ITEM 1. BUSINESS OF AMERITRANS
GENERAL
Ameritrans Capital Corporation (the “Company”, “Ameritrans”, “our”, “us”, or “we”), is a Delaware closed-end investment company formed in 1998, which makes loans and investments with the goal of generating both current income and capital appreciation. Through its wholly-owned subsidiary, Elk Associates Funding Corporation (“Elk”), the Company makes loans to finance the acquisition and operation of small businesses as permitted by U.S. Small Business Administration (the “SBA”) regulations. The Company’s internet site is www.ameritranscapital.com. Ameritrans makes available, free of charge through its internet site its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
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. Ameritrans and Elk have also elected to be treated as regulated investment companies, or “RICs,” for tax purposes. Under the Internal Revenue Code, as a RIC, we will generally not be subject to U.S. federal corporate income tax on our investment income if we make qualifying distributions of our income to stockholders. We qualify for this treatment as long as we distribute at least 90% of our investment company taxable income to our stockholders as dividends. Elk’s dividends are payable to Ameritrans as Elk’s sole stockholder. For the fiscal year ended June 30, 2009, all 9 3/8% Cumulative Participating Redeemable Preferred Stock (“Preferred Stock”) dividends have been timely paid each quarter, with the exception of the dividend for the quarter ending June 30, 2009. On July 28, 2009, the Board of Directors announced that the Company decided not to pay the dividend of $0.28125 per share on its Preferred Stock for the period April 1, 2009 through June 30, 2009. On July 6, 2009 the Company filed a Form 8-K with the Securities and Exchange Commission stating that the declaration and payment of the dividend would be deferred until such time as the Company completed its review for the quarter ended June 30, 2009. The dividend on the Preferred Stock for the period April 1, 2009 through June 30, 2009 will remain in arrears and will be paid to shareholders, when and as declared by the Board of Directors of the Company.
No dividends on the Preferred Stock will be declared or paid or set apart for payment unless payments of interest and repayment of principal then due on any other indebtedness of the Company are made and dividends which have been deferred, have been, or contemporaneously are, declared and paid on all outstanding shares of Preferred Stock. Any dividend payment made on the outstanding shares of Preferred Stock shall first be credited against the dividend deferred for the period April 1, 2009 through June 30, 2009.
During the deferral period, the Company may not, among other things, declare, pay, or set apart for payment any dividend or other distribution on shares of common stock of the Company or any other security of the Company, if any, ranking junior to the Preferred Stock or call for redemption, redeem, purchase, or otherwise acquire for consideration any shares of junior stock or Preferred Stock.
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CURRENT BUSINESS ACTIVITIES
Ameritrans was organized to be the sole shareholder of Elk and to make loans and investments that Elk may not be permitted to make under SBA regulations. Ameritrans makes loans which have primarily been secured by real estate mortgages, senior corporate loans, life insurance settlements and equity investments which have historically been in income producing real estate properties, or in real estate construction projects.
Elk was organized primarily to provide long-term loans to businesses eligible for investments (“Small Business Concerns”) by small business investment companies (“SBICs”) under the U.S. Small Business Investment Act of 1958 (the “1958 Act”). Elk makes loans for financing diversified businesses that qualify for funding under SBA Regulations.
Elk Capital Corporation (“Elk Capital”) is a wholly owned subsidiary of Ameritrans. Since its inception, and through July 2009, Elk Capital had no operations. Since July 2009, Elk Capital has owned certain real estate acquired by the Company in satisfaction of foreclosure by Ameritrans.
During the fiscal year ended June 30, 2009, Elk had one (1) wholly-owned subsidiary: EAF Holding Corporation. EAF Leasing LLC and EAF Leasing II LLC were both liquidated during July 2007. Prior to their liquidation, EAF Leasing LLC and EAF Leasing II LLC owned and leased medallions acquired in satisfaction of foreclosures by Elk.
EAF Holding Corporation is the only wholly owned subsidiary of Elk. EAF Holding Corporation owns and operates certain real estate assets acquired in satisfaction of defaulted loans made by Elk although, at June 30, 2009 it did not hold any assets.
KEY QUANTITATIVE AND QUALITATIVE FINANCIAL MEASURES AND INDICATORS
Net Asset Value
Our net asset value (“NAV”) per share was $3.40 and $5.06 as of June 30, 2009 and June 30, 2008, respectively. As we must report our assets at fair value for each reporting period, NAV also represents the amount of stockholder’s equity per share for the reporting period. Our NAV is comprised mostly of investment assets less debt and other liabilities:
Please refer to the “Investment Portfolio” for a further description of our investment portfolio and the fair value thereof.
Revenue
Revenues consist primarily of investment income from interest on our investment portfolio and various ancillary fees related to our investment holdings.
Interest from Investments in Debt Securities. We generate interest income from our investments in debt securities which consist primarily of secured loans. Our debt securities portfolio is spread across multiple industries and geographic locations, and as such, we are broadly exposed to market conditions and business environments. We seek to limit concentration of exposure in any particular sector or issuer.
Capital Structuring Service Fees. We may earn ancillary structuring and other fees related to the origination and or investment in debt and investment securities.
Expenses
Expenses consist primarily of interest expense on outstanding borrowings, compensation expense and general and administrative expenses, including professional fees.
Interest and Amortization of Debt Issuance Costs. Interest expense is dependent on the average outstanding balances on our bank lines of credit and the base index rate for the period. Our SBA debentures carry fixed-rates of interest. Debt issuance costs represent fees and other direct costs incurred in connection with the Company’s borrowings. These amounts are capitalized and amortized ratably over the contractual term of the borrowing.
Compensation Expense. Compensation expense includes base salaries, bonuses, stock compensation, employee benefits and employer related payroll costs. The largest components of total compensation costs are base salaries; generally, base salaries are expensed as incurred. Our compensation expenses may also increase to reflect increased investment in personnel as we grow our business.
Professional Fees and General and Administrative Expenses. The balance of our expenses includes professional fees, occupancy costs and general administrative and other costs.
Net Unrealized Depreciation on Investments
During the year ended June 30, 2009, the Company’s investments had a net unrealized depreciation of approximately ($1,283,620). The net unrealized depreciation for the year ended June 30, 2009 is primarily due to decreases in the fair value of certain investments in our portfolio.
An unrealized write-down of $1,095,408 in the Company’s life settlement portfolio was the largest component of unrealized depreciation. Other significant factors were a write-down of the fair value of a loan receivable of $250,000 to reflect the Company’s estimate of its recoverable value in the collateral underlying the loan, a $195,000 decrease in the fair value of a loan to reflect the actual recovery achieved on that loan following the resale of the property subsequent to June 30, 2009. Also contributing to unrealized depreciation was a $95,000 reduction in the value of the Company’s LLC equity investments in a condominium construction project, a $62,000 net reduction in the fair value of the various real estate limited partnership investments. Offsetting these items were approximately $410,000 of unrealized losses which is primarily due to reclassifications as “realized losses”.
Net Decrease in Stockholders’ Equity Resulting From Operations
The net decrease in stockholders’ equity resulting from operations for the year ended June 30, 2009 was ($5,462,453), or a decrease of $1.61 per outstanding share of Common Stock. The factors contributing to this decrease were: an operating loss of ($2,939,960), an unrealized write-down of ($1,095,408) in the Company’s life settlement portfolio, a ($604,693) realized loss on an investment in a sanitary ware distributor, a ($339,371) realized loss on the sale of the Company’s taxicab medallion loan portfolio, a ($250,000) reduction in the value of the fair value of a loan, a ($195,000) reduction in the value of a loan due to the subsequent sale of the foreclosed property, a ($95,000) reduction in the value of an LLC equity investment in a condominium conversion construction project, an approximate ($94,000) write off of collateral previously acquired, and a total of approximately ( $455,000) of losses associated with fair value adjustments in other portfolio investments. Offsetting these amounts were increases to the fair value of the company’s corporate loan portfolio of approximately $185,000 and other miscellaneous increases of $420,000 to reflect realized values for assets acquired and certain other fair value adjustments.
Net Investment Income (Loss) and Net Realized Gains (Losses)
Net investment loss and net realized loss represent the net decrease in stockholders’ equity before net unrealized appreciation or depreciation on investments. For the year ended June 30, 2009, net investment income and realized loss were approximately $4,200,000, or $1.24 per share. Generally, we seek to fund our dividend from net investment income and net realized gains. For the year ended June 30, 2009, dividend distributions totaled $253,125 or $0.843 per share on our Preferred Stock.
Dividends
To comply with excise tax regulation imposed on RICs, we currently intend to distribute during each calendar year an amount at least equal to the sum of:
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98% of our ordinary net taxable income for the calendar year;
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98% of our capital gains, if any, in excess of capital losses for the one-year period ending on October 31 of the calendar year; and
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any net ordinary income and net capital gains for the preceding year that were not distributed during such year.
Generally, we seek to fund our dividend from GAAP current earnings, primarily from net interest and other income generated by our investment portfolio and without a return of capital or a high reliance on realized capital gains. The following table sets forth the dividends declared by us on our Common Stock and Preferred Stock:
Business Segments
We currently categorize our business into five segments: 1) Corporate Loans; 2) Commercial Loans; 3) Life Insurance Settlements, 4) Equity Investments; and 5) Taxicab Medallion Finance.
Corporate Loans
Beginning in June 2007, the Company began investing in middle market syndicated loans. The Company’s investment strategy is to build a diverse portfolio of corporate loans (“Corporate Loans”) to middle market companies (the “Corporate Loan Strategy”). Given the size of the Corporate Loan market, we believe that the Corporate Loan Strategy will allow us to increase the Company’s asset base significantly, assuming the Company can obtain adequate financing. As of June 30, 2009, the Company had $12,193,255 of assets invested as part of our Corporate Loan Strategy.
To pursue its Corporate Loan Strategy, the Company has engaged an adviser, Velocity Capital Advisors, LLC (“Velocity” or “VCA”), which will be responsible for recommending to the Company for investment and thereafter recommending action with respect to those investments which have been reviewed and approved by the Company. The Company’s stockholders on March 18, 2008 approved an Investment Management and Advisory Agreement pursuant to which Velocity would act as the Company’s and Elk’s adviser with respect to the Corporate Loan Strategy, subject to such agreement’s approval by the U.S. Small Business Administration. After discussions with SBA, the Company has restructured its proposed relationship with VCA and plans to submit a revised Advisory Agreement to its shareholders for approval. The terms and conditions of the Agreement are substantially the same to the prior agreement except Elk will not be a party to the revised Advisory Agreement and, as such, the Company does not believe SBA approval will be necessary. The principals of VCA have worked together for more than fifteen years investing in middle market companies. As such, the VCA principals have been involved in all aspects of middle market investing including origination, negotiation of terms, portfolio management, distribution and syndication, restructuring and asset sales. The VCA team has experience in assembling portfolios of middle market loans and investments and managing these portfolios through several credit cycles, including both attractive and stressed credit environments.
The Company defines the middle market as comprised of companies with earnings before interest, taxes and depreciation (“EBITDA”) of between $10 and $200 million. The Company believes many opportunities exist to provide loans to companies of this size, due to:
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The large size of the market, with an estimated 17,500 companies,
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The high level of historical acquisition activity in this sector of the market,
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The current dislocation of banks lending to middle market companies,
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The significant amount of private equity that has been raised to invest explicitly in middle market companies, and
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Annual senior secured loan volume estimated to be over $30 billion.
Ameritrans intends to invest primarily in first lien term loans of middle market companies which, because of their priority in a company’s capital structure, we expect will have lower default rates and higher rates of recovery of principal if a default does occur. The Company’s middle market business will primarily target companies that have strong historical cash flows, strong collateral coverage, equity sponsorship, experienced management teams and identifiable and defendable market positions. The Corporate Loan Strategy will initially focus on average investments on the part of the Company of between $1 million and $3 million, with an objective of building a portfolio of Corporate Loans with significant diversity across both issuers and industries.
The Company expects that the investments made as part of the Corporate Loan Strategy will generate current income, capital appreciation and fee income related to the origination and investment management of such investments. Growing our portfolio of Corporate Loan assets will require additional capital and the use of leverage to carry out this plan.
Commercial Loans
The Company began making loans to diversified small businesses (“Commercial Loans”) primarily in the New York City metropolitan area in 1985. Until the Company commenced the implementation of its Corporate Loan Strategy, the Company had been increasing this portfolio on a selective basis, with a concentration on loans to operators of restaurants, laundromats, commercial construction, broadcasting telecommunications and other diversified industries. Many of the Company’s commercial loans are secured by real estate mortgages which are primarily first mortgages on various properties. At June 30, 2009, the dollar amount of the Company’s Commercial Loans that were secured by real estate mortgages was $8,830,921. At June 30, 2009, the dollar amount of the Company’s Commercial Loans that were not secured by real estate mortgages was $2,462,211.
The Company’s non real estate secured Commercial Loans primarily finance either the purchase of the equipment and related assets necessary to open a new business or the purchase or improvement of an existing business. The Company generally holds these loans to maturity, although from time to time it sells participation interests in its loans to share risk, or purchases participation interests in loans originated by other finance companies. The Company generally obtains interest rates on its Commercial Loans that are higher than can be obtained on Corporate Loans. The Company believes that the higher yield on Commercial Loans compensates for their higher risk of default relative to other investment categories and that it will benefit from the diversification of its portfolio. Interest rates on currently outstanding Commercial Loans range from 5.0% to 15.75%. At June 30, 2009, the Company’s Commercial Loans totaled $11,293,132 in aggregate.
SBA Regulations set a ceiling on the interest rates that an SBIC may charge its borrowers. The maximum rate of interest that Elk was allowed to charge its borrowers for loans originated during the year ended June 30, 2009 was 19%.
Equity Investments
Ameritrans, to a limited extent, makes equity investments. These investments may be independent or incidental to our other lines of business. Equity securities in Ameritrans’ investment portfolio at June 30, 2009 totaled $802,300. Under SBA rules, Elk may make additional equity investments; however, unless necessary to protect a prior investment of Elk that is at risk, equity investments shall not exceed 20% of Elk’s total assets.
Life Settlement Contracts
In September, 2006, the Company entered into a joint venture agreement (the “Agreement”) with Vibrant Capital Corporation (“Vibrant”), an unaffiliated company, to purchase previously issued life insurance policies owned by unrelated individuals. Under the terms of the Agreement, the Company was designated as nominee to maintain possession of the policies and process transactions related to such policies until the policies are subsequently sold or paid off. The Company is entitled to receive from Vibrant a twelve percent (12%) annual return on the amount of funds paid by the Company and outstanding on a monthly, prorated basis. Proceeds from the sale of the policies are to be distributed, net of direct expenses, as defined in the Agreement.
As of June 30, 2009, the fair value of the Company’s life settlement portfolio was $1,764,081, which represents 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 related to seven (7) life insurance policies with an aggregate face value of $30,750,000. It was originally contemplated that premiums on the policies will continue to be paid by the Company, until the policies are sold. If an insured dies before the policy is resold, 50% of the death benefit proceeds of the policy will be paid to the insured party’s named beneficiary, and the other 50% of the death benefit proceeds will be paid to the Company, to be distributed in accordance with the terms of the Agreement. Under the Agreement, the Company may sell the policies at any time, at its sole discretion.
On April 2, 2009, the Company learned that Edward Stein, the principal of Vibrant, had been charged with securities fraud by the Securities and Exchange Commission (“SEC”) in connection with an alleged Ponzi scheme. The SEC obtained a court order freezing the assets of Mr. Stein and other entities with which he is involved, including Vibrant. On April 14, 2009, a receiver was appointed to handle the affairs of Vibrant. The Company has provided documents and information to the SEC pursuant to a subpoena. The Receiver has agreed, in writing, to adhere to the terms of the Joint Venture Agreement between Vibrant and Ameritrans, and is seeking to sell the policies and provide Ameritrans with its’ share of the proceeds.
As of June 30, 2009, the Company continued to work closely with the Receiver. The Receiver has determined that all of the policies which the Company had an interest in were in full force. Subsequent to April 2, 2009 the Company and the Receiver have each advanced certain premiums to continue the policies in effect pending their anticipated sale.
In Fiscal 2008, after a review of the current financing and regulatory environment, and other opportunities to make investments in the Corporate Loan Strategy and commercial loans, the Company had 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.
Taxicab Medallion Finance
Since 1980, the Company’s primary business was the investment in loans secured by taxicab medallions. Over recent years, this niche finance market changed significantly. Collateral values increased dramatically while the average rate obtainable from borrowers steadily decreased. As the marketplace for these investment opportunities became more competitive, management and the Board of Directors had been exploring strategic alternative investment strategies for the Company. As discussed below, on October 29, 2008, the Company closed on the sale of substantially all of the Company’s taxicab medallion loans. This transaction was approved by the Company’s shareholders on August 26, 2008. Under the terms of the Loan Purchase Agreement, the Company, and certain of its executives, agreed not to compete in these business areas for periods ranging from three to five years. As of June 30, 2009, the Company had remaining permitted investments of $356,700 in taxicab medallion loans not sold pursuant to the Loan Purchase Agreement.
The following table shows the Company’s portfolio by security type at June 30, 2009 and June 30, 2008:
(1) Represents percentage of total portfolio at fair value.
Valuation Breakdown
SOURCES OF FUNDS
The Company funds its operations from a variety of sources. Elk is authorized to borrow money and issue debentures, promissory notes and other obligations, subject to SBA regulatory limitations. Other than the subordinated debentures issued to the SBA, Elk has to date borrowed funds only from banks. As of June 30, 2009, Elk maintained two lines of credit with an overall borrowing limit of $472,000. At June 30, 2009, Elk had $370,000 outstanding under these lines. The credit lines mature on October 31, 2009 and November 2, 2009, and currently bear interest at rates from 3.1% to 4.5%. Pursuant to the terms of the loan agreements, Elk is required to comply with certain terms, covenants and conditions, and has pledged its loans receivable and other assets as collateral for the above lines of credit. Elk was in compliance with all covenants and credit terms at June 30, 2009.
As interest rates fluctuate, our cost of funds may also fluctuate while the rates on our outstanding loans to a significant number of our borrowers remains fixed, and our profitability therefore varies. In order to partially mitigate this variance, from time to time we have purchased interest rate swaps. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations -- Interest Expense” and Note 13 of Notes to Consolidated Financial Statements.
Pursuant to an agreement with SBA, (the “SBA Agreement”), Elk agreed to limit the aggregate of its indebtedness based on a computation of a borrowing base each quarter. The borrowing base computation is calculated to determine that the total amount of debt due on senior bank debt and SBA debentures does not exceed approximately 80% of the value of performing loans and investments in Elk’s portfolio. Loans that are more than 90 days in arrears are valued at a lower amount in computing the borrowing base. As of June 30, 2009, Elk was in compliance with the borrowing-base.
In connection with the SBA Agreement, Elk has also entered into an intercreditor agreement (the “Intercreditor Agreement”) and a custodian agreement (the “Custodian Agreement”) with its banks and the SBA. Pursuant to the Custodian Agreement, the banks and the SBA appointed Israel Discount Bank of New York as the custodian to hold certain notes, security agreements, financing statements, assignments of financing statements, and other instruments and securities as part of the collateral for Elk’s indebtedness to the banks and the SBA. The Intercreditor Agreement sets forth the respective rights and priorities of the banks and the SBA with respect to the repayment of indebtedness to the banks and the SBA and as to their respective interests in the collateral. Pursuant to the Intercreditor Agreement, the banks consented to the grant by Elk to the SBA of a security interest in the collateral, which security interest ranks junior in priority to the security interests of the banks. The Intercreditor Agreement provides Elk with a right of substitution, permitting other new bank lenders to become parties to the Intercreditor Agreement.
COMPETITION
Banks, credit unions, other finance companies, and other private lenders compete with the Company in the origination of Corporate and Commercial loans. A number of entities compete with us to make the types of investments that we make in middle market companies. We compete with other business development companies, public and private funds, commercial and investment banks, commercial finance companies, insurance companies, high yield investors, hedge funds, and, to the extent they provide an alternative form of financing, private equity funds. Many of our competitors are substantially larger and have considerably greater financial resources than we do. Some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the Investment Company Act imposes on us as a BDC.
EMPLOYEES
As of June 30, 2009, we employed a total of nine (9) employees.
