U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the Quarterly Period
Ended September 30, 2005
or
|_| Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period
from ____________ to _______________
Commission File Number 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 Registrant's principal executive office) (Zip Code)
(800) 214-1047
(Registrant's telephone number, including area code)
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 whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes |_| No |X|
The number of shares of Common Stock, par value $.0001 per share,
outstanding as of November 13, 2005: 2,045,600
AMERITRANS CAPITAL CORPORATION
FORM 10-Q
Table of Contents
PART I. FINANCIAL INFORMATION 1
ITEM 1. FINANCIAL STATEMENTS 1
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES 1
Consolidated Balance Sheets 1
Liabilities And Stockholders' Equity 2
Consolidated Statements Of Operations 3
Consolidated Statements Of Cash Flows 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5
Organization and Principal Business Activity 5
Income Taxes 6
Loan Valuations 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 17
ITEM 4. CONTROLS AND PROCEDURES 19
PART II. OTHER INFORMATION 21
ITEM 1.LEGAL PROCEEDINGS 21
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS 21
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 21
EXHIBIT INDEX 21
(a) Exhibits 21
(b) Reports on Form 8-K 22
SIGNATURES 23
EXHIBIT 31.1 24
EXHIBIT 32.1 25
(All other items omitted from Part II are inapplicable)
-ii-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2005 (Unaudited) and June 30, 2005
ASSETS
September 30, 2005 June 30, 2005
Loans receivable $51,503,498 $52,060,254
Less: unrealized
depreciation on
loans receivable (150,000) (150,000)
Loans receivable, net 51,353,498 51,910,254
Cash and cash equivalents 634,524 327,793
Accrued interest receivable, net
of unrealized depreciation of
$92,000 and $30,500, respectively 677,981 756,701
Assets acquired in satisfaction
of loans 384,528 384,528
Receivables from debtors on sales of
assets acquired in satisfaction
of loans 414,475 455,184
Equity securities 857,364 908,457
Furniture, equipment and leasehold
improvements, net 312,957 329,573
Medallions Under Lease 2,224,701 2,282,201
Prepaid expenses and other assets 543,462 531,904
TOTAL ASSETS $57,403,490 $57,886.595
The accompanying notes are an integral part of these financial
statements.
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2005 (Unaudited) and June 30, 2005
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30,2005 June 30, 2005
LIABILITIES
Debentures payable to SBA $12,000,000 $12,000,000
Notes payable, banks 29,650,652 29,770,652
Accrued expenses and other
liabilities 497,786 604,942
Accrued interest payable 126,860 256,285
Dividends payable 84,375 84,375
TOTAL LIABILITIES 42,359,673 42,716,254
COMMITMENTS AND CONTINGENCIES(Notes 3,4 and 5)
STOCKHOLDERS' EQUITY
Preferred stock 500,000
shares authorized, none issued
or outstanding - -
9 3/8% cumulative participating
callable preferred stock $.01 par
value, $12.00 face value, 500,000
shares authorized; 300,000 shares
issued and outstanding 3,600,000 3,600,000
Common stock, $.0001 par value:
5,000,000 shares authorized;
2,045,600 shares issued,
2,035,600 outstanding 205 205
Additional paid-in-capital 13,869,545 13,869,545
Accumulated deficit (2,202,565) (2,127,134)
Accumulated other
comprehensive loss (153,368) (102,275)
15,113,817 15,240,341
Less: Treasury stock, at cost,
10,000 shares of common stock (70,000) (70,000)
TOTAL STOCKHOLDERS' EQUITY 15,043,817 15,170,341
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $57,403,490 $57,886,595
The accompanying notes are an integral part of these financial
statements.
