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U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act 1934 for the Quarterly Period Ended December 31, 2010

or

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from                 to               

Commission File Number 0-22153

AMERITRANS CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)


 

 

Delaware

52-2102424

(State of incorporation)

(I.R.S.  Employer Identification No.)

 

50 Jericho Quadrangle, Suite 109

Jericho, New York 11753

(Address of registrant’s principal executive office) (Zip Code)

 

(212) 355-2449

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)


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 (the Act) 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 þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Act).


 

 

 

 

 

 

 

 

¨

Large accelerated filer

¨

Accelerated filer

þ

Non-accelerated filer

(Do not check if a small

reporting company.)

¨

Smaller reporting company


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No þ

The number of shares of registrants common stock, par value $.0001 per share, outstanding as of February 11, 2011 was 3,395,583. The number of shares of registrants 9 cumulative participating redeemable preferred stock outstanding as of February 11, 2011 was 300,000.




AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS


 

 

 

 

 

 

 

 

PART I. FINANCIAL INFORMATION

3

 

 

 

 

 

ITEM 1.

FINANCIAL STATEMENTS

3

 

 

 

 

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

29

 

 

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

33

 

 

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

34

 

 

 

 

PART II. OTHER INFORMATION

36

 

 

 

 

 

Item 1.

Legal Proceedings

36

 

Item 1A.

Risk Factors

36

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

36

 

Item 3.

Default upon Senior Securities

36

 

Item 4.

Removed and Reserved

36

 

Item 5.

Other Information

36

 

Item 6.

Exhibits

36

 

Exhibit Index

36

 

(a)

Exhibits

36

 

 

 

 

 

SIGNATURES

37







PART I.    FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES


ASSETS


 

 

 

 

 

 

 

 

December 31, 2010

 

June 30, 2010

 

 

(Unaudited)

 

 

Assets

 

 

 

 

 

 

 

 

 

Investments at fair value

(cost of $31,760,417  and $29,220,386, respectively):

 

 

 

 

Non-controlled/non-affiliated investments

$

27,944,928

$

24,904,497

Non-controlled affiliated investments

 

4,761

 

4,761

Controlled affiliated investments

 

363,697

 

546,440

              Total investments at fair value

 

28,313,386

 

25,455,698

 

 

 

 

 

Cash and cash equivalents

 

1,562,612

 

7,362,491

Accrued interest receivable

 

473,405

 

417,925

Assets acquired in satisfaction of loans

 

1,075,547

 

28,325

Furniture, equipment and leasehold improvements, net

 

54,171

 

40,254

Deferred loan costs, net

 

366,735

 

402,160

Prepaid expenses and other assets

 

233,411

 

202,509

              Total assets

 32,079,267

 33,909,362


The accompanying notes are an integral part of these consolidated financial statements.



3



AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES


LIABILITIES AND NET ASSETS


 

 

 

 

 

 

 

December 31,

2010

 

June 30,

2010

Liabilities and Net Assets

 

(unaudited)

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

    Debentures payable to SBA

$

21,175,000

$

21,175,000 

    Notes payable, banks

 

-

 

370,000 

    Notes payable, other

 

3,000,000

 

3,000,000 

    Accrued expenses and other liabilities

 

612,949

 

576,242 

    Accrued interest payable

 

353,341

 

327,576 

    Dividends payable

 

168,750

 

84,375 

 

 

 

 

 

Total liabilities

 

25,310,040

 

25,533,193 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Notes 2, 3, 4 and 8)

 

 

 

 

 

 

 

 

 

Net Assets:

 

 

 

 

Preferred stock 9,500,000 shares authorized, none issued

 

 

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, 45,000,000 shares authorized, 3,405,583 shares issued; 3,395,583 shares outstanding

 

341 

 

341 

Additional paid-in capital

 

21,330,544 

 

21,330,544 

Losses and distributions in excess of earnings

 

(14,644,627)

 

(12,720,028)

Net unrealized depreciation on investments

 

(3,447,031)

 

(3,764,688)

Total

 

6,839,227

 

8,446,169 

Less:  Treasury stock, at cost, 10,000 shares of common stock

 

(70,000)

 

(70,000)

 

 

 

 

 

Total net assets

 

6,769,227

 

8,376,169

 

 

 

 

 

Total liabilities and net assets

$

32,079,267

$

33,909,362

 

 

 

 

 

Net asset value per common share

$

0.93

$

1.40


The accompanying notes are an integral part of these consolidated financial statements.



4



AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS


 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the six months ended

 

 

December 31,

2010

 

December 31,

2009

 

December 31,

2010

 

December 31,

2009

Investment income:

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

(unaudited)

Interest on loans receivable:

 

 

 

 

 

 

 

 

Non-controlled/non-affiliated investments

$

564,298 

$

436,539 

$

1,044,993 

$

674,063 

Non-controlled affiliated investments

 

 

 

 

-

Controlled affiliated investments

 

10,842 

 

11,691 

 

21,800 

 

23,545 

 

 

575,140 

 

448,230 

 

1,066,793 

 

697,608 

Fees and other income

 

6,391 

 

36,358 

 

15,116 

 

40,740 

Total investment income

 

581,531 

 

484,588 

 

1,081,909 

 

738,348 

Expenses:

 

 

 

 

 

 

 

 

Interest

 

325,440 

 

181,154 

 

653,032 

 

347,413 

Salaries and employee benefits

 

367,209 

 

464,256 

 

731,727 

 

914,412 

Occupancy costs

 

42,630 

 

70,978 

 

86,415 

 

145,853 

Professional fees

 

350,743 

 

301,773 

 

617,032 

 

510,611 

Directors fees and expenses

 

14,261 

 

18,548 

 

59,419 

 

49,346 

Advisory Fee

 

71,674 

 

268,932 

 

121,138 

 

313,932 

Other administrative expenses

 

206,928 

 

180,515 

 

373,661 

 

305,633 

Total expenses

 

1,378,885 

 

1,486,156 

 

2,642,424 

 

2,587,200 

Net investment loss

 

(797,354)

 

(1,001,568)

 

(1,560,515)

 

(1,848,852)

Net realized gains (losses) on investments:

 

 

 

 

 

 

 

 

Non-controlled/non-affiliated investments

 

36,771 

 

(463,550)

 

(195,334)

 

(689,944)

 

 

36,771 

 

(463,550)

 

(195,334)

 

(689,944)

Net unrealized appreciation (depreciation) on

investments

 

(83,062)

 

744,234 

 

317,657 

 

(1,156,083)

Net realized/unrealized gain (losses) on investments

 

(46,291)

 

280,684 

 

122,323 

 

(1,846,027)

Net decrease in net assets from operations

 

(843,645)

 

(720,884)

 

(1,438,192)

 

(3,694,879)

Distributions to preferred shareholders

 

(84,375)

 

-

 

(168,750)

 

-

Net decrease in net assets from operations available to common shareholders

$

(928,020)

$

(720,884)

$

(1,606,942)

$

(3,694,879)

 

 

 

 

 

 

 

 

 

Weighted Average Number of Common Shares Outstanding:

 

 

 

 

 

 

 

 

Basic and diluted

 

3,395,583 

 

3,395,583 

 

3,395,583 

 

3,395,583 

Net Decrease in Net Assets from Operations Per Common Share:

 

 

 

 

 

 

 

 

Basic and diluted

$

(0.27)

$

(0.21)

$

(0.47)

$

(1.09)


The accompanying notes are an integral part of these consolidated financial statements.



5



AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS


 

 

 

 

 

 

 

 

For the six months ended

 

 

December 31,

2010

 

December 31,

2009

 

 

(unaudited)

 

(unaudited)

Increase (decrease) in net assets from operations:

 

 

 

 

Net investment loss

$

(1,560,515)

$

(1,848,852)

Net realized loss from investments

 

(195,334)

 

(689,944)

Unrealized appreciation (depreciation) on investments

 

317,657 

 

(1,156,083)

 

 

 

 

 

Net decrease in net assets resulting from operations

 

(1,438,192)

 

(3,694,879)

 

 

 

 

 

Shareholder distributions:

 

 

 

 

Distributions to preferred shareholders

 

(168,750)

 

 

 

 

 

 

Capital share transactions:

 

 

 

 

Stock options compensation expense

 

 

26,897 

 

 

 

 

 

Net increase (decrease) in net assets resulting from capital shares

transactions and shareholder distributions

 

(168,750)

 

26,897 

 

 

 

 

 

Total decrease in net assets

 

(1,606,942)

 

(3,667,982)

 

 

 

 

 

Net assets:

 

 

 

 

Beginning of period

 

8,376,169 

 

15,143,842 

 

 

 

 

 

   End of period

$

6,769,227 

$

11,475,860 

 

 

 

 

 

   Net assets per preferred

$

3,600,000 

$

3,600,000 

 

 

 

 

 

   Net assets per common

$

3,169,277 

$

7,875,860 


The accompanying notes are an integral part of these consolidated financial statements.



6



AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


 

 

For the six months ended

 

 

December 31,

2010

 

December 31,

2009

 

 

(unaudited)

 

(unaudited)

Cash flows from operating activities:

 

 

 

 

Net decrease in net assets from operations

$

(1,438,192)

$

(3,694,879)

Adjustments to reconcile net decrease in net assets from operations to net cash used in operating activities:

 

 

 

 

Depreciation and amortization

 

39,537 

 

38,061 

Deferred compensation

 

 

26,897 

Net realized losses on investments

 

195,334 

 

689,944 

Net unrealized (appreciation) depreciation on investments

 

(317,657)

 

1,156,083 

Portfolio investments

 

(10,764,263)

 

(2,057,564)

Proceeds from principal receipts, sales, maturity of investments

 

8,028,898 

 

2,808,102 

Transfer out of portfolio to assets acquired in satisfaction of loans

 

(1,047,222)

 

Changes in operating assets and liabilities:

 

 

 

 

Accrued interest receivable

 

(55,480)

 

126,973 

Prepaid expenses and other assets

 

(30,903)

 

38,841 

Accrued expenses and other liabilities

 

36,707 

 

(16,097)

Accrued interest payable

 

25,765 

 

13,418 

Total adjustments

 

(3,889,284)

 

2,824,658 

Net cash used in operating activities

 

(5,327,476)

 

(870,221)

Cash flows from investing activities:

 

 

 

 

Purchases of furniture and equipment

 

(18,028)

 

(4,230)

Net cash used in investing activities

 

(18,028)

 

(4,230)

Cash flows from financing activities:

 

 

 

 

Repayment of note payable, banks

 

(370,000)

 

Proceeds from debentures

 

 

9,175,000 

Proceeds from note payable, other

 

 

2,025,000 

Deferred loan cost

 

 

(314,243)

Dividends paid on preferred stock

 

(84,375)

 

Net cash provided by (used in) financing activities

 

(454,375)

 

10,885,757 

Net increase in cash and cash equivalents

 

(5,799,879)

 

10,011,306 

Cash and cash equivalents:

 

 

 

 

Beginning of period

 

7,362,491 

 

885,434 

   End of period

$

1,562,612 

$

10,896,740 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

     Cash paid during the period for:

 

 

 

 

        Interest

$

627,267 

$

333,995 

Supplemental disclosure of non cash investing and financing activities:

 

 

 

 

      Accrued dividends on preferred stock

$

168,750 

$

 - 


The accompanying notes are an integral part of these consolidated financial statements.



