<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 12, 1997.
REGISTRATION NO. 333-36709
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM N-5
REGISTRATION STATEMENT OF
SMALL BUSINESS INVESTMENT COMPANY
Under The Securities Act of 1933
And
The Investment Company Act of 1940
------------------
EASTERN VIRGINIA SMALL BUSINESS
INVESTMENT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
300 EAST MAIN STREET, SUITE 1380
NORFOLK, VIRGINIA 23510
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
J. ALAN LINDAUER, PRESIDENT AND CHIEF EXECUTIVE OFFICER
EASTERN VIRGINIA SMALL BUSINESS INVESTMENT CORPORATION
300 EAST MAIN STREET, SUITE 1380
NORFOLK, VIRGINIA 23510
(757) 626-1111
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------
With copies to:
FREDERICK T. STANT, III, ESQ.
CLARK & STANT, P.C.
900 COLUMBUS CENTER
VIRGINIA BEACH, VIRGINIA 23462
(757) 499-8800
JOHN M. PARIS, JR., ESQ.
KAUFMAN & CANOLES, P.C.
ONE COMMERCIAL PLACE, SUITE 2000
NORFOLK, VIRGINIA 23510
(757) 624-3181
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
OFFERING PRICE AGGREGATE
TITLE OF SECURITIES TO BE AMOUNT TO BE PER OFFERING AMOUNT OF
REGISTERED REGISTERED(1) SHARE(2) PRICE(2) REGISTRATION FEE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock $1 Par Value.... 800,000 Shares $13.00 $10,400,000 $3,151.52
- -------------------------------------------------------------------------------------------------
Common Stock $1 Par Value.... 120,000 Shares $13.00 $1,560,000 $472.73(3)
=================================================================================================
</TABLE>
(1) Includes 120,000 shares of Common Stock subject to the Underwriter's
over-allotment option.
(2) Estimated solely for purposes of calculating the registration fee.
(3) $593.95 paid in connection with this filing; $3030.30 having been previously
paid.
------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
EASTERN VIRGINIA SMALL BUSINESS INVESTMENT CORPORATION
CROSS REFERENCE SHEET
(Pursuant to Rule 481 showing the location in the Prospectus of the
responses to the Items of Parts I and II of Form N-5)
<TABLE>
<CAPTION>
ITEM NO. AND CAPTION PROSPECTUS CAPTION
- ------------------------------------------------------------ -------------------------------------
<C> <S> <C>
1. Organization and Business............................. PROSPECTUS SUMMARY; BUSINESS;
REGULATION
2. Fundamental Policies of Registrant.................... INVESTMENT POLICIES
3. Policies with Respect to Security Investments......... INVESTMENT POLICIES
4. Ownership of Voting and Convertible Securities of
Other Issuers....................................... Not required to be in the Prospectus
5. Special Tax Provisions Applicable to Registrant....... SPECIAL TAX PROVISIONS APPLICABLE TO
THE COMPANY
6. Pending Legal Proceedings............................. Not Applicable
7. Summary of Earnings................................... PROSPECTUS SUMMARY
8. Persons in Control Relationships with Registrant...... Not Applicable
9. Persons Owning Equity Securities of Registrant........ PRINCIPAL SHAREHOLDERS
10. Number of Holders of Equity Securities of
Registrant.......................................... Not required to be in the Prospectus
11. Directors and Executive Officers...................... MANAGEMENT
12. Members of Advisory Board of Registrant............... Not applicable
13. Remuneration of Directors, Officers and Members of
Advisory Board...................................... MANAGEMENT -- Remuneration
14. Indemnification of Officers and Directors............. Not required to be in the Prospectus
15. Custodians of Portfolio Securities.................... CUSTODIAN, TRANSFER AGENT AND
REGISTRAR
16. Investment Advisers................................... Not Applicable
17. Business and Other Connections of Investment Advisers
and Their Managements............................... Not Applicable
18. Interest of Affiliated Persons in Certain
Transactions........................................ MANAGEMENT -- Remuneration
19. Capital Stock......................................... DESCRIPTION OF CAPITAL STOCK
20. Long-Term Debt........................................ DESCRIPTION OF CAPITAL STOCK
21. Other Securities...................................... Not Applicable
22. Financial Statements.................................. See Item 28
23. Distribution Spread................................... Cover Page
24. Plan of Distribution.................................. UNDERWRITING
25. Use of Proceeds to Registrant......................... USE OF PROCEEDS
26. Sales Otherwise Than for Cash......................... Not Applicable
27. Information Required by Items of Part I............... See Above
28. Financial Statements Required by Item 22 of Part I.... FINANCIAL STATEMENTS
</TABLE>
N-2
<PAGE> 3
PART I
INFORMATION REQUIRED IN REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940
ITEM 1. ORGANIZATION AND BUSINESS.
Reference is made to the information contained in the Prospectus under the
captions "PROSPECTUS SUMMARY -- The Company," "BUSINESS" and "REGULATION."
ITEM 2. FUNDAMENTAL INVESTMENT POLICIES OF THE REGISTRANT.
The following policies of the Registrant with respect to the activities
described below are matters of fundamental policy in accordance with Sections
8(b) and 13(a) of the Investment Act. These policies may not be changed without
the approval of the lesser of (i) 67% of the Registrant's shares present or
represented at a shareholders' meeting at which the holders of more than 50% of
such shares are present or represented or (ii) more than 50% of the outstanding
shares of the Registrant. Undefined capitalized terms have the meanings ascribed
in the attached Prospectus.
(a) The Registrant is permitted to issue the maximum amount of SBA
Debentures and SBA Participating Securities permitted by the SBA Act and SBA
regulations. The Registrant may issue SBA Debentures or SBA Participating
Securities in the future.
(b) The Registrant is permitted to borrow money only for the purpose of
investments in, and making loans to, Small Business Concerns. It is, however,
permitted to finance the acquisition of capital assets used in its ordinary
business operations.
(c) The Registrant is not permitted to engage in the business of
underwriting the securities of other issuers. It is anticipated that all or
substantially all of its investments in Small Business Concerns will be in
securities that may not be sold to the public without registration, or an
exemption from registration, under the Securities Act. All of the Registrant's
current equity investments in Small Business Concerns are so restricted.
(d) The Registrant is prohibited from concentrating more than 25% of the
value of its assets, determined at the time an investment is made, exclusive of
U.S. government securities, in securities issued by companies primarily engaged
in the same industry.
(e) The Registrant is prohibited from engaging in the business of
purchasing or selling real estate. The Registrant may bring mortgage foreclosure
actions and take title to and possession of property with respect to which it is
the mortgagee in accordance with applicable mortgage foreclosure laws.
Additionally, the Registrant may purchase office facilities, although, at
present it leases office facilities.
(f) The Registrant is not permitted to engage in the purchase or sale of
commodities or commodity contracts.
(g) The Registrant is permitted to make loans, and loans with equity
features, to, as well as equity investments in, small Business Concerns to the
extent allowed by the SBA Act and SBA regulations. The Registrant is also
permitted to extend loans to shareholders to finance the purchase of its capital
stock.
ITEM 3. POLICIES WITH RESPECT TO SECURITY INVESTMENTS.
The Registrant's policies with respect to the following matters are not
fundamental policies and may be changed, subject to the SBA Act and SBA
regulations, by the Registrant's Executive Committee without shareholder
approval.
(a) The Registrant may make investments in equity and debt securities of
Small Business Concerns as approved by the Executive Committee.
N-3
<PAGE> 4
(b) The Registrant has no strict policy regarding the percentage of its
assets that may be invested in any specific type of security. The Registrant
follows SBA regulations prohibiting an investment in any single Small Business
Concern and its affiliates exceeding 20% of the Registrant's Regulatory Capital.
(c) As permitted by SBA regulations, the Registrant may purchase (i) up to
49% of the voting securities of a Small Business Concern if it has less than 50
shareholders or (ii) up to 19% (and in certain situations up to 25%) of the
voting securities of a Small Business Concern if it has 50 or more shareholders.
(d) Except where necessary to protect an investment, the Registrant does
not invest in companies for the purpose of exercising control of management and
does not intend to do so in the future. SBA regulations prohibit SBICs from
controlling a Small Business Concern except where necessary to protect an
investment.
(e) The Registrant does not invest in securities of other investment
companies and does not intend to do so in the future.
(f) The Registrant intends to hold its portfolio debt securities for a
minimum of five years as required by SBA regulations or until maturity. It
anticipates retaining its equity investments from five to seven years.
ITEM 4. OWNERSHIP OF VOTING AND CONVERTIBLE SECURITIES OF PORTFOLIO COMPANIES.
As of November 30, 1997, the Registrant owned the following securities of a
portfolio company that are convertible into voting securities. On the conversion
of all such securities, the Registrant would own the following percentage of the
voting securities of this portfolio company:
<TABLE>
<CAPTION>
TITLE OF PERCENTAGE OF
SECURITIES OWNED, PERCENTAGE OF VOTING
CONTROLLED OR VOTING SECURITIES
NATURE OF ITS HELD BY THE SECURITIES OWNED UPON
NAME AND ADDRESS OF COMPANY PRINCIPAL BUSINESS REGISTRANT NOW OWNED CONVERSION
- ------------------------------------------------- -------------------- ----------------- ------------- -------------
<S> <C> <C> <C> <C>
Mid-Atlantic Small Business Finance, Inc. Originator of SBA- 500 shares of 0 49
300 East Main Street, guaranteed loans to convertible
Suite 1380 small businesses preferred stock
Norfolk, VA 23510
Avery Communications, Inc. Long distance Note convertible 2.9 6.2
190 South LaSalle telephone rebilling into 280,000
Suite 1410 services shares of common
Chicago, IL 60603 stock
</TABLE>
ITEM 5. SPECIAL TAX PROVISIONS APPLICABLE TO REGISTRANT.
Reference is made to the information contained in the Prospectus under the
caption "SPECIAL TAX PROVISIONS APPLICABLE TO THE COMPANY."
ITEM 6. PENDING LEGAL PROCEEDINGS.
The Registrant has no pending legal proceedings.
ITEM 7. SUMMARY OF EARNINGS.
Reference is made to the information contained in the Prospectus under the
caption "SUMMARY FINANCIAL INFORMATION."
ITEM 8. PERSONS IN CONTROL RELATIONSHIP WITH REGISTRANT.
The Registrant has no persons in a control relationship.
N-4
<PAGE> 5
ITEM 9. PERSONS OWNING EQUITY SECURITIES OF REGISTRANT.
Reference is made to the information contained in the Prospectus under the
caption "PRINCIPAL SHAREHOLDERS."
ITEM 10. NUMBER OF HOLDERS OF EQUITY SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
TITLE OF CLASS HOLDERS
-------------------------------------------------- ---------
<S> <C>
Common Stock...................................... 87
</TABLE>
ITEM 11. DIRECTORS AND EXECUTIVE OFFICERS.
Reference is made to the information contained in the Prospectus under the
caption "MANAGEMENT."
ITEM 12. MEMBERS OF ADVISORY BOARD OF REGISTRANT.
The Registrant has no advisory board.
ITEM 13. REMUNERATION OF DIRECTORS, OFFICERS AND MEMBERS OF ADVISORY BOARD.
Reference is made to the information contained in the Prospectus under the
caption "MANAGEMENT -- Remuneration."
ITEM 14. INDEMNIFICATION AND ELIMINATION OF LIABILITY.
The Registrant's Articles of Incorporation and Bylaws contain provisions
that govern indemnification of its directors, investment advisors/managers and
shareholders, officers, agents, employees and affiliates. These provisions
enable the Registrant to indemnify these individuals to the fullest extent
permitted by Virginia law. By law, Virginia corporations may indemnify any
person who was or is a party to any proceeding by reason of the fact that the
person is or was a director, officer, employee or agent of the corporation or is
or was serving at the request of the corporation in any such capacity of another
corporation or other entity against liability incurred in connection with such
proceeding, including any appeal thereof, if the individual acted in good faith
and believed (i) in the case of conduct in the individual's official capacity
with the Registrant, that the individual's conduct was in the best interests of
the Registrant or (ii) in all other cases, that the individual's conduct was at
least not opposed to the best interests of the Registrant. In addition, in the
case of any criminal proceeding, the individual must not have had reasonable
cause to believe his conduct was unlawful. Virginia law requires the Registrant
to indemnify its directors and officers (and allows the Registrant to indemnify
employees or agents) who entirely prevail in the defense of any proceeding to
which they were a party because they are or were directors or officers (or
employees or agents) of the Registrant. The indemnification authorized under
Virginia law is not exclusive and is in addition to any other rights granted to
officers and directors under the Articles or Bylaws. The Articles also provide
for the advancement of expenses incurred by the directors, officers, agents and
employees described above in connection with the defense of any action, suit or
proceeding to which such a person is or was a party because such a person is or
was a director, officer, agent or employee of the Registrant, on the receipt of
an undertaking to repay such amount, if it is ultimately determined that such
person is not entitled to indemnification. Virginia law permits the Registrant
to purchase and maintain insurance or furnish similar protection on behalf of
any officer or director against any liability asserted against the officer or
director and incurred by the officer or director in such capacity, or arising
out of the person's status, as an officer or director. This insurance protection
is available under Virginia law whether or not the Registrant would have the
power to indemnify the director or officer against such liability under Virginia
law. The Registrant has purchased such insurance for the benefit of its officers
and directors.
Virginia law prohibits the Registrant from indemnifying directors and
officers in connection with a proceeding by or in the right of the Registrant in
which the director or officer was adjudged liable to the Registrant, although
the court in which such action was brought may order indemnification of the
director or
N-5
<PAGE> 6
officer to the extent of his reasonable expenses if it determines that the
director or officer is entitled to such indemnification. Virginia law also
prohibits the Registrant from indemnifying directors or officers in connection
with any other proceeding charging improper personal benefit to the director or
officer (whether or not involving action in his official capacity) in which the
director or officer was adjudged liable on the basis that personal benefit was
improperly received by him. In addition, under the Bylaws, the Registrant is
prohibited from indemnifying directors and officers from liability arising from
their willful misfeasance, bad faith, gross negligence or reckless disregard in
the performance of their duties and obligations to the Registrant.
Under Virginia law and the Articles and the Bylaws, directors and officers
are not personally liable for monetary damages to the Registrant or any other
person for acts or omissions in their capacity as a director or officer, except
in certain limited circumstances such as certain violations of criminal law and
transactions in which the director or officer derived an improper personal
benefit. As a result, shareholders may be unable to recover monetary damages
against directors and officers for actions taken by directors or officers that
constitute negligence or gross negligence or that violate their fiduciary
duties. Injunctive or other equitable relief may be available.
ITEM 15. CUSTODIANS OF PORTFOLIO SECURITIES.
Reference is made to the information contained in the Prospectus under the
caption "CUSTODIAN, TRANSFER AGENT AND REGISTRAR."
ITEM 16. INVESTMENT ADVISERS.
Reference is made to the information contained in the Prospectus under the
caption "BUSINESS."
ITEM 17. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISERS AND THEIR
MANAGEMENTS.
The Registrant has no investment advisers.
ITEM 18. INTEREST OF AFFILIATED PERSONS IN CERTAIN TRANSACTIONS.
J. Alan Lindauer was elected President and Chief Executive Officer of the
Registrant in March 1994. His annual compensation of $52,000 (and $78,000 after
July 1, 1997 through November 30, 1997) was paid to J.A.L. Management, Inc., a
corporation of which he is the sole shareholder. See "MANAGEMENT --
Renumeration."
ITEM 19. CAPITAL STOCK.
Reference is made to the information contained in the Prospectus under the
caption "DESCRIPTION OF CAPITAL STOCK."
ITEM 20. LONG-TERM DEBT.
The Registrant has no long-term debt.
ITEM 21. OTHER SECURITIES.
The Registrant has no authorized securities other than those described in
Item 19 and Item 20.
ITEM 22. FINANCIAL STATEMENTS.
Reference is made to the information contained in the Prospectus under the
caption "FINANCIAL STATEMENTS."
N-6
<PAGE> 7
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY AN OFFER TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER
TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE
OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE
WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED DECEMBER 12, 1997
800,000 SHARES
EASTERN VIRGINIA SMALL BUSINESS INVESTMENT CORPORATION
COMMON STOCK
Eastern Virginia Small Business Investment Corporation, a Virginia
corporation (the "Company"), is offering 800,000 shares (the "Shares") of its
common stock, par value $1.00 (the "Common Stock"). It is estimated that the
initial offering price will be between $11.00 and $13.00 per share. See
"Underwriting." The Company is a closed-end investment company licensed by the
Small Business Administration as a small business investment corporation. The
Company invests in equity and debt securities of small businesses. Its initial
equity investments have generally been in the form of preferred stock bearing
current-pay dividends between 9% and 14% annually. The Company also provides
long-term loans at similar rates. Its equity and debt financings are generally
coupled with warrants to acquire common stock. The Company seeks to achieve high
levels of current income from preferred stock dividends and interest on loans,
as well as long-term growth in the value of its net assets through appreciation
of its common stock interests in portfolio companies. No assurance can be given
that the Company will achieve these objectives.
Before this Offering, there has been no public market for the Common Stock.
See "Underwriting" for a discussion of the factors considered in determining the
initial public offering price. The Company intends to apply to list the Common
Stock on the Nasdaq SmallCap Market.
AN INVESTMENT IN THE COMMON STOCK INVOLVE A HIGH DEGREE OF RISK. INVESTORS
SHOULD CAREFULLY CONSIDER THE INFORMATION UNDER "RISK FACTORS" BEGINNING ON PAGE
6 IN CONNECTION WITH THEIR INVESTMENT DECISION CONCERNING THE PURCHASE OF COMMON
STOCK IN THIS OFFERING.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
=================================================================================================
<CAPTION>
UNDERWRITING PROCEEDS
PRICE DISCOUNTS AND TO
TO PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
Per Share......................... $ $ $
- -------------------------------------------------------------------------------------------------
Total(3).......................... $ $ $
=================================================================================================
</TABLE>
(1) Excludes the issuance of a warrant to the Underwriter to purchase up to 4%
of the outstanding Common Stock after giving effect to this Offering (and
the over-allotment option, if exercised) at a per share price equal to 115%
of the Price to the Public, exercisable for a period of four years
commencing one year after the date of this Prospectus. The Company has
agreed to indemnify the Underwriter against certain liabilities, including
liabilities under the Securities Act of 1933. See "Underwriting."
(2) Before deducting expenses and other fees payable by the Company estimated at
$400,000.
(3) The Company has granted the Underwriter a 30-day option to purchase up to
120,000 additional shares of Common Stock on the same terms and conditions
as set forth above, solely to cover over-allotments, if any. If all such
shares are purchased, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
The Shares of Common Stock are being offered by the Underwriter subject to
prior sale, as, when and if delivered to and accepted by it, and subject to
certain other conditions. The Underwriter reserves the right to withdraw, cancel
or modify this Offering without notice and to reject orders in whole or in part.
It is expected that delivery of the certificates for the Shares will be made
against payment therefor on or about at the offices of Scott &
Stringfellow, Inc., Richmond, Virginia.
---------------------
SCOTT & STRINGFELLOW, INC.
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE> 8
[COMPANY LOGO]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS
OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON NASDAQ IN ACCORDANCE WITH RULE
103 OF REGULATION M UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE
"UNDERWRITING."
2
<PAGE> 9
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Financial Statements and Notes appearing elsewhere in this
Prospectus. Unless otherwise indicated, the information in this Prospectus
reflects (i) an amendment to the Company's Articles of Incorporation authorizing
an increase in the number of authorized shares of Common Stock from 1.5 million
shares to 10 million shares, (ii) no exercise of the Underwriter's
over-allotment option and (iii) no exercise of the warrant granted the
Underwriter to purchase 4% of the outstanding Common Stock after giving effect
to this Offering (and the over-allotment option, if exercised).
THE COMPANY
Eastern Virginia Small Business Investment Corporation (the "Company") is a
closed-end investment company licensed by the Small Business Administration (the
"SBA") as a small business investment corporation (an "SBIC") under the Small
Business Investment Act of 1958 (the "SBA Act"). The Company invests in equity
and debt securities of small businesses to finance their growth, expansion and
modernization. Its initial equity investments have generally been in the form of
preferred stock bearing current-pay dividends between 9% and 14% annually. The
weighted average dividend on its preferred stock investments is currently
11.84%. The Company also provides long-term loans at similar rates. Its three
loans have been made at annual interest rates of 10%, 10% and 12%. To date, the
Company has made most of its investments in preferred stock because, as an SBIC,
its dividend income is non-taxable. Its equity and debt financings are generally
coupled with warrants to acquire common stock, representing a minority interest
of the portfolio company, at nominal exercise prices. The Company seeks to
achieve high levels of current income from preferred stock dividends and
interest on loans, as well as long-term growth in the value of its net assets
through the appreciation of its common stock positions in portfolio companies.
The Company began formal operations in July 1996 after receiving its SBA
license and closing its initial private placement of Common Stock. The Company
made its first portfolio investment in October 1996 and, at November 30, 1997,
had approximately $2.3 million in investments in six portfolio companies. Its
portfolio companies include a manufacturer of voting machines, a manufacturer of
specialized safes, a provider of data processing services to credit unions, a
provider of management and billing services to the telecommunications industry,
an SBA loan originator and a food processor and distributor.
