As filed with the Securities and Exchange Commission on September 18, 1998
Registration No. 333-58681
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM N-2
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X] PRE-EFFECTIVE AMENDMENT NO. 1
[ ] POST-EFFECTIVE AMENDMENT NO. _____
-------------------
East Coast Venture Capital, Inc.
(Exact Name of Registrant as Specified in its Charter)
50 East 42nd Street
Suite 1301
New York, NY 10017
(212) 245-6460
(Address and Telephone Number of Registrant's Principal Executive Offices)
Zindel Zelmanovitch, President
East Coast Venture Capital, Inc.
50 East 42nd Street
Suite 1301
New York, NY 10017
(212) 245-6460
(Name, Address and Telephone Number of Agent for Service)
Copies to:
Stuart Neuhauser, Esq. Lawrence G. Nusbaum, Esq.
Berlack, Israels & Liberman LLP Gusrae Kaplan & Bruno
120 West 45Th Street 120 Wall Street
New York, NY 10036 New York, NY 10005
(212) 704-0100 (212) 704-0196 (Fax) (212) 269-1400 (212) 809-5449 (Fax)
Approximate date of proposed sale to the public: As soon as reasonably
practicable after the effective date of this Registration Statement.
================================================================================
<PAGE>
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis in reliance on Rule 415 under the
Securities Act of 1933, other than securities offered in connection with a
dividend reinvestment plan, check the following box: [X]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------------
Proposed Proposed
Maximum Maximum
Title of Each Class of Amount to be Offering Price Aggregate Amount of
Securities to be Registered Registered Per Security(1) Offering Price Registration Fee
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units, each consisting of one
Share of Common Stock, $.01
par value per Share, and one
Warrant 1,437,500(2) $ 4.10 $ 5,893,750 $1,738.66
- ----------------------------------------------------------------------------------------------------------------------
Common Stock 1,437,500 -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Warrants 1,437,500 -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Common Stock underlying Warrants 1,437,500 $ 5.50 $ 7,906,250 $2,332.34
- ----------------------------------------------------------------------------------------------------------------------
Underwriters' Unit Purchase Option 125,000 $.0001 $12.50 $ 0.00
- ----------------------------------------------------------------------------------------------------------------------
Units in Underwriters' Purchase
Option 125,000 $ 6.56 820,000 241.90
- ----------------------------------------------------------------------------------------------------------------------
Common Stock in Underwriters'
Unit Purchase Option 125,000 -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Warrants in Underwriters' Unit
Purchase Option 125,000 -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Common Stock underlying Warrants
in Underwriters' Unit Purchase
Option 125,000 $ 8.80 $ 1,100,000 324.50
- ----------------------------------------------------------------------------------------------------------------------
Total Registration and Fee $15,720,012.50 $4,637.40(3)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
ii
<PAGE>
- --------------
(1) Estimated solely for purposes of calculating registration fee
pursuant to Rule 457 under the Securities Act of 1933, as amended (the "Act").
Pursuant to Rule 416 under the Act, this Registration Statement covers such
additional indeterminate number of shares of Common Stock as may be issued by
reason of adjustments in the number of shares of Common Stock pursuant to
anti-dilution provisions contained in the Warrant Agreement governing the
Warrants and the Underwriters' Unit Purchase Option. Because such additional
shares of Common Stock will, if issued, be issued for no additional
consideration, no registration fee is required.
(2) Includes 187,500 Units included in the Representative's Over-
Allotment Option.
(3) $4,393.21 previously paid. $244.19 paid herewith.
It is proposed that this filing will become effective
[X] when declared effective pursuant to Section 8(c).
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.
iii
<PAGE>
EAST COAST VENTURE CAPITAL, INC.
CROSS REFERENCE SHEET
Between Items in Registration
Statement on Form N-2 and the Prospectus
<TABLE>
<CAPTION>
Item in Form N-2 Caption or Location in Prospectus
---------------- ---------------------------------
<S> <C> <C>
1. Outside Front Cover Outside Front Cover
2. Inside Front and Outside Back Cover Page Inside Front and Outside Back Cover Page
3. Fee Table and Synopsis Prospectus Summary; Fees and Expenses
4. Financial Highlights Selected Financial Data
5. Plan of Distribution Outside Front Cover; Underwriting
6. Selling Shareholders Not Applicable
7. Use of Proceeds Use of Proceeds
8. General Description of Registrant Outside Front Cover; Prospectus
Summary; Risk Factors; Business
9. Management Management; Custodian;
Transfer Agent/Warrant Agent
10. Capital Stock, Long-Term Debt and Prospectus Summary; Capitalization;
Other Securities Description of Securities
11. Defaults and Arrears in Senior Not Applicable
Securities
12. Legal Proceedings Business
13. Table of Contents of the Statement Not Applicable
of Additional Information
iv
<PAGE>
14. Cover Page Not Applicable
15. Table of Contents Outside Front Cover Page
16. General Information and History Prospectus Summary; Business
17. Investment Objectives and Policies Business
18. Management Management
19. Control Persons and Principal Holders of Principal Stockholders
Securities
20. Investment Advisory and other Services Transfer Agent/Warrant Agent;
Custodian; Experts
21. Brokerage Allocation and Other Practices Not Applicable
22. Tax Status Business; Tax Considerations
23. Financial Statements Financial Statements
</TABLE>
Pursuant to General Instruction on Form N-2, all information required
to be set forth in Part B: Statement of Additional Information has been included
in Part A: The Prospectus. The items required to be set forth in Part C are set
forth in Part C.
v
<PAGE>
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 AN OFFER, SOLICITATION OF SALE WOULD BE UNLAWFUL
PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 18, 1998
EAST COAST VENTURE CAPITAL, INC.
1,250,000 UNITS
East Coast Venture Capital, Inc., a Delaware corporation (the
"Company") is offering (the "Offering") 1,250,000 units (the "Units") at a price
of $4.10 per Unit. Each Unit consists of one share of Common Stock, par value
$.01 per share ("Common Stock") and one redeemable common stock purchase warrant
("Warrants", and collectively with the Units and Common Stock, the
"Securities").
The Company is a Specialized Small Business Investment Company
("SSBIC") licensed by the United States Small Business Administration ("SBA")
and is also a non-diversified, closed-end investment company that intends to
elect to be treated as a business development company under the Investment
Company Act of 1940, as amended (the "1940 Act"). The Company's business is to
provide loan and/or equity financing to small and medium sized businesses or
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's investment objective is to achieve a high level of
current income from the collection of interest on loans and long term growth
through the appreciation in value of the Company's equity interests in the
companies in which it will invest.
This Prospectus concisely sets forth the information about the Company
that a prospective investor ought to know before investing, and it should be
retained for future reference. Additional information about the Company has been
filed with the Securities and Exchange Commission ("SEC" or "Commission") and is
available upon written or oral request. The information required by the
Statement of Additional Information is included in this Prospectus.
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE
OF RISK AND SUBSTANTIAL DILUTION. AN INVESTMENT IN THESE SECURITIES SHOULD BE
CONSIDERED ONLY BY PERSONS CAPABLE OF SUSTAINING THE LOSS OF THEIR ENTIRE
INVESTMENT. SEE "RISK FACTORS" WHICH BEGIN ON PAGE ___ AND "DILUTION".
SHARES OF CLOSED-END INVESTMENT COMPANIES HAVE IN THE PAST EXHIBITED A
TENDENCY TO TRADE AT DISCOUNTS FROM THEIR UNDERLYING NET ASSET VALUES AND PUBLIC
OFFERING PRICES. THE RISK OF LOSS ASSOCIATED WITH THIS TENDENCY MAY BE GREATER
FOR INVESTORS WHO EXPECT TO SELL THE SECURITIES OFFERED HEREBY SOON AFTER THE
OFFERING COMMENCES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
1
<PAGE>
(Front Cover Continued)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Discounts and Proceeds to the
Price to Public Commissions(1) Company(2)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Unit..................... $4.10 $.41 $3.69
- ------------------------------------------------------------------------------------------------------
Total(3)..................... $5,125,000 $512,500 $4,612,500
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) The value of each share of Common Stock and Warrant included in a
Unit is $4.00 and $.10, respectively. Does not include additional underwriting
compensation to be paid by the Company to the Underwriters in the form of (a)
warrants to purchase up to 125,000 Units exercisable over a four year period
commencing one year from the date of this Prospectus at an exercise price of
$6.56 per Unit (the "Underwriters' Unit Purchase Option"), (b) a non-accountable
expense allowance (the "Non-Accountable Expense Allowance") equal to three
percent (3%) of the aggregate public offering price of the Units, $153,750
($176,813 assuming exercise in full of the Over-Allotment Option, as defined
below) and (c) consulting fees of $108,000 payable to the Representative in full
at the closing of the Offering. The Company has agreed to indemnify the
Underwriters against certain liabilities arising under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting expenses of this offering payable by the Company
estimated to be $561,750, including the Representative's Non-Accountable Expense
Allowance of $153,750 and the $108,000 financial consulting fee referred to
above. After deducting such expenses, the net proceeds to the Company will be
approximately $4,050,750. See "Use of Proceeds."
(3) The Company has granted the Representative an option to purchase up
to 187,500 Units at any time before 30 days from the date hereof solely for
covering over-allotments (the "Over-Allotment Option"). If the Over-Allotment
Option is exercised in full (and the estimated expenses of the Offering are
$584,813) the total price to the public will be $5,893,750, and the total
discounts and commissions will be $589,375. The net proceeds to the Company
after deducting such discounts and commissions and expenses would be $
4,719,562. See "Use of Proceeds."
The Common Stock and Warrants are detachable and may trade separately
immediately upon issuance. Each Warrant entitles the holder to purchase one
share of Common Stock, at an exercise price of $5.50, subject to adjustment,
from the earlier of (i) 24 months from the date of this Prospectus or (ii) 12
months from the date of this Prospectus, with the consent of First Liberty
Investment Group, Inc., the representative (the "Representative") of the several
underwriters of this Offering (the "Underwriters"), until ________, 2003. The
Warrants may be redeemed by the Company from the earlier of (i) 24 months from
the date of this Prospectus or (ii) 12 months from the date of this Prospectus,
with the consent of the Representative, on not less than 30 days notice at $.05
per Warrant, provided the average closing price of the Common Stock exceeds
$7.50 per share for 20 consecutive trading days ending within 15 days prior to
the notice. See "Description of Securities." Prior to this Offering, there has
been no public market for the Securities and there can be no assurance that any
such market will develop. For information regarding the factors considered in
determining the initial public offering prices of the Securities and the
exercise price of the Warrants, see "Underwriting." The Company has applied to
have the Units, Common Stock and Warrants approved for quotation on the Nasdaq
SmallCap Market ("Nasdaq") under the symbols "ECVCU", "ECVC" and "ECVCW",
respectively. No assurances are made that an active trading market will develop
even if the Securities are accepted for quotation or that the Company will
maintain certain minimum criteria established by Nasdaq for continued quotation.
FIRST LIBERTY INVESTMENT GROUP, INC.
The date of this Prospectus is ____________, 1998.
2
<PAGE>
An investment in an SSBIC may afford an 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 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" and "Tax Considerations".
The securities are being offered subject to prior sale, when, as and if
delivered to and accepted by the Underwriters, and subject to certain other
conditions. the Underwriters reserve the right to withdraw, cancel or modify
such offers without notice and to reject orders in whole or in part. it is
expected that delivery of the Securities will be made on or about ___________,
1998.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
SECURITIES, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING
TRANSACTIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
AVAILABLE INFORMATION
The Company has filed with the SEC a Registration Statement on Form N-2
under the Securities Act of 1933, as amended (the "Securities Act") with respect
to the Securities offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement. For further information
with respect to the Company and the Securities, reference is made to the
Registration Statement. Statements contained in this Prospectus as to the
contents of any contract or other documents referred to are not necessarily
complete, and in each instance reference is made the copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.
The Company intends to file a registration statement under the
Securities Exchange Act of 1934, as amended. By doing so it will become subject
to the informational requirements of such Act, and in accordance therewith it
will file reports and other information with the Commission.
Reports and other information filed by the Company can be inspected and
copied at the public reference facilities maintained at the Commission at Room
1024, 450 Fifth Street, N.W., Washington, DC 20549. Copies of such material can
be obtained upon written request addressed to the Commission, Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
The Commission maintains a web site on the Internet (http://www.sec.gov) that
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Commission through the
Electronic Data Gathering, Analysis and Retrieval System ("EDGAR").
3
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS
PROSPECTUS. IN ADDITION, UNLESS OTHERWISE INDICATED TO THE CONTRARY, ALL
INFORMATION APPEARING HEREIN DOES NOT GIVE EFFECT TO THE EXERCISE OF (I) THE
OVER-ALLOTMENT OPTION; (II) THE WARRANTS (INCLUDING THE WARRANTS INCLUDED IN THE
OVER-ALLOTMENT OPTION); (III) THE UNDERWRITERS' UNIT PURCHASE OPTION; (IV)
OPTIONS THAT MAY BE GRANTED PURSUANT TO THE COMPANY'S STOCK OPTION PLAN; AND (V)
OPTIONS TO PURCHASE UP TO 30,150 SHARES OF COMMON STOCK. SEE "MANAGEMENT-STOCK
OPTION PLAN," "DESCRIPTION OF SECURITIES" AND "UNDERWRITING." 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 A 21-FOR-1 STOCK SPLIT ON
SEPTEMBER 29, 1997.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE
RESULTS DISCUSSED IN THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE
THESE POSSIBLE DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN
THE "RISK FACTOR" SECTION OF THIS PROSPECTUS.
THE COMPANY
The Company is a Small Business Investment Company ("SBIC") that
operates as a Specialized Small Business Investment Company ("SSBIC") under the
Small Business Investment Act of 1958, as amended (the "1958 Act"), and is
regulated and financed in part by the Small Business Administration ("SBA"). The
Company is a non-diversified investment company that intends to be regulated as
a business development company ("Business Development Company"), a type of
closed-end investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"). In operating its business as a SSBIC and Business
Development Company, the Company intends to qualify as a "regulated investment
company" ("RIC") for federal income tax purposes. However, it may not qualify as
a RIC before the fiscal year beginning August 1, 1999 or even after that date.
See "Business Regulation as a Business Development Company" and "Tax
Considerations." Prior to this Offering, Veritas Financial Corp. owned 94.7% of
the shares of Common Stock outstanding and following the Offering, it will own
77.68% of such shares. See "Principal Stockholders", "Management" and
"Risk-Factors - Control by Principal Stockholder."
As an SSBIC, the Company provides loan and/or equity financing to small
and medium sized businesses or 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's investment objective is to achieve a
high level of current income from the collection of interest on loans and long
term growth through the appreciation in value of its equity interests in the
companies in which it will invest. Equity interests may be acquired by the
Company as a condition to a loan financing or, in the alternative, the Company
may elect to make financing available to a client by directly purchasing an
equity interest in such client rather than making a loan. The Company has to
date made one equity investment in a business which was not accompanied by a
loan. See "Business-Loan Portfolio; Valuation."
As of July 31, 1998, the Company had outstanding 55 loans, of which 15
loans, representing approximately 15% of the Company assets, were to finance
taxicab medallions, taxicabs and related assets; 9 loans, representing
approximately 21% of the Company's assets, were to auto repair shops and gas
stations; 18 loans, representing approximately 19% of the Company's assets, were
to laundromats and dry cleaners and the balance of its loans, representing
approximately 45% of the Company's assets, were to various small businesses such
as retail stores, gourmet food shops and restaurants. Taxi loans, are
collateralized by taxicabs medallions
4
<PAGE>
and related assets. The loans to other small business concerns are
collateralized by their assets. The Company intends to reduce the percentage of
its assets that relate to New York City taxicab financing by diversifying its
loan portfolio and reducing its concentration in such area and by making equity
investments in small and medium sized businesses.
The Company's business strategy focuses on the following:
o CAPITALIZE ON SSBIC STATUS TO OBTAIN LEVERAGE. The Company intends to
capitalize on its SSBIC status by using its leverageable capital and obtaining
additional funds to increase its lending through the issuance of subordinated
debentures to the SBA.
o CAPITALIZE ON UNDERSERVED MARKET USING SPECIFIC LENDING CRITERIA.
Generally, the Company has and will in the future continue to make loans and/or
equity investments to small and medium sized businesses that meet the Company's
lending and equity investment criteria. The Company believes that such
businesses, because of their size, are not aggressively targeted by larger
traditional lending institutions and offer a significant potential market for
the Company.
o INCREASE LOAN PORTFOLIO. The Company intends to increase its loan
portfolio with the proceeds of the Offering and with additional funds, such as
SBA financing, to increase its interest income.
o INCREASE EQUITY PORTFOLIO. The Company intends to increase its percentage
of loans that will include the issuance to the Company of equity securities
which, as discussed above, may lead to long term growth through the appreciation
in value of such equity interests.
o BROADEN REFERRAL SOURCES TO INCREASE LOANS AND/OR EQUITY PORTFOLIO. The
Company intends to expand its business by increasing its marketing efforts
through loan referral sources to identify prospects to the Company for financing
opportunities.
o IDENTIFY POTENTIAL ACQUISITIONS. The Company intends to increase its loan
and/or equity portfolios through acquisitions of other SBICs and SSBICs or their
respective portfolios, either with cash or with the issuance of Common Stock.
As an SSBIC, the Company has certain benefits not available in other
lending institutions. An investment in an SSBIC, such as a purchase of the
Company's Common Stock, may afford certain investors favorable tax benefits,
including the ability to defer recognizing capital gain from the sale of
publicly traded securities, subject to certain limitations, if the investor uses
the proceeds from such sale within 60 days to purchase common stock in an SSBIC.
See "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 by buying shares of the Company's Common
Stock. See "Federal Regulation-Community Reinvestment Act." In October 1996,
legislation was enacted which eliminated the authority of the SBA to issue new
SSBIC licenses. The Company believes that, on the date of this Prospectus, it
will be only one of two publicly traded SSBICs. See "Business-Specialized Small
Business Investment Companies; Benefits" and "Management - Conflicts of
Interest."
The Company was incorporated in Delaware on June 24, 1998 as the
successor (by merger on June 26, 1998) to East Coast Venture Capital, Inc., a
New York corporation ("East Coast - NY"), which was incorporated on June 14,
1983. Prior to 1995, the Company was a registered investment company under the
1940
5
<PAGE>
Act, but since 1995, it has not operated as a registered investment company or,
until _______, 1998 as a business development company. The Company's executive
offices are located at 50 East 42nd Street, New York, NY 10017, and its
telephone number at such address is (212) 245-6460.
THE OFFERING
Securities offered by the Company....... 1,250,000 Units, each Unit
consisting of one share of Common
Stock, par value $.01, and one
Warrant. The Common Stock and Warrants
are detachable and may trade
separately immediately upon issuance.
See "Description of Securities."
Common Stock Outstanding Prior
to Completion of the Offering.......... 5,701,545 shares
Common Stock to be Outstanding
After Completion of the Offering....... 6,951,545 shares
Warrants Outstanding Prior
to Completion of the Offering.......... 0
Warrants to be Outstanding
After Completion of the Offering....... 1,250,000
Terms of Warrants...................... Each Warrant entitles the holder to
purchase one share of the Company's
Common Stock at a price of $5.50,
subject to adjustment, for a period
commencing the earlier of (i) 24
months from the date of this
Prospectus or (ii) 12 months from the
date of this Prospectus, with the
consent of the Representative, and
ending five years from the date of
this Prospectus. The Warrants are
redeemable by the Company commencing
the earlier of (i) 24 months from the
date of this Prospectus or (ii) 12
months from the date of this
Prospectus, with the consent of the
Representative, on not less than 30
days' notice at $.05 per Warrant, if
the average closing price of the
Common Stock exceeds $7.50 per share
for 20 consecutive trading days ending
within 15 days prior to the notice.
See "Description of Securities."
6
<PAGE>
Proposed Nasdaq SmallCap Market Units -- ECVCU
Symbols .............................. Common Stock -- ECVC
Warrants -- ECVCW
Risk Factors........................... The Securities are subject to a high
degree of risk resulting from, among
other matters, earlier losses and
negligible net income during the past
five years, uncertainties of SBA
financing, loan payment defaults,
illiquidity of potential equity
investments, limitations on taxicab
medallion financing, loan repayments
by borrowers and competition. The
Securities are also subject to
substantial dilution inasmuch as
present stockholders acquired their
equity interest in the Company
substantially below the per share
Offering Price. See "Risk Factors" and
"Dilution."
Use of Proceeds........................ The net proceeds of this Offering,
estimated at $4,050,750, will be used
to make loans and/or equity
investments to small and medium sized
businesses to increase the Company's
loan and equity portfolios that meet
the Company's lending and investment
criteria. See "Use of Proceeds."
7
<PAGE>
FEES AND EXPENSES
The purpose of the following table is to assist an investor in
understanding the various costs and expenses that a purchaser of the Shares in
the Offering (assuming $.10 is attributed to the Warrant contained in the Unit)
will bear directly or indirectly.
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales load (as a percentage of the initial public offering price).................... 15.1%(1)
ANNUAL EXPENSES (as a percentage of net assets attributable to the Common Stock)(2)
Management Fees (3).................................................................. 2.18%
Interest payments on borrowed funds (4).............................................. 4.13%
Other expenses (estimated) (5)....................................................... .59%
TOTAL ANNUAL EXPENSES..................................................................... 6.90%
</TABLE>
- -------------------
(1) Represents a 10% underwriting discount, which is a one-time fee paid by the
Company to the Underwriters in connection with the Offering, a 3%
non-accountable expense allowance and $108,000 of consulting fees paid to
the Representative. Does not reflect other non-cash compensation to the
Underwriters. See "Underwriting."
(2) Assumes a net asset value of $2,188,749, upon completion of the Offering.
(3) The Company's estimated operating expenses for the fiscal year ending July
31, 1999, consisting primarily of management fees and expenses.
(4) Interest expense consists of amounts paid to the SBA on subordinated
debentures issued by the Company to the SBA based on a weighted average
interest rate of 6.83% per annum. Such debentures are used by the Company
as funds to lend and/or make equity investments.
(5) Includes investment origination expenses, rent, other administrative and
similar day-to-day operating expenses, and estimated accounting, legal,
shareholder relations, transfer agent, stock record and miscellaneous
expenses for the fiscal year ending July 31, 1999.
EXAMPLE
The following example projects the amount of cumulative expenses that
would be incurred over various future periods with respect to a $1,000
investment in the Company. These amounts assume no additional leverage and
reflect a 10% sales load (the underwriting discount paid by the Company in
connection with the Offering) and payment of the annual expenses as estimated in
the table above.
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
A purchaser of the Shares would pay the
following expenses on a $1,000 investment,
assuming a 5.0% annual return................... $83 $251 $420 $839
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
EXPENSES OF THE COMPANY, AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN. The example assumes (as required by the Commission) a 5.0% annual return;
however, the Company's performance will vary and may result in a return greater
or less than 5.0%. Although, the example also assumes (as required) that the
investor has reinvested all dividends and distributions at net asset value, no
such plan has been adopted.
8
<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JULY 31,
(AUDITED)
-----------------------------------------------------------------------
1994 1995 1996 1997 1998
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
ASSETS:
Loans and equity
investments ............... $ 2,862,031 $ 2,851,793 $ 4,248,120 $ 4,198,446 $ 4,213,095
Less: reserve for .......... (148,158) (148,158) (148,158) (148,158) (148,158)
loan losses ............... -- -- -- -- --
Loans at fair value ........ 2,713,873 2,703,635 4,099,962 4,050,288 4,064,937
----------- ----------- ----------- ----------- -----------
Current assets ............. 1,293,145 1,098,182 552,480 651,939 2,241,793
----------- ----------- ----------- ----------- -----------
Total Assets ............... $ 4,007,018 $ 3,801,817 $ 4,652,442 $ 4,702,227 $ 6,306,730
=========== =========== =========== =========== ===========
LIABILITIES:
SBA subordinated
debentures ................ 2,000,000 2,000,000 2,700,000 2,740,000 3,780,000
Other current
liabilities ............... 178,914 148,260 282,793 288,551 337,981
----------- ----------- ----------- ----------- -----------
Total Liabilities .......... 2,178,914 2,148,260 2,982,793 3,028,551 4,117,981
----------- ----------- ----------- ----------- -----------
3% Preferred Stock(1) ...... 1,000,000 -- -- -- --
----------- ----------- ----------- ----------- -----------
Retained earnings (deficit). (183,134) (373,323) (369,231) (365,204) (344,046)
Restricted capital (2 and 3) -- 648,000 394,200 264,600 135,000
Common stock and additional
paid-in capital ........... 1,011,238 1,378,880 1,644,680 1,774,280 2,397,795
----------- ----------- ----------- ----------- -----------
Total stockholders' equity.. $ 828,104 $ 1,653,557 $ 1,669,649 $ 1,673,676 $ 2,188,749
=========== =========== =========== =========== ===========
Shares of common stock
outstanding (5) ........... 3,362,205 5,316,045 5,400,045 5,701,545 5,701,545
=========== =========== =========== =========== ===========
Net assets per share of
Common Stock outstanding
(excluding Preferred
Stock)(5) ................. $ 0.25 $ 0.31 $ 0.31 $ 0.29 $ 0.38
=========== =========== =========== =========== ===========
</TABLE>
- -------------------
(1) On April 14, 1995, the Company repurchased at a discount, all
1,000,000 shares of the Company's 3% Preferred Stock from the SBA for a purchase
price of $.35 per share, or an aggregate of $350,000. 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 of $1.00 per share. See "Business -
Specialized Small Business Investment Companies."
(2) Represents the unamortized portion of the gain realized from the
repurchase, at a discount, of all 1,000,000 shares of the Company's 3% Preferred
Stock from the SBA on April 14, 1994. 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 $135,000 will be amortized on a straight line basis and included as
additional paid-in capital over a 12 month period. See "Business - Specialized
Small Business Investment Companies."
9
<PAGE>
(3) In accordance with the repurchase agreement of the 3% Preferred
Stock, the Company is contingently liable on the remaining unamortized 3%
cumulative preferred dividends in the amount of $32,552. See "Business -
Specialized Small Business Investment Companies-Benefits."
(4) All per share date and information relating to the number of shares
of the Company's Common Stock outstanding have been adjusted to give effect to a
twenty-one for one stock split.
(5) Computed on the basis of total assets less total liabilities.
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."
10
<PAGE>
BALANCE SHEET DATA (PRO FORMA)
AS OF JULY 31, 1998
-------------------------
ACTUAL AS ADJUSTED(1)
------ --------------
TOTAL ASSETS .................................. $6,306,730 $10,357,480
SBA DEBENTURES ................................ $3,780,000 $ 3,780,000
OTHER LIABILITIES ............................. $ 337,981 $ 337,981
TOTAL LIABILITIES ............................. $4,117,981 $ 4,117,981
SHAREHOLDERS EQUITY (NET ASSET VALUE) ......... $2,188,749 $ 6,239,499
SHAREHOLDERS EQUITY (NET ASSET VALUE) per share $ .38 $ .90
- ------------------
(1) As adjusted to give effect to the sale of, 1,250,000 Units offered
by the Company and application of the estimated net proceeds from such sale of
approximately $4,050,750.
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS: FISCAL YEARS ENDED JULY 31,
(AUDITED)
-----------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total revenue ......................... $ 273,739 $ 191,740 $ 314,270 $ 360,981 $ 433,652
----------- ----------- ----------- ----------- -----------
Interest Expense ...................... 168,911 168,684 186,346 196,200 219,349
Other Expense ......................... 167,561 179,695 119,056 152,267 184,274
----------- ----------- ----------- ----------- -----------
Total Expense ......................... 336,472 348,379 305,402 348,467 403,623
----------- ----------- ----------- ----------- -----------
Investment income (loss)
before taxes and loan
loss reserve ........................ (62,733) (156,639) 8,868 12,514 30,029
----------- ----------- ----------- ----------- -----------
Unrealized depreciation
in value of investment(1) ........... -- (26,246) -- -- --
----------- ----------- ----------- ----------- -----------
Provision for income taxes
(State and Federal)(2) .............. (713) (7,304) (4,776) (8,487) 8,871
----------- ----------- ----------- ----------- -----------
Net Income ............................. (609,498) (190,189) 4,092 4,027 21,158
----------- ----------- ----------- ----------- -----------
Dividends on preferred stock
to SBA paid or restricted(3) ........ 30,000 -- -- -- --
----------- ----------- ----------- ----------- -----------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS: FISCAL YEARS ENDED JULY 31,
(AUDITED)
-----------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net income (loss) available to
Common Stock ........................ (93,446) (190,189) 4,092 4,027 21,158
----------- ----------- ----------- ----------- -----------
Earnings (loss) per share of
Common Stock after payment
or accrual of preferred
stock dividend(4) ................... $ (0.03) $ (0.04) $ 0.00 $ 0.00 $ 0.00
----------- ----------- ----------- ----------- -----------
Dividends per share of
Common Stock (4 and 5) .............. $ -- $ -- $ -- $ -- $ --
----------- ----------- ----------- ----------- -----------
Dividends paid (4 and 5) .............. $ -- $ -- $ -- $ -- $ --
----------- ----------- ----------- ----------- -----------
Weighted average shares of
Common Stock outstanding(6).......... 3,362,205 5,316,045 5,400,045 5,400,045 5,626,170
=========== =========== =========== =========== ===========
</TABLE>
- -----------------
(1) See Financial Statements for information on annual provisions for
loan loss reserves under the caption "Unrealized Depreciation on Loans
Receivable."
(2) The Company, since the fiscal year ended July 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. Effective
August 1, 1994, the Company filed an application with the SEC for an order
pursuant to SEC 8(f) of the Investment Company Act of 1940 to terminate its
status as a regulated investment company. Accordingly, the Company lost its
ability to avoid corporate taxes to the extent dividends are paid. Commencing
August 1, 1994, the Company was required to pay all corporate taxes according to
the Company's net taxable income. See "Tax Considerations" and Note 2 of Notes
to the Financial Statements. However, the Company intends to be regulated as a
BDC under the 1940 Act and intends to qualify as a RIC for federal income tax
purposes. See "Business-Regulation as a Business Development Company."
(3) These dividends are calculated on the basis of the number of shares
of preferred stock outstanding at the end of each period presented. 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.
This balance represents the undistributed portion of the 3% preferred stock
dividend.
(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
the twenty-one for one stock split.
(5) The Company has not paid any dividends during the periods
represented.
12
<PAGE>
(6) 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. Does not include any exercise of outstanding
options or warrants.
LEVERAGE
At July 31, 1998, the Company had borrowed $3,780,000 million under
subordinated SBA debentures that have fixed rates of interest and substantially
all of which have a ten-year term. These debentures have maturities ranging from
December 1, 2005 to March 1, 2008, and rates of interest varying from 3.54% to
8.07% per annum.
At July 31, 1998, the weighted average annual rate of interest on all
of the Company's borrowings was 6.83%. Based upon that rate, the Company must
achieve annual returns on investments of at least 5.56% to cover annual interest
payments on its subordinated SBA debentures described above. The following table
illustrates the effect of leverage to a stockholder assuming the Company's cost
of funds at July 31, 1998 as described above and various annual rates of return,
net of expenses. The calculations set forth in the table are hypothetical and
actual returns may be greater or less than those appearing below:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Assumed return on investments (net of expenses)(1)....... -10% -5% 0% 5% 10%
Corresponding net income to common stockholders(1)....... -16% -11% -6% -1% 4%
</TABLE>
(1) Assumes (i) $4,635,000 in average assets, (ii) an average cost of
funds of 6.83%, (iii) $3,780,000 in average debt outstanding and (iv) $2,188,000
of average stockholders equity.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This discussion is intended to assist investors in their analysis of
the financial condition and results of operations of the Company. The
information contained in this section should be read in conjunction with the
summary financial information and the financial statements and notes thereto
appearing in this Prospectus.
HISTORY OF THE COMPANY.
East Coast - NY was formed as a New York corporation on September 14,
1983 for the purpose of operating as a SSBIC. On June 24, 1998, the Company was
incorporated as a Delaware corporation and on June 26, 1998 East Coast - NY
merged with and into the Company in accordance with Section 351 of the Internal
Revenue Code. Pursuant to Section 351, the reincorporation is a tax free
reorganization of the Company. East Coast - NY was granted a license to operate
as a SSBIC by the SBA on July 14, 1986. From the time it was licensed through
July 31, 1998, the Company made loans to small business concerns in the
aggregate principal amount of $12,681,308 of which $4,213,095 was outstanding as
of July 31, 1998. From inception, the Company was originally capitalized by its
initial stockholders in the amount of $1,011,238. On June 30, 1995, the Company
raised an additional $367,642 through the sale of 93,040 shares of its Common
Stock. Substantially all of the proceeds were used to repurchase the 1,000,000
shares of its $1 preferred stock from the SBA. The net proceeds allowed the
Company to obtain additional leverage with the SBA. On October 11, 1995, the
Company sold 3,000 shares of its common stock for an aggregate of $12,000. On
October 31, 1997, the Company completed a private placement through the sale of
301,500 shares of the Company's Common Stock at $2 per share. The net proceeds
received by the Company was $493,915. The total private capital raised by the
Company since inception aggregated approximately $1,884,795.
GENERAL
The Company's principal activity is the origination and servicing of
small and medium sized business loans. The earnings of the Company depend
primarily on its level of net interest income, which is the difference between
interest earned on interest-earning assets consisting of small and medium size
business loans, and the interest paid on interest-bearing liabilities consisting
of subordinated debentures issued to the SBA. Net interest income is a function
of the net interest rate spread, which is the difference between the average
yield earned on interest-earning assets and the average interest rate paid on
interest-bearing liabilities, as well as the average balance of interest-earning
assets as compared to interest-bearing liabilities. Unrealized depreciation on
loans and investments is recorded when the Company adjusts the value of a loan
to reflect management's estimate of the fair value, as approved by the Board of
Directors. See Note 2 of "Notes to the Financial Statements" for a description
of the Company and Valuation Policy.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED JULY 31, 1998, 1997 AND 1996
INTEREST INCOME. The Company's gross interest income increased 20.13%
from $360,981 for the fiscal year ended July 31, 1997 to $433,652 for the fiscal
year ended July 31, 1998 and had an increase of 63.91% to $314,270 for the
fiscal year ended July 31, 1996. Gross interest income increased 14.86% to
$360,981 during
14
<PAGE>
the fiscal period ended July 31, 1997. The increases during the fiscal periods
ended July 31, 1996, 1997 and 1998 were mainly attributable to increases in the
loan collections and an increase in the loan portfolio from $2,851,793 at July
31,1995 to $4,213,095 at July 31, 1998.
INTEREST EXPENSE. Interest expense increased from $186,346 for the
fiscal year ended July 31, 1996 to $196,200 for the fiscal year ended July 31,
1997 and to $219,349 during the fiscal year ended July 31, 1998. These increases
were chiefly attributable to increased costs of SBA subordinated debentures, as
well as additional borrowing from the SBA. The subordinated debentures increased
from $2,700,000 at July 31, 1996 to $2,740,000 at July 31, 1997 to $3,780,000 at
July 31, 1998.
OPERATING EXPENSES. The Company's operating expenses consist of
management fees, professional fees, consulting fees and various collections
costs. Operating expenses increased during the fiscal period ended July 31,
1998. These increases were mainly attributable to an increase in management fees
paid. The Company is contingently liable to management for unpaid fees
aggregating $84,000. See "Management-Management Agreement." The Company has
agreed to repay such fees one year from the date of this Prospectus. See
"Certain Relationships and Related Party Transactions."
UNREALIZED DEPRECIATION OF LOANS. The Company values its loan portfolio
periodically to determine the fair value. The Company currently has $148,158
unrealized depreciation on its loan portfolio. The Company had a total of 8
loans aggregating $1,276,718 which were delinquent with unpaid accrued interest
of $810,738. Based upon recent appraisals, the Company anticipates that a
substantial portion of the principal amount of such loans would be collected
upon foreclosure of such loans, if necessary. There can be no assurances,
however, that the collateral securing such loans will be adequate in the event
of foreclosure. See "Risk Factors - Risk of Payment of Default; Current
Delinquent Loans" and "Loan Foreclosures" and "Business-Loan Portfolio;
Valuation."
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has funded its operations through capital
contributions by its principal stockholders, private sales of its securities and
the issuance to the SBA of its subordinated debentures, in order to make loans,
increase its leverageable capital and pay its operating expenses.
The Company's potential sources of liquidity are credit facilities with
banks, fixed rate, long-term subordinated SBA debentures that are issued to the
SBA and loan amortization and prepayments. Upon qualification as a RIC, of which
no assurances can be given, the Company will distribute at least 90% of its
investment company taxable income; consequently, the Company will primarily rely
upon external sources of funds to finance growth. At July 31, 1998, 100% of the
Company's $3,780,000 of debt consisted of debentures with fixed rates of
interest with a weighted average of 6.83%. Upon completion of the Offering, the
Company will be eligible to seek additional SBA funding as well as credit lines
with bank facilities.
Loan amortization and prepayments also provide a source of funding for
the Company. Prepayments on loans are influenced significantly by general
interest rates, economic conditions and competition.
The Company believes that the net proceeds of this Offering,
anticipated borrowings from the SBA, bank credit facilities which will be
applied for, and cash flow from operations (after distributions to stockholders)
will be adequate to fund the continuing growth of the Company's loan portfolio.
In addition, in order to provide the funds necessary for the Company's expansion
strategy, the Company expects to incur, from
15
<PAGE>
time to time, additional short- and long-term bank and (to the extent permitted)
SBA loans. There can be no assurance that such additional financing will be
available on terms acceptable to the Company.
In October 1997, the Company completed a private placement of a total
of 301,500 shares of Common Stock and received net profits of approximately
$493,915. The net proceeds received allowed the Company to obtain additional
leverage with the SBA. See "Description of Securities - Prior Financing."
After the completion of this Offering, the Company will have
approximately $6,239,000 of private capital, which will enable the Company to
borrow an additional $11,120,000, subject to the availability of funds from the
SBA. See "Risk Factors - Need For SBA Financing; SBA Financing Not Assured" and
"Business."
The Company estimates that it will take at least 12 months and possibly
up to 18 months for the net proceeds of the Offering to be substantially fully
loaned or invested, depending on the availability of appropriate opportunities
and other market conditions. After all funds are fully loaned or invested, the
Company will need additional capital to make additional loans and equity
investments. See "Risk Factors - Need for Additional Financing; Risk of
Unavailability of Funds" and "Use of Proceeds."
16
<PAGE>
RISK FACTORS
The success of any investment depends upon many factors including
opportunity, general economic conditions, experience and competence of
management. Such factors which have been present in ventures that have been
successful may not apply to the investment offered by this Prospectus.
A prospective investor in the Securities offered herein should
carefully consider the adverse factors described below, any of which could have
a negative effect on the Company and cause the value of the Company's Securities
to be greatly diminished.
RECENT NET LOSSES; RETAINED DEFICIT. For each of the three fiscal years
ended July 31, 1993, 1994 and 1995, the Company operated at a loss. For the
fiscal years ended July 31, 1995, 1994 and 1993, the Company incurred net losses
of approximately $190,000, $63,000 and $23,000, respectively. During the fiscal
years ended July 31, 1996, July 31, 1997 and July 31, 1998, the Company had net
income of approximately $4,000, $4,000 and $21,000 respectively, which reduced
the Company's retained deficit as of July 31, 1998 to $344,046. The current
retained deficit will reduce the Company's leverageable capital by $344,046,
thereby reducing the amount of debentures that the Company will be eligible to
apply for with the SBA. See "Risk Factor -- Need for SBA Financing; SBA
Financing Not Assured" and "Rank and Leverage".
NEED FOR SBA FINANCING; SBA FINANCING NOT ASSURED. The Company intends
to raise additional funds for investment through the issuance of securities to
the SBA. Such funding is based upon the Company's capital, net of organizational
expenses ("Leverageable Capital"). The sale of the Units in the Offering will
increase the Company's Leverageable Capital. As a consequence, and in accordance
with the 1958 Act, thereafter the Company will be eligible to issue additional
subordinated debentures to the SBA in the approximate principal amount of
$11,120,000. Upon the completion of this Offering, the Company intends to apply
for all or substantially all of the SBA subordinated debenture leverage for
which it would be eligible. Although the Company has obtained SBA financing
benefits in the past, there can be no assurance when or that the Company will be
able to obtain all or any portion of the financing benefits permitted under the
1958 Act. See "Business-Specialized Small Business Investment Companies." In
addition, the Company is subject to many restrictions and regulations
promulgated by the SBA and with which it must comply to be eligible to receive
funding and carry on its existing business. See "Federal Regulation."
The funds available to SSBICs from the SBA are limited and are subject
to the SBA's receipt of annual appropriations from Congress. While the Company
awaits the SBA's response to its applications to be made for additional
financing based upon the net increase in capital from this Offering, it will
experience a lower rate of return than would otherwise occur if such financing
were obtainable by the Company immediately upon closing of this Offering. See
"Risk Factors-Leverage." In addition, the Company will likely 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."
RANK AND LEVERAGE. Debentures issued to or guaranteed by the SBA have a
fixed dollar claim on the Company's assets and income prior to that of the
Common Stock. If income earned by the Company on a loan is less than the
interest payable on such Debentures, the net asset value of the Common Stock and
the income per share of Common Stock will decline more sharply than a loan
funded by the holders of Common Stock. Although funds obtained through the
issuance of subordinated debentures enhance profit opportunities, the risk of
losses is increased by the use of debt. This effect is referred to herein as
"leverage."
17
<PAGE>
RISK OF PAYMENT DEFAULT; CURRENT DELINQUENT LOANS. The Company intends
generally to make four to seven year term loans at relatively high interest
rates (not to exceed 19%, the current maximum rate permitted by the SBA). These
loans will be made to small and medium sized companies that may have limited
financial resources and may be unable to obtain financing from traditional
sources. These loans generally will be secured by the assets of the borrower. A
borrower's ability to repay its loan may be adversely affected by numerous
factors, including the failure to meet its business plan, a downturn in its
industry or negative economic conditions. A deterioration in a borrower's
financial condition and prospects usually will be accompanied by a deterioration
in the value of any collateral for the loan and reduce the likelihood of
realizing on any guarantees from the borrower's management. Although the Company
often will seek to be the senior, secured lender to a borrower, the Company will
not always be the senior lender, and the Company's interest in any collateral
for a loan may be subordinate to another lender's security interest. As of July
31, 1998, the Company had loans totaling $1,276,718 with accrued interest of
$810,738 on such loans which were delinquent. See "Business-Loan Portfolio;
Valuation." Although the Company anticipates that a substantial portion of the
delinquent loans would be collected upon foreclosure, there can be no assurance,
however, that the collateral securing such loans will be adequate in the event
of foreclosure.
LOAN FORECLOSURES. As of July 31, 1998, the Company's provision for
loan losses was $148,158 (12% of the loan portfolio that is currently
delinquent), and related solely to non-taxi related loans. Although the Company
believes that the collateral securing such loans and its provision for loan
losses is adequate, in the event of a foreclosure, the Company may not be able
to recoup all or a portion of a loan. Further, costs associated with foreclosure
proceedings may also reduce the Company's recovery. See "Business-Loan
Portfolio; Valuation."
RISK ASSOCIATED WITH LOANS TO AND INVESTMENTS IN SMALL AND MEDIUM SIZED
PRIVATELY-OWNED BUSINESSES. The Company's portfolio consists of loans to and
securities issued by small and medium sized, privately-owned businesses. There
is generally no publicly available information about such companies, and the
Company must rely on its own employees and agents to obtain information to make
its investment decisions. Typically, small and medium sized businesses depend on
the talents and efforts of one or two persons or a small group of persons, and
the death, disability or resignation of one or more of these persons could have
a material adverse impact on the related company. In addition, such businesses
frequently have smaller product lines and market shares than their competition,
may be more vulnerable to economic downturns and often need substantial
additional capital to expand or compete. Such businesses may also experience
substantial variations in operating results. Accordingly, investment in small
and medium sized business should be considered speculative.
LONG-TERM CHARACTER OF INVESTMENTS. The Company expects to take at
least 12 months and possibly 18 months to fully invest or lend the net proceeds
from the Offering. See "Use of Proceeds." Since the Company generally intends to
make four to seven year term loans and to hold its loans and related equity
investments until the loans mature, realization events, if any, may not occur
for a long time. Similarly, the Company's equity investments may take many years
to appreciate, and are subject to normal risks associated with minority equity
investments in small businesses. See "Business-Strategy."
ILLIQUIDITY. Liquidity refers to the sale of a debt or equity security
in a timely manner at a price that reflects the value of that security. The
Company anticipates that most of its equity investments will consist of
securities acquired directly from their issuers in private transactions. The
securities will usually be subject to restrictions on resale or otherwise
illiquid because there will usually be no trading market for such securities.
The illiquidity of most of the Company's portfolio securities will adversely
affect its ability to dispose of them in a timely manner and at a fair price
when it might be necessary or advantageous to liquidate portfolio securities.
Absent readily ascertainable market value, the valuation of securities in the
Company's portfolio is determined
18
<PAGE>
in good faith by its Board of Directors. The estimated values may differ
significantly from the values that would have been used had a ready market for
the securities existed, and the differences could be material.
NEED FOR ADDITIONAL FINANCING; RISK OF UNAVAILABILITY OF FUNDS. The net
proceeds of the Offering will be used primarily to make loans and/or equity
financings to small and medium sized businesses. See "Use of Proceeds." After
the Offering proceeds are invested, the Company will be required to obtain
additional capital to continue to make loans and investments to increase its
loan and equity portfolios. As the Company can only increase its value by
increasing its loan and equity portfolios, such additional capital is necessary
to continue the planned growth of the Company. In order to maintain its planned
status as a "regulated investment company" ("RIC"), which the Company
anticipates to qualify in fiscal year 2001, the Company will distribute to its
stockholders 90% of its investment company taxable income. See "Dividends and
Distributions". Accordingly, such income will not be available to fund the
Company's loans and investments. The unavailability of funds from commercial
banks or other sources on terms favorable to the Company could have a material
adverse effect on it. See "Tax Considerations."
LIMITATIONS ON TAXICAB MEDALLION FINANCING. As of July 31, 1998,
approximately 23% of the amounts loaned by the Company were loans to finance the
purchase or continued ownership of New York City taxicab medallions. This
percentage may fluctuate dependent on the prepayments of the Company's loans.
The Company is required by the SBA to limit its loans for New York City taxicab
medallion to 25% of its total assets and cannot exceed such limitation without
approval from the SBA. In light of the Company's investment objectives, the
Company intends to reduce such percentage over the next few years. See
"Business."
SBA INDUSTRY REVIEW. In 1994, the SBA studied the New York City taxi
industry to review SBIC practices and financial issues associated with a
significant concentration of SSBIC and SBIC investments in the taxi medallion
industry. The study suggested that, given general SBA funding limitations, the
SBA should continue 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" - essentially 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.
Although the Company believes that it can address any SBA concern with regard to
financing the taxi industry, any change in SBA policies with regard to such
financings potentially could adversely affect the Company's ability to obtain
funds from the SBA and/or make financings to the taxi medallion industry.
Accordingly, the Company intends to commit funds (loans and/or equity) to small
and medium sized businesses in other industries. See "Business-Specialized Small
Business Investment Companies."
UNCERTAIN MARKET. The Company may not 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 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, the availability of financing from
competitors of the Company and changes in laws affecting the industry. In light
of these circumstances, the Company intends to reduce its taxi related loans and
to pursue loan and/or equity opportunities for other small and medium sized
businesses. However,
19
<PAGE>
these efforts may not succeed. See "Business - The New York City Taxi Medallion
Industry and Market; Marketing Strategy."
POSSIBLE PREPAYMENT BY BORROWERS AND LIMITATIONS ON RATE OF INTEREST.
Loans by the Company typically allow borrowers to prepay loans, subject to
prepayment penalties. A borrower is likely to prepay its loan when its interest
rate is greater than prevailing interest rates. If borrowers elect to prepay
loans, the Company might not be able to reinvest such funds at rates equal to
those previously obtained. If the Company's costs remain the same, any reduction
in interest rates would reduce its profits. Furthermore, the maximum rate of
interest that may be charged by the Company is subject to certain restrictions
by the SBA and the usury laws of applicable states. See "Business-General."
POTENTIAL EFFECTS OF CHANGES IN INTEREST RATES DUE TO ECONOMIC FACTORS.
The operating results of the Company are substantially dependent on its net
interest income, which is the difference between the interest income earned on
its interest-earning assets and the interest expense paid on its
interest-bearing liabilities. Like most lending institutions, the Company's
earnings are affected by changes in market interest rates and other economic
factors beyond its control. The Company's net interest income generally would be
adversely affected by material and prolonged increases in interest rates.
Although the Company believes that interest rates generally have been steady for
a number of years, no assurances can be given that interest rates in the future
will follow the same pattern.
MANAGEMENT HAS BROAD DISCRETION IN CHOOSING BUSINESSES TO LOAN AND MAKE
EQUITY INVESTMENTS IN WITH OFFERING PROCEEDS. The Company's Board of Directors
has discretion to allocate the proceeds of this Offering as well as proceeds
received upon exercise of the Warrants, inasmuch as they have authority to
approve or disapprove financing opportunities in their discretion, subject to
the limitations imposed by the 1958 Act and SBA regulations thereunder. As a
result, investors are reliant on the ability of current and future management of
the Company to make loans and/or equity investments to suitable businesses. See
"Use of Proceeds" and "Federal Regulation."
INDUSTRY AND GEOGRAPHICAL CONCENTRATION; LOANS TO OTHER INDUSTRY
GROUPS. The Company has made, and intends to continue to make loans to finance
small businesses, particularly to auto repair shops, gas stations, restaurants,
gourmet food shops, retail stores, laundromats and dry cleaners, and the
purchase or continued ownership of taxicab medallions. Almost all of the
Company's loans have been made to individuals or entities in the Northeast. If
there is significant downturn in the economy or in the economy of the
taxi-related industry group (which comprises approximately 23% of the Company's
outstanding loans) or in the Northeast or all three, the profitability of the
Company will be adversely affected. Other industry specific concerns (e.g.
environmental risks applicable to gas stations, laundromats and dry cleaners)
could have a material adverse effect on the Company. See "Business."
DISPROPORTIONATE RISK; DILUTION. The present stockholders of the
Company acquired their equity interest in the Company substantially below the
per share Offering price. Accordingly, the purchasers of the Units in this
Offering will suffer immediate substantial dilution of their investments, to the
extent that the net tangible book value per share of Common Stock upon
completion of this Offering will be $.90, representing a dilution of $3.20 per
share (78%) from the $4.10 offering price of the Units (attributing $.10 to the
Warrants contained in the Units). See "Dilution."
COMPETITION. Banks, credit unions, finance companies and other SBICs
and SSBICs, many with greater resources than the Company, compete with the
Company in financing small businesses. Some of the
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<PAGE>
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 deemed
adequate to absorb such losses. However, because of the inherent uncertainty of
valuation, real values might be significantly lower than values determined by
the Board of Directors. If the real value of such loans are significantly less
than the value attributed by the Board of Directors, such occurrence could have
a material adverse effect on the Company. See Notes 2 and 10 of Notes to the
Financial Statements.
RELIANCE ON MANAGEMENT. The viability of the Company will largely
depend on the efforts of Zindel Zelmanovitch, its President and a Director, and
Jeanette Berney, its Treasurer and a Director. The death or incapacity of either
of them would materially adversely affect the Company and there can be no
assurance that qualified replacements could be found. Although, the Company
intends, after the Offering, to obtain key man life insurance on the life of Mr.
Zelmanovitch in the amount of $1,000,000, the proceeds of such insurance might
not be adequate to compensate it for the loss of his services. The Company does
not have any employment agreements or non-compete agreements with any of its
officers including Mr. Zelmanovitch and Mrs. Berney. The Company has no
independent investment advisor and its loan and other investment decisions are
made by its officers subject to its investment policies and objectives and
oversight by its Board of Directors. Historically, the Company has relied on Mr.
Zelmanovitch to identify new financing opportunities. See "Management."
CONFLICTS OF INTEREST. Mr. Zelmanovitch, President, director and a
principal stockholder of the Company is also an officer, director and principal
stockholder of Freshstart Venture Capital Corp. ("Freshstart"), an SSBIC.
Freshstart is also in the business of financing small businesses. 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 will be able to allocate such time as is required for the
Company's operations. For a discussion of the agreement between the Company,
Freshstart and Mr. Zelmanovitch, see "Management - Conflicts of Interest" and
"Certain Relationships and Related Transactions."
LACK OF CORRELATION AMONG NET ASSET VALUE, OFFERING PRICE AND MARKET
PRICE. The market value of the Common Stock (if a public market ever develops)
may bear little or no relation to the market or the value of the Company's
portfolio or the resulting net asset value per share. A market for the Common
Stock may not develop at any price. As a result, a holder of shares of Common
Stock may 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 the value of the Company's portfolio. The public offering price of the
Units and the exercise price of the Warrants were arbitrarily determined by the
Company and the Representative and bear no relationship to the assets, book
value or net worth of the Company or any other recognized criteria of value;
they should not be regarded as an indication of the present or future value of
the Company. If the Common Stock offered hereby trade at a price below the new
asset value and/or the offering price, purchasers of shares in this Offering who
wish to sell them may not be able to do so without sustaining a loss. See
"Underwriting."
DISCOUNT TRADING OF SHARES OF CLOSED-END INVESTMENT COMPANIES. Shares
of many closed-end investment companies tend to trade at discounts from their
underlying net asset values and their initial public offering prices. The Shares
offered hereby may follow that pattern. The risk of loss associated with this
tendency
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<PAGE>
of closed-end investment companies may be greater for investors expecting to
sell the Shares offered hereby soon after the Offering commences.
MANAGEMENT OF GROWTH. The Company intends to use the net proceeds of
the Offering (approximately $4,050,750) and all proceeds received by the SBA
from the purchase by the SBA of the Company's subordinated debentures (up to an
additional $11,102,250) to make loans and/or equity investments in small and
medium sized businesses. As a result, the Company intends to expand its current
operations. The ability of the Company to successfully loan and/or invest such
funds and successfully expand its operations will be dependent upon the ability
to manage the growth of the Company, which is subject to risks and uncertainties
in businesses that undergo expansion. No assurances can be given that the
Company will be able to manage such growth.
CONTROL BY PRINCIPAL STOCKHOLDER. Upon completion of this Offering,
Veritas Financial Corp. ("Veritas") will own a sufficient number of the
Company's issued and outstanding shares of Common Stock (77.68% or 75.64% if the
Over-Allotment Option is exercised in full) enabling it to nominate and cause
the election of the entire Board of Directors, control the appointment of its
officers and manage the day-to-day affairs of the Company. Mr. Zelmanovitch,
Mrs. Berney and her husband, officers and/or directors of the Company are all
officers, directors and and/or principal stockholders of Veritas. Current
management of the Company own approximately 36% of the outstanding capital stock
of Veritas, and will own, indirectly (through their ownership in Veritas),
approximately 27% of the Company's Common Stock after the Offering. Accordingly,
management of the Company will have a significant voting position in the Company
to enable them to exercise control. See "Principal Stockholders."
