SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-26214
Freshstart Venture Capital Corp.
(Exact name of registrant as specified in its charter)
New York 13-3134761
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
24-29 Jackson Avenue
Long Island City, New York
(Address of principal executive offices)
11101
(Zip Code)
(718) 361-9595
(Registrant's telephone number, including area code)
313 West 53rd Street
New York, New York 10019
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X_ No ___
The number of shares of Common Stock, par value $.01 per share,
outstanding as of April 14, 1999: 2,172,688
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
FORM 10-Q Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Financial Position as of
February 28, 1999 (unaudited) and May 31, 1998 ................. 2-3
Statements of Operations for the Nine Months
Ended February 28, 1999 and 1998 (unaudited) ................... 4
Statements of Stockholders' Equity for the Nine Months
Ended February 28, 1999 and 1998 (unaudited) ................... 5
Statements of Cash Flows for the Nine Months
Ended February 28, 1999 and 1998 (unaudited) ................... 6
Notes to the Financial Statements ................................ 7-10
Item 2. Managements' Discussion and Analysis of Financial
Condition and Results of Operations ...................... 11-12
SIGNATURES 13
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The statement of financial position of the Company as of February 28, 1999, the
related statements of operations, and cash flows for the nine months ended
February 28, 1999 and 1998 included in Item 1 have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management, the accompanying financial statements include all adjustments
(consisting of normal, recurring adjustments) necessary to summarize fairly the
Company's financial position and results of operations. The results of
operations for the nine months ended February 28, 1999 are not necessarily
indicative of the results of operations for the full year or any other interim
period. These financial statements should be read in conjunction with the
audited financial statements and notes thereto included in the Company's Annual
Report on Form N-30D for the fiscal year ended May 31, 1998 as filed with the
Commission.
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
STATEMENTS OF FINANCIAL POSITION
ASSETS
(Unaudited)
February 28, May 31,
------------ ------------
1999 1998
------------ ------------
Loans Receivable:
Long Term Portion (Notes 2 and 3) $ 25,013,075 $ 24,442,206
Less: Unrealized Depreciation on
Loans Receivable (Note 3) (319,815) (319,815)
------------ ------------
24,693,260 24,122,391
Less: Current Maturities - Loans Receivable (3,751,961) (3,375,072)
------------ ------------
Total Loans Receivable -
Net of Current Maturities 20,941,299 20,747,319
------------ ------------
CURRENT ASSETS
Cash (Note 13) 937,359 1,528,168
Accrued Interest (Notes 2 and 3) 337,487 256,760
Current Maturities - Loans Receivable 3,751,961 3,375,072
Prepaid Expenses and Other Assets 279,556 326,375
------------ ------------
Total Current Assets 5,306,363 5,486,375
------------ ------------
Fixed Assets - Net of Accumulated Depreciation
of $32,864 and $28,364
respectively (Note 2) 24,408 13,908
------------ ------------
Total Assets $ 26,272,070 $ 26,247,602
============ ============
See Accompanying Notes to Unaudited Financial Statements
2
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
STATEMENTS OF FINANCIAL POSITION
LIABILITIES AND STOCKHOLDERS' EQUITY
(Unaudited)
February 28, May 31,
------------ ------------
1999 1998
------------ ------------
LONG TERM DEBT:
Debentures Payable to SBA (Note 5) $ 12,360,000 $ 12,360,000
4% Cumulative, 15 Year Redeemable
Preferred Stock 1,410,000 1,410,000
------------ ------------
Total Long Term Debt 13,770,000 13,770,000
------------ ------------
CURRENT LIABILITIES:
Notes Payable - Bank 5,000,000 5,000,000
Accrued Interest 417,762 317,723
Other Current Liabilities 83,086 57,732
Dividends Payable (Note 7) 9,400 9,400
------------ ------------
Total Current Liabilities 5,510,248 5,384,855
------------ ------------
Total Liabilities 19,280,248 19,154,855
------------ ------------
Commitments and Contingencies
(Notes 11, 12 and 13) -- --
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) -- --
3% Cumulative Preferred Stock - $1 Par Value:
No Shares Issued and Outstanding -- --
Common Stock - $.01 Par Value: 3,000,000 Shares
Authorized, 2,172,688 Shares Issued and
Outstanding 21,726 21,726
Additional Paid in Capital 7,048,816 7,048,816
Retained Earnings (78,720) 22,205
Restricted Capital - Realized Gain on
Redemption (Note 6) -- --
------------ ------------
Total Stockholders' Equity 6,991,822 7,092,747
------------ ------------
Total Liabilities and Stockholders' Equity $ 26,272,070 $ 26,247,602
============ ============
Net Assets Per Share $ 3.26 $ 3.26
============ ============
