PINX:AMTCP Ameritrans Capital Corporation Pref Share Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

AMTCP Fair Value Estimate
Premium
AMTCP Consider Buying
Premium
AMTCP Consider Selling
Premium
AMTCP Fair Value Uncertainty
Premium
AMTCP Economic Moat
Premium
AMTCP Stewardship
Premium
 


U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act 1934 for the Quarterly Period Ended March 31, 2012

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.)

 

50 Jericho Quadrangle, Suite 109

Jericho, New York 11753

(Address of registrant’s principal executive office) (Zip Code)

 

(212) 355-2449

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)


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 (the “ Act ” ) 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 þ No ¨


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Act).


¨

Large accelerated filer

¨

Accelerated filer

þ

Non-accelerated filer

(Do not check if a small

reporting company.)

¨

Smaller reporting company


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ


The number of shares of registrants common stock, par value $.0001 per share, outstanding as of May 10,  2012 was 3,395,583. The number of shares of registrants 9 cumulative participating redeemable preferred stock outstanding as of May 10, 2012 was 300,000.





AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION

3

 

 

 

 

 

ITEM 1.

FINANCIAL STATEMENTS

3

 

 

 

 

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

25

 

 

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

30

 

 

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

31

 

 

 

 

PART II. OTHER INFORMATION

32

 

 

 

 

 

Item 1.

Legal Proceedings

32

 

Item 1A.

Risk Factors

32

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

34

 

Item 3.

Default upon Senior Securities

34

 

Item 4.

Mine Safety Disclosures

34

 

Item 5.

Other Information

34

 

Item 6.

Exhibits

34

 

Exhibit Index

34

 

(a)

Exhibits

34

 

 

 

 

 

SIGNATURES

35




PART I. FINANCIAL INFORMATION


ITEM 1. FINANCIAL STATEMENTS


AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES


 

 

March 31, 2012

 

 

June 30, 2011

 

 

 

(unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

Investments at fair value (cost of $22,044,293 and $27,828,620, respectively):

 

 

 

 

 

 

Non-controlled/non-affiliated investments

 

$

16,386,204

 

 

$

23,565,240

 

Non-controlled affiliated investments

 

 

3,753

 

 

 

4,761

 

Controlled affiliated investments

 

 

337,588

 

 

 

351,734

 

 

 

 

 

 

 

 

 

 

Total investments at fair value

 

 

16,727,545

 

 

 

23,921,735

 

 

 

 

 

 

 

 

 

 

Cash

 

 

2,269,319

 

 

 

4,151,616

 

Accrued interest receivable

 

 

389,863

 

 

 

412,647

 

Assets acquired in satisfaction of loans

 

 

1,075,547

 

 

 

1,075,547

 

Furniture and equipment, net

 

 

46,738

 

 

 

52,075

 

Deferred loan costs, net

 

 

278,172

 

 

 

331,310

 

Prepaid expenses and other assets

 

 

290,246

 

 

 

177,204

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

21,077,430

 

 

$

30,122,134

 

 

 

 

 

 

 

 

 

 

Liabilities and Net Assets

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Debentures payable to SBA

 

$

21,175,000

 

 

$

21,175,000

 

Notes payable

 

 

-

 

 

 

4,500,000

 

Accrued expenses and other liabilities

 

 

732,908

 

 

 

1,505,969

 

Accrued interest payable     

 

 

599,310

 

 

 

367,572

 

Dividends payable

 

 

590,625

 

 

 

337,500

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

23,097,843

 

 

 

27,886,041

 

 

 

 

 

 

 

 

 

 

Commitments and Contingencies (Notes 2, 3, 4, 7 and 8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Assets:

 

 

 

 

 

 

 

 

Preferred stock 9,500,000 shares authorized, none issued or outstanding

 

 

-

 

 

 

-

 

9-3/8% cumulative participating redeemable preferred stock; $.01 par value, $12.00 face value, 500,000 shares designated; 300,000 shares issued and outstanding

 

 

3,600,000

 

 

 

3,600,000

 

Common stock, $.0001 par value; 45,000,000 shares authorized, 3,405,583 shares issued; 3,395,583 shares outstanding

 

 

341

 

 

 

341

 

Additional paid-in capital

 

 

21,330,544

 

 

 

21,330,544

 

Losses and distributions in excess of earnings

 

 

(21,564,550

)

 

 

(18,717,907

)

Net unrealized depreciation on investments

 

 

(5,316,748

)

 

 

(3,906,885

)

Total

 

 

(1,950,413

)

 

 

2,306,093

 

Less: Treasury stock, at cost, 10,000 shares of common stock

 

 

(70,000

)

 

 

(70,000

)

 

 

 

 

 

 

 

 

 

Total net assets (liabilities)

 

 

(2,020,413

)

 

 

2,236,093

 

 

 

 

 

 

 

 

 

 

Total liabilities and net assets

 

$

21,077,430

 

 

$

30,122,134

 

 

 

 

 

 

 

 

 

 

Net liability value per common share

 

$

(1.65

)

 

$

(0.40

)


The accompanying notes are an integral part of these consolidated financial statements.


3




AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS


 

 

For the three months ended

 

For the nine months ended

 

 

March 31, 2012

2011

 

March 31, 2011

2010

 

March 31, 2012

2011

 

March 31, 2011

2010

Investment income:

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

(unaudited)

Interest on loans receivable:

 

 

 

 

 

 

 

 

Non-controlled/non-affiliated investments

$

399,385 

$

607,638 

$

1,333,661

$

1,652,631 

Controlled affiliated investments

 

6,716 

 

10,573 

 

20,593 

 

32,373 

 

 

406,101 

 

618,211 

 

1,354,254 

 

1,685,004 

Fees and other income

 

68

 

5,989 

 

8,316 

 

21,104 

Total investment income

 

406,169

 

624,200 

 

1,362,570

 

1,706,108 

Expenses:

 

 

 

 

 

 

 

 

Interest

 

232,146 

 

401,890 

 

1,025,219 

 

1,054,923 

Salaries and employee benefits

 

284,876 

 

466,412 

 

998,960 

 

1,198,139 

Occupancy costs

 

43,297

 

42,630 

 

129,890 

 

129,045 

Legal fees

 

495,555

 

797,502 

 

1,028,346 

 

1,069,512 

Accounting and compliance fees

 

165,291

 

195,403

 

587,663

 

540,426

Directors fees and expenses

 

   51,665

 

157,951 

 

139,768

 

217,370

Advisory Fee

 

9,289

 

65,745 

 

  101,984

 

186,883

Other administrative expenses

 

170,703

 

157,460 

 

533,157

 

531,117

Total expenses

 

1,452,822 

 

2,284,993 

 

4,544,987

 

4,927,415 

Net investment loss, before gain on extinguishment of debt

 

(1,046,653)

 

(1,660,793)

 

(3,182,417)

 

(3,221,307)

Gain on extinguishment of debt

 

353,620

 

-

 

353,620

 

-

Net investment loss

 

(693,033)

 

(1,660,793)

 

(2,828,797)

 

(3,221,307)

Net realized gains (losses) on investments:

 

 

 

 

 

 

 

 

Non-controlled/non-affiliated investments

 

(44,877) 

 

72,334 

 

235,279

 

(123,000)

 

 

(44,877) 

 

72,334 

 

235,279

 

(123,000)

Net unrealized depreciation on

investments

 

(160,397)

 

(839,663)

 

(1,409,863)

 

(522,006)

Net realized/unrealized gain (losses) on investments

 

(205,274)

 

(767,329)

 

(1,174,584)

 

(645,006)

Net decrease in net assets from operations

 

(898,307)

 

(2,428,122)

 

(4,003,381)

 

(3,866,313)

Distributions to preferred shareholders

 

(84,375)

 

(84,375)

 

(253,125)

 

(253,125)

Net decrease in net assets from operations available to common shareholders

$

(982,682)

$

(2,512,497)

$

(4,256,506)

$

(4,119,438)

 

 

 

 

 

 

 

 

 

Weighted Average Number of Common Shares Outstanding:

 

 

 

 

 

 

 

 

Basic and diluted

 

3,395,583 

 

3,395,583 

 

3,395,583 

 

3,395,583 

Net Decrease in Net Assets from Operations Per Common Share:

 

 

 

 

 

 

 

 

Basic and diluted

$

(0.29)

$

(0.74)

$

(1.25)

$

(1.21)


The accompanying notes are an integral part of these consolidated financial statements.


4




AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS


 

 

 

 

 

 

 

 

 

 

For the nine months ended

 

 

March 31,

2012

 

March 31,

2011

 

 

(unaudited)

 

(unaudited)

Decrease in net assets from operations:

 

 

 

 

Net investment loss

$

(2,828,797)

$

(3,221,307)

Net realized gain (loss) from investments

 

235,279 

 

(123,000)

Unrealized depreciation on investments

 

(1,409,863)

 

(522,006)

 

 

 

 

 

Net decrease in net assets resulting from operations

 

(4,003,381)

 

(3,866,313)

 

 

 

 

 

Shareholder distributions:

 

 

 

 

Distributions to preferred shareholders

 

(253,125)

 

(253,125)

 

 

 

 

 

Net decrease in net assets resulting from shareholder distributions

 

(253,125)

 

(253,125)

 

 

 

 

 

Total decrease in net assets

 

(4,256,506)

 

(4,119,438)

 

 

 

 

 

Net assets (liabilities):

 

 

 

 

Beginning of period

 

2,236,093 

 

8,376,169 

 

 

 

 

 

   End of period

$

(2,020,413) 

$

4,256,731 

 

 

 

 

 

   Net assets per preferred

$

3,600,000 

$

3,600,000 

 

 

 

 

 

   Net assets (liabilities) per common

$

(5,620,413) 

$

656,731 


The accompanying notes are an integral part of these consolidated financial statements.


5




AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


 

 

 

 

 

 

 

For the nine months ended

 

 

March 31,

2012

 

March 31,

2011

 

 

(unaudited)

 

(unaudited)

Cash flows from operating activities:

 

 

 

 

Net decrease in net assets from operations

$

(4,003,381)

$

(3,866,313)

Adjustments to reconcile net decrease in net assets from operations to net cash provided by (used in) operating activities:

 

 

 

 

Depreciation and amortization

 

60,365 

 

59,483 

Net realized (gains) losses on investments

 

(235,279)

 

123,000 

Net unrealized depreciation on investments

 

1,409,863

 

     522,006

Portfolio investments

 

(3,544,205)

 

(12,775,136)

Proceeds from principal receipts, sales, maturity of investments

 

9,563,811 

 

12,506,229 

Transfer out of portfolio to assets acquired in satisfaction of loans

 

-

 

(1,047,222)

Changes in operating assets and liabilities:

 

 

 

 

Accrued interest receivable

 

22,784

 

(60,824)

Prepaid expenses and other assets

 

(113,042)

 

75,961

Accrued expenses and other liabilities

 

(773,061)

 

268,668 

Accrued interest payable

 

231,738

 

(214,774)

Total adjustments

 

6,622,974

 

(542,609)

Net cash provided by (used in) operating activities

 

2,619,593

 

(4,408,922)

Cash flows from investing activities:

 

 

 

 

Purchases of furniture and equipment

 

(1,890)

 

(20,521)

Net cash used in investing activities

 

(1,890)

 

(20,521)

Cash flows from financing activities:

 

 

 

 

Repayment of note payable, banks

 

-

 

(370,000)

Proceeds from (repayments of) notes payable, other

 

(4,500,000)

 

1,500,000 

Dividends paid on preferred stock

 

-

 

(84,375)

Net cash (used in) provided by financing activities

 

(4,500,000)

 

1,045,625

Net decrease in cash and cash equivalents

 

(1,882,297)

 

(3,383,818)

Cash and cash equivalents:

 

 

 

 

Beginning of period

 

4,151,616 

 

7,362,491 

End of period

$

2,269,319 

$

3,978,673 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

     Cash paid during the period for:

 

 

 

 

        Interest

$

793,481 

$

1,269,697 

Supplemental disclosure of non cash investing and financing activities:

 

 

 

 

      Accrued dividends on preferred stock

$

253,125 

$

253,125 


The accompanying notes are an integral part of these consolidated financial statements.


6




AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INVESTMENTS


 

 

 

Portfolio Valuation as of

March 31, 2012

Portfolio Company (1)

Investment

Investment Rate/Maturity

 

Principal

 

 

Net Cost

 

 

Value

Commercial Loans Receivable (260.67%) (4)

 

 

 

 

 

 

 

 

 

PPCP Inc. (6)

Computer Software

Business Loan

8.00%, due 7/08 and 1/10

 

$

36,691

 

 

$

36,691

 

 

$

-

Geronimo ATM Fund LLC (6)

    ATM Operator

Collateralized Business Loan

12.00%, due 5/09

 

 

123,282

 

 

 

123,282

 

 

 

-

Vivas & Associates, Inc. (6)

    Nail Salon

Collateralized Business Loan

    9.00%, due 1/10

 

 

11,985

 

 

 

11,985

 

 

 

-

E&Y General Construction Co. (6)

    Construction Services

Senior Real Estate Mortgage

    10.50%, due 10/10

 

 

870,791

 

 

 

870,791

 

 

 

870,791

Soundview Broadcasting LLC

    Television and Broadcasting

Senior Real Estate Mortgage

    6.00%, due 9/16

 

 

1,772,408

 

 

 

1,772,408

 

 

 

1,772,408

Golden Triangle Enterprises LLC

    Retail Food Service

Senior Real Estate Mortgage

    4.74%, due 12/13

 

 

185,068

 

 

 

185,068

 

 

 

185,068

Conklin Services & Construction Inc. (6)

    Specialty Construction and Maintenance

Collateralized Business Loan

    11.00%, due 10/08

 

 

1,648,181

 

 

 

1,648,181

 

 

 

1,450,000

Mountain View Bar & Grill Inc. (6)

    Retail Food Service

Collateralized Business Loan

    12.00%, due 5/09

 

 

406,067

 

 

 

406,067

 

 

 

406,067

J. JG. Associates, Inc. (6)

    Consumer Receivable Collections

Senior Loan

    no stated rate, no maturity

 

 

182,936

 

 

 

182,936

 

 

 

85,250

J. JG. Associates, Inc. (6)

    Consumer Receivable Collections

Senior Loan

    no stated rate, no maturity

 

 

35,781

 

 

 

35,781

 

 

 

35,781

Car-Matt Real Estate LLC (6)

    Real Estate Mortgage

Senior Real Estate Mortgage

    12.00%, due 11/08

 

 

135,577

 

 

 

135,577

 

 

 

18,933

CMCA, LLC (3)

    Consumer Receivable Collections

Collateralized Business Loan

12,00% no stated maturity

 

 

221,327

 

 

 

221,327

 

 

 

221,327

CMCA, LLC #2 (3) (6)

    Consumer Receivable Collections

Collateralized Business Loan

12.00%, no stated maturity

 

 

106,261

 

 

 

106,261

 

 

 

106,261

Andy Fur (6)

    Dry Cleaners

Collateralized Business Loan

11.50%, due 1/10

 

 

12,103

 

 

 

12,103

 

 

 

-

Greaves-Peters Laundry Systems Inc. (6)

    Laundromat

Collateralized Business Loan

10.90%, due 9/13

 

 

20,471

 

 

 

20,471

 

 

 

20,471

Other Miscellaneous Loans (5) (6)

 

 

 

115,345

 

 

 

115,345

 

 

 

94,291

 

Total Commercial Loans

 

 

 

 

 

 

5,884,274

 

 

 

5,266,648

Corporate Loans Receivable (374.84%) (4)

 

 

 

 

 

 

 

 

 

 

 

 

Charlie Brown’s Acquisition Co. (6)

    Retail Food Service

Term Loan B

    10.25%, all PIK, due 10/13

 

 

2,356,682

 

 

 

2,356,682

 

 

 

518,470

Alpha Media Group Inc.

