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, 2003
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
9 3/8% Participating Redeemable Preferred Stock (face value $12.00)
Warrants exercisable into Common Stock
(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 |_|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES |_| NO |X|
The approximate aggregate market value of common equity held by non-affiliates
of the Registrant as of October 7, 2003 was approximately $4,753,685 based on
the last sale price of the Registrant's Common Stock on the Nasdaq SmallCap
Market as of the close of business on October 7, 2003. There were 2,035,600
shares of the Registrant's Common Stock outstanding as of October 7, 2003.
AMERITRANS CAPITAL CORPORATION
2003 FORM 10-K ANNUAL REPORT
Table of Contents
Page
----
PART I ................................................................... 1
ITEM 1. BUSINESS OF AMERITRANS ...................................... 1
ITEM 2. PROPERTIES .................................................. 26
ITEM 3. LEGAL PROCEEDINGS ........................................... 27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ......... 27
PART II .................................................................. 27
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS ................................. 27
ITEM 6. SELECTED FINANCIAL DATA ..................................... 29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ......................... 31
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK ................................................. 39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ................. 39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES ........................ 39
ITEM 9A.CONTROLS AND PROCEDURES ..................................... 40
PART III ................................................................. 40
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ......... 40
ITEM 11. EXECUTIVE COMPENSATION ..................................... 45
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT ................................................ 52
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ............. 56
PART IV .................................................................. 57
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K .................................................. 58
IMPORTANT FACTORS RELATING TO FORWARD-LOOKING STATEMENTS ................. 58
SIGNATURES ............................................................... 60
PART I
ITEM 1. BUSINESS OF AMERITRANS
BUSINESS
GENERAL
Ameritrans Capital Corporation (the "Company", "Ameritrans", "our", "us", or
"we") 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 Chicago, New
York City, Miami and Boston markets and to other small businesses. Elk has never
experienced any material losses of principal in connection with taxi financings
but from time to time has experienced some small losses of principal on its taxi
medallion lending operations. Loans made to finance the purchase or continued
ownership of taxi medallions, taxis and related assets represented approximately
76% of Elk's loan portfolio as of June 30, 2003. Loans made to finance the
acquisition and/or operation of other small businesses constitute the balance of
Elk's loan portfolio.
From inception through April 2002, our only activities have been the operation
of Elk. In May 2002, Ameritrans made its first loans to businesses using the
proceeds raised from the public offering of 300,000 units, each unit of which
was comprised of one share of common stock, one share of 9 3/8% cumulative
participating preferred stock (face value $12.00) (the "Participating Preferred
Stock") and one warrant exercisable into one share of common stock for five (5)
years at an exercise price of $6.70 (the "Warrant"), which was completed in
April 2002 (the "Unit Offering"). 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 a RIC, 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 a RIC 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
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continuously since June 1996. Since December 16, 1999, when we
acquired Elk, these dividends have been payable to Ameritrans as Elk's sole
stockholder. Ameritrans has paid common dividends to its shareholders since its
inception with the exception of the three month periods ended June 30, 2000,
September 30, 2000, March 31, 2003, June 30, 2003 and September 30, 2003. All
preferred dividends have been duly paid each quarter.
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."
CURRENT BUSINESS ACTIVITIES
AMERITRANS. From inception through April 2002, Ameritrans' only activities have
been the operation of Elk. In May 2002, Ameritrans began making loans to
businesses using the proceeds raised from the Company's Unit Offering.
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, 2003
totaled $697,144 or 1.16% 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 three (3) wholly-owned subsidiaries. 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. EAF Enterprises LLC and Medallion
Management Auto LLC were formed in June 2003 to take title to some of our
remaining Chicago foreclosure medallions, and to thereafter lease them out to
taxi drivers on a 36-month lease, the terms of which will also provide the
lessee with an option to purchase the medallion at $60,000, less credit given
for any future payments required to be paid to maintain the option in full force
and effect. In order to lease the medallion, Medallion Auto Management LLC will
also purchase a taxi vehicle and lease the vehicle to the operator whereby the
operator will own the vehicle for a nominal payment at the end of the term of
the lease, or have an option to purchase the vehicle for its then unamortized
cost.
TAXI MEDALLION FINANCE INDUSTRY AND MARKET OVERVIEW
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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 settlement of an
anti-trust legal action, 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, which were issued over a period of three years from 1998
through the end of the year 2000. Of these medallions, 500 were issued in
lotteries to taxi drivers who never owned a medallion, and the other 500 were
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.
In October, 2000 the City of Chicago held its final auction of 200 medallions
under the program authorized in December, 1997. The City set a minimum bid of
$60,000, and all 200 medallions were sold at auction at prices that ranged from
$60,000 to $68,000. In July, 2000 the last 200 medallions authorized under the
lottery program were distributed by lottery.
In November, 2000, the City Council passed a new ordinance authorizing the City
to auction up to 50 medallions per year through November, 2004, representing a
total of 150 medallions over three years. The City Council, however, did not
authorize any further lotteries of medallions. The new ordinance also requires
purchasers of the medallions to operate a taxi-van instead of the standard
taxicab vehicle, which we believe will cost the medallion purchaser three times
as much to purchase, equip and prepare as compared to a standard taxicab. As a
result, we believe that the 150 medallions, when auctioned, will command lower
prices than the prices that would otherwise be available in the market place for
the purchase of medallions without the taxi-van requirement.
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.
Subsequent to January, 1999, Yellow Cab Company continued to sell medallions
that it owned, and we estimate that they have
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sold approximately 1,300 additional medallions to owner drivers, who they
continue to service through their taxi affiliation and through the Yellow Cab
Company operations. We believe that the sale of these additional medallions by
Yellow Cab Company to owner-drivers will continue to offer additional financing
opportunities for the Company to service their financing needs. Yellow Cab
Company is continuing to sell medallions in the market at this time.
It has been our experience that as the Chicago market has expanded, it has also
become more competitive with more lenders entering the market. 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 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.
Since 2001 the Chicago taxi medallion market has significantly weakened due to
the general economic slowdown and the events of September 11, 2001. The result
of the economic slowdown caused a large number of medallion loans to go into
default and caused a large number of foreclosure sales. The Company for the
first time in 23 years experienced a large number of medallion loan defaults and
foreclosures.
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 is also 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.
Due to the current economic difficulties in the Chicago market, Elk's most
recent experience has been that medallions were selling for between $53,000 and
$58,000 per medallion. Elk is reselling its foreclosed medallions for
approximately $58,000 per medallion, for which it provides full financing to the
purchaser. Previously, the City of Chicago imposed 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. In November 2000 this ordinance was reduced to 10% for the first year
and 5% thereafter, and imposed a flat 5% for any foreclosure sale. 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. As of
June 30, 2003, the total principal amount of our outstanding taxi loans in
Chicago was $23,184,463.
Elk recently set up two additional subsidiary entities and anticipates setting
up more entities as needed to take title to approximately 35 of our remaining
foreclosure medallions, and to
4
thereafter lease them out to taxi drivers on a 36-month lease, the terms of
which will also provide the lessee with an option to purchase the medallion at
$60,000, less credit given for any future payments required to be paid to
maintain the option in full force and effect. In order to lease the medallion,
we will also purchase a taxi vehicle and lease the vehicle to the operator
whereby the operator will own the vehicle for a nominal payment at the end of
the 36-month term of the lease or have an option to purchase the vehicle for its
then unamortized value. By entering into the lease program with options to
purchase, we believe that we will maximize our cash flow and develop a current
income return on these assets that is favorable when compared with the gross
interest income we would receive on a similar transaction that was structured as
a sale with a loan by us to the purchaser.
We are also contemplating entering into agreements with large operators of taxi
medallions whereby one of our subsidiaries would take title to approximately 35
additional foreclosed medallions and lease them to a medallion operator. Unlike
the above structure, the medallion operator would not be given an option to
purchase the medallions.
We presently have discussions underway to sell approximately 62 defaulted
foreclosed medallions. We are also continuing to finance taxi medallion
transactions in Chicago to our existing non-defaulting borrowers and to other
potential borrowers who qualify.
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. The City, however, has proposed selling an additional 900
medallions over the course of three years. Under the proposal the City would
auction 300 medallions each year. The New York City Taxi and Limousine
Commission (the "TLC") is presently conducting an environmental impact study on
this plan.
There are two types of medallions: corporate and individual owner-driver. Of the
present 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 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. According to
the most recent data provided by the TLC,
5
provided as of May 2003, individual medallions are selling for approximately
$224,000 and corporate medallions are selling for approximately $259,000.
However, Elk's most recent experience with corporate medallions has been that
they are selling as of September 2003 for approximately $270,000. 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 $55 million to $99 million a year. Assuming that a typical
individual medallion financing for a purchase of a medallion involves a sum of
approximately $220,000, the dollar volume of New York City individual medallion
financing might range from $55 million to $91 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.
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. As of June 30, 2003, the total principal
amount of outstanding taxi medallion loans in New York was $12,984,115.
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.
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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. In 2001, the City sold an additional 20 medallions for handicap use,
bringing the total of outstanding medallions to approximately 1,790. Current
market prices of Boston medallions are approximately $200,000.
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.
As of June 30, 2003, the total principal amount of our outstanding taxi loans in
Boston was $2,241,768.
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, 1,879 have been issued
to date and 27 are pending. 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 six lending institutions that are
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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 issued in the year 2000,
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. Market prices have increased substantially
since 1997. We estimate that the present market price of licenses/medallions in
Metro-Dade County as of September 2003 is between $115,000 to $120,000 per
medallion.
MIAMI AREA MARKETING STRATEGY FOR MEDALLION FINANCING. We believe
that the recent change to a medallion system and an emphasis on individual
operator-ownership of medallions for the future will open a large new market for
taxi medallion financing in the Miami area. Since this is an emerging market, we
are currently developing strategies to develop contacts and market our financing
to potential purchases of medallions, and in the event refinancing is permitted,
to those owners who may wish to refinance their medallions in the future. As of
June 30, 2003, the total principal amount of our outstanding taxi loans in the
Miami area was $2,947,608.
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 medallion lending that make these industries
attractive candidates for profitable lending.
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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
some 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, commercial construction, car wash, theater, restaurants, 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 share 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, 2003, ranged from
6.0% to 16% 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, 2003 more than 90% 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 a ceiling on the interest rates that an SBIC may charge its
borrowers.
9
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 lowest 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, 2003 was 19%. See "Regulation -- The Small
Business Act of 1958."
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
A large portion 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. Medallion prices in New York City dropped from $223,000 in
July, 2000 for individual medallions to $200,000 by September 2002. Prices for
individual medallions increased to $224,000 by May 2003, as reported by the TLC.
Prices for corporate medallions fell from $257,000 per medallion in July, 2000,
to $230,000 by September, 2002. According to the data provided by the TLC, as of
May 2003, corporate medallions were selling for approximately $259,000. Elk's
most recent experience, as of September 2003, is that corporate medallions are
selling for approximately $270,000. Interest rates in the New York City market
for taxi loans have recently dropped to six percent (6%) per annum. This has
limited Elk's opportunities to make profitable loans or expand its activities in
this market.
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 generally been increasing.
However, in Chicago the market price for medallions dropped approximately 15%
during the fiscal year ended June 30, 2001. Since April 1995 when Elk began
making loans in the Chicago taxi medallion market, the market value of a
medallion increased from approximately $32,000 to a high of approximately
$68,000. From July, 2000 through June, 2002, the market value of a Chicago taxi
medallion decreased to approximately $50,000 to $60,000, depending on the terms
and conditions of the cash or financed sale. As of September 2003, medallions
are selling in a range of between $53,000 to $58,000 per medallion depending on
financing and terms. Elk has made over $75,000,000 of loans to Chicago
10
medallion owners since it began operations in Chicago. 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 $200,000 in Boston and
from approximately $65,000 to between $115,000 and $120,000 in Miami.
As of June 30, 2003, $13,112,880, or 23.7%, of the aggregate principal amount of
its outstanding loans of $55,306,678, represented loans made to finance the
purchase or continued ownership of New York City taxi medallions and related
assets; an aggregate of $23,184,463, or 41.9%, consisted of loans to finance the
purchase or refinancing of taxi medallions in Chicago, and the balance of
$19,009,335 or 34.4% consisted of loans to various commercial borrowers, of
which $2,241,768, or 4.1%, was invested in Boston taxi medallion financing and
$2,947,608, or 5.3%, 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 6.0%. Interest rates on Chicago taxi loans
generally have ranged from 10% to 13% per year. With additional competition
presently in the market place, it is expected that rates will range in the near
term from 10% to 12% 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. Rates may be lowered to induce sales of our
foreclosed medallions to purchasers of such medallions. In addition, most loans
that Elk has made in Chicago 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 7.25-11.5%, and in the Miami
market currently range from 7.25-16%.
COMMERCIAL LOAN PORTFOLIO
Ameritrans began making diversified Commercial Loans in May 2002. At June 30,
2003, Ameritrans' Commercial Loan portfolio consisted of five loans totaling
$671,883, of which two loans for $558,521 were to debt collection businesses,
one loan for $60,000 was to a real estate business and two loans for $53,362
were to Florida taxi medallions. The proceeds of the loan to the debt collection
business were used to purchase an interest in a pool of charged off credit card
receivables.
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 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, Elk's Commercial Loans totaled
$1,275,654, or 5.5%, of Elk's total loan portfolio, while at June 30, 2003,
Elk's Commercial Loans totaled $13,201,437, or 24.2%, of Elk's total loan
portfolio. On July 1, 2002,
11
the Company had a beginning balance in its reserve of loss account of $238,500
and this balance remained unchanged for the year ended June 30, 2003. During the
fiscal year ended 2003, the Company had total write offs and depreciation on
interest and loans receivable of $852,512, most of which was attributable to the
Chicago taxi medallion foreclosures.
