NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information at and for the three and six months ended December 31, 2012 and 2011 is 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 December 31, 2012, and the related consolidated statements of operations, statement of changes in net assets (liabilities), and cash flows for the three and six months ended December 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 “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 and six months ended December 31, 2012 and 2011, 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, 2012, as filed with the Commission by the Company on September 28, 2012.
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 our subsidiary, Elk Associates Funding Corporation (“Elk”), we have historically made 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. The Company categorizes its investments into four types of securities: 1) Corporate Loans Receivable; 2) Commercial Loans Receivable; 3) Life Insurance Settlements and 4) Equity Investments.
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 historically made loans for financing the purchase or continued ownership of businesses that qualify for funding as small concerns under SBA Regulations. However, as described in Notes 3 and 8 below, on October 31, 2012, Elk entered into a Settlement Agreement with the SBA pursuant to which Elk agreed to surrender its SBIC license (the
“
Settlement Agreement
”
). In connection with the entry into the Settlement Agreement, Elk also executed and delivered a Consent Order of Receivership appointing the SBA as permanent, liquidating receiver of Elk, to be filed by the SBA in the event that Elk failed to make payments to the SBA in accordance with the Settlement Agreement. As a result of Elk’s failure to pay the amount due to the SBA pursuant to the Settlement Agreement by January 18, 2013, the SBA informed Elk that it would forward a receivership complaint and the Consent Order of Receivership to the United States Attorney’s Office for the Southern District of New York, for filing with the United States District Court for the Southern District of New York. The SBA further informed Elk that should Elk pay the balance due to the SBA pursuant to the Settlement Agreement prior to the entry of the receivership order in the U.S. District Court, then the SBA will accept such payment in full satisfaction of the agreed-upon settlement payment and will ask that the receivership proceedings be rescinded. Elk has not made any investments since November, 2012. For additional information regarding Elk’s Settlement Agreement with the SBA, see Notes 3 and 8 below.
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 wholly-owned by Ameritrans and each holding one insurance policy in connection with the Company's life 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 December 31, 2012, EAF was operating the real estate of 633 Meade Street, LLC, acquired in satisfaction of loans.
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 the Board of Directors. In determining the fair value, management and the 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 values 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 settlement contracts 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 2012/2013, the Company intends to make the required distributions to its stockholders to the extent the Company has net taxable investment income. No dividends on the Company’s common stock have been paid in each of the fiscal years ended June 30, 2012, 2011 and 2010 or during the three and six months ended December 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 2009 through 2012 are subject to examination by federal, state and local income tax authorities.
Depreciation and Amortization
Depreciation and amortization are computed using the straight-line method over the useful lives of the respective assets. Leasehold improvements are amortized over the life of the respective leases.
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.
Increase (Decrease) in Net Liabilities Per Share
Increase (decrease) in net liabilities per share includes no dilution and is computed by dividing current net increase (decrease) in net liabilities from operations available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted increase (decrease) in net liabilities per share reflects, in periods in which they have a dilutive effect, the effect of common shares issuable upon the exercise of stock options and warrants. The difference between reported basic and diluted weighted average common shares results from the assumption that all dilutive stock options outstanding were exercised. For the periods presented, the effect of common stock equivalents has been excluded from the diluted calculation since the effect would be antidilutive.
Dividends
Dividends and distributions, if any, declared and paid (or payable) to our common and preferred stockholders are recorded on the applicable record date. The amount to be paid out as a dividend is determined by the Board 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 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 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 December 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 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 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).
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 losses are expected to continue. 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. Although the Company 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 rejected all financing transactions that the Company had submitted to it for approval (see Note 3 to the consolidated financial statements). 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. As discussed in Note 3, on October 31, 2012, Elk and the SBA entered into a Settlement Agreement and Mutual Release with respect to Elk’s pending lawsuit against the SBA, pursuant to which Elk agreed to pay the SBA $7,900,000 (the “Settlement Payment”) by December 15, 2012 and through subsequent amendments extended to January 18, 2013 (the “Settlement Effective Date”) and surrender its SBIC license, in full and final satisfaction of all outstanding SBA leverage owed to the SBA through the Settlement Effective Date plus all additional interest which may accrue through the date the Settlement Payment is made. In connection with Elk’s entry into the settlement agreement, Elk also executed and delivered a Consent Order of Receivership appointing the SBA as permanent, liquidating receiver of Elk, to be filed by the SBA in the event that Elk failed to make payments to the SBA in accordance with the Settlement Agreement. Elk has not paid the entire Settlement Payment and the SBA informed Elk that it would forward a receivership complaint and the Consent Order of Receivership to the United States Attorney’s Office for the Southern District of New York, for filing with the United States District Court for the Southern District of New York
.
