<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 9, 1998.
REGISTRATION NO. 333-36709
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
PRE-EFFECTIVE AMENDMENT NO. 2
TO
FORM N-5
REGISTRATION STATEMENT OF
SMALL BUSINESS INVESTMENT COMPANY
Under The Securities Act of 1933
And
The Investment Company Act of 1940
------------------
WATERSIDE CAPITAL 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
WATERSIDE CAPITAL 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>
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PROPOSED MAXIMUM PROPOSED MAXIMUM
OFFERING PRICE AGGREGATE AMOUNT OF
TITLE OF SECURITIES TO BE AMOUNT TO BE PER OFFERING REGISTRATION
REGISTERED REGISTERED SHARE(1) PRICE(1) FEE(2)
- -------------------------------------------------------------------------------------------------
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 $ 460.20
- -------------------------------------------------------------------------------------------------
Common Stock Purchase Warrant
and underlying Common Stock
$1 Par Value................. 66,204 Shares $14.95 $ 989,753 $ 291.98
=================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
(2) $140.06 paid in connection with this filing; $3763.64 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
WATERSIDE CAPITAL 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 permitted by the SBA Act and SBA regulations. The Registrant may
issue SBA Debentures 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 credit to shareholders to finance the purchase of its
capital stock.
(h) So long as the Registrant is licensed as a small business investment
company, it may only conduct those activities permitted by the SBA Act and SBA
regulations and policies.
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.
(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
except with prior SBA approval.
N-3
<PAGE> 4
(c) 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 a prior investment, where there has been a breach of
the financing agreements, where there has been a substantial change in the Small
Business Concern's operation or when financing a start-up company.
(d) The Registrant does not invest in securities of other investment
companies and does not intend to do so in the future.
(e) The Registrant intends to hold its portfolio debt securities for a
minimum of five years, to the extent 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 December 31, 1997, the Registrant owned the following securities of
portfolio companies 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 these portfolio companies:
<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.
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>
N-4
<PAGE> 5
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 and the SBA Act. The Registrants' Articles of
Incorporation and Bylaws have been approved by the SBA. Under its Articles of
Incorporation and Bylaws, the Registrant 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. Its Articles of Incorporation and
Bylaws require 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
Articles of Incorporation and Bylaws 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. Under the Registrant's Articles of Incorporation
and Bylaws, all such determinations of indemnification and expense reimbursement
must be made by a majority of directors not party to the proceedings or
transaction in question, an independent committee not affiliated with the board
of directors or any investment advisor/manager or independent legal counsel. Its
Articles of Incorporation and Bylaws permit 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.
The Registrant's Articles of Incorporation and Bylaws prohibit 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 officer to the extent
of his reasonable expenses if it determines that the director or officer is
entitled to such indemnification. Its Articles of Incorporation and Bylaws also
prohibit 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. Moreover, its
Articles of Incorporation provide that the
N-5
<PAGE> 6
Registrant may not indemnify directors and officers for breaches of fiduciary
duties as prohibited by the SBA Act.
Under Virginia law and the Registrant's Articles of Incorporation and
Bylaws, directors and officers are not personally liable for monetary damages to
the Registrant 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 December 31, 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 JANUARY 9, 1998
800,000 SHARES
WATERSIDE CAPITAL CORPORATION
COMMON STOCK
Waterside Capital 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 has applied to list the Common Stock
on The Nasdaq SmallCap Market under the symbol "WSCC."
AN INVESTMENT IN THE COMMON STOCK INVOLVES 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.
NEITHER THE UNITED STATES SMALL BUSINESS ADMINISTRATION NOR THE UNITED STATES
GOVERNMENT OR ANY AGENCY OR OFFICER THEREOF HAS APPROVED THESE SECURITIES.
<TABLE>
<CAPTION>
=================================================================================================
UNDERWRITING PROCEEDS
PRICE DISCOUNTS AND TO
TO PUBLIC COMMISSIONS(1) COMPANY(2)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share......................... $ $ $
- -------------------------------------------------------------------------------------------------
Total(3).......................... $ $ $
=================================================================================================
</TABLE>
(1) Does not include a warrant issued to the Underwriter in connection with this
Offering to purchase up to 61,204 shares (66,204 shares if the
over-allotment option is exercised in full) of Common Stock at a per share
price equal to 115% of the Price to Public, exercisable for a period of four
years commencing one year after the date of this Prospectus (the
"Underwriter's Warrant") or the Underwriter's accountable expense allowance.
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, including the Underwriter's accountable expense allowance.
(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 , 1998
<PAGE> 8
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."
<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 no exercise of the Underwriter's over-allotment option or the
Underwriter's Warrant.
THE COMPANY
Waterside Capital Corporation (the "Company") is a closed-end investment
company licensed by the Small Business Administration (the "SBA") as a small
business investment company (an "SBIC") under the Small Business Investment Act
of 1958 as amended (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 12.2%.
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
in its portfolio companies. 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 business 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, as of the date of this
Prospectus, has approximately $2.6 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.
The Company targets potential 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 (defined as eligible capital paid for capital stock
and additional paid-in 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 SBIC-eligible investments from other
investment funds.
The Company has raised its Private Capital through investments by
individuals, businesses, financial institutions and governmental entities
located primarily in eastern Virginia. Its Private Capital includes
approximately $1.6 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
eligible to borrow funds from the SBA for up to 10 years at relatively low
interest rates, currently 165 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.
Proposed Nasdaq SmallCap Market Symbol............... WSCC.
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 SBIC-eligible
investments from other investment
funds. See "Use of Proceeds."
Risk Factors......................................... See "Risk Factors."
</TABLE>
4
<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 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 as of December 31, 1997 and the Statement of Operations Data
for the six months ended December 31, 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 six months ended December 31, 1997 are not necessarily
indicative of the results to be expected for the entire year ending June 30,
1998. The financial data shown below should be read in conjunction with the
Financial Statements and Notes.
<TABLE>
<CAPTION>
INCEPTION SIX MONTHS ENDED
JULY 13, 1993 YEAR ENDED JUNE 30, DECEMBER 31,
TO JUNE 30, ----------------------------------------------- -----------------------------
1994 1995 1996 1997 1996 1997
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Operating income:
Interest on cash and
cash equivalents... $ 121 $ 8,834 $ 42,262 $ 166,573 $ 104,016 $ 37,230
Dividend income...... -- -- -- 51,425 -- 86,479
Interest on loans.... -- -- -- 9,430 1,361 3,222
Other income......... -- -- 17,255 37,450 23,700 40,380
------- ----------- ---------- ----------- ----------- -----------
Total operating
income.......... 121 8,834 59,517 264,878 129,077 167,311
Total operating
expenses............. 2,025 34,000 59,777 214,667 94,741 119,552
------- ----------- ---------- ----------- ----------- -----------
Net operating income
(loss) before net
change in unrealized
appreciation on
investments and
provision for income
taxes................ (1,904) (25,166) (260) 50,211 34,336 47,759
Provision (benefit) for
income taxes......... 25 1,855 (7,346) (12,370) (3,599) (15,692)
------- ----------- ---------- ----------- ----------- -----------
Net operating income... (1,929) (27,021) 7,086 62,581 37,935 63,451
Change in unrealized
appreciation in
investments, net of
provision (benefit)
for income taxes..... -- -- -- 211,700 19,325 63,676
------- ----------- ---------- ----------- ----------- -----------
Net income............. $(1,929) $ (27,021) $ 7,086 $ 274,281 $ 57,260 $ 127,127
======= =========== ========== =========== =========== ===========
Net operating income
(loss) per
share(1)............. $ (2.34) $ (4.20) $ .96 $ .11 $ .07 $ .11
Net income (loss) per
share(1)............. $ (2.34) $ (4.20) $ .96 $ .49 $ .10 $ .22
Weighted average number
of shares
outstanding.......... 825 6,433 7,386 562,117 559,378 568,900
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
---------------------------
ACTUAL AS ADJUSTED(2)
---------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................................. $1,222,227 $ 1,222,227
Net unrealized appreciation on investments............................. $ 275,376 $ 275,376
Total stockholders' equity............................................. $4,434,544(3) $ 12,962,544(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 per share.
(3) 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 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 $1,555,000 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 other
estimated costs of this Offering of $300,000.
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," "target" and "anticipate" and concern, among other things, the
Company's ability to identify profitable investments in small businesses, manage
payment defaults, 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). Furthermore, 20% of the Company's portfolio must
consist of investments in smaller enterprises with a net worth of not more than
$6 million and average net income after federal income tax for the preceding two
years of $2 million or less (computed without benefit of any carryover loss).
See "Regulation." The Company's 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
6
<PAGE> 13
loans and six equity investments. Two 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
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 SBIC-eligible investments from
other investment funds. Its future investments in portfolio companies are
unspecified. Moreover, no possible acquisitions of SBIC-eligible investments
from other investment funds have been identified or investigated and there can
be no assurance the Company will consummate any acquisitions. 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 these proceeds will be invested 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, if any, from merely holding such proceeds
will be substantially less than could be realized if the proceeds were
successfully invested in small businesses. 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 SBA's model valuation policy, which the company
has adopted. 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 December 31, 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 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 has applied to list the Common Stock on The Nasdaq SmallCap Market
under the symbol "WSCC." If listed, 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 for the
Common Stock will develop or be sustained after this Offering.
The Common Stock is likely to be thinly traded with a significant
differential between the bid and ask price, and a highly volatile trading price
that will be 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 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 is
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 SBIC-eligible investments from other
investment funds. No assurance can be given that the Company will restructure
its operations in this manner, or that if it does, that the restructuring will
benefit shareholders. If the Company accomplishes these objectives, no assurance
can be given that 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.
Leverage.
An important aspect of the Company's long term strategy in achieving
investment returns is the use of SBA Debentures. Obtaining a license as an SBIC
does not insure that the Company will be able to obtain funds from the SBA ("SBA
Leverage") in the amounts and at times required to optimize investment returns.
The amount of available SBA Leverage is determined by annual Congressional
appropriations. While the Company's management believes that adequate SBA
Leverage will be available, there can be no assurance that there will be
sufficient SBA Leverage available to satisfy the demands of the Company and
other SBICs.
Although it may do so in the future, the Company has not yet issued any SBA
Debentures. If it does so, its operations will involve associated fixed costs.
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."
Regulation as an SBIC.
As an SBIC, the Company is subject to a variety of regulations concerning,
among other things, the size and nature of the companies in which it may invest
and the structure of those investments. SBA regulations provide a variety of
remedies if an SBIC fails to comply with these regulations. These remedies are
graduated in severity depending on the severity of the SBIC's financial
condition or misconduct. In certain circumstances, the SBA may prohibit an SBIC
from making new investments or distributions to shareholders, require the
removal of one or more officers or directors or obtain the appointment of a
receiver for the SBIC. It is likely that new regulations governing SBICs will be
adopted in the future and the Company cannot offer any assurance that any such
new regulations will not have a material adverse effect on the Company's
business and results of operations. In addition, although 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 on funds available to the Company from the SBA may
adversely affect the Company's plans for future operations and growth.
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. Certain shares of Common Stock are eligible for resale under
Rule 144, depending on their date of issue (assuming the other requirements of
Rule 144 are met). Substantially all of the Company's outstanding shares of
Common Stock, however, are subject to "lock-up" agreements 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.
9
<PAGE> 16
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."
Immediate Dilution.
The amount by which the initial public offering price per share of Common
Stock exceeds the adjusted net tangible book value per share of the Common Stock
after this Offering constitutes dilution to investors in this Offering. At an
assumed initial public offering price of $12, investors purchasing shares of
Common Stock in this Offering will incur immediate dilution of $1.39 per share.
See "Dilution."
Absence of 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 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 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 SBIC-eligible
investments from other investment funds. Pending such 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 SBA 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
December 31, 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 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 DECEMBER 31, 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.... 275,376 275,376
Undistributed accumulated earnings
(deficit)................................... 104,168 104,168
Stockholders' notes receivable................ (1,555,000) (1,555,000)
----------- -----------
Total stockholders' equity............... 4,434,544(1) 12,962,544(1)(2)
----------- -----------
Total capitalization................ $ 4,434,544(1) $12,962,544(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 $1,555,000 in such promissory notes
receivable from stockholders. The Company has notified the 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 other
estimated costs of this Offering of $300,000.
11
<PAGE> 18
DILUTION
The net tangible book value of the Company as of December 31, 1997 was
approximately $6 million, or $10.53 per share of Common Stock. Net tangible book
value per share is equal to the Company's total tangible assets less total
liabilities, divided by the total number of shares of Common Stock outstanding.
For the purpose of this section, total tangible assets include $1,555,000 in
non-interest bearing recourse promissory notes executed by existing shareholders
(all of whom are accredited investors) in connection with their purchase of
Common Stock. After giving effect to the sale by the Company of the 800,000
Shares of Common Stock at an assumed initial public offering price of $12 per
share and after deducting the estimated underwriting discounts and commissions
and estimated offering expenses payable by the Company, the adjusted net
tangible book value of the Company as of December 31, 1997 would be $14.5
million, or $10.61 per share. This represents an immediate increase in net
tangible book value of $0.08 per share to existing stockholders and an immediate
dilution in the net tangible book value of $1.39 per share to investors
purchasing Shares of Common Stock in this Offering. The following table
illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price........................................ $12.00
Net tangible book value at December 31, 1997................... $10.53
------
Increase attributable to new investors......................... $ 0.08
------
Adjusted net tangible book value after this Offering......................... $10.61
Dilution to new investors.................................................... $ 1.39
</TABLE>
The following table summarizes, as of December 31, 1997, the difference
between the number of shares of Common Stock purchased from the Company, the
total consideration paid and the average price per share paid by existing
stockholders and by new investors at the assumed initial public offering price
of $12 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders....................... 568,900 41.6 $ 5,680,000 37.2 $ 10.00
New investors............................... 800,000 58.4 9,600,000 62.8 $ 12.00
--------- ---- ---------- -----
Total............................. 1,368,000 100.0 $15,280,000 100.0
========= ==== ========== =====
</TABLE>
12
<PAGE> 19
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 12.2%. 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 minority interests in portfolio companies. 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 the SBA's model valuation policy,
which the Company has adopted. 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 net income 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
$264,878. The Company derived $166,573 or 62.9% 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 interest income
($9,430 or 3.6%), dividends ($51,425 or 19.4%) and other income ($37,450 or
14.1%). 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 (29%) from other income.
Operating Expenses. Operating expenses for the year ended June 30, 1997
were $214,667 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 $50,211. After a tax
benefit of $12,370 reflecting early recognition of organizational expenses for
tax purposes, net operating income for the year was $62,581. 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.
Unrealized Appreciation on Investments. The Company had no unrealized
appreciation at June 30, 1996 because it had made no investments. The Company
had $211,700, net of taxes, of unrealized
13
<PAGE> 20
appreciation on investments for the year ended June 30, 1997. See "Unrealized
Appreciation on Investments at June 30, 1997 and December 31, 1997."
Six Months Ended December 31, 1996 and 1997
Operating Income. During the six months ended December 31, 1997, the
Company began to receive dividend income from the preferred stock investments it
began making in November 1996. During this period, operating income was
$167,311. The Company derived $37,230 (22.3%) 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). The remainder of operating income was derived
from interest income ($3,222 or 1.9%), dividends ($86,479 or 51.7%) and other
income ($40,380 or 24.1%). For the same period in 1996, operating income was
$129,077, almost all of which was interest earned on Private Capital invested in
U.S. government securities.
Operating Expenses. Operating expenses for the six months ended December
31, 1997 were $119,552 (compared to $94,741 in 1996) resulting in net operating
income, before income taxes, of $47,759. With a tax benefit of $15,692, net
operating income was $63,451 compared to a net operating income in 1996 of
$37,935. This operating income 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 December 31, 1997.
Unrealized appreciation, net of income taxes on June 30, 1997, was
$211,700, comprised primarily of a $132,410 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 gross unrealized appreciation
of $341,301 was then reduced by provision for federal and state income taxes of
$129,601 payable if these securities were sold at their estimated value, leaving
net unrealized appreciation of $211,700.
At December 31, 1997, the average per share trading price of common stock
of the rebilling services portfolio company had increased over the June 30, 1997
price. The Company's investment was then revalued resulting in an increase of
$63,676 in total unrealized appreciation, net of taxes, from $211,700 at June
30, 1997 to $275,376 at December 31, 1997.
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 flow from operating
activities. The Company's sources of capital in fiscal years 1994, 1995, 1996
and 1997 and for the six months ended December 31, 1997 were:
<TABLE>
<CAPTION>
INCEPTION
JULY 13, 1993 YEAR ENDED JUNE 30, SIX MONTHS
TO JUNE 30, -------------------------------- ENDED DEC. 31,
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 $ 451,000 $4,055,000
Operating activities....... (1,929) (27,021) 7,086 274,281 127,127 379,544
------- -------- ---------- -------- --------- ----------
Total............ $ 7,071 $310,779 $3,194,786 $343,781 $ 578,127 $4,434,544
======= ======== ========== ======== ========= ==========
</TABLE>
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<PAGE> 21
The Company believes that its cash and cash equivalents at December 31,
1997 of $1,222,227, 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 12.2%. 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
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 minority interests in portfolio companies. 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 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 SBIC-eligible investments from other
investment funds.
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<PAGE> 22
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, generally through the
exercise of warrants acquired in connection with the investment.
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
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
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<PAGE> 23
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. Except with prior SBA approval,
SBA regulations allow only up to 20% of an SBIC's Regulatory Capital (defined as
Private Capital less certain 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
As of the date of this Prospectus, the Company has approximately $2.6
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 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
17
<PAGE> 24
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 175,000
additional shares of common stock, 35,000 of which are immediately exercisable,
with the remainder exercisable in 35,000 share increments on each of the four
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 seeking 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.
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 persons who entered the safe or
security door, when they entered and the duration of the entry. Its customers
are predominately national fast food chains. In November 1997, the Company
purchased $700,000 of preferred stock of this concern. 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
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<PAGE> 25
a Georgia safe manufacturer, expanding the firm's product line and affording
access to a new market segment, primarily national and regional retail chain
stores and oil company convenience stores.
SBA LEVERAGE
The SBA raises capital to enable it to provide funds to SBICs 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 of amounts necessary to cover
anticipated losses in the program (the "Subsidy Rate"). If the Subsidy Rate is
reduced, the same level of Congressional appropriations will support higher
levels of SBA Leverage available to SBICs. Congress authorizes appropriations to
the extent it determines to fund SBIC borrowings from the SBA. The demand for
SBA Debentures exceeded the amounts available in fiscal years 1994, 1995 and
1996. Accordingly, until recently, the SBA restricted the amount of SBA
Debentures available to SBICs, allocated SBA Debentures among existing SBICs and
indicated that SBA Debentures would not be provided at a level exceeding twice
the amount of an SBIC's Private Capital. In fiscal year 1997, funding levels
exceeded industry usage. There can be no assurance that this excess will
continue.
To be eligible to use funds provided by the SBA, an SBIC must obtain a
license and satisfy other requirements. The need for SBA Leverage must be
established. To establish need, an 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. An
SBIC's license entitles an SBIC to apply for SBA Leverage, but does not assure
it will be available. Availability depends on the SBIC's continued regulatory
compliance and sufficient SBA Leverage being available when the SBIC applies to
draw down SBA Leverage.
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 10-year maturities. Interest only is payable
semi-annually until maturity. The interest rate generally is at a modest premium
(165 basis points) over U.S. Treasury Notes with comparable maturities. SBA
Debentures are unsecured. Ten-year SBA Debentures may be prepaid with a penalty
during the first 5 years, and then are prepayable without penalty.