At June 30, 2003, Elk's Commercial Loan portfolio consisted of 83 loans, of
which 15 loans totaling $1,144,096 were to dry-cleaning businesses, 29 loans
totaling $5,945,861 were to laundromat businesses, and 39 loans totaling
$6,111,480 were to a variety of other small businesses. Loans to dry cleaners
and laundromats represented 53.7% of the aggregate principal amount of Elk's
Commercial Loans outstanding at June 30, 2003.
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 6% to 16%.
LOAN PORTFOLIO; VALUATION
The following table sets forth a classification of the Company's outstanding
loans as of June 30, 2003:
Number Interest Maturity Dates Balance
Type of Loan of loans Rates (In Months) Outstanding
------------ -------- ----- ----------- -----------
New York City:
Taxi medallion 48 6 - 13% 2 - 49 $ 12,984,115
Radio car service 16 11 - 13.5% 2 - 47 128,765
Chicago:
Taxi medallion 503 9 - 14.9% 2 - 143 23,184,463
12
Boston:
Taxi medallion 17 7.25 - 11.5% 11 - 48 2,241,768
Miami:
Taxi medallion 74 7.25 - 16% 1 - 95 2,947,608
Other loans:
Restaurant 6 10 - 12.5% 4 - 95 910,922
Car Wash/Auto Center 5 8.5 - 15% 47 - 60 631,203
Dry Cleaner 15 6.75 - 14.5% 1 - 59 1,144,096
Laundromat 29 7.5 - 14.25% 3 - 141 5,945,861
Financial Services 1 10% 60 252,781
Black Car Service (real property) 2 10.25% 41 395,149
Auto Sales 6 10 - 12% 12 - 44 596,206
Movie Theater 1 16% 12 174,984
Retirement home 2 14 - 16% 84 - 97 235,872
Commercial construction 4 13 - 14% 14 - 60 965,916
Telecommunications 1 12% 18 75,085
Leather Goods 1 14% 30 187,233
Beverage distributor 1 14.5% 91 211,874
Marina 1 14.5% 34 224,247
Plumbing & heating supplies 1 14% 95 136,383
Real Estate 2 13.5 - 15% 31 - 63 180,037
Florist 1 7.25% 46 366,885
Food Market 2 12 - 16% 48 - 72 391,895
Debt Collection 2 10% 23 - 26 558,521
Software Company 2 8% 39 34,808
Taxicab Distributor 1 6% 36 200,000
--------------
13,819,959
--------------
Total Loans Receivable 55,306,678
Less: Allowance for loan losses (238,500)
--------------
Loans Receivable, net $ 55,068,178
==============
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 Ameritrans and 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
13
currently outstanding loans range from 6% to 16% per annum. As of June 30, 2003,
the annual weighted average interest rate on Elk's loans was approximately
10.69%. 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. The
Company's loans are recorded at fair value. Since no ready market exists for
these loans, the fair value is determined in good faith by the Board of
Directors. In determining the fair value, the Company and Board of Directors
consider 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. To date, the fair value of the loans has been
determined to approximate cost less unrealized depreciation and no loans have
been recorded above cost.
COLLECTION EXPERIENCE -- Elk has not had a material loss of principal in any
taxi medallion loan. From time to time, Elk has also experienced some small
losses of principal on its taxi lending operations. Elk has also 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.
During the twenty-four (24) months since September 11, 2001, the Chicago taxi
market has suffered through an economic slowdown which caused approximately 35%
of our Chicago taxi loans to default and the Company to commence foreclosure
actions. When the tragic events of September 11, 2001 occurred, the Chicago
market was in the process of absorbing 1,000 new medallions that had been sold
by the city over the prior three years between 1998 and the end of the year
2000. As a result of the increase in supply of medallions and the reduction in
demand for service, and corresponding reduction in revenues by taxi operators,
the Company, as well as other lenders in the Chicago taxi medallion lending
market, experienced a much greater rate of default in their Chicago loan
portfolio than they had previously. It also became more difficult to resell
these medallions due to the fall in their market prices from their high of
$68,000 to $70,000 per
14
medallion.
Market conditions began to improve during the first six months of 2002, during
which the Company sold some of its defaulted medallions directly to buyers and
through an arrangement with the Checker Taxi Association, Inc. By June 30, 2002,
the Company had resold 30 Chicago taxi medallions. During the year ended June
30, 2003, an additional 35 Chicago taxi medallions were resold. In addition to
the medallion sales, some taxi owners who had defaulted were able to reinstate
their loans after paying certain fees and executing loan modification and
reinstatement agreements, and, accordingly, began operating their taxis again.
As a result of the softness in the Chicago taxi market during the fiscal year,
the Company increased its reserve on accrued interest receivable from $300,000
to $691,000. Although foreclosures have increased, the fair value of the
collateral remained higher than the amount owed in nearly all cases and thus
principal impairments have been small.
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, 2003, Elk maintained three lines of credit totaling
$40,000,000 with an overall lending limit of $40,000,000. At June 30, 2003, Elk
had $34,130,000 outstanding under these lines. The loans, which mature through
November 2003, 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
rate minus 1/2% plus certain fees as of June 30, 2003. 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. Elk is in compliance with all covenants and credit terms at June 30,
2003.
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, new debentures payable to the SBA were drawn from the reserved pool of
$12,000,000 in the amount 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, another new
debenture payable to the SBA was drawn in the amount of $5,000,000 with an
interim interest rate of 1.682%. The long term fixed rate will be determined on
the pooling date of March 24, 2004. In addition to the fixed rates, there is an
additional annual SBA user fee on each debenture of 0.87% per annum that will
also be charged making the rates 5.54% and 5.498% and 2.552% before applicable
amortization of points and fees.
15
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 Swaps. While these limit our exposure to 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 hedged by interest rate Swaps. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations -- Interest Expense" and Note 13 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 and on a temporary basis, until March 1, 2002, up to 85% of performing
taxi medallion loans. 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 it 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,
16
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.
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.
17
EMPLOYEES
As of June 30, 2003, we employed a total of ten employees. This includes a
temporary increase of one clerk in June 2003 to assist with some administrative
projects. The temporary employee was terminated during August 2003.
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 has no 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.
18
(h) WRITING OPTIONS. Elk has not engaged, and does not intend to engage, in the
writing of options.
(i) SHORT SALES. Elk has not engaged, and does not intend to engage, in short
sales of securities.
(j) PURCHASING SECURITIES ON MARGIN. Elk has not engaged, and does not intend to
engage, in the purchase of securities on margin.
(k) FUTURES CONTRACTS. Elk has not engaged, and does not intend to engage, in
the purchase or sale of futures contracts.
(l) RESTRICTED SECURITIES. Elk may invest up to 100% of its assets in restricted
securities.
(m) TYPES OF INVESTMENTS. Although Elk was organized primarily to provide long
term loan funds to Small Business Concerns, Elk's certificate of incorporation
provides Elk with the authority to invest in the equity capital of Small
Business Concerns. Accordingly, Elk may make equity investments in Small
Business Concerns if determined by its Board of Directors to be in the best
interests of Elk.
(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
19
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 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 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
20
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.
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.
21
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,
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
22
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.
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.
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.
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
23
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;
(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
24
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, 2003, more than 90% of Elk's portfolio of loans and investments
were
25
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, 2003, Elk's outstanding loans had a
weighted average rate of interest of 10.69%. SBA Regulations also require that
each loan originated by SBICs have a term of between five years and twenty
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.
ITEM 2. PROPERTIES
We rent office space from a law firm, the principals of which are officers and
directors of
26
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.
During the year ended June 30, 2003, Elk paid the law firm approximately $3,550
on account of this agreement. In August, 2001 the Company's Board of Directors
approved the execution of a formal sublease with the law firm on financial terms
and conditions consistent with the prior arrangement for the period July 1, 2001
through April 30, 2004.
Effective July 1, 2003, the Company entered into a new ten-year sublease for
additional office and storage space with an entity in which an officer and
shareholder of the Company has an interest. The new sublease calls for rental
payments ranging from $38,500 to $54,776 per annum from the first year ending
June 30, 2004 through the year ending June 30, 2013. The sublease contains a
provision that either party may terminate the lease in years seven through ten
with six months' notice.
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' 2003 fiscal year.
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, 2002 and
June 30, 2003.
27
AMERITRANS HIGH LOW
FISCAL 2002
1st Quarter 5.75 4.00
2nd Quarter 9.00 4.33
3rd Quarter 7.15 6.24
4th Quarter 7.00 5.10
FISCAL 2003
1st Quarter 6.25 5.00
2nd Quarter 5.78 4.63
3rd Quarter 5.49 2.95
4th Quarter 5.11 3.45
FISCAL 2004
1st Quarter (through September 25, 2003) 5.06 4.16
(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, and paid dividends
quarterly since that time and up until its share exchange with Ameritrans.
Thereafter, Ameritrans has declared and paid dividends to holders of its Common
Stock for each quarter except for the fourth quarter of 2000, the first quarter
of 2001, the third and fourth quarters of 2003, and the first quarter of 2004.
On April 18, 2002, the Company's registration statement filed on Form N-2 was
declared effective by the Securities and Exchange Commission. The offering
closed on April 24, 2002 on the total sale of 300,000 units. Each unit was
comprised of one share of Common Stock, one share of 9 3/8% cumulative
participating preferred stock (face value $12.00) (the "Participating Preferred
Stock"), and one warrant exercisable for five years into one share of Common
Stock at an exercise price of $6.70 per share (the "Warrants"). The units were
split in May, 2002. The Participating Preferred Stock and the Warrants trade on
the NASDAQ SmallCap Market under the symbols, respectively, "AMTCP" and "AMTCW".
The gross proceeds from the sale of the units was $5,750,000 less costs and
commissions of $1,704,399, resulting in net proceeds of $3,995,601. The
underwriter of the offering was granted an option to purchase up to 30,000
units, each unit consisting of one share of Common Stock, one share of
Participating Preferred Stock and one warrant exercisable at $8.40 per share.
The option to purchase the 30,000 units are exercisable for five (5) years
commencing one year after the date of the offering at an exercise price of
$21.45 per unit.
The Company filed a post-effective amendment to the Registration Statement on
Form N-2 on
28
June 24, 2003 to update disclosures contained in the Form N-2, which has not
been declared effctive by the Securities and Exchange Commission. The Company
intends to file a second post-effective amendment to include the audited
financial statements for the year ended June 30, 2003.
The Company has declared and paid the quarterly dividend on the Participating
Preferred Stock since the Participating Preferred Stock was issued. Most
recently, the Company's Board of Directors declared a dividend of $0.28125 per
share on September 23, 2003 on the Participating Preferred Stock for the period
July 1, 2003 through September 30, 2003 payable on October 15, 2003 for all
holders of the Participating Preferred Stock of record as of October 7, 2003.
As of October 6, 2003, there were 195 holders of record of the Ameritrans Common
Stock, and 3 holders of record of the Participating Preferred Stock and
Warrants, which is exclusive of parties holding the securities in street name.
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. 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 DATA FISCAL YEAR ENDED JUNE 30,
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Investment Income $ 6,282,079 $ 6,269,719 $ 6,439,792 $ 6,602,397 $ 5,583,894
=========== =========== =========== =========== ===========
Interest Expense 2,076,861 2,632,918 3,392,202 3,345,526 2,498,284
Other Expenses 3,805,083 2,591,751 2,188,636 2,590,352 1,856,221
----------- ----------- ----------- ----------- -----------
Total Expenses 5,881,944 5,224,669 5,580,838 5,935,878 4,354,505
=========== =========== =========== =========== ===========
Operating Income 400,135 1,045,050 858,954 666,519 1,229,389
=========== =========== =========== =========== ===========
Other Income (Expense) 2,976 2,700 (276,549) (440,196) 7,200
Benefit of (Provision for) Income Taxes(1) (7,897) (8,854) (7,896) (13,571) 769
----------- ----------- ----------- ----------- -----------
Net Income $ 395,214 $ 1,038,896 $ 574,509 $ 212,752 $ 1,237,358
=========== =========== =========== =========== ===========
29
Dividends on Preferred Stock $ (337,500) $ (68,438) $ -- $ -- $ --
----------- ---------- ---------- ----------- -----------
Net Income Available To Common Shareholders $ 57,714 $ 970,458 $ 574,509 $ 212,752 $ 1,237,358
=========== ========== ========== =========== ===========
Net Income Per Common Share $ 0.03 $ 0.54 $ 0.33 $ 0.12 $ 0.71
=========== ========== ========== =========== ===========
Common Stock Dividends Paid $ 552,312 $ 994,991 $ 528,045 $ 1,256,832 $ 1,256,832
=========== ========== ========== =========== ===========
Common Stock Dividends Paid Per Common Share $ 0.27 $ 0.57 $ 0.30 $ 0.72 $ 0.72
=========== ========== ========== =========== ===========
STATEMENT OF OPERATIONS DATA FISCAL YEAR ENDED JUNE 30,
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Weighted Average number of Shares of
Common Stock Outstanding 2,035,600 1,800,614 1,745,600 1,745,600 1,745,600
=========== =========== =========== =========== ===========
Net change to accumulated other
comprehensive income $ (200,338) $ (43,612) $ (123,364) $ (124,319) $ 62,964
=========== =========== =========== =========== ===========
BALANCE SHEET DATA AT JUNE 30,
-----------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Loans Receivable $ 55,306,678 $ 55,029,831 $ 54,559,970 $ 56,806,579 $ 51,103,932
Unrealized depreciation of investments (238,500) (238,500) (318,500) (380,000) (380,000)
------------ ------------ ------------ ------------ ------------
Net of unrealized depreciation of investments $ 55,068,178 $ 54,791,331 $ 54,241,470 $ 56,426,579 $ 50,723,932
============ ============ ============ ============ ============
Total assets $ 60,091,901 $ 59,008,216 $ 57,984,869 $ 60,294,624 $ 54,510,801
============ ============ ============ ============ ============
Notes payable and demand notes $ 34,130,000 $ 33,720,000 $ 35,550,000 $ 37,800,000 $ 31,000,000
============ ============ ============ ============ ============
Subordinated SBA debentures $ 9,200,000 $ 7,860,000 $ 8,880,000 $ 8,800,000 $ 8,880,000
============ ============ ============ ============ ============
Total liabilities $ 44,119,756 $ 42,341,135 $ 45,177,743 $ 47,410,598 $ 40,772,584
============ ============ ============ ============ ============
Total stockholders' equity $ 15,972,145 $ 16,667,081 $ 12,807,126 $ 12,884,026 $ 13,738,217
============ ============ ============ ============ ============
30
(1) Ameritrans since inception and Elk, since the fiscal year ended June 30,
1984, have 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.
