U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 For the
Quarterly Period Ended March 31, 2004
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ____________ to
COMMISSION FILE NUMBER 0-22153
AMERITRANS CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 52-2102424
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
747 Third Avenue
Fourth Floor
New York, New York 10017
(Address of Registrant's (Zip Code)
principal executive office)
Registrant's telephone number, including area code: (800) 214-1047. Indicate by
check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes /X/ No / /
The number of shares of Common Stock, par value $.0001 per share,
outstanding as of May 14, 2004: 2,035,600
AMERITRANS CAPITAL CORPORATION
FORM 10-Q
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2004 (unaudited) and June 30, 2003 1 - 2
Consolidated Statements of Operations -- For the Three Months and Nine Months Ended
March 31, 2004 (unaudited) and 2003 (unaudited) 3
Consolidated Statements of Cash Flows -- For the Nine Months Ended March 31, 2004
(unaudited) and 2003 (unaudited) 4 - 5
Notes to Consolidated Financial Statements 6 - 12
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 - 19
Item 3. Quantitative and Qualitative Disclosure about Market Risk 19 - 20
Item 4. Controls and Procedures 20
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20 - 21
Signatures 22
-ii-
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, 2004
(unaudited) June 30, 2003
-------------------------------
Loans receivable $54,502,805 $55,306,678
Less: unrealized depreciation on loans
receivable (388,500) (238,500)
---------------- -------------
Loans receivable, net (Note 4) 54,114,305 55,068,178
Cash and cash equivalents 434,536 498,669
Accrued interest receivable, net of
unrealized depreciation of $82,100 and
$691,000, respectively 1,133,589 1,321,591
Assets acquired in satisfaction of loans 853,689 1,142,189
Receivables from debtors on sales of assets
acquired in satisfaction of loans 424,258 431,258
Equity investments 1,011,507 929,405
Property and leasehold improvements, net 432,715 173,100
Medallions (Note 2) 1,418,901 -
Prepaid expenses and other assets 646,508 527,511
---------------- -------------
TOTAL ASSETS $60,470,008 $60,091,901
================ =============
1
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, 2004 June 30, 2003
(unaudited)
---------------------------------
LIABILITIES
Debentures payable to SBA (Note 3) $12,000,000 $9,200,000
Notes payable, banks (Note 4) 32,408,652 34,130,000
Accrued expenses and other liabilities 573,181 485,710
Accrued interest payable 63,948 219,671
Accrued dividend payable 84,375 84,375
------------------- -------------
TOTAL LIABILITIES 45,130,156 44,119,756
------------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock 500,000 shares authorized,
none issued or outstanding - -
9 3/8% cumulative participating redeemable preferred
stock $.01 par value, $12.00 face value, 500,000 shares
authorized; 300,000 shares issued and outstanding 3,600,000 3,600,000
Common stock $.0001 par value: 5,000,000 shares
authorized; 2,045,600 shares issued, 2,035,600
outstanding 205 205
Additional paid-in-capital 13,869,545 13,869,545
Accumulated deficit (1,814,687) (1,197,725)
Accumulated other comprehensive income (245,211) (229,880)
------------------- -------------
15,409,852 16,042,145
Less: Treasury stock, at cost, 10,000 shares of
Common stock (70,000) (70,000)
------------------- -------------
TOTAL STOCKHOLDERS' EQUITY 15,339,852 15,972,145
------------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $60,470,008 $60,091,901
=================== =============
The accompanying notes are an integral part of these financial statements.
