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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 1999 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 (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
24-25 Jackson Avenue, Long Island City, New York 11101
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (718) 361-9595
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.01 per share
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 reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of July 31, 1999 was approximately $8,095,857.
The number of outstanding shares of the registrant's common stock as of
July 31, 1999 was 2,172,688 shares.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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PART I
ITEM 1. BUSINESS
GENERAL
Freshstart Venture Capital Corp. (the "Company" or "Freshstart") is a
Small Business Investment Company ("SBIC") that operates as a Specialized Small
Business Investment Company ("SSBIC") under the Small Business Investment Act of
1958, as amended, (the "1958 Act"), and is regulated and financed in part by the
Small Business Administration ("SBA"). The Company is a non-diversified
investment company that has elected to be regulated as a business development
company ("Business Development Company"), a type of closed-end investment
company under the Investment Company Act of 1940, as amended (the "1940 Act").
The Company has elected to be taxed as a "regulated investment company" ("RIC")
for federal income tax purposes. As a regulated investment company, the Company
pays out to its shareholders substantially all of its investment company taxable
income as dividends. Since fiscal 1988, the Company has paid dividends for each
fiscal year and it intends to continue to pay dividends as long as funds are
legally available for distribution.
As an SSBIC, the Company's business is to provide loan financing to
small and medium sized businesses at least 50% owned by persons who qualify
under SBA regulations as socially or economically disadvantaged. The Company has
in the past and intends to continue to make in the future a substantial portion
of its loans to finance taxicab medallions, taxicabs and related assets, with
the balance of its loans being made to other small business concerns. Taxi
loans, which represented approximately 79% of the aggregate principal amount of
the Company's loan portfolio as of May 31, 1999, are collateralized by taxicab
medallions and related assets. The Company has had a very low delinquency rate
with taxicab medallion loans and has never suffered a material loss in
connection with such financings. Historically, the majority of the Company's
taxicab medallion loans have been subordinate to loans by senior lenders. The
balance of the Company's loan portfolio includes loans for the acquisition
and/or operation of other small businesses and the Company intends to continue
to make such loans. The Company has not to date made any equity investments in
any small business concerns and has no present intention to do so. The Company
may in the future, however, make such equity investments, if determined by its
Board of Directors at such time to be in the best interests of the Company.
As an SSBIC, the Company has certain benefits not available in other
lending institutions. An investment in an SSBIC, such as a purchase of the
Company's Common Stock, may afford certain investors favorable tax benefits,
including the ability to defer recognizing capital gain from the sale of
publicly traded securities, subject to certain limitations, if the investor uses
the proceeds from such sale within 60 days to purchase common stock in an SSBIC.
See "Business - Specialized Small Business Investment Companies." In addition,
subject to certain conditions, certain financial institutions may be able to
satisfy their requirements under the Community Reinvestment Act of 1977 by
buying shares of the Company's Common Stock. See "Federal Regulation-Community
Reinvestment Act." In October 1996, legislation was enacted which eliminated the
authority of the SBA to issue new SSBIC licenses.
The Company was organized as a New York corporation on March 4, 1982.
The Company currently maintains offices at 24-25 Jackson Avenue, Long Island
City, NY 11101 (telephone: (718) 361-9595).
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RECENT DEVELOPMENTS
On August 17, 1999, the Company entered into a Letter of Intent with
Medallion Financing Corp. ("Medallion"), a specialty finance company publicly
trading on The Nasdaq National Market (NNM: TAXI), relating to the proposed
acquisition of the Company by Medallion. Medallion, like the Company, is a RIC
that distributes 90% of its income to shareholders.
The Letter of Intent contemplates that a definitive agreement will be
executed by the parties which will provide that the Company's shareholders will
receive Medallion common stock having a fair market value of $4.15 to $5.00 for
each share of the Company's Common Stock held by them. If the fair market value
of the Medallion's common stock falls below $12.00 per share, Medallion may
elect not to proceed with the proposed transaction. In addition, the Letter of
Intent restricts the Company's ability to declare dividends in excess of $.03
per share per fiscal quarter until December 31, 1999 and includes the grant by
the Company of an option to purchase up to 19.99% of the Company's stock at an
exercise price of $3.875 per share if the Company accepts an offer from another
party or, under certain circumstances, elects not close the proposed
transaction. The closing of the proposed transaction is subject to the
completion of due diligence, the approval of the Board of Directors of both
companies, the approval of the shareholders of the Company, regulatory approval,
the execution and delivery of a definitive merger agreement and the satisfaction
of customary conditions. It is the intention of both companies to consummate the
proposed transaction prior to December 31, 1999.
NATURE OF LOANS
THE COMPANY'S LOANS. Loans made by the Company are subject to certain
restrictions imposed by the SBA as to the maximum interest rate that may be
charged and with respect to their terms (currently, no more than 20 years).
Generally, the Company's loans have been made to small business concerns, are
secured by related assets and are personally guaranteed by the owners of the
company owning the small business. In addition, the Company's loan documentation
provides that its liens on the collateral furnished by its borrowers must be
enforceable in the event of a default by such borrowers. The Company will not
lend to, or otherwise invest more than, the lesser of (i) 10% of its total
assets, or (ii) 30% of its paid-in capital attributable to its Common Stock, in
any one small business concern. The Company has not made, and is prohibited by
applicable SBA regulations from making, loans to officers or directors of the
Company or to any person owning or controlling, directly or indirectly, 10% or
more of the Company's Common Stock. Under prior SBA regulations the maximum rate
of interest which the Company could charge on loans could not exceed the higher
of either the Company's weighted average cost of qualified borrowings, as
determined pursuant to SBA regulations without regard to subsidized interest
rates, plus, in either case, seven percentage points, rounded off to the next
lower eighth of one percent; provided however, that if the then current
debenture rate was 8% per annum or lower, the Company was permitted to charge up
to 15% per annum. The maximum rate of interest per annum allowed to be charged
by the Company to its borrowers for loans originated during January 1997 was 19%
for a loan and 14% for a convertible debt security. The new regulations now
allow an SBIC to use its own weighted average cost of borrowing as the basis for
determining the maximum rate that it may charge for loans or debt securities.
However, the ability of the Company to charge such a rate is limited by
competition. The rates of interest on loans in the Company's portfolio ranged
from 8.38% to 18% at May 31, 1999. For the month of May 31, 1999, the average
annual weighted interest rate per loan outstanding was 9.62%.".
A substantial portion of the Company's loans have been made in the past
to purchasers or owners of New York City taxicab medallions. As an investment
company registered under the 1940 Act, the Company is required to adopt certain
fundamental investment policies. Such policies, once adopted, may only be
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changed by the shareholders of the Company. See "Investment Policies." The
Company's investment policy with respect to the concentration of investments
previously permitted the Company to invest up to 50% of its loan portfolio for
the purpose of financing the purchase or continued ownership of taxicab
medallions, taxicabs and related assets. After the 50% limitation was
inadvertently exceeded by the Company without shareholder approval, the
Company's shareholders amended such investment policy. Pursuant to the Company's
present investment policy with respect to the concentration of investments (i)
the Company must make at least 25% of its investments for financing the purchase
or continued ownership of taxicab medallions, taxicabs and related assets and
(ii) the Company may not concentrate 25% or more of its total assets in
securities of issuers in any other industry group. As of May 31, 1999,
approximately 79% of the aggregate principal amount of its outstanding loans,
$19,690,009 of an aggregate of $25,123,632, represented loans made to finance
the purchase or continued ownership of New York City taxicab medallions. The
balance, $5,433,623 (21%), consisted of loans to various commercial borrowers.
See "Loan Portfolio; Valuation." While the Company is authorized by its license
to allocate up to 50% of its portfolio to taxicab medallion loans, the SBA has
to date permitted the Company to operate in excess of this limitation. No
assurance can be given that the SBA will continue to allow the Company to
allocate in excess of 50% of its loan portfolio to taxicab medallion loans.
In 1994, the SBA conducted a study of the New York City taxi industry
to review SBIC policy, compliance and financial issues associated with a
significant concentration of SBIC and SSBIC investments in the taxi medallion
industry. The study suggested that, given funding limitations, the SBA should
remain cognizant of its general policy to avoid the concentration of funding in
one industry or geographic location.
Although the Company currently anticipates that it will continue to
make loans to purchasers or owners of New York City taxicab medallions, it
intends to allocate an increasing portion of its assets to the making of loans
to a variety of small businesses, subject to any limitations imposed by SBA
regulations or the 1940 Act.
BORROWINGS. The Company is authorized by its certificate of
incorporation to issue shares of preferred stock and subordinate debentures to
the SBA pursuant to the 1958 Act. The Company may also borrow money and issue
promissory notes and other obligations, subject to SBA regulatory limitations.
In addition to the subordinated debentures issued to, or guaranteed by, the SBA,
the Company has, from time to time, borrowed funds from banks.
SCOPE OF BUSINESS ACTIVITIES. The Company has not purchased, and does
not intend to purchase, commodities or commodity contracts and it has not
engaged, nor does it intend to engage, in the business of underwriting the
securities of other issuers. In addition, the Company does not intend to
purchase a controlling interest in any small business except as may be necessary
in the event of a foreclosure on the security for a particular loan. The Company
does not intend to engage in the purchase or sale of real estate or in
investments in the securities of other investment companies.
Although the Company's certificate of incorporation authorizes equity
investment in small business concerns, the Company has not to date made any
equity investments in any taxicab or other small business concern. However, the
Company may make such equity investments if determined by its Board of Directors
to be in the best interests of the Company.
The Company currently has no intention of performing advisory services
for other businesses, although as a Business Development Company it has agreed
to offer its portfolio companies, if requested, significant management
assistance.
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SPECIALIZED SMALL BUSINESS INVESTMENT COMPANIES
GENERAL. As an SSBIC, the Company is eligible to apply for certain
financing from the SBA, and the Company and its shareholders are eligible for
certain tax benefits, both described below. The SBA has discretion in
determining whether financing will be available to an SSBIC and the type and
amount of such financing. Therefore, there can be no assurance as to the nature,
amount or timing of SBA financing that may actually be obtained by the Company.
See "Risk Factors-SBA Financing Not Assured." Furthermore, there are certain
restrictions and requirements to which the Company is subject by virtue of its
being an SSBIC. See "Federal Regulation-Regulation under the Small Business
Investment Act of 1958."
BACKGROUND. SBICs and SSBICs are privately owned and managed investment
companies licensed by the SBA. The 1958 Act requires each licensee to have a
minimum level of private investor capital and to be operated by experienced
management. Under present law for companies which were incorporated prior to
October 1, 1996, an SBIC must have at least $2.5 million in private capital and
an SSBIC must have not less than $1.5 million. As noted below, SBICs and SSBICs
are mandated by the 1958 Act to make investments in small businesses and, in
return, are eligible to apply for favorable financing from the SBA called
"leverage." SBICs were created under the 1958 Act as a vehicle for providing
equity capital, long- term loan funds and management assistance to small
businesses. In general, the SBA considers a business to be "small", and
therefore eligible to receive loans from an SBIC, only if (i) its net worth does
not exceed $18,000,000 and if the average of its net annual income after taxes
for the preceding two years was not more than $6,000,000 or (ii) it meets the
size standard for the industry in which it is primarily engaged, pursuant to SBA
regulations. In addition, SBICs are required to allocate a portion of their
portfolio to the financing of any concern that (i) together with its affiliate
does not have net worth in excess of $6 million and does not have an average net
income after taxes for the preceding two years in excess of $2 million or (ii)
meets the size standard for the industry in which it is primarily engaged. SBICs
are licensed, regulated and sometimes financed in part by the SBA. SSBICs are
SBICs which specialize in providing equity funds, long-term loans and management
to small business concerns at least 50 % owned and managed by individuals from
groups in the United States that are socially or economically disadvantaged,
including certain designated ethnic minorities, Vietnam War era veterans, and
other groups which fall within SBA guidelines relating to social or economic
disadvantage.
BENEFITS.
The principal benefits to the Company as a result of its being licensed
as an SSBIC are as follows:
1. Prior to October 1, 1996 the SBA was authorized to purchase shares
of non-voting preferred stock from an SSBIC for cash up to an amount equal to
the SSBIC's aggregate common stock and additional paid-in capital net of
organizational expenses, excluding any amounts paid by the SBA (the
"Leverageable Capital"). Prior to November 1989, such shares of preferred stock
had a 3% annual cumulative dividend. Subsequent to November 1989, all new
preferred stock issued by an SSBIC was required to have a 4% annual cumulative
dividend and to be redeemed by the SSBIC within 15 years from the date of any
such issuance. The Company issued 650,000 shares of its 4% Preferred Stock to
the SBA, for an aggregate purchase price of $650,000 in May 1992 and an
additional 760,000 shares of 4% Preferred Stock, for an aggregate purchase price
of $760,000 in October 1994. The 4% dividend may be accumulated and need not be
paid to the SBA on an annual or other periodic basis, so long as cumulative
dividends are paid to the SBA before any other payments are made to investors.
The Company and the SBA entered into a repurchase agreement, dated May 10, 1993
(the "Repurchase Agreement"). Pursuant to the Repurchase Agreement, the Company
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repurchased all 1,520,000 shares of its 3% Preferred Stock from the SBA for a
purchase price of $.36225679 per share, or an aggregate of $550,630. The
repurchase price was at a substantial discount to the original sale price of the
3% Preferred Stock which was sold to the SBA at par value or $1.00 per share. As
a condition to the repurchase, the Company granted the SBA a liquidating
interest in a newly created restricted capital surplus account (the "Restricted
Surplus Account"). The Restricted Surplus Account is equal to the amount of the
repurchase discount. The initial value of the liquidating interest was $969,370,
the amount of the repurchase discount on the date of repurchase, and is being
amortized over a 60-month period on a straight-line basis. As of May 31, 1999,
the liquidating interest was fully amortized.
2. The term of SBA Debentures may be up to 15 years, but is typically
10 years. The SBA will purchase or guarantee such debentures only after an SSBIC
has demonstrated a need for such debentures as evidenced by the SSBIC's
investment activity and its lack of sufficient additional funds available for
investments. An SSBIC that has invested at least 50% of its Leverageable Capital
and the proceeds of its SBA Debentures is presumed to lack sufficient funds
available for investment. Generally, SBA Debentures will bear interest at a
fixed rate which is based on the rate which is set by the underwriters of the
pooled debentures sold through the SBIC Funding Corp. Prior to October 1, 1996,
the SBA was authorized during the first five years of the initial term of the
debentures, to subsidize an SSBIC's annual interest rate by paying 300 basis
points (3%) of the interest due on such debentures. After maturity, these
debentures may be refinanced by the SBA as a new unsubsidized debenture with a
10-year term. Currently, the Company has $12,360,000 in subordinated debentures
outstanding with a weighted average interest rate of 7.6% per annum.
The SBA also makes available to both SBIC's and SSBIC's financing in
the form of a guaranty of unsubsidized debentures. These debentures have terms
of up to 15 years, but typically 10 years. The debentures are sold through the
SBIC Funding Corp. and carry a fixed interest rate based on prevailing market
rates.
With respect to debentures guaranteed by the SBA after July 1, 1991,
the SBA's claim against an SSBIC is subordinated, in the event of such SSBIC's
insolvency, only in favor of present and future indebtedness outstanding to
lenders and only to the extent that the aggregate amount of such indebtedness
does not exceed the lesser of 200% of such SSBIC's paid-in capital and paid-in
surplus (as adjusted pursuant to SBA regulations), or $10,000,000. However, the
SBA may agree to a subordination in favor of one or more loans from certain
other lenders, in its sole discretion. As of May 31, 1999, the Company has an
aggregate of $12,360,000 of subordinated debentures outstanding. Such debentures
currently bear interest at rates ranging from 6.54% to 9% per annum.
