-----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, Ua4uxGLcLy+1FLBSMVPWpYEVX4zj35My/ST6rnzVZrdQNMfnFKUPX7qlY96Dh9VH Po7MH77HPmzQhxkZ+k2Mxg== 0001157523-04-008801.txt : 20080626 0001157523-04-008801.hdr.sgml : 20080626 20040928152627 ACCESSION NUMBER: 0001157523-04-008801 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040928 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: 041049777 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 a4728666.txt AMERITRANS 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, 2004 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| The approximate aggregate market value of common equity held by non-affiliates of the Registrant as of September 14, 2004 was approximately $10,178,000 based on the last sale price of the Registrant's Common Stock on the Nasdaq SmallCap Market as of the close of business on September 14, 2004. There were 2,035,600 shares of the Registrant's Common Stock outstanding as of September 14, 2004. AMERITRANS CAPITAL CORPORATION 2004 FORM 10-K ANNUAL REPORT Table of Contents
PAGE PART I 1 ITEM 1. BUSINESS OF AMERITRANS 1 ITEM 2. PROPERTIES 27 ITEM 3. LEGAL PROCEEDINGS 27 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 28 PART II 28 ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS 28 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 40 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 40 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES 40 ITEM 9A.CONTROLS AND PROCEDURES 41 PART III 42 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 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 61 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. Elk has not experienced material losses of principal in connection with taxi cab financings in our New York, Boston and Miami markets. Elk has experienced some losses of Principal in its taxi lending business in Chicago since 2001. but from time to time has experienced some small losses of principal on its taxi medallion lending operations. Loans made to finance the purchase or continued ownership of taxi medallions, taxis and related assets represented approximately 72% of Elk's loan portfolio as of June 30, 2004. 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 activities have been the operation of Elk. In May 2002, Ameritrans made its first loans to businesses using the proceeds raised from the public offering of 300,000 units. Each unit 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, June 30, 2003 and fiscal year 2004. Also, the Company does not expect to be able to pay dividends for the three month period ended September 30, 2004. All preferred dividends have been duly paid each quarter. 1 Because it is an SBIC, Elk's operations are subject to other restrictions, and all loans and investments must comply with applicable SBA Regulations. For example, the interest rate that Elk can charge, the percentage of any other company it can own, the size of the businesses to which it can make loans, and the length of time to the maturity date are limited by SBA rules. Elk's business is funded by loans from banks and, to a lesser extent, by the proceeds of subordinated debentures issued to the SBA. Ameritrans is not an SBIC and is not subject to SBA regulation. See "Elk's Loans" and "Regulation -- The Small Business Act of 1958." CURRENT BUSINESS ACTIVITIES AMERITRANS. From inception through April 2002, Ameritrans' only activities have been the operation of Elk. In May 2002, Ameritrans began making loans to businesses using the proceeds raised from the Company's Unit Offering. Since July 2002, Ameritrans has been making equity investments. Equity securities in Ameritrans's investment portfolio at June 30, 2004 totaled $433,226 or 0.76% 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, 2004 totaled $605,391 or 1.06% 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 to own and operate certain real estate assets acquired in satisfaction of loans. EAF Enterprises LLC was formed in June 2003 to take title to some of our remaining Chicago foreclosure medallions, and to thereafter lease them out to taxi drivers on a 36-month lease. 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. The terms of such lease will also provide the lessee with an option to purchase the medallion at $60,000, less credit given for any future payments required to be paid to maintain the option in full force and effect. In order to lease the medallions, Medallion Auto Management LLC has purchased 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. 2 TAXI MEDALLION FINANCE INDUSTRY AND MARKET OVERVIEW CHICAGO TAXI MEDALLION INDUSTRY AND MARKET. As part of its geographic diversification strategy, Elk studied the Chicago taxi medallion market in 1994, and began making loans in Chicago in April, 1995. The taxi market and medallion system in Chicago is regulated by the City of Chicago Department of Consumer Services, Public Vehicle Operations Division. The number of taxi medallions is limited by city ordinances, and until 1988, these ordinances gave control of the majority of the medallions to the two largest taxi operators in Chicago, Yellow Cab Co., and Checker Taxi Co., Inc. Since 1988, the taxi industry in Chicago has shifted toward more individual ownership. Over the succeeding 10 years, the Yellow Cab Co. and Checker Taxi Co., Inc., pursuant to the settlement of an anti-trust legal action, gave 1,300 medallions back to the City of Chicago (the "City"), and the City added 100 medallions each year. These medallions were distributed in a lottery system to taxi drivers who had never owned a medallion. By July, 1997, there were a total of 5,700 medallions issued in Chicago, of which Yellow Cab Co. owned approximately 2,071, and the remaining 3,629 were owned by individual owner drivers, or by individual operators who had purchased multiple medallions. In December, 1997, the City Council increased the number of medallions by 1,000, 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 the City of Chicago held its final auction of 200 medallions under the program authorized in December, 1997. The City set a minimum bid of $60,000, and all 200 medallions were sold at auction at prices that ranged from $60,000 to $68,000. In July, 2000 the last 200 medallions authorized under the lottery program were distributed by lottery. 3 In November, 2000, the City Council passed a new ordinance authorizing the City to auction up to 50 medallions per year through November, 2004, representing a total of 150 medallions over three years. The City Council, however, did not authorize any further lotteries of medallions. The new ordinance also requires purchasers of the medallions to operate taxi-vans instead of the standard taxicab vehicle, which we believe will cost the medallion purchaser three times as much to purchase, equip and prepare as compared to a standard taxicab. As a result, we believe that the 150 medallions, when auctioned, will command lower prices than the prices that would otherwise be available in the market place for the purchase of medallions without the taxi-van requirement. On January 21, 1999, the Yellow Cab Co. auctioned 175 medallions in a sealed bid auction at prices equal to the current open market value price for medallions. Subsequent to January, 1999, Yellow Cab Company continued to sell medallions that it owned, and we estimate that they have sold approximately 1,300 additional medallions to owner drivers, who they continue to service through their taxi affiliation and through the Yellow Cab Company operations. We believe that the sale of these additional medallions by Yellow Cab Company to owner-drivers will continue to offer additional financing opportunities for the Company to service their financing needs. It has been our experience that as the Chicago market has expanded, it has also become more competitive with more lenders entering the market. In addition, as the City of Chicago and Yellow Cab Co. supplied 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 City Council) in setting taxi fares, and in setting maximum lease rates that may be charged by owners to lessees of taxis, who drive them on a daily, weekly, or monthly basis. CHICAGO MARKETING STRATEGY FOR MEDALLION FINANCING. At the present time, most medallion sales in Chicago are handled through brokers or attorneys. An active market place has developed in Chicago for the purchase and resale of medallions. Due to the current economic difficulties in the Chicago market, Elk's most recent experience has been that medallions were selling for between $50,000 and $60,000 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. Previously, the City of Chicago imposed a 5% transfer tax on a medallion held for two years or more, a 10% transfer tax on a medallion held for between one and two years, and a 25% transfer tax on a medallion held less than one year. In November 2000 this ordinance was reduced to 10% for the first year and 5% thereafter, and imposed a flat 5% for any foreclosure sale. The recent imposition of the transfer taxes, in addition to being a source of revenue to the City, was also scaled in order to inhibit speculation in the purchase and resale of taxi medallions without the intent of actually operating taxis. As of June 30, 2004, the total principal amount of our outstanding taxi loans in Chicago was $20,371,583. 4 Elk set up subsidiary entities to take title to approximately 40 of our remaining foreclosure medallions. Five medallions are held by EAF Enterprises LLC, a subsidiary of Elk, which leases them out to taxi drivers on a 36-month lease, the terms of which will also provide the lessee with an option to purchase the medallion at $60,000, less credit given for any future payments required to be paid to maintain the option in full force and effect. Medallion Auto Management LLC, another Elk subsidiary, purchased taxi vehicles and leases the vehicles to the operators. The vehicle lease allows the operator to own the vehicle for a nominal payment at the end of the 36-month term of the lease or have an option to purchase the vehicle for its then unamortized value. By entering into the lease program with option to purchase, we believe that we will maximize our cash flow and develop a current income return on these assets that is favorable when compared with the gross interest income we would receive on a similar transaction that was structured as a sale with a loan by us to the purchaser. 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 would not be given an option to purchase the medallions. As of June 30, 2004, there are 24 remaining foreclosures to complete. We are also continuing to finance taxi medallion transactions in Chicago to our existing non-defaulting borrowers and to other potential borrowers who qualify. THE NEW YORK CITY TAXI MEDALLION INDUSTRY AND MARKET. 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. 5 There are two types of medallions: corporate and individual owner-driver. Of the present total of 12,487 medallions, 7,228 are corporate medallions and 5,259 are for individually owned cabs. A corporate medallion is issued for a cab owned by a corporation that owns a minimum of two cabs and two corporate medallions (i.e., one corporate medallion per cab). An individual owner-driver may not own more than one cab and one medallion. Corporate medallions are used by large fleet concerns with many taxis and many drivers or by small corporations owning at least two medallions and two taxis driven by two owner-drivers (the so-called "minifleet"). Only 11,787 medallions could be issued until August 8, 1995, when a law permitting the issuance of up to 400 additional taxi medallions over a three-year period went into effect. The TLC conducted the sale of 133 medallions in May 1996, 133 medallions in October 1996, and 134 medallions on October 1, 1997. Of these new medallions, 160 were sold to individuals and the balance to minifleets in lots of two. As mentioned above, another law passed in 2003 permitted the issuance of up to 900 additional taxi medallions over a three - -year period. The TLC auctioned the sale of 174 corporate medallions and 126 individual medallions totaling 300 medallions in April 2004. The TLC plans to sell up to 300 additional medallions each in fiscal years 2005 and 2006 also. 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 2004, individual medallions are selling for approximately $278,000 and corporate medallions are selling for approximately $339,000. In addition, a 5% New York City transfer tax and various brokerage commissions are additional expenses incurred in the acquisition and sale of a medallion. Based upon statistics obtained from the TLC, from 1989 through 1998, the number of corporate medallions that were resold by their holders varied each year from approximately 245 to 440, which suggests that there were between 122 and 220 minifleet corporations in need of financing each year, while the number of individual owner medallions sold each year varied from 250 to 415. Assuming that a typical minifleet financing for purchases of medallions might involve a sum of approximately $450,000, the dollar volume of New York City minifleet financings might range from $55 million to $99 million a year. Assuming that a typical individual medallion financing for a purchase of a medallion involves a sum of approximately $220,000, the dollar volume of New York City individual medallion financing might range from $55 million to $91 million a year. In addition to financings for purchases and sales of medallions, a substantial market exists for refinancing the indebtedness of existing minifleet or individual medallions. Management estimates this market to exceed that of the market for financing transfers, and to be in excess of $100,000,000 per year. 6 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, 2004, the total principal amount of outstanding taxi medallion loans in New York was $9,186,024. Elk has received a significant number of referrals from certain medallion brokers in New York. Elk also receives referrals from financing brokers and its borrowers. In addition, Elk occasionally places advertisements in local industry newspapers and magazines. Elk also uses brokers, advertising and referrals in connection with its taxi lending business in the Chicago, Boston, and Miami markets. 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. Current market prices of Boston medallions are approximately $280,000. Under the applicable statutes and rules, Boston taxi medallions are assignable, subject to the approval of the Police Commissioner. In practice, transfer applications are submitted to the Hackney Carriage Unit, which has issued guidelines and forms for transfers. Loans by financial institutions or individuals are secured by taxi medallions and liens on such assets are routinely allowed in accordance with the Hackney Carriage Unit's "Procedures for Recording Secured Party Interest." 7 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, 2004, the total principal amount of our outstanding taxi loans in Boston was $2,982,333. MEDALLION INDUSTRY IN METRO-DADE COUNTY, (MIAMI AREA), FLORIDA. Elk began to investigate the Miami area taxi market in 1995, and began making loans in 1996. The Miami taxi industry has been regulated on a county-wide basis in Metro-Dade County, Florida since 1981. The Passenger Transportation Regulatory Division (the "PTRD") of the Metro-Dade County Consumer Services Division oversees taxi operations and licenses in accordance with the Metro-Dade County Code. Until April 1999, each taxi operator in Metro-Dade County was required to obtain a "For-Hire" license. The number of licenses was limited to one license for each 1,000 residents in the county. With approximately 2,100,000 residents in the county, 2,100 licenses could have been issued; however, 1,879 have been issued to date and 27 are pending. In 1991, a For-Hire license loan program was approved, authorizing the use of loans to purchase (but not to refinance) licenses and taxis. Any lender must be a licensed lending institution authorized to do business in Florida. To the best of our knowledge, Elk is currently one of only six lending institutions that are authorized to make loans to the taxi industry in Metro-Dade County. Transfers of licenses and financing arrangements are subject to prior approval by the PTRD and the County Board of Commissioners. For-Hire licenses were considered a privilege, not a property right. However, since licenses were limited in number, the marketplace created a "market price" or value in connection with the transfer of the license right to a purchaser. As of April 1999, the Metro-Dade County Code was amended to create a "medallion," or property right, system with a view to attracting traditional financing providers to provide the taxi industry with additional funding sources. Existing For-Hire licenses were automatically converted into medallions. According to official Metro-Dade County publications issued in the year 2000, approximately one-third of the currently outstanding licenses are owned by individuals or corporations that own and operate only one license. Other than 106 licenses held by one owner, the balance of the licenses are owned mainly by holders of from two to five licenses. The number of license transfers has been generally increasing in recent years, with a high of 197 transfers in 1997, with an average reported price of $51,658. Market prices have increased substantially since 1997. We estimate that the present market price of licenses/medallions in Metro-Dade County as of June 2004 is approximately $130,000 per medallion. MIAMI AREA MARKETING STRATEGY FOR MEDALLION FINANCING. We believe that the recent change to a medallion system and an emphasis on individual operator-ownership of medallions for the future will open a large new market for taxi medallion financing in the Miami area. 