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

Executive Summary


· 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 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, 55.6% of the certified capital had been invested in qualified businesses as of December 31, 2003. Each Program One CAPCO is required to invest 50% of its certified capital in qualified businesses. All Program One CAPCOs have met this target as of December 31, 2003. As a result of the $30 million allocation from New York's CAPCO Program Two, 51.8% of the certified capital had been invested in qualified businesses since the program's inception in April 2000. Each Program Two CAPCO is required to invest 50% of its certified capital in qualified businesses. One Program Two CAPCO had not met this target as of December 31, 2003. As a result of the $150 million allocation from New York's CAPCO Program Three, 49.8% 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 $44 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 has increased by 27. The change in number of employees in any one business ranged from a decrease of 80 to an increase of 138. Fifty-one businesses showed decreases in the number of New York employees, 6 experienced no change, and of the 45 that experienced increases, 13 had increases of fewer than 5 employees and only 6 entities showed employee growth of more than 50
employees. No current employee information was included for 10 of the businesses because the CAPCOs relationship as an investor ended more than one year ago and they no longer have contact with the entities.

· In Program Three, since the time of the initial investments, the overall change in the number of employees in New York in the qualified businesses has increased by 199 in Empire Zones and by 135 in "underserved areas".

· Program One, Two, and Three investments were in 112 qualified businesses. Their industries were predominately high technology. Significant investments were also in marketing/sales, manufacturing, media, and financial services. The investments in each entity ranged from $30,000 to $6 million. Program One, Two and Three investments in qualified businesses totaled $145.8 million as of December 31, 2003.

· In the three programs combined, 54%, 13%, 8% and 13% of the numbers of businesses and 43%, 20%, 12%, and 10% of the dollars invested in qualified businesses were headquartered in New York County (Manhattan), Long Island, Mid-Hudson and the Capitol District respectively. The remaining 12% of the businesses and 15% of the dollars invested were in other regions of New York State.

· Thirty-two percent of Program Three dollars invested in qualified businesses were in New York County, 35% were made in Empire Zones and 34% were made in "underserved areas" defined as areas outside of New York County and outside of Empire Zones.

· Fifty-three of the 112 entities that received CAPCO funds had less than $1 million in assets at the time of the initial investment. Thirty-eight percent of the total amount of the CAPCOs' investments was invested in these entities.

· CAPCOs have invested approximately $60.4 million or 41% of the total amount invested in early-stage businesses.

· As of year-end 2003, the CAPCOs no longer held 37 investments because the investments were sold, matured, or because the entities were no longer in business.

Fifth Annual Report on the New York State Certified Capital Company Programs, pages 1- 2, June 1, 2004. New York State Insurance Department

Comments on the (New York) CAPCO Program

Comments on the CAPCO Program


The generation of jobs is a major goal of the CAPCO Programs. As a result of the total of approximately $146 million that has been invested in qualified businesses in CAPCO Programs One, Two and Three, from the information provided by the CAPCOs, there has been a net increase of 27 jobs in the State.

Based on a review of the terms of the investments made in 2003, we have the following comments:

· In 2003, a greater percent of the total amount invested was in equity instruments and in debt instruments with longer terms to maturity than in prior years. Approximately 20 percent of the total amount invested in 2003 was in debt instruments in which the final payment is required in two years or less, compared to 49 percent in 2002. Since more funds will be available for a longer period of time, the businesses may be more able to
fully execute their business plans and to continue as viable businesses in the State.


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

Fifth Annual Report on the New York State Certified Capital Company Programs, pages 32-32, June 1, 2004. New York State Insurance Department