U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended June 30, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _________
Commission File No. 0-22153
AMERITRANS CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 52-2102424
(State of incorporation) (I.R.S. Employer Identification No.)
747 THIRD AVENUE, NEW YORK, NEW YORK 10017
(Address of principal executive offices) (Zip Code)
(800) 214-1047
Registrant's Telephone Number, including Area Code:
Securities registered pursuant to Section 12(b) of the Act:
None Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.0001 per share
9 3/8% Participating Redeemable Preferred Stock (face value $12.00)
Warrants exercisable into Common Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K |_|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES |_| NO |X|
The approximate aggregate market value of common equity held by non-affiliates
of the Registrant as of October 7, 2003 was approximately $4,753,685 based on
the last sale price of the Registrant's Common Stock on the Nasdaq SmallCap
Market as of the close of business on October 7, 2003. There were 2,035,600
shares of the Registrant's Common Stock outstanding as of October 7, 2003.
AMERITRANS CAPITAL CORPORATION
2003 FORM 10-K ANNUAL REPORT
Table of Contents
Page
----
PART I ................................................................... 1
ITEM 1. BUSINESS OF AMERITRANS ...................................... 1
ITEM 2. PROPERTIES .................................................. 26
ITEM 3. LEGAL PROCEEDINGS ........................................... 27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ......... 27
PART II .................................................................. 27
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS ................................. 27
ITEM 6. SELECTED FINANCIAL DATA ..................................... 29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ......................... 31
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK ................................................. 39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ................. 39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES ........................ 39
ITEM 9A.CONTROLS AND PROCEDURES ..................................... 40
PART III ................................................................. 40
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ......... 40
ITEM 11. EXECUTIVE COMPENSATION ..................................... 45
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT ................................................ 52
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ............. 56
PART IV .................................................................. 57
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K .................................................. 58
IMPORTANT FACTORS RELATING TO FORWARD-LOOKING STATEMENTS ................. 58
SIGNATURES ............................................................... 60
PART I
ITEM 1. BUSINESS OF AMERITRANS
BUSINESS
GENERAL
Ameritrans Capital Corporation (the "Company", "Ameritrans", "our", "us", or
"we") was formed in 1998 to engage in lending and investment activities,
primarily with small and medium-sized businesses, directly and through
subsidiaries. On December 16, 1999, Ameritrans acquired Elk Associates Funding
Corporation ("Elk") in a one-for-one share exchange in which Elk stockholders
received shares of common stock of Ameritrans, and Elk became a wholly-owned
subsidiary. Elk is a "small business investment company," or "SBIC," formed in
1979 and licensed by the U.S. Small Business Administration ("SBA") in 1980.
Elk makes loans to the owners of taxi medallion businesses in the Chicago, New
York City, Miami and Boston markets and to other small businesses. Elk has never
experienced any material losses of principal in connection with taxi financings
but from time to time has experienced some small losses of principal on its taxi
medallion lending operations. Loans made to finance the purchase or continued
ownership of taxi medallions, taxis and related assets represented approximately
76% of Elk's loan portfolio as of June 30, 2003. Loans made to finance the
acquisition and/or operation of other small businesses constitute the balance of
Elk's loan portfolio.
From inception through April 2002, our only activities have been the operation
of Elk. In May 2002, Ameritrans made its first loans to businesses using the
proceeds raised from the public offering of 300,000 units, each unit of which
was comprised of one share of common stock, one share of 9 3/8% cumulative
participating preferred stock (face value $12.00) (the "Participating Preferred
Stock") and one warrant exercisable into one share of common stock for five (5)
years at an exercise price of $6.70 (the "Warrant"), which was completed in
April 2002 (the "Unit Offering"). Both Ameritrans and Elk are registered as
business development companies, or "BDCs," under the Investment Company Act of
1940 (the "1940 Act"). Accordingly, Ameritrans and Elk are subject to the
provisions of the 1940 Act governing the operations of BDCs. Both companies are
managed by their executive officers under the supervision of their Boards of
Directors, and the same individuals are the executive officers and directors of
both companies.
In addition, both Ameritrans and Elk have elected to be treated as "regulated
investment companies," or "RICs," for tax purposes. Under the Internal Revenue
Code, as a RIC, we will generally not be subject to U.S. federal corporate
income tax on our investment income if we make qualifying distributions of our
income to stockholders. As a RIC we qualify for this treatment as long as we
distribute at least 90% of our investment company taxable income to our
stockholders as dividends. Elk paid qualifying dividends from July 1983 through
June 1992 and
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continuously since June 1996. Since December 16, 1999, when we
acquired Elk, these dividends have been payable to Ameritrans as Elk's sole
stockholder. Ameritrans has paid common dividends to its shareholders since its
inception with the exception of the three month periods ended June 30, 2000,
September 30, 2000, March 31, 2003, June 30, 2003 and September 30, 2003. All
preferred dividends have been duly paid each quarter.
Because it is an SBIC, Elk's operations are subject to other restrictions, and
all loans and investments must comply with applicable SBA Regulations. For
example, the interest rate that Elk can charge, the percentage of any other
company it can own, the size of the businesses to which it can make loans, and
the length of time to the maturity date are limited by SBA rules. Elk's business
is funded by loans from banks and, to a lesser extent, by the proceeds of
subordinated debentures issued to the SBA. Ameritrans is not an SBIC and is not
subject to SBA regulation. See "Elk's Loans" and "Regulation -- The Small
Business Act of 1958."
CURRENT BUSINESS ACTIVITIES
AMERITRANS. From inception through April 2002, Ameritrans' only activities have
been the operation of Elk. In May 2002, Ameritrans began making loans to
businesses using the proceeds raised from the Company's Unit Offering.
ELK. Elk was organized primarily to provide long-term loans to businesses
eligible for investments by SBICs under the 1958 Act ("Small Business
Concerns"). Elk has made loans for financing the purchase or continued ownership
of taxi medallions, taxis and related assets.
Although Elk's certificate of incorporation provides Elk with the authority to
invest in the equity capital of Small Business Concerns, Elk makes equity
investments in Small Business Concerns on a selective basis, and only to a
limited extent. Equity securities in Elk's investment portfolio at June 30, 2003
totaled $697,144 or 1.16% of total assets. Elk may make additional equity
investments. However, unless necessary to protect a prior investment of Elk that
is at risk, equity investments shall not exceed 20% of Elk's total assets. Elk
has three (3) wholly-owned subsidiaries. EAF Holding Corporation, formed in
1992, the sole activities of which are to own and operate certain real estate
assets acquired in satisfaction of loans. EAF Enterprises LLC and Medallion
Management Auto LLC were formed in June 2003 to take title to some of our
remaining Chicago foreclosure medallions, and to thereafter lease them out to
taxi drivers on a 36-month lease, the terms of which will also provide the
lessee with an option to purchase the medallion at $60,000, less credit given
for any future payments required to be paid to maintain the option in full force
and effect. In order to lease the medallion, Medallion Auto Management LLC will
also purchase a taxi vehicle and lease the vehicle to the operator whereby the
operator will own the vehicle for a nominal payment at the end of the term of
the lease, or have an option to purchase the vehicle for its then unamortized
cost.
TAXI MEDALLION FINANCE INDUSTRY AND MARKET OVERVIEW
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CHICAGO TAXI MEDALLION INDUSTRY AND MARKET. As part of its geographic
diversification strategy, Elk studied the Chicago taxi medallion market in 1994,
and began making loans in Chicago in April, 1995. The taxi market and medallion
system in Chicago is regulated by the City of Chicago Department of Consumer
Services, Public Vehicle Operations Division. The number of taxi medallions is
limited by city ordinances, and until 1988, these ordinances gave control of the
majority of the medallions to the two largest taxi operators in Chicago, Yellow
Cab Co., and Checker Taxi Co., Inc. Since 1988, the taxi industry in Chicago has
shifted toward more individual ownership. Over the succeeding 10 years, the
Yellow Cab Co. and Checker Taxi Co., Inc., pursuant to a settlement of an
anti-trust legal action, gave 1,300 medallions back to the City, and the City
added 100 medallions each year. These medallions were distributed in a lottery
system to taxi drivers who had never owned a medallion. By July, 1997, there
were a total of 5,700 medallions issued in Chicago, of which Yellow Cab Co.
owned approximately 2,071, and the remaining 3,629 were owned by individual
owner drivers, or by individual operators who had purchased multiple medallions.
In December, 1997, the City Council increased the number of medallions by 1,000
additional medallions, which were issued over a period of three years from 1998
through the end of the year 2000. Of these medallions, 500 were issued in
lotteries to taxi drivers who never owned a medallion, and the other 500 were
auctioned to the highest bidder. In the November 1998 auction of 150 medallions,
there were 499 bids to purchase medallions. The winning bid prices ranged from
$57,000 to $63,000 per medallion, which was approximately the same as open
market prices for taxi medallions that were sold in Chicago at that time. In the
August, 1999 auction of 150 medallions, the winning bid prices ranged from
$65,000 to $70,000.
In October, 2000 the City of Chicago held its final auction of 200 medallions
under the program authorized in December, 1997. The City set a minimum bid of
$60,000, and all 200 medallions were sold at auction at prices that ranged from
$60,000 to $68,000. In July, 2000 the last 200 medallions authorized under the
lottery program were distributed by lottery.
In November, 2000, the City Council passed a new ordinance authorizing the City
to auction up to 50 medallions per year through November, 2004, representing a
total of 150 medallions over three years. The City Council, however, did not
authorize any further lotteries of medallions. The new ordinance also requires
purchasers of the medallions to operate a taxi-van instead of the standard
taxicab vehicle, which we believe will cost the medallion purchaser three times
as much to purchase, equip and prepare as compared to a standard taxicab. As a
result, we believe that the 150 medallions, when auctioned, will command lower
prices than the prices that would otherwise be available in the market place for
the purchase of medallions without the taxi-van requirement.
On January 21, 1999, the Yellow Cab Co. auctioned 175 medallions in a sealed bid
auction at prices equal to the current open market value price for medallions.
Subsequent to January, 1999, Yellow Cab Company continued to sell medallions
that it owned, and we estimate that they have
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sold approximately 1,300 additional medallions to owner drivers, who they
continue to service through their taxi affiliation and through the Yellow Cab
Company operations. We believe that the sale of these additional medallions by
Yellow Cab Company to owner-drivers will continue to offer additional financing
opportunities for the Company to service their financing needs. Yellow Cab
Company is continuing to sell medallions in the market at this time.
It has been our experience that as the Chicago market has expanded, it has also
become more competitive with more lenders entering the market. In addition, as
the City of Chicago and now Yellow Cab Co. supply medallions to the market
place, we expect that the taxi medallion market will continue to grow, with more
and more owner-drivers and individual owner-operators of multiple medallions. To
the extent that there are more owner-operators and individual owner-operators of
multiple medallions in the market, we believe that there will be increased
opportunities for us to serve this market.
Since 2001 the Chicago taxi medallion market has significantly weakened due to
the general economic slowdown and the events of September 11, 2001. The result
of the economic slowdown caused a large number of medallion loans to go into
default and caused a large number of foreclosure sales. The Company for the
first time in 23 years experienced a large number of medallion loan defaults and
foreclosures.
Chicago city regulations set forth certain qualifications that all owners of
taxi medallions must meet, and require that all security interests in medallions
be registered with the Department of Consumer Services. The Department of
Consumer Services is also involved (along with the City Council) in setting taxi
fares, and in setting maximum lease rates that may be charged by owners to
lessees of taxis, who drive them on a daily, weekly, or monthly basis.