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.
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<PAGE> 26
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.
EMPLOYEES
The Company has six full-time employees. 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.
(a) The Company is permitted to issue the maximum amount of SBA Debentures
permitted by the SBA Act and SBA regulations. The Company may issue SBA
Debentures 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 the extent
allowed by the SBA Act and SBA regulations. The Company is also permitted to
extend credit to shareholders to finance the purchase of its capital stock.
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<PAGE> 27
(h) So long as the Company is licensed as an SBIC, it may only conduct
those activities permitted by the SBA Act and SBA regulations and policies.
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 except with prior
SBA approval.
(c) 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. Except where
necessary to protect an investment, where there has been a breach of the
financing agreements, where there has been a substantial change in the Small
Business Concerns' operation or when financing a start-up company, SBA
regulations prohibit SBICs from controlling a Small Business Concern.
(d) The Company does not invest in securities of other investment companies
and does not intend to do so in the future.
(e) The Company intends to hold its portfolio debt securities for a minimum
of five years, to the extent required by SBA regulations or until maturity. It
anticipates retaining its equity investments from five to seven years.
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 SBA's model valuation policy.
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
21
<PAGE> 28
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 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.
22
<PAGE> 29
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, Director, Treasurer
Norfolk, VA 23510 And Secretary
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
</TABLE>
23
<PAGE> 30
<TABLE>
<CAPTION>
POSITION AND OFFICES
NAME AND ADDRESS AGE WITH THE COMPANY
- -------------------------------------------- --- -------------------------------------------
<S> <C> <C>
Robert P. Louthan........................... 37 Vice President
300 East Main Street
Suite 1380
Norfolk, VA 23510
Robert I. Low............................... 60 Member of Executive
P.O. Box 3297 Committee and Director
Norfolk, VA 23514
Gerald T. McDonald.......................... 51 Treasurer, Chief Financial
1501 Layden Cove Way Officer and
Virginia Beach, VA 23454 Assistant Secretary(1)
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>
- ---------------
(1) Effective February 1, 1998.
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.
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 P. Louthan has served as Vice President of the Company since January
1998. From February 1990 through November 1994, he was Operation Services
Manager of American Filtrona Company, a manufacturer of bonded fiber products.
From December 1994 through November 1997, he was a Vice President with
affiliates of VEDCORP, a venture capital fund.
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.
Gerald T. McDonald will serve as Assistant Secretary, Treasurer and Chief
Financial Officer of the Company effective February 1, 1998. During 1997, Mr.
McDonald was Virginia Financial Manager of Branch Bank & Trust Corp. From 1987
through July 1996, Mr. McDonald was Chief Financial Officer of Commerce Bank.
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.
24
<PAGE> 31
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
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
</TABLE>
25
<PAGE> 32
<TABLE>
<CAPTION>
POSITION AND OFFICES
NAME AND ADDRESS AGE WITH THE COMPANY
- -------------------------------------------- --- -------------------------------------------
<S> <C> <C>
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.
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
26
<PAGE> 33
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. 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/STOCK OPTION COMMITTEE
At its next meeting, the Board of Directors intends to establish, and elect
members to, the Company's Compensation/Stock Option Committee and Audit
Committee.
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 plans (the "Stock Option Plans"), when approved by
shareholders. 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.
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 December 31, 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 January 1, 1998, 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
January 1, 1998. In addition to salary, the Company reimburses expenses incurred
in performing services for the Company and provides health insurance benefits.
The
27
<PAGE> 34
contract contains provisions protecting the Company against competition in the
Commonwealth of Virginia for a two-year period after termination of employment.
Mr. McDonald will be employed by the Company as Treasurer, Assistant
Secretary and Chief Financial Officer under a three-year employment contract
effective February 1, 1998. In addition to a base salary of $95,000, Mr.
McDonald will be entitled to a bonus as determined by the Compensation/Stock
Option Committee. Subject to shareholder approval of the Company's Stock Option
Plans, Mr. McDonald will be granted the option to purchase 20,000 shares of
Common Stock at the Offering Price. The Company will reimburse expenses
incurred in performing services for the Company and provide health insurance
benefits. The contract will contain provisions preventing Mr. McDonald from
soliciting employees of the Company for a one year period after termination of
employment.
Mr. Louthan is employed by the Company as Vice President and manager of the
proposed Richmond office. Under a one-year employment contract presently being
finalized, in addition to a base salary of $80,000, Mr. Louthan will be entitled
to a bonus as determined by the Compensation/Stock Option Committee. Subject to
shareholder approval of the Stock Option Plans, Mr. Louthan will be granted the
option to purchase 10,000 shares of Common Stock at the Offering Price. The
Company reimburses expenses incurred in performing services for the Company and
provides health insurance benefits. The contract will contain provisions
preventing Mr. Louthan from soliciting employees of the Company for a one 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 and to implement Stock Option Plans for the benefit of executive and key
employees of the Company and the outside members of the Board of Directors.
Under these Stock Option Plans, options up to an aggregate of 100,000 shares of
Common Stock may be granted subject to shareholder approval of the plans.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information as of December 31, 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.
28
<PAGE> 35
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, 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.
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. The Shares will, however, be registered for sale under state
securities laws 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
registration filings have not been made unless a registration filing is
subsequently made or there exists an exemption from the applicable state's
registration requirements with respect to such sale or transfer.
29
<PAGE> 36
The Company has applied to list the Common Stock on The NASDAQ SmallCap
Market under the symbol "WSCC." No assurance can be given regarding if or when
the Common Stock will qualify for listing on The NASDAQ SmallCap Market.
ANTI-TAKEOVER STATUTE
The Virginia Control Share Acquisitions statute 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 acquired in a Control Share
Acquisition ("Control Shares") are not 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 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
holders of 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 statute also enables a corporation to make provisions in
its articles of incorporation or bylaws for redemption of Control Shares with no
voting rights (which the Company has not done). 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 statute.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted under the Virginia Act and the SBA Act, the Company's Articles
of Incorporation and Bylaws provide that its 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 securities law.
The Company's Articles of Incorporation and Bylaws contain provisions
regarding the indemnification of directors and officers. Generally, these
provisions allow the Company 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 Company'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. The
Company may not indemnify directors or officers (i) in connection with a
proceeding by or in the right of the Company in which the directors or officers
are adjudged liable to the Company 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.
Moreover, its Articles of Incorporation provide that the Company may not
indemnify directors and officers for breaches of fiduciary duties as prohibited
by the SBA Act. Under the Company's Articles of Incorporation and Bylaws, all
such determinations of indemnification must be made by a majority of directors
not party to the proceedings or transaction in question, an independent
committee not affiliated with the board of directors or any investment
advisor/manager or independent legal counsel.
30
<PAGE> 37
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 provide that an SBIC may not invest more than 20% of the
amount of its Regulatory Capital in any single company. SBA may approve a larger
percentage if necessary to protect the SBIC's investment.
SBA regulations preclude investment in the following: companies whose
principal business is relending or reinvesting (venture capital firms, leasing
companies, factors, banks and the like), many types of real estate projects,
single purpose projects that are not continuing businesses, businesses that will
use the funds outside of the United States, businesses that are passive and do
not carry on an active trade or business and businesses that use 50% or more of
the funds to buy goods or services from an associated supplier.
An SBIC (or two or more SBICs acting in concert) and its "associates"
(controlled or related persons) may not control a Small Business Concern except
on a temporary basis (not exceeding five years) to protect the SBIC's investment
or in the case of certain start-up companies.
SBICs are precluded from making investments in a Small Business Concern if
it would give rise to a conflict of interest. Generally, a conflict of interest
may arise if an associate of the SBIC has or makes an investment in the Small
Business Concern or serves as one of its officers or directors or would
otherwise benefit from the financing. Joint investing with an Associate (such as
another fund controlled by affiliates of the SBIC) may be made on terms fair to
the SBIC.
The amount of annual 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" or the SBIC's own "Cost of
Capital." As defined in SBA regulations, the "Debenture Rate" is the interest
rate announced, from time to time, charged by the SBA on SBA Debentures and
"Cost of Capital" is the weighted average of the interest rate on the SBIC's
actual SBA Debenture borrowings. As of December 31, 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, 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 SBA restricts the ability of an SBIC to repurchase its capital stock,
to retire its debentures, to lend money to its officers, directors and employees
and to 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 that 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 substantially all 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 66,204
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
are eligible for resale under Rule 144, depending on their date of issue
(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. In addition, the Company may issue additional shares of Common Stock in
the future. Likewise, 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. In either event, sales of substantial
amounts of 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 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
32
<PAGE> 39
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 such dividends. 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 discounts and commissions 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 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
the Underwriter's Warrant to purchase up to 61,204 shares of Common Stock
(66,204 shares if the over-allotment option is 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. The Underwriter's Warrant,
as well as the underlying shares of Common Stock, are being registered in this
Offering.
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 substantially all existing 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 it is 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 Underwriter 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
Underwriter 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.
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
WATERSIDE CAPITAL CORPORATION
(FORMERLY 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 SIX MONTHS ENDED
DECEMBER 31, 1997 AND 1996
(UNAUDITED)
WITH
INDEPENDENT ACCOUNTANTS' REPORT
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
INDEPENDENT ACCOUNTANTS' REPORT.................................................. F-2
FINANCIAL STATEMENTS:
Balance sheets at June 30, 1997 and December 31, 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
six months ended December 31, 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 six months ended December 31, 1997 (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
six months ended December 31, 1997 and 1996 (unaudited).................... F-6
NOTES TO FINANCIAL STATEMENTS.................................................... F-7-F-15
</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 (the "Company") as of June 30, 1997, and the
related statements of operations, changes in 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 audits 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 Note B, the financial statements include securities valued at
$1,481,301 at June 30, 1997 (37% 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 September 26, 1997
F-2
<PAGE> 44
WATERSIDE CAPITAL CORPORATION
(FORMERLY EASTERN VIRGINIA SMALL BUSINESS INVESTMENT CORPORATION)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER
JUNE 30, 31,
1997 1997
--------------------- -----------
(RESTATED-SEE NOTE H) (UNAUDITED)
<S> <C> <C>
ASSETS
Investments in equity securities at fair value, cost of
$1,140,000 at
June 30, 1997 and $2,615,889 at December 31, 1997......... $ 1,481,301 $ 3,059,759
Cash and cash equivalents................................... 2,329,148 1,222,227
Interest receivable......................................... 5,729 3,222
Dividends receivable........................................ 51,425 41,917
Prepaid expenses............................................ -- 7,159
Income taxes receivable..................................... 16,752 18,853
----------- -----------
3,884,355 4,353,137
Property and equipment:
Furniture and fixtures................................. 32,231 33,276
Leasehold improvements................................. 20,766 20,766
----------- -----------
52,997 54,042
Less: accumulated depreciation.............................. (3,038) (6,160)
----------- -----------
49,959 47,882
Other assets:
Organization costs, (net of accumulated amortization of
$12,308 at June 30, 1997 and $16,472 at December 31,
1997)................................................ 29,334 25,170
Deferred costs......................................... -- 234,917
Deposits............................................... -- 11,953
----------- -----------
29,334 272,040
----------- -----------
$ 3,963,648 $ 4,673,059
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses.................. $ 931 $ 91,915
Deferred income taxes.................................. 106,300 146,600
----------- -----------
Total liabilities................................. 107,231 238,515
Commitments................................................. -- --
Stockholders' Equity:
Common stock, $1 par value, 10,000,000 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............. 211,700 275,376
Undistributed accumulated earnings..................... 40,717 104,168
Stockholders' notes receivable......................... (2,006,000) (1,555,000)
----------- -----------
Total stockholders' equity........................ 3,856,417 4,434,544
----------- -----------
$ 3,963,648 $ 4,673,059
=========== ===========
Net asset value per common share.................. $ 6.78 $ 7.79
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 45
WATERSIDE CAPITAL CORPORATION
(FORMERLY EASTERN VIRGINIA SMALL BUSINESS INVESTMENT CORPORATION)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
CUMULATIVE SIX MONTHS
FROM INCEPTION ENDED
YEAR ENDED JUNE 30, (JULY 13, 1993) DECEMBER 31,
---------------------- TO --------------------------
1996 1997 JUNE 30, 1996 1996 1997
------- ----------- --------------- ----------- -----------
(RESTATED -- (UNAUDITED) (UNAUDITED)
SEE NOTE H)
<S> <C> <C> <C> <C> <C>
Operating income:
Interest on loans.............. $ -- $ 9,430 $ -- $ 1,361 $ 3,222
Dividends...................... -- 51,425 -- -- 86,479
------- --------- --------- ------- ---------
-- 60,855 -- 1,361 89,701
Interest on cash equivalents... 42,262 166,573 51,217 104,016 37,230
------- --------- --------- ------- ---------
Total interest and
dividends............... 42,262 227,428 51,217 105,377 126,931
Other income................... 17,255 37,450 17,255 23,700 40,380
------- --------- --------- ------- ---------
Total operating income.... 59,517 264,878 68,472 129,077 167,311
Operating expenses:
Management fees................ 16,549 52,000 16,549 26,000 33,000
Salaries and benefits.......... 27,071 41,965 27,071 16,675 25,195
Legal and accounting........... 3,962 33,678 17,962 14,434 25,761
Rent........................... 1,633 20,919 3,658 12,298 8,610
Insurance...................... -- 17,257 -- 8,860 7,157
SBA audit expense fee.......... -- 7,450 -- -- --
Depreciation and
amortization................. -- 15,346 -- 1,946 7,285
Custodial fees................. -- 2,917 -- 5,000 167
Other expenses................. 10,562 23,135 30,562 9,528 12,377
------- --------- --------- ------- ---------
Total operating
expenses................ 59,777 214,667 95,802 94,741 119,552
------- --------- --------- ------- ---------
Net operating income (loss) before
net change in unrealized
appreciation on investments and
benefit for income taxes.......... (260) 50,211 (27,330) 34,336 47,759
Benefit for income taxes............ (7,346) (12,370) (5,466) (3,599) (15,692)
------- --------- --------- ------- ---------
Net operating income (loss)......... 7,086 62,581 (21,864) 37,935 63,451
Change in unrealized appreciation on
investments, net of provision
(benefit) for income taxes of
$129,600 and $38,892 for June 30,
1997 and December 31, 1997,
respectively...................... -- 211,700 -- 19,325 63,676
------- --------- --------- ------- ---------
Net income (loss)................... $ 7,086 $ 274,281 $ (21,864) $57,260 $ 127,127
======= ========= ========= ======= =========
Net income per common share......... $ 0.96 $ 0.49 $ 0.10 $ 0.22
======= ========= ======= =========
Weighted average number of common
shares and common share
equivalents outstanding........... 7,386 562,117 559,378 568,900
======= ========= ======= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 46
WATERSIDE CAPITAL CORPORATION
(FORMERLY EASTERN VIRGINIA SMALL BUSINESS INVESTMENT CORPORATION)
STATEMENTS OF CHANGES IN 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 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 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....................
--------- --------- ------- -------- ---------- --------
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....................
Net unrealized appreciation on
investments........................... 211,700
--------- --------- ------- -------- ---------- --------
Balance, June 30, 1997 (Restated -- see
Note H)............................... -- -- 568,900 568,900 5,041,100 211,700
Proceeds from shareholders' notes
receivable............................
Net operating income....................
Net unrealized appreciation on
investments........................... 63,676
--------- --------- ------- -------- ---------- --------
Balance, December 31, 1997
(unaudited)........................... -- $ -- 568,900 $568,900 $5,041,100 $275,376
========= ========= ======= ======== ========== ========
<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 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 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.................... 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.................... 62,581 62,581
Net unrealized appreciation on
investments........................... 211,700
--------- ----------- ------------ ------------
Balance, June 30, 1997 (Restated -- see
Note H)............................... 40,717 -- (2,006,000) 3,856,417
Proceeds from shareholders' notes
receivable............................ 451,000 451,000
Net operating income.................... 63,451 63,451
Net unrealized appreciation on
investments........................... 63,676
--------- ----------- ------------ ------------
Balance, December 31, 1997
(unaudited)........................... $ 104,168 $ -- $ (1,555,000) $ 4,434,544
========= =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 47
WATERSIDE CAPITAL CORPORATION
(FORMERLY EASTERN VIRGINIA SMALL BUSINESS INVESTMENT CORPORATION)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
CUMULATIVE SIX MONTHS
FROM INCEPTION ENDED
YEAR ENDED JUNE 30, (JULY 13, 1993) DECEMBER 31,
------------------------- TO JUNE 30, --------------------------
1996 1997 1996 1996 1997
---------- ----------- --------------- ----------- -----------
(RESTATED -- (UNAUDITED) (UNAUDITED)
SEE NOTE H)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net operating income (loss) and change in
unrealized appreciation (depreciation)
on investments.......................... $ 7,086 $ 274,281 $ (21,864) $ 57,260 $ 127,127
Loans made................................ -- (400,000) -- (350,000) (350,000)
Investments made.......................... -- (1,140,000) -- (749,950) (1,125,890)
Principal collected on loans made......... -- 400,000 -- -- --
Adjustments to reconcile net operating
income (loss) and change in unrealized
appreciation (depreciation) on
investments to cash used in operating
activities:
Change in unrealized appreciation
(depreciation) on investments....... -- (341,301) -- 19,325 (102,568)
Depreciation and amortization......... -- 15,346 -- 1,946 7,285
Deferred income taxes................. (17,500) 123,800 (17,500) 800 40,300
Increase (decrease) in cash due to
changes in:
Interest receivable................... -- (5,729) -- (62,131) 2,507
Income taxes receivable............... -- (16,752) -- -- (2,101)
Dividends receivable.................. -- (51,425) -- -- 9,508
Prepaid expenses...................... -- -- -- (8,186) (7,159)
Deposits.............................. -- -- -- -- (11,953)
Accounts payable and accrued
expenses............................ 16,682 (114,058) 114,989 (112,257) 90,984
Income taxes payable.................. 6,538 (8,393) 8,393 (6,582) --
---------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
operations........................ 12,806 (1,264,231) 84,018 (1,209,775) (1,321,960)
---------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Proceeds from shareholders' notes
receivable.............................. -- 65,000 -- 60,000 451,000
Decrease in restricted cash held for stock
subscriptions........................... 405,611 -- -- -- --
Purchase of property and equipment........ -- (52,997) -- (49,583) (1,044)
Increase in organization costs............ (31,109) (390) (41,252) -- --
---------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
investing activities.............. 374,502 11,613 (41,252) 10,417 449,956
---------- ----------- ----------- ----------- -----------
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............................ -- -- -- 78,538 (234,917)
---------- ----------- ----------- ----------- -----------
Net cash flow provided by (used in)
financing activities.............. 3,204,200 (14,000) 3,553,000 (9,462) (234,917)
---------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents............................... 3,591,508 (1,266,618) 3,595,766 (1,208,820) (1,106,921)
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 $ 2,386,946 $ 1,222,227
========== =========== =========== =========== ===========
</TABLE>
Supplemental disclosure of non-cash financing activities:
Stock was issued in the amount of $2,016,000 in partial exchange for notes
receivable in the year ended June 30, 1996.
Stock was issued in the amount of $55,000 in partial exchange for notes
receivable in the year ended June 30, 1997.
