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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _________
Commission File No. 0-22153
AMERITRANS CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 52-2102424
(State of incorporation) (I.R.S. Employer Identification No.)
747 THIRD AVENUE, NEW YORK, NEW YORK 10017
(Address of principal executive offices) (Zip Code)
(800) 214-1047
Registrant's Telephone Number, including Area Code:
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.0001 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K [ ]
The approximate aggregate market value of common equity held by
non-affiliates of the Registrant as of September 27, 2000 was approximately
$8,924,388, based on the last sale price of the Registrant's Common Stock on the
Nasdaq SmallCap Market as of the close of business on September 27, 2000. There
were 1,745,600 shares of the Registrant's Common Stock outstanding as of
September 27, 2000.
AMERITRANS CAPITAL CORPORATION
2000 FORM 10-K ANNUAL REPORT
Table of Contents
Page
----
PART I ................................................................... 1
ITEM 1. BUSINESS OF AMERITRANS ...................................... 1
ITEM 2. PROPERTIES .................................................. 22
ITEM 3. LEGAL PROCEEDINGS ........................................... 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ......... 22
PART II .................................................................. 23
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS ................................. 23
ITEM 6. SELECTED FINANCIAL DATA ..................................... 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ......................... 26
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK ................................................. 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ................. 30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES ........................ 30
PART III ................................................................. 31
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ......... 31
ITEM 11. EXECUTIVE COMPENSATION ..................................... 34
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT ................................................ 36
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ............. 38
PART IV .................................................................. 39
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K .................................................. 39
IMPORTANT FACTORS RELATING TO FORWARD-LOOKING STATEMENTS ................. 39
SIGNATURES ............................................................... 40
PART I
ITEM 1. BUSINESS OF AMERITRANS
BUSINESS
GENERAL
Ameritrans Capital Corporation (the "Company" or "Ameritrans") was formed
in 1998 to engage in lending and investment activities, primarily with small and
medium-sized businesses, directly and through subsidiaries. On December 16,
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 79% of Elk's loan
portfolio as of June 30, 2000. 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. 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
December 16, 1999, when we acquired Elk, these dividends have been payable to
Ameritrans as Elk's sole stockholder. The Company recently announced that it
will not pay any dividends to its shareholders for the three months ended
June 30, 2000 due to the Company taking write-offs of certain diversified,
non-taxi loans.
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."
Proposed Merger
Ameritrans proposes to enter into a merger with AMTC Merger Corp., a
wholly-owned subsidiary of Medallion Financial Corp. ("Medallion") pursuant to
an Agreement and Plan of Merger dated as of May 4, 2000, as amended August 29,
2000. (the "Merger Agreement"). Consummation of the Merger is subject to various
conditions, including the affirmative vote of the holders of at least two-thirds
of the outstanding shares of Ameritrans common stock.
The Merger Agreement contemplates the issuance of shares of common stock of
Medallion as consideration for the surrender and exchange of the outstanding
shares of common stock of Ameritrans. The number of shares to be issued by
Medallion as the merger consideration is dependent upon the average market price
of Medallion common stock over a twenty (20) day time period immediately prior
to the closing of the Merger. Based upon a closing price of Medallion's common
stock of $17.00, for example, at the time of closing Ameritrans stockholders
would receive $9.43 per share or 0.5547 shares of Medallion for each Ameritrans
share. If the average market price of Medallion common stock over the twenty
(20) day period is less than $15.00 per share, then either Ameritrans or
Medallion has the right to terminate the Merger Agreement. The Merger Agreement
contains other customary terms and provisions, including representations,
warranties, covenants, and conditions. The Merger Agreement contemplates that
the Merger will be accounted for under the pooling of interests method of
accounting.
1
CURRENT BUSINESS ACTIVITIES
AMERITRANS. To date, Ameritrans' only activities have been the operation of
Elk.
ELK. Elk was organized primarily to provide long-term loans to businesses
eligible for investments by SBICs under the 1958 Act ("Small Business
Concerns"). Elk has made loans for financing the purchase or continued ownership
of taxi medallions, taxis and related assets.
Although Elk's certificate of incorporation provides Elk with the authority
to invest in the equity capital of Small Business Concerns, Elk makes equity
investments in Small Business Concerns on a selective basis, and only to a
limited extent. Equity securities in Elk's investment portfolio at June 30,
2000, totaled $631,974 or 1.0% 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.
2
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 2000, was that individually owned medallions sold
for approximately $210,000 and corporate medallions sold for approximately
$250,000 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.
3
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 the
majority 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. In the August, 1999 auction
of 150 medallions, the winning bid prices ranged from 65,000 to 70,000.
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
4
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 was that medallions were selling for
between $65,000 and $70,000 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 auctioned another 75 medallions in September 1999 and 57 medallions in
May of 2000.
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 $1,638,000 as of June 30, 2000.
5
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 residents 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. To the best
of our knowledge, 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 $75,000 to $80,000
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. As of June 30, 2000, the total
principal amount of our outstanding taxi loans in the Miami area was
approximately $1,620,094.
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
6
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 June 30, 2000, ranged from
8.0% to 18% 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 June 30, 2000 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, 2000 was 19%. See
"Regulation -- The Small Business Act of 1958."
7
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, although between July 1, 1999 and June 30, 2000
medallion prices in New York City dropped approximately 15%. 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 $68,000. 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 $180,000 in Boston and from
approximately $55,000 to $80,000 in Miami.
As of June 30, 2000, $16,822,002, or 30%, of the aggregate principal amount
of its outstanding loans of $56,806,579, represented loans made to finance the
purchase or continued ownership of New York City taxi medallions and related
assets; an aggregate of $24,980,811, or 44%, consisted of loans to finance the
purchase or refinancing of taxi medallions in Chicago, and the balance of
$15,003,766 or 26% consisted of loans to various commercial borrowers, of which
$1,637,688, or 2.9%, was invested in Boston taxi medallion financing and
$1,620,094, or 2.9%, 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 9.5%. 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
8
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 have been increasing
steadily. At June 30, 1995, Commercial Loans totaled $1,275,654, or 5.5%, of
Elk's total loan portfolio, while at June 30,2000, Commercial Loans totaled
$11,745,984, or 20.7%, of Elk's total loan portfolio. For the year ended June
30, 2000 the Company wrote-off certain commercial loans aggregating $617,846.
At June 30, 2000, Elk's Commercial Loan portfolio consisted of 78 loans, of
which 13 loans totaling $1,821,367 were to dry-cleaning businesses, 34 loans
totaling $5,536,645 were to laundromat businesses, and 31 loans totaling
$4,387,972 were to a variety of other small businesses. Loans to dry cleaners
and laundromats represented 62.6% of the aggregate principal amount of
Commercial Loans outstanding at June 30, 2000.
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 8% to 18%.
9
LOAN PORTFOLIO; VALUATION
The following table sets forth a classification of the Company's
outstanding loans as of June 30, 2000 (unaudited):
Maturity
Number Interest Dates Balance
Type of Loan of Loans Rates (In Months) Outstanding
- -----------------------------------------------------------------------------------------------------------------
New York City:
Taxi medallion 103 8 - 16% 48 - 300 $16,612,749
Radio car service 27 11 - 15% 24 - 48 209,253
Chicago:
Taxi medallion 484 11 - 16% 21 - 120 24,980,811
Boston:
Taxi medallion 13 9.5 - 11% 39 - 180 1,637,688
Miami:
Taxi medallion 40 10.5 - 16% 29 - 180 1,620,094
Other loans:
Restaurant 4 10 - 12% 60 - 180 327,261
Hairdresser 2 12% 180 69,322
Car Wash/Auto Center 7 8 - 10.5% 60 - 180 880,027
Golf Course 1 14% 12 200,000
Bagel store 1 14% 60 13,513
Dry Cleaner 13 10.5 - 18% 48 - 120 1,821,367
Laundromat 34 9.5 - 18% 51 - 84 5,536,645
Laundry Equipment Dealer 1 9.5% 52 68,966
Financial Services 1 14% 120 252,782
Black Car Service (real property) 4 10.5 - 11% 60 - 180 652,380
Auto Sales 3 12 - 13% 57 - 120 275,349
Embroidery Manufacturer 2 12 - 18% 24 - 60 214,209
Movie Theater 1 16% 120 157,298
Retirement home 1 14% 84 300,000
Garden Supply/Florist 1 14% 91 287,500
Commercial Construction 2 13 - 16% 72 - 84 689,365
---- -----------
745
Total Loans Receivable 56,806,579
-----------
Less: Allowance for loan losses 380,000
Loans Receivable, net $56,426,579
===========
10
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% to 18% per annum. As of
June 30, 2000, the annual weighted average interest rate on Elk's loans was
approximately 11.5%. 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 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, although it has experienced losses on selective loans
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 June 30, 2000, Elk maintained three lines of credit totaling
$40,000,000 with an overall lending limit of $40,000,000. At June 30, 2000, Elk
had $37,800,000 outstanding under these lines. The loans, which mature through
October 2000, 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
11
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 11 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.
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.
12
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 June 30, 2000, we employed a total of six employees.
13
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.
14
(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' 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 Annual Report,
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
15
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 on December 7, 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.
16
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 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.
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,
17
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.
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.
18
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.
19
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;
20
(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 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 June 30, 2000, 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, 2000, 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.
21
ITEM 2. PROPERTIES
We rent office space from a law firm, the principals of which are officers
and directors of Ameritrans, 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 a short-term arrangement.
