-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OYfKXs0kFR/QMMsrg9YwM8H1/11iW6WiXHSvu/h5HvOuVcgzRJ8VoHHGQl5tAMKj Qg5pTJFLzcu2PZ0DU/kTyw== 0001064015-05-000031.txt : 20080626 0001064015-05-000031.hdr.sgml : 20080626 20050928165022 ACCESSION NUMBER: 0001064015-05-000031 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050928 DATE AS OF CHANGE: 20080620 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERITRANS CAPITAL CORP CENTRAL INDEX KEY: 0001064015 IRS NUMBER: 522102424 STATE OF INCORPORATION: DE FISCAL YEAR END: 0607 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 814-00193 FILM NUMBER: 051108681 BUSINESS ADDRESS: STREET 1: 747 THIRD AVENUE STREET 2: 4TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2123552449 MAIL ADDRESS: STREET 1: 747 THIRD AVENUE STREET 2: 4TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10017 10-K 1 september200510kfiled.txt 10-K 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, 2005 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% Cumulative 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| As of June 30, 2005, the approximate aggregate market value of the Registrant's common stock held by non-affiliates of the Registrant was approximately $8,204,121 based upon a closing price of the Registrant's common stock of $5.90 per share as reported on the NASDAQ Capital Market on that date (For this computation, the Registrant has excluded the market value of all shares of its common stock reported as beneficially owned by executive officers and directors of the registrant and certain other stockholders; such an exclusion shall not be deemed to constitute an admission that any such person is an "affiliate" of the registrant.) There were 2,035,600 shares of the Registrant's Common Stock outstanding as of September 19, 2005. DOCUMENTS INCORPORATED BY REFERENCE. Certain exhibits previously filed with the Securities and Exchange Commission are incorporated by reference into Part IV of this report. AMERITRANS CAPITAL CORPORATION 2005 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 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 26 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 30 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 39 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 42 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES 40 ITEM 9A.CONTROLS AND PROCEDURES 42 PART III 42 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT MANAGEMENT 42 ITEM 11. EXECUTIVE COMPENSATION 46 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 53 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 57 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 59 PART IV 60 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 60 IMPORTANT FACTORS RELATING TO FORWARD-LOOKING STATEMENTS 60 SIGNATURES 62
PART I ITEM 1. BUSINESS OF AMERITRANS 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. The Company's internet site is WWW.AMERITRANSCAPITAL.COM. Ameritrans makes available, free of charge through its internet site its annual report on form 10-K, quarterly reports on form 10-Q, current reports on form 8-K and any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Elk makes loans to the owners of taxi cab businesses in the Chicago, New York City, Miami and Boston markets and to other small businesses, using, among other things, taxi medallions as collateral. Loans made to finance the purchase or continued ownership of taxi medallions, taxis and related assets represented approximately 74% of Elk's loan portfolio as of June 30, 2005. 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, the Company's only activity was 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 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"). The offering 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. The executive officers and directors of both Elk and Ameritrans are identical. In addition, both Ameritrans and Elk have elected to be treated as "regulated investment companies," or "RICs," for tax purposes. Under the Internal Revenue Code, as a RIC, we will generally not be subject to U.S. federal corporate income tax on our investment income if we make qualifying distributions of our income to stockholders. As a RIC we qualify for this treatment as long as we distribute at least 90% of our investment company taxable income to our stockholders as dividends. Elk paid qualifying dividends from July 1983 through June 1992 and continuously since June 1996. Since December 16, 1999, when we acquired Elk, these dividends have been payable to Ameritrans as Elk's sole stockholder. Ameritrans has paid common dividends to its shareholders since its inception with the exception of the three (3) month periods ended June 30, 2000, September 30, 2000, March 31, 2003, and June 30, 2003 all periods of fiscal year 2005. Also, the Company does not expect to be able to pay dividends for the three month period ended September 30, 2005. 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." 1 CURRENT BUSINESS ACTIVITIES AMERITRANS. From inception through April 2002, Ameritrans' only activity was the operation of Elk. In May 2002, Ameritrans began making loans to businesses using the proceeds raised from the Company's Unit Offering. Since July 2002, Ameritrans has been making equity investments. Equity securities in Ameritrans's investment portfolio at June 30, 2005 totaled $554,205 or 0.95% of total assets. 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, 2005 totaled $354,252 or 0.61% 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 six (6) wholly-owned subsidiaries: EAF Holding Corporation, EAF Enterprises LLC, Medallion Auto Management LLC, EAF Leasing LLC, EAF Leasing II LLC and EAF Leasing III LLC. EAF Holding Corporation was formed in 1992, and its sole activity is owning and operating certain real estate assets acquired in satisfaction of loans. EAF Enterprises LLC was formed in June 2003 to take title to some of the Company's remaining Chicago foreclosure medallions, and to thereafter lease them to taxi drivers on a 36-month lease. Medallion Auto Management LLC was formed in June 2003 to own taxi vehicles used primary in conjunction with EAF Enterprises LLC's taxi medallion leasing operation. In order to lease the medallions, Medallion Auto Management LLC was formed to purchase taxi vehicles and leases the vehicles to the operators whereby each 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. EAF Leasing LLC, EAF Leasing II LLC and EAF Leasing III LLC were formed to take title to approximately 35 foreclosed medallions and lease them to large medallion operators. TAXI MEDALLION FINANCE INDUSTRY AND MARKET OVERVIEW CHICAGO TAXI MEDALLION INDUSTRY AND MARKET. As part of its geographic diversification strategy, Elk studied the Chicago taxi medallion market in 1994, and began making loans in Chicago in April, 1995. The taxi market and medallion system in Chicago is regulated by the City of Chicago Department of Consumer Services, Public Vehicle Operations Division. The number of taxi medallions is limited by city ordinances, and until 1988, these ordinances gave control of the majority of the medallions to the two largest taxi operators in Chicago; Yellow Cab Co., ("Yellow Cab") and Checker Taxi Co., Inc. ("Checker Taxi"). Since 1988, the taxi industry in Chicago has shifted toward more individual ownership. Over the succeeding 10 years, Yellow Cab and Checker Taxi, pursuant to the settlement of an anti-trust legal action, gave 1,300 medallions back to the City of Chicago ("Chicago"), and Chicago added an additional 100 medallions each year thereafter. 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 owned approximately 2,071, and the remaining 3,629 were owned by individual owner drivers, or by individual operators who had purchased multiple medallions. 2 In December, 1997, the Chicago City Council increased the number of medallions by 1,000, which were then 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 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. In November, 2000, the Chicago City Council passed a new ordinance authorizing Chicago to auction up to 50 medallions per year through November, 2004, representing a total of 150 medallions over three years. The Chicago City Council, however, did not authorize any further lotteries of medallions. The new ordinance also required purchasers of the medallions to operate taxi-vans instead of the standard taxicab vehicle, which would 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, Yellow Cab 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 has continued to sell medallions that it owned, and the Company estimates that they have sold approximately 1,300 additional medallions to owner drivers, who they continue to service through their taxi affiliation and through the Yellow Cab operations. We believe that the sale of these additional medallions by Yellow Cab to owner-drivers will continue to offer additional financing opportunities for the Company to service their financing needs. It has been our experience that as the Chicago market has expanded, it has also become more competitive with more lenders entering the market. In addition, Chicago and Yellow 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. As a result of these defaults and foreclosures, the Company experienced a large amount of losses on accrued interest, and costs and expenses incurred to foreclose and resell medallions in the Chicago market. 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 Chicago 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. 3 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 $48,000 and $58,000 per medallion. Elk is reselling its foreclosed medallions for approximately $55,000 to $58,000 per medallion, for which it provides full financing to the purchaser. The City of Chicago imposed a 10% transfer tax on a medallion held for the first year and 5% transfer tax thereafter, and for any foreclosure sale. The 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, 2005, the total principal amount of our outstanding taxi loans in Chicago was $23,881,163. Elk set up subsidiary entities to take title to approximately 40 of our remaining foreclosure medallions. Five medallions are held by EAF Enterprises LLC, which leases the medallions out to taxi drivers on a 36-month lease. Medallion Auto Management LLC, another Elk subsidiary, purchased taxi vehicles and leases the vehicles to the operators. Elk also entered into agreements with large operators of taxi medallions and set up the subsidiary entities EAF Leasing LLC, EAF Leasing II LLC, and EAF Leasing III LLC which took title to approximately 35 foreclosed medallions and lease them to medallion operators. Unlike the above structure, the medallion operator is not given an option to purchase the medallions. At June 30, 2005, Elk had executed contracts with one (1) purchaser to purchase a total of twenty (20) Chicago medallions being foreclosed and five (5) being sold by one of Elks subsidiaries, EAF Enterprises LLC, at a price of $57,500 per medallion. As part of the purchase contract, Elk agreed to finance the purchaser for the entire purchase price plus applicable transfer taxes for a period of 8 years with a balloon principal payment at the maturity date. During the first year of the loan, the interest rate is one percent (1%) per annum. Thereafter, beginning in the second year the interest rate increases to 1.5% above the prime rate of interest adjusted each time the prime rate changes. Twenty (20) of the medallions being sold were closed on August 31, 2005, the remaining five (5) medallions under contract are expected to close in the near future. The purchaser has also expressed interest in purchasing five (5) additional Chicago medallions on similar terms and conditions. THE NEW YORK CITY TAXI MEDALLION INDUSTRY AND MARKET. Prior to April 2004, the number of taxi medallions that may be issued by New York City was limited to 12,187. In 2003, the City authorized the sale of an additional 900 medallions over the course of three years by auctioning 300 medallions each year starting fiscal year 2004. On April 16, 2004, the New York City Taxi and Limousine Commission (the "TLC") auctioned the first 174 of 300 medallions that were scheduled for fiscal year 2004. The 174 medallions were corporate medallions. On April 23, 2004, the TLC auctioned the remaining 126 medallions, which were individual medallions. For fiscal 2005, the TLC auctioned a total of 300 medallions: 116 of the 300 medallions were individual medallions. 130 of 300 medallions were corporate (or mini-fleet medallions), 27 of the 300 medallions were earmarked for use with wheelchair accessible and 27 of the 300 medallions were set aside for vehicles powered by alternative fuels. 2005 marked the first time in New York City history that such designated taxicab medallions were sold. A number of both accessible and alternative fuel taxicab medallions were available at auction last spring, but there were no successful bidders. There are two types of medallions: corporate and individual owner-driver. A corporate medallion is issued for a taxi owned by a corporation that owns a minimum of two taxis and two corporate medallions (one corporate medallion per taxi), these taxis do not have to be personally driven by their owners. An individual owner-driver may not own more than one taxi and one medallion and by TLC regulation, must 4 be personally driven by their owners a minimum of 210 shifts per year. 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 "mini-fleet"). 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, provided as of July 2005, individual medallions are selling for approximately $333,000 and corporate medallions are selling for approximately $375,000. 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. 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, 2005, the total principal amount of outstanding taxi medallion loans in New York was $8,203,726. Elk receives 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. 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. Some loans have also been made to medallion owners who own medallions issued by the city of Cambridge, MA. 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 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 Boston sold 75 additional medallions at auction. Prices at this auction exceeded $140,000 per medallion. Boston auctioned another 75 medallions in September 1999 and 57 medallions in May of 2000. In 2001, the city of Boston sold an additional 20 medallions for handicap use, bringing the total of outstanding medallions to approximately 1,790. Market prices of Boston medallions are currently approximately $310,000. 5 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 liens on such 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, 2005, the total principal amount of our outstanding taxi loans in Boston was $2,843,964. 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. Approximately 2,200 medallions have been issued to date. Transfers of licenses are subject to prior approval by the PTRD and financing is authorized for purchased or refinance. For-Hire licenses were previously 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. In 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 two (2) to five (5) licenses. The number of license transfers has been generally increasing in recent years. Market prices have increased substantially since 1997. We estimate that the present market price of licenses/medallions in Metro-Dade County as of June 2005 is approximately $195,000 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 continue to open additional opportunities for taxi medallion financing in the Miami area. We have developed strategies to develop contacts and market our financing to potential purchases of medallions, and to those owners who may wish to refinance their medallions in the future. As of June 30, 2005, the total principal amount of our outstanding taxi loans in the Miami area was approximately $3,202,985. 6 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. 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, 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 $1,200,000 for its share of the loan. 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. At June 30, 2005, Elk's Commercial Loans totaled $13,354,062. ELK'S LOANS Elk's primary business has been to provide long-term business loans at commercially competitive interest rates (which at June 30, 2005, ranged from 4.0% to 14% 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 Small Business Investment Act of 1958 (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. SBA Regulations set a ceiling on the interest rates that an SBIC may charge its borrowers. Under the current SBA Regulations, the basic maximum rate of interest that an SBIC may charge is 19%. However, if either the weighted average cost of the SBIC's qualified borrowings, as determined pursuant to SBA 7 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, 2005 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 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 and $333,000 by July 2005, as reported by the TLC. Prices for corporate medallions fell from $257,000 per medallion in July, 2000, to $230,000 by September, 2002. As of May 2003, the corporate medallion price was back up to $259,000. According to the data provided by the TLC, as of July 2005, corporate medallions were selling for approximately $375,000 each. Interest rates in the New York City market for taxi loans have recently been at approximately 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. 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, 2005, 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 June 2005, medallions were selling in a range of between approximately $48,000 to $58,000 per medallion depending on financing and terms. Elk has made over $90,000,000 of loans to Chicago 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 $250,000 in Boston and from approximately $65,000 to $195,000 in Miami. As of June 30, 2005, $8,264,223, or 15.9%, of the aggregate principal amount of its outstanding loans of $52,060,254, represented loans made to finance the purchase or continued ownership of New York City taxi medallions and related assets; an aggregate of $23,881,163, or 45.9%, consisted of loans to finance the purchase or refinancing of taxi medallions in Chicago, and the balance of $19,914,868 or 38.2% consisted of loans to various commercial borrowers, of which $2,843,964, or 5.47%, was invested in Boston taxi medallion financing and $3,202,985 or 6.07%, 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 taxi market are currently ranging between 6% to 7%. Interest rates on Chicago taxi loans have ranged from 4% to 13.9% during this past year on new loans, depending upon the size of the loan, the repayment schedule, the balloon dates, 9 the loan-to-value ratio, and the credit history of the borrower. Rates have been 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 five (5) to fifteen (15) year terms and are generally self-amortizing. Interest rates on loans in the Boston market currently range from 5.75 to 7.5%, and in the Miami market currently range from 7.25 to 14% depending on the size of the loan and other factors. COMMERCIAL LOAN PORTFOLIO Ameritrans began making diversified Commercial Loans in May 2002. At June 30, 2005, Ameritrans' Commercial Loan portfolio consisted of three (3) loans totaling $513,857, of which two loans totaling $460,857 were to a debt collection and one (1) loan totaling $53,000 to another small business concern. 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, 2005, Elk's Commercial Loans totaled $13,354,062 or 25.9%, of Elk's total loan portfolio. On July 1, 2004, the Company had a beginning balance in its unrealized depreciation on loans receivable account of $509,770 and this balance decreased to $150,000 at June 30, 2005. During the fiscal year ended June 30, 2005, the Company had total write offs and depreciation on interest and loans receivable of $728,710, most of which was attributable to commercial loan losses and the Chicago taxi medallion foreclosures. At June 30, 2005, Elk's Commercial Loan portfolio consisted of 79 loans, of which, 18 loans totaling $741,633 were to dry-cleaning businesses, 22 loans totaling $4,187,498 were to laundromat businesses, and 39 loans totaling $8,424,931 were to a variety of other small businesses. Loans to dry cleaners and laundromats represented 36.88% of the aggregate principal amount of Elk's Commercial Loans outstanding at June 30, 2005. 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 ypically 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 4% to 14%. 10 LOAN PORTFOLIO; VALUATION
Number Interest Maturity Dates Balance Type of Loan of loans Rates (In Months) Outstanding - ---------------------------------------------- ------------- -------------- ----------------- ---------------- Chicago: Taxi Medallion 474 4 - 13.9% 1 - 175 23,881,163 New York City: Taxi Medallion 23 5 - 7.50% 4 - 30 $8,203,726 Radio car service 11 11 - 12% 2 - 18 60,497 Miami: Taxi Medallion 64 7.25 - 12% 1 - 84 3,202,985 Boston: Taxi Medallion 22 6.75 - 9% 1 - 36 2,843,964 38,192,335 Other loans: Laundromat 22 6 - 14% 1 - 111 4,187,498 Commercial construction 4 12.75-13.50% 6 - 11 1,638,701 Restaurant Food Service 12 9 - 12% 15 - 81 1,334,532 Broadcasting/Telecommunications 1 10.50% 180 810,000 Dry Cleaner 18 5.5 - 13% 1 - 72 741,633 Food Market 2 12.50% 34 - 108 645,432 Real Estate Holding 2 8.5 - 10.5% 49-56 623,333 Moving Company 1 12% 45 500,000 Oil Distributor 1 12% 80 496,571 Debt Collection 2 6 - 7% 72 - 84 460,857 Trucking Company 1 11% 105 450,000 Black Car Service (real property) 2 8.5% 13 449,598 Florist 1 7.25% 21 302,962 Taxicab Advertising 1 10% 41 285,668 Auto Sales 2 7 - 12% 19 241,578 Retirement home 1 14% 73 190,181 ATM Manufacturer & Distributor 1 12% 46 149,565 Taxicab Distributor 1 6% 24 118,755 Car Wash / Auto Center 1 9.25% 30 77,405 Miscellaneous 1 13.00% 12 53,000 Nail salon and spa 1 9% 52 45,947 Software Company 3 8% 20 - 42 41.307 Computer Services 1 9.5% 10 23,396 ------------- 13,867,919 Total loans receivable 52,060,254 Less unrealized depreciation on loans receivable (150,000) ------------- Loans receivable, net $ 51,910,254 =============
Loans made by Elk to finance the purchase or continued ownership of taxi medallions, taxis and related assets are typically secured by such medallions, taxis and related assets. Loans made by Ameritrans and Elk to finance the acquisition and/or operation of retail, service or manufacturing businesses are typically secured by real estate and other assets. In the case of loans to corporate owners, the loans are usually personally guaranteed by the stockholders of the borrower. Elk generally obtains first mortgages, but occasionally has participated in certain financings where it has obtained a second mortgage on collateral. Elk has obtained a relatively higher rate of interest in connection with these subordinated financings. Elk has not, to date, committed more than 5% of its assets to any one business concern in its portfolio. The interest rates charged by Elk on its currently outstanding loans range from 4% to 14% per annum. As of June 30, 2005, the annual weighted average interest rate on Elk's loans was approximately 9%. The average term of Elk's currently outstanding loans is approximately 46 months. 11 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 experienced losses of principal on its taxi lending operations. Recently in the last (3) fiscal years, Elk has experienced losses on its Chicago Taxi medallion loan portfolio. 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 selected loans. Following 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 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. Another 35 Chicago taxi medallions were resold by year ended June 30, 2003. During the year ended June 30, 2004, an additional 87 Chicago taxi medallions were resold and 40 taxi medallions were acquired by four of Elk's subsidiaries to lease to taxi drivers and operators of taxi medallions. During the year ended June 30, 2005, the Company contracted to sell 20 foreclosed Chicago taxi medallions and completed closings on 13 foreclosed Chicago taxi medallions. 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. At June 30, 2005 Elk had pending executed contracts with one (1) purchaser to purchase a total of twenty (20) Chicago medallions being foreclosed and five (5) being sold by one of Elk's subsidiaries, EAF Enterprises LLC, at a price of $57,500 per medallion. As part of the purchase contract, Elk agreed to finance the purchaser for the entire purchase price plus applicable transfer taxes for a period of 8 years with a balloon principal payment at the maturity date. During the first year of the loan, the interest rate is one percent (1%) per annum. Thereafter, beginning in the second year the interest rate increases to 1.5% above the prime rate of interest adjusted each time the prime rate changes. Twenty (20) of the medallions being sold were closed on August 31, 2005, the remaining five (5) medallions under contract are expected to close in the near future. The purchaser has also expressed interest in purchasing five (5) additional Chicago medallions on similar terms and conditions. As a result of the Company's efforts to resell most of its defaulted medallions during the fiscal year, the company increased its reserve on accrued interest receivable from $30,500 to $59,000. Although there were 37 remaining foreclosures as of June 30, 2005, the fair value of the collateral remained higher than the amount owed in nearly all cases and thus principal impairments, if any, will be 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, 2005, Elk maintained three lines of credit totaling $40,000,000 with an overall lending limit of $40,000,000. At June 30, 2005, Elk had $29,770,652 outstanding under these lines. The loans, which mature at various dates between October 31, 2005 and December 31, 2005, 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, 2005. 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, 2005. 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 and February 17, 2004, two new debentures payable to the SBA were drawn in the amount of $5,000,000 and $1,950,000, respectively. The interim interest rates assigned were 1.682% and 1.595%, respectively. The long term fixed rate of 4.12% was determined on the pooling date of March 24, 2004 for these two debentures. 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%, 5.498% and 4.99% before applicable amortization of points and fees. The draw down in February 2004 was the final draw from the $12,000,000 commitment. 12 As interest rates rise, our cost of funds increase while the rates on our outstanding loans to our borrowers primarily remains fixed, and our profitability therefore decreases. In order to partially contain this risk, from time to time we have purchased interest rate Swaps. While these limited our exposure to upward movement in interest rates on our bank loans, they initially increased 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. On July 29, 2005, Ameritrans commenced a private offering of Common Stock with warrants to "accredited investors," as that term is defined in Rule 501 of Regulation D promulgated under the 1933 Act. The shares of Common Stock are offered at a price of no less than book value as of the date of the offering. For every four (4) shares of Common Stock purchased, the Company will issue to the investor one (1) warrant, exercisable for five (5) years from the date of issuance, to purchase one (1) share of Common Stock of the Company at an exercise price no less than the purchase price and no more than 110% of the purchase price of the Shares. The Offering period will expire on October 27, 2005, unless extended in the sole discretion of the Company for up to an additional ninety (90) days. The Board of Directors and Management believe that raising additional capital pursuant to a private offering will allow the Company to expand its investment portfolio and diversify the Company's investments beyond the SBA-regulated loans and investments of Elk. This diversification will provide the Company with the flexibility to participate in a wide range of investment opportunities. 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. 13 BACKGROUND. SBICs were created under the 1958 Act as vehicles for providing equity capital, long-term loan funds and management assistance to small businesses. In general, the SBA considers a business to be "small," and therefore eligible to receive loans from an SBIC, only if (i) its net worth does not exceed $18,000,000 and if the average of its net annual income after taxes for the preceding two years was not more than $6,000,000 or (ii) it meets the size standard for the industry in which it is primarily engaged, pursuant to SBA Regulations. In addition, an SBIC is required to allocate a portion of its portfolio to the financing of concerns that (i) together with their affiliates do not have net worth in excess of $6 million and do not have an average net income after taxes for the preceding two years in excess of $2 million or (ii) meet the size standard for the industry in which they are primarily engaged. SBICs are licensed, regulated, and sometimes partially financed, by the SBA. BENEFITS. The principal benefits to Elk of being licensed as an SBIC are as follows: The SBA is authorized to guaranty full repayment of all principal and interest on debentures issued by an SBIC to the extent of 300% of the SBIC's "Leverageable Capital," as defined in the applicable SBA Regulations. However, the percentage of allowable leverage decreases if the SBIC's Leverageable Capital exceeds $15,000,000. The term of such debentures is typically 10 years. The SBA will guarantee such debentures only after such an SBIC has demonstrated a need for such debentures as evidenced by the SBIC's investment activity and its lack of sufficient funds available for investments; provided, however, that an SBIC that has invested at least 50% of its Leverageable Capital and outstanding leverage shall be presumed to lack sufficient funds available for investment. Generally, such debentures will bear interest at a fixed rate that is based on the rate which is set by the underwriters of the pooled debentures sold through SBIC Funding Corp. With respect to debentures guaranteed after July 1, 1991, the SBA's claim against an SBIC is subordinated, in the event of such SBIC's insolvency, only in favor of present and future indebtedness outstanding to lenders and only to the extent that the aggregate amount of such indebtedness does not exceed the lesser of 200% of such SBIC's paid-in capital and paid-in surplus (as adjusted pursuant to SBA Regulations), or $10,000,000. However, the SBA may agree to a subordination in favor of one or more loans from certain lenders, in its sole discretion. Pursuant to the SBA Agreement and the Intercreditor Agreement, the SBA agreed to a subordination in favor of Elk's banks; provided, however, that Elk is required to keep its overall debt to certain levels based upon the performance of its portfolio. COMPETITION Banks, credit unions, other finance companies, some of which are SBICs, and other private lenders compete with Elk in the origination of taxi medallion loans and commercial installment loans. Finance subsidiaries of equipment manufacturers also compete with Elk. Many of these competitors have greater resources than Elk and certain competitors are subject to less restrictive regulations than Elk. As a result, Elk expects to continue to encounter substantial competition from such lenders. Therefore, there can be no assurance that Elk will be able to identify and complete financing transactions that will permit it to compete successfully. EMPLOYEES As of June 30, 2005, we employed a total of ten (10) employees and one part time administrative clerk. 14 SBA Matter On August 29, 2005, the Company received a letter from the US Small Business Administration together with a copy of the Examination Report for the period ending March 31, 2004. The letter and Examination Report contained findings that Elk had potentially violated certain provisions of the SBA regulations, relating to (1) the sale of certain foreclosed Chicago medallions to an associate of Elk without obtaining the SBA's final written approval, and (2) the creation of subsidiary companies and completion of certain related financings to those subsidiary companies without obtaining the SBA's prior written approval. The letter contained certain other comments with respect to partial use of proceeds concerning one loan that the company made to a third party borrower, and the prepayment provision contained in loan documents to a different borrower. Management has already responded to SBA in writing concerning the findings, and Management recently met with the SBA in an effort to resolve these findings in a timely manner. The Company believes that it was acting in good faith when it effectuated the transactions with respect to the sale of the foreclosed Chicago medallions to an associate, as it had applied for prior permission from SBA prior to completion of the loan in questions, had obtained an indication of approval and SBA was in the process of taking the steps to obtain formal written approval for the transaction. The Company believes that it was also acting in good faith when it created the subsidiary companies (deemed "associates" under SBA regulations) to purchase the foreclosed medallions, as it was having ongoing discussions with the SBA at the time to obtain the SBA's approval of the transaction and had received verbal indications that it felt it had or would, in due course, subsequently obtain SBA's written approval to the transactions. The Company believes that it has adequate explanations for the use of proceeds issue the third party loan and the prepayment issue. The Company believes that the tone of the meeting with SBA to reach resolution the of issues on these matters was positive and the Company anticipates a speedy resolution by the SBA. Neither the Company nor its counsel, however can predict when these matters will be resolved, or the manner in which they will be resolved. The COmpany believes that the resolution of these matters with the BSA will not have any material adverse financial or regulatory consequences to the Company. 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. 15 (c) UNDERWRITING. Elk has not engaged, and does not intend to engage, in the business of underwriting the securities of other issuers. (d) CONCENTRATION OF INVESTMENTS. Elk may not concentrate 25% or more of its total assets in securities of issuers in any industry group except the taxi industry. Elk will make at least 25% of its investments for financing the purchase or continued ownership of taxi medallions, taxis and related assets. The balance of its investments includes, and Elk intends to continue to finance, the acquisition and/or operation of other small businesses. (e) REAL ESTATE. Elk has not engaged, and does not intend to engage, in the purchase and sale of real estate. However, Elk may elect to purchase and sell real estate in order to protect any of its prior investments which it considers at risk. (f) COMMODITIES CONTRACTS. Elk has not engaged, and does not intend to engage, in the purchase and sale of commodities or commodities contracts. (g) LOANS. Elk has made, and will continue to make, loans to Small Business Concerns in accordance with the provisions of the 1958 Act and the SBA Regulations. (h) WRITING OPTIONS. Elk has not engaged, and does not intend to engage, in the writing of options. (i) SHORT SALES. Elk has not engaged, and does not intend to engage, in short sales of securities. (j) PURCHASING SECURITIES ON MARGIN. Elk has not engaged, and does not intend to engage, in the purchase of securities on margin. (k) FUTURES CONTRACTS. Elk has not engaged, and does not intend to engage, in the purchase or sale of futures contracts. (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. 16 (q) INVESTMENT COMPANIES. Elk has not invested, and does not intend to invest, in the securities of other investment companies. (r) PORTFOLIO TURNOVER. Elk intends to make changes in its portfolio when, in the judgment of its Board of Directors, such changes will be in the best interest of our stockholders in light of the then existing business and financial conditions. We do not anticipate that Elk's loan portfolio will realize an annual turnover in excess of 50%, although there can be no assurance with respect thereto. AMERITRANS INVESTMENT POLICIES Ameritrans' only fundamental policies, that is, policies that cannot be changed without the approval of the holders of a majority of Ameritrans' outstanding voting securities, as defined under the 1940 Act, are the restrictions described below. A "majority of Ameritrans' outstanding voting securities" as defined under the 1940 Act means the lesser of (i) 67% of the shares represented at a meeting at which more than 50% of the outstanding shares are represented or (ii) more than 50% of the outstanding shares. The other policies and investment restrictions referred to in this Annual Report, including Ameritrans' investment objectives, are not fundamental policies of Ameritrans and may be changed by the Board of Directors of Ameritrans 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 temporary investments it makes with its funds will generally be Qualifying Assets. See "Regulations." (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 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 holds 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.However, see "SBA Audit" under Note 19 to the consolidated financial statements. 