FRESHSTART VENTURE CAPITAL CORP.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 1997, 1996, AND 1995
TABLE OF CONTENTS
Page
Independent Auditors' Report F-3
Statements of Financial Position of
Freshstart Venture Capital Corp. as of
May 31, 1996 and 1997 F-4
Statements of Operations for the Years
Ended May 31, 1995, 1996 and 1997 F-6
Statements of Stockholders' Equity for the
Years Ended May 31, 1995, 1996 and 1997 F-7
Statements of Cash Flows for the Years
Ended May 31, 1995, 1996 and 1997 F-8
Notes to the Financial Statements F-9
Supplemental Schedules F-16
Selected Per Share Data and Ratios F-17
Board of Directors
Freshstart Venture Capital Corp.
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying Statements of financial
position of Freshstart Venture Capital Corp. (the "Company")
as of May 31, 1997 and 1996 and the related statements of
operations, stockholders' equity and cash flows for each of
the three years in the period ended May 31, 1997 and
selected per share data and ratios for each of the five
years in the period ended May 31, 1997. 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
$14,174,033 and $8,417,457 on May 31, 1997 and 1996,
respectively (195% and 265 % respectively of net assets),
whose values have been estimated by the Board of Directors
in absence of readily ascertainable market values.
We have reviewed the procedures used by the Board of
Directors in arriving at its estimate 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
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, 1997 and 1996 and the
results of its operations and its cash flows for the years
then ended in conformity with generally accepted accounting
principles.
New York, New York
July 16, 1997
Michael C. Finkelstein
Certified Public Accountant
F-3
FRESHSTART VENTURE CAPITAL CORP.
STATEMENTS OF FINANCIAL POSITION
ASSETS
<TABLE>
May 31,
1996 1997
<S> <C> <C>
Loans Receivable:
Long Term Portion (Notes 2 and 3) $ 8,598,015 $14,308,959
Less: Unrealized Depreciation
on Loans Receivable (Note 3) (180,558) (180,558)
------------ ------------
8,417,457 14,128,401
Less: Current Maturities -
Loans Receivable (1,178,444) (1,984,365)
------------ ------------
Total Loans Receivable -
Net of Current Maturities 7,239,013 12,144,036
------------- ------------
Assets Acquired in Liquidation of
Portfolio Securities (Note 4) - -
------------- ------------
CURRENT ASSETS
Cash (Note 15) 415,102 2,869,861
Accrued Interest (Notes 2 and 3) 92,946 127,974
Current Maturities-Loans Receivable 1,178,444 1,984,365
Prepaid Expenses and Other Assets 287,351 205,473
------------- ------------
Total Current Assets 1,973,843 5,187,673
Fixed Assets - Net of Depreciation
of $16,369 and $22,366
respectively (Note 2) 25,903 19,906
------------- ------------
Total Assets $ 9,238,759 $17,351,615
============= ============
</TABLE>
See Notes to the Financial Statements
F-4
FRESHSTART VENTURE CAPITAL CORP.
STATEMENTS OF FINANCIAL POSITION
LIABILITIES AND STOCKHOLDERS EQUITY
May 31,
1996 1997
<TABLE>
<S> <C> <C>
LONG TERM DEBT:
Debentures Payable to SBA (Note 6) $ 4,380,000 $ 8,450,000
4% Cumulative, 15 Year Redeemable
Preferred Stock (Note 7) 1,410,000 1,410,000
------------ ------------
Total Long Term Debt 5,790,000 9,860,000
------------ ------------
CURRENT LIABILITIES:
Accrued Interest 121,603 182,344
Other Current Liabilities 34,493 76,824
Dividends Payable (Note 9) 122,202 14,100
------------ ------------
Total Current Liabilities 278,298 273,268
------------ ------------
Total Liabilities 6,068,298 10,133,268
Commitments and Contingencies
(Notes 14 and 17) - -
STOCKHOLDERS EQUITY:
4% Cumulative, 15 Year Redeemable
Preferred Stock - $1 Par
Value; 10,000,000 Shares Authorized,
1,410,000 Shares Issues and Outstanding,
(See Long Term Debt) (Note 7) - -
3% Cumulative Preferred Stock -
$1 Par Value: No Shares Issued and
Outstanding (Notes 7 and 12) - -
Common Stock - $.01 Par Value:
3,000,000 Shares Authorized, 1,096,688
and 2,172,688 Shares Issued and
Outstanding, Respectively (Note 12) 5,483 21,726
Additional Paid in Capital (Note 8) 2,767,600 6,857,817
Retained Earnings 15,379 147,805
Restricted Capital - Realized Gain
on Redemption (Note 8) 381,999 190,999
------------ ------------
Total Stockholders Equity 3,170,461 7,218,347
------------ ------------
Total Liabilities and
Stockholders' Equity $ 9,238,759 $17,351,615
============ ============
Net Assets Per Share $ 2.89 $ 3.32
============ ============
</TABLE>
See Notes to the Financial Statements
F-5
FRESHSTART VENTURE CAPITAL CORP.