ITEM 3. LEGAL PROCEEDINGS
Ameritrans is not currently a party to any material legal proceeding. From
time to time, Ameritrans is engaged in various legal proceedings incident to the
ordinary course of its business. In the opinion of Ameritrans' management and
based upon the advice of legal counsel, there is no proceeding pending, or to
the knowledge of management threatened, which in the event of an adverse
decision would result in a material adverse effect on Ameritrans' results of
operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of Ameritrans' 2000 fiscal year.
22
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
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 December 16, 1999, when Ameritrans acquired Elk, its Common Stock has been
listed on the Nasdaq SmallCap Market under the symbol AMTC.
The following tables show the closing high and low sale prices per share of
common stock as reported by Nasdaq, for the fiscal years ended June 30, 1999 and
2000.
SALE
------------------------
HIGH LOW
-------- --------
FISCAL 1999
1st Quarter.......................... 11.25 7.75
2nd Quarter.......................... 11.00 9.125
3rd Quarter.......................... 10.625 8.875
4th Quarter.......................... 9.87 7.50
FISCAL 2000
1st Quarter ......................... 14.125 7.00
2nd Quarter (through December
16, 1999)(1)..................... 11.50 7.50
AMERITRANS
- ----------
2nd Quarter (from
December 16, 1999)(1) 11.50 7.50
3rd Quarter 10.00 6.00
4th Quarter 9.25 6.00
FISCAL 2001
1st Quarter (through September
27, 2000)........................ 8.96875 7.125
- ----------
(1) Stock prices shown are the high and the low for the quarter.
Elk registered under the 1940 Act for the fiscal year commencing July 1,
1983, and declared and paid dividends to holders of the Common Stock for the
fiscal years ended June 30, 1984 through June 30, 1992. Elk did not pay
dividends during the fiscal years ended June 30, 1993, 1994 and 1995. Elk
recommenced paying dividends for the fiscal year beginning July 1, 1995, has
paid dividends quarterly dividends since that time and up until its share
exchange with Ameritrans. Thereafter, Ameritrans has declared and paid dividends
to holders of its Common Stock. As disclosed on Form 8-K, filed September 25,
2000, Ameritrans will not pay its fourth quarter dividend for fiscal year 2000,
but anticipates that it will thereafter, until its proposed merger with
Medallion Financial Corp. is completed. There can be no assurance, however, that
Ameritrans will have sufficient earnings to pay such dividends in the future.
As of September 27, 2000, there were approximately 274 holders of record of
the Ameritrans Common Stock.
23
ITEM 6. SELECTED FINANCIAL DATA
On December 16, 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 June 30, 2000 and for the years ended 1999 and 2000 are
derived from the company's audited financial statements. You should read these
tables in conjunction with the consolidated financial statements of Ameritrans
(the "Financial Statements") included elsewhere in this Annual Report and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
STATEMENT OF
OPERATIONS FISCAL YEAR ENDED
DATA JUNE 30,
-----------------------------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Investment
Income $3,084,412 $4,023,795 $4,606,456 $ 5,583,894 6,602,397
========== ========== ========== =========== ==========
Interest Expense 1,105,993 1,582,700 1,840,731 2,440,051 3,367,907
Other Expenses 1,108,505 1,408,034 1,852,262 1,903,182 2,506,425
========= ========= ========= =========== ----------
Total Expenses 2,214,498 2,990,734 3,692,993 4,343,233 5,874,332
========= ========= ========= =========== ==========
Investment
Income Before
Credit (provision)
for Loan Gains (Losses)
and Gains on Assets
Acquired other income
(expenses) and
Income Taxes 869,914 1,033,061 913,463 1,240,661 728,065
======= ========= ======= =========== ==========
Credit
(provision) for
Loan Gains
(losses) and
Gains (Losses)
on Assets
Acquired 44,292 (8,923) (14,649) (11,272) (61 546)
Other Income (Expense) 24,885 38,798 7,200 (440,196)
Benefit of
(Provision for)
Income Taxes(1) (5,945) (28,676) (3,271) 769 (13,571)
=========== ======== ========== =========== ----------
Net Income $908,261 $1,020,347 $934,341 $ 1,237,358 $ 212,752
========== ========== =========== =========== ==========
Net Income Per
Common Share $ .73 $ .79 $ .62 $ .71 .12
========== ========== =========== =========== ==========
Common Stock
Dividends Paid $937,028 $946,655 $ 986,724 $ 1,256,832 $1,256,832
======== ======== ========== =========== ==========
Common Stock
Dividends Paid
Per Common Share $ .73 $ .74 $ .57 $ .72 .72
========== ========== =========== =========== ==========
24
STATEMENT OF
OPERATIONS FISCAL YEAR ENDED
DATA JUNE 30,
-------------------------------------------------------------------------------------
1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ----
Weighted
Average
Shares of
Common Stock
Outstanding 988,953 1,247,120 1,283,600 1,518,969 1,745,600 1,745600
======= ========= ========= ========= ========= =========
Net change to
accumulated other
comprehensive
income $ $ $ 58,241 $ 140,548 $ 62,964 $(124,319)
======= ========= ========= ========= ========= =========
BALANCE
SHEET DATA JUNE 30,
------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ----
Loans
Receivable $23,039,462 $24,141,421 $33,249,206 $41,590,000 $51,103,932 $56,806,579
Unrealized
depreciation
of
investments (277,000) (301,000) (325,000) (295,000) (380,000) (380,000)
=========== =========== =========== =========== =========== ===========
Net of
unrealized
depreciation
of
investments $22,762,462 $23,840,421 $32,924,206 $41,295,000 $50,723,932 $56,426,579
Total assets $25,702,600 $26,721,186 $37,026,021 $45,399,738 $54,510,801 $60,294,624
=========== =========== =========== =========== =========== ===========
Notes payable
and demand
notes $ 4,950,000 $ 6,625,000 $16,820,000 $22,085,000 $31,000,000 $37,800,000
Subordinated
SBA
debentures $ 8,804,000 $ 8,858,000 $8,880,000 $ 8,880,000 $ 8,880,000 $ 8,880,000
Total
liabilities $14,085,652 $15,820,351 $25,993,253 $31,705,011 $40,772,584 $47,410,598
=========== =========== =========== =========== =========== ===========
Total
stockholders'
equity $11,616,948 $10,900,835 $11,032,768 $13,694,727 $13,738,217 $12,884,026
=========== =========== =========== =========== =========== ===========
- ----------
(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.
25
ITEM 7. 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 December 16, 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 Consolidated Financial Statements."
26
Results of Operations for the Years Ended June 30, 2000 and 1999
Total Investment Income
The Company's investment income increased by $1,018,503 to $6,602,397 for
the year ended June 30, 2000, when compared with the year ended June 30, 1999.
The increase was due to an increase in interest earned on the loan portfolio of
979,551 plus an increase in other fees and income of $38,952. This reflects
Elk's decision to maximize stockholders' return by maximizing the use of bank
financing.
Operating Expenses
Interest expenses increased by $927,856 to $3,367,907 when compared with
the prior year due to Elk's stragegy to maximize bank financing which rose to
37,800,000 as of June 30, 2000, as compared to $31,000,000 at June 30, 1999.
Other operating expenses increased to $1,950,125 for the year ended June 30,
2000, as compared with $1,767,989 in the prior year. Bad debt expense increased
$471,381 to $617,846 during the year ended June 30, 2000, as compared with the
year ended June 30, 1999. During the year ended June 30, 2000, as part of the
share exchange the Company expensed costs incurred in the amount of $423,045. In
addition, in conjunction with the proposed merger with Medallion, the Company
abandoned its proposed offering of securities which resulted in a write-off of
offering costs in the amount of $256,087. These costs were non operational and a
one time charge.
Net Income
Net income ended June 30, 2000, decreased $1,024,606 to $212,752. This
decrease was mainly due to increased bad debt write offs of $471,381, a one time
write off of offering costs of $256,087 and recapitalization costs of 423,045.
Results of Operation For the Years ended June 30, 1999 and 1998
Total Investment Income
Elk's investment income increased $977,438 to $5,583,894 for the year ended
June 30, 1999, when compared with the year ended June 30, 1998. The increse was
due to an increase in interest earned on the loan portfolio of $1,088,940
off-set by a decrease in other fees and income of $111,502. This reflects Elk's
decision to maximize stockholders' return by maximizing the use of bank
financing.
Operating Expenses
Interest expense increased $599,320 to $2,440,051 when compared with the
prior year due to Elk's strategy to maximize bank financing which rose to
$31,000,000 as of June 30, 1999, as compared to $22,085,000 at June 30, 1998.
Other operating expenses increased to $1,767,989 for the year ended June 30,
1999, as compared with $1,639,163 in the prior year. Bad debt expense decreased
$81,283 to $146,465 during the year ended June 30, 1999, as compared with the
year ended June 30, 1998.
Net Income
Net income for the year ended June 30, 1999, increased $303,017 to
$1,237,358 when compared with the year ended June 30, 1998. The increase
reflects the benefit of Elk's decision to maximize the use of leverage on bank
financing.
27
BALANCE SHEET AND RESERVES
Total assets increased by $5,783,823 as of June 30, 2000 when compared to
total assets as of June 30, 1999. 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, $6,800,000, during the year.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations through private placements of its
securities, bank financing, and the issuance to the SBA of its subordinated
debentures.
In 1994, Elk agreed to repurchase all of the 547,271 outstanding shares of
its 3% preferred stock from the SBA for an aggregate price of $1,915,449,
representing a discount of 65% from the original issue price of $10 per share.
