AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 4, 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. 2
[ ] 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 |
CALCULATION OF REGISTRATION FEE
<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 $ .01 $12.50 $ 0.37
- ----------------------------------------------------------------------------------------------------------------------
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 $4,637.77(3)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------
(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) $4,637.40 previously paid. $0.37 paid herewith.
ii
<PAGE>
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 NOVEMBER 4, 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 has elected 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)
subject to the approval of the SEC, 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"), subject to SEC approval, or, at the Underwriters' election, a
cash payment of $12,812 as consideration for waiving such warrants or if SEC
approval is not granted, (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 has filed a registration statement under the Securities
Exchange Act of 1934, as amended. By doing so it has 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 has elected to be regulated
as a business development company ("Business Development Company"), a type of
closed-end investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"). 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 at least 50% owned by persons who qualify under SBA
regulations as socially or economically disadvantaged. 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
4
<PAGE>
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 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 Act, but since 1995, it has not operated as a registered investment company
or, until October 7, 1998
5
<PAGE>
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."
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.
6
<PAGE>
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>
<CAPTION>
<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."
(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."
9
<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 -- -- -- --
----------- ----------- ----------- ----------- -----------
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."
10
<PAGE>
(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.
(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.
11
<PAGE>
SENIOR SECURITIES
<TABLE>
<CAPTION>
Total
Outstanding Involuntary Average Market
Exclusive of Liquidating Value Per Unit
Treasury Asset Coverage Preference (Excluding Bank
Year Ended Securities(1) Per-Unit(2) Per Unit(3) Loans(4)
---------- ------------- ----------- ----------- --------
<S> <C> <C> <C> <C>
JULY 31, 1989 $3,000,000 $1.35 $4.04 $1,000,000
JULY 31, 1990 $3,000,000 $1.36 $4.08 $1,000,000
JULY 31, 1991 $3,000,000 $1.38 $4.15 $1,000,000
JULY 31, 1992 $3,000,000 $1.36 $4.07 $1,000.000
JULY 31, 1993 $3,000,000 $1.36 $4.07 $1,000,000
JULY 31, 1994 $3,000,000 $1.34 $4.01 $1,000,000
JULY 31, 1995 $3,000,000 $1.27 $3.80 $1,000,000
JULY 31, 1996 $2,700,000 $1.72 ---- ----
JULY 31, 1997 $2,700,000 $1.74 ---- ----
JULY 31, 1998 $3,780,000 $1.67 ---- ----
</TABLE>
(1) Represents SBA Subordinated Debentures of $2,000,000 from July 31, 1989
through July 31, 1995, $2,700,000 from July 31, 1996 through July 31, 1997 and
$3,780,000 in July 31, 1998. additionally, during the periods July 31, 1989
through July 31, 1995 the Company had 1,000,000 shares of 3 percent cumulative
preferred stock $1 par value aggregating $1,000,000. The Company repurchased its
preferred stock from the SBA. Accordingly, the Company did not have any
outstanding preferred stock from July 31, 1996 through July 31, 1998.
(2) Represents total assets divided by total outstanding senior securities.
(3) Represents total assets divided by total preferred stock outstanding.
(4) Represents the stated value of the preferred stock outstanding.
12
<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 the fiscal period ended July 31, 1997. The increases during the
fiscal periods ended July
13
<PAGE>
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 time to time, additional short- and
long-term bank and (to the extent permitted) SBA loans.
14
<PAGE>
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."
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>
<CAPTION>
<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%
(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.
</TABLE>
15
<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 SBA makes
available to both SBICs and SSBICs financing in the form of a guarantee of a
licensee's securities, typically unsubsidized debentures. The Company intends to
raise additional funds for investment through the issuance of such securities to
the SBA. Such funding is based upon the Company's capital, net of organizational
expenses ("Leverageable Capital"). 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
16
<PAGE>
opportunities, the risk of losses is increased by the use of debt. This effect
is referred to herein as "leverage."
