As filed with the Securities and Exchange Commission on March 28, 1996
================================================================================
Registration No. 33-86518
File No. 811-5169
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 1
TO
REGISTRATION STATEMENT OF SMALL BUSINESS INVESTMENT COMPANY
UNDER THE SECURITIES ACT OF 1933
------------------
AMENDMENT NO. 5
TO
FORM N-5
UNDER THE INVESTMENT COMPANY ACT OF 1940
---------------
FRESHSTART VENTURE CAPITAL CORP.
(Exact name of registrant as specified in charter)
313 West 53rd Street
New York, New York 10019
(Address of principal executive offices)
ZINDEL ZELMANOVITCH, PRESIDENT
Freshstart Venture Capital Corp.
313 West 53rd Street
New York, New York 10019
(Name and address of agent for service)
-----------------
With copies to:
C. WALTER STURSBERG, JR., ESQ. STEVEN L. WASSERMAN, ESQ.
Stursberg & Veith Reid & Priest LLP
405 Lexington Avenue, Suite 4949 40 West 57th Street
New York, New York 10174 New York, New York 10019
Approximate date of commencement of proposed sale of the securities to the
public: AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION
STATEMENT.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A)
MAY DETERMINE.
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
---------------
CROSS-REFERENCE SHEET
(Pursuant to Rule 481 showing the location in the prospectus
of the responses to the Items of Parts I and II of Form N-5)
---------------
<TABLE>
<CAPTION>
Item No. and Caption Prospectus Caption
- -------------------- ------------------
<S> <C>
1. Organization and Business ......................... THE COMPANY; BUSINESS
2. Fundamental Policies of the Registrant ............ INVESTMENT POLICIES
3. Policies with Respect to Security Investments ..... INVESTMENT POLICIES
4. Ownership of Voting and Convertible Securities
of Other Issuers .................................. *
5. Special Tax Provisions Applicable to Registrant ... TAX CONSIDERATIONS
6. Pending Legal Proceedings ......................... BUSINESS-Legal Proceedings
7. Summary of Earnings ............................... SUMMARY FINANCIAL INFORMATION
8. Persons in Control Relationship with Registrant ... MANAGEMENT; SECURITY OWNERSHIP OF
PRINCIPAL STOCKHOLDERS AND
MANAGEMENT
9. Persons Owning Equity Securities of Registrant .... SECURITY OWNERSHIP OF PRINCIPAL
STOCKHOLDERS AND MANAGEMENT
10. Number of Holders of Equity Securities ............ *
11. Directors and Executive Officers .................. MANAGEMENT-Officers and Directors
12. Members of Advisory Board of Registrant ........... Not Applicable
13. Remuneration of Directors, Officers and
Members of Advisory Board ......................... MANAGEMENT-Compensation of Officers
and Directors
14. Indemnification of Directors and Officers ......... *
15. Custodians of Portfolio Securities ................ CUSTODIAN
16. Investment Advisers ............................... Not Applicable
17. Business and other Connections of Investment
Advisers and Their Managements .................... Not Applicable
18. Interest of Affiliated Persons in Certain
Transactions ...................................... CERTAIN TRANSACTIONS
19. Capital Stock ..................................... DESCRIPTION OF CAPITAL STOCK AND
LONG-TERM DEBT
20. Long-Term Debt .................................... Not Applicable
21. Other Securities .................................. Not Applicable
22. Financial Statements .............................. See Item 28
23. Distribution Spread ............................... Cover Page
24. Plan of Distribution .............................. PLAN OF DISTRIBUTION
25. Use of Proceeds to Registrant ..................... USE OF PROCEEDS
26. Sales Otherwise Than for Cash ..................... Not Applicable
27. Information Required by Items of Part I ........... See Above
28. Financial Statements Required by Item 22
of Part I ......................................... FINANCIAL STATEMENTS
</TABLE>
- ----------------
*Not required to be included in the Prospectus.
i
<PAGE>
Freshstart Venture Capital Corp.
1,700,000 Shares
Common Stock
Freshstart Venture Capital Corp., a New York corporation (the "Company"),
is a closed-end, diversified registered investment company licensed by the
United States Small Business Administration ("SBA") to operate as a Specialized
Small Business Investment Company ("SSBIC"). The Company is hereby offering a
minimum of 700,000 shares (the "Minimum Offering") of its common stock, par
value $.01 per share (the "Common Stock"), and a maximum of 1,700,000 shares
(the "Maximum Offering") of Common Stock at a per share offering price of $7.15
on a best efforts, all or none basis. Pending the closing of the offering, which
will not occur unless at least 700,000 shares are sold, all proceeds will be
held in an escrow account. Unless at least 700,000 shares are sold on or before
April 30, 1996 (which may be extended up to an additional ten days by agreement
of the Company and the Dealer Manager), all monies received will be refunded to
subscribers in full. There will be only one closing (the "Closing"). The
Company's business is to provide loan financing to persons who qualify under SBA
regulations as socially or economically disadvantaged persons or to entities
which are at least 50% owned by such persons. The Company has made, and intends
to continue to make, a portion, albeit a decreasing percentage, of its loans for
financing the purchase or continued ownership of taxicab medallions, taxicabs
and related assets. The balance of its loan portfolio includes loans for the
acquisition and/or operation of other small businesses and the Company intends
to increase its percentage of such loans. An investment in an SSBIC may afford a
qualified investor certain favorable tax benefits, including the ability to
defer the recognition of capital gain realized on the sale of a publicly traded
security, subject to certain limitations, if the qualified investor uses the
proceeds from the sale of such publicly traded security within 60 days to
purchase common stock in an SSBIC. In addition, subject to certain conditions,
certain financial institutions may be able to satisfy their requirements under
the Community Reinvestment Act through the purchase of shares of the Company's
Common Stock. See "FEDERAL REGULATION--Community Reinvestment Act." Prior to the
offering, there has been no public market for the Common Stock. No assurance can
be given that a public market will develop following the completion of the
offering or that, if any such market does develop, it will be sustained. It is
anticipated that the Common Stock will be listed on the Nasdaq SmallCap Market
under the symbol "FSVC" and on the Boston Stock Exchange under the symbol "FSV."
Such listings will be effective upon the Closing, which shall be not less than
the Minimum Offering and up to the Maximum Offering. See "Plan of Distribution."
SEE "RISK FACTORS" STARTING ON PAGE 7 HEREOF.
-------------------------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE SECURITIES AND INVOLVE A HIGH
DEGREE OF RISK.
IN ADDITION, CLOSED-END FUNDS FREQUENTLY TRADE IN THE SECONDARY MARKET (TO
THE EXTENT ONE EXISTS) AT A PRICE BELOW NET ASSET VALUE AND/OR THE PUBLIC
OFFERING PRICE. ACCORDINGLY, IF THE SHARES OF COMMON STOCK OFFERED HEREBY TRADE
BELOW SUCH LEVELS, PURCHASERS OF SHARES IN THIS OFFERING WHO WISH TO SELL THEIR
SHARES IMMEDIATELY MAY NOT BE ABLE TO DO SO WITHOUT SUSTAINING A LOSS. SEE "RISK
FACTORS."
------------------------------
INVESTORS ARE ADVISED TO READ AND RETAIN A COPY OF THIS PROSPECTUS.
-------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
Price to Underwriting Proceeds to
Public Commissions Company (1)(2)
------ ----------- --------------
Per Share . . . . . . . . . . $7.15 $.572 $6.578
Total Minimum (1) . . . . . . $5,005,000 $400,400 $4,604,600
Total Maximum . . . . . . . . $12,155,000 $972,400 $11,182,600
================================================================================
(Footnotes on following page)
The Common Stock is offered by RAS Securities Corp. (the "Dealer Manager")
and by other members of the NASD authorized as selling agents (collectively, the
"Broker/Dealers"). The Common Stock is offered when, as and if delivered to and
accepted by the Dealer Manager and subject to the approval of certain legal
matters by counsel and to certain other conditions. The Dealer Manager reserves
the right to withdraw, cancel or modify the offering and to reject any order in
whole or in part. Share certificates will be delivered within three (3) days of
the Closing. The Company has agreed to indemnify the Dealer Manager against
certain liabilities, including liabilities under the Securities Act of 1933. For
information regarding these matters see "Plan of Distribution."
RAS Securities Corp.
The date of this Prospectus is March 28, 1996
<PAGE>
(Footnotes from cover page)
(1) The shares are offered on a best efforts basis. The offering terminates on
April 30, 1996, provided the Company and the Dealer Manager may agree to
extend the offering until May 10, 1996. Subscriptions will be placed in
escrow with The Merchants Bank of New York, as agent for Freshstart Venture
Capital Corp., pending the Closing. See "Plan of Distribution."
(2) Before deducting expenses of the offering, including the Dealer Manager's
non-accountable expense allowance equal to 2% of the gross proceeds of the
offering, or $535,100 based upon the Minimum Offering and $678,100 based
upon the Maximum Offering. See "Plan of Distribution."
IN CONNECTION WITH THIS OFFERING, THE DEALER MANAGER MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON
STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
The Company intends to furnish its shareholders with annual reports
containing audited financial statements, semi-annual reports containing
unaudited financial statements and such other periodic reports as the Company
may determine to be appropriate or as may be required by law.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Each prospective investor is urged to
read this Prospectus in its entirety. All per share data and information
relating to the number of shares of the Company's Common Stock outstanding have
been adjusted to give effect to a two for one stock split effective January 12,
1996.
THE COMPANY
Freshstart Venture Capital Corp. (the "Company") operates as a Specialized
Small Business Investment Company ("SSBIC") under the Small Business Investment
Act of 1958 (the "1958 Act"), and is regulated and financed in part by the Small
Business Administration ("SBA"). The Company's business is to provide loan
financing to persons who qualify under SBA regulations as socially or
economically disadvantaged persons or to entities which are at least 50% owned
by such persons. In the future the Company will decrease its taxicab loan
portfolio, making only a portion of its loans to finance taxicab medallions,
taxicabs and related assets, with the balance of its loans being made to
supermarkets and other small business concerns. Taxi loans, which represented
approximately 74% of the aggregate principal amount of the Company's loan
portfolio as of November 30, 1995, are collateralized by taxicab medallions and
related assets. The Company has had a very low delinquency rate with taxicab
medallion loans and has never suffered a material loss in connection with such
financings. Historically, the majority of the Company's taxicab medallion loans
have been subordinate to borrowings from senior lenders.
The balance of its loan portfolio includes loans for the acquisition and/or
operation of other small businesses and the Company intends to continue to make
such loans. In this connection, the Company intends to focus on making loans to
small, independent supermarket businesses. The Company has not to date made any
equity investments in any small business concerns and has no present intention
to do so. The Company may in the future, however, make such equity investments,
if determined by its Board of Directors at such time to be in the best interests
of the Company. See "RISKFACTORS" and "BUSINESS--Marketing Strategy."
The Company, which is a New York corporation formed on March 4, 1982, is
registered as an investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"), and has elected to be taxed as a "regulated investment
company" under the Internal Revenue Code of 1986, as amended (the "Code"), and
intends to be treated as a regulated investment company. As a regulated
investment company, the Company pays out to its shareholders substantially all
of its investment company taxable income as dividends. Since fiscal 1988, the
Company has paid dividends for each fiscal year and it intends to continue to
pay dividends as long as funds are legally available for distribution.
An investment in an SSBIC, such as a purchase of the Company's Common
Stock, may afford certain qualified investors favorable tax benefits, including
the ability to defer the recognition of capital gain realized on the sale of
publicly traded securities, subject to certain limitations, if the qualified
investor uses the proceeds from the sale of such publicly traded security within
60 days to purchase common stock in an SSBIC. See "TAX CONSIDERATIONS." In
addition, subject to certain conditions, certain financial institutions may be
able to satisfy their requirements under the Community Reinvestment Act through
the purchase of shares of the Company's Common Stock. See "FEDERAL
REGULATION--Community Reinvestment Act."
3
<PAGE>
THE OFFERING (1)
Common Stock offered by the Company ........ Maximum Offering: 1,700,000
shares. Minimum Offering:
700,000 shares.
Common Stock outstanding prior to
the offering ............................... 548,344 shares.
Common Stock to be outstanding after
the offering ............................... 2,248,344 shares, if the
Maximum Offering is attained.
See "Description of Capital
Stock."
Use of Proceeds ............................ To make investments in
accordance with the Company's
investment policies and
objectives. See "Use of
Proceeds."
Offering Termination ....................... The offering will terminate on
April 30, 1996, provided that
the Company and the Dealer
Manager may agree to extend
the offering up to May 10,
1996. See "Plan of
Distribution."
Distributions .............................. The Company intends to
distribute to its stockholders
at least 90% of its annual
investment company taxable
income (net investment income
from interest and dividends
and net short-term capital
gains). See "Tax
Considerations."
Previous Trading History ................... None.
Dealer Manager ............................. RAS Securities Corp.
Risk Factors ............................... The securities offered hereby
involve a high degree of risk
and should not be purchased by
investors who cannot afford
the loss of their entire
investment. Such risk factors
include, among others,
limitations on taxicab
medallion financings, SBA
industry review, SBA financing
not assured, possible
prepayment by borrowers,
uncertain market, loan
foreclosures, concentration of
the Company's loans to
borrowers in a single industry
and geographic area, reliance
on management, conflicts of
interest and lack of
correlation between net asset
value, public offering price
and market price of the
Company's Common Stock.
Purchasers of the securities
offered hereby will experience
immediate dilution. See "RISK
FACTORS" and "DILUTION."
Proposed Nasdaq SmallCap Market Symbol ..... FSVC.
Proposed Boston Stock Exchange Symbol ...... FSV.
- ----------
(1) See "PLAN OF DISTRIBUTION."
4
<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Fiscal Year Ended May 31,
(audited)
-----------------------------------------------------
Statement of Operations Data: 1991 1992 1993 1994 1995
- ----------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total revenue .................................... $1,250,221 $1,094,244 $1,101,091 $1,043,071 $1,005,284
---------- ---------- ---------- ---------- ----------
Interest expense ................................. 486,516 437,831 326,841 315,213 322,806
Other expense .................................... 354,881 341,354 328,789 357,997 339,327
---------- ---------- ---------- ---------- ----------
Total expense .................................... 841,397 779,185 655,630 673,210 662,133
---------- ---------- ---------- ---------- ----------
Investment income before
taxes and loan loss reserve ................. 408,824 315,059 445,461 369,861 343,151
Unrealized depreciation
and write off in value of
investment (1) .............................. 48,861 124,687 86,456 78,161 2,399
Provision for income taxes
(State and Federal) (2) ..................... 1,721 1,079 729 985 1,836
---------- ---------- ---------- ---------- ----------
Net Income ....................................... 358,242 189,293 358,276 290,715 338,916
Dividends on preferred stock
to SBA paid or
restricted (3) .............................. 45,600 22,800 26,000 26,000 45,092
---------- ---------- ---------- ---------- ----------
Net income available to
Common Stock ................................ $ 312,642 $ 166,493 $ 332,276 $ 264,715 $ 293,824
========== ========== ========== ========== ==========
Earnings per share of Common
Stock (after payment of
preferred stock dividend) (4) ............... $.79 $.39 $.61 $.48 $.54
==== ==== ==== ==== ====
Dividends paid per share of
Common Stock (4)(5)(6) ...................... $.78 $.35 $.60 $.48 $.54
==== ==== ==== ==== ====
Dividends paid (6) ............................... $ 307,320 $ 151,211 $ 329,005 $ 263,206 $ 296,108
========== ========== ========== ========== ==========
Weighted average shares of
Common Stock
outstanding (4)(7) .......................... 394,000 428,866 548,344 548,344 548,344
========== ========== ========== ========== ==========
<CAPTION>
Six Months Ended
November 30,
(unaudited)
------------------
1994 1995
---- ----
<S> <C> <C>
Total revenue .................................... $509,515 $504,361
-------- --------
Interest expense ................................. 156,479 159,411
Other expense .................................... 173,223 164,967
-------- --------
Total expense .................................... 329,702 324,378
-------- --------
Investment income before
taxes and loan loss reserve ................. 179,813 179,983
Unrealized depreciation
and write off in value of
investment (1) .............................. 11,880 --
Provision for income taxes
(State and Federal) (2) ..................... 1,743 1,433
-------- --------
Net Income ....................................... 166,190 178,550
Dividends on preferred stock
to SBA paid or
restricted (3) .............................. 13,000 14,100
-------- --------
Net income available to
Common Stock ................................ $153,190 $164,450
======== ========
Earnings per share of Common
Stock (after payment of
preferred stock dividend) (4) ............... $.28 $.30
==== ====
Dividends paid per share of
Common Stock (4)(5)(6) ...................... $.24 $.18
==== ====
Dividends paid (6) ............................... $131,603 $197,404
======== ========
Weighted average shares of
Common Stock
outstanding (4)(7) .......................... 548,344 548,344
======== ========
</TABLE>
- ----------
(1) See Statements of Operations for information on annual provisions for loan
loss reserves under the caption "Unrealized Depreciation in Value of
Investments."
(2) The Company, since the fiscal year ended May 31, 1988, has elected and
qualified to be taxed as a regulated investment company, and therefore,
substantially all taxable income has been distributed to shareholders. The
Company also has elected to be treated as a regulated investment company
for the year ending May 31, 1995 and intends to elect to be treated as a
regulated investment company for the year ending May 31, 1996. See "TAX
CONSIDERATIONS" and Note 2 of Notes to the Financial Statements.
(3) These dividends are calculated on the basis of the number of shares of
preferred stock outstanding at the end of each period presented. Restricted
preferred stock dividends represent amounts which must be paid to the SBA
as dividends on the preferred stock prior to any distribution to the
holders of Common Stock. The Company has paid all required 4% Preferred
Stock dividends through November 30, 1995. The Company issued an additional
760,000 shares of 4% Preferred Stock in October 1994. In addition, under
SBA regulations, the Company may be eligible to issue (i) up to 760,000
additional shares of 4% Preferred Stock based upon its leverageable capital
of $2,200,085 as of November 30, 1995, calculated in accordance with SBA
regulations, and (ii) up to 4,069,500 shares and 10,504,500 shares of 4%
Preferred Stock, respectively, based upon the additional capital to be
received from the Minimum and Maximum Offering of net proceeds of
$4,069,500 and $10,504,500, respectively. The availability of financing for
SSBICs specializing in medallion financing is under review by the SBA. See
"RISK FACTORS--SBA Industry Review" and "--SBA Financing Not Assured."
(4) All per share data and information relating to the number of shares of the
Company's Common Stock outstanding have been adjusted to give effect to a
two for one stock split effected prior to the effective date of the
Registration Statement of which this Prospectus is a part.
(5) The amount of dividends paid per share of Common Stock is based on the
actual amount of dividends paid to holders of Common Stock, in accordance
with Subchapter M of the Code. See "TAX CONSIDERATIONS."
(6) For purposes of calculating the amount required to be distributed pursuant
to Subchapter M of the Code, actual bad debt write-offs are calculated in
accordance with the requirements of the Code, and as a result may vary from
loan loss reserves calculated for financial reporting purposes. However,
the cumulative effect of such differences are nominal and amounted to
$15,950 or 1.1% of the total dividends distributed for the five years ended
May 31, 1995. See "TAX CONSIDERATIONS."
(7) Calculated on the basis of the weighted average number of shares
outstanding during each period. The average number of shares has been
calculated on a month-end average basis.
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Fiscal Year Ended May 31,
(audited)
-----------------------------------------------------------------------
Balance Sheet Data: 1991 1992 1993 1994 1995
- ------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Loans ........................ $ 8,740,840 $ 8,021,747 $ 8,173,430 $ 7,907,157 $ 8,313,042
Less: Reserve for loan losses (262,225) (180,000) (180,000) (178,159) (180,558)
----------- ----------- ----------- ----------- -----------
Loans at fair value .......... 8,478,615 7,841,747 7,993,430 7,728,998 8,132,484
----------- ----------- ----------- ----------- -----------
Total Assets ................. $ 8,830,179 $ 8,770,323 $ 8,994,147 $ 8,494,271 $ 9,202,386
=========== =========== =========== =========== ===========
Short-term borrowings ........ $ 2,650,000 $ 1,873,188 $ 334,488 $ 34,488 $ 5,000
----------- ----------- ----------- ----------- -----------
SBA subordinated debentures .. 3,040,000 3,040,000 4,340,000 4,340,000 4,340,000
----------- ----------- ----------- ----------- -----------
4% Preferred Stock
(Redeemable) ............... -- -- 650,000 650,000 1,410,000
----------- ----------- ----------- ----------- -----------
Total liabilities ............ 5,773,699 5,029,414 5,824,630 5,323,245 6,033,644
----------- ----------- ----------- ----------- -----------
3% Preferred Stock (1) ....... 1,520,000 1,520,000 -- -- --
Retained earnings ............ (4,118) 11,164 14,435 15,944 13,660
Restricted capital (2) ....... -- -- 954,997 763,998 572,998
Common Stock and additional
paid-in capital ............ 1,540,598 2,209,745 2,200,085 2,391,084 2,582,084
----------- ----------- ----------- ----------- -----------
Total stockholders' equity ... $ 3,056,480 $ 3,740,909 $ 3,169,517 $ 3,171,026 $ 3,168,742
=========== =========== =========== =========== ===========
Shares of Common Stock
Outstanding (3) ............ 394,000 428,866 548,344 548,344 548,344
=========== =========== =========== =========== ===========
Net assets per share of
Common Stock (excluding
Preferred Stock) (4) ....... $3.91 $5.15 $5.75 $5.75 $5.75
===== ===== ===== ===== =====
<CAPTION>
Six Months Ended
November 30,
(unaudited)
------------------
1994 1995
---- ----
<S> <C> <C>
Loans ........................ $ 8,334,442 $ 8,733,862
Less: Reserve for loan losses (180,558) (180,558)
----------- -----------
Loans at fair value .......... 8,153,884 8,553,304
----------- -----------
Total Assets ................. $ 9,251,252 $ 9,168,883
=========== ===========
Short-term borrowings ........ $ 5,000 $ 5,000
----------- -----------
SBA subordinated debentures .. 4,340,000 4,360,000
----------- -----------
4% Preferred Stock
(Redeemable) ............... 1,410,000 1,410,000
----------- -----------
Total liabilities ............ 6,058,639 5,948,492
----------- -----------
3% Preferred Stock (1) ....... -- --
Retained earnings ............ 37,531 65,307
Restricted capital (2) ....... 668,498 477,499
Common Stock and additional
paid-in capital ............ 2,486,584 2,677,585
----------- -----------
Total stockholders' equity ... $ 3,192,613 $ 3,220,391
=========== ===========
Shares of Common Stock
Outstanding (3) ............ 548,344 548,344
=========== ===========
Net assets per share of
Common Stock (excluding
Preferred Stock) (4) ....... $5.75 $5.75
===== =====
</TABLE>
- ----------
(1) In May 1993, the Company repurchased, at a discount, all 1,520,000 shares
of the Company's 3% Preferred Stock from the SBA. Such repurchased shares
were subsequently reclassified as 4% Preferred Stock in November 1994. See
"BUSINESS--Specialized Small Business Investment Companies."
(2) Represents the unamortized portion of the gain realized from the
repurchase, at a discount, of all 1,520,000 shares of the Company's 3%
Preferred Stock from the SBA on May 10, 1993. The balance in the restricted
capital account as of November 30, 1995 is currently being amortized over
the remaining 30 month period and will be realized as additional paid-in
capital. In the event of the liquidation of the Company, the SBA would have
the right to receive the amount attributed to restricted capital before any
distribution to holders of Common Stock. See "BUSINESS--Specialized Small
Business Investment Companies."
(3) All per share data and information relating to the number of shares of the
Company's Common Stock outstanding have been adjusted to give effect to a
two for one stock split effective January 12, 1996.
(4) Computed on the basis of total assets less total liabilities (including the
4% Preferred Stock outstanding). Retained earnings have not been taken into
account in such calculation since the Company intends to distribute all
such earnings to its current shareholders as dividends prior to the
consummation of this offering. Additionally, the entire gain realized on
the repurchase of the 3% Preferred Stock is included in the computation of
the net assets per share. Such gain is amortized monthly, with the amount
of the amortization transferred to additional paid-in capital. In the event
of the liquidation of the Company, the SBA would have the right to receive
the amount attributed to restricted capital before any distribution to
holders of Common Stock. See "BUSINESS--Specialized Small Business
Investment Companies."
6
<PAGE>
RISK FACTORS
The Securities offered hereby involve a high degree of risk, including, but
not necessarily limited to, the several factors described below. Prospective
investors should carefully consider the following risk factors inherent in the
activities of the Company and this offering before making an investment
decision.
