AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 8, 1998
REGISTRATION NO. 333-_________
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM N-2
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] PRE-EFFECTIVE AMENDMENT NO. _____
[ ] 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) 269-1400
(212) 704-0196 (FAX) (212) 809-5449 (FAX)
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: AS SOON AS REASONABLY
PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
<PAGE>
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis in reliance on Rule 415 under the
Securities Act of 1933, other than securities offered in connection with a
dividend reinvestment plan, check the following box: | X |
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------
Proposed Proposed
Maximum Maximum
Title of Each Class of Amount to be Offering Price Aggregate Amount of
Securities to be Registered Registered per Security(1) Offering Price Registration Fee
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units, each consisting of one 1,437,500(2) $ 4.00 $ 5,750,000 $ 1,696.25
Share of Common Stock, $.01
par value per Share, and one
Warrant
- ---------------------------------------------------------------------------------------------------------
Common Stock 1,437,500 -- -- --
- ---------------------------------------------------------------------------------------------------------
Warrants 1,437,500 -- -- --
- ---------------------------------------------------------------------------------------------------------
Common Stock underlying 1,437,500 $ 5.50 $ 7,906,250 $ 2,332.34
Warrants
- ---------------------------------------------------------------------------------------------------------
Underwriter's Unit Purchase 120,000 $ 4.80 $ 576,000 $ 169.92
Option
- ---------------------------------------------------------------------------------------------------------
Common Stock in Underwriter's 120,000 -- -- --
Unit Purchase Option
- ---------------------------------------------------------------------------------------------------------
Warrants in Underwriter's 120,000 -- -- --
Unit Purchase Option
- ---------------------------------------------------------------------------------------------------------
Common Stock underlying 120,000 $ 5.50 $ 660,000 194.70
Warrants in Underwriter's
Unit Purchase Option
- ---------------------------------------------------------------------------------------------------------
Total Registration and Fee -- -- $14,892,250 $ 4,393.21
- ---------------------------------------------------------------------------------------------------------
</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
Underwriter's 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 Underwriter Over-Allotment Option.
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 Inside Front and Outside Back Cover Page
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
14. Cover Page Not Applicable
15. Table of Contents Outside Front Cover Page
16. General Information and History Prospectus Summary; Business
</TABLE>
iv
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
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 JULY 8, 1998
EAST COAST VENTURE CAPITAL, INC.
1,250,000 UNITS
East Coast Venture Capital, Inc., a Delaware corporation ("East Coast"
or the "Company") is offering (the "Offering") 1,250,000 units (the "Units") at
a price of $4.00 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", collectively with the Units and Common Stock, the
"Securities"). 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, 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 First Liberty Investment Group (the "Underwriter"), and ending on the
date five years from the date of this Prospectus. The Warrants are subject to
redemption 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 Underwriter, 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."
The Company is a Specialized Small Business Investment Company
("SSBIC") licensed by the United States Small Business Administration ("SBA")
and is also a non-diversified, closed-end investment company that intends to
elect to be treated as a business development company under the Investment
Company Act of 1940, as amended (the "1940 Act"). The Company's business is to
provide loan and/or equity financing to small and medium sized businesses or
persons who qualify under SBA regulations as socially or economically
disadvantaged persons or to entities which are at least 50% owned by such
persons. The Company's investment objective is to achieve a high level of
current income from the collection of interest as well as long term growth
through the appreciation in value of the Company's equity interests in the
companies in which it will invest. 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".
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 that an
active trading market will develop even if the Securities are
1
<PAGE>
accepted for quotation or that the Company will maintain certain minimum
criteria established by Nasdaq for continued quotation.
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE
OF RISK. 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.
- --------------------------------------------------------------------------------
Discounts and Proceeds to the
Price to Public Commissions(1) Company(2)
- --------------------------------------------------------------------------------
Per Unit .......... $ 4.00 $ .40 $ 3.60
- --------------------------------------------------------------------------------
Total (3) ......... $ 5,000,000 $ 500,000 $ 4,500,000
- --------------------------------------------------------------------------------
- -----------------
(1) Does not include additional underwriting compensation to be paid by the
Company to the Underwriter in the form of (a) warrants to purchase up to 120,000
Units exercisable over a four year period commencing one year from the date of
this Prospectus at an exercise price of $4.80 per Unit (the "Underwriter's Unit
Purchase Option"), (b) a non-accountable expense allowance (the "Non-Accountable
Expense Allowance") equal to three percent (3%) of the aggregate public offering
price of the Units, $150,000 ($172,500 assuming exercise in full of the
Over-Allotment Option, as defined below) and (c) consulting fees of $108,000
payable to the Underwriter in full at the closing of the Offering. The Company
has agreed to indemnify the Underwriter 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 $558,000, including the Underwriter's Non-Accountable Expense Allowance of
$150,000 and the $108,000 financial consulting fee referred to above. After
deducting such expenses, the net proceeds to the Company will be approximately
$3,942,000. See "Use of Proceeds."
(3) The Company has granted the Underwriter 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 $580,500) the
total price to the public will be $5,750,000, and the total discounts and
commissions will be $575,000. The net proceeds to the Company after deducting
such discounts and commissions and expenses would be $ 4,594,500. See "Use of
Proceeds."
FIRST LIBERTY INVESTMENT GROUP
The date of this Prospectus is ____________, 1998.
2
<PAGE>
THE SECURITIES ARE BEING OFFERED SUBJECT TO PRIOR SALE, WHEN, AS AND IF
DELIVERED TO AND ACCEPTED BY THE UNDERWRITER, AND SUBJECT TO CERTAIN OTHER
CONDITIONS. THE UNDERWRITER RESERVES THE RIGHT TO WITHDRAW, CANCEL OR MODIFY
SUCH OFFER 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 Securities and Exchange Commission
("Commission" or "SEC") a Registration Statement on Form N-2 under the
Securities Act of 1933, as amended (the "Securities Act") with respect to the
Securities offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement. For further information
with respect to the Company and the Securities, reference is made to the
Registration Statement. Statements contained in this Prospectus as to the
contents of any contract or other documents referred to are not necessarily
complete, and in each instance reference is made the copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.
The Company intends to file a registration statement under the
Securities Exchange Act of 1934, as amended. By doing so it will become subject
to the informational requirements of such Act, and in accordance therewith it
will file reports and other information with the Commission.
Reports and other information filed by the Company can be inspected and
copied at the public reference facilities maintained at the Commission at Room
1024, 450 Fifth Street, N.W., Washington, DC 20549. Copies of such material can
be obtained upon written request addressed to the Commission, Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
The Commission maintains a web site on the Internet (http://www.sec.gov) that
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Commission through the
Electronic Data Gathering, Analysis and Retrieval System ("EDGAR").
3
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS
PROSPECTUS. IN ADDITION, UNLESS OTHERWISE INDICATED TO THE CONTRARY, ALL
INFORMATION APPEARING HEREIN DOES NOT GIVE EFFECT TO THE EXERCISE OF (I) THE
OVER-ALLOTMENT OPTION; (II) THE WARRANTS (INCLUDING THE WARRANTS INCLUDED IN THE
OVER-ALLOTMENT OPTION); (III) THE UNDERWRITER'S UNIT PURCHASE OPTION; (IV)
OPTIONS THAT MAY BE GRANTED PURSUANT TO THE COMPANY'S STOCK OPTION PLAN; AND (V)
OPTIONS TO PURCHASE UP TO 30,150 SHARES OF COMMON STOCK. SEE "MANAGEMENT-STOCK
OPTION PLAN," "DESCRIPTION OF SECURITIES" AND "UNDERWRITING." ALL PER SHARE DATA
AND INFORMATION RELATING TO THE NUMBER OF SHARES OF THE COMPANY'S COMMON STOCK
OUTSTANDING HAVE BEEN ADJUSTED TO GIVE EFFECT TO A 21-FOR-1 STOCK SPLIT ON
SEPTEMBER 29, 1997.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE
RESULTS DISCUSSED IN THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE
THESE POSSIBLE DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN
THE "RISK FACTOR" SECTION OF THIS PROSPECTUS.
THE COMPANY
The Company is a Small Business Investment Company ("SBIC") that
operates as a Specialized Small Business Investment Company ("SSBIC") under the
Small Business Investment Act of 1958, as amended (the "1958 Act"), and is
regulated and financed in part by the Small Business Administration ("SBA"). The
Company is a non-diversified investment company that intends to be regulated as
a business development company ("Business Development Company"), a type of
closed-end investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"). The Company intends to qualify as a "regulated
investment company" ("RIC") for federal income taxes purposes. See "Business -
Regulation as a Business Development Company" and "Tax Considerations."
As an SSBIC, the Company provides loan and/or equity financing to small
and medium sized businesses or persons who qualify under SBA regulations as
socially or economically disadvantaged persons or to entities which are at least
50% owned by such persons. The Company's investment objective is to achieve a
high level of current income from the collection of interest as well as 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 April 30, 1998, the Company had outstanding 59 loans, of which 19
loans, representing approximately 25% of the Company assets, were to finance
taxicab medallions, taxicabs and related assets; 9 loans, representing
approximately 31% of the Company's assets, were to auto repair shops and gas
stations; 18 loans, representing approximately 25% of the Company's assets, were
to laundromats and dry cleaners and the balance of its loans, representing
approximately 19% 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 New
4
<PAGE>
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."
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. 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.
5
<PAGE>
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 Underwriter, 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
Underwriter, 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
Symbols................................. Units --- ECVCU
Common Stock --- ECVC
Warrants --- ECVCW
Risk Factors............................. The Securities are subject to a high
degree of risk and substantial
dilution. See "Risk Factors" and
"Dilution."
6
<PAGE>
Use of Proceeds.......................... The net proceeds of this Offering,
estimated at $3,942,000, 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 no value 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).............. 10.0% (1)
ANNUAL EXPENSES (as a percentage of net assets attributable to the Common Stock)(2)
Management Fees (3)............................................................ 2.38%
Interest payments on borrowed funds (4)........................................ 3.24%
Other expenses (estimated) (5)................................................. .82%
TOTAL ANNUAL EXPENSES (estimated)....................................................... 6.44%
</TABLE>
- ------------------
(1) Represents a 10% underwriting discount, which is a one-time fee paid by the
Company to the Underwriter in connection with the Offering. Does not
reflect other compensation to the Underwriter. See "Underwriting."
(2) Assumes a net asset value of $6,125,863, 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, investment
origination expenses, rent and other administrative and similar day-to-day
operating 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 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 invest-
ment, 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>
<TABLE>
<CAPTION>
SUMMARY FINANCIAL INFORMATION
NINE MONTHS ENDED
FISCAL YEARS ENDED JULY 31, APRIL 30,
(AUDITED) (UNAUDITED)
---------------------------------------------------------------------------------------
BALANCE SHEET DATA: 1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ---- ----
ASSETS:
<S> <C> <C> <C> <C> <C> <C> <C>
Loans and equity
investments $ 3,606,693 $ 2,862,031 $ 2,851,793 $ 4,248,120 $ 4,198,446 $ 4,102,003 $ 4,240,525
Less: reserve for loan
losses (125,625) (148,158) (148,158) (148,158) (148,158) (148,158) (148,158)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Loans at fair value 3,481,068 2,713,873 2,703,635 4,099,962 4,050,288 3,953,845 4,092,367
----------- ----------- ----------- ----------- ----------- ----------- -----------
Current assets 593,908 1,293,145 1,098,182 552,480 651,939 681,052 2,172,701
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Assets $ 4,074,976 $ 4,007,018 $ 3,801,817 $ 4,652,442 $ 4,702,227 $ 4,634,897 $ 6,265,068
=========== =========== =========== =========== =========== =========== ===========
LIABILITIES:
SBA subordinated
debentures 2,000,000 2,000,000 2,000,000 2,700,000 2,740,000 2,700,000 3,780,000
Other current liabilities 160,893 178,914 148,260 282,793 288,551 258,004 301,205
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Liabilities 2,160,893 2,178,914 2,148,260 2,982,793 3,028,551 2,958,004 4,081,205
----------- ----------- ----------- ----------- ----------- ----------- -----------
3% Preferred Stock (1) 1,000,000 1,000,000 -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Retained earnings
(deficit) (97,155) (183,134) (373,323) (369,231) (365,204) (361,987) (348,932)
Restricted capital (2 and 3) -- -- 648,000 394,200 264,600 297,000 167,400
Common stock and
additional paid-in
capital 1,011,238 1,011,238 1,378,880 1,644,680 1,774,280 1,741,880 2,365,395
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total stockholders'
equity $ 914,083 $ 828,104 $ 1,653,557 $ 1,669,649 $ 1,673,676 $ 1,676,893 $ 2,183,863
=========== =========== =========== =========== =========== =========== ===========
Shares of common stock
outstanding (5) 3,362,205 3,362,205 5,316,045 5,400,045 5,701,545 5,400,045 5,701.545
=========== =========== =========== =========== =========== =========== ===========
Net assets per share of
Common Stock outstanding
(excluding Preferred Stock) (5) $ 0.27 $ 0.25 $ 0.31 $ 0.31 $ 0.29 $ 0.31 $ 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, 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 $167,400 will be amortized on a straight line basis and included as
additional paid-in capital over a 15 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 $40,365. See "Business-Specialized Small
Business Investment Companies-Benefits."
(4) All per share date and information relating to the number of shares of the
Company's Common Stock outstanding have been adjusted to give effect to a
twenty-one for one stock split.
(5) Computed on the basis of total assets less total liabilities. Additionally,
the entire gain realized on the repurchase of the 3% Preferred Stock is included
in the computation of the net assets per share. Such gain is amortized monthly,
with the amount of the amortization transferred to additional paid in capital.
In the event of the liquidation of the Company, the SBA would have the right to
receive the amount attributed to restricted capital before any distribution to
holders of Common Stock. See "Business - Specialized Small Business Investment
Companies."
10
<PAGE>
BALANCE SHEET DATA (PRO FORMA)
AS OF APRIL 30, 1998
---------------------------
ACTUAL AS ADJUSTED(1)
----------- -----------
TOTAL ASSETS $ 6,265,068 $10,207,068
SBA DEBENTURES $ 3,780,000 $ 3,780,000
OTHER LIABILITIES $ 301,205 $ 301,205
TOTAL LIABILITIES $ 4,081,205 $ 4,081,205
SHAREHOLDERS EQUITY (NET ASSET VALUE) $ 2,183,863 $ 6,125,863
SHAREHOLDERS EQUITY (NET ASSET VALUE) per share $ .38 $ .88
- -----------------
(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 $3,942,000.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEARS ENDED JULY 31, APRIL 30,
STATEMENT OF OPERATIONS: (AUDITED) (UNAUDITED)
-------------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenue $ 323,510 $ 273,739 $ 191,740 $ 314,270 $ 360,981 $ 263,277 $ 312,931
----------- ----------- ----------- ----------- ----------- ----------- -----------
Interest Expense 148,534 168,911 168,684 186,346 196,200 147,002 158,476
Other Expense 174,797 167,561 179,695 119,056 152,267 102,634 133,297
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Expense 323,331 336,472 348,379 305,402 348,467 249,636 291,773
----------- ----------- ----------- ----------- ----------- ----------- -----------
Investment income
(loss) before taxes
and loan loss reserve 179 (62,733) (156,639) 8,868 12,514 13,641 21,158
----------- ----------- ----------- ----------- ----------- ----------- -----------
Unrealized
depreciation in value
of investments (1) (22,533) -- (26,246) -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Provision for income
taxes (State and Federal)(2) (939) (713) (7,304) (4,776) (8,487) 6,397 4,886
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net Income (23,293) (63,446) (190,189) 4,092 4,027 7,244 16,272
----------- ----------- ----------- ----------- ----------- ----------- -----------
Dividends on preferred
stock to SBA paid or
restricted (3) 30,000 30,000 -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)
available to Common Stock (53,293) (93,446) (190,189) 4,092 4,027 7,244 16,272
----------- ----------- ----------- ----------- ----------- ----------- -----------
Earnings (loss) per
share of Common Stock
after payment or accrual
of preferred stock dividend (4) $ (0.02) $ (0.03) $ (0.04) $ 0.00 $ 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 3,362,205 5,316,045 5,400,045 5,400,045 5,400,045 5,601,005
----------- ----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
- ----------------
(1) See Financial Statements for information on annual provisions for loan loss
reserves under the caption "Unrealized Depreciation on Loans Receivable."
(2) The Company, since the fiscal year ended July 31, 1988, has elected and
qualified to be taxed as a regulated investment company, and there,
substantially all taxable income has been distributed to shareholders. Effective
August 1, 1994, the Company filed as 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.
(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>
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 and July 31, 1997, the Company had net income of
approximately $4,000 and $4,000, respectively. For the nine months ended April
30, 1998, the Company had net income of approximately $16,000, which reduced the
Company's retained deficit as of April 30, 1998 to $348,932. The current
retained deficit will reduce the Company's leverageable capital by $348,932,
thereby reducing the amount of debentures that the Company will be eligible to
apply for with the SBA. See "Risk Factor -- Need for SBA Financing; SBA
Financing Not Assured" and "Rank and Leverage".
NEED FOR SBA FINANCING; SBA FINANCING NOT ASSURED. The Company intends
to raise additional funds for investment through the issuance of securities to
the SBA. Such funding is based upon the Company's capital, net of organizational
expenses ("Leverageable Capital"). The sale of the Units in the Offering will
increase the Company's Leverageable Capital. As a consequence, and in accordance
with the 1958 Act, thereafter the Company will be eligible to issue additional
subordinated debentures to the SBA in the approximate principal amount of
$10,770,000. 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
12
<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 April
30, 1998, the Company had loans totaling $1,059,374 with accrued interest of
$726,345 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 April 30, 1998, the Company's provision for
loan losses was $148,158 (14% 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.
13
<PAGE>
ILLIQUIDITY. Liquidity refers to the sale of a debt or equity security
in a timely manner at a price that reflects the value of that security. The
Company anticipates that most of its equity investments will consist of
securities acquired directly from their issuers in private transactions. The
securities will usually be subject to restrictions on resale or otherwise
illiquid because there will usually be no trading market for such securities.
The Illiquidity of most of the Company's portfolio securities will adversely
affect its ability to dispose of them in a timely manner and at a fair price
when it might be necessary or advantageous to liquidate portfolio securities.
Absent readily ascertainable market value, the valuation of securities in the
Company's portfolio is determined 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. 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 April 30, 1998,
approximately 25% 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."
14
<PAGE>
UNCERTAIN MARKET. The Company may not be able to place loans
successfully to the taxi industry upon the terms on which it currently lends.
The ability of the Company to place additional loans in the taxi industry may be
adversely affected by factors over which the Company may have no control and
which may impair the security for the Company's already outstanding loans. These
factors may include, among others, economic conditions, including economic
conditions affecting the taxicab industry in particular, the market rates of
interest in effect from time to time, the availability of financing from
competitors of the Company and changes in laws affecting the industry. In light
of these circumstances, the Company intends to reduce its taxi related loans and
to pursue loan and/or equity opportunities for other small and medium sized
businesses. However, 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 25% of the Company's
assets) 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."
15
<PAGE>
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 $.88, representing a dilution of $3.12 per
share (78%) from the $4.00 offering price of the Units (attributing no value to
the Warrants contained therein). See "Dilution."
COMPETITION. Banks, credit unions, finance companies and other SBICs
and SSBICs, many with greater resources than the Company, compete with the
Company in financing small businesses. Some of the 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
16
<PAGE>
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 Underwriter and bear no
relationship to the assets, book value or net worth of the Company or any other
recognized criteria of value; they should not be regarded as an indication of
the present or future value of the Company. If the Common Stock offered hereby
trade at a price below the new asset value and/or the offering price, purchasers
of shares in this Offering who wish to sell them may not be able to do so
without sustaining a loss. See "Underwriting."
DISCOUNT TRADING OF SHARES OF CLOSED-END INVESTMENT COMPANIES. Shares
of many closed-end investment companies tend to trade at discounts from their
underlying net asset values and their initial public offering prices. The Shares
offered hereby may follow that pattern. The risk of loss associated with this
tendency 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 $3,942,000) and all proceeds received by the SBA
from the purchase by the SBA of the Company's subordinated debentures (up to an
additional $10,770,000) 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."
17
<PAGE>
ANTI-TAKEOVER PROVISIONS. Subject to the prior approval of the SBA, the
Company's Certificate of Incorporation permits its Directors to designate the
terms of and issue additional shares of preferred stock. These provisions might
render it more difficult, and therefore discourage, an unsolicited takeover
proposal such as a proxy contest or the removal of incumbent management, even if
such actions would be in the best interest of the Company's stockholders.
Pursuant to the terms of the Underwriting Agreement between the Company and the
Underwriter, the Company may not issue any preferred stock for a period of 24
months from the date of this Prospectus, other than in certain circumstances,
without the consent of the Underwriter. See "Description of Securities."
UNCERTAINTY OF IDENTIFYING ACQUISITIONS. One of the Company's
strategies to maximize its growth is to increase its loan and/or equity
portfolios through acquisition of other SBICs or SSBICs or their 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
Underwriter, 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 Underwriter solicits the exercise of Warrants, it may be
prohibited by Regulation M under the Exchange
18
<PAGE>
Act from engaging in marketmaking activities during such solicitation and for up
to five days preceding such solicitation. As a result, the Underwriter will be
unable to continue to provide a market for the Company's Securities during
certain periods while the Warrants are exerciseable. The Underwriter is not
obligated to act as a marketmaker. See "Underwriting".
NASDAQ LISTING AND CONTINUED LISTING REQUIREMENTS. The Company's Units,
Common Stock and Warrants are expected to be listed on the date of this
Prospectus on the Nasdaq SmallCap Market, Inc. ("Nasdaq"). For continued listing
on Nasdaq, a company, among other things, must have at least $2,000,000 in net
tangible assets, 500,000 shares in the public float with a market value of
$1,000,000 and a minimum bid price of $1.00 per share. If the Company cannot
satisfy the requirements for continued quotation on Nasdaq, trading, if any, in
the Securities offered hereby would be conducted in the over-the-counter market
in what are commonly referred to as the "pink sheets" or on the NASD OTC
Electronic Bulletin Board. As a result, an investor may find it more difficult
to dispose of, or to obtain accurate quotations as to the price of, the
Securities, and the liquidity of the Company's Securities will be adversely
affected.
"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 Underwriter, 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.
19
<PAGE>
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 Underwriter.
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."
UNDERWRITER'S UNIT PURCHASE OPTION. In connection with this Offering,
the Company will sell to the Underwriter, for nominal consideration, a warrant
to purchase an aggregate of 120,000 Units, each Unit consisting of one share of
the Company's Common Stock and one Warrant (the "Underwriter's Unit Purchase
Option"). The Underwriter's Unit Purchase Option will be exerciseable commencing
one year after the date of this Prospectus and ending four years after such
date, at a price of $4.80 per Unit, subject to certain adjustments. The holders
of the Underwriter's 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 Underwriter's 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 Underwriter's Unit Purchase Option. See
"Description of Securities - Prior Financing" and "Underwriting."
ADDITIONAL AUTHORIZED SHARES AVAILABLE FOR ISSUANCE MAY ADVERSELY
AFFECT THE MARKET. The Company is authorized to issue 25,000,000 shares of its
Common Stock. After the sale of the Units offered hereby, 6,951,545 shares of
Common Stock will be issued and outstanding, excluding the 1,250,000 shares of
the Company's Common Stock underlying the Warrants included in the Units in this
Offering, the 240,000 shares of Common Stock underlying the Underwriter's Unit
Purchase Option, the 375,000 shares underlying the Underwriter's Over-Allotment
Option and 30,150 shares of Common Stock underlying other options. After
reserving a total of 1,895,150 shares of Common Stock for issuance upon the
exercise of all the warrants and options to purchase Common Stock, the Company
will have 16,153,305 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 Underwriter.
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
20
<PAGE>
not less than 90% of its investment company taxable income each year to maintain
such qualification. See "Tax Considerations." If it qualifies as a RIC,
beginning with its fiscal year ending July 31, 2000, the Company intends to make
regular quarterly cash distributions to holders of the Common Stock of at least
90% of its investment company taxable income in each tax year. Dividends will be
payable by the Company at the discretion of the Board of Directors and will
depend on the actual cash flow of the Company, its financial condition, capital
requirements, the distribution requirements of the Code and such other factors
as the Board of Directors may deem relevant. Applicable law, including the SBA
regulations, as well as contracts or loan documents to which the Company is a
party, may limit the payment or amount of dividends and other distributions by
the Company. The Company may not achieve results permitting any, or any
specified level of, dividends. Until it qualifies as a RIC, the Company intends
to apply any earnings to expand and develop its business. See "Dividends and
Distributions."
FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE. This Prospectus
contains forward-looking statements and information that are based on
management's beliefs as well as assumptions made by, and information currently
available to, management. When used in this Prospectus, words such as
"anticipate," "believe," "estimate," "except," and, depending on the context,
"will" and similar expressions, are intended to identify forward-looking
statements. Such statements reflect the Company's current views as to future
events and are subject to certain risks, uncertainties and assumptions,
including the risk factors described above. If one or more of these risks or
uncertainties materialize, or if underlying assumptions prove incorrect, actual
results may vary materially from those anticipated, believed, estimated or
expected. The Company does not intend to update these forward-looking statements
and information.
21
<PAGE>
USE OF PROCEEDS
Upon completion of the Offering, the Company expects to receive net
proceeds of approximately $3,942,000 ($4,594,500 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 $3,942,000, to issue additional subordinated
debentures to the SBA in the approximate principal amount of $10,770,000.
However, the Leverage Capital must be reduced by $348,932, 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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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
April 30, 1998 and as adjusted to give effect to the sale of the 1,250,000
Units.