(See Note 8 for subsequent developments.) If a receivership order is entered in the U.S. District Court,
and Elk is placed in receivership or is otherwise forced to liquidate, the Company’s business, financial condition and results of operations and prospects would be materially adversely affected. 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.
While the Company believes that its business strategy, including its plans to obtain financing to make the Settlement Payment and surrender Elk’s SBIC license prior to the entry of the receivership order in the U.S. District Court in satisfaction of Elk’s obligations to the SBA and to otherwise seek additional financing transactions, is viable and provides the Company the opportunity to continue as a going concern, there can be no assurances to that effect, especially in light of the current status of Elk’s obligations to the SBA. The Company’s plan of obtaining financing, even if successful, may not result in funds sufficient to maintain and expand its business and/or satisfy its Settlement Agreement with the SBA. 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 December 31, 2012 and June 30, 2012:
|
|
December 31, 2012
|
|
|
June 30, 2012
|
|
|
|
(Unaudited)
|
|
|
|
|
Security Type
|
|
Cost
|
|
|
Fair Value
|
|
|
|
% (1)
|
|
|
Cost
|
|
|
Fair Value
|
|
|
|
% (1)
|
|
Commercial Loans
|
|
$
|
5,805,142
|
|
|
$
|
5,175,516
|
|
|
|
37.7
|
%
|
|
$
|
5,857,873
|
|
|
$
|
5,228,247
|
|
|
|
31.7
|
%
|
Corporate Loans
|
|
|
7,575,489
|
|
|
|
3,536,547
|
|
|
|
25.7
|
%
|
|
|
10,668,191
|
|
|
|
6,991,494
|
|
|
|
42.4
|
%
|
Life Settlement Contracts
|
|
|
5,352,344
|
|
|
|
3,893,290
|
|
|
|
28.3
|
%
|
|
|
4,573,290
|
|
|
|
3,204,001
|
|
|
|
19.4
|
%
|
Equity Securities
|
|
|
1,502,027
|
|
|
|
1,137,167
|
|
|
|
8.3
|
%
|
|
|
1,302,627
|
|
|
|
1,078,864
|
|
|
|
6.5
|
%
|
Total
|
|
$
|
20,235,002
|
|
|
$
|
13,742,520
|
|
|
|
100.0
|
%
|
|
$
|
22,401,981
|
|
|
$
|
16,502,606
|
|
|
|
100.0
|
%
|
(1) Represents percentage of total portfolio at fair value
Investments by Industry
Investments by industry consist of the following as of December 31, 2012 and June 30, 2012:
|
|
December 31, 2012
|
|
|
June 30, 2012
|
|
|
|
Value
|
|
|
Percentage of Portfolio
|
|
|
Value
|
|
|
Percentage of Portfolio
|
|
Broadcasting/Telecommunications
|
|
$
|
1,721,723
|
|
|
|
12.5
|
%
|
|
$
|
1,761,340
|
|
|
|
10.7
|
%
|
Commercial Construction
|
|
|
2,339,724
|
|
|
|
17.0
|
%
|
|
|
2,339,724
|
|
|
|
14.2
|
%
|
Construction and Predevelopment
|
|
|
909,000
|
|
|
|
6.6
|
%
|
|
|
1,050,000
|
|
|
|
6.4
|
%
|
Debt Collection
|
|
|
452,518
|
|
|
|
3.3
|
%
|
|
|
453,909
|
|
|
|
2.7
|
%
|
Education
|
|
|
693,920
|
|
|
|
5.0
|
%
|
|
|
719,308
|
|
|
|
4.3
|
%
|
Food and Candy Manufacturing
|
|
|
1,658,395
|
|
|
|
12.1
|
%
|
|
|
2,693,471
|
|
|
|
16.3
|
%
|
Info Data Systems
|
|
|
-
|
|
|
|
-
|
%
|
|
|
1,001,250
|
|
|
|
6.1
|
%
|
Life Insurance Settlement Contracts
|
|
|
3,893,290
|
|
|
|
28.3
|
%
|
|
|
3,204,001
|
|
|
|
19.4
|
%
|
Manufacturing
|
|
|
200,000
|
|
|
|
1.5
|
%
|
|
|
1,165,407
|
|
|
|
7.1
|
%
|
Printing/Publishing
|
|
|
712,896
|
|
|
|
5.2
|
%
|
|
|
940,722
|
|
|
|
5.7
|
%
|
Restaurant/Food Service
|
|
|
1,041,076
|
|
|
|
7.6
|
%
|
|
|
1,052,162
|
|
|
|
6.4
|
%
|
Other industries less than 1%
|
|
|