RISK OF PAYMENT DEFAULT; CURRENT DELINQUENT LOANS. The Company intends
generally to make four to seven year term loans at relatively high interest
rates (not to exceed 19%, the current maximum rate permitted by the SBA). These
loans will be made to small and medium sized companies that may have limited
financial resources and may be unable to obtain financing from traditional
sources. These loans generally will be secured by the assets of the borrower. A
borrower's ability to repay its loan may be adversely affected by numerous
factors, including the failure to meet its business plan, a downturn in its
industry or negative economic conditions. A deterioration in a borrower's
financial condition and prospects usually will be accompanied by a deterioration
in the value of any collateral for the loan and reduce the likelihood of
realizing on any guarantees from the borrower's management. Although the Company
often will seek to be the senior, secured lender to a borrower, the Company will
not always be the senior lender, and the Company's interest in any collateral
for a loan may be subordinate to another lender's security interest. As of 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
17
<PAGE>
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 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
18
<PAGE>
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, 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."
19
<PAGE>
COMPETITION. Banks, credit unions, finance companies and other SBICs
and SSBICs, many with greater resources than the Company, compete with the
Company in financing small businesses. Some of the Company's competitors are
subject to different and in some cases less stringent regulation than the
Company. As a result, there can be no assurance that the Company can compete
successfully in the future. 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."
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<PAGE>
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 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 $11,120,000) 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."
21
<PAGE>
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 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
23
<PAGE>
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.
"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."
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<PAGE>
UNDERWRITERS' UNIT PURCHASE OPTION. Subject tO SEC approval, 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 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."
ONGOING INFLUENCE OF THE REPRESENTATIVE. Pursuant to the provisions of
the Underwriting Agreement and the Financial Consulting Agreement, the
Representative is entitled to the following: (1) to select a person to serve as
a member of the company's board of directors, subject to SBA approval, for a
period of 3 years following the closing of this Offering; (2) to serve as the
Company's non-exclusive financial consultant for a period of two years following
the effective date of this Offering; (3) the right of first refusal for a period
of 3 years after the closing of the Offering to serve as managing underwriter or
placement agent for any public or private offering of the Company's securities
or to serve as the Company's investment bankers with respect to certain
transactions, and (4) subject to SEC approval, the right to purchase a total of
125,000 units at $6.56 per Unit for a four-year period beginning one year from
the effective date of this Prospectus. These arrangements may result in the
representative asserting undue influence on the company. See "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 (subject to SEC approval), 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
24
<PAGE>
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
July 31, 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
==========
* 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.
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(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% 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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<PAGE>
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 has elected to be regulated
as a business development company ("Business Development Company"), a type of
closed-end investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"). 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 at least 50% owned by persons who qualify under SBA
regulations as socially or economically disadvantaged. 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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<PAGE>
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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<PAGE>
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.
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<PAGE>
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 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.
33
<PAGE>
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
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.
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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<PAGE>
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 eligible for certain tax benefits, both described below. The SBA has
discretion in determining whether financing will be available to an SSBIC and
the type and amount of such financing. Therefore, there can be no assurance as
to the nature, amount or timing of SBA financing that may actually be obtained
by the Company. See "Risk Factors-SBA Financing Not Assured." Furthermore, there
are certain restrictions and requirements to which the Company is subject by
virtue of its being an SSBIC. See "Federal Regulation-Regulation under the Small
Business Investment Act of 1958."
BACKGROUND. SBICs and SSBICs are privately owned and managed investment
companies licensed by the SBA. The 1958 Act requires each licensee to have a
minimum level of private investor capital and to be operated by experienced
management. Under present law for companies which were incorporated prior to
October 1, 1996, an SBIC must have at least $2.5 million in private capital and
an SSBIC must have not less than $1.5 million. 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 certain designated ethnic minorities, Vietnam War era veterans, and
other groups which fall within SBA guidelines relating to social or economic
disadvantage.
BENEFITS. The principal benefits to the Company as a result of its
being licensed as an SSBIC are as follows:
1. Prior to October 1, 1996 the SBA was authorized to purchase shares
of non-voting preferred stock from an SSBIC for cash up to an amount equal to
the SSBIC's aggregate 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
35
<PAGE>
price was at a substantial discount to the original sale price of the 3%
Preferred Stock which was sold to the SBA at par value or $1.00 per share. As a
condition to the repurchase, the Company granted the SBA a liquidating interest
in a newly created restricted capital surplus account ("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
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<PAGE>
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.
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.
