COMMON STOCK ------------------- PROSPECTUS ------------------- FIRST COLONIAL SECURITIES GROUP, INC. AUERBACH POLLAK & RICHARDSON, INC. WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE YOU WRITTEN INFORMATION OTHER THAN THIS PROSPECTUS OR TO MAKE REPRESENTATIONS AS TO MATTERS NOT STATED IN THIS PROSPECTUS. YOU MUST NOT RELY ON UNAUTHORIZED INFORMATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES OR OUR SOLICITATION OF YOUR OFFER TO BUY THE SECURITIES IN ANY JURISDICTION WHERE THAT WOULD NOT BE PERMITTED OR LEGAL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALES MADE HEREUNDER AFTER THE DATE OF THIS PROSPECTUS SHALL CREATE AN IMPLICATION THAT THE INFORMATION CONTAINED HEREIN OR THE AFFAIRS OF THE COMPANY HAVE NOT CHANGED SINCE THE DATE HEREOF. PART C -- OTHER INFORMATION ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS. 1. Financial Statements. The following financial statements are included in the Prospectus on the identified pages.
PAGE ---- REPORT OF MARCUM & KLEIGMAN, LLP, INDEPENDENT PUBLIC ACCOUNTANTS REPORT F - 2 REPORT OF DELOITTE & TOUCHE, LLP, F - 3 Consolidated Balance Sheets as of June 30, 1998, June 30, 1999 and March 31, 1999 F - 5 Consolidated Statements of Income for the Years Ended June 30, 1998, June 30, 1997 and June 30, 1996 and for the Nine Months Ended March 31, 1999 and March 31, 1998 F - 6 Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 1998, June 30, 1997 and June 30, 1996 F - 7 Consolidated Statements of Cash Flows for the Years Ended June 30, 1998, June 30, 1997 and June 30, 1996, and for the Nine Months Ended March 31, 1999 and March 31, 1998 F - 9 Schedule of Loans F - 10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F - 11 - 20
2. Exhibits a. Certificate of Incorporation* b. By-laws* f.1 Form of subordinated debentures issued to the U. S. Small Business Administration ("SBA") by Elk Associates Funding Corporation ("Elk") -- Debenture issued March 26, 1997 - principal amount -- $430,000; Maturity Date -- March 1, 2007; Stated Interest Rate -- 7.38%. The following debentures are omitted pursuant to Rule 483: a. Debenture issued September 22, 1993 - principal amount -- $1,500,000; Maturity Date -- September 1, 2003; Stated Interest Rate -- 6.12%. b. Debenture issued September 22, 1993 - principal amount -- $2,220,000; Maturity Date -- September 1, 2003; Stated Interest Rate -- 6.12%. c. Debenture issued September 28, 1994 - principal amount -- $2,690,000; Maturity Date -- September 1, 2004; Stated Interest Rate -- 8.20%. d. Debenture issued December 14, 1995 - principal amount -- $1,020,000; Maturity Date -- December 1, 2005; Stated Interest Rate -- 6.54%. e. Debenture issued June 26, 1996 - principal amount -- $1,020,000; Maturity Date -- June 1, 2006; Stated Interest Rate -- 7.71%. f.2 Security Agreement between Elk and the SBA, dated September 9, 1993. f.3 Custodian Agreement, Intercreditor Agreement and amendments thereto -- See Exhibits j.1, k.2, k.3, and k.4, below. h.1. Form of Underwriting Agreement h.2. Form of Agreement among Underwriters** i.1. 1999 Employee Stock Option Plan* C-1 i.2. Non-Employee Director Stock Option Plan j.1 Custodian Agreement among Elk; Bank Leumi Trust Company of New York ("Leumi"), Israel Discount Bank of New York ("IDB"), Bank Hapoalim B.M. ("Hapoalim") and Extebank; the SBA, and IDB as Custodian; dated September 9, 1993 (the "Custodian Agreement"). k.1 Agreements between Elk and the SBA. a. Agreement dated September 9, 1993. b. Agreement dated February 7, 1997. k.2 Intercreditor Agreement among Elk, Leumi, IDB, Hapoalim, Extebank and the SBA, dated September 9,1993 (the "Intercreditor Agreement"). k.3 Amendments to the Custodian and Intercreditor Agreements. a. Amendment removing Hapoalim and Extebank and adding European American Bank ("EAB"), dated September 28, 1994. b. Form of Amendment adding bank: i. Amendment adding United Mizrahi Bank and Trust Company ("UMB"), dated June , 1995. ii. Amendment adding Sterling National Bank and Trust Company of New York ("Sterling"), dated April , 1996 -- omitted pursuant to Rule 483. k.4 Bank Intercreditor Agreement among Elk, Leumi, IDB, Hapoalim and Extebank, dated September 9,1993 (the "Bank Intercreditor Agreement"). k.5 Amendments to the Bank Intercreditor Agreement. a. Amendment removing Hapoalim and Extebank and adding European American Bank ("EAB"), dated September 28, 1994. b. Form of Amendment adding bank: i. Amendment adding UMB, dated June , 1995. ii. Amendment adding Sterling, dated April , 1996 -- omitted pursuant to Rule 483. k.6 Grid Demand Promissory Note from Elk to IDB in the principal amount of $14,000,000, dated July 28, 1998. k.7 Letter Agreement between Elk and EAB regarding $14,000,000 line of credit, dated September 2, 1998, together with Master Note in the principal amount of $14,000,000, dated September , 1998. C-2 k.8 Promissory Note (Grid) from Elk to Leumi in the principal amount of $7,000,000, dated January 4, 1999, together with side letter dated January 4, 1999. k.9 Form of indemnity agreement between Ameritrans and each of its directors and officers.* l. Opinion and consent of Stursberg & Veith.** n.1 Consent of Marcum & Kliegman LLP. n.2 Consent of Deloitte & Touche LLP. r. Power of attorney authorizing Gary C. Granoff to execute and file Registration Statement and amendments -- see signature page of Registration Statement. - ------------------------------------ * Incorporated by reference from the Registrant's Registration Statement on Form N-14 (File No. 333-63951), initially filed September 22, 1998. ** To be filed by amendment. ITEM 25. MARKETING ARRANGEMENTS See Section 3 of the Underwriting Agreement, which is attached as Exhibit h.1. hereto, and Section ____ of the Agreement Among Underwriters, which is attached as Exhibit h.2. hereof. In connection with the Offering, the Underwriters may over-allot or effect transactions that stabilize or maintain the market price of the Common Stock at a level that might otherwise prevail in the open market. Such stabilizing, if commenced, may be discontinued at any time. ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the estimated expenses to be incurred in connection with the Offering: SEC registration fee.........................................$3,869 NASD fees.....................................................1,891 Nasdaq National Market initial listing fee...................48,750 Blue Sky fees and expenses...................................50,000 Accounting fees and expenses.................................50,000 Legal fees and expenses.....................................150,000 Printing and engraving fees..................................60,000 Registrar and transfer agent's fees...........................3,000 Miscellaneous fees and expenses.......................... 32,490 -------- Total.............................................$400,000 C-3 ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL Elk Associates Funding Corporation, a New York corporation, is 100% owned by the Registrant. Elk Capital Corporation, a New York corporation, is 100% owned by the Registrant. EAF Holding Corporation, a New York corporation, is 100% owned by Elk Associates Funding Corporation. ITEM 28. NUMBER OF HOLDERS OF SECURITIES NAME OF CLASS NUMBER OF RECORD HOLDERS - ------------- ------------------------ Common Stock, par value $.0001 per share 274 ITEM 29. 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 C-4 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 C-5 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. 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 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR. Not applicable. ITEM 31. LOCATION OF ACCOUNTS AND RECORDS The Registrant maintains at its principal office physical possession of each account, book or other document required to be maintained by Section 31(a) of the 1940 Act, as applicable, pursuant to Section 64 of the 1940 Act. ITEM 32. MANAGEMENT SERVICES Not applicable. ITEM 33. UNDERTAKINGS. C-6 1. The Registrant hereby undertakes: (a) to suspend the Offering until the Prospectus is amended if (1) subsequent to the effective date of this Registration Statement, the net asset value declines more than ten percent from its net asset value as of the effective date of the registration statement or (2) the net asset value increases to an amount greater than its net proceeds as stated in the Prospectus. (b) that, for the purpose of determining any liability under the 1933 Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Registrant under Rule 497(h) under the 1933 Act shall be deemed to be part of this registration statement as of the time it was declared effective; and (c) for the purpose of determining any liability under the 1933 Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial BONA FIDE offering thereof. 2. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Company pursuant to the provisions of the Certificate of Incorporation and By-Laws, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company 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 Company 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 Securities Act of 1933 and will be governed by the final adjudication for such issue. C-7 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement has been signed on its behalf by the undersigned thereunto duly authorized, in the City of New York and State of New York on the 12th day of July, 1999. AMERITRANS CAPITAL CORPORATION By: /s/ 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 /s/ GARY C. GRANOFF President, Chairman of the July 12, 1999 - --------------------------------------- Board of Directors Gary C. Granoff Financial and Accounting Officer) /s/ ELLEN M. WALKER Vice President, General Counsel July 12, 1999 - --------------------------------------- and Director Ellen M. Walker /s/ LEE A. FORLENZA Vice President and Director July 12, 1999 - --------------------------------------- Lee A. Forlenza /s/ STEVEN ETRA Vice President and Director July 12, 1999 - --------------------------------------- Steven Etra
/s/ MARVIN SABESAN Director July 12, 1999 - --------------------------------------- Marvin Sabesan /s/ PAUL CREDITOR Director July 12, 1999 - --------------------------------------- Paul Creditor /s/ ALLEN KAPLAN Director July 12, 1999 - --------------------------------------- Allen Kaplan /s/ JOHN L. ACIERNO Director July 12, 1999 - --------------------------------------- John L. Acierno Director ____ __, 1999 - --------------------------------------- Howard F. Sommer /s/ JOHN R. LAIRD Director July 12, 1999 - --------------------------------------- John R. Laird
EXHIBIT INDEX Exhibit Number Exhibit - ------- ------- a. Certificate of Incorporation* b. By-laws* f.1 Form of subordinated debentures issued to the U.S. Small Business Administration ("SBA") by Elk Associates Funding Corporation ("Elk") - Debenture issued March 26, 1997 - principal amount - $430,000; Maturity Date - March 1, 2007; Stated Interest Rate - 7.38%. The following debentures are omitted pursuant to Rule 483: a. Debenture issued September 22, 1993 - principal amount - $1,500,000; Maturity Date - September 1, 2003; Stated Interest Rate - 6.12%. b. Debenture issued September 22, 1993 - principal amount - $2,220,000; Maturity Date - September 1, 2003; Stated Interest Rate - 6.12%. c. Debenture issued September 28, 1994 - principal amount - $2,690,000; Maturity Date - September 1, 2004; Stated Interest Rate - 8.20%. d. Debenture issued December 14, 1995 - principal amount - $1,020,000; Maturity Date - December 1, 2005; Stated Interest Rate - 6.54%. e. Debenture issued June 26, 1996 - principal amount - $1,020,000; Maturity Date - June 1, 2006; Stated Interest Rate - 7.71%. f.2 Security Agreement between Elk and the SBA, dated September 9, 1993. f.3 Custodian Agreement, Intercreditor Agreement and amendments thereto - See Exhibits j.1, k.2, k.3, and k.4, below. h.1 Form of Underwriting Agreement h.2. Form of Agreement among Underwriters** i.1. 1999 Employee Stock Option Plan* i.2. Non-Employee Director Stock Option Plan j.1 Custodian Agreement among Elk; Bank Leumi Trust Company of New York ("Leumi"), Israel Discount Bank of New York ("IDB"), Bank Hapoalim B.M. ("Hapoalim") and Extebank; the SBA, and IDB as Custodian; dated September 9, 1993 (the "Custodian Agreement"). k.1 Agreements between Elk and the SBA. a. Agreement dated September 9, 1993. b. Agreement dated February 7, 1997. k.2 Intercreditor Agreement among Elk, Leumi, IDB, Hapoalim, Extebank and the SBA, dated September 9,1993 (the "Intercreditor Agreement"). k.3 Amendments to the Custodian and Intercreditor Agreements. a. Amendment removing Hapoalim and Extebank and adding European American Bank ("EAB"), dated September 28, 1994. b. Form of Amendment adding bank: i. Amendment adding United Mizrahi Bank and Trust Company ("UMB"), dated June __, 1995. ii. Amendment adding Sterling National Bank and Trust Company of New York ("Sterling"), dated April __, 1996 - omitted pursuant to Rule 483. k.4 Bank Intercreditor Agreement among Elk, Leumi, IDB, Hapoalim and Extebank, dated September 9, 1993 (the "Bank Intercreditor Agreement"). k.5 Amendments to the Bank Intercreditor Agreement. a. Amendment removing Hapoalim and Extebank and adding European American Bank ("EAB"), dated September 28, 1994. b. Form of Amendment adding bank: i. Amendment adding UMB, dated June __, 1995. ii. Amendment adding Sterling, dated April __, 1996 - omitted pursuant to Rule 483. k.6 Grid Demand Promissory Note from Elk to IDB in the principal amount of $14,000,000, dated July 28, 1998. k.7 Letter Agreement between Elk and EAB regarding $14,000,000 line of credit, dated September 2, 1998, together with Master Note in the principal amount of $14,000,000, dated September, 1998. k.8 Promissory Note (Grid) from Elk to Leumi in the principal amount of $7,000,000, dated January 4, 1999, together with side letter dated January 4, 1999. k.9 Form of indemnity agreement between Ameritrans and each of its directors and officers.* l. Opinion and consent of Stursberg & Veith.** n.1 Consent of Marcum & Kliegman LLP. n.2 Consent of Deloitte & Touche LLP. r. Power of attorney authorizing Gary C. Granoff to execute and file Registration Statement and amendments - see signature page of Registration Statement. - ----------------------------------- * Incorporated by reference from the Registrant's Registration Statement on Form N-14 (File No. 333-63951), initially filed September 22, 1998. ** To be filed by amendment. EX-99.F1 2 EXHIBIT 99.F1 OMB Approval No.: 3245-0081 Expiration Date: 04-30-99 Page 1 of 3 SBIC License No. 02/02-5377 Loan No. 04646751-00 ---------- ----------- DEBENTURE ***************** $430,000 Date of Issuance March 26, 1997 - -------------------------------------- ---------------- ELK ASSOCIATES FUNDING CORPORATION (the "Company") - -------------------------------------------------------------- (Name of Licensee) 747 Third Avenue, New York, New York 10017 - ------------------------------------------------------------------------------- (Street) (City) (State) (Zip) For value received, the Company hereby promises to pay to the order of Chase Manhattan Bank, as Trustee (the "Trustee") under that certain Amended and Restated Trust Agreement dated as of December 1, 1996, as same may be amended from time to time, by and among the Trustee, the U.S. Small Business Administration ("SBA") and SBIC Funding Corporation, and as the Holder hereof the principal sum of FOUR HUNDRED THIRTY THOUSAND dollars ($430,000) (the "Original Principal Amount") on March 1, 2007 (the "Maturity Date") at such location as SBA, as guarantor of this debenture, may direct and to pay interest semiannually on March 1st and September 1st (the "Payment Dates") of each year, as herein provided, at the rate of 7.38% per annum (the "Stated Interest Rate"), and to pay a 1% per annum fee to SBA on the above dates, on the basis of a year of 365 days, for the actual number of days (including the first day but excluding the last day) elapsed, on said principal sum from the date of the issuance hereof until payment of such principal sum has been made or duly provided for. The Company shall deposit all payments with respect to this debenture not later than 12:00 noon (Washington, D.C. time) on the applicable Payment Date or the next business day if the Payment Date is not a business day, all as directed by SBA. This debenture is issued by the Company and guaranteed by SBA, pursuant and subject to Section 303 of the Small Business Investment Act of 1958, as amended (the "Act") (15 U.S.C. Section 683). This debenture is subject to all of the regulations promulgated under the Act, as amended from time to time, provided, however, that 13 C.F.R. Sections 107.1810 and 107.1830 through 107.1850 as in effect on the date of this debenture are incorporated herein as if fully set forth. Page 2 of 3 The Company may elect to prepay this debenture, as a whole and not in part, on any Payment Date, in the manner and at the price as next described. The prepayment price (the "Prepayment Price") shall be an amount equal to the outstanding principal balance of this debenture, plus interest accrued and unpaid thereon to the Payment Date selected for prepayment, plus a prepayment premium (the "Prepayment Premium"). The Prepayment Premium amount is calculated as a declining percentage (the "Applicable Percentage"). multiplied by the Original Principal Amount of this debenture in accordance with the following table: Consecutive Payment Dates Applicable Percentage 1st or 2nd 5% 3rd or 4th 4% 5th or 6th 3% 7th or 8th 2% 9th or (10th-If Not also Maturity Date) 1% No Prepayment Premium is required to repay this debenture on its Maturity Date. No Prepayment Premium is required when the prepayment occurs on a Payment Date that is on or after the 11th consecutive Payment Date of this debenture, if this debenture has a 20 consecutive Payment Date term. The amount of the Prepayment Price shall be sent to SBA or such agent as SBA shall direct, by wire payment in immediately available funds, not less than three business days prior to the regular payment date. Until the Company is notified otherwise in writing by SBA, any Prepayment Price shall be paid to the account maintained by the Trustee, entitled the SBA Prepayment Subaccount and shall include an identification of the Company by name and SBA-assigned license number, the loan number appearing on the face hereof, and such other information as SBA or its agent may specify. This debenture shall be deemed issued in the District of Columbia as of the day, month, and year first stated above. The terms and conditions of this debenture shall be construed in accordance with, and its validity and enforcement governed by, federal law. The warranties, representations, or certifications made to SBA on the SBA Form 1022 or the Company's application letter for an SBA commitment related to this debenture are incorporated herein as if fully set forth. Page 3 of 3 Should any provision of this debenture or any of the documents incorporated by reference herein be declared illegal or unenforceable by a court of competent jurisdiction, the remaining provisions shall remain in full force and effect and this debenture shall be construed as if said provisions were not contained herein. All notices to Company which are required or may be given under this debenture shall be sufficient in all respects if sent to the above-noted address of the Company. For the purposes of this debenture, the Company may change this address only upon written approval of SBA. COMPANY ORGANIZED AS CORPORATION IN WITNESS WHEREOF, the Company has caused this debenture to be signed by its duly authorized officer and its corporate seal to be hereunto affixed and attested by its Secretary or Assistant Secretary as of the date of issuance stated above. CORPORATE SEAL ELK ASSOCIATES FUNDING CORPORATION ---------------------------------- (Name of. Licensee) By: /s/ Gary C. Granoff ------------------------------- Gary C. Granoff, President ---------------------------------- (Typed Name and Title) ATTEST: /s/ Margaret Chance - ------------------------------ (Secretary) Margaret Chance EX-99.F.2 3 EXHIBIT-99F.2 SECURITY AGREEMENT ------------------ AGREEMENT made as of the 9th day of September, 1993, by and between the United States Small Business Administration, 409 3rd Street, S.W., Washington, D.C. 20416 ("Secured Party") and Elk Associates Funding Corporation, a New York corporation, having its offices at 600 Third Avenue, Suite 3810, New York, New York 10016 ("Debtor"). W I T N E S S E T H: -------------------- WHEREAS, Debtor is licensed by Secured Party as a Specialized Small Business Investment Company ("SSBIC") pursuant to the Small Business Investment Act of 1958, as amended (the "Act") and the Regulations promulgated thereunder (the "Regulations"); and WHEREAS, Debtor has previously issued to Secured Party, or Secured Party has guaranteed certain debentures issued pursuant to the Act and Regulations, a schedule of which is annexed hereto as Exhibit "A" (the "Debentures"); and WHEREAS, from time to time, Debtor may issue new or additional Debentures to Secured Party or Secured Party may guarantee repayment of such Debentures as may be authorized by the Act and the Regulations; and WHEREAS, Debtor and Secured Party have entered into a certain Agreement dated as of the date hereof (the "Agreement"), under the terms of which Debtor agreed to enter into a Security Agreement and grant Secured Party a security interest in all of Debtor's assets, including its portfolio assets of loans receivable and securities owned as a result of Debtor's business operations as an SSBIC, to secure obligations now or hereafter owed or contingently owed by Debtor to Secured Party; and WHEREAS, the Debtor has agreed to execute this Security Agreement granting Secured Party a security interest in the Collateral hereinafter described; NOW, THEREFORE, in consideration of the premises and the mutual promises contained herein, it is hereby agreed as follows: 1. Creation of Security Interest The Debtor hereby grants and mortgages to the Secured Party and the Secured Party hereby accepts, a security interest in the Collateral described in Paragraph 2 herein to secure the payment of the Debentures by Debtor in accordance with the terms set forth in each Debenture, and any "Obligations" referred to in Paragraph 2 of this Security Agreement. Debtor agrees to execute and deliver UCC-1 Financing Statements in favor of Secured Party and to deliver possession of its instruments and certain other personal property in order to perfect the security interests herein created in the Collateral hereinafter described. The security interest granted herein by Debtor to Secured Party shall be deemed subject to any senior security interest in favor of any bank(s) that presently have a security interest against Debtor's Collateral (as defined in Paragraph 2 hereof) and any bank(s) that may hereafter be substituted for Debtor's existing bank(s) or which may obtain a security interest in addition to Debtor's existing senior bank(s), but only to the extent of the maximum amount of allowable senior secured debt that Debtor may be permitted to maintain, as has previously been agreed to pursuant to any separate written agreement between Debtor and Secured Party. 2. Collateral To secure the payment of the Debentures set forth on Exhibit "A" with interest and any other amounts owing thereon payable in accordance with the terms of such Debentures, and also to secure any other indebtedness or liability of the Debtor to the Secured Party (but not including any preferred stock issued now or hereafter by Debtor to Secured Party), direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, including all future Debentures which may be issued to or guaranteed by Secured Party at the option of the Secured Party (all hereinafter called the "Obligations"), Debtor does hereby grant and convey to Secured Party, a security interest and does hereby assign as collateral security to Secured Party, the following Collateral (as such term is used in Article 9 of the New York Uniform Commercial Code) now owned or hereafter acquired by Debtor or in which Debtor now has or at any time in the future may acquire any right, title or interest (collectively, the "Collateral"): a. Debtor's portfolio of loans receivable from parties who have borrowed monies from Debtor together with any guarantees thereon, and all other obligations owing to the Debtor; b. Investment securities acquired by Debtor as a result of making any investment in a small concern arising out of Debtor's operations as a Specialized Small Business Investment Company, including stocks, bonds, debentures, notes receivable, options, warrants and all other similar investment 2 securities, instruments and participation agreements/interests carried as assets by Debtor; c. All of Debtor's furniture, fixtures, machinery, contract rights, accounts receivable, and all tangible and intangible assets, including but not limited to all computer software and any New York City taxi medallion rights, now owned or later acquired; and d. All security interests of Debtor in any New York City taxi medallion acquired as collateral for Debtor's loans to its borrowers. Debtor and Secured Party further agree that Debtor shall have thirty (30) days from the date hereof to assign to the Custodian (as hereinafter defined) on behalf of the Senior Lenders (as hereinafter defined) and the Secured Party fifty (50%) percent of all security interests of Debtor in any New York City Taxi medallion which secures a loan made by Debtor and an additional thirty (30) days to assign the balance of such security interests; provided, however, Secured Party agrees that Debtor shall have a reasonable period of time beyond such sixty (60) day period to assign those security interests which collateralize loans with respect to which Debtor has not, as of the date hereof, received a copy of the recorded UCC-1 Financing Statement from the applicable recorder's office. e. All proceeds and products from all Collateral covered by this Security Agreement, together with all substitutions and replacements of such Collateral and all proceeds therefrom, and whether or not such Collateral is maintained at Debtor"s offices at 600 Third Avenue, Suite 3810, New York, New York 10016, or elsewhere. To the extent that the same may be necessary, Debtor does hereby assign to Secured Party all of its rights in and to the Collateral as collateral security for the Obligations. 3. Debtor warrants, covenants and agrees as follows: a. Debtor agrees to pay and perform all of the Obligations secured by this Agreement according to their terms and defend the title to the Collateral against all persons and against all claims and demands whatsoever, which Collateral is lawfully owned by the Debtor and is now free and clear of any and all liens, security interests, claims, charges, encumbrances, taxes and assessments except for the security interests and collateral assignments granted hereby and the senior security interests and collateral assignments previously granted to Israel Discount Bank of New York, Bank Leumi Trust Company of New York, Extebank and Bank Hapoalim (hereinafter sometimes collectively referred to as the "Senior Lenders"), subject to the rights of third party participants pursuant to applicable 3 bona fide participation agreements and/or participation interests ("Third Party Participants"). b. Upon the request of the Secured Party, Debtor will furnish further assurance of title, and do any other acts reasonably necessary to effectuate the purposes and provisions of this Agreement, including execution of any instrument or statement required by law or otherwise in order to perfect, continue, modify, assign, or terminate the security interest of the Secured Party in the Collateral and pay all costs or filing fees in connection therewith, including reasonable fees of counsel. c. Debtor agrees to deliver possession of all original promissory notes and other instruments (as defined in the New York Uniform Commercial Code), security agreements and mortgages to Israel Discount Bank of New York (the "Custodian") to be held by the Custodian for the benefit of the Senior Lenders and Secured Party pursuant to the terms of the custodian agreement between Debtor, the Senior Lenders, Secured Party and the Custodian (the "Custodian Agreement"). Subsequent promissory notes, security agreements, mortgages and other instruments held by Debtor shall also be delivered to the Custodian to be held in accordance with the terms of the Custodian Agreement. d. Debtor will not create, incur or permit to exist any liens, charges, encumbrances, taxes or assessments on the Collateral, except in favor of the Senior Lenders, and if for bona fide consideration, to Third Party Participants. e. Debtor agrees to notify the Secured Party in writing of any change in or discontinuance of Debtor's place of business as required by SBA Regulations. f. Except for any financing statement filed in favor of the Secured Party and the Senior Lenders, and except for financing statements evidencing the interest of Third Party Participants (as set forth in Schedule 1 hereto), no financing statement covering any of the Collateral is on file in any public office. Debtor has not granted or given, and shall not grant or give, a security interest in or financing statement covering the Collateral, or any part thereof, to anyone other than the Senior Lenders and the Secured Party, without the Secured Party's prior written consent, provided however that Debtor shall have the right in its sole discretion to substitute senior institutional bank lender(s) for Debtor's existing Senior Lenders, and in such event, Secured Party agrees to amend the Intercreditor Agreement to allow for the substitution of the new lender provided the aggregate amount of senior bank indebtedness does not exceed the amount of senior bank indebtedness that Debtor may be entitled to have in accordance with applicable SBA Regulations or the Agreement or such lower or higher amount that may have been agreed to pursuant to any subsequent written agreement in effect from time to time between 4 Debtor and Secured Party. Notwithstanding the foregoing, Debtor shall be entitled to sell, assign or transfer any interest in any of the Collateral in the ordinary course of business, for bona fide consideration, subject to any restrictions or limitations set forth in the Custodian Agreement. g. Debtor shall notify Secured Party immediately in writing, of any events which at any time may cause the representations and warranties or agreements herein to cease to be true. 4. General Provisions a. The waiver of or acquiescence in any default by the Debtor, or failure of the Secured Party to insist upon strict performance by the Debtor of any warranties or agreements in this Security Agreement, shall not constitute a waiver of any subsequent or other default or failure. b. Notices to either party shall be in writing and shall be delivered personally or by certified mail return receipt requested addressed to the party at the address herein set forth or otherwise designated in writing. c. The Uniform Commercial Code in effect in the State of New York shall govern the rights, duties and. remedies of the parties with respect to the granting, perfection and enforcement of the security interest set forth in this Security Agreement and any provisions herein declared invalid under any law shall not invalidate any other provision of this agreement. The parties agree that the laws of the United States of America as set forth in the United States Code, and the Regulations promulgated thereunder, shall be applied to Debtor and Secured Party with respect to any matter of interpretation of the rights of either party arising out of their relationship of Debtor holding a license from Secured Party as a Specialized Small Business Investment Company and Debtor's and Secured Party's obligations to each other as a result of that relationship. In any case or controversy resulting from this Security Agreement, the parties agree that the United States District Court for the Southern District of New York shall have exclusive jurisdiction with respect to litigation of any claim. d. The Debtor agrees to execute the necessary financing statements in order that such financing statements may be filed by or on behalf of the Secured Party to perfect the Secured Party's interest in the Collateral, subject to the rights of the Senior Lenders. 5. Events of Default The following shall constitute an event of default ("Event of Default") by Debtor: 5 a. In the event Debtor is in default in the payment of any senior indebtedness beyond any applicable grace periods and provided that the senior secured bank(s) have "accelerated" their indebtedness (as that term is commonly used under the Uniform Commercial Code); or b. Debtor is in default under any Obligation beyond any applicable grace periods, and Secured Party has elected to accelerate the payment of the obligation(s) as provided for pursuant to SBA Regulations, or Secured Party has transferred the Debtor to "liquidation status", as provided for pursuant to SBA Regulations. 6. Remedies on Default Upon any Event of Default of the Debtor and at the option of the Secured Party, the Obligations secured by this agreement may be "accelerated", in which event they shall immediately become due and payable in full, and the Secured Party shall have all the rights, remedies, and privileges as are accorded to a Secured Party by the Uniform Commercial Code or as may be available to Secured Party under the Act or Regulations. The Secured Party may exercise such rights, remedies and privileges either concurrently or in such order as Secured Party may determine, it being expressly agreed that any such action will not be considered an election of remedies nor bar Secured Party from any further remedies provided for by agreement or by law. Nothing contained. in this paragraph shall be interpreted as restricting in any way SBA's ability to exercise the rights and remedies available to it under the Act or Regulations. 7. Successors and Assigns All terms and provisions of this agreement shall be binding upon and shall inure to the benefit of, and be enforceable by the parties hereto and their respective legal representatives, successors and assigns. 8. Notices All communications and notices hereunder shall be in writing and shall be deemed to have been duly given if sent by United States mail, postage prepaid, to the parties at the address first above written, or at such other place or places as the party addressed may have designated by written notice to the other. 9. Headings The headings of the paragraph and sections of this agreement are inserted for convenience only and shall not be deemed to constitute a part hereof. 6 10. Severability In the event that any word, sentence, paragraph or article of this agreement is found to be void or voidable, the balance of this agreement shall nevertheless be legal and binding with the same force and effect as though the void or voidable parts were deleted. 11. Entire Agreement This writing and the documents referred to herein contain the entire agreement of the parties with respect to its subject material and no modifications, alterations or waiver of all or any part shall be valid unless made by a writing and signed by all the parties hereto. 12. Counterparts This agreement may be executed in two counterparts each of which is an original, but both of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement the day and year first above written. DEBTOR: ELK ASSOCIATES FUNDING CORPORATION By: /s/ Gary C. Granoff ---------------------------------------- Gary C. Granoff, President SECURED PARTY: UNITED STATES SMALL BUSINESS ADMINISTRATION By: /s/ Wayne S. Foren ---------------------------------------- Wayne S. Foren Associate Administrator for Investment 7 EXHIBITS AND SCHEDULES OMITTED EX-99.H.1 4 EXHIBITS 99-H-1 1,265,000 Shares AMERITRANS CAPITAL CORPORATION Common Stock (Par Value $.0001 Per Share) UNDERWRITING AGREEMENT _____________, 1999 First Colonial Securities Group, Inc. Auerbach, Pollak & Richardson, Inc. As Representatives of the several Underwriters named on Schedule I hereto c/o First Colonial Securities Group, Inc. 1499 West Palmetto, Suite 312 Boca Raton, Florida 33486 Dear Sirs: 1. Introductory. Ameritrans Capital Corporation, a Delaware corporation (the "Company"), proposes to sell, pursuant to the terms of this Agreement, to the several underwriters named on Schedule I hereto (the "Underwriters," or each, an "Underwriter," which term shall also include any underwriter substituted as hereinafter provided in Section 12), an aggregate of 1,100,000 shares of the Company's common stock, par value $.0001 per share (the "Common Stock"). The 1,100,000 shares so proposed to be sold are hereinafter referred to as the "Firm Shares." The Company also proposes to sell to the Underwriters, upon the terms and conditions set forth in Section 3 hereof, up to an additional 165,000 shares of Common Stock (the "Option Shares"). The Firm Shares and the Option Shares are hereinafter referred to collectively as the "Shares." First Colonial Securities Group, Inc. and Auerbach, Pollak & Richardson, Inc. are acting as representatives of the several Underwriters and in such capacity are hereinafter referred to collectively as the "Representatives." Capitalized terms used in this Agreement without definition have the meanings specified in the Prospectus (as hereinafter defined). 