INVESTMENT POLICIES
Ameritrans and Elk Investment Policies
The investment policies described below are the fundamental policies of Ameritrans and Elk (together the “Company”). Fundamental policies, that is, policies that cannot be changed without the approval of the holders of a majority of Ameritrans’ outstanding voting securities, as defined under the 1940 Act, are described below. A “majority of Ameritrans’ outstanding voting securities” as defined under the 1940 Act means the lesser of (i) 67% of the shares represented at a meeting at which more than 50% of the outstanding shares are represented or (ii) more than 50% of the outstanding shares. Because Ameritrans is the only stockholder of Elk, the Company has agreed with the Commission that Elk’s fundamental investment policies will be changed only by the vote of the Ameritrans stockholders.
1.
The Company may invest up to 100% of its assets in restricted securities.
2.
The Company does not intend to engage in the purchase and sale of real estate. However, the Company may elect to purchase and sell real estate in order to protect any of its prior investments which it considers at risk.
3.
The Company may engage in short sales of securities in order to hedge securities held in its portfolio.
4.
The Company may write or buy put or call options in order to hedge a current securities position or to hedge the Company’s portfolio in general.
5.
The Company may engage in the purchase or sale of commodities or commodity contracts, including futures contracts (i) where necessary in working out distressed loan or investment situations and (ii) to otherwise hedge all or a portion of the securities positions in the Company’s portfolio.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a general summary of the federal income tax principles applicable to Ameritrans, based on the currently existing provisions of the Internal Revenue Code and the regulations thereunder. This summary does not purport to be a complete description of the tax considerations applicable to Ameritrans or to the holders of its Common Stock. These principles, in general, also apply to Elk, because the sole direct stockholder of Elk is Ameritrans.
Ameritrans has elected to be treated as a “regulated investment company” (a “RIC”) under Section 851 of the Internal Revenue Code, Elk has been treated as a RIC since 1984. A regulated investment company may deduct, for federal income tax purposes, most dividends paid to stockholders, thereby avoiding federal income taxation at the corporate level.
TAXATION OF REGULATED INVESTMENT COMPANIES
In order to qualify as a RIC for a given fiscal year, a company must meet each of the following conditions for that fiscal year:
(a)
The company must be registered as an investment company under the 1940 Act at all times during the year.
(b)
At least 90% of the company’s gross income for the year must be derived from interest, gains on the sale or other disposition of stock or other securities, dividends and payment with respect to securities loans.
(c)
Less than 30% of the company’s gross income must be derived from the sale or other disposition of securities held for less than three months.
(d)
At the close of each quarter, at least 50% of the value of the company’s total assets must be represented by cash, cash items (including receivables), securities of other RICs and securities of other issuers, except that the investment in a single issuer of securities may not exceed 5% of the value of the RIC’s assets, or 10% of the outstanding voting securities of the issuer.
(e)
At the close of each quarter, and with the exception of government securities or securities of other RICs, no more than 25% of the value of a RIC’s assets may be made up of investments in the securities of a single issuer or in the securities of two or more issuers controlled by the RIC and engaged in the same or a related trade or business. However, if a non-RIC entity controlled by the RIC subsequently sustains internally generated growth (as opposed to growth via acquisitions), the diversification requirement will not be violated even if the non-RIC subsidiary represents in excess of 25% of the RIC’s assets.
(f)
The company must distribute as dividends at least 90% of its investment company taxable income (as defined in Section 852 of the Internal Revenue Code), as well as 90% of the excess of its tax-exempt income over certain disallowed tax-exempt interest deductions. This treatment substantially eliminates the “double taxation” (i.e., taxation at both the corporate and stockholder levels) that generally results from the use of corporate investment vehicles. A RIC is, however, generally subject to federal income tax at regular corporate rates on undistributed investment company taxable income.
In order to avoid the imposition of a non-deductible 4% excise tax on its undistributed income, a company is required, under Section 4982 of the Internal Revenue Code, to distribute within each calendar year at least 98% of its ordinary income for such calendar year and 98% of its capital gain net income (reduced by the RIC’s net ordinary loss for the calendar year, but not below its net capital gain) for the one-year period ending on October 31 of such calendar year.
The tax benefits available to a qualified RIC are prospective, commencing with the fiscal year in which all the conditions listed above are met, and would not permit Ameritrans to avoid income tax at the corporate level on income earned during prior taxable years. If Ameritrans fails to qualify as a RIC for a given fiscal year, Ameritrans will not be entitled to a federal income tax deduction for dividends distributed, and amounts distributed as stockholder dividends by Ameritrans will therefore be subject to federal income tax at both the corporate level and the individual level.
Dividends distributed by Elk to Ameritrans will constitute ordinary income to Ameritrans to the extent derived from non-capital gain income of Elk, and will ordinarily constitute capital gain income to Ameritrans to the extent derived from capital gains of Elk. However, since Ameritrans is also a RIC, Ameritrans will, in general, not be subject to a corporate level tax on its income to the extent that it makes distributions to its stockholders. If Elk does not qualify as a RIC for any reason in any fiscal year, it will not be entitled to a federal income tax deduction for dividends distributed, and will instead be liable to pay corporate level tax on its earnings. Further, if Elk does not qualify as a RIC, such failure will cause Ameritrans to fail to qualify for RIC status as well, as long as Elk stock held by Ameritrans represents more than 25% of Ameritrans’ assets. In such a case, Ameritrans will be taxed on dividends received from Elk, subject to the deduction for corporate dividends received, which is currently 70%. Thus, if Elk fails to qualify as a RIC for any reason, its earnings would be taxed at three levels: to Elk, in part to Ameritrans, and finally, when they are distributed by Ameritrans, to our stockholders.
As long as Ameritrans qualifies as a RIC, dividends distributed by Ameritrans to its stockholders out of current or accumulated earnings and profits constitute ordinary income to such stockholders to the extent derived from ordinary income and short-term capital gains of Ameritrans (such as interest from loans by Ameritrans). Any long-term capital gain dividends distributed by Ameritrans would constitute capital gain income to Ameritrans stockholders. To the extent Ameritrans makes distributions in excess of current and accumulated earnings and profits, these distributions are treated first as a tax-free return of capital to the stockholder, reducing the tax basis of the stockholder’s stock by the amount of such distribution, but not below zero, with distributions in excess of the stockholder’s basis taxable as capital gains if the stock is held as a capital asset.
TAXATION OF SBICS
As a result of Elk’s status as a licensed SBIC under the 1958 Act, Elk and its stockholders qualify for the following tax benefits:
(i)
Under Section 243 of the Internal Revenue Code, Elk may deduct 100% of the dividends received by it from domestic corporations in which it has made equity investments, regardless of whether such corporations are subsidiaries of Elk (in contrast to the generally applicable 70% deduction under the Code).
(ii)
Under Section 1243 of the Internal Revenue Code, losses sustained on Elk’s investments in the convertible debentures, or stock derived from convertible debentures, of Small Business Concerns are treated as ordinary losses rather than capital losses to Elk.
STATE AND OTHER TAXES
Ameritrans is also subject to state and local taxation. The state, local and foreign tax treatment may not conform to the federal tax treatment discussed above. Stockholders should consult with their own tax advisors with respect to the state and local tax considerations pertaining to Ameritrans.
THE INVESTMENT COMPANY ACT OF 1940
Ameritrans and Elk are closed-end, non-diversified management investment companies that have elected to be treated as BDCs and, as such, are subject to regulation under the 1940 Act. The 1940 Act contains prohibitions and restrictions relating to transactions between investment companies and their affiliates, principal underwriters and affiliates of those affiliates or underwriters. In addition, the 1940 Act provides that a BDC may not change the nature of its business so as to cease to be, or to withdraw its election as, a BDC unless so authorized by the vote of a “majority of its outstanding voting securities,” as defined under the 1940 Act.
BDCs are permitted, under specified conditions, to issue multiple classes of indebtedness and one class of stock (collectively, “senior securities,” as defined under the 1940 Act) senior to shares of Common Stock if the asset coverage of such indebtedness and all senior securities is at least 200% immediately after each such issuance. In addition, while senior securities are outstanding, provision must be made to prohibit the declaration of any dividend or other distribution to stockholders (except stock dividends) or the repurchase of such securities or shares unless we meet the applicable asset coverage ratios at the time of the declaration of the dividend or distribution or repurchase. Pursuant to an exemptive order issued by the SEC, subordinated SBA debentures, preferred stock guaranteed by or issued to the SBA by Elk, and Elk bank borrowings are exempt from the asset coverage requirements of the 1940 Act. Additionally, this exemptive order applies to any future Elk SBIC subsidiaries. Ameritrans may, and currently does, when consolidating, exclude Elk borrowings for purposes of the asset coverage rules. The exemptive order also grants certain relief from the asset coverage ratios applicable to BDCs. Ameritrans and Elk must individually comply with Section 18 and Section 61(a) of the 1940 Act. So long as Ameritrans and Elk individually comply with Section 18, for purposes of consolidation, any borrowings of Elk will not be considered senior securities for asset coverage purposes and as such, will not affect Ameritrans’ asset coverage ratio.
Under the 1940 Act, a BDC may not acquire any asset other than Qualifying Assets unless, at the time the acquisition is made, certain Qualifying Assets represent at least 70% of the value of the company’s total assets. The principal categories of Qualifying Assets relevant to our proposed business are the following:
(1)
Securities purchased in transactions not involving a public offering from the issuer of such securities, which issuer is an eligible portfolio company. An “eligible portfolio company” is defined in the 1940 Act as any issuer which:
(a)
is organized under the laws of, and has its principal place of business in, the United States;
(b)
is not an investment company other than an SBIC wholly-owned by the BDC; and
(c)
satisfies one or more of the following requirements:
(i)
the issuer does not have a class of securities with respect to which a broker or dealer may extend margin credit;
(ii)
the issuer is controlled by a BDC and the BDC has an affiliated person serving as a director of issuer;
(iii)
the issuer has total assets of not more than $4,000,000 and capital and surplus (stockholders’ equity less retained earnings) of not less than $2,000,000, or such other amounts as the SEC may establish by rule or regulation;
(iv)
the issuer meets such requirements as the SEC may establish from time to time by rule or regulation; or
(v)
does not have any class of securities listed on a national securities exchange; or
(vi)
has a class of securities listed on a national securities exchange, but has an aggregate market value of outstanding voting and non-voting common equity of less than $250 million.
(2)
Securities for which there is no public market and which are purchased in transactions not involving a public offering from the issuer of such securities where the issuer is an eligible portfolio company which is controlled by the BDC.
(3)
Securities received in exchange for or distributed on or with respect to securities described in (1) or (2) above, or pursuant to the exercise of options, warrants or rights relating to such securities.
(4)
Cash, cash items, government securities, or high quality debt securities maturing in one year or less from the time of investment.
In order to count securities as Qualifying Assets for the purpose of the 70% test, the BDC must either control the issuer of the securities or must make available to the issuer of the securities significant managerial assistance; except that, where the BDC purchases such securities in conjunction with one or more other persons acting together, one of the other persons in the group may make available the required managerial assistance. We believe that the common stock of Elk held by Ameritrans is a Qualifying Asset. Making available managerial assistance means, among other things, any arrangement whereby the business development company, through its directors, officers, or employees, offers to provide, and, if accepted, does so provide, significant guidance and counsel concerning the management, operations, or business objectives and policies of a portfolio company. As provided in the 1940 Act, a loan made by an SBIC is considered the “offering of managerial assistance.”
THE SMALL BUSINESS INVESTMENT ACT OF 1958
The 1958 Act authorizes the organization of SBICs as vehicles for providing equity capital, long term financing and management assistance to Small Business Concerns. A Small Business Concern, as defined in the 1958 Act and the SBA Regulations, is a business that is independently owned and operated and which is not dominant in its field of operation. In addition, at the end of each fiscal year, at least 20% of the total amount of loans made since April 25, 1994 by each SBIC must be made to a subclass of Small Business Concerns that (i) have a net worth, together with any affiliates, of $6 million or less and average annual net income after U.S. federal income taxes for the preceding two (2) years of $2 million or less (average annual net income is computed without the benefit of any carryover loss), or (ii) satisfy alternative criteria under SBA Regulations that focus on the industry in which the business is engaged and the number of persons employed by the business or its gross revenues. SBA Regulations also prohibit an SBIC from providing funds to a Small Business Concern for certain purposes, such as relending and reinvestment.
Under current SBA Regulations and subject to local usury laws, the maximum rate of interest that Elk may charge may not exceed the higher of (i) 19% or (ii) a rate calculated with reference to Elk’s weighted average cost of qualified borrowings, as determined under SBA Regulations or the SBA’s current debenture interest rate. The current maximum rate of interest permitted on loans originated by Elk is 19%. At June 30, 2009, Elk’s outstanding loans had a weighted average rate of interest of 8.4%. SBA Regulations also require that each loan originated by SBICs have a term of between one year and twenty years.
The SBA restricts the ability of SBICs to repurchase their capital stock, to retire their subordinated SBA debentures and to lend money to their officers, directors and employees or invest in affiliates thereof. The SBA also prohibits, without prior SBA approval, a “change of control” or transfers which would result in any person (or group of persons acting in concert) owning 10% or more of any class of capital stock of an SBIC. A “change of control” is any event which would result in the transfer of the power, direct or indirect, to direct the management and policies of an SBIC, whether through ownership, contractual arrangements or otherwise. Because Ameritrans owns 100% of Elk, transfers of more than 10% of any class of voting securities of Ameritrans would require prior written SBA approval.
Under SBA Regulations, without prior SBA approval, loans by licensees with outstanding SBA leverage to any single Small Business Concern may not exceed 20% of an SBIC’s Leveragable Capital. Under the terms of the SBA Agreement, however, Elk is authorized to make loans to Disadvantaged Concerns in amounts not exceeding 30% of its respective Leveragable Capital.
SBICs must invest funds that are not being used to make loans in investments permitted under SBA Regulations. These permitted investments include direct obligations of, or obligations guaranteed as to principal and interest by, the government of the United States with a term of 15 months or less and deposits maturing in one year or less issued by an institution insured by the FDIC. SBICs may purchase voting securities of Small Business Concerns in accordance with SBA Regulations. SBA Regulations prohibit SBICs from controlling a Small Business Concern except where necessary to protect an investment. SBA Regulations presume control when SBICs purchase (i) 50% or more of the voting securities of a Small Business Concern if the Small Business Concern has less than 50 stockholders or (ii) more than 20% (and in certain situations up to 25%) of the voting securities of a Small Business Concern if the Small Business Concern has 50 or more stockholders.
COMMON STOCK DIVIDEND REINVESTMENT PLAN
We have authorized a dividend reinvestment plan (“DRIP”) that provides for reinvestment of our distributions on behalf of our common stockholders, unless a stockholder elects to receive cash as in the plan. As a result, if our Board of Directors authorizes, and we declare, a cash dividend, then our stockholders who have not “opted out” of our dividend reinvestment plan will have their cash dividends automatically reinvested in additional shares of our Common Stock, rather than receiving the cash.
With respect to the DRIP, no action will be required on the part of a registered stockholder to have his or her cash dividends reinvested in shares of Common Stock. A registered stockholder may elect to receive an entire dividend in cash by sending written notice to Continental Stock Transfer & Trust Company, the plan administrator and the Company’s transfer agent, so that such notice is received by the plan administrator no later than the record date for dividends to stockholders. Information regarding this plan will be sent to each stockholder as soon as practicable.
ITEM 1A.
ITEM 1A. RISK FACTORS
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
You should carefully consider these risk factors, together with all of the other information included in this Annual Report on Form 10-K, including our consolidated financial statements and the related notes thereto before making a decision to purchase our Common Stock and Preferred Stock. The risks set out below are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. If any of the following events occur, our business, financial condition and results of operations could be materially adversely affected. In such case, our net asset value and the trading price of our Common Stock and Preferred Stock could decline, and you may lose all or part of your investment.
A failure on our part to maintain our status as a BDC would significantly reduce our operating flexibility.
If we do not continue to qualify as a BDC, we might be regulated as a closed-end investment company under the 1940 Act, which would significantly decrease our operating flexibility.
Our ability to grow depends on our ability to raise capital.
We need to periodically access the capital markets to raise cash to fund new investments. Unfavorable economic conditions could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. Since exiting the taxicab medallion finance business and paying down our bank debt, the Company has been unable to successfully access the capital markets. We believe this is due to the severe current economic and credit conditions and that it has limited our ability to grow our business and fully execute our business strategy and has decreased our earnings. With certain exceptions, we are only allowed to borrow amounts such that our asset coverage, on a consolidated basis, as defined in the 1940 Act, equals at least 200% after such borrowing. The amount of leverage that we employ depends on our board of directors’ assessment of market and other factors at the time of any proposed borrowing. We cannot assure you that we will be able to maintain our current loan facilities or obtain other lines of credit at all or on terms acceptable to us.
In December 2008, Elk applied for a commitment from SBA for $15 million in additional guaranteed debentures. In June 2009, management met with representatives from SBA to further the processing of this application. Management has had continuous communication with SBA to provide updated information on the Company and its investment portfolio, including the development of the Corporate Loan Strategy.
Based upon SBA material reviewed by the Company, following the passage of the American Recovery and Reinvestment Act of 2009 (the “Recovery Act”), certain changes were made to the SBIC program. The Recovery Act changed the formula for calculating the maximum amount of outstanding leverage that can be made available to an SBIC. Based upon these changes, and discussions with SBA, Elk expects, should additional debentures be granted, that it would be immediately eligible for approximately $9.5 million in additional debentures. Elk would remain eligible to apply for approximately $10 million of additional debentures based on its current capital base. In general SBA will only approve leverage request in excess of two tiers of equity after the SBIC has clearly demonstrated consistent, sustainable profitability based on a conservative investment strategy that limits downside risk.
Should the Company raise additional capital and contribute it to Elk as equity, Elk will be eligible to apply for additional debentures of approximately two times such equity. In general, the maximum amount of leverage made available to any one SBIC may not exceed 300 percent of the SBIC’s Regulatory Capital or $150 million, whichever is less. As of June 30, 2009, Elk’s Regulatory Capital was approximately $10.6 million.
As of the date of this filing, SBA has not made a formal determination regarding Elk’s debenture application. Based upon our continued discussions, we remain cautiously optimistic that Elk ‘s request for additional debentures will be approved. For the reasons discussed above, we believe the amount of debentures that will be approved will be approximately $9.5 million.
We will be subject to corporate-level income tax if we are unable to qualify as a RIC.
To qualify as a RIC under the Code, we must meet certain income source, asset diversification and annual distribution requirements.
The annual distribution requirement for a RIC is satisfied if we distribute to our stockholders on a timely basis an amount equal to at least 90% of our ordinary income and net short-term capital gain in excess of net long-term capital losses, if any, reduced by deductible expenses, for each year. Because we use debt financing, we are subject to certain asset coverage ratio requirements under the 1940 Act and financial covenants under our loan agreements that could, under certain circumstances, restrict us from making distributions necessary to qualify as a RIC. If we are unable to obtain cash from other sources, we may fail to qualify as a RIC and, thus, may be subject to corporate level income tax. Because we must make distributions to our stockholders as described above, such amounts, to the extent a stockholder is not participating in our dividend reinvestment plan, will not be available to fund investment originations.
To qualify as a RIC, we must also meet certain asset diversification requirements at the end of each calendar quarter. Failure to meet these tests may result in our having to (i) dispose of certain investments quickly or (ii) raise additional capital to prevent the loss of RIC status. If we fail to qualify as a RIC for any reason and become or remain subject to corporate income tax, the resulting corporate taxes could substantially reduce our net assets, the amount of income available for distribution and the amount of our distributions. Such a failure would have a material adverse effect on us and our stockholders.
We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income.
For federal income tax purposes, we include in income certain amounts that we have not yet received in cash, such as original issue discount, which may arise if we receive warrants in connection with the making of a loan or possibly in other circumstances, or contracted payment-in-kind interest, which represents contractual interest added to the loan balance and due at the end of the loan term. Such original issue discount or increases in loan balances are included in income before we receive any corresponding cash payments. We also may be required to include in income certain other amounts that we will not receive in cash, including, for example, non-cash income from pay-in-kind securities and deferred payment securities.
Since in certain cases we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the tax requirement to distribute an amount equal to at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, reduced by deductible expenses, to maintain our status as a RIC. Accordingly, we may have to sell some of our investments at times we would not consider advantageous, raise additional debt or equity capital or reduce new investment originations to meet these distribution requirements. If we are not able to obtain cash from other sources, we may fail to qualify as a RIC and thus be subject to corporate-level income tax.
