As filed with the Securities and Exchange Commission on October 16, 1996
Registration No. 33-86518
File No. 811-5169
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
POST-EFFECTIVE AMENDMENT NO. 3
TO
REGISTRATION STATEMENT OF SMALL BUSINESS INVESTMENT COMPANY
UNDER THE SECURITIES ACT OF 1933
------------
AMENDMENT NO. 7
TO
FORM N-5
UNDER THE INVESTMENT COMPANY ACT OF 1940
------------
FRESHSTART VENTURE CAPITAL CORP.
(Exact name of registrant as specified in charter)
313 West 53rd Street
New York, New York 10019
(Address of principal executive offices)
ZINDEL ZELMANOVITCH, PRESIDENT
Freshstart Venture Capital Corp.
313 West 53rd Street
New York, New York 10019
(Name and address of agent for service)
With copies to:
C. WALTER STURSBERG, JR., ESQ. STEVEN L. WASSERMAN, ESQ.
Stursberg & Veith Reid & Priest LLP
405 Lexington Avenue, Suite 4949 40 West 57th Street
New York, New York 10174 New York, New York 10019
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after the effective date of this
Registration Statement.
------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a)
may determine.
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<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
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CROSS-REFERENCE SHEET
(Pursuant to Rule 481 showing the location in the prospectus
of the responses to the Items of Parts I and II of Form N-5)
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<TABLE>
<CAPTION>
Item No. and Caption Prospectus Caption
-------------------- ------------------
<S> <C>
1. Organization and Business........................................ THE COMPANY; BUSINESS
2. Fundamental Policies of the Registrant........................... INVESTMENT POLICIES
3. Policies with Respect to Security Investments.................... INVESTMENT POLICIES
4. Ownership of Voting and Convertible Securities
of Other Issuers............................................... *
5. Special Tax Provisions Applicable to Registrant.................. TAX CONSIDERATIONS
6. Pending Legal Proceedings........................................ BUSINESS-- Legal Proceedings
7. Summary of Earnings.............................................. SUMMARY FINANCIAL INFORMATION
8. Persons in Control Relationship with Registrant.................. MANAGEMENT; SECURITY OWNERSHIP OF PRINCIPAL
STOCKHOLDERS AND MANAGEMENT
9. Persons Owning Equity Securities of Registrant................... SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS
AND MANAGEMENT
10. Number of Holders of Equity Securities........................... *
11. Directors and Executive Officers................................. MANAGEMENT-- Officers and Directors
12. Members of Advisory Board of Registrant.......................... Not Applicable
13. Remuneration of Directors, Officers and
Members of Advisory Board...................................... MANAGEMENT-- Compensation of Officers and
Directors
14. Indemnification of Directors and Officers........................ *
15. Custodians of Portfolio Securities............................... CUSTODIAN
16. Investment Advisers.............................................. Not Applicable
17. Business and other Connections of Investment
Advisers and Their Managements................................. Not Applicable
18. Interest of Affiliated Persons in Certain Transactions........... CERTAIN TRANSACTIONS
19. Capital Stock.................................................... DESCRIPTION OF CAPITAL STOCK AND LONG-TERM
DEBT
20. Long-Term Debt................................................... Not Applicable
21. Other Securities................................................. Not Applicable
22. Financial Statements............................................. See Item 28
23. Distribution Spread.............................................. Cover Page
24. Plan of Distribution............................................. PLAN OF DISTRIBUTION
25. Use of Proceeds to Registrant.................................... USE OF PROCEEDS
26. Sales Otherwise Than for Cash.................................... Not Applicable
27. Information Required by Items of Part I.......................... See Above
28. Financial Statements Required by Item 22 of Part I............... FINANCIAL STATEMENTS
</TABLE>
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* Not required to be included in the Prospectus.
<PAGE>
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
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SUBJECT TO COMPLETION DATED OCTOBER 16, 1996
Freshstart Venture Capital Corp.
1,000,000 Shares
Common Stock
Freshstart Venture Capital Corp., a New York corporation (the "Company"),
is a closed-end, diversified registered investment company licensed by the
United States Small Business Administration ("SBA") to operate as a Specialized
Small Business Investment Company ("SSBIC"). The Company is hereby offering
1,000,000 shares of its common stock, par value $.01 per share (the "Common
Stock"). The Company's business is to provide loan financing to persons who
qualify under SBA regulations as socially or economically disadvantaged persons
or to entities which are at least 50% owned by such persons. The Company has
made, and intends to continue to make, a portion of its loans for financing the
purchase or continued ownership of taxicab medallions, taxicabs and related
assets. The balance of its loan portfolio includes loans for the acquisition
and/or operation of other small businesses. An investment in an SSBIC may afford
a qualified investor certain favorable tax benefits, including the ability to
defer the recognition of capital gain realized on the sale of a publicly traded
security, subject to certain limitations, if the qualified investor uses the
proceeds from the sale of such publicly traded security within 60 days to
purchase common stock in an SSBIC. In addition, subject to certain conditions,
certain financial institutions may be able to satisfy their requirements under
the Community Reinvestment Act through the purchase of shares of the Company's
Common Stock. See "FEDERAL REGULATION -- Community Reinvestment Act of 1977."
Prior to the offering, there has been no public market for the Common Stock. No
assurance can be given that a public market will develop following the
completion of the offering or that, if any such market does develop, it will be
sustained. It is anticipated that the Common Stock will be listed on the Nasdaq
SmallCap Market under the symbol "FSVC."
SEE "RISK FACTORS" STARTING ON PAGE 7 HEREOF.
------------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE SECURITIES AND INVOLVE A HIGH
DEGREE OF RISK.
IN ADDITION, CLOSED-END FUNDS FREQUENTLY TRADE IN THE SECONDARY MARKET (TO
THE EXTENT ONE EXISTS) AT A PRICE BELOW NET ASSET VALUE AND/OR THE PUBLIC
OFFERING PRICE. ACCORDINGLY, IF THE SHARES OF COMMON STOCK OFFERED HEREBY TRADE
BELOW SUCH LEVELS, PURCHASERS OF SHARES IN THIS OFFERING WHO WISH TO SELL THEIR
SHARES IMMEDIATELY MAY NOT BE ABLE TO DO SO WITHOUT SUSTAINING A LOSS. SEE "RISK
FACTORS."
------------
INVESTORS ARE ADVISED TO READ AND RETAIN A COPY OF THIS PROSPECTUS.
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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Price to Underwriting Proceeds to
Public Discount (1) Company (2)
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Per Share.............. $5.00 $.50 $4.50
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Total (3).............. $5,000,000 $500,000 $4,500,000
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(Footnotes on following page)
The shares of Common Stock are offered by the Underwriters subject to prior
sale when, as and if delivered to and accepted by the Underwriters, and subject
to the approval of certain legal matters by counsel and to certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify the
offering and to reject any order in whole or in part. It is expected that the
delivery of certificates evidencing shares will be made against payment on or
about , 1996 at the offices of Suppes Securities, Inc., 225 Park Avenue, New
York, New York, 10169. The Company has agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act of
1933. For information regarding these matters see "Underwriting."
SUPPES SECURITIES, INC.
S.D. COHN & CO., INC.
MARLOWE & COMPANY
The date of this Prospectus is October , 1996
<PAGE>
(Footnotes from cover page)
- - ----------
(1) Does not include additional compensation to the Underwriters, in the form
of a non-accountable expense allowance of $150,000 or $.30 per share
($172,500 if the over-allotment option is exercised in full). The Company
has also agreed to indemnify the Underwriters against certain certain civil
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "UNDERWRITING."
(2) Before deducting estimated expenses (including the Underwriters'
non-accountable expense allowance) of $669,000 ($691,500 if the
Underwriters' over-allotment option is exercised in full) payable by the
Company.
(3) The Company has granted the Underwriters a 45-day option to purchase up to
150,000 additional shares of Common Stock upon the same terms and
conditions as set forth above, solely to cover over-allotments, if any. If
such over-allotment option is exercised in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $5,750,000, $575,000
and $5,175,000, respectively.
------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
The Company intends to furnish its shareholders with annual reports
containing audited financial statements, semi-annual reports containing
unaudited financial statements and such other periodic reports as the Company
may determine to be appropriate or as may be required by law.
2
<PAGE>
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Each prospective investor is urged to
read this Prospectus in its entirety. All per share data and information
relating to the number of shares of the Company's Common Stock outstanding have
been adjusted to give effect to two for one stock splits effective on January
12, 1996 and October , 1996.
THE COMPANY
Freshstart Venture Capital Corp. (the "Company") is a type of Small
Business Investment Company ("SBIC"). Specifically the Company 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"). As an SSBIC, the
Company's business is to provide loan financing to persons who qualify under SBA
regulations as socially or economically disadvantaged persons or to entities
which are at least 50% owned by such persons. 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 74% of the aggregate principal amount of the Company's loan
portfolio as of May 31, 1996, 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. See "RISK FACTORS" and
"BUSINESS--Marketing Strategy."
The Company, which is a New York corporation formed on March 4, 1982, is
registered as an investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"), and has elected to be taxed as a "regulated investment
company" under the Internal Revenue Code of 1986, as amended (the "Code"), and
intends to be treated as a regulated investment company. 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.
An investment in an SSBIC, such as a purchase of the Company's Common
Stock, may afford certain qualified investors favorable tax benefits, including
the ability to defer the recognition of capital gain realized on the sale of
publicly traded securities, subject to certain limitations, if the qualified
investor uses the proceeds from the sale of such publicly traded security within
60 days to purchase common stock in an SSBIC. See "TAX CONSIDERATIONS." In
addition, subject to certain conditions, certain financial institutions may be
able to satisfy their requirements under the Community Reinvestment Act of 1977
through the purchase of shares of the Company's Common Stock. See "FEDERAL
REGULATION--Community Reinvestment Act."
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3
<PAGE>
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THE OFFERING(1)
Securities offered.......................... 1,000,000 shares of Common Stock
Common Stock outstanding prior to
the offering.............................. 1,096,688 shares
Common Stock to be outstanding after
the offering.............................. 2,096,688 shares
Previous Trading History.................... None
Underwriters................................ Suppes Securities, Inc., S.D. Cohn
& Co., Inc., Marlowe & Company
Proposed Nasdaq SmallCap MarketSM Symbol.... FSVC
- - ------------
(1) Unless otherwise indicated, no effect is given in this Prospectus to
exercise of the Underwriters' over-allotment option. See "UNDERWRITING."
RISK FACTORS
The securities offered hereby involve a high degree of risk and should not
be purchased by investors who cannot afford the loss of their entire investment.
Such risk factors include, among others, limitations on taxicab medallion
financings, SBA industry review, SBA financing not assured, possible prepayment
by borrowers, uncertain market, loan foreclosures, concentration of the
Company's loans to borrowers in a single industry and geographic area, reliance
on management, conflicts of interest and lack of correlation between net asset
value, public offering price and market price of the Company's Common Stock.
Purchasers of the securities offered hereby will experience immediate dilution.
See "RISK FACTORS" and "DILUTION."
Common Stock outstanding has been adjusted to give effect to two for one
stock splits effective January 12, 1996 and October , 1996.
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4
<PAGE>
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SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Fiscal Year Ended May 31,
(audited)
------------------------------------------------------------------------------
Statement of Operations Data: 1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Total revenue ................................. $1,094,244 $1,101,091 $1,043,071 $1,005,284 $1,033,944
---------- ---------- ---------- ---------- ----------
Interest expense .............................. 437,831 326,841 315,213 322,806 307,764
Other expense ................................. 341,354 328,789 357,997 339,327 335,388
---------- ---------- ---------- ---------- ----------
Total expense ................................. 779,185 655,630 673,210 662,133 643,152
---------- ---------- ---------- ---------- ----------
Net Investment Income before taxes
and loan loss reserve ...................... 315,059 445,461 369,861 343,151 390,792
Unrealized depreciation in value of
investments (1) ............................. 124,687 86,456 78,161 2,399 35,000
Provision for income taxes
(State and Federal) (2) ..................... 1,079 729 985 1,836 1,567
---------- ---------- ---------- ---------- ----------
Net Income .................................... 189,293 358,276 290,715 338,916 354,225
Dividends on preferred stock to SBA
paid or restricted (3) ...................... 22,800 26,000 26,000 45,092 56,400
---------- ---------- ---------- ---------- ----------
Net income available to
Common Stock ................................ $ 166,493 $ 332,276 $ 264,715 $ 293,824 $ 297,825
========== ========== ========== ========== ==========
Earnings per share of Common Stock
(after payment of preferred
stock dividend) (4) ......................... $ .19 $ .30 $ .24 $ .27 $ .27
========== ========== ========== ========== ==========
Dividends paid per share of
Common Stock (4)(5)(6) ...................... $ .18 $ .30 $ .24 $ .27 $ .27
========== ========== ========== ========== ==========
Dividends paid (6) ............................ $ 151,211 $ 329,005 $ 263,206 $ 296,108 $ 296,106
========== ========== ========== ========== ==========
Weighted average shares of
Common Stock outstanding (4)(7) ............. 857,732 1,096,688 1,096,688 1,096,688 1,096,688
========== ========== ========== ========== ==========
</TABLE>
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(1) See Statements of Operations for information on annual provisions for loan
loss reserves under the caption "Unrealized Depreciation in Value of
Investments."
(2) The Company, since the fiscal year ended May 31, 1988, has elected and
qualified to be taxed as a regulated investment company, and, therefore,
substantially all taxable income has been distributed to shareholders. The
Company also intends to elect to be treated as a regulated investment
company for the year ending May 31, 1997.
See "TAX CONSIDERATIONS" and Note 2 of Notes to the Financial Statements.
(3) These dividends are calculated on the basis of the number of shares of
preferred stock outstanding at the end of each period presented. Restricted
preferred stock dividends represent amounts which must be paid to the SBA
as dividends on the preferred stock prior to any distribution to the
holders of Common Stock. The Company has paid all required 4% Preferred
Stock dividends through May 31, 1996. The Company issued additional shares
of 4% Preferred Stock in October 1994.
(4) All per share data and information relating to the number of shares of the
Company's Common Stock outstanding have been adjusted to give effect to two
for one stock splits effective January 12, 1996 and October , 1996.
(5) The amount of dividends paid per share of Common Stock is based on the
actual amount of dividends paid to holders of Common Stock, in accordance
with Subchapter M of the Code. See "TAX CONSIDERATIONS."
(6) For purposes of calculating the amount required to be distributed pursuant
to Subchapter M of the Code, actual bad debt write-offs are calculated in
accordance with the requirements of the Code, and as a result may vary from
loan loss reserves calculated for financial reporting purposes. However,
the cumulative effect of such differences are nominal and amounted to
$15,950 or 1.1% of the total dividends distributed for the eight years
ended May 31, 1996. See "TAX CONSIDERATIONS."
(7) Calculated on the basis of the weighted average number of shares
outstanding during each period. The average number of shares has been
calculated on a month-end average basis.
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5
<PAGE>
- - --------------------------------------------------------------------------------
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Fiscal Year Ended May 31,
(audited)
------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Loans receivable ......................... $ 8,021,747 $ 8,173,430 $ 7,907,157 $ 8,313,042 $ 8,598,015
Less: Unrealized depreciation
on loans receivable .................... (180,000) (180,000) (178,159) (180,558) (180,558)
----------- ----------- ----------- ----------- -----------
Loans at fair value ...................... 7,841,747 7,993,430 7,728,998 8,132,484 8,417,457
----------- ----------- ----------- ----------- -----------
Total Assets ............................. $ 8,770,323 $ 8,994,147 $ 8,494,271 $ 9,202,386 $ 9,238,759
=========== =========== =========== =========== ===========
Loans payable-line of credit ............. $ 1,873,188 $ 334,488 $ 34,488 $ 5,000 $ --
----------- ----------- ----------- ----------- -----------
Debenture payable to SBA ................. 3,040,000 4,340,000 4,340,000 4,340,000 4,380,000
----------- ----------- ----------- ----------- -----------
4% Preferred Stock
(Redeemable) ........................... -- 650,000 650,000 1,410,000 1,410,000
----------- ----------- ----------- ----------- -----------
Total liabilities ........................ 5,029,414 5,824,630 5,323,245 6,033,644 6,068,298
----------- ----------- ----------- ----------- -----------
3% Preferred Stock (1) ................... 1,520,000 -- -- -- --
Retained earnings ........................ 11,164 14,435 15,944 13,660 15,379
Restricted capital (2) ................... -- 954,997 763,998 572,998 381,999
Common Stock and additional
paid-in capital ........................ 2,209,745 2,200,085 2,391,084 2,582,084 2,773,083
----------- ----------- ----------- ----------- -----------
Total stockholders' equity ............... $ 3,740,909 $ 3,169,517 $ 3,171,026 $ 3,168,742 $ 3,170,461
=========== =========== =========== =========== ===========
Shares of Common Stock
Outstanding (3) ........................ 857,732 1,096,688 1,096,688 1,096,688 1,096,688
=========== =========== =========== =========== ===========
Net assets per share of
Common Stock (4) ....................... $ 2.58 $ 2.88 $ 2.88 $ 2.88 $ 2.88
=========== =========== =========== =========== ===========
</TABLE>
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(1) In May 1993, the Company repurchased, at a discount, all 1,520,000 shares
of the Company's 3% Preferred Stock from the SBA. Such repurchased shares
were subsequently reclassified as 4% Preferred Stock in November 1994. See
"BUSINESS--Specialized Small Business Investment Companies."
(2) Represents the unamortized portion of the gain realized from the
repurchase, at a discount, of all 1,520,000 shares of the Company's 3%
Preferred Stock from the SBA on May 10, 1993. In the event of the
liquidation of the Company, the SBA would have the right to receive the
amount attributed to restricted capital before any distribution to holders
of Common Stock. The balance of $381,999 will be amortized on a straight
line basis and included as additional paid-in capital over a 24 month
period. See "BUSINESS--Specialized Small Business Investment Companies."
(3) All per share data and information relating to the number of shares of the
Company's Common Stock outstanding have been adjusted to give effect to two
for one stock splits effective January 12, 1996 and October , 1996.
(4) Computed on the basis of total assets less total liabilities (including the
4% Preferred Stock outstanding). Additionally, the entire gain realized on
the repurchase of the 3% Preferred Stock is included in the computation of
the net assets per share. Such gain is amortized monthly, with the amount
of the amortization transferred to additional paid-in capital. In the event
of the liquidation of the Company, the SBA would have the right to receive
the amount attributed to restricted capital before any distribution to
holders of Common Stock. See "BUSINESS--Specialized Small Business
Investment Companies."
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6
<PAGE>
RISK FACTORS
The Securities offered hereby involve a high degree of risk, including, but
not necessarily limited to, the several factors described below. Prospective
investors should carefully consider the following risk factors inherent in the
activities of the Company and this offering before making an investment
decision.
Limitations on Taxicab Medallion Financings
As of May 31, 1996, approximately 74% 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. In addition, the
Company and the SBA entered into a letter of intent dated December 1, 1992 (the
"Letter of Intent"), setting forth the intentions of the SBA and the Company
with respect to a proposed agreement that would allow the Company to maintain up
to 100% of its loan portfolio in New York City taxicab medallion secured loans.
However, there can be no assurance that the Company and the SBA will execute
such proposed agreement, or that its terms would conform to the Letter of
Intent. If the SBA required the Company to liquidate a portion of its taxicab
medallion loans immediately, it is possible that the Company would incur 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. See "BUSINESS--SBA Letter of
Intent."
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. See "Business--Specialized Small
Business Investment Companies." No assurance can be given, however, as to the
extent or success of such efforts to diversify.
SBA Financing Not Assured
The Company intends to raise additional funds for investment through the
issuance of securities to the SBA. See "BUSINESS--Specialized Small Business
Investment Companies." The amount of financing the Company is able to obtain
from the SBA is based upon the Company's Common Stock and additional paid-in
capital, net of organizational expenses ("Leverageable Capital"). The sale of
the Common Stock will increase the Company's Leverageable Capital and, in
accordance with the 1958 Act, permit the Company to issue additional
subordinated debentures to, or guaranteed by, the SBA in the approximate
principal amount of $11,493,000. Subject to the successful completion of this
offering, the Company can and intends to apply on one or more occasions for all
or substantially all of the SBA subordinated debenture leverage for which it
would be eligible. No assurances can be given, however, as to the amount and
timing of any additional financing from the SBA. See "BUSINESS--Specialized
Small Business Investment Companies." Although the Company has obtained
substantial SBA financing benefits in the past, there can be no assurance that
the Company will be able to obtain all or any portion of the financing benefits
permitted under the 1958 Act. Further, there can be no assurance as to the
timing of the receipt of SBA financing.
7
<PAGE>
Currently there are two types of financial assistance available to SSBICs
from the SBA, commonly referred to as "leverage". SSBICs may apply for SBA
leverage in one or more of the following forms. The 1958 Act authorizes, in the
SBA's sole discretion: (a) the purchase or guarantee of an SSBIC's debentures,
or (b) the purchase or guarantee of an SSBIC's participating securities (i.e.,
equity-type securities with prioritized payments to the SBA) with repayment
obligations related to the extent of earnings. The purchase or guarantee by the
SBA of a participating security currently requires that an SSBIC have private
capital of at least $5,000,000.
The funds available to SSBICs from the SBA are limited and are subject to
the SBA's receipt of annual appropriations from Congress. Because the amount of
financial assistance which can be provided by SBA is a multiple of the amount
appropriated, the Office of Management and Budget (the "OMB") calculates a
"subsidy rate" for each form of leverage. Congressional funding legislation
which is influenced by the respective subsidy rates, specifies the funding
levels each year. To the Company's knowledge, for Federal Fiscal Year 1996
(October 1, 1995, through September 30, 1996), the SBA received Congressional
appropriations resulting in program levels of (a) $108.5 million to be used, in
SBA's sole discretion, for the purchase or guarantee of SBIC and SSBIC
debentures all of which was committed and utilized, and (b) $267.7 million for
the purchase or guarantee of SBIC or SSBIC participating securities, all of
which was committed and utilized. To the Company's knowledge for Federal fiscal
year 1997 (October 1, 1996 through September 30, 1997), the SBA has received
Congressional appropriations resulting in program levels of (a) $225 million for
the purchase or guarantee of SBIC and SSBIC debentures and (b) $400 million for
the purchase or guarantee of SBIC or SSBIC participating securities. Legislation
approving Federal fiscal year 1997 SBA appropriations for the SBIC program also
contained certain user fees (charged to SBICs and SSBICs in connection with
financings) which effectively increase interest rates for unsubsidized
debentures and the cost to an issuer of participating security leverage, and
which thereby reduces the amount of direct Federal appropriations required to
fund the program.
Although the Company plans to apply for SBA funding at the earliest
practicable date, there can be no assurance that the Company will be able to
obtain more funds or funding at the same level as it has been able to obtain in
the past. In addition, there can be no assurance that the SBA will extend or
roll over existing financing benefits extended to the Company when such
obligations mature. An adverse change in the level and/or timing of SBA
financing to the Company could materially adversely affect the profitability of
the Company. While the Company awaits, after the consummation of this offering,
the SBA's response to applications by the Company for additional financing based
upon the net increase in capital resulting from this offering, it will
experience a lower rate of return than it would otherwise experience if such
financing were obtainable by the Company immediately upon closing of this
offering. See "RISK FACTORS--Leverage." In addition, the Company may, depending
upon market conditions, experience some delay between the receipt of any
financing from the SBA and the actual investment of such funds. See
"CAPITALIZATION" and "BUSINESS--Specialized Small Business Investment
Companies."
Leverage
Subordinated debentures issued to raise funds for investment have a fixed
dollar claim on the Company's assets and income prior to that of the Common
Stock. Any income earned by the Company by investing the proceeds from the sale
of such senior securities which is in excess of the interest payable with
respect to such senior securities will cause the net asset value of the
Company's Common Stock and the income per share of Common Stock to increase.
Conversely, if income earned by the Company is less than the interest payable
with respect to such senior securities, the net asset value of the Common Stock
and the income per share of Common Stock will decline, possibly more sharply
than would be the case if there were not fixed senior claims (and the income
"deficiency" were borne by the holders of the senior securities as well as the
holders of Common Stock). The obtaining of funds through the issuance of
subordinated debentures thus enhances profit opportunities, but also increases
the risk of losses. This effect is often referred to herein as "leverage." The
Company may also obtain leverage in the form of loans from banks and other
institutional lenders. See "BUSINESS--Borrowings."
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. See
"Business--General."
8
<PAGE>
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 74% of the Company's loan portfolio at May 31, 1996)
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. A bill permitting the City of New York to issue up
to 400 additional taxi medallions was signed by the Governor of the State of New
York on August 8, 1995 and the New York City Council subsequently approved the
sale of up to such number of medallions over a three year period. The Taxi and
Limousine Commission ("TLC") conducted the sale of 133 medallions in May 1996.
The TLC currently is preparing to conduct a second auction of 133 medallions in
October 1996. 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. See "BUSINESS--The New York City
Taxi Medallion Industry and Market; Marketing Strategy."
Loan Foreclosures
As of May 31, 1996, the Company's provision for loan losses was $180,558,
which provision related solely to non-taxi related loans. Based upon current
market conditions and current loan to value ratios, the Company believes that
the collateral securing its loans and the Company's provision for loan losses
are adequate. There can be no assurance, however, that, in the event of a
foreclosure, the Company will be able to recoup all or a portion of a loan.
Further, costs associated with foreclosure proceedings may also reduce the
Company's recovery. See "BUSINESS--Loan Portfolio; Valuation."
Management has Broad Discretion to Allocate the Use of Proceeds
The Board of Directors of the Company has broad discretion to allocate all
of the proceeds of this offering consistent with the application of such
proceeds, as described in this Prospectus and subject to the limitations imposed
by the 1958 Act and SBA regulations thereunder, the 1940 Act and the Company's
Articles of Incorporation. Accordingly, the Board of Directors will use such
discretion in the best interest of the Company. See "USE OF PROCEEDS,"
"INVESTMENT POLICIES" and "FEDERAL REGULATIONS."
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. In addition, 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 taxi-related
industry group or in the Northeast or both. Any such significant economic
downturn could have a material adverse effect on the profitability of the
Company. The Company intends to pursue loan opportunities for other small
businesses. See "BUSINESS."
Competition
Banks, credit unions, finance companies and Small Business Investment
Companies, and other SSBICs compete with the Company in financing small
businesses. Many of the Company's competitors have greater resources than those
available to the Company. In addition, 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. See "BUSINESS--Competition."
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. However, because of
the inherent uncertainty of the valuation, the estimated values might 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. See "BUSINESS--Loan Portfolio; Valuation" and Notes 2 and 3 of Notes to
the Financial Statements.
9
<PAGE>
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. Messrs. Zelmanovitch and Greenbaum have each made a
substantial investment in the Common Stock of the Company. See "PRINCIPAL
SHAREHOLDERS." 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. Both Mr. Zelmanovitch and Mr.
Greenbaum will enter into employment agreements with the Company immediately
prior to the closing of the offering. See "MANAGEMENT."
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. In addition, Mr. Zelmanovitch
manages a pension plan which makes limited investments to finance taxi
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 also "CERTAIN 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.
Shares Eligible for Future Sale
Sales of substantial amounts of the Common Stock following this offering
could adversely affect the market price of the Common Stock. Of the 1,096,688
shares that currently are issued and outstanding, 822,344 shares are owned by
officers, directors and persons owning at least five percent of the outstanding
shares after giving effect to the sale of shares offered hereby. Such shares are
subject to lock-up agreements with Suppes Securities, Inc. as representative of
the Underwriters which prohibit their sale for a period ending 18 months after
the date of this Prospectus. Thereafter, 193,172 of such shares may be sold
without restriction at any time and 628,996 of such shares may be sold subject
to certain volume limitations under Rule 144 promulgated under the Securities
Act. See "DESCRIPTION OF CAPITAL STOCK AND LONG-TERM DEBT--Shares Eligible for
Future Sale."
Lack of Correlation Between Net Asset Value, Public Offering Price and Market
Price
Closed-end funds such as the Company frequently trade in the secondary
market at a price below net asset value and/or the public offering price.
Therefore, it is possible that the market value of the Common Stock (if a public
market ever develops) 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. No assurance of the development of any significant market for
the Common Stock can be given, at any price. 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. In addition, the public offering price of the shares
offered hereby was arbitrarily determined in negotiations between the Company
and the Underwriter. There can be no assurance that the public offering price
will correspond to the price at which the Common Stock will trade in the public
market subsequent to the offering. If the shares of Common Stock offered hereby
trade at a price below the net asset value and/or the public offering price,
purchasers of shares in this offering who wish to sell their shares immediately
may not be able to do so without sustaining a loss.
10
<PAGE>
No Present Market for Common Stock
There is no public market for the shares of Common Stock offered hereby and
no assurance can be given that a public market will develop following completion
of this offering, or if one develops, that such public market will be sustained.
Although the Company intends to list the shares of Common Stock offered hereby
on the NASDAQ Small Cap MarketSM no assurances can be given that such listings
will result in a market for the shares.
Dilution
Purchasers of the Common Stock offered hereby will experience immediate and
substantial dilution of $1.67 per share or 33.4% (such calculation gives effect
to the Company's restricted capital account) from the public offering price per
share. See "DILUTION."
Limited Experience of the Underwriter; Ability to Make a Market
While the principals of Suppes Securities, Inc. the representative of the
Underwriters (the "Representative"), have had prior experience in firm
commitment underwritings and underwriting syndicates, this is the first offering
in which the Representative which commenced operations in 1983, will act as lead
underwriter. The Representative's lack of experience may have an adverse impact
on its ability to market the Common Stock following this offering. The
Representative intends to make a market in the Common Stock. The
Representative's inexperience may result in the potential inability of the
Representative to utilize correctly over-allotment, stabilization and market
maintenance strategies that more experienced underwriters employ to assist in
maintaining orderly trading markets. This may adversely affect the price of the
Common Stock and the ability of the purchasers in the offering to resell the
Common Stock. The inability of the Representative to make a market for the
Common Stock for any period of time may adversely affect the prices quoted on
the Nasdaq SmallCap Market for the Common Stock. The officers and directors of
the Company do not have a material relationship with the Representative.
11
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company, after deducting the underwriting discount,
the Underwriter's non-accountable expense allowance and other expenses of this
offering, will be approximately $3,831,000 ($4,483,500 if the Underwriter's
over-allotment option is exercised). The proceeds of this offering will be used
primarily to make additional taxi medallion secured loans and a portion of the
proceeds may be used to make loans to other small business concerns. The Company
also may make equity investments in small business concerns, if determined by
the Board of Directors to be in the Company's best interests. The sale of the
Common Stock also will increase the Company's Leverageable Capital and permit
the Company, under current SBA regulations, based upon approximate net proceeds
of $3,831,000, to issue additional unsubsidized subordinated debentures to, or
guaranteed by, the SBA in the approximate principal amount of $11,493,000. While
the Company believes it will be eligible for such SBA financing following the
completion of this offering, there can be no assurances as to the amount and
timing of the receipt of such financing. In 1994, the SBA conducted a study of
the New York City taxi industry to review SBA 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
concentration of funding in one industry or geographic location. The Company
understands that the SBA, in its review of a licensee's leverage request, seeks
information on the extent to which non-taxi medallion investments are
contemplated. See "RISK FACTORS--SBA Industry Review" and "--SBA Financing Not
Assured." Any proceeds from the issuance of subordinated debentures will be
invested for the same purposes as the proceeds of this offering.
Pending use of the net proceeds, such proceeds will be invested in direct
obligations of the United States and certificates of deposit and deposit
accounts, to the extent permitted by SBA regulations. The Company will not
invest in interest only or principal only securities. In all cases it is
expected that such investments will have maturities of 120 days or less. The
Company does not presently intend to invest any of its funds in such investments
for a period in excess of 120 days from their receipt by the Company. If
suitable investments cannot be made prior to the expiration of such 120 day
period, the Company will continue to make similar short-term investments until
it finds suitable investments or loan opportunities. The Company expects to
invest substantially all the proceeds of the offering in loans or other suitable
investments within 180 days.
12
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of May
31, 1996 and as adjusted to give effect to the sale of 1,000,000 shares of
Common Stock:
<TABLE>
<CAPTION>
At May 31, 1996
------------------------------
Actual As Adjusted
---------- ----------
<S> <C> <C>
Long Term Debt--SBA Subordinated Debentures (1)(2)(9) ................................... $4,380,000 $4,380,000(3)
---------- ----------
4% Preferred Stock, $1.00 par value; 10,000,000 shares authorized;
1,410,000 issued and outstanding, respectively (2) .................................... $1,410,000 $1,410,000
---------- ----------
Common Stock, $.01 par value; 3,000,000 shares authorized; 1,096,688
and 2,096,688 shares issued and outstanding, respectively (5) ......................... $ 10,967 $ 20,967
Additional paid-in capital (5)(6) ....................................................... $2,762,116 $6,583,116
Restricted capital (7) .................................................................. $ 381,999 $ 381,999
TOTAL CAPITALIZATION (8) ................................................................ $3,155,082 $6,986,082
Net assets per share of Common Stock (5)(8) ............................................. $ 2.88 $ 3.33
</TABLE>
- - ----------
(1) The interest rate on SBA subordinated debentures is determined by statute
and depends upon factors existing at the time of issuance.
Principal Amount
Outstanding as of
May 31, 1996 Date of Maturity Interest Rate
------------ ---------------- -------------
$ 120,000*....................... 5/14/96 7.375%
120,000*....................... 5/14/96 7.375%
75,000 ....................... 2/06/97 7.125%
75,000 ....................... 2/06/97 7.125%
75,000 ....................... 9/17/97 8.625%
75,000 ....................... 9/17/97 8.625%
750,000 ....................... 6/09/99 9.000%
750,000 ....................... 9/22/99 8.000%
1,300,000**...................... 12/01/02 4.510%
520,000 ....................... 6/01/05 6.690%
520,000 ....................... 12/01/05 6.540%
-----------
$ 4,380,000
===========
- - ----------
* Effective June 26, 1996, the Company refinanced these debentures with a
250,000 unsubsidized debenture with a fixed interest rate of 7.71%. Such
unsubsidized debenture matures on June 1, 2006.
** Interest rate increases to 7.510% in December 1997.
(2) The table as adjusted does not give effect to the potential sale of
subordinated debentures to the SBA. There can be no assurance, however, as
to the amount, if any, of subordinated debentures which the SBA will
actually purchase. See "RISK FACTORS--SBA Financing Not Assured."
(3) Upon completion of the offering, based upon approximate net proceeds to the
Company of $3,831,000, under current SBA regulations, the Company would be
eligible to issue an additional $11,493,000 of unsubsidized subordinated
debentures. The availability of financing for SSBICs specializing in
medallion financing is under review by the SBA. See "RISK FACTORS--SBA
Industry Review" and "--SBA Financing Not Assured."
(4) Shares of 4% Preferred Stock are required to be redeemed by the Company
after 15 years. Of the shares of 4% Preferred Stock currently outstanding,
650,000 shares must be redeemed in July 2007 and 760,000 shares must be
redeemed in October 2009.
(5) All per share data and information relating to the number of shares of the
Company's Common Stock outstanding have been adjusted to give effect to two
for one stock splits effective January 12, 1996 and October , 1996.
(6) Includes the amortized portion of the restricted capital realized from the
gain on the repurchase of the Company's 3% Preferred Stock from the SBA,
$572,998 through May 31, 1996. Such amount was realized in equal increments
as additional paid-in capital over a period from the repurchase date, May
31, 1993. Such gain,
13
<PAGE>
however, may not be used to obtain SBA leverage. See "BUSINESS--Specialized
Small Business Investment Companies."