TAX STATUS. The Company intends to qualify and elect to be treated, as
a "regulated investment company" ("RIC") under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). To qualify as a RIC and obtain
certain tax benefits available to a RIC, the Company must meet certain income
distribution, asset diversification, and other requirements. In any year in
which the Company so qualifies, it generally will not be subject to federal
income tax on its net investment income and net short-term capital gains
distributed to its shareholders. If the Company fails to qualify as a RIC and
its income were fully taxable, the amount of income available for distribution
to the Company's shareholders would be substantially reduced. The Company will
be unable to qualify as a RIC prior to its taxable year ending July 31, 2000;
consequently, it will be fully taxable for its taxable years ending July 31,
1998 and 1999. Although the Company intends to comply with the necessary income
distribution and asset diversification requirements, it may not be able to do
so. Even if the Company qualifies as a RIC, it may be subject to a 4% excise
tax, and to federal taxes based on income, if it fails to make certain
distributions in a timely manner. See "Tax Considerations" and "Dividends and
Distributions."
ANTI-TAKEOVER PROVISIONS. Subject to the prior approval of the SBA, the
Company's Certificate of Incorporation permits its Directors to designate the
terms of and issue additional shares of preferred stock. These provisions might
render it more difficult, and therefore discourage, an unsolicited takeover
proposal such as a proxy contest or the removal of incumbent management, even if
such actions would be in the best interest of the Company's stockholders.
Pursuant to the terms of the Underwriting Agreement between the Company and the
Underwriter, the Company may not issue any preferred stock for a period of 24
months from the date of this Prospectus, other than in certain circumstances,
without the consent of the Underwriter. See "Description of Securities."
UNCERTAINTY OF IDENTIFYING ACQUISITIONS. One of the Company's
strategies to maximize its growth is to increase its loan and/or equity
portfolios through acquisition of other SBICs or SSBICs or their
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<PAGE>
respective portfolios. The Company has not entered into any negotiations to
acquire any such target companies or portfolios. The Company can make no
assurances that it will be able to acquire any companies or portfolios. In
addition, the Company's shareholders may not have the opportunity to review the
financial statements of any of the companies or portfolios that may be acquired
or have the opportunity to vote on any proposed acquisitions since Delaware law
does not require such review and approval. As a result, investors are reliant on
the ability of current and future management of the Company to successfully
identify acquisitions.
REDEMPTION OF REDEEMABLE WARRANTS. The Warrants may be redeemed by the
Company commencing the earlier of (i) 24 months from the date of this Prospectus
or (ii) 12 months from the date of this Prospectus, with the consent of the
Representative, at a price of $.05 per Warrant, if the closing bid price for the
Common Stock equals or exceeds $7.50 per share for any 20 trading days ending no
earlier than the 15th trading day prior to the date of the notice of redemption.
If the Warrants are called for redemption by the Company, Warrantholders will
have 30 days to exercise their rights to purchase shares of Common Stock. If
holders of the Warrants do not exercise them before they are redeemed, the
holders thereof would lose the benefit of the difference between the market
price of the underlying Common Stock and the exercise price of such Warrants, as
well as any possible future price appreciation in the Common Stock. If the
Warrants are exercised, existing stockholders may be diluted and the market
price of the Common Stock may be adversely affected. A Warrantholder who fails
to exercise the Warrants before they are redeemed will receive only $.05 per
Warrant. Redemption of the Warrants could force the holders to exercise the
Warrants when it may be disadvantageous to do so or sell the Warrants at the
market value of the Warrants at the time of redemption. If a current prospectus
is not in effect, the Company will not call the warrants for redemption. See
"Risk Factors -- Current Prospectus and State Blue Sky Registration Required to
Exercise Warrants" and "Description of Securities -- Warrants".
CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE
WARRANTS. Holders of Warrants may exercise them only if a current prospectus
relating to the underlying shares is then in effect and only if such shares are
qualified for sale under securities laws of the states where such holders
reside. The Company may not be able to keep this Prospectus covering such shares
current; it may decide not to seek or may not be able to obtain qualification of
the issuance of its Common Stock in all of the states where the holders of
Warrants may reside. In such events, the Warrants may be deprived of any value.
See "Description of Securities -- Warrants".
RESTRICTIONS ON MARKETMAKING ACTIVITIES DURING WARRANT SOLICITATION. To
the extent that the Underwriters solicit the exercise of Warrants, they may be
prohibited by Regulation M under the Exchange Act from engaging in marketmaking
activities during such solicitation and for up to five days preceding such
solicitation. As a result, the Underwriters will be unable to continue to
provide a market for the Company's Securities during certain periods while the
Warrants are exerciseable. The Underwriters are not obligated to act as
marketmakers. See "Underwriting".
NASDAQ LISTING AND CONTINUED LISTING REQUIREMENTS. The Company's Units,
Common Stock and Warrants are expected to be listed on the date of this
Prospectus on the Nasdaq SmallCap Market, Inc. ("Nasdaq"). For continued listing
on Nasdaq, a company, among other things, must have at least $2,000,000 in net
tangible assets, 500,000 shares in the public float with a market value of
$1,000,000 and a minimum bid price of $1.00 per share. If the Company cannot
satisfy the requirements for continued quotation on Nasdaq, trading, if any, in
the Securities offered hereby would be conducted in the over-the-counter market
in what are commonly referred to as the "pink sheets" or on the NASD OTC
Electronic Bulletin Board. As a result, an investor may find it more difficult
to dispose of, or to obtain accurate quotations as to the price of, the
Securities, and the liquidity of the Company's Securities will be adversely
affected.
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<PAGE>
"PENNY STOCK" REGULATIONS; RISK OF LOW-PRICED SECURITIES. The SEC has
regulations which generally define "penny stock" to be an equity security that
has a market price (as defined in the regulations) of less than $5.00 per share,
subject to certain exceptions. On the date of this Prospectus, the Securities
will initially be exempt from the definition of "penny stock". If, however, the
Securities are removed from Nasdaq, they may be subject to the SEC's rules that
impose additional sales practice requirements on broker-dealers effecting
transactions in penny stocks. In most instances, unless the purchaser is (i) an
institutional accredited investor, (ii) the issuer, (iii) a director, officer,
general partner or beneficial owner of more than 5% of any class of equity
security of the issuer of the penny stock that is the subject of the
transaction, or (iv) an established customer of the broker-dealer, the
broker-dealer must make a special suitability determination for the purchaser of
such securities and have received the purchaser's prior written consent to the
transaction. Additionally, for any transaction involving a penny stock, the
SEC's rules require, among other things, the delivery, prior to the transaction,
of a disclosure schedule prepared by the SEC relating to the penny stock market
and the risks associated therewith. The broker-dealer also must disclose the
commissions payable to both the broker-dealer and its registered representative
and current quotations for the securities. Among other requirements, monthly
statements must be sent to the purchaser of the penny stock disclosing recent
price information for the penny stock held in the purchaser's account and
information on the limited market in penny stocks. Consequently, the penny stock
rules may restrict the ability of broker-dealers to sell the Common Stock or
Class A Warrants and may affect the ability of purchasers in this Offering to
sell the Common Stock in the secondary market.
NO PRIOR PUBLIC MARKET; POTENTIAL LIMITED TRADING MARKET; POSSIBLE
VOLATILITY OF STOCK PRICE. Prior to this Offering, there has been no public
market for the Securities and there can be no assurance that an active trading
market in the Company's Securities will ever develop or be maintained. In the
absence of such a market, an investor may find it difficult to sell the
Securities offered hereby. The initial public offering price of the Units and
the exercise price of the Warrants were determined by negotiation between the
Company and the Representative, and may not be indicative of the market price
for such securities in the future, and does not necessarily bear any
relationship to the Company's assets, book value, net worth or results of
operations of the Company or any other established criteria of value. In
addition, the stock market in recent years has experienced extreme price and
volume fluctuations that have particularly affected the market prices of many
smaller companies.
RESTRICTED SHARES OF COMMON STOCK ELIGIBLE FOR FUTURE SALE. Immediately
prior to the sale of the Units hereunder, 5,701,545 shares of Common Stock of
the Company were issued and outstanding, all of which are "restricted
securities" and may be sold only in compliance with Rule 144 under the
Securities Act. Rule 144 provides, in essence, that a person holding restricted
securities for a period of one year after payment therefor may sell, in brokers'
transactions or to market makers, an amount not exceeding 1% of the outstanding
class of securities being sold, or the average weekly reported volume of trading
of the class of securities being sold over a four-week period, whichever is
greater, during any three-month period. (Persons who are not affiliates of the
Company and have held restricted securities for at least two years are not
subject to the volume or transaction limitations.) Such sales could have a
material adverse effect on the market price for the Common Stock. The Company's
officers, directors and holders of 5,400,045 shares of Common Stock have agreed
not to sell or transfer any shares of Common Stock for 12 months from the date
of this Prospectus, without the prior written consent of the Representative.
Holders of 301,500 shares of Common Stock have unconditionally agreed not to
sell or transfer any shares of Common Stock for 12 months from the date of this
Prospectus. See "Underwriting."
UNDERWRITERS' UNIT PURCHASE OPTION. In connection with this Offering,
the Company will sell to the Underwriters, for nominal consideration, a warrant
to purchase an aggregate of 125,000 Units, each Unit consisting of one share of
the Company's Common Stock and one Warrant (the "Underwriters' Unit Purchase
Option"). The Underwriters' Unit Purchase Option will be exerciseable commencing
one year after the date of
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<PAGE>
this Prospectus and ending four years after such date, at an exercise price of
$6.56 per Unit, subject to certain adjustments. The holders of the Underwriters'
Unit Purchase Option will have the opportunity to profit from a rise in the
market price of the Company's securities, without assuming the risk of
ownership. The Company may find it more difficult to raise additional capital
while the Underwriters' Unit Purchase Option is outstanding. At any time when
the holders thereof might be expected to exercise them, the Company would
probably be able to obtain additional capital on terms more favorable than those
provided by the Underwriters' Unit Purchase Option. See "Description of
Securities - Prior Financing" and "Underwriting."
ADDITIONAL AUTHORIZED SHARES AVAILABLE FOR ISSUANCE MAY ADVERSELY
AFFECT THE MARKET. The Company is authorized to issue 25,000,000 shares of its
Common Stock. After the sale of the Units offered hereby, 6,951,545 shares of
Common Stock will be issued and outstanding, excluding the 1,250,000 shares of
the Company's Common Stock underlying the Warrants included in the Units in this
Offering, the 250,000 shares of Common Stock underlying the Underwriters' Unit
Purchase Option, the 375,000 shares underlying the Representative's
Over-Allotment Option and 30,150 shares of Common Stock underlying other
options. After reserving a total of 1,905,150 shares of Common Stock for
issuance upon the exercise of all the warrants and options to purchase Common
Stock, the Company will have 16,143,305 shares of authorized but unissued
capital stock available for issuance without further shareholder approval. In
addition, the Company is authorized, subject to SBA approval, to issue 5,000,000
shares of preferred stock. Pursuant to the terms of the Underwriting Agreement,
the Company may not issue any securities including, but not limited to, shares
of its preferred stock, other than in certain circumstances, for a period of 24
months from the date of this Prospectus, without the prior written consent of
the Representative. See "Description of Securities." The sale of a significant
number of these shares in the public market may adversely affect prevailing
market prices of the Company's securities following this offering. See
"Underwriting."
NO COMMON STOCK DIVIDENDS. The Company has not paid any dividends on
its Common Stock since 1990. Assuming the Company qualifies as a RIC under the
Code, it must distribute to its shareholders not less than 90% of its investment
company taxable income each year to maintain such qualification. See "Tax
Considerations." If it qualifies as a RIC, beginning with its fiscal year ending
July 31, 2000, the Company intends to make regular quarterly cash distributions
to holders of the Common Stock of at least 90% of its investment company taxable
income in each tax year. Dividends will be payable by the Company at the
discretion of the Board of Directors and will depend on the actual cash flow of
the Company, its financial condition, capital requirements, the distribution
requirements of the Code and such other factors as the Board of Directors may
deem relevant. Applicable law, including the SBA regulations, as well as
contracts or loan documents to which the Company is a party, may limit the
payment or amount of dividends and other distributions by the Company. The
Company may not achieve results permitting any, or any specified level of,
dividends. Until it qualifies as a RIC, the Company intends to apply any
earnings to expand and develop its business. See "Dividends and Distributions."
FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE. This Prospectus
contains forward-looking statements and information that are based on
management's beliefs as well as assumptions made by, and information currently
available to, management. When used in this Prospectus, words such as
"anticipate," "believe," "estimate," "except," and, depending on the context,
"will" and similar expressions, are intended to identify forward-looking
statements. Such statements reflect the Company's current views as to future
events and are subject to certain risks, uncertainties and assumptions,
including the risk factors described above. If one or more of these risks or
uncertainties materialize, or if underlying assumptions prove incorrect, actual
results may vary materially from those anticipated, believed, estimated or
expected. The Company does not intend to update these forward-looking statements
and information.
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<PAGE>
USE OF PROCEEDS
Upon completion of the Offering, the Company expects to receive net
proceeds of approximately $4,050,750 ($4,719,562 if the Over-Allotment Option is
exercised in full), after deducting the underwriting discount, the
non-accountable expense allowance and other expenses of the Offering.
The net proceeds to be received by the Company will be used primarily
to make loan and/or equity financings to small and medium sized businesses. The
sale of the Common Stock also will increase the Company's Leverageable Capital
and may permit the Company, under current SBA regulations, based upon
approximate net proceeds of $4,050,750, to issue additional subordinated
debentures to the SBA in the approximate principal amount of $11,120,000.
However, the Leverage Capital must be reduced by $344,046, which represents the
cumulative losses of the Company. Accordingly, the amount of subordinated
debentures that the Company may issue may also be reduced by such amount. 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. Any proceeds from the issuance of
subordinated debentures will be invested for the same purposes as the proceeds
of this Offering. The Company estimates that it will take at least 12 months and
possibly up to 18 months for the net proceeds of the Offering to be
substantially fully loaned or invested, depending on the availability of
appropriate opportunities and other market conditions. After such funds are
fully loaned or invested, the Company will need additional capital to make
additional loans and equity investments. No assurance can be made that the
Company will successfully obtain such additional capital. The failure to obtain
additional capital on acceptable terms would limit the ability of the Company to
continue its planned growth. See "Risk Factors - Need For Additional Financing;
Risk of Unavailability of Funds."
The foregoing represents the Company's anticipated allocation of the
net proceeds of this Offering based upon the Company's current business plan and
estimates regarding its anticipated allocation. Actual allocation may vary, and
the Company may find it necessary or advisable to use the net proceeds for other
purposes. Until used, such net proceeds will be invested in direct obligations
of or obligations guaranteed as to principal and interest by, the United States,
certificates of deposit and deposit accounts, to the extent permitted by SBA
regulations, with maturities of 120 days or less. The Company will not invest in
interest only or principal only securities. If suitable investments cannot be
made before the end of such 120 day period, the Company will continue to make
similar short-term investments until it finds suitable investments or loan
opportunities.
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CAPITALIZATION
The following table sets forth the capitalization of the Company as of
July 31, 1998 and as adjusted to give effect to the sale of the 1,250,000 Units.
<TABLE>
<CAPTION>
July 31, 1998
-----------------------
Actual As Adjusted
---------- -----------
<S> <C> <C>
Long-Term Debt - SBA Subordinated Debentures (1)(2)(3) ... $3,780,000 $3,780,000
---------- ----------
4% Preferred Stock, $1.00 par value; 2,000,000 shares
authorized; No shares issued or outstanding (4) ......... -- --
Common Stock; 25,000,000 shares Authorized; 5,701,545 and
6,951,545 shares issued and outstanding, respectively (5) $ 57,015 $ 69,515
Additional paid-in capital (5)(6) ......................... $2,340,780 $6,379,030
Restricted Capital (7) .................................... $ 135,000 $ 135,000
Total Capitalization (8) .................................. $2,188,749 $6,239,499
Net assets per share of Common Stock (5)(8) ............... $ .38 $ .90
</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 Date of Interest
April 30, 1998 Maturity Rate
-------------- -------- ----
$1,040,000......................... 6/01/07 8.07%
2,040,000*........................ 3/1/08 7.32%
700,000**....................... 12/01/05 3.54%
----------
$3,780,000
==========
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<PAGE>
* Effective April 4, 1998, the Company refinanced $1,000,000 debentures
with a $2,040,000 unsubsidized debenture with a fixed interest rate of 7.32%.
Such subsidized debenture matures on March 1, 2008.
** Interest rate increases to 6.54% in December, 2000.
(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 $4,050,750, under current SBA regulations, the
Company would be eligible to issue an additional $11,120,000 of unsubsidized
subordinated debentures.
(4) As of July 31, 1998, the Company had no shares of 4% Preferred
Stock issued to the SBA.
(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
twenty-one for one stock split.
(6) Included the amortized portion of the restricted capital realized
from the gain on the repurchase of the Company's 3% Preferred Stock from the
SBA, $513,000 through July 31, 1998. Such amount was realized in equal
increments as additional paid-in capital over a period from the repurchase date,
April 14, 1994. Such gain, 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 1,000,000 shares of the Company's 3% Preferred
Stock from the SBA on April 14, 1995. 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 $135,000 will be amortized on a straight line basis and included as
additional paid-in capital over an 12 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. Does not include the exercise of any outstanding options or
warrants.
DIVIDENDS AND DISTRIBUTIONS
Holders of Common Stock are entitled to receive such dividends as may
be declared by the Board of Directors of the Company. The Company has neither
declared nor paid any dividends on its Common Stock since 1990. Assuming the
Company qualifies for treatment as a RIC under the Code, it is required to
distribute to its shareholders not less than 90% of its investment company
taxable income each year in order to maintain such qualification. See "Tax
Considerations." If it qualifies as such regulated investment company, beginning
with its fiscal year ending July 31, 2000, the Company intends to make regular
quarterly cash distributions to holders of the Common Stock at a rate that is
expected to result in the distribution of at least 90%
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of the Company's investment company taxable income in each tax year. Dividends
will be payable by the Company at the discretion of the Board of Directors and
will depend on the actual cash flow of the Company, its financial condition,
capital requirements, the distribution requirements of the Code and such other
factors as the Board of Directors may deem relevant. Applicable law, including
the SBA regulations, as well as contracts or loan documents to which the Company
is a party, may limit the payment or amount of dividends and other distributions
payable by the Company. The Company expects that such distributions will be
payable approximately 30 days after such declaration. However, there can be no
assurance that the Company will achieve results permitting any, or any specified
level of, dividends. Until as it qualifies as a RIC, the Company intends to
apply any earnings to expand and develop its business.
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DILUTION
Prior to this Offering, 5,701,545 shares of the Company's Common Stock
were issued and outstanding. As of July 31, 1998, the net tangible book value of
the Company was $2,188,749. The net tangible book value per share of the
Company, immediately prior to this offering is, therefore, $0.38. Net tangible
book value per share represents the amount of the Company's tangible assets
(total assets less total liabilities and intangible assets) divided by the
number of shares of Common Stock outstanding.
After giving effect to the sale of the Units (attributing $.10 to the
Warrants contained therein) offered hereby and after receipt of the estimated
net proceeds therefrom, without giving any effect to the exercise of the
Representative's Over-Allotment Option, the pro forma net tangible book value of
the Company would be $.90 per share. Investors in this Offering, therefore, will
sustain an immediate dilution of $3.20 per share (78%) of Common Stock
purchased. Dilution represents the difference between the offering price of the
shares and the net tangible book value per share immediately after completion of
the Offering. The following table illustrates this dilution:
Offering price per share
(includes $.10 allocated to Warrants).. $4.10
Net tangible book value per share
before the Offering ................... .38
Increase per share attributable to the
Offering............................... .52
Net tangible book value per share after
the Offering........................... .90
Dilution per share to new investors...... $3.20
-----
The following table sets forth the percentage of equity to be purchased
by investors in this Offering compared to the percentage of equity to be owned
by the existing shareholders (at an assumed value of $4.00 per share), and the
amounts paid for the shares of Common Stock by the investors in this Offering as
compared to the total consideration paid by the existing stockholders. This does
not take into effect the exercise of Warrants or the Representative's
Over-Allotment Option.
Shares Purchased Total Consideration
-------------------- --------------------
Number Percent Amount Percent
--------- ------- ---------- -------
Existing Stockholders......... 5,701,545 82.02% $1,884,795 27%
Investors in this Offering.... 1,250,000 17.98% $5,000,000 73%
--------- ----- ---------- ---
Total......................... 6,951,545 100% $6,884,795 100%
========= ===== ========== ===
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BUSINESS
THE COMPANY
The Company is a Small Business Investment Company ("SBIC") that
operates as a Specialized Small Business Investment Company ("SSBIC") under the
Small Business Investment Act of 1958, as amended (the "1958 Act"), and is
regulated and financed in part by the Small Business Administration ("SBA"). The
Company is a non-diversified investment company that intends to be regulated as
a business development company ("Business Development Company"), a type of
closed-end investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"). In operating its business as a SSBIC and Business
Development Company, the Company intends to qualify as a "regulated investment
company" ("RIC") for federal income tax purposes. However, it may not qualify as
a RIC before the fiscal year beginning August 1, 1999 or even after that date.
See "Business Regulation as a Business Development Company" and "Tax
Considerations."
As an SSBIC, the Company provides loan and/or equity financing to small
and medium sized businesses or 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's investment objective is to achieve a
high level of current income from the collection of interest on loans and long
term growth through the appreciation in value of the Company's equity interests
in the companies in which it will invest.
As of July 31, 1998, there were 55 loans outstanding. 15 of its loans,
representing approximately 15% of the Company assets, were to finance taxicab
medallions, taxicabs and related assets; 9 of its loans, representing
approximately 21% of the Company's assets, were to auto repair shops and gas
stations; 18 of its loans, representing approximately 19% of the Company's
assets, were to laundromats and dry cleaners and the balance of its loans,
representing approximately 45% of the Company's assets, were to various small
businesses such as retail stores, gourmet food shops and restaurants. Taxi
loans, are collateralized by taxicabs medallions and related assets. The loans
to other small business concerns are collateralized by their assets. The Company
intends to reduce the percentage of its assets that relate to taxicab financing.
The Company's strategies for effecting its goal of maximizing its
growth of its net assets with net income includes capitalizing on its SSBIC
status to obtain leverage, capitalizing on an underserved market, increasing its
loan portfolio, increasing its equity portfolio, broadening referral sources to
increase its loan and/or equity portfolios, and identifying potential
acquisitions.
As an SSBIC, the Company has certain benefits not available in other
lending institutions. An investment in an SSBIC, such as a purchase of the
Company's Common Stock, may afford certain investors favorable tax benefits,
including the ability to defer recognizing capital gain from the sale of
publicly traded securities, subject to certain limitations, if the investor uses
the proceeds from such sale within 60 days to purchase common stock in an SSBIC.
See "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 by buying shares of the Company's Common
Stock. See "Federal Regulation-Community Reinvestment Act." In October 1996,
legislation was enacted which eliminated the authority of the SBA to issue new
SSBIC licenses. The Company believes that, on the date of this Prospectus, it
will be only one of two publicly traded SSBICs. See "Business-Specialized Small
Business Investment Companies; Benefits."
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STRATEGY
The Company's strategies for effecting its goal of maximizing its
growth of its net assets with net income includes the following:
CAPITALIZE ON SSBIC STATUS TO OBTAIN LEVERAGE. The Company intends to
capitalize on its SSBIC status by using its Leverageable Capital and obtaining
additional funds to increase its lending through the issuance of subordinated
debentures to the SBA. The sale of the Units in the Offering will increase the
Company's Leverageable Capital. The Company will be eligible to issue additional
subordinated debentures to the SBA in the amount of $11,102,250. Upon the
completion of the Offering, the Company intends to apply for all or
substantially all of the SBA subordinated debenture leverage for which it will
be eligible.
CAPITALIZE ON UNDERSERVED MARKET USING SPECIFIC CRITERIA. The Company
believes that the market for commercial loans to small and medium sized
businesses is undeserved for a number of reasons. First, traditional lenders,
such as commercial banks and savings and loans, generally are burdened with an
overhead and administrative structure and operate in a regulatory environment
that hinders them from lending effectively to these businesses. Second,
consolidation in the banking industry during the past decade decreased the
number of banks willing to lend to small and medium sized businesses, as the
larger acquiring banks sought to limit both the credit exposure and monitoring
costs associated with loans to these businesses. Third, the banking industry has
experienced structural and regulatory changes that have greatly affected the
ability of traditional financial institutions to make funds available for loans
to small and medium sized businesses.
The Company believes that it is well positioned to provide financing to
small and medium sized businesses. The Company is not burdened with the capital
and other regulatory requirements of the banking and savings and loan industries
and has relatively low overhead and administrative expenses. Moreover, the
Company's strategy of making equity investments in its borrowers is intended to
closely align the interests of the Company and its borrowers, thereby reducing
transaction costs, conveying the Company's commitment to its borrowers and
enhancing the Company's attractiveness as a financing source. The Company
believes that it has the experience and expertise to serve as a financing source
for small and medium sized businesses.
The Company will target small and medium sized businesses that meet
certain criteria, including the potential for growth, adequate assets for loan
collateral, an experienced management team with a significant equity ownership
interest in the business, profitable or near profitable operations and potential
opportunities for the Company to realize appreciation and gain liquidity in its
equity position. Liquidity can be achieved through a sale of the business, a
public offering by the business, a private sale of the Company's loan or equity
interests or exercising the Company's rights to require the business to buy back
the Company's warrants or stock. No assurance can be given that the Company will
be able to make such investments or that it will be successful in doing so.
INCREASE LOAN PORTFOLIO. The Company intends to increase its loan
portfolio with the proceeds of the Offering, and with additional funds, such as
SBA financing, to increase its interest income. The earnings of the Company
depend primarily on its level of net interest income, which is the difference
between interest earned on interest-bearing assets consisting of small and
medium size business loans, and the interest paid on interest-bearing
liabilities consisting of subordinated debentures issued to the SBA. The Company
will be in a position to increase its net interest income with an increase in
its loan portfolio.
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INCREASE EQUITY PORTFOLIO. The Company's loans typically will range
from $50,000 to $300,000, mature in four to seven years, and require monthly
interest payments at relatively high fixed rates. The Company will focus on
making loans accompanied by warrants or stock ownership. The warrants will
typically have a nominal exercise price while the loans generally will be
collateralized by a security interest in assets of the borrower. The Company
expects to make both senior and subordinated loans. From time to time, a company
in which the Company has invested may request additional financing, providing
additional lending or investing opportunities for the Company. Requests for
additional financing will be considered under the criteria established for
acquisition of investments, and debt and equity securities issued in such
follow-on financing are expected to have characteristics comparable to those
issued in the original financing. Follow-on investments generally will not be
made merely to enhance the quality of the earlier investment or to preserve the
Company's proportionate ownership interest. In some situations, the Company's
failure or inability to make a follow-on investment may be detrimental to the
operations or survival of the portfolio company involved and thus jeopardize the
Company's original investment in that company.
The Company's equity interests in privately-owned small and medium
sized businesses will be made with the intention of disposing of such interests
within four to seven years. If a financing is successful, not only will the loan
have been repaid with interest, but the Company will be in a position to realize
a gain on the accompanying equity interests. The opportunity to realize such
gain may occur if the business is sold to new owners or the business makes a
public offering. In most cases, the Company will not have the right to require
that a business undergo an initial public offering by registering securities
under the Securities Act, but the Company generally will have the right to sell
its equity interest in any subsequent public offering by the business. Even when
public offerings occur, underwriters frequently insist that large holders of
equity securities retain all or a substantial portion of their position, at
least for a period of time, even if they have the right to participate in the
offering. Moreover, the Company may decide not to sell an equity position even
when it has the right and the opportunity to do so. Thus, although the Company
expects to dispose of an equity interest after a certain time, situations may
arise in which it may hold equity securities for a longer period. The Company
will endeavor to obtain the right to require the business to purchase the
warrants or stock held by the Company ("Put Rights"). When no public offering is
available the Company may use its Put Rights to dispose of its equity interest
in a business, although the Company's ability to exercise Put Rights may be
limited or nonexistent if a business is illiquid. Similarly, it is anticipated
that he Company will endeavor to obtain the right to require that the business
purchase the Company's warrants or stock if there is an offer for the business
("Co-Sale Rights"). The Co-Sale Rights may allow the Company to sell its equity
interests back to the business at the price offered by the potential acquirer.
BROADEN REFERRAL SOURCES TO INCREASE LOAN AND/OR EQUITY PORTFOLIO. The
Company has no independent investment advisor. Its loan and other investment
decisions are made by its officers, subject to its investment policies and
objectives and oversight by its Board of Directors. Historically, the Company
has relied on its President to identify new financing opportunities. The Company
intends to expand its marketing efforts through loan referral sources to
identify small and medium sized businesses. The Company recently entered into
such an arrangement with First Bank Americano ("FBA") which will refer prospects
to the Company for financing opportunities. Prior to such arrangement, the
Company made an equity investment in FBA. FBA is a New Jersey chartered bank
located in Elizabeth, New Jersey. FBA engages in the business of commercial and
retail banking, and most of its loans are generated in New Jersey. See "Business
- - Loan Portfolio; Valuation." The Company intends to enter into similar referral
arrangements with other financial institutions, but it may not be able to do so.
IDENTIFY POTENTIAL ACQUISITIONS. The Company intends to increase its
loan and/or equity portfolios through acquisitions of other SBICs or SSBICs or
their respective portfolios, either with cash or the
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issuance of Common Stock. The acquisition of other portfolios is intended to
increase the Company's interest income and realize gain on equity investments.
The Company has no specific plans, arrangements, understandings or commitments
with respect to any such acquisitions at the present time, and it is uncertain
at to when or if any acquisition will be made.
NATURE OF LOANS
THE COMPANY'S LOANS. Loans made by the Company are subject to certain
restrictions imposed by the SBA as to the maximum interest rate that may be
charged and with respect to their terms (currently, no more than 20 years).
Generally, the Company's loans have been made to small business concerns, are
secured by related assets and are personally guaranteed by the owners of the
company owning the small business. In addition, the Company's loan documentation
provides that its liens on the collateral furnished by its borrowers must be
enforceable in the event of a default by such borrowers. The Company will not
lend to, or otherwise invest more than, the lesser of (i) 10% of its total
assets, or (ii) 30% of its paid-in capital attributable to its Common Stock, in
any one small business concern. The Company has not made, and is prohibited by
applicable SBA regulations from making, loans to officers or directors of the
Company or to any person owning or controlling, directly or indirectly, 10% or
more of the Company's Common Stock. Under prior SBA regulations the maximum rate
of interest which the Company could charge on loans could not exceed the higher
of either the Company's weighted average cost of qualified borrowings, as
determined pursuant to SBA regulations without regard to subsidized interest
rates, plus, in either case, seven percentage points, rounded off to the next
lower eighth of one percent; provided however, that if the then current
debenture rate was 8% per annum or lower, the Company was permitted to charge up
to 15% per annum. The maximum rate of interest per annum allowed to be charged
by the Company to its borrowers for loans originated during January 1997 was 19%
for a loan and 14% for a convertible debt security. The new regulations now
allow an SBIC to use its own weighted average cost of borrowing as the basis for
determining the maximum rate that it may charge for loans or debt securities.
However, the ability of the Company to charge such a rate is limited by
competition. The rates of interest on loans in the Company's portfolio ranged
from 9% to 15.90% at July 31, 1998. For the month of July 31, 1998, the average
annual weighted interest rate per loan outstanding was 11.9%. In fiscal years
ended July 31, 1995, 1994 and 1993, the Company incurred net losses of $190,189,
$63,446 and $23,293, respectively. During the fiscal years ended July 31, 1996,
1997 and 1998 the Company operated at profits of $4,092, $4,027 and $21,158
respectively. The cumulative net operating losses sustained will be offset
against the Company's taxable income during the fiscal years ended July 31, 1998
and 1999, providing that such taxable income will be generated. Additionally,
the current retained deficit will reduce the Company's leverageable capital by
$344,046. See "Risk Factors -- Recent Operating Losses".
BORROWINGS. The Company may borrow money and issue promissory notes and
other obligations, subject to SBA regulatory limitations.
LIMITATIONS 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.
The Company currently has no intention of performing advisory services
for other businesses, although as a Business Development Company it has agreed
to offer its portfolio companies, if requested, significant management
assistance. The Company will negotiate fees for such services which may include
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the issuance to the Company of an equity position in such other business. See
"Regulation as a Business Development Company".
SELECTION OF LOAN AND INVESTMENT OPPORTUNITIES
The Company has identified certain characteristics that it believes are
important to profitable small and medium sized business lending. The criteria
listed below will provide a general guidepost for the Company's lending and
investment decisions, although not all of such criteria may be followed in each
instance:
GROWTH. In addition to generating sufficient cash flow to service its
debt, a potential borrower generally will be required to establish its ability
to grow its cash flow. Anticipated growth will be a key factor in determining
the value ascribed to the warrants and equity interests acquired by the Company
in connection with its loans.
2 LIQUIDATION VALUE OF ASSETS. Although the Company does not intend to
operate as an asset-based lender, liquidation value of the assets
collateralizing the Company's loans will be an important factor in each credit
decision. Emphasis will be placed both on tangible assets (accounts receivable,
inventory, plant, property and equipment) as well as intangible assets such as
customers lists, networks, databases and recurring revenue streams.
EXPERIENCED MANAGEMENT TEAM. The Company will generally require that
each borrower have or promptly obtain a management team that is experienced and
properly incentivized through a significant ownership interest in the borrower.
The Company generally will require that a borrower have management who have
demonstrated the ability to accomplish the borrower's objectives and implement
its business plan.
PROFITABLE OR NEAR PROFITABLE OPERATIONS. The Company will focus on
borrowers that are profitable or near profitable at the operating level. The
Company does not intend typically to lend to or invest in start-up or other
early stage companies.
EXIT STRATEGY. Prior to making an investment, the Company will analyze
the potential for the borrower to experience a liquidity event that will allow
the Company to realize value for its equity position. Liquidity events include,
among other things, an initial public offering, a private sale of the Company's
financial interest, a sale of the borrower, or a purchase by the borrower or one
of its stockholders of the Company's equity position in the borrower.
There can be no assurance that the Company will be able to
find investment opportunities that meet the foregoing criteria or otherwise to
make loans to or other investments in portfolio companies that meet such
criteria on terms favorable to the Company.
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SPECIALIZED SMALL BUSINESS INVESTMENT COMPANIES
GENERAL. As an SSBIC, the Company is eligible to apply for certain
financing from the SBA on favorable terms, and the Company and its shareholders
are entitled to certain tax benefits, both described below. The SBA has
discretion in determining whether financing will be available to a SSBIC and the
type and amount of such financing. Therefore, there can be no assurance as to
the nature, amount or timing of SBA financing that may actually be obtained by
the Company. See "Risk Factors-SBA Financing Not Assured." Furthermore, there
are certain restrictions and requirements to which the Company is subject by
virtue of its being an SBIC. See "Federal Regulation-Regulation under the Small
Business Investment Act of 1958."
BACKGROUND. SBICs and SSBICs are privately owned and managed investment
companies licensed by the SBA. The 1958 Act requires each licensee to have a
minimum level of private investor capital and to be operated by experienced
management. Under present law for companies which were incorporated prior to
October 1, 1996, an SBIC must have at least $2.5 million in private capital and
an SSBIC must have not less than $1.5 million. July 31, 1998, the Company had
private capital of $2,188,749 (including the gain realized from the repurchase
of the 3% cumulative preferred stock, see "Benefits" below). As noted below,
SBICs and SSBICs are mandated by the 1958 Act to make investments in small
businesses and, in return, are eligible to apply for favorable financing from
the SBA called "leverage." SBICs were created under the 1958 Act as a vehicle
for providing equity capital, long- term loan funds and management assistance to
small businesses. In general, the SBA considers a business to be "small", and
therefore eligible to receive loans from an SBIC, only if (i) its net worth does
not exceed $18,000,000 and if the average of its net annual income after taxes
for the preceding two years was not more than $6,000,000 or (ii) it meets the
size standard for the industry in which it is primarily engaged, pursuant to SBA
regulations. In addition, SBICs are required to allocate a portion of their
portfolio to the financing of any concern that (i) together with its affiliate
does not have net worth in excess of $6 million and does not have an average net
income after taxes for the preceding two years in excess of $2 million or (ii)
meets the size standard for the industry in which it is primarily engaged. SBICs
are licensed, regulated and sometimes financed in part by the SBA. SSBICs are
SBICs which specialize in providing equity funds, long-term loans and management
to small business concerns at least 50 % owned and managed by individuals from
groups in the United States that are socially or economically disadvantaged,
including 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 stockholders' equity net of organizational expenses, excluding
any preferred stock issued to 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.
In 1987, the Company issued 1,000,000 shares of its 3% Preferred Stock
to the SBA. The Company and the SBA entered into a repurchase agreement, dated
August 15, 1994 (the "Repurchase Agreement"). Pursuant to the Repurchase
Agreement, the Company repurchased all 1,000,000 shares of its 3% Preferred
Stock from the SBA for a purchase price of $0.35 per share, or an aggregate of
$350,000. 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
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liquidating interest in a newly created restricted capital surplus account
("Restricted Surplus Account"). The Restricted Surplus Account is equal to the
amount of the repurchase discount. The initial value of the liquidating interest
was $650,000, 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
July 31, 1998, the liquidating interest was $135,000. 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 $2,000 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 gain from the repurchase of the 3% Preferred
Stock may not be used for obtaining SBA leverage. In accordance with the
Repurchase Agreement for the 3% Preferred Stock, as of July 31, 1998, the
Company was contingently liable for unpaid 3% cumulative preferred dividends in
the amount of $32,552 which are amortized in the same manner as the restricted
capital account. This amount will be fully amortized as of July 31, 1999.
2. The term of SBA Debentures may be up to 15 years, but is typically 10
years. The SBA will purchase or guarantee such debentures only after an SSBIC
has demonstrated a need for such debentures as evidenced by the SSBIC's
investment activity and its lack of sufficient additional funds available for
investments. An SSBIC that has invested at least 50% of its Leverageable Capital
and the proceeds of its SBA Debentures is presumed to lack sufficient funds
available for investment. Generally, SBA Debentures will bear interest at a
fixed rate which is based on the rate which is set by the underwriters of the
pooled debentures sold through the SBIC Funding Corp. Prior to October 1, 1996,
the SBA was authorized during the first five years of the initial term of the
debentures, to subsidize an SSBIC's annual interest rate by paying 300 basis
points (3%) of the interest due on such debentures. After maturity, these
debentures may be refinanced by the SBA as a new unsubsidized debenture with a
10-year term. Currently, the Company has $3,780,000 in subordinated debentures
outstanding with a weighted average interest rate of 6.83% per annum.
The SBA also makes available to both SBIC's and SSBIC's financing in
the form of a guaranty of unsubsidized debentures. These debentures have terms
of up to 15 years, but typically 10 years. The debentures are sold through the
SBIC Funding Corp. and carry a fixed interest rate based on prevailing market
rates. To the Company's knowledge, for Federal Fiscal Year 1998 (October 1, 1997
through September 30, 1998), the SBA received Congressional appropriations
resulting in program levels of (a) $600 million be used, in the SBA's sole
discretion, for the purchase or guarantee of SBIC and SSBIC debentures, of which
$247 million has been or will be committed or utilized through May 15, 1998, and
(b) $700 million for the purchase or guarantee of SBIC or SSBIC participating
securities, of which $300 million has been or will be committed or utilized
through May 15, 1998. To the Company's knowledge for Federal fiscal year 1999
(October 1, 1998 through September 30, 1999), Congress is reviewing proposals
for program levels of (a) $546 million for the purchase or guarantee of SBIC and
SSBIC debentures and (b) $550 million for the purchase or guarantee of SBIC or
SSBIC participating securities. While the Company believes it will be eligible
for such SBA financing following the completion of this Offering, there can be
no assurance as to the amount and timing of the receipt of such financing.
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With respect to debentures guaranteed by the SBA after July 1, 1991,
the SBA's claim against an SSBIC is subordinated, in the event of such SSBIC's
insolvency, only in favor of present and future indebtedness outstanding to
lenders and only to the extent that the aggregate amount of such indebtedness
does not exceed the lesser of 200% of such SSBIC's paid-in capital and paid-in
surplus (as adjusted pursuant to SBA regulations), or $10,000,000. However, the
SBA may agree to a subordination in favor of one or more loans from certain
other lenders, in its sole discretion. As of the date of this Prospectus, the
Company has an aggregate of $3,780,000 of subordinated debentures outstanding.
Such debentures currently bear interest at rates ranging from 3.54% to 8.50% per
annum. As a result of this Offering, assuming approximate net proceeds to the
Company of $4,050,750, the SBA would be permitted under its regulations to
purchase, or guarantee, up to an additional $11,120,000 of unsubsidized
subordinated debentures issued by the Company. Following completion of this
Offering, the Company will seek to issue and 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 "Risk Factors- SBA Financing Not Assured."
3. The tax benefits to a company licensed as an SSBIC and to its
shareholders are discussed below under the heading "Tax Considerations."
4. Legislation was enacted on October 1, 1996 which eliminated most
distinctions between SBICs and SSBICs and eliminated the authority to issue new
SSBIC licenses. Under a consolidated program, all new applicants will be
licensed as SBICs. The legislation raises the minimum capital requirements for
new applicants and increased certain user fees charged to licensees in
connection with the receipt of leverage. The legislation exempts from the
increased capital requirements all SSBICs and certain SBICs existing at the date
of the legislation's enactment. The user fees are fees that are charged to
licensees in connection with the purchase or guaranty by the SBA of debentures
or participating securities. The legislation specifies that the user fee will
equal 3% of the principal amount purchased or guaranteed by the SBA plus 1% of
the interest rate charged on the debentures or participating securities. The
legislation also limits the securities that can be purchased or guaranteed by
the SBA to debentures without a federal interest rate subsidy and to
participating equity securities. The Company believes that it will be, on the
date of this Prospectus, one of two publicly traded SSBICs. Inasmuch as
additional SSBIC licenses will not be issued, the Company will be in a unique
position to offer investors the benefit to defer recognizing capital gain (as
more fully described in the section entitled "Tax Considerations"). In addition,
certain financial institutions may be able to satisfy their requirements under
the Community Reinvestment Act of 1977 by buying shares of the Company's Common
Stock.
REGULATION AS A BUSINESS DEVELOPMENT COMPANY
The Company is a closed-end, non diversified investment company that
intends to be regulated as a Business Development Company under the 1940 Act
and, as such, is subject to regulation under that Act. Among other things, the
1940 Act contains prohibitions and restrictions relating to transactions between
the Company and its affiliates, principal underwriters and affiliates of those
affiliates or underwriters and requires the majority of the Company's directors
be persons other than "interested persons," as defined in the 1940 Act. In
addition, the 1940 Act prohibits the Company from changing the nature of its
business so as to cease to be, or to withdraw its election as, a Business
Development Company unless so authorized by the holders of a majority of its
outstanding voting securities.
A Business Development Company is permitted, under specified
conditions, to issue multiple classes of indebtedness and one class of stock
senior to the shares offered hereby (collectively, "Senior Securities" as
defined in the 1940 Act) if the asset coverage, as defined in 1940 Act, of any
Senior Security is at
38
<PAGE>
least 200% immediately after each such issuance and certain other conditions are
met. On the other hand, because the Company is an SSBIC, the only asset coverage
requirement applicable to it would give the holders of its Senior Securities
constituting indebtedness, the right to elect a majority of the Board of
Directors, if on the last business day of each of 12 consecutive calendar
months, the Company failed to maintain at least 100% asset coverage. Also, while
Senior Securities constituting preferred stock are outstanding (other than
preferred stock issued to or guaranteed by the SBA), provision must be made to
prohibit any distributions to shareholders or the repurchase of such securities
or shares unless the applicable asset coverage ratios are met at the time of the
distribution or repurchase of such securities or shares unless the applicable
asset coverage ratios are met at the time of the distribution or repurchase. The
Company may also borrow amounts up to 5% of the value of its total assets for
temporary purposes. Pursuant to the terms of the Underwriting Agreement between
the Company and the Underwriter, the Company may not issue preferred stock for a
period of 24 months from the date of this Prospectus, other than in certain
circumstances, without the prior written consent of the Underwriter.
Under the 1940 Act, a Business Development Company may not acquire any
asset, other than assets of the type listed in Section 55(a) of the 1940 Act
("Qualifying Assets") unless, when the acquisition is made, such Qualifying
Assets represent at least 70% of its total assets. The principal categories of
Qualifying Assets relevant to the business of the Company are the following:
(1) Securities purchased in transactions not involving any public
offering from the issuer of such securities, which issuer is an eligible
portfolio company. An "eligible portfolio company" is defined, in pertinent
part, in the 1940 Act as any issuer which:
(a) is organized under the law of, and has its principal place of
business in, the United states;
(b) is not an investment company, other than another SBIC that is
wholly owned by the Business Development Company; and
(c) does not have any class of securities with respect to which
margin credit may be extended under federal law.
(2) Securities of any eligible portfolio company which is controlled by
the Business Development Company.
(3) Securities received in exchange for or distributed on or with
respect to securities described in item (1) or (2) above, or pursuant to the
exercise of options, warrants or rights relating to such securities.
(4) Cash, cash items, government securities, or high quality debt
securities maturing in one year or less from the time of investment.
In addition, a Business Development Company must have been organized
(and have its principal place of business) in the United States for the purpose
of making investments in the types of securities described in items (1) or (2)
above and, in order to count the securities as Qualifying Assets for the purpose
of the 70% test, the Business Development Company must either control the issuer
of the securities or make available to the issuer of the securities significant
managerial assistance. Making available significant managerial assistance means,
among other things, any arrangement whereby a Business Development Company,
through its directors,
39
<PAGE>
officers or employees, offers to provide, and, if accepted, does so provide,
significant guidance and counsel concerning the management, operations or
business objectives and policies of a portfolio company; or in the case of an
SBIC (such as the Company), making loans to a portfolio company.
FUNDAMENTAL AND OTHER INVESTMENT POLICIES
The Company's investment objective is to achieve a high level of
current income from the collection of interest on loans and long-term growth
through the appreciation in value of the Company's equity interests in the
companies in which it will invest.
FUNDAMENTAL POLICIES
In making investments and managing its portfolio, the Company will
adhere to the following fundamental policies, which may not be changed without
the approval of (i) the holders of 50% or more of the Company's outstanding
voting securities, or (ii) the holders of 67% or more of the Company's
outstanding voting securities present at a meeting of securityholders at which
holders of 50% or more of such securities are present in person or by proxy:
1. The Company will conduct its business so as to retain its status as
an SSBIC and as a Business Development Company, and to qualify as a RIC. The
Company will not be able to qualify as a RIC prior to the fiscal year beginning
August 1, 1999 and there can be no assurance that, after such date, the Company
will qualify as a RIC. See "Risk Factors-Tax Status." In order to retain its
status as an SSBIC, the Company must limit its investments to eligible concerns
and meet the minimum financing obligations applicable to smaller concerns. In
order to retain its status as a Business Development Company, the Company may
not acquire assets (other than non-investment assets necessary and appropriate
to its operations as a Business Development Company) if, after giving effects to
such acquisition, the value of its Qualifying Assets is less than 70% of the
value of its total assets. In order to qualify as a RIC the Company will be
required, among other things, to diversify its holdings as described under "Tax
Considerations."
2. The Company may not borrow money except through the issuance of SBA
Debentures and through one or more bank lines of credit.
3. The Company may issue preferred stock with such terms as the Board
of Directors may determine subject to the requirement of the 1940 Act and the
1958 Act.
4. The Company will not (i) act as an underwriter of securities (except
to the extent it may be deemed to be an "underwriter" as defined in the
Securities Act of securities purchased by it in private transactions), (ii)
purchase or sell real estate or interests in real estate investment trusts
(except that the Company may acquire real estate which collateralizes its loans
or guaranties of its loans upon defaults of such loans and may dispose of such
real estate as and when market conditions permit), (iii) sell securities short,
(iv) purchase securities on margin (except to the extent that the Company may be
deemed to do so as a result of its acquisition of securities in connection with
loans made to portfolio companies which are funded with borrowed money), or (v)
purchase or sell commodities or commodity contracts, including futures contracts
(except where necessary in working out distressed loans or investments).
40
<PAGE>
5. The Company may write or buy put or call options in connection with
loan to, and other investments in, portfolio companies, or rights to require the
issuer of such securities to repurchase such loans and other investments under
certain circumstances.
6. The Company has no policy with respect to concentration of
investments in a particular company, industry or groups of industries, except
that it will not lend money to, or invest in, any company if such loan or
investment excess 30% of the Company's private capital, without SBA approval.
7. The Company may make straight loans and loans with equity features
to the extent permitted under the 1958 Act and the 1940 Act.
OTHER INVESTMENT POLICIES
The Company's investment policies described below are not fundamental
policies, and may be changed, subject to the 1958 Act and the SBA Regulations,
by the Company's Board of Directors without shareholder approval:
1. Except for subsidiaries organized by the Company to hold assets acquired
in foreclosures of defaulted loans, the Company will not acquire (i) 50% or more
of the outstanding voting securities of any issuer held by fewer than 50
shareholders, (ii) 25% or more of the outstanding voting securities of any
issuer having 50 or more shareholders, or (iii) 20% or more of the outstanding
voting securities of any issuer having 50 or more shareholders if, as a result
of such acquisition, the Company would hold a number of voting securities equal
to or greater than the largest other holding of such securities.
2. The Company will not invest in companies for the purpose of controlling
the management of such companies.
3. The Company will not invest in finance companies, foreign companies,
passive businesses or real estate companies, except as permitted by the SBA.
4. The Company has no policy with respect to portfolio turnover. Moreover,
because borrowers have certain prepayment rights, the Company cannot control or
predict the frequency of portfolio turnover. During the past two years, the
Company experienced no significant changes in its turnover rate, and in the near
term it does not expect to experience any significant increases in turnover
rate.
5. Pending the investment of its funds in eligible concerns (including
smaller concerns) or as otherwise permitted by the SBA, the Company may invest
its funds in direct obligations of, or obligations guaranteed as to principal
and interest by, the United States which mature in 120 days or less, or
certificates of deposit or deposit accounts issued by a qualified federally
insured institution which mature in 120 days or less. The Company will not
invest in interest only or principal only securities.
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<PAGE>
LOAN PORTFOLIO; VALUATION
The following table sets forth classification of the Company's outstanding
loans as of July 31, 1998:
<TABLE>
<CAPTION>
Percentage
Number Of Balance of
Type Of Loan Loans Interest Rate Maturity Date Outstanding Portfolio
------------ ----- ------------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Manufacturing............. 1 15.00% 4-5 years $ 64,624 1.58%
Services.................. 3 13.63% - 15.25% 2-5 years 39,417 .95%
Retail.................... 4 14.00% - 15.00% 3-10 years 302,974 7.37%
Auto Service Stations..... 9 9.00% - 15.00% 3-7 years 1,295,272 31.22%
Construction.............. 1 11.00% - 15.00% 5 years 155,318 3.74%
Restaurant................ 4 13.00% - 15.00% 5-7 years 148,060 4.64%
Laundromat................ 18 10.00% - 15.90% 5-10 years 1,170,344 25.32%
NYC Tax Medallion......... 15 9.00% - 14.00% 7 years 947,086 25.18%
-- ---------- -----
TOTAL..................... 55 $4,123,095 100.00%
========== =======
</TABLE>
The following table sets forth information regarding the Company's
equity interests as July 31, 1998:
<TABLE>
<CAPTION>
Company Name Equity Interest No. Of Shares Cost Fair Market Value
------------ --------------- ------------- ---- -----------------
<S> <C> <C> <C> <C>
First Bank Americano........ Common Stock 10,000 $90,000 $90,000
</TABLE>
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 $50,000 to $300,000. 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
loans range from four to seven years and amortize monthly at relatively high
interest rates. 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 15.90% per
annum. For the month of July 31, 1998, the average annual weighted interest rate
per loan was 11.9%. The average size loan is approximately $68,000 and the
largest loan outstanding is $298,000.
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<PAGE>
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 value, based on such quoted
prices. With respect to securities for which price quotations are not readily
available, such securities will be valued at fair value as determined by the
Board of Directors.
LOAN CONSIDERATIONS - In evaluating each applicant for a loan, the
Company considers the following factors: (1) the applicant (or 50% in interest
of the concern's principal owners) must be classified as an economically or
socially disadvantaged person under SBA regulations, (2) the applicant's ability
to repay the loan, and (3) the value and type of collateral proposed by the
prospective borrower to collateralize the business loans, (4) the experience of
management and (5) the potential for growth of such business.
COLLECTION EXPERIENCE - As of July 31, 1998, the Company had 8 loans
totaling $1,276,718 in principal and accrued interest of $810,738 which were
delinquent. The Company considers a loan to be delinquent if the borrower fails
to make payments for 90 days or more. However, the Company may agree with a
borrower that cannot make payments in accordance with the original loan
agreement to modify the payment terms of the loan. The Company's current
provision for loan losses, $148,158, 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. See "Risk Factors - Risk of Payment Default; Current
Delinquent Loans" and "Loan Foreclosures."
THE NEW YORK CITY TAXI MEDALLION INDUSTRY AND MARKET
As presently provided by law, the number of medallions for New York
City taxicabs that may be issued by New York City is limited to 12,187. There
are two basic types of medallions: (a) corporate and (b) individual
owner-driver. Of the total current supply, 7,047 are corporate medallions and
5,160 are for individually owned cabs. A corporate medallion is issued with
respect to a cab owned by a corporation with a minimum of two cabs and two
corporate medallions (i.e. one corporate medallion per cab). An individual
owner-driver may not own more than one cab and one medallion. Corporate
medallions are used by large fleet concerns with many taxicabs and many drivers
or by small corporations owning two 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 tax medallions was signed by the Governor of the State of New York
and approved by the New York City Council which permitted the sale of up to such
number of medallions over a three-year period. 133 of such medallions were sold
in May 1996, an additional 133 were sold in October 1996 and the balance was
sold in September 1997.
At the present time, most medallion sales are handled through brokers.
As a result, an active marketplace has developed for the purchase and resale of
medallions. The price of a medallion varies with supply and demand. Individually
owned medallions currently sell for approximately $225,000 and corporate
43
<PAGE>
medallions sell for approximately $275,000 each. In addition, a 5% New York City
transfer tax and various brokerage commissions are additional expenses incurred
in the acquisition and sale of a medallion.
