SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
---------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended February 29, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ..................to ............................
Commission file number.....................................0-26214
FRESHSTART VENTURE CAPITAL CORP.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEW YORK 13-3134761
--------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
24-29 Jackson Avenue
Long Island City, New York
----------------------------------------
(Address of principal executive offices)
11101
----------
(Zip Code)
(718) 361-9595
----------------------------------------------------
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days.
Yes. .[X]. No. . . .
The number of shares of Common Stock, par value $.01 per share, outstanding
as of February 29 2000: 2,172,688
<PAGE>
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Financial Position as of
February 29, 2000 (unaudited) and May 31, 1999........................... 2-3
Statements of Operations for the Three Months
and Nine Months Ended February 29, 2000 and
February 28, 1999(unaudited)................................................4
Statements of Stockholders' Equity for the Nine
Months Ended February 29, 2000 and February
28, 1999 (unaudited)........................................................5
Statements of Cash Flows for Nine Months
Ended February 29, 2000 and February 28,
1999 (unaudited)............................................................6
Notes to the Financial Statements..........................................7-13
Supplemental Schedules.......................................................14
Per Share Data...............................................................15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...........................16-17
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ...................................18
Signatures...................................................................19
Schedule 27 .................................................................20
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The statement of financial position of the Company as of February 29, 2000, the
related statements of operations, and cash flows for the nine months ended
February 29, 2000 and February 28, 1999 included in Item 1 have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the accompanying financial statements
include all adjustments (consisting of normal, recurring adjustments) necessary
to summarize fairly the Company's financial position and results of operations.
The results of operations for the nine months ended February 29, 2000 are not
necessarily indicative of the results of operations for the full year or any
other interim period. These financial statements should be read in conjunction
with the audited financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1999 as
filed with the Commission.
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
STATEMENTS OF FINANCIAL POSITION
ASSETS
<TABLE>
<CAPTION>
February 29, May 31,
2000 1999
----------- -----------
(Unaudited)
Loans Receivable:
<S> <C> <C>
Long Term Portion (Notes 2 and 3) $21,720,787 $25,123,632
Less: Unrealized Depreciation on
Loans Receivable (Note 3) (816,441) (316,441)
----------- -----------
20,904,346 24,807,191
Less: Current Maturities - Loans Receivable (3,258,118) (3,768,545)
----------- -----------
Total Loans Receivable -
Net of Current Maturities 17,646,228 21,038,646
----------- -----------
CURRENT ASSETS
Cash (Note 12) 1,453,685 814,340
Accrued Interest (Notes 2 and 3) 288,037 308,897
Current Maturities - Loans Receivable 3,258,118 3,768,545
Prepaid Expenses and Other Assets 264,129 305,423
----------- -----------
Total Current Assets 5,263,969 5,197,205
----------- -----------
Fixed Assets - Net of Accumulated Depreciation
of $38,447 and $31,364
respectively (Note 2) 19,360 22,788
------------ -----------
Total Assets $22,929,557 $26,258,639
============ ===========
</TABLE>
See Accompanying Notes to Unaudited Financial Statements
2
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
STATEMENTS OF FINANCIAL POSITION
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
February 29, May 31,
2000 1999
------------- -------------
(Unaudited)
<S> <C> <C>
LONG TERM DEBT:
Debentures Payable to SBA (Note 5) $ 10,860,000 $ 12,360,000
4% Cumulative, 15 Year Redeemable
Preferred Stock (Note 6) 1,410,000 1,410,000
------------ ------------
Total Long Term Debt 12,270,000 13,770,000
------------ ------------
CURRENT LIABILITIES:
Notes Payable - Bank 3,000,000 5,000,000
Accrued Interest 375,142 325,202
Other Current Liabilities 50,051 17,354
Dividends Payable (Note 7) -- 14,100
------------ ------------
Total Current Liabilities 3,425,193 5,356,656
------------ ------------
Total Liabilities 15,695,193 19,126,656
------------ ------------
Commitments and Contingencies
(Notes 11, 12 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 (Note 6) 7,048,816 7,048,816
Retained Earnings 163,822 61,441
Restricted Capital - Realized Gain on
Redemption (Note 6) -- --
-- --