3. Under the provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), Section 1044, C corporations and individuals (not estates,
trust, partnerships or S corporations) may elect to defer recognition of capital
gain realized on the sale of publicly traded securities if the taxpayers use the
sales proceeds within 60 days to purchase common stock or a partnership interest
in an SSBIC. The amount of gain an individual may elect to roll over for a tax
year is limited to the lesser of (1) $50,000, or (2) $500,000 reduced by any
gain previously excluded under this provision for all preceding taxable years
($25,000 and $250,000, respectively, for married individuals filling
separately). For C corporations, the annual and cumulative limits are increased
to $250,000 and $1 million, respectively. To the extent that sales proceeds
exceed the cost of the SSBIC common stock or partnership interest, gain must be
currently recognized. Recognition of ordinary gain may not be deferred. This
election is made by a shareholder on Schedule D to his Form 1040 Federal income
tax return for the year in which the securities are sold.
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For purposes of Section 1044 of the Code, the term "publicly traded
securities" means securities which are traded on an established securities
market. The taxpayer's basis in the SSBIC stock or partnership interest is
reduced, by the amount of any unrecognized gain on the sale of the securities.
Each investor before making an investment should consult with his own
accountant or tax advisor as to the potential application of the tax benefits
available under Code Section 1044. Each shareholder should note that his holding
period for the Company's Common Stock begins upon the purchase of the Common
Stock with no inclusion in such holding period for the time he held the
publicly-traded securities. If a shareholder sells the Common Stock and realizes
a gain or loss upon such sale, such gain or loss will be a long-term capital
gain or loss, if the shareholder held such Common Stock for more than one year.
To encourage investment in new ventures and SSBICs, such as the
Company, Code Section 1202 grants relief to investors who risk their funds in
these businesses. Non-corporate investors may exclude up to 50% of the gain they
realize on the disposition of qualified small business stock issued after August
10,1993, and held for more than five (5) years. The amount of gain eligible for
the 50% exclusion is subject to per issuer limits. The exclusion is available to
taxpayers who own eligible stock for five years in a qualified corporation that
actively conducts a qualified trade or business and that meets a maximum gross
assets test. SSBICs which qualify for Code Section 1202 treatment at the time of
the taxpayer's investment are also exempt from certain line of business
limitations.
However, if an individual utilizes Code Section 1044 to defer
recognition of capital gain on the sale of publicly traded securities and then
invests those funds in qualified small business stock, the deferred gain would
not be eligible for the 50% exclusion, although the appreciation occurring after
the purchase of the qualified small business stock would be eligible for such
50% exclusion.
4. Legislation was enacted on October 1, 1996 which eliminated most
distinctions between SBICs and SSBICs and eliminated the authority to issue new
SSBIC licenses. Under a consolidated program, all new applicants will be
licensed as SBICs. The legislation raises the minimum capital requirements for
new applicants and increased certain user fees charged to licensees in
connection with the receipt of leverage. The legislation exempts from the
increased capital requirements all SSBICs and certain SBICs existing at the date
of the legislation's enactment. The user fees are fees that are charged to
licensees in connection with the purchase or guaranty by the SBA of debentures
or participating securities. The legislation specifies that the user fee will
equal 3% of the principal amount purchased or guaranteed by the SBA plus 1% of
the interest rate charged on the debentures or participating securities. The
legislation also limits the securities that can be purchased or guaranteed by
the SBA to debentures without a federal interest rate subsidy and to
participating equity securities.
REGULATION AS A BUSINESS DEVELOPMENT COMPANY
The Company is a closed-end, non diversified investment company that
has elected to be regulated as a Business Development Company under the 1940 Act
and, as such, is subject to regulation under that Act. Among other things, the
1940 Act contains prohibitions and restrictions relating to transactions between
the Company and its affiliates, principal underwriters and affiliates of those
affiliates or underwriters and requires the majority of the Company's directors
be persons other than "interested persons," as defined in the 1940 Act. In
addition, the 1940 Act prohibits the Company from changing the nature of its
business so as to cease to be, or to withdraw its election as, a Business
Development Company unless so authorized by the holders of a majority of its
outstanding voting securities.
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A Business Development Company is permitted, under specified
conditions, to issue multiple classes of indebtedness and one class of stock
senior to the shares offered hereby (collectively, "Senior Securities" as
defined in the 1940 Act) if the asset coverage, as defined in 1940 Act, of any
Senior Security is at least 200% immediately after each such issuance and
certain other conditions are met. On the other hand, because the Company is an
SSBIC, the only asset coverage requirement applicable to it would give the
holders of its Senior Securities constituting indebtedness, the right to elect a
majority of the Board of Directors, if on the last business day of each of 12
consecutive calendar months, the Company failed to maintain at least 100% asset
coverage. Also, while Senior Securities constituting preferred stock are
outstanding (other than preferred stock issued to or guaranteed by the SBA),
provision must be made to prohibit any distributions to shareholders or the
repurchase of such securities or shares unless the applicable asset coverage
ratios are met at the time of the distribution or repurchase of such securities
or shares unless the applicable asset coverage ratios are met at the time of the
distribution or repurchase. The Company may also borrow amounts up to 5% of the
value of its total assets for temporary purposes.
Under the 1940 Act, a Business Development Company may not acquire any
asset, other than assets of the type listed in Section 55(a) of the 1940 Act
("Qualifying Assets") unless, when the acquisition is made, such Qualifying
Assets represent at least 70% of its total assets. The principal categories of
Qualifying Assets relevant to the business of the Company are the following:
(1) Securities purchased in transactions not involving any public
offering from the issuer of such securities, which issuer is an eligible
portfolio company. An "eligible portfolio company" is defined, in pertinent
part, in the 1940 Act as any issuer which:
(a) is organized under the law of, and has its principal place
of business in, the United states;
(b) is not an investment company, other than another SBIC that
is wholly owned by the Business Development Company; and
(c) does not have any class of securities with respect to
which margin credit may be extended under federal law.
(2) Securities of any eligible portfolio company which is controlled by
the Business Development Company.
(3) Securities received in exchange for or distributed on or with
respect to securities described in item (1) or (2) above, or pursuant to the
exercise of options, warrants or rights relating to such securities.
(4) Cash, cash items, government securities, or high quality debt
securities maturing in one year or less from the time of investment.
In addition, a Business Development Company must have been organized
(and have its principal place of business) in the United States for the purpose
of making investments in the types of securities described in items (1) or (2)
above and, in order to count the securities as Qualifying Assets for the purpose
of the 70% test, the Business Development Company must either control the issuer
of the securities or make available to the issuer of the securities significant
managerial assistance. Making available significant managerial assistance means,
among other things, any arrangement whereby a Business Development Company,
through its directors, officers or employees, offers to provide, and, if
accepted, does so provide, significant guidance and counsel concerning the
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management, operations or business objectives and policies of a portfolio
company; or in the case of an SBIC (such as the Company), making loans to a
portfolio company.
INVESTMENT POLICIES
The investment policies set forth herein constitute fundamental
policies of the Company pursuant to the 1940 Act which may be changed only by
the vote of the lesser of (i) a majority of its outstanding Common Stock, or
(ii) 67% of the number of shares of Common Stock present in person or by proxy
at a duly held shareholder meeting at which at least 50% of the outstanding
shares of Common Stock are so present.
(a) ISSUANCE OF SENIOR SECURITIES. The Company may issue preferred
stock and subordinated debentures to the SBA in the maximum
amounts permissible under the 1958 Act and the applicable
regulations.
(b) BORROWING OF MONEY. The Company has the power to borrow funds
from banks, trust companies, other financial institutions, the
SBA or any success or agency and/or other private or
governmental sources, if determined by the Company's Board of
Directors to be in the best interests of the Company.
(c) UNDERWRITING. The Company has not engaged, and does not intend
to engage, in the business of underwriting the securities of
other issuers.
(d) CONCENTRATION OF INVESTMENTS. The Company may not concentrate
25% or more of its total assets in securities of issuers in
any industry group except the taxicab industry. The Company
will make at least 25% of its investments for financing the
purchase or continued ownership of taxicab medallions,
taxicabs and related assets. The balance of its investments
includes, and the Company intends to continue to finance, the
acquisition and/or operation of other small businesses. All of
the Company's loans are made to those persons defined by SBA
regulations as socially or economically disadvantaged persons
or entities and which are at least 50% owned by persons so
defined as socially or economically disadvantaged.
(e) REAL ESTATE. The Company has not engaged, and does not intend
to engage, in the purchase and sale of real estate. However,
the Company may elect to purchase and sell real estate in
order to protect any of its prior investments which it
considers at risk.
(f) COMMODITIES CONTRACTS. The Company has not engaged, and does
not intend to engage, in the purchase and sale of commodities
or commodities contracts.
(g) LOANS. The Company has made, and will continue to make, loans
to small business concerns in accordance with the provisions
of the 1958 Act and the regulations issued by the SBA
thereunder.
(h) WRITING OPTIONS. The Company has not engaged, and does not
intend to engage, in the writing of options.
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(i) SHORT SALES. The Company has not engaged, and does not intend
to engage, in short sales of securities.
(j) PURCHASING SECURITIES ON MARGIN. The Company has not engaged,
and does not intend to engage, in the purchase of securities
on margin.
(k) FUTURES CONTRACTS. The Company has not engaged, and does not
intend to engage, in the purchase or sale of futures
contracts.
(l) RESTRICTED SECURITIES. The Company may invest up to 100% of
its assets in restricted securities.
(m) TYPES OF INVESTMENTS. Although the Company was organized
primarily to provide long term loan funds to small business
concerns, the Company's certificate of incorporation provides
the Company with the authority to invest in the equity capital
of small business concerns. Accordingly, the Company may make
equity investments in small business concerns if determined by
its Board of Directors to be in the best interests of the
Company. Further, except as otherwise provided by applicable
regulations, there shall be no limitation on to amount of
equity investments the Company may make.
(n) MAXIMUM INVESTMENT. The Company will not lend or otherwise
invest more than the lesser of (i) 10% of its total assets or
(ii) 30% of its paid-in capital attributable to its Common
Stock with respect to any one small business concern.
(o) PERCENTAGE OF VOTING SECURITIES. The percentage of voting
securities of any one small business concern which the Company
may acquire may not exceed 49% of the outstanding voting
equities of such small business concern, except as set forth
in paragraph (p).
(p) MANAGEMENT CONTROL. The Company does not intend to invest in
any company for the purpose of exercising control of
management. However, the Company may elect to acquire control
in order to protect any of its prior investments which it
considers at risk.
(q) INVESTMENT COMPANIES. The Company has not invested, and does
not intend to invest, in the securities of other investment
companies.
(r) PORTFOLIO TURNOVER. The Company intends to make changes in its
portfolio when, in the judgment of its Board of Directors,
such changes will be in the best interest of the Company's
stockholders in light of the then existing business and
financial conditions. The Company does not anticipate that its
loan portfolio will realize an annual turnover in excess of
50%, although there can be no assurance with respect thereto.
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LOAN PORTFOLIO; VALUATION
The following table sets forth a classification of the Company's
outstanding loans as of May 31, 1999.
<TABLE>
<CAPTION>
BALANCE
NUMBER OF MATURITY OUTSTANDING
TYPE OF LOAN OUTSTANDING LOANS INTEREST RATE DATE MAY 31, 1999
- ------------------------ ----- ------------- ---- ------------
<S> <C> <C> <C> <C> <C> <C>
NYC Taxi Medallion 197 8.38% - 15.00% 1 - 7 years $19,690,009
Services 4 15.00% - 16.00% 1 - 7 years 503,418
Auto Repair Service 5 9.38% - 15.00% 1 - 4 years 389,777
Renovation and Construction 1 15.00% 5 years 134,852
Retail Establishment 4 11.25% - 13.00% 1 - 5 years 377,583
Restaurant 8 11.50% - 18.00% 1 - 7 years 1,879,339
Gasoline Service Station 4 10.00% - 15.00% 1 - 7 years 295,726
Manufacturing 1 10.00% - 15.00% 1 - 7 years 151,572
Laundromat and Dry Cleaners 17 10.00% - 15.00% 1 - 7 years 1,595,238
Medical Offices 1 15.00% 1 - 3 years 106,118
---------- ------------
TOTAL 242 $ 25,123,632
========== ============
</TABLE>
Substantially all of the above loans are collateralized by either New York City
tax medallions or real estate holdings.
The average loan made to finance the purchase or continued ownership of
taxi medallions, taxicabs and related assets, and start-up costs varies from
between 75% to 95% of the market value of the taxi medallions, taxicabs and
related assets at the time of such loan. Such loans are typically secured by the
medallions, taxicabs and related assets and range in size from $50,000 to
$212,000. Loans made by the Company to finance the acquisition and/or operation
of retail or manufacturing businesses are typically secured by real estate and
other assets and range in size from $50,000 to $250,000. In the case of loans to
corporate owners, the loans are also personally guaranteed by the shareholders
of the borrower. Historically, the majority of the Company's taxicab medallion
loans have been subordinate to loans from senior lenders. The Company has
experienced a very low delinquency rate with respect to subordinated taxicab
medallion loans. The Company currently intends to increase its portfolio of
unsubordinated taxicab medallion loans in the future because there are more
opportunities for such loans. With the remaining balance of its loan portfolio,
the Company intends to continue to finance the acquisition and/or operation of
other small businesses. The Company has not committed more than 10% of its
assets to any one business concern in the Company's portfolio. The interest
rates charged by the Company on its currently outstanding loans range from 8.83%
to 9% per annum. For the month of May 1999, the average annual weighted interest
rate per loan outstanding originated was 9.62% and the average term of the
Company's outstanding loans was approximately 60 months.
VALUATION. As an SSBIC, the Company is required by applicable SBA
regulations to submit to the SBA semi-annual valuations of its investment
portfolio, as determined by its Board of Directors, which considers numerous
factors including but not limited to the financial strength of its borrowers and
the value of the underlying collateral securing the loans. See Note 2 of Notes
to the Financial Statements for a discussion of the Company's method of
valuation of its current portfolio of loans. In the event the Company invests in
the future in securities for which price quotations are readily available, the
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Company will value such investments at their fair market value, based on such
quoted prices. With respect to securities for which price quotations are not
readily available, such securities will be valued at fair value as determined by
the Board of Directors.
LOAN CONSIDERATIONS. In evaluating each applicant for a loan, the
Company considers the following factors: (1) the applicant (or 50% in interest
of the concern's principal owners) must be classified as an economically or
socially disadvantaged person under SBA regulations, (2) the applicant's ability
to repay the loan, and (3) the value and type of collateral proposed by the
prospective borrower to collateralize the business loans.
COLLECTION EXPERIENCE. As of May 31, 1999, the Company had 16 loans
totaling $1,594,015 with accrued interest (which is not reflected as an asset on
the Company's balance sheet) of $938,645 which were delinquent. The Company
considers a loan to be delinquent if the borrower fails to make payments for 90
days or more. However, the Company may agree with a borrower that cannot make
payments in accordance with the original loan agreement to modify the payment
terms of the loan. The Company's current provision for loan losses, $316,441, is
deemed by the Company to be sufficient. Based upon present appraisals, the
Company anticipates that a substantial portion of the principal amount of its
delinquent loans would be collected upon foreclosure of such loans, if
necessary. There can be no assurance, however, that the collateral securing such
loans will be adequate in the event of a foreclosure by the Company.