As a condition of the repurchase, Elk granted the SBA a liquidating interest in
a newly established restricted capital surplus account (the "Restricted Capital
Account"). The Restricted Capital Account is equal to the amount of the net
repurchase discount in which the SBA received a liquidating interest, amortized
over 60 months ending November 10, 1999. However, if Elk is liquidated or if a
material violation of SBA Regulations occurs during the amortization period, the
SBA would receive the remaining unamortized amount of the Restricted Capital
Account prior to the stockholders of Elk receiving any amounts on their Common
Stock. The unamortized balance of the SBA's liquidating interest at December 31,
1999 was nil.
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 June 30, 2000, 81% of Elk's indebtedness was represented by indebtedness
to its banks and 19% 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 $40,000,000
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.
28
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.
29
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pursuant to the General Instructions to Rule 305 of Regulation S-K, the
quantitative and qualitative disclosures called for by this Item 7A and by Rule
305 of Regulation S-K are inapplicable to Ameritrans at this time.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted in the response found under Item
14(A)(1) in this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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(1) 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 52, 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
31
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 45, 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 43, 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 51, 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 49, 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 46, 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.
32
Marvin Sabesan, age 71, 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 64, 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 50, 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 42, 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 58, 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 60, 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
33
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.
Compliance with Section 16(a) of the 1934 Act
Section 16(a) of the Securities Exchange Act of 1934 (the "1934 Act")
requires Ameritrans' officers and directors, and persons who own more than 10%
of Ameritrans' Common Stock, to file initial reports of beneficial ownership and
changes in beneficial ownership with the SEC and to furnish Ameritrans with
copies of all reports filed.
Based solely on a review of the forms furnished to Ameritrans, or written
representations from certain reporting persons, Ameritrans believes that all
persons who were subject to Section 16(a) in fiscal 2000 complied with the
filing requirements.
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 Howard
Sommer. 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.
The Board of Directors held 4 formal meetings during fiscal 2000. At least
75% of the Company's directors attended each of the meetings of the Board.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all remuneration for services rendered to
the Company to (i) each of the executive officers and (ii) all executive
officers as a group during the fiscal year ended June 30, 2000. 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 $225,084(3) $24,000
Ellen M. Walker, Vice President and General $110,000 $16,500
Counsel
Lee A. Forlenza, Vice President $50,000 $7,500
Silvia Mullens, Vice President $69,889 $10,483
Margaret Chance, Secretary $81,946 $12,292
All executive officers as a group (6 persons) $544,919 $70,775
- ----------
(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.
During the fiscal year ended June 30, 2000, increases in compensation were
given to Gary C. Granoff, Ellen M. Walker, Lee A. Forlenza, Silvia Mullens and
Margaret Chance.
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, $52,050 for the year ended June
30, 1998 and $32,375 for the year ended June 30, 1999 and $36,875 for the year
ended June 30, 2000.
No options were granted to any of the Company's named executive officers
34
during fiscal year ended June 30, 2000. On August 31, 1999 the Company granted
22,224 options of the Company's Common Stock to four of the Company's directors,
and in January 2000 granted an additional 11,112 to two directors, all at an
exercise price of $9.00 per share.
Report of the Board of Directors as to Compensation Matters
The objectives of Ameritrans' executive compensation program are to
establish compensation levels designed to enable Ameritrans to attract, retain
and reward executive officers who contribute to the long-term success of
Ameritrans so as to enhance stockholder value. The Board of Directors makes
decisions each year regarding executive compensation, including annual base
salaries and bonus awards, and the 1999 Employee Plan Committee, consisting of
non-interested directors, will make decisions each year regarding stock option
grants. Option grants are key components of the executive compensation program
and are intended to provide executives with an equity interest in Ameritrans so
as to link a meaningful portion of the compensation of Ameritrans' executives
with the performance of Ameritrans' Common Stock. This report is submitted by
the full Board of Directors and addresses the compensation policies for fiscal
2000 as they affected Gary C. Granoff, in his capacity as the Chief Executive
Officer of the Company, as well as each of Ameritrans' other officers.
Compensation Philosophy
Ameritrans' executive compensation philosophy is based on the belief that
competitive compensation is essential to attract, motivate and retain highly
qualified and industrious employees. Ameritrans' policy is to provide total
compensation that is competitive for comparable work and comparable corporate
performance. The compensation program includes both motivational and
retention-related compensation components. Bonuses may be included to encourage
effective performance relative to current plans and objectives. Stock options
are included to help retain productive people and to more closely align their
interest with those of stockholders.
In executing its compensation policy, Ameritrans seeks to relate
compensation with Ameritrans' financial performance and business objectives,
reward high levels of individual performance and tie a significant portion of
total executive compensation to both the annual and long-term performance of
Ameritrans. While compensation survey data are useful guides for comparative
purposes, Ameritrans believes that a successful compensation program also
requires the application of judgment and subjective determinations of individual
performance, and to that extent the Board of Directors applies judgment in
reconciling the program's objectives with the realities of retaining valued
employees.
Executive Compensation Program
Annual compensation for Ameritrans' executives consists of two principal
elements: cash compensation, consisting of salaries and bonuses, and stock
options.
Cash Compensation
In setting the annual base salaries for Ameritrans' executives, the Board
of Directors reviews the aggregate salary and bonus compensation for
individuals in comparable positions with other companies, including competitors
of Ameritrans, and adjusts such amounts to reflect individual performance. Many
of these companies are specialty finance companies. Ameritrans also regularly
compares the salary levels of its executive officers with other leading
companies.
Increases in annual base salary are based on a review and evaluation of the
performance of the activity for which the executive has responsibility, the
impact of that activity on Ameritrans and the skills and experience required for
the job, coupled with a comparison of these elements with similar elements for
other executives both inside and outside Ameritrans.
Cash bonuses are tied directly to Ameritrans' financial performance and the
contribution of the executive to such performance.
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
35
our success in large measure depends. As of June 30, 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 per share. Accordingly,
25,000 shares of Common Stock are available for future awards under the 1998
Employee Plan.
The 1998 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 1998 Employee Plan as it deems appropriate.
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 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").
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 is administered by a committee
of directors who are not eligible to participate in the Directors Plan.
SIMPLIFIED EMPLOYEE PENSION PLAN
In 1996, Elk adopted a simplified employee pension plan covering, at
present, all eligible employees of the Company. Contributions to the plan are at
the discretion of the Board of Directors. During the fiscal year ended June 30,
2000 contributions amounted to $70,775.
Gary C. Granoff's Fiscal 2000 Compensation
The Board of Directors has set Gary C. Granoff's total annual compensation
at a level it believes to be competitive with the chief executive officers of
similarly capitalized specialty finance companies. Gary C. Granoff, in his
capacity as Chief Executive Officer, is eligible to participate in the same
executive compensation program available to Ameritrans' other senior executives.
INTERLOCKS AND INSIDER PARTICIPATION
Ameritrans does not currently have a compensation committee, and the Board
of Directors as a whole considers executive compensation matters. Each of
Messrs. Granoff, Forlenza and Etra and Ms. Walker, all of whom are executive
officers and directors of Ameritrans, is an "interested person" as such term is
defined in Section 2(a)(19) of the 1940 Act.
STOCK PERFORMANCE GRAPH
Although Ameritrans' Common Stock is listed on the Nasdaq SmallCap Market
trading in Ameritrans' Common Stock has been extremely limited, making it
difficult to meaningfully compare the performance of Ameritrans' Common Stock to
that of other similar companies or a broad market index. Therefore, Ameritrans
has not included a stock performance graph.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS 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, 2000, (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.
NUMBER OF SHARES OF PERCENTAGE OF OUTSTANDING
NAME COMMON STOCK OWNED COMMON STOCK
- ---- ------------------- -------------------------
*Gary C. Granoff 315,387(1) 18.06%
*Ellen M. Walker 57,374(2) 3.1%
*Lee A. Forlenza 48,095(3) 2.6%
*Steven Etra 133,016(4) 7.2%
Marvin Sabesan 84,417(5) 4.3%
c/o Pearl River Textiles, Inc.
990 Sixth Avenue
New York, NY
Paul Creditor 7,556(6) **
747 Third Avenue, Ste. 4C
New York, NY
Allen Kaplan 10,556(7) **
c/o Executive Charge, Inc.
1440 39th Street
Brooklyn, NY
36
NUMBER OF SHARES OF PERCENTAGE OF OUTSTANDING
NAME COMMON STOCK OWNED COMMON STOCK
- ---- ------------------- -------------------------
John L. Acierno 5,556(8) **
c/o Executive Charge, Inc.
1440 39th Street
Brooklyn, NY
John R. Laird 5,656 **
481 Canoe Hill Road
New Canaan, CT
Howard F. Sommer 5,556 **
c/o New York Community
Investment Co., LLC
120 Broadway
New York, NY
Dan M. Granoff 155,979(9) 8.9%
Children's Hospital
Oakland Research Institute
747 52nd Street
Oakland, CA
Paul D. Granoff 143,179(10) 8.2%
c/o Rush-Copley Medical Center
1900 Ogden Avenue
Aurora, IL 60504
All Officers and Directors as a 697,388(11) 39.9%
group (10 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. 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) 261 shares held by GCG Associates Inc., a corporation owned
by Mr. Granoff; (iii) 76,084 shares owned by Dapary Management Corp., a
corporation controlled by Mr. Granoff and (iv) 30,000 shares issuable upon
the exercise of five-year options issued under the 1999 Employee Plan. See
"Stock Option Plans."
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 "Stock Option Plans."
37
3. Includes 17,500 shares issuable upon the exercise of ten-year options
issued to under the 1999 Employee Plan. See "Stock Option Plans."