17 FEDERAL INCOME TAX CONSIDERATIONS The following discussion is a general summary of the federal income tax principles applicable to Ameritrans, based on the currently existing provisions of the Internal Revenue Code and the regulations thereunder. This summary does not purport to be a complete description of the tax considerations applicable to Ameritrans or to the holders of its Common Stock. These principles, in general, also apply to Elk, because the sole direct stockholder of Elk is Ameritrans. Ameritrans has elected to be treated as a "regulated investment company" (a "RIC") under Section 851 of the Internal Revenue Code, Elk has been treated as a RIC since 1984. A regulated investment company may deduct, for federal income tax purposes, most dividends paid to stockholders, thereby avoiding federal income taxation at the corporate level on stockholder dividends. In addition, because Elk currently qualifies for treatment as a RIC, Ameritrans anticipates that the dividends it receives from Elk will not be subject to corporate taxation at the level of Elk. TAXATION OF REGULATED INVESTMENT COMPANIES In order to qualify as a RIC for a given fiscal year, a company must meet each of the following conditions for that fiscal year: a) The company must be registered as an investment company under the 1940 Act at all times during the year. b) At least 90% of the company's gross income for the year must be derived from interest, gains on the sale or other disposition of stock or other securities, dividends and payment with respect to securities loans. c) Less than 30% of the company's gross income must be derived from the sale or other disposition of securities held for less than three months. d) At the close of each quarter, at least 50% of the value of the company's total assets must be represented by cash, cash items (including receivables), securities of other RICs and securities of other issuers, except that the investment in a single issuer of securities may not exceed 5% of the value of the RIC's assets, or 10% of the outstanding voting securities of the issuer. e) At the close of each quarter, and with the exception of government securities or securities of other RICs, no more than 25% of the value of a RIC's assets may be made up of investments in the securities of a single issuer or in the securities of two or more issuers controlled by the RIC and engaged in the same or a related trade or business. However, if a non-RIC entity controlled by the RIC subsequently sustains internally generated growth (as opposed to growth via acquisitions), the diversification requirement will not be violated even if the non-RIC subsidiary represents in excess of 25% of the RIC's assets. f) The company must distribute as dividends at least 90% of its investment company taxable income (as defined in Section 852 of the Internal Revenue Code), as well as 90% of the excess of its tax-exempt income over certain disallowed tax-exempt interest deductions. This treatment substantially eliminates the "double taxation" (i.e., taxation at both the corporate and stockholder levels) that generally results from the use of corporate investment vehicles. A RIC is, however, generally subject to federal income tax at regular corporate rates on undistributed investment company taxable income. In order to avoid the imposition of a non-deductible 4% excise tax on its undistributed income, a company is required, under Section 4982 of the Internal Revenue Code, to distribute within each calendar year at least 98% of its ordinary income for such calendar year and 98% of its capital gain net income (reduced by the RIC's net ordinary loss for the calendar year, but not below its net capital gain) for the one-year period ending on October 31 of such calendar year. The tax benefits available to a qualified RIC are prospective, commencing with the fiscal year in which all the conditions listed above are met, and would not permit Ameritrans to avoid income tax at the corporate level on income earned during prior taxable years. If Ameritrans fails to qualify as a RIC for a given fiscal year, Ameritrans will not be entitled to a federal income tax deduction for dividends distributed, and amounts distributed as stockholder dividends by Ameritrans will therefore be subject to federal income tax at both the corporate level and the individual level. Dividends distributed by Elk to Ameritrans will constitute ordinary income to Ameritrans to the extent derived from non-capital gain income of Elk, and will ordinarily constitute capital gain income to Ameritrans to the extent derived from capital gains of Elk. However, since Ameritrans is also a RIC, Ameritrans will, in general, not be subject to a corporate level tax on its income to the extent that it makes distributions to its stockholders. If Elk does not qualify as a RIC for any reason in any fiscal year, it will not be entitled to a federal income tax deduction for dividends distributed, and will instead be liable to pay corporate level tax on its earnings. Further, if Elk does not qualify as a RIC, such failure will cause Ameritrans to fail to qualify for RIC status as well, as long as Elk stock held by Ameritrans represents more than 25% of Ameritrans' assets. In such a case, Ameritrans will be taxed on dividends received from Elk, subject to the deduction for corporate dividends received, which is currently 70%. Thus, if Elk fails to qualify as a RIC for any reason, its earnings would be taxed at three levels: to Elk, in part to Ameritrans, and finally, when they are distributed by Ameritrans, to our stockholders. As long as Ameritrans qualifies as a RIC, dividends distributed by Ameritrans to its stockholders out of current or accumulated earnings and profits constitute ordinary income to such stockholders to the extent derived from ordinary income and short-term capital gains of Ameritrans (such as interest from loans by Ameritrans). Any long-term capital gain dividends distributed by Ameritrans would constitute capital gain income to Ameritrans stockholders. To the extent Ameritrans makes distributions in excess of current and accumulated earnings and profits, these distributions are treated first as a tax-free return of capital to the stockholder, reducing the tax basis of the stockholder's stock by the amount of such distribution, but not below zero, with distributions in excess of the stockholder's basis taxable as capital gains if the stock is held as a capital asset. TAXATION OF SBICS As a result of Elk's status as a licensed SBIC under the 1958 Act, Elk and its stockholders qualify for the following tax benefits: (i) Under Section 243 of the Internal Revenue Code, Elk may deduct 100% of the dividends received by it from domestic corporations in which it has made equity investments, regardless of whether such corporations are subsidiaries of Elk (in contrast to the generally applicable 70% deduction under the Code). 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. 18 STATE AND OTHER TAXES Ameritrans is also subject to state and local taxation. The state, local and foreign tax treatment may not conform to the federal tax treatment discussed above. Stockholders should consult with their own tax advisors with respect to the state and local tax considerations pertaining to Ameritrans. THE INVESTMENT COMPANY ACT OF 1940 Ameritrans and Elk are closed-end, non-diversified management investment companies that have elected to be treated as BDCs and, as such, are subject to regulation under the 1940 Act. The 1940 Act contains prohibitions and restrictions relating to transactions between investment companies and their affiliates, principal underwriters and affiliates of those affiliates or underwriters. In addition, the 1940 Act provides that a BDC may not change the nature of its business so as to cease to be, or to withdraw its election as, a BDC unless so authorized by the vote of a "majority of its outstanding voting securities," as defined under the 1940 Act. BDCs are permitted, under specified conditions, to issue multiple classes of indebtedness and one class of stock (collectively, "senior securities," as defined under the 1940 Act) senior to 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: 19 (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 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. 20 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, 2005, Elk's outstanding loans had a weighted average rate of interest of 9%. SBA Regulations also require that each loan originated by SBICs have a term of between one year and twenty years. The SBA restricts the ability of SBICs to repurchase their capital stock, to retire their subordinated SBA debentures and to lend money to their officers, directors and employees or invest in affiliates thereof. The SBA also prohibits, without prior SBA approval, a "change of control" or transfers which would result in any person (or group of persons acting in concert) owning 10% or more of any class of capital stock of an SBIC. A "change of control" is any event which would result in the transfer of the power, direct or indirect, to direct the management and policies of an SBIC, whether through ownership, contractual arrangements or otherwise. 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 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 (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, 2004, Elk paid the law firm approximately $2,200 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. In November 2003, the Board of Directors approved a new sublease with the law firm to take effect upon the expiration of the prior sublease, May 1, 2004, and to continue through April 20, 2014 and accounts for certain retroactive adjustments per the agreement. The Company is presently utilizing 37% of the landlord's space and therefore committed to the minimum 37% utilization factor on all rent, additional rent and electricity charges billed to landlord, and subject to annual increases as per the master lease agreement between the landlord and the law firm. In the event that more space is utilized, the percentage of the total rent shall be increased accordingly. In addition, the Company is also obligated to pay for its share of overhead expenses as noted in the agreement, currently a minimum of $3,000 a month, and to reimburse the law firm for certain office costs. 21 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 The Company is not currently a party to any material legal proceeding. From time to time, the Company is engaged in various legal proceedings incident to the ordinary course of its business. In the opinion of the Company's management and based upon the advice of legal counsel, there is no proceeding pending, or to the knowledge of management threatened, which in the event of an adverse decision would result in a material adverse effect on the Company's results of operations or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On June 27, 2005, the Company filed a definitive proxy statement soliciting proxies for and inviting all Shareholders of Ameritrans to a Special Meeting of Shareholders (the "Meeting") held on July 21, 2005. The purpose of the Meeting was (i) to consider the approval of a private offering of shares of the Company's Common Stock, at a fixed purchase price of no less than book value to a limited number of "accredited investors," as that term is defined in Rule 506 of Regulation D, promulgated under the 1933 Act (the "Offering"). For every four (4) shares of Common Stock purchased, the Company will issue to the investor one (1) warrant, exercisable for five (5) years from the date of issuance, to purchase one (1) share of Common Stock at an exercise price to be fixed at a specified dollar amount that is no less than the Purchase Price and no more than 110% of the Purchase Price; and (ii) to consider and act upon other matters as may properly come before the meeting or any adjournment thereof. At the Meeting on July 21, 2005, represented in person and by proxy were 1,479,698 shares of the Company's Common Stock and the Participating Preferred Stock, voting together, representing 63% of the outstanding voting securities of the Company. Being that a quorum was present, the meeting duly commenced and the Offering was approved by the Shareholders. A total of 1,413,658 of votes were cast for approval of the Offering, and 65,914 votes were cast against approval of the Offering. Additionally, 126 abstentions were recorded. No other business was brought before the meeting. 22 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Elk Common Stock was listed on the Nasdaq Capital 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 Market under the symbol AMTC. The following table shows the high and low sale prices per share of Common Stock as reported by Nasdaq, for each quarter in the fiscal years ended June 30, 2004 and June 30, 2005. No dividends were declared on our common stock. AMERITRANS HIGH LOW FISCAL 2004 1st Quarter 5.06 4.16 2nd Quarter 4.90 4.02 3rd Quarter 4.69 3.95 4th Quarter 5.70 4.01 FISCAL 2005 1st Quarter 5.25 4.06 2nd Quarter 5.90 4.36 3rd Quarter 7.00 4.26 4th Quarter 8.50 4.53 FISCAL 2006 6.67 4.36 1st Quarter (through September 19, 2005) The following table details information regarding the Company's existing equity compensation plans as of June 30,2005: Plan Category (a) (b) (c) Equity compensation 80,757(1) $5.05 194,243(1) plans approved by security holders Equity compensation plans not approved by -- -- -- security holders TOTALS 80,757(1) $5.05 194,243(1) (1) Includes options to purchase up to 33,800 shares of common stock granted to employees under the 1999 Employee Plan and optiosn to purchase up to 46,957 shares granted under the Non-Employee Director Plan, See "Stock Option Plans" (2) All of our compensation plans have been approved by our shareholders. 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, fiscal year 2004, and fiscal year 2005. 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 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 is exercisable for five (5) years commencing one (1) year after the date of the offering at an exercise price of $21.45 per unit. 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 20, 2005 on the Participating Preferred Stock for the period April 1, 2005 through June 30, 2005 payable on October 17, 2005 for all holders of the Participating Preferred Stock of record as of September 30, 2005. As of September 19, 2005, there were 174 holders of record of the Ameritrans Common Stock, and 4 holders of record of the Participating Preferred Stock and 3 holders of record Warrants, which is exclusive of securities held in street name. ITEM 6. SELECTED FINANCIAL DATA 29 The tables below contains certain summary historical financial information of Ameritrans. 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, 2005 2004 2003 2002 2001 ---- ---- ---- ---- ----- Investment income $ 6,132,066 $ 5,639,492 $ 6,285,055 $ 6,269,719 $ 6,439,792 ========================================================================= Interest expense 1,837,633 1,443,416 2,076,861 2,632,918 3,392,202 Other expenses 4,169,867 4,517,124 3,805,083 2,591,751 2,188,636 ------------------------------------------------------------------------- Total expenses 6,007,500 5,960,540 5,881,944 5,224,669 5,580,838 ========================================================================= Operating (loss) income 124,566 (321,048) 403,111 1,045,050 858,954 ========================================================================= Other (expense) income (4,081) (29,634) - 2,700 (276,549) Provision for income taxes (1) (7,711) (16,501) (7,897) (8,854) (7,896) ------------------------------------------------------------------------- Net (loss) income $ 112,774 $ (367,183) $ 395,214 $1,038,896 $ 574,509 ========================================================================= Dividends on preferred stock $ (337,500) $ (337,500) $ (337,500) $ (68,438) $ - ------------------------------------------------------------------------- Net (loss) income available to common shareholders $ (224,726) $ (704,683) $ 57,714 $ 970,458 $ 574,509 ========================================================================= Net (loss) income per common share $ (0.11) $ (0.35) $ 0.03 $ 0.54 $ 0.33 ========================================================================= Common stock dividends paid $ - $ - $ 552,312 $ 994,991 $ 528,045 ========================================================================= Common stock dividends paid per common share $ - $ - $ 0.27 $ 0.57 $ 0.30 ========================================================================= Weighted average number of shares of common stock outstanding 2,035,600 2,035,600 2,035,600 1,800,614 1,745,600 ========================================================================= Net change to accumulated other comprehensive income $ 146,608 $ (19,003) $ (200,338) $ (43,612) $ (123,364) ========================================================================= BALANCE SHEET DATA AT JUNE 30, 2005 2004 2003 2002 2001 ---- ---- ---- ---- ----- Loans receivable $ 52,060,254 $ 49,900,989 $ 55,306,678 $ 55,029,831 $ 54,559,970 Unrealized depreciation of loans receivable (150,000) (509,770) (303,170) (303,170) (318,500) ------------------------------------------------------------------------- Loans receivable, net $ 51,910,254 $ 49,391,219 $ 55,003,508 $ 54,726,661 $ 54,241,470 ========================================================================= Total assets $ 57,886,595 $ 57,091,906 $ 60,027,231 $ 58,943,546 $ 57,984,869 ========================================================================= Notes payable and demand notes $ 29,770,652 $ 28,908,652 $ 34,130,000 $ 33,720,000 $ 35,550,000 ========================================================================= Subordinated SBA debentures $ 12,000,000 $ 12,000,000 $ 9,200,000 $ 7,860,000 $ 8,880,000 ========================================================================= Total liabilities $ 42,716,254 $ 41,843,447 $ 44,055,086 $ 42,276,465 $ 45,177,743 ========================================================================= Total stockholders' equity $ 15,170,341 $ 15,248,459 $ 15,972,145 $ 16,667,081 $ 12,807,126 =========================================================================
(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. 26 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 In the preparation of the Company's financial statements in conformity with accounting principles generally accepted in the United States, management uses judgment in selecting policies and procedures and making estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes. Significant estimates that the Company makes include valuation of loans and equity investments, 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 the financial condition of the debtors and its ability to enforce provisions of its contracts in the event of disputes, through litigation if necessary. Although the Company believes that estimates and assumptions used in determining the recorded amounts of net assets and liabilities at June 30, 2005 are reasonable, actual results could differ materially from the estimated amounts recorded in the Company's financial statements. Our key critical accounting policies are those applicable to the valuation of loans receivable and other investments including medallions and contingencies from daily operations, as discussed below: Valuation of Loans Receivable. For loans receivables, fair value generally approximates cost less unrealized depreciation. Overall financial condition of the borrower, the adequacy of the collateral, individual credit risks, historical loss experience and other factors are criteria considered in quantifying the unrealized depreciation, if any, that might exist at the valuation date. 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 estimated fair value. For these non-quoted investments, the Company reviews 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 to its estimated fair value. Assets Acquired in Satisfaction of Loans. Assets acquired in satisfaction of loans are carried at the lower of the net value of the related foreclosed loan or the estimated fair value less cost of disposal. Losses incurred at the time of foreclosure are charged to the unrealized depreciation on loans receivable. Subsequent reductions in estimated net realizable value are charged to operations as losses on assets acquired in satisfaction of loans. Medallions. The Company obtained medallions through foreclosures of loans and the value of such medallions are carried at the lower of the net value of the related foreclosed loans or the fair market value of the medallions. The medallions are being treated as having indefinite lives, therefore, the assets are not being amortized. However, the Company periodically tests their carrying value for impairment. 27 Contingencies. The Company is subject to legal proceedings in the course of its daily operations from enforcement of its rights in disputes pursuant to the terms of various contractual arrangements. In this connection, the Company assesses the likelihood of any adverse judgment or outcome to these matters as well as a potential range of probable losses. A determination of the amount of reserve required, if any, for these contingencies is made after careful analysis of each individual issue. The required reserves may change in the future due to new developments in each matter or changes in approach, such as a change in settlement strategy in dealing with these matters. GENERAL Ameritrans acquired Elk on December 16, 1999. Elk is an SBIC that has been operating since 1980, making loans to (and, to a limited extent, investments in) small businesses, primarily businesses that are majority-owned by persons who qualify under SBA Regulations as socially or economically disadvantaged. Most of Elk's business has consisted of originating and servicing loans collateralized by New York City, Boston, Chicago and Miami taxi medallions, but Elk also makes loans to and investments in other diversified businesses and to persons who qualify under SBA Regulations as "non-disadvantaged." Historically, Elk's earnings derived primarily from net interest income, which is the difference between interest earned on interest-earning assets (consisting of business loans), and the interest paid on interest-bearing liabilities (consisting of indebtedness to Elk's banks and subordinated debentures issued to the SBA). Net interest income is a function of the net interest rate spread, which is the difference between the average yield earned on interest-earning assets and the average interest rate paid on interest-bearing liabilities, as well as the average balance of interest-earning assets as compared to interest-bearing liabilities. Unrealized depreciation on loans and investments is recorded when Elk adjusts the value of a loan to reflect management's estimate of the fair value, as approved by the Board of Directors. See Note 1 of "Notes to Consolidated Financial Statements." RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2005 AND 2004 TOTAL INVESTMENT INCOME The Company's investment income increased $492,574 or 8.73% to $6,132,066 as compared with the prior year ended June 30, 2004. This increase is the result of an increase in the net gain on the sale of securities of $683,209 as well as increases in other fees of $141,039 and leasing income of $92,113 generated by the leasing activities of Elk's subsidiaries, offset by a decrease in interest income of $423,787 due to the impact of lower average interest rates charged on new and modified loans. OPERATING EXPENSES Interest expense for the year ended June 30, 2005 increased $394,217 or 27% to $1,837,633 when compared to the year ended June 30, 2004. This reflects the impact of higher interest charged on outstanding bank borrowing as well as higher outstanding bank notes payable when compared with the prior year. Salaries and employee benefits increased $105,999 or 10% when compared with the prior year. This increase reflects the increases that were put in effect from the recently amended officer's employment agreements. Occupancy costs decreased $18,613 or 9%, when compared with the year ended June 30, 2005 due to the first full year under the amended sublease and shared office expense terms. Professional fees increased $70,231 or 12% when compared with the prior year. This increase reflects the additional legal fees incurred relating to the foreclosures of the Chicago medallion loans as well as fees related to significant new loans issued. Miscellaneous administrative expenses decreased $87,978 or 8% when compared with the prior year. Loss and impairments on both medallions under lease and assets acquired increased by $153,815 due to additional write-downs of related assets to estimated fair value. Foreclosure expenses decreased $275,176 or 76% and write off and depreciation of interest and loans receivable decreased $295,535 or 29% when compared with the year prior. Total write off and depreciation on interest and loans receivable was $728,710, net of an increase in unrealized depreciation of interest of $28,500 offset by a decrease of unrealized depreciation on loans receivable of $359,770. 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 $87,695 for the year ended June 30, 2005. This expense primarily consisted of back taxes, interest and 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 (Loss) Net income increased from a loss of $367,183 for the year ended June 30, 2004 as compared to net income of $112,774 for the year ended June 30, 2005. The increase in the net income for the year ended June 30, 2005 was attributable primarily to the net gain on the sale of securities of $688,874. Dividends of Participating Preferred Stock for each of the years ended June 30, 2005 and 2004 amounted to $337,500, respectively. RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2004 AND 2003 Total Investment Income The Company's investment income decreased $645,563 or 10% to $5,639,492 as compared with the prior year ended June 30, 2003. This decrease was mainly due to the impact of lower average interest rates charged on new and modified loans as well as lower outstanding loans receivable, offset by an increase in other fees of $108,879 and leasing income of $119,527 generated by the leasing activities that commenced during the 2004 fiscal year from Elk's subsidiary entities EAF Enterprises LLC, Medallion Auto Management LLC, EAF Leasing II LLC and EAF Leasing III LLC. Operating Expenses Interest expense for the year ended June 30, 2004 decreased $633,445 or 31% to $1,443,416 when compared to the year ended June 30, 2003. This reflects the impact of lower interest charged on outstanding bank borrowing as well as lower outstanding bank notes payable when compared with the prior year, combined with interest savings due to the refinancing of certain SBA debentures at lower rates during the year. These interest savings were 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 $143,890 or 16% when compared with the prior year. This increase reflects the increases that were put in effect from the recently amended officer's employment agreements and from recent additional administrative employees hired. Occupancy costs increased $62,800 or 44%, when compared with the year ended June 30, 2003, primarily due to the rental of additional office and storage space which started in July 2003. Professional fees increased $30,146 or 5% when compared with the prior year. This increase reflects the additional legal fees incurred relating to the foreclosures of the Chicago medallion loans. Miscellaneous administrative expenses increased $287,260 or 30% when compared with the prior year. This increase relates primarily to increases in commissions, insurance and depreciation. Foreclosure expenses increased $49,193 or 16% and write off and depreciation of interest and loans receivable increased $171,733 or 20% when compared with the year prior. Both of these increases relate primarily to the foreclosures of the Chicago medallion loans. 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 and the increase in unrealized depreciation on loans receivable due to the some delinquencies in the diversified portfolio. Total write off and depreciation on interest and loans receivable was $1,024,245, net of a decrease in unrealized depreciation of interest of $660,500 offset by an increase of unrealized depreciation on loans receivable of $206,600. 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 $362,871 for the year ended June 30, 2004. This expense primarily consisted of back taxes, interest and 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 (LOSS) Net income decreased from $395,214 for the year ended June 30, 2003 as compared to a net loss of $367,183 for the year ended June 30, 2004. The decrease in the net income for the year ended June 30, 2004 was attributable primarily to a decrease in loan activity, the write down of the Chicago loan portfolio and related foreclosure expenses, as well as increases in salaries, occupancy costs, professional fees and miscellaneous administrative expenses, which were only partially offset by favorable interest rates obtained from debt refinancing. Dividends of Participating Preferred Stock for each of the years ended June 30, 2004 and 2003 amounted to $337,500, respectively. BALANCE SHEET AND RESERVES Total assets increased by $794,689 as of June 30, 2005 when compared to total assets as of June 30, 2004. This increase was due to higher outstanding loans receivable partially offset by decreases in medallions owned, and property improvements, assets acquired in satisfaction of loan, and equity securities. During January 2002, the Company and the SBA entered into an agreement where by the SBA committed to reserve debentures in the amount of $12,000,000 to be issued by the Company prior to September 30, 2006. In February 2004, Elk made the final draw down from this commitment pool. During the year ended June 30, 2004, Elk utilized the net proceeds received from the SBA debenture draw downs to pay down on its short-term bank borrowings, as well as fund new loans and increase equity investments. 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. 29 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 $51.9 million and interest rate sensitive liabilities were approximately $41.8 million at June 30, 2005. Having interest-bearing liabilities that mature or reprice more frequently on average than assets may be beneficial in times of declining interest rates, although such an asset/liability structure may result in declining net earnings during periods of rising interest rates. Abrupt increases in market rates of interest may have an adverse impact on our earnings until we are able to originate new loans at the higher prevailing interest rates. Conversely, having interest-earning assets that mature or reprice more frequently on the average than liabilities may be beneficial in times of rising interest rates, although this asset/liability structure may result in declining net earnings during periods of falling interest rates. This mismatch between maturities and interest rate sensitivities of our interest-earning assets and interest-bearing liabilities results in interest rate risk. The effect of changes in interest rates is mitigated by regular turnover of the portfolio. Based on past experience, Ameritrans anticipates that approximately 20% of the portfolio will mature or be prepaid each year. Ameritrans believes that the average life of its loan portfolio varies to some extent as a function of changes in interest rates. Borrowers are more likely to exercise prepayment rights in a decreasing interest rate environment because the interest rate payable on the borrower's loan is high relative to prevailing interest rates. Conversely, borrowers are less likely to prepay in a rising interest rate environment. INTEREST RATE SWAP AGREEMENTS Ameritrans manages the exposure of 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 June 11, 2001, Elk entered into an 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 which expired 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 provided for a fixed rate of 4.95% and 3.56%, respectively for the Company and if the floating one-month LIBOR rate fell 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. As of June 30, 2005, no swaps were in effect. 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. 30 INVESTMENT CONSIDERATIONS The Company is affected by the steady increases in the prime rate of interest due to the federal reserve increase in interest rates due to a corresponding increase in interest rates by the banks. During the past sixteen (16) months ended September 27, 2005, interest rates have increased by approximately 2.7% or 275 basis points. The dollar amount of the Company's adjustable rate loans receivable is approximately $8,625,000, with the remainder being fixed rate loans. Interest rate fluctuations may adversely affect the interest rate spread we receive on our taxicab medallion and commercial loans. Because we borrow money to finance the origination of loans, our income is dependent upon the differences between the rate at which we borrow funds and the rate at which we loan funds. While the loans in our portfolio in most cases bear interest at fixed-rates or adjustable-rates, we finance a substantial portion of such loans by incurring indebtedness with floating interest rates. As short-term interest rates rise, our interest costs increase, decreasing the net interest rate spread we receive and thereby adversely affect our profitability. Although we intend to continue to manage our interest rate risk through asset and liability management, including the use of interest rate Swaps, general rises in interest rates will tend to reduce our interest rate spread in the short term. In addition, we rely on our counterparties to perform their obligations under such interest rate Swaps. A decrease in prevailing interest rates may lead to more loan prepayments, which could adversely affect our business. A borrower is likely to exercise prepayment rights at a time when the interest rate payable on the borrower's loan is high relative to prevailing interest rates. In a lower interest rate environment, we will have difficulty re-lending prepaid funds at comparable rates, which may reduce the net interest spread we receive. Our commercial loan activity has increased in recent years. Lending to small businesses involves a high degree of business and financial risk, which can result in substantial losses and should be considered speculative. Our borrower base consists primarily of small business owners that have limited resources and that are generally unable to achieve financing from traditional sources. There is generally no publicly available information about these small business owners, and we must rely on the diligence of our employees and agents to obtain information in connection with our credit decisions. In addition, these small businesses often do not have audited financial statements. Some smaller businesses have narrower product lines and market shares than their competition. Therefore, they may be more vulnerable to customer preferences, market conditions, or economic downturns, which may adversely affect the return on, or the recovery of, our investment in these businesses. LIQUIDITY AND CAPITAL RESOURCES The Company has funded its operations through private and public placements of its securities, bank financing, the issuance to the SBA of its subordinated debentures and internally generated funds. On April 24, 2002, Ameritrans completed a public offering of 300,000 units, consisting of one share of Common Stock, one share of 9 3/8% cumulative participating redeemable Preferred Stock, face value $12.00, and one redeemable Warrant exercisable into one share of Common Stock. The gross proceeds from the sale were $5,700,000 less offering expenses of approximately $1,704,399. A portion of the proceeds was used temporarily to reduce banks and SBA indebtedness. Ameritrans also used part of the proceeds to start its own loan portfolio. On July 29, 2005 Ameritrans commenced a private offering of Common Stock with warrants to "accredited investors," as that term is defined in Rule 501 of Regulation D promulgated under the 1933 Act. The shares of Common Stock are offered at a price no less than book value. For every four (4) shares of Common Stock purchased, the Company will issue to the investor one (1) warrant, exercisable for five (5) years from the date of issuance, to purchase one (1) share of Common Stock of the Company at an exercise price equal to no more than 110% of the purchase price of the Shares. The Offering period will expire on October 27, 2005, unless extended in the sole discretion of the Company for up to an additional ninety (90) days. This private offering was approved by the requisite vote of shareholders on July 21, 2005. At June 30, 2005, 71% of Elk's indebtedness was represented by indebtedness to its banks and 29% by the debentures issued to the SBA with fixed rates of interest plus user fees which results in rates ranging from 4.99% to 5.54%. Elk currently may borrow up to $40,000,000 under its existing lines of credit, subject to the limitations imposed by its borrowing base agreement with its banks and the SBA, the statutory and regulatory limitations imposed by the SBA and the availability of funds. In addition, during January 2002, the Company and the SBA entered into an agreement whereby the SBA committed to reserve debentures in the amount of $12,000,000 to be issued to the Company on or prior to September 30, 2006. In July and December 2002, new debenture payable to the SBA were drawn from the reserved pool of $12,000,000 in the amount of $2,050,000 and $3,000,000, respectively. The interim interest rates assigned were 2.351 % and 1.927%, respectively. The fixed rates of 4.67% and 4.628% were determined on the pooling dates of September 25, 2002 and March 26, 2003, respectively. On September 15, 2003 and February 17, 2004, two new debentures payable to the SBA were drawn in the amount of $5,000,000 and $1,950,000, respectively. The interim interest rates assigned were 1.682% and 1.595%, respectively. The long term fixed rate of 4.12% was determined on the pooling date of March 24, 2004 for these two debentures. 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%, 5.498% and 4.99% before applicable amortization of points and fees. The draw down in February 2004 was the final draw from the $12,000,000 commitment. Contractual obligations expire or mature at various dates through March 1, 2014. The following table shows all contractual obligations at June 30, 2005.