Our historical banks will not permit us to use our bank borrowings for Corporate Loans subsequent to the sale of our taxi medallion loan portfolio.
Following the completion of the sale of our taxi medallion loan portfolio our banks provided the Company with available credit for real estate secured loans, but will not permit us to utilize our bank borrowings for our Corporate Loan Strategy. In order to successfully grow our Corporate Loan portfolio the Company will be required to obtain other sources of capital and/or refinance our bank lines with other banks that will permit investment in Corporate Loans.
Regulations governing our operation as a BDC affect our ability to, and the way in which, we raise additional capital.
We may issue debt securities or preferred stock, which we refer to collectively as “senior securities,” and borrow money from banks or other financial institutions up to the maximum amount permitted by the 1940 Act. Under the provisions of the 1940 Act, we are permitted, as a BDC, to incur indebtedness or issue senior securities only in amounts such that our asset coverage, as defined in the Investment Company Act, equals at least 200%, subject to certain exemptive relief the Company has received with respect to calculating this amount, after such incurrence or issuance. If the value of our assets declines, we may be unable to satisfy this test, which would prohibit us from paying dividends and could prevent us from maintaining our status as a RIC. If we cannot satisfy this test, we may be required to sell a portion of our investments and, depending on the nature of our leverage, repay a portion of our indebtedness at a time when such sales may be disadvantageous. We are not generally able to issue and sell our Common Stock at a price below net asset value per share. We may, however, sell our Common Stock, or warrants, options or rights to acquire our Common Stock, at a price below the current net asset value of the Common Stock if our board of directors determines that such sale is in our best interests and the best interests of our stockholders, and, in certain instances, our stockholders approve such sale. In any such case, the price at which our securities are to be issued and sold may not be less than a price which, in the determination of our board of directors, closely approximates the market value of such securities (less any commission or discount). As our Common Stock trades at a discount to net asset value, this restriction has adversely affected our ability to raise capital.
Many of our portfolio investments are not publicly traded and, as a result, there is uncertainty as to the value of our portfolio investments.
A large percentage of our portfolio investments are not publicly traded. The fair value of investments that are not publicly traded may not be readily determinable. We value these investments quarterly at fair value as determined in good faith by our board of directors based on the input of our management and audit committee. However, we may be required to value our investments more frequently as determined in good faith by our board of directors to the extent necessary to reflect significant events affecting their value. The types of factors that may be considered in valuing our investments include the enterprise value of the portfolio company, the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings, the markets in which the portfolio company does business, comparison to publicly traded companies, discounted cash flow and other relevant factors. Because such valuations, and particularly valuations of private investments and private companies, are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for these investments existed and may differ materially from the values that we may ultimately realize.
Our ability to achieve our investment objective depends on our senior management’s ability to support our investment process; if the Company were to lose any of its senior management, our ability to achieve our investment objective could be significantly harmed.
We have a small number of employees and, as a result, we depend on the investment expertise, skill and network of business contacts of our senior management. Our senior management team, with the assistance of outside advisors, evaluates, negotiates, structures, executes, monitors and services our investments. Our future success will depend to a significant extent on the continued service and coordination of the principals of our investment senior management team. The departure of any of these individuals could have a material adverse effect on our ability to achieve our investment objective.
The lack of liquidity in our investments may adversely affect our business.
As we generally make investments in private companies, substantially all of these investments are subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. The illiquidity of our investments may make it difficult for us to sell such investments if the need arises. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we have previously recorded our investments.
Our investments in life settlement contracts may be further impaired or we may lose our entire investment in life settlement contracts, particularly if the underlying insurance policies are terminated or determined to be unenforceable.
The life settlement contracts in which the Company has invested are relatively illiquid, which may make it difficult for us to liquidate such investments for their fair value, if at all. The Receiver appointed to operate Vibrant’s assets to date has been unsuccessful, and may continue to have difficulty, identifying a potential purchaser of our investments in life settlement contracts. In part due to the Receiver’s inability to sell such investments, the Company recorded an unrealized write-down in the Company’s life settlement portfolio. If the marketability of the life settlement contracts deteriorates, future write-downs of our investments in life settlement contracts may be necessary.
In addition, if a potential purchaser or an insurance carrier determines that the life insurance policies underlying our life settlement contracts are unenforceable, the value of the policy to us could be adversely affected, which could severely limit our ability to sell our investments in life settlement contract or collect insurance proceeds upon the insured’s demise and result in a complete loss of our investment therein. One of the insurance companies who issued the policies at issue has indicated, to the Receiver, an intent to pursue litigation challenging the enforceability of the policy it issued as an improper stranger-owned life insurance policy. If successful, the insurer could rescind the policy while still retaining the premiums paid to date.
In addition, to maintain the life settlement contracts in full force and effect, premiums on the underlying life insurance policies must be paid in accordance with the terms of the applicable policy. The Receiver has indicated that it does not have adequate funds to continue making paying the premiums on life insurance policies underlying Vibrant’s life settlement contracts. The Receiver has also indicated that if it cannot assure payment of the premiums, in order to fulfill its perceived obligation to protect the value of the assets in the estate, it might be compelled to sell the policies to a third party for whatever value it can obtain, even if it is less than fair value. Accordingly, it may be necessary for the Company to pay such premiums in the future in order for such policies to remain in effect. The Company’s management is currently evaluating whether making such payments is in the best interests of the Company. If the Company’s management determines that it is in the best interests of the Company, the Company may cease making such payments in the future. The failure to make such payments may result in the termination of the underlying insurance polices, which would have a material adverse effect on the value of our investment in life settlement contracts, including a total loss of our investment therein.
We may experience fluctuations in our quarterly results.
We could experience fluctuations in our quarterly operating results due to a number of factors, including the interest rate payable on the debt investments we make, the default rate on such investments, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses and the degree to which we encounter competition in our markets and general economic conditions. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods.
Changes in laws or regulations governing our operations, or changes in the interpretation thereof, and any failure by us to comply with laws or regulations governing our operations may adversely affect our business.
We and our portfolio companies are subject to regulation by laws at the local, state and federal levels. These laws and regulations, as well as their interpretation, may be changed from time to time.
Accordingly, any change in these laws or regulations, or their interpretation, or any failure by us to comply with these laws or regulations may adversely affect our business. As discussed above, there is a risk that certain investments that we intend to treat as qualifying assets will be determined to not be eligible for such treatment. Any such determination would have a material adverse effect on our business.
Other Risk Factors
We borrow money to fund our operations, which magnifies the potential for gain or loss on amounts invested, and may increase the risk of investing in us. Borrowings magnify the potential for gain or loss on amounts invested, and therefore increase the risk associated with investing in the Company. We may borrow from and issue senior debt securities to banks, investment banks and other lenders and through long-term subordinated SBA debentures. These creditors have fixed dollar claims on our assets that are superior to the claims of our common shareholders. If the value of our assets decreases, leveraging would cause net asset value to decline more sharply than it otherwise would have had we not leveraged.
ITEM 2.
ITEM 2. PROPERTIES
In December, 2003, the Company entered into a sublease agreement with a law firm related to the Chairman and other officers and directors of the Company (the “Law Firm”) (See Note 12 to the Financial Statements). Pursuant to a sublease, the Company occupies approximately 3,500 square feet of office space in New York. This sublease, as amended, expires April 2014. The Company’s rent share for the year ended June 30, 2009 was $12,271 per month, subject to periodic escalations and annual increases as per the master lease agreement between the landlord and the Law Firm. Commencing July 1, 2009 the Company’s rent share is $13,139 per month subject to periodic escalations and annual increases as per the master lease agreement between the Landlord and the Law Firm. The Company is committed to the minimum utilization factor on all rent, additional rent and electricity charges billed by the landlord, subject to annual increases as per the master lease agreement between the landlord and the Law Firm. In the event that more space is utilized, the percentage of the total space allocated to the Company will be increased in accordance with the terms of the sublease.
The Company agreed to indemnify the Law Firm from any cost and expense under the terms of its master lease for additional expense associated with certain additional space, in the event the Law Firm is not able to sublease the individual offices until such time as the Company might need to utilize that space. Until the Company utilizes the additional space, the Law Firm sublets the additional space to unaffiliated tenants. In the event all or a portion of the additional space is vacant, the Company has agreed to reimburse the Law Firm for the rent applicable to such vacant space. During the years ended June 30, 2009, 2008 and 2007 no amounts were paid relating to this Indemnification Agreement. Rent expense under the lease amounted to $166,429, $151,165 and $123,261 for the years ended June 30, 2009, 2008 and 2007, respectively.
In addition, the Company is also obligated to pay for its share of overhead expense as noted in the above lease agreement. During January 2007 the overhead cost payments increased to $3,500 per month. Overhead costs and reimbursed office and salary expenses amounted to $64,286, $68,598 and $62,142 for the years ended June 30, 2009, 2008 and 2007, respectively.
In July, 2003, the Company entered into a ten-year sublease for an offsite backup recovery center, office and storage space, as part of the Company’s disaster recovery plan, with another entity in which an officer of the Company has an ownership interest. The sublease calls for rental payments ranging from $38,500 to $54,776 per annum from the first year ended June 30, 2004 through the year ending June 30, 2013. The sublease contains a provision that either party may terminate the lease in years seven through ten with six months notice. Rent expense under the lease amounted to $49,787, $48,739 and $46,792 for the years ended June 30, 2009, 2008 and 2007 respectively. This lease was necessary pursuant to the Company’s disaster recovery plan and is used as storage space and as back-up additional office space.
ITEM 3.
ITEM 3. 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 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held two (2) meetings of stockholders during fiscal 2009. The Company held a special meeting of stockholders on August 26, 2008 and its annual meeting of stockholders on November 25, 2008. The proposal as described below was approved at the special meeting of stockholders held on August 26, 2008:
Approval of the Sale of Assets
The stockholders approved the sale by the Company and the Company’s wholly owned subsidiary Elk Associates Funding Corporation of assets that might constitute under Delaware law, substantially all of the assets of the Company.
The Company’s Annual Meeting of Stockholders was held on November 25, 2008 (the “Meeting”). At the Meeting the following nine (9) individuals were elected to the Board of Directors of the Company by the stockholders to serve until the 2010 Annual Meeting of Stockholders:.
Peter Boockvar
John R. Laird
Steven Etra
Howard F. Sommer
Michael Feinsod
Ellen M. Walker
Gary C. Granoff
Ivan Wolpert
Murray A. Indick
The stockholders also approved and ratified the selection by the Board of Directors of Rosen Seymour Shapss Martin & Company LLP as the Company’s independent registered public accountants for the fiscal year ended June 30, 2009.
The stockholders approved the sale by Ameritrans of assets of the Company pursuant to a loan purchase agreement among the Company, Elk Associates Funding Corp., Medallion Financial Corp. and Medallion Bank.
For more information, please see the Company’s definitive proxy statements filed with the SEC and the Company’s press releases filed with the SEC on Form 8-K, all of which are available online at the Company’s website at www.ameritranscapital.com and www.sec.gov.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON STOCK AND PREFERRED STOCK AND RELATED STOCKHOLDER MATTERS
Ameritrans Common Stock is listed on the NASDAQ Capital Market under the symbol AMTC. Ameritrans Preferred Stock is listed on the NASDAQ Capital Market under the symbol AMTCP.
The following table shows the high and low sale prices per share of Common Stock and Preferred Stock as reported by NASDAQ, for each quarter in the fiscal years ended June 30, 2008 and June 30, 2009.
The following table details information regarding the Company’s existing equity compensation plans as of June 30, 2009:
(1) Includes fully vested options to purchase up to 118,850 shares of Common Stock granted to employees under the 1999 Employee Plan and options to up purchase to 35,574 shares granted to non-employee directors under the Non-Employee Director Plan. See “Stock Option Plans.” Does not include options to purchase up to 40,000 shares of Common Stock granted under the 1999 Employee Plan, and 13,880 shares granted to non-employee directors under the Non-Employee Director Plan which are not fully vested.
(2) All of our compensation plans have been approved by our stockholders.
The Company has declared and paid the quarterly dividend on the Preferred Stock since the Preferred Stock was issued through March 31, 2009. Most recently, the Company’s Board of Directors declared a dividend of $0.28125 per share on March 20, 2009 on the Preferred Stock for the period January 1, 2009 through March 31, 2009 payable on or about April 15, 2009 for all holders of the Preferred Stock of record as of March 31, 2009. On July 28, 2009, the Company announced that the Board had decided not to pay the dividend of $0.28125 per share on its Preferred Stock for the period April 1, 2009 through June 30, 2009. The dividend on the Preferred Stock for the period April 1, 2009 through June 30, 2009 will remain in arrears and will be paid to shareholders, when and as declared by the Board of Directors of the Company.
No dividends on the Preferred Stock will be declared or paid or set apart for payment unless payments of interest and repayment of principal then due on any other indebtedness of the Company are made and dividends which have been deferred, have been, or contemporaneously are, declared and paid on all outstanding shares of Preferred Stock. Any dividend payment made on the outstanding shares of Preferred Stock shall first be credited against the dividend deferred for the period April 1, 2009 through June 30, 2009.
During the deferral period, the Company may not, among other things, declare, pay, or set apart for payment any dividend or other distribution on shares of common stock of the Company or any other security of the Company, if any, ranking junior to the Preferred Stock or call for redemption, redeem, purchase, or otherwise acquire for consideration any shares of junior stock or Preferred Stock.
As of September 8, 2009, there were 153 holders of record of the Ameritrans Common Stock, and 4 holders of record of the Preferred Stock, which is exclusive of securities held in street name.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The table below contains certain summary historical financial information of Ameritrans. You should read this table in conjunction with the consolidated financial statements of Ameritrans (the “Financial Statements”) included elsewhere in this Annual Report and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
(1) Ameritrans since inception and Elk, since the fiscal year ended June 30, 1984, have elected and qualified to be taxed as regulated investment companies and substantially all taxable income was required to be distributed to stockholders. Therefore, only minimal taxes were required to be paid.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with the financial statements and notes to financial statements. The results described below are not necessarily indicative of the results to be expected in any future period. Certain statements in this discussion and analysis, including statements regarding our strategy, financial performance, and revenue sources, are forward-looking statements based on current expectations and entail various risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements, including those described in “Risk Factors” and elsewhere in this Annual Report.
CRITICAL ACCOUNTING POLICIES
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 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, represented as cost, plus or minus unrealized appreciation or depreciation. Investments for which market quotations are readily available are valued at such quoted amounts. If no public market exists, the fair value of investments that have no ready market are determined in good faith by management, and approved by the Board of Directors, based upon assets and revenues of the underlying investee companies as well as general market trends for businesses in the same industry.
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 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.
Assets Acquired in Satisfaction of Loans
Assets acquired in satisfaction of loans are carried at the lower of the net value of the related foreclosed loan or the estimated fair value less cost of disposal. Losses incurred at the time of foreclosure are charged to the unrealized depreciation 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.
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.
RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2009 AND 2008
Total Investment Income
The Company’s investment income for the year ended June 30, 2009, decreased $2,915,953 or 47% to $3,344,324 as compared with the prior year ended June 30, 2008. The decrease is primarily due to a decrease in interest income of $2,814,370. The decrease in interest income is primarily due to the reduction of income producing assets under management as a result of the sale of medallion loans as compared to the year ended June 30, 2008, and a reduction in interest rates received on variable rate loans.
Medallion loans outstanding decreased by $29,513,642, or 99%, to $356,700 as compared with the prior year ended June 30, 2008. The interest earned on medallion loans decreased in 2009 as compared with the prior year by approximately $1,726,000.
Commercial Loans outstanding decreased by $2,539,953, or 18%, to $11,293,070, as compared with the prior year ended June 30, 2008. Interest income decreased approximately $1,500,000 primarily due to a decrease in commercial loans outstanding and further due to a decrease in LIBOR. Offsetting this decrease in Commercial Loans outstanding was stronger performance in the remaining portfolio, interest rate floors and collection of past due interest.
Corporate Loans outstanding increased by $685,285, or 6%, to $12,193,255, as compared with the prior year ended June 30, 2008. The interest income earned on Corporate Loans increased in 2009 by approximately $350,000, primarily due to increased loan funding at the end of June 30, 2008.
Life Settlements Contracts outstanding decreased by $1,078,377, or 38% to $1,764,081, as compared with the prior year ended June 30, 2008. The Company adjusted the fair value of these policies based on marketability, due to market conditions and other factors more specifically detailed below.
Operating Expenses
Interest expense for the year ended June 30, 2009 decreased $1,267,430 or 54% to $1,090,074 when compared to the year ended June 30, 2008. Interest expense decreased due to a net decrease in average bank borrowings over the course of the year ended June 30, 2009. At June 30, 2009, overall bank borrowings had a net decrease of $27,725,697, or 99% as compared to the prior year ended June 30, 2008, due to the use of proceeds from the sale of substantially all of the medallion loan portfolio to pay down existing bank debt.
Salaries and employee benefits increased $344,734 or 18% when compared with the prior year. This increase reflects the costs associated with a one time payment made to an officer during the year ended June 30, 2009 pursuant to the restructuring of his employment agreement, as well as increases due under various other employment agreements.
Occupancy costs increased $12,000 or 4%, when compared with the year ended June 30, 2008 due to rent increases on the Company’s NYC office, as well as increased general overhead expenses.
Professional fees increased $1,022,958 or 130% when compared with the prior year. The increase was due to increases of accounting fees of $165,038 for an out sourced controller, consulting fees related to compliance with Sarbanes Oxley of $161,170, audit and audit related fees of $103,212, consulting fees of $142,758 related to portfolio investments, non related party legal fees of $465,247 largely due to the write off of certain prepaid offering expenses and prepaid fee expenses totaling $247,130 as well as additional legal fees in connection with life settlement related matters of $83,708. These increases were partially offset by decreases in related party legal fees of $28,973 and decreases in legal fees related to Chicago medallion loans of $69,559.
Miscellaneous administrative expenses decreased $138,282 or 15% when compared with the prior year. This decrease in administrative expenses was due to the following reductions: permits of $6,000, bank audit fees of $4,000, commissions of $3,000, outside help of $50,000, recruitment fees of $29,000, service fees of $88,000, filing fees of $4,000, association dues of $11,000, application fees of $25,000, messenger service of $6,000, investor relation fees of $3,000, and custodial fees of $17,000. These decreases were partially offset by increases in foreclosure expenses of $14,000., Market data fees of $22,000, advertising and promotion fees of $8,200, NASDAQ fees of $14,000, website and computer fees of $19,000, and miscellaneous fees of $31,400.
Net Realized Loss on Investments
The components of realized gains and losses were as follows: A loss of approximately ($605,000) related to the sale of the Company’s interest in a sanitary ware distributor, a loss of approximately ($340,000) associated with the sale of the Company’s taxicab medallion portfolio, the loss of approximately ($94,000) associated with the foreclosure and sale of a commercial loan, the loss of approximately ($70,000) associated with the foreclosure and sale of the collateral associated with a commercial loan, and other miscellaneous losses of approximately ($175,000). Offsetting these amounts was approximately $45,000 associated with the reversal of certain reserves for assets acquired which were subsequently sold.
Net Unrealized Depreciation on Investments
During the year ended June 30, 2009, the Company’s investments had a net unrealized depreciation of approximately ($1,283,620). The net unrealized depreciation for the year ended June 30, 2009 is primarily due to decreases in the fair value of certain investments in our portfolio.
An unrealized write-down of $1,095,408 in the Company’s life settlement portfolio was the largest component of unrealized depreciation. Other significant factors were a write-down of the fair value of a loan receivable of $250,000 to reflect the Company’s estimate of its recoverable value in the collateral underlying the loan, a $195,000 decrease in the fair value of a loan to reflect the actual recovery achieved on that loan following the resale of the property subsequent to June 30, 2009. Also contributing to unrealized depreciation was a $95,000 reduction in the value of the Company’s LLC interest in a condominium construction project, a $62,000 net reduction in the fair value of the various real estate limited partnership investments. Offsetting these items was approximately $410,000 of investment value that was reclassified as “realized losses”.
Net Increase (Decrease) in Net Assets from Operations
Net decrease in net assets resulting from operations for the year ended June 30, 2009 was ($5,462,453) as compared to a net decrease in net assets resulting from operations for the year ended June 30, 2008 of ($537,571).
RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
Total Investment Income
The Company’s investment income for the year ended June 30, 2008, increased $383,607 or 6.5% to $6,260,277 as compared with the prior year ended June 30, 2007. The increase is primarily due to increases in interest income of $701,454 which was offset by a decrease of other fees of $241,464 and a decrease in leasing income of $76,383. Elk conducted no leasing activities in the year ended June 30, 2008. The increase in interest income is primarily due to a re-allocation of assets in the Company’s investment portfolio as compared to the year ended June 30, 2007.
Medallion loans outstanding decreased by $4,990,832, or 14%, to $29,870,342 as compared with the prior year ended June 30, 2008. The interest rate earned on medallion loans decreased in 2008 as compared with the prior year, leading to a decrease in income of $486,509.
Commercial Loans outstanding decreased by $4,938,313, or 26% to $ 13,833,085, as compared with the prior year ended June 30, 2008. Offsetting this decrease in Commercial Loans outstanding was stronger performance in the remaining portfolio, interest rate floors and collection of past due interest.
Corporate Loans outstanding increased by $7,507,970, or 187%, to $11,507,970, as compared with the prior year ended June 30, 2008. The interest rate earned on Corporate Loans decreased in 2008, as compared with the prior year, primarily due to decreases in LIBOR. This was offset by higher rates earned on loans originated in this fiscal year and further offset by increases in rates on existing loans due to covenant resets.
Life Settlements Contracts outstanding increased by $932,381, or 49% to $2,842,458, as compared with the prior year ended June 30, 2008. The interest rate on these contracts was constant over the two periods, resulting in an increase in interest income as compared with the prior year ended June 30, 2008.
Operating Expenses
Interest expense for the year ended June 30, 2008 increased $239,829 or 11% to $2,357,504 when compared to the year ended June 30, 2007. Interest expense increased due to a net increase in average bank borrowings over the course of the year ended June 30, 2008. At June 30, 2008, overall bank borrowings had a net decrease of $1,236,803 as compared to the prior year ended June 30, 2007. Offsetting the increase in average bank borrowings was a decrease in the average interest rate the Company paid on its lines of credit.
Salaries and employee benefits increased $99,061 or 6% when compared with the prior year. This increase reflects the costs associated with the hiring of a new employee during the year ended June 30, 2008, as well as increases due under various employment agreements.
Occupancy costs increased $36,307 or 16%, when compared with the year ended June 30, 2007 due to increased office space utilized for an executive hired in the year ended June 30, 2007, as well as increased general overhead expenses.
Professional fees decreased $39,002 or 5% when compared with the prior year. This decrease is due primarily to a decrease in accounting fees, which was partially offset by increases in internal control consulting fees. Miscellaneous administrative expenses decreased $9,549 or 1% when compared with the prior year. Loss and impairments on assets acquired decreased by $54,339 due to no change in value of remaining assets acquired held during the year ended June 30, 2008.
Net Increase (Decrease) in Net Assets from Operations
Net decrease in net assets resulting from operations for the year ended June 30, 2008 was ($537,571) as compared to a net increase in net assets resulting from operations for the year ended June 30, 2007 of $199,072.
Net Unrealized Depreciation on Investments
This decrease was due to a decrease in the fair value of $742,277 as compared to June 30, 2007. This loss was offset by a smaller net investment loss of $111,000 and $106,000 reduction in realized gain as compared to June 30, 2007.
Net Realized Gain on Investments
The Net Realized Gain on Investments of $205,000 was a reduction of $106,000 as compared to June 30, 2007. The net realized gains were comprised of a gain on the sale of an equity investment in a medallion loan for a gain of approximately $555,000, a gain on a sale of a real estate investment of approximately $25,000, offset by a loss on a real estate equity investment of $335,000 and a realized loss on interest of $40,000.
BALANCE SHEET
Total assets decreased by $33,695,312 as of June 30, 2009 when compared to total assets as of June 30, 2008. This decrease was primarily due to a decrease in the investments at fair value of $33,188,819, which is primarily attributable to the sale of medallion loans, and to a lesser extent, payoffs and settlements in excess of new loans, and declines in fair value of certain investments during the fiscal year. Prepaid expenses decreased $586,794, primarily due to the Company expensing costs related to prepaid stock offering costs and costs associated with the pending sale agreement of the Company’s medallion loans receivable. The sale of substantially all of the medallion loans during the fiscal year resulted in proceeds of approximately $29,000,000. In addition, Elk’s proceeds from banks for the fiscal year were $472,000 versus approximately $28,000,000 in repayments made on notes payable from banks. This resulted in net decrease of $27,725,697 in short-term bank borrowings for the fiscal year ended June 30, 2009, which was funded from the proceeds of the medallion loan portfolio sale.
ASSET / LIABILITY MANAGEMENT
Interest Rate Sensitivity
Ameritrans, like other financial institutions, is subject to interest rate risk to the extent its interest-earning assets rise or fall at a different rate over time in comparison to its interest-bearing liabilities (consisting primarily of its credit facilities with banks and subordinated SBA debentures, which currently have fixed rates of interest).
A relative measure of interest rate risk can be derived from Ameritrans’ interest rate sensitivity gap, i.e. the difference between interest-earning assets and interest-bearing liabilities, which mature and/or reprice within specified intervals of time. The gap is considered to be positive when repriceable assets exceed repriceable liabilities and negative when repriceable liabilities exceed repriceable assets. A relative measure of interest rate sensitivity is provided by the cumulative difference between interest sensitive assets and interest sensitive liabilities for a given time interval expressed as a percentage of total assets.
Ameritrans’ interest rate sensitive assets were $25,607,168 and interest rate sensitive liabilities were $370,000 at June 30, 2009. Having interest-bearing liabilities that mature or reprice more frequently on average than assets may be beneficial in times of declining interest rates, although such an asset/liability structure may result in declining net earnings during periods of rising interest rates. Abrupt increases in market rates of interest may have an adverse impact on our earnings until we are able to originate new loans at the higher prevailing interest rates. Conversely, having interest-earning assets that mature or reprice more frequently on the average than liabilities may be beneficial in times of rising interest rates, although this asset/liability structure may result in declining net earnings during periods of falling interest rates. This mismatch between maturities and interest rate sensitivities of our interest-earning assets and interest-bearing liabilities results in interest rate risk.
The effect of changes in interest rates is mitigated by regular turnover of the portfolio. Based on past experience, Ameritrans anticipates that approximately 20% of the portfolio will mature or be prepaid each year. Ameritrans believes that the average life of its loan portfolio varies to some extent as a function of changes in interest rates. Borrowers are more likely to exercise prepayment rights in a decreasing interest rate environment because the interest rate payable on the borrower’s loan is high relative to prevailing interest rates. Conversely, borrowers are less likely to prepay in a rising interest rate environment.
Interest Rate Swap Agreements
Ameritrans manages the exposure of its portfolio to increases in market interest rates by entering into interest rate swap agreements to hedge a portion of its variable-rate debt against increases in interest rates and by incurring fixed-rate debt consisting primarily of subordinated SBA debentures.
On October 14, 2005, Elk entered into two (2) interest rate swap transactions for $5,000,000 each, with expiration dates of October 15, 2007 and October 14, 2008, respectively. As a portion of the Company’s loan portfolio is at “fixed” rates, Elk entered into these swap transactions to hedge against an upward movement in interest rates relating to outstanding bank debt. The swaps expired on October 15, 2007 and October 15, 2008, respectively. The swap transaction that expired October 14, 2008, provided for a fixed rate of 6.23%. As of June 30, 2009, the Company was not a party to any interest rate swaps.
Investment Considerations
In the fiscal year ended June 30, 2009, the Company’s investment income was negatively affected by steady decreases in LIBOR due to the federal reserve’s decrease in interest rates and the general dislocation of credit markets. This decrease had a direct result on the actual rate of interest the Company received on its outstanding Corporate loans, and to a lesser extent, certain Commercial Loans. The dollar amount of the Company’s adjustable rate loans receivable at June 30, 2009 was approximately $19,355,000 million with the remainder being fixed rate loans. Because we borrow money to finance the origination of loans, our income is dependent upon the differences between the rate at which we borrow funds and the rate at which we lend funds. While many of the loans in our portfolio bear interest at fixed-rates or adjustable-rates, we may, in the future, finance a substantial portion of such loans by incurring indebtedness with floating interest rates. As short-term interest rates rise, our interest costs increase, decreasing the net interest rate spread we receive and thereby adversely affect our profitability. Although we intend to continue to manage our interest rate risk through asset and liability management, including the use of interest rate swaps, general rises in interest rates will tend to reduce our interest rate spread in the short term. However, a decrease in prevailing interest rates may lead to more loan prepayments, which could adversely affect our business over time. A borrower is likely to exercise prepayment rights at a time when the interest rate payable on the borrower’s loan is high relative to prevailing interest rates. In a lower interest rate environment, we will have difficulty re-lending prepaid funds at comparable rates, which may reduce the net interest spread we receive.
Lending to small businesses involves a high degree of business and financial risk, which can result in substantial losses and should be considered speculative. Our borrower base consists primarily of small business owners that have limited resources and that are generally unable to obtain financing from banks or other primary sources. There is generally no publicly available information about these small business owners, and we must rely on the diligence of our employees and agents to obtain information in connection with our credit decisions. In addition, these small businesses often do not have audited financial statements. Some smaller businesses have narrower product lines and market shares than their competition. Therefore, they may be more vulnerable to customer preferences, market conditions, or economic downturns, which may adversely affect the return on, or the recovery of, our investment in these businesses.
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. The Company entered into a Loan Purchase Agreement dated July 16, 2008 with Medallion Financial Corp. and Medallion Bank pursuant to which the Company sold substantially all of its taxicab medallion loans. The Company used the proceeds of sale to pay down its bank lines. Because the Company’s banks notified the Company that the Company’s then existing loan agreements permit business loans secured by real estate or equipment but not investments in Corporate Loans, the Company is seeking other sources of financing for its Corporate Loan Strategy and renegotiate the terms of its bank lines of credit for its business loans secured by real estate or equipment. The Company is actively pursuing alternative sources of funding. At June 30, 2009, 2.9% or $370,000 of the Company’s indebtedness was represented by indebtedness to its banks with interest rates of approximately 4.37%, and 97.1% or $12,000,000 by the debentures issued to the SBA with fixed rates of interest plus user fees which results in rates ranging from 4.99% to 5.54%. Elk currently may borrow additional amounts from banks subject to the limitations imposed by its borrowing base agreement with its banks and the SBA, the statutory and regulatory limitations imposed by the SBA and the availability of obtaining future bank credit lines.
Contractual obligations expire or mature at various dates through March 1, 2014. The following table shows all contractual obligations at June 30, 2009.
Our sources of liquidity are credit lines with banks, long-term SBA debentures that are issued to or guaranteed by the SBA, loan amortization and prepayment. As a RIC, we distribute at least 90% of our investment company taxable income. Consequently, we primarily rely upon external sources of funds to finance growth.
Loan amortization and prepayments also provide a source of funding for Elk. Prepayments on loans are influenced significantly by general interest rates, economic conditions and competition.
Like Elk, Ameritrans will distribute at least 90% of its investment company taxable income and, accordingly, we will continue to rely upon external sources of funds to finance growth. In order to provide the funds necessary for our expansion strategy, we expect to raise additional capital and to incur, from time to time, additional bank indebtedness and (if deemed necessary by management) to obtain SBA loans. There can be no assurances that such additional financing will be available on acceptable terms.
The Company will require additional sources of capital and new bank lines of credit and its cash flow from operations to fund its business plan. As a result, the Company continues to explore additional options, which may increase available funds for its growth and expansion of this strategy.
In December 2008, Elk applied for a commitment from SBA for $15 million in additional guaranteed debentures. In June 2009, management met with representatives from SBA to further the processing of this application. As of the date of this filing, SBA has not made a determination regarding Elk’s debenture application.
Recently Issued Accounting Standards
In April 2009, the Financial Accounting Standards Board (“FASB”) issued FSP No. 115-2, Recognition and Presentation of Other-Than-Temporary Impairments (“FSP No. 115-2”), which was issued to make the guidance on other-than-temporary impairment more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. FSP 115-2 requires significant additional disclosures for both annual and interim periods, including the amortized cost basis of available-for-sale and held-to-maturity debt, the methodology and key imports used to measure the credit portion of other-than-temporary impairment, and a roll forward of amounts recognized in earnings for securities by major security type. FSP No. 115-2 amends Statement of Financial Accounting Standards (“SFAS”) No. 115, Accounting for Certain Investments in Debt and Equity Securities (“SFAS No. 115”) and FSP No. 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments to require that entities identify major security classes consistent with how the securities are managed based on the nature and risks of the security, and also expands, for disclosure purposes, the list of major security types identified in SFAS No. 115. FSP No. 115-2 is effective for interim and annual reporting periods ending after June 15, 2009. The Company does not believe the adoption of this pronouncement will have a material impact on its financial condition or results of operations.
In April 2009, the FASB issued FSP No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP No. 157-4”), which provides additional guidance for estimating fair value in accordance with FASB Statement No. 157 when the volume and level of activity for an asset or liability has significantly decreased and also provides guidance on identifying circumstances that indicate a transaction is not orderly. FSP No. 157-4 amends SFAS No. 157 to require entities to disclose in interim and annual periods the inputs and valuation techniques used to measure fair value together with any changes in valuation techniques and related inputs during the period. FSP No. 157-4 also requires reporting entities to define major categories for both debt and equity securities to be major security types as described in paragraph 19 of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities . This requires entities to provide disclosures on a more disaggregated basis than previously had been required under SFAS No. 157. FSP No. 157-4 is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. The Company does not believe the adoption of this pronouncement will have a material impact on its financial condition or results of operations.
In October 2008, the FASB issued Staff Position No. 157-3 - Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active, or FSP 157-3. FSP 157-3 provides an illustrative example of how to determine the fair value of a financial asset in an inactive market. FSP 157-3 does not change the fair value measurement principles set forth in SFAS 157 (see Note 2 for a description of SFAS 157). Since adopting SFAS 157 in July 2008, our process for determining the fair value of our investments has been, and continues to be, consistent with the guidance provided in the example in FSP 157-3. As a result, the adoption of FSP 157-3 did not affect our process for determining the fair value of our investments and did not have a material effect on our financial condition or results of operations.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative and Hedging Activities-an amendment of FASB Statement No. 133.” SFAS 161 requires enhanced disclosures on derivative and hedging activities. These enhanced disclosures will discuss (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years beginning on or after November 15, 2008, with earlier adoption encouraged. The Company does not anticipate a material impact, if any, to the Company’s financial condition or results of operations.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51” (“SFAS 160”), which establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary by clarifying that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as a component of equity. It requires that changes in a parent’s ownership interest while the parent retains its controlling interest be accounted for as equity transactions and any retained noncontrolling equity investment upon the deconsolidation of a subsidiary be initially measured at fair value. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008 and shall be applied prospectively, except for the presentation and disclosure requirements which shall be applied retrospectively. We do not believe that this pronouncement will have an impact on our financial condition or results of operations.
In December 2007, the FASB issued SFAS No. 141R (revised 2007), “Business Combinations” (“SFAS 141R”) which supersedes SFAS No. 141 and establishes principles and requirements on how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date fair value, as well as the recognition and measurement of goodwill acquired in a business combination. SFAS No. 141R also requires certain disclosures to enable users of the financial statements to evaluate the nature and financial effects of the business combination. Acquisition costs associated with the business combination will generally be expensed as incurred. SFAS No. 141R is effective prospectively to business combinations in fiscal years beginning on or after December 15, 2008. We do not believe that this pronouncement will have an impact on our financial condition or results of operations.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company’s business activities contain elements of risk. The Company considers the principal types of risk to be fluctuations in interest rates and portfolio valuations. The Company considers the management of risk essential to conducting its businesses. Accordingly, the Company’s risk management systems and procedures are designed to identify and analyze the Company’s risks, to set appropriate policies and limits and to continually monitor these risks and limits by means of reliable administrative and information systems and other policies and programs.
The Company values its portfolio at fair value as determined in good faith by the Company’s Board of Directors in accordance with the Company’s valuation policy. Unlike certain lending institutions, the Company is not permitted to establish reserves for loan losses. Instead, the Company must value each individual investment and portfolio loan on a quarterly basis. The Company records unrealized depreciation on investments and loans when it believes that an asset has been impaired and full collection is unlikely. Without a readily ascertainable market value, the estimated value of the Company’s portfolio of investments and loans may differ significantly from the values that would be placed on the portfolio if there existed a ready market for the investments. The Company adjusts the valuation of the portfolio quarterly to reflect the Board of Directors’ estimate of the current fair value of each component of the portfolio. Any changes in estimated fair value are recorded in the Company’s statement of operations as net unrealized appreciation (depreciation) on investments.
In addition, the illiquidity of our loan portfolio and investments may adversely affect our ability to dispose of loans at times when it may be advantageous for us to liquidate such portfolio or investments. Also, if we were required to liquidate some or all of the investments in the portfolio, the proceeds of such liquidation 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 balance sheet were to remain constant and no actions were taken to alter the existing interest rate sensitivity, a hypothetical immediate 1% increase in interest rates would have resulted in an additional net increase in net assets from operations of $189,848 at June 30, 2009. This is comprised of a 1% change in two components, interest on loans receivable of $193,548 at variable interest rate terms, and $3,700 for interest on bank debt subject to variable market rates.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted in the response found under Item 15(a)(1) in this Annual Report on Form 10-K.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A(T).
ITEM 9A(T). CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13(a) -15(e) and 15(d)-15(e) under the Exchange Act). Based on such evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of June 30, 2009.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting based on criteria established in the framework in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of June 30, 2009. Further, this evaluation included enhancements to our internal control over financial reporting that have not materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
This Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this Annual Report.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be contained in the Company’s definitive Proxy Statement for its 2009 Annual Stockholder Meeting, to be filed with the SEC within 120 days after June 30, 2009, and is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be contained in the Company’s definitive Proxy Statement for its 2009 Annual Stockholder Meeting, to be filed with the SEC within 120 days after June 30, 2009, and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be contained in the Company’s definitive Proxy Statement for its 2009 Annual Stockholder Meeting, to be filed with the SEC within 120 days after June 30, 2009, and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be contained in the Company’s definitive Proxy Statement for its 2009 Annual Stockholder Meeting, to be filed with the SEC within 120 days after June 30, 2009, and is incorporated herein by reference Ameritrans has directors’ and officers’ liability insurance.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item will be contained in the Company’s definitive Proxy Statement for its 2009 Annual Stockholder Meeting, to be filed with the SEC within 120 days after June 30, 2009, and is incorporated herein by reference.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
a)
1 and 2 FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
1.
The financial statements and financial statement schedules as listed in the Index to Financial Statements are filed as part of this Annual Report on Form 10-K.
2.
No financial statement schedules are filed herewith because the information required has been presented in the aforementioned financial statements.
3.
EXHIBITS
The Exhibits filed as part of this Annual Report on Form 10-K are listed on the Exhibit Index immediately preceding such Exhibits, which Exhibit Index is incorporated by reference.
EXHIBIT INDEX
Exhibit
Number Exhibit
-------- -------
3 (i)
Certificate of Incorporation (3)
3 (ii)
By-laws, as amended, to date (13)
Form of subordinated debentures issued to the U.S. Small Business Administration (“SBA”) by Elk Associates Funding Corporation (“Elk”) Debenture issued March 26, 1997 - principal amount - $430,000; Maturity Date - March 1, 2007; Stated Interest Rate - 7.38%.(4)
The following debentures are omitted pursuant to Rule 483:
a.
Debenture issued September 22, 1993 - principal amount $1,500,000; Maturity Date - September 1, 2003; Stated Interest Rate - 6.12%.
b.
Debenture issued September 22, 1993 - principal amount - $2,220,000; Maturity Date - September 1, 2003; Stated Interest Rate - 6.12%.
c.
Debenture issued September 28, 1994 - principal amount $2,690,000; Maturity Date - September 1, 2004; Stated Interest Rate - 8.20%.
d.
Debenture issued December 14, 1995 - principal amount $1,020,000; Maturity Date - December 1, 2005; Stated Interest Rate - 6.54%.
e.