(7) Represents the unamortized portion of the gain realized from the
repurchase, at a discount, of all 1,520,000 shares of the Company's 3%
Preferred Stock from the SBA on May 10, 1993. In the event of the
liquidation of the Company, the SBA would have the right to receive the
amount attributed to restricted capital before any distribution to holders
of Common Stock. The balance of $381,999 will be amortized on a straight
line basis and included as additional paid-in capital over a 24-month
period. See "BUSINESS--Specialized Small Business Investment Companies."
(8) Computed on the basis of total assets less total liabilities, 4% Preferred
Stock outstanding and excluding retained earnings available for
distributions.
DIVIDEND POLICY
The Company will endeavor to qualify annually for treatment as a regulated
investment company under Subchapter M of the Code. Pursuant to the requirements
of the Code, the Company intends to distribute not less than 90% of its
investment company taxable income to its shareholders so as to maintain its
status as a regulated investment company. The Company has declared and paid
dividends on its Common Stock since fiscal 1988. The Company intends to declare
and pay at least semi-annual dividends in the future to the extent funds are
available for distribution. See "TAX CONSIDERATIONS."
The Company's dividend policy effectively precludes it from expanding its
business through retained earnings. The Company intends to distribute all
undistributed net income through the date immediately preceding the consummation
of the offering to shareholders of record as of such date.
14
<PAGE>
DILUTION
As of May 31, 1996, the net assets of the Company were $3,155,082 or $2.88
per share of Common Stock. The Company's net assets are the total assets of the
Company less all liabilities and the liquidation value of the outstanding 4%
Preferred Stock. Retained earnings of $15,379 as of May 31, 1996 are excluded
from the net assets since the Company intends to distribute such earnings to its
current shareholders prior to consummation of this offering. The entire gain
realized on the repurchase of the 3% Preferred Stock is included in the
computation of the net assets. Such gain is amortized monthly, with the amount
of the amortization transferred to additional paid-in capital. In the event of
the liquidation of the Company, the SBA would have the right to receive the
amount attributed to restricted capital before any distribution to holders of
Common Stock. See "BUSINESS--Specialized Small Business Investment Companies."
Net asset value per share of Common Stock is net assets divided by the number of
shares of Common Stock outstanding as of the relevant date. After effect is
given to the sale of 1,000,000 shares of Common Stock offered hereby, the pro
forma net assets and net asset value per share of the outstanding Common Stock
at May 31, 1996 would be $6,986,082 or $3.33 per share. This result would
constitute an immediate dilution of $1.67 per share to new investors from the
public offering price. Dilution per share represents the difference between the
public offering price and the pro forma net asset value per share after this
offering.
The following table illustrates the per share dilution to be incurred by
new investors from the public offering price:
Public offering price per share (1).............................. $5.00
Net asset value per share before offering...................... 2.88
Change attributable to sale of shares to new investors......... .45
Pro forma net asset value per share to new investors (2)......... 3.33
Dilution in net asset value per share to new investors (2) ...... 1.67
- - --------
(1) Before deduction of underwriting discounts and commissions and estimated
offering expenses payable by the Company, estimated to be $1,169,000.
(2) After deduction of underwriting discounts and commissions and estimated
offering expenses payable by the Company.
The following table sets forth, as of May 31, 1996, the number of shares of
Common Stock held, the total consideration paid (without giving effect to
commissions and offering expenses) and the average price per share paid by
existing shareholders and the new investors:
<TABLE>
<CAPTION>
Shares Purchased Cash Consideration Paid
-------------------------- -----------------------------------------
Average
Price
Number Percent Amount Percent Per Share
--------- ------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Shareholders............. 1,096,688 52.31% $2,297,276 31.5% $4.19
New Investors..................... 1,000,000 47.69 5,000,000 68.5 $5.00
--------- ------ ---------- ----- -----
2,096,688 100.00% $7,297,276 100.0%
========= ====== ========== =====
</TABLE>
15
<PAGE>
BUSINESS
Freshstart Venture Capital Corp. was organized as a New York corporation on
March 4, 1982 in order to engage primarily in the business of financing taxicab
medallions, taxicabs and related assets as an SSBIC licensed by the SBA. The
Company currently maintains offices at 313 West 53rd Street, New York, New York
10019 (telephone: (212) 265-2249). The Company is a diversified, closed-end
investment company registered under the 1940 Act.
General
The Company's Loans--The Company obtained a license to operate as an SSBIC
from the SBA on February 23, 1983. As an SSBIC, the Company's primary business
has been, and is expected to continue to be, to provide long-term loans at
commercially competitive rates of interest to persons defined by SBA regulations
as socially or economically disadvantaged persons (or entities which are at
least 50% owned by persons so defined), in connection with the financing of
diversified businesses. Under current SBA regulations the maximum rate of
interest which the Company may charge on loans may 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, or the current debenture rate, plus, in either case, seven percentage
points, rounded off to the next lower eighth of one percent; provided, however,
that if the current debenture rate is 8% per annum or lower, the Company is
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 August 1996 was 19% for a loan and 14% for a 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 taxicab medallion loans (in
which 74% of the Company's portfolio is concentrated) ranged from 10.75% to
15.00% at May 31, 1996. For the month of May 1996, the average annual weighted
interest rate per loan outstanding was 12.98%. See "Loan Portfolio; Valuation."
A substantial portion of the Company's loans have been made in the past to
purchasers or owners of New York City taxicab medallions. Since the Company was
licensed in February 1983, it has made in excess of 528 loans, aggregating
approximately $24,222,250, to New York City taxicab medallion owners. 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 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, 1996,
approximately 74% of the aggregate principal amount of its outstanding loans,
$6,352,777 of an aggregate of $8,598,015, represented loans made to finance the
purchase or continued ownership of New York City taxicab medallions. The
balance, $2,245,238 (26%), 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. See
"RISK FACTORS--Limitations on Taxicab Medallion Financings."
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. See "RISK FACTORS -- Limitations on Taxicab
Medallion Financings."
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. See "Marketing Strategy."
16
<PAGE>
Loans made by the Company are subject to certain restrictions imposed by
the SBA as to interest rates (as described above) and term (currently, no more
than 20 years). Generally, such loans have been made to finance taxicab
medallions (or to refinance prior medallion-related loans), are secured by the
medallions, taxicabs, and other related assets and are personally guaranteed by
the owners of the company owning the taxicab. The Company may also, in its
discretion, make loans to radio car owners. The Company will only make loans to
borrowers who meet the standards required to operate these vehicles by the New
York City Taxi and Limousine Commission ("TLC"). 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 may revise the nature of its loan portfolio at such time as its Board of
Directors determines, in its sole discretion, that such revision is in the best
interest of the Company in light of then existing business and financial
conditions. However, no such revision is currently contemplated by the Board of
Directors. 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.
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 it reserves the right to do so in the future should
the Company's Board of Directors deem it to be in the Company's best interests.
Specialized Small Business Investment Companies
General. As an SSBIC, the Company is eligible to receive certain financing
from the SBA on favorable terms, and the Company and its shareholders are
entitled to certain tax benefits, both described below. The SBA has a certain
amount of discretion in determining the type and amount of financing that will
be made available to an SSBIC. 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 required each licensee to have a
minimum level of private investor capital and to be operated by experienced
management. Under present law, 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'. Small Business Investment Companies 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
17
<PAGE>
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 individuals, or 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 Blacks, Indians, Eskimos, persons of Mexican, Puerto Rican, Cuban,
Filipino or Asian extraction, Vietnam War era veterans, and other groups which
fall within SBA guidelines relating to socially or economically disadvantaged
persons.
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 July 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 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, 1996,
the liquidating interest was $381,999. Should the Company be in default under
the Repurchase Agreement, at any time, the liquidating interest will become
fixed at the level immediately preceding the event of default and will not
decline further until such time as the default is cured or waived. The
liquidating interest will expire on the later of (i) 60 months from the date of
the Repurchase Agreement, or (ii) if an event of default has occurred and such
default has been cured or waived, such later date on which the liquidating
interest is fully amortized. Should the Company voluntarily or involuntarily
liquidate prior to the expiration of the liquidating interest, any assets which
are available, after the payment of all debts of the Company, shall be
distributed first to the SBA until the amount of the then remaining liquidating
interest has been distributed to the SBA. Such payment, if any, would be prior
in right to any payments made to the Company's shareholders. For financial
reporting purposes, the Company's balance sheet shows a restricted capital
account equal to the value of the SBA's liquidating interest, less $14,373 of
expenses incurred in connection with the repurchase. As the liquidating interest
declines, the restricted capital account is reduced and additional paid-in
capital is increased. The amount of the gain from the repurchase of the 3%
Preferred Stock may not be used for obtaining SBA leverage.
2. The SBA is authorized to guaranty full repayment of all principal and
interest on debentures issued by an SSBIC which loans funds to, but does not
invest in the equity of, small businesses, to the extent of 300% of such SSBIC's
Leverageable Capital, less the amount of preferred stock issued to the SBA. The
term of such 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 funds available for investments; provided,
however, that an SSBIC that has invested at least 50% of its Leverageable
Capital and outstanding leverage is presumed to lack sufficient funds available
for investment. Generally, such 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 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. The
subsidized debentures most recently purchased by the
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<PAGE>
SBA from the Company (during December 1992) bear interest at the rate of 4.510%
per annum for the first five years of their term and 7.510% per annum for the
remaining five years of their term.
The SBA also makes available to both SBIC's and SSBIC's financing in the
form 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. In June 1995,
the Company refinanced a $500,000 subsidized debenture with a $520,000
unsubsidized debenture. Such unsubsidized debenture matures June 1, 2005 and has
a fixed annual interest rate of 6.69%. In December 1995, the Company refinanced
a $500,000 subsidized debenture with a $520,000 unsubsidized debenture. The
unsubsidized debenture issued in 1995 matures December 1, 2005 and has a fixed
interest rate of 6.54%. On June 26, 1996, the Company refinanced two, $120,000
subsidized Debentures with a $250,000 unsubsidized Debenture. The unsubsidized
debenture issued in 1996 matures on June 1, 2006 and has a fixed interest rate
of 7.71%. To the Company's knowledge, the SBA has made available approximately
$108,500,000 for unsubsidized debenture financing for Federal Fiscal year 1996,
all of which was committed and utilized. While the Company believes it will be
eligible for such SBA financing following the completion of this offering, there
can be no assurances as to the amount and timing of the receipt of such
financing.
With respect to debentures guaranteed 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 the date of this Prospectus, the Company has an aggregate
of $4,390,000 of subordinated debentures outstanding. Such debentures currently
bear interest at rates ranging from 4.510% to 9.00% per annum. As a result of
this offering, assuming approximate net proceeds to the Company of $3,831,000,
the SBA would be permitted under its regulations to purchase, or guarantee, up
to $11,493,000 of unsubsidized subordinated debentures issued by the Company.
Following completion of this offering, the Company will seek to sell
subordinated debentures up to the maximum amount and extent permitted by
applicable SBA regulations, although there can be no assurance as to when and/or
if the Company's applications for the sale of such debentures will be accepted
by the SBA. See "RISK FACTORS--SBA Industry Review" and "--SBA Financing Not
Assured."
3. An SSBIC may qualify for leverage exceeding 300% of Leverageable Capital
by having at least 30% of its total funds available for investment (90% of the
sum of total current assets and loans and investments on a cost basis net of
current maturities) invested in disadvantaged concerns represented by (a) equity
securities with no repurchase requirement for at least five years; (b) any right
to purchase equity securities in conjunction with the purchase of equity or debt
securities which, after consideration of all of the terms, conditions and
documentation of such financing, are determined by an SSBIC's Board of Directors
to have in excess of 50% of the anticipated return on such financing represented
by the potential for equity appreciation; or (c) debt securities or loans which
are subordinated by their terms to all borrowings of the issuer, except
borrowings from officers, directors and owners, or close relatives thereof, of
the small concern, and which are not amortized during the first three years.
In determining the maximum amount of preferred stock and debentures of an
SSBIC which it can purchase or guaranty, the SBA's policy is to treat earnings
of an SSBIC which have been capitalized as additional paid-in capital. As a
result, the maximum amount of funds which may be obtained by the Company through
the sale to or guaranty by the SBA of preferred stock and guaranty of
subordinated debentures would be increased by the capitalization of the
Company's earnings. As a result of the Company's registration under the 1940 Act
and its election to be treated as a "regulated investment company" under the
Code, the Company is required to distribute to its shareholders at least 90% of
its taxable income, thereby substantially eliminating its ability to obtain
additional leverage on its future earnings.
4. The tax benefits to a company licensed as an SSBIC and to its
shareholders are discussed below under the heading "TAX CONSIDERATIONS."
5. Legislation was enacted on October 1, 1996 which eliminates most
distinctions between SBICs and SSBICs and eliminates the authority to issue new
SSBIC licenses. In the future, under a consolidated program, all new applicants
will be licensed as SBICs. The legislation raises the minimum capital
requirements for new applicants and increases 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
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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.
Loan Portfolio; Valuation
From the time it was licensed in February 1983 through May 31, 1996, the
Company has made loans to small business concerns in the aggregate principal
amount of approximately $34,036,338 of which $8,598,015 was outstanding on May
31, 1996. The following table sets forth a classification of the Company's
outstanding loans as of May 31, 1996.
<TABLE>
<CAPTION>
Number Maturity
Type of Loan of Date
Outstanding Loans Interest Rate Within Balance
- - ------------ ----- ------------ ------ -------
<S> <C> <C> <C> <C>
NYC Taxi Medallions........................... 142 10.75%-15.00% 1-7 yrs. $6,352,777
Services...................................... 1 14.50%-15.00% 1-7 yrs. 94,717
Auto Repair Service........................... 8 10.00%-15.00% 1-4 yrs. 687,565
Auto Dealership............................... 1 12.00% 1 yr. 69,830
Renovation and Construction................... 1 10.50% 5 yrs. 134,852
Retail Establishments......................... 3 11.25%-12.50% 1-4 yrs. 306,557
Restaurants................................... 3 9.00%-15.00% 1-9 yrs. 214,669
Gasoline Service Stations..................... 3 9.375%-10.00% 1 yr. 286,616
Manufacturing................................. 1 15.00% 1 yr. 151,572
Laundromats and Dry Cleaners.................. 5 12.00%-15.00% 1-4 yrs. 158,630
Medical Offices............................... 2 11.63%-15.00% 1-3 yrs. 118,052
Video Rentals................................. 1 14.00% 6 yrs. 22,178
--- ----------
TOTAL LOANS................................... 171 $8,598,015
=== ==========
</TABLE>
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 80% 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 $15,000 to
$150,000. Loans made by the Company to finance the acquisition and/or operation
of retail or manufacturing businesses are typically secured by real estate, taxi
medallions and other assets and range in size from $15,000 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 and has never suffered a loss exceeding $12,000. 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 9% to 15.5% per annum. For the month
of May 1996, the average annual weighted interest rate per loan outstanding
originated was 12.98% 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
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.
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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, 1996, the Company had loans totaling
$1,122,768 with accrued interest of $500,649 which were delinquent, compared to
13 loans totalling $986,388 with accrued interest of $398,343 as of May 31,
1995. As of May 31, 1995, only one of such loans, in the aggregate principal
amount of $12,000, was a taxi medallion loan which was subsequently written off.
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, $180,558, 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 of 11,920 medallions, 6,998 are corporate medallions and
5,022 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 medallions and two taxicabs driven by two
owner-drivers (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 taxi 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. The TLC conducted the sale of 133
medallions in May 1996, and will sell an additional 133 medallions in October
1996. The TLC has not indicated when the remaining authorized medallions will be
sold. See "RISK FACTORS--Uncertain Market; Possible Issuance of Additional
Medallions."
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. The
Company's most recent experience has been that individually owned medallions
currently sell for approximately $185,000 and corporate medallions sell for
approximately $215,000 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.
Based upon statistics obtained from the TLC, from 1989 through 1995 the
number of corporate medallions sold each year varied from approximately 245 to
440, which suggests that there were between 122 and 220 minifleet corporations
in need of financing each year (taking into consideration the fact that each
taxicab minifleet needs at least two medallions), while the number of individual
owner medallions sold each year varied from 200 to 415. In addition, minifleet
concerns or individuals who have already purchased medallions are frequently
seeking to refinance their existing indebtedness. Assuming that a typical
minifleet financing for purchases of medallions might involve a sum of
approximately $360,000, the dollar volume of New York City minifleet financings
might range (assuming the existence of between 122 and 220 minifleet
corporations in need of medallion financing for purchases of medallions) from
$40.9 million up to $73.7 million a year. Assuming that a typical individual
medallion financing for a purchase of a medallion involves a sum of
approximately $170,000, the dollar volume of New York City individual medallion
financing might range (assuming the existence of between 200 to 415 individuals
in need of medallion financing for purchases of medallions) from $37.5 million
up to $62.3 million a year. The Company believes, based on its own experience
with, and knowledge of, the New York City taxi industry, that a substantial
majority of the purchasers of New York City taxi medallions each year qualify as
socially or economically disadvantaged persons eligible for receipt of funding
from an SSBIC.
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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<PAGE>
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 Strategy
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 Co. ("Pearland"), a medallion
brokerage company of which Neil Greenbaum and Pearl Greenbaum, officers and
directors of the Company, Barbara Joy Hamill, a director of the Company, and
Andrew Greenbaum, a principal shareholder of the Company are principals. 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.
Letter of Intent
The Company and the SBA entered into a Letter of Intent (the "Letter of
Intent") dated December 1, 1992, setting forth the intentions of the parties
with respect to a proposed agreement (the "Agreement"). Pursuant to the Letter
of Intent, the Company and the SBA would agree among other things as follows:
(i) the Company would agree to limit the aggregate of its senior
indebtedness, consisting of bank debt and SBA debentures, to certain
specified levels;
(ii) the SBA would agree to remove the existing requirement that the
Company maintain in its portfolio a certain threshhold amount of
non-taxicab secured loans;
(iii) the SBA would acknowledge that the Company is a registered
investment company, registered under the 1940 Act, and that the SBA will
not require the Company to take any action or refrain from taking any
action necessary in the opinion of the Company's counsel to comply with the
1940 Act; provided, however, the Company will not take any action in
violation of any SBA regulation in complying with the 1940 Act;
(iv) the Company would agree to give the SBA a secured second position
to the senior secured position of its banks. The parties would further
agree that banks or other lenders now or hereafter may loan on a senior
secured basis, an amount which, when aggregated with the Company's SBA
debentures, would not exceed the maximum indebtedness provided for in (i)
above. Such grant of a subordinated security interest to the SBA would
require the consent of the Company's banks;
(v) in order to allow the SBA to perfect a subordinated lien on the
Company's assets, the Company would agree that all notes, mortgages and
security agreements relating to loans made by the Company would be held by
a third party custodian (e.g. a commercial bank);
(vi) subject to (i) above, so long as the Company maintains private
capital of $2.2 million, the Company would agree not to incur senior debt,
including the aggregate amount of its credit lines, in excess of $3
million; and
(vii) the Company would agree to provide reports periodically to the
SBA containing certain specified financial information.
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<PAGE>
The Letter of Intent is subject to the negotiation and execution of a definitive
agreement between the Company and the SBA. To date, the Company and the SBA have
not engaged in negotiations of a definitive agreement. See "RISK
FACTORS--Limitations on Taxicab Medallion Financings."
SBA Regulation
The Company, as the holder of a license from the SBA to operate as an
SSBIC, is subject to broad regulations by the SBA with respect to various
aspects of its ownership and operation, as discussed under the heading "FEDERAL
REGULATION--Regulation Under The Small Business Investment Act of 1958."
23
<PAGE>
MANAGEMENT
Officers and Directors
The following table sets forth the names, addresses and positions with the
Company as of the date of this Prospectus of all of the officers and directors
of the Company. Also set forth below is information as to the principal
occupation and background for each person in the table.
Name and Address Age Position and Office with the Company
- - ----------------- --- ------------------------------------
Zindel Zelmanovitch (1)............. 49 President and Director
1934 East 18th Street
Brooklyn, NY 11229
Neil Greenbaum (1)(2)............... 40 Secretary and Director
29 Flamingo Road North
East Hills, NY 11576
Pearl Greenbaum (1)(2).............. 72 Vice President and Director
300 Winston Drive
Cliffside Park, NJ 07010
Barbara Joy Hamill (1)(2)........... 45 Director
8 Saxon Woods
Avon, CT 06001
Michael L. Moskowitz (3)............ 38 Director
45 East 25th Street
New York, NY 10010
Eugene Haber........................ 49 Director
22 Eagle Lane
East Hills, NY 11576
Alan Work........................... 40 Director
54 Random Farms Drive
Chappaqua, NY 10514
- - ------------
(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 Barbara Joy Hamill.
(3) Michael Moskowitz is the brother-in-law of Zindel Zelmanovitch.
Zindel Zelmanovitch has been President and a director of the Company since
1982. Mr. Zelmanovitch is also President, director and a principal shareholder
of East Coast, which company 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 and a Secretary and a director of the National
Association of Investment Companies Management Group, Inc. since 1993. From 1976
to 1991 Mr. Zelmanovitch was the President and sole shareholder of Z. Zindel
Funding Corp., which company was licensed by the New York State Banking
Department as a Licensed Mortgage Banker. He has also been licensed as a real
estate broker by the New York Department of State since 1976. Mr. Zelmanovitch
is also the President of Z. Zindel Corp., which is an investment adviser
registered under the Investment Advisers Act of 1940, as amended. Mr.
Zelmanovitch received an M.B.A. from Long Island University in June 1977.
Neil Greenbaum has been the Secretary and a director of the Company since
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. He has been the
President of United Brokers Association, a taxicab brokerage organization, since
October 1988. Mr. Greenbaum is also President of All Taxi Management Inc. since
1995.
Pearl Greenbaum has been the Vice President and a director of the Company
since 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.
Barbara Joy Hamill has been a director of the Company since December 1992.
She was also a director of the Company from 1988 to December 1991. Ms. Hamill
has been a Vice President of Pearland Transfer Corp. and Pearland Brokerage Inc.
for more than five years. She has been a director of Hereford Insurance Company
since April 1994.
24
<PAGE>
Michael L. Moskowitz has been a director of the Company since 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 1986.
Alan Work has been a director of the Company since 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.
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.
Pursuant to the Underwriting Agreement, the Underwriter has the right,
subject to SBA approval, to designate one member of the Company's Board of
Directors for a period of three years after the closing of this offering.
Board Committee
The Board of Directors has appointed a Credit Committee comprised of Mr.
Zelmanovitch, Mr. Greenbaum, Mr. Haber, and Ms. Hamill. The Credit Committee
reviews loan activities and delinquencies and provides recommendations to the
Board of Directors.
Compensation of Officers and Directors
The following table sets forth all remuneration for services rendered to
the Company during the year ended May 31, 1996, paid to or accrued for the
account of (i) each of the executive officers and (ii) all executive officers
and directors as a group.
<TABLE>
<CAPTION>
Name of Individual or
Number of Persons in Group Capacities in Which Served Salaries (1)
- - ------------------------- -------------------------- ------------
<S> <C> <C>
Zindel Zelmanovitch............................... President and Director $ 85,320
Neil Greenbaum.................................... Secretary and Director 36,300
Pearl Greenbaum................................... Vice President and Director 20,496
All directors and executive officers as a
group (seven persons)........................... $145,146
--------
</TABLE>
- - ----------
(1) Officers' salaries constitute the 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 employee benefits.
Upon the closing of this offering, the Company will enter into five year
employment agreements with Messrs. Zelmanovitch and Greenbaum. The agreements
provide for annual compensation of $85,320 to Mr. Zelmanovitch and $36,300 to
Mr. Greenbaum. The salaries are to be reviewed annually by the Board of
Directors and are subject to SBA approval.
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.
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 , 1996)
to employees of the Company. As of May 31, 1996, 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 the Compensation Committee of the
Borad of Directors 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
25
<PAGE>
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.
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.
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, 1996.
Accrued Benefits Contributed
for the Twelve Months Ended Balance Vested as
Name of Individual May 31, 1996 of May 31, 1996
- - ----------------- --------------------------- ----------------
Neil Greenbaum................ $ 3,630 $ 92,968
Pearl Greenbaum............... 2,050 69,205
Zindel Zelmanovitch........... 8,532 213,060
All Other Employees........... 1,968 39,425
-------- ---------
$ 16,180 $ 414,658
======== =========
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. In addition, Mr. Zelmanovitch manages a pension plan
which makes limited investments to finance taxi 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 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., 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 also "CERTAIN TRANSACTIONS."
26
<PAGE>
CERTAIN TRANSACTIONS
Neil Greenbaum and Pearl Greenbaum, officers and directors of the Company,
Barbara Joy Hamill, a director of the Company, and Andrew Greenbaum, a principal
shareholder 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 $5,000 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 East Coast, another SSBIC. The Company and East
Coast have made four loans to the same borrowers. The Company's and East Coast's
loans to these borrowers aggregate approximately $400,000 and $115,050,
respectively. Because such coinvesting may be prohibited under the 1940 Act, the
Company has agreed not to make any additional coinvestments unless it is
determined such transaction is consistent with the provisions of the 1940 Act.
The Company currently leases office space from 313 West 53rd Street Assoc.,
a partnership whose partners consist of certain officers and directors of the
Company, for $1,500 per month plus a prorated portion of any increases in the
landlord's operating costs above those in effect at the time the lease was
entered into and the prorated share of any repair expenses incurred by the
landlord. The lease expires in November 1997.
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.
27
<PAGE>
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth, as of the date of this Prospectus, the
beneficial ownership of the shares of Common Stock of the Company of (i) each
person who beneficially owns more than five percent of the Common Stock, (ii)
each officer and director of the Company and (iii) all officers and directors of
the Company as a group:
<TABLE>
<CAPTION>
Percentage of Common Stock
--------------------------
Type of Beneficial Amount of Before After
Name and Address Ownership Shares Owned Offering Offering
- - ---------------- --------- ------------ ------- -------
<S> <C> <C> <C> <C>
Andrew Greenbaum .......................... Of record 93,284(2) 8.5% 4.5%
300 Winston Drive
Cliffside Park, NJ 07010 (1)
Neil Greenbaum ............................ Both beneficially and 105,868(3) 9.7% 5.1%
29 Flamingo Road North of record
East Hills, NY 11576 (1)
Zindel Zelmanovitch ....................... Both beneficially and 174,148(4) 15.9% 8.3%
1934 East 18th Street of record
Brooklyn, NY 11229
Pearl Greenbaum ........................... Both beneficially and 195,052(5) 17.8% 9.3%
300 Winston Drive of record
Cliffside Park, NJ 07010 (1)
Barbara Joy Hamill ........................ Both beneficially and 92,912(6) 8.5% 4.4%
8 Saxon Woods of record
Avon, CT 06001 (1)
American Transit Insurance Co. ............ Of record 99,932 9.1% 4.8%
275 Seventh Avenue
New York, NY 10001
Michael L. Moskowitz ...................... Both beneficially and 32,088(7) 2.9% 1.5%
45 East 25th Street of record
New York, NY 10010
Alan Work ................................. Both beneficially and 2,220(8) * *
54 Random Farms Drive of record
Chappaqua, NY 10514
Eugene Haber............................... Both beneficially and 176(9) * *
22 Eagle Lane of record
East Hill, NY 11576
All officers and directors as a............ Both beneficially and 602,464 54.9% 28.7%
group (7 persons) of record
</TABLE>
- - ----------
* Represents less than 1% of the Common Stock.
(1) Andrew Greenbaum and Pearl Greenbaum are husband and wife and the parents
of Neil Greenbaum and Barbara Joy Hamill.
(2) Excludes 195,052 shares held, directly and indirectly, by his wife, Pearl
Greenbaum.
(3) Includes 2,400 shares held by Mr. Greenbaum's children. Excludes 30,200
shares held by his wife and 20,440 shares held by his mother and children
as joint tenants.
(4) Includes 50,348 shares held with his wife as joint tenants and 1600 shares
held directly by his wife. Also includes 33,564 shares held as custodian
for his children. Includes 4,072 shares held by his children. Also includes
39,900 shares held in pension plans of which Mr. Zelmanovitch is the
beneficiary. Includes 44,664 shares held by a corporation of which Mr.
Zelmanovitch is a majority shareholder.
(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. Excludes 93,240 shares held by her husband,
Andrew Greenbaum, as to which shares Mrs. Greenbaum disclaims beneficial
ownership.
(6) Includes 10,200 shares held by her 3 children. Excludes 18,660 shares held
by her mother, Pearl Greenbaum, and her children as joint tenants. Excludes
17,760 shares held by her husband, as to which shares Mrs. Hamill disclaims
beneficial ownership.
(7) Includes 9,000 shares held by M.L. Moskowitz & Co., Inc. of which Mr.
Moskowitz is a principal shareholder.
(8) These shares are held by Mr. Work and his wife as joint tenants.
(9) Includes 132 shares held by his wife and two children.
28
<PAGE>
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.
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 successor
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.
(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
the amount of equity investments the Company may make.
29
<PAGE>
(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.
FEDERAL REGULATION
Regulation Under the Small Business Investment Act of 1958
As the holder of a license from the SBA to operate as an SSBIC, the Company
qualifies 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 subject to a "cost of money" ceiling based on either the current
debenture rate or its own "cost of capital," as determined by SBA
regulations. At a minimum, an SSBIC may charge up to nineteen (19%) percent
per annum for a loan. In certain instances, based on the SSBIC's cost of
capital (i.e., the weighted averaged interest rate paid by the licensee on
its borrowings), an SSBIC may charge a higher interest rate.
(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) 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.
(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 with outstanding leverage or which has
applied for leverage, or not invested in small businesses, must be
maintained in direct obligations of the U.S. (with maturities of 15 months
or less) or deposited in or invested in time deposits of federally insured
financial institutions.
(ix) Corporate SSBICs 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
30
<PAGE>
officers or directors and to the appointment of the SBA or its designee 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 three categories.
The first category consists 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 to 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.
(x) 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.
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
31
<PAGE>
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
approved management compensation. This category of events includes the
occurrence of any event 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
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.
(xi) An SSBIC is active if during the 18 months preceding its most
recent fiscal year end, it made financings totalling not less than twenty
(20%) percent of its private capital or its idle funds did not exceed
twenty (20%) percent of its total assets at the end of its most recent
fiscal year. The SBA by regulation made certain limited exceptions to this
activity test.
(xii) 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.
(xiii) 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.
Registration Under the Investment Company Act of 1940
The Company registered as an investment company under the 1940 Act for the
year commencing July 1, 1988. Prior to such date, the Company was exempt from
regulation under the 1940 Act. The 1940 Act imposes various substantive
requirements upon registered investment companies, and compliance with these
requirements can in many cases be time consuming, burdensome and expensive.
These requirements include, but are not limited to, the following:
(i) The Board of Directors of the Company must be composed of at least
40% of persons who are not "interested persons" as that term is defined in
the 1940 Act (e.g. persons who are not affiliates, counsel, accountants,
investment advisors of or to the Company).
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(ii) Any arrangement which provides for joint participation by the
Company and any affiliate (as that term is defined in the 1940 Act) of the
Company in any transaction, and the Company loans to, purchases from, or
sells to, any such affiliate must be approved in advance by the Commission.
(iii) Any management advisory contract between the Company and an
investment adviser must be (a) in writing, (b) initially approved by
shareholders holding a "majority of the outstanding voting stock" (as
defined in the 1940 Act) of the Company and annually thereafter by either
the Company's Board of Directors or a majority of its outstanding voting
stock, (c) non-assignable by the adviser, and (d) terminable by the
directors or a majority of the voting shareholders upon 60 days' notice.
(iv) The Company is required to prepare and file various annual and
periodic reports and proxy materials with the Commission.
(v) The Company's fundamental investment policies may not be changed
without the approval of a "majority of the outstanding voting stock" (as
defined in the 1940 Act). See "BUSINESS--Investment Policies."
(vi) The Company is required to comply with special journal and ledger
accounting rules and record-keeping requirements relating to all business
transactions, and will be subject to inspections by representatives of the
Commission without warning.
(vii) The Company may not (i) issue more than one class of stock
senior to the Common Stock (the Company's preferred stock constitutes such
a senior class), or (ii) issue warrants or rights unless they expire in 120
days or less and are issued ratably to all members of a class of voting
securities.
(viii) The Company must adopt a Code of Ethics which is designed to
prevent insiders from competing with the Company for investments. The Code
of Ethics must require that the Company maintain records of all security
transactions of directors, officers and employees with information relating
to the Company's investments. See "CONFLICTS OF INTEREST."
(ix) Holders of 10% or more of any class of the Company's voting
securities and its directors and officers are subject to short-swing profit
liability under Section 16(b) of the Securities Exchange Act of 1934, as
amended, for purchases and sales of securities of the Company within a
six-month period of each other.
(x) The Company may not issue any of its securities for services or
property other than cash (except as a dividend or distribution to its
shareholders or in connection with a reorganization).
(xi) The Company may not sell any of its Common Stock for less than
the current net asset value of such stock except, (a) with the consent of a
majority of the holders of its Common Stock, (b) in connection with an
offering to all holders of the Common Stock, (c) upon the exercise of an
outstanding warrant or (d) upon the conversion of a convertible security in
accordance with its terms.
The foregoing summary of certain requirements of the 1940 Act does not
purport to be complete and investors are urged to consult the 1940 Act for more
detailed information.
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 community in which they are chartered. 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, investing,
and service. The lending test evaluates a bank's performance in helping to meet
the credit needs of its service area(s) through its lending activities. In
evaluating a bank's overall lending performance, the agency considers small
business and small farm lending, as well as the geographic distribution of the
bank's lending, particularly with respect to the number and amount of loans to
low-, moderate-, middle-, and upper-income geographies in the bank's service
area.
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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 service test evaluates a bank's record of helping to meet the credit
needs of the bank's service area(s) by analyzing both the availability and
responsiveness of a bank's systems for delivering retail banking services and
the extent and innovativeness of its community development services.
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 overall rating of a bank, thrift or savings and loan may be positively
affected as a consequence of equity investments in an SSBIC.
TAX CONSIDERATIONS
General
The following discussion is based on the currently existing provisions of
the Internal Revenue Code of 1986, as amended (the "Code") and the currently
existing regulations thereunder. No assurance can be given that future
legislation or administrative changes or court decisions will not significantly
modify the statements expressed herein. The following discussion is only a
general summary of some of the federal tax principles applicable to the Company
and to an investment in the Company's Common Stock, and does not purport to be a
complete description of the tax considerations applicable to such investment.
Prospective investors should consult their own tax advisers with respect to the
tax considerations which pertain to their purchase and ownership of the
Company's Common Stock.
Taxation of a Regulated Investment Company
Under Section 851 of the Code, a corporation which qualifies may elect to
be taxed as a regulated investment company. A regulated investment company is
generally not subject to federal income taxation at the corporate level to the
extent its income is distributed to its shareholders, since it can deduct most
dividends paid. The Company intends to continue to qualify as a regulated
investment company. In order for the Company to qualify for the tax status of a
regulated investment company for a given fiscal year, it must meet each of the
following conditions for that fiscal year:
(a) The Company must be a domestic corporation registered as a
management company under the 1940 Act during the entire year.