THE NEW YORK CITY TAXI MEDALLION INDUSTRY AND MARKET
As presently provided by law, the number of medallions for New York
City taxicabs that may be issued by New York City is limited to 12,187. There
are two basic types of medallions: (a) corporate and (b) individual
owner-driver. Of the total current supply, 7,047 are corporate medallions and
5,160 are for individually owned cabs. A corporate medallion is issued with
respect to a cab owned by a corporation with a minimum of two cabs and two
corporate medallions (i.e. one corporate medallion per cab). An individual
owner-driver may not own more than one cab and one medallion. Corporate
medallions are used by large fleet concerns with many taxicabs and many drivers
or by small corporations owning two or more medallions (the so called
"minifleet").
Until August 1995, only 11,787 medallions were permitted to be issued.
On August 8, 1995, a bill permitting the City of New York to issue up to 400
additional tax medallions was signed by the Governor of the State of New York
and approved by the New York City Council which permitted the sale of up to such
number of medallions over a three-year period. 133 of such medallions were sold
in May 1996, an additional 133 were sold in October 1996 and the balance was
sold in September 1997.
At the present time, most medallion sales are handled through brokers.
As a result, an active marketplace has developed for the purchase and resale of
medallions. The price of a medallion varies with supply and demand. Individually
owned medallions currently sell for approximately $220,000 and corporate
medallions sell for approximately $270,000 each. In addition, a 5% New York City
transfer tax and various brokerage commissions are additional expenses incurred
in the acquisition and sale of a medallion.
In addition to purchases and sales of medallions, a substantial market
exists for refinancing medallions held by existing owners. Management estimates
this market to exceed that of the market for financing transfers.
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A prospective medallion owner must meet the requirements of the TLC
which approves all sales and transfers. In general, the requirements are that
the prospective owner have no criminal record, that the purchase funds be
derived from legitimate sources, and that the taxi vehicle and meter meet
specifications set by the TLC. Also required is a clearance from prior insurers
of the seller in the form of letters stating that there are no outstanding
claims for personal injuries in excess of insurance coverage.
MARKETING
Medallion transfers are usually handled through medallion brokers who
have frequent contact with taxicab owners and drivers. Medallion brokers locate
buyers for sellers of medallions and sellers for buyers of medallions, and then
typically employ a financing broker to arrange for the financing of the
medallion purchases. Presently, to the knowledge of the Company, there are
approximately 35 medallion and financing brokers in New York City. Medallion
brokers customarily receive a brokerage fee of approximately $3,000 to $5,000
per medallion transfer the cost of which fee is typically split between the
buyer and seller.
A substantial portion of the Company's taxicab medallion financings are
referred to the Company by Pearland Transfer Corp. ("Pearland"), a medallion
brokerage company of which Neil Greenbaum and Pearl Greenbaum, officers and
directors of the Company, and Barbara Joy Hamill, the wife of John Hamill, a
director of the Company, are principals. See "Item 14 - Certain Relationships
and Related Transactions." The Company also receives referrals from other
medallion brokers, its current borrowers and other SSBICs.
COMPETITION
SBICs, SSBICs, banks, credit unions and private lenders have
traditionally financed the acquisition and/or operation of small retail and
manufacturing businesses. The Company expects to continue to encounter
competition from such lenders, many of which are well established and have
resources which exceed those available to the Company.
YEAR 2000 COMPLIANCE
Many computer software systems in use today cannot properly process
date-related information beginning on and continuing after January 1, 2000. This
will not pose a problem for the Company since its program which tracks
investment portfolios and tracks accounting functions are all Y2K compliant. In
addition, the Company has inquired of its commercial banks and other service
providers as well as of its major portfolio companies to determine if they will
be prepared for the Year 2000. While all have indicated they are taking the
necessary steps to be in compliance, there can be no assurance that all exposure
will be eliminated. It is anticipated that the Company will incur no material
expenses related to the Year 2000 issue.
EMPLOYEES
As of June 30, 1999, the Company had four full-time employees
(including two of its executive officers). In addition, the Company has from
time engaged the services of temporary staff.
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<PAGE>
FEDERAL REGULATION
REGULATIONS UNDER THE SMALL BUSINESS INVESTMENT ACT OF 1958
As the holder of a license from the SBA to operate as an SSBIC, the
Company may be eligible for certain financing from the SBA on favorable terms as
described above under the heading "Business-Specialized Small Business
Investment Companies," but is subject to certain restrictions and requirements
under the 1958 Act and SBA regulations thereunder. On January 31, 1996, the SBA
promulgated a final rule revising the SBA regulations governing the small
business investment company program. These restrictions and requirements
include, but are not limited to, the following:
(i) The interest rate charged by an SSBIC on loans to a small business
is governed by applicable state laws and by the SBIA regulations. Under
the SBIA rules, the interest rate may not exceed the higher of (i) 19%
and (ii) the sum of (a) the higher of (I) the licensee's weighted
average cost of funds or (II) the current SBA debenture rate, plus (b)
11%, rounded off to the next lower eighth of one percent.
(ii) Without prior SBA approval, the aggregate commitments by an SSBIC
to any single small business enterprise may not exceed 30% of the
private capital of the SSBIC.
(iii) Management and advisory services must be performed by an SSBIC in
accordance with a written contract and certain record-keeping
requirements must be satisfied.
(iv) In general, the minimum term of an SSBIC loan to a small business
is four years and the maximum term may not exceed 20 years.
(v) Prior written consent of the SBA is required in the event of any
proposed transfer of control of an SSBIC and any proposed transfer of
10% or more of any class of an SSBIC's stock ownership by any person or
group of persons acting in concert owning 10% or more of any class of
an SSBIC's stock or the issuance of 10% or more of any class of an
SSBIC's stock.
(vi) Limitations are imposed on the ability of the officers, directors,
managers or 10% stockholders of an SSBIC to become an officer,
director, manager or 10% stockholder of another SSBIC.
(vii) Prior written consent of the SBA is required in the event of a
merger, consolidation or reorganization of an SSBIC.
(viii) The funds of an SSBIC that are not invested in small businesses
must be invested in certain short-term instruments such as Federal
Government securities or certificates of deposit or placed on deposit
with a Federally insured financial institution.
Corporate SSBIC's issuing debentures after April 25, 1994 are required to amend
their articles of incorporation to indicate that they have consented, in
advance, to the SBA's right to require the removal of officers or directors and
to the appointment of the SBA or its designee as a receiver of the SSBIC for the
purpose of continuing to operate the company upon the occurrence of certain
events of default. The regulations divide the events of default into three
categories.
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<PAGE>
The first category consist of three events that automatically
accelerate all outstanding debentures without notice or demand to the SSBIC, and
allow the SBA to apply for receivership of the SSBIC without the SSBIC's
objection. The events are insolvency, a voluntary assignment for the benefit of
creditors, and the filing of a voluntary or involuntary petition for relief
under the Bankruptcy Code.
Under the second category, upon written notice, the SBA may demand
immediate repayment or redemption of all outstanding debentures or take any
other action permitted under the 1958 Act, specifically including institution of
proceedings for the appointment of the SBA or its designees as a receiver of the
SSBIC. Nine violations are included in this category, and no opportunities to
cure the default are afforded the SSBIC. This category of violations includes:
fraud; fraudulent transfers; willful conflicts of interest; willful
non-compliance with one or more of the substantive provisions of the 1958 Act or
of a substantive regulation; repeated events of default; transfer of control;
non-cooperation with remedial steps that the SBA may prescribe; non-notification
of events of default; and non-notification of events of default to others. For
the first six violations listed above the SSBIC will have consented to the SBA's
right to require the SSBIC to replace officers or directors, with persons
approved by the SBA, and the SBA's appointment as receiver for the purpose of
continuing operations.
Under the third category, which includes nine violations, the SBA
affords the SSBIC the opportunity to cure its violations. If the SSBIC fails to
cure to the SBA's satisfaction, the SBA may declare the SSBIC's entire
indebtedness evidenced by the debentures to be immediately due and payable. The
violations in this category include: excessive compensation; improper
distributions; failure to make a timely payment of an SBA obligation; failure to
maintain minimum regulatory capital; capital impairment; failure to pay any
amount when due on any obligation greater than $100,000; nonperformance or
violation of the terms and conditions of any note, debenture, or other
obligation of the SSBIC issued to, held or guaranteed by the SBA, or of any
agreement with, or conditions imposed by, the SBA; failure to comply with one or
more of the substantive provisions of the 1958 Act or regulations thereunder;
and failure to maintain certain investment ratios for leverage in excess of 300%
of Leverageable Capital. For the first three violations listed above, if an
SSBIC fails to cure such violations, the SBA can require the removal of officers
and directors and/or the appointment of its designee as receiver of the SSBIC.
In addition, if an SSBIC repeatedly fails to comply with one or more
"non-substantive" provisions of the 1958 Act or the regulations thereunder, the
SBA, after written notification and until such condition is cured, may deny
additional leverage to such SSBIC and /or require such SSBIC to take such
actions as the SBA may determine to be appropriate under the circumstances. If
the SBA requires the licensee to bring itself into full compliance and it fails
to do so, the SBA may accelerate its leverage and take other remedies, including
a receivership.
As with debentures, corporate SSBICs issuing preferred stock after
April 25, 1994 are required to amend their articles of incorporation to indicate
that they have consented, in advance, to the SBA's right to require the removal
of officers or directors and to the appointment of the SBA or its designees as
receiver of the SSBIC for the purpose of continuing to operate the Company upon
the occurrence of certain events of default. The regulations divide the events
of default into four categories.
The first category consists of six events, the occurrence of any of
which will permit the SBA, upon notice to the SSBIC, to require the SSBIC to
replace, with individuals approved by the SBA, one or more of its officers and
/or directors. In addition the SBA can apply for the institution of an operating
receivership, with the SBA or its designee as receiver. The events are:
equitable or legal insolvency, or a capital impairment percentage of 100% or
more which capital impairment is not cured within the time limits set by the SBA
in writing; a voluntary assignment for the benefit of creditors; the filing of a
voluntary or involuntary petition for relief under the bankruptcy code; transfer
of control; fraud; and fraudulent transfers.
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The second category consists of willful conflicts of interest; willful
or repeated non-compliance with one or more of the substantive provisions of the
1958 Act or any substantive regulation promulgated thereunder; and failure to
comply with a restriction imposed on the SSBIC pursuant to the third category.
Upon the occurrence of any such event, and only if the SSBIC fails to remove the
person(s) the SBA identifies as responsible for such occurrence and/or cure such
occurrence to the SBA's satisfaction within a time period determined by the SBA,
upon written notice, the SBA may replace one or more of the SSBIC's officers
and/or directors or obtain the appointment of the SBA or its designee as
receiver of the SSBIC.
The third category lists eleven events, the occurrence of any of which
will allow the SBA, on written notice to the SSBIC, to prohibit the SSBIC from
making any additional investments except for investments pursuant to legally
binding commitments entered into by the SSBIC prior to such notice and, subject
to the SBA's prior written approval, investments that are necessary to protect
the SSBIC's investment; to prohibit distributions by the SSBIC to any party
other than the SBA, its agent or trustee, until all leverage is redeemed and
amounts due are paid; to require all commitments to the SSBIC to be funded at
the earliest time(s) permitted in accordance with the SSBIC's articles; and to
review and redetermine the SSBIC's approval management compensation. This
category of events included the occurrence of any events listed in the first two
categories; the SSBIC's failure to maintain its minimum regulatory capital;
capital or liquidity impairment and failure to cure the impairment within time
limits set by the SBA in writing; improper distributions; excessive
compensation; failure to pay any amounts due under preferred securities, unless
otherwise permitted by the SBA; noncompliance with one or more of the
substantive provisions of the 1958 Act, or any substantive regulation
promulgated thereunder; failure to maintain diversity between management and
ownership, if applicable to such SSBIC; failure to maintain investment ratios
for leverage in excess of 300% of Leverageable Capital or preferred securities
in excess of 100% of Leverageable Capital, if applicable to such SSBIC, as of
the end of each fiscal year; nonperformance of one or more of the terms and
conditions of any preferred security or of any agreement with or conditions
imposed by the SBA in its administration of the 1958 Act and the regulations
promulgated thereunder; and failure to take appropriate steps to accomplish such
actions as the SBA may have required for repeated non-substantive violations of
the 1958 Act or the regulations promulgated thereunder.
Under the fourth category if an SSBIC repeatedly fails to comply with
any one or more of the non-substantive provisions of the 1958 Act or any
non-substantive regulation promulgated thereunder, the SBA, after written
notification to the SSBIC and until such condition is cured to the SBA's
satisfaction, can deny additional leverage to such SSBIC and /or require such
SSBIC to take such actions as the SBA may determine to be appropriate under the
circumstances.
An SBIC must conduct active operations. A licensee is inactive if at
the close of its fiscal year it has more than 25% of its assets in idle funds
and it has failed to provide financings aggregating 25% of the average amount of
its idle funds during the previous 18 months.
As part of the regulatory framework, SSBICs are subject to examinations
by SBA agents at least bi-annually and are required to pay examination fees and
maintain certain records, files, internal control programs and reports.
Moreover, the SBA is authorized to suspend an SSBIC's license, issue cease and
desist orders, remove officers and directors of an SSBIC, subpoena witnesses and
records, apply for injunctions to the appropriate district court, and apply for
further acts of enforcement to the appropriate U.S.
Circuit Court of Appeals.
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An SSBIC may not provide funds to a small business concern if that
concern is not engaged in a regular and continuous business operation.
The foregoing summary of certain requirements under the 1958 Act and
regulations thereunder does not purport to be complete and investors are urged
to consult the 1958 Act and regulations thereunder for more detailed
information. See below under the heading "Tax Considerations" for a discussion
of the taxation of SSBICs.
COMMUNITY REINVESTMENT ACT
The Community Reinvestment Act of 1977 ("CRA") requires the Comptroller
of the Currency, the Federal Deposit Insurance Corporation, the Federal Reserve
Board and the Office of Thrift Supervision to use their authority when examining
financial institutions to encourage such institutions to help meet the credit
needs of the local communities in which they are chartered and do business.
Specifically, this Act requires each of these federal regulators to assess the
institution's record of meeting the credit needs of its entire community,
including low- and moderate-income neighborhoods, consistent with the safe and
sound operation of the institution, and to take such record into account in its
evaluation of an application for a merger, acquisition, or deposit facility by
such institution. Financial institutions covered by the CRA include banks,
thrifts and savings and loans.
In assessing CRA, agencies review an institution's performance to
produce an overall composite rating based upon three major elements: lending,
service and investing. Agencies assign a rating for an institution under the
lending, investment, and service tests which then are combined to produce an
overall rating under CRA.
The investment test evaluates the degree to which a bank is helping to
meet the credit needs of its service area(s) through qualified investments.
"Qualified investments" include, but are not limited to, organizations promoting
small businesses, including SBICs and SSBICs. An agency will evaluate the
investment performance of an institution based upon several factors: the dollar
amount of qualified investments that directly address credit needs; the use of
innovative or complex qualified investments to support community development
initiatives; and the degree of responsiveness to credit and community economic
development needs. The overall CRA rating of a bank, thrift or savings and loan
may be positively affected as a consequence of equity investments in an SSBIC.
FOR A DISCUSSION REGARDING REGULATION AS A BUSINESS DEVELOPMENT COMPANY
UNDER THE 1940 ACT, SEE "BUSINESS - REGULATION AS A BUSINESS DEVELOPMENT
COMPANY."
FORWARD LOOKING STATEMENTS
Certain information contained in this Annual Report are forward-looking
statements (within the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of 1934, as amended).