2. Representations and Warranties of the Company. The Company represents and warrants to, and agrees with, the several Underwriters that: (a) A registration statement on Form N-2 (File No. 333-______) with respect to the Shares has been prepared in conformity in all material respects with the requirements of the Securities Act of 1933, as amended (the "Securities Act"), and the rules and regulations (the "Securities Act Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder, and the Investment Company Act of 1940, as amended (the "Investment Company Act" and, together with the Securities Act, the "Acts"), and the rules and regulations thereunder (the "Investment Company Act Rules and Regulations" and, together with the Securities Act Rules and Regulations, the "Rules and Regulations"); such registration statement has been filed with the Commission under the Securities Act and has been declared effective by the Commission under the Securities Act and no post-effective amendment to such registration statement has been filed as of the date of this Agreement; one or more amendments to such registration statement, including in each case an amended preliminary prospectus, copies of which amendments have heretofore been delivered to you, have been so prepared and filed. The term "Registration Statement" means such registration statement, as amended, at the time it was declared effective by the Commission and shall be deemed to include all information omitted therefrom in reliance upon Rule 430A and contained in the Prospectus referred to below. If it is contemplated, at the time this Agreement is executed, that a post-effective amendment to the registration statement will be filed and must be declared effective before the offering of the Shares may commence the term "Registration Statement" as used in this Agreement means the registration statement as amended by said post effective amendment. The term "Registration Statement" as used in this Agreement shall also include any registration statement relating to the Shares that is filed and declared effective pursuant to Rule 462(b) under the Securities Act. The term "Prospectus" as used in this Agreement means the prospectus as first filed pursuant to Rule 497(b), (c) or (h) under the Securities Act, except that if any revised prospectus shall be provided to the Underwriters by the Company in conformity with this Agreement for use in connection with the offering of the Shares which differs from the Prospectus on file at the Commission at the time the Registration Statement becomes effective (whether or not such revised prospectus is required to be filed by the Company pursuant to Rule 497(b), (c) or (h) under the Securities Act), the term "Prospectus" shall refer to such revised prospectus from and after the time it is first provided to the Underwriters for such use. The term "Preliminary Prospectus" as used in this Agreement means the prospectus subject to completion in the form included in the Registration Statement at the time of the initial filing of the Registration Statement with the Commission, and as such prospectus shall have been amended from time to time prior to the date of the Prospectus and any prospectus filed by the Company with the consent of the Representatives pursuant to Rule 497(a) under the Securities Act. No document has been or will be prepared or distributed in reliance on Rule 434 under the Securities Act. For purposes of the following representations and warranties, to the extent reference is made to the Prospectus and at the relevant time the Prospectus is not yet in existence, such reference shall be deemed to be to the most recent Preliminary Prospectus. (b) Neither the Commission nor any state regulatory authority has issued or, to the Company's knowledge, threatened to issue any order preventing or suspending the use of any Preliminary Prospectus, and, at its date of issue, each Preliminary Prospectus conformed in all material respects with the requirements of the Acts and did not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and, when the Registration Statement became effective and at all times subsequent thereto up to and including the Closing Dates (as defined in Section 3 hereof) the Registration Statement and the Prospectus at the time the Registration Statement became effective (unless the term "Prospectus" 2 refers to a prospectus which has been provided to the Underwriters by the Company for use in connection with the offering of the Shares which differs from the Prospectus on file at the Commission at the time the Registration Statement became effective, in which case at the time it is first provided to the Underwriters for such use) and at the Closing Dates, conformed or will conform, as the case may be, in all material respects to the requirements of the Acts and the Registration Statement and the Prospectus at such times did not or will not, as the case may be, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the foregoing representations, warranties and agreements shall not apply to information contained in or omitted from any Preliminary Prospectus or the Registration Statement or the Prospectus or any amendment thereto in reliance upon, and in conformity with, written information furnished to the Company by or on behalf of any Underwriter, directly or through the Representatives, specifically for use in the preparation thereof; there is no franchise, lease, contract, agreement or other document required to be described in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement which is not described or filed therein as required and the exhibits that have been filed are complete and correct copies of the documents of which they purport to be copies; and all descriptions of any such franchises, leases, contracts, agreements or other documents contained in the Registration Statement are accurate and complete descriptions of such documents in all material respects and fairly present the information required to be shown with respect thereto by Form N-2 under the Acts. (c) The Company and each of Elk Associates Funding Corporation ("Elk") and Elk Capital Corporation (together, the "Subsidiaries") have been duly organized and are validly existing and in good standing as corporations under the laws of their respective jurisdictions of organization, and have the corporate power and authority to own or lease their properties and to conduct their respective businesses as described in the Prospectus; the Company and each of the Subsidiaries are in possession of and operating in compliance in all material respects with all franchises, grants, registrations, qualifications, authorizations, licenses, permits, easements, consents, certificates and orders required for the conduct of their respective businesses as now being conducted and as described in the Registration Statement and the Prospectus, or for the ownership, leasing and operation of their respective properties, all of which are valid and in full force and effect and no such franchise, grant, registration, consent, certificate or order contains a materially burdensome restriction not adequately disclosed in the Registration Statement or the Prospectus; and the Company and each of the Subsidiaries are duly qualified to do business and are in good standing as foreign corporations in all jurisdictions where their respective ownership or leasing of properties or the conduct of their respective businesses requires such qualification and in which the failure to so qualify would have a Material Adverse Effect (as defined in subsection 2(i)). (d) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, (i) neither the Company nor any of the Subsidiaries has incurred any material liabilities or obligations, direct or contingent, or entered into any other transactions not in the ordinary course of business, (ii) there has not been any material adverse change or development involving a material prospective change in the condition (financial or otherwise), 3 properties, business, management, prospects, net worth, capital stock, investment objectives, investment policies or results of operations of the Company and the Subsidiaries taken as a whole, or any change in the capital stock, or material change in the short-term or long-term debt, of the Company and the Subsidiaries taken as a whole and (iii) there has been no dividend or distribution of any kind declared, paid or made by the Company or the Subsidiaries on any class of their respective capital stock. (e) The pro forma combined financial statements of the Company and the historical financial statements of Elk (including, in each case, the notes thereto) set forth in the Prospectus and elsewhere in the Registration Statement fairly present, on the basis stated in the Registration Statement, the pro forma combined or historical financial position, as the case may be, of the Company and the results of operations and changes in financial position of the Company at the respective dates or for the respective periods therein specified. Such statements and related notes and schedules have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods involved (except as otherwise noted therein). The selected financial and statistical data set forth in the Prospectus under the caption "Summary Consolidated Financial Data" fairly present, on the basis stated in the Prospectus, the information set forth therein and have been compiled on a basis consistent with that of the audited financial statements included in the registration statement and have been prepared in conformity with the requirements of the Securities Act and the Securities Act Rules and Regulations. The unaudited pro forma financial information included in the Registration Statement and the Prospectus present fairly the information shown therein, have been prepared in accordance with the Commission's rules and guidelines with respect to pro forma financial statements, have been properly compiled on the pro forma bases described therein, and, in the opinion of the Company, the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions or circumstances referred to therein. (f) Marcum & Kliegman LLP, who have expressed an opinion on the audited financial statements and related schedules included in the Registration Statement and the Prospectus are independent certified public accountants as required by the Securities Act and the Securities Act Rules and Regulations. (g) The Company's capital stock conforms to the description thereof in the Prospectus and has been duly authorized and validly issued and is fully paid and nonassessable and has been issued in compliance with all federal and state securities laws and was not issued in violation of or subject to any preemptive rights or similar rights to subscribe for or purchase securities. Except as disclosed in or contemplated by the Prospectus and the financial statements of the Company and related notes thereto included in the Prospectus, neither the Company nor the Subsidiaries has outstanding any options or warrants to purchase, or any preemptive rights or other rights to subscribe for or to purchase any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of their respective capital stock or any such options, rights, convertible securities or obligations. The description of the Company's stock option and other stock plans or arrangements, and the options or other rights granted thereunder, as set forth in the Prospectus, accurately and fairly 4 presents in all material respects the information required to be shown with respect to such plans, arrangements, options and rights. All shares of capital stock of each Subsidiary are owned, directly or indirectly, by the Company free and clear of any liens, encumbrances, equities or claims. (h) The Shares to be issued and sold by the Company to the Underwriters hereunder have been duly and validly authorized and, when issued and delivered against payment therefor as provided herein, will be duly and validly issued, fully paid and nonassessable, free of any preemptive or similar rights and will conform to the description thereof in the Prospectus, and good and marketable title to the Shares will pass to the Underwriters on the Closing Dates free and clear of any lien, encumbrance, security interest, claim or restriction whatsoever except for (a) those restrictions imposed under the Company's credit agreements filed as exhibits to the Registration Statement and (b) those restrictions imposed generally under the Investment Company Act, the Investment Company Act Rules and Regulations, the Small Business Investment Act of 1958, as amended (the "1958 Act") and the Regulations of the Small Business Administration ("SBA"). (i) There are no legal or governmental proceedings pending to which the Company or any of the Subsidiaries or any of their affiliated persons, as defined under the Investment Company Act, is a party or of which any property of the Company or any Subsidiary or any of their affiliated persons is subject, which, if determined adversely to the Company or any Subsidiary or any of their affiliated persons, might individually or in the aggregate (i) prevent or materially and adversely affect the transactions contemplated by this Agreement, (ii) suspend the effectiveness of the Registration Statement, (iii) prevent or suspend the use of the Preliminary Prospectus in any jurisdiction or (iv) result in a Material Adverse Effect (as defined below); and to the Company's knowledge no such proceedings are threatened or contemplated against the Company or any Subsidiary or any of their affiliated persons by governmental authorities or others. Except as disclosed in the Prospectus, the Company is not a party nor subject to the provisions of any material injunction, judgment, decree or order of any court, regulatory body or other governmental agency or body. "Material Adverse Effect" means, when used in connection with the Company and the Subsidiaries, any development, change or effect that could reasonably be expected to have a material adverse effect on the condition (financial or otherwise), properties, business, management, prospects, net worth or results of operations of the Company and the Subsidiaries taken as a whole. (j) Neither the Company nor any of the Subsidiaries is in violation of its respective charter, by-laws or other organizational documents or in default in the performance of any note or other evidence of indebtedness or any indenture, mortgage, deed of trust, note agreement or other contract, lease or other instrument to which it is a party or by which it is bound, or to which any of its property or assets is subject other than defaults which would not, individually or in the aggregate, result in a Material Adverse Effect and, as of the Closing Dates, no condition or event shall have occurred which, with notice or a lapse of time or both, would constitute a default under such instruments or agreements or result in the imposition of any penalty or acceleration of any indebtedness other than such defaults, penalties or acceleration which would not, individually or in the aggregate, result in a Material Adverse Effect. 5 (k) The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated herein will not result in a breach or violation of any of the terms or provisions of or constitute a default under any note or other evidence of indebtedness or any indenture, mortgage, deed of trust, note agreement or other contract, lease or instrument to which the Company or any of the Subsidiaries is a party or by which any of them or any of their properties is or may be bound, the certificate of incorporation, by-laws or other organizational documents of the Company or any of the Subsidiaries, or any law, order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or any of the Subsidiaries or any of their properties and will not result in the creation of any lien, charge or encumbrance upon the assets of the Company or the Subsidiaries. (l) Other than those obtained prior to the date hereof, no consent, approval, authorization or order of any court or governmental agency or body is required for the consummation by the Company of the transactions contemplated by this Agreement, except such as may be required by the SBA, the National Association of Securities Dealers, Inc. (the "NASD") or the securities or "Blue Sky" laws of any jurisdiction in connection with the purchase and distribution of the Shares by the Underwriters. (m) The Company and Elk have each duly elected to be treated by the Commission under the Investment Company Act as a business development company and all required action has been taken by the Company and Elk under Section 54 of the Investment Company Act to qualify the Company and Elk as business development companies and under the Acts to make the public offering and consummate the sale of the Shares as provided in this Agreement. (n) Elk is licensed as a Small Business Investment Company ("SBIC") by the SBA under the 1958 Act, and Elk is operating in full compliance with the 1958 Act and all SBA Regulations applicable to SBICs. (o) The Company intends to direct the investment of the proceeds of the Offering (as defined in the Prospectus) in such a manner as to comply with the requirements of Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and, immediately after the Closing Date, the Company and Elk will each be eligible to qualify as regulated investment companies under Subchapter M of the Code. (p) The Company has the full corporate power and authority to enter into this Agreement and to perform its obligations hereunder (including to issue, sell and deliver the Shares), and this Agreement has been duly and validly authorized, executed and delivered by the Company. (q) The Company and the Subsidiaries are in compliance with, and conduct their respective businesses in conformity with, all applicable federal, state, local and foreign laws, rules and regulations of any court or governmental agency or body except non-compliance which would not result in a Material Adverse Effect; to the knowledge of the Company, other than as set forth in the Registration Statement and the Prospectus, no prospective change in any of such federal, state, local 6 or foreign laws, rules or regulations has been adopted which, when made effective, would have a Material Adverse Effect. (r) The Company and the Subsidiaries have filed all necessary federal, state, local and foreign income, payroll, franchise and other tax returns and have paid all taxes shown as due thereon or with respect to any of their properties, and there is no tax deficiency that has been, or to the knowledge of the Company is likely to be, asserted against the Company or any of the Subsidiaries or any of their respective properties or assets that would have a Material Adverse Effect. (s) No person or entity has the right to require registration of shares of Common Stock or other securities of the Company because of the filing or effectiveness of the Registration Statement or otherwise. (t) Neither the Company nor the Subsidiaries nor any of their respective officers, directors or any of their affiliated persons has taken or will take, directly or indirectly, any action designed or intended to stabilize or manipulate the price of any security of the Company, or which caused or resulted in, or which might in the future reasonably be expected to cause or result in, stabilization or manipulation of the price of any security of the Company. (u) The Company and the Subsidiaries own or possess all patents, trademarks, trademark registrations, service marks, service mark registrations, tradenames, copyrights, licenses, inventions, trade secrets and rights described in the Prospectus as being owned by them or any of them or necessary for the conduct of their respective businesses, and the Company is not aware of any claim to the contrary or any challenge by any other person to the rights of the Company and the Subsidiaries with respect to the foregoing. The Company's and the Subsidiaries' businesses as now conducted and as proposed to be conducted do not and will not infringe or conflict with in any material respect any patents, trademarks, service marks, tradenames, copyrights, trade secrets, licenses or any other intellectual property or franchise right of any person. No claim has been made against the Company or any Subsidiary alleging the infringement by the Company or any Subsidiary of any patent, trademark, servicemark, tradename, copyright, trade secret, license in or other intellectual property right or franchise right of any person. (v) The Company and the Subsidiaries have performed all material obligations required to be performed by them under all contracts required by Item 24 of Form N-2 under the Securities Act to be filed as exhibits to the Registration Statement, and neither the Company, any of the Subsidiaries nor any other party to such contract is in default under or in breach of any such obligations except such as would not result in a Material Adverse Effect. Neither the Company nor any of the Subsidiaries has received any notice of such default or breach. (w) Neither the Company or any of the Subsidiaries is involved in any labor dispute which would result in the Material Adverse Effect nor, to the Company's knowledge, is any such dispute threatened. Neither the Company nor any of the Subsidiaries is aware that (i) any executive, key employee or significant group of employees of the Company or any of the Subsidiaries plans to 7 terminate employment with the Company or any of the Subsidiaries or (ii) any such executive or key employee is subject to any noncompete, nondisclosure, confidentiality, employment, consulting or similar agreement that would be violated by the present or proposed business activities of the Company or the Subsidiaries. Neither the Company nor any Subsidiary has or expects to have any liability for any prohibited transaction or funding deficiency or any complete or partial withdrawal liability with respect to any pension, profit sharing or other plan which is subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), to which the Company or any Subsidiary makes or ever has made a contribution and in which any employee of the Company or any Subsidiary is or has ever been a participant. With respect to such plans, the Company and each Subsidiary are in compliance in all material respects with all applicable provisions of ERISA. (x) The Company has obtained the written agreement described in Section 8(j) of this Agreement from each of its officers, directors and holders of Common Stock listed on Schedule II hereto. (y) The Company and the Subsidiaries have, and the Company and the Subsidiaries as of the Closing Dates will have, good and marketable title in fee simple to all real property and good and marketable title to all personal property owned or proposed to be owned by them, in each case free and clear of all liens, charges, encumbrances and defects except as disclosed in the Prospectus or such as would not have a Material Adverse Effect, and any real property and buildings held under lease by the Company and the Subsidiaries or proposed to be held after giving effect to the transactions described in the Prospectus are, or will be as of the Closing Dates, held by them under valid, subsisting and enforceable leases with such exceptions as would not have a Material Adverse Effect, in each case except as described in or contemplated by the Prospectus. (z) The Company and the Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are customary in the businesses in which they are engaged or propose to engage after giving effect to the transactions described in the Prospectus; and neither the Company nor any Subsidiary has any reason to believe that it will not be able to renew such insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue their business at a cost that would not have a Material Adverse Effect. (aa) Other than as contemplated by this Agreement or as disclosed in the Prospectus, there is no broker, finder or other party that is entitled to receive from the Company or the Subsidiaries any brokerage or finders' fee or other fee or commission as a result of any of the transactions contemplated by this Agreement. (bb) Neither the Company or any of the Subsidiaries, nor any director, officer, agent or employee acting on behalf of the Company or the Subsidiaries has (i) used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity, (ii) made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds, (iii) violated or is in violation of any provision of the Foreign Corrupt 8 Practices Act of 1977 or (iv) made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment. (cc) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets, (iii) access to assets is permitted only in accordance with management's general or specific authorization and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (dd) To the Company's knowledge, neither the Company, any of the Subsidiaries nor any employee or agent of the Company or any of the Subsidiaries has made any payment of funds of the Company or any of the Subsidiaries or received or retained any funds in violation of any law, rule or regulation, which payment, receipt or retention of funds is of a character required to be disclosed in the Prospectus. (ee) Each certificate signed by any officer of the Company and delivered to the Underwriters or counsel for the Underwriters in connection with this Agreement or the transactions contemplated hereby shall be deemed to be a representation and warranty by the Company as to the matters covered thereby. (ff) To the Company's knowledge, all hardware and software products used by the Company in the administration and the business operations of the Company will be able to accurately process date data (including, but not limited to calculating, comparing and sequencing) from, into and between the twentieth century (through 1999), the year 2000 and the twenty-first century, including leap year calculations, when used in accordance with the product documentation accompanying such hardware and software products. 3. Purchase by, and Sale and Delivery to, the Underwriters; Closing Dates. (a) On the basis of the representations, warranties, covenants and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell to the several Underwriters the Firm Shares and the Underwriters agree, severally and not jointly, to purchase the Firm Shares from the Company, the number of Firm Shares to be purchased by each Underwriter being set opposite its name on Schedule I, subject to adjustment in accordance with Section 12 hereof. (b) The purchase price per share to be paid by the Underwriters to the Company will be $________ per share (the "Purchase Price") which represents the offering price set forth in the Prospectus less an underwriting discount of 8.75%. 9 (c) The Company will deliver the Firm Shares to the Representatives for the respective accounts of the several Underwriters [(in the form of definitive certificates) issued in such names and in such denominations] as the Representatives may direct by notice in writing to the Company given at or prior to 12:00 noon, New York City time, on the second full business day preceding the Closing Date or, if no such direction is received, in the names of the respective Underwriters or in such other names as First Colonial may designate (solely for the purpose of administrative convenience) and in such denominations as First Colonial may determine, against payment of the aggregate Purchase Price therefor by federal funds wire transfer (same day funds) to an account or accounts previously designated in writing by the Company, all at the offices of ______________ ______________________________________________. The time and date of the delivery and closing shall be at 10:00 a.m., New York City time, on ________________, 1999, in accordance with Rule 15c6-1 of the Exchange Act. [The Company will bear the one-day cost of funds of First Colonial in providing the aggregate Purchase Price in same day funds, rather than next day funds.] The time and date of such payment and delivery are herein referred to as the "Closing Date." The Closing Date and the location of delivery of, and the form of payment for, the Firm Shares may be varied by agreement between the Company and First Colonial. The Closing Date may be postponed pursuant to the provisions of Section 12. (d) The Company shall make the certificates for the Firm Shares available to the Representatives for examination on behalf of the Underwriters not later than 10:00 a.m., New York City time, on the business day preceding the Closing Date at the offices of _______________________________ ______________________________________. (e) It is understood that First Colonial, may (but shall not be obligated to) make payment to the Company on behalf of any Underwriter or Underwriters, for the Shares to be purchased by such Underwriter or Underwriters. Any such payment by First Colonial or Auerbach shall not relieve such Underwriter or Underwriters from any of its or their other obligations hereunder. (f) The several Underwriters propose to make a public offering of the Firm Shares (other than to residents of or in any jurisdiction in which qualification of the Firm Shares is required and has not become effective) at the public offering price and upon the other terms set forth in the Prospectus as soon after the effectiveness of the Registration Statement as in their judgment is advisable. The Representatives shall promptly advise the Company of the making of the public offering. (g) For the purpose of covering any over-allotments in connection with the distribution and sale of the Firm Shares as contemplated by the Prospectus, the Company hereby grants to the Underwriters an option to purchase, severally and not jointly, up to the aggregate number of shares of Option Shares. The price per share to be paid for the Option Shares shall be the Purchase Price. The option granted hereby may be exercised as to all or any part of the Option Shares at any time, but only once, not more than 30 days subsequent to the effective date of this Agreement. No Option Shares shall be sold and delivered unless the Firm Shares previously have been, or 10 simultaneously are, sold and delivered. The right to purchase the Option Shares or any portion thereof may be surrendered and terminated at any time prior to exercise upon notice by the Underwriters to the Company. The option granted hereby may be exercised by the Underwriters by giving written notice from First Colonial to the Company setting forth the number of Option Shares to be purchased by them and the date and time for delivery of and payment for the Option Shares. Each date and time for delivery of and payment for the Option Shares (which may be the Closing Date, but not earlier) is herein called the "Option Closing Date" and shall in no event be earlier than two business days nor later than five business days after written notice is given. The Option Closing Date and the Closing Date are herein collectively called the "Closing Dates." All purchases of Option Shares from the Company shall be made on a pro rata basis. Option Shares shall be purchased for the account of each Underwriter in the same proportion as the number of Firm Shares set forth opposite such Underwriter's name on Schedule I hereto bears to the total number of Firm Shares (subject to adjustment by the Underwriters to eliminate odd lots). Upon exercise of the option by the Underwriters, the Company agrees to sell to the Underwriters the number of Option Shares set forth in the written notice of exercise and the Underwriters agree, severally and not jointly and subject to the terms and conditions herein set forth, to purchase the number of such shares determined as aforesaid. The Company will deliver the Option Shares to the Underwriters (in the form of definitive certificates, issued in such names and in such denominations as the Representatives may direct by notice in writing to the Company given at or prior to 12:00 noon, New York City time, on the second full business day preceding the Option Closing Date or, if no such direction is received, in the names of the respective Underwriters or in such other names as First Colonial may designate (solely for the purpose of administrative convenience) and in such denominations as First Colonial may determine, against payment of the aggregate Purchase Price therefor by certified or official bank check or checks in New York Clearing House funds (next day funds), payable to the order of the Company all at the offices of ____________________________. The Company shall make the certificates for the Option Shares available to the Underwriters for examination not later than 10:00 a.m., New York City time, on the business day preceding the Option Closing Date at the offices of _____________________________________________. The Option Closing Date and the location of delivery of, and the form of payment for, the Option Shares may be varied by agreement between the Company and First Colonial. The Option Closing Date may be postponed pursuant to the provisions of Section 12. 4. Covenants and Agreements of the Company. The Company covenants and agrees with the several Underwriters that: (a) The Company will (i) if the Company and the Representatives have determined not to proceed pursuant to Rule 430A, use its best efforts to cause the Registration Statement to become effective, (ii) if the Company and the Representatives have determined to proceed pursuant to Rule 430A, use its best efforts to comply with the provisions of and make all requisite filings with the Commission pursuant to Rule 430A and Rule 497 of the Securities Act Rules and Regulations and (iii) if the Company and the Representatives have determined to deliver Prospectuses pursuant to Rule 434 of the Securities Act Rules and Regulations, to use its best efforts to comply with all the applicable provisions thereof. The Company will advise the Representatives promptly as to the time 11 at which the Registration Statement becomes effective, will advise the Representatives promptly of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the institution of any proceedings for such purposes, and will use its best efforts to prevent the issuance of any such stop order, and to obtain as soon as possible the lifting thereof, if issued. The Company will advise the Representatives promptly of the receipt of any comments of the Commission or any request by the Commission for any amendment of or supplement to the Registration Statement or the Prospectus or for additional information and will not at any time file any amendment to the Registration Statement or supplement to the Prospectus which shall not previously have been submitted to the Representatives a reasonable time prior to the proposed filing thereof or to which the Representatives shall reasonably object in writing or which is not in compliance with the Acts. The Company will advise the Representatives promptly of receipt by the Company or any representative or attorney of the Company of any other communication from the Commission relating to (i) the Company, if received during the time a Prospectus relating to the Shares is required to be delivered under the Securities Act, or (ii) the Registration Statement, any Preliminary Prospectus, the Prospectus or the transactions contemplated by this Agreement. (b) The Company will promptly prepare and file with the Commission any amendments or supplements to the Registration Statement or the Prospectus which in the judgment of the Company or in the reasonable opinion of the Representatives may be necessary to enable the several Underwriters to continue the distribution of the Shares and will use its best efforts to cause the same to become effective as promptly as possible. (c) If at any time after the effective date of the Registration Statement when a prospectus relating to the Shares is required to be delivered under the Securities Act any event relating to or affecting the Company or any of the Subsidiaries occurs as a result of which the Prospectus or any other prospectus as then in effect would include an untrue statement of a material fact, or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend the Prospectus to comply with the Acts, the Company will promptly notify the Representatives thereof and will prepare an amended or supplemented prospectus which will correct such statement or omission. (d) The Company will deliver to the Representatives, at or before the Closing Dates, copies of the Registration Statement as originally filed with the Commission, and all amendments thereto including all financial statements and exhibits thereto, and will deliver to the Representatives such number of copies of the Registration Statement, including such financial statements but without exhibits, and all amendments thereto, as the Representatives may reasonably request. The Company will deliver or mail to or upon the order of the Representatives, from time to time until the effective date of the Registration Statement, as many copies of the Preliminary Prospectus as the Representatives may reasonably request. The Company will deliver or mail to or upon the order of the Representatives on the date of the public offering, and thereafter from time to time during the period when delivery of a prospectus relating to the Shares is required under the 12 Securities Act, as many copies of the Prospectus, in final form or as thereafter amended or supplemented as the Representatives may reasonably request. (e) The Company will make generally available to its shareholders not later than 45 days after the end of the period covered thereby, an earnings statement of the Company (which need not be audited) that shall comply with Section 11(a) of the Act and cover a period of at least 12 consecutive months beginning not later than the first day of the Company's fiscal quarter next following the Effective Date. (f) The Company will furnish to its shareholders annual reports containing financial statements audited by independent certified public accountants and with quarterly summary financial information in reasonable detail which may be unaudited. During the period of five years from the date hereof, the Company will deliver to the Representatives and, upon request, to each of the other Underwriters, as soon as they are available, copies of each annual report of the Company and each other report furnished by the Company to its shareholders and will deliver to the Representatives, (i) as soon as they are available, copies of any other reports (financial or other) which the Company shall publish or otherwise make available to its shareholders as such, (ii) as soon as they are available, copies of any reports and financial statements furnished to or filed with the Commission or any national securities exchange or the Nasdaq National Market and (iii) from time to time such other information concerning the Company as the Representatives may reasonably request. So long as the Company has active subsidiaries, such financial statements will be on a consolidated basis to the extent the accounts of the Company and the Subsidiaries are consolidated in reports furnished to its shareholders generally. Separate financial statements shall be furnished for Subsidiaries whose accounts are not consolidated but which at the time are significant subsidiaries as defined in the Securities Act Rules and Regulations. (g) The Company will use its best efforts to cause the Shares to be duly appropriate for quotation on the Nasdaq National Market prior to the Closing Date. (h) The Company will maintain a transfer agent and registrar for its Common Stock. (i) The Company will not, without the prior written consent of First Colonial, offer, sell, assign, transfer, encumber, contract to sell, grant an option to purchase or otherwise dispose of any shares of Common Stock or securities convertible into or exercisable or exchangeable for Common Stock (including, without limitation, Common Stock of the Company which may be deemed to be beneficially owned by the Company in accordance with the Securities Act Rules and Regulations) during the 180 days following the date of the Prospectus first filed pursuant to Rule 497(b), (c) or (h), other than (i) the Company's sale of Shares hereunder and the Company's issuance of Common Stock upon the exercise of stock options which are outstanding on the Closing Date or described in the Prospectus and (ii) the Company's issuance of stock options which are described in the Prospectus. 13 (j) The Company will apply the net proceeds from the sale of the Shares as set forth in the description under the caption "Use of Proceeds" in the Prospectus. (k) The Company will supply the Representatives with copies of all written correspondence to and from, and all documents issued to and by, the commission in connection with the registration of the Shares under the Securities Act and the Nasdaq National Market. (l) Prior to the Closing Dates, the Company will furnish to the Representatives, as soon as they have been prepared, copies of any unaudited interim consolidated financial statements of the Company and its subsidiaries for any periods subsequent to the periods covered by the financial statements appearing in the Registration Statement and the Prospectus. (m) Prior to the Closing Dates, unless required under the Acts or the Rules and Regulations, the Company will issue no press release or other communications directly or indirectly and hold no press conference with respect to the Company or any of its subsidiaries, the financial condition, results of operation, business, prospects, assets or liabilities of any of them, or the offering of the Shares, without the prior written consent of the Representatives, which shall not be unreasonably withheld. For a period of 12 months following the Closing Date, the Company will use its best efforts to provide to the Representatives copies of each press release or other public communications with respect to the financial condition, results of operations, business, prospects, assets or liabilities of the Company at least 24 hours prior to the public issuance thereof or such longer advance period as may reasonably be practicable. (n) During the period of five years hereafter, the Company will furnish to the Representatives, and upon request of the Representatives, to each of the Underwriters, (i) as soon as practicable after the end of each fiscal year, copies of the annual report of the Company containing the balance sheet of the Company as of the close of such fiscal year and statements of income, shareholders' equity and cash flows for the year then ended and the opinion thereon of the Company's independent certified public accountants, (ii) as soon as practicable after the filing thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Report on Form 8-K or other report filed by the Company with the Commission, or the Nasdaq National Market or any national securities exchange, (iii) as soon as available, copies of any report or communication of the Company mailed generally to holders of its Common Stock and (iv) all public reports and all reports and financial statements furnished by the Company to the Commission pursuant to the Investment Company Act and the Investment Company Act Rules and Regulations thereunder. (o) The Company agrees to retain First Colonial as a financial advisor for the Company for a period of two (2) years from and after the date of the Prospectus, at a fee of $3,000 per month, plus out-of-pocket expenses; such fee, aggregating $72,000, shall be due and payable in full at the closing of the Shares. 