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 2005 and 2004
(Unaudited)
Three Months Three Months
Ended Ended
Sept 30, Sept 30,
2005 2004
INVESTMENT INCOME
Interest on loans receivable $1,149,783 $1,129,057
Fees and other income 82,301 100,540
Leasing income 49,468 51,537
TOTAL INVESTMENT INCOME 1,281,552 1,281,134
OPERATING EXPENSES
Interest 539,273 382,156
Salaries and employee benefits 276,238 262,664
Occupancy costs 54,716 49,183
Professional fees 69,812 135,564
Other administrative expenses 281,789 245,468
Loss and impairments on
assets acquired in
satisfaction of loans, net 3,000 10,393
Foreclosure expenses 2,208 5,000
Write off and depreciation
on interest and loans
receivable 35,848 101,518
TOTAL OPERATING EXPENSES 1,262,884 1,191,946
OPERATING INCOME 18,668 89,188
OTHER EXPENSE
Equity in loss of investee - (2,011)
TOTAL OTHER EXPENSE - (2,011)
INCOME BEFORE PROVISION
FOR INCOME TAXES 18,668 87,177
PROVISION FOR INCOME TAXES 9,724 2,465
NET INCOME $ 8,944 $ 84,712
DIVIDENDS ON PREFERRED STOCK $ (84,375) $ (84,375)
NET (LOSS) INCOME AVAILABLE TO
COMMON SHAREHOLDERS $ (75,431) $ 337
WEIGHTED AVERAGE SHARES OUTSTANDING
- Basic 2,035,600 2,035,600
- Diluted 2,035,600 2,035,600
NET LOSS PER COMMON SHARE
- Basic $ (0.03) $ (0.00)
- Diluted $ (0.03) $ (0.00)
The accompanying notes are an integral part of these financial
statements
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three Months Ended September 30, 2005 and 2004 (Unaudited)
March 31, March 31,
2005 2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 8,944 $ 84,712
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 31,735 39,888
Equity in loss of investee - 2,011
Change in operating assets and liabilities:
Changes in unrealized depreciation on loans
receivable and accrued interest receivable (34,500) 56,319
Accrued interest receivable 113,220 201,238
Prepaid expenses and other assets (21,893) (119,352)
Accrued expenses and other liabilities (107,156) (7,796)
Accrued interest payable (129,425) (99,706)
_________ __________
TOTAL ADJUSTMENTS (148,019) 72,602
_________ ________
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (139,075) 157,314
_________ ________
CASH FLOWS FROM INVESTING ACTIVITIES
Loans receivable 556,756 1,576,888
Assets acquired in satisfaction of loans - 377,231
Receivables from debtors on sales of assets
acquired in satisfaction of loans 40,709 388,358
Proceeds from sale of Medallion 57,500 -
Purchases of equity securities - (54,153)
Capital expenditures (4,784) -
__________ __________
NET CASH PROVIDED BY INVESTING ACTIVITIES 650,181 2,288,324
__________ ___________
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable, banks 500,000 6,310,000
Repayments of notes payable, banks (620,000) (8,360,000)
Dividends paid (84,375) (84,375)
__________ ___________
NET CASH USED IN FINANCING ACTIVITIES (204,375) (2,134,375)
__________ ___________
NET INCREASE IN CASH AND CASH EQUIVALENTS 306,731 311,263
CASH AND CASH EQUIVALENTS - Beginning 327,793 416,600
CASH AND CASH EQUIVALENTS - Ending $ 634,524 727,863
____________ __________
SUPPLEMENTAL DISCLOSURES OF NON-CASH
INVESTING ACTIVITIES
Unrealized loss on equity securities
arising during the period $ (51,093) $ (5,448)
The accompanying notes are an integral part of these financial
statements.
AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting
Policies
Financial Statements
The consolidated balance sheet of Ameritrans Capital
Corporation ("Ameritrans" or the "Company") as of September 30,
2005, and the related consolidated statements of operations and
cash flows for the three months ended September 30, 2005 and
2004 have been prepared by the Company, without audit, pursuant
to the rules and regulations of the Securities and Exchange
Commission (the "Commission"). Certain information and
footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted
pursuant to such rules and regulations. In the opinion of the
management of the Company ("Management"), the accompanying
consolidated financial statements include all adjustments
(consisting of normal, recurring adjustments) necessary to
summarize fairly the Company's financial position and results of
operations. The results of operations for the three months ended
September 30, 2005 are not necessarily indicative of the results of
operations for the full year or any other interim period. These
financial statements should be read in conjunction with the audited
financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended June 30,
2005, as filed with the Commission.
Organization and Principal Business Activity
Ameritrans, a Delaware corporation, is a specialty finance
company that through its subsidiary, Elk Associates Funding Corp.
("Elk"), makes loans primarily 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. Ameritrans is a regulated investment
company as defined in the Internal Revenue Code (the "Code").
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.
Basis of Consolidation
The consolidated financial statements include the
accounts of Ameritrans, Elk, and Elk's 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, (collectively referred to as the "Company").
All significant inter-company transactions have been eliminated in
consolidation.
EAF Holding Corporation, 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
made 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 and EAF Leasing II LLC, which were
formed in August 2003 and began operations in October 2003,
own and lease medallions acquired in satisfaction of foreclosures
by Elk.
EAF Leasing III LLC, which was formed in January
2004 and began operations in April 2004, owns and leases
medallions acquired in satisfaction of foreclosures by Elk.
Ameritrans organized another subsidiary on June 8,
1998, Elk Capital Corporation ("Elk Capital"), which may engage
in lending and investment activities similar to its parent. Since its
inception, Elk Capital has had no operations.
Income Taxes
The Company has elected to be taxed as a Regulated
Investment Company ("RIC") under the "Code". A RIC generally
is not taxed at the corporate level to the extent its income is
distributed to its stockholders. In order to qualify as a RIC, a
Company must payout at least ninety percent (90%) of its net
taxable investment income to its stockholders as well as meet other
requirements under the Code. In order to preserve this election for
fiscal year 2006, the Company intends to make the required
distributions to its stockholders in accordance with the 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 periods
presented.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing
income (loss) available to common stockholders by the weighted
average number of common shares outstanding for the period.