In addition to purchases and sales of medallions, a substantial market
exists for refinancing medallions held by existing owners. Management estimates
this market to exceed that of the market for financing transfers.
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.
Notwithstanding the above, in light of the Company's investment
objectives which includes achieving long term growth in its stockholders' equity
through the appreciation in value of the Company's equity interests in which it
will invest, the Company intends to reduce the percentage of taxi-related loans
and to pursue loan and/or equity financings in other small and medium sized
businesses.
COMPETITION
SBICs, SSBICs, banks, credit unions and private lenders have
traditionally financed the acquisition and/or operation of small and medium
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.
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."
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are
coded to accept only two-digit entries. By the year 2000, these systems and
products must be modified to accept four digit entries or otherwise distinguish
21st century dates from 20th century dates. The Company has installed a new
software package which addresses its Year 2000 issues, and it believes that its
programs and systems are Year 2000 compliant (i.e., will produce data on and
after December 31, 1999 that will be reasonably timely and error-free).
EMPLOYEES
The Company has no employees. All management services, personnel and
administrative services are provided to the Company directly by Veritas, the
Company's largest shareholder. See "Management - Management Agreement" and
"Principal Stockholders."
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<PAGE>
PROPERTIES
The Company leases (pursuant to a sublease with an unaffiliated party),
office space at 50 East 42nd Street, New York, New York. The lease term
commenced on June 1, 1998 and expires on July 31, 1999. The annual rental is
$6,000. The Company believes that its current facilities are adequate for its
present needs. The Company expects, after the completion of the Offering, to
require additional office space and believes that it will be able to obtain
adequate space at reasonable rates.
LEGAL PROCEEDINGS
From time to time in the ordinary course of business, the Company
initiates legal proceedings against borrowers in default and, where warranted,
their guarantors to seek payment of loan obligations and to take possession of
collateral. In the latter instances, these proceedings are sometimes followed by
court authorized liquidations. All such proceedings require outside counsel with
attendant professional fees and expense.
The Company has never been named as a defendant in any material
litigation.
45
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the
executive officers and directors of the Company as of the date of this
Prospectus:
Name Age Position
---- --- --------
Zindel Zelmanovitch*..................... 51 President and Director
Nathan G. Berney*........................ 70 Secretary
Jeanette Berney*......................... 67 Treasurer and Director
Frederick Schulman....................... 45 Director
-------------
* Interested Person. See "Board Committees/Interested Persons" below.
The term of each director expires at the time of the next annual
meeting of stockholders. Each officer holds office at the pleasure of the Board
of Directors.
ZINDEL ZELMANOVITCH has been the President and a Director of the
Company (including its predecessor) since 1986. Mr. Zelmanovitch has also been
the President and a director and stockholder of Freshstart Venture Capital
Corp., which company has been a licensed SSBIC since 1982 and is listed on
Nasdaq. See "Conflicts of Interest" below. He has also been licensed as a Real
Estate Broker by the New York State Department of State since 1976. Mr.
Zelmanovitch is also the President and sole stockholder of Z. Zindel Corp. which
company provided management services to the Company from July 1986 through the
date of this Prospectus. Mr. Zelmanovitch is also a director, officer and
principal stockholder of Veritas Financial Corp. ("Veritas"), the principal
stockholder of the Company, which, commencing the date of this Prospectus, will
perform management services to the Company. See "Management Agreement" below and
"Principal Stockholders." Since 1991, Mr. Zelmanovitch has been the Secretary of
the National Association of Investment Companies, the association for SSBICs and
has been its Vice Chairman since 1997. Mr. Zelmanovitch has also been a Vice
President and Director of the Council of Jewish Organization of Flatbush since
Fall 1996. He has also been a Board Member of Midwood Federal Credit Union since
1997. Mr. Zelmanovitch received an M.B.A. degree from C.W. Post Center of Long
Island University in 1979.
46
<PAGE>
NATHAN G. BERNEY has been the Secretary of the Company since 1986 and
was a Director of the Company from 1986 until May 1998. From 1986 to the
present, Mr. Berney has been the Vice President of Commodities Trading
International Corporation of Greenwich Connecticut and heads up the metals
trading division. Mr. Berney is also a director and principal stockholder of
Veritas. See "Management Agreement" below and "Principal Stockholders." Since
1992, Mr. Berney has been the President, sole director and sole stockholder of
North Highview Investors, Inc. (Metal Division), a metal trading company. From
1952 through 1986 he was employed by Phillip Brothers, a Division of
Phibro-Salomon, Inc. and held the senior position of Group Vice President. In
this position he headed up the Secondary Metals Trading Department. Mr. Berney
attended college at Lycee St. Charles in Marseilles, France, in 1946, and
studied economics. He also attended City College of New York School of Social
Research where he studied Business Law and Economics from 1953 to 1955. Jeanette
Berney is the wife of Nathan G. Berney.
JEANETTE BERNEY has been the Treasurer and a Director of the Company
since 1986. Since 1992, Mrs. Berney has been the Executive Assistant to North
Highview Investors, Inc. (Metal Division), a metal trading company. Mrs. Berney
is also a director and officer of Veritas. See "Management Agreement" below.
From 1980 to present, Mrs. Berney has been engaged as an investor in the trading
of future contracts. From 1976 through 1978 she was a manager of the Port-a-Sign
Company located in Rockland County, New York which company was engaged in
leasing portable advertising signs. Between 1968 and 1978 she owned and operated
Rapid Public Parking Inc., a company which owned and operated a parking garage
in New York City. Mrs. Berney graduated from the Bais Yaakov Teachers Seminary
of Brooklyn, New York in 1952 and also attended City College of New York and
Rockland Community College. Nathan Berney is the husband of Jeanette Berney.
FREDERICK SCHULMAN has been a Director of the Company since May 1998.
Mr. Schulman is currently Executive Vice President and Director of Investment
Banking of RAS Securities Corp., an NASD and AMEX member firm, which he joined
as a consultant in November 1994 (and as a full-time employee in December 1996).
From 1986 through 1994, Mr. Schulman held the position of President of the Pivko
Group, Inc., an international investment firm which was a principal, syndicator
and/or broker for real estate and commercial transactions. Mr. Schulman was
President of Realty Funding Group (from 1983 to 1985), the real estate
consultant to Equilease Corporation, a subsidiary of Allied Signal Corp. Mr.
Schulman practiced law at the law firms of Bragar, Spiegel, Schulman, Rubin &
Driggin (from 1980 to 1983) and Kahr, Spitzer & Howard (from 1978 to 1980). Mr.
Schulman is a member of the New York bar and a licensed real estate broker with
a J.D. degree from Boston College School of Law (1977) and a B.A. from Clark
University (1974).
From September 1989 to July 1995 Mr. Schulman was the Executive Vice
President and General Counsel of Durso Supermarkets, Inc. ("Durso"), a New York
City supermarket chain. Durso was the subject of a leveraged buy-out in 1989,
which acquisition included certain debt financing which was personally
guaranteed by Mr. Schulman. Durso filed a bankruptcy petition under Chapter 11
in July 1992, was converted to a Chapter 7 liquidation in June 1996 and all the
supermarkets locations were sold. In May 1995 Mr. Schulman filed for personal
Chapter 7 bankruptcy as the lender proceeded against his guarantee. Following
distribution of the assets of Durso, Mr. Schulman was personally discharged in
December 1995.
The Company's Certificate of Incorporation provides that the SBA has
the right to require the removal of officers and directors and to the
appointment of the SBA or its designee as a receiver of the Company for the
purpose of continuing to operate the Company upon the occurrence of certain
events of default. See "Federal Regulation - Regulation Under the Small Business
Investment Act of 1958."
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<PAGE>
REPRESENTATIVE'S RIGHT TO APPOINT DIRECTOR
The Underwriting Agreement between the Company and the Representative
provides that for three years after the completion of this Offering, the
Representative will have the right, subject to SBA approval, to nominate one
person to serve on the Company's Board of Directors. If the Representative does
not exercise this right, it may appoint an advisor, who will be entitled to
attend all meetings of the Board of Directors. To date, the Representative has
not advised the Company as to whether it intends to exercise either right. See
"Underwriting".
BOARD COMMITTEES/INTERESTED PERSONS
The Board of Directors has appointed a Credit Committee comprised of
all of the directors of the Company. The Credit Committee reviews loan
activities and delinquencies and provides recommendations to the Board of
Directors.
The Company has established a compensation committee and an audit
committee. The compensation committee reviews executive salaries, administers
any bonus, incentive compensation and stock option plans of the Company,
including the Company's 1998 Stock Option Plan, and approves the salaries and
other benefits of the executive officers of the Company. In addition, the
compensation committee consults with the Company's management regarding pension
and other benefit plans, and compensation policies and practices of the Company.
The compensation committee currently consists of Zindel Zelmanovitch, _________
and _________.
The audit committee reviews the professional services provided by the
Company's independent auditors, the independence of such auditors from
management of the Company, the annual financial statements of the Company and
the Company's system of internal accounting controls. The audit committee also
reviews such other matters with respect to the accounting, auditing and
financial reporting practices and procedures of the Company as it may find
appropriate or as may be brought to its attention. The audit committee currently
consists of Zindel Zelmanovitch, _________ and __________.
The 1940 Act requires that a majority of the directors of a Business
Development Company, which the Company intends to elect to become, not be
"interested persons", as defined in the 1940 Act. Frederick Schulman, _________
and _______, who constitute a majority of the Board of Directors, are not
"interested persons."
MANAGEMENT AGREEMENT
Commencing on the date of this Prospectus, management services,
personnel, administrative services, and facilities (other than office furniture
and equipment, capital or computer equipment and legal and accounting services)
will be provided to the Company by Veritas, a principal stockholder of the
Company, pursuant to a Management Agreement between Veritas and the Company. Mr.
Zelmanovitch, Mr. Berney and Mrs. Berney are all officers, directors and/or
shareholders of Veritas. See "Principal Stockholders." The Management Agreement
is renewable for successive one year terms and provides for the payment of an
annual management fee of $300,000. The Management Agreement further provides for
Veritas to be indemnified for damages or injuries arising from the carrying out
of Veritas duties under the Management Agreement, except if prohibited by public
policy or if arising from a breach by Veritas of its fiduciary duties to the
Company. Prior to the date of this Prospectus, such services were provided by Z.
Zindel Corp., a company wholly-owned by Mr. Zelmanovitch. Pursuant to that
agreement, the Company is contingently liable to Z. Zindel Corp. for $84,000 in
management fees as of July 31, 1998. See Note 9 to Financial Statements. The
Company has agreed to repay such fees one year from the date of this Prospectus.
See "Certain Relationships and Related Party Transactions."
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<PAGE>
INDEMNIFICATION
Section 145 of the Delaware General Corporation Law (the "GCL")
empowers a corporation to indemnify its directors and officers and to purchase
insurance with respect to liability arising out of the performance of their
duties as directors and officers. The GCL provides further that the
indemnification permitted thereunder shall not be deemed exclusive of any other
rights to which the directors and officers may be entitled under the
corporation's by-laws, any agreement, vote of stockholders or otherwise.
Article Ninth of the Company's Certificate of Incorporation eliminates,
subject to Section 314 of the 1958 Act, the personal liability of directors to
the fullest extent permitted by Section 102 of the GCL. Article Tenth provides,
subject to the SBA's required standard of care, for indemnification of all
persons whom it shall have the power to indemnify pursuant to Section 145 of the
GCL.
The effect of the foregoing is to require the Company to the extent
permitted by law to indemnify the officers and directors of the Company for any
claim arising against such persons in their official capacities if such person
acted in good faith and in a manner that he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling
the Company pursuant to the foregoing provisions, the Company has been informed
that in the opinion of the SEC, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
The Company does not currently have any liability insurance coverage
for its officers and directors.
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<PAGE>
EXECUTIVE COMPENSATION
None of the Company's directors receives compensation for services. The
following table sets forth the cash compensation (consisting entirely of salary)
paid (or accrued for) by the Company to its President, the only executive
officer whose aggregate remuneration exceeded $100,000 in each of the three
Company's fiscal years ended July 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
Summary Compensation Table
- ---------------------------------------------------------------------------------------------------------------------------------
Annual Compensation Compensation Long Term
--------------------------------- -----------------------------------------
Name
and Principal Other Annual
Position Fiscal Year-End Salary Bonus Compensation Awards Payouts
-------- --------------- ------ ----- ------------ ----------------------- -------
Restricted
Stock Options/ LTIP All Other
Awards LSARS Payouts Compensation
------ ----- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Zindel Zelmanovitch,
President (1)......... 1998 $144,000 -- -- -- -- -- --
1997 $108,000 -- -- -- -- -- --
1996 $ 96,000 -- -- -- -- -- --
</TABLE>
- -----------------
(1) The salaries indicated in the table were paid directly to Z. Zindel
Corp., a company wholly-owned by Mr. Zelmanovitch, pursuant to a management
agreement which terminated on the date of this Prospectus See "Management
Agreement" above and "Certain Relationships and Related Transactions".
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STOCK OPTION PLAN
For the purpose of providing employees who have substantial
responsibility for the management of the Company and directors of the Company
with additional incentives to exert their best efforts on behalf of the Company,
to increase their proprietary interest in the success of the Company and to
reward outstanding performance and to attract and retain executive personnel of
outstanding ability, in June 1998 the Board of Directors authorized, and in June
1998 the shareholders of the Company approved, the 1998 Stock Option Plan (the
"Stock Option Plan"). Under the Stock Option Plan, options intended to qualify
as "incentive stock options" under Section 422 of the Code ("Qualified
Options"), options not intended to so qualify, stock appreciation rights
("SARs") and shares of restricted Common Stock may be granted or issued. The
following is a summary of the material terms of the Stock Option Plan.
The total number of shares of Common Stock which are reserved pursuant
to the Stock Option Plan is 1,000,000, of which 300,000 are available for
non-employee directors and 700,000 shares are available for key employees
("Eligible Employees"). At the date of this Prospectus, no options, SARs, or
restricted Common Stock have been granted under the Stock Option Plan. The
Compensation Committee of the Board of Directors, in its discretion, will
determine the employees who are eligible to participate in the Stock Option Plan
and the number of shares, if any, on which options are to be granted, the SARs,
if any, to be granted with respect to such options and the shares of restricted
Common Stock, if any, to be issued, to Eligible Employees. Pursuant to the terms
of the Underwriting Agreement, the Company may not grant more than 400,000
options during the 24 month period following the date of this Prospectus (none
of which may be granted below the initial public offering price of the Units
sold hereby), without the prior written consent of the Representative.
Qualified Options granted to Eligible Employees under the Stock Option
Plan will be exercisable at a price equal to the fair market value of the shares
at the time the Qualified Option is granted except with respect to options
granted to any employee who is a holder of more than 10% of the total combined
voting power of all classes of stock of the Company outstanding, in which case
the exercise price may not be less than 110% of the then current fair market
value. If the aggregate fair market value (determined at the time the Qualified
Option is granted) of the shares exercisable for the first time by any grantee
during any calendar year exceeds $100,000, such excess shares may not be treated
as a Qualified Option. No Qualified Option may be exercised more than 10 years
after the date on which it is granted, except that such period may not exceed
five years in the case of an option granted to any employee who is a holder of
more than 10% of the total combined voting power of all classes of stock of the
Company.
Options not intended to qualify as "incentive stock options" under the
Code may be granted to Eligible Employees under the Stock Option Plan and shall
have such exercise prices and such other terms and conditions as the
Compensation committee may determine in its discretion, subject to the
requirements of the 1940 Act.
Options granted under the Stock Option Plan will not be transferable
other than by the laws of descent and distribution and during the grantee's life
may be exercised only by such grantee. All rights to exercise options will
terminate upon termination for cause of the holder's employment or directorship.
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<PAGE>
Shares purchased upon exercise of options, in whole or in part, must be
paid for in cash or, in the case of Eligible Employees and in the discretion of
the Compensation Committee, by tendering certain qualifying unrestricted shares
of Common Stock or a combination of cash and such shares. At the discretion of
the Compensation Committee, SARs may be granted in connection with the grant to
an Eligible Employee of any Option under the Stock Option Plan. An SAR will
entitle the holder of the related option to surrender such option, or any
portion thereof to the extent unexercised, and receive payment in an amount
determined by multiplying the excess of the fair market value of the Common
Stock on the date of exercise of such SAR over the exercise price of the related
option and the number of shares of Common Stock as to which such SAR is
exercised. Payment of the amount due upon the exercise of an SAR may be made, at
the discretion of the Compensation Committee, in shares of Common Stock having a
fair market value on the date preceding the date the SAR is exercised equal to
such payment or in cash.
The Stock Option Plan also provides that shares of restricted Common
Stock may be granted to Eligible Employees on such terms and in such amounts as
the Compensation Committee determines. Such shares of Common Stock will be
issued under a written agreement which will contain restrictions on transfers
thereof as may be required by law and as the Compensation Committee may
determine in its discretion.
The Stock Option Plan will terminate when there have been granted
shares of Common Stock and options on the total number of shares authorized by
the Stock Option Plan or by action of the Board of Directors, but in no event
later than June 1, 2008. The authorized number of shares may be increased, and
the Stock Option Plan's date of termination may be extended, only by shareholder
action.
The number of stock options that may be granted by the Company under
the Stock Option Plan is limited under the 1940 Act to 25% of the number of
outstanding shares of the Common Stock less the number of outstanding Warrants
and any other warrants, options or right to purchase shares of Common Stock. If,
however, the shares underlying options granted to directors, officers and
employees exceed 15% of outstanding shares of Common Stock of the Company, the
25% limitation is reduced to 20%. Under the 1940 Act, any options granted to
directors, who are neither officers or employees, require the approval of the
SEC.
CONFLICTS OF INTEREST
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 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.
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<PAGE>
Zindel Zelmanovitch, President and a director of the Company, is also
President and a director of FreshStart Venture Capital Corp. ("Freshstart"), an
SSBIC. Freshstart is in the business of financing small businesses, including,
but not limited to, the operation and ownership of taxicabs. Any conflicts of
interest that arise with respect to the foregoing will be resolved in accordance
with the Company's Code of Ethics. Conflicts may also arise as to the allocation
of Mr. Zelmanovitch's time. The Company's Board of Directors believes Mr.
Zelmanovitch has and will continue to be able to allocate such time as is
required for the Company's operations.
The Company, Freshstart and Mr. Zelmanovitch have agreed that if Mr.
Zelmanovitch receives a loan or other investment opportunity, he will present it
to both the Company and Freshstart, each of which shall have the right to
participate equally in such opportunity or in such lesser amount as determined
by its board of directors or investment committee, as the case may be, provided
that no such loan or other investment will exceed 20% of the Company's capital.
The Company's Board of Directors, acting pursuant to Section 57 of the
1940 Act, has determined that the agreement with Freshstart and Mr. Zelmanovitch
described above is reasonable and fair to its stockholders and does not involve
overreaching, and is consistent with the interests of its stockholders and the
fundamental and other policies of the Company described elsewhere in this
Prospectus. Further, each loan or other investment will be subject to review by,
and will require the approval of, a majority of the disinterested directors, and
the board will record in the minutes of its meetings and preserve in its records
as required by the 1940 Act, a description of each loan or other investment made
pursuant to this agreement, their findings and the information and other
materials upon which such findings were made and the basis therefor.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prior to the date of this Prospectus, all management services were
provided to the Company by Z. Zindel Corp., a company wholly-owned and
controlled by Zindel Zelmanovitch, the President and a director of the Company
pursuant to a Management Agreement between Z. Zindel Corp. and the Company.
Commencing on the date of this Prospectus, all management services will be
provided by Veritas, a principal stockholder of the Company. Mr. Zelmanovitch,
Mr. Berney and Mrs. Berney are all officers, directors and/or shareholders of
Veritas. Pursuant to the agreement with Z. Zindel Corp., the Company is
contingently liable for $84,000 in management fees as of July 31, 1998. The
Company has agreed to repay such fees one year from the date of this Prospectus.
See "Management - Management Agreement" and "Principal Stockholders."
Mr. Zelmanovitch is also an officer and director of Freshstart, an
SSBIC. See "Management - Conflicts of Interest."
Frederick Schulman, a director of the Company since May 1998,
is the Executive Vice President and Director of Investment Banking of RAS
Securities Corp. ("RAS"). RAS was the placement agent in a private placement of
the Company's securities in October 1997. See "Description of Securities - Prior
Financing."
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 subject to review and
approval by a majority of the independent, disinterested directors of the
Company.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock, as of the date of this
Prospectus, of (i) each person who is known to the Company to beneficially own
5% or more of the Company's outstanding Common Stock; (ii) each of the Company's
executive officers and directors; and (iii) all executive officers and directors
of the Company as a group. Except as otherwise noted, the persons named in the
table have sole voting and investment power with respect to all shares shown as
beneficially owned by them.
<TABLE>
<CAPTION>
Name of Number of Shares Percentage Ownership Percentage Ownership
Beneficial Owner Beneficially Owned (1) Prior To The Offering After The Offering*
---------------- ---------------------- --------------------- -------------------
<S> <C> <C> <C>
Veritas Financial Corp.(2) 5,400,045 94.7% 77.68%
Zindel Zelmanovitch (2) (5) 5,400,045(3) 94.7% 77.68%
Nathan Berney(2) 5,400,045(3) 94.7% 77.68%
Jeannette Berney(2) 5,400,045(3) 94.7% 77.68%
Frederick Schulman(4) -- --
Michael Moskowitz(5) 514,624 9.03% 7.81%
Officers and Directors
as a group (4 persons) 5,400,045(3) 94.7% 77.68%
</TABLE>
* Based upon 5,701,545 shares of Common Stock outstanding prior to the
Offering and 6,951,545 shares of Common Stock outstanding after the
Offering, which amounts do not include the exercise of the Over-Allotment
Option or any warrants or options.
(1) Beneficial ownership has been determined in accordance with Rule 13d-3 of
the Securities Exchange Act of 1934, as amended. Generally, a person is
deemed to be the beneficial owner of a security if he has the right to
acquire voting or investment power within 60 days.
(2) The address for Veritas Financial Corp. ("Veritas") and each of the named
persons is c/o East Coast Venture Capital, Inc., 50 East 42nd Street, New
York, NY 10017. See "Management."
(3) Includes 5,400,045 shares of Common Stock beneficially owned by Veritas. Mr.
Zelmanovitch, Mr. Berney and Mrs. Berney are all directors of Veritas. Mr.
Zelmanovitch owns 60,463 shares of Veritas representing 18.73% of the
outstanding common stock of Veritas (which would indirectly represent
1,011,428 shares of the Company or 17.74% (15.34% after the Offering)). Mr.
Berney owns 43,909 shares of Veritas through the North Highview Investors,
Inc. Profit Sharing Plan (the "North Highview Plan"), representing 13.60% of
the outstanding common stock of Vertias (which would indirectly represent
734,406 shares of the Company or 12.88% (11.14% after the Offering)). Mrs.
Berney does not beneficially own any shares of Veritas and disclaims
beneficial ownership of the shares owned by the North Highview Plan. Each of
Mr. Zelmanovitch, Mr. Berney and Mrs. Berney disclaim any beneficial
ownership of the shares owned by each other or any other outstanding shares
of Veritas (including shares of their respective members of their immediate
families). See "Management."
(4) The address for this individual is 75 Long Hill Road East, Briarcliff Manor,
NY 10510. Mr. Schulman disclaims any beneficial ownership o the shares
underlying the options granted to RAS. See "Description of Securities -
Prior Financing."
(5) The address for this individual is c/o East Coast Venture Capital, Inc., 50
East 42nd Street, New York, New York 10017. Represents his indirect
ownership in the Company through his 9.53% ownership in Veritas. Mr.
Moskowitz is the brother-in-law of Mr. Zelmanovitch.
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<PAGE>
FEDERAL REGULATION
REGULATIONS UNDER THE SMALL BUSINESS INVESTMENT ACT OF 1958
As the holder of a license from the SBA to operate as an SSBIC, the
Company may be eligible for certain financing from the SBA on favorable terms as
described above under the heading "Business-Specialized Small Business
Investment Companies," but is subject to certain restrictions and requirements
under the 1958 Act and SBA regulations thereunder. On January 31, 1996, the SBA
promulgated a final rule revising the SBA regulations governing the small
business investment company program. These restrictions and requirements
include, but are not limited to, the following:
(i) The interest rate charged by an SSBIC on loans to a small
business is governed by applicable state laws and by the SBIA regulations. Under
the SBIA rules, the interest rate may not exceed the higher of (i) 19% and (ii)
the sum of (a) the higher of (I) the licensee's weighted average cost of funds
or (II) the current SBA debenture rate, plus (b) 11%, rounded off to the next
lower eighth of one percent.
(ii) Without prior SBA approval, the aggregate commitments by an SSBIC
to any single small business enterprise may not exceed 30% of the private
capital of the SSBIC.
(iii) Management and advisory services must be performed by an SSBIC in
accordance with a written contract and certain record-keeping requirements must
be satisfied.
(iv) In general, the minimum term of an SSBIC loan to a small business
is four years and the maximum term may not exceed 20 years.
(v) Prior written consent of the SBA is required in the event of any
proposed transfer of control of an SSBIC and any proposed transfer of 10% or
more of any class of an SSBIC's stock ownership by any person or group of
persons acting in concert owning 10% or more of any class of an SSBIC's stock or
the issuance of 10% or more of any class of an SSBIC's stock.
(vi) Limitations are imposed on the ability of the officers,
directors, managers or 10% stockholders of an SSBIC to become an officer,
director, manager or 10% stockholder of another SSBIC.
(vii) Prior written consent of the SBA is required in the event of a
merger, consolidation or reorganization of an SSBIC.
(viii)The funds of an SSBIC that are not invested in small businesses
must be invested in certain short-term instruments such as Federal Government
securities or certificates of deposit or placed on deposit with a Federally
insured financial institution.
Corporate SSBIC's issuing debentures after April 25, 1994 are required
to amend their articles of incorporation to indicate that they have consented,
in advance, to the SBA's right to require the removal of officers or directors
and to the appointment of the SBA or its designee as a receiver of the SSBIC for
the purpose
55
<PAGE>
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 consist of three events that automatically
accelerate all outstanding debentures without notice or demand to the SSBIC, and
allow the SBA to apply for receivership of the SSBIC without the SSBIC's
objection. The events are insolvency, a voluntary assignment for the benefit of
creditors, and the filing of a voluntary or involuntary petition for relief
under the Bankruptcy Code.
Under the second category, upon written notice, the SBA may demand
immediate repayment or redemption of all outstanding debentures or take any
other action permitted under the 1958 Act, specifically including institution of
proceedings for the appointment of the SBA or its designees as a receiver of the
SSBIC. Nine violations are included in this category, and no opportunities to
cure the default are afforded the SSBIC. This category of violations includes:
fraud; fraudulent transfers; willful conflicts of interest; willful
non-compliance with one or more of the substantive provisions of the 1958 Act or
of a substantive regulation; repeated events of default; transfer of control;
non-cooperation with remedial steps that the SBA may prescribe; non-notification
of events of default; and non-notification of events of default to others. For
the first six violations listed above the SSBIC will have consented to the SBA's
right to require the SSBIC to replace officers or directors, with persons
approved by the SBA, and the SBA's appointment as receiver for the purpose of
continuing operations.
Under the third category, which includes nine violations, the SBA
affords the SSBIC the opportunity to cure its violations. If the SSBIC fails to
cure to the SBA's satisfaction, the SBA may declare the SSBIC's entire
indebtedness evidenced by the debentures to be immediately due and payable. The
violations in this category include: excessive compensation; improper
distributions; failure to make a timely payment of an SBA obligation; failure to
maintain minimum regulatory capital; capital impairment; failure to pay any
amount when due on any obligation greater than $100,000; nonperformance or
violation of the terms and conditions of any note, debenture, or other
obligation of the SSBIC issued to, held or guaranteed by the SBA, or of any
agreement with, or conditions imposed by, the SBA; failure to comply with one or
more of the substantive provisions of the 1958 Act or regulations thereunder;
and failure to maintain certain investment ratios for leverage in excess of 300%
of Leverageable Capital. For the first three violations listed above, if an
SSBIC fails to cure such violations, the SBA can require the removal of officers
and directors and/or the appointment of its designee as receiver of the SSBIC.
In addition, if an SSBIC repeatedly fails to comply with one or more
"non-substantive" provisions of the 1958 Act or the regulations thereunder, the
SBA, after written notification and until such condition is cured, may deny
additional leverage to such SSBIC and /or require such SSBIC to take such
actions as the SBA may determine to be appropriate under the circumstances. If
the SBA requires the licensee to bring itself into full compliance and it fails
to do so, the SBA may accelerate its leverage and take other remedies, including
a receivership.
As with debentures, corporate SSBICs issuing preferred stock after
April 25, 1994 are required to amend their articles of incorporation to indicate
that they have consented, in advance, to the SBA's right to require the removal
of officers or directors and to the appointment of the SBA or its
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<PAGE>
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 determined by the SBA,
upon written notice, the SBA may replace one or more of the SSBIC's officers
and/or directors or obtain the appointment of the SBA or its designee as
receiver of the SSBIC.
The third category lists eleven events, the occurrence of any of which
will allow the SBA, on written notice to the SSBIC, to prohibit the SSBIC from
making any additional investments except for investments pursuant to legally
binding commitments entered into by the SSBIC prior to such notice and, subject
to the SBA's prior written approval, investments that are necessary to protect
the SSBIC's investment; to prohibit distributions by the SSBIC to any party
other than the SBA, its agent or trustee, until all leverage is redeemed and
amounts due are paid; to require all commitments to the SSBIC to be funded at
the earliest time(s) permitted in accordance with the SSBIC's articles; and to
review and redetermine the SSBIC's approval management compensation. This
category of events included the occurrence of any events listed in the first two
categories; the SSBIC's failure to maintain its minimum regulatory capital;
capital or liquidity impairment and failure to cure the impairment within time
limits set by the SBA in writing; improper distributions; excessive
compensation; failure to pay any amounts due under preferred securities, unless
otherwise permitted by the SBA; noncompliance with one or more of the
substantive provisions of the 1958 Act, or any substantive regulation
promulgated thereunder; failure to maintain diversity between management and
ownership, if applicable to such SSBIC; failure to maintain investment ratios
for leverage in excess of 300% of Leverageable Capital or preferred securities
in excess of 100% of Leverageable Capital, if applicable to such SSBIC, as of
the end of each fiscal year; nonperformance of one or more of the terms and
conditions of any preferred security or of any agreement with or conditions
imposed by the SBA in its administration of the 1958 Act and the regulations
promulgated thereunder; and failure to take appropriate steps to accomplish such
actions as the SBA may have required for repeated non-substantive violations of
the 1958 Act or the regulations promulgated thereunder.
Under the fourth category if an SSBIC repeatedly fails to comply with
any one or more of the non-substantive provisions of the 1958 Act or any
non-substantive regulation promulgated thereunder,
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<PAGE>
the SBA, after written notification to the SSBIC and until such condition is
cured to the SBA's satisfaction, can deny additional leverage to such SSBIC and
/or require such SSBIC to take such actions as the SBA may determine to be
appropriate under the circumstances.
An SBIC must conduct active operations. A licensee is inactive if at
the close of its fiscal year it has more than 25% of its assets in idle funds
and it has failed to provide financings aggregating 25% of the average amount of
its idle funds during the previous 18 months.
As part of the regulatory framework, SSBICs are subject to examinations
by SBA agents at least bi-annually and are required to pay examination fees and
maintain certain records, files, internal control programs and reports.
Moreover, the SBA is authorized to suspend an SSBIC's license, issue cease and
desist orders, remove officers and directors of an SSBIC, subpoena witnesses and
records, apply for injunctions to the appropriate district court, and apply for
further acts of enforcement to the appropriate U.S. Circuit Court of Appeals.
An SSBIC may not provide funds to a small business concern if that
concern is not engaged in a regular and continuous business operation.
The foregoing summary of certain requirements under the 1958 Act and
regulations thereunder does not purport to be complete and investors are urged
to consult the 1958 Act and regulations thereunder for more detailed
information. See below under the heading "Tax Considerations" for a discussion
of the taxation of SSBICs.
COMMUNITY REINVESTMENT ACT
The Community Reinvestment Act of 1977 ("CRA") requires the Comptroller
of the Currency, the Federal Deposit Insurance Corporation, the Federal Reserve
Board and the Office of Thrift Supervision to use their authority when examining
financial institutions to encourage such institutions to help meet the credit
needs of the local communities in which they are chartered and do business.
Specifically, this Act requires each of these federal regulators to assess the
institution's record of meeting the credit needs of its entire community,
including low- and moderate-income neighborhoods, consistent with the safe and
sound operation of the institution, and to take such record into account in its
evaluation of an application for a merger, acquisition, or deposit facility by
such institution. Financial institutions covered by the CRA include banks,
thrifts and savings and loans.
In assessing CRA, agencies review an institution's performance to
produce an overall composite rating based upon three major elements: lending,
service and investing. Agencies assign a rating for an institution under the
lending, investment, and service tests which then are combined to produce an
overall rating under CRA.
The investment test evaluates the degree to which a bank is helping to
meet the credit needs of its service area(s) through qualified investments.
"Qualified investments" include, but are not limited to, organizations promoting
small businesses, including SBICs and SSBICs. An agency will evaluate the
investment performance of an institution based upon several factors: the dollar
amount of qualified investments that directly address credit needs; the use of
innovative or complex qualified investments to support community development
initiatives; and the degree of responsiveness to credit and community economic
development needs. The overall CRA rating of a bank, thrift or savings and loan
may be positively affected as a consequence of equity investments in an SSBIC.
FOR A DISCUSSION REGARDING REGULATION AS A BUSINESS DEVELOPMENT COMPANY
UNDER THE 1940 ACT, SEE "BUSINESS - REGULATION AS A BUSINESS DEVELOPMENT
COMPANY."
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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 Securities, 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 Securities.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY
The Company intends to qualify as a RIC under the Code. To so qualify,
the Company must, among other things: (a) either (1) at all times during the
taxable year (A) be registered under the 1940 Act as a management company or
unit investment trust or (B) have in effect an election under the 1940 Act to be
treated as a Business Development Company; or (2) be a common trust fund or
similar fund excluded from the definition of "investment company" under the 1940
Act that is not a "common trust fund" under Code section 584(a); (b) make an
election to be treated as a RIC; (c) derive at least 90% of its gross income
from dividends, interest, payments with respect to securities loans, gains from
the sale or other disposition of stocks, securities or foreign currencies, or
other income (including gains from options, futures contracts and forward
contracts) derived with respect to the Company's business of investing in
stocks, securities or currencies; (d) derive less than 30% of its gross income
from the sale or other disposition of the following assets held for less than
three months --(i) stocks and securities; (ii) options, futures and forward
contracts (other than options, futures and forward contracts on foreign
currencies), and (iii) foreign currencies (and options, futures and forward
contracts on foreign currencies) if such currencies (or options, futures or
forward contracts) are not directly related to the Company's principal business
of investing in stocks and securities (or options, futures and forward contracts
with respect to stocks or securities); and (e) diversify its holdings so that,
at the end of each quarter, (i) at least 50% of the market value of the
Company's total assets is represented by cash and cash items, U.S. Government
securities, securities of other regulated investment companies and other
securities, with such other securities limited in respect of any one issuer to
an amount not greater in value than 5% of the Company's total assets and to not
more than 10% of the outstanding voting securities of such issuer, and (ii) not
more than 25% of the value of the Company's total assets is invested in the
securities (other than U.S. Government securities or securities of other RICs)
of any one issuer or of any two or more issuers that the Company controls and
that are determined to be engaged in the same business or similar or related
businesses.
The Company intends to become a Business Development Company
immediately before the effectiveness of the Registration Statement, of which
this Prospectus forms a part. Consequently, because the Company will not have
been a Business Development Company for its entire taxable year ending July 31,
1999, the Company will be unable to qualify as a RIC for such year. Thus, for
such taxable
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<PAGE>
year, the Company will be subject to federal income tax on its taxable income at
a maximum rate of 35%, and distributions to holders of Shares during such year
will be taxable as dividends (I.E., ordinary income) to the extent of the
Company's current and accumulated earnings and profits.
ELIGIBILITY FOR RIC TAX TREATMENT
Once the Company qualifies as a RIC, the Company and holders of Shares
will be eligible for special treatment under the Code ("RIC Tax Treatment") for
a taxable year only if certain additional requirements are met.
First, the Company must distribute to its shareholders at least 90% of
its "investment company taxable income" in such taxable year. Investment company
taxable income includes dividends, interest and net short-term capital gains in
excess of net long-term capital losses, but does not include net long-term
capital gains in excess of net short-term capital losses. If the Company
acquires debt obligations that were originally issued at a discount, or that
bear interest rates that do not call for payment at fixed rates (or certain
"qualified variable rates") at regular intervals over the life of the
obligation, it will be required to include as interest income each year a
portion of the "original issue discount" that accrues over the life of the
obligation, regardless of whether the income is received by the Company, and to
make distributions accordingly. In addition, if the Company is the holder of
record of any stock on the record date for any dividends payable with respect to
such stock, such dividends are included in the Company's gross income not as of
the date received but as of the later of (a) the date such stock became
ex-dividend with respect to such dividends (I.E., the date on which a buyer of
the stock would not be entitled to receive the declared, but unpaid, dividends),
or (b) the date the Company acquired such stock. Accordingly, in order to
satisfy its income distribution requirements, the Company may be required to pay
dividends based on anticipated earnings.
The Company intends to satisfy the 90% distribution requirement in each
taxable year, and distribute to its shareholders substantially all of its
investment company taxable income, commencing with its taxable year ending July
31, 2000. It may be necessary for the Company to borrow money or liquidate
assets in order to make such distributions. However, applicable law, loan
documents and contracts may prevent the Company from meeting the distribution
requirements. For example, under the SBA Regulations and the terms of the SBA
Debentures, the Company may not make distributions to shareholders except out of
retained earnings. Retained earnings result from interest and dividend income,
less net unrealized depreciation on loans and investments. However, the Code,
unlike the SBA Regulations, does not permit the Company to deduct from
investment company taxable income the amount of unrealized depreciation on loans
and investments. Thus, circumstances may arise in which the SBA Regulations
prevent the Company from complying with the 90% distribution requirement
necessary for RIC Tax Treatment. In addition, the Company may at any time change
its income distribution policy without shareholder consent, which may prevent
the Company from meeting the distribution requirements and qualifying for RIC
Tax Treatment. See "Dividends."
Second, the Company must at the end of such taxable year have no
earnings and profits accumulated in any year during which the Company either was
not a RIC or otherwise failed to qualify for RIC Tax Treatment.
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The Company will not be a RIC for its taxable year ending July 31,
1999. Consequently, in order to qualify for RIC Tax Treatment, the Company may
not at the end of any subsequent taxable year have any earnings and profits
accumulated in the Company's taxable year ending July 31, 1999. The Company may
therefore need to make distributions of such accumulated earnings and profits in
order to qualify for RIC Tax Treatment. The Company intends to eliminate any
such accumulated earnings and profits in order to qualify for RIC Tax Treatment
effective with its taxable year ending July 31, 2000; however, as discussed
above, restrictions on the Company's ability to make distributions or a change
in the Company's income distribution policy may prevent the Company from
eliminating such earnings and profits, in which case the Company will not
qualify for RIC Tax Treatment.
In summary, the Company intends to meet the requirements for
qualification as a RIC and for RIC Tax Treatment and elect to be treated as a
RIC starting with its taxable year ending July 31, 2000, but there is no
guarantee that it will so qualify for such year or any subsequent taxable year.
If the Company fails to qualify for RIC Tax Treatment or otherwise fails to
qualify as a RIC in any taxable year, the Company will be subject to tax in such
year on all of its taxable income, whether or not the Company makes any
distributions to its shareholders. In addition, all distributions to
shareholders, including holders of Shares, will be treated as dividends, taxable
at ordinary income rates, to the extent of the Company's current and accumulated
earnings and profits. Unless otherwise indicated, the following section of this
discussion assumes the Company will be a RIC and qualify for RIC Tax Treatment.
SPECIAL PROVISIONS OF THE CODE APPLICABLE TO SSBICS AND SHAREHOLDERS OF
SSBICS
The Company and its shareholders may qualify for the following tax
benefits which are ordinarily not available to corporations not licensed as
SSBICs and their shareholders:
Under Section 1243 of the Code, the Company will 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.
Under Section 582 of the Code, the Company will be entitled to ordinary
rather than capital loss treatment for losses sustained with respect to debt
instruments.
Under Section 1242 of the Code, except for a short sale of stock, the
Company's shareholders will 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.
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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 RIC". A "publicly offered RIC" means a RIC 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 own 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, C corporations and individuals (not estates,
trust, partnerships or S corporations) may elect to defer recognition of capital
gain realized on the sale of publicly traded securities if the taxpayers use the
sales proceeds within 60 days to purchase common stock or a partnership interest
in an SSBIC. The amount of gain an individual may elect to roll over for a tax
year is limited to the lesser of (1) $50,000, or (2) $500,000 reduced by any
gain previously excluded under this provision for all preceding taxable years
($25,000 and $250,000, respectively, for married individuals filling
separately). For C corporations, the annual and cumulative limits are increased
to $250,000 and $1 million, respectively. To the extent that sales proceeds
exceed the cost of the SSBIC common stock or partnership interest, gain must be
currently recognized. Recognition of ordinary gain may not be deferred. This
election is made by a shareholder on Schedule D to his Form 1040 Federal income
tax return for the year in which the securities are sold.
For purposes of Section 1044 of the Code, the term "publicly traded
securities" means securities which are traded on an established securities
market. The taxpayer's basis in the SSBIC stock or partnership interest is
reduced, by the amount of any unrecognized gain on the sale of the securities.
Each investor before making an investment should consult with his own
accountant or tax advisor as to the potential application of the tax benefits
available under Code Section 1044. Each shareholder should note that his holding
period for the Company's Common Stock begins upon the
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purchase of the Common Stock with no inclusion in such holding period for the
time he held the publicly-traded securities. If a shareholder sells the Common
Stock and realizes a gain or loss upon such sale, such gain or loss will be a
long-term capital gain or loss, if the shareholder held such Common Stock for
more than one year.
(c) EXCLUSION FOR GAIN FROM SALE OF SMALL BUSINESS STOCK
To encourage investment in new ventures and specialized small business
investment companies, such as the Company, Code Section 1022 grants relief to
investors who risk their funds in these businesses. Non-corporate investors may
exclude up to 50% of the gain they realize on the disposition of qualified small
business stock issued after August 10,1993, and held for more than five (5)
years. The amount of gain eligible for the 50% exclusion is subject to per
issuer limits. The exclusion is available to taxpayers who own eligible stock
for five years in a qualified corporation that actively conducts a qualified
trade or business and that meets a maximum gross assets test. SSBICs which
qualify for Code Section 1202 treatment at the time of the taxpayer's investment
are also exempt from certain line of business limitations.
However, if an individual utilizes Code Section 1044 to defer
recognition of capital gain on the sale of publicly traded securities and then
invests those funds in qualified small business stock, the deferred gain would
not be eligible for the 50% exclusion, although the appreciation occurring after
the purchase of the qualified small business stock would be eligible for such
50% exclusion.
TAXATION OF THE COMPANY AND ITS SHAREHOLDERS
GENERALLY
As a RIC qualifying for RIC Tax Treatment, the Company generally will
not be subject to U.S. federal income tax on its investment company taxable
income. However, the Company will be subject to tax on its income and gains, to
the extent that it does not distribute to its shareholders an amount equal to
such income and gains.
The Company also will not be subject to U.S. federal income tax on its
net long-term capital gains in excess of net short-term capital losses that it
distributes to its shareholders. Certain capital transactions of the Company
occurring after October 31 of any taxable year are for purposes of these rules
treated as having occurred on the first day of the following taxable year. If
the Company retains for reinvestment or otherwise an amount of such excess net
long-term capital gains it will be subject to a tax of 35% on the amount
retained. The Company will determine whether to distribute any net long-term
capital gains in excess of net short-term capital losses. The Company expects to
designate amounts retained, if any, as undistributed capital gains in a notice
to stockholders, each of whom (a) will be required to include in income for U.S.
federal income tax purposes, as long-term capital gains, such stockholder's
proportionate share of the undistributed amount, (b) will be entitled to credit
against its U.S. federal income tax liabilities such stockholder's proportionate
share of the tax paid by the Company on the undistributed amount and to claim a
refund to the extent that such stockholder's credits exceed its liabilities and
(c) for U.S. federal
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income tax purposes, will be entitled to increase its tax basis in its Shares by
an amount equal to 65% of the amount of undistributed capital gains included in
the stockholder's income.
Distributions of net long-term capital gains, if any, by the Company
are taxable to stockholders as long-term capital gains, regardless of how long
the Shares have been held, and are not eligible for the dividends received
deduction, as described below. Under the Code, net long-term capital gains will
be taxed at a rate no greater than 28% for individuals and a rate no greater
than 35% for corporations. Dividend distributions of investment company taxable
income are taxable to a stockholder as ordinary income to the extent of the
Company's current and accumulated earnings and profits. Distributions in excess
of the Company's earnings and profits will first reduce the adjusted tax basis
of a stockholder's Shares and, thereafter, will be treated as gains from the
disposition of Shares. Corporate stockholders may in certain circumstances be
eligible for a dividends received deduction with respect to dividend
distributions of investment company taxable income. Eligibility for such a
deduction is dependent in part upon the aggregate amount of dividends received
by the Company from domestic corporations. Corporate stockholders should consult
their own tax advisors concerning the availability of the dividends received
deduction. Stockholders will be notified annually as to the federal income tax
status of their dividends and distributions.
POTENTIAL EXCISE TAX
As a RIC, the Company may be subject to a nondeductible 4% excise tax
on a portion of its undistributed income. To avoid the tax, the Company must
distribute annually at least 98% of its ordinary income (with certain
adjustments) and not taking into account any capital gains or losses) for the
calendar year and at least 98% of its capital gain net income for the 12 months
period ending, as a general rule, on October 31 of each calendar year. For this
purpose, any income or gain retained by the Company that is subject to corporate
income tax will be treated as having been distributed at the end of the calendar
year. In addition, the minimum amounts that must be distributed in any calendar
year to avoid the excise tax will be increased or decreased to reflect the
amounts of distributions in previous calendar years. For a distribution to
qualify under the foregoing provisions, the distribution generally must be
declared and paid during the calendar year. Any dividend declared by the Company
in October, November or December of any calendar year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by each shareholder on December 31 of such calendar year and
to have been paid by the Company during January of the following calendar year.
The Company intends to make sufficient distributions each calendar year to avoid
the excise tax, but limitations on the Company's ability to make distributions
or a change in the Company's income distribution policy may not, permit such
distributions at all times, in which case the excise tax will apply. See
"Dividends".
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.
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HOLDING AND DISPOSING OF WARRANTS
EXERCISE OF WARRANT
The exercise of a Warrant generally will not be a taxable event to the
holder of the Warrant. A holder's initial tax basis in shares of Common Stock
(including a fractional share interest) acquired upon exercise of a Warrant
("Warrant Shares") will equal the amount of any cash paid upon exercise. The
holding period for Warrant Shares acquired upon the exercise of a Warrant will
begin with the date on which the Warrant is exercised.
ADJUSTMENT TO EXERCISE PRICE
Adjustments to the exercise price pursuant to the terms of the Warrants
generally will not constitute a taxable event for a holder. However, under
certain circumstances, an adjustment to the exercise price would be treated as a
taxable constructive distribution to Holders of the Warrants. If a taxable
constructive distribution were to occur, a holder's basis in a Warrant would be
increased by the amount of the taxable distribution with respect to the Warrant.
GAIN OR LOSS ON DISPOSITION FOR EXPIRATION OF WARRANTS
Any gain or loss recognized on a sale or other taxable disposition of
Warrant, and any loss recognized on the expiration of a Warrant, generally will
constitute capital gain or loss if the Warrant Shares underlying the Warrant
would have been held as a capital asset by the holder if the Warrant had been
exercised. Capital gain or loss recognized upon a sale or other taxable
disposition of a Warrant, and any capital loss recognized on the expiration of a
Warrant, will be long term if the holder's holding period for the Warrant is
more than one year at the time of such sale, other taxable disposition, or
expiration.
BACKUP WITHHOLDING
The Company may be required to withhold 31% of reportable payments
(which may include dividends, capital gain distributions, interest, and
principal payments) to certain non-corporate stockholders as backup withholding.
A stockholder, however, may avoid becoming subject to this requirement by filing
an appropriate form providing his taxpayer identification number, certifying
under penalties of perjury that such taxpayer identification number is correct
and that he is not subject to backup withholding, or is exempt from backup
withholding. Corporations and certain other stockholders are exempt from backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
under the backup withholding rules from payments made to stockholders may be
credited against their federal income tax liability.
THE U.S. FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS A SUMMARY
INCLUDED FOR GENERAL INFORMATION PURPOSES ONLY. IN VIEW OF THE INDIVIDUAL NATURE
OF TAX CONSEQUENCES, EACH INVESTOR IS ADVISED TO CONSULT HIS OWN TAX ADVISOR
WITH RESPECT TO HOW AN INVESTMENT IN THE COMPANY WILL AFFECT HIM, INCLUDING THE
EFFECT AND APPLICABILITY OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE
POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
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DETERMINATION OF NET ASSET VALUE
The net asset value per share of Common Stock will be determined, as
soon as practicable after and as of the end of each calendar quarter, by
dividing the book value of the Company's total assets minus total liabilities by
the total number of shares of Common Stock outstanding at the date as of which
the determination is made.
In making its valuation determination, the Board of Directors adheres
to the valuation policy approved by the SBA and adopted by the Board of
Directors. In calculating the value of the Company's total assets, securities,
if any, that are traded in the over-the-counter market or on a stock exchange
are valued at the average of the "bid" and "asked" prices, as the case may be,
for the valuation date and the preceding two days, unless the investment is
subject to a restriction that requires a discount from such price, which is
determined by the Board of Directors. All other investments are valued at fair
value as determined in good faith by the Board of Directors. In making such
determination, the Board of Directors will value loans and nonconvertible debt
securities for which there exists no public trading market at cost; plus
amortized original issue discount, if any, unless adverse factors lead to a
determination of a lesser value. In valuing securities for which there exists no
public trading market, the Board of Directors will determine fair value on the
basis of collateral, the issuer's ability to make payments, its earnings, the
market value of comparable publicly traded companies and other pertinent
factors.
A substantial portion of the Company's assets will consist of loans and
other investments carried at fair values determined by its Board of Directors.
The Company's independent public accountants have historically reviewed and may
in the future review and express an opinion on the reasonableness of the
procedures applied by the directors in valuing such loans and other investments
and the appropriateness of the underlying documentation, but determination of
fair values involves subjective judgment not susceptible to substantiation by
auditing procedures. Accordingly, the accountants' opinion on the Company's
Financial Statements included elsewhere in this Prospectus refers to, and the
financial statements in the Company's annual report is expected to refer to, the
uncertainty with respect to the possible effect on the financial statements of
such valuations.
DESCRIPTION OF SECURITIES
AUTHORIZED CAPITAL
The authorized capital stock of the Company consists of 25,000,000
shares of Common Stock and 5,000,000 shares of Preferred Stock. Prior to this
Offering, the Company had 5,701,545 shares of Common Stock outstanding and no
shares of Preferred Stock outstanding.
COMMON STOCK
The Company is authorized to issue up to 25,000,000 shares of Common
Stock, $.01 par value per share, of which 5,701,545 shares were issued and
outstanding as of the date of this Prospectus.
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The holders of Common Stock are entitled to receive dividends equally when, as
and if declared by the Board of Directors, out of funds legally available
therefor subject to the rights of holders of preferred stock having a dividend
preference over the Common Stock. The Company has not paid dividends on its
Common Stock since 1990. See "Risk Factors No Common Stock Dividends",
"Dividends and Distributions" and "Tax Considerations."
The holders of the Common Stock have sole voting rights, one vote for
each share held of record on all matters submitted to stockholders, and are
entitled upon liquidation of the Company to share ratably in the net assets
available for distribution after creditors and holders of preferred stock having
a liquidation preference over the Common Stock have been paid in full. There are
no preemptive, conversion, redemption or cumulative voting rights applicable to
the Common Stock. The outstanding shares of the Common Stock are fully paid and
non-assessable. Pursuant to the Underwriting Agreement between the Company and
the Representative, the Company may not issue any securities, except in certain
circumstances, for a period of 24 months from the date of this Prospectus,
without prior written consent of the Representative.
PREFERRED STOCK
Subject to the prior approval of the SBA, the Company will be
authorized to issue 5,000,000 shares of Preferred Stock, par value $.01 per
share, from time to time in one or more series. No shares of the Company's
Preferred Stock are outstanding as of the date of this Prospectus nor does the
Company's Board of Directors have any present intention to issue any such
shares.
Subject to the prior approval of the SBA, the Board of Directors will
be authorized, subject to any limitations prescribed by Delaware law, to provide
for the issuance of Preferred Stock in one or more series, to establish from
time to time the number of shares to be included in each such series, to fix the
rights, preferences and privileges of the shares of each wholly unissued series
and any qualifications, limitations or restrictions thereon, and to increase or
decrease the number of shares of any such series (but not below the number of
shares of such series then outstanding), without any further vote or action by
shareholder. The Board of Directors may authorize and issue Preferred Stock with
voting or conversion rights that could adversely affect the voting power or
other rights of the holders of Common Stock, because the terms of the Preferred
Stock that might be issued could conceivably prohibit the Company's consummation
of any merger, reorganization, sale of substantially all its assets, liquidation
or other extraordinary corporate transaction absent approval of the outstanding
shares of Preferred Stock. Thus, the issuance of Preferred Stock may have the
effect of delaying, deferring or preventing a change in control of the Company.
In order for the Company to issue any shares of Preferred Stock it must,
immediately after such issuance and sale, have an asset coverage of at least
200%. Pursuant to the terms of the Underwriting Agreement between the Company
and the Representative, the Company may not issue any shares of Preferred stock
for a period of 24 months from the date of this Prospectus, except in certain
circumstances, without the prior written consent of the Representative.
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WARRANTS
Each Warrant entitles the holder thereof to purchase one share of
Common Stock at an exercise price of $5.50, subject to certain adjustments, for
a period commencing the earlier of (i) 24 months from the date of this
Prospectus or (i) 12 months from the date of the Prospectus, with the consent of
the Representative, and ending five years from the date of the Prospectus. The
Warrants may be exercised in whole or in part.
The Warrants are being issued under a warrant agreement ("Warrant
Agreement") between the Company and Jersey Transfer and Trust Company (the
"Warrant Agent"). The following is a general summary of certain provisions
contained in the Warrant Agreement and is qualified in its entirety by reference
to the Warrant Agreement, a copy of which has been filed as an exhibit to the
Registration Statement, of which this Prospectus is a part.