14 5. Payment of Expenses (a) The Company will pay or cause to be paid (directly or by reimbursement) all costs, fees and expenses incurred in connection with and expenses incident to the performance of the obligations of the Company under this Agreement, as follows: (i) all expenses and taxes incident to the issuance and delivery of the Shares to the Representatives, (ii) all expenses incident to the registration of the Shares under the Securities Act, (iii) the costs of preparing stock certificates (including printing and engraving costs), (iv) all fees and expenses of the registrar and transfer agent of the Shares, (v) all necessary issue, transfer and other stamp taxes in connection with the issuance and sale of the Shares to the Underwriters, (vi) all fees and expenses of the Company's counsel and the Company's independent certified public accountants, (vii) all costs and expenses incurred in connection with the preparation, printing, filing, shipping and distribution of the Registration Statement, each Preliminary Prospectus and the Prospectus (including all exhibits and financial statements) and all amendments and supplements provided for herein, the Master Agreement Among Underwriters between the Representatives and the Underwriters, if any, the Master Selected Dealer Agreement, if any, the Blue Sky memoranda and this Agreement, (viii) all filing fees, reasonable attorneys' fees and expenses incurred by the Company or the Underwriters in connection with exemptions from qualifying or registering (or obtaining qualification or registration of) all or any part of the Shares for offer and sale and determination of its eligibility for investment under the Blue Sky or other securities laws of such jurisdictions as the Representatives may designate, (ix) all fees and expenses paid or incurred in connection with filings made with the NASD, (x) all fees and expenses paid or incurred in connection with the listing of the Shares on the Nasdaq National Market and (xi) all other costs, fees and expenses incurred by the Company incident to the performance of the Company's obligations hereunder which are not otherwise specifically provided for in this Section. (b) In addition to the foregoing, the Company agrees to pay to the Underwriters at the closing a non-accountable expense allowance in the amount of 2.75% of the gross dollar amount of the offering to the public (including the Over-Allotment Option, if exercised), out of which a forty-five thousand ($45,000) dollar advance payment has been made. The Underwriters shall pay their own costs and expenses, including the costs and expenses of their counsel, any transfer taxes on the Shares which they may sell, and the expenses of advertising any offering of the Shares made by the Underwriters. 6. Indemnification and Contribution. (a) The Company shall indemnify and hold harmless each Underwriter, its officers, directors, employees, advisors and attorneys and each person, if any, who controls each Underwriter within the meaning of the Act, against any and all loss, liability, claim, damage and expense whatsoever, including, but not limited to, any and all reasonable expenses whatsoever incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever or in connection with any investigation or inquiry of, or action or proceeding that may be brought against, the respective indemnified parties, arising out of or based upon any breach of the 15 Company's representations and warranties made in this Agreement and any untrue statements or alleged untrue statements of a material fact contained in any Preliminary Prospectus, the Registration Statement or the Prospectus, any application or other document (in this Section 6 collectively called "application") executed by the Company and based upon written information furnished by or on behalf of the Company filed in any jurisdiction in order to qualify all or any part of the Shares under the securities laws thereof or filed with the SEC or the NASD, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the foregoing indemnity: (x) shall not apply to statements in or omissions from any Preliminary Prospectus, the Registration Statement or the Prospectus, or in any application or in any communication to the SEC, as the case may be, made in reliance upon and in conformity with information supplied to the Company in writing by or on behalf of any Underwriter through the Representatives concerning such Underwriters (unless expressly for use therein); and (y) with respect to any Preliminary Prospectus, shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages, liabilities or expenses purchased the Shares if, at or prior to the written confirmation of the sale of such Shares, a copy of an amended Preliminary Prospectus or the Prospectus (or the Prospectus as amended or supplemented) was delivered to such Underwriter but was not sent, or delivered to such person and the untrue statement or omission of a material fact contained in such Preliminary Prospectus was corrected in the amended Preliminary Prospectus or Prospectus (or the Prospectus as amended or supplemented). This indemnity agreement will be in addition to any liability the Company may otherwise have. (b) Each Underwriter, severally and not jointly, shall indemnify and hold harmless the Company, each of the directors of the Company, each of the officers of the Company who shall have signed the Registration Statement, and each other person, if any, who controls the Company within the meaning of the Act to the same extent as the foregoing indemnities from the Company to the several Underwriters as set forth in Section 8(a) hereof, but only with respect to any loss, liability, claim, damage or expense resulting from statements or omissions, or alleged statements or omissions, if any, made in any Preliminary Prospectus, the Registration Statement or the Prospectus, or in any application or in any communication to the SEC, as the case may be, made in reliance upon and in conformity with information supplied to the Company in writing by or on behalf of any Underwriter through the Representatives concerning such Underwriter expressly for use therein. This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have. (c) If any action, inquiry, investigation or proceeding is brought against any person in respect of which indemnity may be sought pursuant to any of the two preceding paragraphs, such person (hereinafter called the "indemnified party") shall, promptly after notification of, or receipt of service of process for, such action, inquiry, investigation or proceeding, notify in writing the party or parties against whom indemnification is to be sought (hereinafter called the "indemnifying party") 16 of the institution of such action, inquiry, investigation or proceeding and the indemnifying party, upon the request of the indemnified party, shall assume the defense of such action, inquiry, investigation or proceeding, including the employment of counsel (reasonably satisfactory to such indemnified party) and payment of reasonable expenses. No indemnification provided for in this Section 6 shall be available to any indemnified party who shall fail to give such notice if the indemnifying party does not otherwise have knowledge of such action, inquiry, investigation or proceeding, to the extent that such indemnifying party has been materially prejudiced by the failure to give such notice, but the omission to so notify the indemnifying party shall not relieve the indemnifying party otherwise than under this Section 6. Such indemnified party or controlling person shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless the employment of such counsel shall have been authorized in writing by the indemnifying party in connection with the defense of such action. If such indemnified party or parties shall have been advised by counsel that there may be a conflict between the positions of the indemnifying party or parties and of the indemnified party or parties or that there may be legal defenses available to such indemnified party or parties different from or in addition to those available to the indemnifying party or parties, the indemnified party or parties shall be entitled to select counsel (such counsel, "Separate Counsel") to conduct the defense to the extent determined by such counsel to be necessary to protect the interests of the indemnified party or parties and the reasonable fees and expenses of such Separate Counsel shall be borne by the indemnifying party. (d) If the indemnification provided for in this Section 6 is unavailable to, or insufficient to hold harmless an indemnified party under Sections 6(a) or (b) hereof in respect of any losses, liabilities, claims, damages or expenses (or actions, inquiries, investigations or proceedings in respect thereof) referred to therein, except by reason of the provisos set forth in Section 6(a) hereof or the failure to give notice as required in Section 6(c) hereof (provided that the indemnifying party does not have knowledge of the action, inquiry, investigation or proceeding and to the extent such party has been materially prejudiced by the failure to give such notice), then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, liabilities, claims, damages or expenses (or actions, inquiries, investigations or proceedings in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, liabilities, claims or reasonable expenses (or actions, inquiries, investigations or proceedings in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bears to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state 17 a material fact relates to information supplied by the Company on the one hand or the Underwriters on the other hand and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 6(d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to above in this Section 6(d). The amount paid or payable by an indemnified party as a result of the losses, liabilities, claims, damages or reasonable expenses (or actions, inquiries, investigations or proceedings in respect thereof) referred to above in this Section 6(d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 6(d), (i) the provisions of the Agreement Among Underwriters shall govern contribution among Underwriters, (ii) no Underwriter (except as provided in the Agreement Among Underwriters) shall be required to contribute any amount in excess of the underwriting discounts and commissions applicable to the Shares purchased by such Underwriter, and (iii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this Section 6(d) to contribute are several in proportion to their individual underwriting obligations and not joint. 7. Survival of Indemnities, Representations, Warranties, etc. The respective indemnities, covenants, agreements, representations, warranties and other statements of the Company and the several Underwriters, as set forth in this Agreement or made by them respectively, pursuant to this Agreement, shall remain in full force and effect, regardless of any termination or cancellation of this Agreement or any investigation made by or on behalf of any Underwriter, the Company or any of its officers or directors or any controlling person, and shall survive delivery of and payment for the Shares. 8. Conditions of Underwriters' Obligations. The respective obligations of the several Underwriters hereunder shall be subject to the accuracy, at and (except as otherwise stated herein) as of the date hereof and at and as of the Closing Dates, of the representations and warranties made herein by the Company, to compliance at and as of the Closing Dates by the Company with its covenants and agreements herein contained and other provisions hereof to be satisfied at or prior to the Closing Dates, and to the following additional conditions: (a) The Registration Statement shall have become effective and no stop order suspending the effectiveness thereof shall have been issued and no proceedings for that purpose shall have been initiated or, to the knowledge of the Company or the Representatives, shall be threatened by the Commission, and any request for additional information on the part of the Commission (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the reasonable satisfaction of the Representatives. Any filings of the Prospectus, or any supplement thereto, required pursuant to Rule 497 or Rule 434 of the Securities Act Rules and Regulations, shall 18 have been made in the manner and within the time period required by Rule 497 and Rule 434 of the Securities Act Rules and Regulations, as the case may be. (b) There shall not have occurred any Material Adverse Effect or any change in the investment objectives, investment policies, capital stock, short-term or long-term debt of the Company and the Subsidiaries taken as a whole, such that (i) the Registration Statement or the Prospectus, or any amendment or supplement thereto, contains an untrue statement of fact which, in the opinion of the Representatives, is material, or omits to state a fact which, in the opinion of the Representatives, is required to be stated therein or is necessary to make the statements therein not misleading in any material respect or (ii) it is inadvisable in the sole judgment of the Representatives to proceed with the public offering or purchase the Shares as contemplated hereby. (c) No legal or governmental action, suit or proceeding affecting the Company which is material and adverse to the Company or which affects or may affect the Company's ability to perform its obligations under this Agreement shall have been instituted or threatened and there shall have occurred no material adverse development in any existing such action, suit or proceeding. (d) At the time of execution of this Agreement, the Representatives shall have received from Marcum & Kliegman LLP, independent certified public accountants, a "cold comfort" letter, dated the date hereof, in form and substance satisfactory to the Underwriters. (e) The Representatives shall have received from Marcum & Kliegman LLP, independent certified public accountants, letters, dated the Closing Dates, to the effect that such accountants reaffirm, as of the Closing Dates, and as though made on the Closing Dates, the statements made in the letter furnished by such accountants pursuant to paragraph (d) of this Section 6. (f) The Representatives shall have received from Stursburg & Veith, counsel for the Company, an opinion, dated the Closing Dates, addressed to the Underwriters (and stating that it may be relied upon by counsel to the Underwriters) to the effect that: (i) The Company and each of the Subsidiaries has been duly incorporated and are validly existing and in good standing as corporations under the laws of their respective jurisdictions of incorporation and have the corporate power and authority to own or lease their properties and to conduct their respective businesses as described in the Prospectus. The Company and each of the Subsidiaries are duly qualified to do business and are in good standing as foreign corporations in all jurisdictions where their respective ownership or leasing of properties or the conduct of their respective businesses requires such qualification, except where the failure to be so qualified would not have a Material Adverse Effect. 19 (ii) The Company has full corporate power and authority to enter into this Agreement and to issue, sell and deliver to the Underwriters the Shares to be issued and sold hereunder. (iii) The Company has the corporate power and authority to enter into the Underwriting Agreement, and the Underwriting Agreement has been duly authorized, executed and delivered by the Company and constitutes a valid and binding obligation of the Company enforceable in accordance with its terms, except as such enforceablility may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium or similar laws affecting creditors' rights generally and to equitable principles (including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing), regardless of whether considered in a proceeding in equity or at law, and except insofar as rights to indemnity or contribution may be limited by applicable securities laws. (iv) The Company has authorized and outstanding capital stock as set forth under the caption "Capitalization" in the Prospectus; the authorized shares of the Company's Common Stock have been duly authorized; the outstanding shares of the Company's Common Stock have been duly authorized and validly issued and are fully paid and nonassessable; all of the Shares conform to the description thereof contained in the Prospectus; the certificates for the Shares are in due and proper form; the Shares have been duly authorized and will be validly issued, fully paid and nonassessable when issued and paid for as contemplated by this Agreement; and no preemptive rights of stockholders exist with respect to any of the Shares or the issue or sale thereof. The holders of Shares are not and will not be subject to personal liability solely by reason of being such holders. The description of the Shares contained in the Registration Statement and the Prospectus conforms to the rights set forth in the instruments or certificates defining the same and is in conformity with the requirements of the Acts and the Rules and Regulations. (v) there are no outstanding securities of the Company or the Subsidiaries convertible or exchangeable into or evidencing the right to purchase or subscribe for any shares of capital stock of the Company or the Subsidiaries and except as disclosed in the Prospectus, there are no outstanding or authorized options, warrants or rights of any character obligating the Company or the Subsidiaries to issue any shares of its capital stock or any securities convertible or exchangeable into or evidencing the right to purchase or subscribe for any shares of such stock; and there is no holder of any securities of the Company or the Subsidiaries or any other person who has the right, contractual or otherwise, to cause the Company to sell or otherwise issue to them, or to permit them to underwrite the sale of, any of the Shares or the right to have any Common Stock or other securities of the Company included in the Registration Statement or the right, as a result of the filing of the Registration Statement, to require registration under the Securities Act of any Common Stock or other securities of the Company. 20 (vi) The Registration Statement and all post-effective amendments thereto, if any, have become effective under the Securities Act; any and all filings, if any, required by Rules 497, 434 and 430A of the Securities Act Rules and Regulations have been made; and, to the knowledge of such counsel, no stop order proceedings with respect thereto have been instituted or are pending or threatened under the Securities Act; any required filing of the Prospectus and any supplement thereto pursuant to Rule 497 of the Securities Act Rules and Regulations has been made in the manner and within the time period required by Rule 497. (vii) The Registration Statement and the Prospectus, and each amendment or supplement thereto, comply as to form in all material respects with the requirements of the Acts and the applicable rules and regulations thereunder (except that such counsel need express no opinion as to the financial statements and related schedules or financial and statistical data included therein). (viii) In connection with the Registration Statement, such counsel has participated in discussions and conferences with certain of the officers and representatives of the Company, representatives of the Underwriters, counsel to the Underwriters, and the independent accountants for the Company at which the contents of the Registration Statement and the Prospectus were discussed. While such counsel does not assume any responsibility for the accuracy, completeness or fairness of the statements made in the Registration Statement and the Prospectus, nothing has come to such counsel's attention which lead them to believe that either the Registration Statement or the Prospectus, or any amendment or supplement thereto, as of their respective effective or issue dates, or as of the date hereof, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. The descriptions in the Registration Statement and Prospectus of statutes and legal and governmental proceedings are accurate and fairly present the information required to be shown. There are no legal proceedings pending or, to such counsel's knowledge, threatened against the Company which are required to be disclosed in the Registration Statement and Prospectus, except as described therein. Such counsel expresses no opinion as to the financial statements or other financial or statistical data contained in the Registration Statement or the Prospectus. (ix) Such counsel has read all contracts and other documents specifically enumerated in the Registration Statement and the Prospectus, and such contracts and other documents are fairly summarized or described therein, fairly present the information required to be shown; conform in all material respects to the descriptions thereof contained therein, and are filed as exhibits thereto, if required, and to such counsel's knowledge, there are no contracts or documents required to be so summarized or disclosed or so filed which have not been so summarized or disclosed or so filed. (x) Such counsel knows of no material legal or governmental proceedings pending or threatened against the Company or any of the Subsidiaries. 21 (xi) The execution and delivery of this Agreement by the Company and the consummation by the Company of the transactions herein contemplated, and the compliance with the terms of this Agreement do not and will not conflict with or result in a breach of any of the terms or provisions of or violate or constitute a default under the Certificate of Incorporation or Bylaws or other constituent documents of the Company or the Subsidiaries or, (i) any indenture, mortgage or other agreement or instrument to which the Company or any of the Subsidiaries is a party or by which the Company or any of the Subsidiaries or any material portion of its properties is bound, or (ii) to such counsel's knowledge, after due inquiry, any judgment, order or decree of any government, governmental instrumentality or court having jurisdiction over the Company or any of the Subsidiaries or any material portion of its properties, or (iii) any existing statute, rule or regulation applicable to the Company or the Subsidiaries, where, with respect to clauses (i), (ii) and (iii) of this paragraph, such violation or default could reasonably be expected to have a Material Adverse Effect on the general affairs, properties, condition (financial or otherwise), results of operations, stockholders' equity, business or prospects of the Company and the Subsidiaries taken as a whole. (xii) No authorization, approval, consent or license of any governmental or regulatory body, domestic or foreign, except as may be required by the SBA, the NASD or as required under the securities (blue sky) laws of the various jurisdictions, is required in connection with the (i) authorization, issuance, transfer, sale or delivery of the Shares to be sold by the Company; (ii) execution, delivery and performance of this Agreement by the Company or (iii) taking of any action contemplated in this Agreement or in the Registration Statement or the Prospectus, or, if so required, all such authorizations, approvals, consents and licenses have been obtained and are in full force and effect. (xiii) The Company has duly elected to be treated under the Investment Company Act as a business development company and all required action has been taken by the Company under the Acts to make the public offering and consummate the sale of the Shares as provided in this Agreement; the provisions of the corporate charter and by-laws of the Company and the Subsidiaries and the investment policies and restrictions described in the Prospectus comply with the requirements of the Investment Company Act. (xiv) The Shares are duly approved, subject to official notice of issuance, for quotation on the Nasdaq National Market and a registration statement has been filed pursuant to Section 12 of the Exchange Act for the Shares and has been declared effective. (xv) To such counsel's knowledge, except as described in the Prospectus, neither the company nor any of the Subsidiaries owns any interest in any corporation, partnership, joint venture, trust or other business entity. In rendering such opinions, such counsel may set forth that as to certain matters of fact, where appropriate, such counsel is relying on one or more certificates of public officials, governmental 22 agencies or officers of the Company. In addition, as to matters of law, counsel for the Company may rely as to matters involving the application of laws other than the laws of the United States (except for laws dealing with matters within the jurisdiction of the laws of New York, the laws of Delaware and jurisdictions in which they are admitted, to the extent such counsel deems proper and to the extent specified in such opinion, if at all, upon an opinion or opinions (in form and substance satisfactory to the Underwriters' counsel) of other counsel reasonably acceptable to the Underwriters' counsel, familiar with the applicable laws. Unless the context clearly indicates otherwise, the term "Company" as used in this Section 6(f) shall include the Subsidiaries. (g) The Representatives shall have received from Klehr, Harrison, Harvey, Branzburg & Ellers, LLP, counsel for the Underwriters, their opinion or opinions dated the Closing Date with respect to the incorporation of the Company, the validity of the Shares, the Registration Statement and the Prospectus and such other related matters as they may reasonably request, and the Company shall have furnished to such counsel such documents as they may request for the purpose of enabling them to pass upon such matters. In addition to the matters set forth above, such opinion shall also include a statement to the effect that nothing has come to the attention of such counsel that leads them to believe that (i) the Registration Statement, or any amendment thereto (except as to the financial statements and related schedules or financial data included therein, with respect to which such counsel need express no belief), as of the time it became effective under the Securities Act, as of the Closing Date or the Option Closing Date, as applicable, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (ii) the Prospectus, or any supplement thereto, on the date it was filed pursuant to the Securities Act Rules and Regulations and as of the Closing Date or the Option Closing Date, as applicable, contained or contains, an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they are made, not misleading (except that such counsel need express no belief as to financial statements and related schedules or financial data included therein). With respect to such statement, Klehr, Harrison, Harvey, Branzburg & Ellers, LLP may state that their belief is based upon the procedures set forth therein, but is without independent check and verification. In rendering such opinion, such counsel may rely upon certificates of any officer of the Company or public officials as to matters of fact; and may rely as to matters of law, to the extent necessary, upon the opinion or opinions of Stursburg & Veith. (h) The Representatives shall have received a certificate, dated the Closing Dates, of the chief executive officer or the President and the chief financial or accounting officer of the Company to the effect that: (i) No stop order suspending the effectiveness of the Registration Statement has been issued, and, to the best of the knowledge of the signers, no proceedings for that purpose have been instituted or are pending or contemplated under the Securities Act; 23 (ii) Neither any Preliminary Prospectus, as of its date, nor the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, as of the respective times when the Registration Statement became effective and at all times subsequent thereto up to the delivery of such certificate, included any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (iii) The representations and warranties of the company in this Agreement are true and correct at and as of the Closing Dates, and the Company has complied with all the agreements and performed or satisfied all the conditions on its part to be performed or satisfied at or prior to the Closing Dates; and (iv) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, (i) neither the Company nor any of the Subsidiaries has incurred any material liabilities or obligations, direct or contingent, or entered into any other transactions not in the ordinary course of business, (ii) there has not been any material adverse change in the condition (financial or otherwise), properties, business, management, prospects, net worth, capital stock, investment objectives, investment policies or results of operations of the Company and the Subsidiaries taken as a whole, or any change in the capital stock, or material change in the short-term or long-term debt, of the Company and the Subsidiaries taken as a whole and (iii) there has been no dividend or distribution of any kind declared, paid or made by the Company or the Subsidiaries on any class of their respective capital stock. (i) The Company shall have furnished to the Representatives such additional certificates as the Representatives may have reasonably requested as to the accuracy, at and as of the Closing Dates, of the representations and warranties made herein by it and as to compliance at and as of the Closing Dates by it with its covenants and agreements herein contained and other provisions hereof to be satisfied at or prior to the Closing Dates, and as to satisfaction of the other conditions to the obligations of the Underwriters hereunder. (j) The Representatives shall have received the written agreements of the officers, directors and holders of Common Stock listed on Schedule II that each will not, except as stated therein, offer, sell, assign, transfer, encumber, contract to sell, grant an option to purchase or otherwise dispose of any shares of Common Stock (including, without limitation, Common Stock of the Company which may be deemed to be beneficially owned by such persons in accordance with the Securities Act Rules and Regulations) during the period of time specified in Schedule II following the date of the Prospectus first filed pursuant to Rule 497(b), (c) or (h), without the prior written consent of First Colonial. All opinions, certificates, letters and other documents will be in compliance with the provisions hereunder only if they are reasonably satisfactory in form and substance to the Representatives and their counsel. The Company will furnish to the Representatives conformed copies 24 of such opinions, certificates, letters and other documents as the Representatives shall reasonably request. if any of the conditions hereinabove provided for in this Section shall not have been satisfied when and as required by this Agreement, this Agreement may be terminated by the Representatives by notifying the Company of such termination in writing at or prior to the Closing Dates, but First Colonial shall be entitled to waive any of such conditions on behalf of the Underwriters. 9. Effective Date. This Agreement shall become effective immediately as to Sections 5, 6, 7, 9, 10, 11, 13, 14, 15, 16 and 17 and, as to all other provisions, at 11:00 a.m. New York City time on the first full business day following the effectiveness of the Registration Statement or at such earlier time after the Registration Statement becomes effective as the Representatives may determine on and by notice to the Company or by release of any of the Shares for sale to the public. For the purposes of this Section 9, the Shares shall be deemed to have been so released upon the release for publication of any newspaper advertisement relating to the Shares or upon written notice from the Representatives (i) advising Underwriters that the Shares are released for public offering or (ii) offering the Shares for sale to securities dealers, whichever may occur first. 10. Termination. This Agreement (except for the provisions of Section 5) may be terminated by the Company at any time before it becomes effective in accordance with Section 9 by notice to the Representatives and may be terminated by the Representatives at any time before it becomes effective in accordance with Section 9 by notice to the Company. In the event of any termination of this Agreement under this or any other provision of this Agreement, there shall be no liability of any party to this Agreement to any other party, other than as provided in Sections 5, 6 and 11 and other than as provided in Section 12 as to the liability of defaulting Underwriters. This Agreement may be terminated after it becomes effective by the Representatives by notice to the Company (i) if at or prior to the Closing Date or, as relates to the Option Shares only, prior to any Option Closing Date trading in securities generally or on the Nasdaq National Market shall have been suspended or minimum prices shall have been established on such market, or a banking moratorium shall have been declared by New York or United States authorities, (ii) if at or prior to the Closing Date or any Option Closing Date there shall have been (A) a major outbreak or significant escalation of hostilities between the United States and any foreign power or any other insurrection or armed conflict involving the United States or (B) any change in financial markets or any calamity or crisis which, in the sole judgment of the Representatives, makes it impractical or inadvisable to offer or sell the Firm Shares or Option Shares, as applicable, on the terms contemplated by the Prospectus, (iii) if there shall be any litigation or proceeding, pending or threatened to which the Company is a party, which in the reasonable judgment of the Representatives, makes it impracticable to offer or deliver the Firm Shares or Option Shares, as applicable, on the terms contemplated by the Prospectus or (iv) if there shall have occurred any of the events specified in the immediately preceding clauses (i) - (iii) together with any other such event that makes it, in the judgment of the Representatives, impracticable to offer or deliver the Firm Shares or Option Shares, as applicable, on the terms contemplated by the Prospectus. 25 11. Reimbursement of Underwriters. Notwithstanding any other provisions hereof, if this Agreement shall not become effective by reason of any election of the Company pursuant to Section 10 or shall be terminated by the Representatives under Section 8 or Section 10, the Company will bear and pay the expenses specified in Section 5(a) hereof and, in addition to its obligations pursuant to Section 8 hereof, the Company will reimburse the reasonable out-of-pocket expenses of the several Underwriters (including reasonable fees and disbursements of counsel for the Underwriters) incurred in connection with this Agreement and the proposed purchase of the Shares to a maximum of $75,000, and promptly upon demand the Company will pay such amounts to you as Representatives. 12. Substitution of Underwriters. If any Underwriter or Underwriters shall default in its or their obligations to purchase Shares hereunder and the aggregate number of Shares which such defaulting Underwriter or Underwriters agreed but failed to purchase does not exceed 10% of the total number of Shares underwritten, the other Underwriters shall be obligated severally, in proportion to their respective commitments hereunder, to purchase the Shares which such defaulting Underwriter or Underwriters agreed but failed to purchase. If any Underwriter or Underwriters shall so default and the aggregate number of Shares with respect to which such default or defaults occur is more than 10% of the total number of Shares underwritten and arrangements satisfactory to the Representatives and the Company for the purchase of such Shares by other persons are not made within 48 hours after such default, this Agreement shall terminate. If the remaining Underwriters or substituted Underwriters are required hereby or agree to take up all or part of the Shares of a defaulting Underwriter or Underwriters as provided in this Section 12, (i) the Company shall have the right to postpone the Closing Dates for a period of not more than five full business days in order that the Company may effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees promptly to file any amendments to the Registration Statement or supplements to the Prospectus which may thereby be made necessary, and (ii) the respective numbers of Shares to be purchased by the remaining Underwriters or substituted Underwriters shall be taken as the basis of their underwriting obligation for all purposes of this Agreement. Nothing herein contained shall relieve any defaulting Underwriter of its liability to the Company or the other Underwriters for damages occasioned by its default hereunder. Any termination of this Agreement pursuant to this Section 12 shall be without liability on the part of any non-defaulting Underwriter or the Company, except for expenses to be paid or reimbursed pursuant to Section 5 and except for the provisions of Section 6. 13. Notices. All communications hereunder shall be in writing and, if sent to the Underwriters shall be mailed, delivered or telecopied and confirmed to the Representatives c/o First Colonial Securities Group, Inc., 1499 West Palmetto, Suite 312, Boca Raton, FL 33486 (telecopier no.: (561) 750-3342), Attention: Ben Lichtenberg, Director of Investment Banking, with a copy to Klehr, Harrison, Harvey, Branzburg & Ellers LLP, 1401 Walnut Street, Philadelphia, PA 19102 (telecopier no. (215) 568-6603), Attention: Stephen T. Burdumy, Esquire, except that notices given to an Underwriter pursuant to Section 6 hereof shall be sent to such Underwriter at the address furnished by the Representatives or, if sent to the Company, shall be mailed, delivered or telecopied 26 and confirmed at 747 Third Avenue, 3rd Floor, New York, NY 10017 (telecopier no.: (212) 759-3338), Attention: Gary C. Granoff, Esquire, with a copy to Stursburg & Veith, 405 Lexington Avenue, 49th Floor, New York, NY 10174-4902 (telecopier no.: (212) 922-0995), Attention: Walter Stursburg, Esquire. 14. Successors. This Agreement shall inure to the benefit of and be binding upon the several Underwriters, the Company and their respective successors and legal representatives. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person other than the persons mentioned in the preceding sentence any legal or equitable right, remedy or claim under or in respect of this Agreement, or any provisions herein contained, this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of such persons and for the benefit of no other person; except that the representations, warranties, covenants, agreements and indemnities of the Company contained in this Agreement shall also be for the benefit of the person or persons, if any, who control any Underwriter or Underwriters within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, including its officers, directors, employees, advisors and attorneys and the indemnities of the several Underwriters shall also be for the benefit of each director of the Company, each of its officers who has signed the Registration Statement and the person or persons, if any, who control the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act. 15. Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware. 16. Authority of the Representatives. In connection with this Agreement, the Representatives will act for and on behalf of the several Underwriters, and hereby represent that they are authorized so to act, and any action taken under this Agreement by the Representatives, will be binding on all the Underwriters. 17. Partial Unenforceability. The invalidity or unenforceability of any Section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other Section, paragraph or provision hereof. If any Section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make it valid and enforceable. 18. General. This Agreement constitutes the entire agreement of the parties to this Agreement and supersedes all prior written or oral and all contemporaneous oral agreements, understandings and negotiations with respect to the subject matter hereof. In this Agreement, the masculine, feminine and neuter genders and the singular and the plural include one another. The section headings in this Agreement are for the convenience of the parties only and will not affect the construction or interpretation of this Agreement. This Agreement may be amended or modified, and the observance of any term of this Agreement may be waived, only by a writing signed by the Company and the Representatives. 27 19. Counterparts. This Agreement may be signed in two or more counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. If the foregoing correctly sets forth our understanding, please indicate your acceptance thereof in the space provided below for that purpose, whereupon this letter and your acceptance shall constitute a binding agreement between us. Very truly yours, AMERITRANS CAPITAL CORPORATION By:____________________________ Name: Title: Accepted and delivered as of the date first above written: FIRST COLONIAL SECURITIES GROUP, INC. AUERBACH, POLLAK & RICHARDSON Acting on their own behalf and as Representatives of the several Underwriters referred to in the foregoing Agreement. By: First Colonial Securities Group, Inc. By:_______________________ Name: Title: 28 SCHEDULE I
Number of Number of Firm Shares to Option Shares to Name be Purchased be Purchased - ---- ------------ ------------ First Colonial Securities Group, Inc. Auerbach, Pollak & Richardson, Inc. - ----------------------------- ------------- -------------- Total................................
