Third Annual Report on the New York State Certified Capital Company Program

New York State CAPCO Program
Annual Report June, 2002

Executive Summary

· New York’s Certified Capital Law was signed into law on Aug, 7 1997 to spur the growth of businesses and employment in New York State. Program One, created $100 million of tax credit incentives for insurance companies that invest in certified capital companies (CAPCOs). The law was amended in 1999 and 2000 adding two additional programs. Program Two created $30 million in tax credit incentives, and Program Three created $150 million in tax credit incentives.

· The Insurance Department (Department) certified five active CAPCOs in each Program. In Program One, three of the five received certified capital of approximately $30 million and two received approximately $4 million. In Program Two, three received approximately $7 million, one received approximately $6 million, and one received $4 million. In Program Three, each of the five CAPCOs received different amounts ranging from approximately $12 million to $53 million.

· Thirty insurers participated as certified investors in Program One with investments ranging from $400,000 to over $6 million. Twenty-eight insurers participated in Program Two with investments ranging from $453,000 to $1.8 million. Forty-four insurers participated in Program Three with investments ranging from $252,000 to over $5,000,000.

· As a result of the $100 million allocation from New York’s CAPCO Program One, 50.9% of the certified capital had been invested in qualified businesses as of December 31, 2001. Each Program One CAPCO is required to invest 50% of its certified capital in qualified businesses by June 2002. Two CAPCOs had not met this target as of December 31, 2001. As a result of the $30 million allocation from New York'’ CAPCO Program Two 34.5% of the certified capital had been invested in qualified businesses since the program’s inception in April 2000. As a result of the $150 million allocation from New York’s CAPCO Program Three, 14.6% of the certified capital had been invested in qualified businesses since the program’s inception in December 2000.

· Since the time of the initial investments, the overall change in the number of employees in New York in the qualified businesses was a decrease of 88. The change in number of employees in any one business ranged from a decrease of 90 to an increase of 149. Thirty-two businesses showed decreases in the number of New York employees, 5 experienced no change, and of the 36 that experienced increases, 18 had increases of fewer than 5 employees and only 3 entities showed employee growth of more than 50 employees. Some of the increases, however, are the result of factors other than the capital contributed by CAPCOs.

· Program One, Two and Three investments were in 74 qualified businesses. Their industries were predominantly high technology. Significant investments were also in media, financial services and manufacturing. The investments in each entity ranged from $30,000 to $5.4 million. Program One, Two and Three Investments in qualified businesses totaled $83.7 million as of December 31, 2001.

· In the three programs combined, 57% of the number of businesses and 55% of the dollars invested in qualified businesses were headquartered in New York County (Manhattan), 16% were in the Capital District, and the remaining 27% were throughout other regions of New York State.

· Fifty-four percent of Program Three investments were made in New York County and 46% in the remaining counties, which are defined by the CAPCO law as “underserved areas.” No Program Three investments were made in Empire Zones.

· Thirty-nine of the 74 entities that received CAPCO funds had less than $1 million in assets at the time of the initial investment. The CAPCO investments accounted for approximately 47% of the total amount invested in these entities.

· Fifty of these 74 entities as early-stage businesses as defined by the CAPCO law. CAPCOs have invested approximately $50.6 million or 60.4% of the total amount invested in early-stage businesses.




Comments on the CAPCO Program


" While the generation of jobs is a major goal of the CAPCO programs, from the information provided by the CAPCOs with respect to job creation, it appears that this goal has not been attained. This is due, in part, to the fact that many of the qualified businesses were computer or internet related companies. These industry sectors have been affected by the crash of the dot-com industries which began over two years ago, the general economic downturn in the country, and of course the impact of the tragic events of September 11, 2001 on the New York economy.

Based on a review of the terms of the investments made in 2001, we have the following comments:

Forty percent of the total amount invested in 2001 (fifty percent of the amount invested in early-stage businesses) was in debt instruments in which the final payment is required in 18 months or less. The majority of these loans are structured so that the repayment of principal begins within one month after the investment closes. As a result, it appears that the funds are not available for use by the qualified business for an adequate period of time in order for the business to get fully established. Given the current state of the economy in New York City and in New York State as a whole, post September 11, 2001, it is clear that, more than ever, start-up (early-stage) enterprises require funds to be available for a longer period of time to fully execute their business plans and to create viable businesses in the State.

Fees (e.g., commitment, financing, origination) and charges for services (e.g., legal,due diligence), were imposed on the qualified businesses which resulted in income to the CAPCO or to entities designated by them. Payment of such fees and expenses resulted in reduced funds for the entities being invested in by the CAPCOs.

Investments in qualified businesses that are debt instruments should be for a minimum of three years before any repayment schedule commences.