SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ..................to ............................
Commission file number...................................................0-26214
FRESHSTART VENTURE CAPITAL CORP.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEW YORK 13-3134761
--------------------------------- -------------------
(State or other jurisdiction (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 January 14,
2000: 2,172,688
<PAGE>
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Financial Position as of
November 30, 1999 (unaudited) and May 31, 1999 ......................... 2-3
Statements of Operations for the Three Months and Six Months
Ended November 30, 1999 and 1998 (unaudited) ........................... 4
Statements of Stockholders' Equity for the Six Months
Ended November 30, 1999 and 1998 (unaudited) ........................... 5
Statements of Cash Flows for the Six Months
Ended November 30, 1999 and 1998 (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
Signatures ............................................................... 18
Schedule 27 .............................................................. 19
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The statement of financial position of the Company as of November 30, 1999, the
related statements of operations, and cash flows for the six months ended
November 30, 1999 and 1998 included in Item 1 have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management, the accompanying financial statements include all adjustments
(consisting of normal, recurring adjustments) necessary to summarize fairly the
Company's financial position and results of operations. The results of
operations for the six months ended November 30, 1999 are not necessarily
indicative of the results of operations for the full year or any other interim
period. These financial statements should be read in conjunction with the
audited financial statements and notes thereto included in the Company's Annual
Report on Form 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
(Unaudited)
November 30, May 31,
1999 1999
------------ ------------
Loans Receivable:
Long Term Portion (Notes 2 and 3) $ 23,524,145 $ 25,123,632
Less: Unrealized Depreciation on
Loans Receivable (Note 3) (746,441) (316,441)
------------ ------------
22,777,704 24,807,191
Less: Current Maturities - Loans Receivable (3,416,656) (3,768,545)
------------ ------------
Total Loans Receivable -
Net of Current Maturities 19,361,048 21,038,646
------------ ------------
CURRENT ASSETS
Cash (Note 12) 1,303,397 814,340
Accrued Interest (Notes 2 and 3) 331,642 308,897
Current Maturities - Loans Receivable 3,416,656 3,768,545
Prepaid Expenses and Other Assets 249,667 305,423
------------ ------------
Total Current Assets 5,301,362 5,197,205
------------ ------------
Fixed Assets - Net of Accumulated Depreciation
of $34,484 and $31,364
respectively (Note 2) 19,815 22,788
------------ ------------
Total Assets $ 24,682,225 $ 26,258,639
============ ============
See Accompanying Notes to Unaudited Financial Statements
2
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
STATEMENTS OF FINANCIAL POSITION
LIABILITIES AND STOCKHOLDERS' EQUITY
(Unaudited)
November 30, May 31,
1999 1999
------------ -----------
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 5,000,000 5,000,000
Accrued Interest 255,690 325,202
Other Current Liabilities 43,804 17,354
Dividends Payable (Note 7) 28,200 14,100
----------- -----------
Total Current Liabilities 5,327,694 5,356,656
----------- -----------
Total Liabilities 17,597,694 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 13,989 61,441
Restricted Capital - Realized Gain on
Redemption (Note 6) -- --
----------- -----------
Total Stockholders' Equity 7,084,531 7,131,983
----------- -----------
Total Liabilities and Stockholders' Equity $24,682,225 $26,258,639
=========== ===========
Net Assets Per Share $ 3.26 $ 3.28
=========== ===========
See Accompanying Notes to Unaudited Financial Statements
3
<PAGE>
<TABLE>
<CAPTION>
FRESHSTART VENTURE CAPITAL CORP.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
November 30, November 30,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE:
Interest Earned on
Outstanding Receivables $ 663,655 $ 737,201 $ 1,377,644 $ 1,456,403
Interest Income - Idle Funds 6,720 2,719 8,105 6,031
----------- ----------- ----------- -----------