The Company targets portfolio companies that meet certain investment
criteria including financial history, potential for significant growth, product,
market size and experienced management teams with significant ownership. The
Company believes that the market for financing small businesses, either through
equity or debt, is underserved by traditional sources of capital and that many
of its potential competitors are burdened with overhead, administrative and
regulatory structures that hinder them from competing more effectively in this
market.
The Company expects to make future investments ranging from $500,000 to
$1,000,000 in equity and debt securities of small businesses, although under
special circumstances, its investments may be less than or exceed this range.
The Company believes that investments of this size will be appropriate given the
size of its Private Capital base after giving effect to the net proceeds of this
Offering and that non-traditional lenders and investors often focus on larger
investments and reject attractive companies with funding needs in this range.
To expand its investment opportunities, the Company is also investigating
the possibility of restructuring its operations to enable it to pursue
investment opportunities not available to SBICs because of regulatory
constraints, as well as seeking to acquire complementary closed-end investment
funds interested in consolidation.
The Company has raised its Private Capital (defined as eligible capital
paid for capital stock and additional paid-in capital) by investments of
individuals, businesses, financial institutions and governmental entities
located primarily in Eastern Virginia. Its Private Capital includes
approximately $2 million in recourse promissory notes of certain "accredited"
investors representing the balance of the unpaid purchase price of Common Stock,
payable on or before December 31, 1999.
3
<PAGE> 10
To fund its equity investments and debt financings, the Company has used
only the cash portion of its Private Capital. As an SBIC, the Company is
entitled to borrow funds from the SBA for up to 10 years at relatively low
interest rates, currently 65 basis points over 10 year U.S. Treasury Notes by
issuing current-pay debentures ("SBA Debentures"). On completion of this
Offering, the Company will meet requirements of the SBA permitting it to apply
to borrow approximately $36 million.
Incorporated in Virginia on July 13, 1993, the Company is registered under
the Investment Company Act of 1940 (the "Investment Act"). Its office is located
at 300 East Main Street, Suite 1380, Norfolk, Virginia 23510, and its telephone
number is (757) 626-1111.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered.................................... 800,000 shares.
Common Stock to be Outstanding after this Offering...... 1,368,900 shares.
Use of Proceeds......................................... To increase Private Capital
available for investments in equity
and debt securities of small
businesses, to open a second office
in Richmond, Virginia and to fund
potential acquisitions of
complementary investment funds. See
"Use of Proceeds."
Risk Factors............................................ See "Risk Factors."
Proposed NASDAQ Trading Symbol.......................... The Company intends to apply to
list the Common Stock on the Nasdaq
SmallCap Market.
</TABLE>
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<PAGE> 11
SUMMARY FINANCIAL INFORMATION
The following table contains certain financial and operating data and is
qualified by the more detailed Financial Statements and Notes included elsewhere
in this Prospectus. The Balance Sheet Data as of June 30, 1997 and the Statement
of Operations Data for the years ended June 30, 1996 and 1997 were derived from
the Company's Financial Statements and Notes that have been audited by Hoffman,
Morrison & Fitzgerald, P.C., independent certified public accountants, and are
included elsewhere in this Prospectus. The Balance Sheet Data for the three
months ended September 30, 1997 and the Statement of Operations Data for the
three months ended September 30, 1996 and 1997 have been derived from the
unaudited financial statements of the Company which, in the opinion of
management, have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting of normal recurring
adjustments, which management considers necessary for a fair presentation of the
selected data shown. The three months ended September 30, 1997 are not
necessarily indicative of the results to be expected for the entire year ending
June 30, 1998. The Statement of Operations Data has been derived from the
unaudited internal records of the Company. The financial data shown below should
be read in conjunction with the Financial Statements and Notes.
<TABLE>
<CAPTION>
INCEPTION THREE MONTHS ENDED
JULY 13, 1993 YEAR ENDED JUNE 30, SEPTEMBER 30,
TO JUNE 30, ----------------------------------------------- -----------------------------
1994 1995 1996 1997 1996 1997
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Operating income:
Interest income on
U.S. government
securities......... $ 121 $ 8,834 $ 42,262 $ 166,573 $ 52,054 $ 24,043
Dividend income...... -- -- -- -- -- 22,863
Interest on loans.... -- -- -- 9,430 -- 1,301
Other income......... -- -- 17,255 37,450 2,400 5,350
------- ---------- ---------- ---------- -------- ----------
Total operating
income.......... 121 8,834 59,517 213,453 54,454 53,557
Total operating
expenses............. 2,025 34,000 59,777 205,376 43,473 63,364
------- ---------- ---------- ---------- -------- ----------
Net operating income
(loss) before net
change in unrealized
appreciation on
investments and
provision for income
taxes................ (1,904) (25,166) (260) 8,077 10,981 (9,807)
Provision (benefit) for
income taxes......... 25 1,855 (7,346) (11,780) 1,008 (8,612)
------- ---------- ---------- ---------- -------- ----------
Net operating income... (1,929) (27,021) 7,086 19,857 9,973 (1,195)
Change in unrealized
appreciation in
investments, net of
provision (benefit)
for income taxes..... -- -- -- 238,094 -- (119,839)
------- ---------- ---------- ---------- -------- ----------
Net income............. $(1,929) $ (27,021) $ 7,086 $ 257,951 $ 9,973 $ (121,034)
======= ========== ========== ========== ======== ==========
Net income (loss) per
share................ $(35.72) $ (409.41) $ .96(1) $ .46(1) $ .02(1) $ (.21)(1)
Net operating income
(loss) per share..... $(35.72) $ (409.41) $ .96(1) $ .04(1) $ .02(1) $ .00(1)
Weighted average number
of shares
outstanding.......... 54 66 7,386 562,117 554,857 568,900
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
---------------------------
ACTUAL AS ADJUSTED(2)
---------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
U.S. government securities............................................. $1,500,000 $ 1,500,000
Net unrealized appreciation on investments............................. $ 118,255 $ 118,255
Total stockholders' equity............................................. $3,719,053(3) $ 12,247,053(3)(4)
</TABLE>
- ------------
(1) Net operating income per share and net income per share are based on the
weighted average number of shares outstanding for the indicated period.
(2) As adjusted to reflect the receipt and application of the net proceeds from
the sale of the 800,000 Shares at an estimated price of $12.00 per share.
(3) Between May 1994 and February 1997, the Company sold 568,300 shares of
Common Stock in a series of transactions in a private placement. As
permitted by the offering documents, the Company allowed accredited
investors, as defined in Regulation D of the Securities Act ("Regulation
D"), to pay 50% of the subscription price of the Common Stock in cash and to
finance the unpaid purchase price by a non-interest bearing recourse
promissory note, payable on demand, secured by the shares of Common Stock
purchased. "Total stockholders' equity" does not reflect $2,006,000 in such
promissory notes receivable from shareholders. The Company has notified the
accredited investors that all such notes are due and payable on or before
December 31, 1999. See Note C to Financial Statements.
(4) Reflects deductions for the Underwriter's discounts and commissions of 7%,
the Underwriter's accountable expense allowance of $100,000 and $300,000 in
other estimated costs of this Offering.
5
<PAGE> 12
RISK FACTORS
Prospective investors should consider carefully the specific factors set
forth below as well as the other information included in this Prospectus before
deciding to invest in the Shares of Common Stock. All statements and information
in this Prospectus, other than statements of historical fact, are
forward-looking statements based on a number of assumptions concerning future
conditions that ultimately may prove to be inaccurate. These forward-looking
statements may be identified by the use of words like "believe," "expect,"
"intend" and "anticipate" and concern, among other things, the Company's ability
to identify profitable investments in small businesses, value its portfolio
accurately and realize value from its investments in the securities of small
businesses. Many phases of the Company's operations are subject to influences
outside its control. Any one or any combination of factors could have a material
adverse effect on the Company's business, financial condition and results of
operations. These factors include competitive pressures, local, regional and
national economic conditions, governmental regulation and policies and other
conditions affecting capital markets. The following factors should be carefully
considered, together with other information in this Prospectus.
Investments in Small, Privately Owned Companies.
The Company's portfolio consists of equity and debt securities issued by
small, privately owned businesses that, under SBA regulations, must have a
tangible net worth of less than $18 million and average net income after federal
income tax for the preceding two years of $6 million or less (computed without
benefit of any carryover loss). See "Regulation." The Company's direct equity
investments in these small businesses have primarily been in the form of
preferred stock, coupled with warrants to acquire shares of common stock. There
is generally no publicly available information about such companies, so the
Company must rely on the diligence of its employees and agents to obtain
information in connection with the Company's investment decisions. Typically,
small businesses depend for their success on the management talents and efforts
of one person or a small group of persons, and the death, disability or
resignation of one or more of these persons could have a material adverse impact
on the Company's business, financial condition and results of operations.
Moreover, small businesses frequently have smaller product lines and market
shares than their competitors, may be more vulnerable to economic downturns and
often need substantial additional capital to expand or compete. Such companies
may also experience substantial variations in operating results. Investment in
small businesses therefore involves a high degree of business and financial
risk, can result in substantial losses and should be considered highly
speculative. See "Investment Policies."
Payment Defaults.
Generally, the Company makes current-pay, dividend-bearing preferred stock
investments in, and nonamortizing, five-year term loans with fixed or variable
rates of interest to, small businesses that have limited financial resources and
are able to obtain only limited financing from traditional sources. Its loans
may or may not be secured by the assets of the borrower. A portfolio company's
ability to pay preferred stock dividends or to repay its loan may be adversely
affected by numerous factors, including the failure to meet its business plan,
the death, disability or resignation of senior management, a downturn in its
industry or negative economic conditions. A deterioration in a portfolio
company's financial condition and prospects usually will be accompanied by a
deterioration in the value of its preferred stock or any collateral for a loan.
As a holder of preferred stock, the Company is always subordinate to any
indebtedness of the portfolio company and, when the Company is not the senior
lender, any collateral for a loan will be subordinate to another lender's
security interest.
Limited Operating History.
The Company obtained its license from the SBA in May 1996 and made its
first portfolio investment in October 1996. Accordingly, its operating history
is extremely limited. Since that time, it has made only three loans and six
equity investments. Two of these loans were repaid by the borrowers. The Company
continues to hold its equity positions, and anticipates holding them for an
extended period of time. See "Investment Policies." The Company has no history
of realizable profits in its investments, although it has recorded
6
<PAGE> 13
unrealized appreciation on certain of its equity investments. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Determination of Net Asset Value." The Company has not operated in recessionary
economic periods when the operating results of small business companies like
those in the Company's portfolio often are adversely affected.
Fluctuations in Quarterly Operating Results.
The Company has experienced, and expects to continue experiencing,
quarterly variations in revenues and operating income as a result of many
factors. Accordingly, it is possible that the Company's results of operations,
including quarter to quarter results, will be below the expectations of public
market analysts and investors. In addition, the Company plans its operating
expenditures based on revenue forecasts, and a revenue shortfall below its
forecasts in any quarter would likely adversely affect the Company's business,
financial condition and results of operations for the year. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Broad Management Discretion in Use of Proceeds.
The net proceeds of the Offering will be used for investments in equity and
debt securities of small businesses, to open a second office in Richmond,
Virginia and to fund possible acquisitions of complementary investment funds.
Its future investments in portfolio companies are unspecified. Moreover, no
possible acquisitions of complementary investment funds have been identified or
investigated and there can be no assurance the Company will consummate any
acquisition. As a result, the uncertainty and risk of an investment in the
Common Stock is increased because investors will not be able to evaluate for
themselves the economic merits of such future investments or acquisitions.
Consequently, there can be no assurance when or how the net proceeds from the
Offering will be used, and management will have broad discretion over the
allocation of the net proceeds from this Offering. If the Company is unable to
invest proceeds from this Offering in a timely manner in new transactions and
significantly expand its current business, returns from merely holding such
proceeds will be substantially less than could be realized if the proceeds were
successfully invested in small businesses. There can be no assurance that the
proceeds can or will be invested to yield a return to the limited extent that
the Company has historically experienced or any significant return at all. See
"Use of Proceeds."
Valuation of Portfolio.
Typically no public market exists for the equity or debt securities of
small, privately owned companies. As a result, in the absence of readily
ascertainable market values, the valuation of securities in the Company's
portfolio is made by the good faith determination of the Company's Executive
Committee in accordance with the valuation policy of the SBA. The estimated
values may differ significantly from the values that would have been established
had a ready market for the securities existed, and the differences could be
material. Unlike commercial lending institutions, the Company does not establish
reserves for investment losses, but revalues its portfolio on a quarterly basis
to reflect the Company's estimate of the current fair value of the investment
portfolio. At September 30, 1997, the Company's Executive Committee estimated
that there was no unrealized depreciation in its investment portfolio. There can
be no assurance that this estimate is accurate and that the Company will not
ultimately suffer losses on its investments. See "Determination of Net Asset
Value."
Illiquidity of Portfolio Investments.
Most of the Company's investments are, and will continue to be, securities
acquired directly from small, privately owned companies. The Company's portfolio
securities are, and will continue to be, subject to restrictions on resale or
otherwise have no established trading market. The illiquidity of most of the
Company's portfolio securities may adversely affect its ability to dispose of
such securities in a timely manner and at a fair price at when necessary or
advantageous.
7
<PAGE> 14
Limited Public Market; Volatility of Stock Price.
Before this Offering, there has been no public market for the Common Stock.
The Company intends to apply for authorization for quotation on the Nasdaq
SmallCap Market. If authorization requirements are met, continued inclusion
requires that the Company satisfy a minimum tangible net worth or net income
standard and that the Common Stock satisfy minimum standards of public float,
bid price and market makers. There can be no assurance, however, that an active
public market will develop or be sustained after this Offering.
The Company Stock is likely to be thinly traded with a significant
differential between the bid and ask price, and a highly volatile trading price
which is subject to wide fluctuations in response to factors, many of which are
beyond the Company's control. These may include fluctuations in the operating
results of its portfolio companies, sales of the Common Stock in the
marketplace, shortfalls in revenues, earnings or other operating results of the
Company, general financial conditions and other factors. There can be no
assurance that the market price of the Common Stock will not experience
significant fluctuations that are material, adverse and unrelated to the
Company's performance.
In addition, the stock market has from time to time experienced extreme
price and volume fluctuations that often have been unrelated to the operating
performance of particular companies. Changes in earnings estimates by analysts
and economic and other external factors and period-to-period fluctuations in
financial results of the Company may have a significant impact on the market
price of the Common Stock. Fluctuations or decreases in its trading price may
adversely affect the liquidity of the trading market for the Common Stock.
Reliance on Management.
Management is a key factor in the successful development and operation of
an SBIC. The Company depends for the selection, structuring, closing and
monitoring of its loans and investments on the diligence and skill of management
and members of the Executive Committee, particularly of J. Alan Lindauer, the
loss of whose services could have a material adverse effect on the operations of
the Company. Mr. Lindauer serves as President and Chief Executive Officer, and
as a Director and Chairman of the Executive Committee of the Company. Until
recently, he was the Company's only full-time executive officer. Although Mr.
Lindauer is a Certified Management Consultant and has experience in business
evaluation and small business investing, until his election as President of the
Company in March 1994, he had never served as an executive officer of an SBIC.
See "Management." The Company does not maintain key man life insurance on Mr.
Lindauer.
Determination of Public Offering Price.
The public offering price of the shares of Common Stock will be determined
by negotiations between the Company and the Underwriter. Among the factors to be
considered in making this determination will be an assessment of the Company's
results of operations, an evaluation of its management, future prospects of the
Company and its industry in general, the relative price to earnings and book
value ratios of securities of publicly-traded companies believed comparable to
the Company, the prevailing conditions in the securities market and the current
state of the economy in the United States. See "Underwriting." There can be no
assurance that, after this Offering, investors will be able to sell Common Stock
at or above the initial public offering price.
Expansion.
The Company intends to expand substantially its small business investment
activities, both in size (with the proceeds of this Offering and, when necessary
and if permitted by the SBA, with SBA Leverage), and geographic scope (by
establishing a second office in Richmond, Virginia). In addition, it may acquire
one or more complementary investment funds. No assurance can be given that, if
the Company accomplishes these objectives, it will be able to develop sufficient
administrative personnel, management and operating systems to manage its
expansion effectively.
8
<PAGE> 15
Competition.
A large number of institutions and individuals compete to make the types of
investments made by the Company. There can be no assurance that the Company will
be able to identify and make investments that satisfy its investment objectives
or that it will be able to invest fully its available capital. The Company
competes with other SBICs, other non-bank financial companies and, to a limited
extent, commercial banks and venture capital investors and venture capital
investment firms. Most of its competitors have greater resources and
significantly more operating history.
Potential Impact of Congressional Reform of the SBA.
Since the election of the 104th Congress in November 1994, some members of
Congress have called for reform or elimination of various federally-funded
programs including the SBA. The Company is not aware of any pending legislation
to eliminate the SBA or restrict or terminate the specific program of the SBA in
which the Company participates. Any significant restrictions of funds available
to the Company under the SBA program may adversely affect the Company's plans
for future operations and growth.
Leverage.
Although it may do so in the future, the Company has not yet issued any SBA
Debentures. When it does so, its operations will involve fixed costs associated
with such leverage. SBA Debentures require that interest be paid on a current
basis and the income from the Company's investments may not be sufficient to
make the required payments. Leverage increases the risk of loss because
increased operating revenues are needed to make required payments of principal
and interest on loans. As such, losses on a small percentage of the Company's
investments and loans can result in a much larger percentage reduction in
shareholders' equity. See "Business -- SBA Leverage."
Shares Eligible For Future Sale.
All of the 568,900 shares of Common Stock currently outstanding were
offered and sold by the Company in private transactions in reliance on
exemptions from registration under the Securities Act of 1933 (the "Securities
Act"). Accordingly, all of such shares are "restricted securities," as defined
by Rule 144 ("Rule 144") under the Securities Act and cannot be resold without
registration, except in reliance on Rule 144 or another applicable exemption
from registration. Shares of Common Stock have been eligible for resale under
Rule 144, depending on their date of issue, since February 1995 (assuming the
other requirements of Rule 144 are met). Substantially all of the Company's
outstanding shares of Common Stock, however, are subject to a "lock-up"
agreement with the Underwriter prohibiting their sale for a period of one year
from the date of this Prospectus.
No prediction can be made as to the effect, if any, that future sales of
restricted shares of Common Stock, or the availability of such Common Stock for
sale, will have on the market price of the Shares prevailing from time to time.
Sales of substantial amounts of formerly restricted Common Stock in the public
market, or the perception that such sales may occur, could adversely affect the
then prevailing market price of the Common Stock.
In addition, in the future the Company may issue additional shares of
Common Stock. No prediction can be made as to the effect, if any, that future
issuances of Common Stock may have on the market price of the Common Stock
prevailing from time to time. Sales of substantial amounts of such Common Stock,
or the perception that such sales may occur, could adversely affect the then
prevailing market price of the Common Stock. See "Shares Available for Future
Sale."
Dividends.
The Company has not declared or paid any cash dividends in the past and
does not expect to pay cash dividends in the foreseeable future. The Company
currently intends to retain its future earnings, if any, to finance the
development and expansion of its business. Any future dividend policy will be
determined by the
9
<PAGE> 16
Board of Directors in light of conditions then existing, including the Company's
earnings and its financial condition and requirements. See "Dividend Policy."
Possible Issuance of Preferred Shares; Anti-Takeover Provisions.
The Company's Articles of Incorporation authorize the Board of Directors to
issue, without shareholder approval, 25,000 shares of preferred stock with
voting, conversion and other rights and preferences that could materially and
adversely affect the voting power or other rights of the holders of Common
Stock. The Company presently has no plans or commitments to issue any shares of
preferred stock. The issuance of preferred stock or of rights to purchase
preferred stock, as well as certain provisions of the Company's Articles of
Incorporation and Virginia law, could delay, discourage, hinder or preclude an
unsolicited acquisition of the Company, make it less likely that shareholders
receive a premium for their shares as a result of any such attempt and adversely
affect the market price, and voting and other rights of the holders of Common
Stock. See "Description of Capital Stock."
USE OF PROCEEDS
Based on an assumed public offering price of $12.00 per share, the Company
will receive approximately $8.5 million, after the Underwriter's discounts and
commissions and estimated expenses of this Offering. The net proceeds will be
used to increase the Company's Private Capital available for investments in
equity and debt securities of small businesses, to open a second office in
Richmond, Virginia and to fund possible acquisitions of complementary investment
funds. Until put to these uses, the Company intends to invest the balance of
such net proceeds in short-term U.S. government securities. See "Risk
Factors -- Broad Management Discretion in Use of Proceeds."
DIVIDEND POLICY
After this Offering, the Company anticipates that all of its earnings will
be retained for development and expansion of its business and does not
anticipate paying any cash dividends in the foreseeable future. The payment of
dividends is subject to the discretion of the Board of Directors and will depend
on the Company's results of operations, financial position, capital
requirements, general business conditions, restrictions imposed by any financing
arrangements, legal and regulatory restrictions on the payment of dividends and
other factors the Board of Directors deems relevant.