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AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
March 31, 2004 March 31, 2003 March 31, 2004 March 31, 2003
--------------------------------------------------------------------------
INVESTMENT INCOME
Interest on loans receivable $1,249,444 $1,499,081 $3,970,646 $4,593,638
Fees and other income 130,030 48,604 238,476 148,173
Leasing income 48,837 - 86,385 -
------------------ ----------------- ------------------ -----------------
TOTAL INVESTMENT INCOME 1,428,311 1,547,685 4,295,507 4,741,811
------------------ ----------------- ------------------ -----------------
OPERATING EXPENSES
Interest 345,172 555,249 1,060,604 1,622,264
Salaries and employee benefits 275,959 220,055 763,525 654,103
Occupancy costs 50,383 35,945 148,624 109,428
Professional fees 152,349 133,372 507,231 395,743
Miscellaneous administrative expenses 321,188 256,471 927,697 711,966
Loss on assets acquired in satisfaction of loans, net 5,102 57,800 41,171 72,464
Foreclosure expenses 46,769 161,667 310,302 281,838
Write off and depreciation of interest and
loans receivable 254,159 220,530 865,713 412,884
------------------ ----------------- ------------------ -----------------
TOTAL OPERATING EXPENSES 1,451,081 1,641,089 4,624,867 4,260,690
------------------ ----------------- ------------------ -----------------
OPERATING (LOSS) INCOME (22,770) (93,404) (329,360) 481,121
------------------ ----------------- ------------------ -----------------
OTHER INCOME
Gain on sale of securities - - 5,665 2,976
Equity in loss of investee (24,747) - (24,747) -
------------------ ----------------- ------------------ -----------------
TOTAL OTHER INCOME (24,747) - (19,082) 2,976
------------------ ----------------- ------------------ -----------------
(LOSS) INCOME BEFORE INCOME TAXES (47,517) (93,404) (348,442) 484,097
------------------ ----------------- ------------------ -----------------
INCOME TAXES 4,106 4,443 15,396 15,926
------------------ ----------------- ------------------ -----------------
NET (LOSS) INCOME (51,623) (97,847) (363,838) 468,171
------------------ ----------------- ------------------ -----------------
DIVIDENDS ON PREFERRED STOCK (84,375) (84,375) (253,125) (253,125)
------------------ ----------------- ------------------ -----------------
NET (LOSS) INCOME AVAILABLE TO
COMMON SHAREHOLDERS $(135,998) $(182,222) $(616,963) $215,046
------------------ ----------------- ------------------ -----------------
WEIGHTED AVERAGE SHARES OUTSTANDING
- - Basic 2,035,600 2,035,600 2,035,600 2,035,600
================== ================= ================== =================
- - Diluted 2,035,600 2,035,600 2,035,600 2,035,600
================== ================= ================== =================
NET (LOSS) INCOME PER COMMON SHARE
- - Basic $(0.07) $(0.09) $(0.30) $0.11
================== ================= ================== =================
- - Diluted $(0.07) $(0.09) $(0.30) $0.11
================== ================= ================== =================
The accompanying notes are an integral part of these financial statements
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AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended March 31, 2004 and 2003
March 31, 2004 March 31, 2003
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $(363,838) $468,171
--------------- ---------------
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 49,765 23,187
Gain on sale of equity securities (5,665) (2,976)
Equity in loss of investee 24,747 -
Change in operating assets and liabilities:
Changes in unrealized depreciation on loans
receivable and accrued interest receivable (458,900) 99,000
Accrued interest receivable 796,902 (367,409)
Prepaid expenses and other assets (118,997) (268,347)
Accrued expenses and other liabilities 87,471 2,422
Accrued interest payable (155,723) (131,129)
--------------- ---------------
TOTAL ADJUSTMENTS 219,600 (645,252)
--------------- ---------------
NET CASH USED IN OPERATING ACTIVITIES (144,238) (177,081)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans receivable (615,026) (1,944,158)
Assets acquired 288,500 165,899
Receivables from debtors on sales of assets
acquired in satisfaction of loans 7,000 (63,987)
Proceeds from sale of equity securities 84,084 27,726
Purchases of equity securities (200,600) (545,986)
Sale of automobiles 60,125 -
Capital expenditures (369,505) (83,763)
--------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES (745,422) (2,444,269)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of notes payable, banks 3,430,000 8,385,000
Repayments of notes payable, banks (5,151,348) (6,325,000)
Proceeds of debentures payable, SBA 6,950,000 5,050,000
Repayments of debentures payable, SBA (4,150,000) (3,710,000)
Dividends paid (253,125) (789,499)
--------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 825,527 2,610,501
--------------- ---------------
-4-
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - Continued
For the Nine Months Ended March 31, 2004 and 2003
March 31, 2004 March 31, 2003
-------------------- --------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (64,133) (10,849)
CASH AND CASH EQUIVALENTS - Beginning 498,669 774,062
-------------------- --------------------
CASH AND CASH EQUIVALENTS - Ending $434,536 $763,213
==================== ====================
SUPPLEMENTAL DISCLOSURES OF NON-CASH
INVESTING ACTIVITIES:
Acquisition of medallions through foreclosure of loans receivable $(1,418,901) $-
==================== ====================
The accompanying notes are an integral part of these financial statements.
-5-
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial Statements
The consolidated balance sheets of Ameritrans Capital Corporation ("Ameritrans")
as of March 31, 2004, and the related statements of operations, and cash flows
for the three months and nine months ended March 31, 2004 and March 31, 2003
included in Item 1 have been prepared by the Company, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission (the
"Commission"). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the accompanying consolidated
financial statements include all adjustments (consisting of normal, recurring
adjustments) necessary to summarize fairly the Company's financial position and
results of operations. The results of operations for the nine months ended March
31, 2004 are not necessarily indicative of the results of operations for the
full year or any other interim period. These financial statements should be read
in conjunction with the audited financial statements and notes thereto included
in the Company's Annual Report on Form 10-K for the fiscal year ended June 30,
2003 as filed with the Commission.