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, 2004, the total principal amount of our outstanding taxi loans in the Miami area was $3,142,806. 8 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 $1,000,000. Elk generally retains these loans, although from time to time it sells participation interests in its loans to share risk, or purchases participation interests in loans generated by other SBICs. At June 30, 2004, Elk's Commercial Loans totaled $13,614,293. 9 ELK'S LOANS Elk's primary business has been to provide long-term business loans at commercially competitive interest rates (which at June 30, 2004, ranged from 4.0% to 16% per annum). From 1979 through March 1997, Elk was a "Specialized Small Business Investment Company" ("SSBIC") under the rules of the SBA. All of its loans were required to be made to small businesses that were majority-owned by socially or economically disadvantaged persons, known as "Disadvantaged Concerns." In September 1996, the 1958 Act was amended to provide, among other things, that no further subsidized funding would be made available to SSBICs. Consequently, Elk amended its Certificate of Incorporation and entered into an agreement with the SBA in February 1997 in order to convert Elk from an SSBIC to an SBIC. As such, Elk may now lend to persons who are not Disadvantaged Concerns. As of June 30, 2004 more than 90% of Elk's loans and investments were to Disadvantaged Concerns. Elk intends to continue to make loans to Disadvantaged Concerns, particularly in connection with the ownership of taxis and related assets in the New York City and Chicago markets. Elk also intends to diversify its activities by lending and investing in a broader range of Small Business Concerns. SBA Regulations set a ceiling on the interest rates that an SBIC may charge its borrowers. Under the current SBA Regulations, the basic maximum rate of interest that an SBIC may charge is 19%. However, if either the weighted average cost of the SBIC's qualified borrowings, as determined pursuant to SBA Regulations, or the SBA's current debenture interest rate, plus, in either case, 11% and rounded off to the next lowest eighth of 1%, is higher, the SBIC may charge the higher rate. The maximum rate of interest that Elk was allowed to charge its borrowers for loans originated during June, 2004 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 $278,000 by July 2004, 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 2004, corporate medallions were selling for approximately $339,000. Interest rates in the New York City market for taxi loans have recently dropped to five percent (5%) per annum. This has limited Elk's opportunities to make profitable loans or expand its activities in this market. 10 In 1995 and 1996 Elk began expanding its taxi lending business into the Chicago, Boston, and Miami markets, where its taxi lending business has increased and continued to be profitable. During the time Elk has been making taxi loans in these markets, the market prices of medallions have generally been increasing. However, in Chicago the market price for medallions dropped approximately 15% during the fiscal year ended June 30, 2001. Since April 1995 when Elk began making loans in the Chicago taxi medallion market, the market value of a medallion increased from approximately $32,000 to a high of approximately $68,000. From July, 2000 through June, 2004, 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 2004, medallions were selling in a range of between $50,000 to $60,000 per medallion depending on financing and terms. Elk has made over $75,000,000 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 $280,000 in Boston and from approximately $65,000 to $130,000 in Miami. As of June 30, 2004, $9,269,093, or 18.6%, of the aggregate principal amount of its outstanding loans of $49,900,989, represented loans made to finance the purchase or continued ownership of New York City taxi medallions and related assets; an aggregate of $20,371,583, or 40.8%, consisted of loans to finance the purchase or refinancing of taxi medallions in Chicago, and the balance of $20,260,313 or 40.6% consisted of loans to various commercial borrowers, of which $2,982,333, or 6.0%, was invested in Boston taxi medallion financing and $3,142,806, or 6.3%, was invested in Miami taxi medallion financing. See "Loan Portfolio; Valuation," below. Due to increasing competition, annual interest rates for new loans in the New York market are currently ranging between 5.0% to 13.5%. 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, 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 four to six year terms and are self-amortizing. With increased competition in the market, the term of the loan may be expected to increase to periods longer than six years. Interest rates on loans in the Boston market currently range from 6.75-10%, and in the Miami market currently range from 7.25-16%. COMMERCIAL LOAN PORTFOLIO Ameritrans began making diversified Commercial Loans in May 2002. At June 30, 2004, Ameritrans' Commercial Loan portfolio consisted of three loans totaling $569,952, of which two loans totaling $520,881 were to debt collection businesses and one loan for $49,071 was to refinance a Florida taxi medallion. 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. 11 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, 2004, Elk's Commercial Loans totaled $13,614,293, or 27.6%, of Elk's total loan portfolio. On July 1, 2003, the Company had a beginning balance in its unrealized depreciation on loans receivable account of $303,170 and this balance increased to $509,770 at June 30, 2004. During the fiscal year ended June 30, 2004, the Company had total write offs and depreciation on interest and loans receivable of $1,024,245, most of which was attributable to the Chicago taxi medallion foreclosures. At June 30, 2004, Elk's Commercial Loan portfolio consisted of 77 loans, of which, 19 loans totaling $1,027,510 were to dry-cleaning businesses, 27 loans totaling $6,042,810 were to laundromat businesses, and 31 loans totaling $6,543,973 were to a variety of other small businesses. Loans to dry cleaners and laundromats represented 51.9% of the aggregate principal amount of Elk's Commercial Loans outstanding at June 30, 2004. Elk generally originates Commercial Loans by financing the cost of dry cleaning, laundromat or other business-specific equipment, while the borrower is making an equity investment to finance the cost of installation, building of appropriate infrastructure to support the equipment, installation of other equipment necessary for the business operations, other decorations and working capital. Substantially all Commercial Loans are collateralized by first security interests in the assets being financed by the borrower, or by real estate mortgages. In addition, Elk generally requires personal guaranties from the principals of the borrower and in limited cases obtains recourse guaranties from the equipment vendors. Elk's Commercial Loans typically require equal monthly payments covering accrued interest and amortization of principal over a four to eight year term and generally can be prepaid with a fee of 60 to 90 days of interest during the first several years of the loan. The term of, and interest rate charged on, Elk's Commercial Loans are subject to SBA Regulations. Elk generally obtains interest rates on its Commercial Loans that are higher than it can obtain on New York City taxi medallion loans. The Company believes that the increased yield on Commercial Loans compensate for their higher risk relative to medallion loans and that it will benefit from the diversification of its portfolio. Interest rates on currently outstanding Commercial Loans range from 4% to 15%. 12 LOAN PORTFOLIO; VALUATION The following table sets forth a classification of the Company's outstanding loans as of June 30, 2004:
Number Interest Maturity Dates Balance Type of Loan of loans Rates (In Months) Outstanding - ---------------------------------------------- ------------- -------------- ----------------- ---------------- New York City: Taxi Medallion 28 5 - 9% 4 - 36 $9,186,024 Radio car service 14 11 - 13.5% 1 - 35 83,069 Chicago: Taxi Medallion 401 4 - 13.9% 1 - 138 20,371,583 Boston: Taxi Medallion 24 6.75 - 10% 1 - 40 2,982,333 Miami: Taxi Medallion 76 7.25 - 16% 1 - 95 3,142,806 Other loans: Restaurant 6 9 - 11.26% 27 - 55 546,398 Car Wash / Auto Center 2 8.5 - 11% 35 - 44 214,131 Dry Cleaner 19 5.5 - 13% 1 - 84 1,027,510 Laundromat 27 6 - 14% 1 - 129 6,042,810 Financial Services 1 10% 1 252,781 Black Car Service (real property) 2 8.5% 25 485,080 Auto Sales 5 10 - 12% 1 - 32 409,923 Retirement home 1 14% 85 190,601 Commercial constructions 1 9.5% 51 446,567 Florist 1 7.25% 34 336,037 Food Market 1 12% 24 290,941 Debt Collection 2 4% 11 - 14 520,881 Software Company 2 8% 27 34,807 Taxicab Distributor 1 6% 24 203,986 Taxicab Advertising 1 10% 41 354,926 Computer Services 1 9.5% 22 49,148 Oil Distributor 1 12% 107 500,000 Moving Company 1 12% 57 500,000 Trucking Company 1 11% 103 450,000 ATM Manufacturer & Distributor 1 12% 58 150,000 Nail Salon & Spa 1 12% 24 748,647 Door Manufacturer 1 15% 1 380,000 ------------- Total loans receivable 49,900,989 Less unrealized depreciation on loans receivable (509,770) ------------- Loans receivable, net $ 49,391,219 =============
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 16% per annum. As of June 30, 2004, the annual weighted average interest rate on Elk's loans was approximately 9.66%. The average term of Elk's currently outstanding loans is approximately 48 months. 13 VALUATION -- As an SBIC, Elk is required by applicable SBA Regulations to submit to the SBA semi-annual valuations of its investment portfolio, as determined by its Board of Directors, which considers numerous factors including but not limited to the financial strength of its borrowers to determine "good" or "bad" status, and fluctuations in interest rates to determine marketability of loans. Reference is made to Footnotes 1, 2 and 3 of Notes to Financial Statements for a discussion of Elk's method of valuation of its current portfolio of loans. The Company's loans are recorded at fair value. Since no ready market exists for these loans, the fair value is determined in good faith by the Board of Directors. In determining the fair value, the Company and Board of Directors consider factors such as the financial condition of the borrower, the adequacy of the collateral, individual credit risks, historical loss experience and the relationships between current and projected market rates and portfolio rates of interest and maturities. To date, the fair value of the loans has been determined to approximate cost less unrealized depreciation and no loans have been recorded above cost. COLLECTION EXPERIENCE -- Elk has not had a material loss of principal in any taxi medallion loan. From time to time, Elk has also experienced some small losses of principal on its taxi lending operations. Elk has also experienced some losses of principal in its diversified (non-taxi) loan portfolio. Likewise, its collection experience (timely payments, collections on foreclosure, etc.) with taxi medallion financings has historically been better than with its non-taxi loans. From 1991 through 1994, substantially all of Elk's provisions for loan losses and losses on assets acquired were related to business loans secured by real estate and to radio car loans. In addition, from 1991 through 1995, Elk had difficulty selling off real estate acquired on defaulted loans as a result of a depressed real estate market. Since 1995, Elk has substantially increased its diversified loan portfolio, and its overall collection experience with these loans has improved, although it has experienced losses on selected loans. During the thirty-six (36) months since September 11, 2001, the Chicago taxi market has suffered through an economic slowdown which caused approximately 35% of our Chicago taxi loans to default and the Company to commence foreclosure actions. When the tragic events of September 11, 2001 occurred, the Chicago market was in the process of absorbing 1,000 new medallions that had been sold by the city over the prior three years between 1998 and the end of the year 2000. As a result of the increase in supply of medallions and the reduction in demand for service, and corresponding reduction in revenues by taxi operators, the Company, as well as other lenders in the Chicago taxi medallion lending market, experienced a much greater rate of default in their Chicago loan portfolio than they had previously. It also became more difficult to resell these medallions due to the fall in their market prices from their high of $68,000 to $70,000 per medallion. 14 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 five of Elk's subsidiaries to lease to taxi drivers and operators of 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. As a result of the Company's efforts to resell most of its defaulted medallions during the fiscal year, the Company decreased its reserve on accrued interest receivable from $691,000 to $30,500. Although there are 24 remaining foreclosures as of June 30, 2004, 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, 2004, Elk maintained three lines of credit totaling $40,000,000 with an overall lending limit of $40,000,000. At June 30, 2004, Elk had $28,908,652 outstanding under these lines. The loans, which mature at various dates between October 31, 2004 and December 31, 2004, 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, 2004. 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, 2004. 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. 15 If interest rates rise, our cost of funds would increase while the rates on our outstanding loans to our borrowers remained fixed, and our profitability could decrease. In order to partially contain this risk, we have purchased interest rate Swaps. While these limit our exposure to upward movement in interest rates on our bank loans, they initially increase the effective interest rates that we pay on loans subject to these agreements. However, general rises in interest rates will reduce our interest rate spread in the short term on the floating portion of our bank debt that is not hedged by interest rate Swaps. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations -- Interest Expense" and Note 13 of Notes to Consolidated Financial Statements. Pursuant to the SBA Agreement, Elk agreed to limit the aggregate of its indebtedness based on a computation of a borrowing base each quarter. The borrowing base computation is calculated to determine that the total amount of debt due on the senior bank debt and SBA debentures does not exceed approximately 80% of the value of performing loans and investments in Elk's portfolio and on a temporary basis, until March 1, 2002, up to 85% of performing taxi medallion loans. Loans that are more than 90 days in arrears are valued at a lower amount in computing the borrowing base. In connection with the SBA Agreement, Elk has also entered into an intercreditor agreement (the "Intercreditor Agreement") and a custodian agreement (the "Custodian Agreement") with its banks and the SBA. Pursuant to the Custodian Agreement, the banks and the SBA appointed Israel Discount Bank of New York as the custodian to hold certain notes, security agreements, financing statements, assignments of financing statements, and other instruments and securities as part of the collateral for Elk's indebtedness to the banks and the SBA. The Intercreditor Agreement sets forth the respective rights and priorities of the banks and the SBA with respect to the repayment of indebtedness to the banks and the SBA and as to their respective interests in the collateral. Pursuant to the Intercreditor Agreement, the banks consented to the grant by Elk to the SBA of a security interest in the collateral, which security interest ranks junior in priority to the security interests of the banks. SBIC BENEFITS GENERAL. As an SBIC, Elk is eligible to receive certain financing from the SBA on favorable terms, and Elk and its stockholder are entitled to certain tax benefits, both described below. The SBA has a certain amount of discretion in determining the type and amount of financing that will be made available to an SBIC. Therefore, there can be no assurance as to the nature and amount of SBA financing that may actually be obtained by Elk. Furthermore, there are certain restrictions and requirements to which Elk is subject by virtue of it being an SBIC. 16 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. 17 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, 2004, we employed a total of eleven employees. This includes a temporary increase of one clerk since December 2003 to assist with some administrative projects. INVESTMENT POLICIES ELK INVESTMENT POLICIES The investment policies described below are the fundamental policies of Elk. Under the 1940 Act, these policies may be changed only by the vote of the lesser of (i) a majority of Elk's outstanding Common Stock, or (ii) 67% of the number of shares of Common Stock present in person or by proxy at a stockholder meeting at which at least 50% of the outstanding shares of Common Stock are present. Because Ameritrans is the only stockholder of Elk, we have agreed with the SEC that Elk's fundamental investment policies will be changed only by the vote of the Ameritrans stockholders. (a) ISSUANCE OF SENIOR SECURITIES. Elk may issue subordinated debentures to the SBA in the maximum amounts permissible under the 1958 Act and the applicable regulations. Elk has no preferred stock authorized. (b) BORROWING OF MONEY. Elk has the power to borrow funds from banks, trust companies, other financial institutions, the SBA or any successor agency and/or other private or governmental sources, if determined by Elk's Board of Directors to be in its best interests. (c) UNDERWRITING. Elk has not engaged, and does not intend to engage, in the business of underwriting the securities of other issuers. (d) CONCENTRATION OF INVESTMENTS. Elk may not concentrate 25% or more of its total assets in securities of issuers in any industry group except the taxi industry. Elk will make at least 25% of its investments for financing the purchase or continued ownership of taxi medallions, taxis and related assets. The balance of its investments includes, and Elk intends to continue to finance, the acquisition and/or operation of other small businesses. 18 (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. 19 (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. 20 (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. 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. 21 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. 22 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. 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 23 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: 24 (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. 25 The 1958 Act authorized the organization of SSBICs to provide assistance to Disadvantaged Concerns, i.e., businesses that are at least 50% owned and managed by persons whose participation in the free enterprise system is hampered because of social or economic disadvantages. Certain 1996 amendment to the 1958 Act provided, among other things, that no further subsidized funding would be made available to SSBICs. Thereafter, pursuant to an agreement with the SBA, Elk was converted to an SBIC, subject to certain conditions imposed by the SBA. Under this agreement, Elk may now lend to persons who are not Disadvantaged Concerns. As of June 30, 2004, more than 90% of Elk's portfolio of loans and investments were to Disadvantaged Concerns. Under current SBA Regulations and subject to local usury laws, the maximum rate of interest that Elk may charge may not exceed the higher of (i) 19% or (ii) a rate calculated with reference to Elk's weighted average cost of qualified borrowings, as determined under SBA Regulations or the SBA's current debenture interest rate. The current maximum rate of interest permitted on loans originated by Elk is 19%. At June 30, 2004, Elk's outstanding loans had a weighted average rate of interest of 9.66%. SBA Regulations also require that each loan originated by SBICs have a term of between five years and twenty years. The SBA restricts the ability of SBICs to repurchase their capital stock, to retire their subordinated SBA debentures and to lend money to their officers, directors and employees or invest in affiliates thereof. The SBA also prohibits, without prior SBA approval, a "change of control" or transfers which would result in any person (or group of persons acting in concert) owning 10% or more of any class of capital stock of an SBIC. A "change of control" is any event which would result in the transfer of the power, direct or indirect, to direct the management and policies of an SBIC, whether through ownership, contractual arrangements or otherwise. Under SBA Regulations, without prior SBA approval, loans by licensees with outstanding SBA leverage to any single Small Business Concern may not exceed 20% of an SBIC's Leveragable Capital. Under the terms of the SBA Agreement, however, Elk is authorized to make loans to Disadvantaged Concerns in amounts not exceeding 30% of its respective Leveragable Capital. SBICs must invest funds that are not being used to make loans in investments permitted under SBA Regulations. These permitted investments include direct obligations of, or obligations guaranteed as to principal and interest by, the government of the United States with a term of 15 months or less and deposits maturing in one year or less issued by an institution insured by the FDIC. The percentage of an SBIC's assets so invested will depend on, among other things, loan demand, timing of equity infusions and SBA funding and availability of funds under credit facilities. 26 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.. Effective July 1, 2003, the Company entered into a new ten-year sublease for additional office and storage space with an entity in which an officer and shareholder of the Company has an interest. The new sublease calls for rental payments ranging from $38,500 to $54,776 per annum from the first year ending June 30, 2004 through the year ending June 30, 2013. The sublease contains a provision that either party may terminate the lease in years seven through ten with six months' notice. ITEM 3. LEGAL PROCEEDINGS Ameritrans is not currently a party to any material legal proceeding. From time to time, Ameritrans is engaged in various legal proceedings incident to the ordinary course of its business. In the opinion of Ameritrans' management and based upon the advice of legal counsel, there is no proceeding pending, or to the knowledge of management threatened, which in the event of an adverse decision would result in a material adverse effect on Ameritrans' results of operations or financial condition. 27 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of Ameritrans' 2004 fiscal year. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Elk Common Stock was listed on the Nasdaq SmallCap Market on June 22, 1998, under the symbol EKFG, prior to which it had traded in the "pink sheets." Since December 16, 1999, when Ameritrans acquired Elk, its Common Stock has been listed on the Nasdaq SmallCap Market under the symbol AMTC. The following 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, 2003 and June 30, 2004. AMERITRANS HIGH LOW FISCAL 2003 1st Quarter 6.25 5.00 2nd Quarter 5.78 4.63 3rd Quarter 5.49 2.95 4th Quarter 5.11 3.45 FISCAL 2004 1st Quarter 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 (through September 14, 2004) 5.25 4.06 Elk registered under the 1940 Act for the fiscal year commencing July 1, 1983, and declared and paid dividends to holders of the Common Stock for the fiscal years ended June 30, 1984 through June 30, 1992. Elk did not pay dividends during the fiscal years ended June 30, 1993, 1994 and 1995. Elk recommenced paying dividends for the fiscal year beginning July 1, 1995, and paid dividends quarterly since that time and up until its share exchange with Ameritrans. Thereafter, Ameritrans has declared and paid dividends to holders of its Common Stock for each quarter except for the fourth quarter of 2000, the first quarter of 2001, the third and fourth quarters of 2003, and fiscal year 2004. 28 On April 18, 2002, the Company's registration statement filed on Form N-2 was declared effective by the Securities and Exchange Commission. The offering closed on April 24, 2002 on the total sale of 300,000 units. Each unit was comprised of one share of Common Stock, one share of 9 3/8% cumulative participating preferred stock (face value $12.00) (the "Participating Preferred Stock"), and one warrant exercisable for five years into one share of Common Stock at an exercise price of $6.70 per share (the "Warrants"). The units were split in May, 2002. The Participating Preferred Stock and the Warrants trade on the NASDAQ SmallCap Market under the symbols, respectively, "AMTCP" and "AMTCW". The gross proceeds from the sale of the units was $5,750,000 less costs and commissions of $1,704,399, resulting in net proceeds of $3,995,601. The underwriter of the offering was granted an option to purchase up to 30,000 units, each unit consisting of one share of Common Stock, one share of Participating Preferred Stock and one warrant exercisable at $8.40 per share. The option to purchase the 30,000 units 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 filed a post-effective amendment to the Registration Statement on Form N-2 on June 24, 2003 to update disclosures contained in the Form N-2, which has not been declared effective by the Securities and Exchange Commission. The Company filed a second post-effective amendment on January 30, 2004 to include the audited financial statements for the year ended June 30, 2003. The Company has declared and paid the quarterly dividend on the Participating Preferred Stock since the Participating Preferred Stock was issued. Most recently, the Company's Board of Directors declared a dividend of $0.28125 per share on September 20, 2004 on the Participating Preferred Stock for the period July 1, 2004 through September 30, 2004 payable on October 15, 2004 for all holders of the Participating Preferred Stock of record as of September 30, 2004. As of September 14, 2004, there were 190 holders of record of the Ameritrans Common Stock, and 3 holders of record of the Participating Preferred Stock and Warrants, which is exclusive of securities held in street name. ITEM 6. SELECTED FINANCIAL DATA On December 16, 1999, Ameritrans acquired Elk in a share-for-share exchange. Prior to the acquisition, Elk had been operating independently and Ameritrans had no operations. 29 The tables below contain 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, 2004 2003 2002 2001 2000 ---- ---- ---- ---- ----- Investment income $ 5,633,827 $ 6,282,079 $ 6,269,719 $ 6,439,792 $ 6,602,397 ========================================================================= Interest expense 1,443,416 2,076,861 2,632,918 3,392,202 3,345,526 Other expenses 4,517,124 3,805,083 2,591,751 2,188,636 2,590,352 ------------------------------------------------------------------------- Total expenses 5,960,540 5,881,944 5,224,669 5,580,838 5,935,878 ========================================================================= Operating (loss) income (326,713) 400,135 1,045,050 858,954 666,519 ========================================================================= Other income (expense) (23,969) 2,976 2,700 (276,549) (440,196) Provision for income taxes (1) (16,501) (7,897) (8,854) (7,896) (13,571) ------------------------------------------------------------------------- Net (loss) income $ (367,183) $ 395,214 $ 1,038,896 $ 574,509 $ 212,752 ========================================================================= Dividends on preferred stock $ (337,500) $ (337,500) $ (68,438) $ - $ - ------------------------------------------------------------------------- Net (loss) income available to common shareholders $ (704,683) $ 57,714 $ 970,458 $ 574,509 $ 212,752 ========================================================================= Net (loss) income per common share $ (0.35) $ 0.03 $ 0.54 $ 0.33 $ 0.12 ========================================================================= Common stock dividends paid $ - $ 552,312 $ 994,991 $ 528,045 $ 1,256,832 ========================================================================= Common stock dividends paid per common share $ - $ 0.27 $ 0.57 $ 0.30 $ 0.72 ========================================================================= Weighted average number of shares of common stock outstanding 2,035,600 2,035,600 1,800,614 1,745,600 1,745,600 ========================================================================= Net change to accumulated other comprehensive income $ (19,003) $ (200,338) $ (43,612) $ (123,364) $ (124,319) ========================================================================= BALANCE SHEET DATA AT JUNE 30, 2004 2003 2002 2001 2000 ---- ---- ---- ---- ----- Loans receivable $ 49,900,989 $ 55,306,678 $ 55,029,831 $ 54,559,970 $ 56,806,579 Unrealized depreciation of loans receivable (509,770) (303,170) (303,170) (318,500) (380,000) ------------------------------------------------------------------------- Loans receivable, net $ 49,391,219 $ 55,003,508 $ 54,726,661 $ 54,241,470 $ 56,426,579 ========================================================================= Total assets $ 57,091,906 $ 60,027,231 $ 58,943,546 $ 57,984,869 $ 60,294,624 ========================================================================= Notes payable and demand notes $ 28,908,652 $ 34,130,000 $ 33,720,000 $ 35,550,000 $ 37,800,000 ========================================================================= Subordinated SBA debentures $ 12,000,000 $ 9,200,000 $ 7,860,000 $ 8,880,000 $ 8,800,000 ========================================================================= Total liabilities $ 41,843,447 $ 44,055,086 $ 42,276,465 $ 45,177,743 $ 47,410,598 ========================================================================= Total stockholders' equity $ 15,248,459 $ 15,972,145 $ 16,667,081 $ 12,807,126 $ 12,884,026 =========================================================================