Limitations on Taxicab Medallion Financings
As of November 30, 1995, approximately 74% of the aggregate principal
amount of the Company's loans represented loans made to finance the purchase or
continued ownership of New York City taxicab medallions. The Company, however,
is only authorized by its SBA license to allocate up to 50% of its portfolio to
taxicab medallion loans. The SBA is aware that the Company has exceeded such
level of taxicab medallion loans, but has raised no objection to date. In
addition, the Company and the SBA entered into a letter of intent dated December
1, 1992 (the "Letter of Intent"), setting forth the intentions of the SBA and
the Company with respect to a proposed agreement that would allow the Company to
maintain up to 100% of its loan portfolio in New York City taxicab medallion
secured loans. However, there can be no assurance that the Company and the SBA
will execute such proposed agreement, or that its terms would conform to the
Letter of Intent. If the SBArequired the Company to liquidate a portion of its
taxicab medallion loans immediately, it is possible that the Company would incur
a loss in such liquidation. Notwithstanding the foregoing, the Company intends
to commit funds to other small businesses, particularly small, independent
supermarket businesses. No assurances can be given, however, as to the extent or
success of such efforts to diversify the Company's portfolio. See "BUSINESS--SBA
Letter of Intent."
SBA Industry Review
The SBA recently conducted a study of the taxicab industry in connection
with a review of the SBA's policy with respect to the permissibility of certain
loans by SBA licensees to taxicab medallion owners. In connection with its
industry study, the SBA, by letter dated November 15, 1994, invited the
managements of SSBICs having a significant concentration of investments in the
taxicab medallion industry to a meeting that was held in December 1994 in
Washington, D.C. with the Associate Administrator/Investment in order to review
certain of the SBA's concerns and obtain insights and observations from these
SSBICs prior to making any policy determinations with respect to the SBA's
future support of SSBIC investment in the taxi medallion industry. The letter
identified certain specific concerns the SBA plans to address which were
discussed at the meeting. The concerns included (a) whether investor owned
taxicab businesses which are managed by third party management companies are
eligible for SBA funding under applicable regulation; (b) whether investment in
the taxi industry is consistent with the basic purpose of the 1958 Act which is
"growth, modernization and expansion of small businesses," in light of the fact
that the number of taxicab medallions is fixed and SBA financing has not
increased the number of shifts of drivers; (c) whether medallion loans
constitute long-term debt as required by applicable SBA regulation; and (d)
whether funding for SSBICs supplants or, as intended, supplements private
financing sources. The letter further noted that due to the limited
appropriations for fiscal 1995, the SBA must avoid the concentration of funding
in any one industry or geographic location. The SBA also indicated that the
satisfaction of all the funding requirements of SSBICs specializing in medallion
financing could utilize most if not all available SSBIC funding, and a
significant portion of SBIC debenture availability. Although the Company's
management believes that it can effectively address the concerns raised in the
SBA's letter, no assurance can be given as to what policy determinations, if
any, will be made by the SBA. Any change in policy in respect of any of the
concerns identified in the letter or any other concern which may arise which
results in a policy change could adversely affect the Company's continued
ability to obtain financing from the SBA and/or make investments in the taxi
medallion industry. Any such change would in all likelihood have a material
adverse effect on the Company. In light of these circumstances the Company
intends to commit funds to other small businesses, particularly small,
independent supermarket businesses. No assurances can be given, however, as to
the extent or success of such efforts to diversify. See "BUSINESS--Specialized
Small Business Investment Companies; Marketing Strategy."
SBA Financing Not Assured
The Company intends to raise additional funds for investment through the
issuance of subordinated debentures and preferred stock to the SBA. See
"BUSINESS--Specialized Small Business Investment Companies." The amount of
financing the Company is able to obtain from the SBA is based upon the Company's
Common Stock and additional paid-in capital, net of
7
<PAGE>
organizational expenses ("Leverageable Capital"). The sale of the Common Stock
will increase the Company's Leverageable Capital and, in accordance with the
1958 Act, permit the Company to issue additional subordinated debentures to, or
guaranteed by, the SBA in the approximate principal amount of $8,139,000 if the
Minimum Offering is sold and $21,009,000 if the Maximum Offering is sold, and an
additional 4,069,500 shares and 10,504,500 shares of 4% Preferred Stock to the
SBA for an aggregate purchase price of $4,069,500 and $10,504,500, respectively,
upon the sale of the Minimum Offering and the Maximum Offering. On July 19,
1995, the Company requested that the SBA reserve through July 31, 1996 for
issuance to the Company unsubsidized debentures of up to $20,000,000. Subject to
the successful completion of this offering, the Company can and intends to apply
on one or more occasions for all or substantially all of the unsubsidized
debentures up to $20,000,000 to the extent it does not apply for or receive the
maximum principal amount of subordinated (subsidized) debentures and preferred
stock for which it would be eligible. No assurances can be given, however, as to
the amount and timing of any additional financing from the SBA. See "RISK
FACTORS--SBA Financing Not Assured" and "--Specialized Small Business Investment
Companies." Although the Company has obtained substantial SBA financing benefits
in the past, there can be no assurance that the Company will be able to obtain
all or any portion of the financing benefits permitted under the 1958 Act.
Further, there can be no assurance as to the timing of the receipt of SBA
financing.
The funds available to SSBICs from the SBA are limited and are subject to
the SBA's receipt of Congressional appropriations for such purposes. To the
Company's knowledge, for the federal fiscal year 1995, October 1, 1994 through
September 30, 1995, the SBA received Congressional appropriations of: (i)
$5,877,032 to be used in SBA's sole discretion, for new purchases of preferred
securities of eligible SSBICs, all of which was committed and utilized and (ii)
$26,563,736 to be used, in SBA's sole discretion, for the guarantee of
subsidized subordinated debentures issued by eligible SSBICs, all of which was
committed and utilized.
The Clinton Administration's proposed budget for the federal fiscal year
1996, October 1995, through September 30, 1996, requested $15,000,000 for the
purchase of preferred securities of eligible SSBICs and $15,000,000 for the
guarantee of subsidized subordinated debentures. The SBA's budget and the
Clinton Administration's SSBIC funding request is subject to Congressional
approval. The pending proposal would reduce or eliminate funds dedicated solely
to SSBICs and no assurance can be given as to whether all or any portion of the
requested funding will be approved and enacted.
A funding bill which provided funding for the SBA and several cabinet
departments and related agencies, and which did not contain dedicated
SSBIC funding, was recently vetoed by President Clinton. That legislation
provided $16,410,000 for unsubsidized debenture guarantees (resulting in a
program level of $110,000,000). Following the President's veto, the SBA was
granted temporary and limited spending authority through March 15, 1996.
Proposals to fund SBA operations and SBICs and SSBICs beyond this date,
presumably for the remainder of fiscal year 1996, are pending in Congress. There
is no assurance when Congress will enact such legislation or that it will
include funding dedicated solely to SSBICs.
Although the Company plans to apply for SBA funding at the earliest
practicable date, there can be no assurance that the Company will be able to
obtain more funds or funding at the same level as it has been able to obtain in
the past. In addition, there can be no assurance that the SBA will extend or
roll over existing financing benefits extended to the Company when such
obligations mature. An adverse change in the level and/or timing of SBA
financing to the Company could materially adversely affect the profitability of
the Company. While the Company awaits, after the consummation of this offering,
the SBA's response to its prospective application for additional financing based
upon the net increase in capital resulting from this offering, it will
experience a lower rate of return than it would otherwise experience if such
financing were obtainable by the Company immediately upon closing of this
offering. See "Leverage." In addition, the Company may, depending upon market
conditions, experience some delay between the receipt of any financing from the
SBA and the actual investment of such funds. See "CAPITALIZATION" and
"BUSINESS--Specialized Small Business Investment Companies."
Leverage
Subordinated debentures and preferred stock issued to raise funds for
investment have a fixed dollar claim on the Company's assets and income prior to
that of the Common Stock. Any income earned by the Company by investing the
proceeds from the sale of such senior securities which is in excess of the
interest or dividends payable with respect to such senior securities will cause
the net asset value of the Company's Common Stock and the income per share of
Common Stock to increase. Conversely, if income earned by the Company is less
than the interest or dividends payable with respect to such senior securities,
the net asset value of the Common Stock and the income per share of Common Stock
will decline, possibly more sharply than would be the case if there were not
fixed senior claims (and the income "deficiency" were borne by the holders of
the senior securities as well as the holders of Common Stock). The obtaining of
funds through the issuance of subordinated debentures and preferred stock thus
enhances profit opportunities, but also increases the risk of losses. This
effect is often referred to herein as "leverage." The Company may also obtain
leverage in the form of loans from banks and other institutional lenders. See
"BUSINESS--Borrowings."
8
<PAGE>
Possible Prepayment By Borrowers
Loans made by the Company typically allow borrowers to prepay loans,
subject to prepayment penalties. A borrower is likely to exercise prepayment
rights at a time when its interest rate is greater than prevailing interest
rates. If borrowers elect to prepay loans, there can be no assurance that the
Company would be able to reinvest such funds at rates equal to those previously
obtained. Assuming the Company's costs remain the same, any reduction in
interest rates would result in less profits to the Company.
Uncertain Market; Possible Issuance of Additional Medallions
There can be no assurance that the Company will be able to place loans
successfully to the taxi industry upon the terms on which it currently lends.
The ability of the Company to place additional loans in the taxi industry (which
represented approximately 74% of the Company's loan portfolio at November 30,
1995) may be adversely affected by factors over which the Company may have no
control and which may impair the security for the Company's already outstanding
loans. These factors may include, among others, economic conditions, including
economic conditions affecting the taxicab industry in particular, the market
rates of interest in effect from time to time, and availability of financing
from competitors of the Company. A bill permitting the City of New York to issue
up to 400 additional taxi medallions was signed by the governor of the State of
New York on August 8, 1995 and the New York City Council subsequently approved
the sale of up to such number of medallions over a three year period. The Taxi
and Limousine Commission (the "TLC") is currently in the process of determining
the procedure for selling these medallions. If all such medallions were sold
over the three year period, this would increase the number of medallions
outstanding by 3.4%. In light of these circumstances, the Company intends to
pursue loan opportunities for non-taxi small businesses, including but not
limited to, small independent supermarket businesses. No assurances can be
given, however, that these efforts will be successful. See "BUSINESS--The New
York City Taxi Medallion Industry and Market; Marketing Strategy."
Loan Foreclosures
As of November 30, 1995, the Company's provision for loan losses was
$180,558, which provision related solely to non-taxi related loans. Based upon
current market conditions and current loan to value ratios, the Company believes
that the collateral securing its loans and the Company's provision for loan
losses are adequate. There can be no assurance, however, that, in the event of a
foreclosure, the Company will be able to recoup all or a portion of a loan.
Further, costs associated with foreclosure proceedings may also reduce the
Company's recovery. See "BUSINESS--Loan Portfolio; Valuation."
Management has Broad Discretion to Allocate the Use of Proceeds
The Board of Directors of the Company has broad discretion to allocate all
of the proceeds of this offering consistent with the application of such
proceeds, as described in this Prospectus and subject to the limitations imposed
by the 1958 Act and SBA regulations thereunder, the 1940 Act and the Company's
Articles of Incorporation. Accordingly, the Board of Directors will use such
discretion in the best interest of the Company. See "USE OF PROCEEDS,"
"INVESTMENT POLICIES" and "FEDERAL REGULATIONS."
Industry and Geographical Concentration; Loans to Other Industry Groups
The Company has made, and intends to continue to make loans, albeit in a
decreasing percentage, in connection with the financing of the purchase or
continued ownership of taxicab medallions, taxicabs and related assets. In
addition, almost all of the Company's loans have been made to individuals or
entities in the Northeast. There can be no assurance that there will not be a
significant economic downturn in the taxi-related industry group or in the
Northeast or both. Any such significant economic downturn could have a material
adverse effect on the profitability of the Company. The Company intends to
pursue loan opportunities for other small businesses, including in particular,
small independent supermarket businesses. The Company does not have any
experience in lending to such businesses but will enter into arrangements with
consultants to such industry. However, there can be no assurances that the
Company will be successful in obtaining loans to such group or that its
experience with such loans will be comparable to taxi medallion loans. See
"BUSINESS."
Competition
Banks, credit unions, finance companies and Small Business Investment
Companies, and other SSBICs compete with the Company in financing small
businesses. Many of the Company's competitors have greater resources than those
available
9
<PAGE>
to the Company. In addition, some of the Company's competitors are subject to
different and in some cases less stringent regulation than the Company. As a
result, there can be no assurance that the Company can compete successfully in
the future. See "BUSINESS--Competition."
Valuation of Loans and Investments; Lack of Ready Market to Value Investment
Portfolio
The Board of Directors has valued the investment portfolio based upon the
cost of such investments, less a provision for loan losses. However, because of
the inherent uncertainty of the valuation, the estimated values might be
significantly higher or lower than values that would exist in a ready market for
such loans, which market has not in the past and does not now exist. The
provision for loan losses represents a good faith determination by the Board of
Directors maintained at a level that, in its judgment, is adequate to absorb
losses. See "BUSINESS--Loan Portfolio; Valuation" and Notes 2 and 4 of Notes to
the Financial Statements.
Reliance on Management
The success of the Company will be largely dependent upon the continued
efforts of Zindel Zelmanovitch, President of the Company, and Neil Greenbaum,
Secretary of the Company. Messrs. Zelmanovitch and Greenbaum have each made a
substantial investment in the Common Stock of the Company. See "PRINCIPAL
SHAREHOLDERS." The death or incapacity of either of Mr. Zelmanovitch or Mr.
Greenbaum could have a material adverse effect on the Company and there can be
no assurance that qualified replacements could be found. The Company has
obtained "key man" life insurance policies on the lives of Messrs. Zelmanovitch
and Greenbaum in the amount of $1,000,000 each. Both Mr. Zelmanovitch and Mr.
Greenbaum will enter into employment agreements with the Company immediately
prior to the Closing. See "MANAGEMENT."
Conflicts of Interest
Mr. Zelmanovitch is also an officer, director and principal shareholder of
East Coast Venture Capital, Inc. ("East Coast"), an SSBIC. East Coast is also in
the business of financing small businesses, including but not limited to,
providing loans for the purchase or continued ownership of taxicab medallions.
In addition, Mr. Zelmanovitch manages a pension plan which makes limited
investments to finance taxi medallions. Any conflicts of interest that arise
with respect to the foregoing will be resolved in accordance with the Company's
Code of Ethics. Conflicts also may arise as to the allocation of Mr.
Zelmanovitch's time. The Company's Board of Directors believes Mr. Zelmanovitch
has and will continue to be able to allocate such time as is reasonably
necessary for the Company's operations.
Mr. Greenbaum is also an officer of Pearland Transfer Corp., a licensed
medallion broker, Pearland Brokerage Inc., an insurance brokerage company, and
Hereford Insurance Company. Mr. Greenbaum is also President of two taxi
management companies. Conflicts may arise as to the allocation of Mr.
Greenbaum's time. The Company's Board of Directors believes Mr. Greenbaum has
and will continue to be able to allocate such time as is reasonably necessary
for the Company's operations. See also "CERTAIN TRANSACTIONS." In addition, Mr.
Greenbaum manages two pension plans which make limited investments to finance
taxi medallions. Any conflicts of interest that arise with respect to such
investments will be resolved in accordance with the Company's Code of Ethics.
Shares Eligible for Future Sale
Sales of substantial amounts of the Common Stock following this offering
could adversely affect the market price of the Common Stock. Of the 548,344
shares that currently are issued and outstanding, 411,084 shares are owned by
officers, directors and persons owning at least two percent of the outstanding
shares after giving effect to the sale of shares offered hereby. Such shares are
subject to lock-up agreements with the Dealer Manager which prohibit their sale
for a period ending May 2, 1997. Thereafter, 96,586 of such shares may be sold
without restriction at any time and 314,498 of such shares may be sold subject
to certain volume limitations under Rule 144 promulgated under the Securities
Act. See "DESCRIPTION OF CAPITAL STOCK AND LONG-TERM DEBT--Shares Eligible for
Future Sale."
Lack of Correlation Between Net Asset Value, Public Offering Price and Market
Price
Closed-end funds such as the Company frequently trade in the secondary
market at a price below net asset value and/or
10
<PAGE>
the public offering price. Therefore, it is possible that the market value of
the Common Stock (if a public market ever develops) will bear little or no
relation to the market or net asset value of the Company's underlying portfolio
assets or the resulting net asset value per share. No assurance of the
development of any significant market for the Common Stock can be given, at any
price. As a result, it may be possible for a holder of shares of Common Stock to
reap a gain or suffer a loss in the market value of his shares of Common Stock
that bears little or no relation to any gains or losses in the market or net
asset value of the underlying securities in the Company's portfolio. In
addition, the public offering price of the shares offered hereby was arbitrarily
determined in negotiations between the Company and the Underwriter. There can be
no assurance that the public offering price will correspond to the price at
which the Common Stock will trade in the public market subsequent to the
offering. If the shares of Common Stock offered hereby trade at a price below
the net asset value and/or the public offering price, purchasers of shares in
this offering who wish to sell their shares immediately may not be able to do so
without sustaining a loss.
No Present Market for Common Stock
There is no public market for the shares of Common Stock offered hereby and
no assurance can be given that a public market will develop following completion
of this offering, or if it develops, that it will be sustained. Although the
Company intends to list the shares of Common Stock offered hereby on NASDAQ and
on the Boston Stock Exchange no assurances can be given that such listings will
result in a market for the shares.
Best Efforts Offering; Escrow of Investor Funds
The Company is offering a minimum of 700,000 shares of its Common Stock and
a maximum of 1,700,000 shares of Common Stock at a per share offering price of
$7.15 on a "best efforts" basis. Pending the sale of at least 700,000 shares and
up to 1,700,000 shares, all proceeds will be held in escrow until the Closing.
If at least 700,000 shares are not sold on or before April 30, 1996 (which may
be extended an additional ten (10) days by mutual agreement of the Company and
the Dealer Manager), all monies received will be refunded to subscribers in
full. There will be one closing at which time it is anticipated the Common Stock
will be listed on the Nasdaq SmallCap Market under the symbol "FSVC" and on the
Boston Stock Exchange under the symbol "FSV". See "PLAN OF DISTRIBUTION."
Dilution
Purchasers of the Common Stock offered hereby will experience immediate and
substantial dilution of $1.36 per share or 19% if the Minimum Offering is sold
and $1.07 per share or 15% if the Maximum Offering is sold (such calculation
gives effect to the Company's restricted capital account) from the public
offering price per share. See "DILUTION."
USE OF PROCEEDS
The net proceeds to the Company, after deducting the Dealer Manager's
commissions and non-accountable expense allowance and other expenses of this
offering, will be approximately $4,069,500 if the Minimum Offering is sold and
$10,504,500 if the Maximum Offering is sold.
The proceeds of this offering will be used to make additional taxi
medallion secured loans and a portion of the proceeds may be used to make loans
to other small business concerns, particularly to small independent supermarket
businesses. To date, the Company has not made any loans to such industry, but
entered into commitments to make loans to two owners of supermarkets in the
aggregate amount of $1,700,000. The Company also may make equity investments in
small concerns, if determined by the Board of Directors to be in the Company's
best interests.
The sale of the Common Stock also will increase the Company's Leverageable
Capital and permit the Company, under current SBA regulations, based upon
approximate net proceeds of $4,069,500 if the Minimum Offering is sold and
$10,504,500 if the Maximum Offering is sold, to issue additional subordinated
debentures to, or guaranteed by, the SBA in the approximate principal amount of
$8,139,000 and $21,009,000, respectively, and an additional 4,069,500 shares and
10,504,500 shares of 4% Preferred Stock to the SBA for an aggregate purchase
price of $4,069,500 and $10,504,500, respectively. On July 19, 1995 the Company
requested that the SBA reserve through July 31, 1996 for issuance to the Company
unsubsidized debentures up to $20,000,000. Subject to the successful completion
of this offering, the Company can and intends to apply on one or more occasions
for all or substantially all of the unsubsidized debentures up to $20,000,000 to
the extent it does not apply for or receive the maximum principal amount of
subordinated (subsidized) debentures and preferred stock for which it would be
eligible. While the Company believes it will be eligible for such SBA financing
following the completion of this offering, there can be no assurances as to the
amount and timing of the receipt of such financing. The availability of
financing for SSBICs specializing in medallion financing is under review by the
SBA and may not be approved by Congress. See "RISK FACTORS--SBA Industry
11
<PAGE>
Review" and "--SBA Financing Not Assured." Any proceeds from the issuance of
subordinated debentures and 4% Preferred Stock will be invested for the same
purposes as the proceeds of this offering.
Pending use of the net proceeds, such proceeds will be invested in direct
obligations of the United States and/or certificates of deposit and deposit
accounts, to the extent permitted by SBA regulations. The Company will not
invest in interest only or principal only securities. In all cases it is
expected that such investments will have maturities of 120 days or less. The
Company does not presently intend to invest any of its funds in such investments
for a period in excess of 120 days from their receipt by the Company. If
suitable investments cannot be made prior to the expiration of such 120 day
period, the Company will continue to make similar short-term investments until
it finds suitable investments or loan opportunities. The Company will invest
substantially all the proceeds of the offering in loans or other suitable
investments within 180 days.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
November 30, 1995 and as adjusted to give effect to the sale of 700,000 and
1,700,000 shares of Common Stock, respectively.
<TABLE>
<CAPTION>
At November 30,1995
-----------------------------------------------
Actual Minimum Maximum
------ ------- -------
<S> <C> <C> <C>
Long Term Debt--SBA Subordinated Debentures (1)(2) .......... $ 4,360,000 $ 4,360,000(3) $ 4,360,000(3)
4% Preferred Stock, $1.00 par value; 10,000,000 shares
authorized; 1,410,000 issued and outstanding,
respectively (2)(4) ..................................... $ 1,410,000 $ 1,410,000(5) $ 1,410,000(5)
Short Term Debt (6) ......................................... $ 5,000 $ 5,000 $ 5,000
Common Stock, $.01 par value; 3,000,000 shares authorized;
548,344, 1,248,344 and 2,248,344 shares issued and
outstanding, respectively (7) ........................... $ 5,483 $ 12,483 $ 22,483
Additional paid-in capital (7)(8) ........................... $ 2,672,102 $ 6,734,602 $13,159,602
Restricted capital (9) ...................................... $ 477,499 $ 477,499 $ 477,499
TOTAL CAPITALIZATION (10) ................................... $ 3,155,084 $ 7,224,584 $13,659,584
Net assets per share of Common Stock (7)(10) ................ $ 5.75 $ 5.79 $ 6.08
</TABLE>
(1) The interest rate on SBA subordinated debentures is determined by statute
and depends upon factors existing at the time of issuance.
Principal Amount
Outstanding as of
November 30, 1995 Date of Maturity Interest Rate
----------------- ---------------- -------------
$ 500,000* ................... 12/5/95 11.125
120,000 .................... 5/14/96 7.375
120,000 .................... 5/14/96 7.375
75,000 .................... 2/6/97 7.125
75,000 .................... 2/6/97 7.125
75,000 .................... 9/17/97 8.625
75,000 .................... 9/17/97 8.625
750,000 .................... 6/9/99 9.000
750,000 .................... 9/22/99 8.000
1,300,000 .................... 12/1/02 4.510**
520,000* ................... 6/1/05 6.69%
- ----------
$4,360,000
==========
- ----------
* The Company refinanced the debenture due December 5, 1995 with a debenture
in the principal amount of $520,000 due December 1, 2005 and bearing
interest at the rate of 6.54% per annum. The Company will apply to the SBA
for the refinancing of the debentures due May 14, 1996. See "RISK
FACTORS--SBA Financing Not Assured" and Note 16 of Notes to Financial
Statements.
** Interest rate increases to 7.510% in December 1997.
(Footnotes continue on following page)
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<PAGE>
(2) The table as adjusted does not give effect to the potential sale of
subordinated debentures or 4% Preferred Stock to the SBA. There can be no
assurance, however, as to the amount, if any, of subordinated debentures or
as to the number of shares of 4% Preferred Stock which the SBA will
actually purchase. See "RISK FACTORS--SBA Financing Not Assured."
(3) Upon completion of the offering, based upon approximate net proceeds to the
Company of $4,069,500 if the Minimum Offering is sold and $10,504,500 if
the Maximum Offering is sold, under current SBA regulations, the Company
would be eligible to issue an additional $8,139,000 and $21,009,000,
respectively, of subsidized subordinated debentures. The availability of
financing for SSBICs specializing in medallion financing is under review by
the SBA. See "RISK FACTORS--SBA Industry Review" and "--SBA Financing Not
Assured."
(4) The Company filed on January 12, 1996 an amendment to its certificate of
incorporation authorizing an additional 5,000,000 shares of 4% Preferred
Stock. As of November 30, 1995, the Company had 5,000,000 shares of 4%
Preferred Stock authorized. Shares of 4% Preferred Stock are required to be
redeemed by the Company after 15 years. Of the shares of 4% Preferred Stock
currently outstanding, 650,000 shares must be redeemed in July 2007 and
760,000 shares must be redeemed in October 2009.
(5) Based upon the Company's Leverageable Capital on November 30, 1995 the
Company was eligible to sell up to an additional 760,000 shares of 4%
Preferred Stock to the SBA for $760,000. In addition, upon completion of
the offering, based upon approximate net proceeds to the Company of
$4,069,500 if the Minimum Offering is sold and $10,504,500 if the Maximum
Offering is sold, under current SBA regulations, the Company would be
eligible to sell to the SBA an additional 4,069,500 shares and 10,504,500
shares, respectively, of its 4% Preferred Stock for $4,069,500 and
$10,504,500 respectively. See "RISK FACTORS--SBA Industry Review" and "SBA
Financing Not Assured."
