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 November 30, 1998
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 incorporation (I.R.S. Employer 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 ___ No _X_
The number of shares of Common Stock, par value $.01 per share,
outstanding as of January 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
November 30, 1998 (unaudited) and May 31, 1998 ................. 2-3
Statements of Operations for the Six Months
Ended November 30, 1998 and 1997 (unaudited) ................... 4
Statements of Stockholders' Equity for the Six Months
Ended November 30, 1998 and 1997 (unaudited) ................... 5
Statements of Cash Flows for the Six Months
Ended November 30, 1998 and 1997 (unaudited) ................... 6
Notes to the Financial Statements ................................. 7-10
Item 2. Managements' Discussion and Analysis of Financial
Condition and Results of Operations ....................... 11-12
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders ........... 13
Item 6. Exhibits and Reports on Form 8-K .............................. 14
SIGNATURES ............................................................. 15
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The statement of financial position of the Company as of November 30, 1998, the
related statements of operations, and cash flows for the six months ended
November 30, 1998 and 1997 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 six months ended November 30, 1998 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)
November 30, May 31,
------------ ------------
1998 1998
------------ ------------
Loans Receivable:
Long Term Portion (Notes 2 and 3) $24,905,906 $24,442,206
Less: Unrealized Depreciation on
Loans Receivable (Note 3) (319,815) (319,815)
----------- -----------
24,586,091 24,122,391
Less: Current Maturities - Loans Receivable (3,734,284) (3,375,072)
----------- -----------
Total Loans Receivable -
Net of Current Maturities 20,851,807 20,747,319
----------- -----------
CURRENT ASSETS
Cash (Note 13) 1,031,546 1,528,168
Accrued Interest (Notes 2 and 3) 300,076 256,760
Current Maturities - Loans Receivable 3,734,284 3,375,072
Prepaid Expenses and Other Assets 298,316 326,375
----------- -----------
Total Current Assets 5,364,222 5,486,375
----------- -----------
Fixed Assets - Net of Accumulated Depreciation
of $31,364 and $28,364
respectively (Note 2) 18,408 13,908
----------- -----------
Total Assets $26,234,437 $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)
November 30, May 31,
1998 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 332,813 317,723
Other Current Liabilities 49,230 57,732
Dividends Payable (Note 7) 9,400 9,400
----------- -----------
Total Current Liabilities 5,391,443 5,384,855
----------- -----------
Total Liabilities 19,161,443 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 2,452 22,205
Restricted Capital - Realized Gain on
Redemption (Note 6) -- --
----------- -----------
Total Stockholders' Equity 7,072,994 7,092,747
----------- -----------
Total Liabilities and Stockholders' Equity $26,234,437 $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 Six Months Ended
November 30, November 30,
----------------------------- -----------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUE:
Interest Earned on
Outstanding Receivables $ 737,201 $ 523,398 $1,456,403 $ 985,572
Interest Income - Idle Funds 2,719 26,262 6,031 44,053
---------- ---------- ---------- ----------
Total Revenue (Note 2) 739,920 549,660 1,462,434 1,029,625
---------- ---------- ---------- ----------
EXPENSES:
Interest Expense (Note 6) 342,798 220,293 680,423 370,025
Professional Fees 66,669 22,050 89,779 36,096
Officers' Salaries (Notes 9 and 10) 30,405 30,405 60,810 60,810
Other Salaries (Note 9) 9,806 6,618 20,520 15,288
Other Operating Expenses 21,578 25,309 73,215 73,959
Pension Expense (Note 8) 3,510 3,805 7,610 7,610
Depreciation and Amortization (Note 2) 10,613 12,391 21,228 19,453
---------- ---------- ---------- ----------
Total Expenses 485,379 320,871 953,585 583,241
---------- ---------- ---------- ----------
Net Investment Income 254,541 228,789 508,849 446,384
Unrealized Depreciation in Value of
Investments (Notes 2 and 3) -- -- -- --
---------- ---------- ---------- ----------
254,541 228,789 508,849 446,384
PROVISION FOR TAXES:
Current Income Taxes (Note 2) -- -- 680 544
---------- ---------- ---------- ----------
Net Income $ 254,541 $ 228,789 $ 508,169 $ 445,840
========== ========== ========== ==========
Earnings Per Share of Common Stock
(Note 2) $ 0.10 $ 0.09 $ 0.21 $ 0.20
========== ========== ========== ==========
Dividends Paid Per Share
of Common Stock $ 0.115 $ 0.110 $ 0.23 $ 0.22
========== ========== ========== ==========