(1) Ameritrans since inception and Elk, since the fiscal year ended June 30, 1984, have elected and qualified to be taxed as a regulated investment company and substantially all taxable income was required to be distributed to stockholders. Therefore, only minimal taxes were required to be paid. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion in conjunction with the financial statements and notes to financial statements. The results described below are not necessarily indicative of the results to be expected in any future period. Certain statements in this discussion and analysis, including statements regarding our strategy, financial performance, and revenue sources, are forward-looking statements based on current expectations and entail various risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements, including those described in "risk factors" and elsewhere in this annual report. 30 CRITICAL ACCOUNTING POLICIES The preparation of the Company's consolidated financial statements in conformity with generally accepted accounting principles requires management to use judgment in making estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes. Significant estimates made by the Company include valuation of loans 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 financial conditions 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, 2004, are reasonable, actual results could differ materially from the estimated amounts recorded in the Company's financial statements. Our critical accounting policies are those applicable to the valuation of loans receivable and various investments discussed below. VALUATION OF LOANS AND DEBT SECURITIES. For loans and debt securities, fair value generally approximates cost less unrealized depreciation. Overall financial condition of the borrower, the adequacy of the collateral, individual credit risks, historical loss experience and other factors are what we consider in the determination of fair value. EQUITY SECURITIES. The fair value of publicly traded corporate equity securities is based on quoted market prices. Privately held corporate equity securities are recorded at the lower of cost or fair value. For these non-quoted investments, the Company reviews the assumptions underlying the financial performance of the privately held companies in which the investments are maintained. If and when a determination is made that a decline in fair value below the cost basis is other than temporary, the related investment is written down to its estimated fair value. ASSETS ACQUIRED IN SATISFACTION OF LOANS. Assets acquired in satisfaction of loans are carried at estimated fair value less selling costs. Losses incurred at the time of foreclosure are charged to the unrealized depreciation on loans receivable. Subsequent reductions in estimated net realizable value are recorded as losses on assets acquired in satisfaction of loans. 31 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, 2004 AND 2003 TOTAL INVESTMENT INCOME The Company's investment income decreased $648,252 or 10% to $5,633,827 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 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 officers 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. 32 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. RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2003 AND 2002 TOTAL INVESTMENT INCOME The Company's investment income increased $12,360 to $6,282,079 as compared with the prior year ended June 30, 2002. This increase was mainly due to the increase in interest earned on higher average loans receivable balance for the year of $87,721, offset by a decrease in other fees of $75,361. 33 OPERATING EXPENSES Interest expense for the years ended June 30, 2003 decreased $556,057 to $2,076,861 when compared to the year ended June 30, 2002. This reflects the lower interest charged on outstanding bank borrowing combined with interest savings due to paydown and reissuance of SBA debentures, offset by interest payments related to Swap agreements since the fixed rates in connection with the Swaps were consistently above the floating one month LIBOR rates during the year. Salaries and employee benefits increased $109,441 when compared with the prior year. This increase reflects the increases that were put in effect from the officers employment agreements, three of which were amended during the year. Professional fees increased $217,791 as a result of increased regulatory filings and examinations. Other administrative costs increased $240,795 when compared with the prior year. The Company also incurred $313,678 in foreclosure expenses for the year ended June 30, 2003, which increased $187,113 from the prior year due to the increase in the number of foreclosures from the weak Chicago market. Depreciation in value of loans and accrued interest increased $459,367 to $852,512 due mainly to the write down of the Company's Chicago loan portfolio and accrued interest. The increase in write off and depreciation of interest and loans receivable is primarily due to the increase in Chicago loan portfolio delinquencies and defaults, which is attributed to the economic slowdown and the effects of September 11, 2001 on the Chicago taxi industry. Total write off and depreciation on interest and loans receivable was $852,512, which includes an increase in unrealized depreciation of interest of $391,000. As mentioned above, the foreclosure expenses incurred by the Company as it satisfies outstanding balances incurred by the default borrowers on the medallions with the City of Chicago were $313,678 for the year ended June 30, 2003. This expense primarily consisted of back taxes, interest and penalties owed to the City of Chicago Department of Revenue by defaulted medallion owners which was required to be paid as a condition of completing the medallion foreclosures sales and transfer to new purchasers, as well as professional fees related to these foreclosures. NET INCOME Net income decreased to $395,214 from $1,038,896 in the year ended June 30, 2003. The change in the net income for the year ended June 30, 2003 that was attributable primarily to the write down of the Chicago loan portfolio as well as increases in salary and professional fees which were only partially offset by favorable interest rates obtained from debt refinancing. Dividends of Participating Preferred Stock for the year ended June 30, 2003 amounted to $337,500 versus $68,438 in the prior year. BALANCE SHEET AND RESERVES Total assets decreased by $2,935,325 as of June 30, 2004 when compared to total assets as of June 30, 2003. This decrease was due to lower outstanding loans receivable partially offset by an increase in medallions owned, and property and improvements. During January 2002, the Company and the SBA entered into an agreement whereby the SBA committed to reserve debentures in the amount of $12,000,000 to be issued by the Company prior to September 30, 2006. 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. 34 ASSET / LIABILITY MANAGEMENT INTEREST RATE SENSITIVITY Ameritrans, like other financial institutions, is subject to interest rate risk to the extent its interest- earning assets (consisting of medallion loans and commercial loans) rise or fall at a different rate over time in comparison to its interest-bearing liabilities (consisting primarily of its credit facilities with banks and subordinated SBA debentures). A relative measure of interest rate risk can be derived from Ameritrans' interest rate sensitivity gap, i.e. the difference between interest-earning assets and interest-bearing liabilities, which mature and/or reprice within specified intervals of time. The gap is considered to be positive when repriceable assets exceed repriceable liabilities and negative when repriceable liabilities exceed repriceable assets. A relative measure of interest rate sensitivity is provided by the cumulative difference between interest sensitive assets and interest sensitive liabilities for a given time interval expressed as a percentage of total assets. Ameritrans' interest rate sensitive assets were approximately $49.4 million and interest rate sensitive liabilities were approximately $40.9 million at June 30, 2004. 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. 35 INTEREST RATE SWAP AGREEMENTS Ameritrans manages the exposure of the portfolio to increases in market interest rates by entering into interest rate Swap agreements to hedge a portion of its variable-rate debt against increases in interest rates and by incurring fixed-rate debt consisting primarily of subordinated SBA debentures. On January 10, 2000, Elk entered into a $5,000,000 interest rate Swap transaction with a bank that expired on October 8, 2001. On June 11, 2001, Elk entered into an additional interest rate Swap transaction with the same bank for $10,000,000 which expired on June 11, 2002. On June 11, 2001, Elk entered into another interest rate Swap transaction for $15,000,000 with this bank which expired June 11, 2003. On February 11, 2003, Elk purchased another interest rate Swap contract for $5,000,000 with the same bank expiring February 11, 2005. These Swap transactions were entered into to protect the Company from an upward movement in interest rates relating to outstanding bank debt. These Swap transactions call for a fixed rate of 4.95%, 4.35%, 4.95% and 3.56%, respectively for the Company and if the floating one-month LIBOR rate is below the fixed rate then the Company is obligated to pay the bank for the difference in rates. When the one-month LIBOR rate is above the fixed rate then the bank is obligated to pay the Company for the differences in rates annually or at the settlement date. Ameritrans believes that its bank credit facilities and cash flow from operations (after distributions to stockholders) will be adequate to fund the continuing operations of the Company's loan portfolio. Nevertheless, the Company continues to explore additional options, which may increase available funds for its growth and expansion strategy. In addition, to the application for SBA funding described above, these financing options would provide additional sources of funds for both external expansion and continuation of internal growth. INVESTMENT CONSIDERATIONS Interest rate fluctuations may adversely affect the interest rate spread we receive on our taxicab medallion and commercial loans. Because we borrow money to finance the origination of loans, our income is dependent upon the differences between the rate at which we borrow funds and the rate at which we loan funds. While the loans in our portfolio in most cases bear interest at fixed-rates or adjustable-rates, we finance a substantial portion of such loans by incurring indebtedness with floating interest rates. As short-term interest rates rise, our interest costs increase, decreasing the net interest rate spread we receive and thereby adversely affect our profitability. Although we intend to continue to manage our interest rate risk through asset and liability management, including the use of interest rate Swaps, general rises in interest rates will tend to reduce our interest rate spread in the short term. In addition, we rely on our counterparties to perform their 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. 36 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 $1,704,399. A portion of the proceeds was used temporarily to reduce banks and SBA indebtedness. Ameritrans also used part of the proceeds to start its own loan portfolio. At June 30, 2004, 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. 37 Contractual obligations expire or mature at various dates through March 1, 2014. The following table shows all contractual obligations at June 30, 2004.
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 $28,908,652 $ -- $ -- $ -- $ -- $ -- $28,908,652 Fixed rate borrowings -- -- -- -- -- 12,000,000 12,000,000 Operating lease obligations 179,266 180,661 182,105 183,599 186,055 905,632 1,817,318 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total $29,087,918 $ 180,661 $ 182,105 $ 183,599 $ 186,055 $12,905,632 $42,725,970 =========== =========== =========== =========== =========== =========== ===========
Our sources of liquidity are credit lines with banks, long-term SBA debentures that are issued to or guaranteed by the SBA, loan amortization and prepayment. As a RIC, we distribute at least 90% of our investment company taxable income. Consequently, we primarily rely upon external sources of funds to finance growth. Loan amortization and prepayments also provide a source of funding for Elk. Prepayments on loans are influenced significantly by general interest rates, economic conditions and competition. Like Elk, Ameritrans will distribute at least 90% of its investment company taxable income and, accordingly, we will continue to rely upon external sources of funds to finance growth. In order to provide the funds necessary for our expansion strategy, we expect to raise additional capital and to incur, from time to time, additional bank indebtedness and (if deemed necessary by management) to obtain SBA loans. There can be no assurances that such additional financing will be available on acceptable terms. NEW ACCOUNTING STANDARDS In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," which expands previously issued accounting guidance and disclosure requirements for certain guarantees. The Interpretation requires an entity to recognize an initial liability for the fair value of an obligation assumed by issuing a guarantee. The provision for initial recognition and measurement of the liability will be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of this Interpretation did not have a material impact on its consolidated financial position or results of operations. 38 In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 (SFAS 148), "Accounting for Stock-Based Compensation--Transition and Disclosure." SFAS 148 amends SFAS 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. The Company continues to apply the intrinsic value method in accordance with APB No. 25. In January 2003 the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities." This standard will require all variable interest entities ("VIEs") to be consolidated by the primary beneficiary. The primary beneficiary is the entity that holds the majority of the beneficial interests in the VIEs. These requirements are effective for financial statements issued after January 31, 2003 This interpretation did not have a material impact on the Company's consolidated financial position or results of operations. In May 2003, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 150 ("SFAS 150"), "Accounting for Certain Financial Instruments With Characteristics of Both Liabilities and Equity." This Statement establishes standards for users to follow in classifying and measuring certain financial instruments with characteristics of both liabilities and equity. This Statement is effective for the first interim period after June 15, 2003. Adoption of this Standard did not have a significant impact on the Company's consolidated results of operations and financial position. In December 2003, the FASB issued Interpretation No. 46 (revised), "Consolidation of Variable Interest Entities." This standard will require all variable interest entities ("VIEs") to be consolidated by the primary beneficiary. The primary beneficiary is the entity that holds the majority of the beneficial interests in the VIEs. These requirements are effective for financial statements issued after December 31, 2003, and did not have a material impact on the Company's consolidated financial position or results of operations. In March 2004, the FASB issued the exposure draft "Share-Based Payment." The proposed statement would require all equity-based awards to employees to be recognized in the Consolidated Statement of Operations based on their fair value for fiscal years beginning after December 15, 2004. The new standard, if accepted in its present form, would apply to all awards granted, modified or settled after the effective date. The Company believes the adoption of this proposed statement will not have a material effect on its consolidated financial position and results of operations. 39 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 investment in 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 the 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 On June 26, 2003 the Company dismissed Marcum & Kliegman, LLP ("M&K") as the principal accountants to audit the Company's financial statements. The reports of M&K on the financial statements of the Company for the past two fiscal years contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principle. The decision to dismiss M&K was recommended and approved by the Company's Audit Committee. 40 In connection with its audits for the two most recent fiscal years through June 30, 2002, there have been no disagreements with M&K on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of M&K would have caused them to make reference thereto in their report on the financial statements for such years. During the two most recent fiscal years through June 30, 2002, the Company has had no reportable events (as defined in Item 304(a)(1)(v) of Regulation S-K). The Company filed a Current Report on Form 8-K on July 1, 2003 disclosing the dismissal of M&K, and filed an exhibit as an exhibit a letter from M&K stating that it agrees with the representations made above. On June 30, 2003, the Company engaged the accounting firm of Rosen Seymour Shapss Martin & Company LLP ("RSSM") as the Company's new independent accountants to audit the Company's financial statements for the fiscal year ending June 30, 2003. The Company has not consulted with RSSM during the last two years or subsequent interim period on either the application of accounting principles or type of opinion RSSM might issue on the Company's financial statements. ITEM 9A. CONTROLS AND PROCEDURES We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is 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 to allow timely decisions regarding required disclosure based closely on the definition of "disclosure controls and procedures" in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"). 