Diluted earnings per share reflect, in periods in which they have a
dilutive effect, the effect of common shares issuable upon the
exercise of stock options and warrants. The difference between
reported basic and diluted weighted average common shares results
from the assumption that all dilutive stock options outstanding
were exercised. For the periods presented, the effect of common
stock equivalents has been excluded from the diluted calculation
since the effect would be antidilutive.
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 to support the loans,
individual credit risks, historical loss experience and the
relationships between current and projected market rates and
portfolio rates of interest and maturities. The Board of Directors
has determined that the fair value of the loans approximates cost
less unrealized depreciation.
Unrealized depreciation in loan values has generally been
caused by specific events related to credit risk. Loans are
considered "non-performing" once they become 90 days past due
as to principal or interest. These past due loans are periodically
evaluated by Management and if, in the judgment of management,
the amount is not collectible and the fair value of the collateral
exceeds the loan balance at the date of valuation, the Company
makes no write-down of the loan amount.
Use of Estimates
The preparation of financial statements in conformity
with U.S. generally accepted accounting principles requires
management to make extensive use of estimates and assumptions
that affect the reported amounts of assets and liabilities at the date
of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates. Estimates that are particularly
susceptible to change relate to the determination of the fair value
of loans receivable and other financial instruments.
2. Medallions
During the year ended June 30, 2004, Elk transferred
Chicago taxicab medallions obtained from defaulted and
foreclosed loans to certain newly formed wholly-owned
subsidiaries. The subsidiaries borrowed funds in the amount of
$2,382,201 from Elk to complete the purchases of the medallions
and gained title by paying related transfer fees and satisfying
outstanding liens with Elk and Chicago.
The subsidiaries in turn, lease these medallions to taxicab
operators or companies in the Chicago market under weekly and
long-term operating lease terms. The weekly leases, which include
both medallions and automobiles, are with individuals and
automatically renew each week, up to a maximum period of 157
weeks, but may be terminated by the lessee at the conclusion of
any weekly period. These 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 September 30, 2005, no
purchase options had been exercised. The long-term medallion
leases have been made with taxicab companies, expire from
December 31, 2005 through February 28, 2006, and may be
canceled by either party upon forty-five (45) days advance written
notice.
Leasing income under all medallion and taxi cab leases
for the three (3) months ended September 30, 2005 was $49,468.
During the year ended June 30, 2005, the medallions
were written down by $100,000 to their estimated fair value, based
on current market conditions. During the quarter ended September
30, 2005, one medallion with a carrying value of $57,500 was sold.
3. Debentures Payable to SBA
At September 30, 2005 and June 30, 2005, debentures payable to the SBA
consisted of subordinated debentures with interest payable semiannually,
as follows:
Issue Date Due Date Effective 9/30/05 amd 6/30/05
Interest Rate Principal Amount
_____________________________________________________________________
July 2002 September 2012 4.67% (1) $ 2,050,000
December 2002 March 2013 4.63% (1) 3,000,000
September 2003 March 2014 4.12% (1) 5,000,000
February 2004 March 2014 4.12% (1) 1,950,000
_________
$ 12,000,000
(1) Elk is required to pay an additional annual user fee of 0.866% on these
debentures.
Under the terms of the subordinated debentures, Elk 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.
SBA Commitment
In January 2002, the Company and the SBA entered into
an agreement whereby the SBA committed to reserve debentures
in the amount of $12,000,000 to be issued by the Company on or
prior to September 30, 2006. A 2% leverage fee will be deducted
pro rata as the commitment proceeds are drawn down. A 1% non-
refundable commitment fee of $120,000 was paid by Elk in 2002
at the time the $12,000,000 commitment was obtained. In
February 2004, Elk made the final draw down under this
commitment.
4. Notes Payable to Banks
At September 30, 2005 and June 30, 2005, Elk had loan
agreements with three banks for lines of credit aggregating
$40,000,000. At September 30, 2005 and June 30, 2005,
$29,650,652 and $29,770,652 respectively, were outstanding under
these lines. The loans, which mature at various dates between
December 31, 2005 and January 31, 2006, bear interest at the
lower of either the reserve adjusted LIBOR rate plus 1.5% or the
banks' prime rates minus 0.5%.
Upon maturity, Elk anticipates that the banks will extend
these lines of credit for another year, as has been their 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 and all other assets as collateral for the
above lines of credit. Pursuant to the SBA agreement and an
"intercreditor agreement" among the lending banks, the SBA
agreed to subordination in favor of the banks, provided that the
Company maintains certain debt levels based on performance of its
portfolio.