STATEMENTS OF OPERATIONS
Years Ended May 31,
1995 1996 1997
<TABLE>
<S> <C> <C> <C>
REVENUE:
Interest Earned on
Outstanding Receivables $ 996,534 $1,027,815 $1,231,318
Interest Income - Idle Funds 8,750 6,129 39,397
---------- ---------- ----------
Total Revenue (Note 2) 1,005,284 1,033,944 1,270,715
---------- ---------- ----------
EXPENES:
Interest (Note 6) 322,806 307,764 360,678
Professional Fees 45,415 50,776 59,945
Officers Salaries
(Notes 11 and 13) 145,146 145,146 141,225
Other Salaries (Note 11) 35,472 23,126 25,966
Other Operating Expenses 89,353 90,450 123,811
Pension Expense
(Notes 10 and 11) 17,942 16,180 14,123
Depreciation and
Amortization (Note 2) 5,999 9,710 15,915
---------- ---------- ----------
Total Expenses 662,133 643,152 741,663
---------- ---------- ----------
Net Investment Income 343,151 390,792 529,052
Unrealized Depreciation
in Value of
Investments (Notes 2 and 3) 2,399 35,000 -
---------- ---------- ----------
340,752 355,792 529,052
PROVISION FOR TAXES:
Current Income Taxes (Note 2) 1,836 1,567 2,528
---------- ---------- ----------
Net Income $ 338,916 $ 354,225 $ 526,524
========== ========== ==========
Earnings Per Share of
Common Stock (Note 2) $ 0.26 $ 0.27 $ 0.29
========== ========== ==========
Dividends Paid Per Share
of Common Stock $ 0.26 $ 0.27 $ 0.21
========== ========== ==========
Weighted Average Shares of
Common Stock Outstanding 1,096,688 1,096,688 1,627,318
========== ========== ==========
</TABLE>
See Notes to the Financial Statements
F-6
FRESHSTART VENTURE CAPITAL CORP.
STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended May 31,
1995 1996 1997
<TABLE>
<S> <C> <C> <C>
4% Cumulative, 15 Year Redeemable
Preferred Stock - $1 Par Value:
10,000,000 Shares Authorized,
1,410,000 Shares Issues and Outstanding
(See Long Tem Debt) (Note 7) - - -
---------- ---------- ----------
Common Stock - $.01 Par Value:
3,000,000 Shares Authorized, 1,096,688
Shares Issued and Outstanding 2,742 2,742 5,483
2 For 1 Stock Split - 2,741 5,483
Sale of 1,076,000 Shares of
Common Stock - - 10,760
---------- ---------- ----------
Balance, End of Period 2,742 5,483 21,726
---------- ---------- ----------
Additional Paid in Capital -
Beginning of Period 2,388,342 2,579,342 2,767,600
Proceeds from Sale of
1,076,000 Shares of
Common Stock - - 3,904,700
2 For 1 Stock Split - (2,741) (5,483)
Amortization of Restricted
Capital (Note 8) 191,000 190,999 191,000
---------- ---------- ----------
Balance, End of Period 2,579,342 2,767,600 6,857,817
---------- ---------- ----------
Retained Earnings -
Beginning of Period 15,944 13,660 15,379
Net Income 338,916 354,225 526,524
Dividends Paid and Accrued (341,200) (352,506) (394,098)
---------- ---------- ----------
Balance, End of Period 13,660 15,379 147,805
---------- ---------- ----------
Restricted Capital
Gain on Redemption of 3% Preferred
Stock (See Note 8) 763,998 572,998 381,999
Amortization of Gain (191,000) (190,999) (191,000)
---------- ---------- ----------
Balance, End of
Period (Note 8) 572,998 381,999 190,999
---------- ---------- ----------
Total Stockholder's Equity $3,168,742 $3,170,461 $7,218,347
========== ========== ==========
</TABLE>
See Notes to the Financial Statements
F-7
FRESHSTART VENTURE CAPITAL CORP.