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REGULATION AS A BUSINESS DEVELOPMENT COMPANY
The Company is a closed-end, non diversified investment company that
has elected to be regulated as a Business Development Company under the 1940 Act
and, as such, is subject to regulation under that Act. Among other things, the
1940 Act contains prohibitions and restrictions relating to transactions between
the Company and its affiliates, principal underwriters and affiliates of those
affiliates or underwriters and requires the majority of the Company's directors
be persons other than "interested persons," as defined in the 1940 Act. In
addition, the 1940 Act prohibits the Company from changing the nature of its
business so as to cease to be, or to withdraw its election as, a Business
Development Company unless so authorized by the holders of a majority of its
outstanding voting securities.
A Business Development Company is permitted, under specified
conditions, to issue multiple classes of indebtedness and one class of stock
senior to the shares offered hereby (collectively, "Senior Securities" as
defined in the 1940 Act) if the asset coverage, as defined in 1940 Act, of any
Senior Security is at least 200% immediately after each such issuance and
certain other conditions are met. On the other hand, because the Company is an
SSBIC, the only asset coverage requirement applicable to it would give the
holders of its Senior Securities constituting indebtedness, the right to elect a
majority of the Board of Directors, if on the last business day of each of 12
consecutive calendar months, the Company failed to maintain at least 100% asset
coverage. Also, while Senior Securities constituting preferred stock are
outstanding (other than preferred stock issued to or guaranteed by the SBA),
provision must be made to prohibit any distributions to shareholders or the
repurchase of such securities or shares unless the applicable asset coverage
ratios are met at the time of the distribution or repurchase of such securities
or shares unless the applicable asset coverage ratios are met at the time of the
distribution or repurchase. The Company may also borrow amounts up to 5% of the
value of its total assets for temporary purposes. 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.
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(3) Securities received in exchange for or distributed on or with
respect to securities described in item (1) or (2) above, or pursuant to
the exercise of options, warrants or rights relating to such securities.
(4) Cash, cash items, government securities, or high quality debt
securities maturing in one year or less from the time of investment.
In addition, a Business Development Company must have been organized
(and have its principal place of business) in the United States for the purpose
of making investments in the types of securities described in items (1) or (2)
above and, in order to count the securities as Qualifying Assets for the purpose
of the 70% test, the Business Development Company must either control the issuer
of the securities or make available to the issuer of the securities significant
managerial assistance. Making available significant managerial assistance means,
among other things, any arrangement whereby a Business Development Company,
through its directors, officers or employees, offers to provide, and, if
accepted, does so provide, significant guidance and counsel concerning the
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.
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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).
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
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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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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.
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.
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LOAN CONSIDERATIONS - In evaluating each applicant for a loan, the
Company considers the following factors: (1) the applicant (or 50% in interest
of the concern's principal owners) must be classified as an economically or
socially disadvantaged person under SBA regulations, (2) the applicant's ability
to repay the loan, and (3) the value and type of collateral proposed by the
prospective borrower to collateralize the business loans, (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
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
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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."
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
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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.
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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
Charles Clarkson ........................ 51 Director elect
David Niederman ......................... 47 Director elect
- -------------
* 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.
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
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<PAGE>
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.
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<PAGE>
CHARLES CLARKSON has agreed to serve the Company as a director upon
completion of this Offering, Mr. Clarkson has been Vice President, Secretary and
Deputy Counsel of TLC Beatrice International Holdings, Inc. ("TLC Beatrice")
since July 1996. From July 1994 to July 1996 he was Secretary and Counsel of TLC
Beatrice. From April 1993 to July 1994, he was Assistant Secretary and Counsel
of TLC Beatrice. From March 1993 through January 1994, he also served as a
consultant to TLC Beatrice. From May 1990 through March 1993, Mr. Clarkson was
on a leave of absence from TLC Beatrice. He was Assistant Secretary of TLC
Beatrice from April 1990 to October 1990 and Secretary to TLC Beatrice from
August 1987 to April 1990.
DAVID NIEDERMAN has agreed to serve the Company as a director upon
completion of this Offering. Mr. Niederman has been Executive Director of United
Jewish Organization of Williamsburg, Brooklyn, since 1991 and a Founder and
Executive Director of Rav Tov Committee, an organization that aids new
immigrants, since 1973. Since 1975 he has been an Executive Vice President Rav
Tov, an international rescue organization. Since 1993 Mr. Niederman has been a
director at Midwood Federal Credit Union. Mr. Niederman is a graduate of the
United Talmudical Academy of Brooklyn, NY.
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."