5. Commitments and Contingencies
Interest Rate Swaps
On October 14, 2005, Elk entered into two interest rate
swap transactions both for $5,000,000 with a bank, which expire
October 15, 2007 and October 14, 2008, respectively. Elk entered
into these swap transactions to hedge against an upward movement
in interest rates relating to outstanding bank debt. The swap
transaction expiring October 15, 2007 provided for a fixed rate of
6.20% for Elk, and the swap transaction expiring October 14, 2008
provided for a fixed rate of 6.23% for Elk. If the Company's
floating borrowing rate (the one-month LIBOR rate plus 1.5%)
falls below the fixed rate, Elk is obligated to pay the bank the
difference in rates. If the Company's floating borrowing rate rises
above the fixed rate, the bank is obligated to pay Elk the
differences in rates.
6. Comprehensive Income (Loss)
Total comprehensive income (loss) for the three-month
periods ended September 30, 2005 and 2004, after considering
other comprehensive income (loss) including unrealized losses on
marketable securities of ($51,093) and ($5,448) was ($42,149) and
$79,264, respectively.
7. Other Matters
Quarterly Dividend
The Company has declared and paid the quarterly
dividend on the Company's 9 3/8 Cumulative Participating
Preferred Stock (the "Participating Preferred Stock") since the
Participating Preferred Stock was issued. Most recently, the
Company's Board of Directors declared a dividend of $0.28125 per
share on September 20, 2005 on the Participating Preferred Stock
for the period July 1, 2005 through September 30, 2005, payable
on October 17, 2005 to all holders of the Participating Preferred
Stock of record as of September 30, 2005.
Stock Offering
On July 29, 2005, Ameritrans commenced a private
offering of Common Stock with warrants to "accredited investors,"
as that term is defined in Rule 501 of Regulation D promulgated
under the 1933 Act (the "Offering"). The shares of Common Stock
are offered at a price no less than book value as of the date of the
Offering. For every four (4) shares of Common Stock purchased,
the Company will issue to the investor one (1) warrant, exercisable
for five (5) years from the date of issuance, to purchase one (1)
share of Common Stock of the Company at an exercise price equal
to 110% of the purchase price of the Shares. On October 26, 2005,
the Company extended the Offering until January 25, 2006. The
Board of Directors and Management believe that raising additional
capital pursuant to a private offering will allow the Company to
expand its investment portfolio and diversify the Company's
investments beyond the SBA-regulated loans and investments of
Elk. This diversification will provide the Company with the
flexibility to participate in a wide range of investment
opportunities. This private offering was approved by the requisite
vote of shareholders on July 21, 2005.
SBA Matter
On August 29, 2005, the Company received a letter from
the US Small Business Administration together with a copy of the
Examination Report for the period ended March 31, 2004. The
letter and Examination Report contained findings that Elk had
potentially violated certain provisions of the SBA regulations,
relating to (1) the sale of certain foreclosed Chicago medallions to
an associate of Elk without obtaining the SBA's final written
approval, and (2) the creation of subsidiary companies and
completion of certain related financings to those subsidiary
companies without obtaining the SBA's prior written approval.
The letter contained certain other comments with respect to partial
use of proceeds concerning one loan that the Company made to a
third party borrower, and the prepayment provision contained in
loan documents to a different borrower. Management has already
responded to the SBA in writing concerning the findings, and
management recently met with the SBA in an effort to resolve
these findings in a timely manner.
The Company believes that it was acting in good faith
when it effectuated the transactions with respect to the sale of the
foreclosed Chicago medallions to an associate, as it had applied for
permission from SBA prior to completion of the loan in question,
had obtained an indication of approval and SBA was in the process
of taking the steps to obtain formal written approval for the
transaction. The Company believes that it was also acting in good
faith when it created the subsidiary companies (deemed
"associates" under SBA regulations) to purchase the foreclosed
medallions, as it was having ongoing discussions with SBA at the
time to obtain SBA's approval of the transaction and had received
verbal indications that it felt it had or would, in due course,
subsequently obtain SBA's written approval to the transactions.
The Company believes that it has adequate explanations for the use
of proceeds issue on the third party loan and the prepayment issue.
The Company believes that the tone of the meeting with
SBA to reach resolution of the issues on these matters was positive
and the Company anticipates a speedy resolution by the SBA.
Neither the Company nor its counsel, however, can predict when
these matters will be resolved, or the manner in which they will be
resolved. The Company believes that the resolution of these
matters with SBA will not have any material adverse financial or
regulatory consequences to the Company.
Chicago Medallion Sales
At September 30, 2005 Elk had one executed contract with
one (1) purchaser to purchase a total of five (5) Chicago
medallions: one (1) being foreclosed and four (4) being sold by
one of Elk's subsidiaries, EAF Enterprises LLC. As part of the
purchase contract, Elk agreed to finance the entire purchase price
plus applicable transfer taxes for a period of 8 years with a balloon
principal payment at the maturity date. As of October 1, 2005,
Elk executed an additional contract with the same principal
purchaser to sell an additional five (5) Chicago medallions being
foreclosed on essentially the same terms and conditions as
previously described. On October 24, 2005, Elk signed an
additional contract with a different purchaser to purchase six (6)
Chicago medallions being foreclosed. In connection with this sale,
Elk agreed to finance the entire purchase price, but the purchaser is
paying the applicable transfer tax from its own funds. The
purchaser is also supplying its own taxi vehicles as part of this
transaction. The financing term of the loan is a sixty (60) month
period based upon a 120 month amortization schedule with a
balloon principal payment due at the end of the sixty (60) month
period. This purchaser is also interested in purchasing an
additional six (6) Chicago medallions being foreclosed on the same
terms and conditions. The parties are presently working on
obtaining an additional executed contract of sale.