Total Stockholders' Equity 7,234,364 7,131,983
------------ ------------
Total Liabilities and Stockholders' Equity $ 22,929,557 $ 26,258,639
============ ============
Net Assets Per Share $ 3.33 $ 3.28
============ ============
See Accompanying Notes to Unaudited Financial Statements
</TABLE>
3
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
February, February,
-------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE:
Interest Earned on
Outstanding Receivables $ 769,372 $ 692,220 $ 2,147,016 $ 2,148,623
Interest Income - Idle Funds 10,258 3,544 18,363 9,575
----------- ----------- ----------- -----------
Total Revenue (Note 2) 779,630 695,764 2,165,379 2,158,198
----------- ----------- ----------- -----------
EXPENSES:
Interest (Notes 4 and 5) 309,344 335,378 931,407 1,015,801
Professional Fees 67,063 68,097 143,142 157,876
Officers' Salaries (Notes 9 and 10) 30,405 30,405 91,215 91,215
Other Salaries (Note 9) 13,914 12,835 37,605 33,355
Other Operating Expenses 45,642 52,198 124,496 125,413
Pension Expense (Note 8) 3,700 3,371 10,731 10,981
Depreciation and Amortization (Note 2) 10,294 10,614 31,494 31,842
----------- ----------- ----------- -----------
Total Expenses 480,362 512,898 1,370,090 1,466,483
----------- ----------- ----------- -----------
Net Investment Income 299,268 182,866 795,289 691,715
Unrealized Depreciation in Value of
Investments (Notes 2 and 3) (70,000) -- (518,351) --
----------- ----------- ----------- -----------
229,268 182,866 276,938 691,715
PROVISION FOR TAXES:
Current Income Taxes (Note 2) (154) (77) (1,886) (757)
----------- ----------- ----------- -----------
Net Income $ 229,114 $ 182,789 $ 275,052 $ 690,958
=========== =========== =========== ===========
Earnings Per Share of Common Stock
(Note 2) $ 0.10 $ 0.06 $ 0.11 $ 0.29
=========== =========== =========== ===========
Dividends Paid Per Share
of Common Stock $ 0.030 $ 0.115 $ 0.06 $ 0.35
=========== =========== =========== ===========
Weighted Average Shares of Common 2,172,688 2,172,688 2,172,688 2,172,688
=========== =========== =========== ===========
Stock Outstanding
</TABLE>
See Accompanying Notes to Unaudited Financial Statements
4
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Nine Months Ended
February,
----------------------------
2000 1999
------------ ------------
4% Cumulative, 15 Year Redeemable
Preferred Stock - $1 Par Value:
10,000,000 Shares Authorized,
1,410,000 Shares Issued and
Outstanding (See Long Term Debt)
Common Stock - $.01 Par Value:
3,000,000 Shares Authorized, 2,172,688
Shares Issued and Outstanding 21,726 21,726
----------- -----------
Additional Paid in Capital -
Beginning of Period 7,048,816 7,048,816
Amortization of Restricted
Capital (Note 6) -- --
----------- -----------
Balance, End of Period 7,048,816 7,048,816
----------- -----------
Retained Earnings -
Beginning of Period 61,441 22,205
Net Income 275,052 690,958
Dividends Paid and Accrued (172,671) (791,883)
----------- -----------
Balance, End of Period 163,822 (78,720)
----------- -----------
Total Stockholder's Equity $ 7,234,364 $ 6,991,822
=========== ===========
See Accompanying Notes to Unaudited Financial Statements
5
<PAGE>
<TABLE>
<CAPTION>
FRESHSTART VENTURE CAPITAL CORP.
STATEMENTS OF CASH FLOWS
Nine Months Ended
February,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS PROVIDED (USED) BY
OPERATING ACTIVITIES:
Net Income $ 275,052 $ 690,958
Depreciation and Amortization Expense 31,494 31,842
Increase in Unrealized Depreciation 500,000 --
(Increase) in Accrued Interest 20,860 (80,727)
Decrease (Increase) in Other Assets 13,228 19,477
Increase in Accrued Liabilities 82,637 125,393
Dividends Paid and Accrued (186,771) (791,883)
----------- -----------
Net Cash (Used) Provided By Operating Activities 736,500 (4,940)
----------- -----------
CASH FLOWS PROVIDED (USED) BY
INVESTING ACTIVITIES:
Net (Decrease) Increase in Loans Receivable 3,402,845 (570,869)
----------- -----------
Net Cash (Used) By Investing Activities 3,402,845 (570,869)
----------- -----------
CASH FLOWS (USED) PROVIDED BY
FINANCING ACTIVITIES:
Acquisition of Fixed Assets -- (15,000)
Repayment of Bank Line of Credit (2,000,000) --
(Decrease) in Debentures Payable to SBA (Net) (1,500,000) --
----------- -----------
Net Cash (Used) Provided by Financing Activities (3,500,000) (15,000)
----------- -----------
Net Increase (Decrease) in Cash 639,345 (590,809)
Cash Balance - Beginning of Period 814,340 1,528,168
----------- -----------
Cash Balance - End of Period $ 1,453,685 $ 937,359
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Interest $ 881,467 $ 665,333
----------- -----------
Taxes $ (1,886) $ 680
----------- -----------
</TABLE>
See Accompanying Notes to Unaudited Financial Statements
6
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
FEBRUARY 29, 2000
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 February 29, 2000, the investment portfolio included net
investments totaling $20,904,346, 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 eighty-three (83%) 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 8.00% 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.