7



AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INVESTMENTS



 

 

 

 Portfolio Valuation as of December 31, 2010 (Unaudited)

Portfolio Company (1)

Investment
Investment Rate/Maturity

 

Principal

 

Net Cost

 

Value

Commercial Loans Receivable (96.76%)(4)

 

 

 

 

 

 

 

PPCP Inc. (6)
Computer Software

Business Loan

8.00%, due 7/08 and 1/10

$

36,691

$

36,691

$

-

Geronimo ATM Fund LLC (6)
ATM Operator

Collateralized Business Loan

12.0%, due 5/09

 

123,282

 

123,282

 

-

Cleaners of North Beach, LLC
Dry Cleaners

Collateralized Business Loan

5.50%, due 5/11

 

9,131

 

9,131

 

9,131

Crown Cleaners of Miami Lakes
Dry Cleaners

Collateralized Business Loan

   6.00%, due 7/11

 

730

 

730

 

730

Crown Cleaners of Miami Lakes
Dry Cleaners

Collateralized Business Loan
6.00%, due 7/11

 

2,862

 

2,862

 

2,862

Andy Fur Dry Cleaning, Inc. (6)
Dry Cleaners

Collateralized Business Loan
11.50%, due 1/10

 

12,103

 

12,103

 

-

Vivas & Associates, Inc. (6)
Nail Salon

Collateralized Business Loan
9.00%, due 1/10

 

11,985

 

11,985

 

-

Monticello Desserts, Inc.
Retail Bakery

Collateralized Business Loan
10.50%, due 4/10

 

5,153

 

5,153

 

5,153

E&Y General Construction Co. (6)
Construction Services

Senior Real Estate Mortgage
10.50%, due 10/10

 

870,791

 

870,791

 

870,791

Soundview Broadcasting LLC
Television and Broadcasting

Senior Real Estate Mortgage
6.00%, due 9/11

 

1,851,987

 

1,851,987

 

1,851,987

Golden Triangle Enterprises LLC
Retail Food Service

Senior Real Estate Mortgage
4.90%, due 12/13

 

252,740

 

252,740

 

252,740

Conklin Services & Construction Inc. (6)
Specialty Construction and Maintenance

Collateralized Business Loan
11.00%, due 10/08

 

1,648,181

 

1,648,181

 

1,450,000

Mountain View Bar & Grill Inc. (6)
Retail Food Service

Collateralized Business Loan

   12.00%, due 5/09

 

406,067

 

406,067

 

406,067

J. JG. Associates, Inc. (6)
Consumer Receivable Collections

Senior Loan

   no stated rate, no maturity

 

187,736

 

187,736

 

87,750

J. JG. Associates, Inc. (6)
Consumer Receivable Collections

Senior Loan

   no stated rate, no maturity

 

36,451

 

36,451

 

36,451

Car-Matt Real Estate LLC (6)
Real Estate Mortgage

Senior Real Estate Mortgage

  12.00%, due 11/08

 

135,577

 

135,577

 

135,577



The accompanying notes are an integral part of these consolidated financial statements.



8



AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES

 CONSOLIDATED STATEMENT OF INVESTMENTS (continued)


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Portfolio Valuation as of December  31, 2010
(Unaudited)

Portfolio Company (1)

Investment
Investment Rate/Maturity

 

Principal

 

Net Cost

 

Value

CMCA, LLC (3)
Consumer Receivable Collections

Collateralized Business Loan

12,00% no stated maturity

 

247,436

 

247,436

 

247,436

CMCA, LLC #2 (3)
Consumer Receivable Collections

Collateralized Business Loan

12.00%, no stated maturity

 

106,261

 

106,261

 

106,261

Adiel Homes Inc.(6)
Construction Services

Senior Real Estate Mortgage

   12.00%, due 1/09

 

270,000

 

270,000

 

270,000

Adiel Homes Inc.(6)
Construction Services

Senior Real Estate Mortgage

   12.0%, no stated maturity

 

89,396

 

89,396

 

89,396

Western Pottery LLC
Ceramic Sanitaryware Distributor

Subordinated Business Loan

4.25%, due 6/09

 

361,609

 

361,609

 

361,609

Greaves-Peters Laundry Systems Inc.

   Laundromat

Collateralized Business Loan
10.90%, due 9/13

 

20,471

 

20,471

 

20,471

Patroon Operating Co. LLC

   Retail Food Service

Collateralized Business Loan

   10.00%, due 6/12

 

250,000

 

250,000

 

250,000

Other Miscellaneous Loans (5)

 

 

116,868

 

116,868

 

95,814

 

Total Commercial Loans

 

 

$

7,053,508

$

6,550,226

Corporate Loans Receivable (274.61%) (4)

 

 

 

 

 

 

 

Charlie Brown’s Acquisition Co.
Retail Food Service

Term Loan B
10.25%, due 10/13

 

2,268,400

 

2,268,400

 

1,587,880

Resco Products Inc.
Diversified Manufacturing

Term Loan, First Lien

8.50%, due 6/13

 

1,357,449

 

1,357,449

 

1,357,449

Alpha Media Group Inc.
Publishing

Term Loan, First Lien

12.00%, due 8/14

 

2,288,471

 

2,224,807

 

1,315,871

BP Metals LLC
Diversified Manufacturing

Term Loan, First Lien

10.0%, due 6/13

 

796,429

 

796,429

 

796,429

Hudson Products Holdings Inc.

 Diversified Manufacturing

Term Loan, First Lien

8.0%, due 8/15

 

1,272,955

 

1,242,561

 

1,234,766

Education Affiliates Inc.

   Private Education

Term Loan, First Lien

   8.0%, due 1/15

 

857,181

 

841,293

 

857,182

Fairway Group Holdings Corp.

  Diversified Supermarkets

Term Loan, First Lien

   12.0%, due 1/15

 

990,002

 

966,146

 

994,952

Shearer’s Foods Inc.

  Wholesale Food Supplier

Term Loan, First Lien

   12.00%, due 6/15

 

1,017,762

 

995,887

 

1,025,395

Syncsort Incorporated

   Data Protection Software

Term Loan, First Lien

   7.50%, due 03/15

 

975,000

 

957,049

 

975,000

Airvana Network Solutions Inc.

   Infrastructure Software for Wireless Providers

Term Loan, First Lien

   11.00%, due 08/14

 

1,183,333

 

1,155,876

 

1,189,250

Wyle Services Corporation

   Multi-Platform Defense Systems

Term Loan, First Lien

   7.75%, due 03/16

 

1,246,872

 

1,229,158

 

1,253,107

Centerplate Inc.

  Stadium Concessions Provider

Term Loan, First Lien

   10.75%, due 09/16

 

997,500

 

969,150

 

997,500

Impact Confections Inc.

  Candy Manufacturer

Term Loan, First Lien

   15.00%, due 07/15

 

1,500,000

 

1,500,000

 

1,500,000

Clopay Ames True Temper Holding

  Plastics Manufacturer

Term Loan, First Lien

   7.75%, due 09/16

 

1,234,375

 

1,210,417

 

1,239,066

Affinity Group Inc.

  Direct marketing organization-focus RV’s

Term Loan, First Lien

   11.50%, due 12/16

 

1,250,000

 

1,224,248

 

1,250,000

Miramax Film NY, LLC

  Film Library

Term Loan, First Lien

7.75%, due 06/16

 

1,000,000

 

980,000

 

1,015,000

 

Total Corporate Loans

 

 

$

19,918,870

$

18,588,847

Medallion Loans Receivable (2.90%) (4)

 

 

 

 

 

 

 

Boston Taxicab Medallion Portfolio

1  Medallion Loan
8.25% Weighted Average Rate

 

7,734

 

7,734

 

7,734

Chicago Taxicab Medallions

2 Medallion Loans
8.00% Weighted Average Rate

 

42,551

 

42,551

 

42,551

Florida Taxicab

1 Medallion Loan
12.00% Rate

 

146,204

 

146,204

 

146,204

 

Total Medallion Loans

 

 

$

196,489

$

196,489

 

Total loans receivable

 

 

$

27,168,867

$

25,335,562

Life Insurance Settlement Contracts (29.0%) (4)

 

 

 

 

 

 

 

Life Settlement Contracts

5 life insurance policies, aggregate
face value of $17,659,809

 

 

$

3,153,423

$

1,962,800


The accompanying notes are an integral part of these consolidated financial statements.


9


AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INVESTMENTS (continued)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Portfolio Valuation as of December 31, 2010

(Unaudited)

Portfolio Company (1)

Investment
Investment Rate/Maturity

 

Principal

 

Net Cost

 

Value

Equity Investments (15.00%)  (4)

 

 

 

 

 

 

 

MBS Serrano, Ltd.
Rental Real Estate Limited Partnership

Limited Partnership Interest

$

 

$

50,600

$

8,487

MBS Colonnade, Ltd.
Rental Real Estate Limited Partnership

Limited Partnership Interest

 

 

 

50,000

 

12,009

MBS Sage Creek, Ltd.
Rental Real Estate Limited Partnership

Limited Partnership Interest

 

 

 

 50,000

 

18,800

MBS Walnut Creek, Ltd.
Rental Real Estate Limited Partnership

Limited Partnership Interest

 

 

 

 25,000

 

-

MBS Lodge At Stone Oak, Ltd.
Rental Real Estate Limited Partnership

Limited Partnership Interest

 

 

 

 60,000

 

30,896

238 W. 108 Realty LLC (2)
Residential Real Estate Development

5.00% LLC Interest

 

 

 

 100,000

 

4,761

Asset Recovery & Management, LLC (3)
Consumer Receivable Collections

30.00% LLC Interest

 

 

 

 6,000

 

6,000

CMCA, LLC (3)
Consumer Receivable Collections

30.00% LLC Interest

 

 

 

 4,000

 

4,000

Soha Terrace II LLC
Real Estate Development

4.80% LLC Interest

 

 

 

 700,000

 

918,295

Fusion Telecommunications
Internet Telephony

69,736 Shares of Common Stock

 

 

 

 367,027

 

6,276

EraGen Biosciences
Analytic Compounds

17,000 shares of Common Stock

 

 

 

 25,500

 

5,500

 

Total equity investments

 

 

 

1,438,127

 

1,015,024

 

Total investments

 

 

$

31,760,417

$

28,313,386


(1) Unless otherwise noted, all investments are pledged as collateral for the Notes Payable, Banks (see Note 5 to the consolidated financial statements).

(2) As defined in the Investment Company Act of 1940, we are an affiliate of this portfolio company because, as of December 31, 2010, we own 5% or more of the portfolio company’s outstanding voting securities.

(3) As defined in the Investment Company Act of 1940, we maintain “control” of this portfolio company because we own more than 25% of the portfolio company’s outstanding voting securities.

(4) Percentage of net assets.

(5) Other small balance loans.

(6) Loan receivable is on non-accrual status and therefore is considered non-income producing.



The accompanying notes are an integral part of these consolidated financial statements.



10



AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INVESTMENTS



 

 

 

 

 

 

 

 

 

 

 

 

 

Portfolio Valuation as of June 30, 2010

Portfolio Company (1)

 

Investment

Investment Rate/Maturity

 

Principal

 

Net Cost

 

Value

 

 

 

 

 

 

 

 

 

Commercial Loans  Receivable (104.13%)(4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PPCP Inc .(6)

 

Business Loan

$

36,691

$

36,691

$

-

Computer Software

 

8.0%, due 7/08 and 1/10

 

 

 

 

 

 

Geronimo ATM Fund LLC. (6)

 

Collateralized Business Loan

 

146,822

 

146,822

 

19,234

ATM Operator

 

12.0%, due 5/09

 

 

 

 

 

 

Cleaners of North Beach, LLC

 

Collateralized Business Loan

 

13,800

 

13,800

 

13,800

Dry Cleaners

 

5.5%, due 5/11

 

 

 

 

 

 

Crown Cleaners of Miami Lakes

 

Collateralized Business Loan

 

1,858

 

1,858

 

1,858

Dry Cleaners

 

6.0%, due 7/11

 

 

 

 

 

 

Crown Cleaners of Miami Lakes

 

Collateralized Business Loan

 

10,236

 

10,236

 

10,236

Dry Cleaners

 

6.0%, due 7/11

 

 

 

 

 

 

Andy Fur Dry Cleaning, Inc. (6)

 

Collateralized Business Loan

 

12,103

 

12,103

 

-

Dry Cleaners

 

11.5%, due 1/10

 

 

 

 

 

 

Vivas & Associates, Inc. (6)

 

Collateralized Business Loan

 

11,985

 

11,985

 

-

Nail Salon

 

9.0%, due 1/10

 

 

 

 

 

 

Monticello Desserts, Inc.

 

Collateralized Business Loan

 

26,033

 

26,033

 

26,033

Retail Bakery

 

10.50%, due 4/10

 

 

 

 

 

 

Just Salad LLC

 

Collateralized Business Loan

 

300,000

 

300,000

 

300,000

Retail Food Service

 

10.0%, due 10/10

 

 

 

 

 

 



The accompanying notes are an integral part of these consolidated financial statements.



11



AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INVESTMENTS (continued)



 

 

 

 

 

 

 

 

 

 

 

 

 

Portfolio Valuation as of June 30, 2010

Portfolio Company (1)

 

Investment

Investment Rate/Maturity

 

Principal

 

Net Cost

 

Value

E&Y General Construction Co.(6)

 

Senior Real Estate Mortgage

 

870,791

 

870,791

 

870,791

Construction Services

 

10.5%, due 10/10

 

 

 

 

 

 

Sealmax, Inc. (6)

 

Senior Real Estate Mortgage

 

914,195

 

914,195

 

775,000

Construction Services

 

12.0%, due 4/11

 

 

 

 

 

 

Soundview Broadcasting LLC

 

Senior Real Estate Mortgage

 

1,882,189

 

1,882,189

 

1,882,189

Television and Broadcasting

 

6.0%, due 9/11

 

 

 

 

 

 

Golden Triangle Enterprises LLC

 

Senior Real Estate Mortgage

 

276,370

 

276,370

 

276,370

Retail Food Service

 

4.9%, due 12/13

 

 

 

 

 

 

Goldhkin Wholesale Ent. Inc.