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 "Stock Option Plans."
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. Also includes 5,556
shares issuable upon the exercise of ten-year options issued under the
Director Plan. See "Stock Option Plans."
6. Includes 5,556 shares issuable upon exercise of ten year options issued
under the Director Plan. See "Stock Options Plans."
7. Includes 5,556 shares issuable upon exercise of ten year options issued
under the Director Plan. See "Stock Options Plans."
8. Includes 5,556 shares issuable upon exercise of ten year options issued
under the Director Plan. See "Stock Options Plans."
9. 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.
10. 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.
11. Includes 100,000 shares issuable upon the exercise of 30,000 five-year and
70,000 ten-year options issued under the 1999 Employee Plan and 22,224
shares issuable upon the exercise of ten-year options issued under the
Director Plan. See "Stock Option Plans."
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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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 during the fiscal year ended June 30, 2000. 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, 2000, we paid
$39,600 in rent, $59,400 in shared overhead expense, and $28,786 of other
reimbursable shared overhead expense.
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
38
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.
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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a) 1. and 2. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The financial statements and financial statement schedules as listed in the
Index to Financial Statements are filed as part of this Anual Report on Form
10-K.
b) REPORTS ON FORM 8-K
On May 12, 2000 the Company filed a current report on 8-K reporting under
Item V (Other Events) that the Company entered into an Agreement and Plan of
Merger by and among Medallion Financial Corp. and AMTC Merger Corp. a wholly
owned subsidiary of Medallion Financial Corp.
Subsequent to the period covered by this Annual Report the Company filed a
current report on 8-K on September 25, 2000 reporting under Item V (Other
Events) that the Company issued a press release announcing that it had (i)
amended its quarterly results to reflect a change in accounting treatment of
holding company restructuring costs, (ii) that it will omit its fourth quarter
dividend, and (iii) that it adjusted its merger price with Medallion Financial
Corp.
c) EXHIBITS
The Exhibits filed as part of this Annual Report on Form 10-K are listed on the
Exhibit Index immediately preceding such Exhibits, which Exhibit Index is
incorporated by reference.
IMPORTANT FACTORS RELATING TO FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in such statements. In connection with
certain forward-looking statements contained in this Form 10-K and those that
may be made in the future by or on behalf of Ameritrans, Ameritrans notes that
there are various factors that could cause actual results to differ materially
from those set forth in any such forward-looking statements. The forward looking
statements contained in this Form 10-K were prepared by management and are
qulified by, and subject to, significant business, economic, competitive,
regulatory and other uncertainties and contingencies, all of which are difficult
or impossible to predict and many of which are beyond the control of Ameritrans.
Accordingly, there can be no assurance that the forward-looking statements
contained in this Form 10-K will be realized or that actual results will not be
significantly higher or lower. The statements have not been audited by, examined
by, compiled by or subjected to agreed-upon procedures by independent
accountants, and no third-party has independently verified or reviewed such
statements. Readers of this Form 10-K should consider these facts in evaluating
the information contained herein. In addition, the business and operations of
Ameritrans are subject to substantial risks which increase the uncertainity
inherent in the forward-looking statements contained in this Form 10-K. The
inclusion of the forward-looking statements contained in this form 10-K should
not be regarded as a representation by Ameritrans or any other person that the
forward-looking statements contained in this Form 10-K, will be achieved. In
light of the foregoing, readers of this Form 10-K are cautioned not to place
undue reliance on the forward-looking statements contained herein. These risks
and others that are detailed in this Form 10-K and other documents that
Ameritrans files from time to time with the Securities and Exchange Commission,
including quarterly reports on Form 10-Q and any current reports on Form 8-K
must be considered by any investor or potential investor in Ameritrans.
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) Securities Act of 1934,
the Registrant has duly caused this report has been signed on the its behalf by
the undersigned therunto duly authorized, in the City of New York and State of
New York on the 28th day of September, 2000.
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.
SIGNATURE TITLE DATE
/s/ GARY C. GRANOFF President, Chairman of the September 28, 2000
- ---------------------------- Board of Directors
Gary C. Granoff Financial and Accounting Officer
/s/ ELLEN M. WALKER Vice President, General Counsel September 28, 2000
- ---------------------------- Board of Directors
Ellen M. Walker Financial and Accounting Officer
/s/ LEE A. FORLENZA Vice President and Director September 28, 2000
- ----------------------------
Lee A. Forlenza
/s/ STEVEN ETRA Vice President and Director September 28, 2000
- ---------------------------- Board of Directors
Steven Etra
40
/s/ MARVIN SABESAN Director September 28, 2000
- ----------------------------
Marvin Sabesan
/s/ PAUL CREDITOR Director September 28, 2000
- ----------------------------
Paul Creditor
/s/ ALLEN KAPLAN Director September 28, 2000
- ----------------------------
Allen Kaplan
/s/ JOHN L. ACIERNO Director September 28, 2000
- ----------------------------
John L. Acierno
/s/ HOWARD F. SOMMER Director September 28, 2000
- ----------------------------
Howard F. Sommer
/s/ JOHN R. LAIRD Director September 28, 2000
- ----------------------------
John R. Laird
41
AMERITRANS CAPITAL CORPORATION
AND SUBSIDIARIES
CONTENTS
- --------------------------------------------------------------------------------
Page
----
Independent Auditors Report F-1
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets at June 30, 2000 and June 30, 1999 F-2-3
Statements of Income for the years ended June 30, 2000, 1999 and 1998 F-4
Statements of Comprehensive Income for the years ended June 30, 2000, 1999 and 1998 F-5
Statements of Stockholders' Equity for the years ended June 30, 2000, 1999 and 1998 F-6
Statements of Cash Flows for the years ended June 30, 2000, 1999 and 1998 F-7-8
Schedule of Loans as of June 30, 2000 F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-10-23
42
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Ameritrans Capital Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Ameritrans
Capital Corporation and Subsidiaries as of June 30, 2000 and 1999, and the
related consolidated statements of income, comprehensive income, stockholders'
equity and cash flows for the years then ended June 30, 2000, 1999 and 1998 and
the schedule of loans as of June 30, 2000. 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
Ameritrans Capital Corporation and Subsidiaries as of June 30, 2000 and 1999,
and the results of their operations and their cash flows for the years ended
June 30, 2000, 1999 and 1998 in conformity with generally accepted accounting
principles.
As explained in Note 1, the consolidated financial statements include loans
valued at $56,426,579 and $50,723,932 as of June 30, 2000 and 1999,
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.
New York, NY
September 7, 2000
F-1
AMERITRANS CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2000 and 1999
- --------------------------------------------------------------------------------
ASSETS
2000 1999
----------------------------
Loans receivable $ 56,806,579 $ 51,103,932
Less: allowance for loan losses (380,000) (380,000)
------------ ------------
56,426,579 50,723,932
Cash and cash equivalents 376,507 542,290
Accrued interest receivable 928,765 714,626
Assets acquired in satisfaction of loans 609,106 612,491
Receivables from debtors on sales of assets acquired
in satisfaction of loans 743,954 409,939
Equity securities 631,974 909,386
Furniture, fixtures and leasehold improvements, net 110,019 105,440
Prepaid expenses and other assets 467,720 492,697
------------ ------------
TOTAL ASSETS $ 60,294,624 $ 54,510,801
============ ============
The accompanying notes are an integral part of these financial statements.
F-2
AMERITRANS CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2000 and 1999
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
2000 1999
----------------------------
LIABILITIES
Debentures payable to SBA $ 8,880,000 $ 8,880,000
Notes payable, banks 37,800,000 31,000,000
Accrued expenses and other liabilities 365,328 223,458
Accrued interest payable 365,270 354,918
Dividends payable -- 314,208
------------ ------------
TOTAL LIABILITIES 47,410,598 40,772,584
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, 1,000,000 shares authorized, -- --
none outstanding
Common stock, $.0001, par value, 5,000,000 shares
authorized; 1,745,600 shares issued and outstanding 175 175
Additional paid-in-capital 13,471,474 13,214,558
Restricted capital -- 256,916
Accumulated (deficit) earnings (725,057) 4,815
Accumulated other comprehensive income 137,434 261,753
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 12,884,026 13,738,217
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 60,294,624 $ 54,510,801
============ ============
The accompanying notes are an integral part of these financial statements.