    Publishing

Term Loan, First Lien

12.00%, all of which is PIK , due 7/13

 

 

2,608,682

 

 

 

2,566,444

 

 

 

1,499,992

Hudson Products Holdings Inc.

    Diversified Manufacturing

Term Loan, First Lien

8.50%, due 8/15

 

 

1,259,899

 

 

 

1,237,540

 

 

 

1,160,745

Education Affiliates Inc.

    Private Education

Term Loan, First Lien

    8.00%, due 1/15

 

 

787,098

 

 

 

776,175

 

 

 

735,071

Shearer’s Foods Inc.

    Wholesale Food Supplier

Term Loan, First Lien

    15.75%, of which 3.75% is PIK, due 6/15

 

 

1,055,412

 

 

 

1,048,745

 

 

 

1,048,745

 

(continued)


7




AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INVESTMENTS (continued)


 

 

 

Portfolio Valuation as of

March 31, 2012

Portfolio Company (1)

Investment

Investment Rate/Maturity

 

Principal

 

 

Net Cost

 

 

Value

Impact Confections Inc.

    Candy Manufacturer

Term Loan, First Lien

    17.00%, of which 5% is PIK, due 07/15

 

 

1,597,875

 

 

 

1,597,875

 

 

 

1,597,875

Sterling Infosystems, Inc.

    Information Data Systems

Term Loan, First Lien

    7.25%, due 3/18

 

 

1,000,000

 

 

 

980,314

 

 

 

1,012,500

 

Total Corporate Loans

 

 

 

 

 

 

10,563,775

 

 

 

7,573,398

 

Total loans receivable

 

 

 

 

 

 

16,448,049

 

 

 

12,840,046

Life Insurance Settlement Contracts

    (138.59%) (4)

 

 

 

 

 

 

 

 

 

 

 

 

Life Settlement Contracts

4 life insurance policies, aggregate

    face value of $17,250,000

 

 

 

 

 

 

4,243,617

 

 

 

2,800,000

Equity Investments (53.83%) (4)

 

 

 

 

 

 

 

 

 

 

 

 

MBS Serrano, Ltd.

    Rental Real Estate Limited Partnership

Limited Partnership Interest

 

 

 

 

 

 

50,600

 

 

 

-

MBS Colonnade, Ltd.

    Rental Real Estate Limited Partnership

Limited Partnership Interest

 

 

 

 

 

 

50,000

 

 

 

10,211

MBS Sage Creek, Ltd.

    Rental Real Estate Limited Partnership

Limited Partnership Interest

 

 

 

 

 

 

50,000

 

 

 

2,377

MBS Walnut Creek, Ltd.

    Rental Real Estate Limited Partnership

Limited Partnership Interest

 

 

 

 

 

 

25,000

 

 

 

-

238 W. 108 Realty LLC (2)

    Residential Real Estate Development

5.00% LLC Interest

 

 

 

 

 

 

100,000

 

 

 

3,753

Asset Recovery & Management, LLC (3)

    Consumer Receivable Collections

30.00% LLC Interest

 

 

 

 

 

 

6,000

 

 

 

6,000

CMCA, LLC (3)

    Consumer Receivable Collections

30.00% LLC Interest

 

 

 

 

 

 

4,000

 

 

 

4,000

Soha Terrace II LLC

    Real Estate Development

4.20% LLC Interest

 

 

 

 

 

 

700,000

 

 

 

1,050,000

Fusion Telecommunications

    Internet Telephony

69,736 Shares of Common Stock

 

 

 

 

 

 

367,027

 

 

 

11,158

 

Total equity investments

 

 

 

 

 

 

1,352,627

 

 

 

1,087,499

 

Total investments

 

 

 

 

 

$

22,044,293

 

 

$

16,727,545

 

(1)   As of July 5, 2011, all investments previously pledged as collateral for a note payable to a bank were released in connection with the expiration of the credit line. All investments, other than investments held through Elk Associates Funding Corporation, were pledged as collateral for a Senior Secured Note, but were released as such notes were paid off in March 2012 (see Note 4 to the consolidated financial statements).

(2)   As defined in the Investment Company Act of 1940, we are an affiliate of this portfolio company because, as of March 31, 2012, we own 5% or more of the portfolio company’s outstanding voting securities.

(3)   As defined in the Investment Company Act of 1940, we maintain “control” of this portfolio company because we own more than 25% of the portfolio company’s outstanding voting securities.

(4)   Percentage of net liabilities.

(5)   Other small balance loans.

(6)   Loan receivable is on non-accrual status and therefore is considered non-income producing. Included in Other Miscellaneous Loans is a loan valued at $12,000 that is on non-accrual status.


The accompanying notes are an integral part of these consolidated financial statements.


8




AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INVESTMENTS


 

 

 

Portfolio Valuation as of June 30, 2011

Portfolio Company (1)

Investment

Investment Rate/Maturity

 

Principal

 

 

Net Cost

 

 

Value

Commercial Loans Receivable (279.27%) (4)

 

 

 

 

 

 

 

 

 

PPCP Inc. (6)

    Computer Software

Business Loan

8.00%, due 7/08 and 1/10

 

$

36,691

 

 

$

36,691

 

 

$

-

Geronimo ATM Fund LLC (6)

    ATM Operator

Collateralized Business Loan

12.0%, due 5/09

 

 

123,282

 

 

 

123,282

 

 

 

-

Vivas & Associates, Inc. (6)

    Nail Salon

Collateralized Business Loan

    9.00%, due 1/10

 

 

11,985

 

 

 

11,985

 

 

 

-

E&Y General Construction Co. (6)

    Construction Services

Senior Real Estate Mortgage

    10.50%, due 10/10

 

 

870,791

 

 

 

870,791

 

 

 

870,791

Soundview Broadcasting LLC

    Television and Broadcasting

Senior Real Estate Mortgage

    6.00%, due 9/11

 

 

1,820,868

 

 

 

1,820,868

 

 

 

1,820,868

Golden Triangle Enterprises LLC

    Retail Food Service

Senior Real Estate Mortgage

    4.74%, due 12/13

 

 

218,824

 

 

 

218,824

 

 

 

218,824

Conklin Services & Construction Inc. (6)

    Specialty Construction and Maintenance

Collateralized Business Loan

    11.00%, due 10/08

 

 

1,648,181

 

 

 

1,648,181

 

 

 

1,450,000

Mountain View Bar & Grill Inc. (6)

    Retail Food Service

Collateralized Business Loan

    12.00%, due 5/09

 

 

406,067

 

 

 

406,067

 

 

 

406,067

J. JG. Associates, Inc. (6)

    Consumer Receivable Collections

Senior Loan

    no stated rate, no maturity

 

 

185,436

 

 

 

185,436

 

 

 

87,750

J. JG. Associates, Inc. (6)

    Consumer Receivable Collections

Senior Loan

    no stated rate, no maturity

 

 

36,121

 

 

 

36,121

 

 

 

36,121

Car-Matt Real Estate LLC (6)

    Real Estate Mortgage

Senior Real Estate Mortgage

    12.00%, due 11/08

 

 

135,577

 

 

 

135,577

 

 

 

135,577

CMCA, LLC (3)

    Consumer Receivable Collections

Collateralized Business Loan

12,00% no stated maturity

 

 

235,473

 

 

 

235,473

 

 

 

235,473

CMCA, LLC #2 (3) (6)

    Consumer Receivable Collections

Collateralized Business Loan

12.00%, no stated maturity

 

 

106,261

 

 

 

106,261

 

 

 

106,261

Adiel Homes Inc. (6)

    Construction Services

Senior Real Estate Mortgage

    12.00%, due 1/09

 

 

270,000

 

 

 

270,000

 

 

 

270,000

Adiel Homes Inc. (6)

    Construction Services

Senior Real Estate Mortgage

    12.0%, no stated maturity

 

 

89,396

 

 

 

89,396

 

 

 

89,396

Andy Fur (6)

    Dry Cleaners

Collateralized Business Loan

11.5%, due 1/10

 

 

12,103

 

 

 

12,103

 

 

 

-

Greaves-Peters Laundry Systems Inc. (6)

    Laundromat

Collateralized Business Loan

10.90%, due 9/13

 

 

20,471

 

 

 

20,471

 

 

 

20,471

Patroon Operating Co. LLC

    Retail Food Service

Collateralized Business Loan

10.00%, due 6/12

 

 

250,000

 

 

 

250,000

 

 

 

250,000

Medallion Loans

    Taxicab Medallion Loans

2 Medallion Loan

    11.7% weighted average rate

 

 

152,000

 

 

 

152,000

 

 

 

152,000

Other Miscellaneous Loans (5) (6)

 

 

 

116,270

 

 

 

116,270

 

 

 

95,216

 

Total Commercial Loans

 

 

 

 

 

 

6,745,797

 

 

 

6,244,815

Corporate Loans Receivable (638.96%) (4)

 

 

 

 

 

 

 

 

 

 

 

 

Charlie Brown’s Acquisition Co. (6)

    Retail Food Service

Term Loan B

    10.25%, all PIK, due 10/13

 

 

2,356,682

 

 

 

2,356,682

 

 

 

1,343,309

Resco Products Inc.

    Diversified Manufacturing

Term Loan, First Lien

8.50%, due 6/13

 

 

1,301,945

 

 

 

1,301,945

 

 

 

1,301,945

Alpha Media Group Inc.

    Publishing

Term Loan, First Lien

12.00%, of which 8% is PIK , due 7/13

 

 

2,359,106

 

 

 

2,304,012

 

 

 

1,344,691

Hudson Products Holdings Inc.

    Diversified Manufacturing

Term Loan, First Lien

8.5%, due 8/15

 

 

1,269,691

 

 

 

1,242,511

 

 

 

1,231,600

Education Affiliates Inc.

    Private Education

Term Loan, First Lien

    8.0%, due 1/15

 

 

829,824

 

 

 

815,922

 

 

 

829,824


(continued)


9




AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INVESTMENTS (continued)


 

 

 

Portfolio Valuation as of June 30, 2011

Portfolio Company (1)

Investment

Investment Rate/Maturity

 

Principal

 

 

Net Cost

 

 

Value

Fairway Group Acquisition Company

    Diversified Supermarkets

Term Loan, First Lien

    7.5%, due 3/17

 

 

1,500,000

 

 

 

1,485,635

 

 

 

1,500,000

Shearer’s Foods Inc.

    Wholesale Food Supplier

Term Loan, First Lien

    15.50%, due 6/15

 

 

1,035,751

 

 

 

1,015,960

 

 

 

1,043,519

Syncsort Incorporated

    Data Protection Software

Term Loan, First Lien

    7.50%, due 03/15

 

 

910,067

 

 

 

894,298

 

 

 

910,067

Centerplate Inc.

    Stadium Concessions Provider

Term Loan, First Lien

    10.5%, due 09/16

 

 

992,500

 

 

 

967,150

 

 

 

997,463

Impact Confections Inc.

    Candy Manufacturer

Term Loan, First Lien

    17.00%, of which 5% is PIK, due 07/15

 

 

1,538,367

 

 

 

1,538,367

 

 

 

1,538,367

Affinity Group Inc.

    Direct marketing organization-focus RV’s

Term Loan, First Lien

    11.50%, due 12/16

 

 

1,250,000

 

 

 

1,226,456

 

 

 

1,312,500

Miramax Film NY, LLC

    Film Library

Term Loan, First Lien

    7.75%, due 06/16

 

 

892,308

 

 

 

874,126

 

 

 

928,000

 

Total Corporate Loans

 

 

 

 

 

 

16,023,064

 

 

 

14,281,285

 

Total loans receivable

 

 

 

 

 

 

22,768,861

 

 

 

20,526,100

Life Insurance Settlement Contracts

    (107.74%) (4)

 

 

 

 

 

 

 

 

 

 

 

 

Life Settlement Contracts

5 life insurance policies, aggregate

    face value of $17,659,809

 

 

 

 

 

 

3,681,632

 

 

 

2,408,000

Equity Investments (44.19%) (4)

 

 

 

 

 

 

 

 

 

 

 

 

MBS Serrano, Ltd.

    Rental Real Estate Limited Partnership

Limited Partnership Interest

 

 

 

 

 

 

50,600

 

 

 

8,487

MBS Colonnade, Ltd.

    Rental Real Estate Limited Partnership

Limited Partnership Interest

 

 

 

 

 

 

50,000

 

 

 

10,211

MBS Sage Creek, Ltd.

    Rental Real Estate Limited Partnership

Limited Partnership Interest

 

 

 

 

 

 

50,000

 

 

 

10,015

MBS Walnut Creek, Ltd.

    Rental Real Estate Limited Partnership

Limited Partnership Interest

 

 

 

 

 

 

25,000

 

 

 

-

238 W. 108 Realty LLC (2)

    Residential Real Estate Development

5.00% LLC Interest

 

 

 

 

 

 

100,000

 

 

 

4,761

Asset Recovery & Management, LLC (3)

    Consumer Receivable Collections

30.00% LLC Interest

 

 

 

 

 

 

6,000

 

 

 

6,000

CMCA, LLC (3)

    Consumer Receivable Collections

30.00% LLC Interest

 

 

 

 

 

 

4,000

 

 

 

4,000

Soha Terrace II LLC

    Real Estate Development

4.20% LLC Interest

 

 

 

 

 

 

700,000

 

 

 

936,337

Fusion Telecommunications

    Internet Telephony

69,736 Shares of Common Stock

 

 

 

 

 

 

367,027

 

 

 

6,974

EraGen Biosciences

    Analytic Compounds

17,000 shares of Common Stock

 

 

 

 

 

 

25,500

 

 

 

850

 

Total equity investments

 

 

 

 

 

 

1,378,127

 

 

 

987,635

 

Total investments

 

 

 

 

 

$

27,828,620

 

 

$

23,921,735

 

(1)   As of July 5, 2011, all investments previously pledged as collateral for a note payable to a bank were released in connection with the expiration of a credit line. All investments, other than investments held through Elk Associates Funding Corporation, were pledged as collateral for a Senior Secured Note, but were released as such notes were paid off in March 2012 (see Note 4 to the consolidated financial statements).