SCHEDULE II Party to Lock-up Agreement Period EX-99.I.2 5 EXHIBIT-99.I.2 AMERITRANS CAPITAL CORPORATION NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN This Non-Employee Director Stock Option Plan dated _________, 1999 (the "Plan") governs options to purchase Common Stock, $0.001 par value (the "Common Stock"), of Ameritrans Capital 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 $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. (a) No Right to Continue as a Director. Neither the Plan nor the granting of an Option or any other action taken pursuant to the Plan, shall constitute an agreement or understanding, express or implied that the Company will retain an optionee as a Director for any period of time or at any particular rate of compensation. (b) No Stockholders' Rights for Options. No Director shall have any rights as a stockholder with respect to the shares covered by his or her Option until the date he or she exercises such Option and pays the Option price to the Company, and no adjustment will be made for dividends or other rights for which the record date is prior to the date such Option is exercised and paid for. 8. Amendment or Termination. The Board may amend, suspend or terminate the Plan or any portion thereof at any time, subject to any stockholder approval that the Board determines to be necessary or advisable, provided that the Participant's consent will be required for any amendment, suspension or termination that would adversely affect the rights of the Participant under any outstanding Options. 9. No Fractional Shares. All grants of Options shall be rounded to the nearest whole share and no Options representing fractional shares shall be issued. 10. Governing Law. The provisions of the Plan shall be governed by and interpreted in accordance with the laws of the State of New York. 11. Successor to Elk Associates Funding Corporation Non-Employee Director Stock Option Plan. (a) Notwithstanding anything herein, this Plan shall be effective only upon the consummation of a Share Exchange Plan with Elk Associates Funding Corporation ("Elk") pursuant to which each outstanding share of the common stock, par value $0.01 per share of Elk (the "Elk Common Stock"), would vest in the Company, Elk would become a wholly-owned subsidiary of Ameritrans, and the holders of all the outstanding shares of Elk Common Stock would become the stockholders of the Company and receive one share of the Company for each share of Elk owned (the "Share Exchange"). (b) Upon completion of the Share Exchange, and without any further action on the part of the Company or of Elk, this Plan will be deemed to be the successor plan to the Elk Associates Funding Corporation Non-Employee Director Stock Option Plan (the "Elk Director Plan"), election or appointment as a director of Elk will be deemed to be election or appointment as a director of the Company for purposes of Sections 6(a) and (b) hereof, and options issued under Section 6(a) (Initial Grant of Options) of the Elk Director Plan will be deemed to have been issued pursuant to this Plan, and (iii) upon consummation of the Share Exchange, options, if any, granted under the Elk Director Plan would be treated as options granted under this Plan and will be exercisable only to purchase shares of the Company's Common Stock. THIS PLAN WAS APPROVED BY THE BOARD OF DIRECTORS ON ________ __, 1999. THIS PLAN WAS APPROVED BY THE STOCKHOLDERS ON ____________ __, 1999. THIS PLAN WAS APPROVED BY THE SECURITIES AND EXCHANGE COMMISSION ON ___________ __, 199__. EX-99.J.1 6 EXHIBIT-99.J.1 CUSTODIAN AGREEMENT This CUSTODIAN AGREEMENT is dated as of September 9, 1993, and made among ELK ASSOCIATES FUNDING CORPORATION, a New York corporation ("Borrower"), and BANK LEUMI TRUST COMPANY OF NEW YORK, ISRAEL DISCOUNT BANK OF NEW YORK, BANK HAPOALIM B.M. AND EXTEBANK (collectively, the "Banks"), and the U.S. SMALL BUSINESS ADMINISTRATION ("SBA") (the Banks and the SBA, collectively, the "Lenders"), and ISRAEL DISCOUNT BANK OF NEW YORK, as Custodian for the Banks and SBA (in such capacity, the "Custodian"). RECITALS WHEREAS, the Banks and SBA have entered into an Intercreditor Agreement dated as of the date hereof with Borrower (as hereafter amended or otherwise modified from time to time, the "Intercreditor Agreement"); WHEREAS, Borrower has granted a security interest in its assets to the Banks and SBA, including but not limited to all notes, security agreements, financing statements, assignments of financing statements, and other instruments and securities from time to time hereafter delivered to or otherwise held by the Custodian for or on behalf of the Banks and SBA (all such assets to be held by the Custodian, collectively, the "Custodian Collateral"), as collateral security for the prompt payment in full when due, whether at stated maturity, by acceleration or otherwise, of certain obligations; and WHEREAS, the parties hereto intend that Borrower deliver to the Custodian the Custodian Collateral and the Custodian accept and hold the Custodian Collateral in accordance with the terms of this Custodian Agreement; NOW, THEREFORE, in consideration of the foregoing and the agreements, provisions and covenants contained herein, Borrower, the Custodian, SBA and each of the Banks hereby agree as follows: 1. Definitions. The terms in this Custodian Agreement unless otherwise specified shall have the same meaning as in the Intercreditor Agreement. 2. Appointment of Custodian. The Custodian is hereby appointed to act as agent for the Banks and SBA hereunder and agrees to accept, hold and deliver the Custodian Collateral in accordance with the terms hereof. Each Lender hereby designates and appoints Custodian to act as agent and (and each Bank hereby designates and appoints the Custodian to act as attorney-in-fact) for and on behalf of each of the Lenders to take such action on behalf of the Lenders under those provisions of the Loan -1- Agreements and the SBA Security Agreement, as the case may be, which relate solely to the Custodian Collateral, and to exercise such powers and to perform such duties, with respect to the management, supervision, servicing, administration and disbursement of the Custodian Collateral (including, without limitation, perfecting such Lender's security interest in the Custodian Collateral by filing financing statements, holding physical possession of instruments or otherwise) and the payments or amounts realized or recovered from the Custodian Collateral as are specifically delegated to or required of Custodian by the terms of this Agreement, together with such other powers as are incidental thereto, with, subject to approval by all Lenders, (1) full power of substitution and (2) the power to select one or more sub-agents or designees to carry out certain specific powers and obligations of Custodian pursuant hereto. The power of attorney granted hereby being coupled with an interest is irrevocable while this Agreement remains in effect. 3. Delivery of Custodian Collateral to Custodia. All notes, security agreements, financing statements, assignments of financing statements, participation agreements/interests and other instruments and securities presently held or hereafter acquired by Borrower shall be assigned to the Custodian, contain the endorsement set forth on Exhibit C attached hereto, and be delivered to and held by the Custodian pursuant hereto. Custodian acknowledges that each Lender has been granted a security interest in the Custodian Collateral and agrees to hold any portion of the Custodian Collateral in possession of the Custodian as bailee for the benefit of each Lender. 4. General Powers of Custodian. Lenders agree that Custodian shall have the right to and shall exercise the following powers as long as this Agreement remains in effect: (a) maintain, in accordance with its customary business practices, records reflecting the status of the Custodian Collateral; (b) subject to the terms of the Loan Agreements and the SBA Agreement, execute and/or file in its name as Custodian for the benefit of the Lenders any and all financing or similar statements or notices, amendments, renewals, supplements, documents, instruments, proofs of claim for the Banks, notices and other written agreements with respect to the Custodian Collateral and hold and maintain physical possession of the instruments constituting Custodian Collateral; (c) upon notice to Borrower (unless the giving of such notice would create a delay which would impair the Custodian Collateral), incur and pay such reasonable expenses as Custodian may deem necessary or appropriate for the performance and fulfillment of its functions and powers pursuant to this Agreement. -2- 5. Release of Custodian Collateral to Borrower: Loan Information. (a) Borrower shall be entitled to remove and the Custodian shall be required to deliver to Borrower, or allow Borrower access to any of the Custodian Collateral, in connection with any payment, refinancing, satisfaction or amendment, provided that (i) Borrower provides the Custodian with a written certification specifying for which type of event the removal is being requested, and (ii) no Event of Default has been declared under the Intercreditor Agreement, or if any Event of Default under the Intercreditor Agreement has been declared, such Event of Default has been cured. In the event Borrower intends to sell all or a portion of Borrower's interest in any note or other evidence of indebtedness, including but not limited to any participation interest proposed to be sold by Borrower, such sale may be made by Borrower in its sole discretion and the Custodian shall deliver to Borrower, or allow Borrower access to the related Custodian Collateral, so long as Borrower provides the Custodian with a written certification that the net proceeds from such sale will be utilized immediately to reduce Borrower's Senior Indebtedness and the proceeds are so utilized; provided further, however, in the event Borrower does not intend to utilize the proceeds to repay the Senior Indebtedness, it will notify the SBA, the Banks and the Custodian in writing, which may be done by facsimile, of the proposed sale (i) at least five (5) business days prior to the date of the proposed transaction if the transaction involves proceeds of not more than $500,000, which proceeds will be utilized for purposes other than reducing the Senior Indebtedness and (ii) at least six (6) business days prior to the date of the proposed transaction if the transaction involves proceeds of more than $500,000, which proceeds will be utilized for purposes other than reducing the Senior Indebtedness. If the SBA and the Banks do not object to the proposed transaction within the applicable time period, the Borrower shall be entitled to proceed with the transaction and the Custodian shall deliver to Borrower, or allow Borrower access to the related Custodian Collateral. If the SBA or the Banks object within the time period specified, the grounds of which objection shall not be unreasonable, they shall do so in writing to the Borrower and the Custodian, stating in reasonable detail the basis for such objections. Written notice from the Borrower to the SBA, the Banks and the Custodian, as required above shall set forth (i) the identity of the Borrower, (ii) the date the loan was entered into, (iii) the current loan balance as carried on the Borrower's books, (iv) the collateral securing the loan and the value thereof as estimated by Borrower, (v) the consideration to be received by Borrower and (vi) the use of the proceeds arising from the sale of the loan or interest in such loan. -3- (b) Notwithstanding the foregoing, upon the occurrence of an Event of Default as defined in the Intercreditor Agreement, the Borrower shall be entitled to remove the Custodian Collateral only (i) upon substitution of collateral of equal value, such valuation to be subject to the reasonable confirmation by the SBA and the Banks, or (ii) by payment of cash in an amount equal to the gross proceeds resulting from the sale of the collateral or from routine loan repayments. Any such payment in cash shall either, at the election of Borrower in its sole discretion, (A) be utilized to repay the Senior Indebtedness or (B) be held by the Custodian as part of the Custodian Collateral, provided that if the Borrower cures each Event of Default and no Event of Default exists and is continuing, Borrower may remove such cash, but only if it notifies SBA and the Banks in writing at least six (6) business days prior to such proposed removal and SBA and the Banks do not reasonably object within such time period. (c) Prior to the occurrence of an Event of Default, Borrower shall have the sole right to issue pay-off letters and/or to furnish any pay-off or other information to third parties regarding the status of any loan which is secured by any of the Custodian Collateral. Custodian shall direct to Borrower's attention any inquiry from any person relating to pay-off information, collection and/or payment or any other matter relating to any loan made by Borrower. In connection therewith, Custodian shall issue in respect of any such inquiry a letter substantially in the form of Exhibit A attached hereto. In addition, upon written certification from Borrower that a loan has been repaid in full, Custodian shall promptly deliver to Borrower an executed UCC-3 Termination Statement with respect to such loan. 6. Representations and Warranties. Borrower represents and warrants that the following statements are true, correct and complete: a) Borrower has full power and authority to enter in this Custodian Agreement and Borrower shall be bound to its terms; b) Borrower is the legal and beneficial owner of the Custodian Collateral free and clear of any lien except for the liens and security interests created by (i) the Security Agreement between Borrower and SBA, (ii) the respective security agreements between Borrower and the Banks and (iii) any security agreements between Borrower and Third Party Participants (as defined in the Security Agreement) with respect to any specific Custodian Collateral in which such participant is assigned an interest; and -4- c) the Custodian Collateral delivered to the Custodian pursuant to this Custodian Agreement consists of all the notes, security agreements, copies of financing statements, assignments of financing statements, participation agreements/interests and other instruments and securities presently owned or held by Borrower. d) Each obligation owed to the Borrower evidenced by notes and documents delivered to the Custodian is a valid, binding, and unconditional obligation owed to the Borrower, payable in accordance with the terms of each such note or document and to the best of Borrower's knowledge, information and belief, there is no defense, counterclaim or offset to the payment of such obligation. 7. Further Assurances. Borrower agrees that at any time and from time to time, at its expense, it will promptly deliver to the Custodian any further instruments and documents, and take any further actions, that may be necessary or that SBA or the Custodian may reasonably request, in order to carry out the intent of this Custodian Agreement or the Intercreditor Agreement. 8. Other Liens. In connection with the sale of a portion of Borrower's interest as provided in Section 5 hereof, Borrower may create or permit to exist any lien upon or with respect to any of the Custodian Collateral which does not violate any agreement with any Bank or with the SBA and which does not require the release of the Custodian Collateral. Nothing contained in this Section 8 or elsewhere in this Agreement shall affect Borrower's right to substitute a new secured party or add one or more additional secured parties at any time, or from time to time, in its sole discretion, provided such substitute or additional secured parties became parties to the Intercreditor Agreement and this Custodian Agreement and such substitution or addition is in compliance with the Agreement dated the date hereof between the Borrower and the SEA. 9. Standard of Care: No Responsibility for Certain Matters. (a) In dealing with the Custodian Collateral in its possession, Custodian shall exercise such care as a fiduciary exercises with respect to property in its care. The Custodian shall have no right to exercise any of Borrower's rights with respect to the Custodian Collateral, including but not limited to collection of any proceeds from any of Borrower's underlying obligors prior to the occurrence of an Event of Default. (b) Neither Custodian nor any of its officers, directors, employees or agents shall be liable to the Lenders or -5- Borrower for any action taken or omitted to be taken under or in connection with this Agreement, (whether or not such action taken or omitted is within or without Custodian's responsibilities and duties expressly set forth in this Agreement), except as a result of gross negligence or willful misconduct on the part of Custodian or such other persons. Custodian does not assume any responsibility for any failure or delay in performance or breach by Borrower or any Lender of its obligations in this Agreement. (c) Custodian shall be entitled to act, and shall be fully protected in acting upon, any written communication believed by Custodian, in good faith, to be genuine and correct and to have been signed by a proper person or persons or entity. Custodian may consult counsel (other than any counsel affiliated with the Borrower) and shall be entitled to act, and shall be fully protected in any action taken in good faith in accordance with advice given by counsel. Custodian may employ agents and attorneys-in-fact satisfactory to Lenders and reasonably satisfactory to Elk and shall not be liable for the default or misconduct of any such agents or attorneys-in-fact selected by Custodian with reasonable care. (d) The Banks and the SBA expressly acknowledge that neither the Custodian nor any of its officers, directors, employees, or agents have made any representations or warranties or assume any responsibility to the Banks and the SBA with respect to the validity, authenticity, or accuracy of any documents delivered to the Custodian by the Borrower in connection with the Custodian Collateral or with respect to the perfection or enforceability of any security interest in the Custodian Collateral. Upon reasonable request of any Bank or the SBA, the Custodian will provide copies of any documents delivered into its custody by the Borrower to such Bank or the SBA, as the case may be. (e) Each Bank and the SBA represent that it has made and will continue to make, independently and without reliance upon any act, omission, statement, information or representation made or furnished by the Custodian, and based on such documents and information as it has deemed appropriate, its own appraisal of or an investigation into the business, operations, property, financial and other condition and creditworthiness of the Borrower and will continue to do so with regard to any extensions of credit to the Borrower. 10. Certain Rights of Custodian. If Custodian shall request instructions from Lenders with respect to any act or action (including failure to act) in connection with the Custodian Collateral, Custodian shall be entitled to refrain from such act or taking such action unless and until Custodian shall have received instructions from the Lenders and Custodian shall not incur liability to any Lender by reason of so refraining. Custodian shall be entitled to act or refrain from acting, and in -6- all cases shall not be liable to any other Lender in acting or refraining from acting under this Agreement, in accordance with any instructions from Lenders. 11. Remedies upon Default. If any Event of Default shall have occurred and be continuing, the Custodian shall continue to hold the Custodian Collateral subject to the rights of the parties. The Banks shall further have the right if any Event of Default shall have occurred and be continuing to commence foreclosure proceedings with respect to the Custodian Collateral and upon thirty (30) days prior written notice to both the Borrower and the Custodian, the Banks and the SBA shall have all rights accorded secured creditors as provided in Article 9 of the New York Uniform Commercial Code, including the right to sell the Custodian Collateral, subject to the terms of the Intercreditor Agreement. Nothing contained in this paragraph shall be interpreted as restricting in any way the SBA's ability to exercise the rights and remedies available to it under the Act or applicable regulation. 12. Resignation and Removal; Appointment of Successor Custodian. The Custodian shall at all times have the right to resign as Custodian without the consent of the Lenders upon fifteen (15) business days prior written notice to each of the Lenders. Upon the resignation of the Custodian and subject to the approval of SBA and the Banks (which approval shall not be unreasonably withheld), and provided no Event of Default exists and is continuing, Borrower may appoint a successor Custodian provided such successor Custodian is a bank or trust company licensed to operate in New York State. The Custodian may be removed by Borrower, the Banks or SBA at any time upon thirty (30) days prior written notice provided Borrower has appointed a successor Custodian approved by SBA and the Banks (which approval shall not be unreasonably withheld) which has agreed to serve in such capacity and such successor Custodian is a bank or trust company licensed to operate in New York State. Upon its appointment, the successor Custodian shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Custodian under this Custodian Agreement, and the retiring Custodian under this Custodian Agreement shall promptly deliver to such successor Custodian all Custodian Collateral held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Custodian as depository under this Custodian Agreement, whereupon such retiring Custodian shall be discharged from its duties and obligations under this Custodian Agreement. 13. Reports by Custodian. The Custodian shall deliver to the respective parties to this Agreement at the addresses and in the manner set forth in the Intercreditor Agreement within thirty (30) days of the end of each three month period, commencing with the period ending December 31, 1993, a report in -7- the form of Exhibit B, attached hereto itemizing the Custodian Collateral maintained by the Custodian as of the last business day of such three month period. 14. Custodian Fee. The fee charged by the Custodian for its services in connection with the performance of its duties hereunder shall be payable by Borrower. In the event of a resignation by the Custodian, any unearned and prepaid fees shall be refunded to Borrower. Custodian may incur and pay reasonable costs and expenses to the extent it deems reasonably necessary or appropriate for the performance and fulfillment of its functions, powers and obligations pursuant to this Agreement including without limiting the generality of the foregoing, court costs, attorneys' fees, and insurance premiums paid to maintain the Custodian Collateral, whether or not Borrower is obligated to reimburse Custodian or Lenders for such expenses pursuant to the Loan Agreements or otherwise. Lenders shall be responsible for reimbursing Custodian for their pro rata share of such costs and expenses. 15. No Waiver. No failure on the part of the Custodian to exercise, and no course of dealing with respect to, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof;. nor shall any single or partial exercise by the Custodian of any right, power or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies herein provided are to the fullest extent permitted by law cumulative and are not exclusive of any remedies provided by law. 16. Amendments Etc. No amendment, modification, termination or waiver of any provision of this Custodian Agreement shall in any event be effective without the written agreement of the parties. Any amendment, modification, termination or waiver of any provisions of this Agreement or any other agreement respecting only the Lenders' relationship among themselves shall not require the concurrence of Borrower. Any waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. Any provision of this Section respecting Lenders' relationship among themselves are solely for the benefit of Custodian and Lenders and neither the Borrower nor any other person shall have any rights to rely on, inquire into, or enforce any of such provisions. No course of dealing between Borrower (or other person at any time liable on or in respect of the Obligations) and either Custodian or Lenders nor any delay in exercising any rights hereunder or under the Loan Agreements or the SBA Security Agreement shall operate as a waiver of any rights of Custodian or Lenders. 17. Notices. Except as otherwise specifically provided herein, all notices shall be given in accordance with the Intercreditor Agreement. -8- 18. Governing Law; Terms. This Custodian Agreement shall be governed by, and shall be construed and enforced in accordance with, the laws of the State of New York. 19. Term. This Agreement shall become effective upon the date hereof and shall continue in full force and effect until the indefeasible payment and satisfaction in full of all obligations of the Borrower to the Lenders and the irrevocable termination of the Loan Agreements and the SBA Agreement, as the case may be. Termination of this Agreement shall not affect the respective rights or obligations hereunder incurred prior to the effective date of such termination. 20. No Benefit to Third Parties. The terms and provisions of this Agreement shall be for the sole benefit of the Banks, the SBA and the Custodian and their permitted successors and assigns and no other person, firm, entity or corporation, including, but not limited to, the Borrower, shall have any right, benefit, priority or interest under, or because of the existence of this Agreement. 21. Consent to Jurisdiction; Service of Process. Each of the parties other than the SBA consent to the jurisdiction of the Supreme Court of the State of New York and each of the parties consent to the jurisdiction of the United States District Court for the Southern District of New York for all purposes in connection with this Agreement. Each party further consents that any process or notice of motion or other application to either of said courts or a Judge thereof, or any notice in connection with any proceedings hereunder, may be served inside or outside the State of New York or Southern District of New York by registered or certified mail, return receipt requested, or by personal service provided a reasonable time for appearance is allowed, or in such other manner as may be permissible under the Rules of said Courts. 22. Further Assurances. Each party hereby agrees to execute and/or deliver any and all further documents, instruments or agreements reasonably requested by the other party in order to give effect to, and more fully carry out the terms and provisions of this Agreement. 23. WAIVER OF JURY TRIAL. THE PARTIES HERETO HEREBY WAIVE TRIAL BY JURY IN ANY LITIGATION IN ANY COURT WITH RESPECT TO, IN CONNECTION WITH, OR ARISING OUT OF THIS AGREEMENT, OR ANY INSTRUMENT OR DOCUMENT DELIVERED PURSUANT HERETO, OR THE VALIDITY, PROTECTION, INTERPRETATION, ADMINISTRATION HEREOF OR ANY OTHER CLAIM OR DISPUTE HEREUNDER. 24. Counterparts. This Custodian Agreement may be executed by one or more of the parties on any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same agreement. -9- IN WITNESS WHEREOF, Borrower, the Banks, SBA and the Custodian have caused this Custodian Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first above written. ELK ASSOCIATES FUNDING CORPORATION By: /s/ Gary C. Granoff ----------------------------------------------- Name: Gary C. Granoff Title: President BANK LEUMI TRUST COMPANY OF NEW YORK By: /s/ Melvyn F. Plotzker ------------------------------------------------- Name: Melvyn F. Plotzek Title: S.P. By: /s/ Iris Schechter ------------------------------------------------- Name: Iris Schechter Title: Assistant Vice-President ISRAEL DISCOUNT BANK OF NEW YORK By: /s/ Robert J. Fainelli ------------------------------------------------- Name: Robert J. Fainelli Title: Vice-President By: /s/ Gary M. Solomon ------------------------------------------------- Name: Gary M. Solomon Title: Vice-President -10- BANK HAPOALIM B.M. By: /s/ Barry Shivak ------------------------------------------------- Name: Barry Shivak Title: Vice-President By: /s/ Laura Ann Raffa ------------------------------------------------- Name: Laura Ann Raffa Title: Vice-President EXTEBANK By: /s/ Walter H. Wright ------------------------------------------------- Name: Walter H. Wright Title: Assistant Vice-Pesident U.S. SMALL BUSINESS ADMINISTRATION By: /s/ Wayne S. Foren ------------------------------------------------- Name: Wayne S. Foren Title: ISRAEL DISCOUNT BANK OF NEW YORK, As Custodian By: /s/ Robert J. Fainelli ------------------------------------------------- Name: Robert J. Fainelli Title: Vice-President By: /s/ Gary M. Solomon ------------------------------------------------- Name: Gary M. Solomon Tit1e: Vice-President -11- EXHIBITS OMITTED EX-99.K1A 7 EXHIBIT-99.K1A AGREEMENT THIS AGREEMENT made as of September 9, 1993 between ELK ASSOCIATES FUNDING CORPORATION, a New York Corporation (the "Company"), with offices located at 600 Third Avenue, New York, New York 10016 AND THE UNITED STATES SMALL BUSINESS ADMINISTRATION, located at 409 Third Street, SW, Washington, DC 20416 (the "SBA") W I T N E S S E T H: WHEREAS, the Company is a Specialized Small Business Investment Company ("SSBIC") licensed by the SBA under the Small Business Investment Act of 1958, as amended (the "Act"); and WHEREAS, the Company and the SBA have entered into a letter of intent dated October 1, 1992 (the "Letter of Intent"); and WHEREAS, the parties desire to carry out their intentions as set forth in the Letter of Intent by entering into a definitive agreement with respect to the provisions thereof; NOW, THEREFORE, in consideration of the mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: I. Financial Statement Adjustments. 1.1 The SBA acknowledges that the Company has made certain adjustments to the Company's financial statements for the year ended June 30, 1992, a copy of which financial statements have been delivered to the SBA. The SBA further acknowledges that it has no objection to such financial statements. 1.2 The Company agrees that for the fiscal year ended June 30, 1993, it will make adjustments to its reserve loss account to the extent necessary to comply with the accounting policies and practices for small business investment companies as set forth in Appendix II to Part 107 of Title 13 of the Code of Federal Regulations. II. Retained Earnings Deficit. 2.1 The SBA agrees to permit the Company to carry the retained earnings deficit on its books, which retained earnings deficit results from the adjustments described in Sections 1.1 and 1.2 above, without penalty or violation, until such retained earnings deficit has been reduced to zero, subject to the regulatory limitations relating to capital impairment as set forth in Part 107 of Title 13 of the Code of Federal Regulations, as amended from time to time. III. Indebtedness. 3.1 The company will limit the aggregate of its indebtedness, consisting of senior bank debt and SBA debentures, notes or other borrowings from the SBA, excluding any preferred stock previously or hereafter issued by the Company to the SBA (the "Indebtedness"), to a level not to exceed: (a) 80% of each of the Company's "acceptable" (as hereinafter defined) loans which is secured by a New York City taxicab medallion; and (b) 80% of all other "acceptable" secured loans and investments of the company. An "acceptable" loan or investment is defined as follows: (1) 100% of the principal amount of any loan not in payment default 90 days or more (a "current loan") shall be deemed to be "acceptable"; (2) For any non-current loan secured by a New York City taxicab medallion, the entire principal balance of the Company's ownership share of such non-current loan (a) up to 80% of the then current market value of such medallion provided the Company has taken reasonable steps to exercise its rights to foreclose upon and sell the collateral or to the Company's knowledge a voluntary sale is pending at the New York City Taxi and Limousine Commission or (b) up to 70% of the then current market value of such medallion if the Company has elected not to foreclose; provided, in each case, that the Company is first lienholder and has not released or transferred any rights as such lienholder. Notwithstanding the foregoing, in the event the Company is a second lienholder, an "acceptable" loan shall also include any loan made by the Company which is non-current and which is secured by a New York City taxicab medallion; provided, however, any such loan together with the aggregate loan(s) from first lienholder(s) shall not exceed 70% of the then current market value of such medallion. (3) For any non-current loan secured by real estate or for any assets involved in "in substance foreclosures" in process, 50% of the value of the collateral securing such loan, marked to current market value, provided the Company is the first mortgagee (30% if second or junior 2 mortgagee) and provided the Company has an appraisal acceptable to the SBA which is dated within the preceding 12 months (such acceptance not to be unreasonably withheld). For purposes of obtaining appraisals, the Company agrees to have its loan collateral with respect to non-current loans re-evaluated or appraised each year at or about the time it submits its Form 468; and the Company will submit once each year with its Form 468 a schedule of loan valuations to be utilized in computing the aggregate of acceptable loans; and (4) For assets acquired as a result of the foreclosure of any loan, 50% of the fair market value of the Company's equity ownership in such acquired assets, unless the asset is a New York City taxicab medallion, in which case 100% of the then fair market value of the Company's equity ownership in such medallion. Provided, however, in the event the Company's "Indebtedness" exceeds the maximum permitted as provided herein, the Company will as soon as practicable after it has exceeded such maximum, commence taking all reasonable steps to reduce such "Indebtedness" to the maximum permitted level. Such reduction shall in no event be completed later than December 31, 1996. 