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, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Under the supervision of the Company's management, including our Chief Executive Officer (also acting Chief Financial Officer), the Company has conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, we have concluded that such controls and procedures were effective as of the end of the period covered by this report. 41 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 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, 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 56, 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 President and a director since June 1996 of Gemini Capital Corporation ("Gemini"), a company primarily engaged in the business of making consumer loans. Mr. Granoff has also been a director of Titanium Holdings Group, Inc., formerly known as Enviro-Clean of America, Inc. 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. 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. 42 Ellen M. Walker, age 49, 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 nineteen 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 47, 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 55, 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 68, 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. 43 Allen Kaplan, age 54, 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 62, 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 64, has been a director of Ameritrans and of Elk since January 1999. Mr. Sommer has been 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, since 1995. 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 of Directors 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. Wesley Finch, age 57, 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). 44 Silvia Maria Mullens, age 53, 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 50, 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. COMPLIANCE WITH SECTION 16(A) OF THE 1934 ACT Section 16(a) of the Securities Exchange Act of 1934 (the "1934 Act") requires Ameritrans' officers and directors, and persons who own more than 10% of Ameritrans' Common Stock, to file initial reports of beneficial ownership and changes in beneficial ownership with the SEC and to furnish Ameritrans with copies of all reports filed. Based solely on a review of the forms furnished to Ameritrans, or written representations from certain reporting persons, Ameritrans believes that all persons who were subject to Section 16(a) in fiscal year 2004 complied with the filing requirements. 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 six (6) meetings during fiscal year 2004. 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. 45 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 2004. Eight of the Company's directors attended each of the meetings of the Board and one director missed one meeting. 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 $60,000 during that period. 46 SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION -------------------------------- ANNUAL COMPENSATION SECURITIES ------------------------------- UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY($)(1) BONUS ($) OPTIONS (#)(2) COMPENSATION (3) - ----------------------------------------- ---- ------------ ---------- -------------- ---------------- Gary C. Granoff 2004 296,500 (4) 15,000 -- 34,238 President, Chief Executive Officer, 2003 255,000 (4) 15,750 -- 28,763 Chief Financial Officer and Director 2002 242,500 (4) 15,750 -- 25,500 Ellen M. Walker 2004 119,801 -- -- 17,846 Vice President and Director 2003 117,832 -- -- 17,675 2002 115,800 -- -- 17,370 Lee A. Forlenza 2004 77,075 10,000 -- 12,938 Senior Vice President and Director 2003 53,560 7,500 -- 9,159 2002 51,500 -- -- 7,725 Steven Etra 2004 68,000 10,000 -- 8,775 Vice President and Director 2003 60,000 -- -- -- 2002 31,000 -- -- -- Silvia Mullens 2004 103,688 7,500 -- 16,451 Vice President 2003 100,782 10,000 -- 16,443 2002 85,522 15,000 -- 15,078 Margaret Chance 2004 84,680 13,375 -- 14,336 Vice President and Secretary 2003 81,193 15,000 -- 14,202 2002 74,707 13,500 -- 13,321
(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, 2004. 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. Ameritrans and Elk have a policy of paying their directors who are not employees fees of $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. 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 and $32,500 for the year ended June 30, 2004. 47 No options were granted to any of the Company's named executive officers during the fiscal year ended June 30, 2004. 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. 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. 48 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: 1. 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 will be paid an annual salary of $296,500 commencing July 1, 2003, which increases each year the agreement is in effect. The agreement also provides that Mr. Granoff will 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. 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. 49 2. 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 will be paid an annual salary, which presently is $118,976, 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. 3. 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 of $95,400, which increases five percent (5%) each year the agreement is in effect. 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. 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. 4. 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 will be paid an annual salary of $76,250 commencing July 1, 2003, 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. 50 5. 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 will be paid an annual salary of $75,000, 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. 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. 51 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. As of June 30, 2004, options to purchase an aggregate of 70,000 shares of Common Stock exercisable at $8.88 per share were outstanding. These options expire on January 12, 2009. Accordingly, 130,000 shares of Common Stock are available for future awards under the 1999 Employee Plan. 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 the date of expiration, the day immediately prior to the grant date 52 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. On September 26, 2003, options were granted to Wesley Finch, a newly Eligible Director to purchase up to 10,917 shares. As of June 30, 2004, options to purchase an aggregate of 33,141 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 leaving options to purchase an aggregate of 22,029 shares outstanding. The Director Plan is administered by a committee of directors who are not eligible to participate in the Directors Plan. 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, 2004 contributions amounted to $116,610. 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 SmallCap 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. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of September 14, 2004, there were 2,035,600 shares of the Company's Common Stock, $.0001 par value, and 300,000 shares of Participating Preferred Stock outstanding. 53 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 14, 2004, (ii) each of our directors and (iii) all of our officers and directors as a group. Except as set forth below, the address of each person listed 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 326,625(1) 16.04% 7,038(a) 2.34% *Ellen M. Walker 57,374(2) 2.81% ** ** *Lee A. Forlenza 56,648(3) 2.78% 1,000 ** *Steven Etra 137,806(4) 6.76% ** ** Paul Creditor 2,000 ** ** ** 747 Third Avenue, Ste. 4C New York, NY Allen Kaplan 5,000 ** ** ** c/o Executive Charge, Inc. 1440 39th Street Brooklyn, NY John R. Laird 5,656(5) ** ** ** 481 Canoe Hill Road New Canaan, CT Howard F. Sommer 5,556(6) ** ** ** c/o New York Community Investment Co., LLC 120 Broadway New York, NY Wesley Finch 40,788(7) 2.00% 10,000 3.33% 3625 Carlton Place Boca Raton, Florida 33496 Dan M. Granoff 162,879(8) 8.00% ** ** Children's Hospital Oakland Research Institute 747 52nd Street Oakland, CA Paul D. Granoff 143,179(9) 7.03% ** ** c/o Rush-Copley Medical Center 1900 Ogden Avenue Aurora, IL 60504 Infinity Capital Partners, L.P. 128,000 6.28% ** ** 767 Third Avenue, 16th Floor New York, New York 10017 *Margaret Chance 13,890(10) ** 220 (b) ** *Silvia Mullens 5,000(11) ** 293 ** 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 656,343 32.24% 18,551 6.18% 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%. 54 (1) Includes (i) 155,180 shares of common stock $.0001 par value (the "Shares") owned directly by Mr. Granoff; (ii) 3,300 warrants, which are exercisable into 3,300 Shares (the "Warrants"), which expire April 1, 2007; (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 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; and (vii) 57,100 Shares, and 1800 Warrants held by Mr. Granoff in various IRA or pension accounts. Excludes (A) 12,937 Shares, and 1,000 Warrants owned directly by Leslie Granoff, Mr. Granoff's wife, which 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, which 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) 20,000 Shares issuable upon the exercise of ten-year options issued under the 1999 Employee Plan 55 (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 Warrants, and (iv) 17,500 Shares issuable upon the exercise of ten-year options issued to Mr. Forlenza 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) 17,500 Shares issuable upon the exercise of ten-year options issued under the 1999 Employee Plan. (5) Includes 100 Shares owned directly by Mr. Laird and 5,556 Shares issuable upon exercise of five-year options issued under the Director Plan (6) 5,556 Shares issuable upon exercise of five-year options issued under the Director Plan (7) 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, which options were granted as of September 26, 2003 exercisable on September 26, 2004; and (iii) 10,000 Warrants which are exercisable into 10,000 Shares. 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. (8) 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) 2,800 Shares held in an IRA Rollover Account for the benefit of Dr. Granoff. (9) 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. (10) Includes (i) 1,200 Shares owned directly by Ms. Chance, (ii) 10,000 Shares issuable upon the exercise of ten-year options issued under the 1999 Employee Plan; (iii) 200 Shares held by Ms. Chance as custodian for her daughter, Alexis Chance; (iv) 50 Shares held directly by her daughter, Alexis Chance; (v) 2,220 Shares held by Ms. Chance in various IRA or pension accounts, and (vi) 220 Warrants which expire January 25, 2007. b. Participating Preferred Stock held in a pension account. 56 (11) Includes 5,000 Shares issuable upon the exercise of ten-year options issued under the 1999 Employee Plan. 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. EQUITY COMPENSATION PLAN INFORMATION The following table details information regarding the Company's existing equity compensation plans as of June 30, 2004:
PLAN CATEGORY (A) (B) (C) NUMBER OF SECURITIES REMAINING AVAILABLE FOR FUTURE NUMBER OF ISSUANCE UNDER SECURITIES TO BE WEIGHTED-AVERAGE EQUITY COMPENSATION ISSUED UPON EXERCISE PRICE OF PLANS (EXCLUDING EXERCISE OF OUTSTANDING SECURITIES REFLECTED IN OPTIONS OPTIONS COLUMN (A)) - ------------------------------------------------------------------ ------------------ -------------- ----------------------- Equity compensation plans approved by security hold 103,141(1) $ 8.45 171,859(1) - ------------------------------------------------------------------ ------------------ -------------- ----------------------- Equity compensation plans not approved by security holde -- -- -- - ------------------------------------------------------------------ ------------------ -------------- ----------------------- Totals 103,141(1) $ 8.45 171,859(1) - ------------------------------------------------------------------ ------------------ -------------- -----------------------
(1) Includes options to purchase up to 70,000 shares of Common Stock granted to employees under the 1999 Employee Plan and options to up purchase to 33,141 shares granted to non-employee directors granted under the Non-Employee Director Plan. See "Stock Option Plans." 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 $20,554 in fees during the fiscal year ended June 30, 2004. 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, 2004, we paid $101,116 in rent, $36,000 in shared overhead expense, and $26,840 of other reimbursable shared overhead expense. 57 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 2004, Elk paid the law firm approximately $2,200 on account of 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 $43,123 for the year ended June 30, 2004. CONFLICTS OF INTEREST POLICIES 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. 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. 58 The Company's Code of Ethics is filed as an exhibit to this Annual Report. 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. 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, 2004 and 2003 were $85,100 and $61,200, respectively. Review fees for year ended June 30, 2003 paid to Marcum & Kliegman, LLP, the Company's prior independent public accountants were $36,269. 59 AUDIT-RELATED FEES Fees for audit related services years ended June 30, 2004 and 2003 were $11,700 and $0, respectively. The review related fees paid to Marcum & Kliegman, LLP for the year ended June 30, 2003 were $37,165. TAX FEES Fees for professional services by the accountants for tax compliance, tax advice, and tax planning for the years ended June 30, 2004 and 2003 are $0, respectively. 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, 2004 and 2003 were $0 and $0, respectively. Fees for all other services paid to Marcum & Kliegman, LLP for the year ended June 30, 2003 were $0. 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 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. 60 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. The statements have not been audited by, examined by, compiled by or subjected to agreed-upon procedures by independent accountants, and no third-party has independently verified or reviewed such statements. 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. 61 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, 2004. 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 of September 28, 2004 - ----------------------- Directors, Chief Executive Officer and Gary C. Granoff Chief Financial Officer /s/ Ellen M. Walker Executive Vice President and Director September 28, 2004 - ----------------------- Ellen M. Walker /s/ Lee A. Forlenza Senior Vice President and Directo r September 28, 2004 - ----------------------- Lee A. Forlenza /s/ Steven Etra Vice President and Director September 28, 2004 - ----------------------- Steven Etra /s/ Paul Creditor Director September 28, 2004 - ----------------------- Paul Creditor /s/ Allen Kaplan Director September 28, 2004 - ----------------------- Allen Kaplan /s/ John R. Laird Director September 28, 2004 - ----------------------- John R. Laird /s/ Howard F. Sommer Director September 28, 2004 - ----------------------- Howard F. Sommer /s/ Wesley Finch Director September 28, 2004 - ----------------------- Wesley Finch
62 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.(10) 16.1 Letter of Marcum & Kliegman, LLP dated July 1, 2003 issued in connection with the dismissal of Marcum & Kliegman, LLP.(11) 21.1 List of Subsidiaries of Ameritrans. 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 - ------------ (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 annual report on Form 10-K for the fiscal year ended June 30, 2003, filed on October 8, 2003. (11) Incorporate by reference from the Registrant's Current Report on Form 8-K (File No. 811-08847) filed July 1, 2003. AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONTENTS June 30, 2004, 2003 and 2002 - --------------------------------------------------------------------------------
