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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _________
Commission File No. 0-22153
AMERITRANS CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 52-2102424
(State of incorporation) (I.R.S. Employer Identification No.)
747 THIRD AVENUE, NEW YORK, NEW YORK 10017
(Address of principal executive offices) (Zip Code)
(800) 214-1047
Registrant's Telephone Number, including Area Code:
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.0001 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K [ ]
The approximate aggregate market value of common equity held by
non-affiliates of the Registrant as of September 25, 2002 was approximately
$6,421,043 based on the last sale price of the Registrant's Common Stock on the
Nasdaq SmallCap Market as of the close of business on September 24, 2002. There
were 2,045,600 shares of the Registrant's Common Stock outstanding as of
September 27, 2002.
AMERITRANS CAPITAL CORPORATION
2002 FORM 10-K ANNUAL REPORT
Table of Contents
Page
----
PART I ................................................................... 1
ITEM 1. BUSINESS OF AMERITRANS ...................................... 1
ITEM 2. PROPERTIES .................................................. 22
ITEM 3. LEGAL PROCEEDINGS ........................................... 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ......... 22
PART II .................................................................. 23
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS ................................. 23
ITEM 6. SELECTED FINANCIAL DATA ..................................... 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ......................... 26
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK ................................................. 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ................. 30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES ........................ 30
PART III ................................................................. 31
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ......... 31
ITEM 11. EXECUTIVE COMPENSATION ..................................... 34
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT ................................................ 37
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ............. 39
PART IV .................................................................. 40
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K .................................................. 40
IMPORTANT FACTORS RELATING TO FORWARD-LOOKING STATEMENTS ................. 40
SIGNATURES ............................................................... 41
PART I
ITEM 1. BUSINESS OF AMERITRANS
BUSINESS
GENERAL
Ameritrans Capital Corporation (the "Company" or "Ameritrans") was formed
in 1998 to engage in lending and investment activities, primarily with small and
medium-sized businesses, directly and through subsidiaries. On December 16,
1999, Ameritrans acquired Elk Associates Funding Corporation ("Elk") in a
one-for-one share exchange in which Elk stockholders received shares of common
stock of Ameritrans, and Elk became a wholly-owned subsidiary. Elk is a "small
business investment company," or "SBIC," formed in 1979 and licensed by the U.S.
Small Business Administration ("SBA") in 1980.
Elk makes loans to the owners of taxi medallion businesses in the Chicago,
New York City, Miami and Boston markets and to other small businesses. Elk has
never experienced any material losses of principal in connection with taxi
financings but from time to time has experienced some small losses of principal
on its taxi medallion lending operations. Loans made to finance the purchase or
continued ownership of taxi medallions, taxis and related assets represented
approximately 75% of Elk's loan portfolio as of June 30, 2002. Loans made to
finance the acquisition and/or operation of other small businesses constitute
the balance of Elk's loan portfolio.
From inception through April 2002, our only activities have been the
operation of Elk. In May 2002, Ameritrans made its first loans to businesses
using the proceeds raised from the public offering of 300,000 units, each unit
of which was comprised of one share of common stock, one share of 9 3/8%
cumulative participating preferred stock (face value $12.00) (the "Participating
Preferred Stock") and one warrant exercisable into one share of common stock for
five (5) years at an exercise price of $6.70 (the "Warrant"), and was completed
in April 2002 (the "Unit Offering"). Both Ameritrans and Elk are registered as
business development companies, or "BDCs," under the Investment Company Act of
1940 (the "1940 Act"). Accordingly, Ameritrans and Elk are subject to the
provisions of the 1940 Act governing the operations of BDCs. Both companies are
managed by their executive officers under the supervision of their Boards of
Directors, and the same individuals are the executive officers and directors of
both companies.
In addition, both Ameritrans and Elk have elected to be treated as
"regulated investment companies," or "RICs," for tax purposes. Under the
Internal Revenue Code, as a RIC, we will generally not be subject to U.S.
federal corporate income tax on our investment income if we make qualifying
distributions of our income to stockholders. As a RIC we qualify for this
treatment as long as we distribute at least 90% of our investment company
taxable income to our stockholders as dividends. Elk paid qualifying dividends
from July 1983 through June 1992 and continuously since June 1996. Since
December 16, 1999, when we acquired Elk, these dividends have been payable to
Ameritrans as Elk's sole stockholder. Ameritrans has paid dividends to its
shareholders since its inception with the exception of the three month periods
ended June 30, 2000 and September 30, 2000.
Because it is an SBIC, Elk's operations are subject to other restrictions,
and all loans and investments must comply with applicable SBA Regulations. For
example, the interest rate that Elk can charge, the percentage of any other
company it can own, the size of the businesses to which it can make loans, and
the length of time to the maturity date are limited by SBA rules. Elk's business
is funded by loans from banks and, to a lesser extent, by the proceeds of
subordinated debentures issued to the SBA. Ameritrans is not an SBIC and is not
subject to SBA regulation. See "Elk's Loans" and "Regulation -- The Small
Business Act of 1958."
1
CURRENT BUSINESS ACTIVITIES
AMERITRANS. From inception through April 2002, Ameritrans' only activities
have been the operation of Elk. In May 2002, Ameritrans began making loans to
businesses using the proceeds raised from the Company's Unit Offering.
ELK was organized primarily to provide long-term loans to businesses
eligible for investments by SBICs under the 1958 Act ("Small Business
Concerns"). Elk has made loans for financing the purchase or continued ownership
of taxi medallions, taxis and related assets.
Although Elk's certificate of incorporation provides Elk with the authority
to invest in the equity capital of Small Business Concerns, Elk makes equity
investments in Small Business Concerns on a selective basis, and only to a
limited extent. Equity securities in Elk's investment portfolio at June 30,
2002, totaled $443,327 or 0.75% of total assets. Elk may make additional equity
investments. However, unless necessary to protect a prior investment of Elk that
is at risk, equity investments shall not exceed 20% of Elk's total assets. Elk
has one (1) wholly-owned subsidiary, EAF Holding Corporation, formed in 1992,
the sole activities of which are to own and operate certain real estate assets
acquired in satisfaction of loans.
2
TAXI MEDALLION FINANCE INDUSTRY AND MARKET OVERVIEW
CHICAGO TAXI MEDALLION INDUSTRY AND MARKET. As part of its geographic
diversification strategy, Elk studied the Chicago taxi medallion market in 1994,
and began making loans in Chicago in April, 1995. The taxi market and medallion
system in Chicago is regulated by the City of Chicago Department of Consumer
Services, Public Vehicle Operations Division. The number of taxi medallions is
limited by city ordinances, and until 1988, these ordinances gave control of the
majority of the medallions to the two largest taxi operators in Chicago, Yellow
Cab Co., and Checker Taxi Co., Inc.
Since 1988, the taxi industry in Chicago has shifted toward more individual
ownership. Over the succeeding 10 years, the Yellow Cab Co. and Checker Taxi
Co., Inc., pursuant to a new ordinance, gave 1,300 medallions back to the City,
and the City added 100 medallions each year. These medallions were distributed
in a lottery system to taxi drivers who had never owned a medallion. By July,
1997, there were a total of 5,700 medallions issued in Chicago, of which Yellow
Cab Co. owned approximately 2,071, and the remaining 3,629 were owned by
individual owner drivers, or by individual operators who had purchased multiple
medallions.
In December, 1997, the City Council increased the number of medallions by
1,000 additional medallions, which were issued over a period of three years. Of
these medallions, 500 were issued in lotteries to taxi drivers who never owned a
medallion, and the other 500 were auctioned to the highest bidder. In the
November 1998 auction of 150 medallions, there were 499 bids to purchase
medallions. The winning bid prices ranged from $57,000 to $63,000 per medallion,
which was approximately the same as open market prices for taxi medallions that
were sold in Chicago at that time. In the August, 1999 auction of 150
medallions, the winning bid prices ranged from $65,000 to $70,000.
In October, 2000 the City of Chicago held its final auction of 200
medallions under the program authorized in December, 1997. The City set a
minimum bid of $60,000, and all 200 medallions were sold at auction at prices
that ranged from $60,000 to $68,000. In July, 2000 the last 200 medallions
authorized under the lottery program were distributed by lottery.
In November, 2000, the City Council passed a new ordinance authorizing the
City to auction up to 50 medallions per year through November, 2004,
representing a total of 150 medallions over three years. The City Council,
however, did not authorize any further lotteries of medallions. The new
ordinance also requires purchasers of the medallions to operate a taxi-van
instead of the standard taxicab vehicle, which we believe will cost the
medallion purchaser three times as much to purchase, equip and prepare as
compared to a standard taxicab. As a result, we believe that the 150 medallions,
when auctioned, will command lower prices than the prices that would otherwise
be available in the market place for the purchase of medallions without the
taxi-van requirement.
On January 21, 1999, the Yellow Cab Co. auctioned 175 medallions in a
sealed bid auction at prices equal to the current open market value price for
medallions. Subsequent to January, 1999, Yellow Cab Company continued to sell
medallions that it owned, and we believe that they have sold approximately 800
additional medallions to owner drivers, who they continue to service in their
radio group, and through the Yellow Cab Company operations. We believe that the
sale of these additional medallions by Yellow to owner drivers will offer
additional financing opportunities for the Company to service their financing
needs.
It has been our experience that as the Chicago market has expanded, it has
also become more competitive. In addition, as the City of Chicago and now Yellow
Cab Co. supply medallions to the market place, we expect that the taxi medallion
market will continue to grow, with more and more owner-drivers and individual
owner-operators of multiple medallions. To the extent that there are more
owner-operators and individual owner-operators of multiple medallions in the
market, we believe that there will be increased opportunities for us to serve
this market.
Chicago city regulations set forth certain qualifications that all owners
of taxi medallions must meet, and require that all security interests in
medallions be registered with the Department of Consumer Services. The
Department of Consumer Services also is involved (along with the City Council)
in setting taxi fares, and in setting maximum lease rates that may be charged by
owners to lessees of taxis, who drive them on a daily, weekly, or monthly basis.
CHICAGO MARKETING STRATEGY FOR MEDALLION FINANCING. At the present time,
most medallion sales in Chicago are handled through brokers or attorneys. An
active market place has developed in Chicago for the purchase and resale of
medallions. Elk's most recent experience was that medallions were selling for
between $55,000 and $60,000 per medallion and are presently selling for
approximately $58,000 per medallion. Previously, the City of Chicago imposed a
5% transfer tax on a medallion held for two years or more, a 10% transfer tax on
a medallion held for between one and two years, and a 25% transfer tax on a
medallion held less than one year. In November 2000 this ordinance was reduced
to 10% for the first year and 5% thereafter, and imposed a flat 5% for any
foreclosure sale. The recent imposition of the transfer taxes, in addition to
being a source of revenue to the City, was also scaled in order to inhibit
speculation in the purchase and resale of taxi medallions without the intent of
actually operating taxis.
We believe that as many as 1,000 medallions are bought each year by
purchasers, and at today's market value, this would give gross potential volume
of approximately $55,000,000. If 80% of these purchases were financed, the
annual market for loans to purchase medallions would be $44,000,000 per annum.
In addition to purchases and sales of medallions, a substantial market exists
for refinancing the indebtedness of existing owners. Based on the number of
medallions currently issued and to be issued, we believe the market for
financing transfers could exceed $60,000,000 per year.