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 48
WATERSIDE CAPITAL CORPORATION
(FORMERLY EASTERN VIRGINIA SMALL BUSINESS INVESTMENT CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND 1996 AND FOR THE
SIX MONTHS THEN ENDED IS UNAUDITED)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business -- Waterside Capital Corporation (formerly known as
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 equity 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 a 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>
JUNE 30, 1997 DECEMBER 31, 1997
------------- -----------------
(UNAUDITED)
<S> <C> <C>
Cash.................................................... $ 19,678 $ 632,332
Certificate of Deposit.................................. 100,000 --
Repurchase agreements................................... 2,209,470 589,895
----------- -----------
Total.............................................. $ 2,329,148 $ 1,222,227
=========== ===========
</TABLE>
On June 30, 1997 and December 31, 1997, the Company had purchased
$2,209,470 and $589,895, respectively, of overnight repurchase agreements
collateralized by U.S. government securities under agreements to resell on July
1, 1997 and January 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
F-7
<PAGE> 49
WATERSIDE CAPITAL CORPORATION
(FORMERLY EASTERN VIRGINIA SMALL BUSINESS INVESTMENT CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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 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. In the
case of dividends on preferred stock investments where the Company has an
agreement stipulating dividends payable, the Company accrues the dividends in
income on a pro-rata basis during the year. Otherwise, dividends are recorded as
income on the ex-dividend 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
December 31, 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 December 31, 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 to 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
WATERSIDE CAPITAL CORPORATION
(FORMERLY EASTERN VIRGINIA SMALL BUSINESS INVESTMENT CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
B. INVESTMENTS
As of June 30, 1997 and December 31, 1997, investments in small business
concerns were as follows:
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 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 $ 832,410 $ 700,000 $ 833,980
</TABLE>
F-9
<PAGE> 51
WATERSIDE CAPITAL CORPORATION
(FORMERLY EASTERN VIRGINIA SMALL BUSINESS INVESTMENT CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
B. INVESTMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1997
------------------------ ------------------------
COST VALUE COST VALUE
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
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.
In December 1997, an unsecured loan
was made in the amount of $350,000,
12% annual interest rate, five year
term, 35,000 warrants earned
initially and 35,000 warrants earned
for each additional year the note is
outstanding convertible at the
Company's option at $1.25 per common
share............................... $ -- $ 208,891 $ 599,900 $ 909,790
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.......... 140,000 140,000 140,000 140,000
</TABLE>
F-10
<PAGE> 52
WATERSIDE CAPITAL CORPORATION
(FORMERLY EASTERN VIRGINIA SMALL BUSINESS INVESTMENT CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
B. INVESTMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1997
------------------------ ------------------------
COST VALUE COST VALUE
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
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 Shares....... $ 125,000 $ 125,000 $ 125,000 $ 125,000
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
Product Sales Company, located in
eastern Virginia -- purchased 700
shares of its Series A Preferred
Stock on November 3, 1997, par value
$1,000 per share, dividends payable
at a rate of $140 per share per
annum of which $100 per share
accrues in equal quarterly
increments of $25 per share on
January 1, April 1, July 1 and
December 1 of each year commencing
January 1, 1998 and $40 per share
accrues annually on January 1 of
each year commencing January 1,
1998. Also purchased 989 shares of
Class A Voting Common Stock at $1
per share........................... $ -- $ -- $ 700,989 $ 700,989
---------- ---------- ---------- ----------
$1,140,000 $1,481,301 $2,615,889 $3,059,759
========== ========== ========== ==========
</TABLE>
F-11
<PAGE> 53
WATERSIDE CAPITAL CORPORATION
(FORMERLY EASTERN VIRGINIA SMALL BUSINESS INVESTMENT CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 December
31, 1997, $2,006,000 and $1,555,000 of these notes were outstanding,
respectively.
On December 3, 1997, the Board of Directors of the Company authorized the
officers of the Company to demand that the stockholders repay the notes on or
before December 31, 1999. Notice of this demand was sent to the stockholders on
December 11, 1997.
D. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
YEAR ENDED JUNE 30, ENDED ENDED
--------------------- DECEMBER 31, DECEMBER 31,
1996 1997 1996 1997
-------- --------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Current income tax expense (benefit)... $ 10,154 $ (6,570) $ 6,901 $(17,100)
Deferred income tax expense
(benefit)............................ (17,500) 123,800 800 40,300
-------- --------- -------- --------
(7,346) 117,230 7,701 23,200
Amount included in change in unrealized
appreciation on investments.......... -- (129,600) (11,300) (38,892)
-------- --------- -------- --------
Total income tax benefit.......... $ (7,346) $ (12,370) $ (3,599) $(15,692)
======== ========= ======== ========
</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>
DECEMBER 31,
JUNE 30, 1997 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
Deferred tax assets:
Depreciation and amortization.......................... $ (23,300) $(21,900)
Less: valuation allowance.............................. -- --
--------- --------
Total net tax provision (benefit)................. (23,300) (21,900)
--------- --------
Deferred tax liabilities:
Appreciation in investments............................ 129,600 168,500
--------- --------
Total deferred income tax liability............... $ 106,300 $146,600
========= ========
</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 $16,549, respectively, and expenses associated with his role with
the Company.
F-12
<PAGE> 54
WATERSIDE CAPITAL CORPORATION
(FORMERLY EASTERN VIRGINIA SMALL BUSINESS INVESTMENT CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
E. RELATED PARTY TRANSACTIONS -- (CONTINUED)
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.
During the six months ended December 31, 1997 and 1996, the Company paid to
a company owned by an officer and director of the Company management fees of
$33,000 and $26,000, respectively, and expenses associated with his role with
the Company.
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.
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 for the six months ended December 31, 1997 and 1996 was
$8,610 and $12,298, respectively. It 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 December
31, 1997, the Company had approximately $22,000 and $437,984, 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 December
31, 1997, these cash equivalents totaled $2,209,470 and $589,895, respectively.
H. SUBSEQUENT EVENTS
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 Stock at $1.02 per share, for an additional investment of
$249,900.
F-13
<PAGE> 55
WATERSIDE CAPITAL CORPORATION
(FORMERLY EASTERN VIRGINIA SMALL BUSINESS INVESTMENT CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
H. SUBSEQUENT EVENTS -- (CONTINUED)
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 September 8, 1997, the Board of Directors authorized the Company to
issue and sell to the public up to 800,000 shares of common stock at $12.50 per
share subject to the required affirmative vote of the stockholders of the
Company. The Company has not engaged a broker or dealer 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.
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 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 is to be implemented by a
stock dividend of 99 shares for each share outstanding to shareholders of record
on September 10, 1997, payable on the filing of the Certificate of Amendment of
its Articles of Incorporation. 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.
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.
I. EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF ACCOUNTANTS REPORT
INVESTMENTS
On December 10, 1997, the Company made an additional five-year loan to the
high tech communications company 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 175,000
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 four subsequent anniversary dates of the issuance of
the warrant, assuming at each applicable anniversary date, the loan is
outstanding. In December 1997, the Company made a five-year unsecured loan in
the amount of $350,000, as described in Note B. The annual interest rate is 12%.
The Company earned 35,000 warrants initially and 35,000 warrants will be earned
every additional year the note is outstanding. The warrants are exercisable at
the Company's option at $1.25 per common share.
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 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
F-14
<PAGE> 56
WATERSIDE CAPITAL CORPORATION
(FORMERLY EASTERN VIRGINIA SMALL BUSINESS INVESTMENT CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
I. EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF ACCOUNTANTS
REPORT -- (CONTINUED)
price as is finally negotiated between the Company and the underwriter. The
Company has engaged an underwriter for this transaction and has applied for
listing of its common stock on The NASDAQ Small Cap Market.
On December 24, 1997, the Board of Directors submitted to a vote and the
stockholders voted to 1) change the authorized shares of common stock from
1,500,000 shares to 10,000,000, 2) change the legal name of the Company to
Waterside Capital Corporation and 3) authorize the Board of Directors to
implement a qualified and non-qualified stock option plan ("Stock Plan").
RELATED PARTY TRANSACTIONS
Effective January 1, 1998, 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.
J. RESTATEMENT OF FINANCIAL STATEMENTS
The Company's financial statements as of June 30, 1997 have been restated
to reflect a change in the valuation of the appreciation of the investments and
a change in the amortization of organization costs.
The effect of the restatement is as follows:
<TABLE>
<CAPTION>
AS PREVIOUSLY
REPORTED AS RESTATED
------------- -----------
<S> <C> <C>
For the year ended June 30, 1997
Balance sheet:
Investments............................................. $ 1,532,726 $ 1,481,301
Dividends receivable.................................... -- 51,425
Income taxes receivable................................. 16,162 16,752
Organization costs...................................... 38,626 29,334
Deferred income taxes................................... 131,332 106,300
Net unrealized appreciation on investments.............. 238,094 211,700
Undistributed accumulated earnings (deficit)............ (2,007) 40,717
Net asset value per common share........................ 6.75 6.78
Statement of operations:
Dividends............................................... -- 51,425
Depreciation and amortization........................... 6,054 15,346
Benefit for income taxes................................ (11,780) (12,370)
Change in unrealized appreciation on investments........ 238,094 211,700
Net income................................................... 257,951 274,281
Net income per common share.................................. $ .46 $ .49
</TABLE>
F-15
<PAGE> 57
------------------------------------------------------
------------------------------------------------------
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 THE 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 IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN 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
Dilution.............................. 12
Management Discussion and Analysis of
Financial Condition and Results of
Operations.......................... 13
Business.............................. 15
Investment Policies................... 20
Determination of Net Asset Value...... 22
Management............................ 23
Principal Shareholders................ 28
Description of Capital Stock.......... 29
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
Experts............................... 35
Index to Financial Statements......... F-1
</TABLE>
------------------
UNTIL , 1998 (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
WATERSIDE
CAPITAL
CORPORATION
A SMALL BUSINESS INVESTMENT COMPANY
COMMON STOCK
------------------------
PROSPECTUS
------------------------
Scott & Stringfellow, Inc.
, 1998
------------------------------------------------------
------------------------------------------------------
<PAGE> 58
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...................................................... $ 3,903
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> 59
<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> 60
<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, of which $451,000 have been paid. The Company has formally demanded
all reoccurring 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
S-3
<PAGE> 61
shares (i) were made to no more than 35 non-accredited investors who, either
alone or with their purchaser 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> 62
(b) Exhibits
<TABLE>
<C> <S>
(1) Amended and Restated Articles of Incorporation of the Registrant*
(2) Amended and Restated Bylaws of the Registrant.***
(3.1) Form of Lock Up Agreement.**
(3.2) Form of Stock Certificate.*
(8) The Registrant's license from the Small Business Administration.*
(9.1) Employment Agreement, dated as of December 1, 1997, between the Registrant
and J. Alan Lindauer, Jr.***
(9.2) Consent of Hoffman, Morrison & Fitzgerald, P.C.*
(9.3) Form of Warrant Agreement.***
(10.1) Form of Underwriting Agreement*
(10.2) Form of Selected Dealer Agreement.*
(11) Opinion of Clark & Stant, P.C.***
(13) Financial Data Schedule.*
</TABLE>
--------------------
* Filed herewith.
** Previously filed.
*** To be filed by amendment.
S-5
<PAGE> 63
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 9TH
DAY OF JANUARY, 1998.
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 January 9, 1998
- ----------------------------------------
JAMES E. ANDREWS
/s/ DONNA C. BENNETT Director January 9, 1998
- ----------------------------------------
DONNA C. BENNETT
/s/ J. W. WHITING CHISMAN, JR. Member of Executive January 9, 1998
- ---------------------------------------- Committee and Director
J. W. WHITING CHISMAN, JR.
/s/ JEFFREY R. ELLIS Director January 9, 1998
- ----------------------------------------
JEFFREY R. ELLIS
/s/ ERIC L. FOX Member of Executive Committee, January 9, 1998
- ---------------------------------------- Director and
ERIC L. FOX Secretary/Treasurer
/s/ ROGER L. FROST Director January 9, 1998
- ----------------------------------------
ROGER L. FROST
/s/ ERNEST F. HARDEE Member of Executive January 9, 1998
- ---------------------------------------- Committee and Director
ERNEST F. HARDEE
</TABLE>
S-6
<PAGE> 64
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- ------------------------------ ----------------
<S> <C> <C>
/s/ HENRY U. HARRIS, III Director January 9, 1998
- ----------------------------------------
HENRY U. HARRIS, III
/s/ MATTHEW JAMES Director January 9, 1998
- ----------------------------------------
MATTHEW JAMES
/s/ J. ALAN LINDAUER Member of Executive Committee, January 9, 1998
- ---------------------------------------- Director, President, Chief
J. ALAN LINDAUER Executive Officer and Chief
Accounting Officer
/s/ ROBERT I. LOW Member of Executive Committee January 9, 1998
- ---------------------------------------- and Director
ROBERT I. LOW
/s/ HAROLD J. MARIONEAUX, JR. Director January 9, 1998
- ----------------------------------------
HAROLD J. MARIONEAUX, JR.
/s/ PETER M. MEREDITH, JR. Chairman of the Board of January 9, 1998
- ---------------------------------------- Directors, Member of Executive
PETER M. MEREDITH, JR. Committee and Director
/s/ AUGUSTUS C. MILLER Director January 9, 1998
- ----------------------------------------
AUGUSTUS C. MILLER
/s/ PAUL F. MILLER Director January 9, 1998
- ----------------------------------------
PAUL F. MILLER
/s/ JUAN M. MONTERO, II Director January 9, 1998
- ----------------------------------------
JUAN M. MONTERO, II
/s/ R. SCOTT MORGAN, SR. Director January 9, 1998
- ----------------------------------------
R. SCOTT MORGAN, SR.
/s/ JAMES W. NOEL, JR. Director January 9, 1998
- ----------------------------------------
JAMES W. NOEL, JR.
/s/ THOMAS A. O'GRADY Director January 9, 1998
- ----------------------------------------
THOMAS A. O'GRADY
/s/ RICHARD G. ORNSTEIN Member of Executive January 9, 1998
- ---------------------------------------- Committee and Director
RICHARD G. ORNSTEIN
/s/ RICHARD S. SCHREIBER Director January 9, 1998
- ----------------------------------------
RICHARD A. SCHREIBER
/s/ JORDAN E. SLONE Director January 9, 1998
- ----------------------------------------
JORDAN E. SLONE
</TABLE>
S-7
<PAGE> 1
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
WATERSIDE CAPITAL CORPORATION
Pursuant to Section 13.1-711 of the Code of Virginia of 1950,
as amended (the "Code"), the undersigned sets forth the following:
ARTICLE I
NAME
The name of the Corporation is: Waterside Capital Corporation
ARTICLE II
PURPOSE
2.1. This Corporation is organized and chartered solely
for the purpose of operating under the Small Business Investment Act of 1958,
as amended ("SBIC Act"), and will operate in the manner and shall have the
powers, responsibilities and be subject to the limitations provided by the SBIC
Act and the regulations issued by the Small Business Administration ("SBA")
thereunder.
2.2. Subject to the above, the Corporation shall have the
power to do all things necessary or convenient to carry out its business and
affairs and to engage in any lawful activity not required to be stated in these
Articles of Incorporation, including, but not limited to, those activities and
powers set forth in the Code.
2.3. Subject to the above, the powers and purposes in
these Articles of Incorporation shall not be deemed to exclude in any way or
limit by inference any powers or purposes granted to the Corporation by the
laws of the Commonwealth of Virginia, now or subsequently in effect, or implied
by any reasonable construction of such laws.
ARTICLE III
AUTHORIZED SHARES
3.1. Number and Designation. The aggregate number and
designation of shares which the Corporation shall have the authority to issue
and the par value per share are as follows:
<TABLE>
<CAPTION>
Class Number of Shares Par Value
----- ---------------- ---------
<S> <C> <C>
Preferred 25,000 $1.00
Common 10,000,000 $1.00
</TABLE>
3.2. Preemptive Rights. No holder of outstanding shares of
any class shall have any preemptive right with respect to (i) any shares of any
class of the Corporation, whether now or hereafter authorized, (ii) any
warrants, rights or options to purchase any such shares, or (iii) any
obligations convertible into or exchangeable for any such shares or into
warrants, rights or options to purchase any such shares.
<PAGE> 2
ARTICLE IV
PREFERRED SHARES
4.1 Issuance in Series. The Board of Directors is
authorized to issue the Preferred Shares from time to time in one or more
series and to provide for the designation, preferences, limitations and
relative rights of the shares of each series by the adoption of Articles of
Amendment to the Articles of Incorporation of the Corporation setting forth:
(i) The maximum number of shares in the series
and the designation of the series, which designation shall distinguish the
shares thereof from the shares of any other series or class;
(ii) Whether shares of the series shall have
special, conditional or limited voting rights, or no right to vote, except to
the extent prohibited by law;
(iii) Whether shares of the series are redeemable
or convertible (a) at the option of the Corporation, a shareholder or another
person or upon the occurrence of a designated event, (b) for cash,
indebtedness, securities or other property, and (c) in a designated amount or
in an amount determined in accordance with a designated formula or by reference
to extrinsic data or events;
(iv) Any right of holders of shares of the series
to distributions, calculated in any manner, including the rate or rates of
dividends, and whether dividends shall be cumulative, noncumulative or
partially cumulative;
(v) The amount payable upon the shares of the
series in the event of voluntary or involuntary liquidation, dissolution or
winding up of the affairs of the Corporation;
(vi) Any preference of the shares of the series
over the shares of any other series or class with respect to distributions,
including dividends, and with respect to distributions upon the liquidation,
dissolution or winding up of the affairs of the Corporation; and
(vii) Any other preferences, limitations or
specified rights (including a right that no transaction of a specified nature
shall be consummated while any shares of such series remain outstanding except
upon the assent of all or a specified portion of such shares) now or hereafter
permitted by the laws of the Commonwealth of Virginia and not inconsistent with
the provisions of this Section 4.1.
Except as to the designations, preferences, limitations and relative rights of
each series of Preferred Shares which the Board of Directors is authorized to
establish, as is hereinabove set forth, all Preferred Shares, regardless of
series, shall rank in a parity as to dividends (whether or not the dividend
rates or payment dates are different) and as to rights in the liquidation,
dissolution or winding up of the affairs of the Corporation (whether or not the
redemption or liquidation prices are different).
- 2 -
<PAGE> 3
4.2. Articles of Amendment. Before the issuance of any
shares of a series, Articles of Amendment establishing such series shall be
filed with and made effective by the State Corporation Commission of Virginia,
as required by law.
ARTICLE V
COMMITTEES
5.1. Executive Committee.
A. There shall be an Executive Committee of the
Board of Directors, consisting of not less than five nor greater than nine
Directors who shall be elected annually by the Board of Directors. The
Executive Committee shall at least annually elect one (1) of its members to
preside at all meetings of the Executive Committee. The Executive Committee
shall hold such regular meetings as its members shall determine, and, in
addition, shall meet on call of the president or of any two members of the
Executive Committee.
B. The Executive Committee shall have and may
exercise all of the authority of the Board of Directors in the management of
the property, business and affairs of the Corporation including approving the
Corporation's investments and valuing the assets of the Corporation; provided,
however, that the Executive Committee shall not have the power to approve an
amendment to the Articles of Incorporation, a plan of merger or consolidation,
a sale, lease, exchange, pledge, mortgage or other disposition of all or
substantially all of the property and assets of the Corporation other than in
the usual and regular course of business, the voluntary dissolution of the
Corporation, the revocation of voluntary dissolution proceedings, or to take
any action prohibited by express resolution of the Board of Directors. The
Executive Committee shall not have the power to fill vacancies on the Board of
Directors or to adopt, amend or repeal the Bylaws. Any action duly taken by
the Executive Committee within the course and scope of its authority shall bind
the Corporation. The Executive Committee shall report at the next regular or
special meeting of the Board of Directors any significant action taken on
behalf of the Board of Directors since the last regular or special meeting of
the Board of Directors.