The Board of Directors of the Company has the right to amend the terms
of the Warrant Agreement at its discretion to, among other things, reduce the
exercise price or extend the exercise period of the Warrants; PROVIDED, HOWEVER,
that no amendment adversely affecting the rights of the holders of Warrants may
be made without the approval of the holders of a majority of the affected
Warrants and PROVIDED, FURTHER, that no reduction in the number or change in the
nature of the securities purchasable upon exercise of the Warrant, no increase
in the exercise price, or the acceleration of the expiration date, may be made
without the approval of each holder of a Warrant, unless such changes result
from the effect of the anti-dilution provisions of the Warrant, as summarized
below.
Commencing the earlier of (i) 24 months from the date of this
Prospectus or (ii) 12 months from the date of the Prospectus, with the consent
of the Representative, the Company has the right to redeem all the Warrants at a
price of $.05 per Warrant upon not less than 30 days' prior written notice;
provided that before any redemption of Warrants can take place, the average
closing price of the Company's Common Stock as reported on Nasdaq shall have
been $7.50 per share for 20 consecutive trading days ending within 15 days prior
to the date on which notice of redemption is sent.
In order for a holder to exercise his or her Warrants, and as required
in the Warrant Agreement, there must be a current registration statement on file
with the SEC and various state securities commissions to continue registration
of the shares of Common Stock underlying such Warrants. The Company will be
required to file post-effective amendments when events require such amendments.
There can be no assurance that the registration statement can be kept current.
If it is not kept current for any reason, the Warrants will not be exercisable
and will be deprived of any value. The Company has agreed to use its best
efforts to maintain a current registration statement to permit the issuance of
the Common Stock upon exercise of the Warrants.
Holders of the Warrants will be protected against dilution of the
interest represented by the underlying shares of Common Stock upon the
occurrence of certain events, including, but not limited to, stock dividends,
stock-splits, reclassifications and mergers. In the event of the complete
liquidation and dissolution of the Company, the Warrants terminate. Holders of
the Warrants will not have voting power and will not be entitled to dividends.
In the event of liquidation, dissolution or winding up of the Company, holders
of the Warrants will not be entitled to participate in the Company's assets.
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Pursuant to the Underwriting Agreement, the Company has agreed to pay
to the Underwriters and/or any registered broker-dealer which is a member of the
National Association of Securities Dealers, Inc. ("NASD") a commission equal to
four percent (4%) of the exercise price of each Warrant exercised provided: (1)
at least one year has elapsed from the date of this Prospectus, (2) the market
price for the Common Stock is greater than the exercise price of the Warrants;
(3) the Underwriters or such other NASD broker-dealer member has solicited the
holder to exercise the Warrant with such solicitation being confirmed in writing
by each holder; and (4) the compensation arrangements were disclosed to the
holder at the time of exercise, such disclosure being confirmed in writing by
said holder. The commission is further conditioned upon the Company's Warrant
Agent being furnished by such Underwriter or NASD broker-dealer member with a
certificate stating that:
(i) the Warrants exercised were not held in a discretionary account;
(ii) such Underwriter or the NASD member did not, within 5 business
days immediately preceding the solicitation of the exercise of the Warrant
or the date of such exercise, bid for or purchase the Common Stock of the
Company or any securities of the Company immediately convertible into or
exchangeable for the Common Stock (including the Warrants) or otherwise
engage in any activity that would be prohibited by Regulation M under the
Securities Exchange Act of 1934, as amended, to one engaged in a
distribution of the Company's securities; and
(iii) in connection with the solicitation, such Underwriter and/or the
NASD member disclosed to the person exercising the Warrant the compensation
it would receive upon exercise of the Warrant.
PRIOR FINANCING
In October 1997 the Company sold 301,500 shares of Common Stock in a
private offering for an aggregate purchase price of $603,000. The investors who
purchased such Common Stock have unconditionally agreed not to sell or transfer
any shares of Common Stock for a period of 12 months from the date of this
Prospectus. The Company paid a commission (10%) and a non-accountable expense
allowance (3%) in the aggregate amount of approximately $78,390 to RAS, the
placement agent of such offering. Frederick Schulman, a Director of the Company,
is the Executive Vice President and Director of Investment Banking of RAS. See
"Management".
RAS and its designees received options to purchase 30,150 shares of
Common Stock at a purchase price of $2.40 per share, exercisable through
November 4, 2002. RAS has certain demand and piggyback registration rights
commencing 13 months from the date of this Prospectus. RAS has agreed not to
sell or transfer any shares of Common Stock underlying such options for a period
of 12 months from the date of this Prospectus.
DELAWARE ANTI-TAKEOVER LAW
As a Delaware corporation, the Company is subject to Section 203 of the
GCL In general, Section 203 prevents an "interested stockholder" (defined
generally as a person owing 15% or more of a
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Delaware corporation's outstanding voting stock) from engaging in a "business
combination" (as defined) with such Delaware corporation for three years
following the date such person became an interested stockholder unless (i)
before such person became an interested stockholder, the board of directors of
the corporation approved the transaction in which the interested stockholder
became an interested stockholder or approved the business combination, (ii) upon
consummation of the transaction that resulted in the interested stockholder's
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding stock held by the directors who are also
officers of the corporation and by certain employee stock plans), or (iii)
following the transaction in which such person became an interested stockholder,
the business combination is approved by the board of directors of the
corporation and authorized at a meeting of stockholders by the affirmative vote
of the holders of two-thirds of the outstanding voting stock of the corporation
not owned by the interested stockholder. Under section 203, the restrictions
described above also do not apply to certain business combinations proposed by
an interested stockholder following the public announcement or notification of
one of certain extraordinary transactions involving the corporation and a person
who had not been an interested stockholder during the previous three years or
who became an interested stockholder with the approval of the corporation's
board of directors and if such business combination is approved by a majority of
the board members who were directors prior to any person's becoming an
interested stockholder. The provisions of Section 203 requiring a super-majority
vote to approve certain corporate transactions could have the effect of
discouraging, delaying or preventing hostile takeovers, including those that
might result in the payment of a premium over market price or changes in control
or management of the Company.
LIMITATION ON LIABILITY OF DIRECTORS
The Company's Certificate of Incorporation provides that, subject to
Section 314 of the 1958 Act, a director of the Company will not be personally
liable to the Company or its stockholders for monetary damages for breach of the
fiduciary duty of care as a director, including breaches which constitute gross
negligence. By its terms and in accordance with the GCL, however, this provision
does not eliminate or limit the liability of a director of the Company (i) for
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the GCL
(relating to unlawful payments or dividends or unlawful stock repurchases or
redemptions), (iv) for any improper benefit or (v) for breaches of a director's
responsibilities under the federal securities laws.
TRANSFER AGENT/WARRANT AGENT
The Company's transfer agent for the Common Stock and the warrant agent
for the Warrants is Jersey Transfer & Trust Co., 201 Bloomfield Avenue, P.O. Box
36, Verona, New Jersey 07044.
SHARES AVAILABLE FOR FUTURE SALE
Immediately prior to the sale of the Common Stock hereunder, the
Company had an aggregate of 5,701,545 shares of its Common Stock issued and
outstanding, all of which are "restricted
70
<PAGE>
securities," which may be sold only in compliance with Rule 144 under the
Securities Act of 1933, as amended. Rule 144 provides, in essence, that a person
holding restricted securities for a period of one year after payment therefor
may sell, in brokers' transactions or to market makers, an amount not exceeding
1% of the outstanding class of securities being sold, or the average weekly
reported volume of trading of the class of securities being sold over a
four-week period, whichever is greater, during any three-month period. (Persons
who are not affiliates of the Company and who had held their restricted
securities for at least two years are not subject to the volume or transaction
limitations.) Pursuant to the terms of the Underwriting Agreement, the Company's
officers, directors, and principal stockholder (holding 5,400,045 shares of
Common Stock) have agreed not to sell any of their shares of capital stock for a
period of 12 months following the date of this Prospectus without the prior
written consent of the Representative. Holders of 301,500 shares of Common Stock
have unconditionally agreed not to sell or transfer any shares of Common Stock
for a period of 12 months from the date of this Prospectus. The sale of a
significant number of these shares in the public market may adversely affect
prevailing market prices of the Company's securities following this Offering.
See "Underwriting."
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement by and between the Company and the Representative ("Underwriting
Agreement"), the Company has agreed to sell to the Underwriters, on a firm
commitment basis, a total of 1,250,000 Units. The Underwriters have agreed to
purchase the number of Units set forth opposite their name in the table below:
Underwriters Number Of Units
------------ ---------------
First Liberty Investment Group, Inc.
------------------------------
------------------------------
Total 1,250,000
The Company has agreed to sell the Units to the Underwriters at a
discount of ten percent (10%) of the public offering price thereof. The Company
has also agreed to pay the Representative a non-accountable expense allowance in
the amount of 3% of the aggregate offering price of the Units ($35,000 of which
has already been paid), including the Units purchased pursuant to the
Over-Allotment Option. In addition, the Company has agreed to pay all costs of
issuance of the Units, including blue sky fees and related counsel fees, but not
including fees and expenses of the Representative's counsel. The Company
estimates that it will incur costs of $300,000 in connection with this Offering,
not including the Representative's 3% non-accountable expense allowance and the
$108,000 financial consulting fee payable to the Representative. As part of the
underwriting arrangements, the Company will enter into an agreement to retain
the Representative as a financial consultant to the Company for a three year
period commencing as of the closing of the Offering at an annual fee of $36,000,
for a total of $108,000, payable in full at the closing of the Offering.
71
<PAGE>
The Company has agreed to indemnify the Underwriters against certain
liabilities which may be incurred in connection with this offering, including
certain civil liabilities under the Securities Act, and where such
indemnification is not available, to contribute to the payments the Underwriters
may be required to make in respect of such liabilities.
The Underwriting Agreement further provides that, subject to SBA
approval, for three years after the completion of this Offering, the
Representative will have the right to nominate one person to serve on the
Company's Board of Directors. While the Representative has not exercised this
right, it may appoint an advisor, who will be entitled to attend all meetings of
the Board of Directors during such three-year period.
The Company's officers, directors and principal stockholder have agreed
not to sell, offer to sell or otherwise dispose of any shares of the Company's
Common Stock, or securities convertible into Common Stock, owned by them, for a
period of 12 months from the date of this Prospectus, without the prior written
consent of the Representative. The Representative shall have, for a period of
three years after the date of this Prospectus, a preferential right to purchase
for its account, or sell for the accounts of any of the Company's directors or
officers or any of their relatives or affiliates, any securities sold by such
persons pursuant to Rule 144 under the 1933 Act, or any successor provision, on
terms at least as favorable to such persons as available elsewhere.
The Company has granted the Representative an Over-Allotment Option,
which is exercisable for 30 days from the date hereof, to purchase up to an
aggregate of 187,500 additional Units, all at the offering price, less the
underwriting discount, set forth on the cover page of this Prospectus. The
Representative may exercise the Over-Allotment Option solely for the purpose of
covering over-allotments incurred in the sale of Units offered hereby.
The Company has granted the Representative a right of first refusal for
three years after the closing of this Offering to (i) serve as managing
underwriter or placement agent for any public offering or private placement,
respectively, of securities of the Company or its subsidiaries, on terms no less
favorable to the Representative than that offered to such other prospective
underwriter or placement agent, or (ii) to serve as its investment banker with
respect to any merger, acquisition of disposition of assets of the Company or
any of its subsidiaries that is originated by the Representative or not
otherwise originated by a third party, as to which the Representative shall be
given prompt written notice thereof and 20 days from its receipt of notice
thereof to accept or decline such service.
The Representative has advised the Company that sales to certain
dealers may be made at a public offering price less a concession not in excess
of _%. The Underwriters do not intend to confirm sales of more than one percent
of the Units offered hereby to any accounts over which it exercises
discretionary authority.
The Underwriters may engage in over-allotment, stabilizing
transactions, syndicate covering transactions and penalty bids in accordance
with Regulation M under the Securities Exchange Act of 1934, as amended.
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long
72
<PAGE>
as the stabilizing bids do not exceed a specific maximum. Syndicate covering
transactions involve purchases of the Company's securities in the open market
after the distribution has been completed in order to cover syndicate short
positions. Penalty bids permit the Underwriters to reclaim a selling concession
from a syndicate member when the securities originally sold by such syndicate
member are purchased in a syndicate covering transaction to cover syndicate
short positions. Such stabilizing transactions, syndicate covering transactions
and penalty bids may cause the price of the securities to be higher than they
would otherwise be in the absence of such transactions.
The Company has agreed, at the closing of this Offering, to sell to the
Underwriters or their nominee, for $.0001 per option, the Underwriters' Unit
Purchase Option to purchase 125,000 Units, each Unit consisting of one share of
Common Stock and one Warrant. The Underwriters' Unit Purchase Option will be
exercisable for a four-year term, commencing one year after the date of this
Prospectus, at an exercise price of $6.56 per Unit, 160% of the public offering
price of the Units. The exercise price of the Warrants contained therein is
$8.80 (160% of the exercise price of the Warrants contained in the public
Units). The Underwriters' Unit Purchase Option will be restricted from exercise,
sale, transfer, assignment or hypothecation (except to officers of the
Underwriters or of any other broker-dealer which participates in this Offering)
for a period of one year from the date of this Prospectus. The Underwriters'
Unit Purchase Option also provides that on two occasions, upon the request of
the Underwriters or holders of a majority interest in the Underwriters' Unit
Purchase Option or the underlying securities, at any time during the four-year
period commencing one year after the Effective Date, the Company will prepare
and file a post-effective amendment or new registration statement permitting the
sale of the Underwriters' Unit Purchase Option and/or the underlying securities
and use its best efforts to keep the registration statement effective for a
nine-month period following the effective date of such post-effective amendment
or new registration statement. The Company will bear the cost of the first such
registration statement, and the holders will bear all costs incident to the
second such registration statement. If the Company files a registration
statement relating to an equity offering under the provisions of the Securities
Act at any time during the five-year period commencing on the date of this
Prospectus, the holders of the Underwriters' Unit Purchase Option or underlying
securities will have the right, subject to certain conditions, to include in
such registration statement, at the Company's expense, all or part of the
underlying securities at the request of the holders. The number of Units covered
by the Underwriters' Unit Purchase Option and the exercise price are subject to
adjustment upon certain events to prevent dilution.
For the life of the Underwriters' Unit Purchase Option, the holders
thereof will have the opportunity to profit from a rise in the market price of
the Securities with a resulting dilution in the interests of other stockholders.
The Underwriters' registration rights may result in substantial expense to the
Company at a time when it may not be able to afford such expense and may impede
future financing. The Company may find that the terms on which it could obtain
additional capital may be adversely affected while the Underwriters' Unit
Purchase Option is outstanding.
The Company has also agreed to pay the Underwriters a warrant
solicitation fee equal to 4% of the Warrant exercise price for any of the
publicly held Warrants, when exercised, at any time commencing one year after
the date of this Prospectus. See "Description of Securities -- Warrants".
73
<PAGE>
DETERMINATION OF PUBLIC OFFERING PRICE
Prior to this Offering, there has been no public market for the
Securities. The initial public offering prices for the Securities has been
determined by negotiations between the Company and the Representative. Among the
factors considered in the negotiations were the market price of the Company's
Common Stock, an analysis of the areas of activity in which the Company is
engaged, the present state of the Company's business, the Company's financial
condition, the Company's prospects, an assessment of management, and the general
condition of the securities market at the time of this Offering. The public
offering prices of the Securities does not necessarily bear any relationship to
assets, earnings, book value or other criteria of value applicable to the
Company.
The Company anticipates that the Units, Common Stock and Warrants will
be listed for quotation on Nasdaq under the symbols "ECVCU", "ECVC" and "ECVCW",
respectively, but there can be no assurances that an active trading market will
develop, even if the securities are accepted for quotation. The Underwriter
intends to make a market in all of the publicly-traded securities of the
Company.
LEGAL MATTERS
The validity of the securities offered hereby has been passed upon for
the Company by Berlack, Israels & Liberman LLP, 120 West 45th Street, New York,
New York 10036. Certain legal matters in connection with this offering will be
passed upon for the Representative by Gusrae, Kaplan & Bruno, 120 Wall Street,
New York, NY 10005
EXPERTS
The statements in this Prospectus under the captions "Risk Factors -
Need For SBA Financing; SBA Financing Not Assured", "SBA Industry Review",
"Business - Specialized Small Business Investment Companies," "Federal
Regulation" and "Tax Considerations" have been reviewed and approved by Reid &
Priest LLP, Market Square, 701 Pennsylvania Avenue, N.W., Washington, D.C.
20004, special regulatory counsel for the Company, as experts in such matters,
and are included herein in reliance upon such review and approval.
The financial statements of East Coast Venture Capital, Inc. have been
included herein and in the Registration Statement in reliance upon the report of
Michael C. Finkelstein & Co., independent certified public accountants,
appearing elsewhere herein and upon the authority of said firm 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. The Company retains its securities and original loan
documentation in a rented safe deposit vault at European American Bank, 1345
Avenue of the Americas, New York, New York 10105.
74
<PAGE>
EAST COAST VENTURE CAPITAL, INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
JULY 31, 1998, 1997 AND 1996
<PAGE>
TABLE OF CONTENTS
PAGE
Independent Auditors' Report . . . . . . . . . . . . . F-1
Statements of Financial Position of
East Coast Venture Capital, Inc. as of
July 31, 1998 and 1997 . . . . . . . . . . . . . . . F-2
Statements of Operations for the Years
Ended July 31, 1998, 1997 and 1996 . . . . . . . . . F-4
Statements of Cash Flows for the Years
Ended July 31, 1998, 1997 and 1996 . . . . . . . . . F-5
Statements of Stockholders' Equity for the Years
Ended July 31, 1998, 1997 and 1996 . . . . . . . . . F-6
Notes to the Financial Statements. . . . . . . . . . . F-7
Supplemental Schedules. . . . . . . . . . . . . . . . . F-14
Selected Per Share Data and Ratios. . . . . . . . . . . F-15
<PAGE>
MICHAEL C. FINKELSTEIN
CERTIFIED PUBLIC ACCOUNTANT
198 Route 9, Suite 205 253 Fifth Avenue, 5th
Floor
Manalapan, New Jersey 07726 New York, New York 10016
Tel. (732) 577-7055 Tel. (212) 689-4633
Fax. (732) 577-1844
Board of Directors
East Coast Venture Capital, Inc.
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying Statements of financial position of East Coast
Venture Capital, Inc. (the "Company") as of July 31, 1998 and 1997 and the
related statements of operations, stockholders' equity and cash flows for the
three years then ended. 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 $4,064,937 and $4,050,288 as of July 31, 1998 and 1997,
respectively (185% and 241% 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 may 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 July 31, 1998
and 1997 and the results of its operations and its cash flows for the three
years then ended in conformity with generally accepted accounting principles.
September 9, 1998
Certified Public Accountant
F-1
<PAGE>
EAST COAST VENTURE CAPITAL , INC.
STATEMENTS OF FINANCIAL POSITION
ASSETS
<TABLE>
<CAPTION>
July 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Loans Receivable-Long Term Portion (Notes 2 and 10) $ 4,123,095 $ 4,198,446
Equity Investments 90,000 --
Less: Unrealized Depreciation on Loans Receivable (148,158) (148,158)
----------- -----------
4,064,937 4,050,288
Less: Current Maturities - Loans Receivable 609,741 629,767
----------- -----------
Total Loans Receivable - Net of Current Maturities 3,455,196 3,420,521
----------- -----------
Current Assets:
Cash (Note 12) 1,828,014 445,232
Accrued Interest 213,422 127,335
Current Maturities - Loans Receivable (Note 2) 609,741 629,767
Other Assets 200,357 79,372
----------- -----------
Total Current Assets 2,851,534 1,281,706
----------- -----------
Total Assets $ 6,306,730 $ 4,702,227
=========== ===========
</TABLE>
See Notes to the Financial Statements
F-2
<PAGE>
EAST COAST VENTURE CAPITAL , INC.
STATEMENTS OF FINANCIAL POSITION
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
July 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Long Term Debt:
Debenture Payable to SBA (Note 3) $ 3,780,000 $ 2,740,000
----------- -----------
Current Liabilities:
Accrued Interest 72,683 39,023
Other Current Liabilities 32,270 16,500
Deferred Income 99,521 99,521
Loan Participations 133,507 133,507
----------- -----------
Total Current Liabilities 337,981 288,551
----------- -----------
Total Liabilities 4,117,981 3,028,551
----------- -----------
Commitments and Contingencies (Notes 8, 9,10 and 11) -- --
Stockholders' Equity: (Notes 5, 6 and 7)
Class A 3% Cumulative Preferred Stock, $1 Par Value;
1,000,000 Shares Authorized, 0 Shares
Issued and Outstanding -- --
Class B 4% Cumulative Preferred Stock, with a
15 Year Redemption Period, $1 Par Value;
2,000,000 Shares Authorized: No Shares
Outstanding -- --
Common Stock, $.01 Par Value; 25,000,000 Shares
Authorized: 5,701,545 and 5,400,045 Shares Issued
and Outstanding, Respectively 57,015 54,000
Additional Paid in Capital 2,340,780 1,720,280
Restricted Capital - Realized Gain
on Redemption 135,000 264,600
Retained Earnings (Deficit) (344,046) (365,204)
----------- -----------
Total Stockholders' Equity 2,188,749 1,673,676
----------- -----------
Total Liabilities and Stockholders' Equity $ 6,306,730 $ 4,702,227
=========== ===========
</TABLE>
See Notes to the Financial Statements
F-3
<PAGE>
<TABLE>
<CAPTION>
EAST COAST VENTURE CAPITAL , INC.
STATEMENTS OF OPERATIONS
Years Ended
July 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue:
Interest Earned on Outstanding Receivables (Note 2) $ 404,627 $ 358,491 $ 295,803
Interest Income on Idle Funds 29,025 2,490 18,467
---------- ---------- ----------
Total Revenue 433,652 360,981 314,270
---------- ---------- ----------
Expenses:
Interest (Note 3) 219,349 196,200 186,346
Professional Fees 17,917 27,350 19,722
Management Fees (Note 9) 144,000 108,000 96,000
Other Operating Expenses 22,357 16,917 3,334
---------- ---------- ----------
Total Expenses 403,623 348,467 305,402
---------- ---------- ----------
Net Investment Income 30,029 12,514 8,868
Unrealized (Depreciation) in Value of Investments (Note 2) -- -- --
---------- ---------- ----------
Net Income Before Taxes 30,029 12,514 8,868
Provision for Taxes:
Current Income Taxes (Note 2) 8,871 8,487 4,776
---------- ---------- ----------
Net Income $ 21,158 $ 4,027 $ 4,092
========== ========== ==========
Earnings (Loss) Per Common Share (Note 2) $ -- $ -- $ --
========== ========== ==========
Weighted Average Shares of Common Stock Outstanding 5,701,545 5,400,045 5,400,045
========== ========== ==========
</TABLE>
See Notes to the Financial Statements
F-4
<PAGE>
EAST COAST VENTURE CAPITAL , INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
July 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 21,158 $ 4,027 $ 4,092
(Increase) in Accrued Interest Receivable (86,087) (28,370) (7,667)
(Increase) in Other Assets (120,985) (49,282) (21,537)
Increase in Accrued Liabilities 49,430 6,400 384
----------- ----------- -----------
Net Cash (Used) by Operating Activities (136,484) (67,225) (24,728)
----------- ----------- -----------
Cash Flows From Investing Activities:
Loans Receivable Originated (889,649) (1,336,000) (1,737,000)
Repayment of Loans Receivable 875,000 1,385,674 502,074
(Decrease) in Loan Participations -- (642) (1,006)
----------- ----------- -----------
Net Cash (Used) Provided by Investing Activities (14,649) 49,032 (1,235,932)
----------- ----------- -----------
Cash Flows from Financing Activities:
Proceeds from Sale of Common Stock 493,915 -- 12,000
Sale of Debentures (Net) 1,040,000 40,000 700,000
----------- ----------- -----------
Net Cash Provided by Financing Activities 1,533,915 40,000 712,000
----------- ----------- -----------
Net Increase in Cash 1,382,782 21,807 (548,660)
Cash Balance - Beginning of Period 445,232 423,425 972,085
----------- ----------- -----------
Cash Balance - End of Period $ 1,828,014 $ 445,232 $ 423,425
=========== =========== ===========
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Period For:
Interest $ 185,689 $ 192,275 $ 182,270
=========== =========== ===========
Taxes $ 8,871 $ 8,487 $ 8,468
=========== =========== ===========
</TABLE>
See Notes to the Financial Statements
F-5
<PAGE>
<TABLE>
<CAPTION>
EAST COAST VENTURE CAPITAL , INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Year Ended
July 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
3% Cumulative Preferred Stock, $1 Par Value
3,000,000 Shares Authorized; 0 Shares
Issued and Outstanding $ -- $ -- $ --
----------- ----------- -----------
Common Stock, $.01 Par Value, 25,000,000 Shares
Authorized; 5,701,545 and 5,400,045 Shares Issued
and Outstanding, Respectively 54,000 54,000 53,160
Proceeds from Sale of Common Stock 3,015 -- 840
----------- ----------- -----------
Balance - End of Period 57,015 54,000 54,000
----------- ----------- -----------
Additional Paid In Capital - Beginning of Period 1,720,280 1,590,680 1,449,920
Amortization of Restricted Capital 129,600 129,600 129,600
Proceeds from Sale of Common Stock 490,900 -- 11,160
----------- ----------- -----------
Balance - End of Period 2,340,780 1,720,280 1,590,680
----------- ----------- -----------
Restricted Capital
Balance - Beginning of Period 264,600 394,200 523,800
Amortization of Realized Gain (129,600) (129,600) (129,600)
----------- ----------- -----------
Balance - End of Period 135,000 264,600 394,200
----------- ----------- -----------
Retained Earnings (Deficit)
Balance - Beginning of Period (365,204) (369,231) (373,323)
Net Income 21,158 4,027 4,092
----------- ----------- -----------
Balance - End of Period (344,046) (365,204) (369,231)
----------- ----------- -----------
Total Stockholders' Equity $ 2,188,749 $ 1,673,676 $ 1,669,649
=========== =========== ===========
</TABLE>
See Notes to the Financial Statements
F-6
<PAGE>
EAST COAST VENTURE CAPITAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
JULY 31, 1998, 1997 AND 1996
NOTE 1 ORGANIZATION
East Coast Venture Capital, Inc., (the "Company") was formed on June
14, 1983 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 Small
Business Administration ("SBA"). The Company's business is to provide
financing to persons who qualify under SBA regulations. The Company was
granted a license to operate as a SSBIC by the SBA on July 14, 1986.
Effective June 24, 1998, the Company was incorporated in Delaware as
the successor to East Coast Venture Capital Inc., a New York
Corporation. The reorganization was a tax free reorganization.
Accordingly, for both financial reporting and tax reporting purposes,
the Company maintained its current fiscal year which ended July 31,
1998.
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 method of accounting in conformity with generally accepted
accounting principles for investment companies.
VALUATION OF LOANS AND INVESTMENTS
As of July 31, 1998 all loans receivable (loans) made by the Company
have been in the form of loans to closely held corporations. Since
there exists no ready market for these loans the Board of Directors has
valued the loans based upon the cost of such loans, less a provision
for loan losses. Because of the inherent uncertainty of the valuation,
the estimated values might otherwise be significantly lower than values
that would exist in a ready market for such loans which market has not
and does not presently exist. The balance in the reserve account is
adjusted periodically by the Board of Directors on the basis of fair
value of the collateral held and past loss experience. The provision
for loan losses represents a good faith determination by the Board of
Directors. Substantially, all loans are collateralized by real estate,
fixed assets, inventories, intangibles, personal guarantees and/or New
York City taxi medallions.
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 which are past due is not recorded until actually
received.
F-7
<PAGE>
EAST COAST VENTURE CAPITAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
JULY 31, 1998, 1997 AND 1996
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
(Continued)
GAINS AND LOSSES ON SECURITIES
Cost of securities sold is reported on the average cost basis. Amounts
reported as realized gains and losses are measured by the difference
between the proceeds of sale and the cost basis of the investment
without regard to unrealized gain or loss reported in prior years.
INCOME TAXES
The accompanying financial statements include a current tax provision
at the statutory rates based on income or private capital presented for
Federal, State and Local taxes.
NOTE 3 LONG TERM DEBT
The long term debt to the Small Business Administration consisted of
the following subordinated debentures as of:
July 31,
------------------------
1998 1997
First Second Principal Principal
Due Date Five Years Amount Amount
-------- ---------- ------ ------
April 1, 1998 5.25% 8.25% -- $1,000,000
June 1, 2007 8.07% 8.07% $1,040,000 1,040,000
December 1, 2005 3.54% 6.54% 700,000 700,000
March 1, 2008 7.32% 7.32% 2,040,000 --
---------- ----------
$3,780,000 $2,740,000
========== ==========
Effective December 14, 1995, the Company sold $700,000 of subordinated
subsidized debentures to the SBA, with subsidized interest at 3.54% for
the first five years and 6.54% for the second five years. The debenture
is due December 1, 2005. As a condition, the Company paid a one-time
non-refundable commitment fee in the amount of $21,000. The prepaid
commitment fee is being amortized over a period of 10 years.
Effective June 1, 1997, the Company sold $1,040,000 of subordinated
debentures to the SBA with interest at 8.07%, plus 1% annual fee. The
debenture is due June 1, 2007. As a condition, the Company paid a
one-time non-refundable commitment fee in the amount of $31,200.
F-8
<PAGE>
EAST COAST VENTURE CAPITAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
JULY 31, 1998, 1997 AND 1996
NOTE 3 LONG TERM DEBT
(Continued)
The prepaid commitment fee is being amortized over a period of ten
years. The proceeds from this debenture were used to pay off their
debenture which expired in the amount of $1,000,000.
On March 5, 1998, the Company sold $2,040,000 of subordinated
debentures to the SBA with interest at 7.32%, plus 1% annual fee. The
debenture is due March 1, 2008. The Company paid a one-time
non-refundable commitment fee of $71,400. The prepaid commitment fee is
being amortized over a period of ten years. The Company used $1,000,000
of this debenture to pay off the $1,000,000 debenture which expired on
April 1, 1998.
NOTE 4 DEFERRED INCOME
During the fiscal year ended July 31, 1991, the Company entered into
loan modification agreements with several borrowers. In accordance with
the modification agreements, all past due interest was added to the
original principal balance and deferred as income. The deferred portion
of accrued interest will be amortized over the lives of the various
loans.
NOTE 5 PREFERRED STOCK
As of July 31, 1993, the Company was authorized to issue 3,000,000
shares of 3% cumulative preferred stock, $1 par value. As of July 31,
1994, 1,000,000 shares of preferred stock were issued to the SBA. Each
share was entitled to receive 3% per annum. Dividends were not required
to be paid to the SBA on an annual or other periodic basis, so long as
cumulative dividends were paid to the SBA before any other payments
were made to shareholders. Such dividends on the preferred stock will
be deemed to be earned at the time dividends on the Company's common
stock are declared, and, accordingly will reduce the amounts available
for distributions to the common shareholders.
Effective November 21, 1989 Congress passed legislation which alters
the preferred stock to a 4 percent cumulative dividend and a fifteen
year call provision for all preferred stock sold subsequent to the
effective date. The Company amended its certificate of incorporation to
create a class A preferred stock $1 par value which will consist of the
1,000,000 outstanding preferred stock and to change the existing
2,000,000 authorized but unissued shares of preferred stock into a new
class B preferred stock $1 par value which will carry a 4 percent
cumulative dividend rate and a mandatory 15 year redemption.
F-9
<PAGE>
EAST COAST VENTURE CAPITAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
JULY 31, 1998, 1997 AND 1996
NOTE 6 RESTRICTED CAPITAL - UNREALIZED GAIN ON REDEMPTION
The Company and the SBA entered into a repurchase agreement dated April
14, 1995. Pursuant to the agreement, the Company repurchased all
1,000,000 shares of its $1 par value, 3% cumulative preferred stock
from the SBA for a purchase price of $.35 per share, or an aggregate of
$350,000. 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 of $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 discount less expenses
associated with the repurchase. The initial value of the liquidating
interest was equal to $650,000, the amount of the repurchase discount
on the date of repurchase, less $2,000 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
is 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 latter 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 to the SBA. Such payment, if any, would
be prior in right to any payments made to the Company's shareholders.
The liquidating interest in the restricted capital account is $135,000
as of July 31, 1998.
As a condition for the repurchase of the preferred stock, the SBA
regulations also require that all dividends accumulated and unpaid on
the 3 Percent preferred stock issued to the SBA be paid before any
declaration of dividends on any distributions other than to the SBA.
The undeclared cumulative preferred dividends were not canceled at the
time of the repurchase, but will also be amortized over a sixty (60)
month period from the date of the repurchase agreement. The initial
value of the undeclared dividends was $156,250 as of the date of the
repurchase agreement.
NOTE 7 COMMON STOCK
Effective June 30, 1995, the Company sold 93,040 shares of its $.01 par
value Common stock for an aggregate total of $367,642. Substantially
all of the proceeds were used to repurchase the 1,000,000 shares of its
$1 par value, 3% preferred stock held by the SBA. The net proceeds
received also enabled the Company to obtain additional leverage from
the SBA in the form of preferred stock and debentures.
F-10
<PAGE>
EAST COAST VENTURE CAPITAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
JULY 31, 1998, 1997 AND 1996
NOTE 7 COMMON STOCK
(Continued)
On October 11, 1995, the Company sold 3,000 shares of its $.01 par
value common stock for an aggregate of $12,000 to Veritas Financial
Corp.
On January 16, 1996, all of the outstanding capital stock of the
Company (257,145 shares of common stock) was acquired by Veritas
Financial Corp., ("Veritas") a Delaware Corporation. Veritas acquired
the Company by issuing an aggregate of 257,145 of its' shares to all
the shareholders of the Company in exchange for the Veritas common
shares.
On September 29, 1997, the Company effected a 21 for 1 stock split
prior to a private placement completed on October 31, 1997. The Company
successfully completed a private placement through the sale of 301,500
shares of the Company's common stock at $2 per share. The gross
proceeds from the sale aggregated $603,000. The net proceeds received
by the Company after deducting underwriting discounts and various costs
of the private placements totaled $490,900. The financial statements
are reflected after taking into effect the 21 for 1 stock split for the
periods presented.
NOTE 8 CONTINGENT DIVIDENDS
In accordance with the repurchase agreement of the preferred stock, as
of July 31, 1998, the Company is contingently liable for the
unamortized portion on the 3% cumulative preferred stock dividends in
the amount of $32,552.
NOTE 9 RELATED PARTY TRANSACTIONS
The SBA has approved a management agreement by and between the Company
and Z. Zindel Corp. The approved management agreement calls for annual
management fees of $144,000. Zindel Zelmanovitch is the sole
shareholder of Z. Zindel Corp.
During the year ended July 31, 1998, the Company paid management fees
totaling $144,000. The Company is contingently liable for the
cumulative remaining $84,000 of unpaid management fees. Such amount
will be repaid one year from the date the Company files a registration
statement with the SEC.
NOTE 10 CONTINGENCIES - LOANS RECEIVABLE
As of July 31, 1998, there were 8 borrowers in arrears in payment of
principal totaling $1,276,718 or 30% of its loan portfolio. The
difference between the original principal balances and any collection
costs incurred less the amount collected will be written off at the
time of disposition of these loans. These loans are collateralized by
either first or second positions on real estate.
F-11
<PAGE>
EAST COAST VENTURE CAPITAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
JULY 31, 1998, 1997 AND 1996
NOTE 11 SIGNIFICANT CONCENTRATION OF CREDIT RISK
Approximately twenty-three (23%) 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 (see Schedule of
Investments).
NOTE 12 FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISKS
The Company maintains approximately $1,322,796 in banks, in excess of
amounts that would be insured by the Federal Depository Insurance
Corporation.
NOTE 13 FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,
requires disclosure of fair value information about certain financial
instruments, whether or not recognized on the balance sheet.
Where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. In
addition, SFAS No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Therefore,
the aggregate fair value amounts presented do not purport to represent
and should not be considered representative of the underlying market of
franchise value of the Company.
LOANS RECEIVABLE
As described in Note 2, the carrying amount of investments in
securities is the estimated fair value of such securities, which is
currently estimated at the cost of such securities.
CASH
For short-term investments, the carrying amount approximates fair
value.
DEBENTURES PAYABLE TO THE SBA
The fair value of the debentures payable to SBA are estimated based
upon current market interest rates for similar debt.
F-12
<PAGE>
EAST COAST VENTURE CAPITAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
JULY 31, 1998, 1997 AND 1996
NOTE 13 FAIR VALUE OF FINANCIAL INSTRUMENTS
(Continued)
The carrying amounts and estimated fair values of the Company's
financial instruments are as follows:
<TABLE>
<CAPTION>
July 31, 1998 July 31, 1997
------------------------ ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial Assets -
Investments in Securities $ 4,064,937 $ 4,064,937 $ 4,050,288 $ 4,050,288
Cash 1,828,014 1,828,014 445,232 445,232
Financial Liabilities -
Debentures payable to SBA 3,780,000 3,780,000 2,740,000 2,740,000
Other Liabilities 337,981 337,981 288,511 288,511
</TABLE>
NOTE 14 SUBSEQUENT EVENTS
The Company intends to file a registration statement with the
Securities and Exchange Commission to sell up to 1,250,000 units, at a
Public Offering price of $4.10 per unit, for an aggregate offering
price of $5,125,000.
F-13
<PAGE>
EAST COAST VENTURE CAPITAL, INC.
SCHEDULE OF INVESTMENTS
AS OF JULY 31, 1998
Number
of Balance
Type of Loan Loans Interest Rate Maturity Date Outstanding
- ------------ ----- ------------- ------------- -----------
Manufacturing 1 15.00% 5 years $ 64,624
Services 3 13.63% - 15.25% 2 - 5 years 39,417
Retail 4 14.00% - 15.00% 3 - 10 years 302,974
Auto Service Stations 9 9.50% - 15.00% 3 - 7 years 1,295,272
Construction 1 12.50% 5 years 155,318
Restaurants 4 13.00% - 15.00% 5 - 7 years 148,060
Laundromat 18 10.00% - 15.90% 5 - 10 years 1,170,344
NYC Taxi Medallion 15 9.00% - 14.00% 7 years 947,086
-- ----------
TOTAL 55 $4,123,095
==========
Substantially, all of the above loans are collateralized by real estate holdings
and/or New York City taxi medallions. Loans receivable (securities) have been
valued at fair value (cost basis) as determined by the Board of Directors.
EQUITY INTERESTS
Fair Market
Company Name Number of Shares Cost Value
------------ ---------------- ---- -----
First BankAmericano
Common Stock 10,000 $90,000 $90,000
======= =======
F-14
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
EAST COAST VENTURE CAPITAL, INC.
SUPPLEMENTAL INFORMATION
SELECTED PER SHARE DATA AND RATIOS
Years Ended July 31,
-------------------------------------------------------------------------------------
1994 1995 1996 1997 1998
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Investment Income $ 0.08 $ 0.04 $ 0.06 $ 0.06 $ 0.08
Investment Expenses (0.10) (0.07) (0.06) (0.06) (0.07)
------------- ------------- ------------- ------------- -------------
Net Investment (Loss) Income (0.02) (0.03) -- -- 0.01
Dilution in Net Assets -- (0.09) -- -- (1.94)
Net Realized and Unrealized Gains
and Losses on Securities -- (0.01) -- -- --
Gain on Preferred Stock Buy Back -- 0.12 -- -- --
Sale of Common Stock -- 0.07 -- -- 2.00
------------- ------------- ------------- ------------- -------------
Net Increase (Decrease) in Net Asset Value (0.02) 0.06 -- -- 0.07
Net Asset Value - Beginning of Period 0.27 0.25 0.31 0.31 0.31
------------- ------------- ------------- ------------- -------------
Net Asset Value - End of Period (1) $ 0.25 $ 0.31 $ 0.31 $ 0.31 $ 0.38
============= ============= ============= ============= =============
Ratios
Ratio of Expenses to Average Net Assets (1) 40.71% 23.10% 18.58% 21.33% 21.36%
============= ============= ============= ============= =============
Ratio of Net Investment (Loss) Income
to Average Net Assets (2.78%) (11.51%) .25% .24% 1.10%
============= ============= ============= ============= =============
Common Shares Outstanding 3,362,205 5,316,045 5,400,045 5,400,045 5,701,545
============= ============= ============= ============= =============
</TABLE>
(1) The net asset value includes the unamortized portion of the realized gain
from the repurchase of the three (3%) percent preferred stock and the
undistributed retained earnings (deficit) at the end of the period. The
unamortized balance remaining in the restricted capital account as of July 31,
1998 was $135,000.
F-15
<PAGE>
No dealer, salesman or other person has been authorized to give any
information or to make any representations not contained in this Prospectus and
if given or made, such information or representations must not be relied upon as
having been authorized by the Company or any Underwriter. 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 since the date hereof. This Prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any of the securities offered hereby
in any jurisdiction to any person to make such offer or solicitation in such
jurisdiction.
TABLE OF CONTENTS
Page
----
Prospectus Summary..............................................
The Offering....................................................
Summary Financial
Information...................................................
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations.....................................................
Risk Factors....................................................
Use of Proceeds.................................................
Capitalization..................................................
Dividends.......................................................
Dilution........................................................
Business........................................................
Management......................................................
Certain Relationships
and Related Transactions.......................................
Principal Stockholders..........................................
Federal Regulation..............................................
Tax Considerations..............................................
Determination of Net Asset Value................................
Description of
Securities.....................................................
Shares Available for
Future Sale....................................................
Underwriting....................................................
Legal Matters...................................................
Experts.........................................................
Custodian.......................................................
Financial Statements............................................
Until ________________,1998 (25 days after the date of this
Prospectus), 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.
================================================================================
1,250,000 UNITS
EAST COAST VENTURE
CAPITAL, INC.
---------------
PROSPECTUS
---------------
FIRST LIBERTY INVESTMENT GROUP, INC.
______ __, 1998
---------------
================================================================================
<PAGE>
PART C
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
1. FINANCIAL STATEMENTS.
The financial statements referred to in the Prospectus under the
caption "Index to Financial Statements" are hereby incorporated by reference to
the Prospectus. All financial schedules are omitted because they are not
applicable or the required information is shown in the financial statements or
notes thereto.
2. EXHIBITS.
a1. Certificate of Incorporation of the Company*
a2. Certificate of Merger (Delaware)*
a3. Certificate of Merger (New York)*
a4. Agreement and Plan of Merger*
b. By-Laws of the Company*
d1. Specimen Certificate for Shares of Common Stock**
d2. Specimen Certificate for Warrants**
d3. Form of Underwriter's Purchase Option**
d4. Form of Warrant Agreement**
h1 Form of Underwriting Agreement**
h2 Form of Selected Dealer Agreement**
h3 Form of Financial Consulting Agreement**
h4 Form of Agreement Among Underwriters**
i 1998 Stock Option Plan*
k1 Management Agreement between the Company and Veritas Financial
Corp.**
k2 Code of Ethics*
k3 Agreement between the Company, Freshstart Venture Capital
Corp. and Zindel Zelmanovitch*
1 Opinion of Berlack, Israels & Liberman LLP***
n1 Consent of Berlack, Israels & Liberman LLP (included in
Exhibit 1)
n2 Consent of Michael C. Finkelstein & Co.**
n3 Consent of Reid & Priest LLP***
- ---------------
* Previously Filed
** Filed herewith
*** To be filed by amendment
C-1
<PAGE>
ITEMS 25. MARKETING ARRANGEMENTS
The information contained under the heading "Underwriting" on pages 71
through 73 of the Prospectus is incorporated herein by this reference.
In connection with this Offering, the Underwriters may over-allot or
effect transactions which stabilize or maintain the market price of the
Securities at a level above that which might otherwise prevail in the open
market. Such stabilizing, if commenced, may be discontinued at any time.
ITEMS 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with this Offering are as follows:
SEC filing fee .................................................. $ 4,637.40
The Nasdaq Small Cap Market filing fee .......................... $ 10,000.00
NASD filing fee ................................................. $ 1,989.23
Accounting fees and expenses* ................................... $ 75,000.00
Legal fees and expenses* ........................................ $125,000.00
Blue Sky fees and expenses* ..................................... $ 40,000.00
Printing and engraving* ......................................... $ 40,000.00
Transfer and Warrant Agents' and Registrar's fees* .............. $ 2,000.00
Miscellaneous expenses* ......................................... $ 1,331.34
Total ........................................................... $300,000.00
- ----------------
* Estimated
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL.
The information contained under the heading "Principal Stockholders" on
page 53 of the Prospectus is incorporated herein by reference.
C-2
<PAGE>
ITEM 28. NUMBER OF HOLDERS OF SECURITIES.
The following table sets forth the number of recordholders of the
Company's Common Stock as of the date hereof.
NUMBER OF
TITLE OF CLASS RECORD HOLDERS
Common Stock, $.01 par value 24
ITEM 29. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
In connection with the Offering, the Underwriters agreed to indemnify
the Company, its directors, and each person who controls it within the meaning
of Section 15 of the Securities Act with respect to any statement in or omission
from the registration statement or the Prospectus or any amendment or supplement
thereto if such statement or omission was made in reliance upon information
furnished in writing to the Company by the Underwriters specifically for or in
connection with the preparation of the registration statement, the prospectus,
or any such amendment or supplement thereto.
Section 145 of the GCL empowers a corporation to indemnify its
directors and officers and to purchase insurance with respect to liability
arising out of the performance of their duties as directors and officers. The
GCL provides further that the indemnification permitted thereunder shall not be
deemed exclusive of any other rights to which the directors and officers may be
entitled under the corporation's by-laws, any agreement, vote of stockholders or
otherwise.
Article Ninth of the Company's Certificate of Incorporation eliminates,
subject to Section 314 of the 1958 Act, the personal liability of directors to
the fullest extent permitted by Section 102 of the GCL. Article Tenth provides,
subject to the SBA's required standard of care, for indemnification of all
persons whom it shall have the power to indemnify pursuant to Section 145 of
GCL.
The effect of the foregoing is to require the Company to the extent
permitted by law to indemnify the officers and directors of the Company for any
claim arising against such persons in their official capacities if such person
acted in good faith and in a manner that he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling
the Company pursuant to the foregoing provisions, the Company has been informed
that in the opinion of the SEC, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
The Company does not currently have any liability insurance coverage
for its officers and directors.
C-3
<PAGE>
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR.
Not Applicable.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS.
The Company maintains at its principal office physical possession of
each account, book or other document required to be maintained by Section 31(a)
of the 1940 Act.
ITEM 32. MANAGEMENT SERVICES.
Not Applicable
ITEM 33. UNDERTAKING.
The Registrant hereby undertakes:
(a) to suspend the offering of securities until the Prospectus is
amended if subsequent to the effective date of this Registration Statement, its
net asset value declines more than ten percent from its net asset value as of
the effective date of this Registration Statement.
(b) that, for the purpose of determining any liability under the
Securities Act of 1933, the information omitted from the form of Prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of Prospectus filed by the Registrant under Rule 497(h)
under the Securities Act of 1933 shall be deemed to be part of this Registration
Statement as of the time it was declared effective; and
(c) that, for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a from of
Prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of the securities at that time
shall be deemed to be the initial bona fide offering thereof.
Subject to the terms and condition 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.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers or controlling persons of the Registrant
pursuant to the provisions referred to in Item 29 of this Registration Statement
or otherwise, the Registrant has been advised that in the
C-4
<PAGE>
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
RULE 415 OFFERING
The undersigned Registrant will:
1. File, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Act;
(ii) Reflect in the prospectus any facts or events which, individually
or in the aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) Include any additional or changed material information on the
plan of distribution.
2. For determining liability under the Act, treat each such
post-effective amendment as a new registration statement of the securities
offered, and the Offering of such securities at that time shall be deemed to be
the initial bona fide offering.
3. File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the Offering.
RULE 430A
The undersigned Registrant will:
1. For determining any liability under the Act, treat the information
omitted from the form of Prospectus filed as part of this Registration Statement
in reliance upon Rule 430A and contained in the form of a prospectus filed by
the small business issuer under Rule 424(b)(1) or (4) or 497(h) under the Act as
part of this Registration Statement as of the time the Commission declared it
effective.
2. For any liability under the Act, treat each post-effective
amendment that contains a form of prospectus as a new registration statement for
the securities offered in the Registration Statement, and that the Offering of
the securities at that time as the initial bona fide Offering of those
securities.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, and/or the
Investment Company Act of 1940, the Registrant has duly caused this amendment to
its 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
17th day of September, 1998.
EAST COAST VENTURE CAPITAL, INC.
By: /s/ ZINDEL ZELMANOVITCH
------------------------
Name: Zindel Zelmanovitch
Title: President and Director
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the Registrant's 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 (principal executive and September 17, 1998
- ----------------------- financial officer) and Director
Zindel Zelmanovitch
/s/ NATHAN G. BERNEY Secretary September 17, 1998
- -----------------------
Nathan G. Berney
/s/ JEANETTE BERNEY Treasurer (principal accounting officer) September 17, 1998
- ----------------------- and Director
Jeanette Berney
/s/ FREDERICK SCHULMAN Director September 17, 1998
- -----------------------
Frederick Schulman
</TABLE>
C-6
EAST COAST VENTURE CAPITAL, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
COMMON STOCK SEE REVERSE FOR CERTAIN DEFINITIONS
CUSIP 271795 106
THIS
CERTIFIES
that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE $.01 PAR VALUE COMMON STOCK OF
East Coast Venture Capital, Inc.
transferable only on the books of the corporation by the holder hereof in person
or by a duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid until countersigned by the Transfer
Agent. This certificate and the shares represented hereby are issued and shall
be held subject to all of the provisions of the Certificate of Incorporation and
By-Laws of the Corporation and all amendments thereto, copies of which are on
file with the Transfer Agent, to all of which the holder of this certificate, by
acceptance hereof, assents.
IN WITNESS WHEREOF, the corporation has caused this certificate to be
signed by the facsimile signatures of its duly authorized officers and to be
sealed with the facsimile seal of the Corporation.
Dated: By
By
- ---------------------- ----------------------
PRESIDENT SECRETARY
East Coast Venture Capital, Inc.
Corporate
SEAL
DELAWARE 1998
<PAGE>
EAST COAST VENTURE CAPITAL, INC.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - _____ Custodian _______
(Cust) (Minor)
TEN ENT - as tenants by the entireties under Uniform Gifts to Minor
Act _______________________
JT TEN - as joint tenants with right of (State)
survivorship and not as tenants in common
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _____________________ hereby sell, assign and transfer unto
Please insert social security or other
identifying number of assignee
--------------------
- --------------------------------------------------------------------------------
(Please Print or Typewrite Name and Address,
Including Postal Zip Code, Of Assignee)
- --------------------------------------------------------------------------------
Shares
- --------------------------------------------------------------------------
of the common stock represented by the within Certificate and do hereby
irrevocably constitute and appoint
Attorney
- ------------------------------------------------------------------------
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated:
----------------------
----------------------------------
NOTICE: The signature to this
assignment must correspond with
the name as written upon the face
of the Certificate in every
particular, without alteration or
enlargement or any change
whatever.
Signature(s) Guaranteed:
- ------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE
MEDALLION PROGRAM), PURSUANT TO SEC RULE 17Ad-15
EXHIBIT D-2
[Form of Face of Warrant Certificate]
No. W-_____ _________ Warrants
VOID AFTER SEPTEMBER ___, 2003
WARRANT CERTIFICATE FOR PURCHASE OF COMMON STOCK
EAST COAST VENTURE CAPITAL, INC.
THIS CERTIFIES THAT FOR VALUE RECEIVED -----------------------------------------
- --------------------------------------------------------------------------------
or registered assigns (the "Registered Holder") is the owner of the number of
Redeemable Common Stock Purchase Warrants ("Warrants") specified above. Each
Warrant initially entitles the Registered Holder to purchase, subject to the
terms and conditions set forth in this Certificate and the Warrant Agreement (as
hereinafter defined), one fully paid and nonassessable share of Common Stock,
$.01 par value per share ("Common Stock"), of EAST COAST VENTURE CAPITAL, INC.,
a Delaware corporation (the "Company"), at any time between the Initial Warrant
Exercise Date and the Expiration Date (as hereinafter defined), upon the
presentation and surrender of this Warrant Certificate with the Subscription
Form on the reverse hereof duly executed, at the corporate office of JERSEY
TRANSFER & TRUST, INC. as Warrant Agent, or its successor (the "Warrant Agent"),
accompanied by payment of $5.50 (the "Purchase Price") in lawful money of the
United States of America in cash or by official bank or certified check made
payable to East Coast Venture Capital, Inc.
This Warrant Certificate and each Warrant represented hereby are issued
pursuant to and are subject in all respects to the terms and conditions set
forth in the Warrant Agreement (the "Warrant Agreement") dated September ___,
1998, by and between the Company and the Warrant Agent.
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price or the number of shares of Common Stock subject to
purchase upon the exercise of each Warrant represented hereby are subject to
modifications or adjustment.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional shares of Common Stock will be issued. In
the case of the exercise of less than all the Warrants represented hereby, the
Company shall cancel this Warrant Certificate upon the surrender hereof and
shall execute and deliver a new Warrant Certificate or Warrant Certificates of
like tenor, which the Warrant Agent shall countersign, for the balance of such
Warrants.
The term "Initial Warrant Exercise Date" shall mean September ___,
2000, except if the express prior written consent of First Liberty Investment
Group, Inc. has been received, only in which case such date shall mean September
___, 1999.
1
<PAGE>
The term "Expiration Date" shall mean 5:00 p.m. New York time) on
September ___, 2003, or such earlier date as the Warrants shall be redeemed. If
such date shall in the State of New York be a holiday or a day on which the
banks are authorized to close, then the Expiration Date shall mean 5:00 p.m.
(New York time) the next following day which in the State of New York is not a
holiday or a day on which banks are authorized to close.
The Company shall not be obligated to deliver any securities pursuant
to the exercise of this Warrant unless a registration statement under the
Securities Act of 1933, as amended, with respect to such securities is then
effective. This Warrant shall not be exercisable by a Registered Holder in any
state where such exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by
the Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon due presentment with any transfer fee in addition
to any tax or other governmental charge imposed in connection therewith, for
registration of transfer of this Warrant Certificate at such office, a new
Warrant Certificate or Warrant Certificates representing an equal aggregate
number of Warrants will be issued to the transferee in exchange therefor,
subject to the limitations provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder shall not be entitled to any rights of a stockholder of the Company,
including, without limitation, the right to vote or to receive dividends or
other distributions, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided in the Warrant Agreement.