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.
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<PAGE>
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, Charles
Clarkson and David Niederman.
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, Charles Clarkson and David Niederman.
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, Charles
Clarkson and David Niederman, 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."
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.
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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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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 (but not less than 85% of the fair market value on the
date of grant) 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.
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
52
<PAGE>
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.
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.
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<PAGE>
The Company, Freshstart and Mr. Zelmanovitch have agreed that, subject
to receiving an exemptive order (or a no-action letter) from the SEC permitting
the Company and Freshstart to co-invest in the same portfolio companies, 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.
55
<PAGE>
FEDERAL REGULATION
REGULATIONS UNDER THE SMALL BUSINESS INVESTMENT ACT OF 1958
As the holder of a license from the SBA to operate as an SSBIC, the
Company may be eligible for certain financing from the SBA on favorable terms as
described above under the heading "Business-Specialized Small Business
Investment Companies," but is subject to certain restrictions and requirements
under the 1958 Act and SBA regulations thereunder. On January 31, 1996, the SBA
promulgated a final rule revising the SBA regulations governing the small
business investment company program. These restrictions and requirements
include, but are not limited to, the following:
(i) The interest rate charged by an SSBIC on loans to a small
business is governed by applicable state laws and by the SBIA regulations. Under
the SBIA rules, the interest rate may not exceed the higher of (i) 19% and (ii)
the sum of (a) the higher of (I) the licensee's weighted average cost of funds
or (II) the current SBA debenture rate, plus (b) 11%, rounded off to the next
lower eighth of one percent.
(ii) Without prior SBA approval, the aggregate commitments by an SSBIC
to any single small business enterprise may not exceed 30% of the private
capital of the SSBIC.
(iii) Management and advisory services must be performed by an SSBIC in
accordance with a written contract and certain record-keeping requirements must
be satisfied.
(iv) In general, the minimum term of an SSBIC loan to a small business
is four years and the maximum term may not exceed 20 years.
(v) Prior written consent of the SBA is required in the event of any
proposed transfer of control of an SSBIC and any proposed transfer of 10% or
more of any class of an SSBIC's stock ownership by any person or group of
persons acting in concert owning 10% or more of any class of an SSBIC's stock or
the issuance of 10% or more of any class of an SSBIC's stock.
(vi) Limitations are imposed on the ability of the officers,
directors, managers or 10% stockholders of an SSBIC to become an officer,
director, manager or 10% stockholder of another SSBIC.
(vii) Prior written consent of the SBA is required in the event of a
merger, consolidation or reorganization of an SSBIC.
(viii)The funds of an SSBIC that are not invested in small businesses
must be invested in certain short-term instruments such as Federal Government
securities or certificates of deposit or placed on deposit with a Federally
insured financial institution.
Corporate SSBIC's issuing debentures after April 25, 1994 are required
to amend their articles of incorporation to indicate that they have consented,
in advance, to the SBA's right to require the removal of officers or directors
and to the appointment of the SBA or its designee as a receiver of the SSBIC for
the purpose of continuing to operate the company upon the occurrence of certain
events of default. The regulations divide the events of default into three
categories.
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<PAGE>
The first category consist of three events that automatically
accelerate all outstanding debentures without notice or demand to the SSBIC, and
allow the SBA to apply for receivership of the SSBIC without the SSBIC's
objection. The events are insolvency, a voluntary assignment for the benefit of
creditors, and the filing of a voluntary or involuntary petition for relief
under the Bankruptcy Code.
Under the second category, upon written notice, the SBA may demand
immediate repayment or redemption of all outstanding debentures or take any
other action permitted under the 1958 Act, specifically including institution of
proceedings for the appointment of the SBA or its designees as a receiver of the
SSBIC. Nine violations are included in this category, and no opportunities to
cure the default are afforded the SSBIC. This category of violations includes:
fraud; fraudulent transfers; willful conflicts of interest; willful
non-compliance with one or more of the substantive provisions of the 1958 Act or
of a substantive regulation; repeated events of default; transfer of control;
non-cooperation with remedial steps that the SBA may prescribe; non-notification
of events of default; and non-notification of events of default to others. For
the first six violations listed above the SSBIC will have consented to the SBA's
right to require the SSBIC to replace officers or directors, with persons
approved by the SBA, and the SBA's appointment as receiver for the purpose of
continuing operations.