C. With the exception of the President, no person shall
serve more than five (5) one-year terms on the Executive Committee without
a break in service of at least one year between terms. This restriction,
however, shall not apply to members of the Executive Committee serving in an ex
officio capacity.
D. The Board of Directors, by resolution adopted
by a majority of Directors at the annual meeting, shall appoint all members of
the Executive Committee. The Chairperson of the Board shall propose and submit
his or her recommendations for appointments to the Executive Committee. The
Board of Directors shall also consider any additional recommendations brought
before it by motion of a Director and duly seconded by another Director. All
members shall be appointed by confirmation of the Board of Directors. Members
of the Executive Committee shall hold office for a one-year term or until their
successors are elected by the Board of Directors, their committee is dissolved
by the Board of Directors or their committee stands discharged. Any member of
the Executive Committee may resign at any time by giving written notice of his
or her intention to do so to the Board of Directors or may be removed, with or
without cause, at any time by vote of a majority of the Board of Directors.
- 3 -
<PAGE> 4
ARTICLE VI
REGISTERED OFFICE AND REGISTERED AGENT
The address of the initial registered office of the corporation, which
is located in the City of Virginia Beach, Virginia, is 900 One Columbus Center,
Virginia Beach, Virginia 23462. The initial registered agent of the
Corporation is Lawrence R. Siegel, whose business office is identical with the
registered office and who is a resident of Virginia and a member of the
Virginia State Bar.
ARTICLE VII
INDEMNIFICATION
7.1. Standard of Care. (i) Neither the Board of Directors, any
Investment Advisor/manager nor any shareholder, officer or employee nor
any Affiliate of any thereof shall be liable to the Corporation for any action
taken or omitted to be taken by it or any other person in good faith and in a
manner they reasonably believed to be in, or not opposed to, the best interests
of the Corporation, and, with respect to any criminal action or proceeding, had
no reasonable cause to believe their conduct was unlawful.
(ii) The Board of Directors and any Investment
Advisor/manager, the stockholders, officers, employees and partners of either
thereof and any member of a Corporation committee or board, may consult with
reputable legal counsel selected by them and shall be fully protected, and
shall incur no liability to the Corporation in acting or refraining to act in
good faith in reliance upon the opinion or advice of such counsel.
(iii) This Section 7.1 shall not constitute a
modification, limitation or waiver of 15 U.S.C.A. 314(b), or a waiver by the
SBA of any of its rights pursuant to such Section 314(b).
(iv) In addition to the standards of care set
forth in this section 7.1, the Bylaws may also provide for additional standards
of care which must also be met.
7.2. Indemnification. (i)The Corporation shall indemnify
and hold harmless, but only to the extent of Assets Under Management, the Board
of Directors, any Investment Advisor/manager, and any shareholder, officer,
employee or any Affiliate of any thereof from any and all costs, expenses,
damages, claims, liabilities, fines and judgments (including the reasonable
cost of the defense of any claim or action and any sums which may be paid with
the consent of the Corporation in settlement thereof) which may be incurred by
or asserted against such person or entity, by reason of any action taken or
omitted to be taken on behalf of the Corporation and in furtherance of its
interests.
(ii) The Corporation shall have the power, in the
discretion of the Board of Directors, to agree to indemnify on the same terms
as set forth in Section 7.2(i) any person who is or was serving, pursuant to a
prior written request from the Corporation, as a consultant to, agent for, or
representative of, the Corporation as a director, officer, employee, agent of
or consultant to another corporation, partnership, joint venture, trust or
other enterprise,
- 4 -
<PAGE> 5
against any liability asserted against such person and incurred by such person
in any such capacity, or arising out of such person's status as such.
(iii) No person shall be entitled to claim any
indemnity or reimbursement under Section 7.2(i) or (ii) in respect of any cost,
expense, damage, liability, claim, fine, judgment (including any cost of the
defense of any claim, action, suit, proceeding or investigation, by or before
any court or administrative or legislative body or authority) that may be
incurred by such person which results from the failure of such person to act in
accordance with the provisions of these Articles and the applicable standard of
care set forth in Section 7.1. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, preclude a determination
that such person acted in accordance with the applicable standard of care set
forth in Section 7.1.
(iv) To the extent that a person claiming
indemnification under Section 7.2(i) or (ii) has been successful on the merits
in defense of any action, suit or proceeding referred to in Section 7.2(i) or
(ii) or in defense of any claim, issue or matter therein, such person shall be
indemnified with respect to such matter as provided in such Section. Except as
provided in the foregoing sentence and as provided in Section 7.2(vii) with
respect to advance payments, any indemnification under this Section 7.2 shall
be paid only upon determination that the person to be indemnified has met the
applicable standard of conduct set forth in Section 7.2(i)
(v) A determination that a person to be
indemnified under this Section 7.2 has met the applicable standard set forth in
Section 7.1(i) shall be made by (a) the Board of Directors with respect to
indemnification of any person other than a person claiming indemnification
under Section 7.2(i), (b) a committee of the Corporation whose members are not
affiliated with the Board if Directors or any Investment Advisor/Manager with
respect to indemnification of any person indemnified under Section 7.2(i), or
(c) at the election of the Board of Directors, independent legal counsel
selected by the Board of Directors with respect to the indemnification of any
person indemnified under Section 7.2 in a written opinion.
(vi) In making any such determination with respect
to indemnification under Section 7.2(v), the Corporation, a committee of the
Corporation whose members are not affiliated with the Board of Directors or any
Investment Advisor/manager or independent legal counsel, as the case may be,
shall be authorized to make such determination on the basis of its evaluation
of the records of the Corporation or any Investment Advisor/manager to the
Corporation and of the statements of the party seeking indemnification with
respect to the matter in question and shall not be required to perform any
independent investigation in connection with any such determination. Any party
making any such determination is authorized, however, in its sole discretion,
to take such other actions (including engaging counsel) as it deems advisable
in making such determination.
(vii) Expenses incurred by any person in respect of
any such costs, expenses, damages, claims, liabilities, fines, and judgments
(including any cost of the defense of any claim, action, suit, proceeding or
investigation, by or before any court or administrative or legislative body or
authority) may be paid by the Corporation in advance of the final disposition
of any such claim or action upon receipt of any undertaking by or on behalf of
such person to
- 5 -
<PAGE> 6
repay such amount unless it shall ultimately be determined as provided in
Section 7.2(iv) or (v) that such person is entitled to be indemnified by the
Corporation as authorized in this Section.
(viii) The rights provided by this Section 7.2 shall
inure to the benefit of the heirs, executors, administrators, successors, and
assigns of each person eligible for indemnification hereunder.
(ix) The rights to indemnification provided in
this Section 7.2 shall be the exclusive rights of all those seeking
indemnification to indemnification by the Corporation. No director, officer,
employee, or agent of the Corporation shall enter into, or make any claim
under, any other agreement with the Corporation (whether direct or indirect)
providing for indemnification. The Board of Directors shall not enter into any
agreement with any person which is an employee, officer, partner or
shareholder, or an affiliate, associate or control person of any of the
foregoing providing for indemnification of any such person unless such
agreement provides for a determination with respect to such indemnification as
provided under Section 7.2(v)(b) or (c). The provisions of this Section 7.2
shall not apply to indemnification of any person which is not at the expense
(whether in whole or in part) of the Corporation.
(x) The Corporation may purchase and maintain
insurance on its own behalf, or on behalf of any person or entity, with respect
to liabilities of the types described in this Section 7.2. The Corporation may
purchase such insurance regardless of whether such person is acting in a
capacity described in this Section 7.2 or whether the Corporation would have
the power to indemnify such person against such liability under the provisions
of this Section 7.2.
ARTICLE VIII
CONSENT TO REMOVAL OF OFFICERS AND DIRECTORS
AND/OR APPOINTMENT OF RECEIVER BY THE SMALL
BUSINESS ADMINISTRATION
8.1. Upon the occurrence of any of the events specified in
13 C.F.R. 107.261(c)(1)-(6), 107.262(d)(1)-(3), 107.262(b)(1)-(6),
107.262(c)(1)-(3), 107.262(d)(1)-(11), or 107.262(e) as determined by the SBA,
SBA shall have the right, and the Corporation consents to SBA's exercise of
such right:
(i) upon written notice, to require the
corporation to replace, with individuals approved by SBA, one or more of the
Corporation's officers and/or such number of members of the Corporation's
Executive Committee as is sufficient to constitute a majority of such Executive
Committee; or
(ii) to obtain the appointment of SBA or its
designee as receiver of the corporation pursuant to Section 311(c) of the SBIC
Act for the purpose of continuing to operate the Corporation.
- 6 -
<PAGE> 7
ARTICLE IX
SBIC PROVISIONS
9.1. Approval of Executive Committee and Officers. No
person may serve as an Executive Committee Member or officer of the Corporation
without the prior approval of the SBA.
9.2. SBA As Third Party Beneficiary. The SBA shall be
deemed an express third party beneficiary of the provisions of these Articles
of Incorporation to the extent of the rights of the SBA hereunder and under the
SBIC Act, and the SBA shall be entitled to enforce such provisions for its
benefit.
Pursuant to Section 13.1-707 of the Code of Virginia of 1950,
as amended, the Shareholders of the Corporation approved these Amended and
Restated Articles of Incorporation by more than two-thirds of the Shareholders
entitled to vote on December 24, 1997.
Dated as of the ____ day of December, 1997.
WATERSIDE CAPITAL CORPORATION
By:
---------------------------------
J. Alan Lindauer, President
- 7 -
<PAGE> 1
CERTIFICATE
No.______________
For ______ Shares
Issued to
- ----------------------
- ----------------------
- ----------------------
Dated __________, 19__
FROM WHOM TRANSFERRED
- ----------------------
Dated __________, 19__
NO. ORIGINAL NO. ORIGINAL NO. OF SHARES
CERTIFICATE SHARES TRANSFERRED
Received CERTIFICATE NO._____
For __________________ Shares
this _____ day of _____, 19__
INCORPORATED UNDER THE LAWS
OF
VIRGINIA
[SEAL] [SEAL]
No. Shares
WATERSIDE CAPITAL CORPORATION
This Certifies that _______________________is the owner of _________Shares of
teh Capital Stock of
WATERSIDE CAPITAL CORPORATION
transferable only on the books of the Corporation by the holder hereof in person
or by Attorney upon surrender of this Certificate properly endorsed.
IN WITNESS WHEREOF, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and its Corporate Seal to be hereunto
affixed this _____ day of _______, A.D. 19___.
- ------------------------- --------------------------
President Secretary
SHARES $1.00 EACH
(C) GOES 156
<PAGE> 2
CERTIFICATE
FOR
SHARES
OF THE
CAPITAL STOCK
WATERSIDE CAPITAL
CORPORATION
ISSUED TO
------------------
DATE
------------------
For Value Received, __________ hereby sell, assign and transfer unto ________
__________________________Shares of the Capital Stock represented by the within
Certificate, and do hereby irrevocably constitute and appoint ______________
Attorney to transfer the said Stock in the books of the within named Company
with full power by substitution in the premises.
Dated ____________, 19___
In presence of
--------------------------------
- -----------------------------
NOTICE: THE SIGNATURE OF THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVRY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER.
<PAGE> 1
EXHIBIT 8
THE UNITED STATES OF AMERICA
SMALL BUSINESS ADMINISTRATION
LICENSE
This is to certify that Eastern Virginia Small Business Investment Corporation
a Virginia Corporation with its principal office located at Virginia Beach,
Virginia is hereby licensed as a Small Business Investment Company under the
Small Business Investment Act of 1958, as amended, to provide equity capital,
long-term loans and management assistance to small businesses for their
operations, growth, expansion and modernization.
This License is not assignable or transferable without the prior approval of
the Small Business Administration.
The aforesaid Licensee is authorized to conduct its operations in the areas
described in its license application
Issued at Washington, D.C. on May 14, 1996
[sig]
-------------------
Administrator
<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
<PAGE> 1
WATERSIDE CAPITAL CORPORATION
800,000 COMMON SHARES
UNDERWRITING AGREEMENT
Richmond, Virginia
, 1998
SCOTT & STRINGFELLOW, INC.
As Representative of the Several
Underwriters Named in Schedule I Hereto
909 East Main Street
Richmond, Virginia 23219
Ladies and Gentlemen:
Waterside Capital Corporation, a Virginia corporation (the "Company"),
proposes to sell to Scott & Stringfellow, Inc. (the "Representative") and the
several other underwriters named in Schedule I hereto (collectively, with the
Representative, the "Underwriters") 800,000 shares of the Company's $1.00 par
value common stock ("Common Shares"). Such Common Shares to be sold to the
Underwriters by the Company are referred to collectively herein as the "Firm
Shares." The respective amounts of the Firm Shares to be purchased by the
several Underwriters are set forth opposite their names in Schedule I hereto.
The Firm Shares shall be offered to the public at a public offering price of
$ per Firm Share (the "Offering Price").
In addition, in order to cover over-allotments in the sale of the Firm
Shares, the Underwriters may purchase for the Underwriters' own accounts,
ratably in proportion to the amounts set forth opposite their respective names
in Schedule I hereto, up to 120,000 additional Common Shares from the Company.
Such 120,000 additional Common Shares are referred to collectively herein as the
"Optional Shares." If any Optional Shares are purchased, they shall be purchased
for offering to the public at the Offering Price and in accordance with the
terms and conditions set forth herein. The Firm Shares and the Optional Shares
are referred to collectively herein as the "Shares."
The Company, intending to be legally bound, hereby confirms its agreement
with the Underwriters as follows:
1. REPRESENTATIONS AND WARRANTIES.
Representations and Warranties of the Company. The Company represents
and warrants to, and agrees with, the several Underwriters that:
(a) the Company has prepared, in conformity with the requirements
of the Securities Act of 1933, as amended (the "Act"), and the rules and
regulations (the "Regulations") of the Securities and Exchange
Commission (the "SEC") under the Act in effect at all applicable times,
and has filed with the SEC a registration statement on Form N-5 (File
No. 333-36709) and one or more amendments thereto for the purpose of
registering the Shares (or a portion of the Shares if a "Rule 462(b)
Registration Statement," as defined below, has been or is to be filed),
the common stock purchase warrant referred to in Section 5(u) (the
"Representative's Warrant"), and the shares of common stock underlying
the Representative's Warrant (the "Warrant Stock"). The Company
similarly may have prepared or may prepare an additional registration
statement on Form N-5 with respect to a portion of the Shares pursuant
to Rule 462(b) of the Regulations, and if so prepared or if to be so
prepared, such additional registration statement has been or will be
filed pursuant to Rule 462(b) of the Regulations. The term "Rule 462(b)
Registration Statement" means such additional registration statement, if
any, filed pursuant to Rule 462(b) of the Regulations, including,
without limitation, all exhibits thereto, the contents of the earlier
registration statement incorporated therein by reference, and any
price-related information included therein, but omitted from the earlier
registration statement in reliance on Rule 430A of the Regulations.
Copies of all such registration statements (or the form thereof in the
case of a Rule 462(b) Registration Statement that has not yet
<PAGE> 2
been filed) and any amendments thereto, and all forms of the related
prospectus contained therein, have been delivered to the Representative.
Each prospectus included in any such registration statement before it
became effective under the Act and any prospectus filed with the SEC
pursuant to Rule 424(a) of the Regulations is hereinafter called a
"Preliminary Prospectus." The various parts of the first registration
statement referenced in this Section l(a), including all exhibits
thereto and the information contained in the form of final prospectus
filed with the SEC pursuant to Rule 424(b) of the Regulations in
accordance with Section 5(b) of this Agreement and deemed by virtue of
Rule 430A(b) of the Regulations to be part of the registration statement
at the time it was declared effective, each as amended at the time the
registration statement became effective, as well as the information
contained in the Rule 462(b) Registration Statement, if any, deemed to
be a part of the registration statement, are hereinafter collectively
called the "Primary Registration Statement." The term "Registration
Statements" means both the Primary Registration Statement and the Rule
462(b) Registration Statement, if any, collectively. The term "Term
Sheet" means the term sheet, if any, containing the information required
pursuant to Rule 434(b) or (c), as applicable, of the Regulations, and
filed pursuant to Rule 424(b)(7) of the Regulations. The term
"Prospectus" means the Prospectus relating to the Shares included in the
Registration Statement at the time it became effective (including, if
the Company omitted information from the Primary Registration Statement
pursuant to Rule 430A(a) of the Regulations, the information deemed to
be a part of the Primary Registration Statement at the time it became
effective pursuant to Rule 430A(b) of the Regulations); provided,
however, that, if with the consent of the Representative, the Company
provides a Term Sheet prior to the time any confirmation is sent or
given for purposes of Section 2(10)(a) of the Act, the term "Prospectus"
shall mean the "prospectus subject to completion" (as defined in Rule
434(g) of the Regulations) last provided to the Representative by the
Company and circulated by the Underwriters to all prospective purchasers
of the Shares, plus and including the information contained in the Term
Sheet. Notwithstanding the foregoing, if any revised Prospectus shall be
provided to the Underwriters by the Company for use in connection with
the offering of the Shares that differs from the Prospectus referred to
in the immediately preceding sentence (whether or not such revised
Prospectus is required to be filed with the SEC pursuant to Rule 424(b)
of the Regulations), the term "Prospectus" shall refer to such revised
Prospectus from and after the time it is first provided to the
Underwriters for such use. If, with the consent of the Representative,
the Company shall have provided to the Underwriters a Term Sheet prior
to the time any confirmation is sent or given for purposes of Section
2(10)(a) of the Act, the Prospectus and the Term Sheet together will not
be materially different from the prospectus in the Registration
Statements;
(b) the Primary Registration Statement has become effective under
the Act and the SEC has not issued any stop order suspending the
effectiveness of the Registration Statements or preventing or suspending
the use of any Preliminary Prospectus, nor has the SEC instituted or
threatened to institute proceedings with respect to such an order. No
stop order suspending the sale of the Shares, the Representative's
Warrants, or the Warrant Stock in any jurisdiction designated by the
Representative as provided for in Section 5(i) hereof has been issued,
and no proceedings for that purpose have been instituted or threatened.
The Company has complied in all material respects with all requests of
the SEC, or requests of which the Company has been advised of any state
or foreign securities commission in a state designated by the
Representative as provided for in Section 5(i) hereof, for additional
information to be included in the Registration Statements, any
Preliminary Prospectus or the Prospectus. Each Preliminary Prospectus
conformed to all the requirements of the Act and the Regulations as of
its date in all material respects and did not as of its date contain any
untrue statement of material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, except the foregoing shall not apply to statements in, or
omissions from, any Preliminary Prospectus in reliance upon and in
conformity with information regarding the Underwriters supplied to the
Company in writing by or on behalf of any Underwriter through the
Representative expressly for use therein. The Primary Registration
Statement, on the date on which
2
<PAGE> 3
it was declared effective by the SEC (the "Effective Date") and when any
post-effective amendment thereof shall become effective, the Rule 462(b)
Registration Statement when filed with the SEC, and the Prospectus, at
the time it is filed with the SEC and on the Closing Date (as defined in
Section 3 hereof) and any Option Closing Date (as defined in Section
4(b) hereof), conformed and will conform in all material respects to all
the requirements of the Act and the Regulations, and did not and will
not, on any of such dates, include any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, except that
this representation and warranty does not apply to statements in or
omissions from the Primary Registration Statement (including the
information contained in the Rule 462(b) Registration Statement after it
is filed with the SEC) or the Prospectus made in reliance upon and in
conformity with information regarding the Underwriters furnished to the
Company in writing by or on behalf of any Underwriter through the
Representative expressly for use therein;
(c) the Company is a corporation duly organized, validly existing
and in good standing under the laws of the Commonwealth of Virginia,
with all necessary corporate power and authority, and all required
licenses, permits, clearances, certifications, registrations, approvals,
and consents, to own or lease and operate its properties and to conduct
its business as described in the Prospectus, and to execute, deliver and
perform this Agreement. The Company is duly qualified to do business as
a foreign corporation or partnership, as applicable, and is in good
standing, in all jurisdictions in which such qualification is required,
except where the failure to so qualify would not have a material adverse
effect on the general affairs, properties, condition (financial or
otherwise), results of operations, stockholders' equity, business or
prospects of the Company taken as a whole (a "Material Adverse Effect").