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 annual report.
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. Significant estimates
made by the Company include valuation of loans, evaluation of the recoverability
of various receivables and 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 and its ability
to enforce provisions of its contracts in the event of disputes, through
litigation if necessary, in accordance with generally accepted accounting
principles, to record net assets and liabilities at estimated realizable values.
The matters that give rise to such provisions 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 June 30, 2003, are reasonable, actual results could differ
materially from the estimated amounts recorded in the Company's financial
statements. Our 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 the fair value at a different
amount.
31
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 reviews 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 the cost basis is other
than temporary, the related investment is written down to its 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.
GENERAL
Ameritrans acquired Elk in December 16, 1999. 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
32
the fair value, as approved by the Board of Directors. See Note 1 of "Notes to
Consolidated Financial Statements."
Results of Operations for the Years Ended June 30, 2003 and 2002
Total Investment Income
The Company's investment income increased $12,360 to $6,282,079 as compared with
the prior year ended June 30, 2002. This increase was mainly due to the increase
in interest earned on higher average loans receivable balance for the year of
$87,721, offset by a decrease in other fees of $75,361.
Operating Expenses
Interest expense for the years ended June 30, 2003 decreased $556,057 to
$2,076,861 when compared to the year ended June 30, 2002. This reflects the
lower interest charged on outstanding bank borrowing combined with interest
savings due to paydown and reissuance of SBA debentures, offset by interest
payments related to Swap agreements since the fixed rates in connection with the
Swaps were consistently above the floating one month LIBOR rates during the
year. Salaries and employee benefits increased $109,441 when compared with the
prior year. This increase reflects the increases that were put in effect from
the officers employment agreements, three of which were amended during the year.
Other administrative costs increased $457,410 when compared with the prior year.
This increase was due to increased professional fees and related costs as a
result of increased regulatory filings and examinations. The Company also
incurred $313,678 in foreclosure expenses for the year ended June 30, 2003,
which increased $187,113 from the prior year due to the increase in the number
of foreclosures from the weak Chicago market. Depreciation in value of loans and
accrued interest increased $459,367 to $852,512 due mainly to the write down of
the Company's Chicago loan portfolio and accrued interest.
The increase in write off and depreciation of interest and loans receivable is
primarily due to the increase in Chicago loan portfolio delinquencies and
defaults, which is attributed to the economic slowdown and the effects of
September 11, 2001 on the Chicago taxi industry. Activities in connection with
the Chicago operations as of June 30, 2003 are as follows: a) $50,018 of charge
off of principal due to losses on 14 of the 35 completed Chicago medallion
foreclosures that occurred during the year ended June 30, 2003 and b) $248,985
of accrued interest on the completed Chicago medallion foreclosures was written
off. In addition, the Company increased its unrealized depreciation on interest
receivable for potential losses on the remaining Chicago taxi medallion loans
that were in default by an additional net amount of $391,000 for the year ended
June 30, 2003. As mentioned above, the foreclosure expenses incurred by the
Company as it satisfies outstanding balances incurred by the default borrowers
on the medallions with the City of Chicago were $313,678 for the year ended June
30, 2003. This expense primarily consisted of back taxes, interest and
33
penalties owed to the City of Chicago Department of Revenue by defaulted
medallion owners which was required to be paid as a condition of completing the
medallion foreclosures sales and transfer to new purchasers, as well as
professional fees related to these foreclosures.
Net Income
Net income decreased to $395,214 from $1,038,896 in the year ended June 30,
2003. The change in the net income for the year ended June 30, 2003 that was
attributable primarily to the write down of the Chicago loan portfolio as well
as increases in salary and professional fees which were only partially offset by
favorable interest rates obtained from debt refinancing. Dividends of
Participating Preferred Stock for the year ended June 30, 2003 amounted to
$337,500 versus $68,438 in the prior year.
Results of Operations for the Years Ended June 30, 2002 and 2001
Total Investment Income
The Company's investment income decreased $170,073 to $6,269,719 as compared
with the prior year ended June 30, 2001. This decrease was mainly due to the
decrease in interest earned on loans receivable, ($181,232), offset by an
increase in other fees ($11,159). This decrease reflects a lower average
interest rate earned on the Company's outstanding loan portfolio.
Operating Expenses
Interest expense for the years ended June 30, 2002 decreased $759,284 to
$2,632,918 when compared to the year ended June 30, 2001. This reflects the
lower interest charged on outstanding bank borrowing combined with a paydown of
the notes payable, bank and an SBA debenture in the amount of $1,020,000 as a
result of the Company's successful public offering of 300,000 units in April
2002. Salaries and employee benefits increased $142,620 when compared with the
prior year. This increase reflects the increases that were put in effect when
the officers signed employment agreements combined with a temporary increase in
staff due to the implementation of the Company's new computer system. Other
administrative costs decreased $33,980 when compared with the prior year. This
decrease was mainly due to decreased miscellaneous administrative expenses and
loss on assets acquired in satisfaction of loans, net. The Company also incurred
$126,565 in foreclosure expenses for the year ended June 30, 2002. Depreciation
in value of loans and accrued interest increased $167,910 to $393,145 due mainly
to the write down of the Company's Chicago loan portfolio and accrued interest.
Net Income
Net income increased to $1,038,896 from $574,509 in the year ended June 30,
2002. The change
34
in the net income for the year ended June 30, 2002 that was attributable to
other income (expense) amounted to $279,249. This change was primarily due to a
one time charge of $413,186 due to the termination of the Company's merger talks
with Medallion, net of $121,637 gain on the sale of equity securities for the
year ended June 30, 2001.
Balance Sheet and Reserves
Total assets increased by $1,083,685 as of June 30, 2003 when compared to total
assets as of June 30, 2002. This increase was due to the Company's increased
borrowings from the SBA. 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 by the Company prior to September 30, 2006. As of
June 30, 2003, debentures payable to the SBA in the amount of $2,050,000 and
$3,000,000 were drawn from the reserved pool of $12,000,000. In September and
December 2002, the Company paid off SBA debentures in the amount of $2,690,000
and $1,020,000 in order to reduce interest costs.
Asset / Liability Management
Interest Rate Sensitivity
Ameritrans, like other financial institutions, is subject to interest rate risk
to the extent its interest- earning assets (consisting of medallion loans and
commercial loans) rise or fall at a different rate over time in comparison to
its interest-bearing liabilities (consisting primarily of its credit facilities
with banks and subordinated SBA debentures).
A relative measure of interest rate risk can be derived from Ameritrans'
interest rate sensitivity gap i.e. the difference between interest-earning
assets and interest-bearing liabilities, which mature and/or reprice within
specified intervals of time. The gap is considered to be positive when
repriceable assets exceed repriceable liabilities and negative when repriceable
liabilities exceed repriceable assets. A relative measure of interest rate
sensitivity is provided by the cumulative difference between interest sensitive
assets and interest sensitive liabilities for a given time interval expressed as
a percentage of total assets.
Ameritrans' interest rate sensitive assets were approximately $55.1 million and
interest rate sensitive liabilities were approximately $43.3 million at June 30,
2003. Having interest-bearing liabilities that mature or reprice more frequently
on average than assets may be beneficial in times of declining interest rates,
although such an asset/liability structure may result in declining net earnings
during periods of rising interest rates. Abrupt increases in market rates of
interest may have an adverse impact on our earnings until we are able to
originate new loans at the higher prevailing interest rates. Conversely, having
interest-earning assets that mature or reprice more
35
frequently on the average than liabilities may be beneficial in times of rising
interest rates, although this asset/liability structure may result in declining
net earnings during periods of falling interest rates. This mismatch between
maturities and interest rate sensitivities of our interest-earning assets and
interest-bearing liabilities results in interest rate risk.
The effect of changes in interest rates is mitigated by regular turnover of the
portfolio. Based on past experience, Ameritrans anticipates that approximately
20% of the portfolio will mature or be prepaid each year. Ameritrans believes
that the average life of its loan portfolio varies to some extent as a function
of changes in interest rates. Borrowers are more likely to exercise prepayment
rights in a decreasing interest rate environment because the interest rate
payable on the borrower's loan is high relative to prevailing interest rates.
Conversely, borrowers are less likely to prepay in a rising interest rate
environment.
Interest Rate Swap Agreements
Ameritrans manages the exposure of the portfolio to increases in market interest
rates by entering into interest rate Swap agreements to hedge a portion of its
variable-rate debt against increases in interest rates and by incurring
fixed-rate debt consisting primarily of subordinated SBA debentures.
On January 10, 2000, Elk entered into a $5,000,000 interest rate Swap
transaction with a bank that expired on October 8, 2001. On June 11, 2001, Elk
entered into an additional interest rate Swap transaction with the same bank for
$10,000,000 which expired on June 11, 2002. On June 11, 2001, Elk entered into
another interest rate Swap transaction for $15,000,000 with this bank which
expired June 11, 2003. On February 11, 2003, Elk purchased another interest rate
Swap contract for $5,000,000 with the same bank expiring February 11, 2005.
These Swap transactions were entered into to protect the Company from an upward
movement in interest rates relating to outstanding bank debt. These Swap
transactions call for a fixed rate of 4.95%, 4.35%, 4.95% and 3.56%,
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 annually or at the
settlement date.
Ameritrans believes that its bank credit facilities and cash flow from
operations (after distributions to stockholders) will be adequate to fund the
continuing operations of the Company's loan portfolio. Nevertheless, the Company
continues to explore additional options, which may increase available funds for
its growth and expansion strategy. In addition, to the application for SBA
funding described above, these financing options would provide additional
sources of funds for both external expansion and continuation of internal
growth.
36
Investment Considerations
Interest rate fluctuations may adversely affect the interest rate spread we
receive on our taxicab medallion and commercial loans.
Because we borrow money to finance the origination of loans, our income is
dependent upon the differences between the rate at which we borrow funds and the
rate at which we loan funds. While the loans in our portfolio in most cases bear
interest at fixed-rates or adjustable-rates, we finance a substantial portion of
such loans by incurring indebtedness with floating interest rates. As short-term
interest rates rise, our interest costs increase, decreasing the net interest
rate spread we receive and thereby adversely affect our profitability. Although
we intend to continue to manage our interest rate risk through asset and
liability management, including the use of interest rate Swaps, general rises in
interest rates will tend to reduce our interest rate spread in the short term.
In addition, we rely on our counterparties to perform their obligations under
such interest rate Swaps.
A decrease in prevailing interest rates may lead to more loan prepayments, which
could adversely affect our business.
A borrower is likely to exercise prepayment rights at a time when the interest
rate payable on the borrower's loan is high relative to prevailing interest
rates. In a lower interest rate environment, we will have difficulty re-lending
prepaid funds at comparable rates, which may reduce the net interest spread we
receive.
Our commercial loan activity has increased in recent years. Lending to small
businesses involves a high degree of business and financial risk, which can
result in substantial losses and should be considered speculative. Our borrower
base consists primarily of small business owners that have limited resources and
that are generally unable to achieve financing from traditional sources. There
is generally no publicly available information about these small business
owners, and we must rely on the diligence of our employees and agents to obtain
information in connection with our credit decisions. In addition, these small
businesses often do not have audited financial statements. Some smaller
businesses have narrower product lines and market shares than their competition.
Therefore, they may be more vulnerable to customer preferences, market
conditions, or economic downturns, which may adversely affect the return on, or
the recovery of, our investment in these businesses.
37
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 banks and SBA indebtedness. Ameritrans
also used part of the proceeds to start its own loan portfolio.
At June 30, 2003, 79% of Elk's indebtedness was represented by indebtedness to
its banks and 21% by the debentures issued to the SBA with fixed rates of
interest plus user fees which results in rates ranging from 5.50% to 8.38%. 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, 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, new debenture payable to the
SBA were drawn from the reserved pool of $12,000,000 in the amount 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, another new debenture payable to the SBA was drawn in the
amount of $5,000,000 with an interim interest rate of 1.682%. The long term
fixed rate will be 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 2.55% 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.
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.
38
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.
New Accounting Standards
In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146 (SFAS 146), "Accounting for Costs Associated With Exit or Disposal
Activities." SFAS 146 requires that a liability be recognized for costs
associated with an exit or disposal activity when the liability is incurred. It
also requires that the initial measurement of a liability be at fair value. The
adoption of SFAS 146 is not expected to have a material impact on the Company's
consolidated results of operations and financial position.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," which expands previously issued accounting guidance and
disclosure requirements for certain guarantees. The Interpretation requires an
entity to recognize an initial liability for the fair value of an obligation
assumed by issuing a guarantee. The provision for initial recognition and
measurement of the liability will be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. The Company does not
expect this Interpretation to have a material impact on its consolidated
financial position or results of operations.
In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148 (SFAS 148), "Accounting for 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 is not expected to
have a material effect on the consolidated financial statements as the Company
continues to apply the intrinsic value method in accordance with APB No. 25.
