« AnteriorContinuar »
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 1962 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.
6 Proceedings initiated during fiscal year---
Proceedings terminated during fiscal year by issuance of stop orders---
Proceedings pending at the end of the 1962 fiscal year..
Several of the proceedings which were terminated during the fiscal year are described below.
American Finance Company, Inc.—The registrant, a Delaware corporation organized in 1955, engages in the automobile sales finance business primarily with overseas members of United States Armed Forces. It filed a registration statement covering a proposed offering of 2,500 units, each consisting of 1 $200 debenture, 30 shares of common stock, and 10 warrants, with the price of $500 per unit, for which Myron A. Lomasney (Lomasney) was named as the managing underwriter. The registration statement also covered 60,000 shares of common stock held by Lomasney and 17 persons associated with it, proposed to be offered from time to time at such prices as may prevail on the market following the completion of the offering of the Units.
In the course of the proceeding the registrant stipulated to certain facts and consented to the entry of a stop order. Some of the more important deficiencies found in the registration statement are described below.3
The Commission held than an accountant's relationship as attorney for the registrant during the same period covered by his accounting firm's certification disqualified him and the accounting firm of which he was a partner from certifying registrant's financial statements as independent accountants. The Commission stated that “though owing a public responsibility, an attorney, in acting as the client's advisor, defender, advocate, and confidant enters into a personal relationship in which his principal concern is with the interest and rights of his client. The requirement of the Act of certification by an independent accountant, on the other hand, is intended to secure for the benefit of public investors the detached objectivity of a disinterested person. The certifying accountant must be one who is in no way
: Securities Act Release No. 4465 (March 19, 1962).
connected with the business or its management, and who does not have any relationship that might affect the independence which at times may require him to voice public criticisms of his client's accounting practices."
Prior to the filing of the registration statement, Lomasney had purchased the 60,000 shares of registrant's common stock for its own account at an advantageous price, and passed some of these shares on to certain favored customers so that they too might benefit from the planned public offering of shares at a higher price. In offering these 60,000 shares to the public, Lomasney and his favored customers, a group of 17 persons, would be statutory underwriters participating in the distribution of a large block of the registrant's stock. The Commission found that in view of the large number of shares proposed to be offered in relation to the limited floating supply of shares, the apparent lack of cohesiveness in the selling group, and the absence of a prior market, the registration statement should have identified the sellers and their relationship to each other, the registrant, and Lomasney; and it should have disclosed that such distribution would not be coordinated or controlled by a managing underwriter and that the selling group had not provided the contractual safeguards for the protection of buyers and sellers usually provided in a conventional distribution. Accordingly, the Commission required undertakings similar to those required in Hazel Bishop, Inc.
Standard Savings and Loan Association, a wholly-owned subsidiary of the registrant, was described in the registration statement as an operating savings and loan association. The Commission found that Standard was organized and operated merely as a collection agency for the registrant, in that it received allotment payments from military persons in connection with registrant's automobile sales financing business and forwarded such allotments to registrant for application on the unpaid balances of the automobile loans. The Commission held that the opening of shareholders' savings accounts, evidenced by pass books, involved the sale of unregistered securities in violation of Section 5 of the Act; that based on the facts there was not available for such securities the exemption provided by Section 3(a) (5) of the Act for securities issued by a savings and loan association "substantially all the business of which is confined to the making of loans to members."
Faradyne Electronics Corp.--Faradyne Electronics Corp., a New Jersey corporation formed in 1959, offered and sold to public investors in December 1959, while in a promotional stage, 200,000 shares of its common stock at $5 per share pursuant to a registration state
• Securities Act Release No. 4371 (June 7, 1961) ; See 27th Annual Report, p. 31.
ment filed under the Securities Act of 1933. The four promoters together received 300,000 Class A common shares for a cash investment of $20,000. A second registration statement filed in January 1961, as amended, covered a $2 million offering of convertible debentures.
The prospectus included in the 1959 registration statement was found by the Commission to be materially false and misleading in several respects. One was in conveying the false impression that Faradyne intended to proceed promptly with plans to develop and produce capacitors whereas its officials in fact contemplated that they might develop an entirely different type of business through the acquisition of the assets or stock of other companies and might use a substantial part of the proceeds from the public offering for that purpose. Faradyne in fact used a substantial portion of the proceeds to acquire the assets or stock of six other companies within a period of several months after the effective date of the registration statement, including the assets and business of Mansol Ceramics Company, of which two of Faradyne's promoters were the principal partners.