STATEMENTS OF CASH FLOWS
Years Ended May 31,
1995 1996 1997
<TABLE>
<S> <C> <C> <C>
CASH FLOWS (USED) PROVIDED BY
OPERATING ACTIVITIES:
Net Income $ 338,916 $ 354,225 $ 526,524
Depreciation and
Amortization Expense 5,999 9,710 15,915
Provision for Losses
on Loans Receivable 2,399 35,000 -
Decrease (Increase) in
Accrued Interest 15,015 (21,449) (35,028)
Decrease (Increase) in
Other Assets (195,878) (57,326) 71,960
Increase (Decrease) in
Accrued Liabilities (20,113) (346) 103,072
Dividends Paid and Accrued (341,200) (352,506) (502,200)
---------- ---------- ----------
Net Cash (Used) Provided
By Operating Activities (194,862) (32,692) 180,243
---------- ---------- ----------
CASH FLOWS (USED) BY
INVESTING ACTIVITIES:
Increase in Loans
Receivable (3,626,250) (4,594,750) (9,556,400)
Repayments of Loans
Receivable 3,259,799 2,115,540 3,609,690
Increase in Loan
Participations 125,000 2,227,000 3,145,900
Repayment of Loan
Participations (164,434) (67,763) (2,910,134)
Increase in Fixed Assets (2,578) (25,936) -
Decrease (Increase) in Assets
Acquired in Liquidation 148,287 13,344 -
---------- ---------- ----------
Net Cash (Used)
By Investing Activities (260,176) (332,565) (5,710,944)
---------- ---------- ----------
CASH FLOWS PROVIDED BY
FINANCING ACTIVITIES:
Net Proceeds from sale of
of Common Stock - - 3,915,460
(Decrease) in Line of
Credit (29,488) (5,000) -
(Decrease) in Restricted
Capital (191,000) (190,999) (191,000)
Increase in Debentures
Payable to SBA (Net) - 40,000 4,070,000
Sale of 4% Preferred Stock 760,000 - -
Increase in Additional
Paid in Capital 191,000 190,999 191,000
---------- ---------- ----------
Net Cash Provided by
Financing Activities 730,512 35,000 7,985,460
---------- ---------- ----------
Net (Decrease) Increase
in Cash 275,474 (330,257) 2,454,759
Cash Balance -
Beginning of Period 469,885 745,359 415,102
---------- ---------- ----------
Cash Balance -
End of Period $ 745,359 $ 415,102 $2,869,861
========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOR INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Interest $ 312,142 $ 314,491 $ 299,922
---------- ---------- ----------
Taxes $ 1,836 $ 1,567 $ 2,528
---------- ---------- ----------
</TABLE>
See Notes to the Financial Statements
F-8
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 1997 AND 1996
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 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 three (73%) percent of the
Company's loan portfolio consists of loans made
for the financing of taxi cab 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 (90%) percent 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-9
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 1997 AND 1996
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 Standard 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 loans' effective interest rate.
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:
May 31,
1995 1996 1997
Outstanding Loans $8,649,412 $11,093,622 $17,040,332
Loan Participations (336,370) (2,495,607) (2,731,373)
---------- ----------- -----------
Net Loans
Outstanding $8,313,042 $ 8,598,015 $14,308,959
========== =========== ===========
Loans on non-accrual status as of May 31, 1997 and
1996 were approximately $1,038,294 and $1,122,768,
respectively. Additionally, the total amount of
interest income not accrued was $138,555, $157,712
and $145,846 during the years ended May 31, 1997,
1996 and 1995.
Reconciliation of Loan Loss Reserve
A reconciliation of loan loss reserve is as follows:
F-10
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 1997 AND 1996
NOTE 3 LOANS RECEIVABLE
(Continued)
Year Ended May 31,
1995 1996 1997
<TABLE>
<S> <C> <C> <C>
Balance, Beginning $178,159 $180,558 $180,558
Provision for
Loan Losses 2,399 35,000 --
Charge-Offs -- (35,000) --
-------- -------- --------
Balance, Ending $180,558 $180,558 $180,558
======== ======== ========
</TABLE>
Effective June, 1996, the Company foreclosed on
one of its loans. The total value of the loan
including past due interest is $182,864. The loan
is collateralized by real estate. The Company
anticipates recovery of the entire balance
outstanding including past due interest.