10
<PAGE> 17
CAPITALIZATION
The following sets forth the equity capitalization of the Company at
September 30, 1997, and, as adjusted, to give effect to the sale by the Company
of the 800,000 Shares of Common Stock (based on an assumed public offering price
of $12.00 per share) and the application of the estimated net proceeds of such
sale.
This table should be read in conjunction with the Financial Statements and
Notes included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
---------------------------------
OUTSTANDING AS ADJUSTED
----------- -----------
<S> <C> <C>
Stockholders' equity:
Preferred Stock, par value $1 per share,
25,000 shares authorized; no shares issued
or outstanding or as adjusted............... $ -- $ --
Common Stock, par value $1 per share;
10,000,000 shares authorized, 568,900 shares
issued and outstanding; 1,368,900 shares as
adjusted.................................... 568,900 1,368,900
Additional paid-in capital.................... 5,041,100(1) 12,769,100(1)(2)
Net unrealized appreciation on investments.... 118,255 118,255
Undistributed accumulated earnings
(deficit)................................... (3,202) (3,202)
Stockholders' notes receivable................ (2,006,000) (2,006,000)
----------- -----------
Total stockholders' equity............... 3,719,053(1) 12,247,053(1)(2)
----------- -----------
Total capitalization................ $ 3,719,053(1) $12,247,053(1)(2)
========== ==========
</TABLE>
- ---------------
(1) Between May 1994 and February 1997, the Company sold 568,900 shares of
Common Stock in a series of transactions in a private placement. As
permitted by the offering documents, the Company allowed accredited
investors (as defined in Regulation D) to pay 50% of the subscription price
of the Common Stock in cash and to finance the unpaid purchase price by a
non-interest bearing recourse promissory note, payable on demand, secured by
the shares of Common Stock purchased. "Total stockholders' equity" and
"Total capitalization" do not reflect $2,006,000 in such promissory notes
receivable from stockholders. The Company has notified the accredited
investors that all such notes are due and payable on or before December 31,
1999. See Note C to Financial Statements.
(2) Reflects deductions for the Underwriter's discounts and commissions of 7%,
the Underwriter's accountable expense allowance of $100,000 and $300,000 in
other estimated costs of this Offering.
11
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of the financial condition and results of operations
of the Company should be read together with the Company's Financial Statements
and the Notes and the other financial data included elsewhere in this
Prospectus. The Company's results of operations for the period from inception to
June 30, 1996 are not comparable to those for the year ended June 30, 1997
because the Company did not begin its investing operations until October 1996.
Because of the very limited operating results and history of the Company, there
can be no assurances that the Company's historical financial performance is
indicative of its future results of operations.
OVERVIEW
The Company invests in the equity and debt securities of small businesses.
Its initial equity investments have been in the form of preferred stock carrying
current-pay dividends between 9% and 14% annually. The weighted average dividend
on its preferred stock investments is currently 11.84%. Dividend income for an
SBIC is non-taxable. Its loans have been made at annual interest rates of 10%,
10% and 12%. Its investments and loans are generally coupled with warrants to
purchase a minority interest in the portfolio company, at nominal exercise
prices. The Company derives most of its operating income from dividends paid on
preferred stock and interest earned on loans and on its U.S. government
securities. The balance of the Company's operating income is derived from
application fees and processing fees received on the origination of investments.
The Company has not yet sold any securities of its portfolio companies.
Accordingly, its financial statements do not reflect any realized gains or
losses on these investments. It has, however, recognized unrealized appreciation
on certain investments. Unrealized appreciation or depreciation of investments
results when the Company adjusts the value of its investments, on a quarterly
basis, to reflect management's estimate of current fair value as determined by
the Executive Committee in accordance with SBA valuation policies. Any change in
the fair value of loans and equity investments is reflected in unrealized
appreciation or depreciation of investments but has no impact on net operating
income. The Financial Statements present unrealized appreciation or depreciation
on investments after deduction for applicable federal and state income taxes.
Both the Company's net worth and its operating results are, and will continue to
be, significantly impacted by unrealized appreciation or depreciation of its
investments.
RESULTS OF OPERATIONS
Years Ended June 30, 1996 and 1997
Operating Income. For the year ended June 30, 1997, operating income was
$213,453. The Company derived $166,573 or 78% from interest received on the cash
portion of its Private Capital which it had invested in U.S. government
securities. The remainder of operating income was derived from application and
processing fees ($37,450 or 17.5%) and interest income on two loans to portfolio
companies ($9,430 or 4.5%). For the year ended June 30, 1996, operating income
was $59,517, of which $42,262 (71%) was from interest in U.S. government
securities and the remaining $17,255 from application and processing fees (28%).
Operating Expenses. Operating expenses for the year ended June 30, 1997
were $205,346 reflecting increased investment activities of the Company (which
began in October 1996) and accompanying increased payroll, legal and accounting
costs. Net operating income before net change in unrealized appreciation on
investments and provision (benefit) for income taxes was $8,077. After a tax
benefit of $11,780 reflecting early recognition of organizational expenses for
tax purposes, net operating income for the year was $19,857. In the year ended
June 30, 1996, operating expenses were $59,777, resulting in a net operating
loss of $260 before net change in unrealized appreciation on investments and
provision (benefit) for income taxes. After a tax benefit of $7,346 reflecting
early recognition of organizational expenses for tax purposes, net operating
income was $7,086.
12
<PAGE> 19
Unrealized Appreciation on Investments. The Company had no unrealized
appreciation at June 30, 1996 because it had made no investments. The Company
had $238,094, net of taxes, of unrealized appreciation on investments for the
year ended June 30, 1997. See "Unrealized Appreciation on Investments at June
30, 1997 and September 30, 1997."
Three Months Ended September 30, 1996 and 1997
Operating Income. In the first quarter of fiscal year 1998, the Company
began to receive dividend income from the preferred stock investments it began
making in November 1996. In the three-month period ended September 30, 1997,
operating income was $53,557. The Company derived $24,043 or 44.8% from interest
received on U.S. government securities (reflecting a decrease in cash Private
Capital invested in U.S. government securities and an increase in cash
investments in preferred stock of portfolio companies). Dividend income of
$22,863 represented 42.7% of operating income for the period and other income
only $6,651 or 12.5%. For the same period in 1996, operating income was $54,454,
almost all of which was interest earned on Private Capital invested in U.S.
government securities.
Operating Expenses. Operating expenses for the period in 1997 were $63,364
(compared to $43,473 in 1996) resulting in a net operating loss, before income
taxes, of $9,807. With a tax benefit of $8,612, net operating loss was $1,195
compared to a net operating income in 1996 of $9,973. This operating loss was
attributable to the Company's transition from operating income based primarily
on interest from U.S. government securities yielding relatively low interest
income, paid monthly or more frequently, to operating income derived from
higher-coupon dividends, payable quarterly, semi-annually or annually, and to
increased personnel, legal and accounting fees resulting from investment
activities.
Unrealized Appreciation of Investments at June 30, 1997 and September 30,
1997.
Unrealized appreciation, net of income taxes on June 30, 1997, was
$238,094, comprised primarily of a $174,410 increase in the valuation of its
preferred stock in the financial services industry back office and software
support portfolio company and a $208,891 increase in the valuation of the
301,000 common stock warrants of the portfolio company engaged in long-distance
telephone rebilling services.
In establishing these valuations, management considered several factors.
These included an increase in the maximum redemption price of preferred stock
reflecting increased adjusted earnings in the case of one portfolio company and
the excess of market price over the exercise price of its warrants, as well as
operating results, in the case of the other. The remaining $9,425 represented
small increases in the valuation of other portfolio companies. The gross
unrealized appreciation of $392,726 was then reduced by provision for federal
and state income taxes of $154,632 payable if these securities were sold at
their estimated value, leaving net unrealized appreciation of $238,094.
At September 30, 1997, the average per share trading price of common stock
of the rebilling services portfolio company had declined. Accordingly, the
Executive Committee eliminated the previously recorded unrealized appreciation
and carried the investment at cost. Primarily as a result of this devaluation,
the total unrealized appreciation, net of taxes, of $238,094 at June 30, 1997
decreased at September 30, 1997 to $118,255 and the Company's operating data for
the three-month period ending September 30, 1997 reflects the resulting loss of
$119,839.
CAPITAL RESOURCES
Since inception, the Company has funded its operations and the growth in
its investment portfolio primarily through two sources of capital (i) the
private placement of equity securities and (ii) cash flows from
13
<PAGE> 20
operating activities. The Company's sources of capital in fiscal years 1994,
1995, 1996 and 1997 and for the three months ended September 30, 1997 were:
<TABLE>
<CAPTION>
INCEPTION
JULY 13, 1993 YEAR ENDED JUNE 30, THREE MONTHS
TO JUNE 30, ------------------------------- ENDED SEPT. 30,
1994 1995 1996 1997 1997 TOTAL
------------- -------- --------- -------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Private placement of equity
securities................ $ 9,000 $337,800 $3,187,700 $ 69,500 $ -- $3,604,000
Operating activities........ (1,929) (27,021) 7,086 257,951 (121,034) 115,053
------------- -------- --------- -------- --------------- ----------
Total............. $ 7,071 $310,779 $3,194,786 $327,451 $(121,034) $3,719,053
========= ======== ======== ======== =========== =========
</TABLE>
The Company believes that its cash and cash equivalents at September 30,
1997 of $1,870,319, the net proceeds of this Offering of approximately $8.5
million, and its expected cash flow from operations will be adequate to fund the
continuing growth of its investment portfolio through the upcoming fiscal year.
In addition, if necessary, to provide the funds to continue its growth strategy,
the Company may issue SBA Debentures and could incur, from time to time,
short-or long-term bank financing. There can be no assurance that any such
additional financing will be available on terms acceptable to the Company.
BUSINESS
The Company is a closed-end investment company licensed by the SBA as an
SBIC under the SBA Act. The Company invests in equity and debt securities of
small businesses to finance their growth, expansion and modernization. Its
initial equity investments have generally been in the form of preferred stock
bearing current-pay dividends between 9% and 14% annually. The weighted average
dividend on its preferred stock investments is currently 11.84%. The Company
also provides long-term loans. Its three loans have been made at annual interest
rates of 10%, 10% and 12%. To date, the Company has made most of its investments
a preferred stock because, as an SBIC, its dividend income is non-taxable. Its
equity and debt financings are generally coupled with warrants to acquire common
stock, representing a minority interest in the portfolio company, at nominal
exercise prices. The Company seeks to achieve high levels of current income from
preferred stock dividends and interest on loans, as well as long-term growth in
the value of its net assets through the appreciation of its common stock
positions in portfolio companies.
STRATEGY
The Company seeks to provide growth capital financing to small businesses.
Primarily through their experience in business and with financial institutions,
management and members of the Executive Committee have developed a level of
expertise in identifying and developing new investment opportunities in this
market. The Company targets portfolio companies that meet certain criteria,
including financial history, potential for significant growth and experienced
management teams with a significant ownership interest. The Company believes the
market for small commercial loans is underserved by traditional lending sources.
Traditionally, small businesses have relied on commercial banks and the savings
and loan industry to provide debt financing to fund growth. In the latter half
of the 1980's and the early 1990's, funds from these traditional lending sources
diminished as commercial banks consolidated market share and sought to limit
both credit exposure and administrative expense associated with monitoring
numerous small company loans. Concurrently, the savings and loan industry
experienced significant structural and regulatory changes that greatly reduced
the funds previously available as debt financing for small, privately owned
businesses. The Company also believes that many of its competitors are also
burdened with overhead, regulatory and administrative structures that hinder
them from competing more effectively in this market. As a result of these
fundamental changes, a significant opportunity has developed for nontraditional
lenders to provide not only debt financing to, but also equity infusions in,
small companies, creating the potential for attractive risk-adjusted returns.
The Company expects to make future investments ranging from $500,000 to
$1,000,000 in equity and debt securities of small businesses, although under
special circumstances, its investments may be less than or
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<PAGE> 21
exceed this range. The Company believes that investments of this size will be
appropriate given the size of its Private Capital base after giving effect to
the net proceeds of this Offering and that non-traditional lenders and investors
often focus on larger investments and reject attractive companies with funding
needs in this range.
To expand its investment opportunities, the Company is also investigating
the possibility of restructuring its operations to enable it to pursue
investment opportunities not available to SBICs because of regulatory
constraints, as well as seeking to acquire complementary close-end investment
funds interested in consolidation.
INVESTMENT OBJECTIVES
The investing formats of SBIC's can range from making long-term secured and
unsecured loans to providing equity capital. The Company has utilized, and
anticipates continuing to utilize, both types of investments to achieve a
balanced portfolio of both equity and debt investments structured to meet the
individual needs of, and the investment opportunities associated with, its
portfolio companies.
The Company seeks to achieve both a high level of current income through
preferred stock dividends and loan interest and long-term growth in the value of
its assets through appreciation of its common stock interests in portfolio
companies. The Company prefers to invest in preferred stock of portfolio
companies, as opposed to debt instruments, because, as an SBIC, it gets a 100%
deduction for dividends received from taxable domestic corporations. The Company
attempts to structure its asset portfolio for relative safety and soundness,
while, at the same time, provide for equity features that will permit it to
achieve returns commensurate with its risks. Management believes that an
attractive return can be obtained on investments in small businesses, provided
that their principals contribute the requisite skill and dedication and the
investment is appropriately structured.
SELECTION OF INVESTMENT OPPORTUNITIES
The Company has invested, and expects to continue investing in a wide range
of businesses -- from technology companies to manufacturing and service firms.
Since making its first investment in late 1996, the Company has identified
certain key elements for investing in emerging growth small businesses. The
Company initiates its investment decisions by analyzing traditional criteria for
making any equity investment or granting any credit character, collateral,
growth potential, capacity to repay, financial and credit history and other
factors. After an initial screening based on these factors, management
recommends to the Executive Committee investments in those small businesses it
believes will succeed and contribute to the profitability of the Company. In
general, although obviously involving substantially more risk, providing growth
capital to small businesses can generate a higher return on investment because
these companies often have higher growth rates of revenues and profits than
larger, more established firms. The Company generally avoids loans to or
investments in start-up and early stage companies that may have difficulty
making current dividends or interest payments.
Traditional lenders require certain standards before affirmatively
considering a loan. Among others, these standards include debt service coverage
ratios, profit history, adequate working capital and collateral security. The
Company includes these factors in its decision-making process, but also
attributes significant weight to product, market size, growth potential,
capability of management and exit strategies for the equity portion of its
investment. To identify an exit strategy, management carefully studies the
portfolio company's growth potential, as well as historical financial
performance.
REALIZATIONS OF GAIN ON EQUITY INVESTMENTS AND REPAYMENT OF LOANS
The Company makes its equity investments with the intention of liquidating
for cash within five to seven years, although situations may arise in which it
may hold equity securities for a longer period. Its loans are made for a minimum
of five years as required by SBA regulations. The Company expects that a
successful investment will result in the redemption of preferred stock or the
repayment of a loan with interest, and the Company may be in a position to
realize a gain on the portfolio company's common stock acquired in connection
with the investment.
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Preferred stock purchased by the Company generally bears a "put option,"
exercisable after five years, requiring the portfolio company to repurchase the
shares at par, together with any unpaid dividends. The warrants it acquires are
typically at nominal exercise prices and often carry a similar put option, also
exercisable after five years, requiring a repurchase of the underlying common
stock at fair market value, contain anti-dilution provisions and are detachable
and transferable.
Before making any investment, the Company analyzes the potential for the
portfolio company to experience a liquidity event that will allow the Company to
recover the purchase price of its preferred stock investments or to have its
loan repaid and to realize appreciation in its common stock positions. Liquidity
events include, not only the exercise of put options or loan maturity, but an
initial public offering or the sale, merger or recapitalization of the portfolio
company.
ASSET/RISK MANAGEMENT
Investment in a small business, whether by debt or equity, necessarily
involves the risk that the debt will not be repaid or that the equity component
will remain illiquid even if the portfolio company performs and underlying value
is present. The Company expects that losses will occur in its investments.
Management attempts to minimize any such losses through several strategies.
Limitation on investments in one borrower. Although SBA regulations allow
up to 20% of an SBIC's Regulatory Capital (defined as Private Capital less non
cash assets) to be committed to one portfolio company, the Company has adopted a
policy allowing an investment to approach this outside limit only in rare
circumstances.
Appropriate underwriting standards. Management analyzes each proposed
transaction. If analysis does not reveal an investment meeting the Company's
underwriting standards, management promptly notifies the applicant business of
the denial of its funding request. Management examines numerous applications for
every one recommended to the Executive Committee.
Executive Committee Approval. If the investment appears to management to
meet Company underwriting standards , it must be presented to the Executive
Committee for additional evaluation and approval.
Board Representation. The Company generally requires portfolio companies
to have a majority of the members of its boards of directors who are not
shareholders or employees. The Company also requires that it have the right to
designate one or more members.
Monitoring. Management closely and frequently monitors the performance of
each portfolio company through its board representation and otherwise. The
Company does not believe that merely requiring the submission of financial
statements on a periodic basis provides the timely information necessary to
evaluate current performance. The Company believes that, by the time financial
statements are submitted and analyzed, many problems may be out of control and
beyond solution.
Default Covenants. Typically, the Company's investment documents contain
covenants allowing the Company, to acquire control of the board of directors of
the portfolio company, and replace its management if necessary, in the event
certain financial standards are not met or maintained.
PORTFOLIO COMPANIES
At November 30, 1997, the Company had approximately $2.3 million invested
in the capital stock of six portfolio companies. Two of the Company's debt
financings were for $350,000 and $50,000, both of which have been repaid. Its
third debt financing of $350,000 remains outstanding. A brief description of
these transactions follows.
Financial Services Industry Back Office and Software Support Company. This
Virginia business provides data processing services to, and maintains internal
software primarily for, credit unions located in four East Coast states. It has
also developed and markets an ATM especially designed for credit unions. In
October 1996, the Company loaned this concern $50,000 for five years at 10% and
in November 1996, purchased $700,000 of its preferred stock. The preferred stock
carries an annual cumulative dividend rate of
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<PAGE> 23
10%. As part of the transaction, the Company acquired a warrant, that, if
exercised, will represent approximately 4% of the outstanding common stock. The
Company's investment was used to expand on-going research and development
activities and to acquire the interests of non-participating investors.
Long Distance Telephone Rebilling Services Company. This Illinois business
provides billing services to long-distance resellers, or firms that buy blocks
of long-distance telephone time from companies like AT&T, MCI and Sprint and
then resell the long-distance time to their customers. It bills for more than
1,200 local phone companies and provides direct billing software and services,
as well as information management services to the telecommunications industry.
In December 1996, the Company made this firm a fully collateralized,
five-year loan at 10%. As part of the transaction, the Company received a
warrant for 245,000 shares of the portfolio company's common stock at a discount
of approximately 25% over the current market price.
In January 1997, the borrower requested that the Company subordinate a
portion of its collateral interest to another lender. The Company agreed to do
so in exchange for a warrant exercisable until February 2000 for 56,000 shares
of common stock (representing less than 1% of the outstanding shares of common
stock). In March 1997, the borrower prepaid the $350,000 loan. In June 1997, the
Company agreed to exercise the original warrant for 245,000 shares of common
stock, representing 2.9% of the then outstanding common stock of the borrower,
in exchange for a reduction in its exercise price. In December 1997, the Company
made an unsecured, five-year $350,000 loan at an annual interest rate of 12% to
the borrower. The debt instrument is convertible into common stock of the
borrower at $1.25 per share. The Company received a warrant to acquire 210,000
additional shares of common stock, 35,000 of which are immediately exercisable,
with the remainder to be exercisable in 35,000 share increments on each of the
five subsequent anniversary dates of the issuance of the warrant, assuming at
each applicable anniversary date, the loan is outstanding. The Company's
investments provided additional working capital to accommodate the growth of
this business.
SBA Loan Originator. This Virginia firm provides SBA-loan origination
services. It assists small businesses in applying for and obtaining
SBA-guaranteed loans through financial institutions and assists financial
institutions in processing SBA-guaranteed loans for small businesses. In January
1997, the Company purchased $140,000 of its redeemable convertible preferred
stock. The preferred stock carries an annual cumulative dividend rate of 9% and
is convertible into common stock of the portfolio company representing 49% of
its outstanding common stock. The Company's investment provided the working
capital to facilitate growth of this portfolio company.
Processor of Roasted Meats. This Virginia concern processes delicatessen
meats and barbecue products for food distributors and supermarket chains in the
Eastern United States. It is the continuation of a manufacturing business
established in 1952. In April 1997, the Company purchased $125,000 of redeemable
preferred stock of this company. The preferred stock carries an annual
cumulative dividend rate of 10%. As part of the transaction, the Company
acquired a warrant exercisable for 15% of the portfolio company's common stock.
The Company's investment provided this business the means to increase
significantly its inventory to meet sales growth.
Voting Machine Sales and Service Company. This Virginia business
manufactures, sells and services computerized electronic voting systems, and
associated operating software, used by local governments for federal, state and
local elections. Its product eliminates paper ballots and lever-operated
machines. It is certified to supply voting machines in three states and is in
the process of obtaining certification in all other U.S. states and territories.