(b) At least 90% of the Company's gross income for the year, including
its tax exempt interest income, but excluding losses from the sale or other
disposition of stock or securities, must be derived from interest, gains on
the sale or other disposition of stock or other securities, dividends, and
payments with respect to securities loans.
(c) Less than 30% of the Company's gross income including tax exempt
interest income, but excluding losses from the sale or other disposition of
stock or securities, must be derived from the sale or other disposition of
securities held for less than three months.
(d) At the close of each quarter, at least 50% of the value of the
Company's total assets must be represented by cash, cash items (including
receivables), government securities, securities of other regulated
investment companies and other securities, subject to limitations on the
extent to which the Company's holdings may be concentrated in the
securities of a single issuer.
(e) The Company must distribute as dividends at least 90% of its
investment company taxable income (as defined in Code Section 852) as well
as 90% of the excess of its tax-exempt income over certain disallowed
tax-exempt interest deductions (the "Distribution Requirement").
If the Distribution Requirement is satisfied, a regulated investment
company may not be taxed on distributed income, provided all the other
requirements are satisfied. Only undistributed income and undistributed net
capital gain will be taxed at the ordinary income tax rates of Code Section 11
and the capital gains rates of Code Section 1201.
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The tax on undistributed ordinary income is really a tax on investment company
taxable income calculated with the dividends paid deduction for ordinary
dividends, while the capital gains tax is imposed against the excess of net
capital gain over the dividends paid deduction determined with reference to
capital gain dividends.
A 4% non-deductible excise tax is imposed on a regulated investment company
that fails to distribute in each calendar year an amount equal to 98% of
ordinary taxable income for the calendar year and 98% of capital gain net income
for the one-year period ended October 31 of such calendar year (or, at the
election of a regulated investment company having a taxable year ending November
30 or December 31, for its taxable year). The Company intends to make sufficient
distributions or deemed distributions of its ordinary taxable income and capital
gain net income prior to the end of each calendar year to avoid liability for
the excise tax. However, investors should note that the Company may in certain
circumstances be required to liquidate portfolio investments to make sufficient
distributions to avoid excise tax liability.
If the Company fails to qualify as a regulated investment company, the
Company's earnings will generally be subject to corporate income taxation, and
distributions by the Company in the form of dividends will generally be taxed as
ordinary income to its shareholders to the extent of the Company's current and
accumulated earnings and profits.
Taxation of Shareholders of Regulated Investment Companies
Regulated investment company shareholders also are taxed differently from
shareholders in ordinary corporations. Usually, dividends are included in a
shareholder's income as ordinary income, unless they are return of capital
distributions, which normally are nontaxable since they are a return of a
shareholder's investment. For regulated investment company shareholders,
dividends are classified as ordinary, capital gain or exempt interest, depending
on the type of earnings of the regulated investment company from which they are
paid.
The portion of the dividend that represents a capital gains distribution is
reportable as long-term capital gain by the shareholder, regardless of how long
the shareholder may have owned the stock. Long-term capital gain distributions
do not qualify for the corporate dividends received deduction. For individuals,
the capital gain dividends are taxed at the maximum rate of 28%, while ordinary
income is taxed at the maximum rate of 39.6%.
The portion of dividends that does not represent a capital gains
distribution received by a corporate shareholder qualifies for the dividends
received deduction to the extent the regulated investment company designates the
amount distributed as an ordinary dividend, and the aggregate amount received
does not exceed the aggregate amount of dividends received by the regulated
investment company. In general, where aggregate dividends received by a
regulated investment company are less than its gross income for such taxable
year, part of the ordinary income dividends paid by a regulated investment
company will qualify for the dividend received deductions available to corporate
shareholders, in the same ratio that the regulated investment company's dividend
income from domestic corporations for a taxable year bears to its gross income
for such year (excluding from the regulated investment company's gross income
gain from the sale or other disposition of stock or other securities). Based on
the plans of the Company to enter into transactions that will result in interest
income, it is unlikely that any part of the ordinary dividends payable by the
Company will qualify for the exclusion for the dividends received deduction.
Dividends declared and payable by a regulated investment company in
October, November or December are treated as paid on December 31 even though
they are actually paid in January. In addition, dividends that are declared
prior to the time that a regulated investment company is required to file its
tax return for a taxable year and that are distributed within 12 months
following the close of a taxable year (but not later than the date of the first
regular dividend payment made after the declaration) may be treated for purposes
of the dividend paid deduction, at the election of the regulated investment
company, as having been paid in that prior taxable year (such dividends are
treated as having been received by shareholders in the year of distribution).
The Company will advise the shareholders annually as to the federal income
tax consequences of distributions made (or deemed made) during the year. The
Company will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of ordinary income dividends and capital gain dividends, and the
proceeds of redemption of shares, paid to any shareholder (1) who has provided
either an incorrect tax identification number or no number at all, (2) who is
subject to backup withholding by the IRS for failure to report the receipt of
interest or dividend income properly, or (3) who has failed to certify to the
Company that it is not subject to backup withholding or that it is a corporation
or other "exempt recipient."
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Special Provisions of the Code Applicable to SSBICs and Shareholders of SSBICs
The Company and its shareholders should qualify for the following tax
benefits which are ordinarily not available to corporations not licensed as
SSBICs and their shareholders:
1. Under Section 1243 of the Code, the Company would be entitled to
ordinary rather than capital loss treatment for losses sustained with
respect to stock derived from convertible debentures of small business
corporations. Because the Company does not presently intend to purchase
convertible debentures, however, this potential benefit is not likely to be
of practical significance to investors.
2. Under Section 582 of the Code, the Company would be entitled to
ordinary rather than capital loss treatment for losses sustained with
respect to debt instruments.
3. Under Section 1242 of the Code, except for a short sale of stock,
the Company's shareholders would be entitled to take an ordinary rather
than a capital loss deduction on losses resulting from the worthlessness or
the sale or exchange of the Company's Common Stock.
Other Potentially Applicable Code Provisions
(a) Pass-Through of Itemized Deductions
Pursuant to Code Section 67(a), the miscellaneous itemized deductions of an
individual taxpayer will only be allowed as a deduction to the extent that such
miscellaneous itemized deductions exceed two (2%) percent of the taxpayer's
adjusted gross income (generally, gross income less trade or business expenses).
Section 67(c) of the Code provides that, pursuant to Treasury regulations, the
limit on such itemized deductions will, to a certain extent, apply to a
shareholder of regulated investment companies as if the shareholder had earned
his share of the Company's income and incurred his share of the expenses of the
Company directly. The 2% floor on itemized deductions does not apply to a
"publicly-offered regulated investment company". A "publicly offered regulated
investment company" means a regulated investment company the shares of which are
continuously offered pursuant to a public offering, regularly traded on an
established securities market or held by no fewer than 500 persons at all times
during the taxable year. If the Company does not qualify as a publicly offered
investment company, the 2% floor on itemized deductions will apply to
shareholders of the Company with respect to Company expenses. As a result, each
shareholder would be treated, pursuant to applicable Treasury Regulations, as
including both an amount of income and an expense, that must be claimed subject
to the above described limitations, equal to a portion of the Company's
expenses. The impact of this provision upon a shareholder of the Company, if it
were to apply, depends not only upon his share of the Company's income and
expenses but also depends upon the shareholder's income and expenses from other
sources. Each shareholder should consult his tax advisor regarding the potential
application of Code Section 67 and other provisions of the Code that limit the
deduction of itemized deductions by individuals.
(b) Deferral of Capital Gains
Under Code Section 1044, Subchapter C corporations and individuals (not
estates, trusts, 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 filing 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 on his
Form 1040 Federal income tax return for the year in which the securities are
sold.
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
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 in 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
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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.
(c) Exclusion for Gain from Sale of Small Business Stock
Code Section 1202, as a manner of encouraging investment in new ventures
and specialized small business investment companies, grants relief to investors
who risk their funds in these businesses. Non-corporate investors may exclude up
to fifty (50%) percent 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 fifty (50%) percent exclusion is
subject to per issuer limits. The exclusion is available to taxpayers who own
eligible stock for five (5) years in a qualified corporation that actively
conducts a qualified trade or business and that meets a maximum gross assets
test.
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 fifty (50%) percent exclusion, although the appreciation occurring after
the purchase of the qualified small business stock would be eligible for such
fifty (50%) percent exclusion.
State and Local Taxes
The foregoing discussion relates only to federal income tax matters. The
Company and its shareholders will also be subject to state and local taxation.
Investors should consult their own tax advisers with respect to the state and
local tax consequences to them of the above-described transactions.
DESCRIPTION OF CAPITAL STOCK AND LONG-TERM DEBT
The Company has 13,000,000 shares, of which 10,000,000 shares are four (4%)
percent preferred stock having a par value of $1.00 each ("4% Preferred Stock")
and 3,000,000 shares are common stock having a par value of $.01 each (the
"Common Stock").
Common Stock
Each share of Common Stock is entitled to one vote on all matters submitted
to a vote of shareholders. The Common Stock does not have cumulative voting
rights, which means that the holders of a majority of the outstanding shares of
Common Stock may elect all of the directors of the Company. The Common Stock
does not have any pre-emptive rights.
All shares of the Common Stock outstanding upon the completion of this
offering and upon payment therefor will be fully paid and nonassessable. Upon
liquidation, dissolution or winding up of the affairs of the Company, its assets
remaining after provision for payment of creditors and holders of preferred
stock, would be distributed pro rata among holders of the Common Stock.
Dividends may be paid in cash or stock to the holders of the Common Stock
when and if declared by the Board of Directors out of funds legally available
therefor, but only after the Company has paid all cumulative dividends then in
arrears on its preferred stock. In order to qualify as a "regulated investment
company" for federal income tax purposes, the Company is required to distribute
annually as dividends at least 90% of its taxable income, to the extent earned.
As of September 1996, the Company had issued and outstanding 1,096,688 shares of
Common Stock with 156 holders of record.
Preferred Stock
Shares of 4% Preferred Stock may be issued only to the SBA. The shares are
nonvoting and four (4%) percent dividends thereon are preferred and cumulative.
Such shares have a mandatory 15 year redemption requirement.
Since the Company, in order to continue to qualify as a "regulated
investment company," under the Code, will be required to make dividend
distributions to its shareholders, the Company will be required to pay the
cumulative dividend on its preferred stock on a current basis, to the extent
funds are available for such purpose. Prior to any liquidation or redemption or
repurchase of Common Stock, the SBA, as the holder of the preferred stock, will
be entitled to the payment of the par value of such shares, and to the payment
of all cumulative dividends then in
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arrears. Pursuant to SBA regulations, in order to continue to qualify for the
issuance of preferred stock to the SBA, the Company amended its certificate of
incorporation to consent in advance to the SBA's right to require the removal of
officers and directors and to the appointment of the SBA or its prior designee
as receiver of the Company upon the occurrence of certain events of default. See
"FEDERAL REGULATION--Regulation Under the Small Business Investment Act of
1958." As of the date hereof, the Company had issued and outstanding 1,410,000
shares of 4% Preferred Stock.
The Company previously had 1,520,000 shares of 3% Preferred Stock
outstanding and held by the SBA. Such shares were repurchased by the Company in
1993 at a substantial discount. See "BUSINESS--Specialized Small Business
Investment Companies." The Company subsequently amended its certificate of
incorporation reclassifying such shares as 4% Preferred Stock.
Long-Term Debt
The Company's only long-term debt is its subordinated debentures, issued
to, or guaranteed by the SBA, of which $4,390,000 were outstanding on the date
hereof. The subordinated debentures bear interest ranging from 4.51% to 9.00%
per annum and have varying maturities from February 1997 to May 2006. The
weighted average interest cost as of May 31, 1996 was 7.06%. No principal
payments are required until maturity. The subordinated debentures are not
convertible and have no sinking fund provisions. The subordinated debentures are
unsecured and subordinated to all other debt of the Company, but have a priority
over the Common Stock of the Company upon any dissolution, winding-up,
liquidation or reorganization. As a result of the issuance of subordinated
debentures, the Company was required to amend its certificate of incorporation
granting the SBA certain rights including, but not limited to, the right to
accelerate payment of the subordinated debentures, appoint the SBA or its
designee as receiver of the Company, and the right to remove officers and
directors of the Company upon the occurrence of certain events of default. See
"FEDERAL REGULATION--Regulation Under the Small Business Investment Act of
1958."
Shares Eligible for Future Sale
The Company will have 2,096,688 shares of Common Stock outstanding if the
offering is consummated. Of the 1,096,688 issued and outstanding shares prior to
this offering, 822,168 shares are owned by officers, directors and persons
owning at least five percent of the outstanding shares after giving effect to
the sale of shares offered hereby. Such shares are subject to lock-up agreements
which prohibit their sale for a period ending 18 months after the date of this
Prospectus. Thereafter, 193,172 of such shares may be sold without restriction
at any time and 628,996 of such shares may be sold subject to certain volume
limitations under Rule 144 promulgated under the Securities Act. In general,
under Rule 144 as currently in effect, a person (or persons whose shares are
aggregated) who has beneficially owned restricted securities for at least two
years is entitled to sell within any three-month period a number of shares that
does not exceed the greater of one percent of the then outstanding shares of
Common Stock or the average weekly trading volume of the Common Stock during the
four calendar weeks preceding such sale. Sales under Rule 144 are also subject
to certain manner-of-sale provisions, notice requirements and the availability
of current public information about the Company. A person, however, who is not
deemed to be an affiliate of the Company at any time during the three months
preceding a sale, and who has beneficially owned restricted securities last
acquired from the Company or an affiliate of the Company over three years
previously, would be entitled to sell such shares under Rule 144(k) without
regard to volume limitations or other restrictions.
Transfer Agent
The transfer agent for the Common Stock will be Continental Stock Transfer
and Trust Company, 2 Broadway, New York, New York 10004.
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UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement between
the Company and the Underwriter, the Company has agreed to sell to each of the
Underwriters, and each of the Underwriters has severally agreed to purchase from
the Company the respective number of shares of Common Stock as set forth
opposite its name below:
Underwriter Number of Shares
----------- ----------------
Suppes Securities, Inc.............................
S.D. Cohn & Co., Inc...............................
Marlowe & Company..................................
==========
1,000,000
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to the approval of certain legal matters by counsel and
various other conditions. Under the terms of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken;
The Underwriters have advised the Company that they propose to offer the
shares of Common Stock offered hereby to the public at the offering price set
forth on the cover page of this Prospectus and to certain dealers at such price
less concessions of not in excess of $ per share, of which amount a sum not in
excess of $ per share may in turn be allowed by such dealers to other dealers.
After the public offering, the public offering price and other selling terms may
be changed by the Underwriters. The Underwriters do not expect sales to
discretionary accounts will exceed five percent of the total number of shares of
Common Stock offered hereby.
The Company has granted to the Underwriters an option exercisable during
the 45-day period after the date of this Prospectus, to purchase from the
Company at the offering price less underwriting discount and the Underwriters'
non-accountable expense allowance, up to an aggregate of 150,000 additional
shares of Common Stock for the sole purpose of covering over-allotments, if any.
The Company has agreed to pay the Underwriters a non-accountable expense
allowance equal to three (3%) percent of the gross proceeds of the shares of
Common Stock underwritten. The Company has agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act, or
to contribute to payment that the Underwriters may be required to make.
The Company has agreed to issue to Suppes Securities, Inc. (the
"Representative") warrants for the purchase of up to ten (10%) percent of the
number of shares of Common Stock sold in the public offering (the
"Representative's Warrants"). The Representative's Warrants shall be for a term
of five years and shall be non-transferable except to certain permitted persons
for one year after the effective date. The Representative's Warrants are
exercisable for four years at one hundred twenty (120%) percent of the initial
public offering price of the Common Stock. Any expenses incurred in connection
with obtaining any such approvals of the Securities and Exchange Commission will
be borne by the Representative. In addition, the Company has agreed to enter
into a two year non-exclusive financial consulting agreement with the
Representative pursuant to which the Representative would receive fees of
$25,000 per year. The grant of the Underwriters' Warrants is subject to the
prior approval of the Securities and Exchange Commission.
The Company, its officers and directors and holders in excess of 5% of the
shares of Common Stock to be outstanding after this offering have agreed that
they will not, without the prior written consent of the Representative, Inc.,
sell, or dispose of any shares of Common Stock owned by such person on the date
of this Prospectus for a period of 18 months after the date of this Prospectus.
The Representative has the right, subject to SBA approval, to designate one
member to the Company's Board of Directors or, at the option of the
Representative, to designate a person to attend Board of Directors meetings for
a period of two years after the date of this Prospectus.
The Company has granted the Representative a preferential right for a
period of three years after the commencement of this offering to sell for its
account any securities offered by the Company, excluding bank debt and certain
securities pursuant to which the Company receives SBA leverage.
The foregoing is a summary of the principal terms of the Underwriting
Agreement and does not purport to be complete. Reference is made to a copy of
the Underwriting Agreement which is filed as an exhibit to the Registration
Statement of which this Prospectus forms a part.
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On or about October 31, 1995, the Securities and Exchange Commission
instituted an action, entitled Securities and Exchange Commission v. Sarivola,
et al., 95 Civ. 9270, in United States District Court, Southern District of New
York against the Representative and numerous other defendants, including
Michelle P. Suppes, a principal executive officer of the Representative relating
to transactions in 1991 and 1992. The Securities and Exchange Commission alleges
that two brokers employed by the Representative improperly promoted and
disseminated false financial information to the public concerning the securities
of Leona Enterprises, Inc. ("Leona") in exchange for undisclosed compensation,
and executed illegal sales of unregistered securities of Leona through the
Representative. The complaint seeks, inter alia, a judgment enjoining the
defendants from engaging in violations of various securities laws, an order
requiring the disgorgement by the defendants of benefits obtained as a result of
the sale of Leona securities and unspecified civil penalties pursuant to the
securities laws. An answer to the complaint denying the allegations was served
by the Representative on or about November 30, 1995. The case is currently in
litigation.
LEGAL MATTERS
Certain legal matters in connection with the offering will be passed upon
for the Company by Stursberg & Veith, New York, New York. C. Walter Stursberg,
Jr., a member of such firm, owns 444 shares of Common Stock. Certain legal
matters in connection with the offering will be passed upon for the Underwriter
by Reid & Priest LLP, New York, New York.
EXPERTS
The financial statements of Freshstart Venture Capital Corp. as of May 31,
1994, 1995 and 1996 and for each of the three years then ended included in the
Prospectus, have been audited by Michael C. Finkelstein & Co., independent
accountants, as stated in their report dated July 23, 1996 and are included
herein in reliance upon such report given upon their authority as experts in
accounting and auditing.
CUSTODIAN
The Company currently acts as a self-custodian of its portfolio securities
in compliance with applicable regulations promulgated under the 1940 Act,
although the Company reserves the right to appoint a third party custodian in
the future.
ADDITIONAL INFORMATION
The Company has filed with the SEC, 450 Fifth Street, N.W., Washington,
D.C. 20549, a Registration Statement on Form N-5 with respect to the securities
offered hereby. This Prospectus, which is part of the Registration Statement,
does not contain all of the information included in the Registration Statement
and the exhibits and schedules thereto. For further information with respect to
the Company and the securities offered hereby, reference is made to the
Registration Statement and the exhibits thereto which may be inspected, without
charge, at the SEC, or copies of which may be obtained from the SEC in
Washington, D.C., upon payment of the requisite fees. Statements contained in
this Prospectus as to the content of any contract or other document referred to
are not necessarily complete, and where such contract or other document is an
exhibit to the Registration Statement, each such statement is deemed to be
qualified in all respects by reference to the provisions of the exhibit.
40
<PAGE>
TABLE OF CONTENTS
---------------------
Page
----
Independent Auditors' Report ........................................... F-2
Statements of Financial Position of Freshstart Venture Capital Corp.
as of May 31, 1995 and 1996 .......................................... F-3
Statements of Operations for the Years Ended
May 31, 1994, 1995 and 1996 .......................................... F-4
Statements of Stockholders' Equity for the Years Ended
May 31, 1994, 1995 and 1996 .......................................... F-5
Statements of Cash Flows for the Years Ended
May 31, 1994, 1995 and 1996 .......................................... F-6
Notes to the Financial Statements ...................................... F-7
Supplemental Schedules ................................................. F-13
Selected Per Share Data and Ratios ..................................... F-14
F-1
<PAGE>
Board of Directors
Freshstart Venture Capital Corp.
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying Statements of financial position of Freshstart
Venture Capital Corp. (the "Company") as of May 31, 1996 and 1995 and the
related statements of operations, stockholders' equity and cash flows for each
of the three years in the period ended May 31, 1996 and selected per share data
and ratios for each of the five years in the period ended May 31, 1996. 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.
As described in Note 2, these financial statements were prepared in conformity
with the accounting practices prescribed by the Small Business Administration,
which provide for specific allocations of certain types of income to specific
capital accounts. As explained in Note 2, the financial statements include
securities valued at $8,417,457 and $8,132,484 on May 31, 1996 and 1995 (266%
and 257% respectively of net assets), whose values have been estimated by the
Board of Directors in absence of readily ascertainable market values.
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, 1996
and 1995 and the results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
New York, New York
July 23, 1996
Michael C. Finkelstein
Certified Public Accountant
F-2
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
ASSETS
May 31,
--------------------------
1995 1996
----------- -----------
<S> <C> <C>
Loans Receivable:
Long Term Portion (Notes 2 and 3) ............................. $ 8,313,042 $ 8,598,015
Less: Unrealized Depreciation on Loans Receivable (Note 3) ... (180,558) (180,558)
----------- -----------
8,132,484 8,417,457
Less: Current Maturities-- Loans Receivable .................. (1,140,416) (1,178,444)
----------- -----------
Total Loans Receivable-- Net of Current Maturities .. 6,992,068 7,239,013
----------- -----------
Assets Acquired in Liquidation of Portfolio Securities (Note 4) 13,344 --
----------- -----------
CURRENT ASSETS
Cash (Note 15) ................................................ 745,359 415,102
Accrued Interest (Notes 2 and 3) .............................. 71,497 92,946
Current Maturities - Loans Receivable ......................... 1,140,416 1,178,444
Prepaid Expenses and Other Assets ............................. 236,088 287,351
----------- -----------
Total Current Assets ................................ 2,193,360 1,973,843
----------- -----------
Fixed Assets - Net of Accumulated Depreciation
of $16,369 and $10,852 respectively (Note 2) ................ 3,614 25,903
----------- -----------
Total Assets ........................................ $ 9,202,386 $ 9,238,759
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LONG TERM DEBT:
Debentures Payable to SBA (Note 6) ............................ $ 4,340,000 $ 4,380,000
4% Cumulative, 15 Year Redeemable Preferred Stock (Note 7) .... 1,410,000 1,410,000
----------- -----------
Total Long Term Debt .................................. 5,750,000 5,790,000
----------- -----------
CURRENT LIABILITIES:
Loans Payable - Line of Credit (Note 5) ....................... 5,000 --
Accrued Interest .............................................. 128,330 121,603
Other Current Liabilities ..................................... 37,512 34,493
Dividends Payable (Note 9) .................................... 112,802 122,202
----------- -----------
Total Current Liabilities ............................. 283,644 278,298
----------- -----------
Total Liabilities ..................................... 6,033,644 6,068,298
----------- -----------
Commitments and Contingencies (Notes 14 and 16) ............... -- --
STOCKHOLDERS' EQUITY:
4%Cumulative, 15 Year Redeemable Preferred Stock-- $1 Par
Value; 10,000,000 Shares Authorized, 650,000 and 1,410,000
Shares Issued and Outstanding, respectively (See Long
Term Debt ) (Note 7) ........................................ -- --
3% Cumulative Preferred Stock - $1 Par Value: No Shares Issued
and Outstanding (Notes 7 and 12) ............................ -- --
Common Stock - $.01 Par Value: 3,000,000 Shares Authorized,
1,096,688 Shares Issued and Outstanding (Note 12) ........... 10,967 10,967
Additional Paid in Capital (Note 8) ........................... 2,571,117 2,762,116
Retained Earnings ............................................. 13,660 15,379
Restricted Capital-- Realized Gain on Redemption (Note 8) ..... 572,998 381,999
----------- -----------
Total Stockholders' Equity ............................ 3,168,742 3,170,461
----------- -----------
Total Liabilities and Stockholders' Equity ............ $ 9,202,386 $ 9,238,759
=========== ===========
Net Assets Per Share .......................................... $ 2.88 $ 2.88
=========== ===========
</TABLE>
See Notes to the Financial Statements
F-3
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended May 31,
------------------------------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
REVENUE:
Interest Earned on Outstanding Receivables ....................... $1,033,638 $ 996,534 $1,027,815
Interest Income - Idle Funds ..................................... 9,433 8,750 6,129
---------- ---------- ----------
Total Revenue (Note 2) ................................... 1,043,071 1,005,284 1,033,944
---------- ---------- ----------
EXPENSES:
Interest (Note 6) ................................................ 315,213 322,806 307,764
Professional Fees ................................................ 62,629 45,415 50,776
Officers' Salaries (Notes 11 and 13) ............................. 145,146 145,146 145,146
Other Salaries (Note 11) ......................................... 35,586 35,472 23,126
Other Operating Expenses ......................................... 90,958 89,353 90,450
Pension Expense (Notes 10 and 11) ................................ 18,073 17,942 16,180
Depreciation and Amortization (Note 2) ........................... 5,605 5,999 9,710
---------- ---------- ----------
Total Expenses ........................................... 673,210 662,133 643,152
---------- ---------- ----------
Net Investment Income ............................................ 369,861 343,151 390,792
Unrealized Depreciation in Value of
Investments (Notes 2 and 3) .................................... 78,161 2,399 35,000
---------- ---------- ----------
291,700 340,752 355,792
PROVISION FOR TAXES:
Current Income Taxes (Note 2) .................................... 985 1,836 1,567
---------- ---------- ----------
Net Income ..................................................... $ 290,715 $ 338,916 $ 354,225
========== ========== ==========
Earnings Per Share of Common Stock (Note 2) ...................... $ .24 $ .27 $ .27
========== ========== ==========
Dividends Paid Per Share of Common Stock ......................... $ .24 $ .27 $ .27
========== ========== ==========
Weighted Average Shares of Common
Stock Outstanding .............................................. 1,096,688 1,096,688 1,096,688
========== ========== ==========
</TABLE>
See Notes to the Financial Statements
F-4
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years Ended May 31,
-------------------------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
4% Cumulative, 15 Year Redeemable
Preferred Stock - $1 Par Value:
10,000,000 Shares Authorized, 650,000
and 1,410,000 Shares Issued and
Outstanding (See Long Term Debt)
(Note 7) ....................................................... $ -- $ -- $ --
----------- ----------- -----------
Common Stock - $.01 Par Value: 3,000,000
Shares Authorized, 1,096,688 Shares Issued
and Outstanding ................................................ 10,967 10,967 10,967
----------- ----------- -----------
Additional Paid in Capital --
Beginning of Period .......................................... 2,189,118 2,380,117 2,571,117
Amortization of Restricted Capital (Note 8) ...................... 190,999 191,000 190,999
----------- ----------- -----------
Additional Paid in Capital --
End of Period ................................................ 2,380,117 2,571,117 2,762,116
----------- ----------- -----------
Retained Earnings
Balance, Beginning of Period ..................................... 14,435 15,944 13,660
Net Income ....................................................... 290,715 338,916 354,225
Dividends Paid and Accrued ....................................... (289,206) (341,200) (352,506)
----------- ----------- -----------
Balance, End of Period ....................................... 15,944 13,660 15,379
----------- ----------- -----------
Restricted Capital
Gain on Redemption of 3% Preferred
Stock (See Note 8) ............................................. 954,997 763,998 572,998
Amortization of Gain ............................................. (190,999) (191,000) (190,999)
----------- ----------- -----------
Balance, End of Period (Note 8) .............................. 763,998 572,998 381,999
----------- ----------- -----------
Total Stockholders' Equity ................................... $ 3,171,026 $ 3,168,742 $ 3,170,461
=========== =========== ===========
</TABLE>
See Notes to the Financial Statements
F-5
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended May 31,
-----------------------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS PROVIDED (USED) BY
OPERATING ACTIVITIES:
Net Income .......................................................... $ 290,715 $ 338,916 $ 354,225
Depreciation and Amortization Expense ............................... 5,605 5,999 9,710
Provision for Losses on Loans Receivable ............................ 78,161 2,399 35,000
Decrease (Increase) in Accrued Interest ............................. 31,540 15,015 (21,449)
Decrease (Increase) in Other Assets ................................. (8,346) (195,878) (57,326)
Increase (Decrease) in Accrued Liabilities .......................... (201,386) (20,113) (346)
Dividends Paid and Accrued .......................................... (289,206) (341,200) (352,506)
----------- ----------- -----------
Net Cash Provided (Used) By Operating Activities .................... (92,917) (194,862) (32,692)
----------- ----------- -----------
CASH FLOWS PROVIDED (USED) BY
INVESTING ACTIVITIES:
Increase in Loans Receivable ........................................ (3,179,900) (3,626,250) (4,594,750)
Repayment of Loans Receivable ....................................... 3,497,946 3,259,799 2,115,540
Increase in Loan Participations ..................................... 66,000 125,000 2,227,000
Repayment of Loan Participations .................................... (180,689) (164,434) (67,763)
Increase in Fixed Assets ............................................ (1,475) (2,578) (25,936)
Decrease (Increase) in Assets Acquired in Liquidation ............... (167,510) 148,287 13,344
----------- ----------- -----------
Net Cash Provided (Used) By Investing Activities .................... 34,372 (260,176) (332,565)
----------- ----------- -----------
CASH FLOWS (USED) PROVIDED BY
FINANCING ACTIVITIES:
(Decrease) in Line of Credit ........................................ (300,000) (29,488) (5,000)
(Decrease) in Restricted Capital .................................... (190,999) (191,000) (190,999)
Increase in Debenture Payable to SBA (Net) .......................... -- -- 40,000
Sale of 4% Preferred Stock .......................................... -- 760,000 --
Increase in Additional Paid in Capital .............................. 190,999 191,000 (190,999)
----------- ----------- -----------
Net Cash (Used) Provided by Financing Activities .................... (300,000) 730,512 35,000
----------- ----------- -----------
Net (Decrease) Increase in Cash ..................................... (358,545) 275,474 (330,257)
Cash Balance - Beginning of Period .................................. 828,430 469,885 745,359
----------- ----------- -----------
Cash Balance - End of Period ........................................ $ 469,885 $ 745,359 $ 415,102
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Interest ........................................................ $ 308,488 $ 312,142 $ 314,491
----------- ----------- -----------
Taxes ........................................................... $ 985 $ 1,836 $ 1,567
----------- ----------- -----------
</TABLE>
See Notes to the Financial Statements
F-6
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 1996 AND 1995
NOTE 1 ORGANIZATION
Freshstart Venture Capital Corp., a New York Corporation (the
"Company"), was formed on March 4, 1982 for the purpose of
operating as a specialized small business investment company
("SSBIC"), licensed under the Small Business Investment Act of
1958 and regulated and financed in part by the U.S. Small Business
Administration ("SBA"). The Company has also registered as an
investment company under the Investment Company Act of 1940. The
Company's business is to provide financing to persons who qualify
under SBA regulations as socially or economically disadvantaged
and to entities which are at least fifty (50%) percent owned by
such individuals.
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies
applied by the Company in the preparation of its financial
statements. The Company maintains its accounts and prepares its
financial statements on the accrual basis of accounting in
conformity with generally accepted accounting principles for
investment companies.
Valuation of Loans and Investments
The Board of Directors has valued the investment portfolio based
upon the cost of such investments, less a provision for loan
losses. However, because of the inherent uncertainty of the
valuation, the estimated values might otherwise be significantly
higher or lower than values that would exist in a ready market for
such loans, which market has not in the past and does not now
exist. The provision for loan losses represents a good faith
determination by the Board of Directors maintained at a level
that, in its judgment, is adequate to absorb losses. The balance
in the reserve account is adjusted periodically by the Board of
Directors on the basis of the fair value of the collateral held
and past loss experience. Approximately seventy four (74%) percent
of the Company's loan portfolio consists of loans made for the
financing of taxi cab medallions and related assets. The remaining
portion of the loans are made to various small commercial
enterprises. Substantially all loans are collateralized by either
NYC taxi medallions or real estate and the personal guarantees of
the individual owners.
Depreciation and Amortization
Depreciation and amortization of furniture, fixtures and leasehold
improvements is computed on the straight line method at rates
adequate to allocate the costs of applicable assets over their
expected useful lives.
Recognition of Interest Income
It is the Company's policy to record interest on loans and debt
securities only to the extent that management and the Board of
Directors anticipate such amounts may be collected. Interest on
doubtful accounts and accounts which are 180 days past due is not
recorded until actually received.
Income Taxes
The Company has elected to be taxed as a regulated investment
company under the Internal Revenue Code. A regulated investment
company can generally avoid taxation at the corporate level to the
extent that ninety (90%) percent of its income is distributed to
its stockholders. Therefore, no provision for federal income taxes
has been made. The financial statements include provisions for New
York State and local minimum taxes.
Earnings Per Share
Earnings per share are based on a weighted average number of
shares outstanding during the period, less accrued dividends on
cumulative preferred stock.
F-7
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 1996 AND 1995
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (Continued)
Assets Acquired in Liquidation of Portfolio Securities.
Assets acquired in liquidation of portfolio securities are carried
at estimated net realizable value. Expenses incurred at the time
of foreclosure are charged against the assets and adjusted to the
estimated net realizable value. Subsequent reductions in estimated
net realizable value are recorded as losses.
Recently Issued Accounting Standards.
Statement of Financial Accounting Standard No. 114, "Accounting by
Creditors for Impairment of a Loan" ("SFAS 114") was issued in May
1993 and is effective for fiscal years beginning after December
15, 1994. SFAS 114 generally requires all creditors to account for
impaired loans, except those loans that are accounted for at fair
value or at the lower of cost or fair value, at the present value
of expected future cash flows discounted at the loans' effective
interest rate. Creditors may account for impaired loans at the
fair value of the collateral or at the observable market price of
the loan if one exists. Due to the nature of the Company's loan
portfolio, SFAS 114 is not expected to have a material effect on
the Company's financial condition or results of operations.
Other
Certain information from the prior years has been reclassified to
conform its presentation to the current financial statements.
NOTE 3 LOANS RECEIVABLE
The Company's loan portfolio includes participations with other
lenders as presented in the following schedule. The following is a
breakdown of the outstanding loans receivable:
<TABLE>
<CAPTION>
May 31,
------------------------------
1995 1996
--------- ----------
<S> <C> <C>
Outstanding Loans................................ $8,649,412 $11,093,622
Loan Participations.............................. (336,370) (2,495,607)
--------- ----------
Net Loans Outstanding............................ $8,313,042 $ 8,598,015
========= ==========
</TABLE>
Loans on non-accrual status as of May 31, 1995 and 1996 were
approximately $986,388 and $1,122,768, respectively. Additionally,
the total amount of interest income not accrued was $417,018,
$398,343 and $500,649 during the years ended May 31, 1994, 1995
and 1996.