F-3
AMERITRANS CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended June 30, 2000, 1999 and 1998
- --------------------------------------------------------------------------------
2000 1999 1998
-----------------------------------------
INVESTMENT INCOME
Interest on loans receivable $ 6,177,218 $ 5,197,667 $ 4,108,727
Fees and other income 425,179 386,227 497,729
----------- ----------- -----------
TOTAL INVESTMENT INCOME 6,602,397 5,583,894 4,606,456
----------- ----------- -----------
OPERATING EXPENSES
Interest 3,367,907 2,440,051 1,840,731
Salaries and employee benefits 594,804 533,352 495,889
Legal and professional fees 395,366 303,995 336,700
Miscellaneous administrative expenses 861,534 886,995 739,875
Loss on assets acquired in satisfaction of loans, net 61,546 11,272 14,649
Directors' fee 36,875 32,375 52,050
Bad debt expense 617,846 146,465 227,748
----------- ----------- -----------
TOTAL OPERATING EXPENSES 5,935,878 4,354,505 3,707,642
----------- ----------- -----------
OPERATING INCOME 666,519 1,229,389 898,814
----------- ----------- -----------
OTHER INCOME (EXPENSES)
Write-off non-cash receivable -- -- (25,000)
Net gain from rental activities 7,233 7,200 6,125
Gain on sale of equity securities 231,703
Recapitalization costs (423,045) -- --
Terminated offering costs (256,087) -- --
Recoveries -- -- 57,673
----------- ----------- -----------
TOTAL OTHER (EXPENSES) INCOME (440,196) 7,200 38,798
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 226,323 1,236,589 937,612
INCOME TAX (BENEFIT) EXPENSE 13,571 (769) 3,271
----------- ----------- -----------
NET INCOME $ 212,752 $ 1,237,358 $ 934,341
=========== =========== ===========
Weighted Average Shares Outstanding
- Basic 1,745,600 1,745,600 1,518,969
=========== =========== ===========
- Diluted 1,745,600 1,750,684 1,518,969
=========== =========== ===========
Net Income Per Common Share
- Basic $0.12 $0.71 $0.62
=========== =========== ===========
- Diluted $0.12 $0.71 $0.62
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-4
AMERITRANS CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended June 30, 2000, 1999 and 1998
- --------------------------------------------------------------------------------
2000 1999 1998
-------------------------------------
NET INCOME $ 212,752 $1,237,358 $ 934,341
OTHER COMPREHENSIVE INCOME
Unrealized gain on equity securities arising during
the period 84,283 62,964 140,548
Reclassification adjustment for gains included in
net income (208,602) -- --
---------- ---------- ----------
TOTAL COMPREHENSIVE INCOME $ 88,433 $1,300,322 $1,074,889
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-5
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended June 30, 2000, 1999 and 1998
- --------------------------------------------------------------------------------
Shares of Common
Common Stock Additional
Stock $0.0001 Par Paid-In Restricted
Outstanding Value Capital Capital
-----------------------------------------------------------------
BALANCE - July 1, 1997 1,283,600 $ 128 $ 8,903,701 $ 1,679,820
Transfer of restricted capital -- -- 711,452 (711,452)
Dividends paid -- -- -- --
Net income -- -- -- --
Unrealized gain on equity securities
arising during the period -- -- -- --
Proceeds from sale of common stock, net
of direct costs 462,000 47 2,887,953 --
------------ ------------ ------------ ------------
BALANCE - June 30, 1998 1,745,600 175 12,503,106 968,368
Transfer of restricted capital -- -- 711,452 (711,452)
Dividends paid -- -- -- --
Net income -- -- -- --
Unrealized gain on equity securities
arising during the period -- -- -- --
------------ ------------ ------------ ------------
BALANCE - June 30, 1999 1,745,600 175 13,214,558 256,916
Transfer of restricted capital -- -- 256,916 (256,916)
Dividends declared -- -- -- --
Net income -- -- -- --
Unrealized gain on equity securities
arising during the period -- -- -- --
Reclassification adjustment for gains
included in net income -- -- -- --
------------ ------------ ------------ ------------
BALANCE - June 30, 2000 1,745,600 $ 175 $ 13,471,474 $ --
============ ============ ============ ============
Retained Accumulated
Earnings Restricted Other
(Accumulated Retained Comprehensive
Deficit) Earnings Income Total
------------------------------------------------------------
BALANCE - July 1, 1997 $ 365,878 $ 25,000 $ 58,241 $ 11,032,768
Transfer of restricted capital -- -- -- --
Dividends paid (1,300,930) -- -- (1,300,930)
Net income 959,341 (25,000) -- 934,341
Unrealized gain on equity securities
arising during the period -- -- 140,548 140,548
Proceeds from sale of common stock, net
of direct costs -- -- -- 2,888,000
------------ ------------ ------------ ------------
BALANCE - June 30, 1998 24,289 -- 198,789 13,694,727
Transfer of restricted capital -- -- -- --
Dividends paid (1,256,832) -- -- (1,256,832)
Net income 1,237,358 -- -- 1,237,358
Unrealized gain on equity securities
arising during the period -- -- 62,964 62,964
------------ ------------ ------------ ------------
BALANCE - June 30, 1999 4,815 -- 261,753 13,738,217
Transfer of restricted capital -- -- -- --
Dividends declared (942,624) -- -- (942,624)
Net income 212,752 -- -- 212,752
Unrealized gain on equity securities
arising during the period -- -- 84,283 84,283
Reclassification adjustment for gains
included in net income -- -- (208,602) (208,602)
------------ ------------ ------------ ------------
BALANCE - June 30, 2000 $ (725,057) $ -- $ 137,434 $ 12,884,026
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-6
AMERITRANS CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 2000, 1999 and 1998
- --------------------------------------------------------------------------------
2000 1999 1998
-----------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 212,752 $ 1,237,358 $ 934,341
----------- ----------- -----------
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 74,714 63,649 49,890
Gain on sale of equity securities (231,703) -- --
Write-off of non-cash receivable -- -- 25,000
Increase in accrued interest receivable (214,139) (198,516) (107,945)
(Increase) decrease in prepaid expenses and
other assets 522 (267,071) (30,616)
Increase in accrued expenses and
other liabilities 141,870 19,358 92,096
Increase in accrued interest payable 10,352 133,214 40,456
----------- ----------- -----------
TOTAL ADJUSTMENTS (218,384) (249,366) 68,881
----------- ----------- -----------
NET CASH (USED) PROVIDED BY
OPERATING ACTIVITIES (5,632) 987,992 1,003,222
----------- ----------- -----------
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 (6,013,277) (9,599,670) (8,177,183)
Net sales (purchases) of equity securities 364,796 (217,242) (52,450)
Acquisition of furniture, fixtures and leasehold
improvements (54,838) (42,387) (37,468)
----------- ----------- -----------
NET CASH USED IN INVESTING
ACTIVITIES (5,703,319) (9,859,299) (8,267,101)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable, banks, net 6,800,000 8,915,000 5,265,000
Net proceeds from sale of common stock -- -- 2,888,000
Dividends paid (1,256,832) (1,256,832) (986,724)
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 5,543,168 7,658,168 7,166,276
----------- ----------- -----------
NET DECREASE IN CASH
AND CASH EQUIVALENTS (165,783) (1,213,139) (97,603)
CASH AND CASH EQUIVALENTS - Beginning 542,290 1,755,429 1,853,032
----------- ----------- -----------
CASH AND CASH EQUIVALENTS - Ending $ 376,507 $ 542,290 $ 1,755,429
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-7
AMERITRANS CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
For the Years Ended June 30, 2000, 1999 and 1998
- --------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
2000 1999 1998
-----------------------------------------
Cash paid during the years for:
Interest $ 3,357,555 $ 2,306,837 $ 1,840,276
Income taxes $ 9,864 $ -- $ 8,048
Noncash investing and financing activities:
Conversion of loans to assets acquired in
satisfaction of loans $ -- $ 381,500 $ 26,090
Unrealized gains of equity securities
arising during the period $ 84,283 $ 62,694 $ 140,548
Reclassification adjustment for gains
included in net income $ (208,602) $ -- $ --
Transfer of restricted capital $ 256,916 $ 711,452 $ 711,452
Declaration of cash dividend $ -- $ 314,208 $ 314,208
The accompanying notes are an integral part of these financial statements.
F-8
AMERITRANS CAPITAL CORPORATION
AND SUBSIDIARIES
SCHEDULE OF LOANS
June 30, 2000
- --------------------------------------------------------------------------------
Maturity
Number Interest Dates Balance
Type of Loan of Loans Rates (In Months) Outstanding
- -----------------------------------------------------------------------------------------------------------------
New York City:
Taxi medallion 103 8 - 16% 48 - 300 $16,612,749
Radio car service 27 11 - 15% 24 - 48 209,253
Chicago:
Taxi medallion 484 11 - 16% 21 - 120 24,980,811
Boston:
Taxi medallion 13 9.5 - 11% 39 - 180 1,637,688
Miami:
Taxi medallion 40 10.5 - 16% 29 - 180 1,620,094
Other loans:
Restaurant 4 10 - 12% 60 - 180 327,261
Hairdresser 2 12% 180 69,322
Car Wash/Auto Center 7 8 - 10.5% 60 - 180 880,027
Golf Course 1 14% 12 200,000
Bagel store 1 14% 60 13,513
Dry Cleaner 13 10.5 - 18% 48 - 120 1,821,367
Laundromat 34 9.5 - 18% 51 - 84 5,536,645
Laundry Equipment Dealer 1 9.5% 52 68,966
Financial Services 1 14% 120 252,782
Black Car Service (real property) 4 10.5 - 11% 60 - 180 652,380
Auto Sales 3 12 - 13% 57 - 120 275,349
Embroidery Manufacturer 2 12 - 18% 24 - 60 214,209
Movie Theater 1 16% 120 157,298
Retirement home 1 14% 84 300,000
Garden Supply/Florist 1 14% 91 287,500
Commercial Construction 2 13 - 16% 72 - 84 689,365
-----------
Total Loans Receivable 56,806,579
Less: Allowance for loan losses 380,000
-----------
Loans Receivable, net $56,426,579
===========
The accompanying notes are an integral part of these financial statements.
F-9
AMERITRANS CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - Organization and Summary of Significant Accounting Policies
Organization and Principal Business Activity
Ameritrans Capital Corporation ("Ameritrans"), a Delaware corporation,
acquired all of the outstanding shares of Elk Associates Funding
Corporation ("Elk") on December 16, 1999 in a share for share exchange.
Prior to the acquisition, Elk had been operating independently and
Ameritrans had no operations. The historical financial statements prior to
December 16, 1999 were those of Elk. In the accompanying financial
statements, the capital structure and earnings per share of Elk has been
retroactively restated to reflect the share exchange as if it occurred at
the beginning of the periods presented.