(6) As of November 30, 1995, the Company maintained a $1,100,000 line of credit
which the Company did not renew. See "BUSINESS--Borrowings."
(7) All per share data and information relating to the number of shares of the
Company's Common Stock outstanding have been adjusted to give effect to a
two for one stock split effective January 12, 1996. The Company filed on
January 12, 1996 an amendment to its certificate of incorporation
authorizing an additional 2,000,000 shares of Common Stock. As of November
30, 1995 the Company had 1,000,000 shares of Common Stock authorized.
(8) Includes the amortized portion of the restricted capital realized from the
gain on the repurchase of the Company's 3% Preferred Stock from the SBA,
$477,499 through November 30, 1995. Such amount was realized in equal
increments as additional paid-in capital over a period of 30 months from
the repurchase date, May 10, 1993. Such gain, however, may not be used to
obtain SBA leverage. See "BUSINESS--Specialized Small Business Investment
Companies."
(9) Represents the unamortized portion of the gain realized from the
repurchase, at a discount, of all 1, 520,000 shares of the Company's 3%
Preferred Stock from the SBA on May 10, 1993. In the event of the
liquidation of the Company, the SBA would have the right to receive the
amount attributed to restricted capital before any distribution to holders
of Common Stock. The balance of $477,499 will be amortized on a straight
line basis and included as additional paid-in capital over the remaining 30
month period. See "BUSINESS--Specialized Small Business Investment
Companies."
(10) Computed on the basis of total assets less total liabilities and 4%
Preferred Stock outstanding.
DIVIDEND POLICY
The Company will endeavor to qualify annually for treatment as a regulated
investment company under Subchapter M of the Code. Pursuant to the requirements
of the Code, the Company intends to distribute not less than 90% of its
investment company taxable income to its shareholders so as to maintain its
status as a regulated investment company. The Company has declared and paid
dividends on its Common Stock since fiscal 1988. The Company intends to declare
and pay at least semi-annual dividends in the future to the extent funds are
available for distribution. See "TAX CONSIDERATIONS."
The Company's dividend policy effectively precludes it from expanding its
business through retained earnings. The Company intends to distribute all
undistributed net income through the date immediately preceding the consummation
of the Minimum Offering to shareholders of record as of such date.
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<PAGE>
DILUTION
As of November 30, 1995, the net assets of the Company were $3,155,084 or
$5.75 per share of Common Stock. The Company's net assets are the total assets
of the Company less all liabilities and the liquidation value of the outstanding
4% Preferred Stock. Retained earnings of $65,307 as of November 30, 1995 are
excluded from the net assets since the Company intends to distribute such
earnings to its current shareholders prior to consummation of this offering. The
entire gain realized on the repurchase of the 3% Preferred Stock is included in
the computation of the net assets. Such gain is amortized monthly, with the
amount of the amortization transferred to additional paid-in capital. In the
event of the liquidation of the Company, the SBA would have the right to receive
the amount attributed to restricted capital before any distribution to holders
of Common Stock. See "BUSINESS--Specialized Small Business Investment
Companies." Net asset value per share of Common Stock is net assets divided by
the number of shares of Common Stock outstanding as of the relevant date. After
effect is given to the sale of 700,000 shares if the Minimum Offering is sold
and 1,700,000 shares of Common Stock if the Maximum Offering is sold, the pro
forma net assets and net asset value per share of the outstanding Common Stock
at November 30, 1995 would be $7,224,584 or $5.79 per share and $13,695,584 or
$6.08 per share, respectively. This result would constitute an immediate
dilution of $1.36 and $1.07 per share to new investors from the public offering
price. Dilution per share represents the difference between the public offering
price and the pro forma net asset value per share after this offering.
The following table illustrates the per share dilution to be incurred by new
investors from the public offering price:
Minimum Maximum
Offering Offering
-------- --------
Public offering price per share (1) ........................ $ 7.15 $ 7.15
Net asset value per share before offering ................ 5.75 5.75
Change attributable to sale of shares to new investors ... .04 .33
Pro forma net asset value per share to new investors (2) ... 5.79 6.08
Dilution in net asset value per share to new investors (2) . 1.36 1.07
(1) Before deduction of commissions and estimated offering expenses payable by
the Company, estimated to be $935,500 if the Minimum Offering is sold and
$1,650,500 if the Maximum Offering is sold.
(2) After deduction of commissions and estimated offering expenses payable by
the Company.
The following table sets forth, as of November 30, 1995, the number of
shares of Common Stock held, the total consideration paid (without giving effect
to commissions and offering expenses) and the average price per share paid by
existing shareholders and the new investors:
Shares Purchased Cash Consideration Paid
---------------- -----------------------
Average
Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
Minimum Offering:
Existing Shareholders $ 548,344 43.9% $ 2,297,276 31.5% $4.19
New Investors ....... 700,000 56.1 5,005,000 68.5 $7.15
---------- ---- ----------- ----
1,248,344 100% $ 7,302,276 100%
========== ==== =========== ====
Maximum Offering:
Existing Shareholders 548,344 24.4% $ 2,297,276 15.9% $4.19
New Investors ....... 1,700,000 75.6 12,155,000 84.1 $7.15
---------- ---- ----------- ----
2,248,344 100% $14,452,276 100%
========== ==== =========== ====
14
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BUSINESS
Freshstart Venture Capital Corp. was organized as a New York corporation on
March 4, 1982 in order to engage primarily in the business of financing taxicab
medallions, taxicabs and related assets as an SSBIC licensed by the SBA. The
Company currently maintains offices at 313 West 53rd Street, New York, New York
10019 (telephone: (212) 265-2249). The Company is a diversified, closed-end
investment company registered under the 1940 Act.
General
The Company's Loans--The Company obtained a license to operate as an SSBIC
from the SBA on February 23, 1983. As an SSBIC, the Company's primary business
has been, and is expected to continue to be, to provide long-term loans at
commercially competitive rates of interest to persons defined by SBA regulations
as socially or economically disadvantaged persons (or entities which are at
least 50% owned by persons so defined), in connection with the financing of
diversified businesses. Under current SBA regulations the maximum rate of
interest which the Company may charge on loans may not exceed the higher of
either the Company's weighted average cost of qualified borrowings, as
determined pursuant to SBA regulations without regard to subsidized interest
rates, or the current debenture rate, plus, in either case, seven percentage
points, rounded off to the next lower eighth of one percent; provided, however,
that if the current debenture rate is 8% per annum or lower, the Company is
permitted to charge up to 15% per annum. The maximum rate of interest per annum
allowed to be charged by the Company to its borrowers for loans originated
during January 1996 was 19% for a loan and 14% for a debt security. The new
regulations now allow an SBIC to use its own weighted average cost of borrowing
as the basis for determining the maximum rate that it may charge for loans or
debt securities. However, the ability of the Company to charge such a rate is
limited by competition. The rates of interest on taxicab medallion loans (in
which 74% of the Company's portfolio is concentrated) ranged from 9% to 15.5% at
November 30, 1995. See "Loan Portfolio; Valuation."
A substantial portion of the Company's loans have been made in the past to
purchasers or owners of New York City taxicab medallions. Since the Company
commenced operations, it has made in excess of 509 loans, aggregating
approximately $22,699,250, to New York City taxicab medallion owners. As an
investment company registered under the 1940 Act, the Company is required to
adopt certain fundamental investment policies. Such policies, once adopted, may
only be changed by the shareholders of the Company. See "INVESTMENT POLICIES."
The Company's investment policy with respect to the concentration of investments
previously permitted the Company to invest up to 50% of its loan portfolio for
the purpose of financing the purchase or continued ownership of taxicab
medallions, taxicabs and related assets. After the 50% limitation was
inadvertently exceeded by the Company without shareholder approval, the
Company's shareholders amended such investment policy. Pursuant to the Company's
present investment policy with respect to the concentration of investments (i)
the Company must make at least 25% of its investments for financing the purchase
or continued ownership of taxicab medallions, taxicabs and related assets and
(ii) the Company may not concentrate 25% or more of its total assets in
securities of issuers in any other industry group. As of November 30, 1995,
approximately 74% of the aggregate principal amount of its outstanding loans,
$6,464,901 of an aggregate of $8,733,862 represented loans made to finance the
purchase or continued ownership of New York City taxicab medallions. The
balance, $2,268,961 (26%), consisted of loans to various commercial borrowers.
See "Loan Portfolio; Valuation." While the Company is authorized by its license
to allocate up to 50% of its portfolio to taxicab medallion loans, the SBA has
to date permitted the Company to operate in excess of this limitation. No
assurance can be given that the SBA will continue to allow the Company to
allocate in excess of 50% of its loan portfolio to taxicab medallion loans. See
"RISK FACTORS--Limitations on Taxicab Medallion Financings."
In 1994, the SBA conducted a study of the taxi industry in order to review
its policies with respect to the permissibility of certain loans by SBA
licensees to taxicab medallion owners. The results of such study have been
released, but the decision by the SBA as to what policy changes, if any, will be
adopted cannot be determined. See "RISK FACTORS--Limitations on Taxicab
Medallion Financings."
Although the Company currently anticipates that it will continue to make
loans to purchasers or owners of New York City taxicab medallions, it intends to
allocate an increasing portion of its assets to the making of loans to a variety
of small businesses, subject to any limitations imposed by SBA regulations or
the 1940 Act, including in particular, to small, independent supermarket
businesses. See "Marketing Strategy."
Loans made by the Company are subject to certain restrictions imposed by the
SBA as to interest rates (as described above) and term (currently, no more than
20 years). Generally, such loans have been made to finance taxicab medallions
(or to refinance prior medallion-related loans), are secured by the medallions,
taxicabs, and other related assets and are personally guaranteed by the owners
of the company owning the taxicab. The Company may also, in its discretion, make
loans to radio
15
<PAGE>
car owners. The Company will only make loans to borrowers who meet the standards
required to operate these vehicles by the New York City Taxi and Limousine
Commission ("TLC"). In addition, the Company's loan documentation provides that
its liens on the collateral furnished by its borrowers must be enforceable in
the event of a default by such borrowers. The Company may revise the nature of
its loan portfolio at such time as its Board of Directors determines, in its
sole discretion, that such revision is in the best interest of the Company in
light of then existing business and financial conditions. However, no such
revision is currently contemplated by the Board or Directors. The Company will
not lend to, or otherwise invest more than, the lesser of (i) 10% of its total
assets, or (ii) 30% of its paid-in capital attributable to its Common Stock, in
any one small business concern. The Company has not made, and is prohibited by
applicable SBA regulations from making, loans to officers or directors of the
Company or to any person owning or controlling, directly or indirectly 10% or
more of the Company's Common Stock.
Pending use of the net proceeds, such proceeds will be invested in direct
obligations of, or obligations guaranteed as to principal and interest by, the
United States and/or certificates of deposit and deposit accounts, to the extent
permitted by SBA regulations. In all cases it is expected that such investments
will have maturities of 120 days or less. The Company does not presently intend
to invest any of its funds in such investments for a period in excess of 120
days from their receipt by the Company. If suitable investments cannot be made
prior to the expiration of such 120 day period, the Company will continue to
make similar short-term investments until it finds suitable investments or loan
opportunities.
Borrowings--The Company is authorized by its certificate of incorporation
to issue shares of preferred stock and subordinate debentures to the SBA
pursuant to the 1958 Act. The Company may also borrow money and issue promissory
notes and other obligations, subject to SBA regulatory limitations. In addition
to the subordinated debentures issued to, or guaranteed by, the SBA, the Company
has, from time to time, borrowed funds from banks.
Scope of Business Activities--The Company has not purchased, and does not
intend to purchase, commodities or commodity contracts and it has not engaged,
nor does it intend to engage, in the business of underwriting the securities of
other issuers. In addition, the Company does not intend to purchase a
controlling interest in any small business except as may be necessary in the
event of a foreclosure on the security for a particular loan. The Company does
not intend to engage in the purchase or sale of real estate or in investments in
the securities of other investment companies.
Although the Company's certificate of incorporation authorizes equity
investment in small business concerns, the Company has not to date made any
equity investments in any taxicab or other small concern. However, the Company
may make such equity investments if determined by its Board of Directors to be
in the best interests of the Company.
The Company currently has no intention of performing advisory services for
other businesses, although it reserves the right to do so in the future should
the Company's Board of Directors deem it to be in the Company's best interests.
Specialized Small Business Investment Companies
General. As an SSBIC, the Company is eligible to receive certain financing
from the SBA on favorable terms, and the Company and its shareholders are
entitled to certain tax benefits, both described below. The SBA has a certain
amount of discretion in determining the type and amount of financing that will
be made available to an SSBIC. Therefore, there can be no assurance as to the
nature, amount or timing of SBA financing that may actually be obtained by the
Company. See "RISK FACTORS--SBA Financing Not Assured." Furthermore, there are
certain restrictions and requirements to which the Company is subject by virtue
of its being an SSBIC. See "FEDERAL REGULATION--Regulation under the Small
Business Investment Act of 1958."
Background. Small Business Investment Companies ("SBICs") were created
under the 1958 Act as a vehicle for providing equity capital, long-term loan
funds and management assistance to small businesses. In general, the
16
<PAGE>
SBA considers a business to be "small," and therefore eligible to receive loans
from an SBIC, only if (i) its net worth does not exceed $18,000,000 and if the
average of its net annual income after taxes for the preceding two years was not
more than $6,000,000 or (ii) it meets the size standard for the industry in
which it is primarily engaged, pursuant to SBA regulations. In addition, SBICs
are required to allocate a portion of their portfolio to the financing of any
concern that (i) together with its affiliate does not have net worth in excess
of $6 million and does not have an average net income after taxes for the
preceding two years in excess of $2 million or (ii) meets the size standard for
the industry in which it is primarily engaged. SBICs are licensed, regulated and
sometimes financed in part by the SBA. SSBICs are SBICs which specialize in
providing equity funds, long-term loans and management to individuals, or to
small business concerns at least 50% owned and managed by individuals from
groups in the United States that are socially or economically disadvantaged,
including Blacks, Indians, Eskimos, persons of Mexican, Puerto Rican, Cuban,
Filipino or Asian extraction, Vietnam War era veterans, and other groups which
fall within SBA guidelines relating to socially or economically disadvantaged
persons.
Benefits. The principal benefits to the Company as a result of its being
licensed as an SSBIC are as follows:
1. The SBA is authorized to purchase shares of non-voting preferred stock
from an SSBIC for cash up to an amount equal to the SSBIC's aggregate common
stock and additional paid-in capital net of organizational expenses, excluding
any amounts paid by the SBA (the "Leverageable Capital"). Prior to November
1989, such shares of preferred stock had a 3% annual cumulative dividend. As
currently required by statute, all new preferred stock issued by an SSBIC is
required to have a 4% annual cumulative dividend and must be redeemed by the
SSBIC within 15 years from the date of any such issuance. The 4% dividend may be
accumulated and need not be paid to the SBA on an annual or other periodic
basis, so long as cumulative dividends are paid to the SBA before any other
payments are made to investors. The SBA is authorized to purchase preferred
stock in excess of the SSBIC's Leverageable Capital (up to 200% of Leverageable
Capital) to the extent such excess amount does not exceed the amount of the
SSBIC's funds invested in certain qualified investments. Such qualified
investments include investments in disadvantaged concerns represented by stock
of any class (including preferred stock) or limited partnership interests, or
shares of any eligible syndicate, business trust, joint stock company or
association, mutual corporation, cooperative or other joint venture for profit;
or unsecured debt instruments which are subordinated by their terms to all other
borrowings of the issuer and which, after consideration of all of the terms,
conditions and documentation of such instruments, are determined by an SSBIC's
Board of Directors to have in excess of 50% of the anticipated return on such
financing represented by the potential for equity appreciation.
The Company and the SBA entered into a repurchase agreement, dated May 10,
1993 (the "Repurchase Agreement"). Pursuant to the Repurchase Agreement, the
Company repurchased all 1,520,000 shares of its 3% Preferred Stock from the SBA
for a purchase price of $.36225679 per share, or an aggregate of $550,630. The
repurchase price was at a substantial discount to the original sale price of the
3% Preferred Stock which was sold to the SBA at par value or $1.00 per share. As
a condition to the repurchase, the Company granted the SBA a liquidating
interest in a newly created restricted capital surplus account (the "Restricted
Surplus Account"). The Restricted Surplus Account is equal to the amount of the
repurchase discount. The initial value of the liquidating interest was $969,370,
the amount of the repurchase discount on the date of repurchase, and is being
amortized over a 60 month period on a straight-line basis. As of November 30,
1995, the liquidating interest was $477,499. Should the Company be in default
under the Repurchase Agreement, at any time, the liquidating interest will
become fixed at the level immediately preceding the event of default and will
not decline further until such time as the default is cured or waived. The
liquidating interest will expire on the later of (i) 60 months from the date of
the Repurchase Agreement, or (ii) if an event of default has occurred and such
default has been cured or waived, such later date on which the liquidating
interest is fully amortized. Should the Company voluntarily or involuntarily
liquidate prior to the expiration of the liquidating interest, any assets which
are available, after the payment of all debts of the Company, shall be
distributed first to the SBA until the amount of the then remaining liquidating
interest has been distributed to the SBA. Such payment, if any, would be prior
in right to any payments made to the Company's shareholders. For financial
reporting purposes, the Company's balance sheet shows a restricted capital
account equal to the value of the SBA's liquidating interest, less $14,373 of
expenses incurred in connection with the repurchase. As the liquidating interest
declines, the restricted capital account is reduced and additional paid-in
capital is increased. The amount of the gain from the repurchase of the 3%
Preferred Stock may not be used for obtaining SBA leverage.
The Company issued 650,000 shares of its 4% Preferred Stock to the SBA, for
an aggregate purchase price of $650,000 in July 1992 and an additional 760,000
shares of 4% Preferred Stock, for an aggregate purchase price of
17
<PAGE>
$760,000 in October 1994. Based upon the Company's Leverageable Capital of
$2,200,085 as of November 30, 1995, the Company was eligible to sell to the SBA
an additional 760,000 shares of 4% Preferred Stock, for an aggregate of
$760,000. As a result of this offering, assuming approximate net proceeds to the
Company of $4,069,500 if the Minimum Offering is sold and $10,504,500, if the
Maximum Offering is sold, the SBA would be permitted under its current
regulations to purchase up to an additional 4,069,500 shares and 10,504,500
shares, respectively, of the Company's 4% Preferred Stock, for an aggregate of
$4,069,500 and $10,504,500 respectively. Following the completion of this
offering, the Company will seek to have the SBA purchase additional shares of 4%
Preferred Stock up to the maximum amount and extent permitted by applicable SBA
regulations, although there can be no assurance as to when and/or if such
preferred stock will be purchased by the SBA. There is a limited amount of SBA
leverage available to SSBICs, and the availability of financing for SSBICs
specializing in medallion financing is under review by the SBA. See "RISK
FACTORS--SBA Industry Review" and--SBA Financing Not Assured."
2. The SBA is authorized to guaranty full repayment of all principal and
interest on debentures issued by an SSBIC which loans funds to, but does not
invest in the equity of, small businesses, to the extent of 300% of such SSBIC's
Leverageable Capital, less the amount of preferred stock issued to the SBA. The
term of such debentures may be up to 15 years, but is typically 10 years. The
SBA will purchase or guarantee such debentures only after an SSBIC has
demonstrated a need for such debentures as evidenced by the SSBIC's investment
activity and its lack of sufficient funds available for investments; provided,
however, that an SSBIC that has invested at least 50% of its Leverageable
Capital and outstanding leverage is presumed to lack sufficient funds available
for investment. Generally, such debentures will bear interest at a fixed rate
which is based on the rate which is set by the underwriters of the pooled
debentures sold through SBIC Funding Corp., except that during the first five
years of the initial term of the debentures, the SBA will subsidize an SSBIC's
annual interest rate by paying 300 basis points (3%) of the interest due on such
debentures. After maturity, these debentures may be refinanced by the SBA as a
new unsubsidized debenture with a 10 year term. The aggregate amount of
debentures with an interest rate subsidy and preferred stock of an SSBIC may not
exceed 400% of an SSBIC's Leverageable Capital or $35,000,000, whichever is
less. An SSBIC applying for leverage in excess of $35,000,000 is subject to SBA
leverage formulas and limitations applicable to SBICs. The subsidized debentures
most recently purchased by the SBA from the Company (during December 1992) bear
interest at the rate of 4.510% per annum for the first five years of their term
and 7.510% per annum for the remaining five years of their term.
The SBA also makes available to both SBIC's and SSBIC's financing in the
form of unsubsidized debentures. These debentures have terms of up to 15 years,
but typically 10 years. The debentures are sold through the SBIC Funding Corp.
and carry a fixed interest rate based on prevailing market rates. The aggregate
amount of unsubsidized debentures, subsidized debentures and preferred stock an
SSBIC may issue may not exceed the limitations set forth above. In June 1995,
the Company refinanced a $500,000 subsidized debenture with a $520,000
unsubsidized debenture. Such unsubsidized debenture matures June 1, 2005 and has
a fixed annual interest rate of 6.69%. In December 1995, the Company refinanced
a $500,000 subsidized debenture with a $520,000 unsubsidized debenture. Such
unsubsidized debenture matures December 1, 2005 and has a fixed interest rate of
6.54%. To the Company's knowledge, the SBA has made available approximately
$260,000,000 for unsubsidized debenture financing through July 31, 1996. While
the Company believes it will be eligible for such SBA financing following the
completion of this offering, there can be no assurances as to the amount and
timing of the receipt of such financing.
With respect to debentures guaranteed after July 1, 1991, the SBA's claim
against an SSBIC is subordinated, in the event of such SSBIC's insolvency, only
in favor of present and future indebtedness outstanding to lenders and only to
the extent that the aggregate amount of such indebtedness does not exceed the
lesser of 200% of such SSBIC's paid-in capital and paid-in surplus (as adjusted
pursuant to SBA regulations), or $10,000,000. However, the SBA may agree to a
subordination in favor of one or more loans from certain other lenders, in its
sole discretion. Following the completion of this offering and at the earliest
time permitted under SBA regulations, the Company will seek to have the SBA
guarantee the maximum amount of additional debentures permitted under the
applicable regulations. However, the availability of financing for SSBICs
specializing in medallion financing is under review by the SBA and there can be
no assurance as to when and/or if financing in such amount will be available.
See "RISK FACTORS--SBA Industry Review" and "--SBA Financing Not Assured."
As of the date of this Prospectus, the Company has an aggregate of
$4,360,000 of subordinated debentures outstanding. Such debentures currently
bear interest at rates ranging from 4.125% to 11.125% per annum. As a result of
this offering, assuming approximate net proceeds to the Company of $4,069,500 if
the Minimum Offering is sold and $10,504,500 if the Maximum Offering is sold,
the SBA would be permitted under its regulations to purchase, or guarantee, up
to $8,139,000 and $21,009,000 respectively, of subsidized subordinated
debentures. Following completion
18
<PAGE>
of this offering, the Company will seek to sell subordinated debentures up to
the maximum amount and extent permitted by applicable SBA regulations, although
there can be no assurance as to when and/or if the Company's applications for
the sale of such debentures will be accepted by the SBA. In addition, there is a
limited amount of SBA leverage available to SSBICs. See "RISK FACTORS--SBA
Industry Review" and "--SBA Financing Not Assured."
3. An SSBIC may qualify for leverage exceeding 300% of Leverageable Capital
by having at least 30% of its total funds available for investment (90% of the
sum of total current assets and loans and investments on a cost basis net of
current maturities) invested in a disadvantaged concern represented by equity
securities with no repurchase requirement for at least five years; any right to
purchase equity securities in conjunction with the purchase of equity or debt
securities which, after consideration of all of the terms, conditions and
documentation of such financing, are determined by an SSBIC's Board of Directors
to have in excess of 50% of the anticipated return on such financing represented
by the potential for equity appreciation; or debt securities or loans which are
subordinated by their terms to all borrowings of the issuer, except borrowings
from officers, directors and owners, or close relatives thereof, of the small
concern, and which are not amortized during the first three years.
In determining the maximum amount of preferred stock and debentures of an
SSBIC which it can purchase or guaranty, the SBA's policy is to treat earnings
of an SSBIC which have been capitalized as additional paid-in capital. As a
result, the maximum amount of funds which may be obtained by the Company through
the sale to the SBA of preferred stock and guaranty of subordinated debentures
would be increased by the capitalization of the Company's earnings. As a result
of the Company's registration under the 1940 Act and its election to be treated
as a "regulated investment company" under the Code, the Company will be required
to distribute to its shareholders at least 90% of its taxable income, thereby
substantially eliminating its ability to obtain additional leverage on its
future earnings.
4. The tax benefits to a company licensed as an SSBIC and to its
shareholders are discussed below under the heading "TAX CONSIDERATIONS."
Loan Portfolio; Valuation
From the time it was licensed in February 1983 through November 30, 1995,
the Company has made loans to small business concerns in the aggregate principal
amount of approximately $32,233,750 of which $8,733,862 was outstanding on
November 30, 1995. The following table sets forth a classification of the
Company's outstanding loans as of November 30, 1995.