Reconciliation of Loan Loss Reserve
A reconciliation of loan loss reserve is as follows:
<TABLE>
<CAPTION>
Year Ended May 31,
---------------------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Balance, Beginning.................. $ 180,000 $ 178,159 $ 180,558
Provision for Loan Losses........... 78,161 2,399 35,000
Charge-Offs......................... (80,002) -- (35,000)
-------- -------- --------
Balance, Ending..................... $ 178,159 $ 180,558 $ 180,558
======== ======== ========
</TABLE>
F-8
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 1996 AND 1995
NOTE 4 ASSETS ACQUIRED IN LIQUIDATION OF PORTFOLIO SECURITIES
The Company foreclosed on two loans during the fiscal years ended
May 31, 1993 and 1994. Both loans were collateralized by real
estate. The Company's cost of the loans plus costs to obtain title
to such properties is included in the carrying value of the assets
acquired in liquidation. The Company wrote off the balance
remaining of $13,344 against its earnings for the fiscal year
ended May 31, 1996.
NOTE 5 LOANS PAYABLE -- LINE OF CREDIT
Effective October 23, 1992, the Company established a $1,500,000
line of credit with Extebank. On January 15, 1995, the Company
entered into a new agreement with Extebank providing for a
$1,100,000 discretionary line of credit without any officer
guarantees, expiring December 15, 1995. All advances bear interest
at .5% above the prime rate. Pursuant to the terms of the line of
credit, the Company is required to comply with certain terms,
covenants and conditions. The Company pledged its loans receivable
as collateral for the above line of credit and is required to
maintain a minimum of $100,000 non-interest bearing collected
balance with Extebank during the term of the line of credit. The
balance outstanding as of May 31, 1995 was $5,000. The Company did
not renew the line of credit at its expiration on December 15,
1995.
NOTE 6 LONG TERM DEBT
The long term debt to the SBA consisted of the following
subordinated debentures as of May 31, 1996 with interest payable
semi-annually:
<TABLE>
<CAPTION>
Interest Rate Period
-----------------
Maturity Date First Second Face Amount
---------- ------ ------ ---------
<S> <C> <C> <C>
June 1, 2005............................. 6.690% 6.690% $ 520,000
December 1, 2005......................... 6.540% 6.540% 520,000
May 14, 1996............................. 4.375% 7.375% 120,000
May 14, 1996............................. 4.375% 7.375% 120,000
February 6, 1997......................... 4.125% 7.125% 75,000
February 6, 1997......................... 4.125% 7.125% 75,000
September 17, 1997....................... 5.625% 8.625% 75,000
September 17, 1997....................... 5.625% 8.625% 75,000
September 22, 1999....................... 5.000% 8.000% 750,000
June 9, 1999............................. 6.000% 9.000% 750,000
December 1, 2002......................... 4.510% 7.510% 1,300,000
---------
$4,380,000
=========
</TABLE>
During the fiscal period ended May 31, 1996, the Company paid off
$1,000,000 in subsidized debentures through the sale of two
$520,000 unsubsidized subordinated debentures, due June 1, 2005
and December 1, 2005 with interest at 6.69% and 6.54%,
respectively.
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-9
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 1996 AND 1995
NOTE 7 PREFERRED STOCK
As of May 31, 1992, the Company was authorized to issue 4,000,000
shares of $1 par value, 3% cumulative preferred stock. Dividends
are not required to 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 distributions are made to investors.
Effective November 21, 1989, Congress passed legislation which
required all preferred stock sold subsequent to the effective date
to pay a four percent cumulative dividend and to provide for a
mandatory fifteen year redemption. Subsequently, the Company
amended its certificate of incorporation creating a Class A
Preferred Stock, $1 par value, which consisted of the 1,520,000
outstanding shares of preferred stock and to change the existing
2,480,000 authorized but unissued shares of preferred stock into a
new Class B Preferred Stock, $1 par value, which will carry a four
percent cumulative dividend rate and a mandatory fifteen year
redemption.
All preferred shares are restricted solely for issuance to the
SBA. Effective November, 1994, the Company amended its certificate
of incorporation authorizing an additional 1,000,000 shares of
four percent preferred stock and reclassifying all 1,520,000
authorized and unissued shares of three percent preferred stock as
4 percent preferred stock. The effect of the amendment authorized
5,000,000 shares of 4 percent cumulative preferred stock.
Effective October 13, 1994, the Company sold 760,000 shares,
respectively, of its $1 par value 4 percent cumulative, 15 year
redeemable preferred stock to the SBA for $760,000.
NOTE 8 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.
As a condition precedent to the repurchase, the Company granted
the SBA a liquidating interest in a newly created restricted
capital surplus account. The surplus account is equal to the
amount of the repurchase, less $14,373 of expenses incurred in
connection with the repurchase, and is being amortized over a
sixty (60) month period on a straight-line basis. Should the
Company be in default under the repurchase agreement at any time,
the liquidating interest will become fixed at the level
immediately preceding the event of default and will not decline
further until such time as the default has been cured or waived.
The liquidating interest will expire on the later of (i) sixty
(60) months from the date of the repurchase agreement, or (ii) if
any event of default has occurred and such default has been cured
or waived, such later date on which the liquidating interest is
fully amortized.
Should the Company voluntarily or involuntarily liquidate prior to
the amortization of the liquidating interest, any assets which are
available, after the payment of all debts of the Company, shall be
distributed first to the SBA until the amount of the then
remaining liquidating interest has been distributed to the SBA.
Such payment, if any, would be prior in right to any payments made
to the Company's shareholders.
NOTE 9 DIVIDENDS
Dividends paid to the SBA for each of the fiscal years ended May
31, 1996 and 1995 were $56,400 and $45,092, respectively. Total
dividends paid to common stockholders for the fiscal years ended
May 31, 1996, 1995 and 1994 were $296,106, $296,108 and $263,206
respectively. The Company is contingently liable to the SBA for
$23,500 in preferred dividends due for the five months ended
F-10
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 1996 AND 1995
May 31, 1996. Effective May 31, 1996, and for the five month
period then ended, the Board of Directors declared a three percent
dividend to holders of common stock totaling $98,702. This
dividend will be paid in August, 1996.
NOTE 10 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
participant's compensation. Total contributions made for the
fiscal years ended May 31, 1996, 1995 and 1994 were $16,180,
$17,942 and $18,073 respectively. All contributions to the plan
have been funded on a current basis.
NOTE 11 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 12 STOCKHOLDERS' EQUITY -- PRIVATE PLACEMENT
Effective April 21, 1992, pursuant to a private placement, the
Company sold 56,304 shares of common stock at a price of $12 per
share to accredited investors. Total capital raised was $675,648
less private placement costs of $16,274, including $9,660 paid
during the six months ended November 30, 1992. Substantially all
of the proceeds were used to repurchase the 1,520,000 shares of
its $1 par value, 3% Preferred Stock held by the SBA and to make
additional investments. The net proceeds received also enabled the
Company to obtain additional leverage from the SBA in the form of
preferred stock and debentures.
Pursuant to SBA regulations, all SSBIC's issuing debentures
subsequent to April 25, 1994 were required to amend their
certificates 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 to take such action in the event of the occurrence of
certain events of default. Effective November, 1994, the Company
amended its certificate of incorporation in accordance with the
relevant provisions of the SBA regulations.
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 will also provide 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 will be to increase the 274,172
issued and outstanding shares of common stock to 548,344 shares.
The Board of Directors has approved a two for one stock split with
respect to the Company's shares of Common Stock which shall be
effective immediately prior to the effective date of this
registration statement. The effect of the stock split will be to
increase the 548,344 issued and outstanding shares of common stock
to 1,098,688 shares.
F-11
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 1996 AND 1995
NOTE 12 STOCKHOLDERS' EQUITY -- PRIVATE PLACEMENT (Continued)
The Stockholders' Equity section of the financial statements is
presented after giving effect to an amendment to the certificate
of incorporation which was filed in January, 1996, and the October
1996 two for one stock split.
NOTE 13 RELATED PARTY TRANSACTION
The Company currently leases office space from a real estate
partnership, whose partners consist of certain officers and
directors of the Company, for $1,500 per month plus certain
extraordinary operating expenses. The lease expires in November,
1997 with a minimum annual rental of $18,000. Total rental expense
under this lease was $18,000, $18,000 and $26,700 for the years
ended May 31, 1996, 1995 and 1994 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 each of the fiscal years ended May 31, 1996,
1995 and 1994, $159,661 in officers' salaries, including pension
contributions, were paid.
NOTE 14 SIGNIFICANT CONCENTRATION OF CREDIT RISK
Approximately seventy four (74%) 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 15 FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISKS
The Company maintained approximately $267,468 in one bank in
excess of amounts that would be insured by the Federal Depository
Insurance Corporation.
NOTE 16 SUBSEQUENT EVENTS
The Company intends to file a registration statement with the
Securities and Exchange Commission to sell up to 1,000,000 shares
of common stock , at a public offering price of $5.00 per common
share, for an aggregate offering price of $5,000,000.
Effective June, 1996, the Company foreclosed on one of its loans.
The total value of the loan including past due interest is
$182,864. The loan is collateralized by real estate. The Company
anticipates to recover the entire balance outstanding including
past due interest.
Effective June 26, 1996 the Company refinanced two $120,000
debentures due May 14, 1996 with a $250,000 unsubsidized
debenture, with a fixed rate of 7.71%. Such unsubsidized debenture
matures June 1, 2006.
NOTE 17 COMMITMENTS AND CONTINGENCIES
Minimum future lease obligations on the Company's long term
non-cancelable operating lease will total $27,000 over the
remaining eighteen (18) months of the lease term ending November,
1997.
During the fiscal year ended May 31, 1996, Scott Printing filed a
lawsuit against the Company. Scott Printing is seeking an
approximate amount of $50,000 for printing work performed during
the Company's proposed public offering. The Company is contesting
the amount claimed and intends to vigorously defend the action. As
such, no amounts have been presented in the financial statements.
F-12
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
SUPPLEMENTAL SCHEDULES
MAY 31, 1996
<TABLE>
<CAPTION>
SCHEDULE I -- LOANS RECEIVABLE
Number Balance
of Maturity Outstanding
Type of Loan Loans Interest Rate Date May 31, 1996
- - ------------ ------ ------------ -------- -------------
<S> <C> <C> <C> <C>
NYC Taxi Medallions......................... 142 10.75%-15.00% 1-7 yrs. $6,352,777
Services.................................... 1 14.50%-15.00% 1-7 yrs. 94,717
Auto Repair Service......................... 8 10.00%-15.00% 1-4 yrs. 687,565
Auto Dealership............................. 1 12.00% 1 yr. 69,830
Renovation and Construction................. 1 10.50% 5 yrs. 134,852
Retail Establishments....................... 3 11.25%-12.50% 1-4 yrs. 306,557
Restaurants................................. 3 9.00%-15.00% 1-9 yrs. 214,669
Gasoline Service Stations................... 3 9.375%-10.00% 1 yr. 286,616
Manufacturing............................... 1 15.00 1 yr. 151,572
Laundromats and Dry Cleaners................ 5 12.00%-15.00% 1-4 yrs. 158,630
Medical Offices............................. 2 11.63%-15.00% 1-3 yrs. 118,052
Video Rentals............................... 1 14.00% 6 yrs. 22,178
--- ---------
TOTAL LOANS................................. 171 $8,598,015
=== =========
</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, 1994............................. $34,488 7.63% $634,489 $280,322
May 31, 1995............................. $ 5,000 9.45% $ 34,489 $ 17,361
May 31, 1996............................. $-- 9.29% $ 5,000 $ 2,500
</TABLE>
- - ----------
(1) Computed based on weighted average of amount outstanding during the period.
(2) The Company did not renew its Line of Credit.
F-13
<PAGE>
FRESHSTART VENTURE CAPITAL CORP.
SUPPLEMENTARY INFORMATION
SELECTED PER SHARE DATA AND RATIOS
FOR THE FIVE YEARS ENDED
MAY 31, 1992, 1993, 1994, 1995, AND 1996
<TABLE>
<CAPTION>
For the Years Ended May 31,
-----------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
----------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Per Share Data
Investment Income .................. $ 1.28 $ 1.00 $ .95 $ .92 $ .94
Investment Expenses ................ (.91) (.60) (.62) (.61) (.58)
----------- ------------- ------------- ------------- -------------
Net Investment Income .............. .37 .40 .33 .31 (.36)
Net Realized and Unrealized
Gains and Losses on
Securities ....................... (.15) (.08) (.07) -- (.03)
Private Placement Costs ............ -- (.01) -- -- --
Gain on Preferred Stock
Buy Back ......................... -- .30 -- -- --
Dividends-- Common Stock ........... (.17) (.30) (.24) (.27) (.27)
Dividends-- Preferred Stock ........ (.03) (.02) (.02) (.04) (.06)
Sale of Common Stock ............... .62 -- -- -- --
----------- ------------- ------------- ------------- -------------
Net Increase/Decrease
in Net Asset Value ............... .64 .29 -- -- --
Net Asset Value-- Beginning
of Period ........................ 1.95 2.59 2.88 2.88 $ 2.88
----------- ------------- ------------- ------------- -------------
Net Asset Value -- End of
Year ............................. $ 2.59(1) $ 2.88(1) $ 2.88(1) $ 2.88 $ 2.88(1)
=========== ============= ============= ============= =============
Net Asset Value -- End of
Year Excluding Retained
Earnings (2) ..................... $ 2.58(1) $ 2.88(1) $ 2.88(1) $ 2.88 $ 2.88(1)
=========== ============= ============= ============= =============
Ratios
Ratio of Expenses to
Average Net Assets ............... 24.2% 23.4% 23.7% 21.0% 21.4%
=========== ============= ============= ============= =============
Ratio of Net Income to
Average Net Assets ............... 5.1% 11.3% 9.2% 10.7% 11.2%
=========== ============= ============= ============= =============
Weighted Average of Common
Shares Outstanding ............... 857,732 1,096,688 1,096,688 1,096,688 1,096,688
=========== ============= ============= ============= =============
</TABLE>
- - ----------
(1) The net asset value includes the unamortized portion of the realized gain
from the repurchase of three (3%) percent stock and the undistributed
retained earnings at the end of the period. The unamortized balance
remaining in the preferred restricted capital account is $381,999.
(2) Excluded undistributed retained earnings at the end of the period.
F-14
<PAGE>
================================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representation other than those contained in this
Prospectus in connection with the offer made by this Prospectus, and if given or
made, such information or representations must not be relied upon as having been
authorized by the Company or the Underwriters. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that there has been no change in the affairs of the Company at
any time subsequent to the date hereof. However, if any material change occurs
while this Prospectus is required by law to be delivered, this Prospectus will
be amended or supplemented accordingly. This Prospectus does not constitute an
offer to sell or a solicitation of an offer to buy by anyone in any jurisdiction
in which such offer to sell or a solicitation is not authorized, or in which the
person making such offer or solicitation is not authorized, or in which the
person making such offer or solicitation is not qualified to do so, or to any
person to whom it is unlawful to make such offer or solicitation.
----------
TABLE OF CONTENTS
Page
---
Prospectus Summary ......................... 3
Risk Factors ............................... 7
Use of Proceeds ............................ 12
Capitalization ............................. 13
Dividend Policy ............................ 14
Dilution ................................... 15
Business ................................... 16
Management ................................. 24
Conflict of Interests ...................... 26
Certain Transactions ....................... 27
Security Ownership of Principal Stockholders
and Management ........................... 28
Investment Policies ........................ 29
Federal Regulation ......................... 30
Tax Considerations ......................... 34
Description of Capital Stock and
Long-Term Debt ........................... 37
Underwriting ............................... 39
Legal Matters .............................. 40
Experts .................................... 40
Custodian .................................. 40
Additional Information ..................... 40
Table of Contents .......................... F-1
Until 25 days after the Closing, all dealers effecting transactions in the
registered securities, whether or not participating in this distribution, may be
required to deliver a Prospectus. This is in addition to the obligation of
dealers to deliver a Prospectus when acting as underwriters and with respect to
their unsold allotments or subscriptions.
================================================================================
================================================================================
Freshstart
Venture Capital Corp.
1,000,000 Shares
Common Stock
________________
PROSPECTUS
________________
Suppes Securities, Inc.
S. D. Cohn & Co., Inc.
Marlowe & Company
October , 1996
================================================================================
<PAGE>
PART II
Item 29. Marketing Arrangements.
Incorporated by reference to the inside cover page of the Prospectus and to
the text of the Prospectus under the caption "PLAN OF DISTRIBUTION".
Item 30. Other Expenses of Issuance and Distribution.
The estimated expenses in connection with the issuance and distribution of
the securities being registered, other than underwriting discounts and
commissions, are as follows:
SEC Registration Fee................................ $ 4,191.38
Legal fees and expenses............................. 300,000.00
Accounting fees and expenses........................ 65,000.00
Blue Sky fees and expenses.......................... 54,000.00
Transfer Agent's fees............................... 7,500.00
Printing expenses................................... 75,000.00
Miscellaneous....................................... 13,308.62
-----------
Total............................................... $519,000.00
===========
Item 31. Relationship with Registrant of Experts Named in Registration
Statement.
None.
Item 32. Recent Sales of Unregistered Securities.
In May 1992, the Company sold 56,304 shares of its Common Stock at $12 per
share, an aggregate of $675,648 in a private placement pursuant to Rule 506 of
Regulation D promulgated under the Securities Act of 1933, as amended (the
"Securities Act"). Such sales were made to "accredited investors" as that term
is defined under Rule 501(a) of Regulation D. Offers and sales were made by the
officers and directors of the Company. No commissions were paid in connection
with the sales.
In July 1992, the Company sold 650,000 shares of its 4% Preferred Stock, $1
par value, to the SBA for an aggregate of $650,000 pursuant to Section 4(2) of
the Securities Act.
In December 1992, the Company sold $1,300,000 of subordinated debentures
which were guaranteed by the SBA and sold through the SBIC Funding Corp.
pursuant to Section 4(2) of the Securities Act.
In October 1994, the Company sold 760,000 shares of its 4% Preferred Stock,
$1 par value, to the SBA for an aggregate of $760,000 pursuant to Section 4(2)
of the Securities Act.
In June 1995, the Company refinanced a debenture due June 20, 1995 in the
principal amount of $500,000 with a debenture due June 1, 2005 in the principal
amount of $520,000.
In December 1995, the Company refinanced a debenture due December 15, 1995
in the principal amount of $500,000 with a debenture due December 1, 2005 in the
principal amount of $520,000.
Item 33. Treatment of Proceeds from Stock Being Registered.
Not applicable.
Item 34. Undertaking.
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
II-1
<PAGE>
Item 35. Financial Statements and Exhibits.
(a) Financial Statements.
Reference is made to "FINANCIAL STATEMENTS" included in Part II of the
Registration Statement.
(b) Exhibits.
<TABLE>
<CAPTION>
Exhibits Page
-------- ----
<S> <C> <C>
(1.1)* --Certificate of Incorporation of Registrant, as amended through November 24, 1987 (Exhibit 1 to
Amendment No. 2 to Registrant's Registration Statement on Form N-5 filed January 5, 1988 (File
No. 33-15890) are incorporated by reference herein.
(1.2)* --Amendments to the Certificate of Incorporation of Registrant from November 25, 1987 through May
11, 1993 (Exhibit 1.2 to Registrant's Registration Statement on Form N-5 filed November 18,
1994 (File No. 33-86518)) are incorporated by reference herein.
(1.3)* --Amendment to Certificate of Incorporation of Registrant filed November 17, 1994.
(1.4)* --Form of Amendment to Certificate of Incorporation of Registrant.
(2.1)* --By-laws of Registrant, as amended.
(3.1)* --Specimen of share of Common Stock, $.01 par value, of Registrant.
(4) --None.
(5) --None.
(6) --None.
(7.1)* --Defined Contribution Plan of Registrant (Exhibit 7.1 to Registrant's Registration
Statement on Form N-5 filed November 18, 1994 (File No. 33-86518)) is incorporated by
reference herein.
(8.1)* --Copy of Registrant's license from the Small Business Administration (Exhibit 4.(a). to
the Registrant's Registration Statement on Form N-5 filed July 17, 1987 (File No.
33-15890)) is incorporated by reference herein.
(9.1)* --Letter of Intent dated as of December 1, 1992 by and between Registrant and the U.S.
Small Business Administration (Exhibit 9.1 to Registrant's Registration Statement on
Form N-5 filed November 18, 1994 (File No. 33-86518)) is incorporated by reference
herein.
(9.2)* --Loan Agreement dated January 15, 1995 between Registrant and Extebank.
(9.3)* --Form of Employment Agreement to be entered into between the Registrant and Zindel
Zelmanovitch.
(9.4)* --Form of Employment Agreement to be entered into between the Registrant and Neil Greenbaum.
(9.5)* --Lease dated October 1, 1994 by and between Registrant and 313 West 53rd Street
Association.
(10.1) --Form of Underwriting Agreement relating to the offering of shares.
(11.1)* --Opinion of Stursberg & Veith as to the legality of the securities being registered
hereunder and the issuance thereof.
(12.1) --Consent of Michael C. Finkelstein, Certified Public Accountants.
(13.1)* --Code of Ethics of Registrant (Exhibit 8 to the Registrant's Registration Statement on
Form N-5 filed July 17, 1987 (File No. 33-15890)) is incorporated by reference.
(14.1) --Form of Representative Warrant Agreement.
(15.1) --Form of Consulting Agreement.
(16.1) --Form of Stock Option Plan.
(17.1) --Financial Data Schedule.
</TABLE>
- - ----------
* Previously filed or incorporated by reference.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the registrant has duly caused this
Post-Effective Amendment No. 3 and Amendment No. 7, respectively, to this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York, and State of New York, on the 16th day
of October 1996.
FRESHSTART VENTURE CAPITAL CORP.
(Registrant)
By: /s/ NEIL GREENBAUM
----------------------------------
Neil Greenbaum, Secretary
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ ZINDEL ZELMANOVITCH* President and Director October 16, 1996
- - -----------------------------------------
Zindel Zelmanovitch
/s/ PEARL GREENBAUM* Vice President and Director October 16, 1996
- - -----------------------------------------
Pearl Greenbaum
/s/ NEIL GREENBAUM Secretary and Director October 16, 1996
- - -----------------------------------------
Neil Greenbaum
/s/ BARBARA JOY HAMILL* Director October 16, 1996
- - -----------------------------------------
Barbara Joy Hamill
/s/ MICHAEL MOSKOWITZ* Director October 16, 1996
- - -----------------------------------------
Michael Moskowitz
/s/ EUGENE HABER Director October 16, 1996
- - -----------------------------------------
Eugene Haber
/s/ ALAN WORK* Director October 16, 1996
- - -----------------------------------------
Alan Work
*By: /s/ NEIL GREENBAUM
----------------------------------
Neil Greenbaum, Attorney-In-Fact
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibits Page
-------- ----
<S> <C> <C> <C>
(1.1)* Certificate of Incorporation of Registrant, as amended through November 24, 1987
(Exhibit 1 to Amendment No. 2 to Registrant's Registration Statement on Form N-5 filed
January 5, 1988 (File No. 33-15890) are incorporated by reference herein.
(1.2)* Amendments to the Certificate of Incorporation of Registrant
from November 25, 1987 through May 11, 1993 (Exhibit 1.2 to
Registrant's Registration Statement on Form N-5 filed November
18, 1994 (File No. 33-86518)) are incorporated by reference
herein.
(1.3)* Amendment to Certificate of Incorporation of Registrant filed November 17, 1994.
(1.4)* Form of Amendment to Certificate of Incorporation of Registrant.
(2.1)* By-laws of Registrant, as amended.
(3.1)* Specimen of share of Common Stock, $.01 par value, of Registrant.
(4) None.
(5) None.
(6) None.
(7.1)* Defined Contribution Plan of Registrant (Exhibit 7.1 to
Registrant's Registration Statement on Form N-5 filed November
18, 1994 (File No. 33-86518)) is incorporated by reference
herein.
(8.1)* Copy of Registrant's license from the Small Business Administration (Exhibit 4.(a).
to the Registrant's Registration Statement on Form N-5 filed July 17, 1987 (File No.
33-15890)) is incorporated by reference herein.
(9.1)* Letter of Intent dated as of December 1, 1992 by and between
Registrant and the U.S. Small Business Administration (Exhibit
9.1 to Registrant's Registration Statement on Form N-5 filed
November 18, 1994 (File No. 33-86518)) is incorporated by
reference herein.
(9.2)* Loan Agreement dated January 15, 1995 between Registrant and Extebank.
(9.3)* Form of Employment Agreement to be entered into between the Registrant and Zindel
Zelmanovitch.
(9.4)* Form of Employment Agreement to be entered into between the Registrant and Neil
Greenbaum.
(9.5)* Lease dated October 1, 1994 by and between Registrant and 313 West 53rd Street
Association.
(10.1) Form of Underwriting Agreement relating to the offering of shares.
(11.1)* Opinion of Stursberg & Veith as to the legality of the securities being registered
hereunder and the issuance thereof.
(12.1) Consent of Michael C. Finkelstein, Certified Public Accountants.
(13.1)* Code of Ethics of Registrant (Exhibit 8 to the Registrant's Registration Statement on
Form N-5 filed July 17, 1987 (File No. 33-15890)) is incorporated by reference.
(14.1) Form of Representative Warrant Agreement.
(15.1) Form of Consulting Agreement.
(16.1) Form of Stock Option Plan.
(17.1) Financial Data Schedule.
</TABLE>
- - ----------
* Previously filed or incorporated by reference.
Form of Underwriting Agreement
1,000,000 Shares of Common Stock
FRESHSTART VENTURE CAPITAL CORP.
UNDERWRITING AGREEMENT
New York, New York
November , 1996
Suppes Securities, Inc.
As Representative of the
several Underwriters listed on Schedule A hereto
2 Broadway
New York, New York 10004
Ladies and Gentlemen:
Freshstart Venture Capital Corp., a New York corporation (the "Company")
confirms its agreement with Suppes Securities, Inc. ("Suppes") and each of the
underwriters named in Schedule A hereto (collectively, the "Underwriters," which
term shall also include any underwriter substituted as hereinafter provided in
Section 11), for whom Suppes is acting as representative (in such capacity,
Suppes shall hereinafter be referred to as "you" or the "Representative"), with
respect to the sale by the Company and the purchase by the Underwriters, acting
severally and not jointly, of the respective numbers of shares ("Shares") of the
Company's common stock, $.01 par value per share ("Common Stock"), set forth in
Schedule A hereto. Such Shares are hereinafter referred to as the "Firm
Securities." Upon your request, as provided in Section 2(b) of this Underwriting
Agreement (the "Agreement"), the Company shall also sell to the Underwriters,
acting severally and not jointly, up to an additional 150,000 shares of Common
Stock for the purpose of covering over-allotments, if any. Such 150,000 Shares
are hereinafter referred to as the "Option Securities." The Firm Securities and,
the Option Securities are more fully described in the Registration Statement and
the Prospectus referred to below. Subject to the receipt of such approval, order
or exemptive relief as may be required under the Investment Company Act of 1940,
as amended (the "1940 Act"), the Company also proposes to issue to the
Representative or such persons as it may designate pursuant to the rules of the
National Association of Securities Dealers, Inc. the option (the
<PAGE>
"Representative's Warrant") referred to and defined in Section 13, to purchase
certain additional shares of Common Stock. The Firm Securities, the Option
Securities and the shares of Common Stock issuable upon exercise of the
Representative's Warrant are herein collectively called the "Securities".
1. Representations and Warranties. (a) The Company represents and warrants
to, and agrees with, each of the Underwriters as of the date hereof, and as of
the Closing Date (hereinafter defined) and the Option Closing Date (hereinafter
defined), if any, as follows:
(i) The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement, and an
amendment or amendments thereto, on Form N-5 (No. 33-86518) File No. 811-5169,
including any related preliminary prospectus ("Preliminary Prospectus"), for the
registration of the Firm Securities and the Option Securities under the
Securities Act of 1933, as amended, and the Investment Company Act of 1940, as
amended (collectively, the "Acts"), which registration statement and amendment
or amendments have been prepared by the Company in conformity with the
requirements of the Acts, and the Rules and Regulations of the Commission
thereunder. The Company will promptly file a further amendment to said
registration statement in the form heretofore delivered to the Underwriters and
will not, file any other amendment thereto to which the Underwriters shall have
objected in writing after having been furnished with a copy thereof. Except as
the context may otherwise require, such registration statement, as amended, on
file with the Commission at the time the registration statement becomes
effective (including the prospectus, financial statements, schedules, exhibits
and all other documents filed as a part thereof or incorporated therein
(including, but not limited to those documents or information incorporated by
reference therein) and all information deemed to be a part thereof as of such
time pursuant to paragraph (b) of Rule 430(A) of the rules and regulations), is
hereinafter called the "Registration Statement", and the form of prospectus in
the form first filed with the Commission pursuant to Rule 497 of the rules and
regulations, is hereinafter called the "Prospectus." For purposes hereof, "Rules
and Regulations" mean the rules and regulations adopted by the Commission under
either the Securities Act of 1933, as amended (the "Act"), the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), the 1940 Act or the
Investment Advisers Act of 1940, as amended (the "Advisers Act"), as applicable.
(ii) Neither the Commission nor any state regulatory authority has
issued any order preventing or suspending the use of any Preliminary Prospectus,
the Registration Statement or Prospectus or any part of any thereof and no
proceedings for a stop order suspending the effectiveness of the Registration
Statement or any of the Company's securities have been instituted or are pending
or threatened. Each of the Preliminary Prospectus, the Registration Statement
and Prospectus at the time of filing thereof conformed with the requirements of
the Acts and the Rules and Regulations, and none of the Preliminary Prospectus,
the Registration Statement or Prospectus at the time of filing thereof contained
an untrue statement of a material fact or omitted to state a material fact
required to be stated therein and necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, except
that this representation and warranty does not apply to statements made in
reliance upon
<PAGE>
and in conformity with written information furnished to the Company with respect
to the Underwriters by or on behalf of the Underwriters expressly for use in
such Preliminary Prospectus, Registration Statement or Prospectus. The Company
acknowledges that the only such information so furnished by the Underwriters is
the paragraph relating to stabilization on the inside front cover page of the
Prospectus and the statements under the caption "Underwriting" in the
Prospectus.
(iii) When the Registration Statement becomes effective and at all
times subsequent thereto up to the Closing Date and each Option Closing Date, if
any, and during such longer period as the Prospectus may be required to be
delivered in connection with sales by the Underwriters or a dealer, the
Registration Statement and the Prospectus will contain all statements which are
required to be stated therein in accordance with the Acts and the Rules and
Regulations, and will conform to the requirements of the Acts and the Rules and
Regulations; neither the Registration Statement nor the Prospectus, nor any
amendment or supplement thereto, contains or will contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, provided, however,
that this representation and warranty does not apply to statements made or
statements omitted in reliance upon and in conformity with information furnished
to the Company in writing by or on behalf of any Underwriter (as set forth in
paragraph 1(a)(ii) hereof) expressly for use in the Preliminary Prospectus,
Registration Statement or Prospectus or any amendment thereof or supplement
thereto.
(iv) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the state of its incorporation.
The Company does not own an equity interest in any corporation, partnership,
trust, joint venture or other business entity. The Company is not qualified as a
foreign corporation in any jurisdiction, there being no jurisdiction in which
failure to so qualify would have a material adverse effect upon the Company.
Except as set forth in the Prospectus, the Company has all requisite power and
authority (corporate and other), and has obtained any and all authorizations,
approvals, orders, licenses, certificates, franchises and permits of and from
all governmental or regulatory officials and bodies (including, without
limitation, those having jurisdiction over environmental or similar matters), to
own or lease its properties and conduct its business as described in the
Prospectus; the Company is and has been doing business in compliance with all
such authorizations, approvals, orders, licenses, certificates, franchises and
permits and all federal, state, local and foreign laws, rules and regulations,
and the Company has not received any notice of proceedings relating to the
revocation or modification of any such authorization, approval, order, license,
certificate, franchise, or permit which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would materially and
adversely affect the condition, financial or otherwise, or the earnings,
position, prospects, value, operation, properties, business or results of
operations of the Company. The disclosures in the Registration Statement
concerning the effects of federal, state, local, and foreign laws, rules and
regulations on the Company's business as currently conducted and as contemplated
are correct in all material
-3-
<PAGE>
respects and do not omit to state a material fact necessary to make the
statements contained therein not misleading in light of the circumstances in
which they were made.
(v) The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus, and will have the adjusted
capitalization set forth therein on the Closing Date and the Option Closing
Date, if any, based upon the assumptions set forth therein, and the Company is
not a party to or bound by any instrument, agreement or other arrangement
providing for it to issue any capital stock, rights, warrants, options or other
securities, except for this Agreement and as described in the Prospectus. The
Securities and all other securities issued or issuable by the Company conform
or, when issued and paid for, will conform, in all respects to all statements
with respect thereto contained in the Registration Statement and the Prospectus.
All issued and outstanding securities of the Company have been duly authorized
and validly issued and are fully paid and non-assessable and the holders thereof
have no rights of rescission with respect thereto, and are not subject to
personal liability under the laws of the State of New York as currently in
effect by reason of being such holders; and none of such securities were issued
in violation of the preemptive rights of any holders of any security of the
Company or similar contractual rights granted by the Company. The Securities are
not and will not be subject to any preemptive or other similar rights of any
stockholder, have been duly authorized and, when issued, paid for and delivered
in accordance with the terms hereof, will be validly issued, fully paid and
non-assessable and will conform to the description thereof contained in the
Prospectus; the holders thereof will not be subject to any liability under the
laws of the State of New York as currently in effect solely as such holders; all
corporate action required to be taken for the authorization, issue and sale of
the Securities has been duly and validly taken; and the certificates
representing the Securities are in due and proper form. Upon the issuance and
delivery pursuant to the terms hereof of the Securities to be sold by the
Company hereunder, the Underwriters will acquire good and marketable title to
such Securities free and clear of any lien, charge, claim, encumbrance, pledge,
security interest, defect or other restriction or equity of any kind whatsoever.
(vi) The financial statements of the Company together with the related
notes and schedules thereto, included in the Registration Statement, each
Preliminary Prospectus and the Prospectus fairly present the financial position,
changes in cash flow, changes in stockholders' equity and the results of
operations of the Company at the respective dates and for the respective periods
to which they apply and such financial statements have been prepared in
conformity with generally accepted accounting principles and the Rules and
Regulations, consistently applied throughout the periods involved. There has
been no material adverse change or development involving a material prospective
change in the condition, financial or otherwise, or net assets of the Company or
in the management, capital stock, investment objectives, investment policies,
earnings, liabilities, business affairs or business prospects of the Company
whether or not arising in the ordinary course of business, since the date of the
financial statements included in the Registration Statement and the Prospectus.
(vii) The Company (A) has paid all federal, state, local, and foreign
taxes for which it is liable, including, but not limited to, withholding taxes
and amounts payable under
-4-
<PAGE>
Chapters 21 through 24 of the Internal Revenue Code of 1986, as amended (the
"Code"), and has furnished all information returns it is required to furnish
pursuant to the Code, (B) has established adequate reserves for such taxes which
are not due and payable, and (C) does not have any tax deficiency or claims
outstanding, proposed or assessed against it.
(viii) No transfer tax, stamp duty or other similar tax is payable by
or on behalf of the Underwriters in connection with (A) the issuance by the
Company of the Securities or the Representative's Warrants, (B) the purchase by
the Underwriters of the Securities from the Company, (C) the consummation by the
Company of any of its obligations under this Agreement, or (D) resales of the
Securities in connection with the distribution contemplated hereby.