Payments due by period ---------------------------------------------------------------------------------------------- More than Less than 1 yea 1 - 2 years 2 - 3 years 3 - 4 years 4 - 5 years 5 years Total --------------- -------------- ------------ ------------ ----------- ---------- --------------- Floating rate borrowings $29,770,652 $ - $ - $ - $ - $ - $ 29,770,652 Fixed rate borrowings -- -- -- -- -- 12,000,000 12,000,000 Operating lease obligations 180,661 182,105 183,599 186,055 192,202 713,340 1,638,052 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total $29,951,313 $ 182,105 $ 183,599 $ 186,055 $ 192,202 $12,713,430 $43,408,704 =========== =========== =========== =========== =========== =========== ===========
Our sources of liquidity are credit lines with banks, long-term SBA debentures that are issued to or guaranteed by the SBA, loan amortization and prepayment. As a RIC, we distribute at least 90% of our investment company taxable income. Consequently, we primarily rely upon external sources of funds to finance growth. Loan amortization and prepayments also provide a source of funding for Elk. Prepayments on loans are influenced significantly by general interest rates, economic conditions and competition. 31 Like Elk, Ameritrans will distribute at least 90% of its investment company taxable income and, accordingly, we will continue to rely upon external sources of funds to finance growth. In order to provide the funds necessary for our expansion strategy, we expect to raise additional capital and to incur, from time to time, additional bank indebtedness and (if deemed necessary by management) to obtain SBA loans. There can be no assurances that such additional financing will be available on acceptable terms. NEW ACCOUNTING STANDARDS In December 2004, the Financial Accounting Standards Board ("FASB") issued the SFAS No. 123(R), "Share-Based Payment" ("SFAS 123(R)"), which replaced SFAS No. 123, "Accounting for Stock-Based Compensation," and superseded APB Opinion 25, "Accounting for Stock Issued to Employees." SFAS 123(R) requires that all share-based payments to employees be recognized in the financial statements based on their fair values on the date of grant. The Company currently uses the intrinsic value method to measure compensation expense for stock-based awards. On April 14, 2005, the SEC amended the compliance dates for SFAS 123(R), which extended the Company's required adoption date of SFAS 123(R) to its fiscal third quarter. Its fiscal year ended June 30, 2006. The Company is evaluating the requirements of SFAS 123(R) and expects that its adoption will not have a material impact on its financial position or results of operations and earnings per share. Also in December 2004, the FASB issued Statement No. 153, "Exchanges of Nonmonetary Assets," ("SFAS No. 153") which addresses the measurement of exchanges of No monetary assets and eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets and replaces it with an exception for exchanges that do not have commercial substance. SFAS No. 153 is effective for nononetary asset exchanges occurring in fiscal periods beginning after June 15, 2005, with earlier application permitted. The adoption of SFAS No. 153 will have no impact on the Company's results of operations or its financial position. In June 2005, the FASB issued Statement No. 154, "Accounting Changes and Error Corrections," ("SFAS No. 154") which changes the requirements for accounting for and reporting of a change in accounting principle. SFAS No. 154 requires retrospective application to prior periods' financial statements of a voluntary change in accounting principle unless it is impracticable. SFAS No. 154 also requires that a change in method of depreciation, amortization, or depletion for long-lived, non-financial assets be accounted for as a change in accounting estimate that is effected by a change in accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made a fiscal years beginning after December 15, 2005, but does not change the transition provisions of any existing accounting pronouncements, including those that are in a transition phase as of the effective date of the Statement. The adoption of SFAS No. 154 will not have a material effect on results of operations or the Company's financial position. 32 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's business activities contain elements of risk. The Company considers the principal types of risk to be fluctuations in interest rates and portfolio valuations. The Company considers the management of risk essential to conducting its businesses. Accordingly, the Company's risk management systems and procedures are designed to identify and analyze the Company's risks, to set appropriate policies and limits and to continually monitor these risks and limits by means of reliable administrative and information systems and other policies and programs. The Company values its portfolio at fair value as determined in good faith by the Company's Board of Directors in accordance with the Company's valuation policy. Unlike certain lending institutions, the Company is not permitted to establish reserves for loan losses. Instead, the Company must value each individual investment and portfolio loan on a quarterly basis. The Company records unrealized depreciation on investments and loans when it believes that an asset has been impaired and full collection is unlikely. Without a readily ascertainable market value, the estimated value of the Company's portfolio of investments and loans may differ significantly from the values that would be placed on the portfolio if there existed a ready market for the investments. The Company adjusts the valuation of the portfolio quarterly to reflect the Board of Directors' estimate of the current fair value of each component of the portfolio. Any changes in estimated fair value are recorded in the Company's statement of operations as net unrealized appreciation (depreciation) on investments. In addition, the illiquidity of our loan portfolio and investments may adversely affect our ability to dispose of loans at times when it may be advantageous for us to liquidate such portfolio or investments. Also, if we were required to liquidate some or all of the investments in the portfolio, the proceeds of such liquidation may be significantly less than the current value of such investments. Because we borrow money to make loans and investments, our net operating income is dependent upon the difference between the rate at which we borrow funds and the rate at which we loan and invest these funds. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our interest income. As interest rates rise, our interest costs increase, decreasing the net interest rate spread we receive and thereby adversely affect our profitability. Although we intend to continue to manage our interest rate risk through asset and liability management, including the use of interest rate swaps, general rises in interest rates will tend to reduce our interest rate spread in the short term. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this item is submitted in the response found under Item 15(a)(1) in this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES During the two most recent fiscal years through June 30, 2005, the Company has had no reportable events (as defined in Item 304(a)(2) of Regulation S-K). ITEM 9A. CONTROLS AND PROCEDURES The Company maintains disclosure controls and procedures as defined under the Securities Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed in our periodic reports filed pursuant to the rules promulgated under the Exchange Act are recorded,processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management including our Chief Executive Officer (also acting as Chief Financial Officer), to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management including our Chief Executive Officer (also acting as Chief Financial Officer), of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on that evaluation, the Company concluded that as of the end of the period covered by this report our disclosure controls and procedures are effective in timely communicating the material information required to be included in our periodic SEC filings. 33 There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the period covered by this report that materially affected, or is reasonably likely to materially affect,the Company's internal control over financial reporting. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The Board of Directors and executive officers of Ameritrans and Elk are identical. The following table sets forth certain information concerning our directors and executive officers: NAME POSITION ---- Gary C. Granoff(1) President, CEO, CFO and Chairman of Board of Directors Ellen M. Walker(1) Executive Vice President and Director Lee A. Forlenza(1) Senior Vice President and Director Steven Etra(1) Vice President and Director Silvia M. Mullens(1) Vice President Margaret Chance(1) Vice President and Secretary Paul Creditor Director Allen Kaplan Director John R. Laird Director Howard F. Sommer Director Wesley Finch Director (1) As a BDC under the 1940 Act, a majority of the directors of both Ameritrans and Elk are required to be individuals who are not "interested persons" of the company. Gary C. Granoff, Ellen M. Walker, Lee A. Forlenza, Steven Etra, Margaret Chance and Silvia M. Mullens are each "interested persons" with respect to both Ameritrans and Elk, as such term is defined in the 1940 Act. Gary C. Granoff, age 57, has been President and a director of Ameritrans since its formation and of Elk since its formation in July 1979 and Chairman of the Board of Directors since December 1995. Mr. Granoff has been a practicing attorney for the past 31 years and is presently an officer and stockholder in the law firm of Granoff, Walker & Forlenza, P.C. Mr. Granoff is a member of the bar of the State of New York and the State of Florida and is admitted to the United States District Court of the Southern District of New York. Mr. Granoff is also President and a stockholder of GCG Associates, Inc. ("GCG"), Elk's former investment adviser. He has served as President and the sole stockholder of Seacrest Associates, Inc., a hotel operator, since August 1994. Mr. Granoff has also been a director of Titanium Holdings Group, Inc., formerly known as Enviro-Clean of America, Inc. from September 1999 through May 2003. In February 1998, Mr. Granoff was elected to and served as a trustee on the Board of Trustees of The George Washington University for a term which expired on June 30, 2003. In June 2005, Mr. Granoff was re-elected to and currently serves as, a trustee on the Board of Trustees of The George Washington University for a term which expires in June 2009. Mr. Granoff also serves as a Trustee of the Parker Jewish Institute for Healthcare and Rehabilitation. Mr. Granoff holds a Bachelor of Business Administration degree in Accounting and a Juris Doctor degree (with honors) from The George Washington University. 34 Ellen M. Walker, age 50, has been a Vice President, and a director of Ameritrans since its formation and a Vice President and General Counsel of Elk since July 1983. In August 2000, Ms. Walker was elected to be the Executive Vice President of the Company. She was a director of Elk from July 1983 to August 1994, and has been a director of Elk since 1995. Ms. Walker has been a practicing attorney for more than twenty-five years and she is presently an officer and stockholder in the law firm of Granoff, Walker & Forlenza, P.C. Ms. Walker is a member of the Bar of the State of New York and she is admitted to the United States District Court of the Southern District of New York. Since August 1983 Ms. Walker has been Vice President of GCG. Ms. Walker has been a director, Vice President and General Counsel of Gemini since June 1996. Ms. Walker received a Bachelor of Arts degree from Queens College and obtained her Juris Doctor degree with honors from Brooklyn Law School. Lee A. Forlenza, age 48, has been a Vice President and a director of Ameritrans since its formation, a Vice President of Elk since March 1992, and a director of Elk since January 1995. In August 2000, Mr. Forlenza was elected to be Senior Vice President of the Company. Mr. Forlenza has been a practicing attorney since February 1983 and is presently an officer and stockholder in the law firm of Granoff, Walker & Forlenza, P.C. Since March 1992 Mr. Forlenza has been an investment analyst for GCG. Mr. Forlenza has also been Vice President, Secretary and a director of Gemini since June 1996. Mr. Forlenza was Vice President of True Type Printing, Inc. from 1976-1995 and has been President since May 1995. From 1983 through 1986 Mr. Forlenza was an attorney with the SBA. Mr. Forlenza graduated Phi Beta Kappa from New York University and obtained his Juris Doctor degree from Fordham University School of Law. Steven Etra, age 56, has been a Vice President and a director of Ameritrans since its inception, a Vice President of Elk since January 1999, and a director of Elk since November 1995. Mr. Etra has been Sales Manager since 1975 of Manufacturers Corrugated Box Company, a company owned by Mr. Etra's family for more than seventy-five years. Mr. Etra has also been a director of Gemini since June 1996. Mr. Etra has also been a director of Titanium Holdings Group, Inc., formerly known as Enviro- Clean of America, Inc. since March 1999. Mr. Etra has extensive business experience in investing in emerging companies. Paul Creditor, age 69, has been a director of Ameritrans since its inception and a director of Elk since November 1995. Mr. Creditor has been a practicing attorney since 1961, engaging in the general practice of law and specializing in corporate law. From 1974 through 1979 he served as an elected Judge in Suffolk County, New York. He also served as counsel to the New York State Constitutional Convention and various state agencies and commissions. Allen Kaplan, age 55, has been a director of Ameritrans since its inception and a director of Elk since November 1995. Mr. Kaplan has been since November 1986, Vice President and Chief Operating Officer of Team Systems, Inc., a company which manages and operates more than 200 New York City medallion taxis. Mr. Kaplan is currently Vice President of the Metropolitan Taxicab Board of Trade, a trade association consisting of 22 member fleets representing 1,200 New York City medallions. John R. Laird, age 63, has been a director of Ameritrans and of Elk since January 1999. Mr. Laird has been a private investor since 1994, when he retired from Shearson Lehman Brothers Inc. ("Shearson"). Mr. Laird served as President and Chief Executive Officer of the Shearson Lehman Brothers Division of Shearson and as a member of the Shearson Executive Committee from 1992 to 1994. Mr. Laird was also Chairman and Chief Executive Officer of The Boston Company, a subsidiary of Shearson, from 1990 until its sale by Shearson in 1993. From 1977 to 1989 Mr. Laird was employed by American Express in various capacities including Senior Vice President and Treasurer. Mr. Laird received a B.S. in finance and an M.B.A. from Syracuse University and attended the Advanced Management Program at Harvard Business School. Howard F. Sommer, age 65, has been a director of Ameritrans and of Elk since January 1999. Mr. Sommer is currently Chief Administrative Officer and Chief Financial Officer of SellJewelry, Inc., a nationally-based buyer of pre-owned jewelry. Mr. Sommer was President and Chief Executive Officer of New York Community Investment Company L.L.C., an equity investment fund providing long-term capital to small businesses throughout the State of New York, from 1995 to 2005. Mr. Sommer was President of Fundex Capital Corporation from 1978 to 1995, President of U.S. Capital Corporation from 1973 to 1995, worked in management consulting from 1971 to 1973 and held various positions at IBM and Xerox Corporations from 1962 to 1971. Mr. Sommer was also a member of the board for the National Association of Small Business Investment Companies, serving on its executive committee from 1989 to 1993 and as Chairman of the Board in 1994. He received a B.S. in electrical engineering from City College of New York and attended the Graduate School of Business at New York University. 36 Wesley Finch, age 58, was elected to the Board of Directors September 2002. Mr. Finch is the principal of The Finch Group, a real estate development and management company, specializing in the management, restructuring and revitalization of affordable, subsidized and assisted housing. Over the last 20 years, The Finch Group has developed, or advised government entities, on more than $1.5 billion of low-income housing. During 1992-1993, Mr. Finch served as a member of President Clinton's transition team at the U.S. Department of Housing and Urban Development. Previously, Mr. Finch served as Finance Chairman for U.S. Senator John F. Kerry's 1984 campaign, and as the Chairman of Senator Kerry's successful 1990 and 1996 campaigns. In addition, during 1987-1988, Mr. Finch was the National Coordinating Chairman of the Democratic Senatorial Campaign Committee, a legal extension of the U.S. Senate. Mr. Finch earned his bachelors degree in accounting from the Bernard M. Baruch School of the City College of New York, and is a non-practicing certified public accountant (CPA). Silvia Maria Mullens, age 54, has been a Vice President of Ameritrans since its inception, a Vice President of Elk since 1996, and the Loan Administrator of Elk since February 1994. Prior to joining Elk, she was the Legal Coordinator for Castle Oil Corporation from September 1991 through June 1993 and from June 1993 through January 1994, a legal assistant specializing in foreclosures in the law firm of Greenberg & Posner. Ms. Mullens received a B.A. from Fordham University and an M.B.A. from The Leonard Stern School of Business Administration of New York University. Margaret Chance, age 51, has been Secretary of Ameritrans since its inception and Secretary of Elk and involved in loan administration since November 1980. In August 2000, Ms. Chance was elected to be a Vice President of the Company. Ms. Chance is the office manager of Granoff, Walker & Forlenza, P.C. and has served as the Secretary of GCG, since January 1982. Ms. Chance holds a paralegal certificate. Our directors are actively involved in the oversight of our affairs, including financial and operational issues, credit and loan policies, asset valuation, and strategic direction. No officer or director of Ameritrans has been involved in any legal proceeding requiring disclosure under Item 401 of Regulation S-K. COMPLIANCE WITH SECTION 16(A) OF THE 1934 ACT Section 16(a) of the Securities Exchange Act of 1934 (the "1934 Act") requires the Company's officers and directors, and persons who own more than ten percent (10%) of the Company's Common Stock, to file initial reports of beneficial ownership and changes in beneficial ownership with the SEC and to furnish the Company with copies of all reports filed. Based solely on a review of the forms furnished to the Company, or written representations from certain reporting persons, Ameritrans believes that while as of June 30, 2005, all changes in beneficial ownership have been disclosed to the SEC as required by Section 16(a) of the 1934 Act, certain Reporting Persons failed to timely disclose changes in beneficial ownership with the SEC. 37 Ellen Walker, Lee Forlenza, Steven Etra, Margaret Chance, Silvia Mullens, Gary Granoff, Paul Creditor, Allen Kaplan, John Laird, and Howard Sommer each submitted one (1) late Form 4 to report one (1) transaction that was not reported on a timely basis. The Directors and Officers named above unintentionally failed to disclose their change in beneficial ownership on SEC Form 4 within the required two business days. The above failures to timely disclose the changes in beneficial ownership were mistakes made in good faith. The Company, however, has disclosed timely the transactions on all Company filings made pursuant to the 1934 Act and other federal securities laws. COMMITTEES OF THE AMERITRANS BOARD Ameritrans has a standing Audit Committee, a standing 1999 Employee Plan Committee and a Compensation Committee. The Audit Committee is presently comprised of Paul Creditor, John Laird and Howard Sommer. The function of the Audit Committee is to review our internal accounting control procedures, review our consolidated financial statements and review with the independent public accountants the results of their audit. The Audit Committee held four (4) meetings during fiscal year 2005. The Audit Committee's financial expert is John Laird. The members of the Audit Committee have adopted a formal written charter which they will review and assess the adequacy of on an annual basis. The Audit Committee Charter is filed as an exhibit to this Annual Report. The Charter and any changes or updates thereto will also be posted on the Company's internet website at http://www.ameritranscapital.com. The 1999 Employee Plan Committee administers our 1999 Employee Plan. The committee is comprised of Allen Kaplan and John Laird. See "Stock Option Plans" below. The Compensation Committee reviews the Company's employment and compensation agreements with its employees. The committee is comprised of Allen Kaplan and John Laird. The Board of Directors held 3 formal meetings during fiscal 2005. All of the Company's directors attended each of the meetings of the Board and one director missed one (1) meeting. Coe of Ethics of the Company Information regarding the Company's code of Ethics, as amended is set forth in Item 13. The Code of Ethics, as amended, is included as Exhibit 14.1 to this filing. 38 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth all remuneration for services rendered to the Company to (i) each of the executive officers and (ii) all executive officers as a group during the fiscal year ended June 30, 2004. No non-employee director received compensation in excess of $60,000 during that period. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION -------------------------------- ANNUAL COMPENSATION SECURITIES ------------------------------- UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR Base Salary BONUS OPTIONS COMPENSATION ($)(1) ($) (#)(2) ($)(3) - ----------------------------------------- ---- ------------ ---------- -------------- ---------------- Gary C. Granoff 2005 321,500 (4) 15,000 -- 32,625 President, Chief Executive Officer, 2004 296,500 (4) 15,000 -- 34,238 Chief Financial Officer and Director 2003 255,000 (4) 15,750 -- 28,763 Ellen M. Walker 2005 127,447 -- 5,000 19,628 Vice President and Director 2004 119,801 -- -- 17,846 2003 117,832 -- -- 17,675 Lee A. Forlenza 2005 79,300 10,000 4,375 13,395 Senior Vice President and Director 2004 77,075 10,000 -- 12,938 2003 53,560 7,500 -- 9,159 Steven Etra 2005 78,000 -- 11,700 Vice President and Director 2004 68,000 10,000 4,375 8,775 2003 60,000 -- -- -- Silvia Mullens 2005 106,180 20,000 3,350 18,927 Vice President 2004 103,688 7,500 -- 16,451 2003 100,782 10,000 -- 16,443 Margaret Chance 2005 83,520 15,000 3,350 14,768 Vice President and Secretary 2004 84,680 13,375 -- 14,336 2003 81,193 15,000 -- 14,202
(1) Officers' salaries constitute a major portion of Elk's total "management fee compensation," which must be approved by the SBA. The SBA has approved total officer and employee compensation of Elk in the amounts paid to date and for the projected amounts for the fiscal year ending June 30, 2005. This amount includes officers' salaries, other salaries, employee benefits, insurance, and expenses. (2) Grants of stock options received during the fiscal year. (3) Amounts received under Simplified Employee Pension Plan. (4) Does not include $35,000 of reimbursable expenses. Compensation of Directors Ameritrans and Elk have a policy of paying their directors who are not employees fees for each meeting attended. Since September 24, 2004, Eligible Directors have been paid a fee of $1,000 for each meeting attended. Prior to September 24, 2004, Eligible Directors were paid $750 for each meeting attended. Since July 1, 1996, non-employee directors have been paid annual fees of $2,000 per year in addition to the fees paid for each meeting attended. As of September 24, 2004, Ameritrans began paying the Audit Committee a fee for each committee meeting attended. Regular members of the Audit Committee are paid $1,000 for each meeting, and the head of the Audit Committee receives $1,250 for each meeting. Fees and expenses paid to non-affiliated directors were, in the aggregate, $29,750 for the year ended June 30, 2002, $36,250 for the year ended June 30, 2003, $32,500 for the year ended June 30, 2004, and 31,250 for the year ended June 30, 2005. 39 The following table sets forth information regarding individual stock option grants made during the last completed fiscal year to each executive officer of the Company.