 

Senior Real Estate Mortgage

 

570,413

 

570,413

 

570,413

Retail Gasoline

 

11.5%, due 7/12

 

 

 

 

 

 

Conklin Services & Construction Inc. (6)

 

Collateralized Business Loan

 

1,648,181

 

1,648,181

 

1,400,954

Specialty Construction and Maintenance

 

11.0%, due 10/08

 

 

 

 

 

 

Mountain View Bar & Grill Inc. (6)

 

Collateralized Business Loan

 

406,067

 

406,067

 

406,067

Retail Food Service

 

12.0%, due 5/09

 

 

 

 

 

 

J. JG. Associates, Inc. (6)

 

Senior Loan

 

190,236

 

190,236

 

87,750

Consumer Receivable Collections

 

no stated rate, no maturity

 

 

 

 

 

 

J. JG. Associates, Inc. (6)

 

Senior Loan

 

36,781

 

36,781

 

22,960

Consumer Receivable Collections

 

no stated rate, no maturity

 

 

 

 

 

 

Car-Matt Real Estate LLC (6)

 

Senior Real Estate Mortgage

 

135,577

 

135,577

 

135,577

Real Estate Mortgage

 

12.0%, due 11/08

 

 

 

 

 

 

633 Mead Street, LLC (3) (6)

 

Senior Real Estate Mortgage

 

215,000

 

215,000

 

175,000

Unimproved real estate

 

15.0%, due 8/08

 

 

 

 

 

 

CMCA, LLC (3)

 

Collateralized Business Loan

 

254,379

 

254,379

 

254,379

Consumer Receivable Collections

 

12.0%, no stated maturity

 

 

 

 

 

 

CMCA, LLC #2 (3)

 

Collateralized Business Loan

 

106,261

 

106,261

 

106,261

Consumer Receivable Collections

 

12.0%, no stated maturity

 

 

 

 

 

 

Adiel Homes Inc. (6)

 

Senior Real Estate Mortgage

 

270,000

 

270,000

 

270,000

Construction Services

 

12.0%, due 1/09

 

 

 

 

 

 

Adiel Homes Inc. (6)

 

Senior Real Estate Mortgage

 

89,386

 

89,386

 

89,386

Construction Services

 

12.0%, no stated maturity

 

 

 

 

 

 

Western Pottery LLC

 

Subordinated Business Loan

 

361,609

 

361,609

 

361,609

Ceramic Sanitaryware Distributor

 

4.25.%, due 6/09

 

 

 

 

 

 

Greaves-Peters Laundry Systems Inc.

 

Collateralized Business Loan

 

292,562

 

292,562

 

292,562

  Laundromat

 

10.9%, due 9/13

 

 

 

 

 

 



The accompanying notes are an integral part of these consolidated financial statements.



12



AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INVESTMENTS (continued)



 

 

 

 

 

 

 

 

 

 

 

 

 

Portfolio Valuation as of June 30, 2010

Portfolio Company (1)

 

Investment

Investment Rate/Maturity

 

Principal

 

Net Cost

 

Value

 

 

 

 

 

 

 

 

 

Patroon Operating Co. LLC

  Retail Food Service

 

Collateralized Business Loan

10.0%, due 6/12

 

250,000

 

250,000

 

250,000

Other Miscellaneous Loans (5)

 

 

 

144,973

 

144,973

 

123,919

 

 

 

 

 

 

 

 

 

 

 

Total Commercial Loans

 

 

 

9,474,498

 

8,722,348

Corporate Loans Receivable (168.71%) (4)

 

 

 

 

 

 

 

 

Charlie Brown’s Acquisition Co.

 

Term Loan B

 

2,146,101

 

2,146,101

 

2,038,796

Retail Food Service

 

10.25%, due 10/13

 

 

 

 

 

 

Resco Products Inc.

 

Term Loan, First Lien

 

1,494,405

 

1,494,405

 

1,494,405

Diversified Manufacturing

 

8.5%, due 6/13

 

 

 

 

 

 

Alpha Media Group Inc.

 

Term Loan, First Lien

 

2,155,014

 

2,082,778

 

937,725

Publishing

 

12.0%, due 8/14

 

 

 

 

 

 

Centaur LLC (6)

 

Term Loan, First Lien

 

1,384,914

 

1,365,139

 

1,108,004

Gaming

 

11.25%, due 10/12

 

 

 

 

 

 

X-Rite Inc.

 

Term Loan, First Lien

 

1,047,948

 

1,043,107

 

1,039,059

Process Control Instruments

 

7.5%, due 10/12

 

 

 

 

 

 

BP Metals LLC

 

Term Loan, First Lien

 

859,567

 

859,567

 

859,567

Diversified Manufacturing

 

10.03%, due 6/13

 

 

 

 

 

 

Hudson Products Holdings Inc.

 

Term Loan, First Lien

 

1,272,955

 

1,239,347

 

1,234,766

 Diversified Manufacturing

 

8.5%, due 8/15

 

 

 

 

 

 

Education Affiliates Inc.

 

Term Loan, First Lien

 

884,538

 

866,663

 

884,538

   Private Education

 

   8.0%, due 1/15

 

 

 

 

 

 

Fairway Group Holdings Corp.

 

Term Loan, First Lien

 

995,000

 

968,162

 

995,000

  Diversified Supermarkets

 

   12.0%, Due 1/15

 

 

 

 

 

 

Shearer’s Foods Inc.

 

Term Loan, First Lien

 

1,000,000

 

978,542

 

1,007,500

  Wholesale Food Supplier

 

12%, due 6/15

 

 

 

 

 

 

Kratos Defense & Security Solutions Inc.

 

Term Loan, First Lien

 

1,250,000

 

1,250,000

 

1,268,750

Multi-platform Defense Systems

 

10%, due 10/13

 

 

 

 

 

 

Roundy’s Supermarkets Inc.

 

Term Loan, First Lien

 

1,225,000

 

1,225,475

 

1,268,750

  Retail Food Supplier

 

10%, due 6/15

 

 

 

 

 

 

 

 

Total Corporate Loans

 

 

 

15,519,286

 

14,136,860

Medallion Loans Receivable (2.61%) (4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Boston Taxicab Medallions

 

2 Medallion Loans

 

25,465

 

25,465

 

25,465

 

 

8.19% Weighted Average Rate

 

 

 

 

 

 

Chicago Taxicab Medallions

 

2 Medallion Loans

 

44,660

 

44,660

 

44,660

 

 

8.0% Weighted Average Rate

 

 

 

 

 

 

Florida Taxicab Medallion

 

1 Medallion Loan

 

148,859

 

148,859

 

148,859

  

 

12.0% Rate

 

 

 

 

 

 

 

 

 

 

 

 

218,984

 

218,984

 

 

 

 

 

 

 

 

 

 

 

Total loans receivable

 

 

 

25,212,768

 

23,078,192








The accompanying notes are an integral part of these consolidated financial statements.



13



AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INVESTMENTS (continued)



 

 

 

 

 

 

 

 

 

 

 

 

 

Portfolio Valuation as of June 30, 2010

Portfolio Company (1)

 

Investment

Investment Rate/Maturity

 

Principal

 

Net Cost

 

Value

Life Insurance Settlement Contracts (16.20%) (4)

 

 

 

 

 

 

 

 

  Life insurance policies

 

5 life insurance policies, aggregate

 

 

 

2,568,691

 

1,356,800

 

 

    face value of $17,659,809

 

 

 

 

 

 

Equity Investments (12.19%) (4)

 

 

 

 

 

 

 

 

MBS Serrano, Ltd.

 

Limited Partnership Interest

 

 

 

50,600

 

8,487

Rental Real Estate Limited Partnership

 

 

 

 

 

 

 

 

MBS Colonnade, Ltd.

 

Limited Partnership Interest

 

 

 

50,000

 

12,009

Rental Real Estate Limited Partnership

 

 

 

 

 

 

 

 

MBS Sage Creek, Ltd.

 

Limited Partnership Interest

 

 

 

50,000

 

18,800

Rental Real Estate Limited Partnership

 

 

 

 

 

 

 

 

MBS Walnut Creek, Ltd.

 

Limited Partnership Interest

 

 

 

25,000

 

-

Rental Real Estate Limited Partnership

 

 

 

 

 

 

 

 

MBS Lodge At Stone Oak, Ltd.

 

Limited Partnership Interest

 

 

 

60,000

 

30,896

Rental Real Estate Limited Partnership

 

 

 

 

 

 

 

 

238 W. 108 Realty LLC (2)

 

5.00% LLC Interest

 

 

 

100,000

 

4,761

Residential Real Estate Development

 

 

 

 

 

 

 

 

Asset Recovery & Management, LLC (3)

 

30.00% LLC Interest

 

 

 

6,000

 

6,000

Consumer Receivable Collections

 

 

 

 

 

 

 

 

633 Mead Street, LLC   (3)

 

57.10% LLC Interest

 

 

 

800

 

800

Real Estate Development

 

 

 

 

 

 

 

 

CMCA, LLC (3)

Consumer Receivable Collections

 


30.00% LLC Interest

 

 

 

4,000

 

4,000

Soha Terrace II LLC

 

 

 

 

 

700,000

 

918,295

Real Estate Development

 

4.80% LLC Interest

 

 

 

 

 

 

Fusion Telecommunications

Internet Telephony

 


69,736 Shares of Common Stock

 

 

 

367,027

 

11,158

EraGen Biosciences

Analytic Compounds

 


17,000 shares of Common Stock

 

 

 

25,500

 

5,500

 

 

 

 

 

 

 

 

 

 

 

Total equity investments

 

 

 

1,438,927

 

1,020,706

 

 

Total investments

 

 

 

$29,220,386

 

$25,455,698


(1) Unless otherwise noted, all investments are pledged as collateral for the Notes Payable, Banks (see Note 4 to the consolidated financial statements).

(2) As defined in the Investment Company Act of 1940, we are an affiliate of this portfolio company because, as of June 30, 2010, we own 5% or more of the portfolio company’s outstanding voting securities.

(3) As defined in the Investment Company Act of 1940, we maintain “control” of this portfolio company because we own more than 25% of the portfolio company’s outstanding voting securities.

(4) Percentage of net assets

(5) Other small balance loans.

(6) Loan receivable is on non-accrual status and therefore is considered non-income producing.



14



AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Information at and for the three months and six months ended December 31, 2010 and 2009 are unaudited

1.    Organization and Summary of Significant Accounting Policies

Financial Statements

The consolidated statement of assets and liabilities of Ameritrans Capital Corporation (“Ameritrans”, the “Company”, “our”, “us”, or “we”) as of  December 31, 2010, and the related consolidated statements of operations, statement of changes in net assets, and cash flows for the three-months and six-month periods ended December 31, 2010 and 2009, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC” or “the Commission”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. In the opinion of management and the board of directors of the Company (“Management” and “Board of Directors”), the accompanying consolidated financial statements include all adjustments (consisting of normal, recurring adjustments) necessary to summarize fairly the Company’s financial position and results of operations. The results of operations for the three months and six months ended December 31, 2010, are not necessarily indicative of the results of operations for the full year or any other interim period. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2010, as filed with the Commission.

Organization and Principal Business Activity

Ameritrans Capital Corporation is a Delaware closed-end investment company formed in 1998, which, among other activities, makes loans and investments with the goal of generating both current income and capital appreciation.  Through its subsidiary, Elk Associates Funding Corporation (“Elk”), the Company makes loans to finance the acquisition and operation of small businesses as permitted by the U.S. Small Business Administration (the “SBA”).  Ameritrans also makes loans to and invests in opportunities that Elk may be unable to make due to SBA restrictions.  Ameritrans makes loans which have primarily been secured by real estate mortgages or, in the case of corporate loans, generally are senior within the capital structure.  

 Elk was organized primarily to provide long-term loans to businesses eligible for investments by small business investment companies (each an “SBIC”) under the Small Business Investment Act of 1958, as amended (the “1958 Act”).  Elk makes loans for financing the purchase or continued ownership of businesses that qualify for funding as small concerns under SBA regulations.

Both Ameritrans and Elk are registered as business development companies, or “BDCs,” under the Investment Company Act of 1940, as amended (the “1940 Act”).  Accordingly, Ameritrans and Elk are subject to the provisions of the 1940 Act governing the operation of BDCs.  Both companies are managed by their executive officers under the supervision of their Boards of Directors.

