FRESHSTART VENTURE CAPITAL CORP.
FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1997 AND 1996
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TABLE OF CONTENTS
-----------------
Page
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Accountant's Review Report ..................................... F-3
Statements of Financial Position of Freshstart
Venture Capital Corp. as of November 30, 1996 and 1997 ....... F-5
Statements of Operations for the Six Months
Ended November 30, 1996 and 1997 ............................. F-6
Statements of Stockholders' Equity for the Six Months
Ended November 30, 1996 and 1997 ............................. F-7
Statements of Cash Flows for the Six Months
Ended November 30, 1996 and 1997 ............................. F-9
Notes to the Financial Statements .............................. F-10
Supplemental Schedules ......................................... F-17
Selected Per Share Data and Ratios ............................. F-18
<PAGE>
Board of Directors
Freshstart Venture Capital Corp.
ACCOUNTANTS' REVIEW REPORT
We have reviewed the accompanying Statements of financial position of Freshstart
Venture Capital Corp. (the "Company") as of November 30, 1997 and 1996 including
the schedules of loans receivable, and the related statements of operations,
stockholders' equity and cash flows for the six months ended November 30, 1997
and 1996. 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 interim financial statements, applying analytical review
procedures to 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 $20,623,217 as of November 30, 1997 (288% of net assets), whose
values have been estimated by the Board of Directors in the absence of readily
ascertainable market values. We have reviewed the procedures used by the Board
of Directors in arriving at their estimate of the value of such loans 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 value that would have been used had a ready market for
such loans existed, and the differences could be material.
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. 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.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of November
30,1997 and 1996 and the results of its operations and its cash flows for the
six months ended November 30, 1997 and 1996 in conformity with generally
accepted accounting principles.
3
<PAGE>
Board of Directors
Freshstart Venture Capital Corp.
We have previously examined, in accordance with generally accepted auditing
standards, the financial statements of Freshstart Venture Capital Corp. as of
May 31, 1997 and for the year then ended; and in our report dated July 16, 1997,
we expressed an unqualified opinion on those financial statements and included
an explanatory paragraph regarding the possible effect on the financial
statements of the valuation of loans determined by the Board of Directors.
New York, New York
December 30, 1997
Michael C. Finkelstein
Certified Public Accountant
4
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FRESHSTART VENTURE CAPITAL CORP.
STATEMENTS OF FINANCIAL POSITION
ASSETS
May 31, November 30,
------------ ------------
1997 1997
------------ ------------
Loans Receivable:
Long Term Portion (Notes 2 and 3) $ 14,308,959 $ 20,803,775
Less: Unrealized Depreciation on
Loans Receivable (Note 3) (180,558) (180,558)
------------ ------------
14,128,401 20,623,217
Less: Current Maturities - Loans Receivable (1,984,365) (2,912,529)
------------ ------------
Total Loans Receivable -
Net of Current Maturities 12,144,036 17,710,688
------------ ------------
Assets Acquired in Liquidation of
Portfolio Securities (Note 4) -- --
------------ ------------
CURRENT ASSETS
Cash (Note 15) 2,869,861 15,363
Accrued Interest (Notes 2 and 3) 127,974 213,208
Current Maturities - Loans Receivable 1,984,365 2,912,529
Prepaid Expenses and Other Assets 205,473 350,045
------------ ------------