<TABLE>
<CAPTION>
April 30, 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 $ 69,500
Additional paid-in capital (5)(6) $2,308,380 $ 6,237,895
Restricted Capital (7) $ 167,400 $ 167,400
Total Capitalization (8) $2,183,863 $ 6,125,863
Net assets per share of Common Stock (5)(8) $ .38 $ .88
</TABLE>
- ------------------
(1) The interest rate on SBA subordinated debentures is determined by statute
and depends upon factors existing at the time of issuance.
Principal Amount
Outstanding as of Date of Interest
April 30, 1998 Maturity Rate
-------------- -------- ----
$ 1,040,000 ............................. 6/01/07 8.07%
2,040,000* ............................. 3/1/08 7.32%
700,000** ............................. 12/01/05 3.54%
-----------
$ 3,780,000
===========
* 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 $3,942,000, under current SBA regulations, the Company would be
eligible to issue an additional $10,770,000 of unsubsidized subordinated
debentures.
(4) As of April 30, 1998, the Company had no shares of 4% Preferred Stock
issued to the SBA.
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<PAGE>
(5) All per share data and information relating to the number of shares of the
Company's Common Stock outstanding have been adjusted to give effect to
twenty-one for one stock split.
(6) Included the amortized portion of the restricted capital realized from the
gain on the repurchase of the Company's 3% Preferred Stock from the SBA,
$480,600 through April 30, 1998. Such amount was realized in equal increments as
additional paid-in capital over a period from the repurchase date, April 14,
1995. 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 $167,400 will be amortized on a straight line basis and included as
additional paid-in capital over an 15 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.
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<PAGE>
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.
25
<PAGE>
DILUTION
Prior to this Offering, 5,701,545 shares of the Company's Common Stock
were issued and outstanding. As of April 30, 1998, the net tangible book value
of the Company was $2,183,863. 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 no value 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 Underwriter's Over-Allotment Option, the pro forma net tangible book value
of the Company would be $.88 per share. Investors in this Offering, therefore,
will sustain an immediate dilution of $3.12 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.................... $ 4.00
Net tangible book value per share
before the Offering .38
Increase per share attributable
to the Offering........................... .50
Net tangible book value per share
after the Offering........................ .88
Dilution per share to new investors......... $ 3.12
-------
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, 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 Underwriter'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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<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
April 30, 1998, the Company made loans to small business concerns in the
aggregate principal amount of $12,681,308 of which $4,240,525 was outstanding as
of April 30, 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, 1997, 1996 AND 1995
INTEREST INCOME. The Company's gross interest income decreased 29.96%
from $273,739 for the fiscal year ended July 31, 1994 to $191,740 for the fiscal
year ended July 31, 1995 and had an increase of
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<PAGE>
63.91% to $314,276 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 decrease during the fiscal year ended July 31, 1995 was mainly
attributable to several borrowers defaulting on their loan agreements. The
increases during the fiscal periods ended July 31, 1996 and 1997 were mainly
attributable to increases in the loan portfolio from $2,851,793 at July 31,1995
to $4,248,120 and $4,198,446 at July 31, 1996 and 1997, respectively.
INTEREST EXPENSE. Interest expense increased from $168,684 for the
fiscal year ended July 31, 1995 to $186,346 for the fiscal year ended July 31,
1996 and to $196,200 during the fiscal year ended July 31, 1997. 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 $2,000,000 at July 31, 1995 to $2,700,000 at July 31, 1996 to $3,780,000 at
July 31, 1997.
OPERATING EXPENSES. The Company's operating expenses consist of
management fees, professional fees, consulting fees and various collections
costs. Operating expenses decreased during the fiscal period ended July 31,
1997. This decreases was mainly attributable to a decrease 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 $1,059,374 which were delinquent with unpaid accrued interest
of $726,345. 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."
NINE MONTHS ENDED APRIL 30, 1998 AND 1997
INVESTMENT INCOME. Gross interest income from loans increased 18.86%
due to an increase in the size of the loan portfolio as well as increased
collection efforts.
INTEREST EXPENSE. Interest expense increased during the nine month
period ended April 30, 1998 by $11,474 (7.8%). The increase was mainly
attributable to the issuance of additional SBA subordinated debentures.
OPERATING EXPENSES. Operating expense increased by approximately
$31,000 (29.88%). This increase was mainly attributable to increased management
fees and collection costs.
NET INCOME. For the nine months ended April 30, 1998 and 1997, the
Company had net income of $16,272 and $7,244, respectively. The increased net
income was mainly due to an increase in interest earned on loans receivable.
28
<PAGE>
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 April 30, 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. 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 $6,126,000 of private capital, which will enable the Company to
borrow an additional $10,770,000, 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."
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BUSINESS
THE COMPANY
The Company is a Small Business Investment Company ("SBIC") that
operates as a Specialized Small Business Investment Company ("SSBIC") under the
Small Business Investment Act of 1958, as amended (the "1958 Act"), and is
regulated and financed in part by the Small Business Administration ("SBA"). The
Company is a non-diversified investment company that intends to be regulated as
a business development company ("Business Development Company"), a type of
closed-end investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"). The Company intends to qualify as a "regulated
investment company" ("RIC") for federal income taxes purposes. See "Business -
Regulation as a Business Development Company" and "Tax Considerations."
As an SSBIC, the Company provides loan and/or equity financing to small
and medium sized businesses or persons who qualify under SBA regulations as
socially or economically disadvantaged persons or to entities which are at least
50% owned by such persons. The Company's investment objective is to achieve a
high level of current income from the collection of interest as well as long
term growth through the appreciation in value of the Company's equity interests
in the companies in which it will invest.
As of April 30, 1998, there were 59 loans outstanding. 19 of its loans,
representing approximately 25% of the Company assets, were to finance taxicab
medallions, taxicabs and related assets; 9 of its loans, representing
approximately 31% of the Company's assets, were to auto repair shops and gas
stations; 18 of its loans, representing approximately 25% of the Company's
assets, were to laundromats and dry cleaners and the balance of its loans,
representing approximately 19% of the Company's assets, were to various small
businesses such as retail stores, gourmet food shops and restaurants. Taxi
loans, are collateralized by taxicabs medallions and related assets. The loans
to other small business concerns are collateralized by their assets. The Company
intends to reduce the percentage of its assets that relate to taxicab financing.
The Company's strategies for effecting its goal of maximizing its
growth of its net assets with net income includes capitalizing on its SSBIC
status to obtain leverage, capitalizing on an underserved market, increasing its
loan portfolio, increasing its equity portfolio, broadening referral sources to
increase its loan and/or equity portfolios, and identifying potential
acquisitions.
As an SSBIC, the Company has certain benefits not available in other
lending institutions. An investment in an SSBIC, such as a purchase of the
Company's Common Stock, may afford certain investors favorable tax benefits,
including the ability to defer recognizing capital gain from the sale of
publicly traded securities, subject to certain limitations, if the investor uses
the proceeds from such sale within 60 days to purchase common stock in an SSBIC.
See "Tax Considerations." In addition, subject to certain conditions, certain
financial institutions may be able to satisfy their requirements under the
Community Reinvestment Act of 1977 by buying shares of the Company's Common
Stock. See "Federal Regulation-Community Reinvestment Act." In October 1996,
legislation was enacted which eliminated the authority of the SBA to issue new
SSBIC licenses. The Company believes that, on the date of this Prospectus, it
will be only one of two publicly traded SSBICs. See "Business-Specialized Small
Business Investment Companies; Benefits."
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STRATEGY
The Company's strategies for effecting its goal of maximizing its
growth of its net assets with net income includes the following:
CAPITALIZE ON SSBIC STATUS TO OBTAIN LEVERAGE. The Company intends to
capitalize on its SSBIC status by using its Leverageable Capital and obtaining
additional funds to increase its lending through the issuance of subordinated
debentures to the SBA. The sale of the Units in the Offering will increase the
Company's Leverageable Capital. The Company will be eligible to issue additional
subordinated debentures to the SBA in the amount of $10,770,000. 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
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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.
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
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engages in the business of commercial and retail banking, and most of its loans
are generated in New Jersey. See "Business - Loan Portfolio; Valuation." The
Company intends to enter into similar referral arrangements with other financial
institutions, but it may not be able to do so.
IDENTIFY POTENTIAL ACQUISITIONS. The Company intends to increase its
loan and/or equity portfolios through acquisitions of other SBICs or SSBICs or
their respective portfolios, either with cash or the 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 15.25% at April 30, 1998. For the month of April 30, 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 and 1997, the Company operated at profits of $4,092 and $4,027,
respectively. For the nine months ended April 30, 1998, the Company had a net
profit of $16,272 which reduced the Company's retained deficit as of April 30,
1998 to $348,932. 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
$348,932. See "Risk Factors -- Recent Operating Losses".
BORROWINGS. The Company may borrow money and issue promissory notes and
other obligations, subject to SBA regulatory limitations.
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LIMITATIONS OF BUSINESS ACTIVITIES. The Company has not purchased, and
does not intend to purchase, commodities or commodity contracts and it has not
engaged, nor does it intend to engage, in the business of underwriting the
securities of other issuers. In addition, the Company does not intend to
purchase a controlling interest in any small business except as may be necessary
in the event of a foreclosure on the security for a particular loan. The Company
does not intend to engage in the purchase or sale of real estate or in
investments in the securities of other investment companies.
The Company currently has no intention of performing advisory services
for other businesses, although as a Business Development Company it has agreed
to offer its portfolio companies, if requested, significant management
assistance. The Company will negotiate fees for such services which may include
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.
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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.
SPECIALIZED SMALL BUSINESS INVESTMENT COMPANIES
GENERAL. As an SSBIC, the Company is eligible to apply for certain
financing from the SBA on favorable terms, and the Company and its shareholders
are entitled to certain tax benefits, both described below. The SBA has
discretion in determining whether financing will be available to a SSBIC and the
type and amount of such financing. Therefore, there can be no assurance as to
the nature, amount or timing of SBA financing that may actually be obtained by
the Company. See "Risk Factors-SBA Financing Not Assured." Furthermore, there
are certain restrictions and requirements to which the Company is subject by
virtue of its being an SBIC. See "Federal Regulation-Regulation under the Small
Business Investment Act of 1958."
BACKGROUND. SBICs and SSBICs are privately owned and managed investment
companies licensed by the SBA. The 1958 Act requires each licensee to have a
minimum level of private investor capital and to be operated by experienced
management. Under present law for companies which were incorporated prior to
October 1, 1996, an SBIC must have at least $2.5 million in private capital and
an SSBIC must have not less than $1.5 million. As of April 30, 1998, the Company
had private capital of $2,183,863 (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 individuals, or to small business concerns at
least 50 % owned and managed by individuals from groups in the United States
that are socially or economically disadvantaged, including Blacks, Indians,
Eskimos, persons of Mexican, Puerto Rican, Cuban, Filipino or Asian extraction,
Vietnam War era veterans, and other groups which fall within SBA guidelines
relating to socially or economically disadvantaged persons.
BENEFITS. The principal benefits to the Company as a result of its
being licensed as an SSBIC are as follows:
1. Prior to October 1, 1996 the SBA was authorized to purchase shares
of non-voting preferred stock from an SSBIC for cash up to an amount equal to
the SSBIC's aggregate 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%
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annual cumulative dividend and to be redeemed by the SSBIC within 15 years from
the date of any such issuance.
In 1987, the Company issued 1,000,000 shares of its 3% Preferred Stock
to the SBA. The Company and the SBA entered into a repurchase agreement, dated
August 15, 1994 (the "Repurchase Agreement"). Pursuant to the Repurchase
Agreement, the Company repurchased all 1,000,000 shares of its 3% Preferred
Stock from the SBA for a purchase price of $0.35 per share, or an aggregate of
$350,000. The repurchase price was at a substantial discount to the original
sale price of the 3% Preferred Stock which was sold to the SBA at par value or
$1.00 per share. As a condition to the repurchase, the Company granted the SBA a
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
April 30, 1998, the liquidating interest was $167,400. 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 April 30, 1998, the
Company was contingently liable for unpaid 3% cumulative preferred dividends in
the amount of $40,365 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 (for example, to SBIC Funding
Corp.) 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
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market rates. To the Company's knowledge, for Federal Fiscal Year 1998 (October
1, 1997 through September 30, 1998), the SBA received Congressional
appropriations resulting in program levels of (a) $600 million be used, in the
SBA's sole discretion, for the purchase or guarantee of SBIC and SSBIC
debentures, of which $247 million has been or will be committed or utilized
through May 15, 1998, and (b) $700 million for the purchase or guarantee of SBIC
or SSBIC participating securities, of which $300 million has been or will be
committed or utilized through May 15, 1998. To the Company's knowledge for
Federal fiscal year 1999 (October 1, 1998 through September 30, 1999), Congress
is reviewing proposals for program levels of (a) $546 million for the purchase
or guarantee of SBIC and SSBIC debentures and (b) $550 million for the purchase
or guarantee of SBIC or SSBIC participating securities. While the Company
believes it will be eligible for such SBA financing following the completion of
this Offering, there can be no assurance as to the amount and timing of the
receipt of such financing.
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 $3,942,000, the SBA would be permitted under its regulations to
purchase, or guarantee, up to an additional $10,770,000 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
intends to be regulated as a Business Development Company under the 1940 Act
and, as such, is subject to regulation under that Act. Among other things, the
1940 Act contains prohibitions and restrictions relating to transactions between
the Company and its affiliates, principal underwriters and affiliates of those
affiliates or underwriters and requires the majority of the Company's directors
be persons other than "interested persons," as defined in the 1940 Act. In
addition, the 1940 Act prohibits the Company from changing the nature of its
business so as to cease to be, or to withdraw its election as, a Business
Development Company unless so authorized by the holders of a majority of its
outstanding voting securities.
A Business Development Company is permitted, under specified
conditions, to issue multiple classes of indebtedness and one class of stock
senior to the shares offered hereby (collectively, "Senior Securities" as
defined in the 1940 Act) if the asset coverage, as defined in 1940 Act, of any
Senior Security is at 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.
38
<PAGE>
(2) Securities of any eligible portfolio company which is
controlled by the Business Development Company.
(3) Securities received in exchange for or distributed on or with
respect to securities described in item (1) or (2) above, or pursuant
to the exercise of options, warrants or rights relating to such
securities.
(4) Cash, cash items, government securities, or high quality debt
securities maturing in one year or less from the time of investment.
In addition, a Business Development Company must have been organized
(and have its principal place of business) in the United States for the purpose
of making investments in the types of securities described in items (1) or (2)
above and, in order to count the securities as Qualifying Assets for the purpose
of the 70% test, the Business Development Company must either control the issuer
of the securities or make available to the issuer of the securities significant
managerial assistance. Making available significant managerial assistance means,
among other things, any arrangement whereby a Business Development Company,
through its directors, 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 objectives are to achieve a high level of
current income from interest on loans and long-term growth through equity
interests in its portfolio companies.
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. 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. See "Regulation as a Business
Development Company" above. In order to qualify as a RIC the Company will be
required, among other things, to diversify its holdings as described under "Tax
Considerations." 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."
39
<PAGE>
2. The Company may not borrow money except through the issuance of
SBA Debentures and through one or more bank lines of credit.
3. The Company may issue preferred stock with such terms as the Board
of Directors may determine subject to the requirement of the 1940 Act and the
1958 Act.
4. The Company will not (i) act as an underwriter of securities
(except to the extent it may be deemed to be an "underwriter" as defined in the
Securities Act of securities purchased by it in private transactions), (ii)
purchase or sell real estate or interests in real estate investment trusts
(except that the Company may acquire real estate which collateralizes its loans
or guaranties of its loans upon defaults of such loans and may dispose of such
real estate as and when market conditions permit), (iii) sell securities short,
(iv) purchase securities on margin (except to the extent that the Company may be
deemed to do so as a result of its acquisition of securities in connection with
loans made to portfolio companies which are funded with borrowed money), or (v)
purchase or sell commodities or commodity contracts, including futures contracts
(except where necessary in working out distressed loans or investments).
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.
40
<PAGE>
4. The Company has no policy with respect to portfolio turnover.
Moreover, because borrowers have certain prepayment rights, the Company cannot
control or predict the frequency of portfolio turnover. During the past two
years, the Company experienced no significant changes in its turnover rate, and
in the near term it does not expect to experience any significant increases in
turnover rate.
5. Pending the investment of its funds in eligible concerns
(including smaller concerns) or as otherwise permitted by the SBA, the Company
may invest its funds in direct obligations of, or obligations guaranteed as to
principal and interest by, the United States which mature in 120 days or less,
or certificates of deposit or deposit accounts issued by a qualified federally
insured institution which mature in 120 days or less. The Company will not
invest in interest only or principal only securities.
41
<PAGE>
LOAN PORTFOLIO; VALUATION
The following table sets forth classification of the Company's outstanding loans
as of April 30, 1998:
<TABLE>
<CAPTION>
NUMBER PERCENTAGE
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 $ 65,624 1.58%
- ----------------------------------------------------------------------------------------------------------------------
Services 3 13.63% - 15.25% 2-5 years 39,416 .95%
- ----------------------------------------------------------------------------------------------------------------------
Retail 4 14.00% - 15.00% 3-10 years 305,671 7.37%
- ----------------------------------------------------------------------------------------------------------------------
Auto Service Stations 9 11.25% - 14.00% 3-7 years 1,295,706 31.22%
- ----------------------------------------------------------------------------------------------------------------------
Construction 1 11.00% - 15.00% 5 years 155,318 3.74%
- ----------------------------------------------------------------------------------------------------------------------
Restaurant 4 13.00% - 15.00% 5-7 years 192,667 4.64%
- ----------------------------------------------------------------------------------------------------------------------
Laundromat 18 10.00% - 15.50% 5-10 years 1,051,093 25.32%
- ----------------------------------------------------------------------------------------------------------------------
NYC Tax Medallion 19 9.00% - 14.00% 7 years 1,045,030 25.18%
-- ------------ -------
- ----------------------------------------------------------------------------------------------------------------------
TOTAL 59 -- -- $ 4,150,525 100.00%
============ =======
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth information regarding the Company's
equity interests as of April 30, 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 15.25% per
annum. For the month of April 30, 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
42
<PAGE>
quotations are not readily available, such securities will be valued at fair
value as determined by the Board of Directors.
LOAN CONSIDERATIONS - In evaluating each applicant for a loan, the
Company considers the following factors: (1) the applicant (or 50% in interest
of the concern's principal owners) must be classified as an economically or
socially disadvantaged person under SBA regulations, (2) the applicant's ability
to repay the loan, and (3) the value and type of collateral proposed by the
prospective borrower to collateralize the business loans, (4) the experience of
management and (5) the potential for growth of such business.
COLLECTION EXPERIENCE - As of April 30, 1998, the Company had 8 loans
totaling $1,059,374 in principal and accrued interest of $726,345 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.
43
<PAGE>
A prospective medallion owner must meet the requirements of the TLC
which approves all sales and transfers. In general, the requirements are that
the prospective owner have no criminal record, that the purchase funds be
derived from legitimate sources, and that the taxi vehicle and meter meet
specifications set by the TLC. Also required is a clearance from prior insurers
of the seller in the form of letters stating that there are no outstanding
claims for personal injuries in excess of insurance coverage.
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."
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 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.
44
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the
executive officers and directors of the Company as of the date of this
Prospectus:
NAME AGE POSITION
- ---- --- --------
Zindel Zelmanovitch* 51 President and Director
Nathan G. Berney* 70 Secretary
Jeanette Berney* 67 Treasurer and Director
Frederick Schulman 45 Director
- ----------------
* Interested Person. See "Board Committees/Interested Persons" below.
The term of each director expires at the time of the next annual
meeting of stockholders. Each officer holds office at the pleasure of the Board
of Directors.
ZINDEL ZELMANOVITCH has been the President and a Director of the
Company (including its predecessor) since 1986. Mr. Zelmanovitch has also been
the President and a director and stockholder of Freshstart Venture Capital
Corp., which company has been a licensed SSBIC since 1982 and is listed on
Nasdaq. 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 to , 1998. Mr. Zelmanovitch is also a director, officer
and principal stockholder of Veritas Financial Corp. ("Veritas"), the principal
stockholder of the Company, which performs 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 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.
45
<PAGE>
He also attended City College of New York School of Social Research where he
studied Business Law and Economics from 1953 to 1955. Jeanette Berney is the
wife of Nathan G. Berney.
JEANETTE BERNEY has been the Treasurer and a Director of the Company
since 1986. Since 1992, Mrs. Berney has been the Executive Assistant to North
Highview Investors, Inc. (Metal Division), a metal trading company. Mrs. Berney
is also a director and officer of Veritas. See "Management Agreement" below.
From 1980 to present , Mrs. Berney has been engaged as an investor in the
trading of future contracts. From 1976 through 1978 she was a manager of the
Port-a-Sign Company located in Rockland County, New York which company was
engaged in leasing portable advertising signs. Between 1968 and 1978 she owned
and operated Rapid Public Parking Inc., a company which owned and operated a
parking garage in New York City. Mrs. Berney graduated from the Bais Yaakov
Teachers Seminary of Brooklyn, New York in 1952 and also attended City College
of New York and Rockland Community College. Nathan Berney is the husband of
Jeanette Berney.
FREDERICK SCHULMAN has been a Director of the Company since May 1998.
Mr. Schulman is currently Executive Vice President and Director of Investment
Banking of RAS Securities Corp., an NASD and AMEX member firm, which he joined
as a consultant in November 1994 (and as a full-time employee in December 1996).
From 1986 through 1994, Mr. Schulman held the position of President of the Pivko
Group, Inc., an international investment firm which was a principal, syndicator
and/or broker for real estate and commercial transactions. Mr. Schulman was
President of Realty Funding Group (from 1983 to 1985), the real estate
consultant to Equilease Corporation, a subsidiary of Allied Signal Corp. Mr.
Schulman practiced law at the law firms of Bragar, Spiegel, Schulman, Rubin &
Driggin (from 1980 to 1983) and Kahr, Spitzer & Howard (from 1978 to 1980). Mr.
Schulman is a member of the New York bar and a licensed real estate broker with
a J.D. degree from Boston College School of Law (1977) and a B.A. from Clark
University (1974).
From September 1989 to July 1995 Mr. Schulman was the Executive Vice
President and General Counsel of Durso Supermarkets, Inc. ("Durso"), a New York
City supermarket chain. Durso was the subject of a leveraged buy-out in 1989,
which acquisition included certain debt financing which was personally
guaranteed by Mr. Schulman. Durso filed a bankruptcy petition under Chapter 11
in July 1992, was converted to a Chapter 7 liquidation in June 1996 and all the
supermarkets locations were sold. In May 1995 Mr. Schulman filed for personal
Chapter 7 bankruptcy as the lender proceeded against his guarantee. Following
distribution of the assets of Durso, Mr. Schulman was personally discharged in
December 1995.
The Company's Certificate of Incorporation provides that the SBA has
the right to require the removal of officers and directors and to the
appointment of the SBA or its designee as a receiver of the Company for the
purpose of continuing to operate the Company upon the occurrence of certain
events of default. See "Federal Regulation - Regulation Under the Small Business
Investment Act of 1958."
UNDERWRITER'S RIGHT TO APPOINT DIRECTOR
The Underwriting Agreement between the Company and the Underwriter
provides that for three years after the completion of this Offering, the
Underwriter will have the right, subject to SBA approval, to nominate one person
to serve on the Company's Board of Directors. If the Underwriter 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 Underwriter has not advised
the Company as to whether it intends to exercise either right. See
"Underwriting".
46
<PAGE>
BOARD COMMITTEES/INTERESTED PERSONS
The Board of Directors has appointed a Credit Committee comprised of
all of the directors of the Company. The Credit Committee reviews loan
activities and delinquencies and provides recommendations to the Board of
Directors.
The Company has established a compensation committee and an audit
committee. The compensation committee reviews executive salaries, administers
any bonus, incentive compensation and stock option plans of the Company,
including the Company's 1998 Stock Option Plan, and approves the salaries and
other benefits of the executive officers of the Company. In addition, the
compensation committee consults with the Company's management regarding pension
and other benefit plans, and compensation policies and practices of the Company.
The compensation committee currently consists of Zindel Zelmanovitch, and .
The audit committee reviews the professional services provided by the
Company's independent auditors, the independence of such auditors from
management of the Company, the annual financial statements of the Company and
the Company's system of internal accounting controls. The audit committee also
reviews such other matters with respect to the accounting, auditing and
financial reporting practices and procedures of the Company as it may find
appropriate or as may be brought to its attention. The audit committee currently
consists of Zindel Zelmanovitch, and .
The 1940 Act requires that a majority of the directors of a Business
Development Company, which the Company intends to elect to become, not be
"interested persons", as defined in the 1940 Act. Frederick Schulman,
____________ and ____________, who constitute a majority of the Board of
Directors, are not "interested persons."
MANAGEMENT AGREEMENT
All management services, personnel, administrative services, and
facilities (other than office furniture and equipment, capital or computer
equipment and legal and accounting services) are provided to the Company by
Veritas, a principal stockholder of the Company, pursuant to a Management
Agreement between Veritas and the Company dated , 1998. 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 , 1998, such services were provided by Z. Zindel Corp., a company
wholly-owned by Mr. Zelmanovich. Pursuant to that agreement, the Company is
contingently liable to Z. Zindel Corp. for $84,000 in management fees as of
April 30, 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."
47
<PAGE>
INDEMNIFICATION
The By-Laws of the Company contain various provisions, subject to the
provision of the 1958 Act and the SBA's required standard of care, entitling
directors, officers, agents and employees of the Company to indemnification
against all reasonable expenses, including attorney's fees, actually and
necessarily incurred in connection with the defense of any action, suit or
proceeding or any appeal therein (including any court approved settlement) to
the fullest extent and in the manner permitted by the General Corporation Law of
the State of Delaware ("GCL").