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)
Six Months Ended
November 30,
-----------------------------
1998 1997
----------- -----------
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) -- 95,499
----------- -----------
Balance, End of Period 7,048,816 6,953,316
----------- -----------
Retained Earnings -
Beginning of Period 22,205 147,805
Net Income 508,169 445,840
Dividends Paid and Accrued (527,922) (506,232)
----------- -----------
Balance, End of Period 2,452 87,413
----------- -----------
Restricted Capital
Gain on Redemption of 3% Preferred
Stock (See Note 6) -- 190,999
Amortization of Gain -- (95,499)
----------- -----------
Balance, End of Period (Note 6) -- 95,500
----------- -----------
Total Stockholder's Equity $ 7,072,994 $ 7,157,955
=========== ===========
See Accompanying Notes to Unaudited Financial Statements
5
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
STATEMENTS OF CASH FLOWS
Six Months Ended
November 30,
---------------------------
1998 1997
----------- -----------
CASH FLOWS PROVIDED (USED) BY
OPERATING ACTIVITIES:
Net Income $ 508,169 $ 445,840
Depreciation and Amortization Expense 21,228 19,453
(Increase) in Accrued Interest (43,316) (85,234)
Decrease (Increase) in Other Assets 9,831 (161,027)
Increase in Accrued Liabilities 6,588 17,518
Dividends Paid and Accrued (527,922) (506,232)
----------- -----------
Net Cash (Used) By Operating Activities (25,422) (269,682)
----------- -----------
CASH FLOWS PROVIDED (USED) BY
INVESTING ACTIVITIES:
Increase in Loans Receivable (9,129,875) (8,448,700)
Repayment of Loans Receivable 4,927,584 1,560,182
Increase in Loan Participations 5,294,611 595,000
Repayment of Loan Participations (1,556,020) (201,298)
----------- -----------
Net Cash (Used) By Investing Activities (463,700) (6,494,816)
----------- -----------
CASH FLOWS (USED) PROVIDED BY
FINANCING ACTIVITIES:
Acqisition of Fixed Assets (7,500) --
(Decrease) in Restricted Capital -- (95,499)
Increase in Debentures Payable to SBA (Net) -- 3,910,000
Increase in Additional Paid in Capital -- 95,499
----------- -----------
Net Cash (Used) Provided by Financing Activities (7,500) 3,910,000
----------- -----------
Net (Decrease) in Cash (496,622) (2,854,498)
Cash Balance - Beginning of Period 1,528,168 2,869,861
----------- -----------
Cash Balance - End of Period $ 1,031,546 $ 15,363
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Interest $ 665,333 $ 298,608
----------- -----------
Taxes $ 680 $ 544
----------- -----------
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:
November 30,
1998
------------
Outstanding Loans $ 36,345,556
Loan Participations (11,439,650)
------------
Net Loans Outstanding $ 24,905,906
============
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 November 30, 1998 with interest payable semi-annually:
November 30,
Interest Rate Period 1998
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 six months
ended November 30, 1998, were $527,922. The Company is contingently liable
to the SBA for $9,400 in preferred dividends due for the two months ended
November 30, 1998.
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 six months ended November 30, 1998, were $7,610.
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 six months ended
November 30, 1998, officers' salaries, including pension contributions,
were $66,891.
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 $788,556 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 November 30, 1998 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 Six Months ended November 30, 1998 and 1997
Total investment income. The Company's investment income for the six months
ended November 30, 1998 increased to $1,456,403 (an increase of 47.8%) from
$985,572 for the six month period ended November 30, 1997. This increase was
mainly due to an increase in the loan portfolio during the fiscal year. The
portfolio increased from $20,803,989 as of November 30, 1997 to $24,905,906 as
of November 30, 1998, as part of the Company's strategy to maximize shareholder
rate of return by use of bank debt.
Operating Expenses
Interest expense for the six month period ended November 30, 1998 increased
$310,398 ($680,423 from $370,025) over the similar quarter ended November 30,
1997. This increase was mainly due to increased bank borrowings for the period
offset by lower interest rates for the six months ended November 30, 1998.
Other operating expenses increased $59,886 when compared with the similar
six month period ended November 30, 1997. 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 November 30, 1998 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 November 30. 1998.
Accordingly, the Company did not take any additional bad debt charge-offs.