Number Maturity
Type of Loan of Date
Outstanding Loans Interest Rate Within Balance
- ----------- ----- ------------- ------ -------
NYC Taxi Medallions .......... 145 10.00%-15.00% 1-7 yrs. $6,464,901
Services ..................... 1 14.50%-15.00% 1-7 yrs. 95,000
Auto Repair Service .......... 9 10.00%-15.00% 1-4 yrs. 701,113
Auto Dealership .............. 1 12.00% 1 yr. 72,434
Renovation and Construction .. 1 10.50% 5 yrs. 134,852
Retail Establishments ........ 4 11.25%-15.50% 1-4 yrs. 316,757
Restaurants .................. 3 9.00%-15.00% 1-9 yrs. 250,205
Gasoline Service Stations .... 3 9.375%-10.00% 1 yr. 307,317
Manufacturing ................ 1 15.00% 1 yr. 151,572
Laundromats and Dry Cleaners . 3 12.00%-15.00% 1-4 yrs. 100,141
Medical Offices .............. 2 11.63%-15.00% 1-3 yrs. 119,005
Video Rentals ................ 1 14.00% 6 yrs. 20,565
--- ----------
TOTAL LOANS 174 $8,733,862
=== ==========
The average loan made to finance the purchase or continued ownership of taxi
medallions, taxicabs and related assets, and start-up costs varies from between
75% to 80% of the market value of the taxi medallions, taxicabs and related
assets at the time of loan. Such loans are typically secured by the medallions,
taxicabs and related assets and range in size from $15,000 to $150,000. Loans
made by the Company to finance the acquisition and/or operation of retail or
maufacturing businesses are typically secured by real estate, taxi medallions
and other assets and range in size from $15,000 to $250,000. In the case of
loans to corporate owners, the loans are also personally guaranteed by the
shareholders of the borrower. Historically, the majority of the Company's
taxicab medallion loans have been subordinate to loans from senior lenders, with
respect to which loans the Company has experienced a very low delinquency rate
and has never suffered a material loss. The Company
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<PAGE>
currently intends to increase its portfolio of senior taxicab medallion loans in
the future because there are more opportunities for such loans. The balance of
its loan portfolio includes and the Company intends to continue to finance the
acquisition and/or operation of other small businesses, including but not
limited to small, independent supermarket businesses, which loans the Company
anticipates will range from approximately $250,000 to $1,000,000. The Company
has not committed more than 10% of its assets to any one business concern in the
Company's portfolio. The interest rates charged by the Company on its currently
outstanding loans range from 9% to 15.5% per annum. For the month of November
30, 1995, the average annual weighted interest rate per loan was 11.83% and the
average term of the Company's outstanding loans was approximately 60 months.
Valuation-- As an SSBIC, the Company is required by applicable SBA
regulations to submit to the SBA semi-annual valuations of its investment
portfolio, as determined by its Board of Directors, which considers numerous
factors including but not limited to the financial strength of its borrowers and
the value of the underlying collateral securing the loans. See Note 2 of Notes
to the Financial Statements for a discussion of the Company's method of
valuation of its current portfolio of loans. In the event the Company invests in
the future in securities for which price quotations are readily available, the
Company will value such investments at their fair market value, based on such
quoted prices. With respect to securities for which price quotations are not
readily available, such securities will be valued at fair value as determined by
the Board of Directors.
Loan Considerations-- In evaluating each applicant for a loan, the Company
considers the following factors: (1) the applicant (or 50% in interest of the
concern's principal owners) must be classified as an economically or socially
disadvantaged person under SBA regulations, (2) the applicant's ability to repay
the loan, and (3) the value and type of collateral proposed by the prospective
borrower to collateralize the business loans.
Collection Experience-- As of November 30, 1995, the Company had 13 loans
totaling $1,021,419 with accrued interest of $478,847 which were delinquent,
compared to 13 loans totalling $918,706 with accrued interest of $346,982 as of
November 30, 1994. Only one of such loans, in the aggregate principal amount of
$12,000, was a taxi medallion loan. The Company considers a loan to be
delinquent if the borrower fails to make payments for 90 days or more. However,
the Company may agree with a borrower that cannot make payments in accordance
with the original loan agreement to modify the payment terms of the loan. The
Company's current provision for loan losses, $180,558, is deemed by the Company
to be sufficient. Based upon present appraisals, the Company anticipates that a
substantial portion of the principal amount of its delinquent loans would be
collected upon foreclosure of such loans, if necessary. There can be no
assurance, however, that the collateral securing such loans will be adequate in
the event of a foreclosure by the Company.
The New York City Taxi Medallion Industry and Market
As presently provided by law, the number of medallions for New York City
taxicabs that may be issued by New York City is limited to 11,787. There are two
basic types of medallions: (1) corporate and (2) individual owner-driver. Of the
total supply of 11,787 medallions, 6,818 are corporate medallions and 4,969 are
for individually owned cabs. A corporate medallion is issued with respect to a
cab owned by a corporation with a minimum of two cabs and two corporate
medallions (i.e. one corporate medallion per cab). An individual owner-driver
may not own more than one cab and one medallion. Corporate medallions are used
by large fleet concerns with many taxicabs and many drivers or by small
corporations owning two medallions and two taxicabs driven by two owner-drivers
(the so-called "minifleet").
A bill permitting the City of New York to issue up to 400 additional taxi
medallions was signed by the Governor of the State of New York on August 8, 1995
and has been approved by the New York City Council to permit the sale of up to
such number of medallions over a three year period. The TLC is currently in the
process of determining the procedure for selling these medallions. If all such
medallions were sold over the three year period, this would increase the number
of medallions outstanding by 3.4%. See "RISK FACTORS--Uncertain Market; Possible
Issuance of Additional Medallions."
At the present time, most medallion sales are handled through brokers. As a
result, an active marketplace has developed for the purchase and resale of
medallions. The price of a medallion varies with supply and demand. The
Company's most recent experience has been that individually owned medallions
currently sell for approximately $165,000 and corporate medallions sell for
approximately $225,000 each. In addition, a 5% New York City transfer tax and
various brokerage commissions are additional expenses incurred in the
acquisition and sale of a medallion.
Based upon statistics obtained from the TLC, from 1989 through 1995 the
number of corporate medallions sold each year varied from approximately 245 to
440, which suggests that there were between 122 and 220 minifleet cor-
20
<PAGE>
porations in need of financing each year (taking into consideration the fact
that each taxicab minifleet needs at least two medallions), while the number of
individual owner medallions sold each year varied from 200 to 415. In addition,
minifleet concerns or individuals who have already purchased medallions are
frequently seeking to refinance their existing indebtedness. Assuming that a
typical minifleet financing for purchases of medallions might involve a sum of
approximately $335,000, the dollar volume of New York City minifleet financings
might range (assuming the existence of between 122 and 220 minifleet
corporations in need of medallion financing for purchases of medallions) from
$40.9 million up to $73.7 million a year. Assuming that a typical individual
medallion financing for a purchase of a medallion involves a sum of
approximately $150,000, the dollar volume of New York City individual medallion
financing might range (assuming the existence of between 200 to 415 individuals
in need of medallion financing for purchases of medallions) from $37.5 million
up to $62.3 million a year. The Company believes, based on its own experience
with, and knowledge of, the New York City taxi industry, that a substantial
majority of the purchasers of New York City taxi medallions each year qualify as
socially or economically disadvantaged persons eligible for receipt of funding
from an SSBIC.
In addition to purchases and sales of medallions, a substantial market
exists for refinancing medallions held by existing owners. Management estimates
this market to exceed that of the market for financing transfers.
A prospective medallion owner must meet the requirements of the TLC which
approves all sales and transfers. In general, the requirements are that the
prospective owner have no criminal record, that the purchase funds be derived
from legitimate sources, and that the taxi vehicle and meter meet specifications
set by the TLC. Also required is a clearance from prior insurers of the seller
in the form of letters stating that there are no outstanding claims for personal
injuries in excess of insurance coverage.
Marketing Strategy
Medallion transfers are usually handled through medallion brokers who have
frequent contact with taxicab owners and drivers. Medallion brokers locate
buyers for sellers of medallions and sellers for buyers of medallions, and then
typically employ a financing broker to arrange for the financing of the
medallion purchases. Presently, to the knowledge of the Company, there are
approximately 35 medallion and financing brokers in New York City. Medallion
brokers customarily receive a brokerage fee of approximately $3,000-$4,000 per
medallion transfer the cost of which fee is typically split between the buyer
and seller.
A substantial portion of the Company's taxicab medallion financings are
referred to the Company by Pearland Transfer Co., a medallion brokerage company
of which Neil Greenbaum and Pearl Greenbaum, officers and directors of the
Company, Barbara Joy Hamill, a director of the Company, and Andrew Greenbaum, a
principal shareholder of the Company are principals. The Company also receives
referrals from other medallion brokers, its current borrowers and other SSBICs.
In order to diversify its portfolio by making loans to small independent
supermarket businesses, while maintaining the historical credit quality and
return that the Company has achieved, the Company will enter into an agreement
with Hayward, Lake Capital Corp. ("HLC") upon the Closing. HLC is a recently
organized company whose management has had extensive experience in providing
financial consulting services to the supermarket industry. The shareholders of
HLC are an officer of and a consultant to the Dealer Manager. Pursuant to its
agreement with the Company, HLC will identify and present loan opportunities to
the Company, which presentations will include among other things credit research
and analysis and asset valuation. The Company will have no obligation to commit
to any loan opportunity presented to it by HLC and will evaluate every such
opportunity to determine its suitability for the Company's portfolio. In the
event the Company determines to make a loan presented by HLC to the Company, HLC
will assist in closing and servicing the loan. For any such loan made by the
Company, HLC will receive a fee not to exceed three (3%) percent of the
principal amount of the loan, which fee shall be payable by the borrower at
closing. HLC will also be responsible for servicing these loans and will receive
a fee not to exceed one-half of one (.5%) percent of the principal amount of
each loan annually, payable from amounts collected under the loan. HLC will bear
all of its own expenses associated with originating, closing and servicing
loans. In order to assist in providing services under the agreement, HLC will
enter into agreements with Alpha Marketing Corp. ("Alpha"), a supermarket
marketing company, and Consolidated Supermarket Supply, LLC ("CSS"), a
supermarket servicing company and an affiliate of Alpha. Many independent
supermarket owners are members of racial or ethnic minorities, and the vast
majority of these small business owners operate their businesses in
economically-disadvantaged areas. Alpha sponsors voluntary groups of
independently-owned supermarkets with more than 200 locations in the tri-state
area and New England. Alpha also provides a full range of services for retailers
inlcuding, among other
21
<PAGE>
things, site analysis, credit analysis, management consulting and financing. The
Company believes that HLC, through Alpha's experience and field team, will
provide the expertise and access necessary to generate lending opportunities in
the supermarket industry.
As a result of the foregoing, the Company expects to have access to lending
opportunities in the supermarket industry. The Company presently intends to lend
an increasing portion of its available capital in this industry. In November
1995, the Company entered into commitments to make loans to two owners of
supermarkets in the aggregate amount of $1,700,000.
Competition
SBICs, SSBICs, banks, credit unions and private lenders have traditionally
financed the acquisition and/or operation of small retail and manufacturing
businesses. The Company expects to continue to encounter competition from such
lenders, many of which are well established and have resources which exceed
those available to the Company.
Letter of Intent
The Company and the SBA entered into a Letter of Intent (the "Letter of
Intent") dated December 1, 1992, setting forth the intentions of the parties
with respect to a proposed agreement (the "Agreement"). Pursuant to the Letter
of Intent, the Company and the SBA would agree among other things as follows:
(i) the Company would agree to limit the aggregate of its senior
indebtedness, consisting of bank debt and SBA debentures, to certain
specified levels;
(ii) the SBA would agree to remove the existing requirement that the
Company maintain in its portfolio a certain threshhold amount of
non-taxicab secured loans;
(iii) the SBA would acknowledge that the Company is a registered investment
company, registered under the 1940 Act, and that the SBA will not require
the Company to take any action or refrain from taking any action necessary
in the opinion of the Company's counsel to comply with the 1940 Act;
provided, however, the Company will not take any action in violation of any
SBA regulation in complying with the 1940 Act;
(iv) the Company would agree to give the SBA a secured second position to
the senior secured position of its banks. The parties would further agree
that banks or other lenders now or hereafter may loan on a senior secured
basis, an amount which, when aggregated with the Company's SBA debentures,
would not exceed the maximum indebtedness provided for in (i) above. Such
grant of a subordinated security interest to the SBA would require the
consent of the Company's banks;
(v) in order to allow the SBA to perfect a subordinated lien on the
Company's assets, the Company would agree that all notes, mortgages and
security agreements relating to loans made by the Company would be held by
a third party custodian e.g. a commercial bank;
(vi) subject to (i) above, so long as the Company maintains private capital
of $2.2 million, the Company would agree not to incur senior debt,
including the aggregate amount of its credit lines, in excess of $3
million; and
(vii) the Company would agree to provide reports periodically to the SBA
containing certain specified financial information.
The Letter of Intent is subject to the negotiation and execution of a definitive
agreement between the Company and the SBA. See "RISK FACTORS--Limitations on
Taxicab Medallion Financings."
22
<PAGE>
SBA Regulation
The Company, as the holder of a license from the SBA to operate as an SSBIC,
is subject to broad regulations by the SBA with respect to various aspects of
its ownership and operation, as discussed under the heading "FEDERAL
REGULATION--Regulation Under The Small Business Investment Act Of 1958."
23
<PAGE>
MANAGEMENT
Officers and Directors
The following table sets forth the names, addresses and positions with the
Company as of the date of this Prospectus of all of the officers and directors
of the Company. Also set forth below is information as to the principal
occupation and background for each person in the table.
Name and Address Age Position and Office with the Company
- ---------------- --- ------------------------------------
Zindel Zelmanovitch (1) ....... 49 President and Director
1934 East 18th Street
Brooklyn, NY 11229
Neil Greenbaum (1)(2) ......... 40 Secretary and Director
29 Flamingo Road North
East Hills, NY 11576
Pearl Greenbaum (1)(2) ........ 72 Vice President and Director
300 Winston Drive
Cliffside Park, NJ 07010
Barbara Joy Hamill (1)(2) ..... 45 Director
8 Saxon Woods
Avon, CT 06001
Michael L. Moskowitz (3) ...... 37 Director
45 East 25th Street
New York, NY 10010
Fred Brodsky .................. 35 Director
219-04 74th Avenue
Bayside, NY 11364
Phillip Pollack ............... 62 Director
300 Winston Drive
Cliffside Park, NJ 07010
Alan Work ..................... 40 Director
54 Random Farms Drive
Chappaqua, NY 10514
- ----------
(1) Directors who are "interested persons" with respect to the Company, as such
term is defined in the 1940 Act.
(2) Pearl Greenbaum is the mother of Neil Greenbaum and Barbara Joy Hamill.
(3) Michael Moskowitz is the brother-in-law of Zindel Zelmanovitch.
Zindel Zelmanovitch has been President and a director of the Company since
1982. Mr. Zelmanovitch is also President, director and a principal shareholder
of East Coast, which company has been a licensed SSBIC since 1986. He has also
served as Secretary and a director of the National Association of Investment
Companies (NAIC) since 1991 and a Secretary and a director of the National
Association of Investment Companies Management Group, Inc. since 1993. From 1976
to 1991 Mr. Zelmanovitch was the President and sole shareholder of Z. Zindel
Funding Corp., which company was licensed by the New York State Banking
Department as a Licensed Mortgage Banker. He has also been licensed as a real
estate broker by the New York Department of State since 1976. Mr. Zelmanovitch
is also the President of Z. Zindel Corp., which is an investment adviser
registered under the Investment Advisers Act of 1940, as amended. Mr.
Zelmanovitch received an M.B.A. from Long Island University in June 1977.
Neil Greenbaum has been the Secretary and a director of the Company since
1982. Mr. Greenbaum has acted as Vice President and Secretary of Pearland
Transfer Corp., a licensed medallion broker, and Pearland Brokerage Inc., an
insurance brokerage company, for more than five years. Mr. Greenbaum has been
President of Hereford Insurance
24
<PAGE>
Company since April 1994. He has been the President of United Brokers
Association, a taxicab brokerage organization, since October 1988. Mr. Greenbaum
is also President of two taxi management companies, Abigone Management Inc.
(since 1994) and N.B. Taxi Management Inc. (since 1988).
Pearl Greenbaum has been the Vice President and a director of the Company
since 1982. Mrs. Greenbaum has been President of Pearland Transfer Corp. and
Pearland Brokerage Inc. for more than five years. She has been Treasurer of
Hereford Insurance Company since April 1994.
Barbara Joy Hamill has been a director of the Company since December 1992.
She was also a director of the Company from 1988 to December 1991. Ms. Hamill
has been a Vice President of Pearland Transfer Corp. and Pearland Brokerage Inc.
for more than five years. She has been a director of Hereford Insurance Company
since April 1994.
Michael L. Moskowitz has been a director of the Company since 1984. From
1984 to 1992 Mr. Moskowitz was Treasurer of the Company. Mr. Moskowitz has been
President of M.L. Moskowitz and Co., Inc., a residential mortgage banking firm,
since August of 1986.
Fred Brodsky has been a director of the Company since 1989. Since 1983, Mr.
Brodsky has been office manager and a computer consultant for Pearland Brokerage
Inc. From 1983 to 1993 Mr. Brodsky was a taxi medallion broker and a computer
consultant for Pearland Transfer Corp.
Philip Pollack has been a director of the Company since 1989. Mr. Pollack
has been Chief Executive Officer and Treasurer of the League of Mutual Taxi
Owners Federal Credit Union for more than five years.
Alan Work has been a director of the Company since 1988. Since 1989, he has
been Executive Vice President for Quantex Associates Inc., an executive search
firm. From 1982 to 1989, Mr. Work was an account executive for E.D.P. World.
Pursuant to the Underwriting Agreement, the Dealer Manager has the right,
subject to SBA approval, to designate one member of the Company's Board of
Directors for a period of three years after the commencement of this offering.
Board Committee
The Board of Directors has appointed a Credit Committee comprised of Mr.
Zelmanovitch, Mr. Greenbaum, Mr. Pollack, Mr. Brodsky and Ms. Hamill. The Credit
Committee reviews loan activities and delinquencies and provides recommendations
to the Board of Directors.
Compensation of Officers and Directors
The following table sets forth all remuneration for services rendered to the
Company during the year ended May 31, 1995, paid to or accrued for the account
of (i) each of the executive officers and (ii) all executive officers and
directors as a group.
<TABLE>
<CAPTION>
Name of Individual or
Number of Persons in Group Capacities in Which Served Salaries (1)
- -------------------------- -------------------------- ------------
<S> <C> <C>
Zindel Zelmanovitch ...................... President and Director $85,320
Neil Greenbaum ........................... Secretary and Director 36,300
Pearl Greenbaum .......................... Vice President and Director 20,496
All directors and executive officers
as a group (eight persons) ........... $145,146
--------
</TABLE>
- ----------
(1) Officers' salaries constitute the major portion of the Company's total
"Management fee compensation" which must be approved by the SBA. The SBA
has approved management fee compensation of $225,000 for the Company. This
amount includes officers' salaries, other salaries and employee benefits.
Upon the Closing, the Company will enter into five year employment
agreements with Messrs. Zelmanovitch and Greenbaum. The agreements provide for
annual compensation of $85,320 to Mr. Zelmanovitch and $36,300 to Mr. Greenbaum.
The salaries are to be reviewed annually by the Board of Directors and are
subject to SBA approval.
The Company pays its directors who are not employees of the Company fees of
$100 for each meeting attended, not to exceed a total of $1,000 in any single
year for any individual director.
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<PAGE>
The Company initiated a defined contribution plan in fiscal 1989. The
eligibility requirements for participation in the plan are a minimum age of 21
years old and twenty-four months of continuous employment with the Company.
Contributions are currently limited to ten percent of each participant's
compensation. All employees and officers were covered and fully vested in the
plan as of May 31, 1995.
Accrued Benefits Contributed
for the Twelve Months Ended Balance Vested as of
Name of Individual May 31, 1995 May 31, 1995
------------------- ---------------------------- --------------------
Neil Greenbaum ......... $ 3,630 $ 79,894
Pearl Greenbaum ........ 2,050 59,473
Zindel Zelmanovitch .... 8,532 183,097
All Other Employees .... 3,730 33,880
-------- --------
$ 17,942 $356,344
======== ========
CONFLICTS OF INTERESTS
The Board of Directors of the Company has adopted policies governing
potential conflicts of interest between the Company and its directors and
officers. Together, these policies comprise the Company's "Code of Ethics" as
required under the 1940 Act.
These policies generally provide that no officer, director or employee of
the Company will make any loan which might be deemed to be appropriate for the
Company, unless such transaction is approved by a majority of the directors of
the Company who are not "interested persons" of the Company within the meaning
of the 1940 Act and who have no financial or other material interest in the
transaction. In reviewing any such transaction, the directors will examine,
among other factors, whether the transaction would deprive the Company of an
opportunity or whether it would otherwise conflict with the best interests of
the Company and its shareholders.
Zindel Zelmanovitch, President and a director of the Company, is also
President and a director of East Coast, an SSBIC. East Coast is in the business
of financing small businesses, including, but not limited to, the operation and
ownership of taxicabs. In addition, Mr. Zelmanovitch manages a pension plan
which makes limited investments to finance taxi medallions. Any conflicts of
interest that arise with respect to the foregoing will be resolved in accordance
with the Company's Code of Ethics. Conflicts may also arise as to the allocation
of Mr. Zelmanovitch's time. The Company's Board of Directors believes Mr.
Zelmanovitch has and will continue to be able to allocate such time as is
necessary to the Company's operations.
Mr. Greenbaum is also an officer of Pearland Transfer Corp., a licensed
medallion broker, Pearland Brokerage Inc., an insurance brokerage company, and
Hereford Insurance Company. Mr. Greenbaum is also President of two taxi
management companies. Conflicts may arise as to the allocation of Mr.
Greenbaum's time. The Company's Board of Directors believes Mr. Greenbaum has
and will continue to be able to allocate such time as is necessary to the
Company's operations. In addition, Mr. Greenbaum manages two pension plans which
make limited investments to finance taxi medallions. Any conflicts of interest
that arise with respect to such investments will be resolved in accordance with
the Company's Code of Ethics. See also "CERTAIN TRANSACTIONS."
Philip Pollack, a director of the Company, is Chief Executive Officer and
Treasurer of the League of Mutual Taxi Owners Federal Credit Union ("LOMTO
Credit Union"). In addition to other loan activities, LOMTO Credit Union makes
loans to finance taxi medallions to members of its sponsor, League of Mutual
Taxi Owners Inc. LOMTO Credit Union does not coinvest with the Company.
CERTAIN TRANSACTIONS
Neil Greenbaum and Pearl Greenbaum, officers and directors of the Company,
Barbara Joy Hamill, a director of the Company, and Andrew Greenbaum, a principal
shareholder of the Company, are principals in Pearland Transfer Corp.
("Pearland") which is licensed to broker taxi medallions. Frequently, Pearland
refers an individual purchasing a medallion to sources of financing, including
the Company and other SSBICs. A substantial portion of the Company's taxicab
medallion financings are referred to the Company by Pearland. Pearland receives
no compensation from the Company for these referrals. Pearland, however,
receives a brokerage fee of approximately $3,000-$4,000 per medallion transfer,
the cost of which fee is typically split between the purchaser and seller of the
medallion.
26
<PAGE>
Mr. Zelmanovitch, President and a director of the Company, is also
President and a director of East Coast, another SSBIC. The Company and East
Coast have made four loans to the same borrowers. The Company's and East Coast's
loans to these borrowers aggregate approximately $400,000 and $115,050,
respectively. Because such coinvesting may be prohibited under the 1940 Act, the
Company has agreed not to make any additional coinvestments unless it is
determined such transaction is consistent with the provisions of the 1940 Act.
The Company currently leases office space from 313 West 53rd Street
Assoc., a partnership whose partners consist of certain officers and directors
of the Company, for $1,500 per month plus a prorated portion of any increases in
the landlord's operating costs above those in effect at the time the lease was
entered into and the prorated share of any repair expenses incurred by the
landlord. The lease expires in November 1997.
All future transactions between the Company and officers, directors and 5%
shareholders will be on terms no less favorable than could be obtained from
independent third parties and will be approved by a majority of the independent,
disinterested directors of the Company.