Organization and Principal Business Activity
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 of the Company prior to December 16, 1999 were those of Elk.
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 is 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, primarily makes loans to taxi owners to finance the acquisition and
operation of taxi medallions and related assets, and to other small businesses
in the New York City, Chicago, Miami,
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and Boston markets. From inception through April 2002, Ameritrans' only
activities have been the operations of Elk. In May 2002, Ameritrans made its
first loans to businesses using the proceeds raised from a public offering,
which was completed in April 2002.
Basis of Consolidation
The consolidated financial statements include the accounts of Ameritrans, Elk,
EAF Holding Corporation ("EAF"), EAF Enterprises LLC, Medallion Auto Management
LLC, EAF Leasing LLC, EAF Leasing II LLC and EAF Leasing III LLC, (collectively
referred to as the "Company"). EAF, EAF Enterprises LLC, Medallion Auto
Management LLC, EAF Leasing LLC, EAF Leasing II LLC and EAF Leasing III LLC are
all wholly owned subsidiaries of Elk. 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.
EAF Enterprises LLC was formed in June 2003 and began operations in July
2003. The purpose of EAF Enterprises LLC is to own, lease and resell medallions
acquired in satisfaction of foreclosures by Elk.
Medallion Auto Management LLC was formed in June 2003 and began operations
in July 2003. The purpose of Medallion Auto Management LLC is to own, lease and
resell automobiles in conjunction with the medallions owned by EAF Enterprises
LLC.
EAF Leasing LLC was formed in August 2003 and began operations in October
2003. The purpose of EAF Leasing LLC is to own and lease medallions acquired in
satisfaction of foreclosures by Elk.
EAF Leasing II LLC was formed in August 2003 and began operations in
October 2003. The purpose of EAF Leasing II LLC is to own and lease medallions
acquired in satisfaction of foreclosures by Elk.
EAF Leasing III LLC was formed in January 2004. The purpose of EAF Leasing
III LLC is to own and lease medallions acquired in satisfaction of foreclosures
by Elk.
Ameritrans organized another subsidiary on June 8, 1998, Elk Capital Corporation
("Elk Capital"), which may engage in similar lending and investment activities
as its parent, Elk. Since its inception, Elk Capital has had no operations.
-7-
Equity Investments
Ameritrans invested $100,000 to obtain a 50% stock ownership interest in a
company in August 2003. Since control of the entity resides with the other
owner, as evident by the running of the day-to-day operations as well as the
number of board seats, this entity is carried using the equity basis of
accounting.
Elk also obtained a 48% stock ownership interest in another company
during December 2003 in exchange for providing 100% financing for this company
to acquire and gain title to certain Chicago medallions from Elk arising from
defaulted and foreclosed loans, to purchase vehicles, and for related start up
costs. The profit or loss of this company is to be retained by the majority
stockholder of this company. Commencing on or after July 1, 2007, and for a two
and one-half year period thereafter, the majority stockholder has the right to
purchase Elk's interest in this company at a price described in the
stockholders' agreement, by giving notice and exercising its right to repurchase
Elk's shares. Elk also has the right (put option) under the agreement to require
the company to repurchase Elk's 48% interest in this company.
Income Taxes
The Company has elected to be taxed as a Regulated Investment Company ("RIC")
under the Internal Revenue Code (the "Code"). An RIC generally is not taxed at
the corporate level to the extent its income is distributed to its stockholders.
In order to be taxed as a RIC, the Company must pay at least 90 percent of its
net taxable investment income to its stockholders as well as meet other
requirements under the Code. In order to preserve this election for fiscal 2004,
the Company intends to make the required distributions to its stockholders in
accordance with applicable tax rules.
Net Income (Loss) Per Common Share
Net income (loss) per share has been computed in accordance with Statement of
Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS No. 128"),
which requires presentation of basic and diluted earnings per share ("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 for the period. Common stock
equivalents have been excluded from the weighted-average shares for 2004 and
2003 as inclusion is anti-dilutive.
Loan Valuations
The Company's loan portfolio is carried at fair value. Since no ready
market exists for these loans, the fair value is determined in good faith by the
board of directors of the
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Company ("the Board of Directors"). In determining the fair value, the Board of
Directors considers factors such as the financial condition of the borrower, the
adequacy of the collateral, individual credit risks, historical loss experience
and the relationships between current and projected market rates and portfolio
rates of interest and maturities. The fair value of the loans has been
determined to approximate cost less unrealized depreciation.
Use Of Estimates
In The Financial Statements The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
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 fair value
of the loans.
Reclassifications
Certain amounts in the prior financial statements have been reclassified for
comparative purposes to conform with the presentation used in the financial
statements for the three months and nine months ended March 31, 2004.