In May 1997, the Company purchased $175,000 of redeemable preferred stock of
this company. The preferred stock carries an annual cumulative dividend rate of
13%. As part of the transaction, the Company acquired a warrant, exercisable
incrementally over a four-year period from its issuance, representing 16% of the
outstanding shares of common stock. This investment provided working capital to
build its inventory levels to meet sales growth. In July 1997, it purchased an
additional $175,000 of the same series of preferred stock and acquired a second
warrant exercisable for 3% of the outstanding common stock of the portfolio
company. The Company's additional investment provided working capital to meet
new increased sales demand.
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Specialized Safe Manufacturer. This 65-year old Virginia company is a
leading manufacturer of smart safes and security doors as solutions to loss
prevention for businesses. As an option for its products, it developed an
electronic lock and audit system that identifies who entered the safe or
security door, when and the duration of the entry. Its customers are
predominately fast food chains and include McDonald's, Pizza Hut and Boston
Market. In November 1997, the Company purchased $700,000 of preferred stock of
this company. The preferred stock carries an annual cumulative dividend of 14%.
In addition, the Company received a warrant exercisable for 9% of the common
stock which it subsequently exercised. The Company's investment was used, in
part, to acquire a Georgia safe manufacturer, expanding the firm's product line
and affording access to a new market segment, primarily retail chain stores and
oil company convenience stores including Kroger, Toys 'R Us, Exxon and Amoco.
SBA LEVERAGE
The SBA raises capital to enable it to provide funds to SBIC's by
guaranteeing certificates or bonds that are pooled and sold to purchasers of
government-guaranteed securities. The amount of funds that SBA may lend is
determined by annual Congressional appropriations. Congress authorizes
appropriations to the extent it determines to fund SBIC borrowings. In recent
years, funding levels have exceeded industry usage.
To be eligible to use funds provided by the SBA ("SBA Leverage"), an SBIC
must obtain a license and satisfy other requirements. The need for SBA Leverage
must be established. To establish need, the SBIC must invest 50% of its
Leverageable Capital (defined as Private Capital less unfunded commitments from
federal sources) and any outstanding SBA Leverage. Other requirements include
compliance with SBA regulations, adequacy of capital and meeting liquidity
standards.
SBIC's may obtain up to $90 million in SBA Leverage in the following
ratios:
<TABLE>
<CAPTION>
LEVERAGEABLE CAPITAL MATCHING RATIO SBA LEVERAGE
- --------------------- --------------- -------------
<S> <C> <C>
First $15 million 3:1 $45 million
Second $15 million 2:1 $30 million
Third $15 million 1:1 $15 million
</TABLE>
SBA Debentures are issued with five- and 10-year maturities. Interest only
is payable semi-annually until maturity. The interest rate generally is at a
modest premium (65 basis points) over U.S. Treasury Notes with comparable
maturities. Ten-year SBA Debentures may be prepaid with a penalty during the
first 5 years, and then are prepayable without penalty. Five-year SBA Debentures
may be prepaid without penalty.
Another form of SBA Leverage is deferred-coupon preferred stock or
debentures ("SBA Participating Securities"). An SBIC issuing SBA Participating
Securities must invest in portfolio companies an amount equal to the outstanding
face amount of SBA Participating Securities solely in "equity capital" (defined
as common or preferred stock, including subordinated debt with unamortized
equity features providing for interest payments contingent on, and limited to
the extent of, earnings of the portfolio company).
SBA Participating Securities must be redeemed within 15 years. The coupon
or interest rate on SBA Participating Securities approximates the rate on
10-year Treasury Notes at the time the securities are issued. Payments on the
coupons or dividends or interest are deferred or accrued and are payable if and
when the SBIC generates earnings adequate in amount to make the payments. During
the deferral period, the SBA makes payments to the bondholders who purchased the
SBA-guaranteed certificates. In return, the SBA is entitled from the SBIC to a
priority return of its full interest expense (much like the coupon on preferred
stock) from the SBIC's earnings. In addition, the SBA receives a portion of the
SBIC's profits. The formula for determining the SBA's profit share is based on
the ratio of the SBIC's Participating Securities to its Leveragable Capital,
indexed to the yield-to-maturity on 10-year Treasury Notes. This structure
enables equity-oriented SBIC's to adopt a longer-term investment policy and to
match its payments on the SBA Participating Securities with its actual
realization of gains.
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Distributions to investors and the SBA are patterned after standard venture
agreements. To assure that the SBA's position is protected, certain limitations
are placed on distributions, including profit and return of capital
distributions; debt limitations; liquidity requirements and management fees.
Although the Company may, in the future, issue SBA Debentures, it has no
present intention of issuing SBA Participating Securities.
TEMPORARY INVESTMENTS
Pending investment in portfolio company securities , the Company will
invest its otherwise uninvested cash in (i) federal governmental or agency
issued or guaranteed securities that mature in 15 months or less, (ii)
repurchase agreements with banks, deposits of which are insured by the Federal
Deposit Insurance Corporation (the "FDIC") (an "insured bank"), with maturities
of seven days or less, the underlying instruments of which are securities issued
or guaranteed by the federal government, (iii) certificates of deposit in an
insured bank with maturities of one year or less, up to the amount of the
deposit insurance, (iv) deposit accounts in an insured bank subject to
withdrawal restrictions of one year or less, up to the amount of deposit
insurance or (v) certificates of deposit or deposit accounts in an insured bank
in amounts in excess of the insured amount if the insured bank is deemed
"well-capitalized" by the FDIC. See "Use of Proceeds."
INVESTMENT ADVISER
The Company has no investment adviser.
COMPETITION
The Company competes with so-called "angel" investors, venture capital
investment firms, other SBICs and non-traditional investors that, like the
Company, take equity positions in small businesses. Some of its competitors
invest in earlier stage companies that typically cannot pay dividends and
interest on a current basis. These types of investments do not fit within the
Company's investment guidelines, but can offer attractive investment returns to
the Company's competitors who provide this type of financing. The Company also
competes, to a limited extent, with commercial banks and commercial finance
companies. Most of its competitors have substantially greater assets, capital
and personnel resources. The Company believes that, because of its size and
structure, it can tailor equity investment or loan terms to a portfolio
company's needs and circumstances better than many of its larger competitors.
The Company also believes that it competes effectively on the basis of its
reputation, responsiveness and the quality of its service in its timely analysis
and decision-making processes. Management believes that many of the Company's
potential competitors are burdened with overhead, regulatory and administrative
structures that prevent them from competing effectively in this market.
EMPLOYEES
As of December 1, 1997, the Company had three full-time and one part-time
employees. The Company expects to add three additional full-time employees when
it opens its Richmond, Virginia office. The Company has maintained, and intends
to continue to maintain, low personnel overhead by extensively utilizing, in
particular, the members of the Executive Committee and the unpaid members of its
Board of Directors, for business referrals, marketing, investment analysis and
due diligence reviews.
INVESTMENT POLICIES
The following policies of the Company with respect to the activities
described below are matters of fundamental policy in accordance with Sections
8(b) and 13(a) of the Investment Act. These policies may not be changed without
the approval of the lesser of (i) 67% of the Company's shares present or
represented at a shareholders' meeting at which the holders of more than 50% of
such shares are present or represented or (ii) more than 50% of the outstanding
shares of the Company.
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(a) The Company is permitted to issue the maximum amount of SBA Debentures
or SBA Participating Securities permitted by the SBA Act and SBA regulations.
The Company may issue SBA Debentures or SBA Participating Securities in the
future.
(b) The Company is permitted to borrow money only for the purpose of
investing in, and making loans to, Small Business Concerns, as defined below. It
is, however, permitted to finance the acquisition of capital assets used in its
ordinary business operations.
(c) The Company is not permitted to engage in the business of underwriting
the securities of other issuers. It anticipates that all or substantially all of
its investments in Small Business Concerns will be in securities that may not be
sold to the public without registration, or an exemption from registration,
under the Securities Act. All of the Company's current equity investments in
Small Business Concerns are so restricted.
(d) The Company is prohibited from concentrating more than 25% of the value
of its assets, determined at the time an investment is made, exclusive of U.S.
government securities, in securities issued by companies engaged primarily in
the same industry.
(e) The Company is prohibited from engaging in the business of purchasing
or selling real estate. The Company may bring mortgage foreclosure actions and
take title to and possession of property with respect to which it is the
mortgagee in accordance with applicable mortgage foreclosure laws. Additionally,
the Company may purchase office facilities, although, at present, it leases its
office facilities.
(f) The Company is not permitted to engage in the purchase or sale of
commodities or commodity contracts.
(g) The Company is permitted to make loans and loans with equity features
to, as well as equity investments in, Small Business Concerns to Small Business
Concerns to the extent allowed by the SBA Act and SBA regulations. The Company
is also permitted to extend loans to shareholders to finance the purchase of its
capital stock.
The Company's policies with respect to the following matters are not
fundamental policies and may be changed, subject to the SBA Act and SBA
regulations, by the Company's Executive Committee without shareholder approval.
(a) The Company may make investments in equity and debt securities of Small
Business Concerns as approved by the Executive Committee.
(b) The Company has no strict policy regarding the percentage of its assets
that may be invested in any specific type of security. The Company follows SBA
regulations prohibiting investment in any single Small Business Concern and its
affiliates exceeding 20% of the Company's Regulatory Capital.
(c) As permitted by SBA regulations, the Company may purchase (a) up to 49%
of the voting securities of a Small Business Concern if it has less than 50
shareholders or (b) up to 19% (and in certain situations up to 25%) of the
voting securities of a Small Business Concern if it has 50 or more shareholders.
(d) Except where necessary to protect an investment, the Company does not
invest in companies for the purpose of exercising control of management and does
not intend to do so in the future. SBA regulations prohibit SBICs from
controlling a Small Business Concern except where necessary to protect its
investment.
(e) The Company does not invest in securities of other investment companies
and does not intend to do so in the future.
(f) The Company intends to hold its portfolio debt securities for a minimum
of five years (as required by SBA regulations or until maturity. It anticipates
retaining its equity investments from five to seven years.
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DETERMINATION OF NET ASSET VALUE
The Board of Directors has delegated to the Executive Committee the sole
responsibility for determining the asset value of each of the Company's equity
investments and loans and of its portfolio in the aggregate. The Company's
valuation policy is to provide a consistent basis for establishing the asset
value of its portfolio and it has adopted the SBIC valuation policy of the SBA.
Pursuant to SBA regulations, investments are deemed to be "fair value" if such
values are determined by the Executive Committee in accordance with SBA
valuation policy. This requirement is consistent with the procedure for
determining fair value contained in the Investment Act. The Company's policy is
that equity investments be held for five to seven years and loans for a minimum
of five years (as required by SBA regulations) or until maturity.
The Executive Committee determines the net asset value per share of common
stock of portfolio companies quarterly, as soon as practicable after and as of
the end of each calendar quarter, by dividing the value of total assets minus
liabilities by the total number of shares outstanding on a fully-diluted basis
at the date of the determination.
In making its valuation determination, the Executive Committee adheres to
the valuation policy of the SBA. In calculating the value of the Company's total
assets, securities traded in the over-the-counter market or on a stock exchange
are valued at the average bid at close or closing price, as the case may be, for
the valuation date and the preceding two days, unless the investment is subject
to a restriction that requires a discount from such price, as determined by the
Executive Committee. Discounts typically range from 10% to 40%, but may be more
or less, depending on resale restrictions under securities laws or contractual
agreements.
All other investments are valued at fair value as determined in good faith
by the Executive Committee. In making its determination, the Executive Committee
values loans and nonconvertible debt securities for which there exists no public
trading market at cost plus amortized original issue discount, if any, unless
adverse factors lead to a determination of a lesser value when unrealized
depreciation is recognized. The valuation of loans and associated interest
receivables on interest- bearing securities reflects the portfolio company's
current and projected financial condition and operating results, its payment
history and its ability to generate sufficient cash flow to make payments when
due.
When a valuation relies more heavily on assets than earnings, additional
criteria are considered, including, the value of the collateral, the priority of
the Company's security interest, the net liquidation value of collateral and the
personal integrity and overall financial condition of the owners of the
business. An appropriate downward adjustment is recognized when collection is
doubtful. Collection is presumed to be in doubt when one or both of the
following conditions occur (i) interest payments are more than 120 days past due
or (ii) the portfolio company is in bankruptcy, is insolvent or substantial
doubt exists about its ability to continue as a going concern. The carrying
value of interest-bearing securities is not adjusted for changes in interest
rates. The valuation of convertible debt may be adjusted to reflect the value of
the underlying equity security net of the conversion price. Convertible debt
securities and warrants are valued to reflect the value of the underlying equity
security less the conversion or exercise price.
In valuing equity securities for which there exists no public trading
market, investment cost is presumed to represent fair value except when the
valuation policy provides that the Executive Committee may determine fair value
on the basis of financings by unaffiliated investors or when a company has been
self-financing and has had positive cash flow from operations for at least the
past two fiscal years. Asset value may be increased based on price/earnings
ratios, cash flow multiples and other appropriate financial measures of any
similar publicly-traded companies, discounted for illiquidity. If the chosen
valuation ceases to be meaningful, it may be restored to a cost basis or, in the
event of significant deterioration in performance or potential, to a valuation
below cost to reflect impairment. With respect to portfolio companies likely to
face bankruptcy or discontinue operations for some other reason, liquidating
value may be employed. This value is determined by estimating the realizable
value (often through professional appraisals or firm offers to purchase) of all
assets and then subtracting all liabilities and all associated liquidation
costs.
Valuation is reduced if a portfolio company's performance has significantly
deteriorated. If the factors that led to the reduction in valuation are
overcome, the valuation may be restored. Warrants are valued at the
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excess of the value of the underlying security over the exercise price. The
Executive Committee, may also consider recent operating results of a portfolio
company or offers to purchase its securities when valuing a warrant.
A substantial portion of the Company's assets are, and will continue to,
consist of securities carried at fair values determined by its Executive
Committee. The Company's independent public accountants review and express an
opinion on the reasonableness of the bases used by the Executive Committee in
determining the valuation of investments, the adequacy of the procedures applied
in valuing investments and the appropriateness of the underlying documentation.
Determination of fair values, however, involves subjective judgment not
susceptible to substantiation by auditing procedures. Accordingly, under current
standards, the accountants' opinion on the Company's financial statements refers
to the uncertainty with respect to the possible effect on the financial
statements of such valuations.
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MANAGEMENT
POWERS OF THE EXECUTIVE COMMITTEE
The Company's Articles of Incorporation provide for the appointment by the
Board of Directors of an Executive Committee comprised of not less than five nor
more than nine members, all of whom must be a member of the Board of Directors.
The Executive Committee was constituted by the Board of Directors in December
1993 and, under Virginia law, may exercise all the authority of the Board of
Directors except that it may not (i) approve or recommend to shareholders action
that Virginia law requires to be approved by shareholders, (ii) fill vacancies
on the Board of Directors or any committee, (iii) amend the Articles of
Incorporation, (iv) adopt, amend or repeal the Bylaws, (v) approve a plan of
merger, (vi) authorize or approve a distribution, except according to a general
formula or method prescribed by the Board of Directors or (vii) authorize or
approve the issuance or sale or contract for sale of shares, or determine the
designation of relative rights, preferences and limitations of a class or series
of shares except within limits specifically prescribed by the Board of
Directors.
MEMBERS OF THE EXECUTIVE COMMITTEE AND EXECUTIVE OFFICERS
The following table sets forth the names, addresses, ages and positions
with the Company of all members of the Executive Committee (who also are
directors of the Company) and Executive Officers of the Company. Information
concerning their principal occupation and background follows.
<TABLE>
<CAPTION>
POSITION AND OFFICES
NAME AND ADDRESS AGE WITH THE COMPANY
- -------------------------------------------- --- -------------------------------------------
<S> <C> <C>
J. W. Whiting Chisman, Jr. ................. 56 Member of Executive
226 Creekview Lane Committee and Director
Hampton, VA 23669
Eric L. Fox................................. 51 Member of Executive
One Commercial Place Committee and Director
Norfolk, VA 23510 And Secretary/Treasurer
Ernest F. Hardee............................ 57 Member of Executive
100 E. 15th Street Committee and Director
Norfolk, VA 23510
J. Alan Lindauer............................ 58 Chairman of Executive
300 East Main Street Committee, Director, President
Suite 1380 And Chief Executive Officer
Norfolk, VA 23510
Robert I. Low............................... 60 Member of Executive
P.O. Box 3297 Committee and Director
Norfolk, VA 23514
Peter M. Meredith, Jr. ..................... 45 Member of Executive Committee
P.O. Box 11265 Chairman of the Board of Directors
Norfolk, VA 23517
Richard G. Ornstein......................... 55 Member of Executive
524 Fisherman's Bend Committee and Director
Virginia Beach, VA 23451
</TABLE>
J. W. Whiting Chisman, Jr. has served as a director of the Company since
February 1994. Since 1988, he has been President of Dare Investment Company, a
land developer and investor in equities.
Eric L. Fox has served as a director of the Company since July 1993 and as
Secretary/Treasurer since September 1996. In 1975, Mr. Fox joined the investment
firm of Kidder, Peabody & Co. which was acquired by Paine Webber in 1995. He is
currently a Portfolio Manager of Paine Webber.
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<PAGE> 30
Ernest F. Hardee has served as a director of the Company since September
1997. Since 1963, he has been President and Chief Executive Officer of Hardee
Realty Corporation, a real estate brokerage firm. He has also served as a
director of Branch Bank & Trust Corp. since 1995.
J. Alan Lindauer has served as a director since July 1993 and as Chairman
of the Executive Committee of the Company since December 1993 and since March
1994 as its President and Chief Executive Officer. Since 1986, Mr. Lindauer has
been President of JTL, Inc., a business consulting firm. Mr. Lindauer is a
Certified Management Consultant.
Robert I. Low has served as a director of the Company since July 1993. Mr.
Low is a senior partner of Goodman & Company, a firm of Certified Public
Accountants. He has been with that firm since 1969.
Peter M. Meredith, Jr. has served as a director of the Company and as
Chairman of the Board of Directors since May 1994. Since 1978, he has served in
various executive capacities with Meredith Construction Company, Inc. Since
1995, he has been the Chairman of the Board of Directors of Heritage Bank.
Richard G. Ornstein has served as a director of the Company and a member of
the Executive Committee since September 1997. Since 1964, Mr. Ornstein has been
privately engaged in real estate management and development.
OTHER MEMBERS OF THE BOARD OF DIRECTORS
The following table sets forth the names, addresses and ages of all
directors of the Company who are not members of the Executive Committee.
Information concerning their principal occupation and background follows.
<TABLE>
<CAPTION>
POSITION AND OFFICES
NAME AND ADDRESS AGE WITH THE COMPANY
- ---------------------------------------------------------------------- --- --------------------
<S> <C> <C>
James E. Andrews...................................................... 59 Director
109 East 40th Street
Norfolk, VA 23504
Donna C. Bennett...................................................... 36 Director
500 East Plume Street
Norfolk, VA 23510
Jeffrey R. Ellis...................................................... 53 Director
513 Kerry Lane
Virginia Beach, VA 23451
Roger L. Frost........................................................ 65 Director
1700 Grove Court
Norfolk, VA 23503
Henry U. Harris, III.................................................. 45 Director
500 E. Main Street, Suite 1500
Norfolk, VA 23510
Matthew James......................................................... 42 Director
200 High Street, Suite 200
Portsmouth, VA 23704
Harold J. Marioneaux, Jr. ............................................ 42 Director
504 Mill Stone Road
Chesapeake, VA 23320
Augustus C. Miller.................................................... 63 Director
1000 E. City Hall Avenue
Norfolk, VA 23504
</TABLE>
24
<PAGE> 31
<TABLE>
<CAPTION>
POSITION AND OFFICES
NAME AND ADDRESS AGE WITH THE COMPANY
- ---------------------------------------------------------------------- --- --------------------
<S> <C> <C>
Paul F. Miller........................................................ 66 Director
2400 Washington Avenue
Newport News, VA 23607
Juan M. Montero, II................................................... 55 Director
2147 Old Greenbrier Road
Chesapeake, VA 23320
R. Scott Morgan, Sr. ................................................. 51 Director
5101 Cleveland Street
Virginia Beach, VA 23462
James W. Noel, Jr. ................................................... 41 Director
224 Ballard Street
P.O. Box 612
Yorktown, VA 23690
Thomas A. O'Grady..................................................... 40 Director
201 N. Main Street, Suite B
Suffolk, VA 23434
Richard A. Schreiber.................................................. 56 Director
36076 Lankford Highway
P.O. Box 395
Belle Haven, VA 23306
Jordan E. Slone....................................................... 35 Director
500 E. Main Street, #820
Norfolk, VA 23510
</TABLE>
James E. Andrews has served as a director of the Company since May 1997.
Since 1974, Mr. Andrews has been the principal owner of Anzell Automotive, Inc.,
an automotive repair firm and franchisor of automotive repair shops.
Donna C. Bennett has served as a director of the Company since September
1996. She is a Vice-President of Signet Bank and has been employed since 1985
with Signet Bank in various capacities.
Jeffrey R. Ellis has served as a director of the Company since August 1997.