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 Company wrote off the balance
remaining of $13,344 against its earnings for the
fiscal period ending May 31, 1996.
NOTE 5 LOANS 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. The Company renewed the line
of credit with an expiration date of October 31,
1996. All advances bear interest at .75% above
the prime rate. Pursuant to the terms of the
line of credit, the Company was required to comply
with certain terms, covenants and conditions. The
Company pledged its loans receivable as collateral
for the above line of credit and was required to
maintain a minimum of $200,000 non-interest
bearing collected balance with Extebank during
the term of the line of credit. The balance
outstanding as of May 31, 1997 and 1996 was $0.
The Company has not renewed the line of credit.
NOTE 6 LONG TERM DEBT
The long term debt to the SBA consisted of the
following subordinated debentures as of May 31,
1997 and 1996 with interest payable semi-annually:
Interest May 31,
Rate Period 1996 1997
Maturity Date First Second Face Amount Face Amount
<TABLE>
<S> <C> <C> <C> <C>
June 1, 2005 6.690% 6.690% $520,000 $520,000
December 1, 2005 6.540% 6.540% 520,000 520,000
March 17, 1998 5.625% 8.625% 75,000 75,000
March 17, 1998 5.625% 8.625% 75,000 75,000
September 22, 1999 5.000% 8.000% 750,000 750,000
June 9, 1999 6.000% 9.000% 750,000 750,000
December 16, 2002 4.510% 7.510% 1,300,000 1,300,000
March 1, 2007 7.380% 7.380% - 4,210,000
June 1, 2006 7.710% 7.710% - 250,000
May 14, 1996 4.375% 7.375% 120,000 -
May 14, 1996 4.375% 7.375% 120,000 -
February 6, 1997 4.125% 7.125% 75,000 -
February 6, 1997 4.125% 7.125% 75,000 -
--------- ---------
$4,380,000 $8,450,000
========== ==========
</TABLE>
F-11
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 1997 AND 1996
NOTE 6 LONG TERM DEBT
(Continued)
During the fiscal period ended May 31, 1996, the
Company paid off $1,000,000 in subsidized
debentures through the sale of two $520,000
unsubsidized subordinated debentures, due June 1,
2005 and December 1, 2005 with interest at 6.69%
and 6.54%, respectively.
During the fiscal period ended May 31, 1997 the
Company paid off $390,000 in subsidized debentures
and sold two unsubsidized subordinated debentures
totaling $4,460,000 due June 1, 2006 and
March 1, 2007 with interest at 7.71% and 7.38%,
respectively.
Under the terms of the subordinated debentures,
the Company may not repurchase or retire any of
its capital stock or make any distributions to its
stockholders other than dividends out of retained
earnings 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.
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 three percent preferred stock
as 4 percent preferred stock. The effect of the
amendment authorized 5,000,000 shares of 4 percent
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 percent 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 percent cumulative
preferred stock from the SBA for a purchase price
of $.36225670 per share, or an aggregate of
$550,630. The repurchase price was at a
substantial discount to the original sale price of
the 3 percent 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, 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 has been 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.
F-12
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 1997 AND 1996
NOTE 8 RESTRICTED CAPITAL - UNREALIZED GAIN ON REDEMPTION
(Continued)
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, 1997 and 1996 were $56,400.
Total dividends paid to common stockholders for
the fiscal years ended May 31, 1997, 1996 and 1995
were $337,698 and $296,106 and $296,108
respectively. The Company is contingently liable
to the SBA for $14,100 in preferred dividends due
for the three months ended May 31, 1997.
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. Contributions are currently
limited to ten percent of each participants
compensation. Total contributions made for the
fiscal years ended May 31, 1997, 1996 and 1995
were $14,123, $16,180 and $17,942 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
enabled the Company to obtain additional leverage
from the SBA in the form of preferred stock and
debentures.
Pursuant to SBA regulations, all SSBIC's 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.
F-13
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 1997 AND 1996
NOTE 12 STOCKHOLDERS' EQUITY - PRIVATE PLACEMENT
(Continued)
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 percent
cumulative, 15 year redeemable preferred stock and
3,000,000 shares of $.01 par value, common shares.
The financial statements are presented after
giving effect to these changes.