NOTE 2 - ACQUISITION OF MEDALLIONS AND OTHER PROPERTY
During the nine months ended March 31, 2004, Elk transferred Chicago medallions
obtained from defaulted and foreclosed loans to certain newly formed
wholly-owned subsidiaries, which, in turn, lease the medallions to customers.
The subsidiaries gained title by paying related transfer fees and satisfying
outstanding liens with Elk and the city of Chicago. The subsidiaries borrowed
funds in the amount of $1,418,901 from Elk to complete the purchases of the
medallions.
Another subsidiary, Medallion Auto Management LLC, purchased vehicles
(aggregating $163,233) which it leases to individual taxi operators in
conjunction with the medallions owned by EAF Enterprises LLC. Other capital
expenditures included the purchase of furniture and equipment and additional
leasehold improvements related to the additional office and storage space
occupied in July 2003.
NOTE 3 -- DEBENTURES PAYABLE TO SBA
At March 31, 2004 and June 30, 2003 debentures payable to the SBA consisted of
subordinated debentures with interest payable semiannually, as follows:
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Current
Effective 3/31/04 6/30/03
Interest Principal Principal
Issue Date Due Date Rate Amount Amount
---------- -------- --------- --------- ---------
September 1993 September 2003 6.12(3) $ - $ 2,220,000
September 1993 September 2003 6.12(3) $ - $ 1,500,000
March 1997 March 2007 7.38(1)(4) $ - $ 430,000
July 2002 September 2012 4.67(2) $ 2,050,000 $ 2,050,000
December 2002 March 2013 4.63(2) $ 3,000,000 $ 3,000,000
September 2003 March 2014 4.12(2)(5) $ 5,000,000 $ -
February 2004 March 2014 4.12(2)(5) $ 1,950,000 $ -
------------ -----------
$ 12,000,000 $ 9,200,000
============ ===========
(1) Elk was required to pay an additional annual user fee of 1% on this
debenture.
(2) Elk is also required to pay an additional annual user fee of 0.866% on
these debentures.
(3) The debentures matured and were paid in full during September 2003.
(4) The debenture was prepaid in full during March 2004.
(5) The fixed rate of 4.12% was determined on the pooling date of March 24,
2004. Prior to that date, the interim interest rates assigned to the
$5,000,000 and the $1,950,000 debentures were 1.682% and 1.595%,
respectively.
Under the terms of the subordinated debentures, Elk 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.
SBA Commitment
During January 2002 Elk and the SBA entered into an agreement whereby the SBA
issued a commitment to reserve debentures in the amount of $12,000,000 to be
issued by Elk on or prior to September 30, 2006. A 2.5% leverage fee will be
deducted pro rata as the commitment proceeds are drawn down. A $120,000
non-refundable fee was paid by Elk at the time of obtaining the $12,000,000
commitment. In February 2004, Elk made the final draw down from this commitment.
-10-
NOTE 4 -- NOTES PAYABLE TO BANKS
On March 31, 2004 and June 30, 2003 Elk had loan agreements with three (3) banks
for lines of credit aggregating $40,000,000 and had $32,408,652 and $34,130,000
respectively, outstanding under these lines. The loans, which mature at various
dates between May 15, 2004 and December 31, 2004, bear interest at the lower of
either the reserve adjusted LIBOR rate plus 1.5% or the banks' prime rate minus
0.5%. 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
agreements Elk is required to comply with certain terms, covenants and
conditions. At March 31, 2004 and June 30, 2003, Elk is in compliance with all
terms, covenants and conditions. Elk pledged its loans receivable and other
assets as collateral for the above lines of credit.
NOTE 5 -- COMMITMENTS AND CONTINGENCIES
Interest Rate Swaps
On June 11, 2001 Elk entered into an interest rate swap transaction for
$15,000,000 with a bank which expired June 11, 2003. On February 11, 2003, Elk
entered into another interest rate swap transaction for $5,000,000 with the same
bank expiring February 11, 2005. These swap transactions were entered into to
protect Elk from an upward movement in interest rates relating to outstanding
bank debt. These swap transactions call for a fixed rate of 4.95% and 3.56%
respectively for Elk. If the floating one-month LIBOR rate is below the fixed
rate then Elk is obligated to pay the bank the difference in rates. When the
one-month LIBOR rate is above the fixed rate then the bank is obligated to pay
Elk the differences in rates. For the three months and nine months ended March
31, 2004, Elk incurred additional interest expense of $12,140 and $35,895 due to
the fluctuation of interest rate.