3.2 Either the SBA or the Company may request a review of the percentages and terms utilized in calculating the amount of "acceptable" loans set forth herein within 90 days of the end of the Company's fiscal year. 3.3 Subject to Section 8.1 hereof, the parties further agree that the Banks (as defined in Article XII hereof) or other lenders now or hereafter may loan on a senior secured basis, an amount which, when aggregated with the Company's SBA debentures, notes or other SBA borrowings (excluding any preferred stock previously or hereafter issued by the Company to the SBA) does not exceed the maximum "Indebtedness" provided for in Section 3.1 above. IV. Removal of Diversification Requirement. 4.1 The SBA agrees that the requirement that the Company maintain certain non-taxicab medallion secured loans in the amount of $3,448,000 is removed and, accordingly, the Company is no longer required to maintain any level of non-taxicab medallion secured loans. V. Refinancing. 5.1 The SBA agrees to rollover for ten years, subject to the terms of a certain Intercreditor Agreement (as hereinafter defined) of even date, the existing $1.925 million of demand debentures as of the date of the SBA-guaranteed funding next ensuing the 3 execution of this Agreement. In addition, the SBA agrees that the Company's Private Capital (as defined in 13 CFR Sec. 107.3), $5,490,385 as of the date of this Agreement, shall be calculated without giving effect to the retained earnings deficit resulting from the adjustments described in Section 1.1. hereof for purposes of (a) "rolling over" any of the Company's debentures other than those referred to above; and (b) applying for new leverage from the SBA. VI. Grant of Security Interest. 6.1 The SBA's performance under this Agreement is conditioned upon the SBA's receipt of a perfected security interest in all of the Collateral (as defined in the Security Agreement (defined below)), second only to the security interest of the Banks. Contemporaneously with the execution of this Agreement, the Company will execute a security agreement (the "Security Agreement") in favor of the SBA and the Company agrees to execute Form UCC-1 Financing Statements in the forms attached hereto as Exhibit A. Such grant of a security interest will be subject to the rights of the Company's senior lenders, as may exist from time to time, as provided under the Company's respective loan agreements with each of such senior lenders, copies of which loan agreements are attached hereto as Exhibits B1-B4. In connection therewith, the SBA will execute an inter-creditor agreement with the Company's senior lenders (the "Inter-Creditor Agreement") in the form attached hereto as Exhibit C, acknowledging the SBA's secured position, which Inter-Creditor Agreement will, among other things, contain cross-notice provisions among the parties in the event of a default by the Company; 6.2 In order to allow the SBA to perfect its lien on Company assets, the parties are simultaneously entering into a custodian agreement (the "Custodian Agreement") with a third party (satisfactory to the SBA) and with the Company's Banks, in the form attached hereto as Exhibit D, pursuant to which the Company will immediately turn over to such third party all original notes, mortgages, security agreements and other documents now held by the Company, the possession of which is necessary to perfect a lien thereon. The Company agrees to bear the expenses in connection therewith. 6.3 The SBA acknowledges that it has advised the Company that the SBA's present policy is generally to obtain a security interest in collateral owned by Small Business Investment Companies or Specialized Small Business Investment Companies licensed under the Act which have secured indebtedness senior to the indebtedness owed to the SBA by such licensees. In the event SBA significantly changes this policy in the future, or if SBA fails to implement, or 4 take significant steps toward the implementation of this policy with other licensees within eighteen months from the date hereof by having such licensees enter into substantially similar agreements as the Company is executing on the date hereof, SBA agrees to notify the Company of the change of such policy, or that it has failed to implement, or take significant steps toward the implementation of this policy with other licensees. In such event, the Company shall request SBA to execute and deliver to the Company all necessary documents to terminate the security interest granted by the Company to SBA, and SBA agrees that consent to such request shall not be unreasonably withheld. VII. SBA Acceptance of Application for New Leverage and Repurchase of Preferred Stock. 7.1 The SBA agrees to accept for consideration the Company's applications for the sale of additional debentures from time to time which the Company is entitled to apply for based upon its capital, subject to the terms of this Agreement. 7.2 The SBA agrees that none of the audits conducted by the SBA Inspector General's office as of the date of this Agreement shall prevent the Company from submitting an application for leverage in connection with the sale of preferred stock or debentures or from taking any other action normally permitted to be taken by SSBICs. 7.3 Subject to final rules and policies, the SBA agrees to permit the Company to apply to participate in the first round (after the pilot round of nine SSBICs) of SSBICs that repurchase from the SBA the 3% cumulative preferred stock previously sold to the SBA. 7.4 The SBA makes no commitment to guarantee additional debentures, to purchase preferred stock or to permit the Company to repurchase its 3% cumulative preferred stock at a discount. VIII. Payment of Dividends and Limitation of Senior Indebtedness. 8.1 The Company agrees (a) not to pay or declare any dividends in the future and (b) not to incur senior debt, including the aggregate amount of its credit lines, in excess of the current level of nine million ($9,000,000) dollars principal amount (excluding interest, costs and legal fees whether or not such items are ultimately included in principal), until such time as the Company has achieved positive retained earnings or has received a capital contribution of cash in an amount equal to its then negative retained earnings, as determined in accordance with the accounting policies and practices for small business investment companies as set forth in Appendix II to Part 107 of Title 13 of the Code of Federal Regulations. 5 IX. Compliance with Investment Company Act of 1940. 9. 1 The SBA acknowledges that the Company is a registered investment company, registered under the Investment Company Act of 1940 (the "'40 Act"), and that the SBA will not require the Company to take any action or refrain from taking any action necessary in the opinion of the Company's counsel to comply with the 140 Act; provided, however, the company will not take any action, or refrain from taking any action, if to do so would violate any SBA regulation. X. Termination of Investigation. 10.1 On January 28, 1993, the SBA provided the Company with a formal stipulation and resolution of the investigation of certain matters previously referred to the Office of the Inspector General (the "Investigation"), a copy of which stipulation has been furnished to the parties hereto (the "Stipulation") and incorporated by reference herein. Except as otherwise set forth in the Stipulation, the SBA further acknowledges and agrees, with respect to the Investigation, the Company is not presently subject to any further inquiry, investigation, regulatory review, restriction or penalty by SBA. XI. Reporting. 11.1 The Company agrees to provide financial statements and financial information to the SBA as follows: (a) (i) for the first fiscal quarter ending September 30, a financial statement (compilation statement) prepared internally by management, (ii) for the six month period ending December 31, a review statement prepared by the Company's independent certified public accountants for such period, (iii) for the nine month period ending March 31, a financial statement (compilation statement) prepared internally by management, and (iv) for the twelve month period ending June 30, the company will provide an audited financial statement; (b) simultaneously with the delivery of the financial information for each of the four periods set forth in (a) above, the Company will provide a summary of the computation of the amount of "acceptable" loans and total Indebtedness as described herein; and (c) the Company will provide the information referred to in subparagraphs (a) and (b) above within 60 days following the end of each fiscal quarter ending September 30 and March 31 and within 90 days following the end of each of the periods ending December 31 and June 30. 6 XII. Consent of Senior Lenders. 12.1 The Company has entered into loan agreements with the following banks: (i) Israel Discount Bank of New York, (ii) Bank Leumi Trust Company of New York, (iii) Extebank and (iv) Bank Hapoalim (each of the foregoing banks being individually referred to as a "Bank" and collectively, as the "Banks"). The Company has entered into an Intercreditor Agreement with the Banks and the SBA as of the date hereof pursuant to which the Banks have consented to the terms of this Agreement. XIII. Representations and Warranties. 13.1 Company's Representations and Warranties. The Company represents and warrants that: (a) the Company is a corporation duly organized and validly existing, in good standing, under the laws of the State of New York and has the corporate power and authority to enter into and to carry out the terms of this Agreement, including the Exhibits hereto. (b) the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on behalf of the Company and, except as otherwise described in this Agreement and the Exhibits hereto, the Company is not subject to any charter, bylaw, lien, encumbrance of any kind, agreement, instrument, order, or decree of any court or governmental body (other than any governmental approval required) which would prevent consummation of the transactions contemplated by this Agreement. 13.2 SBA's Representations and Warranties. The SBA represents and warrants that: (a) the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby to be performed by SBA have been duly authorized by all necessary action by or on behalf of the SBA and the SBA is not presently subject to any statute, regulation, agreement, instrument, order or decree of any court or governmental body which would prevent the consummation of the actions contemplated by this Agreement, including the Exhibits hereto. (b) the Investigation has been resolved and terminated pursuant to the Stipulation and no further action will be taken by the SBA with respect to the matters which were the subject of such Investigation so long as the Company is in compliance with the Stipulation. 7 XIV. Affect of Non-Performance. 14.1 Non-performance of any of the terms of this Agreement by the Company may be deemed also to be a violation of 13 CFR Sec. 107.906(a). XV. Press Release. 15.1 The SBA agrees and acknowledges that as soon as practicable after the execution of this Agreement, the Company may issue a press release announcing certain of the transactions contemplated in this Agreement. XVI. Assignment. 16.1 This Agreement will not be assigned or transferred by either party without the prior written consent of the other. XVII. Notices. 17.1 Any notices required or permitted to be given under this Agreement will be sufficient if in writing and if sent by registered mail, by overnight courier, or telefacsimile, as follows: A. To the Company: ELK ASSOCIATES FUNDING CORPORATION 600 Third Avenue Suite 3810 New York, New York 10016 Attn: Gary C. Granoff, Esq. Telecopy: 212-983-0571 With a Copy to: Stursberg & Veith 405 Lexington Avenue Suite 4949 New York, New York 10174-4902 Attn: C. Walter Stursberg, Jr., Esq. Telecopy: 212-922-0995 8 B. To the SBA: U.S. SMALL BUSINESS ADMINISTRATION Office of Investment 409 Third Street SW Washington, DC 20416 Attn: Director, Office of Investment Telecopy: 202-205-6959 With a Copy to: U.S. SMALL BUSINESS ADMINISTRATION Office of General Counsel 409 Third Street SW, Suite 7200 Washington, DC 20416 Attn: Chief Counsel for Investment. Telecopy: 202-205-6846 or to such other persons or addresses as may from time to time be designated by either of the parties in writing. Any such notice shall be deemed given upon receipt. XVIII. Waiver. 18.1 Waiver by either party of the breach of any provisions of this Agreement will not operate or be construed as a waiver of any subsequent such breach by the offending party. No failure or delay in exercising any right, remedy, power or privilege hereunder shall operate as a waiver thereof. XIX. Entire Agreement. 19.1 All prior negotiations, discussions and agreements by and between the parties and/or their representatives, concerning this Agreement, whether in writing or by parol, are herein merged and engrossed, and there are and will be no other such agreements and/or understandings by the parties other than may be contained herein or in a subsequent amendment or rider to this Agreement executed by the parties with all of the formalities hereto. XX. Severability. 20.1 The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provisions. 9 XXI. Applicable Laws. 21.1 In any case or controversy resulting from this Agreement, the parties agree to the exclusive jurisdiction of the United States District Court for the Southern District of New York. XXII. Effect of Headings. 22.1 The section and paragraph headings herein are for convenience only and shall not affect the construction hereof. XXIII. Counterparts. 23.1 This Agreement may be executed in one or more counterparts, all of which together shall constitute a single agreement. IN WITNESS WHEREOF, the parties have set their hands and seals. ELK ASSOCIATES FUNDING CORPORATION, INC. By: /s/ Gary C. Granoff ------------------------------- Gary C. Granoff Esq., President U.S. SMALL BUSINESS ADMINISTRATION By: /s/ Wayne S. Foren ------------------------------- Wayne S. Foren Associate Administrator for Investment 10 EXHIBITS OMITTED EX-99.K-1-B 8 EXHIBIT 99.K-1-B U.S. SMALL BUSINESS ADMINISTRATION WASHINGTON, D.C. 20416 License No. 02/02-5377 JAN 23, 1997 Gary C. Granoff, President Elk Associates Funding Corporation 747 Third Avenue New York, New York 10017 Dear Mr. Granoff: We have reviewed the request recently submitted by Elk Associates Funding Corporation ("Licensee") for approval to amend Licensee's Articles of Incorporation. The amendment would allow the Licensee to invest in small businesses other than Disadvantaged Businesses (as defined in 13 CFR Section 107.50). It has been determined that the amendment is satisfactory as drafted and hereby approved upon the Licensee's acceptance of the following terms and conditions. By countersigning this letter, which sets forth the terms and conditions of SBA's approval, Licensee hereby agrees to each such term and condition. All capitalized terms used but not defined herein shall have the meanings assigned to such terms in 13 CFR Part 107. 1. Immediately prior to making any investment in a small business other than a Disadvantaged Business (a "Non-Disadvantaged Business Financing"), Licensee must have, in its portfolio, investments in Disadvantaged Businesses with an aggregate cost basis at least equal to the sum of the following, each measured at the time of the Non-Disadvantaged Business Financing: (i) the principal amount of Licensee's outstanding debentures on which SBA is still paying a portion of the interest, (ii) the value of SBA's remaining Liquidating Interest (as defined in Licensee's 3% Preferred Stock Repurchase Agreement with SBA) measured at the time of the Non-Disadvantaged Business Financing. 2. For each Non-Disadvantaged Business Financing, Licensee must prepare and maintain in the portfolio concern financing files, a supplemental worksheet demonstrating Licensee's compliance with Item #1 above. 3. Each Non-Disadvantaged Business Financing by Licensee will be subject to the 20% overline limitation applicable to financings by Section 301(c) Licensees (as set forth in 13 CFR Section 107.740(a)(1)). Each financing of a Disadvantaged Business by Licensee will be subject to the 30% overline limitation applicable to financings by Section 301(d) Licensees (as set forth in 13 CFR Section 107.740(a)(2)). 2 4. Licensee's maximum permitted capital impairment percentage will continue to be 75% until Licensee issues new Leverage or "rolls over" existing Leverage. For purposes of the new or rollover Leverage only, Licensee's maximum permitted capital impairment percentage will be the relevant percentage applicable to a Section 301(c) Licensee under 13 CFR Section 107.1830(c)(2). 5. Licensee may continue to treat the amount in its Restricted Contributed Capital Surplus Account as Regulatory Capital for purposes of computing its overline limitation under 13 CFR Section 107.740 and its capital impairment under 13 CFR Section 107.1840. This letter agreement, if countersigned by Licensee, will constitute a written agreement with SBA and any failure to comply with any of the terms hereof will constitute nonperformance of this agreement under 13 CFR Section 107.507(a). Once executed by Licensee and SBA, this letter agreement shall be in full force and effect until such time as both parties agree in writing to its termination or modification. Please indicate your approval and acceptance of this letter agreement by having an authorized officer execute both copies of this letter, affix the corporate seal, and return both copies to SBA. A signed copy will be returned to you. Upon receipt of the signed copy, Licensee may file the amendment with the appropriate State office and may begin making Non-Disadvantaged Business Financings in accordance with this letter agreement. Licensee should submit a certified copy of the filed amendment to SBA. Sincerely, /s/ Don A Christensen - ---------------------------- Don A. Christensen Associate Administrator for Investment 3 Approved and accepted this 7th day of February, 1997, Elk Associates Funding Corporation By: /s/ Gary C. Granoff ----------------------------- Name: Gary C. Granoff Title: President Corporate Seal Attested /s/ Margaret Chance ---------------------- Margaret Chance Secretary EX-99.K.2 9 EXHIBIT 99.K.2 INTERCREDITOR AGREEMENT THIS INTERCREDITOR AGREEMENT made this 9th day of September, 1993 by and among ISRAEL DISCOUNT BANK OF NEW YORK ("IDB"), EXTEBANK (("EB"), BANK LEUMI TRUST COMPANY OF NEW YORK ("BL"), BANK HAPOALIM B.M. ("BH") (IDB, EB, BL and BH being hereinafter each referred to as a "Senior Lender" or "Bank", or collectively as the "Senior Lenders" or "Banks"), the U.S. SMALL BUSINESS ADMINISTRATION (the "SBA") and ELK ASSOCIATES FUNDING CORPORATION (the "Borrower"). W I T N E S S E T H: WHEREAS, the Senior Lenders have entered into certain loan agreements (collectively, the "Loan Agreements") with the Borrower pursuant to which the Borrower has borrowed funds and from time to time may borrow additional funds as provided in such Loan Agreements; and WHEREAS, the obligations incurred by Borrower under said Loan Agreements are or may be secured, either wholly or partially, by certain collateral as defined in the Loan Agreements (the "Collateral"); and WHEREAS, the security interest of each Senior Lender in the Collateral ranks equally in priority with each other Senior Lender and is senior in right to any other interest, whether secured or unsecured now or hereafter; and WHEREAS, the Borrower is a licensed specialized small business investment company, licensed by the SBA under the Small Business Investment Act of 1958, as amended (the "Act"); and WHEREAS, the Borrower has incurred certain indebtedness through the sale to the SBA of debentures or through the sale of debentures guaranteed by the SBA; and WHEREAS, as of the date of this Agreement the Borrower and the SBA have entered into a security agreement (the "SBA Security Agreement") pursuant to which the Borrower has granted to the SBA a security interest in the Collateral securing obligations which have been or hereafter may be incurred from time to time through the sale to the SBA of debentures, through the sale of debentures guaranteed by the SBA, or through other indebtedness or liability to SBA; and WHEREAS, the security interest of the SBA will rank junior in priority to the security interests of the Senior Lenders; and WHEREAS, simultaneously with the execution of this agreement, the Borrower, the Senior Lenders and the SBA are entering into a custodian agreement (the "Custodian Agreement"), pursuant to which IDB, as custodian (such party and any and all successors hereinafter referred to as the "Custodian") will hold certain collateral (collectively, the "Escrow Collateral") solely for the benefit of the Senior Lenders and the SBA; and WHEREAS, simultaneously with the execution of this agreement, the Borrower and the SBA are entering into an agreement (the "SBA Agreement") relating to, among other things, the permitted amount of total indebtedness the Borrower may incur from time to time; and WHEREAS, it is contemplated that the Borrower may incur (i) additional senior indebtedness either under the Loan Agreements or with other senior lenders and (ii) additional indebtedness through the sale to the SBA of debentures or through the sale of debentures guaranteed by the SBA, each such occurrence of indebtedness to be made in accordance with the terms of the SBA Agreement, SBA Security Agreement, Custodian Agreement and this Agreement; and WHEREAS, the parties desire to set forth their respective rights and priorities with respect to the repayment of indebtedness to the Banks and to the SBA and as to their respective interests in the Collateral, NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto mutually agree as follows: 1. Certain Definitions. 1.1 Event of Default. The following shall constitute an Event of Default: a. In the event Borrower is in default (i) in the payment of any Senior Indebtedness beyond any applicable grace periods or (ii) under any provision of the Loan Agreements other than for the payment of money beyond any applicable grace periods and provided that any of the Senior Lender(s) have "accelerated" their indebtedness; and further as respects either (i) or (ii) above, any Senior Lender has delivered to SBA and Borrower a Notice of Event of Default; or b. Borrower is in default under any Obligation (as defined in the SBA Security Agreement) beyond any applicable grace periods, and the SBA has elected to accelerate the payment of the Obligation(s) as provided for pursuant to SBA Regulations, or the SBA has transferred the Borrower to "liquidation status", as provided for pursuant to SBA Regulations. 2 1.2 Notice of Event of Default. The term "Notice of Event of Default" shall mean a written notice from any Senior Lender or the SBA that one or more Events of Default (as defined in Section 1.1) in respect of Senior Indebtedness and/or the Junior Indebtedness, as hereinafter defined, has occurred and is continuing, describing such Event or Events of Default, which notice shall constitute a notice of the Event or Events of Default described therein. 1.3 Senior Indebtedness and Junior Indebtedness. As used in this Agreement, each of the obligations enumerated in Section 1.3.1 shall at all times constitute "Senior Indebtedness" which indebtedness shall be senior and have priority with respect to all obligations whatsoever enumerated in Section 1.3.2, which obligations shall constitute "Junior Indebtedness". 1.3.1 (Senior Indebtedness): Any and all indebtedness and other obligations including, without limitation, all principal, interest (including all interest accruing after commencement of any case, proceeding or other action relating to the bankruptcy, insolvency or reorganization of the Borrower) charges, expenses, fees and other sums owing by the Borrower under the Loan Agreements from time to time in effect, new or replacement loan agreements with other senior lenders and any refinancing or refinancings of the foregoing including any agreement or agreements increasing the obligations under, extending the maturity of, refinancing or restructuring any of the Loan Agreements, new or replacement loan agreements with other senior lenders or any successor agreement or agreements. The Company agrees that the Senior Indebtedness shall not be increased so that the Company's total indebtedness exceeds the limitations provided for in the SBA Agreement. 1.3.2 (Junior Indebtedness): Any and all indebtedness and other obligations owing by the Borrower to the SBA, including any and all amounts outstanding from time to time under any and all debentures sold to or guaranteed by the SBA (the "Debentures") whether principal, interest or otherwise, plus all fees, expenses, other amounts and other monetary obligations owing pursuant to the Debentures and refinancings of the foregoing, but not including any preferred stock sold to the SBA. 2. Terms of Priority. 2.1 Priority of Senior Indebtedness. Any payment in respect of or to or for the benefit of any Junior Indebtedness is and shall be junior in right of payment and the exercise of any remedy to the prior payment in full of Senior Indebtedness to the extent and in the manner provided for herein. The Borrower agrees to comply with the rights of the holders of Senior Indebtedness and the rights of the SBA (or any holder of Junior Indebtedness), as embodied in the terms and provisions of this 3 Agreement. It is further agreed that Junior Indebtedness shall also be second in priority as a claim against the Borrower or any of the assets of the Borrower to the prior payment in full of Senior Indebtedness, regardless of whether any such claim is made (i) in any distribution of the assets of the Borrower upon any voluntary or involuntary dissolution, winding-up, total or partial liquidation or reorganization, or bankruptcy, insolvency, receivership or other statutory or common law proceedings or arrangements involving the Borrower or the readjustment of the Borrower's liabilities or any assignment for the benefit of creditors or any marshalling of the assets or liabilities of the Borrower (hereinafter collectively referred to as a "Reorganization") or (ii) other than in connection with a Reorganization. 2.2 Event of Default; Repayment of Junior Indebtedness. No payment, direct or indirect, on account of principal or premium, if any, interest or otherwise on or in respect of Junior Indebtedness shall be made to the SBA (or any holder of Junior Indebtedness) if, at the time of such payment, there exists or shall have occurred an Event of Default and the Senior Indebtedness has not been paid in full. 2.3 Distributions in Reorganization. 2.3.1 In the event of any Reorganization, then all Senior Indebtedness owing shall first be paid, before any payment or distribution whatsoever is made upon or in respect of any Junior Indebtedness, and in any such proceedings, any and all payments or distributions of any kind or character, whether in cash, property, securities or otherwise (or any combination of the foregoing), which is or may be payable or deliverable upon, in respect of, or to or for the benefit of such Junior Indebtedness shall be paid or delivered directly first to the Banks, in proportion to the extent they hold Senior Indebtedness, until all such Senior Indebtedness has been paid and satisfied in full. The SBA hereby authorizes the Banks, to the extent they hold Senior Indebtedness, to the extent permitted by law, to accept, receive and retain any and all payments or distributions, it being understood that any monies or other assets so received shall be applied first to the payment in full of the Senior Indebtedness (as set forth above) and any remainder shall be transferred to the SBA (or upon written approval of the SBA to the holders of any of the Junior Indebtedness). If, notwithstanding the foregoing, during any such Reorganization, any payment or distribution of assets of the Borrower of any kind or character, whether in cash, property, securities or otherwise, shall be, directly or indirectly, received by (or the benefit of such payment or distribution shall accrue, directly or indirectly, to) the SBA (or any holder of Junior Indebtedness) before all Senior Indebtedness is paid in full, such payment or 4 distribution shall be immediately paid over first to the Banks, in proportion to the Senior Indebtedness held by each Bank and to the extent they hold Senior Indebtedness, provided all such Banks consent in writing to the proposed distribution, and then, but in no event unless and until all such Senior Indebtedness has been paid in full, to the SBA. 2.3.2 In the event that any Senior Indebtedness is paid in full and subsequently, for whatever reason (including, but not limited to, an order or judgment for disgorgement of a preference under any law regarding reorganization, fraudulent conveyance or fraudulent transfer or the settlement of any claim in respect thereof), former or satisfied Senior Indebtedness becomes unpaid or unsatisfied, then the priorities provided in this Agreement shall again be operative until all such Senior Indebtedness shall have been paid in full. 2.3.3 The provisions of this Agreement shall continue to be effective regardless of whether the Borrower shall have taken advantage of or been subject to any bankruptcy, Reorganization or similar proceeding. 2.4 Effect of Provisions. The provisions hereof as to payment priorities are solely for the purpose of defining the relative rights of holders of Senior Indebtedness, on the one hand, and the SBA (or its assigns) as holders of Junior Indebtedness, on the other hand, and, except to the extent otherwise provided in this Agreement, none of such provisions shall impair, as between the Borrower and the SBA (or any holder of Junior Indebtedness), the obligations of the Borrower, which are unconditional and absolute, to pay the Junior Indebtedness, nor shall any such provisions prevent the SBA from exercising all remedies otherwise permitted by applicable law or under the terms of any agreement governing Junior Indebtedness, as the case may be, upon a default thereunder; provided, however, that to the extent that any terms or provisions of any agreement governing Junior Indebtedness contradict or conflict with any terms or provisions of this Agreement, the terms or provisions in this Agreement shall prevail, except as hereinafter set forth in Section 3 hereof. 3. Escrow Collateral. The parties hereto have entered into the Custodian Agreement pursuant to which the Custodian will hold the Escrow Collateral as security for the Senior Indebtedness and the Junior Indebtedness. If any conflicts arise between this Agreement and the Custodian Agreement with respect to the Escrow Collateral, then the Custodian Agreement shall govern. As provided in the Custodian Agreement, Borrower shall have the right to substitute or add other senior lenders, subject to the limitations on indebtedness set forth in the SBA Agreement and provided no Event of Default exists and is continuing and to take all actions in respect of the Escrow Collateral as provided 5 in the Custodian Agreement; provided, however, the rights of any substitute or additional senior lender shall be subject to such senior lender's execution of this Agreement, the Custodian Agreement and such other agreements among the parties as are in effect from time to time. 4. Requirement of Notice. 4.1 The SBA agrees to notify the Borrower and each of the Banks or other senior lenders upon becoming aware of any of the following: 4.1.1 The occurrence of any payment default or Event of Default; or 4.1.2 The curing by Borrower of any Event of Default. 4.1.3 The transfer of any Junior Indebtedness, specifying the name and address of the transferee. 4.2 Each of the Senior Lenders agrees to notify the Borrower and SBA and the other Senior Lenders upon becoming aware of any of the following: 4.2.1 The occurrence of any payment default or Event of Default; 4.2.2 The waiver by any Bank of any payment default under its Loan Agreement or any other agreement governing Senior Indebtedness, as applicable; or 4.2.3 The transfer of any Senior Indebtedness, specifying the name and address of the transferee. 5. Consent to Grant of Junior Security Interest. The Banks hereby consent to the grant by the Company to the SBA of a security interest in the Escrow Collateral which security interest shall rank junior in priority to the security interests of the Banks. The Banks further consent to the execution of the SBA Agreement. 6. Rights of Action. 6.1 If any senior Lender has declared an acceleration of Senior Indebtedness or if an Event of Default under 1.1b. hereof has occurred, the SBA may declare, claim, permit or seek the benefit of an acceleration of the Junior Indebtedness or avail itself of any other remedy available under the Small Business Investment Act of 1958, as amended, or the regulations promulgated thereunder, but the rights of the SBA (or any holder of Junior Indebtedness) thereupon and any payments, distributions, redemptions, defeasance, purchases, acquisitions 6 or retirements, direct or indirect, whether in whole or in part, upon or in respect thereof shall be subject to all other provisions of this Agreement. 