Percentage of Potential Value at Number of total option assumed annual rates of Securities granted to stock price appreciation underlying employees in Exercise Expiration for option term (2) Name the option fiscal year Price(1) Date _________________________________________________________________________________________________ 5% 10% Ellen M. Walker 5,000 14.7% $4.50 October 29, 2009 $23,625 $24,750 Lee A. Forlenza 4,375 12.9% $4.50 October 29, 2009 $20,672 $21,656 Steven Etra 4,375 12.9% $4.50 October 29, 2009 $20,672 $21,656 Margaret Chance 3,350 10% $4.50 October 29, 2009 $15,829 $16,583 Silvia Mullens 3,350 10% $4.50 October 29, 2009 $15,829 $16,583 Gary Granoff 13,350 39.5% $4.95 October 29, 2009 $63,079 $66,083
(1) The exercise of these options is equal to the closing price of Company's Stock on the date of grant, as reported by the NASDAQ Capital Market (2) The dollar amount under these columns are the results of calculations at the 5% and 10% rates set by the Commission and, therefore, are not intended to forecast possible future appreciations, if any, in the price of the underlying Common Stock. No gain to the optionees is possible without an increase in price of the underlying Common Stock which will benefit all stockholders proportionately. REPORT OF THE BOARD OF DIRECTORS AS TO COMPENSATION MATTERS The objectives of Ameritrans' executive compensation program are to establish compensation levels designed to enable Ameritrans to attract, retain and reward executive officers who contribute to the long-term success of Ameritrans so as to enhance stockholder value. The Board of Directors makes decisions each year regarding executive compensation, including annual base salaries and bonus awards, and the 1999 Employee Plan Committee, consisting of non-interested directors, will make decisions each year regarding stock option grants. Option grants are key components of the executive compensation program and are intended to provide executives with an equity interest in Ameritrans so as to link a meaningful portion of the compensation of Ameritrans' executives with the performance of Ameritrans' Common Stock. COMPENSATION PHILOSOPHY Ameritrans' executive compensation philosophy is based on the belief that competitive compensation is essential to attract, motivate and retain highly qualified and industrious employees. Ameritrans' policy is to provide total compensation that is competitive for comparable work and comparable corporate performance. The compensation program includes both motivational and retention-related compensation components. Bonuses may be included to encourage effective performance relative to current plans and objectives. Stock options are included to help retain productive people and to more closely align their interest with those of stockholders. 40 In executing its compensation policy, Ameritrans seeks to relate compensation with Ameritrans' financial performance and business objectives, reward high levels of individual performance and tie a significant portion of total executive compensation to both the annual and long-term performance of Ameritrans. While compensation survey data are useful guides for comparative purposes, Ameritrans believes that a successful compensation program also requires the application of judgment and subjective determinations of individual performance, and to that extent the Board of Directors applies judgment in reconciling the program's objectives with the realities of retaining valued employees. EXECUTIVE COMPENSATION PROGRAM Annual compensation for Ameritrans' executives consists of two principal elements: cash compensation, consisting of salaries, bonuses and contributions from the Simplified Employee Pension Plan, and stock options. CASH COMPENSATION In setting the annual base salaries made pursuant to the terms of the employment agreements for Ameritrans' executives, the Compensation Committee reviews the aggregate salary and bonus compensation for individuals in comparable positions with other companies, including competitors of Ameritrans, and adjusts such amounts to reflect individual performance. Many of these companies are specialty finance companies. Ameritrans also regularly compares the salary levels of its executive officers with other leading companies. Bonuses are based on a review and evaluation of the performance of the activity for which the executive has responsibility, the impact of that activity on Ameritrans and the skills and experience required for the job, coupled with a comparison of these elements with similar elements for other executives both inside and outside Ameritrans. EMPLOYMENT AGREEMENTS We have entered into employment agreements with six of our employees. We are required to disclose the terms of the agreements for five of those individuals: Gary Granoff. We entered into an amended and restated employment agreement with Gary Granoff dated December 31, 2002, for a term of five (5) years commencing July 1, 2003, which replaces the employment agreement by and between the Company and Mr. Granoff dated July 1, 2001. The agreement automatically renews for a five (5) year term, unless either party gives notice of non-renewal as provided therein. The agreement provides that Mr. Granoff be paid an annual salary of which presently is $321,500 for fiscal year ending June 30, 2005, which increases each year the agreement is in effect. The agreement also provides that Mr. Granoff be paid a yearly bonus, based on his and Ameritrans' performance, an amount of which is determined by the Board of Directors but which may not be less than $15,000 per year for the first five (5) years of the employment agreement. If renewed, any bonus will be given solely in the Board's discretion. The agreement also provides for compensation to Mr. Granoff if he is terminated prior to the expiration of his employment term, the amount of which varies depending upon the nature of his termination. If, for instance, Mr. Granoff is terminated without cause (as defined in the agreement) he is entitled to a lump-sum payment in an amount equal to (i) his salary, as in effect at the time of termination, through the date of termination and an amount equal to his salary multiplied by the number of years remaining under the agreement, and (ii) an amount equal to all of the consulting fees payable under the terms of Mr. Granoff's consulting agreement with Ameritrans, as discussed below. The employment agreement also provides for confidentiality and for non-competition, and non-solicitation during the term of the agreement and for one (1) year thereafter. 41 In conjunction with the employment agreement we also entered into an amended and restated consulting agreement with Mr. Granoff, which replaces the consulting agreement by and between the Company and Mr. Granoff dated as of July 1, 2001. The consulting agreement does not become effective and does not commence unless and until the employment agreement is terminated due to (i) Mr. Granoff's voluntary resignation from the Company or (ii) a notice of non-renewal of the employment agreement from either the Company or the Consultant. Upon the effectiveness of the consulting agreement Mr. Granoff shall be paid as a consultant at a rate equal to 1/2 the monthly salary in effect at the time the employment agreement is terminated plus any bonus received, if any, for that employment year and other benefits. The agreement also provides for confidentiality and non-competition for the term of the agreement, and non-solicitation during the term of the agreement and for one (1) year thereafter. Ellen Walker. We entered into an employment agreement with Ellen Walker for a term of five (5) years dated as of October 1, 2001. The agreement automatically renews for another five (5) year term unless either party terminates prior to renewal. The agreement provides that Ms. Walker is paid an annual salary, which presently is $128,685 for the twelve months ending September 30, 2005, and increases each year the agreement is in effect. The agreement also provides that Ms. Walker will be paid a yearly bonus, at the discretion of Ameritrans, based on her and the Company's performance. The agreement provides for compensation to Ms. Walker if she is terminated prior to the expiration of her employment term, the exact amount of which varies depending upon the nature of the termination. If, for instance, Ms. Walker terminates the employment agreement for good reason (as defined in the agreement) she is entitled to a lump-sum payment equal to the sum of her salary, as in effect at the time of termination, and an amount equal to her salary multiplied by the number of years remaining under the agreement or two-and-one half years, whichever is greater. The agreement also provides for confidentiality and for non-competition and non-solicitation during the term of the agreement and for one (1) year thereafter. Silvia M. Mullens. The agreement with Ms. Mullens is for a term of five years dated as of January 1, 2002. The agreement automatically renews for another five-year term unless either party terminates prior to renewal. The agreement provides that Ms. Mullens will be paid an annual salary which presently is $106,180 for calendar year 2005, which increases five percent (5%) each year the agreement is in effect. In fiscal year ended June 30, 2005 Ms. Walker received a payment in the gross amount of $3,569 for compensation due her not paid in the fiscal year due to an error. The agreement also provides that Ms. Mullens will be paid a yearly bonus, at the discretion of Ameritrans, based on her and the Company's performance. Ms. Mullens was paid a bones of $20,000 during the fiscal year ended June 30, 2005. The agreement provides for compensation to Ms. Mullens if she is terminated prior to the expiration of her employment term, the exact amount of which varies depending upon the nature of the termination. If, for instance, Ms. Mullens terminates the employment agreement for good reason (as defined in the agreement), she is entitled to a lump-sum payment equal to the sum of her salary, as in effect at the time of termination, and an amount equal to her salary multiplied by the number of years remaining under the agreement or two-and-one-half (2 1/2) years, whichever is greater. The agreement also provides for confidentiality and for non-competition and non-solicitation during the term of the agreement and for one year thereafter. Lee Forlenza. We entered into an amended and restated employment agreement with Lee Forlenza dated December 31, 2002, for a five (5) year term commencing as of July 1, 2003, which replaces the employment agreement by and between the Company and Mr. Forlenza dated October 1, 2001. The agreement automatically renews for a five (5) year term, unless either party gives notice of non-renewal prior to the expiration of the initial term. The agreement provides that Mr. Forlenza is paid an annual salary which presently is $79,300 for the fiscal year ended June 30, 2005, and increases each year the agreement is in effect. The agreement also provides that Mr. Forlenza will be paid a yearly bonus based on his and the Company's performance, an amount of which is determined by the Board of Directors but which may not be less than $10,000 for the first five (5) years of the employment agreement, and an initial bonus of $7,500. If the employment agreement is renewed, any bonus after the initial term will be paid solely in the discretion of the Board. The agreement provides for compensation to Mr. Forlenza if he is terminated prior to the expiration of his employment term, the exact amount of which varies depending upon the nature of the termination. If Mr. Forlenza terminates the employment agreement for good reason (as defined in the agreement, he is entitled to a lump-sum payment equal to the sum of his salary, as in effect at the time of termination, and an amount equal to his salary multiplied by the number of years remaining under the agreement or two-and-one half years, whichever is greater. The agreement also provides for confidentiality and for non-competition, and for non-solicitation during the term of the agreement and for one (1) year thereafter. 42 Margaret Chance. The agreement with Ms. Chance is for a term of five (5) years dated as of January 1, 2002. The agreement automatically renews for another five-year term unless either party terminates prior to renewal. The agreement provides that Ms. Chance is paid an annual salary which presently is $83,520 for calendar year 2005 which increases four percent (4%) each year the agreement is in effect. The agreement also provides that Ms. Chance will be paid a yearly bonus, at the discretion of Ameritrans but which shall not be less than $8,500 per year, based on her and the Company's performance. Ms. Chance was paid a bonus of $15,000 during the fiscal year ended June 30, 2005. The agreement provides for compensation to Ms. Chance if she is terminated prior to the expiration of her employment term, the exact amount of which varies depending upon the nature of the termination. If, for instance, Ms. Chance terminates the employment agreement for good reason (as defined in the agreement), she is entitled to a lump-sum payment equal to the sum of her salary, as in effect at the time of termination, and an amount equal to her salary multiplied by the number of years remaining under the agreement or two-and-one-half (2 1/2) years, whichever is greater. The agreement also provides for confidentiality and for non-competition and non-solicitation during the term of the agreement and for one year thereafter. STOCK OPTION PLANS The descriptions of the 1999 Employee Plan and the Director Plan set forth below are qualified in their entirety by reference to the text of the plans. 1999 EMPLOYEE PLAN An employee stock option plan (the "1999 Employee Plan") was adopted by the Ameritrans Board of Directors, including a majority of the non-interested directors, and approved by a stockholder vote, in order to link the personal interests of key employees to our long-term financial success and the growth of stockholder value. An amendment to the 1999 Employee Plan was approved by the shareholders in January, 2002. The amendment increased the number of shares reserved under the plan from 125,000 to 200,000 shares. The 1999 Employee Plan authorizes the grant of incentive stock options within the meaning of Section 422 of the Internal Revenue Code for the purchase of an aggregate of 200,000 shares (subject to adjustment for stock splits and similar capital changes) of common stock to our employees. By adopting the 1999 Employee Plan, the Board believes that we will be better able to attract, motivate and retain as employees people upon whose judgment and special skills our success in large measure depends. On October 29 2004, options to purchase an aggregate of 20,450 shares of Common Stock exercisable at $4.50 per share were granted to certain officers of Ameritrans as set forth in Item 12 below. On the same date, Gary Granoff was granted options to purchase 13,350 shares of Common Stock exercisable at $4.95 per share. All of these options expire On October 29, 2009. On May 27, 2005, options to purchase an aggregate of 70,000 shares of Common Stock exercisable at $8.88 per share were cancelled pursuant to a unanimous written consent of the Board and consent of each option holder. Accordingly, as of June 30, 2005, options to purchase an aggregate of 33,800 shares of Common Stock were outstanding, and 166,200 shares of Common Stock are available for future awards under the 1999 Employee Plan. 43 The 1999 Employee Plan is administered by the 1999 Employee Plan Committee of the Board of Directors, which is comprised solely of non-employee directors (who are "outside directors" within the meaning of Section 152(m) of the Internal Revenue Code and "disinterested persons" within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934 (the "1934 Act")). The committee can make such rules and regulations and establish such procedures for the administration of the 1999 Employee Plan as it deems appropriate. NON-EMPLOYEE DIRECTOR PLAN A stock option plan for non-employee directors (the "Director Plan") was adopted by the Ameritrans Board of Directors and approved by a stockholder vote, in order to link the personal interests of non-employee directors to our long-term financial success and the growth of stockholder value. The Director Plan is substantially identical to, and the successor to, a non-employee director stock option plan adopted by the Board of Directors of Elk and approved by its stockholders in September 1998 (the "Elk Director Plan"). Ameritrans and Elk submitted an application for, and received on August 31, 1999, an exemptive order relating to these plans from the SEC. The Director Plan was amended by the Board of Directors on November 14, 2001 and approved by the shareholders at the Annual Meeting on January 18, 2002. The amendment is still subject to the approval of the Securities and Exchange Commission. The amendment (i) increases the number of shares reserved under the plan from 75,000 to 125,000 and (ii) authorizes the automatic grant of an option to purchase up to 1,000 shares at the market value at the date of grant to each eligible director who is re-elected to the Board of Directors. The Director Plan provides for the automatic grant of options to directors who are not employees, officers or interested persons of the Company (an "Eligible Director") who are elected and serve one year on the Board of Directors. By adopting the Director Plan, the Board believes that the Company will be better able to attract motivate and retain as directors people upon whose judgment and special skills our success in large measure depends. The goal, policy and purpose of the Director Plan is to attract, motivate and retain as directors, individuals upon whose judgment and special skills the Company's success depends. As such, the Director Plan, in an effort to retain these individuals serving on the Board, allows for automatic grants of new options under the Plan upon expiration of the initial five (5) year term. Upon expiration of these options, and with approval of the Board, new options may be automatically granted to the Directors, with an exercise price equal to the last sales price as of the close of business on date of expiration. The total number of shares for which options may be granted from time to time under the Director Plan is 75,000 shares, which will be increased to 125,000 shares upon SEC approval of the Amended Director Plan. As of June 30, 2005, options to purchase an aggregate of 46,957 shares were outstanding. On August 31, 2004, options to purchase an aggregate of 11,112 shares of common stock, exercisable at $9.00 per share expired. Pursuant to the automatic grant provisions of the Director Plan, on the same date the options expired, options to purchase an aggregate of 20,040 shares of Common Stock exercisable at $4.99 per share were granted. On January 12, 2005 options to purchase an aggregate of 11,112 shares of Common Stock, exercisable at $6.25 per share were granted to purchase an aggregate of 16,000 shares of Common Stock exercisable at $6.25 per share were granted pursuant to the automatic grant provisions of the Director Plan. The Director Plan is administered by a committee of directors who are not eligible to participate in the Director Plan. 44 SIMPLIFIED EMPLOYEE PENSION PLAN In 1996, Elk adopted a simplified employee pension plan covering, at present, all eligible employees of the Company. Contributions to the plan are at the discretion of the Board of Directors. During the fiscal year ended June 30, 2005 contributions amounted to $127,376. GARY C. GRANOFF'S FISCAL 2004 COMPENSATION The Board of Directors has set Gary C. Granoff's total annual compensation at a level it believes to be competitive with the chief executive officers of similarly capitalized specialty finance companies. Gary C. Granoff, in his capacity as Chief Executive Officer, is eligible to participate in the same executive compensation program available to Ameritrans' other senior executives. STOCK PERFORMANCE GRAPH Although Ameritrans' Common Stock is listed on the Nasdaq Market trading in Ameritrans' Common Stock has been extremely limited, making it difficult to meaningfully compare the performance of Ameritrans' Common Stock to that of other similar companies or a broad market index. Therefore, Ameritrans has not included a stock performance graph. 45 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of September 20, 2005, there were 2,035,600 shares of the Company's Common Stock, $.0001 par value, and 300,000 shares of Participating Preferred Stock outstanding. The following table sets forth certain information as to (i) those persons who, to our knowledge, owned 5% or more of our outstanding common stock as of September 19, 2005, (ii) each of our directors and (iii) all of our officers anddirectors as a group. Except as set forth below, the address of each personlisted below is the address of Ameritrans.
NUMBER OF NUMBER OF PERCENTAGE OF SHARES OF PERCENTAGE OF SHARES OF OUTSTANDING PARTICIPATING OUTSTANDING COMMON STOCK COMMON STOCK PREFERRED PREFERRED NAME OWNED OWNED STOCK OWNED STOCK OWNED - ------------------------------ ------------------- ----------------- ------------------ -------------- *Gary C. Granoff 339,975(1) 16.70% 7,038(a) 2.34% *Ellen M. Walker 42,374(2) 2.08% ** ** *Lee A. Forlenza 43,523(3) 2.14% 1,000 ** *Steven Etra 124,681(4) 6.13% ** ** Paul Creditor 12,020(5) ** ** ** Allen Kaplan 15,020(6) ** ** ** John R. Laird 8,100(7) ** ** ** Howard F. Sommer 8,000(8) ** ** ** Wesley Finch 40,788(9) 2.00% 10,000 3.33% Dan M. Granoff 164,579(10) 8.08% ** ** Paul D. Granoff 143,179(11) 7.03% ** ** c/o Rush-Copley Medical Center 1900 Ogden Avenue Aurora, IL 60504 Infinity Capital Partners, L.P. 202,200 9.90% ** ** 767 Third Avenue, 16th Floor New York, New York 10017 *Margaret Chance 7,240(12) ** 220(b) ** *Silvia Mullens 3,350(13) ** ** ** Mitchell Partners L.P. 188,585 9.26% 12,000 4.00% 3187-D Airway Avenue Costa Mesa, CA 92626 All Officers and Directors, as 645,071 31.68% 18,258 6.09% a group (11 persons)***
* Gary C. Granoff, Ellen M. Walker, Lee A. Forlenza, Steven Etra, Margaret Chance, and Silvia Mullens are each "interested persons" with respect to Ameritrans and Elk, as such term is defined in the 1940 Act. ** Less than 1%. 46 (1) Includes (i) 155,180 ("Shares") owned directly by Mr. Granoff; (ii) 3,300 Public Warrants (iii) 16,900 Shares owned by the Granoff Family Foundation, a charitable foundation for which Mr. Granoff and his mother and brother are trustees; (iv) 261 Shares held by GCG Associates Inc., a corporation controlled by Mr. Granoff; (v) 78,584 Shares and 500 Public Warrants owned by DAPARY Management Corp., a corporation controlled by Mr. Granoff; (vi) 12,000 Shares and 1,000 Warrants owned by J & H Associates Ltd. Pts., a partnership whose general partner is GCG Associates Inc., a corporation controlled by Mr. Granoff; (vii) 57,100 Shares, and 1800 Warrants held by Mr. Granoff in various IRA or pension accounts, and (viii) 13,350 Shares issuable upon exercise of five-year options issued under the 1999 Employee Plan. Excludes (A) 12,937 Shares, and 1,000 Public Warrants owned directly by Leslie Granoff, Mr. Granoff's wife, of which Shares he disclaims beneficial ownership; and (B) 47,855 Shares held by JR Realty Corp., a company owned in part and controlled in part by Mr. Granoff's wife, where Mr. Granoff serves as Treasurer. a. Includes (i) 500 shares of Participating Preferred Stock, owned by DAPARY Management Corp., a corporation controlled by Mr. Granoff; (ii) 1,000 shares of Participating Preferred Stock owned by J & H Associates Ltd. Pts., a partnership whose general partner is GCG Associates Inc., a corporation controlled by Mr. Granoff; (iii) 5,538 shares of Participating Preferred Stock held by Mr. Granoff in various IRA or pension accounts. Excludes 1,000 shares of Participating Preferred Stock directly owned by Leslie Granoff, Mr. Granoff's wife, of which Shares he disclaims beneficial ownership. (2) Includes (i) 200 Shares held by Ms. Walker as custodian for her son, Paul; (ii) 22,800 Shares held by various trusts of which Ms. Walker is a trustee and as to which she disclaims beneficial ownership (Gary C. Granoff retains a reversionary interest in 21,000 of such Shares), and (iii) 5,000 Shares issuable upon the exercise of ten-year options issued under the 1999 Employee Plan (3) Includes (i) 35,218 Shares held directly by Mr. Forlenza, (ii) 3,230 Shares held for the benefit of Mr. Forlenza's IRA, (iii) 700 Public Warrants, and (iv) 4,375 Shares issuable upon the exercise of five-year options issued under the 1999 Employee Plan. (4) Includes (i) 8,294 Shares held directly by Mr. Etra; (ii) 29,022 Shares owned jointly by Mr. Etra and his wife; (iii) 27,000 Shares held by Mr. Etra's wife; (iv) 35,990 Shares held by Fiserv Securities Inc. for the benefit of Mr. Etra's IRA; (v) 10,000 Shares held by SRK Associates LLC, a limited liability company controlled by Mr. Etra, (vi) 10,000 Shares held by Lance's Property Development Corp. Pension Plan, of which Mr. Etra is a trustee; and (vii) 4,375 Shares issuable upon the exercise of five-year options issued under the 1999 Employee Plan. (5) Includes 10,020 Shares issuable upon the exercise of five-year options issued under the Non-Employee Director Plan (the "Director Plan"). (6) Includes 10,020 Shares issuable upon exercise of five-year options issued under the Director Plan. (7) Includes 100 Shares owned directly by Mr. Laird and 8,000 Shares issuable upon exercise of five-year options issued under the Director Plan. (8) Includes 8,000 Shares issuable upon exercise of five-year options issued under the Director Plan. (9) Includes (i) 19,871 Shares owned directly by Mr. Finch; (ii) 10,917 Shares issuable upon exercise of five-year options issued under the Director Plan, and (iii) 10,000 Public Warrants. Excludes (A) 6,000 Shares owned directly by Mr. Finch's wife as to which he disclaims beneficial ownership and (B) 26,300 Shares held by the Tudor Trust, a grantor trust, of which Mr. Finch is the grantor, Mr. Finch's wife and their two children are the beneficiaries, and Mr. Finch's wife is one of the two trustees. Mr. Finch disclaims beneficial ownership of the trust's 26,300 Shares. 47 (10) Includes (i) 143,179 Shares owned by Dr. Dan Granoff directly; (ii) 16,900 Shares owned by the Granoff Family Foundation, a charitable foundation, of which Jeannette Granoff, Gary C. Granoff, and Dr. Dan M. Granoff are the trustees; and (iii) 4,000 Shares held in an IRA Rollover Account for the benefit of Dr. Granoff. (11) Includes 40,049 Shares held by Dr. Paul Granoff directly, 77,630 held by Granoff Family Partners Ltd., of which Dr. Granoff is a general partner, and 25,500 Shares held by the Granoff Pediatric Associates Profit Sharing Plan. Excludes 14,127 Shares held by Suzanne Granoff, Dr. Granoff's wife, of which Shares he disclaims beneficial ownership. (12) Includes (i) 1,200 Shares owned directly by Ms. Chance, (ii) 200 Shares held by Ms. Chance as custodian for her daughter, Alexis Chance; (iii) 50 Shares held directly by her daughter, Alexis Chance; (iv) 2,220 Shares held by Ms. Chance in various IRA or pension accounts, (v) 220 Public Warrants and (vi) 3,350 Shares issuable upon the exercise of five-year options issued under the 1999 Employee Plan. (13) Includes 3,350 Shares issuable upon the exercise of five-year options issued under the 1999 Employee Plan. (b) Participating Preferred Stock held in a pension account. Except pursuant to applicable community property laws or as described above, each person listed in the table above has sole voting and investment power, and is both the owner of record and the beneficial owner of his or her respective Shares. The following table details information regarding the Company's existing equity compensation plans as of June 30, 2005: ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Elk pays legal fees, on a fixed or hourly basis, for loan closing services relating to loans other than New York taxi and radio car loan closings to Granoff, Walker & Forlenza, P.C. ("GWF") whose stockholders are officers and directors of Elk and Ameritrans. Such services related to New York taxi and radio car loans are provided by the officers and employees of Elk. Elk paid GWF approximately $115,000 in fees during the fiscal year ended June 30, 2005. Elk generally charges its borrowers loan origination fees to generate income to offset the legal fees paid by Elk for loan closing services. We also rent office space from GWF and share certain office expenses with that firm. In November 2003, the Board of Directors approved a new sublease with the law firm to take effect upon the expiration of the prior sublease, May 1, 2004, and to continue through April 20, 2014 and accounts for certain retroactive adjustments per the agreement. The Company is presently utilizing 37% of the landlord's space and therefore committed to the minimum 37% utilization factor on all rent, additional rent and electricity charges billed to landlord, and subject to annual increases as per the master lease agreement between the landlord and the law firm. In the event that more space is utilized, the percentage of the total rent shall be increased accordingly. In addition, the Company is also obligated to pay for its share of overhead expenses as noted in the agreement, currently a minimum of $3,000 a month. For the fiscal year ended June 30, 2005, we paid $84,226 in rent, $36,000 in shared overhead expense, and $20,664 of other reimbursable shared overhead expense. 