119,978
|
|
|
|
0.9
|
%
|
|
|
121,312
|
|
|
|
0.7
|
%
|
TOTAL
|
|
$
|
13,742,520
|
|
|
|
100.00
|
%
|
|
$
|
16,502,606
|
|
|
|
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 sixteen loans which are considered non-performing aggregating $3,628,563 and $3,464,890 as of December 31, 2012 and June 30, 2012, respectively. These loans are either fully or substantially collateralized and are in some instances personally guaranteed by a principal of the debtor or third party. The Company’s non-performing loans are no longer accruing interest since the loan principal and accrued interest exceed the estimated fair value of the underlying collateral. The following table sets forth certain information regarding performing and non-performing loans as of December 31, 2012 and June 30, 2012:
|
|
December 31, 2012
|
|
|
June 30, 2012
|
|
Loans receivable
|
|
$
|
8,712,063
|
|
|
$
|
12,219,741
|
|
Performing loans
|
|
|
5,083,500
|
|
|
|
8,754,851
|
|
Nonperforming loans
|
|
$
|
3,628,563
|
|
|
$
|
3,464,890
|
|
Nonperforming loans:
|
|
|
|
|
|
|
|
|
Accrual
|
|
$
|
163,673
|
|
|
$
|
-
|
|
Nonaccrual
|
|
|
3,464,890
|
|
|
|
3,464,890
|
|
|
|
$
|
3,628,563
|
|
|
$
|
3,464,890
|
|
As of June 30, 2012 the Company had paid all 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. Effective December 10, 2011, the Advisory Agreement expired and has not been renewed. On May 14, 2012, all amounts due to the Adviser 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 charges against the manager of the Joint Venture for securities law violations and a court order freezing the assets of the manager, including 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 manager of the Joint Venture 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 December 31, 2012 and June 30, 2012, the fair value of the policies owned by the Company was $3,893,290 and $3,204,001, respectively, which represents the estimated fair value for the four life insurance policies with an aggregate face value of $17,250,000. The Company’s cost on these policies to date is $5,352,344 including insurance premiums of $779,054, which were paid during the six-month period ended December 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:
|
Year Ending
June 30
|
|
Policy
Premiums
|
|
|
|
|
|
|
|
2013 (six months)
|
|
$
|
437,034
|
|
|
2014
|
|
|
874,068
|
|
|
2015
|
|
|
874,068
|
|
|
2016
|
|
|
874,068
|
|
|
2017
|
|
|
823,092
|
|
|
Thereafter
|
|
|
683,355
|
|
|
|
|
$
|
4,565,685
|
|
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 overall economy, the fact that these policies may have diminished value due to having been associated with the former manager of the Joint Venture, 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 the Board of Directors that is consistent with GAAP. 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 may not be 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 (if any) 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 we 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 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
|
|
|
|
December 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
|
|
$
|
5,175,516
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,175,516
|
|
Corporate Loans
|
|
|
3,536,547
|
|
|
|
.