7. Amendments. 7.1 (a) Each holder of Senior Indebtedness hereby reserves the right, without the consent of the SBA (or any holder of Junior Indebtedness) but with the required consent of the Borrower, if any, to modify, amend, waive or release any of the terms of the Senior Indebtedness held by such holder of Senior Indebtedness, or any other document executed in connection with such Senior Indebtedness, or any other document relative thereto, and to exercise or refrain from exercising any powers or rights, in whole or in part, which such holder of Senior Indebtedness may have thereunder; and such modification, amendment, waiver, release, exercise or failure to exercise shall not affect the rights of any such holder of Senior Indebtedness under this Agreement. (b) The SBA (or any holder of Junior Indebtedness) hereby reserves the right, without the consent of the Banks (or any holder of Senior Indebtedness) but with the required consent of the Borrower, if any, to modify, amend, waive or release any of the terms of the Junior Indebtedness held by such holder of Junior Indebtedness, or any other document executed in connection with such Junior Indebtedness, or any other document relative thereto, and to exercise or refrain from exercising any powers or rights, in whole or in part, which such holder of Junior Indebtedness may have thereunder; and such modification, amendment, waiver, release, exercise or failure to exercise shall not affect the rights of the SBA or any such holder of Junior Indebtedness under this Agreement. 7.2 The Borrower shall furnish each party hereto with a copy of any amendment to any agreement relating to Senior Indebtedness or Junior Indebtedness; provided, however, that the failure of the Borrower so to furnish any such amendment shall in no way affect the enforceability of any amendment effected in accordance with this Agreement or in any other way affect the relative rights of the parties hereto. 8. Further Assurances. The SBA, as a holder of Junior Indebtedness, covenants to execute and deliver to each other holder of Senior Indebtedness, such further instruments and to take such further action as may be reasonably necessary at any time or times in order to effectuate the priority provisions of this Agreement. 9. Conflicts with Other Agreements. After giving effect to this Agreement, there are no agreements between any Senior Lender and the Borrower as a result of which Borrower is or will 7 be in violation of any of the terms of any of the Loan Agreements, the related notes or security documents. 10. Notices. Any notice or other communication in connection with this Agreement shall be in writing addressed as provided below and delivered by express delivery (including overnight courier) providing receipt of delivery or mailed by certified or registered mail, postage prepaid, return receipt requested, or transmitted by telex or facsimile transmission with a copy sent by first class mail: If to Israel Discount Bank, to it at the following address: Israel Discount Bank of New York 511 Fifth Avenue New York, New York 10017 Attention: Mr. Robert J. Fainelli Telecopy: 212-986-4786 If to Bank Leumi Trust Company of New York, to it at the following address: Bank Leumi Trust Company of New York 562 Fifth Avenue New York, New York 10036 Attention: Ms. Iris Schechter Telecopy: 212-626-1329 If to Bank Hapoalim B.M., to it at the following address: Bank Hapoalim B.M. 1177 Avenue of the Americas New York, New York 10036 Attention: Mr. Barry Shivak Telecopy: 212-782-2187 If to Extebank, to it at the following address: Extebank 1001 Avenue of the Americas New York, New York 10018 Attention: Mr. Walter Wright Telecopy: 212-768-8785 8 with a copy to: Extebank 1001 Avenue of the Americas New York, New York 10018 Attention: Mr. Charles D. Rothenberg, Senior Vice President Telecopy: 212-768-8785 If to the SBA, to it at the following address: United States Small Business Administration Office of Investment 409 Third Street SW Washington, DC 20416 Attention: Director, Office of Investment Telecopy: 202-205-6959 with a copy to: United States Small Business Administration Office of General Counsel 409 Third Street SW, Suite 7200 Washington, DC 20416 Attention: Chief Counsel for Investment Telecopy: 202-205-6846 If to the Borrower, to it at the following address: Elk Associates Funding Corporation 600 Third Avenue New York, New York 10016 Attention: Gary C. Granoff, President Telecopy: 212-983-0571 with a copy to: Stursberg & Veith 405 Lexington Avenue Suite 4949 New York, New York 10174 Attention: C. Walter Stursberg, Jr., Esq. Telecopy: 212-922-0995 or at such other addresses as the addressee shall have specified by notice given in compliance with this Section. Any such notice or communication, if given or made by prepaid, registered or certified mail or by recorded express delivery, shall be deemed to have been received on the earlier of when actually received or five (5) business days after the same was posted or given to such express delivery service (and in proving such it shall be sufficient to prove that the envelope containing the same was 9 properly addressed and posted or given to such service as aforesaid) and if given or made by telex or facsimile transmission shall be deemed to have been received at the time of dispatch. 11. Successors; Continuing Effect, etc. This Agreement is being entered into for the benefit of, and is binding upon, the Borrower, the Banks, any other holders of Senior Indebtedness and their respective successors and assigns and the SBA and its respective successors and assigns. This Agreement shall be a continuing agreement and shall be irrevocable and shall remain in full force and effect so long as there is any Senior Indebtedness outstanding. 12. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED WHOLLY THEREIN. 13. CONSENT TO JURISDICTION. ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT MAY BE BROUGHT IN THE COURT OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH PARTY HERETO HEREBY IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. EACH PARTY HERETO FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF THE AFOREMENTIONED COURT IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE RESPECTIVE PARTY HERETO AT ITS ADDRESS FOR NOTICES PURSUANT TO SECTION 10 HEREOF, SUCH SERVICE TO BECOME EFFECTIVE 30 DAYS AFTER SUCH MAILING. NOTHING HEREIN SHALL AFFECT THE RIGHT OF ANY HOLDER OF SENIOR OR JUNIOR INDEBTEDNESS To SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. 14. The headings in this Agreement are for convenience of reference only and shall not alter or otherwise affect the meaning hereof. 15. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. 10 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first written above. ELK ASSOCIATES FUNDING CORPORATION By: /s/ Gary C. Granoff ------------------------------------ Name: Gary C. Granoff Title: President ISRAEL DISCOUNT BANK OF NEW YORK By:/s/ Robert J. Fainelli ------------------------------------ Name: Robert J. Fainelli Title: Vice President By:/s/ Gary M. Solomon ------------------------------------ Name: Gary M. Solomon Title: Vice President BANK LEUMI TRUST COMPANY OF NEW YORK By:/s/ Melvyn F. Plotzker ------------------------------------ Name: Melvyn F. Plotzker Title: Vice President By:/s/ Iris Schechter ------------------------------------ Name: Iris Schechter Title: Assistant Vice President BANK HAPOALIM B.M. By:/s/ Barry Shivak ------------------------------------ Name: Barry Shivak Title: Vice President By:/s/ Laura Anne Raffa ------------------------------------ Name: Laura Anne Raffa Title: Vice President 11 EXTEBANK By:/s/ Walter H. Wright ------------------------------------ Name: Walter H. Wright Title: Assistant Vice President UNITED STATES SMALL BUSINESS ADMINISTRATION By:/s/ Wayne Foren ------------------------------------ Name: Wayne Foren Title: Assoc. Admin. for Ins. 12 EX-99.K3A 10 EXHIBIT 99.K3A AGREEMENT THIS AGREEMENT made as of 28th day of September, 1994 by and among ISRAEL DISCOUNT BANK OF NEW YORK ("IDB"), EXTEBANK ("EB"), BANK LEUMI TRUST COMPANY OF NEW YORK ("BL"), BANK HAPOALIM B.M. ("BH"), EUROPEAN AMERICAN BANK ("EAB"), the U.S. SMALL BUSINESS ADMINISTRATION (the "SBA") and ELK ASSOCIATES FUNDING CORPORATION (the "Borrower"). W I T N E S S E T H: WHEREAS, IDB, EB, BL, BH, the SBA and the Borrower previously entered into an intercreditor agreement dated September 9, 1993 which is attached hereto as Exhibit A (the "Intercreditor Agreement"); and WHEREAS, IDB, EB, BL, BH, the SBA and the Borrower previously entered into a custodian agreement dated September 9, 1993 which is attached hereto as Exhibit B (the "Custodian Agreement"); and WHEREAS, the Borrower has terminated its loan agreement with EB and is about to terminate its loan agreement with BH (hereinafter EB and BH are sometimes collectively referred to as the "Former Banks"); and WHEREAS, the Borrower has entered into a loan agreement with EAB; and WHEREAS, the parties desire to remove the Former Banks as parties to the Custodian Agreement and the Intercreditor Agreement (collectively, the "Agreements") and to make EAB a party to the Agreements; NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto mutually agree as follows: 1. Removal of Former Banks as Parties to the Agreements. (a) Effective as of the date hereof, the Agreements are hereby amended in order to remove EB as a party to the Agreements. Accordingly, EB is hereby relieved of all obligations and shall no longer have any rights or be entitled to any benefits as a Bank (as that term is defined in the Agreements) pursuant to the terms of the Agreements. (b) Effective upon the payment by Borrower to BH in an amount necessary to satisfy in full all obligations due from Borrower to BH under Borrower's loan agreement with BH, BH shall be removed as a party to the Agreements. BH shall thereafter be relieved of all obligations and shall no longer have any rights or be entitled to any benefits as a Bank (as that term is defined in the Agreements) pursuant to the terms of the Agreements. Upon the satisfaction of Borrower's obligations to BH, BH shall execute a letter substantially in the form set forth in Exhibit A hereto, copies of which shall be delivered to all the parties hereto. 2. Admission of EAB as a Party to the Agreements. Effective as of the date hereof, the Agreements are hereby amended in order to admit EAB as a party to the Agreements. Accordingly, EAB shall be bound by the terms of the Agreements and shall assume all of the obligations and be entitled to any and all rights and benefits as a Bank (as that term is defined in the Agreements) pursuant to the terms of the Agreements. 3. Continuation Agreements. The Agreements shall remain in full force and effect as modified pursuant to the terms hereof. 4. Further Assurances. The parties agree to execute any and all documents necessary to effectuate the withdrawal of the Former Banks as parties to the Agreements and the admission of EAB as a party to the Agreements. 5. Notices. (a) EAB's address for notice or other communication in connection with the Agreements shall be: European American Bank 335 Madison Avenue New York, NY 10017 Attention: Zach Mayo, Vice President Telecopy: 212-503-2667 (b) Borrower's new address for notice or other communication in connection with the Agreements shall be: Elk Associates Funding Corporation 747 Third Avenue- 4th Floor New York, New York 10017 Attention: Gary C. Granoff, President Telecopy: 212-421-3488 6. Governing Law. This agreement shall be governed by the laws of the state of New York applicable to contracts made and to be performed wholly therein. 7. Headings. The headings in this Agreement are for convenience reference only and shall not alter or otherwise affect the meaning hereof. 2 8. Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first written above. ELK ASSOCIATES FUNDING CORPORATION By: /s/ Gary C. Granoff ------------------------------- Name: Gary C. Granoff Title: President ISRAEL DISCOUNT BANK OF NEW YORK By: /s/ Robert J. Fainelli ------------------------------- Name: Robert J. Fainelli Title: Vice President By: /s/ Leslie Miller ------------------------------- Name: Leslie Miller Title: Vice President BANK LEUMI TRUST COMPANY OF NEW YORK By: /s/ Melvyn F. Plotzker ------------------------------- Name: Melvyn F. Plotzker Title: Vice President By: /s/ Iris Schechter ------------------------------- Name: Iris Schechter Title: Vice President BANK HAPOALIM B.M. By: /s/ Erik Vanderke ------------------------------- Name: Erik Vanderke Title: xxxxxxxxxxxxxxxxxxx By: /s/ Lorin Alvarez ------------------------------- Name: Lorin Alvarez Title: Assistant Vice President 3 EXTEBANK By: /s/ Kenneth Lipke ------------------------------- Name: Kenneth Lipke Title: Vice President EUROPEAN AMERICAN BANK By: /s/ Dennis J. Nochowitz ------------------------------- Name: Dennis J. Nochowitz Title: Assistant Vice President UNITED STATES SMALL BUSINESS ADMINISTRATION By: /s/ Don A. Christensen ------------------------------- Name: Don A. Christensen Title: Assoc. Admin/Invest. EXHIBIT A - filed as Exhibit k.2 to Registration Statement EXHIBIT B - filed as Exhibit j.1 to Registration Statement EX-99.K.3BI 11 EXHIBIT-99.K.3BI AGREEMENT --------- THIS AGREEMENT made as of the - day of June, 1995 by and among ISRAEL DISCOUNT BANK OF NEW YORK ("IDB"), BANK LEUMI TRUST COMPANY OF NEW YORK ("BL"), EUROPEAN AMERICAN BANK ("EAB"), UNITED MIZRAHI BANK AND TRUST COMPANY ("UMB"), the U.S. SMALL BUSINESS ADMINISTRATION (the "SBA") and ELK ASSOCIATES FUNDING CORPORATION (the "Borrower"). W I T N E S S E T H: -------------------- WHEREAS, IDB, BL, EAB, the SBA and the Borrower are parties to an intercreditor agreement dated September 9, 1993, as amended by agreement dated September 28, 1994 (the "Intercreditor Agreement"); and WHEREAS, IDB, EB, BL, the SBA and the Borrower are parties to a custodian agreement dated September 9, 1993, as amended by agreement dated September 28, 1994 (the "Custodian Agreement"); and WHEREAS, the Borrower has entered into a loan agreement with UMB; and WHEREAS, the parties desire to make UMB a party to the Custodian Agreement and the Intercreditor Agreement (collectively, the "Agreements"); NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto mutually agree as follows: 1. Admission of UMB as a Party to the Agreements. Effective as of the date hereof, the Agreements are hereby amended in order to admit UMB as a party to the Agreements. Accordingly, UMB shall be bound by the terms of the Agreements and shall assume all of the obligations and be entitled to any and all rights and benefits as a Bank (as that term is defined in the Agreements) pursuant to the terms of the Agreements. 2. Continuation Agreements. The Agreements shall remain in full force and effect as modified pursuant to the terms hereof. 3. Further Assurances. The parties agree to execute any and all documents necessary to effectuate the admission of UMB as a party to the Agreements. 4. Notices. UMB's address for notice or other communication in connection with the Agreements shall be: United Mizrahi Bank and Trust Company One Rockefeller Plaza New York, NY 10020 Attention: Joseph C. LoMonaco, Vice President Telecopy: 212-332-7466 5. Governing Law. This agreement shall be governed by the laws of the state of New York applicable to contracts made and to be performed wholly therein. 6. Headings. The headings in this Agreement are for convenience reference only and shall not alter or otherwise affect the meaning hereof. 7. Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first written above. ELK ASSOCIATES FUNDING CORPORATION By: Gary C. Granoff ----------------------------------------- Name: Gary C. Granoff Title: President ISRAEL DISCOUNT BANK OF NEW YORK By: Robert J. Fainelli ----------------------------------------- Name: Robert J. Fainelli Title: Vice President By: Robert E. Stark ----------------------------------------- Name: Robert E. Stark Title: Sr. Vice President BANK LEUMI TRUST COMPANY OF NEW YORK By: Iris Schechter ----------------------------------------- Name: Iris Schechter Title: Vice President By: Joseph Eirel ----------------------------------------- Name: Joseph Eirel Title: Banking Officer 2 EUROPEAN AMERICAN BANK By: Dennis J. Nochowitz ----------------------------------------- Name: Dennis J. Nochowitz Title: Assistant Vice President UNITED MIZRAHI BANK AND TRUST COMPANY By: Peter W. Blake ----------------------------------------- Name: Peter W. Blake Title: Vice President By: David Barsion ----------------------------------------- Name: David Barsion Title: Vice President UNITED STATES SMALL BUSINESS ADMINISTRATION By: Don A. Christensen ----------------------------------------- Name: Don A. Christensen Title: Assoc. Admin./Invest. 3 EX-99.K.4 12 BANK INTERCREDITOR AGREEMENT BANK INTERCREDITOR AGREEMENT ELK ASSOCIATES FUNDING CORPORATION (the "Debtor") from time to time incurs obligations, direct, indirect and/or contingent including principal, interest, charges relating thereto and fees and expenses in connection therewith ("Obligations") to each of Bank Hapoalim, B.M., Bank Leumi Trust Company of New York, Israel Discount Bank of New York and Extebank (each, individually a "Creditor" and collectively, the "Creditors"), some or all of which Obligations are or may be secured, either wholly or partially, by Collateral (as hereinafter defined) granted to each Creditor by the Debtor under various agreements. Each Creditor has filed or may file a financing statement ("Financing Statement") under the Uniform Commercial Code as adopted in the State of New York. The Creditors desire to agree among themselves as to the relative priority of their respective security interests in Collateral. It is hereby agreed as follows: 1. "Collateral" means all personal property and fixtures of the Debtor, whether now or hereafter existing or now owned or hereafter acquired and wherever located, of every kind and description, tangible or intangible, including, but not limited to, all goods, equipment, inventory, documents, instruments, chattel paper, accounts, contract rights, general intangibles, notes and other instruments and all other rights to the payment of money arising out of the Debtor's providing financial services, any collateral securing payment of the foregoing (including security interests in New York City tax medallions) and including the products and proceeds thereof and accessions thereto, constituting security for obligations of the Debtor, whether direct or indirect, liquidated or contingent. Collateral shall also include any and all deposits or other sums at any time credited by or due from a Creditor to the Debtor and any monies or securities and other property of the Debtor held or received by a Creditor. 2. Borrower hereby acknowledges and confirms by its execution below that each and every Creditor is and has been granted a security interest in all of the Collateral. 3. "General Security Interest" means any perfected and enforceable security interest of a Creditor in any Collateral however arising, including purchase money security interests. 4. The General Security Interest of each Creditor in any Collateral ranks equally in priority with the General Security Interest of each other Creditor in the same Collateral. Any Collateral, or proceeds thereof, received at any time or from time to time by any of the Creditors shall be shared by all of the Creditors, and applied to the payment of the then outstanding Obligations, pro rata in accordance with the outstanding amounts of Obligations owed by the Debtor to each Creditor. Without limiting the generality of the foregoing, notes payable to Debtor and held by any Creditor shall be deemed to be subject to a General Security Interest for the benefit of all the Creditors to be shared on a pro rata basis. For the purposes of perfecting such General Security Interest, the possession of notes by any Creditor shall be deemed to be possession of the notes by all of the Creditors. Each Creditor agrees that any such note shall be endorsed as collateral security to the order of the Creditor holding the note as Custodian for itself and all Lenders party to a Custodian Agreement dated September 9, 1993 and be held pursuant to the terms thereof. 5. The priorities specified herein shall be applicable irrespective of the time or order of attachment or perfection of any Creditor's security interest or the time or order of filing of Financing Statements or the giving or failure to give notice of the acquisition or expected acquisition of purchase money or other security interests. 6. The priorities provided herein shall not be altered or otherwise affected by any amendment, modification, supplement, extension, renewal, restatement or refinancing of any Obligation of Debtor to any Creditor, nor by any action or inaction which any Creditor may take or fail to take with respect to any Collateral. 7. Subject to the provisions of paragraph 3 hereof, each Creditor shall have the right to manage, perform and enforce the terms of its respective agreements with Debtor with respect to Collateral and to exercise and enforce all privileges and rights thereunder according to its discretion and the exercise of its business judgment including, without limitation, the exclusive right to take or retake control or possession of the Collateral and to hold, prepare for sale, process, sell, lease, dispose of, or liquidate the Collateral. 8. All of the Creditors acknowledge that this Agreement shall constitute notice of each of their respective security interests in the Collateral as provided by Section 9-504 of the New York Uniform Conunercial Code. 9. This Agreement shall terminate ten (10) days after the date that all Creditors receive written notice at the address specified on the signature page for such Creditor and in the manner set forth below of a Creditor's intention to terminate. Termination shall not impair any General Security Interest theretofore acquired by any Creditor or affect the priorities thereof or the sharing of Collateral and any proceeds hereunder. 10. All notices permitted or required to be given or among the Creditors under this Agreement shall be in writing and shall be deemed to be duly given if given personally with receipt acknowledged or sent by registered or certified mail, return receipt requested, or via facsimile, with a confirmation sent by registered or certified mail, or by overnight courier for next day delivery, addressed to the parties at their addresses or facsimile numbers set forth below, unless notice in writing is given of a change of address or telecopy number in the manner set forth herein, in which case notices shall be sent to the new address or telecopy number as designated. Notice of change of address or telecopy number shall be deemed given when actually received -2- or upon refusal to accept delivery thereof; all other notices shall be deemed given and received on the earlier of (a) when actually received or upon refusal to accept delivery thereof, or (b) on the date personally delivered, one day after being sent by telecopy or overnight courier and four days after mailing, as aforesaid. 11. This Agreement shall be governed by the laws of the State of New York. Unless the context otherwise requires all terms used herein and not otherwise defined herein which are defined in the Uniform Commercial Code shall have the meanings therein stated. 12. This Agreement is solely for the benefit of the Creditors and their successors or assigns and no other person or persons shall have any right, benefit, priority or interest under, or because of the existence of, this Agreement. This Agreement shall not be amended, nor any provisions hereof waived without the prior written consent of all the parties hereto. 13. This Agreement may be executed in several counterparts, each of which shall be deemed an original. All such counterparts shall together constitute one and the same instrument. 14. Each Creditor agrees that it will give written notice to each of the other Creditors at the respective addresses below and in the manner set forth herein upon the declaration of an event of default under the security agreements between each of the Creditors and the Debtor with respect to any Obligation owed by the Debtor to it and before giving such Debtor any instructions with respect to the Collateral or taking any actions with respect to the Collateral. IN WITNESS WHEREOF, each Creditor has caused this Agreement to be duly executed the 9th day of September 1993. ISRAEL DISCOUNT BANK OF NEW YORK BANK LEUMI TRUST COMPANY OF NEW YORX Address: 511 Fifth Avenue Address: 535 Seventh Avenue New York, NY 10017 New York, NY 10036 Fax No: 212/986-4786 Fax No:212/626-1329 By: /s/ Robert J. Fannell By: /s/ Melvyn F. Plotzker ---------------------------------- ------------------------------------ Title: Vice President Title: Vice President By: /s/ Gary M. Solomon By: /s/ Thomas Scheckter ---------------------------------- ------------------------------------ Title: Vice President Title: Vice President EXTEBANK BANK HAPOALIM, B.M. Address: 1001 Avenue of the Americas Address: 75 Rockefeller Plaza New York, NY 10016 New York, NY 10019 Fax No: 212/768-8785 Fax No: 212/782-2187 By: /s/ Walter H. Wright By: /s/ Roy XXXXXXXXXX ---------------------------------- ------------------------------------ Title: Assistant Vice President Title: Vice President
-3- ACKNOWLEDGED AND AGREED: ELK ASSOCIATES FUNDING CORPORATION By: /s/ Gary C. Granoff ---------------------------------- -4- EX-99.K5A 13 EXHIBIT 99.K5A AGREEMENT THIS AGREEMENT made as of 28th day of September, 1994 by and among ISRAEL DISCOUNT BANK OF NEW YORK ("IDB"), EXTEBANK ("EB"), BANK LEUMI TRUST COMPANY OF NEW YORK ("BL"), BANK HAPOALIM B.M. ("BH") and EUROPEAN AMERICAN BANK ("EAB"). W I T N E S S E T H: WHEREAS, IDB, EB, BL and BH previously entered into a bank intercreditor agreement dated September 9, 1993 which is attached hereto as Exhibit A (the "Bank Intercreditor Agreement") relating to certain obligations of Elk Associates Funding Corporation (the "Debtor"); and WHEREAS, the Debtor has terminated its loan agreement with EB and is about to terminate its loan agreement with BH (hereinafter EB and BH are sometimes collectively referred to as the "Former Banks"); and WHEREAS, the Debtor has entered into a loan agreement with EAB; and WHEREAS, the parties desire to remove the Former Banks as parties to the Bank Intercreditor Agreement and to make EAB a party to the Bank Intercreditor Agreement; NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto mutually agree as follows: 1. Removal of Former Banks as Parties to the Bank Intercreditor Agreement. (a) Effective as of the date hereof, the Bank Intercreditor Agreement is hereby amended in order to remove EB as a party to the Bank Intercreditor Agreement. Accordingly, EB is hereby relieved of all obligations and shall no longer have any rights or be entitled to any benefits as a Creditor (as that term is defined in the Bank Intercreditor Agreement) pursuant to the terms of the Bank Intercreditor Agreement. (b) Effective upon the payment by Debtor to BH in an amount necessary to satisfy in full all obligations due from Debtor to BH under Debtor's loan agreement with BH, BH shall be removed as a party to the Bank Intercreditor Agreement. BH shall thereafter be relieved of all obligations and shall no longer have any rights or be entitled to any benefits as a Creditor (as that term is defined in the Bank Intercreditor Agreement) pursuant to the terms of the Bank Intercreditor Agreement. 2. Admission of EAB as a Party to the Bank Intercreditor Agreement. Effective as of the date hereof, the Bank Intercreditor Agreement is hereby amended in order to admit EAB as a party to the Bank Intercreditor Agreement. Accordingly, EAB shall be bound by the terms of the Bank Intercreditor Agreement and shall assume all of the obligations and be entitled to any and all rights and benefits as a Creditor (as that term is defined in the Bank Intercreditor Agreement) pursuant to the terms of the Bank Intercreditor Agreement. 3. Continuation Agreements. The Bank Intercreditor Agreement shall remain in full force and effect as modified pursuant to the terms hereof. 4. Further Assurances. The parties agree to execute any and all documents necessary to effectuate the withdrawal of the Former Banks as parties to the Bank Intercreditor Agreement and the admission of EAB as a party to the Bank Intercreditor Agreement. 5. Notices. EAB's address for notice or other communication in connection with the Bank Intercreditor Agreement shall be: European American Bank 335 Madison Avenue New York, NY 10017 Attention: Zach Mayo, Vice President Telecopy: 212-503-2667 6. Governing Law. This agreement shall be governed by the laws of the state of New York applicable to contracts made and to be performed wholly therein. 7. Headings. The headings in this Agreement are for convenience reference only and shall not alter or otherwise affect the meaning hereof. 8. Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. 2 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first written above. ISRAEL DISCOUNT BANK OF NEW YORK By: /s/ Robert J. Fainelli ------------------------------- Name: Robert J. Fainelli Title: Vice President By: /s/ Leslie Miller ------------------------------- Name: Leslie Miller Title: Vice President BANK LEUMI TRUST COMPANY OF NEW YORK By: /s/ Melvyn F. Plotzker ------------------------------- Name: Melvyn F. Plotzker Title: Vice President By: /s/ Iris Schechter ------------------------------- Name: Iris Schechter Title: Vice President BANK HAPOALIM B.M. By: /s/ Lorin Alvarez ------------------------------- Name: Lorin Alvarez Title: Assistant Vice President By: /s/ Erik Vanderke ------------------------------- Name: Erik Vanderke Title: Vice President EXTEBANK By: /s/ Kenneth Lipke ------------------------------- Name: Kenneth Lipke Title: Vice President 3 EUROPEAN AMERICAN BANK By: /s/ Dennis Nochowitz ------------------------------- Name: Dennis Nochowitz Title: Assistant Vice President ACKNOWLEDGED AND AGREED: ELK ASSOCIATES FUNDING CORPORATION By: /s/ Gary C. Granoff ------------------------------- Name: Gary C. Granoff Title: President 4 EXHIBIT A - filed as Exhibit k.5 to Registration Statement EX-99.K.5BI 14 EXHIBIT 99-K-5BI AGREEMENT THIS AGREEMENT made as of the ______ day of June, 1995 by and among ISRAEL DISCOUNT BANK OF NEW YORK ("IDB"), BANK LEUMI TRUST COMPANY OF NEW YORK ("BL"), EUROPEAN AMERICAN BANK ("EAB") and UNITED MIZRAHI BANK AND TRUST COMPANY ("UMB"). W I T N E S S E T H: WHEREAS, IDB, BL and EAB are parties to a bank intercreditor agreement dated September 9, 1993, as amended by agreement dated September 28, 1994 (the "Bank Intercreditor Agreement"), relating to certain obligations of Elk Associates Funding Corporation (the "Debtor"); and WHEREAS, the Debtor has entered into a loan agreement with UMB; and WHEREAS, the parties desire to make UMB a party to the Bank Intercreditor Agreement; NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto mutually agree as follows: 1. Admission of UMB as a Party to the Bank Intercreditor Agreement. Effective as of the date hereof, the Bank Intercreditor Agreement is hereby amended in order to admit UMB as a party to the Bank Intercreditor Agreement. Accordingly, UMB shall be bound by the terms of the Bank Intercreditor Agreement and shall assume all of the obligations and be entitled to any and all rights and benefits as a Creditor (as that term is defined in the Bank Intercreditor Agreement) pursuant to the terms of the Bank Intercreditor Agreement. 2. Continuation Agreements. The Bank Intercreditor Agreement shall remain in full force and effect as modified pursuant to the terms hereof. 3. Further Assurances. The parties agree to execute any and all documents necessary to effectuate the admission of UMB as a party to the Bank Intercreditor Agreement. 4. Notices. EAB's address for notice or other communication in connection with the Bank Intercreditor Agreement shall be: United Mizrahi Bank and Trust Company One Rockefeller Plaza New York, NY 10020 Attention: Joseph C. LoMonaco, Vice President Telecopy: 212-332-7466 5. Governing Law. This agreement shall be governed by the laws of the state of New York applicable to contracts made and to be performed wholly therein. 6. Headings. The headings in this Agreement are for convenience reference only and shall not alter or otherwise affect the meaning hereof. 7. Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first written above. ISRAEL DISCOUNT BANK OF NEW YORK By:/s/ Robert J. Fainelli ------------------------------------ Name: Robert J. Fainelli Title: Vice President By:/s/ Robert E. Stark ------------------------------------ Name: Robert E. Stark Title: Senior Vice President BANK LEUMI TRUST COMPANY OF NEW YORK By:/s/ Iris Schechter ------------------------------------ Name: Iris Schechter Title: Vice President By:/s/ Joseph Euter ------------------------------------ Name: Joseph Euter Title: Bank Officer EUROPEAN AMERICAN BANK By:/s/ Dennis J. Nochowitz ------------------------------------ Name: Dennis J. Nochowitz Title: Assistant Vice President 2 UNITED MIZRAHI BANK AND TRUST COMPANY BY:/s/ Peter W. Blake ------------------------------------ Name: Peter W. Blake Title: Vice President BY:/s/ David Barsion ------------------------------------ Name: David Barsion Title: Vice President ACKNOWLEDGED AND AGREED: ELK ASSOCIATES FUNDING CORPORATION By:/s/ Gary C. Granoff ------------------------------------ Name: Gary C. Granoff Title: President 3 EX-99.K.6 15 EXHIBIT-99.K.6 GRID DEMAND PROMISSORY NOTE (Eurodollar/Prime Rates) $14,000,000.00 New York, July 28, 1998 FOR VALUE RECEIVED, the undersigned promises to pay to the order of ISRAEL DISCOUNT BANK OF NEW YORK (hereinafter the "Bank") at its principal office, located at 511 Fifth Avenue, New York, NY 10017, the principal sum of FOURTEEN MILLION DOLLARS ($14,000,000), or, if less, the aggregate unpaid principal amount of all advances made by the Bank (each an "Advance" and collectively, the "Advances"), endorsed on the schedule attached hereto and made a part of this Note, including additional pages, if any, attached hereto (the "Schedule") on the maturity date of each such Advance as shown or at demand. The undersigned shall also pay to the Bank interest as set forth herein. Each Advance hereunder which is a Eurodollar Advance (as defined below) shall bear interest on the unpaid principal amount thereof for the Interest Period applicable thereto at a rate per annum equal to LIBOR (as defined below) determined for each Interest Period therefor in accordance with the terms of this Note plus a margin of 150 basis points on the unpaid amount of all Advances. Each Advance which is a Prime Rate Advance (as defined below) shall bear interest on the unpaid principal amount thereof from the date thereof until payment of such Prime Rate Advance in full at a fluctuating rate per annum equal to the Prime Rate minus a margin of 1/2% per annum. The undersigned shall notify the Bank not later than 12 noon three (3) Business Days prior to each Advance hereunder which the undersigned requests to maintain at a rate of interest based on LIBOR (a "Eurodollar Advance"), and not later than 12 noon on the date of each Advance which the undersigned requests to maintain, at a rate of interest based on the Prime Rate (a "Prime Rate Advance"). All requests for Advances shall be irrevocable and shall be in the minimum amount of $100,000. Each request by the undersigned for an Advance hereunder shall specify whether the requested Advance is a Eurodollar Advance or a Prime Rate Advance, the proposed date to fund the Advance, and if a Eurodollar Advance is requested, the Interest Period applicable thereto. Any Eurodollar Advance may be continued as a Eurodollar Advance upon expiration of an Interest Period with respect thereto by complying with the notice provisions contained in the definition of Interest Period; provided, however, that no Eurodollar Advance may be continued as such when any Event of Default or event which upon notice, passage of time or both would constitute an Event of Default has occurred and is continuing but shall be automatically converted to a Prime Rate Advance on the last date of the Interest Period. The undersigned may elect from time to time to convert outstanding Eurodollar Advances to Prime Rate Advances by giving the Bank at least three (3) Business Days prior irrevocable notice of such election; provided that any conversion of a Eurodollar Advance may be made only on the last day of an Interest Period with respect thereto. The undersigned may elect from time to time to convert an outstanding Prime Rate Advance to a Eurodollar Advance by giving the Bank irrevocable written notice of such election not later than 12 noon, three (3) Business Days prior to the date of the proposed conversion and further provided that (i) the conversion shall be in the minimum principal amount of $100,000 and (ii) no Event of Default or event upon notice, passage of time or both would constitute an Event of Default shall have occurred and be continuing. The Bank may act without liability upon the basis of telephonic notice believed by the Bank in good faith to be from the undersigned. The undersigned shall immediately confirm to the Bank, in writing, each telephonic notice. All Advances are made at the Bank's sole and absolute discretion and the Bank, at its option and in its sole and absolute discretion and without notice to the undersigned, may decline to make any Advance requested by the undersigned. The undersigned hereby expressly authorizes the Bank to record on the attached Schedule the amount and date of each Advance, the applicable rate of interest, the applicable Interest Period, and each payment of principal and interest thereon. In the event of any discrepancy between any such notation by the Bank and any records of the undersigned, the records of the Bank shall be controlling and conclusive. The failure to make any notation to the Schedule shall not limit or otherwise affect the obligations of the undersigned to repay each Advance made by the Bank, in accordance with the terms hereof. Interest shall be calculated on the basis of a 360-day year for the actual number of days elapsed and shall be payable on the first day of each month commencing on the first such date to occur after the date the Advance is made, and on demand. All payments hereunder shall be payable in immediately available funds in lawful money of the United States. The undersigned authorizes the Bank to charge any of the undersigned's accounts for payments of principal or interest. Any payment of principal or interest payable hereunder which is not paid when due, whether at maturity, on demand, by acceleration, or otherwise, shall bear interest from the date due until paid in full at a rate per annum equal to five percent (5%) above the interest rate in effect with respect thereto. 2 Subject to the terms and conditions hereof and the terms and conditions set forth in any agreement in writing between the Bank and the undersigned, the undersigned may borrow, repay in whole or in part, and reborrow on a revolving basis, up to the maximum amount of this Note. Prime Rate Advances may be prepaid without premium or penalty together with accrued interest thereon to and including the date of prepayment. Eurodollar Advances may be prepaid without premium or penalty (except as provided in the next succeeding paragraph) together with accrued interest thereon to and including the date of prepayment, provided such prepayment date must be the last day of the then current Interest Period of such Advance. The outstanding balance (principal and accrued interest) of any Eurodollar Advance may be prepaid in full or in part, on any Business Day, upon five (5) days' prior written notice to the Bank of such prepayment, subject to a prepayment premium in the amount of one (1%) percent per annum of the principal amount of the Eurodollar Advance being prepaid. The Bank shall not be obligated to accept any prepayment of a Eurodollar Advance unless it is accompanied by the prepayment premium. The undersigned has pledged or deposited with or endorsed and/or assigned or caused to be assigned to the order of the Bank and delivered to the Bank as collateral security for the payment of this Note and all Liabilities (as defined hereinbelow) of the undersigned to the Bank the following property: Assignments of liens on various New York City taxi medallions. The term "Security" shall include the property described above and shall also include the following property: All personal property (exclusive of inventory) now, owned or hereafter acquired and wherever located, including, but not limited to, all furniture, fixtures, equipment, leasehold improvements, instruments, accounts including, without limitation, accounts owing from credit card servicing companies or other similar agencies, documents, contract rights, chattel paper, rights and claims for the payment of monies arising from sales made to customers through the use of credit cards, and general intangibles; (including, without limitation, trademarks and trade names), together with all replacements, additions, products and cash and non-cash proceeds of all the foregoing, and the balance of every deposit account of the undersigned with the Bank and any other claim of the undersigned against the Bank, now or hereafter existing, and all money, instruments, securities, documents, chattel paper, credits, claims, demands and any other property, rights and interests of the undersigned which at any time shall come into the lawful possession or custody or under the control of the Bank or any of its agents, associates or correspondents, for any purpose, and shall include the proceeds of any thereof. The Bank shall be deemed to have possession of any of the Security in transit to or set apart for it or any of its agents, associates or correspondents. 3 The term "Liabilities" shall include this Note and all other indebtedness, obligations and liabilities of any kind of the undersigned to the Bank and also to others to the extent of their participations granted to or interests therein created or acquired for them by the Bank, now or hereafter existing, arising directly between the undersigned and the Bank or acquired outright, conditionally or as collateral security from another by the Bank, absolute or contingent, joint and/or several, secured or unsecured, due or not due, contractual or tortious, liquidated or unliquidated, arising by operation of law or otherwise, or direct or indirect, including liabilities to the Bank of the undersigned as a member of any partnership, syndicate, association or other group, and whether incurred by the undersigned as principal, surety, indorser, guarantor, accommodation party or otherwise. As security for the payment of all the Liabilities, the undersigned hereby grant to the Bank a security interest in, and a general lien upon and/or right of set-off of, the Security. The right is expressly granted to the Bank, at its discretion and without notice to or containing the signature of the undersigned, to file one or more financing statements under the Uniform Commercial Code naming the undersigned as debtor and the Bank as secured party and indicating therein the types or describing the items of Security herein specified and forwarding a copy thereof, after filing, to the undersigned. Without the prior written consent of the Bank the undersigned will not file or authorize or permit to be filed in any jurisdiction any such financing or like statement in which the Bank is not named as the sole secured party covering the Security set forth herein. The Bank, at its discretion, whether any Liabilities be due may, in its name or in the name of the undersigned or otherwise, demand, sue for, collect or receive any money or property at any time payable or receivable on account of or in exchange for, or make any compromise or settlement deemed desirable with respect to, any of the Security, but shall be under no obligation so to do, or the Bank may extend the time of payment, arrange for payment in installments, or otherwise modify the terms of, or release, any of the Security, without thereby incurring responsibility to, or discharging or otherwise affecting any liability of, the undersigned. The Bank shall not be required to take any steps necessary to preserve any rights of prior parties to any of the Security. Upon default hereunder or in connection with any of the Liabilities (whether such default be that of the undersigned or of any other party obligated thereon), the Bank shall have the rights and remedies provided by law; and the Bank may sell or cause to be sold in the Borough of Manhattan, New York City, or elsewhere, in one or more sales or parcels, at such price as the Bank may deem best, and for cash or on credit or for future delivery, without assumption of any credit risk, all or any of the Security, at any brokers' board or at public or private sale, without demand of performance or notice of intention to sell or of time or place of sale (except such notice as is required by applicable statute and cannot be waived), and the Bank or anyone else may be the 4 purchaser of any or all of the Security so sold and thereafter hold the same, absolutely free from any claim or right of whatsoever kind, including any equity of redemption, of the undersigned, any such demand, notice or right and equity being hereby waived and released. The undersigned will pay to the Bank all reasonable out of pocket expenses (including reasonable expense for legal services of every kind) of, or incidental to, the enforcement of any of the provisions hereof or of any of the Liabilities, or any actual or attempted sale, or any exchange, enforcement, collection, compromise or settlement of any of the Security or receipt of the proceeds thereof, and for the care of the Security and defending or asserting the rights and claims of the Bank in respect thereof, by litigation or otherwise, including expense of insurance, and all such expenses shall be indebtedness within the terms of this Note. The Bank, at any time, at its option, may apply the net cash receipts from the Security to the payment of principal of and/or interest on any of the Liabilities, whether or not then due, making proper rebate of interest or discount. Notwithstanding that the Bank, whether in its own behalf and/or in behalf of another and/or of others, may continue to hold Security and regardless of the value thereof, the undersigned shall be and remain liable for the payment in full, principal and interest, of any balance of the Liabilities and expenses at any time unpaid. Upon the occurrence of any of the following specified events of default (each an "Event of Default"): (1) default by the undersigned in making any payment of principal, interest, or any other amount payable under this note when due; or (2) default by the undersigned in the due payment of any indebtedness for borrowed money or in the observance or performance of any covenant or condition contained in any agreement or instrument evidencing, securing, or relating to any such indebtedness, and continuance of any such default for a period sufficient to cause or permit the acceleration of the maturity thereof; or (3) default in the observance or performance of any other agreement of the undersigned set forth herein and continuance of any such default for thirty (30) days after notice thereof to the undersigned; or (4) any representation or warranty made by the undersigned herein or in any certificate furnished by the undersigned pursuant to the provisions hereof, proves untrue in any material respect; (5) the undersigned becomes insolvent or bankrupt, is generally not paying its debts as they become due, or makes an assignment for the benefit of creditors, or a trustee or receiver is appointed for the undersigned or for the greater part of the properties of the undersigned with the consent of the undersigned, or if appointed without the consent of the undersigned, such Trustee or Receiver is not discharged within thirty (30) days, or bankruptcy, reorganization, liquidation or similar proceedings are instituted by or against the undersigned under the laws of any jurisdiction, and if instituted against the undersigned are consented to by it or remain undismissed for thirty (30) days, or a writ or warrant of attachment or similar process shall be issued against a substantial part of the property of the undersigned and shall not be released or bonded within thirty (30) days after levy; then, in any such event, and at any time thereafter, if any Event of Default shall then be continuing, the principal and the 5 accrued interest in respect of each advance under this note shall become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are expressly waived by the undersigned. As used herein the following terms shall have the following meanings: "Bank" shall be deemed to include the Bank, its successors and assigns and any holder hereof. "Business Day" means a day other than a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to close. "Interest Period" with respect to any Eurodollar Advance means: (a) initially, the period commencing on the date such Eurodollar Advance is made and ending one, two or three months thereafter as selected by the undersigned; and (b) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such Eurodollar Advance and ending one, two or three months thereafter, as selected by the undersigned by irrevocable written notice to the Bank not less than three (3) Business Days prior to the last day of the then current Interest Period with respect to such Eurodollar Advance. In the event the undersigned fails to notify the Bank as provided above, then in that event, the Bank has the option, in its sole discretion, to chose on behalf of the undersigned an Interest Rate; and (c) provided, however, that all of the foregoing provisions relating to Interest Periods are subject to the following: (i) if any Interest Period pertaining to a Eurodollar Advance would otherwise end on a day which is not a Business Day, the Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the immediately preceding Business Day; and (ii) if the undersigned shall fail to give notice as provided in clause (b) above, the undersigned shall be deemed to have requested conversion of the affected Eurodollar Advance to a Prime Rate Advance on the last day of the 6 then current Interest Period with respect thereto; and (iii) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of a calendar month. "Prime Rate" shall mean a fluctuating rate per annum equal to the rate of interest publicly announced by the Bank at its principal office from time to time as its Prime Rate. Any change in the Prime Rate shall be effective on the date such change is announced by the Bank. "LIBOR" shall mean with respect to the Interest Period pertaining to a Eurodollar Advance, the rate per annum as quoted on telerate page 3750 at 11:00 o'clock New York Time on the second Business Day prior to the beginning of such Interest Period. "Undersigned" shall mean if this Note is signed by more than one party, unless otherwise stated herein, shall mean the "undersigned and each of them" and each undertaking herein contained shall be their joint and several undertaking. The Bank may proceed against one or more of the undersigned at one time or from time to time as it elects in its sole and absolute discretion. In the event that the Bank shall have determined (which determination shall be conclusive and binding upon the undersigned) that, by reason of circumstances affecting the London interbank market, adequate and reasonable means do not exist for ascertaining LIBOR for any requested Interest Period or with respect to the continuation of a Eurodollar Advance beyond the expiration of the then current Interest Period with respect thereto, the Bank shall forthwith give notice of such determination, confirmed in writing, to the undersigned. If such notice is given, any outstanding Eurodollar Advance shall be converted, on the last day of the then current Interest Period with respect thereto, to a Prime Rate Advance. Such notice shll be withdrawn by the Bank when the Bank shall determine that adequate and reasonable means exist for ascertaining LIBOR. Notwithstanding anything to the contrary contained elsewhere in this Note, if any change after the date hereof in law, rule, regulation, guideline or order or in the interpretation thereof by any governmental authority charged with the administration thereof, shall make it unlawful for the Bank to make or maintain any Advance as a Eurodollar Advance, then, by written notice to the undersigned, the Bank may require that the Eurodollar Advance be converted to a Prime Rate Advance, whereupon the Eurodollar Advance shall be automatically converted to a Prime Rate Advance as of the date of such notice to the undersigned. 7 In the event that any change in applicable law or regulation, or in the interpretation thereof by any governmental authority charged with the administration thereof, shall impose on or deem applicable to the Bank any reserve requirements against this Note or the Line or impose upon the Bank any other costs or assessments, the undersigned shall pay to the Bank on demand an amount sufficient to compensate the Bank for the additional cost resulting from the maintenance or imposition of such reserves, costs or assessments. Any consents, agreements, instructions or requests pertaining to any matter in connection with this Note, signed by any one of the undersigned, shall be binding upon all of the undersigned. This Note shall bind the respective successors, heirs or representatives of the undersigned. This Note and the Line shall not be assigned by the undersigned without the Bank's prior written consent. The undersigned in any litigation (whether or not arising out of or relating to this Note or any other obligations or liability, of the undersigned to the Bank) in which the Bank and the undersigned shall be adverse parties, waives trial by jury and the right to interpose any defense, set-off or counterclaim of any nature or description. The undersigned agrees to pay on demand all of the Bank's reasonable out of pocket costs and expenses, including reasonable counsel fees, in connection with collection of any amounts due to the Bank and enforcement of its rights under this Note. The undersigned agrees that the action, proceeding or claim against it arising out of, or relating in any way to, this Note may be brought and enforced in the courts of the State of New York or of the United States of America for the Southern District of New York, and hereby irrevocably submits to each such jurisdiction, which jurisdiction shall be non-exclusive. With respect to any such action, proceeding or claim, the undersigned consents to accept service of process and any legal summons to be served upon the undersigned and consents that same may be served by mailing a copy by certified and/or regular mail hereof to the undersigned at the last known address of the undersigned appearing on the records of the Bank. Such mailing shall be deemed personal service and shall be legal and binding upon the undersigned in any such action or claim. Within thirty days after such mailing the undersigned shall appear, answer or otherwise move in respect of such summons, complaint or other process. Should the undersigned fail to appear, answer within said thirty day period, the undersigned shall be deemed in default and judgment may be entered by the Bank against the undersigned for the amount as demanded in any summons, complaint or other process so served. No modification or waiver of any provision of this note and no consent by the Bank to any departure therefrom by the undersigned shall be effective unless such modification or waiver shall be in writing and signed by a duly authorized 8 officer of the Bank, and the same shall then be effective only for the period and on the conditions and for the specific instances specified in such writing. No failure or delay by the Bank in exercising any right, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any rights, power or privilege. In the event any one or more of the provisions in this Note should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. This Note shall be construed according to and governed by the laws of the State of New York. ELK ASSOCIATES FUNDING CORP. [S E A L] By: Gary C. Granoff --------------------------------- Name: Gary C. Granoff Title: President By: Marqaret Chance --------------------------------- Name: Margaret Chance Title: Secretary 9 EX-99.K.7 16 EXHIBIT-99.K.7 EAB - -------------------------------------------------------------------------------- September 2, 1998 Elk Associates Funding Corp. 747 Third Avenue New York, NY 10017 Re: $14,000,000 borrowing base line of credit Gentlemen: European American Bank ("EAB") is pleased to advise you it holds available for Elk Associates Funding Corp. (the "Borrower"), a corporation organized and in good standing under the laws of the State of New York, a borrowing base line of credit (the "Line") in the amount of $14,000,000, subject to the following terms and conditions: 1. Description of the Line: Loans provided under the Line shall be evidenced by EAB's standard Master Note (the "Note") in the amount of the Line. Each advance thereunder shall bear interest at a rate to be elected by the Borrower at the time of each request for an advance thereunder equal to either (i) a floating rate of interest equal to 1/2% below EAB's Prime Rate (the rate of interest stated by EAB to be its Prime Rate in effect from time to time and adjusted when said Prime Rate changes) computed on the basis of actual days elapsed in a 360 day year or (ii) a fixed rate of interest equal to the Reserve Adjusted LIBOR, as such term is defined in the Note, plus a margin of 150 basis points for interest periods not to exceed ninety (90) days. Interest on the unpaid principal balance of the Note from time to time outstanding shall be payable monthly in arrears commencing on the first day of the month following the date of the first advance under the Note. Any advance under the Line made by EAB in its discretion shall be in an amount not less than $100,000 for both Prime Rate and LIBOR Rate advances. In the event that an advance bears interest at the Prime Rate Option, such advance may be prepaid, in whole or in part, in increments of not less than $100,000, without premium or penalty. Member FDIC - -------------------------------------------------------------------------------- 335 Madison Avenue Equal New York, NY 10017 Housing Tel: (212) 370-8535 Lender Fax: (212) 503-2667 - -------------------------------------------------------------------------------- The Borrower agrees to indemnify EAB and hold EAB harmless from any loss or expense that EAB may sustain or incur, including, without limitation, any interest or fees payable by EAB to lenders of funds obtained by it in order to make or maintain an advance under the Note at the LIBOR Rate Option should the Borrower make any prepayment of the principal of an advance hereunder bearing interest at the LIBOR Rate or in the event of a default by the Borrower in the payment or performance of any terms of the Note or this line letter. Notwithstanding anything to the contrary contained herein, availability under the Line shall be subject to such limitations as may be imposed by the U.S. Small Business Administration (the "SBA") from time to time pursuant to a borrowing base formula established and monitored by the SBA. Notwithstanding any provisions herein to the contrary, availability under the Line shall be reduced by a $400,000 assumed exposure under a $10,000,000 three (3) year swap agreement between the Borrower and Lasalle National Bank. The Borrower acknowledges and agrees that the Line is uncommitted and requests for advances or extensions of credit thereunder shall be approved in the discretion of EAB, which may refuse to make an extension of credit under the Line at any time without prior notice to the Borrower, and that the performance or compliance by the Borrower of the agreements contained in this letter, or in any other document or agreement evidencing or securing such advances or extensions of credit, shall not obligate EAB to make an advance or provide an extension of credit thereunder. Subject to the terms and conditions hereof, the Line shall be available until November 30, 1998. 2. Purpose of the Line: The purpose of the Line shall be to support a portion of the loan portfolio of the Borrower. 3. Security for the Line: The Line shall be secured by a first priority security interest in all assets and personal property of the Borrower pursuant to EAB's standard General Security Agreement and duly filed UCC-1 Financing Statements. The priority of EAB's security interest shall be ranked equally with the security interest of Israel Discount Bank of New York ("IDB") and Bank Leumi Trust Company of New York ("Bank Leumi") pursuant to an intercreditor agreement satisfactory to EAB. 2 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 4. Conditions Precedent: Prior to the Borrower's initial request for an advance under the Line, it shall have provided to EAB: (i) A copy of the resolutions passed by the Borrower's Board of Directors certified by its Secretary as being in full force and effect authorizing the borrowing described herein and the execution of all documents and agreements required by EAB to evidence and secure the Line; and (ii) A certified copy of the certificate of incorporation of the Borrower. 5. Financial Reporting: The Borrower shall provide to EAB: (i) As soon as available, but in any event within one hundred twenty (120) days after the last day of its 1998 fiscal year, a balance sheet of the Borrower, as of such last day of the fiscal year, and statements of income and retained, earnings and cash flows for such fiscal year prepared in accordance with generally accepted accounting principles consistently applied, in reasonable detail, such statements to be audited by a firm of independent certified public accountants satisfactory to EAB. (ii) As soon as available, but in any event within ninety (90) days after the last day of each semi-annual period prior to the expiration of the Line, a balance sheet of the Borrower as of the last day of such semi-annual period, and statements of income and retained earnings and cash flows for such period, each prepared in accordance with generally accepted accounting principles consistently applied, in reasonable detail, such statements to be prepared on a review basis by a firm of independent certified public accountants satisfactory to EAB. (iii) As soon as available, but in any event within sixty (60) days after the end of each fiscal quarter prior to the expiration of the Line, a balance sheet of the Borrower and statements of income and retained earnings and cash flows of the Borrower for such quarter, and the portion of the fiscal year through such date all in reasonable detail, such statements to be prepared on a compilation basis in accordance with generally accepted accounting principles consistently applied, in reasonable detail, by a firm of independent certified public accountants satisfactory to EAB. 3 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Each of the financial statements specified in Sections (i), (ii) and (iii) above shall be accompanied by a certificate signed by the president or chief financial officer of the Borrower to the effect that such statements fairly present the financial condition of the Borrower as of the balance sheet date and results of the operations of the Borrower for the period(s) then ended in accordance with generally accepted accounting principles consistently applied. (iv) As soon as available, but in any event within sixty (60) days after the end of each calendar quarter, copies of the Borrowing Base Certificates, submitted quarterly by the Borrower to the SBA demonstrating compliance with the SBA borrowing formula. (v) As soon as available, but in any event within sixty (60) days after the end of each calendar quarter, copies of the Borrower's loan lists and copies of custodian reports generated by IDB. (vi) As soon as available but in any event within fifteen (15) days after the end of each calendar quarter, copies of the Borrower's delinquency reports. (vii) Such other financial or additional information as EAB may from time to time request. 6. Special Requirements: a. The Borrower agrees to maintain at all times: (i) a tangible net worth (the sum of capital surplus, earned surplus, capital stock and such other items as are allowable under generally accepted accounting principles minus deferred charges, intangibles, receivables due from stockholders, officers or affiliates and treasury stock) in an amount not less than $10,500,000. (iv) a maximum leverage ratio (the ratio of total unsubordinated liabilities to capital base) of not greater than 1.0 to 1.0, capital base to be defined as the sum of capital surplus, earned surplus, capital stock and such other items as are allowable under generally accepted accounting principles and subordinated liabilities minus deferred charges, intangibles, receivables due from stockholders, officers or affiliates and treasury stock). b. The Borrower covenants and agrees not to apply for or accept credit facilities from institutional or other lenders of funds in an amount in excess of $35,000,000 in the aggregate. 