(2)   As defined in the Investment Company Act of 1940, we are an affiliate of this portfolio company because, as of June 30, 2011, we own 5% or more of the portfolio company’s outstanding voting securities.

(3)   As defined in the Investment Company Act of 1940, we maintain “control” of this portfolio company because we own more than 25% of the portfolio company’s outstanding voting securities.

(4)   Percentage of net assets.

(5)   Other small balance loans.

(6)   Loan receivable is on non-accrual status and therefore is considered non-income producing. Included in Other Miscellaneous Loans is a loan valued at $12,000 that is on non-accrual status.


The accompanying notes are an integral part of these consolidated financial statements.


10




AMERITRANS CAPITAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Information at and for the three months and nine months ended March 31, 2012 and 2011 are unaudited


1.    Organization and Summary of Significant Accounting Policies


Financial Statements


The consolidated statement of assets and liabilities of Ameritrans Capital Corporation (“Ameritrans,” the “Company,” “our,” “us,” or “we”), as of  March 31, 2012, and the related consolidated statements of operations, statement of changes in net assets, and cash flows for the three-month and nine-month periods ended March 31, 2012 and 2011, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC” or 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 management and the board of directors of the Company (“Management” and “Board of Directors”), 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 and nine months ended March 31, 2012, 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, 2011, as filed with the Commission by the Company on September 28, 2011.


Organization and Principal Business Activity


Ameritrans is a Delaware closed-end investment company formed in 1998, which, among other activities, makes loans and investments with the goal of generating both current income and capital appreciation. Through its subsidiary, Elk Associates Funding Corporation (“Elk”), it makes loans to finance the acquisition and operation of small businesses as permitted by the U.S. Small Business Administration (the “SBA”).  Ameritrans also makes direct loans to and directly invests in opportunities that Elk has historically been unable to make due to SBA restrictions.  Ameritrans makes loans which have primarily been secured by real estate mortgages or, in the case of corporate loans, generally are senior within the capital structure. Elk was organized primarily to provide long-term loans to businesses eligible for investments by small business investment companies (each an “SBIC”) under the Small Business Investment Act of 1958, as amended (the “1958 Act”).  Elk makes loans for financing the purchase or continued ownership of businesses that qualify for funding as small concerns under SBA Regulations. The Company categorizes its investments into four security types:  1) Corporate Loans Receivable; 2) Commercial Loans Receivable; 3) Life Insurance Settlements and 4) Equity Investments.


Both Ameritrans and Elk are registered as business development companies, or “BDCs,” under the Investment Company Act of 1940, as amended (the “1940 Act”).  Accordingly, Ameritrans and Elk are subject to the provisions of the 1940 Act governing the operation of BDCs.  Both companies are managed by their executive officers under the supervision of their Boards of Directors.


Basis of Presentation and Consolidation


The consolidated financial statements are presented based on accounting principles generally accepted in the United States of America (“GAAP”). These consolidated financial statements include the accounts of Ameritrans, Elk Capital Corporation (“Elk Capital”), Elk and Elk’s wholly owned subsidiary, EAF Holding Corporation (“EAF”) and five single-member, limited liability companies, each of which is wholly-owned by Ameritrans and four of which each hold one insurance policy included in the Company’s life insurance settlement investments portfolio. All significant inter-company transactions have been eliminated in consolidation.


Elk Capital is a wholly owned subsidiary of Ameritrans, which may engage in lending and investment activities similar to its parent.


EAF began operations in December 1993 and owns and operates certain real estate assets acquired in satisfaction of defaulted loans by Elk debtors.  At March 31, 2012, EAF was operating the real estate of Sealmax, Inc., and 633 Meade St.


Presentation of Prior Year Data


Certain reclassifications have been made to conform prior years’ data to the current year’s presentation. Although the reclassifications resulted in changes to certain line items in the previously filed financial statements, the overall effect of the reclassifications did not impact net assets available.


11




Investment Valuations


The Company’s loans receivable, net of participations and any unearned discount are considered investment securities under the 1940 Act and are recorded at fair value. As part of fair value methodology, loans are valued at cost adjusted for any unrealized appreciation (depreciation). Since no ready market exists for these loans, the fair value is determined in good faith by Management and approved by its 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. Foreclosed properties, which represent collateral received from defaulted borrowers, are valued similarly.


Loans are, generally, considered “non–performing” once they become 90 days past due as to principal or interest. The value of past due loans are periodically determined in good faith 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, the value of the loan will be reduced to fair value.


Equity investments (preferred stock, common stock, stock warrants, LLC interests, and LP interests including certain controlled subsidiary portfolio investments) and investment securities are recorded at fair value, represented as cost, plus or minus unrealized appreciation or depreciation.  Investments for which market quotations are readily available are valued at such quoted amounts. If no public market exists the fair value of investments that have no ready market are determined in good faith by Management and approved by the Board of Directors, based upon assets and revenues of the underlying investee companies, as well as general market trends for businesses in the same industry.


The Company records the investment in life insurance policies at the Company’s estimate of their fair value based upon various factors including a discounted cash flow analysis of anticipated life expectancies, future premium payments and anticipated death benefits. The Company also considers the market for similar policies. The fair value of the investment in life settlement contracts have no ready market and are determined in good faith by Management and approved by the Board of Directors (see Note 2).


Because of the inherent uncertainty of valuations, the Company’s estimates of the values of the investments may differ significantly from the values that would have been used had a ready market for the investments existed and the differences could be material.


Income Taxes


The Company has elected to be taxed as a Regulated Investment Company (“RIC”) under the Internal Revenue Code (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 pay out 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 year 2011/2012, the Company intends to make the required distributions to its stockholders to the extent the Company has net taxable investment income. Therefore, no provision for federal income taxes has been provided in the accompanying consolidated financial statements. No dividends on the Company’s common stock have been paid in each of the fiscal years ended June 30, 2011, 2010 and 2009 or during the nine months ended March 31, 2012, inasmuch as the Company had no taxable investment income during such periods. Accordingly, the Company has maintained its status as a RIC.


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 included in “Other administrative expenses” in the consolidated statements of operations in each of the fiscal periods presented.  The Company’s tax returns for fiscal years ended 2008 through 2011 are subject to examination by federal, state and local income tax authorities.


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. Losses incurred at the time of foreclosure are charged to the realized losses on loans receivable. Subsequent reductions in estimated net realizable value are charged to operations as losses on assets acquired in satisfaction of loans.


Use of Estimates


The preparation of financial statements in conformity with GAAP 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.  The fair value of the Company’s investments is particularly susceptible to significant changes.


12




Increase (Decrease) in Net Assets Per Share

Increase (decrease) in net assets per share is computed by dividing current net increase (decrease) in net assets from operations available to common stockholders by the weighted average number of common shares outstanding for the period.  Diluted increase (decrease) in net assets per share includes, in periods in which they have a dilutive effect, the potential 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.


Dividends


Dividends and distributions to our common and preferred stockholders are recorded on the record date.  The amount to be paid out as a dividend is determined by the Board of Directors each quarter and is generally based upon the earnings estimated by Management. Net realized capital gains, if any, are distributed at least annually, although the Company may decide to retain such capital gains for investment.


On June 30, 2008, the Board of Directors approved and adopted a dividend reinvestment plan that provides for reinvestment of distributions in the Company’s Common Stock on behalf of common stockholders, unless a stockholder elects to receive cash.  As a result, if the Board of Directors authorizes, and the Company declares, a cash dividend, then those stockholders who have not “opted out” of the dividend reinvestment plan will have their cash dividends automatically reinvested in additional shares of Common Stock, rather than receiving the cash dividends. As of March 31, 2012, no shares have been purchased under the plan.


Income Recognition


Interest income, including interest on loans in default, 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 related collateral exceeds the specific loan balance.  Loans that are not fully collateralized and which are in the process of collection, are placed on nonaccrual status when, in the judgment of management, the collectability of interest and principal is doubtful.


Stock Options


Stock-based employee compensation costs in the form of stock options is recognized as an expense over the vesting period of the underlying option using the fair values established by usage of the Black-Scholes option pricing model.


The 1940 Act restricts BDCs’ ability to grant equity-based incentive compensation at a time when it has engaged an investment adviser.  The Company’s stock option plans expired on May 21, 2009 and during the two year period ended December 10, 2011 for which the Company engaged Velocity Capital Advisors LLC as the Company’s investment adviser, the Company’s ability to grant equity-based incentive compensation was severely limited by the 1940 Act.    


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 Company’s investments, including loans receivable, life insurance settlement contracts and equity securities, are carried at their estimated fair value.    The fair value of the SBA debentures was computed using the discounted amount of future cash flows using the Company’s current incremental borrowing rate for similar types of borrowings (see Note 6). The carrying value of the notes payable is a reasonable estimate of the fair value based on prevailing market rates.


Going Concern and Management’s Plans


The accompanying financial statements have been prepared assuming that the Company will continue as a going concern which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred operating losses and negative operating cash flow and future losses are expected to continue. The Company’s plan of obtaining equity financing, even if successful, may not result in funds sufficient to maintain and expand its business and/or satisfy the capital requirements of the SBA. These factors raise doubt about the Company’s ability to continue as a going concern. Realization of assets is dependent upon continued operations of the Company, which in turn is dependent upon Management’s plans to meet its financing requirements and the success of its future operations. The ability of the Company to continue as a going concern is dependent on securing additional financing and on improving the Company’s profitability and cash flow. In addition, on February 22, 2012, the SBA referred Elk to the SBA’s Office of Liquidation, based on Elk’s violation of capital impairment percentage requirements in prior periods, which is continuing.  Although the Company has attempted to obtain equity financing on multiple occasions with a view towards, among other


13




things, curing Elk’s capital impairment and executing its growth strategy, the SBA has rejected all financing transactions that the Company has submitted to it (see Note 3 to the consolidated financial statements).  As discussed in Note 4, the SBA may declare Elk’s total indebtedness to the SBA to be immediately due and payable and/or institute legal proceedings seeking the appointment of the SBA as Elk’s receiver.  In such instance, the Company’s ability to pay its indebtedness and/or raise capital would be adversely impacted. While the Company believes in the viability of its strategy to obtain financing and increase profitability and in its ability to execute that strategy and believes that the actions presently being taken by the Company provide the opportunity for it to continue as a going concern, including its continuing activities in seeking potential financing transactions, there can be no assurances to that effect. These financial statements do not include any adjustments related to the recoverability and classification of asset amounts or the amounts and classification of liabilities that might be necessary if the Company is unable to continue as a going concern.


2.    Investments


The following table shows the Company’s portfolio by security type at March 31, 2012 and June 30, 2011:


 

 

March 31, 2012

 

 

June 30, 2011

 

 

 

(Unaudited)

 

 

 

 

Security Type

 

Cost

 

 

Fair Value

 

 

 

% (1)

 

 

Cost

 

 

Fair Value

 

 

 

% (1)

 

Commercial Loans

 

$

5,884,274

 

 

$

5,266,648

 

 

 

31.5

%

 

$

6,745,797

 

 

$

6,244,815

 

 

 

26.1

%

Corporate Loans

 

 

10,563,775

 

 

 

7,573,398

 

 

 

45.3

%

 

 

16,023,064

 

 

 

14,281,285

 

 

 

59.7

%

Life Settlement Contracts

 

 

4,243,617

 

 

 

2,800,000

 

 

 

16.7

%

 

 

3,681,632

 

 

 

2,408,000

 

 

 

10.1

%

Equity Securities

 

 

1,352,627

 

 

 

1,087,499

 

 

 

6.5

%

 

 

1,378,127

 

 

 

987,635

 

 

 

4.1

%

Total

 

$

22,044,293

 

 

$

16,727,545

 

 

 

100.0

%

 

$

27,828,620

 

 

$

23,921,735

 

 

 

100.0

%


(1)     Represents percentage of total portfolio at fair value


Investments by Industry  

Investments by industry consist of the following as of March 31, 2012 and June 30, 2011:


 

 

March 31, 2012

(Unaudited)

 

 

June 30, 2011

 

 

 

 

Value

 

 

Percentage of Portfolio

 

 

Value

 

 

Percentage of Portfolio

 

Broadcasting/Telecommunications

 

$

1,772,408

 

 

 

10.6

%

 

$

1,820,868

 

 

 

7.6

%

Commercial Construction

 

 

2,395,791

 

 

 

14.3

%

 

 

2,456,368

 

 

 

10.3

%

Computer Software

 

 

-

 

 

 

-

%

 

 

910,067

 

 

 

3.8

%

Construction and Predevelopment

 

 

1,053,753

 

 

 

6.3

%

 

 

1,300,494

 

 

 

5.4

%

Direct Marketing

 

 

-

 

 

 

-

%

 

 

1,312,500

 

 

 

5.5

%

Debt Collection

 

 

458,619

 

 

 

2.7

%

 

 

475,605

 

 

 

2.0

%

Education

 

 

735,071

 

 

 

4.4

%

 

 

829,824

 

 

 

3.5

%

Film Distribution

 

 

-

 

 

 

-

%

 

 

928,000

 

 

 

3.9

%

Food and Candy Manufacturing

 

 

2,646,620

 

 

 

15.8

%

 

 

2,581,886

 

 

 

10.8

%

Life Insurance Settlement Contracts

 

 

2,800,000

 

 

 

16.7

%

 

 

2,408,000

 

 

 

10.1

%

Manufacturing

 

 

1,160,745

 

 

 

6.9

%

 

 

2,533,545

 

 

 

10.6

%

Printing/Publishing

 

 

1,499,992

 

 

 

9.0

%

 

 

1,344,691

 

 

 

5.6

%

Restaurant/Food Service

 

 

1,053,538

 

 

 

6.3

%

 

 

3,215,663

 

 

 

13.5

%

Supermarkets

 

 

-

 

 

 

-

%

 

 

1,500,000

 

 

 

6.3

%

Information Data Systems

 

 

1,012,500

 

 

 

6.1

%

 

 

-

 

 

 

-

%

Other industries less than 1%

 

 

138,508

 

 

 

0.9

%

 

 

304,224

 

 

 

1.1

%

TOTAL

 

$

16,727,545

 

 

 

100.00

%

 

$

23,921,735

 

 

 

100.00

%


Loans Receivable


Loans are considered non-performing once they become ninety (90) days past due as to principal or interest.  The Company had fifteen and sixteen loans as of March 31, 2012, and June 30, 2011, respectively, which are considered non-performing in the amount of $3,580,091 and $4,827,743 as of March 31, 2012, and June 30, 2011, respectively. These loans are either fully or substantially collateralized and are, in some instances, personally guaranteed by the debtor. The Company does not accrue interest on non-performing loans to the extent the loan principal and accrued interest exceed the estimated fair value of the underlying collateral.