Elk, 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. Elk
has also registered as an investment company under the Investment Company
Act of 1940 to make business loans.
Ameritrans is a specialty finance company that through its subsidiary, Elk
makes loans to taxi owners, to finance the acquisition and operation of the
medallion taxi businesses and related assets, and to other small businesses
in the New York City, Chicago, Miami, and Boston markets.
Basis of Consolidation
The consolidated financial statements include the accounts of Ameritrans,
Elk and EAF Holding Corporation ("EAF"), a wholly owned subsidiary of Elk,
collectively referred to as the "Company". All significant inter-company
transactions have been eliminated in consolidation.
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 by Elk.
Ameritrans organized another subsidiary on June 8, 1998, Elk Capital
Corporation ("Elk Capital"), which will engage in the similar lending and
investment activities. Since inception, Elk Capital had no operations and
activities.
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' judgment, 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
F-10
AMERITRANS CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - Organization and Summary of Significant Accounting Policies, continued
Loans and the Allowance for Loans Losses, continued
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, 2000 and
1999, approximately 79% and 85% respectively, of all loans are
collateralized by New York City, Boston, Chicago, and Miami taxicab
medallions.
Accounting Standard for Impairment of Loans
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 114 as
amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan
- Income Recognition and Disclosure", a loan is determined to be impaired
if it is probable that the contractual amounts due will not be collected in
accordance with the terms of the loan. The SFAS generally requires that
impaired loans be measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent. As all of the
Company's loans are collateral dependent, impairment is measured based on
the fair value of the collateral. If the fair value of the impaired loan is
less than the recorded investment in the loan (including accrued interest,
net of deferred loan fees or costs, and unamortized premium or discount),
the Company recognized an impairment by creating a valuation allowance with
a corresponding charge to the provision for loan losses. The Company
individually evaluates all loans for impairment. See Note 3 for further
discussion.
Loans Receivable
Loans are placed on nonaccrual status once they become 180 days past due as
to principal or interest. In addition, loans that are not fully
collateralized and in the process of collection are placed on nonaccrual
status when, in the judgment of management, the ultimate collectibility of
interest and principal is doubtful.
Cash and Cash Equivalents
For the purposes of the statement of cash flows, the Company considers all
short-term investments with an original maturity of three months or less to
be cash equivalents.
The Company has cash balances in banks in excess of the maximum amount
insured by the FDIC as of June 30, 2000 and 1999.
Income Taxes
Ameritrans and Elk have elected to be taxed as a Regulated Investment
Company under the Internal Revenue Code. A Regulated Investment Company
will generally not be taxed at the corporate level to the extent its income
is distributed to its stockholders. In order to be taxed as a Regulated
Investment Company, the Company must pay at least 90 percent of its net
investment company taxable income to its stockholders as well as meet other
requirements
F-11
AMERITRANS CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - Organization and Summary of Significant Accounting Policies, continued
Income Taxes, continued
under the Code. In order to preserve this election for fiscal 2000, the
Company intends to make the required distributions to its stockholders in
accordance with applicable tax rules.
Depreciation and Amortization
Depreciation and amortization of furniture, fixtures and leasehold
improvements is computed on the straight-line method at rates adequate to
allocate the cost of applicable assets over their expected useful lives.
Net Income per Share
During the year ended June 30, 1998, the Company adopted the provision of
SFAS No. 128, "Earnings per Share". SFAS No. 128 eliminates the
presentation of primary and fully dilutive earnings per share ("EPS") and
requires presentation of basic and diluted EPS. Basic EPS is computed by
dividing income (loss) available to common stockholders by the
weighted-average number of common shares outstanding for the period.
Diluted EPS is based on the weighted-average number of shares of common
stock and common stock equivalents outstanding at year-end. Common stock
equivalents have been excluded from the weighted-average shares for 2000
and 1998, as inclusion is anti-dilutive. For 1999, the Company had options
outstanding which resulted in common stock equivalents of 5,084 shares.
Loan Costs
Loan costs are included in prepaid expenses and other assets. Amortization
of loan costs is computed on the straight-line method over ten (10) years.
At June 30, 2000 and 1999, loan costs amounted to $104,876 and $129,331,
respectively, net of accumulated amortization of $139,105 and $114,650,
respectively. Amortization expense for the years ended June 30, 2000, 1999
and 1998 was $24,455.
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.
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.
F-12
AMERITRANS CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - Organization and Summary of Significant Accounting Policies, continued
Comprehensive Income
During the year ended June 30, 1999, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income". SFAS 130 requires the reporting of
comprehensive income in addition to net income from operations.
Comprehensive income is a more inclusive financial reporting methodology
that includes disclosure of certain financial information that historically
has not been recognized in the calculation of net income.
Stock-Based Compensation
In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation"
was issued. SFAS 123 prescribes accounting and reporting standards for all
stock-based compensation plans, including employee stock options,
restricted stock, employee stock purchase plans and stock appreciation
rights. SFAS 123 requires compensation expense to be recorded (i) using the
new fair value method or (ii) using the existing accounting rules
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25") and related interpretations with pro
forma disclosure of what net income and earnings per share would have been
had the Company adopted the new fair value method. The Company intends to
continue to account for its stock based compensation plans in accordance
with the provisions of APB 25.
Business Segment
During the year ended June 30, 1999, the Company adopted SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information",
which supersedes SFAS No. 14, "Financial Reporting for Segments of A
Business Enterprise". SFAS No. 131 establishes standards for the way that
public enterprises report information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements regarding products and
services, geographic areas and major customers. SFAS No. 131 defines
operating segments as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in
assessing performance. The Company has determined that under SFAS No. 131,
it operates in one segment of financing services. The Company's customers
and operations are within the United States.
Loan Sales and Servicing Fee Receivable
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" was issued in June 1996. SFAS 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. This statement also
provides consistent standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings. It
requires that liabilities and derivatives incurred or obtained by
transferors as part of a transfer of financial assets be initially measured
at fair value. SFAS 125 also requires that servicing assets be
F-13
AMERITRANS CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - Organization and Summary of Significant Accounting Policies, continued
Loan Sales and Servicing Fee Receivable, continued
measured by allocating the carrying amount between the assets sold and
retained interests based on their relative fair values at the date of
transfer. Additionally, this statement requires that the servicing assets
and liabilities be subsequently measured by (a) amortization in proportion
to and over the period of estimated net servicing income or loss and (b)
assessment for asset impairment or increased obligation based on their fair
values. SFAS 125 also requires the Company's excess servicing rights be
measured at fair market value and reclassified as interest only receivables
and accounted for in accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". As required by SFAS 125, the
Company adopted in the new requirements effective January 1, 1998.
Implementation of SFAS 125 did not have any material impact on the
financial statements of the Company.
Cost of Start-Up Activities
In April 1998, Statement of Position ("SOP") 98-5, "Reporting on the Costs
of Start-Up Activities" was issued. This SOP provides guidance on the
financial reporting of start-up costs and organization costs. It requires
the costs of start-up activities and organization costs to be expensed as
incurred. The SOP is effective for financial statements for fiscal year
beginning after December 15, 1998.
Accounting for Derivatives and Hedging Activities
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued and is required to be adopted in years
beginning after June 15, 2000, which has been deferred to June 30, 2000.
Management does not anticipate that the adoption of the new statement will
have a significant effect on results of operations or the financial
position of the Company.
NOTE 2 - Assets Acquired in Satisfaction of Loans
Receivables from debtors on sales of assets acquired in satisfaction of
loans represent loans to borrowers arising out of the sales of defaulted
assets. Pursuant to an SBA regulation, these loans are presented separately
in the accompanying consolidated balance sheets.
Assigned
Mortgage and
Real Estate Radio Cars Artwork Note Total
----------------------------------------------------------------------------------
BALANCE, July 1, 1998 $ 312,935 $ 39,285 $ 48,250 $ -- $ 400,470
Additions -- -- -- 381,500 381,500
Sales (122,000) (8,044) -- -- (130,044)
Write-offs and payments -- (10,000) (10,000) (19,435) (39,435)
--------- --------- --------- --------- ---------
BALANCE, June 30, 1999 $ 190,935 $ 21,241 $ 38,250 $ 362,065 $ 612,491
--------- --------- --------- --------- ---------
F-14
AMERITRANS CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - Assets Acquired in Satisfaction of Loans, continued
Assigned
Mortgage and
Real Estate Radio Cars Artwork Note Total
-------------------------------------------------------------------------------
BALANCE, June 30, 1999 $ 190,935 $ 21,241 $ 38,250 $ 362,065 $ 612,491
--------- --------- --------- --------- ---------
Write-offs and payments -- -- -- (3,385) (3,385)
--------- --------- --------- --------- ---------
BALANCE, June 30, 2000 $ 190,935 $ 21,241 $ 38,250 $ 358,680 $ 609,106
========= ========= ========= ========= =========
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 $804,000
and $762,000 at June 2000 and 1999 respectively, which are still accruing
interest but are not performing according to the terms of the contract and
accordingly these loans are impaired under SFAS 114. At June 30, 2000 and
1999 approximately $804,000 and $743,000 respectively, of these loans were
fully collateralized as to principal and interest. Interest receivable at
June 30, 2000 and 1999 totaled approximately $90,000 and $78,000
respectively, for such loans.