CHICAGO MARKETING STRATEGY FOR MEDALLION FINANCING. At the present time, most
medallion sales in Chicago are handled through brokers or attorneys. An active
market place has developed in Chicago for the purchase and resale of medallions.
Due to the current economic difficulties in the Chicago market, Elk's most
recent experience has been that medallions were selling for between $53,000 and
$58,000 per medallion. Elk is reselling its foreclosed medallions for
approximately $58,000 per medallion, for which it provides full financing to the
purchaser. Previously, the City of Chicago imposed a 5% transfer tax on a
medallion held for two years or more, a 10% transfer tax on a medallion held for
between one and two years, and a 25% transfer tax on a medallion held less than
one year. In November 2000 this ordinance was reduced to 10% for the first year
and 5% thereafter, and imposed a flat 5% for any foreclosure sale. The recent
imposition of the transfer taxes, in addition to being a source of revenue to
the City, was also scaled in order to inhibit speculation in the purchase and
resale of taxi medallions without the intent of actually operating taxis. As of
June 30, 2003, the total principal amount of our outstanding taxi loans in
Chicago was $23,184,463.
Elk recently set up two additional subsidiary entities and anticipates setting
up more entities as needed to take title to approximately 35 of our remaining
foreclosure medallions, and to
4
thereafter lease them out to taxi drivers on a 36-month lease, the terms of
which will also provide the lessee with an option to purchase the medallion at
$60,000, less credit given for any future payments required to be paid to
maintain the option in full force and effect. In order to lease the medallion,
we will also purchase a taxi vehicle and lease the vehicle to the operator
whereby the operator will own the vehicle for a nominal payment at the end of
the 36-month term of the lease or have an option to purchase the vehicle for its
then unamortized value. By entering into the lease program with options to
purchase, we believe that we will maximize our cash flow and develop a current
income return on these assets that is favorable when compared with the gross
interest income we would receive on a similar transaction that was structured as
a sale with a loan by us to the purchaser.
We are also contemplating entering into agreements with large operators of taxi
medallions whereby one of our subsidiaries would take title to approximately 35
additional foreclosed medallions and lease them to a medallion operator. Unlike
the above structure, the medallion operator would not be given an option to
purchase the medallions.
We presently have discussions underway to sell approximately 62 defaulted
foreclosed medallions. We are also continuing to finance taxi medallion
transactions in Chicago to our existing non-defaulting borrowers and to other
potential borrowers who qualify.
THE NEW YORK CITY TAXI MEDALLION INDUSTRY AND MARKET. Under current
law, the number of taxi medallions that may be issued by New York City is
limited to 12,187. The City, however, has proposed selling an additional 900
medallions over the course of three years. Under the proposal the City would
auction 300 medallions each year. The New York City Taxi and Limousine
Commission (the "TLC") is presently conducting an environmental impact study on
this plan.
There are two types of medallions: corporate and individual owner-driver. Of the
present total of 12,187 medallions, 7,058 are corporate medallions and 5,129 are
for individually owned cabs. A corporate medallion is issued for a cab owned by
a corporation that owns a minimum of two cabs and two corporate medallions
(i.e., one corporate medallion per cab). An individual owner-driver may not own
more than one cab and one medallion. Corporate medallions are used by large
fleet concerns with many taxis and many drivers or by small corporations owning
at least two medallions and two taxis driven by two owner-drivers (the so-called
"minifleet").
Only 11,787 medallions could be issued until August 8, 1995, when a law
permitting the issuance of up to 400 additional taxi medallions over a
three-year period went into effect. The TLC conducted the sale of 133 medallions
in May 1996, 133 medallions in October 1996, and 134 medallions on October 1,
1997. Of these new medallions, 160 were sold to individuals and the balance to
minifleets in lots of two.
At the present time, most medallion sales are handled through brokers. As a
result, an active marketplace has developed for the purchase and resale of
medallions. The price of a medallion varies with supply and demand. According to
the most recent data provided by the TLC,
5
provided as of May 2003, individual medallions are selling for approximately
$224,000 and corporate medallions are selling for approximately $259,000.
However, Elk's most recent experience with corporate medallions has been that
they are selling as of September 2003 for approximately $270,000. In addition, a
5% New York City transfer tax and various brokerage commissions are additional
expenses incurred in the acquisition and sale of a medallion.
Based upon statistics obtained from the TLC, from 1989 through 1998, the number
of corporate medallions that were resold by their holders varied each year from
approximately 245 to 440, which suggests that there were between 122 and 220
minifleet corporations in need of financing each year, while the number of
individual owner medallions sold each year varied from 250 to 415. Assuming that
a typical minifleet financing for purchases of medallions might involve a sum of
approximately $450,000, the dollar volume of New York City minifleet financings
might range from $55 million to $99 million a year. Assuming that a typical
individual medallion financing for a purchase of a medallion involves a sum of
approximately $220,000, the dollar volume of New York City individual medallion
financing might range from $55 million to $91 million a year.
In addition to financings for purchases and sales of medallions, a substantial
market exists for refinancing the indebtedness of existing minifleet or
individual medallions. Management estimates this market to exceed that of the
market for financing transfers, and to be in excess of $100,000,000 per year.
A prospective medallion owner must meet the requirements of the TLC, which
approves all sales and transfers. In general, the requirements are that the
prospective owner have no criminal record, that the purchase funds be derived
from legitimate sources, and that the taxi vehicle and meter meet specifications
set by the TLC. Also required is a clearance from prior insurers of the seller
in the form of letters stating that there are no outstanding claims for personal
injuries in excess of insurance coverage.
NEW YORK MARKETING STRATEGY FOR MEDALLION FINANCING. Medallion transfers in the
New York City market are usually handled through medallion brokers, who have
frequent contact with taxi owners and drivers. Medallion brokers locate buyers
for sellers of medallions and sellers for buyers of medallions, and then
typically employ a financing broker to arrange for the financing of the
medallion purchases. In many cases the medallion broker and the financing broker
are the same party or related parties. As of June 30, 2003, the total principal
amount of outstanding taxi medallion loans in New York was $12,984,115.
Elk has received a significant number of referrals from certain medallion
brokers in New York. Elk also receives referrals from financing brokers and its
borrowers. In addition, Elk occasionally places advertisements in local industry
newspapers and magazines. Elk also uses brokers, advertising and referrals in
connection with its taxi lending business in the Chicago, Boston, and Miami
markets.
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BOSTON TAXI MEDALLION INDUSTRY AND MARKET. Elk began to review the Boston
taxi market in the fall of 1994 and began making loans in this market in 1995.
Since 1930, the Boston Police Commissioner has had exclusive jurisdiction over
the regulation of taxi operations, including the issuance and transfer of
medallions. The Hackney Carriage Unit of the Boston Police Department deals with
taxi regulatory issues.
By statute, the number of medallions issued in the City of Boston may not exceed
1,525, subject to increase or decrease in the Police Commissioner's discretion.
The number of medallions remained essentially unchanged from the late 1940's
until January 1999, when the City sold 75 additional medallions at auction.
Prices at this auction exceeded $140,000 per medallion. The City of Boston
auctioned another 75 medallions in September 1999 and 57 medallions in May of
2000. In 2001, the City sold an additional 20 medallions for handicap use,
bringing the total of outstanding medallions to approximately 1,790. Current
market prices of Boston medallions are approximately $200,000.
Under the applicable statutes and rules, Boston taxi medallions are assignable,
subject to the approval of the Police Commissioner. In practice, transfer
applications are submitted to the Hackney Carriage Unit, which has issued
guidelines and forms for transfers. Loans by financial institutions or
individuals are secured by taxi medallions and assets are routinely allowed in
accordance with the Hackney Carriage Unit's "Procedures for Recording Secured
Party Interest."
BOSTON MARKETING STRATEGY FOR MEDALLION FINANCING. The Boston taxi
market services the City of Boston, which includes Logan Airport. Elk's
marketing efforts have included retention of a local attorney, advertising in
the Carriage News, a local trade newspaper, and the use of forwarding brokers.
As of June 30, 2003, the total principal amount of our outstanding taxi loans in
Boston was $2,241,768.
MEDALLION INDUSTRY IN METRO-DADE COUNTY, (MIAMI AREA), FLORIDA. Elk began to
investigate the Miami area taxi market in 1995, and began making loans in 1996.
The Miami taxi industry has been regulated on a county-wide basis in Metro-Dade
County, Florida since 1981. The Passenger Transportation Regulatory Division
(the "PTRD") of the Metro-Dade County Consumer Services Division oversees taxi
operations and licenses in accordance with the Metro-Dade County Code.
Until April 1999, each taxi operator in Metro-Dade County was required to obtain
a "For-Hire" license. The number of licenses was limited to one license for each
1,000 residents in the county. With approximately 2,100,000 residents in the
county, 2,100 licenses could have been issued; however, 1,879 have been issued
to date and 27 are pending. In 1991, a For-Hire license loan program was
approved, authorizing the use of loans to purchase (but not to refinance)
licenses and taxis. Any lender must be a licensed lending institution authorized
to do business in Florida. To the best of our knowledge, Elk is currently one of
only six lending institutions that are
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authorized to make loans to the taxi industry in Metro-Dade County. Transfers of
licenses and financing arrangements are subject to prior approval by the PTRD
and the County Board of Commissioners.
For-Hire licenses were considered a privilege, not a property right. However,
since licenses were limited in number, the marketplace created a "market price"
or value in connection with the transfer of the license right to a purchaser. As
of April 1999, the Metro-Dade County Code was amended to create a "medallion,"
or property right, system with a view to attracting traditional financing
providers to provide the taxi industry with additional funding sources. Existing
For-Hire licenses were automatically converted into medallions.
According to official Metro-Dade County publications issued in the year 2000,
approximately one-third of the currently outstanding licenses are owned by
individuals or corporations that own and operate only one license. Other than
106 licenses held by one owner, the balance of the licenses are owned mainly by
holders of from two to five licenses. The number of license transfers has been
generally increasing in recent years, with a high of 197 transfers in 1997, with
an average reported price of $51,658. Market prices have increased substantially
since 1997. We estimate that the present market price of licenses/medallions in
Metro-Dade County as of September 2003 is between $115,000 to $120,000 per
medallion.
MIAMI AREA MARKETING STRATEGY FOR MEDALLION FINANCING. We believe
that the recent change to a medallion system and an emphasis on individual
operator-ownership of medallions for the future will open a large new market for
taxi medallion financing in the Miami area. Since this is an emerging market, we
are currently developing strategies to develop contacts and market our financing
to potential purchases of medallions, and in the event refinancing is permitted,
to those owners who may wish to refinance their medallions in the future. As of
June 30, 2003, the total principal amount of our outstanding taxi loans in the
Miami area was $2,947,608.
COMMERCIAL (NON-TAXI) LOANS -- OVERVIEW
Elk began making loans to diversified (non-taxi) small businesses ("Commercial
Loans") in the New York City metropolitan area in 1985, in order to diversify
its loan portfolio, which until that time had consisted almost entirely of loans
to owners of New York City taxi medallions. After a period of losses in its
Commercial Loan portfolio from 1991 to 1994, Elk has been increasing this
portfolio on a selective basis since 1995, with a concentration on loans to
operators of retail dry cleaners and laundromats. Recently, Elk has also begun
geographically expanding its Commercial Loan portfolio, with loans in South
Florida, Massachusetts, and North Carolina.