Section 145 of the GCL empowers a corporation to indemnify its
directors and officers and to purchase insurance with respect to liability
arising out of the performance of their duties as directors and officers. The
GCL provides further that the indemnification permitted thereunder shall not be
deemed exclusive of any other rights to which the directors and officers may be
entitled under the corporation's by-laws, any agreement, vote of stockholders or
otherwise.
Article Ninth of the Company's Certificate of Incorporation eliminates,
subject to Section 314 of the 1958 Act, the personal liability of directors to
the fullest extent permitted by Section 102 of the GCL. Article Tenth provides,
subject to the SBA's required standard of care, for indemnification of all
persons whom it shall have the power to indemnify pursuant to Section 145 of the
GCL.
The effect of the foregoing is to require the Company to the extent
permitted by law to indemnify the officers and directors of the Company for any
claim arising against such persons in their official capacities if such person
acted in good faith and in a manner that he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling
the Company pursuant to the foregoing provisions, the Company has been informed
that in the opinion of the SEC, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
The Company does not currently have any liability insurance coverage
for its officers and directors.
48
<PAGE>
EXECUTIVE COMPENSATION
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
-------------------
Long Term Compensation
----------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Name and Other Annual
Principal Position Fiscal Year-End Salary Bonus Compensation Awards Payouts
- ------------------ --------------- ------ ----- ------------ ------ -------
- ----------------------------------------------------------------------------------------------------------------------------------
Restricted
Stock LTIP All Other
Awards Options/LSARS payouts Compensation
------ ------------- ------- ------------
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Zindel 1997 $ 108,000 -- -- -- -- -- --
Zelmanovitch,
President (1)
- ----------------------------------------------------------------------------------------------------------------------------------
1996 $ 96,000 -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
1995 $ 144,000 -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
</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 , 1998. See "Management Agreement" above and "Certain
Relationships and Related Transactions".
49
<PAGE>
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 Underwriter.
Qualified Options granted to Eligible Employees under the Stock Option
Plan will be exercisable at a price equal to the fair market value of the shares
at the time the Qualified Option is granted except with respect to options
granted to any employee who is a holder of more than 10% of the total combined
voting power of all classes of stock of the Company outstanding, in which case
the exercise price may not be less than 110% of the then current fair market
value. If the aggregate fair market value (determined at the time the Qualified
Option is granted) of the shares exercisable for the first time by any grantee
during any calendar year exceeds $100,000, such excess shares may not be treated
as a Qualified Option. No Qualified Option may be exercised more than 10 years
after the date on which it is granted, except that such period may not exceed
five years in the case of an option granted to any employee who is a holder of
more than 10% of the total combined voting power of all classes of stock of the
Company.
Options not intended to qualify as "incentive stock options" under the
Code may be granted to Eligible Employees under the Stock Option Plan and shall
have such exercise prices and such other terms and conditions as the
Compensation committee may determine in its discretion, subject to the
requirements of the 1940 Act.
Options granted under the Stock Option Plan will not be transferable
other than by the laws of descent and distribution and during the grantee's life
may be exercised only by such grantee. All rights to exercise options will
terminate upon termination for cause of the holder's employment or directorship.
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
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discretion of the Compensation Committee, SARs may be granted in connection with
the grant to an Eligible Employee of any Option under the Stock Option Plan. An
SAR will entitle the holder of the related option to surrender such option, or
any portion thereof to the extent unexercised, and receive payment in an amount
determined by multiplying the excess of the fair market value of the Common
Stock on the date of exercise of such SAR over the exercise price of the related
option and the number of shares of Common Stock as to which such SAR is
exercised. Payment of the amount due upon the exercise of an SAR may be made, at
the discretion of the Compensation Committee, in shares of Common Stock having a
fair market value on the date preceding the date the SAR is exercised equal to
such payment or in cash.
The Stock Option Plan also provides that shares of restricted Common
Stock may be granted to Eligible Employees on such terms and in such amounts as
the Compensation Committee determines. Such shares of Common Stock will be
issued under a written agreement which will contain restrictions on transfers
thereof as may be required by law and as the Compensation Committee may
determine in its discretion.
The Stock Option Plan will terminate when there have been granted
shares of Common Stock and options on the total number of shares authorized by
the Stock Option Plan or by action of the Board of Directors, but in no event
later than May 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
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of Ethics. Conflicts may also arise as to the allocation of Mr. Zelmanovitch's
time. The Company's Board of Directors believes Mr. Zelmanovitch has and will
continue to be able to allocate such time as is required for the Company's
operations.
The Company, Freshstart and Mr. Zelmanovitch have agreed that if Mr.
Zelmanovitch receives a loan or other investment opportunity, he will present it
to both the Company and Freshstart, each of which shall have the right to
participate equally in such opportunity or in such lesser amount as determined
by its board of directors or investment committee, as the case may be, provided
that no such loan or other investment will exceed 20% of the Company's capital.
The Company's Board of Directors, acting pursuant to Section 57 of the
1940 Act, has determined that the agreement with Freshstart and Mr. Zelmanovitch
described above is reasonable and fair to its stockholders and does not involve
overreaching, and is consistent with the interests of its stockholders and the
fundamental and other policies of the Company described elsewhere in this
Prospectus. Further, each loan or other investment will be subject to review by,
and will require the approval of, a majority of the disinterested directors, and
the board will record in the minutes of its meetings and preserve in its records
as required by the 1940 Act, a description of each loan or other investment made
pursuant to this agreement, their findings and the information and other
materials upon which such findings were made and the basis therefor.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prior to _________________, 1998, 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. Currently, all
management services are 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 April 30, 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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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) 5,400,045(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
ndirectly 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.
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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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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
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<PAGE>
more of its officers and /or directors. In addition the SBA can apply for the
institution of an operating receivership, with the SBA or its designee as
receiver. The events are: equitable or legal insolvency, or a capital impairment
percentage of 100% or more which capital impairment is not cured within the time
limits set by the SBA in writing; a voluntary assignment for the benefit of
creditors; the filing of a voluntary or involuntary petition for relief under
the bankruptcy code; transfer of control; fraud; and fraudulent transfers.
The second category consists of willful conflicts of interest; willful
or repeated non-compliance with one or more of the substantive provisions of the
1958 Act or any substantive regulation promulgated thereunder; and failure to
comply with a restriction imposed on the SSBIC pursuant to the third category.
Upon the occurrence of any such event, and only if the SSBIC fails to remove the
person(s) the SBA identifies as responsible for such occurrence and/or cure such
occurrence to the SBA's satisfaction within a time period determined by the SBA,
upon written notice, the SBA may replace one or more of the SSBIC's officers
and/or directors or obtain the appointment of the SBA or its designee as
receiver of the SSBIC.
The third category lists eleven events, the occurrence of any of which
will allow the SBA, on written notice to the SSBIC, to prohibit the SSBIC from
making any additional investments except for investments pursuant to legally
binding commitments entered into by the SSBIC prior to such notice and, subject
to the SBA's prior written approval, investments that are necessary to protect
the SSBIC's investment; to prohibit distributions by the SSBIC to any party
other than the SBA, its agent or trustee, until all leverage is redeemed and
amounts due are paid; to require all commitments to the SSBIC to be funded at
the earliest time(s) permitted in accordance with the SSBIC's articles; and to
review and redetermine the SSBIC's approval management compensation. This
category of events included the occurrence of any events listed in the first two
categories; the SSBIC's failure to maintain its minimum regulatory capital;
capital or liquidity impairment and failure to cure the impairment within time
limits set by the SBA in writing; improper distributions; excessive
compensation; failure to pay any amounts due under preferred securities, unless
otherwise permitted by the SBA; noncompliance with one or more of the
substantive provisions of the 1958 Act, or any substantive regulation
promulgated thereunder; failure to maintain diversity between management and
ownership, if applicable to such SSBIC; failure to maintain investment ratios
for leverage in excess of 300% of Leverageable Capital or preferred securities
in excess of 100% of Leverageable Capital, if applicable to such SSBIC, as of
the end of each fiscal year; nonperformance of one or more of the terms and
conditions of any preferred security or of any agreement with or conditions
imposed by the SBA in its administration of the 1958 Act and the regulations
promulgated thereunder; and failure to take appropriate steps to accomplish such
actions as the SBA may have required for repeated non-substantive violations of
the 1958 Act or the regulations promulgated thereunder.
Under the fourth category if an SSBIC repeatedly fails to comply with
any one or more of the non-substantive provisions of the 1958 Act or any
non-substantive regulation promulgated thereunder, 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.
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As part of the regulatory framework, SSBICs are subject to examinations
by SBA agents at least bi-annually and are required to pay examination fees and
maintain certain records, files, internal control programs and reports.
Moreover, the SBA is authorized to suspend an SSBIC's license, issue cease and
desist orders, remove officers and directors of an SSBIC, subpoena witnesses and
records, apply for injunctions to the appropriate district court, and apply for
further acts of enforcement to the appropriate U.S. Circuit Court of Appeals.
An SSBIC may not provide funds to a small business concern if that
concern is not engaged in a regular and continuous business operation.
The foregoing summary of certain requirements under the 1958 Act and
regulations thereunder does not purport to be complete and investors are urged
to consult the 1958 Act and regulations thereunder for more detailed
information. See below under the heading "Tax Considerations" for a discussion
of the taxation of SSBICs.
COMMUNITY REINVESTMENT ACT
The Community Reinvestment Act of 1977 ("CRA") requires the Comptroller
of the Currency, the Federal Deposit Insurance Corporation, the Federal Reserve
Board and the Office of Thrift Supervision to use their authority when examining
financial institutions to encourage such institutions to help meet the credit
needs of the local communities in which they are chartered and do business.
Specifically, this Act requires each of these federal regulators to assess the
institution's record of meeting the credit needs of its entire community,
including low- and moderate-income neighborhoods, consistent with the safe and
sound operation of the institution, and to take such record into account in its
evaluation of an application for a merger, acquisition, or deposit facility by
such institution. Financial institutions covered by the CRA include banks,
thrifts and savings and loans.
In assessing CRA, agencies review an institution's performance to
produce an overall composite rating based upon three major elements: lending,
service and investing. Agencies assign a rating for an institution under the
lending, investment, and service tests which then are combined to produce an
overall rating under CRA.
The investment test evaluates the degree to which a bank is helping to
meet the credit needs of its service area(s) through qualified investments.
"Qualified investments" include, but are not limited to, organizations promoting
small businesses, including SBICs and SSBICs. An agency will evaluate the
investment performance of an institution based upon several factors: the dollar
amount of qualified investments that directly address credit needs; the use of
innovative or complex qualified investments to support community development
initiatives; and the degree of responsiveness to credit and community economic
development needs. The overall CRA rating of a bank, thrift or savings and loan
may be positively affected as a consequence of equity investments in an SSBIC.
FOR A DISCUSSION REGARDING REGULATION AS A BUSINESS DEVELOPMENT COMPANY
UNDER THE 1940 ACT, SEE "BUSINESS - REGULATION AS A BUSINESS DEVELOPMENT
COMPANY."
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TAX CONSIDERATIONS
GENERAL
The following discussion is based on the currently existing provisions
of the Internal Revenue Code of 1986, as amended (the "Code") and the currently
existing regulations thereunder. No assurance can be given that future
legislation or administrative changes or court decisions will not significantly
modify the statements expressed herein. The following discussion is only a
general summary of some of the federal tax principles applicable to the Company
and to an investment in the Company's Securities, and does not purport to be a
complete description of the tax considerations applicable to such investment.
Prospective investors should consult their own tax advisers with respect to the
tax considerations which pertain to their purchase and ownership of the
Company's Securities.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY
The Company intends to qualify as a RIC under the Code. To so qualify,
the Company must, among other things: (a) either (1) at all times during the
taxable year (A) be registered under the 1940 Act as a management company or
unit investment trust or (B) have in effect an election under the 1940 Act to be
treated as a Business Development Company; or (2) be a common trust fund or
similar fund excluded from the definition of "investment company" under the 1940
Act that is not a "common trust fund" under Code section 584(a); (b) make an
election to be treated as a RIC; (c) derive at least 90% of its gross income
from dividends, interest, payments with respect to securities loans, gains from
the sale or other disposition of stocks, securities or foreign currencies, or
other income (including gains from options, futures contracts and forward
contracts) derived with respect to the Company's business of investing in
stocks, securities or currencies; (d) derive less than 30% of its gross income
from the sale or other disposition of the following assets held for less than
three months --(i) stocks and securities; (ii) options, futures and forward
contracts (other than options, futures and forward contracts on foreign
currencies), and (iii) foreign currencies (and options, futures and forward
contracts on foreign currencies) if such currencies (or options, futures or
forward contracts) are not directly related to the Company's principal business
of investing in stocks and securities (or options, futures and forward contracts
with respect to stocks or securities); and (e) diversify its holdings so that,
at the end of each quarter, (i) at least 50% of the market value of the
Company's total assets is represented by cash and cash items, U.S. Government
securities, securities of other regulated investment companies and other
securities, with such other securities limited in respect of any one issuer to
an amount not greater in value than 5% of the Company's total assets and to not
more than 10% of the outstanding voting securities of such issuer, and (ii) not
more than 25% of the value of the Company's total assets is invested in the
securities (other than U.S. Government securities or securities of other RICs)
of any one issuer or of any two or more issuers that the Company controls and
that are determined to be engaged in the same business or similar or related
businesses.
The Company intends to become a Business Development Company
immediately before the effectiveness of the Registration Statement, of which
this Prospectus forms a part. Consequently, because the Company will not have
been a Business Development Company for its entire taxable year ending July 31,
1999, the Company will be unable to qualify as a RIC for such year. Thus, for
such taxable year, the Company will be subject to federal income tax on its
taxable income at a maximum rate
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of 35%, and distributions to holders of Shares during such year will be taxable
as dividends (I.E., ordinary income) to the extent of the Company's current and
accumulated earnings and profits.
ELIGIBILITY FOR RIC TAX TREATMENT
Once the Company qualifies as a RIC, the Company and holders of Shares
will be eligible for special treatment under the Code ("RIC Tax Treatment") for
a taxable year only if certain additional requirements are met.
First, the Company must distribute to its shareholders at least 90% of
its "investment company taxable income" in such taxable year. Investment company
taxable income includes dividends, interest and net short-term capital gains in
excess of net long-term capital losses, but does not include net long-term
capital gains in excess of net short-term capital losses. If the Company
acquires debt obligations that were originally issued at a discount, or that
bear interest rates that do not call for payment at fixed rates (or certain
"qualified variable rates") at regular intervals over the life of the
obligation, it will be required to include as interest income each year a
portion of the "original issue discount" that accrues over the life of the
obligation, regardless of whether the income is received by the Company, and to
make distributions accordingly. In addition, if the Company is the holder of
record of any stock on the record date for any dividends payable with respect to
such stock, such dividends are included in the Company's gross income not as of
the date received but as of the later of (a) the date such stock became
ex-dividend with respect to such dividends (I.E., the date on which a buyer of
the stock would not be entitled to receive the declared, but unpaid, dividends),
or (b) the date the Company acquired such stock. Accordingly, in order to
satisfy its income distribution requirements, the Company may be required to pay
dividends based on anticipated earnings.
The Company intends to satisfy the 90% distribution requirement in each
taxable year, and distribute to its shareholders substantially all of its
investment company taxable income, commencing with its taxable year ending July
31, 2000. It may be necessary for the Company to borrow money or liquidate
assets in order to make such distributions. However, applicable law, loan
documents and contracts may prevent the Company from meeting the distribution
requirements. For example, under the SBA Regulations and the terms of the SBA
Debentures, the Company may not make distributions to shareholders except out of
retained earnings. Retained earnings result from interest and dividend income,
less net unrealized depreciation on loans and investments. However, the Code,
unlike the SBA Regulations, does not permit the Company to deduct from
investment company taxable income the amount of unrealized depreciation on loans
and investments. Thus, circumstances may arise in which the SBA Debentures
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
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Company may therefore need to make distributions of such accumulated earnings
and profits in order to qualify for RIC Tax Treatment. The Company intends to
eliminate any such accumulated earnings and profits in order to qualify for RIC
Tax Treatment effective with its taxable year ending July 31, 2000; however, as
discussed above, restrictions on the Company's ability to make distributions or
a change in the Company's income distribution policy may prevent the Company
from eliminating such earnings and profits, in which case the Company will not
qualify for RIC Tax Treatment.
In summary, the Company intends to meet the requirements for
qualification as a RIC and for RIC Tax Treatment and elect to be treated as a
RIC starting with its taxable year ending July 31, 2000, but there is no
guarantee that it will so qualify for such year or any subsequent taxable year.
If the Company fails to qualify for RIC Tax Treatment or otherwise fails to
qualify as a RIC in any taxable year, the Company will be subject to tax in such
year on all of its taxable income, whether or not the Company makes any
distributions to its shareholders. In addition, all distributions to
shareholders, including holders of Shares, will be treated as dividends, taxable
at ordinary income rates, to the extent of the Company's current and accumulated
earnings and profits. Unless otherwise indicated, the following section of this
discussion assumes the Company will be a RIC and qualify for RIC Tax Treatment.
SPECIAL PROVISIONS OF THE CODE APPLICABLE TO SSBICS AND SHAREHOLDERS OF SSBICS
The Company and its shareholders may qualify for the following tax
benefits which are ordinarily not available to corporations not licensed as
SSBICs and their shareholders:
Under Section 1243 of the Code, the Company will be entitled to
ordinary rather than capital loss treatment for losses sustained with respect to
stock derived from convertible debentures of small business corporations.
Because the Company does not presently intend to purchase convertible
debentures, however, this potential benefit is not likely to be of practical
significance to investors.
Under Section 582 of the Code, the Company will be entitled to ordinary
rather than capital loss treatment for losses sustained with respect to debt
instruments.
Under Section 1242 of the Code, except for a short sale of stock, the
Company's shareholders will be entitled to take an ordinary rather than a
capital loss deduction on losses resulting from the worthlessness or the sale or
exchange of the Company's Common Stock.
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
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public offering, regularly traded on an established securities market or held by
no fewer than 500 persons at all times during the taxable year. If the Company
does not qualify as a publicly offered investment company, the 2% floor on
itemized deductions will apply to shareholders of the Company with respect to
Company expenses. As a result, each shareholder would be treated, pursuant to
applicable Treasury Regulations, as including both an amount of income and an
expense, that must be claimed subject to the above described limitations, equal
to a portion of the Company's expenses. The impact of this provision upon a
shareholder of the Company, if it were to apply, depends not only upon his share
of the Company's income and expenses but also depends upon the shareholder's
income and expenses from other sources. Each shareholder should consult his own
tax advisor regarding the potential application of Code Section 67 and other
provisions of the Code that limit the deduction of itemized deductions by
individuals.
(b) DEFERRAL OF CAPITAL GAINS
Under Code Section 1044, C corporations and individuals (not estates,
trust, partnerships or S corporations) may elect to defer recognition of capital
gain realized on the sale of publicly traded securities if the taxpayers use the
sales proceeds within 60 days to purchase common stock or a partnership interest
in an SSBIC. The amount of gain an individual may elect to roll over for a tax
year is limited to the lesser of (1) $50,000, or (2) $500,000 reduced by any
gain previously excluded under this provision for all preceding taxable years
($25,000 and $250,000, respectively, for married individuals filling
separately). For C corporations, the annual and cumulative limits are increased
to $250,000 and $1 million, respectively. To the extent that sales proceeds
exceed the cost of the SSBIC common stock or partnership interest, gain must be
currently recognized. Recognition of ordinary gain may not be deferred. This
election is made by a shareholder on Schedule D to his Form 1040 Federal income
tax return for the year in which the securities are sold.
For purposes of Section 1044 of the Code, the term "publicly traded
securities" means securities which are traded on an established securities
market. The taxpayer's basis in the SSBIC stock or partnership interest is
reduced, by the amount of any unrecognized gain on the sale of the securities.
Each investor before making an investment should consult with his own
accountant or tax advisor as to the potential application of the tax benefits
available under Code Section 1044. Each shareholder should note that his holding
period for the Company's Common Stock begins upon the purchase of the Common
Stock with no inclusion in such holding period for the time he held the
publicly-traded securities. If a shareholder sells the Common Stock and realizes
a gain or loss upon such sale, such gain or loss will be a long-term capital
gain or loss, if the shareholder held such Common Stock for more than one year.
(c) EXCLUSION FOR GAIN FROM SALE OF SMALL BUSINESS STOCK
To encourage investment in new ventures and specialized small business
investment companies, such as the Company, Code Section 1022 grants relief to
investors who risk their funds in these businesses. Non-corporate investors may
exclude up to 50% of the gain they realize on the disposition of qualified small
business stock issued after August 10,1993, and held for more than five (5)
years. The amount of gain eligible for the 50% exclusion is subject to per
issuer limits. The exclusion is available to taxpayers who own eligible stock
for five years in a qualified corporation that actively conducts a qualified
trade or business and that meets a maximum gross assets test. SSBICs which
qualify for Code
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Section 1202 treatment at the time of the taxpayer's investment are also exempt
from certain line of business limitations.
However, if an individual utilizes Code Section 1044 to defer
recognition of capital gain on the sale of publicly traded securities and then
invests those funds in qualified small business stock, the deferred gain would
not be eligible for the 50% exclusion, although the appreciation occurring after
the purchase of the qualified small business stock would be eligible for such
50% exclusion.
TAXATION OF THE COMPANY AND ITS SHAREHOLDERS
GENERALLY
As a RIC qualifying for RIC Tax Treatment, the Company generally will
not be subject to U.S. federal income tax on its investment company taxable
income. However, the Company will be subject to tax on its income and gains, to
the extent that it does not distribute to its shareholders an amount equal to
such income and gains.
The Company also will not be subject to U.S. federal income tax on its
net long-term capital gains in excess of net short-term capital losses that it
distributes to its shareholders. Certain capital transactions of the Company
occurring after October 31 of any taxable year are for purposes of these rules
treated as having occurred on the first day of the following taxable year. If
the Company retains for reinvestment or otherwise an amount of such excess net
long-term capital gains it will be subject to a tax of 35% on the amount
retained. The Company will determine whether to distribute any net long-term
capital gains in excess of net short-term capital losses. The Company expects to
designate amounts retained, if any, as undistributed capital gains in a notice
to stockholders, each of whom (a) will be required to include in income for U.S.
federal income tax purposes, as long-term capital gains, such stockholder's
proportionate share of the undistributed amount, (b) will be entitled to credit
against its U.S. federal income tax liabilities such stockholder's proportionate
share of the tax paid by the Company on the undistributed amount and to claim a
refund to the extent that such stockholder's credits exceed its liabilities and
(c) for U.S. federal income tax purposes, will be entitled to increase its tax
basis in its Shares by an amount equal to 65% of the amount of undistributed
capital gains included in the stockholder's income.
Distributions of net long-term capital gains, if any, by the Company
are taxable to stockholders as long-term capital gains, regardless of how long
the Shares have been held, and are not eligible for the dividends received
deduction, as described below. Under the Code, net long-term capital gains will
be taxed at a rate no greater than 28% for individuals and a rate no greater
than 35% for corporations. Dividend distributions of investment company taxable
income are taxable to a stockholder as ordinary income to the extent of the
Company's current and accumulated earnings and profits. Distributions in excess
of the Company's earnings and profits will first reduce the adjusted tax basis
of a stockholder's Shares and, thereafter, will be treated as gains from the
disposition of Shares. Corporate stockholders may in certain circumstances be
eligible for a dividends received deduction with respect to dividend
distributions of investment company taxable income. Eligibility for such a
deduction is dependent in part upon the aggregate amount of dividends received
by the Company from domestic corporations. Corporate stockholders should consult
their own tax advisors concerning the availability of the dividends received
deduction. Stockholders will be notified annually as to the federal income tax
status of their dividends and distributions.
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POTENTIAL EXCISE TAX
As a RIC, the Company may be subject to a nondeductible 4% excise tax
on a portion of its undistributed income. To avoid the tax, the Company must
distribute annually at least 98% of its ordinary income (with certain
adjustments) and not taking into account any capital gains or losses) for the
calendar year and at least 98% of its capital gain net income for the 12 months
period ending, as a general rule, on October 31 of each calendar year. For this
purpose, any income or gain retained by the Company that is subject to corporate
income tax will be treated as having been distributed at the end of the calendar
year. In addition, the minimum amounts that must be distributed in any calendar
year to avoid the excise tax will be increased or decreased to reflect the
amounts of distributions in previous calendar years. For a distribution to
qualify under the foregoing provisions, the distribution generally must be
declared and paid during the calendar year. Any dividend declared by the Company
in October, November or December of any calendar year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by each shareholder on December 31 of such calendar year and
to have been paid by the Company during January of the following calendar year.
The Company intends to make sufficient distributions each calendar year to avoid
the excise tax, but limitations on the Company's ability to make distributions
or a change in the Company's income distribution policy may not, permit such
distributions at all times, in which case the excise tax will apply. See
"Dividends".
STATE AND LOCAL TAXES
The foregoing discussion relates only to federal income tax matters.
The Company and its shareholders will also be subject to state and local
taxation. Investors should consult their own tax advisers with respect to the
state and local tax consequences to them of the above-described transactions.
HOLDING AND DISPOSING OF WARRANTS
EXERCISE OF WARRANT
The exercise of a Warrant generally will not be a taxable event to the
holder of the Warrant. A holder's initial tax basis in shares of Common Stock
(including a fractional share interest) acquired upon exercise of a Warrant
("Warrant Shares") will equal the amount of any cash paid upon exercise. The
holding period for Warrant Shares acquired upon the exercise of a Warrant will
begin with the date on which the Warrant is exercised.