7
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
FEBRUARY 29, 2000
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.
8
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
FEBRUARY 29, 2000
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:
February 29, 2000
-----------------
Outstanding Loans $38,814,777
Participations Loan 17,093,990
-----------
Net Loans Outstanding $21,720,787
===========
Loans on non-accrual status as of February 29, 2000 were
approximately $1,367,589. Additionally, the cumulative amount of
accrued interest income not recorded was $1,034,734 as of February
29, 2000.
9
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
FEBRUARY 29, 2000
NOTE 3 LOANS RECEIVABLE
(Continued)
RECONCILIATION OF LOAN LOSS RESERVE
A reconciliation of loan loss reserve is as follows:
February 29, 2000
-----------------
Balance, Beginning $ 316,441
Provision for Loan 518,351
Losses
Charge-Offs (18,351)
----------
Balance, Ending $ 816,441
==========
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 February 28, 1999 and February 29,
2000 with interest payable semi-annually:
MATURITY DATE FIRST SECOND FACE AMOUNT
June 1, 2005 6.690%6.690% $ 520,000
December 1, 2005 6.540%6.540% 520,000
December 16,2002 4.510%7.510% 1,300,000
March 1, 2007 7.380%7.380% 4,210,000
June 1, 2006 7.710%7.710% 250,000
September 1, 2007 7.760%7.760% 4,060,000
-----------
$10,860,000
===========
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.
Effective September 2, 1999, the Company paid off $750,000 in
subsidized debentures.
10
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
FEBRUARY 29, 2000
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 full
value of the discount aggregating $969,370 is included in
paid-in-capital.
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
Dividedends paid to the SBA for the nine months ended February 29,
2000 were $56,400.
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. The provision made for the nine months
ended February 29, 2000 and February 28, 1999 were $10,731 and
$10,981 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 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. Total rental expense under this lease was $22,430.
Certain officers and directors of the Company are also shareholders
of the Company. Officers' salaries are set by the Board of Directors
and are also subject to maximum compensation set by the SBA. For the
nine months ended February 29, 2000 and February 28, 1999 officers'
salaries, including pension contributions, were $100,333 and
$100,333, respectively.
NOTE 11 SIGNIFICANT CONCENTRATION OF CREDIT RISK
Approximately eighty-three (83%) percent of the Company's loan
portfolio consists of loans made for the financing and purchase of
New York City taxicab medallions and related assets.
11
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
FEBRUARY 29, 2000
NOTE 12 FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISKS
The Company maintained approximately $947,269 in one bank in excess
of amounts that would be insured by the Federal Depository Insurance
Corporation. Management of the Company feels that the bank is well
capitalized under FDIC guidelines.
NOTE 13 MERGER
On December 22, 1999, an Agreement and Plan of Merger (the "Merger
Agreement") was executed by and among Medallion Financial Corp.
("Medallion"), FS Merger Corp., a wholly owned subsidiary of
Medallion ("Merger Corp."), and the Company. Under the terms and
subject to the satisfaction of certain conditions contained in the
Merger Agreement, it is anticipated that Merger Corp. will merge with
and into the Company (the "Merger") and that the Company will become
a wholly-owned subsidiary of Medallion. Following the satisfaction of
pre-closing conditions, including the approval the shareholders of
the Company and regulatory approval, it is expected that the closing
of the Merger will occur during the first half of 2000.
The Merger Agreement contemplates the issuance of shares of common
stock of Medallion as consideration for the surrender and exchange of
the outstanding shares of common stock of the Company. The number of
shares to be issued by Medallion as the merger consideration is
dependent upon the market price of Medallion common stock at the time
of closing the Merger. If the fair market value of Medallion common
stock is less than $16.00 per share, then each outstanding share of
Company common stock will receive a fraction of a share of Medallion
common stock having a fair market value equal to $4.025. If the
market price of Medallion common stock is greater than $27.51 per
share, then each outstanding share of Company common stock will
receive a fraction of a share of Medallion common stock having a fair
market equal to $4.875. If the market price of Medallion common stock
is between $16.01 and $27.50 per share, then each outstanding share
of Company common stock will receive a fraction of a share of
Medallion common stock having a fair market value ranging between
$4.125 and $4.625. If the fair market price of the Medallion common
stock is less than $12.00 per share, Medallion has the right to
terminate the Merger Agreement. The Merger Agreement contains other
customary terms and provisions, including representations,
warranties, covenants and conditions. The Merger Agreement
contemplates that the Merger will be accounted for under the pooling
method of accounting.