PAGE REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS Rosen Seymour Shapss Martin & Company LLP F-2 Marcum & Kliegman LLP F-3 CONSOLIDATED FINANCIAL STATEMENTS Balance Sheets at June 30, 2004 and 2003 F-4 - F-5 Statements of Operations for the Years Ended June 30, 2004, 2003 and 2002 F-6 Statements of Comprehensive (Loss) Income for the Years Ended June 30, 2004, 2003 and 2002 F-7 Statements of Stockholders' Equity for the Years Ended June 30, 2004, 2003 and 2002 F-8 Statements of Cash Flows for the Years Ended June 30, 2004, 2003 and 2002 F-9 - F-10 Notes to Consolidated Financial Statements F-11 - F-28 Schedule of Loans as of June 30, 2004 F-29
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, 2004 and 2003, and the related consolidated statements of operations, comprehensive income, stockholders' equity and cash flows for the years then ended, and the schedule of loans as of June 30, 2004. 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 audit. We conducted our audit in accordance with the standards of the Public 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 audit provides a reasonable basis for our opinion. As explained in Note 1, the consolidated financial statements include loans valued at $49,391,219 and $55,003,508 as of June 30, 2004 and 2003, 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, 2004 and 2003, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. /s/ Rosen Seymour Shapss Martin & Company LLP CERTIFIED PUBLIC ACCOUNTANTS New York, New York August 20, 2004 F-2 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ------------------------------------------------------- To the Audit Committee of the Board of Directors of Ameritrans Capital Corporation and Subsidiaries We have audited the accompanying consolidated statements of operations, comprehensive income, stockholders' equity and cash flows for the year ended June 30, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the 2002 consolidated financial statements of Ameritrans Capital Corporation and Subsidiaries referred to above present fairly, in all material respects, the results of their operations and their cash flows for the year ended June 30, 2002 in conformity with U.S. generally accepted accounting principles. As explained in Note 1, the consolidated financial statements include loans, 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, and the differences could be material. /s/ Marcum & Kliegman LLP New York, NY September 17, 2002 F-3 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS June 30, 2004 and 2003 - --------------------------------------------------------------------------------
2004 2003 ---------------- ---------------- ASSETS - ------ Loans receivable $ 49,900,989 $ 55,306,678 Less unrealized depreciation on loans receivable (509,770) (303,170) ---------------- ---------------- Loans receivable, net 49,391,219 55,003,508 Cash and cash equivalents 416,600 498,669 Accrued interest receivable, net of unrealized depreciation of $30,500 in 2004 and $691,000 in 2003 969,912 1,321,591 Assets acquired in satisfaction of loans 1,421,723 1,142,189 Receivables from debtors on sales of assets acquired in satisfaction of loan 422,158 431,258 Equity securities 1,038,617 929,405 Furniture, equipment and leasehold improvements, net 439,262 173,100 Medallions 2,382,201 - Prepaid expenses and other assets 610,214 527,511 ---------------- ---------------- Total assets $ 57,091,906 $ 60,027,231 ================ ================ - -------------------------------------------------------------------------------- (Continued)
F-4 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS (Continued) June 30, 2004 and 2003 - --------------------------------------------------------------------------------
2004 2003 ---------- ---------- Liabilities and Stockholders' Equity - ------------------------------------ Liabilities: Debentures payable to SBA $ 12,000,000 $ 9,200,000 Notes payable, bank 28,908,652 34,130,000 Accrued expenses and other liabilities 578,790 421,040 Accrued interest payable 271,630 219,671 Dividends payable 84,375 84,375 ---------- ---------- Total liabilities 41,843,447 44,055,086 ---------- ---------- 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 (1,902,408) (1,197,725) Accumulated other comprehensive loss (248,883) (229,880) ---------- ---------- Total 15,318,459 16,042,145 Less:Treasury stock, at cost, 10,000 shares of common stock (70,000) (70,000) ---------- ---------- Total stockholders' equity 15,248,459 15,972,145 Total liabilities and stockholders' equity $ 57,091,906 $ 60,027,231 ================ ================ - -------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
F-5 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended June 30, 2004, 2003 and 2002 - --------------------------------------------------------------------------------
2004 2003 2002 --------- --------- --------- Investment Income: Interest on loans receivable $ 5,195,741 $ 6,072,399 $ 5,984,678 Fees and other income 318,559 209,680 285,041 Leasing income 119,527 - - --------- --------- --------- Total investment income 5,633,827 6,282,079 6,269,719 --------- --------- --------- Operating Expenses: Interest 1,443,416 2,076,861 2,632,918 Salaries and employee benefits 1,022,964 879,074 769,633 Occupancy costs 207,079 144,279 143,890 Professional fees 605,168 575,022 357,231 Other administrative expenses 1,250,435 963,175 722,380 Loss on assets acquired in satisfaction of loans, net 44,362 77,343 78,907 Foreclosure expenses 362,871 313,678 126,565 Write off and depreciation on interest and loans receivable 1,024,245 852,512 393,145 --------- --------- --------- Total operating expenses 5,960,540 5,881,944 5,224,669 --------- --------- --------- Operating (loss) income (326,713) 400,135 1,045,050 --------- --------- --------- Other Income (Expense): Net gain from rental activities - - 2,700 Gain on sale of securities 5,665 2,976 - Equity in loss of investee (29,634) - - --------- --------- --------- Total other income (expense) (23,969) 2,976 2,700 --------- --------- --------- (Loss) income before income taxes (350,682) 403,111 1,047,750 Income Taxes 16,501 7,897 8,854 Net (loss) income (367,183) 395,214 1,038,896 Dividends on preferred stock (337,500) (337,500) (68,438) --------- --------- --------- Net (loss) income available to common shareholders $ (704,683) $ 57,714 $ 970,458 ============= ============= ============= Weighted Average Number of Common Shares Outstanding Basic 2,035,600 2,035,600 1,800,614 ============= ============= ============= Diluted 2,035,600 2,035,600 1,800,614 ============= ============= ============= Net (Loss) Income Per Common Share Basic $ (0.35) $ 0.03 $ 0.54 ============= ============= ============= Diluted $ (0.35) $ 0.03 $ 0.54 ============= ============= ============= - -------------------------------------------------------------------------------- The Accompanying Notes are an Integral Part of These Financial Statements.
F-6 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME Years Ended June 30, 2004, 2003 and 2002 - --------------------------------------------------------------------------------
2004 2003 2002 ----------- ----------- ------------- Net (loss) income $ (367,183) $ 395,214 $ 1,038,896 Other comprehensive (loss) income Unrealized loss on equity securities arising during the period (13,338) (200,338) (43,612) Reclassification adjustment for gain included in net income (5,665) - - ----------- ----------- ------------- Total comprehensive (loss) income $ (386,186) $ 194,876 $ 995,284 =========== =========== ============= - -------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
F-7 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended June 30, 2004, 2003 and 2002 - --------------------------------------------------------------------------------
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--July 1, 2001 $175 $- $13,471,474 $- $(678,593) $14,070 $12,807,125 Dividends declared on common stock - - - - (994,991) - (994,991) Dividends declared on preferred stock - - - - (68,438) - (68,438) Net income - - - - 1,038,896 - 1,038,896 Unrealized loss on equity securities - - - - - (43,612) (43,612) Net proceeds from stock offering 30 3,600,000 395,571 - - - 3,995,601 Issuance of warrants - - 2,500 - - - 2,500 Reacquisition of common stock - - - (70,000) - - (70,000) -- --------- ------- ------- -- -- ------- 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 ==== ========== =========== ======== =========== ========= =========== - -------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
F-8 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended June 30, 2004, 2003 and 2002 - --------------------------------------------------------------------------------
2004 2003 2002 ------------- ------------- ------------- Cash flows from operating activities: Net (loss) income $ (367,183) $ 395,214 $ 1,038,896 ------------- ------------- ------------- Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 133,685 77,660 68,633 Gain on sale of equity securities (5,665) (2,976) - Equity in loss of investee 29,634 - - Changes in operating assets and liabilities: Changes in unrealized depreciation on loans receivable and accrued interest receivable, net (453,900) 391,000 220,000 Accrued interest receivable 1,012,179 (609,244) (418,013) Prepaid expenses and other assets (142,716) (214,478) (60,259) Accrued expenses and other liabilities 157,750 51,371 (21,977) Accrued interest payable 51,959 (38,687) (33,069) ------------- ------------- ------------- Total adjustments 782,926 (345,354) (244,685) Net cash provided by operating activities 415,743 49,860 794,211 Cash flows from investing activities: Loans receivable 2,354,954 (476,847) (836,071) Assets acquired in satisfaction of loans 389,000 165,899 120,936 Receivables from debtors on sales of assets acquired in satisfaction of loans 9,100 (63,987) 54,552 Proceeds from sales of equity securities 109,084 27,726 - Purchases of equity securities (261,268) (711,166) (50,025) Sale of automobiles 60,125 - - Capital expenditures (399,959) (143,003) (37,879) ------------- ------------- ------------- Net cash provided by (used in) investing activities 2,261,036 (1,201,378) (748,487) ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from stock offering - - 3,998,101 Proceeds from notes payable, banks 6,590,000 52,385,000 37,980,000 Repayment of notes payable, banks (11,811,348) (51,975,000) (39,810,000) Proceeds from debentures payable to SBA 6,950,000 5,050,000 - Repayment of debentures payable to SBA (4,150,000) (3,710,000) (1,020,000) Dividends paid (337,500) (873,875) (994,991) ------------- ------------- ------------- Net cash (used in) provided by financing activities (2,758,848) 876,125 153,110 ------------- ------------- ------------- Net (decrease) increase in cash and cash equivalents (82,069) (275,393) 198,834 CASH AND CASH EQUIVALENTS: Beginning of year 498,669 774,062 575,228 ------------- ------------- ------------- End of year $ 416,600 $ 498,669 $ 774,062 ============= ============= ============= - -------------------------------------------------------------------------------- (Continued)
F-9 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Years Ended June 30, 2004, 2003 and 2002 - --------------------------------------------------------------------------------
2004 2003 2002 ------------- ------------- ------------- Supplemental disclosures of cash flow information: cash paid during the years for: Interest $ 1,391,457 $ 2,115,548 $ 2,665,987 ============= ============ ============ Income taxes $ 17,276 $ 15,759 $ 8,551 ============= ============ ============ Supplemental disclosures of non-cash investing activities: Unrealized loss on equity securities arising during the period $ (13,338) $ (200,338) $ (43,612) ============= ============ ============ Reclassification adjustment for gain included in net income $ (5,665) $ - $ - ============= ============ ============ Debt settled through reacquisition of common stock $ - $ - $ 70,000 ============= ============ ============ Conversion of loans to assets acquired in satisfaction of loans $ (668,534) $ (200,000) $ (366,210) ============= ============ ============ Acquisition of medallions through foreclosure of loans receivable $ (2,382,201) $ - $ - ============= ============ ============ - -------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
F-10 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004, 2003 and 2002 - -------------------------------------------------------------------------------- 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 through its subsidiary, Elk, primarily makes loans to taxi 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-11 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004, 2003 and 2002 - -------------------------------------------------------------------------------- Ameritrans organized another subsidiary on June 8, 1998, Elk Capital Corporation ("Elk Capital"), which may engage in similar lending and investment activities as 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 of Directors"). In determining the fair value, the Board of Directors considers 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. The fair value of the loans has been determined to approximate 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. 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 (loss) income 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 F-12 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004, 2003 and 2002 - -------------------------------------------------------------------------------- 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. 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, the 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 2004, 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. At June 30, 2004 and 2003, deferred loan costs and commitment fees amounted to $357,936 and $244,198, respectively, net of accumulated amortization of $306,045 and $246,033, respectively. Amortization expense for the years ended June 30, 2004, 2003 and 2002 was $60,013, $45,864 and $36,609, respectively. Assets Acquired in Satisfaction of Loans ---------------------------------------- Assets acquired in satisfaction of loans are carried at their estimated fair values less estimated selling costs. Write-downs recognized at the time of foreclosure are charged to the unrealized depreciation on loans receivable. Subsequent reductions in estimated net realizable value are recorded as losses on assets acquired in satisfaction of loans. 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 F-13 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004, 2003 and 2002 - -------------------------------------------------------------------------------- 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. 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 the fair value of financial instruments. Treasury Stock -------------- Treasury stocks are 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 per share includes no dilution and is computed by dividing income 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. 