This Warrant may be redeemed at the option of the Company, at a
redemption price of $.05 per Warrant any time commencing September ___, 2000 (or
September ___, 1999 with the prior consent of First Liberty Investment Group,
Inc. (the "Representative"), provided the per share Market Price (as defined in
the Warrant Agreement) for the securities issuable upon exercise of such Warrant
shall exceed $7.50 on each of the twenty (20) consecutive trading days during a
period ending within fifteen (15) days prior to the date on which notice of
redemption is given. Notice of redemption shall be given not later than the
thirtieth day before the date fixed for redemption, all as provided in the
Warrant Agreement. On and after the date fixed for redemption, the Registered
Holder shall have no rights with respect to this Warrant except to receive the
$.05 per Warrant upon surrender of this Certificate.
2
<PAGE>
Prior to due presentment for registration of transfer hereof, the
Company and the Warrant Agent may deem and treat the Registered Holder as the
absolute owner hereof and of each Warrant represented hereby (notwithstanding
any notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all purposes and
shall not be affected by any notice to the contrary.
The Company has agreed to pay a fee of four percent (4%) of the
Purchase Price upon certain conditions as specified in the Warrant Agreement
upon the exercise of any Warrants represented hereby.
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of New York.
This Warrant Certificate is not valid unless countersigned by the
Warrant Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed, manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
EAST COAST VENTURE CAPITAL, INC.
By:
------------------------------------
Name:
Title:
By:
------------------------------------
Name:
Title:
Dated:
-----------------------
[Seal]
COUNTERSIGNED:
JERSEY TRANSFER & TRUST, INC.,
as Warrant Agent
By:
----------------------------------
Name:
Title:
3
<PAGE>
[Form of Reverse of Warrant Certificate]
NOTICE OF ELECTION TO EXERCISE
To Be Executed by the Registered Holder
in Order to Exercise Warrants
THE UNDERSIGNED REGISTERED HOLDER hereby irrevocably elects to exercise
_______________ Warrants represented by this Warrant Certificate, and to
purchase the securities issuable upon the exercise of such Warrants, and
requests that certificates for such securities shall be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER and
be delivered to:
--------------------------------------
--------------------------------------
--------------------------------------
--------------------------------------
(please print or type name and address)
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below.
The undersigned represents that the exercise of the Warrants evidenced
hereby was solicited by a member of the National Association of Securities
Dealers, Inc. If not solicited by an NASD member firm, please write
"unsolicited" in the space below. Unless otherwise indicated by listing the name
of another NASD member firm, it will be assumed that the exercise was solicited
by First Liberty Investment Group, Inc.
----------------------------------
(Name of NASD Member, if other
than First Liberty Investment
Group, Inc.)
----------------------------------
Dated:
------------------------ ----------------------------------
----------------------------------
Address
----------------------------------
Taxpayer Identification Number
----------------------------------
Signature Guaranteed
----------------------------------
4
<PAGE>
ASSIGNMENT
To Be Executed by the Registered Holder in Order to Assign Warrants
FOR VALUE RECEIVED, ___________________________ hereby sells, assigns,
and transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF TRANSFEREE
----------------------------------------
----------------------------------------
----------------------------------------
----------------------------------------
(please print or type name and address)
__________ of the Warrants represented by this Warrant Certificate, and
hereby irrevocably constitutes and appoints _________________________ Attorney
to transfer this Warrant Certificate on the books of the Company, with full
power of substitution in the premises.
Dated: X
----------------- ------------------------------
Signature Guaranteed
------------------------------
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE
GUARANTEED BY AN ELIGIBLE INSTITUTION (AS DEFINED IN RULE 17Ad-15 UNDER THE
SECURITIES AND EXCHANGE ACT OF 1934) WHICH MAY INCLUDE A COMMERCIAL BANK OR
TRUST COMPANY, SAVINGS ASSOCIATION, CREDIT UNION OR A MEMBER FIRM OF THE
AMERICAN STOCK EXCHANGE, NEW YORK STOCK EXCHANGE, PACIFIC STOCK EXCHANGE OR
MIDWEST STOCK EXCHANGE.
5
NO SALE OR TRANSFER OF THIS OPTION OR THE SECURITIES
UNDERLYING THIS OPTION MAY BE MADE UNTIL
THE EFFECTIVENESS OF A REGISTRATION STATEMENT
OR OF A POST-EFFECTIVE AMENDMENT THERETO
UNDER THE SECURITIES ACT OF 1933 (THE "ACT"),
COVERING THIS OPTION OR THE SECURITIES UNDERLYING
THIS OPTION, OR UNTIL THE COMPANY IS IN RECEIPT OF AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM
THE REGISTRATION REQUIREMENTS OF THE ACT. TRANSFER OF
THIS OPTION IS RESTRICTED UNDER PARAGRAPH 2 BELOW.
REPRESENTATIVE'S UNIT PURCHASE OPTION
FOR THE PURCHASE OF COMMON STOCK AND
REDEEMABLE COMMON STOCK PURCHASE WARRANTS
EAST COAST VENTURE CAPITAL, INC.
(a Delaware corporation)
Dated: ______________, 1998
<PAGE>
THIS CERTIFIES THAT First Liberty Investment Group, Inc. (the
"Representative", and together with its assigns, the "Holder") pursuant to this
Representative's Option (the "Representative's Option" and also, sometimes, the
"Option") is entitled to purchase from East Coast Venture Capital, Inc., a
Delaware corporation (the "Company"), for an aggregate price of $.001 per Unit
underlying the Option, during the period as hereinafter specified, up to 125,000
Units (the "Units"), at a purchase price of $6.15 per Unit (the "Exercise
Price"), each Unit consisting of one share of the Company's common stock, $.001
par value per share (the "Common Stock") and one Warrant (the "Warrants")
entitling the holder to purchase one share of Common Stock at $8.25 per share
(the "Warrant Exercise Price").
This Representative's Option is issued pursuant to an Underwriting
Agreement dated ____________, 1998, between the Company and the Representative
in connection with a public offering through the Representative and certain
other dealers (collectively, the "Representatives") (the "Public Offering") of
1,250,000 Units consisting in the aggregate of 1,250,000 shares of Common Stock
and 1,250,000 Warrants exercisable for an additional 1,250,000 shares of Common
Stock.
1. EXERCISE OF THE REPRESENTATIVE'S OPTION.
(a) The rights represented by this Representative's Option
shall be exercised at the prices and during the periods as follows:
(i) During the period from ___________, 1998 to
___________, 1999, inclusive, the Holder shall have no right to purchase any
Securities hereunder.
(ii) Between ___________, 1999 and _________,
2003, inclusive, the Holder shall have the option to purchase Units issuable
hereunder upon the exercise hereof at a price of $4.80, such price being 150% of
the public offering price for the Units, as set forth in the Prospectus forming
a part of the registration statement on Form N-2 (Registration No. 333-58681) of
the Company, as amended (the "Registration Statement").
(iii) After __________, 2003, the Holder shall have
no right to purchase any Units or the Common Stock or Warrants included in the
Units (collectively, the "Securities") hereunder and this Representative's
Option shall expire effective at 5:00 p.m., New York time on such date.
(b) The rights represented by this Representative's Option may
be exercised at any time within the period above specified, in whole or in part,
by (i) the surrender of this
-1-
<PAGE>
Representative's Option (with the purchase form at the end hereof properly
executed) at the principal executive of office of the Company (or such other of
office or agency of the Company as it may designate by notice in writing to the
Holder at the address of the Holder appearing on the books of the Company); (ii)
payment to the Company of the Exercise Price then in effect for the number of
Units specified in the above-mentioned purchase form together with applicable
stock transfer taxes, if any; and (iii) delivery to the Company of a duly
executed agreement signed by the person(s) designated in the purchase form to
the effect that such person(s) agree(s) to be bound by the provisions of
Paragraph 5 and subparagraphs (b), (c) and (d) of Paragraph 6 hereof. This
Representative's Option shall be deemed to have been exercised, in whole or in
part to the extent specified, immediately prior to the close of business on the
date this Representative's Option is surrendered and payment is made in
accordance with the foregoing provisions of this Paragraph 1, and the person or
persons in whose name or names the certificates for the Common Stock and
Warrants shall be issuable upon such exercise shall become the Holder or Holders
of record of such Common Stock and Warrants at that time and date. The Common
Stock and Warrants so purchased shall be delivered to the Holder within a
reasonable time, not exceeding ten (10) business days, after the rights
represented by this Representative's Option shall have been so exercised.
(c) Any surrender of this Representative's Option pursuant to
paragraph (b)(1) of Section 1 of this Option Agreement, if such surrender is
pursuant to the exercise of this Representative's Option for any amount of Units
less than the maximum number issuable upon the exercise hereof, shall be
contingent upon the issuance to the Holder of a new Option, identical to the
Representative's Option, representing the rights to purchase any remaining
balance of Units with regards to which the Representative's Option was not
exercised within a reasonable time, not exceeding ten (10) business days after
the rights represented by this Representative's Option shall have been so
exercised.
2. RESTRICTIONS ON TRANSFER.
This Representative's Option shall not be transferred, sold,
assigned, or hypothecated for a period of one year commencing as of the date
hereof, except that it may be transferred to successors of the Holder, and may
be assigned in whole or in part to any person who is an officer of the
Representative during such period; and after such one-year period, such a
transfer may occur providing the Representative's Option is exercised
immediately upon transfer, and if not exercised immediately on transfer, the
Representative's Option shall lapse. Any such assignment shall be effected by
the Holder by (i) completing and executing the form of
-2-
<PAGE>
assignment at the end hereof and (ii) surrendering this Representative's Option
with such duly completed and executed assignment form for cancellation,
accompanied by funds sufficient to pay any transfer tax, at the office or agency
of the Company referred to in Paragraph 1 hereof, accompanied by a certificate
(signed by a duly authorized Representative of the Holder), stating that each
transferee is a permitted transferee under this Paragraph 2 hereof; whereupon
the Company shall issue, in the name or names specified by the Holder (including
the Holder) a new Representative's Option or Representative's Options of like
tenor and representing in the aggregate rights to purchase the same number of
Securities as are then purchasable hereunder.
3. COVENANTS OF THE COMPANY.
(a) The Company covenants and agrees that all shares of Common
Stock and the Warrants included in the Units issuable upon exercise of the
Representative's Option, and the Common Stock underlying such Warrants, will,
upon issuance, be duly and validly issued, fully paid and nonassessable and no
personal liability will attach to the holder thereof by reason of being such a
holder, other than as set forth herein.
(b) The Company covenants and agrees that during the period
within which this Representative's Option may be exercised, the Company will at
all times have authorized and reserved a sufficient number of shares of Common
Stock to provide for the exercise of this Representative's Option and issuance
of the Common Stock underlying each of the Option and the Warrants also
underlying the Option.
(c) The Company covenants and agrees that for so long as the
Securities shall be outstanding, the Company shall use its best efforts to cause
all Units, Common Stock and Warrants issuable upon the exercise of the
Representative's Option to be listed on or quoted by the NASDAQ National Market
System or on the NASDAQ SmallCap Market.
4. NO RIGHTS OF STOCKHOLDER.
This Representative's Option shall not entitle the Holder to
any voting rights or other rights as a stockholder of the Company, either at law
or in equity, and the rights of the Holder are limited to those expressed in
this Representative's Option and are not enforceable against the Company except
to the extent set forth herein.
-3-
<PAGE>
5. REGISTRATION RIGHTS.
(a) The Company shall advise the Holder or its transferee,
whether the Holder holds this Representative's Option or has exercised this
Representative's Option and holds Common Stock and Warrants, by written notice
at least 30 days prior to the filing of any post-effective amendment to the
Registration Statement or of any new registration statement or post-effective
amendment thereto under the Act, covering any equity securities of the Company,
for its own account or for the account of others, and will for a period of five
years from the date of the issuance hereof, upon the request of the Holder,
include in any such post-effective amendment or registration statement such
information as may be required to permit a public offering of any of the Common
Stock issuable hereunder (also referred to herein as the "Registerable
Securities"), provided however that this Section 5(a) is not applicable to any
registration statement by the Company on Forms S-4 or S-8 (including any Form
S-3 related to such Form S-8) or any other comparable form. The Company shall
supply prospectuses in order to facilitate the public sale or other disposition
of the Registerable Securities, use its best efforts to register and qualify any
of the Registerable Securities for sale in such states as such Holder reasonably
designates, provided such qualification is not solely for the purpose of
subjecting the Company to jurisdiction in that state or is not unduly
burdensome, and do any and all other acts and things which may be necessary to
enable such Holder to consummate the public sale of the Registerable Securities,
and furnish indemnification in the manner provided in Paragraph 6 hereof. The
Holder shall furnish information reasonably requested by the Company in
accordance with such post-effective amendments or registration statements,
including its intentions with respect thereto, and shall furnish indemnification
as set forth in Paragraph 6. The Company shall continue to advise the Holders of
the Registerable Securities of its intention to file a registration statement or
amendment pursuant to this Paragraph 5(a) until the earlier of (i) the date five
years after the date hereof; or (ii) such time as all of the Registerable
Securities have been registered and sold under the Act.
(b) If the Representative or any fifty-one (51%) percent
holder (as defined in Paragraph 5(d)) or holders of a majority interest in the
aggregate in the Company shall give notice to the Company at any time during the
four (4) year period beginning on the date one (1) year after the date hereof to
the effect that such holder(s) desires to register under the Act any
Registerable Securities, under such circumstances that a public distribution
(within the meaning of the Act) of any such Registerable Securities will be
involved, then the Company will as promptly as practicable after receipt of such
notice, but not later than thirty (30) days after receipt of such notice, file a
post-effective amendment to
-4-
<PAGE>
the current Registration Statement or a new registration statement pursuant to
the Act to the end that the Registerable Securities may be publicly sold under
the Act as promptly as practicable thereafter and the Company will use its best
efforts to cause such registration to become and remain effective for a
nine-month period following the effective date of such new registration
statement or post-effective amendment, as provided herein (including the taking
of such steps as are necessary to obtain the removal of any stop order);
provided, that such 51% holder shall furnish the Company with appropriate
information in connection therewith as the Company may reasonably request; and
provided, further, that the Company shall not be required to file such a
post-effective amendment or registration statement on more than one occasion at
its expense. The Company will maintain such registration statement or
post-effective amendment thereto current under the Act for a period of at least
nine (9) months from the effective date thereof. The Company shall supply
prospectuses in order to facilitate the public sale of the Registerable
Securities, use its best efforts to register and qualify any of the Registerable
Securities for sale in such states as such holder reasonably designates,
provided such qualification is not solely for the purpose of subjecting the
Company to jurisdiction in that state or is not unduly burdensome, and furnish
indemnification in the manner provided in Paragraph 6 hereof.
(c) The Holder may, in accordance with Paragraphs 5(a) or (b),
at his, her or its option, and subject to the limitations set forth in Paragraph
1(a) hereof, request the registration of any of the Registerable Securities in a
filing made by the Company prior to the acquisition of the Securities upon
exercise of this Representative's Option. The Holder may thereafter exercise the
Options at any time or from time to time subsequent to the effectiveness under
the Act of the registration statement in which the Common Stock underlying the
Representative's Options and Options were included.
(d) The term "51% holder," as used in this Paragraph 5, shall
include any owner or combination of owners of Representative's Options or
Registerable Securities if the aggregate number of Common Shares included in and
underlying the Representative's Options and Registerable Securities held of
record by it or them, would constitute a majority of the aggregate of such
Common Shares.
(e) The following provisions of this Paragraph 5 shall also be
applicable:
(i) Within ten (10) days after receiving any
notice pursuant to Paragraph 5(b), the Company shall give notice to the other
Holders of Representative's Options or Registerable
-5-
<PAGE>
Securities, advising that the Company is proceeding with such post-effective
amendment or registration and offering to include therein the Registerable
Securities of such other Holders, provided that they shall furnish the Company
with all information in connection therewith as shall be necessary or
appropriate and as the Company shall reasonably request in writing. Following
the effective date of such post-effective amendment or registration, the Company
shall, upon the request of any Holder of Registerable Securities, forthwith
supply such number of prospectuses meeting the requirements of the Act, as shall
be reasonably requested by such Holder. The Company shall use its best efforts
to qualify the Registerable Securities for sale in such states as the 51% holder
shall designate, provided such qualification is not solely for the purpose of
subjecting the Company to jurisdiction in that state or is not unduly
burdensome, at such times as the registration statement is effective under the
Act.
(ii) The Company shall bear the entire cost and
expense of any registration of securities initiated by it under Paragraph 5(a)
hereof notwithstanding that the Registerable Securities subject to this
Representative's Option may be included in any such registration. The Company
shall also comply with one request for registration made by the 51% holder
pursuant to Paragraph 5(b) hereof at the Company's own expense and without
charge to any holder of the Registerable Securities, and with one request at the
expense of the Holders thereof. Notwithstanding the foregoing, any Holder whose
Registerable Securities are included in any such registration statement pursuant
to this Paragraph 5 shall, however, bear the fees of any counsel retained by him
and any transfer taxes or underwriting discounts or commissions applicable to
the Registerable Securities sold by him pursuant thereto and, in the case of a
registration pursuant to Paragraph 5(a) hereof, any additional registration fees
attributable to the registration of such Holder's Registerable Securities.
(iii) If the managing representative in any such
underwritten offering shall advise the Company that it declines to include a
portion or all of the Registerable Securities requested by the Holders to be
included in the registration statement, then distribution of all or a specified
portion of the Registerable Securities shall be excluded from such registration
statement (in case of an exclusion as to a portion of such Registerable
Securities, such portion to be allocated among such Holders in proportion to the
respective numbers of Registerable Securities requested to be registered by each
such Holder). In such event the Company shall give the Holder prompt notice of
the number of Registerable Securities excluded. Further, in such event the
Company shall, within six (6) months of the completion of such subsequent
offering, file and use its best efforts to have declared effective and maintain
effectiveness for nine (9) months, at its
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<PAGE>
sole expense, a registration statement relating to such excluded securities.
6. INDEMNIFICATION.
(a) Whenever pursuant to Paragraph 5, a registration statement
relating to any Registerable Securities is filed under the Act, amended or
supplemented, the Company will indemnify and hold harmless each Holder of the
Registerable Securities covered by such registration statement, amendment or
supplement (such holder hereinafter referred to as the "Distributing Holder"),
each person, if any, who controls (within the meaning of the Act) the
Distributing Holder, and each officer, employee, partner or agent of the
Distributing Holder, if the Distributing Holder is a broker or dealer, against
any losses, claims, damages or liabilities, joint or several, to which the
Distributing Holder may become subject under the Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in any such registration statement or any
preliminary prospectus or final prospectus constituting a part thereof or any
amendment or supplement thereto, or arise out of or are based upon the omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading; and will reimburse the Distributing
Holder for any legal or other expenses reasonably incurred by the Distributing
Holder, in connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that the Company will not be
liable in any such case (i) to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in said registration statement,
said preliminary prospectus, said final prospectus or said amendment or
supplement in reliance upon and in conformity with written information furnished
by such Distributing Holder, any other Distributing Holder or any such
representative for use in the preparation thereof, and (ii) such losses, claims,
damages or liabilities arise out of or are based upon any actual or alleged
untrue statement or omission made in or from any preliminary prospectus, but
corrected in the final prospectus, as amended or supplemented.
(b) Whenever pursuant to Paragraph 5 a registration statement
relating to the Registerable Securities is filed under the Act, or is amended or
supplemented, the Distributing Holder will indemnify and hold harmless the
Company, each of its directors, each of its officers who have signed said
registration statement and such amendments and supplements thereto, and each
person, if any, who controls the Company (within the meaning of the Act) against
any losses, claims, damages or liabilities to which
-7-
<PAGE>
the Company or any such director, officer or controlling person may become
subject under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue or alleged untrue statement of any material fact contained in any such
registration statement or any preliminary prospectus or final prospectus
constituting a part thereof, or any amendment or supplement thereto, or arise
out of or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent that
such untrue statement or alleged untrue statement or omission was made in said
registration statement, said preliminary prospectus, said final prospectus or
said amendment or supplement in reliance upon and in conformity with written
information furnished by such Distributing Holder for use in the preparation
thereof; and will reimburse the Company or any such director, officer or
controlling person for any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such loss, claim, damage,
liability or action.
(c) Promptly after receipt by an indemnified party under this
Paragraph 6 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against any indemnifying
party, give the indemnifying party notice of the commencement thereof; but the
omission to so notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under this
Paragraph 6.
(d) In case any such action is brought against any indemnified
party, and it notifies an indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in, and, to the extent that
it may wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election to so assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
Paragraph 6 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation.
7. ADJUSTMENTS OF EXERCISE PRICE, WARRANT EXERCISE PRICE AND
NUMBER OF SECURITIES.
(a) The Exercise Price shall be subject to adjustment from
time to time as follows:
-8-
<PAGE>
(1) In case the Company shall at any time after
the date hereof pay a dividend in shares of Common Stock or make a distribution
in shares of Common Stock, then upon such dividend or distribution the Exercise
Price in effect immediately prior to such dividend or distribution shall
forthwith be reduced to a price determined by dividing:
(A) an amount equal to the total number of
shares of Common Stock outstanding immediately prior to such dividend or
distribution multiplied by the Exercise Price in effect immediately prior to
such dividend or distribution, by
(B) the total number of shares of Common
Stock outstanding immediately after such issuance or sale.
For the purposes of any computation to be made in accordance with the
provisions of this subsection (a)(1), the following provisions shall be
applicable: Common Stock issuable by means of dividend or other distribution on
any stock of the Company shall he deemed to have been issued immediately after
the opening of business on the date following the date fixed for the
determination of stockholders entitled to receive such dividend or other
distribution.
(2) In case the Company shall at any time
subdivide or combine the outstanding Common Stock, the Exercise Price shall
forthwith be proportionately decreased in the case of subdivision or increased
in the case of combination to the nearest one cent. Any such adjustment shall
become effective at the time such subdivision or combination shall become
effective.
(3) Within a reasonable time after the close of
each quarterly fiscal period of the Company during which the Exercise Price has
been adjusted as herein provided, the Company shall:
(A) Deliver to the Representative a
certificate signed by (I) the President or Vice President of the Company and by
(II) the Treasurer or Assistant Treasurer or the Secretary or an Assistant
Secretary of the Company, showing in detail the facts requiring all such
adjustments occurring during such period and the Exercise Price after each such
adjustment.
(B) Notwithstanding anything contained
herein to the contrary, no adjustment of the Exercise Price shall be made if the
amount of such adjustment shall be less than $.05, but in such case any
adjustment that would otherwise be required then to be made shall be carried
forward and shall be made at the time and together with the next subsequent
adjustment which, together with
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<PAGE>
any adjustment so carried forward, shall amount to not less than $.05.
(b) In the event that the number of outstanding shares of
Common Stock is increased by a stock dividend payable in Common Stock or by a
subdivision of the outstanding Common Stock, then, from and after the time at
which the adjusted Exercise Price becomes effective pursuant to Subsection (b)
of this Section by reason of such dividend or subdivision, the number of shares
of Common Stock issuable upon the exercise of the Option, and of each Warrant
issuable upon the exercise of such Option, shall be increased in proportion to
such increase in outstanding shares. In the event that the number of shares of
Common Stock outstanding is decreased by a combination of the outstanding Common
Stock, then, from and after the time at which the adjusted Exercise Price
becomes effective pursuant to Subsection (b) of this Section by reason of such
combination, the number of shares of Common Stock issuable upon the exercise of
each Option shall be decreased in proportion to such decrease in the outstanding
shares of Common Stock.
(c) In case of any reorganization or reclassification of the
outstanding Common Stock (other than a change in par value, or from par value to
no par value, or as a result of a subdivision or combination), or in case of any
consolidation of the Company with, or merger of the Company into, another
corporation (other than a consolidation or merger in which the Company is the
continuing corporation and which does not result in any reclassification of the
outstanding Common Stock), or in case of any sale or conveyance to another
corporation of the property of the Company as an entirety or substantially as an
entirety, the holder of each Option then outstanding shall thereafter have the
right to purchase the kind and amount of shares of Common Stock and/or Warrants
and/or other securities and property receivable upon such reorganization,
reclassification, consolidation, merger, sale or conveyance by a holder of the
number of shares of Common Stock which the holder of such Representative's
Option shall then be entitled to purchase; such adjustments shall apply with
respect to all such changes occurring between the date of this Option and the
date of exercise of such Option.
(d) Subject to the provisions of this Section, in case the
Company shall, at any time prior to the exercise of the Representative's Option,
make any distribution of its assets to holders of its Common Stock as a
liquidating or a partial liquidating dividend, then the holder of
Representative's Option who exercises his Representative's Option after the
record date for the determination of those holders of Common Stock entitled to
such distribution of assets as a liquidating or partial liquidating dividend
shall be entitled to receive for the Exercise Price per
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<PAGE>
share, in addition to each share of Common Stock, the amount of such
distribution (or, at the option of the Company, a sum equal to the value of any
such assets at the time of such distribution as determined by the Board of
Directors of the Company in good faith), which would have been payable to such
holder had he been the holder of record of the Common Stock receivable upon
exercise of his Option, or the Warrants issuable upon exercise of such Option,
on the record date for the determination of those entitled to such distribution.
(e) In case of the dissolution, liquidation or winding-up of
the Company, all rights under the Representative's Options shall terminate on a
date fixed by the Company, such date to be no earlier than ten (10) days prior
to the effectiveness of such dissolution, liquidation or winding-up and not
later than five (5) days prior to such effectiveness. Notice of such termination
of purchase rights shall be given to the last registered holder of the
Representative's Options, as the same shall appear on the books of the Company
maintained by the Warrant Agent, by registered mail at least thirty (30) days
prior to such termination date.
(f) In case the Company shall, at any time prior to the
expiration of the Representative's Options and prior to the exercise thereof,
offer to the holders of its Common Stock and/or any rights to subscribe for
additional shares of any class of the Company, or for additional options,
warrants or other securities or instruments convertible into or exercisable for
shares of any class of capital stock of the Company, then the Company shall give
written notice thereof to the last registered holder thereof not less than
thirty (30) days prior to the date on which the books of the Company are closed
or a record date is fixed for the determination of the stockholders entitled to
such subscription rights. Such notice shall specify the date as to which the
books shall be closed or record date fixed with respect to such offer of
subscription and the right of the holder thereof to participate in such offer of
subscription shall terminate if the Representative's Option shall not be
exercised on or before the date of such closing of the books or such record
date.
(g) Any adjustment pursuant to the aforesaid provisions shall
be made on the basis of the number of shares of Common Stock which the holder
thereof would have been entitled to acquire by the exercise of the
Representative's Option immediately prior to the event giving rise to such
adjustment.
(h) Irrespective of any adjustments in the Exercise Price or
the number or kind of shares purchasable upon exercise of the Representative's
Options, any Representative's Options previously or thereafter issued may
continue to express the same
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<PAGE>
price and number and kind of shares as are stated in the similar
Representative's Options initially issuable pursuant hereto.
(i) The Company may retain a firm of independent public
accountants (who may be any such firm regularly employed by the Company) to make
any computation required under this Section, and any certificate setting forth
such computation signed by such firm shall be conclusive evidence of the
correctness of any computation made under this Section.
(j) If at any time, as a result of an adjustment made pursuant
to paragraph (d) above, the holders of a Representative's Option shall become
entitled to purchase any securities other than shares of Common Stock,
thereafter the number of such securities so purchasable upon exercise of each
Option and the Exercise Price for such shares, and the Warrant Exercise Price,
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 paragraphs (b) and (c).
(k) No adjustment to the Exercise Price or to the number of
shares of Common Stock or Warrants purchasable upon the exercise of such
Representative's Options will be made, however under the following
circumstances:
(i) upon the grant or exercise of any options
presently outstanding (or options which may hereafter be granted and/or
exercised) under the Company's Stock Option Plan for officers, directors and/or
employees, consultants and similar situated parties of the Company; or
(ii) upon exercise of this Representative's
Option; or
(iii) upon exercise or sale of the Representative's
Securities issuable upon exercise of the Representative's Option or upon the
exercise or sale of the Warrants issuable upon exercise of the Representative's
Option; or
(iv) upon any amendment to or change in the term
of any rights or Options to subscribe for or purchase, or options for the
purchase of, Common Stock, Warrants or convertible securities, including, but
not limited to, any extension of any expiration date of any such right, warrant
or option, any change in any exercise or purchase price provided for in any such
right, warrant or option, any extension of any date through which any
convertible securities are convertible into or exchangeable for Common Stock or
Warrants or any change in the rate at which any convertible securities are
convertible into or exchangeable for Common Stock or Warrants (other than
rights, warrants, options or convertible securities
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<PAGE>
issued or sold after the close of business on the date of the original issue of
the Common Stock, (i) for presently outstanding securities, or (ii) for which an
adjustment in the Exercise Price then in effect was theretofore made or required
to be made, upon issuance or sale thereof).
(l) The Warrant Exercise Price shall be adjusted in accordance
with the provisions of this Section 7 as applicable to adjustments to the
Exercise Price.
8. FRACTIONAL SHARES.
(a) The Company shall not be required to issue fractional
shares of Common Stock upon the exercise of the Representative's Option. The
Company shall not be obligated to issue any fractional share interests or
fractional Warrant interests upon the exercise of any Representative's Option,
nor shall it be obligated to issue scrip or pay cash in lieu of fractional
interests, provided, however, that if a holder exercises all the
Representative's Options held of record by such holder, the fractional interests
shall be eliminated by rounding any fraction up to the nearest whole number of
shares.
(b) The Holder of this Representative's Option, by acceptance
hereof, expressly waives his right to receive any fractional shares of Common
Stock upon exercise hereof.
9. MISCELLANEOUS.
(a) This Representative's Option shall be governed by and in
accordance with the laws of the State of New York.
(b) All notices, requests, consents and other communications
hereunder shall be made in writing and shall be deemed to have been duly made
when delivered, or mailed by registered or certified mail, return receipt
requested: (i) if to a Holder, to the address of such Holder as shown on the
books of the Company, or (ii) if to the Company, to: East Coast Venture Capital,
Inc., 50 East 42nd Street, Suite 1301, New York, New York 10017, Attention:
Zindel Zelmanovitch.
(c) The Company and the Representative may from time to time
supplement or amend this Representative's Option without the approval of any
other Holders in order to cure any ambiguity, to correct or supplement any
provision contained herein which may be defective or inconsistent with any
provisions herein, or to make any other provisions in regard to matters or
questions arising hereunder which the Company and the Representative may deem
necessary or desirable and which the Company and the Representative deem not to
adversely affect the interest of the Holders.
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<PAGE>
(d) All the covenants and provisions of this Representative's
Option by or for the benefit of the Company and the Holders inure to the benefit
of their respective successors and assigns hereunder.
(e) Nothing in this Representative's Option shall be construed
to give to any person or corporation other than the Company and the
Representative's and any other registered Holder or Holders, any legal or
equitable right and that any such right is for the sole and exclusive benefit of
the Company and the Representative and any other Holder or Holders.
(f) This Representative's Option may be executed in any number
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and such counterparts shall together constitute but one and
the same instrument.
IN WITNESS WHEREOF, East Coast Venture Capital, Inc. has caused this
Representative's Option to be signed by its duly authorized officer and dated
______________, 1998.
EAST COAST VENTURE CAPITAL, INC.
By:
----------------------------------------
Zindel Zelmanovitch, President
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<PAGE>
PURCHASE FORM
(To be signed only upon exercise of the Representative's Option)
The undersigned, the Holder of the foregoing Representative's Option,
hereby irrevocably elects to exercise the purchase rights represented by such
Representative's Option for, and to purchase thereunder, ________ Units,
consisting of ________ shares of Common Stock and ________ Warrants,
respectively, of East Coast Venture Capital, Inc., and herewith makes payment of
$______ thereof, and requests that the certificates for the Units, Common Stock
and Warrants be issued in the name(s) of, and delivered to ____________ whose
address(es) is (are) _________________________.
Dated:
-------------------------
- -------------------------------
- -------------------------------
Address
<PAGE>
TRANSFER FORM
(To be signed only upon transfer of the
Representative's Purchase Option)
For value received, the undersigned hereby sells, assigns, and
transfers unto _______________________ the right to purchase Units, shares of
Common Stock and Warrants of East Coast Venture Capital, Inc. represented by the
foregoing Representative's Purchase Option, to the extent of ________ Units,
_______ shares of Common Stock and ___________ Warrants, and appoints
______________, attorney to transfer such rights on the books of East Coast
Venture Capital, Inc., with full power of substitution in the premises.
Dated:
--------------------------
- --------------------------------
(Name of holder)
- --------------------------------
Address
- --------------------------------
In the presence of:
- --------------------------------
- --------------------------------
EAST COAST VENTURE CAPITAL, INC.
(A DELAWARE CORPORATION)
AND
JERSEY TRANSFER & TRUST, INC.
WARRANT AGENT
WARRANT AGREEMENT
<PAGE>
TABLE OF CONTENTS
SECTION PAGE
1. Appointment of Warrant Agent.......................................... 1
2. Form of Warrant....................................................... 1
3. Countersignature and Registration..................................... 2
4. Transfers and Exchanges............................................... 2
5. Exercise of Warrants; Payment of Warrant Solicitation
Fee................................................................... 2
6. Payment of Taxes...................................................... 5
7. Mutilated or Missing Warrants......................................... 5
8. Reservation of Common Stock........................................... 5
9. Warrant Price: Adjustments............................................ 6
10. Fractional Interests.................................................. 11
11. Notices to Warrantholders............................................. 11
12. Disposition of Proceeds on Exercise of Warrants....................... 12
13. Redemption of Warrants................................................ 12
14. Merger or Consolidation or Change of Name of Warrant
Agent................................................................. 13
15. Duties of Warrant Agent............................................... 13
16. Change of Warrant Agent............................................... 15
17. Identity of Transfer Agent............................................ 16
18. Notices............................................................... 16
19. Supplements and Amendments............................................ 16
20. New York Contract..................................................... 17
21. Benefits of this Agreement............................................ 17
22. Successors............................................................ 17
<PAGE>
WARRANT AGREEMENT, dated as of September ___, 1998, by and among EAST
COAST VENTURE CAPITAL, INC., a Delaware corporation (the "Company"), and JERSEY
TRANSFER & TRUST INC., as warrant agent (hereinafter called the "Warrant
Agent").
WHEREAS, the Company proposes to issue and sell, through an initial
public offering (the "Offering") by First Liberty Investment Group, Inc. (the
"Representative") and certain other registered broker-dealers (the
"Underwriters"), pursuant to an Underwriting Agreement dated September ___, 1998
and an Agreement Among Underwriters dated September ___, 1998, an aggregate of
up to 1,250,000 Units, each Unit ("Unit") consisting of one share of common
stock, $.0001 par value per share (the "Common Stock"), and up to one Redeemable
Common Stock Purchase Warrant (the "Warrants") of the Company; and in connection
with such offering the Company has agreed to issue to the Representative or its
designees options to purchase up to 125,000 Units, consisting in the aggregate
125,000 shares of Common Stock and 125,000 Warrants (the "Representative's
Option");
WHEREAS, each Warrant will entitle the holder to purchase one share of
Common Stock;
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act in connection with the
issuance, registration, transfer, exchange and exercise of the Warrants;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereto agree as follows:
SECTION 1. APPOINTMENT OF WARRANT AGENT. The Company hereby appoints
the Warrant Agent to act as Warrant Agent for the Company in accordance with the
instructions hereinafter set forth in this Agreement, and the Warrant Agent
hereby accepts such appointment.
SECTION 2. FORM OF WARRANT. The text of the Warrants and of the form of
election to purchase Common Stock to be printed on the reverse thereof shall be
substantially as set forth in Exhibit A attached hereto. Each Warrant shall
entitle the registered holder thereof to purchase one share of Common Stock at
an exercise price of $5.50 (the "Warrant Exercise Price"), at any time from the
date two (2) years after the effective date (the "Effective Date") of the
prospectus of the public offering (September ___, 1998) at any time from the
date one (1) year after the Effective Date) until 5:00 p.m. Eastern time, on
September ___, 2003. The Warrant Exercise Price and the number of shares of
Common Stock issuable upon exercise of the Warrants are subject to adjustment
upon the occurrence of certain events, all as hereinafter provided. The
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Warrants shall be executed on behalf of the Company by the manual or facsimile
signature of the present or any future President or Vice President of the
Company, and attested to by the manual or facsimile signature of the present or
any future Secretary or Assistant Secretary of the Company.
Warrants shall be dated as of the issuance by the Warrant Agent either
upon initial issuance or upon partial exercise, transfer or exchange.
In the event the aforesaid expiration dates of the Warrants falls on a
Saturday or Sunday, or on a legal holiday on which the New York Stock Exchange
is closed, then the Warrants shall expire at 5:00 p.m. Eastern time on the next
succeeding business day.
SECTION 3. COUNTERSIGNATURE AND REGISTRATION. The Warrant Agent shall
maintain books for the transfer and registration of the Warrants. Upon the
initial issuance of the Warrants, the Warrant Agent shall issue and register the
Warrants in the names of the respective holders thereof. The Warrants shall be
countersigned manually or by facsimile by the Warrant Agent (or by any successor
to the Warrant Agent then acting as warrant agent under this Agreement) and
shall not be valid for any purpose unless so countersigned. The Warrants may,
however, be so countersigned by the Warrant Agent (or by its successor as
Warrant Agent) and be delivered by the Warrant Agent, notwithstanding that the
persons whose manual or facsimile signatures appear thereon as proper officers
of the Company shall have ceased to be such officers at the time of such
countersignature or delivery.
SECTION 4. TRANSFERS AND EXCHANGES. The Warrant Agent shall transfer,
from time to time, any outstanding Warrants upon the books to be maintained by
the Warrant Agent for that purpose, upon surrender thereof for transfer properly
endorsed or accompanied by appropriate instructions for transfer. Upon any such
transfer, a new Warrant shall be issued to the transferee and the surrendered
Warrant shall be cancelled by the Warrant Agent. Warrants so cancelled shall be
delivered by the Warrant Agent to the Company from time to time upon request.
Warrants may be exchanged at the option of the holder thereof, when surrendered
at the office of the Warrant Agent, for another Warrant, or other Warrants of
different denominations of like tenor and representing in the aggregate the
right to purchase a like number of shares of Common Stock.
SECTION 5. EXERCISE OF WARRANTS; PAYMENT OF WARRANT SOLICITATION FEE.
Subject to the provisions of this Agreement, each registered holder of Warrants
shall have the right, which may be exercised commencing at the opening of the
business on September ___, 1999, if such holder has received the express prior
written consent of the Representative, or September ___, 2000 in all other
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<PAGE>
cases, to purchase from the Company (and the Company shall instruct the Warrant
Agent to issue and sell to such registered holder of Warrants) the number of
fully paid and non-assessable shares of Common Stock specified in such Warrants
upon surrender of such Warrants to the Company at the office of the Warrant
Agent, with the form of election to purchase on the reverse thereof duly filled
in and signed, and upon payment to the Company of the warrant price, determined
in accordance with the provisions of Sections 9 and 10 of this Agreement, for
the number of shares of Common Stock in respect of which such Warrants are then
exercised. Payment of such warrant price shall be made in cash or by certified
check or bank draft to the order of the Company. Subject to Section 6, upon such
surrender of Warrants and payment of the warrant price, the Company shall
instruct the Warrant Agent to issue and cause to be delivered with all
reasonable dispatch to or upon the written order of the registered holder of
such Warrants and in such name or names as such registered holder may designate,
a certificate or certificates for the number of full shares of Common Stock so
purchased upon the exercise of such Warrants. Such certificate or certificates
shall be deemed to have been issued and any person so designated to be named
therein shall be deemed to have become a holder of record of such shares of
Common Stock as of the date of the surrender of such Warrants and payment of the
warrant price as aforesaid. The rights of purchase represented by the Warrants
shall be exercisable, at the election of the registered holders thereof, either
as an entirety or from time to time for a portion of the shares specified
therein and, in the event that any Warrant is exercised in respect of less than
all of the shares of Common Stock specified therein at any time prior to the
date of expiration of the Warrants, a new Warrant or Warrants will be issued to
the registered holder for the remaining number of shares of Common Stock
specified in the Warrant so surrendered, and the Warrant Agent is hereby
irrevocably authorized to countersign and to deliver the required new Warrants
pursuant to the provisions of this Section and of Section 3 of this Agreement
and the Company, whenever requested by the Warrant Agent, will supply the
Warrant Agent with Warrants duly executed on behalf of the Company for such
purpose. Anything in the foregoing to the contrary notwithstanding, no Warrant
will be exercisable unless at the time of exercise the Company has filed with
the Securities and Exchange Commission a registration statement under the
Securities Act of 1933, as amended (the "Act") covering the shares of Common
Stock issuable upon exercise of such Warrant and such registration statement
shall have been declared effective, such shares have been so registered or
qualified or deemed to be exempt under the securities laws of the state of
residence of the holder of such Warrant. The Company shall use its best efforts
to have all shares so registered or qualified on or before the date on which the
Warrants become exercisable.
3
<PAGE>
(a) If at the time of exercise of any Warrant after September
___, 1999: (i) the market price of the Company's Common Stock is equal to or
greater than the exercise price of the Warrant, (ii) the exercise of the Warrant
is solicited by an Representative at such time as it is a member of the National
Association of Securities Dealers, Inc. ("NASD"), (iii) the Warrant is not held
in a discretionary account, (iv) disclosure of the compensation arrangement and
the provision of documents in connection therewith is made both at the time of
the offering and at the time of the exercise of the Warrants, (v) the
Representative is designated in writing as the soliciting broker and (vi) the
solicitation of the exercise of the Warrant is not in violation of Regulation M
(as such rule or any successor rule may be in effect as of such time of
exercise) promulgated under the Securities Exchange Act of 1934, then the
Representative soliciting such Warrant shall be entitled to receive from the
Company upon exercise of each of the Warrants so exercised a fee of four percent
(4%) of the aggregate price of the Warrants so exercised (the "Exercise Fee").
The procedures for payment of the warrant solicitation fee are set forth in
Section 5(b) below.
(b) (1) Within five (5) days of the last day of each month
commencing with September ___, 1999, the Warrant Agent will notify the
Representative of each Warrant Certificate which has been properly completed for
exercise by holders of Warrants during the last month. The Company and Warrant
Agent shall determine, in their sole and absolute discretion, whether a Warrant
Certificate has been properly completed. The Warrant Agent will provide the
Representative with such information, in connection with the exercise of each
Warrant, as the Representative shall reasonably request.
(2) The Company hereby authorizes and instructs the
Warrant Agent to deliver to the soliciting Representative the Exercise Fee
promptly after receipt by the Warrant Agent from the Company of a check payable
to the order of the soliciting Representative in the amount of the Exercise Fee.
In the event that an Exercise Fee is paid to the Representative with respect to
a Warrant which the Company or the Warrant Agent determines is not properly
completed for exercise or in respect of which the Representative is not entitled
to an Exercise Fee, the soliciting Representative will return such Exercise Fee
to the Warrant Agent which shall forthwith return such fee to the Company.
The Representative and the Company may at any time commencing September
___, 1998, and during business hours, examine the records of the Warrant Agent,
including its ledger of original Warrant certificates returned to the Warrant
Agent upon exercise of Warrants. Notwithstanding any provision to the contrary,
the
4
<PAGE>
provisions of paragraph 5(a) and 5(c) may not be modified, amended or deleted
without the prior written consent of the Representative.
SECTION 6. PAYMENT OF TAXES. The Company will pay any documentary stamp
taxes attributable to the initial issuance of Common Stock issuable upon the
exercise of Warrants; provided, however, that the Company shall not be required
to pay any tax which may be payable in respect of any transfer involved in the
issuance or delivery of any certificates of shares of Common Stock in a name
other than that of the registered holder of Warrants in respect of which such
shares are issued, and in such case neither the Company nor the Warrant Agent
shall be required to issue or deliver any certificate for shares of Common Stock
or any Warrant until the person requesting the same has paid to the Company the
amount of such tax or has established to the Company's satisfaction that such
tax has been paid.
SECTION 7. MUTILATED OR MISSING WARRANTS. In case any of the Warrants
shall be mutilated, lost, stolen or destroyed, the Company may, in its
discretion, issue and the Warrant Agent shall countersign and deliver in
exchange and substitution for and upon cancellation of the mutilated Warrant, or
in lieu of and in substitution for the Warrant lost, stolen or destroyed, a new
Warrant of like tenor and representing an equivalent right or interest, but only
upon receipt of evidence satisfactory to the Company and the Warrant Agent of
such loss, theft or destruction and, in case of a lost, stolen or destroyed
Warrant, indemnity, if requested, also satisfactory to them. Applicants for such
substitute Warrants shall also comply with such other reasonable regulations and
pay such reasonable charges as the Company or the Warrant Agent may prescribe.
SECTION 8. RESERVATION OF COMMON STOCK. There have been reserved, and
the Company shall at all times keep reserved, out of the authorized and unissued
shares of Common Stock, a number of shares of Common Stock sufficient to provide
for the exercise of the rights of purchase represented by the Warrants, and the
transfer agent for the shares of Common Stock and every subsequent transfer
agent for any shares of the Company's Common Stock issuable upon the exercise of
any of the rights of purchase aforesaid are irrevocably authorized and directed
at all times to reserve such number of authorized and unissued shares of Common
Stock as shall be required for such purpose. The Company agrees that all shares
of Common Stock issued upon exercise of the Warrants shall be, at the time of
delivery of the certificates of such shares, validly issued and outstanding,
fully paid and nonassessable and listed on any national securities exchange upon
which the other shares of Common Stock are then listed. So long as any unexpired
Warrants remain outstanding, the Company will file such post-effective
amendments to the registration statement
5
<PAGE>
(Form N-2, Registration No. 333-58681) (the "Registration Statement") filed
pursuant to the Act with respect to the Warrants (or other appropriate
registration statements or post-effective amendment or supplements) as may be
necessary to permit it to deliver to each person exercising a Warrant, a
prospectus meeting the requirements of Section 10(a)(3) of the Act and otherwise
complying therewith, and will deliver such prospectus to each such person. To
the extent that during any period it is not reasonably likely that the Warrants
will be exercised, due to market price or otherwise, the Company need not file
such a post-effective amendment during such period. The Company will keep a copy
of this Agreement on file with the transfer agent for the shares of Common Stock
and with every subsequent transfer agent for any shares of the Company's Common
Stock issuable upon the exercise of the rights of purchase represented by the
Warrants. The Warrant Agent is irrevocably authorized to requisition from time
to time from such transfer agent stock certificates required to honor
outstanding Warrants. The Company will supply such transfer agent with duly
executed stock certificates for that purpose. All Warrants surrendered in the
exercise of the rights thereby evidenced shall be cancelled by the Warrant Agent
and shall thereafter be delivered to the Company, and such cancelled Warrants
shall constitute sufficient evidence of the number of shares of Common Stock
which have been issued upon the exercise of such Warrants. Promptly after the
date of expiration of the Warrants, the Warrant Agent shall certify to the
Company the total aggregate amount of Warrants then outstanding, and thereafter
no shares of Common Stock shall be subject to reservation in respect of such
Warrants which shall have expired.
SECTION 9. WARRANT PRICE: ADJUSTMENTS.
(a) The warrant price at which Common Stock shall be
purchasable upon the exercise of the Warrants shall be $5.50 at any time from
September ___, 1999 until 5:00 Eastern time on September ___, 2003 or after
adjustment, as provided in this Section, shall be such price as so adjusted (the
"Warrant Price").
(b) The Warrant Price shall be subject to adjustment from time
to time as follows:
(i) In case the Company shall at any time after
the date hereof pay a dividend in shares of Common Stock or make a distribution
in shares of Common Stock, then upon such dividend or distribution the Warrant
Price in effect immediately prior to such dividend or distribution shall
forthwith be reduced to a price determined by dividing:
(A) an amount equal to the total number of
shares of Common Stock outstanding immediately prior to such
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<PAGE>
dividend or distribution multiplied by the Warrant Price in effect immediately
prior to such dividend or distribution, by
(B) the total number of shares of Common
Stock outstanding immediately after such issuance or sale.
For the purposes of any computation to be made in accordance with the
provisions of this clause:
(i) The following provisions shall be applicable:
Common Stock issuable by way of dividend or other distribution on any stock of
the Company shall be deemed to have been issued immediately after the opening of
business on the date following the date fixed for the determination of
stockholders entitled to receive such dividend or other distribution.
(ii) In case the Company shall at any time subdivide
or combine the outstanding Common Stock, the Warrant Price shall forthwith be
proportionately decreased in the case of subdivision or increased in the case of
combination to the nearest one cent. Any such adjustment shall become effective
at the time such subdivision or combination shall become effective.
(iii) Within a reasonable time after the close of
each quarterly fiscal period of the Company during which the Warrant Price has
been adjusted as herein provided, the Company shall:
(A) File with the Warrant Agent a certificate
signed by the President or Vice President of the Company and by the Treasurer or
Assistant Treasurer or the Secretary or an Assistant Secretary of the Company,
showing in detail the facts requiring all such adjustments occurring during such
period and the Warrant Price after each such adjustment; and
(B) The Warrant Agent shall have no duty with
respect to any such certificate filed with it except to keep the same on file
and available for inspection by holders of Warrants during reasonable business
hours, and the Warrant Agent may conclusively rely upon the latest certificate
furnished to it hereunder. The Warrant Agent shall not at any time be under any
duty or responsibility to any holder of a Warrant to determine whether any facts
exist which may require any adjustment of the Warrant Price, or with respect to
the nature or extent of any adjustment of the Warrant Price when made, or with
respect to the method employed in making any such adjustment, or with respect to
the nature or extent of the property or securities deliverable hereunder. In the
absence of a certificate having been furnished, the Warrant Agent may
conclusively rely upon the provisions of the
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Warrants with respect to the Common Stock deliverable upon the exercise of the
Warrants and the applicable Warrant Price thereof.
(C) Notwithstanding anything contained herein
to the contrary, no adjustment of the Warrant Price shall be made if the amount
of such adjustment shall be less than $.05, but in such case any adjustment that
would otherwise be required then to be made shall be carried forward and shall
be made at the time and together with the next subsequent adjustment which,
together with any adjustment so carried forward, shall amount to not less than
$.05.
(c) In the event that the number of outstanding shares of
Common Stock is increased by a stock dividend payable in Common Stock or by a
subdivision of the outstanding Common Stock, then, from and after the time at
which the adjusted Warrant Price becomes effective pursuant to Subsection (b) of
this Section by reason of such dividend or subdivision, the number of shares of
Common Stock issuable upon the exercise of each Warrant shall be increased in
proportion to such increase in outstanding shares. In the event that the number
of shares of Common Stock outstanding is decreased by a combination of the
outstanding Common Stock, then, from and after the time at which the adjusted
Warrant Price becomes effective pursuant to Subsection (b) of this Section by
reason of such combination, the number of shares of Common Stock issuable upon
the exercise of each Warrant shall be decreased in proportion to such decrease
in the outstanding shares of Common Stock.
(d) In case of any reorganization or reclassification of the
outstanding Common Stock (other than a change in par value, or from par value to
no par value, or as a result of a subdivision or combination), or in case of any
consolidation of the Company with, or merger of the Company into, another
corporation (other than a consolidation or merger in which the Company is the
continuing corporation and which does not result in any reclassification of the
outstanding Common Stock), or in case of any sale or conveyance to another
corporation of the property of the Company as an entirety or substantially as an
entirety, the holder of each Warrant then outstanding shall thereafter have the
right to purchase the kind and amount of shares of Common Stock and/or other
securities and property receivable upon such reorganization, reclassification,
consolidation, merger, sale or conveyance by a holder of the number of shares of
Common Stock which the holder of such Warrant shall then be entitled to
purchase; such adjustments shall apply with respect to all such changes
occurring between the date of this Warrant Agreement and the date of exercise of
such Warrant.
(e) Subject to the provisions of this Section 9, in case the
Company shall, at any time prior to the exercise of the
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Warrants, make any distribution of its assets to holders of its Common Stock as
a liquidating or a partial liquidating dividend, then the holder of Warrants who
exercises his Warrants after the record date for the determination of those
holders of Common Stock entitled to such distribution of assets as a liquidating
or partial liquidating dividend shall be entitled to receive for the Warrant
Price per Warrant, in addition to each share of Common Stock, the amount of such
distribution (or, at the option of the Company, a sum equal to the value of any
such assets at the time of such distribution as determined by the Board of
Directors of the Company in good faith), which would have been payable to such
holder had he been the holder of record of the Common Stock receivable upon
exercise of his Warrant on the record date for the determination of those
entitled to such distribution.
(f) In case of the dissolution, liquidation or winding-up of
the Company, all rights under the Warrants shall terminate on a date fixed by
the Company, such date to be no earlier than ten (10) days prior to the
effectiveness of such dissolution, liquidation or winding-up and not later than
five (5) days prior to such effectiveness. Notice of such termination of
purchase rights shall be given to the last registered holder of the Warrants, as
the same shall appear on the books of the Company maintained by the Warrant
Agent, by registered mail at least thirty (30) days prior to such termination
date.
(g) In case the Company shall, at any time prior to the
expiration of the Warrants and prior to the exercise thereof, offer to the
holders of its Common Stock any rights to subscribe for additional shares of any
class of the Company, then the Company shall give written notice thereof to the
last registered holder thereof not less than thirty (30) days prior to the date
on which the books of the Company are closed or a record date is fixed for the
determination of the stockholders entitled to such subscription rights. Such
notice shall specify the date as to which the books shall be closed or record
date fixed with respect to such offer of subscription and the right of the
holder thereof to participate in such offer of subscription shall terminate if
the Warrant shall not be exercised on or before the date of such closing of the
books or such record date.
(h) Any adjustment pursuant to the aforesaid provisions shall
be made on the basis of the number of shares of Common Stock which the holder
thereof would have been entitled to acquire by the exercise of the Warrant
immediately prior to the event giving rise to such adjustment.
(i) Irrespective of any adjustments in the Warrant Price or
the number or kind of shares purchasable upon exercise of the Warrants, Warrants
previously or thereafter issued may continue to
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express the same price and number and kind of shares as are stated in the
similar Warrants initially issuable pursuant to this Warrant Agreement.
(j) The Company may retain a firm of independent public
accountants (who may be any such firm regularly employed by the Company) to make
any computation required under this Section, and any certificate setting forth
such computation signed by such firm shall be conclusive evidence of the
correctness of any computation made under this Section.
(k) If at any time, as a result of an adjustment made pursuant
to paragraph (d) above, the holders of a Warrant or Warrants shall become
entitled to purchase any securities other than shares of Common Stock,
thereafter the number of such securities so purchasable upon exercise of each
Warrant and the Warrant Price for such shares 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 paragraphs (b)
and (c).