New Accounting Standards
In December 2004, the Financial Accounting Standards
Board ("FASB") issued the SFAS No. 123(R), "Share-Based
Payment" ("SFAS 123(R)"), which replaced SFAS No. 123,
"Accounting for Stock-Based Compensation," and superseded
APB Opinion 25, "Accounting for Stock Issued to Employees."
SFAS 123(R) requires that all share-based payments to employees
be recognized in the financial statements based on their fair values
on the date of grant. The Company currently uses the intrinsic
value method to measure compensation expense for stock-based
awards. On April 14, 2005, the SEC amended the compliance
dates for SFAS 123(R), which extended the Company's required
adoption date of SFAS 123R to its fiscal third quarter in its fiscal
year ended June 30, 2006. The Company is evaluating the
requirements of SFAS 123(R) and expects that its adoption will not
have a material impact on its financial position on results of
operations and earnings per share.
Also in December 2004, the FASB issued Statement No.
153, "Exchanges of Nonmonetary Assets," SFAS No. 153 which
addresses the measurement of exchanges of non-monetary assets
and eliminates the exception from fair value measurement for
nonmonetary exchanges of similar productive assets and replaces it
with an exception for exchanges that do not have commercial
substance. SFAS No. 153 is effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15,
2005, with earlier application permitted. The adoption of SFAS
No. 153 will have no impact on the Company's results of
operations or its financial position.
In June 2005, the FASB issued Statement No. 154,
"Accounting Changes and Error Corrections," ("SFAS No. 154")
which changes the requirements for accounting for and reporting
of a change in accounting principle. SFAS No. 154 requires
retrospective application to prior periods' financial statements of a
voluntary change in accounting principle unless it is impracticable.
SFAS No. 154 also requires that a change in method of
depreciation, amortization, or depletion for long-lived, non-
financial assets be accounted for as a change in accounting
estimate that is effected by a change in accounting principle.
SFAS No. 154 is effective for accounting changes and corrections
of errors made for fiscal years beginning after December 15, 2005,
but does not change the transition provisions of any existing
accounting pronouncements, including those that are in a transition
phase as of the effective date of the Statement. The adoption of
SFAS No. 154 will not have a material effect on results of
operations or the Company's financial position.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The information contained in this section should be read
in conjunction with the consolidated Financial Statements and
Notes therewith appearing in this quarterly report on Form 10-Q
and in the Company's Annual Report on Form 10-K for the year
ended June 30, 2005, filed by the Company on September 28, 2005
which is available on the Company's web site at
www.ameritranscapital.com.
Critical Accounting Policies
In the preparation of the Company's financial statements
in conformity with accounting principles generally accepted in the
United States, management uses judgment in selecting policies and
procedures and making estimates and assumptions that affect
amounts reported and disclosed in the financial statements and
related notes. Significant estimates that the Company makes
include valuation of loans and equity investments, evaluation of
the recoverability of various receivables and the assessment of
litigation and other contingencies. The Company's ability to collect
receivables and recover the value of its loans depends on a number
of factors, including the financial condition of the debtors and its
ability to enforce provisions of its contracts in the event of
disputes, through litigation if necessary. Although the Company
believes that estimates and assumptions used in determining the
recorded amounts of net assets and liabilities at September 30,
2005 are reasonable, actual results could differ materially from the
estimated amounts recorded in the Company's financial statements.
Our key critical accounting policies are those applicable to the
valuation of loans receivable and other investments including
medallions, and contingencies from daily operations, as discussed
below:
Valuation of Loans Receivable. For loans receivable, fair value
generally approximates cost less unrealized depreciation. Overall
financial condition of the borrower, the adequacy of the collateral
supporting the loans, individual credit risks, historical loss
experience and other factors are criteria considered in quantifying
the unrealized depreciation, if any, that might exist at the valuation
date.
Equity Securities. The fair value of publicly traded corporate
equity securities is based on quoted market prices. Privately held
corporate equity securities are recorded at the lower of cost or
estimated fair value. For these non-quoted investments, the
Company reviews the financial performance of the privately held
companies in which the investments are maintained. If and when a
determination is made that a decline in fair value below the cost
basis is other than temporary, the related investment is written
down to its estimated fair value.