Factors set forth that appear with the forward-looking statements, or in the
Company's other Securities and Exchange Commission filings, including its
Registration Statement on Form N-2 dated November 26, 1996, could affect the
Company's actual results and could cause the Company's actual results to differ
materially from those expressed in any forward-looking statements made by, or on
behalf of, the Company in this Annual Report. Due to the foregoing factors, the
Company believes that period-to-period comparisons of its operating results are
not necessarily meaningful and that such comparisons cannot be relied upon as
indicators of future performance. Additionally, the Company undertakes no
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obligation to publicly release the results of any revisions to these
forward-looking statements which may be made to reflect events or circumstances
occurring after the date hereof or to reflect the occurrence of unanticipated
events.
IN ADDITION TO OTHER INFORMATION IN THIS ANNUAL REPORT ON FORM 10-K,
THE FOLLOWING IMPORTANT FACTORS SHOULD BE CAREFULLY CONSIDERED IN EVALUATING THE
COMPANY AND ITS BUSINESS BECAUSE SUCH FACTORS CURRENTLY HAVE A SIGNIFICANT
IMPACT ON THE COMPANY'S BUSINESS, PROSPECTS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
LIMITATIONS ON TAXICAB MEDALLION FINANCINGS.
As of May 31, 1999, approximately 79% of the aggregate principal amount
of the Company's loans represented loans made to finance the purchase or
continued ownership of New York City taxicab medallions. The Company, however,
is only authorized by its SBA license to allocate up to 50% of its portfolio to
taxicab medallion loans. The SBA is aware that the Company has exceeded such
level of taxicab medallion loans, but has raised no objection to date. If the
SBA required the Company to liquidate a portion of its taxicab medallion loans
immediately, it is possible that the Company would incure a loss in such
liquidation. The Company intends to commit funds to other small businesses. No
assurances can be given, however, as to the extent or success of such efforts to
diversify the Company's portfolio.
SBA INDUSTRY REVIEW
In 1994, the SBA conducted a study of the New York City taxi industry
to review SBIC policy, compliance and financial issues associated with a
significant concentration of SSBIC and SBIC investments in the taxi medallion
industry. The study suggested that, given funding limitations, the SBA should
remain cognizant of its general policy to avoid the concentration of funding in
one industry or geographic location. In addition, the study raised concerns as
to whether certain investor-owned taxicab businesses which are managed by
third-party management companies are passive businesses ineligible for SBA
funding under applicable regulations.
To date, the SBA has not issued new rules specifically related to the
taxi industry. SBA regulations promulgated in January 1996, however, restate the
SBA's general prohibition against financing a `passive business' -- defined in
pertinent part as a concern that is not engaged in a regular and continuous
business operation or where its employees do not carry on the majority of
day-to-day operations. In addition, it is the Company's understanding that in
the review of a licensee's leverage request, the SBA seeks information on the
extent to which non-taxi medallion investments are contemplated.
Although the Company's management believes that it can effectively
address any SBA concern with regard to its operations and investments in the
taxi industry, any change in SBA policies with regard to lending to the taxi
medallion industry potentially could adversely affect the Company's ability to
obtain financing from the SBA and/or make investments in the taxi medallion
industry. In light of these circumstances, the Company intends to commit funds
to small businesses in other industries.
SBA FINANCING NOT ASSURED
The SBA makes available to both SBICs and SSBICs financing in the form
of a guarantee of a licensee's securities, typically unsubsidized debentures.
The Company intends to raise additional funds for investment through the
issuance of such securities to the SBA. Such funding is based upon the Company's
capital, net of organizational expenses ("Leverageable Capital"). Although the
Company has obtained SBA financing benefits in the past, there can be no
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assurance when or that the Company will be able to obtain all or any portion of
the financing benefits permitted under the 1958 Act. In addition, the Company is
subject to many restrictions and regulations promulgated by the SBA and with
which it must comply to be eligible to receive funding and carry on its existing
business.
RANK AND LEVERAGE
Debentures issued to or guaranteed by the SBA have a fixed dollar claim
on the Company's assets and income prior to that of the Common Stock. If income
earned by the Company on a loan is less than the interest payable on such
Debentures, the net asset value of the Common Stock and the income per share of
Common Stock will decline more sharply than a loan funded by the holders of
Common Stock. Although funds obtained through the issuance of subordinated
debentures enhance profit opportunities, the risk of losses is increased by the
use of debt. This effect is referred to herein as "leverage."
RISK OF PAYMENT DEFAULT; CURRENT DELINQUENT LOANS
The Company intends generally to make four to seven year term loans at
relatively high interest rates (not to exceed 19%, the current maximum rate
permitted by the SBA). These loans will be made to small and medium sized
companies that may have limited financial resources and may be unable to obtain
financing from traditional sources. These loans generally will be secured by the
assets of the borrower. A borrower's ability to repay its loan may be adversely
affected by numerous factors, including the failure to meet its business plan, a
downturn in its industry or negative economic conditions. A deterioration in a
borrower's financial condition and prospects usually will be accompanied by a
deterioration in the value of any collateral for the loan and reduce the
likelihood of realizing on any guarantees from the borrower's management.
Although the Company often will seek to be the senior, secured lender to a
borrower, the Company will not always be the senior lender, and the Company's
interest in any collateral for a loan may be subordinate to another lender's
security interest. As of May 31, 1999, the Company had loans totaling $1,594,015
with accrued interest (which is not reflected as an asset on the Company's
balance sheet) of $938,615 on such loans which were delinquent. Although the
Company anticipates that a substantial portion of the delinquent loans would be
collected upon foreclosure, there can be no assurance, however, that the
collateral securing such loans will be adequate in the event of foreclosure.
LOAN FORECLOSURES.
As of May 31, 1999, the Company's provision for loan losses was
$316,441. Although the Company believes that the collateral securing such loans
and its provision for loan losses is adequate, in the event of a foreclosure,
the Company may not be able to recoup all or a portion of a loan. Further, costs
associated with foreclosure proceedings may also reduce the Company's recovery.
RISK ASSOCIATED WITH LOANS TO SMALL AND MEDIUM SIZED PRIVATELY-OWNED BUSINESSES
The Company's portfolio consists of loans to small and medium sized,
privately-owned businesses. There is generally no publicly available information
about such companies, and the Company must rely on its own employees and agents
to obtain information to make its investment decisions. Typically, small and
medium sized businesses depend on the talents and efforts of one or two persons
or a small group of persons, and the death, disability or resignation of one or
more of these persons could have a material adverse impact on the related
company. In addition, such businesses frequently have smaller product lines and
market shares than their competition, may be more vulnerable to economic
downturns and often need substantial additional capital to expand or compete.
Such businesses may also experience substantial variations in operating results.
Accordingly, investment in small and medium sized business should be considered
speculative.
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<PAGE>
POSSIBLE PREPAYMENT BY BORROWERS
Loans made by the Company typically allow borrowers to prepay loans,
subject to prepayment penalties. A borrower is likely to exercise prepayment
rights at a time when its interest rate is greater than prevailing interest
rates. If borrowers elect to prepay loans, there can be no assurance that the
Company would be able to reinvest such funds at rates equal to those previously
obtained. Assuming the Company's costs remain the same, any reduction in
interest rates would result in less profits to the Company.
UNCERTAIN MARKET; ISSUANCE OF ADDITIONAL MEDALLIONS
There can be no assurance that the Company will be able to place loans
successfully to the taxi industry upon the terms on which it currently lends.
The ability of the Company to place additional loans in the taxi industry (which
represented approximately 79% of the Company's loan portfolio at May 31, 1999)
may be adversely affected by factors over which the Company may have no control
and which may impair the security for the Company's already outstanding loans.
These factors may include, among others, economic conditions, including economic
conditions affecting the taxicab industry in particular, the market rates of
interest in effect from time to time, and availability of financing from
competitors of the Company. In light of these circumstances, the Company intends
to pursue loan opportunities for non-taxi small businesses. No assurances can be
given, however, that these efforts will be successful.
POTENTIAL EFFECTS OF CHANGES IN INTEREST RATES DUE TO ECONOMIC FACTORS
The operating results of the Company are substantially dependent on its
net interest income, which is the difference between the interest income earned
on its interest-earning assets and the interest expense paid on its
interest-bearing liabilities. Like most lending institutions, the Company's
earnings are affected by changes in market interest rates and other economic
factors beyond its control. The Company's net interest income generally would be
adversely affected by material and prolonged increases in interest rates.
Although the Company believes that interest rates generally have been steady for
a number of years, no assurances can be given that interest rates in the future
will follow the same pattern.
INDUSTRY AND GEOGRAPHICAL CONCENTRATION; LOANS TO OTHER INDUSTRY GROUPS
The Company has made, and intends to continue to make loans in
connection with the financing of the purchase or continued ownership of taxicab
medallions, taxicabs and related assets. Almost all of the Company's loans have
been made to individuals or entities in the Northeast. There can be no assurance
that there will not be a significant economic downturn in the economy, in the
taxi-related industry group or in the Northeast, or all three. Any such
significant economic downturn could have a material adverse effect on the
profitability of the Company.
COMPETITION
Banks, credit unions, finance companies and other SBICs and SSBICs,
many with greater resources than the Company, compete with the Company in
financing small businesses. Some of the Company's competitors are subject to
different and in some cases less stringent regulation than the Company. As a
result, there can be no assurance that the Company can compete successfully in
the future.
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<PAGE>
VALUATION OF LOANS AND INVESTMENTS; LACK OF READY MARKET TO VALUE INVESTMENT
PORTFOLIO
The Board of Directors has valued the investment portfolio based upon
the cost of such investments, less a provision for loan losses deemed adequate
to absorb such losses. However, because of the inherent uncertainty of
valuation, real values might be significantly lower than values determined by
the Board of Directors. If the real value of such loans are significantly less
than the value attributed by the Board of Directors, such occurrence could have
a material adverse effect on the Company.
RELIANCE ON MANAGEMENT
The success of the Company will be largely dependent upon the continued
efforts of Zindel Zelmanovitch, President of the Company, and Neil Greenbaum,
Secretary of the Company. The death or incapacity of either of Mr. Zelmanovitch
or Mr. Greenbaum could have a material adverse effect on the Company and there
can be no assurance that qualified replacements could be found. The Company has
obtained "key man" life insurance policies on the lives of Messrs. Zelmanovitch
and Greenbaum in the amount of $1,000,000 each.
CONFLICTS OF INTEREST
Mr. Zelmanovitch is also an officer and director of East Coast Venture
Capital, Inc. ("East Coast"), an SSBIC, and a principal shareholder of the
parent company of East Coast. East Coast is also in the business of financing
small businesses, including but not limited to, providing loans for the purchase
or continued ownership of taxicab medallions. Any conflicts of interest that
arise with respect to the foregoing will be resolved in accordance with the
Company's Code of Ethics. Conflicts also may arise as to the allocation of Mr.
Zelmanovitch's time. The Company's Board of Directors believes Mr. Zelmanovitch
has and will continue to be able to allocate such time as is reasonably
necessary for the Company's operations.
Mr. Greenbaum is also an officer of Pearland Transfer Corp., a licensed
medallion broker, Pearland Brokerage Inc., an insurance brokerage company, and
Hereford Insurance Company. Mr. Greenbaum is also President of one taxi
management company. Conflicts may arise as to the allocation of Mr. Greenbaum's
time. The Company's Board of Directors believes Mr. Greenbaum has and will
continue to be able to allocate such time as is reasonably necessary for the
Company's operations. See Item 14 - "Certain Relationships and Related
Transactions." In addition, Mr. Greenbaum manages two pension plans which make
limited investments to finance taxi medallions. Any conflicts of interest that
arise with respect to such investments will be resolved in accordance with the
Company's Code of Ethics.
LACK OF CORRELATION BETWEEN NET ASSET VALUE AND MARKET PRICE
Closed-end funds such as the Company frequently trade in the secondary
market at a price below net asset value. Therefore, it is possible that the
market value of the Common Stock will bear little or no relation to the market
or net asset value of the Company's underlying portfolio assets or the resulting
net asset value per share. As a result, it may be possible for a holder of
shares of Common Stock to reap a gain or suffer a loss in the market value of
his shares of Common Stock that bears little or no relation to any gains or
losses in the market or net asset value of the underlying securities in the
Company's portfolio.
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<PAGE>
FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE
This Annual Report contains forward-looking statements and information
that are based on management's beliefs as well as assumptions made by, and
information currently available to, management. When used in this Annual Report
(including Exhibits), words such as "anticipate," "believe," "estimate,"
"except," and, depending on the context, "will" and similar expressions, are
intended to identify forward-looking statements. Such statements reflect the
Company's current views with respect to future events and are subject to certain
risks, uncertainties and assumptions, including the specific risk factors
described above. Should one or more of these risks or uncertainties materialize,
or should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, believed, estimated or expected. The Company
does not intend to update these forward-looking statements and information.
ITEM 2. PROPERTIES.
The Company currently subleases office space from All Taxi Management,
an entity owned by Mr. Greenbaum, the Company's Secretary and Director, pursuant
to a 5 year lease, at 24-25 Jackson Avenue, Long Island City, NY 11101, which
serves as the Company's executive offices. The lease term expires on October 31,
2003. The annual rental is $27,975 (plus 15% of the expenses for the building).
ITEM 3. LEGAL PROCEEDINGS
From time to time in the ordinary course of business, the Company
initiates legal proceedings against borrowers in default and, where warranted,
their guarantors to seek payment of loan obligations and to take possession of
collateral. In the latter instances, these proceedings are sometimes followed by
court authorized liquidations. All such proceedings require outside counsel with
attendant professional fees and expense.
The Company has never been named as a defendant in any material
litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the holders of the Company's
Common Stock during the last quarter of its fiscal year ended May 31, 1999.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock commenced trading on the Nasdaq Small Cap
Market on November 27, 1996. The Common Stock is regularly quoted and traded on
the Nasdaq SmallCap Market under the symbol FSVC.
The following table sets forth the range of high and low closing prices
for the Company's Common Stock for the period November 27, 1996 up to December
31, 1996, fiscal 1997, fiscal 1998 and for the period of January 1, 1999 up to
June 30, 1999 as reported by the Nasdaq SmallCap Market. The trading volume of
the Company's Common Stock fluctuates and may be limited during certain periods.
As a result, the liquidity of an investment in the Common Stock may be adversely
affected.
CLOSING PRICE
-------------
CALENDAR YEAR HIGH LOW
------------- ---- ---
1996
----
November 27 - December 31 $5.00 $3.875
1997
----
January 1 - March 31 $5.00 $3.813
April 1 - June 30 $6.563 $4.125
July 1 - September 30 $6.00 $4.13
October 1 - December 31 $7.00 $5.00
1998
----
January 1 - March 31 $6.625 $5.50
April 1 - June 30 $6.875 $5.75
July 1 - September 30 $6.125 $4.75
October 1 - December 31 $5.875 $4.25
1999
----
January 1 - March 31 $6.00 $4.188
April 1 - June 30 $5.063 $3.75
On July 31, 1999 the closing price of the Common Stock as reported on
Nasdaq SmallCap Market was $4.906. On July 31, 1999 there were 2,172,688 shares
of Common Stock outstanding, held of record by approximately 124 record holders
(with over 1,000 beneficial owners).
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
SUMMARY FINANCIAL INFORMATION
The following table set forth certain summary information concerning
the Company and is qualified by reference to the financial statements and notes
thereto included elsewhere in this Annual Report.