|
|
|
|
-
|
|
|
|
3,536,547
|
|
Life Settlement Contracts
|
|
|
3,893,290
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,893,290
|
|
Equity Securities
|
|
|
1,137,167
|
|
|
|
5,579
|
|
|
|
-
|
|
|
|
1,131,588
|
|
Total Investments
|
|
$
|
13,742,520
|
|
|
$
|
5,579
|
|
|
$
|
-
|
|
|
$
|
13,736,941
|
|
|
|
|
|
|
Fair Value at Reporting Date Using
|
|
|
|
June 30, 2012
|
|
|
Quoted Prices
in Active
Markets for Identical Assets
(Level 1)
|
|
|
Significant Other Observable
Inputs (Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Commercial Loans
|
|
$
|
5,228,247
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,228,247
|
|
Corporate Loans
|
|
|
6,991,494
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,991,494
|
|
Life Settlement Contracts
|
|
|
3,204,001
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,204,001
|
|
Equity Securities
|
|
|
1,078,864
|
|
|
|
6,276
|
|
|
|
-
|
|
|
|
1,072,588
|
|
Total Investments
|
|
$
|
16,502,606
|
|
|
$
|
6,276
|
|
|
$
|
-
|
|
|
$
|
16,496,330
|
|
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, 2012
|
|
$
|
5,228,247
|
|
|
$
|
6,991,494
|
|
|
$
|
3,204,001
|
|
|
$
|
1,072,588
|
|
|
$
|
16,496,330
|
|
Net realized losses on investments
|
|
|
-
|
|
|
|
(83,717
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(83,717
|
)
|
Net unrealized losses on investments
|
|
|
-
|
|
|
|
(362,245
|
)
|
|
|
(89,765
|
)
|
|
|
(141,000)
|
|
|
|
(593,010
|
)
|
Purchases of investments
|
|
|
|
|
|
|
280,199
|
|
|
|
779,054
|
|
|
|
200,000
|
|
|
|
1,259,253
|
|
Repayments, sales or redemptions of investments
|
|
|
(52,731
|
)
|
|
|
(3,289,184
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,341,915
|
)
|
Transfers in and/or out of Level 3
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Ending balance as of December 31, 2012
|
|
$
|
5,175,516
|
|
|
$
|
3,536,547
|
|
|
$
|
3,893,290
|
|
|
$
|
1,131,588
|
|
|
$
|
13,736,941
|
|
|
|
|
|
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.
|
|
$
|
(593,010
|
)
|
Losses (realized and unrealized) included in net decrease in net assets from operations for the period above are reported as follows:
|
|
|
|
|
Net realized loss on sales and dispositions
|
|
|
(3,248
|
)
|
Change in unrealized gains or losses relating to assets still held at reporting date
|
|
$
|
(596,258
|
)
|
|
|
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
|
|
|
|
(75,250
|
)
|
|
|
184,878
|
|
Net unrealized gains (losses) on investments
|
|
|
(128,644
|
)
|
|
|
(1,848,874
|
)
|
|
|
(95,657
|
)
|
|
|
168,027
|
|
|
|
(1,905,148
|
)
|
Purchases of investments
|
|
|
2,463
|
|
|
|
1,517,902
|
|
|
|
931,366
|
|
|
|
-
|
|
|
|
2,451,731
|
|
Repayments, sales or redemptions of investments
|
|
|
(890,387
|
)
|
|
|
(5,618,308
|
)
|
|
|
(327,847
|
)
|
|
|
(850
|
)
|
|
|
(6,837,392
|
)
|
Transfers in and/or out of Level 3
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Ending balance as of June 30, 2012
|
|
$
|
5,228,247
|
|
|
$
|
6,991,494
|
|
|
$
|
3,204,001
|
|
|
$
|
1,072,588
|
|
|
$
|
16,496,330
|
|
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
|
|
$
|
(1,905,148
|
)
|
Gains and losses (realized and unrealized) included in net decrease in net assets from operations for the period above are reported as follows:
|
|
|
|
|
Gain on sales and dispositions
|
|
|
54,055
|
|
Change in unrealized losses relating to assets still held at reporting date
|
|
$
|
(1,851,093
|
)
|
As of December 31, 2012, the aggregate net unrealized loss on the investments that use Level 3 inputs was $6,131,034. As of December 31, 2012, the aggregate net unrealized loss on Level 1 investments was $361,448. For the three and six months ended December 31, 2012, the net unrealized loss on Level 1 investments aggregated $(4,184) and $(697), respectively. At December 31, 2012, only the investment in Fusion Communications was included in Level 1.