The Company categorizes its investments into five security types:  1) Corporate Loans Receivable; 2) Commercial Loans Receivable; 3) Life Insurance Settlements; 4) Equity Investments; and 5) Medallion Loans Receivable.   For a more detailed description of these investment categories please see the Company’s Annual Report on Form 10-K for the year ended June 30, 2010, filed with the Commission by the Company on September 28, 2010 and which is available on the Company’s web site at www.ameritranscapital.com .

Basis of Consolidation

The consolidated financial statements include the accounts of Ameritrans, Elk Capital Corporation (“Elk Capital”), Elk and Elk’s wholly owned subsidiary, EAF Holding Corporation (“EAF”).  All significant inter-company transactions have been eliminated in consolidation.

Elk Capital is a wholly owned subsidiary of Ameritrans, which may engage in lending and investment activities similar to its parent.

EAF began operations in December 1993 and owns and operates certain real estate assets acquired in satisfaction of defaulted loans by Elk debtors.  At December 31, 2010 EAF was operating the real estate of Sealmax, Inc.



15



Investment Valuations

The Company’s loans receivable, net of participations and any unearned discount are considered investment securities under the 1940 Act and are recorded at fair value. As part of fair value methodology, loans are valued at cost adjusted for any unrealized appreciation (depreciation). Since no ready market exists for these loans, the fair value is determined in good faith by management, and approved 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. Foreclosed properties, which represent collateral received from defaulted borrowers, are valued similarly.

Loans are considered “non-performing” once they become ninety (90) days past due as to principal or interest. The value of past due loans are periodically determined in good faith 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, the value of the loan will be reduced to fair value.

Equity investments (common stock, preferred stock and stock warrants, including certain controlled subsidiary portfolio investments) and investment securities are recorded at fair value, represented as cost, plus or minus unrealized appreciation or depreciation. Investments for which market quotations are readily available are valued at such quoted amounts.  When no public market exists the fair value of the investment are determined by management and approved by the Board of Directors.  Fair market valuation will be based upon the assets and revenue of the underlying investee companies as well as general market trends for business in the same industry.

The Company records the investment in life insurance policies at the Company’s estimate of their fair value based upon various factors including a discounted cash flow analysis of anticipated life expectancies, future premium payments, and anticipated death benefits.  The fair value of the investment in life settlement contracts has no ready market and is determined in good faith by management, and approved by the Board of Directors (see Note 2).

Because of the inherent uncertainty of valuations, the Company’s estimates of the values of the investments may differ significantly from the values that would have been used had a ready market for the investments existed, and the differences could be material.

Effective July 1, 2008, the Company adopted Accounting Standard Codification (“ASC”) 820-10 previously Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”), which expands the application of fair value accounting for investments (see Note 2).

Income Taxes

The Company has elected to be taxed as a Regulated Investment Company (“RIC”) under the Internal Revenue Code (the “Code”).  A RIC generally is not taxed at the corporate level to the extent its income is distributed to its stockholders.  In order to qualify as a RIC, a company must pay out at least 90 percent of its net taxable investment income to its stockholders as well as meet other requirements under the Code.  In order to preserve this election for fiscal year 2010/2011, the Company intends to make the required distributions to its stockholders to the extent the Company has net taxable investment income. Therefore, no provision for federal income taxes has been provided in the accompanying consolidated financial statements. No dividends on the Company’s common stock have been paid in each of the fiscal years ended June 30, 2010 and 2009 or during the six months ended December 31, 2010, inasmuch as the Company had no taxable investment income during such periods. Accordingly, the Company has maintained its status as a RIC.

The Company is subject to certain state and local franchise taxes, as well as related minimum filing fees assessed by state taxing authorities.  Such taxes and fees are included in “Other administrative expenses” in the consolidated statements of operations in each of the fiscal years presented.  The Company’s tax returns for fiscal years ended 2007 through 2010 are subject to examination by federal, state and local income tax authorities.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make extensive use of 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.  The fair values of the Company’s investments are particularly susceptible to significant changes.



16



Increase (Decrease) in Net Assets Per Share

Increase (decrease) in net assets per share includes no dilution and is computed by dividing current net increase (decrease) in net assets from operations available to common stockholders by the weighted average number of common shares outstanding for the period.  Diluted increase in net assets per share reflects, 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 periods presented, the effect of common stock equivalents has been excluded from the diluted calculation since the effect would be antidilutive.

Dividends

Dividends and distributions to our common and preferred stockholders are recorded on the record date.  The amount to be paid out as a dividend is determined by the Board each quarter and is generally based upon the earnings estimated by management.  Net realized capital gains, if any, are distributed at least annually, although the Company may decide to retain such capital gains for investment.

On June 30, 2008, the Board approved and adopted a dividend reinvestment plan that provides for reinvestment of distributions in the Company’s Common Stock on behalf of common stockholders, unless a stockholder elects to receive cash.  As a result, if the Board authorizes, and the Company declares, a cash dividend, then those stockholders who have not “opted out” of the dividend reinvestment plan will have their cash dividends automatically reinvested in additional shares of Common Stock, rather than receiving the cash dividends.  As of December 31, 2010, no shares have been purchased under the Plan.

Income Recognition

Interest income, including interest on loans in default, 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 related collateral exceeds the specific loan balance.  Loans that are not fully collateralized and in the process of collection are placed on nonaccrual status when, in the judgment of management, the collectability of interest and principal is doubtful.

Stock Options

The Company adopted ASC 718-10 (previously SFAS No. 123R, “ Accounting for Stock-Based Compensation ”) and related interpretations in accounting for its stock option plans effective January 1, 2006, and accordingly, the Company will expense these grants as required.  Stock-based employee compensation costs in the form of stock options will be reflected in net increase (decrease) in net assets from operations for grants made including and subsequent to January 1, 2006 only, since there were no unvested options outstanding at December 31, 2005, using the fair values established by usage of the Black-Scholes option pricing model, expensed over the vesting period of the underlying option.  Previously, no compensation cost was recognized under these plans, as the Company followed the disclosure-only provisions under guidance at that time.

The Company’s stock option plans expired on May 21, 2009.  The Company has chosen not to renew the plans and, as a result of the restrictions contained in the 1940 Act, the Company’s ability to grant equity-based compensation in the future may be limited due to compensation terms contained in the agreement with its investment advisor.

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 Company’s investments, including loans receivable, life settlement contracts and equity securities, are carried at their estimated fair value.  The carrying value of the bank debt is a reasonable estimate of their fair value as the interest rates are variable, based on prevailing market rates.  The fair value of the SBA debentures was computed using the discounted amount of future cash flows using the Company’s current incremental borrowing rate for similar types of borrowings (see Note 6).

Presentation of Prior Quarter Data

Certain reclassifications have been made to conform prior quarter data to the current presentation.  Although the reclassifications resulted in changes to certain line items in the previously filed financial statements, the overall effect of the reclassifications did not impact net assets available.



17



2.    Investments


The following table shows the Company’s portfolio by security type at December 31, 2010 and June 30, 2010:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2010

 

June 30, 2010

 

 

(Unaudited)

 

 

Security Type

 

Cost

 

Fair Value

 

% (1)

 

Cost

 

Fair Value

 

% (1)

Commercial Loans

7,053,508

$

6,550,226

 

23.1%

9,474,498

8,722,348

 

34.3%

Corporate Loans

 

19,918,870

 

18,588,847

 

65.7%

 

15,519,286

 

14,136,860

 

55.5%

Life Settlement Contracts

 

3,153,423

 

1,962,800

 

6.9%

 

2,568,691

 

1,356,800

 

5.3%

Equity Securities

 

1,438,127

 

1,015,024

 

3.6%

 

1,438,927

 

1,020,706

 

4.0%

Taxi Cab Medallion Loans

 

196,489

 

196,489

 

0.7%

 

218,984

 

218,984

 

0.9%

Total

$

31,760,417

$

28,313,386

 

100.0%

$

29,220,386

$

25,455,698

 

100.0%

1)     Represents percentage of total portfolio at fair value


Investments by Industry  

Investments by industry consist of the following as of December 31, 2010 and June 30, 2010:


 

 

 

 

 

Percentage of Portfolio at

 

December 31, 2010

 

June 30, 2010

Broadcasting/Telecommunications

6.5%

 

7.4%

Commercial Construction

8.7%

 

10.8%

Computer Software

7.6%

 

-

Construction and Predevelopment

4.5%

 

7.5%

Direct Marketing

4.4%

 

-

Debt Collection

1.7%

 

1.9%

Education

3.0%

 

3.5%

Film Distribution

3.6%

 

-

Food

12.4%

 

-

Gaming

-

 

4.4%

Gasoline Distribution

-

 

2.2%

Laundromat

-

 

1.1%

Life Insurance Settlement Contracts

6.9%

 

5.3%

Military Defense

4.4%

 

5.0%

Manufacturing

16.3%

 

14.1%

Printing/Publishing

4.6%

 

3.7%

Processing Control Instruments

-

 

4.0%

Restaurant/Food Service

8.8%

 

17.0%

Sanitaryware Distributor

1.3%

 

1.4%

Supermarkets

3.5%

 

8.9%

Industries less than 1%

1.8%

 

1.8%

TOTAL

100.0%

 

100.0%

 

 

 

 


Loans Receivable

Loans are considered non-performing once they become ninety (90) days past due as to principal or interest.  The Company had loans which are considered non-performing in the amount of $5,040,503 and $$7,531,813 as of December 31, 2010 and June 30, 2010, respectively.  These loans are either fully or substantially collateralized and are in some instances personally guaranteed by the debtor.  Included in the total non-performing loans are fifteen and twenty loans at December 31, 2010 and June 30, 2010, respectively, aggregating $3,346,362  and $5,360,723  at December 31, 2010 and June 30, 2010, respectively, which are no longer accruing interest since the loan principal and accrued interest exceed the estimated fair value of the underlying collateral.  The following table sets forth certain information regarding performing and non-performing loans as of December 31, 2010 and June 30, 2010:



18




 

 

December 31, 2010

(Unaudited)

 

June 30, 2010

Loans receivable

25,335,562

23,078,192

Performing loans

 

20,295,059

 

15,546,379

Nonperforming loans

5,040.503

7,531,813

  Nonperforming loans:

 

 

 

 

        Accrual

1,694,141

2,171,090

        Nonaccrual

 

3,346,362

 

5,360,723

 

5,040,503

7,531,813


The Company has pledged its loans receivable and all other assets of the Company as collateral for its lines of credit (see Note 4).

As of December 31, 2010 the Company has accrued, but not yet paid, approximately $86,000 in professional fees, in connection with the Company’s Investment Advisory and Management Agreement, as amended, (the “Advisory Agreement”) with Velocity Capital Advisors LLC related to Corporate Loans. Pursuant to the Advisory Agreement, the Company will pay a pro rated annual base fee of 1.50% per annum of the aggregate fair value of Corporate Loans outstanding at the end of each quarter.  The Advisory Agreement also provides for an Income Based and Capital Gains fee as described therein.  

Pursuant to the Advisory Agreement, Velocity Capital Advisors serves as the non-discretionary investment adviser to the Company with respect to the investment in below investment grade senior loans and notes, and subordinated notes, which are collectively referred to as “Corporate Loans” and incidental equity investments received in connection with the investment in the Debt Portfolio (“Incidental Equity”) (collectively, the “Velocity Assets”).  All investments in Corporate Loans are subject to the supervision of management and the Board.

At such time as the Velocity Assets exceed $75 million, the Adviser’s services under the Advisory Agreement will be exclusive to the Company with respect to the Velocity Assets.  The Advisory Agreement may be terminated at any time, without payment of a penalty, upon 60 days’ written notice, by the vote of stockholders holding a majority of the outstanding voting securities of the Company, or by the vote of the Company’s directors or by the Adviser.  The Advisory Agreement will automatically terminate in the event of its assignment by the Adviser.

Life Settlement Contracts

In September, 2006, the Company entered into a joint venture agreement with an unaffiliated entity (the “Joint Venture”) to purchase previously issued life insurance policies owned by unrelated individuals.  Under the terms of the Joint Venture, the Company was designated as nominee to maintain possession of the policies and process transactions related to such policies until the policies were subsequently sold.  The Company was entitled to receive a twelve percent (12%) annual return on the amount of funds paid by the Company and outstanding on a monthly, prorated basis.  Under the terms of the Joint Venture, proceeds from the sale of the policies were to be distributed, net of direct expenses.


As of December 31, 2010, the fair value of the policies owned by the Company was $1,962,500, which represents the estimated fair value for the five life insurance policies with an aggregate face value of $17,659,809. The Company’s cost on these policies to date is $3,153,423, including insurance premiums of $584,732 and $301,365, which were paid in the six-month and three-month periods, respectively, ended December 31, 2010. Premiums on the policies must be paid until the policies are sold in order to keep the policies in full force.   