In January 2003 the FASB issued Interpretation No. 46, "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
January 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 Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 150 ("SFAS 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 Company does not expect that the adoption of this Standard will have a
significant impact on its consolidated results of operations and financial
position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's business activities contain elements of risk. The Company
considers the principal types of risk to be fluctuations in interest rates and
portfolio valuations. The Company considers the management of risk essential to
conducting its businesses. 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 our loan portfolio and investments may
adversely affect our ability to dispose of loans at times when it may be
advantageous for us to liquidate such portfolio or investments. Also, if we were
required to liquidate some or all of the investments in the portfolio, the
proceeds of such liquidation may be significantly less than the current value of
such investments. Because we borrow money to make loans and investments, our net
operating income is dependent upon the difference between the rate at which we
borrow funds and the rate at which we loan and invest 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 our interest income. As interest
rates rise, our interest costs increase, decreasing the net interest rate spread
we receive and thereby adversely affect our profitability. Although we intend to
continue to manage our interest rate risk through asset and liability
management, including the use of interest rate swaps, general rises in interest
rates will tend to reduce our interest rate spread in the short term.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted in the response found under Item 15(a)(1)
in this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
On June 26, 2003 the Company dismissed Marcum & Kliegman, LLP ("M&K") as
the principal accountants to audit the Company's financial statements. The
reports of M&K on the financial statements of the Company for the past two
fiscal years contained no adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope, or accounting principle.
The decision to dismiss M&K was recommended and approved by the Company's Audit
Committee.
In connection with its audits for the two most recent fiscal years through
June 30, 2002, there have been no disagreements with M&K on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements if not resolved to the satisfaction of
M&K would have caused them to make reference thereto in their report on the
financial statements for such years. During the two most recent fiscal years
through June 30, 2002, the Company has had no reportable events (as defined in
Item 304(a)(1)(v) of Regulation S-K).
The Company filed a Current Report on Form 8-K on July 1, 2003 disclosing
the dismissal
39
of M&K, and filed an exhibit as an exhibit a letter from M&K stating that it
agrees with the representations made above.
On June 30, 2003, the Company engaged the accounting firm of Rosen Seymour
Shapss Martin & Company LLP ("RSSM") as the Company's new independent
accountants to audit the Company's financial statements for the fiscal year
ending June 30, 2003. The Company has not consulted with RSSM during the last
two years or subsequent interim period on either the application of accounting
principles or type of opinion RSSM might issue on the Company's financial
statements.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
The term "disclosure controls and procedures" refers to the controls and
procedures of a company that are designed to ensure that information
required to be disclosed by a company in the reports that it files under
Rules 13a - 14 of the Securities Exchange Act of 1934 (the "Exchange Act")
is recorded, processed, summarized and reported within required time
periods. As of the end of the period covered by this Annual Report on Form
10-K (the "Evaluation Date"), we carried out an evaluation under the
supervision and with the participation of our Chief Executive Office &
Chief Financial Officer of the effectiveness of our disclosure controls
and procedures. Based on that evaluation, our Chief Executive Office &
Chief Financial Officer has concluded that, as of the Evaluation Date,
such controls and procedures were effective in ensuring that required
information will be disclosed on a timely basis in our periodic reports
filed under the Exchange Act.
(b) Changes in internal controls
There were no significant changes to our internal controls or in other
factors that could significantly affect our internal controls subsequent
to the Evaluation Date.
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) Executive Vice President and Director
Lee A. Forlenza(1) Senior Vice President and Director
Steven Etra(1) Vice President and Director
Silvia Mullens(1) Vice President
Margaret Chance(1) Vice President, Secretary
Paul Creditor Director
Allen Kaplan Director
40
John R. Laird Director
Howard F. Sommer Director
Wesley Finch Director
(1) As a BDC 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 55, 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 30 years and is presently an 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 a 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. Mr. Granoff has also been a director of Titanium Holdings Group,
Inc., formerly known as Enviro-Clean of America, Inc. from September 1999
through May 2003. In February 1998, Mr. Granoff was elected to and served as a
trustee on the Board of Trustees of The George Washington University for a term
which expired on June 30, 2003. Mr. Granoff also serves as a Trustee of the
Parker Jewish Institute for Healthcare and Rehabilitation. 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 48, has been a Vice President, and a director of Ameritrans
since its formation and a Vice President and General Counsel of Elk since July
1983. In August 2000, Ms. Walker was elected to be the Executive Vice President
of the Company. 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 eighteen 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
41
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 46, 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. In August 2000, Mr. Forlenza was elected to be Senior
Vice President of the Company. 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 54, 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 also been a director of Titanium Holdings Group, Inc.,
formerly known as Enviro- Clean of America, Inc. since March 1999. Mr. Etra has
extensive business experience in investing in emerging companies.
Paul Creditor, age 67, 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 53, 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 R. Laird, age 61, 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
42
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 63, 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 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.
Wesley Finch, age 56, was elected to the Board of Directors September 2002. Mr.
Finch is the principal of The Finch Group, a real estate development and
management company, specializing in the management, restructuring and
revitalization of affordable, subsidized and assisted housing. Over the last 20
years, The Finch Group has developed, or advised government entities, on more
than $1.5 billion of low-income housing. During 1992-1993, Mr. Finch served as a
member of President Clinton's transition team at the U.S. Department of Housing
and Urban Development. Previously, Mr. Finch served as Finance Chairman for U.S.
Senator John F. Kerry's 1984 campaign, and as the Chairman of Senator Kerry's
successful 1990 and 1996 campaigns. In addition, during 1987-1988, Mr. Finch was
the National Coordinating Chairman of the Democratic Senatorial Campaign
Committee, a legal extension of the U.S. Senate. Mr. Finch earned his bachelors
degree in accounting from the Bernard M. Baruch School of the City College of
New York, and is a non-practicing certified public accountant (CPA).
Silvia Maria Mullens, age 52, 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
43
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 49, has been Secretary of Ameritrans since its inception
and Secretary of Elk and involved in loan administration since November 1980. In
August 2000, Ms. Chance was elected to be a Vice President of the Company. 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.
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 2003 complied with the
filing requirements, except for a From 3 filed late for Wesley Finch and Silvia
Mullens.
COMMITTEES OF THE AMERITRANS BOARD
Ameritrans has a standing Audit Committee, a standing 1999 Employee Plan
Committee and a Compensation Committee.
The Audit Committee is presently comprised of Paul Creditor, John Laird 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
Audit Committee held six (6) meetings during fiscal year 2003. The Audit
Committee's financial expert is John Laird.
The 1999 Employee Plan Committee administers our 1999 Employee Plan. The
committee is comprised of Allen Kaplan and John Laird. See " -- Stock Option
Plans -- The 1999 Employee Plan," below.
The Compensation Committee reviews the Company's employment and compensation
agreements with its employees. The committee is comprised of Allen Kaplan and
John Laird.
44
The Board of Directors held 3 formal meetings during fiscal 2003. Eight of the
Company's directors attended each of the meetings of the Board and one director
missed one meeting.
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, 2003. No non-employee director
received compensation in excess of $60,000 during that period.
Summary Compensation Table
Long-Term
Annual Compensation Compensation
------------------- ----------------
Securities
Underlying All Other
Name and Principal Position Year Salary($)(1) Bonus($) Options(#)(2) Compensation(3)
- --------------------------- ---- ------------ -------- ------------- ---------------
Gary C. Granoff 2003 255,000(4) 15,750 -- 28,763
President, Chief Executive Officer, 2002 242,500(4) 15,750 -- 25,500
Chief Financial Officer and Director 2001 230,875(4) 15,000 -- 25,500
Ellen M. Walker 2003 117,832 -- -- 17,675
Vice President and Director 2002 115,800 -- -- 17,370
2001 110,000 -- -- 16,500
Lee A. Forlenza 2003 53,560 7,500 -- 9,159
Senior Vice President and Director 2002 51,500 -- -- 7,725
2001 50,000 -- -- 7,500
Steven Etra 2003 60,000 -- -- --
Vice President and Director 2002 31,000 -- -- --
2001 N/A N/A N/A N/A
Silvia Mullens 2003 99,620 10,000 -- 16,443
Vice President 2002 85,522 15,000 -- 15,078
2001 65,474 18,500 -- 12,596
Margaret Chance 2003 94,678 15,000 -- 14,202
Vice President and Secretary 2002 88,207 13,500 -- 13,321
2001 72,819 8,500 -- 12,198
(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 Elk in the amounts paid to date and for the
projected amounts for the fiscal year ending June 30, 2004. This amount includes
officers' salaries, other salaries,employee benefits, insurance, and expenses.
(2) Grants of stock options received during the fiscal year.
45
(3) Amounts received under Simplified Employee Pension Plan.
(4) Does not include $35,000 of reimbursable expenses.
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,$19,750 for the year ended June 30, 2001,
$29,750 for the year ended June 30, 2002 and $36,250 for the year ended June 30,
2003.
No options were granted to any of the Company's named executive officers during
the fiscal year ended June 30, 2003
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.
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
46
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 made pursuant to the terms of the employment
agreements for Ameritrans' executives, the Compensation Committee 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.
Bonuses 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.
EMPLOYMENT AGREEMENTS
We have entered into employment agreements with six of our employees. We are
required to disclose the terms of the agreements for five of those individuals:
1. Gary Granoff. We entered into an amended and restated employment agreement
with Gary Granoff dated December 31, 2002, for a term of five (5) years
commencing July 1, 2003, which replaces the employment agreement by and between
the Company and Mr. Granoff dated July 1, 2001. The agreement automatically
renews for a five (5) year term, unless either party gives notice of non-renewal
as provided therein. The agreement provides that Mr. Granoff will be paid an
annual salary of $296,500 commencing July 1, 2003, which increases each year the
agreement is in effect. The agreement also provides that Mr. Granoff will be
paid a yearly bonus, based on his and Ameritrans' performance, an amount of
which is determined by the Board of Directors but which may not be less than
$15,000 per year for the first five (5) years of the employment agreement. If
renewed, any bonus will be given solely in the Board's discretion. The agreement
also provides for compensation to Mr. Granoff if he is terminated prior to the
expiration of his employment term, the amount of which varies depending upon the
nature of his termination. If, for instance, Mr. Granoff is terminated without
cause (as defined in the agreement) he is entitled
47
to a lump-sum payment in an amount equal to (i) his salary, as in effect at the
time of termination, through the date of termination and an amount equal to his
salary multiplied by the number of years remaining under the agreement, and (ii)
an amount equal to all of the consulting fees payable under the terms of Mr.
Granoff's consulting agreement with Ameritrans, as discussed below. The
employment agreement also provides for confidentiality and for non-competition,
and non-solicitation during the term of the agreement and for one (1) year
thereafter.
In conjunction with the employment agreement we also entered into an amended and
restated consulting agreement with Mr. Granoff, which replaces the consulting
agreement by and between the Company and Mr. Granoff dated as of July 1, 2001.
The consulting agreement does not become effective and does not commence unless
and until the employment agreement is terminated due to (i) Mr. Granoff's
voluntary resignation from the Company or (ii) a notice of non-renewal of the
employment agreement from either the Company or the Consultant. Upon the
effectiveness of the consulting agreement Mr. Granoff shall be paid as a
consultant at a rate equal to 1/2 the monthly salary in effect at the time the
employment agreement is terminated plus any bonus received, if any, for that
employment year and other benefits. The agreement also provides for
confidentiality and non-competition for the term of the agreement, and
non-solicitation during the term of the agreement and for one (1) year
thereafter.
2. Ellen Walker. We entered into an employment agreement with Ellen Walker for a
term of five (5) years dated as of October 1, 2001. The agreement automatically
renews for another five (5) year term unless either party terminates prior to
renewal. The agreement provides that Ms. Walker will be paid an annual salary,
which presently is $118,976, and increases each year the agreement is in effect.
The agreement also provides that Ms. Walker will be paid a yearly bonus, at the
discretion of Ameritrans, based on her and the Company's performance. The
agreement provides for compensation to Ms. Walker if she is terminated prior to
the expiration of her employment term, the exact amount of which varies
depending upon the nature of the termination. If, for instance, Ms. Walker
terminates the employment agreement for good reason (as defined in the
agreement) she is entitled to a lump-sum payment equal to the sum of her salary,
as in effect at the time of termination, and an amount equal to her salary
multiplied by the number of years remaining under the agreement or two-and-one
half years, whichever is greater. The agreement also provides for
confidentiality and for non-competition and non-solicitation during the term of
the agreement and for one (1) year thereafter.
3. Silvia Mullens. The agreement with Ms. Mullens is for a term of five years
dated as of January 1, 2002. The agreement automatically renews for another
five-year term unless either party terminates prior to renewal. The agreement
provides that Ms. Mullens will be paid an annual salary of $95,400, which
increases five percent (5%) each year the agreement is in effect. The
48
agreement also provides that Ms. Mullens will be paid a yearly bonus, at the
discretion of Ameritrans, based on her and the Company's performance. The
agreement provides for compensation to Ms. Mullens if she is terminated prior to
the expiration of her employment term, the exact amount of which varies
depending upon the nature of the termination. If, for instance, Ms. Mullens
terminates the employment agreement for good reason (as defined in the
agreement), she is entitled to a lump-sum payment equal to the sum of her
salary, as in effect at the time of termination, and an amount equal to her
salary multiplied by the number of years remaining under the agreement or
two-and-one-half (2 1/2) years, whichever is greater. The agreement also
provides for confidentiality and for non-competition and non-solicitation during
the term of the agreement and for one year thereafter.
4. Lee Forlenza. We entered into an amended and restated employment agreement
with Lee Forlenza dated December 31, 2002, for a five (5) year term commencing
as of July 1, 2003, which replaces the employment agreement by and between the
Company and Mr. Forlenza dated October 1, 2001. The agreement automatically
renews for a five (5) year term, unless either party gives notice of non-renewal
prior to the expiration of the initial term. The agreement provides that Mr.
Forlenza will be paid an annual salary of $76,250 commencing July 1, 2003, and
increases each year the agreement is in effect. The agreement also provides that
Mr. Forlenza will be paid a yearly bonus based on his and the Company's
performance, an amount of which is determined by the Board of Directors but
which may not be less than $10,000 for the first five (5) years of the
employment agreement, and an initial bonus of $7,500. If the employment
agreement is renewed, any bonus after the initial term will be paid solely in
the discretion of the Board. The agreement provides for compensation to Mr.