Lease Agreement
In November 2003, the Board of Directors approved a new sublease with an
affiliated entity for office space to take effect upon the expiration of the
existing sublease, May 1, 2004, and to continue through April 30, 2014 and
accounts for certain retroactive adjustments per the agreement. The Company is
presently utilizing 37% of the landlord's space and therefore committed to the
minimum 37% utilization factor on all rent, additional rent and electricity
charges billed to landlord. The Company's rent share is currently $8,327 per
month and subject to annual increases as per the master lease agreement between
the landlord and Granoff Walker & Forlenza, P.C., whose stockholders are
officers and directors of the Company. In the event that more space is utilized,
the percentage of the total rent shall be increased accordingly. In addition,
the Company is also obligated to pay for its share of overhead expenses as noted
in the agreement, currently a minimum of $3,000 a month.
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The future minimum rental and overhead costs for the next five years and in the
aggregate thereafter are as follows:
Year Ending
June 30 Rent Overhead
----------- --------- --------
2004 $ 34,607 $ 9,000
2005 139,777 36,000
2006 141,172 36,000
2007 142,616 36,000
2008 144,110 36,000
Thereafter 834,053 210,000
--------- --------
$1,436,335 $363,000
========= ========
NOTE 6 -- OTHER MATTERS
Quarterly Dividend
The Company's Board of Directors declared a dividend of $0.28125 per share or
$84,375 on September 25, 2003 on the Company's 9 3/8% Cumulative Participating
Redeemable Preferred Stock (the "Participating Preferred Stock") for the period
July 1, 2003 through September 30, 2003, which was paid on October 15, 2003 to
all holders of the Company's Participating Preferred Stock of record as of
October 7, 2003.
The Company's Board of Directors declared a dividend of $0.28125 per share or
$84,375 on December 31, 2003 on the Company's 9 3/8% Cumulative Participating
Redeemable Preferred Stock (the "Participating Preferred Stock") for the period
October 1, 2003 through December 31, 2003, which was paid on January 20, 2004 to
all holders of the Company's Participating Preferred Stock of record as of
January 12, 2004.
The Company's Board of Directors declared a dividend of $0.28125 per share or
$84,375 on March 23, 2004 on the Company's 9 3/8% Cumulative Participating
Redeemable Preferred Stock (the "Participating Preferred Stock") for the period
January 1, 2004 through March 31, 2004, which was paid on April 12, 2004 to all
holders of the Company's Participating Preferred Stock of record as of March 31,
2004.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in this section should be used in conjunction
with the consolidated Financial Statements and Notes thereto appearing in this
Form 10-Q and the Company's Annual Report on Form 10-K for the year ended June
30, 2003.
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This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. When we refer to forward-looking statements or
information, sometimes we use words such as "may," "will," "could," "should,"
"plans," "intends," "expects," "believes," "estimates," "anticipates" and
"continues." The risk factors describe risks that may affect these statements
but are not all-inclusive, particularly with respect to possible future events.
Many things can happen that can cause actual results to be different from those
we describe.
General
Ameritrans acquired Elk on December 16, 1999 in a share-for-share exchange. Elk
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. Both Ameritrans and Elk are registered as an investment
company under the Investment Company Act of 1940, as amended.
Elk primarily makes loans to persons who qualify under SBA regulation as
socially or economically disadvantaged and makes loans and investments in
entities which are at least 50% owned by such persons. Elk also makes loans and
investments to persons who qualify under SBA regulation as "non-disadvanged".
Elk's primary lending activity is to originate and service loans collateralized
by the cities of New York, Boston, Chicago and Miami taxicab medallions. Elk
also makes loans and investments in other diversified businesses.
At March 31, 2004, 74% of Elk's portfolio of loans was invested in loans
secured by taxicab medallions and 26% of Elk's loans were to other diversified
businesses.
>From inception through April 2002, Ameritrans' only activities have been the
operations of Elk. In May 2002, Ameritrans made its first loans to businesses
using the proceeds raised from a public offering, which was completed in April
2002.
Elk established two additional wholly owned subsidiaries, EAF Enterprises LLC
and Medallion Auto Management LLC, in June 2003. Starting July 2003, EAF
Enterprises LLC took title to five of Elk's foreclosed medallions and leased
them to new individual operators and Medallion Auto Management LLC purchased
vehicles, which it leased with the medallions. The taxi operators have the
option to purchase both the medallions and the vehicles.
Elk also set up another three wholly owned subsidiaries, EAF Leasing LLC
and EAF Leasing II LLC in August 2003 and EAF Leasing III LLC in January 2004.
Commencing in October 2003, EAF Leasing LLC took title to ten of Elk's
foreclosed medallions and EAF Leasing II LLC took title to another nine of Elk's
foreclosed
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medallions. As of March 31, 2004, EAF Leasing III LLC had not taken title to any
of Elk's foreclosed medallions. These subsidiaries will lease the medallions to
a large medallion operator. No option to purchase the medallions has been
offered to the medallion operator.