As of June 30, 2012, the aggregate net unrealized loss on the investments that use Level 3 inputs was $5,538,024. As of June 30, 2012, the aggregate net unrealized loss on Level 1 investments was $360,751. For the year ended June 30, 2012, the net unrealized loss on Level 1 investments aggregated $86,742. At June 30, 2012, only the investment in Fusion Communications was included in Level 1.
3.
Debentures Payable to SBA
At December 31, 2012, and June 30, 2012, debentures payable to the SBA consisted of subordinated debentures with interest payable semiannually, as follows:
Issue Date
|
Due Date
|
|
% Interest Rate
|
|
|
December 31, 2012
|
|
|
June 30, 2012
|
|
|
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 user fee of 0.866% on these debentures.
(2)
Elk is also required to pay an additional user fee of 0.28% on these debentures.
(3)
See SBA Litigation, discussed below and in Note 8.
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 December 31, 2012, Elk’s maximum permitted calculated impairment percentage (regulatory limit) was 40%, with an actual capital impairment percentage, before allocation of Elk’s expenses, of approximately 80%. Accordingly, Elk had a condition of capital impairment as of December 31, 2012.
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”). As of December 31, 2012, Elk had 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 June 1, 2012, Elk received a written notice from the SBA (the “Second SBA Notice”) that declared Elk’s entire indebtedness to the SBA, including principal, accrued interest and any other amounts owed by Elk to the SBA pursuant to Elk’s outstanding debentures, to be immediately due and payable. The Second SBA Notice indicates that such acceleration of Elk’s obligations relates to an event of default under Elk’s outstanding debentures resulting from Elk’s condition of capital impairment described above, which, according to the Second SBA Notice, Elk failed to cure within applicable cure periods.
According to the Second SBA Notice, as of May 25, 2012, Elk was indebted to the SBA in the aggregate principal amount of $21,175,000, plus accrued interest of $239,372 (with an additional $2,816 of interest accruing on a per diem basis) (the “Indebtedness”).
The Second SBA Notice stated that Elk was required to remit the entire amount of the Indebtedness to the SBA no later than June 15, 2012. In addition the Second SBA Notice states that the SBA may avail itself of any remedy available to it under the 1958 Act, including institution of proceedings for the appointment of SBA or its designee as receiver for Elk’s assets. In the event Elk is placed into receivership, the interests of the SBA or its designee in its capacity as a receiver of Elk would differ materially from the interests of Ameritrans’ stockholders. In the event Elk is placed in receivership or is otherwise forced to liquidate, its business, financial condition and results of operations would be materially adversely affected. If Elk is placed into receivership, the Company 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 the Company’s securities.
On June 5, 2012, Elk submitted a proposal to cure its condition of capital impairment and return to the active business of providing capital to small business concerns. Notwithstanding the submission of a plan that would permit Elk to remain an active SBIC, SBA requested that Elk submit a proposed settlement plan relating to Elk’s liquidation process to the SBA no later than June 18, 2012. Elk submitted the requested settlement plan which included a proposed schedule for the payment of Elk’s indebted to SBA and alternatives to SBA’s potential attempts to appoint a receiver. Elk subsequently filed an amended complaint in the matter while also pursuing a settlement proposal with the Office of Liquidation. The amended complaint included information that was discovered during Elk’s review of the SBA’s “Administrative Record.”
On October 31, 2012, Elk and the SBA entered into a Settlement Agreement and Mutual Release with respect to Elk’s pending lawsuit against the SBA, pursuant to which Elk agreed to pay the SBA $7,900,000 by the Settlement Effective Date and surrender its SBIC license, in full and final satisfaction of all outstanding SBA leverage owed to the SBA through the Settlement Effective Date plus all additional interest which may accrue through the date the settlement payment is made. Elk did not make the required payment to the SBA prior to the Settlement Effective Date. See Note 8 for additional details. If this settlement is effected, it is expected to result in a gain from early extinguishment of debt aggregating approximately $14.2 million as of January 31, 2013.
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 are 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 $41,250 for the three months ended December 31, 2012 and 2011 and $0 and $82,500 for the six months ended December 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 have 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 $20,550 for the three months ended December 31, 2012 and 2011 and $0 and $41,100 for the six months ended December 31, 2012 and 2011, respectively.