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
for $.01 par value per share. The effect of the
amendment increased the 274,172 issued and
outstanding shares of common stock to 548,344
shares. Additionally, effective October 24, 1996,
the Company amended the certificate of
incorporation, providing for a 2 for 1 stock
split. The effect of this amendment increased the
548,344 issued and outstanding shares of common
stock to 1,096,688 shares.
The Stockholders' Equity section of the financial
statements is presented after giving effect
to amendments to the certificate of incorporation
occurring in November, 1994 and January, 1996.
NOTE 13 RELATED PARTY TRANSACTION
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 $18,000, for all of the years ended May 31,
1997, 1996 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 the fiscal years ended May 31, 1997,
1996 and 1995, officers' salaries, including
pension contributions, were $155,348, $159,661 and
$159,661, respectively.
NOTE 14 SIGNIFICANT CONCENTRATION OF CREDIT RISK
Approximately seventy three (73%) percent 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
The Company maintained approximately $2,869,861 in
one bank in excess of amounts that would be
insured by the Federal Depository Insurance
Corporation
NOTE 16 SUBSEQUENT EVENTS
Effective June 30, 1997, and for the four months
then ended, the Board of Directors declared a
dividend of $.11 per share to holders of common
stock, aggregating $238,996. The dividend was
paid July 16, 1997.
F-14
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 1997 AND 1996
NOTE 17 PUBLIC OFFERING
The Company filed a registration statement with
the Securities and Exchange Commission to sell up
to 1,000,000 shares of common stock, at a public
offering price of $5.00 per common share, for an
aggregate offering price of $5,000,000.
On December 3 1996, the Company successfully
completed its public offering of 1,076,000 shares
of the Company's common stock, including 76,000
shares of common stock pursuant to the excercise
of the underwriters over allotment option. The
gross proceeds from the sale aggregated
$5,380,000. The net proceeds received by the
Company after deducting underwriting discounts and
various costs of the offering totaled $3,904,708.
NOTE 17 COMMITMENTS AND CONTINGENCIES
Minimum future lease obligations on the Company's
long term non-cancelable operating lease will
total $9,000 over the remaining six (6) months of
the lease term ending November, 1997.
During the fiscal year ended May 31, 1996, Scott
Printing filed a lawsuit against the Company.
Scott Printing is seeking an approximate amount of
$50,000 for printing work performed during the
Company's public offering. The Company is
contesting the amount claimed and intends to
vigorously defend the action. However, the
Company has accrued $40,000 as a contingency
against such litigation.
F-15
FRESHSTART VENTURE CAPITAL CORP.
SUPPLEMENTAL SCHEDULES
MAY 31, 1997
SCHEDULE I - LOANS RECEIVABLE
<TABLE>
<S> <C> <C> <C> <C>
Balance
Number of Interest Maturity Outstanding
Type of Loan Loans Rate Date May 31, 1997
NYC Taxi
Medallions 186 9.00%-15.00% 1-7 years $ 10,484,810
Services 1 14.00% 1-7 years 94,272
Auto Repair
Service 8 10.00%-15.00% 1-4 years 690,006
Auto Dealership 1 12.00% 1 year 62,463
Renovation and
Construction 1 10.50% 5 years 134,852
Retail
Establishment 3 11.25%-13.00% 1-4 years 285,013
Restaurant 3 13.00%-15.00% 1 year 360,333
Gasoline Service
Station 4 9.50%-12.00% 1 year 237,836
Manufacturing 1 15.00% 1 year 151,572
Laundromat and
Dry Cleaners 18 11.00%-15.00% 1-4 years 1,605,126
Medical
Offices 3 11.63%-15.00% 1-3 years 202,676
--- -----------
TOTAL 229 $14,308,959
=== ===========
</TABLE>
Susbtantially 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 ther periods presented
were as follows:
<TABLE>
<S> <C> <C> <C> <C>
Maximum Average
Weighted Amount Amount
Balance Average Outstanding Outstanding
Category of End of Interest During During
Borrowing Period Rate Period Period(1)
May 31, 1995 $ 5,000 9.45% $34,489 $17,361
May 31, 1996(2) $ - 9.29% $ 5,000 $ 2,500
May 31, 1997(2) $ - - $ - $ -
</TABLE>
(1) Computed based on weighted average of amount
outstanding during the period.
(2) The Company did not renew its Line of Credit.
F-16
FRESHSTART VENTURE CAPITAL CORP.