(ix) The Company maintains insurance policies, including, but not
limited to, general liability and property insurance, which insures the Company
and its employees, against such losses and risks generally insured against by
comparable businesses. The Company (A) has not failed to give notice or present
any insurance claim with respect to any matter, including but not limited to the
Company's business, property or employees, under the insurance policy or surety
bond in a due and timely manner, (B) does not have any disputes or claims
against any underwriter of such insurance policies or surety bonds or has not
failed to pay any premiums due and payable thereunder, or (C) has not failed to
comply with all conditions contained in such insurance policies and surety
bonds. There are no facts or circumstances under any such insurance policy or
surety bond which would relieve any insurer of its obligation to satisfy in full
any valid claim of the Company.
(x) There is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental proceeding (including, without
limitation, those having jurisdiction over environmental or similar matters),
domestic or foreign, pending or threatened against (or circumstances that may
give rise to the same), or involving the properties or business of the Company
which (A) questions the validity of the capital stock of the Company or this
Agreement or of any action taken or to be taken by the Company pursuant to or in
connection with this Agreement, (B) is required to be disclosed in the
Registration Statement which is not so disclosed (and such proceedings as are
summarized in the Registration Statement are accurately summarized in all
material respects), or (C) except as set forth in the Prospectus, if adversely
determined, might materially and adversely affect the condition, financial or
otherwise, or the business affairs or business prospects, earnings, liabilities,
prospects, stockholders' equity, value, properties, business or assets of the
Company.
(xi) The Company has full legal right, power and authority to
authorize, issue, deliver and sell the Securities, the Representative's Warrant,
enter into this Agreement, and to consummate the transactions provided for
herein and therein (subject, with respect to the issuance of the
Representative's Warrant and the shares of Common Stock issuable upon exercise
of the Representative's Warrant to receipt of such approval, order or exemptive
relief as may be required under the 1940 Act); and this Agreement and the
Representative's Warrant each has been duly and properly authorized, executed
and delivered by the Company. Subject with
<PAGE>
respect to the issuance of the Representative's Warrant and the shares of Common
Stock issuable upon exercise of the Representative's Warrant to receipt of such
order or exemptive relief as may be required under the 1940 Act, this agreement
and the Representative's Warrant each constitutes a legal, valid and binding
agreement of the Company enforceable against the Company in accordance with its
terms, and neither the Company's issue and sale of the Securities or execution
or delivery of this Agreement and the Representative's Warrant, its performance
hereunder and thereunder, its consummation of the transactions contemplated
herein and therein, or the conduct of its business as described in the
Registration Statement, the Prospectus, and any amendments or supplements
thereto, conflicts with or will conflict with or results or will result in any
breach or violation of any of the terms or provisions of, or constitutes or will
constitute a default under, or result in the creation or imposition of any lien,
charge, claim, encumbrance, pledge, security interest, defect or other
restriction or equity of any kind whatsoever upon, any property or assets
(tangible or intangible) of the Company pursuant to the terms of, (A) the
certificate of incorporation or by-laws of the Company, (B) any license,
contract, indenture, mortgage, deed of trust, voting trust agreement,
stockholders agreement, note, loan or credit agreement or any other agreement or
instrument to which the Company is a party or by which it is or may be bound or
to which its properties or assets (tangible or intangible) is or may be subject,
or any indebtedness, or (C) any statute, judgment, decree, order, rule or
regulation applicable to the Company of any arbitrator, court, regulatory body
or administrative agency or other governmental agency or body (including,
without limitation, those having jurisdiction over environmental or similar
matters), domestic or foreign, having jurisdiction over the Company or any of
its activities or properties, in each case except for conflicts, breaches,
violations, defaults, creations or impositions which do not and would not have a
material adverse effect on the Company.
(xii) Except as described in the Prospectus, no consent, approval,
authorization or order of, and no filing with, any court, regulatory body,
government agency or other body, domestic or foreign, is required for the
issuance of the Securities pursuant to the Prospectus and the Registration
Statement, the execution, delivery or performance of this Agreement and the
Representative's Warrant and the transactions contemplated hereby, including
without limitation, any waiver of any preemptive, first refusal or other rights
that any entity or person may have for the issue and/or sale of any of the
Securities, except such as have been or may be obtained under the Acts or may be
required under state securities or Blue Sky laws in connection with the
Underwriters' purchase and distribution of the Securities, to be sold by the
Company hereunder.
(xiii) All executed agreements, contracts or other documents or copies
of executed agreements, contracts or other documents filed as exhibits to the
Registration Statement to which the Company is a party or by which it may be
bound or to which its assets, properties or business may be subject have been
duly and validly authorized, executed and delivered by the Company and
constitute the legal, valid and binding agreements of the Company, enforceable
against the Company, in accordance with their respective terms. The descriptions
in the Registration Statement of agreements, contracts and other documents and
statutes and regulations are accurate and fairly present the information
required to be shown with respect thereto by
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<PAGE>
Form N-5, and there are no contracts or other documents which are required by
the Acts to be described in the Registration Statement or filed as exhibits to
the Registration Statement which are not described or filed as required, and the
exhibits which have been filed are complete and correct copies of the documents
of which they purport to be copies.
(xiv) Subsequent to the respective dates as of which information is
set forth in the Registration Statement and Prospectus, and except as may
otherwise be indicated or contemplated herein or therein, the Company has not
(A) issued any securities or incurred any liability or obligation, direct or
contingent, for borrowed money, (B) entered into any transaction other than in
the ordinary course of business, or (C) declared or paid any dividend or made
any other distribution on or in respect of its capital stock of any class, and
there has not been any change in the capital stock, or any change in the debt
(long or short term) or liabilities or material adverse change in or affecting
the business affairs or prospects, management, stockholders' equity, properties,
business or assets of the Company.
(xv) No default exists in the due performance and observance of any
term, covenant or condition of any license, contract, indenture, mortgage,
installment sale agreement, lease, deed of trust, voting trust agreement,
stockholders agreement, partnership agreement, note, loan or credit agreement,
purchase order, or any other material agreement or instrument evidencing an
obligation for borrowed money, or any other material agreement or instrument to
which the Company is a party or by which the Company may be bound or to which
the property or assets (tangible or intangible) of the Company is subject or
affected, which default would have a material adverse effect on the Company.
(xvi) Neither the Company nor any of its employees, directors,
stockholders, or affiliates (within the meaning of the Rules and Regulations) of
any of the foregoing has taken or will take, directly or indirectly, any action
designed to or which has constituted or which might be expected to cause or
result in, under the Exchange Act, or otherwise, stabilization or manipulation
of the price of any security of the Company to facilitate the sale or resale of
the Securities.
(xvii) The Company has good and marketable title to, or valid and
enforceable leasehold estates in, all items of real and personal property stated
in the Prospectus, to be owned or leased by it free and clear of all liens,
charges, claims, encumbrances, pledges, security interests, defects, or other
restrictions or equities of any kind whatsoever, other than those referred to in
the Prospectus and liens for taxes not yet due and payable.
(xviii) Michael C. Finkelstein, Certified Public Accountants, whose
report is filed with the Commission as a part of the Registration Statement, are
independent certified public accountants as required by the Acts and the Rules
and Regulations.
(xix) The Company has caused to be duly executed legally binding and
enforceable agreements pursuant to which each of its officers, directors and
current stockholders who beneficially owns in excess of five percent of the
issued and outstanding shares of Common
-7-
<PAGE>
Stock (collectively, the "Principal Stockholders") has agreed not to, directly
or indirectly, offer to sell, sell, grant any option for the sale of, assign,
transfer, pledge, hypothecate or otherwise encumber or dispose of any shares of
Common Stock (either pursuant to Rule 144 of the Rules and Regulations or
otherwise) or dispose of any beneficial interest therein for a period of not
less than 18 months following the effective date of the Registration Statement
without the prior written consent of the Representative and that any Common
Stock to be sold or otherwise disposed of with the consent of the Representative
shall only be sold or otherwise disposed of through the Representatives. The
Company will cause the Transfer Agent, as defined below, to mark an appropriate
legend on the face of stock certificates representing all of such securities and
to place "stop transfer" orders on the Company's stock ledgers.
(xx) There are no claims, payments, issuances, arrangements or
understandings, whether oral or written, for services in the nature of a
finder's or origination fee with respect to the sale of the Securities hereunder
or any other arrangements, agreements, understandings, payments or issuance with
respect to the Company, or any of its officers, directors, stockholders,
partners, employees or affiliates that may affect the Underwriters'
compensation, as determined by the National Association of Securities Dealers,
Inc. ("NASD") and the Company is aware that the Representatives shall compensate
any of their respective personnel who may have acted in such capacities as they
shall determine in their sole discretion.
(xxi) The Securities have been approved for quotation on the National
Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ").
(xxii) Neither the Company, nor any of its officers, employees, agents
or any other person acting on behalf of the Company has, directly or indirectly,
given or agreed to give any money, gift or similar benefit (other than legal
price concessions to customers in the ordinary course of business) to any
customer, supplier, employee or agent of a customer or supplier, or official or
employee of any governmental agency (domestic or foreign) or instrumentality of
any government (domestic or foreign) or any political party or candidate for
office (domestic or foreign) or other person who was, is, or may be in a
position to help or hinder the business of the Company (or assist the Company in
connection with any actual or proposed transaction) which (A) might subject the
Company, or any other such person to any damage or penalty in any civil,
criminal or governmental litigation or proceeding (domestic or foreign), (B) if
not given in the past, might have had a materially adverse effect on the assets,
business or operations of the Company, or (C) if not continued in the future,
might adversely affect the assets, business, operations or prospects of the
Company. The Company's internal accounting controls are sufficient to cause the
Company to comply with the Foreign Corrupt Practices Act of 1977, as amended.
(xxiii) Except as set forth in the Prospectus, no officer, director,
or stockholder of the Company, or any "affiliate" or "associate" (as these terms
are defined in Rule 405 promulgated under the Rules and Regulations) of any of
the foregoing persons or entities has or has had, either directly or indirectly,
(A) an interest in any person or entity which (1) furnishes or sells services or
products which are furnished or sold
-8-
<PAGE>
by the Company, or (2) purchases from or sells or furnishes to the Company any
goods or services, or (B) a beneficiary interest in any contract or agreement to
which the Company is a party or by which it may be bound or affected. Except as
set forth in the Prospectus under "Certain Transactions," there are no existing
agreements, arrangements, understandings or transactions, or proposed
agreements, arrangements, understandings or transactions, between or among the
Company, and any officer, director, Principal Stockholder (as such term is
defined in the Prospectus) of the Company, or any partner, affiliate or
associate of any of the foregoing persons or entities.
(xxiv) Any certificate signed by any officer of the Company and
delivered to the Underwriters or to Underwriters' Counsel (as defined herein)
shall be deemed a representation and warranty by the Company to the Underwriters
as to the matters covered thereby.
(xxv) The minute books of the Company have been made available to the
Underwriters and contains a complete summary of all meetings and actions of the
directors and stockholders of the Company, since the time of its incorporation,
and reflects all transactions referred to in such minutes accurately in all
material respects.
(xxvi) Except and to the extent described in the Prospectus, no
holders of any securities of the Company have the right to include any
securities issued by the Company in the Registration Statement or any
registration statement to be filed by the Company or to require the Company to
file a registration statement under the Acts and no person or entity holds any
anti-dilution rights with respect to any securities of the Company.
(xxvii) The Company is registered with the Commission under the 1940
Act as an investment company. The Company is, and at all times through the
Closing Date and the Option Closing Date, each as hereinafter defined, if any,
will be, in compliance with the terms and provisions of the Acts in all material
respects. No person is serving or acting as an officer or director of, or
investment adviser to, the Company except in accordance with the provisions of
the 1940 Act, the Advisers Act, and the Rules and Regulations thereunder.
(xxviii) The Company has purchased "key-man" life insurance policies
on the life of Zindel Zelmanovitch and Neil Greenbaum of which the Company is
the sole beneficiary, on terms and conditions satisfactory to the
Representative.
(xxix) The Company has entered into employment agreements with Zindel
Zelmanovitch, Neil Greenbaum and Pearl Greenbaum on terms and conditions
satisfactory to the Representative.
2. Purchase, Sale and Delivery of the Securities
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to sell to each Underwriter, and each Underwriter,
severally and not jointly, agrees to purchase
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<PAGE>
from the Company at a price of $_______ per Share, that number of Firm
Securities set forth in Schedule A opposite the name of such Underwriter,
subject to such adjustment as the Representative in its sole discretion shall
make to eliminate any sales or purchases of fractional shares, plus any
additional number of Firm Securities which such Underwriter may become obligated
to purchase pursuant to the provisions of Section 11 hereof.
(b) In addition, on the basis of the representations, warranties,
covenants and agreements, herein contained, but subject to the terms and
conditions herein set forth, the Company hereby grants an option to the
Underwriters, severally and not jointly, to purchase all or any part of an
additional 150,000 shares of Common Stock at a price of $______ per Share. The
option granted hereby will expire 45 days after (i) the date the Registration
Statement becomes effective, if the Company has elected not to rely on Rule 430A
under the Rules and Regulations, or (ii) the date of this Agreement if the
Company has elected to rely upon Rule 430A under the Rules and Regulations, and
may be exercised in whole or in part from time to time only for the purpose of
covering over-allotments which may be made in connection with the offering and
distribution of the Firm Securities upon notice by the Representatives to the
Company setting forth the number of Option Securities as to which the several
Underwriters are then exercising the option and the time and date of payment and
delivery for any such Option Securities. Any such time and date of delivery (an
"Option Closing Date") shall be determined by the Representative, but shall not
be later than seven full business days after the exercise of said option, nor in
any event prior to the Closing Date, as hereinafter defined, unless otherwise
agreed upon by the Representative and the Company. Nothing herein contained
shall obligate the Underwriters to make any over-allotments. No Option
Securities shall be delivered unless the Firm Securities shall be simultaneously
delivered or shall theretofore have been delivered as herein provided.
(c) Payment of the purchase price for, and delivery of certificates
evidencing the Firm Securities shall be made at the offices of Suppes
Securities, Inc., 225 Park Avenue, New York, New York 10169, or at such other
place as shall be agreed upon by the Representative and the Company. Such
delivery and payment shall be made at 10:00 a.m. (New York City time) on
November __, 1996 or at such other time and date as shall be agreed upon by the
Representative and the Company, but not less than five (5) nor more than ten
(10) full business days after the effective date of the Registration Statement
(such time and date of payment and delivery being herein called "Closing Date").
In addition, in the event that any or all of the Option Securities are purchased
by the Underwriters, payment of the purchase price for, and delivery of
certificates for, such Option Securities shall be made at the above mentioned
office of the Representative or at such other place as shall be agreed upon by
the Representative and the Company on each Option Closing Date as specified in
the notice from the Representative to the Company. Delivery of the certificates
for the Firm Securities and the Option Securities, if any, shall be made to the
Underwriters against payment by the Underwriters, severally and not jointly, of
the purchase price for the Firm Securities and the Option Securities, if any, to
the order of the Company by New York Clearing House Funds. In the event such
option is exercised, each of the Underwriters, acting severally and not jointly,
shall purchase that proportion of the total number of Option Securities then
being purchased which the number of
-10-
<PAGE>
Firm Securities set forth in Schedule A hereto opposite the name of such
Underwriter bears to the total number of Firm Securities, subject in each case
to such adjustments as the Representative in its discretion shall make to
eliminate any sales or purchases of fractional shares. Certificates for the Firm
Securities and the Option Securities, if any, shall be in definitive, fully
registered form, shall bear no restrictive legends and shall be in such
denominations and registered in such names as the Underwriters may request in
writing at least two (2) business days prior to Closing Date or the relevant
Option Closing Date, as the case may be. The certificates for the Firm
Securities and the Option Securities, if any, shall be made available to the
Representative at such office or such other place as the Representative may
designate for inspection, checking and packaging no later than 9:30 a.m. on the
last business day prior to Closing Date or the relevant Option Closing Date, as
the case may be.
3. Public Offering of the Shares. As soon after the Registration Statement
becomes effective as the Representative deems advisable, the Underwriters shall
make a public offering of the Shares (other than to residents of or in any
jurisdiction in which qualification of the Shares is required and has not become
effective) at the price and upon the other terms set forth in the Prospectus.
The Representative may from time to time increase or decrease the public
offering price after distribution of the Shares has been completed to such
extent as the Representative, in its sole discretion deems advisable. The
Underwriters may enter into one of more agreements as the Underwriters, in each
of their sole discretion, deem advisable with one or more broker-dealers who
shall act as dealers in connection with such public offering.
4. Covenants and Agreements of the Company. The Company covenants and
agrees with each of the Underwriters as follows:
(a) The Company shall use its best efforts to cause the Registration
Statement and any amendments thereto to become effective as promptly as
practicable and will not at any time, whether before or after the effective date
of the Registration Statement, file any amendment to the Registration Statement
or supplement to the Prospectus or file any document under the Acts or Exchange
Act before termination of the offering of the Shares by the Underwriters of
which the Representatives shall not previously have been advised and furnished
with a copy, or to which the Representatives shall have objected or which is not
in compliance with the Acts, the Exchange Act or the Rules and Regulations.
(b) As soon as the Company is advised or obtains knowledge thereof,
the Company will advise the Representatives and confirm the notice in writing,
(i) when the Registration Statement, as amended, becomes effective, if the
provisions of Rule 497 promulgated under the Act will be relied upon, when the
Prospectus has been filed in accordance with said Rule 497 and when any
post-effective amendment to the Registration Statement becomes effective, (ii)
of the issuance by the Commission of any stop order or of the initiation, or the
threatening, of any proceeding, suspending the effectiveness of the Registration
Statement or any order preventing or suspending the use of the Preliminary
Prospectus or the Prospectus, or any amendment or supplement thereto, or the
institution of proceedings for that purpose, (iii) of the issuance by the
Commission or by any state securities commission of any proceedings for
-11-
<PAGE>
the suspension of the qualification of any of the Securities for offering or
sale in any jurisdiction or of the initiation, or the threatening, of any
proceeding for that purpose, (iv) of the receipt of any comments from the
Commission; and (v) of any request by the Commission for any amendment to the
Registration Statement or any amendment or supplement to the Prospectus or for
additional information. If the Commission or any state securities commission
authority shall enter a stop order or suspend such qualification at any time,
the Company will make every effort to obtain promptly the lifting of such order.
(c) The Company shall file the Prospectus (in form and substance
satisfactory to the Representative) or transmit the Prospectus by a means
reasonably calculated to result in filing with the Commission pursuant to Rule
497 not later than the Commission's close of business on the earlier of (i) the
second business day following the execution and delivery of this Agreement and
(ii) the fifth business day after the effective date of the Registration
Statement.
(d) The Company will give the Representative notice of its intention
to file or prepare any amendment to the Registration Statement (including any
post-effective amendment) or any amendment or supplement to the Prospectus
(including any revised prospectus which the Company proposes for use by the
Underwriters in connection with the offering of the Securities which differs
from the corresponding prospectus on file at the Commission at the time the
Registration Statement becomes effective, whether or not such revised prospectus
is required to be filed pursuant to Rule 497 of the Rules and Regulations), and
will furnish the Representatives with copies of any such amendment or supplement
a reasonable amount of time prior to such proposed filing or use, as the case
may be, and will not file any such prospectus to which the Representative or
Reid & Priest LLP ("Underwriters' Counsel"), shall reasonably object.
(e) The Company shall endeavor in good faith, in cooperation with the
Representative, at or prior to the time the Registration Statement becomes
effective, to qualify the Securities for offering and sale under the securities
laws of such jurisdictions as the Representative may designate to permit the
continuance of sales and dealings therein for as long as may be necessary to
complete the distribution, and shall make such applications, file such documents
and furnish such information as may be required for such purpose; provided,
however, the Company shall not be required to qualify as a foreign corporation
or file a general or limited consent to service of process in any such
jurisdiction. In each jurisdiction where such qualification shall be effected,
the Company will, unless the Representative agrees that such action is not at
the time necessary or advisable, use all reasonable efforts to file and make
such statements or reports at such times as are or may reasonably be required by
the laws of such jurisdiction to continue such qualification.
(f) During the time when a prospectus is required to be delivered
under the Acts, the Company shall use all reasonable efforts to comply with all
requirements imposed upon it by the Acts and the Exchange Act, as now and
hereafter amended and by the Rules and Regulations, as from time to time in
force, so far as necessary to permit the continuance of sales of or dealings in
the Securities in accordance with the provisions hereof and the Prospectus, or
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<PAGE>
any amendments or supplements thereto. If at any time when a prospectus relating
to the Securities is required to be delivered under the Acts, any event shall
have occurred as a result of which, in the reasonable opinion of counsel for the
Company or Underwriters' Counsel, the Prospectus, as then amended or
supplemented, includes an untrue statement of a material fact or omits to state
any material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or if it is necessary at any time to amend the Prospectus
to comply with the Acts and the Rules and Regulations, the Company will notify
the Representative promptly and prepare and file with the Commission an
appropriate amendment or supplement in accordance with Section 10 of the Act,
each such amendment or supplement to be satisfactory to Underwriters' Counsel,
and the Company will furnish to the Underwriters copies of such amendment or
supplement as soon as available and in such quantities as the Underwriters may
request.
(g) As soon as practicable, but in any event not later than 45 days
after the end of the 12-month period beginning on the day after the end of the
fiscal quarter of the Company during which the effective date of the
Registration Statement occurs (90 days in the event that the end of such fiscal
quarter is the end of the Company's fiscal year), the Company shall make
generally available to its security holders, in the manner specified in Rule
158(b) of the Rules and Regulations, and to the Representative, an earnings
statement which will be in the detail required by, and will otherwise comply
with, the provisions of Section 11(a) of the Act and Rule 158(a) of the Rules
and Regulations, which statement need not be audited unless required by the Act,
covering a period of at least 12 consecutive months after the effective date of
the Registration Statement.
(h) During a period of seven years after the date hereof, the Company
will furnish to its stockholders, as soon as practicable, annual reports
(including financial statements audited by independent public accountants) and
unaudited quarterly reports of earnings, and will deliver to the
Representatives:
(i) concurrently with furnishing such quarterly reports to its
stockholders, statements of income of the Company for each quarter in the form
furnished to the Company's stockholders and certified by the Company's principal
financial or accounting officer;
(ii) concurrently with furnishing such annual reports to its
stockholders, a balance sheet of the Company as at the end of the preceding
fiscal year, together with statements of operations, stockholders' equity, and
cash flows of the Company for such fiscal year, accompanied by a copy of the
certificate thereon of independent certified public accountants;
(iii) as soon as they are available, copies of all reports (financial
or other) mailed to stockholders;
(iv) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, the NASD or any
securities exchange;
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<PAGE>
(v) every press release and every material news item or article of
interest to the financial community in respect of the Company or its affairs
which was released or prepared by or on behalf of the Company; and
(vi) any additional information of a public nature concerning the
Company (and any future subsidiaries) or its businesses which the Representative
may reasonably request.
During such seven-year period, if the Company has active subsidiaries, the
foregoing financial statements will be on a consolidated basis to the extent
that the accounts of the Company and its subsidiaries are consolidated, and will
be accompanied by similar financial statements for any significant subsidiary
which is not so consolidated.
(i) The Company will retain counsel, an accounting firm, and
financial printer and maintain a Transfer Agent and, if necessary under the
jurisdiction of incorporation of the Company, a Registrar (which may be the same
entity as the Transfer Agent) for its Common Stock, all of whom shall be
reasonably acceptable to the Representatives.
(j) The Company will furnish to the Representative or on the
Representative's order, without charge, at such place as the Representative may
designate, copies of each Preliminary Prospectus, the Registration Statement and
any pre-effective or post-effective amendments thereto (two of which copies will
be signed and will include all financial statements and exhibits), the
Prospectus, and all amendments and supplements thereto, including any Prospectus
prepared after the effective date of the Registration Statement, in each case as
soon as available and in such quantities as the Representatives may reasonably
request.
(k) On or before the effective date of the Registration Statement,
the Company shall provide the Representatives with true copies of duly executed,
legally binding and enforceable agreements pursuant to which for a period of 18
months from the effective date of the Registration Statement, each of the
Principal Stockholders agrees that he, she or it, as the case may be, will not,
directly or indirectly, issue, offer to sell, sell, grant an option for the sale
of, assign, transfer, pledge, hypothecate or otherwise encumber or dispose of
any shares of Common Stock (either pursuant to Rule 144 of the Rules and
Regulations or otherwise) or dispose of any beneficial interest therein without
the prior written consent of the Representative (collectively, the "Lock-up
Agreements"). During the two year period commencing with the effective date of
the Registration Statement, the Company shall not, without the prior written
consent of the Representative, sell, contract or offer to sell, issue, transfer,
assign, pledge, distribute, or otherwise dispose of, directly or indirectly, any
shares of Common Stock or any options, rights or warrants with respect to any
shares of Common Stock, other than as contemplated by the Registration
Statement. On or before the Closing Date, the Company shall deliver instructions
to the Transfer Agent authorizing it to place appropriate legends on the
certificates representing the securities subject to the Lock-up Agreement and to
place appropriate stop transfer orders on the Company's ledgers.
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(l) Neither the Company, nor any of its officers, directors,
stockholders or affiliates (within the meaning of the Rules and Regulations)
will take, directly or indirectly, any action designed to, or which might in the
future reasonably be expected to cause or result in, stabilization or
manipulation of the price of any securities of the Company.
(m) The Company shall apply the net proceeds from the sale of the
Securities in the manner, and subject to the conditions, set forth under "Use of
Proceeds" in the Prospectus. No portion of the net proceeds will be used,
directly or indirectly, to acquire any securities issued by the Company.
(n) The Company shall timely file all such reports, forms or other
documents as may be required (including, but not limited to, a Form SR as may be
required pursuant to Rule 463 under the Act) from time to time, under the Act,
the Exchange Act, the 1940 Act, the Advisers Act and the Rules and Regulations,
and all such reports, forms and documents filed will comply as to form and
substance with the applicable requirements under the Act, the Exchange Act, the
Advisers Act, the 1940 Act, and the Rules and Regulations.
(o) The Company shall furnish to the Representatives as early as
practicable prior to each of the date hereof, the Closing Date and each Option
Closing Date, if any, but no later than two (2) full business days prior
thereto, a copy of the latest available unaudited interim financial statements
of the Company (which in no event shall be as of a date more than thirty (30)
days prior to the date of the Registration Statement) which have been read by
the Company's independent public accountants, as stated in their letters to be
furnished pursuant to Section 6(j) hereof.
(p) The Company shall cause the Securities to be listed on NASDAQ and,
for a period of seven (7) years from the date hereof, use its best efforts to
maintain NASDAQ quotation of the Securities to the extent outstanding.
(q) For a period of five (5) years from the Closing Date, the Company
shall furnish to the Representatives at the Representative's request and at the
Company's sole expense, (i) daily consolidated transfer sheets relating to the
Common Stock (ii) the list of holders of all of the Company's securities and
(iii) a Blue Sky "Trading Survey" for secondary sales of the Company's
securities prepared by counsel to the Company.
(r) As soon as practicable, (i) but in no event more than five
business days before the effective date of the Registration Statement, file a
Form 8-A with the Commission providing for the registration under the Exchange
Act of the Securities and (ii) but in no event more than 30 days from the
effective date of the Registration Statement, take all necessary and appropriate
actions to be included in Standard and Poor's Corporation Descriptions and
Moody's Manual and to use its best efforts to continue such inclusion for as
long as the securities are outstanding.
(s) Until the completion of the distribution of the Securities, the
Company shall not without the prior written consent of the Representatives and
Underwriters' Counsel, issue,
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directly or indirectly any press release or other communication or hold any
press conference with respect to the Company or its activities or the offering
contemplated hereby, other than trade releases issued in the ordinary course of
the Company's business consistent with past practices with respect to the
Company's operations.
(t) For a period of two (2) years after the effective date of the
Registration Statement, Suppes shall have the right to designate, subject to any
approval required to be obtained from the United States Small Business
Administration (the "SBA"), one (1) individual for election to the Company's
Board of Directors ("Board") and the Company shall use its best efforts to elect
any individual so designated to the Board. The Company shall provide its outside
Directors with compensation on a par to its existing Directors in the form of
cash on its Common Stock as deemed appropriate and customary for similar
companies. In the event Suppes shall not have designated such individual at the
time of any meeting of the Board or such person is unavailable to serve, the
Company shall notify Suppes of each meeting of the Board and an individual
designated by Suppes shall be permitted to attend all meetings of the Board and
to receive all notices and other correspondence and communications sent by the
Company to members of the Board. Such individual shall be reimbursed for all
out-of-pocket expenses incurred in connection with his or her service on, or
attendance at meetings of, the Board.
(u) For a period of two (2) years after the effective date of the
Registration Statement, Suppes, individually and not in its capacity as
Representative, shall have a preferential right on the terms and subject to the
conditions set forth in this paragraph, to purchase for its account, or to sell
for the account of the Company or any of its subsidiaries, any securities of the
Company or of its subsidiaries, with respect to which the Company or any such
subsidiary may seek a public or private offering and sale of such securities
other than any securities purchased or guaranteed by the SBA; and the Company
will consult with Suppes with regard to any such offering and will offer to
Suppes the opportunity, on terms not more favorable to the Company than they can
secure elsewhere, to purchase or sell any such securities. If Suppes fails to
accept in writing such proposal made by the Company thereof within fifteen (15)
business days after receipt of a notice containing such proposal, then Suppes
shall have no further claim or right with respect to the proposal contained in
such notice. If, thereafter such proposal is modified, the Company shall again
consult with Suppes in connection with such modification and shall in all
respects have the same obligations and adopt the same procedures with respect to
such proposal as are provided hereinabove with respect to the original proposal.
(v) On or before the effective date of the Registration Statement, the
Company shall engage a financial public relations firm satisfactory to the
Representative which shall be continuously engaged from such engagement date to
a date twelve months from the effective date.
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5. Payment of Expenses.
(a) The Company hereby agrees to pay on each of the Closing Date and
the Option Closing Date (to the extent not paid at the Closing Date) all
expenses and fees (other than fees of Underwriters' Counsel, except as provided
in (iv) below) incident to the performance of the obligations of the Company
under this Agreement, including, without limitation, (i) the fees and expenses
of accountants and counsel for the Company, (ii) all costs and expenses incurred
in connection with the preparation, duplication, printing, (including mailing
and handling charges) filing, delivery and mailing (including the payment of
postage with respect thereto) of the Registration Statement and the Prospectus
and any amendments and supplements thereto and the printing, mailing (including
the payment of postage with respect thereto) and delivery of this Agreement, the
Agreement Among Underwriters, the Selected Dealer Agreements, the Powers of
Attorney and related documents, including the cost of all copies thereof and of
the Preliminary Prospectuses and of the Prospectus and any amendments thereof or
supplements thereto supplied to the Underwriters and such dealers as the
Underwriters may request, in quantities as hereinabove stated, (iii) the
printing, engraving, issuance and delivery of the Securities, (iv) the
qualification of the Securities under state or foreign securities or "Blue Sky"
laws and determination of the status of such securities under legal investment
laws, including the costs of printing and mailing the "Preliminary Blue Sky
Memorandum", the "Supplemental Blue Sky Memorandum" and "Legal Investments
Survey," if any, and disbursements and fees of counsel in connection therewith,
(v) advertising costs and expenses, including but not limited to costs and
expenses in connection with the "road show", information meetings and
presentations, bound volumes and prospectus memorabilia and "tomb-stone"
advertisement expenses, (vi) costs and expenses in connection with Company
counsel's due diligence investigations, including but not limited to the fees of
any independent counsel or consultant retained, (vii) fees and expenses of the
transfer agent and registrar, (viii) applications, if any, for assignments of a
rating of the Securities by qualified rating agencies, (ix) the fees payable to
the Commission, NASDAQ and the NASD, and (x) the fees and expenses incurred in
connection with the application for quotation of the Securities on NASDAQ.
(b) If this Agreement is terminated by the Underwriters in accordance
with the provisions of Section 6, Section 10(a) or Section 12, the Company shall
reimburse and indemnify the Representatives for all of their actual
out-of-pocket expenses, including the fees and disbursements of Underwriters'
Counsel (and in addition to fees and expenses of Underwriters' Counsel incurred
pursuant to Section 5(a)(iv) above for which the Company shall remain liable).
(c) The Company further agrees that, in addition to the expenses
payable pursuant to subsection (a) of this Section 5, it will pay to the
Representative on the Closing Date by certified or bank cashier's check or, at
the election of the Representative, by deduction from the proceeds of the
offering contemplated herein a non-accountable expense allowance equal to three
percent (3%) of the gross proceeds received by the Company from the sale of the
Firm Securities. In the event the Representatives elects to exercise the
over-allotment option described in Section 2(b) hereof, the Company further
agrees to pay to the Representatives on the Option Closing Date (by certified or
bank cashier's check or, at the Representative's election, by
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deduction from the proceeds of the offering) a non-accountable expense allowance
equal to three percent (3%) of the gross proceeds received by the Company from
the sale of the Option Securities.
(d) The Underwriter shall not be responsible for any expense of the
Company or others or for any charge or claim related to the offering
contemplated by hereunder in the event that the sale of the Securities as
contemplated hereunder is not consummated.
6. Conditions of the Underwriters' Obligations. The obligations of the
Underwriters hereunder shall be subject to the continuing accuracy of the
representations and warranties of the Company herein as of the date hereof and
as of the Closing Date and each Option Closing Date, if any, as if they had been
made on and as of the Closing Date or each Option Closing Date, as the case may
be; the accuracy on and as of the Closing Date or Option Closing Date, if any,
of the statements of the officers of the Company made pursuant to the provisions
hereof; and the performance by the Company on and as of the Closing Date and
each Option Closing Date, if any, of its covenants and obligations hereunder and
to the following further conditions:
(a) The Registration Statement which shall be in form and substance
satisfactory to the Representative and Underwriter's Counsel, shall have become
effective not later than 12:00 p.m., New York time, on the date of this
Agreement or such later date and time as shall be consented to in writing by the
Representative, and, at Closing Date and each Option Closing Date, if any, no
stop order suspending the effectiveness of the Registration Statement shall have
been issued and no proceedings for that purpose shall have been instituted or
shall be pending or contemplated by the Commission and any request on the part
of the Commission for additional information shall have been complied with to
the reasonable satisfaction of Underwriters' Counsel. If the Company has elected
to rely upon Rule 430A of the Rules and Regulations, the price of the Shares and
any price-related information previously omitted from the effective Registration
Statement pursuant to such Rule 430A shall have been transmitted to the
Commission for filing pursuant to Rule 497 of the Rules and Regulations within
the prescribed time period, and prior to Closing Date the Company shall have
provided evidence satisfactory to the Representative of such timely filing, or a
post-effective amendment providing such information shall have been promptly
filed and declared effective in accordance with the requirements of Rule 497 of
the Rules and Regulations.
(b) The Representative shall not have advised the Company that the
Registration Statement, or any amendment thereto, contains an untrue statement
of fact which, in the Representative's opinion, is material, or omits to state a
fact which, in the Representative's opinion, is material and is required to be
stated therein or is necessary to make the statements therein not misleading, or
that the Prospectus, or any supplement thereto, contains an untrue statement of
fact which, in the Representative's opinion, is material, or omits to state a
fact which, in the Representative's opinion, is material and is required to be
stated therein or is necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
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<PAGE>
(c) On or prior to the Closing Date, the Representative shall have
received from Underwriters' Counsel, such opinion or opinions with respect to
the organization of the Company, the validity of the Securities, the
Registration Statement, the Prospectus and other related matters as the
Representatives may request and Underwriters' Counsel shall have received such
papers and information as they request to enable them to pass upon such matters.