In addition, Zindel Zelmanovitch, the President and a director of the
Company, and Neil Greenbaum, the Secretary and a director of the
Company, executed a Voting Agreement pursuant to which Messrs.
Zelmanovich and Greenbaum agreed, among other things, to vote the
shares of the Company beneficially owned by them in favor of the
Merger.
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.
12
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
FEBRUARY 29, 2000
NOTE 14 FAIR VALUE OF FINANCIAL INSTRUMENTS
(Continued)
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:
March 31, 2000 through May 31, 2000 $ 6,626
June 1, 2000 through November 30, 2003 97,872
----------
Total future minimum rental $ 104,498
==========
NOTE 16 SUBSEQUENT EVENTS
On February 29, 2000 the Company declared dividends of $.03 per share
to shareholders of record on February 29, 2000. The total dividends
paid on March 10, 2000 aggregated $65,190.
13
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
SUPPLEMENTAL SCHEDULES
FEBRUARY 29, 2000
SCHEDULE I - LOANS RECEIVABLE
<TABLE>
<CAPTION>
Balance
Number of Outstanding
Type of Loan Loans Interest Rate Maturity Date February 29, 2000
-------------- --------- -------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
NYC Taxi Medallion 189 8.00% - 18.00% 1 - 7 years $18,060,492
Services 3 13.90% - 16.00% 1 - 7 years 457,441
Auto Repair Service 7 9.38% - 15.00% 1 - 4 years 482,004
Renovation and Construction 1 10.50% 5 years 134,852
Retail Establishment 4 11.25% - 13.00% 1 - 4 years 342,972
Restaurant 7 11.00% - 18.00% 1 year 398,594
Gasoline Service Station 3 11.50% - 15.00% 1 year 505,292
Manufacturing 1 15.00% 1 year 151,572
Laundromat and Dry Cleaners 14 11.00% - 15.00% 1 - 4 years 1,187,568
------- -----------
TOTAL 229 $21,720,787
======= ===========
</TABLE>
Substantially all of the above loans are collateralized by either New York City
taxi medallions or real estate holdings.
SCHEDULE VII - SHORT TERM BORROWINGS
Short term borrowing activities for the periods presented were as follows:
<TABLE>
<CAPTION>
Weighted
Balance Average Maximum Amount Average Amount
Category of End of Interest Outstanding Outstanding
Borrowing Period Rate During Period During Period (1)
- --------- ------ ---- ------------- -----------------
<S> <C> <C> <C> <C>
May 31, 1999 (2) $ 5,000,000 7.00% $ 5,000,000 $ 5,000,000
February 28, 1999 $ 5,000,000 7.44% $ 5,000,000 $ 5,000,000
February 29, 2000 $ 3,000,000 7.24% $ 5,000,000 $ 4,888,888
</TABLE>
(1) Computed based on weighted average of amount outstanding during the period.
(2) The Company did not renew its Line of Credit.
14
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
SUPPLEMENTARY INFORMATION
SELECTED PER SHARE DATA AND RATIOS
FOR THE NINE MONTHS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
For the Nine Months Ended
February 29, and 28
-------------------------------
2000 1999
--------- ---------
Per Share Data
Investment Income $ 1.00 $ 0.99
Investment Expenses (0.63) (0.68)
--------- ---------
Net Investment Income 0.37 0.31
Net Realized and Unrealized
Gains and Losses on
Securities (0.24) --
Dividends - Common Stock (0.06) (0.34)
Dividends - Preferred Stock (0.02) (0.02)
--------- ---------
Net Increase/Decrease
in Net Asset Value 0.05 (0.05)
Net Asset Value - Beginning
of Period $ 3.28 $ 3.26
========= =========
Net Asset Value - End of
Year $ 3.33(1) $ 3.21(1)
========= =========
Net Asset Value - End of
Year Excluding Retained
Earnings (2) $ 3.25(1) $ 3.25(1)
========= =========
Ratios
Ratio of Expenses to
Average Net Assets 26.32% 20.83%
========= =========
Ratio of Net Income to
Average Net Assets 3.83% 9.81%
========= =========
Weighted Average of Common
Shares Outstanding 2,172,688 2,172,688
========= =========
(1) The net asset value includes the realized gain from the repurchase of three
percent stock and the undistributed retained earnings at the end of the
period.