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<PAGE>
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth, as of the date of this Prospectus, the
beneficial ownership of the shares of Common Stock of the Company of (i) each
person who beneficially owns more than five percent of the Common Stock, (ii)
each officer and director of the Company and (iii) all officers and directors of
the Company as a group:
<TABLE>
<CAPTION>
Percentage of Common Stock
----------------------------
After After
Type of Beneficial Amount of Before Minimum Maximum
Name and Address Ownership Shares Owned Offering Offering Offering
- ---------------- --------- ------------ -------- -------- --------
<S> <C> <C> <C> <C> <C>
Andrew Greenbaum Of record 46,620 (2) 8.5% 3.7% 2.1%
300 Winston Drive
Cliffside Park, NJ 07010 (1)
Neil Greenbaum Both beneficially and 52,934 (3) 9.7% 4.2% 2.4%
29 Flamingo Road North of record
East Hills, NY 11576 (1)
Zindel Zelmanovitch Both beneficially and 87,074 (4) 15.9% 7.0% 3.9%
1934 East 18th Street of record
Brooklyn, NY 11229
Pearl Greenbaum Both beneficially and 97,526 (5) 17.8% 7.8% 4.3%
300 Winston Drive of record
Cliffside Park, NJ 07010 (1)
Barbara Joy Hamill Both beneficially and 46,456 (6) 8.5% 3.7% 2.1%
8 Saxon Woods of record
Avon, CT 06001 (1)
American Transit Insurance Co. Of record 49,966 9.1% 4.0% 2.2%
275 Seventh Avenue
New York, NY 10001
Michael L. Moskowitz Both beneficially and 16,044 (7) 2.9% 1.3% .7%
45 East 25th Street of record
New York, NY 10010
Alan Work Both beneficially and 1,110 (8) * * *
54 Random Farms Drive of record
Chappaqua, NY 10514
Philip Pollack Both beneficially and 12,466 (9) 2.3% 1.0% .6%
300 Winston Drive of record
Cliffside Park, NJ 07010
Fred Brodsky Both beneficially and 888 (10) * * *
219-04 74th Avenue of record
Bayside, NY 11364
All officers and directors as Both beneficially and 314,498 57.4% 25.2% 14.0%
group (8 persons) of record
</TABLE>
- ----------
* Represents less than 1% of the Common Stock.
(1) Andrew Greenbaum and Pearl Greenbaum are husband and wife and the parents
of Neil Greenbaum and Barbara Joy Hamill.
(2) Excludes 97,526 shares held, directly and indirectly, by his wife, Pearl
Greenbaum.
(3) Includes 1,200 shares held by Mr. Greenbaum's children. Excludes 15,100
shares held by his wife and 10,220 shares held by his mother and children
as joint tenants.
(4) Includes 25,174 shares held with his wife as joint tenants and 800 shares
held directly by his wife. Also includes 16,782 shares held as custodian
for his children. Includes 2,036 shares held by his children. Also includes
19,950 shares held in pension
28
<PAGE>
plans of which Mr. Zelmanovitch is the beneficiary. Includes 22,332 shares
held by a corporation of which Mr. Zelmanovitch is a majority shareholder.
(5) Includes 19,550 shares held in joint tenancy with Mrs. Greenbaum's
grandchildren. Also includes 16,880 shares held in joint tenancy with her
daughter, Karen Franklin. Excludes 46,620 shares held by her husband,
Andrew Greenbaum, as to which shares Mrs. Greenbaum disclaims beneficial
ownership.
(6) Includes 5,100 shares held by her 3 children. Excludes 9,330 shares held by
her mother, Pearl Greenbaum, and her children as joint tenants. Excludes
8,880 shares held by her husband, as to which shares Mrs. Hamill disclaims
beneficial ownership.
(7) Includes 4,500 shares held by M.L. Moskowitz & Co., Inc. of which
Mr.Moskowitz is a principal shareholder.
(8) These shares are held by Mr. Work and his wife as joint tenants.
(9) Includes 617 shares held as joint tenants with Mr. Pollack's wife. Also
includes 4,808 shares held by Mr. Pollack's wife and children as joint
tenants and 808 shares held by Mr. Pollack's wife and grandchildren as
joint tenants.
(10) Includes 444 shares held as joint tenants with Mr. Brodsky's wife. Also
includes 222 shares held directly by Mr. Brodsky's wife.
Except as otherwise indicated above, the persons listed in the above table
have voting and investment power with respect to their respective shares.
All of the persons listed above, for as long as they continue to hold 5%
or more of the Company's outstanding common stock, will each be deemed an
"affiliated person" of the Company, as such term is defined in the 1940 Act.
All of the Company's outstanding shares of preferred stock is non-voting
and is held by the SBA.
INVESTMENT POLICIES
The investment policies set forth herein constitute fundamental policies
of the Company pursuant to the 1940 Act which may be changed only by the vote of
the lesser of (i) a majority of its outstanding Common Stock, or (ii) 67% of the
number of shares of Common Stock present in person or by proxy at a duly held
shareholder meeting at which at least 50% of the outstanding shares of Common
Stock are so present.
(a) Issuance of Senior Securities. The Company may issue preferred stock
and subordinated debentures to the SBA in the maximum amounts permissible under
the 1958 Act and the applicable regulations.
(b) Borrowing of Money. The Company has the power to borrow funds from
banks, trust companies, other financial institutions, the SBA or any successor
agency and/or other private or governmental sources, if determined by the
Company's Board of Directors to be in the best interests of the Company.
(c) Underwriting. The Company has not engaged, and does not intend to
engage, in the business of underwriting the securities of other issuers.
(d) Concentration of investments. The Company may not concentrate 25% or
more of its total assets in securities of issuers in any industry group except
the taxicab industry. The Company will make at least 25% of its investments for
financing the purchase or continued ownership of taxicab medallions, taxicabs
and related assets. The balance of its investments includes, and the Company
intends to continue to finance, the acquisition and/or operation of other small
businesses. All of the Company's loans are made to those persons defined by SBA
regulations as socially or economically disadvantaged persons or entities and
which are at least 50% owned by persons so defined as socially or economically
disadvantaged.
(e) Real Estate. The Company has not engaged, and does not intend to
engage, in the purchase and sale of real estate. However, the Company may elect
to purchase and sell real estate in order to protect any of its prior
investments which it considers at risk.
(f) Commodities Contracts. The Company has not engaged, and does not
intend to engage, in the purchase and sale of commodities or commodities
contracts.
(g) Loans. The Company has made, and will continue to make, loans to small
business concerns in accordance with the provisions of the 1958 Act and the
regulations issued by the SBA thereunder.
29
<PAGE>
(h) Writing Options. The Company has not engaged, and does not intend to
engage, in the writing of options.
(i) Short Sales. The Company has not engaged, and does not intend to
engage, in short sales of securities.
(j) Purchasing Securities on Margin. The Company has not engaged, and does
not intend to engage, in the purchase of securities on margin.
(k) Futures Contracts. The Company has not engaged, and does not intend to
engage, in the purchase or sale of futures contracts.
(l) Restricted Securities. The Company may invest up to 100% of its assets
in restricted securities.
(m) Types of Investments. Although the Company was organized primarily to
provide long term loan funds to small business concerns, the Company's
certificate of incorporation provides the Company with the authority to invest
in the equity capital of small business concerns. Accordingly, the Company may
make equity investments in small business concerns if determined by its Board of
Directors to be in the best interests of the Company. Further, except as
otherwise provided by applicable regulations, there shall be no limitation on
the amount of equity investments the Company may make.
(n) Maximum Investment. The Company will not lend or otherwise invest more
than the lesser of (i) 10% of its total assets or (ii) 30% of its paid-in
capital attributable to its Common Stock with respect to any one small business
concern.
(o) Percentage of Voting Securities. The percentage of voting securities
of any one small business concern which the Company may acquire may not exceed
49% of the outstanding voting equities of such small business concern, except as
set forth in paragraph (p).
(p) Management Control. The Company does not intend to invest in any
company for the purpose of exercising control of management. However, the
Company may elect to acquire control in order to protect any of its prior
investments which it considers at risk.
(q) Investment Companies. The Company has not invested, and does not
intend to invest, in the securities of other investment companies.
(r) Portfolio Turnover. The Company intends to make changes in its
portfolio when, in the judgment of its Board of Directors, such changes will be
in the best interest of the Company's stockholders in light of the existing
business and financial conditions. The Company does not anticipate that its loan
portfolio will realize an annual turnover in excess of 50%, although there can
be no assurance with respect thereto.
FEDERAL REGULATION
Regulation Under the Small Business Investment Act of 1958
As the holder of a license from the SBA to operate as an SSBIC, the
Company qualifies for certain financing from the SBA on favorable terms as
described above under the heading "BUSINESS--Specialized Small Business
Investment Companies," but is subject to certain restrictions and requirements
under the 1958 Act and SBA regulations thereunder. On January 31, 1996, the SBA
promulgated a final rule revising the SBA regulations governing the small
business investment company program. These restrictions and requirements
include, but are not limited to, the following:
(i) The interest rate charged by an SSBIC on loans to a small business is
subject to a "cost of money" ceiling based on either the current debenture rate
or its own "cost of capital," as determined by SBA regulations. At a minimum, an
SSBIC may charge up to nineteen (19%) percent per annum for a loan. In certain
instances, based on the SSBIC's cost of capital (i.e. the weighted averaged
interest rate paid by the licensee on its borrowings), an SSBIC may charge a
higher interest rate.
(ii) Without prior SBA approval, the aggregate commitments by an SSBIC to
any single small business enterprise may not exceed 30% of the private capital
of the SSBIC.
(iii) Management and advisory services must be performed by an SSBIC in
accordance with a written contract and certain record-keeping requirements must
be satisfied.
(iv) The minimum term of an SSBIC loan to a small business is four years
and the maximum term may not exceed 20 years.
(v) Prior written consent of the SBA is required in the event of any
proposed transfer of control of an SSBIC and any proposed transfer of 10% or
more of any class of an SSBIC's stock ownership by any person or group of
persons acting in concert owning 10% or more of any class of an SSBIC's stock.
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(vi) Limitations are imposed on the ability of the officers, directors,
managers or 10% stockholders of an SSBIC to become an officer, director, manager
or 10% stockholder of another SSBIC.
(vii) Prior written consent of the SBA is required in the event of a
merger, consolidation or reorganization of an SSBIC.
(viii) The funds of an SSBIC with outstanding leverage or which has
applied for leverage, or not invested in small businesses, must be maintained in
direct obligations of the U.S. (with maturities of 15 months or less) or
deposited in or invested in time deposits of federally insured financial
institutions.
(ix) Corporate SSBICs issuing debentures after April 25, 1994 are required
to amend their articles of incorporation to indicate that they have consented,
in advance, to the SBA's right to require the removal of officers or directors
and to the appointment of the SBA or its designee as receiver of the SSBIC for
the purpose of continuing to operate the company upon the occurrence of certain
events of default. The regulations divide the events of default into three
categories.
The first category consists of three events that automatically accelerate
all outstanding debentures without notice or demand to the SSBIC, and allow the
SBA to apply for receivership of the SSBIC without the SSBIC's objection. The
events are insolvency, a voluntary assignment for the benefit of creditors, and
the filing of a voluntary or involuntary petition for relief under the
Bankruptcy Code.
Under the second category, upon written notice, the SBA may demand
immediate repayment or redemption of all outstanding debentures or take any
other action permitted under the 1958 Act, specifically including institution of
proceedings for the appointment of the SBA or its designees as a receiver of the
SSBIC. Nine violations are included in this category, and no opportunities to
cure the default are afforded the SSBIC. This category of violations includes:
fraud; fraudulent transfers; willful conflicts of interest; willful
non-compliance with one or more of the substantive provisions of the 1958 Act or
of a substantive regulation; repeated events of default; transfer of control;
non-cooperation with remedial steps that the SBA may prescribe; non-notification
of events of default; and non-notification of events of default to others. For
the first six violations listed above the SSBIC will have consented to the SBA's
right to require the SSBIC to replace officers or directors, with persons
approved by the SBA, and to the SBA's appointment as receiver for the purpose of
continuing operations.
Under the third category, which includes nine violations, the SBA affords
the SSBIC the opportunity to cure its violations. If the SSBIC fails to cure to
the SBA's satisfaction, the SBA may declare the SSBIC's entire indebtedness
evidenced by the debentures to be immediately due and payable. The violations in
this category include: excessive compensation; improper distributions; failure
to make a timely payment of an SBA obligation; failure to maintain minimum
regulatory capital; capital impairment; failure to pay any amount when due on
any obligation greater than $100,000; nonperformance or violation of the terms
and conditions of any note, debenture, or other obligation of the SSBIC issued
to, held or guaranteed by the SBA, or of any agreement with, or conditions
imposed by, the SBA; failure to comply with one or more of the substantive
provisions of the 1958 Act or regulations thereunder; and failure to maintain
certain investment ratios for leverage in excess of 300% of Leverageable
Capital. For the first three violations listed above, if an SSBIC fails to cure
such violations the SBA can require the removal of officers and directors and/or
the appointment of its designee as receiver of the SSBIC.
In addition, if an SSBIC repeatedly fails to comply with one or more
"non-substantive" provisions of the 1958 Act or the regulations thereunder, the
SBA, after written notification and until such condition is cured, may deny
additional leverage to such SSBIC and/or require such SSBIC to take such actions
as the SBA may determine to be appropriate under the circumstances. If the SBA
requires the licensee to bring itself into full compliance and it fails to do
so, the SBA may accelerate its leverage and take other remedies, including a
receivership.
(x) As with debentures, corporate SSBICs issuing preferred stock after
April 25, 1994 are required to amend their articles of incorporation to indicate
that they have consented, in advance, to the SBA's right to require the removal
of officers or directors and to the appointment of the SBA or its designees as
receiver of the SSBIC for the purpose of continuing to operate the Company upon
the occurrence of certain events of default. The regulations divide the events
of default into four categories.
The first category consists of six events, the occurrence of any of which
will permit the SBA, upon notice to the SSBIC, to require the SSBIC to replace,
with individuals approved by the SBA, one or more of its officers and/or
directors. In addition the SBA can apply for the institution of an operating
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receivership, with the SBA or its designee as receiver. The events are:
equitable or legal insolvency, or a capital impairment percentage of 100% or
more which capital impairment is not cured within the time limits set by the
SBA in writing; a voluntary assignment for the benefit of creditors; the filing
of a voluntary or involuntary petition for relief under the bankruptcy code;
transfer of control; fraud; and fraudulent transfers.
The second category consists of willful conflicts of interest; willful or
repeated non-compliance with one or more of the substantive provisions of the
1958 Act or any substantive regulation promulgated thereunder; and failure to
comply with a restriction imposed on the SSBICpursuant to the third category.
Upon the occurrence of any such event, and only if the SSBIC fails to remove the
person(s) the SBA identifies as responsible for such occurrence and/or cure such
occurrence to the SBA's satisfaction within a time period determined by the SBA,
upon written notice, the SBA may replace one or more of the SSBIC's officers
and/or directors or obtain the appointment of the SBA or its designee as
receiver of the SSBIC.
The third category lists eleven events, the occurrence of any of which
will allow the SBA, on written notice to the SSBIC, to prohibit the SSBIC from
making any additional investments except for investments pursuant to legally
binding commitments entered into by the SSBIC prior to such notice and, subject
to the SBA's prior written approval, investments that are necessary to protect
the SSBIC's investment; to prohibit distributions by the SSBIC to any party
other than the SBA, its agent or trustee, until all leverage is redeemed and
amounts due are paid; to require all commitments to the SSBIC to be funded at
the earliest time(s) permitted in accordance with the SSBIC's articles; and to
review and redetermine the SSBIC's approved management compensation. This
category of events includes the occurrence of any event listed in the first two
categories; the SSBIC's failure to maintain its minimum regulatory capital;
capital or liquidity impairment and failure to cure the impairment within time
limits set by SBA in writing; improper distributions; excessive compensation;
failure to pay any amounts due under preferred securities, unless otherwise
permitted by the SBA; noncompliance with one or more of the substantive
provisions of the 1958 Act, or any substantive regulation promulgated
thereunder; failure to maintain diversity between management and ownership, if
applicable to such SSBIC; failure to maintain investment ratios for leverage in
excess of 300% of Leverageable Capital or preferred securities in excess of 100%
of Leverageable Capital, if applicable to such SSBIC, as of the end of each
fiscal year; nonperformance of one or more of the terms and conditions of any
preferred security or of any agreement with or conditions imposed by SBA in its
administration of the 1958 Act and the regulations promulgated thereunder; and
failure to take appropriate steps to accomplish such actions as the SBA may have
required for repeated non-substantive violations of the 1958 Act or the
regulations promulgated thereunder.
Under the fourth category if an SSBIC repeatedly fails to comply with any
one or more of the non-substantive provisions of the 1958 Act or any
non-substantive regulation promulgated thereunder, the SBA, after written
notification to the SSBIC and until such condition is cured to the SBA's
satisfaction, can deny additional leverage to such SSBIC and/or require such
SSBIC to take such actions as the SBA may determine to be appropriate under the
circumstances.
(xi) An SSBIC is active if during the 18 months preceding its most recent
fiscal year end, it made financings totalling not less than twenty (20%) percent
of its private capital or its idle funds did not exceed twenty (20%) percent of
its total assets at the end of its most recent fiscal year. The SBA by
regulation made certain limited exceptions to this activity test.
(xii) As part of the regulatory framework, SSBICs are subject to
examinations by SBA agents at least bi-annually and are required to pay
examination fees and maintain certain records, files, internal control programs
and reports. Moreover, the SBA is authorized to suspend an SSBIC's license,
issue cease and desist orders, remove officers and directors of an SSBIC,
subpoena witnesses and records, apply for injunctions to the appropriate
district court, and apply for further acts of enforcement to the appropriate
U.S. Circuit Court of Appeals.
(xiii) An SSBIC may not provide funds to a small concern if that concern
is not engaged in a regular and continuous business operation.
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The foregoing summary of certain requirements under the 1958 Act and regulations
thereunder does not purport to be complete and investors are urged to consult
the 1958 Act and regulations thereunder for more detailed information. See below
under the heading "TAX CONSIDERATIONS" for a discussion of the taxation of
SSBICs.
Registration Under the Investment Company Act of 1940
The Company registered as an investment company under the 1940 Act for the
year commencing July 1, 1988. Prior to such date, the Company was exempt from
regulation under the 1940 Act. The 1940 Act imposes various substantive
requirements upon registered investment companies, and compliance with these
requirements can in many cases be time consuming, burdensome and expensive.
These requirements include, but are not limited to, the following:
(i) The Board of Directors of the Company must be composed of at least
40% of persons who are not "interested persons" as that term is defined in
the 1940 Act (e.g. persons who are not affiliates, counsel, accountants,
investment advisors of or to the Company).
(ii) Any arrangement which provides for joint participation by the
Company and any affiliate (as that term is defined in the 1940 Act) of the
Company in any transaction, and Company loans to, purchases from, or sales
to, any such affiliate must be approved in advance by the Commission.
(iii) Any management advisory contract between the Company and an
investment adviser must be (a) in writing, (b) initially approved by
shareholders holding a "majority of the outstanding voting stock"(as
defined in the 1940 Act) of the Company and annually thereafter by either
the Company's Board of Directors or a majority of its outstanding voting
stock, (c) non-assignable by the adviser, and(d) terminable by the
directors or a majority of the voting shareholders upon 60 days' notice.
(iv) The Company is required to prepare and file various annual and
periodic reports and proxy materials with the Commission.
(v) The Company's fundamental investment policies may not be changed
without the approval of a "majority of the outstanding voting stock" (as
defined in the 1940 Act). See "BUSINESS-Investment Policies."
(vi) The Company is required to comply with special journal and ledger
accounting rules and record-keeping requirements relating to all business
transactions, and will be subject to inspections by representatives of the
Commission without warning.
(vii) The Company may not (i) issue more than one (l) class of stock
senior to the Common Stock (the Company's preferred stock constitutes such
a senior class), or (ii) issue warrants or rights unless they expire in 120
days or less and are issued ratably to all members of a class of voting
securities.
(viii) The Company must adopt a Code of Ethics which is designed to
prevent insiders from competing with the Company for investments. The Code
of Ethics must require that the Company maintain records of all security
transactions of directors, officers and employees with information relating
to the Company's investments. See "CONFLICTS OF INTEREST."
(ix) Holders of 10% or more of any class of the Company's voting
securities and its directors and officers are subject to short-swing profit
liability under Section 16(b) of the Securities Exchange Act of 1934, as
amended, for purchases and sales of securities of the Company within a
six-month period of each other.
(x) The Company may not issue any of its securities for services or
property other than cash (except as a dividend or distribution to its
shareholders or in connection with a reorganization).
(xi) The Company may not sell any of its Common Stock for less than
the current net asset value of such stock except, (a) with the consent of a
majority of the holders of its Common Stock, (b) in connection with an
offering to all holders of the Common Stock, (c) upon the exercise of an
outstanding warrant or (d) upon the conversion of a convertible security in
accordance with its terms.
The foregoing summary of certain requirements of the 1940 Act does not
purport to be complete and investors are urged to consult the 1940 Act for more
detailed information.
Community Reinvestment Act
The Community Reinvestment Act of 1977 ("CRA") requires the Comptroller of
the Currency, the Federal Deposit Insurance Corporation, the Federal Reserve
Board and the Office of Thrift Supervision to use their authority when examining
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financial institutions to encourage such institutions to help meet the credit
needs of the local community in which they are chartered. Specifically, this Act
requires each of these federal regulators to assess the institution's record of
meeting the credit needs of its entire community, including low- and
moderate-income neighborhoods, consistent with safe and sound operation of the
institution, and to take such record into account in its evaluation of an
application for a merger, acquisition, or deposit facility by such institution.
Financial institutions covered by the CRA include banks, thrifts and savings and
loans.
In assessing CRA, agencies review an institution's performance to produce
an overall composite rating based upon three major elements, lending, investing,
and service. The lending test evaluates a bank's performance in helping to meet
the credit needs of its service area(s) through its lending activities. In
evaluating a bank's overall lending performance, the agency considers small
business and small farm lending, as well as the geographic distribution of the
bank's lending, particularly with respect to the number and amount of loans to
low-, moderate-, middle-, and upper-income geographies in the bank's service
area.
The investment test evaluates the degree to which a bank is helping to
meet the credit needs of its service area(s) through qualified investments.
Qualified investments include, but are not limited to, organizations promoting
small businesses, including SBICs and SSBICs. An agency will evaluate the
investment performance of an institution based upon several factors: the dollar
amount of qualified investments that directly address credit needs; the use of
innovative or complex qualified investments to support community development
initiatives; and the degree of responsiveness to credit and community economic
development needs.
The service test evaluates a bank's record of helping to meet the credit
needs of the bank's service area(s) by analyzing both the availability and
responsiveness of a bank's systems for delivering retail banking services and
the extent and innovativeness of its community development services.
Agencies assign a rating for an institution under the lending, investment,
and service tests which then are combined to produce an overall rating under
CRA. The overall rating of a bank, thrift or savings and loan may be positively
affected as a consequence of equity investments in an SSBIC.
TAX CONSIDERATIONS
General
The following discussion is based on the currently existing provisions of
the Internal Revenue Code of 1986, as amended (the "Code") and the currently
existing regulations thereunder. No assurance can be given that future
legislation or administrative changes or court decisions will not significantly
modify the statements expressed herein. The following discussion is only a
general summary of some of the federal tax principles applicable to the Company
and to an investment in the Company's Common Stock, and does not purport to be a
complete description of the tax considerations applicable to such investment.
Prospective investors should consult their own tax advisers with respect to the
tax considerations which pertain to their purchase and ownership of the
Company's Common Stock.
Taxation of a Regulated Investment Company
Under Section 851 of the Code, a corporation which qualifies may elect to
be taxed as a regulated investment company. A regulated investment company is
generally not subject to federal income taxation at the corporate level to the
extent its income is distributed to its shareholders, since it can deduct most
dividends paid. The Company intends to continue to qualify as a regulated
investment company. In order for the Company to qualify for the tax status of a
regulated investment company for a given fiscal year, it must meet each of the
following conditions for that fiscal year:
(a) The Company must be a domestic corporation registered as a
management company under the 1940 Act during the entire year.
(b) At least 90% of the Company's gross income for the year, including
its tax exempt interest income, but excluding losses from the sale or other
disposition of stock or securities, must be derived from interest, gains on
the sale or other disposition of stock or other securities, dividends, and
payments with respect to securities loans.
(c) Less than 30% of the Company's gross income including tax exempt
interest income, but excluding losses from the sale or other disposition of
stock or securities, must be derived from the sale or other disposition of
securities held for less than three months.
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(d) At the close of each quarter, at least 50% of the value of the
Company's total assets must be represented by cash, cash items (including
receivables), government securities, securities of other regulated
investment companies and other securities, subject to limitations on the
extent to which the Company's holdings may be concentrated in the
securities of a single issuer.
(e) The Company must distribute as dividends at least 90% of its
investment company taxable income (as defined in Code Section 852) as well
as 90% of the excess of its tax-exempt income over certain disallowed
tax-exempt interest deductions (the "Distribution Requirement").
If the Distribution Requirement is satisfied, a regulated investment
company may not be taxed on distributed income, provided all the other
requirements are satisfied. Only undistributed income and undistributed net
capital gain will be taxed at the ordinary income tax rates of Code Section 11
and the capital gains rates of Code Section 1201. The tax on undistributed
ordinary income is really a tax on investment company taxable income calculated
with the dividends paid deduction for ordinary dividends, while the capital
gains tax is imposed against the excess of net capital gain over the dividends
paid deduction determined with reference to capital gain dividends.