14




The following table sets forth certain information regarding performing and non-performing loans as of March 31, 2012 and June 30, 2011:


 

 

March 31, 2012

(Unaudited)

 

 

June 30, 2011

 

 

Loans receivable

 

$

12,840,046

 

 

$

20,526,100

 

Performing loans

 

 

9,316,022

 

 

 

15,698,357

 

Non-performing loans

 

$

3,524,024

 

 

$

4,827,743

 

Non-performing loans:

 

 

 

 

 

 

 

 

Accrual

 

$

-

 

 

$

-

 

Nonaccrual

 

 

3,524,024

 

 

 

4,827,743

 

 

 

$

3,524,024

 

 

$

4,827,743

 


As of March 31, 2012 the Company has accrued, but not yet paid, approximately $56,000 in fees in connection with the Company’s Investment Advisory and Management Agreement, as amended, (the “Advisory Agreement”) with Velocity Capital Advisors LLC (the “Adviser”) related to its Corporate Loans business. Pursuant to the Advisory Agreement, the Company incurred fees payable to the Adviser that were comprised of the following: (a) an annual base fee of 1.50% per annum of the aggregate fair value of Corporate Loans outstanding at the end of each quarter; (b) an income-based fee of 5% per annum, calculated quarterly, computed on interest and dividends earned from the Corporate Loan portfolio and (c) a capital gains fee of 17.5%, based on capital gains from the Corporate Loan portfolio. However, because minimum thresholds were not met during the term of the Advisory Agreement, the fees paid or accrued pursuant to the Advisory Agreement were based solely on each quarterly portion of the annual fee. As of December 10, 2011, the Advisory Agreement expired and has not been renewed. On May 14, 2012, all amounts due to the Advisor were paid.

Life Settlement Contracts


In September, 2006, the Company entered into a joint venture agreement with an unaffiliated entity (the “Joint Venture”) to purchase previously issued life insurance policies owned by unrelated individuals. Subsequently, after a series of events involving the manager of the Joint Venture, on April 14, 2009, a receiver was appointed (the “Receiver”) to operate the Joint Venture and to administer the assets of the Joint Venture and other entities with which the Receiver was involved (the “Receivership Estate”). Following discussions with the Receiver, in December 2009, the Company negotiated an agreement, which, among other items, granted the Company the right to purchase the policies, subject to certain terms and conditions, including, but not limited to the Company’s agreement to pay the Receivership Estate 20% of all recoveries until the Company has recouped $2.1 million, plus the amount of any premiums paid following the date of the Purchase Agreement and 50% of all recoveries above such amount.  


After a review of the current financing and regulatory environment, and other opportunities to make loans and investments, the Company decided to exit this line of business and plans to make no new investments in life insurance settlement policies other than the continued payment of premiums on existing investments.


As of March 31, 2012 and June 30, 2011, the fair value of the policies owned by the Company was $2,800,000 and $2,408,000, respectively, which represents the estimated fair value for the four (as of March 31, 2012) and five (as of June 30, 2011) life insurance policies with an aggregate face value of $17,250,000 and $17,659,809, respectively. The Company’s cost on these policies to date is $4,243,617, including insurance premiums of $601,693, which were paid in the nine months ended March 31, 2012. Premiums on the policies must be paid until the policies are sold in order to keep the policies in full force. One of the insureds who was covered by one of the policies in the Company’s life insurance settlement portfolio, passed away in August, 2011. The Company received approximately $320,000 from the proceeds of such policy after payment to the Receiver. At June 30, 2011, the fair value of such policy was $58,400, with a cost of $39,708.


The Company is entitled to sell the policies at any time, in its sole discretion, and has no obligation to pay future premiums on the various policies.  The approximate future minimum premiums due for each of the next five (5) years and in the aggregate thereafter, based on current life expectancy of the insureds, are as follows:


Fiscal Year Ending
June 30

 

Policy
Premiums

2012 (three months)

$

289,335

2013

 

871,236

2014

 

871,236

2015

 

871,236

2016

 

871,236

Thereafter

 

1,603,877

 

$

5,378,156


15




Based upon the current uncertain state of the life settlement market, the lack of liquidity at this time in this market due to the difficult credit conditions and the Company’s previously stated decision to exit the life settlement area, the Company has adjusted the fair value of these policies to reflect the current anticipated recovery based on estimated actuarial values that take into account the various factors discussed above. This is an estimate based upon the information currently available. The Company intends to pay future premiums and continues to pursue alternatives that could allow for a higher recovery.


Fair Value of Investments


GAAP has established a framework for measuring fair value and has expanded the disclosure requirements related to fair value measurements. Fair value is the price that would be received for an investment in a current sale, which assumes an orderly transaction between market participants on the measurement date. GAAP requires the Company to assume that the portfolio investment is sold in a principal market to market participants, or in the absence of a principal market, the most advantageous market, which may be a hypothetical market. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable, and willing and able to transact. In accordance with GAAP, the Company has considered its principal market as the market in which the Company exits its portfolio investments with the greatest volume and level of activity. GAAP specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. In accordance with GAAP, these inputs are summarized in the three broad levels listed below:


·

Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

·

Level 2 – Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

·

Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement.


In addition to using the above inputs in investment valuations, the Company continues to employ the valuation policy approved by its Board of Directors that is consistent with GAAP (see Note 1).  Consistent with its valuation policy, the Company evaluates the source of inputs, including any markets in which its investments are trading (or any markets in which securities with similar attributes are trading), in determining fair value. The Company’s valuation policy considers the fact that because there is not a readily available market value for most of the investments in its portfolio, the fair value of the investments must typically be determined using unobservable inputs. The Company's Level 3 investments require significant judgments by its investment committee, its investment advisor and its Management and include market price quotations from market makers, original transaction price, recent transactions in the same or similar investments, financial analysis, economic analysis and related changes in financial ratios or cash flows to determine fair value. Such investments may also be discounted to reflect observed or reported illiquidity and/or restrictions on transferability. See Note 1 for additional information on the Company’s valuation policy.

 

Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments may fluctuate from period to period. Additionally, the fair value of the Company’s investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that the Company may ultimately realize. Further, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If the Company was required to liquidate a portfolio investment in a forced or liquidation sale, the Company may realize significantly less than the value at which the Company previously recorded it.


In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned.


Assets measured at fair value on a recurring basis:


 

 

 

Fair Value at Reporting Date Using

 

March 31, 2012

(Unaudited)

 

Quoted Prices in

Active Markets

for Identical

Assets (Level 1)

 

 

Significant Other Observable

Inputs (Level 2)

 

 

Significant

Unobservable

Inputs (Level 3)

Commercial Loans

$

5,266,648

 

$

-

 

 

$

-

 

 

$

5,266,648

Corporate Loans

 

7,573,398

 

 

-

 

 

 

-

 

 

 

7,573,398

Life Settlement Contracts

 

2,800,000

 

 

-

 

 

 

-

 

 

 

2,800,000

Equity Securities

 

1,087,499

 

 

11,158

 

 

 

-

 

 

 

1,076,341

Total Investments

$

16,727,545

 

$

11,158

 

 

$

-

 

 

$

16,716,387


16





 

 

 

Fair Value at Reporting Date Using

 

June 30, 2011

 

Quoted Prices in

Active Markets

for Identical

Assets (Level 1)

 

 

Significant Other Observable

Inputs (Level 2)

 

 

Significant

Unobservable

Inputs (Level 3)

Commercial Loans

$

6,244,815

 

$

-

 

 

$

-

 

 

$

6,244,815

Corporate Loans

 

14,281,285

 

 

1,312,500

 

 

 

-

 

 

 

12,968,785

Life Settlement Contracts

 

2,408,000

 

 

-

 

 

 

-

 

 

 

2, 408,000

Equity Securities

 

987,635

 

 

6,974

 

 

 

-

 

 

 

980,661

Total Investments

$

23,921,735

 

$

1,319,474

 

 

$

-

 

 

$

22,602,261

 

Assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3):


 

Commercial Loans

 

Corporate Loans

 

Life Settlement Contracts

 

Equity Securities

 

Total

 

Beginning balance as of June 30, 2011

$

6,244,815

 

$

12,968,785

 

$

2,408,000

 

$

980,661

 

$

22,602,261

 

Net realized gains (losses) on investments

 

-

 

 

(28,011

)

 

288,139

 

 

(24,650

)

 

235,478

 

Net unrealized gains (losses) on investments

 

(116,644

)

 

(1,162,554

)

 

(169,985

)

 

121,180

 

 

(1,328,003

)

Purchases of investments

 

2,463

 

 

1,399,837

 

 

601,693

 

 

-

 

 

2,003,993

 

Repayments, sales or redemptions of investments

 

(863,986

)

 

(5,604,659

)

 

(327,847

)

 

(850

)

 

(6,797,342

)

Transfers in and/or out of Level 3

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

Ending balance as of March 31, 2012

$

5,266,648

 

$

7,573,398

 

$

2,800,000

 

$

1,076,341

 

$

16,716,387

 


The amount of total gains or (losses) for the period included in changes in net assets attributable to the change in unrealized gains or losses relating to assets still held at the reporting date.

 

$

(1,328,003

)

Gains and losses (realized and unrealized) included in net decrease in net assets from operations for the period above are reported as follows:

 

 

 

 

 Net realized gain on sales and dispositions

 

 

54,055

 

Change in unrealized gains or (losses) relating to assets still held at reporting date

 

$

(1,273,948

)


  

  

Commercial Loans

  

Corporate Loans

  

Life Settlement Contracts

  

Equity Securities

  

Total

Beginning balance as of June 30, 2010

$

8,941,332

$

12,868,110

$

1,356,800

$

1,009,548

$

24,175,790

Net realized losses on investments

  

(105,914)

  

(139,448)

  

-

  

(800)

  

(246,162)

Net unrealized losses on investments

  

(60,363)

  

(437,972)

  

(42,107)

  

(45,080)

  

(585,522)

Purchases of investments

  

1,719

  

10,423,308

  

880,107

  

-

  

11,305,134

Repayments, sales or redemptions of investments

  

(2,428,271)

  

(8,460,146)

  

-

  

-

  

(10,888,417)

Transfers in and/or out of Level 3

  

-

  

-

  

-

  

-

  

-

Ending balance as of March 31, 2011

$

6,348,503

$

14,253,852

$

2,194,800

$

963,668

$

23,760,823


 

 

 

Amount of total gains or losses for the period included in changes in net assets attributable to the change in unrealized gains or losses relating to assets still held at the reporting date

$

(585,522) 

 

 

 

Gains and losses (realized and unrealized) included in net decrease in net assets from operations for the period above are reported as follows:

 

 

Gain (loss) on sales and dispositions

 

(246,162)

Change in unrealized gains or (losses) relating to assets still held at reporting date

$

(831,684)


As of June 30, 2011, the aggregate net unrealized loss on the investments that use Level 3 inputs was $3,632,876. As of June 30, 2011, the aggregate net unrealized loss on Level 1 investments was $274,009. At June 30, 2011, only the investments in Affinity Group, Inc. and Fusion Communications were included in Level 1.


17





As of March 31, 2012, the aggregate net unrealized loss on the investments that use Level 3 inputs was $4,960,879. As of March 31, 2012, the aggregate net unrealized loss on Level 1 investments was $355,869. For the nine-month period ended March 31, 2012, the net unrealized loss on Level 1 investments aggregated $81,860. At March 31, 2012, only the investment in Fusion Telecommunications was included in Level 1.


3.      Debentures Payable to SBA


As of March 31, 2012, Elk’s total indebtedness to the SBA was $21,774,310, including $599,310 of accrued, but unpaid, interest and fees.  At March 31, 2012 and June 30, 2011 debentures payable to the SBA consisted of subordinated debentures with interest payable semiannually, as follows:


Issue Date

 

Due Date

 

% Interest Rate

 

March 31,

2012

 

June 30,

2011

 

Annual Amount of Interest and User Fees

 

 

 

 

 

 

 

 

 

 

 

July 2002

 

September 2012

 

4.67 (1)

$

2,050,000 

$

2,050,000 

$

113,488

December 2002

 

March 2013

 

4.63 (1)

 

3,000,000 

 

3,000,000 

 

164,880

September 2003

 

March 2014

 

4.12 (1)

 

5,000,000 

 

5,000,000 

 

249,300

February 2004

 

March 2014

 

4.12 (1)

 

1,950,000 

 

1,950,000 

 

97,227

December 2009

 

March 2020

 

4.11 (2)

 

9,175,000

 

9,175,000 

 

402,782

 

 

 

 

 

$

21,175,000 

$

21,175,000  

$

1,027,677


(1)    Elk is also required to pay an additional annual user fee of 0.866% on these debentures.

(2)    Elk is also required to pay an additional annual user fee of 0.28% 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.


Elk is required to calculate the amount of capital impairment each reporting period based on SBA regulations. The purpose of the calculation is to determine if the Undistributed Net Realized Earnings (Deficit) after adjustment for net unrealized gain or loss on securities exceeds the SBA regulatory limits. If so, Elk is considered to have impaired capital.  Since June 30, 2010, Elk’s capital has been impaired. As of March 31, 2012, Elk’s maximum permitted calculated impairment percentage (regulatory limit) was 40%, with an actual capital impairment percentage of approximately 67.6%. Accordingly, Elk had a condition of capital impairment as of March 31, 2012, which would require additional capital of approximately $9.8 million to cure.    

On March 6, 2012 (the “Notice Date”), Sean J. Greene (“Greene”), Associate Administrator Office of Investment and Innovation of SBA delivered written notice (the “Notice”) to Elk of SBA’s determination that Elk has a condition of capital impairment, based on Elk’s financial condition as of September 30, 2011.As stated in the Notice, Elk’s capital impairment percentage as of September 30, 2011 was 59%. Pursuant to the Notice, Greene directed Elk to cure the capital impairment within fifteen days from the Notice Date (the “Cure Period”). The Notice indicated the SBA may declare Elk’s total indebtedness to the SBA to be immediately due and payable and/or institute legal proceedings seeking the appointment of the SBA as Elk’s receiver if Elk failed to cure the capital impairment within the Cure Period. To date, Elk has not cured its capital impairment.


The Notice also indicated that, on February 22, 2012, the SBA referred Elk to the SBA’s Office of Liquidation, based on Elk’s violation of capital impairment percentage requirements in prior periods, which are continuing. The Company believes that this referral was in error as it was enacted prior to Elk’s receiving the applicable fifteen day notice and opportunity to cure required under SBA regulations. Prior to receiving the Notice, Elk had notified the SBA of Elk’s belief that the SBA was in error. In this regard, the Notice stated that, notwithstanding the prior transfer to the Office of Liquidation, the SBA would suspend liquidation activities during the Cure Period to allow Elk the opportunity to cure its condition of capital impairment to the SBA’s satisfaction.


On March 20, 2012, Elk filed a lawsuit against the SBA and its Administrator.  The following day, in connection with preliminary discussions regarding such litigation, the SBA represented that it would suspend liquidation activities involving Elk and refrain from taking any action to revoke Elk’s license as an SBIC until April 25, 2012.  For additional information regarding such litigation, See  Note 8 to the consolidated financial statements.  


On April 20, 2012, Elk received, through counsel, a letter from SBA acknowledging that, "by no fault of Elk," interest and annual charge payments totaling $512,538 initially due on March 1, 2012 under Elk's indebtedness to the SBA had not been received.