ADJUSTMENT TO EXERCISE PRICE
Adjustments to the exercise price pursuant to the terms of the Warrants
generally will not constitute a taxable event for a holder. However, under
certain circumstances, an adjustment to the exercise price would be treated as a
taxable constructive distribution to Holders of the Warrants. If a taxable
constructive distribution were to occur, a holder's basis in a Warrant would be
increased by the amount of the taxable distribution with respect to the Warrant.
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GAIN OR LOSS ON DISPOSITION FOR EXPIRATION OF WARRANTS
Any gain or loss recognized on a sale or other taxable disposition of
Warrant, and any loss recognized on the expiration of a Warrant, generally will
constitute capital gain or loss if the Warrant Shares underlying the Warrant
would have been held as a capital asset by the holder if the Warrant had been
exercised. Capital gain or loss recognized upon a sale or other taxable
disposition of a Warrant, and any capital loss recognized on the expiration of a
Warrant, will be long term if the holder's holding period for the Warrant is
more than one year at the time of such sale, other taxable disposition, or
expiration.
BACKUP WITHHOLDING
The Company may be required to withhold 31% of reportable payments
(which may include dividends, capital gain distributions, interest, and
principal payments) to certain non-corporate stockholders as backup withholding.
A stockholder, however, may avoid becoming subject to this requirement by filing
an appropriate form providing his taxpayer identification number, certifying
under penalties of perjury that such taxpayer identification number is correct
and that he is not subject to backup withholding, or is exempt from backup
withholding. Corporations and certain other stockholders are exempt from backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
under the backup withholding rules from payments made to stockholders may be
credited against their federal income tax liability.
THE U.S. FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS A SUMMARY
INCLUDED FOR GENERAL INFORMATION PURPOSES ONLY. IN VIEW OF THE INDIVIDUAL NATURE
OF TAX CONSEQUENCES, EACH INVESTOR IS ADVISED TO CONSULT HIS OWN TAX ADVISOR
WITH RESPECT TO HOW AN INVESTMENT IN THE COMPANY WILL AFFECT HIM, INCLUDING THE
EFFECT AND APPLICABILITY OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE
POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
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DETERMINATION OF NET ASSET VALUE
The net asset value per share of Common Stock will be determined, as
soon as practicable after and as of the end of each calendar quarter, by
dividing the book value of the Company's total assets minus total liabilities by
the total number of shares of Common Stock outstanding at the date as of which
the determination is made.
In making its valuation determination, the Board of Directors adheres
to the valuation policy approved by the SBA and adopted by the Board of
Directors. In calculating the value of the Company's total assets, securities,
if any, that are traded in the over-the-counter market or on a stock exchange
are valued at the average of the "bid" and "asked" prices, as the case may be,
for the valuation date and the preceding two days, unless the investment is
subject to a restriction that requires a discount from such price, which is
determined by the Board of Directors. All other investments are valued at fair
value as determined in good faith by the Board of Directors. In making such
determination, the Board of Directors will value loans and nonconvertible debt
securities for which there exists no public trading market at cost; plus
amortized original issue discount, if any, unless adverse factors lead to a
determination of a lesser value. In valuing securities for which there exists no
public trading market, the Board of Directors will determine fair value on the
basis of collateral, the issuer's ability to make payments, its earnings, the
market value of comparable publicly traded companies and other pertinent
factors.
A substantial portion of the Company's assets will consist of loans and
other investments carried at fair values determined by its Board of Directors.
The Company's independent public accountants have historically reviewed and may
in the future review and express an opinion on the reasonableness of the
procedures applied by the directors in valuing such loans and other investments
and the appropriateness of the underlying documentation, but determination of
fair values involves subjective judgment not susceptible to substantiation by
auditing procedures. Accordingly, the accountants' opinion on the Company's
Financial Statements included elsewhere in this Prospectus refers to, and the
financial statements in the Company's annual report is expected to refer to, the
uncertainty with respect to the possible effect on the financial statements of
such valuations.
DESCRIPTION OF SECURITIES
AUTHORIZED CAPITAL
The authorized capital stock of the Company consists of 25,000,000
shares of Common Stock and 5,000,000 shares of Preferred Stock. Prior to this
Offering, the Company had 5,701,545 shares of Common Stock outstanding and no
shares of Preferred Stock outstanding.
COMMON STOCK
The Company is authorized to issue up to 25,000,000 shares of Common
Stock, $.01 par value per share, of which 5,701,545 shares were issued and
outstanding as of the date of this Prospectus. 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
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Common Stock since 1990. See "Risk Factors - No Common Stock Dividends",
"Dividends and Distributions" and "Tax Considerations."
The holders of the Common Stock have sole voting rights, one vote for
each share held of record on all matters submitted to stockholders, and are
entitled upon liquidation of the Company to share ratably in the net assets
available for distribution after creditors and holders of preferred stock having
a liquidation preference over the Common Stock have been paid in full. There are
no preemptive, conversion, redemption or cumulative voting rights applicable to
the Common Stock. The outstanding shares of the Common Stock are fully paid and
non-assessable. Pursuant to the Underwriting Agreement between the Company and
the Underwriter, 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 Underwriter.
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 Underwriter, 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 Underwriter.
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 Underwriter, and ending five years from the date of the Prospectus. The
Warrants may be exercised in whole or in part.
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The Warrants are being issued under a warrant agreement ("Warrant
Agreement") between the Company and Jersey Transfer and Trust Company (the
"Warrant Agent"). The following is a general summary of certain provisions
contained in the Warrant Agreement and is qualified in its entirety by reference
to the Warrant Agreement, a copy of which has been filed as an exhibit to the
Registration Statement, of which this Prospectus is a part.
The Board of Directors of the Company has the right to amend the terms
of the Warrant Agreement at its discretion to, among other things, reduce the
exercise price or extend the exercise period of the Warrants; PROVIDED, HOWEVER,
that no amendment adversely affecting the rights of the holders of Warrants may
be made without the approval of the holders of a majority of the affected
Warrants and PROVIDED, FURTHER, that no reduction in the number or change in the
nature of the securities purchasable upon exercise of the Warrant, no increase
in the exercise price, or the acceleration of the expiration date, may be made
without the approval of each holder of a Warrant, unless such changes result
from the effect of the anti-dilution provisions of the Warrant, as summarized
below.
Commencing the earlier of (i) 24 months from the date of this
Prospectus or (ii) 12 months from the date of the Prospectus, with the consent
of the Underwriter, 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 Underwriter 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 Underwriter 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
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further conditioned upon the Company's Warrant Agent being furnished by the
Underwriter or NASD broker-dealer member with a certificate stating that:
(i) the Warrants exercised were not held in a discretionary account;
(ii) the Underwriter or the NASD member did not, within 5 business
days immediately preceding the solicitation of the exercise of the
Warrant or the date of such exercise, bid for or purchase the Common
Stock of the Company or any securities of the Company immediately
convertible into or exchangeable for the Common Stock (including the
Warrants) or otherwise engage in any activity that would be prohibited
by Regulation M under the Securities Exchange Act of 1934, as amended,
to one engaged in a distribution of the Company's securities; and
(iii) in connection with the solicitation, the 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
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outstanding voting stock of the corporation not owned by the interested
stockholder. Under section 203, the restrictions described above also do not
apply to certain business combinations proposed by an interested stockholder
following the public announcement or notification of one of certain
extraordinary transactions involving the corporation and a person who had not
been an interested stockholder during the previous three years or who became an
interested stockholder with the approval of the corporation's board of directors
and if such business combination is approved by a majority of the board members
who were directors prior to any person's becoming an interested stockholder. The
provisions of Section 203 requiring a super-majority vote to approve certain
corporate transactions could have the effect of discouraging, delaying or
preventing hostile takeovers, including those that might result in the payment
of a premium over market price or changes in control or management of the
Company.
LIMITATION ON LIABILITY OF DIRECTORS
The Company's Certificate of Incorporation provides that, subject to
Section 314 of the 1958 Act, a director of the Company will not be personally
liable to the Company or its stockholders for monetary damages for breach of the
fiduciary duty of care as a director, including breaches which constitute gross
negligence. By its terms and in accordance with the GCL, however, this provision
does not eliminate or limit the liability of a director of the Company (i) for
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the GCL
(relating to unlawful payments or dividends or unlawful stock repurchases or
redemptions), (iv) for any improper benefit or (v) for breaches of a director's
responsibilities under the federal securities laws.
TRANSFER AGENT/WARRANT AGENT
The Company's transfer agent for the Common Stock and the warrant agent
for the Warrants is Jersey Transfer & Trust Co., 201 Bloomfield Avenue, P.O. Box
36, Verona, New Jersey 07044.
SHARES AVAILABLE FOR FUTURE SALE
Immediately prior to the sale of the Common Stock hereunder, the
Company had an aggregate of 5,701,545 shares of its Common Stock issued and
outstanding, all of which are "restricted 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 Underwriter. 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
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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 Underwriter ("Underwriting
Agreement"), the Company has agreed to sell to the Underwriter, on a firm
commitment basis, a total of 1,250,000 Units.
The Company has agreed to sell the Units to the Underwriter at a
discount of ten percent (10%) of the public offering price thereof. The Company
has also agreed to pay the Underwriter a non-accountable expense allowance in
the amount of 3% of the 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 Underwriter's counsel. The Company estimates that it will
incur costs of $300,000 in connection with this Offering, not including the
Underwriter's 3% non-accountable expense allowance and the $108,000 financial
consulting fee payable to the Underwriter. As part of the underwriting
arrangements, the Company will enter into an agreement to retain the Underwriter
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 Underwriter 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 Underwriter
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 Underwriter
will have the right to nominate one person to serve on the Company's Board of
Directors. If the Underwriter does not exercise this right, it may appoint an
advisor, who will be entitled to attend all meetings of the Board of Directors.
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 Underwriter.
The Company has granted the Underwriter 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 Underwriter may
exercise the Over-Allotment Option solely for the purpose of covering
over-allotments incurred in the sale of Units offered hereby.
The Underwriter 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 Underwriter does not intend to confirm sales of more than one percent of the
Units offered hereby to any accounts over which it exercises discretionary
authority.
70
<PAGE>
The Underwriter 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 Underwriter to reclaim a
selling concession from a syndicate member when the securities originally sold
by such syndicate member are purchased in a syndicate covering transaction to
cover syndicate short positions. Such stabilizing transactions, syndicate
covering transactions and penalty bids may cause the price of the securities to
be higher than they would otherwise be in the absence of such transactions.
The Company has agreed, at the closing of this Offering, to sell to the
Underwriter or its nominee, for $.001 per option, the Underwriter's Unit
Purchase Option to purchase 120,000 Units, each Unit consisting of one share of
Common Stock and one Warrant. The Underwriter's 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 $4.80 per Unit, 120% of the public offering
price of the Units. The Underwriter's Unit Purchase Option will be restricted
from exercise, sale, transfer, assignment or hypothecation (except to officers
of the Underwriter or of any other broker-dealer which participates in this
Offering) for a period of one year from the date of this Prospectus. The
Underwriter's Unit Purchase Option also provides that on two occasions, upon the
request of the Underwriter or holders of a majority interest in the
Underwriter's 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 Underwriter's 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 Underwriter's 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 Underwriter's Unit Purchase Option and the exercise price are
subject to adjustment upon certain events to prevent dilution.
For the life of the Underwriter's 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 Underwriter's 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 Underwriter's Unit
Purchase Option is outstanding.
The Company has also agreed to pay the Underwriter 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".
71
<PAGE>
DETERMINATION OF PUBLIC OFFERING PRICE
Prior to this Offering, there has been no public market for the
Securities. The initial public offering prices for the Securities has been
determined by negotiations between the Company and the Underwriter. 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 Underwriter by Gusrae, Kaplan & Bruno, 120 Wall Street, New
York, NY 10005
EXPERTS
The statements in this Prospectus under the captions "Risk Factors -
Need For SBA Financing; SBA Financing Not Assured", "SBA Industry Review",
"Business - Specialized Small Business Investment Companies," "Federal
Regulation" and "Tax Considerations" have been reviewed and approved by Reid &
Priest LLP, Market Square, 701 Pennsylvania Avenue, N.W., Washington, D.C.
20004, special regulatory counsel for the Company, as experts in such matters,
and are included herein in reliance upon such review and approval.
The financial statements of East Coast Venture Capital, Inc. have been
included herein and in the Registration Statement in reliance upon the report of
Michael C. Finkelstein & Co., independent certified public accountants,
appearing elsewhere herein and upon the authority of said firm as experts in
accounting and auditing.
CUSTODIAN
The Company currently acts as a self-custodian of its portfolio
securities in compliance with applicable regulations promulgated under the 1940
Act, although the Company reserves the right to appoint a third party custodian
in the future. The Company retains its securities and original loan
documentation in a rented safe deposit vault at European American Bank, 1345
Avenue of the Americas, New York, New York 10105.
72
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Accountants' Review Report ............................................................ F-1
Independent Auditors' Report .......................................................... F-2
Statements of Financial Position of
East Coast Venture Capital, Inc. as of July 31, 1996 and 1997 and
April 30, 1997 and 1998 ............................................................. F-3-4
Statements of Operations for the Years Ended July 31, 1995, 1996 and 1997
and for the Nine Months Ended April 30, 1997 and 1998 ............................... F-5
Statements of Cash Flows for the Years Ended July 31, 1995, 1996 and 1997
and for the Nine Months Ended April 30, 1997 and 1998 ............................... F-6
Statements of Stockholders' Equity for the Years Ended July 31, 1995, 1996
and 1997 and for the Nine Months Ended April 30, 1997 and 1998 ...................... F-7
Notes to the Financial Statements ..................................................... F-8
Supplemental Schedules ................................................................ F-15
Selected Per Share Data and Ratios .................................................... F-16
</TABLE>
<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.
Accountants' Review Report
We have reviewed the accompanying statements of financial position of East Coast
Venture Capital, Inc. as of April 30, 1997 and 1998, and the related statements
of operations, cash flows and stockholders' equity for the nine month periods
then ended, in accordance with Statements on Standards for Accounting and Review
Services issued by the American Institute of Certified Public Accountants.
A review of the interim financial statements consists principally of obtaining
an understanding of the system for the preparation of interim financial
statements, applying analytical review procedures to financial data and making
inquires of persons responsible for financial and accounting matters. It is
substantially less in scope than an examination in accordance with generally
accepted auditing standards, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles applied on a consistent basis.
As indicated in Note 2 to the financial statements as of April 30, 1997 and
1998, loans and investment securities amounting to $3,953,845 and $4,092,367
respectively, are valued at cost, less a provision for loan losses. Because of
the inherent uncertainty of the valuation, the estimated values might otherwise
be significantly higher or lower than values that would exist in a ready market
for such loans which market has not and does not presently exist.
Our review was made for the purpose of expressing limited assurance that there
are no material modifications that should be made to the financial statements in
order for them to be in conformity with generally accepted accounting
principles. The information included in the accompanying supplementary schedules
is presented only for supplementary analytical purposes. Such information has
been subjected to the same inquiry and analytical procedures applied in the
review of the basic financial statements and we are not aware of any material
modifications that should be made thereto.
The financial statements presented for the years ended July 31, 1995, 1996 and
1997 were audited by us and we expressed unqualified opinions on them in our
audit report dated October 6, 1997, which is included herein, but we have not
performed any auditing procedures since that date.
May 29, 1998
Certified Public Accountant
F-1
<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, 1995, 1996 and 1997 and the
related statements of operations, stockholders' equity and cash flows for the
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 $4,099,962 and $4,050,288 as of July 31, 1996 and 1997,
respectively (245% 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 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, 1996
and 1997 and the results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
October 6, 1997
Certified Public Accountant
F-2
<PAGE>
EAST COAST VENTURE CAPITAL, INC.
STATEMENTS OF FINANCIAL POSITION
ASSETS
<TABLE>
<CAPTION>
July 31, April 30,
-------------------------- --------------------------
1996 1997 1997 1998
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Loans Receivable (Note 2) $ 4,248,120 $ 4,198,446 $ 4,102,003 $ 4,150,525
Equity Investment in Small Business Concerns -- -- -- $ 90,000
Less: Unrealized Depreciation on Loans Receivable (148,158) (148,158) (148,158) (148,158)
----------- ----------- ----------- -----------
4,099,962 4,050,288 3,953,845 4,092,367
Less: Current Maturities - Loans Receivable 570,320 629,767 593,077 622,579
----------- ----------- ----------- -----------
Total Portfolio Securities - Net of Current Maturities 3,529,642 3,420,521 3,360,768 3,469,788
----------- ----------- ----------- -----------
Current Assets:
Cash (Note 13) 423,425 445,232 541,353 1,815,549
Accrued Interest 98,965 127,335 104,424 194,055
Current Maturities - Loans Receivable (Note 2) 570,320 629,767 593,077 622,579
Other Assets 30,090 79,372 35,275 163,097
----------- ----------- ----------- -----------
Total Current Assets 1,122,800 1,281,706 1,274,129 2,795,280
----------- ----------- ----------- -----------
Total Assets $ 4,652,442 $ 4,702,227 $ 4,634,897 $ 6,265,068
=========== =========== =========== ===========
See Accountants' Review Report and Notes to the Financial Statements
F-3
</TABLE>
<PAGE>
EAST COAST VENTURE CAPITAL, INC.
STATEMENTS OF FINANCIAL POSITION
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
July 31, April 30,
-------------------------- --------------------------
1996 1997 1997 1998
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Long Term Debt:
Debentures Payable to SBA (Note 3) $ 2,700,000 $ 2,740,000 $ 2,700,000 $ 3,780,000
----------- ----------- ----------- -----------
Current Liabilities:
Accrued Interest 42,623 39,023 48,791 63,677
Other Current Liabilities 6,500 16,500 3,500 4,500
Deferred Income 99,521 99,521 73,275 99,521
Loan Participations 134,149 133,507 132,438 133,507
----------- ----------- ----------- -----------
Total Current Liabilities 282,793 288,551 258,004 301,205
----------- ----------- ----------- -----------
Total Liabilities 2,982,793 3,028,551 2,958,004 4,081,205
----------- ----------- ----------- -----------
Commitments and Contingencies (Notes 8, 10, 11 and 12) -- -- -- --
Stockholders' Equity: (Notes 5, 6, 14)
Class A 3% Cumulative Preferred Stock, $1 Par Value;
1,000,000 Shares Authorized, No Shares Issued or
Outstanding -- -- -- --
Class B 4% Cumulative Preferred Stock, with a
15 Year Redemption Period, $1 Par Value;
5,000,000 Shares Authorized: No Shares
Issued or Outstanding -- -- -- --
Common Stock, $.01 Par Value; 25,000,000 Shares
Authorized: 5,400,045 and 5,701,545
Issued and Outstanding, Respectively 54,000 54,000 54,000 57,015
Additional Paid in Capital 1,590,680 1,720,280 1,687,880 2,308,380
Restricted Capital - Realized Gain
on Redemption 394,200 264,600 297,000 167,400
Retained Earnings (Deficit) (369,231) (365,204) (361,987) (348,932)
----------- ----------- ----------- -----------
Total Stockholders' Equity 1,669,649 1,673,676 1,676,893 2,183,863
----------- ----------- ----------- -----------
Total Liabilities and Stockholders' Equity $ 4,652,442 $ 4,702,227 $ 4,634,897 $ 6,265,068
=========== =========== =========== ===========
Net Asset Per Share $ 0.31 $ 0.31 $ 0.31 $ 0.38
=========== =========== =========== ===========
See Accountants' Review Report and Notes to the Financial Statements
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EAST COAST VENTURE CAPITAL, INC.
STATEMENTS OF OPERATIONS
Years Ended Nine Months Ended
July 31, April 30,
---------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
Interest Earned on Outstanding Receivables $ 182,009 $ 295,803 358,491 $ 261,041 $ 292,609
Interest Income on Idle Funds 9,731 18,467 2,490 2,236 20,322
----------- ----------- ----------- ----------- -----------
Total Revenue 191,740 314,270 360,981 263,277 312,931
----------- ----------- ----------- ----------- -----------
Expenses:
Interest 168,684 186,346 196,200 147,002 158,476
Professional Fees 23,702 19,722 27,350 20,201 14,174
Management Fees 144,000 96,000 108,000 72,000 108,000
Other Operating Expenses 11,993 3,334 16,917 10,433 11,123
----------- ----------- ----------- ----------- -----------
Total Expenses 348,379 305,402 348,467 249,636 291,773
----------- ----------- ----------- ----------- -----------
Net Investment Income (Loss) (156,639) 8,868 12,514 13,641 21,158
Unrealized (Depreciation) in Value of Investment (26,246) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net Income (Loss) Before Taxes (182,885) 8,868 12,514 13,641 21,158
Provision for Taxes:
Current Income Taxes (Note 2) 7,304 4,776 8,487 6,397 4,886
----------- ----------- ----------- ----------- -----------
Net Income (Loss) $ (190,189) $ 4,092 $ 4,027 $ 7,244 $ 16,272
=========== =========== =========== =========== ===========
Earnings (Loss) Per Common Share (Note 2) $ (0.04) $ -- $ -- $ -- $ --
=========== =========== =========== =========== ===========
Actual Dividends Paid $ -- $ -- $ -- $ -- $ --
=========== =========== =========== =========== ===========
Weighted Average Shares of Common Stock Outstanding 5,316,045 5,400,045 5,400,045 5,400,045 5,601,005
=========== =========== =========== =========== ===========
See Accountants' Review Report and Notes to the Financial Statements
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
EAST COAST VENTURE CAPITAL, INC.
STATEMENTS OF CASH FLOWS
Years Ended Nine Months Ended
July 31, April 30,
----------------------------------------- --------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net (Loss) Income (190,189) $ 4,092 $ 4,027 $ 7,244 $ 16,272
Decrease in Subscription Deposits (34,271) -- -- -- --
Decrease (Increase) in Accrued Interest Receivable 32,876 (7,667) (28,370) (5,459) (66,720)
Decrease (Increase) in Other Assets 118 (21,537) (49,282) (5,185) (83,725)
Amortization of Deferred Income (74) -- -- -- --
(Decrease) Increase in Accrued Liabilities 3,691 384 6,400 (23,078) 12,654
Provision for Loan Losses 26,246 -- -- -- --
----------- ----------- ----------- ----------- -----------
Net Cash (Used) by Operating Activities (161,603) (24,728) (67,225) (26,478) (121,519)
----------- ----------- ----------- ----------- -----------
Cash Flows From Investing Activities:
Loans Receivable Originated (597,000) (1,737,000) (1,336,000) (1,046,000) (475,000)
Repayment of Loans Receivable 445,838 502,074 1,385,674 1,192,117 522,921
Purchase of Equity Interest -- -- -- -- (90,000)
Decrease in Assets Acquired 593,209 -- -- -- --
(Decrease) Increase in Loan Participations 135,154 (1,006) (642) (1,711) --
----------- ----------- ----------- ----------- -----------
Net Cash Provided (Used) by Investing Activities 577,201 (1,235,932) 49,032 144,406 (42,079)
----------- ----------- ----------- ----------- -----------
Cash Flows from Financing Activities:
Gain on Repayment of 3% Preferred Stock 648,000 -- -- -- --
Repayment of 3% Preferred Stock (1,000,000) -- -- -- --
Proceeds from Sale of Common Stock 367,642 12,000 -- -- 493,915
Sale of Debentures (Net) -- 700,000 40,000 -- 1,040,000
----------- ----------- ----------- ----------- -----------
Net Cash Provided by Financing Activities 15,642 712,000 40,000 -- 1,533,915
----------- ----------- ----------- ----------- -----------
Net Increase (Decrease) in Cash 431,240 (548,660) 21,807 117,928 1,370,317
Cash Balance - Beginning of Period 540,845 972,085 423,425 423,425 445,232
----------- ----------- ----------- ----------- -----------
Cash Balance - End of Period $ 972,085 $ 423,425 $ 445,232 $ 541,353 $ 1,815,549
=========== =========== =========== =========== ===========
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Period For:
Interest $ 168,685 $ 182,270 $ 192,275 $ 140,834 $ 133,822
=========== =========== =========== =========== ===========
Taxes $ 3,612 $ 8,468 $ 8,487 $ 6,397 $ 4,886
=========== =========== =========== =========== ===========
See Accountants' Review Report and Notes to the Financial Statements
F-6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EAST COAST VENTURE CAPITAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Nine Months Ended
July 31, April 30,
----------------------------------------- --------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
3% Cumulative Preferred Stock, $1 Par Value
3,000,000 Shares Authorized; No Shares
Issued and Outstanding $ 1,000,000 $ -- $ -- $ -- $ --
Repayment of 3% Preferred Stock (1,000,000) -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance - End of Period -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Common Stock, $.01 Par Value, 10,500,000 Shares
Authorized; 5,316,045, 5,400,045 and 5,701,545
Shares Issued and Outstanding, Respectively 33,621 53,160 54,000 54,000 54,000
Proceeds from Sale of Common Stock 19,539 840 -- -- 3,015
----------- ----------- ----------- ----------- -----------
Balance - End of Period 53,160 54,000 54,000 54,000 57,015
----------- ----------- ----------- ----------- -----------
Additional Paid In Capital - Beginning of Period 977,617 1,449,920 1,590,680 1,590,680 1,720,280
Amortization of Restricted Capital -- 129,600 129,600 97,200 97,200
Proceeds from Sale of Common Stock 348,103 11,160 -- -- 490,900
----------- ----------- ----------- ----------- -----------
Balance - End of Period 1,325,720 1,590,680 1,720,280 1,687,880 2,308,380
----------- ----------- ----------- ----------- -----------
Restricted Capital
Balance - Beginning of Period -- 523,800 394,200 394,200 264,600
Gain on Sale of 3% Preferred Stock 648,000 -- -- -- --
Amortization of Restricted Capital -- (129,600) (129,600) (97,200) (97,200)
----------- ----------- ----------- ----------- -----------
Balance - End of Period 648,000 394,200 264,600 297,000 167,400
----------- ----------- ----------- ----------- -----------
Retained Earnings
Balance - Beginning of Period (183,134) (373,323) (369,231) (369,231) (365,204)
Net Income (Loss) (190,189) 4,092 4,027 7,244 16,272
----------- ----------- ----------- ----------- -----------
Balance - End of Period (373,323) (369,231) (365,204) (361,987) (348,932)
----------- ----------- ----------- ----------- -----------
Total Stockholders' Equity $ 1,653,557 $ 1,669,649 $ 1,673,676 $ 1,676,893 $ 2,183,863
=========== =========== =========== =========== ===========
See Accountants' Review Report and Notes to the Financial Statements
F-7
</TABLE>
<PAGE>
EAST COAST VENTURE CAPITAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1995, 1996 AND 1997
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED
APRIL 30, 1997 AND 1998)
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.