In connection with the issuance of a Senior Secured Note on January 19, 2011 (see below), in order to facilitate certain covenants under this 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, including default interest of approximately $77,000. 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 14.2% 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 14.2% 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 $43,183 in the three months ended December 31, 2012 and 2011 and $0 and $87,903 for the six months ended December 31, 2012 and 2011, respectively, without giving effect to any default interest as discussed below.
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 were terminated. The Payoff Amount represents an approximate 9.8% 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 accrued by the Company on its Preferred Stock for the three and six months ended December 31, 2012, and 2011:
|
|
For the six months ended December 31, 2012
|
|
|
Dividend
Per Share
|
|
|
Amount
|
|
Declaration Date
|
|
Record
Date
|
|
Pay
Date
|
Preferred Stock:
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
(July 1, 2012 - September 30, 2012)
|
|
$
|
0.28125
|
|
|
$
|
84,375
|
|
Not Declared
|
|
|
|
|
Second quarter
(October 1, 2012 – December 31, 2012)
|
|
|
0.28125
|
|
|
$
|
84,375
|
|
Not Declared
|
|
|
|
|
Total Preferred Stock Dividends Accrued
|
|
$
|
0.56250
|
|
|
$
|
168,750
|
|
|
|
|
|
|
|
|
For the six months ended December 31, 2011
|
|
|
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
|
|
|
|
|
Total Preferred Stock Dividends Accrued
|
|
$
|
0.56250
|
|
|
$
|
168,750
|
|
|
|
|
|
|
The Company did not declare or pay dividends on its Common stock during the three and six months ended December 31, 2012 or 2011. Dividends on Preferred Stock accrue whether or not they have been declared. As of December 31, 2012, dividends not declared, but accrued and in arrears aggregated $843,750.
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 have been determined by using available market information and by applying valuation methodologies.
Loans Receivable and Life Settlement Contracts
Loans receivable and life settlement contracts are recorded at their estimated fair value based on discounted expected future cash flows and other factors (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 December 31, 2012 and June 30, 2012 were $21,175,000. The fair value is the same as the recorded value, inasmuch as the SBA had given the Company notice on June 1, 2012 that Elk's entire indebtedness to the SBA was due and payable currently. However, Elk’s settlement agreement with the SBA provided that Elk’s obligations under these debentures could be satisfied in full for $7,900,000 on or before the Settlement Effective Date and the surrender of Elk’s SBIC license. Elk paid $1.2 million to the SBA on January 4, 2013 from its cash on hand in partial satisfaction of the Settlement Payment, which left $6.7 million of the Settlement Payment remaining to be paid as of such date. Although Elk did not make the Settlement Payment in full prior to the Settlement Effective Date, the SBA has informed Elk that should Elk pay the balance of the Settlement Payment prior to the entry of a receivership order in the U.S. District Court, then the SBA will accept such payment in full satisfaction of the Settlement Payment and will ask that the receivership proceedings be rescinded. See Notes 3 and 8.
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 and its counsel 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 (see 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 3, in February 2012, the Company presented a potential transaction with another party, which also was rejected by SBA.
On October 31, 2012, Elk and the SBA entered into a Settlement Agreement and Mutual Release with respect to Elk’s pending lawsuit against the SBA, pursuant to which Elk agreed to pay the SBA $7,900,000 by the Settlement Effective Date and surrender its SBIC license, in full and final satisfaction of all outstanding SBA leverage owed to the SBA through the Settlement Effective Date plus all additional interest which may accrue through the date the Settlement Payment is made. Elk did not make the required payment to the SBA prior to the Settlement Effective Date. See Note 8 for additional details.
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 sought monetary damages in an amount to be determined at trial.
Subsequently, Elk filed an amended complaint in the matter while also pursuing a settlement proposal with the Office of Liquidation.
The SBA made a motion for Summary Judgment in the Litigation and Elk filed its Memorandum of Law in Opposition to SBA's motion for Summary Judgment. Simultaneously with the filing of its reply, Elk filed a motion seeking leave to conduct discovery.