No proceeding has been instituted in any jurisdiction revoking, limiting
or curtailing, or seeking to revoke, limit or curtail the Company's
corporate power and authority or qualification or ability to own or
lease and operate its properties and to conduct its business as
described in the Prospectus;
(d) The Company has no subsidiaries. The Company owns no stock or
other interest whatsoever, directly or indirectly, whether equity or
debt, in any corporation, partnership or other entity other than
disclosed in the Prospectus and Registration Statements;
(e) this Agreement and the Representative's Warrant Agreement
("Representative's Warrant Agreement") have been duly authorized,
executed and delivered by the Company and constitute its legal, valid
and binding obligation, enforceable against the Company in accordance
with their terms, except as enforcement may be limited by bankruptcy,
insolvency or other similar laws affecting the enforcement of creditors'
rights generally and subject to applicability of general principles of
equity and except, as to this Agreement, as rights to indemnity and
contribution may be limited by federal and state securities laws or
principles of public policy;
(f) the execution, delivery and performance of this Agreement and
the Representative's Warrant Agreement and the transactions contemplated
therein do not and will not, with or without the giving of notice or the
lapse of time, or both, (i) conflict with any term or provision of the
Company's Articles of Incorporation or Bylaws; (ii) result in a breach
of, constitute a default under, result in the termination or
modification of, result in the creation or imposition of any lien,
security interest, charge or encumbrance upon any of the assets of the
Company under, or require any payment by the Company or impose any
liability on the Company pursuant to, any contract, indenture, mortgage,
deed of trust, commitment or other agreement or instrument to which the
Company is a party or by which any of their assets are bound or
affected; (iii) assuming compliance with Blue Sky laws and regulations
applicable to the offer and sale of the Shares, the Representative's
Warrant and the Warrant Stock, violate any applicable law, rule,
regulation, judgment, order or decree of any government or governmental
agency, instrumentality or court, domestic or foreign, having
jurisdiction over the Company or any of its properties or businesses; or
(iv) result in a breach, termination or lapse of the Company's corporate
power and authority to own or lease and operate its respective assets
and properties and conduct its businesses as described in the
Prospectus;
3
<PAGE> 4
(g) at the date or dates indicated in the Prospectus, the Company
had the duly authorized and outstanding capitalization set forth in the
Prospectus under the caption "Capitalization" and will have, as of the
issuance of the Firm Shares on the Closing Date, the pro forma adjusted
capitalization set forth therein. The description of the Company's
capitalization in the Prospectus conforms in all material respects with
the instruments defining the same. On the Effective Date, the Closing
Date and any Option Closing Date (as defined in Section 4(b) hereto),
there will be no options or warrants for the purchase of, other
outstanding rights to purchase, agreements or obligations to issue or
agreements or other rights to convert or exchange any obligation or
security into, capital stock of the Company or securities convertible
into or exchangeable for capital stock of the Company, except as
expressly described in the Prospectus. The information in the Prospectus
insofar as it relates to all outstanding options and other rights to
acquire securities of the Company as of the Effective Date and
immediately prior to the Closing Date and any Option Closing Date is
true and correct in all material respects;
(h) the currently outstanding shares of the Company's capital stock
have been duly authorized and are validly issued, fully paid and
non-assessable, and none of such outstanding shares of the Company's
capital stock has been issued in violation of any preemptive rights of
any security holder of the Company. No preemptive rights or other rights
to subscribe for or purchase exist with respect to the sale of the
Shares by the Company. The holders of the outstanding shares of the
Company's capital stock are not subject to personal liability solely by
reason of being such holders. All previous offers and sales of the
outstanding shares of the Company's capital stock, whether described in
the Registration Statement or otherwise, were made in conformity with
applicable federal and state securities laws. The authorized capital
stock of the Company, including, without limitation, the outstanding
Common Shares, the Shares being issued, the Representative's Warrant,
the Warrant Stock and the outstanding options to purchase shares of
Common Shares conform in all material respects with the descriptions
thereof in the Prospectus, and such descriptions conform in all material
respects with the instruments defining the same.
(i) when the Shares and Warrant Stock have been duly delivered
against payment therefor as contemplated by this Agreement, the Shares
and Warrant Stock will be validly issued, fully paid and non-assessable.
The certificates representing the Shares are, and certificates
representing the Warrant Stock will be, in proper legal form under, and
conform in all respects to the requirements of, the Virginia Stock
Corporation Act, as amended (the "VSCA"). Neither the filing of the
Registration Statement nor the offering or sale of Shares, the
Representative's Warrant or the Warrant Stock as contemplated by this
Agreement gives any security holder of the Company any rights for or
relating to the registration of any Common Shares or any other capital
stock of the Company or any rights to convert or have redeemed or
otherwise receive anything of value with respect to any other security
of the Company;
(j) no consent, approval, authorization, order, registration,
license, permit of, or filing or registration with, any court,
government, governmental agency, instrumentality or other regulatory
body or official is required for the valid and legal execution, delivery
and performance by the Company of this Agreement or the Representative's
Warrant Agreement and the consummation of the transactions contemplated
hereby and described in the Prospectus, except such as may be required
for the registration of the Shares, the Representative's Warrant and the
Warrant Stock under the Act, the Regulations and for compliance with the
1940 Act, applicable state securities or Blue Sky laws or the Bylaws,
rules and other pronouncements of the National Association of Securities
Dealers, Inc. (the "NASD"):
(k) the Company is registered under the Investment Company Act of
1940 ("1940 Act") and the Company has complied in all material respects
with the applicable provisions of the 1940 Act during the period it was
subject to such requirements;
(l) the statements in the Registration Statements and Prospectus,
insofar as they are descriptions or summaries of or references to
contracts, agreements or other documents, are accurate in all
4
<PAGE> 5
material respects and present or summarize fairly, in all material
respects, the information required to be disclosed under the Act, the
1940 Act and/or the Regulations, and there are no contracts, agreements
or other documents, instruments or transactions of any character
required to be described or referred to in the Registration Statements
or Prospectus or to be filed as exhibits to the Registration Statements
that have not been so described, referred to or filed, as required;
(m) the consolidated financial statements of the Company (including
the notes thereto) filed as part of any Preliminary Prospectus, the
Prospectus and the Registration Statements present fairly, in all
material respects, the financial position of the Company as of the
respective dates thereof, and the results of operations and cash flows
of the Company for the periods indicated therein, all in conformity with
generally accepted accounting principles consistently applied throughout
the periods involved. The supporting notes and schedules included in the
Registration Statements fairly state in all material respects the
information required to be stated therein in relation to the financial
statements taken as a whole. The selected and summary financial and
statistical information in the Prospectus including, but not limited to,
that under the captions "Summary Financial Information" and
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" presents fairly the information shown therein and has
been compiled on a basis consistent with that of the audited financial
statements included in the Registration Statements. The unaudited
financial statements included in the Registration Statements comply as
to form in all material respects with the applicable accounting
requirements of Regulation S-X under the Act and the pro forma
adjustments, if any, have been properly applied to the historical
amounts in the compilation of those statements. No financial statements
or schedules or other information other than that which appears in the
Prospectus is required to be included in the Registration Statement;
(n) since the respective dates as of which information is given in
the Registration Statements and the Prospectus, except as otherwise
stated therein, there has not been (i) any material adverse change
(including, whether or not insured against, any material loss or damage
to any material assets), or development involving a prospective material
adverse change, in the general affairs, properties, assets, management,
condition (financial or otherwise), results of operations, stockholders'
equity, business or prospects of the Company; (ii) any material adverse
change, loss, reduction, termination or non-renewal of any contract to
which the Company is a party; (iii) any transaction entered into by the
Company not in the ordinary course of its business that is material to
the Company, (iv) any dividend or distribution of any kind declared,
paid or made by the Company on its capital stock, (v) any liabilities or
obligations, direct or indirect, incurred by the Company that are
material to the Company on a consolidated basis; (vi) any change in the
capitalization or stock ownership of the Company; or (vii) any change in
the indebtedness of the Company that is material to the Company on a
consolidated basis. The Company does not have any contingent liabilities
or obligations that are material to the Company that are not expressly
disclosed in the Prospectus;
(o) the Company has not distributed, and will not distribute, any
offering material in connection with the offering and sale of the Shares
other than the Registration Statements, a Preliminary Prospectus, the
Prospectus and other material, if any, permitted by the Act, the 1940
Act and the Regulations. Neither the Company nor any of its officers,
directors or affiliates has taken, nor shall the Company or such persons
take, any action designed to, or that might be reasonably expected to,
cause or result in stabilization or manipulation of the price of the
Shares;
(p) the Company has filed with the appropriate federal, state and
local governmental agencies, and all foreign countries and political
subdivisions thereof, all tax returns that are required to be filed or
has duly obtained extensions of time for the filing thereof and has paid
all taxes shown on such returns or otherwise due and all material
assessments received by them to the extent that the same have become
due. The Company has not executed or filed with any taxing authority,
foreign or domestic, any agreement extending the period for assessment
or collection of any income or other tax and neither is a party to any
pending action or proceeding by any foreign or domestic governmental
agency for the assessment or collection of taxes, and no claims for
assessment or
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<PAGE> 6
collection of taxes have been asserted against the Company that might
have a Material Adverse Effect;
(q) Hoffman, Morrison & Fitzgerald, P.C., which has given its
reports on certain financial statements included as part of the
Registration Statements, is a firm of independent certified public
accountants as required by the Act and the Regulations with respect to
the Company;
(r) the Company is not in violation of, or in default under, any of
the terms or provisions of (i) its Articles or Certificate of
Incorporation or Bylaws or similar governing instruments, or (ii) any
indenture, mortgage, deed of trust, contract, commitment or other
agreement or instrument to which it is a party or by which it or any of
its properties is bound or affected, (iii) any law, rule, regulation,
judgment, order or decree of any government or governmental agency,
instrumentality or court, domestic or foreign, having jurisdiction over
it or any of its properties or business, or (iv) any license, permit,
certification, registration, approval, or consent referred to in Section
1(c) hereof;
(s) except as expressly disclosed in the Prospectus, there are no
claims, actions, suits, protests, proceedings, arbitrations,
investigations or inquiries pending before, or to the Company's
knowledge threatened or contemplated by, any governmental agency,
instrumentality, court or tribunal, domestic or foreign, or before any
private arbitration tribunal to which the Company is or may be made a
party or otherwise affecting the Company that could reasonably be
expected to affect the validity of any of the outstanding Common Shares,
or that, if determined adversely to the Company would, in any case or in
the aggregate, result in any Material Adverse Effect, nor is the Company
aware of any reasonable basis for any such claim, action, suit, protest,
proceeding, arbitration, investigation or inquiry. Except as expressly
disclosed in the Prospectus, there are no outstanding orders, judgments
or decrees of any court, governmental agency, instrumentality or other
tribunal enjoining the Company from, or requiring the Company to take or
refrain from taking, any action, or to which the Company or its
properties, assets or businesses are bound or subject;
(t) the Company owns, or possesses adequate rights to use, all
patents, patent applications, trademarks, trademark registrations,
applications for trademark registration, trade names, service marks,
licenses, inventions, copyrights, know-how (including trade secrets and
other unpatented and/or unpatentable proprietary or confidential
technology, information, systems, design methodologies and devices or
procedures developed or derived from or for the businesses of the
Company), trade secrets, confidential information, processes and
formulations and other proprietary information necessary for, used in,
or proposed to be used in, the conduct of its business as described in
the Prospectus (collectively, the "Intellectual Property"). The Company
owns any rights in or to any patents. The Company has not infringed, nor
is it infringing and, except as expressly and specifically disclosed in
the Prospectus, has it received any notice of conflict with, the
asserted rights of others with respect to the Intellectual Property
that, individually or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would have a Material Adverse Effect, and
the Company knows of no reasonable basis therefor. To the knowledge of
the Company, no other parties, including but not limited to directors or
officers of the Company have infringed upon or are in conflict with the
Intellectual Property. The Company is not a party to, or bound by, any
agreement pursuant to which royalties, honorariums or fees are payable
by the Company to any person by reason of the ownership or use of any
Intellectual Property that is material to the business of the Company on
a consolidated basis;
(u) the Company has good and marketable title to all property
described in the Prospectus as being owned by it, free and clear of all
liens, security interests, charges or encumbrances and the like, except
such as are expressly described or referred to in the Prospectus or such
as would not have a Material Adverse Effect. The Company has adequately
insured its property against loss or damage by fire or other casualty
and maintains, in amounts reasonably believed by it to be adequate, and
insurance against such other risks as management of the Company deems
appropriate. All real and personal property leased by the Company as
described or referred to in the Prospectus is held by the Company under
valid leases. The executive offices and the other facilities of the
Company (the
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<PAGE> 7
"Premises"), and all operations presently or formerly conducted thereon
by the Company are now and, since the Company began to use such
Premises, always have been and, to the knowledge of the Company and
prior to when the Company began to use such Premises, always had been,
in compliance with all federal, state and local statutes, ordinances,
regulations, rules, standards and requirements of common law concerning
or relating to industrial hygiene and the protection of health and the
environment (collectively, "the Environmental Laws"), except to the
extent that any failure to be in such compliance would not have a
Material Adverse Effect. There are no conditions on, about, beneath or
arising from the Premises or at any other location that might give rise
to liability, the imposition of a statutory lien or require a
"Response," "Removal" or "Remedial Action," as defined herein, under any
of the Environmental Laws, and that would have a Material Adverse
Effect. Except as expressly disclosed in the Prospectus, or where such
items will not result in any Material Adverse Effect, (i) the Company
has not received notice and does not have knowledge of any claim,
demand, investigation, regulatory action, suit or other action
instituted or threatened against the Company or any portion of the
Premises relating to any of the Environmental Laws and (ii) the Company
has not received any notice of material violation, citation, complaint,
order, directive, request for information or response thereto, notice
letter, demand letter or compliance schedule to or from any governmental
or regulatory agency arising out of or in connection with "hazardous
substances" (as defined by applicable Environmental Laws) on, about,
beneath, arising from or generated at the Premises or at any other
location. As used in this subsection, the terms "Response," "Removal"
and "Remedial Action" shall have the respective meanings assigned to
such terms under Sections 101(23) - 101(25) of the Comprehensive
Environmental Response, Compensation and Liability Act, as amended by
the Superfund Amendments and Reauthorization Act 42 U.S.C.
9601(23)-9601(25);
(v) the Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that: (i) transactions are
executed in accordance with management's general or specific
authorization; (ii) transactions are recorded as necessary in order to
permit preparation of financial statements in accordance with generally
accepted accounting principles and to maintain accountability for
assets; (iii) access to assets is permitted only in accordance with
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with existing assets at reasonable
intervals and appropriate action is taken with respect to any
differences;
(w) no unregistered securities of the Company have been sold by the
Company or on behalf of the Company by any person or persons
controlling, controlled by, or under common control with the Company
within the three years prior to the date hereof, except as expressly
disclosed in the Registration Statements and any such sales of
unregistered securities by the Company were completed in compliance with
the applicable provisions of the state and federal securities or bluesky
laws;
(x) the Company has not had and currently does not have any
employee benefit plan, profit sharing plan, employee pension benefit
plan or employee welfare benefit plan or deferred compensation
arrangements ("Plans") that are subject to the provisions of the
Employee Retirement Income Security Act of 1974, as amended, or the
rules and regulations thereunder ("ERISA") and that are not in
compliance with ERISA in all material respects, and, to the extent
required by the Internal Revenue Code of 1986, as amended (the "Code"),
in compliance with the Code in all material respects. The Company has
not had any employee pension benefit plan that is subject to Part 3 of
Subtitle 8 of Title I of ERISA or any defined benefit plan or
multi-employer plan. The Company has not maintained retired life and
retired health insurance plans that are employee welfare benefit plans
providing for continuing benefit or coverage for any employee or any
beneficiary of any employee after such employee's termination of
employment, except as required by Section 4980B of the Code. No
fiduciary or other party in interest with respect to any of the Plans
has caused any of such Plans to engage in a prohibited transaction as
defined in Section 406 of ERISA. As used in this subsection, the terms
"defined benefit plan," "employee benefit plan," "employee pension
benefit plan,"
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<PAGE> 8
"employee welfare benefit plan," "fiduciary" and "multiemployer plan"
shall have the respective meanings assigned to such terms in Section 3
of ERISA;
(y) no labor dispute exists with any employees of the Company and
to the Company's knowledge, no such labor dispute is threatened. The
Company has no knowledge of any existing or threatened labor disturbance
by the employees of any of its principal suppliers, contractors or
customers that would have a Material Adverse Effect. None of the
employees of the Company is covered by a collective bargaining agreement
and no union organizing activity exists with respect to any of such
employees;
(z) the Company has not incurred any liability for any finder's
fees or similar payments in connection with the transactions
contemplated herein other than as disclosed in the Prospectus;
(aa) the Company is familiar with the Investment Company Act, as
amended, and the rules and regulations thereunder, and has in the past
conducted, and the Company intends to conduct, its affairs in such a
manner as to ensure that it will be in compliance with the Investment
Company Act and the rules and regulations thereunder;
(bb) no statement, representation, warranty or covenant made by the
Company in this Agreement or in any certificate or document required by
this Agreement to be delivered to the Representative is, was when made,
or as of the Closing Date or any Option Closing Date will be,
inaccurate, untrue or incorrect in any material respect. No transaction
has occurred or is proposed between or among the Company and any of its
officers, directors or stockholders or any affiliate of any such
officer, director or stockholder that is required to be described in and
is not described in the Registration Statements and the Prospectus;
(cc) the Company or any officer, director, employee, agent or other
person acting on behalf of the Company has not directly or indirectly,
given or agreed to give any money, property or similar benefit or
consideration to any customer or supplier (including any employee or
agent of any customer or supplier) or official or employee of any agency
or instrumentality of any government (foreign or domestic) or political
party or candidate for office (foreign or domestic) or any other person
who was, is or in the future may be in a position to affect the general
affairs, properties, condition (financial or otherwise), results of
operations, stockholders' equity, business or prospects of the Company
or any actual or proposed business transaction of the Company that (i)
could subject the Company to any liability (including, but not limited
to, the payment of monetary damages) or penalty in any civil, criminal
or governmental action or proceeding that would have a Material Adverse
Effect, or (ii) violates any law, rule or regulation to which the
Company is subject, which violation if proven would have a Material
Adverse Effect;
(dd) each person listed on Schedule II hereto has executed an
agreement in a form reasonably satisfactory to the Representative that
such person will not, for the period specified in such agreement (the
"Lock-up Period"), offer to sell, contract to sell, or otherwise sell,
dispose of, loan, pledge or grant any rights with respect to
(collectively, a "Disposition") any Common Shares, any options or
warrants to purchase any Common Shares or any securities convertible
into or exchangeable for Common Shares (collectively, "Securities") now
owned or hereafter acquired directly by such person or with respect to
which such person has or hereafter acquires the power of disposition,
otherwise than as specified in such agreement or with the prior written
consent of the Representative; provided, however, that the foregoing
language shall not prohibit the purchase of Common Stock from the
Company pursuant to the exercise of stock options. The Company has
provided to counsel for the Underwriters a complete and accurate list of
all securityholders of the Company and the number and type of securities
held by each securityholder. The Company has provided to counsel for the
Underwriters true, accurate and complete copies of all of the agreements
pursuant to which its officers, directors and shareholders have agreed
to such or similar restrictions (the "Lock-Up Agreements");
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<PAGE> 9
(ee) each contract or other instrument (however characterized or
described) to which the Company is a party or by which its respective
properties or businesses is bound or affected and which is material to
the conduct of the business of the Company has been duly and validly
executed by the Company and, to the knowledge of the Company, by the
other parties thereto. Each such contract or other instrument is in full
force and effect and is enforceable against the parties thereto in
accordance with its terms and the Company is not, and to the knowledge
of the Company, no other party is, in default thereunder, and no event
has occurred that, with the lapse of time or the giving of notice, or
both, would constitute a default under any such contract or other
instrument. All necessary consents under such contracts or other
instruments to the disclosure in the Prospectus with respect thereto
have been obtained;
(ff) The Company is in compliance with the applicable requirements
of the Small Business Administration rules governing small business
investment companies, including the Small Business Investment Act of
1958 (the "SBA Act"), and the applicable provisions of federal and state
laws or regulations governing the activities of a small business
investment company. The Company is not a "business development" company
as defined under the 1940 Act. No person is serving as an officer or
director of the Company except in compliance with the provisions of the
1940 Act and the rules and regulations thereunder;
(gg) The Company's application for listing the Common Shares,
including the Shares and the Warrant Stock, on NASDAQ's SmallCap Market
has been approved, subject to notice to issuance; and
(hh) Neither the Company nor any of its affiliates is presently
doing business with the government of Cuba or with any person or
affiliate located in Cuba.