Between 1973 and 1986, Mr. Ellis was the President and Chief Executive Officer
of Ridgewell Caterers, Inc. Since 1986, he has been a private investor.
Roger L. Frost has served as a director of the Company since May 1997.
Between 1956 and 1997, he was an accountant with Goodman & Company, a firm of
Certified Public Accountants, from which he retired as a senior partner in 1997.
Henry U. Harris, III has served as a director of the Company since
September 1997. Since 1980, he has been Portfolio Manager of Virginia Investment
Counselors, Inc., a financial consulting firm, of which he is now President.
Since 1991, he has been the vice-chairman of the Board of Directors of Heritage
Bank & Trust.
Matthew James has served as a director of the Company since July 1993.
Since 1990, Mr. James has been Director of Economic Development for the City of
Portsmouth, Virginia.
Harold J. Marioneaux, Jr. has served as a director of the Company since
November 1994. Since 1990, he has practiced as a dental surgeon and since 1993
has acted as a certified financial planner.
Augustus C. Miller has served as a director of the Company since August
1994. Since 1977, he has been President and Chief Executive Officer of Miller
Oil Co., Inc., a distributor of fuels.
25
<PAGE> 32
Paul F. Miller has served as a director of the Company since May 1994.
Since 1987, he has served as Director of Planning and Development for the City
of Newport News, Virginia.
Juan M. Montero, II has served as a director of the Company since July
1995. Since 1972, he has engaged in the private practice of general and thoracic
surgery.
R. Scott Morgan, Sr. has served as a director of the Company since
September 1997. Since 1995, Mr. Morgan has been Executive Vice President and
Corporate Banking Manager with the Corporate Banking Group of Branch Bank &
Trust Corp. Between 1992 and 1995, he was employed in various capacities with
Commerce Bank.
James W. Noel, Jr. has served as a director of the Company since August
1994. Since 1993, Mr. Noel has been the Executive Director of the York County
Industrial Development Authority. Between 1991 and 1993, he served in various
capacities with the City of Portsmouth, Virginia.
Thomas A. O'Grady has served as a director of the Company since May 1997.
In 1996, he was appointed Director of Economic Development of the City of
Suffolk, Virginia. Between 1989 and 1996, he was Director of Development for
Forward Hampton Roads and was responsible for marketing and prospect development
for the five-city region of Chesapeake, Norfolk, Portsmouth, Suffolk and
Virginia Beach, Virginia.
Richard A. Schreiber has served as a director of the Company since May
1995. Since 1994, he has been President and Chief Executive Officer of the
Virginia Eastern Shore Corporation, which is engaged in development of business
for the Eastern Shore of Virginia. Between 1980 and 1993, he was Vice-President
and Chief Executive Officer of Colonial Williamsburg Hotel Properties, Inc.
Jordan E. Slone has served as a director of the Company since July 1995.
Since 1987, Mr. Slone has been Chairman and Chief Executive Officer of the
Harbor Group Companies, a diversified real estate and financial services firm.
THE BOARD OF DIRECTORS
The Company's existing Board of Directors has 22 members.
The Company's Board of Directors is divided into four classes. The members
of each class serve for differing staggered terms, including five Class I
Directors, who serve one-year terms (Messrs. James, Paul Miller, Noel, O'Grady
and Schreiber), five Class II Directors, who serve two-year terms (Ms. Bennett
and Messrs. Frost, Harris, Marioneaux and Slone), five Class III Directors, who
serve three-year terms (Messrs. Andrews, Ellis, Augustus Miller, Montero and
Morgan) and seven Class IV Directors, who serve four-year terms (Messrs.
Chisman, Fox, Hardee, Lindauer, Low, Meredith and Ornstein ). Class I, II, III
and IV director terms expire at the end of their respective terms of office at
the appropriate annual meeting of shareholders. Directors hold office until
expiration of their respective terms and until their successors are elected, or
until death, resignation or removal. Officers of the Company serve at the
discretion of the Board of Directors, subject to any employment contract rights.
AUDIT COMMITTEE AND COMPENSATION COMMITTEE
At its December 8, 1997 meeting, the Board of Directors established, but
has not elected members to, the Compensation/Stock Option Committee and Audit
Committee of the Company.
The Compensation/Stock Option Committee will review compensation
arrangements for management and key employees and make recommendations
concerning compensation to the Executive Committee. It also will administer the
Company's stock option plan, when implemented. It will also grant options to
officers and key employees and set the exercise price, terms and other
provisions of the options granted.
The Audit Committee will recommend selection of the Company's independent
accountants and review the scope of the annual audit and the results of the
audit with management and the independent accountants.
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<PAGE> 33
REMUNERATION
The aggregate remuneration paid by the Company during the fiscal year ended
June 30, 1997, with respect to each officer and Director of the Company whose
aggregate remuneration exceeded $30,000, is set forth below.
<TABLE>
<CAPTION>
CAPACITIES IN WHICH AGGREGATE
NAME OF INDIVIDUAL REMUNERATION WAS RECEIVED REMUNERATION
- ------------------ ------------------------------------------------ -------------
<S> <C> <C>
J. Alan Lindauer Chairman of Executive Committee, $52,000
Director, President and Chief Executive Officer
</TABLE>
Mr. Lindauer was elected President and Chief Executive Officer of the
Company in March 1994. Through November 30, 1997, his annual compensation of
$52,000 (after July 1, 1997, $78,000) was paid to J.A.L. Management, Inc., a
corporation of which he is the sole shareholder. Effective December 1, 1997, Mr.
Lindauer became an employee of the Company and his annual compensation was
increased to $130,000.
Before July 1997, no other officer or director of the Company received any
remuneration. Since July 1997, members of the Executive Committee (except Mr.
Lindauer) have received $50 for each committee meeting attended.
EMPLOYMENT CONTRACTS
Mr. Lindauer is employed by the Company as its President and Chief
Executive Officer under a five-year employment contract entered into as of
December 1, 1997. In addition to salary, the Company reimburses expenses
incurred in performing services for the Company and provides health insurance
benefits. The contract contains provisions protecting the Company against
competition in the Commonwealth of Virginia for a two-year period after
termination of employment.
EMPLOYEE INCENTIVE STOCK OPTION PLAN AND OUTSIDE DIRECTOR STOCK PLAN
The Company's shareholders have authorized to the Board of Directors to
adopt a qualified incentive stock option plan for the benefit of executive and
key employees of the Company and a nonqualified stock plan for outside members
of the Board of Directors. Under these plans, options up to an aggregate of
100,000 shares of Common Stock may be granted.
27
<PAGE> 34
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information as of November 30, 1997
as to each person who holds or controls 5% or more of the outstanding Common
Stock:
<TABLE>
<CAPTION>
TITLE OF AMOUNT PERCENTAGE OF
NAME AND ADDRESS CLASS TYPE OF OWNERSHIP OWNED CLASS
- --------------------------- ------------- ------------------------------ ------ -------------
<S> <C> <C> <C> <C>
J. Alan Lindauer Common Stock Beneficially Only(1) 40,000 7.03
300 East Main Street 1,200 .21
Suite 1380
Norfolk, VA 23510
Branch Bank & Trust Common Stock Beneficially and of Record 35,000 6.15
Company of Virginia
5101 Cleveland Street
Virginia Beach, VA
23465
All officers and directors Common Stock Beneficially 80,000 14.06
as a Group(22 persons) Only(1)(2)(3)(4)(5)(6) 60,300 10.60
Beneficially and of Record
</TABLE>
- ---------------
(1) Includes 40,000 shares held by Hometown Bank & Co. for J. Alan Lindauer
Profit Sharing Plan.
(2) Includes 10,000 shares held by Meredith Realty Company, L.L.C., of which Mr.
Meredith is a member.
(3) Includes 10,000 shares held by Pomar Holding Company, L.L.C., of which Mr.
Meredith is a member.
(4) Includes 10,000 shares held by Goodman & Company 401(k) Profit Sharing Plan
for the benefit of Mr. Frost.
(5) Includes 5,000 shares held by DanSan, a general partnership, of which Mr.
Harris is one of two general partners.
(6) Includes 5,000 shares held by Juan M. Montero II M.D. P.C. Profit Sharing
and Money Purchase Pension Plan for benefit of Dr. Montero.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 10 million shares
of Common Stock, par value $1 per share, and 25,000 shares of Preferred Stock,
par value $1 per share. As of the date of this Prospectus, there are issued and
outstanding 568,900 shares of Common Stock held of record by 87 shareholders.
Following this Offering, there will be 1,368,900 shares of Common Stock
outstanding. There are no outstanding shares of Preferred Stock. The following
description is qualified in its entirety by reference to the Company's Articles
of Incorporation and Bylaws, which are filed as exhibits to the Registration
Statement of which this Prospectus is a part.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders. Cumulative voting in
the election of directors is not permitted. Holders of Common Stock are entitled
to receive ratably such dividends as may be declared by the Board of Directors
of the Company out of legally available funds. In the event of liquidation,
dissolution or winding up of the Company, holders of Common Stock are entitled
to participate ratably in the assets remaining after payment of and provision
for liabilities. Holders of Common Stock have no conversion, preemptive or other
rights to subscribe for additional shares or other securities and there are no
redemption or sinking fund provisions with respect to such shares. All of the
outstanding shares of Common Stock are, and the Shares will be on issuance,
fully paid and nonassessable. Without the consent of the SBA, the Company is
prohibited from redeeming Common Stock. Redemption is, in any event, prohibited
if it would render the Company insolvent.
The rights, preferences and privileges of holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of
shares of any series of Preferred Stock that the Company may designate and issue
in the future.
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<PAGE> 35
PREFERRED STOCK
The Board of Directors has the authority, without further action of
shareholders of the Company, to issue up to an aggregate of 25,000 shares of
Preferred Stock in one or more series and to fix or determine the designations,
preferences, rights and any qualifications, limitations or restrictions of the
shares of each such series, including dividend rates, conversion rights, voting
rights, terms of redemption price or prices, liquidation preferences and the
number of shares constituting any series or the designation of such series.
The Board of Directors, without shareholder approval, has the power to
issue Preferred Stock with voting and conversion rights that could adversely
affect the voting power of holders of Common Stock. The issuance of Preferred
Stock, although providing desirable flexibility in raising additional Private
Capital and other corporate purposes, may have the effect of discouraging,
delaying or preventing a change in control of the Company. There are currently
no issued or outstanding shares of Preferred Stock and the Company has no
present plans to issue any shares of Preferred Stock.
LIMITATIONS ON TRANSFERS OF SHARES
There is currently no public market for the Company's Common Stock, and
there is little likelihood that an active trading market will develop in the
near future as a result of this Offering. The Registration Statement of which
this Prospectus is a part has been filed with the Commission under the
Securities Act and, as a result, once the Registration Statement is declared
effective by the Commission, the Shares will be freely tradable under federal
securities laws. Notification filings of this Offering, however, will be made in
only a limited number of states, and the Shares may not be sold or otherwise
transferred to persons who are residents of any state in which notification
filings have not been made unless a notification filing is subsequently made or
there exists an exemption from the applicable state's registration requirements
with respect to such sale or transfer.
The Company intends to apply for listing of the Common Stock on the NASDAQ
SmallCap Market when, and if, the Company meets the following listing
requirements: $4 million of total assets, $2 million of total shareholders'
equity, a minimum bid price of $3 per share and a minimum of two market makers.
No assurance can be given if or when the Common Stock will qualify for listing
on the NASDAQ SmallCap Market.
ANTI-TAKEOVER STATUTES
Affiliated Transactions. The Virginia Stock Corporation Act (the "Virginia
Act") contains provisions governing "Affiliated Transactions." Affiliated
Transactions include certain mergers and share exchanges, certain material
dispositions of corporate assets not in the ordinary course of business, any
dissolution of a corporation proposed by or on behalf of an Interested
Shareholder (as defined below), and reclassifications, including reverse stock
splits, recapitalizations, or mergers of a corporation with its subsidiaries, or
distributions or other transactions which have the effect of increasing the
percentage of voting shares beneficially owned by an Interested Shareholder by
more than 5%. For purposes of the Virginia Act, an Interested Shareholder is
defined as any beneficial owner of more than 10% of any class of the voting
securities of a Virginia corporation.
Subject to certain exceptions discussed below, the provisions governing
Affiliated Transactions require that, for three years following the date on
which any shareholder becomes an Interested Shareholder, any Affiliated
Transaction must be approved by the affirmative vote of holders of two-thirds of
the outstanding shares of the corporation entitled to vote, other than the
shares beneficially owned by the Interested Shareholder, and by a majority (but
not less than two) of the "Disinterested Directors." A Disinterested Director is
defined in the Virginia Act as a member of a corporation's board of directors
who (i) was a member before the later of January 1, 1998 or the date on which an
Interested Shareholder became an Interested Shareholder and (ii) was recommended
for election by, or was elected to fill a vacancy and received the affirmative
vote of, a majority of the Disinterested Directors then on the corporation's
board of directors. At the expiration of the three year period after a
shareholder becomes an Interested Shareholder, these provisions require approval
of the Affiliated Transaction by the affirmative vote of the holders' of
two-thirds of
29
<PAGE> 36
the outstanding shares of the corporation entitled to vote, other than those
beneficially owned by the Interested Shareholder.
The principal exceptions to the special voting requirement apply to
Affiliated Transactions occurring after the three year period has expired and
require either that the transaction be approved by a majority of the
corporation's Disinterested Directors or that the transaction satisfy certain
fair price requirements of the statute. In general, the fair price requirements
provide that the shareholders must receive the higher of the highest per share
price for their shares as was paid by the Interested Shareholder for his or its
shares, or the fair market value of the shares. The fair price requirements also
require that, during the three years preceding the announcement of the proposed
Affiliated Transaction, all required dividends have been paid and no special
financial accommodations have been accorded the Interested Shareholder, unless
approved by a majority of the Disinterested Directors.
None of these limitations and special voting requirements applies to a
transaction with an Interested Shareholder who had been an Interested
Shareholder continuously since the effective date of the statute (January 26,
1988) or who became an Interested Shareholder by gift or inheritance from such a
person or whose acquisition of shares making such person an Interested
Shareholder was approved by a majority of the Disinterested Directors of the
corporation.
These provisions are designed to deter certain takeovers of Virginia
corporations. In addition, the Virginia Act provides that, by affirmative vote
of a majority of the voting shares other than shares owned by any Interested
Shareholders, a corporation may adopt, by meeting certain voting requirements,
an amendment to its articles of incorporation or bylaws providing that the
Affiliated Transaction provisions shall not apply to the corporation. The
Company has not adopted such an amendment.
Control Share Acquisitions. The Virginia Control Share Acquisitions
statute also is designed to afford shareholders of a public company incorporated
in Virginia protection against certain types of non-negotiated acquisitions in
which a person, entity, or group ("Acquiring Person") seeks to gain voting
control of that corporation. With certain enumerated exceptions, the statute
applies to acquisitions of shares of a corporation which would result in an
Acquiring Person's ownership of the corporation's shares entitled to vote in the
election of directors falling within any one of the following ranges: 20% to
33 1/3%, 33 1/3% to 50%, or 50% or more (a "Control Share Acquisition"). Shares
that are the subject of a Control Share Acquisition ("Control Shares") will not
be entitled to voting rights unless the holders of a majority of the
"Disinterested Shares" vote at an annual or special meeting of shareholders of
the corporation to accord the Control Shares with voting rights. Disinterested
Shares do not include shares owned by the Acquiring Person or by officers and
inside directors of the target company. Under certain circumstances, the statute
permits an Acquiring Person to call a special shareholders' meeting for the
purpose of considering granting voting rights to the holders of the Control
Shares. As a condition to having this matter considered at either an annual or
special meeting, the Acquiring Person must provide shareholders with detailed
disclosures about his identity, the method and financing of the Control Share
Acquisition, and any plans to engage in certain transaction with, or to make
fundamental changes to, the corporation, its management, or business. Under
certain circumstances, the statute grants dissenters' rights to shareholders who
vote against granting voting rights to the Control Shares. The Virginia Control
Share Acquisitions statute also enables a corporation to make provisions for
redemption of Control Shares with no voting rights. A corporation may opt out of
the statute (which the Company has not done) by so providing in its articles of
incorporation or bylaws. Among the acquisitions specifically excluded from the
statute are acquisitions to which the corporation is a party and which, in the
case of mergers or share exchanges, have been approved by the corporation's
shareholders under other provisions of the Virginia Act.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted under the Virginia Act, the Company's Articles and Bylaws
provide that the Company's officers and directors will not be liable with
respect to any proceeding brought by or in the right of the Company or brought
by or on behalf of the shareholders of the Company, provided that the officer or
director has not engaged in willful misconduct or a knowing violation of the
criminal law or of any federal or state
30
<PAGE> 37
securities law. The Company's Articles also provide that the Company will
indemnify its directors, officers, employees, and agents in the manner provided
by the Virginia Act.
The Virginia Act sets forth certain provisions regarding the
indemnification of directors and officers. Generally, these provisions of the
Virginia Act allow a corporation to indemnify directors and officers if (i) they
conducted themselves in good faith, (ii) they believed (a) in the case of
conduct in their official capacity, that their conduct was in the corporation's
best interest, and (b) in all other cases, that their conduct was at least not
opposed to its best interest and (iii) in the case of any criminal proceeding,
that they had no reasonable cause to believe their conduct was unlawful. Under
the Virginia Act, a corporation may not indemnify directors or officers (i) in
connection with a proceeding by or in the right of the corporation in which the
directors or officers are adjudged liable to the corporation or (ii) in any
other proceeding charging improper personal benefit, in which they are adjudged
liable on the basis that personal benefit was improperly received. In addition,
under its Bylaws, the Company is prohibited from indemnifying directors and
officers from liability arising from their willful misfeasance, bad faith, gross
negligence or reckless disregard in the performance of their duties and
obligations to the Company.
REGULATION
As an SBIC, the Company may make loans to or investments only in "Small
Business Concerns," which must be independently owned and operated concerns not
dominant in their fields of operation, and must either (i) have a tangible net
worth, together with any affiliates, of $18 million or less and an average net
income after federal income taxes for the preceding two years of $6 million or
less (average net income to be computed without benefit of any carryover loss)
or (ii) satisfy alternative criteria under SBA regulations that focus on the
industry in which the business is engaged and the number of persons employed by
the business or its gross revenues. In addition, at the end of each fiscal year,
20% of the total amount of investments made by an SBIC since April 8, 1994 must
be made to concerns that (i) have a net worth of not more than $6 million and
not more than $2 million in average net income after federal income taxes for
the preceding two years or (ii) satisfy alternative industry-related size
criteria. SBA regulations also prohibit an SBIC from providing funds to a Small
Business Concern for certain purposes, such as relending and investment outside
the United States.
The amount of annual interest payments an SBIC may charge its borrowers is
limited by SBA regulations. Maximum annual financing costs (including interest)
of loans with equity features to Small Business Concerns may not exceed the
greater of 14% or 6 percentage points above the "Debenture Rate." As defined in
SBA regulations, the "Debenture Rate" is the interest rate announced, from time
to time, charged by the SBA on SBA Debentures. As of September 30, 1997, the
maximum annual financing costs were 14%. SBA regulations also allow an SBIC to
charge total application processing and closing fees of up to 5%, which fees are
not included in the financing cost calculation.
Equity securities with redemption features, like the preferred stock of
portfolio companies held by the Company, may not be redeemed within five years
of purchase. The redemption price must be either a fixed price no higher than
par, the acquisition price of the equity security, or a price based on a formula
that reflects the financial performance of the portfolio company or its fair
market value at the time of redemption. SBA regulations provide that any equity
securities with different redemption features are considered debt securities.
The practical effect of these regulations is that the dividend rate on equity
securities may not exceed 14%.
The SBA restricts the ability of an SBIC to repurchase its capital stock,
to retire its debentures and to lend money to its officers, directors and
employees or invest in affiliates. The SBA also prohibits, without prior SBA
approval, a "change of control" or transfers which would result in any person
(or group of persons acting in concert) owning 10% or more of any class of
capital stock of an SBIC. A "change of control" is any event which would result
in the transfer of the power, direct or indirect, to direct the management and
policies of an SBIC, whether through ownership, contractual arrangements or
otherwise.
The Company is currently a diversified investment company. The Company
expects that, as its investment operations expand, it may evolve into a
non-diversified investment company.
31
<PAGE> 38
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of shares of Common Stock by the Company's current
shareholders could adversely affect the market price of the Common Stock. On
completion of this Offering, the Company will have outstanding an aggregate of
1,368,900 shares of Common Stock. Pursuant to certain "lock-up" agreements, all
of the Company's directors and officers and certain of its shareholders,
together with the Company, have agreed that they will not offer, pledge, sell,
contract to sell, grant any option for the sale of, or otherwise dispose of,
directly or indirectly, any shares of Common Stock without the prior written
consent of the Underwriter for a period of one year following the date of this
Prospectus. In addition, the Company has reserved for issuance 57,038 shares of
Common Stock issuable on exercise of the Underwriter's warrant. The 800,000
Shares offered by this Prospectus will be freely transferable without
restriction or further registration under the Securities Act, except for shares
acquired by affiliates of the Company. Such shares are subject to certain volume
and other restrictions on resale, as described below.