On September 17, 2012, the Court issued a ruling finding it prudent to postpone further briefing on SBA's Motion for Summary Judgment to allow Elk's Motion for Leave to Serve Discovery to be fully briefed. The Court ruled that the Motion for Summary Judgment was held-in-abeyance. The Court ruled that the SBA need not and shall not file a reply until otherwise ordered by the Court. The Court ordered the SBA to file a response to Elk's Motion for Leave to Serve Discovery by no later than October 1, 2012, which was filed; Elk was required to file its reply, if any, by no later than October 11, 2012, which was timely filed.
On October 31, 2012 Elk and the SBA entered into a Settlement Agreement and Mutual Release (the “Settlement Agreement”) with respect to the Litigation. The Settlement Agreement, as amended on December 7, 2012, provided, among other things, for the payment by Elk to the SBA of $7,900,000 by January 7, 2013 and the surrender of Elk’s small business investment company license, in full and final satisfaction of all outstanding SBA leverage owed to the SBA through the Effective Date plus all additional interest, aggregating approximately $860,000 as of January 31, 2013, which may accrue through the date the Settlement Payment is made. As of January 31, 2013, Elk's outstanding leverage with the SBA was $21,175,000. Elk also executed and delivered a Consent Order of Receivership, to be filed only if the Settlement Payment was not made within the required period, appointing the SBA as permanent, liquidating receiver of Elk. In connection with the Settlement Agreement, the parties have filed with the court a Joint Stipulation dismissing the SBA Litigation. The Settlement Agreement includes mutual releases by both parties releasing the other party and various associated entities from any and all actions, causes of action, claims, rights and demands of every kind which such party may have through October 31, 2012. SBA's release of Elk does not include any claims of criminal liability, any claims arising from fraudulent conduct or any claims by any other federal agency of the United States, including the Internal Revenue Service. Pursuant to the Settlement Agreement, the SBA has acknowledged that it is unaware of any such claim referred to in the immediately preceding sentence.
On January 4, 2013, the SBA agreed to extend the January 7, 2013 deadline until January 18, 2013 (the “Payoff Deadline”), provided that Elk promptly remits to the SBA all of the proceeds (up to the amount of the Settlement Payment) from any asset sales consummated by Elk prior to such date. As a condition to the SBA’s agreement to the extended Payoff Deadline, Elk paid $1.2 million to the SBA on January 4, 2013 from its cash on hand in partial satisfaction of the Settlement Payment, which left $6.7 million of the Settlement Payment remaining to be paid as of such date.
As of January 18, 2013, Elk had not secured the balance of the Settlement Payment to be paid to the SBA. Accordingly, Elk requested an additional extension of the Payoff Deadline to January 31, 2013. On January 22, 2013, the SBA informed Elk that the SBA had decided it would not grant Elk another extension of the Payoff Deadline. As a result of Elk’s failure to pay the balance of the Settlement Payment by January 18, 2013, the SBA informed Elk that it would forward a receivership complaint and the Consent Order of Receivership to the United States Attorney’s Office for the Southern District of New York, for filing with the United States District Court for the Southern District of New York. The SBA further informed Elk that should Elk pay the balance of the Settlement Payment prior to the entry of the receivership order in the U.S. District Court, which the Company anticipates will take a few days following SBA’s delivery of the receivership complaint and the Consent Order of Receivership to the United States Attorney’s Office, then the SBA will accept such payment in full satisfaction of the Settlement Payment and will ask that the receivership proceedings be rescinded.
The Company is actively working to raise the requisite funds through asset sales and debt and/or equity financings. There can be no assurance, however, that any such asset sales or financings will be completed on a timely basis or at all, or that the Company will otherwise be able to finance any remaining balance of the Settlement Payment prior to the entry of the Consent Order of Receivership in the U.S. District Court. The interests of the SBA or its designee in its capacity as a receiver of Elk would differ materially from the interests of the Company’s stockholders. In the event Elk is placed in receivership or is otherwise forced to liquidate, the Company’s business, financial condition and results of operations would be materially adversely affected. If Elk is placed into receivership, the Company 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 the Company’s securities.
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 above, 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 Company’s employee incentive stock option plan and non-employee director stock option plan expired on May 21, 2009.