Under the third category, which includes nine violations, the SBA
affords the SSBIC the opportunity to cure its violations. If the SSBIC fails to
cure to the SBA's satisfaction, the SBA may declare the SSBIC's entire
indebtedness evidenced by the debentures to be immediately due and payable. The
violations in this category include: excessive compensation; improper
distributions; failure to make a timely payment of an SBA obligation; failure to
maintain minimum regulatory capital; capital impairment; failure to pay any
amount when due on any obligation greater than $100,000; nonperformance or
violation of the terms and conditions of any note, debenture, or other
obligation of the SSBIC issued to, held or guaranteed by the SBA, or of any
agreement with, or conditions imposed by, the SBA; failure to comply with one or
more of the substantive provisions of the 1958 Act or regulations thereunder;
and failure to maintain certain investment ratios for leverage in excess of 300%
of Leverageable Capital. For the first three violations listed above, if an
SSBIC fails to cure such violations, the SBA can require the removal of officers
and directors and/or the appointment of its designee as receiver of the SSBIC.
In addition, if an SSBIC repeatedly fails to comply with one or more
"non-substantive" provisions of the 1958 Act or the regulations thereunder, the
SBA, after written notification and until such condition is cured, may deny
additional leverage to such SSBIC and /or require such SSBIC to take such
actions as the SBA may determine to be appropriate under the circumstances. If
the SBA requires the licensee to bring itself into full compliance and it fails
to do so, the SBA may accelerate its leverage and take other remedies, including
a receivership.
As with debentures, corporate SSBICs issuing preferred stock after
April 25, 1994 are required to amend their articles of incorporation to indicate
that they have consented, in advance, to the SBA's right to require the removal
of officers or directors and to the appointment of the SBA or its designees as
receiver of the SSBIC for the purpose of continuing to operate the Company upon
the occurrence of certain events of default. The regulations divide the events
of default into four categories.
The first category consists of six events, the occurrence of any of
which will permit the SBA, upon notice to the SSBIC, to require the SSBIC to
replace, with individuals approved by the SBA, one or more of its officers and
/or directors. In addition the SBA can apply for the institution of an operating
receivership, with the SBA or its designee as receiver. The events are:
equitable or legal insolvency, or a capital impairment percentage of 100% or
more which capital impairment is not cured within the time
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<PAGE>
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, 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
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<PAGE>
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; and (d) 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 elected to become a Business Development Company in October
1998. 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
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.
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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.
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
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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.
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
RIC, 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.
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(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 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 SSBICs, such as the
Company, Code Section 1202 grants relief to investors who risk their funds in
these businesses. Non-corporate investors may exclude up to 50% of the gain they
realize on the disposition of qualified small business stock issued after August
10,1993, and held for more than five (5) years. The amount of gain eligible for
the 50% exclusion is subject to per issuer limits. The exclusion is available to
taxpayers who own eligible stock for five years in a qualified corporation that
actively conducts a qualified trade or business and that meets a maximum gross
assets test. SSBICs which qualify for Code Section 1202 treatment at the time of
the taxpayer's investment are also exempt from certain line of business
limitations.
However, if an individual utilizes Code Section 1044 to defer
recognition of capital gain on the sale of publicly traded securities and then
invests those funds in qualified small business stock, the deferred gain would
not be eligible for the 50% exclusion, although the appreciation occurring after
the purchase of the qualified small business stock would be eligible for such
50% exclusion.
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.
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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 income tax purposes, will be entitled to increase its tax
basis in its Shares by an amount equal to the difference between the amount of
such includible gains and the tax deemed paid by such stockholder in respect of
such shares under clause (b).
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, on December 31 of such calendar year if such
dividend is actually 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
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distribution policy may not, permit such distributions at all times, in which
case the excise tax will apply. See "Dividends".
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 basis of the Warrant plus 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
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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.
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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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. 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."
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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.
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.
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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.
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
69
<PAGE>
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 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.
70
<PAGE>
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 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
71
<PAGE>
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.
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. In the alternative, the Representative 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 "Management."
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
72
<PAGE>
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 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.