In general, under Rule 144, a person (or persons whose shares are required
to be aggregated), including any affiliate of the Company, who beneficially owns
restricted shares for a period of at least one year is entitled to sell, within
any three-month period, shares equal in number to the greater of (i) 1% of the
then outstanding shares of Common Stock or (ii) the average weekly trading
volume of the same class of shares during the four calendar weeks preceding the
filing of the required notice of sale with the Commission. The seller must also
comply with the notice and manner of sale requirements of Rule 144, and there
must be current public information available about the Company. In addition, any
person (or persons whose shares are required to be aggregated) who is not, at
the time of sale, or during the preceding three months, an affiliate of the
Company, and who has beneficially owned restricted shares for at least two
years, can sell such shares without regard to notice, manner of sale, public
information or the volume limitations described above. Shares of Common Stock
have been eligible for resale under Rule 144, depending on their date of issue,
since February 1995 (assuming the other requirements of Rule 144 are met).
No prediction can be made as to the effect, if any, that future sales of
restricted shares of Common Stock, or the availability of such Common Stock for
sale, will have on the market price of the Common Stock prevailing from time to
time. Sales of substantial amounts of Common Stock in the public market, or the
perception that such sales may occur, could adversely affect the then prevailing
market price of the Common Stock.
In addition, the Company may issue additional shares of Common Stock in the
future. No prediction can be made as to the effect, if any, that future
issuances of Common Stock may have on the market price of the Common Stock
prevailing from time to time. Sales of substantial amounts of such Common Stock,
or the perception that such sales may occur, could adversely affect the then
prevailing market price of the Common Stock.
SPECIAL INCOME TAX PROVISIONS APPLICABLE TO THE COMPANY
The following discussion is only a general summary of some of the federal
income tax principles applicable to the Company and to an investment in the
Common Stock. It does not purport to be a complete description of the tax
considerations applicable to such an investment. Prospective investors should
consult their own tax advisers with respect to the tax considerations pertaining
to their purchase of the Shares.
Congress created SBICs to serve as privately-owned stock corporations that
are designed to furnish capital to Small Business Concerns. In connection with
this legislation, Congress provided special tax benefits to SBICs operating
under the SBA Act and their shareholders.
A shareholder's loss sustained on the sale or exchanges or worthlessness of
stock in an SBIC is not a capital loss, but a fully deductible ordinary loss.
For the purpose of the net operating loss deduction, the loss is considered
attributable to the shareholder's trade or business. Because these losses are
treated as noncapital losses, they are not subject to the limitation that
capital losses must be offset against capital gains. There is no annual limit on
the amount of loss a shareholder may receive. In addition, there is no fixed
limit on the amount of stock an SBIC may issue. There is no requirement that
gains and losses from dispositions of the stock be
32
<PAGE> 39
netted so that gains and losses in any one taxable year on dispositions of stock
may result in both capital gains and ordinary losses. A loss is treated as a
business loss for purposes of the net operating loss deduction of the Internal
Revenue Code (the "Code"). Thus, if the loss is not fully used in the year it is
incurred, the excess may be carried over.
Corporations generally get a 70% deduction for dividends received from
taxable domestic corporations. Under the Code, however, an SBIC gets a 100%
deduction for "dividends" received from taxable domestic corporations. Certain
types of dividends are excluded from this special deduction, including dividends
received from mutual savings banks, cooperative banks, domestic building and
loan associations, real estate investment trusts and regulated investment
companies.
An SBIC's loss on the sale, exchange or worthlessness of "stock received
pursuant to the conversion privilege of convertible debentures" is a fully
deductible ordinary business loss. Because such transactions are not considered
to be a sale or exchange of a capital asset, the gain or loss from the sale or
exchange of a bond, debenture, note or certificate or other evidence of
indebtedness by an SBIC is treated as an ordinary gain or loss. Because these
losses are treated as noncapital losses, they are not subject to the limitation
that capital losses must be offset by capital gains. Thus, they are treated as
ordinary losses that may be offset by ordinary income. Generally, under the
Code, an SBIC is exempt from the personal holding company tax if the SBIC is (i)
licensed by the SBA and (ii) actively engaged in the business of providing funds
to Small Business Concerns under the SBA Act. This exemption does not apply,
however, if at any time during the taxable year, a shareholder of the SBIC owns,
directly or indirectly (a) a 5% or more proprietary interest in a Small Business
Concern to which the SBIC provides funds or (b) 5% or more of the value of the
outstanding stock of the Small Business Concern. In applying these 5% tests,
ownership by members of a individual's family (as defined in Code) is treated as
ownership by that individual.
UNDERWRITING
Subject to the terms and conditions set forth in the agreement (the
"Underwriting Agreement") between the Company and Scott & Stringfellow, Inc.
(the "Underwriter"), the Company has agreed to sell to the Underwriter, and the
Underwriter has agreed to purchase, the Shares of Common Stock at the public
offering price less the underwriting discount set forth on the cover page of
this Prospectus.
The Underwriting Agreement provides that the obligation of the Underwriter
to purchase the Shares is subject to certain conditions. The Underwriter is
committed to purchase all of the Shares (other than those covered by the
over-allotment option described below), if any are purchased. The Underwriting
Agreement also provides for the payment of a $100,000 accountable expense
allowance to the Underwriter to cover expenses incurred in connection with this
Offering.
The Underwriter proposes to offer the Common Stock to the public at the
public offering price set forth on the cover page of the Prospectus, and to
certain dealers at such price less a concession not in excess of $ per
share. The Underwriter may allow, and such dealers may reallow to certain
dealers a discount, not in excess of $ per share. After this Offering, the
public offering price, the concession to selected dealers and the reallowance to
other dealers may be changed by the Underwriter.
The Company has granted to the Underwriter an option, exercisable for 30
days from the date of this Prospectus, to purchase up to 120,000 additional
shares of Common Stock, at the public offering price less the underwriting
discount. To the extent the option is exercised, the Underwriter will become
obligated, subject to certain conditions, to purchase additional shares of
Common Stock proportionate to the Underwriter's commitment. The Underwriter may
exercise its right to purchase only for the purpose of covering over-allotments,
if any, made in connection with the sale of the Shares of Common Stock. If
purchased, the Underwriter will offer such additional Shares on the same terms
as those on which the 800,000 Shares are being offered. In addition, the Company
has issued a warrant to the Underwriter to purchase up to 4% of the outstanding
Common Stock (after giving effect to this Offering and the over-allotment
option, if exercised) exercisable at a price per share equal to 115% of the
Price to Public, for a period of four years commencing one year after the date
of the Prospectus.
33
<PAGE> 40
The Company has agreed to indemnify the Underwriter or contribute to losses
arising out of certain liabilities, including liabilities under the Securities
Act of 1933.
As of the date of this Prospectus, the Company, its officers and directors,
and certain shareholders have agreed that they will not, directly or indirectly,
offer, sell, offer to sell, contract to sell, grant any option to purchase or
otherwise dispose of, loan, pledge or transfer (or announce any offer, sale,
offer of sale, contract of sale, grant of any options to purchase or otherwise
dispose of, loan, pledge or transfer) or grant any rights with respect to any
shares of Common Stock or similar securities of the Company or any securities
convertible into, or exercisable or exchangeable for, any shares of Common Stock
of the Company without prior written consent of the Underwriter, for a period of
365 days from the date of this Prospectus. See "Shares Eligible for Future
Sale."
The Underwriter has informed the Company that it does not intend to confirm
sales to any accounts over which it exercises discretionary authority.
In connection with this Offering, the Underwriter, (and selling group
members) and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriter also may create a short position for its account by selling more
Common Stock in connection with this Offering than they are committed to
purchase from the Company, and in such case may purchase Common Stock in the
open market following completion of this Offering to cover all or a portion of
such short position. The Underwriter may also cover all or a portion of such
short position, up to 120,000 shares, by exercising its over-allotment option.
In addition, the Underwriters may impose "penalty bids" under contractual
arrangements whereby it may reclaim from dealers participating in this
Offering), for its account, the selling concession with respect to Common Stock
that is distributed in this Offering but subsequently purchased for the account
of the Underwriters in the open market. Any of the transactions described in
this paragraph may result in the maintenance of the price of the Common Stock at
a level above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if undertaken, may be
discontinued at any time.
In connection with this Offering, the Underwriter (and other selling group
members) may engage in passive market making transactions in the Common Stock on
the Nasdaq SmallCap Market in accordance with Rule 103 of Regulation M under the
Securities Exchange Act of 1934. Passive market making consists of displaying
bids on the Nasdaq SmallCap Market limited by the prices of independent market
makers and effecting purchases limited by such prices and in response to order
flow. Net purchases by a passive market maker on each day are limited to a
specified percentage of the passive market maker's average daily trading volume
in the Common Stock during a specified prior time period and must be
discontinued when such limit is reached. Passive market making may stabilize the
market price of the Common Stock at a level above that which might otherwise
prevail and, if commenced, may be discontinued at any time.
Before this Offering, there has been no public market for the Common Stock.
Consequently, the initial public offering price for the Shares of Common Stock
will be determined by negotiations between the Company and the Underwriter.
Among the factors to be considered in determining such price will be an
assessment of the Company's results of operations, an evaluation of the
Company's management, future prospects of the Company and its industry in
general, the relative price to earnings and book value ratios of securities of
publicly-traded companies believed comparable to the Company, the prevailing
conditions in the securities market and the current state of the economy in the
United States.
LEGAL MATTERS
Clark & Stant, a professional corporation, Virginia Beach, Virginia, will
pass on the validity of the issuance of the Shares for the Company. Kaufman &
Canoles, a professional corporation, Norfolk, Virginia, will pass on certain
legal matters for the Underwriter.
34
<PAGE> 41
CUSTODIAN, TRANSFER AGENT AND REGISTRAR
Pursuant to the Investment Act, the Company's portfolio securities are
maintained in the custody of the Company. As required by the Investment Act, all
securities and similar investments of the Company, except securities on loans
collateralized to the extent of their full market value or securities that are
hypothecated, pledged or placed in escrow for the account of the Company in
connection with a loan or other transaction authorized by specific resolution of
the Company's Board of Directors, will be deposited with a national banking
association. Securities so deposited may be removed by officers of the Company
only in accordance with the Investment Act. The Company currently acts as its
own transfer agent and registrar. It intends to retain an independent corporate
transfer agent and registrar in the immediate future.
REPORTS TO SHAREHOLDERS
The Company will furnish unaudited quarterly and audited annual reports to
the holders of Common Stock. The annual report will include a list of
investments held by the Company.
EXPERTS
The financial statements for the fiscal years ended June 30, 1997 and 1996
and the period July 13, 1993 (inception) through June 30, 1996 included in this
Prospectus have been so included in reliance on the report of Hoffman, Morrison
& Fitzgerald, P.C., independent accountants, given on the authority of the firm
as experts in auditing and accounting.
35
<PAGE> 42
EASTERN VIRGINIA SMALL BUSINESS
INVESTMENT CORPORATION
FINANCIAL STATEMENTS
FROM JULY 13, 1993 (DATE OF INCEPTION)
TO JUNE 30, 1996
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
AND FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1997
(UNAUDITED)
WITH
INDEPENDENT ACCOUNTANTS' REPORT
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
INDEPENDENT ACCOUNTANTS' REPORT.................................................. F-2
FINANCIAL STATEMENTS:
Balance sheet at June 30, 1997 and September 30, 1997 (unaudited)........... F-3
Statements of operations for the years ended June 30, 1997 and 1996 and for
the period July 13, 1993 (date of inception) to June 30, 1996 and for the
three months ended September 30, 1997 and 1996 (unaudited)................. F-4
Statements of changes in stockholders' equity for the years ended June 30,
1997 and 1996 and for the period July 13, 1993 (date of inception) to June
30, 1996 and for the three months ended September 30, 1997 and 1996
(unaudited)................................................................ F-5
Statements of cash flows for the years ended June 30, 1997 and 1996 and for
the period July 13, 1993 (date of inception) to June 30, 1996 and for the
three months ended September 30, 1997 and 1996 (unaudited)................. F-6
NOTES TO FINANCIAL STATEMENTS.................................................... F-7-F-13
</TABLE>
F-1
<PAGE> 43
INDEPENDENT ACCOUNTANTS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
EASTERN VIRGINIA SMALL BUSINESS INVESTMENT CORPORATION
Norfolk, Virginia
We have audited the accompanying balance sheet of EASTERN VIRGINIA SMALL
BUSINESS INVESTMENT CORPORATION as of June 30, 1997, and the related statements
of operations, stockholders' equity and cash flows for the years ended June 30,
1997 and 1996 and for the period July 13, 1993 (date of inception) to June 30,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of June 30, 1997. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of EASTERN VIRGINIA SMALL BUSINESS
INVESTMENT CORPORATION as of June 30, 1997, and the results of its operations
and its cash flows for the years ended June 30, 1997 and June 30, 1996, and for
the period July 13, 1993 (date of inception) to June 30, 1996, in conformity
with generally accepted accounting principles.
As explained in the note B, the financial statements include securities valued
at $1,532,726 at June 30, 1997 (39% of total assets), whose values have been
estimated by the Executive Committee of the Board of Directors in the absence of
readily ascertainable market values. We have reviewed the procedures used by the
Executive Committee in arriving at its estimate of value of such securities and
have inspected underlying documentation, and, in the circumstances, we believe
that procedures are reasonable and the documentation appropriate. However,
because of the inherent uncertainty of valuation, those estimated values may
differ significantly from the values that would have been used had a ready
market for the securities existed, and the differences could be material.
HOFFMAN, MORRISON & FITZGERALD, P.C.
McLean, Virginia
August 2, 1997 except Note H
which is as of December 12, 1997
F-2
<PAGE> 44
EASTERN VIRGINIA SMALL BUSINESS
INVESTMENT CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER
30,
JUNE 30, 1997
1997 ------------
----------- (UNAUDITED)
<S> <C> <C>
ASSETS
Investments in equity securities at fair value, cost of $1,140,000
at June 30, 1997 and $1,564,900 at September 30, 1997............. $ 1,532,726 $1,771,135
Cash and cash equivalents........................................... 2,329,148 1,870,319
Interest receivable................................................. 5,729 11,659
Prepaid expenses.................................................... 10,738
Dividend receivable................................................. 13,438
Income taxes receivable............................................. 16,162 31,626
----------- ------------
3,883,765 3,708,915
Property and equipment:
Furniture and fixtures......................................... 32,231 32,456
Leasehold improvements......................................... 20,766 20,766
----------- ------------
52,997 53,222
Less: accumulated depreciation...................................... (3,038) (4,537)
----------- ------------
49,959 48,685
Other assets:
Deferred costs, (net of accumulated amortization of $3,016 at
June 30, 1997 and $3,276 at September 30, 1997)............... 38,626 38,366
Deferred costs................................................. -- 88,868
----------- ------------
38,626 127,234
----------- ------------
$ 3,972,350 $3,884,834
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses............................... $ 931 $ 94,247
Deferred income taxes............................................... 131,332 71,534
----------- ------------
Total liabilities.............................................. 132,263 165,781
Commitments......................................................... -- --
Stockholders' Equity:
Common stock, $1 par value, 1,500,000 shares authorized,
568,900 shares issued and outstanding......................... 568,900 568,900
Preferred stock, $1 par value, 25,000 shares authorized, no
shares issued and outstanding................................. -- --
Additional paid-in capital..................................... 5,041,100 5,041,100
Net unrealized appreciation on investments..................... 238,094 118,255
Undistributed accumulated earnings (deficit)................... (2,007) (3,202)
Stockholders' notes receivable................................. (2,006,000) (2,006,000)
----------- ------------
Total stockholders' equity................................ 3,840,087 3,719,053
----------- ------------
$ 3,972,350 $3,884,834
========== ==========
Net asset value per common share.......................... $ 6.75 $ 6.38
========== ==========
</TABLE>
F-3
<PAGE> 45
EASTERN VIRGINIA SMALL BUSINESS
INVESTMENT CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
CUMULATIVE
FROM INCEPTION THREE MONTHS
YEAR ENDED JUNE 30, (JULY 13, 1993) ENDED
------------------- TO SEPTEMBER 30,
1996 1997 JUNE 30, 1996 --------------------------
------- -------- --------------- 1996 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating income:
Interest on loans............... $ -- $ 9,430 $ -- $ -- $ 1,301
Dividends....................... -- -- -- -- 22,863
------- -------- -------- ------- -------
-- 9,430 -- -- 24,164
Interest on cash equivalents.... 42,262 166,573 51,217 52,054 24,043
------- -------- -------- ------- -------
Total interest and
dividends................ 42,262 176,003 51,217 52,054 48,207
Other income.................... 17,255 37,450 17,255 2,400 5,350
------- -------- -------- ------- -------
Total operating income..... 59,517 213,453 68,472 54,454 53,557
Operating expenses:
Management fees................. 16,549 52,000 16,549 13,000 13,500
Salary and benefits............. 27,071 41,965 27,071 7,856 12,691
Legal and accounting............ 3,962 33,678 17,962 5,300 21,095
Rent............................ 1,633 20,919 3,658 5,899 4,305
Insurance....................... -- 17,257 -- 4,768 4,534
SBA audit expense fee........... -- 7,450 -- -- --
Depreciation and amortization... -- 6,054 -- 595 1,759
Custodial fees.................. -- 2,917 -- 3,000 167
Other operating expenses........ 10,562 23,136 30,562 3,055 5,313
------- -------- -------- ------- -------
Total operating expenses... 59,777 205,376 95,802 43,473 63,364
------- -------- -------- ------- -------
Net operating income (loss) before
net change in unrealized
appreciation on investments and
provision for income taxes......... (260) 8,077 (27,330) 10,981 (9,807)
Provision (benefit) for income
taxes.............................. (7,346) (11,780) (5,466) 1,008 (8,612)
------- -------- -------- ------- -------
Net operating income................. 7,086 19,857 (21,864) 9,973 (1,195)
Change in unrealized appreciation on
investments, net of provision for
income taxes of $154,632 for June
30, 1997........................... -- 238,094 -- -- (119,939)
------- -------- -------- ------- -------
Net income (loss).................... $ 7,086 $257,951 $ (21,864) $ 9,973 $(121,034)
======= ======== ======== ======= =======
Net income per common share.......... $ 0.96 $ 0.46 $ 0.02 $ (0.21)
======= ======== ======= =======
Weighted average number of common
shares and common share equivalents
outstanding........................ 7,386 562,117 554,847 568,900
======= ======== ======= =======
</TABLE>
F-4
<PAGE> 46
EASTERN VIRGINIA SMALL BUSINESS
INVESTMENT CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET
COMMON STOCK UNREALIZED
---------------------------------------------- ADDITIONAL APPRECIATION
SHARES SHARES PAID-IN ON
SUBSCRIBED AMOUNT ISSUED AMOUNT CAPITAL INVESTMENTS
---------- --------- ------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, July 13, 1993
Issuance of common stock to founders... 5,400 $ 5,400 $ 48,600 $ --
Common stock subscribed................ 29,900 $ 29,900 269,100
Stock issuance costs incurred in
connection with proposed private
placement............................ (66,000)
Collections on stock subscription
receivable...........................
Net operating income (loss)............
--------- --------- -------- -------- ----------- --------
Balance, June 30, 1994................. 29,900 29,900 5,400 5,400 251,700 --
Common stock issued pursuant to March
1994 private placement............... 2,400 2,400 39,600
Stock issuance costs incurred in
connection with private placement.... (13,000)
Common stock subscribed................ 354,700 354,700 3,192,300
Collections on stock subscriptions
receivable...........................
Net operating income (loss)............
--------- --------- -------- -------- ----------- --------
Balance, June 30, 1995................. 384,600 384,600 7,800 7,800 3,470,600 --
Common stock issued pursuant to March
1994 private placement............... (529,600) (529,600) 529,600 529,600
Common stock subscribed................ 250,400 250,400 2,253,600
Common stock subscriptions cancelled... (79,400) (79,400) (737,100)
Collections on stock subscriptions
receivable...........................
Issuance of shareholders' notes
receivable...........................
Net operating income (loss)............
--------- --------- -------- -------- ----------- --------
Balance, June 30, 1996................. 26,000 26,000 537,400 537,400 4,987,100 --
Common stock issued pursuant to March
1994 private placement............... (26,000) (26,000) 31,500 31,500 54,000
Proceeds from shareholders' notes
receivable...........................
Net operating income (loss)............
Net unrealized appreciation on
investments.......................... 238,094
--------- --------- -------- -------- ----------- --------
Balance, June 30, 1997................. -- -- 568,900 568,900 5,041,100 238,094
Net operating income...................