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 April 30, 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-8
<PAGE>
EAST COAST VENTURE CAPITAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1995, 1996 AND 1997
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED
APRIL 30, 1997 AND 1998)
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:
April 30,
1998 1997
Principal Principal
Due Date First Second Amount Amount
-------- ------ ------
Five Years
----------
April 1, 1998 5.25% 8.25% -- $ 1,000,000
June 1, 1997 5.50% 8.50% -- 1,000,000
June 1, 2007 8.07% 8.07% $ 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 $ 2,700,000
============ ============
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-9
<PAGE>
EAST COAST VENTURE CAPITAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1995, 1996 AND 1997
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED
APRIL 30, 1997 AND 1998)
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-10
<PAGE>
EAST COAST VENTURE CAPITAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1995, 1996 AND 1997
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED
APRIL 30, 1997 AND 1998)
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 $167,400
as of April 30, 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-11
<PAGE>
EAST COAST VENTURE CAPITAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1995, 1996 AND 1997
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED
APRIL 30, 1997 AND 1998)
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 $493,915. 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 April 30, 1998, the Company is contingently liable for the
unamortized portion on the 3% cumulative preferred stock dividends in
the amount of $40,365.
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 nine months ended April 30, 1998, the Company paid
management fees totaling $102,000. 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 April 30, 1998, there were 8 borrowers in arrears in payment of
principal totaling $1,059,374 or 26% 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-12
<PAGE>
EAST COAST VENTURE CAPITAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1995, 1996 AND 1997
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED
APRIL 30, 1997 AND 1998)
NOTE 11 SIGNIFICANT CONCENTRATION OF CREDIT RISK
Approximately twenty-five (25%) 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 $1,715,549 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-13
<PAGE>
EAST COAST VENTURE CAPITAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1995, 1996 AND 1997
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED
APRIL 30, 1997 AND 1998)
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>
April 30, 1997 April 30, 1998
-------------- --------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial Assets -
Investments in Securities $ 3,953,845 $ 3,953,845 $ 4,092,367 $ 4,092,367
Cash 541,353 541,353 1,815,549 1,815,549
Financial Liabilities -
Debentures payable to SBA 2,700,000 2,700,000 3,780,000 3,780,000
Other Liabilities 258,004 258,004 301,205 301,205
</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 $4.00 per unit, for an aggregate offering
price of $5,000,000.
F-14
<PAGE>
EAST COAST VENTURE CAPITAL, INC.
SCHEDULE OF INVESTMENTS
AS OF APRIL 30, 1998
<TABLE>
<CAPTION>
Number
of Balance
Type of Loan Loans Interest Rate Maturity Date Outstanding
- ------------ ----- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Manufacturing 1 15.00% 5 years $ 65,624
Services 3 13.63% - 15.25% 2 - 5 years 39,416
Retail 4 14.00% - 15.00% 3 - 10 years 305,671
Auto Service Stations 9 11.25% - 14.00% 3 - 7 years 1,295,706
Construction 1 11.00% - 15.00% 5 years 155,318
Restaurants 4 13.00% - 15.00% 5 - 7 years 192,667
Laundromat 18 10.00% - 15.50% 5 - 10 years 1,051,093
NYC Taxi Medallion 19 9.00% - 14.00% 7 years 1,045,030
-- -----------
TOTAL 59 $ 4,150,525
===========
</TABLE>
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-15
<PAGE>
EAST COAST VENTURE CAPITAL, INC.
SUPPLEMENTAL INFORMATION
SELECTED PER SHARE DATA AND RATIOS
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended July 31, April 30,
-------------------- ---------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Data
Investment Income $ 0.09 $ 0.08 $ 0.04 $ 0.06 $ 0.06 $ 0.05 $ 0.05
Investment Expenses (0.10) (0.10) (0.07) (0.06) (0.06) 0.05 0.05
--------- --------- --------- --------- --------- --------- ---------
Net Investment (Loss) Income (0.01) (0.02) (0.03) -- -- -- 0.01
Dilution in Net Assets -- -- (0.09) -- -- -- (1.97)
Net Realized and Unrealized Gains
and Losses on Securities (0.01) -- (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) (0.02) 0.06 -- -- -- 0.07
Net Asset Value - Beginning of Period 0.29 0.27 0.25 0.31 0.31 0.31 0.31
--------- --------- --------- --------- --------- --------- ---------
Net Asset Value - End of Period (1) $ 0.27 $ 0.25 $ 0.31 $ 0.31 $ 0.31 $ 0.31 $ 0.38
========= ========= ========= ========= ========= ========= =========
Ratios
Ratio of Expenses to Average Net Assets (1) 37.94% 40.71% 23.10% 18.58% 21.33% 15.27% 13.58%
========= ========= ========= ========= ========= ========= =========
Ratio of Net Investment (Loss) Income
to Average Net Assets (1.59%) (2.78%) (11.51%) .25% .24% .43% .75%
========= ========= ========= ========= ========= ========= =========
Common Shares Outstanding 3,362,205 3,362,205 5,316,045 5,400,045 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 April 30,
1998 was $167,400.
F-16
<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....................................... 4
The Offering............................................. 6
Summary Financial
Information............................................ 10
Risk Factors............................................. 12
Use of Proceeds.......................................... 22
Capitalization........................................... 23
Dividends................................................ 25
Dilution................................................. 26
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations............................................. 27
Business................................................. 30
Management............................................... 45
Certain Relationships
and Related Transactions............................... 52
Principal Stockholders................................... 53
Federal Regulation....................................... 54
Tax Considerations....................................... 58
Determination of Net Asset Value......................... 65
Description of
Securities............................................. 65
Shares Available for
Future Sale............................................ 69
Underwriting............................................. 70
Legal Matters............................................ 72
Experts.................................................. 72
Custodian................................................ 72
Financial Statements..................................... C-1
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
________________ __, 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. Speciman Certificate for Shares of Common Stock**
d2. Speciman 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**
i 1998 Stock Option Plan*
k1 Management Agreement between the Company and Veritas Financial
Corp.**
k2 Code of Ethics*
k3 Agreement between the Company, Freshstart Venture Capital
Corp. and Zindel Zelmanovitch*
1 Opinion of Berlack, Israels & Liberman LLP**
n1 Consent of Berlack, Israels & Liberman LLP (included in
Exhibit 1)
n2 Consent of Michael C. Finkelstein & Co.*
n3 Consent of Reid & Priest LLP**
- --------------------------
* Filed herewith
** To be filed by amendment
ITEMS 25.MARKETING ARRANGEMENTS
The information contained under the heading "Underwriting" on pages 66
through 69 of the Prospectus is incorporated herein by this reference.
In connection with this Offering, the Underwriters may over-allot or
effect transactions which stabilize or maintain the market price of the
Securities at a level above that which might otherwise prevail in the open
market. Such stabilizing, if commenced, may be discontinued at any time.
C-1
<PAGE>
ITEMS 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with this Offering are as follows:
<TABLE>
<CAPTION>
<S> <C>
SEC filing fee........................................... $ 4,393.21
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*.................................. $ 1,617.56
Total.................................................... $ 300,000.00
</TABLE>
- ----------------
* Estimated
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL.
The information contained under the heading "Principal Stockholders" on
page 50 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 Underwriter 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 Underwriter specifically for or in
connection with the preparation of the registration statement, the prospectus,
or any such amendment or supplement thereto.
Section 145 of the GCL empowers a corporation to indemnify its
directors and officers and to purchase insurance with respect to liability
arising out of the performance of their duties as directors and officers. The
GCL provides further that the indemnification permitted thereunder
C-2
<PAGE>
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.
C-4
<PAGE>
RULE 430A
The undersigned Registrant will:
1. For determining any liability under the Act, treat the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form of a
prospectus filed by the small business issuer under Rule 424(b)(1) or (4) or
497(h) under the Act as part of this Registration Statement as of the time the
Commission declared it effective.
2. For any liability under the Act, treat each post-effective
amendment that contains a form of prospectus as a new registration statement for
the securities offered in the Registration Statement, and that the Offering of
the securities at that time as the initial bona fide Offering of those
securities.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, and/or the
Investment Company Act of 1940, the Registrant has duly caused this 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 _____ day of
,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
Registration Statement or Amendments thereto 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 July 8, 1998
Zindel Zelmanovitch financial officer) and Director
/s/ NATHAN G. BERNEY Secretary July 8, 1998
- -------------------------
Nathan G. Berney
/s/ JEANETTE BERNEY Treasurer (principal accounting officer) July 8, 1998
- ------------------------- and Director
Jeanette Berney
/s/ FREDERICK SCHULMAN
- ------------------------- Director July 8, 1998
Frederick Schulman
</TABLE>
C-6
CERTIFICATE OF MERGER
OF
EAST COAST VENTURE CAPITAL, INC.
(A NEW YORK CORPORATION)
AND
EAST COAST VENTURE CAPITAL, INC.
(A DELAWARE CORPORATION)
It is hereby certified that:
1. The constituent business corporations participating in the
merger herein certified are :
(i) East Coast Venture Capital, Inc., which is incorporated
under the laws of the State of New York ("East Coast NY"); and
(ii) East Coast Venture Capital, Inc., which is incorporated
under the laws of the State of Delaware ("East Coast DEL").
2. An Agreement and Plan of Merger has been approved, adopted,
certified, executed and acknowledged by each of the aforesaid constituent
corporations in accordance with the provisions of subsection (c) of Section 252
of the General Corporation Law of the State of Delaware, to wit, by East Coast
NY in accordance with the State of its incorporation and by East Coast DEL in
the same manner as is provided in Section 251 of the General Corporation Law of
the State of Delaware.
3. The name of the surviving corporation in the merger herein
certified is East Coast DEL, which will continue its existence as said surviving
corporation under its present name upon the effective date of said merger
pursuant to the provisions of the General Corporation Law of the State of
Delaware.
4. The Certificate of Incorporation of East Coast DEL, as now in
force and effect, shall continue to be the Certificate of Incorporation of said
surviving corporation until amended and changed pursuant to the provisions of
the General Corporation Law of the State of Delaware.
5. The executed Agreement and Plan of Merger between the
aforesaid constituent corporations is on file at the principal place of business
of the aforesaid surviving corporation, the address of which is as follows:
50 East 42nd Street
New York, NY 10017
<PAGE>
6. A copy of the aforesaid Agreement and Plan of Merger will be
furnished by the aforesaid surviving corporation, on request, and without cost,
to any stockholder of each of the aforesaid constituent corporations.
7. The authorized capital stock of East Coast NY consists of
25,000,000 shares, $.01 par value per share.
Dated: June 25, 1998
EAST COAST VENTURE CAPITAL, INC.
(NEW YORK)
By: /s/ ZINDEL ZELMANOVICH
--------------------------------
Name: Zindel Zelmanovich
Title: President
Dated: June 25, 1998
EAST COAST VENTURE CAPITAL, INC.
(DELAWARE)
By: /s/ ZINDEL ZELMANOVICH
--------------------------------
Name: Zindel Zelmanovich
Title: President
2
CERTIFICATE OF MERGER
OF
EAST COAST VENTURE CAPITAL, INC.
(A NEW YORK CORPORATION)
AND
EAST COAST VENTURE CAPITAL, INC.
(A DELAWARE CORPORATION)
(UNDER SECTION 907 OF THE BUSINESS CORPORATION LAW)
It is hereby certified, upon behalf of each of the constituent
corporations herein named, as follows:
FIRST: The Board of Directors of each of the constituent corporations
has duly adopted an agreement and plan of merger setting forth the terms and
conditions of the merger of said corporations.
SECOND: The name of the foreign constituent corporation, which is to be
the surviving corporation, is East Coast Venture Capital, Inc. (the "Surviving
Corporation). The jurisdiction of its incorporation is Delaware; and the date of
its incorporation therein is June 24, 1998. No Application for Authority in the
State of New York of the Surviving Corporation to transact business as a foreign
corporation therein was filed by the Department of State of the State of New
York; and it is not to do business in the State of New York until an Application
for Authority shall have been filed by the Department of State of the State of
New York.
THIRD: The name of the domestic constituent corporation, which is being
merged into the Surviving Corporation, is East Coast Venture Capital, Inc. (the
"Merged Corporation"). The date upon which its certificate of incorporation was
filed by the Department of State is June 14, 1983.
FOURTH: The designation and number of the issued and outstanding shares
of the Merged Corporation are as follows:
Designation of Number of
each outstanding outstanding
class of shares shares
--------------- ------
Common Stock 5,701,545
Preferred Stock None
<PAGE>
The designation and number of the issued and outstanding shares of the
Surviving Corporation are as follows:
Designation of Number of
each outstanding outstanding
class of shares shares
--------------- ------
Preferred Stock None
Common Stock None
FIFTH: The merger herein certified was authorized in respect of the
Merged Corporation by the requisite vote of holders of outstanding shares of the
Merged Corporation entitled to vote on the agreement and plan of merger under
paragraph (a)(2) of Section 903 of the Business Corporation Law of the State of
New York.
SIXTH: The merger herein certified is permitted by the laws of the
jurisdiction of incorporation of the Surviving Corporation and is in compliance
with said laws.
SEVENTH: The Surviving Corporation agrees that it may be served with
process in the State of New York in any action or special proceeding for the
enforcement of any liability of obligation of the Merged Corporation, for the
enforcement of any liability of obligation of the Surviving Corporation for
which the Surviving Corporation is previously amenable to suit in the State of
New York, and for the enforcement, as provided in the Business Corporation Law
of the State of New York, of the right of shareholders of the Merged Corporation
to receive payment for their shares against the Surviving Corporation.
EIGHTH: The Surviving Corporation agrees that, subject to the
provisions of Section 623 of the Business Corporation Law of the State of New
York, it will promptly pay to the shareholders of the Merged Corporation the
amount, if any, to which they shall be entitled under the provisions of the
Business Corporation Law of the State of New York relating to the rights of
shareholders to receive payment for their shares.
NINTH: The Surviving Corporation hereby designates the Secretary of
State of the State of New York as its agent upon whom process against it may be
served in the manner set forth in paragraph (b) of Section 306 of the Business
Corporation Law of the State of New York in any action or special proceeding.
The post office address within the State of New York to which the said Secretary
of State shall mail a copy of any process against the Surviving Corporation
served upon it is:
50 East 42nd Street, New York, NY 10017
TENTH: The Merged Corporation hereby certifies that all fees and taxes
(including penalties and interest) administered by the Department of Taxation
and Finance of the State of New York which are now due and payable by Merged
Corporation have been paid and a
2
<PAGE>
cessation franchise tax report (estimated or final) through the anticipated date
of merger has been filed by Merged Corporation. The said report, if estimated,
is subject to amendment. The Surviving Corporation agrees that it will within
thirty days after the filing of the certificate of merger file the cessation tax
report, if an estimated report was previously filed, and promptly pay to the
Department of Taxation and Finance of the State of New York all fees and taxes
(including penalties and interest), if any, due to the Department of Taxation
and Finance by Merged Corporation.
IN WITNESS WHEREOF, we have subscribed this document on the date set
forth below and do hereby affirm, under the penalties of perjury, that the
statements contained therein have been examined by us and are true and correct.
Dated: June 25, 1998
EAST COAST VENTURE CAPITAL, INC.
(NEW YORK)
/s/ ZINDEL ZELMANOVICH
--------------------------------
Zindel Zelmanovich, President
Attest:
/s/ NATHAN BERNEY
- --------------------------------
Nathan Berney, Secretary
EAST COAST VENTURE CAPITAL, INC.
(DELAWARE)
/s/ ZINDEL ZELMANOVICH
--------------------------------
Zindel Zelmanovich, President
Attest:
/s/ NATHAN BERNEY
- --------------------------------
Nathan Berney, Secretary
3
AGREEMENT AND PLAN OF MERGER approved on June 3, 1998, by
East Coast Venture Capital, Inc., a business corporation organized under the
laws of the State of New York, and by its Board of Directors on said date ("East
Coast NY"), and approved on June 24, 1998 by East Coast Venture Capital, Inc., a
business corporation organized under the laws of the State of Delaware, and by
its Board of Directors on said date ("East Coast DEL").
1. East Coast NY and East Coast DEL shall pursuant to the
provisions of the New York Business Corporation Law and the provisions of the
laws of the jurisdiction of organization of East Coast DEL, be merged with and
into a single corporation, to wit, East Coast DEL, which shall be the surviving
corporation upon the effective date of the merger and which is sometimes
hereinafter referred to as the "surviving corporation", and which shall continue
to exist as said surviving corporation under its present name pursuant to the
provisions of the laws of the jurisdiction of its organization. The separate
existence of East Coast NY, which is sometimes hereinafter referred to as the
"terminating corporation", shall cease upon the effective date of the merger in
accordance with the provisions of the New York Business Corporation Law.
2. The certificate of incorporation of the surviving
corporation upon the effective date of the merger in the jurisdiction of its
organization shall be the certificate of incorporation of said surviving
corporation; and said certificate of incorporation shall continue in full force
and effect until amended and changed in the manner prescribed by the provisions
of the laws of the jurisdiction of organization of the surviving corporation.
3. The by-laws of the surviving corporation upon the
effective date of the merger in the jurisdiction of its organization will be the
by-laws of said surviving corporation and will continue in full force and effect
until changed, altered, or amended as therein provided and in the manner
prescribed by the provisions of the laws of the jurisdiction of its
organization.
4. The directors and officers in office of the surviving
corporation upon the effective date of the merger in the jurisdiction of its
organization shall be the members of the first Board of Directors and the first
officers of the surviving corporation, all of whom shall hold their
directorships and offices until the election and qualification of their
respective successors or until their tenure is otherwise terminated in
accordance with the by-laws of the surviving corporation.
5. The number of outstanding shares of the terminating
corporation is 5,701,545 shares, all of which are of one class and are common
shares and all of which are entitled to vote. There are no outstanding shares of
the surviving corporation.
Each issued share of the terminating corporation shall,
upon the effective date of the merger, be converted into one (1) share of the
surviving corporation. The issued shares of the surviving corporation shall not
be converted in any manner, but each said share which is issued as of the
effective date of the merger shall continue to represent one issued share of the
surviving corporation.
<PAGE>
6. The Agreement and Plan of Merger herein made and approved
shall be submitted to the shareholders of the terminating corporation for their
approval or rejection in the manner prescribed by the provisions of the New York
Business Corporation Law, and the merger of the terminating corporation with and
into the surviving corporation shall be authorized in the manner prescribed by
the laws of the jurisdiction of organization of the surviving corporation.
7. In the event that the Agreement and Plan of Merger shall
have been approved by the shareholders entitled to vote of the terminating
corporation in the manner prescribed by the provisions of the New York Business
Corporation Law, and in the event that the merger of the terminating corporation
with and into the surviving corporation shall have been duly authorized in
compliance with the laws of the jurisdiction of organization of the surviving
corporation, the terminating corporation and the surviving corporation hereby
stipulate that they will cause to be executed and filed and/or recorded any
document or documents prescribed by the laws of the State of New York and of the
State of Delaware, and that they will cause to be performed all necessary acts
therein and elsewhere to effectuate the merger.
8. The Board of Directors and the proper officers of the
terminating corporation and of the surviving corporation, respectively, are
hereby authorized, empowered and directed to do any and all things, and to make,
execute, deliver, file, and/or record any and all instruments, papers, and
documents which shall be or become necessary, proper, or convenient to carry out
or put into effect any of the provisions of this Agreement and Plan of Merger or
of the merger herein provided for.
9. The effective date in the State of New York of the merger
herein provided for shall be the date of filing of the Certificate of Merger.
IN WITNESS WHEREOF, each of the constituent corporations
are executing this Agreement and Plan of Merger as of the day of June, 1998.
EAST COAST VENTURE CAPITAL, INC.
(NEW YORK)
By: /s/ ZINDEL ZELMANOVICH
--------------------------------
Name: Zindel Zelmanovich
Title: President
EAST COAST VENTURE CAPITAL, INC.
(DELAWARE)
By: /s/ ZINDEL ZELMANOVICH
--------------------------------
Name: Zindel Zelmanovich
Title: President
2
CERTIFICATE OF INCORPORATION
OF
EAST COAST VENTURE CAPITAL, INC.
The undersigned, a natural person, for the purpose of
organizing a corporation for conducting the business and promoting the purposes
hereinafter stated, under the provisions and subject to the requirements of the
laws of the State of Delaware (particularly Chapter 1, Title 8 of the Delaware
Code and the acts amendatory thereof and supplemental thereto, and known,
identified, and referred to as the "General Corporation Law of the State of
Delaware"), hereby certifies that:
FIRST: The name of the corporation (hereinafter called the
"Corporation") is EAST COAST VENTURE CAPITAL, INC.
SECOND: The address, including street, number, city, and
county, of the registered office of the corporation in the State of Delaware is
Corporation Service Company, 1013 Centre Road, in the City of Wilmington, County
of New Castle; and the name of the registered agent of the corporation in the
State of Delaware at such address is Corporation Service Company.
THIRD: Subject to the following paragraph, the purpose of the
Corporation is to engage in any lawful act or activity for which corporations
may be organized under the General Corporation Law of the State of Delaware.
The Corporation is organized and chartered solely for the
purpose of operating under Section 301(d) of the Small Business Investment Act
of 1958, as amended (the "Act"), and shall make investments pursuant to the Act
solely in small business concerns which will contribute to a well-balanced
national economy by facilitating ownership in such concerns by persons whose
participation in the free enterprise system is hampered because of social or
economic disadvantages and shall operate in the manner and shall have the
powers, responsibilities, and be subject to the limitations provided by the Act
and the regulations issued by the Small Business Administration ("SBA")
thereunder.
FOURTH:
(a) The total number of shares of capital stock which the
Corporation shall have authority to issue is 30,000,000, 25,000,000 of which are
common shares, par value $.01 per share, each entitled to one vote per share,
and 5,000,000 of which are preferred shares, par value $.01 per share.
<PAGE>
Subject to the prior approval of the SBA, the shares of Preferred Stock
may be issued from time to time in one or more series, in any manner permitted
by law, as determined from time to time by the Board of Directors, and stated in
the resolution or resolutions providing for the issuance of such shares adopted
by the Board of Directors pursuant to authority hereby vested in it. Without
limiting the generality of the foregoing, shares in such series shall have such
voting powers, full or limited, or no voting powers, and shall have such
designations, preferences and relative, participating, optional, or other
special rights, and qualifications, limitations, or restrictions thereof,
permitted by law, as shall be stated in the resolution or resolutions providing
for the issuance of such shares adopted by the Board of Directors pursuant to
authority hereby vested in it. The number of shares of any such series so set
forth in such resolution or resolutions may be increased (but not above the
total number of authorized shares of Preferred Stock) or decreased (but not
below the number of shares thereof then outstanding) by further resolution or
resolutions adopted by the Board of Directors pursuant to authority hereby
vested in it.
No holder of any of the shares of the stock of the
Corporation, whether now or hereafter authorized and issued, shall be entitled
as of right to purchase or subscribe for any unissued stock of any class, or any
additional shares of any class to be issued by reason of any issuances of
capital stock of the Corporation or any increase of the authorized capital stock
of any class of the Corporation, or bonds, certificates of indebtedness,
debentures, or other securities convertible into stock of any class of the
Corporation, or carrying any right to purchase stock of any class of the
Corporation, but any such unissued stock or any such additional authorized issue
of any stock or of other securities convertible into stock, or carrying any
right to purchase stock, may be issued and disposed of pursuant to resolution of
the Board of Directors to such persons, firms, corporations, or associations,
and upon such terms, as may be deemed advisable by the Board of Directors in the
exercise of its discretion."
(b) GRANT OF LIQUIDATING INTEREST TO THE UNITED STATES SMALL
BUSINESS ADMINISTRATION AND CREATION OF RESTRICTED CONTRIBUTED CAPITAL SURPLUS
ACCOUNT.
(i) DEFINITIONS: For the purposes of this Article 4(b) the
following terms shall have the meaning hereinafter set forth:
"LIQUIDATING INTEREST" shall mean a preferential limited
ownership interest in a capital surplus account created
by the predecessor of the Corporation and known as the
"Restricted Contributed Capital Surplus Account". The
Liquidating Interest has been granted to the United
States Small Business Administration in conjunction with
a redemption at a discount of the predecessor's Series A
Preferred Stock, with a 3% dividend rate, formerly held
by the United States Small Business Administration, as
contemplated and authorized by Public Law 101-162, dated
November 21, 1989.
"RESTRICTED CONTRIBUTED CAPITAL SURPLUS" shall mean the
capital account which will be used solely for the
purpose of recording on the accounts of the
2
<PAGE>
Corporation, a credit representing the difference
between the purchase price paid for the redemption of
the Series A Preferred Stock, and the aggregate par
value of the Series A Preferred Stock.
THE "SHARES" shall mean the aggregate number of shares
of Series A Preferred Stock repurchased.
"PURCHASE PRICE" shall mean the aggregate value of the
consideration paid to the United States Small Business
Administration by the predecessor to the Corporation for
the Shares, including the right to any unpaid dividends
accrued thereon.