(d) At Closing Date, the Underwriters shall have received the
favorable opinion of Stursberg & Veith, counsel to the Company, dated the
Closing Date, addressed to the Underwriters and in form and substance
satisfactory to Underwriters' Counsel, to the effect that:
(i) the Company (A) has been duly organized and is validly existing as
a corporation in good standing under the laws of its jurisdiction, and (B) has
all requisite corporate power and authority, and has obtained any and all
authorizations, approvals, orders, licenses, certificates, franchises and
permits of and from all governmental or regulatory officials and bodies
(including, without limitation, those having jurisdiction over environmental or
similar matters), materially necessary to own or lease its properties and
conduct its business as described in the Prospectus; the Company is not
qualified as a foreign corporation in any jurisdiction (to such counsel's
knowledge, there being no jurisdiction in which failure to so qualify would have
a material adverse effect on the Company); to such counsel's knowledge, the
Company has not received any notice of proceedings relating to the revocation or
modification of any such authorization, approval, order, license, certificate,
franchise, or permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would materially adversely affect the
business, operations, condition, financial or otherwise, or the earnings,
business affairs or prospects, properties, business or assets of the Company.
The disclosures in the Registration Statement concerning the effects of federal,
state and local laws, rules and regulations on the Company's business as
currently conducted and as contemplated are correct in all material respects and
do not omit to state a fact necessary to make the statements contained therein
not misleading in light of the circumstances in which they were made.
(ii) to such counsel's knowledge, the Company does not own an equity
interest in any other corporation, partnership, joint venture, trust or other
business entity;
(iii) the Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus, and any amendment or supplement
thereto, under "Capitalization", and, to such counsel's knowledge, after due
inquiry, the Company is not a party to or bound by any instrument, agreement or
other arrangement providing for it to issue any capital stock, rights, warrants,
options or other securities, except for this Agreement and as described in the
Prospectus. The Securities, and all other securities issued or issuable by the
Company, conform in all material respects to all statements with respect thereto
contained in the Registration Statement and the Prospectus. All issued and
outstanding securities of the Company have been duly authorized and validly
issued and are fully paid and non-assessable; the holders thereof have no rights
of rescission with respect thereto, and are not subject to personal liability
under the laws of the State of New York as currently in effect by reason of
being such holders; and none of such securities were issued in violation of the
preemptive rights of any holders of any security
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of the Company contained in the certificate of incorporation of the Company or,
to such counsel's knowledge, any agreement, document or instrument. The
Securities to be sold by the Company hereunder are not and will not be subject
to any preemptive or other similar rights of any stockholder contained in the
certificate of incorporation of the Company or, to such counsel's knowledge,
agreement, document or instrument, have been duly authorized and, when issued,
paid for and delivered in accordance with the terms hereof or the
Representative's Warrant, will be validly issued, fully paid and non-assessable
and conform to the description thereof contained in the Prospectus; the holders
thereof will not be subject to any liability under the laws of the State of New
York as currently in effect solely as such holders; all corporate action
required to be taken for the authorization, issue and sale of the Securities has
been duly and validly taken; and the certificates representing the Securities
are in due and proper form. Upon the issuance and delivery pursuant to this
Agreement and the Representative's Warrant of the Securities to be sold by the
Company, the Underwriters and the holders of the Representative's Warrant, as
the case may be, will acquire good and marketable title to the Securities free
and clear of any pledge, lien, charge, claim, encumbrance, pledge, security
interest, or other restriction or equity of any kind whatsoever (except those
arising out of acts or claims against the Underwriters or the holders of the
Representative's Warrant). No transfer tax is payable by or on behalf of the
Underwriters in connection with (A) the issuance by the Company of the
Securities, (B) the purchase by the Underwriters of the Securities from the
Company, (C) consummation by the Company of any of its obligations under this
Agreement, or (D) resales of the Securities in connection with the distribution
contemplated hereby.
(iv) the Registration Statement is effective under the Acts, and, if
applicable, filing of all pricing information has been timely made in the
appropriate form under Rule 430A, and, to such counsel's knowledge, after due
inquiry, no stop order suspending the use of the Preliminary Prospectus, the
Registration Statement or Prospectus or any part of any thereof or suspending
the effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or threatened
or contemplated under the Acts;
(v) each of the Preliminary Prospectus, the Registration Statement,
and the Prospectus and any amendments or supplements thereto (other than the
financial statements and other financial and statistical data included therein,
as to which no opinion need be rendered) comply as to form in all material
respects with the requirements of the Acts and the Rules and Regulations.
(vi) to the best of such counsel's knowledge, (A) there are no
agreements, contracts or other documents required by the Acts to be described in
the Registration Statement and the Prospectus and filed as exhibits to the
Registration Statement other than those described in the Registration Statement
(or required to be filed under the Exchange Act if upon such filing they would
be incorporated, in whole or in part, by reference therein) and the Prospectus
and filed as exhibits thereto, and the exhibits which have been filed are
correct copies of the documents of which they purport to be copies; (B) the
descriptions in the Registration Statement and the Prospectus and any supplement
or amendment thereto of contracts and other documents
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to which the Company is a party or by which it is bound, including any document
to which the Company is a party or by which it is bound, incorporated by
reference into the Prospectus and any supplement or amendment thereto, are
accurate in all material respects and fairly represent the information required
to be shown by Form N-5; (C) there is not pending or threatened against the
Company any action, arbitration, suit, proceeding, inquiry, investigation,
litigation, governmental or other proceeding (including, without limitation,
those having jurisdiction over environmental or similar matters), domestic or
foreign, pending or threatened against (or circumstances that may give rise to
the same), or involving the properties or business of the Company which (1) is
required to be disclosed in the Registration Statement which is not so disclosed
(and such proceedings as are summarized in the Registration Statement are
accurately summarized in all respects), (2) questions the validity of the
capital stock of the Company or this Agreement or the Representative's Warrant
or of any action taken or to be taken by the Company pursuant to or in
connection with any of the foregoing; (D) no statute or regulation or legal or
governmental proceeding required to be described in the Prospectus is not
described as required; and (E) except as disclosed in the Prospectus, there is
no action, suit or proceeding pending, or threatened, against or affecting the
Company before any court or arbitrator or governmental body, agency or official
(or any basis thereof known to such counsel) in which an adverse decision which
may result in a material adverse change in the condition, financial or
otherwise, or the earnings, position, prospects, stockholders' equity, value,
operation, properties, business or results of operations of the Company, which
could materially adversely affect the present or prospective ability of the
Company to perform its obligations under this Agreement or which in any manner
draws into question the validity or enforceability of this Agreement;
(vii) the Company has full legal right, power and authority to enter
into this Agreement and the Representative's Warrant, subject as to the
Representative's Warrant of receipt of an order or exemptive relief under the
1940 Act, and to consummate the transactions provided for therein; and this
Agreement and the Representative's Warrant each has been duly authorized,
executed and delivered by the Company. This Agreement and the Representative
Warrant, assuming due authorization, execution and delivery by each other party
hereto and, with respect to the Representative's Warrant, the receipt of an
order or exemptive relief under the 1940 Act, constitutes a legal, valid and
binding agreement of the Company enforceable against the Company in accordance
with its terms (except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws of general
application relating to or affecting enforcement of creditors' rights and the
application of equitable principles in any action, legal or equitable, and
except as rights to indemnity or contribution may be limited by applicable law),
and neither the Company's execution or delivery of this Agreement and of the
Representative's Warrant, its performance hereunder and thereunder, its
consummation of the transactions contemplated herein, or the conduct of its
business as described in the Registration Statement, the Prospectus, and any
amendments or supplements thereto, conflicts with or will conflict with or
results or will result in any breach or violation of any of the terms or
provisions of, or constitutes or will constitute a default under, or result in
the creation or imposition of any lien, charge, claim, encumbrance, pledge,
security interest, defect or other restriction or equity of any kind whatsoever
upon, any property or assets
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(tangible or intangible) of the Company pursuant to the terms of, (A) the
certificate of incorporation or by-laws of the Company, (B) any license,
contract, indenture, mortgage, deed of trust, voting trust agreement,
stockholders agreement, note, loan or credit agreement or any other agreement or
instrument to which the Company is a party or by which it is or may be bound or
to which any of its properties or assets (tangible or intangible) is or may be
subject, or any indebtedness, or (C) any statute, judgment, decree, order, rule
or regulation applicable to the Company of any arbitrator, court, regulatory
body or administrative agency or other governmental agency or body (including,
without limitation, those having jurisdiction over environmental or similar
matters), domestic or foreign, having jurisdiction over the Company or any of
its activities or properties, except for conflicts, breaches, violations,
defaults, creations or impositions which do not and would not have a material
adverse effect on the Company.
(viii) except as described in the Prospectus, no consent, approval,
authorization or order, and no filing with, any court, regulatory body,
government agency or other body (other than such as may be required under Blue
Sky laws, as to which no opinion need be rendered) is required in connection
with the issuance of the Securities pursuant to the Prospectus and the
Registration Statement, the performance of this Agreement and the transactions
contemplated hereby;
(ix) to such counsel's knowledge, the properties and business of the
Company conform to the description thereof contained in the Registration
Statement and the Prospectus;
(x) to such counsel's knowledge, the Company is not in breach of, or
in default under, any term or provision of any license, contract, indenture,
mortgage, installment sale agreement, deed of trust, lease, voting trust
agreement, stockholders' agreement, partnership agreement, note, loan or credit
agreement or any other agreement or instrument evidencing an obligation for
borrowed money, or any other agreement or instrument to which the Company is a
party or by which any of the Company may be bound or to which the property or
assets (tangible or intangible) of any of the Company is subject or affected,
which could materially adversely affect the Company; and the Company is not in
violation of any term or provision of its Certificate of Incorporation or
By-Laws, or in violation of any franchise, license, permit, judgment, decree,
order, statute, rule or regulation the result of which would materially and
adversely affect the condition, financial or otherwise, or the earnings,
business affairs, position, shareholders' equity, value operation, properties,
business or results of operations of the Company.
(xi) the Company owns or possesses, free and clear of all liens or
encumbrances and rights thereto or therein by third parties, the requisite
licenses or other rights to use all trademarks, service marks, copyrights,
service names, trade names, patents, patent applications and licenses necessary
to conduct its business (including, without limitation any such licenses or
rights described in the Prospectus as being owned or possessed by the Company),
and to the best of such counsel's knowledge after reasonable investigation,
there is no claim or action by any person pertaining to, or proceeding, pending,
or threatened, which challenges the exclusive rights of the Company with respect
to any trademarks, service marks, copyrights,
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service names, trade names, patents, patent applications and licenses used in
the conduct of the Company's businesses (including, without limitations, any
such licenses or rights described in the Prospectus as being owned or possessed
by the Company).
(xii) except as described in the Prospectus, the Company does not (a)
maintain, sponsor or contribute to any ERISA Plans, (b) maintain or contribute,
now or at any time previously, to a defined benefit plan, as defined in Section
3(35) of ERISA, and (c) has never completely or partially withdrawn from a
"multiemployer plan".
(xiii) the statements in the Prospectus under "BUSINESS," "FEDERAL
REGULATION," "CONFLICTS OF INTEREST," "TAX CONSIDERATIONS," and "DESCRIPTION OF
CAPITAL STOCK AND LONG TERM DEBT," have been reviewed by such counsel with the
exception of "TAX CONSIDERATIONS" which section has been reviewed by special tax
counsel (which is delivering its separate opinion addressed to the Underwriters
in form and substance satisfactory to Underwriters' Counsel), and insofar as
they refer to statements of law, descriptions of statutes, licenses, rules or
regulations or legal conclusions, are correct in all material respects;
(xiv) the Securities have been approved for listing on NASDAQ, and the
Company's Registration Statement on Form 8-A under the Exchange Act has become
effective.
(xv) to such counsel's knowledge, the persons listed under the caption
"SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT" in the Prospectus
are the respective "beneficial owners" (as such phrase is defined in regulation
13d-3 under the Exchange Act) of the securities set forth opposite their
respective names thereunder as and to the extent set forth therein;
(xvi) to such counsel's knowledge, except as described in the
Prospectus, no person, corporation, trust, partnership, association or other
entity has the right to include and/or register any securities of the Company in
the Registration Statement, require the Company to file any registration
statement or, if filed, to include any security in such registration statement;
(xvii) to such counsel's knowledge, except as described in the
Prospectus, there are no claims, payments, issuances, arrangements or
understandings for services in the nature of a finder's or origination fee with
respect to the sale of the Securities hereunder or the financial consulting
arrangement or any other arrangements, agreements, understandings, payments or
issuances that may affect the Underwriters' compensation, as determined by the
NASD;
(xviii) assuming due execution by the parties thereto other than the
Company, the Lock-up Agreements are legal, valid and binding obligations of the
parties thereto, enforceable against each such party and any subsequent holder
of the securities subject thereto in accordance with its terms (except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating
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to or affecting enforcement of creditors' rights and the application of
equitable principles in any action, legal or equitable); and
(xix) The Company is duly registered with the Commission under the
1940 Act as an investment company, and all action under the Acts necessary to
make the public offering and consummate the sale of the Shares as provided in
this Agreement has been taken by the Company. The provisions of the Certificate
of Incorporation and By-laws of the Company comply as to form in all material
respects with the Acts and the Rules and Regulations.
Such counsel shall state that such counsel has participated in conferences
with officers and other representatives of the Company and representatives of
the independent public accountants for the Company, at which conferences such
counsel made inquiries of such officers, representatives and accountants and
discussed the contents of the Preliminary Prospectus, the Registration
Statement, the Prospectus, and related matters were discussed and, although such
counsel is not passing upon and does not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Preliminary Prospectus, the Registration Statement and Prospectus, on the basis
of the foregoing, no facts have come to the attention of such counsel which lead
them to believe that either the Registration Statement or any amendment thereto,
at the time such Registration Statement or amendment became effective or the
Preliminary Prospectus or Prospectus or amendment or supplement thereto as of
the date of such opinion contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading (it being understood that such
counsel need express no opinion with respect to the financial statements and
schedules and other financial and statistical data included in the Preliminary
Prospectus, the Registration Statement or Prospectus).
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States and
jurisdictions in which they are admitted, to the extent such counsel deems
proper and to the extent specified in such opinion, if at all, upon an opinion
or opinions (in form and substance satisfactory to Underwriters' Counsel) of
other counsel acceptable to Underwriters' Counsel, familiar with the applicable
laws; (B) as to matters of fact, to the extent they deem proper, on certificates
and written statements of responsible officers of the Company and certificates
or other written statements of officers of departments of various jurisdictions
having custody of documents respecting the corporate existence or good standing
of the Company, provided that copies of any such statements or certificates
shall be delivered to Underwriters' Counsel if requested. The opinion of such
counsel for the Company shall state that the opinion of any such other counsel
is in form satisfactory to such counsel and that the Representatives and they
are justified in relying thereon.
At each Option Closing Date, if any, the Underwriters shall have received
the favorable opinion of Stursberg & Veith, counsel to the Company, and of
special tax counsel to the Company dated the Option Closing Date, addressed to
the Underwriters and in form and
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substance satisfactory to Underwriters' Counsel confirming as of Option Closing
Date the statements made in its opinion delivered on the Closing Date.
(e) On or prior to each of the Closing Date and the Option Closing
Date, if any, Underwriters' Counsel shall have been furnished such documents,
certificates and opinions as they may reasonably require for the purpose of
enabling them to review or pass upon the matters referred to in subsection (c)
of this Section 6, or in order to evidence the accuracy, completeness or
satisfaction of any of the representations, warranties or conditions of the
Company, or herein contained.
(f) Prior to each of Closing Date and each Option Closing Date, if
any, (i) there shall have been no adverse change nor development involving a
prospective change in the condition, financial or otherwise, prospects,
stockholders' equity or the business activities of the Company, whether or not
in the ordinary course of business, from the latest dates as of which such
condition is set forth in the Registration Statement and Prospectus; (ii) there
shall have been no transaction, not in the ordinary course of business, entered
into by the Company, from the latest date as of which the financial condition of
the Company is set forth in the Registration Statement and Prospectus which is
adverse to the Company; (iii) the Company shall not be in default under any
provision of any instrument relating to any outstanding indebtedness; (iv) the
Company shall not have issued any securities (other than the Securities) or
declared or paid any dividend or made any distribution in respect of its capital
stock of any class and there has not been any change in the capital stock or any
change in the debt (long or short term) or liabilities or obligations of the
Company (contingent or otherwise); (v) no material amount of the assets of the
Company shall have been pledged or mortgaged, except as set forth in the
Registration Statement and Prospectus; (vi) no action, suit or proceeding, at
law or in equity, shall have been pending or threatened (or circumstances giving
rise to same) against the Company, or affecting any of their respective
properties or business before or by any court or federal, state or foreign
commission, board or other administrative agency wherein an unfavorable
decision, ruling or finding may adversely affect the business, operations,
management prospects or financial condition or assets of the Company, except as
set forth in the Registration Statement and Prospectus; and (vii) no stop order
shall have been issued under the Acts and no proceedings therefor shall have
been initiated, threatened or contemplated by the Commission.
(g) At each of the Closing Date and each Option Closing Date, if any,
the Underwriters shall have received a certificate of the principal executive
officer and the chief financial or chief accounting officer of the Company,
dated the Closing Date or Option Closing Date, as the case may be, to the effect
that each of such persons has carefully examined the Registration Statement, the
Prospectus and this Agreement, and that:
(i) The representations and warranties in this Agreement of the
Company are true and correct, as if made on and as of the Closing Date or the
Option Closing Date, as the case may be, and the Company has complied with all
agreements and covenants and satisfied all conditions contained in this
Agreement on its part to be performed or satisfied at or prior to such Closing
Date or Option Closing Date, as the case may be;
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(ii) No stop order suspending the effectiveness of the Registration
Statement or any part thereof has been issued, and no proceedings for that
purpose have been instituted or are pending or, to the best of each of such
person's knowledge, after due inquiry are contemplated or threatened under the
Acts;
(iii) The Registration Statement and the Prospectus and, if any, each
amendment and each supplement thereto, contain all statements and information
required to be included therein, and none of the Registration Statement, the
Prospectus nor any amendment or supplement thereto includes any untrue statement
of a material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not misleading and neither
the Preliminary Prospectus or any supplement thereto included any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; and
(iv) Since the dates as of which information is given in the
Registration Statement and the Prospectus, (A) there must not have been any
material change in the shares of Common Stock or liabilities of the Company
except as set forth in or contemplated by the Prospectus; (B) there must not
have been any material adverse change in the general affairs, management,
business, financial condition or results of operations of the Company, whether
or not arising from transactions in the ordinary course of business, as set
forth in or contemplated by the Prospectus; (C) the Company must not have
sustained any material loss or interference with its business from any court or
from legislative or other governmental action, order or decree, whether foreign
or domestic, or from any other occurrence, not described in the Registration
Statement and Prospectus; and (D) there must not have occurred any event that
makes untrue or incorrect in any material respect any statement or information
contained in the Registration Statement or Prospectus or that is not reflected
in the Registration Statement or Prospectus but should be reflected therein in
order to make the statements or information therein, in light of the
circumstances in which they were made, not misleading in any material respect.
References to the Registration Statement and the Prospectus in this subsection
(h) are to such documents as amended and supplemented at the date of such
certificate.
(h) By the Closing Date, the Underwriters will have received clearance
from the NASD as to the amount of compensation allowable or payable to the
Underwriters, as described in the Registration Statement.
(i) At the time this Agreement is executed, the Underwriters shall
have received a letter, dated such date, addressed to the Underwriters in form
and substance satisfactory (including the non-material nature of the changes or
decreases, if any, referred to in clause (iii) below) in all respects to the
Underwriters and Underwriters' Counsel, from Michael Finkelstein:
(i) confirming that they are independent accountants with respect
to the Company within the meaning of the Acts and the applicable Rules and
Regulations;
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(ii) stating that it is their opinion that the financial
statements of the Company included in the Registration Statement comply as to
form in all material respects with the applicable accounting requirements of the
Acts and the Rules and Regulations thereunder and that the Representatives may
rely upon the opinion of Michael C. Finkelstein with respect to the financial
statements and supporting schedules included in the Registration Statement;
(iii) stating that, on the basis of a limited review which
included a reading of the latest available unaudited interim financial
statements of the Company (with an indication of the date of the latest
available unaudited interim financial statements), a reading of the latest
available minutes of the stockholders and board of directors and the various
committees of the boards of directors of the Company, consultations with
officers and other employees of the Company responsible for financial and
accounting matters and other specified procedures and inquiries, nothing has
come to their attention which would lead them to believe that (A) the unaudited
financial statements, if any, of the Company included in the Registration
Statement do not comply as to form in all material respects with the applicable
accounting requirements of the Acts and the Rules and Regulations or are not
fairly presented in conformity with generally accepted accounting principles
applied on a basis substantially consistent with that of the audited financial
statements of the Company included in the Registration Statement, or (B) at a
specified date not more than five (5) days prior to the effective date of the
Registration Statement, there has been any change in the capital stock or
long-term debt of the Company, or any decrease in the stockholders' equity or
net current assets or net assets of the Company as compared with amounts shown
in the May 31, 1996 balance sheet included in the Registration Statement, other
than as set forth in or contemplated by the Registration Statement, or, if there
was any change or decrease, setting forth the amount of such change or decrease;
(iv) setting forth, at a date not later than five (5) days prior
to the date of the Registration Statement, the amount of liabilities of the
Company;
(v) stating that they have compared specific dollar amounts,
numbers of shares, percentages of revenues and earnings, statements and other
financial information pertaining to the Company set forth in the Prospectus in
each case to the extent that such amounts, numbers, percentages, statements and
information may be derived from the general accounting records, including work
sheets, of the Company and excluding any questions requiring an interpretation
by legal counsel, with the results obtained from the application of specified
readings, inquiries and other appropriate procedures (which procedures do not
constitute an examination in accordance with generally accepted auditing
standards) set forth in the letter and found them to be in agreement;
(vi) statements as to such other matters incident to the
transaction contemplated hereby as the Representatives may request.
(j) At Closing Date and each Option Closing Date, if any, the
Underwriters shall have received from Michael C. Finkelstein, a letter, dated as
of the Closing Date or the Option Closing Date, as the case may be, to the
effect that they reaffirm the statements made in
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the letter furnished pursuant to subsection (j) of this Section, except that the
specified date referred to shall be a date not more than five days prior to
Closing Date or the Option Closing Date, as the case may be, and, if the Company
has elected to rely on Rule 430A of the Rules and Regulations, to the further
effect that they have carried out procedures as specified in clause (v) of
subsection (j) of this Section with respect to certain amounts, percentages and
financial information as specified by the Representatives and deemed to be a
part of the Registration Statement pursuant to Rule 430A(b) and have found such
amounts, percentages and financial information to be in agreement with the
records specified in such clause (v).
(k) On each of Closing Date and Option Closing Date, if any, there
shall have been duly tendered to the Representative for the several
Underwriters' accounts the appropriate number of Securities.
(l) No order suspending the sale of the Securities in any jurisdiction
designated by the Representative pursuant to subsection (e) of Section 4 hereof
shall have been issued on either the Closing Date or the Option Closing Date, if
any, and no proceedings for that purpose shall have been instituted or shall be
contemplated.
(m) On or before Closing Date, the Securities shall have been approved
for quotation on NASDAQ.
(n) On or before Closing Date, there shall have been delivered to the
Representative the Lock-up Agreement, in form and substance satisfactory to
Underwriters' Counsel.
If any condition to the Underwriters' obligations hereunder to be fulfilled
prior to or at the Closing Date or the relevant Option Closing Date, as the case
may be, is not so fulfilled, the Representatives may terminate this Agreement
or, if the Representative so elects, it may waive any such conditions which have
not been fulfilled or extend the time for their fulfillment.
7. Indemnification.
(a) The Company will indemnify and hold harmless each of the
Underwriters (for purposes of this Section 7 "Underwriter" shall include the
officers, directors, partners, employees, agents and counsel of the Underwriter,
including specifically each person who may be substituted for an Underwriter as
provided in Section 11 hereof), and each person, if any, who controls the
Underwriter ("controlling person") within the meaning of Section 15 of the Act
or Section 20(a) of the Exchange Act, from and against any and all losses,
claims, damages, expenses or liabilities, joint or several (and actions in
respect thereof), whatsoever (including but not limited to any and all expenses
whatsoever reasonably incurred in investigating, preparing or defending against
any litigation, commenced or threatened, or any claim whatsoever), as such are
incurred, to which the Underwriter or such controlling person may become subject
under the Acts, the Exchange Act, the Advisers Act or any other statute or at
common law or otherwise or under the laws of foreign countries, arising out of
or based upon
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any untrue statement or alleged untrue statement of a material fact contained
(i) in any Preliminary Prospectus, the Registration Statement or the Prospectus
(as from time to time amended and supplemented); (ii) in any post-effective
amendment or amendments or any new registration statement and prospectus in
which is included securities of the Company issued or issuable upon exercise of
the Securities; or (iii) in any application or other document or written
communication (in this Section 7 collectively called "Application") executed by
the Company or based upon written information furnished by the Company in any
jurisdiction in order to qualify the Securities under the securities laws
thereof or filed with the Commission, any securities commission or agency, or
any securities exchange; or the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the statements
therein not misleading (in the case of the Prospectus, in the light of the
circumstances under which they were made), unless such statement or omission was
made in reliance upon and in conformity with written information furnished to
the Company with respect to any Underwriter by or on behalf of such Underwriter
expressly for use in any Preliminary Prospectus, the Registration Statement or
Prospectus, or any amendment thereof or supplement thereto, or in any
Application, as the case may be.
The indemnity agreement in this subsection (a) shall be in addition to any
liability which the Company may have at common law or otherwise.
(b) Each of the Underwriters agrees severally, but not jointly, to
indemnify and hold harmless the Company, each of their respective directors,
each of the Company's officers who has signed the Registration Statement, and
each other person, if any, who controls the Company within the meaning of the
Act, to the same extent as the foregoing indemnity from the Company to the
Underwriters but only with respect to statements or omissions, if any, made in
any Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment thereof or supplement thereto or in any Application made in reliance
upon, and in strict conformity with, written information furnished to the
Company with respect to any Underwriter by such Underwriter expressly for use in
such Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment thereof or supplement thereto or in any such Application, provided
that such written information or omissions only pertain to disclosures in the
Preliminary Prospectus, the Registration Statement or Prospectus directly
relating to the transactions effected by the Underwriters in connection with
this offering. The Company acknowledges that the statements with respect to the
public offering of the Securities set forth under the heading "Underwriting" and
the stabilization legend in the Prospectus have been furnished by the
Underwriters expressly for use therein and constitute the only information
furnished in writing by or on behalf of the Underwriters for inclusion in the
Prospectus.
(c) Promptly after receipt by an indemnified party under this Section
7 of notice of the commencement of any action, suit or proceeding, such
indemnified party shall, if a claim in respect thereof is to be made against one
or more indemnifying parties under this Section 7, notify each party against
whom indemnification is to be sought in writing of the commencement thereof (but
the failure so to notify an indemnifying party shall not relieve it from any
liability which it may have under this Section 7 except to the extent that it
has been prejudiced in any
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material respect by such failure or from any liability which it may have
otherwise). In case any such action is brought against any indemnified party,
and it notifies an indemnifying party or parties of the commencement thereof,
the indemnifying party or parties will be entitled to participate therein, and
to the extent it may elect by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof with counsel reasonably satisfactory to such
indemnified party. Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own counsel in any such case
but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such counsel shall
have been authorized in writing by the indemnifying parties in connection with
the defense of such action at the expense of the indemnifying party, (ii) the
indemnifying parties shall not have employed counsel reasonably satisfactory to
such indemnified party to have charge of the defense of such action within a
reasonable time after notice of commencement of the action, or (iii) such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them which are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties), in any of which events
such fees and expenses of one additional counsel shall be borne by the
indemnifying parties. In no event shall the indemnifying parties be liable for
fees and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances.
Anything in this Section 7 to the contrary notwithstanding, an indemnifying
party shall not be liable for any settlement of any claim or action effected
without its written consent; provided, however, that such consent was not
unreasonably withheld.
(d) In order to provide for just and equitable contribution in any
case in which (i) an indemnified party makes claim for indemnification pursuant
to this Section 7, but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
the express provisions of this Section 7 provide for indemnification in such
case, or (ii) contribution under the Act may be required on the part of any
indemnified party, then each indemnifying party shall contribute to the amount
paid as a result of such losses, claims, damages, expenses or liabilities (or
actions in respect thereof) (A) in such proportion as is appropriate to reflect
the relative benefits received by each of the contributing parties, on the one
hand, and the party to be indemnified on the other hand, from the offering of
the Securities or (B) if the allocation provided by clause (A) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of each of the contributing parties, on the one hand, and the party to be
indemnified on the other hand in connection with the statements or omissions
that resulted in such losses, claims, damages, expenses or liabilities, as well
as any other relevant equitable considerations. In any case where the Company is
a contributing party and the Underwriters are the indemnified party, the
relative benefits received by the Company, on the one hand, and
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the Underwriters, on the other, shall be deemed to be in the same proportion as
the total net proceeds from the offering of the Securities (before deducting
expenses) bear to the total underwriting discounts received by the Underwriters
hereunder, in each case as set forth in the table on the Cover Page of the
Prospectus. Relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Underwriters, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such untrue statement or omission. The amount paid or payable by an indemnified
party as a result of the losses, claims, damages, expenses or liabilities (or
actions in respect thereof) referred to above in this subdivision (d) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this subdivision (d) the
Underwriters shall not be required to contribute any amount in excess of the
underwriting discount applicable to the Securities purchased by the Underwriters
hereunder. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. For purposes of this
Section 7, each person, if any, who controls the Company within the meaning of
the Act, each officer of the Company who has signed the Registration Statement,
and each director of the Company shall have the same rights to contribution as
the Company, subject in each case to this subparagraph (d). Any party entitled
to contribution will, promptly after receipt of notice of commencement of any
action, suit or proceeding against such party in respect to which a claim for
contribution may be made against another party or parties under this
subparagraph (d), notify such party or parties from whom contribution may be
sought, but the omission so to notify such party or parties shall not relieve
the party or parties from whom contribution may be sought from any obligation it
or they may have hereunder or otherwise than under this subparagraph (d), or to
the extent that such party or parties were not adversely affected by such
omission. The contribution agreement set forth above shall be in addition to any
liabilities which any indemnifying party may have at common law or otherwise.
8. Representations and Agreements to Survive Delivery. All representations,
warranties and agreements contained in this Agreement or contained in
certificates of officers of the Company submitted pursuant hereto, shall be
deemed to be representations, warranties and agreements at the Closing Date and
the Option Closing Date, as the case may be, and such representations,
warranties and agreements of the Company and the respective indemnity agreements
contained in Section 7 hereof, shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any Underwriter,
the Company, any controlling person of any Underwriter or the Company, and shall
survive termination of this Agreement or the issuance and delivery of the
Securities to the Underwriters and the Representative, as the case may be.
9. Effective Date. This Agreement shall become effective at 10:00 a.m., New
York City time, on the next full business day following the date hereof, or at
such earlier time after the Registration Statement becomes effective as the
Representative, in its discretion, shall release
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the Securities for the sale to the public; provided, however, that the
provisions of Sections 5, 7 and 10 of this Agreement shall at all times be
effective. For purposes of this Section 9, the Securities to be purchased
hereunder shall be deemed to have been so released upon the earlier of dispatch
by the Representatives of telegrams to securities dealers releasing such shares
for offering or the release by the Representatives for publication of the first
newspaper advertisement which is subsequently published relating to the
Securities.
10. Termination.
(a) Subject to subsection (b) of this Section 10, the Representative
shall have the right to terminate this Agreement, (i) if any domestic or
international event or act or occurrence has disrupted, or in the
Representative's opinion will in the immediate future disrupt the financial
markets; or (ii) any material adverse change in the financial markets shall have
occurred; or (iii) if trading on the New York Stock Exchange, the American Stock
Exchange, or in the over-the-counter market shall have been suspended, or
minimum or maximum prices for trading shall have been fixed, or maximum ranges
for prices for securities shall have been required on the over-the-counter
market by the NASD or by order of the Commission or any other government
authority having jurisdiction; or (iv) if the United States shall have become
involved in a war or major hostilities, or if there shall have been an
escalation in an existing war or major hostilities or a national emergency shall
have been declared in the United States; or (v) if a banking moratorium has been
declared by a state or federal authority; or (vi) if a moratorium in foreign
exchange trading has been declared; or (vii) if the Company shall have sustained
a loss material or substantial to the Company by fire, flood, accident,
hurricane, earthquake, theft, sabotage or other calamity or malicious act which,
whether or not such loss shall have been insured, will, in the Representative's
opinion, make it inadvisable to proceed with the delivery of the Securities; or
(viii) if there shall have been such a material adverse change in the condition
(financial or otherwise), business affairs or prospects of the Company, whether
or not arising in the ordinary course of business, which would render, in the
Representatives' judgment, either of such parties unable to perform
satisfactorily its respective obligations as contemplated by this Agreement or
the Registration Statement, or such material adverse change in the general
market, political or economic conditions, in the United States or elsewhere as
in the Representative's judgment would make it inadvisable to proceed with the
offering, sale and/or delivery of the Securities.
(b) If this Agreement is terminated by the Representative in
accordance with the provisions of Section 10(a), the Company shall promptly
reimburse and indemnify the Representative for all of their actual out-of-pocket
expenses, including the fees and disbursements of counsel for the Underwriters.
Notwithstanding any contrary provision contained in this Agreement, if this
Agreement shall not be carried out within the time specified herein, or any
extension thereof granted to the Representative, by reason of any failure on the
part of the Company to perform any undertaking or satisfy any condition of this
Agreement by it to be performed or satisfied (including, without limitation,
pursuant to Section 6 or Section 12) then, the Company shall promptly reimburse
and indemnify the Representative for all of their actual out-of-pocket expenses,
including the fees and disbursements of counsel for the
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Underwriters (less amounts previously paid pursuant to Section 5(c) above). In
addition, the Company shall remain liable for all Blue Sky counsel fees and
expenses and Blue Sky filing fees. Notwithstanding any contrary provision
contained in this Agreement, any election hereunder or any termination of this
Agreement (including, without limitation, pursuant to Sections 6, 10, 11 and 12
hereof), and whether or not this Agreement is otherwise carried out, the
provisions of Section 5 and Section 7 shall not be in any way affected by such
election or termination or failure to carry out the terms of this Agreement or
any part hereof.
11. Substitution of the Underwriters. If one or more of the Underwriters
shall fail (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 6, Section 10 or Section 12
hereof) to purchase the Securities which it or they are obligated to purchase on
such date under this Agreement (the "Defaulted Securities"), the Representatives
shall have the right, within 24 hours thereafter, to make arrangement for one or
more of the non-defaulting Underwriters, or any other underwriters, to purchase
all, but not less than all, of the Defaulted Securities in such amounts as may
be agreed upon and upon the terms herein set forth; if, however, the
Representative shall not have completed such arrangements within such 24-hour
period, then:
(a) if the number of Defaulted Securities does not exceed 10% of the
total number of Firm Securities to be purchased on such date, the non-defaulting
Underwriters shall be obligated to purchase the full amount thereof in the
proportions that their respective underwriting obligations hereunder bear to the
underwriting obligations of all non-defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the total
number of Firm Securities, this Agreement shall terminate without liability on
the part of any non- defaulting Underwriters.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of any default by such Underwriter under
this Agreement.