Any certificate signed by any officer of the Company in such capacity
and delivered to the Representative or to counsel for the Underwriters
pursuant to this Agreement shall be deemed a representation and warranty by
the Company to the several Underwriters as to the matters covered thereby.
2. PURCHASE SALE OF FIRM' SHARES. On the basis of the
representations, warranties, covenants and agreements contained herein, and
subject to the terms and conditions set forth herein, the Company shall
sell the Firm Shares to the Underwriters, and each of the Underwriters,
severally and not jointly, shall purchase the number of Firm Shares set
forth opposite its name in Schedule I hereto. The purchase price of the
Firm Shares hereunder shall be the Offering Price less the Underwriting
Discounts and Commissions shown on the cover page of the Prospectus. Each
Underwriter shall be obligated to purchase from the Company that number of
Firm Shares as is set forth opposite the name of such Underwriter in
Schedule I hereto. The several Underwriters intend to offer the Shares to
the public as set forth in the Prospectus; provided, however, that no
Shares registered pursuant to the Rule 462(b) Registration Statement, if
any, will be offered prior to the filing of such registration statement
with the SEC. After the public offering, the several Underwriters may, in
their discretion, vary the public offering price.
3. PAYMENT AND DELIVERY.
(a) Delivery of and payment for the Firm Shares shall be made at
the offices of Scott & Stringfellow, Inc., 909 East Main Street,
Richmond, Virginia at 10:00 a.m., Richmond, Virginia time (i) on the
third full business day following the first day that the Firm Shares are
traded, or (ii) at such other time and date not later than seven full
business days following the first day the Firm Shares are traded as the
Representative and the Company may determine (or at such time and date
to which delivery and payment shall have been postponed pursuant to
Section 11 hereof). Such date and time of delivery and payment are
referred to collectively herein as the "Closing Date." Notwithstanding
the foregoing, if the Company has not made available to the
Representative copies of the Prospectus in the quantities and within the
time provided for in Section 5(g) hereof, the
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<PAGE> 10
Representative may, in its sole discretion, postpone the Closing Date
until no later than two full business days following delivery of such
copies of the Prospectus to the Representative.
(b) On the Closing Date, the Company shall deliver or cause to be
delivered certificates representing the Firm Shares to the
Representative for the account of each Underwriter against payment to or
upon the order of the Company of the purchase price (i) by certified or
official bank check or checks payable in New York Clearing House
(next-day) funds, or (ii) in immediately available funds wired to such
accounts as the Company may specify (with all costs and expenses
incurred by the Underwriters in connection with such settlement in
immediately available funds, including, but not limited to, interest or
cost of funds expense, to be borne by the Company). Time is of the
essence, and delivery at the time and place specified pursuant to this
Agreement is a further condition of each Underwriter's obligation
hereunder.
(c) The certificates representing the Firm Shares to be sold and
delivered will be in such denominations and registered in such names as
the Representative requests not less than two full business days prior
to the Closing Date, and will be made available to the Representative
for inspection, checking and packaging at the offices of Scott &
Stringfellow, 909 East Main Street, Richmond, Virginia, not less than
one full business day prior to the Closing Date. If the Representative
so elects, delivery of the Firm Shares may be made by credit through
full fast transfer to the accounts at The Depository Trust Company
designated by the Representative.
(d) The Company shall not be obligated to deliver any Firm Shares
to be delivered on the Closing Date, except upon payment for all the
Firm Shares to be purchased on such date.
4. OPTION TO PURCHASE OPTIONAL SHARES.
(a) For the purposes of covering any over-allotments in connection
with the distribution and sale of the Firm Shares as contemplated by the
Prospectus, subject to the terms and conditions herein set forth, the
several Underwriters are hereby granted an option by the Company to
purchase all or any part of the Optional Shares (the "Over-allotment
Option"). The purchase price to be paid for the Optional Shares shall be
the Offering Price less the Underwriting Discounts and Commissions shown
on the cover page of the Prospectus. The Over-allotment Option granted
hereby may be exercised by the Representative on behalf of the several
Underwriters as to all or any part of the Optional Shares at any time
and from time to time within 30 days after the date of the Prospectus.
No Underwriter shall be under any obligation to purchase any Optional
Shares prior to an exercise of the Over-allotment Option.
(b) The Over-allotment Option granted hereby may be exercised by
the Representative on behalf of the several Underwriters by giving
notice to the Company by a letter delivered by hand or sent by
registered or certified mail, postage prepaid, or by courier, telegram
or facsimile (such notice to be effective when received), addressed as
provided in Section 13 hereof, setting forth the number of Optional
Shares to be purchased, the date and time for delivery of, and payment
for, such Optional Shares and stating that the Optional Shares referred
to therein are to be used for the purpose of covering over-allotments in
connection with the distribution and sale of the Firm Shares. If such
notice is given at least two full business days prior to the Closing
Date, the date set forth therein for such delivery and payment shall be
the Closing Date. If such notice is given less than two full business
days prior to the Closing Date, the date set forth therein for such
delivery and payment shall be a date selected by the Representative that
is not more than three full business days after the date the notice is
effective. The date and time set forth in such a notice is referred to
herein as an "Option Closing Date," and a closing held pursuant to such
a notice is referred to herein as an "Option Closing." Upon each
exercise of the Over-allotment Option, and on the basis of the
representations, warranties, covenants and agreements herein contained,
and subject to the terms and conditions herein set forth, the several
Underwriters shall become severally, but not jointly, obligated to
purchase from the Company the number of Optional Shares specified in
each notice of exercise of the Over-allotment Option (allocated among
the several Underwriters in accordance with Section 4(c) hereof.)
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<PAGE> 11
(c) The number of Optional Shares purchased and sold pursuant to
each exercise of the Over-allotment Option shall be subject to such
adjustment as the Representative may approve to eliminate fractional
shares and shall be subject to the provisions for the allocation of
Optional Shares purchased for the purpose of covering over-allotments
set forth in the agreement entered into by and among the Underwriters in
connection herewith (the "Agreement Among Underwriters").
(d) Delivery of and payment for the Optional Shares to be purchased
by the several Underwriters pursuant to any exercise of the
Over-allotment Option shall be made at the offices of Scott &
Stringfellow, Inc., 909 East Main Street, Richmond, Virginia, or such
other place as shall be agreed upon by the Company and the
Representative at 10:00 a.m., Richmond, Virginia time on the Option
Closing Date set forth in the notice of such exercise. On such Option
Closing Date, the Company shall deliver or cause to be delivered
certificates representing the Optional Shares to the Representative for
the account of each Underwriter against payment to or upon the order of
the Company (with respect to Optional Shares sold by it, if any), (i) by
certified or official bank check or checks payable in New York Clearing
House (next-day) funds, or (ii) in immediately available funds wired to
such accounts as the Company may specify (with all costs and expenses
incurred by the Underwriters in connection with such settlement in
immediately available funds, including, but not limited to, interest or
cost of funds expense, to be borne by the Company). Time shall be of the
essence, and delivery at the time and place specified pursuant to this
Agreement is a further condition of the obligation of each Underwriter
hereunder.
(e) The certificates representing the Optional Shares to be issued
and delivered will be in such denominations and registered in such names
as the Representative requests not less than two full business days
prior to the Option Closing Date, and will be made available to the
Representative for inspection, checking and packaging at the office of
the Company's transfer agent not less than one full business day prior
to the Option Closing Date. If the Representative so elects, delivery of
the Option Shares may be made by credit through full fast transfer to
the accounts at The Depository Trust Company designated by the
Representative.
5. CERTAIN COVENANTS AND AGREEMENTS. The Company covenants and agrees
with the several Underwriters as follows:
(a) if the Rule 462(b) Registration Statement has not been filed at
the time this Agreement is executed and delivered by the parties hereto
and such Rule 462(b) Registration Statement is required to be filed, the
Company will use its best efforts to cause such registration statement
to be filed and become effective as promptly as possible;
(b) if the Company omitted information from the Primary
Registration Statement at the time it was declared effective in reliance
upon Rule 430A of the Regulations, the Company will timely file the
Prospectus pursuant to and in compliance with Rule 424(b)(1) or (4) and
Rule 430A(a)(3) of the Regulations and will advise the Representative of
the time and manner of such filing; provided, however, that if the
Representative shall agree to the utilization of Rule 434 of the
Regulations, the Company will timely file pursuant to and in compliance
with Rule 424(b)(7) and Rule 430A(a)(3) of the Regulations the
information required to be included in the Term Sheet, and will advise
the Representative of the time and manner of such filing;
(c) if for any reason the filing of a form of Prospectus is
required under Rule 424(b)(3) of the Regulations, the Company will
timely file such Prospectus pursuant to and in compliance with such Rule
and will advise the Representative of the time and manner of such
filing;
(d) the Company will not file or publish any Rule 462(b)
Registration Statement or any amendment or supplement to the
Registration Statement(s), Preliminary Prospectus or Prospectus at any
time before the completion (in the opinion of the Underwriters' counsel)
of the distribution of the Shares by the Underwriters that is not (i) in
compliance with the Regulations; and (ii) approved by the
Representative;
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(e) the Company will advise the Representative immediately, and
confirm such advice in writing, (i) when any Rule 462(b) Registration
Statement or post-effective amendment to the Registration Statements is
filed with the SEC, (ii) of the receipt of any comments from the SEC
concerning the Registration Statements, (iii) when any post-effective
amendment to the Registration Statements becomes effective, or when any
supplement to the Prospectus or any amended Prospectus has been filed,
(iv) of any request of the SEC for amendment or supplementation of the
Registration Statements or Prospectus or for additional information, (v)
during the period when the Prospectus is required to be delivered under
the Act and Regulations, of the happening of any event as a result of
which the Registration Statements would include an untrue statement of a
material fact or omit to state a material fact required therein or
necessary to make the statements therein not misleading, or as a result
of which the Prospectus, as then amended or supplemented, would include
any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, (vi) during
the period noted in clause (vii) above, of the need to amend the
Registration Statements or supplement the Prospectus to comply with the
Act, (viii) of the issuance by the SEC of any stop order suspending the
effectiveness of the Registration Statements or of any order preventing
or suspending the use of any Preliminary Prospectus or the Prospectus,
and (ix) of the suspension of the qualification of any the Shares for
offering or sale in any jurisdiction in which the Underwriters intend to
make such offers or sales, or of the initiation or threatening of any
proceedings for any of such purposes known to the Company. The Company
will use its best efforts to prevent the issuance of any such stop order
or of any order preventing or suspending such use, and if any such order
is issued, to obtain as soon as possible the lifting thereof;
(f) in case of any event (occurring at any time within the period
during which, in the opinion of counsel for the Underwriters
("Underwriters' Counsel"), a prospectus is required to be delivered
under the Act and Regulations), as a result of which any Preliminary
Prospectus or the Prospectus, as then amended or supplemented, would
contain, in the opinion of Underwriters' Counsel, an untrue statement of
a material fact, or omit to state any material fact necessary in order
to make the statements therein, in light of the circumstances under
which they were made, not misleading, or, if it is necessary at any time
to amend any Preliminary Prospectus or the Prospectus to comply with the
Act and Regulations or any applicable securities or Blue Sky laws, the
Company promptly will prepare and file with the SEC, and any applicable
state or foreign securities commission, an amendment, supplement or
document that will correct such statement or omission or effect such
compliance and will furnish to the several Underwriters such number of
copies of such amendments, supplements or documents (in form and
substance satisfactory to the Representative and Underwriters' Counsel)
as the Representative may reasonably request. For purposes of this
Section 5(f), the Company will provide such information to the
Representative, the Underwriters' Counsel and counsel to the Company as
shall be necessary to enable such persons to consult with the Company
with respect to the need to amend or supplement the Registration
Statements, Preliminary Prospectus or Prospectus or file any document,
and shall furnish to the Representative and the Underwriters' Counsel
such further information as each may from time to time reasonably
request;
(g) the Company has delivered to the Representative, without
charge, as many copies of each Preliminary Prospectus as the
Representative has reasonably requested. The Company will deliver to the
Representative, without charge, from time to time during the period when
delivery of the Prospectus is required under the Act, such number of
copies of the Prospectus (as supplemented or amended) as the
Representative may reasonably request. The Company hereby consents to
the use of such copies of the Preliminary Prospectus and the Prospectus
for purposes permitted by the Act, the Regulations and the securities or
Blue Sky laws of the states or foreign jurisdictions in which the Common
Shares are offered by the several Underwriters and by all dealers to
whom Shares may be sold, both in connection with the offering and sale
of the Shares and for such period of time thereafter as the Prospectus
is required by the Act to be delivered in connection with sales by any
Underwriter or dealer. The Company has furnished or will furnish to the
Representative at least three original signed copies of the Registration
Statements as originally filed and of all amendments
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<PAGE> 13
and supplements thereto, whether filed before or after the Effective
Date, at least three copies of all exhibits filed therewith and of all
consents and certificates of experts, and will deliver to the
Representative such number of conformed copies of the Registration
Statements, including financial statements and exhibits, and all
amendments thereto, as the Representative may reasonably request;
(h) the Company will comply with the Act, the 1940 Act, the
Regulations, the Exchange Act and the rules and regulations thereunder
so as to permit the continuance of sales of, and dealings in, the Shares
, the Representative's Warrant and the Warrant Stock for as long as may
be necessary to complete the distribution of the Shares, the
Representative's Warrant and the Warrant Stock as contemplated hereby;
(i) the Company will furnish such information and pay such filing
fees and other expenses as may be required, and otherwise cooperate in
the registration or qualification of the Shares, the Representative's
Warrant and the Warrant Stock, or exemption therefrom, for offering and
sale by the several Underwriters and by dealers under the securities or
Blue Sky laws of such jurisdictions in which the Representative
determines to offer the Shares, the Representative's Warrant and the
Warrant Stock, after consultation with the Company, and will file such
consents to service of process or other documents necessary or
appropriate in order to effect such registration or qualification;
provided, however, that no such qualification shall be required in any
jurisdiction where, solely as a result thereof, the Company would be
subject to taxation or qualification as a foreign corporation doing
business in such jurisdiction where it is not now so qualified or to
take any action that would subject it to service of process in suits,
other than those arising out of the offering or sale of the Shares, the
Representative's Warrant and the Warrant Stock, in any jurisdiction
where it is not now so subject. The Company will, from time to time,
prepare and file such statements and reports as are or may be required
to continue such qualification in effect for so long a period as is
required under the laws of such jurisdictions for such offering and
sale;
(j) the Company will make generally available to its security
holders, as soon as practicable, but not later than 45 days after the
end of the period covered thereby, an earnings statement of the Company
(which need not be audited unless required by the Act or the
Regulations) that shall comply with Section 11 (a) of the Act and the
Regulations (including, at the option of the Company, Rule 158) and
cover a period of at least 12 consecutive months beginning not later
than the first day of the Company's fiscal quarter next following the
Effective Date;
(k) beginning with the quarter ended September 30, 1999, the
Company will file quarterly and annual reports with the SEC to the same
extent as issuers subject to the periodic reporting requirements of the
Exchange Act, and for a period of five years from the Effective Date,
the Company will deliver to the Representative: (i) a copy of each
report or document, including, without limitation, reports on Forms 8-K,
10-K and 10-Q (or such similar forms as may be designated by the SEC),
registration statements and any exhibits thereto, filed with or
furnished to the SEC or any securities exchange or the Nasdaq Stock
Market's SmallCap Market or the NASD, on the date each such report or
document is so filed or furnished; (ii) as soon as practicable, copies
of any reports or communications (financial or other) of the Company
mailed to its security holders; and (iii) every press release in respect
of the Company or its affairs that is released or prepared by the
Company;
(l) during the course of the distribution of the Shares, the
Company will not take, directly or indirectly, any action designed to,
or that could reasonably be expected to, cause or result in
stabilization or manipulation of the price of the Common Shares;
(m) the Company will not engage in any transactions with affiliates
(as defined in the Regulations) without the prior approval of a majority
of the disinterested members of its Board of Directors;
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<PAGE> 14
(n) the Company will use all reasonable efforts to list the Common
Shares (including, without limitation, the Shares and the Warrant Stock)
for quotation on the Nasdaq Stock Market's SmallCap Market;
(o) the Company shall, at its sole cost and expense, supply and
deliver to the Representative and Underwriters' Counsel, within a
reasonable period from the Closing Date, closing binders, in such number
as the Representative shall reasonably request, each of which shall
include the Registration Statements, as amended or supplemented, all
exhibits to the Registration Statements, the Prospectus, as amended or
supplemented, the Preliminary Blue Sky Memorandum and any supplement
thereto, all underwriting and closing documents and all other
correspondence, filings and applications with the SEC, the NASD and the
Nasdaq Stock Market's SmallCap Market;
(p) the Company will use the net proceeds from the sale of the
Shares to be sold by it hereunder substantially in accordance with the
description set forth under the caption "Use of Proceeds" in the
Prospectus and shall file such reports with the SEC with respect to the
sale of such Shares and the application of the proceeds therefrom as may
be required under the Regulations, including, but not limited to, Rule
463;
(q) the Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar
(which may be the same entity as the transfer agent) for its Common
Shares;
(r) the Company will take such steps as shall be necessary to
insure that it complies with all requirements of an "investment company"
within the meaning of such term under the Investment Company Act, and
the rules and regulations of the SEC thereunder;
(s) during the Lock-Up Period, the Company will not, without the
prior written consent of the Representative, effect the Disposition of,
directly or indirectly, any Securities other than the sale of the Firm
Shares, the Optional Shares, the Representative's Warrant and the
Warrant Stock hereunder and the Company's issuance of Common Stock upon
the exercise of options, presently outstanding, under the Company's
stock option plans (the "Stock Plans") and expressly described in the
Prospectus;
(t) for a period of five years from the Effective Date, the Company
will deliver to the Representative, subject to execution of an
appropriate confidentiality agreement, such additional information
concerning the business and financial condition of the Company as the
Representative may from time to time reasonably request, and which can
be prepared or obtained by the Company without unreasonable effort or
expense;
(u) on or prior to the Closing Date, the Company shall sell to the
Representative or its designees, individually and not as representatives
of the Underwriters, the Representative's Warrant to purchase an
aggregate of 66,204 shares of Warrant Stock;
(v) if the officers, directors or certain shareholders of the
Company are required by the "blue sky" or securities authority of any
jurisdiction selected by the Representative pursuant to Section 5(i) to
escrow or agree to restrict the sale of any security of the Company
owned by them for the Company to qualify or register the Shares, the
Representative's Warrant or the Warrant Stock for sale under the "blue
sky" or securities laws of any such jurisdiction, the Company shall
cause each such person to escrow or restrict the sale of such security
on the terms and conditions and in the form specified by the securities
administrator of such jurisdiction;
(w) until the expiration of years from the Closing Date, if
the Representative, individually and not as representative of the
Underwriters, shall so indicate in writing to the Company, the Company
shall use its best efforts to cause an individual selected from time to
time by the Representative to be elected a director of the Company;
(x) until the expiration of years from the Closing Date, the
Company shall afford the Representative, individually and not as
representative of the Underwriters, the right of first refusal to
14
<PAGE> 15
purchase for the Representative's own account or to sell for the account
of the Company or any subsidiary of the Company (or any successor to any
of them), or any of the Company's stockholders owning at least %
of the Common Stock (the "Principal Shareholders"), any securities of
the Company or any such subsidiary (or successor to any of them) which
the Company or any such subsidiary or successor or any of the Principal
Shareholders may seek to sell whether pursuant to registration under the
Act or otherwise. Any of the Company or any subsidiary or such successor
intending to make such an offering is hereinafter referred to as a
"Company Offeror." If during such year period any Company
Offeror or Principal Shareholder intends to make an offering, before any
discussions of the proposed offering with any other prospective
underwriter or agent shall occur, the Company shall notify the
Representative of such intention and of the proposed terms of the
offering and will offer to the Representative the opportunity to
purchase or sell any such securities on terms not more favorable to the
Company Offeror or such Principal Shareholder, as the case may be, than
those of the proposed offering. The Company shall thereafter promptly
furnish the Representative with such information concerning the
operations, business, properties, assets, liabilities, or future
prospects of the Company or such subsidiary or successor and, if
applicable, the Principal Shareholder shall furnish such information
concerning such Principal Shareholder as the Representative may
reasonably request. If within 30 business days after receipt of all such
information the Representative does not accept in writing the offer to
purchase or sell such securities for the Representative's own account
or, at the Representative's option, act as sole underwriter or sole
agent or as co-underwriter or co-agent with others, as the case may be,
as aforesaid with respect to such offering upon the terms proposed, the
Company Offeror or Principal Shareholder, as the case may be, shall be
free to enter into discussions with other underwriters or agents with
respect to such offering and to effect such offering upon such proposed
terms within six months of the date of such notice. Before the Company
Offeror or Principal Shareholder, as the case may be, shall accept any
proposal less favorable to the Company or such Principal Shareholder, as
the case may be, than that conveyed to the Representative in such
notice, the rights set forth in this Section 5(x) shall be reinstated
and the same procedure with respect to such modified proposal as
provided above shall be adopted. In connection with any public offering,
the Representative may include other persons as underwriters or dealers.