SUPPLEMENTARY INFORMATION
SELECTED PER SHARE DATA AND RATIOS
FOR THE FIVE YEARS ENDED
MAY 31, 1993, 1994, 1995, 1996 AND 1997
For the Years Ended May 31,
1993 1994 1995 1996 1997
<TABLE>
<S> <C> <C> <C> <C> <C>
Per Share Data
Investment Income $ 2.01 $ 1.90 $ 1.83 $ 1.88 $ 0.79
Investment Expenses (1.20) (1.23) (1.21) (1.17) (0.46)
------- ------- ------- ------- -------
Net Investment Income 0.81 0.67 0.62 0.71 0.33
Net Realized and Unrealized
Gains and Losses on
Securities (0.15) (0.14) - (0.06) -
Private Placement Costs (0.02) - - - -
Gain on Preferred Stock
Buy Back 0.61 - - - -
Reduction Due to
Stock Split - - - - (4.94)
Dividends-Common Stock (0.60) (0.48) (0.54) (0.54) (0.22)
Dividends-Preferred Stock (0.05) (0.05) (0.08) (0.11) (0.03)
Net Sale of Common Stock - - - - 2.40
------- ------- ------- ------- -------
Net Increase/Decrease
in Net Asset Value 0.60 - - - (2.46)
Net Asset Value -
Beginning of Period 5.18 5.78 5.78 5.78 5.78
------- ------- ------- ------- -------
Net Asset Value -
End of Year $ 5.78(1)$ 5.78(1) $ 5.78(1) $ 5.78(1) $ 3.32(1)
======= ======= ======= ======= =======
Net Asset Value -
End of Year Excluding
Retained Earnings (2) $ 5.75(1)$ 5.75(1) $ 5.75(1) $ 5.75(1) $ 3.23(1)
======= ======= ======= ======= =======
Ratios
Ratio of Expenses to
Average Net Assets 24.3% 21.3% 20.9% 20.3% 14.3%
======= ======= ======= ======= =======
Ratio of Net Income to
Average Net Assets 10.4% 9.3% 10.6% 11.2% 10.1%
======= ======= ======= ======= =======
Weighted Average of Common
Shares Outstanding 548,344 548,344 548,344 548,344 1,627,318
======= ======= ======= ======= =========
</TABLE>
(1) The net asset value includes the unamortized portion of the realized gain
from the repurchase of three 3% percent preferred stock and the undistributed
retained earnings at the end of the period. The unamortized balance remaining
in the preferred restricted capital account is $190,999.
F-17
To the Shareholders and Board of Directors
Freshstart Venture Capital Corp.
We have examined the financial statements of Freshstart
Venture Capital Corp. (the "Company") for the years ended
May 31, 1997, 1996 and 1995, and have issued our report
thereon dated July 10, 1997. As a part of our examination,
we made a study and evaluation of the Company's system of
internal accounting control (which includes the procedures
for safeguarding securities) to the extent we considered
necessary to evaluate the system as required by generally
accepted auditing standards. The purpose of our study and
evaluation was to determine the nature, timing, and extent
of the auditing procedures necessary for expressing an
opinion on the Company's financial statements. Our study
and evaluation was more limited than would be necessary to
express and opinion on the system of internal accounting
control taken as a whole.
The management of Freshstart Venture Capital Corp. is
responsible for establishing and maintaining a system of
internal accounting control. In fulfilling this
responsibility, estimates and judgments by management are
required to assess the expected benefits and related costs
of control procedures. The objectives of a system are to
provide management with reasonable, but not absolute,
assurance that assets are safeguarded against loss from
unauthorized use or disposition and transactions are
executed in accordance with management's authorization and
recorded properly to permit preparation of financial
statements in conformity with generally accepted accounting
principles. Because of inherent limitation in any system of
internal accounting control, errors or irregularities may
occur and may not be detected. Also, projection of any
evaluation of the system to future periods is subject to the
risk that procedures may become inadequate because of
changes in conditions or that the degree of compliance with
the procedures may deteriorate.
Our study and evaluation, made for the limited purpose
described in the first paragraph, would not necessarily
disclose all material weaknesses in the system that may have
existed as of May 31, 1997. Accordingly, we do not express
an opinion on the system of internal accounting control of
Freshstart Venture Capital Corp. taken as a whole. However,
our study and evaluation disclosed no condition that we
believed to be a material weakness as of May 31, 1997.
This report is intended solely for the use of management and
the SEC, and should not be used for any other purpose.
New York, New York
July 10, 1997
Michael C. Finkelstein
Certified Public Accountant