THE NEW YORK CITY TAXI MEDALLION INDUSTRY AND MARKET. Under current law,
the number of taxi medallions that may be issued by New York City is limited to
12,187. There are two types of medallions: corporate and individual
owner-driver. Of the total of 12,187 medallions, 7,058 are corporate medallions
and 5,129 are for individually owned cabs. A corporate medallion is issued for a
cab owned by a corporation that owns a minimum of two cabs and two corporate
medallions (i.e., one corporate medallion per cab). An individual owner-driver
may not own more than one cab and one medallion. Corporate medallions are used
by large fleet concerns with many taxis and many drivers or by small
corporations owning at least two medallions and two taxis driven by two
owner-drivers (the so-called "minifleet").
Only 11,787 medallions could be issued until August 8, 1995, when a law
permitting the issuance of up to 400 additional taxi medallions over a
three-year period went into effect. The New York City Taxi and Limousine
Commission (the "TLC") conducted the sale of 133 medallions in May 1996, 133
medallions in October 1996, and 134 medallions on October 1, 1997. Of these new
medallions, 160 were sold to individuals and the balance to minifleets in lots
of two.
At the present time, most medallion sales are handled through brokers. As a
result, an active marketplace has developed for the purchase and resale of
medallions. The price of a medallion varies with supply and demand. Elk's most
recent experience, in June, 2002, was that individually owned medallions sold
for approximately $200,000 and corporate medallions sold for approximately
$230,000 each. In addition, a 5% New York City transfer tax and various
brokerage commissions are additional expenses incurred in the acquisition and
sale of a medallion.
Based upon statistics obtained from the TLC, from 1989 through 1998, the
number of corporate medallions that were resold by their holders varied each
year from approximately 245 to 440, which suggests that there were between 122
and 220 minifleet corporations in need of financing each year, while the number
of individual owner medallions sold each year varied from 250 to 415. Assuming
that a typical minifleet financing for purchases of medallions might involve a
sum of approximately $450,000, the dollar volume of New York City minifleet
financings might range from $55 million to $99 million a year. Assuming that a
typical individual medallion financing for a purchase of a medallion involves a
sum of approximately $200,000, the dollar volume of New York City individual
medallion financing might range from $48 million to $88 million a year.
In addition to financings for purchases and sales of medallions, a
substantial market exists for refinancing the indebtedness of existing minifleet
or individual medallions. Management estimates this market to exceed that of the
market for financing transfers, and to be in excess of $100,000,000 per year.
3
A prospective medallion owner must meet the requirements of the TLC, which
approves all sales and transfers. In general, the requirements are that the
prospective owner have no criminal record, that the purchase funds be derived
from legitimate sources, and that the taxi vehicle and meter meet specifications
set by the TLC. Also required is a clearance from prior insurers of the seller
in the form of letters stating that there are no outstanding claims for personal
injuries in excess of insurance coverage.
NEW YORK MARKETING STRATEGY FOR MEDALLION FINANCING. Medallion transfers in
the New York City market are usually handled through medallion brokers, who have
frequent contact with taxi owners and drivers. Medallion brokers locate buyers
for sellers of medallions and sellers for buyers of medallions, and then
typically employ a financing broker to arrange for the financing of the
medallion purchases. In many cases the medallion broker and the financing broker
are the same party or related parties.
Elk has received a significant number of referrals from certain medallion
brokers in New York. Elk also receives referrals from financing brokers and its
borrowers. In addition, Elk occasionally places advertisements in local industry
newspapers and magazines. Elk also uses brokers, advertising and referrals in
connection with its taxi lending business in the Chicago, Boston, and Miami
markets.
4
BOSTON TAXI MEDALLION INDUSTRY AND MARKET. Elk began to review the Boston
taxi market in the fall of 1994 and began making loans in this market in 1995.
Since 1930, the Boston Police Commissioner has had exclusive jurisdiction over
the regulation of taxi operations, including the issuance and transfer of
medallions. The Hackney Carriage Unit of the Boston Police Department deals with
taxi regulatory issues.
By statute, the number of medallions issued in the City of Boston may not
exceed 1,525, subject to increase or decrease in the Police Commissioner's
discretion. The number of medallions remained essentially unchanged from the
late 1940's until January 1999, when the City sold 75 additional medallions at
auction. Prices at this auction exceeded $140,000 per medallion. The City of
Boston auctioned another 75 medallions in September 1999 and 57 medallions in
May of 2000. In 2001, the City sold an additional 20 medallions for handicap
use, bringing the total of outstanding medallions to approximately 1790. Current
market prices of Boston medallions are approximately $180,000.
Under the applicable statutes and rules, Boston taxi medallions are
assignable, subject to the approval of the Police Commissioner. In practice,
transfer applications are submitted to the Hackney Carriage Unit, which has
issued guidelines and forms for transfers. Loans by financial institutions or
individuals are secured by taxi medallions and assets are routinely allowed in
accordance with the Hackney Carriage Unit's "Procedures for Recording Secured
Party Interest."
BOSTON MARKETING STRATEGY FOR MEDALLION FINANCING. The Boston taxi market
services the City of Boston, which includes Logan Airport. Elk's marketing
efforts have included retention of a local attorney, advertising in the Carriage
News, a local trade newspaper, and the use of forwarding brokers. As of June 30,
2002, the total principal amount of our outstanding taxi loans in Boston was
$1,229,791.
5
MEDALLION INDUSTRY IN METRO-DADE COUNTY, (MIAMI AREA), FLORIDA. Elk began
to investigate the Miami area taxi market in 1995, and began making loans in
1996. The Miami taxi industry has been regulated on a county-wide basis in
Metro-Dade County, Florida since 1981. The Passenger Transportation Regulatory
Division (the "PTRD") of the Metro-Dade County Consumer Services Division
oversees taxi operations and licenses in accordance with the Metro-Dade County
Code.
Until April 1999, each taxi operator in Metro-Dade County was required to
obtain a "For-Hire" license. The number of licenses was limited to one license
for each 1,000 residents in the county. With approximately 2,100,000 residents
in the county, 2,100 licenses could have been issued; however, 1879 have been
issued to date and 27 are pending. In 1991, a For-Hire license loan program was
approved, authorizing the use of loans to purchase (but not to refinance)
licenses and taxis. Any lender must be a licensed lending institution authorized
to do business in Florida. To the best of our knowledge, Elk is currently one of
only six lending institutions that are authorized to make loans to the taxi
industry in Metro-Dade County. Transfers of licenses and financing arrangements
are subject to prior approval by the PTRD and the County Board of Commissioners.
For-Hire licenses were considered a privilege, not a property right.
However, since licenses were limited in number, the marketplace created a
"market price" or value in connection with the transfer of the license right to
a purchaser. As of April 1999, the Metro-Dade County Code was amended to create
a "medallion," or property right, system with a view to attracting traditional
financing providers to provide the taxi industry with additional funding
sources. Existing For-Hire licenses were automatically converted into
medallions.
According to official Metro-Dade County publications issued in the year
2000, approximately one-third of the currently outstanding licenses are owned by
individuals or corporations that own and operate only one license. Other than
106 licenses held by one owner, the balance of the licenses are owned mainly by
holders of from two to five licenses. The number of license transfers has been
generally increasing in recent years, with a high of 197 transfers in 1997, with
an average reported price of $51,658. However, we believe that the present
market price of licenses/medallions in Metro-Dade County is between $90,000 to
$95,000 per medallion.
MIAMI AREA MARKETING STRATEGY FOR MEDALLION FINANCING. We believe that the
recent change to a medallion system and an emphasis on individual
operator-ownership of medallions for the future will open a large new market for
taxi medallion financing in the Miami area. Since this is an emerging market, we
are currently developing strategies to develop contacts and market our financing
to potential purchases of medallions, and in the event refinancing is permitted,
to those owners who may wish to refinance their medallions in the future. As of
June 30, 2002, the total principal amount of our outstanding taxi loans in the
Miami area was $2,629,349.
COMMERCIAL (NON-TAXI) LOANS -- OVERVIEW
Elk began making loans to diversified (non-taxi) small businesses
("Commercial Loans") in the New York City metropolitan area in 1985, in order to
diversify its loan portfolio, which until that time had consisted almost
entirely of loans to owners of New York City taxi medallions. After a period of
losses in its Commercial Loan portfolio from 1991 to 1994, Elk has been
increasing this portfolio on a selective basis since 1995, with a concentration
on loans to operators of retail dry cleaners and laundromats. Recently, Elk has
also begun geographically expanding its Commercial Loan portfolio, with loans in
South Florida, Massachusetts, and North Carolina.
Elk has chosen to concentrate its Commercial Loan portfolio in loans
secured by retail dry cleaning and coin-operated laundromat equipment because of
certain characteristics similar to taxi
6
medallion lending that make these industries attractive candidates for
profitable lending. These factors include: (i) relatively high fixed rates of
interest ranging from approximately 325 to 700 basis points over the prevailing
Prime Rate at the time of origination, (ii) low historical repossession rates,
(iii) vendor recourse in some cases, (iv) significant equity investments by
borrowers, (v) an active market for repossessed equipment, and for resale of
businesses as going concerns through transfers of the leasehold and business
equipment to new operators, and (vi) a collateral service life that is
frequently twice as long as the term of the loans. We estimate that there are
approximately 4,000 retail dry cleaners and approximately 3,000 laundromats in
the New York City metropolitan area. In addition, we believe that specialization
in the dry cleaning and laundromat industries will permit relatively low
administrative costs because documentation and terms of credit are standardized,
and the consistency among the loans has simplified credit review and portfolio
analysis.
We further believe that other niche industries with similar characteristics
will provide additional loan portfolio growth opportunities. Elk's other
Commercial Loans are currently spread among other industries, including auto
sales, retirement home, commercial construction, car wash, theater, restaurant,
and financial services.
Elk's Commercial Loans finance either the purchase of the equipment and
related assets necessary to open a new business or the purchase or improvement
of an existing business, and Elk has originated Commercial Loans in principal
amounts up to $1,000,000. Elk generally retains these loans, although from time
to time it sells participation interests in its loans to diversify risk, or
purchases participation interests in loans generated by other SBICs.
ELK'S LOANS
Elk's primary business has been to provide long-term business loans at
commercially competitive interest rates (which at June 30, 2002, ranged from
7.0% to 18% per annum). From 1979 through March 1997, Elk was a "Specialized
Small Business Investment Company" ("SSBIC") under the rules of the SBA. All of
its loans were required to be made to small businesses that were majority-owned
by socially or economically disadvantaged persons, known as "Disadvantaged
Concerns." In September 1996, the 1958 Act was amended to provide, among other
things, that no further subsidized funding would be made available to SSBICs.
Consequently, Elk amended its Certificate of Incorporation and entered into an
agreement with the SBA in February 1997 in order to convert Elk from an SSBIC to
an SBIC. As such, Elk may now lend to persons who are not Disadvantaged
Concerns. As of June 30, 2002 more than 90% of Elk's loans and investments were
to Disadvantaged Concerns.
Elk intends to continue to make loans to Disadvantaged Concerns,
particularly in connection with the ownership of taxis and related assets in the
New York City and Chicago markets. Elk also intends to diversify its activities
by lending and investing in a broader range of Small Business Concerns.