Critical Accounting Policies
The preparation of the Company's consolidated financial statements requires
management to make estimates and assumptions that affect amounts reported and
disclosed in the financial statements and related notes. The significant
estimates made by the Company include (1) valuation of loans, (2) evaluation of
the recoverability of various receivables, and (3) the assessment of litigation
and other contingencies. The Company's ability to collect receivables and
recover the value of its loans depends on a number of factors, including
financial conditions, collateral values, and its ability to enforce provisions
of its contracts in the event of disputes, through litigation if necessary. Such
estimates and assumptions are inherently uncertain and may require complex and
subjective judgments. Although the Company believes that estimates and
assumptions used in determining the recorded amounts of net assets and
liabilities at March 31, 2004, are reasonable, actual results could differ
materially from the estimated amounts recorded in the Company's financial
statements. The critical accounting policies are those applicable to the
valuation of loans receivable and various investments discussed below.
VALUATION OF LOANS AND DEBT SECURITIES. For loans and debt securities, fair
value generally approximates cost less unrealized depreciation and no loans have
been recorded above cost. Overall financial condition of the borrower, the
adequacy of the collateral, individual credit risks, historical loss experience
and other factors lead to a determination of fair value.
EQUITY SECURITIES. The fair value of publicly traded corporate equity securities
is based on quoted market prices. Privately held corporate equity securities are
recorded at the lower of cost or fair value. For these non-quoted investments,
the Company makes a careful review of the assumptions underlying the financial
performance of the privately held companies in which the investments are
maintained. If and when a determination is made that a decline in fair value
below cost is other than temporary, the related investment is written down to
its new estimated fair value.
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 unrealized depreciation on loans
receivable. Subsequent reductions in estimated net realizable value are recorded
as losses on assets acquired in satisfaction of loans.
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Results of Operations for the Nine Months Ended March 31, 2004 and 2003
Total Investment Income
The Company's investment income for the period ended March 31, 2004 decreased by
$446,304 or 9% to $4,295,507 as compared with the prior period ended March 31,
2003. This decrease was mainly due to the impact of lower average interest rates
charged on new and modified loans as well as lower outstanding loans receivable.
Operating Expenses
Total operating expenses increased by $364,177 or 9% from $4,260,690 to
$4,624,867. Lower interest costs were more than offset by increases in salary,
foreclosure expenses, depreciation in the value of loans and other
administrative expenses. Interest expense for the period ended March 31, 2004
decreased $561,660 or 35% when compared to the period ended March 31, 2003. This
reflects the lower interest charged on outstanding bank borrowings and certain
SBA debentures refinanced at lower rates during the current period. Salary and
employee benefits increased $109,422 or 17% when compared with this period the
year prior. This increase reflects the increases that were put into effect from
recently amended officers' employment agreements. Occupancy costs increased
$39,196 or 36%, when compared with the period ended March 31, 2003, primarily
due to the rental of additional office and storage space starting July 2003.
Professional fees increased $111,488 or 28% when compared with the similar
period in the prior year. This increase reflects the additional legal fees
incurred relating to the foreclosures of the Chicago medallion loans.
Foreclosure expenses increased $28,464 or 10% and depreciation in the value of
loans increased $452,829 or 110% when compared with this period the year prior.
Both of these increases relate primarily to the foreclosures of the Chicago
medallion loans. Other administrative expenses increased $215,731 or 30% when
compared with this period the year prior. This increase relates primarily to
increases in Chicago service fees, commissions, insurance and depreciation.
Net Income (Loss)
Net income decreased from $468,171 for the nine month period ended March 31,
2003 as compared to a net loss of $363,838 for the period ended March 31, 2004.
The decrease in the net income for the period was attributable primarily to the
write down of the Chicago loan portfolio and related foreclosure expenses,
increases in salaries and certain other administrative costs, which were only
partially offset by favorable interest rates obtained from debt refinancing.
Dividends of Participating Preferred Stock for the quarter amounted to $84,375
in each of the quarters ended March 31, 2004 and 2003.
Results of Operations for the Three Months Ended March 31, 2004 and 2003
Total Investment Income
The Company's investment income for the three months ended March 31, 2004
decreased
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$119,374 or 8% to $1,428,311 as compared with the period ended March 31, 2003.
This decrease was mainly due to the impact of lower average interest rates
charged on new and refinanced loans as well as lower outstanding loans
receivable.
Operating Expenses
Total operating expenses decreased $190,008 or 12% from $1,641,089 to
$1,451,081. This decrease was mainly due to lower interest costs and decreases
in foreclosure expenses. Interest expenses for the three months ended March 31,
2004 decreased $210,077 or 38% when compared to the period ended March 31, 2003.
This reflects the lower interest charged on outstanding bank borrowings and
certain SBA debentures refinanced at lower rates during the current quarter.