Elk has chosen to concentrate its Commercial Loan portfolio in loans secured by
retail dry cleaning and coin-operated laundromat equipment because of certain
characteristics similar to taxi medallion lending that make these industries
attractive candidates for profitable lending.
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These factors include: (i) relatively high fixed rates of interest ranging from
approximately 325 to 700 basis points over the prevailing Prime Rate at the time
of origination, (ii) low historical repossession rates, (iii) vendor recourse in
some cases, (iv) significant equity investments by borrowers, (v) an active
market for repossessed equipment, and for resale of businesses as going concerns
through transfers of the leasehold and business equipment to new operators, and
(vi) a collateral service life that is frequently twice as long as the term of
the loans. We estimate that there are approximately 4,000 retail dry cleaners
and approximately 3,000 laundromats in the New York City metropolitan area. In
addition, we believe that specialization in the dry cleaning and laundromat
industries will permit relatively low administrative costs because documentation
and terms of credit are standardized, and the consistency among the loans has
simplified credit review and portfolio analysis.
We further believe that other niche industries with similar characteristics will
provide additional loan portfolio growth opportunities. Elk's other Commercial
Loans are currently spread among other industries, including auto sales,
retirement home, commercial construction, car wash, theater, restaurants, and
financial services.
Elk's Commercial Loans finance either the purchase of the equipment and related
assets necessary to open a new business or the purchase or improvement of an
existing business, and Elk has originated Commercial Loans in principal amounts
up to $1,000,000. Elk generally retains these loans, although from time to time
it sells participation interests in its loans to share risk, or purchases
participation interests in loans generated by other SBICs.
ELK'S LOANS
Elk's primary business has been to provide long-term business loans at
commercially competitive interest rates (which at June 30, 2003, ranged from
6.0% to 16% per annum). From 1979 through March 1997, Elk was a "Specialized
Small Business Investment Company" ("SSBIC") under the rules of the SBA. All of
its loans were required to be made to small businesses that were majority-owned
by socially or economically disadvantaged persons, known as "Disadvantaged
Concerns." In September 1996, the 1958 Act was amended to provide, among other
things, that no further subsidized funding would be made available to SSBICs.
Consequently, Elk amended its Certificate of Incorporation and entered into an
agreement with the SBA in February 1997 in order to convert Elk from an SSBIC to
an SBIC. As such, Elk may now lend to persons who are not Disadvantaged
Concerns. As of June 30, 2003 more than 90% of Elk's loans and investments were
to Disadvantaged Concerns.
Elk intends to continue to make loans to Disadvantaged Concerns, particularly in
connection with the ownership of taxis and related assets in the New York City
and Chicago markets. Elk also intends to diversify its activities by lending and
investing in a broader range of Small Business Concerns.
SBA Regulations set a ceiling on the interest rates that an SBIC may charge its
borrowers.
9
Under the current SBA Regulations, the basic maximum rate of interest that an
SBIC may charge is 19%. However, if either the weighted average cost of the
SBIC's qualified borrowings, as determined pursuant to SBA Regulations, or the
SBA's current debenture interest rate, plus, in either case, 11% and rounded off
to the next lowest eighth of 1%, is higher, the SBIC may charge the higher rate.
The maximum rate of interest that Elk was allowed to charge its borrowers for
loans originated during June, 2003 was 19%. See "Regulation -- The Small
Business Act of 1958."
Elk may revise the nature of its loan portfolio at such time as its Board of
Directors determines that such revision is in the best interests of Elk. Elk
does not currently anticipate that its loan portfolio will realize an annual
turnover in excess of 50%. Elk will not lend to, or otherwise invest more than
the lesser of (i) 10% of its total assets, or (ii) 30% of its paid-in capital
attributable to its common stock in any one Small Business Concern. Elk has not
made, and is prohibited by applicable SBA Regulations from making, loans to
officers, directors or principal stockholders of Elk or "associates" of Elk, as
such term is defined in applicable SBA Regulations.
TAXI MEDALLION FINANCING LOANS
A large portion of Elk's loans have been made to purchasers or owners of New
York City taxi medallions. Since Elk commenced operations it has made over
$175,000,000 of such loans. However, the New York market has become increasingly
more competitive. Medallion prices in New York City dropped from $223,000 in
July, 2000 for individual medallions to $200,000 by September 2002. Prices for
individual medallions increased to $224,000 by May 2003, as reported by the TLC.
Prices for corporate medallions fell from $257,000 per medallion in July, 2000,
to $230,000 by September, 2002. According to the data provided by the TLC, as of
May 2003, corporate medallions were selling for approximately $259,000. Elk's
most recent experience, as of September 2003, is that corporate medallions are
selling for approximately $270,000. Interest rates in the New York City market
for taxi loans have recently dropped to six percent (6%) per annum. This has
limited Elk's opportunities to make profitable loans or expand its activities in
this market.
In 1995 and 1996 Elk began expanding its taxi lending business into the Chicago,
Boston, and Miami markets, where its taxi lending business has increased and
continued to be profitable. During the time Elk has been making taxi loans in
these markets, the market prices of medallions have generally been increasing.
However, in Chicago the market price for medallions dropped approximately 15%
during the fiscal year ended June 30, 2001. Since April 1995 when Elk began
making loans in the Chicago taxi medallion market, the market value of a
medallion increased from approximately $32,000 to a high of approximately
$68,000. From July, 2000 through June, 2002, the market value of a Chicago taxi
medallion decreased to approximately $50,000 to $60,000, depending on the terms
and conditions of the cash or financed sale. As of September 2003, medallions
are selling in a range of between $53,000 to $58,000 per medallion depending on
financing and terms. Elk has made over $75,000,000 of loans to Chicago
10
medallion owners since it began operations in Chicago. During the time Elk has
been making taxi loans in Boston and the Miami area, the market price of
medallions has increased from approximately $90,000 to $200,000 in Boston and
from approximately $65,000 to between $115,000 and $120,000 in Miami.
As of June 30, 2003, $13,112,880, or 23.7%, of the aggregate principal amount of
its outstanding loans of $55,306,678, represented loans made to finance the
purchase or continued ownership of New York City taxi medallions and related
assets; an aggregate of $23,184,463, or 41.9%, consisted of loans to finance the
purchase or refinancing of taxi medallions in Chicago, and the balance of
$19,009,335 or 34.4% consisted of loans to various commercial borrowers, of
which $2,241,768, or 4.1%, was invested in Boston taxi medallion financing and
$2,947,608, or 5.3%, was invested in Miami taxi medallion financing. See " --
Loan Portfolio; Valuation," below.
Due to increasing competition, annual interest rates for new loans in the New
York market are currently averaging 6.0%. Interest rates on Chicago taxi loans
generally have ranged from 10% to 13% per year. With additional competition
presently in the market place, it is expected that rates will range in the near
term from 10% to 12% per year on new loans, depending upon the size of the loan,
the repayment schedule, the balloon dates, the loan-to-value ratio, and the
credit history of the borrower. Rates may be lowered to induce sales of our
foreclosed medallions to purchasers of such medallions. In addition, most loans
that Elk has made in Chicago have been for four to six year terms and are
self-amortizing. With increased competition in the market, the term of the loan
may be expected to increase to periods longer than six years. Interest rates on
loans in the Boston market currently range from 7.25-11.5%, and in the Miami
market currently range from 7.25-16%.
COMMERCIAL LOAN PORTFOLIO
Ameritrans began making diversified Commercial Loans in May 2002. At June 30,
2003, Ameritrans' Commercial Loan portfolio consisted of five loans totaling
$671,883, of which two loans for $558,521 were to debt collection businesses,
one loan for $60,000 was to a real estate business and two loans for $53,362
were to Florida taxi medallions. The proceeds of the loan to the debt collection
business were used to purchase an interest in a pool of charged off credit card
receivables.
Elk began making non-taxi Commercial Loans in 1985. Due to the effects of the
nationwide recession of the early 1990's on the New York City metropolitan area
economy, between 1990 and 1994 Elk suffered significant losses in its Commercial
Loan portfolio. These losses were primarily written off against income earned by
Elk on its taxi loan portfolio. By 1995, the local economy had improved and Elk
again began making selective Commercial Loans, and its activities in this area
have been increasing steadily. At June 30, 1995, Elk's Commercial Loans totaled
$1,275,654, or 5.5%, of Elk's total loan portfolio, while at June 30, 2003,
Elk's Commercial Loans totaled $13,201,437, or 24.2%, of Elk's total loan
portfolio. On July 1, 2002,
11
the Company had a beginning balance in its reserve of loss account of $238,500
and this balance remained unchanged for the year ended June 30, 2003. During the
fiscal year ended 2003, the Company had total write offs and depreciation on
interest and loans receivable of $852,512, most of which was attributable to the
Chicago taxi medallion foreclosures.
At June 30, 2003, Elk's Commercial Loan portfolio consisted of 83 loans, of
which 15 loans totaling $1,144,096 were to dry-cleaning businesses, 29 loans
totaling $5,945,861 were to laundromat businesses, and 39 loans totaling
$6,111,480 were to a variety of other small businesses. Loans to dry cleaners
and laundromats represented 53.7% of the aggregate principal amount of Elk's
Commercial Loans outstanding at June 30, 2003.
Elk generally originates Commercial Loans by financing the cost of dry cleaning,
laundromat or other business-specific equipment, while the borrower is making an
equity investment to finance the cost of installation, building of appropriate
infrastructure to support the equipment, installation of other equipment
necessary for the business operations, other decorations and working capital.
Substantially all Commercial Loans are collateralized by first security
interests in the assets being financed by the borrower, or by real estate
mortgages. In addition, Elk generally requires personal guaranties from the
principals of the borrower and in limited cases obtains recourse guaranties from
the equipment vendors. Elk's Commercial Loans typically require equal monthly
payments covering accrued interest and amortization of principal over a four to
eight year term and generally can be prepaid with a fee of 60 to 90 days of
interest during the first several years of the loan. The term of, and interest
rate charged on, Elk's Commercial Loans are subject to SBA Regulations.
Elk generally obtains interest rates on its Commercial Loans that are higher
than it can obtain on New York City taxi medallion loans. The Company believes
that the increased yield on Commercial Loans compensate for their higher risk
relative to medallion loans and that it will benefit from the diversification of
its portfolio. Interest rates on currently outstanding Commercial Loans range
from 6% to 16%.