A 4% non-deductible excise tax is imposed on a regulated investment
company that fails to distribute in each calendar year an amount equal to 98% of
ordinary taxable income for the calendar year and 98% of capital gain net income
for the one-year period ended October 31 of such calendar year (or, at the
election of a regulated investment company having a taxable year ending November
30 or December 31, for its taxable year). The Company intends to make sufficient
distributions or deemed distributions of its ordinary taxable income and capital
gain net income prior to the end of each calendar year to avoid liability for
the excise tax. However, investors should note that the Company may in certain
circumstances be required to liquidate portfolio investments to make sufficient
distributions to avoid excise tax liability.
If the Company fails to qualify as a regulated investment company, the
Company's earnings will generally be subject to corporate income taxation, and
distributions by the Company in the form of dividends will generally be taxed as
ordinary income to its shareholders to the extent of the Company's current and
accumulated earnings and profits.
Taxation of Shareholders of Regulated Investment Companies
Regulated investment company shareholders also are taxed differently from
shareholders in ordinary corporations. Usually, dividends are included in a
shareholder's income as ordinary income, unless they are a return of capital
distributions, which normally are nontaxable since they are a return of a
shareholder's investment. For regulated investment company shareholders,
dividends are classified as ordinary, capital gain or exempt interest, depending
on the type of earnings of the regulated investment company from which they are
paid.
The portion of the dividend that represents a capital gains distribution
is reportable as long-term capital gains by the shareholder, regardless of how
long the shareholder may have owned the stock. Long-term capital gain
distributions do not qualify for the corporate dividends received deduction. The
capital gain dividends are taxed at the maximum rate of 28%, while ordinary
income is taxed at the maximum rate of 39.6%.
The portion of dividends that does not represent a capital gains
distribution received by a corporate shareholder qualifies for the dividends
received deduction to the extent the regulated investment company designates the
amount distributed as an ordinary dividend, and the aggregate amount received
does not exceed the aggregate amount of dividends received by the regulated
investment company. In general, where aggregate dividends by a regulated
investment company are less than 75% of its gross income for such taxable year,
part of the ordinary income dividends paid by a regulated investment company
will qualify for the dividend received deductions available to corporate
shareholders, but only in the same ratio that the regulated investment company's
dividend income from domestic corporations for a taxable year bears to its gross
income for such year (excluding from the regulated investment company's gross
income gain from the sale or other disposition of stock or other securities).
Based on the plans of the Company to enter into transactions that will result in
interest income, it is unlikely that any part of the ordinary dividends payable
by the Company will qualify for the exclusion for the dividends received
deduction.
Dividends declared and payable by a regulated investment company in
October, November, or December are treated as paid on December 31 even though
they are actually paid in January. In addition, dividends that are declared
prior to the time that a regulated investment company is required to file its
tax return for a taxable year and that are distributed within 12 months
following the close of a taxable year (but not later than the date of the first
regular dividend payment made after the
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declaration) may be treated for purposes of the dividend paid deduction, at the
election of the regulated investment company, as having been paid in that prior
taxable year (such dividends are treated as having been received by shareholders
in the year of distribution).
The Company will advise the shareholders annually as to the federal income
tax consequences of distributions made (or deemed made) during the year. The
Company will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of ordinary income dividends and capital gain dividends, and the
proceeds of redemption of shares, paid to any shareholder (1) who has provided
either an incorrect tax identification number or no number at all, (2) who is
subject to backup withholding by the IRS for failure to report the receipt of
interest or dividend income properly, or (3) who has failed to certify to the
Company that it is not subject to backup withholding or that it is a corporation
or other "exempt recipient."
Special Provisions of the Code Applicable to SSBICs and Shareholders of SSBICs
The Company and its shareholders should qualify for the following tax
benefits which are ordinarily not available to corporations not licensed as
SSBICs and their shareholders:
1. Under Section 1243 of the Code, the Company would be entitled to
ordinary rather that capital loss treatment for losses sustained with
respect to stock derived from convertible debentures of small business
corporations. Because the Company does not presently intend to purchase
convertible debentures, however, this potential benefit is not likely to be
of practical significance to investors.
2. Under Section 582 of the Code, the Company would be entitled to
ordinary rather than capital loss treatment for losses sustained with
respect to debt instruments.
3. Under Section 1242 of the Code, except for a short sale of stock,
the Company's shareholders would be entitled to take an ordinary rather
than a capital loss deduction on losses resulting from the worthlessness or
the sale or exchange of the Company's Common Stock.
Other Potentially Applicable Code Provisions
(a) Pass-Through of Itemized Deductions
Pursuant to Code Section 67(a), the miscellaneous itemized deductions of
an individual taxpayer will only be allowed as a deduction to the extent that
such miscellaneous itemized deductions exceed two (2%) percent of the taxpayer's
adjusted gross income (generally, gross income less trade or business expenses).
Section 67(c) of the Code provides that, pursuant to Treasury regulations, the
limit on such itemized deductions will, to a certain extent, apply to a
shareholder of regulated investment companies as if the shareholder had earned
his share of the Company's income and incurred his share of the expenses of the
Company directly. The 2% floor on itemized deductions does not apply to a
"publicly-traded" regulated investment company. A "publicly offered regulated
investment company" means a regulated investment company the shares of which are
continuously offered pursuant to a public offering, regularly traded on an
established securities market or held by no fewer than 500 persons at all times
during the taxable year. If the Company does not qualify as a publicly traded
investment company, the 2% floor on itemized deductions will apply to
shareholders of the Company with respect to Company expenses. As a result, each
shareholder would be treated, pursuant to applicable Treasury Regulations, as
including both an amount of income and an expense, that must be claimed subject
to the above described limitations, equal to a portion of the Company's
expenses. The impact of this provision upon a shareholder of the Company, if it
were to apply, depends not only upon his share of the Company's income and
expenses but also depends upon the shareholder's income and expenses from other
sources. Each shareholder should consult his tax advisor regarding the potential
application of Code Section 67 and other provisions of the Code that limit the
deduction of itemized deductions by individuals.
(b) Deferral of Capital Gains
Under Code Section 1044, Subchapter C corporations and individuals (not
estates, trusts, partnerships or S corporations) may elect to defer recognition
of capital gain realized on the sale of publicly traded securities if the
taxpayers use the sales proceeds within 60 days to purchase common stock or a
partnership interest in an SSBIC. The amount of gain an individual may elect to
roll over for a tax year is limited to the lesser of (1) $50,000, or (2)
$500,000 reduced by any gain previously excluded under this provision ($25,000
and $250,000, respectively, for married individuals filing separately). For C
corporations, the annual and cumulative limits are increased to $250,000 and $1
million, respectively. To the extent that sales proceeds exceed the cost of the
SSBIC common stock or partnership interest, gain must be currently recognized.
Recognition of ordinary gain may not be deferred. This election is made by a
shareholder on Schedule D on his Form 1040 federal income tax return for the
year in which the securities are sold.
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For purposes of Section 1044 of the Code, the term "publicly traded
securities" means securities which are traded on an established securities
market. The taxpayer's basis in the SSBIC stock or partnership interest is
reduced, by the amount of any unrecognized gain on the sale of the securities.
Each investor before making an investment should consult with his
accountant or tax advisor as to the potential application of the tax benefits
available under Code Section 1044. Each shareholder should note that his holding
period in the Company's Common Stock begins upon the purchase of the Common
Stock with no inclusion in such holding period for the time he held the
publicly-traded securities. If a shareholder sells the Common Stock and realizes
a gain or loss upon such sale, such gain or loss will be a long-term capital
gain or loss, if the shareholder held such Common Stock for more than one year.
(c) Exclusion for Gain from Sale of Small Business Stock
Code Section 1202, as a manner of encouraging investment in new ventures
and specialized small business investment companies, grants relief to investors
who risk their funds in these businesses. Non-corporate investors may exclude up
to fifty (50%) percent of the gain they realize on the disposition of qualified
small business stock issued after August 10, 1993, and held for more than five
(5) years. The amount of gain eligible for the fifty (50%) percent exclusion is
subject to per issuer limits. The exclusion is available to taxpayers who own
eligible stock for five (5) years in a qualified corporation that actively
conducts a qualified trade or business and that meets a maximum gross assets
test.
However, if an individual utilizes Code Section 1044 to defer recognition
of capital gain on the sale of publicly traded securities and then invests those
funds in qualified small business stock, the deferred gain would not be eligible
for the fifty (50%) percent exclusion, although the appreciation occurring after
the purchase of the qualified small business stock would be eligible for such
fifty (50%) percent exclusion.
State and Local Taxes
The foregoing discussion relates only to federal income tax matters. The
Company and its shareholders will also be subject to state and local taxation.
Investors should consult their own tax advisers with respect to the state and
local tax consequences to them of the above-described transactions.
DESCRIPTION OF CAPITAL STOCK AND LONG-TERM DEBT
The Company has 13,000,000 shares, of which 10,000,000 shares are four
(4%) percent preferred stock having a par value of $1.00 each ("4% Preferred
Stock") and 3,000,000 shares are common stock having a par value of $.01 each
(the "Common Stock").
Common Stock
Each share of Common Stock is entitled to one vote on all matters
submitted to a vote of shareholders. The Common Stock does not have cumulative
voting rights, which means that the holders of a majority of the outstanding
shares of Common Stock may elect all of the directors of the Company. The Common
Stock does not have any pre-emptive rights.
All shares of the Common Stock outstanding upon the completion of this
offering and upon payment therefor will be fully paid and nonassessable. Upon
liquidation, dissolution or winding up of the affairs of the Company, its assets
remaining after provision for payment of creditors and holders of preferred
stock, would be distributed pro rata among holders of the Common Stock.
Dividends may be paid in cash or stock to the holders of the Common Stock
when and if declared by the Board of Directors out of funds legally available
therefor, but only after the Company has paid all cumulated dividends then in
arrears on its preferred stock. In order to qualify as a "regulated investment
company" for federal income tax purposes, the Company is required to distribute
annually as dividends at least 90% of its taxable income, to the extent earned.
As of March 1, 1996, the Company had issued an outstanding 548,344 shares of
Common Stock with 156 holders of record.
Preferred Stock
Shares of 4% Preferred Stock may be issued only to the SBA. The shares are
nonvoting and four (4%) percent dividends thereon are preferred and cumulative.
Such shares have a mandatory 15 year redemption requirement.
Since the Company, in order to continue to qualify as a "regulated
investment company," will be required to make dividend distributions to its
shareholders, the Company will be required to pay the cumulative dividend on its
preferred stock on a current basis, to the extent funds are available for such
purpose. Prior to any liquidation or redemption or repurchase of Common Stock,
the SBA, as the holder of the preferred stock, will be entitled to the payment
of the par value of such shares, and to the payment of all cumulative dividends
then in arrears. Pursuant to SBA regulations, in order to continue to qualify
for the issuance of preferred stock to the SBA, the Company amended its
certificate of incorporation to consent in advance to the
37
<PAGE>
SBA's right to require the removal of officers and directors and to the
appointment of the SBA or its prior designee as receiver of the Company upon the
occurrence of certain events of default. See "FEDERAL REGULATION-Regulation
Under the Small Business Investment Act of 1958." As of the date hereof, the
Company had issued and outstanding 1,410,000 shares of 4% Preferred Stock.
The Company previously had 1,520,000 shares of 3% Preferred Stock
outstanding and held by the SBA. Such shares were repurchased by the Company in
1993 at a substantial discount. See "BUSINESS--Specialized Small Business
Investment Companies." The Company subsequently amended its certificate of
incorporation reclassifying such shares as 4% Preferred Stock.
Long-Term Debt
The Company's only long-term debt is its subordinated debentures, issued
to, or guaranteed by the SBA, of which $4,360,000 were outstanding on the date
hereof. The subordinated debentures bear interest ranging from 4.51% to 11.125%
per annum and have varying maturities from May 1996 to December 2005. No
principal payments are required until maturity. The subordinated debentures are
not convertible and have no sinking fund provisions. The subordinated debentures
are unsecured and subordinated to all other debt of the Company, but have a
priority over the Common Stock of the Company upon any dissolution, winding-up,
liquidation or reorganization. As a result of the issuance of subordinated
debentures, the Company was required to amend its certificate of incorporation
granting the SBA certain rights including, but not limited to, the right to
accelerate payment of the subordinated debentures, appoint the SBA or its
designee as receiver of the Company, and the right to remove officers and
directors of the Company upon the occurrence of certain events of default. See
"FEDERAL REGULATION--Regulation Under the Small Business Investment Act of
1958."
Shares Eligible for Future Sale
The Company will have 1,248,344 shares of Common Stock outstanding if the
Minimum Offering is consummated and 2,248,344 if the Maximum Offering is
consummated. Of the 548,344 issued and outstanding shares prior to this
offering, 411,084 shares are owned by officers, directors and persons owning at
least two percent of the outstanding shares after giving effect to the sale of
shares offered hereby. Such shares are subject to lock-up agreements which
prohibit their sale for a period ending May 2, 1997. Thereafter, 96,586 of such
shares may be sold without restriction at any time and 314,498 of such shares
may be sold subject to certain volume limitations under Rule 144 promulgated
under the Securities Act. In general, under Rule 144 as currently in effect, a
person (or persons whose shares are aggregated) who has beneficially owned
restricted securities for at least two years is entitled to sell within any
three-month period a number of shares that does not exceed the greater of one
percent of the then outstanding shares of Common Stock or the average weekly
trading volume of the Common Stock during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain manner-of-sale
provisions, notice requirements and the availability of current public
information about the Company. A person, however, who is not deemed to be an
affiliate of the Company at any time during the three months preceding a sale,
and who has beneficially owned restricted securities last acquired from the
Company or an affiliate of the Company over three years previously, would be
entitled to sell such shares under Rule 144(k) without regard to volume
limitations or other restrictions.
Transfer Agent
The transfer agent for the Common Stock will be Continental Stock Transfer
and Trust Company, 2 Broadway, New York, New York 10004.
PLAN OF DISTRIBUTION
The shares of Common Stock offered hereby are being offered on a best
efforts basis by the Dealer Manager, whose office is at 2 Broadway, New York,
New York 10004.
The Dealer Manager has agreed, subject to the terms and conditions
contained in the Selling Agreement, to offer up to 1,700,000 shares of Common
Stock to the public at the offering price set forth on the cover page of this
Prospectus. The purchase price must be paid upon subscription. All payments
shall be made by check payable to The Merchants Bank of New York, as agent for
Freshstart Venture Capital Corp., pending attainment of at least the Minimum
Offering and up to the Maximum Offering. Interest on escrow funds will be paid
to the Company. If at least the Minimum Offering of 700,000 shares of Common
Stock is not attained by April 30, 1996 (unless extended up to May 10, 1996 by
mutual agreement of the Company and the Dealer Manager), all funds will be
returned to investors without interest. The Dealer Manager will conduct one
closing of up to the Maximum Offering. The Dealer Manager may enter into selling
agreements with certain Broker/Dealers who are members of the NASD for sale of
the shares and will pay a $.43 sales commission per share to such
Broker/Dealers.
38
<PAGE>
The Company has agreed to pay to the Dealer Manager a non-accountable
expense allowance of two (2%) percent of the gross proceeds of this offering.
In order to diversify its portfolio by making loans to small independent
supermarket businesses, while maintaining the historical credit quality and
return that the Company has achieved, the Company will enter into an agreement
with Hayward, Lake Capital Corp. ("HLC" ) upon the Closing. HLC is a recently
organized company whose management has had extensive experience in providing
financial consulting services to the supermarket industry. The shareholders of
HLC are an officer of and a consultant to the Dealer Manager. Pursuant to its
agreement with the Company, HLC will identify and present loan opportunities to
the Company, which presentations will include among other things credit research
and analysis and asset valuation. The Company will have no obligation to commit
to any loan opportunity presented to it by HLC and will evaluate every such
opportunity to determine its suitability. In the event the Company determines to
make a loan presented by HLC to the Company, HLC will assist in closing and
servicing the loan. For any such loan made by the Company, HLC will receive a
fee not to exceed three (3%) percent of the principal amount of the loan, which
fee shall be payable by the borrower at closing. HLC will also be responsible
for servicing these loans and will receive a fee not to exceed one-half of one
(.5%) percent of the principal amount of each loan annually payable from amounts
collected under the loan. HLC will bear all of its own expenses associated with
originating, closing and servicing loans.
The Company has agreed to indemnify the Dealer Manager against certain
civil liabilities, including liabilities under the federal securities laws.
However, such indemnification is subject to the provisions of Section 17(1) of
the Investment Company Act which provides, in part, that no agreement shall
contain a provision which protects or purports to protect an underwriter of an
investment company against any liability to such company or its security holders
to which it would otherwise be subject due to its misfeasance, bad faith or
gross negligence in the performance of its duties, or reckless disregard of its
obligations and duties under such agreement.
It is anticipated that the Common Stock will be listed on the Nasdaq
SmallCap Market under the symbol "FSVC" and on the Boston Stock Exchange under
the symbol "FSV". Such listing will be effective upon the Closing of the
offering which shall be not less than the Minimum Offering and up to the Maximum
Offering. There will be one closing.
LEGAL MATTERS
Certain legal matters in connection with the offering will be passed upon
for the Company by Stursberg & Veith, New York, New York. C. Walter Stursberg,
Jr., a member of such firm, owns 222 shares of Common Stock. Certain legal
matters in connection with the offering will be passed upon for the Dealer
Manager by Reid & Priest LLP, New York, New York.
EXPERTS
The financial statements of Freshstart Venture Capital Corp. as of May 31,
1995 and for each of the three years then ended included in the Prospectus, have
been audited by Michael C. Finkelstein &Co., independent accountants, as stated
in their report dated July 27, 1995 and are included herein in reliance upon
such report given upon their authority as experts in accounting and auditing.
With respect to the unaudited financial statements of Freshstart Venture
Capital Corp. for the six months ended November 30, 1995 and 1994, respectively
and as of each such date Michael C. Finkelstein & Co., has reported that they
have applied limited procedures in accordance with professional standards for a
review of such information. However, their separate report included herein
states that they did not audit and they do not express an opinion on such
unaudited financial statements. Accordingly, the degree of reliance on their
report on such information should be restricted in light of the limited nature
of the review procedures applied. With respect to such unaudited financial
statements, Michael C. Finkelstein & Co. is not subject to the liability
provisions of Section 11 of the Securities Act for their report on the November
30, 1994 and 1995 unaudited financial statements because that report is not a
"report" or a "part" of the registration statement prepared or certified by the
accountants within the meaning of Sections 7 and 11 of the Securities Act.
CUSTODIAN
The Company currently acts as a self-custodian of its portfolio securities
in compliance with applicable regulations promulgated under the 1940 Act,
although the Company reserves the right to appoint a third party custodian in
the future.
39
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the SEC, 450 Fifth Street, N.W., Washington,
D.C. 20549, a Registration Statement on Form N-5 with respect to the securities
offered hereby. This Prospectus, which is part of the Registration Statement,
does not contain all of the information included in the Registration Statement
and the exhibits and schedules thereto. For further information with respect to
the Company and the securities offered hereby, reference is made to the
Registration Statement and the exhibits thereto which may be inspected, without
charge, at the SEC, or copies of which may be obtained from the SEC in
Washington, D.C., upon payment of the requisite fees. Statements contained in
this Prospectus as to the content of any contract or other document referred to
are not necessarily complete, and where such contract or other document is an
exhibit to the Registration Statement, each such statement is deemed to be
qualified in all respects by reference to the provisions of the exhibit.
40
<PAGE>
INDEX OF FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditor's Report ................................................... F-2
Statements of Financial Position of Freshstart Venture Capital Corp. as of
May 31, 1994 and 1995 and November 30, 1994 and 1995 ......................... F-6
Statements of Operations for the years ended May 31, 1993, 1994 and 1995
and the six months ended November 30, 1994 and 1995 .......................... F-8
Statements of Stockholders' Equity for the Years Ended May 31, 1993, 1994 and 1995
and the six months ended November 30, 1994 and 1995 .......................... F-9
Statements of Cash Flows for the Years Ended May 31, 1993, 1994 and 1995
and the six months ended November 30, 1994 and 1995 .......................... F-10
Notes to the Financial Statements .............................................. F-11
Supplemental Schedules .......................................................... F-18
Selected Per Share Data and Ratios ............................................. F-19
</TABLE>
F-1
<PAGE>
Accountant's Review Report
Board of Directors
Freshstart Venture Capital Corp.
We have reviewed the accompanying Statements of Financial Position of Freshstart
Venture Capital Corp. as of November 30, 1994 and 1995, including the schedule
of loans receivable as of November 30, 1995, and the related statements of
operations, stockholders' equity and cash flows for the six month periods then
ended. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
statements consists principally of obtaining an understanding of the system for
the preparation of the interim financial data and making inquiries of persons
responsible for financial and accounting matters. It is substantially less in
scope than an examination in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
As discussed more fully in Note 1 to the financial statements, securities
amounting to $8,153,884 and $8,553,304 as of November 30, 1994 and 1995
respectively (255% and 266% of net assets, respectively) have been valued at
fair value as determined by the Board of Directors.
We have reviewed the procedures used by the Board of Directors in arriving at
its estimate of fair value of such securities and have inspected underlying
documentation, and, in the circumstances, we believe the procedures are
reasonable and the documentation appropriate.
F-2
<PAGE>
However, because of the inherent uncertainty of valuation, those estimated fair
values may differ significantly from the values that would have been used had a
ready market for the securities existed, and the differences could be material.
Our review was made for the purpose of expressing limited assurance that there
are no material modifications that should be made to the financial statements in
order for them to be in conformity with generally accepted accounting
principles. The information included in the accompanying supplementary schedules
is presented only for supplementary analytical purposes. Such information has
been subjected to the inquiry and analytical procedures applied in the review of
the basic financial statements and we are not aware of any material
modifications that should be made thereto.
The financial statements presented for the years ended May 31, 1993, 1994 and
1995 were audited by us and we expressed unqualified opinions on them in our
audit report dated July 25, 1995, which is included herein, but we have not
performed any auditing procedures since that date.
Michael C. Finkelstein
Certified Public Accountant
New York, New York
December 29, 1995
F-3
<PAGE>
Independent Auditor's Report
Board of Directors
Freshstart Venture Capital Corp.
We have audited the accompanying statements of financial position of
Freshstart Venture Capital Corp. (the "Company"), as of May 31, 1994 and 1995
and the related statements of operations, stockholders' equity and cash flows
for each of the three years in the period ended May 31, 1995 and selected per
share data and ratios for each of the five years in the period ended May 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described in Note 2, these financial statements were prepared in
conformity with the accounting practices prescribed by the Small Business
Administration, which provide for specific allocations of certain types of
income to specific capital accounts. As explained in Note 2, the financial
statements include securities valued at $7,728,998 and $8,132,484 on May 31,
1994 and 1995 (244% and 257%, respectively of net assets), whose values have
been estimated by the Board of Directors in the absence of readily ascertainable
market values
F-4
<PAGE>
We have reviewed the procedures used by the Board of Directors in arriving at
its estimate of value of such securities and have inspected underlying
documentation, and, in the circumstances, we believe the procedures are
reasonable and the documentation appropriate. However, because of the inherent
uncertainty of valuation, those estimated values may differ significantly from
the values that would have been used had a ready market for the securities
existed, and the differences could be material.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of May 31,
1993, 1994 and 1995 and the results of its operations and its cash flows for the
three years then ended in conformity with generally accepted accounting
principles.