See Accompanying Notes to Unaudited Financial Statements
3
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
February 28, February 28,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE:
Interest Earned on
Outstanding Receivables $ 692,220 $ 661,726 $ 2,148,623 $ 1,647,298
Interest Income - Idle Funds 3,544 2,279 9,575 46,332
----------- ----------- ----------- -----------
Total Revenue (Note 2) 695,764 664,005 2,158,198 1,693,630
=========== =========== =========== ===========
EXPENSES:
Interest Expense (Note 6) 335,378 255,952 1,015,801 625,977
Professional Fees 68,097 21,694 157,876 57,790
Officers' Salaries (Notes 9 and 10) 30,405 30,405 91,215 91,215
Other Salaries (Note 9) 12,835 11,789 33,355 27,077
Other Operating Expenses 52,198 43,325 125,413 117,284
Pension Expense (Note 8) 3,371 3,958 10,981 11,568
Depreciation and Amortization (Note 2) 10,614 5,478 31,842 24,931
----------- ----------- ----------- -----------
Total Expenses 512,898 372,601 1,466,483 955,842
=========== =========== =========== ===========
Net Investment Income 182,866 291,404 691,715 737,788
Unrealized Depreciation in Value of
Investments (Notes 2 and 3) -- -- -- --
----------- ----------- ----------- -----------
182,866 291,404 691,715 737,788
PROVISION FOR TAXES:
Current Income Taxes (Note 2) (77) -- (757) (1,224)
----------- ----------- ----------- -----------
Net Income $ 182,789 $ 291,404 $ 690,958 $ 736,564
=========== =========== =========== ===========
Earnings Per Share of Common Stock
(Note 2) $ 0.06 $ 0.09 $ 0.29 $ 0.31
=========== =========== =========== ===========
Dividends Paid Per Share
of Common Stock $ 0.115 $ 0.110 $ 0.35 $ 0.33
=========== =========== =========== ===========
Weighted Average Shares of Common
Stock Outstanding 2,172,688 2,172,688 2,172,688 2,172,688
=========== =========== =========== ===========
</TABLE>
See Accompanying Notes to Unaudited Financial Statements
4
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Nine Months Ended
February 28,
----------------------------
1999 1998
----------- -----------
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) -- --
----------- -----------
Common Stock - $.01 Par Value:
3,000,000 Shares Authorized, 2,172,688
Shares Issued and Outstanding 21,726 21,726
----------- -----------
Additional Paid in Capital -
Beginning of Period 7,048,816 6,857,817
Amortization of Restricted
Capital (Note 6) -- 143,250
----------- -----------
Balance, End of Period 7,048,816 7,001,067
----------- -----------
Retained Earnings -
Beginning of Period 22,205 147,805
Net Income 690,958 736,564
Dividends Paid and Accrued (791,883) (759,327)
----------- -----------
Balance, End of Period (78,720) 125,042
----------- -----------
Restricted Capital
Gain on Redemption of 3% Preferred
Stock (See Note 6) -- 190,999
Amortization of Gain -- (143,250)
----------- -----------
Balance, End of Period (Note 6) -- 47,749
----------- -----------
Total Stockholder's Equity $ 6,991,822 $ 7,195,584
=========== ===========
See Accompanying Notes to Unaudited Financial Statements
5
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
STATEMENTS OF CASH FLOWS
Nine Months Ended
February 28,
--------------------------
1999 1998
----------- -----------
CASH FLOWS PROVIDED (USED) BY
OPERATING ACTIVITIES:
Net Income $ 690,958 $ 736,564
Depreciation and Amortization Expense 31,842 24,931
(Increase) in Accrued Interest (80,727) (126,945)
Decrease (Increase) in Other Assets 19,477 (145,958)
Increase in Accrued Liabilities 125,393 168,918
Dividends Paid and Accrued (791,883) (764,027)
----------- -----------
Net Cash (Used) By Operating Activities (4,940) (106,517)
----------- -----------
CASH FLOWS PROVIDED (USED) BY
INVESTING ACTIVITIES:
Increase in Loans Receivable, Net (570,869) (7,917,182)
----------- -----------
Net Cash (Used) By Investing Activities (570,869) (7,917,182)
----------- -----------
CASH FLOWS (USED) PROVIDED BY
FINANCING ACTIVITIES:
Acqisition of Fixed Assets (15,000) --
(Decrease) in Restricted Capital -- (143,250)
Increase in Debentures Payable to SBA (Net) -- 3,910,000
Increase In banl Line of Credit 1,750,000
Increase in Additional Paid in Capital -- 143,250
----------- -----------
Net Cash (Used) Provided by Financing Activities (15,000) 5,660,000
----------- -----------
Net (Decrease) in Cash (590,809) (2,363,699)
Cash Balance - Beginning of Period 1,528,168 2,869,861
----------- -----------
Cash Balance - End of Period $ 937,359 $ 506,162
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Interest $ 665,333 $ 319,146
----------- -----------
Taxes $ 680 $ 1,224
----------- -----------
See Accompanying Notes to Unaudited Financial Statements
6
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
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 elected to be regulated as a business development
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-nine
(79%) percent 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.