LOAN PORTFOLIO; VALUATION
The following table sets forth a classification of the Company's outstanding
loans as of June 30, 2003:
Number Interest Maturity Dates Balance
Type of Loan of loans Rates (In Months) Outstanding
------------ -------- ----- ----------- -----------
New York City:
Taxi medallion 48 6 - 13% 2 - 49 $ 12,984,115
Radio car service 16 11 - 13.5% 2 - 47 128,765
Chicago:
Taxi medallion 503 9 - 14.9% 2 - 143 23,184,463
12
Boston:
Taxi medallion 17 7.25 - 11.5% 11 - 48 2,241,768
Miami:
Taxi medallion 74 7.25 - 16% 1 - 95 2,947,608
Other loans:
Restaurant 6 10 - 12.5% 4 - 95 910,922
Car Wash/Auto Center 5 8.5 - 15% 47 - 60 631,203
Dry Cleaner 15 6.75 - 14.5% 1 - 59 1,144,096
Laundromat 29 7.5 - 14.25% 3 - 141 5,945,861
Financial Services 1 10% 60 252,781
Black Car Service (real property) 2 10.25% 41 395,149
Auto Sales 6 10 - 12% 12 - 44 596,206
Movie Theater 1 16% 12 174,984
Retirement home 2 14 - 16% 84 - 97 235,872
Commercial construction 4 13 - 14% 14 - 60 965,916
Telecommunications 1 12% 18 75,085
Leather Goods 1 14% 30 187,233
Beverage distributor 1 14.5% 91 211,874
Marina 1 14.5% 34 224,247
Plumbing & heating supplies 1 14% 95 136,383
Real Estate 2 13.5 - 15% 31 - 63 180,037
Florist 1 7.25% 46 366,885
Food Market 2 12 - 16% 48 - 72 391,895
Debt Collection 2 10% 23 - 26 558,521
Software Company 2 8% 39 34,808
Taxicab Distributor 1 6% 36 200,000
--------------
13,819,959
--------------
Total Loans Receivable 55,306,678
Less: Allowance for loan losses (238,500)
--------------
Loans Receivable, net $ 55,068,178
==============
Loans made by Elk to finance the purchase or continued ownership of taxi
medallions, taxis and related assets are typically secured by such medallions,
taxis and related assets. Loans made by Ameritrans and Elk to finance the
acquisition and/or operation of retail, service or manufacturing businesses are
typically secured by real estate and other assets. In the case of loans to
corporate owners, the loans are usually personally guaranteed by the
stockholders of the borrower. Elk generally obtains first mortgages, but
occasionally has participated in certain financings where it has obtained a
second mortgage on collateral. Elk has obtained a relatively higher rate of
interest in connection with these subordinated financings. Elk has not, to date,
committed more than 5% of its assets to any one business concern in its
portfolio. The interest rates charged by Elk on its
13
currently outstanding loans range from 6% to 16% per annum. As of June 30, 2003,
the annual weighted average interest rate on Elk's loans was approximately
10.69%. The average term of Elk's currently outstanding loans is approximately
48 months.
VALUATION -- As an SBIC, Elk is required by applicable SBA Regulations to submit
to the SBA semi-annual valuations of its investment portfolio, as determined by
its Board of Directors, which considers numerous factors including but not
limited to the financial strength of its borrowers to determine "good" or "bad"
status, and fluctuations in interest rates to determine marketability of loans.
Reference is made to Footnotes 1, 2 and 3 of Notes to Financial Statements for a
discussion of Elk's method of valuation of its current portfolio of loans. The
Company's loans are recorded at fair value. Since no ready market exists for
these loans, the fair value is determined in good faith by the Board of
Directors. In determining the fair value, the Company and Board of Directors
consider factors such as the financial condition of the borrower, the adequacy
of the collateral, individual credit risks, historical loss experience and the
relationships between current and projected market rates and portfolio rates of
interest and maturities. To date, the fair value of the loans has been
determined to approximate cost less unrealized depreciation and no loans have
been recorded above cost.
COLLECTION EXPERIENCE -- Elk has not had a material loss of principal in any
taxi medallion loan. From time to time, Elk has also experienced some small
losses of principal on its taxi lending operations. Elk has also experienced
some losses of principal in its diversified (non-taxi) loan portfolio. Likewise,
its collection experience (timely payments, collections on foreclosure, etc.)
with taxi medallion financings has historically been better than with its
non-taxi loans. From 1991 through 1994, substantially all of Elk's provisions
for loan losses and losses on assets acquired were related to business loans
secured by real estate and to radio car loans. In addition, from 1991 through
1995, Elk had difficulty selling off real estate acquired on defaulted loans as
a result of a depressed real estate market. Since 1995, Elk has substantially
increased its diversified loan portfolio, and its overall collection experience
with these loans has improved, although it has experienced losses on selective
loans.
During the twenty-four (24) months since September 11, 2001, the Chicago taxi
market has suffered through an economic slowdown which caused approximately 35%
of our Chicago taxi loans to default and the Company to commence foreclosure
actions. When the tragic events of September 11, 2001 occurred, the Chicago
market was in the process of absorbing 1,000 new medallions that had been sold
by the city over the prior three years between 1998 and the end of the year
2000. As a result of the increase in supply of medallions and the reduction in
demand for service, and corresponding reduction in revenues by taxi operators,
the Company, as well as other lenders in the Chicago taxi medallion lending
market, experienced a much greater rate of default in their Chicago loan
portfolio than they had previously. It also became more difficult to resell
these medallions due to the fall in their market prices from their high of
$68,000 to $70,000 per
14
medallion.
Market conditions began to improve during the first six months of 2002, during
which the Company sold some of its defaulted medallions directly to buyers and
through an arrangement with the Checker Taxi Association, Inc. By June 30, 2002,
the Company had resold 30 Chicago taxi medallions. During the year ended June
30, 2003, an additional 35 Chicago taxi medallions were resold. In addition to
the medallion sales, some taxi owners who had defaulted were able to reinstate
their loans after paying certain fees and executing loan modification and
reinstatement agreements, and, accordingly, began operating their taxis again.
As a result of the softness in the Chicago taxi market during the fiscal year,
the Company increased its reserve on accrued interest receivable from $300,000
to $691,000. Although foreclosures have increased, the fair value of the
collateral remained higher than the amount owed in nearly all cases and thus
principal impairments have been small.
SOURCES OF FUNDS
Elk is authorized to borrow money and issue debentures, promissory notes and
other obligations, subject to SBA regulatory limitations. Other than the
subordinated debentures issued to the SBA, Elk has to date borrowed funds only
from banks. As of June 30, 2003, Elk maintained three lines of credit totaling
$40,000,000 with an overall lending limit of $40,000,000. At June 30, 2003, Elk
had $34,130,000 outstanding under these lines. The loans, which mature through
November 2003, bear interest based on the Company's choice of the lower of
either the reserve adjusted LIBOR rate plus 150 basis points or the banks' prime
rate minus 1/2% plus certain fees as of June 30, 2003. Upon maturity, Elk
anticipates extending the lines of credit for another year as has been the
practice in previous years. Pursuant to the terms of the loan agreements, Elk is
required to comply with certain terms, covenants and conditions, and has pledged
its loans receivable and other assets as collateral for the above lines of
credit. Elk is in compliance with all covenants and credit terms at June 30,
2003.
During January 2002, the Company and the SBA entered into an agreement whereby
the SBA committed to reserve debentures in the amount of $12,000,000 to be
issued to the Company on or prior to September 30, 2006. In July and December
2002, new debentures payable to the SBA were drawn from the reserved pool of
$12,000,000 in the amount of $2,050,000 and $3,000,000, respectively. The
interim interest rates assigned were 2.351 % and 1.927%, respectively. The fixed
rates of 4.67% and 4.628% were determined on the pooling dates of September 25,
2002 and March 26, 2003, respectively. On September 15, 2003, another new
debenture payable to the SBA was drawn in the amount of $5,000,000 with an
interim interest rate of 1.682%. The long term fixed rate will be determined on
the pooling date of March 24, 2004. In addition to the fixed rates, there is an
additional annual SBA user fee on each debenture of 0.87% per annum that will
also be charged making the rates 5.54% and 5.498% and 2.552% before applicable
amortization of points and fees.
15
If interest rates rise, our cost of funds would increase while the rates on our
outstanding loans to our borrowers remained fixed, and our profitability could
decrease. In order to partially contain this risk, we have purchased interest
rate Swaps. While these limit our exposure to upward movement in interest rates
on our bank loans, they initially increase the effective interest rates that we
pay on loans subject to these agreements. However, general rises in interest
rates will reduce our interest rate spread in the short term on the floating
portion of our bank debt that is not hedged by interest rate Swaps. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations -- Interest Expense" and Note 13 of Notes to
Consolidated Financial Statements.
Pursuant to the SBA Agreement, Elk agreed to limit the aggregate of its
indebtedness based on a computation of a borrowing base each quarter. The
borrowing base computation is calculated to determine that the total amount of
debt due on the senior bank debt and SBA debentures does not exceed
approximately 80% of the value of performing loans and investments in Elk's
portfolio and on a temporary basis, until March 1, 2002, up to 85% of performing
taxi medallion loans. Loans that are more than 90 days in arrears are valued at
a lower amount in computing the borrowing base.
In connection with the SBA Agreement, Elk has also entered into an intercreditor
agreement (the "Intercreditor Agreement") and a custodian agreement (the
"Custodian Agreement") with its banks and the SBA. Pursuant to the Custodian
Agreement, the banks and the SBA-appointed Israel Discount Bank of New York as
the custodian to hold certain notes, security agreements, financing statements,
assignments of financing statements, and other instruments and securities as
part of the collateral for Elk's indebtedness to the banks and the SBA. The
Intercreditor Agreement sets forth the respective rights and priorities of the
banks and the SBA with respect to the repayment of indebtedness to the banks and
the SBA and as to their respective interests in the collateral. Pursuant to the
Intercreditor Agreement, the banks consented to the grant by Elk to the SBA of a
security interest in the collateral, which security interest ranks junior in
priority to the security interests of the banks.
SBIC BENEFITS
GENERAL. As an SBIC, Elk is eligible to receive certain financing from the SBA
on favorable terms, and Elk and its stockholder are entitled to certain tax
benefits, both described below. The SBA has a certain amount of discretion in
determining the type and amount of financing that will be made available to an
SBIC. Therefore, there can be no assurance as to the nature and amount of SBA
financing that may actually be obtained by Elk. Furthermore, there are certain
restrictions and requirements to which Elk is subject by virtue of it being an
SBIC.
BACKGROUND. SBICs were created under the 1958 Act as vehicles for providing
equity capital, long-term loan funds and management assistance to small
businesses. In general, the SBA considers a business to be "small," and
therefore eligible to receive loans from an SBIC,
16
only if (i) its net worth does not exceed $18,000,000 and if the average of its
net annual income after taxes for the preceding two years was not more than
$6,000,000 or (ii) it meets the size standard for the industry in which it is
primarily engaged, pursuant to SBA Regulations. In addition, an SBIC is required
to allocate a portion of its portfolio to the financing of concerns that (i)
together with their affiliates do not have net worth in excess of $6 million and
do not have an average net income after taxes for the preceding two years in
excess of $2 million or (ii) meet the size standard for the industry in which
they are primarily engaged. SBICs are licensed, regulated, and sometimes
partially financed, by the SBA.
BENEFITS. The principal benefits to Elk of being licensed as an SBIC are as
follows:
The SBA is authorized to guaranty full repayment of all principal and interest
on debentures issued by an SBIC to the extent of 300% of the SBIC's
"Leverageable Capital," as defined in the applicable SBA Regulations. However,
the percentage of allowable leverage decreases if the SBIC's Leverageable
Capital exceeds $15,000,000. The term of such debentures is typically 10 years.
The SBA will guarantee such debentures only after such an SBIC has demonstrated
a need for such debentures as evidenced by the SBIC's investment activity and
its lack of sufficient funds available for investments; provided, however, that
an SBIC that has invested at least 50% of its Leverageable Capital and
outstanding leverage shall be presumed to lack sufficient funds available for
investment. Generally, such debentures will bear interest at a fixed rate that
is based on the rate which is set by the underwriters of the pooled debentures
sold through SBIC Funding Corp.
