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the next 18 months, cash requirements would exceed cash generated by $860,000;
7. The minimum principal amount of debentures required to be sold to meet the company's present and anticipated cash needs was $1,050,000;
8. Past due accounts and notes payable which might not be paid if sufficient funds were not realized through sale of the debentures might be enforced through legal proceedings;
9. No priority would be accorded the debenture holders as to principal or interest vis-a-vis other general creditors in the event the company's cash needs were not met through the sale of debentures or otherwise.
While a skilled financial analyst, after study and analysis, might have been able to deduce some of the information set forth above, none of the statements recited was contained in the prospectus as originally filed. It is fair to assume that the average investor would have been materially misled by the prospectus as originally filed. Revision of Summary of Earnings
A corporation which had both domestic and foreign subsidiaries filed a registration statement containing financial statements which failed to reflect significant losses from the operations of one of the foreign subsidiaries. After our staff determined this fact during the course of the examination procedures and discussed it with the corporation's representatives, the financial statements were appropriately amended to include provisions for the foreign subsidiary's losses.
The effect of such revision was to reduce net income for 1956, 1957, and 1958 by approximately $164,000, $88,000, and $10,000 respectively. After this revision net income per share for the 3 years was $0.06, $0.04 and $0.09 per share, or reductions of approximately 76, 70, and 10 percent, respectively. Disclosure as to Operations
A company engaged in the development and production of certain electronic equipment filed a registration statement covering 240,000 shares of common stock at the par value of 75 cents a share. The offering price was $6 per share and the underwriting commission was $1 a share. In reviewing the registration statement it was noted that the proposed offering was to be made on an extremely high priceearnings ratio and price-book-value ratio. Accordingly the registrant was required to amend the prospectus to state that the price of the shares being offered had been arbitrarily determined by the board of directors and did not bear any relationship to assets or earnings of the company. It was further required to be pointed out that the offering price was 312 times the unaudited earnings per share for the last fiscal year and 13.2 times the net tangible book value on the basis of the company's balance sheet.
With respect to the company's operations, the company was required to state in regard to one of its lines of business that it had at all times operated substantially below production capacity and that during a recent month, for example, it operated at about 7.5 percent of such capacity, leaving 92.5 percent of its capacity idle. The company was further required to point out that it had not yet engaged regularly in the production of certain machinery for commercial use and had no assurance as to the size of the market for such machinery or the acceptability of the company's products in such market.
STOP ORDER PROCEEDINGS
Section 8(d) provides that if it appears to the Commission at any time that a registration statement contains an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, the Commission may institute proceedings looking to the issuance of a stop order suspending the effectiveness of the registration statement. Where such an order is issued, the offering cannot lawfully be made, or continued if it has already begun, until the registration statement has been amended to cure the deficiencies and the Commission has lifted the stop order.
The following table indicates the number of proceedings under section 8(d) of the act pending at the beginning of the 1959 fiscal year, the number initiated during the year, the number terminated and the number pending at the end of the year: Proceedings pending at beginning of fiscal year. Proceedings initiated during fiscal year---
Proceedings pending at the end of the 1959 fiscal year.
13 Shortly after the end of the fiscal year stop orders were issued in two of the proceedings which were pending at the end of the fiscal year and a third proceeding was dismissed. The two proceedings in which stop orders were issued are included in the proceedings described below.
Comico Corporation.—Comico Corporation is a Delaware corporation organized in 1957 for the purpose of exploiting a deposit of silica material located in Arkansas and held under a leasehold assigned to the company by its promoters. The company filed a registration statement covering a proposed public offering of 750,000 shares of common stock at $2 per share. The Commission instituted investigative hearings to determine whether a stop order should issue. Following these hearings and prior to the effective date of the registration statement the Commission instituted stop order proceedings. Prior to the institution of the stop order proceedings, the registrant filed an application for withdrawal of the registration statement which was denied by the Commission.
* One of these proceedings, Woodland Oil & Gas Co. Inc., was described in the Commission's 24th Annual Report, p. 40.
The registration statement contained a lengthy and optimistic discussion of the uses and markets for the minerals in the registrant's leasehold. The Commission found this statement materially misleading, among other things, because it was not based upon any factual engineering or market survey. The Commission found that the registration statement was also misleading for failure to disclose prior unsuccessful attempts to develop the property leased by the registrant and for failure to fully and adequately disclose the proposed use of the proceeds of the offering, the compensation to underwriters and the interests of management in transactions with the registrant. Moreover, the registration statement failed to indicate clearly that the management would receive 660,000 shares of the registrant's stock for $25,000, whereas the public would be asked to pay $1,500,000 for 750,000 shares. Other deficiencies included the failure to disclose the provisions of the lease and the obligation to pay unusually high royalties, and the failure to set forth clearly in one place the speculative feature of the registrant's business and securities. The Commission issued a stop order suspending the effectiveness of the registration statement.