In the event of any such default which does not result in a termination of
this Agreement, the Representative shall have the right to postpone the Closing
Date for a period not exceeding seven days in order to effect any required
changes in the Registration Statement or Prospectus or in any other documents or
arrangements.
12. Default by the Company. If the Company shall fail at the Closing Date
or any Option Closing Date, as applicable, to sell and deliver the number of
Securities which it is obligated to sell hereunder on such date, then this
Agreement shall terminate (or, if such default shall occur with respect to any
Option Securities to be purchased on an Option Closing Date, the Underwriters
may at the Representative's option, by notice from the Representative to the
Company, terminate the Underwriters' obligation to purchase Option Securities
from the Company on such date) without any liability on the part of any
non-defaulting party other than
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pursuant to Section 5, Section 7 and Section 10 hereof. No action taken pursuant
to this Section shall relieve the Company from liability, if any, in respect of
such default.
13. Representative's Warrant. On the Closing Date, the Company shall issue
and sell to the Representative or such persons as it may designate pursuant to
the rules of the NASD, for a total purchase price of $5,00, the Representative's
Warrant, entitling the holder thereof to purchase 100,000 shares of Common Stock
in accordance with the terms of the Representative's Warrant.
14. Notices. All notices and communications hereunder, except as herein
otherwise specifically provided, shall be in writing and shall be deemed to have
been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Underwriters shall be directed to the
Representatives at [225 Park Avenue, New York, New York 10160, Attention: [ ],
with a copy to Reid & Priest LLP, New York, New York 10019, Attention: Steven L.
Wasserman, Esq. Notices to the Company shall be directed to the Company at 313
West 53rd Street, New York, New York 10019, Attention: Zindel Zelmanovitch,
President, with a copy to Stursberg & Veith, Attention: C. Walter Stursberg,
Jr., Esq.
15. Parties. This Agreement shall inure solely to the benefit of and shall
be binding upon, the Underwriters, the Company and the controlling persons,
directors and officers referred to in Section 7 hereof, and their respective
successors, legal representatives and assigns and no other person shall have or
be construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provisions herein contained. No
purchaser of Securities from any Underwriter shall be deemed to be a successor
by reason merely of such purchase.
16. Construction. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of New York without giving
effect to the choice of law or conflict of laws principles.
17. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
taken together shall be deemed to be one and the same instrument.
18. Entire Agreement; Amendments. This Agreement constitutes the entire
agreement of the parties hereto and supersede all prior written or oral
agreements, understandings and negotiations with respect to the subject matter
hereof. This Agreement may not be amended except in a writing, signed by the
Representative and the Company.
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If the foregoing correctly sets forth the understanding between the
Underwriters and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement among
us.
Very truly yours,
FRESHSTART VENTURE CAPITAL CORP.
By:____________________________
Confirmed and accepted as of
the date first above written
SUPPES SECURITIES, INC.
For itself and as Representative of the several
Underwriters named in Schedule A
hereto
By: Suppes Securities, Inc.
By: ____________________________
Name:
Title:
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<PAGE>
SCHEDULE A
Name of Underwriters Number of Firm
- - -------------------- Securities to
be Purchased
--------------
TOTAL....................................... ---------
1,000,000
=========
-36-
1996 STOCK OPTION PLAN
of
FRESHSTART VENTURE CAPITAL CORP.
1. PURPOSES OF THE PLAN. This stock option plan (the "Plan") is designed to
provide an incentive to key employees (including directors and officers who are
key employees) and to consultants and advisors and directors who are not
employees of Freshstart Venture Capital Corp., a New York corporation (the
"Company"), or its present and future Subsidiaries or a Parent (as each such
term is defined in Paragraph 19), and to offer an additional inducement in
obtaining the services of such persons. The Plan provides for the grant of
"incentive stock options" ("ISOs") within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), and nonqualified stock
options which do not qualify as ISOs ("NQSOs"), but the Company makes no
representation or warranty, express or implied, as to the qualification of any
option as an "incentive stock option" under the Code.
2. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Paragraph 12,
the aggregate number of shares of common stock, $.01 par value per share, of the
Company ("Common Stock") for which options may be granted under the Plan shall
not exceed 75,000. Such shares of Common Stock may, in the discretion of the
Board of Directors of the Company (the "Board of Directors"), consist either in
whole or in part of authorized but unissued shares of Common Stock or shares of
Common Stock held in the treasury of the Company. Subject to the provisions of
Paragraph 13, any shares of Common Stock subject to an option which for any
reason expires, is canceled or is terminated unexercised or which ceases for any
reason to be exercisable shall again become available for the granting of
options under the Plan. The Company shall at all times during the term of the
Plan reserve and keep available such number of shares of Common Stock as will be
sufficient to satisfy the requirements of the Plan.
3. ADMINISTRATION OF THE PLAN. The Plan shall be administered by a
committee of the Board of Directors consisting of not less than two directors
(the "Committee"). During such time as the Company has a class of equity
securities registered under Section 12 of the Securities Exchange Act of 1934,
each member of the Committee shall be (a) a "disinterested person" within the
meaning of Rule 16b-3 promulgated under such act until such time as the
amendments to Rule 16b-3 adopted by the Securities and Exchange Commission on
May 30, 1966 in Release No. 34-37260 become effective with respect to the Plan
(the "New Rule Date") and (b) from and after the New Rule Date, a "Non-Employee
Director" within the meaning of Rule 16b-3 (as the same may be in effect and
interpreted from time to time, "Rule 16b-3"). A majority of the members of the
Committee shall constitute a quorum, and the acts of a majority of the members
present at any meeting at which a quorum is present, and any acts approved in
writing by all members without a meeting, shall be the acts of the Committee.
Subject to the express provisions of the Plan, the committee shall
have the authority, in its sole discretion, with respect to Employee Options and
Consultant Options (as defined in Paragraph 19): to determine the key employees
who shall be granted Employee Options and the consultants who shall be granted
Consultant Options; the times when options shall be granted; whether an Employee
Option shall be an ISO or a NQSO; the number of shares of Common Stock to be
subject to each option; the term of each option; the date each option shall
become exercisable; whether an option shall be exercisable in whole, or in part
or in installments and, if in installments, the number of shares of
<PAGE>
Common Stock to be subject to each installment, whether the installments shall
be cumulative, the date each installment shall become exercisable and the term
of each installment; whether to accelerate the date of exercise of an option as
partly paid and, if so, the dates when future installments of the exercise price
shall become due and the amounts of such installments; the exercise price of
each option; the form of payment of the exercise price; whether to restrict the
sale or other disposition of the shares of Common Stock acquired upon the
exercise of an option and, if so, whether to waive any such restriction; whether
to subject the exercise of all or any portion of an option to the fulfillment of
contingencies as specified in the contract referred to in Paragraph 11 (the
"Contract"), including without limitation, contingencies relating to entering
into a covenant not to compete with the Company, any of its Subsidiaries or a
Parent (as defined in Paragraph 19), to financial objectives for the Company,
any of its subsidiaries or a Parent, a division of any of the foregoing, a
product line or other category, and/or the period of continued employment of the
optionee with the Company, any of its Subsidiaries or a Parent, and to determine
whether such contingencies have been met; whether an optionee is Disabled (as
defined in Paragraph 19); and with respect to Employee Options, Consultant
Options and, subject prior to the New Rule Date to the limitations with respect
to formula plans under Rule 16b-3, Non-Employee Director Options (as defined in
Paragraph 19): the amount, if any, necessary to satisfy the obligation of the
Company, a Subsidiary or a Parent to withhold taxes or other amounts, the fair
market value of a share of Common Stock; to construe the respective Contracts
and the Plan, with the consent of the optionee, to cancel or modify an option,
provided, that the modified provision is permitted to be included in an option
granted under the Plan on the date of the modification, and further, provided,
that in the case of a modification (within the meaning of Section 424(h) of the
Code) of an ISO, such option as modified would be permitted to be granted on the
date of such modification under the terms of the Plan; to prescribe, amend and
rescind rules and regulations relating to the Plan; from and after the New Rule
Date, to approve any provisions which under Rule 16b-3 requires approval by the
Board of Directors, a committee of Non-Employee Directors or the stockholders to
be exempt (unless otherwise specifically provided herein); and to make all other
determinations necessary or advisable for administering the Plan. Any
controversy or claim arising out of or relating to the Plan, any option granted
under the Plan or any Contract shall be determined unilaterally by the Committee
in its sole discretion. The determinations of the Committee on the matters
referred to in this Paragraph 3 shall be conclusive and binding on the parties.
No member or former member of the Committee shall be liable for any
action or determination made in good faith with respect to the Plan or any
option granted hereunder. In addition to any other rights of indemnification
they may have as directors or as members or former members of the Committee,
each such member and former member shall be indemnified and held harmless by the
Company from and against any reasonable expenses (including reasonable
attorneys' fees) actually and necessarily incurred in connection with the
defense, of any claim, action, suit, proceeding or appeal (collectively, "Case")
to which he is a party by reason of an action or failure to act under or in
connection with the Plan or any option granted hereunder, and against all
amounts paid by him in settlement of such Case (provided such settlement is
approved by the Company) or paid in satisfaction of a judgment in such Case;
provided, however, that such member or former member shall not be entitled to
indemnification (a) if he did not within 60 days after the institution of such
Case offer to the Company in writing the opportunity to handle and defend the
Case at its own expense, or (b) to the extent the Case resulted from his gross
negligence or willful misconduct.
4. ELIGIBILITY; GRANTS. The Committee may from time to time, in its sole
discretion, consistent with the purposes of the Plan, grant Employee Options to
key employees (including officers and directors who are key employees) of, and
Consultant Options to consultants and advisors to, the Company or any of its
Subsidiaries or a Parent. Such options granted shall cover such number of shares
of Common Stock as the Committee may determine, in its sole discretion,
provided, however,
-2-
<PAGE>
that [the maximum number of shares subject to Employee Options that may be
granted to any individual during any calendar year under the Plan (the "162(m)
Maximum") shall not exceed 15,000 shares; and further, provided, that the
aggregate market value (determined at the time the option is granted in
accordance with Paragraph 5) of the shares of Common Stock for which any
eligible employee may be granted ISOs under the Plan or any other plan of the
Company, or of a Parent or a Subsidiary of the Company, which are exercisable
for the first time by such optionee during any calendar year shall not exceed
$100,000. Such limitation shall be applied by taking ISOs into account in the
order in which they were granted. Any option (or the option thereof) granted in
excess of such amount shall be treated as a NQSO.
Every individual who, on the date the Plan is adopted or approved by
the Securities and Exchange Commission, whichever shall occur later, is a
Non-Employee Director (as defined in Paragraph 19) shall be granted on such date
a Non-Employee Director Option to purchase such number of shares of Common Stock
as shall be determined by the Committee. Thereafter, on the date an individual
first becomes a Non-Employee Director, he shall be granted an option to purchase
such number of shares of Common Stock as shall be determined by the Committee.
5. EXERCISE PRICE. The exercise price of the shares of Common Stock under
each Employee Option and Consultant Option shall be determined by the Committee
in its sole discretion; provided, however, that the exercise price of an ISO
shall not be less than the fair market value of the Common Stock subject to such
option on the date of grant; and further, provided, that if, at the time an ISO
is granted, the optionee owns (or is deemed to own under Section 424(d) of the
Code) stock possessing more than 10% of the total combined voting power of all
classes of stock of the Company, or any of its Subsidiaries or of a Parent, the
exercise price of such ISO shall not be less than 110% of the fair market value
of the Common Stock subject to such ISO on the date of grant. The exercise price
of the shares of Common Stock under each Non-Employee Director Option shall be
equal to the fair market value of the Common Stock subject to such option on the
date of grant.
The fair market value of a share of Common Stock on any day shall be
(a) if the principal market for the Common Stock is a national securities
exchange, the average between the high and low sales prices per share of Common
Stock on such day as reported by such exchange or on a composite tape reflecting
transactions on such exchange, (b) if the principal market for the Common Stock
is not a national securities exchange and the Common Stock is quoted on The
Nasdaq Stock Market ("Nasdaq"), and (i) if actual sales price information is
available with respect to the Common Stock, the average between the high and low
sales prices per share of Common Stock on such day on Nasdaq, or (ii) if such
information is not available, the average between the highest bid and lowest
asked prices per share of Common Stock on such day on Nasdaq, or (c) if the
principal market from the Common Stock is not a national securities exchange and
the Common Stock is not quoted on Nasdaq, the average between the highest bid
and lowest asked prices per share of Common Stock on such day as reported on the
OTC Bulletin Board Service or by National Quotation Bureau, Incorporated or a
comparable service; provided, however, that if clauses (a), (b) and (c) of this
Paragraph are all inapplicable, or if no trades have been made or no quotes are
available for such day, the fair market value of the Common Stock shall be
determined by the Board by any method consistent with applicable regulations
adopted by the Treasury Department relating to stock options. The determination
of the Committee shall be exclusive in determining the fair market value of the
stock.
6. TERM. The term of each Employee Option and Consultant Option granted
pursuant to the Plan shall be such term as is established by the Committee, in
its sole discretion; provided, however, that the term of each ISO granted
pursuant to the Plan shall be for a period not exceeding 10 years from the date
of grant thereof; and further provided, that if, at the time an ISO is granted,
the
-3-
<PAGE>
optionee owns (or is deemed to own under Section 424(d) of the Code) stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company, of any of its Subsidiaries or of a Parent, the term of the
ISO shall be for a period not exceeding five years from the date of grant.
Employee Options and Consultant Options shall be subject to earlier termination
as hereinafter provided. Subject to earlier termination as hereinafter provided,
each Non-Employee Director Option shall be exercisable for a term of five years
commencing on the date of grant.
7. EXERCISE. An option (or any part or installment thereof), to the extent
then exercisable, shall be exercised by giving written notice to the Company at
its principal office (at present 313 West 53rd Street, New York, New York 10019)
stating which ISO or NQSO is being exercised, specifying the number of shares of
Common Stock as to which such option is being exercised and accompanied by
payment in full of the aggregate exercise price therefor (or the amount due on
exercise if the Contract with respect to an Employee Option permits installment
payments) (a) in cash or by certified check or (b) in the case of an Employee
Option or a Consultant Option, if the applicable Contract permits, with
previously acquired shares of Common Stock having an aggregate fair market value
on the date of exercise (determined in accordance with Paragraph 5) equal to the
aggregate exercise price of all options being exercised, or with any combination
of cash, certified check or shares of Common Stock. The Committee may, in its
sole discretion, permit payment of the exercise price of an option by delivery
by the optionee of a properly executed notice, together with a copy of his
irrevocable instructions to a broker acceptable to the Committee to delivery
promptly to the Company the amount of sale or loan proceeds sufficient to pay
such exercise price. In connection therewith, the Company may enter into
agreements for coordinated procedures with one or more brokerage firms.
A person entitled to receive Common Stock upon the exercise of an
option shall not have the rights of a stockholder with respect to such shares of
Common Stock until the date of issuance of a stock certificate to him for such
shares; provided, however, that until such stock certificate is issued, any
optionee using previously acquired shares of Common Stock in payment of an
option exercise price shall continue to have the rights of a stockholder with
respect to such previously acquired shares.
In no case may a fraction of a share of Common Stock be purchased or
issued under the Plan.
8. TERMINATION OF RELATIONSHIP. Except as may otherwise be expressly
provided in the applicable Contract, any holder of an Employee Option or
Consultant Option whose relationship with the Company, its Parent and
Subsidiaries [as an employee, a consultant or advisor] has terminated for any
reason other than in the case of an individual optionee his death or Disability
(as defined in Paragraph 19) may exercise such option, to the extent exercisable
on the date of such termination, at any time within three months after the date
of termination, but not thereafter and in no event after the date the option
would otherwise have expired; provided, however, that if such relationship is
terminated either (a) for cause, or (b) without the consent of the Company, such
option shall terminate immediately. Except as may otherwise be expressly
provided in the applicable Contract, Employee Options and Consultant Options
granted under the Plan shall not be affected by any change in the status of the
optionee so long as the optionee continues to be an employee of, or a consultant
or an advisor to, the Company, or any of the Subsidiaries or a Parent
(regardless of having changed from one to the other or having been transferred
from one corporation to another).
For purposes of the Plan, an employment relationship shall be deemed
to exist between an individual and a corporation if, at the time of the
determination, the individual was an employee of such corporation for purposes
of Section 422(a) of the Code. As a result, an individual on military, sick
-4-
<PAGE>
leave or other bona fide leave of absence shall continue to be considered an
employee for purposes of the Plan during such leave if the period of the leave
does not exceed 90 days, or, if longer, so long as the individual's right to
reemployment with the Company (or a related corporation) is guaranteed either by
statute or by contract. If the period of leave exceeds 90 days and the
individual's right to reemployment is not guaranteed by statute or by contract,
the employment relationship shall be deemed to have terminated on the 91st day
of such leave.
The holder of a Consultant Option whose consulting or advisory
relationship with the Company (and its Parent and Subsidiaries) has terminated
for any reason may exercise such option to the extent exercisable on the date of
such termination, but not thereafter and in no event after the date the option
would otherwise have expired; provided, however, that if such relationship was
terminated either (a) for cause or (b) without the consent of the Company (other
than as a result of the death or Disability of the holder or a key employee of
the holder) the option shall terminate immediately.
Except as provided below, a Non-Employee Director Option may be
exercised at any time during its five year term. The Non-Employee Director
Option shall not be affected by the optionee ceasing to be a director of the
Company or becoming an employee of the Company, any of its Subsidiaries or a
Parent; provided, however, that if he is terminated for cause, such option shall
terminate immediately.
Nothing in the Plan or in any option under the Plan shall confer on
any optionee any right to continue in the employ of, or as a consultant or
advisor to, the Company, any of its Subsidiaries or a Parent, or as a director
of the Company, or interfere in any way with any right of the Company, any of
its Subsidiaries or a Parent to terminate the optionee's relationship at any
time for any reason whatsoever without liability to the Company, any of its
Subsidiaries or a Parent.
9. DEATH OR DISABILITY OF AN OPTIONEE. Except as may otherwise be expressly
provided in the applicable Contract, if an optionee dies (a) while he is an
employee of, or consultant or advisor to, the Company, any of its Subsidiaries
or a Parent, (b) within three months after the termination of such relationship
(unless such termination was for cause or without the consent of the Company) or
(c) within one year following the termination of such relationship by reason of
his Disability, his Employee Option or Consultant Option may be exercised to the
extent exercisable on the date of his death, by his Legal Representative (as
defined in Paragraph 19) at any time within one year after death, but not
thereafter and in no event after the date the option would otherwise have
expired.
Except as may otherwise be expressly provided in the applicable
Contract, any optionee whose relationship as an employee of, or consultant or
advisor to, the Company, its Parent and Subsidiaries has terminated by reason of
such optionee's Disability may exercise his Employee Option or Consultant
Option, to the extent exercisable upon the effective date of such termination,
at any time within one year after such date, but not thereafter and in no event
after the date the option would otherwise have expired.
The term of a Non-Employee Director Option shall not be affected by
the death or Disability of the optionee. If an optionee holding a Non-Employee
Director Option dies during the term of such option, the option may be exercised
at any time during its term by his Legal Representative.
10. COMPLIANCE WITH SECURITIES LAWS. The Committee may require, in its sole
discretion, as a condition to the exercise of any option that either (a) a
Registration Statement under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the shares of Common Stock to be issued upon
such exercise shall be effective and current at the time of exercise, or (b)
there
-5-
<PAGE>
is an exemption from registration under the Securities Act for the issuance of
the shares of Common Stock upon such exercise. Nothing herein shall be construed
as requiring the Company to register shares subject to any option under the
Securities Act or to keep any Registration Statement effective or current.
The Committee may require, in its sole discretion, as a condition to
the exercise of any option that the optionee execute and deliver to the Company
his representations and warranties, in form, substance a scope satisfactory to
the Committee, that (a) the shares of Common Stock to be issued upon the
exercise of the option are being acquired by the optionee for his own account,
for investment only and not with a view to the resale or distribution thereof,
and (b) any subsequent resale or distribution of shares of Common Stock by such
optionee will be made only pursuant to (i) a Registration Statement under the
Securities Act which is effective and current with respect to the shares of
Common Stock being sold, or (ii) a specific exemption from the registration
requirements of the Securities Act, but in claiming such exemption, the optionee
shall prior to any offer of sale or sale of such shares of Common Stock provide
the Company with a favorable written opinion of counsel satisfactory to the
Company, in form, substance and scope satisfactory to the Company, as to the
applicability of such exemption to the proposed sale or distribution.
In addition, if at any time the Committee shall determine, in its sole
discretion, that the listing or qualification of the shares of Common Stock
subject to such option on any securities exchange, Nasdaq or under any
applicable law, or the consent or approval of any governmental agency or
regulatory body, is necessary or desirable as a condition to, or in connection
with, the granting of an option or the issue of shares of Common Stock
thereunder, such option may not be exercised in whole or in part unless such
listing, qualification, consent or approval shall have been effected or obtained
free of any conditions not acceptable to the Committee.
11. STOCK OPTION CONTRACTS. Each option shall be evidenced by an
appropriate Contract which shall be duly executed by the Company and the
optionee, and shall contain such terms, provisions and conditions not
inconsistent herewith as may be determined by the Committee.
12. ADJUSTMENTS UPON CHANGES IN COMMON STOCK. Notwithstanding any other
provisions of the Plan, in the event of any change in the outstanding Common
Stock by reason of a stock dividend, recapitalization, merger in which the
Company is the surviving corporation, split-up, combination or exchange of
shares or the like, the aggregate number and kind of shares subject to the Plan,
the aggregate number and kind of shares subject to each outstanding option and
the exercise price thereof shall be appropriately adjusted by the Board of
Directors, whose determination shall be conclusive.
In the event of (a) the liquidation or dissolution of the Company, or
(b) a merger in which the Company is not the surviving corporation or a
consolidation, any outstanding options shall terminate upon the earliest of any
such event, unless other provision is made therefor in the transaction.
13. AMENDMENTS AND TERMINATION OF THE PLAN. The Plan was adopted by the
Board of Directors on October , 1996. No ISO may be granted under the Plan after
October , 2006. The Board of Directors, without further approval of the
Company's stockholders, may at any time suspend or terminate the Plan, in whole
or in part, or amend it from time to time in such respects as it may deem
advisable, including, without limitation, in order the ISOs granted hereunder
meet the requirements for "incentive stock options" under the Code, to comply
with the provisions of Rule 16b-3, Section 162(m) of the Code, or any change in
applicable law, regulations, rulings or interpretations of administrative
-6-
<PAGE>
agencies; provided, however, that no amendment shall be effective without the
requisite prior or subsequent stockholder approval which would (a) except as
contemplated in Paragraph 12, increase the maximum number of shares of Common
Stock for which options may be granted under the Plan or the 162(m) Maximum, (b)
prior to the New Rule Date, materially increase the benefits accruing to
participants under the Plan or (c) change the eligibility requirements to
receive options hereunder. Notwithstanding the foregoing, prior to the New Rule
Date, the provisions regarding the selection of directors for participation in,
and the amount, the price or the timing of, Non-Employee Director Options shall
not be amended more than once every six months, other than to comport with
changes in the Code, the Employee Retirement Income Security Act or the rules
thereunder. No termination, suspension or amendment of the Plan shall, without
the consent of the holder of an existing and outstanding option affected
thereby, adversely affect his rights under such option. The power of the
Committee to construe and administer any options granted under the Plan prior to
the termination or suspension of the Plan nevertheless shall continue after such
termination or during such suspension.
14. NON-TRANSFERABILITY OF OPTIONS. No option granted under the Plan shall
be transferable otherwise than by will or the laws of descent and distribution,
and options may be exercised, during the lifetime of the optionee, only by the
optionee or his Legal Representatives. Except to the extent provided above,
options may not be assigned, transferred, pledged, hypothecated or disposed of
in any way (whether by operation of law or otherwise) and shall not be subject
to execution, attachment or similar process, and any such attempted assignment,
transfer, pledge, hypothecation or disposition shall be null and void ab initio
and of no force or effect.
15. WITHHOLDING TAXES. The Company (and/or its Subsidiary or Parent, as
applicable) may withhold (a) cash, (b) subject to any limitations under Rule
16b-3, shares of Common Stock to be issued with respect thereto having an
aggregate fair market value on the exercise date (determined in accordance with
Paragraph 5), or (c) any combination thereof, in an amount equal to the amount
which the Committee determines is necessary to satisfy the obligation of the
Company, a Subsidiary or a Parent to withhold Federal, state and local income
taxes or other amounts incurred by reason of the grant or exercise of an option,
its disposition, or the disposition of the underlying shares of Common Stock.
Alternatively, the Company may require the holder to pay to the Company (or to
the Subsidiary or Parent) such amount, in cash, promptly upon demand. The
Company shall not be required to issue any shares of Common Stock pursuant to
any such option until all required payments have been made. Fair market value of
the shares of Common Stock shall be determined in accordance with Paragraph 5.
16. LEGENDS; PAYMENT OF EXPENSES. The Company may endorse such legend or
legends upon the certificates for shares of Common Stock issued upon the
exercise of an option under the Plan and may issue such "stop transfer"
instructions to its transfer agent in respect of such shares as it determines,
in its discretion, to be necessary or appropriate to (a) prevent a violation of,
or to perfect an exemption from, the registration requirements of the Securities
Act any applicable securities laws, (b) implement the provisions of the Plan or
any agreement between the Company and the optionee with respect to such shares
of Common Stock, or (c) permit the Company to determine the occurrence of a
"disqualifying disposition," as described in Section 421(b) of the Code, of the
shares of Common Stock issued or transferred upon the exercise of an ISO granted
under the Plan.
The Company shall pay all issuance taxes with respect to the issuance
of shares of Common Stock upon the exercise of an option granted under the Plan,
as well as all fees and expenses incurred by the Company in connection with such
issuance.
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<PAGE>
17. USE OF PROCEEDS. The cash proceeds from the sale of shares of Common
Stock pursuant to the exercise of options under the Plan shall be added to the
general funds of the Company and used for such corporate purposes as the Board
of Directors may determine.
18. SUBSTITUTION AND ASSUMPTIONS OF OPTIONS OF CERTAIN CONSTITUENT
CORPORATIONS. Anything in this Plan to the contrary notwithstanding, the Board
of Directors may, without further approval by the stockholders, substitute new
options for prior options of a Constituent Corporation (as defined in Paragraph
19) or assume the prior options of such Constituent Corporation.
19. DEFINITIONS. For purposes of the Plan, the following terms shall be
defined as set forth below:
(a) Constituent Corporation. The term "Constituent Corporation" shall
mean any corporation which engages with the Company, any of its Subsidiaries or
a Parent in a transaction to which Section 424(a) of the Code applies (or would
apply if the option assumed for substituted were an ISO), or any Parent or
Subsidiary of such corporation.
(b) Consultant Option. The term "Consultant Option" shall mean a NQSO
granted pursuant to the Plan to a person who, at the time of grant, is a
consultant to the Company or a Subsidiary of the Company, and at such time is
neither a common law employee of the Company or any of its Subsidiaries nor a
director of the Company.
(c) Disability. The term "Disability" shall mean a permanent and total
disability within the meaning of Section 22(e)(3) of the Code.
(d) Employee Option. The term "Employee Option" shall mean an option
granted pursuant to the Plan to an individual who, at the time of grant, is a
key employee of the Company or any of its subsidiaries.
(e) Legal Representative. The term "Legal Representative" shall mean
the executor, administrator or other person who at the time is entitled by law
to exercise the rights of a deceased or incapacitated optionee with respect to
an option granted under the Plan.
(f) Non-Employee Director. The term "Non-Employee Director" shall mean
a person who is a director of the Company, but is not a common law employee of
the Company, any of its Subsidiaries or a Parent.
(g) Non-Employee Director Option. The term "Non-Employee Director
Option" shall mean a NQSO granted pursuant to the Plan to a person who, at the
time of the grant, is a Non- Employee Director.
(h) Parent. The term "Parent" shall have the same definition as
"parent corporation" in Section 424(e) of the Code.
(i) Subsidiary. The term "Subsidiary" shall have the same definition
as "subsidiary corporation" in Section 424(f) of the Code.
20. GOVERNING LAW; CONSTRUCTION. The Plan, such options as may be granted
hereunder and all related matters shall be governed by, and construed in
accordance with, the laws of the State of Delaware, without regard to conflict
of law provisions.
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<PAGE>
Neither the Plan or any Contract shall be construed or interpreted
with any presumption against the Company by reason of the Company causing the
Plan or Contract to be drafted. Whenever from the context it appears
appropriate, any term stated in either the singular or plural shall include the
singular and plural, and any term stated in the masculine, feminine or neuter
gender shall include the masculine, feminine and neuter.
21. PARTIAL INVALIDITY. The invalidity, illegality or unenforceability of
any provision in the Plan or any Contract shall not affect the validity,
legality or enforceability of any other provision, all of which shall be valid,
legal and enforceable to the fullest extent permitted by applicable law.
22. STOCKHOLDER APPROVAL. The Plan shall be subject to approval by a
majority of the votes present in person or by proxy at the next duly held
meeting of the Company's stockholders at which a quorum is present. No options
granted hereunder may be exercised prior to such approval; provided, however,
that the date of grant of any option shall be determined as if the Plan had not
been subject to such approval. Notwithstanding the foregoing, if the Plan is not
approved by a vote of the stockholders of the Company on or before October ,
1997, the Plan and any options granted hereunder shall terminate.
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REPRESENTATIVE WARRANT AGREEMENT
REPRESENTATIVE WARRANT AGREEMENT dated as of ____________, 1996, between
FRESHSTART VENTURE CAPITAL CORPORATION, a New York corporation (the "Company"),
and SUPPES SECURITIES, INC. ("Suppes").
W I T N E S S E T H
WHEREAS, in connection with a public offering (the "Offering") of up to
1,150,000 shares of Common Stock, $.01 par value (the "Common Stock") of the
Company pursuant to a registration statement (the "Registration Statement") on
Form N-5 (File No. 33- 86518), the Company desires to issue to Suppes
Representative Warrants (the "Representative Warrants") to purchase an aggregate
of 100,000 shares (the "Shares") of Common Stock.
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements herein contained, the Company and Suppes hereby agree as follows:
1. Issuance of Warrants: Form of Warrants; Execution of Warrants. The
Company shall issue, sell and deliver the Representative Warrants to Suppes or,
at Suppes' direction, to its bona fide officers or designees, for $5.00
concurrently with the Firm Shares closing date (the "Closing") under the
underwriting agreement, dated _________, 1996, between the Company and the
underwriters for which Suppes will act as representative and certain other
parties (the "Underwriting Agreement") relating to the Offering. The
Representative Warrants shall be executed on behalf of the Company by the manual
or facsimile signature of its present or any future Chairman or President, under
its corporate seal affixed or in facsimile, and attested by the manual or
facsimile signature of its Secretary or Assistant Secretary.
2. Registration. The Representative Warrants shall be numbered and shall be
registered in a warrant register as they are issued. The Company shall be
entitled to treat the registered holder of any Representative Warrant (the
"Holder") as the owner thereof for all purposes and shall not be bound to
recognize any equitable or other claim to or interest in such Representative
Warrants on the part of any other Person (as hereinafter defined), and shall not
be liable for any registration or transfer of Representative Warrants that are
registered or to be registered in the name of a fiduciary or the nominee of a
fiduciary unless made with the actual knowledge that a fiduciary or nominee is
committing a breach of trust in requesting such registration or transfer or with
such knowledge of such facts that its participation therein amounts to bad
faith. The Representative Warrants shall be registered initially in the name of
"Suppes Securities, Inc." in such denominations as Suppes may request in writing
to the Company; provided, however, that prior to the Closing, Suppes may
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designate that the Representative Warrants be issued in varying amounts directly
to its bona fide officers or designees and not to Suppes. Such designation will
only be made by Suppes if it determines such issuances would not violate the
interpretation of the Board of Governors of the National Association of
Securities Dealers, Inc. (the "NASD") relating to the review of corporate
financing arrangements.
3. Transfer of Warrants
3.1 The Representative Warrants may not be sold, assigned, transferred,
pledged or hypothecated (collectively, "transferred") for a period of one year
after the effective date of the Registration Statement, except to bona fide
officers of Suppes. Subsequent to such one year period the Representative
Warrants may be transferred to any persons subject to compliance with the
provisions of Section 10 hereof. The Representative Warrants shall be
transferable only on the books of the Company maintained at its principal
executive office (the "Company Office") upon delivery thereof duly indorsed by
the Holder or by the Holder's duly authorized attorney or representative, or
accompanied by proper evidence of succession, assignment or authority to
transfer. In all cases of transfer by an attorney, the original power of
attorney, duly approved, or a copy thereof, duly certified, shall be deposited
and remain with the Company. In case of transfer by executors, administrators,
guardians or other legal representatives, duly authenticated evidence of their
authority shall be produced, and may be required to be deposited and remain with
the Company in its discretion.
3.2 Upon any registration of transfer, the Company shall deliver a new
Representative Warrant or Representative Warrants to the Persons entitled
thereto. The Representative Warrants may be exchanged, at the option of the
Holder thereof, for other Representative Warrants of different denominations, of
like tenor and representing in the aggregate the right to purchase a like number
of Shares upon surrender to the Company or its duly authorized agent.
Notwithstanding the foregoing, the Company shall have no obligation to cause
Representative Warrants to be transferred on its books to any Person, unless the
Holder or Holders thereof shall furnish to the Company evidence of compliance
with the Securities Act of 1933, as amended (the "Act"), in accordance with the
provisions of Section 10 of this Agreement.
4. Exercise of Warrants; Terms of Warrants
4.1 Each Representative Warrant shall entitle the Holder thereof to
purchase from the Company one share of Common Stock at a purchase price of
$______ per Share, payable in full at the time of exercise of the Representative
Warrant. Except as the context otherwise requires, the term "Exercise Price" as
used in this Agreement shall mean the purchase price of one share. Each
Representative Warrant may be exercised for a four-year period commencing on the
first anniversary of the effective date of the Registration Statement. The term
"Expiration Date" as used in this Agreement shall mean the latest time and date
at which the Representative Warrants may be exercised. After the Expiration
Date,
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any unexercised Representative Warrants shall be void and all rights of Holders
with respect thereto shall cease.
4.2 During the period specified in and subject to the provisions of this
Section 4, Representative Warrants may be exercised by their surrender at the
Company Office with the election-to-purchase form set forth on (or attached to)
the Representative Warrant duly completed and executed, accompanied by payment
in full to the Company of the aggregate Exercise Price for each Share with
respect to which Representative Warrants are being exercised, which amounts
shall be paid in full, either in United States currency, by a bank cashier's
check or money order payable to the order of the Company or by wire transfer to
an account designated by the Company or pursuant to Section 4.3 hereof. Within
three (3) business days after the exercise of any Representative Warrants, the
Company shall issue a certificate or certificates for the number of full Shares
to which the Holder is entitled, registered in accordance with the instructions
set forth in the election-to-purchase form. All Shares shall be duly authorized,
validly issued, fully paid, nonassessable and free from all taxes, liens and
charges. Certificates representing such Shares shall be delivered by the Company
in such names and denominations as are required for delivery to, or in
accordance with the instructions of, the Holder.
4.3 In lieu of a monetary payment of the Exercise Price, a Holder may elect
to receive, without the payment of any additional consideration, Shares equal to
the value of his Representative Warrants or portion thereof by the surrender of
such Representative Warrants to the Company with the net issuance election
marked in the election-to-purchase form. Thereupon, the Company shall issue to
the Holder, such number of fully paid and nonassessable Shares as is computed
using the following formula:
X = Y(A-B)
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A
where X = the number of Shares to be issued to the Holder pursuant to this
Section 4.3.