SBA Regulations set forth a ceiling on the interest rates that an SBIC may
charge its borrowers. Under the current SBA Regulations, the basic maximum rate
of interest that an SBIC may charge is 19%. However, if either the weighted
average cost of the SBIC's qualified borrowings, as determined pursuant to SBA
Regulations, or the SBA's current debenture interest rate, plus, in either case,
11% and rounded off to the next lower eighth of 1%, is higher, the SBIC may
charge the higher rate. The maximum rate of interest that Elk was allowed to
charge its borrowers for loans originated during June, 2002 was 19%. See
"Regulation -- The Small Business Act of 1958."
7
Elk has agreed with the SBA that it must maintain a non-taxi
investment/loan portfolio (included with the combination of its assets acquired
and receivables on assets acquired in the future) in an amount not less than its
outstanding SBA guaranteed leverage (i.e., debentures) issued since 1995, which
amount is currently $2,470,000. See "Investment Policies -- Elk's Investment
Policies -- Concentration of Investments."
Elk may revise the nature of its loan portfolio at such time as its Board
of Directors determines that such revision is in the best interests of Elk. Elk
does not currently anticipate that its loan portfolio will realize an annual
turnover in excess of 50%. Elk will not lend to, or otherwise invest more than
the lesser of (i) 10% of its total assets, or (ii) 30% of its paid-in capital
attributable to its Common Stock in any one Small Business Concern. Elk has not
made, and is prohibited by applicable SBA Regulations from making, loans to
officers, directors or principal stockholders of Elk or "associates" of Elk, as
such term is defined in applicable SBA Regulations.
TAXI MEDALLION FINANCING LOANS
A large portion of Elk's loans have been made to purchasers or owners of
New York City taxi medallions. Since Elk commenced operations it has made over
$175,000,000 of such loans. However, the New York market has become increasingly
more competitive and the value of medallions has dropped in recent years.
Medallion prices in New York City dropped from $223,000 in July, 2000 for
individual medallions to $180,000 to $190,000 in June, 2001. Since July, 2001
individual medallions increased in value to approximately $205,000. Prices for
corporate medallions fell from $257,000 per medallion in July, 2000, to 222,000
in June, 2001, reaching a low during the course of the year of $190,000. Since
July, 2001 corporate medallions increased in value to $230,000 to $235,000 per
corporate medallion. This has limited Elk's opportunities to make profitable
loans or expand its activities in this market.
In 1995 and 1996 Elk began expanding its taxi lending business into the
Chicago, Boston, and Miami markets, where its taxi lending business has
increased and continued to be profitable. During the time Elk has been making
taxi loans in these markets, the market prices of medallions have generally been
increasing. However, in Chicago the market price for medallions dropped
approximately 15% during the fiscal year ended June 30, 2001. Since April 1995
when Elk began making loans in the Chicago taxi medallion market, the market
value of a medallion increased from approximately $32,000 to a high of
approximately $68,000. From July, 2000 through June, 2002, the market value of a
Chicago taxi medallion decreased to approximately $56,000 to $58,000. During the
time Elk has been making taxi loans in Boston and the Miami area, the market
price of medallions has increased from approximately $90,000 to $180,000 in
Boston and from approximately $80,000 to $90,000 in Miami.
As of June 30, 2002, $14,039,563, or 25.5%, of the aggregate principal
amount of its outstanding loans of $55,029,831, represented loans made to
finance the purchase or continued ownership of New York City taxi medallions and
related assets; an aggregate of $23,109,314, or 42.0%, consisted of loans to
finance the purchase or refinancing of taxi medallions in Chicago, and the
balance of $17,880,954 or 32.5% consisted of loans to various commercial
borrowers, of which $1,229,791, or 2.2%, was invested in Boston taxi medallion
financing and $2,629,349, or 4.8%, was invested in Miami taxi medallion
financing. See " -- Loan Portfolio; Valuation," below.
Due to increasing competition, annual interest rates for new loans in the
New York market are currently averaging 8.0%. Interest rates on Chicago taxi
loans generally have ranged from 10.5% to 14% per year. With additional
competition presently in the market place, it is expected that rates will range
in the near term from 10% to 12% per year on new loans, depending upon the size
of the loan, the repayment schedule, the balloon dates, the loan-to-value ratio,
and the credit history of the borrower. In addition, most loans that Elk has
made in Chicago have been for four to six year terms and are self-amortizing.
With increased competition in the market, the term of the loan may be expected
to increase to periods longer than six years. Interest rates on loans in the
Boston market currently range from 10-13%, and in the Miami market currently
range from 10-13%.
COMMERCIAL LOAN PORTFOLIO
Ameritrans began making diversified Commercial Loans in May 2002. At June
30, 2002, Ameritrans' Commercial Loan portfolio consisted of two loans totaling
$582,000, of which one loan for $500,000 was to a debt collection business and
one loan for $82,000 was to a housing renovation business. The proceeds of the
loan to the debt collection business were used to purchase an interest in a pool
of charged off credit card receivables.
Elk began making non-taxi Commercial Loans in 1985. Due to the effects of
the nationwide recession of the early 1990's on the New York City metropolitan
area economy, between 1990 and
8
1994 Elk suffered significant losses in its Commercial Loan portfolio. These
losses were primarily written off against income earned by Elk on its taxi loan
portfolio. By 1995, the local economy had improved and Elk again began making
selective Commercial Loans, and its activities in this area have been increasing
steadily. At June 30, 1995, Elk's Commercial Loans totaled $1,275,654, or 5.5%,
of Elk's total loan portfolio, while at June 30, 2002, Elk's Commercial Loans
totaled $13,439,814, or 24.7%, of Elk's total loan portfolio. On July 1, 2001,
the Company had a beginning balance in its reserve of loss account of $318,500.
For the year ended June 30, 2002, the Company took charge offs from the reserves
of $80,000. This resulted in the ending balance of the reserve for loss account
at June 30, 2002 of $238,500. During the fiscal year ended 2002, the Company had
total write off and depreciation on interest and loan receivable of $393,145.
At June 30, 2002, Elk's Commercial Loan portfolio consisted of 85 loans, of
which 12 loans totaling $1,153,153 were to dry-cleaning businesses, 35 loans
totaling $6,435,636 were to laundromat businesses, and 38 loans totaling
$5,851,026 were to a variety of other small businesses. Loans to dry cleaners
and laundromats represented 56.5% of the aggregate principal amount of
Commercial Loans outstanding at June 30, 2002.
Elk generally originates Commercial Loans by financing the cost of dry
cleaning, laundromat or other business-specific equipment, while the borrower is
making an equity investment to finance the cost of installation, building of
appropriate infrastructure to support the equipment, installation of other
equipment necessary for the business operations, other decorations and working
capital. Substantially all Commercial Loans are collateralized by first security
interests in the assets being financed by the borrower, or by real estate
mortgages. In addition, Elk generally requires personal guaranties from the
principals of the borrower and in limited cases obtains recourse guaranties from
the equipment vendors.
Elk's Commercial Loans typically require equal monthly payments covering
accrued interest and amortization of principal over a four to eight year term
and generally can be prepaid with a fee of 60 to 90 days of interest during the
first several years of the loan. The term of, and interest rate charged on,
Elk's Commercial Loans are subject to SBA Regulations.
Elk generally obtains interest rates on its Commercial Loans that are
higher than it can obtain on New York City taxi medallion loans. The Company
believes that the increased yield on Commercial Loans compensate for their
higher risk relative to medallion loans and that it will benefit from the
diversification of its portfolio. Interest rates on currently outstanding
Commercial Loans range from 7% to 18%.
9
LOAN PORTFOLIO; VALUATION
The following table sets forth a classification of the Company's
outstanding loans as of June 30, 2002:
Number of Interest Maturity Dates Balance
Type of Loan Loans Rates (In Months) Outstanding
- ----------------------------------------------------------------------------------------------
New York City:
Taxi medallion 80 7 - 16% 2 - 180 $13,899,244
Radio car service 18 11 - 15% 3 - 48 140,319
Chicago:
Taxi medallion 437 11 - 16% 1 - 120 23,109,314
Boston:
Taxi medallion 13 9.5 - 11% 1 - 46 1,229,791
Miami:
Taxi medallion 75 10.5 - 16% 21 - 113 2,629,349
Other loans:
Restaurant 5 10 - 15% 30 - 120 555,577
Car Wash/Auto Center 6 8 - 15% 29 - 57 718,157
Dry Cleaner 12 10.5 - 18% 24 - 96 1,153,153
Laundromat 35 7.5 - 18% 29 - 76 6,435,635
Laundry Equipment Dealer 1 9.5% 40 172,160
Financial Services 1 14% 108 252,781
Black Car Service (real property) 2 10.5 - 11% 48 412,524
Auto Sales 5 11 - 13% 12 - 96 571,515
Movie Theater 1 16% 108 169,478
Retirement home 3 13.5 - 14.5% 84 - 120 440,141
Commercial construction 3 13 - 16% 48 - 63 676,139
Telecommunications 1 12% 42 154,866
Leather Goods 1 16% 53 190,000
Beverage distributor 1 14.5% 163 194,488
Marina 1 14.5% 45 192,007
Construction supplies 1 13% 43 125,000
Plumbing & heating supplies 1 14% 106 143,559
Recycling 1 14.5% 48 150,000
Real Estate 1 13.5% 54 138,236
Florist 1 7.25% 118 395,508
Food Market 2 12 - 16% 82 - 120 198,890
Debt Collection 1 17.5% 35 500,000
Housing renovator 1 15.00% 12 82,000
-----------
Total Loans Receivable 55,029,831
Less: Allowance for loan losses (238,500)
-----------
Loans Receivable, net $54,791,331
===========
10
Loans made by Elk to finance the purchase or continued ownership of taxi
medallions, taxis and related assets are typically secured by such medallions,
taxis and related assets. Loans made by Ameritrans and Elk to finance the
acquisition and/or operation of retail, service or manufacturing businesses are
typically secured by real estate and other assets. In the case of loans to
corporate owners, the loans are usually personally guaranteed by the
stockholders of the borrower. Elk generally obtains first mortgages, but
occasionally has participated in certain financings where it has obtained a
second mortgage on collateral. Elk has obtained a relatively higher rate of
interest in connection with these subordinated financings. Elk has not, to date,
committed more than 5% of its assets to any one business concern in its
portfolio. The interest rates charged by Elk on its currently outstanding loans
range from 7% to 18% per annum. As of June 30, 2002, the annual weighted average
interest rate on Elk's loans was approximately 11.00%. The average term of Elk's
currently outstanding loans is approximately 48 months.
VALUATION -- As an SBIC, Elk is required by applicable SBA Regulations to
submit to the SBA semi-annual valuations of its investment portfolio, as
determined by its Board of Directors, which considers numerous factors including
but not limited to the financial strength of its borrowers to determine "good"
or "bad" status, and fluctuations in interest rates to determine marketability
of loans. Reference is made to Footnotes 1, 2 and 3 of Notes to Financial
Statements for a discussion of Elk's method of valuation of its current
portfolio of loans. In the event Elk invests in securities for which price
quotations are readily available, Elk will value such investments at their fair
market value, based on such quoted prices. With respect to securities for which
price quotations are not readily available, such securities will be valued at
fair market value as determined by the Board of Directors.