"DISCOUNT" shall mean the amount by which the aggregate
par value of the repurchased Series A Preferred Stock
exceeded the Purchase Price.
(ii) LIQUIDATING INTEREST
Pursuant to a preferred stock repurchase agreement dated
August 15, 1994 between the United States Small Business
Administration and the predecessor to the Corporation
(the "Agreement"), the Corporation shall carry on its
balance sheet a capital account designated Restricted
Contributed Capital Surplus and the Corporation shall
grant to the United States Small Business Administration
a Liquidating Interest in the Restricted Contributed
Capital Surplus Account.
The initial value of the Liquidating Interest shall be
equal to $650,000.00 and shall decline on a
straight-line basis at the end of each month by an
amount equal to 1/60th (1.6667%) of its original amount
beginning one month after the date of the Agreement.
Upon the occurrence of any Event of Default (as defined
in the Agreement) the value of the Liquidating Interest
shall become fixed at the level immediately preceding
the Event of Default and shall not decline further until
such time as the default is cured or waived.
The Liquidating Interest shall expire on the later of
(i) the date sixty (60) months from the date of the
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.
If, prior to the expiration of the Liquidating Interest
as set forth above, the Corporation's Board of Directors
or its shareholders authorize the liquidation of the
Corporation, or a judicial order is issued directing the
voluntary or involuntary liquidation of the Corporation,
or the United States
3
<PAGE>
Small Business Administration initiates receivership or
liquidation proceedings, pursuant to the Act, and the
regulations adopted thereunder, any assets which are
available, after the payment or the provision for the
payment of all debts of the Corporation, shall be
distributed first to the United States Small Business
Administration until the fair market value of such
assets is equal to the amount of the Liquidating
Interest or all remaining assets have been distributed
to the United States Small Business Administration.
(c) The provisions of 13CFR ss.107.1810(i) are hereby
incorporated by reference into this Certificate of Incorporation as if fully set
forth herein. This Corporation hereby consents to the exercise by the United
States Small Business Administration of all rights of the United States Small
Business Administration under 13CFR ss.107.1810(i) and agrees to take all
actions which the United States Small Business Administration may require in
accordance with such provisions.
FIFTH: The name and the mailing address of the incorporator
are as follows:
NAME MAILING ADDRESS
Stuart Neuhauser Berlack, Israels & Liberman LLP
120 West 45th Street
New York, New York 10036
SIXTH: The corporation is to have perpetual existence.
SEVENTH: Subject to the prior approval of the SBA, whenever a
compromise or arrangement is proposed between this Corporation and its creditors
or any class of them and/or between this Corporation and its stockholders or any
class of them, any court of equitable jurisdiction within the State of Delaware
may, on the application in a summary way of this Corporation or of any creditor
or stockholder thereof or on the application of any receiver or receivers
appointed for this Corporation under ss.291 of Title 8 of the Delaware Code or
on the application of trustees in dissolution or of any receiver or receivers
appointed for this Corporation under ss.279 of Title 8 of the Delaware Code
order a meeting of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this Corporation, as the case may be,
to be summoned in such manner as the said court directs. If a majority in number
representing three fourths in value of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of this Corporation, as the
case may be, agree to any compromise or arrangement and to any reorganization of
this Corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of this Corporation, as the case may be, and also on this
Corporation.
4
<PAGE>
EIGHTH: For the management of the business and for the
conduct of the affairs of the Corporation, and in further definition,
limitation, and regulation of the powers of the Corporation and of its directors
and of its stockholders or any class thereof, as the case may be, it is further
provided:
1. The management of the business and the conduct of the
affairs of the Corporation shall be vested in its Board of Directors. The number
of directors which shall constitute the whole Board of Directors shall be fixed
by, or in the manner provided in, the Bylaws, but shall always equal or exceed
three (3) members. The phrase "whole Board" and the phrase "total number of
directors" shall be deemed to have the same meaning, to wit, the total number of
directors which the corporation would have if there were no vacancies. No
election of directors need be by written ballot.
2. After the original or other Bylaws of the Corporation
have been adopted, amended, or repealed, as the case may be, in accordance with
the provisions of ss.109 of the General Corporation Law of the State of
Delaware, and, after the Corporation has received any payment for any of its
stock, the power to adopt, amend, or repeal the Bylaws of the Corporation may be
exercised by the Board of Directors of the Corporation; provided, however, that
any provision for the classification of directors of the Corporation for
staggered terms pursuant to the provisions of subsection (d) of ss.141 of the
General Corporation Law of the State of Delaware shall be set forth in an
initial Bylaw or in a Bylaw adopted by the stockholders entitled to vote of the
Corporation unless provisions for such classification shall be set forth in this
certificate of incorporation.
3. Whenever the Corporation shall be authorized to issue
only one class of stock, each outstanding share shall entitle the holder thereof
to notice of, and the right to vote at, any meeting of stockholders. Whenever
the Corporation shall be authorized to issue more than one class of stock, no
outstanding share of any class of stock which is denied voting power under the
provisions of the certificate of incorporation shall entitle the holder thereof
to the right to vote at any meeting of stockholders except as the provisions of
paragraph (2) of subsection (b) of ss.242 of the General Corporation Law of the
State of Delaware shall otherwise require; provided, that no share of any such
class which is otherwise denied voting power shall entitle the holder thereof to
vote upon the increase or decrease in the number of authorized shares of said
class.
NINTH: Subject to Section 314 of the Act, the personal
liability of the directors of the Corporation is hereby eliminated to the
fullest extent permitted by the provisions of paragraph (7) of subsection (b) of
ss.102 of the General Corporation Law of the State of Delaware, as the same may
be amended and supplemented.
TENTH: Subject to the SBA's required standard of care
described in the next paragraph of this Article Tenth, the Corporation shall, to
the fullest extent permitted by the provisions of ss.145 of the General
Corporation Law of the State of Delaware, as the same may be
5
<PAGE>
amended and supplemented, but only to the extent of the Corporation's assets
less its liabilities, indemnify any and all persons whom it shall have power to
indemnify under said section from and against any and all of the expenses,
liabilities, or other matters referred to in or covered by said section which
may be incurred by or asserted against such persons by reason of any action
taken or entitled to be taken on behalf of the Corporation and in furtherance of
its interests, and the indemnification provided for herein shall continue as to
a person who has ceased to be a director, officer, employee, or agent and shall
inure to the benefit of the heirs, executors, and administrators of such a
person.
Neither the directors, officers, employees or agents shall be
liable to the Corporation for any action taken or omitted to be taken by it or
any other person in good faith and in a manner they reasonably believed to be in
or not opposed to the best interests of the Corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe their
conduct was unlawful.
To the extent that a person claiming indemnification under
this Article Tenth has been successful on the merits in defense of any action,
suit or proceeding or in defense of any claim, issue or matter therein, such
person shall be indemnified with respect to such matter as provided in this
Article Tenth. Except as provided in the foregoing sentence and as provided
below with respect to advance payments, any indemnification under this Article
Tenth shall be paid only upon determination that the person to be indemnified
has met the standard of care set forth in the preceding paragraph.
A determination that a person to be indemnified has met the
standard of care shall be made by a committee of the Corporation whose members
are not affiliated with the person seeking indemnification or in a written
opinion by independent legal counsel selected by disinterested members of the
Board of Directors. The person making such determination is authorized to make
such determination on the basis of its evaluation of the records of the
Corporation and of the statements of the party seeking indemnification and is
not required to perform any independent investigation in connection with any
such determination. Any person making any such determination is authorized,
however, in its sole discretion, to take such other actions (including engaging
counsel) as its deems advisable in making such determination.
Expenses incurred by any person in respect of any such costs,
expenses, damages, claims, liabilities, fines, and judgments (including any cost
of the defense of any claim, action, suit, proceeding or investigation, by or
before any court or administrative or legislative body or authority) may be paid
by the Corporation in advance of the final disposition of any such claim or
action upon receipt of an undertaking by or on behalf of such person to repay
such amount unless it shall ultimately be determined as provided above that such
person is entitled to be indemnified by the Corporation as authorized in this
Article Tenth.
6
<PAGE>
The rights of indemnification provided in this Article Tenth
shall be the exclusive rights of all directors, officers, employees and agents
of the Corporation to indemnification by the Corporation.
This Article Tenth shall not constitute a modification,
limitation or waiver of Section 314(b) of the Act, or a waiver by the SBA of any
of its rights pursuant to such Section 314(b).
ELEVENTH: Subject to the prior approval of the SBA (to the
extent required by applicable laws and regulations governing the activities of
the Corporation), from time to time any of the provisions of this certificate of
incorporation may be amended, altered, or repealed, and other provisions
authorized by the laws of the State of Delaware at the time in force may be
added or inserted in the manner and at the time prescribed by said laws, and all
rights at any time conferred upon the stockholders of the corporation by this
certificate of incorporation are granted subject to the provisions of this
Article ELEVENTH.
Signed on June 24, 1998.
/s/ STUART NEUHAUSER
----------------------------
Stuart Neuhauser
Incorporator
7
BY-LAWS
OF
EAST COAST VENTURE CAPITAL, INC.
(A DELAWARE CORPORATION)
ARTICLE I
STOCKHOLDERS
1. CERTIFICATES REPRESENTING STOCK. Certificates representing
stock in the corporation shall be signed by, or in the name of, the corporation
by the Chairman or Vice-Chairman of the Board of Directors, if any, or by the
President or a Vice-President and by the Treasurer or an Assistant Treasurer or
the Secretary or an Assistant Secretary of the corporation. Any or all the
signatures on any such certificate may be a facsimile. In case any officer,
transfer agent, or registrar who has signed or whose facsimile signature has
been placed upon a certificate shall have ceased to be such officer, transfer
agent, or registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if he were such officer, transfer agent, or
registrar at the date of issue.
Whenever the corporation shall be authorized to issue more
than one class of stock or more than one series of any class of stock, and
whenever the corporation shall issue any shares of its stock as partly paid
stock, the certificates representing shares of any such class or series or of
any such partly paid stock shall set forth thereon or registration of transfer
of any shares of stock of any class or series shall be noted conspicuously
representing such shares.
The corporation may issue a new certificate of stock or
uncertified shares in place of any certificate theretofore issued by it, alleged
to have been lost, stolen, or destroyed, and the Board of Directors may require
the owner of the lost, stolen, or destroyed certificate, or his legal
representative, to give the corporation a bond sufficient to indemnify the
corporation against any claim that may be made against it on account of the
alleged loss, theft, or destruction of any such certificate or the issuance of
any such new certificate or uncertificated shares.
2. UNCERTIFICATED SHARES. Subject to any conditions imposed
by the General Corporation Law, the Board of Directors of the corporation may
provide by resolution or resolutions that some or all of any or all classes or
series of the stock of the corporation shall be uncertificated shares. Within a
reasonable time after the issuance or transfer of any uncertified shares, the
corporation shall send to the registered owner thereof any written notice
prescribed by the General Corporation Law.
3. FRACTIONAL SHARE INTERESTS. The corporation may, but shall
not be required to, issue fractions of a share. If the corporation does not
issue fractions of a share, it shall arrange for the disposition of fractional
interests by those entitled thereto, pay in cash the fair
<PAGE>
value of fractions of a share as of the time when those entitled to receive such
fractions are determined, or issue scrip or warrants in registered form (either
represented by a certificate or uncertificated) or bearer form (represented by a
certificate) which shall entitle the holder to receive a full share upon the
surrender of such scrip or warrants aggregating a full share. A certificate for
a fractional share or an uncertificated fractional share shall, but scrip or
warrants shall not unless otherwise provided therein, entitle the holder to
exercise voting rights, to receive dividends thereon, and to participate in any
of the assets of the corporation in the event of liquidation. The Board of
Directors may cause scrip or warrants to be issued subject to the conditions
that they shall become void if not exchanged for certificates representing the
full shares or uncertificated full shares before a specified date, or subject to
the conditions that the shares for which scrip or warrants are exchangeable may
be sold by the corporation and the proceeds thereof distributed to the holders
of scrip or warrants, or subject to any other conditions which the Board of
Directors may impose.
4. STOCK TRANSFERS. Upon compliance with provisions
restricting the transfer or registration of transfer of shares of stock, if any,
transfers or registration of transfers of shares of stock of the corporation
shall be made only on the stock ledger of the corporation by the registered
holder thereof, or by his attorney thereunto authorized by power of attorney
duly executed and filed with the Secretary of the corporation or with a transfer
agent or a registrar, if any, and, in the case of shares represented by
certificates, on surrender of the certificate or certificates for such shares of
stock properly endorsed and the payment of all taxes due thereon.
5. RECORD DATE FOR STOCKHOLDERS. In order that the
corporation may determine the stockholders entitled to notice of or to vote at
any meeting of stockholders or any adjournment thereof, the Board of Directors
may fix a record date, which record date shall not precede the date upon which
the resolution fixing the record date is adopted by the Board of Directors, and
which record date shall not be more than sixty nor less than ten days before the
date of such meeting. If no record date is fixed by the Board of Directors, the
record date for determining stockholders entitled to notice of or to vote at a
meeting of stockholders shall be at the close of business on the day next
preceding the day on which the meeting is held. A determination of stockholders
of record entitled to notice of or to vote a meeting of stockholders shall apply
to any adjournment of the meeting; provided, however, that the Board of
Directors may fix a new record date for the adjourned meeting. In order that the
corporation may determine the stockholders entitled to consent to corporate
action in writing without a meeting, the Board of Directors may fix a record
date, which record date shall not precede the date upon which the resolution fix
the record date is adopted by the Board of Directors, and which date shall not
be more than ten days after the date upon which the resolution fixing the record
date is adopted by the Board of Directors. If no record date has been fixed by
the Board of Directors, the record date for determining the stockholders
entitled to consent to corporate action in writing without a meeting, when no
prior action by the Board of Directors is required by the General Corporation
Law, shall be the first date on which a signed written consent setting forth the
action taken or proposed to be taken is delivered to the corporation by delivery
to its registered office in the State of Delaware, its principal place of
business, or an officer or agent of the corporation having custody of the book
in which proceedings of meeting of stockholders are recorded. Delivery made to
the corporation's registered office shall be by hand or by certified or
registered mail, return receipt requested. If no record date has been fixed by
the Board of Directors and prior action by the Board of Directors is required by
the
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General Corporation Law, the record date for determining stockholders enitled to
consent to corporate action in writing without a meeting shall be at the close
of business on the day on which the Board of Directors adopts the resolution
taking such prior action. In order that the corporation may determine the
stockholders entitled to receive payment of any dividend or other distribution
or allotment of any rights or the stockholders entitled to exercise any rights
in respect of any change, conversion, or exchange of stock, or for the purpose
of any other lawful action, the Board of Directors may fix a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted, and which record date shall be not more than sixty days
prior to such action. If no record date is fixed, the record date for
determining stockholders for any such purpose shall be at the close of business
on the day on which the Board of Directors adopts the resolution relating
thereto.
6. MEANING OF CERTAIN TERMS. As used herein in respect of the
right to notice of a meeting of stockholders or a waiver thereof or to
participate or vote thereat or to consent or dissent in writing in lieu of a
meeting, as the case may be, the term "share" or "shares" or "share of stock" or
"shares of stock" or "stockholder" or "stockholders" refers to an outstanding
share or shares of stock and to a holder or holders of record of outstanding
shares of stock when the corporation is authorized to issue only one class of
shares of stock and said reference is also intended to include any outstanding
share or shares of stock any holder or holders of record of outstanding shares
of stock of any class upon which or upon whom the certificate of incorporation
confers such rights where there are two or more classes or series of shares of
stock or upon which or upon whom the General Corporation Law confers such rights
notwithstanding that the certificate of incorporation may provide for more than
one class or series of shares of stock, one or more of which are limited or
denied such rights thereunder; provided, however, that no such right shall vest
in the event of an increase or a decrease in the authorized number of shares of
stock of any class or series which is otherwise denied voting rights under the
provisions of the certificate of incorporation, except as any provision of law
may otherwise require.
7. STOCKHOLDER MEETINGS
- TIME. The annual meeting shall be held on the date and
at the time fixed, from time to time, by the directors, provided, that the first
annual meeting shall be held on a date within thirteen months after the
organization of the corporation, and each successive annual meeting shall be
held on a date within thirteen months after the date of the preceding annual
meeting. A special meeting shall be held on the date and at the time fixed by
the directors.
- PLACE. Annual meetings and special meetings shall be
held at such place, within or without the State of Delaware, as the directors
may, from time to time, fix. Whenever the directors shall fail to fix such
place, the meeting shall be held at the registered office of the corporation in
the State of Delaware.
- CALL. Annual meetings and special meetings may be called
by the directors or by any officer instructed by the directors to call the
meeting or by the holders of at least a majority of the outstanding Common
Stock.
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- NOTICE OR WAIVER OF NOTICE. Written notice of all
meeting shall be given, stating the place, date, and hour of the meeting and
stating the place within the city or other municipality or community at which
the list of stockholder of the corporation may be examined. The notice of an
annual meeting shall state that the meeting is called for the election of
directors and for the transaction of other business which may properly come
before the meeting, and shall (if any other action which could be taken at a
special meeting is to be taken at such annual meeting) state the purpose or
purposes. The notice of a special meeting shall in all instances state the
purpose or purposes for which the meeting is called. The notice of any meeting
shall also include, or be accompanied by, any additional statements,
information, or documents prescribed by the General Corporation Law. Except as
otherwise provided by the General Corporation Law, a copy of the notice of any
meeting shall be given, personally or by mail, not less than ten days nor more
than sixty days before the date of the meeting, unless the lapse of the
prescribed period of time shall have been waived, and directed to each
stockholder at his record address or at such other address which may have
furnished by request in writing to the Secretary of the corporation. Notice by
mail shall be deemed to be given when deposited, with postage thereon prepaid,
in the United States Mail. If a meeting is adjourned to another time, not more
than thirty days hence, and/or to another place, and if an announcement of the
adjourned time and/or place is made at the meeting, it shall not be necessary to
give notice of the adjourned meeting unless the directors, after adjournment,
fix a new record date for the adjourned meeting. Notice need not be given to any
stockholder who submits a written waiver of notice signed by him before or after
the time stated therein. Attendance of a stockholder at a meeting of stockholder
shall constitute a waiver of notice of such meeting, except when the stockholder
attends the meeting for the express purpose of objecting, at the beginning of
the meeting, to the transaction of any business because the meeting is not
lawfully called or convened. Neither the business to be transacted at, nor the
purpose of, any regular or special meeting of the stockholders need be specified
in any written waiver of notice.
- STOCKHOLDER LIST. The officer who has charge of the
stock ledger of the corporation shall prepare and make, at least ten days before
every meeting of stockholders, a complete list of the stockholders, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at lease ten days prior to the
meeting, either at a place within the city or other municipality or community
where the meeting is to be held, which place shall be specified in the notice of
the meeting, or if not so specified, at the place where the meeting is to be
held. The list shall also be produced and kept at the time and place of the
meeting during the whole time thereof, and may be inspected by any stockholder
who is present. The stock ledger shall be the only evidence as to who are the
stockholders entitled to examine the stock ledger, the list required by this
section or the books of the corporation, or to vote at any meeting of
stockholders.
- CONDUCT OF MEETING. Meetings of the stockholders shall
be presided over by one of the following officers in the order of seniority and
if present and acting - the Chairman of the Board, if any, the Vice-Chairman of
the Board, if any, the President, a Vice-President, or, if non of the foregoing
is in office and present and acting, by a chairman to be chosen by the
stockholders. The Secretary of the corporation, or in his absence, an Assistant
Secretary,
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shall act as secretary of every meeting, but if neither the Secretary nor an
Assistant Secretary is present the Chairman of the meeting shall appoint a
secretary of the meeting.
- PROXY REPRESENTATION. Every stockholder may authorize
another person or persons to act for him by proxy in all matters in which a
stockholder is entitled to participate, whether by waiving notice of any
meeting, voting or participating at a meeting, or expressing consent or dissent
without a meeting. Every proxy must be signed by the stockholder or by his
attorney-in-fact. No proxy shall be voted or acted upon after three years from
its date unless such proxy provides for a longer period. A duly executed proxy
shall be irrevocable it states that it is irrevocable and, if, and only as long
as, it is coupled with an interest sufficient in law to support an irrevocable
power. A proxy may be made irrevocable regardless of whether the interest with
which it is coupled is an interest in the stock itself or an interest in the
corporation generally.
- INSPECTORS. The directors, in advance of any meeting,
may, but need not, appoint one or more inspectors of election to act at the
meeting or any adjournment thereof. If an inspector or inspectors are not
appointed, the person presiding at the meeting may, but need not, appoint one or
more inspectors. In case any person who may be appointed as an inspector fails
to appear or act, the vacancy may be filled by appointment made by the directors
in advance of the meeting or at the meeting by the person presiding thereat.
Each inspector, if any, before entering upon the discharge of his duties, shall
take and sign an oath faithfully to execute the duties of inspectors at such
meeting with strict impartiality and according to the best of his ability. The
inspectors, if any, shall determine the number of shares of stock outstanding
and the voting power of each, the shares of stock represented at the meeting,
the existence of a quorum, the validity and effect of proxies, and shall receive
votes, ballots, or consents, hear and determine all challenges and questions
arising in connection with the right to vote, count and tabulate all votes,
ballots, or consents, determine the result, and do such acts as are proper to
conduct the election or vote with fairness to all stockholders. On request of
the person presiding at the meeting, the inspector or inspectors, if any, shall
make a report in writing of any challenge, question, or matter determined by him
or them and execute a certificate of any fact found by him or them. Except as
otherwise required by subsection (e) of Section 231 of the General Corporation
Law, the provisions of that Section shall not apply to the corporation.
- QUORUM. The holders of a majority of the outstanding
shares of stock shall constitute a quorum at a meeting of stockholders for the
transaction of any business. The stockholders present may adjourn the meeting
despite the absence of a quorum.
- VOTING. Each share of stock shall entitle the holder
thereof to one vote. Directors shall be elected by a plurality of the votes of
the shares present in person or represented by proxy at the meeting and entitled
to vote on the election of directors. Any other action shall be authorized by a
majority of the votes cast except where the General Corporation Law prescribes a
different percentage of votes and/or a different exercise of voting power, and
except as may be otherwise prescribed by the provisions of the certificate of
incorporation and these By-laws. In the election of directors, and for any other
action, voting need not by ballot.
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8. STOCKHOLDER ACTION WITHOUT MEETINGS. Any action required
by the General Corporation Law to be taken at any annual or special meeting of
stockholders, or any action which may be taken at any annual or special meeting
of stockholders, may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted. Prompt notice of there taking of the corporate action without a meeting
by less than unanimous written consent shall be given to those stockholders who
have not consented in writing. Action taken pursuant to this paragraph shall be
subject to the provisions of Section 228 of the General Corporation Law.
ARTICLE II
DIRECTORS
1. FUNCTION AND DEFINITION. The business and affairs of the
corporation shall be managed by or under the direction of the Board of Directors
of the corporation. The Board of Directors shall have the authority to fix the
compensation of the members thereof. The use of the phrase "whole board" herein
refers to the total number of directors which the corporation would have if
there were no vacancies.
2. QUALIFICATIONS AND NUMBERS. A director need not be a
stockholder or a resident of the State of Delaware but must be a United States
citizen or a permanent resident of the United States. The initial Board of
Directors shall consist of 3 persons. Thereafter the number of directors
constituting the whole board shall be at least three. Subject to the foregoing
limitation and except for the first Board of Directors, such number may be fixed
from time to time by action of the stockholders or of the directors, or, if the
number is not fixed, the number shall be 3. The number of directors may be
increased or decreased by action of the stockholders or of the directors.
3. ELECTION AND TERM. The first Board of Directors, unless
the members thereof shall have been named in the certificate of incorporation,
shall be elected by the incorporator or incorporators and shall hold office
until the first annual meeting of stockholders and until their successors are
elected and qualified or until their earlier resignation or removal. Any
director may resign at any time upon written notice to the corporation.
Thereafter, directors who are elected at an annual meeting of stockholders, and
directors who are elected in the interim to fill vacancies and newly crested
directorships, shall hold office until the next annual meeting of stockholders
and until their successors are elected and qualified or until their earlier
resignation or removal. Except as the General Corporation Law may otherwise
require, in the interim between annual meetings of stockholders or of special
meetings of stockholders called for the election of directors and/or for the
removal of one or more directors and for the filing of any vacancy in that
connection, newly created directorships and any vacancies in the Board of
Directors, including unfilled vacancies resulting from the removal of directors
for cause or without cause, may be filled by the vote of a majority of the
remaining directors then in office, although less than a quorum, or by the sole
remaining director.
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4. MEETINGS.
- TIME. Meetings shall be held at such time as the Board
shall fix, except that the first meeting of a newly elected Board shall be held
as soon after its election as the directors may conveniently assemble.
- PLACE. Meetings shall be held at such place within or
without the State of Delaware as shall be fixed by the Board.
- CALL. No call shall be required for regular meetings for
which time and place have been fixed. Special meetings may be called by or at
the direction of the Chairman of the board, if any, the Vice-Chairmen of the
Board, if any of the President, or of a majority of the directors in office.
- NOTICE OR ACTUAL OR CONSTRUCTIVE WAIVER. No notice shall
be required for regular meetings for which the time and place have been fixed.
Written, oral, or any other mode of notice of the time and place shall be given
for special meetings in sufficient time for the convenient assembly of the
directors thereat. Notice need not be given to any directors or to any member of
a committee of directors who submits a written waiver of notice signed by him
before or after the time stated herein. Attendance of any such person at a
meeting shall constitute a waiver of notice of such meeting, except when he
attends a meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened. Neither the business to be transacted at, nor the purpose
of, any regular or special meeting of the directors need be specified in any
written waiver of notice.