The following table sets forth certain information concerning impaired
loans as of June 30, 2000 and 1999:
2000 1999
-------------------------
Impaired loans with an allowance $ -- $ 167,212
Impaired loans without an allowance 1,363,003 1,512,456
---------- ----------
Total Impaired Loans $1,363,003 $1,679,668
========== ==========
Allowance for impaired loans $ -- $ 157,886
========== ==========
Average balance of impaired loans $1,521,335 $1,213,258
========== ==========
F-15
AMERITRANS CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 - Loans Receivable, continued
Transactions in the allowance for loan losses are summarized as follows:
BALANCE, July 1, 1998 $295,000
--------
Additions, net 85,000
--------
BALANCE, June 30, 1999 380,000
--------
Additions, net --
--------
BALANCE, June 30, 2000 $380,000
========
NOTE 4 - Equity Securities
Equity securities consist of the following as of June 30, 2000 and 1999:
Chicago Miami Investment Dry Telecommuni
Taxicab Taxicab Advisory Cleaner cations
Medallions Medallions Firm Company and Technology Total
------------------------------------------------------------------------------
BALANCE, July 1, 1998 $ 444,427 $ 86,752 $ 70,000 $ 28,000 $ -- $ 629,179
Purchase of securities 128,754 4,102 -- -- 150,000 282,856
Sale of securities (15,613) -- (50,000) -- -- (65,613)
Unrealized gain (loss)
on equity securities
arising durning the period 85,897 (22,933) -- -- -- 62,964
--------- --------- --------- --------- --------- ---------
BALANCE, June 30, 1999 643,465 67,921 20,000 28,000 150,000 909,386
Purchase of securities -- -- -- -- 150,576 150,576
Sale of securities (269,669) -- (20,000) (14,000) -- (303,669)
Unrealized gain (loss) on equity
securities arising during the
period 8,089 76,194 -- -- -- 84,283
Reclassification adjustment for
gains included in net income (208,602) -- -- -- -- (208,602)
--------- --------- --------- --------- --------- ---------
BALANCE, June 30, 2000 $ 173,283 144,115 $ -- $ 14,000 300,576 $ 631,974
========= ========= ========= ========= ========= =========
F-16
AMERITRANS CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4 - Equity Securities, continued
At June 30, 2000 and 1999, the fair value of the Chicago and Miami Taxicab
Medallions were increased resulting in unrealized gains.
NOTE 5 - Debentures Payable to SBA
At June 30, 2000 and 1999 debentures payable to the SBA consist of
subordinated debentures with interest payable semiannually, as follows:
2000 1999
Current Effective Principal Principal
Issue Date Due Date Interest Rate Amount Amount
----------------------------------------------------------------------------------------------
September 1993 September 2003 6.12(1) $1,500,000 $1,500,000
September 1993 September 2003 6.12 2,220,000 2,220,000
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 was 3.12% from inception through September 1998
(2) The Company is also required to pay an additional annual user fee of
1% on this debenture
Under the terms of the subordinated debentures, the Company may not
repurchase or retire any of its capital stock or make any distributions to
its stockholders other than dividends out of retained earnings (as computed
in accordance with SBA regulations) without the prior written approval of
the SBA.
NOTE 6 - Notes Payable to Banks
At June 30, 2000 and 1999 the Company had loan agreements with three (3)
banks for lines of credit aggregating $40,000,000 and $35,000,000
respectively. At June 30, 2000 and 1999, the Company had $37,800,000 and
$31,000,000 respectively, outstanding under these lines. The loans, which
mature through November 30, 2000, bear interest based on the Company's
choice of the lower of either the reserve adjusted LIBOR rate plus 150
basis points or the banks' prime rates including certain fees which make
the effective rates approximately 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-17
AMERITRANS CAPITAL CORPORATION
AND SUBSIDIARIES
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.
NOTE 7 - Preferred Stock
Pursuant to a preferred stock repurchase agreement dated November 10, 1994,
the Company repurchased all cumulative preferred stock from the SBA for
$3.50 per share, or an aggregate $1,915,449. As a condition precedent to
the repurchase, the Company granted the SBA a liquidating interest in a
newly established restricted capital surplus account. The surplus account
is equal to the amount of the net repurchase discount. The initial value of
the liquidating interest was $3,557,261, which is being amortized over a
60-month period on a straight-line basis. Should the Company be in default
under the repurchase agreement at any time, the liquidating interest will
become fixed at the level immediately preceding the event of default and
will not decline further until such time as the default is cured or waived.
The liquidating interest shall expire on (i) sixty months from the date of
the repurchase agreement, or (ii) if any event of default has occurred and
such default has been cured or waived, such later date on which the
liquidating interest is fully amortized. Should the Company voluntarily or
involuntarily liquidate prior to the amortization of the liquidating
interest, any assets which are available, after the payment of all debts of
the Company, shall be distributed first to the SBA until the fair market
value of such assets is equal to the amount of the liquidating interest.
Such payment, if any, would be prior in right to any payments made to the
Company's stockholders. The amount restricted under this agreement at June
30, 2000 and 1999 was approximately $-0- and $256,000, respectively.
During 1992, the Company authorized the issuance of 752,729 shares of a new
Series B cumulative preferred stock with a 4 percent dividend and a $10 par
value. All preferred shares are restricted solely for issuance to the SBA.
No sales of the Series B preferred shares have occurred to date. On
September 30, 1996, Congress passed a law that in effect prevents the SBA
from making any further purchase of 4% preferred stock from any specialized
small business investment company.
In September 1998, the stockholders of the Company approved and in February
1999 the SBA approved an amendment to the Certificate of Incorporation of
the Company eliminating all of the authorized Series A and Series B
preferred stock of the Company. This amendment to the Certificate of
Incorporation was filed and became effective on May 21, 1999.
F-18
AMERITRANS CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8 - Common Stock
Ameritrans has 5,000,000 authorized common shares, $0.0001 par value, of
which 1,745,600 shares are issued and outstanding after the shares exchange
with Elk (see Note 1). Ameritrans also has 1,000,000 shares of "blank
check" preferred stock, none of which are issued and outstanding.
For the year ended June 30, 1998, the Company completed the sale, as part
of a private placement offering, of 462,000 shares of common stock. Total
proceeds from the sale of common stock amounted to $2,888,000, net of
direct related expenses of $115,000.
NOTE 9 - Income Taxes
The provision for income tax expense (benefit) for the years ended June 30,
2000, 1999 and 1998 consists of the following:
2000 1999 1998
--------------------------------------
Federal $ 986 $ 1,689 $ (1,014)
State and City 12,585 (2,458) 4,285
-------- -------- --------
$ 13,571 $ (769) $ 3,271
======== ======== ========
The above provision represents income taxes incurred on undistributed
income for the respective years.
NOTE 10 - Related Party Transactions
Related Party Transactions
The Company paid $63,688, $62,987 and $43,234 to a related law firm for the
years June 30, 2000, 1999 and 1998, respectively, for the services
provided. The Company generally charges its borrowers loan origination fees
to generate income to offset expenses incurred by the Company for legal
fees paid by the Company for loan closing services.
The Company rents office space on a month-to-month basis from an affiliated
entity without a formal lease agreement. Rent expense amounted to $39,600
each for the years ended June 30, 2000 and 1999, respectively and $40,048
for the year ended June 30, 1998. The Company also shares overhead costs
and reimburses for office and salary expenses from this affiliated entity.
Overhead costs and reimbursed office and salary expenses amounted to
$88,186 and $85,138 and $81,308 for the years ended June 30, 2000, 1999 and
1998, respectively.
F-19
AMERITRANS CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11 - Commitments and Contingencies
Interest Rate Swap
On June 8, 1998, the Company entered into a $10,000,000 interest rate Swap
transaction with a bank expiring on June 8, 2001. On October 13, 1999, the
Company entered into an additional interest rate swap transaction with the
same bank for $5,000,000 expiring on October 8, 2001. On January 12, 2000,
the Company entered into another interest rate swap transaction for
$10,000,000 with this bank expiring January 8, 2001. These Swap
transactions were entered into to protect the Company from an upward
movement in interest rates relating to outstanding bank debt (see Note 6
for terms and effective interest rates). These Swap transactions call for a
fixed rate of 5.86%, 4.95% and 6.57% (plus 150 basis points for each swap),
respectively for the Company and if the floating one month LIBOR rate is
below the fixed rate then the Company is obligated to pay the bank for the
difference in rates. When the one-month LIBOR rate is above the fixed rate
then the bank is obligated to pay the Company for the differences in rates.
Interest Rate Cap
At March 20, 1997, the Company was a party to one $5 million notional
interest rate cap. This cap, which expired on March 20, 2000, was purchased
by the Company to protect it from the impact of upward movements in
interest rates related to its outstanding bank debt. The cap provided
interest rate protection in the event that the three-month LIBOR rate
exceeded 6.75 percent. The premium paid for the purchase of this cap was
amortized over its life and recorded as an adjustment to interest expense.
Payments received under this cap would be credited to interest expense.
Loan Commitments
At June 30, 2000 and 1999, the Company had commitments to make loans
totaling approximately $2,070,000 and $4,058,000, respectively, at interest
rates ranging from 8.25% to 18%.
Other Commitment
On May 4, 2000, the Company executed an Agreement and Plan of Merger with
Medallion Financial Corporation ("Medallion") and subsequently has amended
certain terms and conditions, pursuant to which the Company will merge into
and with a wholly owned subsidiary of Medallion. The transaction which is
structured to qualify as a "pooling of interests" for accounting purposes,
is subject to the approval of the shareholders of the company, the
satisfactory completion of due diligence by Medallion, approval from the
U.S. Small Business Administration, the U.S. Department of Justice and the
Federal Trade Commission and other customary closing conditions. Subject to
the foregoing conditions, the Company expects to close the transaction in
the fourth quarter of 2000.