COLLECTION EXPERIENCE -- Elk has not, to date, had a material loss of
principal in any taxi medallion loan but from time to time it has experienced
some small losses of principal on its taxi lending operations. ELK has also
experienced some losses of principal in its diversified (non-taxi) loan
portfolio. Likewise, its collection experience (timely payments, collections on
foreclosure, etc.) with taxi medallion financings has historically been better
than with its non-taxi loans. From 1991 through 1994, substantially all of Elk's
provisions for loan losses and losses on assets acquired were related to
business loans secured by real estate and to radio car loans. In addition, from
1991 through 1995, Elk had difficulty selling off real estate acquired on
defaulted loans as a result of a depressed real estate market. Since 1995, Elk
has substantially increased its diversified loan portfolio, and its overall
collection experience with these loans has improved, although it has experienced
losses on selective loans.
The Chicago taxi market during the last fiscal year since September 11,
2001, has suffered through an economic slowdown which caused approximately 15%
of our Chicago taxi loans to eventually default to the point that a foreclosure
action was necessary to recover on our collateral. When the events of September
11, 2001, took place, the Chicago market was in the process of absorbing
additional medallions that had been sold by the city approximately six months
before, but which were coming into service during the spring and summer of 2001.
As a result of the increase in supply of medallions and the reduction in demand
for service and corresponding reduction in revenues experienced by taxi
operators for several months after September 11, 2001, the Company, as well as
other lenders in the Chicago taxi medallion lending market, began experiencing a
greater rate of default in their Chicago loan portfolio than they had previously
experienced. It was also more difficult to resell these medallions due to the
price reductions that had taken place in medallion sales both before and after
September 11, 2001, from their prior high prices of $68,000 to $70,000 per
medallion. Market conditions began to improve during the 3rd and 4th quarters of
the Company's fiscal year, and the Company was able to develop a program to sell
its defaulted medallions both directly to buyers and through an arrangement with
the Checker Taxi Association, Inc. in Chicago. By June 30, 2002, the Company had
resold 30 Chicago taxi medallions, and found that market conditions were getting
stronger. During May, June, and July 2002, some of the defaulted taxi owners
came back to reinstate their loans, paid various amounts in connection with
reinstating their loans, executed loan modification and reinstatement
agreements, and began to operate their medallions again. As a result of the
softness in the Chicago taxi market during the fiscal year, the Company charged
off a total of $62,881 of principal on the Chicago loan portfolio, of which
$48,604 was due to losses on 12 completed medallion foreclosure sales of Chicago
medallions. The Company also wrote off $114,928 of accrued interest on all of
the 30 completed Chicago foreclosed medallion loans, and did not accrue an
additional $38,145 of interest on certain of the foreclosed Chicago medallion
loans. In addition, the Company increased its unrealized depreciation on
interest receivable for potential losses on the remaining Chicago taxi medallion
loans that were in default by an additional net amount of $206,272.
SOURCES OF FUNDS
Elk is authorized to borrow money and issue debentures, promissory notes
and other obligations, subject to SBA regulatory limitations. Other than the
subordinated debentures issued to the SBA, Elk has to date borrowed funds only
from banks. As of June 30, 2002, Elk maintained three lines of credit totaling
$40,000,000 with an overall lending limit of $40,000,000. At June 30, 2002, Elk
had $33,720,000 outstanding under these lines. The loans, which mature through
November 2002, bear interest based on the Company's choice of the lower of
either the reserve adjusted LIBOR rate plus 150 basis points or the banks' prime
rates minus 1/2% plus certain fees as of June 30, 2002. Upon maturity, Elk
anticipates extending the lines of credit for another year as has been the
practice in previous years. Pursuant to the terms of the loan agreements, Elk is
required to comply with certain terms, covenants and conditions, and has pledged
its loans receivable and other assets as collateral for the above lines of
credit.
During January 2002, the Company and the SBA entered into an agreement
whereby the SBA committed to reserve debentures in the amount of $12,000,000 to
be issued to the Company on or prior to September 30, 2006. As of June 30, 2002,
no amount has been drawn on this commitment. Subsequently in July 2002, a new
debenture payable to the SBA was drawn from the reserved pool of $12,000,000 in
the amount of $2,050,000 with an interim interest rate of 2.351 %. The fixed
rate of 4.67% was determined on the pooling date of September 25, 2002. In
addition to the fixed rate, there is an additional annual SBA user fee of $0.88%
per annum that will also be changed making the rate 5.55% before applicable
amortization of points and fees.
If interest rates rise, our cost of funds would increase while the rates on
our outstanding loans to our borrowers remained fixed, and our profitability
could decrease. In order to partially contain this risk, we have purchased
interest rate caps and interest rate swaps. While these limit our exposure to
11
upward movement in interest rates on our bank loans, they initially increase the
effective interest rates that we pay on loans subject to these agreements.
However, general rises in interest rates will reduce our interest rate spread in
the short term on the floating portion of our bank debt that is not covered by
interest rate caps or interest rate swaps. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations -- Interest Expense" and Note 12 of Notes to Consolidated Financial
Statements.
Pursuant to the SBA Agreement, Elk agreed to limit the aggregate of its
indebtedness based on a computation of a borrowing base each quarter. The
borrowing base computation is calculated to determine that the total amount of
debt due on the senior bank debt and SBA debentures does not exceed
approximately 80% of the value of performing loans and investments in Elk's
portfolio and on a temporary basis up to 85% of performing taxi medallion loans.
Loans that are more than 90 days in arrears are valued at a lower amount in
computing the borrowing base.
In connection with the SBA Agreement, Elk has also entered into an
intercreditor agreement (the "Intercreditor Agreement") and a custodian
agreement (the "Custodian Agreement") with its banks and the SBA. Pursuant to
the Custodian Agreement, the banks and the SBA-appointed Israel Discount Bank of
New York as the custodian to hold certain notes, security agreements, financing
statements, assignments of financing statements, and other instruments and
securities as part of the collateral for Elk's indebtedness to the banks and the
SBA. The Intercreditor Agreement sets forth the respective rights and priorities
of the banks and the SBA with respect to the repayment of indebtedness to the
banks and the SBA and as to their respective interests in the collateral.
Pursuant to the Intercreditor Agreement, the banks consented to the grant by Elk
to the SBA of a security interest in the collateral, which security interest
ranks junior in priority to the security interests of the banks.
SBIC BENEFITS
GENERAL. As an SBIC, Elk is eligible to receive certain financing from the
SBA on favorable terms, and Elk and its stockholder are entitled to certain tax
benefits, both described below. The SBA has a certain amount of discretion in
determining the type and amount of financing that will be made available to an
SBIC. Therefore, there can be no assurance as to the nature and amount of SBA
financing that may actually be obtained by Elk. Furthermore, there are certain
restrictions and requirements to which Elk is subject by virtue of it being an
SBIC.
BACKGROUND. SBICs were created under the 1958 Act as vehicles for providing
equity capital, long-term loan funds and management assistance to small
businesses. In general, the SBA considers a business to be "small," and
therefore eligible to receive loans from an SBIC, only if (i) its net worth does
not exceed $18,000,000 and if the average of its net annual income after taxes
for the preceding two years was not more than $6,000,000 or (ii) it meets the
size standard for the industry in which it is primarily engaged, pursuant to SBA
Regulations. In addition, an SBIC is required to allocate a portion of its
portfolio to the financing of concerns that (i) together with their affiliates
do not have net worth in excess of $6 million and do not have an average net
income after taxes for the preceding two years in excess of $2 million or (ii)
meet the size standard for the industry in which they are primarily engaged.
SBICs are licensed, regulated, and sometimes partially financed, by the SBA.
12
BENEFITS. The principal benefits to Elk of being licensed as an SBIC are as
follows:
The SBA is authorized to guaranty full repayment of all principal and
interest on debentures issued by an SBIC to the extent of 300% of the SBIC's
"Leverageable Capital," as defined in the applicable SBA Regulations. However,
the percentage of allowable leverage decreases if the SBIC's Leverageable
Capital exceeds $15,000,000. The term of such debentures is typically 10 years.
The SBA will guarantee such debentures only after such an SBIC has demonstrated
a need for such debentures as evidenced by the SBIC's investment activity and
its lack of sufficient funds available for investments; provided, however, that
an SBIC that has invested at least 50% of its Leverageable Capital and
outstanding leverage shall be presumed to lack sufficient funds available for
investment. Generally, such debentures will bear interest at a fixed rate that
is based on the rate which is set by the underwriters of the pooled debentures
sold through SBIC Funding Corp.
With respect to debentures guaranteed after July 1, 1991, the SBA's claim
against an SBIC is subordinated, in the event of such SBIC's insolvency, only in
favor of present and future indebtedness outstanding to lenders and only to the
extent that the aggregate amount of such indebtedness does not exceed the lesser
of 200% of such SBIC's paid-in capital and paid-in surplus (as adjusted pursuant
to SBA Regulations), or $10,000,000. However, the SBA may agree to a
subordination in favor of one or more loans from certain lenders, in its sole
discretion. Pursuant to the SBA Agreement and the Intercreditor Agreement, the
SBA agreed to a subordination in favor of Elk's banks; provided, however, that
Elk is required to keep its overall debt to certain levels based upon the
performance of its portfolio.
COMPETITION
Banks, credit unions, other finance companies, some of which are SBICs, and
other private lenders compete with Elk in the origination of taxi medallion
loans and commercial installment loans. Finance subsidiaries of equipment
manufacturers also compete with Elk. Many of these competitors have greater
resources than Elk and certain competitors are subject to less restrictive
regulations than Elk. As a result, Elk expects to continue to encounter
substantial competition from such lenders. Therefore, there can be no assurance
that Elk will be able to identify and complete financing transactions that will
permit it to compete successfully.
EMPLOYEES
As of June 30, 2002, we employed a total of eleven employees. This
includes a temporary increase of three clerks starting May 2002 due to the
implementation of the Company's new computer system. The three temporary
employees were terminated during August, 2002.
13
INVESTMENT POLICIES
ELK INVESTMENT POLICIES
The investment policies described below are the fundamental policies of
Elk. Under the 1940 Act, these policies may be changed only by the vote of the
lesser of (i) a majority of Elk's outstanding Common Stock, or (ii) 67% of the
number of shares of Common Stock present in person or by proxy at a stockholder
meeting at which at least 50% of the outstanding shares of Common Stock are
present. Because Ameritrans is the only stockholder of Elk, we have agreed with
the SEC that Elk's fundamental investment policies will be changed only by the
vote of the Ameritrans stockholders.
(a) ISSUANCE OF SENIOR SECURITIES. Elk may issue subordinated debentures to
the SBA in the maximum amounts permissible under the 1958 Act and the applicable
regulations. Elk currently does not have any preferred stock authorized.
(b) BORROWING OF MONEY. Elk has the power to borrow funds from banks, trust
companies, other financial institutions, the SBA or any successor agency and/or
other private or governmental sources, if determined by Elk's Board of Directors
to be in its best interests.
(c) UNDERWRITING. Elk has not engaged, and does not intend to engage, in
the business of underwriting the securities of other issuers.
(d) CONCENTRATION OF INVESTMENTS. Elk may not concentrate 25% or more of
its total assets in securities of issuers in any industry group except the taxi
industry. Elk will make at least 25% of its investments for financing the
purchase or continued ownership of taxi medallions, taxis and related assets.