Michael C. Finkelstein
Certified Public Accountant
New York, New York
July 27, 1995
F-5
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
ASSETS
May 31, November 30,
1994 1995 1994 1995
-------------------------- --------------------------
(unaudited)
<S> <C> <C> <C> <C>
Loans Receivable - Long Term Portion (Notes 2 and 3) ................... $ 7,907,157 $ 8,313,042 $ 8,334,442 $ 8,733,862
Less: Unrealized Depreciation on Loans Receivable (Note 3) ............ (178,159) (180,558) (180,558) (180,558)
----------- ----------- ----------- -----------
7,728,998 8,132,484 8,153,884 8,553,304
Less: Current Maturities - Loans Receivable ........................... 1,183,510 1,140,416 1,250,166 1,282,996
----------- ----------- ----------- -----------
Total Loans Receivable - Net of Current Maturities ................. 6,545,488 6,992,068 6,903,718 7,270,308
----------- ----------- ----------- -----------
Assets Acquired in Liquidation of
Loans Receivable (Note 4) ............................................ 161,631 13,344 12,631 13,344
----------- ----------- ----------- -----------
CURRENT ASSETS
Cash (Note 15) ......................................................... 469,885 745,359 804,280 214,973
Accrued Interest (Notes 2 and 3) ....................................... 86,512 71,497 71,178 89,913
Current Maturities - Loans Receivable .................................. 1,183,510 1,140,416 1,250,166 1,282,996
Prepaid Expenses and Other Assets ...................................... 44,339 236,088 205,234 273,750
----------- ----------- ----------- -----------
Total Current Assets ............................................... 1,784,246 2,193,360 2,330,858 1,861,632
----------- ----------- ----------- -----------
Fixed Assets - Net of Accumulated Depreciation
of $10,852, $12,722, $11,255 and $14,328, respectively (Note 2) ...... 2,906 3,614 4,045 23,599
----------- ----------- ----------- -----------
Total Assets ....................................................... $ 8,494,271 $ 9,202,386 $ 9,251,252 $ 9,168,883
=========== =========== =========== ===========
See Accountants' Review Report and Accompanying Notes to the Financial Statements
</TABLE>
F-6
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
May 31, November 30,
1994 1995 1994 1995
-------------------------- --------------------------
(unaudited)
<S> <C> <C> <C> <C>
LONG TERM DEBT:
Debentures Payable to SBA (Note 6) $ 4,340,000 $ 4,340,000 $ 4,340,000 $ 4,360,000
4% Cumulative, 15 Year Redeemable Preferred Stock (Note 7) 650,000 1,410,000 1,410,000 1,410,000
----------- ----------- ----------- -----------
Total Long Term Debt 4,990,000 5,750,000 5,750,000 5,770,000
----------- ----------- ----------- -----------
CURRENT LIABILITIES:
Loans Payable - Line of Credit (Note 5) 34,488 5,000 5,000 5,000
Accrued Interest 117,666 128,330 128,775 127,631
Other Current Liabilities 36,488 37,512 30,261 31,761
Dividends Payable (Note 9) 144,603 112,802 144,603 14,100
----------- ----------- ----------- -----------
Total Current Liabilities 333,245 283,644 308,639 178,492
----------- ----------- ----------- -----------
Total Liabilities 5,323,245 6,033,644 6,058,639 5,948,492
----------- ----------- ----------- -----------
Commitments and Contingencies (Notes 14, 15 and 17) -- -- -- --
STOCKHOLDERS' EQUITY:
4% Cumulative, 15 Year Redeemable Preferred Stock - $1 Par
Value: 5,000,000 Shares Authorized, 650,000 and 1,410,000
Shares Issued and Outstanding, respectively (See Long
Term Debt) (Note 7) -- -- -- --
3% Cumulative Preferred Stock - $1 Par Value: 1,520,000
Shares Authorized, No Shares Issued and Outstanding (Note 8) -- -- -- --
Common Stock - $.01 Par Value: 1,000,000 Shares
Authorized, 548,344 Shares Issued and Outstanding (Note 12) 5,483 5,483 5,483 5,483
Additional Paid in Capital (Note 8) 2,385,601 2,576,601 2,481,101 2,672,102
Retained Earnings 15,944 13,660 37,531 65,307
Restricted Capital - Realized Gain on Redemption (Note 8) 763,998 572,998 668,498 477,499
----------- ----------- ----------- -----------
Total Stockholders' Equity 3,171,026 3,168,742 3,192,613 3,220,391
----------- ----------- ----------- -----------
Total Liabilities and Stockholders' Equity $ 8,494,271 $ 9,202,386 $ 9,251,252 $ 9,168,883
=========== =========== =========== ===========
Net Assets Per Share $ 5.78 $ 5.78 $ 5.82 $ 5.88
=========== =========== =========== ===========
See Accountants' Review Report and Accompanying Notes to the Financial Statements
</TABLE>
F-7
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
Years Ended May 31, November 30,
1993 1994 1995 1994 1995
------------------------------------------ --------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
REVENUE:
Interest Earned on Outstanding Receivables $1,071,111 $1,033,638 $ 996,534 $ 503,528 $ 500,412
Interest Income-Idle Funds 29,980 9,433 8,750 5,987 3,949
---------- ---------- ---------- ---------- ----------
Total Revenue (Note 2) 1,101,091 1,043,071 1,005,284 509,515 504,361
---------- ---------- ---------- ---------- ----------
EXPENSES:
Interest (Note 6) 326,841 315,213 322,806 156,479 159,411
Professional Fees 48,684 62,629 45,415 22,212 23,953
Officers' Salaries (Note 11 and 13) 145,146 145,146 145,146 72,573 72,573
Other Salaries (Note 11) 37,965 35,586 35,472 18,074 15,215
Other Operating Expenses 74,132 90,958 89,353 48,572 40,282
Pension Expense (Notes 10 and 11) 18,311 18,073 17,942 8,921 8,591
Depreciation and Amortization (Note 2) 4,551 5,605 5,999 2,871 4,353
---------- ---------- ---------- ---------- ----------
Total Expenses 655,630 673,210 662,133 329,702 324,378
---------- ---------- ---------- ---------- ----------
Net Investment Income 445,461 369,861 343,151 179,813 179,983
Unrealized Depreciation in Value of
Investments (Notes 2 and 3) 86,456 78,161 2,399 11,880 --
---------- ---------- ---------- ---------- ----------
359,005 291,700 340,752 167,933 179,983
PROVISION FOR TAXES:
Current Income Taxes (Note 2) 729 985 1,836 1,743 1,433
---------- ---------- ---------- ---------- ----------
Net Income $ 358,276 $ 290,715 $ 338,916 $ 166,190 $ 178,550
========== ========== ========== ========== ==========
Earnings Per Share of Common Stock (Note 2) $ .61 $ .48 $ .54 $ .28 $ .30
Dividends Paid Per Share
Of Common Stock $ .60 $ .48 $ .54 $ .24 $ .18
---------- ---------- ---------- ---------- ----------
Weighted Average Shares of Common Stock
Outstanding 548,344 548,344 548,344 548,344 548,344
========== ========== ========== ========== ==========
See Accountants' Review Report and Accompanying Notes to the Financial Statements
</TABLE>
F-8
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Six Months Ended
Years Ended May 31, November 30,
1993 1994 1995 1994 1995
----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
3% Cumulative Preferred Stock - $1 Par
Value: 1,520,000 Shares Authorized,
1,520,000 Shares Issued and Outstanding $ 1,520,000 $ -- $ -- $ -- $ --
Redemption of Preferred Stock (Note 8) (1,520,000) -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance, End of Period -- -- -- -- --
----------- ----------- ----------- ----------- -----------
4% Cumulative, 15 Year Redeemable Preferred
Stock - $1 Par Value: 5,000,000 Shares
Authorized, 650,000 and 1,410,000 Shares Issued
and Outstanding (See Long Term Debt) (Note 7) -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Common Stock - $.01 Par Value: 1,000,000
Shares Authorized, 548,344 Shares
Issued and Outstanding 5,483 5,483 5,483 5,483 5,483
----------- ----------- ----------- ----------- -----------
Additional Paid in Capital - Beginning of Period 2,204,262 2,194,602 2,385,601 2,385,601 2,576,601
Private Placement Costs (Note 12) (9,660) -- -- -- --
Amortization of Restricted Capital (Note 8) -- 190,999 191,000 95,500 95,501
----------- ----------- ----------- ----------- -----------
Additional Paid in Capital - End of Period 2,194,602 2,385,601 2,576,601 2,481,101 2,672,102
----------- ----------- ----------- ----------- -----------
Retained Earnings
Balance, Beginning of Period 11,164 14,435 15,944 15,944 13,660
Net Income 358,276 290,715 338,916 166,190 178,550
Dividends Paid and Accrued (355,005) (289,206) (341,200) (144,603) (126,903)
----------- ----------- ----------- ----------- -----------
Balance, End of Period 14,435 15,944 13,660 37,531 65,307
----------- ----------- ----------- ----------- -----------
Restricted Capital
Gain on Redemption of 3% Preferred Stock 954,997 954,997 763,998 763,998 572,998
Amortization of Gain -- (190,999) (191,000) (95,500) (95,499)
----------- ----------- ----------- ----------- -----------
Balance, End of Period (Note 8) 954,997 763,998 572,998 668,498 477,499
----------- ----------- ----------- ----------- -----------
Total Stockholders' Equity $ 3,169,517 $ 3,171,026 $ 3,168,742 $ 3,192,613 $ 3,220,391
=========== =========== =========== =========== ===========
</TABLE>
See Accountants' Review Report and Accompanying Notes
to the Financial Statements
F-9
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
Years Ended May 31, November 30,
1993 1994 1995 1994 1995
----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES:
Net Income $ 358,276 $ 290,715 $ 338,916 $ 166,190 $ 178,550
Depreciation and Amortization Expense 4,551 5,605 5,999 2,870 4,353
Provision for Losses on Loans Receivable 86,456 78,161 2,399 11,880 --
Decrease (Increase) in Accrued Interest 34,362 31,540 15,015 15,334 (18,416)
Decrease (Increase) in Other Assets (22,850) (8,346) (195,878) (162,959) (40,409)
Increase (Decrease) in Accrued Liabilities 390,230 (201,386) (20,113) 149,485 (6,450)
Dividends Paid and Accrued (355,005) (289,206) (341,200) (289,206) (225,604)
----------- ----------- ----------- ----------- -----------
Net Cash Provided (Used) by Operating Activities 496,020 (92,917) (194,862) (106,406) (107,976)
----------- ----------- ----------- ----------- -----------
CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES:
Increase in Loans Receivable (3,661,105) (3,179,900) (3,626,250) (2,178,000) (2,244,750)
Repayment of Loans Receivable 3,841,014 3,497,946 3,259,799 1,776,116 490,760
Increase in Loan Participations 169,500 66,000 125,000 50,000 1,342,500
Repayment of Loan Participations (587,548) (180,689) (164,434) (101,967) (9,330)
Increase in Fixed Assets -- (1,475) (2,578) (1,945) (21,592)
Decrease (Increase) in Assets Acquired in Liquidation (1,900) (167,510) 148,287 166,085 --
----------- ----------- ----------- ----------- -----------
Net Cash Provided (Used) by Investing Activities (240,039) 34,372 (260,176) (289,711) (442,412)
----------- ----------- ----------- ----------- -----------
CASH FLOWS (USED) PROVIDED BY FINANCING ACTIVITIES:
Redemption of 3% Preferred Stock (1,520,000) -- -- -- --
Increase (Decrease) in Line of Credit (1,538,700) (300,000) (29,488) (29,488) --
Private Placement Costs (9,660) -- -- -- --
(Decrease) Increase in Restricted Capital 954,997 (190,999) (191,000) (95,500) (95,499)
Increase in Debenture Payable to SBA 1,300,000 -- -- -- 20,000
Repayment of Subscription Deposits (6,314) -- -- -- --
Sale of 4% Preferred Stock 650,000 -- 760,000 760,000 --
Increase in Additional Paid in Capital -- 190,999 191,000 95,500 95,501
----------- ----------- ----------- ----------- -----------
Net Cash (Used) Provided by Financing Activities (169,677) (300,000) 730,512 730,512 20,002
----------- ----------- ----------- ----------- -----------
Net Increase (Decrease) in Cash 86,304 (358,545) 275,474 334,395 (530,386)
Cash Balance - Beginning of Period 742,126 828,430 469,885 469,885 745,359
----------- ----------- ----------- ----------- -----------
Cash Balance - End of Period $ 828,430 $ 469,885 $ 745,359 $ 804,280 $ 214,973
=========== =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Interest $ 300,832 $ 274,258 $ 312,142 $ 145,370 $ 160,555
=========== =========== =========== =========== ===========
Taxes $ 729 $ 935 $ 1,836 $ 1,743 $ 1,433
=========== =========== =========== =========== ===========
</TABLE>
See Accountants' Review Report and Accompanying Notes
to the Financial Statements
F-10
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1993, 1994 AND 1995
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED NOVEMBER 30, 1994 AND 1995)
NOTE 1 ORGANIZATION
Freshstart Venture Capital Corp., a New York corporation (the
"Company"), was formed on March 4, 1982 for the purpose of operating as
a specialized small business investment company ("SSBIC"), licensed
under the Small Business Investment Company Act of 1958 and regulated
and financed in part by the U.S. Small Business Administration ("SBA").
The Company has also registered as an investment company under the
Investment Company Act of 1940. The Company's business is to provide
financing to persons who qualify under SBA regulations as socially or
economically disadvantaged and to entities which are at least fifty
(50%) percent owned by such individuals.
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies applied by
the Company in the preparation of its financial statements. The Company
maintains its accounts and prepares its financial statements on the
accrual basis of accounting in conformity with generally accepted
accounting principles for investment companies.
Valuation of Loans and Investments
The Board of Directors has valued the investment portfolio based upon
the cost of such investments, less a provision for loan losses. However,
because of the inherent uncertainty of the valuation, the estimated
values might otherwise be significantly higher or lower than values that
would exist in a ready market for such loans, which market has not in
the past and does not now exist. The provision for loan losses
represents a good faith determination by the Board of Directors
maintained at a level that, in its judgment, is adequate to absorb
losses. The balance in the reserve account is adjusted periodically by
the Board of Directors on the basis of the fair value of the collateral
held and past loss experience. Approximately seventy four percent (74%)
of the Company's loan portfolio consists of loans made for the financing
of taxicab medallions and related assets. The remaining portion of the
loans are made to various small commercial enterprises. Substantially
all loans are collateralized by either NYC taxi medallions or real
estate and the personal guarantees of the individual owners.
Depreciation and Amortization
Depreciation and amortization of furniture, fixtures and leasehold
improvements is computed on the straight line method at rates adequate
to allocate the costs of applicable assets over their expected useful
lives.
Recognition of Interest Income
It is the Company's policy to record interest on loans and debt
securities only to the extent that management and the Board of Directors
anticipate such amounts may be collected. Interest on doubtful accounts
and accounts which are 180 days past due is not recorded until actually
received.
Income Taxes
The Company has elected to be taxed as a regulated investment company
under the Internal Revenue Code. A regulated investment company can
generally avoid taxation at the corporate level to the extent that
ninety percent (90%) of its income is distributed to its stockholders.
Therefore, no provision for federal income taxes has been made. The
financial statements include provisions for New York State and local
minimum taxes.
F-11
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1993, 1994 AND 1995
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED NOVEMBER 30, 1994 AND 1995)
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Earnings Per Share
Earnings per share are based on a weighted average number of shares
outstanding during the period, less accrued dividends on cumulative
preferred stock.
Assets Acquired in Liquidation of Portfolio Securities
Assets acquired in liquidation of portfolio securities are carried at
estimated net realizable value. Expenses incurred at the time of
foreclosure are charged against the assets and adjusted to the estimated
net realizable value. Subsequent reductions in estimated net realizable
value are recorded as losses.
Recently Issued Accounting Standards
Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for impairment of a Loan" ("SFAS 114") was issued in May 1993
and is effective for fiscal years beginning after December 15, 1994.
SFAS 114 generally requires all creditors to account for impaired loans,
except those loans that are accounted for at fair value or at the lower
of cost or fair value, at the present value of expected future cash
flows discounted at the loan's effective interest rate. As is expedient,
creditors may account for impaired loans at the fair value of the
collateral or at the observable market price of the loan if one exists.
Due to the nature of the Company's loan portfolio, SFAS 114 is not
expected to have a material effect on the Company's financial condition
or results of operations.
Other
Certain information from the prior years has been reclassified to
conform its presentation to the current financial statements.
NOTE 3 LOANS RECEIVABLE
The Company's loan portfolio includes participations with other lenders
as presented in the following schedule. The following is a breakdown of
the outstanding loans receivable:
<TABLE>
<CAPTION>
May 31, November 30,
1994 1995 1994 1995
----------------------------------- ------------------------------------
(unaudited)
<S> <C> <C> <C> <C>
Outstanding Loans $ 8,282,961 $ 8,649,412 $ 8,658,279 $ 10,403,402
Loan Participations (375,804) (336,370) (323,837) (1,669,540)
------------ ------------ ------------ ------------
Net Loans Outstanding $ 7,907,157 $ 8,313,042 $ 8,334,442 $ 8,733,862
============ ============ ============ ============
</TABLE>
F-12
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1993, 1994 AND 1995
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED NOVEMBER 30, 1994 AND 1995)
NOTE 3 LOANS RECEIVABLE
(Continued)
Loans on non-accrual status as of November 31, 1994 and 1995, and were
approximately $918,706 and $1,021,419, respectively. Additionally, the
total amount of interest income not accrued was $417,018 and $398,343
during the years ended May 31, 1994 and 1995, and $346,982 and $478,847
during the six month periods ended November 30, 1994 and 1995,
respectively.
NOTE 4 ASSETS ACQUIRED IN LIQUIDATION OF PORTFOLIO SECURITIES
The Company foreclosed on two loans during the fiscal years ended May
31, 1994 and 1993. Both loans are collateralized by real estate. The
Company's cost of the loans plus costs to obtain title to such
properties is included in the carrying value of the assets acquired in
liquidation. The Board of Directors has determined that the fair market
value of the assets acquired in liquidation is equal to the cost, and
therefore a provision for loss is not required.
NOTE 5 LOAN PAYABLE - LINE OF CREDIT
Effective October 23, 1992, the Company established a $1,500,000 line of
credit with Extebank. On January 15, 1995, the Company entered into a
new agreement with Extebank providing for a $1,100,000 discretionary
line of credit without any officer guarantees, expiring December 15,
1995. All advances bear interest at .5% above the prime rate. Pursuant
to the terms of the line of credit, the Company is required to comply
with certain terms, covenants and conditions. The Company pledged its
loans receivable as collateral for the above line of credit and is
required to maintain a minimum of $100,000 non-interest bearing
collected balance with Extebank during the term of the line of credit.
The balance outstanding as of May 31, 1995, November 30, 1994 and 1995
was $5,000. The Company did not renew the line of credit.
F-13
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1993, 1994 AND 1995
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED NOVEMBER 30, 1994 AND 1995)
NOTE 6 LONG TERM DEBT
The long term debt to the SBA consisted of the following subordinated
debentures for all periods presented with interest payable
semi-annually:
Interest Rate
Period
Maturity Date First Second Face Amount
------------- ----- ------ -----------
Dec. 5, 1995 8.125% 11.125% $ 500,000
May 14, 1996 4.375% 7.375% 120,000
May 14, 1996 4.375% 7.375% 120,000
Feb. 6, 1997 4.125% 7.125% 75,000
Feb. 6, 1997 4.125% 7.125% 75,000
March 17, 1998 5.625% 8.625% 75,000
March 17, 1998 5.625% 8.625% 75,000
Sept. 22, 1999 5.000% 8.000% 750,000
June 9, 1999 6.000% 9.000% 750,000
Dec. 1, 2002 4.510% 7.510% 1,300,000
June 1, 2005 6.690% 6.690% 520,000
----------
$4,360,000
==========
Effective June 28, 1995, the Company paid off a $500,000 subordinated
debenture due June 20, 1995 through the sale of a $520,000 unsubsidized
subordinated debenture, due June 1, 2005 with interest at 6.69 percent.
Under the terms of the subordinated debentures, the Company may not
repurchase or retire any of its capital stock or make any distributions
to its stockholders other than dividends out of retained earnings
without the prior written approval of the SBA.
NOTE 7 PREFERRED STOCK
As of May 31, 1992, the Company was authorized to issue 4,000,000 shares
of $1 par value, 3% cumulative preferred stock. Dividends are not
required to be paid to the SBA on an annual or other periodic basis, so
long as cumulative dividends are paid to the SBA before any other
distributions are made to investors. Effective November 21, 1989,
Congress passed legislation which required all preferred stock sold
subsequent to the effective date to pay a four percent cumulative
dividend and to provide for a mandatory fifteen year redemption.
Subsequently, the Company amended its certificate of incorporation
creating a Class A Preferred Stock, $1 par value, which consisted of the
1,520,000 outstanding shares of preferred stock and to change the
existing 2,480,000 authorized but unissued shares of preferred stock
into a new Class B Preferred Stock, $1 par value, which will carry a
four percent cumulative dividend rate and a mandatory fifteen year
redemption.
F-14
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1993, 1994 AND 1995
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED NOVEMBER 30, 1994 AND 1995)
NOTE 7 PREFERRED STOCK
(Continued)
All preferred shares are restricted solely for issuance to the SBA.
Effective November 1994, the Company amended its certificate of
incorporation authorizing an additional 1,000,000 shares of four percent
preferred stock and reclassifying all 1,520,000 authorized and unissued
shares of 3% preferred stock as 4% preferred stock. The effect of this
amendment authorized 5,000,000 shares of 4% cumulative preferred stock.
Effective October 13, 1994 and July 11, 1992, the Company sold 760,000
and 650,000 shares, respectively, of its $1 par value, 4% cumulative, 15
year redeemable preferred stock to the SBA for $760,000 and $650,000,
respectively.
NOTE 8 RESTRICTED CAPITAL - UNREALIZED GAIN ON REDEMPTION
Repurchase of 3% Preferred Stock
The Company and the SBA entered into a repurchase agreement dated May
10, 1993. Pursuant to the agreement, the Company repurchased all
1,520,000 shares of its $1 par value, 3% cumulative preferred stock from
the SBA for a purchase price of $.36225679 per share, or an aggregate of
$550,630. The repurchase price was at a substantial discount to the
original sale price of the 3% preferred stock which was sold to the SBA
at par value or $1.00 per share.
As a condition precedent to the repurchase, the Company granted the SBA
a liquidating interest in a newly created restricted capital surplus
account. The surplus account is equal to the amount of the repurchase
discount less expenses associated with the repurchase. The initial value
of the liquidating interest was equal to $969,370, the amount of the
repurchase discount on the date of repurchase, less $14,373 of expenses
incurred in connection with the repurchase, and is being amortized over
a sixty (60) month period on a straight-line basis. Should the Company
be in default under the repurchase agreement at any time, the
liquidating interest will become fixed at the level immediately
preceding the event of default and will not decline further until such
time as the default is cured or waived. The liquidating interest will
expire on the later of (i) sixty (60) months from the date of the
repurchase agreement, or (ii) if any event of default has occurred and
such default has been cured or waived, such later date on which the
liquidating interest is fully amortized. Should the Company voluntarily
or involuntarily liquidate prior to the amortization of the liquidating
interest, any assets which are available, after the payment of all debts
of the Company, shall be distributed first to the SBA until the amount
of the then remaining liquidating interest has been distributed to the
SBA. Such payment, if any, would be prior in right to any payments made
to the Company's shareholders.
NOTE 9 DIVIDENDS
Dividends paid to the SBA for each of the fiscal years ended May 31,
1994 and 1995 was $26,000 and $45,092, respectively. Total dividends
paid to common stockholders for the fiscal years ended May 31, 1994 and
1995 were $263,206 and $296,108, respectively. The Company is
contingently liable to the SBA for $14,100 in preferred dividends due
for the three months ended November 30, 1995. Effective December 31,
1995, and for the seven month period then ended, the Board of Directors
declared a three percent dividend to holders of common stock totaling
$98,702. This dividend was paid in January 1996.
F-15
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1993, 1994 AND 1995
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED NOVEMBER 30, 1994 AND 1995)
NOTE 10 MONEY PURCHASE PLAN
Effective for the fiscal year ending May 31, 1989 the Company initiated
a defined contribution pension plan. The eligibility requirements for
participation in the plan are a minimum age of 21 years old and 24
months of continuous employment with the Company. All employees and
officers were covered under the plan for the fiscal year ended May 31,
1995. Contributions are currently limited to ten percent of each
participant's compensation. Total contributions made for the fiscal
years ended May 31, 1993, 1994, and 1995 were $18,311, $18,073 and
$17,942, respectively. Total contributions provided for the six months
ended November 30, 1994 and 1995 were $8,591 and $8,921, respectively.
All contributions to the plan have been funded on a current basis.
NOTE 11 MANAGEMENT FEES
The SBA approved the Company's total compensation of $225,000.
Compensation is inclusive of officers' and staff salaries and pension
contributions.
NOTE 12 STOCKHOLDERS' EQUITY - PRIVATE PLACEMENT
Effective April 21, 1992, pursuant to a private placement, the Company
sold 56,304 shares of common stock at a price of $12 per share to
accredited investors. Total capital raised was $675,648 less private
placement costs of $16,274, including $9,660 paid during the six months
ended November 30, 1992. Substantially all of the proceeds were used to
repurchase the 1,520,000 shares of its $1 par value, 3% Preferred Stock
held by the SBA and to make additional investments. The net proceeds
received also enable the Company to obtain additional leverage from the
SBA in the form of preferred stock and debentures.
Pursuant to SBA regulations, all SSBICs issuing debentures subsequent to
April 25, 1994 were required to amend their certificates of
incorporation to indicate that they have consented, in advance, to the
SBA's right to require the removal of officers or directors and to the
appointment of the SBA or its designee to take such action in the event
of the occurrence of certain events of default. Effective November 1994,
the Company amended its certificate of incorporation in accordance with
the relevant provisions of the SBA regulations.
The Stockholders' Equity section of the financial statements is
presented after giving effect to an amendment to the certificate of
incorporation occurring in November 1994.
NOTE 13 RELATED PARTY TRANSACTIONS
The Company currently leases office space from a real estate
partnership, whose partners consist of certain officers and directors of
the Company, for $1,500 per month plus certain extraordinary operating
expenses. The lease expires in November 1997 with a minimum annual
rental of $18,000. Total rental expense under this lease was $19,500,
$26,700 and $18,000 for the years ended May 31, 1993, 1994 and 1995,
respectively.
Certain officers and directors of the Company are also shareholders of
the Company. Officers' salaries are set by the Board of Directors and
are also subject to maximum compensation set by the SBA. For each of the
fiscal years ended May 31, 1993, 1994 and 1995, $159,661 in officers'
salaries, including pension contributions, were paid.