<TABLE>
<CAPTION>
YEARS ENED MAY 31
--------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS
<S> <C> <C> <C> <C> <C>
Total Investment Income $ 2,921,796 $ 2,464,343 $ 1,270,715 $ 1,033,944 $ 1,005,284
------------ ------------ ------------ ------------ ------------
Total Investment Expenses (Including Taxes) (1,906,692) (1,438,262) (744,191) (644,719) (663,969)
Bad Debts (179,285) (139,257) -- (35,000) (2,399)
------------ ------------ ------------ ------------ ------------
Net Income $ 835,819 $ 886,824 $ 526,524 $ 354,225 $ 338,916
============ ============ ============ ============ ============
Earnings Per Share $ 0.36 $ 0.38 $ 0.29 $ 0.27 $ 0.26
============ ============ ============ ============ ============
Dividends Paid Per Common Share $ 0.35 $ 0.44 $ 0.21 $ 0.27 $ 0.26
============ ============ ============ ============ ============
SBA Dividends $ 56,400 $ 56,400 $ 56,400 $ 56,400 $ 56,400
============ ============ ============ ============ ============
Weighted Average Number of
Shares Outstanding 2,172,688 2,172,688 1,627,318 1,096,688 1,096,688
============ ============ ============ ============ ============
OTHER OPERATING DATA
Loans Originated Net of Participations $ 7,378,026 $ 18,328,160 $ 6,410,500 $ 2,367,750 $ 3,501,250
============ ============ ============ ============ ============
Investment expenses as a percentage
of average net assets 8.10% 22.00% 14.30% 20.30% 20.90%
============ ============ ============ ============ ============
BALANCE SHEET DATA
Loans Receivable (Net of Unrealized
Depreciation) $ 24,807,191 $ 24,442,206 $ 14,128,401 $ 8,417,457 $ 8,132,484
============ ============ ============ ============ ============
Total Assets $ 26,258,639 $ 26,247,602 $ 17,351,615 $ 9,238,759 $ 9,202,386
============ ============ ============ ============ ============
SBA Debentures $ 12,360,000 12,360,000 $ 8,450,000 $ 4,380,000 $ 4,340,000
Notes Payable Bank 5,000,000 5,000,000 -- -- --
SBA Cumulative Preferred Stock 1,410,000 1,410,000 1,410,000 1,410,000 1,410,000
------------ ------------ ------------ ------------ ------------
Total Liabilities 19,126,656 19,154,855 10,133,268 6,068,298 6,033,644
------------ ------------ ------------ ------------ ------------
Common Stock (Including Additional
Paid-in Capital) 7,070,542 7,070,542 6,879,543 2,788,462 2,582,084
Restricted Capital -- -- 190,999 381,999 572,998
------------ ------------ ------------ ------------ ------------
Total Stockholders' Equity 7,131,983 7,092,747 7,218,347 3,170,461 3,168,742
------------ ------------ ------------ ------------ ------------
Total Liabilities and Stockholders Equity $ 26,258,639 $ 26,247,602 $ 17,351,615 $ 9,238,759 $ 9,202,386
============ ============ ============ ============ ============
Net Assets Per Share $ 3.28 $ 3.26 $ 3.32 $ 2.89 $ 5.70
============ ============ ============ ============ ============
</TABLE>
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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, as amended.
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 YEARS ENDED MAY 31, 1999 AND 1998
Total investment income. The Company's investment income for the years
ended May 31, 1999 increased by $457,453 to $2,921,796 (an increase of 18.6%)
from $2,464,343 for the year ended May 31, 1998. This increase was mainly due to
an increase in the loan portfolio during the fiscal year, and the utilization of
all available cash and bank debt. The portfolio increased by $681,426 from
$24,442,206 as of May 31, 1998 to $25,123,632 as of May 31, 1999. The portfolio
increased by $10,133,247 from $14,308,959 as of May 31, 1997 to $24,442, 206 as
of May 31, 1998 as part of the Company's strategy to maximize shareholder rate
of return by use of bank debt aggregating $5,000,000 and a reduction in loan
participations and an increase in SBA Debentures of $3,910,000.
OPERATING EXPENSES
Interest expense for the year ended May 31, 1999 increased by $371,332
(an increase of 38%) ($1,338,335 from $967,003) over the similar period ended
May 31, 1998. This increase was mainly due to increased bank borrowings for the
period, and higher debenture costs for the year ended May 31, 1999. Interest
expense increased by $606,325 from $360,678 (an increase of 168%) for the year
ended May 31, 1997 to $967,003 for the year ended May 31, 1998. The increase was
due to an increase in indebtedness of $3,910,000 to the SBA and $5,000,000 to
bank borrowings.
STATEMENT OF FINANCIAL POSITION
Total assets and liabilities remained constant as of May 31, 1999 when
compared with the statement of financial position as of May 31, 1998. The
Company evaluates its investment portfolio periodically to determine the fair
market value of the portfolio and, accordingly, maintains unrealized
depreciation for loan losses. The Company wrote off $182,659 in bad debts for
the year ended May 31, 1999 as compared to none for the year ended May 31, 1998.
However, the Company increased its reserve for bad debts by $139,257 to $319,815
for the year ended May 31, 1998. The reserves for bad debts were deemed to be
adequate as of May 31, 1999. Accordingly, the Company did not take any
additional bad debt charge-offs.
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<PAGE>
OPERATING EXPENSES
The Company's operating expenses consist of employee compensation and
benefits, rent, insurance, professional and consulting fees, marketing and
investment solicitation expenses and losses on loans receivable. The Company's
operating expenses increased by $96,888 (an increase of 20.6%) from $470,035 for
the year ended May 31,1998 to $566,923 for the year ended May 31, 1999,
primarily as a result of an increase in professional fees of $40,052, and other
operating expenses of $42,503 consisting mainly of public relations and
investment banking fees. Other smaller increases were in depreciation and
amortization of $3,668, and payroll and payroll related expenses of $11,915. The
Company's operating expenses increased by $89,050 (an increase of 23.3%) from
$380,985 for the year ended May 31,1997 to $470,035 for the year ended May 31,
1998, primarily as a result of increases in payroll and payroll related expenses
of $7,738 and increases in professional fees of $96,827. These increases were
partially offset by a decrease in officers salary of $19,605
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 May 31,
1999, the Company's $19,126,656 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 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
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<PAGE>
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.
YEAR 2000
Many computer software systems in use today cannot properly process
date-related information beginning on and continuing after January 1, 2000. This
will not pose a problem for the Company since its program which tracks
investment portfolios and tracks accounting functions are all Y2K compliant. In
addition, the Company has inquired of its commercial banks and other service
providers as well as of its major portfolio companies to determine if they will
be prepared for the Year 2000. While all have indicated they are taking the
necessary steps to be in compliance, there can be no assurance that all exposure
will be eliminated. It is anticipated that the Company will incur no material
expenses related to the Year 2000 issue.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Not Applicable
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See financial statements following Item 14 of this Annual Report on
Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT OF THE REGISTRANT
The names and ages of the directors and executive officers of the
Company are set forth below:
NAME AND ADDRESS AGE POSITION(S) WITH THE COMPANY
- ---------------- --- ----------------------------
Zindel Zelmanovitch (1)(3) 52 President and Director
Neil Greenbaum (1)(2) 43 Secretary and Director
Pearl Greenbaum (1)(2) 75 Vice President and Director
Michael L. Moskowitz (3) 41 Director
Eugene Haber 51 Director
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<PAGE>
NAME AND ADDRESS AGE POSITION(S) WITH THE COMPANY
- ---------------- --- ----------------------------
Alan Work 43 Director
John Hamill (2) 54 Director
- ------------
(1) Directors who are "interested persons" with respect to the
Company, as such term is defined in the 1940 Act.
(2) Pearl Greenbaum is the mother of Neil Greenbaum and
mother-in-law of John Hamill.
(3) Michael Moskowitz is the brother-in-law of Zindel
Zelmanovitch.
BACKGROUND OF EXECUTIVE OFFICERS AND DIRECTORS
Zindel Zelmanovitch, has been President and a director of the Company
since March 1982. Mr. Zelmanovitch is also President, director and a principal
shareholder of East Coast Venture Capital Inc., a wholly-owned subsidiary of
Veritas Financial, Inc., that has been a licensed SSBIC since 1986. He has also
served as Secretary and a director of the National Association of Investment
Companies (NAIC) since 1991. He has been Secretary and a director of the
National Association of Investment Companies Management Group, Inc. since 1993
and Vice Chairman since 1997. Mr. Zelmanovitch is also the President of Z.
Zindel Corp., which provides management services. Since 1997, he has been a
director of the Midwood Federal Credit Union. Mr. Zelmanovitch received an
M.B.A. from Long Island University in June 1987. He has also been licensed as a
real estate broker by the New York Department of State since 1976.
Neil Greenbaum, has been the Secretary and a director of the Company
since March 1982. Mr. Greenbaum has acted as Vice President and Secretary of
Pearland Transfer Corp., a licensed medallion broker, and Pearland Brokerage
Inc., an insurance brokerage company, for more than five years. Mr. Greenbaum
has been President of Hereford Insurance Company since April 1994. Mr. Greenbaum
has also been President of All Taxi Management Inc. since 1995. Mr. Greenbaum
was also President of the New York City Committee for Taxi Cab Safety from 1996
to 1998.
Pearl Greenbaum, has been the Vice President and a director of the
Company since March 1982. Mrs. Greenbaum has been President of Pearland Transfer
Corp. and Pearland Brokerage Inc. for more than five years. She has been
Treasurer of Hereford Insurance Company since April 1994.
Michael L. Moskowitz, has been a director of the Company since June
1984. From 1984 to 1992 Mr. Moskowitz was Treasurer of the Company. Mr.
Moskowitz has been President of M. L. Moskowitz and Co., Inc., a residential
mortgage banking firm, since August of 1986.
Eugene Haber, has been a director of the Company since September 1996.
He has been a practicing attorney since 1973 and since 1975 a partner in the
firm of Cobert, Haber & Haber, a general practice law firm specializing in
litigation and commercial transactions with a heavy emphasis on the New York
City Taxi industry.
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<PAGE>
Alan Work, has been a director of the Company since March 1988. Since
1989, he has been Executive Vice President for Quantex Associates Inc., an
executive search firm. From 1982 to 1989, Mr. Work was an account executive for
E.D.P. World.
John Hamill, has been a director of the Company since June 1997. He has
been President of Suburban Greater Hartford Realty Management Corporation
("Suburban Greater Hartford") since 1992. From 1976 to 1992 Mr. Hamill was a
Vice President of Greater Hartford Realty Management Corporation until he bought
the company and changed its name to Suburban Greater Hartford in 1992. Also from
1972 to 1992 Mr. Hamill was a Vice President of Utility Development Corporation,
the parent corporation of Suburban Greater Hartford, which rehabilitated or
constructed over 6,000 units many of which projects were constructed with the
help of HUD mortgage insurance programs. Mr. Hamill received a B.S. in Biology
and a Masters in Education from the University of Hartford.
BOARD MEETINGS AND COMMITTEES
During the fiscal year ended May 31, 1999, the Company's Board of
Directors held six meetings. The Company has standing Credit, Audit, 1998 Plan
and Director Plan Committees, but does not have standing nominating or
compensation committees.
The Credit Committee is comprised of Mr. Zelmanovitch, Mr. Greenbaum
and Mr. Haber. The Credit Committee reviews loan activities and delinquencies
and provides recommendations to the Board of Directors. The Credit Committee met
six times during the last fiscal year.
The Audit Committee is comprised of Zindel Zelmanovitch, Neil
Greenbaum, Eugene Haber, Michael L. Moskowitz and John Hamill. The Audit
Committee met two times during the last fiscal year. The function of the Audit
Committee is to review the internal accounting control procedures of the
Company, review the consolidated financial statements of the Company and review
with the independent public accountants the results of their audit.
The 1998 Employee Plan Committee is comprised of Michael Moskowitz,
Eugene Haber and Alan Work. The function of the Plan Committee is to administer
the 1998 Incentive Stock Option Plan.
The Director Plan Committee will be established at such time as the
Non-Employee Directors Option Plan is approved by the stockholders and the
Securities and Exchange Commission (the "Commission"). The function of the
Directors Plan Committee will be to administer the Non-Employee Directors Option
Plan.
Each director attended at least 75% of the aggregate number of meetings
of the Board of Directors and the meetings of all committees of the Board of
Directors on which he served during the last fiscal year.
The Company pays its directors who are not employees of the Company
fees of $100 for each meeting attended, not to exceed a total of $1,000 in any
single year for any individual director.
The 1940 Act requires that a majority of the directors of a Business
Development Company, which the Company intends to elect to become, not be
"interested persons", as defined in the 1940 Act. Michael L. Moskowitz, Eugene
Haber, John Hamill and John Hamill, who constitute a majority of the Board of
Directors, are not "interested persons."
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<PAGE>
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
percent (10%) of a registered class of the Company's equity securities, to file
with the Securities and Exchange Commission initial reports of ownership and
reports of changes in ownership of common stock and other equity securities of
the Company. Officers, directors and greater than ten percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
To the Company's knowledge, based solely upon its review of the copies
of such reports furnished to the Company during the year ended May 31, 1999, all
Section 16(a) filing requirements applicable to its officers and directors and
greater than ten percent beneficial owners were satisfied.
CONFLICT OF INTERESTS
The Board of Directors of the Company has adopted policies governing
potential conflicts of interest between the Company and its directors and
officers. Together, these policies comprise the Company's "Code of Ethics" as
required under the 1940 Act.
These policies generally provide that no officer, director or employee
of the Company will make any loan which might be deemed to be appropriate for
the Company, unless such transaction is approved by a majority of the directors
of the Company who are not "interested persons" of the Company within the
meaning of the 1940 Act and who have no financial or other material interest in
the transaction. In reviewing any such transaction, the directors will examine,
among other factors, whether the transaction would deprive the Company of an
opportunity or whether it would otherwise conflict with the best interests of
the Company and its shareholders.
Zindel Zelmanovitch, President and a director of the Company, is also
President and a director of East Coast, an SSBIC. East Coast is in the business
of financing small businesses, including, but not limited to, the operation and
ownership of taxicabs. Any conflicts of interest that arise with respect to the
foregoing will be resolved in accordance with the Company's Code of Ethics.
Conflicts may also arise as to the allocation of Mr. Zelmanovitch's time. The
Company's Board of Directors believes Mr. Zelmanovitch has and will continue to
be able to allocate such time as is necessary to the Company's operations.
Mr. Greenbaum is also an officer of Pearland Transfer Corp.
("Pearland"), a licensed medallion broker, Pearland Brokerage Inc., an insurance
brokerage company, and Hereford Insurance Company. Mr. Greenbaum is also
President of two taxi management companies. Conflicts may arise as to the
allocation of Mr. Greenbaum's time. The Company's Board of Directors believes
Mr. Greenbaum has and will continue to be able to allocate such time as is
necessary to the Company's operations. In addition, Mr. Greenbaum manages two
pension plans which make limited investments to finance taxi medallions. Any
conflicts of interest that arise with respect to such investments will be
resolved in accordance with the Company's Code of Ethics. See Item 14 - "Certain
Relationships and Related Party Transactions."
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<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all renumberation for services rendered
to the Company during the year ended May 31, 1999 paid to or acquired for the
account of all directors and executive officers being paid an aggregate of
$60,000 per year.
<TABLE>
<CAPTION>
PENSION OR RETIREMENT ESTIMATED
BENEFITS ACCRUED AS ANNUAL BENEFITS TOTAL
AGGREGATE PART OF COMPANY UPON COMPENSATION
NAME OF PERSON AND POSITION COMPENSATION (1) EXPENSE (2) RETIREMENT (3) PAID TO DIRECTORS
--------------------------- ---------------- --------------------- --------------- -----------------
<S> <C> <C> <C>
Zindel Zelmanovitch, $ 85,320(4) $8,532 $93,852(4)
(President and Director)
Neil Greenbaum, 36,300(4) 3,630 39,930(4)
(Secretary and Director)
Pearl Greenbaum, 0(4) 0 0(4)
(Vice President and Director)
Michael Moskowitz, (Director) 500(5) 500(5)
Eugene Haber, (Director) 400(5) 400(5)
Alan Work, (Director) 500(5) 500(5)
John Hamill, (Director) 400(5) 400(5)
</TABLE>
- --------------
(1) Officers' salaries constitute a major portion of the Company's
total "management fee compensation," which must be approved by the SBA.