Subject to SEC approval, the Company has agreed to sell to the
Underwriters or their nominee, for $.01 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 per share (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. At closing, both the
form of Underwriters' Unit Purchase Option and $12,812 in cash (the value of the
Underwriters' Unit Purchase Option as determined by the NASD) will be deposited
in an escrow account pending SEC determination as to whether it would grant the
Company a no-action letter, or exemptive relief, to the effect that the SEC
would not raise objections to the Underwriters being issued the Underwriters'
Unit Purchase Option. The Underwriters' Unit Purchase Option will only be
released from escrow and issued after the Company receives a no-action letter or
exemptive relief from the SEC stating that the issuance of such Underwriters'
Unit Purchase Option would not violate certain provisions of the 1940 Act. The
Underwriters may at any time elect to receive the $12,812 and not accept the
Underwriters' Unit Purchase Option. In lieu of issuing the Underwriters' Unit
Purchase Option the Company has agreed to take any and all actions reasonably
requested by the Underwriters (and pay all costs associated therewith) in
connection with requesting the no-action letter or exemptive relief. 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.
73
<PAGE>
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".
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.
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 Thelen,
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.
74
<PAGE>
EXPERTS
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.
75
<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 Thelen, Reid & Priest LLP***
n4 Consent of Director to be elected**
n5 Consent of Director to be elected**
n6 Consent of Director to be elected**
- ---------------
* Previously Filed
** Filed herewith
*** To be filed by amendment
ITEMS 25. MARKETING ARRANGEMENTS
The information contained under the heading "Underwriting" on pages 73
through 75 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
C-1
<PAGE>
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 .................................................. $ 4,637.77
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* ......................................... $ 1,330.97
-----------
Total ........................................................... $300,000.00
===========
- ----------------
* Estimated
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL.
The information contained under the heading "Principal Stockholders" on
page 55 of the Prospectus is incorporated herein by reference.
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
C-2
<PAGE>
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.
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-3
<PAGE>
(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 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
C-4
<PAGE>
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
3rd day of November, 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 November 3, 1998
- ----------------------- financial officer) and Director
Zindel Zelmanovitch
/s/ NATHAN G. BERNEY Secretary November 3, 1998
- -----------------------
Nathan G. Berney
/s/ JEANETTE BERNEY Treasurer (principal accounting officer) November 3, 1998
- ----------------------- and Director
Jeanette Berney
/s/ FREDERICK SCHULMAN Director November 3, 1998
- -----------------------
Frederick Schulman
</TABLE>
C-6
EXHIBIT L
OPINION OF BERLACK, ISRAELS & LIBERMAN LLP
<PAGE>
November 2, 1998
Board of Directors
East Coast Venture Capital, Inc.
50 East 42nd Street
Suite 1301
New York, New York 10017
RE: EAST COAST VENTURE CAPITAL, INC.
REGISTRATION STATEMENT ON FORM N-2
----------------------------------
Gentlemen:
We have acted as counsel for East Coast Venture Capital, Inc., a
Delaware corporation (the "Company"), in connection with the preparation and
filing by the Company of a registration statement (the "Registration Statement")
on Form N-2, File No. 333-58681, under the Securities Act of 1933, as amended,
relating to the public offering of 1,250,000 Units ("Units"), each Unit
consisting of one (1) share of the Company's Common Stock, par value $.01 per
share (the "Common Stock") and one (1) Redeemable Common Stock Purchase Warrant
(the "Warrant"). The offering also involves the grant to First Liberty
Investment Group, Inc. (the "Representative") of an option to purchase an
additional 187,500 Units, consisting of 187,500 shares of Common Stock and
187,500 Warrants to cover over-allotments in connection with the offering, and,
subject to the approval by the Securities and Exchange Commission ("SEC"), the
sale to the Representative, for cash, of an option (the "Representative's
Option") to purchase up to 125,000 Units consisting of 125,000 shares of Common
Stock and 125,000 Warrants.
We have examined the Certificate of Incorporation and the By-Laws of
the Company, the minutes of the various meetings and consents of the Board of
Directors of the Company, drafts of the Underwriting Agreement relating to the
offering of the Common Stock and Warrants, drafts of the Warrant Agreement and
Representative's Option, draft forms of certificates representing the Common
Stock and the Warrants, originals or copies of such records of the Company,
agreements, certificates of public officials, certificates of officers and
representatives of the Company and others, and such other documents,
certificates, records, authorizations, proceedings, statutes and judicial
decisions as we have deemed necessary to form the basis of the opinion expressed
below. In such examination, we have assumed the genuiness of all signatures, the
authenticity of all documents submitted to us as originals and the conformity to
originals of all documents submitted to us as copies thereof. As to various
<PAGE>
Board of Directors
East Coast Venture Capital, Inc.