18




Elk had, historically, made all scheduled semi-annual payments under its SBA-guaranteed debentures through a dedicated cash sweep arrangement with The Bank of New York as trustee under the debentures.   Further, with respect to the March 1, 2012 payment, Elk had properly deposited the funds in the account designated by SBA.  On April 27, 2012, the Company remitted to SBA an aggregate of $512,538, representing the semi-annual interest payment and annual fees that were due as of March 1, 2012. The Company has accrued all debenture-related interest due the SBA, which, at March 31, 2012, aggregated $599,310.


4.      Notes Payable

 

On December 22, 2009, the Company issued $2,025,000 aggregate principal amount of its 8.75% notes due December 2011 (the “December Notes”) in a private offering.  Prior to their amendment, as described below, the Notes bore interest at a rate of 8.75%, payable quarterly, but the Company had the option to extend the December Notes until December 2012 at a rate of 5.5%, plus the then-current prime rate.  The December Notes were redeemable by the Company at any time upon not less than 30 days prior notice.  A member of the Company’s Board of Directors and certain affiliated entities acquired $1,375,000 of the December Notes in the offering. The total amount of interest incurred on the December Notes issued to related parties was $0 and $40,304 for the three months ended March 31, 2012 and 2011, respectively, and $82,500 and $100,460 for the nine months ended March 31, 2012 and 2011, respectively.


On March 24, 2010, the Company issued $975,000 aggregate principal amount of its 8.75% notes due March 2012 (the “March Notes” and, together with the December Notes, the “2009/2010 Notes”) in a private offering.  The March Notes had the same terms as the December Notes, except prior to their amendment as described below, the March Notes were scheduled to mature in March 2012.  A member of the Company’s Board of Directors, and certain affiliated entities acquired $685,000 of the March Notes in the offering. The total amount of interest incurred on the March Notes issued to related parties was $0 and $17,587 for the three months ended March 31, 2012 and 2011, respectively, and $41,100 and $46,262 for the nine months ended March 31, 2012 and 2011.


In connection with the issuance of a Senior Secured Note on January 19, 2011 (see below), in order to facilitate certain covenants under the Senior Secured Note relating to the 2009/2010 Notes, the Company entered into an Amendment to Promissory Note (the “Amendment”) with each holder of the 2009/2010 Notes. Pursuant to the Amendment, the interest rate on the 2009/2010 Notes was increased from 8.75% to 12.0% and the maturity date was extended until May 2012. The holders of the 2009/2010 Notes also waived certain covenants contained in the 2009/2010 Notes related to additional borrowings by the Company. In connection with the Amendment, the Company paid a fee equal to 1% of principal, or an aggregate of $30,000, to the holders of the 2009/2010 Notes.


On March 16, 2012, the Company paid the holders of the 2009/2010 Notes an aggregate of $2,650,000 (the “Senior Notes Payoff Amount”) in full satisfaction of the Company’s obligations under the 2009/2010 Notes. Upon the noteholders’ receipt of such payment, the 2009/2010 Notes and the Company’s obligations thereunder terminated. The Senior Notes Payoff Amount represents an approximate 19.4% discount from the principal, interest and other amounts payable under the 2009/2010 Notes as of date of payment. A member of the Company’s Board of Directors and certain affiliated entities held $2,060,000 principal amount of the 2009/2010 Notes, and as such received approximately $1,820,000 of the Senior Notes Payoff Amount. As a result of the 19.4% discount, the Company realized a gain of $350,000, in the third quarter of fiscal 2012, from the satisfaction of the obligations related to the 2009/2010 Notes.


On January 19, 2011, the Company issued a Senior Secured Note in the principal amount of $1,500,000 (the “Original 2011 Note”) to an unaffiliated lender, Ameritrans Holdings LLC (the “Lender”). The Lender is an affiliate of Renova US Holdings Ltd., the purchaser under the Stock Purchase Agreement (See Note 7, Stock Purchase Agreement). The Original 2011 Note provided for interest at the rate of 12% per annum, except following an event of default under the Original 2011 Note, in which case the Original 2011 Note provided that  interest would accrue at the rate of 14%. The Original 2011 Note matured on February 1, 2012.

 

The Original 2011 Note was originally secured by a pledge of 100% of the issued and outstanding shares of common stock of Elk owned by the Company and was subsequently amended to include all personal property and other assets of the Company other than the common stock and all other equity interests of Elk as provided in the Amended and Restated Pledge Agreement, dated May 5, 2011, between the Company and the Lender (the “Pledge Agreement”).

 

On April 12, 2011, the Company also entered into an amendment to the Original 2011 Note (the “Note Amendment” and the Original 2011 Note, as amended, the “2011 Note”), which amended a provision of the Original 2011 Note that prohibited the Company from incurring any indebtedness for borrowed money in excess of $250,000.  Such provision, as modified by the Note Amendment, provided that the Company would not incur any indebtedness for borrowed money in excess of $250,000 other than indebtedness incurred in the ordinary course of business consistent with past practices for use as working capital in an aggregate principal amount not to exceed $500,000.  All other terms of the Original 2011 Note remained in full force and effect. Interest expense incurred in connection with the 2011 Note aggregated $0 and $87,903, respectively, in the three months and nine months ended March 31, 2012, without giving effect to any default interest as discussed below.


19




On January 19, 2012 (the “Notice Date”), the Lender delivered written notice (the “Notice”) to the Company that an event of default under the 2011 Note had occurred and was continuing. Pursuant to the Notice, the Lender declared all outstanding principal, interest (including default interest), fees and other amounts owed by the Company under the 2011 Note to be immediately due and payable. Based on the occurrence of an event of default under the 2011 Note, the Lender also declared an event of default under the Pledge Agreement. The event of default specified in the Notice related to the Company’s failure as of June 30, 2011 to maintain a minimum consolidated net asset value equal to at least $4,000,000, in violation of a covenant contained in the 2011 Note.


As of the Notice Date, the Company’s outstanding indebtedness under the 2011 Note included $1,424,000 million of principal and approximately $36,000 of accrued and unpaid interest, including default interest, or approximately $1,460,000 in the aggregate (the “Indebtedness”). In addition to payment of the Indebtedness, the Lender sought reimbursement of costs and expenses related to the execution, delivery, performance, administration and enforcement of the 2011 Note and Pledge Agreement in an unspecified amount, which the Lender estimated to be approximately $100,000.


The 2011 Note matured on February 1, 2012. On March 7, 2012, the Company paid the Lender $1,420,000 (the “Payoff Amount”) in full satisfaction of the Company’s obligations under the 2011 Note. Upon the Lender’s receipt of such payment, the 2011 Note, the Company’s obligations thereunder, all liens and security interests previously granted by the Company to the Lender to secure such obligations, and the related pledge agreement was terminated. The Payoff Amount represents an approximate 9.9% discount from the principal, interest and other amounts payable under the 2011 Note as of the date of payment. Accordingly, the Company realized a gain of $3,620 in the third quarter of fiscal 2012 from the extinguishment of this debt.

5.      Dividends to Stockholders


The following table sets forth the dividends declared and/or accrued by the Company on its Common Stock and Preferred Stock for the nine months ended March 31, 2012, and 2011:


 

 

For the nine months ended  March 31, 2012

 

 

Dividend

Per Share

 

Amount

 

Declaration Date

 

Record

Date

 

Pay

Date

Preferred Stock:

 

 

 

 

 

 

 

 

 

 

First quarter

(July 1, 2011 - September 30, 2011)

 $

0.28125

$

84,375

 

 Not Declared

 

 

 

 

 Second quarter

(October 1, 2011 – December  31, 2011)

 

0.28125

 

84,375

 

 Not Declared

 

 

 

 

 Third quarter

(January 1, 2012 – March 31, 2012)

 

0.28125

 

84,375

 

 Not Declared

 

 

 

 

Total Preferred Stock Dividends

$

0.84375

$

253,125

 

 

 

 

 

 


 

 

For the nine months ended March 31, 2011

 

 

Dividend

Per Share

 

Amount

 

Declaration Date

 

Record

Date

 

Pay

Date

Preferred Stock:

 

 

 

 

 

 

 

 

 

 

First quarter

(July 1, 2010 - September 30, 2010)

$

0.28125

$

84,375

 

 Not Declared

 

 

 

 

 Second quarter

(October 1, 2010 – December  31, 2010)

 

0.28125

 

84,375

 

 Not Declared

 

 

 

 

Third quarter

(January 1, 2011 – March 31, 2011)

$

0.28125

 

84,375

 

 Not Declared

 

 

 

 

Total Preferred Stock Dividends

$

 0.84375

$

253,125

 

 

 

 

 

 


The Company did not declare or pay any dividends on its Common stock during the nine months ended March 31, 2012 and 2011.


6.      Financial Instruments


Fair value is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties. The fair values presented below have been determined by using available market information and by applying valuation methodologies.


20





Loans Receivable and Life Settlement Contracts


Loans receivable and life settlement contracts are recorded at their estimated fair value (see Note 2).


Investment Securities


The estimated fair value of publicly traded equity securities is based on quoted market prices and privately held equity securities are recorded at their estimated fair value (see Note 2).


Debt


The fair value of the SBA debentures was computed using the discounted amount of future cash flows using the Company’s current incremental borrowing rate for similar types of borrowings.  The estimated fair values of such debentures as of March 31, 2012 and June 30, 2011 were approximately $22,344,000 and $22,188,000, respectively.  However, the Company does not expect that the estimated fair value amounts determined for these debentures would be realized in an immediate settlement of such debentures with the SBA.


The carrying value of the notes payable is a reasonable estimate of the fair value based on prevailing market rates.


Other


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.


7.   Stock Purchase Agreement


On April 12, 2011, the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) with Renova US Holdings Ltd. (“Renova”). Subject to the terms and conditions set forth in the Purchase Agreement, the Company agreed to issue and sell to Renova, and Renova agreed to purchase, (i) $25,000,000 of Common Stock of the Company at a price per share equal to the greater of $1.80 and the then-prevailing per share net asset value of the Company at the time of issuance (as determined in accordance with the terms of the Purchase Agreement) (the "Applicable Per Share Purchase Price"), at an initial closing to be held no later than November 30, 2011, following satisfaction or waiver of the conditions to such issuance  and (ii) between an additional $35,000,000 to $40,000,000 of additional Common Stock (depending upon the timing of such purchases) at the Applicable Per Share Purchase Price at subsequent closings to be held from time to time, subject to satisfaction of the conditions to such issuances, between the date of the initial closing and the second anniversary of the initial closing, based upon the terms and conditions set forth in the Purchase Agreement.


 Requisite stockholder approval of the transactions contemplated by the Purchase Agreement was obtained at a special meeting of stockholders held on June 24, 2011. Consummation of the Initial Closing was subject to certain additional customary closing conditions, as well as the approval of the SBA of the indirect change of ownership and control of the Company’s wholly-owned subsidiary, Elk, which is a SBA licensee.  


On September 19, 2011, the Company received a letter from the SBA describing certain concerns related to its change of ownership and control application and requesting certain additional pieces of information. In particular, the SBA informed the Company that the proposed transaction, as then structured, would not satisfy applicable SBA management-ownership diversity requirements. While the Company believed that the transaction satisfied all SBA regulatory requirements, the SBA did not concur with that view.  


As of November 16, 2011, the Company and Renova terminated the Purchase Agreement, although the Company continued to engage in discussions with Renova regarding potential modifications to the terms of the transaction contemplated by the Purchase Agreement in order to satisfy the SBA interpretation of its management-ownership diversity regulations. As noted, below, in Note 8, Commitments and Contingencies – Litigation, the Company presented a restructured transaction with Renova, specifically drawn to address SBA’s stated concerns. On December 22, 2012, SBA informed Elk that it would not approve the transaction. In light of the SBA’s continued belief that the Renova Transaction, as proposed to be modified, would not satisfy such regulations, on January 19, 2012, Renova advised the Company that Renova was ceasing its efforts to pursue a transaction with the Company and Elk. As a result, the Company and Renova are no longer engaging in discussions regarding a potential financing transaction.


As also discussed in Note 8, in February 2012, the Company presented a potential transaction with another party, which was rejected by SBA.


The Company is actively pursuing an alternative transaction and alternative sources of financing. There is no assurance that any

alternative sources of financing will be available or what the terms of any alternative transaction would be.


21





In connection with the anticipated termination of the Advisory Agreement, as contemplated by the Purchase Agreement, the Company canceled a warrant that was issued to the Adviser on December 10, 2009. Such warrant gave the Adviser the right to purchase 100,000 shares of the Company’s common stock at an initial exercise price of $1.25, subject to adjustment, for five years from the date of issuance.


8.      Commitments and Contingencies


Litigation


Lawsuit Against the SBA


On March 20, 2012, Elk filed a lawsuit against the SBA and its Administrator in the United States District Court for the District of Columbia (the “District Court”) (Case No. 1200438 CKK), seeking temporary, preliminary, and permanent injunctive relief; declaratory relief; and damages (the “Litigation”). The injunctive relief sought by Elk includes: (i) setting aside the SBA’s decision to transfer Elk to the SBA’s Office of Liquidation (see Note 3, Debentures Payable to SBA), (ii) requiring the SBA to provide Elk with a commercially reasonable amount of time to present a plan for curing Elk’s position of capital impairment and (iii) requiring the SBA to accept legitimate commitment letters from qualified investors in the Company as a cure to Elk’s position of capital impairment, so long as those letters guaranty that funds identified in the commitment letters are transferred by the Company to Elk. Elk’s lawsuit also seeks monetary damages in an amount to be determined at trial.


On the evening of March 20, 2012, the SBA and Elk notified the District Court that the SBA had agreed to suspend liquidation activities and take no action to revoke Elk's license for 15 days from March 21, 2012. On March 21, 2012, the District Court held a Scheduling Conference in connection with the Litigation. During the Scheduling Conference, the SBA represented that it would suspend liquidation activities involving Elk and refrain from taking any action to revoke Elk's license until April 25, 2012. This representation on the record by the SBA made Elk's motion for a temporary restraining order seeking to preserve the status quo pending a decision on Elk's motion for a preliminary injunction moot. The District Court indicated during the Scheduling Conference that a decision on Elk's motion for a preliminary injunction would be rendered on or before April 25, 2012. Also on March 21, 2012, the District Court set (i) a briefing schedule on Elk's motion for a preliminary injunction and (ii) a schedule related to the SBA’s production of a complete certified administrative record concerning the events identified by Elk in the lawsuit that are the subject of the Litigation.


On April 24, 2012, the District Court denied Elk’s motion for a preliminary injunction and ordered the SBA to file a response to Elk’s lawsuit no later than June 4, 2012.  Accordingly, since April 25, 2012, the SBA is no longer required to suspend liquidation activities with respect to Elk.

Other


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, other than the matter referred to in the previous paragraphs, 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.