With respect to debentures guaranteed after July 1, 1991, the SBA's claim
against an SBIC is subordinated, in the event of such SBIC's insolvency, only in
favor of present and future indebtedness outstanding to lenders and only to the
extent that the aggregate amount of such indebtedness does not exceed the lesser
of 200% of such SBIC's paid-in capital and paid-in surplus (as adjusted pursuant
to SBA Regulations), or $10,000,000. However, the SBA may agree to a
subordination in favor of one or more loans from certain lenders, in its sole
discretion. Pursuant to the SBA Agreement and the Intercreditor Agreement, the
SBA agreed to a subordination in favor of Elk's banks; provided, however, that
Elk is required to keep its overall debt to certain levels based upon the
performance of its portfolio.
COMPETITION
Banks, credit unions, other finance companies, some of which are SBICs, and
other private lenders compete with Elk in the origination of taxi medallion
loans and commercial installment loans. Finance subsidiaries of equipment
manufacturers also compete with Elk. Many of these competitors have greater
resources than Elk and certain competitors are subject to less restrictive
regulations than Elk. As a result, Elk expects to continue to encounter
substantial competition from such lenders. Therefore, there can be no assurance
that Elk will be able to identify and complete financing transactions that will
permit it to compete successfully.
17
EMPLOYEES
As of June 30, 2003, we employed a total of ten employees. This includes a
temporary increase of one clerk in June 2003 to assist with some administrative
projects. The temporary employee was terminated during August 2003.
INVESTMENT POLICIES
ELK INVESTMENT POLICIES
The investment policies described below are the fundamental policies of Elk.
Under the 1940 Act, these policies may be changed only by the vote of the lesser
of (i) a majority of Elk's outstanding Common Stock, or (ii) 67% of the number
of shares of Common Stock present in person or by proxy at a stockholder meeting
at which at least 50% of the outstanding shares of Common Stock are present.
Because Ameritrans is the only stockholder of Elk, we have agreed with the SEC
that Elk's fundamental investment policies will be changed only by the vote of
the Ameritrans stockholders.
(a) ISSUANCE OF SENIOR SECURITIES. Elk may issue subordinated debentures to the
SBA in the maximum amounts permissible under the 1958 Act and the applicable
regulations. Elk has no preferred stock authorized.
(b) BORROWING OF MONEY. Elk has the power to borrow funds from banks, trust
companies, other financial institutions, the SBA or any successor agency and/or
other private or governmental sources, if determined by Elk's Board of Directors
to be in its best interests.
(c) UNDERWRITING. Elk has not engaged, and does not intend to engage, in the
business of underwriting the securities of other issuers.
(d) CONCENTRATION OF INVESTMENTS. Elk may not concentrate 25% or more of its
total assets in securities of issuers in any industry group except the taxi
industry. Elk will make at least 25% of its investments for financing the
purchase or continued ownership of taxi medallions, taxis and related assets.
The balance of its investments includes, and Elk intends to continue to finance,
the acquisition and/or operation of other small businesses.
(e) REAL ESTATE. Elk has not engaged, and does not intend to engage, in the
purchase and sale of real estate. However, Elk may elect to purchase and sell
real estate in order to protect any of its prior investments which it considers
at risk.
(f) COMMODITIES CONTRACTS. Elk has not engaged, and does not intend to engage,
in the purchase and sale of commodities or commodities contracts.
(g) LOANS. Elk has made, and will continue to make, loans to Small Business
Concerns in accordance with the provisions of the 1958 Act and the SBA
Regulations.
18
(h) WRITING OPTIONS. Elk has not engaged, and does not intend to engage, in the
writing of options.
(i) SHORT SALES. Elk has not engaged, and does not intend to engage, in short
sales of securities.
(j) PURCHASING SECURITIES ON MARGIN. Elk has not engaged, and does not intend to
engage, in the purchase of securities on margin.
(k) FUTURES CONTRACTS. Elk has not engaged, and does not intend to engage, in
the purchase or sale of futures contracts.
(l) RESTRICTED SECURITIES. Elk may invest up to 100% of its assets in restricted
securities.
(m) TYPES OF INVESTMENTS. Although Elk was organized primarily to provide long
term loan funds to Small Business Concerns, Elk's certificate of incorporation
provides Elk with the authority to invest in the equity capital of Small
Business Concerns. Accordingly, Elk may make equity investments in Small
Business Concerns if determined by its Board of Directors to be in the best
interests of Elk.
(n) MAXIMUM INVESTMENT. Elk will not lend or otherwise invest more than the
lesser of (i) 10% of its total assets or (ii) 30% of its paid-in capital
attributable to its Common Stock with respect to any one Small Business Concern.
(o) PERCENTAGE OF VOTING SECURITIES. The percentage of voting securities of any
one Small Business Concern which Elk may acquire may not exceed 49% of the
outstanding voting equities of such Small Business Concern.
(p) MANAGEMENT CONTROL. Elk does not intend to invest in any company for the
purpose of exercising control of management. However, Elk may elect to acquire
control in order to protect any of its prior investments which it considers at
risk.
(q) INVESTMENT COMPANIES. Elk has not invested, and does not intend to invest,
in the securities of other investment companies.
(r) PORTFOLIO TURNOVER. Elk intends to make changes in its portfolio when, in
the judgment of its Board of Directors, such changes will be in the best
interest of our stockholders in light of the then existing business and
financial conditions. We do not anticipate that Elk's loan portfolio will
realize an annual turnover in excess of 50%, although there can be no assurance
with respect thereto.
AMERITRANS INVESTMENT POLICIES
Ameritrans' only fundamental policies, that is, policies that cannot be changed
without the approval of the holders of a majority of Ameritrans' outstanding
voting securities, as defined
19
under the 1940 Act, are the restrictions described below. A "majority of
Ameritrans' outstanding voting securities" as defined under the 1940 Act means
the lesser of (i) 67% of the shares represented at a meeting at which more than
50% of the outstanding shares are represented or (ii) more than 50% of the
outstanding shares. The other policies and investment restrictions referred to
in this Annual Report, including Ameritrans' investment objectives, are not
fundamental policies of Ameritrans and may be changed by Ameritrans' Board of
Directors without stockholder approval. Unless otherwise noted, whenever an
investment policy or limitation states a maximum percentage of Ameritrans'
assets that may be invested in any security or other asset, or sets forth a
policy regarding quality standards, such standard or percentage limitation will
be determined immediately after and as a result of Ameritrans' acquisition of
such security or other asset. Accordingly, any subsequent change in values,
assets, or other circumstances will not be considered when determining whether
the investment complies with Ameritrans' investment policies and limitations.
Ameritrans' fundamental policies are as follows:
(a) Ameritrans will at all times conduct its business so as to retain its status
as a BDC under the 1940 Act. In order to retain that status, Ameritrans may not
acquire any assets (other than non-investment assets necessary and appropriate
to its operations as a BDC) if, after giving effect to such acquisition, the
value of its "Qualifying Assets," amount to less than 70% of the value of its
total assets. Ameritrans believes that the securities it proposes to acquire in
connection with the acquisition of Elk, as well as temporary investments it
makes with its funds, will generally be Qualifying Assets. See "Regulation."
(b) Ameritrans may borrow funds and issue "senior securities" to the maximum
extent permitted under the 1940 Act. As a BDC, Ameritrans may issue senior
securities if, immediately after such issuance, the senior securities will have
an asset coverage of at least 200%. Under the 1940 Act, subordinated debentures
issued to or guaranteed by the SBA, the preferred stock issued to the SBA by Elk
and Elk's bank borrowings may be considered senior securities issued by
Ameritrans requiring asset coverage of 200%; however, pursuant to an Exemptive
Order issued by the SEC on December 7, 1999, such debentures, preferred stock
and bank borrowings are exempt from the asset coverage requirements of the 1940
Act.
(c) Ameritrans will not (i) underwrite securities issued by others (except to
the extent that it may be considered an "underwriter" within the meaning of the
Securities Act in the disposition of restricted securities), (ii) engage in
short sales of securities, (iii) purchase securities on margin (except to the
extent that it may purchase securities with borrowed money), (iv) write or buy
put or call options, or (v) engage in the purchase or sale of commodities or
commodity contracts, including futures contracts (except where necessary in
working out distressed loan or investment situations). Ameritrans and Elk may
purchase Swaps covering up to 100% of their variable rate debt. In addition,
Ameritrans may sponsor the securitization of loan portfolios.
(d) Ameritrans and Elk may originate loans and loans with equity features. To
the extent
20
permitted under the 1940 Act and the regulations promulgated thereunder,
Ameritrans may also make loans as permitted (i) under its existing stock option
plans, (ii) under plans providing for options for disinterested directors that
might be adopted by Ameritrans in the future, and (iii) to officers and
directors for the purchase of Ameritrans Common Stock.
(e) Ameritrans will hold all of the outstanding common stock of Elk and Elk
Capital and may organize additional subsidiaries in the future. Ameritrans may
acquire restricted securities of small businesses.
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a general summary of the federal income tax
principles applicable to Ameritrans, based on the currently existing provisions
of the Internal Revenue Code and the regulations thereunder. This summary does
not purport to be a complete description of the tax considerations applicable to
Ameritrans or to the holders of its Common Stock. These principles, in general,
also apply to Elk, but the sole direct stockholder of Elk is Ameritrans.
Ameritrans has elected to be treated as a "regulated investment company" (a
"RIC") under Section 851 of the Internal Revenue Code, and Elk has elected to be
treated as a RIC since 1984. A regulated investment company may deduct, for
federal income tax purposes, most dividends paid to stockholders, thereby
avoiding federal income taxation at the corporate level on stockholder
dividends. In addition, because Elk currently qualifies for treatment as a RIC,
Ameritrans anticipates that the dividends it receives from Elk will not be
subject to corporate taxation at the level of Elk.
TAXATION OF REGULATED INVESTMENT COMPANIES
In order to qualify as a RIC for a given fiscal year, a company must meet each
of the following conditions for that fiscal year:
a) The company must be registered as an investment company under the 1940 Act at
all times during the year.
b) At least 90% of the company's gross income for the year must be derived from
interest, gains on the sale or other disposition of stock or other securities,
dividends and payment with respect to securities loans.
c) Less than 30% of the company's gross income must be derived from the sale or
other disposition of securities held for less than three months.
d) At the close of each quarter, at least 50% of the value of the company's
total assets must be represented by cash, cash items (including receivables),
securities of other RICs and securities of other issuers, except that the
investment in a single issuer of securities may not exceed 5% of the value of
the RIC's assets, or 10% of the outstanding voting securities of the issuer.
21
e) At the close of each quarter, and with the exception of government securities
or securities of other RICs, no more than 25% of the value of a RIC's assets may
be made up of investments in the securities of a single issuer or in the
securities of two or more issuers controlled by the RIC and engaged in the same
or a related trade or business. However, if a non-RIC entity controlled by the
RIC subsequently sustains internally generated growth (as opposed to growth via
acquisitions), the diversification requirement will not be violated even if the
non-RIC subsidiary represents in excess of 25% of the RIC's assets.
f) The company must distribute as dividends at least 90% of its investment
company taxable income (as defined in Section 852 of the Internal Revenue Code),
as well as 90% of the excess of its tax-exempt income over certain disallowed
tax-exempt interest deductions. This treatment substantially eliminates the
"double taxation" (i.e., taxation at both the corporate and stockholder levels)
that generally results from the use of corporate investment vehicles. A RIC is,
however, generally subject to federal income tax at regular corporate rates on
undistributed investment company taxable income.