4 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- c. The Borrower agrees that, with the exception of medallion loans which shall constitute not less than sixty-five (65%) of the Borrower's total loan portfolio, loan concentrations in any other single industry shall not exceed twenty-five (25%) of the Borrower's aggregate loan portfolio. d. The Borrower agrees that any security interest in its personal property it may grant to the SBA will rank junior to that of both EAB, IDB or Bank Leumi pursuant to a subordination agreement satisfactory to EAB. 7. Acceptance: If the foregoing is acceptable, please so indicate by signing and returning this letter together with the administration fee before September 15, 1998, the date this letter will otherwise expire, unless extended in writing by EAB. Very truly yours, EUROPEAN AMERICAN BANK By: /s/Dennis Nochowitz ----------------------- Dennis Nochowitz Vice President Agreed and Accepted this ________ day of September, 1998 Elk Associates Funding Corp. By: /s/Gary Granoff ------------------------- Name: Gary Granoff Title: President 5 - -------------------------------------------------------------------------------- EAB MASTER NOTE (Eurodollar/Prime RATE) - -------------------------------------------------------------------------------- $14,000,000 DATE: , 1998 FOR VALUE RECEIVED, the undersigned, a New York corporation, promises to pay to the order of EUROPEAN AMERICAN BANK (the "Bank"), on or before November 30, 1998 (the "Maturity Date"), the sum of Fourteen Million Dollars ($14,000,000), or, if less, the aggregate unpaid principal amount of all advances made by the Bank pursuant to the line of credit (each an "Advance" and collectively, the "Advances"), not to exceed an aggregate amount at any one time outstanding of Fourteen Million Dollars ($14,000,000), available to the undersigned hereunder (the "Line") together with interest thereon as set forth herein. Each Advance hereunder which is a Eurodollar Advance (as defined below) shall bear interest on the unpaid principal amount thereof for the Interest Period applicable thereto at a rate per annum equal to the Reserve Adjusted Libor determined for each Interest Period therefor in accordance with the terms of this Note plus a margin of 1 1/2% per annum. Each Advance which is a Prime Rate Advance (as refined below) shall bear interest on the unpaid principal amount thereof from the date thereof until payment of such Prime Rate Advance in full at a fluctuating rate per annum equal to the Prime Rate minus a margin of 1/2% per annum. The undersigned shall notify the Bank not later than 12 noon three Business Days prior to each Advance hereunder which the undersigned requests to maintain at a rate of interest based on Reserve Adjusted Libor (a "Eurodollar Advance"), and not later than 12 noon on the date of each Advance which the undersigned requests to maintain at a rate of interest based on the Prime Rate (a "Prime Rate Advance"). All requests for Advances shall be irrevocable and shall be in the minimum amount of $100,000. Each request by the undersigned for an Advance hereunder shall specify whether the requested Advance is a Eurodollar Advance or a Prime Rate Advance, the proposed date to fund the Advance, and if a Eurodollar Advance is requested, the Interest Period applicable thereto. Any Eurodollar Advance may be continued as a Eurodollar Advance upon expiration of an Interest Period with respect thereto by complying with the notice provisions contained in the definition of Interest Period; provided, however, that no Eurodollar Advance may be continued as such when any Event of Default or event which upon notice, passage of time or both would constitute an Event of Default has occurred and is continuing but shall be automatically converted to a Prime Rate Advance on the last date of the Interest Period in effect when he Bank is notified of such default or Event of Default. The undersigned may elect from time to time to convert outstanding Eurodollar Advances to Prime Rate Advances by giving the Bank at least three Business Days prior irrevocable notice of such election; provided that any conversion of a Eurodollar Advance may be made only on the last day of an Interest Period with respect thereto. The undersigned may elect from time to time to convert an outstanding Prime Rate Advance to a Eurodollar Advance by giving the Bank irrevocable written notice of such election not later than 12 noon, three Business Days prior to the date of the proposed conversion and further provided that (i) the conversion shall be in the minimum principal amount of $100,000 and (ii) no Event of Default or event upon notice, passage of time or both would constitute an Event of Default shall have occurred and be continuing. Notwithstanding the foregoing, no Advance may be converted to or continued as a Eurodollar Advance if the Interest Period would extend beyond the Maturity Date. Interest in respect of Prime Rate Advances shall be payable on the first day of each month commencing on the first such date to occur after the date the Advance is made, and on the Maturity Date. Interest in respect of Eurodollar Advances shall be payable on the last lay of the Interest Period in respect thereof. Interest shall be calculated on the basis of a 360-day year for the actual number of days elapsed. All payments hereunder shall be payable in immediately available funds in lawful money of the United States. The undersigned authorizes the Bank to charge any of the undersigned's accounts for payments of principal or interest. Any payment of principal of or interest payable hereunder which is not paid when due, whether at maturity, by acceleration, or otherwise, shall bear interest from the date due until paid in full at a rate per annum equal to three percent (3%) above the rate otherwise payable with respect thereto. - ------------------------ This note provides that interest be paid monthly in respect of Prime Rate Advances and on the last day of an Interest Period in respect of Eurodollar Advances. Upon the occurrence and during the continuance of an Event of Default, the Bank shall be entitled to setoff against and apply to the payment hereof the balance of any account or accounts maintained with the Bank by the undersigned and to exercise any other right or remedy granted hereunder. or under any agreement between the undersigned and the Bank or available at law or in equity, including, but not limited to, the rights and remedies of a secured party under the New York Uniform Commercial Code. The failure by the Bank at any time to exercise any such right shall not be deemed a waiver thereof, nor shall it bar the exercise of any such right at a later date. Each and every right and remedy granted to the Bank hereunder or under any agreement between the undersigned and the Bank or available at law or in equity shall be cumulative and not exclusive of any other rights, powers, privileges or remedies, and may be exercised by the Bank from time to time and as often as may be necessary in the sole and absolute discretion of the Bank. The undersigned agrees to pay, on demand, all of the Bank's costs and expenses, including reasonable counsel fees (whether inhouse or outside counsel), in connection with the collection of any amounts due to the Bank hereunder or in connection with the enforcement of the Bank's rights under this Note. This Note shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to principles of conflict or choice of laws. The undersigned covenants and represents that any reprogramming or other corrective modifications required to permit the proper functioning, in and following the year 2000, of (i) the undersigned's and its subsidiaries' computer systems and (ii) equipment containing embedded microchips (including systems and equipment supplied by others or with which undersigned's or its subsidiaries' systems interface) and the testing of all such systems and equipment, as so reprogrammed, will be, completed by January 1, 1999. The cost to the undersigned and its subsidiaries of such reprogramming, modifications and testing and of the reasonably foreseeable consequences of year 2000 to the undersigned and its subsidiaries (including, without limitation, reprogramming errors and the failure of others' systems or equipment) will not result in the occurrence of an Event of Default or have a material adverse effect on the business, properties or financial condition of the undersigned. Except for such of the reprogramming and modifications referred to in the preceding sentence as may be necessary, the computer and management information systems of the undersigned and its subsidiaries are, and with ordinary course upgrading and maintenance, will continue for the term of this Note to be, sufficient to permit the undersigned to conduct its business without any material adverse effect thereto. THE UNDERSIGNED HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY FEDERAL OR STATE COURT IN THE STATE OF NEW YORK IN ANY ACTION, SUIT OR PROCEEDING BROUGHT AGAINST IT AND RELATED TO OR IN CONNECTION WITH THIS NOTE OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY AND CONSENTS TO THE PLACING OF VENUE IN THE COUNTY OF NASSAU OR OTHER COUNTY PERMITTED BY LAW. TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE UNDERSIGNED HEREBY WAIVES AND AGREES NOT TO ASSERT BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE, IN ANY SUCH SUIT, ACTION OR PROCEEDING ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURTS, THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM, THAT THE VENUE OF THE SUIT, ACTION OR PROCEEDING IS IMPROPER, OR THAT THIS NOTE OR ANY OTHER DOCUMENT OR INSTRUMENT REFERRED TO HEREIN MAY NOT BE LITIGATED IN OR BY SUCH COURTS. TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE UNDERSIGNED AGREES NOT TO SEEK AND HEREBY WAIVES THE RIGHT TO ANY REVIEW OF THE JUDGMENT OF ANY SUCH COURT BY ANY COURT OF ANY OTHER NATION OR JURISDICTION WHICH MAY BE CALLED UPON TO GRANT AN ENFORCEMENT OF SUCH JUDGMENT. THE UNDERSIGNED AGREES THAT SERVICE OF PROCESS MAY BE MADE UPON IT BY CERTIFIED OR REGISTERED MAIL TO ITS ADDRESS SET FORTH BELOW OR SUCH OTHER ADDRESS THAT THE UNDERSIGNED SHALL HAVE NOTIFIED THE BANK IN WRITING OR ANY METHOD AUTHORIZED BY THE LAWS OF THE STATE OF NEW YORK. EXCEPT AS PROHIBITED BY LAW, THE UNDERSIGNED HEREBY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS NOTE. Neither the undersigned nor any affiliate of the undersigned shall use any portion of the proceeds of the Loans, nor have any Letter of Credit issued, either directly or indirectly, for the purpose of purchasing any securities underwritten by ABN AMRO Chicago Corporation, an affiliate of the Bank. 3 Any consents, agreements, instructions or requests pertaining to any matter in connection with this Note, signed by any one of the undersigned, shall be binding upon all of the undersigned. This Note shall bind the respective successors, heirs or representatives of the undersigned. This Note and the Line shall not be assigned by the undersigned without the Bank's prior written consent. IN WITNESS WHEREOF, the undersigned has duly executed this Note the day and year first above written. Witness: Elk Associates Funding Corp. --------------------- EAB Officer By: --------------------------------- Name: Title: Borrower's Address: 747 Third Avenue New York, NY 10017 6 EX-99.K8A 17 EXHIBIT 99.K8A "THIS NOTE SUPERSEDES AND REPLACES THAT CERTAIN PROMISSORY NOTE (GRID) DATED OCTOBER 8, 1998 IN THE ORIGINAL PRINCIPAL AMOUNT OF $7,000,00000" PROMISSORY NOTE (GRID) New York, N.Y. January 4, 1999 $7,000,000 For Value Received, ELK ASSOCIATES FUNDING CORP. promises to pay to the order of BANK LEUMI USA (the "Bank"), at its offices at 579 Fifth Avenue, New York, New York, the principal sum of Seven Million Dollars ("Maximum Principal Amount") or, if less, the aggregate unpaid principal sum of all loans made by the Bank, in its sole discretion, to the maker of this Note from time to time. The principal sum of each such loan shall be payable November 1, 1999. Within the limits of the Maximum Principal Amount, the maker may borrow, prepay, and reborrow in the manner provided herein. Each loan shall bear interest (from the date of such loan), at the option of the maker, at a rate per annum which shall be equal to (a) the rate of interest designated by the Bank, and in effect from time to time, as its "Reference Rate" minus 1/2% per annum, adjusted when said Reference Rate changes (the maker acknowledges that the Reference Rate may not necessarily represent the lowest rate of interest charged by the Bank to customers) or (b) 1 1/2% per annum above the Libor Rate (Reserve Adjusted)* for a one, two or three month term, as elected by the maker and calculated by the Bank, in the manner hereinafter provided, but in no event in excess - ---------------- * "Libor Rate" means, relative to any Interest Period (hereinafter defined) for loans made pursuant to this Note and which bear interest at the "Libor Rate (Reserve Adjusted)", the rate of interest per annum determined by the Bank to be the arithmetic mean (rounded upward to the next 1/6th of 1%) of the rates of interest per annum at which dollar deposits in the approximate amount of the amount of the loan to be made or continued hereunder by the Bank and having a maturity comparable to such Interest Period would be offered to the Bank in the London Interbank market at its request at approximately 11:00 a.m. (London time) two Business Days prior to the commencement of such Interest Period. "Libor Reserve Percentage" means, relative to any Interest Period for loans hereunder, the percentage (expressed as a decimal, rounded upward to the next 1/100th of 1%) in effect on such day (whether or not applicable to the Bank) under regulations issued from time to time by the Federal Reserve System Board for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to Eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of the Federal Reserve System Board). "Libor Rate (Reserve Adjusted)" means, relative to any loan to be made or continued hereunder for any Interest Period, the rate of interest per annum (rounded upwards to the next 1/16th of 1%) determined by the Bank as follows: Libor Rate Libor Rate (Reserve Adjusted) = 1.00 - Libor Reserve Percentage of the maximum rate permitted by applicable law; provided, that in the event the Bank shall have determined that by reason of circumstances affecting the Libor Rate (Reserve Adjusted) adequate and reasonable means do not exist for ascertaining the Libor Rate (Reserve Adjusted) for any Interest Period, the applicable rate of interest during such Interest Period shall be equal to its Reference Rate minus 1/2% per annum adjusted when said Reference Rate changes, but in no event in excess of the maximum rate permitted by law; further provided that if, at the end of any Interest Period, the maker has failed to timely notify the Bank of its election of the choice of interest rate for or length of the next Interest Period, then the interest rate in effect thereafter shall be at the Libor Rate (Reserve Adjusted) plus 1 1/2% per annum for an Interest Period the length of which shall be the same length as the immediately preceding Interest Period unless such Interest Period would end after the stated maturity date of this Note, in which case the Interest Period shall be of a duration equal to the next longest Interest Period which would end prior to such scheduled maturity date, provided further that no Libor Rate (Reserve Adjusted)-based loan shall be made less than one month before the stated maturity date of this Note or after the occurrence and continuance of an Event of Default or an event which, upon notice, passage of time or both would constitute an Event of Default. Interest hereunder shall be payable on the last day of each Interest Period and at maturity (whether by acceleration or otherwise). The term "Interest Period" as used in this Note shall mean a period of one, two or three month(s), as elected by the maker by written or facsimile notice to the Bank given not later than 12:00 noon three Business Days prior to the commencement of an Interest Period. No Interest Period shall extend beyond the stated maturity date of this Note. The initial Interest Period for this Note shall begin on the day of the initial draw down under the Note, and each subsequent Interest Period shall begin on the last day of the immediately preceding Interest Period. The Bank shall give notice to the maker of the interest rate determined for each Interest Period as provided herein, and such notice shall be conclusive and binding upon the maker for all purposes absent manifest error. The maker shall pay to the Bank to compensate it for any loss, cost or expense that the Bank determines is attributable to any prepayment of a loan made by the Bank to the maker using the Libor Rate (Reserve Adjusted). Such compensation shall include an amount equal to the excess (if any) of (i) the amount of interest that otherwise would have accrued on the principal amount so prepaid for the period from the date of such prepayment to the last day of the then current Interest Period for such loan at the applicable rate of interest for such loan provided for herein over (ii) the amount of interest that otherwise would have accrued on such principal amount at a rate per annum equal to the interest component of the amount the Bank would have bid in The London Interbank market for dollar deposits of leading banks in amounts comparable to such principal amount and with maturities comparable to such period (as reasonably determined by the Bank). The term "Business Day" shall mean any day of the year on which the Bank is open for business (as required or permitted by law or otherwise) and on which dealings in U.S. dollar deposits are carried on in London, England. If any law, treaty, rule, regulation or determination of a court or governmental authority or any change therein or in the interpretation or application thereof (each, a "Change in Law") shall make it unlawful for the Bank to make Libor Rate (Reserve Adjusted)-based loans, or to maintain interest rates based on Libor, then in the former event, any obligation of the Bank contained herein or in any agreement of the Bank to make available such unlawful Libor Rate (Reserve Adjusted)-based loans shall immediately be cancelled, and in the latter event, any such unlawful Libor Rate (Reserve Adjusted)-based loans then outstanding shall be converted, at the Bank's option, so that interest on the outstanding principal balance subject hereto is determined in relation to the Reference Rate as hereinabove provided; provided however, that if any such Change in Law shall permit any Libor Rate (Reserve Adjusted)-based loans to remain in effect until the expiration of the Interest Period applicable thereto, then such permitted Libor Rate (Reserve Adjusted)-based loans shall continue in effect until the expiration of such Interest Period. Upon the occurrence of any of the foregoing events, maker shall pay to the Bank immediately upon demand such amounts as may be necessary to compensate the Bank for any fines, fees, charges, penalties or other costs incurred or payable by the Bank as a result thereof and which are attributable to any Libor Rate (Reserve Adjusted) options made available to maker hereunder, and any reasonable allocation made by the Bank among its operations shall be conclusive and binding upon maker. If any Change in Law or compliance by the Bank with any request or directive (whether or not having the force of law) from any central bank or other governmental authority shall: (A) subject the Bank to any tax, duty or other charge with respect to any Libor Rate (Reserve Adjusted) options, or change the basis of taxation of payments to the Bank of principal, interest, fees or any other amount payable hereunder (except for changes in the rate of tax on the overall net income of the Bank); or (B) impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances or loans by, or any other acquisition of funds by any office of the Bank; or (C) impose on the Bank any other condition; and the result of any of the foregoing is to increase the cost to the Bank of making, renewing or maintaining any Libor Rate (Reserve Adjusted)-based loan hereunder and/or to reduce any amount receivable by the Bank in connection therewith, then in any such case, maker shall pay to the Bank immediately upon demand such amounts as may be necessary to compensate the Bank for any additional costs incurred by the Bank and/or reductions in amounts received by the Bank which are attributable to such Libor Rate (Reserve Adjusted)-based loan. In determining which costs incurred by the Bank and/or reductions in amounts received by the Bank are attributable to any Libor Rate (Reserve Adjusted)-based loan made to maker hereunder, any reasonable allocation made by the Bank among its operations shall be conclusive and binding upon maker. The Bank is hereby authorized to enter on the schedule attached hereto the amount of each loan and each payment of principal thereon, without any further authorization on the part of the maker or any endorser or guarantor of this Note, but the Bank's failure to make such entry shall not limit or otherwise affect the obligations of the maker or any endorser or guarantor of this Note. In the event that any other Liabilities (as hereinafter defined) of maker to the Bank are due at any time that the Bank receives a payment from maker on account 3 of this Note or any such other Liabilities of maker, the Bank may apply such payments to amounts due under this Note or any such other Liabilities in such manner as the Bank, in its discretion, elects, regardless of any instructions from maker to the contrary. The maker and each endorser and guarantor of this Note acknowledge and agree that the use of this form of Note is for their convenience, and there is no obligation on the part of the Bank to make loans to the maker whatsoever. Interest shall be computed on the basis of a 360-day year. Each maker or endorser authorizes (but shall not require) the Bank to debit any account maintained by the maker or endorser with the Bank, at any date on which the payment of principal or of interest on any of the Liabilities is due, in an amount equal to any unpaid portion of such payment. If the time for payment of principal of or interest on any of the Liabilities or any other money payable hereunder or with respect to any of the Liabilities becomes due on a day on which the Bank's offices are closed (as required or permitted by law or otherwise), such payment shall be made on the next succeeding business day, and such extension shall be included in computing interest in connection with such payment. All payments by any maker or endorser of this Note on account of principal, interest or fees hereunder shall be made in lawful money of the United States of America, in immediately available funds. All Property (as hereinafter defined) held by the Bank shall be subject to a security interest in favor of the Bank or holder hereof as security for any and all Liabilities. The term "Property" shall mean the balance of every deposit account of the maker with the Bank or any of the Bank's nominees or agents and all other obligations of the Bank or any of its nominees or agents to the maker, whether now existing or hereafter arising, and all other personal property of the maker (including without limitation all money, accounts, general intangibles, goods, instruments, documents and chattel paper) which, or evidence of which, are now or at any time in the future shall come into the possession or under the control of or be in transit to the Bank or any of its nominees or agents for any purpose, whether or not accepted for the purposes for which it was delivered. The term "Liabilities" shall mean the indebtedness evidenced by this Note and all other indebtedness, liabilities and obligations of any kind of the maker (or any partnership or other group of which the maker is a member) to (a) the Bank, (b) any group of which the Bank is a member, or (c) any other person if the Bank has a participation or other interest in such indebtedness, liabilities or obligations, whether (i) for the Bank's own account or as agent for others, (ii) acquired directly or indirectly by the Bank from the maker or others, (iii) absolute or contingent, joint or several, secured or unsecured, liquidated or unliquidated, due or not due, contractual or tortious, now existing or hereafter arising, or (iv) incurred by the maker as principal, surety, endorser, guarantor or otherwise, and including without limitation all expenses, including attorneys' fees, incurred by the Bank in connection with any such indebtedness, liabilities or obligations or any of the Property (including any sale or other disposition of the Property). 4 Upon the happening, with respect to any maker, endorser or guarantor of this Note or any assets of any such maker, endorser or guarantor, of any of the following events (each an "Event of Default"): death of the maker, endorser or guarantor or any member of the maker, endorser or guarantor (if a partnership); the failure to furnish the Bank with any requested information or failing to permit inspection of books or records by the Bank or any of its agents; the making of any misrepresentation to the Bank in obtaining credit for any of them; dissolution (if a corporation or partnership); the making of a mortgage or pledge; the commencement of a foreclosure proceeding; default in the payment of principal or interest on this Note or in the payment of any other obligation of any said maker, endorser or guarantor held by the Bank or holder hereof or in the performance or observance of any covenant or agreement contained in the instrument evidencing such obligation; default in the payment of principal of or interest on any indebtedness for borrowed money owed to any other person or entity (including any such indebtedness in the nature of a lease) or default in the performance or observance of the terms of any instrument pursuant to which such indebtedness was created or is secured, the effect of which default is to cause or permit any holder of any such indebtedness to cause the same to become, due prior to its stated maturity (and whether or not such default is waived by the holder thereof); a change in the financial condition or affairs of any of them which in the opinion of the Bank or subsequent holder hereof materially reduces his, their or its ability to pay all of his, their or its obligations; the suspension of business; the making of an assignment for the benefit of creditors, or the appointment of a trustee, receiver or liquidator for the maker, endorser or guarantor or for any of his, its or their property, or the commencement of any proceedings by the maker, endorser or guarantor under any bankruptcy, reorganization, arrangement of debt, insolvency, readjustment of debt, receivership, liquidation or dissolution law or statute (including, if the maker, endorser or guarantor is a partnership, its dissolution pursuant to any agreement or statute), or the commencement of any such proceedings without the consent of the maker, endorser or guarantor, as the case may be, and such proceedings shall continue undischarged for a period of 30 days; the sending of notice of an intended bulk sale; the entry of judgments or any attachment, levy or execution against any of his, their or its properties shall not be released, discharged, dismissed, stayed or fully bonded for a period of 30 days or more after its entry, issue or levy, as the case may be; or the issuance of a warrant of distraint or assertion of a lien for unpaid taxes, this Note, if not then due or payable on demand, shall become due and payable immediately without demand or notice and all other debts or obligations of the makers and endorsers hereof to the Bank or holder hereof, whether due or not due and whether direct or contingent and howsoever evidenced, shall, at the option of the Bank or holder hereof, also become due and payable immediately without demand or notice. After this Note becomes due, at stated maturity or on acceleration, any unpaid balance hereof shall bear interest from the date it becomes due until paid at a rate per annum 3% above the rate borne by this Note when it becomes due or, if such rate shall not be lawful with respect to the undersigned, then at the highest lawful rate. The liability of any party to commercial paper held by the Bank or holder hereof, other than the makers and endorsers hereof, shall remain unaffected hereby and such parties shall remain liable thereon in accordance with the original tenor thereof. Each maker and endorser agrees that if an attorney is retained to enforce or collect this Note or any other obligations by reason of non-payment of this Note when due or made due hereunder, a reasonable attorneys' fee shall be paid in addition, which fees shall be computed as follows: 15% of the principal, interest and all other sums due and owing to the payee or holder or the reasonable value of the attorneys' services, whichever is greater. 5 This Note shall be governed by the laws of the State of New York and shall be binding upon the maker and each endorser and the maker's and each endorser's heirs, administrators, successors and assigns. The maker and each endorser hereby irrevocably consent to the jurisdiction of any New York State or Federal court located in New York City over any action or proceeding arising out of any dispute between the maker and each endorser and the Bank, and the maker further irrevocably consents to the service of process in any such action or proceeding by the mailing of a copy of such process to the maker at the address set forth below. In the event of litigation between the Bank and the maker over any matter connected with this Note or resulting from transactions hereunder, the right to a trial by jury is hereby waived by the Bank and the maker. The maker also waives the right to interpose any set-off or counterclaim of any nature. The Bank or any holder may accept late payments, or partial payments, even though marked "payment in full" or containing words of similar import or other conditions, without waiving any of its rights. No amendment, modification or waiver of any provision of this Note nor consent to any departure by maker therefrom shall be effective, irrespective of any course of dealing, unless the same shall be in writing and signed by the Bank, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. The rights and remedies of the Bank provided for hereunder (including but not limited to the right to accelerate Liabilities of maker and to realize on any security for any such Liabilities) are cumulative with the rights and remedies of the Bank available under any other instrument or agreement or under applicable law. The undersigned, if more than one, shall be jointly and severally liable hereunder. ELK ASSOCIATES FUNDING CORP. By: /s/ Gary Granoff ------------------------- Gary Granoff, President By: /s/ Margaret Chance ------------------------- Margaret Chance, Secretary (Address) 747 Third Avenue New York, New York 10017 VALUE RECEIVED 6 This Note shall be governed by the laws of the State of New York and shall be binding upon the maker and each endorser and the maker's and each endorser's heirs, administrators, successors and assigns. The maker and each endorser hereby irrevocably consent to the jurisdiction of any New York State or Federal court located in New York City over any action or proceeding arising out of any dispute between the maker and each endorser and the Bank, and the maker further irrevocably consents to the service of process in any such action or proceeding by the mailing of a copy of such process to the maker at the address set forth below. In the event of litigation between the Bank and the maker over any matter connected with this Note or resulting from transactions hereunder, the right to a trial by jury is hereby waived by the Bank and the maker. The maker also waives the right to interpose any set-off or counterclaim of any nature. The Bank or any holder may accept late payments, or partial payments, even though marked "payment in full" or containing words of similar import or other conditions, without waiving any of its rights. No amendment, modification or waiver of any provision of this Note nor consent to any departure by maker therefrom shall be effective, irrespective of any course of dealing, unless the same shall be in writing and signed by the Bank, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. The rights and remedies of the Bank provided for hereunder (including but not limited to the right to accelerate Liabilities of maker and to realize on any security for any such Liabilities) are cumulative with the rights and remedies of the Bank available under any other instrument or agreement or under applicable law. The undersigned, if more than one, shall be jointly and severally liable hereunder. ELK ASSOCIATES FUNDING CORP. By: /s/ ------------------------- By: /s/ ------------------------- (Address) 747 Third Avenue New York, New York 10017 VALUE RECEIVED 6 bank leumi USA (Graphic Omitted) ================================================================================ Member FDIC January 4, 1999 Elk Associates Funding Corporation ("Borrower") 747 Third Avenue New York, NY 10017 Attn: Mr. Gary Granoff, President Dear Mr. Granoff: Reference is made to promissory note dated January 4, 1999 in the principal amount of $7,000,000. You have agreed that for good and valuable consideration including but not limited to the extension and increase of credit accommodations to Borrower, in the amount of $7,000,000, that letter agreement dated January 20, 1998 shall continue to be in full force and effect with respect to credit accommodations now or in the future outstanding to Borrower. You have agreed that the first paragraph of such letter is modified to provide as follows: "In order to induce you to make and/or continue loans for the account of the undersigned pursuant to Promissory Note (Grid) dated January 4, 1999, as such note is hereafter modified, extended, renewed or replaced with other notes, the Borrower will, and will cause each affiliate and subsidiary (to the extent applicable) to:". 562 Fifth Avenue, New York, NY 10036 Commercial Banking - Private Banking - International Banking - A Member of the Worldwide Bank Leumi le-Israel Group Elk Associates Funding Corporation Page 2 January 4, 1999 Please confirm your agreement to the foregoing by signing and returning a copy of this letter to the undersigned. Very truly yours, BANK LEUMI USA By: /s/ Fran Davis ------------------------------ Fran Davis, Vice President By: /s/ Iris Schechter ------------------------------ Iris Schechter, Vice President Consented and Agreed to: ELK ASSOCIATES FUNDING CORPORATION By: /s/ Gary Granoff --------------------------- Gary Granoff, President By: /s/ Margaret Chance --------------------------- Margaret Chance, Secretary Elk Associates Funding Corporation Page 2 January 4, 1999 Please confirm your agreement to the foregoing by signing and returning a copy of this letter to the undersigned. Very truly yours, BANK LEUMI USA By: /s/ ------------------------------ By: /s/ ------------------------------ Consented and Agreed to: ELK ASSOCIATES FUNDING CORPORATION By: /s/ --------------------------- By: /s/ --------------------------- EX-99.N1 18 EXHIBIT 99.N1 Exhibit n.1 ----------- CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Ameritrans Capital Corporation and Subsidiaries We consent to the reference to our firm under the caption "Experts" in the Registration Statement on Form N-2 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 July 12, 1999 EX-99.N2 19 EXHIBIT 99.N2 Exhibit n.2 ----------- INDEPENDENT AUDITORS' CONSENT To the Board of Directors and Shareholders of Ameritrans Capital Corporation and Subsidiaries We consent to the use in this Registration Statement of Ameritrans Capital Corporation on Form N-2 of our report dated August 2, 1996 on the financial statements of Elk Associates Funding Corporation and Subsidiary, appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the heading "Experts" in such Prospectus. DELOITTE & TOUCHE LLP New York, New York July 8, 1999 -----END PRIVACY-ENHANCED MESSAGE-----