November 2, 1998
questions of fact material to such opinion, we have relied upon statements and
certificates of officers and representatives of the Company and others.
Based on the foregoing, we are of the opinion that:
1. All shares of Common Stock included in the Units have been duly
authorized and, when issued and sold in accordance with the Prospectus, will be
legally issued, fully paid and non-assessable.
2. The Warrants included in the Units and, subject to SEC approval, the
Representative's Option, have been duly authorized and, when issued and sold in
accordance with the Prospectus (and in the case of the Representative's Option,
upon SEC approval), will be legally issued, fully paid and non-assessable.
3. The shares of Common Stock issuable upon exercise of the Warrants
and, subject to SEC approval, the Representative's Option, have been duly
authorized and reserved for issuance and, when issued in accordance with the
terms of the Warrants and the Representative's Option, as the case may be, will
be duly authorized, legally issued, fully paid and nonassessable.
As used herein, the terms "SEC approval" and "approval of the SEC" mean
and include an order by the SEC approving the sale of the Representative's
Option and/or a "no action" letter from the SEC with respect to the sale of the
Representative's Option.
We hereby consent to be named in the Registration Statement and the
Prospectus as attorneys who have passed upon legal matters in connection with
the offering of the securities offered thereby under the caption "Legal
Matters."
We further consent to your filing a copy of this opinion as an exhibit
to the Registration Statement.
Very truly yours,
/s/ Berlack, Israels & Liberman LLP
----------------------------------
BERLACK, ISRAELS & LIBERMAN LLP
EXHIBIT N2
CONSENT OF MICHAEL C. FINKELSTEIN & CO.
<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
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".
/s/ Michael C. Finkelstein
- --------------------------------
MICHAEL C. FINKELSTEIN
Certified Public Accountant
New York, New York
November 2, 1998
EXHIBIT N3
CONSENT OF THELEN, REID & PRIEST LLP
<PAGE>
NEW YORK THELEN REID & PRIEST LLP
SAN FRANCISCO ATTORNEYS AT LAW
WASHINGTON, D.C. MARKET SQUARE, SUITE 800
LOS ANGELES WASHINGTON, D.C. 20004-2608
SAN JOSE TEL (202) 508-4000 FAX (202) 508-4321 (202) 508-4343
www.thelenreid.com
November 2, 1998
Stuart Neuhauser, Esquire
Berlack, Israels & Liberman LLP
120 West 45th Street
New York, New York 10036
Re: East Coast Venture Capital Inc.
-------------------------------
Dear Stuart:
Thelen Reid & Priest LLP consents to be named in SEC Form N-2
(#333-58681) and Prospectus related thereto as attorneys who have passed upon
certain legal matters under the caption "Legal Matters".
Sincerely yours,
/s/ WILLIAM A. KIRK
-------------------------
William A. Kirk
EXHIBIT N4
CONSENT OF DIRECTOR TO BE ELECTED
<PAGE>
CONSENT OF DIRECTOR ELECT
I, Charles Clarkson, hereby consent to act as a director of East Coast
Venture Capital, Inc. (the "Company"), effective upon consummation of the public
offering of the Company's securities as set forth in the prospectus contained in
the registration statement on Form N-2 (File No. 333-58681). I also consent,
pursuant Rule 438 under the Securities Act of 1933, as amended, to the reference
in the prospectus under the caption "Management".
October 29, 1998 /s/ CHARLES CLARKSON
- ---------------- ------------------------------
Date Charles Clarkson
EXHIBIT N5
CONSENT OF DIRECTOR TO BE ELECTED
<PAGE>
CONSENT OF DIRECTOR ELECT
I, David Niederman, hereby consent to act as a director of East Coast
Venture Capital, Inc. (the "Company"), effective upon consummation of the public
offering of the Company's securities as set forth in the prospectus contained in
the registration statement on Form N-2 (File No. 333-58681). I also consent,
pursuant Rule 438 under the Securities Act of 1933, as amended, to the reference
in the prospectus under the caption "Management".
October 29, 1998 /s/ DAVID NIEDERMAN
- ---------------- --------------------------------
Date David Niederman