Total Current Assets 5,187,673 3,491,145
------------ ------------
Fixed Assets - Net of Accumulated Depreciation
of $22,366 and $25,364
respectively (Note 2) 19,906 16,908
------------ ------------
Total Assets $ 17,351,615 $ 21,218,741
============ ============
See Accountants' Review Report and Notes to the Financial Statements
F-5
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
STATEMENTS OF FINANCIAL POSITION
LIABILITIES AND STOCKHOLDERS' EQUITY
May 31, November 30,
----------- ------------
1997 1997
----------- -----------
LONG TERM DEBT:
Debentures Payable to SBA (Note 6) $ 8,450,000 $12,360,000
4% Cumulative, 15 Year Redeemable
Preferred Stock (Note 7) 1,410,000 1,410,000
----------- -----------
Total Long Term Debt 9,860,000 13,770,000
----------- -----------
CURRENT LIABILITIES:
Accrued Interest 182,344 253,761
Other Current Liabilities 76,824 27,625
Dividends Payable (Note 9) 14,100 9,400
----------- -----------
Total Current Liabilities 273,268 290,786
----------- -----------
Total Liabilities 10,133,268 14,060,786
----------- -----------
Commitments and Contingencies
(Notes 14, 15 and 18) -- --
STOCKHOLDERS EQUITY:
4% Cumulative, 15 Year Redeemable Preferred
Stock- $1 Par Value; 10,000,000 Shares
Authorized, 1,410,000 Shares Issued 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, 2,172,688 Shares Issued and
Outstanding, (Note 12) 21,726 21,726
Additional Paid in Capital (Note 8) 6,857,817 6,953,316
Retained Earnings 147,805 87,413
Restricted Capital - Realized Gain on
Redemption (Note 8) 190,999 95,500
----------- -----------
Total Stockholders' Equity 7,218,347 7,157,955
----------- -----------
Total Liabilities and Stockholders' Equity $17,351,615 $21,218,741
=========== ===========
Net Assets Per Share $ 3.32 $ 3.29
=========== ===========
See Accountants' Review Report and Notes to the Financial Statements
F-6
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
STATEMENTS OF OPERATIONS
Year Six Months Ended
Ended May 31, November 30,
------------- -----------------------
1997 1996 1997
---------- ---------- ----------
REVENUE:
Interest Earned on
Outstanding Receivables $1,231,318 $ 519,193 $ 985,572
Interest Income - Idle Funds 39,397 3,052 44,053
---------- ---------- ----------
Total Revenue (Note 2) 1,270,715 522,245 1,029,625
---------- ---------- ----------
EXPENSES:
Interest (Note 6) 360,678 149,808 370,025
Professional Fees 59,945 23,355 36,096
Officers' Salaries (Notes 11 and 13) 141,225 72,573 60,810
Other Salaries (Note 11) 25,966 11,008 15,288
Other Operating Expenses 123,811 55,001 73,959
Pension Expense (Notes 10 and 11) 14,123 10,886 7,610
Depreciation and Amortization (Note 2) 15,915 6,757 19,453
---------- ---------- ----------
Total Expenses 741,663 329,388 583,241
---------- ---------- ----------
Net Investment Income 529,052 192,857 446,384
Unrealized Depreciation in Value of
Investments (Notes 2 and 3) -- -- --
---------- ---------- ----------
529,052 192,857 446,384
PROVISION FOR TAXES:
Current Income Taxes (Note 2) 2,528 1,840 544
---------- ---------- ----------
Net Income $ 526,524 $ 191,017 $ 445,840
========== ========== ==========
Earnings Per Share of Common Stock
(Note 2) $ 0.29 $ 0.14 $ 0.20
========== ========== ==========
Dividends Paid Per Share
of Common Stock $ 0.21 $ 0.09 $ 0.22
========== ========== ==========
Weighted Average Shares of Common
Stock Outstanding 1,627,318 1,096,688 2,172,688
========== ========== ==========
See Accountants' Review Report and Notes to the Financial Statements
F-7
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Year Six Months Ended
Ended May 31, November 30,
------------- --------------------------
1997 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
4% Cumulative, 15 Year Redeemable
Preferred Stock - $1 Par Value:
10,000,000 Shares Authorized,
1,410,000 Shares Issued and
Outstanding (See Long Term Debt)
(Note 7) -- -- --
----------- ----------- -----------