The SBA has approved management fee compensation of $225,000 for the
Company. This amount includes officers' salaries, other salaries and
employment benefits.
(2) The Company initiated a defined contribution plan in fiscal 1989.
The eligibility requirements for participation in the plan are a
minimum age of 21 years old and 24 months of continuous employment with
the Company. Contributions are currently limited to ten percent of each
participant's compensation. All employees and officers were covered and
fully vested in the plan as of May 31, 1998.
(3) The amounts vested at the time of retirement may be withdrawn as a
lump sum or periodic payments in the discretion of the beneficiary. The
annual benefits upon retirement can not be estimated. However, the
amounts vested for the named individuals are as follows: Zindel
Zelmanovitch, $271,766; Neil Greenbaum, $118,584; and Pearl Greenbaum,
$88,273.
(4) Employee directors do not receive additional compensation for their
services as directors.
(5) The Company has a policy of paying its non-employee directors fees
of $100 for each meeting attended, not to exceed a total of $1,000 in
any single year for any individual director.
EMPLOYMENT AGREEMENTS
The Company has entered into five-year employment agreements commencing
December 1996 with each of Messrs. Zelmanovitch and Greenbaum. The employment
agreements provide for annual base salaries of $85,320 and $36,300,
respectively. The salaries are to be reviewed annually by the Board of Directors
and are subject to SBA review.
-30-
<PAGE>
STOCK OPTION PLANS AND AGREEMENTS
1996 STOCK OPTION PLAN
The 1996 Plan was adopted by the Board of Directors, including a
majority of the non-interested directors, in 1996. The 1996 Plan authorizes the
grant of incentive stock options within the meaning of Section 422 of the Code
and non-qualified stock options for the purchase of an aggregate of 75,000
shares of Common Stock (after giving effect to the stock split effective October
24, 1996) to employees of the Company. As of May 31, 1999, no non-qualified
options to purchase shares of Common Stock and no incentive stock options had
been granted under the 1996 Plan.
The Board of Directors has appointed Michael Moskowitz, Eugene Haber
and Alan Work to administer the 1996 Plan. Awards of options under the 1996 Plan
are granted at the discretion of the Compensation Committee, which determines
the eligible persons to whom, and the times at which, awards shall be granted,
the type of award to be granted, and all other related terms, conditions and
provisions of each award granted. In addition, all questions of interpretation
of the 1996 Plan are determined by the Compensation Committee. In accordance
with the provisions of the 1940 Act, the grant of options under the 1996 Plan
will not occur until after the date of the approval of the plan by the
Securities and Exchange Commission (the "Approval Date"). Any expenses incurred
in connection with obtaining approval of the Securities and Exchange Commission
will be borne by the Company.
To date no request for exemptive relief has been filed with the
Securities and Exchange Commission. No assurances can be given that the relief
requested by the Securities and Exchange Commission will be granted or that the
options will ever be issued.
No option may be exercised more than five years after the date on which
it is granted. The number of shares available for options, the number of shares
subject to outstanding options and their exercise prices will be adjusted for
changes in outstanding shares such as stock splits and combinations of shares.
Shares purchased upon exercise of options, in whole or in part, must be paid for
in cash or by means of unrestricted shares of Common Stock or any combination
thereof.
The 1996 Plan may be terminated at any time by the Board of Directors,
and will terminate ten years after the effective date of the 1996 Plan. The
Board of Directors may not materially increase the number of shares authorized
under the plan or materially increase the benefits accruing to participants
under the plan without the approval of the stockholders of the Company.
DEFINED CONTRIBUTION PLAN
The Company initiated a defined contribution plan in fiscal 1989. The
eligibility requirements for participation in the plan are a minimum age of 21
years old and twenty-four months of continuous employment with the Company.
Contributions are currently limited to ten percent of each participant's
compensation. All employees and officers were covered and fully vested in the
plan as of May 31, 1999.
-31-
<PAGE>
ACCRUED BENEFITS CONTRIBUTED
FOR THE TWELVE MONTHS ENDED BALANCE VESTED AS OF
NAME OF INDIVIDUAL MAY 31, 1999 MAY 31, 1999
- ------------------ ---------------------------- --------------------
Neil Greenbaum $ 3,630 $ 147,178
Pearl Greenbaum -------- 76,655
Zindel Zelmanovitch. 8,532 338,039
All Other Employees 1,968 9,128
-------- ---------
$ 14,130 $ 571,000
INCENTIVE STOCK OPTION PLAN
The Company's Board of Directors and shareholders adopted an employee
stock option plan (the "1998 Employee Plan") in order to link the personal
interests of key employees to the long-term financial success of the Company and
the growth of shareholder value. The 1998 Employee Plan authorizes the grant of
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code for the purchase of an aggregate of 125,000 shares (subject to
adjustment for stock splits and similar capital changes) of Common Stock to
employees of the Company. By adopting the 1998 Employee Plan, the Board believes
that the Company will be better able to attract, motivate and retain as
employees people upon whose judgment and special skills the success of the
Company in large measure depends. To date, no options to purchase shares of
Common Stock have been granted under the 1998 Employee Plan. Accordingly, as of
such date, 125,000 shares of Common Stock were available for future awards under
the 1998 Employee Plan.
The 1998 Employee Plan will be administered by the 1998 Employee Plan
Committee of the Board of Directors, which are comprised by Michael Moskowitz,
Eugene Haber and Alan Work, non-employee directors (who are "outside directors"
within the meaning of Section 152(m) of the Internal Revenue Code of 1986, as
amended (the "Code"), "disinterested persons" within the meaning of Rule 16b-3
under the Securities Exchange Act of 1934 (the "1934 Act") and not interested
persons under Section 2(a)(19) of the Investment Company Act of 1940 (the
"Committee")). The 1998 Employee Plan Committee can make such rules and
regulations and establish such procedures for the administration of the 1998
Employee Plan as it deems appropriate.
The exercise price of an incentive stock option must be at the fair
market value of the Company's Common Stock on the date of grant (110% of the
fair market value for shareholders who, at the time the option is granted, own
more than 10% of the total combined classes of stock of the Company or any
subsidiary). No employees may exercise more than $100,000 in options held by
them in any year.
No option may have a term of more than ten years (five years for 10%
or greater shareholders). Options generally may be exercised only if the option
holder remains continuously associated with the Company or a subsidiary from the
date of grant to the date of exercise. However, options may be exercised upon
termination of employment or upon death or disability of any employee within
certain specified periods.
The following is a general summary of the federal income tax
consequences under current tax law of incentive stock options ("ISOs"). It does
not purport to cover all of the special rules, including special rules relating
to persons subject to the reporting requirements of Section 16 under the 1934
-32-
<PAGE>
Act who do not hold the shares acquired upon the exercise of an option for at
least six months after the date of grant of the option and special rules
relating to the exercise of an option with previously-acquired shares, or the
state or local income or other tax consequences inherent in the ownership and
exercise of stock options and the ownership and disposition of the underlying
shares.
An optionee will not recognize taxable income for federal income tax
purposes upon the grant of an ISO. Upon the exercise of an ISO, the optionee
will not recognize taxable income. If the optionee disposes of the shares
acquired pursuant to the exercise of an ISO more than two years after the date
of grant and more than one year after the transfer of the shares to him or her,
the optionee will recognize long-term capital gain or loss and the Company will
not be entitled to a deduction. However, if the optionee disposes of such shares
within the required holding period, all or a portion of the gain will be treated
as ordinary income and the Company will generally be entitled to deduct such
amount.
In addition to the federal income tax consequences described above, an
optionee may be subject to the alternative minimum tax.
NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
The Company's Board of Directors and shareholders adopted a stock
option plan for non-employee directors (the "Director Plan") in order to link
the personal interests of such non-employee directors to the long-term financial
success of the Company and the growth of shareholder value. The Director Plan
provides for the automatic grant of options to directors of the Company who are
not employees, officers or interested persons of the Company (an "Eligible
Director"). By adopting the Director Plan, the Board believes that the Company
will be better able to attract, motivate and retain as directors people upon
whose judgment and special skills the success of the Company in large measure
depends. In accordance with the provisions of the 1940 Act, the automatic grant
of options under the Director Plan will not occur until after the date of the
approval (the "Approval Date") of the Director Plan by the Commission. There can
be no assurance that the Commission will approve the Director Plan. The total
number of shares for which options may be granted from time to time under the
Director Plan is 75,000 shares.
The Director Plan provides that an Eligible Director serving on the
Company's Board of Directors who has served as a director for at least one year
prior to the Approval Date will automatically receive on the Approval Date the
grant of an option to purchase the number of shares of Common Stock determined
by dividing $50,000 by the fair market value of the Common Stock on the Approval
Date. With respect to any Eligible Director who is elected or reelected as a
director of the Company after the Approval Date such elected director will
automatically receive on the date such director has served as a director of the
Company for one year of such election or reelection an option to purchase the
number of shares of Common Stock determined by dividing $50,000 by the fair
market value of the Common Stock on the date of the first anniversary such
director became a director of the Company.
The Director Plan will be administered by a committee of directors who
are not eligible to participate in the Director Plan (the "Committee") or by the
entire Board of Directors, if the Board so determines. Options become
exercisable with respect to such shares granted on the date on which the option
was granted, so long as the optionee remains an Eligible Director. No option may
be exercised more than five years after the date on which it is granted. The
number of shares available for options, the number of shares subject to
outstanding options and their exercise prices will be adjusted for changes in
outstanding shares such as stock splits and combinations of shares. Shares
purchased upon exercise of options, in whole or in part, must be paid for in
cash or by means of unrestricted shares of Common Stock or any combination
thereof.
-33-
<PAGE>
The following is a general summary of the federal income tax
consequences under current tax law of non-qualified stock options ("NQSOs"). It
does not purport to cover all of the special rules, including special rules
relating to persons subject to the reporting requirements of Section 16 under
the 1934 Act who do not hold the shares acquired upon the exercise of an option
for at least six months after the date of grant of the option and special rules
relating to the exercise of an option with previously-acquired shares, or the
state or local income or other tax consequences inherent in the ownership and
exercise of stock options and the ownership and disposition of the underlying
shares.
Upon the exercise of a NQSO, the optionee will recognize ordinary
income in an amount equal to the excess, if any, of the fair market value of the
shares acquired on the date of exercise over the exercise price thereof, and the
Company will generally be entitled to a deduction for such amount at that time.
If the optionee later sells shares acquired pursuant to the exercise of a NQSO,
he or she will recognize long-term or short-term capital gain or loss, depending
on the period for which the shares were held. Long-term capital gain is
generally subject to more favorable tax treatment than ordinary income or
short-term capital gains.
If the option does not have a readily ascertainable fair market value,
an optionee will not recognize taxable income for federal income tax purposes
upon the grant of an NQSO.
Options granted under the Director Plan will not be transferable other
than by the laws of descent and during the optionee's life may be exercised only
by the optionee. All rights to exercise options will terminate after the
optionee ceases to be an Eligible Director. If the optionee dies before
expiration of the option, his legal successors may have the right to exercise
the option in whole or in part within one year of death.
The Director Plan may be terminated at any time by the Board of
Directors, and will terminate ten years after the effective date of the Director
Plan. The Board of Directors may not materially increase the number of shares
authorized under the plan or materially increase the benefits accruing to
participants under the plan without the approval of the shareholders of the
Company.
The exercise or conversion price of the options issued pursuant to the
Director Plan shall be not less than current market value at the date of
issuance, or if no such market value exists, the current net asset value of such
voting securities. To date no options have been granted under the Director Plan.
Each person who is a director at the time of the Approval Date or
thereafter becomes a director of the Company will receive a one time grant of
options to purchase that number of shares of Common Stock determined by dividing
$50,000 by the current market price on the Approval Date, or on his first
anniversary date of becoming a director, as described in more detail above.
The following table sets forth the number of shares which the current
non-employee directors would have been entitled to receive if the Approval Date
had been May 31, 1999.
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<PAGE>
NAME AND POSITION DOLLAR VALUE NUMBER OF SHARES
----------------- ------------ ----------------
Michael Moskowitz, Director $50,000 10,192
Eugene Haber, Director 50,000 10,192
Alan Work, Director 50,000 10,192
John Hamill, Director 50,000 10,192
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of July 31 with respect
to the beneficial ownership of the outstanding shares of the Company's Common
Stock by (i) any holder of more than five percent (5%) of the outstanding
shares; (ii) the Company's officers and directors; and (iii) the directors and
officers of the Company as a group:
NO. OF SHARES PERCENTAGE OF
NAME OF BENEFICIAL OWNER OF COMMON STOCK OWNERSHIP
- ------------------------ --------------- ---------
Neil Greenbaum 142,848 (2) 6.58%
29 Flamingo Road North
East Hills, NY 11576 (1)
Zindel Zelmanovitch 91,744 (3) 4.22%
1934 East 18th Street
Brooklyn, NY 11229 (4)
Pearl Greenbaum 205,312 (5) 9.45%
300 Winston Drive
Cliffside Park, NJ 07010 (1)
Michael L. Moskowitz 39,183 (6) 1.80%
45 East 25th Street
New York, NY 10010 (4)
Eugene Haber 176 (8) (7)%
22 Eagle Lane
East Hill, NY 11576
Alan Work 4,720 (9) (7)%
54 Random Farms Drive
Chappaqua, NY 10514
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<PAGE>
NO. OF SHARES PERCENTAGE OF
NAME OF BENEFICIAL OWNER OF COMMON STOCK OWNERSHIP
- ------------------------ --------------- ---------
John Hamill 38,500 (10) 1.77%
8 Saxon Woods
Avon, CT 06001 (1)
All officers and directors as a 522,493 23.82%
group (7 persons)
- --------------
(1) Pearl Greenbaum is the mother of Neil Greenbaum and the
mother-in-law of John Hamill.
(2) Includes 5,400 shares held by Mr. Greenbaum's children. Also
includes 13,400 shares held in joint tenancy with Mr.
Greenbaum's wife. Also includes 10,260 shares held by the
defined benefit plan of Pearland Brokerage, Inc., of which Mr.
Greenbaum is an administrator. Also includes 7,180 shares held
by the Freshstart Venture Capital Money Purchase Plan, of
which Mr. Greenbaum is an administrator. Excludes 30,200
shares held by his wife and 20,440 held by his mother and
children as joint tenants, as to which shares Mr. Greenbaum
disclaims beneficial ownership.
(3) Includes 84,564 shares held in pension plans of which Mr.
Zelmanovitch is the beneficiary and 7,180 shares held by the
Freshstart Venture Capital Money Purchase Plan of which Mr.
Zelmanovitch is an administrator.
(4) Mr. Zelmanovitch is the brother-in-law of Mr. Moskowitz.
(5) Includes 39,100 shares held in joint tenancy with Mrs.
Greenbaum's grandchildren. Also includes 33,760 shares held in
joint tenancy with her daughter, Karen Franklin. Also includes
10,260 shares held by the benefit plan of Pearland Brokerage
Inc. of which Mrs. Greenbaum is an administrator. Excludes
93,240 shares held by the estate of her husband, Andrew
Greenbaum, as to which shares Mrs. Greenbaum disclaims
beneficial ownership.