Assets Acquired in Satisfaction of Loans. Assets acquired in
satisfaction of loans are carried at the lower of the net value of the
related foreclosed loan or the estimated fair value less cost of
disposal. Losses incurred at the time of foreclosure are charged to
the unrealized depreciation on loans receivable. Subsequent
reductions in estimated net realizable value are charged to
operations as losses on assets acquired in satisfaction of loans.
Medallions. The Company obtained medallions through
foreclosure of loans and the value of such medallions are carried at
the lower of the net value of the related foreclosed loans or the fair
market value of the medallions. The medallions are being treated
as having indefinite lives, therefore, the assets are not being
amortized. However, the Company periodically tests their carrying
value for impairment.
Contingencies. The Company is subject to legal proceedings in
the course of its daily operations from enforcement of its rights in
disputes pursuant to the terms of various contractual arrangements.
In this connection, the Company assesses the likelihood of any
adverse judgment or outcome to these matters as well as a potential
range of probable losses. A determination of the amount of reserve
required, if any, for these contingencies is made after careful
analysis of each individual issue. The required reserves may
change in the future due to new developments in each matter or
changes in approach, such as a change in settlement strategy in
dealing with these matters.
General
Ameritrans acquired Elk on December 16, 1999 in a share
for share exchange. Elk 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 (the "1958 Act"). Both Ameritrans and Elk are
registered as investment companies under the Investment
Company Act of 1940.
Elk makes loans to and investments in businesses that
qualify under SBA regulations for funding under the Small
Business Investment Act of 1958, as amended. Elk's primary
lending activity is to originate and service loans collateralized by
the cities of New York, Boston, Chicago and Miami taxicab
medallions. Elk also makes loans and investments in other
diversified businesses. At September 30, 2005, 74% of Elk's loan
portfolio consisted of loans secured by taxi medallions and 26%
consisted of loans to other diversified businesses.
From inception through April 2002, Ameritrans' only
activity had been the operations of Elk. In May 2002, Ameritrans
began making loans to businesses using the proceeds raised from a
public offering, which was completed in April 2002. Since July
2002 Ameritrans has been making equity investments.
Elk has six (6) wholly-owned subsidiaries: EAF Holding
Corporation, EAF Enterprises LLC, Medallion Auto Management
LLC, EAF Leasing LLC, EAF Leasing II LLC and EAF Leasing
III LLC.
EAF Holding Corporation was formed in 1992, and its sole
activity is owning and operating certain real estate assets acquired
in satisfaction of loans. EAF Enterprises LLC was formed in June
2003 to take title to some of the Company's remaining Chicago
foreclosure medallions, and to thereafter lease them to taxi drivers
on a 36-month lease. Medallion Auto Management LLC was
formed in June 2003 to own taxi vehicles used primary in
conjunction with EAF Enterprises LLC's taxi medallion leasing
operation. In order to lease the medallions, Medallion Auto
Management LLC was formed to purchase taxi vehicles and lease
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.
Results of Operations for the Three Months Ended September
30, 2005 and 2004
Total Investment Income
The Company's interest income for the three months ended
September 30, 2005 increased $20,726 or 2% to $1,149,783 as
compared to the three months ended September 30, 2004, as a
result of an increase in the loan portfolio which was partially offset
by a decrease in average interest rates charged on new and
modified loans.
Operating Expenses
Interest expense for the three months ended September 30,
2005 increased $157,117, or 41%, to $539,273 as compared to the
three months ended September 30, 2004, due to higher interest
rates charged on outstanding bank borrowing as well as higher
outstanding banks notes payable. Salaries and employee benefits
increased $13,574, or 5%, as compared to the similar period in the
prior year. These increases resulted primarily from increases
specified in certain officers' employment agreements as well as
commissions paid to an employee. Professional fees decreased
$65,752, or 48%, as compared to the comparable period in the
prior year, due primarily to a reduction in Chicago legal fees.
Foreclosure expenses decreased $2,792 or 56% and write off and
depreciation of interest and loans receivable decreased $65,670, or
65%, as compared to the similar quarter in the prior year. Both of
these decreases reflect the reduction of foreclosures of Chicago
medallion loans. Other administrative expenses increased $36,321
or 15% as compared to the similar period in the prior year, due
primarily to an increase in Chicago service fees and computer
expense.
Net Income (Loss)
Net income decreased from $84,712 for the three months
ended September 30, 2004 to $8,944 for the three months ended
September 30, 2005. The decrease in net income between the
periods was attributable primarily to an increase in interest expense
only partially offset by an increase in interest income. Dividends
for Participating Preferred Stock were unchanged at $84,375 for
the three months ended September 30, 2005 and 2004.
Financial Condition at September 30, 2005 and 2004
Balance Sheet and Reserves
Total assets decreased by $483,105 as of September 30,
2005 from $57,886,595 as of June 30, 2005. This decrease was
primarily due to lower outstanding loans receivable. In addition,
Elk's proceeds from notes payable from banks for the quarter were
$500,000 versus $620,000 in repayments made on notes payable
from banks. This resulted in a $120,000 decrease in its short-term
bank borrowings.