On April 2, 2009, the Company learned that the manager of the Joint Venture had been charged with various violations of securities laws by the SEC. The SEC obtained a court order freezing the assets of the manager of the Joint Venture and other entities with which he was involved, including the assets of the Joint Venture.  On April 14, 2009, a receiver was appointed (the “Receiver”) to handle the affairs of the manager of the Joint Venture.   Initially, the Company made certain contributions to the payment of the premiums in order to keep the policies in full force and effect and preserve their value.  Thereafter, utilizing a line of credit secured by certain assets of the Receivership Estate, the Receiver advanced premiums due under certain policies to keep the policies in full force and effect.  The Receiver engaged an independent specialist firm to service and market for sale all of the policies in the Receivership Estate.    Following discussions with the Receiver, the Company negotiated an agreement (the “Purchase Agreement”), which among other items, granted the Company the right to purchase the policies, subject to certain terms and conditions and court approval.



19



As of January 8, 2010, the Company purchased the life insurance policies pursuant to a purchase agreement (the “Purchase Agreement”) entered into with the Receiver:


1)  The Company acquired all of the rights to and title and interest in, ten (10) life insurance policies (7 of which had been previously included in the Joint Venture), with an aggregate death benefit of $28,159,809.

2)  The Company agreed to pay the Receiver $30,000 to cover certain expenses;

3)  The Company agreed to pay the Receivership Estate 20% of all recoveries until such time as the Company has recouped approximately $2.1 million plus the amount of any premiums paid following the date of the Purchase Agreement;

4)  The Company agreed to pay the Receivership Estate 50% of all recoveries above the amounts described in Item 3 above;

5)  The Company entered into an agreement of sale on the rescission of one of the original Joint Venture policies.  In accordance with the terms of the settlement agreement with the Receiver, the Company recorded proceeds of $109,857 and recognized a loss on the sale of the policy of $342,496;

6)  The Company agreed to the cancellation of certain claims the Company had against the Receivership Estate for premiums advanced since April 2, 2009;

7)  The Company and the Receivership Estate agreed that the Joint Venture would be cancelled, terminated and have no further effect; and

8)  Despite the retained interest of the Receiver in any recovery, the Company reserved the right, in its sole discretion, to continue to fund premium payments or let any or all of the policies lapse.


The Purchase Agreement was dated December 18, 2009, and approved by the court on January 8, 2010.


Subsequent to court approval, the Company learned that certain of the policies had lapsed due to non-payment of premiums.

After a review of the current financing and regulatory environment, and other opportunities to make loans and investments, the Company decided to exit this line of business and plans to make no new investments in life insurance settlement policies other than the continued payment of premiums on existing investments.


The Company is entitled to sell the policies at any time, in its sole discretion and has no obligation to pay future premiums on the various policies.  The approximate future minimum premiums due for each of the next five (5) years and in the aggregate thereafter, based on current life expectancy of the insureds, are as follows:


 

 

 

Fiscal Year Ending
June 30

 

Policy
Premiums

 

 

 

2011 (six months)

$

423,048

2012

 

846,096

2013

 

846,096

2014

 

846,096

2015

 

846,096

Thereafter

 

1,993,441

 

$

5,800,873


Based upon the current uncertain state of the life settlement market, the lack of liquidity at this time in this market due to the difficult credit conditions and the overall economy, the fact that these policies may have diminished value due to having been associated with the former manager of the Joint Venture, and the Company’s previously stated decision to exit the life settlement area, the Company has adjusted the fair value of these policies to reflect the current anticipated recovery based on estimated actuarial values that take into account the various factors discussed above.   This is an estimate based upon the information currently available.  The Company continues to pursue alternatives that could allow for a higher recovery.

Fair Value of Investments

Effective July 1, 2008, the Company adopted ASC 820-10 (previously SFAS 157, Fair Value Measurements), which expands application of fair value accounting. ASC 820-10 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosure of fair value measurements. ASC 820-10 determines fair value to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between market participants on the measurement date. ASC 820-10 requires the Company to assume that the portfolio investment is sold in a principal market to market participants, or in the absence of a principal market, the most advantageous market, which may be a hypothetical market. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent,



20



knowledgeable, and willing and able to transact. In accordance with ASC 820-10, the Company has considered its principal market as the market in which the Company exits its portfolio investments with the greatest volume and level of activity. ASC 820-10 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. In accordance with ASC 820-10, these inputs are summarized in the three broad levels listed below:


·

Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

·

Level 2 – Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

·

Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement.


In addition to using the above inputs in investment valuations, the Company continues to employ the valuation policy approved by its board of directors that is consistent with ASC 820-10 (see Note 1).  Consistent with the Company’s valuation policy, it evaluates the source of inputs, including any markets in which its investments are trading (or any markets in which securities with similar attributes are trading), in determining fair value. The Company’s valuation policy considers the fact that because there is not a readily available market value for most of the investments in its portfolio, the fair value of the investments must typically be determined using unobservable inputs.

Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments may fluctuate from period to period. Additionally, the fair value of its investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that the Company may ultimately realize.   Further, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If the Company was required to liquidate a portfolio investment in a forced or liquidation sale, it may realize significantly less than the value at which the Company had previously recorded it.

In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned.


Assets measured at fair value on a recurring basis:


  

  

  

  

Fair Value at Reporting Date Using

  

  

December 31, 2010

  

Quoted Prices in Active Markets for Identical Assets

(Level 1)

  

Significant Other Observable Inputs

(Level 2)

  

Significant Unobservable Inputs

(Level 3)

Commercial Loans

$

6,550,226

$

-

$

-

$

6,550,226

Corporate Loans

  

18,588,847

  

-

  

-

  

18,588,847

Life Settlement Contracts

  

1,962,800

  

-

  

-

  

1,962,800

Equity Securities

  

1,015,024

  

6,276

  

-

  

1,008,748

Taxicab Medallion Loans

  

196,489

  

-

  

-

  

196,489

Total Investments

$

28,313,386

$

                   6,276

$

-

$

28,307,110


Assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3):


  

  

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

  

  

Commercial Loans

  

Corporate Loans

  

Life Settlement Contracts

  

Equity Securities

  

Taxicab Medallion Loans

  

Total

Beginning balance as of June 30, 2010

$

8,722,348

$

12,868,110

$

1,356,800

$

1,009,548

$

218,984

$

24,175,790

Net realized losses on investments

  

-

  

(316,897)

  

-

  

(800)

  

-

  

(317,697)

Net unrealized gains on investments

  

248,868

  

71,153

  

21,268

  

-

  

-

  

341,289

Purchases of investments

  

1,719

  

10,177,812

  

584,732

  

-

  

-

  

10,764,263

Repayments, sales or redemptions of investments

  

(2,422,709)

  

(4,211,331)

  

-

  

-

  

(22,495)

  

(6,656,535)

Transfers in and/or out of Level 3

  

-

  

-

  

-

  

-

  

-

  

-

Ending balance as of December 31, 2010

$

6,550,226

$

18,588,847

$

1,962,800

$

1,008,748

$

196,489

$

28,307,110


Amount of total gains or losses for the period included in changes in net assets attributable to the change in unrealized gains or losses relating to assets still held at the reporting date

$

341,289 

 

 

 

Gains and losses (realized and unrealized) included in net decrease in net assets from operations for the period above are reported as follows:

 

 

Gain (loss) on sales and dispositions

 

(316,896)

Change in unrealized gains or (losses) relating to assets still held at reporting date

$

24,393 


21




3.     Debentures Payable to SBA

At December 31, 2010 and June 30, 2010 debentures payable to the SBA consisted of subordinated debentures with interest payable semiannually, as follows:


 

 

 

 

 

 

 

 

 

 

 

Issue Date

 

Due Date

 

% Interest Rate

 

December 31,

2010

 

June 30,

2010

 

Annual Amount of Interest and User Fees

 

 

 

 

 

 

 

 

 

 

 

July 2002

 

September 2012

 

4.67 (1)

$

2,050,000 

$

2,050,000 

$

113,488

December 2002

 

March 2013

 

4.63 (1)

 

3,000,000 

 

3,000,000 

 

164,880

September 2003

 

March 2014

 

4.12 (1)

 

5,000,000 

 

5,000,000 

 

249,300

February 2004

 

March 2014

 

4.12 (1)

 

1,950,000 

 

1,950,000 

 

97,227

December 2009

 

March 2020

 

4.11 (2)

 

9,175,000

 

9,175,000

 

402,782

 

 

 

 

 

$

21,175,000 

$

21,175,000  

$

1,027,677


(1)    Elk is also required to pay an additional annual user fee of 0.866% on these debentures.

(2)    Elk is also required to pay an additional annual user fee of 0.28% on these debentures.

Under the terms of the subordinated debentures, Elk may not repurchase or retire any of its capital stock or make any distributions to its stockholders other than dividends out of retained earnings (as computed in accordance with SBA regulations) without the prior written approval of the SBA.

Pursuant to SBA’s issuance of leverage in the form of debentures in the aggregate of $9,175,000, Elk submitted an application to draw the full amount of the awarded fiscal year 2009 commitment. SBA approved the leverage request and on December 2, 2009, Elk received the disbursement of $9,175,000 from the long-term guaranteed debenture, and paid fees totaling $314,244. In accordance with SBA regulations, $91,750 of these fees was paid prior to the closing. Therefore, the net fees at closing were $222,494. The net proceeds of the draw were $8,952,506.


Elk is required to calculate the amount of capital impairment each reporting period based on SBA regulations. The purpose of the calculation is to determine if the Undistributed Net Realized Earnings (Deficit) after adjustment for net unrealized gain or loss on securities exceeds the SBA regulatory limits. If so, Elk is considered to have impaired capital.  As of December 31, 2010, Elk’s maximum permitted calculated impairment percentage (regulatory limit) was 40%, with an actual capital impairment percentage of approximately 44.6%. Accordingly, Elk had a condition of capital impairment as of December 31, 2010, which would require additional capital of approximately $1.6 million to cure.   In October 2010, members of management met with representatives of SBA for a portfolio review meeting.  After discussions with SBA, management has undertaken a plan to invest additional equity in Elk which, it is anticipated, will cure the condition of capital impairment.

4.     Notes Payable

Banks

At December 31, 2010, the Company had a  $120,000 line of credit with a bank, with no balance outstanding, as the line had been paid in full as of August 31, 2010. Although this loan was paid in full, the line remains available until its maturity date of July 6, 2011. Pursuant to the terms of the current agreement governing the line of credit, the Company is required to comply with certain covenants and conditions, as defined in the agreement. The Company has pledged its loans receivable and all other assets as collateral for the line of credit. Pursuant to the SBA agreement and an “intercreditor agreement” between the lending bank and the SBA, the SBA agreed to subordinate the SBA Debentures outstanding in favor of the bank. In accordance with the loan documentation with the SBA and the bank, the Company must also comply with maintaining overall debt levels within a formula based upon the performance of its loan portfolio according to an SBA formula “borrowing base,” which is submitted for review to the SBA and the bank for periodic review. As there are no outstanding bank balances, SBA has indicated that the Company is not required to submit the borrowing base. Another credit line of $352,000, the amount of which was paid in full as of August 31, 2010, and which was extended to December 10, 2010, expired by its terms as of that date.



22



Other


On December 22, 2009, the Company issued $2,025,000 aggregate principal amount of its 8.75% notes due December 2011 (the “December Notes”) in a private offering.  Prior to their amendment, as described below, the Notes bore interest at a rate of 8.75%, payable quarterly, but the Company had the option to extend the December Notes until December 2012 at a rate of 5.5%, plus the then-current prime rate.  The December Notes are redeemable by the Company at any time upon not less than 30 days prior notice.  A member of the Company’s Board of Directors and certain affiliated entities acquired $1,375,000 of the December Notes in the offering. The total amount of interest incurred on these related-party December Notes was $30,078 and $5,013 for the three-month periods ended December 31, 2010 and 2009, respectively, and $60,156  and $5,347 for the six-month periods ended December 31, 2010 and 2009, respectively.


On March 24, 2010, the Company issued $975,000 aggregate principal amount of its 8.75% notes due March 2012 (the “March Notes” and, together with the December Notes, the “2009/2010 Notes”) in a private offering.  The March Notes have the same terms as the December Notes, except prior to their amendment as described below, the March Notes were scheduled to mature in March 2012 and bore interest at a rate of 8.75%, payable quarterly, but the Company had the option to extend the March Notes until March 2013 at a rate of 5.5%, plus the then-current prime rate.  The March Notes are redeemable by the Company at any time upon not less than 30 days prior notice.  A member of the Company’s Board of Directors, and certain affiliated entities acquired $660,000 of the March Notes in the offering. The total amount of interest incurred on these related-party March Notes was $14,438 and $0 for the three-month periods ended December 31, 2010 and 2009, respectively, and $28,875 and $0 for the six-month periods ended December 31, 2010 and 2009, respectively.