Total Revenue (Note 2) 670,375 739,920 1,385,749 1,462,434
----------- ----------- ----------- -----------
EXPENSES:
Interest (Notes 4 and 5) 289,812 342,798 622,063 680,423
Professional Fees 24,141 66,669 76,079 89,779
Officers' Salaries (Notes 9 and 10) 30,405 30,405 60,810 60,810
Other Salaries (Note 9) 12,263 9,806 23,691 20,520
Other Operating Expenses 40,342 21,578 78,854 73,215
Pension Expense (Note 8) 3,731 3,510 7,031 7,610
Depreciation and Amortization (Note 2) 28,827 10,613 21,200 21,228
----------- ----------- ----------- -----------
Total Expenses 429,521 485,379 889,728 953,585
----------- ----------- ----------- -----------
Net Investment Income 240,854 254,541 496,021 508,849
Unrealized Depreciation in Value of
Investments (Notes 2 and 3) (448,351) -- (448,351) --
----------- ----------- ----------- -----------
(207,497) 254,541 47,670 508,849
PROVISION FOR TAXES:
Current Income Taxes (Note 2) 854 -- 1,732 680
----------- ----------- ----------- -----------
Net Income $ (208,351) $ 254,541 $ 45,938 $ 508,169
=========== =========== =========== ===========
Earnings Per Share of Common Stock
(Note 2) $ (0.10) $ 0.10 $ 0.01 $ 0.21
=========== =========== =========== ===========
Dividends Paid Per Share
of Common Stock $ 0.03 $ 11.5 $ 0.03 $ 0.23
=========== =========== =========== ===========
Weighted Average Shares of Common
Stock Outstanding 2,172,688 2,172,688 2,172,688 2,172,688
=========== =========== =========== ===========
</TABLE>
See Accompanying Notes to Unaudited Financial Statements
4
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Six Months Ended
November 30,
------------------------------
1999 1998
----------- -----------
4% Cumulative, 15 Year Redeemable
Preferred Stock - $1 Par Value:
10,000,000 Shares Authorized,
1,410,000 Shares Issued and
Outstanding (See Long Term Debt) -- --
----------- -----------
Common Stock - $.01 Par Value:
3,000,000 Shares Authorized, 2,172,688
Shares Issued and Outstanding 21,726 21,726
----------- -----------
Additional Paid in Capital -
Beginning of Period 7,048,816 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 45,938 508,169
Dividends Paid and Accrued (93,390) (527,922)
----------- -----------
Balance, End of Period 13,989 2,452
----------- -----------
Total Stockholder's Equity $ 7,084,531 $ 7,072,994
=========== ===========
See Accompanying Notes to Unaudited Financial Statements
5
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
STATEMENTS OF CASH FLOWS
Six Months Ended
November 30,
---------------------------
1999 1998
----------- -----------
CASH FLOWS PROVIDED (USED) BY
OPERATING ACTIVITIES:
Net Income $ 45,938 $ 508,169
Depreciation and Amortization Expense 21,200 21,228
Increase in Unrealized Depreciation 430,000
(Increase) in Accrued Interest (22,745) (43,316)
Decrease (Increase) in Other Assets 37,529 9,831
Increase in Accrued Liabilities (43,062) 6,588
Dividends Paid and Accrued (79,290) (527,922)
----------- -----------
Net Cash (Used) Provided By Operating Activities 389,570 (25,422)
----------- -----------
CASH FLOWS PROVIDED (USED) BY
INVESTING ACTIVITIES:
Increase in Loans Receivable (5,335,875) (9,129,875)
Repayment of Loans Receivable 4,411,185 4,927,584
Increase in Loan Participations 3,700,000 5,294,611
Repayment of Loan Participations (1,175,823) (1,556,020)
----------- -----------
Net Cash (Used) By Investing Activities 1,599,487 (463,700)
----------- -----------
CASH FLOWS (USED) PROVIDED BY
FINANCING ACTIVITIES:
Acqisition of Fixed Assets -- (7,500)
(Decrease) in Restricted Capital -- --
(Decrease) in Debentures Payable to SBA (Net) (1,500,000) --
Net Cash (Used) Provided by Financing Activities (1,500,000) (7,500)
----------- -----------
Net Increase (Decrease) in Cash 489,057 (496,622)
Cash Balance - Beginning of Period 814,340 1,528,168
----------- -----------
Cash Balance - End of Period $ 1,303,397 $ 1,031,546
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Interest $ 665,333 $ 665,333
----------- -----------
Taxes $ 680 $ 680
----------- -----------
See Accompanying Notes to Unaudited Financial Statements
6
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
NOVEMBER 30, 1999
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 November 30, 1999, the investment portfolio included
investments totaling $23,524,145, 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-one (81%) 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.