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. F-14 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004, 2003 and 2002 - -------------------------------------------------------------------------------- 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 123 for valuing stock-based compensation to employees. SFAS 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 Note 16). Financial Instruments --------------------- The carrying value of cash and cash equivalents, accrued interest receivable and payable, and other receivables and payables approximates fair value due to the relative short maturities of these financial instruments. The estimated fair value of publicly traded equity securities is based on quoted market prices and the estimated fair value of privately held equity securities are recorded at the lower of cost or fair value. The estimated fair value of bank debt as well as debentures is based on the terms of similar debt arrangements. Loans receivable are recorded at their estimated fair value. Derivatives ----------- The Company from time to time enters into interest rate swap agreements in order to manage interest rate risk. The Company does not use interest rate swaps or other derivatives for trading or other speculative purposes. In accordance with Statement of Financial Accounting Standards No. 133, 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. That portion of the hedge deemed to be ineffective is recognized immediately in the consolidated statements of income. Presentation of Prior Year Data ------------------------------- Certain reclassifications have been made to conform prior year data with the current presentation. Effects of Recently Issued Accounting Standards ----------------------------------------------- In November 2002, the Financial Accounting Standards Board (the "FASB") issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," which expands previously issued accounting guidance and disclosure requirements for certain guarantees. The Interpretation requires an entity to recognize an initial liability for the fair value of an obligation assumed by issuing a guarantee. The provision applies to guarantees issued or modified after December 31, 2002. The adoption of this Interpretation did not have any impact on the Company's consolidated financial position or results of operations. F-15 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004, 2003 and 2002 - -------------------------------------------------------------------------------- In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 (SFAS 148), "Accounting for Stock-based Compensation--Transition and Disclosure." Sfas 148 Amends Sfas 123, "Accounting for Stock-based Compensation," to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. The Company continues to apply the intrinsic value method in accordance with APB No. 25. In January 2003 the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities." This standard will require all variable interest entities ("VIEs") to be consolidated by the primary beneficiary. The primary beneficiary is the entity that holds the majority of the beneficial interests in the VIEs. These requirements are effective for financial statements issued after January 31, 2003. This interpretation did not have a material impact on the Company's consolidated financial position or results of operations. In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 ("SFAS 150"), "Accounting for Certain Financial Instruments With Characteristics of Both Liabilities and Equity." This Statement establishes standards for users to follow in classifying and measuring certain financial instruments with characteristics of both liabilities and equity. This Statement is effective for the first interim period after June 15, 2003. Adoption of this Standard did not have any impact on the Company's consolidated results of operations and financial position. In December 2003, the FASB issued FASB Interpretation No. 46 (revised), "Consolidation of Variable Interest Entities." This standard requires all variable interest entities ("VIEs") to be consolidated by the primary beneficiary. The primary beneficiary is generally defined as having the majority of the risks and rewards of ownership arising from the VIE. The adoption of this interpretation did not have a material impact on the Company's consolidated financial condition or results of operations In March 2004, the FASB issued the exposure draft "Share-Based Payment." The proposed statement would require all equity-based awards to employees to be recognized in the Consolidated Statement of Operations based on their fair value for fiscal years beginning after December 15, 2004. The new standard, if approved in its present form, would apply to all awards granted, modified or settled after the effective date. The Company believes the adoption of this proposed statement will not have a material effect on its consolidated financial position and results of operations. F-16 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004, 2003 and 2002 - -------------------------------------------------------------------------------- 2. Assets Acquired in Satisfaction of Loans ---------------------------------------- Assets acquired in satisfaction of loans consist of the following as of June 30, 2004 and 2003:
Assigned Mortgage Real Estate and Note Equipment Other Total ----------- -------- --------- ----- ----- Balance--July 1, 2002 $ 287,500 $ 616,439 $ 165,899 $ 38,250 $ 1,108,088 Additions - - 200,000 - 200,000 Sales - - (165,899) - (165,899) ----------- ----------- ----------- ----------- ------------- Balance--June 30, 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 =========== =========== =========== =========== =============
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 $2,182,000 and $9,818,000 at June 30, 2004 and 2003, 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. The following table sets forth certain information concerning performing and nonperforming loans as of June 30, 2004 and 2003:
2004 2003 ---------- ---------- Loans receivable, net $ 49,391,219 $ 55,003,508 Performing loans 47,208,741 45,185,192 ---------- ---------- Nonperforming loans $ 2,182,478 $ 9,818,316 ============= ==============
F-17 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004, 2003 and 2002 - -------------------------------------------------------------------------------- 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, 2002 $ 300,000 $ 303,170 Increases, net 391,000 - ------- ------- Balance--June 30, 2003 691,000 303,170 Increase, net - 206,600 Decreases, net (660,500) - ------- ------- Balance--June 30, 2004 $ 30,500 $ 509,770 ============= =============
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, 2004 and 2003:
Telecom- Chicago munications Taxi Taxicab and Vehicle Real Medallions Technology Hotel Distributor Estate Other Total ---------- ----------- ----- ---------- ------- ----- ----- Balance--July 1, 2002 $58,840 $352,145 $- $- $- $32,342 $443,327 Purchase of securities - 68,905 310,000 100,000 232,261 - 711,166 Sale of securities (24,750) - - - - - (24,750) Unrealized loss on equity securities arising during the period (8,131) (174,865) - - - (17,342) (200,338) -------- -------- -------- -------- -------- ------- ---------- Balance--June 30, 2003 25,959 246,185 310,000 100,000 232,261 15,000 929,405 Purchase of securities - 30,668 - 100,000 130,600 - 261,268 Sale of securities (20,294) (25,000) (58,125) - - - (103,419) Unrealized loss on equity securities arising during the period (5,665) (13,005) - - - (333) (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 ======== ======== ======== ======== ======== ======= ==========
F-18 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004, 2003 and 2002 - -------------------------------------------------------------------------------- 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 maintained. If and when a determination is made that a decline in fair value below the cost basis is other than temporary, the related investment is written down to its estimated fair value. Certain Investments ------------------- Ameritrans invested $100,000 to obtain a 50% stock ownership interest in a company in August 2003. Since control of the entity resides with the other owner, as evident by the running of the day-to-day operations as well as the number of board seats, this entity is carried using 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 also 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 the market value of the medallions and the outstanding balance on the loan on the date the right is exercised. 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 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, 2004, the principal balance outstanding on the loans was $1,654,597. F-19 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004, 2003 and 2002 - -------------------------------------------------------------------------------- 5. Furniture, Equipment and Leasehold Improvements ----------------------------------------------- Major classes of furniture, equipment and leasehold improvements as of June 30, 2004 and 2003 are as follows:
Estimated 2004 2003 Useful Lives ----------- ----------- ------------- Furniture and fixtures $ 64,380 $ 182,299 7 years Office equipment 306,629 376,994 3-5 years Leasehold improvements 175,633 35,406 Life of lease Automobiles 131,108 - 5 years ----------- ----------- 677,750 594,699 Less accumulated depreciation and amortization 238,488 421,599 ----------- ----------- $ 439,262 $ 173,100 =========== ===========
Depreciation and amortization expense for the years ended June 30, 2004, 2003 and 2002 was $73,672, $31,797 and $32,024, respectively. 6. Medallions ---------- During the year ended June 30, 2004, Elk transferred Chicago 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. The subsidiaries lease medallions owned in the Chicago market under weekly and long-term operating lease terms. The weekly medallion leases, including 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, 2004, no purchase options have been exercised. The long-term medallion leases are with taxi cab companies expiring December 31, 2005 through 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 year ended June 30, 2004 was $119,527. The minimum leasing income due under the long-term leases, during the next two years in the aggregate, are approximately $109,000 and $68,000, for the fiscal years ending June 30, 2005 and 2006, respectively. F-20 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004, 2003 and 2002 - -------------------------------------------------------------------------------- 7. Debentures Payable to SBA ------------------------- At June 30, 2004 and 2003 debentures payable to the SBA consist of subordinated debentures with interest payable semiannually, as follows:
Issue Date Due Date % Interest Rate 2004 2003 ---------- -------- --------------- ---- ---- September 1993 September 2003 6.12*** $ - $ 1,500,000 September 1993 September 2003 6.12*** - 2,220,000 March 1997 March 2007 7.38*, **** - 430,000 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 2014 4.12**, ***** 5,000,000 - February 2004 March 2014 4.12 **, ***** 1,950,000 - ------------- ------------- $ 12,000,000 $ 9,200,000 ============= =============
* Elk was required to pay an additional annual user fee of 1% on this debenture ** Elk is also required to pay an additional annual user fee of 0.866% on these debentures *** The debentures matured and were paid in full during September 2003 **** The debenture was prepaid in full during March 2004. ***** The fixed rate of 4.12% was determined on the pooling date of March 24, 2004. Prior to that date, 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 2004 and 2003 were in accordance with SBA regulations. 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 $120,000 non-refundable fee was paid by Elk 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, 2004 and 2003 the Company had loan commitments with three banks for lines of credit aggregating $40,000,000. At June 30, 2004 and 2003, the Company had $28,908,652 and $34,130,000, respectively, outstanding under these lines. The loans, which mature at various dates between October 31, 2004 and December 31, 2004, 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, 2004, the weighted average interest rate on outstanding bank debt was approximately 2.69%. F-21 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004, 2003 and 2002 - -------------------------------------------------------------------------------- Upon maturity, the Company anticipates extending the 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 other assets as collateral for the above lines of credit. 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, 2004 and 2003. 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. 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. 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, 2004 and 2003 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, until April 2007. The warrants may be redeemed by the Company under certain conditions. 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 F-22 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004, 2003 and 2002 - -------------------------------------------------------------------------------- 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, 2004, 2003 and 2002 consists of the following:
2004 2003 2002 --------- --------- --------- Federal $ 2,908 $ 473 $ 1,067 State and local 13,593 7,424 7,787 --------- --------- --------- $ 16,501 $ 7,897 $ 8,854 ========= ========= =========
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. Related Party Transactions -------------------------- The Company paid approximately $21,000, $38,000 and $64,000 to a related law firm for the years ended June 30, 2004, 2003 and 2002, respectively, for legal services provided. During the year ended June 30, 2001, the Company rented office space on a month-to-month basis from an affiliated entity 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 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, F-23 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004, 2003 and 2002 - -------------------------------------------------------------------------------- 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, 2004, 2003 and 2002 the Company paid the affiliated entity approximately $2,200, $3,500, and $7,000, respectively, relating to this space. Rent expense under the lease amounted to $101,116, $59,290 and $44,965 for the years ended June 30, 2004, 2003 and 2002, 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 costs. Overhead costs and reimbursed office and salary expenses amounted to $62,840, $84,989 and $98,925 for the years ended June 30, 2004, 2003 and 2002, respectively. 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 $43,123 for the year ended June 30, 2004. Total occupancy costs under the above lease and overhead cost reimbursement agreements amounted to $207,079, $144,279 and $143,890 for the years ended June 30, 2004, 2003 and 2002, respectively. The future minimum rental and overhead costs for the next five years and in the aggregate thereafter are as follows: Year Ending June 30 Rent Overhead ------------- ------------- ----------- 2005 $ 143,266 $ 36,000 2006 144,661 36,000 2007 146,105 36,000 2008 147,599 36,000 2009 150,055 36,000 Thereafter 731,632 174,000 ------------- ----------- $ 1,463,318 $ 354,000 ============= =========== F-24 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004, 2003 and 2002 - -------------------------------------------------------------------------------- 14. Commitments and Contingencies ----------------------------- Interest Rate Swap ------------------ On June 11, 2001, the Company entered into a $10,000,000 notional amount interest rate swap transaction with a bank which expired on June 11, 2002. Also on June 11, 2001, the Company entered into another interest rate swap transaction for $15,000,000 notional amount with this bank expiring June 11, 2003. On February 11, 2003, the Company entered into another interest rate swap transaction for $5,000,000 notional amount with the same bank expiring February 11, 2005. These swap transactions were entered into to protect the Company from an upward movement in interest rates relating to outstanding bank debt and settle the 11th day of each month. These swap transactions call for a fixed rate of 4.35%, 4.95%, and 3.56%, respectively for the Company and if the floating one month LIBOR rate is below the fixed rate then the Company is obligated to pay the bank for the difference in rates. When the one-month LIBOR rate is above the fixed rate the bank is obligated to pay the Company for the differences in rates. For the twelve months ended June 30, 2004, 2003 and 2002, Elk incurred additional interest expense of $47,795, $507,436 and $585,758, respectively, due to the fluctuation of interest rates, under these agreements. 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 from October 2006 through 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. F-25 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004, 2003 and 2002 - -------------------------------------------------------------------------------- 15. 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, 2004, 2003 and 2002, contributions amounted to $116,610, $86,443 and $79,484, respectively. 16. 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. Under the plan, the option price will be 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. No options were granted during the years ended June 30, 2004, 2003 or 2002. 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. There were no additional options granted for the years ended June 30, 2003 or 2002. F-26 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004, 2003 and 2002 - -------------------------------------------------------------------------------- A summary of Stock Option Plan's transactions in fiscal periods 2004, 2003 and 2002 is as follows:
Weighted Average Exercise Price Number of Shares Per Share ---------------- --------- Options outstanding at June 30, 2001 133,336 $9.11 Granted - - Canceled (11,112) 9.00 Exercised - - ------- ----- Options outstanding at June 30, 2002 122,224 $9.12 Granted - - Canceled - - Exercised - - ------- ----- Options outstanding at June 30, 2003 122,224 $9.12 Granted 10,917 4.58 Canceled - - Expired (30,000) 9.76 Exercised - - ------- ----- Options outstanding at June 30, 2004 103,141 $8.45 ======= =====
The following table summarizes information about the stock options outstanding under the Company's option plans as of June 30, 2004:
Options Outstanding Options Exercisable - -------------------------------------------------- ------------------------------ Weighted Average Number Number Remaining Weighted Exercisable Weighted Outstanding at Contractual Average at June 30, Average June 30, 2004 Life Exercise Price 2004 Exercise Price ------------- ---- -------------- ---- -------------- 70,000 4.5 years $8.88 70,000 $8.88 22,224 .5 years $9.00 22,224 $9.00 10,917 4.25 years $4.58 - - ------ ----- 103,141 92,224 ======= ======
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. F-27 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004, 2003 and 2002 - -------------------------------------------------------------------------------- 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. However, since no options vested during the years ended June 30, 2004, 2003 and 2002, there is no pro forma net (loss) income or (loss) income per share effect to be disclosed. 17. Quarterly Financial Data (Unaudited) ------------------------------------ For the year ended June 30, 2004:
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Investment income $ 1,455,235 $ 1,411,961 $ 1,428,311 $ 1,338,320 Operating income (loss) (113,521) (193,069) (22,770) 2,647 Loss before taxes (107,856) (193,069) (47,517) (2,240) Net loss available to common shareholders (202,773) (278,191) (135,998) (87,721) Net loss per common share Basic (0.10) (0.14) (0.07) (0.04) Diluted (0.10) (0.14) (0.07) (0.04) For the year ended June 30, 2003: First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Investment income $ 1,608,233 $ 1,588,869 $ 1,547,685 $ 1,537,292 Operating income (loss) 318,214 259,287 (93,404) (83,962) Income (loss) before taxes 318,214 259,287 (93,404) (80,986) Net income (loss) available to common shareholders 222,356 174,912 (182,222) (157,332) Net income (loss) per common share Basic 0.11 0.09 (0.09) (0.08) Diluted 0.11 0.09 (0.09) (0.08)
F-28 AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- SCHEDULE OF LOANS June 30, 2004 - --------------------------------------------------------------------------------
Number of Maturity Dates Balance Type of Loan Loans Interest Rates (in Months) Outstanding ------------ ----- -------------- ----------- ----------- New York City: Taxi medallion 28 5 - 9% 4 - 36 $ 9,186,024 Radio car service 14 11 - 13.5% 1 - 35 83,069 Chicago: Taxi medallion 401 4 - 13.9% 1 - 138 20,371,583 Boston: Taxi medallion 24 6.75 - 10% 1 - 40 2,982,333 Miami: Taxi medallion 76 7.25 - 16% 1 - 95 3,142,806 Other loans: Restaurant/food service 6 9 - 11.26% 27 - 55 546,398 Car wash/auto center 2 8.5 - 11% 35 - 44 214,131 Dry cleaner 19 5.5 - 13% 1 - 84 1,027,510 Laundromat 27 6 - 14% 1 - 129 6,042,810 Financial services 1 10% 1 252,781 Black car service (real property) 2 8.5% 25 485,080 Auto sales 5 10 - 12% 1 - 32 409,923 Retirement home 1 14% 85 190,601 Commercial construction 1 9.5% 51 446,567 Florist 1 7.25% 34 336,037 Food market 1 12% 24 290,941 Debt collection 2 4% 11 - 14 520,881 Software company 2 8% 27 34,807 Taxicab distributor 1 6% 24 203,986 Taxicab advertising 1 10% 41 354,926 Computer services 1 9.5% 22 49,148 Oil distributor 1 12% 107 500,000 Moving company 1 12% 57 500,000 Tracking company 1 11% 103 450,000 ATM manufacturer & distributor 1 12% 58 150,000 Nail salon & spa 1 12% 24 748,647 Door manufacturer 1 15% 1 380,000 ------------- Total loans receivable 49,900,989 Less unrealized depreciation on loans receivable (509,770) ------------- Loans receivable, net $ 49,391,219 ============= - -------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
F-29 EX-21.1 2 a4728666ex211.txt SUBSIDIARIES OF AMERITRANS CAPITAL CORPORATION Exhibit 21.1 SUBSIDIARIES OF AMERITRANS CAPITAL CORPORATION 1. Elk Associates Funding Corporation (New York) 2. EAF Holding Corporation* (New York) 3. Elk Capital Corporation (New York) 4. EAF Enterprises LLC* (Illinois) 5. Medallion Auto Management LLC* (Illinois) 6. EAF Leasing LLC* (Illinois) 7. EAF Leasing II LLC* (Illinois) 8. EAF Leasing III LLC* (Illinois) * EAF Holding Corporation, EAF Enterprises LLC, Medallion Auto Management LLC, EAF Leasing LLC, EAF Leasing II LLC and EAF Leasing III LLC are wholly-owned subsidiaries of Elk Associates Funding Corporation. EX-31.1 3 a4728666ex311.txt CERTIFICATION 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, 2004 /s/ GARY C. GRANOFF -------------------------------------- GARY C. GRANOFF PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER EX-32.1 4 a4728666ex321.txt CERTIFICATION 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. /s/ GARY C. GRANOFF - ---------------------------------------------- GARY C. GRANOFF PRESIDENT, CHIEF EXECUTIVE OFFICER, AND CHIEF FINANCIAL OFFICER September 28, 2004 EX-99.1 5 a4728666ex991.txt AUDIT COMMITTEE OF THE BOARD OF DIRECTORS Exhibit 99.1 CHARTER OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS OF AMERITRANS CAPITAL CORPORATION I. AUDIT COMMITTEE PURPOSE. The Audit Committee (the "Committee") of Ameritrans Capital Corporation (the "Corporation") is appointed by the Board of Directors (the "Board") to assist the Board in fulfilling its oversight responsibilities. The Committee's primary duties and responsibilities are to: (i) monitor the integrity of the Company's financial reporting process and systems of internal controls regarding finance, accounting, and legal compliance; (ii) appoint the Company's independent accountants; (iii) monitor the independence and performance of the Company's independent accountants, the external audit function, and the loan review function; and (iv) provide an avenue of communication among the independent accountants, management, the external audit function, and the Board. II. AUDIT COMMITTEE AUTHORITY. The Audit Committee has the authority (i) to conduct any investigation appropriate to fulfilling its responsibilities and has direct access to the independent accountants, as well as anyone in the Company; (ii) to retain, at the Company's expense, special legal, accounting, or other consultants or experts it deems necessary in the performance of its duties; (iii) to appoint and determine the compensation of the independent accountants, and the Company shall provide appropriate funding for such compensation; and (iv) to resolve disagreements between the Company's management and the independent accountants regarding financial reporting. III. ROLE AND INDEPENDENCE; ORGANIZATION. A. The Committee appoints the Company's independent accountants and assists the Board in fulfilling its responsibility for oversight of the quality and integrity of the accounting, internal control, and financial reporting practices of the Company. It may also have such other duties as may from time to time be assigned to it by the Board. The membership of the Committee shall consist of at least three directors, who are each free of any relationship that, in the opinion of the Board, may interfere with such member's individual exercise of independent judgment. No Committee member, other than in his or her capacity as a member of the Board of Directors or of the Committee, may accept any consulting, advisory, or other compensatory fee from the Company. No Committee member may be an officer, employee, or 10% or greater shareholder of the Company or any parent or subsidiary thereof. Each Committee member shall also meet the independence and financial literacy requirements for serving on audit committees, and at least one member shall have accounting or related financial management expertise, as set forth in the applicable rules of NASDAQ. B. A director will not be considered "independent" under NASDAQ rules, if, among other things, he or she has: 1. Been employed by the Company in the current or past three years; 2. Accepted any compensation from the Company in excess of $60,000 during the previous fiscal year (except for Board service, retirement plan benefits, or non-discretionary compensation). 3. An immediate family member who is, or has been in the past three years, employed by the Company as an executive officer; 4. Been a partner, controlling shareholder, or an executive officer of any for-profit business to which the Company made, or from which it received, payments (other than those which arise solely from investments in the Company's securities) that exceed five percent of the Company's consolidated gross revenues for that year, or $200,000, whichever is more, in any of the past three years; or 5. Been employed as an executive of another entity where any of the Company's executives serve on that entity's compensation committee. IV. AUDIT COMMITTEE COMPOSITION AND MEETINGS. A. The Audit Committee shall be comprised of at least three (3) members, each of whom must comply with applicable NASDAQ Marketplace Rules, meet the independence requirements set forth in Article III above and must have a basic understanding of finance and accounting and be able to read and understand fundamental financial statements, and at least one member of the Audit Committee shall have accounting or related financial management expertise. B. Audit Committee members shall be appointed by the Board. If an Audit Committee Chair is not designated or present, the members of the Audit Committee may designate a Chair by majority vote of the Audit Committee membership. The Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, and Compliance Officer, at the request of the Audit Committee, may attend Audit Committee meetings, as non-voting, non-member liaisons of the Company. C. The Audit Committee shall meet at least four times annually, or more frequently, as circumstances dictate. The Audit Committee should meet privately in executive session at least annually with management, the independent accountants, and as a committee to discuss any matters that the Audit Committee or each of these groups believe should be discussed. In addition, the Audit Committee, or at least its Chair, should communicate with management and/or the independent accountants quarterly to review the Company's financial statements and significant findings based upon the auditors' limited review procedures. V. AUDIT COMMITTEE RESPONSIBILITIES AND DUTIES. In carrying out its responsibilities, the Committee believes its policies and procedures should remain flexible, in order to best react to changing conditions and to ensure to the Board and stockholders that the corporate accounting and reporting practices of the Corporation are in accordance with all requirements and are of the highest quality. A. REVIEW PROCEDURES. The Audit Committee shall: 1. Review and reassess the adequacy of this charter at least annually, submit the charter to the Board of Directors for approval annually, and make the document publicly available. 2. Review the Audit Committee budget, plan and changes in plan, activities, and organizational structure, as needed. 3. On at least an annual basis, review with the Company's counsel any legal matters that could have a significant impact on the Company's financial statements, compliance with applicable laws and regulations, and inquiries received from regulators or governmental agencies, if any. -2- B. FINANCIAL REPORTING PROCESSES. 1. In consultation with the independent accountants review the integrity of the organization's financial reporting processes, both internal and external. 2. Consider the independent accountants' judgments about the quality and appropriateness of the Corporation's accounting principals as applied in its financial reporting. 3. Consider and approve, if appropriate, major changes to the Corporation's auditing and accounting principals and practices, including internal controls, as suggested by the independent accountants, or management. C. DOCUMENTS/REPORTS REVIEW. 1. Submit the minutes of all meetings of the Committee to, or discuss the matters discussed at each Committee meeting with, the Board. 2. Review with financial management and the independent accountants the Corporation's annual and periodic financial statements and any reports or other financial information submitted to any governmental body, or the public, including any certification, report, opinion, or review rendered by the independent accountants, considering, as appropriate, whether the information contained in these documents is consistent with the information contained in the financial statements and whether the independent accountants and legal counsel are satisfied with the disclosure and content of such documents. The Chair may represent the entire Committee for purposes of this review. D. INDEPENDENT ACCOUNTANTS. 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 traditional accounting functions performed by the independent accountants, but also consulting, legal, and other professional services rendered 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 or approve any discharge of accountants when circumstances warrant. 2. The Audit Committee shall approve the audit fees and other compensation to be paid to the independent accountants for permitted services. 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, but also consulting, legal, and other professional services rendered 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 accountants' evaluation of the Corporation's financial, and accounting personnel, and the cooperation that the independent accountants received during the course of each audit. E. PROCESS IMPROVEMENT. 1. Establish regular and separate systems of reporting to the Committee by each of management, and the independent accountants, regarding any significant judgments made in management's preparation of the financial statements and the view of each as to appropriateness of such judgments. 2. Following completion of the annual audit, review separately with each of management and the independent accountants, any significant difficulties encountered during the course of the audit, including any restrictions on the scope of work or access to required information. 3. Review any significant disagreement among management and the independent accountants in connection with the preparation of the financial statements. 4. Review with the independent accountants, and management the extent to which changes or improvements in financial or accounting practices, as approved by the Committee, have been implemented. This review should be conducted at an appropriate time subsequent to implementation of changes or improvements, as decided by the Committee. F. OTHER AUDIT COMMITTEE RESPONSIBILITIES. (a.) The Audit Committee shall also: (i) Annually prepare a report to shareholders as required by the SEC. This report should be sent to shareholders, together with the Company's annual proxy statement. (ii) Review significant reports prepared by the Company's internal and/or external loan review personnel, together with management's response and follow-up to these reports. (iii) Perform any other activities consistent with this Charter, the Company's by-laws, and governing law, as the Committee or the Board deems necessary or appropriate. (iv) Maintain minutes of meetings and periodically report to the Board of Directors on significant results of the foregoing activities. (v) Review the Company's risk management policy and systems to ensure the various types of risk are defined, measured, controlled, and monitored. -4- -----END PRIVACY-ENHANCED MESSAGE-----