Common Stock - $.01 Par Value:
3,000,000 Shares Authorized, 1,096,688
Shares Issued and Outstanding 5,483 5,483 21,726
2 For 1 Stock Split 5,483 5,483 --
Sale of 1,076,000 Shares of Common Stock 10,760 -- --
----------- ----------- -----------
Balance, End of Period 21,726 10,966 21,726
----------- ----------- -----------
Additional Paid in Capital -
Beginning of Period 2,767,600 2,762,116 6,857,817
Proceeds from Sale of 1,076,000 Shares
of Common Stock 3,904,700 -- --
2 For 1 Stock Split (5,483) -- --
Amortization of Restricted
Capital (Note 8) 191,000 95,500 95,499
----------- ----------- -----------
Balance, End of Period 6,857,817 2,857,616 6,953,316
----------- ----------- -----------
Retained Earnings -
Beginning of Period 15,379 15,379 147,805
Net Income 526,524 191,017 445,840
Dividends Paid and Accrued (394,098) (126,903) (506,232)
----------- ----------- -----------
Balance, End of Period 147,805 79,493 87,413
----------- ----------- -----------
Restricted Capital
Gain on Redemption of 3% Preferred
Stock (See Note 8) 381,999 381,999 190,999
Amortization of Gain (191,000) (95,500) (95,499)
----------- ----------- -----------
Balance, End of Period (Note 8) 190,999 286,499 95,500
----------- ----------- -----------
Total Stockholder's Equity $ 7,218,347 $ 3,234,574 $ 7,157,955
=========== =========== ===========
</TABLE>
See Accountants' Review Report and Notes to the Financial Statements
F-8
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Six Months Ended
Ended May 31, November 30,
------------- --------------------------
1997 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS PROVIDED (USED) BY
OPERATING ACTIVITIES:
Net Income $ 526,524 $ 191,017 $ 445,840
Depreciation and Amortization Expense 15,915 6,757 19,453
(Increase) in Accrued Interest (35,028) (8,642) (85,234)
Decrease (Increase) in Other Assets 71,960 (71,561) (161,027)
Increase (Decrease) in Accrued Liabilities 103,072 (214) 17,518
Dividends Paid and Accrued (502,200) (239,705) (506,232)
----------- ----------- -----------
Net Cash (Used) Provided By Operating Activities 180,243 (122,348) (269,682)
----------- ----------- -----------
CASH FLOWS PROVIDED (USED) BY
INVESTING ACTIVITIES:
Increase in Loans Receivable (9,556,400) (2,555,250) (8,448,700)
Repayment of Loans Receivable 3,609,690 1,865,034 1,560,182
Increase in Loan Participations 3,145,900 630,500 595,000
Repayment of Loan Participations (2,910,134) (97,348) (201,298)
----------- ----------- -----------
Net Cash (Used) By Investing Activities (5,710,944) (157,064) (6,494,816)
----------- ----------- -----------
CASH FLOWS (USED) PROVIDED BY
FINANCING ACTIVITIES:
Net Proceeds from sale of 1,076,000
Shares of Common Stock 3,915,460 -- --
(Decrease) in Restricted Capital (191,000) (95,500) (95,499)
Increase in Debentures Payable to SBA (Net) 4,070,000 10,000 3,910,000
Increase in Additional Paid in Capital 191,000 95,500 95,499
----------- ----------- -----------
Net Cash Provided by Financing Activities 7,985,460 10,000 3,910,000
----------- ----------- -----------
Net (Decrease) Increase in Cash 2,454,759 (269,412) (2,854,498)
Cash Balance - Beginning of Period 415,102 415,102 2,869,861
----------- ----------- -----------
Cash Balance - End of Period $ 2,869,861 $ 145,690 $ 15,363
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Interest $ 299,922 $ 150,886 $ 298,608
----------- ----------- -----------
Taxes $ 2,528 $ 1,840 $ 544
----------- ----------- -----------
</TABLE>
See Accountants' Review Report and Notes to the Financial Statements
F-9
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
NOVEMBER 30, 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 83% 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.
F-10
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
NOVEMBER 30, 1997 AND 1996
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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.