(l) No adjustment to the Purchase Price of the Warrants or to
the number of shares of Common Stock purchasable upon the exercise of such
Warrants will be made, however under the following circumstances:
(i) upon the grant or exercise of any of the
options presently outstanding (or options which may hereafter be granted and/or
exercised) under the Company's Stock Option Plan for officers, directors and/or
employees, consultants and similar situated parties of the Company; or
(ii) upon the sale or exercise of the Warrants;
or
(iii) upon exercise of the Representative's
Option as otherwise described in the Company's Prospectus dated September ___,
1998; or
(iv) upon exercise or sale of the Warrants
issuable upon exercise of the Representative's Option; or
(v) upon any amendment to or change in the
term of any rights or warrants to subscribe for or purchase, or options for the
purchase of Common Stock or convertible securities, including, but not limited
to, any extension of any expiration date of any such right, warrant or option,
any change in any exercise or purchase price provided for in any such right,
warrant or option, any extension of any date through which any convertible
securities are convertible into or exchangeable for Common Stock or any change
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in the rate at which any convertible securities are convertible into or
exchangeable for Common Stock.
SECTION 10. FRACTIONAL INTERESTS. The Warrants may only be exercised to
purchase full shares of Common Stock and the Company shall not be required to
issue fractions of shares of Common Stock on the exercise of Warrants. However,
if a Warrantholder exercises all Warrants then owned of record by him and such
exercise would result in the issuance of a fractional share, the Company will
pay to such Warrantholder, in lieu of the issuance of any fractional share
otherwise issuable, an amount of cash based on the market value of the Common
Stock of the Company on the last trading day prior to the exercise date.
SECTION 11. NOTICES TO WARRANTHOLDERS.
(a) Upon any adjustment of the Warrant Price and the number of
shares of Common Stock issuable upon exercise of a Warrant, then and in each
such case, the Company shall give written notice thereof to the Warrant Agent,
which notice shall state the Warrant Price resulting from such adjustment and
the increase or decrease, if any, in the number of shares purchasable at such
price upon the exercise of a Warrant, setting forth in reasonable detail the
method of calculation and the facts upon which such calculation is based. The
Company shall also mail such notice to the holders of the Warrants at their
respective addresses appearing in the Warrant register. Failure to give or mail
such notice, or any defect therein, shall not affect the validity of the
adjustments.
(b) In case at any time:
(i) the Company shall pay dividends payable in stock
upon its Common Stock or make any distribution (other than regular cash
dividends) to the holders of its Common Stock; or
(ii) the Company shall offer for subscription pro rata
to all of the holders of its Common Stock any additional shares of stock of any
class or other rights; or
(iii) there shall be any capital reorganization or
reclassification of the capital stock of the Company, or consolidation or merger
of the Company with, or sale of substantially all of its assets to another
corporation; or
(iv) there shall be a voluntary or involuntary
dissolution, liquidation or winding-up of the Company; then in any one or more
of such cases, the Company shall give written notice in the manner set forth in
Section 11(a) of the date on which (A) a record shall be taken for such
dividend, distribution or subscription rights, or (B) such reorganization,
reclassification,
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consolidation, merger, sale, dissolution, liquidation or winding-up shall take
place, as the case may be. Such notice shall also specify the date as of which
the holders of Common Stock of record shall participate in such dividend,
distribution or subscription rights, or shall be entitled to exchange their
Common Stock for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding-up as the case may be. Such notice shall be given at
least thirty (30) days prior to the action in question and not less than thirty
(30) days prior to the record date in respect thereof. Failure to give such
notice, or any defect therein, shall not affect the legality or validity of any
of the matters set forth in this Section 1(b).
(c) The Company shall cause copies of all financial statements
and reports, proxy statements and other documents that are sent to its
stockholders to be sent by first-class mail, postage prepaid, on the date of
mailing to such stockholders, to each registered holder of Warrants at his
address appearing in the Warrant register as of the record date for the
determination of the stockholders entitled to such documents.
SECTION 12. DISPOSITION OF PROCEEDS ON EXERCISE OF WARRANTS.
(a) The Warrant Agent shall promptly forward to the Company
all monies on collected funds on a weekly basis received by the Warrant Agent
for the purchase of shares of Common Stock through the exercise of such
Warrants.
(b) The Warrant Agent shall keep copies of this Agreement
available for inspection by holders of Warrants during normal business hours.
SECTION 13. REDEMPTION OF WARRANTS. The Warrants are redeemable by the
Company commencing on September ___, 2000, (or September ___, 1999, with the
prior written consent of the Representative) and prior to their expiration on
September ___, 2003, in whole or in part, on not less than thirty (30) days'
prior written notice, at a redemption price of $.05 per Warrant; provided that
the closing bid price per share on the Nasdaq SmallCap Market, or the last sale
price, if listed on the Nasdaq National Market or a national exchange (the
"Market Place"), of the Common Stock for a period of twenty (20) consecutive
trading days ending within fifteen (15) days prior to the date of any redemption
notice, exceeds $7.50. Any redemption in part shall be made pro rata to all
Warrant holders. The redemption notice shall be mailed to the holders of the
Warrants at their respective addresses appearing in the Warrant register.
Holders of the Warrants will have exercise rights until the close of business on
the date fixed for redemption.
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The Warrants underlying the Representative's Warrant shall not be
subject to redemption by the Company until they have been exercised and the
underlying Warrants are outstanding.
SECTION 14. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF WARRANT AGENT.
Any corporation or company which may succeed to the corporate trust business of
the Warrant Agent by any merger or consolidation or otherwise shall be the
successor to the Warrant Agent hereunder without the execution or filing of any
paper or any further act on the part of any of the parties hereto, provided that
such corporation would be eligible for appointment as a successor Warrant Agent
under the provisions of Section 16 of this Agreement. In case at the time such
successor to the Warrant Agent shall succeed to the agency created by this
Agreement, any of the Warrants shall have been countersigned but not delivered,
any such successor to the Warrant Agent may adopt the countersignature of the
original Warrant Agent and deliver such Warrants so countersigned.
In case at any time the name of the Warrant Agent shall be changed and
at such time any of the Warrants shall have been countersigned but not
delivered, the Warrant Agent may adopt the countersignature under its prior name
and deliver Warrants so countersigned. In all such cases such Warrants shall
have the full force provided in the Warrants and in the Agreement.
SECTION 15. DUTIES OF WARRANT AGENT. The Warrant Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Warrants, by their
acceptance thereof, shall be bound:
(a) The statements of fact and recitals contained herein and
in the Warrants shall be taken as statements of the Company, and the Warrant
Agent assumes no responsibility for the correctness of any of the same except as
such describe the Warrant Agent or action taken or to be taken by it. The
Warrant Agent assumes no responsibility with respect to the distribution of the
Warrants except as herein expressly provided.
(b) The Warrant Agent shall not be responsible for any failure
of the Company to comply with any of the covenants in this Agreement or in the
Warrants to be complied with by the Company.
(c) The Warrant Agent may consult at any time with counsel
satisfactory to it (who may be counsel for the Company) and the Warrant Agent
shall incur no liability or responsibility to the Company or to any holder of
any Warrant in respect of any action taken, suffered or omitted by it hereunder
in good faith and in accordance with the opinion or the advice of such counsel.
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(d) The Warrant Agent shall incur no liability or
responsibility to the Company or to any holder of any Warrant for any action
taken in reliance on any notice, resolution, waiver, consent, order, certificate
or other instrument believed by it to be genuine and to have been signed, sent
or presented by the proper party or parties.
(e) The Company agrees to pay to the Warrant Agent reasonable
compensation for all services rendered by the Warrant Agent in the execution of
this Agreement, to reimburse the Warrant Agent for all expenses, taxes and
governmental charges and other charges incurred by the Warrant Agent in the
execution of this Agreement and to indemnify the Warrant Agent and save it
harmless against any and all liabilities, including judgments, costs and
reasonable counsel fees, for anything done or omitted by the Warrant Agent in
the execution of this Agreement except as a result of the Warrant Agent's
negligence, willful misconduct or bad faith.
(f) The Warrant Agent shall be under no obligation to
institute any action, suit or legal proceeding or to take any other action
likely to involve expenses unless the Company or one or more registered holders
of Warrants shall furnish the Warrant Agent with reasonable security and
indemnity for any costs and expenses which may be incurred (for which there is
no obligation of the Company to do so, except as provided herein) but this
provision shall not affect the power of the Warrant Agent to take such action as
the Warrant Agent may consider proper, whether with or without any such security
or indemnity. All rights of action under this Agreement or under any of the
Warrants may be enforced by the Warrant Agent without the possession of any of
the Warrants or the production thereof at any trial or other proceeding, and any
such action, suit or proceeding instituted by the Warrant Agent shall be brought
in its name as Warrant Agent, and any recovery of judgment shall be for the
ratable benefit of the registered holders of the Warrants, as their respective
rights and interests may appear.
(g) The Warrant Agent and any stockholder, director, officer,
partner or employee of the Warrant Agent may buy, sell or deal in any of the
Warrants or other securities of the Company or become pecuniarily interested in
any transaction in which the Company may be interested, or contract with or lend
money to or otherwise act as fully and freely as though it were not the Warrant
Agent under this Agreement. Nothing herein shall preclude the Warrant Agent from
acting in any other capacity for the Company or for any other legal entity.
(h) The Warrant Agent shall act hereunder solely as agent and
its duties shall be determined solely by the provisions hereof.
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(i) The Warrant Agent may execute and exercise any of the
rights or powers hereby vested in it or perform any duty hereunder either itself
or by or through its attorneys, agents or employees, and the Warrant Agent shall
not be answerable or accountable for any such attorneys, agents or employees or
for any loss to the Company, provided reasonable care had been exercised in the
selection and continued employment thereof.
(j) Any request, direction, election, order or demand of the
Company shall be sufficiently evidenced by an instrument signed in the name of
the Company by its President or a Vice President or its Secretary or an
Assistant Secretary or its Treasurer or an Assistant Treasurer (unless other
evidence in respect thereof be herein specifically prescribed); and any
resolution of the Board of Directors may be evidenced to the Warrant Agent by a
copy thereof certified by the Secretary or an Assistant Secretary of the
Company.
SECTION 16. CHANGE OF WARRANT AGENT. The Warrant Agent may resign and
be discharged from its duties under this Agreement by giving to the Company
notice in writing, and to the holders of the Warrants notice by mailing such
notice to the holders at their respective addresses appearing on the Warrant
register, of such resignation, specifying a date when such resignation shall
take effect. The Warrant Agent may be removed by like notice to the Warrant
Agent from the Company and the like mailing of notice to the holders of the
Warrants. If the Warrant Agent shall resign or be removed or shall otherwise
become incapable of action, the Company shall appoint a successor to the Warrant
Agent. If the Company shall fail to make such appointment within a period of
thirty (30) days after such removal or after it has been notified in writing of
such resignation or incapacity by the resigning or incapacitated Warrant Agent
or after the Company has received such notice from a registered holder of a
Warrant (who shall, with such notice, submit his Warrant for inspection by the
Company), then the registered holder of any Warrant may apply to any court of
competent jurisdiction for the appointment of a successor to the Warrant Agent.
Any successor Warrant Agent, whether appointed by the Company or by such a
court, shall be a bank or trust company, in good standing, incorporated under
any state or federal law. After appointment, the successor Warrant Agent shall
be vested with the same powers, rights, duties and responsibility as if it had
been originally named as Warrant Agent without further act or deed and the
former Warrant Agent shall deliver and transfer to the successor Warrant Agent
all cancelled Warrants, records and property at the time held by it hereunder,
and execute and deliver any further assurance or conveyance necessary for the
purpose. Failure to file or mail any notice provided for in this Section,
however, or any defect therein, shall not affect the validity of
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the resignation or removal of the Warrant Agent or the appointment of the
successor Warrant Agent, as the case may be.
SECTION 17. IDENTITY OF TRANSFER AGENT. Forthwith upon the appointment
of any transfer agent for the shares of Common Stock or of any subsequent
transfer agent for the shares of Common Stock or other shares of the Company's
Common Stock issuable upon the exercise of the rights of purchase represented by
the Warrants, the Company will file with the Warrant Agent a statement setting
forth the name and address of such transfer agent.
SECTION 18. NOTICES. Any notice pursuant to this Agreement to be given
by the Warrant Agent, or by the registered holder of any Warrant to the Company,
shall be sufficiently given if sent by first-class mail, postage prepaid,
addressed (until another is filed in writing by the Company with the Warrant
Agent) as follows:
East Coast Venture Capital, Inc.
50 East 42nd Street, Suite 1301
New York, New York 10017
Attention: Zindel Zelmanovitch, President
and a copy thereof to:
Berlack, Israels & Liberman LLP
120 West 45th Street
New York, New York 10036
Attention: Stuart Neuhauser, Esq.
Any notice pursuant to this Agreement to be given by the Company or by
the registered holder of any Warrant to the Warrant Agent shall be sufficiently
given if sent by first-class mail, postage prepaid, addressed (until another
address is filed in writing by the Warrant Agent with the Company) as follows:
Jersey Transfer & Trust, Inc.
201 Bloomfield Avenue
P.O. Box 36
Verona, New Jersey 07044
Attention: _____________________
SECTION 19. SUPPLEMENTS AND AMENDMENTS. The Company and the Warrant
Agent, with the prior written consent of the Representative, may from time to
time supplement or amend this Agreement in order to cure any ambiguity or to
correct or supplement any provision contained herein which may be defective or
inconsistent with any other provision herein, or to make any other provisions in
regard to matters or questions arising hereunder which the Company and the
Warrant Agent and the Representative may deem necessary or desirable and which
shall not be inconsistent
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with the provisions of the Warrants and which shall not adversely affect the
interest of the holders of Warrants.
SECTION 20. NEW YORK CONTRACT. This Agreement and each Warrant issued
hereunder shall be deemed to be a contract made under the laws of the State of
New York and shall be construed in accordance with the laws of New York
applicable to agreements to be performed wholly within New York.
SECTION 21. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall
be construed to give to any person or corporation other than the Company, the
Warrant Agent and the registered holders of the Warrants any legal or equitable
right, remedy or claim under this Agreement; but this Agreement shall be for the
sole and exclusive benefit of the Company, the Warrant Agent and the registered
holders of the Warrants.
SECTION 22. SUCCESSORS. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Warrant Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
IN WITNESS WHEREOF, the parties have entered into this Agreement on the
date first above written.
EAST COAST VENTURE CAPITAL, INC.
By:
--------------------------------------
Zindel Zelmanovitch, President
JERSEY TRANSFER & TRUST, INC.
By:
--------------------------------------
Name:
Title:
17
EAST COAST VENTURE CAPITAL, INC.
1,250,000 Units, such Units consisting of
in the aggregate 1,250,000 shares of
Common Stock, $.01 par value, and
1,250,000 Redeemable Common Stock Purchase Warrants
UNDERWRITING AGREEMENT
_________________, 1998
First Liberty Investment Group, Inc.
80 Broad Street, 6th Floor
New York, New York 10004
Attn: SHELDON L. TRAUBE
Dear Sirs:
East Coast Venture Capital, Inc., a Delaware corporation (the
"Company"), hereby confirms its agreement with you (the "Representative"), as
follows:
1. DESCRIPTION OF THE SECURITIES.
The Company proposes to issue and sell to the Representative an
aggregate of 1,250,000 Units (the "Units"), each Unit consisting of one share of
common stock, $.001 par value per share (the "Common Stock") and one redeemable
common stock purchase warrant (the "Warrant") with an exercise price of $5.50
per share (the "Exercise Price") (the Common Stock and Warrants are collectively
referred to as the "Securities") at an offering price of $4.10 per Unit. The
Warrants shall be exercisable during the period (the "Warrant Exercise Period")
commencing the earlier of (i) 24 months after the date of the Prospectus, or
(ii) 12 months after the date of the Prospectus with the Representative's prior
written consent, and ending five years after the date of the Prospectus.
The Company proposes to grant to the Representative an option (the
"Representative's Option") to purchase up to 125,000 additional Units, each
exercisable for $6.15 per Unit, or 150% of the initial public offering price per
Unit, including Common Stock and Warrants exercisable for $8.25 per share,
subject to
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adjustment. The Company also proposes to grant to the Representative an option
(the "Overallotment Option"), exercisable during the 30-day period after the
Closing Date hereof, to purchase, at the initial public offering price less
underwriting discounts, up to an additional 187,500 Units (the "Overallotment
Units", and collectively with the Overallotment Option and the Common Stock and
Warrants included in the Overallotment Units, the "Overallotment Securities"),
on the same terms as the Units are offered to the public, solely to cover
overallotments. The Representative's Securities (as defined hereafter) and
Overallotment Securities shall collectively be referred to as the "Additional
Securities". The offering of Securities and Additional Securities contemplated
hereby may sometimes be referred to as the "Offering."
(a) REPRESENTATIVE'S OPTION
The Company will sell to the Representative, the
Representative's Option to purchase, for $.001 per Unit underlying the
Representative's Option, one Unit for each ten Units sold in this Offering (the
"Representative's Units") excluding the Additional Securities (a maximum of
125,000 Units) at an exercise price of $6.15 per Unit (the Representative's
Option, the Representative's Units and the Common Stock (the "Representative's
Shares") and Warrants (the "Representative's Warrants") included therein,
collectively may be referred to as the "Representative's Securities"). The
Representative's Warrants shall be exercisable at $8.25 per share, subject to
adjustment, during the Warrant Exercise Period. The Representative's Option
shall be exercisable for a four-year period commencing one year from the date of
this Offering. The Representative's Securities shall be non-exercisable and
non-transferable (other than to (i) officers of the Representative, and (ii)
members of the selling group and their officers or partners) for a period of 12
months following the Effective Date. The Representative and/or holders of a
majority interest in the Representative's Securities may, upon two occasions,
during the four-year period commencing one year from the date of this Offering,
demand that the Company prepare and file a post-effective amendment to this
registration statement, or a new registration statement, permitting the sale of
the Representative's Securities, and to use its best efforts to keep such
registration statement effective for a nine-month period following its effective
date. The Company shall bear all costs relating or incident to the first such
registration statement, and the holders will bear all costs relating or incident
to the second such registration statement. In addition, the Representative
and/or holders of a majority interest in the Representative's Securities will
have the right, subject to certain conditions, to include all or part of the
Representative's Securities, at the Company's expense, in any
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registration statement relating to an equity offering filed under the Securities
Act of 1933, as amended (the "1933 Act").
(b) THE OVERALLOTMENT OPTION
The Company also proposes to grant to the Representative the
Overallotment Option, exercisable during the 30-day period after the Closing
Date hereof, to purchase, at the initial public offering price less underwriting
discounts, up to an additional 187,500 Units, on the same terms as the Units are
offered to the public, solely to cover overallotments. The Overallotment
Securities shall be registered for sale to the public and included in the
Registration Statement filed in connection with the Offering.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND VERITAS
FINANCIAL CORP.
The Company and Veritas Financial Corp. ("Veritas"), a ___________
corporation and principal shareholder of the Company, make the following
representations and warranties to the Representative, as the case may be, that:
(a) The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission"), a registration statement on Form N-2
(File No. 333-58681), including any related preliminary prospectus ("Preliminary
Prospectus"), for the registration of the Securities under the 1933 Act and
under the Investment Company Act of 1940, as amended (the "1940 Act") (the 1933
Act and 1940 Act, collectively, the "Acts"), which has been prepared in
conformity with the Acts and the Rules and Regulations of the Commission
promulgated thereunder. The Company will file further amendments to said
registration statement in the form to be delivered to you and will not, before
the registration statement becomes effective, file any other amendment thereto
to which you 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,
exhibits and all other documents filed as a part thereof or incorporated
therein), is hereinafter called the "Registration Statement," and the
prospectus, in the form filed with the Commission pursuant to Rule 424(b) of the
General Rules and Regulations of the Commission under the Act (the
"Regulations") or, if no such filing is made, the definitive prospectus used in
the Offering, is hereinafter called the "Prospectus." The Company has delivered
to you copies of each Preliminary Prospectus as filed with the Commission and
has consented to the use of such copies for purposes permitted by the Act. For
purposes hereof, "Rules" and "Regulations" mean the
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<PAGE>
rules and regulations adopted by the Commission under either the 1933 Act, the
1940 Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
or the Investment Advisers Act of 1940, as amended (the "Advisers Act").
(b) Neither the Commission nor any state regulatory authority
have issued any orders preventing or suspending the use of any Preliminary
Prospectus, and each Preliminary Prospectus has conformed in all material
respects with the requirements of the Act and has not 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, not misleading,
subject to the provisions set forth below and except as such untrue statement or
omission has been cured in the a subsequent preliminary prospectus or in the
final prospectus.
(c) When the Registration Statement becomes effective under
the Act and at all times subsequent thereto including the Closing Date (as
hereinafter defined) and the Option Closing Date (as hereinafter defined) and
for such longer periods as in the opinion of counsel for the Representative, a
Prospectus is required to be delivered in connection with the sale of the
Securities by the Representative and the several Underwriters ("Underwriters"),
as the case may be, the Registration Statement and Prospectus, and any amendment
thereof or supplement thereto, will contain all material statements which are
required to be stated therein in accordance with the Act and the Regulations,
and will in all material respects conform to the requirements of the Act and the
Regulations, and neither the Registration Statement nor the Prospectus, nor any
amendment or supplement thereto, 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, not misleading; provided, however,
that this representation and warranty does not apply to statements or omissions
made in reliance upon and in conformity with express written information
furnished to the Company by you, for use in connection with the preparation of
the Registration Statement or Prospectus, or in any amendment thereof or
supplement thereto. It is understood that the statements set forth under the
heading "Underwriting" in the Prospectus with respect to (i) the amounts of the
selling concession and reallowance; (ii) the identity of counsel to the
Representative under the heading "Legal Matters;" and (iii) the information
concerning the NASD affiliation of the Representative; constitute for purposes
of this Paragraph the only information furnished in writing by or on behalf of
the Representative for inclusion in the Registration Statement and Prospectus,
as the case may be.
(d) Each of the Company and Veritas is, and at each of the
Closing Date and the Option Closing Date will be, a corporation
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duly organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation. Each of the Company and Veritas is duly
qualified or licensed and in good standing as a foreign corporation in each
jurisdiction in which its ownership or leasing of any properties or the
character of its operations requires such qualification or licensing, except
those jurisdictions in which the failure to so qualify would not have a material
adverse effect. Each of the Company and Veritas has all requisite corporate
powers and authority, and, except as set forth in the Registration Statement,
the Company and Veritas have all material and necessary authorizations,
approvals, orders, licenses, certificates and permits of and from all
governmental regulatory officials and bodies to own or lease its properties and
conduct its business as described in the Prospectus, including its license from
the federal Small Business Administration ("SBA") to operate as a Specialized
Small Business Investment Company ("SSBIC"), and applicable laws or rules and
regulations promulgated by the SBA and/or the Internal Revenue Service ("IRS")
relating to SSBICs or to which SSBICs are subject, and the Company and Veritas
are doing business and have been doing business during the period described in
the Registration Statement in compliance with all such material authorizations,
approvals, orders, licenses, certificates and permits and all material federal,
state and local laws, rules and regulations concerning the business in which the
Company and Veritas are engaged, including its license from the federal Small
Business Administration ("SBA") to operate as a Specialized Small Business
Investment Company ("SSBIC"), and applicable laws or rules and regulations
promulgated by the SBA and/or the Internal Revenue Service ("IRS") relating to
SSBICs or to which SSBICs are subject. The disclosures in the Registration
Statement concerning the effects of federal, state and local regulation on the
business of the Company, as currently conducted and as contemplated are correct
in all material respects and do not omit to state a material fact. The
authorized, issued and outstanding capital stock of the Company as of April 30,
1998 and as of the date of the Prospectus is as set forth in the Prospectus
under "Capitalization"; the shares of issued and outstanding capital stock of
the Company set forth thereunder have been duly authorized, validly issued and
are fully paid and non-assessable; except as set forth in the Prospectus, no
options, warrants or other rights to purchase, agreements or other obligations
to issue, or agreements or other rights to convert any obligation into, any
shares of capital stock of the Company, have been granted or entered into by the
Company, as the case may be, with respect to any of the Company's securities;
and the Units, the Common Stock and Warrants included in the Units and the
Common Stock underlying such Warrants, the Representative's Securities and the
Overallotment Securities conform, in all material respects, to all statements
relating thereto contained in the Registration Statement and Prospectus.
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<PAGE>
(e) The Company and Veritas have all corporate power and
authority to enter into this Agreement and carry out the provisions and
conditions hereof, and all consents, authorizations, approvals and orders
required in connection therewith have been obtained or will have been obtained
prior to the Closing Date. This Agreement has been duly and validly authorized
and executed by the Company and Veritas. The Securities to be issued and sold by
the Company pursuant to this Agreement, the Representative's Shares and
Representative's Warrants issuable upon exercise of the Representative's Option
and payment therefor, the Overallotment Option and the Overallotment Units and
Common Stock and Warrants (including Common Stock issuable upon the exercise
thereof) included in the Overallotment Units issuable upon the exercise thereof,
have all been duly authorized (and, in the case of the Common Stock underlying
the Representative's Warrant and the Common Stock underlying the Warrants
included in the Overallotment Units issuable upon exercise of the Overallotment
Option, have been duly reserved for issuance) and, when issued and paid for in
accordance with this Agreement (and, in the case of the Common Stock underlying
the Representative's Warrants, upon exercise of such Representative's Warrants
and payment to the Company of the exercise price therefor), the Common Stock
included in the Units and Common Stock issuable upon exercise of the Warrants
included in the Units will be validly issued, fully paid and non-assessable;
none of the Units, Common Stock or Warrants included therein or the Common Stock
underlying such Warrants, the Representative's Securities and the Overallotment
Securities are and will be subject to the preemptive rights of any stockholder
of the Company, and none of the capital stock of the Company is and will be
subject to the preemptive rights of any stockholder of the Company, and all of
such securities conform and at all times up to and including their issuance will
conform in all material respects to all statements with regard thereto contained
in the Registration Statement and 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; and all corporate action required to be taken for
the authorization, issuance and sale of the Units, the Common Stock and Warrants
included therein (including the Common Stock underlying the Warrants),
Representative's Securities and the Overallotment Securities has been taken, and
this Agreement constitutes a valid and binding obligation of the Company or
Veritas, enforceable in accordance with its terms, to issue and sell, upon
exercise in accordance with the terms thereof, the number and kind of securities
called for thereby; and upon the issuance and delivery of the Units sold
hereunder pursuant to the terms hereof, the purchasers of such Units will
acquire good and marketable title to such Units and the underlying securities,
free and clear of any lien, charge, claim, encumbrance, pledge, security
interest, defect or other restriction or equity of any kind whatsoever.
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<PAGE>
(f) The Company had all corporate power and authority to enter
into a merger with (the "Merger") East Coast Venture Capital, Inc., a New York
corporation ("East Coast-NY"), to which the Company is the successor, and to
carry out the provisions and conditions hereof, and all consents,
authorizations, approvals and orders required in connection therewith or to
effectuate such Merger under both New York and Delaware law have been obtained
or will have been obtained prior to the Closing Date.
(g) Except as set forth in the Prospectus, the consummation of
the transactions contemplated by this Agreement or the Warrant Agreement or
Consulting Agreement, and the fulfillment of the terms hereof or thereof, will
not result in a breach or violation of any of the terms or provisions of, or
constitute a default under, the Articles of Incorporation, as amended, or Bylaws
of the Company or Veritas or of any evidence of material indebtedness, lease,
contract or other agreement or instrument to which the Company or Veritas is a
party or by which the Company or Veritas or any of their material properties is
bound, or under any applicable law, rule, regulation, judgment, order or decree
of any government, professional advisory body, administrative agency or court,
domestic or foreign, having jurisdiction over the Company or Veritas, including
those of the SBA which relate to SSBICs or to which SSBICs are subject, or their
respective properties which are material to the Company or Veritas or their
businesses, or result in the creation or imposition of any lien, charge or
encumbrance upon any of the properties or assets of the Company or Veritas; and
no consent, approval, authorization or order of any court or governmental or
other regulatory agency or body, including the SBA, is required for the
consummation by the Company or Veritas of the transactions on its part herein
contemplated or the issuance of the Units, the Common Stock or the Warrants
included in the Units, except such as may be required under the Act or under
state securities or blue sky laws, except where a breach, violation or failure
to obtain such consent would not have a material adverse effect upon the
business or operation of the Company or Veritas.
(h) Subsequent to the date hereof, and prior to the Closing
Date and the Option Closing Date, the Company will not issue or acquire any
equity securities or securities or instruments convertible into or exchangeable
for equity securities or other like convertible or exchangeable securities or
instruments, and except as described in the Registration Statement, the Company
does not have, and at the Closing Date will not have, outstanding any options to
purchase or rights or warrants to subscribe for, or any securities or
obligations convertible into or exchangeable for, or any contracts or
commitments to issue or sell shares of its Preferred Stock, Common Stock or any
such options, warrants, convertible securities or instruments, or obligations.
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<PAGE>
(i) The financial statements and notes thereto included in the
Registration Statement and the Prospectus fairly present the financial position
and the results of operations of the Company, of which all its capital stock was
at the dates and for the periods to which they apply; and such financial
statements have been prepared in conformity with generally accepted accounting
principles, consistently applied throughout the periods involved.
(j) Except as set forth in the Registration Statement, neither
the Company nor Veritas is, and at each of the Closing Date and the Option
Closing Date will be, in violation or breach of, or default in, the due
performance and observance of any term, covenant or condition of any indenture,
mortgage, deed of trust, 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 or Veritas is a party or by which
the Company or Veritas is or may be bound or to which any of the property or
assets of the Company or any of its subsidiaries are subject, which violations,
breaches, default or defaults, singularly or in the aggregate, would have a
material adverse effect on the Company or Veritas or their subsidiaries. Neither
the Company nor Veritas have or will have taken any action in material violation
of the provisions of the Articles of Incorporation, as amended, or the By-laws
of the Company or Veritas or any statute or any order, rule or regulation of any
court or regulatory authority or governmental body having jurisdiction over or
application to the Company or Veritas or their businesses or properties.
(k) The Company had all corporate power and authority to enter
into all agreements pertaining to, and carry out the provisions and conditions
thereof, the Company's private placement of approximately 301,500 shares of
Common Stock in October 1997 (the "1997 Placement"), and the agreements thereto
were duly and validly authorized and executed by the Company. The Common Stock
issued in the 1997 Placement were duly authorized, validly issued, fully paid
and non-assessable.
(l) (i) The financial statements and schedules of the Company
included as part of the Registration Statement or the Prospectus present fairly
and financial condition of the Company as of the dates thereof, and the results
of operations of the Company for the periods covered thereby, all in conformity
with generally accepted accounting principles and the Rules and Regulations
applied on a consistent basis throughout the entire periods involved; (ii)
Michael C. Finkelstein, C.P.A. (the "Company's Accountants"), who have reported
on such financial statements and schedules of the Company, are independent
accountants with respect to the Company, as required by the Acts and the Rules
and Regulations; and (iii) no other financial statements or schedules
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<PAGE>
of the Company are required to be included in the Registration Statement or the
Prospectus.
(m) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus and prior to the
Closing Date or the Option Closing Date, except as set forth in or contemplated
by the Registration Statement and the Prospectus, (i) each of the Company and
Veritas have and will have conducted its business in substantially the same
manner as on April 30, 1998; (ii) neither the Company nor Veritas have incurred
or will have incurred any material liability or obligation, direct or
contingent, or has entered into or will have entered into any material
transaction; (iii) neither the Company nor Veritas have or will have paid or
declared any dividend or other distribution on its capital stock, (iv) there has
not been and will not have been any change in (A) the capitalization of the
Company, (B) the business, properties, prospects, financial condition or results
of operations of the Company, or (C) the value of the assets of the Company,
arising for any reason whatsoever; and (v) neither the Company nor Veritas have,
or at the Closing Date or the Option Closing Date will have, any material
contingent obligation.
(n) The Company has, and at the Closing Date and at the Option
Closing Date will have, good and marketable title to all properties and assets
described in the Registration Statement and the Prospectus as owned by them,
free and clear of all liens, charges, encumbrances, claims, security interests,
restrictions and defects of any material nature whatsoever, except such as are
described or referred to in the Registration Statement and the Prospectus. All
of the material leases and subleases under which the Company is the lessor or
sublessor of properties or assets or under which the Company holds properties or
assets as lessee as described in the Prospectus are, and will on the Closing
Date and the Option Closing Date be, in full force and effect, and except as
described in the Prospectus, the Company is not and will not be in default in
respect to any of the terms or provisions of any of such leases or subleases,
and no claim has been asserted by anyone adverse to rights of the Company as
lessor, sublessor, lessee or sublessee under any of the leases or subleases
mentioned above, or affecting or questioning the right of the Company to
continue possession of the leased or subleased premises or assets under any such
lease or sublease except as described or referred to in the Prospectus, and the
Company owns or leases all such properties as are necessary to its operations as
now conducted and, except as otherwise stated in the Prospectus, as proposed to
be conducted set forth in the Prospectus.
(o) Except as set forth in the Prospectus, the Company does
not own or control any capital stock or securities of, or have
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<PAGE>
any proprietary interest in, or otherwise participate in any other corporation,
partnership, joint venture, firm, association or business organization;
provided, however, that this provision shall not be applicable to the
investment, if any, of the net proceeds from the sale of the Securities sold by
the Company in certificates of deposits, savings deposits, short-term
obligations of the United States Government, money market instruments or other
short-term investments.
(p) Except as disclosed in the Prospectus, there is no
business relationship, arrangement or conflict of interest between the Company
and Veritas which could have a material adverse effect upon the Company,
Veritas, or their respective businesses.
(q) To the knowledge of the Company, the Company's
accountants, who have given their reports on certain financial statements filed
and to be filed with the Commission as a part of the Registration Statement,
which are incorporated in the Prospectus, are with respect to the Company,
independent public accountants as required by the Act and the Rules and
Regulations promulgated thereunder.
(r) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus, and except as otherwise
expressly set forth herein or therein, the Company has not (i) issued any
securities or incurred any material liability or obligation, direct or
contingent, for borrowed money; or (ii) entered into any material transaction
other than in the ordinary course of business; or (iii) declared or paid any
dividend or made any other distribution on or in respect to its capital stock.
(s) There is no litigation or governmental proceeding pending,
or to the knowledge of the Company, threatened against, or involving the
properties or business of, either the Company or Veritas, which might materially
adversely affect the value, assets or the operation of the properties or the
business of the Company, except as expressly set forth in the Prospectus.
Further, except as referred to in the Prospectus, there are no pending actions,
suits or proceedings related to environmental matters or related to
discrimination on the basis of age, sex, religion or race, nor is the Company
charged with or, to its knowledge, under investigation with respect to any
violation of any statutes or regulations of any regulatory authority having
jurisdiction over its business or operations, and no labor disturbances by the
employees of the Company exist or, to the knowledge of the Company, have been
threatened.
(t) Each of the Company and Veritas have, and at the Closing
Date and at the Option Closing Date will have, filed all
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<PAGE>
necessary federal, state and foreign income and franchise tax returns or has
requested extensions thereof (except in any case where the failure to so file
would not have a material adverse effect on the Company or Veritas, as the case
may be, and has paid all taxes which it believes in good faith were required to
be paid by it except for any such tax that currently is being contested in good
faith or as described in the Prospectus.
(u) No transfer tax, stamp duty or other similar tax is
payable by or on behalf of the Representative in connection with (i) the
issuance by the Company of the Units, including the Common Stock and Warrants
underlying the Units, (ii) the purchase of the Units by the Representative,
(iii) the consummation by the Company of any of its obligations under this
Agreement, or (iv) any tax deficiency or claims outstanding, proposed or
assessed against it.
(v) Either the Company or Veritas maintains insurance policies
including, but not limited to, general liability and property insurance, which
sufficiently insures the Company and its employees against such losses and risks
generally insured against by comparable businesses, and neither the Company nor
Veritas (i) have 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, (ii) 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 (iii) have 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 or of
Veritas on behalf of the Company.
(w) The Company is in compliance with the requirements of
Section 13(b)(2) of the Securities Exchange Act of 1934, as amended, and all
rules and regulations promulgated thereunder (the "Exchange Act") and, except as
disclosed in the Prospectus, to the Company's knowledge, neither the Company nor
Veritas, nor any of their respective employees, officers, directors, agents or
affiliates, have made, directly or indirectly, any payment of funds of such
entity or received or retained funds in violation of any law, rule or
regulation, which payment, receipt on retention is of a character which is
required to be disclosed in the Prospectus.
(x) Neither the Company nor any of its employees, directors,
stockholders, or affiliates (as defined by the Rules and Regulations) of any of
the foregoing (including Veritas) have taken or will take, directly or
indirectly, any action designed to or which has constituted or which might be
expected to cause or result
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<PAGE>
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
Units or Warrants or Common Stock underlying such Units.
(y) Neither the Company nor Veritas have at any time (i) made
any contribution to any candidate for political office, or failed to disclose
fully any such contribution, in violation of law, or (ii) made any payment to
any state, federal, foreign governmental or professional regulatory agency,
officer or official or other person charged with similar public, quasi-public or
professional regulatory duties, other than payments or contributions required or
allowed by applicable law.
(z) Except as set forth in the Registration Statement, to the
knowledge of the Company, neither the Company, nor any officer, director,
employee or agent of the Company (including Veritas), has made any payment or
transfer of any funds or assets of any such entity or conferred any personal
benefit by use of such entity's assets or received any funds, assets or personal
benefit in violation of any law, rule or regulation, which is required to be
stated in the Registration Statement or necessary to make the statements therein
not misleading.
(aa) There are no contracts, agreements, securities,
instruments, certificates, or other documents of the Company or Veritas, which
are of a character required to be described in the Registration Statement or
Prospectus or filed as exhibits to the Registration Statement, which have not
been so described or filed.
(bb) The Company will apply the net proceeds from the sale of
the Securities sold by it for the purposes and in the manner set forth in the
Registration Statement and Prospectus under the heading "Use of Proceeds."
(cc) The Company shall maintain a system of internal
accounting controls sufficient to provide reasonable assurance that (1)
transactions are executed in accordance with management's general or specified
authorizations; (2) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (3) access to assets is
permitted only in accordance with management's general or specific
authorizations; and (4) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(dd) Except as set forth in the Registration Statement,
no holder of any securities of the Company has the right to require
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<PAGE>
registration of any securities because of the filing or effectiveness of the
Registration Statement.
(ee) Neither the Company nor Veritas shall have taken and at
the Closing Date will have taken, directly or indirectly, any action designed to
cause or result in, or which has constituted or which might reasonably be
expected to constitute, the stabilization or manipulation of the price of the
Units, Common Stock or Warrants to facilitate the sale or resale of such
securities.
(ff) To the best of the Company's and Veritas' knowledge,
there are no claims for services in the nature of a finder's origination fee
with respect to the sale of the Securities hereunder.
(gg) No right of first refusal exists with respect to any sale
of securities by the Company, except that right of first refusal granted by the
Company to the Representative to (1) underwrite or place any public or private
offering of any debt or equity securities of the Company (excluding sales to
employees of the Company) or any of its subsidiaries or affiliates, or (2) act
as its investment banker with respect to any merger, acquisition or disposition
of assets of the Company or any of its subsidiaries, for two years following the
Closing Date, and as to which the Representative shall have twenty (20) days
after its receipt of written notice thereof to accept or decline such offering.
If the Representative declines to participate in such offering and if thereafter
the terms of such offering are modified, the Representative shall have up to ten
(10) days thereafter to accept or decline the modified terms.
(hh) No statement, representation, warranty or covenant made
by the Company or Veritas, as the case may be, in this Agreement or made in any
certificate or document required by this Agreement to be delivered to the
Representative was, when made, or as of the Closing Date or as of the Option
Closing Date, will be materially inaccurate, untrue or incorrect.
(ii) The Company and Veritas have generally enjoyed
satisfactory employer/employee relationships with their respective employees and
are in compliance with all federal, state and local laws and regulations
respecting the employment of their respective employees and employment
practices, terms and conditions of employment and wages and hours relating
thereto. To the knowledge of the Company and Veritas, there are no pending or
threatened investigations involving the Company by the U.S. Department of Labor
or any other federal, state or local agency responsible for the enforcement of
such laws and regulations. To the knowledge of the Company and Veritas, there
are no unfair labor practice charges or complaints against the Company or
Veritas or any subsidiary
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<PAGE>
pending before the National Labor Relations Board or any strikes, picketing,
boycotts, disputes, slowdowns or stoppage pending or threatened against or
involving the Company or Veritas or any subsidiary, or any predecessor entity,
and none has occurred. No collective bargaining agreements or modifications
thereof are currently in effect or being negotiated by the Company or Veritas or
any subsidiary and their respective employees. No grievance or arbitration
proceeding is pending under any expired or existing collective bargaining
agreements of the Company, Veritas and any subsidiary.
(jj) Neither the Company nor Veritas has not maintained or
contributed to any deferred compensation, profit sharing, savings, retirement,
pension or other benefit plan or arrangements with or for the benefit of any
person resulting from a relationship with the Company, except as may be
disclosed in the Prospectus.
(kk) Each of the Company and Veritas is in compliance with all
federal and state laws, rules and regulations relating to consumer protection,
occupational safety and health and to the storage, handling or transportation of
hazardous or toxic materials and the Company and Veritas have received all
permits, licenses or other approvals required of the Company under applicable
federal and state occupational safety and health and environmental laws and
regulations to conduct its business and the Company and Veritas are in
compliance with all terms and conditions of any such permit, license or
approval, except any such violation of law or regulation, failure to receive
required permits, licenses or other approvals which would not, singly or in the
aggregate, result in a material adverse change in the condition (financial or
otherwise), business, net worth or results of operations of the Company, except
as the case may be, as may be described in or contemplated by the Prospectus.
(ll) Any certificate signed by any officer of the Company or
Veritas, respectively, and delivered to the Representative or counsel to the
Representative shall be deemed a representation and warranty by the Company or
Veritas, respectively, to the Representative as to the matters covered thereby.
(mm) The minute books of the Company have been made available
to the Representative and contain a complete summary of all meetings and actions
of the directors and stockholders of the Company, since the time of its
incorporation, and reflect all transactions referred to in such minutes
accurately in all material respects.
(nn) The Company is or will be registered with the Commission
under the 1940 Act as an investment company upon the consummation of this
Offering. The Company is, and at all times
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through the Closing Date and Option Closing Date, will be in compliance with the
terms and provisions of the Acts in all material respects. The Company will take
all best efforts to maintain such registration as an investment company under
the 1940 Act with the Commission. No person is serving or acting as an officer
or director of, or investment adviser to, the Company or Veritas, respectively,
except in accordance with the provisions of the 1940 Act, the Advisers Act, and
the Rules and Regulations thereunder.
(oo) The Company has purchased "key man" life insurance
policies on the life of Zindel Zelmanovitch, of which the Company is the sole
beneficiary, on terms and conditions satisfactory to the Representative.
(pp) The Company has received, and promptly presented to the
Representative and counsel for the Representative, copies of all duly executed
and delivered "lock-up" letters from each of the officers, directors and
shareholders of the Company regarding any Common Stock of the Company or
securities convertible into or exchangeable for such Common Stock, that each of
the foregoing is thereby restricted from selling, hypothecating, pledging or
otherwise disposing of any shares of Common Stock or securities convertible into
or exchangeable for Common Stock, for eighteen (18) months from the Effective
Date (or one year with the prior written consent of the Representative).
(qq) The Company has received, and promptly presented to the
Representative and counsel for the Representative, "10b-5" letters from each of
the officers, directors and holders of at least five percent of the outstanding
shares of any class of equity stock of the Company (both before and after giving
effect to the Acquisitions), whereby such individuals stated that the
information contained in the Registration Statement and the Prospectus was
accurate, and affirmed that he or she has not, in the five years preceding the
Effective Date (or as disclosed in the Registration Statement and Prospectus),
been the subject of any court order, judgment or decree restricting in any way
such person's involvement in the securities or commodities industries, convicted
in or named in a criminal proceeding, the subject of any bankruptcy petition, or
found by a court of competent jurisdiction of violating any securities or
federal commodities law.
3. COVENANTS OF THE COMPANY AND VERITAS.
The Company and Veritas covenant and agree, as the case may be, that:
(a) The Company will cause the Units, the Common Stock and
Warrants included in the Units and the Common Stock underlying
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such Warrants to be registered pursuant to Section 12 of the Exchange Act, not
later than the Effective Date.
(b) The Company will file with NASDAQ, as long as the
Securities are quoted on the NASDAQ National Market System or SmallCap Market,
all documents required thereby to maintain listing or quotation thereupon, and
will take any and all actions required to comply with and maintain all
continuing requirements for listing thereupon.
(c) The Company will notify the Representative immediately of
any actual or threatened or impending investigations (formal or informal) or any
delisting or other proceedings brought by NASDAQ, the NASD, SEC or any other
governmental or regulatory agency or body or any exchange.
(d) The Company will deliver to the Representative, without
charge, two conformed copies of each Registration Statement and of each
amendment or supplement thereto, including all financial statements and
exhibits.
(e) The Company has delivered to the Representative, and each
of the Underwriters and dealers selected by the Representative (the "Selected
Dealers") which are registered broker-dealers under the Exchange Act of 1934, as
amended, if any, without charge, as many copies as have been requested of each
Preliminary Prospectus heretofore filed with the Commission in accordance with
and pursuant to the Commission's Rule 430 under the Act and will deliver to the
Representative and to others whose names and addresses are furnished by the
Underwriter or a Selected Dealer, without charge, on the Effective Date of the
Registration Statement, and thereafter from time to time during such reasonable
period as you may request if, in the opinion of counsel for the Representative,
the Prospectus is required by law to be delivered in connection with sales by
the underwriter or a selected dealer, as many copies of the Prospectus (and, in
the event of any amendment of or supplement to the Prospectus, of such amended
or supplemented Prospectus) as the underwriter or selected dealer may reasonably
request for the purposes contemplated by the Act. The Company will take all
necessary actions to furnish to whomever directed by the Representative, when
and as requested by the Representative, all necessary documents, exhibits,
information, applications, instruments and papers as may be reasonably required
or, in the written opinion of counsel to the Representative desirable, in order
to permit or facilitate the sale of the Securities.
(f) The Company has authorized the Representative to use, and
make available for use by prospective dealers, the Preliminary Prospectus, and
authorizes the underwriters and all
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selected dealers in connection with the distribution of the Securities to be
purchased by the Representative and all dealers to whom any of such Securities
may be sold by the Representative or by any Underwriter or Selected Dealer, to
use the Prospectus, as from time to time amended or supplemented, in connection
with the sale of the Securities in accordance with the applicable provisions of
the Act, the applicable Regulations and applicable state law, until completion
of the distribution of the Securities and for such longer period as you may
request if the Prospectus is required under the Act, the applicable Regulations
or applicable state law to be delivered in connection with sales of the
Securities by the Representative or the Underwriters or Selected Dealers.
(g) The Company will use its best efforts to cause the
Registration Statement to become effective and will notify the Representative
immediately, and confirm the notice in writing: (i) when the Registration
Statement or any post-effective amendment thereto becomes effective, if the
provisions of Rule 497 promulgated under the Acts will be relied upon and when
the Prospectus has been filed in accordance with said Rule 497; (ii) of the
issuance by the Commission of any stop order or of the initiation, or to the
best of the Company's knowledge, the threat of any proceedings for that purpose;
(iii) of the suspension of the qualification of the Securities, the
Representative's Warrants and the Representative's Securities, or underlying
securities, for offering or sale in any jurisdiction or of the initiating, or to
the best of the Company's knowledge the threatening, of any proceeding for that
purpose; and (iv) of the receipt of any comments from the Commission. If the
Commission shall enter a stop order at any time, the Company will make every
reasonable effort to obtain the lifting of such order at the earliest possible
moment.
(h) During the time when a prospectus is required to be
delivered under the 1933 Act and 1940 Act, the Company will comply with all
requirements imposed upon it by the 1933 Act, the 1940 Act and the Exchange Act,
as now and hereafter amended and by the Rules and Regulations, as from time to
time in force, as necessary to permit the continuance of sales of or dealings in
the Securities in accordance with the provisions hereof and the Prospectus. 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 opinion of counsel for the Company or counsel for the Representative, 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, not misleading, or if it is
necessary at any time to amend the Prospectus to comply with the Act, the
Company will notify you promptly and prepare and file with the Commission an
appropriate amendment or supplement in accordance
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with Section 10 of the 1933 Act and will furnish to you copies thereof.
(i) The Company shall file the Prospectus (in form and
substance satisfactory to the Representative and counsel 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 or post-effective amendment
thereto.
(j) The Company will endeavor in good faith, in cooperation
with you, at or prior to the time the Registration Statement becomes effective,
to qualify the Securities for offering and sale under the securities laws or
blue sky laws of such jurisdictions as you may reasonably designate. In each
jurisdiction where such qualification shall be effected, the Company will,
unless you agree that such action is not at the time necessary or advisable,
file and make such statements or reports at such times as are or may reasonably
be required by the laws of such jurisdiction.
(k) The Company shall cause the Units and Common Stock and
Warrants underlying the Units to be listed on NASDAQ SmallCap or NASDAQ/NMS and,
for a period of seven (7) years from the date hereof, use its best efforts to
maintain NASDAQ quotation of the Units, Common Stock and Warrants to the extent
each security remains outstanding.
(l) The Company will make generally available to its
securityholders, as soon as practicable, but in no event later than the first
day of the fifteenth full calendar month following the Effective Date of the
Registration Statement, an earnings statement of the Company, which will be in
reasonable detail but which need not be audited, covering a period of at least
twelve months beginning after the Effective Date of the Registration Statement,
which earnings statements shall satisfy the requirements of Section 11(a) of the
Act and the Regulations as then in effect. The Company may discharge this
obligation in accordance with Rule 158 of the Rules and Regulations.
(m) During the period of seven years commencing on the
Effective Date of the Registration Statement, the Company will make available to
its stockholders an annual report (including financial statements audited by its
independent public accountants), in reasonable detail, and, at its expense,
furnish the Representative (i) within 90 days after the end of each fiscal year
of the Company, a consolidated balance sheet of the Company and a separate
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balance sheet of each subsidiary of the Company the accounts of which are not
included in such consolidated balance sheet as of the end of such fiscal year,
and consolidated statements of operations, stockholders' equity and cash flows
of the Company and separate statements of operations, stockholders' equity and
cash flows of any subsidiaries of the Company the accounts of which are not
included in such consolidated statements, for the fiscal year then ended all in
reasonable detail and all certified by independent accountants (within the
meaning of the Act and the Regulations), (ii) within 45 days after the end of
each of the first three fiscal quarters of each fiscal year, similar balance
sheets as of the end of such fiscal quarter and similar statements of
operations, stockholders' equity and cash flows for the fiscal quarter then
ended, all in reasonable detail, and subject to year end adjustment, all
certified by the Company's principal financial officer or the Company's
principal accounting officer as having been prepared in accordance with
generally accepted accounting principles applied on a consistent basis, (iii) as
soon as available, each report furnished to or filed with the Commission or any
securities exchange and each report and financial statement furnished to the
Company's shareholders generally, and (iv) as soon as available, such other
material as the Representative may from time to time reasonably request
regarding the financial condition and operations of the Company. 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.
(n) 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 securityholders, 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
Acts, covering a period of at least 12 months after the Effective Date of the
Registration Statement.
(o) For a period of eighteen months from the Closing Date, the
Company, at its expense, shall cause its regularly engaged independent certified
public accountants to review (but not audit), the Company's financial statements
for each of the first three quarters prior to the announcement of quarterly
financial
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information, the filing of the Company's 10-Q quarterly report and the mailing
of quarterly financial information to stockholders.
(p) For a period of three (3) years after the Effective Date
of the Registration Statement, the 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, any
securities of the Company, with respect to which the Company may seek a public
offering and sale of such securities; and the Company will consult with the
Representative with regard to any such offering and will offer to the
Representative the opportunity, on terms not more favorable to the Company than
they can secure elsewhere, to purchase or sell any such securities. If the
Representative 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 the Representative 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 the Representative 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.
(q) Prior to the filing of the Registration Statement, the
Company shall have provided to the Representative the results of any title,
lien, Uniform Commercial Code or other search as the Representative or its
counsel may request.
(r) Prior to the Closing Date or the Option Closing Date,
neither the Company nor Veritas will issue, directly or indirectly, without your
prior written consent and that of counsel for the Representative, any press
release or other public announcement or hold any press conference with respect
to the Company or its activities with respect to this Offering.
(s) The Company will deliver to you prior to filing, any
amendment or supplement to the Registration Statement or Prospectus proposed to
be filed after the Effective Date of the Registration Statement and will not
file any such amendment or supplement to which you shall reasonably object after
being furnished such copy.
(t) During the period of 120 days commencing on the date
hereof, neither the Company nor Veritas will at any time take, directly or
indirectly, any action designed to, or which will constitute or which might
reasonably be expected to cause or result in stabilization or manipulation of
the price of the Securities to facilitate the sale or resale of any of the
Securities.
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(u) The Company will apply the net proceeds from the Offering
received by it in the manner, and subject to the conditions, set forth under the
section entitled "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.
(v) 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 and Warrant Agent) for its Common Stock and
Warrants, all of whom shall be reasonably acceptable to the Representative.
(w) Counsel for the Company, the Company's accountants, and
the officers and directors of the Company will, respectively, furnish the
opinions, the letters and the certificates referred to in subsections of
Paragraph 9 hereof, and, in the event that the Company shall file any amendment
to the Registration Statement relating to the offering of the Securities or any
amendment or supplement to the Prospectus relating to the offering of the
Securities subsequent to the Effective Date of the Registration Statement, such
counsel, such accountants, such officers and directors, respectively, will, at
the time of such filing or at such subsequent time as you shall specify, so long
as securities being registered by such amendment or supplement are being
underwritten by the Representative and the Underwriters, as the case may be,
furnish to you such opinions, letters and certificates, each dated the date of
its delivery, of the same nature as the opinions, the letters and the
certificates referred to in said Paragraph 9, as you may reasonably request, or,
if any such opinion or letter or certificate cannot be furnished by reason of
the fact that such counsel or such accountants or any such officer or director
believes that the same would be inaccurate, such counsel or such accountants or
such officer or director will furnish an accurate opinion or letter or
certificate with respect to the same subject matter.
(x) The Company and Veritas, as the case may be, will comply
with all of the provisions of any undertakings contained in the Registration
Statement in all material respects.
(y) The Company will reserve and keep available for issuance
that maximum number of its authorized but unissued shares of Common Stock which
are issuable upon exercise of the Warrants underlying the Units,
Representative's Warrants, and the Overallotment Option and any Warrants
issuable upon the exercise thereof, and any shares of capital stock issuable
upon the exercise or conversion of any other options, warrants, instruments or
loans outstanding from time to time.
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(z) During a period of three years commencing on the Effective
Date, the Company will furnish to you and any Underwriters or Selected Dealers,
who may so request copies of such financial statements and other periodic and
special reports as the Company may from time to time distribute generally to the
holders of any class of its capital stock, and will furnish to the
Representative and such Underwriters or Selected Dealers who may request a copy
of each annual or other report which the Company is required to file with the
Commission.