Salary and employee benefits increased $55,904 or 25% when compared with the
same quarter the prior year. This increase reflects the increases that were put
into effect from recently amended officers' employment agreements. Professional
fees increased $18,977 or 14% when compared with the same quarter year prior.
This increase reflects the additional legal fees incurred relating to the
foreclosure of the Chicago medallion loans. Foreclosure expenses decreased
$114,898 or 71%. This decrease reflects the reduction of foreclosures of the
Chicago medallion loans. The depreciation in the value of loans increased
$33,629 or 15% when compared with the same quarter in the prior year. Other
administrative expenses increased $64,717 or 25% when compared with the same
quarter in the prior year. This increase relates primarily to increases in
Chicago service fees, commissions, insurance and depreciation.
Net Income (loss)
Net loss decreased from $97,847 for the three months ended March 31, 2003 to a
net loss of $51,623 for the quarter ended March 31, 2004. The decrease in the
net loss for the period was attributable primarily to less write down relating
to the Chicago foreclosures, combined with interest rate reductions as a result
of the debt refinancings offset by increases in salaries and certain other
administrative costs.
Balance Sheet and Reserves
Total assets increased by $378,107 as of March 31, 2004 when compared to
total assets as of June 30, 2003. A decrease in loans receivable was partially
offset by an increase in medallions owned, and property and improvements. In
September 2003 a new debenture payable to the SBA for $5,000,000 was drawn from
the commitment pool of $12,000,000. In the same month, Elk also paid off two SBA
debentures in the amount of $2,220,000 and $1,500,000 that matured in September
2003. In February 2004, Elk made the final draw down in the amount of $1,950,000
from the commitment pool of $12,000,000. In March 2004, Elk prepaid a SBA
debenture for $430,000. In addition,
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Elk utilized these funds to pay down $1,721,348, net of proceeds on its
short-term bank borrowings.
Liquidity and Capital Resources
The Company has funded its operations through private and public placements
of its securities, bank financing, the issuance to the SBA of its subordinated
debentures and internally generated funds.
On April 24, 2002, Ameritrans completed a public offering of 300,000 units,
consisting of one share of Common Stock, one share of 9 3/8% cumulative
participating redeemable Preferred Stock, face value $12.00, and one redeemable
Warrant exercisable into one share of Common Stock. The gross proceeds from the
sale were $5,700,000 less offering expenses of $1,704,399. A portion of the
proceeds was used temporarily to reduce bank and SBA indebtedness. Ameritrans
also used part of the proceeds to start its own loan portfolio.
At March 31, 2004, 73% of Elk's indebtedness was represented by
indebtedness to its banks and 27% by the debentures issued to the SBA with fixed
rates of interest plus user fees, which results in rates ranging from 4.99% to
5.54%. Elk currently may borrow up to $40,000,000 under its existing lines of
credit, of which $7,591,348 is available at March 31, 2004, 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, during January 2002, the Company and the SBA entered into
an agreement whereby the SBA committed to reserve debentures in the amount of
$12,000,000 to be issued to the Company on or prior to September 30, 2006. In
July and December 2002, debentures payable to the SBA were drawn from this
reserved pool in the amounts of $2,050,000 and $3,000,000, respectively. The
interim interest rates assigned were 2.351% and 1.927%, respectively. The fixed
rates of 4.67% and 4.628% were determined on the pooling dates of September 25,
2002 and March 26, 2003, respectively. On September 15, 2003 and February 17,
2004, two additional debentures payable to the SBA were drawn in the amounts of
$5,000,000 and $1,950,000, respectively to complete the $12,000,000 pool. The
interim interest rates assigned were 1.682% and 1.595%, respectively. The fixed
rate of 4.12% for both debentures was determined on the pooling date of March
24, 2004. In addition to the fixed rates, there is an additional annual SBA user
fee of 0.87% per annum that will also be charged making the rate 5.54%, 5.49%
and 4.99% before applicable amortization of points and fees.
Our sources of liquidity are credit lines with banks, long-term SBA debentures
that are issued to or guaranteed by the SBA, loan amortization and prepayment.
As a RIC, we distribute at least 90% of our investment company taxable income.
Consequently, we primarily rely upon external sources of funds to finance
growth.
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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.
During the nine months ended March 31, 2004, the Company transferred
Chicago medallions in the amount of $1,418,901 relating to defaulted and
foreclosed loans to certain newly formed subsidiaries, which, in turn, are
leasing those medallions to customers. Although Elk never had title to the
medallions, which serve as collateral for loans, the subsidiaries gained title
by paying related transfer fees and satisfying any outstanding liens with the
city of Chicago. The subsidiaries borrowed funds from Elk to complete the
purchases of the medallions. In connection with the above, another subsidiary,
Medallion Auto Management LLC, purchased vehicles for $163,233 to be leased in
conjunction with the medallions owned by EAF Enterprises LLC to individual taxi
operators. Other capital expenditures include the purchases of furniture and
equipment and additional leasehold improvements relating to the additional
office and storage space occupied in July 2003.