(6) Includes 9,000 shares held by M.L. Moskowitz & Co., Inc. of
which Mr. Moskowitz is a principal shareholder. Also includes
7,095 shares held by the profit sharing plan of M.L. Moskowitz
& Co. of which Mr. Moskowitz it the trustee.
(7) Represents less than 1% of the Common Stock.
(8) Includes 132 shares held by his wife.
(9) Includes 2,220 shares held by Mr. Work and his wife as joint
tenants and 2,500 shares held by the pension plan of a company
of which Mr. Work is the sole trustee.
(10) Excludes (i) 10,200 shares held by Mr. Hamill's three
children, (ii) 18,660 shares held by his mother-in-law, Pearl
Greenbaum, and his children as joint tenants and (iii) 72,500
shares held by his wife, as to all of which shares Mr.
Hamill disclaims beneficial ownership.
Except as otherwise indicated above, the persons listed in the above
table have voting and investment power with respect to their respective shares.
All of the persons listed above, for as long as they continue to hold
5% or more of the Company's outstanding common stock, will each be deemed an
"affiliated person" of the Company, as such term is defined in the 1940 Act.
All of the Company's outstanding shares of preferred stock is
non-voting and is held by the SBA.
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<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Neil Greenbaum and Pearl Greenbaum, officers and directors of the
Company and Barbara Joy Hamill, the wife of John Hamill, a director of the
Company, are principals in Pearland which is licensed to broker taxi medallions.
Frequently, Pearland refers an individual purchasing a medallion to sources of
financing, including the Company and other SSBICs. A substantial portion of the
Company's taxicab medallion financings are referred to the Company by Pearland.
Pearland receives no compensation from the Company for these referrals.
Pearland, however, receives a brokerage fee of approximately $3,000 to $4,000
per medallion transfer, the cost of which fee is typically split between the
purchaser and seller of the medallion.
Mr. Zelmanovitch, President and a director of the Company, is also
President and a director of another SSBIC, East Coast Venture Capital Inc.
("East Coast"), a wholly-owned subsidiary of Veritas Financial, Inc. The Company
and East Coast may in the future co-invest in certain loan and/or other
investment opportunities. Because such co-investing would require prior approval
from the Securities and Exchange Commission pursuant to the 1940 Act, the
Company will seek such approval if the Company's management determines such
co-investing to be in the best interests of the Company.
The Company currently leases office space from All Taxi Management, an
entity owned by Mr. Greenbaum, the Company's Secretary and Director, for $2,331
per month (plus 15% of the expenses of the building). The lease expires on
October 31, 2003.
All future transactions between the Company and officers, directors and
5% shareholders will be on terms no less favorable than could be obtained from
independent third parties and will be approved by a majority of the independent,
disinterested directors of the Company.
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<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements.
The following financial statements are included in Part II, Item 8:
Independent Auditor's Report......................................F-1
Statements of Financial Position of Freshstart
Venture Capital Corp. as of May 31, 1999 and 1998...............F-2
Statements of Operations for the Years
Ended May 31, 1999, 1998 and 1997...............................F-4
Statements of Stockholders' Equity for the Years
Ended May 31, 1999, 1998 and 1997...............................F-5
Statements of Cash Flows for the Years
Ended May 31, 1999, 1998 and 1997...............................F-6
Notes to the Financial Statements.................................F-7
Supplement Schedules..............................................F-13
Selected Per Share Data and Ratios................................F-15
(a) (2) Financial Statement Schedules.
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are not applicable and therefore,
have been omitted.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the fourth
quarter of fiscal 1999.
(c) Exhibits
1.1* Certificate of Incorporation of the Company, as
amended through November 24, 1987.
1.2* Amendments to the Certificate of Incorporation of
the Company from November 25, 1987 through May 11,
1993.
1.3* Amendment to Certificate of Incorporation of the
Company filed November 17, 1994.
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<PAGE>
1.4* Amendment to Certificate of Incorporation of the
Company.
1.5** Amendment to Certificate of Incorporation of the
Company.
2.1* By-laws of the Company, as amended.
3.1* Specimen of share of Common Stock of the Company.
10.1* Defined Contribution Plan of the Company
10.2* Copy of the Company's license from the Small
Business Administration.
10.3* Letter of Intent dated as of December 1, 1992 by and
between the Company and the U.S. Small Business
Administration.
10.4* Employment Agreement between the Company and Zindel
Zelmanovitch.
10.5* Employment Agreement between the Company and Neil
Greenbaum.
10.6* Code of Ethics of the Company.
10.7* 1996 Stock Option Plan
10.8** Incentive Stock Option Plan
10.9** Non-Employee Director Stock Option Plan
23.1 Consent of Michael C. Finkelstein, Certified Public
Accountants.
27.1 Financial Data Schedule.
----------
* Incorporated by reference to the Company's Registration
Statement on Form N-5 (File No. 33-15890).
** Incorporated by reference to the Company's Definitive Proxy
Statement on Form 14A filed October 16, 1998.
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<PAGE>
TABLE OF CONTENTS
Page
----
Independent Auditors' Report ........................................ F-1
Statements of Financial Position of Freshstart
Venture Capital Corp. as of May 31, 1999 and 1998 ................. F-2
Statements of Operations for the Years
Ended May 31, 1999, 1998 and 1997 ................................. F-4
Statements of Stockholders' Equity for the Years
Ended May 31, 1999, 1998 and 1997 ................................. F-5
Statements of Cash Flows for the Years
Ended May 31, 1999, 1998 and 1997 ................................. F-6
Notes to the Financial Statements ................................... F-7
Supplemental Schedules .............................................. F-13
Selected Per Share Data and Ratios .................................. F-15
<PAGE>
Michael C. Finkelstein
CERTIFIED PUBLIC ACCOUNTANT
704 Ginesi Drive - Suite 23 1370 Avenue of the Americas
Morganville, New Jersey 07751 New York, New York 10019
Tel. (732) 972-2700 Tel. (212) 689-4633
Fax. (732) 972-5001 Fax. (212) 664-1700
Board of Directors
Freshstart Venture Capital Corp.
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying Statements of financial position of Freshstart
Venture Capital Corp. (the "Company") as of May 31, 1999 and 1998, including the
schedule of portfolio investments as of May 31, 1999 and 1998, and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended May 31, 1999 and selected per share data and
ratios for each of the five years in the period ended May 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
We have reviewed the procedures used by the Board of Directors in arriving at
its estimate of such securities and have inspected underlying documentation,
and, in the circumstances, we believe the procedures are reasonable and the
documentation appropriate. However, because of the inherent uncertainty of
valuation, those estimated values differ significantly from the values that
would have been used had a ready market for the securities existed, and the
differences could be material.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of May 31, 1999
and 1998 and the results of its operations and its cash flows for the three
years in the period ended May 31, 1999 in conformity with generally accepted
accounting principles.
New York, New York
August 18, 1999
Michael C. Finkelstein
Certified Public Accountant
F-1
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
STATEMENTS OF FINANCIAL POSITION
ASSETS
May 31, May 31,
------------ ------------
1999 1998
------------ ------------
Loans Receivable:
Long Term Portion (Notes 2 and 3) $ 25,123,632 $ 24,442,206
Less: Unrealized Depreciation on
Loans Receivable (Note 3) (316,441) (319,815)
------------ ------------
24,807,191 24,122,391
Less: Current Maturities - Loans Receivable (3,768,545) (3,375,072)
------------ ------------
Total Loans Receivable -
Net of Current Maturities 21,038,646 20,747,319
------------ ------------
CURRENT ASSETS
Cash (Note 13) 814,340 1,528,168
Accrued Interest (Notes 2 and 3) 308,897 256,760
Current Maturities - Loans Receivable 3,768,545 3,375,072
Prepaid Expenses and Other Assets 305,423 326,375
------------ ------------
Total Current Assets 5,197,205 5,486,375
------------ ------------
Fixed Assets - Net of Accumulated Depreciation
of $28,364 and $34,484
respectively (Note 2) 22,788 13,908
------------ ------------
Total Assets $ 26,258,639 $ 26,247,602
============ ============
See Accompanying Notes to Financial Statements
F-2
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
STATEMENTS OF FINANCIAL POSITION
LIABILITIES AND STOCKHOLDERS' EQUITY
May 31, 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 325,202 317,723
Other Current Liabilities 17,354 57,732
Dividends Payable (Note 7) 14,100 9,400
----------- -----------
Total Current Liabilities 5,356,656 5,384,855
----------- -----------
Total Liabilities 19,126,656 19,154,855
----------- -----------
Commitments and Contingencies
(Notes 12, 13 and 14) -- --
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 61,441 22,205
Restricted Capital - Realized Gain on
Redemption (Note 6) -- --
----------- -----------
Total Stockholders' Equity 7,131,983 7,092,747
----------- -----------
Total Liabilities and Stockholders' Equity $26,258,639 $26,247,602
=========== ===========
Net Assets Per Share $ 3.28 $ 3.26
=========== ===========
See Accompanying Notes to Financial Statements
F-3
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
STATEMENTS OF OPERATIONS
Years Ended May 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
REVENUE:
Interest Earned on
Outstanding Receivables $2,905,062 $2,415,527 $1,231,318
Interest Income - Idle Funds 16,734 48,816 39,397
---------- ---------- ----------
Total Revenue (Note 2) 2,921,796 2,464,343 1,270,715
---------- ---------- ----------
EXPENSES:
Interest Expense (Note 6) 1,338,335 967,003 360,678
Professional Fees 196,824 156,772 59,945
Officers' Salaries (Notes 9 and 10) 121,620 121,620 141,225
Other Salaries (Note 9) 45,619 33,704 25,966
Other Operating Expenses 146,002 103,499 123,811
Pension Expense (Note 8) 14,282 15,532 14,123
Depreciation and Amortization (Note 2) 42,576 38,908 15,915
---------- ---------- ----------
Total Expenses 1,905,258 1,437,038 741,663
---------- ---------- ----------
Net Investment Income 1,016,538 1,027,305 529,052
Unrealized Depreciation in Value of
Investments (Notes 2 and 3) 179,285 139,257 --
---------- ---------- ----------
837,253 888,048 529,052
PROVISION FOR TAXES:
Current Income Taxes (Note 2) 1,434 1,224 2,528
---------- ---------- ----------
Net Income $ 835,819 $ 886,824 $ 526,524
========== ========== ==========
Earnings Per Share of Common Stock
(Note 2) $ 0.36 $ 0.38 $ 0.29
========== ========== ==========
Dividends Paid Per Share
of Common Stock $ 0.35 $ 0.44 $ 0.21
========== ========== ==========
Weighted Average Shares of Common
Stock Outstanding 2,172,688 2,172,688 1,627,318
========== ========== ==========
See Accompanying Notes to Financial Statements
F-4
<PAGE>
<TABLE>
<CAPTION>
FRESHSTART VENTURE CAPITAL CORP.
STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended May 31,
-----------------------------------------
1999 1998 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) $ -- $ -- $ --
----------- ----------- -----------
Common Stock - $.01 Par Value:
3,000,000 Shares Authorized, 2,172,688
Shares Issued and Outstanding 21,726 21,726 5,483
2 For 1 Stock Split -- -- 5,483
Sale of 1,076,000 Shares of Common Stock -- -- 10,760
----------- ----------- -----------
Balance, End of Period 21,726 21,726 21,726
----------- ----------- -----------
Additional Paid in Capital -
Beginning of Period 7,048,816 6,857,817 2,767,600
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 6) -- 190,999 191,000
----------- ----------- -----------
Balance, End of Period 7,048,816 7,048,816 6,857,817
----------- ----------- -----------
Retained Earnings -
Beginning of Period 22,205 147,805 15,379
Net Income 835,819 886,824 526,524
Dividends Paid and Accrued (796,583) (1,012,424) (394,098)
----------- ----------- -----------
Balance, End of Period 61,441 22,205 147,805
----------- ----------- -----------
Restricted Capital
Gain on Redemption of 3% Preferred
Stock (See Note 6) -- 190,999 381,999
Amortization of Gain -- (190,999) (191,000)
----------- ----------- -----------
Balance, End of Period -- -- 190,999
----------- ----------- -----------
Total Stockholder's Equity $ 7,131,983 $ 7,092,747 $ 7,218,347
=========== =========== ===========
</TABLE>
See Notes to the Financial Statements
F-5
<PAGE>
<TABLE>
<CAPTION>
FRESHSTART VENTURE CAPITAL CORP.
STATEMENTS OF CASH FLOWS
Years Ended May 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS PROVIDED (USED) BY
OPERATING ACTIVITIES:
Net Income $ 835,819 $ 886,824 $ 526,524
Depreciation and Amortization Expense 42,576 38,908 15,915
Provision for Losses on Loans Receivable (3,374) 139,257 --
(Increase) in Accrued Interest (52,137) (128,786) (35,028)
Decrease (Increase) in Other Assets (15,504) (153,812) 71,960
Increase (Decrease) in Accrued Liabilities (32,899) 111,587 103,072
Dividends Paid and Accrued (791,883) (1,012,424) (502,200)
------------ ------------ ------------
Net Cash (Used) Provided By Operating Activities (17,402) (118,446) 180,243
------------ ------------ ------------
CASH FLOWS (USED) BY
INVESTING ACTIVITIES:
Increase in Loans Receivable (14,982,025) (23,415,660) (9,556,400)
Repayment of Loans Receivable 8,868,088 8,474,842 3,609,690
Increase in Loan Participations 7,603,999 5,087,500 3,145,900
Repayment of Loan Participations (2,171,488) (279,929) (2,910,134)
Increase in Fixed Assets (15,000) -- --
------------ ------------ ------------
Net Cash (Used) By Investing Activities (696,426) (10,133,247) (5,710,944)
------------ ------------ ------------
CASH FLOWS PROVIDED BY
FINANCING ACTIVITIES:
Net Proceeds from sale of 1,076,000
Shares of Common Stock -- -- 3,915,460
Increase (Decrease) in Line of Credit -- 5,000,000 --
(Decrease) in Restricted Capital -- (190,999) (191,000)
Increase in Debentures Payable to SBA (Net) -- 3,910,000 4,070,000
Increase in Additional Paid in Capital -- 190,999 191,000
------------ ------------ ------------
Net Cash Provided by Financing Activities -- 8,910,000 7,985,460
------------ ------------ ------------
Net (Decrease) Increase in Cash (713,828) (1,341,693) 2,454,759
Cash Balance - Beginning of Period 1,528,168 2,869,861 415,102
------------ ------------ ------------
Cash Balance - End of Period $ 814,340 $ 1,528,168 $ 2,869,861
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Interest $ 1,367,312 $ 831,624 $ 299,922
------------ ------------ ------------
Taxes $ 680 $ 1,224 $ 2,528
------------ ------------ ------------
</TABLE>
See Notes to the Financial Statements
F-6
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 1999 AND 1998
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 is a
non-diversified investment Company that has elected to be
regulated as a business development Company, a type of
closed-end Investment Company under the Investment Company Act
of 1940. Beginning June 1, 1997, the Company elected to be
taxed as a regulated Investment Company under sub-chapter M of
the Internal Revenue Code of 1986, as amended. 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
At May 31, 1999 and 1998, the investment portfolio included
investments totaling $25,123,632 and $24,442,206,
respectively, whose values had been estimated by the Board of
Directors in the absence of readily ascertainable market
values. Accordingly, 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 portions of the loans are
made to various small commercial enterprises. The Company's
loans to small business concerns range up to approximately
$250,000 in size, typically have a five to fifteen year
maturity and bear interest at rated ranging from 8.38% to
18.0% per annum.