7
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
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.
Accounting Standard for Impairment of Loans
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:
February 28,
1999
------------
Outstanding Loans $ 36,628,744
Loan Participations (11,615,669)
------------
Net Loans Outstanding $ 25,013,075
============
NOTE 4 LOANS PAYABLE - LINE OF CREDIT
Effective March 6, 1997, the Company established a $5,000,000 line of
credit with Israel Discount Bank. All advances bear interest at 1.75%
above the LIBOR rate. Pursuant to the terms of the line of credit, the
Company is required to comply with certain terms, covenants and
conditions. The line of credit is unsecured and the Company is
required to maintain a minimum $100,000 compensating balance with the
bank.
8
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 5 LONG TERM DEBT
The long-term debt to the SBA consisted of the following subordinated
debentures as of February 28, 1999 with interest payable
semi-annually:
February 28,
Interest Rate Period 1999
Maturity Date First Second Face Amount
------------- ----- ------ -----------
June 9, 1999 6.000% 9.000% 750,000
September 22, 1999 5.000% 8.000% 750,000
December 16, 2002 4.510% 7.510% 1,300,000
June 1, 2005 6.690% 6.690% 520,000
December 1, 2005 6.540% 6.540% 520,000
June 1, 2006 7.710% 7.710% 250,000
March 1, 2007 7.380% 7.380% 4,210,000
September 1, 2007 7.760% 7.760% 4,060,000
-----------
$12,360,000
===========
During the period ended May 31, 1998, the Company paid off $150,000 in
subsidized debentures and sold an additional debenture (listed above)
for $4,060,000 due September 1, 2007 with interest and fees totaling
7.760% per annum.
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 6 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.
The Company issued the SBA a liquidating interest in a newly created
restricted capital surplus account which was equal to the amount of
the repurchase discount. This repurchase discount was amortized over a
sixty month period and was fully amortized as of May 31, 1998.
NOTE 7 DIVIDENDS
Dividends paid to the SBA for the fiscal year ended May 31, 1998 were
$56,400. Total dividends paid to common stockholders during the nine
months ended February 28, 1999 were $749,583. The Company is
contingently liable to the SBA for $9,400 in preferred dividends due
for the two months ended February 28, 1999.
NOTE 8 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 nine
months ended February 28, 1999, were $10,981. All contributions to the
plan have been funded on a current basis.
9
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 9 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 10 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 is month to month with a minimum annual
rental of $18,000
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 nine
months ended February 28, 1999, officers' salaries, including pension
contributions, were $91,215.
NOTE 11 SIGNIFICANT CONCENTRATION OF CREDIT RISK
Approximately seventy nine (79%) 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 12 FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISKS
The Company maintained approximately $644,182 in one bank in excess of
amounts that would be insured by the Federal Depository Insurance
Corporation. Management of the Company feels that the bank is well
capitalized under FDIC guidelines.
NOTE 13 FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures represent the Company's best estimate of the
fair value of financial instruments, determined on a basis consistent
with requirements of Statement of Financial Accounting Standards No.
107, "Disclosures about Fair Value of Financial Instruments."
The estimated fair values of the Company's financial instruments are
derived using estimation techniques based on various subjective
factors including discount rates. Such estimates may not necessarily
be indicative of the net realizable or liquidation values of these
instruments. Fair values typically fluctuate in response to changes in
market or credit conditions. Additionally, valuations are presented as
of a specific point in time and may not be relevant in relation to the
future earnings potential of the Company.
Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company will realize in a current market
exchange.
The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value
amounts.
Loans Receivable - The fair value of loans is estimated at cost net of
the allowance for loan losses. The Company believes that the rates of
these loans approximate current market rates.
Debentures Payable to Small Business Administration - The fair value
of debentures as of February 28, 1999 and May 31, 1998 was
approximately $12,360,000 and was estimated by discounting the
expected future cash flows using the current rate at which the SBA has
extended similar debentures to the Company.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information contained in this section should be used in conjunction with the
Financial Statements and Notes therewith appearing in this report Form 10-Q and
the Company's Annual Report for the year ended May 31, 1998.
General
The Company is licensed by the Small Business Administration (SBA) to
operate as a Specialized Small Business Investment Company (SSBIC) under the
Small Business Investment Act of 1958, as amended. The Company has also elected
to be regulated as a business development company under the Investment Company
Act of 1940.
The Company primarily makes loans and investments to persons who qualify
under SBA regulations as socially or economically disadvantaged and loans and
investments to entities which are at least 50% owned by such persons. The
Company's primary lending activity is to originate and service loans
collateralized by New York City Taxicab Medallions. The Company also makes loans
and investments in other diversified businesses.