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, November 30,
------- ------------
1997 1996 1997
---- ---- ----
Outstanding Loans $ 17,040,332 $ 11,718,114 $ 23,928,850
Loan Participations (2,731,373) 2,963,035 3,125,075
------------- ------------ ------------
Net Loans Outstanding $ 14,308,959 $ 8,755,079 $ 20,803,775
============= ============ ============
F-11
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
NOVEMBER 30, 1997 AND 1996
NOTE 3 LOANS RECEIVABLE
(Continued)
Loans on non-accrual status as of November 30, 1997 and 1996 were
approximately $1,165,878 and $1,190,349 , respectively. Additionally,
the total amount of interest income not accrued was $948,406 and
$808,784 during the six months ended November 30, 1997 and 1996.
Reconciliation of Loan Loss Reserve
A reconciliation of loan loss reserve is as follows:
Six Months Ended November 30,
-----------------------------
1996 1997
---- ----
Balance, Beginning $180,558 $180,558
Provision for Loan Losses -- --
Charge-Offs -- --
-------- --------
Balance, Ending $180,558 $180,558
======== ========
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
November 30, 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 November
30, 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 November 30, 1997
and 1996 was $0. The Company has not renewed the line of credit.
The Company has established a new line of credit with Israel Discount
Bank of New York for $5,000,000. All advances under this agreement
bear interest at the banks prime rate less .25%. The Company pledged
its loan portfolio as collateral for the above line of credit and is
required to maintain compensating balances of $100,000 with the bank.
F-12
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
NOVEMBER 30, 1997 AND 1996
NOTE 6 LONG TERM DEBT
The long term debt to the SBA consisted of the following subordinated
debentures as of November 30, 1996 and 1997 with interest payable
semi-annually:
Interest Rate Period November 30,
Maturity Date First Second 1997
------------- ----- ------ ------------
September 1, 2007 7.760% 7.760% $ 4,060,000
June 1, 2005 6.690% 6.690% 520,000
December 1, 2005 6.540% 6.540% 520,000
September 22, 1999 5.000% 8.000% 750,000
June 9, 1999 6.000% 9.000% 750,000
December 16, 2002 4.510% 7.510% 1,300,000
March 1, 2007 7.380% 7.380% 4,210,000
June 1, 2006 7.710% 7.710% 250,000
-----------
$12,360,000
===========
During the six months ended November 30, 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 six months ended November 30, 1997 the Company paid off
$150,000 in subsidized debentures and sold two additional debentures
totaling $4,060,000 due September 1, 2006 with interest at 7.76%.
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 November 30, 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-13
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
NOVEMBER 30, 1997 AND 1996
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 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.
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 six month period ended
November 30, 1997 and 1996 were $28,200. Total dividends paid to
common stockholders for the six months ended November 30, 1997 and
1996 were $478,032 and $98,703 respectively. The Company is
contingently liable to the SBA for $9,400 in preferred dividends due
for the three months ended November 30, 1997.
F-14
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
NOVEMBER 30, 1997 AND 1996
NOTE 10 MONEY PURCHASE PLAN
Effective for the fiscal year ending November 30, 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 periods
ended November 30, 1997 and 1996 were $10,886 and $7,610 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.
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.
F-15
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
NOVEMBER 30, 1997 AND 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 November 30, 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 six
months ended November 30, 1997 and 1996, officers' salaries, including
pension contributions, were $66,891, and $78,163, respectively.
NOTE 14 SIGNIFICANT CONCENTRATION OF CREDIT RISK
Approximately $17,201,995 (83%) 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 maintains approximately $2,769,861 in one bank as of May
31, 1997 in excess of amounts that would be insured by the Federal
Depository Insurance Corporation.
NOTE 16 SUBSEQUENT EVENTS
Effective December 31, 1997, and for the three 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 January,
1998.
On December 1, 1995 and December 15, 1997, the Company borrowed
$350,000 and $650,000, respectively, from its line of credit with
Israel Discount Bank.