48 During the fiscal year ended June 30, 1998, GWF exercised an option in its lease, at our request, and rented an additional 1,800 square feet of office space contiguous with our offices at a below market rent (the "Additional Space"). 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. The terms for the Additional Space are included in the new sublease with the law firm approved by the Board of Directors in November 2003 to take effect upon the expiration of the prior sublease, May 1, 2004, and to continue through April 20, 2014. Until we require the Additional Space, the law firm sublets the Additional Space to outside tenants under short-term arrangements. In the event all or a portion of the Additional Space is vacant, Elk's Board of Directors has agreed to reimburse the law firm for the additional rent due. During the year ended 2005, No additional amount was paid in connection with this agreement. 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. Rent expense under the lease amounted to $47,576 for the year ended June 30, 2005. CONFLICTS OF INTEREST POLICIES AND CODE OF ETHICS The Boards of Directors of Ameritrans and Elk have adopted policies governing potential conflicts of interest between the companies and their directors and officers. Together, these policies comprise our "Code of Ethics" as required under the 1940 Act. On July 5, 2005, the Board adopted an amended Code of Ethics, which is included as Exhibit 14.1 to his filing. These policies generally provide that no officer, director or employee of the respective company will make any loan which might be deemed to be appropriate for that company, unless and until such transaction is first approved by a majority of the directors of that company who are not "interested persons" of that company within the meaning of the 1940 Act and who have no financial or other material interest in the transaction. A loan would not be deemed to be appropriate for Elk if in any manner such loan (or investment) would in any way violate SBA Regulations in effect at the time of making such loan or investment. In reviewing any such transaction, the directors will examine, among other factors, whether the transaction would deprive the company of an opportunity or whether it would otherwise conflict with our best interests and those of our stockholders. A complete record of any such review and the results of the review will be maintained by the respective company as part of its permanent records. The Code of Ethics and any changes or updates thereto will also be posted on the Company's internet website at the internet address: http://www.ameritranscapital.com. Copies of the code may be obtained free of charge from the Company's website at the above internet address. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Ameritrans Certificate of Incorporation limits the liability of our directors for monetary damages arising from a breach of their fiduciary duty as directors, except to the extent otherwise required by the Delaware General Corporation Law. This limitation of liability does not affect the availability of equitable remedies such as injunctive relief or rescission. The Ameritrans by-laws provide that Ameritrans shall indemnify its officers and directors to the fullest extent permitted by Delaware law, including in circumstances in which indemnification is otherwise discretionary under Delaware law. We have entered into indemnification agreements with our officers and directors containing provisions that may require Ameritrans, among other things, to indemnify its officers and directors against certain liabilities that may arise by reason of their status as directors or officers (other than liabilities arising from willful misconduct of a culpable nature) and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. 49 Ameritrans has directors' and officers' liability insurance. This policy was previously held by Elk for the benefit of its officers and directors and was assumed by Ameritrans upon the completion of the Share Exchange. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The fees for services provided by Rosen Seymour Shapss Martin & Company LLP, the Company's independent public accountants, are as follows: AUDIT FEES Fees for the audit of the Company's annual financial statements and the review of the financial statements included in the Company's Form 10-Q for the years ended June 30, 2005 and 2004 were $115,400 and $85,100, respectively. AUDIT-RELATED FEES Fees for audit related services for the years ended June 30, 2005 and 2004 were $5,300 and $11,700 respectively. TAX FEES Fees for professional services by the accountants for tax compliance, tax advice, and tax planning for the years ended June 30, 2005 and 2004 are $0. ALL OTHER FEES Fees for services provided by the accountants, other than the services rendered in the above paragraphs, for the years ended June 30, 2005 and 2004 were $0. AUDIT COMMITTEE POLICIES AND PROCEDURES The Audit Committee will recommend to the Board the selection of the independent accountants, considering independence and effectiveness and approve the fees and other compensation to be paid to the independent accountants. On an annual basis, the Committee shall review and discuss with the independent accountants all significant relationships the independent accountants have with the Corporation and relevant third parties to determine the independent accountants' independence. In making this determination, the Committee shall consider not only auditing and other transitional accounting functions performed by the independent accountants and their affiliates. The Committee will also require the independent accountants to submit on an annual basis a formal written statement delineating all relationships among the Corporation, the independent accountants, and their respective affiliates. 1. The independent accountants are ultimately accountable to the Audit Committee and the Board of Directors. The Audit Committee shall review the independence and performance of the accountants and shall be responsible for the annual appointment of the independent accountants when circumstances warrant. 2. The Audit Committee shall approve the audit fees and other compensation to be paid to the independent accountants or approve any discharge of accountants when circumstances warrant. 3. Prior to releasing the year-end earnings, the Audit Committee shall discuss the results of the audit with the independent accountants. Discuss certain matters required to be communicated to Audit Committee. 4. In making this determination, the Committee shall consider not only auditing and other traditional accounting functions performed by the independent accountants and their affiliates. The Committee will also require the independent accountants to submit on an annual basis a formal written statement delineating all relationships among the Corporation, the independent accountants, and their respective affiliates. 5. Review the performance of the independent accountants and approve any proposed discharge of the independent accountants when circumstances warrant. 6. Periodically consult with the independent accountants out of the presence of management about internal controls and the fullness and accuracy of the organization's financial statements. Among the items to be discussed in these meetings are the independent accounts' evaluation of the Corporation's financial, and accounting personnel, and the cooperation that the independent accountants received during the course of each audit. IMPORTANT FACTORS RELATING TO FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in such statements. In connection with certain forward-looking statements contained in this Form 10-K and those that may be made in the future by or on behalf of Ameritrans, Ameritrans notes that there are various factors that could cause actual results to differ materially from those set forth in any such forward-looking statements. The forward looking statements contained in this Form 10-K were prepared by management and are qualified by, and subject to, significant business, economic, competitive, regulatory and other uncertainties and contingencies, all of which are difficult or impossible to predict and many of which are beyond the control of Ameritrans. Accordingly, there can be no assurance that the forward-looking statements contained in this Form 10-K will be realized or that actual results will not be significantly higher or lower. Readers of this Form 10-K should consider these facts in evaluating the information contained herein. In addition, the business and operations of Ameritrans are subject to substantial risks which increase the uncertainty inherent in the forward-looking statements contained in this Form 10-K. The inclusion of the forward-looking statements contained in this form 10-K should not be regarded as a representation by Ameritrans or any other person that the forward-looking statements contained in this Form 10-K, will be achieved. In light of the foregoing, readers of this Form 10-K are cautioned not to place undue reliance on the forward-looking statements contained herein. These risks and others that are detailed in this Form 10-K and other documents that Ameritrans files from time to time with the Securities and Exchange Commission, including quarterly reports on Form 10-Q and any current reports on Form 8-K must be considered by any investor or potential investor in Ameritrans. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 28th day of September, 2005. AMERITRANS CAPITAL CORPORATION By: /s/ Gary C. Granoff ----------------------------------- Gary C. Granoff, President As required by the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated. SIGNATURE TITLE DATE /s/ Gary C. Granoff President, Chairman of the Board ofSeptember 28, 2005 Directors, Chief Executive Officer and - ----------------------- Gary C. Granoff Chief Financial Officer /s/ Ellen M. Walker Executive Vice President September 28, 2005 and Director - ------------------- Ellen M. Walker /s/ Lee A. Forlenza Senior Vice President and Director September 28, 2005 - ----------------------- Lee A. Forlenza /s/ Steven Etra Vice President and Director September 28, 2005 - ----------------------- Steven Etra /s/ Paul Creditor Director September 28, 2005 - ----------------------- Paul Creditor /s/ Allen Kaplan Director September 28, 2005 - ----------------------- Allen Kaplan /s/ John R. Laird Director September 28, 2005 - ----------------------- John R. Laird /s/ Howard F. Sommer Director September 28, 2005 - ----------------------- Howard F. Sommer /s/ Wesley Finch Director September 28, 2005 - ----------------------- Wesley Finch PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K a) 1 and 2 FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES 1. The financial statements and financial statement schedules as listed in the Index to Financial Statements are filed as part of this Annual Report on Form 10-K. 2. No financial statement schedules are filed herewith because the information required has been presented in the aforementioned financial statements. b) REPORTS ON FORM 8-K On September 20, 2005, the Company filed a current report on Form 8-K reporting under Item 2.02 that the Company issued a press release announcing the its third quarter results 9 3/8% Preferred Stock. (11) On July 22, 2005 the Company filed a current report on Form 8-K reporting under Item 8.01 that the Company issued a press release announcing the results of a vote at a Special Meeting of Shareholders held on July 21, 2005 approving a private offering of the Company's common stock. (12) On July 1, 2005 the Company filed a current report on Form 8-K reporting under Item 2.02 (Regulation FD Financial Disclosure) that the Company issued a press release announcing the receipt of sales proceeds from the Arlington, Virginia hotel investment. (13) On June 27, 2005 the Company filed a current report on Form 8-K reporting under item 8.01 that the Company issued a press release announcing a Special Meeting of Shareholders to be held July 21, 2005. (14) On June 20, 2005 the Company filed a current report on Form 8-K reporting under Item 2.02 (regulation FD Financial Disclosure) that the Company issued a press release announcing the declaration of a quarterly dividend on its 9 3/8% Preferred Stock. (15) On May 19, 2005 the Company filed a current report on Form 8-K reporting under Item 2.02 (Regulation FD Financial Disclosure) that the Company issued a press release announcing a development with an Arlington, Virginia hotel investment. (16) On May 16, 2005 the Company filed a current report on Form 8-K reporting under Items 2.02 and 9.01 that the Company issued a press release announcing its third quarter results. (17) On March 22, 2005, the Company filed a current report on Form 8-K reporting under Items 2.02 and 9.01 that the Company issued a press release announcing the declaration of a quarterly dividend on its 9 3/8% Preferred Stock. (18) On February 23, 2005, the Company filed a current report on Form 8-K reporting under Item 2.02 that the Company issued a press release announcing its share ownership in Fusion Telecommunications Internation Inc. (19) On February 14, 2005, the Company filed current report on Form 8-K reporting under items 2.02 and 9.01 that the Company issued a press release announcing its second quarter results. (20) On December 20, 2005, the Company filed a current report on Form 8-K reporting under item 9.01 that the Company issued a press release announcing the declaration of a quarterly dividend on its 9 3/8% Preferred Stock. (21) On November 15, 2004, the Company filed a current report on Form 8-K reporting under items 2.02 and 9.01 that the company issue a pre release announcing its first quarter results. (22). On September 21, 2004, the Company filed a current report on Form 8-K reporting under Item 2.02 that the Company issued a press release announcing the declaration of a quarterly dividend on its 9 3/8% Preferred Stock. (23) On May 17, 2004 the Company filed a current report on Form 8-K reporting under Item 9 (Regulation FD Financial Disclosure) that the Company issued a press release announcing its third quarter results. c) EXHIBITS The Exhibits filed as part of this Annual Report on Form 10-K are listed on the Exhibit Index immediately preceding such Exhibits, which Exhibit Index is incorporated by reference. EXHIBIT INDEX Exhibit Number Exhibit - -------- ------- 2.1 Agreement and Plan of Merger dated as of May 4, 2000 by and among Medallion Financial Corp., AMTC Merger Corp., and Ameritrans Capital Corporation.(1) 2.2 Amendment No. 8 dated as of August 29, 2000 to the Agreement and Plan of Merger dated as of May 4, 2000 by and among Medallion Financial Corp., AMTC Merger Corp., and Ameritrans Capital Corporation.(2) 3(i) Certificate of Incorporation(3) 3(ii) By-laws(3) 4 Form of subordinated debentures issued to the U.S. Small Business Administration ("SBA") by Elk Associates Funding Corporation ("Elk") - Debenture issued March 26, 1997 - principal amount - $430,000; Maturity Date - March 1, 2007; Stated Interest Rate - 7.38%.(4) The following debentures are omitted pursuant to Rule 483: a. Debenture issued September 22, 1993 - principal amount - $1,500,000; Maturity Date - September 1, 2003; Stated Interest Rate - 6.12%. b. Debenture issued September 22, 1993 - principal amount - $2,220,000; Maturity Date - September 1, 2003; Stated Interest Rate - 6.12%. c. Debenture issued September 28, 1994 - principal amount - $2,690,000; Maturity Date - September 1, 2004; Stated Interest Rate - 8.20%. d. Debenture issued December 14, 1995 - principal amount - $1,020,000; Maturity Date - December 1, 2005; Stated Interest Rate - 6.54%. e. Debenture issued June 26, 1996 - principal amount - $1,020,000; Maturity Date - June 1, 2006; Stated Interest Rate - 7.71%. 10.1 Security Agreement between Elk and the SBA, dated September 9, 1993.(4) 10.3 1999 Employee Stock Option Plan.(5) 10.4 Non-Employee Director Stock Option Plan.(5) 10.5 Custodian Agreement among Elk; Bank Leumi Trust Company of New York ("Leumi"), Israel Discount Bank of New York ("IDB"), Bank Hapoalim B.M. ("Hapoalim") and Extebank; the SBA, and IDB as Custodian; dated September 9, 1993 (the "Custodian Agreement").(4) 10.6 Agreements between Elk and the SBA.(4) 10.7 Intercreditor Agreement among Elk, Leumi, IDB, Hapoalim, Extebank and the SBA dated September 9, 1993 (the "Intercreditor Agreement") (4) 10.8 Amendments to the Custodian and Intercreditor Agreements.(4) a. Amendment removing Hapoalim and Extebank and adding European American Bank ("EAB"), dated September 28, 1994. b. Form of Amendment adding bank: i. Amendment adding United Mizrahi Bank and Trust Company ("UMB"), dated June, 1995 was previously filed. ii. Amendment adding Sterling National Bank and Trust Company of New York ("Sterling"), dated April, 1996 - omitted pursuant to Rule 483. 10.9 Bank Intercreditor Agreement among Elk, Leumi, IDB, Hapoalim and Extebank, dated September 9, 1993 (the "Bank Intercreditor Agreement").(4) 10.10 Amendments to the Bank Intercreditor Agreement.(4) a. Amendment removing Hapoalim and Extebank and adding European American Bank ("EAB"), dated September 28, 1994. b. Form of Amendment adding bank: i. Amendment adding UMB, dated June, 1995 was previously filed. ii. Amendment adding Sterling, dated April, 1996 - omitted pursuant to Rule 483. 10.11 Letter Agreement renewing line of credit for Elk with IDB Bank dated April 13, 2004.(6) 10.12 Promissory Note dated March 3, 2003 between Ameritrans and Bank Leumi USA and Letter Agreement dated March 11, 2003 between aforementioned parties.(6) 10.13 Master Note dated October 4, 1999 between Ameritrans and European American Bank.(6) 10.14 Line of Credit Agreement dated January 3, 2002 between Elk and Citibank.(7) 10.15 Form of indemnity agreement between Ameritrans and each of its directors and officers.(3) 10.16 Amended and Restated Employment Agreement dated as of December 31, 2002 between Ameritrans and Gary Granoff.(8) 10.17 Amended and Restated Consulting Agreement dated as of December 31, 2002 between Ameritrans and Gary Granoff.(8) 10.18 Amended and Restated Employment Agreement dated as of December 31, 2002 between Ameritrans and Lee Forlenza.(8) 10.19 Employment Agreement dated as of October 1, 2001 between Ameritran and Ellen Walker.(9) 10.20 Employment Agreement dated as of January 1, 2002 between Ameritrans and Silvia Mullens.(9) 10.21 Employment Agreement dated as of January 1, 2002 between Ameritrans and Margaret Chance.(9) 14.1 Code of Ethics of Ameritrans Capital Corporation. 21.1 List of Subsidiaries of Ameritrans.(10) 31.1 Certification pursuant to 18 USC Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.1 Ameritrans Audit Committee Charter(10) - ------------ (1) Incorporated by reference from the Registrant's Current Report on 8-K (Item V) (File No. 333-63951) filed on May 12, 2000. (2) Incorporated by reference from the Registrant's Current Report on 8-K (Item V) (File No. 333-63951) filed on September 6, 2000. (3) Incorporated by reference from the Registrant's Registration Statement on Form N-14 (File No. 333-63951) filed September 22, 1998. (4) Incorporated by reference from the Registrant's Registration Statement filed on Form N-2 (File No. 333-82693) filed July 12, 1999. (5) Incorporated by reference from the Registrant's Proxy Statement on Form 14A (File No. 811-08847) filed on December 14, 2001. (6) Incorporated by reference from the Registrant's 10-Q (File No. 811-08847) filed May 14, 2004. (7) Incorporated by reference from the amendment to the Registrant's N-2 (File No. 333-82693) filed March 1, 2002. (8) Incorporated by reference from the Registrant's 10-Q (File No. 811-08847) filed February 14, 2003. (9) Incorporated by reference from the Registrant's 10-Q (File No. 811-08847) filed February 14, 2002. (10) Incorporated by Reference from the Registrants 10-K (File No. 811-08847 filed September 28, 2004. 11. Incorporated by reference from the Registrants Current Report on form 8-K (File No. 811-08847) filed on September 20, 2005. 12. Incorporated by reference from the Registrants's Current Report form 8-K (File No. 811-08847 filed on July 22, 2005. 13. Incorporated by reference from the Registrants's Current Report form 8-K (File No. 811-08847) filed on July 1, 2005. 14. Incorporated by reference from the Registrants's Current Report form 8-K (File No. 811-08847) filed on June 27, 2005. 15. Incorporated by reference from the Registrants's Current Report form 8-K (File No. 811-08847) filed on June 20, 2005. 16. Incorporated by reference from the Registrants's Current Report form 8-K (File No. 811-08847) filed on May 19, 2005. 17. Incorporated by reference from the Registrants's Current Report form 8-K (File No. 811-08847) filed on May 16, 2005. 18. Incorporated by reference from the Registrants's Current Report form 8-K (File No. 811-08847) filed on March 22, 2005. 19. Incorporated by reference from the Registrants's Current Report form 8-K (File No. 811-08847) filed on February 23, 2005. 20. Incorporated by reference from the Registrants's Current Report form 8-K (File No. 811-08847) filed on February 14, 2005 21. Incorporated by reference from the Registrants's Current Report form 8-K (File No. 811-08847) filed on December 20, 2005. 22. Incorporated by reference from the Registrants's Current Report form 8-K (File No. 811-08847) filed on November 15, 2004. 23. Incorporated by reference from the Registrants's Current Report form 8-K (File No. 811-08847) filed on September 21, 2004. AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONTENTS June 30, 2005, 2004 and 2003 - --------------------------------------------------------------------------------
PAGE REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS Rosen Seymour Shapss Martin & Company LLP F-2 CONSOLIDATED FINANCIAL STATEMENTS Balance Sheets at June 30, 2005 and 2004 F-3 - F-4 Statements of Operations for the Years Ended June 30, 2005, 2004, and 2003 F-5 Statements of Comprehensive Income (Loss) for the Years Ended June 30, 2005, 2004, and 2003 F-6 Statements of Stockholders' Equity for the Years Ended June 30, 2005, 2004 and 2003 F-7 Statements of Cash Flows for the Years Ended June 30, 2005, 2004 and 2003 F-8 - F-9 Notes to Consolidated Financial Statements F-10 - F-32 Schedule of Loans as of June 30, 2005 F-33
F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Ameritrans Capital Corporation and Subsidiaries: We have audited the accompanying consolidated balance sheets of Ameritrans Capital Corporation and Subsidiaries (the "Company") as of June 30, 2005 and 2004, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for each of the three years in the period ended June 30, 2005, and the schedule of loans as of June 30, 2005. These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As explained in Note 1, the consolidated financial statements include loans valued at $51,910,254 and $49,391,219 as of June 30, 2005 and 2004, respectively, whose values have been estimated by the Board of Directors in the absence of readily ascertainable market values. We have reviewed the procedures used by the Board of Directors in arriving at their estimate of the value of such loans and have inspected underlying documentation and, in the circumstances, we believe the procedures are reasonable and the documentation is appropriate. However, because of the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a ready market for such loans existed. In our opinion, the consolidated financial statements and schedule referred to above present fairly, in all material respects, the financial position of Ameritrans Capital Corporation and Subsidiaries as of June 30, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2005, in conformity with U.S. generally accepted accounting principles. /s/ Rosen Seymour Shapss Martin & Company LLP CERTIFIED PUBLIC ACCOUNTANTS New York, New York August 30, 2005 F-2 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS June 30, 2005 and 2004 - --------------------------------------------------------------------------------
2005 2004 ---------------- ---------------- ASSETS - ------ Loans receivable $ 52,060,254 $ 49,900,989 Less unrealized depreciation on loans receivable (150,000) (509,770) ---------------- ---------------- Loans receivable, net 51,910,254 49,391,219 Cash and cash equivalents 327,793 416,600 Accrued interest receivable, net of unrealized depreciation of $59,000 in 2005 and $30,500 in 2004 756,701 969,912 Assets acquired in satisfaction of loans 384,528 1,421,723 Receivables from debtors on sales of assets acquired in satisfaction of loan 455,184 422,158 Equity securities 908,457 1,038,617 Furniture, equipment and leasehold improvements, net 329,573 439,262 Medallions under lease 2,282,201 2,382,201 Prepaid expenses and other assets 531,904 610,214 ---------------- ---------------- Total assets (Note 8) $ 57,886,595 $ 57,091,906 ================ ================ - -------------------------------------------------------------------------------- (Continued)
F-3 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS (Continued) June 30, 2005 and 2004 - --------------------------------------------------------------------------------
2005 2004 ---------- ---------- Liabilities and Stockholders' Equity - ------------------------------------ Liabilities: Debentures payable to SBA $ 12,000,000 $ 12,000,000 Notes payable, bank 29,770,652 28,908,652 Accrued expenses and other liabilities 604,942 578,790 Accrued interest payable 256,285 271,630 Dividends payable 84,375 84,375 ---------- ---------- Total liabilities 42,716,254 41,843,447 ---------- ---------- Commitments and Contingencies Stockholders' Equity: Preferred stock 500,000 shares authorized, none issued or outstanding - - 9-3/8% cumulative participating redeemable preferred stock $.01 par value, $12.00 face value, 500,000 shares authorized; 300,000 shares issued and outstanding 3,600,000 3,600,000 Common stock, $.0001 par value; 5,000,000 shares authorized, 2,045,600 shares issued, 2,035,600 outstanding 205 205 Additional paid-in capital 13,869,545 13,869,545 Accumulated deficit (2,127,134) (1,902,408) Accumulated other comprehensive loss (102,275) (248,883) ---------- ---------- Total 15,240,341 15,318,459 Less: Treasury stock, at cost, 10,000 shares of common stock (70,000) (70,000) ---------- ---------- Total stockholders' equity 15,170,341 15,248,459 Total liabilities and stockholders' equity $ 57,886,595 $ 57,091,906 ================ ================ - -------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
F-4 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended June 30, 2005, 2004 and 2003 - --------------------------------------------------------------------------------
2005 2004 2003 --------- --------- --------- Investment Income: Interest on loans receivable $ 4,771,954 $ 5,195,741 $ 6,072,399 Gain on sale of equity securities, net (Note 4) 688,874 5,665 2,976 Fees and other income 459,598 318,559 209,680 Leasing income 211,640 119,527 - --------- --------- --------- Total investment income 6,132,066 5,639,492 6,285,055 --------- --------- --------- Operating Expenses: Interest 1,837,633 1,443,416 2,076,861 Salaries and employee benefits 1,128,963 1,022,964 879,074 Occupancy costs 188,466 207,079 144,279 Professional fees 675,399 605,168 575,022 Other administrative expenses 1,162,457 1,250,435 963,175 Loss and impairments on both medallions under lease and assets acquired in satisfaction of loans, net 198,177 44,362 77,343 Foreclosure expenses 87,695 362,871 313,678 Write off and depreciation on interest and loans receivable 728,710 1,024,245 852,512 --------- --------- --------- Total operating expenses 6,007,500 5,960,540 5,881,944 --------- --------- --------- Operating income (loss) 124,566 (321,048) 403,111 --------- --------- --------- Other Expense: Equity in loss of investee (Note 4) (4,021) (29,634) - Loss on sale of automobile (60) - - --------- --------- --------- Total other expense (4,081) (29,634) - --------- --------- --------- Income (loss) before income taxes 120,485 (350,682) 403,111 Income Taxes 7,711 16,501 7,897 --------- --------- --------- Net income (loss) 112,774 367,183 395,214 Dividends on preferred stock (337,500) (337,500) (337,500) --------- --------- ---------- Net income (loss) available to common shareholders $ (224,726) $ (704,683) $ 57,714 ============= ============= ============== Weighted Average Number of Common Shares Outstanding Basic 2,035,600 2,035,600 2,035,600 ============= ============= ============== Diluted 2,035,600 2,035,600 2,035,600 ============= ============= ============== Net (Loss) Income Per Common Share Basic $ (0.11) $ (0.35) $ 0.03 ============= ============= ============= Diluted $ (0.11) $ (0.35) $ 0.03 ============= ============= ============= - -------------------------------------------------------------------------------- The Accompanying Notes are an Integral Part of These Financial Statements.