In connection with the issuance of a Senior Secured Note on January 19, 2011(the “2011 Note”) (See Note 11, Subsequent Events), in order to facilitate certain covenants under the 2011 Note relating to the 2009/2010 Notes, the Company entered into an Amendment to Promissory Note (the “Amendment”) with each holder of the 2009/2010 Notes. Pursuant to the Amendment, the interest rate on the 2009/2010 Notes was increased from 8.75% to 12.0% and the maturity date was extended until May 2012. The holders of the 2009/2010 Notes also waived certain covenants contained in the 2009/2010 Notes related to additional borrowings by the Company. In connection with the Amendment, the Company paid a fee equal to 1% of principal, or an aggregate of $30,000, to the holders of the 2009/2010 Notes.

5.     Dividends to Stockholders

The following table sets forth the dividends declared and/or accrued  by the Company on its Common Stock and Preferred Stock for the six months ended December 31, 2010, and 2009:


 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended  December 31, 2010

 

 

Dividend Per Share

 

Amount

 

Declaration Date

 

Record Date

 

Pay Date

Preferred Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First quarter

(July 1, 2010 - September 30, 2010)

 $

0.28125

$

84,375

 

 Not Declared

 

 

 

 

 Second quarter

(October 1, 2010 – December 31, 2010)

 

0.28125

$

84,375

 

 Not Declared

 

 

 

 

Total Preferred Stock Dividends Declared

$

0.56250

$

168,750

 

 

 

 

 

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended December 31, 2009

 

 

Dividend Per Share

 

Amount

 

Declaration Date

 

Record Date

 

Pay Date

Preferred Stock:

 

 

 

 

 

 

 

 

 

 

First quarter

(July 1, 2009 - September 30, 2009)

$

0.28125

$

84,375

 

2/25/10

 

3/8/10

 

3/10/10

Second quarter

(October 1, 2009 - December 31, 2009)

$

0.28125

$

84,375

 

2/25/10

 

3/8/10

 

3/10/10

Total Preferred Stock Dividends Declared

$

0.56250

$

168,750

 

 

 

 

 

 




23



The Company has not declared a Preferred Stock dividend for the quarters ended September 30, 2010, or December 31, 2010. Dividends on Preferred Stock accrue whether or not they have been declared. As of December 31, 2010, dividends not declared and in arrears were $168,750.   The Company did not declare or pay any dividends on its Common stock during the six months ended December 31, 2009.

6.     Financial Instruments

Fair value is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties. The fair values presented below have been determined by using available market information and by applying valuation methodologies.

Loans Receivable and Life Settlement Contracts

Loans receivable and life settlement contracts are recorded at their estimated fair value (see Note 2).

Investment Securities

The estimated fair value of publicly traded equity securities is based on quoted market prices and privately held equity securities are recorded at their estimated fair value (see Note 2).

Debt

The carrying value of the bank debt is a reasonable estimate of fair value as the interest rates are variable, based on prevailing market rates.


The fair value of the SBA debentures was computed using the discounted amount of future cash flows using the Company’s current incremental borrowing rate for similar types of borrowings.  The estimated fair values of such debentures as of December 31, 2010 and June 30, 2010 were approximately $21,232,000 and $21,247,000 respectively.  However, the Company does not expect that the estimated fair value amounts determined for these debentures would be realized in an immediate settlement of such debentures with the SBA.


The carrying value of the note payable, other is a reasonable estimate of the fair value based on prevailing market rates.

Other

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


7.     Related Party Transactions

Total occupancy costs under existing leases and overhead cost reimbursement agreements paid to a law firm related to the Company’s former Chairman of the Board and certain other officers of the Company and to another entity in which an officer of the Company has a financial interest amounted to $0 and $145,000 for the six months ended December 31, 2010 and 2009, respectively, and $0 and $70,978 for the three months ended December 31, 2010 and 2009, respectively.

See Note 4 for additional related party transactions.

8.     Commitments and Contingencies


Litigation

From time to time, the Company is engaged in various legal proceedings incident to the ordinary course of its business.  In the opinion of the Company’s 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 the Company’s results of operations or financial condition.


9.     Stock Option Plans

The Company’s stock option plans expired on May 21, 2009

Employee Incentive Stock Option Plan

An employee stock option plan (the “1999 Employee Plan”) was adopted by the Ameritrans Board, including a majority of the non-interested directors, and approved by a vote of the stockholders, in order to link the personal interests of key employees to the Company’s long-term financial success and the growth of stockholder value.  The Plan had a ten (10) year life which expired in May, 2009.  Subsequent amendments to the 1999 Employee Plan were approved by the stockholders in January 2002 and June 2007.  The amendments increased the number of shares reserved under the plan to 300,000 shares.



24



The 1999 Employee Plan authorized the grant of incentive stock options within the meaning of the Section 422 of the Internal Revenue Code for the purchase of an aggregate of 300,000 shares (subject to adjustment for stock splits and similar capital changes) of Common Stock to the Company’s employees.   Effective as of May 21, 2009, in accordance with the terms of the 1999 Employee Plan, the Board can no longer issue incentive stock options pursuant to such plan.  The Board adopted the 1999 Employee Plan to be in a better position attract, motivate, and retain as employees people upon whose judgment and special skills the Company’s success in large measure depends.  As of December 31, 2010, options to purchase an aggregate of 233,000 shares of Common Stock were outstanding and fully vested.

The 1999 Employee Plan is administered by the 1999 Employee Plan Committee of the Board, 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 “Exchange 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.  Effective May 21, 2009, the 1999 Employee Plan expired.

Non-Employee Director Stock Option Plan

A stock option plan for non-employee directors (the “Director Plan”) was adopted by the Ameritrans Board and approved by a vote of the stockholders, in order to link the personal interests of non-employee directors to the Company’s 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 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 on November 14, 2001, and approved by the stockholders 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 automatic 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.

The total number of shares for which options may be granted from time to time under the Director Plan is 75,000 shares.  As of December 31, 2010, options to purchase an aggregate of 59,000 shares of common stock were outstanding and fully vested under the Director Plan.  The Director Plan is administered by a committee of directors who are not eligible to participate in the Director Plan.  Effective May 21, 2009, the Director Plan expired.

Options Granted, Expired and Canceled

There were no options granted during the six-month period ended December 31, 2010.

Options for 29,425 shares expired during the six-month period ended December 31, 2010. After adoption of ASC 718-10 (previously SFAS No. 123R, “ Accounting for Stock-Based Compensation ”)  (see Note 1), the fair value of the options granted amounted to $191,040 at December 31, 2010 and June 30, 2010, which is reflected as additional paid-in capital in the accompanying consolidated statements of assets and liabilities.  Compensation expense related to options vested for the six months ended December 31, 2010 and 2009 was $0 and $26,897, respectively, and for the three months ended December 31, 2010 and 2009 was $0 and $25,548, respectively.  As of December 31, 2010, there was no deferred compensation related to unvested options.


The following tables summarize information about the transactions of both stock option plans as of December 31, 2010:


 

 

 

 

 

 

 

Stock Options

 

 

Number of Options

 

Weighted
Average
Exercise Price
Per Share

Options outstanding at June 30, 2010

 

321,425

$

3.71

Granted

 

-

 

-

Canceled

 

-

 

-

Expired

 

(29,425)

 

5.81

Exercised

 

-

 

-

Options outstanding at December 31, 2010

 

292,000

$

3.50




25




 

 

 

 

 

 

 

 

 

 

 

 

 

Options Outstanding

 

Options Exercisable

Range of Exercise Prices

 

Number Outstanding at

December 31, 2010

 

Weighted Average Years Remaining Contractual Life

 

Weighted Average Exercise Price

 

Number Exercisable at December 31, 2010

 

Weighted Average Exercise Price

$3.60

 

13,888

 

2.39

 

$3.60

 

13,888

 

$3.60

$5.28

 

80,000

 

2.41

 

$5.28

 

80,000

 

$5.28

$5.30

 

9,433

 

 .98

 

$5.30

 

9,433

 

$5.30

$4.50

 

20,000

 

1.78

 

$4.50

 

20,000

 

$4.50

$4.93

 

10,141

 

1.36

 

$4.93

 

10,141

 

$4.93

$2.36

 

133,000

 

2.78

 

$2.36

 

133,000

 

$2.36

$1.78

 

25,538

 

3.35

 

$1.78

 

25,538

 

$1.78

$1.78 - $5.30

 

292,000

 

2.24

 

$3.50

 

292,000

 

$3.50


10.     Financial Highlights


 

 

 

 

 

 

 

 

 

Six Months Ended December 31, 2010

(Unaudited)

 

Six Months Ended December 31, 2009

(Unaudited)

 

Year Ended June 30, 2010

Net share data

 

 

 

 

 

 

Net asset value at the beginning of the period

$

1.40 

$

3.40

$

3.40 

Net investment loss

 

(0.46)

 

(0.54)

 

(1.17)

Net realized and unrealized gains ( losses) on investments

 

.04

 

(0.54)

 

(0.71)

Net decrease in net assets from operations

 

(0.42)

 

(1.08)

 

(1.88)

Distributions to Stockholders (4)

 

(0.05)

 

-

 

(0.12) 

Total decrease in net asset value

 

(0.47)

 

(1.08)

 

(2.00 )

Net asset value at the end of the period

$

0.93

$

2.32

$

1.40

Per share market value at beginning of period

$

1.32 

$

1.63

$

1.63 

Per share market value at end of period

$

.97 

$

1.30

$

1.32 

Total return (1)

 

(27.00)% 

 

(20.25)%

 

      (11.60)%

Ratios/supplemental data

 

 

 

 

 

 

Average net assets (2) (in 000’s)

$

3,973 

$

9,710

$

8,160 

Total expense ratio (3)

 

133%

 

53.3%

 

69.0%

Net investment loss to average net assets (5)

 

(79.0)%

 

(38.1)%

 

(48.8)%


(1) Total return is calculated by dividing the change in market value of a share of common stock during the year, assuming the reinvestment of dividends on the payment date, by the per share market value at the beginning of the year.

(2) Average net assets excludes capital from preferred stock.

(3) Total expense ratio represents total expenses divided by average net assets annualized for interim periods.

(4) Amount represents total dividends on both common and preferred stock divided by weighted average shares.

(5) Annualized for interim periods.




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11.     Subsequent Events

The Company has evaluated subsequent events that have occurred through February 11, 2011, the date of the financial statements issuance.


On January 19, 2011, the Company issued a Senior Secured Note (the “Note”) in the principal amount of $1,500,000 to an unaffiliated lender. The Note bears interest at the rate of 12% per annum (except following an event of default under the Note, in which case the interest rate applicable to the Note would be 14%) and matures on February 1, 2012. The Company may prepay the Note at any time. The Company is required to prepay the Note in certain circumstances, including in the event and to the extent (i) the Company issues any capital stock (other than upon the conversion of securities outstanding as of January 19, 2011), (ii) a subsidiary of the Company pays a dividend to the Company; (iii) the Company sells assets (other than in the ordinary course of business in an amount less than $100,000 in the aggregate and only to the extent of 50% of the proceeds from such sales); or (iv) the Company engages in a transaction that results in a change of control. The Company will incur a 15% fee for any principal prepayments other than in respect of asset sales. The Company’s obligations under the Note may be accelerated by the Note holder under certain circumstances, including: (i) the Company fails to pay the principal of the Note when due or interest on the Note when due and such failure continues for three business days and/or fails to pay any other amount payable under the Note for thirty days following notice of such failure; (ii) the Company materially breaches any representation, warranty or covenant made pursuant to the Note and such breach is not cured within five business days following the Company’s awareness thereof or receipt of notice with respect thereto; (iii) the Company or any of its subsidiaries commences a bankruptcy or similar proceeding (or such a proceeding is commenced against the Company or its subsidiaries); (iv) a person or group of persons acquires a majority of the voting power of the Company or Elk; (v) a judgment is entered against the Company or any of its subsidiaries in an aggregate amount exceeding $500,000 or any execution, garnishment or attachment is levied against the Company’s or any of its subsidiaries’ assets and such execution, garnishment or attachment impairs the Company’s or its subsidiaries’ ability to conduct its business; (vi) the Company fails to pay obligations in excess of $500,000 when due; or (vii) an event occurs which has or would reasonably be expected to have a material adverse effect on the Company’s or any of its subsidiaries’ business. The Note also contains customary representations and warranties as well as affirmative and negative covenants. Pursuant to the Note, the Company has agreed, among other things, (i) to reimburse the lender for certain out-of-pocket expenses incurred in connection with the Note; (ii) to maintain a minimum consolidated net asset value of $4,000,000; (iii) not to sell any material assets with a fair market value in excess of $500,000; (iv) not to declare or pay any dividend with respect to any class of capital stock or make any payment on any indebtedness ranking junior to the lender under the Note; (v) not incur any indebtedness for borrowed money in excess of $250,000; and (vi) not to enter into certain related party transactions. The Note is secured by a pledge of 100% of the issued and outstanding shares of common stock of Elk owned by the Company. In order to facilitate certain covenants under the Note relating to the Company’s 2009/2010 Notes, on January 19, 2011, the Company entered into an Amendment to Promissory Note with each holder of the 2009/2010 Notes (see Note 4. Notes Payable).