In order to avoid the imposition of a non-deductible 4% excise tax on its
undistributed income, a company is required, under Section 4982 of the Internal
Revenue Code, to distribute within each calendar year at least 98% of its
ordinary income for such calendar year and 98% of its capital gain net income
(reduced by the RIC's net ordinary loss for the calendar year, but not below its
net capital gain) for the one-year period ending on October 31 of such calendar
year.
The tax benefits available to a qualified RIC are prospective, commencing with
the fiscal year in which all the conditions listed above are met, and would not
permit Ameritrans to avoid income tax at the corporate level on income earned
during prior taxable years. If Ameritrans fails to qualify as a RIC for a given
fiscal year, Ameritrans will not be entitled to a federal income tax deduction
for dividends distributed, and amounts distributed as stockholder dividends by
Ameritrans will therefore be subject to federal income tax at both the corporate
level and the individual level.
Dividends distributed by Elk to Ameritrans will constitute ordinary income to
Ameritrans to the extent derived from non-capital gain income of Elk, and will
ordinarily constitute capital gain income to Ameritrans to the extent derived
from capital gains of Elk. However, since Ameritrans is also a RIC, Ameritrans
will, in general, not be subject to a corporate level tax on its income to the
extent that it makes distributions to its stockholders. If Elk does not qualify
as a RIC for any reason in any fiscal year, it will not be entitled to a federal
income tax deduction for dividends distributed, and will instead be liable to
pay corporate level tax on its earnings. Further, if Elk does not qualify as a
RIC, such failure will cause Ameritrans to fail to qualify for RIC status as
well, as long as Elk stock held by Ameritrans represents more than 25% of
Ameritrans' assets. In such a case, Ameritrans will be taxed on dividends
received from Elk, subject to the deduction for corporate dividends received,
which is currently 70%. Thus, if Elk fails to qualify as a RIC for any reason,
its earnings would be taxed at three levels: to Elk, in part to Ameritrans, and
22
finally, when they are distributed by Ameritrans, to our stockholders.
As long as Ameritrans qualifies as a RIC, dividends distributed by Ameritrans to
its stockholders out of current or accumulated earnings and profits constitute
ordinary income to such stockholders to the extent derived from ordinary income
and short-term capital gains of Ameritrans (such as interest from loans by
Ameritrans). Any long-term capital gain dividends distributed by Ameritrans
would constitute capital gain income to Ameritrans stockholders. To the extent
Ameritrans makes distributions in excess of current and accumulated earnings and
profits, these distributions are treated first as a tax-free return of capital
to the stockholder, reducing the tax basis of the stockholder's stock by the
amount of such distribution, but not below zero, with distributions in excess of
the stockholder's basis taxable as capital gains if the stock is held as a
capital asset.
TAXATION OF SBICS
As a result of Elk's status as a licensed SBIC under the 1958 Act, Elk and its
stockholders qualify for the following tax benefits:
(i) Under Section 243 of the Internal Revenue Code, Elk may deduct 100% of the
dividends received by it from domestic corporations in which it has made equity
investments, regardless of whether such corporations are subsidiaries of Elk (in
contrast to the generally applicable 70% deduction under the Code). Because Elk
generally makes long-term loans rather than equity investments, this potential
benefit is not likely to be of practical significance to Elk or its stockholder.
(ii) Under Section 1243 of the Internal Revenue Code, losses sustained on Elk's
investments in the convertible debentures, or stock derived from convertible
debentures, of Small Business Concerns are treated as ordinary losses rather
than capital losses to Elk. Because Elk does not presently intend to purchase
convertible debentures, however, this potential benefit is not likely to be of
practical significance to Elk or its stockholder.
STATE AND OTHER TAXES
The foregoing discussion relates only to federal income tax matters. Ameritrans
is also subject to state and local taxation. The state, local and foreign tax
treatment may not conform to the federal tax treatment discussed above.
Stockholders should consult with their own tax advisors with respect to the
state and local tax considerations pertaining to Ameritrans.
THE INVESTMENT COMPANY ACT OF 1940
Ameritrans and Elk are closed-end, non-diversified management investment
companies that have elected to be treated as BDCs and, as such, are subject to
regulation under the 1940 Act. The 1940 Act contains prohibitions and
restrictions relating to transactions between investment companies and their
affiliates, principal underwriters and affiliates of those affiliates or
23
underwriters. In addition, the 1940 Act provides that a BDC may not change the
nature of its business so as to cease to be, or to withdraw its election as, a
BDC unless so authorized by the vote of a "majority of its outstanding voting
securities," as defined under the 1940 Act.
BDCs are permitted, under specified conditions, to issue multiple classes of
indebtedness and one class of stock (collectively, "senior securities," as
defined under the 1940 Act) senior to the shares of Common Stock offered hereby
if their asset coverage of such indebtedness and all senior securities is at
least 200% immediately after each such issuance. Subordinated SBA debentures,
preferred stock guaranteed by or issued to the SBA by Elk, and Elk bank
borrowings are not subject to this asset coverage test. In addition, while
senior securities are outstanding, provision must be made to prohibit the
declaration of any dividend or other distribution to stockholders (except stock
dividends) or the repurchase of such securities or shares unless we meet the
applicable asset coverage ratios at the time of the declaration of the dividend
or distribution or repurchase. The Exemptive Order issued by the SEC grants
certain relief from the asset coverage ratios applicable to BDCs.
Under the 1940 Act, a BDC may not acquire any asset other than Qualifying Assets
unless, at the time the acquisition is made, certain Qualifying Assets represent
at least 70% of the value of the company's total assets. The principal
categories of Qualifying Assets relevant to our proposed business are the
following:
(1) Securities purchased in transactions not involving a public offering from
the issuer of such securities, which issuer is an eligible portfolio company. An
"eligible portfolio company" is defined in the 1940 Act as any issuer which:
(a) is organized under the laws of, and has its principal place of business in,
the United States;
(b) is not an investment company other than an SBIC wholly-owned by the BDC; and
(c) satisfies one or more of the following requirements:
(i) the issuer does not have a class of securities with respect to which a
broker or dealer may extend margin credit; or
(ii) the issuer is controlled by a BDC and the BDC has an affiliated person
serving as a director of issuer;
(iii) the issuer has total assets of not more than $4,000,000 and capital and
surplus (stockholders' equity less retained earnings) of not less than
$2,000,000, or such other amounts as the SEC may establish by rule or
regulation; or
(iv) the issuer meets such requirements as the SEC may establish from time to
time by rule or regulation.
(2) Securities for which there is no public market and which are purchased in
transactions not involving a public offering from the issuer of such securities
where the issuer is an eligible
24
portfolio company which is controlled by the BDC.
(3) Securities received in exchange for or distributed on or with respect to
securities described in (1) or (2) above, or pursuant to the exercise of
options, warrants or rights relating to such securities.
(4) Cash, cash items, government securities, or high quality debt securities
maturing in one year or less from the time of investment.
In addition, a BDC must have been organized (and have its principal place of
business) in the United States for the purpose of making investments in the
types of securities described in (1) or (2) above. In order to count securities
as Qualifying Assets for the purpose of the 70% test, the BDC must either
control the issuer of the securities or must make available to the issuer of the
securities significant managerial assistance; except that, where the BDC
purchases such securities in conjunction with one or more other persons acting
together, one of the other persons in the group may make available the required
managerial assistance. We believe that the common stock of Elk held by
Ameritrans are Qualifying Assets.
The Small Business Investment Act of 1958
Elk was formerly an SSBIC and, as explained in further detail below, was
converted to an SBIC in February 1997 in accordance with an agreement with the
SBA. The 1958 Act authorizes the organization of SBICs as vehicles for providing
equity capital, long term financing and management assistance to Small Business
Concerns. A Small Business Concern, as defined in the 1958 Act and the SBA
Regulations, is a business that is independently owned and operated and which is
not dominant in its field of operation. In addition, at the end of each fiscal
year, at least 20% of the total amount of loans made since April 25, 1994 by
each SBIC must be made to a subclass of Small Business Concerns that (i) have a
net worth, together with any affiliates, of $6 million or less and average
annual net income after U.S. federal income taxes for the preceding two (2)
years of $2 million or less (average annual net income is computed without the
benefit of any carryover loss), or (ii) satisfy alternative criteria under SBA
Regulations that focus on the industry in which the business is engaged and the
number of persons employed by the business or its gross revenues. SBA
Regulations also prohibit an SBIC from providing funds to a Small Business
Concern for certain purposes, such as relending and reinvestment.
The 1958 Act authorized the organization of SSBICs to provide assistance to
Disadvantaged Concerns, i.e., businesses that are at least 50% owned and managed
by persons whose participation in the free enterprise system is hampered because
of social or economic disadvantages. Certain 1996 amendment to the 1958 Act
provided, among other things, that no further subsidized funding would be made
available to SSBICs. Thereafter, pursuant to an agreement with the SBA, Elk was
converted to an SBIC, subject to certain conditions imposed by the SBA. Under
this agreement, Elk may now lend to persons who are not Disadvantaged Concerns.
As of June 30, 2003, more than 90% of Elk's portfolio of loans and investments
were
25
to Disadvantaged Concerns.
Under current SBA Regulations and subject to local usury laws, the maximum rate
of interest that Elk may charge may not exceed the higher of (i) 19% or (ii) a
rate calculated with reference to Elk's weighted average cost of qualified
borrowings, as determined under SBA Regulations or the SBA's current debenture
interest rate. The current maximum rate of interest permitted on loans
originated by Elk is 19%. At June 30, 2003, Elk's outstanding loans had a
weighted average rate of interest of 10.69%. SBA Regulations also require that
each loan originated by SBICs have a term of between five years and twenty
years.
The SBA restricts the ability of SBICs to repurchase their capital stock, to
retire their subordinated SBA debentures and to lend money to their officers,
directors and employees or invest in affiliates thereof. The SBA also prohibits,
without prior SBA approval, a "change of control" or transfers which would
result in any person (or group of persons acting in concert) owning 10% or more
of any class of capital stock of an SBIC. A "change of control" is any event
which would result in the transfer of the power, direct or indirect, to direct
the management and policies of an SBIC, whether through ownership, contractual
arrangements or otherwise.
Under SBA Regulations, without prior SBA approval, loans by licensees with
outstanding SBA leverage to any single Small Business Concern may not exceed 20%
of an SBIC's Leveragable Capital. Under the terms of the SBA Agreement, however,
Elk is authorized to make loans to Disadvantaged Concerns in amounts not
exceeding 30% of its respective Leveragable Capital.
SBICs must invest funds that are not being used to make loans in investments
permitted under SBA Regulations. These permitted investments include direct
obligations of, or obligations guaranteed as to principal and interest by, the
government of the United States with a term of 15 months or less and deposits
maturing in one year or less issued by an institution insured by the FDIC. The
percentage of an SBIC's assets so invested will depend on, among other things,
loan demand, timing of equity infusions and SBA funding and availability of
funds under credit facilities.
SBICs may purchase voting securities of Small Business Concerns in accordance
with SBA Regulations. SBA Regulations prohibit SBICs from controlling a Small
Business Concern except where necessary to protect an investment. SBA
Regulations presume control when SBICs purchase (i) 50% or more of the voting
securities of a Small Business Concern if the Small Business Concern has less
than 50 stockholders or (ii) more than 20% (and in certain situations up to 25%)
of the voting securities of a Small Business Concern if the Small Business
Concern has 50 or more stockholders.
ITEM 2. PROPERTIES
We rent office space from a law firm, the principals of which are officers and
directors of
26
Ameritrans, and we share certain office expenses with that firm. The law firm,
at our request, rented an additional 1,800 square feet of office space
contiguous with our offices at a below market rent (the "Additional Space").