(aa) The Company agrees that it will, upon the Closing Date,
have obtained approval from the SBA to engage, for a period of no less than
three (3) years, a designee of the Representative as an advisor (the "Advisor")
to its Board of Directors where such Advisor shall attend meetings of the Board,
receive all notices and other correspondence and communications sent by the
Company to members of its Board of Directors and shall be entitled to receive
compensation therefor equal to the entitlement of all non-employee directors.
Such Advisor shall also be entitled to receive reimbursement for all reasonable
costs incurred in attending such meetings including, but not limited to, food,
lodging, and transportation. The Company further agrees that during said three
(3) year period, it shall schedule no less than four (4) formal and "in person"
meetings of its Board of Directors in each such year and fifteen (15) days
advance notice of such meetings shall be given to the Advisor. Further, during
such three (3) year period, the Company shall give notice to the Representative
with respect to any proposed acquisitions, mergers, reorganizations or other
similar transactions. The Representative shall have the right during such
three-year periods in its sole discretion, to designate one person for election
as a Director of the Company and the Company will utilize its best efforts to
obtain the election of such person who shall be entitled to receive the same
compensation, expense reimbursements and other benefits set forth above.
Both the Company and Veritas agree to indemnify and hold the
Representative and such Advisor or Director harmless against any and all claims,
actions, damages, costs and expenses, and judgments arising solely out of the
attendance and participation of your designee at any such meeting described
herein. In the event the Company maintains a liability insurance policy
affording coverage for the acts of its of officers and directors, it agrees, if
possible, to include the Representative's designee as an insured under such
policy.
(bb) The Company agrees that it will, upon the Closing Date,
enter into a Financial Consulting Agreement with the Representative, whereby it
shall engage the Representative as a financial consultant for a three (3) year
term and for an annual
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fee of $36,000, which full amount for the entire three year term shall be paid
in advance and in full upon the Closing Date.
(cc) As soon as practicable, but (i) in no event more than
five (5) business days before the Effective Date of the Registration Statement,
the Company shall file a Form 8-A with the Commission providing for the
registration under the Exchange Act of the Units, Common Stock and Warrants, and
(ii) in no event more than 30 days after the Effective Date of the Registration
Statement, apply for listing in Standard and Poor's Corporation Reports or
Moody's OTC Guide, and use its best efforts to have the Company included in such
publications and continue such inclusion for at least five years from the
Closing Date.
(dd) For a period of eighteen (18) months from the Effective
Date, no officer, director or holder of any securities of the Company prior to
the Offering will, directly or indirectly, offer, sell (including any short
sale), grant any option for the sale of, acquire any option to dispose of, or
otherwise dispose of any shares of Common Stock into public markets, including
shares of Common Stock issuable upon exercise of options, warrants or any
convertible securities of the Company, without the prior written consent of the
Representative, and other than as set forth in the Registration Statement. In
order to enforce this covenant, the Company shall impose stop-transfer
instructions with respect to the securities owned by every stockholder prior to
the Offering until the end of such period (subject to any exceptions to such
limitation on transferability set forth in the Registration Statement).
Notwithstanding the foregoing, the Company's current stockholders shall be
permitted to make transfers for estate planning purposes or in private sales, so
long as the transferee agrees in writing to be bound by the foregoing
provisions. If necessary to comply with any applicable Blue-sky Law, the shares
held by such stockholders will be escrowed with counsel for the Company or
otherwise as required. In addition, prior to the end of such eighteen (18) month
period, the Company will not permit its counsel to issue any opinions to remove
any legends from any of its securities.
(ee) Except for the issuance of shares of capital stock by the
Company in connection with the exercise of warrants or options outstanding as of
the Closing Date and Option Closing Date and as disclosed in the Registration
Statement, the Company shall not, for a period of eighteen (18) months following
the Closing Date, directly or indirectly, offer, sell, issue, agree to issue or
transfer any of its debt, equity or other securities of any kind, including any
security exchangeable or exercisable for, or convertible into, shares of its
capital stock or register any of such securities (under any form of registration
statement, including Form S-8), without the prior written consent of the
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Representative. Options granted pursuant to plans as described in or permitted
under the Registration Statement must be exercisable at the fair market value on
the date of grant.
(ff) For so long as any of the Warrants underlying the Units
remain outstanding, the Company shall maintain "key person" life insurance
payable to the Company on the life of Zindel Zelmanovitch, its Chief Executive
Officer, in the amount of at least $1,000,000, unless his employment with the
Company is earlier terminated. In such event, the Company will obtain a
comparable policy on the life of his successor for the balance of such period.
(gg) The Company will use its best efforts to obtain, as soon
after the Closing Date as is reasonably possible, liability insurance covering
its officers and directors.
(hh) The Company agrees that any conflict of interest arising
between a member of the Company's Board of Directors or any officer and the
Company in connection with such Director's dealing with, or obligations to, the
Company or Veritas, shall be resolved by a vote of the majority of the
independent members of the Board of Directors of the Company, which members
shall also not be board members or officers of Veritas.
(ii) The Company agrees that it will employ the services of a
financial public relations firm reasonably acceptable to the Representative for
a period of at least twelve months following the Effective Date.
(jj) For a period of five (5) years from the Effective Date,
at the request of the Representative, the Company shall provide promptly, at its
expense, copies of the Company's daily transfer sheets furnished to it by its
transfer agent and copies of the securities positions provided to it by the
Depository Trust Company, and the list of holders of all of the Company's
securities.
(kk) The Company shall take all actions necessary or required
to effectuate and preserve the registration rights granted to the Representative
pursuant to the Representative's Warrant.
4. SALE, PURCHASE AND DELIVERY OF SECURITIES: CLOSING DATE.
(a) The Company agrees to sell to the Representative, and the
Representative, on the basis of the warranties, representations and agreements
of the Company herein, and subject to the terms and conditions herein, agrees to
purchase the Securities from the Company at a price of $4.10 per Unit, less an
underwriting discount of ten percent (10%) of the offering price thereof. The
Representative may allow a concession not exceeding
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$.____ per Unit to Selected Dealers who are members of the National Association
of Securities Dealers, Inc ("NASD"), and to certain foreign dealers.
(b) Delivery of the Securities and payment therefor shall be
made at 10:00 a.m., New York time on the Closing Date, as hereinafter defined,
at the offices of the Representative or such other location as may be agreed
upon by you and the Company. Delivery of certificates for the Common Stock (in
definitive form and registered in such names and in such denominations as you
shall request by written notice to the Company delivered at least two business
days' prior to the Closing Date), shall be made to you against payment of the
purchase price therefor by certified or bank check or wire transfer payable in
New York Clearing House funds to the order of the Company. The Company will make
such certificates available for inspection at least two business days prior to
the Closing Date at such place as you shall designate.
(c) Unless otherwise agreed, the "Closing Date" shall be
_____________, 1998, or such other date not later than the sixth business day
following the effective date of the Registration Statement as you shall
determine and advise the Company.
(d) The cost of original issue tax stamps, if any, in
connection with the issuance and delivery of the Securities by the Company to
the Representative and the Underwriters shall be borne by the Company. The
Company will pay and hold the Representative and the Underwriters, as the case
may be, and any subsequent holder of the Securities, harmless from any and all
liabilities with respect to or resulting from any failure or delay in paying
federal and state stamp taxes, if any, which may be payable or determined to be
payable in connection with the original issuance or sale to the Representative
and the Underwriters, as the case may be, of the Securities or any portions
thereof.
5. SALE, PURCHASE AND DELIVERY OF THE OVERALLOTMENT SECURITIES:
OPTION CLOSING DATE.
(a) The Company agrees to sell to the Representative, and upon
the basis of the representations, warranties and agreements of the Company
herein contained, subject to the satisfaction of all the terms and conditions of
this Agreement, the Representative shall have the option (the "Overallotment
Option") to purchase the Overallotment Securities from the Company, at the same
price per Security as set forth in Paragraph 4(a) above. Overallotment
Securities may be purchased solely for the purpose of covering overallotments
made in connection with the distribution and sale of the Securities.
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(b) The Overallotment Option to purchase all or part of the
Overallotment Securities covered thereby is exercisable by you at any time and
from time to time before the expiration of a period of 30 calendar days from the
date of the Effective Date of the Registration Statement (the "Option Period")
by written notice to the Company setting forth the number of Overallotment
Securities for which the Option is being exercised, the name or names in which
the certificates for such Overallotment Securities are to be registered and the
denominations of such certificates. Upon each exercise of the Overallotment
Option, the Company shall sell to the Representative the aggregate number of
Overallotment Securities specified in the notice exercising such Overallotment
Option.
(c) Delivery of the Overallotment Securities with respect to
which the Overallotment Option shall have been exercised and payment therefor
shall be made at 10:00 a.m., New York time on the Option Closing Date, as
hereinafter defined, at the offices of the Representative or at such other
locations as may be agreed upon by you and the Company. Delivery of certificates
for Overallotment Securities shall be made to you against payment of the
purchase price therefor by certified or bank check or wire transfer in New York
Clearing House Funds to the order of the Company. The Company will make
certificates for Overallotment Securities to be purchased at the Option Closing
Date available for inspection at least two business days prior to such Option
Closing Date at such place as you shall designate.
(d) The "Option Closing Date" shall be the date not later than
five business days after the end of the Option Period as you shall determine and
advise the Company by at least three full business days' notice, unless some
other time is agreed upon between you and the Company.
(e) The obligations of the Representative to purchase and pay
for Overallotment Securities at such Option Closing Date shall be subject to
compliance as of such date with all the conditions specified in Paragraph 2
herein and the delivery to you of opinions, certificates and letters, each dated
such Option Closing Date, substantially similar in scope to those specified in
Paragraph 9 herein.
(f) The cost of original issue tax stamps, if any, in
connection with the issuance and delivery of the Overallotment Securities by the
Company to the Representative shall be borne by the Company. The Company will
pay and hold the Representative, and any subsequent holder of Overallotment
Securities, harmless from any and all liabilities with respect to or resulting
from any failure or delay in paying federal and state stamp taxes, if any, which
may be payable or determined to be payable in connection with
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the original issuance or sale to the Representative of the Overallotment
Securities or any portion thereof.
6. WARRANT SOLICITATION FEE.
The Company agrees to pay the Representative a fee (the "Warrant
Solicitation Fee") of four percent (4%) of the aggregate exercise price of the
Warrants if: (i) the market price of the Common Stock is greater than the
exercise price of the Warrants on the date of exercise; (ii) the exercise of the
Warrants are solicited by the Representative or any other member of the NASD and
the customer states in writing that the transaction was solicited and designates
in writing the broker-dealer to receive compensation for the exercise; (iii) the
disclosure of compensation arrangements was made both at the time of the
Offering and at the time of the exercise of the Warrant; and (iv) the
solicitation of the Warrant is not in violation of Regulation M promulgated
under the Exchange Act. The Company agrees not to solicit the exercise of any
Warrants other than through the Representative and will not authorize any other
dealer to engage in such solicitation without the prior written consent of the
Representative which will not be unreasonably withheld. The Warrant Solicitation
Fee will not be paid in a non-solicited transaction. No Warrant solicitation by
the Representative will occur prior to one year from the Effective Date.
7. REPRESENTATIONS AND WARRANTIES OF THE REPRESENTATIVE.
The Representative represents and warrants to the Company that:
(a) The Representative is a member in good standing of the
National Association of Securities Dealers, Inc., and has complied with all NASD
requirements concerning net capital and compensation to be received in
connection with the Offering.
(b) To the Representative's knowledge, there are no claims for
services in the nature of a finder's origination fee with respect to the sale of
the Securities hereunder to which the Company is, or may become, obligated to
pay.
(c) Neither the Representative, the Underwriters or Selected
Dealers, nor any of their registered representatives, respectively, have
provided purchasers of the Securities with any information concerning the
Company other than the Preliminary Prospectus and the Prospectus.
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8. PAYMENT OF EXPENSES.
(a) The Company will pay and bear all costs, fees, taxes and
expenses incident to and in connection with: (i) the issuance, offer, sale and
delivery of the Securities, including all expenses and fees incident to the
preparation, printing, filing and mailing (including the payment of postage with
respect to such mailing) of the Registration Statement (including all exhibits
thereto), each Preliminary Prospectus, the Prospectus, and amendments and
post-effective amendments thereof and supplements thereto, and this Agreement
and related documents, Preliminary and Final Blue Sky Memoranda, including the
cost of preparing and copying all copies thereof in quantities deemed necessary
by the Underwriters; (ii) the costs of preparing transaction closing binders and
lucite cube mementos in such quantity as the Representative specifies, and the
preparing and printing all "Tombstone" and other appropriate advertisements in
THE WALL STREET JOURNAL, THE NEW YORK TIMES and other publications selected by
the Representative; (iii) the printing, engraving, issuance and delivery of the
Unit Certificates, Common Stock, Warrants, and any of the Additional Securities,
including any transfer or other taxes payable thereon in connection with the
original issuance thereof; (iv) the qualification of the Units, Common Stock and
Warrants under the state or foreign securities or "Blue Sky" laws selected by
the Representative and the Company, and all legal fees of counsel for the
Representative in connection therewith (in the amount of $20,000) plus all
disbursements and filing fees incurred by such counsel for such states; (v) fees
and disbursements of counsel and accountants for the Company, including those
incurred in connection with the actions specified in the foregoing clause (i);
(vi) other expenses and disbursements reasonably incurred on behalf of the
Company; (vii) the filing fees payable to the Commission and the National
Association of Securities Dealers, Inc. ("NASD"); and (viii) any application for
listing of the Units, Common Stock and Warrants on a securities exchange, or
application for quotation thereof on NASDAQ.
(b) In addition to the expenses to be paid and borne by the
Company referred to in Paragraph 8(a) above, the Company shall reimburse you at
closing for expenses incurred by you in connection with the Offering (for which
you need not make any accounting), in the amount of three percent (3%) of the
price to the public of the Securities and Additional Securities sold in the
Offering. This 3% non-accountable expense allowance shall cover the fees of your
legal counsel, but shall not include any expenses for which the Company is
responsible under Paragraph 8(a) above, including the reasonable fees and
disbursements of your legal counsel with respect to Blue Sky matters.
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(c) In the event that the Company does not or cannot, for any
reason whatsoever other than a default by the Representative, proceed with the
Offering, or if any of the representations, warranties or covenants contained in
this Agreement are not materially correct or cannot be complied with by the
Company, or business prospects or obligations of the Company are adversely
affected and the Company does not commence or continue with the Offering at any
time or terminates the proposed transaction prior to the Closing Date, the
Company shall reimburse the Representative on an accountable basis for all
out-of-pocket expenses actually incurred in connection with the Underwriting,
this Agreement and all of the transactions hereby contemplated (including,
without limitation, your legal fees and expenses) and the Representative shall
not be responsible for any expense of the Company or others or for any change or
claim related to the Offering contemplated by hereunder in the event that the
Offering is not consummated.
9. CONDITIONS OF REPRESENTATIVE'S OBLIGATIONS.
The obligations of the Representative to consummate the transactions
contemplated by this Agreement shall be subject to the continuing accuracy of
the representations and warranties of the Company contained herein as of the
date hereof and as of the Closing Date, the accuracy of the statements of the
Company and its officers and directors made pursuant to the provisions hereof,
and to the performance by the Company of its covenants and agreements hereunder
and under any and all covenants and agreements contemplated herein and under
each certificate, opinion and document contemplated hereunder and to the
following additional conditions:
(a) The Registration Statement, in form and substance
satisfactory to the Representative and counsel to the Representative, shall have
become effective not later than 5:00 p.m., New York time, on the date following
the date of this Agreement, or such later date and time as shall be consented to
in writing by you and, on or prior to the Closing Date, no stop order suspending
the effectiveness of the Registration Statement or the qualification or
registration of the Securities under the securities laws of any jurisdiction
shall have been issued and no proceedings for that purpose shall have been
instituted or shall be pending or to your knowledge or the knowledge of the
Company, shall be contemplated by the Commission or any such authorities of any
jurisdiction and any request on the part of the Commission or any such
authorities for additional information shall have been complied with to the
reasonable satisfaction of the Commission or such authorities and counsel to the
Representative, and after the date hereof no amendment or supplement shall have
been filed to the Registration Statement or Prospectus without your prior
consent. If
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the Company has elected to rely upon Rule 430A of the Rules and Regulations, the
price of the Units and the Common Stock and Warrants included therein, and the
exercise price of the Warrants included therein 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 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 Rule 497.
(b) The Registration Statement or the Prospectus or any
amendment thereof or supplement thereto shall not contain an untrue statement of
a fact which is material, or omit to state a fact which is material and is
required to be stated therein or is necessary to make the statements therein,
not misleading.
(c) Between the time of the execution and delivery of this
Agreement and the Closing Date, there shall be no litigation instituted against
the Company, Veritas or any of its officers or directors and between such dates
there shall be no proceeding instituted or, to the Company's knowledge,
threatened against the Company, Veritas or any of its officers or directors
before or by any federal, state or county commission, regulatory body,
administrative agency or other governmental body, domestic or foreign, in which
litigation or proceeding an unfavorable ruling, decision or finding would have a
material adverse effect on the Company or its business, business prospects or
properties, or have a material adverse effect on the financial condition or
results of operation of the Company.
(d) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, (i) there shall have
been no litigation instituted against the Company, Veritas or any officer or
director of the Company or Veritas, and since such dates there shall have been
no proceeding instituted or threatened against the Company, Veritas or any
officer or director of the Company or Veritas, before or by any federal, state
or local court, commission, regulatory body, administrative agency or other
governmental agency or body, domestic or foreign, in which litigation or
proceeding an unfavorable ruling, decision or finding could materially affect
the business, properties, prospects, financial condition or results of
operations of the Company, and (ii) no executive officer of the Company listed
as such in the Prospectus shall have died, become physically or mentally
disabled, resigned or been removed or discharged.
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(e) Each of the representations and warranties of the Company
or Veritas, as the case may be, contained herein and each certificate and
document contemplated under this Agreement to be delivered to you shall be true
and correct at the Closing Date as if made at the Closing Date, and all
covenants and agreements contained herein and in each such certificate and
document to be performed on the part of the Company or Veritas, as the case may
be, and all conditions contained herein and in each such certificate and
document to be fulfilled or complied with by the Company at or prior to the
Closing Date shall be fulfilled or complied with.
(f) At the Closing Date, you shall have received the opinion
of Berlack, Israels & Liberman, LLP, counsel to the Company, dated as of such
Closing Date, addressed to the Representative and in form and substance
satisfactory to counsel to the Representative, to the effect that:
(i) Each of the Company and Veritas is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation, with full corporate power and
authority, and all licenses, permits, certifications, registrations, approvals,
consents and franchises to own or lease and operate its properties and to
conduct their businesses as described in the Registration Statement. Each of the
Company and Veritas is duly qualified to do business as a foreign corporation
and is in good standing in all jurisdictions wherein such qualification is
necessary and failure so to qualify could have a material adverse effect on the
financial condition, results of operations, business or properties of the
Company; and the disclosure 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) The Company has full corporate power and
authority to execute, deliver and perform the Underwriting Agreement, Warrant
Agreement and Consulting Agreement issue the Units, the Common Stock and
Warrants included in the Units, the Representative's Securities and
Overallotment Securities, and issue and reserve for issuance any securities
underlying any of the Additional Securities, as the case may be, and to
consummate the transactions contemplated thereby. The execution, delivery and
performance of the Underwriting Agreement, Warrant Agreement, Consulting
Agreement and issuance of the Units, Common Stock and Warrants included in the
Units, Securities, the consummation by the Company of the transactions therein
contemplated and the compliance by the Company and Veritas with the terms of the
Underwriting
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Agreement, Warrant Agreement and Consulting Agreement, and the issuance of the
Units, Common Stock and Warrants included in the Units, and the Additional
Securities have been duly authorized by all necessary corporate action, and each
of the Underwriting Agreement, Warrant Agreement and Consulting Agreement, and
the Units, Common Stock and Warrants underlying the Units, and the Additional
Securities have been duly executed and delivered by the Company. The
Underwriting Agreement, Warrant Agreement and Consulting Agreement, and the
Units, Common Stock and Warrants included in the Units, and the Additional
Securities are valid and binding obligations of the Company (and in the case of
the Underwriting Agreement, a valid and binding obligation of Veritas),
enforceable in accordance with their respective terms, subject, as to
enforcement of remedies, to applicable bankruptcy, insolvency, reorganization,
moratorium and other laws affecting the rights of creditors generally and the
discretion of courts in granting equitable remedies and except that
enforceability of the indemnification provisions and the contribution provisions
set forth in the Underwriting Agreement may be limited by the federal securities
laws or public policy underlying such laws;
(iii) The execution, delivery and performance of
the Underwriting Agreement, Warrant Agreement and Consulting Agreement, and the
Securities (including the Additional Securities) by the Company and Veritas, as
the case may be, the consummation by the Company of the transactions therein
contemplated and the compliance by the Company with the terms of the
Underwriting Agreement and the Securities (including the Additional Securities)
do not, and will not, with or without the giving of notice or the lapse of time,
or both, (A) result in a violation of the Articles of Incorporation, as the same
may be amended, or By-laws of the Company or Veritas, (B) to the best of our
knowledge, result in a breach of, or conflict with, any terms or provisions of
or constitute a default under, or result in the modification or termination of,
or result in the creation or imposition of any lien, security interest, charge
or encumbrance upon any of the properties or assets of the Company or Veritas
pursuant to, any indenture, mortgage, note, contract, commitment or other
material agreement or instrument to which the Company or Veritas is a party or
by which the Company or Veritas or any of their properties or assets are or may
be bound or affected, except where any of the foregoing would not result in a
material adverse effect upon the Company's business or operations; (C) to the
best of our knowledge, violate any existing applicable law, rule or regulation
or judgment, order or decree known to us of any governmental agency or court,
domestic or foreign, having jurisdiction over the Company or Veritas or any of
their respective properties or businesses; or (D) to the best of our knowledge,
have any effect on any permit, certification, registration, approval, consent,
license or franchise necessary for the Company or Veritas to own or lease and
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operate their properties and to conduct their business or the ability of the
Company or Veritas to make use thereof;
(iv) To the knowledge of counsel to the Company,
neither the Company nor Veritas owns an equity interest in any other
corporation, partnership, joint venture, trust or other business entity, except
as disclosed in the Prospectus;
(v) To the best of our knowledge, no
authorization, approval, consent, order, registration, license or permit of any
court or governmental agency or body (other than under the Act, the Rules and
Regulations and applicable state securities or Blue Sky laws) is required for
the valid authorization, issuance, sale and delivery of the Securities, the
Additional Securities, or the Representative's Warrants and the underlying
shares, and the consummation by the Company of the transactions contemplated by
the Underwriting Agreement or the Representative's Warrants;
(vi) The Registration Statement was declared
effective under the 1933 Act and under the 1940 Act, on ___________, 1998; to
the best our knowledge, no stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings for that purpose have
been instituted or are pending, threatened or contemplated under the Act or
applicable state securities laws;
(vii) The Registration Statement and the
Prospectus, as of the Effective Date (except for the financial statements and
other financial data included therein or omitted therefrom, as to which we
express no opinion), comply as to form in all material respects with the
requirements of the Act and Regulations and the conditions for use of a
registration statement on Form SB-2 have been satisfied by the Company;
(viii) The description in the Registration Statement
and the Prospectus of statutes, regulations, contracts and other documents have
been reviewed by us, and, based upon such review, are accurate in all material
respects and present fairly the information required to be disclosed, and to the
best of our knowledge, there are no material statutes or regulations, or, to the
best of our knowledge, material contracts or documents, of a character required
to be described in the Registration Statement or the Prospectus or to be filed
as exhibits to the Registration Statement, which are not so described or filed
as required, and to the best of our knowledge, none of the material provisions
of the contracts or instruments described above violates any existing applicable
law, rule or regulation or judgment, order or decree known to us of any United
States governmental agency or court
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having jurisdiction over the Company or any of its assets or businesses;
(ix) The Company has a duly authorized, issued and
outstanding capitalization as set forth in the Prospectus, and any amendment or
supplement thereto, under the heading "Capitalization", and the Company is not a
party to or bound by any instruments, agreement or other arrangement providing
for it to issue any capital stock, warrants, options or other securities, except
for this Agreement and as described in the Prospectus. The outstanding
securities of the Company has been duly authorized, validly issued, fully paid
and nonassessable. None of the outstanding securities of the Company have been
issued in violation of the preemptive rights of any securityholder of the
Company. All of the issued and outstanding securities of the Company offered in
this Offering, will be owned by the holders thereof free and clear of any
mortgage, pledge, lien, charge or encumbrance, except as set forth in the
Registration Statement and the Prospectus. None of the holders of the
outstanding securities of the Company is subject to personal liability solely by
reason of being such a holder. The authorized securities conforms to the
description thereof contained in the Registration Statement and Prospectus. To
the best of our knowledge, except as set forth in the Prospectus, no holders of
any of the Company's securities have any rights, "demand," "piggyback" or
otherwise, to have such securities registered under the Act. All corporate
action required to be taken for the authorization, issuance and sale of the
securities has been duly, validly and sufficiently taken. Neither the
Securities, the Additional Securities, nor the Common Stock are subject to
preemptive rights of any stockholder of the Company. The certificates
representing the Securities are in proper legal form;
(x) The issuance and sale of the Securities has
been duly authorized and, when paid for, the Securities issued and delivered
pursuant to the terms of the Representative's Warrants, as the case may be, and
the Representative's Warrants will constitute the valid and binding obligations
of the Company, enforceable in accordance with their terms, to issue and sell
the Representative's Warrants and underlying Representative's Shares. The shares
of Common Stock have been duly authorized by the Company to be offered in the
form of the Securities. The Representative's Warrants and underlying
Representative's Shares conform to the descriptions thereof contained in the
Registration Statement and Prospectus;
(xi) The Representative will have acquired good
title to the Securities upon consummation of the Offering and will be able to
acquire good title to the Additional Securities upon the exercise of the
Overallotment Option or Representative's Option, as the case may be, free and
clear of all liens, encumbrances,
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equities, security interests and claims, provided that the Representative is a
bona fide purchaser as defined in ss.8-302 of the Uniform Commercial Code, as
amended;
(xii) Assuming that the Representative exercises
the Overallotment Option to purchase the Additional Securities and make payments
therefor in accordance with the terms of the Underwriting Agreement, upon
delivery of the Additional Securities to the Representative thereunder, the
Representative will acquire good title to the Additional Securities, free and
clear of any liens, encumbrances, equities, security interests and claims,
provided that the Representative is a bona fide purchaser as defined in ss.8-302
of the Uniform Commercial Code;
(xiii) 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;
(xiv) To the best of our knowledge, after due
inquiry, there are no claims, actions, suits, proceedings, arbitrations,
investigations or inquiries before any governmental agency, court or tribunal,
foreign or domestic, or before any private arbitration tribunal, pending or
threatened against the Company or Veritas or involving their properties or
businesses, other than as described in the Prospectus, such description being
accurate, and other than litigation incident to the kind of business conducted
by the Company which, individually and in the aggregate, is not material, and,
except as otherwise disclosed in the Prospectus and the Registration Statement,
the Company and Veritas have complied with all federal and state laws, statutes
and regulations concerning the business of the Company and Veritas;
(xv) All sales of the Company's securities have
been made in compliance with or under an exemption from the registration
requirements of the Act, and no purchaser of such securities in any such sale
has a right of action against the Company for failure to comply with the
registration or filing requirements of any state;
(xvi) Each of the Company and Veritas 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
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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 or Veritas, as the case may be), 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 or Veritas, as the case may be,
with respect to any trademarks, service marks, copyrights, service names, trade
names, patents, patent applications and licenses used in the conduct of the
Company's business (including, without limitations, any such licenses or rights
described in the Prospectus as being owned or possessed by the Company or
Veritas);
(xvii) Except as described in the Prospectus,
neither the Company nor Veritas (a) maintains, sponsors or contributes to any
ERISA Plans, (b) maintains or contributes, now or at any time previously, to a
defined benefit plan, as defined in Section 3(35) of ERISA, and (c) have either
completely or partially, withdrawn from a "multiemployer plan," with respect to
any employees of or who perform duties on behalf of the Company.
(xviii) The Company has no subsidiaries;
(xix) We have participated in reviews and
discussions in connection with the preparation of the Registration Statement and
the Prospectus. Although we are not passing upon and do not assume
responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement, no facts came to our attention which
lead us to believe that (A) the Registration Statement (except as to the
financial statements and other financial data contained therein, as to which we
express no opinion), on the Effective Date, contained any untrue statement of a
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, or that (B) the Prospectus (except as to the financial statements
and other financial data contained therein, as to which we express no opinion)
contains any untrue statement or a material fact or omits to state any material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(xx) The Prospectus has been reviewed by such
counsel, and insofar as it refers to statements of law, descriptions of
statutes, licenses, rules or regulations or legal conclusions is correct in all
material respects;
(xxi) To Company counsel's knowledge, the persons
listed in the Principal Stockholders or Management sections of the
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Prospectus are the respective "beneficial owners" (as such phrase is defined in
Regulation 13d-3 promulgated under the Exchange Act) of the securities set forth
opposite their respective names thereunder as and to the extent set forth
therein;
(xxii) 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;
(xxiii) 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 Shares hereunder or the
financial consulting arrangement or any other arrangements, agreements,
understandings, payments or issuances that may affect the Representative's
compensation, as determined by the NASD;
(xxiv) The Company has, or will have before the
Effective Date, gained approval for quotation of each of the Units, Common Stock
and Warrants by the NASDAQ SmallCap Market and will maintain and fulfill all
requirements for continued quotation thereby;
(xxv) The Company is, or will before the Effective
Date have become, duly registered with the Commission under the 1940 Act as an
investment company, and all action under the Acts necessary to consummate the
public offering and sale of the Units thereunder as provided in this Agreement
has or will have been taken by the Company, and all rules and regulations of the
SBA or IRS, as the case may be, for which compliance is necessary to gain and
maintain status as a SSBIC, have or will have been complied with as of or by the
Effective Date. 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;
(xxvi) The Company shall have obtained, and provided
copies to the Representative and counsel to the Representative of, duly executed
and delivered "lock-up" letters from each of the Company's officers, directors
and shareholders whereby each such person agrees not to sell, issue, pledge,
hypothecate or otherwise transfer, any of such person's shares of Common Stock
for a period of eighteen (18) months from the Closing Date, which "lock-up"
letters are legal, valid and binding obligations of the parties thereto,
enforceable against each such
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party and any subsequent holder of the securities subject thereto in accordance
with its terms.
(g) The sections in the Prospectus substantially entitled as
or relating to "Tax Considerations" have been reviewed by counsel to the Company
or special tax counsel to the Company, with expertise sufficient in tax matters.
(h) On or prior to the Closing Date, counsel for the
Representative shall have been furnished such documents, certificates and
opinions as they may reasonably require for the purpose of enabling them to
review the matters referred to in this Paragraph 9, or in order to evidence the
accuracy, completeness or satisfaction of any of the representations, warranties
or conditions herein contained.
(i) Prior to the Closing Date:
(i) There shall have been no material adverse
change in the condition or prospects or the business activities, financial or
otherwise, of the Company or Veritas, 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, outside
the ordinary course of business, entered into by the Company or Veritas, from
the latest date as of which the financial condition of the Company, is set forth
in the Registration Statement and Prospectus which is material to the Company,
which is either (x) required to be disclosed in the Prospectus or Registration
Statement and is not so disclosed, or (y) likely to have a material adverse
effect on the business or financial condition of the Company;
(iii) The Company shall be in default under any
material provision of any instrument relating to any outstanding indebtedness,
except as described in the Prospectus;
(iv) No material amount of the assets of any of
the Company or Veritas shall have been pledged, mortgaged or otherwise
encumbered, except as set forth in the Registration Statement and Prospectus;
(v) No action, investigation suit or proceeding,
at law or in equity, shall have been pending or to the best of their knowledge
threatened against the Company or Veritas or affecting any of their respective
properties or businesses before or by any court or federal or state commission,
board or other administrative agency wherein an unfavorable decision, ruling or
finding would materially and adversely affect the business,
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operations, prospects or financial condition or income of the Company, taken as
a whole, except as set forth in the Registration Statement and Prospectus;
(vi) No stop order shall have been issued under
the Act and no proceedings therefor shall have been initiated or, to the best of
the knowledge of the Company threatened by the Commission; and
(vii) Each of the representations and warranties of
any of the Company and Veritas contained in this Agreement and in each
certificate and document contemplated under this Agreement to be delivered to
you was, when originally made and is at the time such certificate is dated, true
and correct.
(j) Concurrently with the execution and delivery of this
Agreement and at the Closing Date, you shall have received a certificate of the
Company signed by the Chief Executive Officer of each of the Company and Veritas
and the principal financial officer of each of the Company and Veritas, dated as
of the Closing Date, to the effect that the conditions set forth in subparagraph
(i) above have been satisfied and that, as of the Closing Date, the
representations and warranties of the Company and Veritas set forth in Paragraph
2 herein and the statements in the Registration Statement and Prospectus were
and are true and correct in all material respects. Any certificate signed by any
officer of the Company or Veritas, and delivered to you or for counsel for the
Representative shall be deemed a representation and warranty by the Company or
Veritas, as the case may be, to the Representative as to the statements made
therein.
(k) At the time this Agreement is executed, and at the Closing
Date, you shall have received a "cold comfort" letter, addressed to the
Representative and in form and substance satisfactory in all respects to you and
counsel for the Representative, from Michael C. Finkelstein, C.P.A., auditors
for the Company, with regards to the Company's financial statements, dated as of
the date of this Agreement and as of the Closing Date.
(l) All proceedings taken in connection with the
authorization, issuance or sale of the Units, Common Stock and Warrants included
therein, Representative's Warrants, the Representative's Securities, and the
Overallotment Securities as herein contemplated shall be satisfactory in form
and substance to you and to counsel to the Representative, and the
Representative shall have received from such counsel an opinion, dated as the
Closing Date with respect to such of these proceedings as you may reasonably
require.
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(m) The Company and Veritas, as the case may be, shall have
furnished to you such certificates, additional to those specifically mentioned
herein, as you may have reasonably requested in a timely manner as to the
accuracy and completeness, at the Closing Date, of any statement in the
Registration Statement or the Prospectus, as to the accuracy, at the Closing
Date, of the representations and warranties of each of the Company and Veritas,
as the case may be, herein and in each certificate and document contemplated
under this Agreement to be delivered to you, as to the performance by the
Company and Veritas of their obligations hereunder and under each such
certificate and document or as to the fulfillment of the conditions concurrent
and precedent to your obligations hereunder.
(n) On or before the Closing Date, the Company shall cause to
be provided, and the Representative shall have received, from each officer,
director and shareholder of the Company, "lockup" agreements from each such
person restricting any sales, transfers, pledges or other hypothecations of such
person's shares of any class of equity security of the Company for a period of
eighteen (18) months from the Closing Date.
(o) The obligation of the Representative to purchase any
Securities hereunder is subject to the accuracy of the representations and
warranties of the Company contained herein on and as of the Option Closing Date
and to the satisfaction on and as of the Option Closing Date of the conditions
set forth herein.
(p) On the Closing Date there shall have been duly tendered to
you for your account the appropriate number of shares of Common Stock and
Warrants constituting the Securities.
(q) No action shall have been taken by the Commission or the
NASD the effect of which would make it improper, at any time prior to the
Closing Date, for members of the NASD to execute transactions (as principal or
agent) in the Securities and no proceedings for the taking of such action shall
have been instituted or shall be pending, or, to the knowledge of the
Representative, the Company shall be contemplated by the Commission or the NASD.
The Company and the Representative represent that at the date hereof each has no
knowledge that any such action is in fact contemplated against any of them by
the Commission or the NASD.
(r) Prior to the Effective Date, the Company will make all
filings required, including registration under the Exchange Act, to obtain, and
shall have obtained and shall use its best efforts to maintain, the listing of
the Common Stock on the NASDAQ SmallCap Market.
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(s) If any of the conditions herein provided for in this
Paragraph shall not have been fulfilled, or all "lock-up" letters restricting
sales, pledges, transfers or hypothecations of any kind by officers, directors
or shareholders of the Company for eighteen (18) months after the Closing Date
have not been received, as of the date indicated, this Agreement and all
obligations of the Representative under this Agreement may be canceled at, or at
any time prior to, each Closing Date by the Representative notifying the Company
of such cancellation in writing or by telegram at or prior to the applicable
Closing Date. Any such cancellation shall be without liability of the
Representative to the Company or to Veritas.
10. INDEMNIFICATION AND CONTRIBUTION.
(a) Subject to the conditions set forth below, each of the
Company and Veritas, jointly and severally, agrees to indemnify and hold
harmless the Representative and each of the Representatives and each person, if
any, who controls such Representative (such person, a "controlling person")
within the meaning of either Section 15 of the Act or Section 20 of the Exchange
Act, and any of its agents including its attorneys, against any and all losses,
liabilities, claims, damages, actions and expenses or liability, joint or
several, whatsoever (including but not limited to any and all expense whatsoever
reasonably incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever, including those
regarding legal fees), joint or several, to which it or such controlling persons
may become subject under the Act, the Exchange Act or under any other statute or
at common law or otherwise or under the laws of foreign countries, arising out
of or based upon any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement or any Preliminary Prospectus or
the Prospectus (as from time to time amended and supplemented); in any
post-effective amendment or amendments or any new registration statement and
prospectus in which is included the shares of the Company issued or issuable
upon exercise of the Representative's Warrants, or in any application or other
document or written communication (in this Paragraph 10 collectively called
"application") executed by the Company and Veritas or based upon written
information furnished by the Company filed in any jurisdiction in order to
qualify the Common Stock, Additional Securities, Representative's Warrants and
Representative's Shares underlying the Representative's Warrant under the
securities laws thereof or filed with the Commission 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
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in reliance upon or in conformity with written information furnished to the
Company with respect to the Representative by or on behalf of the Representative
expressly for use in any Preliminary Prospectus, the Registration Statement or
Prospectus, or any amendment or supplement thereof, or in application, as the
case may be. Notwithstanding the foregoing, the Company shall have no liability
under this Paragraph 10(a) if any such untrue statement or omission made in a
Preliminary Prospectus, is cured in the Prospectus and the Representative failed
to deliver to the person or persons alleging the liability upon which
indemnification is being sought, at or prior to the written confirmation of such
sale, a copy of the Prospectus. This indemnity will be in addition to any
liability which the Company or Veritas may otherwise have.
(b) The Representative agrees to indemnify and hold harmless
the Company and each of the officers and directors of the Company who have
signed the Registration Statement and each other person, if any, who controls
the Company within the meaning of Section 15 of the 1933 Act or Section 20(a) of
the Exchange Act, to the same extent as the foregoing indemnity from the Company
to the Representative in Paragraph 10(a), but only with respect to any untrue
statement or alleged untrue statement of any material fact contained in or any
omission or alleged omission to state a material fact required to be stated in
the Registration Statement or Prospectus or any amendment or supplement thereof
or necessary to make the statements therein not misleading or in any application
made solely in reliance upon, and in conformity with, written information
furnished to the Company by you specifically expressly for use in the
preparation of the Registration Statement or Prospectus directly relating to the
transactions effected by the Representative and the Representatives in
connection with this Offering. This indemnity agreement will be in addition to
any liability which the Representative may otherwise have. Notwithstanding the
foregoing, the Representative shall have no liability under this Paragraph 10(b)
if any such untrue statement or omission made in a Preliminary Prospectus is
cured in the Prospectus, and the Prospectus is delivered to the person or
persons alleging the liability upon which indemnification is being sought.
(c) If any action is brought against any indemnified party
(the "Indemnitee") in respect of which indemnity may be sought against another
party pursuant to the foregoing (the "Indemnitor"), the Indemnitor shall assume
the defense of the action, including the employment and fees of counsel
(reasonably satisfactory to the Indemnitee) and payment of expenses. Any
Indemnitee 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
Indemnitee unless the employment of such counsel shall have been authorized in
writing by the Indemnitor in
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connection with the defense of such action. If the Indemnitor shall have
employed counsel to have charge of the defense or shall previously have assumed
the defense of any such action or claim, the Indemnitor shall not thereafter be
liable to any Indemnitee in investigating, preparing or defending any such
action or claim. Each Indemnitee shall promptly notify the Indemnitor of the
commencement of any litigation or proceedings against the Indemnitee in
connection with the issue and sale of the Common Stock, Additional Securities,
Representative's Warrants or Representative's Shares, or in connection with the
Registration Statement or Prospectus.
(d) In order to provide for just and equitable contribution
under the 1933 Act in any case in which: (i) the Representative makes a claim
for indemnification pursuant to Paragraph 10 hereof, but it is judicially
determined (by the entry of a final judgment or decree by a court of competent
jurisdiction and the time to appeal has expired or the last right of appeal has
been denied) that such indemnification may not be enforced in such case
notwithstanding the fact that this Paragraph 10 provides for indemnification of
such case; or (ii) contribution under the 1933 Act may be required on the part
of the Representative in circumstances for which indemnification is provided
under this Paragraph 10, then, and in each such case, the Company and the
Representative shall contribute to the aggregate losses, claims, damages or
liabilities to which they may be subject (after any contribution from others) in
such proportion so that the Representative is responsible for the portion
represented by dividing the total compensation received by the Representative
herein by the total purchase price of all Securities sold in the public offering
and the Company is responsible for the remaining portion; provided, that in any
such case, no person guilty of a fraudulent misrepresentation (within the
meaning of Section 11 (f) of the 1933 Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent misrepresentation.
The foregoing contribution agreement shall in no way affect
the contribution liabilities of any persons having liability under Section 11 of
the 1933 Act other than the Company, Veritas, and the Representative. As used in
this Paragraph 10, the term "Representative" includes any officer, director, or
other person who controls the Representative within the meaning of Section 15 of
the 1933 Act, and the word "Company" includes any officer, director or person
who controls the Company or Veritas, within the meaning of Section 15 of the
1933 Act. If the full amount of the contribution specified in this paragraph is
not permitted by law, then the Representative and each person who controls the
Representative shall be entitled to contribution from the Company to the full
extent permitted by law. No contribution shall be
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<PAGE>
requested with regard to the settlement of any matter from any party who did not
consent to the settlement.
(e) Within fifteen (15) days after receipt by any party to
this Agreement (or its Representative) of notice of the commencement of any
action, suit or proceeding, such party will, if a claim for contribution in
respect thereof is made against another party (the "contributing party"), notify
the contributing party of the commencement thereof, but the omission so to
notify the contributing party will not relieve it from any liability it may have
to any other party other than for contribution hereunder.
In case any such action, suit or proceeding is brought against
any party, and such party notifies a contributing party or his or its
Representative of the commencement thereof within the aforesaid fifteen (15)
days, the contributing party will be entitled to participate therein with the
notifying party and any other contributing party similarly notified. Any such
contributing party shall not be liable to any party seeking contribution on
account of any settlement of any claim, action or proceeding effected by such
party seeking contribution without the written consent of such contributing
party. The indemnification provisions contained in this Paragraph 10 are in
addition to any other rights or remedies which either party hereto may have with
respect to the other or hereunder.
11. REPRESENTATIONS, WARRANTIES, AND AGREEMENTS TO SURVIVE
DELIVERY.
The respective indemnity and contribution agreements by the
Representative, Veritas and the Company contained in Paragraph 10 hereof, and
the covenants, representations and warranties of the Company, Veritas and the
Representative set forth in this Agreement, shall remain operative and in full
force and effect regardless of (i) any investigation made by the Representative
or on its behalf or by or on behalf of any person who controls the
Representative, or by the Company or Veritas, or any controlling person of the
Company, or any director or any officer of the Company or Veritas, (ii)
acceptance of any of the Securities and payment therefor, or (iii) any
termination of this Agreement, and shall survive the delivery of the Securities
and any successor of the Representative or the Company or Veritas, or of any
person who controls you or the Company or Veritas, or any other indemnified
party, as the case may be, shall be entitled to the benefit of such respective
indemnity and contribution agreements. The respective indemnity and contribution
agreements by the Representative and the Company or Veritas contained in this
Paragraph 11 shall be in addition to any liability which the Representative and
the Company or Veritas may otherwise have.
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<PAGE>
12. DEFAULT.
If one or more underwriters default in their obligations to purchase
Securities hereunder and the aggregate number of such Securities that such
defaulting underwriter or underwriters agreed but failed to purchase is ten
percent or less of the aggregate number of Securities to be purchased by all of
the underwriters at such time hereunder, the other underwriters, as the case may
be, may make arrangements satisfactory to the Representative, as the case may
be, for the purchase of such Securities by other persons (who may include one or
more of the non-defaulting underwriters, including the Representative), but if
no such arrangements are made by the Closing Date or Option Closing Date, as the
case may be, the other underwriters shall be obligated severally in proportion
to their respective commitments hereunder to purchase the Securities that such
defaulting underwriter or underwriters agreed but failed to purchase. If one or
more underwriters so default with respect to an aggregate number of Securities
that is more than ten percent of the aggregate number of Securities, as the case
may be, to be purchased by all of the underwriters at such time hereunder, and
if arrangements satisfactory to the Representative or Representative are not
made within 36 hours after such default for the purchase by other persons (who
may include one or more of the non-defaulting underwriters, including the
Representative) of the Securities with respect to which such default occurs,
this Agreement will terminate without liability on the part of any
non-defaulting underwriter or the Company, except as provided herein. In the
event of any default by one or more underwriters as described in this Section 9,
the Representative shall have the right to postpone the Closing Date on the
Option Closing Date for not more than seven business days in order that any
necessary changes may be made in the arrangements or documents for the purchase
and delivery of the Securities. As used in this Section 12, the term
"underwriter" includes any Underwriter, any co-underwriter, selected dealer or
syndicate member, and any person substituted for an underwriter under this
Section, unless otherwise specified. Nothing herein shall relieve any defaulting
underwriter from liability for its default.
13. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION THEREOF.
(a) This Agreement shall become effective at 10:00 a.m., New
York time, on the first full business day following the day on which you and the
Company receive notification that the Registration Statement became effective.
(b) This Agreement may be terminated by the Representative by
notifying the Company at any time on or before the Closing Date, if any domestic
or international event or act or occurrence has in your sole opinion, materially
disrupted, or in your sole opinion will in the immediate future materially
disrupt,
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<PAGE>
securities markets; or 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 NASDAQ or by order of the Commission or any other
governmental authority having jurisdiction; or if a moratorium in foreign
exchange trading by major international banks or persons has been declared; or
if the Company shall have sustained a loss material or substantial to the
Company taken as a whole 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 your sole opinion, make it inadvisable to
proceed with the delivery of the Securities; or if there shall have been a
material adverse change in the conditions of the securities market in general,
as in your reasonable judgment would make it inadvisable to proceed with the
offering, sale and delivery of the Securities; or if there shall have been a
material adverse change in the financial or securities markets, particularly in
the over-the-counter market, in the United States having occurred since the date
of this Agreement; or your clearing agent has refused to grant you credit in
connection with the purchase of the Units, Common Stock or Warrants; or the
NASDAQ Stock Market, Inc. has refused to release the Units, Common Stock or
Warrants for trading on the NASDAQ SmallCap market.
(c) If you elect to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Paragraph 13, the
Company shall be notified promptly by you by telephone or facsimile, confirmed
by letter.
(d) If this Agreement shall not become effective or if this
Agreement shall not be carried out within the time specified herein by reason of
any failure on the part of the Company to perform any undertaking, or to
materially satisfy any condition of this Agreement by it to be performed or
satisfied, the sole liability of the Company to the Representative, in addition
to the obligations assumed by the Company pursuant to Paragraph 8 herein, will
be to reimburse the Representative for the following: (i) Blue Sky counsel fees
and expenses to the extent set forth in Paragraph 8; (ii) Blue Sky filing fees;
and (iii) such reasonable out-of-pocket expenses of the Representative
(including the fees and disbursements of their counsel), to the extent set forth
in Paragraph 8(c), in connection with this Agreement and the proposed offering
of the Securities.
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<PAGE>
Notwithstanding any contrary provision contained in this
Agreement, any election hereunder or any termination of this Agreement, and
whether or not this Agreement is otherwise carried out, the provisions of
Paragraph 8 and 10 hereof 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.
14. NOTICES.
All communications hereunder, except as herein otherwise specifically
provided, shall be in writing and, if sent to the Representative, shall be
mailed by registered or certified mail, postage prepaid, return receipt
registered, or delivered personally with receipt acknowledged or by a
nationally-recognized next-day courier service with delivery confirmed to the
Representative at First Liberty Investment Group, Inc., 80 Broad Street, 6th
Floor, New York, New York 10004, Attention: Sheldon L. Traube, Vice President,
with a copy thereof to Lawrence G. Nusbaum, Esq., Gusrae, Kaplan & Bruno, 120
Wall Street, 11th Floor, New York, New York 10005, if sent to the Company, shall
be mailed or delivered as set forth above to the Company at East Coast Venture
Capital, Inc., 50 East 42nd Street, Suite 1301, New York, New York 10017,
Attention: Zindel Zelmanovitch, President, with a copy thereof to Berlack,
Israels & Liberman, LLP, 120 West 45th Street, New York, New York 10036,
Attention: Stuart Neuhauser, Esq., and if sent to Veritas, to Veritas Financial
Corp., c/o East Coast Venture Capital, Inc., 50 East 42nd Street, Suite 1301,
New York, New York 10017, Attention: Zindel Zelmanovitch, President.
15. PARTIES.
This Agreement shall inure solely to the benefit of and shall be
binding upon, the Representative and any underwriters or selected dealers as to
which the Representative shall or may act hereunder as Representative, the
Company, Veritas and the controlling persons, directors and officers referred to
in Paragraph 10 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 provision herein contained.
16. CONSTRUCTION.
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of New York and shall supersede any
agreement or understanding, oral or in writing, express or implied, between any
of the Company, Veritas and you relating to the sale of any of the Securities.
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<PAGE>
17. JURISDICTION AND VENUE.
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York with respect to contracts made and to be fully
performed therein, without regard to the conflicts of laws principles thereof.
The parties hereto hereby agree that any suit or proceeding arising under this
Agreement, or in connection with the consummation of the transactions
contemplated hereby, shall be brought solely in a federal or state court located
in the City, County and State of New York, or in any court of competent
jurisdiction selected by the Holder. By its execution hereof, the Company hereby
consents and irrevocably submits to the IN PERSONAM jurisdiction of the federal
and state courts located in the City, County and State of New York (or any such
other court of competent jurisdiction selected by the Representative) and agrees
that any process in any suit or proceeding commenced in such courts under this
Agreement may be served upon it personally or by certified or registered mail,
return receipt requested, or by Federal Express or other courier service, with
the same force and effect as if personally served upon it in New York City (or
in the city or county in which such other court is located). The parties hereto
each waive any claim that any such jurisdiction is not a convenient forum for
any such suit or proceeding and any defense of lack of IN PERSONAM jurisdiction
with respect thereto.
18. COUNTERPARTS.
This Agreement may be executed in counterparts.
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<PAGE>
If the foregoing correctly sets forth the understanding between the
Representative and the Company, please so indicate in the space provided below
for that purpose, whereupon this letter shall constitute a binding agreement
between us.
Very truly yours,
EAST COAST VENTURE CAPITAL, INC.
By:
---------------------------------------
Zindel Zelmanovitch, President
VERITAS FINANCIAL CORP.
By:
---------------------------------------
Name:
Title:
Accepted as of the date first above written:
FIRST LIBERTY INVESTMENT GROUP, INC.,
as Representative
By:
-----------------------------------------
Sheldon L. Traube, Vice President
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EAST COAST VENTURE CAPITAL, INC.
1,250,000 Units
SELECTED DEALERS AGREEMENT
_______________, 1998
Dear Sirs:
First Liberty Investment Group, Inc., the Representative (the
"Representative") of the several Underwriters (the "Underwriters") named in the
Prospectus dated ______________, 1998, has agreed to purchase, subject to the
terms and conditions set forth in the Underwriting Agreement referred to in the
Prospectus, an aggregate of 1,250,000 units (the "Units") consisting of in the
aggregate of 1,250,000 shares of common stock, par value $.01 per share (the
"Common Stock"), and 1,250,000 redeemable common stock purchase warrants (the
"Warrants") of East Coast Venture Capital, Inc. (the "Company"), and up to
187,500 additional Units (the "Additional Securities"), pursuant to an option
for the purpose of covering over-allotments (said 1,250,000 Units and the
1,250,000 shares of Common Stock and 1,250,000 Warrants included therein, plus
any of said Additional Securities purchased upon exercise of the option, being
herein collectively called the "Securities"). The Units and the terms upon which
they are to be offered for sale by the Representative are more particularly
described in the Prospectus.
1. The Units are to be offered to the public by the Representative at a
price of $4.10 per Unit (herein called the "Public Offering Price"), and in
accordance with the terms of the offering set forth in the Prospectus.
2. The Representative is offering, subject to the terms and conditions
hereof, a portion of the Securities for sale to certain dealers which are
members of the National Association of Securities Dealers, Inc. and agree to
comply with the provisions of Rule 2740 of the NASD Conduct Rules, and to
foreign dealers or institutions ineligible for membership in said Association
which agree (a) not to resell Securities (i) to purchasers located in, or to
persons who are nationals of, the United States of America or (ii) when there is
a public demand for the Securities to persons specified as those to whom members
of said Association participating in a distribution may not sell; and (b) to
comply, as though such foreign dealer or institution were a member of such
Association, with Rules 2730 and 2750 of the NASD Conduct Rules (such dealers
and institutions agreeing to purchase Common Stock and/or Warrants
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<PAGE>
hereunder being hereinafter referred to as "Selected Dealers") at the Public
Offering Price less a selling concession of $.___ per Unit, payable as
hereinafter provided. The Representative may be included among the Selected
Dealers.
3. The Representative shall act as your representative under this
Agreement and shall have full authority to take such action as it may deem
advisable in respect to all matters pertaining to the public offering of the
Securities.
4. If you desire to purchase any of the Units, your application should
reach us promptly by telephone or facsimile at the office of the Representative,
and we will use our best efforts to fill the same. We reserve the right to
reject all subscriptions in whole or in part, to make allotments and to close
the subscription books at any time without notice. The shares of Common Stock
and the Warrants allotted to you will be confirmed, subject to the terms and
conditions of this Agreement.
5. The privilege of purchasing the Units is extended to you by the
Representative only if it may lawfully sell the Units to dealers in your state.
6. Any of the Units purchased by you under the terms of this Agreement
may be immediately reoffered to the public in accordance with the terms of the
offering set forth herein and in the Prospectus, subject to the securities laws
of the various states. Neither you nor any other person is or has been
authorized to give any information or to make any representations in connection
with the sale of Securities other than as contained in the Prospectus.
7. This Agreement will terminate when we shall have determined that the
public offering of the Units has been completed and upon telephonic or facsimile
notice to you of such termination, but, if not previously terminated, this
Agreement will terminate at the close of business on the 20th full business day
after the date hereof; provided, however, that we shall have the right to extend
this Agreement for an additional period or periods not exceeding 20 full
business days in the aggregate upon telephonic or facsimile notice to you.