The prospectus filed as part of the 1961 registration statement was also found materially misleading. It stated that Faradyne, through a subsidiary, Mansol Corporation, had paid $150,000 cash in March 1960, for the assets and business of Mansol Ceramics Company and that it had agreed to make further fixed payments of $1,200,000 and $200,000 plus an additional maximum contingent payment of $2,500,000, payable in annual installments comprised of 50% of Mansol Corporation's annual net profit after taxes beginning with the fiscal year ending January 31, 1961. The prospectus further stated that the obligation to make contingent payments “will terminate on February 1, 1980," and that if such payments are not completed by that date "any balance contingently due will be forgiven.” These statements were found misleading in failing to disclose material provisions of the sale agreement. First, under the sale agreement Mansol Corporation could have at any time after January 31, 1962, anticipated all or any part of the obligation to pay the $2,500,000, in which event the two promoters from whom the ceramics company was acquired might receive more than would have been payable on the basis of annual payments of 50% of Mansol Corporation's net profits. Second, the agreement also provided that in the event Mansol Corporation should incur losses for any fiscal year ended January 31, 1966, or thereafter, the period ending in 1980 would be extended 1 year for each such loss year.
Moreover, the prospectus set forth a summary of consolidated earnings of Faradyne and its subsidiaries for the fiscal year ended January 31, 1961, which showed net income, after provision for
income taxes, of $387,000 in the aggregate or 74 cents per share. Based upon the Commission's findings, the earnings figure on a pro forma basis should have been only $108,000 or 21 cents per share for the same period.
The assets acquired, consisting of machinery, inventories, and written technical information, and carried on the books of the seller at $364,000, were recorded initially on the books of the subsidiary at the contract price of $1,550,000. However, there was no evidence to support the allocation of 100% of this amount to fixed assets and no part thereof to good will. Further, Faradyne proposed to increase the carrying value of plant assets as the amounts of the contingent payments were accrued, which would result in a continuing increase in book value of fixed assets without any actual change in assets. The Commission found the transaction to be "actually a profit-sharing or division-of-earnings arrangement-or to put it another way—it provided for the receipt of net earnings after 50% reserved to the sellers. Indeed, no contingent payments can ever be said in any realistic sense to become the property of the registrant.” The Commission held that the contingent payments should have been shown as a deduction before arriving at net income, and concluded that Faradyne's failure to deduct the $134,696 of contingent payments from earnings resulted in a misleading overstatement of earnings by that amount.
The Commission further held that the summary of earnings was rendered materially misleading by the failure to present a pro forma earnings statement to reflect debenture interest chargeable to the replacement of a $1,200,000 interest-free obligation with an interestbearing obligation, to provide adequately for income taxes, and to explain that net earnings for the fiscal year 1961 were higher because of the utilization of nonrecurring tax loss benefits.
The Commission concluded that the issuance of a stop order with respect to both registration statements was required in the public interest. Faradyne subsequently filed amendments to the 1961 registration statement changing the offering to one of stock, and correcting the deficiencies, and on October 30, 1962, the Commission lifted the stop order.
Miami Window Corporation. The registrant, a Florida corporation organized in 1947, engages in the manufacture of various types of windows and other products. It filed a registration statement with the Commission on February 24, 1959, covering $3,500,000 612 percent sinking fund debentures with detachable common stock purchase warrants, 150,000 shares of convertible preferred stock, and a
5 Securities Act Release No. 4469 (March 21, 1962) & Securities Act Release No. 4551.
total of 1,075,000 shares of common stock issuable upon exercise of the warrants and the conversion of the preferred stock. The registration statement became effective on March 24, 1959, and the offering of the debentures and the preferred stock was completed shortly thereafter. The Commission subsequently instituted stop order proceedings.
The Commission found that registrant's consolidated inventory, as shown in the balance sheet included in the registration statement, was materially overstated and included material amounts which had no adequate basis in fact.
It further found that the certifying accountants failed to comply with generally accepted auditing standards in auditing the inventory, thereby rendering false and misleading the representations in their certificate that their examination was made in accordance with such standards and that the financial statements fairly presented registrant's financial position and results of operations,
The Commission noted that subsequent to the filing of the registration statement, registrant had submitted periodic reports to the Commission and to its stockholders, including certified financial statements for the 9 months ended February 29, 1960, and the fiscal year ending February 28, 1961.
It concluded that in view of the distribution of the recent financial statements, investors would be adequately informed of the facts upon distribution of the Commission's opinion to all security holders of the registrant, and that, under all the circumstances, issuance of a stop order was not necessary, provided such distribution were made. Accordingly, the Commission dismissed the proceedings, subject to the condition noted."
EXAMINATIONS AND INVESTIGATIONS
The Commission is authorized by Section 8(e) of the Act to make an examination in order to determine whether a stop order proceeding should be instituted under Section 8(d). For this purpose the Commission is empowered to subpoena witnesses and require the production of pertinent documents. The Commission is also authorized by Section 20(a) of the Act to make an investigation to determine whether any provision of the Act or of any rule or regulation prescribed thereunder has been or is about to be violated. In appropriate cases, investigations are instituted under this section as an expeditious means of determining whether a registration statement is false or misleading or omits to state any material fact. The following