The balance of its investments includes, and Elk intends to continue to finance,
the acquisition and/or operation of other small businesses.
(e) REAL ESTATE. Elk has not engaged, and does not intend to engage, in the
purchase and sale of real estate. However, Elk may elect to purchase and sell
real estate in order to protect any of its prior investments which it considers
at risk.
(f) COMMODITIES CONTRACTS. Elk has not engaged, and does not intend to
engage, in the purchase and sale of commodities or commodities contracts.
(g) LOANS. Elk has made, and will continue to make, loans to Small Business
Concerns in accordance with the provisions of the 1958 Act and the SBA
Regulations.
(h) WRITING OPTIONS. Elk has not engaged, and does not intend to engage, in
the writing of options.
(i) SHORT SALES. Elk has not engaged, and does not intend to engage, in
short sales of securities.
(j) PURCHASING SECURITIES ON MARGIN. Elk has not engaged, and does not
intend to engage, in the purchase of securities on margin.
(k) FUTURES CONTRACTS. Elk has not engaged, and does not intend to engage,
in the purchase or sale of futures contracts.
14
(l) RESTRICTED SECURITIES. Elk may invest up to 100% of its assets in
restricted securities.
(m) TYPES OF INVESTMENTS. Although Elk was organized primarily to provide
long term loan funds to Small Business Concerns, Elk's certificate of
incorporation provides Elk with the authority to invest in the equity capital of
Small Business Concerns. Accordingly, Elk may make equity investments in Small
Business Concerns if determined by its Board of Directors to be in the best
interests of Elk.
(n) MAXIMUM INVESTMENT. Elk will not lend or otherwise invest more than the
lesser of (i) 10% of its total assets or (ii) 30% of its paid-in capital
attributable to its Common Stock with respect to any one Small Business Concern.
(o) PERCENTAGE OF VOTING SECURITIES. The percentage of voting securities of
any one Small Business Concern which Elk may acquire may not exceed 49% of the
outstanding voting equities of such Small Business Concern.
(p) MANAGEMENT CONTROL. Elk does not intend to invest in any company for
the purpose of exercising control of management. However, Elk may elect to
acquire control in order to protect any of its prior investments which it
considers at risk.
(q) INVESTMENT COMPANIES. Elk has not invested, and does not intend to
invest, in the securities of other investment companies.
(r) PORTFOLIO TURNOVER. Elk intends to make changes in its portfolio when,
in the judgment of its Board of Directors, such changes will be in the best
interest of our stockholders in light of the then existing business and
financial conditions. We do not anticipate that Elk's loan portfolio will
realize an annual turnover in excess of 50%, although there can be no assurance
with respect thereto.
AMERITRANS INVESTMENT POLICIES
Ameritrans' only fundamental policies, that is, policies that cannot be
changed without the approval of the holders of a majority of Ameritrans'
outstanding voting securities, as defined under the 1940 Act, are the
restrictions described below. A "majority of Ameritrans' outstanding voting
securities" as defined under the 1940 Act means the lesser of (i) 67% of the
shares represented at a meeting at which more than 50% of the outstanding shares
are represented or (ii) more than 50% of the outstanding shares. The other
policies and investment restrictions referred to in this Annual Report,
including Ameritrans' investment objectives, are not fundamental policies of
Ameritrans and may be changed by Ameritrans' Board of Directors without
stockholder approval. Unless otherwise noted, whenever an investment policy or
limitation states a maximum percentage of Ameritrans' assets that may be
invested in any security or other asset, or sets forth a policy regarding
quality standards, such standard or percentage limitation will be determined
immediately after and as a result of Ameritrans' acquisition of such security or
other asset. Accordingly, any subsequent change in values, assets, or
15
other circumstances will not be considered when determining whether the
investment complies with Ameritrans' investment policies and limitations.
Ameritrans' fundamental policies are as follows:
(a) Ameritrans will at all times conduct its business so as to retain its
status as a BDC under the 1940 Act. In order to retain that status, Ameritrans
may not acquire any assets (other than non-investment assets necessary and
appropriate to its operations as a BDC) if, after giving effect to such
acquisition, the value of its "Qualifying Assets," amount to less than 70% of
the value of its total assets. Ameritrans believes that the securities it
proposes to acquire in connection with the acquisition of Elk, as well as
temporary investments it makes with its funds, will generally be Qualifying
Assets. See "Regulation."
(b) Ameritrans may borrow funds and issue "senior securities" to the
maximum extent permitted under the 1940 Act. As a BDC, Ameritrans may issue
senior securities if, immediately after such issuance, the senior securities
will have an asset coverage of at least 200%. Under the 1940 Act, subordinated
debentures issued to or guaranteed by the SBA, the preferred stock issued to the
SBA by Elk and Elk's bank borrowings may be considered senior securities issued
by Ameritrans requiring asset coverage of 200%; however, pursuant to an
Exemptive Order issued by the SEC on December 7, 1999, such debentures,
preferred stock and bank borrowings are exempt from the asset coverage
requirements of the 1940 Act.
(c) Ameritrans will not (i) underwrite securities issued by others (except
to the extent that it may be considered an "underwriter" within the meaning of
the Securities Act in the disposition of restricted securities), (ii) engage in
short sales of securities, (iii) purchase securities on margin (except to the
extent that it may purchase securities with borrowed money), (iv) write or buy
put or call options, or (v) engage in the purchase or sale of commodities or
commodity contracts, including futures contracts (except where necessary in
working out distressed loan or investment situations). Ameritrans and Elk may
purchase interest rate caps and swaps covering up to 100% of their variable rate
debt. In addition, Ameritrans may sponsor the securitization of loan portfolios.
(d) Ameritrans and Elk may originate loans and loans with equity features.
To the extent permitted under the 1940 Act and the regulations promulgated
thereunder, Ameritrans may also make loans as permitted (i) under its existing
stock option plans, (ii) under plans providing for options for disinterested
directors that might be adopted by Ameritrans in the future, and (iii) to
officers and directors for the purchase of Ameritrans Common Stock.
(e) Ameritrans will hold all of the outstanding common stock of Elk and Elk
Capital and may organize additional subsidiaries in the future. Ameritrans may
acquire restricted securities of small businesses.
16
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a general summary of the federal income tax
principles applicable to Ameritrans, based on the currently existing provisions
of the Internal Revenue Code and the regulations thereunder. This summary does
not purport to be a complete description of the tax considerations applicable to
Ameritrans or to the holders of its Common Stock. These principles, in general,
also apply to Elk, but the sole direct stockholder of Elk is Ameritrans.
Ameritrans has elected to be treated as a "regulated investment company" (a
"RIC") under Section 851 of the Internal Revenue Code, and Elk has elected to be
treated as a RIC since 1984. A regulated investment company may deduct, for
federal income tax purposes, most dividends paid to stockholders, thereby
avoiding federal income taxation at the corporate level on stockholder
dividends. In addition, because Elk currently qualifies for treatment as a RIC,
Ameritrans anticipates that the dividends it receives from Elk will not be
subject to corporate taxation at the level of Elk.
TAXATION OF REGULATED INVESTMENT COMPANIES
In order to qualify as a RIC for a given fiscal year, a company must meet
each of the following conditions for that fiscal year:
a) The company must be registered as an investment company under the
1940 Act at all times during the year.
b) At least 90% of the company's gross income for the year must be
derived from interest, gains on the sale or other disposition of stock or
other securities, dividends and payment with respect to securities loans.
c) Less than 30% of the company's gross income must be derived from
the sale or other disposition of securities held for less than three
months.
d) At the close of each quarter, at least 50% of the value of the
company's total assets must be represented by cash, cash items (including
receivables), securities of other RICs and securities of other issuers,
except that the investment in a single issuer of securities may not exceed
5% of the value of the RIC's assets, or 10% of the outstanding voting
securities of the issuer.
e) At the close of each quarter, and with the exception of government
securities or securities of other RICs, no more than 25% of the value of a
RIC's assets may be made up of investments in the securities of a single
issuer or in the securities of two or more issuers controlled by the RIC
and engaged in the same or a related trade or business. However, if a
non-RIC entity controlled by the RIC subsequently sustains internally
generated growth (as opposed to growth via acquisitions), the
diversification requirement will not be violated even if the non-RIC
subsidiary represents in excess of 25% of the RIC's assets.
f) The company must distribute as dividends at least 90% of its
investment company taxable income (as defined in Section 852 of the
Internal Revenue Code), as well as 90% of the excess of its tax-exempt
income over certain disallowed tax-exempt interest deductions. This
treatment substantially eliminates the "double taxation" (i.e., taxation at
both the corporate and stockholder levels) that generally results from the
use of corporate investment vehicles. A RIC is,
17
however, generally subject to federal income tax at regular corporate rates
on undistributed investment company taxable income.
In order to avoid the imposition of a non-deductible 4% excise tax on its
undistributed income, a company is required, under Section 4982 of the Internal
Revenue Code, to distribute within each calendar year at least 98% of its
ordinary income for such calendar year and 98% of its capital gain net income
(reduced by the RIC's net ordinary loss for the calendar year, but not below its
net capital gain) for the one-year period ending on October 31 of such calendar
year.
The tax benefits available to a qualified RIC are prospective, commencing
with the fiscal year in which all the conditions listed above are met, and would
not permit Ameritrans to avoid income tax at the corporate level on income
earned during prior taxable years. If Ameritrans fails to qualify as a RIC for a
given fiscal year, Ameritrans will not be entitled to a federal income tax
deduction for dividends distributed, and amounts distributed as stockholder
dividends by Ameritrans will therefore be subject to federal income tax at both
the corporate level and the individual level.
Dividends distributed by Elk to Ameritrans will constitute ordinary income
to Ameritrans to the extent derived from non-capital gain income of Elk, and
will ordinarily constitute capital gain income to Ameritrans to the extent
derived from capital gains of Elk. However, since Ameritrans is also a RIC,
Ameritrans will, in general, not be subject to a corporate level tax on its
income to the extent that it makes distributions to its stockholders. If Elk
does not qualify as a RIC for any reason in any fiscal year, it will not be
entitled to a federal income tax deduction for dividends distributed, and will
instead be liable to pay corporate level tax on its earnings. Further, if Elk
does not qualify as a RIC, such failure will cause Ameritrans to fail to qualify
for RIC status as well, as long as Elk stock held by Ameritrans represents more
than 25% of Ameritrans' assets. In such a case, Ameritrans will be taxed on
dividends received from Elk, subject to the deduction for corporate dividends
received, which is currently 70%. Thus, if Elk fails to qualify as a RIC for any
reason, its earnings would be taxed at three levels: to Elk, in part to
Ameritrans, and finally, when they are distributed by Ameritrans, to our
stockholders.
As long as Ameritrans qualifies as a RIC, dividends distributed by
Ameritrans to its stockholders out of current or accumulated earnings and
profits constitute ordinary income to such stockholders to the extent derived
from ordinary income and short-term capital gains of Ameritrans (such as
interest from loans by Ameritrans). Any long-term capital gain dividends
distributed by Ameritrans would constitute capital gain income to Ameritrans
stockholders. To the extent Ameritrans makes distributions in excess of current
and accumulated earnings and profits, these distributions are treated first as a
tax-free return of capital to the stockholder, reducing the tax basis of the
stockholder's stock by the amount of such distribution, but not below zero, with
distributions in excess of the stockholder's basis taxable as capital gains if
the stock is held as a capital asset.
