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

Executive Summary (New York State CAPCO Programs)


· New York’s Certified Capital Law was signed into law on August 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 recived $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, 56.3% of the certified capital has been invested in qualified businesses as of December 31, 2002. Each Program One CAPCO is required to invest 50% of its certified capital in qualified businesses. One CAPCO had not yet met this target as of December 31, 2002. As a result of the $30 million allocation from New York’s CAPCO Program Two, 45% of the certified capital had been invested in qualified businesses since the programs inception in April 2000. As a result of the $150 million allocation from New York’s CAPCO Program Three, 33.9% of the certified capital had been invested in qualified businesses since the program’s inception in December 2000.

· It should be noted that there are no further statutory requirements for the Program One CAPCOs that have met the 50% milestone to invest the remaining allocated certified capital of approximately $46 million. Nevertheless, each Program One CAPCO continues to be subject to regulation by the Insurance Department pursuant to Section 11(e)(5) of the Tax Law until it has invested 100% of its allocated certified capital in qualified businesses.

· Since the time of the initial investments, the overall change in the number of employees in New York in the qualified businesses was an increase of 38. The change in the number of employees in any one business ranged froma decrease of 80 to an increase of 191. Forty-nine businesses show decreases in the number of New York employees, 7 experienced no change, and of the 39 that experienced increases, 13 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. No current employee information was included for five of the businesses because the CAPCOs relationship as an investor ended more than two years ago and they no longer have contact with the entities.

· Program One, Two and Three investments were in 100 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 $117.9 million as of December 31, 2002.

· In the three programs combined, 51%, 14% and 12% of the numbers of businesses and 45%, 23% and 12% of the dollars invested in qualified businesses were headquartered in New York County (Manhattan), Long Island and the Capital District respectively. The remaining 23% of the businesses were located throughout other regions of New York State.

· Thirty-eight percent of Program Three investments were made in New York County and 16% were made in Empire Zones and 46% were made in “underserved areas” defined as areas outside of New York County and outside of Empire Zones.

· Fifty-two of the 100 entities that received CAPCO funds had less than $1 million in assets at the time of the initial investment. Forty-three percent of the total amount of the CAPCOs’ investments was invested in these entities.

· Sixty-three of these 100 entities were early-stage businesses as defined by the CAPCO law. CAPCOs have invested approximately $55.6 million or 47% of the total amount invested in early-stage businesses.

· As of year-end 2002, the CAPCOs no longer held 30 investments because the investments were sold, matured or because the entities were no longer in business.

Fourth Annual Report on the New York State Certified Capital Company Programs, pages 1- 2, June 1, 2003. New York State Insurance Department

Comments on the (New York) 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 busnesses 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 2002, we have the following comments:

· Forty-nine percent of the total amount invested in 2002 was in debt instruments in which the final payment is required in two years or less. The majority of these loans are structured so that the repayment of the 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 fully utilize these funds. Given the current state of the economy in New York City and in New York State as a whole, it is clear that, more than ever, enterprises require funds to be available for a longer period of time to fully execute their business plans and to continue as viable businesses in the State.

· Fees (e.g., commitment, financing, origination, monitoring) 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.

The following are the Department’s recommendations for changes to the CAPCO statute, which we believe, would facilitate the CAPCO Programs’ achievement of their stated goals:

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

· Fees or other charges imposed by a CAPCO on any entity for which the CAPCO applies or intends to apply to the Department to be a qualified business should be limited or not permitted. Due diligence and other costs incurred to determine if an investment is appropriate for the CAPCO Program should be borne by the CAPCO.

Fourth Annual Report on the New York State Certified Capital Company Programs, pages 31-32, June 1, 2003. New York State Insurance Department