Forlenza if he is terminated prior to the expiration of his employment term, the
exact amount of which varies depending upon the nature of the termination. If
Mr. Forlenza terminates the employment agreement for good reason (as defined in
the agreement, he is entitled to a lump-sum payment equal to the sum of his
salary, as in effect at the time of termination, and an amount equal to his
salary multiplied by the number of years remaining under the agreement or
two-and-one half years, whichever is greater. The agreement also provides for
confidentiality and for non-competition, and for non-solicitation during the
term of the agreement and for one (1) year thereafter.
5. Margaret Chance. The agreement with Ms. Chance is for a term of five (5)
years dated as of January 1, 2002. The agreement automatically renews for
another five-year term unless either party terminates prior to renewal. The
agreement provides that Ms. Chance will be paid an annual salary of $75,000,
which increases four percent (4%) each year the agreement is in effect. The
agreement also provides that Ms. Chance will be paid a yearly bonus, at the
discretion of Ameritrans but which shall not be less than $8,500 per year, based
on her and the Company's performance. The agreement provides for compensation to
Ms. Chance if she is terminated prior
49
to the expiration of her employment term, the exact amount of which varies
depending upon the nature of the termination. If, for instance, Ms. Chance
terminates the employment agreement for good reason (as defined in the
agreement), she is entitled to a lump-sum payment equal to the sum of her
salary, as in effect at the time of termination, and an amount equal to her
salary multiplied by the number of years remaining under the agreement or
two-and-one-half (2 1/2) years, whichever is greater. The agreement also
provides for confidentiality and for non-competition and non-solicitation during
the term of the agreement and for one year thereafter.
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. An amendment to the 1999 Employee Plan was approved by the
shareholders in January, 2002. The amendment increased the number of shares
reserved under the plan from 125,000 to 200,000 shares.
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 200,000 shares (subject to adjustment for stock splits and similar
capital changes) of common stock to our employees. By adopting the 1999 Employee
Plan, the Board believes that we will be better able to attract, motivate and
retain as employees people upon whose judgment and special skills our success in
large measure depends. As of December 31, 2001, options to purchase an aggregate
of 100,000 shares of Common Stock had been granted to various officers. 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, 100,000 shares of
Common Stock are available for future awards under the 1999 Employee Plan.
The 1999 Employee Plan is administered by the 1999 Employee Plan Committee of
the Board of Directors, which is comprised solely of non-employee directors (who
are "outside directors" within the meaning of Section 152(m) of the Internal
Revenue Code and "disinterested persons" within the meaning of Rule 16b-3 under
the Securities Exchange Act of 1934 (the "1934 Act")). The committee can make
such rules and regulations and establish such procedures for the administration
of the 1999 Employee Plan as it deems appropriate.
50
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, a non-employee director stock
option plan adopted by the Board of Directors of Elk and approved by its
stockholders in September 1998 (the "Elk Director Plan"). Ameritrans and Elk
submitted an application for, and received on August 31, 1999, an exemptive
order relating to these plans from the SEC. The Director Plan was amended by the
Board of Directors on November 14, 2001 and approved by the shareholders at the
Annual Meeting on January 18, 2002. The amendment is still subject to the
approval of the Securities and Exchange Commission. The amendment (i) increases
the number of shares reserved under the plan from 75,000 to 125,000 and (ii)
authorizes the grant of an option to purchase up to 1,000 shares at the market
value at the date of grant to each eligible director who is re-elected to the
Board of Directors.
The Director Plan provides for the automatic grant of options to directors who
are not our employees, officers or interested persons (an "Eligible Director")
who are elected and serve one year on the Board of Directors. 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, which will be increased to 125,000 shares upon SEC approval of the
Amended Director Plan. As of June 30, 2003, there were options to purchase up to
22,224 shares. On September 26, 2003, an option was granted to a newly Eligible
Director to purchase up to 10,917 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, 2003
contributions amounted to $86,443.
Gary C. Granoff's Fiscal 2003 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.
51
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
September 25, 2003, (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 PERCENTAGE NUMBER OF PERCENTAGE
SHARES OF OF SHARES OF OF
COMMON OUTSTANDING PARTICIPATING OUTSTANDING
STOCK COMMON PREFERRED REFERRED
NAME OWNED STOCK OWNED STOCK OWNED STOCK OWNED
*Gary C. Granoff 346,025(1) 16.73% 7,000 2.33%
*Ellen M. Walker 57,374(2) 2.79% ** **
*Lee A. Forlenza 53,418(3) 2.60% 1,000 **
*Steven Etra 133,617(4) 6.51% ** **
Paul Creditor 7,556(5) ** ** **
747 Third Avenue, Ste. 4C
New York, NY
Allen Kaplan 10,556(6) ** ** **
c/o Executive Charge, Inc.
1440 39th Street
Brooklyn, NY
52
John R. Laird 5,656(7) ** ** **
481 Canoe Hill Road
New Canaan, CT
Howard F. Sommer 5,556(8) ** ** **
c/o New York Community Investment
Co., LLC
120 Broadway
New York, NY
Wesley Finch 39,871(9) 1.94% 10,000 3.33%
1801 Clint Moore Road, Suite 210
Boca Raton, FL 33487
Dan M. Granoff 155,979(10) 7.66% ** **
Children's Hospital Oakland Research
Institute
747 52nd Street
Oakland, CA
Paul D. Granoff 143,179(11) 7.03% ** **
c/o Rush-Copley Medical Center
1900 Ogden Avenue
Aurora, IL 60504
Infinity Capital Partners, L.P. 128,800 6.33% ** **
767 Third Avenue, 16th Floor
New York, New York 10017
*Margaret Chance 10,700(12) ** ** **
53
*Silvia Mullens 5,293(13) ** 293 **
All Officers, Directors and 5% 1,103,580(14) 53.81% 18,293 6.10%
Stockholders as a group (14 persons)***
* Gary C. Granoff, Ellen M. Walker, Lee A. Forlenza, Steven Etra, Margaret
Chance and Silvia Mullens are each "interested persons" with respect to
Ameritrans and Elk, as such term is defined in the 1940 Act.
** Less than 1%.
(1) Excludes 30,533 shares of Common Stock owned directly and indirectly by Mr.
Granoff's wife, as well as 1,000 shares of Participating Preferred Stock and
1,000 Warrants directly owned by her as to which he disclaims beneficial
ownership. Also excludes 500 shares of Participating Preferred Stock owned by
Dapary Management Corp., a corporation controlled by Mr. Granoff, and 1,000
shares of Participating Preferred Stock owned by J&H Associates Ltd. Pts., a
partnership whose general partner is GCG Associates Inc., a corporation
controlled by Mr. Granoff. Includes 30,000 options for the purchase of 30,000
shares of Common Stock, which options are exercisable immediately and expire
five years from the date of grant, and 1,800 Warrants, which are exercisable
within 60 days into 1,800 shares of Common Stock and which expire April 1, 2007.
Also includes 16,900 shares owned by The Granoff Family Foundation, a charitable
foundation for which Mr. Granoff and his mother and brother are trustees. Also
includes 261 shares held by GCG Associates Inc., a corporation controlled by Mr.
Granoff. Also includes 77,584 shares of common stock, as well as 500 shares of
Participating Preferred Stock and 500 Warrants owned by DAPARY Management Corp.,
a corporation controlled by Mr. Granoff. Also includes 12,000 shares of Common
Stock, as well as 1,000 shares of Participating Preferred Stock and 1,000
Warrants owned by J & H Associates Ltd. Pts., a partnership whose general
partner is GCG Associates Inc., a corporation controlled by Mr. Granoff.
(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."
(3) Includes 1,000 Warrants, and 17,500 shares of Common Stock issuable upon the
exercise of ten-year options issued to under the 1999 Employee Plan. See "Stock
Option Plans."
(4) Includes (i) 27,000 shares held by Mr. Etra's wife; (ii) 1,500 shares held
by Mr. Etra's son; (iii) 10,000 shares held by SRK Associates LLC, a limited
liability company controlled by Mr.
54
Etra, (iv) 10,000 shares held by Lance's Property Development Corp. Pension
Plan, of which Mr. Etra is a trustee and (v) 17,500 shares issuable upon the
exercise of ten-year options issued under the 1999 Employee Plan. See "Stock
Option Plans."
(5) Includes 5,556 shares issuable upon exercise of five year options issued
under the Director Plan. See "Stock Options Plans."
(6) Includes 5,556 shares issuable upon exercise of five year options issued
under the Director Plan. See "Stock Options Plans."
(7) Includes 5,556 shares issuable upon exercise of five year options issued
under the Director Plan. See "Stock Option Plans."
(8) Includes 5,556 shares issuable upon exercise of five year options issued
under the Director Plan. See "Stock Option Plans."
(9) Does not include 6,000 shares of Common Stock owned directly by Mr. Finch's
wife as to which he disclaims beneficial ownership. Also, does not include
26,300 shares of Common Stock held by The Tudor Trust, a grantor trust, of which
Mr. Finch is the grantor, Mr. Finch's wife and two children are the
beneficiaries and Mr. Finch's wife is one of the two trustees. Mr. Finch
disclaims beneficial ownership of the trust's 26,300 shares. Also, does not
include 10,917 shares issuable upon exercise of five year options issued under
the Director Plan, which options were granted as of September 26, 2003, but are
not exercisable until September 26, 2004. Includes 10,000 Warrants which are
exercisable into 10,000 shares of Common Stock. See "Stock Options Plans."
(10) Includes (i) 10,900 shares owned by a charitable foundation, of which
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.
(11) 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.
(12) Includes 10,000 shares of Common Stock issuable upon the exercise of
ten-year options issued under the 1999 Employee Plan.
(13) Includes 5,000 shares of Common Stock issuable upon the exercise of
ten-year options issued under the 1999 Employee Plan.
(14) Includes 4,000 shares issuable upon the exercise of 4,000 Warrants, 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 five-year options issued under the
55
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.
Equity Compensation Plan Information
The following table details information regarding the Company's existing equity
compensation plans as of June 30, 2003:
- ----------------------------------------- ----------------------- --------------------- ----------------------------------------
Plan Category (a) (b) (c)
Number of securities Weighted-average Number of securities
to Exercise price of Remaining available for
be issued upon Outstanding options, future issuance under equity
exercise of Warrants and rights compensation Plans(excluding
Outstanding options, securities reflected in column (a))
Warrants and rights
- ----------------------------------------- ----------------------- --------------------- ----------------------------------------
Equity compensation plans approved by 122,224(1) $9.12 152,776
security holders
- ----------------------------------------- ----------------------- --------------------- ----------------------------------------
Equity compensation plans not approved
by security holders -- -- --
- ----------------------------------------- ----------------------- --------------------- ----------------------------------------
Totals 122,224 $9.12 152,776
- ----------------------------------------- ----------------------- --------------------- ----------------------------------------
(1) Includes options to purchase up to 100,000 shares of Common Stock granted to
employees under the 1999 Employee Plan and options to up to 22,224 shares
granted to non-employee directors granted under the Non-Employee Director Plan.
See "Stock Option Plans."
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 $37,699 in fees during the fiscal year ended June 30, 2003.
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, 2003, we paid $59,290 in
rent, $63,187 in shared overhead expense, and $21,802 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 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. During the year
ended 2003, Elk paid the law firm approximately $3,550 on account of this
agreement. In August, 2001, the Company's Board of Directors approved the
execution of a formal sublease with the law firm on financial terms and
conditions consistent with the prior arrangement for the period July 1, 2001
through April 30, 2004.
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 "Code 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
56
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.
The Company's Code of Ethics is filed as an exhibit to this Annual Report. The
Code of Ethics shall also be posted on the Company's internet website at the
internet address: http://www.ameritranscapital.com. Copies of the code may be
obtained free of charge from the Company's website at the above internet
address.
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.
57
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a) 1. and 2. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
1. The financial statements and financial statement schedules as listed in the
Index to Financial Statements are filed as part of this Annual Report on Form
10-K.
2. No financial statement schedules are filed herewith because the information
required has been presented in the aforementioned financial statements.
b) REPORTS ON FORM 8-K
On July 1, 2003 the Company filed a current report on Form 8-K reporting under
Item 4 (Changes in Registrant's Certifying Accountants) that effective as of
June 26, 2003 the Company dismissed Marcum & Kliegman, LLP as the principal
accountants to audit the Company's financial statements; and that the Company,
effective as of June 30, 2003, engaged the accounting firm of Rosen Seymour
Shapss Martin & Company LLP as the Company's new independent accountants to
audit the Company's financial statements for the year ending June 30, 2003.
On May 22, 2003 the Company filed a current report on Form 8-K reporting under
Item 9 (Regulation FD Financial Disclosure) that the Company issued a press
release announcing its third quarter results.
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
58
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 qualified 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 uncertainty 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.
59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of Securities Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 8th day of October, 2003.
AMERITRANS CAPITAL CORPORATION
By: /s/ Gary C. Granoff
-----------------------------------
Gary C. Granoff, President
As required by the Securities Exchange Act of 1934, this report 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 Board of October 8, 2003
- ----------------------- Directors, Chief Executive Officer and
Gary C. Granoff Chief Financial Officer
/s/ Ellen M. Walker Executive Vice President and Director October 8, 2003
- -----------------------
Ellen M. Walker
/s/ Lee A. Forlenza Senior Vice President and Director October 8, 2003
- -----------------------
Lee A. Forlenza
/s/ Steven Etra Vice President and Director October 8, 2003
- -----------------------
Steven Etra
/s/ Paul Creditor Director October 8, 2003
- -----------------------
Paul Creditor
/s/ Allen Kaplan Director October 8, 2003
- -----------------------
Allen Kaplan
/s/ John R. Laird Director October 8, 2003
- -----------------------
John R. Laird
60
/s/ Howard F. Sommer Director October 8, 2003
- -----------------------
Howard F. Sommer
/s/ Wesley Finch Director October 8, 2003
- -----------------------
Wesley Finch
61
Ameritrans Capital Corporation and Subsidiaries
- --------------------------------------------------------------------------------
CONTENTS
June 30, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
Page
INDEPENDENT AUDITORS' REPORTS
Rosen Seymour Shapss Martin & Company LLP F-2
Marcum & Kliegman, LLP F-3
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets at June 30, 2003 and 2002 F-4 - F-5
Statements of Income for the Years Ended
June 30, 2003, 2002 and 2001 F-6
Statements of Comprehensive Income for the Years Ended
June 30, 2003, 2002 and 2001 F-7
Statements of Stockholders' Equity for the Years Ended
June 30, 2003, 2002 and 2001 F-8
Statements of Cash Flows for the Years Ended
June 30, 2003, 2002 and 2001 F-9 - F-10
Notes to Consolidated Financial Statements F-11 - F-26
Schedule of Loans as of June 30, 2003 F-27
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Ameritrans Capital Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheet of Ameritrans
Capital Corporation and Subsidiaries (the "Company") as of June 30, 2003, and
the related consolidated statements of income, comprehensive income,
stockholders' equity and cash flows for the year ended June 30, 2003, and the
schedule of loans as of June 30, 2003. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
As explained in Note 1, the consolidated financial statements include loans
valued at $55,068,178 and $54,791,331 as of June 30, 2003 and 2002,
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.