Debenture issued June 26, 1996 - principal amount $1,020,000; Maturity Date - June 1, 2006; Stated Interest Rate - 7.71%.
10.1
Security Agreement between Elk and the SBA, dated September 9, 1993. (4)
10.2
Citibank Lines of Credit Approval letter dated April 1, 2008 and Master Note dated April 15, 2008 (33)
10.3
1999 Employee Stock Option Plan, as amended. (5)
10.4
Non-Employee Director Stock Option Plan, as amended. (5)
10.5
Custodian Agreement among Elk; Bank Leumi Trust Company of New York (“Leumi”), Israel Discount Bank of New York (“IDB”), Bank Hapoalim B.M. (“Hapoalim”) and Extebank; the SBA, and IDB as Custodian; dated September 9, 1993 (the “Custodian Agreement”).(4)
10.6
Agreements between Elk and the SBA.(4)
10.7
Intercreditor Agreement among Elk, Leumi, IDB, Hapoalim, Extebank and the SBA dated September 9, 1993 (the “Intercreditor Agreement”) (4)
10.8
Amendments to the Custodian and Intercreditor Agreements. (4)
a.
Amendment removing Hapoalim and Extebank and adding European American Bank (“EAB”), dated September 28, 1994.
b.
Form of Amendment adding bank:
i.
Amendment adding United Mizrahi Bank and Trust Company (“UMB”), dated June,
1995 was previously filed.
ii.
Amendment adding Sterling National Bank and Trust Company of New York
(“Sterling”), dated April, 1996 - omitted pursuant to Rule 483.
10.9
Bank Intercreditor Agreement among Elk, Leumi, IDB, Hapoalim and Extebank, dated September 9, 1993 (the “Bank Intercreditor Agreement”). (4)
10.10
Amendments to the Bank Intercreditor Agreement. (4)
a.
Amendment removing Hapoalim and Extebank and adding European American Bank (“EAB”), dated September 28, 1994.
b.
Form of Amendment adding bank:
i.
Amendment adding UMB, dated June, 1995 was previously filed.
ii.
Amendment adding Sterling, dated April, 1996 omitted pursuant to Rule 483.
10.11
Letter Agreement renewing line of credit for Elk with IDB Bank dated April 13, 2004.(6)
10.12
Promissory Note dated March 3, 2003 between Ameritrans and Bank Leumi USA and Letter Agreement dated March 11, 2003 between aforementioned parties. (6)
10.13
Master Note dated October 4, 1999 between Ameritrans and European American Bank.(6)
10.14
Line of Credit Agreement dated January 3, 2002 between Elk and Citibank.(7)
10.15
Form of indemnity agreement between Ameritrans and each of its directors and officers.(3)
10.16
Amended and Restated Employment Agreement dated as of December 31, 2002 between Ameritrans and Gary Granoff. (8)
10.17
Amended and Restated Consulting Agreement dated as of December 31, 2002 between Ameritrans and Gary Granoff.(8)
10.18
Amended and Restated Employment Agreement dated as of February 21, 2006 between Ameritrans and Lee Forlenza.(29)
10.19
Amended and Restated Employment Agreement dated as of February 21, 2006 between Ameritrans and Ellen Walker.(29)
10.20
Employment Agreement dated as of January 1, 2002 between Ameritrans and Silvia Mullens.(9)
10.21
Amendment dated August 25, 2006 to Silvia Mullens Employment Agreement dated as of January 1, 2002.
10.22
Employment Agreement dated as of January 1, 2002 between Ameritrans and Margaret Chance.(9)
10.23
Amendment dated August 25, 2006 to Margaret Chance Employment Agreement dated as of January 1, 2002.
10.24
Form of Swap Agreement in the principal amount of $5,000,000 at a fixed rate of 6.20% effective October 14, 2005 between Elk Associates Funding Corp. and Citibank, N.A.
10.25
Form of Swap Agreement in the principal amount of $5,000,000 at a fixed rate of 6.23% effective October 14, 2005 between Elk Associates Funding Corp. and Citibank, N.A.
10.26
Amended and Restated Employment Agreement dated as of September 20, 2007 between Ameritrans and Gary Granoff. (31)
10.27
Amended and Restated Consulting Agreement dated as of September 20, 2007 between Ameritrans and Gary Granoff. (31)
10.28
Employment Agreement dated as of November 27, 2006 between Ameritrans and Michael Feinsod.(32)
10.29
Amended and Restated Employment Agreement dated as of May 2, 2008 between Ameritrans and Michael Feinsod.(14)
10.30
Amended and Restated Employment Agreement dated as of October 10, 2008 between amenities and Michael Feinsod. (15)
10.31
Amended and Restated Employment Agreement dated as of October 10, 2008 between amenities and Gary Granoff. (15)
12.1
Computation of Ratio of Earnings to Fixed Charges and Preference Dividends
13.1
Ameritrans 10-Q (File No. 814-00193) filed May 14, 2008. (13)
14.1
Code of Ethics of Ameritrans Capital Corporation as amended July 1, 2008
21.1
List of Subsidiaries of Ameritrans. (10)
31.1
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of the Chief Executive Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of the Chief Financial Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1
Ameritrans Audit Committee Charter (32)
99.2
Ameritrans Registration Statement on Form N-2 (File No. 333-132438) filed March 15, 2006. (29)
NOTES
(3)
Incorporated by reference from the Registrant’s Registration Statement on Form N-14 (File No. 333-63951) filed September 22, 1998.
(4)
Incorporated by reference from the Registrant’s Registration Statement filed on Form N-2 (File No. 333-82693) filed July 12, 1999.
(5)
Incorporated by reference from the Registrant’s Proxy Statement on Form 14A (File No. 814-00193) filed on May 21, 2007.
(6)
Incorporated by reference from the Registrant’s 10-Q (File No. 814-00193) filed May 14, 2004.
(7)
Incorporated by reference from the amendment to the Registrant’s N-2 (File No. 333-82693) filed March 1, 2002.
(8)
Incorporated by reference from the Registrant’s 10-Q (File No. 814-00193) filed February 14, 2003.
(9)
Incorporated by reference from the Registrant’s 10-Q (File No. 814-00193) filed February 14, 2002.
(10)
Incorporated by reference from the Registrant’s 10-K (File No. 814-00193) filed September 28, 2004.
(13)
Incorporated by reference from the Registrant’s Current Report on Form 8-K (File No. 814-00193) filed on July 1, 2008.
(14)
Incorporated by reference from the Registrant’s Current Report on Form 8-K (File No. 814-00193) filed on May 5, 2008.
(15)
Incorporated by reference from the Registrant’s Current Report on Form 8-K (File No. 814-00193) filed on October 10, 2008.
(29)
Incorporated by reference from the Registrant’s N-2 (File No. 333-132438) filed on March 15, 2006.
(31)
Incorporated by reference from the Registrant’s 8-K (File No. 814-00193) filed September 20, 2007.
(32)
Incorporated by reference from the Registrant’s 10-Q (File No. 814-00193) filed February 14, 2007.
(33)
Incorporated by reference from the Registrant’s 10-Q (File No. 814-00193) filed May 14, 2008.
Exhibit 31.1
CERTIFICATIONS
I, Michael Feinsod, certify that:
1.
I have reviewed this annual report on Form 10-K of Ameritrans Capital Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter, that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: September 28, 2009
/s/ Michael R. Feinsod
Michael R. Feinsod
Chief Executive Officer
Exhibit 31.2
CERTIFICATIONS
I, Gary C. Granoff, certify that:
1.
I have reviewed this annual report on Form 10-K of Ameritrans Capital Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter, that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: September 28, 2009
/s/ Gary C. Granoff
Gary C. Granoff
Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Ameritrans Capital Corporation (the "Company") on Form 10-K for the period ended June 30, 2009 as filed with the Securities and Exchange Commission on September 28, 2009 (the "Report"), the undersigned, in the capacity and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
Date: September 28, 2009
/s/ Michael R. Feinsod
Michael R. Feinsod
Chief Executive Officer
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Ameritrans Capital Corporation (the "Company") on Form 10-K for the period ended June 30, 2009 as filed with the Securities and Exchange Commission on September 28, 2009 (the "Report"), the undersigned, in the capacity and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
Date: September 28, 2009
/s/ Gary C. Granoff
Gary C. Granoff
Chief Financial Officer
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 28th day of September, 2009.
AMERITRANS CAPITAL CORPORATION
By: /s/ Michael R. Feinsod
-----------------------------------
Michael R. Feinsod
Chief Executive Officer
President
As required by the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE
TITLE
DATE
/s/ Gary C. Granoff
-----------------------------
Gary C. Granoff
Chairman of the Board of Directors, Managing Director and Chief Financial Officer
September 28, 2009
/s/ Michael Feinsod
-----------------------------
Michael Feinsod
Chief Executive Officer, President, Chief Compliance Officer and Director
September 28, 2009
/s/ Ellen M. Walker
-----------------------------
Ellen M. Walker
Executive Vice President and Director
September 28, 2009
-----------------------------
Murray A. Indick
Director
September 28, 2009
-----------------------------
Steven Etra
Director
September 28, 2009
/s/ John R. Laird
-----------------------------
John R. Laird
Director
September 28, 2009
-----------------------------
Howard F. Sommer
Director
September 28, 2009
/s/ Ivan Wolpert
-----------------------------
Ivan Wolpert
Director
September 28, 2009
/s/ Peter Boockvar
-----------------------------
Peter Boockvar
Director
September 28, 2009
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
CONTENTS
June 30, 2009, 2008 and 2007
Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Rosen Seymour Shapss Martin & Company LLP
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets at June 30, 2009 and 2008
-
Statements of Operations for the Years Ended
June 30, 2009, 2008 and 2007
Statements of Changes in Net Assets for the Years Ended
June 30, 2009, 2008 and 2007
Statements of Cash Flows for the Years Ended
June 30, 2009, 2008 and 2007
-
Schedules of Investments as of June 30, 2009 and 2008
-
Notes to Consolidated Financial Statements
-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Ameritrans Capital Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets, including the schedules of investments, of Ameritrans Capital Corporation and Subsidiaries (the “Company”) as of June 30, 2009 and 2008, and the related consolidated statements of operations, changes in net assets, and cash flows for each of the three years in the period ended June 30, 2009, and the financial highlights for each of the periods presented. These consolidated financial statements and financial highlights are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Ameritrans Capital Corporation and Subsidiaries as of June 30, 2009 and 2008, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2009 and the financial highlights for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America.
/s/ Rosen Seymour Shapss Martin & Company LLP
New York, New York
September 25, 2009
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2009 and 2008
Assets (Note 6)
Investments at fair value (cost of $28,769,396 and
$60,431,182, respectively):
Non-controlled/non-affiliated investments
$ 25,080,451
$
56,782,716
Non-controlled affiliated investments
711,000
1,424,264
Controlled affiliated investments
618,017
1,391,307
Net investments at fair value
26,409,468
59,598,287
Cash and cash equivalents
885,434
665,893
Accrued interest receivable
540,213
602,956
Assets acquired in satisfaction of loans
28,325
38,250
Furniture, equipment and leasehold improvements, net
130,217
156,125
Deferred loan costs, net
146,096
186,760
Prepaid expenses and other assets
146,403
733,197
Total assets
$ 28,286,156
$
61,981,468
(Continued)
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
June 30, 2009 and 2008
Liabilities and Stockholders’ Equity
Liabilities:
Debentures payable to SBA
$
12,000,000
$
12,000,000
Notes payable, banks
370,000
28,095,697
Note payable - related party
-
100,000
Accrued expenses and other liabilities
562,149
640,576
Accrued interest payable
210,165
262,528
Dividends payable
-
84,375
Total liabilities
$ 13,142,314
$ 41,183,176
Commitments and contingencies (Notes 12 and 13)
Stockholders’ equity:
Preferred stock 9,500,000 shares authorized, none issued or outstanding
-
-
9-3/8% cumulative participating redeemable preferred stock $.01 par value, $12.00 face value, 500,000 shares authorized; 300,000 shares issued and outstanding
3,600,000
3,600,000
Common stock, $.0001 par value; 45,000,000 shares authorized, 3,405,583 shares issued; 3,395,583 shares outstanding
Deferred compensation (Note 15)
(29,166)
(40,921)
Stock options outstanding (Note 15)
191,040
141,668
Additional paid-in capital
21,139,504
21,139,504
Losses and distributions in excess of earnings
(7,327,949)
(2,895,992)
Net unrealized depreciation on investments
(2,359,928)
(1,076,308)
Total
15,213,842
20,868,292
Less: Treasury stock, at cost, 10,000 shares of common stock
(70,000)
(70,000)
Total stockholders’ equity
15,143,842
20,798,292
Total liabilities and stockholders’ equity
$
28,286,156
$
61,981,468
Net asset value per common share
$
3.40
$
5.06
The accompanying notes are an integral part of these consolidated financial statements.
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended June 30, 2009, 2008 and 2007
Investment income:
Interest on loans receivable:
Non-controlled/non-affiliated investments
$ 3,023,497
$ 5,663,970
$ 4,960,257
Non-controlled affiliated investments
13,981
21,002
116,675
Controlled affiliated investments
67,776
234,652
141,238
3,105,254
5,919,624
5,218,170
Fees and other income
239,070
340,653
582,117
Leasing income
-
-
76,383
Total investment income
3,344,324
6,260,277
5,876,670
Operating expenses:
Interest
1,090,074
2,357,504
2,117,675
Salaries and employee benefits
2,216,963
1,872,228
1,773,167
Occupancy costs
280,502
268,502
232,195
Professional fees
1,808,979
786,021
825,023
Directors fees and expenses
107,715
114,134
60,712
Other administrative expenses
770,126
908,408
971,379
Loss and impairments on assets acquired in satisfaction
of loans, net
9,925
-
54,339
Total operating expenses
6,284,284
6,306,797
6,034,490
Net investment loss
(2,939,960)
(46,520)
(157,820)
Net realized gains (losses) on investments:
Non-controlled/non-affiliated investments
(642,495)
(349,612)
456,402
Non-controlled affiliated investments
(604,693)
-
(145,307)
Controlled affiliated investments
8,315
555,041
-
(1,238,873)
205,429
311,095
Net unrealized appreciation (depreciation) on investments
(1,283,620)
(696,480)
45,797
Net realized/unrealized gains (losses) on investments
(2,522,493)
(491,051)
356,892
Net increase (decrease) in net assets from operations
(5,462,453)
(537,571)
199,072
Distributions to preferred shareholders
(253,125)
(337,500)
(337,500)
Net decrease in net assets from operations available to
common shareholders
$ (5,715,578)
$ (875,071)
$ (138,428)
Weighted Average Number of Common Shares
Outstanding:
Basic and diluted
3,395,583
3,394,981
3,391,208
Net Decrease in Net Assets from Operations Per
Common Share:
Basic and diluted
$ (1.68)
$ (0.26)
$ (0.04)
The accompanying notes are an integral part of these consolidated financial statements.
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended June 30, 2009, 2008 and 2007
Increase (decrease) in net assets from operations:
Net investment loss
$ (2,939,960)
$ (46,520)
$ (157,820)
Net realized gains (losses) from investments
(1,238,873)
205,429
311,095
Unrealized appreciation (depreciation) on investments
(1,283,620)
(696,480)
45,797
Net increase (decrease) in net assets
resulting from operations
(5,462,453)
(537,571)
199,072
Shareholder distributions:
Distributions to preferred shareholders
(253,125)
(337,500)
(337,500)
Distributions to common shareholders
-
(67,912)
-
Capital share transactions:
Proceeds from stock options exercised
-
19,688
-
Stock options compensation expense
61,128
76,747
24,000
Net decrease in net assets resulting from capital shares transactions and shareholder distributions
(191,997)
(308,977)
(313,500)
Total decrease in net assets
(5,654,450)
(846,548)
(114,428)
Net assets:
Beginning of year
20,798,292
21,644,840
21,759,268
End of year
$ 15,143,842
$ 20,798,292
$ 21,644,840
Net assets per common
$ 11,543,842
$ 17,198,292
$ 18,044,840
Net assets per preferred
$ 3,600,000
$ 3,600,000
$ 3,600,000
Capital share activity:
Common shares issued upon exercise of stock options
-
4,375
-
The accompanying notes are an integral part of these consolidated financial statements.
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 2009, 2008 and 2007
Cash flows from operating activities:
Net increase (decrease) in net assets from operations
$ (5,462,453)
$ (537,571)
$ 199,072
Adjustments to reconcile net increase (decrease) in net assets from operations to net cash provided by (used in) operating activities:
Depreciation and amortization
70,986
76,631
108,084
Deferred compensation
61,128
76,747
24,000
Net realized (gains) losses on investments
1,238,873
(205,429)
(311,095)
Net unrealized (appreciation) depreciation on investments
1,283,620
696,480
(45,797)
Investments originated
(5,206,619)
(25,510,806)
(35,107,723)
Proceeds from principal receipts, sales, maturity of
investments
35,872,945
27,801,835
26,650,579
Assets acquired in satisfaction of loans
9,925
17,780
180,950
Loss on write-down of assets acquired
-
-
51,270
Changes in operating assets and liabilities:
Accrued interest receivable
62,743
(6,403)
46,293
Prepaid expenses and other assets
586,794
(483,575)
(79,328)
Accrued expenses and other liabilities
(78,427)
208,999
(448,626)
Accrued interest payable
(52,363)
(39,063)
(65,874)
Dividends Payable
(84,375)
-
-
Total adjustments
33,765,230
2,633,196
(8,997,267)
Net cash provided by (used in) operating activities
28,302,777
2,095,625
(8,798,195)
Cash flows from investing activities:
Purchases of furniture and equipment
(4,414)
(8,599)
(14,534)
Net cash used in investing activities
(4,414)
(8,599)
(14,534)
Cash flows from financing activities:
Proceeds from stock options exercised
-
19,688
-
Proceeds from note payable, related parties
-
500,000
150,000
Repayment of note payable, related parties
(100,000)
(550,000)
-
Proceeds from notes payable, banks
3,130,000
22,103,197
16,305,000
Repayment of notes payable, banks
(30,855,697)
(23,340,000)
(7,900,000)
Dividends paid
(253,125)
(405,412)
(337,500)
Net cash provided by (used in) financing activities
(28,078,822)
(1,672,527)
8,217,500
Net increase (decrease) in cash and cash equivalents
219,541
414,499
(595,229)
Cash and cash equivalents:
Beginning of year
665,893
251,394
846,623
End of year
$ 885,434
$ 665,893
$ 251,394
(Continued)
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended June 30, 2009, 2008 and 2007
Supplemental disclosure of cash flow information:
Cash paid during the years for:
Interest
$ 1,142,437
$ 2,396,567
$
2,244,866
Supplemental disclosures of non-cash investing and
financing activities:
Reclassification of proceeds of medallions sold and
financed by the Company to loans receivable
$ -
$
-
$
2,096,608
Stock options granted
$ 49,372
$ 23,193
$
118,475
The accompanying notes are an integral part of these consolidated financial statements.
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
SCHEDULE OF INVESTMENTS
June 30, 2009
Portfolio Company (1)
Investment
Investment Rate/Maturity
Principal
Net Cost
Value
Medallion Loans Receivable (2.36%)(5)
$ 26,173
$ 26,173
$ 26,173
Boston Taxicab Medallion Portfolio
2 Medallion Loans
8.19% Weighted Average Rate
Chicago Taxicab Medallions
3 Medallion Loans
7.83% Weighted Average Rate
84,309
84,309
84,309
Florida Taxicab
2 Medallion Loans
9.34% Weighted Average Rate
252,129
252,129
246,218
362,611
356,700
Commercial Loans Receivable (74.57%)(5)
A Lot of Cars LLC (7)
Black Car Leasing
Collateralized Business Loan
7.0%, due 6/09
75,050
75,050
75,050
PPCP Inc.
Computer Software
Business Loan
8.0%, due 7/08
14,272
14,272
-
PPCP Inc.
Computer Software
Business Loan
8.0%, due 7/08
16,499
16,499
-
Geronimo ATM Fund LLC
ATM Operator
Collateralized Business Loan
12.0%, due 5/09
146,822
146,822
-
Cleaners of North Beach, LLC
Dry Cleaners
Collateralized Business Loan
5.5%, due 5/11
24,454
24,454
24,454
Crown Cleaners of Miami Lakes
Dry Cleaners
Collateralized Business Loan
6.0%, due 7/11
3,072
3,072
3,072
Crown Cleaners of Miami Lakes
Dry Cleaners
Collateralized Business Loan
6.0%, due 7/11
19,262
19,262
19,262
City Brite Cleaners Inc.