F-5 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) Years Ended June 30, 2005, 2004 and 2003 - --------------------------------------------------------------------------------
2005 2004 2003 ----------- ----------- ------------- Net income (loss) $ 112,774 $ (367,183) $ 395,214 Other comprehensive income (loss) Unrealized gain (loss) on equity securities arising during the period 46,583 (13,338) (200,338) Reclassification adjustment for (gain) loss included in net income (loss) 100,025 (5,665) - ----------- ----------- ------------- Total comprehensive income (loss) $ 259,382 $ (386,186) $ 194,876 =========== =========== ============= - -------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
F-6 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended June 30, 2005, 2004 and 2003 - --------------------------------------------------------------------------------
9-3/8% Cumulative Participating Accumulated Redeemable Additional Other Common Preferred Paid-In Treasury Accumulated Comprehensive Stock Stock Capital Stock Deficit Income (Loss) Total ----- ----- ------- ----- ------- ------------- ----- Balance--June 30, 2002 $205 $ 3,600,000 $13,869,545 $ (70,000) $(703,127) $ (29,542) $16,667,081 Dividends declared on common stock - - - - (552,312) - (552,312) Dividends declared on preferred stock - - - - (337,500) - (337,500) Net income - - - - 395,214 - 395,214 Unrealized loss on equity securities - - - - - (200,338) (200,338) -- --------- ------- ------- -------- ---------- --------- Balance--June 30, 2003 205 3,600,000 13,869,545 (70,000) (1,197,725) (229,880) 15,972,145 Dividends declared on preferred stock - - - - (337,500) - (337,500) Net loss - - - - (367,183) - (367,183) Unrealized loss on equity securities - - - - - (13,338) (13,338) Reclassification adjustment for gain included in net income - - - - - (5,665) (5,665) --- --------- ------- ------- --------- -- ------- Balance--June 30, 2004 205 3,600,000 13,869,545 (70,000) (1,902,408) (248,883) 15,248,459 Dividends declared on preferred stock - - - - (337,500) - (337,500) Net income - - - - 112,774 - 112,774 Unrealized loss on equity securities - - - - - 46,583 46,583 Reclassification adjustment for gain included in net income - - - - - 100,025 100,025 -- --------- ------- ------- --------- --------- -------- Balance--June 30, 2005 $205 $3,600,000 $13,869,545 $(70,000)$(2,127,134) $(102,275)$15,170,341 ==== ========== =========== ======== =========== ========= =========== - -------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
F-7 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended June 30, 2005, 2004 and 2003 - --------------------------------------------------------------------------------
2005 2004 2003 ------------- ------------- ------------- Cash flows from operating activities: Net income (loss) $ 112,774 $ (367,183) $ 395,214 ------------- ------------- ------------- Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Depreciation and amortization 148,677 133,685 77,660 Gain on sale of equity securities, net (688,874) (5,665) (2,976) Equity in loss of investee 4,021 29,634 - Loss on sale of automobile 60 - Loss on impairment of medallions under lease 100,000 - - Changes in operating assets and liabilities: Changes in unrealized depreciation on loans receivable and accrued interest receivable (331,270) (453,900) 455,670 Accrued interest receivable 184,711 1,012,179 (609,244) Prepaid expenses and other assets 30,254 (142,716) (214,478) Accrued expenses and other liabilities 26,152 157,750 (13,299) Accrued interest payable (15,345) 51,959 (38,687) ------------- ------------- ------------- Total adjustments (541,614) 782,926 (345,354) Net cash (used in) provided by operating activities (428,840) 415,743 49,860 Cash flows from investing activities: Loans receivable (2,312,465) 3,023,488 (276,847) Assets acquired 751,762 279,534 (34,101) Receivables from debtors on sales of assets acquired in satisfaction of loans 405,607 9,100 (63,987) Proceeds from sales of equity securities 1,090,774 109,084 27,726 Purchases of equity securities (129,153) (261,268) (711,166) Proceeds from sale of automobiles 13,000 60,125 - Capital expenditures (3,992) (399,959) (143,003) -------------- ------------- -------------- Net cash (used in) provided by investing activities (184,467) 2,261,036 (1,201,378) ------------- -------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable, banks 47,397,883 6,590,000 52,385,000 Repayment of notes payable, banks (46,535,883) (11,811,348) (51,975,000) Proceeds from debentures payable to SBA - 6,950,000 5,050,000 Repayment of debentures payable to SBA - (4,150,000) (3,710,000) Dividends paid (337,500) (337,500) (873,875) ------------- ------------- ------------- Net cash provided (used in) by financing activities 524,500 (2,758,848) 876,125 ------------- ------------- ------------- Net decrease in cash and cash equivalents (88,807) (82,069) (275,393) CASH AND CASH EQUIVALENTS: Beginning of year 416,600 498,669 774,062 ------------- ------------- ------------- End of year $ 327,793 $ 416,600 $ 498,669 ============= ============= ============= - -------------------------------------------------------------------------------- (Continued)
F-8 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Years Ended June 30, 2005, 2004 and 2003 - --------------------------------------------------------------------------------
2005 2004 2003 ------------- ------------- ------------- Supplemental disclosures of cash flow information: cash paid during the years for: Interest $ 1,852,993 $ 1,391,457 $ 2,115,548 ============= ============ ============ Income taxes $ 7,711 $ 17,276 $ 15,759 ============= ============ ============ Supplemental disclosures of non-cash investing activities: Unrealized gain (loss) on equity securities arising during the period $ 46,583 $ 13,338 $ (200,338) ============= ============ ============ Reclassification adjustment for loss (gain) included in net income $ 100,025 $ (5,665) $ _ ============= ============ ============ Conversion of loans receiable to assets acquired in satisfaction of loans $ (153,200) $ (668,534) $ (200,000) ============= ============ ============ Reclassification of assets acquired to receivables from debtors $ (438,633) $ _ $ _ on sales of assets acquired. ============= ============ ============ Acquisition of medallions through foreclosure of loans receivable $ _ $ (2,382,201) $ - ============= ============ ============ - -------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
F-9 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2005, 2004, and 2003 - -------------------------------------------------------------------------------- 1. Organization and Summary of Significant Accounting Policies Organization and Principal Business Activity -------------------------------------------- Ameritrans Capital Corporation ("Ameritrans"), a Delaware corporation, acquired all of the outstanding shares of Elk Associates Funding Corporation ("Elk") on December 16, 1999 in a share-for-share exchange. Prior to the acquisition, Elk had been operating independently and Ameritrans had no operations. Elk, a New York corporation, is licensed by the Small Business Administration ("SBA") to operate as a Small Business Investment Company ("SBIC") under the Small Business Investment Act of 1958, as amended. Elk is also registered as an investment company under the Investment Company Act of 1940 to make business loans. Ameritrans is a specialty finance company that primarily through its subsidiary Elk, makes loans to taxicab owners to finance the acquisition and operation of taxi medallions and related assets, and to other small businesses in the New York City, Chicago, Miami, and Boston markets. Basis of Consolidation ---------------------- The consolidated financial statements include the accounts of Ameritrans, Elk and Elk's wholly owned subsidiaries, EAF Holding Corporation ("EAF"), EAF Enterprises LLC, Medallion Auto Management LLC, EAF Leasing LLC, EAF Leasing II LLC and EAF Leasing III LLC, (collectively referred to as the "Company"). All significant inter-company transactions have been eliminated in consolidation. EAF, which was formed in June 1992 and began operations in December 1993, owns and operates certain real estate assets acquired in satisfaction of defaulted loans by Elk. EAF Enterprises LLC, which was formed in June 2003 and began operations in July 2003, owns, leases and resells medallions acquired in satisfaction of foreclosures by Elk. Medallion Auto Management LLC, which was formed in June 2003 and began operations in July 2003, owns, leases and resells automobiles in conjunction with the medallions owned by EAF Enterprises LLC. EAF Leasing LLC, which was formed in August 2003 and began operations in October 2003, owns and leases medallions acquired in satisfaction of foreclosures by Elk. EAF Leasing II LLC, which was formed in August 2003 and began operations in October 2003, owns and leases medallions acquired in satisfaction of foreclosures by Elk. EAF Leasing III LLC, which was formed in January 2004, owns and leases medallions acquired in satisfaction of foreclosures by Elk. F-10 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2005, 2004 and 2003 - -------------------------------------------------------------------------------- Ameritrans organized another subsidiary on June 8, 1998 Elk Capital Corporation ("Elk Capital"), which may engage in lending and investment activities similar to its parent. Since its inception, Elk Capital has had no operations. From inception through April 2002, Ameritrans' only activities have been the operations of Elk. In May 2002, Ameritrans made its first loans to businesses using the proceeds raised from a public offering, which was completed in April 2002. Loan Valuations --------------- The Company's loan portfolio is carried at fair value. Since no ready market exists for these loans, the fair value is determined in good faith by the board of directors of the Company ("the Board"). In determining the fair value, the Board considers factors such as the financial condition of the borrower, the adequacy of the collateral to support loans, individual credit risks, historical loss experience and the relationships between current and projected market rates and portfolio rates of interest and maturities. The fair value of the loans approximates cost less unrealized depreciation. Unrealized depreciation in loan values has generally been caused by specific events related to credit risk. Loans are considered "non-performing" once they become 90 days past due as to principal or interest. These past due loans are periodically evaluated by management and if, in the judgment of management, the amount is not collectible and the fair value of the collateral is less than the amount due, a reserve is established. If the fair value of the collateral exceeds the loan balance at the date of valuation, the Company makes no write-down of the loan amount. Cash and Cash Equivalents ------------------------- For the purposes of the statement of cash flows, the Company considers all short-term investments with an original maturity of three months or less when acquired to be cash equivalents. The Company maintains its cash balances with various banks with high quality ratings, however, at times balances may exceed federally insured limits. Equity Securities ----------------- Equity securities are comprised principally of common stock investments in various companies. The Company currently classifies equity securities as available-for-sale. Securities classified as available-for-sale are required to be reported at fair value with unrealized gains and losses, net of taxes, excluded from earnings and recorded in the statement of comprehensive (loss) income, and separately as a component of accumulated other comprehensive income (loss) within stockholder's equity unless an unrealized loss is deemed to be other than temporary, in which case, the cost basis of the individual security is written down to fair value as a new cost basis and such loss is charged to earnings. Realized gains and losses on the sale of securities available-for-sale are determined using the specific-identification method and are reported in earnings. In addition, any unrealized gains and losses deferred in accumulated other comprehensive income (loss) is recognized in determining net gain or loss on disposition. F-11 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2005, 2004 and 2003 - ------------------------------------------------------------------------------- Income Taxes ------------ The Company has elected to be taxed as a Regulated Investment Company ("RIC") under the Internal Revenue Code (the "Code"). An RIC generally is not taxed at the corporate level to the extent its income is distributed to its stockholders. In order to qualify as an RIC, a company must payout at least 90 percent of its net taxable investment income to its stockholders as well as meet other requirements under the Code. In order to preserve this election for fiscal 2005, the Company intends to make the required distributions to its stockholders in accordance with applicable tax code. The Company is subject to certain state and local franchise taxes, as well as related minimum filing fees assessed by state taxing authorities. Such taxes and fees are reported as provisions for income taxes and reflected in each of the fiscal years presented. Depreciation and Amortization ----------------------------- Depreciation and amortization are computed using the straight-line method over the useful lives of the respective assets. Leasehold improvements are amortized over the life of the respective leases. Deferred Loan Costs and Fees ---------------------------- Deferred loan costs are included in prepaid expenses and other assets. Amortization of deferred loan costs is computed on the straight-line method over the respective loan term. Amortization of deferred loan costs and fees for the years ended June 30, 2005, 2004, and 2003 was $48,056, $60,013, and $45,864 respectively.At June 30, 2005 and 2004, deferred loan costs and commitment fees amounted to $309,880 and $357,936, respectively, net of accumulated amortization of $354,101 and $306,045 respectively. Assets Acquired in Satisfaction of Loans ---------------------------------------- Assets acquired in satisfaction of loans are carried at the lower of the net value of the related foreclosed loan or the estimated fair value less cost of disposal Losses incurred at the time of foreclosure are charged to the unrealized depreciation on loans receivable. Subsequent reductions in estimated net realizable value are charged to operations as losses on assets acquired in satisfaction of loans. F-12 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2005, 2004 and 2003 - -------------------------------------------------------------------------------- Impairment of Long-lived Assets and Acquired Intangible Assets -------------------------------------------------------------- The Company monitors events and changes in circumstances that could indicate carrying amounts of long-lived assets, including intangible assets, may not be recoverable. When such events or changes in circumstances occur, the Company assesses the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the undiscounted cash flows are less than the carrying amount, an impairment loss is recorded to the extent that the carrying amount exceeds the fair value. During the fiscal year ended June 30, 2004 the Company obtained medallions through foreclosure of loans and the value of such medallions are carried at the net value of the related foreclosed loans. The medallions are being treated as having indefinite lives, therefore, the assets are not being amortized. However, the Company periodically tests their carrying value for impairment. During the year ended June 30, 2005, the medallions were written down by $100,000 to their estimated fair value, based on current market conditions. The amount is included in loss and impairments on medallions under lease and assets acquired in satisfaction of loans, net, in the accompanying consolidated statements of operations. Use of Estimates ---------------- The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make extensive use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates that are particularly susceptible to change relate to the determination of the fair value of loans receivable and other financial instruments. Treasury Stock -------------- Treasury stock is carried at cost. Gains and losses on disposition of treasury stock, if any, are recorded as increases or decreases to additional paid-in capital with losses in excess of previously recorded gains charged directly to retained earnings. Earnings Per Share ------------------ Basic earnings (loss) per share includes no dilution and is computed by dividing current income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect, in periods in which they have a dilutive effect, the effect of common shares issuable upon the exercise of stock options and warrants. The difference between reported basic and diluted weighted average common shares results from the assumption that all dilutive stock options outstanding were exercised. For the years presented, the effect of common stock equivalents has been excluded from the diluted calculation since the effect would be antidilutive. F-13 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2005, 2004 and 2003 - -------------------------------------------------------------------------------- Income Recognition ------------------ Interest income, including default interest, is recorded on an accrual basis and in accordance with loan terms to the extent such amounts are expected to be collected. The Company recognizes interest income on loans classified as non-performing only to the extent that the fair market value of the collateral exceeds the loan balance. Loans that are not fully collateralized and in the process of collection are placed on non accrual status when, in the judgment of management, the collectibility of interest and principal is doubtful. Stock Options ------------- The Company uses the intrinsic value method of accounting for employee stock options in accordance with APB No. 25 as permitted by Statement of Financial Accounting Standards No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION" (SFAS No. 123). Under APB No. 25, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the stock at the date of the grant over the option price. However, companies that do not adopt SFAS No. 123 must provide additional pro forma disclosure as if they had adopted SFAS No. 123 for valuing stock-based compensation to employees. SFAS No. 123 requires the measurement of such compensation using the Black-Scholes or similar option-pricing model to value the amount of compensation granted. The compensation cost is then recognized over the vesting period of the options (see "Recently Issued Accounting Standards" below and Note 17). Financial Instruments --------------------- The carrying value of cash and cash equivalents, accrued interest receivable and payable, and other receivables and payables approximates fair value due to the relative short maturities of these financial instruments. Loans receivable are carried at their estimated fair value. The estimated fair values of publicly traded equity securities are based on quoted market prices and the estimated fair values of privately held equity securities are recorded at the lower of cost or fair value. The carrying value of the bank debt is a reasonable estimate of their fair values as the interest rates are variable, based on prevailing market rates. The fair value of the SBA debentures were computed using the discounted amount of future cash flows using the Company's current incremental borrowing rate for similar types of borrowings (see Note 13). Derivatives ----------- The Company from time to time entered into interest rate swap agreements in order to manage interest rate risk. The Company does not use interest rate swaps or other derivatives for trading or other speculative purposes. In accordance with Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as subsequently amended, all derivative instruments are recorded at fair value. For derivative instruments designed as cash flow hedges, the effective portion of that hedge is deferred and recorded as a component of other comprehensive income. Any portion of the hedge deemed to be ineffective is recognized promptly in the consolidated statements of income. F-14 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2005, 2004 and 2003 - ------------------------------------------------------------------------------- Recently Issued Accouting Standards In December 2004, the Financial Accounting Standards Board ("FASB") issued the SFAS No. 123(R), "Share-Based Payment" ("SFAS 123(R)"), which replaced SFAS No. 123, "Accounting for Stock-Based Compensation," and superceded APB Opinion 25, "Accounting for Stock Issued to Employees." SFAS 123(R) requires that all share-based payments to employees be recognized in the financial statements based on their fair values on the date of grant. The Company currently uses the intrinsic value method to measure compensation expense for stock based awards.On April 14, 2005, the SEC amended the compliance dates for SFAS 123(R), which extended the Company's required adoption date of SFAS 123(R) to its fiscal third quarter in its fiscal year ended June 30, 2006. The Company is evaluating the requirements of SFAS 123(R) and expects that its adoption will not have a material impact on its financial position or results of operations and earnings per share. Also in December 2004, the FASB issued Statement No. 153, "Exchanges of Nonmonetary Assets," ("SFAS No. 153") which addresses the measurement of exchanges of nonmonetary assets and eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets and replaces it with an exception for exchanges that do not have commercial substance. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005, with earlier application permitted. The adoption of SFAS No. 153 will have no impact on the Company's results of operations or its financial position. In June 2005, the FASB issued Statement No. 154, "Accounting Changes and Error Corrections," ("SFAS No. 154") which changes the requirements for accounting for and reporting of a change in accounting principle. SFAS No. 154 requires retrospective application to prior periods' financial statements of a voluntary change in accounting principle unless it is impracticable. SFAS No. 154 also requires that a change in method of depreciation, amortization, or depletion for long-lived, non-financial assets be accounted for as a change in accounting estimate that is effected by a change in accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005, but does not change the transition provisions of any existing accounting pronouncements, including those that are in a transition phase as of the effective date of the Statement. The adoption of SFAS No. 154 will not have a material effect on results of operations or the Company's financial position. F-15 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2005, 2004 and 2003 - -------------------------------------------------------------------------------- 2. Assets Acquired in Satisfaction of Loans ---------------------------------------- Assets acquired in satisfaction of loans consist of the following as of June 30, 2005 and 2004:
Assigned Mortgage Real Estate and Note Equipment Other Total ----------- -------- --------- ----- ----- Balance--July 1, 2003 $ 287,500 $ 616,439 $ 200,000 $ 38,250 $ 1,142,189 Additions 573,668 - 94,866 - 668,534 Sales (287,500) (1,500) - - (289,000) Write-offs - - (100,000) (100,000) ----------- ----------- ----------- ----------- ------------- Balance--June 30, 2004 573,668 614,939 194,866 38,250 1,421,723 Additions 40,647 - 93,200 - 133,847 Sales $ (333,626) (612,350) (100,066) - (1,046,042) Write-offs - - (125,000) - (125,000) ----------- ----------- ----------- ----------- ------------- Balance--June 30, 2005 $ 280,689 $ 2,589 $ 63,000 $ 38,250 $ 384,528 =========== =========== =========== =========== =============
3. Loans Receivable ---------------- Loans are considered non-performing once they become 90 days past due as to principal or interest. The Company has loans of approximately $2,928,000 and $2,182,000 at June 30, 2005 and 2004, respectively, which are considered non-performing. These loans, which were made predominantly in the Chicago market, are either fully or substantially collateralized and are personally guaranteed by the debtor. Included in the total non-performing loans are approximately $720,000 and $571,000 at June 30, 2005 and 2004, respectively, which are no longer accruing interest since the loan principal and accrued interest exceed the collateral value. The followoing table sets forth certain information concerning performing, nonperforming, and non accrual loans as of June 30, 2005 and 2004:
1 2005 2004 ---------- ---------- Loans receivable, net $ 51,910,254 $ 49,391,219 Performing loans 48,982,626 47,208,741 ---------- ---------- Nonperforming loans $ 2,927,628 $ 2,182,478 ============= ============== Nonperforming loans Accrual $ 2,207,220 $ 1,611,386 Nonaccrual 720,408 571,092 ------------- -------------- Average balance of nonperforming loans $ 2,927,628 $ 2,182,478 ============= ==============
F-16 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2005, 2004 and 2003 - -------------------------------------------------------------------------------- Changes in the unrealized depreciation on loans receivable and interest receivable are summarized as follows:
Unrealized depreciation Unrealized on interest depreciation on receivable loans receivable ---------- ---------------- Balance--June 30, 2003 $ 691,000 $ 303,170 Increases, net - 206,600 Decreases, net (660,500) - ------- ------- Balance--June 30, 2004 30,500 509,770 Increase, net 96,500 316,903 Decreases, net (68,000) (676,673) ------- ------- Balance--June 30, 2005 $ 59,000 $ 150,000 ============= =============
The Company has pledged its loans receivable and all other assets of the Company as collateral for its lines of credit (see Note 8). 4. Equity Securities ----------------- Equity securities consist of the following as of June 30, 2005 and 2004:
Telecom- munications Taxi and Vehicle Real Technology Hotel Distributor Estate Other Total ---------- ----------- ---------- --------- ------- -------- Balance--July 1, 2003 $ 246,185 $ 310,000 $ 100,000 $232,261 $ 40,959 $ 929,405 Purchase of securities 30,668 - 100,000 130,600 - 261,268 Sale of securities (25,000) (58,125) - - (20,294) (103,419) Unrealized loss on equity securities arising during the period (13,005) - - - (5,998) (19,003) Equity in loss of investee - - (29,634) - - (29,634) -------- -------- -------- -------- -------- --------- Balance--June 30, 2004 238,848 251,875 170,366 362,861 14,667 1,038,617 Purchase of securities 4,153 - - 125,000 - 129,153 Sale of securities - (251,875) - - - (251,875) Unrealized gain (loss) on equity securities arising during the period 27,268 - (50,000) - 19,315 (3,417) Equity in loss of investee - - (4,021) - - (4,021) -------- -------- -------- -------- -------- --------- Balance--June 30, 2005 $270,269 $ - $116,345 $487,861 $ 33,982 $ 908,457 ======== ======== ======== ======== ======== =========
F-17 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2005, 2004 and 2003 - -------------------------------------------------------------------------------- In June 2005,the Company received $1,090,774 as proceeds from the liquidation of its investment in a hotel. The proceeds represented a return of the remaining carrying value of the investment of $251,875, and the resulting gain for the balance of $838,899 is included in gain on sale of equity securities, net in the accompanying consolidated statements of operations. General ------- 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 held. 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. Certain Investments ------------------- Ameritrans invested $100,000 to obtain a 50% stock ownership interest in a company in August 2003. Since control of the entity resided with the other owner, as evidented by the management of the day-to-day operations as well as the number of board seats, this investment was accounted for using the equity basis of accounting. In February 2005, the Company received common shares of another entity in lieu of full liquidation of its initial investment. The new shares represent an immaterial ownership percentage and are, therefore, no longer accounted for by the equity basis of accounting. Elk also obtained a 48% stock ownership interest in another company during December 2003 in exchange for providing 100% financing for this company to acquire and gain title to certain Chicago medallions from Elk arising from defaulted and foreclosed loans, to purchase vehicles, and for related start up costs. The profit or loss of this company is to be retained by the majority stockholder of this company. Commencing on or after July 1, 2007, and for a two and one-half year period thereafter, the majority stockholder has the right to purchase Elk's interest in this company at a price described in the stockholders' agreement, by giving notice and exercising its right to repurchase Elk's shares. Elk has the right (put option) under the agreement to require the company to repurchase Elk's 48% interest in this company. Under both purchase arrangements, the price is determined by the difference between themarket value of the medallions and the outstanding balance on the loan on the date the right is exercised. F-18 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2005, 2004 and 2003 - -------------------------------------------------------------------------------- The financing related to the purchase of medallions amounted to $1,449,000, and is collateralized by such medallions. The loan bears interest at 4% per annum, and requires two interest only payments of $4,830 due on the first of the month beginning February 1, 2004, then fifty-nine monthly payments of $10,718, including interest, based on a 15 year amortization schedule, with a balloon payment of the balance due on March 1, 2009, the maturity date. The Company also loaned the entity $222,000 on December 31, 2003 related to the purchase of vehicles and such loan is collateralized by the vehicles. The loan bears interest at 4% per annum, and requires three interest only payments of $740 due on the first of the month beginning February 1, 2004, then twenty-six monthly payments of $8,928, including interest, through June 1, 2006, the maturity date. As of June 30, 2005 and 2004, the principal balance outstanding on the loans was $1,538,224 and $1,654,597, respectively. 5. Furniture, Equipment and Leasehold Improvements ----------------------------------------------- Major classes of furniture, equipment and leasehold improvements as of June 30, 2005 and 2004 are as follows:
Estimated 2005 2004 Useful Lives ----------- ----------- ------------- Furniture and fixtures $ 66,061 $ 64,380 7 years Office equipment 308,940 306,629 3-5 years Leasehold improvements 175,633 175,633 Life of lease Automobiles 110,487 131,108 5 years ----------- ----------- 661,121 677,750 Less accumulated depreciation and amortization 331,548 238,488 ----------- ----------- $ 329,573 $ 439,262 =========== ===========
Depreciation and amortization expense for the years ended June 30, 2005, 2004 and 2003 was $100,621, $73,672, and $31,797 respectively. 6. Medallions ---------- During the year ended June 30, 2004, Elk transferred City of Chicago taxicab medallions obtained from defaulted and foreclosed loans to certain newly formed wholly-owned subsidiaries. The subsidiaries borrowed funds in the amount of $2,382,201 from Elk to complete the purchases of the medallions and gained title by paying related transfer fees and satisfying outstanding liens with Elk and the City of Chicago. F-19 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004, 2003 and 2002 - -------------------------------------------------------------------------------- The subsidiaries, in turn lease these medallions to taxicab operators or companies in the Chicago market under weekly and long-term operating lease terms. The weekly leases, which include both medallions and automobiles, are with individuals and automatically renew each week, up to a maximum period of 157 weeks, but may be terminated by the lessee at the conclusion of any weekly period. The weekly leases also include an option for the lessee to purchase either the medallion or automobile, at an amount defined in the agreement, at any time throughout the term of the lease, with credit given for a portion of the lease payments towards the purchase price. As of June 30, 2005, no purchase options have been exercised. The long-term medallion leases are with taxicab companies, which expire at various dates between December 31, 2005 and February 28, 2006, and may be canceled by either party with forty-five days advance written notice. Leasing income under all medallion and taxi cab leases for the years ended June 30, 2005 and 2004 were $211,640 and $119,527, respectively. The minimum leasing income due underlong-term lease agreements, during the year and in the aggregate, is approximately $97,000, for the fiscal year ending June 30, 2006 During theyear ended June 30, 2005, the medallions were written down by $100,000 to their estimated fair value, based on current market conditions. The amount is included in loss and impairments on medallions under lease and assets acquired in satisfaction of loans, net, in the accompaying consolidated statements of operations. 7. Debentures Payable to SBA ------------------------- At June 30, 2005 and 2004 debentures payable to the SBA consisted of subordinated debentures with interest payable semiannually, as follows:
Issue Date Due Date % Interest Rate 2005 2004 ---------- -------- --------------- ---- ---- July 2002 September 2012 4.67* $ 2,050,000 $ 2,050,000 December 2002 March 2013 4.63* 3,000,000 3,000,000 September 2003 March 2013 4.12*, ** 5,000,000 5,000,000 February 2004 March 2014 4.21** 1,950,000 1,950,000 ------------- ------------- $ 12,000,000 $ 12,000,000 ============= =============