Until we require the Additional Space, the law firm sublets the Additional Space
to outside tenants. In the event all or a portion of the Additional Space is
vacant, Elk has agreed to reimburse the law firm for any additional rent due.
During the year ended June 30, 2003, Elk paid the law firm approximately $3,550
on account of this agreement. In August, 2001 the Company's Board of Directors
approved the execution of a formal sublease with the law firm on financial terms
and conditions consistent with the prior arrangement for the period July 1, 2001
through April 30, 2004.
Effective July 1, 2003, the Company entered into a new ten-year sublease for
additional office and storage space with an entity in which an officer and
shareholder of the Company has an interest. The new sublease calls for rental
payments ranging from $38,500 to $54,776 per annum from the first year ending
June 30, 2004 through the year ending June 30, 2013. The sublease contains a
provision that either party may terminate the lease in years seven through ten
with six months' notice.
ITEM 3. LEGAL PROCEEDINGS
Ameritrans is not currently a party to any material legal proceeding. From time
to time, Ameritrans is engaged in various legal proceedings incident to the
ordinary course of its business. In the opinion of Ameritrans' management and
based upon the advice of legal counsel, there is no proceeding pending, or to
the knowledge of management threatened, which in the event of an adverse
decision would result in a material adverse effect on Ameritrans' results of
operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of Ameritrans' 2003 fiscal year.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Elk Common Stock was listed on the Nasdaq SmallCap Market on June 22, 1998,
under the symbol EKFG, prior to which it had traded in the "pink sheets." Since
December 16, 1999, when Ameritrans acquired Elk, its Common Stock has been
listed on the Nasdaq SmallCap Market under the symbol AMTC.
The following tables show the closing high and low sale prices per share of
Common Stock as reported by Nasdaq, for the fiscal years ended June 30, 2002 and
June 30, 2003.
27
AMERITRANS HIGH LOW
FISCAL 2002
1st Quarter 5.75 4.00
2nd Quarter 9.00 4.33
3rd Quarter 7.15 6.24
4th Quarter 7.00 5.10
FISCAL 2003
1st Quarter 6.25 5.00
2nd Quarter 5.78 4.63
3rd Quarter 5.49 2.95
4th Quarter 5.11 3.45
FISCAL 2004
1st Quarter (through September 25, 2003) 5.06 4.16
(1) Stock prices shown are the high and the low for the quarter.
Elk registered under the 1940 Act for the fiscal year commencing July 1, 1983,
and declared and paid dividends to holders of the Common Stock for the fiscal
years ended June 30, 1984 through June 30, 1992. Elk did not pay dividends
during the fiscal years ended June 30, 1993, 1994 and 1995. Elk recommenced
paying dividends for the fiscal year beginning July 1, 1995, and paid dividends
quarterly since that time and up until its share exchange with Ameritrans.
Thereafter, Ameritrans has declared and paid dividends to holders of its Common
Stock for each quarter except for the fourth quarter of 2000, the first quarter
of 2001, the third and fourth quarters of 2003, and the first quarter of 2004.
On April 18, 2002, the Company's registration statement filed on Form N-2 was
declared effective by the Securities and Exchange Commission. The offering
closed on April 24, 2002 on the total sale of 300,000 units. Each unit was
comprised of one share of Common Stock, one share of 9 3/8% cumulative
participating preferred stock (face value $12.00) (the "Participating Preferred
Stock"), and one warrant exercisable for five years into one share of Common
Stock at an exercise price of $6.70 per share (the "Warrants"). The units were
split in May, 2002. The Participating Preferred Stock and the Warrants trade on
the NASDAQ SmallCap Market under the symbols, respectively, "AMTCP" and "AMTCW".
The gross proceeds from the sale of the units was $5,750,000 less costs and
commissions of $1,704,399, resulting in net proceeds of $3,995,601. The
underwriter of the offering was granted an option to purchase up to 30,000
units, each unit consisting of one share of Common Stock, one share of
Participating Preferred Stock and one warrant exercisable at $8.40 per share.
The option to purchase the 30,000 units are exercisable for five (5) years
commencing one year after the date of the offering at an exercise price of
$21.45 per unit.
The Company filed a post-effective amendment to the Registration Statement on
Form N-2 on
28
June 24, 2003 to update disclosures contained in the Form N-2, which has not
been declared effctive by the Securities and Exchange Commission. The Company
intends to file a second post-effective amendment to include the audited
financial statements for the year ended June 30, 2003.
The Company has declared and paid the quarterly dividend on the Participating
Preferred Stock since the Participating Preferred Stock was issued. Most
recently, the Company's Board of Directors declared a dividend of $0.28125 per
share on September 23, 2003 on the Participating Preferred Stock for the period
July 1, 2003 through September 30, 2003 payable on October 15, 2003 for all
holders of the Participating Preferred Stock of record as of October 7, 2003.
As of October 6, 2003, there were 195 holders of record of the Ameritrans Common
Stock, and 3 holders of record of the Participating Preferred Stock and
Warrants, which is exclusive of parties holding the securities in street name.
ITEM 6. SELECTED FINANCIAL DATA
On December 16, 1999, Ameritrans acquired Elk in a share-for-share exchange.
Prior to the acquisition, Elk had been operating independently and Ameritrans
had no operations.
The tables below contain certain summary historical financial information of
Elk. You should read these tables in conjunction with the consolidated financial
statements of Ameritrans (the "Financial Statements") included elsewhere in this
Annual Report and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
STATEMENT OF OPERATIONS DATA FISCAL YEAR ENDED JUNE 30,
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Investment Income $ 6,282,079 $ 6,269,719 $ 6,439,792 $ 6,602,397 $ 5,583,894
=========== =========== =========== =========== ===========
Interest Expense 2,076,861 2,632,918 3,392,202 3,345,526 2,498,284
Other Expenses 3,805,083 2,591,751 2,188,636 2,590,352 1,856,221
----------- ----------- ----------- ----------- -----------
Total Expenses 5,881,944 5,224,669 5,580,838 5,935,878 4,354,505
=========== =========== =========== =========== ===========
Operating Income 400,135 1,045,050 858,954 666,519 1,229,389
=========== =========== =========== =========== ===========
Other Income (Expense) 2,976 2,700 (276,549) (440,196) 7,200
Benefit of (Provision for) Income Taxes(1) (7,897) (8,854) (7,896) (13,571) 769
----------- ----------- ----------- ----------- -----------
Net Income $ 395,214 $ 1,038,896 $ 574,509 $ 212,752 $ 1,237,358
=========== =========== =========== =========== ===========
29
Dividends on Preferred Stock $ (337,500) $ (68,438) $ -- $ -- $ --
----------- ---------- ---------- ----------- -----------
Net Income Available To Common Shareholders $ 57,714 $ 970,458 $ 574,509 $ 212,752 $ 1,237,358
=========== ========== ========== =========== ===========
Net Income Per Common Share $ 0.03 $ 0.54 $ 0.33 $ 0.12 $ 0.71
=========== ========== ========== =========== ===========
Common Stock Dividends Paid $ 552,312 $ 994,991 $ 528,045 $ 1,256,832 $ 1,256,832
=========== ========== ========== =========== ===========
Common Stock Dividends Paid Per Common Share $ 0.27 $ 0.57 $ 0.30 $ 0.72 $ 0.72
=========== ========== ========== =========== ===========
STATEMENT OF OPERATIONS DATA FISCAL YEAR ENDED JUNE 30,
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Weighted Average number of Shares of
Common Stock Outstanding 2,035,600 1,800,614 1,745,600 1,745,600 1,745,600
=========== =========== =========== =========== ===========
Net change to accumulated other
comprehensive income $ (200,338) $ (43,612) $ (123,364) $ (124,319) $ 62,964
=========== =========== =========== =========== ===========
BALANCE SHEET DATA AT JUNE 30,
-----------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Loans Receivable $ 55,306,678 $ 55,029,831 $ 54,559,970 $ 56,806,579 $ 51,103,932
Unrealized depreciation of investments (238,500) (238,500) (318,500) (380,000) (380,000)
------------ ------------ ------------ ------------ ------------
Net of unrealized depreciation of investments $ 55,068,178 $ 54,791,331 $ 54,241,470 $ 56,426,579 $ 50,723,932
============ ============ ============ ============ ============
Total assets $ 60,091,901 $ 59,008,216 $ 57,984,869 $ 60,294,624 $ 54,510,801
============ ============ ============ ============ ============
Notes payable and demand notes $ 34,130,000 $ 33,720,000 $ 35,550,000 $ 37,800,000 $ 31,000,000
============ ============ ============ ============ ============
Subordinated SBA debentures $ 9,200,000 $ 7,860,000 $ 8,880,000 $ 8,800,000 $ 8,880,000
============ ============ ============ ============ ============
Total liabilities $ 44,119,756 $ 42,341,135 $ 45,177,743 $ 47,410,598 $ 40,772,584
============ ============ ============ ============ ============
Total stockholders' equity $ 15,972,145 $ 16,667,081 $ 12,807,126 $ 12,884,026 $ 13,738,217
============ ============ ============ ============ ============
30
(1) Ameritrans since inception and Elk, since the fiscal year ended June 30,
1984, have elected and qualified to be taxed as a regulated investment company
and substantially all taxable income was required to be distributed to
stockholders. Therefore, only minimal taxes were required to be paid.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with the financial
statements and notes to financial statements. The results described below are
not necessarily indicative of the results to be expected in any future period.
Certain statements in this discussion and analysis, including statements
regarding our strategy, financial performance, and revenue sources, are
forward-looking statements based on current expectations and entail various
risks and uncertainties that could cause actual results to differ materially
from those expressed in the forward-looking statements, including those
described in "risk factors" and elsewhere in this annual report.
CRITICAL ACCOUNTING POLICIES
The preparation of the Company's consolidated financial statements requires
management to make estimates and assumptions that affect amounts reported and
disclosed in the financial statements and related notes. Significant estimates
made by the Company include valuation of loans, evaluation of the recoverability
of various receivables and the assessment of litigation and other contingencies.
The Company's ability to collect receivables and recover the value of its loans
depends on a number of factors, including financial conditions and its ability
to enforce provisions of its contracts in the event of disputes, through
litigation if necessary, in accordance with generally accepted accounting
principles, to record net assets and liabilities at estimated realizable values.
The matters that give rise to such provisions are inherently uncertain and may
require complex and subjective judgments. Although the Company believes that
estimates and assumptions used in determining the recorded amounts of net assets
and liabilities at June 30, 2003, are reasonable, actual results could differ
materially from the estimated amounts recorded in the Company's financial
statements. Our critical accounting policies are those applicable to the
valuation of loans receivable and various investments discussed below.
Valuation of Loans and Debt Securities. For loans and debt securities, fair
value generally approximates cost less unrealized depreciation and no loans have
been recorded above cost. Overall financial condition of the borrower, the
adequacy of the collateral, individual credit risks, historical loss experience
and other factors lead to a determination of the fair value at a different
amount.
31
Equity Securities. The fair value of publicly traded corporate equity securities
is based on quoted market prices. Privately held corporate equity securities are
recorded at the lower of cost or fair value. For these non-quoted investments,
the Company reviews the assumptions underlying the financial performance of the
privately held companies in which the investments are maintained. If and when a
determination is made that a decline in fair value below the cost basis is other
than temporary, the related investment is written down to its estimated fair
value.