Dry Cleaners
Collateralized Business Loan
11.0%, due 7/09
Andy Fur Dry Cleaning, Inc.
Dry Cleaners
Collateralized Business Loan
14.5%, due 1/10
12,103
12,103
-
Vivas & Associates, Inc.
Nail Salon
Collateralized Business Loan
9.0%, due 1/10
12,185
12,185
-
PPCP, Inc.
Computer Software
Business Loan
8.0%, due 1/10
5,965
5,965
-
Monticello Desserts, Inc.
Retail Bakery
Collateralized Business Loan
14.0%, due 4/10
53,237
53,237
53,237
Chao Tenga LLC d/b/a AsianChao
Retail Fast Food
Collateralized Business Loan
15.5%, due 5/10
98,481
98,481
98,481
Just Salad LLC
Retail Food Service
Collateralized Business Loan
10.0%, due 10/10
320,925
320,925
320,925
Mi Tren Greenlawn, Inc. (7)
Retail Fast Food
Subordinate Real Estate Mortgage
13.75%, due 2/11
54,616
54,616
54,616
E&Y General Construction Co.
Construction Services
Senior Real Estate Mortgage
10.5%, due 10/10
870,791
870,791
870,791
Lifehouse-Golden Acres Prop.
Assisted Living Facility
Senior Real Estate Mortgage - Participation
11.0%, due 2/09
770,840
770,840
770,840
Sealmax, Inc. (7)
Construction Services
Senior Real Estate Mortgage
12.0%, due 4/11
437,230
437,230
437,230
Sealmax, Inc. (7)
Construction Services
Senior Real Estate Mortgage
12.0%, due 4/11
325,000
325,000
325,000
Pier-Tech, Inc.
Specialty Construction Services
Subordinate Real Estate Mortgage - Participation 12.0%, due 8/10
173,140
173,140
173,140
Soundview Broadcasting LLC
Television and Broadcasting
Senior Real Estate Mortgage
7.75%, due 9/11
1,939,947
1,939,947
1,939,947
Golden Triangle Enterprises LLC
Retail Food Service
Senior Real Estate Mortgage
7.01%, due 12/13
331,473
331,473
331,473
Goldhkin Wholesale Ent. Inc.
Retail Gasoline
Senior Real Estate Mortgage
10.25%, due 7/12
632,414
632,414
632,414
Sealmax, Inc.
Construction Services
Subordinate Real Estate Mortgage
12.0%, due 4/11
155,561
155,561
155,561
Conklin Services & Construction Inc. (7)
Specialty Construction and Maintenance
Collateralized Business Loan
12%, due 10/08
1,713,280
1,713,280
1,463,280
Conklin Services & Construction Inc. Dem Note
Specialty Construction and Maintenance(7)
Collateralized Business Loan
11%, no maturity
43,488
43,488
43,488
Conklin Services & Construction Inc. Dem Note
Specialty Construction and Maintenance(7)
Collateralized Business Loan
11%, no maturity
12,424
12,424
12,424
Mountain View Bar & Grill Inc.
Retail Food Service
Collateralized Business Loan
12.0%, due 5/09
412,500
412,500
412,500
J. JG. Associates, Inc. (7)
Consumer Receivable Collections
Senior Loan
no stated rate, no maturity
202,736
202,736
90,750
J. JG. Associates, Inc. (7)
Consumer Receivable Collections
Senior Loan
no stated rate, no maturity
38,731
38,731
23,260
Natural Person (7)
Real Estate Mortgage
Senior Real Estate Mortgage
12.0%, due 11/08
665,000
665,000
470,000
Lifehouse - Golden Acres Prop.
Assisted Living Facility
Senior Real Estate Mortgage - Participation
11.0%, due 7/08
137,640
137,640
137,640
Car-Matt Real Estate LLC
Real Estate Mortgage
Senior Real Estate Mortgage
12.0%, due 11/08
135,577
135,577
135,577
633 Mead Street, LLC (3)
First lien mortgage
Senior Real Estate Mortgage
12.0%, due 8/08
215,000
215,000
215,000
CMCA, LLC (3)
Consumer Receivable Collections
Collateralized Business Loan
12%, no stated maturity
285,956
285,956
285,956
CMCA, LLC #2 (3)
Consumer Receivable Collections
Collateralized Business Loan
12%, no stated maturity
106,261
106,261
106,261
Adiel Homes Inc.
Construction Services
Senior Real Estate Mortgage
12%, due 1/09
250,000
250,000
250,000
Western Pottery LLC(2)
Ceramic Sanitaryware Distributor
Subordinated Business Loan
5.0%, due 7/08
53,575
53,575
53,575
Western Pottery LLC(2)
Ceramic Sanitaryware Distributor
Subordinated Business Loan
3.25%, due 10/08
107,142
107,142
107,142
Western Pottery LLC(2)
Ceramic Sanitaryware Distributor
Subordinated Business Loan
5.0%, due 11/08
107,142
107,142
107,142
Western Pottery LLC(2)
Ceramic Sanitaryware Distributor
Subordinated Business Loan
5.0%, due 3/09
56,250
56,250
56,250
Western Pottery LLC(2)
Ceramic Sanitaryware Distributor
Subordinated Business Loan
5.0%, due 6/09
37,500
37,500
37,500
PWT Holdings Inc
Water Cooler Distributor
Collateralized Business Loan
12.5%, due 6/10
508,159
508,159
508,159
Greaves-Peters Laundry Systems Inc.
Laundromat
Collateralized Business Loan
10.9%, due 9/13
352,922
352,922
352,922
Other Miscellaneous Loans (6)
159,143
159,143
138,148
Total Commercial Loans
12,094,430
11,293,132
Corporate Loans Receivable (80.52%)(5)
Charlie Brown’s Acquisition Co.
Retail Food Service
Term Loan B
6.67%, due 10/13
2,035,447
2,035,447
2,035,447
Resco Products Inc.
Diversified Manufacturing
Term Loan, First Lien
5.95%, due 6/13
1,697,130
1,697,130
1,697,130
Alpha Media Group Inc.
Publishing
Term Loan, First Lien
5.75%, due 8/14
1,845,791
1,845,791
1,935,172
Centaur LLC
Gaming
Term Loan, First Lien
6.7%, due 10/12
1,356,931
1,356,931
1,384,913
Learning Care Group Inc
Private Education
Term Loan, First Lien
8.4%, due 6/15
955,556
955,556
990,000
Hudson Products Holdings Inc.
Diversified Manufacturing
Term Loan, First Lien
8.9%, due 8/15
1,448,715
1,448,715
1,488,751
X-Rite Inc.
Process Control Instruments
Term Loan, First Lien
7.95%, due 10/12
1,244,210
1,244,210
1,251,051
BP Metals LLC
Diversified Manufacturing
Term Loan, First Lien
8.76%, due 6/13
911,224
911,224
911,224
Test Center LLC
Data Collection Services
Term Loan, First Lien
5.45%, due 10/13
512,935
512,935
499,567
Total Corporate Loans
12,007,939
12,193,255
Total loans receivable
24,464,980
23,843,087
Life Insurance Settlement Contracts (11.65%)(5)
Vibrant Capital Corp. (J.V. #1)(4)
7 life insurance policies, aggregate
face value of $30,750,000
2,859,489
1,764,081
Equity Investments (5.30%)(5)
MBS Steeplecrest, Ltd.
Rental Real Estate Limited Partnership
Limited Partnership Interest
-
-
MBS Huntwick, Ltd.
Rental Real Estate Limited Partnership
Limited Partnership Interest
-
-
MBS Cranbrook Ltd.
Rental Real Estate Limited Partnership
Limited Partnership Interest
-
-
MBS Serrano, Ltd.
Rental Real Estate Limited Partnership
Limited Partnership Interest
50,600
-
MBS Colonnade, Ltd.
Rental Real Estate Limited Partnership
Limited Partnership Interest
50,000
-
MBS Briar Meadows, Ltd.
Rental Real Estate Limited Partnership
Limited Partnership Interest
-
-
MBS Indian Hollow, Ltd.
Rental Real Estate Limited Partnership
Limited Partnership Interest
-
-
MBS Sage Creek, Ltd.
Rental Real Estate Limited Partnership
Limited Partnership Interest
50,000
27,558
MBS Walnut Creek, Ltd.
Rental Real Estate Limited Partnership
Limited Partnership Interest
25,000
7,480
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% LLC Interest
106,000
11,000
Asset Recovery & Management, LLC (3)
Consumer Receivable Collections
30.0% LLC Interest
6,000
6,000
633 Mead Street, LLC (3)
Real Estate Development
57.1% LLC Interest
CMCA, LLC (3)
Consumer Receivable Collections
30% LLC Interest
4,000
4,000
Soha Terrace II LLC (2)
Real Estate Development
6% LLC Interest
700,000
700,000
Fusion Telecommunications
Internet Telephony
69,736 Shares of Common Stock
367,027
9,066
EraGen Biosciences
Analytic Compounds
17,000 shares of Common Stock
25,500
5,500
Total equity investments
1,444,927
802,300
Total investments
$ 28,769,396
$ 26,409,468
(1)Unless otherwise noted, all investments are pledged as collateral for the Notes payable, banks (see Note 6 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, 2009, 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)The Company receives interest at a rate of 12% per annum pursuant to an agreement with another company (see Note 3 to the consolidated financial statements for more details).
(5)Percentage of net assets.
(6)Other small balance loans.
(7) Loan receivable is on non-accrual status and therefore is considered non-income producing.
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
SCHEDULE OF INVESTMENTS (Continued)
June 30, 2008
Portfolio Company (1)
Investment
Investment Rate/Maturity
Principal
Net Cost
Value
Medallion Loans Receivable (143.4%)(5)
Boston Taxicab Medallion Portfolio
26 Medallion Loans
8.19% Weighted Average Rate
$
4,557,009
$
4,557,009
$
4,597,158
Chicago Taxicab Medallions
193 Medallion Loans
7.83% Weighted Average Rate
17,239,802
17,239,802
17,391,690
Florida Taxicab
75 Medallion Loans
9.34% Weighted Average Rate
7,812,514
7,812,514
7,881,494
29,609,325
29,870,342
Commercial Loans Receivable (66.7%)(5)
Across the Town
Chicago Taxicab Operations
Collateralized Business Loan
8.0%, due 6/15
15,038
15,038
15,038
Jade R. Inc. d/b/a Eagle Cleaner
Laundromat
Collateralized Business Loan
9.5%, due 7/03
3,974
3,974
3,974
1519 Avenue J. Laundromat (7)
Laundromat
Collateralized Business Loan
12.5%, due 9/01
63,123
63,123
63,123
A Lot of Cars LLC(7)
Black Car Leasing
Collateralized Business Loan
7.0%, due 6/09
110,050
110,050
75,500
Hi-Tech Laundromat Inc.
Laundromat
Collateralized Business Loan
11.0%, due 11/08
134,410
134,410
134,410
PPCP Inc.
Computer Software
Business Loan
8.0%, due 7/08
17,569
17,569
-
PPCP Inc.
Computer Software
Business Loan
8.0%, due 7/08
14,272
14,272
-
Lucky Coin Laundry Inc.
Laundromat
Collateralized Business Loan
8.0%, due 9/11
99,080
99,080
99,080
AKBA International Inc.
Retail Food Service
Collateralized Business Loan
11.25%, due 5/09
7,563
7,563
7,563
6717 Laundromat & Dry Cleaning
Laundromat
Collateralized Business Loan
11.0%, due 4/11
249,339
249,339
249,339
Colgate Dry Cleaners Corp.
Dry Cleaners
Collateralized Business Loan
10.5%, due 1/09
2,917
2,917
2,917
Geronimo ATM Fund LLC(7)
ATM Operator
Collateralized Business Loan
12.0%, due 5/09
146,822
146,822
30,000
Cleaners of North Beach, LLC
Dry Cleaners
Collateralized Business Loan
5.5%, due 5/11
34,370
34,370
34,370
Crown Cleaners of Miami Lakes
Dry Cleaners
Collateralized Business Loan
6.0%, due 7/11
4,290
4,290
4,290
Crown Cleaners of Miami Lakes
Dry Cleaners
Collateralized Business Loan
6.0%, due 7/11
28,426
28,426
28,426
City Brite Cleaners Inc.
Dry Cleaners
Collateralized Business Loan
11.0%, due 7/09
8,191
8,191
8,191
Whiter Than Snow Laundry, Inc.
Laundromat
Collateralized Business Loan
9.0%, due 12/12
64,912
64,912
-
Andy Fur Dry Cleaning, Inc.
Dry Cleaners
Collateralized Business Loan
14.5%, due 1/10
19,027
19,027
19,027
Vivas & Associates, Inc. (7)
Nail Salon
Collateralized Business Loan
9.0%, due 1/10
12,385
12,385
6,385
PPCP, Inc.
Computer Software
Business Loan
8.0%, due 1/10
5,965
5,965
-
Monticello Desserts, Inc.
Retail Bakery
Collateralized Business Loan
14.0%, due 4/10
79,401
79,401
79,401
Cooper Ave. Wash, Inc.
Laundromat
Business Loan
10.0%, due 3/12
305,333
305,333
305,333
Best Choice Dry Cleaners
Dry Cleaners
Collateralized Business Loan
11.0%, due 5/10
14,375
14,375
14,375
Chao Tenga LLC d/b/a AsianChao
Retail Fast Food
Collateralized Business Loan
15.5%, due 5/10
205,382
205,382
205,382
JNJ Associates Inc.
Laundromat
Collateralized Business Loan
7.5%, due 6/12
73,913
73,913
50,000
Just Salad LLC
Retail Food Service
Collateralized Business Loan
10.0%, due 10/10
320,925
320,925
320,925
MGM/Clean-Rite Laundromat
Laundromat
Subordinate Real Estate Mortgage
14.0%, due 10/07
44,624
44,624
44,624
Elite Limousine Plus Inc.
Black Car Service
Collateralized Business Loan
11.0%, due 7/08
318,270
318,270
318,270
Scotto Pizza of Woodbridge Inc.
Retail Food Service
Collateralized Business Loan
12.75%, due 3/09
5,569
5,569
5,569
Mi Tren Greenlawn, Inc.
Retail Fast Food
Subordinate Real Estate Mortgage
13.75%, due 2/11
91,606
91,606
91,606
E&Y General Construction Co.
Construction Services
Senior Real Estate Mortgage
10.5%, due 10/10
880,791
880,791
880,791
Lifehouse-Golden Acres Prop.
Assisted Living Facility
Senior Real Estate Mortgage - Participation
11.0%, due 7/08
770,840
770,840
770,840
Sealmax, Inc.
Construction Services
Senior Real Estate Mortgage
12.0%, due 4/11
435,032
435,032
435,032
Sealmax, Inc.
Construction Services
Senior Real Estate Mortgage
12.0%, due 4/11
325,000
325,000
325,000
Pier-Tech, Inc.
Specialty Construction Services
Subordinate Real Estate Mortgage - Participation 12.0%, due 8/10
304,682
304,682
304,682
Soundview Broadcasting LLC
Television and Broadcasting
Senior Real Estate Mortgage
7.75%, due 9/11
1,989,638
1,989,638
1,989,638
Golden Triangle Enterprises LLC
Retail Food Service
Senior Real Estate Mortgage
7.01%, due 12/13
381,316
381,316
381,316
Goldhkin Wholesale Ent. Inc.
Retail Gasoline
Senior Real Estate Mortgage
10.25%, due 7/12
686,666
686,666
686,666
Sealmax, Inc.
Construction Services
Subordinate Real Estate Mortgage
12.0%, due 4/11
155,815
155,815
155,815
Conklin Services & Construction Inc.
Specialty Construction and Maintenance
Collateralized Business Loan
12%, due 10/08
1,718,219
1,718,219
1,718,219
Mountain View Bar & Grill Inc.
Retail Food Service
Collateralized Business Loan
12.0%, due 5/09
412,500
412,500
412,500
J. JG. Associates, Inc.
Consumer Receivable Collections
Senior Loan
no stated rate, no maturity
218,986
218,986
107,000
J. JG. Associates, Inc.
Consumer Receivable Collections
Senior Loan
no stated rate, no maturity
39,071
39,071
23,600
Ogden Avenue CH, LLC
Real Estate Development
Collateralized Business Loan
11.0%, due 12/10
387,794
387,794
387,794
Soha Terrace II LLC
Real Estate Development
Senior Real Estate Mortgage
12.0%, due 4/08
62,500
62,500
62,500
Natural Person
Real Estate Mortgage
Senior Real Estate Mortgage
12.0%, due 11/08
665,000
665,000
665,000
Lifehouse - Golden Acres Prop.
Assisted Living Facility
Senior Real Estate Mortgage - Participation
11.0%, due 7/08
137,640
137,640
137,640
Car-Matt Real Estate LLC
Real Estate Mortgage
Senior Real Estate Mortgage
12.0%, due 11/08
135,577
135,577
135,577
633 Mead Street, LLC (3)
First lien mortgage
Senior Real Estate Mortgage
12.0%, due 8/08
215,000
215,000
215,000
CMCA, LLC (3)
Consumer Receivable Collections
Collateralized Business Loan
12%, no stated maturity
388,440
388,440
388,440
CMCA, LLC #2 (3)
Consumer Receivable Collections
Collateralized Business Loan
12%, no stated maturity
143,752
143,752
143,752
Adiel Homes Inc.
Construction Services
Senior Real Estate Mortgage
12%, due 1/09
250,000
250,000
250,000
Puretech Enterprises LLC(3)
Water Cooler Distributor
Collateralized Business Loan
12.5%, due 6/10
200,000
200,000
200,000
Puretech Enterprises LLC(3)
Water Cooler Distributor
Collateralized Business Loan
12.5%, due 7/10
200,000
200,000
200,000
Western Pottery LLC(2)
Ceramic Sanitaryware Distributor
Subordinated Business Loan
5.0%, due 7/08
53,575
53,575
53,575
Puretech Enterprises LLC(3)
Water Cooler Distributor
Collateralized Business Loan
12.5%, due 9/10
200,000
200,000
200,000
Western Pottery LLC(2)
Ceramic Sanitaryware Distributor
Subordinated Business Loan
5.0%, due 11/08
107,142
107,142
107,142
Western Pottery LLC(2)
Ceramic Sanitaryware Distributor
Subordinated Business Loan
5.0%, due 3/09
56,250
56,250
56,250
Western Pottery LLC(2)
Ceramic Sanitaryware Distributor
Subordinated Business Loan
5.0%, due 6/09
37,500
37,500
37,500
Other Miscellaneous Loans (6)
184,698
184,698
184,698
Total Commercial Loans
14,244,545
13,833,085
Corporate Loans Receivable (55.3%)(5)
Charlie Brown’s Acquisition Co.
Retail Food Service
Term Loan B
6.67%, due 10/13
2,000,000
2,000,000
2,000,000
Resco Products Inc.
Diversified Manufacturing
Term Loan, First Lien
5.95%, due 6/13
2,000,000
1,900,000
1,900,000
Alpha Media Group Inc.
Publishing
Term Loan, First Lien
5.75%, due 8/14
1,876,667
1,775,143
1,775,143
Centaur LLC
Gaming
Term Loan, First Lien
6.7%, due 10/12
2,061,224
2,025,033
1,954,157
X-Rite Inc.
Process Control Instruments
Term Loan, First Lien
7.95%, due 10/12
1,985,000
1,976,159
1,976,159
BP Metals LLC
Diversified Manufacturing
Term Loan, First Lien
8.76%, due 6/13
1,000,000
1,000,000
1,000,000
Test Center LLC
Data Collection Services
Term Loan, First Lien
5.45%, due 10/13
944,862
902,511
902,511
Total Corporate Loans
11,578,846
11,507,970
Total loans receivable
55,432,716
55,211,397
Life Insurance Settlement Contracts (13.7%)(5)
Vibrant Capital Corp. (J.V. #1)(4)
8 life insurance policies, aggregate
face value of $40,750,000
2,842,458
2,842,458
Equity Investments (7.4%)(5)
MBS Steeplecrest, Ltd.
Rental Real Estate Limited Partnership
Limited Partnership Interest
-
-
MBS Huntwick, Ltd.