18
TAXATION OF SBICS
As a result of Elk's status as a licensed SBIC under the 1958 Act, Elk and
its stockholders qualify for the following tax benefits:
(i) Under Section 243 of the Internal Revenue Code, Elk may deduct
100% of the dividends received by it from domestic corporations in which it
has made equity investments, regardless of whether such corporations are
subsidiaries of Elk (in contrast to the generally applicable 70% deduction
under the Code). Because Elk generally makes long-term loans rather than
equity investments, this potential benefit is not likely to be of practical
significance to Elk or its stockholder.
(ii) Under Section 1243 of the Internal Revenue Code, losses sustained
on Elk's investments in the convertible debentures, or stock derived from
convertible debentures, of Small Business Concerns are treated as ordinary
losses rather than capital losses to Elk. Because Elk does not presently
intend to purchase convertible debentures, however, this potential benefit
is not likely to be of practical significance to Elk or its stockholder.
STATE AND OTHER TAXES
The foregoing discussion relates only to federal income tax matters.
Ameritrans is also subject to state and local taxation. The state, local and
foreign tax treatment may not conform to the federal tax treatment discussed
above. Stockholders should consult with their own tax advisors with respect to
the state and local tax considerations pertaining to Ameritrans.
19
THE INVESTMENT COMPANY ACT OF 1940
Ameritrans and Elk are closed-end, non-diversified management investment
companies that have elected to be treated as BDCs and, as such, are subject to
regulation under the 1940 Act. The 1940 Act contains prohibitions and
restrictions relating to transactions between investment companies and their
affiliates, principal underwriters and affiliates of those affiliates or
underwriters. In addition, the 1940 Act provides that a BDC may not change the
nature of its business so as to cease to be, or to withdraw its election as, a
BDC unless so authorized by the vote of a "majority of its outstanding voting
securities," as defined under the 1940 Act.
BDCs are permitted, under specified conditions, to issue multiple classes
of indebtedness and one class of stock (collectively, "senior securities," as
defined under the 1940 Act) senior to the shares of Common Stock offered hereby
if their asset coverage of such indebtedness and all senior securities is at
least 200% immediately after each such issuance. Subordinated SBA debentures,
preferred stock guaranteed by or issued to the SBA by Elk, and Elk bank
borrowings are not subject to this asset coverage test. In addition, while
senior securities are outstanding, provision must be made to prohibit the
declaration of any dividend or other distribution to stockholders (except stock
dividends) or the repurchase of such securities or shares unless we meet the
applicable asset coverage ratios at the time of the declaration of the dividend
or distribution or repurchase. The Exemptive Order issued by the SEC grants
certain relief from the asset coverage ratios applicable to BDCs.
Under the 1940 Act, a BDC may not acquire any asset other than Qualifying
Assets unless, at the time the acquisition is made, certain Qualifying Assets
represent at least 70% of the value of the company's total assets. The principal
categories of Qualifying Assets relevant to our proposed business are the
following:
(1) Securities purchased in transactions not involving a public
offering from the issuer of such securities, which issuer is an eligible
portfolio company. An "eligible portfolio company" is defined in the 1940
Act as any issuer which:
(a) is organized under the laws of, and has its principal place
of business in, the United States;
(b) is not an investment company other than an SBIC wholly-owned
by the BDC; and
(c) satisfies one or more of the following requirements:
(i) the issuer does not have a class of securities with
respect to which a broker or dealer may extend margin credit; or
(ii) the issuer is controlled by a BDC and the BDC has an
affiliated person serving as a director of issuer;
20
(iii) the issuer has total assets of not more than
$4,000,000 and capital and surplus (stockholders' equity less
retained earnings) of not less than $2,000,000, or such other
amounts as the SEC may establish by rule or regulation; or
(iv) the issuer meets such requirements as the SEC may
establish from time to time by rule or regulation.
(2) Securities for which there is no public market and which are
purchased in transactions not involving a public offering from the issuer
of such securities where the issuer is an eligible portfolio company which
is controlled by the BDC.
(3) Securities received in exchange for or distributed on or with
respect to securities described in (1) or (2) above, or pursuant to the
exercise of options, warrants or rights relating to such securities.
(4) Cash, cash items, government securities, or high quality debt
securities maturing in one year or less from the time of investment.
In addition, a BDC must have been organized (and have its principal place
of business) in the United States for the purpose of making investments in the
types of securities described in (1) or (2) above. In order to count securities
as Qualifying Assets for the purpose of the 70% test, the BDC must either
control the issuer of the securities or must make available to the issuer of the
securities significant managerial assistance; except that, where the BDC
purchases such securities in conjunction with one or more other persons acting
together, one of the other persons in the group may make available the required
managerial assistance. We believe that the common stock of Elk held by
Ameritrans are Qualifying Assets.
The Small Business Investment Act of 1958
Elk was formerly an SSBIC and, as explained in further detail below, was
converted to an SBIC in February 1997 in accordance with an agreement with the
SBA. The 1958 Act authorizes the organization of SBICs as vehicles for providing
equity capital, long term financing and management assistance to Small Business
Concerns. A Small Business Concern, as defined in the 1958 Act and the SBA
Regulations, is a business that is independently owned and operated and which is
not dominant in its field of operation. In addition, at the end of each fiscal
year, at least 20% of the total amount of loans made since April 25, 1994 by
each SBIC must be made to a subclass of Small Business Concerns that (i) have a
net worth, together with any affiliates, of $6 million or less and average
annual net income after U.S. federal income taxes for the preceding two (2)
years of $2 million or less (average annual net income is computed without the
benefit of any carryover loss), or (ii) satisfy alternative criteria under SBA
Regulations that focus on the industry in which the business is engaged and the
number of persons employed by the business or its gross revenues. SBA
Regulations also prohibit an SBIC from providing funds to a Small Business
Concern for certain purposes, such as relending and reinvestment.
The 1958 Act authorized the organization of SSBICs to provide assistance to
Disadvantaged Concerns, i.e., businesses that are at least 50% owned and managed
by persons whose participation in the free enterprise system is hampered because
of social or economic disadvantages. Certain 1996 amendment to the 1958 Act
provided, among other things, that no further subsidized funding would be made
available to SSBICs. Thereafter, pursuant to an agreement with the SBA, Elk was
converted to an SBIC, subject to certain conditions imposed by the SBA. Under
this agreement, Elk may now lend to persons who are not Disadvantaged Concerns.
As of June 30, 2001, more than 90% of Elk's portfolio of loans and investments
were to Disadvantaged Concerns.
Under current SBA Regulations and subject to local usury laws, the maximum
rate of interest that Elk may charge may not exceed the higher of (i) 19% or
(ii) a rate calculated with reference to Elk's weighted average cost of
qualified borrowings, as determined under SBA Regulations or the SBA's current
debenture interest rate. The current maximum rate of interest permitted on loans
originated by Elk is 19%. At June 30, 2002, Elk's outstanding loans had a
weighted average rate of interest of 11.00%. SBA Regulations also require that
each loan originated by SBICs have a term of between five years and 20 years.
The SBA restricts the ability of SBICs to repurchase their capital stock,
to retire their subordinated SBA debentures and to lend money to their officers,
directors and employees or invest in affiliates thereof. The SBA also prohibits,
without prior SBA approval, a "change of control" or transfers which would
result in any person (or group of persons acting in concert) owning 10% or more
of any class of capital stock of an SBIC. A "change of control" is any event
which would result in the transfer of the power, direct or indirect, to direct
the management and policies of an SBIC, whether through ownership, contractual
arrangements or otherwise.
Under SBA Regulations, without prior SBA approval, loans by licensees with
outstanding SBA leverage to any single Small Business Concern may not exceed 20%
of an SBIC's Leveragable Capital. Under the terms of the SBA Agreement, however,
Elk is authorized to make loans to Disadvantaged Concerns in amounts not
exceeding 30% of its respective Leveragable Capital.
SBICs must invest funds that are not being used to make loans in
investments permitted under SBA Regulations. These permitted investments include
direct obligations of, or obligations guaranteed as to principal and interest
by, the government of the United States with a term of 15 months or less and
deposits maturing in one year or less issued by an institution insured by the
FDIC. The percentage of an SBIC's assets so invested will depend on, among other
things, loan demand, timing of equity infusions and SBA funding and availability
of funds under credit facilities.
SBICs may purchase voting securities of Small Business Concerns in
accordance with SBA Regulations. SBA Regulations prohibit SBICs from controlling
a Small Business Concern except where necessary to protect an investment. SBA
Regulations presume control when SBICs purchase (i) 50% or more of the voting
securities of a Small Business Concern if the Small Business Concern has less
than 50 stockholders or (ii) more than 20% (and in certain situations up to 25%)
of the voting securities of a Small Business Concern if the Small Business
Concern has 50 or more stockholders.
21
ITEM 2. PROPERTIES
We rent office space from a law firm, the principals of which are officers
and directors of Ameritrans, and we share certain office expenses with that
firm. The law firm, at our request, rented an additional 1,800 square feet of
office space contiguous with our offices at a below market rent (the "Additional
Space"). Until we require the Additional Space, the law firm sublets the
Additional Space to outside tenants. In the event all or a portion of the
Additional Space is vacant, Elk has agreed to reimburse the law firm for any
additional rent due. During the year ended 2002, ELK paid the law firm
approximately $7,000 on account of this agreement. In August, 2001 the Company's
Board of Directors approved the execution of a formal sublease with the law firm
on financial terms and conditions consistent with the prior arrangement for the
period July 1, 2001 through April 30, 2004.
ITEM 3. LEGAL PROCEEDINGS
Ameritrans is not currently a party to any material legal proceeding. From
time to time, Ameritrans is engaged in various legal proceedings incident to the
ordinary course of its business. In the opinion of Ameritrans' management and
based upon the advice of legal counsel, there is no proceeding pending, or to
the knowledge of management threatened, which in the event of an adverse
decision would result in a material adverse effect on Ameritrans' results of
operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of Ameritrans' 2002 fiscal year.
22
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Elk Common Stock was listed on the Nasdaq SmallCap Market on June 22,
1998, under the symbol EKFG, prior to which it had traded in the "pink sheets."
Since December 16, 1999, when Ameritrans acquired Elk, its Common Stock has been
listed on the Nasdaq SmallCap Market under the symbol AMTC.
The following tables show the closing high and low sale prices per share of
Common Stock as reported by Nasdaq, for the fiscal years ended June 30, 2001 and
June 30, 2002.
SALE
------------------------
HIGH LOW
-------- --------
AMERITRANS
- ----------
FISCAL 2001
1st Quarter 10.00 7.125
2nd Quarter 9.25 4.125
3rd Quarter 7.375 4.625
4th Quarter 5.25 4.00
FISCAL 2002
1st Quarter 5.75 4.00
2nd Quarter 9.00 4.33
3rd Quarter 7.15 6.24
4th Quarter 7.00 5.10
FISCAL 2003
1st Quarter (through September 23, 2002) 6.25 5.00
- ----------
(1) Stock prices shown are the high and the low for the quarter.