Results of Operations For the Nine Months ended February 28, 1999 and 1998
Total investment income. The Company's investment income for the nine
months ended February 28, 1999 increased to $2,158,198 (an increase of 27%) from
$1,693,630 for the nine month period ended February 28, 1998. This increase was
mainly due to an increase in the loan portfolio during the fiscal year, and the
utilization of an additional $3,250,000 in bank debt. The portfolio increased
from $22,226,141 as of February 28, 1998 to $25,013,075 as of February 28, 1999,
as part of the Company's strategy to maximize shareholder rate of return by use
of bank debt and a reduction in loan participations.
Operating Expenses
Interest expense for the nine month period ended February 28, 1999 increased
$389,824 ($1,015,801 from $625,977) over the similar quarter ended February 28,
1998. This increase was mainly due to increased bank borrowings for the period,
and higher debenture costs for the nine months ended February 28, 1999.
Other operating expenses increased $120,817 when compared with the similar
nine month period ended February 28, 1999. This increase was mainly due to
increases in legal fees, and other fees.
Statement of Financial Position
Total assets and liabilities remained constant as of February 28, 1999 when
compared with the statement of financial position as of May 31, 1998. The
reserves for bad debts were deemed to be adequate as of February 28, 1999.
Accordingly, the Company did not take any additional bad debt charge-offs.
Results of Operations For the Three Months ended February 28, 1999 and 1998
Total investment income. The Company's investment income for the three
months ended February 28, 1999 increased to $31,759 (an increase of 5%) from
$695,764 for the three month period ended February 28, 1998. This increase was
mainly due to a small increase in the loan portfolio.
Operating Expenses
Interest expense for the three month period ended February 28, 1999
increased $79,426 ($335,378 from $255,952) over the similar quarter ended
February 28, 1998. This increase was mainly due to increased bank borrowings for
the period.
Professional fees increased by $46,403, when compared with the similar
three month period ended February 28, 1998. This increase was mainly due to
increases in legal fees.
There were no significant changes in other operating expenses when compared
with the similar three month period ended February 28, 1999.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has funded its operations through capital
contributions by its principal stockholders, public and private sales of its
securities, the issuance to the SBA of its subordinated debentures and SBA 4%
cumulative preferred stock, in order to make loans, increase its leverageable
capital and pay its operating expenses.
The Company's potential sources of liquidity are credit facilities with
banks, fixed rate long-term subordinated debentures that are issued to the SBA
and loan amortization and prepayments. The Company currently distributes at
least 90% of its investment company taxable income; consequently, the Company
primarily relies upon external sources of funds to finance growth. At February
28, 1999, the Company's $19,280,248 of debts consisted of $12,360,000 SBA
subordinated debentures with fixed rates of interest with a weighted average of
6.93%, $1,410,000 of 4% cumulative preferred stock and a $5,000,000 short term
bank line of credit.
Loan amortization and prepayments also provide a source of funding for the
Company. Prepayments on loans are influenced significantly by general interest
rates, economic conditions and competition.
The Company believes that anticipated borrowings from the SBA, bank credit
facilities which will be applied for, and cash flow from operations (after
distributions to stockholders) will be adequate to fund the continuing growth of
the Company's loan portfolio. In addition, in order to provide the funds
necessary for the Company's expansion strategy, the Company expects to incur,
from time to time, additional short-and long-term bank and (to the extent
permitted) SBA loans. There can be no assurance that such additional financing
will be available on terms acceptable to the Company.
As a result of several factors, the number and dollar volume of taxi loans
originated by the Company have not increased. The factors which contributed to
this included an increased competition for taxi loans, and more alternative loan
products. These other products often provide prospective borrowers with interest
only rates, which the Company does not provide.
The reduction in the interest rate spread (investment income versus
interest expense) where investment income went up by only 31% and interest
expense went up by 63%, reduced profits by 7% versus the comparable nine months.
The current lower interest rate environment and increased lending
competition have reduced the spread between the rate at which the Company lends
funds and the cost of such funds. There can be no assurance that the Company
will experience increased spreads in the foreseeable future. In some cases, the
increased level of lending competition has resulted in interest rates
considerable more aggressive than those offered by the Company. In order to
maintain a quality portfolio, the Company has and will continue to adhere to its
historical underwriting criteria. Accordingly, certain loan origination
opportunities which do not meet the Company's underwriting criteria will not be
funded by the Company.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: April 14, 1999 Freshstart Venture Capital Corp.
By: /s/ Zindel Zelmanovitch
----------------------------------------
Zindel Zelmanovitch, Chief Executive,
Financial and Accounting Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-END> FEB-28-1999
<CASH> 937,359
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1,410,000
0
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<EPS-PRIMARY> .29
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</TABLE>