Rental Real Estate Limited Partnership
Limited Partnership Interest
-
-
MBS Cranbrook Ltd.
Rental Real Estate Limited Partnership
Limited Partnership Interest
-
-
MBS Serrano, Ltd.
Rental Real Estate Limited Partnership
Limited Partnership Interest
50,600
34,822
MBS Colonnade, Ltd.
Rental Real Estate Limited Partnership
Limited Partnership Interest
50,000
4,395
MBS Briar Meadows, Ltd.
Rental Real Estate Limited Partnership
Limited Partnership Interest
-
-
MBS Indian Hollow, Ltd.
Rental Real Estate Limited Partnership
Limited Partnership Interest
-
-
MBS Sage Creek, Ltd.
Rental Real Estate Limited Partnership
Limited Partnership Interest
50,000
35,841
MBS Walnut Creek, Ltd.
Rental Real Estate Limited Partnership
Limited Partnership Interest
25,000
12,345
MBS Lodge At Stone Oak, Ltd.
Rental Real Estate Limited Partnership
Limited Partnership Interest
60,000
40,408
Brickman Real Estate Fund II LLP
Real Estate Acquisition & Management
Limited Partnership Interest
225,001
238,896
238 W. 108 Realty LLC (2)
Residential Real Estate Development
5% LLC Interest
100,000
100,000
Asset Recovery & Management, LLC (3)
Consumer Receivable Collections
30.0% LLC Interest
6,000
6,000
633 Mead Street, LLC (3)
Real Estate Development
57.1% LLC Interest
CMCA, LLC (3)
Consumer Receivable Collections
30% LLC Interest
4,000
4,000
Soha Terrace II LLC (2)
Real Estate Development
6% LLC Interest
700,000
700,000
Western Pottery LLC(2)
Ceramic Sanitaryware Distributor
21.8% LLC Interest
467,080
307,297
Fusion Telecommunications
Internet Telephony
69,736 Shares of Common Stock
367,027
20,813
EraGen Biosciences
Analytic Compounds
17,000 shares of Common Stock
25,500
5,500
Puretech Enterprises LLC(3)
Water Cooler Distributor
40% Equity Interest
25,000
33,315
Total equity investments
2,156,008
1,544,432
Total investments
$
60,431,182
$
59,598,287
(1)Unless otherwise noted, all investments are pledged as collateral for the Notes payable, banks (see Note 6 to the consolidated financial statements).
(2)
As defined in the Investment Company Act of 1940, we are an affiliate of this portfolio company because 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)
The Company receives interest at a rate of 12% per annum pursuant to an agreement with another company (see Note 3 to the consolidated financial statements for more details).
(5)Percentage of net assets.
(6)Other small balance loans.
(7) Loan receivable is on non-accrual status and therefore is considered non-income producing.
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009, 2008 and 2007
1. Organization and Summary of Significant Accounting Policies
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 our subsidiary, Elk Associates Funding Corporation (“Elk”), we make 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 has historically been 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. We also make equity investments which have primarily been in income producing real estate properties, or in real estate construction projects.
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.
Basis of Consolidation
The consolidated financial statements include the accounts of Ameritrans, Elk Capital Corporation (“ECC”), Elk and Elk’s wholly owned subsidiaries, EAF Holding Corporation (“EAF”), EAF Leasing LLC, EAF Leasing II LLC, and EAF Leasing III LLC. All significant inter-company transactions have been eliminated in consolidation.
ECC is a wholly-owned subsidiary of Ameritrans, which may engage in lending and investment activities similar to its parent. Since July 2009, ECC has owned certain real estate acquired by the Company in satisfaction of foreclosures.
EAF began operations in December 1993 and owns and operates certain real estate assets acquired in satisfaction of defaulted loans by Elk debtors. At June 30, 2009, EAF was not operating any assets acquired in satisfaction of defaulted loans by Elk.
EAF Leasing LLC began operations in October 2003 and owned, leased, and resold taxi medallions acquired in satisfaction of foreclosures by Elk. EAF Leasing LLC was voluntarily liquidated and dissolved on July 17, 2007.
EAF Leasing II LLC began operations in October 2003 and owned, leased, and resold taxi medallions acquired in satisfaction of foreclosures by Elk. EAF Leasing II LLC was voluntarily liquidated and dissolved on July 17, 2007.
EAF Leasing III LLC began operations in January 2004 and owned, leased, and resold taxi medallions acquired in satisfaction of foreclosures by Elk. EAF Leasing III LLC was voluntarily liquidated and dissolved on April 10, 2007.
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 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 fair value of the loan will be reduced to reflect such amounts .
Equity investments (common 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. If no public market exists the fair value of investments that have no ready market are determined in good faith by management, and approved by the Board of Directors, based upon assets and revenues of the underlying investee companies as well as general market trends for businesses 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 have no ready market and are determined in good faith by management, and approved by the Board of Directors.
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 SFAS 157, which expands the application of fair value accounting for investments (see Note 3).
Cash and Cash Equivalents
For the purposes of the statement of cash flows, the Company considers all short-term investments with an original maturity of three months or less when acquired to be cash equivalents. The Company maintains its cash balances with various banks with high quality ratings. However, at times balances may exceed federally insured limits.
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 2008/2009, the Company intends to make the required distributions to its stockholders, therefore, no provision for federal income taxes has been provided.
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.
Depreciation and Amortization
Depreciation and amortization are computed using the straight-line method over the useful lives of the respective assets. Leasehold improvements are amortized over the life of the respective leases.
Deferred Loan Costs and Fees
Amortization of deferred loan costs is computed on the straight-line method over the respective loan term. Amortization of deferred loan costs and fees for the years ended June 30, 2009, 2008 and 2007 was $40,664, $41,114 and $41,004, respectively. At June 30, 2009 and 2008, deferred loan costs and commitment fees amounted to $146,096 and $186,760, net of accumulated amortization of $273,904 and $233,240, respectively.
Assets Acquired in Satisfaction of Loans
Assets acquired in satisfaction of loans are carried at the lower of the net value of the related foreclosed loan or the estimated fair value less cost of disposal. Losses incurred at the time of foreclosure are charged to the unrealized depreciation on loans receivable. Subsequent reductions in estimated net realizable value are charged to operations as losses on assets acquired in satisfaction of loans.
Impairment of Long-Lived Assets and Acquired Intangible Assets
The Company monitors events and changes in circumstances that could indicate that the carrying amounts of long-lived assets, including intangible assets, may not be recoverable. When such events or changes in circumstances occur, the Company assesses the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the undiscounted cash flows are less than the carrying amount, an impairment loss is recorded to the extent that the carrying amount exceeds the fair value.
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.
Treasury Stock
Treasury stock is carried at cost. Gains and losses on disposition of treasury stock, if any, are recorded as increases or decreases to additional paid-in capital with losses in excess of previously recorded gains charged directly to retained earnings.
Earnings (Loss) Per Share
Basic earnings (loss) 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 earnings per share reflect, in periods in which they have a dilutive effect, the effect of common shares issuable upon the exercise of stock options and warrants. The difference between reported basic and diluted weighted average common shares results from the assumption that all dilutive stock options outstanding were exercised. For the years presented, the effect of common stock equivalents has been excluded from the diluted calculation since the effect would be antidilutive.
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.
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 Statement of Financial Accounting Standards No. 123R (“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, the Company applied APB Opinion No. 25 and related Interpretations in accounting for all the plans. Accordingly, no compensation cost was recognized under these plans, as the Company followed the disclosure-only provisions of SFAS No. 123 and SFAS No. 148, “Accounting for Stock-Based Compensation Transition and Disclosure.”
The Company elected the modified prospective transition method for adopting SFAS No. 123R. Under this method, the provisions of SFAS 123R apply to all awards granted or modified after the date of adoption. The compensation cost is then recognized over the vesting period of the options (see Note 15).
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 were computed using the discounted amount of future cash flows using the Company’s current incremental borrowing rate for similar types of borrowings (see Note 11).
Derivatives
The Company from time to time enters into interest rate swap agreements in order to manage interest rate risk. The Company does not use interest rate swaps or other derivatives for trading or other speculative purposes. In accordance with Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as subsequently amended, all derivative instruments are recorded at fair value. For derivative instruments designed as cash flow hedges, the effective portion of that hedge is deferred and recorded as a component of other comprehensive income. Any portion of the hedge deemed to be ineffective is recognized promptly in the consolidated statements of operations.
Recently Issued Accounting Standards
In April 2009, the Financial Accounting Standards Board (“FASB”) issued FSP No. 115-2, Recognition and Presentation of Other-Than-Temporary Impairments (“FSP No. 115-2”), which was issued to make the guidance on other-than-temporary impairment more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. FSP 115-2 requires significant additional disclosures for both annual and interim periods, including the amortized cost basis of available-for-sale and held-to-maturity debt, the methodology and key imports used to measure the credit portion of other-than-temporary impairment, and a roll forward of amounts recognized in earnings for securities by major security type. FSP No. 115-2 amends Statement of Financial Accounting Standards (“SFAS”) No. 115, Accounting for Certain Investments in Debt and Equity Securities (“SFAS No. 115”) and FSP No. 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments to require that entities identify major security classes consistent with how the securities are managed based on the nature and risks of the security, and also expands, for disclosure purposes, the list of major security types identified in SFAS No. 115. FSP No. 115-2 is effective for interim and annual reporting periods ending after June 15, 2009. The Company does not believe the adoption of this pronouncement will have a material impact on its financial condition or results of operations.
In April 2009, the FASB issued FSP No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP No. 157-4”), which provides additional guidance for estimating fair value in accordance with FASB Statement No. 157 when the volume and level of activity for an asset or liability has significantly decreased and also provides guidance on identifying circumstances that indicate a transaction is not orderly. FSP No. 157-4 amends SFAS No. 157 to require entities to disclose in interim and annual periods the inputs and valuation techniques used to measure fair value together with any changes in valuation techniques and related inputs during the period. FSP No. 157-4 also requires reporting entities to define major categories for both debt and equity securities to be major security types as described in paragraph 19 of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. This requires entities to provide disclosures on a more disaggregated basis than previously had been required under SFAS No. 157. FSP No. 157-4 is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. The Company does not believe the adoption of this pronouncement will have a material impact on its financial condition or results of operations.
In October 2008, the FASB issued Staff Position No. 157-3 - Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active, or FSP 157-3. FSP 157-3 provides an illustrative example of how to determine the fair value of a financial asset in an inactive market. FSP 157-3 does not change the fair value measurement principles set forth in SFAS 157 (see Note 2 for a description of SFAS 157). Since adopting SFAS 157 in July 2008, our process for determining the fair value of our investments has been, and continues to be, consistent with the guidance provided in the example in FSP 157-3. As a result, the adoption of FSP 157-3 did not affect our process for determining the fair value of our investments and did not have a material effect on our financial condition or results of operations.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative and Hedging Activities-an amendment of FASB Statement No. 133.” SFAS 161 requires enhanced disclosures on derivative and hedging activities. These enhanced disclosures will discuss (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years beginning on or after November 15, 2008, with earlier adoption encouraged. The Company does not anticipate a material impact, if any, to the Company’s financial condition or results of operations.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51” (“SFAS 160”), which establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary by clarifying that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as a component of equity. It requires that changes in a parent’s ownership interest while the parent retains its controlling interest be accounted for as equity transactions and any retained noncontrolling equity investment upon the deconsolidation of a subsidiary be initially measured at fair value. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008 and shall be applied prospectively, except for the presentation and disclosure requirements which shall be applied retrospectively. We do not believe that this pronouncement will have an impact on our financial condition or results of operations.
In December 2007, the FASB issued SFAS No. 141R (revised 2007), “Business Combinations” (“SFAS 141R”) which supersedes SFAS No. 141 and establishes principles and requirements on how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date fair value, as well as the recognition and measurement of goodwill acquired in a business combination. SFAS No. 141R also requires certain disclosures to enable users of the financial statements to evaluate the nature and financial effects of the business combination. Acquisition costs associated with the business combination will generally be expensed as incurred. SFAS No. 141R is effective prospectively to business combinations in fiscal years beginning on or after December 15, 2008. We do not believe that this pronouncement will have an impact on our financial condition or results of operations.
2. Assets Acquired in Satisfaction of Loans
Assets acquired in satisfaction of loans consist of the following as of June 30, 2009 and 2008:
Real Estate
Other
Total
Balance-June 30, 2007
$
17,780
$
38,250
$
56,030
Proceeds
(17,780)
-
(17,780)
Balance-June 30, 2008
-
38,250
38,250
Write-offs
-
(9,925)
(9,925)
Balance-June 30, 2009
$ -
$ 28,325
$ 28,325
3. Investments
Loans Receivable
Loans are considered non-performing once they become 90 days past due as to principal or interest. The Company had loans which are considered non-performing in the amount of $4,952,769 and $2,850,939 as of June 30, 2009 and June 30, 2008, respectively. These loans are either fully or substantially collateralized and are usually personally guaranteed by the debtor. Included in the total non-performing loans is $3,249,070 and $175,008 at June 30, 2009 and June 30, 2008, respectively, which is no longer accruing interest since the loan principal and accrued interest exceed the estimated collateral value. The following table sets forth certain information regarding performing and non-performing loans as of June 30, 2009 and June 30, 2008:
Loans receivable
$ 23,843,087
$
55,211,397
Performing loans
18,890,318
52,360,458
Nonperforming loans
4,952,769
$
2,850,939
Nonperforming loans:
Accrual
1,703,699
$
2,675,931
Nonaccrual
3,249,070
175,008
$ 4,952,769
$
2,850,939
The Company has pledged its loans receivable and all other assets of the Company as collateral for its lines of credit. (see Note 6)
On October 29, 2008, the Company completed the sale of substantially all of the Company’s taxicab medallion portfolio to Medallion Financial Corp. and Medallion Bank, pursuant to that certain loan portfolio sale and purchase agreement dated as of July 16, 2008, as amended October 17, 2008 and October 20, 2008 (the “Loan Purchase Agreement”). Ameritrans utilized cash on hand and all of the net proceeds from this transaction in the amount of $25,883,820 to fully pay down its existing bank indebtedness. Except for costs in the amount of approximately $340,000, relating to disposal of the assets, there was no gain or loss realized on this transaction as the taxi medallion portfolio was sold at par value. The Loan Purchase Agreement was approved by the Company’s shareholders on August 26, 2008.
As of June 30, 2009, the Company’s loan portfolio had decreased by approximately $31,368,310 or 57% from $55,211,937 at June 30, 2008. This was primarily due to the sale of substantially all of the Company’s taxicab medallion portfolio, partially offset by a small increase in corporate loans. As such, the Company expects significantly lower interest income until new loans are added to the portfolio.
As of June 30, 2009, the Company has accrued approximately $150,000 in professional fees, based on an agreement previously approved by shareholders which it anticipates will be paid upon execution of an amended investment advisory agreement to be submitted to shareholders for approval.
Investments by Industry
Investments by industry consist of the following as of June 30, 2009 and 2008:
Life Settlement Contracts
In September 2006, the Company entered into an agreement with an unaffiliated entity to purchase previously issued life insurance policies owned by unrelated individuals. Under the terms of the agreement, the Company was designated as nominee to maintain possession of the policies and process transactions related to such policies until the policies are subsequently sold or paid off. The Company is entitled to receive from the unaffiliated entity a twelve percent (12%) annual return on the amount of funds paid by the Company and outstanding on a monthly, prorated basis, but the Company is not presently accruing such interest. Proceeds from the sale of the policies are to be distributed, net of direct expenses, as defined in the agreement.
As of June 30, 2009, the carrying value of amounts invested was $1,764,081, which represents the fair value paid to cover first year and any subsequent period premiums for seven (7) life insurance policies with an aggregate face value of $30,750,000, net of fair value adjustments made to date. Premiums on the policies must be paid by either the Company or the unaffiliated entity, until the policies are sold in order to keep the policies in full force. As of June 30, 2009, the unaffiliated entity had paid the premiums on the policies in the aggregate amount of $513,903, which was the unaffiliated entity’s principal carrying value. If an insured dies before the policy is resold, 50% of the death benefit proceeds of the policy will be paid to the insured party’s beneficiary, and the other 50% of the death benefit proceeds will be paid to the Company, to be distributed in accordance with the terms of the agreement. The terms of the agreement with the third party presently entitles the Company to sell the policies at any time, in its sole discretion, provided however, that in order to effectuate any such sales the Company may need to obtain additional documentation from the insured or the record owner(s) of each policy. Since September 11, 2008, the unaffiliated entity made certain of the life insurance premium payments voluntarily amounting to a total of $513,903, however, the Company no longer expects the unaffiliated entity to make such payments on any of the policies for the life expectancy of the insured. 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 insurers, are as follows:
Year Ending
June 30
Policy Premiums
$ 1,368,000
1,368,000
1,368,000
1,368,000
1,368,000
Thereafter
5,763,000
$ 12,603,000
On December 16, 2008, the Company sold one policy for $474,860. There was no gain or loss realized on this transaction as the policy sale price was equal to the carrying value of such policy.
On April 2, 2009, the Company learned that the unaffiliated manager of its life insurance joint venture had been charged with securities fraud by the SEC. The SEC obtained a court order freezing the assets of the manager and other entities with which he was involved, including Vibrant Capital Corp. (“Vibrant”), the corporate entity acting as the Company’s partner in its life settlement venture. As of April 14, 2009, a trustee and a receiver were appointed to operate Vibrant. Ameritrans is presently working with the trustee and receiver to determine the impact, if any, of these SEC actions on its investment in this business venture and on its rights, interests and obligations in connection therewith.
Medallions
During the year ended June 30, 2004, Elk transferred City of Chicago taxicab medallions obtained from defaulted and foreclosed loans to certain newly formed wholly owned subsidiaries. The subsidiaries borrowed funds in the amount of $2,282,201 from Elk to complete the purchases of the medallions and gained title by paying related transfer fees and satisfying outstanding liens with Elk and the City of Chicago. All medallions were sold by these subsidiaries and these loans were all paid in full by June 30, 2007.
The subsidiaries previously leased the medallions to taxicab operators or companies in the Chicago market under weekly and long-term operating lease terms. By the close of fiscal year ended June 30, 2006, there were no leases to individuals in effect and all medallions previously leased to individual operators were sold. The long-term medallion leases were with taxicab companies, which were to expire at various dates between January 31, 2008 and December 31, 2008, and could be canceled by either party with forty-five days advance written notice.
During the year ended June 30, 2006, ten (10) medallions with a carrying value of $575,000 were sold at a price of $57,500 per medallion. As part of the purchase contract, Elk agreed to finance the purchaser for the entire purchase price plus applicable transfer taxes for a period of 8 years with a balloon principal payment at the maturity date. During the first year of the loan, the interest rate was one percent (1) per annum. Thereafter, beginning in the second year the interest rate increased to 1.5% above the prime rate of interest adjusted each time the prime rate changes. No gain or loss was recognized on the sales of the medallions.
Leasing income under all remaining medallion and taxicab leases for the year ended June 30, 2007, was $76,383.
During the fiscal year ended June 30, 2007, the Company sold all its remaining thirty (30) medallions owned for a total of $2,230,358, resulting in a realized gain of $512,354.
Fair Value of Investments
Effective July 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”), which expands application of fair value accounting. SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosure of fair value measurements. SFAS 157 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. SFAS 157 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, knowledgeable, and willing and able to transact. In accordance with SFAS 157, 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. SFAS 157 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. In accordance with SFAS 157, 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 of similar assets or liabilities based on quoted prices in markets that are active or inactive for which all significant inputs are observable, either directly or indirectly.
·
Level 3 - Valuations based on unobservable inputs for similar items and significant to the overall fair value measurement.
In addition to using the above inputs in investment valuations, we continue to employ the valuation policy approved by our board of directors that is consistent with SFAS 157 (see Note 1). Consistent with our valuation policy, we evaluate the source of inputs, including any markets in which our investments are trading (or any markets in which securities with similar attributes are trading), in determining fair value. Our valuation policy considers the fact that because there is not a readily available market value for most of the investments in our 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 our investments may fluctuate from period to period. Additionally, the fair value of our 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 we 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 we were required to liquidate a portfolio investment in a forced or liquidation sale, we may realize significantly less than the value at which we have 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. The following table presents fair value measurements of investments as of June 30, 2009:
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009, 2008 and 2007
The following table presents changes in investments that use Level 3 inputs for the year ended June 30, 2009:
Year Ended June 30, 2009
Balance as of June 30, 2008
$ 59,577,474
Net unrealized losses
(1,283,620)
Net purchases, sales or redemptions
(31,893,452)
Net transfers in and/or out of Level 3
-
Balance as of June 30, 2009
$ 26,400,402
As of June 30, 2009, the net unrealized loss on the investments that use Level 3 inputs was $2,001,967.