The Representative's failure to exercise its rights under this Section
5(x) with respect to any particular proposed offering shall not affect
the Representative's rights under this Section 5(x) with respect to any
other proposed offering. The Company will use its best efforts to cause
its Principal Shareholders to comply with the provisions of this Section
5(x);
(y) if, at any time after the date that the Registration Statement
is declared effective with the Commission or with the Florida Department
of Banking and Finance (the "Florida Department"), whichever date is
later, and prior to the end of the period during which a Prospectus
relating to the Shares or the Warrant Stock is required to be delivered
hereunder or under the Act or the Regulations, the Company or any of its
affiliates commences doing business with the government of Cuba or with
any person or affiliate located in Cuba, the Company will so inform the
Florida Department within ninety days after such commencement of
business in Cuba, and if, during such period when a Prospectus is
required to be delivered, any change occurs with respect to previously
reported information, the Company will inform the Florida Department
within ninety days after the occurrence of such change;
(z) if at any time during the thirty (30) day period after the
Registration Statement becomes effective, any rumor, publication or
event relating to or affecting the Company shall occur as a result of
which, in the Representative's reasonable opinion, the market price of
the Common Shares has been or is likely to be materially affected
(regardless of whether such rumor, publication or event necessitates an
amendment of or supplement to the Prospectus), the Company will, after
written notice from the Representative advising the Company to the
effect set forth above, forthwith prepare, consult with the
Representative concerning the substance of, and disseminate a press
release or other public statement, reasonably satisfactory to the
Representative, responding to or commenting on such rumor, publication
or event;
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<PAGE> 16
(aa) the Company will not establish a record date for the payment
of dividends or other distributions which is earlier than seven (7) full
business days after the last day on which the several Underwriters
exercise their option to purchase the Optional Shares pursuant to this
Agreement; and
(bb) the Company will deliver to the Representative copies of all
financial statements forwarded to the Company by the various entities in
which the Company holds debt or equity interests within five (5)
business days of the receipt of such financial statements by the
Company.
6. PAYMENT OF FEES.
(a) Whether or not the transactions contemplated by this Agreement
are consummated and regardless of the reason this Agreement is
terminated, the Company will pay or cause to be paid, and bear or cause
to be borne, all costs and expenses incident to the performance of the
obligations of the Company under this Agreement, including:
(i) the fees and expenses of the accountants and counsel for the
Company incurred in the preparation of the Registration Statements
and any post-effective amendments thereto (including financial
statements and exhibits), Preliminary Prospectuses and the Prospectus
and any amendments or supplements thereto;
(ii) printing and mailing expenses associated with the
Registration Statements and any post-effective amendments thereto,
Preliminary Prospectus, the Prospectus, this Agreement, the Agreement
Among Underwriters, the Underwriters' Questionnaire submitted to each
of the Underwriters by the Representative in connection herewith, the
Power of Attorney executed by each of the Underwriters in favor of
the Representative, the Selected Dealer Agreement and related
documents and the preliminary Blue Sky memorandum (collectively with
any supplement thereto, the "Blue Sky Memorandum");
(iii) the costs (other than fees and expenses of the
Underwriters' Counsel, except such fees incurred in connection with
Blue Sky and NASD filings or exemptions as provided herein and any
fees incurred under Section (6)(a)(xiv)) incident to the
authentication, insurance, sale and delivery of the Shares, the
Representative's Warrant and the Warrant Stock to the Underwriters;
(iv) the fees, expenses and all other costs of qualifying the
Shares, the Representative's Warrant and the Warrant Stock for sale
under the securities or Blue Sky laws of those states in which the
Shares, the Representative's Warrant and the Warrant Stock are to be
offered or sold, including, without limitation, the reasonable fees
and expenses of Underwriters' Counsel and such local counsel as may
have been reasonably required and retained for such purpose;
(v) the fees, expenses and other costs of, or incident to,
securing any review or approvals by or from the NASD, including the
reasonable fees and expenses of the Underwriters' Counsel;
(vi) the filing fees of the SEC;
(vii) the cost of furnishing to the Underwriters copies of the
Registration Statements, Preliminary Prospectuses and Prospectuses as
herein provided;
(viii) the Company's travel expenses in connection with meetings
with the brokerage community and institutional investors;
(ix) the costs and expenses associated with settlement in same
day funds (including, but not limited to, interest or cost of funds
expenses), if desired by the Company;
(x) any fees or costs payable to the Nasdaq Stock Market's
SmallCap Market as a result of the offering;
(xi) the cost of printing certificates for the Shares, the
Representative's Warrant and the Warrant Stock;
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<PAGE> 17
(xii) the cost and charges of any transfer agent;
(xiii) all taxes, if any, on the issuance, delivery and transfer
of the Shares, the Representative's Warrant and the Warrant Stock
sold by the Company; and
(xiv) all other costs and expenses reasonably incident to the
performance of the Company's obligations hereunder that are not
otherwise specifically provided for in this Section 6(a); provided,
however, that, except as specifically set forth in Section 6(c)
hereof, the Company shall pay to the Representative, an accountable
expense allowance of $100,000 to cover expenses incurred by the
Representative in connection with the Offering (including price
stabilization transactions).
(b) The Company shall pay as due any state or foreign registration,
qualification and filing fees and any accountable out-of-pocket
disbursements in connection with such registration, qualification or
filing in the states and foreign jurisdictions in which the
Representative determines to offer or sell the Shares.
(c) If the Underwriters are willing to proceed with the offering,
and the transactions contemplated by this Agreement are not consummated
because the Company elects not to proceed with the offering for any
reason or if the Representative terminates this Agreement pursuant to
Section 10(b) hereof, then the Company will reimburse the Representative
for its out-of-pocket expenses, including, without limitation, fees and
disbursements of Underwriters' Counsel, incurred in connection with
investigating, marketing and proposing to market the Shares or in
contemplation of performing their obligations hereunder, in an amount
not to exceed $100,000.
7. CONDITIONS OF UNDERWRITERS' OBLIGATIONS.
The obligation of each Underwriter to purchase and pay for the Firm
Shares that it has agreed to purchase hereunder on the Closing Date, and to
purchase and pay for any Optional Shares as to which it exercises its right
to purchase under Section 4 on an Option Closing Date, is subject at the
date hereof, the Closing Date and any Option Closing Date, to the
continuing accuracy and fulfillment of the representations and warranties
of the Company, to the performance by the Company of their covenants and
obligations hereunder, and to the following additional conditions:
(a) if required by the Regulations, the Prospectus shall have been
filed with the SEC pursuant to Rule 424(b) of the Regulations within the
applicable time period prescribed for such filing by the Regulations. On
or prior to the Closing Date or any Option Closing Date, as the case may
be, no stop order or other order preventing or suspending the
effectiveness of the Primary Registration Statement or the Rule 462(b)
Registration Statement, if any, or the sale of any of the Shares shall
have been issued under the Act or any state securities law, and no
proceedings for that purpose shall have been initiated or shall be
pending or, to the Representative's knowledge or the knowledge of the
Company, shall be contemplated by the SEC or by any authority in any
jurisdiction designated by the Representative pursuant to Section 5(i)
hereof. Any request on the part of the SEC for additional information
shall have been complied with to the reasonable satisfaction of
Underwriters' Counsel;
(b) all corporate proceedings and other matters incident to the
authorization, from and validity of this Agreement, the Shares, the
Representative's Warrant Agreement, the Representative's Warrant or the
Warrant Stock, and the form of the Registration Statements and the
Prospectus, as amended and supplemented, and all other legal matters
relating to this Agreement and the transactions contemplated hereby
shall be satisfactory in all material respects to Underwriters' Counsel.
The Company shall have furnished to such counsel all documents and
information that they may have reasonably requested to enable them to
pass upon such matters;
(c) the NASD shall have indicated it has no objection to the
underwriting arrangements pertaining to the sale of any Shares, the
Representative's Warrant or the Warrant Stock;
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<PAGE> 18
(d) the Company shall have entered into the Representative's
Warrant Agreement with the Representative and the Representative shall
have received a copy of an executed Lock-up Agreement from each person
described on Schedule hereto;
(e) the Representative shall have received at or prior to the
Closing Date from the Underwriters' Counsel a memorandum or summary, in
form and substance satisfactory to the Representative, with respect to
the qualification for offering and sale by the Underwriters of the
Shares under the securities or Blue Sky laws of such jurisdictions
designated by the Representative pursuant to Section 5(i) hereof;
(f) on the Closing Date and any Option Closing Date, there shall
have been delivered to the Representative a signed opinion of Clark &
Stant, a professional corporation, counsel for the Company in the form
attached hereto as Exhibit 1, dated as of each such date and addressed
to the Representative individually and as representatives of the several
Underwriters to such effect as is reasonably satisfactory to the
Representative;
(g) at the Closing Date and any Option Closing Date: (i) the
Registration Statements and any post-effective amendment thereto and the
Prospectus and any amendments or supplements thereto shall contain all
statements that are required to be stated therein in accordance with the
Act and the Regulations and in all material respects shall conform to
the requirements of the Act and the Regulations, and the Registration
Statements and any Post-effective amendment thereto shall not contain
any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements
therein not misleading, and the Prospectus, as amended or supplemented,
shall not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; (ii) since the respective dates as of which information
is given in the Registration Statements and any post-effective amendment
thereto and the Prospectus and any amendments or supplements thereto,
except as otherwise expressly stated therein, there shall have been no
material adverse change in the properties, condition (financial or
otherwise), results of operations, prospects, stockholders' equity,
business or management of the Company from that set forth therein,
whether or not arising in the ordinary course of business; (iii) since
the respective dates as of which information is given in the
Registration Statements and any post-effective amendment thereto and the
Prospectus or any amendment or supplement thereto, there shall have been
no event or transaction, contract or agreement entered into by the
Company, other than in the ordinary course of business and as set forth
in the Registration Statements or Prospectus, that has not been, but
would be required to be, set forth in the Registration Statements or
Prospectus; and (iv) no action, suit or proceeding at law or in equity
shall be pending or threatened against the Company that would be
required to be set forth in the Prospectus, other than as set forth
therein, and no proceedings shall be pending or threatened against or
directly affecting the Company before or by any federal, state or other
commission, board or administrative agency wherein an unfavorable
decision, ruling or finding would have a Material Adverse Effect other
than as set forth in the Prospectus;
(h) the Representative shall have received at the Closing Date and
any Option Closing Date certificates of the Company signed by the Chief
Executive Officer and the Chief Financial Officer of the Company dated
as of the date of the Closing Date or Option Closing Date, as the case
may be, and addressed to the Representative, individually and as
representative of the several Underwriters, to the effect that (i) the
signers of the certificate have read this Agreement, and the
representations and warranties of the Company in this Agreement are true
and correct in all material respects, as if made at and as of the
Closing Date or the Option Closing Date, as the case may be, and the
Company has complied in all material respects with all the agreements,
fulfilled in all material respects all the covenants and satisfied in
all material respects all the conditions on its part to be performed,
fulfilled or satisfied at or prior to the Closing Date or the Option
Closing Date, as the case may be, and (ii) the signers of the
certificate have carefully examined the Registration
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<PAGE> 19
Statement and the Prospectus and any amendments or supplements thereto,
and the conditions set forth in Section 7(h) hereof have been satisfied;
(i) at the time this Agreement is executed and at the Closing Date
and any Option Closing Date, the Representative shall have received a
letter addressed to the Representative, individually and as
representatives of the several Underwriters, in form and substance
satisfactory to the Representative in all respects (including, without
limitation, the non-material nature of the changes or decreases, if any,
referred to in clause (iii) below) from Hoffman, Morrison & Fitzgerald,
P.C., dated as of the date of this Agreement, the Closing Date or the
Option Closing Date, as the case may be:
(i) confirming they are independent certified public accountants
within the meaning of the Act and the Regulations, and stating that
the section of the Primary Registration Statement under the caption
"Experts" is correct insofar as it relates to them;
(ii) stating that, in their opinion, the consolidated financial
statements, schedules and notes of the Company audited by them and
included in the Registration Statements comply in form in all
material respects with the applicable accounting requirements of the
Act and the Regulations;
(iii) stating that, on the basis of specified procedures, which
included the applicable procedures specified by the American
Institute of Certified Public Accountants for a review of interim
financial information, as described in SAS No. 71, Interim Financial
Information, a reading of the latest available unaudited interim
consolidated financial statements of the Company (with an indication
of the date of the latest available unaudited interim financial
statements), a reading of the minutes of the meetings of the
stockholders and the Board of Directors of the Company and executive,
audit and compensation committees of such Board, if any, and
inquiries to certain officers and other employees of the Company
responsible for operational, financial and accounting matters and
other specified procedures and inquiries, nothing has come to their
attention that would cause them to believe that (A) the unaudited
consolidated financial statements of the Company included in the
Registration Statements and related schedules if any, (1) do not
comply in form and in all material respects with the applicable
accounting requirements of the Act and the Regulations, or (2) should
be materially modified in order for such unaudited financial
statements to be in conformity with generally accepted accounting
principles; (B) at a specified date not more than five business days
prior to the date of such letter, there was any change in the capital
stock or debt of the Company or any decrease in net current assets,
total assets or stockholders' equity of the Company as compared with
the amounts shown in the December 31, 1997 consolidated balance sheet
of the Company included the Registration Statements, or that for the
period from January 1, 1998 to a specified date not more than five
days prior to the date of the letter, there were any decreases in
revenues, operating income or total or per share amounts of net
income, except in all instances for changes, decreases or increases
that the Registration Statements disclose have occurred or may occur
and except for such other changes, decreases or increases which the
Representative shall in its sole discretion accept; or (C) the
unaudited pro forma financial statements included in the Registration
Statements, if any, do not comply as to form in all material respects
with the applicable accounting requirements of Regulation S-X under
the Act and that the pro forma adjustments have not been properly
applied to the historical amounts in the compilation of those
statements; and
(iv) stating that they have compared specific dollar amounts,
numbers of shares and other numerical data and financial information
set forth in the Registration Statement that have been specified by
the Representative prior to the date of this Agreement (to the extent
that such information is derived from the accounting records subject
to the internal control structure, policies and procedures of the
Company's accounting system, or has been derived directly from such
accounting records by analysis or comparison or has been derived from
other records and
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<PAGE> 20
analyses maintained or prepared by the Company) with the results
obtained from the application of readings, inquiries and other
appropriate procedures (which procedures do not constitute an audit
in accordance with generally accepted auditing standards) set forth
in the letter, and found them to be in agreement;
(j) the Representative shall have received from Hoffman, Morrison &
Fitzgerald, P.C., a letter addressed to the Company and made available
to the Representative for the use of the Underwriters stating that their
review of the Company's system of internal accounting controls, to the
extent they deem necessary in establishing the scope of their audit of
the Company's consolidated financial statements as of June 30, 1997 did
not disclose any weaknesses in internal controls that they considered to
be material weaknesses;
(k) there shall have been duly tendered to the Representative for
the respective accounts of the Underwriters certificates representing
all of the Shares to be purchased by the Underwriters on the Closing
Date or any Option Closing Date, as the case may be;
(l) at the Closing Date and any Option Closing Date, the
Representative shall have been furnished such additional documents,
information and certificates as they shall have reasonably requested;
(m) the issuance and sale of the Shares, the Representative's
Warrant and the Warrant Stock shall be legally permitted under
applicable Blue Sky or state securities laws so long as such sales are
made in accordance with the Blue Sky Memorandum;
(n) Prior to or on the Closing Date, the application for quotation
of the Shares and the Warrant Stock on NASDAQ shall have been approved
for quotation on NASDAQ subject to notice of issuance;
(o) all corporate and other proceedings and other matters incident
to the authorization, form and validity of this Agreement and the
Representative's Warrant Agreement and the form of the Registration
Statements and Prospectus and all other legal matters related to this
Agreement and the transactions contemplated hereby (including but not
limited to all opinions, certificates, letters and documents required or
permitted hereunder) shall be reasonably satisfactory in all respects to
Underwriters' Counsel. The Company shall have furnished to such counsel
all documents and information that they shall have reasonably requested
to enable them to pass upon such matters.