F-20
AMERITRANS CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12 - Defined Contribution Plan
On April 15, 1996, the Company adopted a simplified employee pension plan
covering all eligible employees of the Company. Contributions to the plan
are at the discretion of the Board of Directors. During the years ended
June 30, 2000, 1999 and 1998, contributions amounted to $72,463, $64,137
and $63,435, respectively.
NOTE 13 - Stock Option Plans
Employee Incentive Stock Option Plan
During September 1998, Elk adopted an employee incentive stock option plan,
an aggregate of 125,000 shares of common stock are authorized for issuance
under the plan. Subsequently Ameritrans adopted an employee stock option
plan which is substantially identical to and successor to the Elk plan. The
plan provides that options may be granted to attract and retain key
employees of the Company. Options granted under the plan are exercisable
for periods ranging from five to ten years. In addition, the option price
will be at least market value or at least 110% of market value of the
common stock on the grant date for employees and stockholders who own more
than 5% of the common stock, respectively. In January 1999, the Company
granted 100,000 options to certain key employees at an exercise price
ranging from $8.875 to $9.7625 per share.
Non-Employee Directors Stock Option Plan
On August 31, 1999, the SEC approved a Non-Employee Directors Stock Option
Plan with an aggregate of 75,000 options authorized for issuance. The plan
provides that options may be granted to attract and retain qualified
persons to serve as directors of the Company. Options granted under this
plan are exercisable twelve months from the date of grant and expire five
years from the date of grant. In addition, the option price will not be
less than the market value of the common stock on the grant date. On August
31, 1999, the Company granted 22,224 options to four directors at an
exercise price of $9.00 per share. In January 2000, the Company granted an
additional 11,112 options to two directors at an exercise price of $9.00
per share.
Activities under this plan are as follows:
Weight Weighted Average
Number of Average Remaining Life
Options Exercise Price Contractual
----------------------------------------
BALANCE - July 1, 1999 100,000 $9.14 8.5
Options granted 33,336 9.00 4.2
------- ----- -----
BALANCE - June 30, 2000 133,336 9.00 6.3
======= ===== =====
Exercisable - June 30, 2000 133,336 $9.11 6.3
======= ===== =====
F-21
AMERITRANS CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13 - Stock Option Plans, continued
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of
SFAS 123. The fair market value for these options was estimated at the date
of grant using a Black-Scholes option-pricing model with the following
weighted-average assumptions for the year ended June 30, 2000.
Assumptions
--------------------------------------------------------------------------
Risk-free rate 5.23%-6.18%
Dividend yield 7.5%
Volatility factor of the expected market price of the Company's
common stock 0.72
Average life 5 years
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of the options. The
Company's pro forma information for the year ended June 30, 2000 is as
follows:
Pro forma net income $ 128,968
===========
Pro forma net income per share
- basic $ 0.07
===========
- diluted $ 0.07
===========
The weighted average fair value of options granted during the year ended
June 30, 2000 was $2.51 for shares.
Note 14 - Other Matters
Recapitalization costs
In connection with the share for share exchange between Elk and Ameritrans
on December 16, 1999 (see note 1), recapitalization costs incurred by the
Company in the amount of $423,045 have been recorded as an expense for the
year ended June 30, 2000
Terminated offering costs
Based on the proposed merger with Medallion Funding (see note 11) the
Company has determined not to pursue and therefore terminate as of May 4,
2000, the Company's proposed public offering. Deferred offering costs
incurred by the Company in the amount of $256,087 have been recorded as an
expense for the year ended June 30, 2000.
F-22
AMERITRANS CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15 - Fair Value of Financial Instruments
The following disclosures represent the Company's best estimate of the fair
value of financial instruments, determined on a basis consistent with
requirements of SFAS No. 107, "Disclosure about Fair Value of Financial
Instruments".
The estimated fair values of the Company's financial instruments are
derived using estimation techniques based on various subjective factors
including discount rates. Such estimates may not necessarily be indicative
of the net realizable or liquidation values of these instruments. Fair
values typically fluctuate in response to changes in market or credit
conditions. Additionally, valuations are presented as of a specific point
in time and may not be relevant in relation to the future earnings
potential of the Company. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts the Company will realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair
value amounts.
Loans Receivable - The fair value of loans is estimated at cost net of the
allowance for loan losses. The Company believes that the rates of these
loans approximate current market rates (see Note 3).
Equity Securities - The Company's equity securities consist of investments
in corporations who own and operate Chicago taxicab medallions (28%), a dry
cleaner (2%), Miami taxicab medallions (23%) and a Telecommunications
Company (47%) (see Note 4).
Debentures Payable to Small Business Administration - The fair value of
debentures as of June 30, 2000 and 1999 were approximately $ 9,431,000 and
$8,989,000, respectively, and were estimated by discounting the expected
future cash flows using the current rate at which the SBA has extended
similar debentures to the Company (see Note 5).
The fair value of financial instruments that are short-term or reprice
frequently and have a history of negligible credit losses is considered to
approximate their carrying value. Those instruments include balances
recorded in the following captions:
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
F-23
EXHIBIT INDEX
Exhibit
Number Exhibit
- -------- -------
2.1 Agreement and Plan of Merger dated as of May 4, 2000 by and among
Medallion Financial Corp., AMTC Merger Corp., and Ameritrans Capital
Corporation.(1)
2.2 Amendment No. 8 dated as of August 29, 2000 to the Agreement and Plan
of Merger dated as of may 4, 2000 by and among Medallion Financial
Corp., AMTC Merger Corp., and Ameritrans Capital Corporation.(2)
3(i) Certificate of Incorporation(3)
3(ii) By-laws(3)
4 Form of subordinated debentures issued to the U.S. Small Business
Administration ("SBA") by Elk Associates Funding Corporation ("Elk") -
Debenture issued March 26, 1997 - principal amount - $430,000;
Maturity Date - March 1, 2007; Stated Interest Rate - 7.38%.
The following debentures are omitted pursuant to Rule 483:
a. Debenture issued September 22, 1993 - principal amount -
$1,500,000; Maturity Date - September 1, 2003;
Stated Interest Rate - 6.12%.
b. Debenture issued September 22, 1993 - principal amount -
$2,220,000; Maturity Date - September 1, 2003;
Stated Interest Rate - 6.12%.
c. Debenture issued September 28, 1994 - principal amount -
$2,690,000; Maturity Date - September 1, 2004;
Stated Interest Rate - 8.20%.
d. Debenture issued December 14, 1995 - principal amount - $1,020,000;
Maturity Date - December 1, 2005; Stated Interest Rate - 6.54%.
e. Debenture issued June 26, 1996 - principal amount - $1,020,000;
Maturity Date - June 1, 2006; Stated Interest Rate - 7.71%.
10.1 Security Agreement between Elk and the SBA, dated September 9,
1993.(4)
10.2 Custodian Agreement, Intercreditor Agreement and amendments thereto -
See Exhibits j.1, k.2, k.3, and k.4, below.
10.3 1998 Employee Stock Option Plan.(3)
10.4 Non-Employee Director Stock Option Plan.(4)
10.5 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").(4)
10.6 Agreements between Elk and the SBA.
a. Agreement dated September 9, 1993.(4)
b. Agreement dated February 7, 1997.(4)
10.7 Intercreditor Agreement among Elk, Leumi, IDB, Hapoalim, Extebank and
the SBA, dated September 9,1993 (the "Intercreditor Agreement").(4)
10.8 Amendments to the Custodian and Intercreditor Agreements.
a. Amendment removing Hapoalim and Extebank and adding European
American Bank ("EAB"), dated September 28, 1994.(4)
b. Form of Amendment adding bank:
i. Amendment adding United Mizrahi Bank and Trust Company
("UMB"), dated June __, 1995 was previously filed.
ii. Amendment adding Sterling National Bank and Trust Company of
New York ("Sterling"), dated April __, 1996 - omitted pursuant
to Rule 483.
10.9 Bank Intercreditor Agreement among Elk, Leumi, IDB, Hapoalim and
Extebank, dated September 9, 1993 (the "Bank Intercreditor
Agreement").(4)
10.10 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 was previously filed.
ii. Amendment adding Sterling, dated April __, 1996 - omitted
pursuant to Rule 483.
10.11 Grid Demand Promissory Note dated August 27, 1999 between Ameritrans
and Israel Discount Bank of New York.(5)
10.12 Promissory Note dated January 15, 2000 between Ameritrans and Bank
Leumi USA and Letter Agreement of even date between aforementioned
parties.(5)
10.13 Master Note dated October 4, 1999 between Ameritrans and European
American Bank.(5)
10.14 Form of indemnity agreement between Ameritrans and each of its
directors and officers.(3)
27 Ameritrans Capital Corporation Financial Data Schedule.
- ----------
(1) Incorporated by reference from the registrant's Current Report on 8-K (Item
V) (File No. 333-63951) filed on May 12, 2000.
(2) Incorporated by reference from the registrant's Current Report on 8-K (Item
V) (File No. 333-63951) filed on September 6, 2000.
(3) Incorporated by reference from the Registrant's Registration Statement on
Form N-14 (File No. 333-63951), initially filed September 22, 1998.
(4) Incorporated by reference from the registrant's Registration Statement
filed on Form N-2 (File No. 333-82693) filed July 12, 1999.
(5) Incorporated by reference from the Registrant's 10-Q (File No. 811-08847)
filed February 15, 2000.