(2) Excluded undistributed retained earnings at the end of the period.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information contained in this section should be sued in conjunction with the
Financial Statements and Notes therewith appearing in this report Form and the
Company's Annual Report for the year ended May 31, 1999.
General
The Company is licensed by the Small Business Administration (SBA) to
operate as a Specialized Small Business Investment Company (SSBIC) under the
Small Business Investment Act of 1958, as amended. The Company has also elected
to be regulated as a business development company under the Investment Company
Act of 1940.
The Company primarily makes loans and investments to persons who qualify
under SBA regulations as socially or economically disadvantaged and loans and
investments to entities which are at least 50% owned by such persons. The
Company's primary lending activity is to originate and service loans
collateralized by New York City Taxicab Medallions. The Company also makes loans
and investments in other diversified businesses.
Results of Operations For the Nine Months ended February 29, 2000 and February
28, 1999
Total investment income. The Company's investment income for the nine
months ended February 29, 2000 was $2,165,379 as compared to $2,158,198 for the
period ending February 28, 1999. Although the loan portfolio decreased, the
Company collected interest on several of its delinquent loans. The expanded
collection efforts on these loans resulted in a small increase in its investment
income. The increase aggregated $7.181 (an increase of .03%).
Operating Expenses
Interest expense for the nine-month period ended February 29, 2000
decreased by $84,394 ($931,407 from $1,015,801) over the similar period ended
February 28, 1999. The Company paid off $1,500,000 in SBA subordinated
debentures during the current period, and $2,000,000 on February 15, 2000 on its
bank line of credit, which resulted in a lower period interest rate.
Other operating expenses decreased by $11,401 when compared with the
similar nine-month period ended February 28, 1999. The decrease was mainly due
to decreases in dues, equipment rental and miscellaneous fees. The Management of
the Company reviewed its loan portfolio as of February 29, 2000, and based on
such review, the provision for bad debt was increased by $500,000. Accordingly,
the reserve for bad debt was increased to $816,441 from $316,441.
Statement of Financial Position
Total assets and liabilities decreased by $3,329,082 as of February 29,
2000 when compared with the statement of financial position as of May 31, 1999.
The decrease consisted of paying off two SBA debentures aggregating $1,500,000,
repayment of the bank line of credit in the amount of $2,000,000 and a decrease
in the loan portfolio of $3,402,845. The reserves for bad debts were increased
by $500,000 as of February 29, 2000 and were deemed to be adequate as of
February 29, 2000.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has funded its operations through capital
contributions by its principal stockholders, public and private sales of its
securities, the issuance to the SBA of its subordinated debentures and SBA 4%
cumulative preferred stock, in order to make loans, increase its leverageable
capital and pay its operating expenses.
The Company's potential sources of liquidity are credit facilities with
banks, fixed rate long-term subordinated debentures that are issued to the SBA
and loan amortization and prepayments. The Company currently distributes at
least 90% of its investment company taxable income; consequently, the Company
primarily relies upon external sources of funds to finance growth. At February
29, 2000, the Company's $15,695,193 of debts consisted of $10,860,000 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 $3,000,000 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
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.
17
<PAGE>
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) REPORTS ON FORM 8-K. The Registrant filed a Current Report on Form 8-K on
December 29, 1999, disclosing the Merger Agreement with Medallion (See Part I -
Note 13).
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: April 14, 2000 Freshstart Venture Capital Corp.
BY: /s/ ZINDEL ZELMANOVITCH
-----------------------------------------
Zindel Zelmanovitch, Chief Executive,
Financial and Accounting Officer
19
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000818897
<NAME> Freshstart Venture Capital Corp.
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1999
<PERIOD-END> FEB-29-2000
<EXCHANGE-RATE> 1
<CASH> 1,453,685
<SECURITIES> 21,720,787
<RECEIVABLES> 288,037
<ALLOWANCES> (816,441)
<INVENTORY> 0
<CURRENT-ASSETS> 552,166
<PP&E> 57,807
<DEPRECIATION> (38,447)
<TOTAL-ASSETS> 22,929,557
<CURRENT-LIABILITIES> 3,425,193
<BONDS> 0
1,410,000
0
<COMMON> 7,070,542
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 22,929,557
<SALES> 2,165,379
<TOTAL-REVENUES> 2,165,379
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 438,683
<LOSS-PROVISION> 518,351
<INTEREST-EXPENSE> 931,407
<INCOME-PRETAX> 276,938
<INCOME-TAX> 1,886
<INCOME-CONTINUING> 275,052
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 275,052
<EPS-BASIC> .11
<EPS-DILUTED> .11
</TABLE>