Elk registered under the 1940 Act for the fiscal year commencing July 1,
1983, and declared and paid dividends to holders of the Common Stock for the
fiscal years ended June 30, 1984 through June 30, 1992. Elk did not pay
dividends during the fiscal years ended June 30, 1993, 1994 and 1995. Elk
recommenced paying dividends for the fiscal year beginning July 1, 1995, has
paid dividends quarterly since that time and up until its share exchange with
Ameritrans. Thereafter, Ameritrans has declared and paid dividends to holders of
its Common Stock for each quarter except for the fourth quarter of 2000 and the
first quarter of 2001. The Company's Board of Directors declared a dividend of
$0.06 per share of Common Stock for the fourth quarter of 2002, and an estimated
dividend for the first quarter of 2003 of $0.11 per share of Common Stock. The
dividend is payable on October 16, 2002 to stockholders of record on October 7,
2002.
On April 18, 2002, the Company's registration statement filed on Form N-2
was declared effective by the Securities and Exchange Commission. The offering
closed on April 24, 2002 on the total sale of 300,000 units. Each unit was
comprised of one share of Common Stock, one share of 9 3/8% cumulative
participating preferred stock (face value $12.00) (the "Participating Preferred
Stock"), and one warrant exercisable for five years into one share of Common
Stock at an exercise price of $6.70 per share (the "Warrants"). The units were
split in May, 2002. The Participating Preferred Stock and the Warrants trade on
the NASDAQ SmallCap Market under the symbols, respectively, "AMTCP" and "AMTCW".
The gross proceeds from the sale of the units was $5,750,000 less costs and
commissions of $1,704,399, resulting in net proceeds of $3,995,601. The
underwriter of the offering was granted an option to purchase up to 30,000
units, each unit consisting of one share of Common Stock, one share of
Participating Preferred Stock and one warrant exercisable at $8.40 per share.
The option to purchase the 30,000 units are exercisable for five (5) years
commencing one year after the date of the offering at an exercise price of
$21.45 per unit.
The Company paid a dividend of $0.228125 per share on the Participating
Preferred Stock for the period April 18, 2002 through June 30, 2002. The
Company's Board of Directors declared a dividend of $0.28125 per share on
September 20, 2002 on the Participating Preferred Stock for the period July 1,
2002 through September 30, 2002 payable on October 7, 2002 for all holders of
the Participating Preferred stock of record as of September 30, 2002.
As of September 23, 2002, there were 206 holders of record, not including
parties holding the Common Stock in street name, of the Ameritrans Common Stock.
23
ITEM 6. SELECTED FINANCIAL DATA
On December 16, 1999, Ameritrans acquired Elk in a share-for-share
exchange. Prior to the acquisition, Elk had been operating independently and
Ameritrans had no operations.
The tables below contain certain summary historical financial information
of Elk. You should read these tables in conjunction with the consolidated
financial statements of Ameritrans (the "Financial Statements") included
elsewhere in this Annual Report and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
STATEMENT OF
OPERATIONS FISCAL YEAR ENDED
DATA JUNE 30,
----------------------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
Investment
Income $4,606,456 $ 5,583,894 $6,602,397 $6,439,792 $6,269,719
========== =========== ========== ========== ==========
Interest Expense 1,840,731 2,498,284 3,345,526 3,392,202 2,632,918
Other Expenses 1,852,262 1,844,949 2,528,806 2,065,724 2,512,844
========== =========== ========== ========== ==========
Total Expenses 3,692,993 4,343,233 5,874,332 5,457,926 5,145,762
========== =========== ========== ========== ==========
Investment
Income Before
Credit (provision)
for Loan Gains (Losses)
and Gains on Assets
Acquired other income
(expenses) and
Income Taxes 913,463 1,240,661 728,065 981,866 1,123,957
========== =========== ========== ========== ==========
Credit
(provision) for
Loan Gains
(losses) and
Gains (Losses)
on Assets
Acquired (14,649) (11,272) (61 546) (122,912) (78,907)
Other Income (Expense) 38,798 7,200 (440,196) (276,549) 2,700
Benefit of
(Provision for)
Income Taxes(1) (3,271) 769 (13,571) (7,896) (8,854)
---------- ----------- ---------- ---------- ----------
Net Income $ 934,341 $ 1,237,358 $ 212,752 $ 574,509 $1,038,896
========== =========== ========== ========== ==========
Dividends on Preferred
Stock -- -- -- -- (68,438)
---------- ----------- ---------- ---------- ----------
Net Income Available
To Common Shareholders $ 934,341 $ 1,237,358 $ 212,752 $ 574,509 $ 970,458
========== =========== ========== ========== ==========
Net Income Per
Common Share $ .62 $ .71 $ .12 $ .33 $ .54
========== =========== ========== ========== ==========
Common Stock
Dividends Paid $ 986,724 $ 1,256,832 $1,256,832 $ 528,045 $ 994,992
========== =========== ========== ========== ==========
Common Stock
Dividends Paid
Per Common Share $ .57 $ .72 $ .72 $ .30 $ .57
========== =========== ========== ========== ==========
24
STATEMENT OF
OPERATIONS FISCAL YEAR ENDED
DATA JUNE 30,
--------------------------------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
Weighted
Average
Shares of
Common Stock
Outstanding 1,518,969 1,745,600 1,745,600 1,745,600 1,800,614
========= ========= ========= ========= =========
Net change to
accumulated other
comprehensive
income $ 140,548 $ 62,964 $(124,319) $(123,364) $ (43,612)
========= ========= ========= ========= =========
BALANCE
SHEET DATA JUNE 30,
--------------------------------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
Loans
Receivable $41,590,000 $51,103,932 $56,806,579 $54,559,970 $55,029,831
Unrealized
depreciation
of
investments (295,000) (380,000) (380,000) (318,500) (238,500)
=========== =========== =========== =========== ===========
Net of
unrealized
depreciation
of
investments $41,295,000 $50,723,932 $56,426,579 $54,241,470 $54,791,331
Total assets $45,399,738 $54,510,801 $60,294,624 $57,984,869 $59,008,216
=========== =========== =========== =========== ===========
Notes payable
and demand
notes $22,085,000 $31,000,000 $37,800,000 $35,550,000 $33,720,000
Subordinated
SBA
debentures $ 8,880,000 $ 8,880,000 $ 8,880,000 $ 8,880,000 $7,860,000
Total
liabilities $31,705,011 $40,772,584 $47,410,598 $45,177,743 $42,341,135
=========== =========== =========== =========== ===========
Total
stockholders'
equity $13,694,727 $13,738,217 $12,884,026 $12,807,126 $16,667,081
=========== =========== =========== =========== ===========
- ----------
(1) Ameritrans since inception and Elk, since the fiscal year ended June 30,
1984, have elected and qualified to be taxed as a regulated investment
company and substantially all taxable income was required to be distributed
to stockholders. Therefore, only minimal taxes were required to be paid.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with the financial
statements and notes to financial statements. The results described below are
not necessarily indicative of the results to be expected in any future period.
Certain statements in this discussion and analysis, including statements
regarding our strategy, financial performance, and revenue sources, are
forward-looking statements based on current expectations and entail various
risks and uncertainties that could cause actual results to differ materially
from those expressed in the forward-looking statements, including those
described in "risk factors" and elsewhere in this prospectus.
GENERAL
Ameritrans acquired Elk in December 16, 1999. Elk is an SBIC that has been
operating since 1980, making loans to (and, to a limited extent, investments in)
small businesses, primarily businesses that are majority-owned by persons who
qualify under SBA Regulations as socially or economically disadvantaged. Most of
Elk's business has consisted of originating and servicing loans collateralized
by New York City, Boston, Chicago and Miami taxi medallions, but Elk also makes
loans to and investments in other diversified businesses and to persons who
qualify under SBA Regulations as "non-disadvantaged."
Historically, Elk's earnings derived primarily from net interest income,
which is the difference between interest earned on interest-earning assets
(consisting of business loans), and the interest paid on interest-bearing
liabilities (consisting of indebtedness to Elk's banks and subordinated
debentures issued to the SBA). Net interest income is a function of the net
interest rate spread, which is the difference between the average yield earned
on interest-earning assets and the average interest rate paid on
interest-bearing liabilities, as well as the average balance of interest-earning
assets as compared to interest-bearing liabilities. Unrealized depreciation on
loans and investments is recorded when Elk adjusts the value of a loan to
reflect management's estimate of the fair value, as approved by the Board of
Directors. See Note 1 of "Notes to Consolidated Financial Statements."
26
Results of Operations for the Years Ended June 30, 2002 and 2001
Total Investment Income
The Company's investment income decreased $170,073 to $6,269,719 as
compared with the prior year ended June 30, 2001. This decrease was mainly due
to the decrease in interest earned on loans receivable, ($181,232), offset by an
increase in other fees ($11,159). This decrease reflects a lower average
interest rate earned on the Company's outstanding loan portfolio.
Operating Expenses
Interest expense for the years ended June 30, 2002 decreased $759,284 to
$2,632,918 when compared to the year ended June 30, 2001. This reflects the
lower interest charged on outstanding bank borrowing combined with a paydown of
the notes payable, bank and an SBA debenture in the amount of $1,020,000 as a
result of the Company's successful public offering of 300,000 units in April
2002. Salaries and employee benefits increased $142,620 when compared with the
prior year. This increase reflects the increases that were put in effect when
the officers signed employment agreements combined with a temporary increase in
staff due to the implementation of the Company's new computer system. Other
administrative costs decreased $33,980 when compared with the prior year. This
decrease was mainly due to decreased miscellaneous administrative expenses and
loss on assets acquired in satisfaction of loans, net. The Company also charged
off $126,565 in foreclosure expenses for the year ended June 30, 2002.
Depreciation in value of loans and accrued interest increased $167,910 to
$393,145 due mainly to the write down of the Company's Chicago loan portfolio
and accrued interest.
Net Income
Net income increased to $1,038,896 from $574,509 in the year ended June 30,
2002. The change in the net income for the year ended June 30, 2002 that was
attributable to other income (expense) amounted to $279,249. This change was
primarily due to a one time charge of $413,186 due to the termination of the
Company's merger talks with Medallion, net of $121,637 gain on the sale of
equity securities for the year ended June 30, 2001.
Results of Operations for the Years Ended June 30, 2001 and 2000
Total Investment Income
The Company's investment income decreased by $162,605 to $6,439,792 for the
year ended June 30, 2001, when compared with the year ended June 30, 2000. The
decrease was due to a decrease in interest earned on the loan portfolio of
$11,308 combined with a decrease in fees and other income of $151,297. This
decrease reflects the leveling of the company's portfolio which occurred during
its merger discussions with Medallion.
Operating Expenses
Interest expense increased by $46,676 to $3,392,202 when compared with the
prior year due to increased interest rates during the beginning of the fiscal
year combined with increased average outstanding loan balance during the year.
Other operating expenses decreased to $1,963,401 for the year ended June 30,
2001, as compared with $1,972,506 in the prior year due to a slowdown of Chicago
Medallion loan deals. Depreciation in value of loans decreased $392,611 to
$225,235 during the year ended June 30, 2001, as compared with the year ended
June 30, 2000. During the year ended June 30, 2001 the Company expensed costs
incurred in connection with the proposed merger with Medallion in the amount of
$413,186. These costs were non operational and a one time charge.