F-16
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1993, 1994 AND 1995
(UNAUDITED WITH RESPECT TO THE SIX MONTHS ENDED NOVEMBER 30, 1994 AND 1995)
NOTE 14 SIGNIFICANT CONCENTRATION OF CREDIT RISK
Approximately seventy four percent (74%) of the Company's loan portfolio
consists of loans made for the financing and purchase of New York City
taxicab medallions and related assets.
NOTE 15 FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISKS
As of November 30, 1995 the Company maintained approximately $96,686 in
one bank in excess of amounts that would be insured by the Federal
Depository Insurance Corporation.
NOTE 16 SUBSEQUENT EVENTS
The Company filed a registration statement with the Securities and
Exchange Commission to sell up to 1,700,000 shares of common stock, at a
public offering price of $7.15 per common share, for an aggregate
offering price of $12,155,000.
On January 12, 1996 the Company filed an amendment to its certificate of
incorporation which increased the number of authorized shares to
13,000,000 shares of capital stock consisting of 10,000,000 shares of $1
par value, 4% cumulative, 15 year redeemable preferred stock and
3,000,000 shares of $.01 par value, common shares.
The amended certificate of incorporation also provided for a 2 for 1
stock split with respect to the Company's shares of common stock, $.01
par value per share, for two shares of common stock, $.01 par value per
share. The effect of the amendment was to increase the 274,172 issued
and outstanding shares of common stock to 548,344 shares. The financial
statements are presented after giving effect to these changes.
On December 14, 1995, the Company paid off a $500,000 subordinated
debenture due December 5, 1995 through the sale of a $520,000
unsubsidized subordinated debenture due December 1, 2005, with interest
at 6.54%.
NOTE 17 COMMITMENTS AND CONTINGENCIES
Minimum future lease obligations on the Company's long term
non-cancelable operating lease will total $36,000 over the remaining
twenty-four (24) months of the lease term ending November 1997.
F-17
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
SUPPLEMENTAL SCHEDULES
NOVEMBER 30, 1995
SCHEDULE I - LOANS RECEIVABLE
<TABLE>
<CAPTION>
Balance
Number of Outstanding
Type of Loan Loans Interest Rate Maturity Date November 30, 1995
- ------------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C>
NYC Taxi Medallion 145 10.00%-15.00% 1-7 years $6,464,901
Services 1 14.50%-15.00% 1-7 years 95,000
Auto Repair Service 9 10.00%-15.00% 1-4 years 701,113
Auto Dealership 1 12.00% 1 year 72,434
Renovation and Construction 1 10.50% 5 years 134,852
Retail Establishment 4 11.25%-15.50% 1-4 years 316,757
Restaurant 3 9.00%-15.00% 1 year 250,205
Gasoline Service Station 3 9.375%-10.00% 1 year 307,317
Manufacturing 1 15.00% 1 year 151,572
Laundromat and Dry Cleaners 3 12.00%-15.00% 1-4 years 100,141
Medical Offices 2 11.63%-15.00% 1-3 years 119,005
Video Rental 1 14.00% 6 years 20,565
--- ----------
TOTAL 174 $8,733,862
=== ==========
</TABLE>
Substantially all of the above loans are collateralized by either New York City
taxi medallions or real estate holdings.
SCHEDULE VII - SHORT TERM BORROWINGS
Short term borrowing activities for the periods presented were as follows:
Weighted
Average Maximum Amount Average Amount
Category of Balance End Interest Outstanding Outstanding
Borrowing of Period Rate During Period During Period (1)
- --------- --------- ---- ------------- -----------------
May 31, 1993 $334,488 7.63% $2,650,000 $951,800
May 31, 1994 $ 34,488 7.63% $ 634,489 280,322
May 31, 1995 $ 5,000 9.45% $ 34,489 17,361
November 30, 1994 $ 5,000 9.11% $ 34,489 29,574
November 30, 1995 $ 5,000 9.31% $ 205,000 25,879
(1) Computed based on weighted average of amount outstanding during the period.
F-18
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
SUPPLEMENTARY INFORMATION
SELECTED PER SHARE DATA AND RATIOS
AND THE FIVE YEARS ENDED MAY 31, 1991, 1992, 1993, 1994 AND 1995
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1994 AND 1995
<TABLE>
<CAPTION>
For the Six Months Ended
For the Five Years Ended May 31, November 30,
-------------------------------- ------------
(unaudited)
1991 1992 1993 1994 1995 1994 1995
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Data
Investment Income $ 3.17 $ 2.55 $ 2.01 $ 1.90 $ 1.83 $ .93 $ .91
Investment Expenses (2.14) (1.82) (1.20) (1.23) (1.21) (.61) (.59)
-------- -------- -------- -------- -------- -------- --------
Net Investment Income 1.03 .73 .81 .67 .62 .32 .32
Net Realized and Unrealized Gains
and Losses on Securities (.12) (.29) (.15) (.14) -- (.02) --
Private Placement Costs -- -- (.02) -- -- -- --
Gain on Preferred Stock Buy Back -- -- .61 -- -- -- --
Dividends - Common Stock (.78) (.35) (.60) (.48) (.54) (.24) (.18)
Dividends - Preferred Stock (.12) (.05) (.05) (.05) (.08) (.02) (.05)
Sale of Common Stock -- 1.24 -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net Increase/Decrease
in Net Asset Value .01 1.28 .60 -- -- .04 .09
Net Asset Value - Beginning of Period 3.89 3.90 5.18 5.78 5.78 5.78 5.78
-------- -------- -------- -------- -------- -------- --------
Net Asset Value - End of Year $ 3.90 $ 5.18 $ 5.78(1) $ 5.78(1) $ 5.78(1) $ 5.82(1) $ 5.87(1)
======== ======== ======== ======== ======== ======== ========
Net Asset Value - End of Year
Excluding Retained Earnings (2) $ 3.91 $ 5.75 $ 5.75(1) $ 5.75(1) $ 5.75(1) $ 5.75(1) $ 5.75(1)
======== ======== ======== ======== ======== ======== ========
Ratios
Ratio of Expenses to
Average Net Assets 54.9% 45.8% 24.3% 21.3% 20.9% 10.5% 10.2%
======== ======== ======== ======== ======== ======== ========
Ratio of Net Income to Average
Net Assets 11.7% 5.6% 10.4% 9.3% 10.6% 5.6% 5.6%
======== ======== ======== ======== ======== ======== ========
Weighted Average of Common Shares
Outstanding 394,000 428,866 548,344 548,344 548,344 548,344 548,344
======== ======== ======== ======== ======== ======== ========
</TABLE>
(1) The net asset value includes the unamortized portion of the realized gain
from the repurchase of the three (3%) percent preferred stock and the
undistributed retained earnings at the end of the period. The unamortized
balance remaining in the restricted capital account as of November 30, 1995 was
$477,499.
(2) Excluded undistributed retained earnings at the end of the period.
F-19
<PAGE>
SUBSCRIPTION AND TAX QUALIFICATION PAGE
FRESHSTART VENTURE CAPITAL CORP.
Investment must be made through a participating NASD Broker/Dealer by
confirmation or by subscription utilizing this application. By signature below,
the undersigned investor subscribes for and agrees to purchase shares of Common
Stock, par value $.01 per share ("Common Stock"), of the Company as provided
below at a price of $7.15 per share, such subscription being tendered pursuant
to the prospectus to which this page is attached (the "Prospectus"). This
subscription is subject to the terms and conditions discussed in the Prospectus
and on the reverse side hereof.
ESCROW
Payments pursuant hereto shall be placed in an escrow account with The
Merchants Bank of New York, 434 Broadway, New York, New York 10013, to be
returned to the investor without interest or expense if (i) this subscription
has not been accepted or is subsequently rejected by the Company or (ii) less
than 700,000 shares of Common Stock are subscribed by the date of closing of the
subscription period as specified in the Prospectus or as extended pursuant
thereto. Costs of escrow and any interest on escrowed funds will accrue to the
Company. At the time of the Closing, all subscription funds tendered, along with
interest thereon, shall be released to the general account of the Company in
accordance with the terms of the offering of the Common Stock contemplated by
the Prospectus. If the investor is allocated less than the full amount of shares
subscribed, any overpayment of funds shall be promptly refunded, without
interest.
TERMS AND CONDITIONS OF SUBSCRIPTION AGREEMENT
ACCEPTANCE OR REJECTION
The Company, in its sole discretion and for any reason, shall have the
right to accept or reject this subscription in whole or in part. The investor
hereby agrees that the investor is not entitled to cancel, terminate or revoke
this subscription except as otherwise required under applicable law, and that
such subscription and agreement shall survive the death or disability of the
investor.
OFFERING INFORMATION
The investor acknowledges the investor's receipt and review of the
Prospectus; that the offering was made only through direct communication between
the investor and a duly authorized representative of the Company; that the
investor has been offered and has obtained all further information desired to
verify or supplement the information contained in the Prospectus; and that the
investor has been advised by the Company that a purchaser of the shares of
Common Stock must be prepared to bear the risk of such investment for an
indefinite time because, among other things, of the possible illiquidity of the
offering and the lack of a prior market. The investor also acknowledges that no
person except the officers of the Company and its duly authorized selling agents
have been authorized to make any representations on behalf of the Company
relating to this offering other than as set forth in the Prospectus and, if
given or made, such representations must not be relied upon.
SUITABILITY REQUIREMENTS
The investor represents that the shares of Common Stock are being
purchased solely for investment purposes and that the investor understands the
risk factors discussed in the Prospectus. The investor (if an individual) is of
majority age and under no disability with respect to entering into the
Subscription Agreement. Based on the investor's investment expertise gained
through experience, education, consultation with qualified advisors, or a
combination thereof, the investor believes that the investment being made hereby
is suitable in view of the investor's financial situation and investment
objectives. In addition, the investor understands that no federal or state
agency has made any finding or determination as to the fairness of an investment
in the shares of Common Stock by the public at large or any recommendations or
endorsement of such shares. The investor, if acting herein in a fiduciary
capacity, represents that the representations and warranties herein contained
are true and correct as to the investor's principals, that the investor has full
and complete authority to execute this Agreement on behalf of all parties whom
it purports to represent and to bind them to the terms hereof. If the investor
is acting on behalf of an entity, such entity was not organized for the specific
purpose of acquiring the shares of Common Stock. The investor agrees, to the
fullest extent permitted by law, to indemnify and hold the Company and the
officers, directors, agents and representatives of the Company harmless from all
loss, damage, liability, cost or expense (including attorneys' fees and court
costs) arising out of any misrepresentation or warranty of the investor
contained herein.
<PAGE>
================================================================================
The investor authorizes the Company to pay all commissions and fees due
hereunder to the named Broker/Dealer.
================================================================================
NEW YORK LAW
THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE
LAWS OF THE STATE OF NEW YORK, EXCLUDING MATTERS ARISING UNDER STATE AND FEDERAL
SECURITIES LAWS, WITHOUT REGARD TO PRINCIPLES RELATING TO THE CONFLICTS OF LAWS.
<PAGE>
Number of Shares purchased hereby_______________________________________________
Purchase price for Shares (at $7.15 per Share) included herewith $______________
Make Check Payable to
THE MERCHANTS BANK OF NEW YORK, AS AGENT FOR FRESHSTART VENTURE CAPITAL CORP.
Forward Check and this Signed Tax Qualification and Subscription Page to
The Merchants Bank of New York
434 Broadway
New York, New York 10013
Indicate Manner of Ownership
Individual / / Separate Property / / Joint Tenants / /
Community / / Partnership / / Corporation / /
"S" Corp. / / Trust / / Other / / (describe):______
________________________________________________________________________________
________________________________________________________________________________
Enter
Social Security Number___ ___ ____ or Tax Identification Number____ ____________
Print Names in Which shares of Common Stock are to be Registered
For Individual(s),
Print Names Here________________________________________________________________
First M.I. Last Name
For Trust, Print Trust Name here________________________________________________
For Corporation or Other
Business, Print Name here_______________________________________________________
ADDITIONAL SUBSCRIPTION INFORMATION-PLEASE PRINT
Registered Stockholder's Address
Residency Address
City_____________________________State________________________Zip_______________
Additional Address For Stockholder Communications
Mail Address
City_____________________________State________________________Zip_______________
Office Phone( ) Home Phone( ) Fax( )
<PAGE>
Advisor's Address (CPA, Attorney, CFP, RIA)
Name and Firm___________________________________________________________________
Mail Address:
City_____________________________State________________________Zip_______________
Office Phone( ) Home Phone( ) Fax( )
- --------------------------------------------------------------------------------
INFORMATION TO BE COMPLETED BY ACCOUNT EXECUTIVE-PLEASE PRINT
- --------------------------------------------------------------------------------
Broker Dealer Firm
- --------------------------------------------------------------------------------
Branch Office Name Manager Name
- --------------------------------------------------------------------------------
Account Executive
Name Signature
- --------------------------------------------------------------------------------
Office Address
Street Address
City State Zip
- --------------------------------------------------------------------------------
Office Phone( ) Home Phone( )
- --------------------------------------------------------------------------------
Signature
I certify that (1) the Taxpayer ID number is correct as shown and (2) I am not
subject to backup withholding as a result of failure to report all interest or
dividends, or the Internal Revenue Service has notified me I am no longer
subject to withholding under Section 3406(a)(1)(C) of the Internal Revenue Code
of 1986, as amended.
Dated_______________________Signature___________________________________________
Dated_______________________Signature___________________________________________
<PAGE>
================================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representation other than those contained in this
Prospectus in connection with the offer made by this Prospectus, and if given or
made, such information or representations must not be relied upon as having been
authorized by the Company or the Dealer Manager. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that there has been no change in the affairs of the Company at
any time subsequent to the date hereof. However, if any material change occurs
while this Prospectus is required by law to be delivered, this Prospectus will
be amended or supplemented accordingly. This Prospectus does not constitute an
offer to sell or a solicitation of an offer to buy by anyone in any jurisdiction
in which such offer to sell or a solicitation is not authorized, or in which the
person making such offer or solicitation is not authorized, or in which the
person making such offer or solicitation is not qualified to do so, or to any
person to whom it is unlawful to make such offer or solicitation.
----------
TABLE OF CONTENTS
Page
----
Prospectus Summary ..................................................... 3
Risk Factors ........................................................... 7
Use of Proceeds ........................................................ 11
Capitalization ......................................................... 12
Dividend Policy ........................................................ 13
Dilution ............................................................... 14
Business ............................................................... 15
Management ............................................................. 24
Conflicts of Interests ................................................. 26
Certain Transactions ................................................... 26
Security Ownership of Principal Stockholders
and Management ..................................................... 28
Investment Policies .................................................... 29
Federal Regulation ..................................................... 30
Tax Considerations ..................................................... 34
Description of Capital Stock and Long-Term
Debt ............................................................... 37
Plan of Distribution ................................................... 38
Legal Matters .......................................................... 39
Experts ................................................................ 39
Custodian .............................................................. 39
Additional Information ................................................. 40
Index to Financial Statements .......................................... F-1
Until 25 days after the Closing, all dealers effecting transactions in the
registered securities, whether or not participating in this distribution, may be
required to deliver a Prospectus. This is in addition to the obligation of
dealers to deliver a Prospectus when acting as underwriters and with respect to
their unsold allotments or subscriptions.
================================================================================
================================================================================
Freshstart
Venture Capital Corp.
----------
1,700,000 Shares
Common Stock
----------
PROSPECTUS
----------
RAS Securities Corp.
March 28, 1996
================================================================================
<PAGE>
PART III.
Item 29. Marketing Arrangements.
Incorporated by reference to the inside cover page of the Prospectus
and to the text of the Prospectus under the caption "PLAN OF DISTRIBUTION".
Item 30. Other Expenses of Issuance and Distribution.
The estimated expenses in connection with the issuance and distribution
of the securities being registered, other than underwriting discounts and
commissions, are as follows:
SEC Registration Fee ........................... $ 4,191.38
Legal fees and expenses ........................ 250,000.00
Accounting fees and expenses ................... 40,000.00
Blue Sky fees and expenses ..................... 45,000.00
Transfer Agent's fees .......................... 7,500.00
Printing expenses .............................. 75,000.00
Miscellaneous .................................. 13,308.62
------------
Total ................................... $ 435,000.00
============
Item 31. Relationship with Registrant of Experts Named in Registration
Statement.
None.
Item 32. Recent Sales of Unregistered Securities.
In May 1992, the Company sold 56,304 shares of its Common Stock at $12
per share, an aggregate of $675,648 in a private placement pursuant to Rule 506
of Regulation D promulgated under the Securities Act of 1933, as amended (the
"Securities Act"). Such sales were made to "accredited investors" as that term
is defined under Rule 501(a) of Regulation D. Offers and sales were made by the
officers and directors of the Company. No commissions were paid in connection
with the sales.
In July 1992, the Company sold 650,000 shares of its 4% preferred
stock, $1 par value, to the SBA for an aggregate of $650,000 pursuant to Section
4(2) of the Securities Act.
In December 1992, the Company sold $1,300,000 of subordinated
debentures which were guaranteed by the SBA and sold through the SBIC Funding
Corp. pursuant to Section 4(2) of the Securities Act.
In October 1994, the Company sold 760,000 shares of its 4% preferred
stock, $1 par value, to the SBA for an aggregate of $760,000 pursuant to Section
4(2) of the Securities Act.
In June 1995, the Company refinanced a debenture due June 20, 1995 in
the principal amount of $500,000 with a debenture due June 1, 2005 in the
principal amount of $520,000.
In December 1995, the Company refinanced a debenture due December 15,
1995 in the principal amount of $500,000 with a debenture due December 1, 2005
in the principal amount of $520,000.
Item 33. Treatment of Proceeds from Stock Being Registered.
Not applicable.
Item 34. Undertaking.
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
II-1
<PAGE>
Item 35. Financial Statements and Exhibits.
(a) Financial Statements.
Reference is made to "FINANCIAL STATEMENTS" included in Part II of the
Registration Statement.
(b) Exhibits.
Exhibits Page
- -------- ----
(1.1)* Certificate of Incorporation of Registration, as amended
through November 24, 1987 (Exhibit 1 to Amendment No. 2 to
Registrant's Registration Statement on Form N-5 filed January 5,
1988 (File No. 33-15890) are incorporated by reference herein.
(1.2)* Amendments to the Certificate of Incorporation of Registrant
from November 25, 1987 through May 11, 1993 (Exhibit 1.2 to
Registrant's Registration Statement on Form N-5 filed November
18, 1994 (File No. 33-86518)) are incorporated by reference
herein.
(1.3)* Amendment to Certificate of Incorporation of Registration filed
November 17, 1994.
(1.4)* Form of proposed Amendment to Certificate of Incorporation of
Registrant.
(2.1)* By-laws of Registrant, as amended.
(3.1)* Specimen of share of Common Stock, $.01 par value, of
Registrant.
(4) None.
(5) None.
(6) None.
(7.1)* Defined Contribution Plan of Registrant (Exhibit 7.1 to
Registrant's Registration Statement on Form N-5 filed November
18, 1994 (File No. 33-86518)) is incorporated by reference
herein.
(8.1)* Copy of Registrant's license from the Small Business
Administration (Exhibit 4.(a). to the Registrant's Registration
Statement on Form N-5 filed July 17, 1987 (File No. 33-15890)) is
incorporated by reference herein.
(9.1)* Letter of Intent dated as of December 1, 1992 by and between
Registrant and the U.S. Small Business Administration (Exhibit
9.1 to Registrant's Registration Statement on Form N-5 filed
November 18, 1994 (File No. 33-86518)) is incorporated by
reference herein.
(9.2)* Loan Agreement dated January 15, 1995 between Registrant and
Extebank.
(9.3)* Form of Employment Agreement to be entered into between the
Registrant and Zindel Zelmanovitch.
(9.4)* Form of Employment Agreement to be entered into between the
Registrant and Neil Greenbaum.
(9.5)* Lease dated October 1, 1994 by and between Registrant and 313
West 53rd Street Association.
(10.1)* Form of Underwriting Agreement with Soliciting Dealer
Agreement relating to the offering of shares.
(10.2)* Form of Origination Administration and Servicing Agreement by and
between Hayward Lake Capital Corp. and Freshstart Venture Capital Corp.
(10.3)* Form of Escrow Agreement by and between The Merchants Bank of New York
and Freshstart Venture Capital Corp.
(11.1)* Opinion of Stursberg & Veith as to the legality of the securities being
registered hereunder and the issuance thereof.
(12.1) Consent of Michael C. Finkelstein, Certified Public Accountants.
(13.1)* Code of Ethics of Registrant (Exhibit 8 to the Registrant's Registration
Statement on Form N-5 filed July 17, 1987 (File No. 33-15890)) is
incorporated by reference.
- ----------
* Previously filed or incorporated by reference.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the registrant has duly caused this
Post-Effective Amendment No. 1 and Amendment No. 5, respectively, to this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York, and State of New York, on the 27th day
of March 1996.
FRESHSTART VENTURE CAPITAL CORP.
(Registrant)
By: /s/ NEIL GREENBAUM
---------------------------------
Neil Greenbaum, Secretary
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ ZINDEL ZELMANOVITCH* President and Director March 27, 1996
- --------------------------------------
Zindel Zelmanovitch
/s/ PEARL GREENBAUM* Vice President and Director March 27, 1996
- --------------------------------------
Pearl Greenbaum
/s/ NEIL GREENBAUM Secretary and Director March 27, 1996
- --------------------------------------
Neil Greenbaum
/s/ BARBARA JOY HAMILL* Director March 27, 1996
- --------------------------------------
Barbara Joy Hamill
/s/ MICHAEL MOSKOWITZ* Director March 27, 1996
- --------------------------------------
Michael Moskowitz
/s/ FRED BRODSKY* Director March 27, 1996
- --------------------------------------
Fred Brodsky
/s/ PHILIP POLLACK* Director March 27, 1996
- --------------------------------------
Philip Pollack
/s/ ALAN WORK* Director March 27, 1996
- --------------------------------------
Alan Work
*By: /s/ NEIL GREENBAUM
- --------------------------------------
Neil Greenbaum, Attorney-In-Fact
</TABLE>
II-3
<PAGE>
EXHIBIT INDEX
Exhibits Page
- -------- ----
(1.1)* Certificate of Incorporation of Registration, as amended
through November 24, 1987 (Exhibit 1 to Amendment No. 2 to
Registrant's Registration Statement on Form N-5 filed January 5,
1988 (File No. 33-15890) are incorporated by reference herein.
(1.2)* Amendments to the Certificate of Incorporation of Registrant
from November 25, 1987 through May 11, 1993 (Exhibit 1.2 to
Registrant's Registration Statement on Form N-5 filed November
18, 1994 (File No. 33-86518)) are incorporated by reference
herein.
(1.3)* Amendment to Certificate of Incorporation of Registration filed
November 17, 1994.
(1.4)* Form of proposed Amendment to Certificate of Incorporation of
Registrant.
(2.1)* By-laws of Registrant, as amended.
(3.1)* Specimen of share of Common Stock, $.01 par value, of
Registrant.
(4) None.
(5) None.
(6) None.
(7.1)* Defined Contribution Plan of Registrant (Exhibit 7.1 to
Registrant's Registration Statement on Form N-5 filed November
18, 1994 (File No. 33-86518)) is incorporated by reference
herein.
(8.1)* Copy of Registrant's license from the Small Business
Administration (Exhibit 4.(a). to the Registrant's Registration
Statement on Form N-5 filed July 17, 1987 (File No. 33-15890)) is
incorporated by reference herein.
(9.1)* Letter of Intent dated as of December 1, 1992 by and between
Registrant and the U.S. Small Business Administration (Exhibit
9.1 to Registrant's Registration Statement on Form N-5 filed
November 18, 1994 (File No. 33-86518)) is incorporated by
reference herein.
(9.2)* Loan Agreement dated January 15, 1995 between Registrant and
Extebank.
(9.3)* Form of Employment Agreement to be entered into between the
Registrant and Zindel Zelmanovitch.
(9.4)* Form of Employment Agreement to be entered into between the
Registrant and Neil Greenbaum.
(9.5)* Lease dated October 1, 1994 by and between Registrant and 313
West 53rd Street Association.
(10.1)* Form of Underwriting Agreement with Soliciting Dealer
Agreement relating to the offering of shares.
(10.2)* Form of Origination Administration and Servicing Agreement by and
between Hayward Lake Capital Corp. and Freshstart Venture Capital Corp.
(10.3)* Form of Escrow Agreement by and between The Merchants Bank of New York
and Freshstart Venture Capital Corp.
(11.1)* Opinion of Stursberg & Veith as to the legality of the securities being
registered hereunder and the issuance thereof.
(12.1) Consent of Michael C. Finkelstein, Certified Public Accountants.
(13.1)* Code of Ethics of Registrant (Exhibit 8 to the Registrant's Registration
Statement on Form N-5 filed July 17, 1987 (File No. 33-15890)) is
incorporated by reference.
- ----------
* Previously filed or incorporated by reference.
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement of
Freshstart Venture Capital Corp. on Form N-5 of our report dated July 27, 1995
on our examinations for the years ended May 31, 1995, 1994 and 1993. We also
consent to the reference to our firm under the caption "Experts".
/s/ MICHAEL C. FINKELSTEIN
----------------------
MICHAEL C. FINKELSTEIN
Certified Public Accountant
New York, New York
March 28, 1996