Net unrealized appreciation on
investments.......................... (119,839)
--------- --------- -------- -------- ----------- --------
Balance, September 30, 1997
(unaudited).......................... -- $ -- 568,900 $568,900 $5,041,100 $118,255
========= ========= ======== ======== =========== ========
<CAPTION>
UNDISTRIBUTED
ACCUMULATED STOCK SHAREHOLDERS' TOTAL
EARNINGS SUBSCRIPTIONS NOTES STOCKHOLDERS'
(DEFICIT) RECEIVABLE RECEIVABLE EQUITY
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance, July 13, 1993
Issuance of common stock to founders... $ -- $ -- $ $ 54,000
Common stock subscribed................ (299,000) --
Stock issuance costs incurred in
connection with proposed private
placement............................ (66,000)
Collections on stock subscription
receivable........................... 21,000 21,000
Net operating income (loss)............ (1,929) (1,929)
-------- ----------- ----------- -----------
Balance, June 30, 1994................. (1,929) (278,000) 7,071
Common stock issued pursuant to March
1994 private placement............... 42,000
Stock issuance costs incurred in
connection with private placement.... (13,000)
Common stock subscribed................ (3,547,000) --
Collections on stock subscriptions
receivable........................... 308,800 308,800
Net operating income (loss)............ (27,021) (27,021)
-------- ----------- ----------- -----------
Balance, June 30, 1995................. (28,950) (3,516,200) -- 317,850
Common stock issued pursuant to March
1994 private placement............... --
Common stock subscribed................ (2,504,000) --
Common stock subscriptions cancelled... 819,000 2,500
Collections on stock subscriptions
receivable........................... 5,201,200 5,201,200
Issuance of shareholders' notes
receivable........................... (2,016,000) (2,016,000)
Net operating income (loss)............ 7,086 7,086
-------- ----------- ----------- -----------
Balance, June 30, 1996................. (21,864) -- (2,016,000) 3,512,636
Common stock issued pursuant to March
1994 private placement............... 59,500
Proceeds from shareholders' notes
receivable........................... 10,000 10,000
Net operating income (loss)............ 19,857 19,857
Net unrealized appreciation on
investments.......................... 238,094
-------- ----------- ----------- -----------
Balance, June 30, 1997................. (2,007) -- (2,006,000) 3,840,087
Net operating income................... (1,195) (1,195)
Net unrealized appreciation on
investments.......................... (119,839)
-------- ----------- ----------- -----------
Balance, September 30, 1997
(unaudited).......................... $ 3,202 $ -- $(2,006,000) $ 3,719,053
======== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 47
EASTERN VIRGINIA SMALL BUSINESS
INVESTMENT CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
CUMULATIVE
FROM INCEPTION THREE MONTHS
YEAR ENDED JUNE 30, (JULY 13, 1993) ENDED
------------------------- TO JUNE 30, SEPTEMBER 30,
1996 1997 1996 --------------------------
---------- ----------- --------------- 1996 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net operating income and change in
unrealized appreciation on
investments.......................... $ 7,086 $ 257,951 $ (21,864) $ 9,973 $ (121,034)
Loans made........................... -- ...... (400,000) -- -- --
Investments made..................... -- (1,140,000) -- -- (424,900)
Principal collected on loans made.... -- 400,000 -- -- --
Adjustments to reconcile net operating
income and change in unrealized
appreciation on investments to cash
used in operating activities:
Change in unrealized appreciation
on investments.................. -- (392,726) -- -- 186,491
Depreciation and amortization...... -- 6,054 -- 595 1,759
Deferred income taxes.............. (17,500) 148,832 (17,500) (1,500) (59,798)
Increase (decrease) in cash due to
changes in:
Interest receivable................ -- (5,729) -- (33,769) (5,930)
Income taxes receivable............ -- (16,162) -- -- (15,464)
Dividend receivable................ -- -- -- -- (13,438)
Prepaid expense.................... -- -- -- (12,278) (10,738)
Accounts payable and accrued
expenses........................ 16,682 (114,058) 114,989 (111,418) 93,316
Income taxes payable............... 6,538 (8,393) 8,393 (3,414) --
---------- ----------- --------------- ----------- -----------
Net cash provided by (used in)
operations.................... 12,806 (1,264,231) 84,018 (151,811) (367,736)
---------- ----------- --------------- ----------- -----------
Cash flows from investing activities:
Proceeds from notes receivable--
shareholders......................... -- 65,000 -- 60,000 --
Decrease in restricted cash held for
stock subscriptions.................. 405,611 -- -- -- --
Purchase of property and equipment..... -- (52,997) -- (13,401) (255)
Increase in organization costs......... (31,109) (390) (41,252) 78,610 --
---------- ----------- --------------- ----------- -----------
Net cash provided by (used in)
investing activities.......... 374,502 11,613 (41,252) 125,209 (255)
---------- ----------- --------------- ----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of common
stock................................ 3,185,200 5,000 3,534,000 (69,000) --
Proceeds from short term debt.......... 19,000 -- 19,000 -- --
Curtailments of short term debt........ -- (19,000) -- (19,000) --
Deferred costs......................... -- -- -- -- (88,868)
---------- ----------- --------------- ----------- -----------
Net cash flow provided by (used
in) financing activities...... 3,204,200 (14,000) 3,553,000 (88,000) (88,868)
---------- ----------- --------------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents............................ 3,591,508 (1,266,618) 3,595,766 (114,602) (458,829)
Cash and cash equivalents, beginning of
year................................... 4,258 3,595,766 -- 3,595,766 2,329,148
---------- ----------- --------------- ----------- -----------
Cash and cash equivalents, end of year... $3,595,766 $ 2,329,148 $ 3,595,766 $ 3,481,164 $ 1,870,319
========== ============ ============ ========== ==========
Supplemental disclosure of non-cash financing activities:
Stock were issued in the amount of $2,016,000 in partial exchange for notes receivable in 1996.
Stock was issued in the amount of $55,000 in partial exchange for notes receivable in 1997.
</TABLE>
F-6
<PAGE> 48
EASTERN VIRGINIA SMALL BUSINESS INVESTMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business -- Eastern Virginia Small Business Investment
Corporation ("the Company") was incorporated in the Commonwealth of Virginia on
July 13,1993 and is a closed-end investment company licensed by the Small
Business Administration (the "SBA") as a Small Business Investment Corporation
("SBIC") under the Small Business Investment Act of 1958, as amended (the "SBA
Act"). The Company makes equity investments in, and provides loans to, small
business concerns to finance their growth, expansion and development.
The Company operated as a development stage company through its fiscal year
ended June 30, 1996. The Company made its first loan to a small business concern
in October, 1996. The Company made its first equity investment in November,
1996, and subsequently made four other investments in the fiscal year ended June
30, 1997.
Beginning March 21, 1994, the Company authorized the issuance of 1,000,000
shares of its common stock in a private placement for $1,000 per share ($1 par
value) pursuant to a private placement memorandum. As of June 30, 1996, the
Company closed the offering, ultimately issuing 568,300 shares of common stock
with aggregate net cash proceeds, after $79,000 of offering costs, of
$3,598,000.
On July 28,1995, the Company submitted its application to the SBA and on
May 14, 1996 was granted a license to operate as an SBIC.
Basis of Presentation and Use of Estimates -- These financial statements
are prepared in accordance with generally accepted accounting principles. In
preparing financial statements in conformity with generally accepted accounting
principles, management is required to make assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
Cash and Cash Equivalents -- The Company considers all highly liquid
securities purchases with insignificant interest rate risk and original
maturities of three months or less at the acquisition date to be cash
equivalents. Cash and cash equivalents consisted of the following at:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
JUNE 30, 1997 ------------------
------------- (UNAUDITED)
<S> <C> <C>
Cash.................................................... $ 19,678 $ 270,319
Certificate of Deposit.................................. 100,000 100,000
Repurchase agreements................................... 1,500,000 1,500,000
------------- ------------------
Total.............................................. $ 2,329,148 $1,870,319
========== ==============
</TABLE>
On June 30, 1997 and September 30, 1997, the Company had purchased
$2,209,470 and $1,500,000, respectfully, of overnight repurchase agreements
collateralized by U.S. government securities under agreements to resell on July
1, 1997 and October 1, 1997. Due to the short-term nature of the agreements, the
Company did not take possession of the securities which were instead held for
the Company by a bank.
Investment Valuation -- Investments are carried at value, as determined by
the Executive Committee of the Board of Directors. The Company through its Board
of Directors has adopted the Model Valuation Policy, as published by the SBA, in
Appendix III to Part 107 of Title 12 of the Code of Federal Regulations (the
"Policy"). The Policy, among other things, presumes that loans and investments
are acquired with the intent that they are to be held until maturity or disposed
of in the ordinary course of business. Interest-bearing securities are valued in
an amount not greater than cost, with unrealized depreciation being recognized
when value is impaired. Equity securities of private companies are presumed to
represent cost unless the performance of the portfolio company, positive or
negative, indicates otherwise in accordance with the Policy
F-7
<PAGE> 49
EASTERN VIRGINIA SMALL BUSINESS INVESTMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
guidelines. Equity securities of publicly traded companies are generally valued
at their quoted market price discounted for the effect of restrictions on the
sale of such securities. Discounts range from 0% to 40%.
Realized and Unrealized Gain or Loss on Investments -- Realized gains or
losses are recorded upon disposition of investments, calculated on the
difference between the proceeds and the cost basis determined using the specific
identification method. All other changes in the value of investments, including
any provision for losses, are included as changes in the unrealized appreciation
or depreciation in the statement of operations.
Recognition of Interest and Dividend Income -- Interest income is recorded
on the accrual basis to the extent that management anticipates that such amounts
will be collected. In all other cases, an entry is made to accrue interest, but
the unpaid interest is monitored, and interest is recorded upon receipt.
Dividend income is recognized on the ex-dividend date or the record date.
Income taxes -- Income taxes are provided for the tax effects of
transactions reported in the financial statements and consist of taxes currently
due plus deferred taxes. Deferred taxes are recognized for differences between
the basis of assets and liabilities for financial statement and income tax
purposes. The differences relate primarily to the treatment of start-up expenses
and the appreciation of the Company's investments. The deferred tax assets and
liabilities represent the future tax return consequences of those differences,
which will either be taxable or deductible when the assets and liabilities are
recovered.
Depreciation and amortization -- Property and equipment are stated at cost.
Depreciation is determined using the straight-line method over estimated useful
lives ranging from five to seven years. Leasehold improvements are amortized
over the life of the related lease.
Organization Costs -- Organization costs of $41,642 at June 30, 1997 and
September 30, 1997, which consist of incorporation costs and expenses, SBA
license application fees and professional fees, are being amortized over a
sixty-month period.
Deferred Costs -- Deferred costs at September 30, 1997 consisted of legal,
accounting and other expenses associated with specific incremental costs
directly attributable to the planned initial public offering ("IPO"), which will
be charged against the gross proceeds of the offering. In the event the offering
is not completed, the costs will be charged to expense at that time.
Net Income Per Common Share -- The computation of net income per common
share is based on the weighted average number of common shares and common share
equivalents outstanding during the period.
F-8
<PAGE> 50
EASTERN VIRGINIA SMALL BUSINESS INVESTMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
B. INVESTMENTS
As of June 30, 1997 and September 30, 1997, investments in small business
concerns were as follows:
<TABLE>
<CAPTION>
JUNE 30, 1997 SEPTEMBER 30, 1997
------------------------ ------------------------
COST VALUE COST VALUE
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Financial Services Company, located in
eastern Virginia -- purchased 700
shares of its 1996 Preferred Stock
in November 1996, par value $1,000
per share, annual cumulative
preferred dividend of 10%, payable
annually within fifteen days from
the anniversary purchase date, for
an aggregate purchase of $700,000.
The Company also received a stock
purchase warrant exercisable for the
purchase of 125 shares of Voting
Common Stock at $1.00 per share. The
Company made a short term secured
loan of $50,000 in October 1996 at
an annual rate of interest of 10%.
The note was paid in full, with
accrued interest of approximately
$490 in November 1996. ............. $ 700,000 $ 874,410 $ 700,000 $ 896,810
High Tech Communications Company,
located in Chicago, Illinois -- loan
made on December 23, 1996 for
$350,000, secured by collateral of
an affiliate company, 10% annual
interest rate, payable quarterly,
five year term. The loan was paid in
full, with accrued interest of
approximately $8,900, in March 1997.
The Company was also granted a stock
purchase warrant exercisable from
the date of grant at originally
$1.50 per share for the purchase of
245,000 shares of Voting Common
Stock. In June 1997, the exercise
price was reduced to $1.02 per share
in exchange for the Company agreeing
to exercise the warrant. In February
1997, in consideration for release
of certain collateral, the portfolio
company agreed to grant the Company
an additional warrant to purchase
56,000 shares of Voting Common Stock
exercisable at $2.00 per share. In
July 1997, the Company exercised
245,000 warrants at $1.02 per
share. ............................. $ -- $ 208,891 $ 249,900 $ 249,900
</TABLE>
F-9
<PAGE> 51
EASTERN VIRGINIA SMALL BUSINESS INVESTMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, 1997 SEPTEMBER 30, 1997
------------------------ ------------------------
COST VALUE COST VALUE
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
</TABLE>
B. INVESTMENTS -- (CONTINUED)
<TABLE>
<S> <C> <C> <C> <C>
Finance Company, located in eastern
Virginia -- purchased 500 shares of
its Convertible Preferred Stock in
January, 1997, par value $280 per
share, annual cumulative dividend
rate of 9%, for an aggregate
purchase price of $140,000. ........ $ 140,000 $ 146,300 $ 140,000 $ 146,300
Meat Processing Company, located in
eastern Virginia -- purchased 125
shares of its 1997 Preferred Stock
in April 1997, par value $1,000 per
share, annual dividend rate of 10%,
for an aggregate investment of
$125,000. The Company was also
granted a stock purchase warrant
exercisable from the date of grant
at $.10 per share for the purchase
of 1,177 Voting Common Stock. ...... 125,000 128,125 125,000 128,125
Sales and Service Company, located in
eastern Virginia -- purchased 100
shares of its Series A Redeemable
Preferred Stock on May 30, 1997, par
value $1,750 per share, annual
cumulative dividend rate of 13%, for
an aggregate purchase price of
$175,000. The Company was also
granted a stock purchase warrant
exercisable from the date of grant
at $1.00 per share for the purchase
of up to 4% of the outstanding
Voting Common Shares. In July 1997,
the Company purchased an additional
100 shares of its Series A
Redeemable Preferred Stock at $1,750
per share. ......................... $ 175,000 $ 175,000 $ 350,000 $ 350,000
---------- ---------- ---------- ----------
$1,140,000 $1,532,726 $1,564,900 $1,771,135
========= ========= ========= =========
</TABLE>
C. STOCKHOLDERS' NOTES RECEIVABLE
In connection with the Company's private placement memorandum, dated March
21, 1994, the Company sold shares of common stock to accredited investors for
50% of the subscription price paid in cash and the balance financed by a
non-interest bearing demand recourse promissory note. The Company holds the
issued shares as collateral for the note until the note is paid in full. Other
investors that purchased shares in this private placement elected to pay all
cash for their shares at the time of issuance. As of June 30, 1997 and September
30, 1997, $2,006,000, of these notes were outstanding.
On December 3, 1997, the Board of Directors of the Company authorized the
officers of the Company to demand that the shareholders repay the notes on or
before December 31, 1999. Notice of this demand was sent to the shareholders on
December 11, 1997.
F-10
<PAGE> 52
EASTERN VIRGINIA SMALL BUSINESS INVESTMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
D. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, THREE MONTHS THREE MONTHS
--------------------- ENDED ENDED
1997 1996 SEPTEMBER 30, SEPTEMBER 30,
--------- -------- 1997 1996
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Current income tax expense (benefit)... $ (5,980) $ 10,154 $ (15,466) $ 2,503
Deferred income tax expense
(benefit)............................ 148,832 (17,500) (59,793) (1,500)
--------- -------- ------------- -------------
142,852 (7,346) (75,264) 1,003
Amount included in change in Unrealized
appreciation on Investments.......... (154,632) -- 66,652 --
--------- -------- ------------- -------------
Total income tax benefit.......... $ (11,780) $ (7,346) $ (8,612) $ 1,003
========= ======== ========== ==========
</TABLE>
In accordance with Regulation S-X, Article 6, the income tax expense
associated with the unrealized appreciation in investments is shown as a
reduction of the unrealized appreciation in investments.
Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
JUNE 30, 1997 -------------
------------- (UNAUDITED)
<S> <C> <C>
Deferred tax assets:
Depreciation and amortization.......................... $ 23,300 $ 16,446
Less: valuation allowance.............................. -- --
------------- -------------
Total net tax provision (benefit)................. 23,300 (16,446)
------------- -------------
Deferred tax liabilities:
Appreciation in investments............................ 154,632 87,930
------------- -------------
Total deferred income tax liability............... $ 131,332 $ 71,534
========== ==========
</TABLE>
E. RELATED PARTY TRANSACTIONS
During the fiscal years ended June 30, 1997 and 1996, the Company paid to a
company owned by an officer and director of the Company management fees of
$52,000 and $16,000, respectively, and expenses associated with his role with
the Company.
During the three months ended September 30, 1997 and 1996, the Company paid
to a company owned by an officer and director of the Company management fees of
$13,500 and $13,000, respectively, and expenses associated with his role with
the Company.
During the fiscal year June 30, 1996, an officer and director of the
Company loaned $19,000 to the Company, non-interest bearing. The amount was
repaid on July 31, 1996. This expense is classified in management fees in the
accompanying statements of operations.
F. COMMITMENTS
The Company leases office space under a non-cancelable operating lease,
dated August 20,1996. The office lease provides for a term of five years and two
months commencing on November 1, 1996 and ending on December 31, 2001, with
increases in the base rental rate in years 1998 through 2001.
F-11
<PAGE> 53
EASTERN VIRGINIA SMALL BUSINESS INVESTMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
F. COMMITMENTS -- (CONTINUED)
On February 1, 1997, the Company entered into a sub-lease agreement with a
company in which it has invested. The sub-lease agreement provides for the same
term as the prime lease, except that this sub-lease may be terminated by either
party on 90 days notice.
Minimum future lease payments under the non-cancelable operating lease, and
the offsetting anticipated sub-lease income, are as follows for each of the
years ending June 30:
<TABLE>
<CAPTION>
PRIME SUB-LEASE
LEASE INCOME NET
-------- --------- -------
<S> <C> <C> <C>
1998............................ $ 26,262 $ 8,575 $17,687
1999............................ 27,586 8,995 18,591
2000............................ 28,824 9,415 19,409
2001............................ 30,102 9,835 20,267
2002............................ 15,372 5,880 9,492
-------- --------- -------
$128,146 $42,700 $85,446
======== ======= =======
</TABLE>
Net rent expense for the years ended June 30, 1997 and 1996 was $20,919 and
$1,633, respectively, and is included in operating expenses in the accompanying
statements of operations.
G. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents.
The Company maintains its cash accounts in a commercial bank located in
Virginia. Cash balances are insured by the Federal Deposit Insurance Corporation
("FDIC") up to $100,000 per financial institution. At June 30, 1997 and
September 30, 1997, the Company had approximately $22,000 and $251,795,
respectively, in uninsured cash balances with a bank.
Cash equivalents are principally maintained in U.S. government securities.
These cash equivalents are not insured by the FDIC, but are collateralized by
the underlying assets of the federal government. At June 30, 1997 and September
30, 1997, these cash equivalents totaled $2,209,470 and $1,500,000,
respectively.
H. SUBSEQUENT EVENTS
INVESTMENTS
In July 1997, the Company exercised the stock purchase warrant of the high
tech communications company, as described in Note B, for 245,000 shares of
Voting Common Shares at $1.02 per share, for an additional investment of
$249,900. On December 10, 1997, the Company made an additional five year loan of
$350,000, convertible, at the Company's option into common stock at the
conversion rate of $1.25 per share. The interest rate is 12% payable quarterly.
The Company received a warrant to acquire 210,000 additional shares of common
stock at $1.50 per share, 35,000 of which are immediately exercisable, with the
remainder to be exercisable in 35,000 share increments on each of the five
subsequent anniversary dates of the issuance of the warrant, assuming at each
applicable anniversary date, the loan is outstanding.
In July 1997, the Company also purchased an additional $175,000 of the
Series A Preferred Stock of the sales and service company, as described in Note
B, and acquired an additional common stock purchase warrant, exercisable at
$1.00 per share for 44 shares of common stock.
On November 3, 1997, the Company purchased $700,000 of preferred stock of a
small business concern engaged in manufacturing safes and security doors. It
also exercised a warrant for 9% of the outstanding shares of common stock of
this company for which it paid $989. The dividend rate on the preferred stock is
14% and
F-12
<PAGE> 54
EASTERN VIRGINIA SMALL BUSINESS INVESTMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
H. SUBSEQUENT EVENTS -- (CONTINUED)
a 10% annual return is payable quarterly, of which 4% of the 10% annual return
dividend can be compounded annually and deferred to the end of the fifth year.
INITIAL PUBLIC OFFERING
On December 8, 1997, the Board of Directors authorized the Company to issue
and sell to the public up to 800,000 shares of common stock (920,000 shares if
the underwriter's over allotment is exercised) at such price as is finally
negotiated between the Company and the underwriter. The Company has engaged an
underwriter for this transaction. If successful with this offering, the Company
intends to apply for listing of its common stock on the NASDAQ Small Cap Market,
when and if, the Company meets the listing requirements.
In September, 1997, the Board of Directors submitted to vote and on October
15, 1997, the stockholders approved the amendment of the Company's Articles of
Incorporation authorizing an increase in the number of authorized shares of
common stock from 25,000 shares to 1,500,000 shares and declaring a one
hundred-for-one stock split prior to the effective date of the proposed public
offering. The stock split has been implemented by a stock dividend of 99 shares
for each share outstanding to shareholders of record on September 10, 1997.