Diversified Oil and Mining Corporation.--This company was organized as a spin-off from Shawano Development Corporation and engaged principally in the acquisition of interests in and the operation of oil and gas properties. It filed a registration statement covering a proposed public offering of 2,500,000 shares of $1 par 6 percent convertible, noncumulative, preferred stock, and warrants to purchase at $2 per share 500,000 shares of the company's 10 cent par common stock. The securities were to be offered in units of 25 shares of preferred stock and 5 warrants at a price of $25.50 per unit.
The statement of matters to be considered at the hearing in a stop order proceedings challenged the adequacy and accuracy of the information disclosed in the registration statement in numerous respects, including information given with respect to the proposed plan of distribution, the use of the proceeds, the description of the business and securities of the registrant, transactions with the promoters and possible liabilities for the previous sa le of unregistered securities. Prior to the commencement of the hearing, the registrant submitted a stipulation in which it waived a hearing and the post-hearing procedures provided for in the Commission's rules of practice and con
- Securities Act Release No. 4050 (Apr. 27, 1959).
sented to the entry of an order suspending the effectiveness of the registration statement. Thereafter, the Commission issued an order suspending the effectiveness of the registration statement.
Fort Pierce Port & Terminal Company.—This company was organized in 1956 primarily for the purpose of acquiring harbor front property at Fort Pierce, Fla., to be developed and operated as a deepwater port facility. The company filed a registration statement coyering a proposed public offering of 2,138,500 shares of its $1 par common stock at $1.25 per share.
The company's properties, consisting of 3,000 feet of harbor front and certain other properties on nearby Causeway Island and on the mainland, were acquired by promoters of the company (including Joseph C. Mackey, board chairman, and H. A. Ramsey, president) with the intention of selling them to the company. The promoters' cost was $155,000 in cash and the assumption of mortgages aggregating $608,750. The properties were transferred to the company at an appraised value of $1,838,500, the company assuming the $608,750 of mortgages and issuing $1,229,500 par value of stock to the promoters. Subsequently, the company acquired 64.4 acres of submerged lands from the State of Florida for $3,220.
Various references in the prospectus to the appraised value of the company's properties were questioned by the Commission's staff including the $430,000 appraised value of the property acquired from the State of Florida for $3,220. According to the staff there appeared to be a lack of adequate basis for the values determined by the appraisal. The properties acquired from the promoters were carried in the company's balance sheet at the appraised valuation ($1,838,250) contrary to generally accepted accounting principles, and the prospectus failed to contain proper disclosures with respect, among other things, to (1) the competitive traffic situation in relation to the port development project, including the results of a study of the facilities made in 1957 by the U.S. Army Engineers; and (2) the speculative feature of the proposed offering. The Commission instituted stop order proceedings with respect to the registration statement.*
Prior to completion of the proceedings, the company filed an application for withdrawal of the registration statement. In its application the company conceded “certain inaccurate statements of material facts and certain omissions of material facts” and agreed that correction would be made in any new registration statement which might be filed by the registrant, although the company stated that it did not intend to proceed with its stock offering at that time. The Commission concluded that withdrawal would not be inconsistent
- Securities Act Release No. 3971 (Oct. 2, 1958). • Securities Act Release No. 3951 (Aug. 6, 1958).
with the public interest and the protection of investors and consented to the withdrawal of the registration statement."
Funeral Directors Manufacturing and Supply Company.-This registrant was organized in Kentucky in 1954 for the purpose of manufacturing plastic grave vaults and plastic and aluminum caskets. It filed a registration statement covering a proposed offering of 199,907 shares of the registrant's common stock at $100 per share. The registration statement represented that registrant owned no property but that, depending on the success of the offering, it intended to purchase or construct warehouses and plants and factories.
The Commission found that the registration statement contained material misstatements and omissions of material facts with respect to the state of the development work necessary to effect volume production of the registrant's products and failed to disclose the length of time it would take to effect full production. The registration statement also failed to list two officers employed by the registrant and stated that the remuneration to be paid registrant's officers had not been determined or authorized when, as a matter of fact, such remuneration had been authorized and the registrant had incurred a substantial contingent indebtedness to its officers. The registration statement also stated that there were no agreements to recompense any promoter for past or future services when, in fact, registrant was indirectly indebted to a promoter, who was the president of the registrant, for accrued rents, utilities, and services.
A post-effective amendment to the registration statement not only failed to correct the previously existing deficiencies but was itself deficient in additional material respects.
At the close of the case presented by the Commission's staff, the registrant admitted that the disclosures made in the registration statement and in the post-effective amendment were inadequate and that material events and changes which had occurred since the statement became effective were not disclosed in the post-effective amendment. The registrant consented to the issuance of a stop order by the Commission.
Industro Transistor Corporation.—The registrant was organized in New York in December 1953 and engaged in the manufacture and sale of transistors. It filed a registration statement in 1958 covering a proposed public offering of 135,000 shares of 10-cent par value common stock and, in addition, 36,000 transferable 5-year warrants for the purchase of 1 share of common stock per warrant and the 36,000 shares of common stock subject to such warrants. Proceedings were instituted to determine whether a stop order should issue sus