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, 2003, and the
results of their operations and their cash flows for the year ended June 30,
2003, in conformity with accounting principles generally accepted in the United
States of America.
CERTIFIED PUBLIC ACCOUNTANTS
/s/ Rosen Seymour Shapss Martin & Company LLP
New York, New York
September 3, 2003
F-2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Ameritrans Capital Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheet of Ameritrans
Capital Corporation and Subsidiaries as of June 30, 2002, and the related
consolidated statements of income, comprehensive income, stockholders' equity
and cash flows for the years ended 2002, and 2001. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Ameritrans Capital
Corporation and Subsidiaries as of June 30, 2002, and the results of their
operations and their cash flows for the years ended June 30, 2002 and 2001 in
conformity with accounting principles generally accepted in the United States of
America.
As explained in Note 1, the consolidated financial statements include loans
valued at $54,791,331 as of June 30, 2002, 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 17, 2002
/s/ Marcum & Kliegman, LLP
F-3
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
June 30, 2003 and 2002
- --------------------------------------------------------------------------------
2003 2002
------------ ------------
Assets
Loans receivable $ 55,306,678 $ 55,029,831
Less unrealized depreciation on loans receivable (238,500) (238,500)
------------ ------------
Loans receivable, net 55,068,178 54,791,331
Cash and cash equivalents 498,669 774,062
Accrued interest receivable, net of unrealized depreciation
of $691,000 in 2003 and $300,000 in 2002 1,321,591 1,103,347
Assets acquired in satisfaction of loans 1,142,189 1,108,088
Receivables from debtors on sales of assets acquired in
satisfaction of loan 431,258 367,271
Equity securities 929,405 443,327
Furniture, equipment and leasehold improvements, net 173,100 107,757
Prepaid expenses and other assets 527,511 313,033
------------ ------------
Total assets $ 60,091,901 $ 59,008,216
============ ============
- --------------------------------------------------------------------------------
(Continued)
F-4
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS (Continued)
June 30, 2003 and 2002
- --------------------------------------------------------------------------------
2003 2002
------------ ------------
Liabilities and Stockholders' Equity
Liabilities:
Debentures payable to SBA $ 9,200,000 $ 7,860,000
Notes payable, bank 34,130,000 33,720,000
Accrued expenses and other liabilities 485,710 434,339
Accrued interest payable 219,671 258,358
Dividends payable 84,375 68,438
------------ ------------
Total liabilities 44,119,756 42,341,135
------------ ------------
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 (1,197,725) (703,127)
Accumulated other comprehensive loss (229,880) (29,542)
------------ ------------
16,042,145 16,737,081
Less: Treasury stock, at cost, 10,000 shares
of common stock (70,000) (70,000)
------------ ------------
Total stockholders' equity 15,972,145 16,667,081
------------ ------------
Total liabilities and stockholders' equity $ 60,091,901 $ 59,008,216
============ ============
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
F-5
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
2003 2002 2001
----------- ----------- -----------
Investment income:
Interest on loans receivable $ 6,072,399 $ 5,984,678 $ 6,165,910
Fees and other income 209,680 285,041 273,882
----------- ----------- -----------
Total investment income 6,282,079 6,269,719 6,439,792
----------- ----------- -----------
Operating expenses:
Interest 2,076,861 2,632,918 3,392,202
Salaries and employee benefits 879,074 769,633 627,013
Legal fees 304,097 232,494 187,183
Other administrative expenses 1,342,129 961,257 1,006,543
Loss on assets acquired in satisfaction of loans, net 77,343 78,907 122,912
Directors' fees 36,250 29,750 19,750
Foreclosure expenses 313,678 126,565 --
Write off and depreciation on interest and loans receivable 852,512 393,145 225,235
----------- ----------- -----------
Total operating expenses 5,881,944 5,224,669 5,580,838
----------- ----------- -----------
Operating income 400,135 1,045,050 858,954
----------- ----------- -----------
Other income (expense):
Net gain from rental activities -- 2,700 15,000
Gain on sale of securities 2,976 -- 121,637
Terminated merger costs -- -- (413,186)
----------- ----------- -----------
Total other income (expense) 2,976 2,700 (276,549)
----------- ----------- -----------
Income before income taxes 403,111 1,047,750 582,405
Income taxes 7,897 8,854 7,896
----------- ----------- -----------
Net income 395,214 1,038,896 574,509
Dividends on preferred stock (337,500) (68,438) --
----------- ----------- -----------
Net income available to common shareholders $ 57,714 $ 970,458 $ 574,509
=========== =========== ===========
Weighted Average Number of Shares Outstanding
Basic 2,035,600 1,800,614 1,745,600
=========== =========== ===========
Diluted 2,035,600 1,800,614 1,745,600
=========== =========== ===========
Net Income Per Common Share
Basic $ 0.03 $ 0.54 $ 0.33
=========== =========== ===========
Diluted $ 0.03 $ 0.54 $ 0.33
=========== =========== ===========
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
F-6
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended June 30, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
2003 2002 2001
----------- ----------- -----------
Net income $ 395,214 $ 1,038,896 $ 574,509
Other comprehensive income
Unrealized loss on equity securities arising during the period (200,338) (43,612) (4,852)
Reclassification adjustment for gains included in net income -- -- (118,512)
----------- ----------- -----------
Total comprehensive income $ 194,876 $ 995,284 $ 451,145
=========== =========== ===========
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
F-7
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended June 30, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
9-3/8% Cumulative
Participating Additional
Redeemable Paid-In
Common Stock Preferred Stock Capital Treasury Stock
------------ ----------------- ------------ --------------
Balance--July 1, 2000 $ 175 $ -- $ 13,471,474 $ --
Dividends declared on common stock -- -- -- --
Net income -- -- -- --
Unrealized loss on equity securities -- -- -- --
Reclassification adjustment for gains
included in net income -- -- -- --
------------ ------------ ------------ ------------
Balance--June 30, 2001 175 -- 13,471,474 --
Dividends declared on common stock -- -- -- --
Dividends declared on preferred stock -- -- -- --
Net income -- -- -- --
Unrealized loss on equity securities -- -- -- --
Net proceeds from stock offering 30 3,600,000 395,571 --
Issuance of warrants -- -- 2,500 --
Reacquisition of common stock -- -- -- (70,000)
------------ ------------ ------------ ------------
Balance--June 30, 2002 205 3,600,000 13,869,545 (70,000)
Dividends declared on common stock -- -- -- --
Dividends declared on preferred stock -- -- -- --
Net income -- -- -- --
Unrealized loss on equity securities -- -- -- --
------------ ------------ ------------ ------------
Balance--June 30, 2003 $ 205 $ 3,600,000 $ 13,869,545 $ (70,000)
============ ============ ============ ============
Retained Accumulated
Earnings Other
(Accumulated Comprehensive
Deficit) Income (Loss) Total
------------ ------------- ------------
Balance--July 1, 2000 $ (725,057) $ 137,434 $ 12,884,026
Dividends declared on common stock (528,045) -- (528,045)
Net income 574,509 -- 574,509
Unrealized loss on equity securities -- (4,852) (4,852)
Reclassification adjustment for gains
included in net income -- (118,512) (118,512)
------------ ------------ ------------
Balance--June 30, 2001 (678,593) 14,070 12,807,125
Dividends declared on common stock (994,991) -- (994,991)
Dividends declared on preferred stock (68,438) -- (68,438)
Net income 1,038,896 -- 1,038,896
Unrealized loss on equity securities -- (43,612) (43,612)
Net proceeds from stock offering -- -- 3,995,601
Issuance of warrants -- -- 2,500
Reacquisition of common stock -- -- (70,000)
------------ ------------ ------------
Balance--June 30, 2002 (703,127) (29,542) 16,667,081
Dividends declared on common stock (552,312) -- (552,312)
Dividends declared on preferred stock (337,500) -- (337,500)
Net income 395,214 -- 395,214
Unrealized loss on equity securities -- (200,338) (200,338)
------------ ------------ ------------
Balance--June 30, 2003 $ (1,197,725) $ (229,880) $ 15,972,145
============ ============ ============
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
F-8
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
Years Ended June 30, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
2003 2002 2001
----------- ----------- -----------
Cash flows from operating activities:
Net income $ 395,214 $ 1,038,896 $ 574,509
----------- ----------- -----------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 77,660 68,633 65,739
Gain on sale of equity securities (2,976) -- (121,637)
Changes in operating assets and liabilities:
Changes in unrealized depreciation on loans
receivable and accrued interest receivable 391,000 220,000 (61,500)
Accrued interest receivable (609,244) (418,013) (56,569)
Prepaid expenses and other assets (214,478) (60,259) 153,882
Accrued expenses and other liabilities 51,371 (21,977) 90,988
Accrued interest payable (38,687) (33,069) (73,843)
----------- ----------- -----------
Total adjustments (345,354) (244,685) (2,940)
----------- ----------- -----------
Net cash provided by operating activities 49,860 794,211 571,569
----------- ----------- -----------
Cash flows from investing activities:
Loans receivable (276,847) (836,071) 1,901,660
Assets acquired in satisfaction of loans (34,101) 120,936 21,241
Receivables from debtors on sales of assets
acquired in satisfaction of loans (63,987) 54,552 322,131
Sales of equity securities 27,726 -- 256,557
Purchases of equity securities (711,166) (50,025) (63,224)
Capital expenditures (143,003) (37,879) (33,167)
----------- ----------- -----------
Net cash provided by (used in) investing activities (1,201,378) (748,487) 2,405,198
----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from stock offering -- 3,998,101 --
Proceeds from notes payable, banks 8,385,000 5,320,000 950,000
Repayment of notes payable, banks (7,975,000) (7,150,000) (3,200,000)
Proceeds from debentures payable to SBA 5,050,000 -- --
Repayment of debentures payable to SBA (3,710,000) (1,020,000) --
Dividends paid (873,875) (994,991) (528,045)
----------- ----------- -----------
Net cash provided by (used in) financing activities 876,125 153,110 (2,778,045)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (275,393) 198,834 198,722
Cash and cash equivalents:
Beginning of year 774,062 575,228 376,507
----------- ----------- -----------
End of year $ 498,669 $ 774,062 $ 575,229
=========== =========== ===========
- --------------------------------------------------------------------------------
(Continued)
F-9
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS (Continued)
Years Ended June 30, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
2003 2002 2001
----------- ----------- -----------
Supplemental disclosures of cash flow information:
Cash paid during the years for:
Interest $ 2,115,548 $ 2,665,987 $ 3,548,409
=========== =========== ===========
Income taxes $ 15,759 $ 8,551 $ 1,822
=========== =========== ===========
Supplemental disclosures of non-cash investing activities:
Unrealized loss on equity securities arising during the period $ (200,338) $ (43,612) $ (4,852)
=========== =========== ===========
Reclassification adjustment for gains included in net income $ -- $ -- $ (118,512)
=========== =========== ===========
Debt settled through reacquisition of common stock $ -- $ 70,000 $ --
=========== =========== ===========
Conversion of loans to assets acquired in satisfaction of loans $ -- $ (366,210) $ (344,949)
=========== =========== ===========
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
F-10
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
1. Organization and Summary of Significant Accounting Policies
Organization and Principal Business Activity
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. The Company believes that
it operates in one reportable business segment.
Ameritrans Capital Corporation ("Ameritrans"), a Delaware corporation,
acquired all of the outstanding shares of Elk Associates Funding Corporation
("Elk") on December 16, 1999 in an exchange of stock. The acquisition was
accounted for as a purchase. Prior to the acquisition, Elk had been operating
independently and Ameritrans had no operations.
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.
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 for the
purpose of owning and operating certain real estate assets acquired in
satisfaction of defaulted loans made by Elk.
Ameritrans organized another subsidiary on June 8, 1998, Elk Capital
Corporation ("Elk Capital"), for the purpose of engaging in similar lending and
investment activities. Since inception, Elk Capital has had no operations or
activities.
Loan Valuations
The Company's loans are recorded at fair value determined by its Board of
Directors (the "Board"). Since no ready market exists for these loans, their
fair value is determined in good faith by members of the Company's Board. In
determining fair value, management and the Board consider 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. To
date, the fair value of the loans has been determined to approximate cost less
unrealized depreciation. No loans have been recorded above cost.
F-11
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
Unrealized depreciation in loan values has generally been caused by
specific events related to credit risk. Loans are considered "non-performing"
once they become 90 days past due as to principal or interest. These past due
loans are periodically evaluated by management and if, in the judgment of
management, the amount is not collectible and the fair value of the collateral
is less than the amount due, a reserve is established. If the fair value of the
collateral exceeds the loan balance at the date of valuation, the Company makes
no write-down of the loan amount.
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 when
acquired to be cash equivalents.
Equity Securities
Equity securities are comprised principally of common stock investments in
various companies. The Company currently classifies all equity securities as
available-for-sale. Securities classified as available-for-sale are required to
be reported at fair value with unrealized gains and losses, net of taxes,
excluded from earnings and shown in the statement of comprehensive income, and
separately as a component of accumulated other comprehensive income within
stockholders' equity. Realized gains and losses on the sale of securities
available-for-sale are determined using the specific-identification method.