12.      Recent Accounting Pronouncements


In December 2010, the FASB amended the existing guidance to require a public entity, which presents comparative financial statements, to disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendment also expanded the required supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination, which are included in the reported pro forma revenue and earnings. The amendments are effective for the Company beginning July 1, 2011. The Company believes the adoption of the provisions of this amendment will not have a material impact on the Company’s financial condition and results of operations.

In January 2010, FASB issued ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820),” that requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair-value measurements.  The FASB also clarified existing fair-value measurement disclosure guidance about the level of disaggregation, inputs, and valuation techniques. The new and revised disclosures are required to be implemented for interim and annual periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements of Level 3 activity.  Those disclosures are effective for interim and annual periods beginning after December 15, 2010.  The adoption of FASB ASU 2010-06 did not have a material impact on the Company’s financial condition and results of operations.

In December 2009, FASB issued ASU No. 2009-17, “Consolidations: Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities,” that amends the FASB ASC for the issuance of FASB Statement No. 167, “Amendments to FASB Interpretation No. 46(R).”  The amendments in this ASU replace the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity (“VIE”) with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact such entity’s economic performance and (1) the obligation to absorb losses of such entity or (2) the right to receive benefits from such entity. An approach that is expected to be primarily qualitative will be more effective for identifying which reporting entity has a controlling financial interest in a variable interest entity. The amendments in ASU No. 2009-17 also require additional disclosures



27



about a reporting entity’s involvement in variable interest entities, which will enhance the information provided to users of financial statements.  ASU No. 2009-17 is effective for annual periods beginning after November 15, 2009.  The adoption of this standard did not have a material impact on the Company’s financial condition and results of operations.

In June 2009, FASB issued ASC 810 (previously SFAS No. 167, Amendments to FASB Interpretation No. 46(R), which amends the guidance in FASB Interpretation No. (“FIN”) 46(R), Consolidation of Variable Interest Entities ). It requires reporting entities to evaluate former qualifying special-purpose entities (“QSPEs”) for consolidation, changes the approach to determining the primary beneficiary of a VIE from a quantitative assessment to a qualitative assessment designed to identify a controlling financial interest, and increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a VIE. It also clarifies, but does not significantly change, the characteristics that identify a VIE. ASC 810 requires additional year-end and interim disclosures for public and non-public companies that are similar to the disclosures required by FSP FAS 140-4 and FIN 46(R)-8,  Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities.  ASC 810 is effective as of the  beginning of a company’s first fiscal year that begins after November 15, 2009, and for subsequent interim and annual reporting periods. All QSPE’s and entities currently subject to FIN 46(R) will need to be reevaluated under the amended consolidation requirements as of the beginning of the first annual reporting period that begins after November 15, 2009. Early adoption is prohibited. The adoption of the provisions of ASC 810 did have a material impact on the Company’s financial condition and results of operations.

In June 2009, the FASB issued ASC 860 (previously SFAS No. 166, Accounting for Transfer of Financial Assets, which amends the guidance in SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities).  It eliminates the QSPEs concept, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies the derecognition criteria, revises how retained interests are initially measured, and removes the guaranteed mortgage securitization recharacterization provisions. ASC 860 requires additional year-end and interim disclosures for public and nonpublic companies that are similar to the disclosures required by FSP FAS 140-4 and FIN 46(R)-8. ASC 860 is effective as of the beginning of a company’s first fiscal year that begins after November 15, 2009, and for subsequent interim and annual reporting periods. ASC 860’s disclosure requirements must be applied to transfers that occurred before and after its effective date. Early adoption is prohibited. The adoption of the provisions of ASC 860 did not have a material impact on the Company’s financial condition and results of operations.



28



ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The information contained in this section should be read in conjunction with the consolidated Financial Statements and Notes thereto appearing in this quarterly report on Form 10-Q and in the Company’s Annual Report on Form 10-K for the year ended June 30, 2010, filed with the Commission by the Company on September 28, 2010 and which is available on the Company’s web site at www.ameritranscapital.com.

CRITICAL ACCOUNTING POLICIES

Investment Valuations

The Company’s loans receivable, net of participations, are considered investment securities under the 1940 Act and are recorded at fair value. As part of fair value methodology, loans are valued at cost adjusted for any unrealized appreciation (depreciation). Since no ready market exists for these loans, the fair value is determined in good faith by management, and approved 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. Foreclosed properties, which represent collateral received from defaulted borrowers, are valued similarly.

Loans are considered “non-performing” once they become 90 days past due as to principal or interest. The value of past due loans are periodically determined in good faith 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, the value of the loan will be reduced to fair value. Equity investments (common stock and stock warrants, including certain controlled subsidiary portfolio investments) and investment securities are recorded at fair value.   

The Company records the investment in life insurance policies at fair value, represented as cost, plus or minus unrealized appreciation or depreciation. The fair value of the investment in life settlement contracts have no ready market and are determined in good faith by management, and approved by the Board of Directors, based on secondary market conditions, policy characteristics and actuarial life expectancy, including health evaluations.

Because of the inherent uncertainty of valuations, the Company’s estimates of the values of the investments may differ significantly from the values that would have been used had a ready market for the investments existed, and the differences could be material.

Effective July 1, 2008, the Company adopted ASC 820-10 (previously SFAS 157, Fair Value Measurements), which expands the application of fair value accounting for investments.

Assets Acquired in Satisfaction of Loans

Assets acquired in satisfaction of loans are carried at the estimated fair value adjusted for estimated cost of disposal.  Losses incurred at the time of foreclosure are charged to the realized losses on loans receivable.  Subsequent reductions in estimated net realizable value are charged to operations as losses on assets acquired in satisfaction of loans.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make extensive use of 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 significant change relate to the determination of the fair value of the Company’s investments.

Income Recognition

Interest income, including interest on loans in default, 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 related collateral exceeds the specific loan balance.  Loans that are not fully collateralized and in the process of collection are placed on nonaccrual status when, in the judgment of management, the collectability of interest and principal is doubtful.



29



Contingencies

The Company is subject to legal proceedings in the course of its daily operations from enforcement of its rights in disputes pursuant to the terms of various contractual arrangements.  In this connection, the Company assesses the likelihood of any adverse judgment or outcome to these matters as well as a potential range of probable losses.  A determination of the amount of reserve required, if any, for these contingencies is made after careful analysis of each individual issue.  The required reserves may change in the future due to new developments in each matter or changes in approach, such as a change in settlement strategy in dealing with these matters.

General

Ameritrans acquired Elk on 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, who qualify under SBA Regulations. Most of Elk’s business historically consisted of originating and servicing loans collateralized by taxi medallions and loans to and investments in other diversified businesses.  Since completing the sale of the medallion portfolio, most of the Company’s net interest income has been generated from its Corporate and Commercial loans. 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 appreciation or depreciation on loans and investments is recorded when Elk adjusts the value of a loan to reflect management’s estimate of the fair value, as approved by the Board of Directors.   

Results of Operations for the Three Months Ended December 31, 2010 and 2009  

Total Investment Income

The Company’s investment income for the three months ended December 31, 2010 increased $96,943, or 20%, to $581,531, as compared to investment income of $484,588 for the three months ended December 31, 2009.  The increase in investment income between the periods can be attributed primarily to an overall increase in the size of the Company’s investment portfolio, which increased approximately 19% at December 31, 2010 as compared with December 31, 2009. 

Commercial Loans as of December 31, 2010 decreased by $2,652,810, or 29%, to $6,550,226, as compared with $9,203,036 at December 31, 2009. The decrease in Commercial Loans was due, primarily, to loan amortization and paid off loans of approximately $1,984,000 and foreclosure on two loans that had been carried at an aggregate of $1,047,000, partially offset by new loans aggregating $365,000.

Corporate Loans outstanding as of December 31, 2010 increased by $5,936,562, or 47%, to $18,588,847, as compared with $12,652,285 outstanding at December 31, 2009. This increase was primarily attributable to new loans of approximately $15,600,000, partially offset by payoffs of approximately $9,000,000 and the reduction of the fair value of certain loans of approximately $700,000.

Taxicab Medallion Loans outstanding as of December 31, 2010 decreased by $27,495, or approximately 12%, to $196,489, as compared with $223,984 at December 31, 2009 as a result of the payoff of one loan.  The average interest rate earned on medallion loans remained the same in 2010 as compared with the prior year. Because of late fees and a payoff fee in the current period, interest income on these loans of $6,000 for the three months ended December 31, 2010 approximated that of the comparable 2009 period.

Life Settlement Contracts outstanding increased by $1,031,503 as of December 31, 2010, or 110%, to $1,962,800, from $931,297 at December 31, 2009.  This investment has stopped accruing interest and a fair value adjustment of $1,200,000 has been made to reflect the value of the investment.   The investment has been valued based on industry valuation.  This revaluation was partially offset by additional premiums paid. No interest income was recorded for the three months ended December 31, 2010 and 2009. 

Operating Expenses

Interest expense for the three months ended December 31, 2010 increased $144,286, or 80%, to $325,440, as compared to $181,154 for the three months ended December 31, 2009.  This increase was primarily due to a $9,175,000 increase in SBA Debentures and a $975,000 note offering in March 2010.

Salaries and employee benefits for the three months ended December 31, 2010 decreased $97,047 to $367,209, or approximately 21%, when compared with $464,256 for the three months ended December 31, 2009.  This decrease reflects the reduction in staff as well as a restructuring of the employment agreement of a key employee.



30



Occupancy costs for the three months ended December 31, 2010 decreased by $28,348 to $42,630, or approximately 40%, when compared with $70,978 for the three months ended December 31, 2009.   This was due to relocation of the Company’s offices to less expensive space and the closing of a storage facility in July 2010.

Professional fees for the three months ended December 31, 2010 increased $48,970 to $350,743, or approximately 16%, when compared with $301,773 for the three months ended December 31, 2009.  Included in professional fees are accounting fees relating to the Company’s internal controls; consulting fees in connection with the Company’s chief financial officer; legal fees to non-related parties; general legal fees to both related and non-related  parties; legal fees related to the Company’s life settlement portfolio; fees for accounting services and audit fees. Accounting fees for internal controls decreased approximately $10,000 to $10,548 when compared to the three months ended December 31, 2009.  In 2009, documentation with regard to controls was being improved, therefore, more fees were spent on implementation. Consulting fees related to the Company’s chief financial officer, who started in July 2010,  were $53,000 in the 2010 quarter as compared with $0 in the comparable 2009 period. Legal fees to non-related parties increased approximately $60,000 to $173,067 when compared to the three months ended December 31, 2009, primarily, as a result of increased legal activity related to potential financing issues.  Legal fees to related parties decreased approximately $6,700 to $0 when compared with the three months ended December 31, 2009 due to curtailment of assignments during the current period. Legal fees associated with the Company’s life settlement portfolio decreased to $0 during the three months ended December 31, 2010 from approximately $32,000 in the comparable prior period because of the activity relating to resolution of issues during the earlier period. Accounting fees increased approximately $6,600 to $56,550 when compared with the three months ended December 31, 2009.  Audit fees decreased approximately $22,000 to $41,770 when compared with the three months ended December 31, 2009.  This decrease was due to a reduction in audit fees attributable to changes in the Company’s investment portfolio and other efficiencies.

Advisory Fees decreased approximately $197,258 to $71,674, or 73%, when compared with $268,932 for the three months ended December 31, 2009.  This decrease was primarily due to a one-time payment of $225,000 in the 2009 period as specified in the Advisory Agreement.  

Miscellaneous administrative expenses increased $26,413, or 15%, to $206,928 for the three months ended December 31, 2010 when compared with $180,515 for the three months ended December 31, 2009.  This increase was primarily due to a $54,000 increase in foreclosure expense, as partially offset by decreases in officers’ insurance, depreciation and computer expenses.