Promptly after the termination of this Agreement there shall become payable to
you the selling concession on all Units which you shall have purchased hereunder
and which shall not have been purchased or contracted for (including
certificates issued upon transfer) by us, in the open market or otherwise
(except pursuant to Section 10 hereof), during the terms of this Agreement for
the account of the Representative.
8. For the purpose of stabilizing the market in the Units, and the
Common Stock and Warrants included therein, of the Company, we have been
authorized to make purchases and sales thereof, in the open market or otherwise,
and, in arranging for sale of the Units, to over-allot.
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<PAGE>
9. You agree to advise us from time to time, upon request, prior to the
termination of this Agreement, of the number of Units purchased by you hereunder
and remaining unsold at the time of such request, and, if in our opinion any
such Units shall be needed to make delivery of the Units sold or over-allotted
for the account of the Representative, you will, forthwith upon our request,
grant to us, or such party as we determine for, our account the right,
exercisable promptly after receipt of notice from you that such right has been
granted, to purchase, at the Public Offering Price less the selling concession
as we shall determine, such number of Units owned by you as shall have been
specified in our request.
10. On becoming a Selected Dealer and in offering and selling the
Units, you agree to comply with all applicable requirements of the Securities
Act of 1933, the Securities Exchange Act of 1934 and the NASD's Conduct Rules.
11. Upon application, you will be informed as to the jurisdictions in
which we have been advised that the Securities have been qualified for sale
under the respective securities or blue sky laws of such jurisdictions, but we
assume no obligation or responsibility as to the right of any Selected Dealer to
sell the Units in any jurisdiction or as to any sale therein.
12. Additional copies of the Prospectus will be supplied to you in
reasonable quantities upon request.
13. It is expected that public advertisement of the Units will be made
on the first day after the effective date of the Registration Statement.
Twenty-four hours after such advertisement shall have appeared but not before,
you will be free to advertise at your own expense, over your own name, subject
to any restrictions of local laws, but your advertisement must conform in all
respects to the requirements of the Securities Act of 1933, and we will not be
under any obligation or liability in respect of your advertisement.
14. No Selected Dealer is authorized to act as our agent or to make any
representation as to the existence of an agency relationship otherwise to act on
our behalf in offering or selling the Units to the public or otherwise.
15. We shall not be under any liability for or in respect of the value,
validity or form of the certificates for the Units, shares of Common Stock and
Warrants, or delivery of the certificates for the Units, Common Stock or
Warrants, or the performance by anyone of any agreement on his part, or the
qualification of the Securities for sale under the laws of any jurisdiction, or
for or in respect of any matter connected with this Agreement, except for lack
of good faith and for obligations expressly assumed by us in this Agreement. The
foregoing provisions
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<PAGE>
shall be deemed a waiver of any liability imposed under the Securities Act of
1933.
16. Payment for the Units sold to you hereunder is to be made at the
Public Offering Price, on or about ______________, 1998, or such later date as
we may advise, by certified or official bank check payable to the order of First
Liberty Investment Group, Inc., in current New York Clearing House funds at such
place as we shall specify on one day's notice to you against delivery of
certificates for the Units, Common Stock and Warrants.
17. Notice to us should be addressed to us at the office of First
Liberty Investment Group, Inc., 80 Broad Street, New York, New York 10005.
Notices to you shall be deemed to have been duly given if telefaxed or mailed to
you at the address to which this letter is addressed.
18. If you desire to purchase any of the Units, please confirm your
application by signing and returning to us your confirmation on the duplicate
copy of this letter enclosed herewith even though you have previously advised us
thereof by telephone or facsimile.
Dated: , 1998
----------------
FIRST LIBERTY INVESTMENT
GROUP, INC.
By:
----------------------------------
Name:
Title:
Accepted and Agreed
as to Units, this day
----------- --------
of , 1998.
----------------
By:
------------------------------------
Name of Selected Dealer
By:
------------------------------------
Name:
Title:
-4-
D R A F T
FINANCIAL CONSULTING AGREEMENT
______________, 1998
East Coast Venture Capital, Inc.
50 East 42nd Street
Suite 1301
New York, New York 10017
Attn: ZINDEL ZELMANOVITCH, PRESIDENT
Gentlemen:
This agreement (the "Agreement") will confirm the arrangements, terms
and conditions pursuant to which First Liberty Investment Group, Inc. (the
"Consultant") has been retained to serve as consultant and advisor to East Coast
Venture Capital, Inc., a Delaware corporation (the "Company"), on a
non-exclusive basis for the term set forth in Section 2 below. The undersigned
hereby agree to the following terms and conditions:
1. DUTIES OF CONSULTANT.
(a) CONSULTING SERVICES. Consultant will provide such financial
consulting services and advice pertaining to the Company's business affairs as
the Company may from time to time reasonably request. Without limiting the
generality of the foregoing, Consultant will assist the Company in developing,
studying and evaluating financing, merger and acquisition proposals, prepare
reports and studies thereon when advisable, and assist in negotiations and
discussions pertaining thereto.
(b) FINANCING. Consultant will assist and represent the Company in
obtaining both short and long-term financing, when so requested by the Company.
The Consultant will be entitled to additional compensation under such terms as
may be agreed to by the parties.
(c) WALL STREET LIAISON. Consultant will, when appropriate, arrange
meetings between representatives of the Company and individuals and financial
institutions in the investment community, such as security analysts, portfolio
managers and market makers.
The services described in this Section 1 shall be rendered by
Consultant without any direct supervision by the Company and at such time and
place and in such manner (whether by conference, telephone, letter or otherwise)
as Consultant may determine.
<PAGE>
2. TERM.
This Agreement shall continue for a period of thirty-six (36) months
from the date hereof (the "Term").
3. COMPENSATION.
(a) As compensation for Consultant's services hereunder, the Company
shall pay to Consultant the sum of $3,000.00 per month, or an aggregate fee of
$108,000. Consultant's fee shall be due and payable in full on the date hereof.
4. RELATIONSHIP. Nothing herein shall constitute Consultant as an employee or
agent of the Company, except to such extent as might hereinafter be agreed upon
for a particular purpose. Except as might hereinafter be expressly agreed,
Consultant shall not have the authority to obligate or commit the Company in any
manner whatsoever.
5. CONFIDENTIALITY. Except in the course of the performance of its duties
hereunder, Consultant agrees that it shall not disclose any trade secrets,
know-how, or other proprietary information not in the public domain learned as a
result of this Agreement unless and until such information becomes generally
known.
6. ASSIGNMENT AND TERMINATION. This Agreement shall not be assignable by either
party except to successors to all or substantially all of the business of such
party for any reason whatsoever without the prior written consent of the other
party, which consent may not be arbitrarily withheld by the party whose consent
is required.
Very truly yours,
FIRST LIBERTY INVESTMENT
GROUP, INC.
By:
-----------------------------
AGREED AND ACCEPTED:
EAST COAST VENTURE CAPITAL, INC.
By:
-----------------------------------
Zindel Zelmanovitch, President
EAST COAST VENTURE CAPITAL, INC.
1,250,000 Units, such Units consisting in
the aggregate of 1,250,000 shares of Common
Stock, par value $.001, and 1,250,000 Redeemable
Common Stock Purchase Warrants
AGREEMENT AMONG UNDERWRITERS
New York, New York
____________, 1998
First Liberty Investment Group, Inc.
As Representative of the Several Underwriters
80 Broad Street, 6th Floor
New York, New York 10004
Dear Sirs:
1. UNDERWRITING AGREEMENT. We understand that EAST COAST VENTURE
CAPITAL, INC., a Delaware corporation (the "Company"), proposes to enter into an
underwriting agreement in the form attached hereto as Exhibit A (the
"Underwriting Agreement") with the underwriters named in Schedule A to the
Underwriting Agreement (the "Underwriters") acting severally and not jointly
with respect to the purchase of 1,250,000 Units ("Units"), such Units consisting
in the aggregate of 1,250,000 shares of Common Stock, par value $.001 per share
(the "Common Stock"), and 1,250,000 Redeemable Common Stock Purchase Warrants
("Warrants") (the Units, Warrants, and the Common Stock are collectively
referred to herein as the "Securities"). In addition, the Underwriters (or, at
its option, First Liberty Investment Group, Inc., the "Representative,"
individually) have been granted an option to purchase up to 187,500 Units
additional to cover over-allotments, if any, referred to in Section 2(b) of the
Underwriting Agreement (the "Additional Securities").
This is to confirm that we agree to purchase, in accordance with the
terms hereof and of the Underwriting Agreement, the number of Securities set
forth opposite our name in Schedule A to the Underwriting Agreement, plus such
number of Securities, if any, which we may become obligated to purchase pursuant
to Section 4 hereof ("our Securities"). The ratio which the number of our
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<PAGE>
Securities bears to the total number of Securities purchased pursuant to the
Underwriting Agreement is herein called "our underwriting proportion."
2. REGISTRATION STATEMENT AND PROSPECTUS. We have heretofore received
and examined a copy of the registration statement, as amended to the date
hereof, and the related prospectus in respect of the Securities, as filed with
the Securities and Exchange Commission. The registration statement, as amended
at the time it becomes effective, including financial statements and exhibits,
is hereinafter referred to as the "Registration Statement," and the prospectus
in the form first filed with the Securities and Exchange Commission pursuant to
Rule 424(b) after the Registration Statement becomes effective is referred to as
the "Prospectus."
We confirm that the information furnished to you by us for use in the
Registration Statement and in the Prospectus is correct and is not misleading
insofar as it relates to us. We consent to being named as an Underwriter in such
Registration Statement and we are willing to accept our responsibilities under
the Securities Act of 1933, as amended, as a result thereof. We confirm that we
have authorized you to advise the Company on our behalf (a) as to the statements
to be included in any Preliminary Prospectus and in the Prospectus under the
heading "Underwriting" insofar as they relate to us and (b) that there is no
other information about us required to be stated in the Registration Statement
or Prospectus. We further confirm that, upon request by you, as Representative,
we have furnished a copy of any amended preliminary prospectus to each person to
whom we have furnished a copy of any previous preliminary prospectus, and we
confirm that we have delivered, and we agree that we will deliver, all
preliminary and final prospectuses required for compliance with the provisions
of Rule 15c2-8 under the Securities Exchange Act of 1934, as amended.
3. AUTHORITY OF THE REPRESENTATIVE. We authorize you, acting as
Representative, to execute and deliver on our behalf the Underwriting Agreement,
and to agree to any variation of its terms (except as to the purchase price and
the number of our Securities) which, in your judgment, is not a variation which
materially and adversely affects our rights and obligations. We also authorize
you, in your discretion and on our behalf, with approval of counsel for the
Underwriters, to approve the Prospectus and to approve of, or object to, any
further amendments to the Registration Statement, or amendments or supplements
to the Prospectus. We further authorize you to exercise all the authority and
discretion vested in the Underwriters and in you by the provisions of the
Underwriting Agreement and to take all such action as you, in your discretion,
may believe desirable to carry out the provisions of the Underwriting Agreement
and of this Agreement, including the extension of any date specified in the
Underwriting Agreement, the
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<PAGE>
exercise of any right of cancellation or termination, and to determine all
matters relating to the public advertisement of the Securities; provided,
however, that, except with the consent of Underwriters who shall have agreed to
purchase in the aggregate 50% or more of the Securities, no extension of the
time by which the Registration Statement is to become effective, as provided in
Section 9(a) of the Underwriting Agreement, shall be for a period in excess of
two business days. We authorize you to take such action as in your discretion
may be necessary or desirable to effect the sale and distribution of the
Securities, including, without limiting the generality of the foregoing, the
right to determine the terms of any proposed offering, the concession to
Selected Dealers (as hereinafter defined) and the reallowance, if any, to other
dealers and the right to make the judgments provided for in Section 11 of the
Underwriting Agreement.
4. AUTHORITY OF REPRESENTATIVE AS TO DEFAULTING UNDERWRITERS. Until the
termination of this Agreement, we authorize you to arrange for the purchase by
other persons, who may include you or any of the other Underwriters, of any
Securities not taken up by any defaulting Underwriter. In the event that such
arrangements are made, the respective amounts of the Securities to be purchased
by the non-defaulting Underwriters and by such other person or persons, if any,
shall be taken as the basis for all rights and obligations hereunder; but this
shall not in any way affect the liability of any defaulting Underwriter to the
other Underwriters for damages resulting from its default, nor shall any such
default relieve any other Underwriter of any of its obligations hereunder or
under the Underwriting Agreement except as herein or therein provided.
In the event of default by one or more Underwriters in respect of their
obligations (a) under the Underwriting Agreement to purchase the Securities,
agreed to be purchased by them thereunder, or (b) under this Agreement to take
up and pay for any Securities purchased, or (c) to deliver any Securities sold
or over-allotted by you for the respective accounts of the Underwriters pursuant
to Section 10 hereof, or to bear their respective share of expenses or
liabilities pursuant to Sections 12, 15 and 16 hereof, and to the extent that
arrangements shall not have been made by you for any persons to assume the
obligations of such defaulting Underwriter or Underwriters, we agree to assume
our proportionate share of the obligations of each defaulting Underwriter or
Underwriters (subject in the case of clause (a) above to the limitations
contained in Section 11 of the Underwriting Agreement) without relieving any
such defaulting Underwriter or Underwriters of its liability therefor.
5. OFFERING OF SECURITIES. We understand that you will notify us when
the initial public offering of the Securities is to
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be made and of the initial public offering price. We hereby authorize you, in
your sole discretion, after the initial public offering, to change the public
offering price, the concession and the reallowance. The offering price at any
time in effect is hereinafter referred to as the "public offering price." We
agree that we will not offer any of the Securities for sale at a price other
than the public offering price or allow any discount therefrom except as herein
otherwise specifically provided.
We agree that public advertisement of the offering shall be made by you
on behalf of the Underwriters on such date as you shall determine. We have not
advertised the offering and will not do so until after such date. We understand
that any advertisement we may then make will be our own responsibility and at
our own expense.
We authorize you to reserve and offer for sale to institutions and
other retail purchasers and to dealers (the "Selected Dealers") to be selected
by you (such dealers may include any Underwriter) such of our Securities as you,
in your sole discretion, shall determine. Any such offering to Selected Dealers
may be made pursuant to a Selected Dealers Agreement, in the form attached
hereto as Exhibit B, or otherwise, as you may determine. The form of Selected
Dealers Agreement attached hereto as Exhibit B is satisfactory to us.
We authorize you to make purchases and sales of the Securities from or
to any Selected Dealers or Underwriters at the public offering price, less all
or any part of the concession and, with your consent, any Underwriter may make
purchases or sales of the Securities from or to any Selected Dealer or
Underwriter at the public offering price, less all or any part of the
concession.
We understand that you will notify each Underwriter promptly upon the
release of the Securities for public offering as to the amount of Securities
reserved for sale to Selected Dealers and retail purchasers. Securities not so
reserved may be sold by each Underwriter for its own account, except that from
time to time you may, in your discretion, add to the Securities reserved for
sale to Selected Dealers and retail purchasers any Securities retained by an
Underwriter remaining unsold. We agree to notify you, from time to time, upon
request, of the amount of our Securities retained by us remaining unsold. If all
of the Securities reserved for offering to Selected Dealers and retail
purchasers are not promptly sold by you, any Underwriter may, from time to time,
with your consent, obtain a release of all or any Securities of such Underwriter
then remaining unsold, and Securities so released shall thereafter be deemed not
to have been reserved. Securities of any Underwriter so reserved which remain
unsold, or, if sold, have not been paid for at any time prior to the termination
of this Agreement may, in your discretion or upon the request of such
Underwriter, be delivered to
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such Underwriter for carrying purposes only, but such Securities shall remain
subject to redelivery to you upon demand for disposition by you until this
Agreement is terminated.
We agree that in connection with sales and offers to sell the
Securities, if any, made by us outside the United States or its territories or
possessions, (a) we will furnish to each person to whom any such offer or sale
is made such prospectus, advertisement or other offering document containing
information relating to the Securities or the Company, as may be required under
the laws of the jurisdiction in which such offer or sale is made and (b) we will
furnish to each person to whom any such offer is made a copy of the then current
preliminary prospectus, and to each person to whom any such sale is made, a copy
of the Prospectus referred to in the Underwriting Agreement (as then amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto). Any prospectus, advertisement or other offering document (other than
any such preliminary prospectus or Prospectus) furnished by us to any person in
accordance with the preceding sentence and all such additional offering
material, if any, as we may furnish to any person (i) shall comply in all
respects with the laws of the jurisdiction in which it is so furnished, (ii)
shall be prepared and so furnished at our sole risk and expense, and (iii) shall
not contain information relating to the Securities or the Company which is
inconsistent in any respect with information contained in the then current
preliminary prospectus or in the Prospectus (as then amended or supplemented if
the Company shall have furnished any amendments or supplements thereto), as the
case may be.
We recognize the importance of a broad distribution of the Securities
among bona fide investors and we agree to use our best efforts to obtain such
broad distribution and, to that end, to the extent we deem practicable, to give
priority to small orders.
We agree that we will not sell to any account over which we exercise
discretionary authority any of the Securities which we have agreed to purchase
pursuant to the Underwriting Agreement.
6. REPURCHASES IN THE OPEN MARKET. Any Securities sold by us (otherwise
than through you) which, prior to the termination of this Agreement or such
earlier date as you may determine, shall be contracted for or purchased in the
open market by you on behalf of any Underwriter or Underwriters, shall be
repurchased by us on demand at a price equal to the cost of such purchase
(including commissions and taxes paid in connection with such purchase) plus
commissions and taxes on redelivery. Any Securities delivered on such repurchase
need not be the identical Securities originally sold by us. In lieu of delivery
of such Securities to us, you may (a) sell such Securities in any manner for our
account and charge
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us with the amount of any loss or expense, or credit us with the amount of any
profit less any expense, resulting from such sale or, at your option, (b) charge
our account with an amount not in excess of the concession to dealers on such
Securities, plus commissions and taxes paid in connection with such purchase.
7. COMPENSATION TO REPRESENTATIVE. We authorize you to charge to our
account, as compensation for your services as Representative in connection with
this offering, including the purchase from the Company of the Securities and the
management of the offering, an amount equal to twenty percent of the
underwriting discount and commissions with respect to each of the Securities.
8. PAYMENT AND DELIVERY. At or before 9:00 a.m., New York City time, on
the Closing Date as defined in the Underwriting Agreement, we agree to deliver
to you at your office a certified or official bank check payable in New York
Clearing House funds to your order, in an amount equal to the initial public
offering price, less the concession (if any) to the Selected Dealers in respect
of that portion of our Securities which has been retained by or released to us
for direct sales.
In the event that our funds are not received by you when required, you
are authorized, in your discretion, but shall not be obligated, to make payment
for our account pursuant to the Underwriting Agreement by advancing your own
funds. Any such payment by you shall not relieve us from any of our obligations
hereunder or under the Underwriting Agreement.
We authorize you to hold and deliver against payment any of our
Securities which have been sold or reserved for sale to Selected Dealers or
retail purchasers. Any of our Securities not sold or reserved by you as
aforesaid will be available for delivery to us at your office as soon as
practicable after such Securities have been delivered to you.
Upon the termination of this Agreement, or prior thereto at your
discretion, you will deliver to us any of our Securities reserved by you for
sale to Selected Dealers or retail purchasers, but not sold and paid for against
payment by us of an amount equal to the initial public offering price of such
Securities, less the concession to the Selected Dealers in respect thereof.
9 AUTHORITY TO BORROW. We authorize you to arrange loans for our
account and to execute and deliver any notes or other instruments in connection
therewith, and to pledge as security therefor all or any part of our Securities,
as you may deem necessary or advisable to carry out the purchase, carrying and
distribution of the Securities, and to advance your own funds, charging current
interest rates.
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<PAGE>
10. OVER-ALLOTMENT; STABILIZATION. We authorize you, for the account of
each Underwriter, prior to the termination of this Agreement, and for such
longer period as may be necessary to cover any short position incurred for the
accounts of the several Underwriters pursuant to this Agreement, (a) to
over-allot in arranging for sales of Securities to Selected Dealers and others
and, if necessary, to purchase Securities (whether pursuant to exercise of the
option set forth in Section 2(b) of the Underwriting Agreement or otherwise) at
such prices as you may determine for the purpose of covering such
over-allotments, and (b) for the purpose of stabilizing the market in the
Securities, to make purchases and sales of Securities on the open market or
otherwise, for long or short account, on a when-issued basis or otherwise, at
such prices, in such amounts and in such manner as you may determine; provided,
however, that at no time shall our net commitment, either for long or short
account, under this Section 10 exceed 15% of the amount of our Securities. Such
purchases, sales and over-allotments shall be made for the respective accounts
of the several Underwriters as nearly as practicable to their respective
underwriting proportions. We agree to take up on demand at cost any Securities
so purchased for our account and deliver on demand any Securities so sold or
over-allotted for our account. We authorize you to sell for the account of the
Underwriters any Securities purchased pursuant to this Section 10 upon such
terms as you may deem advisable, and any Underwriter, including yourselves, may
purchase such Securities. You are authorized to charge the respective accounts
of the Underwriters with broker's commissions or dealer's mark-up on purchases
and sales effected by you.
If pursuant to the provision of the preceding paragraph and prior to
the termination of this Agreement (or prior to such earlier date as you may have
determined) you purchase or contract to purchase for the account of any
Underwriter in the open market or otherwise any Securities which were retained
by, or released to, us for direct sale, or any Securities which may have been
issued in exchange for such Securities, we authorize you either to charge our
account with an amount equal to the concession to Selected Dealers with respect
thereto, which amount shall be credited against the cost of such Securities, or
to require us to repurchase such Securities at a price equal to the total cost
of such purchase, including transfer taxes and broker's commissions or dealer's
mark-up, if any. In lieu of such action you may, in your discretion, sell for
our account the Securities so purchased and debit or credit our account for the
loss or profit resulting from such sale.
You will notify us promptly if and when you engage in any stabilization
transaction pursuant to this Section 9 or otherwise and will notify us of the
date of termination of stabilization. We agree to file with you any reports
required of us including "Not as
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Manager" reports pursuant to Rule 17a-2 under the Securities Exchange Act of
1934, as amended, not later than five business days following the day upon which
such stabilization transaction was terminated, and we authorize you to file on
our behalf with the Securities and Exchange Commission any reports required by
such Rule.
11. LIMITATION ON TRANSACTIONS BY UNDERWRITERS. Except as permitted by
you, we will not, during the term of this Agreement, bid for, purchase, sell or
attempt to induce others to purchase or sell, directly or indirectly, any
Securities other than (i) as provided in the Underwriting Agreement and in this
agreement, (ii) purchases from or sales to dealers of the Securities at the
public offering price, less all or any part of the reallowance to dealers, or
(iii) purchases or sales by us of any Securities as broker or unsolicited orders
for the account of others.
We represent that we have not participated in any transaction
prohibited by the preceding paragraph and that we have at all times complied
with the provisions of Regulation M of the Securities and Exchange Commission
applicable to this offering.
We may, with your prior consent, make purchases of the Securities from
and sales to other Underwriters at the public offering price, less all or any
part of the concession to dealers.
12. ALLOCATION AND PAYMENT OF EXPENSES. We understand that all expenses
of a general nature incurred by you, as Representative, in connection with the
purchase, carrying, marketing and sale of the Securities shall be borne by the
Underwriters in accordance with their respective share of the underwriting
obligations. We authorize you to charge our account with our share, based on our
underwriting obligation, of the aforesaid expenses, including all transfer taxes
paid on our behalf on sales or transfers made for our account.
As promptly as possible after the termination of this Agreement, the
accounts arising pursuant hereto shall be settled and paid. Your ascertainment
of all expenses and the apportionment thereof shall be conclusive.
Notwithstanding any settlement or settlements hereunder, we will remain liable
for our share of all expenses and liabilities which may be incurred by or for
the accounts of the Underwriters, including any expenses and liabilities
referred to in Sections 15 and 16(b) hereof, which shall be determined as
provided in this Section 12.
13. REPRESENTATIVE'S OPTION. Each Underwriter shall be entitled to
purchase such portion of the Representative's Option, referred to in Section 12
of the Underwriting Agreement, as the Representative, in its discretion,
determines.
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14. TERMINATION. Unless this Agreement or any provision hereof is
earlier terminated by you, and except for provisions herein that contemplate
obligations surviving the termination hereof as noted in the next paragraph,
this Agreement will terminate at the close of business on the 30th day after the
date hereof, but in your discretion, may be extended by you for a further period
not exceeding 30 days with the consent of the Underwriters who have agreed to
purchase in the aggregate 50% or more of the Securities. No termination or
suspension pursuant to this Section shall affect your authority under Section 9
to cover any short position under this Agreement.
Upon termination of this Agreement, all authorizations, rights and
obligations hereunder shall cease, except (i) the mutual obligations to settle
accounts under Section 12, (ii) our obligation to pay any transfer taxes which
may be assessed and paid on account of any sales hereunder for our account,
(iii) our obligation with respect to purchases which may be made by you from
time to time thereafter to cover any short position incurred under this
Agreement, (iv) the provisions of Sections 15 and 16, and (v) the obligations of
any defaulting Underwriter, all of which shall continue until fully discharged.
15. LIABILITY OF REPRESENTATIVE AND UNDERWRITERS. Neither as
Representative nor individually shall you be under any liability whatsoever to
any other Underwriter, nor shall you be under any liability in respect of any
matters connected herewith or action taken by you pursuant hereto, except for
the obligations expressly assumed by you in this Agreement. You shall be under
no liability for or in respect of the value of the Securities or the validity of
the form thereof, the Registration Statement, the Prospectus, or agreements or
other instruments executed by the Company or others; or for or in respect of the
delivery of the Securities; or for the performance by the Company or others of
any agreement on its or their part.
Nothing herein contained shall constitute the several Underwriters an
association, or partners with us or with each other, or, except as herein
expressly provided, render any Underwriter liable for the obligation of any
other Underwriter. The rights, obligations and liabilities of each of the
Underwriters are several, in accordance with their respective obligations, and
not joint. Notwithstanding any settlement of accounts under this Agreement, we
agree to pay our underwriting proportion of the amount of any claim, demand or
liability which may be asserted against and discharged by the Underwriters or
any of them, based on the claim that the Underwriters constitute an association,
unincorporated business or other entity, and also to pay our underwriting
proportion of expenses approved by you incurred by the Underwriters, or any of
them, in contesting any such claims,
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demands or liabilities. If the Underwriters shall be deemed to constitute a
partnership for income tax purposes, it is the intent of each Underwriter to be
excluded from the application of Sub-chapter K, Chapter 1, Subtitle A of the
Internal Revenue Code, as amended. Each Underwriter elects to be so excluded and
agrees not to take any position inconsistent with such election. Each
Underwriter authorizes you, in your discretion, to execute and file on behalf of
the Underwriters such evidence of election as may be required by the Internal
Revenue Service.
16. INDEMNIFICATION AND FUTURE CLAIMS.
(a) We agree to indemnify and hold harmless you and each other
Underwriter, and each person, if any, who controls you and such other
Underwriter within the meaning of Section 15 of the Securities Act of 1933, as
amended, and to reimburse their expenses, to the extent and upon the terms that
we agree to indemnify and hold harmless the Company and to reimburse expenses as
set forth in the Underwriting Agreement. Our indemnity agreement set forth in
this Section 16 shall remain in full force and effect regardless of any
investigation made by or on behalf of such other Underwriter or controlling
person and shall survive the delivery of and payment for the Securities and the
termination of this Agreement.
(b) In the event that any time any claim or claims shall be
asserted against you, as Representative, or otherwise involving the Underwriters
generally, relating to the Registration Statement or any preliminary prospectus
or the Prospectus, as such may be from time to time amended or supplemented, the
public offering of the Securities or any of the transactions contemplated by
this Agreement, we authorize you to take such other action as you shall deem
necessary or desirable under the circumstances, including settlement of any such
claim or claims if such course of action shall be recommended by counsel
retained by you. We agree to pay to you on request, our underwriting proportion
of all expenses incurred by you (including, but not limited to, disbursements
and fees of counsel so retained) in investigating and defending against such
claim or claims and our underwriting proportion of any liability incurred by you
in respect of such claim or claims, whether such liability shall be the result
of a judgment or as a result of any such settlement.
17. TITLE TO SECURITIES. The Securities purchased by, or on behalf of,
the respective Underwriters shall remain the property of such Underwriters until
sold, and title to any such Securities shall not in any event pass to the
Representative by virtue of any of the provisions of this Agreement.
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18. BLUE SKY MATTERS. It is understood that you assume no
responsibility with respect to the right of any Underwriter or other person to
offer or to sell Securities in any jurisdiction, notwithstanding any information
which you may furnish as to the jurisdictions under the securities laws of which
it is believed the Securities may be sold.
19. APPLICABLE LAW. This Agreement will be governed by and construed in
accordance with the laws of the State of New York without regard to the
conflicts of laws provisions thereof or the actual domiciles of the parties
hereto.
20. CAPITAL REQUIREMENTS. We confirm that the incurrence by us of our
obligation under this Agreement and under the Underwriting Agreement will not
place us in violation of the net capital requirements of Rule 15c3-1 under the
Securities Exchange Act of 1934 or of any applicable rules relating to capital
requirements of any securities exchange to which we are subject. We confirm that
we currently have, and will commit the necessary net capital required of us in
order to meet our underwriting commitments in connection with the public
offering of the Securities.
21. MISCELLANEOUS. Any notice from you to us shall be deemed to have
been duly given if mailed, telephoned or telegraphed to us at the address set
forth in the Underwriters Questionnaire furnished by us to you. Any notice from
us to you shall be deemed to have been duly given if mailed, telephoned or
telegraphed to you at 80 Broad Street, 6th Floor, New York, New York 10004.
We understand that you are a member in good standing of the National
Association of Securities Dealers, Inc. (the "NASD"). We hereby confirm that we
are actually engaged in the investment banking or securities business and are
either (i) a member in good standing of the NASD or (ii) a dealer with its
principal place of business located outside the United States, its territories
and its possessions, and not registered as a broker or dealer under the
Securities Exchange Act of 1934, as amended, who agrees not to make any sales
within the United States, its territories or its possessions, or to persons who
are nationals thereof or residents therein (except that we may participate in
sales to Selected Dealers and others under Section 5 of this Agreement). We
hereby agree to comply with the provisions of Rule 2740 of the NASD Conduct
Rules, and if we are a foreign dealer and not a member of the NASD, we also
hereby agree to comply with the NASD's interpretation with respect to
free-riding and withholding and to comply, as though we were a member of the
NASD, with the provisions of Rule 2730 and 2750 of the NASD Conduct Rules. In
connection with sales and offers to sell the Securities made by us outside the
United States, its territories and possessions (i) we will either
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furnish to each person to whom any such sale or offer is made a copy of the then
current Preliminary Prospectus or the Prospectus, as the case may be, or inform
such person that such Preliminary Prospectus or Prospectus will be available
upon request, and (ii) we will furnish to each person to whom any such sale or
offer is made such prospectus, advertisement or other offering document
containing information relating to the Securities or the Company as may be
required under the law of the jurisdiction in which such sale or offer is made.
Any prospectus, advertisement or other offering document furnished by us to any
person in accordance with the preceding sentence and any such additional
offering material as we may furnish to any person (x) shall comply in all
respects with the law of the jurisdiction in which it is so furnished, (y) shall
be prepared and so furnished at our sole risk and expense and (z) shall not
contain information relating to the Securities or the Company which is
inconsistent in any respect with the information contained in the then current
Preliminary Prospectus or in the Prospectus, as the case may be.
We understand that, in consideration of your services in connection
with the public offering of the Securities, the Company has agreed with you
individually and not as Representative of the Underwriters (a) to sell to you
the Representative's Option referred to in Section 1 of the Underwriting
Agreement for the sum of $.001 per underlying Unit, (b) to pay to you a
non-accountable expense allowance referred to in Section 8(b) of the
Underwriting Agreement, and (c) to enter into the Consulting Agreement described
in Section 3(bb) of the Underwriting Agreement. In addition, you may, at your
sole discretion, elect to exercise the over-allotment option described in
Section 1 hereof, individually. We confirm to you that we shall make no claim to
the Representative's Option, any rights related thereto, the Company's
securities underlying the Representative's Option, the non-accountable expense
allowance, or, to the over-allotment option, to the extent you elect to exercise
such option individually. You confirm to us that we shall have no obligations or
liabilities with respect to the purchase of the Representative's Option, the
exercise thereof, the Company's securities underlying the Representative's
Option, or the non-accountable expense allowance, or, to the over-allotment
option, to the extent you elect to exercise such option individually.
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Please confirm that the foregoing correctly states the understanding
between us by signing and returning to us a counterpart hereof.
Very truly yours,
--------------------------------------
Name of Registered Broker-Dealer
By:
--------------------------------------
Name:
Title:
Confirmed as of the date first above written:
FIRST LIBERTY INVESTMENT GROUP, INC.,
as Representative
By:
------------------------------------------
Name:
Title:
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MANAGEMENT AGREEMENT
THIS AGREEMENT made as of the 15th day of September 1998, between
Eastcoast Venture Capital, Inc., a Delaware corporation, maintaining its
principal office at 313 West 53rd Street, New York, New York 10019 (hereinafter
referred to as the "Corporation"), and Veritas Financial Corp., a New York
corporation, maintaining its principal office at 313 West 53rd Street, New York,
New York 10019 (hereinafter referred to as the "Manager").
WHEREAS, the Corporation is presently licensed by the United States
Small Business Administration (hereinafter referred to as the "SBA") to operate
as a Small Business Investment Company (hereinafter referred to as an "SBIC")
and intends to elect registration as a regulated investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"); and intends to be
regulated as a Business Development Company under the 1940 Act; and
WHEREAS, the regulations of the SBA require active management of the
SBIC to carry out the purposes for which it is licensed; and
WHEREAS, the Manager through its officers and employees has special
knowledge and expertise in the commercial finance business and the conducting of
the operations of an SBIC; and
WHEREAS, the Corporation desires that the Manager act as its
"Investment Adviser" as that term is used in applicable SBA Regulations and the
Manager is desirous of acting as said Investment Adviser on the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained which the parties hereto hereby acknowledge is a good and valuable
consideration, the parties hereto hereby agrees as follows:
<PAGE>
1. APPOINTMENT AND TERM
1.1. APPOINTMENT. The Corporation hereby appoints the Manager and the
Manager hereby accepts the appointment, on the terms and conditions hereinafter
provided, as exclusive managing agent of the Corporation and as its Investment
Adviser as that term is contemplated in the SBA regulations and the Small
Business Investment Act of 1958, as amended (hereinafter referred to as the
"Act").
1.2. TERM. Subject to the prior approval of the SBA, the term of this
Agreement shall commence as of the effective of the Corporation's initial public
offering of securities (the "Commencement Date") and shall continue until the
end of the twelve month period following the Commencement Date. This Agreement
may be renewed, following notice to the SBA, for a new term of twelve months
provided, however, that such renewal shall have been approved by a majority vote
of the disinterested directors of the Corporation. This Agreement may be
cancelled by either party at any time, without penalty, upon giving 60 days
notice in writing by certified mail, return receipt requested.
1.3 AUTHORITY. The Manager hereby acknowledges that the purposes of
the Corporation is the operation and management of an SBIC (and as a regulated
investment company under the 1940 Act) dedicated to the principle of making
investments solely in Small Businesses (as that term is defined in the
applicable SBA regulations) which will contribute to a well-balanced national
economy by facilitating ownership in such businesses by persons whose
participation in the free enterprise system is hampered because of social or
economic disadvantage and consistent therewith to provide such small concerns
with financial and managerial assistance. In carrying out the terms of this
Agreement, and notwithstanding the authority given to the Manager in this
Agreement, the Manager agrees to confer fully and freely with the board of
directors of the Corporation in the performance of its duties as herein set
forth and to attend stockholders' meetings or directors' meeting at reasonable
times requested by the board of directors or stockholders of the Corporation.
2. DUTIES OF MANAGER
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2.1 The Manager, subject to the general policy direction and the
control of the Corporation's board of directors, shall render and perform duties
as follows:
2.2. PERSONNEL AND EMPLOYEES. The Manager shall investigate, hire,
pay, supervise and discharge in its own name all personnel necessary to be
employed in order to properly maintain and operate the Corporation as a duly
licensed SBIC and a regulated investment company. The Manager and all employees
thereof who handle or are responsible for the handling of the Corporation's
funds or the Manager's funds, may be bonded in an amount acceptable to the
Corporation, as may be determined by the board of directors of the Corporation,
from time to time, or as otherwise may be required by the 1940 Act and/or SBA
regulations. The cost of such bond shall be at the expense of the Corporation.
It is expressly understood and agreed by the parties hereto that all employees
retained by the Manager pursuant to the terms of this Agreement, shall, in every
instance, be in the Manager's and not the Corporation's employees, and that the
Corporation shall in no way be liable to such employees for their wages or other
benefits and the Corporation shall not be liable for any act or omission on the
part of such employees. The Manager shall have and maintain qualified personnel
in charge of the Corporation's operations who shall be available at the
Manager's office which shall be open to the public during reasonable business
hours.
2.3 OFFICE OF MANAGER. The Manager shall obtain and maintain a
reasonably accessible office, which will display the Corporation's license, the
name of the licensee, and have a listed telephone number, in accordance with SBA
regulations, the 1940 Act and the Act. Out of the fees to be paid to the Manager
by the Corporation, the Manager shall pay all rental charges in connection with
said office as well as all other pertinent office expenses.
2.4. EQUIPMENT. The Manager shall have no obligation to provide or
lease office furniture, office equipment, capital equipment, computer equipment,
computer software, or other equipment or expenses that would customarily be
capitalized and which would be used in connection with the business operations
of the Corporation. The Corporation shall be obligated to obtain and to pay for
all such equipment as the board of directors of
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the Corporation shall deem necessary to properly operate the business of the
Corporation.
2.5 PREPARATION AND PRESERVATION OF CORPORATE RECORDS. The Manager
shall be responsible to prepare all appropriate records, reports, financial
records, minutes of meetings of stockholders, directors, executive committees,
or other documents and supporting material relating to the Corporation's
transactions and the Manager shall keep those records at the Manager's office.
The Manager shall preserve the aforesaid business records on behalf of the
Corporation for the periods specified and required by the SBA regulations, the
1940 Act and the Act. In addition thereto, the Manager shall be responsible to
submit any and all reports that may be required from time to time in accordance
with the SBA regulations or under the 1940 Act or Advisers Act.
2.6. COLLECTION. The Manager shall assist in the collection of all
loans receivable or other consideration due from Small Businesses for which the
Corporation has provided financing and of all sums due from other parties in
consequence of the authorized operations of the Corporation. The Corporation
hereby authorizes the Manager to request, demand, collect and receive any and
all loans or receivables which may at any time be or become due to the
Corporation by way of legal process or otherwise which may be required for the
collection of delinquent monthly installments and/or delinquent loans. As a
standard practice, the Manager shall furnish the Corporation and the SBA, if
entitled thereto, with an itemized list of delinquent accounts, if any,
immediately following the last day of each month.
2.7. COMPLIANCE WITH OFFICIAL ORDERS. The Manager shall take such
action as may be necessary to comply properly with any and all orders or
requirements affecting the Corporation as may be submitted by the SBA, by the
Securities and Exchange Commission (the "SEC") or by any Federal, State, County
or municipal authority having jurisdiction thereover. The Manager, however,
shall not take any action under this Paragraph 2.6 as long as the Corporation is
contesting, or has affirmed its intention to contest, any such order or
requirement. The Manager shall promptly, and in no event later than 72 hours
from the time
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of their receipt, notify the Corporation in writing, of all such orders and
notices.
2.8. LENDING POLICY OF CORPORATION. The Manager shall ascertain from
the Corporation the investment policy of the Corporation as decided upon by the
board of directors (and approved by the SBA) and shall insure that all loans
that are made by the Corporation shall comply with such policy. The Manager
shall review all loan applications and other requests for financing, perform due
diligence (including determining eligibility under the SBA regulations) and
shall make financing recommendations to the investment committee of the
Corporation. All financing documents shall be approved by counsel to the
Corporation and/or counsel to the Manager so as to insure that all such
documents shall be prepared in compliance with the investment policy of the
Corporation and shall comply with applicable SBA regulations. All such financing
agreements shall be made in the name of the Corporation and all collections on
account of said agreements shall be deposited directly to the Corporation's
general bank account.
2.9. RECEIPTS AND DISBURSEMENTS. All receipts of revenues of the
Corporation from any source shall be deposited in the Corporation's general bank
accounts, and all disbursements on behalf of the Corporation, including the
payment of the Manager's fee and the funding of loans or investments by the
Corporation, shall be made from the Corporation's general bank accounts. Any
payments or disbursements to be made shall be signed by such officers or agents
of the Corporation as will comply in all respects with applicable SBA
regulations. On behalf of the Corporation, the Manager shall have authority to
invest any liquid funds from time to time into monetary instruments bearing
interest that will comply with applicable SBA regulations, the 1940 Act and the
Act (and regulations promulgated thereunder), provided that the investment of
said funds shall at all times be done in the name of the Corporation.
The Manager shall maintain a separate bank account in its own name for
the receipt of the Manager's fee and from said bank account the Manager shall
make disbursements for all expenses required to be paid by it pursuant to this
Agreement.
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2.10. ACCOUNTING. The Manager shall prepare or cause to be prepared for
execution and filing by the Corporation all tax returns, forms, reports and
returns required by law in connection with any tax liabilities or reports due to
the SBA or the SEC or required to be distributed to the shareholders of the
Corporation pursuant to the 1940 Act or Act. The Manager shall also prepare, or
cause to be prepared, any forms in connection with insurance, worker's
compensation, if applicable, disability benefits, sales, franchise and other
taxes now in effect or hereafter imposed and all requirements relating to the
employment of its personnel. All of the foregoing shall be prepared by the
Corporation's Certified Public Accountant at the Corporation's expense under the
supervision of the Manager.
The Manager shall select an independent Certified Public Accountant who
shall be responsible to prepare certified financial reports in form and in
manner satisfactory to comply with all SBA regulations, the 1940 Act, the Act
and the regulations promulgated thereunder. Said reports shall be submitted from
time to time to the appropriate parties including the SBA, the SEC, the
Corporation and the shareholders of the Corporation. The Certified Public
Accountant selected by the Manager shall be approved annually by the board of
directors of the Corporation and by the stockholders, and if such approval is
not given, the Manager shall thereafter select a Certified Public Accountant who
is acceptable to the board of directors of the Corporation and the stockholders.
2.11. RECORDS. In addition to the provisions herein-above set forth in
Paragraph 2.5, the Manager shall also maintain and pay for a comprehensive
system of office records, books and accounts for the Corporation in the manner
provided in; and in compliance with, the by-laws, which records shall be subject
to examination by the Corporation at reasonable hours on business days by
appointment. As a standard practice, the Manager shall deliver to the board of
directors of the Corporation at least quarterly, a statement of receipts and
disbursements as of the end of the previous quarter. The foregoing shall be
prepared by the Corporation's Certified Public Accountants at the Corporation's
expense under the supervision of the Manager.
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2.12. INTERNAL CONTROL. The Manager shall institute a system of
internal controls that shall comply with the SBA regulations concerned therewith
and with applicable provisions of the 1940 Act, the Act and the regulations
promulgated thereunder.
2.13. STANDARDS. It shall be the duty of the Manager at all times
during the term of this Agreement to operate and maintain the Corporation
according to the highest standards achievable consistent with good business
practice and to operate the Corporation in the best interests of the
shareholders of the Corporation and so as to comply with each and every one of
the applicable SBA regulations and the terms of the 1940 Act, the Act and the
regulations promulgated thereunder. The Manager shall perform such other acts or
deeds as are reasonable, necessary and proper in the discharge of its duties
under this Agreement.
3. MANAGER AS INDEPENDENT CONTRACTOR
The Manager shall not be obligated to make any advance to or for the
account of the Corporation or to pay any sum, except for the benefit of the
Corporation, nor shall the Manager be obligated to incur any liability or
obligation for the account of the Corporation without assurances that the
necessary funds for the discharge thereof will be provided. The Manager shall
not be deemed to be an employee of the Corporation but shall at all times be
considered an independent contractor.
4. COMPENSATION OF MANAGER
4.1. COMMENCEMENT OF MANAGER'S COMPENSATION. The compensation which
the Manager shall be entitled to receive for all services performed under this
Agreement shall commence as of the first day of the next month immediately
following the Commencement Date. The Manager acknowledges and agrees that he
shall have no authority to act on behalf of the Corporation hereunder as the
Investment Adviser of the Corporation until the Corporation shall have received
the approval of the SBA and the Corporation's registration under the 1940 Act is
effective.
4.2. COMPENSATION OF MANAGER. The Corporation agrees to pay Manager,
for its services to be rendered hereunder, an annual management fee of Three
Hundred Thousand ($300,000) dollars. The management fee shall be paid in equal
payments of $25,000 per month.
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5. GENERAL PROVISIONS
5.1 LIABILITY OF THE MANAGER; INDEMNIFICATION.
(a) STANDARD OF CARE. (i) Neither the Manager nor any
shareholder, director, officer or employee thereof shall be liable to the
Corporation for any action taken or omitted to be taken by it or other person in
good faith and in a manner they reasonably believed to be in or not opposed to
the best interests of the Corporation and, with respect to any criminal action
or proceeding, had no reasonable cause to believe their conduct was unlawful.
(ii) The Manager, its stockholders, directors, officers and employees
thereof may consult with reputable legal counsel selected by them and shall be
fully protected, and shall incur no liability to the Corporation in acting or
refraining to act in good faith in reliance upon the opinion of advice of such
counsel.
(b) INDEMNIFICATION. (i) The Corporation shall indemnify and
hold harmless, but only to the extent of assets under management, the Manager
and any shareholder, director, officer or employee thereof from any and all
reasonable costs, expenses, damages, claims, liabilities, fines and judgments
(including the reasonable cost of the defense of any claim or action and any
sums which may be paid with the consent of the Corporation in settlement
thereof) which may be incurred by or asserted against such person or entity, by
reason of any action taken or omitted to be taken on behalf of the Corporation
and in furtherance of its interests.
(ii) No person shall be entitled to claim any indemnity or
reimbursement under Paragraph 5(b)(i) in respect of any cost, expense, damage,
liability, claim, fine, judgment (including any cost of the defense of any
claim, action, suit, proceeding or investigation, by or before any court or
administrative or legislative body or authority) that may be incurred by such
person which results from the failure of such person to act in accordance with
the provisions of this Agreement and the applicable standard of care set forth
in Paragraph 5(a). The termination of any action, suit or proceeding by
judgment, order,
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settlement, conviction, or upon a plea of NOLO CONTENDERE or its equivalent,
shall not, of itself, preclude a determination that such person acted in
accordance with the applicable standard of care set forth in Paragraph 5(a).
(iii) To the extent that a person claiming indemnification under
Paragraph 5(b)(i) has been successful on the merits in defense of any action,
suit or proceeding referred to in Paragraph 5(b)(i) or in defense of any claim,
issue or matter therein, such person shall be indemnified with respect to such
matter as provided in such Paragraph. Except as provided in the foregoing
sentence and as provided in Paragraph 5(b)(vi) with respect to advance payments,
any indemnification under this Paragraph 5(b) shall be paid only upon
determination that the person to be indemnified has met the applicable standard
of conduct set forth in Paragraph 5(a)(i).
(iv) A determination that a person to be indemnified under this
Paragraph 5 has met the applicable standard set forth in Paragraph 5(a)(i) shall
be made by (A) a committee of the Corporation whose members are not affiliated
with the Manager or (B) at the election of the Corporation, independent legal
counsel selected by the Corporation's board of directors with respect to
indemnification of any person indemnified under Paragraph 5(a) in a written
opinion.
(v) In making any such determination with respect to indemnification
under Paragraph 5(b)(iv), a committee of the Corporation whose members are not
affiliated with the Manager or independent legal counsel, as the case may be,
shall be authorized to make such determination on the basis of its evaluation of
the records of the Corporation or the Manager and of the statements of the party
seeking indemnification with respect to the matter in question and shall not be
required to perform any independent investigation in connection with any such
determination. Any party making any such determination is authorized, however,
in its sole discretion, to take such other actions (including engaging counsel)
as it deems advisable in making such determination.
(vi) Expenses incurred by any person in respect of any such costs,
expenses, damages, claims, liabilities, fines, and
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judgments (including any cost of defense of any claim, action, suit, proceeding
or investigation, by or before any court or administrative or legislative body
or authority) may be paid by the Corporation in advance of the final disposition
of any such claim or action upon receipt of an undertaking by or on behalf of
such person to repay such amount unless it shall ultimately be determined as
provided in Paragraph 5(b)(iii) or (iv) that such person is entitled to be
indemnified by the Corporation as authorized in this Paragraph 5.
(vii) The rights provided by this Paragraph 5 shall inure to the
benefit of the heirs, executors, administrators, successors, and assigns of each
person eligible for indemnification hereunder.
5.2. OBLIGATION. This Agreement shall inure to the benefit of and
constitute a binding obligation upon the contracting parties, their respective
successors and the Corporation's permitted assigns. The Agreement shall
automatically terminate in the event of its assignment by the Manager.
Notwithstanding the foregoing, in the event the Manager becomes insolvent,
commits an act of bankruptcy, or insolvency, or proceedings are begun by or
against it for relief from debts under any State or Federal bankruptcy or
insolvency laws, or there occurs any voluntary act of bankruptcy, and a trustee
in bankruptcy for the benefit of creditors is appointed, the Corporation may
immediately cancel and terminate this Agreement on five (5) days written notice.
Further, due to the personal nature of the services to be rendered hereunder,
the Corporation may immediately cancel and terminate this Agreement on five (5)
days written notice if Mr. Zindel Zelmanovitch shall resign as the President and
Chief Executive Officer of Manager.
5.3. EXPENSES. The Corporation is obligated to pay for all of its
operating expenses with the exception solely of the following operating expenses
of the Corporation which are payable by the Manager: salaries and applicable
payroll taxes, rent, office administration expenses, telephone and other
utilities. Among, but not necessarily all of, the operating expenses which the
Corporation is required to pay for, are its own taxes, debt service, legal and
accounting fees incurred in complying with applicable SBA or securities
regulations, legal fees and other
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costs attendant to initiating and preserving the Corporation's loan and
investment portfolio (e.g., fees arising out of "due diligence" or "collection"
activities or attendant to loan closings), fees incurred for regular audits of
the Corporation by its certified public accountants, audit fees incurred in any
audit required by applicable SBA or securities regulations, directors' fees,
filing fees, mailing costs and printing costs incurred in connection with
reports, proxy statements or other communications disseminated to shareholders
or filed with governmental authorities, fees of stock transfer or dividend
disbursement agents, insurance premiums including fidelity insurance premiums
required by applicable securities regulations, costs and expenses incurred in
raising additional capital for the Corporation (from other than the SBA) or
monies expended to purchase or lease any furnishings, office equipment,
computers, computer programs or other types of capital equipment to be used in
the operation of the Corporation.
5.4. ENTIRE AGREEMENT. This Agreement constitutes the entire
understanding between the contracting parties, and no variance or modification
thereof shall be valid and enforceable, except by supplemental agreement in
writing, executed and approved in compliance with applicable SBA regulations and
the 1940 Act.
5.5. CONFLICT OF INTEREST.
(a) MANAGEMENT SERVICES TO OTHER SBIC'S; OTHER CLIENTS. The
Corporation acknowledges that the Manager may offer, and intends to perform
services of the type to be performed hereunder for various clients, including
other SBICs. Some of these clients may have investment objectives similar to, or
identical with, those of the Corporation. Upon written notice to the
Corporation, Manager may enter into any such contract provided that Manager's
service shall not violate any applicable SBA regulations, or any provision of
the 1940 Act or Advisers Act (or regulations promulgated thereunder) or
otherwise impair the performance of its obligations to the Corporation
hereunder. Further, the Corporation acknowledges and it is understood that the
Manager may give advice to any of its other clients which may differ in its
timing or nature from advice given to the Corporation and may recommend an
investment to one of if its
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clients even though it has not recommended the investment to one or more other
clients with assets available for investment.
(b) OFFICERS, DIRECTORS AND LEGAL COUNSEL TO THE CORPORATION AND
MANAGER. The Corporation and the Manager acknowledge that the Officers and
directors of the Corporation and Manager may overlap in that certain officers
and directors of the Corporation may also serve as officers and/or directors of
the Manager. The aforesaid relationship shall not constitute any conflict of
interest provided that the officer and directors of the Manager who serve in
such dual capacity shall at all times be responsible to the Corporation for the
standards of conduct concerning fiduciary duties and responsibilities that would
otherwise be applicable to them in their respective capacities as an officer
and/or director of the Corporation.
5.6. NOTICE. Any written notice to any of the parties to this
Agreement required or permitted hereunder shall be deemed to have been duly
given and received (a) on the date of service, if served personally or sent by
telex or facsimile transmission to the party to who such notice is to be given,
or (b) on the fourth day after mailing, if mailed to such party by registered or
certified mail, postage prepaid, and addressed to such party at the address set
forth below, or (c) on the next day if sent by a nationally recognized courier
for next day service and so addressed and if there is evidence of acceptance by
receipt.
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If to the Corporation, send it to:
50 East 42nd Street, Suite 1301
New York, NY 10001
Attn: Zendel Zelmanovitch
If to the Manager, send it to:
50 East 42nd Street, Suite 1301
New York, NY 10001
Attn: Jeanette Berney
5.7. If any provision of this Agreement or the application thereof to
any party or circumstance is held invalid or unenforceable, the remainder of
this Agreement and the application of such provision to other parties or
circumstances, shall not be affected thereby, and to this end, the provisions
hereof are declared severable.
5.8. This Agreement may be executed in one or more counterparts, but
all such counterparts shall constitute one and the same agreement.
5.9. The laws of the State of New York shall govern the construction,
interpretation and effect of this Agreement.
IN WITNESS WHEREOF, the parties have hereunto set their hands and
seals as of the day and year first above written.
East Coast Venture Capital
By:
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Veritas Financial Corp.
By:
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MICHAEL C. FINKELSTEIN
CERTIFIED PUBLIC ACCOUNTANT
198 Route 9, Suite 205 253 Fifth Avenue, 5th
Floor
Manalapan, New Jersey 07726 New York, New York 10016
Tel. (732) 577-7055 Tel. (212) 689-4633
Fax. (732) 577-1844
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement of
East Coast Venture Capital, Inc. on Form N-2 of our audited report dated
September 9, 1998 on our examinations for the years ended July 31, 1998, 1997
and 1996. We also consent to the reference to our firm under the caption
"Experts".
MICHAEL C. FINKELSTEIN
Certified Public Accountant
New York, New York
September 18, 1998