Income Taxes
Ameritrans and Elk have elected to be taxed as Regulated Investment
Companies under the Internal Revenue Code (the "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 under the Code. In order to preserve this election for fiscal 2003,
the Company intends to make the required distributions to its stockholders in
accordance with the Code.
Depreciation and Amortization
Depreciation and amortization are computed on the straight-line method
over the useful lives of the respective assets. Leasehold improvements are
amortized over the life of the respective leases.
Deferred Loan Costs and Fees
Deferred loan costs are included in prepaid expenses and other assets.
Amortization of deferred loan costs is computed on the straight-line method over
the respective loan term. At June 30, 2003 and 2002, deferred loan costs and
commitment fees amounted to $244,198 and $163,812, respectively, net of
accumulated amortization of $246,033 and $200,169, respectively. Amortization
expense for the years ended June 30, 2003, 2002 and 2001 was $45,864, $36,609
and $24,455, respectively.
F-12
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
Assets Acquired in Satisfaction of Loans
Assets acquired in satisfaction of loans are carried at their estimated
fair values less estimated 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.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 loans receivable and
the fair value of financial instruments.
Treasury Stock
Treasury stock is recorded at cost. Gains and losses on disposition of
treasury stock, if any, are recorded as increases or decreases to additional
paid-in capital with losses in excess of previously recorded gains charged
directly to retained earnings.
Earnings Per Share
Basic earnings per share includes no dilution and is computed by dividing
income available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflect, in
periods in which they have a dilutive effect, the effect of common shares
issuable upon the exercise of stock options and warrants. The difference between
reported basic and diluted weighted average common shares results from the
assumption that all dilutive stock options outstanding were exercised. For the
years presented, the effect of common stock equivalents has been excluded from
the diluted calculation since the effect would be antidilutive.
Income Recognition
Interest income, including default interest, is recorded on an accrual
basis and in accordance with loan terms to the extent such amounts are expected
to be collected. The Company recognizes interest income on loans classified as
non-performing only to the extent that the fair market value of the collateral
exceeds the loan balance.
F-13
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
Stock Options
The Company uses the intrinsic value method of accounting for employee
stock options in accordance with APB No. 25 as permitted by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Under APB No. 25, compensation cost for stock options is measured
as the excess, if any, of the quoted market price of the stock at the date of
the grant over the option price. However, companies that do not adopt SFAS No.
123 must provide additional disclosure as if they had adopted SFAS 123. The
compensation cost is recognized over the vesting period of the options.
Financial Instruments
The carrying value of cash and cash equivalents, accrued interest
receivable and payable, and other receivables and payables approximates fair
value due to the relative short maturities of these financial instruments. The
estimated fair value of publicly traded equity securities is based on quoted
market prices and the estimated fair value of privately held equity securities
are recorded at the lower of cost or fair value. The estimated fair value of
bank debt as well as debentures is based on the terms of similar debt
arrangements. Loans receivable are recorded as their estimated fair value.
Derivatives
The Company from time to time enters into interest rate swap agreements in
order to manage interest rate risk. The Company does not use interest rate swaps
or other derivatives for trading or other speculative purposes. In accordance
with Statement of Financial Standards No. 133, all derivative instruments are
recorded at fair value. For derivative instruments designed as cash flow hedges,
the effective portion of that hedge is deferred and recorded as a component of
accumulated other comprehensive income. That portion of the hedge deemed to be
ineffective is recognized immediately in the consolidated statements of income.
Presentation of Prior Year Data
Certain reclassifications have been made to conform prior year data with
the current presentation.
New Accounting Standards
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 (SFAS 146), "Accounting for Costs Associated With Exit or Disposal
Activities." SFAS 146 requires that a liability be recognized for costs
associated with an exit or disposal activity when the liability is incurred. It
also requires that the initial measurement of a liability be at fair value. The
adoption of SFAS 146 is not expected to have a material impact on the Company's
consolidated results of operations and financial position.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," which expands previously issued
accounting guidance and disclosure requirements for certain guarantees. The
Interpretation requires an entity to recognize an initial liability for the fair
value of an obligation assumed by issuing a guarantee. The provision for initial
recognition and measurement of the liability will be applied on a prospective
basis to guarantees issued or modified after December 31, 2002. The Company does
not expect this Interpretation to have a material impact on its consolidated
financial position or results of operations.
F-14
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 (SFAS 148), "Accounting for 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 is not
expected to have a material effect on the consolidated financial statements as
the Company continues to apply the intrinsic value method in accordance with APB
No. 25.
In January 2003 the FASB issued Interpretation No. 46, "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
January 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 Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 150 ("SFAS 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 Company does not expect that the adoption of this
Standard will have a significant impact on its consolidated results of
operations and financial position.
2. Assets Acquired in Satisfaction of Loans
Assets acquired in satisfaction of loans consist of the following as of
June 30, 2003 and 2002:
Assigned
Mortgage
Real Estate Artwork and Note Equipment Total
----------- ----------- ----------- ----------- -----------
Balance--July 1, 2001 $ 478,435 $ 38,250 $ 416,129 $ -- $ 932,814
Additions -- -- 240,310 125,899 366,209
Sales (190,935) -- -- -- (190,935)
----------- ----------- ----------- ----------- -----------
Balance--June 30, 2002 287,500 38,250 656,439 125,899 1,108,088
Additions -- -- -- 200,000 200,000
Sales -- -- -- (165,899) (165,899)
----------- ----------- ----------- ----------- -----------
Balance--June 30, 2003 $ 287,500 $ 38,250 $ 656,439 $ 160,000 $ 1,142,189
=========== =========== =========== =========== ===========
F-15
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
3. Loans Receivable
Loans are considered non-performing once they become 90 days past due as
to principal or interest. The Company has loans of approximately $9,818,000 and
$5,009,250 at June 30, 2003 and 2002, respectively, which are considered
non-performing. These loans, which were made predominantly to the Chicago
market, are either fully or substantially collateralized and are personally
guaranteed by the debtor. The following table sets forth certain information
concerning performing and nonperforming loans as of June 30, 2003 and 2002:
2003 2002
----------- -----------
Loans receivable, net $55,068,178 $54,791,331
Performing loans 45,249,862 49,782,081
----------- -----------
Nonperforming loans $ 9,818,316 $ 5,009,250
=========== ===========
Average balance of nonperforming loans $ 7,413,783 $ 4,096,277
=========== ===========
Changes in the unrealized depreciation on loans receivable and interest
receivable are summarized as follows:
Unrealized Unrealized
depreciation depreciation
on interest on loans
receivable receivable
Balance--June 30, 2001 $ -- $ 318,500
Increases, net 300,000 --
Decreases, net -- (80,000)
--------- ---------
Balance--June 30, 2002 300,000 238,500
Increase, net 391,000 --
--------- ---------
Balance--June 30, 2003 $ 691,000 $ 238,500
========= =========
The Company has pledged its loans receivable and other assets as
collateral for its lines of credit (see Note 7).
F-16
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
4. Equity Securities
Equity securities consist of the following as of June 30, 2003 and 2002:
Chicago Telecom- Taxi
Taxicab Dry Cleaner munications Cosmetics Vehicle Real
Medallions Company and Technology Company Hotel Distributor Estate Total
---------- ----------- -------------- --------- --------- ----------- --------- ---------
Balance--July 1, 2001 $ 59,114 $ 14,000 $ 363,800 $ -- $ -- $ -- $ -- $ 436,914
Purchase of securities -- -- -- 50,025 -- -- -- 50,025
Unrealized loss on equity
securities arising
during the period (274) -- (11,655) (31,683) -- -- -- (43,612)
--------- --------- --------- --------- --------- --------- --------- ---------
Balance--June 30, 2002 58,840 14,000 352,145 18,342 -- -- -- 443,327
Purchase of securities -- -- 68,905 -- 310,000 100,000 232,261 711,166
Sale of securities (24,750) -- -- -- -- -- -- (24,750)
Unrealized loss on equity
securities arising
during the period (8,131) -- (174,865) (17,342) -- -- -- (200,338)
--------- --------- --------- --------- --------- --------- --------- ---------
Balance--June 30, 2003 $ 25,959 $ 14,000 $ 246,185 $ 1,000 $ 310,000 $ 100,000 $ 232,261 $ 929,405
========= ========= ========= ========= ========= ========= ========= =========
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
reviews 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 the cost basis is other
than temporary, the related investment is written down to its estimated fair
value.
5. Furniture, Equipment and Leasehold Improvements
Major classes of furniture, equipment and leasehold improvements as of
June 30, 2003 and 2002 are as follows:
Estimated
2003 2002 Useful Lives
--------- --------- ------------
Furniture and fixtures $ 182,299 $ 179,586 7 years
Office equipment 376,994 296,171 3-5 years
Leasehold improvements 35,406 21,802 Life of lease
--------- ---------
594,699 497,559
Less accumulated depreciation 421,599 389,802
--------- ---------
$ 173,100 $ 107,757
========= =========
F-17
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
Depreciation expense for the years ended June 30, 2003, 2002 and 2001 was
$31,797, $32,024 and $41,284, respectively.
6. Debentures Payable to SBA
At June 30, 2003 and 2002 debentures payable to the SBA consist of
subordinated debentures with interest payable semiannually, as follows:
Issue Date Due Date % Interest Rate 2003 2002
- -------------- -------------- --------------- ----------- -----------
September 1993 September 2003 6.12* $ 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
June 1996 June 2006 7.71** -- 1,020,000
March 1997 March 2007 7.38*** 430,000 430,000
September 2002 September 2012 4.67**** 2,050,000 --
March 2003 March 2013 4.63**** 3,000,000 --
----------- -----------
$ 9,200,000 $ 7,860,000
=========== ===========
* Interest rate was 3.12% from inception through September 1998.
** The loan was prepaid in full during the fiscal year ended June 30, 2003.
*** The Company is also required to pay an additional annual user fee of 1% on
this debenture.
**** The Company is also required to pay an additional annual fee of .866% 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.
Dividends paid in 2003 and 2002 were in accordance with SBA regulations.
SBA Commitment
In 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 by the Company on or prior to September 30, 2006. A 2% leverage fee will
be deducted pro rata as the commitment proceeds are drawn down. A $120,000
non-refundable fee has been paid by the Company.
Subsequent Event
In September 2003, the Company completed the sale of $5,000,000 in
debentures under its outstanding SBA commitment. The term of the debenture is
10-1/2 years, maturing in March 2014. The interim interest rate from September
2003 to March 2004, is 1.682% plus a user fee of 0.866%. A new long-term
interest rate will be determined in March 2004 as part of the SBA pooling
process. The two debentures issued in September 1993 that matured in September
2003 in the respective principal amounts of $1,500,000 and $2,220,000 were paid
and satisfied in full out of the proceeds of the new $5,000,000 debenture issued
in September 2003.
F-18
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
7. Notes Payable to Banks
At June 30, 2003 and 2002 the Company had loan commitments with three
banks for lines of credit aggregating $40,000,000. At June 30, 2003 and 2002,
the Company had $34,130,000 and $33,720,000, respectively, outstanding under
these lines. These loans, which mature through November 30, 2003, bear interest
at the lower of either the reserve adjusted LIBOR rate plus 1.5% or the banks'
prime rate minus 0.50%. At June 30, 2003, the weighted average interest rate on
outstanding bank debt was approximately 2.75%.
Upon maturity, the Company anticipates extending the lines of credit for
another year, as has been the practice in previous years. Pursuant to the terms
of the agreements the Company is required to comply with certain covenants and
conditions, as defined in the agreements. The Company has pledged its loans
receivable and other assets as collateral for the above lines of credit.
8. Preferred Stock
Ameritrans had 1,000,000 shares of "blank check" preferred shares
authorized of which 500,000 shares were designated as 9 3/8% cumulative
participating preferred stock $.01 par value, $12.00 face value. The remaining
500,000 shares of these "blank check" preferred shares were unissued at June 30,
2003 and 2002.
As part of the April 24, 2002 stock offering (see Note 10) Ameritrans
issued 300,000 shares of 9-3/8% cumulative participating preferred stock $.01
par value, $12.00 face value. These preferred shares are redeemable at the
option of the Company at the face value plus an additional amount up to 8% of
face value, based on certain criteria, through April 2007.
9. Common Stock
Ameritrans has 5,000,000 authorized common shares, $0.0001 par value, of
which 1,745,600 shares were issued and outstanding after the shares exchange
with Elk (see Note 1) as of June 30, 2001.
As part of the April 24, 2002 stock offering (see Note 10) the Company
issued an additional 300,000 shares of common stock.
Pursuant to a foreclosure agreement with a borrower, Elk obtained 10,000
shares of Ameritrans common stock, which had previously been pledged by the
borrower as collateral. At June 30, 2003 and 2002 these shares are recorded as
treasury stock at cost, which was the market value of the shares at the
foreclosure date.
F-19
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
10. Stock Offering
On April 24, 2002 the Company completed a public offering of 300,000
units, each unit consisting of one share of common stock, one share of 9 3/8%
cumulative participating preferred stock, $.01 par value, face value $12.00, and
one redeemable warrant exercisable into one share of common stock. Each warrant
entitles the holder to purchase one share of common stock at an exercise price
of $6.70, subject to adjustment, until April 2007. The warrants may be redeemed
by the Company under certain conditions. To date, no warrants have been
exercised. The gross proceeds from the offering was $5,700,000 less costs and
commissions of $1,704,399 resulting in net proceeds of $3,995,601. The
underwriter had the option to increase this offering by 45,000 units to cover
over-allotments through June 2, 2002, which option was not exercised. The
underwriter also earned the right in exchange for $2,500 to purchase up to
30,000 units at an exercise price of $21.45 per unit, each unit consisting of
one share of common stock, one share of 9-3/8% cumulative participating
preferred stock, $.01 par value, face value $12.00, and one redeemable warrant
exercisable at $8.40 per share. These units are exercisable over a five year
period which commenced April 18, 2003. To date, the underwriter has not
exercised the right to purchase these units.