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 July 29, 2005, Ameritrans commenced a private
offering of Common Stock with warrants to "accredited investors,"
as that term is defined in Rule 501 of Regulation D promulgated
under the 1933 Act (the "Offering"). The shares of Common Stock
are offered at a price no less than book value as of the date of the
offering. For every four (4) shares of Common Stock purchased,
the Company will issue to the investor one (1) warrant, exercisable
for five (5) years from the date of issuance, to purchase one (1)
share of Common Stock of the Company at an exercise price equal
to 110% of the purchase price of the Shares. On October 26, 2005,
the Company extended the Offering until January 25, 2006. The
Offering was approved by the requisite vote of shareholders on July
21, 2005.
On April 24, 2002, Ameritrans completed a public offering
of 300,000 units, consisting of one share of Common Stock, one
share of 9 3/8% cumulative participating redeemable Preferred
Stock, face value $12.00, and one redeemable Warrant exercisable
into one share of Common Stock. The gross proceeds from the sale
were $5,700,000 less offering expenses of approximately
$1,704,399. A portion of the proceeds was used temporarily to
reduce bank and SBA indebtedness. Ameritrans also used part of
the proceeds to start its own loan portfolio.
At September 30, 2005, 71% of Elk's indebtedness was
represented by indebtedness to its banks and 29% by debentures
issued to the SBA with fixed rates of interest plus user fees
resulting in rates ranging from 5.17% to 5.3125%. Elk currently
may borrow up to $40,000,000, $10,349,348 of which was
available for draw down as of September 30, 2005 under its
existing lines of credit, subject to 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 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,
subsequently adjusted to long term fixed rates of 4.67% and
4.628% 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.
Interim interest rates assigned were 1.682% and 1.595%,
respectively, subsequently adjusted to the long term fixed rate of
4.12% on the pooling date of March 24, 2004. In addition to the
fixed rates, there is an additional annual SBA user fee on each
debenture of 0.87% per annum 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.
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, will
continue to rely upon external sources of funds to finance growth.
In order to provide the funds necessary for expansion, management
expects to raise additional capital and to incur, from time to time,
additional bank indebtedness and (if deemed necessary) to obtain
SBA loans. There can be no assurances that such additional
financing will be available on acceptable terms.
New Accounting Standards
In December 2004, the Financial Accounting Standards
Board ("FASB") issued the SFAS No. 123(R), "Share-Based
Payment" ("SFAS 123(R)"), which replaced SFAS No. 123,
"Accounting for Stock-Based Compensation," and superseded
APB Opinion 25, "Accounting for Stock Issued to Employees."
SFAS 123(R) requires that all share-based payments to employees
be recognized in the financial statements based on their fair values
on the date of grant. The Company currently uses the intrinsic
value method to measure compensation expense for stock-based
awards. On April 14, 2005, the SEC amended the compliance
dates for SFAS 123(R), which extended the Company's required
adoption date of SFAS 123R to its fiscal third quarter in its fiscal
year ended June 30, 2006. The Company is evaluating the
requirements of SFAS 123(R) and expects that its adoption will not
have a material impact on its financial position on results of
operations and earnings per share.
Also in December 2004, the FASB issued Statement No.
153, "Exchanges of Nonmonetary Assets," SFAS No. 153 which
addresses the measurement of exchanges of non-monetary assets
and eliminates the exception from fair value measurement for
nonmonetary exchanges of similar productive assets and replaces it
with an exception for exchanges that do not have commercial
substance. SFAS No. 153 is effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15,
2005, with earlier application permitted. The adoption of SFAS
No. 153 will have no impact on the Company's results of
operations or its financial position.
In June 2005, the FASB issued Statement No. 154,
"Accounting Changes and Error Corrections," ("SFAS No. 154")
which changes the requirements for accounting for and reporting
of a change in accounting principle. SFAS No. 154 requires
retrospective application to prior periods' financial statements of a
voluntary change in accounting principle unless it is impracticable.
SFAS No. 154 also requires that a change in method of
depreciation, amortization, or depletion for long-lived, non-
financial assets be accounted for as a change in accounting
estimate that is effected by a change in accounting principle.
SFAS No. 154 is effective for accounting changes and corrections
of errors made a fiscal years beginning after December 15, 2005,
but does not change the transition provisions of any existing
accounting pronouncements, including those that are in a transition
phase as of the effective date of the Statement. The adoption of
SFAS No. 154 will not have a material effect on results of
operations or the Company's financial position.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK
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 Commission'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 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.
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 of loans and investments
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 and loans. The Company adjusts
the valuation of the portfolio of loans and investments quarterly to
reflect the Board of Directors' estimate of the current fair value of
each investment and loan in the portfolio. Any changes in
estimated fair value of loans are recorded in the Company's
balance sheet as unrealized depreciation on loans receivable and
also in the Company's statement of operations as write off and
depreciation on interest and loans receivable. Any changes in
estimated fair value of investments are recorded in the Company's
balance sheet as accumulated other comprehensive loss.