7
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
NOVEMBER 30, 1999
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
NOVEMBER 30, 1999
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:
November, 1999
--------------
Outstanding Loans $ 39,399,777
Loan Participations (15,875,632)
-------------
Net Loans Outstanding $ 23,524,145
=============
Loans on non-accrual status as of November 30, 1999 were
approximately $1,367,589. Additionally, the cumulative amount
of accrued interest income not recorded was $994,734 as of
November 30, 1999.
9
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
NOVEMBER 30, 1999
NOTE 3 LOANS RECEIVABLE
(Continued)
RECONCILIATION OF LOAN LOSS RESERVE
A reconciliation of loan loss reserve is as follows:
November 30, 1999
-----------------
Balance, Beginning $ 316,441
Provision for Loan Losses 448,351
Charge-Offs (18,351)
-----------
Balance, Ending $ 746,441
===========
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 November 30, 1998 and 1999 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
NOVEMBER 30, 1999
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
Dividends paid to the SBA for the six months ended November
30, 1999 were $28,200.
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 six months ended November 30, 1999 and 1998 were
$7,031 and $7,610 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 $14,883.
Certain officers and directors of the Company are also
shareholders of the Company. Officers' salaries are set by the
Board of Directors and are also subject to maximum
compensation set by the SBA. For the six months ended November
30, 1999 and 1998 officers' salaries, including pension
contributions, were $66,891.
NOTE 11 SIGNIFICANT CONCENTRATION OF CREDIT RISK
Approximately eighty-one (81%) 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
NOVEMBER 30, 1999
NOTE 12 FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISKS
The Company maintained approximately $1,205,987 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 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.
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
12
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
NOVEMBER 30, 1999
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:
November 30, 1999 through May 31, 2000 $ 13,619
June 1, 2000 through November 30, 2003 97,872
---------
Total future minimum rental $ 111,491
=========
NOTE 16 SUBSEQUENT EVENTS
On November 30, 1999 the Company declared and paid dividends
of $.03 per share to shareholders of record on November 30,
1999. The total dividends aggregated $65,190. Additionally,
for the three months ending November 30, 1999, the Company
paid $14,100 to the SBA on its 4% preferred stock outstanding.
13
<PAGE>
<TABLE>
<CAPTION>
FRESHSTART VENTURE CAPITAL CORP.