11. Income Taxes
The provision for income taxes for the years ended June 30, 2003, 2002 and
2001 consists of the following:
2003 2002 2001
-------- -------- --------
Federal $ 473 $ 1,067 $ 2,562
State and local 7,424 7,787 5,334
-------- -------- --------
$ 7,897 $ 8,854 $ 7,896
======== ======== ========
In order to be taxed as a Regulated Investment Company, the Company must
pay at least 90% of its net taxable income to its stockholders. The above
provision represents income taxes accrued on undistributed income for the
respective years.
12. Related Party Transactions
The Company paid approximately $38,000, $64,000 and $29,000 to a related
law firm for the years ended June 30, 2003, 2002 and 2001, respectively, for
legal services provided.
F-20
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
During the year ended June 30, 2001, the Company rented office space on a
month-to-month basis from an affiliated entity without a formal lease agreement.
On July 1, 2001 the Company entered into a sublease agreement with this
affiliated entity requiring rental payments of $3,292 per month, which expires
April 30, 2004. As part of this agreement the affiliated entity, at the
Company's request, rented an additional 1,800 square feet of office space
contiguous with the Company's offices. Until the Company utilizes the additional
space, the affiliated entity sublets the additional space to unaffiliated
tenants. In the event all or a portion of the additional space is vacant, the
Company has agreed to reimburse the affiliated entity for any losses on the
sublease up to a maximum of $58,000 per year. During the years ended June 30,
2003 and 2002 the Company paid the affiliated entity approximately $3,500 and
$7,000, respectively, relating to this additional space. Rent expense amounted
to $59,290, $44,965 and $39,600 for the years ended June 30, 2003, 2002 and
2001, respectively.
The Company also shares overhead costs with this affiliated entity and
reimburses it for certain office costs. Overhead cost payments will be a minimum
of $7,333 per month expiring April 30, 2004. Overhead costs and reimbursed
office and salary expenses amounted to $84,989, $98,925 and $91,301 for the
years ended June 30, 2003, 2002 and 2001, respectively. The Company expects to
renew its sublease with the affiliated entity by executing a new formal sublease
agreement for a new ten-year term commencing on May 1, 2004 through April 30,
2014, which will also require the Company to make payments of shared office
expense. The renewal sublease and the terms of the arrangements between the
parties are presently under consideration by the Company's Board.
Effective July 1, 2003, the Company entered into a new ten-year sublease
for additional office and storage space with an entity in which an officer and
shareholder of the Company has an interest. The new sublease calls for rental
payments ranging from $38,500 to $54,776 per annum from the first year ending
June 30, 2004 through the year ending June 30, 2013. The sublease contains a
provision that either party may terminate the lease in years seven through ten
with six months' notice.
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 $ 71,420 $ 73,330
2005 39,850 --
2006 41,245 --
2007 42,689 --
2008 44,183 --
Thereafter 251,148 --
--------- --------
$ 490,535 $ 73,330
========= ========
F-21
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
13. Commitments and Contingencies
Interest Rate Swap
On June 11, 2001, the Company entered into a $10,000,000 notional amount
interest rate swap transaction with a bank which expired on June 11, 2002. Also
on June 11, 2001, the Company entered into another interest rate swap
transaction for $15,000,000 notional amount with this bank expiring June 11,
2003. On February 11, 2003, the Company entered into another interest rate swap
transaction for $5,000,000 notional amount with the same bank expiring February
11, 2005. These swap transactions were entered into to protect the Company from
an upward movement in interest rates relating to outstanding bank debt and
settle the 11th day of each month. These swap transactions call for a fixed rate
of 4.35%, 4.95%, and 3.56%, 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.
Employment Agreements
In July 2001, the Company entered into an employment agreement with an
executive. This agreement was amended and restated in December 2002. The amended
and restated agreement calls for annual compensation of $296,500, $321,500,
$336,500, $348,900 and $361,800, respectively, for the five fiscal years
beginning July 1, 2003. The agreement also calls for a discretionary bonus based
on the determination by the Board of Directors but in no event shall it be less
than $15,000 per year as well as certain other benefits. The amended and
restated agreement expires July 1, 2008 but will automatically renew for an
additional five (5) years unless either the Company or the executive gives
notice of non-renewal. In July 2001, the Company also entered into a consulting
agreement with this executive. This agreement was amended and restated in
December 2002. The amended and restated agreement does not become effective
unless the employment agreement between the Company and the executive is
terminated. If the employment agreement is terminated under certain
circumstances, as defined, the consulting agreement becomes effective and
continues for a period of five (5) years. The amended and restated consulting
agreement calls for compensation of one-half of the executive's base salary in
effect at the termination date of the employment agreement plus any bonus paid.
From October 2001 through December 2002, the Company entered into
employment agreements with five executives whereby the Company would pay a
minimum aggregate base salary, including minimum bonus, of approximately
$462,000 per annum plus discretionary bonuses. The agreements also call for
annual increases in base salary. These employment agreements expire from October
2006 through June 2008, but will be automatically renewed for an additional five
(5) years unless either the Company or the executives give notice of
non-renewal.
F-22
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
14. Defined Contribution Plan
On April 15, 1996, the Company adopted a simplified employee pension plan
covering all eligible employees of the Company. Contributions to the plan are at
the discretion of the Board of Directors. During the years ended June 30, 2003,
2002 and 2001, contributions amounted to $86,443, $79,484 and $77,289,
respectively.
15. 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 were 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.
During January 2002, the plan was amended to increase the shares of common stock
authorized for issuance to an aggregate of 200,000 shares. The plan provides
that options may be granted to attract and retain key employees of the Company.
Options granted under the plan vest immediately and are exercisable for periods
ranging from five to ten years.
Under the plan, the option price will be equal to at least the market
value of the common stock on the grant date for employees and 110% of market
value for stockholders who own more than 5% of the common stock. In January
1999, the Company granted 100,000 options to certain key employees at an
exercise price ranging from $8.878 to $9.7625 per share. There were no options
granted during the years ended June 30, 2003, 2002 or 2001.
Non-Employee Directors Stock Option Plan
On August 31, 1999, the Company adopted a Non-Employee Directors Stock
Option Plan (the "Plan") with an aggregate of 75,000 options authorized for
issuance. During January 2002, the Board of Directors and shareholders approved
an amendment to the Plan to increase the aggregate of options authorized for
issuance to 125,000 and to provide for automatic grants of options upon
re-election of eligible directors. This amendment is still subject to the
approval of the Securities and Exchange Commission. 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. In August 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. During the year ended June 30, 2002, 11,112 of these
options were subsequently terminated. There were no additional options granted
for the years ended June 30, 2003, 2002 or 2001.
F-23
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
A summary of Stock Option Plan's transactions in fiscal periods 2003, 2002
and 2001 is as follows:
Weighted
Average
Number of Exercise Price
Shares Per Share
--------- --------------
Options outstanding at June 30, 2001 133,336 $ 9.11
Granted -- --
Canceled (11,112) $ 9.00
Exercised -- --
--------- ---------
Options outstanding at June 30, 2002 122,224 $ 9.12
Granted -- --
Canceled -- --
Exercised -- --
--------- ---------
Options outstanding at June 30, 2003 122,224 $ 9.12
========= =========
The following table summarizes information about the stock options
outstanding under the Company's option plans as of June 30, 2003:
Options Outstanding Options Exercisable
- --------------------------------------------------------- ---------------------------------
Weighted Average Number
Number Outstanding Remaining Weighted Average Exercisable at Weighted Average
at June 30, 2003 Contractual Life Exercise Price June 30, 2003 Exercise Price
- ------------------ ---------------- ---------------- -------------- ----------------
70,000 5.5 years $8.88 70,000 $8.88
22,224 1.2 years $9.00 22,224 $9.00
30,000 0.5 years $9.76 30,000 $9.76
--------- ---------
122,224 122,224
========= =========
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 required by SFAS 123.
The fair market value for these options was estimated at the date of grant using
a Black-Scholes option-pricing model.
F-24
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
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. There is
no pro forma net income effect for the years ended June 30, 2003, 2002 and 2001.
16. Other Matters
Terminated Merger Costs
On January 31, 2001 the proposed agreement and plan of merger (the "Merger
Agreement") between the Company and Medallion Financial Corp. was terminated by
the Company because the parties were unable to reach mutually agreeable terms
for an extension of the closing date. Merger costs incurred by the Company
amounted to $413,186 for the year ended June 30, 2001.
F-25
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
17. Quarterly Financial Data (Unaudited)
For the year ended June 30, 2003:
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
Investment income $1,608,233 $1,588,869 $1,547,685 $1,537,685
Operating income (loss) 318,214 259,287 (93,404) (83,962)
Income (loss) before taxes 318,214 259,287 (93,404) (80,986)
Net income (loss) 306,731 259,287 (97,847) (72,957)
Net income (loss) per
common share
Basic 0.11 0.09 (0.09) (0.08)
Diluted 0.11 0.09 (0.09) (0.08)
For the year ended June 30, 2002:
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
Investment income $1,525,331 $1,473,801 $1,638,307 $1,632,280
Operating income 321,422 323,075 220,697 179,856
Income before taxes 322,622 323,075 222,197 179,856
Net income 321,552 323,075 215,671 178,598
Net income per common share
Basic 0.18 0.19 0.12 0.05
Diluted 0.18 0.19 0.12 0.05
F-26
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
SCHEDULE OF LOANS
June 30, 2003
- --------------------------------------------------------------------------------
Number of Maturity Dates Balance
Type of Loan Loans Interest Rates (in Months) Outstanding
- --------------------------------------- --------- -------------- -------------- ------------
New York City:
Taxi medallion 48 6%-13% 2-49 $ 12,984,115
Radio car service 16 11%-13.5% 2-47 128,765
Chicago:
Taxi medallion 503 9%-14.9% 2-143 23,184,463
Boston:
Taxi medallion 17 7.25%-11.5% 11-48 2,241,768
Miami:
Taxi medallion 74 7.25%-16% 1-95 2,947,608
Other loans:
Restaurant/food service 6 10%-12.5% 4-95 910,922
Car wash/auto center 5 8.5%-15% 47-60 631,203
Dry cleaner 15 6.75%-14.5% 1-59 1,144,096
Laundromat 29 7.5%-14.25% 3-141 5,945,861
Financial services 1 10% 60 252,781
Black car service (real property) 2 10.25% 41 395,149
Auto sales 6 10%-12% 12-44 596,206
Movie theater 1 16% 12 174,984
Retirement home 2 14%-16% 84-97 235,872
Commercial construction 4 13%-14% 14-60 965,916
Telecommunications 1 12% 18 75,085
Leather goods 1 14% 30 187,233
Beverage distributor 1 14.5% 91 211,874
Marina 1 14.5% 34 224,247
Plumbing and heating supplies 1 14% 95 136,383
Real estate 2 13.5%-15% 31-63 180,037
Florist 1 7.25% 46 366,885
Food market 2 12%-16% 48-72 391,895
Debt collection 2 10% 23-26 558,521
Software company 2 8% 39 34,808
Taxicab distributor 1 6% 36 200,000
------------
Total loans receivable 55,306,678
Less unrealized depreciation on loans receivable (238,500)
------------
Loans receivable, net $ 55,068,178
============
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
F-27
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%.(4) 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%.
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)
10.3 1999 Employee Stock Option Plan.(5)
10.4 Non-Employee Director Stock Option Plan.(5)
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.(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.(4)
a. Amendment removing Hapoalim and Extebank and adding
European American Bank ("EAB"), dated September 28,
1994.
b. Form of Amendment adding bank:
i. Amendment adding United Mizrahi Bank and Trust
Company ("UMB"), dated June, 1995 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.(4)
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 Letter Agreement renewing line of credit for Elk with IDB Bank dated
April 30, 2003.(6)
10.12 Promissory Note dated March 3, 2003 between Ameritrans and Bank Leumi
USA and Letter Agreement dated March 11, 2003 between aforementioned
parties.(6)
10.13 Master Note dated October 4, 1999 between Ameritrans and European
American Bank.(6)
10.14 Line of Credit Agreement dated January 3, 2002 between Elk and
Citibank.(7)
10.15 Form of indemnity agreement between Ameritrans and each of its
directors and officers.(3)
10.16 Amended and Restated Employment Agreement dated as of December 31,
2002 between Ameritrans and Gary Granoff.(8)
10.17 Amended and Restated Consulting Agreement dated as of December 31,
2002 between Ameritrans and Gary Granoff.(8)
10.18 Amended and Restated Employment Agreement dated as of December 31,
2002 between Ameritrans and Lee Forlenza.(8)
10.19 Employment Agreement dated as of October 1, 2001 between Ameritran
and Ellen Walker.(9)
10.20 Employment Agreement dated as of January 1, 2002 between Ameritrans
and Silvia Mullens.(9)
10.21 Employment Agreement dated as of January 1, 2002 between Ameritrans
and Margaret Chance.(9)
14.1 Code of Ethics of Ameritrans Capital Corporation.
16.1 Letter of Marcum & Kliegman, LLP dated July 1, 2003 issued in
connection with the dismissal of Marcum & Kliegman, LLP.(10)
21.1 List of Subsidiaries of Ameritrans.
31.1 Certification pursuant to 18 USC Section 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to 18 USC Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
- ------------
(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) 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 Proxy Statement on
Form 14A (File No. 811-08847) filed on December 14, 2001.
(6) Incorporated by reference from the Registrant's 10-Q (File No.
811-08847) filed May 15, 2003.
(7) Incorporated by reference from the amendment to the Registrant's N-2
(File No. 333-82693) filed March 1, 2002.
(8) Incorporated by reference from the Registrant's 10-Q (File No.
811-08847) filed February 14, 2003.
(9) Incorporated by reference from the Registrant's 10-Q (File No.
811-08847) filed February 14, 2002.
(10) Incorporate by reference from the Registrant's Current Report on Form
8-K (File No. 811-08847) filed July 1, 2003.