Substantially all loans are collateralized by either NYC taxi
medallions or real estate and the personal guarantees of the
individual owners.
DEFERRED DEBENTURE COSTS
SBA Debenture costs are amortized over ten years which
represents the term of the SBA debentures.
F-7
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 1999 AND 1998
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
(Continued)
DEPRECIATION AND AMORTIZATION
Depreciation and amortization of furniture, fixtures and
leasehold improvements is computed on the straight line method
at rates adequate to allocate the costs of applicable assets
over their expected useful lives.
RECOGNITION OF INTEREST INCOME
It is the Company's policy to record interest on loans and
debt securities only to the extent that management and the
Board of Directors anticipate such amounts may be collected.
Interest on doubtful accounts and accounts, which are 180 days
past due, is not recorded until, actually received.
INCOME TAXES
Effective 1998, the Company has elected to be taxed as a
regulated investment company under sub-chapter M of 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
The Company adopted SFAS No. 128 "Earnings per Share" which
supercedes Accounting Principles Board Opinion No. 15. Under
SFAS No. 128, net increase (decrease) in shareholders' equity
by the weighted average number of common shares outstanding
during the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock.
RISKS AND UNCERTAINTIES
Pursuant to Section 64 (b) (1) of the Investment Company Act
of 1940, the Company is required to advise shareholders
annually that the Company is engaged in a high risk business.
Loans and other investments to small business concerns are
extremely speculative. Most of such concerns are privately
held. Even if a public market for the securities of such
concerns exists, the loans and other securities purchased by
the Company are often restricted against sale or other
transfer for specified periods of time, Thus, such loans and
other investments have little, if any, liquidity, and the
Company must bear significantly larger risks, including
possible losses on such investments, than would be the case
with traditional investment companies.
F-8
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 1999 AND 1998
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of income and expense during the
reporting period. The most significant estimates relate to the
valuation of the loans receivable. Actual results could differ
from those estimates.
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,
--------------------------------
1999 1998
----------- -----------
Outstanding Loans $38,095,087 $31,981,150
Loan Participations (12,971,455) (7,538,944)
----------- -----------
Net Loans Outstanding $25,123,632 $24,442,206
=========== ===========
Loans on non-accrual status as of May 31, 1999 and 1998 were
approximately $1,594,015 and $1,026,133 respectively.
Additionally, the cumulative amount of accrued interest income
not recorded was $938,645 and $976,694 as of May 31, 1999 and
1998, respectively.
F-9
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 1999 AND 1998
NOTE 3 LOANS RECEIVABLE
(Continued)
RECONCILIATION OF LOAN LOSS RESERVE
A reconciliation of loan loss reserve is as follows:
Year Ended May 31,
----------------------------------
1999 1998 1997
--------- --------- ---------
Balance, Beginning $ 319,815 $ 180,558 $ 180,558
Provision for Loan Losses 179,285 139,257 --
Charge-Offs (182,659) -- --
--------- --------- ---------
Balance, Ending $ 316,441 $ 319,815 $ 180,558
========= ========= =========
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. Effective March
31, 1999, the line of credit was increased to $10,000,000.
NOTE 5 LONG TERM DEBT
The long-term debt to the SBA consisted of the following
subordinated debentures as of May 31, 1998 and 1999 with
interest payable semi-annually:
<TABLE>
<CAPTION>
May 31,
----------------------------
Interest Rate Period 1999 1998
Maturity Date First Second Face Amount Face Amount
------------- ----- ------ ----------- -----------
<S> <C> <C> <C> <C> <C>
June 1, 2005 6.690% 6.690% $ 520,000 $ 520,000
December 1, 2005 6.540% 6.540% 520,000 520,000
September 22, 1999 5.000% 8.000% 750,000 750,000
June 9, 1999 6.000% 9.000% 750,000 750,000
December 16, 2002 4.510% 7.510% 1,300,000 1,300,000
March 1, 2007 7.380% 7.380% 4,210,000 4,210,000
June 1, 2006 7.710% 7.710% 250,000 250,000
September 1, 2007 7.760% 7.760% 4,060,000 4,060,000
----------- -----------
$12,360,000 $12,360,000
=========== ===========
</TABLE>
During the period ended May 31, 1998, the Company paid off
$150,000 in subsidized debentures and sold an additional
debenture 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.
F-10
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 1999 AND 1998
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 that 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 each of the fiscal years ended
May 31, 1999 and 1998 were $56,400. Total dividends paid to
common stockholders during the fiscal years ended May 31,
1999, 1998 and 1997 were $749,583, $988,923 and $337,698,
respectively. The Company is contingently liable to the SBA
for $14,100 and $9,400, in preferred dividends due for years
ended May 31, 1999 and 1998, respectively.
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 fiscal years ended May 31, 1999, 1998 and 1997
were $14,282, $15,532, and $14,123 respectively. All
contributions to the plan have been funded on a current basis.
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 STOCKHOLDERS' EQUITY
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-11
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 1999 AND 1998
NOTE 10 STOCKHOLDERS' EQUITY
(Continued)
On December 3, 1996, the Company successfully completed its
initial public offering of 1,076,000 shares of its 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 11 RELATED PARTY TRANSACTION
Effective November 1, 1998, the Company entered into a lease
agreement with a corporation whose shareholder is also a
shareholder of the Company. Prior to November 1, 1998, the
Company was paying rent on a month to month basis to a real
estate partnership whose partners were also shareholders of
the Company. Total rental expense under this lease was
$21,373. The total rent aggregated $30,372 and $18,000 for the
years ended May 31, 1999 and 1998, respectively.
Certain officers and directors of the Company are also
shareholders of the Company. Officers' salaries are set by the
Board of Directors and are also subject to maximum
compensation set by the SBA. For the fiscal years ended May
31, 1999, 1998 and 1997, officers' salaries, including pension
contributions, were $133,782, $133,782 and, $155,348,
respectively.
NOTE 12 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 13 FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISKS
The Company maintained approximately $711,142 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 14 SUBSEQUENT EVENTS
On August 17, 1999 the Company entered into a Letter of Intent
with Medallion Financial Corp. ("Medallion"), relating to the
proposed merger of the Company with and into Medallion.
Pursuant to the Letter of Intent, the Company's shareholders
will receive Medallion common stock for each share of
Freshstart Common Stock having a fair market value of $4.15 to
$5.00, based upon the fair market value of Medallion common
stock. If the fair market value of Medallion stock falls below
$12.00 per share, Medallion may elect not to close the merger.
Freshstart granted Medallion the option to purchase 19.99% of
its stock (at an average exercise price of $3.875) exercisable
by Medallion in the event that Freshstart accepts an offer
from another party or elects not to close the transaction. The
Letter of Intent also restricts Freshstart's ability to
declare dividends in excess of $.03 per share per fiscal
quarter until December 31, 1999.
F-12
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 1999 AND 1998
NOTE 14 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 Standard No. 107,
"DISCLOSURE 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 (see Note 2).
The fair value of financial instruments that are short-term or
reprice frequently and have a history of negligible credit
losses is considered to approximate their carrying value.
Those instruments include balances recorded in the following
captions:
ASSETS LIABILITIES
--------------------------- -----------------------------
Cash Notes Payable to Banks
Accrued Interest Receivable Debentures Payable to SBA
4% Cumulative Preferred Stock
NOTE 15 COMMITMENTS AND CONTINGENCIES
Effective November 1, 1998, the Company entered into a five
year lease agreement expiring November 30, 2003, with a
minimum rental of $2,331 plus 15% of the total expense for the
entire building. The minimum future rental throughout the
lease term shall be as follows:
June 1, 1999 through May 31, 2000 $ 27,975
June 1, 2000 through November 30, 2003 97,872
---------
Total future minimum rental $ 125,847
=========
F-13
<PAGE>
<TABLE>
<CAPTION>
FRESHSTART VENTURE CAPITAL CORP.
SUPPLEMENTAL SCHEDULES
MAY 31, 1999
SCHEDULE I LOANS RECEIVABLE
Balance
Number of Outstanding
Type of Loan Loans Interest Rate Maturity Date May 31, 1999
- ------------ ----- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
NYC Taxi Medallion 197 8.38% - 15.00% 1 - 7 years $ 19,690,009
Services 4 15.00% - 16.00% 1 - 7 years 503,418
Auto Repair Service 5 9.38% - 15.00% 1 - 4 years 389,777
Renovation and Construction 1 15.00% 5 years 134,852
Retail Establishment 4 11.25% - 13.00% 1 - 5 years 377,583
Restaurant 8 11.50% - 18.00% 1 - 7 years 1,879,339
Gasoline Service Station 4 10.00% - 15.00% 1 - 7 years 295,726
Manufacturing 1 10.00% - 15.00% 1 - 7 years 151,572
Laundromat and Dry Cleaners 17 10.00% - 15.00% 1 - 7 years 1,595,238
Medical Offices 1 15.00% 1 - 3 years 106,118
------- ------------
TOTAL 242 $ 25,123,632
======= ============
</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
- ----------- ------- -------- ------------- --------------
<S> <C> <C> <C> <C>
May 31, 1998 $5,000,000 7.44% $5,000,000 $ 416,667
May 31, 1999 $5,000,000 7.00% $5,000,000 $5,000,000
</TABLE>
F-14
<PAGE>
<TABLE>
<CAPTION>
FRESHSTART VENTURE CAPITAL CORP.
SUPPLEMENTAL SCHEDULES
MAY 31, 1998
SCHEDULE I LOANS RECEIVABLE
Balance
Number of Outstanding
Type of Loan Loans Interest Rate Maturity Date May 31, 1998
- ------------ --------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
NYC Taxi Medallion 226 9.00% - 15.00% 1 - 7 years $ 19,272,896
Services 3 14.00% 1 - 7 years 322,838
Auto Repair Service 8 10.00% - 15.00% 1 - 4 years 665,479
Import/Export 1 12.00% 1 year 97,781
Renovation and Construction 2 10.50% 5 years 164,720
Retail Establishment 6 11.25% - 13.00% 1 - 4 years 1,359,921
Restaurant 6 13.00% - 15.00% 1 year 575,075
Gasoline Service Station 3 9.50% - 12.00% 1 year 216,192
Manufacturing 1 15.00% 1 year 151,572
Laundromat and Dry Cleaners 19 11.00% - 15.00% 1 - 4 years 1,438,228
Medical Offices 2 11.63% - 15.00% 1 - 3 years 177,504
----- ------------
TOTAL 277 $ 24,442,206
===== ============
</TABLE>
Substantially all of the above loans are collateralized by either New York City
taxi medallions or real estate holdings.
SCHEDULE VII SHORT TERM BORROWINGS
Short term borrowing activities for the periods presented were as follows:
Weighted
Balance Average Maximum Amount Average Amount
Category of End of Interest Outstanding Outstanding
Borrowing Period Rate During Period During Period
- ----------- ------- -------- -------------- --------------
May 31, 1997 $ -- -- $ -- $ --
May 31, 1998 $5,000,000 7.44% $5,000,000 $ 416,667
F-15
<PAGE>
<TABLE>
<CAPTION>
FRESHSTART VENTURE CAPITAL CORP.
SUPPLEMENTARY INFORMATION
SELECTED PER SHARE DATA AND RATIOS
FOR THE FIVE YEARS ENDED
MAY 31, 1995, 1996, 1997, 1998 AND 1999
FOR THE YEARS ENDED MAY 31,
--------------------------------------------------------------------
PER SHARE DATA 1995 1996 1997 1998 1999
-------- ------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Investment Income $ 1.83 $ 1.88 $ 0.79 $ 1.13 $ 1.34
Investment Expenses (1.21) (1.17) (0.46) (0.66) (0.88)
-------- ------- ---------- ---------- -----------
Net Investment Income 0.62 0.71 0.33 0.47 0.46
Net Realized and Unrealized
Gains and Losses on
Securities -- (0.06) -- (0.06) (0.08)
Reduction Due to
Stock Split -- -- (4.94) -- --
Dividends Common Stock (0.54) (0.54) (0.22) (0.44) (0.33)
Dividends Preferred Stock (0.08) (0.11) (0.03) (0.03) (0.03)
Net Sale of Common Stock -- -- 2.40 -- --
-------- ------- ---------- ---------- -----------
Net Increase/Decrease
in Net Asset Value -- -- (2.46) (0.06) 0.02
Net Asset Value Beginning
of Period 5.78 5.78 5.78 3.32 3.26
-------- ------- ---------- ---------- -----------
Net Asset Value End of
Year $ 5.78 $ 5.78(1) $ 3.32(1) $ 3.26 $ 3.28
======== ======= ========== ========== ===========
Net Asset Value End of
Year Excluding Retained
Earnings $ 5.75 $ 5.75(1) $ 3.23(1) $ 3.25 $ 3.25
======== ======= ========== ========== ===========
Ratios
Ratio of Expenses to
Average Net Assets 20.9% 20.3% 14.3% 22.0% 7.9%
===== ===== ===== ===== ====
Ratio of Net Income to
Average Net Assets 10.6% 11.2% 10.1% 12.4% 3.2%
===== ===== ===== ===== ====
Weighted Average of Common
Shares Outstanding 548,344 548,344 1,627,318 2,172,688 $ 2,172,688
======== ======= ========== ========== ===========
</TABLE>
(1) The net asset value includes the unamortized portion of the realized gain
from the repurchase of three 3% percent preferred stock and the
undistributed retained earnings at the end of the period.
F-16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ ZINDEL ZELMANOVITCH
----------------------------------
Name: Zindel Zelmanovitch
Title: President and Director
Pursuant to the requirements of Section 13 or 15(d) 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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ ZINDEL ZELMANOVITCH President and Director August 25, 1999
- ------------------------------------
Zindel Zelmanovich
/s/ NEIL GREENBAUM Secretary and Director August 25, 1999
- ------------------------------------
Neil Greenbaum
/s/ PEARL GREENBAUM Vice President and Director August 25, 1999
- ------------------------------------
Pearl Greenbaum
/s/ MICHAEL L. MOSKOWITZ Director August 25, 1999
- ------------------------------------
Michael L. Moskowitz
/s/ EUGENE HABER Director August 25, 1999
- ------------------------------------
Eugene Haber
/s/ ALAN WORK Director August 25, 1999
- ------------------------------------
Alan Work
/s/ JOHN HAMILL Director August 25, 1999
- ------------------------------------
John Hamill
</TABLE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Annual Report of Freshstart
Venture Capital Corp. on Form 10-K of our report dated August 24, 1999 on our
examinations for the years ended May 31, 1998 and 1999.
/s/ MICHAEL C. FINKELSTEIN
- -------------------------------
Michael C. Finkelstein
Certified Public Accountant
New York, New York
August 24, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<CIK> 0000818897
<NAME> Freshstart Venture Capital Corp.
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> MAY-31-1999
<EXCHANGE-RATE> 1
<CASH> 814,340
<SECURITIES> 0
<RECEIVABLES> 25,123,632
<ALLOWANCES> (316,441)
<INVENTORY> 0
<CURRENT-ASSETS> 5,197,205
<PP&E> 22,788
<DEPRECIATION> 34,484
<TOTAL-ASSETS> 26,258,639
<CURRENT-LIABILITIES> 5,356,656
<BONDS> 0
0
1,410,000
<COMMON> 21,726
<OTHER-SE> 7,110,257
<TOTAL-LIABILITY-AND-EQUITY> 26,258,639
<SALES> 2,905,062
<TOTAL-REVENUES> 2,921,796
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 566,923
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 179,285
<INCOME-PRETAX> 1,338,335
<INCOME-TAX> 1,434
<INCOME-CONTINUING> 835,819
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 835,815
<EPS-BASIC> .36
<EPS-DILUTED> .36
</TABLE>