9.      Stock Option Plans


The following tables summarize information, as of March 31, 2012, about the outstanding stock options under the Company’s employee stock option plan and non-employee director stock option plan, both of which expired on May 21, 2009:


 

Stock Options

 

Number of Options

 

 

Weighted

Average

Exercise Price

Per Share

Options outstanding at June 30, 2011

 

289,000

 

 

$

3.51

Granted

 

-

 

 

 

-

Canceled

 

-

 

 

 

-

Expired

 

(39,433

)

 

 

4.55

Exercised

 

-

 

 

 

-

Options outstanding at March 31, 2012

 

249,567

 

 

$

3.35


22





 

 

Options Outstanding and Exercisable

Range of

Exercise Prices

 

Number

Outstanding and Exercisable

at March 31, 2012

 

Weighted

Average

Remaining

Contractual

Life

 

Weighted

Average

Exercise

Price

$3.60

 

 

13,888

 

1.14 years

 

 

$3.60

$5.28

 

 

60,000

 

1.66 years

 

 

$5.28

$4.50

 

 

20,000

 

0.53 years

 

 

$4.50

$4.93

 

 

10,141

 

0.10 years

 

 

$4.93

$2.36

 

 

120,000

 

1.53 years

 

 

$2.36

$1.78

 

 

25,538

 

2.10 years

 

 

$1.78

$ 1.78-$ 5.28

 

 

249,567

 

1.46 years

 

 

$3.35


10.      Financial Highlights


 

Nine months

Ended

March 31, 2012

 

Nine months

Ended

March 31, 2011

 

Year Ended

June 30, 2011

 

Net share data

 

 

 

 

 

 

Net asset (liability) value at the beginning of the period

$

(0.40

)

$

1.40

 

$

1.40

 

Net investment loss

 

(0.83

)

 

(0.95

)

 

(1.53

)

Net realized and unrealized gains (losses) on investments

 

(0.35

)

 

(0.19

)

 

(0.17

)

Net decrease in net assets from operations

 

(1.18

)

 

(1.14

)

 

(1.70

)

Distributions to stockholders (4)

 

(0.07

)

 

(0.07

)

 

(.10

)

Total decrease in net asset value

 

(1.25

)

 

(1.21

)

 

(1.80

)

Net asset (liability) value at the end of the period

$

(1.65

)

$

0.19

 

$

(0.40

)

Per share market value at beginning of period

$

1.17

 

$

1.32

 

$

1.32

 

Per share market value at end of period

$

0.15

 

$

1.02

 

$

1.17

 

Total return (1)

 

(87.2

)%

 

(23.50

)%

 

(11.4

)%

Ratios/supplemental data

 

 

 

 

 

 

 

 

 

Average net assets (liability) (2) (in 000’s)

$

(3,492

)

$

2,716

 

$

1,706

 

Total expense ratio (3)

 

(172.9

)%

 

241.9

%

 

431.8

%

Net investment loss to average net assets (5)

 

(108.1

)%

 

(158.1

)%

 

(306.2

)%


(1)

 Total return is calculated by dividing the change in market value of a share of common stock during the year, assuming the reinvestment of dividends on the payment date, by the per share market value at the beginning of the year.

(2)

 Average net assets excludes capital from preferred stock.

(3)

 Total expense ratio represents total expenses divided by average net assets annualized for interim periods.

(4)

 Amount represents total dividends on both common and preferred stock divided by weighted average shares.

(5)

 Annualized for interim periods.


11.      Other Matters


On September 20, 2011, the Company received a letter (the “Minimum Bid Notice”) from The Nasdaq Stock Market (“Nasdaq”) notifying the Company that, because the closing bid price for the Company’s common stock had been below $1.00 per share for the 30 consecutive business days preceding the Minimum Bid Notice, the Company no longer complied with the continued listing requirements under Nasdaq Marketplace Rule 5550(a)(2). Nasdaq Marketplace Rule 5550(a)(2) requires securities listed on the Nasdaq Capital Market to maintain a minimum bid price of $1.00 per share (the “Minimum Bid Requirement”). The Company did not regain compliance with the Minimum Bid Requirement during the applicable180-day grace period.


On October 3, 2011, the Company received a letter (the “Stockholders’ Equity Notice”) from Nasdaq notifying the Company that the Company did not satisfy the minimum stockholders’ equity requirement (or alternative standards) for continued listing under Nasdaq Marketplace Rule 5550(b) (the “Minimum Stockholders’ Equity Requirement”), based on its stockholders’ equity as of June 30, 2011. Nasdaq Marketplace Rule 5550(b)(1) requires listed companies to maintain a minimum of $2.5 million of stockholders' equity or satisfy alternative standards of market value of listed securities or net income from continuing operations.  


23




On February 1, 2012, the Company received a letter from Nasdaq notifying the Company of the Nasdaq staff’s determination that the Company had not regained compliance with the Minimum Stockholders’ Equity Requirement, and did not satisfy certain conditions necessary for an extension of the time period in which the Company could demonstrate its compliance with such requirement.  Under Nasdaq rules, the suspension of trading and delisting of the Company’s securities (which would otherwise have taken effect on February 10, 2012) was stayed based on the Company’s request for a hearing with a Nasdaq Hearings Panel (the “Panel”) to appeal the Nasdaq staff’s determination described in the preceding sentence.  


On November 8, 2011, Company received a letter (the “Common MVPHS Notice”) from Nasdaq notifying the Company that it does not satisfy the minimum market value of publicly held shares (“MVPHS”) requirement for continued listing of its common stock under Nasdaq Marketplace Rule 5550(a)(5), based on the Company’s MVPHS during the period from September 26, 2011 through November 7, 2011.  Nasdaq Marketplace Rule 5550(a)(5) requires listed companies to maintain a minimum MVPHS of $1,000,000. The Common MVPHS Notice did not immediately result in the delisting of the Company’s common stock. Under Nasdaq rules, the Company had 180 calendar days to regain compliance with the MVPHS requirement.


On January 24, 2012, Company received a letter (the “Preferred MVPHS Notice”) from Nasdaq notifying the Company that it does not satisfy MVPHS requirement for continued listing of its preferred stock under Nasdaq Market place Rule 5550(a)(5), based on the Company’s preferred stock MVPHS during the period from December 7, 2011 through January 20, 2012.  The Preferred MVPHS Notice did not immediately result in the delisting of the Company’s preferred stock. Under Nasdaq rules, the Company had 180 calendar days to regain compliance with the MVPHS requirement.  


On May 1, 2012, the Company received a letter from the Nasdaq staff informing the Company that the Panel had denied the Company’s appeal and determined to delist the Company’s securities from Nasdaq, effective at the open of trading on Thursday, May 3, 2012, based on the Company’s non-compliance with the Minimum Stockholders’ Equity Requirement and the Minimum Bid Requirement.  Nasdaq has also informed that Company that Nasdaq will file a Form 25 Notification of Delisting with the SEC after all appeal periods have expired.  The Company does not intend to appeal the determination of the Panel at this time, although the Nasdaq Listing and Hearing Review Counsel may, on its own motion, determine to review any Panel decision within 45 calendar days after the issuance of such decision.


12.     Recent Accounting Pronouncements

 

In December 2011, the FASB issued Accounting Standards Update (ASU) 2011-11, “Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11 adds certain additional disclosure requirements about financial instruments and derivative instruments that are subject to offsetting and related arrangements. The new disclosures are required for annual reporting periods beginning on or after January 1, 2013, and interim periods within those periods. As the amendment impacts disclosures only, it will not have an effect on the Company’s financial condition or results of operation.

 

Other recently issued accounting pronouncements are not expected to have a material impact on our financial position or results of operations.


13.     Subsequent Events


Except for the matters discussed in Note 8, Litigation and Note 11, Other Matters, the Company is aware of no significant subsequent events.


24




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 thereto 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, 2011, filed with the Commission by the Company on September 28, 2011 and which is available on the Company’s web site at www.ameritranscapital.com.


CRITICAL ACCOUNTING POLICIES


Investment Valuations


Our loans receivable, net of participations and any unearned discount, are considered investment securities under the 1940 Act and are recorded at fair value. As part of fair value methodology, loans are valued at cost adjusted for any unrealized appreciation (depreciation). Since no ready market exists for these loans, the fair value is determined in good faith by management, and approved by the Board of Directors. In determining the fair value, we and our Board of Directors consider factors such as the financial condition of 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. Foreclosed properties, which represent collateral received from defaulted borrowers, are valued based on appraisals prepared by third parties and market analysis.

 

Loans are, generally, considered “non–performing” once they become 90 days past due as to principal or interest. The value of past due loans are periodically determined in good faith 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, the value of the loan will be reduced to fair value .

 

Equity investments (preferred stock, common stock, LLC interests, LP interests, and stock warrants, including controlled subsidiary portfolio investments) and investment securities are recorded at fair value, represented as cost, plus or minus unrealized appreciation or depreciation. Investments for which market quotations are readily available are valued at such quoted amounts. If no public market exists, the fair value of investments that have no ready market are determined in good faith by management, and approved by the Board of Directors, based upon assets and revenues of the underlying investee companies as well as general market trends for businesses in the same industry.

 

We record the investment in life insurance policies at fair value, represented as cost, plus or minus unrealized appreciation or depreciation. The fair value of the investment in life settlement contracts have no ready market and are determined in good faith by management, and approved by the Board of Directors, based on actuarial life expectancy, health evaluations and market trends.

 

Because of the inherent uncertainty of valuations, our estimates of the values of the investments may differ significantly from the values that would have been used had a ready market for the investments existed, and the differences could be material.

 

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 realized losses on loans receivable.  Subsequent reductions in estimated net realizable value are charged to operations as losses on assets acquired in satisfaction of loans.

 

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 significant change relate to the determination of the fair value of our investments.

 

Income Recognition


Interest income, including interest on non-performing loans, is recorded on an accrual basis and in accordance with loan terms to the extent such amounts are expected to be collected.  We recognize interest income on loans classified as non-performing only to the extent that the fair market value of the related collateral exceeds the specific loan principal balance.  Loans that are not fully collateralized and that are in the process of collection are placed on nonaccrual status when, in the judgment of management, the collectability of interest and principal is doubtful.


25





Contingencies

 

We are subject to legal proceedings in the course of our daily operations from enforcement of our rights in disputes pursuant to the terms of various contractual arrangements.  We may assess 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 may be made after analysis of each individual issue.  The required reserves may change in the future due to new developments in each matter or changes in approach, such as a change in settlement strategy in dealing with these matters.


General

 

Ameritrans acquired Elk on December 16, 1999. Elk is an SBIC that has been operating since 1980, making loans to (and, to a limited extent, investments in) small businesses, who qualify under SBA Regulations. Most of Elk’s business historically consisted of originating and servicing loans collateralized by taxi medallions and loans to and investments in other diversified businesses.  Since completing the sale of the medallion portfolio, most of our net interest income has been generated from our Corporate and Commercial loans. Our earnings are 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 subordinated debentures issued to the SBA and other loans). 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 appreciation or depreciation on loans and investments is recorded when we adjust the value of a loan to reflect management’s estimate of the fair value, as approved by the Board of Directors.  


Results of Operations for the Three Months Ended March 31, 2012 and 2011  


Total Investment Income


Our investment income for the three months ended March 31, 2012, decreased $218,031, or 35%, to $406,169, as compared to investment income of $624,200 for the three months ended March 31, 2011.  The decrease in investment income between the periods can be attributed primarily to an overall decrease in the size of our investment portfolio, which decreased, based on fair value, approximately 33% at March 31, 2012 as compared with March 31, 2011. 


Corporate Loans outstanding as of March 31, 2012 decreased by $7,992,954, or 51%, to $7,573,398, as compared with $15,566,352 outstanding at March 31, 2011. This decrease in Corporate Loans outstanding was due to payoffs of approximately $9,800,000 in principal; and the aggregate decrease of fair value of certain Corporate Loans of approximately $1,240,000, as partially offset by two new loans of approximately $2,500,000 in principal and capitalized interest and loan discount amortization aggregating approximately $540,000. For the three months ended March 31, 2012, interest income on Corporate Loans decreased approximately $193,000 to approximately $369,000 from $562,000 in the comparable quarter in the prior fiscal year. The interest earned on Corporate Loans decreased in the third quarter of fiscal 2012, as compared with the comparable quarter in the prior year, primarily due to the decrease in the size of the portfolio.   


Commercial Loans as of March 31, 2012 decreased by $1,081,855, or 17%, to $5,266,648, as compared with $6,348,503 at March 31, 2011. The decrease in Commercial Loans was due, primarily, to loan amortization and paid off loans of approximately $1,279,000 and an increase in fair value of approximately $196,000. For the three months ended March 31, 2012, interest income on Commercial Loans had a net decrease of approximately $19,000, primarily, as a result of a smaller portfolio.


Life Settlement Contracts outstanding increased by $605,200 as of March 31, 2012, or 28%, to $2,800,000, from $2,194,800 at March 31, 2011, primarily as a result of additional premium payments during the period, as partially offset by the elimination of the cost of one policy upon the death of the insured. The fair value as of March 31, 2012, represents our estimate of the policies’ fair value based upon various factors, including a discounted cash flow analysis of anticipated life expectancies, future premium payments, current market conditions and anticipated death benefits related to the four life insurance policies, which have an aggregate face value of $17,250,000.


Operating Expenses


Interest expense for the three months ended March 31, 2012 decreased $169,744, or 42%, to $232,146, as compared to $401,890 for the three months ended March 31, 2011.  This was primarily due to the early retirement of our Notes Payable of $4,423,620. As part of the agreement on the early extinguishment of this debt, no interest was incurred for the quarter ended March 31, 2012 and, inasmuch as no interest was charged for the period December 15, 2011 through December 31, 2012, a prior accrual of $23,593 was reversed in the March 31, 2012 period.  As a result of the early extinguishment of this debt, we realized a gain of $353,620 during this period.


26





Salaries and employee benefits for the three months ended March 31, 2012 decreased $181,536 to $284,876, or approximately 39%, when compared with $466,412 for the three months ended March 31, 2011.  This decrease was due to a reduction in officers’ salaries as a result of officer terminations.


Occupancy costs for the three months ended March 31, 2012 remained consistent at $43,297 when compared with $42,630 for the three months ended March 31, 2011.   


Legal fees decreased $301,947, or 38%, to $495,555 in the third quarter of fiscal 2012 from $797,502 in the corresponding quarter in fiscal 2011 due, primarily, to legal services, in the prior period, provided in connection with our capital raising efforts, which were mainly attributable to legal work relating to the transactions contemplated by the Stock Purchase Agreement (the “Purchase Agreement”), dated April 12, 2011, between us and Renova US Holdings Ltd. (“Renova”) and the $1.5 million Senior Secured Note (the “Senior Secured Note”) that we issued to Ameritrans Holdings LLC, an affiliate of Renova. The decrease was partially offset by increases in the 2012 period in legal fees related to SBA matters, including litigation-related issues.

 

Accounting and compliance fees decreased $30,112 or 15% to $165,291 in the third quarter of fiscal 2012 from $195,403 in the corresponding quarter in the prior fiscal year. Such decrease was primarily attributable to a $29,156 decrease in audit fees.