* Elk is also required to pay an additional annual user fee of 0.866% on these debentures. ** The fixed rate of 4.12% was determined on the pooling date of March 24, 2004. Prior to the dae, the interim interest rates assigned to the $5,000,000 and the $1,950,000 debentures were 1.682% and 1.595%, respectively. Under the terms of the subordinated debentures, the Company may not repurchase or retire any of its capital stock or make any distributions to its stockholders other than dividends out of retained earnings (as computed in accordance with SBA regulations) without the prior written approval of the SBA. Dividends paid in 2005 and 2004 were in accordance with SBA regulations. F-20 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2005, 2004 and 2003 - -------------------------------------------------------------------------------- SBA Commitment -------------- In January 2002 the Company and the SBA entered into an agreement whereby the SBA committed to reserve debentures in the amount of $12,000,000 to be issued by the Company on or prior to September 30, 2006. A 2% leverage fee will be deducted pro rata as the commitment proceeds are drawn down. A 1% non-refundable commitment fee of $120,000 was paid by Elk in 2002 at the time of obtaining the $12,000,000 commitment. In February 2004, Elk made the final draw down under this commitment. 8. Notes Payable to Banks ---------------------- At June 30, 2005 and 2004 the Company had loan commitments with three banks for lines of credit aggregating $40,000,000. At June 30, 2005 and 2004, the Company had $29,770,652 and $28,908,652, respectively, outstanding under these lines. The loans, which mature at various dates between October 31, 2005 and December 31, 2005, bear interest at the lower of either the reserve adjusted LIBOR rate plus 1.5% or the banks' prime rate minus 0.50%. At June 30, 2005, the weighted average interest rate on outstanding bank debt was approximately 4.73%. Upon maturity, the Company anticipates that the banks will extend these lines of credit for another year, as has been the practice in previous years. Pursuant to the terms of the agreements the Company is required to comply with certain covenants and conditions, as defined in the agreements. The Company has pledged its loans receivable (see Note 3) and all other assets as collateral for the above lines of credit. Pursuant to the SBA agreement and an "intercreditor agreement" among the lending banks, the SBA agreed to a subordination in favor of the banks, provided that the Company maintains certain debt levels based on performance of its portfolio. 9. Preferred Stock --------------- Ameritrans had 1,000,000 shares of "blank check" preferred shares authorized of which 500,000 shares were designated as 9 3/8% cumulative participating preferred stock $.01 par value, $12.00 face value. The remaining 500,000 shares of these "blank check" preferred shares were unissued at June 30, 2005 and 2004. As part of the April 24, 2002 stock offering (see Note 10) Ameritrans issued 300,000 shares of 9-3/8% cumulative participating redeemable preferred stock $.01 par value, $12.00 face value. These preferred shares are redeemable at the option of the Company at the face value plus a redemption premium of up to 8% of face value, based on certain criteria, through April 2007. F-21 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2005, 2004 and 2003 - -------------------------------------------------------------------------------- 10. Common Stock ------------ Ameritrans has 5,000,000 authorized common shares, $0.0001 par value, of which 1,745,600 shares were issued and outstanding after the shares exchange with Elk (see Note 1) as of June 30, 2001. As part of a stock offering in April 2002, the Company issued an additional 300,000 shares of common stock. (see Note 11). Pursuant to a foreclosure agreement with a borrower, Elk obtained 10,000 shares of Ameritrans common stock, which had previously been pledged by the borrower as collateral. At June 30, 2005 and 2004 these shares are recorded as treasury stock at cost, which was the market value of the shares at the foreclosure date. 11. Stock Offering -------------- On April 24, 2002 the Company completed a public offering of 300,000 units, each unit consisting of one share of common stock, one share of 9-3/8% cumulative participating preferred stock, $.01 par value, face value $12.00, and one redeemable warrant exercisable into one share of common stock. Each warrant entitles the holder to purchase one share of common stock at an exercise price of $6.70, subject to adjustment, as defined until April 2007. The warrants may be redeemed by the Company under certain conditions. The Company has the right to redeem all the warrants at a price of $.10 per warrant upon not less than 30 days prior written notice; provided that before any redemption of warrants can take place, the average closing price of the Company's common stock as reported on NASDAQ shall have been $8.70 per share for 20 consecutive trading days ending within 30 days prior to the date on which notice of redemption is sent. To date, no warrants have been exercised. The gross proceeds from the offering was $5,700,000 less costs and commissions of $1,704,399 resulting in net proceeds of $3,995,601. The underwriter had the option to increase this offering by 45,000 units to cover over-allotments through June 2, 2002, which option was not exercised. The underwriter also earned the right in exchange for $2,500 to purchase up to 30,000 units at an exercise price of $21.45 per unit, each unit consisting of one share of common stock, one share of 9-3/8% cumulative participating preferred stock, $.01 par value, face value $12.00, and one redeemable warrant exercisable at $8.40 per share. These units are exercisable over a five-year period which commenced April 18, 2003. To date, the underwriter has not exercised the right to purchase these units. 12. Income Taxes ------------ The provision for income taxes for the years ended June 30, 2005, 2004, and 2003 consists of the following:
2005 2004 2003 --------- --------- --------- Federal $ - $ 2,908 $ 473 State and local 7,711 13,593 7,424 --------- --------- --------- $ 7,711 $ 16,501 $ 7,897 ========= ========= =========
F-22 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2005, 2004 and 2003 - ------------------------------------------------------------------------------- In order to be taxed as a Regulated Investment Company, the Company must payout at least 90% of its net taxable income to its stockholders in the form of dividends. The above provision represents income taxes accrued on undistributed income for the respective years. 13. Financial Instruments --------------------- Fair value is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties. The fair values presented below have been determined by using available market information and by applying valuation methodologies. The methods and assumptions described below were used in calculating the fair values of the instruments: Loans Loans receivable are recorded at their estimated fair value. Investment Securities The estimated fair value of publicly traded equity securities is based on quoted market prices and the estimated fair value of privately held equity securities is recorded at the lower of cost or fair value. Debt The carrying value of the bank debt is a reasonable estimate of their fair values as the interest rates are variable, based on prevailing market rates. The fair value of the SBA debentures were computed using the discounted amount of future cash flows using the Company's current incremental borrowing rate for similar types of borrowings. The estimated fair values of such debentures as of June 30, 2005 and, 2004 were approximately $11,440,000 and $11,630,000, respectively. Other The carrying value of cash and cash equivalents, accured interest receivable and payable, and other receivables and payables,approximates fair value due to the relative short maturities of these financial instruments. 14. Related Party Transactions -------------------------- The Company paid approximately $115,000, $21,000 and $38,000 to a law firm related to the President and other officers and directors of the Company for the years ended June 30, 2005, 2004, and 2003, respectively, for legal services provided. F-23 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2005, 2004 and 2003 - ------------------------------------------------------------------------------- During the year ended June 30, 2001, the Company rented office space on a month-to-month basis from the lawfirm owned by the President and other officers and directors of the Company without a formal lease agreement. On July 1, 2001 the Company entered into a sublease agreement with this affiliated entity requiring rental payment of $3,292 per month, which expired April 30, 2004. As part of this agreement the affiliated entity, at the Company's request, rented an additional 1,800 square feet of office space contiguous with the Company's offices. In November 2003, the Board of Directors approved a new sublease with the affiliated entity to take effect upon the expiration of the prior sublease, May 1, 2004, and to continue through April 20, 2014. The Company's rent share is currently $8,327 per month and subject to annual increases as per the master lease agreement between the landlord and the lawfirm of Granoff Walker & Forlenza, P.C., whose stockholders are officers and directors of the Company. The Company is presently utilizing 37% of the rented space and therefore committed to the minimum 37% utilization factor on all rent, additional rent and electricity charges billed to landlord, subject to annual increases as per the master lease agreement between the landlord and the affiliated entity. In the event that more space is utilized, the percentage of the total rent shall be increased accordingly. Until the Company utilizes the additional space, the affiliated entity sublets the additional space to unaffiliated tenants. In the event all or a portion of the additional space is vacant, the Company has agreed to reimburse the affiliated entity for the additional rent due. During the years ended June 30, 2005, 2004 and 2003 the Company paid the affiliated entity approximately $0, $2,200, and $3,500, respectively, relating to this space. Rent expense under the lease amounted to $84,226, $101,116, and $59,290 for the years ended June 30, 2005, 2004, and 2003, respectively. In addition, the Company was also obligated to pay for its share of overhead expense as noted in the above lease agreement. Under the agreement which expired April 30, 2004, minimum overhead cost payments were $7,333 per month. Under the extended lease agreement, the current minimum amount is now $3,000 a month, and the Company is also required to reimburse the affiliated entity for certain office and salary costs. Overhead costs and reimbursed office and salary expenses amounted to $56,664, $62,840 and $84,989 for the years ended June 30, 2005, 2004 and 2003, respectively. Effective July 1, 2003, the Company entered into a new ten-year sublease for additional office and storage space with another entity in which an officer and director of the Company has a financial 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. Rent expense under the lease amounted to $47,576 and $43,123 for the years ended June 30, 2005 and 2004, respectively. Total occupancy costs under the above lease and overhead cost reimbursement agreements amounted to $188,466, $207,079, and $144,279 for the years ended June 30, 2005, 2004 and 2003, respectively. F-24 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2005, 2004 and 2003 - -------------------------------------------------------------------------------- The future minimum rental and overhead payments for each of the next five years and in the aggregate thereafter are as follows: Year Ending June 30 Rent Overhead Total Occupancy ------------- ------------- ----------- _______________ 2006 $ 144,661 $ 36,000 $ 180,661 2007 146,105 36,000 182,105 2008 147,599 36,000 183,599 2009 150,055 36,000 186,055 2010 156,202 36,000 192,202 Thereafter 575,430 138,000 713,430 ------------- ----------- ----------- $ 1,320,052 $ 318,000 $ 1,638,052 ============= =========== =========== 15. Commitments and Contingencies ----------------------------- Interest Rate Swap ------------------ On June 11, 2001, the Company entered into an interest rate swap transaction for $15,000,000 notional amount with a bank which expired June 11, 2003 and on February 11, 2003, the Company entered into another interest rate swap transaction for $5,000,000 notional amount with the same bank which expired February 11, 2005. These swap transactions were entered into to protect the Company from an upward movement in interest rates relating to outstanding bank debt and settle the 11th day of each month. These swap transactions provided for a fixed rate of 4.95%, and 3.56%, respectively for the Company and if the floating one month LIBOR rate fell below the fixed rate then the Company was obligated to pay the bank for the difference in rates. When the one-month LIBOR rate is above the fixed rate the bank is obligated to pay the Company for the differences in rates. For the twelve months ended June 30, 2005, 2004, and 2003, Elk incurred additional interest expense of $5,551, $47,795 and $507,436, respectively, due to the fluctuation of interest rates, under these agreements. F-25 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2005, 2004 and 2003 - -------------------------------------------------------------------------------- Employment Agreements --------------------- In July 2001, the Company entered into an employment agreement with an executive. This agreement was amended and restated in December 2002. The amended and restated agreement calls for annual compensation of $296,500, $321,500, $336,500, $348,900 and $361,800, respectively, for the five fiscal years beginning July 1, 2003. The agreement also calls for a discretionary bonus to be determined by the Board of Directors but in no event less than $15,000 per year, as well as certain other benefits. The amended and restated agreement expires July 1, 2008 but will automatically renew for an additional five (5) years unless either the Company or the executive gives notice of non-renewal. In July 2001, the Company also entered into a consulting agreement with this executive. This agreement was amended and restated in December 2002. The amended and restated agreement does not become effective unless the employment agreement between the Company and the executive is terminated. If the employment agreement is terminated under certain circumstances, as defined, the consulting agreement becomes effective and continues for a period of five (5) years. The amended and restated consulting agreement calls for compensation of one-half of the executive's base salary in effect at the termination date of the employment agreement plus any bonus paid. From October 2001 through December 2002, the Company entered into employment agreements with five other executives of the Company which calls for a minimum aggregate base salary, including minimum bonus, of approximately $462,000 per annum plus discretionary bonuses. The agreements also call for annual increases in base salary. These employment agreements expire between October 2006 and June 2008, but will be automatically renewed for an additional five (5) years unless either the Company or the executives give notice of non-renewal. 16. Defined Contribution Plan ------------------------- The Company maintains a simplified employee pension plan covering all eligible employees of the Company. Contributions to the plan are at the discretion of the Board of Directors. During the years ended June 30, 2005, 2004 and 2003, contributions amounted to $127,376, $116,610, and $86,443, respectively. 17. Stock Option Plans ------------------ Employee Incentive Stock Option Plan ------------------------------------ During September 1998, Elk adopted an employee incentive stock option plan. An aggregate of 125,000 shares of common stock were authorized for issuance under the plan. Subsequently Ameritrans adopted an employee stock option plan which is substantially identical to and successor to the Elk plan. During January 2002, the plan was amended to increase the shares of common stock authorized for issuance to an aggregate of 200,000 shares. The plan provides that options may be granted to attract and retain key employees of the Company. Options granted under the plan vest immediately and are exercisable for periods ranging from five to ten years. F-26 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2005, 2004 and 2003 - -------------------------------------------------------------------------------- Under the plan, each stock option granted will have an exercise price equal to at least the market value of the common stock on the grant date for all other employees, but 110% of market value for employees/stockholders who own more than 5% of the common stock. In January 1999, the Company granted 100,000 options to certain key employees at an exercise price ranging from $8.878 to $9.7625 per share which equaled market values at the dates of grant. In January 2004, 30,000 options expired. During the year ended June 30, 2005, 70,000 options were canceled and 33,800 options were granted with exercise prices ranging from $4.50 to $4.95 per share. No options were granted during the years ended June 30, 2004, or 2003. Non-Employee Directors Stock Option Plan ---------------------------------------- On August 31, 1999, the Company adopted a Non-Employee Directors Stock Option Plan (the "Plan") with an aggregate of 75,000 options authorized for issuance. During January 2002, the Board of Directors and shareholders approved an amendment to the Plan to increase the aggregate of options authorized for issuance to 125,000 and to provide for automatic grants of options upon re-election of eligible directors. This amendment is still subject to the approval of the Securities and Exchange Commission. The Plan provides that options may be granted to attract and retain qualified persons to serve as directors of the Company. Options granted under this Plan are exercisable twelve months from the date of grant and expire five years from the date of grant. In addition, the option price will not be less than the market value of the common stock on the grant date. In August 1999, the Company granted 22,224 options to four directors at an exercise price of $9.00 per share. In January 2000, the Company granted an additional 11,112 options to two directors at an exercise price of $9.00 per share. During the year ended June 30, 2002, 11,112 of these options were terminated. In September 2003, the Company granted 10,917 options to a newly eligible director at an exercise price of $4.58 per share. During the year ended June 30, 2005, 22,224 options granted to four Directors expired and 36,040 options were automatically granted with exercise prices ranging from $4.99 to $6.25 per share. There were no options granted for the year ended June 30, 2003. F-27 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2005, 2004 and 2003 - -------------------------------------------------------------------------------- A summary of Stock Option Plan's transactions in fiscal periods 2005, 2004 and 2003 is as follows:
Options Outstanding ------------------------------- Weighted Average Available for Number of Exercise Price Options Shares Per Share ---------------- --------- ----------- Options outstanding at June 30, 2003 and 2002 152,776 122,224 $9.12 Granted (10,917) 10,917 $4.58 Canceled - - - Expired 30,000 (30,000) $9.76 Exercised - - - ------- --------- Options outstanding at June 30, 2004 171,859 103,141 $8.45 Granted (69,840) 69,840 $5.13 Canceled 70,000 (70,000) $8.88 Exercised 22,224 (22,224) $9.00 ------- ------- Options outstanding at June 30, 2005 194,243 80,757 $5.06 ========= =========
The following table summarizes information about the stock options outstanding under the Company's option plans as of June 30, 2005:
Options Outstanding Options Exercisable ------------------- ------------------- Weighted Number Average Weighted Number Range of Outstanding Remaining Average Exercisable Weighted Exercise at June 30, Contractual Exercise at June 30, Average Prices 2005 Life Price 2005 Exercise Price ------------- ---- -------------- --------- ------------- -------------- $4.50-$4.95 33,800 4.33 years $4.68 33,800 $4.68 $4.58 10,917 3.24 years $4.58 10,917 $4.58 $4.99 20,040 4.17 years $4.99 - - $6.25 16,000 4.54 years $6.25 - - ----------- -------- ------- $4.50-$6.25 80,757 4.20 years $5.06 44,717 $4.66 =========== ========= ======
Pro forma information regarding net income and earnings per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method required by SFAS 123. The fair market value for these options was estimated at the date of grant using a Black-Scholes option-pricing model and the following assumptions for the year ended June 30, 2005: F-28 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2005, 2004 and 2003 - -------------------------------------------------------------------------------- Risk-free rate 5.00% Dividend yield 0.00% Volatility factor .27 Average life 5 years The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the vesting period of the options. The Company's pro forma information for the year ended June 30, 2005 is as follows: 2005 2004 2003 ---- ---- ---- Net loss available to common shareholders as reported $ (224,726) $(704,683) $57,714 Deduct: stock-based compensation expense determined under fair value method (66,028) - - __________ ________ _______ Pro forma net loss available to common shareholders $ (290,754) $(704,683) $57,714 Net loss per common share: Basic -as reported $ (0.11) $(0.35) $0.03 -pro forma $ (0.14) $(0.35) $0.03 Diluted -as reported $ (0.11) $(0.35) $0.03 -pro forma $ (0.14) $(0.35) $0.03 Since no options vested during the years ended June 20, 2004 and 2003, there is no pro forma net (loss) income or (loss) income per share effect disclosed for those years. F-29 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2005, 2004 and 2003 - -------------------------------------------------------------------------------- 18. Quarterly Financial Data (Unaudited) ------------------------------------ For the year ended June 30, 2005:
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Investment income $ 1,281,134 $ 1,267,191 $ 1,393,656 $ 2,190,085 Operating income (loss) 89,188 (326,432) 41,808 285,289 Income (loss) before taxes 87,177 (326,558) 74,637 285,229 Net (loss) available to common shareholders 337 (411,615) (14,075) 200,627 Net income (loss) per common share: Basic 0.00 (0.20) (0.01) 0.09 Diluted 0.00 (0.20) (0.01) 0.09 For the year ended June 30, 2004: First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Investment income $ 1,460,900 $ 1,411,961 $ 1,428,311 $ 1,338,320 Operating income (loss) (107,856) (193,069) (22,770) 2,647 Loss before taxes (107,856) (193,069) (47,517) (2,240) Net income (loss) available to common shareholders (202,773) (278,191) (135,998) (87,721) Net income (loss) per common share: Basic (0.10) (0.14) (0.07) (0.04) Diluted (0.10) (0.14) (0.07) (0.04)
F-30 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2005, 2004 and 2003 - -------------------------------------------------------------------------------- 19. Subsequent Event ---------------- Private Offering In July 2005, the shareholders of the Company approved the private offering of the Company's common stock, $.0001 par value, at a fixed purchase price of no les than book value to a limmited of "accredited investors," as that term is defined in Rule 506 of Regulation D, promulgated under the Securities Act of 1933, as amended. Additionally, for evey four (4) shares of common stock purchased, the Company will issuet to the inbvestor one (1) warrant, exercisable for five (5) years from the date of issuance, to purchase one (1) share of common stock at an exercise price to be fixed at a specified dollar amount that is 110% of the purchase price of the shares. The Company proposes to raise aggregate gross proceeds between a minimum of $3,000,000 and up to a maximum to $10,000,000. SBA Audit On August 29 2005, the Company received a letter from the US Small Business Administration together with a copy of the Examination Report for the period ended March, 31, 2004. The letter and Examination Report contained findings that Elk had potentially violated certain provisions of the SBA regulations, relating to (1) the sale of certain foreclosed Chicago medallions to an associate of Elk without obtaining the SBA's final written approval, and (2) the creation of subsidiary companies and completion of certain related financings to those subsidiary companies without obtaining the SBA's prior written approval. The letter contained certain other comments with respect to partial use of proceeds concerning one loan that the Company made to a third party borrower, and the prepayment provision contained in the loan documents to a different borrower. Management has already rsponded to the SBA in writing concerning the findings, and Management recently met with the SBA in an effort to resolve these findings in a timely manner. The Company believes that it was acting in good faith when it effectuated the transactions with respect to the sale of the foreclosed Chicago medallions to an associate, as it had applied for permissions from the SBA prior to completion of the loan in question, had obtained an indication of approval and SBA was in the process of taking the steps to obtain formal written approval for the transaction. The Company believes that it was also acting in good faith when it created the subsidiary companies (deemed "associates" under SBA regulations) to purchase the foreclosed medallions, as it was having ongoing discussions with SBA at the time to obtain SBA's approval of the transaction and had received verbal indications that it felt it had or would, in due course, subsequently obtain SBA's written approval to the transactions. The Company believes that it has adequate explanations for the use of proceeds issue on the third party loan and the prepayment issue. The Company believes that the tone of the meeting with SBA to reach resolution of the issues on these matters was positive and the Company anticipates a speedy resolution by the SBA. Neither the Company nor its counsel, however, can predict when these matters will be resolved, or the manner in which they will be resolved. The Company believes that the resolution of these matters with SBA will not have any material adverse financial or regulatory consquences to the Company. F-31 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- SCHEDULE OF LOANS June 30, 2005 - --------------------------------------------------------------------------------
Number of Maturity Dates Balance Type of Loan Loans Interest Rates (in Months) Outstanding ------------ ----- -------------- ----------- ----------- Chicago: Taxi medallion 474 4 - 13.9% 1 - 175 $ 23,881,163 New York City: Taxi medallion 23 5 - 7.50% 4 - 30 8,203,726 Radio car service 11 11 - 12% 2 - 18 60,497 Miami: Taxi medallion 64 7.25 - 12% 1 - 84 3,202,985 Boston: Taxi medallion 22 6.75 - 9% 1 - 36 2,843,964 --------- 38,192,235 ---------- Other loans: Laundromat 22 6 - 14% 1 - 111 4,187,498 Commercial construction 4 12.75-13.50% 6-11 1,638,701 Restaurant/food service 12 9 - 12% 15 - 81 1,334,532 Broadcasting/telecommunications 1 10.50% 180 810,000 Dry cleaner 18 5.5 - 13% 1- 72 741,633 Food Market 2 12.50% 34 - 108 645,432 Real estate holding 2 8.5 - 10.5% 49-56 623,333 Moving company 1 12% 45 500,000 Oil distributor 1 12% 80 496,571 Debt collection 2 6-7% 72-84 460,857 Trucking company 1 11% 105 450,000 Black car service (real property) 2 8.50% 13 449,598 Florist 1 7.25% 21 302,962 Taxicab advertising 1 10% 41 285,668 Auto sales 2 7 - 12% 19 241,578 Retirement home 1 14% 73 190,181 ATM manufacturer & distributor 1 12% 46 149,565 Taxicab distributor 1 6% 24 118,755 Car wash/auto center 1 9.25% 30 77,405 Miscellaneous 1 13.00% 12 53,000 Nail salon and spa 1 9% 52 45,947 Software company 3 8% 20-42 41,307 Computer services 1 9.5% 10 23,39 13,867,919 ------------- Total loans receivable 52,060,254 less unrealized depreciation on loans receivable (150,000) ------------- Loans receivable, net $ 51,910,254 ============= - -------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
F-32 EX-31 2 exhibit311final.txt 31.1 EXHIBIT 31.1 CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 DISCLOSURE IN THE REGISTRANT'S ANNUAL REPORT I, Gary C. Granoff, President, Chief Executive Officer, and Chief Financial Officer of Ameritrans Capital Corporation, certify that: 1. I have reviewed this annual report on Form 10-k of Ameritrans Capital Corporation (the "report"); 2. Based on my knowledge, the report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the report; 3. Based on my knowledge, the financial statements, and other financial information included in the report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in the report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of the report (evaluation date); and (c) Presented in this report my conclusions about the effectiveness of the disclosure controls and procedures based on my evaluation as of the evaluation date. 5. I have disclosed, based on my most recent evaluation, to the registrant's auditors and the audit committee of the board of directors (or persons performing the equivalent functions): (a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data; and have identified for the registrant's auditors any material weakness in internal controls; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. I have indicated in the report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of my most recent evaluation, including any corrective actions with regard to significant deficiencies and material weakness. Dated: September 28, 2005 -------------------------------------- GARY C. GRANOFF PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER EX-32 3 exhibit321final.txt 32.1 EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Ameritrans Capital Corporation (the "Company") on Form 10-K for the fiscal year ended June 30, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Gary C. Granoff, President, Chief Executive Officer, and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. - ---------------------------------------------- GARY C. GRANOFF PRESIDENT, CHIEF EXECUTIVE OFFICER, AND CHIEF FINANCIAL OFFICER September 28, 2005 EX-99.2R CODE ETH 4 exhibit141ethicsjuly5.txt CODE OF ETHICS VALIDATED AMERITRANS CAPITAL CORPORATION CODE OF ETHICAL CONDUCT I. INTRODUCTION 1. PURPOSE It is the policy of Ameritrans Capital Corporation and its wholly-owned subsidiaries (together, the "Company") to conduct business with honesty and integrity and in compliance with all applicable legal and regulatory requirements. The company recognizes that some individuals hold an important and elevated role in corporate governance, These people are uniquely capable and empowered to ensure that shareholders' interests are appropriately balanced, protected, and preserved. Accordingly, this Code provides principles to which persons identified as Access Persons, as defined below, are expected to adhere. This Code embodies rules regarding individual and peer responsibilities to the Company, the public, and shareholders. This Code of Ethics sets out the fundamental standards to be followed by Access Persons, as defined below, and seeks to promote honest and ethical conduct. Further guidance on the Company's standards in specific areas will be provided through related corporate policies and guidelines. 2. SCOPE This policy applies to all Company Access Persons, as defined in Section 3 below. This definition includes, but is not limited to, Directors, Officers, and Beneficial Interest holders of the Company. 3. DEFINITIONS (a) "Access Person" means: (i) any officer or director of the Company; (ii) any employee of the Company (or of any company in a control relationship to the Company) who, in connection with his or her regular functions or duties, makes, participates in or obtains information regarding the purchase or sale of Covered Securities by the Company, or whose functions or duties relate to the making of any recommendations with respect to such purchases or sales; (iii) any natural person in a control relationship, as defined in part (d) of this section, to the Company who obtains information concerning recommendations made for the purchase or sale of Covered Securities by the Company. (b) "Affiliated Person" of another person means: (i) any person directly or indirectly owning, controlling or holding with power to vote, five percent (5%) or more of the outstanding voting securities of such other person; (ii) any person 5% or more of whose outstanding voting securities are directly or indirectly owned, controlled or held with power to vote, by such other person; (iii) any person directly or indirectly controlling, controlled by, or under common control with, such other person; (iv) any officer, director, partner, copartner, or Access Person of such other person; and (v) any investment advisor of the Company. (c) "Beneficial Interest" means any interest by which an Access Person or any member of his or her immediate family (relative by blood or marriage living in the same household) can directly or indirectly derive a monetary benefit from the purchase, sale (or other acquisition or disposition) or ownership of a Security, except such interests as the Designated Officer shall determine to be too remote for the purpose of this Insider Trading Policy. (A transaction in which an Access Person acquires or disposes of a Security in which he or she has or thereby acquires a direct or indirect Beneficial Interest will be referred to in this Insider Trading Policy as a "personal securities" transaction or a transaction for the person's "own account"). (d) "Control" means the power to exercise a controlling influence over the management or policies of a company (unless such power is sole the result of an official position with such company). Any person who owns beneficially, directly or through one of more controlled companies, more than twenty-five percent (25%) of the voting securities of a company shall be presumed to control such company. Natural persons shall be presumed not to be controlled persons. (e) "Covered Person" means all affiliated persons of the Company. (f) "Covered Securities" means a Security on the Company's Restricted List, any warrant for, option in, or Security immediately convertible into that Security. A security as defined in Section 2(a)(36) of the Investment Company Act of 1940, as amended (the "1940 Act"), except that it does not include (i) direct obligations of the Government of the United States; (ii) banker's acceptances, bank certificates of deposit, commercial paper and high quality short term debt instruments including repurchase agreements; and (iii) shares issued by open-end funds. (g) "Designated Officer" means the officer of the Company designated by the Board of Directors from time to time to be responsible for management of compliance with this Code. The Designated Officer may appoint a designee to carry out certain of his or her functions pursuant to this Code. The Designated Officer is set forth on Exhibit B hereto, as such shall be amended from time to time. (h) "Independent Director" means any Director of the Company who is not an "interested person" (as defined in the Investment Company Act of 1940, as amended (the "Act") of the Company. (i) "Investment Personnel" of the Fund means any person covered by Section (a)(ii) or (iii). (j) "Security" or "security" includes all stock, debt obligations and other instruments, including any warrant or option to acquire or sell a Security and financial futures contracts, but excludes securities issued by the U.S. government or its agencies, bankers, acceptance, bank certificates of deposit, commercial paper, repurchase agreements and shares of a mutual fund. References to a "security" in this Insider Trading Policy shall include any warrant for, option in, or Security immediately convertible into that Security. (k) A "Security held or to be acquired" by the Fund means any Security that, within the most recent fifteen (15) days: (i) is or has been held by the Company; or (ii) is being or has been considered for purchase by the Company; and (iii) any option to purchase or sell, and any securities convertible into or exchangeable for any security described in (i) or (ii). II. CODE OF CONDUCT AND ETHICS 1. POLICY Each Access Person must: (a) Act honestly and ethically, including ethically handling actual or apparent conflicts of interest between personal and professional relationships. (b) Act to ensure full, fair, accurate, timely and understandable disclosure in reports and documents that the Company files with, or submits to, the Securities and Exchange Commission and in other public communications made by the Company. (c) Comply with applicable governmental laws, rules, and regulations. (d) Act in good faith, responsibly, and with due care and diligence, without misrepresenting material facts or allowing independent judgment to be impaired. (e) Promptly report to the Designated Officer any conduct that you believe to be a violation of the law, business ethics, and this Code, including any transaction or relationship that reasonably could be expected to give rise to such a violation, or any other policy of the Company. 