Shareholders' equity has been restated to give retroactive recognition to the
stock split for all periods presented by reclassifying from additional
paid-in-capital to common stock the par value of the additional shares arising
from the split. In addition, all references to numbers of shares, per share
amounts and market prices of common stock have been restated to reflect the
stock split.
The Board of Directors has submitted to a vote of the stockholders the
amendment of the Company's Articles of Incorporation authorizing an increase in
the number of authorized shares or common stock from 1,500,000 shares to
10,000,000 shares. In addition, the Board of Directors has submitted to a vote
of the stockholders to change the legal name of the Company to Waterside Capital
Corporation and to a vote of the stockholders to implement a qualified and
non-qualified stock option plan.
RELATED PARTY TRANSACTIONS
As of July 1997, the Company entered into a management contract with a
company owned by the Company's President and Chief Executive Officer. The
contract is for a five year term with an annual fee of $78,000 payable monthly,
plus health insurance benefits. The contract also contains a non-compete
provision for two years after the termination of the contract in the
southeastern Virginia territory.
Effective December 1, 1997, the Company's President and Chief Executive
Officer became an employee of the Company entering into a five year employment
contract with an annual salary of $130,000, plus reimbursement of expenses
incurred while performing services for the Company and health insurance
benefits. The contract also contains a non-compete provision for two years after
the termination of the contract in the southeastern Virginia territory.
F-13
<PAGE> 55
- ------------------------------------------------------
------------------------------------------------------
- ------------------------------------------------------
------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON IS AUTHORIZED IN CONNECTION
WITH ANY OFFER MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION
IN CONNECTION WITH THIS COMPANY NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED ON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY SECURITY
OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE
SHARES OF COMMON STOCK IN ANY JURISDICTION WHICH SUCH OFFER OR SOLICITATION IS
NOT AUTHORIZED OR WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SAID OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Summary Financial Information......... 5
Risk Factors.......................... 6
Use of Proceeds....................... 10
Dividend Policy....................... 10
Capitalization........................ 11
Management Discussion and Analysis of
Financial Condition and Results of
Operations.......................... 12
Business.............................. 14
Investment Policies................... 19
Determination of Net Asset Value...... 21
Management............................ 23
Principal Shareholders................ 28
Description of Capital Stock.......... 28
Regulation............................ 31
Shares Eligible for Future Sale....... 32
Special Income Tax Provisions
Applicable To The Company........... 32
Underwriting.......................... 33
Legal Matters......................... 34
Custodian, Transfer Agent and
Registrar........................... 35
Reports to Shareholders............... 35
Experts............................... 35
Index to Financial Statements......... F-1
</TABLE>
------------------
UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THIS
OFFERING) ALL PERSONS EFFECTING TRANSACTIONS IN COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
800,000 SHARES
EASTERN VIRGINIA
SMALL BUSINESS
INVESTMENT
CORPORATION
A SMALL BUSINESS INVESTMENT CORPORATION
COMMON STOCK
------------------------
PROSPECTUS
------------------------
SCOTT & STRINGFELLOW, INC.
, 1997
- ------------------------------------------------------
------------------------------------------------------
- ------------------------------------------------------
------------------------------------------------------
<PAGE> 56
PART III
ITEM 29. MARKETING ARRANGEMENTS
Reference is made to the information contained in the Prospectus under the
caption "Underwriter."
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses in connection with the issuance and distribution of the
securities covered hereby, other than underwriting discounts and commissions and
compensation to authorized agents, are, subject to future contingencies,
estimated to be as follows:
<TABLE>
<S> <C>
SEC Registration Fee..................................................... $3,624.25
Legal Fees and Expenses.................................................. *
Accounting Fees and Expenses............................................. *
Blue Sky Fees and Expenses............................................... *
Accountable Expense Allowance to Underwriter............................. 100,000
Printing Expenses........................................................ *
Miscellaneous............................................................ *
Total.......................................................... $ 400,000
========
</TABLE>
--------------------
*To be filed by amendment
ITEM 31. RELATIONSHIP WITH REGISTRANT OF EXPERTS NAMED IN REGISTRATION STATEMENT
Not applicable.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES
Between February 1994 and February 1997, the Registrant sold 568,900 shares
of Common Stock, par value $1 per share, for $5,689,000 at $10 per share. There
were no principal underwriters. All securities were sold pursuant to exemptions
under the Securities Act of 1933 to five founders, 79 "accredited investors" and
three "non-accredited" investors, as defined in the Securities Act of 1933 (the
"Securities Act"), as follows:.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
NAME OF SHAREHOLDER DATE OF PURCHASE COMMON STOCK PURCHASED
- ---------------------------------------------------- ------------------- ----------------------
<S> <C> <C>
Hansen, Eugene W. .................................. February 7, 1994 200
Fox, Eric L. ....................................... February 7, 1994 100
Lindauer, J. Alan................................... February 7, 1994 100
Richardson, Philip W. .............................. February 7, 1994 100
Baker, Samantha L. ................................. February 7, 1994 100
Hansen, Eugene W., IRA Prudential Securities
Custodian......................................... May 6, 1994 4,800
Meredith, Peter M., Jr. ............................ November 14, 1994 500
Lindauer, J. Alan................................... November 14, 1994 500
Davenport & Co. of Va., Inc. fbo Eugene W. Hansen,
IRA............................................... December 5, 1994 500
Low, Robert I. ..................................... December 10, 1994 500
Fox, Eric L. ....................................... February 2, 1995 400
Meredith Realty Holding Company, L.L.C. ............ June 30, 1996 10,000
Chisman, J. W. W., Jr. ............................. June 30, 1996 10,000
Industrial Development Authority of York County..... June 30, 1996 5,000
White, Corbin B. ................................... June 30, 1996 5,000
JFR Reinsurance Co., Ltd. .......................... June 30, 1996 5,000
Miller, Augustus C. ................................ June 30, 1996 10,000
Virginia Beach Federal Savings Bank................. June 30, 1996 10,000
</TABLE>
S-1
<PAGE> 57
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
NAME OF SHAREHOLDER DATE OF PURCHASE COMMON STOCK PURCHASED
- ---------------------------------------------------- ------------------- ----------------------
<S> <C> <C>
Kavadias, Gabriel................................... June 30, 1996 5,000
Santiago, Gloria A. ................................ June 30, 1996 500
William A. Gooch Trust.............................. June 30, 1996 10,000
Nelson, J. Brock.................................... June 30, 1996 500
Scott & Stringfellow, Inc. fbo Victor Cabanas, MD
IRA............................................... June 30, 1996 5,000
Uy, Gregorio C. .................................... June 30, 1996 5,000
Miller, Jerrold L. ................................. June 30, 1996 5,000
Irwin, R. Thomas Dobson Revocable Living Trust...... June 30, 1996 5,000
Santos, Amelia L. .................................. June 30, 1996 5,000
Commerce Bank....................................... June 30, 1996 35,000
Hampton Roads Chamber Foundation.................... June 30, 1996 5,000
Ornstein, Yevrah.................................... June 30, 1996 5,000
Ornstein, Richard G. ............................... June 30, 1996 10,000
James C. Nocito, Inc. Profit Sharing................ June 30, 1996 5,000
Farrell, Paul J. & Lynne G. ........................ June 30, 1996 5,000
Andrews, J. E. ..................................... June 30, 1996 10,000
York Oil Company Profit Sharing..................... June 30, 1996 5,000
Rogelio F. Arcuino, MD Profit Sharing Plan.......... June 30, 1996 10,000
Garden Capital Acquisitions, L.L.C. ................ June 30, 1996 5,000
Domestic Virginia Partnership....................... June 30, 1996 5,000
Irving, D. P. ...................................... June 30, 1996 5,000
AutoInfo Finance of Virginia, Inc. ................. June 30, 1996 20,000
Davis Oil Company Employee Trust.................... June 30, 1996 11,000
Portsmouth Industrial Foundation.................... June 30, 1996 5,000
The Manfred and Sonya Bloch Revocable Trust......... June 30, 1996 5,000
Hall, Joseph B. .................................... June 30, 1996 10,000
Old Dominion University Research Foundation......... June 30, 1996 10,000
Old, William W. .................................... June 30, 1996 5,000
Patten, Donald N. .................................. June 30, 1996 5,000
Resource Bank....................................... June 30, 1996 5,000
Signet Bank......................................... June 30, 1996 10,000
Old Point National Bank............................. June 30, 1996 5,000
Cooper, David J. ................................... June 30, 1996 5,000
Smith, L.A. Jr. & V.K. ............................. June 30, 1996 2,000
Goodloe, Norman..................................... June 30, 1996 20,000
Kayes, Micheal T. .................................. June 30, 1996 5,000
Pallet, Claude Stanley.............................. June 30, 1996 3,000
Pomar Holding Company, L.L.C. ...................... June 30, 1996 10,000
Mastracco, Vincent J., Jr. ......................... June 30, 1996 5,000
Juanarena, Douglas B. .............................. June 30, 1996 8,000
Chisman, J. W. W., Jr. ............................. June 30, 1996 1,000
J. Daniel Ballard & Henry U. Harris III............. June 30, 1996 5,000
Ehrenzeller, Charles F. ............................ June 30, 1996 5,000
Ellis, Jeffrey R. .................................. June 30, 1996 5,000
Rumsey, Carl C. .................................... June 30, 1996 1,000
Divaris, Gerald S. ................................. June 30, 1996 1,000
Levin. Eugene M. ................................... June 30, 1996 2,500
Ross, Jess G. & Jeanne P. .......................... June 30, 1996 6,000
Dr. Gerald Einhorn, Ltd. Defined Benefit Plan....... June 30, 1996 2,500
Freidberg, Marvin S. ............................... June 30, 1996 2,500
Viola, Pat J. ...................................... June 30, 1996 1,700
</TABLE>
S-2
<PAGE> 58
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
NAME OF SHAREHOLDER DATE OF PURCHASE COMMON STOCK PURCHASED
- ---------------------------------------------------- ------------------- ----------------------
<S> <C> <C>
Pariser, Carol O. .................................. June 30, 1996 1,600
Viola, Emil A. ..................................... June 30, 1996 1,700
Stern, Russell T., Jr. ............................. June 30, 1996 15,000
Haynes, Patrick J., III............................. June 30, 1996 15,000
Hearring, William J. ............................... June 30, 1996 5,000
Lindauer, J. Alan................................... June 30, 1996 600
Hansen, Eugene W. .................................. June 30, 1996 200
Davenport & Co. of Va., Inc. c/f Eugene W. Hansen,
IRA............................................... June 30, 1996 14,300
Mauer, Anne R. ..................................... June 30, 1996 3,300
Hines, Angus I., III................................ June 30, 1996 3,400
Stulb, Marilyn H. .................................. June 30, 1996 3,300
Fox, Eric L. ....................................... June 30, 1996 4,500
Santoro, Frank J. .................................. June 30, 1996 5,000
Meredith, Peter M., Jr. ............................ June 30, 1996 500
Williamson, B. Yeh.................................. June 30, 1996 5,000
Virginia Eastern Shore Sustainable Development
Corporation....................................... June 30, 1996 5,000
J. M. Peterson & E. S. Lifland Trustees, Roger Frost
401(k) Plan....................................... June 30, 1996 5,000
Industrial Development Authority of the City of
Suffolk, Virginia, Inc. .......................... June 30, 1996 3,000
Economic Development Authority of the City of
Newport News, Virginia............................ June 30, 1996 5,000
Industrial Development Authority of the City of
Hampton, Virginia................................. June 30, 1996 5,000
Hometown Bank & Co. for J. Alan Lindauer Profit
Sharing Plan...................................... June 30, 1996 40,000
Montero, Juan M. II MD P.C. Profit Sharing and Money
Purchase Pension Plan............................. June 30, 1996 5,000
Falk, Charles E. Sr. ............................... July 17, 1996 5,000
Marioneaux, Stephanie J. & Harold J. ............... July 17, 1996 5,000
Angus I. Hines, Inc. ............................... July 17, 1996 10,000
Low, Robert I. ..................................... August 28, 1996 1,500
Hamlin, Janet Hale.................................. September 24, 1996 2,500
Friedman, Leslie H. ................................ September 24, 1996 2,500
Goodman & Company 401(k) Profit Sharing Plan for
Roger L. Frost.................................... February 1, 1997 5,000
----------
Total Number of Shares Outstanding........ 568,900
===================
</TABLE>
The aggregate cash proceeds of Common Stock in the private placement were
$3,683,000. The terms of the private placement permitted "institutional
investors," as defined by SBA regulations (substantially equivalent to
"accredited investors" as defined in Rule 501 of Regulation D under the
Securities Act) to purchase shares of Common Stock by paying 50% of the purchase
price in cash and the balance by a non-interest bearing recourse demand
promissory note, secured by the purchased Common Stock. There were no
underwriting discounts or commissions. The Registrant received $2,006,000 in
such notes. The Company has formally demanded all promissory notes be paid on or
before December 31, 1999.
The Common Stock was sold pursuant to an exemption from registration under
Section 4(2) of the Securities Act, Rule 505 and Rule 506 of Regulation D. This
exemption was available because sales of the shares (i) were made to no more
than 35 non-accredited investors who, either alone or with their purchaser
S-3
<PAGE> 59
representatives, had such knowledge and experience in financial and business
matters to evaluate the merits of an investment of the Registrant, (ii) were not
made pursuant to any general solicitation or general advertising and (iii) were
subject to limitations on resale pursuant to Rule 502(d) of Regulation D.
ITEM 33. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED
Not applicable.
ITEM 34. UNDERTAKINGS
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "1933 Act") may be permitted to directors, officers and
controlling persons of the undersigned registrant, the registrant has been
advised that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the 1933 Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the mater
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement is reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(H) under the Securities Act of 1933 shall be deemed to be part
of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements (incorporated by reference to the Prospectus under
the caption "Index To Financial Statements"). All other schedules are omitted
because they are not applicable or the required information is shown in the
financial statements or the notes thereto.
S-4
<PAGE> 60
(b) Exhibits
<TABLE>
<S> <C>
(1) Amended and Restated Articles of Incorporation of the Registrant*
(2) Amended and Restated Bylaws of the Registrant.*
(3) Exhibit (1) is incorporated by reference. Form of Lock Up Agreement.
(4) None.
(5) Exhibits (1) and (2) are incorporated by reference.
(6) None.
(7) Employment Agreement, dated as of December 1, 1997, between the Registrant
and J. Alan Lindauer, Jr.*
(8) The Registrant's license from the Small Business Administration.*
(9) Form of Underwriting Agreement.*
(10) None.
(11) Opinion of Clark & Stant, P.C.*
(12) Not applicable.
(14) Consent of Hoffman, Morrison & Fitzgerald, P.C.
(27) Financial Data Schedule
</TABLE>
--------------------
*To be filed by amendment
S-5
<PAGE> 61
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE
INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF NORFOLK, AND THE COMMONWEALTH OF VIRGINIA, ON THE
12TH DAY OF DECEMBER, 1997.
EASTERN VIRGINIA SMALL BUSINESS
INVESTMENT CORPORATION
By: /s/ J. ALAN LINDAUER
------------------------------------
J. ALAN LINDAUER
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
AND CHIEF ACCOUNTING OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated. Each person whose signature appears below
constitutes and appoints J. Alan Lindauer, Eric L. Fox and Peter M. Meredith,
Jr., and each of them individually, his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission granting unto each said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully as he might or
could do in person, hereby ratifying and confirming all that each said
attorney-in-fact and agent or his substitute may lawfully do or cause to be done
by virtue hereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- ------------------------------ ------------------
<S> <C> <C>
/s/ JAMES E. ANDREWS Director December 12, 1997
- ----------------------------------------
JAMES E. ANDREWS
/s/ DONNA C. BENNETT Director December 12, 1997
- ----------------------------------------
DONNA C. BENNETT
/s/ J. W. WHITING CHISMAN, JR. Member of Executive December 12, 1997
- ---------------------------------------- Committee and Director
J. W. WHITING CHISMAN, JR.
/s/ JEFFREY R. ELLIS Director December 12, 1997
- ----------------------------------------
JEFFREY R. ELLIS
/s/ ERIC L. FOX Member of Executive Committee, December 12, 1997
- ---------------------------------------- Director and
ERIC L. FOX Secretary/Treasurer
/s/ ROGER L. FROST Director December 12, 1997
- ----------------------------------------
ROGER L. FROST
/s/ ERNEST F. HARDEE Member of Executive December 12, 1997
- ---------------------------------------- Committee and Director
ERNEST F. HARDEE
</TABLE>
S-6
<PAGE> 62
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- ------------------------------ ------------------
<S> <C> <C>
/s/ HENRY U. HARRIS, III Director December 12, 1997
- ----------------------------------------
HENRY U. HARRIS, III
/s/ MATTHEW JAMES Director December 12, 1997
- ----------------------------------------
MATTHEW JAMES
/s/ J. ALAN LINDAUER Member of Executive Committee, December 12, 1997
- ---------------------------------------- Director, President, Chief
J. ALAN LINDAUER Executive Officer and Chief
Accounting Officer
/s/ ROBERT I. LOW Member of Executive Committee December 12, 1997
- ---------------------------------------- and Director
ROBERT I. LOW
/s/ HAROLD J. MARIONEAUX, JR. Director December 12, 1997
- ----------------------------------------
HAROLD J. MARIONEAUX, JR.
/s/ PETER M. MEREDITH, JR. Chairman of the Board of December 12, 1997
- ---------------------------------------- Directors, Member of Executive
PETER M. MEREDITH, JR. Committee and Director
/s/ AUGUSTUS C. MILLER Director December 12, 1997
- ----------------------------------------
AUGUSTUS C. MILLER
/s/ PAUL F. MILLER Director December 12, 1997
- ----------------------------------------
PAUL F. MILLER
/s/ JUAN M. MONTERO, II Director December 12, 1997
- ----------------------------------------
JUAN M. MONTERO, II
/s/ R. SCOTT MORGAN, SR. Director December 12, 1997
- ----------------------------------------
R. SCOTT MORGAN, SR.
/s/ JAMES W. NOEL, JR. Director December 12, 1997
- ----------------------------------------
JAMES W. NOEL, JR.
/s/ THOMAS A. O'GRADY Director December 12, 1997
- ----------------------------------------
THOMAS A. O'GRADY
/s/ RICHARD G. ORNSTEIN Member of Executive December 12, 1997
- ---------------------------------------- Committee and Director
RICHARD G. ORNSTEIN
/s/ RICHARD S. SCHREIBER Director December 12, 1997
- ----------------------------------------
RICHARD A. SCHREIBER
/s/ JORDAN E. SLONE Director December 12, 1997
- ----------------------------------------
JORDAN E. SLONE
</TABLE>
S-7
<PAGE> 1
HOFFMAN, MORRISON & FITZGERALD, P.C.
Certified Public Accountants and Consultants
Consent of Hoffman, Morrison & Fitzgerald, P.C., Independent Auditors
We hereby consent to the use in this Registration Statement on Form N-5 of our
report included herein dated August 2, 1997, relating to the financial
statements of EASTERN VIRGINIA SMALL BUSINESS INVESTMENT CORPORATION and to the
reference to our Firm under the caption "Experts" in the Prospectus.
/s/ Hoffman, Morrison & Fitzgerald, P.C.
- ------------------------------------
HOFFMAN, MORRISON & FITZGERALD, P.C.
McLean, VA
December 11, 1997
7926 Jones Branch Drive * Suite 330 * Tysons Corner * McLean, Virginia 22102 *
703-847-4600 * Fax: 703-356-4821
190 E. 5th Avenue * Naperville * Illinois * 60563 * 630-983-2535 * Fax:
630-983-2582
- -------------------------------------------------------------------------------
Members of : American Institute of Certified Public Accountants PCPS/SEC *
Virginia Society of Certified Public Accountants
Illinois CPA Society * CPA Associates International, Inc. with Associated
Offices in Principal U.S. and International Cities
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 1,564,900
<INVESTMENTS-AT-VALUE> 1,771,135
<RECEIVABLES> 0
<ASSETS-OTHER> 67,461
<OTHER-ITEMS-ASSETS> 1,870,319
<TOTAL-ASSETS> 3,884,834
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 165,381
<TOTAL-LIABILITIES> 165,381
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,712,255
<SHARES-COMMON-STOCK> 568,900
<SHARES-COMMON-PRIOR> 568,900
<ACCUMULATED-NII-CURRENT> (3,202)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 118,255
<NET-ASSETS> 3,719,053
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 48,207
<OTHER-INCOME> 0
<EXPENSES-NET> 63,364
<NET-INVESTMENT-INCOME> (121,034)
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> (119,839)
<NET-CHANGE-FROM-OPS> (1,195)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (121,034)
<ACCUMULATED-NII-PRIOR> (2,007)
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 63,364
<AVERAGE-NET-ASSETS> 3,779,570
<PER-SHARE-NAV-BEGIN> 6.75
<PER-SHARE-NII> (.21)
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 6.38
<EXPENSE-RATIO> 59.65
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