The following tables summarize information about the transactions of both stock option plans as of December 31, 2012:
|
|
Stock Options
|
|
|
|
Number of Options
|
|
|
Weighted
Average
Exercise Price
Per Share
|
|
Options outstanding at June 30, 2012
|
|
|
239,426
|
|
|
$
|
3.28
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Canceled
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
40,000
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Options outstanding at December 31, 2012
|
|
|
199,426
|
|
|
$
|
2.96
|
|
The following table summarizes information about the stock options outstanding under the Company’s options plans as of December 31, 2012:
|
|
Options Outstanding and Exercisable
|
|
Range of
Exercise Prices
|
|
Number
Outstanding
At December 31, 2012
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
|
$3.60
|
|
|
13,888
|
|
.39 years
|
|
$
|
3.60
|
|
$5.28
|
|
|
40,000
|
|
.91 years
|
|
$
|
5.28
|
|
$2.36
|
|
|
120,000
|
|
.78 years
|
|
$
|
2.36
|
|
$1.78
|
|
|
25,538
|
|
1.35 years
|
|
$
|
1.78
|
|
$ 1.78-$ 5.28
|
|
|
199,426
|
|
|
|
$
|
3.28
|
|
|
|
Six months
Ended
December 31,
2012
|
|
|
Six months
Ended
December 31,
2011
|
|
|
Year Ended
June 30,
2012
|
|
Net share data
|
|
|
|
|
|
|
|
|
|
Net liability value at the beginning of the period
|
|
$
|
(2.11
|
)
|
|
$
|
(0.40
|
)
|
|
$
|
(0.40
|
)
|
Net investment loss
|
|
|
(0.68
|
)
|
|
|
(0.63
|
)
|
|
|
(1.08
|
)
|
Net realized and unrealized losses on investments
|
|
|
(0.20
|
)
|
|
|
(0.29
|
)
|
|
|
(0.53
|
)
|
Net decrease in net assets from operations
|
|
|
(0.88
|
)
|
|
|
(0.92
|
)
|
|
|
(1.61
|
)
|
Distributions to Stockholders (4)
|
|
|
(0.05
|
)
|
|
|
(0.05
|
)
|
|
|
(.10
|
)
|
Total decrease in net asset value
|
|
|
(0.93
|
)
|
|
|
(0.97
|
)
|
|
|
(1.71
|
)
|
Net liability value at the end of the period
|
|
$
|
(3.04
|
)
|
|
$
|
(1.37
|
|
|
$
|
(2.11
|
)
|
Per share market value at beginning of period
|
|
$
|
0.11
|
|
|
$
|
1.17
|
|
|
$
|
1.17
|
|
Per share market value at end of period
|
|
$
|
0.38
|
|
|
$
|
0.12
|
|
|
$
|
0.11
|
|
Total return
(1)
|
|
|
245.45
|
%
|
|
|
(89.7
|
)%
|
|
|
(90.6
|
)%
|
Ratios/supplemental data
|
|
|
|
|
|
|
|
|
|
|
|
|
Average net liabilities (2) (in 000’s)
|
|
$
|
(8,744
|
)
|
|
$
|
(3,000
|
)
|
|
$
|
(4,264
|
)
|
Total expense ratio (3)
|
|
|
(64.46
|
)%
|
|
|
(206.1
|
)%
|
|
|
142.4
|
%
|
Net investment loss to average net liabilities (5)
|
|
|
(53.00
|
)%
|
|
|
(142.4
|
)%
|
|
|
85.7
|
%
|
(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 liabilities 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
Between September 2011 and January 2012, the Company received notices from The Nasdaq Stock Market (“Nasdaq”) notifying the Company that it did not satisfy various continued listing requirements applicable to the Company’s common stock and preferred stock, including requirements that the Company maintain a minimum bid price for its common stock of $1.00 per share, a minimum of $2.5 million of stockholders’ equity and a minimum market value of publicly held shares of $1 million with respect to the Company’s common stock and its preferred stock. The Company did not regain compliance with Nasdaq’s continued listing requirements and, on May 3, 2012, the Company’s securities were delisted from the Nasdaq Capital Market.
12.
Recently Issued Accounting Standards
No accounting standards or interpretations issued recently are expected by management to a have a material impact on the Company’s results of operations, financial position, or cash flow.
13.
Subsequent Events
Except for the recent developments in connection with the SBA Settlement Agreement as discussed in Note 8, Commitments and Contingencies, the Company is not aware of any other significant subsequent events.