 

Director fees for the three months ended March 31, 2012 decreased $106,286, or 67%, to $51,665 when compared to $157,951 for the three months ended March 31, 2011. Such decrease resulted from fewer director meetings during the third quarter of fiscal 2012 than in the comparable quarter of fiscal 2011 that were attributable, primarily, to the number of Board meetings held in the prior year’s quarter related to the Board’s consideration of financing transactions and strategic alternatives for the Company, including consideration of the transactions contemplated by the Purchase Agreement.

 

Advisory Fees for the three months ended March 31, 2012 decreased $56,456 to $9,289, or 86%, when compared with $65,745 for the three months ended March 31, 2011. This was due to the expiration on December 10, 2011 of our advisory agreement. The 2012 amount represents an estimate of a settlement of any potential differences in calculating amounts due to the advisor during the period prior to the expiration of the advisory agreement. At the present time, we have no plans to renew such agreement with our advisor, Velocity Capital Advisers LLC.

 

Miscellaneous administrative expenses increased $13,243, or 8%, to $170,703 for the three months ended March 31, 2012 when compared with $157,460 for the three months ended March 31, 2011.  This increase was primarily due to increases in SBA audit and compliance fees of approximately $9,100, and miscellaneous expenses and credits, aggregating approximately $12,300, as partially offset by decreases in insurance, foreclosure expenses and office expense of approximately $3,200, $3,100 and $1,600, respectively.

 

Decrease in Net Assets from Operations and Net Unrealized/Realized Gains (Losses)


Net decrease in net assets from operations was $898,307, for the three months ended March 31, 2012, as compared to $2,428,122 for the three months ended March 31, 2011.  This upward performance of approximately $1,530,000 in operations in the 2012 three-month period was, primarily, attributable to (1) the aggregate reduction in expenses of approximately $832,000 consisting of decreases  in legal fees ($302,000), interest expense ($170,000), salaries ($180,000), directors’ fees ($106,000), advisory fees ($56,000) and accounting fees ($30,000), net of a $13,000 increase in administrative costs; (2) a net decrease in unrealized losses of $679,000 and (3) a gain of $354,000 resulting from the early extinguishment of debt. This aggregate increase was partially offset by a reduction in total investment income of $218,000 and a negative change of $117,000 from realized gain of $72,000 in the 2011 quarter to realized loss of $45,000 in the 2012 current quarter. The decrease in investment income is attributable to the decrease in the size of our investment portfolio, which went from approximately $25.1 million at March 31, 2011 to approximately $16.8 million at March 31, 2012.


Dividends for Participating Preferred Stock, accrued, but not declared, were $84,375 in the three months ended March 31, 2012 and 2011.


Results of Operations for the Nine months Ended March 31, 2012 and 2011


Total Investment Income


The Company’s investment income for the nine months ended March 31, 2012 decreased $343,538, or 20%, to $1,362,570, as compared with $1,706,108 for the nine months ended March 31, 2011.  The decrease in investment income between the periods can be attributed primarily to the decrease in the size of our Corporate Loan portfolio. For changes in outstanding balances of Commercial Loans, Corporate Loans and Life Settlement Contracts see the discussion, above, under “Results of Operations for The Three Months Ended March 31, 2012 and March 31, 2011.”


27




Operating Expenses


Interest expense for the nine months ended March 31, 2012 decreased $29,704, or 2.8%, to $1,025,219, as compared with $1,054,923 for the nine months ended March 31, 2011.  This was due, primarily, to the forgiveness of interest from December 15, 2011 through March 13, 2012 in connection with the early extinguishment of outstanding notes. Accordingly, no interest was paid or accrued on these notes in the third quarter of fiscal 2012.


Salaries and employee benefits for the nine months ended March 31, 2012 decreased $199,179 to $998,960, or approximately 16%, when compared to $1,198,139 for the nine months ended March 31, 2011.  This decrease reflects, primarily, the effects of the terminations of several officers.


Occupancy costs for the nine months ended March 31, 2012 remained consistent at $129,890 when compared with $129,045 for the same period in 2011.  


Legal fees decreased $41,166, or 4%, to $1,028,346 in the first nine months of fiscal 2012 from $1,069,512 in the corresponding period in fiscal 2011 due, primarily, to legal services, in the prior period, provided in connection with our capital raising efforts, which were mainly attributable to legal work relating to the transactions contemplated by the Purchase Agreement and the Senior Secured Note. The decrease was partially offset by increases in the 2012 period in legal fees related to SBA matters, including litigation-related issues.

 

Accounting and compliance fees increased $47,237 or 9% to $587,663 in the first three quarters of fiscal 2012 from $540,426 in the corresponding period in the prior fiscal year. Such increase was attributable to a $17,043 increase in general accounting and other compliance fees and a $41,256 increase in financial management personnel, primarily related to our Chief Financial Officer, who was engaged in September 2010, as partially offset by an $11,062 decrease in audit fees.

 

Director fees for the nine months ended March 31, 2012 decreased $77,602, or 36%, to $139,768 when compared to $217,370 for the nine months ended March 31, 2011. Such decrease resulted from fewer director meetings during the first nine months of fiscal 2012 than in the comparable period of fiscal 2011 that were attributable, primarily, to less frequent meetings of the Board to consider financing transactions and strategic alternatives for the Company following the execution of the Purchase Agreement in April 2011. 


Advisory Fees decreased approximately $84,899 or 45%, to $101,984 in the nine months ended March 31, 2012 when compared with $186,883 for the nine months ended March 31, 2011.  This was due to a decrease in the size of the Corporate Loan portfolio and the expiration of the advisory agreement.    


Miscellaneous administrative expenses remained consistent with $533,157 for the nine months ended March 31, 2012 when compared with $531,117 for the nine months ended March 31, 2011.


Decrease in Net Assets from Resulting from Operations and Net Unrealized/Realized Gains (Losses)


Net decrease in net assets from operations was $4,003,381, for the nine months ended March 31, 2012, as compared to $3,866,313 for the three months ended March 31, 2011.  This downward performance of approximately $137,000 in operations in the 2012 nine-month period was, primarily, attributable to a reduction in total investment income of $344,000 and an $888,000 increase in unrealized loss. This was offset by (1) the aggregate reduction in expenses of approximately $383,000, consisting of decreases in legal fees ($42,000), interest expense ($30,000), salaries ($199,000), directors’ fees ($78,000) and advisory fees ($85,000), less an increase in accounting fees of $47,000; (2) a net decrease in realized losses of $358,000 and (3) a gain of $354,000 resulting from the early extinguishment of debt.


Dividends on Participating Preferred Stock, accrued, but not declared, were $253,125 for the nine months ended March 31, 2012 and $253,125 for the nine months ended March 31, 2011.


Financial Condition at March 31, 2012 and June 30, 2011


Assets and Liabilities


Total assets decreased approximately $9.0 million to $21.1 million at March 31, 2012, as compared with total assets of $30.1 million at June 30, 2011. This net decrease was primarily due to a decrease in cash of approximately $1.9 million plus a net decrease in the loan portfolio of $7.1 million.


Total liabilities had a decrease of approximately $4.8 million between periods with a total of approximately $23.1 million at March 31, 2012 as compared with $27.9 million at March 31, 2011. This decrease was substantially attributable to a decrease of $4,500,000 in notes payable and approximately $780,000 in accrued expenses, being partially offset by an aggregate increase of approximately $485,000 in interest and preferred dividends payable.


28




Liquidity and Capital Resources


We have funded our operations through private and public placements of our securities, bank financing, the issuance to the SBA of our subordinated debentures, other borrowings and internally generated funds.

 

At March 31, 2012, 100% of our indebtedness was due to debentures issued to the SBA with fixed rates of interest plus user fees resulting in rates ranging from 4.39% to 5.54%.

  

We invested in life settlement contracts which require us to continue premium payments to keep the policies in force through each insured’s life expectancy or until such time the policies are sold.  We may sell the policies at any time, at our sole discretion. However, if we choose to keep the policies, as of and after March 31, 2012, aggregate premium payments due through the life expectancy of the insureds are approximately $2,903,000 through June 30, 2015 and approximately $2,475,000 thereafter (see Note 2 to the consolidated financial statements).


Loan amortization and prepayments also provide a source of funding for us. Prepayments on loans are influenced significantly by general interest rates, economic conditions and competition.

 

We will distribute at least 90% of our investment company taxable income, if any, and, accordingly, will continue to rely upon external sources of funds to finance growth. No dividends on our common stock have been paid in each of the fiscal years ended June 30, 2011 and 2010 or during the nine months ended March 31, 2012, inasmuch as we had no taxable investment income during such periods. Accordingly, we have maintained our status as a RIC.

 

On April 12, 2011, we entered into the Purchase Agreement with Renova, which provided for an equity investment in the Company of between $25 million at an initial closing to be held no later than November 30, 2011 and between $35 million and $40 million at subsequent closings to be held over the succeeding two year period.  The transactions contemplated by the Purchase Agreement represented a significant potential source of liquidity for us.  


In February 2011, approximately two months prior to executing the Purchase Agreement with Renova, we notified the SBA of the proposed structure of the transaction. After providing substantial detail on the Renova transaction, and receiving no notification of any issues from the SBA and after several weeks of negotiations, due diligence and expenditures, we signed the Purchase Agreement with Renova in April 2011. Following shareholder approval of the Renova transaction on June 24, 2011, the parties were prepared to consummate the transaction immediately, subject to receipt of SBA approval of the indirect change of ownership and control of Elk resulting from the transaction.


On September 19, 2011, seven months after first submitting the proposed structure of the transaction to the SBA, we received written notice that the Renova transaction, as structured, did not comply with certain ownership diversity requirements under SBA regulations. While we did not agree with the SBA's interpretation of those regulations, and presented detailed legal arguments demonstrating compliance with same, in view of the SBA's continued interpretation of the regulations, we and Renova mutually terminated the Purchase Agreement  on November 16, 2011. Following the termination, we continued to engage in discussions with Renova regarding potential modifications to the terms of the Renova transaction that, in our view, satisfied the SBA’s stated interpretation of the regulations. Our management met with SBA officials on various occasions in an effort to structure a transaction acceptable to SBA.  However, in light of the SBA’s continued belief that the Renova transaction, as proposed to be modified, would not satisfy such regulations, on January 19, 2012, Renova advised us that Renova was ceasing its efforts to pursue a transaction with the Company and Elk and the parties ceased all discussions regarding a transaction.


Subsequently, we engaged in discussions regarding alternative change of control transactions with other parties that also would have cured the capital impairment. We kept the SBA informed of these discussions and attempted to determine whether SBA was likely to approve a proposed transaction. Based upon discussions and written communications, the SBA indicated it would not approve any such transaction. We believe this determination was made arbitrarily and capriciously and is in contravention of applicable regulations.


We continue to explore all options available to cure our capital impairment and maximize value for our shareholders.   However, since October of 2010, Elk has brought multiple potential transactions that would cure its capital impairment to the SBA’s Investment Division for approval.  Each time the SBA has indicated, both orally and in writing, that it would not approve such transaction for reasons that Elk believes are wrong, both legally and on the merits. We believe that the SBA’s decisions to date have significantly impaired, [and any unwillingness on the part of the SBA, or the perception by potential investors or other strategic partners that the SBA is unwilling, to approve transactions involving an indirect change of ownership or control of Elk may continue to impair,] our ability to raise capital. 


29





We have incurred operating losses and negative operating cash flow and future losses are anticipated. Our plan of obtaining equity financing, even if successful, may not result in funds sufficient to maintain and expand our business and/or satisfy the capital requirements of the SBA. These factors raise doubt about our ability to continue as a going concern. Realization of assets is dependent upon our continued operations, which, in turn, is dependent upon management’s plans to meet our financing requirements and the success of our future operations. Our ability to continue as a going concern is dependent on securing additional financing and on improving our profitability and cash flow. On February 22, 2012, the SBA referred Elk to the SBA’s Office of Liquidation, based on Elk’s violation of capital impairment percentage requirements in prior periods, which is continuing.  Although the Company has attempted to obtain equity financing on multiple occasions with a view towards, among other things, curing Elk’s capital impairment and executing its growth strategy, the SBA has rejected any potential financing transaction that the Company has submitted to it.  As discussed in Note 4 to the financial statements, the SBA may declare Elk’s total indebtedness to the SBA to be immediately due and payable and/or institute legal proceedings seeking the appointment of the SBA as Elk’s receiver.  In such instance, our ability to pay our indebtedness and/or raise capital would be severely adversely impacted. While we believe in the viability of our strategy to obtain financing and increase profitability and in our ability to execute that strategy and believe that the actions presently being taken by us provide the opportunity for us to continue as a going concern, there can be no assurances to that effect.


We are actively pursuing alternative sources of financing. There is no assurance that any alternative sources of financing will be available to us or what the terms of any alternative transaction would be.


 

 Recently Issued Accounting Standards


Refer to Note 12 in the accompanying consolidated financial statements for a summary of the recently issued accounting pronouncements.


ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK


Our business activities contain elements of risk. We consider the principal types of risk to be fluctuations in interest rates and portfolio valuations.  We consider the management of risk essential to conducting our businesses.  Accordingly, our risk management systems and procedures are designed to identify and analyze our 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.


We value our investment portfolio at fair value as determined in good faith by our Board of Directors in accordance with the our valuation policy.  Unlike certain lending institutions, we are not permitted to establish reserves for loan losses.  Instead, we must value each individual investment and portfolio loan on a quarterly basis.  We record unrealized depreciation on investments and loans when we believe that an asset has been impaired and full collection is unlikely.  Without a readily ascertainable market value, the estimated value of our portfolio of investments may differ significantly from the values that would be placed on the investment portfolio if there existed a ready market for the investments.  We adjust the valuation of the portfolio quarterly to reflect the Board of Directors’ estimate of the current fair value of each component of the portfolio.  Any changes in estimated fair value are recorded in our statement of operations as net unrealized appreciation or depreciation on investments.


In addition, the illiquidity of our investment portfolio may adversely affect our ability to dispose of investments at times when it may be advantageous for us to liquidate such investments.  Also, if we were required to liquidate some or all of the investments in the portfolio, the proceeds of such liquidation might 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.

 

Assuming that the assets and liabilities were to remain constant and no actions were taken to alter the existing interest rate sensitivity, based on the balances at March 31, 2012, a hypothetical immediate 1% increase in interest rates would have resulted in an additional net increase in net assets from operations of $85,458 at March 31, 2012. This is based on a 1% increase in the Company’s loans receivable at variable interest rate terms. There is no offset to this because, at March 31, 2012, the Company had no outstanding variable rate loans payable. This hypothetical does not take into account interest rate floors or caps on the Company’s loan receivable portfolio.  No assurances can be given however, that actual results would not differ materially from the potential outcome simulated by these estimates.


30




ITEM 4.  CONTROLS AND PROCEDURES


Disclosure Controls and Procedures


Our management is responsible for establishing and maintaining adequate disclosure controls and procedures (as defined in Rules 13a-15( e ) and 15d-15( e) under the Exchange Act). Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures.  Based on such evaluation, our management, including our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2012.