Net Income
Net income ended June 30, 2001, increased $361,757 to $574,509. This
increase was mainly due to a decrease in depreciation in value of loans of
$392,611 and a one time write off of merger costs of $413,186. As compared with
prior year recapitalization costs and terminated offering cost of $679,132.
Balance Sheet and Reserves
Total assets increased by $1,023,347 as of June 30, 2002 when compared to
total assets as of June 30, 2001. This increase was due to the Company's
successful public offering of 300,000 units at $19 per unit in April 2002. The
proceeds were used to pay down notes payable bank, and to pay off an SBA
debenture in the amount of $1,020,000. During January 2002, the Company and the
SBA entered into an agreement where the SBA committed to reserve debentures in
the amount of $12,000,000 to be issued by the Company prior to September 30,
2006. As of June 30, 2002 no amount has been drawn in this commitment.
Subsequently in July 2002, a new debenture payable to the SBA for $2,050,000 was
drawn from the reserved pool of $12,000,000. In September 2002, the Company paid
off an additional SBA debenture in the amount of $2,690,000 in order to reduce
interest costs.
27
Asset / Liability Management
Interest Rate Sensitivity
Ameritrans, like other financial institutions, is subject to interest rate
risk to the extent its interest- earning assets (consisting of medallion loans
and commercial loans) rise or fall at a different rate over time in comparison
to its interest-bearing liabilities (consisting primarily of its credit
facilities with banks and subordinated SBA debentures).
A relative measure of interest rate risk can be derived from Ameritrans'
interest rate sensitivity gap i.e. the difference between interest-earning
assets and interest-bearing liabilities, which mature and/or reprice within
specified intervals of time. The gap is considered to be positive when
repriceable assets exceed repriceable liabilities and negative when repriceable
liabilities exceed repriceable assets. A relative measure of interest rate
sensitivity is provided by the cumulative difference between interest sensitive
assets and interest sensitive liabilities for a given time interval expressed as
a percentage of total assets.
Ameritrans' interest rate sensitive assets were approximately $54.8
million and interest rate sensitive liabilities were approximately $41.6 million
at June 30, 2002. 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 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 40% of the portfolio will mature or be prepaid each year.
Ameritrans believes that the average life of its loan portfolio varies to some
extent as a function of changes in interest rates. Borrowers are more likely to
exercise prepayment rights in a decreasing interest rate environment because the
interest rate payable on the borrower's loan is high relative to prevailing
interest rates. Conversely, borrowers are less likely to prepay in a rising
interest rate environment.
Interest Rate Swap Agreements
Ameritrans manages the exposure of the portfolio to increases in market
interest rates by entering into interest rate cap agreements on interest rate
Swap agreements to hedge a portion of its variable-rate debt against increases
in interest rates and by incurring fixed-rate debt consisting primarily of
subordinated SBA debentures.
On January 10, 2000, the Company entered into a $5,000,000 interest rate
Swap transaction with a bank expiring on October 8, 2001. On June 11, 2001, the
Company entered into an additional interest rate swap transaction with the same
bank for $10,000,000 expiring on June 11, 2002. On June 11, 2001, the Company
entered into another interest rate swap transaction for $15,000,000 with this
bank expiring June 11, 2003. These Swap transactions were entered into to
protect the Company from an upward movement in interest rates relating to
outstanding bank debt (see Note 6 for terms and effective interest rates). These
Swap transactions call for a fixed rate of 4.95%, 4.35% and 4.95%, respectively
(plus 150 basis points) for the Company and if the floating one- month LIBOR
rate is below the fixed rate then the Company is obligated to pay the bank for
the difference in rates. When the one-month LIBOR rate is above the fixed rate
then the bank is obligated to pay the Company for the differences in rates. The
effective fixed costs on the debt that was swapped, including the 150 basis
points, is 6.45%, 5.85% and 6.45% respectively.
Ameritrans believes that its bank credit facilities and cash flow from
operations (after distributions to stockholders) will be adequate to fund the
continuing operations of the Company's loan portfolio. Nevertheless, the Company
continues to explore additional options, which may increase available funds for
its growth and expansion strategy. In addition, to the application for SBA
funding described above, these financing options would provide additional
sources of funds for both external expansion and continuation of internal
growth. We are working with investment banking firms to investigate the
viability of a number of other financing options which include an equity
offering of securities.
Investment Considerations
Interest rate fluctuations may adversely affect the interest rate spread we
receive on our taxicab medallion and commercial loans.
Because we borrow money to finance the origination of loans, our income is
dependent upon the differences between the rate at which we borrow funds and the
rate at which we loan funds. While the loans in our portfolio in most cases bear
interest at fixed-rates or adjustable-rates, we finance a substantial portion of
such loans by incurring indebtedness with floating interest rates. As short-term
interest rates rise, our interest costs increase, decreasing the net interest
rate spread we receive and thereby adversely affect our profitability. Although
we intend to continue to manage our interest rate risk through asset and
liability management, including the use of interest rate caps, general rises in
interest rates will tend to reduce our interest rate spread in the short term.
In addition, we rely on our counterparties to perform their obligations under
such interest rate caps.
A decrease in prevailing interest rates may lead to more loan prepayments,
which could adversely affect our business.
A borrower is likely to exercise prepayment rights at a time when the
interest rate payable on the borrower's loan is high relative to prevailing
interest rates. In a lower interest rate environment, we will have difficulty
re-lending prepaid funds at comparable rates, which may reduce the net interest
spread we receive.
Lending to small businesses involves a high degree of risk and is highly
speculative.
Our commercial loan activity has increased in recent years. Lending to
small businesses involves a high degree of business and financial risk, which
can result in substantial losses and should be considered speculative. Our
borrower base consists primarily of small business owners that have limited
resources and that are generally unable to achieve financing from traditional
sources. There is generally no publicly available information about these small
business owners, and we must rely on the diligence of our employees and agents
to obtain information in connection with our credit decisions. In addition,
these small businesses often do not have audited financial statements. Some
smaller businesses have narrower product lines and market shares than their
competition. Therefore, they may be more vulnerable to customer preferences,
market conditions, or economic downturns, which may adversely affect the return
on, or the recovery of, our investment in these businesses.
Liquidity and Capital Resources
The Company has funded its operations through private and public
placements of its securities, bank financing, and the issuance to the SBA of its
subordinated debentures.
During January 1998, Elk completed a private placement of 462,000 shares of
Common Stock at $6.50 per share for aggregate gross proceeds of $3,003,000, less
offering expenses of $115,000. The net proceeds were utilized to repay bank
indebtedness and for working capital. A portion of the proceeds temporarily use
to reduce bank indebtedness, up to a maximum of $963,000, was allocated by Elk
toward the organization and capitalization of its then new parent company,
Ameritrans.
On April 24, 2002, Ameritrans completed a public offering of 300,000
units, consisting of one share of Common Stock, one share of 9 3/8% cumulative
participating redeemable Preferred Stock, face value $12.00, and one redeemable
Warrant exercisable into one share of Common Stock. The gross proceeds from the
sale were $5,700,000 less offering expenses of approximately $1,704,399. A
portion of the proceeds was used temporarily to reduce banks and SBA
indebtedness. Ameritrans also used part of the proceeds to start its own loan
portfolio.
At June 30, 2002, 81% of Elk's indebtedness was represented by indebtedness
to its banks and 19% by the debentures issued to the SBA with fixed rates of
interest ranging form 6.12% to 8.20%. Elk currently may borrow up to $40,000,000
under its existing lines of credit, subject to the limitations imposed by its
borrowing base agreement with its banks and the SBA, the statutory and
regulatory limitations imposed by the SBA and the availability of funds. In
addition, during January 2002, the Company and the SBA entered into an agreement
whereby the SBA committed to reserve debentures in the amount of $12,000,000 to
be issued to the Company on or prior to September 30, 2006. As of June 30, 2002,
no amount has been drawn on this commitment. Subsequently in July 2002, a new
debenture payable to the SBA was drawn from the reserved pool of $12,000,000 in
the amount of $2,050,000 with an interim interest rate of 2.351%. The fixed rate
of 4.67% was determined on the pooling date of September 25, 2002. In addition
to the fixed rate, there is an additional annual SBA user fee of 0.88% per annum
that will also be charged making the rate 5.55% before applicable amortization
of points and fees.
Our sources of liquidity are credit lines with banks, long-term SBA
debentures that are issued to or guaranteed by the SBA, loan amortization and
prepayment. As a RIC, we distribute at least 90% of our investment company
taxable income. Consequently, we primarily rely upon external sources of funds
to finance growth.
28
Loan amortization and prepayments also provide a source of funding for Elk.
Prepayments on loans are influenced significantly by general interest rates,
economic conditions and competition.
Like Elk, Ameritrans will distribute at least 90% of its investment company
taxable income and, accordingly, we will continue to rely upon external sources
of funds to finance growth. In order to provide the funds necessary for our
expansion strategy, we expect to raise additional capital and to incur, from
time to time, additional bank indebtedness and (if deemed necessary by
management) to obtain SBA loans. There can be no assurances that such additional
financing will be available on acceptable terms.
29
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pursuant to the General Instructions to Rule 305 of Regulation S-K, the
quantitative and qualitative disclosures called for by this Item 7A and by Rule
305 of Regulation S-K are inapplicable to Ameritrans at this time.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted in the response found under Item
14(A)(1) in this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors and executive officers of Ameritrans and Elk are
identical. The following table sets forth certain information concerning our
directors and executive officers:
NAME POSITION
---- --------
Gary C. Granoff(1) President and Chairman of Board of Directors
Ellen M. Walker(1) Executive Vice President and Director
Lee A. Forlenza(1) Senior Vice President and Director
Steven Etra(1) Vice President and Director
Silvia Mullens(1) Vice President
Margaret Chance(1) Vice President, Secretary
Paul Creditor Director
Allen Kaplan Director
John R. Laird Director
Howard F. Sommer Director
Wesley Finch Director
- ----------
(1) As a BDC under the 1940 Act, a majority of the directors of both Ameritrans
and Elk are required to be individuals who are not "interested persons" of
the company. Gary C. Granoff, Ellen M. Walker, Lee A. Forlenza, Steven
Etra, Margaret Chance and Silvia Mullens are each "interested persons" with
respect to both Ameritrans and Elk, as such term is defined in the 1940
Act.
Gary C. Granoff, age 54, has been President and a director of Ameritrans
since its formation and of Elk since its formation in July 1979 and Chairman of
the Board of Directors since December 1995. Mr. Granoff has been a practicing
attorney for the past 28 years and is presently an
31
officer and stockholder in the law firm of Granoff, Walker & Forlenza, P.C. Mr.
Granoff is a member of the bar of the State of New York and the State of Florida
and is admitted to the United States District Court of the Southern District of
New York. Mr. Granoff is also President and a stockholder of GCG
Associates, Inc. ("GCG"), Elk's former investment adviser. He has served as
President and the sole stockholder of Seacrest Associates, Inc., a hotel
operator, since August 1994. Mr. Granoff has also been President and a director
since June 1996 of Gemini Capital Corporation ("Gemini"), a company primarily
engaged in the business of making consumer loans. Mr. Granoff has also been a
director of Titanium Holdings Group, Inc., formerly known as Enviro-Clean of
America, Inc. since September 1999. In February 1998, Mr. Granoff was elected to
and is presently serving as a trustee on the Board