Decrease in Net Assets from Operations and Net Unrealized/Realized Gains (Losses)

Net decrease in net assets from operations was $843,645, for the three months ended December 31, 2010 as compared to $720,884 for the three months ended December 31, 2009.   The change in net assets from operations between the periods, a net decrease in net assets of $122,761, was primarily the result of a net increase in unrealized loss of  $827,296 that was significantly offset by a net increase in investment income of $204,214 and a net increase in realized gain of $500,321.

Dividends for Participating Preferred Stock, accrued, but not declared, were $84,375 in the three months ended December 31, 2010. Dividends for Participating Preferred Stock were not declared, for the three months ended December 31, 2009. They were subsequently declared in February 2010 and paid in March 2010. 

Results of Operations for the Six Months Ended December 31, 2010 and 2009

Total Investment Income

The Company’s investment income for the six months ended December 31, 2010 increased $343,561, or 47%, to $1,081,909, as compared with $738,348 for the six months ended December 31, 2009.  The increase in investment income between the periods can be attributed primarily to the increase in the Company’s Corporate loan portfolio stemming from the use of $9,175,000 proceeds from the SBA debentures received in December 2009.

For changes in outstanding balances of Commercial Loans, Corporate Loans, Taxicab Medallion Loans and Life Settlement Contracts see the discussion, above, under “Results of Operations for The Three Months Ended December 31, 2010 and December 31, 2009.”

Operating Expenses

Interest expense for the six months ended December 31, 2010 increased $305,619, or 88%, to $653,032, as compared with $347,413 for the six months ended December 31, 2009.  This increase was primarily due to the increase of $9,125,000 in SBA debentures and a $975,000 note offering in March 2010.



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Salaries and employee benefits for the six months ended December 31, 2010 decreased $182,685 to $731,727, or approximately 20%, when compared to $914,412 for the six months ended December 31, 2009.  This decrease reflects a  reduction in staff, as well as a restructuring of  the employment agreement of a key employee and a reduction in pension expense as the Company has not made any contributions to the SEP Plan in fiscal 2011.

Occupancy costs for the six months ended December 31, 2010 decreased $59,438, or 41%, to $86,415 from $145,853 for the same period in 2009 as a result of relocation of the Company’s offices to less expensive space and the closing of a storage facility in July 2010.

Professional fees for the six months ended December 31, 2010 increased $106,421 to $617,032, or approximately 21%, when compared with $510,611 for the six months ended December 31, 2009. Accounting fees for internal controls decreased approximately $19,000 when compared to the six months ended December 31, 2009.  Consulting fees related to the Company’s chief financial officer, who started in July 2010, was $86,000 in the 2010 six-month period and $0 in the comparable 2009 period. Legal fees to non-related parties increased approximately $118,000 to $272,000 in the 2010 period when compared with $154,000 for the six months ended December 31, 2009 and were comprised significantly of fees related to capital raises, SEC compliance, foreclosures and office lease issues.  Legal fees to related parties decreased to $0 in the 2010 six-month period from $4,500 in the prior fiscal year’s first-half due to curtailment of assignments during the current period. Legal fees associated with the Company’s life settlement portfolio decreased to $0 during the six months ended December 31, 2010 from approximately $59,000 in the comparable prior period  because of the activity relating to resolution of issues during the earlier period. Accounting fees were relatively flat, going from $111,000 in 2009 six-month period to $112,000 in the 2010 six-month period.  Audit fees decreased approximately $19,000 to $85,000, when compared with $104,000 for the six months ended December 31, 2009.  This decrease was due to a reduction in audit fees attributable to changes in the Company’s investment portfolio and other efficiencies.

Advisory Fees decreased approximately $192,794 or 61%, to $121,138 in the six months ended December 31, 2010 when compared with $313,932 for the six months ended December 31, 2009.  This decrease was primarily due to a one-time payment of $225,000 in the 2009 period, as specified in the Advisory Agreement.  

Miscellaneous administrative expenses increased $68,028, or 22%, to $373,661 for the six months ended December 31, 2010 when compared with $305,633 for the six months ended December 31, 2009. This increase was significantly due to a $56,000 increase in foreclosure expense and increases in moving and related office expenses aggregating $29,000, as partially offset by decreases in officers’ insurance, depreciation and computer expenses

Decrease in Net Assets from Resulting from Operations and Net Unrealized/Realized Gains (Losses)

The decrease in net assets resulting from operations decreased $2,256,687, or 61% to  $1,438,192 for the six months ended December 31, 2010 from $3,694,879  for the six months ended December 31, 2009.  This change in net assets from operations between periods was attributable primarily to a net decrease in investment loss of approximately $288,000 (primarily attributable to an increase in interest income resulting from the larger investment portfolio of approximately $343,000, as partially offset by an increase in expenses of approximately $55,000), a decrease in net realized loss from investments of approximately $495,000 and a change from unrealized depreciation on investments in the 2009 period to unrealized appreciation on investments in 2010 aggregating approximately $1,474,000.

Dividends on Participating Preferred Stock, accrued, but not declared, were $168,750 for the six months ended December 31, 2010. Dividends on Participating Preferred Stock were not declared for the six months ended December 31, 2009. They were subsequently declared in February 2010 and paid in March 2010. 

Financial Condition at December 31, 2010 and June 30, 2010

Assets and Liabilities

Total assets decreased $1,830,095 to $32,079,267 at December 31, 2010 as compared with total assets of $33,909,362 at June 30, 2010. This net decrease was primarily due to a decrease in cash and equivalents of approximately $5,800,000 less a net increase in the loan portfolio of $2,860,000; an increase in assets acquired in satisfaction of loans of $1,050,000  and a net increase in other assets aggregating approximately $100,000.  Total liabilities had a small decrease of approximately $223,000 between periods with a total of $25,310,000 at December 31, 2010 as compared with $25,533,000 at June 30, 2010. This decrease was substantially attributable to a decrease of $370,000 in notes payable, banks (the banks loans were paid off in July 2010), being partially offset by increases of approximately $84,000 in preferred dividends payable and approximately $37,000 in accrued expense and other liabilities.



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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.

At December 31, 2010, approximately 84% of the Company’s indebtedness was due to debentures issued to the SBA with fixed rates of interest plus user fees resulting in rates ranging from 4.39% to 5.54%. At December 31, 2010, approximately 12% of the Company’s indebtedness was represented by certain notes payable which were issued in December, 2009 and March 2010 (the “2009/2010 Notes”), and, until their amendment in January 2011,  bore an interest rate of 8.5%.  At December 31, 2010, the Company had available $120,000 of credit lines from its bank, subject to the statutory and regulatory limitations imposed by the SBA, of which $0 was drawn down as of that date.   

In September 2006, the Company invested in life settlement contracts which require the company to continue premium payments to keep the policies in force through the insured’s life expectancy, or until such time the policies are sold.  The Company may sell the policies at any time, at its sole discretion.  However, if the Company chooses to keep the policies, as of and after December 31, 2010, premium payments due through the life expectancy of the insured are approximately $3,807,000 through December 31, 2015 and approximately $1,994,000 thereafter (see Note 2 to the consolidated financial statements).

Loan amortization and prepayments also provide a source of funding for the Company. Prepayments on loans are influenced significantly by general interest rates, economic conditions and competition.

The Company will distribute at least 90% of its investment company taxable income, if any, and, accordingly, will continue to rely upon external sources of funds to finance growth. No dividends on the Company’s common stock have been paid in each of the fiscal years ended June 30, 2010 and 2009 or during the six months ended December 31, 2010, inasmuch as the Company had no taxable investment income during such periods. Accordingly, the Company has maintained its status as a RIC.

On January 19, 2011, the Company issued a Senior Secured Note in the principal amount of $1,500,000, with an interest rate of 12% per annum (except following an event of default under the Note, in which case the interest rate applicable to the Note would be 14%) to an unaffiliated lender (see Note 11 to the consolidated financial statements). In addition, in order to facilitate certain covenants under such Senior Secured Note, the Company entered into an Amendment to Promissory Note (the “Amendment”) with each holder of the 2009/2010 Notes. Pursuant to the Amendment, the interest rate on the 2009/2010 Notes was increased from 8.75% to 12.0% and the maturity date was extended until May 2012. The holders of the 2009/2010 Notes also waived certain covenants contained in the 2009/2010 Notes related to additional borrowings by the Company. In connection with the Amendment, the Company paid a fee equal to 1% of principal, or an aggregate of $30,000, to the holders of the 2009/2010 Notes.

To provide the funds necessary for expansion, management expects to raise additional capital and may incur, from time to time, additional bank indebtedness and additional SBA debentures. There can be no assurances that such additional financing will be available on acceptable terms.

Recently Issued Accounting Standards

Refer to Note 12 in the accompanying consolidated financial statements for a summary of the recently issued accounting pronouncements.

ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 investment 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 may differ significantly from the values that would be placed on the investment 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 component of the portfolio.  Any changes in estimated fair value are recorded in the Company’s statement of operations as net unrealized appreciation or depreciation on investments.



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In addition, the illiquidity of our investment portfolio may adversely affect our ability to dispose of investments at times when it may be advantageous for us to liquidate such investments.  Also, if we were required to liquidate some or all of the investments in the portfolio, the proceeds of such liquidation might be significantly less than the current value of such investments.  Because 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.

Assuming that the assets and liabilities were to remain constant and no actions were taken to alter the existing interest rate sensitivity, based on the balances at December 31, 2010, a hypothetical immediate 1% increase in interest rates would have resulted in an additional net increase in net assets from operations of $203,640 at December 31, 2010. This is based on a 1% increase in the Company’s loans receivable at variable interest rate terms. There is no offset to this because, at December 31, 2010, the Company had no outstanding variable rate loans payable. This hypothetical does not take into account interest rate floors or caps on the Company’s loan receivable portfolio.  No assurances can be given however, that actual results would not differ materially from the potential outcome simulated by these estimates.

ITEM 4.  CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management is responsible for establishing and maintaining adequate disclosure controls and procedures (as defined in Rules 13a-15( e ) and 15d-15( e) under the Exchange Act). Our management, with the participation of our Chief Executive Officer, President and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures.  Based on such evaluation, our management, including our Chief Executive Officer, President and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2010.

Because of their inherent limitations, disclosure controls and procedures may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that disclosure controls and procedures may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the six months ended  December 31,, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.



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IMPORTANT FACTORS RELATING TO FORWARD-LOOKING STATEMENTS

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report includes forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. The matters discussed in this Quarterly Report, as well as in future oral and written statements by management of Ameritrans Capital Corporation, that are forward-looking statements are based on current management expectations that involve substantial risks and uncertainties which could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking statements. Forward-looking statements relate to future events or our future financial performance. We generally identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar words. Important assumptions include our ability to originate new investments, achieve certain margins and levels of profitability, the availability of additional capital, and the ability to maintain certain debt to asset ratios. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this Quarterly Report should not be regarded as a representation by us that our plans or objectives will be achieved. The forward-looking statements contained in this Quarterly Report include but are not limited to statements as to:

·

our future operating results;

·

our business prospects and the prospects of our existing and prospective portfolio companies;

·

the impact of investments that we expect to make;

·

our informal relationships with third parties;

·

the dependence of our future success on the general economy and its impact on the industries in which we invest;

·

the ability of our portfolio companies to achieve their objectives;

·

our expected financings and investments;

·

our regulatory structure and tax treatment;

·

our ability to operate as a BDC and a RIC; and

·

the adequacy of our cash resources and working capital.

You should not place undue reliance on these forward-looking statements. The forward-looking statements made in this Quarterly Report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date of this Quarterly Report.



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PART II.  OTHER INFORMATION


INFORMATION INCORPORATED BY REFERENCE. Certain information previously disclosed in Part I of this quarterly report on Form 10-Q are incorporated by reference into Part II of this quarterly report on Form 10-Q.

Item 1. Legal Proceedings

The Company is not currently a party to any material legal proceeding. From time to time, the Company is engaged in various legal proceedings incident to the ordinary course of its business. In the opinion of the Company’s 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 the Company’s results of operations or financial condition.

Item 1A. Risk Factors

None

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Default upon Senior Securities

None

Item 4. Removed and Reserved

Item 5. Other Information

None.

Item 6. Exhibits

The Exhibits filed as part of this report on Form 10-Q are listed on the Exhibit Index immediately preceding such Exhibits, which Exhibit index is incorporated by reference.

Exhibit Index

(a )

Exhibits

31.1   Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.  (attached hereto)

31.2   Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.  (attached hereto)

32.1   Certification pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (attached hereto)

32.2   Certification pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (attached hereto)

(All other items of Part II are inapplicable)





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AMERITRANS CAPITAL CORPORATION

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


AMERITRANS CAPITAL CORPORATION


Dated: February 11, 2011


By: /s/ Michael Feinsod                                  

Michael Feinsod

Chief Executive Officer and President    








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