Like Elk, Ameritrans distributes at least 90% of its investment company taxable
income and, accordingly, will continue to rely upon external sources of funds to
finance growth. In order to provide the funds necessary for our expansion
strategy, the Company expects 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.
New Accounting Standards
In December 2003 the FASB issued Interpretation No. 46 (revised),
"Consolidation of Variable Interest Entities." This standard will require all
variable interest entities ("VIEs") to be consolidated by the primary
beneficiary. The primary beneficiary is the entity that holds the majority of
the beneficial interests in the VIEs. These requirements are effective for
financial statements issued after December 31, 2003, and are not expected to
have a material impact on the Company's consolidated financial position or
results of operations.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, "Accounting for Certain Financial Instruments With Characteristics of
Both Liabilities and Equity." This Statement establishes standards for users to
follow in classifying and measuring certain financial instruments with
characteristics of both liabilities and equity. This statement is effective for
the first interim period after June 15, 2003. The adoption of this standard did
not have a significant impact on the Company's consolidated results of
operations and financial position.
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 148 (SFAS 148), "Accounting for
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Stock-Based Compensation--Transition and Disclosure." SFAS 148 amends SFAS 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for stock-based employee compensation. The adoption of this
pronouncement did not have a material effect on the consolidated financial
statements as the Company continues to apply the intrinsic value method in
accordance with Accounting Principles Board No. 25.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's business activities are subject to market risk. The Company
considers the principal types of market risk to be fluctuations in interest
rates and portfolio valuations. The Company considers the management of risk
essential to conducting its business. Accordingly, the Company's risk management
systems and procedures are designed to identify and analyze the Company's risks,
to set appropriate policies and limits and to continually monitor these risks
and limits by means of reliable administrative and information systems and other
policies and programs.
The Company values its portfolio at fair value as determined in good faith by
the Company's Board of Directors in accordance with the Company's valuation
policy. Unlike certain lending institutions, the Company is not permitted to
establish reserves for loan losses. Instead, the Company must value each
individual investment and portfolio loan on a quarterly basis. The Company
records unrealized depreciation on investments and loans when it believes that
an asset has been impaired and full collection is unlikely. Without a readily
ascertainable market value, the estimated value of the Company's portfolio of
investments and loans may differ significantly from the values that would be
placed on the portfolio if there existed a ready market for the investments. The
Company adjusts the valuation of the portfolio quarterly to reflect the Board of
Directors' estimate of the current fair value of each investment in the
portfolio. Any changes in estimated fair value are recorded in the Company's
statement of operations as net unrealized appreciation (depreciation) on
investments.
In addition, the illiquidity of the Company's loan portfolio and investments may
adversely affect its ability to dispose of loans at times when it may be
advantageous for it to liquidate such portfolio or investments. Also, if it was
required to liquidate some or all of the investments in the portfolio, the
proceeds of such liquidation might be significantly less than the current value
of such investments. Because the Company borrows money to make loans and
investments, its net operating income is dependent upon the difference between
the rate at which it borrows funds and the rate at which it loans and invests
these funds. As a result, there can be no assurance that a significant change in
market interest rates will not have a material adverse effect on interest
income. As interest rates rise, interest costs increase, decreasing the net
interest rate spread the Company receives and
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thereby adversely affect profitability. Although the Company intends to continue
to manage its interest rate risk through asset and liability management,
including the use of interest rate swaps, general rises in interest rates will
tend to reduce the interest rate spread in the short term.
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to our management to allow timely decisions regarding required disclosure based
closely on the definition of "disclosure controls and procedures" in Rule
13a-15(e) promulgated under the Exchange Act. In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
Our Chief Executive Officer (also acting Chief Financial Officer) has conducted
an evaluation of the effectiveness of our disclosure controls and procedures as
of the end of the period covered by this report. Based on that evaluation, he
has concluded that such controls and procedures were effective as of the end of
the period covered by this report.
There were no changes in our internal controls over financial reporting during
the period covered by this report that materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 6-- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Letter Agreement between Israel Discount Bank of New York and Elk
dated April 13, 2004 extending line of credit.
31.1 Certification of the Chief Executive and Chief Financial Officer of
the Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive and Chief Financial Officer of
the Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
A Form 8-K was filed on February 18, 2004 in response to Items 7 and 12 of
that form.
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AMERITRANS CAPITAL CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: MAY 14, 2004 BY: /s/ GARY C. GRANOFF
--------------------------
GARY C. GRANOFF
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER AND
CHIEF ACCOUNTING OFFICER)
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