Assets Acquired in Satisfaction of Loans. Assets acquired in satisfaction of
loans are carried at estimated fair value less selling costs. Losses incurred at
the time of foreclosure are charged to the unrealized depreciation on loans
receivable. Subsequent reductions in estimated net realizable value are recorded
as losses on assets acquired in satisfaction of loans.
GENERAL
Ameritrans acquired Elk in December 16, 1999. Elk is an SBIC that has been
operating since 1980, making loans to (and, to a limited extent, investments in)
small businesses, primarily businesses that are majority-owned by persons who
qualify under SBA Regulations as socially or economically disadvantaged. Most of
Elk's business has consisted of originating and servicing loans collateralized
by New York City, Boston, Chicago and Miami taxi medallions, but Elk also makes
loans to and investments in other diversified businesses and to persons who
qualify under SBA Regulations as "non-disadvantaged."
Historically, Elk's earnings derived primarily from net interest income, which
is the difference between interest earned on interest-earning assets (consisting
of business loans), and the interest paid on interest-bearing liabilities
(consisting of indebtedness to Elk's banks and subordinated debentures issued to
the SBA). Net interest income is a function of the net interest rate spread,
which is the difference between the average yield earned on interest-earning
assets and the average interest rate paid on interest-bearing liabilities, as
well as the average balance of interest-earning assets as compared to
interest-bearing liabilities. Unrealized depreciation on loans and investments
is recorded when Elk adjusts the value of a loan to reflect management's
estimate of
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the fair value, as approved by the Board of Directors. See Note 1 of "Notes to
Consolidated Financial Statements."
Results of Operations for the Years Ended June 30, 2003 and 2002
Total Investment Income
The Company's investment income increased $12,360 to $6,282,079 as compared with
the prior year ended June 30, 2002. This increase was mainly due to the increase
in interest earned on higher average loans receivable balance for the year of
$87,721, offset by a decrease in other fees of $75,361.
Operating Expenses
Interest expense for the years ended June 30, 2003 decreased $556,057 to
$2,076,861 when compared to the year ended June 30, 2002. This reflects the
lower interest charged on outstanding bank borrowing combined with interest
savings due to paydown and reissuance of SBA debentures, offset by interest
payments related to Swap agreements since the fixed rates in connection with the
Swaps were consistently above the floating one month LIBOR rates during the
year. Salaries and employee benefits increased $109,441 when compared with the
prior year. This increase reflects the increases that were put in effect from
the officers employment agreements, three of which were amended during the year.
Other administrative costs increased $457,410 when compared with the prior year.
This increase was due to increased professional fees and related costs as a
result of increased regulatory filings and examinations. The Company also
incurred $313,678 in foreclosure expenses for the year ended June 30, 2003,
which increased $187,113 from the prior year due to the increase in the number
of foreclosures from the weak Chicago market. Depreciation in value of loans and
accrued interest increased $459,367 to $852,512 due mainly to the write down of
the Company's Chicago loan portfolio and accrued interest.
The increase in write off and depreciation of interest and loans receivable is
primarily due to the increase in Chicago loan portfolio delinquencies and
defaults, which is attributed to the economic slowdown and the effects of
September 11, 2001 on the Chicago taxi industry. Activities in connection with
the Chicago operations as of June 30, 2003 are as follows: a) $50,018 of charge
off of principal due to losses on 14 of the 35 completed Chicago medallion
foreclosures that occurred during the year ended June 30, 2003 and b) $248,985
of accrued interest on the completed Chicago medallion foreclosures was written
off. In addition, the Company increased its unrealized depreciation on interest
receivable for potential losses on the remaining Chicago taxi medallion loans
that were in default by an additional net amount of $391,000 for the year ended
June 30, 2003. As mentioned above, the foreclosure expenses incurred by the
Company as it satisfies outstanding balances incurred by the default borrowers
on the medallions with the City of Chicago were $313,678 for the year ended June
30, 2003. This expense primarily consisted of back taxes, interest and
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penalties owed to the City of Chicago Department of Revenue by defaulted
medallion owners which was required to be paid as a condition of completing the
medallion foreclosures sales and transfer to new purchasers, as well as
professional fees related to these foreclosures.
Net Income
Net income decreased to $395,214 from $1,038,896 in the year ended June 30,
2003. The change in the net income for the year ended June 30, 2003 that was
attributable primarily to the write down of the Chicago loan portfolio as well
as increases in salary and professional fees which were only partially offset by
favorable interest rates obtained from debt refinancing. Dividends of
Participating Preferred Stock for the year ended June 30, 2003 amounted to
$337,500 versus $68,438 in the prior year.
Results of Operations for the Years Ended June 30, 2002 and 2001
Total Investment Income
The Company's investment income decreased $170,073 to $6,269,719 as compared
with the prior year ended June 30, 2001. This decrease was mainly due to the
decrease in interest earned on loans receivable, ($181,232), offset by an
increase in other fees ($11,159). This decrease reflects a lower average
interest rate earned on the Company's outstanding loan portfolio.
Operating Expenses
Interest expense for the years ended June 30, 2002 decreased $759,284 to
$2,632,918 when compared to the year ended June 30, 2001. This reflects the
lower interest charged on outstanding bank borrowing combined with a paydown of
the notes payable, bank and an SBA debenture in the amount of $1,020,000 as a
result of the Company's successful public offering of 300,000 units in April
2002. Salaries and employee benefits increased $142,620 when compared with the
prior year. This increase reflects the increases that were put in effect when
the officers signed employment agreements combined with a temporary increase in
staff due to the implementation of the Company's new computer system. Other
administrative costs decreased $33,980 when compared with the prior year. This
decrease was mainly due to decreased miscellaneous administrative expenses and
loss on assets acquired in satisfaction of loans, net. The Company also incurred
$126,565 in foreclosure expenses for the year ended June 30, 2002. Depreciation
in value of loans and accrued interest increased $167,910 to $393,145 due mainly
to the write down of the Company's Chicago loan portfolio and accrued interest.
Net Income
Net income increased to $1,038,896 from $574,509 in the year ended June 30,
2002. The change
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in the net income for the year ended June 30, 2002 that was attributable to
other income (expense) amounted to $279,249. This change was primarily due to a
one time charge of $413,186 due to the termination of the Company's merger talks
with Medallion, net of $121,637 gain on the sale of equity securities for the
year ended June 30, 2001.
Balance Sheet and Reserves
Total assets increased by $1,083,685 as of June 30, 2003 when compared to total
assets as of June 30, 2002. This increase was due to the Company's increased
borrowings from the SBA. During January 2002, the Company and the SBA entered
into an agreement whereby the SBA committed to reserve debentures in the amount
of $12,000,000 to be issued by the Company prior to September 30, 2006. As of
June 30, 2003, debentures payable to the SBA in the amount of $2,050,000 and
$3,000,000 were drawn from the reserved pool of $12,000,000. In September and
December 2002, the Company paid off SBA debentures in the amount of $2,690,000
and $1,020,000 in order to reduce interest costs.
Asset / Liability Management
Interest Rate Sensitivity
Ameritrans, like other financial institutions, is subject to interest rate risk
to the extent its interest- earning assets (consisting of medallion loans and
commercial loans) rise or fall at a different rate over time in comparison to
its interest-bearing liabilities (consisting primarily of its credit facilities
with banks and subordinated SBA debentures).
A relative measure of interest rate risk can be derived from Ameritrans'
interest rate sensitivity gap i.e. the difference between interest-earning
assets and interest-bearing liabilities, which mature and/or reprice within
specified intervals of time. The gap is considered to be positive when
repriceable assets exceed repriceable liabilities and negative when repriceable
liabilities exceed repriceable assets. A relative measure of interest rate
sensitivity is provided by the cumulative difference between interest sensitive
assets and interest sensitive liabilities for a given time interval expressed as
a percentage of total assets.
Ameritrans' interest rate sensitive assets were approximately $55.1 million and
interest rate sensitive liabilities were approximately $43.3 million at June 30,
2003. Having interest-bearing liabilities that mature or reprice more frequently
on average than assets may be beneficial in times of declining interest rates,
although such an asset/liability structure may result in declining net earnings
during periods of rising interest rates. Abrupt increases in market rates of
interest may have an adverse impact on our earnings until we are able to
originate new loans at the higher prevailing interest rates. Conversely, having
interest-earning assets that mature or reprice more
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frequently on the average than liabilities may be beneficial in times of rising
interest rates, although this asset/liability structure may result in declining
net earnings during periods of falling interest rates. This mismatch between
maturities and interest rate sensitivities of our interest-earning assets and
interest-bearing liabilities results in interest rate risk.
The effect of changes in interest rates is mitigated by regular turnover of the
portfolio. Based on past experience, Ameritrans anticipates that approximately
20% of the portfolio will mature or be prepaid each year. Ameritrans believes
that the average life of its loan portfolio varies to some extent as a function
of changes in interest rates. Borrowers are more likely to exercise prepayment
rights in a decreasing interest rate environment because the interest rate
payable on the borrower's loan is high relative to prevailing interest rates.
Conversely, borrowers are less likely to prepay in a rising interest rate
environment.
Interest Rate Swap Agreements
Ameritrans manages the exposure of the portfolio to increases in market interest
rates by entering into interest rate Swap agreements to hedge a portion of its
variable-rate debt against increases in interest rates and by incurring
fixed-rate debt consisting primarily of subordinated SBA debentures.
On January 10, 2000, Elk entered into a $5,000,000 interest rate Swap
transaction with a bank that expired on October 8, 2001. On June 11, 2001, Elk
entered into an additional interest rate Swap transaction with the same bank for
$10,000,000 which expired on June 11, 2002. On June 11, 2001, Elk entered into
another interest rate Swap transaction for $15,000,000 with this bank which
expired June 11, 2003. On February 11, 2003, Elk purchased another interest rate
Swap contract for $5,000,000 with the same bank expiring February 11, 2005.
These Swap transactions were entered into to protect the Company from an upward
movement in interest rates relating to outstanding bank debt. These Swap
transactions call for a fixed rate of 4.95%, 4.35%, 4.95% and 3.56%,
respectively for the Company and if the floating one-month LIBOR rate is below
the fixed rate then the Company is obligated to pay the bank for the difference
in rates. When the one-month LIBOR rate is above the fixed rate then the bank is
obligated to pay the Company for the differences in rates annually or at the
settlement date.
Ameritrans believes that its bank credit facilities and cash flow from
operations (after distributions to stockholders) will be adequate to fund the
continuing operations of the Company's loan portfolio. Nevertheless, the Company
continues to explore additional options, which may increase available funds for
its growth and expansion strategy. In addition, to the application for SBA
funding described above, these financing options would provide additional
sources of funds for both external expansion and continuation of internal
growth.
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Investment Considerations
Interest rate fluctuations may adversely affect the interest rate spread we
receive on our taxicab medallion and commercial loans.
Because we borrow money to finance the origination of loans, our income is
dependent upon the differences between the rate at which we borrow funds and the
rate at which we loan funds. While the loans in our portfolio in most cases bear
interest at fixed-rates or adjustable-rates, we finance a substantial portion of
such loans by incurring indebtedness with floating interest rates. As short-term
interest rates rise, our interest costs increase, decreasing the net interest
rate spread we receive and thereby adversely affect our profitability. Although
we intend to continue to manage our interest rate risk through asset and
liability management, including the use of interest rate Swaps, general rises in
interest rates will tend to reduce our interest rate spread in the short term.
In addition, we rely on our counterparties to perform their obliga