Y = the number of Shares covered by his Representative Warrants in
respect of which the net issuance election is made pursuant to this
Section 4.3.
A = the fair market value of one share of Common Stock, as defined
below, as at the time the net issuance election is made pursuant to
this Section 4.3.
B = the Exercise Price in effect under this Representative Warrant at
the time the net issuance election is made pursuant to this Section
4.3.
The fair market value of a share of Common Stock shall be the per share last
sale price for the Common Stock on the trading day immediately preceding the day
the Company receives the duly completed election-to-purchase form as quoted on
the Nasdaq Small Cap Market or
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such other quotation system or national securities exchange on which the Common
Stock is then principally traded.
4.4 Each Person in whose name any such certificate for Shares is issued
shall for all purposes be deemed to have become the holder of record of the
Shares represented thereby on the date upon which such Representative Warrants
were surrendered for exercise, accompanied by payment of the Exercise Price,
irrespective of the date of issuance or delivery of such certificate for Shares;
provided, however, that if, at the date of the surrender of such Representative
Warrants and payment of the Exercise Price, the transfer books for the Shares
purchasable upon the exercise of such Representative Warrants shall be closed,
the certificates for the Shares shall be issuable as of the date on which such
books shall next be opened (whether before or after the Expiration Date) and,
until such date, the Company shall be under no duty to deliver any certificate
for such Shares; provided further, that the transfer books of record, unless
otherwise required by law, shall not be closed at any one time for a period
longer than twenty (20) days.
4.5 The Representative Warrants shall be exercisable, at the election of
the Holders thereof, in full or from time to time in part and, in the event that
less than all of the surrendered Representative Warrants are exercised, the
Company shall execute and mail, by first-class mail, within ten (10) days of the
date upon which the Representative Warrants were exercised, to the Holder of
such Representative Warrants or such other Person (as defined herein) as shall
be designated in the election to purchase, a new Representative Warrant
representing the number of full Representative Warrants not exercised. No
fractional Shares shall be issued; all issuances upon exercise would be rounded
to the nearest whole Share.
5. Payment of Taxes. The Company shall promptly pay all documentary stamp
taxes attributable to the issuance of Shares upon the exercise of any
Representative Warrants, but any transfer taxes that may be payable in
connection with the issuance of Representative Warrants or certificates for
Shares in any name other than that of the Holder of the Representative Warrants
surrendered shall be paid by such Holder.
6. Mutilated or Missing Representative Warrants. In case any of the
Representative Warrants shall be mutilated, lost, stolen or destroyed, the
Company shall issue and deliver in exchange and substitution for and upon
cancellation of the mutilated Representative Warrant, or in lieu of and
substitution for the lost, stolen or destroyed Representative Warrant, a new
Representative Warrant of like tenor and representing an equivalent right or
interest; but only upon receipt of evidence reasonably satisfactory to the
Company of such loss, theft or destruction of such Representative Warrant.
Applicants for such substitute Representative Warrants shall also comply with
such other reasonable regulations and pay such other reasonable charges as the
Company may prescribe.
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7. Reservation of Shares. The Company shall at times reserve and keep
available for issuance upon the exercise of Representative Warrants a number of
Shares that will be sufficient to permit the exercise in full of all outstanding
Representative Warrants. Continental Stock Transfer and Trust Company (the
"Transfer Agent") and every subsequent transfer agent for the Company's Common
Stock, or other securities issuable upon exercise of Representative Warrants,
shall be irrevocably authorized and directed at all times to reserve such number
of Shares as shall be required for such purpose. The Company will keep a copy of
this Agreement on file with the Transfer Agent and with every subsequent
transfer agent for any of the Company's Shares or other securities issuable upon
the exercise of Representative Warrants. The Company shall supply the Transfer
Agent (and any such subsequent transfer agent) with duly executed certificates
for such purpose. All Representative Warrants surrendered upon the exercise
thereof shall be canceled and such canceled Representative Warrants shall
constitute sufficient evidence of the number of Shares that have been issued
upon the exercise of the Representative Warrants. After the Expiration Date, no
Shares shall be subject to reservation in respect of any unexercised
Representative Warrant.
8. Adjustments.
The Exercise Price and the number and kind of Shares shall be subject to
adjustment from time to time upon the happening of certain events as provided in
this Section 8.
8.1 If at any time prior to the full exercise of Representative Warrants
the Company shall (a) pay a dividend or make a distribution on its shares of
Common Stock in shares of Common Stock (other than cash dividends or
distributions out of surplus or earnings), (b) subdivide, reclassify or
recapitalize its outstanding Common Stock into a greater number of shares or (c)
combine, reclassify or recapitalize its outstanding Common Stock into a smaller
number of shares, the Exercise Price in effect at the time of the record date of
such subdivision, combination, reclassification or recapitalization shall be
proportionately adjusted so that the Holder shall be entitled to receive the
aggregate number and kind of shares which, if this Warrant had been exercised in
full immediately prior to such time, he would have owned upon such exercise and
been entitled to receive upon such dividend, subdivision, combination,
reclassification or recapitalization. Such adjustment shall be made successively
whenever any event listed in this Section 8.1 shall occur.
8.2 If the Company shall hereafter issue rights, options or warrants to all
holders of its outstanding Common Stock, without charge to such holders,
entitling them to subscribe for or purchase shares of Common Stock (or Common
Stock equivalents) at a price (or having a conversion price per share) less than
the lower of the Exercise Price or the current market price of the Common Stock
(as determined pursuant to Section 8.5 hereof) on the record date described
below, the Exercise Price then in effect shall be adjusted so that the Exercise
Price shall equal the price determined by multiplying the Exercise Price in
effect immediately prior to the date of such sale or issuance (which date in the
event of distribution
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to shareholders shall be deemed to be the record date set by the Company to
determine shareholders entitled to participate in such distribution) by a
fraction, the numerator of which shall be (i) the number of shares of Common
Stock outstanding on the date of such sale or issuance, plus (ii) the number of
additional shares of Common Stock which the aggregate consideration received by
the Company upon such issuance or sale (plus the aggregate of any additional
amount to be received by the Company upon the exercise of such rights or
warrants) would purchase at such current market price per share of the Common
Stock; and the denominator of which shall be (i) the number of shares of Common
Stock outstanding on the date of such issuance or sale, plus (ii) the number of
additional shares of Common Stock offered for subscription or purchase (or into
which the Common Stock equivalents so offered are convertible). Such adjustments
shall be made successively whenever such warrants or rights are issued. To the
extent that shares of Common Stock are not delivered (or Common Stock
equivalents are not delivered) after the expiration of such rights or warrants,
the Exercise Price shall be readjusted to the Exercise Price which would then be
in effect had the adjustments been made upon the issuance of such rights or
warrants been made upon the basis of delivery of only the number of shares of
Common Stock (or Common Stock equivalents) actually delivered.
8.3 In case the Company shall hereafter fix a record date for making a
distribution to the holders of Common Stock of assets or evidences of its
indebtedness (excluding cash dividends or distributions out of earnings and
dividends or distributions referred to in Section 8.1 hereof) or Common Stock
subscription rights, options or warrants for Common Stock or Common Stock
equivalents (excluding those referred to in Section 8.2 hereof), then in each
such case the Exercise Price in effect after such record date shall be adjusted
to the price determined by multiplying the Exercise Price in effect immediately
prior thereto by a fraction, the numerator of which shall be the total number of
shares of Common Stock outstanding multiplied by the current market price per
share of Common Stock (as defined in Section 8.5 hereof), less the fair market
value (as determined by the Company's Board of Directors) of said assets or
evidences of indebtedness so distributed or of such Common Stock subscription
rights, options and warrants or of such Common Stock equivalents applicable to
one share of Common Stock, and the denominator of which shall be the total
number of shares of Common Stock outstanding multiplied by such current market
price per share of Common Stock. Such adjustment shall be made successively
whenever the record date for such distribution is fixed and shall become
effective immediately after such record date.
8.4 Whenever the Exercise Price payable upon exercise of each
Representative Warrant is adjusted pursuant to Section 8.1, 8.2 or 8.3 hereof,
the Shares shall simultaneously be adjusted by multiplying the number of Shares
initially issuable upon exercise of each Warrant by the Exercise Price in effect
on the date thereof and dividing the product so obtained by the Exercise Price,
as adjusted.
8.5 For the purpose of any computation under this Section 8, the current
market price per share of Common Stock at any date shall be deemed to be the
average of
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the daily closing price for five (5) consecutive trading days immediately
preceding such date. The closing sale or price for each day shall be the last
sale price regular way or, in case no such reported sales take place on such
day, the average of the last reported bid and asked prices regular way, in
either case on the principal national securities exchange on which the Common
Stock is admitted to trading or listed, or if not listed or admitted to trading
on such exchange, the representative closing sale or bid price as reported by
Nasdaq, or other similar organization if Nasdaq is no longer reporting such
information, or if not so available, the fair market price as determined by the
Board of Directors.
8.6 No adjustments in the Exercise Price shall be required unless such
adjustment would require an increase or decrease of at least five cents ($.05)
in such price; provided, however, that any adjustments which by reason of this
Section 8.6 are not required to be made shall be carried forward and taken into
account in any subsequent adjustment. All calculations under this Section 8
shall be made to the nearest cent or to the nearest one-hundredth of a share, as
the case may be.
8.7 In the event that at any time, as a result of any adjustment made
pursuant to Section 8.1 hereof, the Holder thereafter shall become entitled to
receive any shares of the Company, other than Common Stock, thereafter the
number of such other shares so receivable upon exercise of any Representative
Warrant shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to the
Common Stock contained in this Section 8.
9. Consolidation, Merger, Sale of Assets, Reorganization, etc. General
Provisions
9.1 In case the Company, after the Effective Date, (a) shall consolidate
with or merge into any other Person (as defined below) and shall not be the
continuing or surviving Person of such consolidation or merger, (b) shall permit
any other Person to consolidate with or merge into the Company and the Company
shall be the continuing or surviving person but, in connection with such
consolidation or merger, Common Stock or other securities shall be changed into
or exchanged for cash, stock, or other securities of any other Person or any
other property, (c) shall transfer, directly or indirectly through transactions
involving any of or all of its subsidiaries all or substantially all its
properties and assets to any other Person or (d) shall effect a capital
reorganization or reclassification of Common Stock or other securities, then,
and in the case or each such transaction, the Company shall make proper
provision such that the Holder of a Representative Warrant, upon the exercise
thereof at any time after the consummation of each such transaction, shall be
entitled to receive, at the Exercise Price in effect immediately prior to such
consummation, the highest amount of cash, securities or other property to which
such Holder would actually have been entitled as a shareholder of Common Stock
upon such consummation if such Holder had exercised this Representative Warrant
immediately prior thereto, subject to adjustments subsequent to such
consummation as nearly equivalent as possible to the adjustments provided for in
this Section 9; provided, however, that if prior to
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the consummation of such transaction, a purchase tender or exchange offer shall
have been made to and accepted by the holders of more than 50% of the
outstanding shares of Common Stock, and if the Holder of the Representative
Warrants, by written notice to the Company signed on or before the date
immediately preceding the date of expiration of such purchase, tender or
exchange offer, declares an intention to exercise his Warrants in whole or in
part, such Holder shall be entitled, upon consummation of such offer, to receive
upon exercise the highest amount of cash, securities or other property to which
such Holder would actually have been entitled as a holder of the Shares under
the Representative Warrants if such Holder had exercised his Warrants prior to
the expiration of such purchase, tender, or exchange offer, and if all Shares
which such Holder would have owned as a result of such exercise had been
purchased pursuant to such purchase, tender or exchange offer. "Person" shall
mean an individual, a corporation, a partnership, a trust, an unincorporated
organization or a government or any agency or political subdivision thereof.
9.2 Assumption of Obligations. Notwithstanding anything contained in this
Agreement to the contrary, the Company shall not effect any of the transactions
described in subdivisions (a) through (d) of Section 9.1 unless prior to the
consummation thereof, each Person (other than the Company) that may be required
to deliver any cash, stock or other securities or other property upon the
exercise of Representative Warrants as provided herein shall assume, by written
instrument delivered to the Holders of the Representative Warrants, and
reasonably satisfactory to Suppes or Holders of a majority in interest of the
Representative Warrants (i) the obligations of the Company under this Agreement
and the Representative Warrants (and if the Company shall survive the
consummation of any such transaction, such assumption shall be in addition to,
and shall not release the Company from, any continuing obligations of the
Company under this Agreement and the Representative Warrants) and (ii) the
obligation to deliver to such Holder such cash, stock or other securities or
other property as such Holder may be entitled to receive in accordance with the
provisions of this Section 9.
9.3 Other Dilutive Events. The Board of Directors of the Company shall have
an ongoing obligation to determine in good faith whether any event has occurred
as to which the provisions of Section 8 or this Section 9 shall not be strictly
applicable, but with respect to which the failure to make any adjustment to the
Exercise Price or the Shares would not fairly protect the purchase rights
represented by the Representative Warrant in accordance with the intent and
principles of this Agreement. In each case in which such determination shall be
made, the Company shall appoint a firm of independent public accountants,
reasonably acceptable to Suppes or the Holders of a majority-in-interest of the
Representative Warrants, which shall give its opinion upon the adjustments, if
any, consistent with the intent and principles established in this Agreement
necessary to preserve without dilution the purchase rights represented by this
Agreement and the Representative Warrants. Upon receipt of such opinion, the
Company will promptly mail a copy thereof to the Holders and shall make the
adjustments described therein.
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9.4 No Dilution or Impairment. The Company shall not, by amendment of its
Articles of Incorporation or By-Laws or through any consolidation, merger,
reorganization, transfer of assets, dissolution, issue, sale, grant or
assumption of securities or any other voluntary action, avoid or seek to avoid
the observance or performance of any of the terms of this Agreement or the
Representative Warrants, but will at all times, whether or not requested to do
so, in good faith assist in the carrying out of all such terms and in the taking
of all such action as may be necessary or appropriate in order to protect the
rights of the Holders against dilution or other impairment. Without limiting the
generality of the foregoing, the Company shall take all such action as may be
necessary or appropriate in order that the Company may validly and legally issue
fully paid and nonassessable Shares upon the exercise of all Representative
Warrants from time to time outstanding.
9.5 Notice Evidence of Adjustments. Whenever any adjustment is made
pursuant to this Agreement, the Company shall promptly cause a notice setting
forth the details of the adjustment to be mailed to the Holders, at their last
addresses appearing in the Warrant register, and shall cause a certified copy
thereof to be mailed to the Transfer Agent. The Company shall retain a firm of
independent public accountants of recognized standing selected by the Board of
Directors (who may be the regular accountants employed by the Company) to make
any computation required by such adjustment and a certificate signed by such
firm shall accompany said notice and shall be conclusive evidence of the
correctness of such adjustment.
10. Restrictions of Dispositions. The Shares have not been registered under
the Act pursuant to the Registration Statement. Suppes represents and warrants
to the Company that it understands that (a) the Shares may not be transferred
except pursuant to (i) a post-effective amendment to the effective Registration
Statement, (ii) another effective registration statement under the Act relating
thereto, or (iii) any available exemption from registration under the Act
permitting such disposition of securities and an opinion of counsel, reasonably
satisfactory to counsel for the Company, that an exemption from such
registration is available and (b) the Representative Warrants may not be
transferred except in accordance with the provisions of Section 3 hereof,
pursuant to an effective registration statement under the Act relating thereto
or pursuant to any available exemption from registration under the Act
permitting such disposition of securities and an opinion of counsel, reasonably
satisfactory to counsel for the Company, that an exemption from such
registration is available.
11. Certificates to Bear Legends. The Representative Warrants shall be
subject to a stop-transfer order and the certificate or certificates therefor
shall bear the following legend:
NEITHER THE REPRESENTATIVE WARRANTS NOR THE SECURITIES ISSUABLE UPON EXERCISE
HEREOF MAY BE SOLD OR TRANSFERRED PRIOR TO ________ 1997 (SUBJECT TO CERTAIN
LIMITED EXCEPTIONS), SUCH SECURITIES MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT
TO (i) A POST-EFFECTIVE
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AMENDMENT TO THE REGISTRATION STATEMENT, (ii) ANOTHER EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933 (THE "ACT") RELATING THERETO OR (iii)
AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE ACT RELATING TO THE
DISPOSITION OF SECURITIES AND AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO
COUNSEL FOR THE COMPANY, THAT AN EXEMPTION FROM REGISTRATION UNDER THE ACT IS
AVAILABLE, AND THE REPRESENTATIVE WARRANTS MAY NOT BE TRANSFERRED EXCEPT IN
ACCORDANCE WITH THE PROVISIONS OF SECTION 3 OF THE REPRESENTATIVE WARRANT
AGREEMENT BETWEEN FRESHSTART VENTURE CAPITAL CORP. AND SUPPES SECURITIES, INC.
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT RELATING THERETO
OR PURSUANT TO ANY AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE ACT
PERMITTING SUCH DISPOSITION OF SECURITIES AND AN OPINION OF COUNSEL, REASONABLY
SATISFACTORY TO COUNSEL FOR THE COMPANY, THAT AN EXEMPTION FROM SUCH
REGISTRATION IS AVAILABLE.
The Shares upon exercise of the Representative Warrants shall be subject to
a stop-transfer order and the certificate or certificates evidencing any such
Shares shall bear a legend in substantially the following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 (THE "ACT") PURSUANT TO A REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION. SUCH SHARES MAY NOT BE OFFERED OR
SOLD EXCEPT PURSUANT TO (i) A POST-EFFECTIVE AMENDMENT TO THE REGISTRATION
STATEMENT, (ii) ANOTHER EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT RELATING
THERETO OR (iii) AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER SUCH ACT
RELATING TO THE DISPOSITION OF SECURITIES AND AN OPINION OF COUNSEL, REASONABLY
SATISFACTORY TO COUNSEL FOR THE COMPANY, THAT AN EXEMPTION FROM REGISTRATION
UNDER THE ACT IS AVAILABLE.
12. Registration Rights.
12.1 Demand Registration Rights. Upon written request of the then Holder(s)
of at least a majority of the Representative Warrants or Shares, if issued, made
at any time within the period commencing one (1) year and ending six (6) years
after the effective date of the Registration Statement, the Company shall file
within a reasonable period of time and, in any event, within sixty (60) days
after receipt of such written request, at its sole expense, on no more than two
occasions, a registration statement or a post effective amendment to any
previously filed registration statement that included the Shares under the Act
and the Investment Company Act of 1940, as amended (the "1940 Act") registering
the Shares for sale to the public and either must be declared effective. Within
fifteen (15) days after receiving any such notice, the Company shall give notice
to the other
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Holders of the Representative Warrants and/or Shares acquired upon exercise of
the Representative Warrants advising that the Company is proceeding with such
post-effective amendment or registration statement, and offering to include
therein the Shares of such other Holders. The Company shall not be obligated to
so include the Shares of any such other Holder unless such other Holder shall
accept such offer by notice in writing to the Company within ten (10) days after
receipt of such notice from the Company. The Company shall use its best efforts,
through its officers, directors, auditors and counsel in all matters necessary
or advisable, to file and cause to become effective such post-effective
amendment or registration statement as promptly as practicable and for a period
of ninety (90) days thereafter to reflect in the post-effective amendment or
registration statement financial statements that are prepared in accordance with
Section 10(a)(3) of the Act and any facts or events arising that, individually
or in the aggregate, represent a fundamental and/or material change in the
information set forth in the post-effective amendment or registration statement
to enable any Holders of Representative Warrants to exercise Representative
Warrants and/or sell Shares during said ninety-day period. If the initiating
Holders intend to distribute the Shares covered by their request by means of an
underwriting they shall so advise the Company as part of their request made
pursuant to this Section 12.1 and the Company shall include such information in
the written notice referred to in this Section 12.1. In such event, the right of
any Holder to include its Shares in such registration shall be conditioned upon
such Holder's participation in such underwriting and the inclusion of such
Holder's Shares in such registration (unless otherwise mutually agreed upon by a
majority in interest of the initiating Holders and such Holder) to the extent
provided herein. All Holders proposing to distribute their securities through
such underwriting shall, together with the Company, enter into an underwriting
agreement in customary form with the underwriter or underwriters selected for
such underwriting by a majority in interest of the initiating Holders, which
underwriter shall be reasonably acceptable to the Company. Notwithstanding any
other provision of this Section 12.1, if the underwriter advises the initiating
Holders and the Company in writing that marketing factors require a limitation
of the number of shares to be underwritten, then the Company shall so advise all
Holders of Shares which would otherwise be underwritten pursuant hereto, and the
number of Shares that may be included in the underwriting shall be allocated
among all Holders thereof, including the initiating Holders, on a pro rata basis
according to the number of Shares held by such Holders.
12.2 Other Registration Rights. If at any time within the period commencing
on the date hereof and ending six (6) years after the effective date of the
Registration Statement, the Company determines to file a registration statement
(other than a registration statement on Form S-8 or any other similar form) or a
post-effective amendment to the Registration Statement or any other registration
statement, covering the offer and sale of any securities of the Company, whether
for its own account or for the account of others, the Company shall (i) advise
each Holder of the Representative Warrant or Shares by written notice
("Registration Notice") at least four weeks prior to the proposed filing date of
any such registration statement or post-effective amendment to a registration
statement and (ii) upon request of the Holder by written notice to the Company
within fifteen (15) days after receipt of the Registration Notice, include in
any such registration statement or post-effective
-11-
<PAGE>
amendment the Shares of such Holder, subject to the terms and conditions hereof.
If the registration statement or post-effective amendment to a registration
statement is with respect to a distribution in an underwritten offering, the
right of any Holder to include its Shares in such registration shall be
conditioned upon such Holder's participation in such underwriting and the
inclusion of such Holder's Shares in such registration may be limited to the
extent provided herein. All Holders proposing to distribute their securities
through such underwriting shall, together with the Company, enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting by a majority in interest of the initiating
holders, which underwriter shall be reasonably acceptable to the Company.
Notwithstanding any other provision of this Section 12.2, if the underwriter
advises the shareholders that desire to participate in such offering (including
the initiating holder) and the Company in writing that marketing factors require
a limitation of the number of shares to be underwritten, then the Company shall
so advise all Holders of Shares which would otherwise be underwritten pursuant
hereto, and the number of Shares that may be included in the underwriting shall
be allocated first to the Company and thereafter to the extent that any Shares
may be offered for the account of any shareholders among all holders thereof,
including the initiating holders, on a pro rata basis according to the number of
Shares held by such holders.
12.3 Action to be Taken by the Company. In connection with the registration
of Shares in accordance with Section 12.1, and Section 12.2 hereof, the Company
shall:
(a) bear the expenses of any registration under Section 12.1 or 12.2
hereof, including but not limited to legal, accounting and printing fees;
provided, however, that in no event shall the Company be obligated to pay
(i) any fees and disbursements of legal counsel retained by Holders of
Representative Warrants and/or Shares, or (ii) any underwriters' discount
or commission payable in respect of such Shares, payment of which shall, in
each case, be the sole responsibility of the Holders of the Shares;
(b) use its best efforts to register or qualify the Shares for offer
or sale under state securities or blue sky laws of such jurisdictions in
which the participating Holders propose to offer Shares, and to do any and
all other acts and things that may be necessary or advisable to enable the
Holders to consummate the proposed sale, transfer or other disposition of
such securities in any jurisdiction; and
(c) enter into a cross-indemnity agreement, in customary form, with
each underwriter, if any, and each Holder of Shares included in such
Registration Statement provided that, if so requested by the underwriter,
such Holders shall provide the underwriters with several indemnity
agreements as to information regarding such Holders.
-12-
<PAGE>
12.4 Information by Holders. Each Holder shall provide, upon reasonable
request by the Company, information for inclusion in such Registration Statement
as may be required by the applicable rules and regulations of the Act.
13. Notices to Holders.
13.1 Nothing contained in this Agreement or in any of the Representative
Warrants shall be construed as to confer upon the Holders thereof the right to
vote or to receive dividends or to consent to receive notice as shareholders in
respect of the meetings of shareholders or the election of directors of the
Company or any other matter, or any rights whatsoever as shareholders of the
Company; provided, however, that in the event that a meeting of shareholders
shall be called to consider and take action on a proposal for the voluntary
dissolution of the Company, other than in connection with a consolidation,
merger, or sale of all, or substantially all, of its property, assets, business
and good will as an entirety, then and in that event the Company shall cause a
notice thereof to be sent by first- class mail, postage prepaid, at least twenty
(20) days prior to the date fixed as a record date or the date of closing the
transfer books in relation to such meeting, to each registered Holder of
Registration Warrants at such Holder's address appearing on the Warrant
register; but failure to mail or receive such notice or any defect therein or in
the mailing thereof shall not affect the validity of any action taken in
connection with such voluntary dissolution. If such notice shall have been so
given and if such a voluntary dissolution shall be authorized at such meeting or
any adjournment thereof, then from and after the date on which such voluntary
dissolution shall have been duly authorized by the shareholders, the purchase
rights represented by the Representative Warrants and all other rights with
respect thereto shall cease and terminate.
13.2 In the event the Company intends to make any distribution on or to
shareholders of its Common Stock, including, without limitation, any dividend or
distribution from earned surplus, any dividend or distribution of stock, assets
or evidences of indebtedness, any distribution to be made in connection with a
consolidation or merger in which the Company is the surviving corporation or any
distribution of shares of stock of any corporation at least a majority of whose
outstanding stock is owed by the Company, then the Company shall cause a notice
of its intention to make such distribution to be sent by first- class mail,
postage prepaid, at least twenty (20) days prior to the date fixed as a record
date or the date of closing the transfer books in relation to such distribution,
to each registered Holder of Representative Warrants at such Holder's address
appearing on the Warrant register, but failure to mail or to receive such notice
or any defect therein or in the mailing thereof shall not affect the validity of
any action taken in connection with such distribution or issuance.
14. Notices. Any notice or demand required by this Agreement to be given or
made by the Holder to or on the Company shall be sufficiently given or made if
in writing and sent by first-class or registered mail, postage prepaid, or
transmitted by any standard form of telecommunication addressed as follows:
-13-
<PAGE>
Freshstart Venture Capital Corp.
313 West 53rd Street
New York, New York 10019
Attn: President
Any notice or demand required by this Agreement to be given or made by the
Company to or on the Holder of any Representative Warrant shall be sufficiently
given or made, whether or not such Holder receives the notice, if sent by
first-class or registered mail, postage prepaid, addressed to such Holder at his
last address as shown on the books of the Company.
15. Governing Law. The validity, interpretation and performance of this
Agreement of each Representative Warrant issued hereunder and of the respective
terms and provisions thereof shall be governed by the law of the State of New
York.
16. Counterparts. This Agreement may be executed in any number of
counterparts, each of which so executed shall be deemed to be an original; but
such counterparts shall together constitute but one and the same instrument.
FRESHSTART VENTURE CAPITAL CORP.
By: ___________________________
Name:
Title:
SUPPES SECURITIES, INC.
By: ___________________________
Name:
Title:
-14-
<PAGE>
EXHIBIT A
(Form of Representative Warrant Certificate)
NEITHER THE REPRESENTATIVE WARRANT NOR THE SECURITIES ISSUABLE UPON EXERCISE
HEREOF MAY BE SOLD OR TRANSFERRED PRIOR TO _______ 1997 (SUBJECT TO CERTAIN
LIMITED EXCEPTIONS), SUCH SECURITIES MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT
TO (i) A POST-EFFECTIVE AMENDMENT TO THE REGISTRATION STATEMENT, (ii) ANOTHER
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ("THE ACT")
RELATING THERETO OR (iii) AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE ACT
RELATING TO THE DISPOSITION OF SECURITIES AND AN OPINION OF COUNSEL, REASONABLY
SATISFACTORY TO COUNSEL FOR THE COMPANY, THAT AN EXEMPTION FROM REGISTRATION
UNDER THE ACT IS AVAILABLE AND THE REPRESENTATIVE WARRANT MAY NOT BE TRANSFERRED
EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF SECTION 3 OF THE WARRANT AGREEMENT
BETWEEN FRESHSTART VENTURE CAPITAL CORP. AND SUPPES SECURITIES, INC., PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT RELATING THERETO OR
PURSUANT TO ANY AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE ACT PERMITTING
SUCH DISPOSITION OF SECURITIES AND AN OPINION OF COUNSEL, REASONABLY
SATISFACTORY TO COUNSEL FOR THE COMPANY, THAT AN EXEMPTION FROM SUCH
REGISTRATION IS AVAILABLE.
No. ________ _______ Representative Warrants
VOID AFTER 5:00 P.M. NEW YORK CITY TIME
On ________ __, 2001
FRESHSTART VENTURE CAPITAL CORP.
Representation Warrant Certificate
THIS CERTIFIES THAT for the value received, SUPPES SECURITIES, INC., or
registered assigns, is the registered holder of the number of Representative
Warrants set forth above, each of which entitles the owner thereof to purchase
at any time from _____ __, 1997 until 5:00 p.m., New York City time on _____,
2001 (the "Expiration Date"), one share (the "Share") of Common Stock, $.01 par
value, of FRESHSTART VENTURE CAPITAL CORP., a New York corporation (the
"Company"), at a purchase price per Share (the "Exercise Price") equal to $_____
upon presentation and surrender of
-15-
<PAGE>
this Representative Warrant Certificate with the Form of Election to Purchase
duly executed. The number of Representative Warrants evidenced by this
Representative Warrant Certificate (and the number of Shares that may be
purchased upon exercise thereof) set forth above, and the Exercise Price set
forth above, are the number and Exercise Price as of the date of original
issuance of the Representative Warrant, based on the shares of Common Stock of
the Company as constituted at such date.
This Representative Warrant Certificate is subject to, and entitled to the
benefits of, all of the terms, provisions and conditions of an agreement dated
as of _____, 1996 (the "Representative Warrant Agreement") between the Company
and Suppes Securities, Inc., which Representative Warrant Agreement is hereby
incorporated herein by reference and made a part hereof and to which
Representative Warrant Agreement reference is hereby made for full description
of the rights, limitations of rights, duties and immunities hereunder of the
Company and the holders of the Representative Warrant Certificates. Copies of
the Representative Warrant Agreement are on file at the principal office of the
Company.
This Representative Warrant Certificate, with or without other
Representative Warrant Certificates, upon surrender at the principal office of
the Company, may be exchanged for another Representative Warrant Certificate or
Certificates of like tenor and date evidencing Representative Warrants entitling
the holder to purchase a like aggregate number of Shares as the Representative
Warrant evidenced by the Representative Warrant Certificate. If the
Representative Warrant evidenced by this Representative Warrant Certificate
shall be exercised in part, the holder hereof shall be entitled to receive upon
surrender hereof another Representative Warrant Certificate or Certificates for
the number of whole Representative Warrants not exercised.
No holder of this Representative Warrant Certificate shall be entitled to
vote or to receive dividends or to consent or to receive notice as a shareholder
at the meetings of shareholders for the election of directors of the Company or
any other matter, or to any rights whatsoever as shareholder of the Company.
If this Representative Warrant Certificate shall be surrendered for
exercise within any period during which the transfer books for the Company's
Common Stock are closed for any purpose, the Company shall not be required to
make delivery of certificates for the Shares purchasable upon such exercise
until the date of the reopening of said transfer books.
-16-
<PAGE>
IN WITNESS WHEREOF, Freshstart Venture Capital Corp. has caused the
signature (or facsimile signature) of its Chairman and Secretary to be printed
hereon and its corporate seal (or facsimile) to be printed hereon.
Dated: _______, 1996
FRESHSTART VENTURE CAPITAL CORP.
By:____________________________________
Name:
Title:
[Corporate Seal]
Attest:
- - --------------------------------
-17-
<PAGE>
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer the
Representation Warrant Certificates).
TO FRESHSTART VENTURE CAPITAL CORP.
FOR VALUE RECEIVED _______________________ hereby sells, assigns and
transfers unto _________ this Representative Warrant Certificate, together with
all right, title and interest therein, and does hereby irrevocably constitute
and appoint ______, to transfer the within Representative Warrant Certificate on
the books of the within-named Company, with full power of substitution.
DATED: _____________, 19
Signature___________________________
Signature Guaranteed:
NOTICE
The signature of the foregoing assignment must correspond to the name as
written upon the face of this Representative Warrant Certificate in every
particular, without alteration or enlargement or any change whatsoever.
-18-
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise the Representative Warrant
Certificates).
TO FRESHSTART VENTURE CAPITAL CORP.
The undersigned hereby irrevocably elects to exercise Representative
Warrants represented by this Representative Warrant Certificate to purchase
_____ Shares issuable upon the exercise of such Representative Warrants and
requests that certificates for such Shares be issued in the name of:
Please insert social security or other
identifying number
_______________________________
_______________________________
- - -------------------------------
(Please print name and address)
The undersigned elects to pay the Exercise Price for the Shares being
purchased by [check one]:
|_| Delivery of a check, money order or wire transfer pursuant to Section
4.2 of the Representative Warrant Agreement
|_| Net cashless exercise pursuant to Section 4.3 of the Representative
Warrant Agreement.
If such number of Representative Warrants shall not be all the Representative
Warrants evidenced by this Representative Warrant Certificate, a new
Representative Warrant Certificate for the balance remaining of such
Representative Warrants shall be registered in the name of and delivered to:
Please insert social security or other
identifying number
_______________________________
_______________________________
-19-
<PAGE>
- - -------------------------------
(Please print name and address)
Dated: _______________, 19
- - -------------------------------
Signature
(Signature must conform in all aspects to name of holder as specified on the
face of this Representative Warrant Certificate)
Signature Guaranteed:
-20-
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement
of Freshstart Venture Capital Corp. on Form N-5 of our report dated July 23,
1995 on our examinations for the years ended May 31, 1996, 1995 and 1994. We
also consent to the reference to our firm under the caption "Experts".
/s/ MICHAEL C. FINKELSTEIN
MICHAEL C. FINKELSTEIN
Certified Public Accountant
New York, New York
October 16, 1996
<TABLE> <S> <C>
<ARTICLE> 6
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> JUN-01-1995
<PERIOD-END> MAY-31-1996
<INVESTMENTS-AT-COST> 8,598,015
<INVESTMENTS-AT-VALUE> 8,417,457
<RECEIVABLES> 92,946
<ASSETS-OTHER> 415,102
<OTHER-ITEMS-ASSETS> 313,254
<TOTAL-ASSETS> 9,238,759
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 4,380,000
<OTHER-ITEMS-LIABILITIES> 278,298
<TOTAL-LIABILITIES> 4,658,298
<SENIOR-EQUITY> 1,410,000
<PAID-IN-CAPITAL-COMMON> 3,155,082
<SHARES-COMMON-STOCK> 1,096,688
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 15,379
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 3,170,461
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,033,944
<OTHER-INCOME> 0
<EXPENSES-NET> 679,719
<NET-INVESTMENT-INCOME> 354,225
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 1,719
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 352,506
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 36,373
<ACCUMULATED-NII-PRIOR> 13,660
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 307,764
<GROSS-EXPENSE> 335,388
<AVERAGE-NET-ASSETS> 3,169,602
<PER-SHARE-NAV-BEGIN> 2.89
<PER-SHARE-NII> 0.32
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.27
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<AVG-DEBT-PER-SHARE> 3.98
</TABLE>