SUPPLEMENTAL SCHEDULES
NOVEMBER 30, 1999
SCHEDULE I - LOANS RECEIVABLE
Balance
Number of Outstanding
Type of Loan Loans Interest Rate Maturity Date November 30, 1999
------------ --------- ------------- ------------- -----------------
<S> <C> <C> <C> <C>
NYC Taxi Medallion 189 8.00% - 18.00% 1 - 7 years $ 18,942,989
Services 3 13.90% - 16.00% 1 - 7 years 475,436
Auto Repair Service 6 9.38% - 15.00% 1 - 4 years 678,611
Renovation and Construction 1 10.50% 5 years 134,852
Retail Establishment 4 11.25% - 13.00% 1 - 4 years 353,992
Restaurant 7 11.00% - 18.00% 1 year 1,048,081
Gasoline Service Station 4 11.50% - 15.00% 1 year 316,401
Manufacturing 1 15.00% 1 year 151,572
Laundromat and Dry Cleaners 14 11.00% - 15.00% 1 - 4 years 1,316,093
Medical Offices 2 11.00% - 11.63% 1 - 3 years 106,118
-------- ------------
TOTAL 231 $ 23,524,145
======== ============
</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
November 30, 1998 $ 5,000,000 7.44% $ 5,000,000 $ 5,000,000
November 30, 1999 $ 5,000,000 7.02% $ 5,000,000 $ 5,000,000
</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 SIX MONTHS ENDED NOVEMBER 30, 1999 AND 1998
For the Six Months Ended
November 30,
------------------------------
1999 1998
------------ ------------
Per Share Data
Investment Income $ 0.64 $ 0.67
Investment Expenses 0.41 (0.44)
------------ ------------
Net Investment Income 0.23 0.23
Net Realized and Unrealized
Gains and Losses on
Securities (0.21) --
Dividends - Common Stock (0.03) (0.23)
Dividends - Preferred Stock (0.01) (0.01)
------------ ------------
Net Increase/Decrease
in Net Asset Value (0.02) -0.01
Net Asset Value - Beginning
of Period $ 3.28 $ 3.26
Net Asset Value - End of
Year $ 3.26(1) $ 3.25(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 18.85% 13.47%
============ ============
Ratio of Net Income to
Average Net Assets 0.65% 7.17%
============ ============
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 used in conjunction with the
Financial Statements and Notes therewith appearing in this report on Form 10-Q
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 Six Months ended November 30, 1999 and 1998
Total investment income. The Company's investment income for the six
months ended November 30, 1999 was $1,385,749 as compared to $1,462,434 for the
period ending November 30, 1998. The decrease of $76,685 (a decrease of 5.24%)
resulted from a decrease in the loan portfolio of $1,599,476 (a decrease of
6.4%).
Operating Expenses
Interest expense for the six month period ended November 30, 1999
decreased by $58,360 ($622,063 from $680,423) over the similar period ended
November 30, 1998. The Company paid off $1,500,000 in SBA subordinated
debentures during the current period, which resulted in a lower period interest
rate.
Other operating expenses decreased by $5,497 when compared with the
similar six month period ended November 30, 1998. The decrease was mainly due to
decreases in dues, equipment rental and miscellaneous feed. The Management of
the Company reviewed its loan portfolio as of November 30, 1999, and based on
such review, the provision for bad debt was increased by $430,000. Accordingly,
the reserve for bad debt was increased to $746,441 from $316,441.
Statement of Financial Position
Total assets and liabilities decreased by $1,576,414 as of November 30,
1999 when compared with the statement of financial position as of May 31, 1998.
The decrease consisted of paying off two SBA debentures aggregating $1,500,000,
and a decrease in the loan portfolio of $1,599,487. The reserves for bad debts
were increased by $430,000 as of November 30, 1999 and were deemed to be
adequate as of November 30, 1999.
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 November
30, 1999, the Company's $17,597,644 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 $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
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>
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: January 14, 2000 Freshstart Venture Capital Corp.
By: /s/ ZINDEL ZELMANOVITCH
-----------------------------------------
Zindel Zelmanovitch, Chief Executive,
Financial and Accounting Officer
18
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000818897
<NAME> Freshstart Venture Capital Corp.
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1999
<PERIOD-END> NOV-30-1999
<EXCHANGE-RATE> 1
<CASH> 1,303,397
<SECURITIES> 23,524,145
<RECEIVABLES> 331,642
<ALLOWANCES> (746,442)
<INVENTORY> 0
<CURRENT-ASSETS> 249,667
<PP&E> 54,299
<DEPRECIATION> (34,484)
<TOTAL-ASSETS> 24,682,225
<CURRENT-LIABILITIES> 5,327,694
<BONDS> 0
1,410,000
0
<COMMON> 7,070,542
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 24,682,225
<SALES> 1,385,749
<TOTAL-REVENUES> 1,385,749
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 267,665
<LOSS-PROVISION> 448,351
<INTEREST-EXPENSE> 622,063
<INCOME-PRETAX> 47,670
<INCOME-TAX> 1,732
<INCOME-CONTINUING> 45,938
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 45,938
<EPS-BASIC> .01
<EPS-DILUTED> .01
</TABLE>