2. RESPONSIBILITY (a) All Access Persons must uphold these standards in the conduct of Company business and the Company must handle, in a manner consistent with these standards and related policies, all actual and apparent conflicts of interest between personal and professional relationships and all other matters governed by this Code of Ethics and such related policies. If a decision about a particular action is not covered specifically by this Code or related corporate policies, employees are required to seek guidance from the Designated Officer. (b) Upon determination that a violation of this Code has occurred, appropriate management personnel of the Company may impose such sanctions as they deem appropriate, including, among other things, a letter of censure or suspension or termination of the employment of the violator. All violations of this Code and any sanctions imposed with respect thereto shall be reported in a timely manner to the Board of Directors of the Company. III. CONFLICTS OF INTEREST POLICY 1. POLICY (a) The Company expects all Access Persons to be free from actual or potential conflicts of interest when dealing with other persons or business entities on behalf of the Company. While the Company desires that its Access Persons be free to make personal investments and to enjoy social and normal business relations, they must not have any personal interest that conflicts with those of the Company, or which might influence or appear to influence their judgment or actions in performing their corporate duties. The key to addressing any conflicts of interest is full disclosure. Often, with prior disclosure, a potential conflict may be resolved. (b) This policy acknowledges the general principles that Access Persons: (i) owe a fiduciary obligation to the Company; (ii) have the duty at all times to place the interest of the Company shareholders first; (iii) must conduct all personal securities transactions in such a manner as to avoid any actual or potential conflict of interest or abuse of an individual's position of trust and responsibility; and (iv) should not take inappropriate advantage of their positions in relation to the Company. (c) While it is not practical to describe every circumstance that might lead an Access Person into conflict with the aims and interests of the Company, the following examples highlight areas in which conflicts may arise. In other cases, Access Persons should seek guidance from the Designated Officer: (i) The holding by an Access Person or any member of his or her immediate family of any substantial financial interest in any enterprise which engages competitively in any field of activity engaged in by the Company or which has, or is seeking, business dealings (e.g. as suppliers or customers) with the Company without the written approval described in Section 2 below. (ii) Acting as a director, officer, employee, consultant, advisor or in any other capacity for any business or other organization with which the Company currently (or potentially) has a competitive or business relationship without the written approval as described in Section 4 below. (iii) Engaging in any outside activity with an individual, business or organization which currently (or potentially) has a competitive or business relationship with the Company where such activity is likely to decrease the impartiality, judgment, effectiveness, or productivity expected from such employee in his or her job without the written approval as described in Section 2 below. (iv) Acceptance, directly or indirectly, from an individual, business or organization which currently (or potentially) has a competitive or business relationships with the Company by an Access Person or any member of an Access Person's immediate family of any vacations, cash, cash equivalents, service, payment, loan, discount, gifts, or entertainment except as provided in Section IV below. (v) Knowingly competing with the Company in the purchase or sale of any kind of property - tangible or intangible; or diversion from the Company, for the Access Person's own direct or indirect benefit, of a business opportunity in which the Company has, or is likely to have, and interest. (vi) Recommending any securities transactions by the Company without having disclosed his or her interest, if any, in such securities or the issuer thereof, including without limitation (i) any direct or indirect ownership of any securities of such issuer, (ii) any contemplated transaction by such person in such securities, (iii) any position with such issuer or its affiliates, and (iv) any present or proposed business relationship between such issuer or its affiliates and such person or any party in which such person has a significant interest. (d) Nothing in this Conflicts on Interest policy shall restrict any officer, director, or employee who is a licensed attorney practicing at a law firm from representing third party clients within the scope of such person's legal practice. 2. PROCEDURE (a) If an Access Person has any doubt about whether a conflict of interest exists, the Access Person must promptly disclose the situation to their supervisor or the Designated Officer and seek appropriate guidance before taking any action. This includes situations where members of the Access Person's immediate family hold or assume positions in any business or other organization which may cause the Access Person to have a conflict with the aims and interests of the Company. (b) If there is any question or concern regarding a potential conflict of interest, prior review and written approval should be obtained from the Designated Officer. 3. RESPONSIBILITY All Access Persons are responsible for compliance with this policy. IV. ACCEPTANCE OF GIFTS AND ENTERTAINMENT POLICY 1. POLICY (a) The Company's reputation and the respect of those with whom it deals are among its most vital assets. These assets must not be jeopardized by acceptance of any entertainment, gift or other favor intended to or perceived by others to influence the business judgment of the recipient. This requires: (i) Adherence to high standards of ethical conduct, integrity and legal compliance; and (ii) Avoidance of conflicts of interest and the perception of impropriety. (b) Business Meals and Entertainment: (i) Access Persons may accept business meals and entertainment when it is: Lawful and ethical; Occasional; Customary and reasonable in value; and In support of the Company's business and not just for the Access Person's well-being or use. (ii) Costs of excessive travel and overnight accommodation should not be accepted, as these are not considered entertainment which is reasonable in value. (iii) If you are in doubt, follow the procedure in Section 2, disclose the situation to your supervisor or the Designated Officer and seek appropriate guidance. (c) Gifts: (i) Access Persons may not accept any gift of more than a de minimus value from any person or entity that does business with or on behalf of the Company. (ii) Gifts of greater than de minimus value should be politely declined and returned to the sender in a timely manner. (iii) Access Persons may accept frequent flyer miles awarded by airlines for business travel for the Company, provided that the travel option selected is in accordance with the corporate travel policy and is solely based on the best interest of the Company in terms of cost, timing, and good procurement practices. (iv) Except as permitted under sections 1(b) and 1(c) above, Access Persons (and members of their immediate family) must not accept or solicit, directly or indirectly, from any vendor or supplier of the Company, current or potential, any entertainment or gifts, including, but not limited to: Vacations; Cash payments; Cash equivalents (e.g., gift certificates); Services; Loans (except as private individuals from banks or other financial institutions); or Discounts (except those offered to employees of the Company generally). 2. PROCEDURE If an Access Person has any doubt about whether it is appropriate to accept entertainment or a gift, you must promptly disclose the situation to the Designated Officer and seek appropriate guidance before taking any action. 3. RESPONSIBILITY All Access Persons are responsible for compliance with this policy. V. INSIDER TRADING POLICY This Insider Trading Policy has been adopted by Ameritrans Capital Corporation and each of its wholly-owned subsidiaries in compliance with Rule 17j-1 (the "Rule") under the Investment Company Act of 1940, as amended (the "Act") to establish standards and procedures for the detection and prevention of activities by which persons having knowledge of the investments and investment intentions of the Company may abuse their fiduciary duties to the Company. This Insider Trading Policy is limited in its scope to address situations involving those officers, directors or Access Persons of the Company who have access to knowledge of the Company's potential and actual investments. 1. GENERAL PROHIBITIONS The specific provisions and reporting requirements of the Rule and this Insider Trading Policy are concerned primarily with those investment activities of Access Persons, defined above, who are associated with the Company and who thus may benefit from or interfere with the purchase or sale of securities by the Company. The Rule and Section 1, however, apply to all affiliated persons of the Company ("Covered Persons"). The Rule makes it unlawful for Covered Persons to engage in conduct that is deceitful, fraudulent or manipulative, or that involves false or misleading statements, in connection with the purchase or sale of securities by an investment company. Accordingly, under the Rule and this Insider Trading Policy, no Covered Person shall use any information concerning the investments or investment intentions of the Company, or his or her ability to influence such investments or investment intentions, for personal gain or in a manner detrimental to the interests of the Company. In addition, no Covered Person shall, directly or indirectly, in connection with the purchase or sale of a "security held or to be acquired" (as defined below) by the Company: (a) employ any device, scheme or artifice to defraud the Company; (b) make to the Company any untrue statement of a material fact or omit to state to the Company a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading; (c) engage in any act, practice or course of business that operates or would operate as a fraud or deceit on the Company; or (d) engage in any manipulative practice with respect to the Company. 2. POLICY ON INSIDER TRADING The Company prohibits any officer, director or Access Person from trading, either personally or on behalf of others, on material, non-public information or communicating material non-public information to others in violation of the law. This policy applies to all Covered Persons. Material, non-public information includes, but is not limited to, information about the Company's intention to make a merger or acquisition proposal to another company. Information in the possession of a Covered Person that is material and non-public must be kept secure and should not be communicated to anyone who does not have a "need to know" in connection with accomplishing a particular transaction. Appropriate precautions should be taken to effect this, such as use of controls over the distribution of draft documents, use of code words, restricting access to computers containing confidential information, and control over support staff and others who may have access to confidential information. The Company will maintain a Restricted List on which the Designated Officer will record the names of all companies with which the Company is potentially contemplating engaging in a strategic corporate transaction. The Restricted List may include the names of a Target Company, its parents or affiliates or other affected companies. The affected securities will remain on the Restricted List until the Designated Officer is notified that the potential transaction has been dropped or completed. No Access Person may purchase or sell Securities on the Restricted List for his or her own account or any account in which he or she has a Beneficial Interest without the prior written approval of the Designated Officer. 3. ADMINISTRATION The administration of this Insider Trading Policy shall be responsibility of the Designated Officer. 4. PROHIBITED TRANSACTIONS (a) General Prohibition. An Access Person may not effect a personal securities transaction without prior approval in accordance with Section 5 of this Insider Trading Policy if he or she knows or should have known at the time of entering into the transaction that: (i) the Company has engaged in a transaction in the same Security within the last fifteen (15) days, or is engaging in a transaction or is going to engage in a transaction in the same Security in the next fifteen (15) days; or (ii) the Security is on the Restricted List. (b) Blackout Period. Investment Personnel may not effect a personal securities transaction on a day during which the Company has a pending "buy" or "sell" order of that same Security until that order is executed or withdrawn. (c) Service as a Director. Investment Personnel may not serve on the board of directors of any publicly traded company without prior written approval in accordance with Section 5 of this Insider Trading Policy. In the event such board service is approved, Investment Personnel must be excluded from making investment decisions on behalf of the Company involving the subject company through the implementation of appropriate "Fire Wall" or other procedures. (d) Interested Transaction. Investment Personnel shall not recommend any securities transactions by the Company without having disclosed his or her interest, if any, in such securities or the issuer thereof, including without limitation: (i) any direct or indirect ownership of any securities of such issuer; (ii) any contemplated transaction by such person in such securities; (iii) any position with such issuer or its affiliates; and (iv) any present or proposed business relationship between such issuer or its affiliates and such person or any party in which such person has a significant interest. (e) Initial Public Offerings. The Company at this time is not interested in acquiring securities in initial public offerings, however, in the event the Company decides to invest in securities in initial public offerings, Investment Personnel shall not acquire, directly or indirectly, beneficial ownership of any Securities in an initial public offering without prior approval of the Designated Officer who has been provided by such person with full details of the proposed transaction. In granting this prior approval, the Designated Officer shall take into consideration, among other factors, whether the investment opportunity should be reserved for the Company and its shareholders and whether the opportunity is being offered to the Investment Personnel by virtue of his or her position with the Company. Purchases of initial public offerings of volatile securities which are difficult to obtain, such as certain common stocks, will ordinarily not be approved. In contrast, purchases of generally available initial public offerings of less volatile securities (such as municipal bonds) in which the Company does not customarily invest would usually be approved. (f) Private Placements. Investment Personnel shall not acquire, directly or indirectly, beneficial ownership of any Securities in a private placement in which the Company is then considering making an investment or which the Company has previously made an investment, without prior approval of the Designated Officer who has been provided by such person with full details of the proposed transaction. In granting this prior approval, the Designated Officer shall take into consideration, among other factors, whether the investment opportunity should be reserved for the Company and its shareholders and whether the opportunity is being offered to the Investment Personnel by virtue of his or her position with the Company. Investment Personnel who have been authorized to acquire securities in a private placement are required to disclose that investment when they play a part in the Company's subsequent consideration of an investment in the issuer. In such circumstance, the Company's decision to purchase securities of the issuer will be subject to an independent review by Investment Personnel with no personal interest in the issuer. 5. EXPRESS PRIOR APPROVAL (a) Procedures. Except as provided in Section 6(a), advance clearance of each personal securities transaction covered by Section 4(a) or (i) any initial public offering or (ii) any private placement restricted by provisions of Paragraph 4(f) herein, must be obtained from the Designated Officer. Transaction clearances must be obtained in advance of the transaction. Clearance must be obtained in writing by completing and signing a form provided for that purpose by the Company, which form shall set forth the details of the completed clearance forms, with all required signatures, shall be retained by the Designated Officer. (b) Factors Considered. The Designated Officer may refuse to grant clearance of a personal securities transaction in its sole discretion without being required to specify any reason for the refusal. Generally, the Designated Officer will consider the following factors, as applicable, in determining whether or not to clear a proposed transaction: (i) Whether the amount or nature of the transaction or person making it is likely to affect the price or market for the Security; (ii) Whether the individual making the proposed purchase or sale is likely to benefit from purchases or sales being made or being considered by the Company; (iii) Whether the Security proposed to be purchased or sold is one that would qualify for purchase or sale by the Company; and (iv) Whether the transaction is nonvolitional on the part of the individual, such as receipt of a stock dividend or a sinking fund call. Request for clearance for transactions in Covered Securities will generally be denied. (c) Other Clearance. Advance clearance of service on the board of directors of a publicly traded company as required under Section 4(d) above must be obtained from the Designated Officer of the Code of Ethical Conduct. The Designated Officer may approve service on the board of directors of a publicly traded company if it is determined that such service is consistent with the interests of the Company and its shareholders. 6. EXEMPT TRANSACTION (a) No Influence or Control. Neither the prohibitions nor the preclearance reporting requirements of this Insider Trading Policy shall apply to purchases, sales or other acquisitions or dispositions of Securities for an account over which the Covered Person or Access Person has no direct influence or control and does not exercise indirect influence or control. (b) Involuntary Transaction. Neither the prohibitions nor the preclearance requirements of this Insider Trading Policy shall apply to involuntary purchases or sales made by a Covered Person or an Access Person. (c) Automatic Dividend Reinvestment Plans. Neither the prohibitions nor the preclearance requirements of this Insider Trading Policy shall apply to purchases which are part of an automatic dividend reinvestment plan. (d) Issuer Distributions. Neither the prohibitions nor the preclearance requirements of this Insider Trading Policy shall apply to purchases or other acquisitions or dispositions resulting from the exercise of rights acquired from an issuer as part of a pro rata distribution to all holders of a class of Securities of such issuer and the sale of such rights. (e) Approved Transactions. The prohibitions of this Insider Trading Policy shall not apply to purchases, sales or other acquisitions or dispositions which receive the prior approval of the Designated Officer upon consideration of the factors stated in Section 5(b) above because: (i) their potential harm to the Company is remote; (ii) they would be unlikely to affect a highly institutional market; or (iii) they are clearly not related economically to Securities being considered for purchase or sale by the Company. 7. REPORTING REQUIREMENTS The following reports must be filed with the Designated Officer of the Insider Trading Policy: (a) Quarterly Reports. Upon request of the Designated Officer, each Access Person shall make a written report to the Designated Officer of this Insider Trading Policy of all transactions occurring in the quarter by which they acquired or disposed of a Beneficial Interest in any Designated Covered Security other than as provided in Section 6(a). Such report must contain the following information with respect to each reportable transaction: (i) date and nature of the transaction (purchase, sale or any other type of acquisition or disposition); (ii) title, interest rate and maturity date (if applicable), number of shares or principal amount of each Designated Covered Security and the price at which the transaction was effected; and (iii) the date that the report is submitted. Such report may contain a statement that the report is not to be construed as an admission that the person making it has or had any direct or indirect Beneficial Interest in any Security to which the report relates. The broker through which the transaction was effected shall be directed by the Access Person to supply to the Designated Officer, on a timely basis, duplicate confirmations and monthly brokerage statements for all securities accounts. An Access Person need not make a quarterly transaction report (under Section 7(a)) or an annual report (under Section 7(b)) if the report would duplicate information contained in broker trade confirmations or account statements received by the Company with respect to the Access Person in the time period required by this Policy, if all of the information required by the Policy is contained in the broker trade confirmations or account statements. (iv) None of our officers or directors or Access Persons may invest, directly or indirectly, in entities related, directly or indirectly, to past, current or proposed portfolio companies. This will be verified quarterly through certifications by our officers, directors and Access Persons. Quarterly Transaction Reports must be completed each quarter, no later than 30 days after the end of the quarter, by each of our officers, directors and Access Persons (b) Disclosure of Personal Holdings. Upon commencement of employment and quarterly thereafter, each Access Person who is also an employee of the Company may be required to disclose his or her current personal securities holdings if upon review of their completed Quarterly Transaction Report, the Designated Officer deems it appropriate. An Access Person must file an initial report not later than 10 days after that person became an Access Person. The initial report must (a) contain the title, number of shares and principal amount of each Designated Covered Security in which the Access Person had any direct or indirect beneficial ownership when the person became an Access Person; (b) identify any broker, dealer or bank with whom the Access Person maintained an account in which any Designated Covered Securities identified in the Initial Holdings Report required by this paragraph (1) were held for the direct or indirect benefit of the Access Person as of the date the person became an Access Person, and (c) indicate the date that the report is filed with the Designated Officer. Provided, however, such Access Person need only identify those Covered Securities that are designated in writing (the "Designated Covered Security") to such Access Person by the Designated Officer in connection with the Access Person's preparation of such initial report. (c) Confirmations and Account Statements. In lieu of providing a Quarterly Transaction Report, an Access Person may direct his or her broker to provide to the Designated Officer (a) duplicate confirmations of all transactions in any Designated Covered Security in which he or she has, or by reason of such transaction acquires, any direct or indirect Beneficial Ownership, and (b) copies of periodic statements for all investment accounts in which they have Beneficial Ownership. (d) Each Access Person shall be required to provided a signed written statement to the Designated Officer in each instance that such Access Person had during the applicable period any interest, directly or indirectly, in any Designated Covered Securities other than those identified, if any. (e) Independent Directors. An Independent Director shall be required to comply with Sections 5(a) and 7(a) above with respect to a transaction only if such person, at the time of that transaction knew, or in the ordinary course of fulfilling his or her official duties of a Director of the Company should have known, that during the 15-day period immediately preceding the date if the transaction by such person, (i) the security such person purchased or sold is or was purchased or sold by the Company or was being considered for purchase or sale by the Company or (ii) the Company is or was considering a strategic corporate transaction with the issuer of the security. (f) Certification of Compliance. Each Access Person is required to certify annually that he or she has read and understood the Company's Policy and recognizes that he or she is subject to such Policy. Further, each Access Person is required to certify annually that he or she has complied with all the requirements of the Policy and that he or she has disclosed or reported all personal securities transactions required to be disclosed or reported pursuant to the requirements of the Policy. (g) Review by the Board of Directors. At least annually, the Company's Designated Officer shall provide a written report to the Board of Directors containing: (i) Any changes made to existing procedures concerning Access Person's personal trading activities made during the past year; (ii) Any recommended changes to the Company's Policy or procedures; (iii) A summary of issues arising under the Policy or procedures since the last report, including information about any material violations with respect to the Company's Policy which occurred during the past year and any sanctions imposed in response to such material violations; and (iv) A certification that the Company has adopted procedures reasonably necessary to prevent Access Persons from violating the Policy. 8. CONFIDENTIALITY OF COMPANY TRANSACTIONS Until disclosed in a public report to shareholders or to the Securities and Exchange Commission in the normal course, all information concerning Securities being considered for purchase or sale by the Company shall be kept confidential by all Access Persons and disclosed by them only on a "need to know" basis. It shall be the responsibility of the Designated Officer of this Insider Trading Policy to report any inadequacy found by him or her to the Board of Directors of the Company or any committee appointed by the Board to deal with such information. 9. SANCTIONS Any violation of this Insider Trading Policy shall be subject to the imposition of such sanctions as the Company may deem appropriate under the circumstances to achieve the purposes of the Rule and this Insider Trading Policy, which sanctions may include suspension or termination of employment, a letter of censure and/or restitution of an amount equal to the difference between the price paid or received by the Company and the more advantageous price paid or received by the offending person. Any profits realized on trades in violation of this Insider Trading Policy must be disgorged to the Company. Sanctions for violation of this Insider Trading Policy by a director of the Company will be determined by a majority vote of its Directors who are not interested persons of the Company. 10. ADMINISTRATION AND RECORDKEEPING (a) Duties of the Designated Officer. The duties of the Designated Officer designated in accordance with Section 2 of this Insider Trading Policy shall include the following: (i) Continuous maintenance of a current list of names of all Access Persons with an appropriate description of their title or employment; (ii) Providing each Access Person a copy of this Insider Trading Policy and informing them of their duties and obligations hereunder, and assuring that Covered Persons who are not Access Persons are familiar with applicable requirements of this Insider Trading Policy; (iii) Maintaining or supervising the maintenance of all records and reports required by this Insider Trading Policy; (iv) Preparing listings of all transactions effected by any Access Person within fifteen (15) days of the date on which the same Security was help, purchased or sold by the Company; (v) Maintaining the Restricted List and communicating its contents to all Access Persons; (vi) Determining whether any particular securities transaction should be exempted pursuant to the provisions of Section 6 of this Insider Trading Policy; (vii) Issuing either personally or with the assistance of counsel as may be appropriate, any interpretation of this Insider Trading Policy which may appear consistent with the objectives of the Rule and this Insider Trading Policy; (viii) Conducting such inspections or investigations as shall reasonably be required to detect and report, with his recommendations, any apparent violations of this Insider Trading Policy to the Board of Directors of the Company or any committee appointed by them to deal with such information; and (ix) Submitting an annual report to the Directors of the Company as required by Section 7(e). (b) Recordkeeping Requirements. The Designated Officer shall maintain, at the Company's principal place of business, the following: (i) A copy of any Insider Trading Policy adopted pursuant to the Rule which has been in effect during the past five (5) years; (ii) A record of any violation of any such Insider Trading Policy and of any action taken as a result of such violation must be maintained in an easily accessible place for at least five (5) years after the end of the fiscal year in which the violation occurs; (iii) A copy of each report made by the Designated Officer under Section 7(e) within two (2) years from the end of the fiscal year of the Company in which such report is made and for an additional three (3) years in place which need not be easily accessible; (iv) A list of all persons who are, or within the past five (5) years have been, required to make reports pursuant to the Rule and any Insider Trading Policy in effect during the period or who are or were responsible for reviewing those reports during the period, must be maintained in an easily accessible place; and (v) A copy of each report made by an Access Person, including any information provided in lieu of such reports, must be maintained for at least five (5) years after the end of the fiscal year in which the report is given or the information is provided, the first two years in an easily accessible place. VI. AMENDMENTS AND MODIFICATIONS This Code of Ethical Conduct may not be amended or modified except in a written form which is specifically approved by majority vote of the directors of the Company who are not interested persons of the Company. This Code of Ethical Conduct was adopted by the Board of Directors of the Company, including a majority of such Directors who are not interested persons of the Company, by unanimous written consent dated as of July 5, 2005. Gary C. Granoff, President EXHIBIT A AMERITRANS CAPITAL CORPORATION Access Persons 1. Gary C. Granoff 2. Ellen M. Walker 3. Lee A. Forlenza 4. Steven Etra 5. Wesley Finch 6. Paul Creditor 7. Allen Kaplan 8. Howard Sommer 9. John Laird 10. Margaret Chance 11. Silvia Mullens EXHIBIT B AMERITRANS CAPITAL CORPORATION Designated Officer and Appointees: Ellen M. Walker - Designated Officer; reviews quarterly reports ACKNOWLEDGMENT AND CERTIFICATION I acknowledge receipt of the Code of Ethics of Ameritrans Capital Corporation. I have read and understand such Code of Ethics and agree to be governed by it at all times. Further, if I have been subject to the Code of Ethics during the preceding year, I certify that I have complied with the requirements of the Code of Ethics and have disclosed or reported all personal securities transactions required to be disclosed or reported pursuant to the requirements of the Code of Ethics. (signature) (please print name) Date: 22 -----END PRIVACY-ENHANCED MESSAGE-----