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 exercise 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 18 COMMITMENTS AND CONTINGENCIES
During the fiscal period ended November 30, 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-16
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
SUPPLEMENTAL SCHEDULES
NOVEMBER 30, 1997
SCHEDULE I - LOANS RECEIVABLE
<TABLE>
<CAPTION>
Balance
Number of Outstanding
Type of Loan Loans Interest Rate Maturity Date November 30, 1997
------------ --------- -------------- ------------- -----------------
<S> <C> <C> <C> <C>
NYC Taxi Medallion 199 9.00% - 15.00% 1 - 7 years $ 17,201,995
Services 2 14.00% 1 - 7 years 211,694
Auto Repair Service 8 10.00% - 15.00% 1 - 4 years 666,659
Renovation and Construction 2 10.50% 5 years 165,212
Retail Establishment 4 11.25% - 13.00% 1 - 4 years 374,334
Restaurant 4 13.00% - 15.00% 1 year 335,296
Gasoline Service Station 3 9.50% - 12.00% 1 year 268,775
Manufacturing 1 15.00% 1 year 151,572
Laundromat and Dry Cleaners 17 11.00% - 15.00% 1 - 4 years 1,226,166
Medical Offices 3 11.63% - 15.00% 1 - 3 years 202,072
--- ------------
TOTAL 243 $ 20,803,775
=== ============
</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:
<TABLE>
<CAPTION>
Weighted
Balance Average Maximum Amount Average Amount
Category of End of Interest Outstanding Outstanding
Borrowing Period Rate During Period During Period (1)
- --------- ------ ---- ------------- -----------------
<S> <C> <C> <C> <C>
May 31, 1997 (2) $ -- -- $ -- $ --
November 30, 1996 $ -- -- $ -- $ --
November 30, 1997 $ -- 8.25% $200,000 $ --
</TABLE>
(1) Computed based on weighted average of amount outstanding during the period.
(2) The Company did not renew its Line of Credit.
F-17
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
SUPPLEMENTARY INFORMATION
SELECTED PER SHARE DATA AND RATIOS
FOR THE YEAR ENDED MAY 31, 1997
AND THE SIX MONTHS ENDED NOVEMBER 30, 1997 AND 1996
For the Six Months Ended Year Ended
--------------------------- ----------
November 30, May 31,
--------------------------- ----------
1997 1996 1997
---------- ---------- ----------
Per Share Data
Investment Income $ 0.47 $ 0.46 $ 0.79
Investment Expenses 0.27 (0.30) (0.46)
---------- ---------- ----------
Net Investment Income 0.20 0.16 0.33
Net Realized and Unrealized
Gains and Losses on
Securities -- -- (0.03)
Reduction Due to Stock Split -- -- (4.94)
Dividends - Common Stock (0.22) (0.09) (0.22)
Dividends - Preferred Stock (0.01) (0.02) (0.03)
Sale of Common Stock -- -- 2.4
Net Increase/Decrease
in Net Asset Value -0.03 0.05 (2.46)
Net Asset Value - Beginning
of Period $ 3.32 $ 2.88 $ 5.78
Net Asset Value - End of
Year $ 3.29(1) $ 2.93(1) $ 3.32(1)
---------- ---------- ----------
Net Asset Value - End of
Year Excluding Retained
Earnings (2) $ 3.25(1) $ 2.87(1) $ 3.23(1)
========== ========== ==========
Ratios
Ratio of Expenses to
Average Net Assets 8.17% 10.30% 14.30%
========== ========== ==========
Ratio of Net Income to
Average Net Assets 06.2% 6.0% 10.1%
========== ========== ==========
Weighted Average of Common
Shares Outstanding 2,172,688 1,096,688 1,627,318
========== ========== ==========
(1) The net asset value includes the unamortized portion of the realized gain
from the repurchase of three percent 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.
(2) Excluded undistributed retained earnings at the end of the period.
F-18