Because of their inherent limitations, disclosure controls and procedures may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that disclosure controls and procedures may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


Internal Control over Financial Reporting


There have been no changes in our internal control over financial reporting during the nine months ended  March 31, 2012 that have materially affected, or are 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 Quarterly Report includes forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. The matters discussed in this Quarterly Report, as well as in future oral and written statements by management of Ameritrans Capital Corporation, that are forward-looking statements are based on current management expectations that involve substantial risks and uncertainties which could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking statements. Forward-looking statements relate to future events or our future financial performance. We generally identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar words. Important assumptions include our ability to originate new investments, achieve certain margins and levels of profitability, the availability of additional capital, our ability to continue as a going concern and the ability to maintain certain debt to asset ratios. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this Quarterly Report should not be regarded as a representation by us that our plans or objectives will be achieved. The forward-looking statements contained in this Quarterly Report include, but are not limited to, statements as to:


·

our future operating results;

·

our business prospects and the prospects of our existing and prospective portfolio companies;

·

the impact of investments that we expect to make;

·

our informal relationships with third parties;

·

the dependence of our future success on the general economy and its impact on the industries in which we invest;

·

the ability of our portfolio companies to achieve their objectives;

·

our expected financings and investments;

·

our regulatory structure and tax treatment;

·

our ability to continue to operate as a going concern;

·

Elk’s ability to return to the SBA’s Office of Operations;

·

our ability to operate as a BDC and a RIC; and

·

the adequacy of our cash resources and working capital.


You should not place undue reliance on these forward-looking statements. The forward-looking statements made in this Quarterly Report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date of this Quarterly Report.


31



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


On March 20, 2012, Elk filed a lawsuit against the SBA and its Administrator in the United States District Court for the District of Columbia (the “District Court”) (Case No. 1200438 CKK), seeking temporary, preliminary, and permanent injunctive relief; declaratory relief; and damages (the “Litigation”).  The injunctive relief sought by Elk includes: (i) setting aside the SBA’s decision to transfer Elk to the SBA’s Office of Liquidation, (ii) requiring the SBA to provide Elk with a commercially reasonable amount of time to present a plan for curing Elk’s position of capital impairment and (iii) requiring the SBA to accept legitimate commitment letters from qualified investors in the Company as a cure to Elk’s position of capital impairment, so long as those letters guaranty that funds identified in the commitment letters are transferred by the Company to Elk.  Elk’s lawsuit also seeks monetary damages in an amount to be determined at trial.


Elk’s complaint in the Litigation alleges, among other things, that the SBA’s refusal to approve the indirect change of ownership and control of Elk that would have resulted from the financing transactions submitted to the SBA for review, including the transactions contemplated by the Purchase Agreement with Renova, was arbitrary and capricious, and that the SBA’s referral of Elk to its Office of Liquidation resulted from a process whereby the SBA failed to follow its own regulations.  The complaint further alleges that, due to the SBA’s actions and its arbitrary and capricious decision-making process, Elk was denied a meaningful opportunity to cure its capital impairment. As a result, the complaint alleges, Elk will be forced into liquidation by the SBA, thereby losing a valuable property right that it holds as an SBIC, subject to certain regulatory requirements as in effect at the time it obtained its SBIC license.


On the evening of March 20, 2012, the SBA and Elk notified the District Court that the SBA had agreed to suspend liquidation activities and take no action to revoke Elk's license for 15 days from March 21, 2012.  On March 21, 2012, the District Court held a Scheduling Conference in connection with the Litigation.  During the Scheduling Conference, the SBA represented that it would suspend liquidation activities involving Elk and refrain from taking any action to revoke Elk's license until April 25, 2012.  This representation on the record by the SBA made Elk's motion for a temporary restraining order seeking to preserve the status quo pending a decision on Elk's motion for a preliminary injunction moot.  Also on March 21, 2012, the District Court set (i) a briefing schedule on Elk's motion for a preliminary injunction and (ii) a schedule related to the SBA’s production of a complete certified administrative record concerning the events identified by Elk in the lawsuit that are the subject of the Litigation.


On April 24, 2012, the District Court denied Elk’s motion for a preliminary injunction and ordered the SBA to file a response to Elk’s lawsuit no later than June 4, 2012.


As of April 25, 2012, the SBA is no longer required to suspend liquidation activities with respect to Elk.


Except as described above, we are not currently a party to any material legal proceeding. From time to time, we are engaged in various legal proceedings incident to the ordinary course of our business. In the opinion of our 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 our results of operations or financial condition.


Item 1A. Risk Factors


Part I, Item 1A — “Risk Factors,” of our Annual Report on Form 10-K for the year ended June 30, 2011 (the “2011 Annual Report”), describes important factors that could materially affect our business, financial condition and/or future results and cause our operating results to differ materially from those indicated, projected or implied by forward-looking statements made in this Quarterly Report or presented elsewhere by management from time to time. The risks described in our Annual Report on Form 10-K are not the only risks facing us; additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results and cause our operating results to differ materially from those indicated, projected or implied by forward-looking statements made in this Quarterly Report or presented elsewhere by management from time to time.


There were no material changes during the nine months ended March 31, 2012 to the risk factors set for in the 2011 Annual Report, except for the addition of the following risks:


There is doubt about our ability to continue as a going concern.


We have incurred operating losses and negative operating cash flow and future losses are anticipated.  If the SBA forces Elk into liquidation, the SBA may declare Elk’s total indebtedness to the SBA to be immediately due and payable and/or institute legal proceedings seeking the appointment of the SBA as Elk’s receiver.  In such instance, our ability to pay our indebtedness and/or raise capital would be severely adversely impacted.   Management has determined that significant additional sources of capital will likely be required for us to continue operating through the end of our next fiscal year and beyond and we are actively pursuing financing and alternative transactions to strengthen our capitalization. Our plan of obtaining equity financing, even if successful, may not result in funds sufficient to maintain and expand our business and/or satisfy the capital requirements of the SBA. In addition, restrictions


32



imposed by the SBA may limit our ability to attract potential investors and/or consummate a financing or other transaction.  These factors raise doubt about our ability to continue as a going concern.  Realization of assets is dependent upon our continued operations, which in turn is dependent upon management’s plans to meet its financing requirements and the success of its future operations. Our ability to continue as a going concern is dependent on securing additional financing and on improving our profitability and cash flow. There can be no assurance that we will be able to obtain financing or improve profitability and cash flow or that doing so will enable us to continue as a going concern.


The delisting of our securities from the Nasdaq Capital Market may adversely affect the market price and liquidity of our Common Stock and Preferred Stock, our ability to raise additional capital and our corporate governance.

Effective May 3, 2012 our Common Stock and Preferred Stock were delisted from the Nasdaq Capital Market and began trading in the over-the-counter market.  Delisting of our securities from the Nasdaq Capital Market could materially and adversely affect the value and liquidity of our Common Stock and Preferred Stock.   In the absence of an active trading market for our securities, you may be unable to buy or sell your Common Stock or Preferred Stock on short notice, if at all, and the sale of a large number of shares of our Common Stock or Preferred Stock could result in a significant decrease in the market price for our securities.  Delisting may also adversely affect our ability to raise additional capital, which is critical to the execution of our business strategy.  

As a result of the delisting of our securities from the Nasdaq Capital Market, we are no longer subject to the rules of The Nasdaq Stock Market, including rules related to corporate governance matters such as the circumstances (including but not limited to certain issuances of our securities) in which shareholder approval is required, requirements regarding the independence of our directors and the existence of committees of our board of directors comprised of independent directors. Delisting could also have other negative results, including the potential loss of confidence by employees, the loss of institutional interest (if any) in our securities, and our inability to take advantage of certain exemptions available to listed securities under the Exchange Act and the 1940 Act.   We remain subject to corporate governance requirements applicable to BDCs under the 1940 Act, including, without limitation, the requirement that a majority of the board be disinterested directors as determined under the 1940 Act.   

Our securities are subject to “penny stock” rules which may further reduce the liquidity and market price for our Common Stock and Preferred Stock.

Certain securities that are not listed on a national securities exchange, have a trading price below $5.00 and satisfy certain other requirements, such as our Common Stock and Preferred Stock, are subject to the SEC’s “penny stock” rules.  Under the SEC’s penny stock rules, among other things, broker-dealers may not sell a penny stock to, or effect the purchase of a penny stock by an investor (other than an accredited investor or an “established customer” as defined in Rule 15g-9), unless, prior to executing the transaction, the broker-deal has determined that transactions in penny stocks are suitable for the purchaser (and delivers a written statement of such determination to the purchaser), obtained the purchaser’s written agreement to engage in the transaction, provided the purchaser with a written disclosure document regarding certain risks associated with investing in penny stocks and obtained written acknowledgement from the purchaser that the purchaser has receive the required disclosure documents.  Broker-dealers may find it difficult to execute transactions in our Common Stock and Preferred Stock as a result of the penny stock rules summarized above.  These requirements may further reduce the liquidity and trading price of our common stock.  

Our ability to grow depends on our ability to raise capital.


We need to periodically access the capital markets and, historically, have participated in the SBA debenture program to raise cash to fund new investments.  We will not have access to additional SBA financing unless Elk is transferred out of the SBA’s Office of Liquidation (and no assurance can be given that such transfer will occur in the near future or at all).  In addition, unfavorable economic conditions, our operating results and uncertainty regarding the continued viability of Elk as a licensed SBIC could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. With certain exceptions, we are only allowed to borrow amounts such that our asset coverage, on a consolidated basis, as defined in the 1940 Act, equals at least 200% after such borrowing. The amount of leverage that we employ depends on our Board of Directors’ assessment of market and other factors at the time of any proposed borrowing. We cannot assure you that we will be able to maintain our current, or obtain new, sources of financing on terms acceptable to us, if at all.


Elk’s continuing capital impairment under SBA regulations and its transfer to the SBA’s Office of Liquidation may materially and adversely affect our business and the value of our securities.  

As an SBIC we must comply with the rules and regulations of the SBA. At March 31, 2012, the aggregate amount of principal, interest and fees due under Elk’s outstanding debentures payable to the SBA was $21,774,310, including $599,310 of interest and fees.  On March 6, 2012, we received a notice from the SBA of the SBA's determination that Elk has a condition of impairment, directing Elk to cure the capital impairment within 15 days of the date of the notice and indicating, among other things, that on February 22, 2012, the SBA referred Elk to the SBA’s Office of Liquidation. As the capital impairment has not been cured to date, the SBA may declare Elk's debentures immediately due and payable.  If the SBA were to require Elk to immediately repay its outstanding indebtedness, Elk could be required to dispose of its assets in a forced sale that could result in proceeds less than the carrying value of the asset being sold.   As a result of Elk's having been referred to the SBA's Office of Liquidation, Elk is not eligible for additional financing from the SBA and the SBA may institute proceedings to place Elk into receivership and to appoint the SBA or its designee


33




as the receiver.  The interests represented by any such receiver could differ materially from the interests of our stockholders. In the event Elk is placed in receivership or is otherwise forced to liquidate, our interest in Elk may lose all value, which would have a material adverse effect on our business, financial condition and results of operations.  If Elk is placed into receivership, we may be forced to cease operations and liquidate or seek bankruptcy protection, in which case shareholders may receive little or no value for their investment in our securities.   In addition, Elk would, likely, not be permitted to make any new investments or significant expenditures without the SBA’s prior approval unless and until it is transferred out of the SBA’s Office of Liquidation.

If we fail to pay dividends on our Preferred Stock in an amount equal to two years of dividends, the holders of our Preferred Stock will be entitled to elect a majority of our directors.


The terms of the Preferred stock provide for quarterly dividends in the amount of $0.28125 per outstanding share of Preferred Stock. We have not declared or paid dividends on the Preferred Stock for the quarterly periods ended September 30, 2010, December 31, 2010, March 31, 2011, June 30, 2011, September 30, 2011, December 31, 2011 and March 31, 2012. The terms of the Preferred Stock provide that, if dividends on the Preferred Stock are unpaid in an amount equal to at least two years of dividends, the holders of Preferred Stock will be entitled to elect a majority of our Board of Directors. Accordingly, if we do not declare and pay at least a portion of the accrued dividends on our Preferred Stock during the current fiscal quarter, ending June 30, 2012, we will be required to increase the size of our Board of Directors and take such actions as may be necessary to permit the holders of our Preferred Stock to elect a majority of our the members of our Board of Directors following such increase.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds


None.


Item 3. Default upon Senior Securities


See our Current Report on Form 8-K filed with the Securities and Exchange Commission on January 25, 2012 and Note 4 to our consolidated financial statements, each of which is incorporated herein by reference.


We have not declared or paid dividends on our 9-3/8% Cumulative Participating Redeemable Preferred Stock; $.01 par value, ($12.00 face value) for the quarterly periods ended September 30, 2010, December 31, 2010, March 31, 2011, June 30, 2011, September 30, 2011, December 31, 2011 and March 31, 2012.  Accordingly, as of the date of this report, an aggregate of $506,250 of dividends on such preferred stock have accrued, but have not been declared or paid.


Item 4. Mine Safety Disclosures.


None.


Item 5. Other Information


None.


Item 6. Exhibits


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


31.1   Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.  (attached hereto)

31.2   Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.  (attached hereto)

32.1   Certification pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (attached hereto)

32.2   Certification pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (attached hereto)


(All other items of Part II are inapplicable)


34




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: May 15, 2012


By: /s/ Michael R. Feinsod                                  

Michael Feinsod

Chief Executive Officer and President


 


PINX:AMTCP Ameritrans Capital Corporation Pref Share Quarterly Report 10-Q Filling

Ameritrans Capital Corporation Pref Share PINX:AMTCP Stock - Get Quarterly Report SEC Filing of Ameritrans Capital Corporation Pref Share PINX:AMTCP stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

Content Partners
PINX:AMTCP Ameritrans Capital Corporation Pref Share Quarterly Report 10-Q Filing - 3/31/2012
Name |  Ticker |  Star Rating |  Market Cap |  Stock Type |  Sector |  Industry Star Rating |  Investment Style |  Total Assets |  Category |  Top Holdings |  Top Sectors |  Symbol |  Title Star Rating |  Category |  Total Assets |  Top Holdings |  Top Sectors |  Symbol |  Name Title |  Date |  Author |  Collection |  Interest |  Popularity Topic |  Sector |  Key Indicators |  User Interest |  Market Cap |  Industry Name |  Ticker |  Star Rating |  Market Cap |  Stock Type |  Sector |  Industry Star Rating |  Investment Style |  Total Assets |  Category |  Top Holdings |  Top Sectors |  Symbol / Ticker |  Title Star Rating |  Category |  Total Assets |  Symbol / Ticker |  Name Title |  Date |  Author |  Collection |  Popularity |  Interest Title |  Date |  Company |  Symbol |  Interest |  Popularity Title |  Date |  Company |  Symbol |  Interest |  Popularity

Previous: PINX:AMTCP Ameritrans Capital Corporation Pref Share Insider Activity 4 Filing - 2/21/2012  |  Next: PINX:AMTY Amerityre Corporation Annual Report 10-K Filing - 6/30/2012