- QUORUM AND ACTION. A majority of the whole Board shall
constitute a quorum except when a vacancy or vacancies prevents such majority,
whereupon a majority of the directors in office shall constitute a quorum,
provided, that such majority shall constitute at least one-third of the whole
Board. A majority of the directors present, whether or not a quorum is present,
may adjourn a meeting to another time and place. Except as herein otherwise
provided, and except as otherwise provided by the General Corporation Law, the
vote of the majority of directors present at a meeting at which a quorum is
present shall be the act of the Board. The quorum and voting provisions herein
stated shall not be construed as conflicting with any provisions of the General
Corporation Law and these Bylaws which govern a meeting of directors held to
fill vacancies and newly created directorships in the Board or action of
disinterested directors.
Any member or members of the Board of Directors or of any
committee designated by the Board, may participate in a meeting of the Board, or
any such committee, as the case may be, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other.
- CHAIRMAN OF THE MEETING. The Chairmen of the Board, if
any and if present and acting, shall preside at all meetings. Otherwise, the
Vice-Chairman of the Board, of
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any and if present and acting, or the President, if present and acting, or any
other director chosen by the Board, shall preside.
5. REMOVAL OF DIRECTORS. Except as may otherwise be provided
by the General Corporation Law, any directors or the entire Board of Directors
may be removed, with or without cause, by the holders of a majority of the
shares then entitled to vote at an election of directors.
6. COMMITTEES. The Board of Directors may, by resolution
passed by a majority of the whole Board, designate one or more committees, each
committee to consist of one or more of the directors of the corporation. The
Board may designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. In the absence or disqualification of any member of any such
committee or committees, the member or members thereof present at any meeting
and not disqualified from voting, whether or not he or they constitute a quorum,
may unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board, shall have and
may exercise the powers and authority of the Board of Directors in the
management of the business and affairs of the corporation with the exception of
any authority of the Board of Directors in the management of the business and
affairs of the corporation with the exception of any authority the delegation of
which is prohibited by Section 141 of the General Corporation Law, and may
authorize the seal of the corporation to be affixed to all papers which may
require it.
7. WRITTEN ACTION. Any action required or permitted to be
taken at any meeting of the Board of Directors or any committee, as the case may
be, consent thereto in writing, and the writing, and the writing or writings,
are filed with the minutes of proceedings of the Board or committee.
ARTICLE III
OFFICERS
The officers of the corporation shall consist of a President,
a Secretary, a Treasurer, and, if deemed necessary, expedient, or desirable by
the Board of Directors, a Chairman of the Board, an Executive Vice President,
one or more other Vice-Presidents, one or more Assistant Secretaries, one or
more Assistant Treasurers, and such other officers with such titled as the
resolution of the Board of Directors choosing them shall designate. Except as
may otherwise be provided in the resolution of the Board of Directors choosing
him, no officer other than the Chairman or Vice Chairman of the Board if any,
need be a director. Any number of offices may be held by the same person, as the
directors may determine.
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ARTICLE IV
INDEMNIFICATION
8.1 (a) Subject to the provisions of the Small Business
Investment Act of 1958, as amended, and the standard of care provisions provided
below, the Corporation shall (a) indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action
or suit by or in the right of the Corporation to procure a judgment in its favor
by reason of the fact that he is or was a director, officer, employee or agent
of the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement or such action or suit, (b) indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation), by
reason of the fact that he is or was a director, officer, employee or agent of
the Corporation, or served at the request of the Corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by him in
connection with any such action, suit or proceeding, in each case to the fullest
extent permissible under subsections (a) through (f) of Section 145 of General
Corporation Law of the State of Delaware of the indemnification provisions of
any successor statute and (c) advance reasonable and necessary expenses in
connection with such actions or suits, and not seek reimbursement of such
expenses unless there is a specific determination that the officer or director
is not entitled to such indemnification. The foregoing right of indemnification
shall in no way be exclusive of any other rights of indemnification to which any
such persons may be entitled, under any by-law, agreement, vote of shareholders
or disinterest directors or otherwise, and shall inure to the benefit of the
heirs, executors and administrators of such a person. The indemnification is
limited to the extent of the Corporation's assets less its liabilities and must
be incurred by or asserted against such person seeking indemnification by reason
of any action taken or omitted to be taken on behalf of the Corporation and in
furtherance of its interests.
(b) STANDARD OF CARE. Neither the officers, directors,
employees or agents shall be liable to the Corporation for any action taken or
omitted to be taken by it or any other officer, director, employee or agent or
other person in good faith and in a manner they reasonably believed to be in or
not opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe their conduct
was unlawful.
The officers, directors, employees or agents, and any member
of a Corporation committee or board, may consult with reputable legal counsel
selected by them and shall be fully protected, and shall incur no liability to
the Corporation, in acting or refraining to act in good faith in reliance upon
the opinion of advice of such counsel.
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This Section 8.1(b) shall not constitute a modification,
limitation or waiver of Section 314(b) of the SBIC Act, or a waiver by the SBA
of any of its rights pursuant to such Section 314(b).
No person shall be entitled to claim any indemnify or
reimbursement in respect of any cost, expense, damage, liability, claim, fine,
judgment (including any cost of the defense of any claim, action, suit,
proceeding or investigation, by or before any court or administrative or
legislative body or authority) that may be incurred by such person which results
from the failure of such person to act in accordance with the applicable
standard of care set forth in Section 8.1(b). The termination of any action,
suit or proceeding by judgment, order, settlement, conviction, or upon a plea of
NOLO CONTENDERE or its equivalent, shall not, of itself, preclude a
determination that such person acted in accordance with the applicable standard
of care set forth in Section 8.1.
The rights provided by this Section 8.2 shall inure to the
benefit of the heirs, executors, administrators, successors, and assigns of each
person eligible for indemnification hereunder.
The Corporation may purchase and maintain insurance on its
own behalf, or on behalf of any person or entity, with respect to liabilities of
the types described in this Section 8.1. The Corporation may purchase such
insurance regardless of whether such person is acting in a capacity described in
this Section 8.1 or whether the Corporation would have the power to indemnify
such person against such liability under the provision of this Section 8.1. The
terms of Article Tenth of the Corporation's Certificate of Incorporation are
hereby incorporated by reference.
ARTICLE V
CORPORATE SEAL
The corporate seal shall be in such form as the Board of
Directors shall prescribe.
ARTICLE VI
FISCAL YEAR
The fiscal year of the corporation shall be fixed, and shall
be subject to change, by the Board of Directors.
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CONTROL OVER BYLAWS
Subject to the provisions of the certificate of incorporation
and the provisions of the General Corporation Law, the power to amend, alter, or
repeal these Bylaws and to adopt new Bylaws may be exercised by the Board of
Directors or by the stockholders.
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MICHAEL C. FINKELSTEIN
Certified Public Accountant
198 Route 9, Suite 205 253 Fifth Avenue, 5th Floor
Manalapan, New Jersey 07726 New York, New York 10016
Tel. (732) 577-7055 Tel. (212) 689-4633
Fax. (732) 577-1844
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement of
East Coast Venture Capital Corp. on Form N-2 of our audited report dated October
6, 1997 on our examinations for the years ended July 31, 1995, 1996 and 1997,
and for the review report dated May 29, 1998 on our review of the financial
statements for the nine months ended April 30, 1998. We also consent to the
reference to our firm under the caption "Experts".
MICHAEL C. FINKELSTEIN
Certified Public Accountant
New York, New York
July 7, 1998
EAST COAST VENTURE CAPITAL, INC.
1998 STOCK PLAN
1. ESTABLISHMENT, PURPOSE, AND EFFECTIVE DATE OF PLAN
1.1 ESTABLISHMENT. East Coast Venture Capital, Inc., a
Delaware corporation (the "Company" ), hereby establishes the "1998 STOCK PLAN"
(the "Plan") for its key employees and directors and certain outside consultants
and advisors of the Company. The Plan permits the grant of Stock Options, Stock
Appreciation Rights and Restricted Stock.
1.2 PURPOSE. The purpose of the Plan is to advance the
interests of the Company and its Subsidiaries and promote continuity of
management by encouraging and providing key employees and directors and certain
outside consultants and advisors of the Company with the opportunity to acquire
an equity interest in the Company and to participate in the increase in
shareholder value as reflected in the growth in the price of the shares of the
Company's Stock and by enabling the Company to attract and retain the services
of key employees and and certain outside consultants and advisors of the Company
upon whose judgment, interest, skills, and special effort the successful conduct
of its operations is largely dependent.
1.3 EFFECTIVE DATE. The Plan became effective in June 1998.
2. DEFINITIONS; CONSTRUCTION
2.1 DEFINITIONS. Whenever used herein, the following terms
shall have their respective meanings set forth below:
(a) "Act" means the Securities Exchange Act of 1934, as
amended.
(b) "Board" means the Board of Directors of the Company,
which shall determine all matters concerning Options, Restricted Stock and Stock
Appreciation Rights.
(c) "Cause" means (i) the conviction of a felony
involving moral turpitude, (ii) the performance of an act which is or may pose a
material threat to the business of the Company or is materially inconsistent
with such person's duties as an employee or director of the Company or (iii) the
failure to perform the material duties required of such employee or director for
any reason other than illness.
(d) "Change in Capitalization" means any increase or
reduction in the number of shares of Stock, or any change (including, but not
limited to, a change in value) in the shares of Stock or exchange of shares of
Stock for a different number or kind of shares or other securities of the
Company or any other corporation or other entity, by reason of a
reclassification, recapitalization, merger, consolidation, reorganization,
spin-off, split-up,
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issuance of warrants or rights or debentures, stock dividend, stock split or
reverse stock split, extraordinary dividend, property dividend, combination or
exchange of shares or otherwise.
(e) A "Change in Control" means an event or series of
events after the Effective Date by which (i) any "person" or "group" (as such
terms are used in Section 13(d) and 14(d) of the Act) becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of more
than 50% of the aggregate voting power of all the capital stock of the Company
normally entitled to vote in the election of directors or (ii) during any period
of two consecutive calendar years, individuals who at the beginning of such
period constituted the Board (together with any new directors whose election by
the Board or whose nomination for election by the Company's stockholders was
approved by a vote of at least a majority of the directors then still in office
who either were directors at the beginning of such period or whose election or
nomination was previously so approved) cease for any reason to constitute a
majority of the directors then in office.
(f) "Code" means the Internal Revenue Code of 1986, as
amended.
(g) "Committee" means a committee of the Board
designated to administer the Plan consisting solely of two or more members of
the Board who are Non-Employee Directors within the meaning of Rule 16b-3 under
the Act and who are also "outside directors" within the meaning of Section
162(m) of the Code. If no Committee is designated or is administering the Plan,
all references to the Committee herein shall refer to the Board, the decisions
of which shall be made by such persons as aforesaid.
(h) "Company" means East Coast Venture Capital, Inc., a
Delaware corporation, and any successors thereto.
(i) "Disability" means the inability to engage in any
substantial activity by reason of any medically determinable, physical or mental
impairment that can be expected to result in death or that has lasted or can be
expected to last for a continuous period of not less than 12 months.
(j) "Eligible Employee" means any key employee of the
Company or a Subsidiary designated by the Committee as eligible to participate
in the Plan pursuant to Subsection 3.1. "Eligible Director" means a director of
the Company who is not also an employee of the Company or a Subsidiary.
"Eligible Consultant" means any non-employee consultant or advisor to the
Company or Subsidiary designated by the Committee as eligible to participate in
the Plan pursuant to Subsection 3.1.
(k) "Employee Option" shall mean an Option granted to an
Eligible Employee. "Consultant Option" shall mean an Option granted to an
Eligible Consultant. An Employee Option may be either (i) an "incentive stock
option" within the meaning of Section 422 of the Code or (ii) a "nonstatutory
stock option."
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(l) "Fair Market Value" means the mean of the high and
low prices at which a share of the Stock is reported to have traded on the
relevant date as reported on the Nasdaq Stock Market ("Nasdaq System"); and if
there is no trade on such date, the Fair Market Value means the mean of the low
asked and high bid prices on such date as reported on the Nasdaq System. If the
principal market for the Stock becomes a national securities exchange then the
Fair Market Value means the mean of the high and low prices at which a share of
the Stock is reported to have traded on the relevant date; and if there is no
trade on the relevant date, the Fair Market Value shall mean the mean of the low
asked and high bid prices on such date. If no Fair Market Value has been
established in accordance with the foregoing, Fair Market Value shall be the
current net asset value as determined by the Board in good faith and, in the
case of an incentive stock option, in accordance with Section 422 of the Code.
(m) "Option" means the right to purchase Stock at a
stated price for a specified period of time.
(n) "Option Agreement" means the agreement evidencing
the grant of an Option as described in Section 6.2.
(o) "Option Price" means the price at which Stock may be
purchased pursuant to an Option.
(p) "Optionee" means a person to whom an Option has been
granted under the Plan.
(q) "Participant" means an Eligible Employee, an
Eligible Director or an Eligible Consultant who has been granted and, at the
time of reference, holds an Option, Restricted Stock or Stock Appreciation
Right.
(r) "Period of Restriction" means the period during
which shares of Restricted Stock are subject to restrictions pursuant to Section
9 of the Plan.
(s) "Restricted Stock" means Stock granted pursuant to
Section 9 of the Plan.
(t) "Stock" means the Common Stock of the Company, par
value of $.01 per share.
(u) "Stock Appreciation Right" means the right to
receive the increase in the value of Stock subject to an Option in lieu of
purchasing such Stock.
(v) "Subsidiary" means any present or future subsidiary
of the Company, as defined in Section 424(f) of the Code.
2.2 NUMBER. Except when otherwise indicated by the context,
the singular shall include the plural, and the plural shall include the
singular.
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3. ELIGIBILITY AND PARTICIPATION
3.1 ELIGIBILITY AND PARTICIPATION. Eligible Employees,
Eligible Directors and Eligible Consultants shall be selected by the Committee
from among those officers and other key employees and Directors of the Company
and its Subsidiaries who, in the opinion of the Committee, are in a position to
contribute materially to the Company's continued growth and development and to
its long-term financial success.
4. STOCK SUBJECT TO PLAN
4.1 NUMBER. The total number of shares of Stock subject to
issuance under the Plan shall not exceed 1,000,000, of which 300,000 shares
shall be earmarked for directors other than Directors who are Eligible
Employees. The shares to be delivered under the Plan may consist, in whole or in
part, of authorized but unissued Stock or treasury Stock, not reserved for any
other purpose. The numbers of shares of Stock referred to herein shall be
subject to adjustment upon occurrence of any of the events indicated in
Subsection 4.5.
4.2 UNUSED STOCK; UNEXERCISED RIGHTS. If any shares of Stock
are subject to an Option which for any reason expires or is terminated
unexercised as to such shares, or any shares of Stock subject to a Restricted
Stock grant made under the Plan are reacquired by the Company pursuant to
Section 9 of the Plan, such shares shall again become available for issuance
under the Plan.
4.3 EXERCISE OF STOCK APPRECIATION RIGHT. Whenever a Stock
Appreciation Right is exercised and payment of the amount determined in
Subsection 8.1 (b) is made in cash, the shares of Stock allocable to the portion
of the Option surrendered may again be the subject of Options or Restricted
Stock hereunder. Whenever a Stock Appreciation Right is exercised and payment of
the amount determined in Subsection 8.1 (b) is made in shares of Stock, no
shares of Stock with respect to which the Stock Appreciation Right is exercised
may again be the subject of Options or Restricted Stock hereunder.
4.4 RESTRICTED STOCK. Whenever any shares of Stock are
forfeited pursuant to Section 9 herein, such shares may again be the subject of
Options or Restricted Stock hereunder, but only if the Participant had not been
paid any dividend or received any other benefit of ownership of such forfeited
shares.
4.5 ADJUSTMENTS.
(a) In the event of a Change in Capitalization, the
Committee shall conclusively determine the appropriate adjustments, if any, to
the (i) maximum number and class of shares of Stock or other securities with
respect to which Options or Restricted Stock may be granted under the Plan; (ii)
the number and class of shares of Stock or other securities which are subject to
outstanding Options or Restricted Stock granted under the Plan, and the purchase
price therefor, if applicable; and (iii) the maximum number of shares of Stock
or other securities with
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respect to which Options or Stock Appreciation Rights may be granted during the
term of the Plan.
(b) Any such adjustment in the shares of Stock or other
securities subject to outstanding incentive stock options (including any
adjustments in the purchase price) shall be made in such manner as not to
constitute a modification as defined by Section 424(h)(3) of the Code and only
to the extent otherwise permitted by Sections 422 and 424 of the Code.
(c) If, by reason of a Change in Capitalization, a
grantee of Restricted Stock shall be entitled to, or an Optionee shall be
entitled to exercise an Option with respect to, new, additional or different
shares of stock or securities, such new additional or different shares shall
thereupon be subject to all of the conditions, restrictions and performance
criteria which were applicable to the Restricted Stock or shares of Stock
subject to the Option, as the case may be, prior to such Change in
Capitalization.
(d) If, in the opinion of the Committee, the Option
Price of an outstanding Option held by an Eligible Director exceeds the Fair
Market Value of the Stock and for that reason no longer fulfills the purpose of
the Plan as described in Subsection 1.2 hereof, the Committee may adjust the
Option Price to the current Fair Market Value of the Stock as of the date of
such adjustment.
5. DURATION OF PLAN
5.1 DURATION OF PLAN. The Plan shall remain in effect,
subject to the Board's right to earlier terminate the Plan pursuant to
Subsection 12.3 hereof, until all Stock subject to the Plan shall have been
purchased or acquired pursuant to the provisions hereof. Notwithstanding the
foregoing, no Option, Stock Appreciation Right or Restricted Stock may be
granted under the Plan on or after the tenth anniversary of the Effective Date.
6. OPTION GRANTS
6.1 GRANT OF OPTIONS. Subject to Sections 4 and 5, Options
may be granted to Eligible Employees, Eligible Directors or Eligible Consultants
at any time and from time to time as determined by the Committee. The Committee
shall have complete discretion consistent with the terms of the Plan in
determining whether to grant Options, the number of Options to be granted to
each Eligible Employee, Eligible Director or Eligible Consultant and whether an
Employee Option is to be an incentive stock option within the meaning of Section
422 of the Code or a nonstatutory stock option. Nothing in this Section 6 of the
Plan shall be deemed to prevent the grant of nonstatutory stock options in
excess of the maximum established by Section 422 of the Code.
6.2 OPTION AGREEMENT. Each Option shall be evidenced by an
Option Agreement that shall specify the type of Option granted, the Option
Price, the duration of such Option, the number of shares of Stock to which such
Option pertains and such other provisions as the Committee shall determine.
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6.3 OPTION PRICE. The Option Price for each Employee Option
or Consultant Option shall be determined by, or in the manner specified by, the
Committee; provided that in the case of an incentive stock option, no Employee
Option or Consultant Option shall have an Option Price that is less than the
Fair Market Value of the Stock on the date the Employee Option or Consultant
Option, as the case may be, is granted (110% of Fair Market Value in the case of
an incentive stock option granted to any person who owns stock possessing more
than 10% of the total combined voting power of all classes of stock of the
Company or any Subsidiary (a "Ten Percent Shareholder")).
6.4 DURATION OF OPTIONS. Each Option shall have a duration
of such term as the Committee shall determine, but in no event longer than ten
years from the time such Option is granted; in the case of an incentive stock
option granted to a Ten Percent Stockholder, the term of such Option shall not
exceed five years.
6.5 EXERCISE OF OPTIONS. Each Option shall be exercisable at
such times and be subject to such restrictions and conditions as the Committee
shall approve. Such restrictions and conditions need not be the same for each
Option.
6.6 OPTIONS TO ELIGIBLE DIRECTORS. Each Eligible Director
may be granted an Option to purchase such number of shares of Stock as the
Committee shall determine, during each year in which such Eligible Director is
serving as a director of the Company on the terms and conditions set forth
herein, subject to such limitations as may be imposed by applicable law. Such
Options shall immediately vest and shall be exercisable during the five year
period following the date of the grant, whether or not such Eligible Director's
service as a director is terminated, unless such Eligible Director's service is
terminated for Cause, in which event any outstanding Option held by him shall
immediately terminate. The Option Price of such Options shall be the Fair Market
Value on the date such Option is granted. Such price shall be subject to
adjustment provided in Subsection 4.5.
7. TERMS AND CONDITIONS APPLICABLE TO ALL OPTIONs
7.1 PAYMENT. The Option Price shall be payable to the
Company in full upon exercise of an Option either in cash or its equivalent or,
at the discretion of the Committee, by tendering shares of Stock having a Fair
Market Value at the time of exercise equal to the Option Price, or by a
combination of cash and such Stock. The proceeds from such a payment shall be
added to the general funds of the Company and shall be used for general
corporate purposes.
7.2 RESTRICTIONS ON STOCK TRANSFERABILITY. The Committee may
impose such restrictions on any shares of Stock acquired pursuant to the
exercise of an Option under the Plan as it may deem advisable, including.
without limitation, restrictions under applicable Federal securities law, under
requirements of any stock exchange upon which such shares of Stock are then
listed and under any blue sky or state securities laws applicable to such
shares.
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7.3 TERMINATION OF EMPLOYMENT DUE TO RETIREMENT. The Option
Agreement may with respect to an Option provide that if the Optionee's
employment or service as a director is terminated for a reason other than for
Cause or following a Change in Control, any outstanding Options granted to the
Optionee which are then exercisable shall continue to be exercisable at any time
prior to the earlier of the expiration date of such Options and one year after
the date of termination, and any such Options not then exercisable shall
terminate immediately, subject to such exceptions (which shall be set forth in
the Option Agreement) as the Committee may, in its sole discretion, approve.
7.4 TERMINATION OF EMPLOYMENT DUE TO DEATH OR DISABILITY.
The Option Agreement may provide that if an Optionee's employment or service as
a director is terminated by reason of death or Disability, the rights of an
Optionee under any then outstanding Option granted to the Optionee pursuant to
the Plan shall survive for up to one year after such death or Disability.
7.5 TERMINATION OF EMPLOYMENT FOR CAUSE. Notwithstanding
anything to the contrary herein, if an Optionee's employment or service as a
director shall be terminated for Cause, any then outstanding Employee Option
granted pursuant to the Plan to such Optionee shall terminate immediately.
7.6 NONTRANSFERABILITY AND EXERCISABILITY OF OPTIONS. No
Option granted under the Plan may be sold, transferred, pledged, assigned or
otherwise alienated or hypothecated, otherwise than by will or by the laws of
descent and distribution. Further, all Options granted to an Optionee under the
Plan shall be exercisable during his lifetime only by such Optionee.
8. STOCK APPRECIATION RIGHTS
8.1 STOCK APPRECIATION RIGHTS. The Committee may, in its
discretion, in connection with the grant of an Option, grant to the Optionee
Stock Appreciation Rights, the terms and conditions of which shall be set forth
in an agreement. A Stock Appreciation Right shall cover the same shares of Stock
covered by the Option (or such lesser number of shares of Stock as the Committee
may determine) and shall, except as provided in this Section 8, be subject to
the same terms and conditions as the related Option. Stock Appreciation Rights
shall be subject to the following terms and provisions:
(a) A Stock Appreciation Right may be granted (i) either
at the time of grant, or at any time thereafter during the term of the Option if
related to a nonstatutory stock option; or (ii) only at the time of grant if
related to an incentive stock option.
(b) A Stock Appreciation Right will entitle the holder
of the related Option upon exercise of the Stock Appreciation Right, to
surrender such Option or any portion thereof to the extent unexercised, and to
receive payment of an amount determined by multiplying (i) the excess of the
Fair Market Value of the Stock on the date of exercise of such Stock
Appreciation Right over the Option Price under the related Option, by (ii) the
number of
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shares as to which such Stock Appreciation Right has been exercised.
Notwithstanding the foregoing, the agreement evidencing the Stock Appreciation
Right may limit in any manner the amount payable with respect to any Stock
Appreciation Right.
(c) A Stock Appreciation Right will be exercisable at
such time or times and only to the extent that a related Option is exercisable,
and will not be transferable except to the extent that such related Option may
be transferable. A Stock Appreciation Right granted in connection with an
incentive stock option shall be exercisable only if the Fair Market Value of the
Stock on the date of exercise exceeds the Option Price in the related Option.
(d) Upon the exercise of a Stock Appreciation Right, the
related Option shall be canceled to the extent of the number of shares of Stock
as to which the Stock Appreciation Right is exercised, and upon the exercise of
an Option granted in connection with a Stock Appreciation Right, the Stock
Appreciation Right shall be canceled to the extent of the number of shares of
Stock as to which the Option is exercised or surrendered.
(e) A Stock Appreciation Right may be exercised by an
Optionee only by a written notice delivered in person or by mail to the
Secretary of the Company at the Company's principal executive office, specifying
the number of shares of Stock with respect to which the Stock Appreciation Right
is being exercised. The Optionee shall deliver the agreement evidencing the
Stock Appreciation Right being exercised and the agreement evidencing any
related Option to the Secretary of the Company who shall endorse thereon a
notation of such exercise and return such agreement to the Optionee.
(f) Payment of the amount determined under Subsection
(b) may be made by the Company in the discretion of the Committee, as the case
may be, solely in whole shares of Stock in a number determined at their Fair
Market Value on the date preceding the date of exercise of the Stock
Appreciation Right or solely in cash, or in a combination of cash and Stock. If
payment is made in Stock and the amount payable results in a fractional share,
payment for the fractional share will be made in cash.
(g) Subject to the terms of the Plan, the Committee may
modify outstanding awards of Stock Appreciation Rights or accept the surrender
of outstanding awards of Stock Appreciation Rights (to the extent not exercised)
and grant new awards in substitution for them. Notwithstanding the foregoing, no
modification of an award of Stock Appreciation Rights shall adversely alter or
impair any rights or obligations under the agreement granting such Stock
Appreciation Rights without the Optionee's consent.