Results of Operations For the Three Months ended November 30, 1998 and 1997
Total investment income. The Company's investment income for the three
months ended November 30, 1998 increased to $737,201 (an increase of 40.8%) from
$523,398 for the three month period ended November 30, 1997. This increase was
mainly due to an increase in the loan portfolio during the fiscal year.
Operating Expenses
Interest expense for the three month period ended November 30, 1998
increased $122,505 ($342,798 from $220,293) over the similar quarter ended
November 30, 1997. This increase was mainly due to increased bank borrowings for
the period offset by lower interest rates for the three months ended November
30, 1998.
There were no significant changes in other operating expenses when compared
with the similar three month period ended November 30, 1997.
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 November
30, 1998, the Company's $18,770,000 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.
12
<PAGE>
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on November 10, 1998 (the
"Annual Meeting").
The Company's shareholders were asked to take the following actions at the
meeting:
1. Elect eight Directors to serve until the 1999 annual meeting of
shareholders or until their successors shall otherwise be elected (the
"Board Proposal");
2. Approve the amendment of the Company's Restated Certificate of
Incorporation to increase the number of authorized shares of Common Stock
therein from 3,000,000 to 5,000,000 shares, subject to the approval of the
U.S. Small Business Administration (the "Charter Proposal");
3. Approve the Board of Directors' selection of Michael C. Finkelstein & Co.
to serve as the Company's independent auditors for the fiscal year ending
May 31, 1998 (the "Auditors Proposal");
4. Approve the election to become a Business Development Company under Section
54 of the Investment Company Act of 1940 (the "BDC Proposal");
5. Adopt an incentive stock option plan for employees of the Company (the
"Incentive Plan Proposal"); and
6. Adopt a stock option plan for non-employee directors of the Company,
subject to the approval of the Securities and Exchange Commission (the
"Director Plan Proposal"); and
With respect to the Board Proposal, the eight individuals nominated for director
were elected by the affirmative vote of a majority of shares of common stock
present at the Annual Meeting. The nominees and votes each received are as
follows:
FOR WITHHELD
--------- --------
Zindel Zelmanovitch 1,912,787 51,050
Neil Greenbaum 1,912,787 51,050
Pearl Greenbaum 1,912,787 51,050
Michael L. Moskowitz 1,912,787 53,050
Eugene Habar 1,912,787 51,050
Alan Work 1,910,787 53,050
Ben Lichtenberg 1,912,787 51,050
John Hamill 1,912,787 51,050
13
<PAGE>
The Charter Proposal, the Auditors Proposal, the BDC Proposal, the Incentive
Plan Proposal and the Director Plan Proposal were also approved by affirmative
vote of a majority of shares of Common Stock present at the Annual Meeting. Each
of the proposals received the following votes:
Votes Cast For Against Abstentions Not Voted
Charter Proposal 1,863,187 92,950 7,700 0
Auditors Proposal 1,551,287 5,550 7,000 0
BDC Proposal 1,290,901 85,992 4,595 582,349
Incentive Plan Proposal 1,228,962 142,729 6,744 585,402
Director Plan Proposal 1,227,133 144,551 6,701 585,402
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
3.1(a) Certificate of Incorporation, as amended. Filed Exhibit 4.1 to
the Company's Registration Statement on Form 8-A and incorporated
by reference thereto.
3.1(b) Form of Certificate of Amendment of Certificate of Incorporation,
as approved by the shareholders of the Company at the Annual
Meeting of Shareholders on November 10, 1998 to be filed in New
York State upon receipt of approval by the U.S. Small Business
Administration. Filed as Exhibit 1 to the 1998 Proxy Statement of
the Company and incorporated by reference thereto.
3.2 By-Laws. Filed as Exhibit 4.2 to the Company's Registration
Statement on Form 8-A and incorporated by reference thereto.
10.1 1998 Incentive Stock Option Plan. Filed as Exhibit 2 to the 1998
Proxy Statement of the Company and incorporated by reference
thereto.
10.2 Non-Employer Director Plan. Filed as Exhibit 3 to the 1998 Proxy
Statement of the Company and incorporated by reference thereto.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the fiscal quarter ended
November 30, 1998.
14
<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.
Freshstart Venture Capital Corp.
Dated: January 14, 1999 By:/s/ Zindel Zelmanovitch
------------------------------------------
Zindel Zelmanovitch
Chief Executive, Financial and Accounting
Officer
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