4. Furniture, Equipment and Leasehold Improvements
Major classes of furniture, equipment and leasehold improvements as of June 30, 2009 and 2008 are as follows:
Estimated
Useful Lives
Furniture and fixtures
$ 77,293
$
76,774
7 years
Office equipment
372,460
368,566
3-5 years
Leasehold improvements
175,634
175,633
Life of lease
625,387
620,973
Less accumulated depreciation
and amortization
495,170
464,848
$ 130,217
$
156,125
Depreciation and amortization expense for the years ended June 30, 2009, 2008 and 2007 was $30,322, $35,517 and $67,081, respectively.
5. Debentures Payable to SBA
At June 30, 2009 and 2008 subordinated debentures payable to the SBA with interest payable semiannually, consisted of the following:
Issue Date
Due Date
% Interest Rate
June 30, 2009 and 2008
Annual Amount of Interest and User Fees
July 2002
September 2012
4.67 (1)
$
2,050,000
$ 113,488
December 2002
March 2013
4.63 (1)
3,000,000
164,880
September 2003
March 2014
4.12 (1)
5,000,000
249,300
February 2004
March 2014
4.12 (1)
1,950,000
97,227
$
12,000,000
$ 624,895
(1)
Elk is also required to pay an additional annual user fee of 0.866% on these debentures.
Under the terms of the subordinated debentures, the Company may not repurchase or retire any of its capital stock or make any distributions to its stockholders other than dividends out of retained earnings (as computed in accordance with SBA regulations) without the prior written approval of the SBA.
6. Notes Payable
Banks
At June 30, 2008, the Company had loan agreements with three (3) banks for lines of credit aggregating $40,000,000 of which $28,095,697 was outstanding under these lines. The lines bore interest at the lower of either the reserve adjusted LIBOR rate plus 1.5% or the banks’ prime rates minus 0.50%. The bank lines were scheduled to mature on or about October 30, 2008. On October 29, 2008, following the closing of the sale of substantially all of the taxi medallion loan portfolio (see Note 3) the Company paid the banks in full all principal and accrued interest due on the three lines.
At June 30, 2009, the Company had credit lines with two (2) banks for lines of credit aggregating $472,000 of which $370,000 was outstanding under these lines. The weighted average interest rate on the outstanding bank debt at June 30, 2009 was approximately 4.38% which represents an interest rate of 1% above the prime rate of interest designated by each bank. Any outstanding indebtedness pursuant to these credit lines was due and payable on or before October 31, 2009.
On April 28, 2009, the Company repaid the entire principal balance in the amount of $228,000 on one of its banks lines, and extended the credit lines with the other two (2) banks. On April 30, 2009, the Company extended until October 31, 2009, one credit line with a principal balance of $352,000 with an annual interest rate floor of 4.50%. In connection with such extension, the Company purchased a Certificate of Deposit for $250,000 for thirty (30) days and pledged such Certificate of Deposit as additional collateral. The Company reduced said balance to $250,000 by May 30, 2009. On April 29, 2009, the Company extended until July 1, 2009, and on July 1, 2009 the Company extended to November 2, 2009 the outstanding balance on the other credit line in the amount of $120,000, at an annual interest rate of 4.10%. In connection with such extension, the Company purchased a Certificate of Deposit for $120,000 which matures on October 31, 2009, and pledged such Certificate of Deposit as additional collateral.
It is not presently contemplated that the Company will request to continue any lines of credit thereafter with its existing banks. Pursuant to the terms of the current agreements the Company is required to comply with certain covenants and conditions, as defined in the agreements. The Company has pledged its loans receivable and all other assets as collateral for the above lines of credit. Pursuant to the SBA agreement and an “intercreditor agreement” among the lending banks and the SBA, the SBA agreed to subordinate the SBA Debentures outstanding in favor of the banks. In accordance with the loan documentation with the SBA and the banks, the Company must also comply with maintaining overall debt levels within a formula based upon the performance of its loan portfolio according to a “borrowing base” which is submitted for review to the SBA and the banks for periodic review. The Company was in compliance with the terms and conditions of the “borrowing base” at June 30, 2009.
Related Party Loans
In July 2007, the Company received three loans totaling $500,000 from three related parties to facilitate the funding of new loans receivable. The loan principal was due and payable within 30 days of demand and bore interest at a rate of 10% per annum. Payments of interest only were due and payable on the first of each month. At June 30, 2009 there were no loans to related parties outstanding. For the years ended June 30, 2009 and 2008, interest paid on the loans was $2,689 and $28,463, respectively. Also see Note 12 for other related party transactions.
7. Preferred Stock
Ameritrans had 1,000,000 shares of “blank check” preferred shares authorized of which 500,000 shares were designated as 9-3/8% cumulative participating preferred stock $.01 par value, $12.00 face value. On March 18, 2008, the Company filed an amendment to the Company’s Articles of Incorporation to increase the number of shares of authorized preferred stock from 1,000,000 to 10,000,000 shares. The remaining 9,500,000 and 500,000 shares, respectively, of these “blank check” preferred shares were unissued at June 30, 2009 and 2008.
As part of the April 2002 stock offering (see Note 9) Ameritrans issued 300,000 shares of 9-3/8% cumulative participating redeemable preferred stock $.01 par value, $12.00 face value. Since April 2007, these preferred shares are redeemable at the option of the Company at face value without any premium.
As of June 30, 2009, dividends not declared, and in arrears, were $84,375 (see Note 10).
8. Common Stock
Ameritrans had 5,000,000 authorized common shares, $0.0001 par value, of which 1,745,600 were issued and outstanding after the shares exchange with Elk (see Note 1) as of June 30, 2001. As part of stock offerings completed in April 2002 and March 2006, the Company issued an additional 300,000 and 1,355,608 shares of Common Stock, respectively (see Note 9).
During the years ended June 30, 2006 and 2007, the stockholders approved amendments to the Company’s Certificate of Incorporation to increase the number of shares of Ameritrans’ authorized Common Stock from 5,000,000 shares to 10,000,000 shares, from 10,000,000 shares to 50,000,000 shares, respectively. During the year ended June 30, 2008 the stockholders approved an amendment to decrease the authorized Common Stock from 50,000,000 shares to 45,000,000 shares. The amendments to the Certificate of Incorporation were filed with the Delaware Secretary of State in May, 2006, June, 2007, and March 2008, respectively, and became effective immediately upon filing.
Pursuant to a foreclosure agreement with a borrower, Elk obtained 10,000 shares of Ameritrans Common Stock, which had previously been pledged by the borrower as collateral. At June 30, 2009 and 2008 these shares are recorded as treasury stock at cost, which was the market value of the shares at the foreclosure date.
9. Stock Offerings
In, 2002 the Company completed a public offering of 300,000 units, each unit consisting of one share of Common Stock, one share of Preferred Stock, and one redeemable warrant entitling the holder to purchase one share of Common Stock at an exercise price of $6.70. None of the warrants were exercised prior to their expiration in April, 2007. The underwriter also obtained the right in exchange for $2,500 to purchase up to 30,000 units at an exercise price of $21.45 per unit, each unit consisting of one share of Common Stock, one share of Preferred Stock, and one redeemable common share warrant exercisable at $8.40 per share. These units were exercisable over a five-year period which commenced April 18, 2004. To date, the underwriter has not exercised the right to purchase these units and the right to purchase such units expired on April 18, 2009.
In March, 2006, the Company closed on the sale of 1,355,608 shares of Common Stock of the Company and 338,902 warrants to purchase shares of Common Stock (“Private Offering Warrants”) for aggregate gross proceeds totaling $7,930,310 ($7,250,407 net of expenses). Each Private Offering Warrant entitles the holder thereof to purchase one share of Common Stock at an exercise price of $6.44 per share. The Private Offering Warrants may be exercised in whole or in part, and expire five (5) years from the date of issuance. The Common Stock and Private Offering Warrants were issued pursuant to the private offering by the Company dated July 29, 2005, of which various closings took place throughout December 2005 and January, February and March of 2006.
On March 15, 2006, Ameritrans filed a registration statement with the SEC to cover the 1,355,608 shares of Common Stock and 338,902 shares of Common Stock underlying the Private Offering Warrants sold in the private offering. The registration statement was declared effective by the SEC on April 25, 2006.
On March 18, 2008, the stockholders of the Company approved a private offering of one or a combination of the following securities of the Company’s (i) Common Stock, (ii) warrants exercisable into shares of Common Stock and/or (iii) shares of Preferred Stock, with such rights and preferences as determined by the Company’s Board of Directors, subject to applicable law and regulation. The Company proposes to raise aggregate gross proceeds between a minimum of $5,000,000 and up to a maximum of $50,000,000.
10. Dividends to Stockholders
The following table sets forth the dividends declared by the Company on our Common Stock and Preferred Stock in each of the years ended June 30, 2009, 2008 and 2007:
The table below shows the tax character of distributions for tax reporting purposes.
Our ability to make dividend payments is restricted by SBA regulations and under the terms of the SBA debentures (See Note 5).
11. 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 3).
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 3).
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 June 30, 2009 and 2008 were approximately $11,844,000 and $11,308,000, 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.
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.
12. Related Party Transactions
The Company paid legal expenses of approximately $30,000, $60,000 and $108,000 to a law firm related to the Chairman and other officers and directors of the Company (the “Law Firm”) for the years ended June 30, 2009, 2008 and 2007, respectively.
In December, 2003, the Company entered into a sublease agreement with the Law Firm. Pursuant to the sublease, the Company occupies approximately 3,500 square feet of office space in New York. This sublease, as amended, expires April 2014. Starting in February, 2007 the Company increased the amount of space it was utilizing and as a result, the Company’s rent share for the year ended June 30, 2009 was approximately $12,271 per month, subject to periodic escalations and annual increases as per the master lease agreement between the landlord and the Law Firm. Commencing July 1, 2009 the Company’s rent share is $13,139 per month subject to periodic escalations and annual increases as per the master lease agreement between the Landlord and the Law Firm. The Company is committed to the minimum utilization factor on all rent, additional rent and electricity charges billed by the landlord, subject to annual increases as per the master lease agreement between the landlord and the Law Firm. In the event that more space is utilized, the percentage of the total space allocated to the Company will be increased in accordance with the terms of the sublease. An additional office was rented in May 2008 on a month-to-month basis to accommodate certain short-term needs of the Company at a rental rate of $2,500 per month. Usage of additional space was cancelled as of December 31, 2008.
The Company agreed to indemnify the Law Firm from any cost and expense under the terms of its Master Lease Agreement for additional expense associated with certain additional space leased at the Company’s request, in the event the Law Firm is not able to sublease the individual offices until such time as the Company might need to utilize that space. Until the Company utilizes the additional space, the Law Firm sublets the additional space to unaffiliated tenants. In the event all or a portion of the additional space is vacant, the Company has agreed to reimburse the Law Firm for the rent applicable to such vacant space. During the years ended June 30, 2009, 2008 and 2007 no amounts were paid relating to this space. Rent expense under the lease amounted to $166,429, $151,165 and $123,261 for the years ended June 30, 2009, 2008 and 2007, respectively.
In addition, the Company is also obligated to pay for certain overhead expense as noted in the above lease agreement. During January, 2007 the overhead cost payments increased to $3,500 per month. Overhead costs and reimbursed office and salary expenses amounted to $64,286, $68,598 and $62,142 for the years ended June 30, 2009, 2008 and 2007, respectively.
In July, 2003, the Company entered into a ten-year sublease for an offsite backup recovery center, office and storage space, as part of the Company’s disaster recovery plan, with another entity in which an officer and director of the Company has a financial interest. The sublease calls for rental payments ranging from $38,500 to $54,776 per annum from the first year ended June 30, 2004 through the year ending June 30, 2013. The sublease contains a provision that either party may terminate the lease in years seven through ten with six months’ notice. Rent expense under the lease amounted to $49,787, $48,739 and $46,792 for the years ended June 30, 2009, 2008 and 2007 respectively.
Total occupancy costs under the above leases and overhead cost reimbursement agreements amounted to $280,502, $268,502 and $232,195 for the years ended June 30, 2009, 2008 and 2007, respectively.
The future minimum rental and overhead payments for each of the next five years are as follows:
Year Ending
June 30
Rent
Overhead
Total
Occupancy
$ 188,422
$ 42,000
$ 230,422
191,735
42,000
233,735
193,761
42,000
235,761
195,868
42,000
237,868
117,577
35,000
152,577
$ 887,363
$ 203,000
$ 1,090,363
The Company entered into an at-will consulting arrangement with an individual who is considered a related person of the Company. An aggregate of $5,500 during the fiscal year ended June 30, 2008 for such consulting services. The consulting arrangement was terminated as of June 30, 2008.
The Company utilized a relative of an officer of the Company to perform part-time administrative services. This individual is paid per hour for administrative work he performs for the Company. For the fiscal years ending June 30, 2009, 2008 and 2007, he was paid an aggregate of $9,085, $15,926 and $6,626, respectively. Such person did not perform any service nor was he compensated since October 24, 2008.
In October, 2007 the Company paid $3,000 to an individual who is considered a related person of the Company, for consulting services relating to the review of the Company’s medical insurance plan.
The Company pays printing fees to a company partially owned by an officer of the Company. An aggregate of $8,760 and $8,609 was paid for the services during the fiscal years ended June 30, 2009 and 2008, respectively.
Also see Note 6 for related party loan transactions.
13. Commitments and Contingencies
Interest Rate Swap
In October, 2005, Elk entered into two (2) interest rate swap transactions for $5,000,000 each, to hedge against an upward movement in interest rates relating to outstanding bank debt. The swap transaction which expired October 15, 2007 provided for a fixed rate of 6.20%, and the swap transaction expiring October 14, 2008 provides for a fixed rate of 6.23%. If the Company’s floating borrowing rate (the one-month LIBOR rate plus 1.5%) falls below the fixed rate, Elk is obligated to pay the bank the differences in rates. If the Company’s floating borrowing rate rises above the fixed rate, the bank is obligated to pay Elk the differences in rates. For the years ended June 30, 2009, 2008 and 2007, Elk incurred additional net interest expense (benefit) of $32,972, $12,036 and $(64,151), respectively, due to the fluctuation of interest rates under these agreements. As of June 30, 2009, the Company had no interest swaps outstanding.
Employment Agreements
The Company has entered into employment agreements with six executives of the Company for various terms expiring through June, 2013, including a provision for a two year consulting agreement for one of the executives. Certain agreements also provide for minimum bonuses. The table below summarizes the minimum payments due under employment agreements, including minimum bonuses and the extended term for consulting services:
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.
14. Defined Contribution Plan
The Company maintains a simplified employee pension plan covering all eligible employees of the Company. During the years ended June 30, 2009, 2008 and 2007, contributions amounted to $171,020, $125,523 and $159,117, respectively.
15. Stock Option Plans
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. 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 from 125,000 to 200,000 shares and from 200,000 to 300,000 shares, respectively.
The 1999 Employee Plan authorizes the grant of incentive stock options within the meaning of Section 422 of the Internal Revenue Code for the purchase of an aggregate of 300,000 shares (subject to adjustment for stock splits and similar capital changes) of Common Stock to the Company’s employees. By adopting the 1999 Employee Plan, the Board believes that the Company will be better able to attract, motivate, and retain as employees people upon whose judgment and special skills the Company’s success in large measure depends. As of June 30, 2009, options to purchase an aggregate of 291,850 shares of Common Stock outstanding with 271,850 fully vested and 8,150 shares of common stock were available for future award under the 1999 Employee Plan.
The 1999 Employee Plan is administered by the 1999 Employee Plan Committee of the Board (the Committee), 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. Upon effectiveness of the Investment Management and Advisory Agreement with Velocity the Company will terminate the 1999 Employee Plan.
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, which will be increased to 125,000 shares upon SEC approval of the Amended Director Plan. As of June 30, 2009, options to purchase an aggregate of 75,000 shares were issued and outstanding with 49,462 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. Upon effectiveness of the Investment Management and Advisory Agreement with Velocity the Company will terminate the Director Plan.
Options Granted and Canceled
On October 10, 2008, the Board of Directors, upon the recommendation of the 1999 Employee Plan Committee, granted certain employee options to purchase up to an aggregate of 133,000 shares of common stock of the Company’s exercisable at $2.36 per share which vested immediately on date of grant. On May 6, 2009, options to purchase up to 25,538 Shares at $1.78 per share were issued to a Director and on May 6, 2010 will become fully vested.
After adoption of SFAS 123(R) (see Note 1), the fair value of the options granted amounted to $191,040 at June 30, 2009 and $141,668 at June 30, 2008, which is reflected as stock options outstanding in the accompanying consolidated balance sheets. Compensation expense related to options vested for the years ended June 30, 2009, 2008 and 2007 was $61,128, $76,747, and $24,000, respectively. As of June 30, 2009, total deferred compensation related to unvested options was $29,175, which is expected to be recognized over a period of approximately one year.
A summary of both of the Stock Option Plans’ transactions in fiscal periods 2009, 2008 and 2007 is as follows:
The following table summarizes information about the stock options outstanding under the Company’s option plans as of June 30, 2009:
The fair market value for options granted was estimated at the date of grant using a Black-Scholes option-pricing model and the following assumptions for the years ended June 30, 2009, 2008 and 2007:
Risk-free rate
2.04%
3.09%
5.00%
Dividend yield
0.00%
0.00%
0.00%
Volatility factor
.08
.08
.07
Average life
5 years
5 years
5 years
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
The Company’s shareholders approved an Investment Advisory and Management and Advisory Agreement dated March 18, 2008 pursuant to which Velocity Capital Advisors will act as adviser, subject to approval of the U.S. Small Business Administration. Upon effectiveness of that agreement, the Company will make no further grants under its stock option plans.
16. Subsequent Events
The Company has evaluated subsequent events that have occurred through September 25, 2009, the date of financial statements issuance.
On September 17, 2009, the Company completed the sale of a parcel of real estate that it had foreclosed upon located in Northern, California. The parcel was sold for a price of $500,000 less $33,403 of selling expense which included the payment of unpaid real estate taxes, which resulted in net sale proceeds to the Company of $466,597. The Company had previously reduced its carrying value on this parcel as of March 31, 2009 to $600,000 and a portion of the accrued interest in the amount of $33,250 was written off as of March 31, 2009. At June 30, 2009 in anticipation of the actual sales price that could be obtained through negotiations to sell the parcel, the Company further reduced its carrying value to $470,000 and the remaining balance of accrued interest in the amount of $59,835 was also charged off at June 30, 2009.
During July 2009, the Company sold its remaining interest in the loan with Test Center LLC which had an unpaid principal balance of $512,936 for proceeds of $499,577 which was below the Company’s carrying value. As such, the Company took a charge for the difference of $13,359 at June 30, 2009 in anticipation of the loss of $13,359 resulting from the sale.
17. Financial Highlights
(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.
(4)
Amount represents total dividends on both common and preferred stock divided by weighted average shares.
18. Quarterly Financial Data (Unaudited)
For the year ended June 30, 2009:
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Investment income
$ 1,459,461
$ 970,744
$ 655,377
$ 258,742
Net investment loss
$ (298,833)
$ (756,741)
$ (619,056)
$ (1,265,330)
Net decrease in net assets from operations
$ (478,606)
$ (1,307,397)
$ (769,550)
$ (2,906,900)
Net decrease in net assets from operations per common share:
Basic and diluted
$ (0.17)
$ (0.41)
$ (0.25)
$ (0.85)
For the year ended June 30, 2008:
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Investment income
$
1,641,418
$
1,611,470
$
1,583,108
$
1,424,281
Net investment income (loss)
$
123,525
$
28,080
$
2,886
$
(201,011)
Net increase (decrease) in net assets from operations
$
3,917
$
(225,397)
$
(4,215)
$
(311,876)
Net increase (decrease) in net assets from operations per common share:
Basic and diluted
$
(0.02)
$
(0.09)
$
(0.03)
$
(0.12)