In addition, the illiquidity of our investments and loan
portfolio may adversely affect our ability to dispose of investments
or loans at times when it may be advantageous for us to liquidate
such investments or loans. Also, if we were required to liquidate
some or all of these items in the portfolio, the proceeds of such
liquidation might be significantly less than the current value of
such investments or loans. 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 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures
as defined under the Securities Exchange Act Rule 13a-15(e), that
are designed to ensure that information required to be disclosed in
our periodic reports filed pursuant to the rules promulgated under
the Exchange Act are recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and
forms and that such information is accumulated and communicated
to our management including our Chief Executive Officer (also
acting as Chief Financial Officer), to allow timely decisions
regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognized that
any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the
desired control objectives. As of the end of the period covered by
this report, we carried out an evaluation, under the supervision and
with the participation of our management, including our Chief
Executive Officer (also acting as Chief Financial Officer), of the
effectiveness of the design and operation of our disclosure controls
and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the
Exchange Act. Based on that evaluation, the Company concluded
that, as of the end of the period covered by this report, our
disclosure controls and procedures are effective in timely
communicating the material information required to be included in
our periodic SEC filings.
There were no changes to the Company's internal controls
over financial reporting as defined in Rule 13a-15(f) of the
Exchange Act that occurred during our most recently completed
fiscal quarter that materially affected, or is reasonably likely to
materially affect our internal control over financial reporting.
IMPORTANT FACTORS RELATING TO FORWARD-LOOKING STATEMENTS
Cautionary Note Regarding Forward-Looking Statements
This report, including, but not limited to, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations," may contain certain forward-looking statements
within the meaning of the federal securities laws. Some of the
forward-looking statements can be identified by the use of
forward-looking words. When used in this report, statements which
are not historical in nature, including the words "anticipate,"
"may," "estimate," "should," "seek," "expect," "plan," "believe,"
"intend," and similar words, or the negatives of those words, are
intended to identify forward-looking statements. Statements which
also contain a projection of revenues, earnings (loss), capital
expenditures, dividends, capital structure or other financial terms
are intended to be 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-Q 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-Q 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-Q will be realized or that actual results will not be
significantly higher or lower. Readers of this Form 10-Q 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-Q. The
inclusion of the forward-looking statements contained in this Form
10-Q should not be regarded as a representation by Ameritrans or
any other person that the forward-looking statements contained in
this Form 10-Q, will be achieved. In light of the foregoing, readers
of this Form 10-Q 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-Q and other documents that
Ameritrans files from time to time with the 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.
PART II. OTHER INFORMATION
INFORMATION INCORPORATED BY REFERENCE. Certain
information previously disclosed in Part I of this quarterly report
on Form 10-Q are incorporated by reference into Part II of this
quarterly report on Form 10-Q.
Item 1. Legal Proceedings
The Company is not currently a party to any material legal
proceeding. From time to time, the Company is engaged in various
legal proceedings incident to the ordinary course of its business. In
the opinion of the Company's management and based upon the
advice of legal counsel, there is no proceeding pending, or to the
knowledge of management threatened, which in the event of an
adverse decision would result in a material adverse effect on the
Company's results of operations or financial condition.
Item 2 Changes in Securities and Use of Proceeds
None
Item 3 Default upon Senior Securities
None
Item 4 Submission of Matters to a Vote of Security Holders
As previously disclosed in Part I of this quarterly report on Form
10-Q are incorporated by reference into Part II of this quarterly
report on Form 10-Q.
ITEM 6-- Exhibits and Reports on Form 8-K
The Exhibits filed as part of this report on Form 10-Q are listed on
the Exhibit Index immediately preceding such Exhibits, which
Exhibit index is incorporated by reference.
Exhibit Index
(a) Exhibits
10.1 Letter Agreement between Israel Discount Bank of New
York and Elk dated November 1, 2005 extending the line
of credit.
10.2 Promissory Note dated November 1, 2005 between
Ameritrans and Bank Leumi USA and Letter Agreement dated
November 1, 2005 between aforementioned parties.
31.1 Certification of the Chief Executive and Chief Financial
Officer of the Company pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive and Chief Financial
Officer of the Company pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On October 18, 2005, the Company filed a current report on Form
8-K reporting under Item 8.01 that the Company issued a press
release announcing the Company's completion of interest rate
swaps.
On September 29, 2005 the Company filed a current report on
Form 8-K, reporting under items 2.02 and 9.01 that the Company
issued a press release announcing the Company's results for the
fourth quarter and fiscal year ending June 30, 2005.
(All other items of Part II are inapplicable)
AMERITRANS CAPITAL CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERITRANS CAPITAL CORPORATION
Dated: November 14, 2005
By: /s/ Gary C. Granoff
Gary C. Granoff
President, Chief Executive Officer and
Chief Financial Officer
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