9. RESTRICTED STOCK
9.1 GRANT OF RESTRICTED STOCK. Subject to Sections 4 and 5,
the Committee at any time and from time to time may grant Restricted Stock under
the Plan and in such amounts as it determines in its sole discretion. Eligible
Directors may not be granted Restricted Stock. Each grant of Restricted Stock
shall be made pursuant to a written agreement which shall contain such
restrictions, terms and conditions as the Committee or the Board may determine
in its
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discretion. Restrictions upon Restricted Stock shall be for such period or
periods (herein called "Period(s) of Restriction") and on such terms and
conditions as the Committee may, in its discretion, determine.
9.2 TRANSFERABILITY. Except as provided in this Section 9,
the shares of Restricted Stock granted hereunder may not be sold, transferred,
pledged, assigned or otherwise alienated or hypothecated for such period of time
as shall be determined by the Committee and shall be specified in the Restricted
Stock grant, or upon earlier satisfaction of other conditions set forth in the
Restricted Stock grant.
9.3 OTHER RESTRICTIONS. The Committee may impose such other
restrictions on any shares of Restricted Stock granted to any Participant
pursuant to the Plan as it may deem advisable including, without limitation,
restrictions under applicable federal or state securities laws, and shall legend
the certificates representing Restricted Stock to give appropriate notice of
such restrictions.
9.4 CERTIFICATE LEGEND. In addition to any legends placed on
certificates pursuant to Subsection 9.3 hereof, each certificate representing
shares of Restricted Stock granted pursuant to the Plan shall bear the following
legend:
"The sale or other transfer of the shares of stock
represented by this certificate, whether voluntary,
involuntary or by operation of law, is subject to certain
restrictions on transfer set forth in East Coast Venture
Capital, Inc.'s 1998 Stock Plan and Restricted Stock
agreement dated [TO BE COMPLETED WITH THE DATE OF GRANT]. A
copy of the Plan and such Restricted Stock agreement may be
obtained from the Secretary of East Coast Venture Capital,
Inc."
9.5 REMOVAL OF RESTRICTIONS. Except as otherwise provided in
this Section 9, shares of Restricted Stock covered by each Restricted Stock
grant made under the Plan shall become freely transferable by the Participant
after the last day of the Period of Restriction. Once the shares are released
from the restrictions, the Participant shall be entitled to have the legend
required by Subsection 9.4 removed from his stock certificate.
9.6 VOTING RIGHTS. During the Period of Restriction,
Participants holding shares of Restricted Stock granted hereunder may exercise
full voting rights with respect to those shares.
9.7 DIVIDENDS AND OTHER DISTRIBUTIONS. During the Period of
Restriction, Participants holding shares of Restricted Stock granted hereunder
shall be entitled to receive all dividends and other distributions paid with
respect to those shares while they are so held. If any such dividends or
distributions are paid in shares of Stock, such shares shall be subject to the
same restrictions as the shares of Restricted Stock with respect to which they
were paid.
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10. BENEFICIARY DESIGNATION
10.1 BENEFICIARY DESIGNATION. Subject to Subsections 7.6 and
9.2, each Participant may, from time to time, name any beneficiary or
beneficiaries (who may be named contingently or successively) to whom any
benefit under the Plan is to be paid in case of the Participant's death before
he or she receives any or all of such benefit. Each designation will revoke all
prior designations by the same Participant, shall be in a form prescribed by the
Committee and will be effective only when filed by the Participant in writing
with the Committee during the lifetime of the Participant. In the absence of any
such designation, benefits remaining unpaid at the Participant's death shall be
paid to the estate of the Participant.
11. RIGHTS OF PARTICIPANTS
11.1 EMPLOYMENT OR SERVICE. Nothing in the Plan shall
interfere with or limit in any way the right of the Company to terminate any
Participant's employment, directorship or service at any time nor confer upon
any Participant any right to continue in the employ or service or as a director
of the Company. No person shall have a right to be selected as an Eligible
Employee or Eligible Director or, having been so selected, to be selected again
as an Optionee or recipient of Restricted Stock. The preceding sentence shall
not be construed or applied so as to deny a person any participation in the Plan
solely because he or she was a Participant in connection with a prior grant of
benefits under the Plan.
12. ADMINISTRATION; POWERS AND DUTIES OF THE COMMITTEE AND THE BOARD
12.1 ADMINISTRATION.
(a) The Committee shall be responsible for the
administration of the Plan; provided that if no Committee is designated or is
administering the Plan all references to the Committee shall be to the Board,
subject to Subsection 2.1(f). The Committee, by majority action thereof, is
authorized to interpret the Plan, to prescribe, amend, and rescind rules and
regulations relating to the Plan, to provide for conditions and assurances
deemed necessary or advisable to protect the interests of the Company, and to
make all other determinations necessary or advisable for the administration of
the Plan, but only to the extent not contrary to the express provisions of the
Plan. The Committee may employ attorneys, consultants, accountants or other
persons and the Committee, the Company and its officers and directors shall be
entitled to rely upon the advice, opinions or valuations of any such persons.
Determinations, interpretations, or other actions made or taken by the Committee
pursuant to the provisions of the Plan shall be final and binding and conclusive
for all purposes and upon all persons whomsoever.
(b) The Committee may delegate to one or more of its
members or to one or more agents such administrative duties as it may deem
advisable, and the Committee or any person to whom it has delegated duties as
aforesaid may employ one or more persons to render advice with respect to any
responsibility the Committee or such person may have under the Plan; provided,
that the Committee may delegate such duties only to members of the Board of
Directors who are Non-Employee Directors within the meaning of Rule 16b-3 under
the Act.
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(c) No member or agent of the Committee shall be
personally liable for any action, determination or interpretation made in good
faith with respect to the Plan or awards made hereunder, and all members and
agents of the Committee shall be fully indemnified and held harmless by the
Company in respect of any such action, determination or interpretation.
12.2 CHANGE IN CONTROL. Without limiting the authority of the
Committee as provided herein, the Committee, either at the time Options or
shares of Restricted Stock are granted, or, if so provided in the applicable
Option Agreement or Restricted Stock grant, at any time thereafter, shall have
the authority to take such actions as it deems advisable, including the right to
accelerate in whole or in part the exercisability of Options and/or to reduce
the Period of Restriction upon a Change in Control. The Option Agreements and
Restricted Stock grants approved by the Committee may contain provisions which,
if there is a Change in Control, accelerate the exercisability of Options and/or
the Period of Restriction automatically or at the discretion of the Committee or
if the Change in Control is approved by a majority of the members of the Board
or depending such other criteria as the Committee may specify. Nothing herein
shall obligate the Committee to take any action upon a Change in Control.
12.3 AMENDMENT, MODIFICATION AND TERMINATION OF PLAN. The
Board may at any time terminate, and from time to time may amend or modify, the
Plan, provided, however, that no such action of the Board, without approval of
the stockholders may increase the total amount of Stock which may be issued
under the Plan, except as provided in Subsection 4.5 of the Plan; The Board may
seek approval of the shareholders for any amendments or modifications to the
Plan in order to comply with Section 422 of the Code. No amendment, modification
or termination of the Plan shall in any manner adversely affect any Options or
Restricted Stock theretofore granted to any Participant under the Plan, without
the consent of that Participant.
12.4 INTERPRETATION. Unless otherwise expressly stated in the
relevant Agreement, any grant of Options, Stock Appreciation Rights and
Restricted Stock is intended to be performance-based compensation within the
meaning of 162(m)(4)(C) of the Code. The Committee shall not be entitled to
exercise any discretion otherwise authorized hereunder with respect to such
Options, Stock Appreciation Rights or Restricted Stock if the ability to
exercise such discretion or the exercise of such discretion itself would cause
the compensation attributable to such Options to fail to qualify as such
performance-based compensation.
13. TAX WITHHOLDING
13.1 TAX WITHHOLDING. At such times as a Participant
recognizes taxable income in connection with the receipt of shares, securities,
cash or property hereunder (a "Taxable Event"), the Participant shall pay to the
Company an amount equal to the federal, state and local income taxes and other
amounts as may be required by law to be withheld by the Company in connection
with the Taxable Event (the "Withholding Taxes") prior to the issuance, or
release from escrow, of such shares or the payment of such cash. The Company
shall have the right to deduct from any payment of cash to a Participant an
amount equal to the Withholding
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Taxes in satisfaction of the obligation to pay Withholding Taxes. In
satisfaction of his obligation to pay Withholding Taxes to the Company, the
Participant may make a written election (the "Tax Election"), which may be
accepted or rejected in the discretion of the Committee, to have withheld a
portion of the shares of Stock then issuable to him having an aggregate Fair
Market Value, on the date preceding the date of such issuance, equal to the
Withholding Taxes.
14. REQUIREMENTS OF LAW
14.1 REQUIREMENTS OF LAW. The granting of Options or
Restricted Stock, and the issuance of shares of Stock upon the exercise of an
Option shall be subject to all applicable laws, rules and regulations, and to
such approvals by any governmental agencies or national securities exchanges as
may be required.
14.2 GOVERNING LAW. The Plan, and all agreements hereunder,
shall be construed in accordance with and governed by the laws of the State of
New York without giving effect to the choice of law principles thereof, except
to the extent that such law is preempted by federal law.
14.3 LISTING, ETC. Each Option or share of Restricted Stock
is subject to the requirement that, if at any time the Committee determines, in
its discretion, that the listing, registration or qualification of Stock
issuable pursuant to the Plan is required by any securities exchange or under
any state or federal law, or the consent or approval of any governmental
regulatory body is necessary or desirable as a condition of, or in connection
with, the grant of an Option or the issuance of Stock, no Options or Restricted
Stock shall be granted or payment made or shares of Stock issued, in whole or in
part, unless such listing, registration, qualification, consent or approval has
been effected or obtained free of any conditions which are unacceptable to the
Committee acting in good faith.
14.4 RESTRICTION ON TRANSFER. Notwithstanding anything
contained in the Plan or any Agreement to the contrary, if the disposition of
Stock acquired pursuant to the Plan is not covered by a then current
registration statement under the Securities Act of 1933, as amended, and is not
otherwise exempt from such registration, such Stock shall be restricted against
transfer to the extent required by said Act, and Rule 144 or other regulations
thereunder. The Committee may require anyone receiving Stock pursuant to an
Option or Restricted Stock granted under the Plan, as a condition precedent to
receiving such Stock, to represent and warrant to the Company in writing that
such Stock is being acquired without a view to any distribution thereof and will
not be sold or transferred other than pursuant to an effective registration
thereof under said Act or pursuant to an exemption applicable under said Act, or
the rules and regulations promulgated thereunder. The certificates evidencing
any shares of such Stock shall be appropriately legended to reflect their status
as restricted securities.
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EAST COAST VENTURE CAPITAL, INC.
CODE OF ETHICS
I. PREAMBLE
The officers, directors and other "affiliated" persons (as
that term is defined in the Investment Company Act of 1940, as amended) of East
Coast Venture Capital, Inc. (the "Company") will in varying degrees participate
in, or be aware of, decisions made to implement the investment objectives and
policies of the Company. The relationship thus created mandates adherence to the
highest standards of conduct and integrity by each and every director, officer
or other affiliate of the Company. The establishment of high standards of
behavior is intended to prevent any intentional or unintentional transgression,
while not unnecessarily interfering with the privacy and freedom of the
individuals concerned. This Code of Ethics has therefore been adopted by the
Board of Directors of the Company.
II. SCOPE
It is intended that all investments or investment practices
involving a possible conflict of interest will be avoided so as to prevent any
impairment of any person's independence in making investment decisions for the
Company, and to avoid any use for the benefit of a personal account (as
hereinafter defined) of information relating to a transactions recommended to
the Company.
III. APPLICABILITY
Except as otherwise provided in Section VI hereof, the
provisions of this Code shall apply to all "access persons" as that term is
defined below.
IV. DEFINITIONS
A. "Access person" shall mean any director, officer or
advisory person of the Company.
B. "Act" shall mean the Investment Company Act of 1940, as
amended.
C. "Advisory person" of the Company shall mean:
(i) Any employee of the Company (or of any company in a
control relationship to the Company) who, in connection with his or her
regular functions or duties, makes, participates in, or obtains
information regarding the making of any loan or
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investment by the Company, or whose functions relate to the making of
any recommendations with respect to such loans or investments; and
(ii) any natural person in a control relationship to the
Company who obtains information concerning recommendations made to the
Company with regard to the making of loans or investments.
D. "Beneficial ownership" of securities by any person subject
to this Code shall mean ownership of record and beneficially and also direct or
indirect beneficial interest in securities, including all securities in the name
of, or for the direct or indirect benefit of, such person's spouse, minor
children, or any individual living with him or her or to whose support such
person substantially contributes; and such term shall be interpreted in the same
manner as it would be in determining the applicability of Section 16 of the
Securities Exchange Act of 1934, as amended, and the rules and regulations of
the SEC thereunder.
E. "Control" shall have the meaning set forth in Section
2(a)(9) of the Act.
F. "Disinterested director" shall mean a director who is not
an "interested person" as defined in Section 2(a)(19) of the Act.
G. "Interested person" shall have the meaning set forth in
Section 2(a)(19) of the Act.
H. "Personal account" of any person subject to this Code
shall mean: (i) accounts as to which such person has beneficial ownership; (ii)
accounts of any other individual or entity whose accounts are managed or
controlled by or through such person; and (iii) accounts of any other individual
or entity to whom such person gives advice in regard to the acquisition or
disposition of securities, other than the Company; provided, however, that the
term "personal account" shall not be construed in a manner which would impose
limitations or restrictions upon the normal conduct of business by directors,
officers, employees and affiliates of the Company.
I. "Purchase or sale of a security" shall include, among
other things, the writing of an option to purchase or sell a security.
J. "Required majority" shall have the meaning set forth in
Section 57(o) of the Act.
K. "SBA Regulations" shall mean the regulations of the Small
Business Administration, as from time to time in effect.
L. "SEC" shall mean the Securities and Exchange Commission.
M. "Security" shall mean any "security", as defined in
Section 2(a)(36) of the Act, that is issued by a Small Business, and shall
include loans as defined in the SBA Regulations, except that it shall not
include securities issued or guaranteed by the government of
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the United States, bankers' acceptances, bank certificates of deposit,
commercial paper and shares of registered open-end investment companies.
N. "Security held or to be acquired" by the Company shall
mean any security which, within the most recent 15 days, (i) is or has been held
by the Company, or (ii) is being or has been considered by the Company for
purchase by the Company.
O. "Small Business" shall have the meaning set forth in the
SBA Regulations.
V. STANDARDS OF CONDUCT
A. CONFLICT OF INTEREST- GENERAL RULE.In any matter involving
both the personal account of an access person and securities held or to be
acquired or sold by the Company, the access person shall resolve any conflict of
interest which is known to such person or which is reasonably to be anticipated
by such person in favor of the Company.
B. PROHIBITED TRANSACTIONS.
1. PURCHASE OR SALES OF SECURITIES. Except as otherwise
provided in Section VI hereof, (i) officers and employees of the Company shall
not knowingly contract to purchase or sell any security of an issuer for a
personal account during the period that the security (or a security which is
convertible into such security) is held or is to be acquired by the Company, and
(ii) if a director or other affiliated person of the Company (other than an
officer or employee) acquires actual knowledge that the Company is in the
process of purchasing or selling the securities of a particular issuer or that
it contemplates such a purchase or sale, he shall not knowingly purchase or sell
such security (or of a security into which such security is convertible) for his
personal account until he has ascertained that the Company's purchasing or
selling program with respect to such securities has been limited or completed or
deferred. Subject to the foregoing, no director or other affiliated person of
the Company is prohibited from purchasing any security that is the same as any
security purchased by the Company, after the Company's purchasing program is
limited or completed, provided such purchase is on terms no more favorable than
those applicable to the Company's purchase.
2. CERTAIN ACTIONS AND REPRESENTATIONS. Access persons,
in connection with the direct or indirect purchase or sale of a security for a
personal account (which security, within the most recent 15 days, is or has been
held by the Company or is being or has been considered for purchase for the
Company's portfolio) may not:
(1) employ any device, scheme or artifice to defraud
the Company;
(2) make any untrue statement of a material fact to
the Company or omit to state to the Company a
material fact
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necessary in order to make any statements made, in
light of the circumstances under which they are
made, not misleading;
(3) engage in any act, practice, or course of business
which operates or would operate as a fraud or
deceit upon the Company; or
(4) engage in any manipulative practice with respect
to the Company.
3. FAVORED TREATMENT; GIFTS. An access person shall not
solicit or accept any offer by any person whereby he would be enabled to
purchase or sell any security of an issuer other than the Company at a price or
under conditions more favorable than those obtainable or offered to the Company,
unless the Company has previously determined that it will not pursue a
transaction involving such security. Each access person understands that
pursuant to Sections 17(e)(1) and (2) of the Act, (a) acting as the agent of the
Company, he may not receive compensation (other than a regular salary from the
Company) from any source for the purchase or sale of any security to or for the
Company; and (b) acting as a broker in connection with the sale of securities to
or by the Company, he may not receive commissions, fees or other remuneration in
excess of the usual and customary broker's commission if the sale is effected on
a securities exchange, 2% of the sales price if the sale is effected in
connection with a secondary distribution of such securities or 1% of the
purchase or sale price of such securities if the sale is otherwise effected
unless the SEC permits a larger commission.
4. DISCLOSURE OF MATERIAL PERSONAL INTERESTS. An access
person shall not recommend or authorize the holding, purchase or sale of any
security by the Company without first disclosing to one or more disinterested
directors the existence of any material (in relationship to personal financial
circumstances) personal interest in such security.
VI. EXEMPTED TRANSACTIONS
The prohibitions of Section V.B.1. shall not apply to:
A. purchases or sales of securities currently held or to be
acquired by the Company (or a security into which a security held or to be
acquired by the Company is convertible) which receive prior written approval of
the required majority of the Company's directors, upon the request of the
potential purchaser or seller; in determining whether to give such prior written
approval, the required majority of directors shall take into account whether the
proposed transaction is likely (i) to impair the potential purchaser's ability
to be independent in making investment decisions, (ii) to effect the market
price for the security in question, or (iii) to benefit from market reaction to
the portfolio transactions of the Company;
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B. purchases or sales which are involuntary or non-volitional
on the part of either the access person or the Company (e.g., liquidation or
merger), or investments for the account of an access person over which such
person has no direct or indirect influence or control (e.g. discretionary
accounts);
C. purchases of securities which are part of an automatic
dividend reinvestment plan; and/or
D. purchases of securities effected upon the exercise of
subscription rights issued by an issuer PRO RATA to all holders of a class of
its securities, to the extent such rights were acquired directly from such
issuer, and sales of such rights so acquired.
VII. REPORTING REQUIREMENTS
A. REQUIREMENTS.
1. Not later than three (3) days before each securities
transaction proposed to be made by the Company, it shall notify each access
person of such transaction.
2. Pursuant to Rule 17j-1 of the general rules and
regulations of the SEC under the Act, each access person shall submit a report,
within ten (10) days after the end of each calendar quarter, to the Chief
Executive Officer of the Company or to an officer designated by him. Such report
shall indicate each transaction in the same securities as are described in any
notice from the Company pursuant to Section VII.A.1. that was effected during
the preceding period for such access person's personal account or for accounts
in which he has any direct or indirect beneficial ownership (unless such
transaction is exempted by Section VI.). If no such transaction took place no
report will be required.
3. All reports by access persons will be reviewed
regularly by the Chief Executive Officer of the Company or an officer designated
by him. The reports, together with a report of any violations of this Code,
will, as required by Rule 17j-1, be available for inspection by the SEC staff,
but will otherwise be afforded confidential treatment. A sample report is
attached hereto as Exhibit A.
B. EXCEPTIONS. Any access person by virtue of his position as
a director of the Company who is not an "interested person" of the Company need
not file a report, except where he knows or, in the ordinary course of
fulfilling his official duties should have known, that during the 15 day period
immediately preceding or after the date of a transaction in a security for his
personal account, such security is or was purchased or sold by the Company or is
or was considered by the Company.
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VIII. SANCTIONS
Violation of this Code by an officer or employee of the
Company is grounds for dismissal.
IX. INTERPRETATION AND EXCEPTIONS
Any questions regarding the applicability, meaning or
administration of this Code shall be referred by the person concerned to the
Chief Executive Officer of the Company or to a disinterested director who has no
financial interest in the transaction in advance of any contemplated
transaction. Exemptions will be granted (in addition to those pursuant to
Section VI hereof) by said person if, in his judgment, the fundamental
obligation of the person involved is not compromised.
X. ACCEPTANCE
Each person to whom this Code applies shall receive a copy of
same. Any amendments to this Code shall be similarly furnished to each person to
whom this Code applies. Each officer, director and employee of the Company to
whom this Code applies shall sign a statement that he has read this Code and
will abide by it. A form of the Statement is attached hereto as Exhibit B.
XI. EFFECTIVE DATE
The provisions of this Code shall become effective on and
after May 1, 1998, and amendments shall become effective when promulgated.
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EXHIBIT A
REPORT ON PERSONAL TRANSACTIONS IN SECURITIES
DURING QUARTER ENDED ________________________
(Pursuant to Investment Company Act Rule 17j-1)
of
------------------------------------------------
Name of Access Person*
EAST COAST VENTURE CAPITAL, INC.
This Report should be filed with the Chief Executive Officer of East Coast
Venture Capital, Inc. within ten (10) days after the end of the quarterly
period covered by the Report.
Name of Security Purchased
or Sold (Indicate "P" for Date of
Purchase or "S" for Sale) Quantity Transaction
- ------------------------- -------- -----------
- ------------------
* An access person who is not an "interested person" of East Coast
Venture Capital, Inc. need not file this Report unless such person
knows or, in the ordinary course of fulfilling his official duties for
East Coast Venture Capital, Inc., should have known that during the 15
day period immediately preceding or after the date of a transaction in
a security for his personal account, such security is or was purchased
or sold by East Coast Venture Capital, Inc. or is or was considered by
East Coast Venture Capital, Inc.
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EXHIBIT B
Statement Concerning the Code of Ethics of
EAST COAST VENTURE CAPITAL, INC.
The undersigned hereby certifies that he has read and will
abide by the Code of Ethics dated as of May 1, 1998 or as subsequently amended,
and that he knows that a violation of such Code may also constitute a violation
of federal securities laws and regulations which may subject him to civil
liabilities and criminal penalties. If the undersigned is an officer or employee
of East Coast Venture Capital, Inc., he acknowledges that his failure to observe
such provisions of said Code shall be a basis for his dismissal for cause.
------------------------------------------
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ZINDEL ZELMANOVITCH
1934 East 18th Street
Brooklyn, New York 11229
June 18, 1998
East Coast Venture Capital, Inc.
50 East 42nd Street
New York, New York 10017
Attention: Jeanette Berney, Treasurer
Freshstart Venture Capital Corp.
313 West 53rd Street
New York, New York 10019
Attention: Neil Greenbaum, Secretary
Ladies and Gentlemen:
The purpose of this letter agreement is to confirm the following
arrangement among us:
1. In my capacities as the President of East Coast Venture Capital,
Inc. ("East Coast") and the President of Freshstart Venture Capital Corp.
("Freshstart"), both of which are specialized small business investment
companies which seek to make loans to, and other investments in, small and
medium sized business concerns, various loan and investment opportunities come
or are brought to my attention.
2. If, as and when a loan or investment opportunity comes or is brought
to my attention, I shall present it to (the investment committees of) both East
Coast and Freshstart at or approximately at the same time.
3. East Coast and Freshstart shall each have the right to participate
in any such loan or other investment opportunity to the extent of fifty percent
(50%) thereof. If either East Coast or Freshstart determines to participate in
less than fifty percent (50%) of any such loan or investment opportunity, it
shall promptly so advise me and the other company, and in such case the other
company shall have the right, but not the obligation, to increase its
participation therein to the extent either of the companies declines to make
fifty percent (50%) of such loan or other investment.
<PAGE>
4. In making its decision to participate in any loan or other
investment opportunity presented by me, each company shall cause such
opportunity to be reviewed by its board of directors (or the appropriate
committee of such board), and the loan or other investment decision shall be
made by a majority of the disinterested directors of such company (or a majority
of the disinterested directors who are members of such committee). Each company
shall record in the minutes of the meeting at which such loan or other
investment opportunity was presented a detailed description of such loan or
other proposed investment, the findings and other conclusions reached by the
board (or committee) with respect thereto, the reasons for such findings or
conclusions and shall include with such minutes copies of all written materials
presented to the board (or committee) in connection with such loan or
investment. Such proceedings and related materials shall be preserved by each
company in accordance with the requirements of the Investment Company Act of
1940 and the rules and regulations of the Securities and Exchange Commission
thereunder.
5. This agreement and the rights and obligations of East Coast and
Freshstart herein are conditioned upon the submission of this agreement to the
board of directors of each company and the affirmative vote of a majority of the
disinterested directors of each company for a resolution that this agreement (a)
is reasonable and fair to the stockholders of such company, (b) does not involve
overreaching, and (c) is consistent with the interests of its stockholders and
the fundamental and other policies of such company as expressed in its
prospectus and/or annual report.
Please be good enough to confirm your agreement and acceptance of the
above-described arrangements among us by countersigning in the spaces provided
below and returning to me the duplicate copies of this letter agreement.
Very truly yours,
Zindel Zelmanovitch
AGREED AND ACCEPTED:
East Coast Venture Capital, Inc.
By: /s/ JEANETTE BERNAY
-------------------
Jeanette Bernay
Freshstart Venture Capital Corp.
By: /s/ NEIL GREENBAUM
------------------
Neil Greenbaum