The Company shall furnish the Representative with such conformed
copies of such opinions, certificates, letters and other documents as they
shall reasonably request. All such opinions, certificates, letters and
documents shall be in compliance with the provisions hereof only if they
are reasonably satisfactory in form and substance to the Representative and
the Underwriters' Counsel. If any condition to the Underwriters'
obligations hereunder to be fulfilled prior to or at the Closing Date or
any Option Closing Date, as the case may be, is not fulfilled, the
Representative may on behalf of the several Underwriters terminate this
Agreement with respect to the Closing Date or such Option Closing Date, as
applicable, or, if they so elect, waive any such conditions that have not
been fulfilled or extend the time for their fulfillment. Any such
termination shall be without liability of the Underwriters to the Company.
8. INDEMNIFICATION AND CONTRIBUTION
(a) The Company shall indemnify and hold harmless each Underwriter,
and each person, if any, who controls each Underwriter within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act, against any and
all loss, liability, claim, damage and expense whatsoever, including, but
not limited to, any and all reasonable expenses incurred in investigating,
preparing or defending against any litigation, commenced or threatened, or
any claim whatsoever or in connection with any investigation or inquiry of,
or action or proceeding that may be brought against, the respective
indemnified parties, arising out of or based upon (i) any breach of
representations and warranties made in this Agreement; (ii) any untrue
statements or alleged untrue statements of material fact contained in any
Preliminary Prospectus, the Registration Statements or the Prospectus, or
any amendment or supplement thereto, any
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<PAGE> 21
application or other document (in this Section 8 collectively called
"application") executed by the Company and based upon written information
furnished by or on behalf of the Company filed in any jurisdiction in order
to qualify all or any part of the Shares, the Representative's Warrant or
the Warrant Stock under the securities laws thereof or with the SEC or the
NASD, (iii) the omission or alleged omission therefrom of a material fact
required to be stated therein or necessary to make the statements therein
not misleading, (iv) any untrue statement or alleged untrue statement of
material fact contained in any audio or visual materials used in connection
with the marketing of the Shares, including without limitation, slides,
videos, films and tape recordings, or (v) any act or failure to act or any
alleged act or failure to act by any Underwriter in connection with, or
relating in any manner to, the Shares or the offering contemplated hereby,
and which is included as part of or referenced in any claim or action
arising out of or based upon matters covered by (i) or (ii) above;
provided, however, that the foregoing indemnity:
(i) shall not apply in respect of any statement or omission made in
reliance upon and in conformity with written information furnished to
the Company by any Underwriter through the Representative expressly for
use in any Preliminary Prospectus, the Registration Statements or
Prospectus, or any amendment or supplement thereto, as the case may be;
and
(ii) with respect to any Preliminary Prospectus, shall not inure to
the benefit of any Underwriter from whom the person asserting any such
losses, claims, damages, liabilities or expenses purchased the Shares,
the Representative's Warrant or the Warrant Stock if, at or prior to the
written confirmation of the sale of such Shares, a copy of an amended
Preliminary Prospectus or the Prospectus (or the Prospectus as amended
or supplemented) was delivered to such Underwriter, but was not sent, or
delivered to such person and the untrue statement or omission of a
material fact contained in such Preliminary Prospectus was corrected in
the amended Preliminary Prospectus or Prospectus (or the Prospectus as
amended or supplemented), unless such failure on the part of such
Underwriter is the result of noncompliance by the Company with Section
5(g) hereof.
The obligations of the Company under this Section 8(a) will be in
addition to any liability the Company may otherwise have.
(b) Each Underwriter, severally and not jointly, shall indemnify and
hold harmless the Company, each of the directors of the Company, each of
the officers of the Company who shall have signed the Registration
Statements, and each other person, if any, who controls the Company within
the meaning of the Act to the same extent as the foregoing indemnities from
the Company to the several Underwriters, but only with respect to any loss,
liability, claim, damage or expense resulting from statements or omissions,
or alleged statements or omissions, if any, made in any Preliminary
Prospectus, the Registration Statements or Prospectus or any amendment or
supplement thereto, and in conformity with written information furnished to
the Company by any Underwriter through the Representative expressly for use
in any Preliminary Prospectus, the Registration Statements or Prospectus,
or any amendment or supplement thereto, or any application, as the case may
be.
(c) If any action, inquiry, investigation or proceeding is brought
against any person in respect of which indemnification may be sought
pursuant to Section 8(a) or (b) hereof, such person (hereinafter called the
"indemnified party") shall, promptly after notification of, or receipt of
service of process for, such action, inquiry, investigation or proceeding,
notify in writing the party or parties against whom indemnification is to
be sought (hereinafter called the "indemnifying party") of the institution
of such action, inquiry, investigation or proceeding. The indemnifying
party, upon the request of the indemnified party, shall assume the defense
of such action, inquiry, investigation or proceeding, including, without
limitation, the employment of counsel (reasonably satisfactory to such
indemnified party) and payment of expenses. No indemnification provided for
in this Section 8 shall be available to any indemnified party who shall
fail to give such notice if the indemnifying party does not have knowledge
of such action, inquiry, investigation or proceeding, to the extent that
such indemnifying party has been materially prejudiced by the failure to
give such notice, but the omission to so notify the indemnifying party
shall not relieve the indemnifying party otherwise than under this Section
8. Such indemnified party or controlling
21
<PAGE> 22
person thereof shall have the right to employ its or their own counsel in
any such case, but the fees and expenses of such counsel shall be at the
expense of such indemnified party unless the employment of such counsel
shall have been authorized in writing by the indemnifying party in
connection with the defense of such action. If such indemnified party or
parties shall have been advised by counsel that there may be a conflict
between the positions of the indemnifying party or parties and of the
indemnified party or parties or that there may be legal defenses available
to such indemnified party or parties different from or in addition to those
available to the indemnifying party or parties, the indemnified party or
parties shall be entitled to select counsel to conduct the defense to the
extent determined by such counsel to be necessary to protect the interests
of the indemnified party or parties, and the reasonable fees and expenses
of such counsel shall be borne by the indemnifying party. Expenses covered
by the indemnification in this Section 8 shall be paid by the indemnifying
party as they are incurred by the indemnified party. No indemnifying party
shall, without the prior written consent of the indemnified party, effect
any settlement of any pending or threatened action in respect of which any
indemnified party is or could have been a party and indemnity could have
been sought hereunder by such indemnified party unless such settlement
includes an unconditional release of such indemnified party from all
liability on any claims that are the subject matter of such action.
Anything in this Section 8 to the contrary notwithstanding, the
indemnifying party shall not be liable for any settlement of any such claim
effected without its written consent.
(d) If the indemnification provided for in this Section 8 is
unavailable or insufficient to hold harmless an indemnified party under
Section 8(a) or (b) hereof in respect of any losses, liabilities, claims,
damages or expenses (or actions, inquiries, investigations or proceedings
in respect thereof) referred to herein, except by reason of the provisos
set forth in Section 8(a) hereof or the failure to give notice as required
in Section 8(c) hereof (provided that the indemnifying party does not have
knowledge of the action, inquiry, investigation or proceeding and to the
extent such party has been materially prejudiced by the failure to give
such notice), then each indemnifying party shall contribute to the amount
paid or payable by such indemnified party as a result of such losses,
liabilities, claims, damages or expenses (or actions, inquiries,
investigations or proceedings in respect thereof) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the
one hand and the Underwriters on the other from the offering of the Shares.
If, however, the allocation provided by the immediately preceding sentence
is not permitted by applicable law, then each indemnifying party shall
contribute to such amount paid or payable by such indemnified party in such
proportion as is appropriate to reflect not only such relative benefits but
also the relative fault of the Company on the one hand and the Underwriters
on the other in connection with the statements or omissions that resulted
in such losses, liabilities, claims or reasonable expenses (or actions,
inquiries, investigations or proceedings in respect thereof), as well as
any other relevant equitable considerations. The relative benefits received
by the Company an the one hand and the Underwriters on the other shall be
deemed to be in the same proportion as the total net proceeds from the
offering (before deducting expenses) received by the Company bears to the
total underwriting discount and commissions received by the Underwriters,
in each case as set forth in the table on the cover page of the Prospectus.
The relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to
information supplied by the Company on the one hand or the Underwriters on
the other hand and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission.
The Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section 8(d) were determined by
pro rata allocation or by any other method of allocation that does not take
account of the equitable considerations referred to above in this Section
8(d). The amount paid or payable by an indemnified party as a result of the
losses, liabilities, claims, damages or reasonable expenses (or actions,
inquiries, investigations or proceedings in respect thereof) referred to
above in this Section 8(d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 8(d), (i) the provisions of the Agreement Among
Underwriters shall govern contribution among Underwriters, (ii) no
Underwriter shall be required to
22
<PAGE> 23
contribute any amount in excess of the underwriting discounts and
commissions applicable to the Shares purchased by such Underwriter, and
(iii) no person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations in this Section 8(d) to contribute are several in
proportion to their individual underwriting obligations and number of
Shares sold, respectively, and not joint.
9. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. Except as the
context otherwise requires, all representations, warranties and agreements
contained in this Agreement shall be deemed to be representations, warranties
and agreements made as of the Closing Date and any Option Closing Date. All such
representations, warranties and agreements of the Underwriters and the Company,
including, without limitation, the indemnity and contribution agreements
contained in Section 8 hereof and the agreements contained in Sections 6, 9, 10
and 13 hereof, shall remain operative and in full force and effect regardless of
any investigation made by or on behalf of any Underwriter or any controlling
person, and shall survive delivery of the Shares and termination of this
Agreement, whether before or after the Closing Date or any Option Closing Date.
10. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION HEREOF.
(a) This Agreement shall become effective at the earlier of (i) 10:00
a.m., Richmond, Virginia time, on the first business day following the
Effective Date or (ii) at the time of the public offering by the
Underwriters of the Shares, whichever is earlier, except that the
provisions of Sections 6, 8, 10 and 13 hereof shall be effective upon
execution hereof. The time of the public offering, for the purpose of this
Section 10, shall mean the time when any of the Shares are first released
by the several Underwriters for offering by dealers. The Representative may
prevent the provisions of this Agreement (other than those contained in
Sections 6, 8, 10 and 13) hereof from becoming effective without liability
of any party to any other party, except as provided in Sections 6 and 8
hereof, by giving the notice indicated in Section 10(c) hereof before the
time the other provisions of this Agreement become effective.
(b) The Representative shall have the right to terminate this
Agreement at any time prior to the Closing Date as provided in Sections 7
and 11 hereof or if any of the following have occurred:
(i) since the respective dates as of which information is given in
the Registration Statements and the Prospectus, any material adverse
change or any development involving a prospective material adverse
change in or affecting the condition, financial or otherwise, of the
Company, or the earnings, business affairs, management or business
prospects of the Company, whether or not arising in the ordinary course
of business, that would, in the Representative's reasonable judgment,
make the offering or delivery of the Shares impracticable;
(ii) any outbreak of hostilities or other national or international
calamity or crisis or change in economic, political or financial market
conditions if the effect on the financial markets of the United States
of such outbreak, calamity, crisis or change would, in the
Representative's reasonable judgment, make the offering or delivery of
the Shares impracticable;
(iii) suspension of trading generally in securities on the New York
Stock Exchange, the American Stock Exchange, or the over-the-counter
market (including, without limitation, the Nasdaq Stock Market's
SmallCap Market) or limitation on prices (other than limitations on
hours or numbers of days of trading) for securities or the promulgation
of any federal or state statute, regulation, rule or order of any court
or other governmental authority that in the Representative's sole
opinion materially and adversely affects trading of the Shares on such
exchange or over-the-counter market;
(iv) the enactment, publication, decree or other promulgation of
any federal or state statute, regulation, rule or order of any court or
other governmental authority that in the Representative's reasonable
opinion materially and adversely affects or will materially or adversely
affect the business or operations of the Company;
23
<PAGE> 24
(v) the taking of any action by any federal, state or local
government or agency in respect of monetary or fiscal affairs that in
the Representative's reasonable opinion has a material adverse effect on
the securities markets in the United States; or
(vi) trading in any securities of the Company shall have been
suspended or halted by the Nasdaq Stock Market's National Market System,
the Nasdaq SmallCap Market, or the SEC.
(c) If the Representative elects to prevent this Agreement from
becoming effective or to terminate this Agreement as provided in this
Section 10, the Representative shall notify the Company thereof promptly by
telephone, telegram or facsimile, confirmed by letter.
11. DEFAULT BY AN UNDERWRITER.
(a) If any Underwriter shall default in its or their obligation to
purchase Firm Shares or Optional Shares hereunder, and if the Firm Shares
or Optional Shares with respect to which such default relates do not exceed
in the aggregate 10% of the number of Firm Shares or Optional Shares, as
the case may be, that all Underwriters have agreed to purchase hereunder,
then such Firm Shares or Optional Shares to which the default relates shall
be purchased severally by the non-defaulting Underwriters in proportion to
their respective commitments hereunder.
(b) If such default relates to more than 10% of the Firm Shares or
Optional Shares, as the case may be, the Representative may in its sole
discretion arrange for another party or parties (including a non-defaulting
Underwriter) to purchase such Firm Shares or Optional Shares to which such
default relates, on the terms contained herein. In the event that the
Representative does not arrange for the purchase of the Firm Shares or
Optional Shares to which a default relates as provided in this Section
11(b), this Agreement may be terminated by the Representative or by the
Company without liability on the part of the several Underwriters (except
as provided in Section 8 hereof) or the Company (except as provided in
Sections 6 and 8 hereof); provided that if such default occurs with respect
to Optional Shares after the Closing Date, this Agreement will not
terminate as to the Firm Shares or any Optional Shares purchased prior to
such termination. Nothing herein shall relieve a defaulting Underwriter of
its liability, if any, to the other several Underwriters and to the Company
for damages occasioned by its default hereunder.
(c) If the Firm Shares or Optional Shares to which the default relates
are to be purchased by the nondefaulting Underwriters, or are to be
purchased by another party or parties, the Representative or the Company
shall have the right to postpone the Closing Date or any Option Closing
Date, as the case may be, for a reasonable period, but not in any event
exceeding seven days, in order to effect whatever changes may thereby be
made necessary in the Registration Statements or the Prospectus or in any
other documents and arrangements, and the Company agrees to file promptly
any amendment to the Registration Statements or supplement to the
Prospectus that in the opinion of Underwriters' Counsel may thereby be made
necessary. The terms "Underwriters" and "Underwriter" as used in this
Agreement shall include any party substituted under this Section 11 with
like effect as if it had originally been a party to this Agreement with
respect to the Firm Shares and/or Optional Shares purchased by it.
(d) It is understood that the Representative, individually and not as
the representatives of the several Underwriters, may (but shall not be
obligated to) make payment of the purchase price on behalf of any
Underwriter or Underwriters whose check or checks shall not have been
received by them prior to the Closing Date or the Option Closing Date for
the Firm Shares or Optional Shares, as the case may be, to be purchased by
such Underwriter or Underwriters. Any such payment by the Representative
shall not relieve any such Underwriter or Underwriters of any of its or
their obligations hereunder.
12. INFORMATION FURNISHED BY UNDERWRITERS. For all purposes of this
Agreement, the amounts of the selling concession and reallowance set forth in
the Prospectus constitute the only information furnished in writing by or on
behalf of any Underwriter expressly for inclusion in any Preliminary Prospectus,
the Registration Statement, or the Prospectus (as from time to time amended or
supplemented), or any amendment or supplement thereto, or in any application, as
the case may be.
24
<PAGE> 25
13. NOTICE. All communications hereunder, except as otherwise specifically
provided herein, shall be in writing and, if sent to the Representative or any
Underwriter, shall be mailed, delivered, telegrammed or faxed and confirmed to
such Underwriter, c/o Scott & Stringfellow, 909 East Main Street, Richmond,
Virginia 23219, Attention: Mr. J. Scott Cardozo, with a copy to Kaufman &
Canoles, One Commercial Place, Norfolk, Virginia 23510, Attention: John M.
Paris, Jr., Esq., and T. Richard Litton, Jr., Esq. if sent to the Company, shall
be mailed, delivered, telegrammed or faxed and confirmed to Waterside Capital
Corporation, 300 East Main Street, Suite 1380, Norfolk, Virginia 23510,
Attention: Alan Lindauer, Chairman, President and Chief Executive Officer, with
a copy to Clark & Stant, One Columbus Center, Virginia Beach, Virginia 23462,
Attention: Frederick J. Stant, Esq.
14. PARTIES. This Agreement shall inure solely to the benefit of, and
shall be binding upon, the several Underwriters, the Company, the controlling
persons, directors and officers thereof, and their respective successors,
assigns, heirs, legatees and legal representatives, and no other person shall
have or be construed to have any legal or equitable right, remedy or claim under
or in respect of or by virtue of this Agreement or any provision herein
contained. The terms "successors" and "assigns" shall not include any purchaser
of the Shares merely because of such purchase.
15. DEFINITION OF BUSINESS DAY. For purposes of this Agreement, "business
day" means any day on which the Nasdaq Stock Market's SmallCap Market is opened
for trading.
16. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, and all such counterparts will constitute one and the same
instrument.
17. CONSTRUCTION. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Virginia applicable to
agreements made and performed entirely within the Commonwealth.
18. CONSENT TO JURISDICTION. The Company irrevocably consents to the
jurisdiction of the courts of the Commonwealth of Virginia in Richmond, Virginia
and of any federal court located in the Commonwealth of Virginia in Richmond,
Virginia in connection with any action or proceeding arising out of or relating
to this Agreement, any document or instrument delivered pursuant to, in
connection with, or simultaneously with this Agreement, or a breach of this
Agreement or any such document or instrument. In any such action or proceeding,
the Company waives personal service of any summons, complaint, or other process
and agrees that service thereof may be made in accordance with Section 13.
Within 30 days after such service, or such other time as may be mutually agreed
upon in writing by the attorneys for the parties to such action or proceeding,
the Company shall appear or answer such summons, complaint, or other process.
Should the Company fail to appear or answer within such 30-day period or such
extended period, as the case may be, the Company shall be deemed in default and
judgment may be entered against the Company for the amount as demanded in any
summons, complaint, or other process so served.
If the foregoing correctly sets forth your understanding of our agreement,
please sign and return to the Company the enclosed duplicate hereof, whereupon
it will become a binding agreement in accordance with its terms.
Very truly yours,
WATERSIDE CAPITAL CORPORATION
By:
----------------------------------
Alan Lindauer, Chairman, President
and Chief Executive Officer
BY: SCOTT & STRINGFELLOW, INC.
By:
-----------------------------
Authorized Representative
25
<PAGE> 26
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF FIRM SHARES
UNDERWRITER TO BE PURCHASED
- ------------------------------------------------------------------------ ---------------------
<S> <C>
Scott & Stringfellow, Inc...............................................
------------
TOTAL...................................................................
------------
============
</TABLE>
I-1
<PAGE> 27
SCHEDULE II
PERSONS WHO ARE TO DELIVER LOCK-UP AGREEMENTS
Officers and Directors
J. Alan Lindauer
[INSERT]
Shareholders
[INSERT]
I-2
<PAGE> 1
WATERSIDE CAPITAL
CORPORATION
COMMON SHARES
---------------------------------------------------
SELECTED DEALER AGREEMENT
---------------------------------------------------
Richmond, Virginia
, 1998
Ladies and Gentlemen:
We have delivered to you a prospectus (the "Prospectus") relating to the
offering by Waterside Capital Corporation, a Virginia corporation (the
"Company"), of the number of shares of common stock of the Company stated
therein ("Shares"). The undersigned has agreed to purchase the Shares, subject
to the conditions specified in the Underwriting Agreement.
Subject to the terms and conditions hereof and to the modification,
withdrawal or cancellation of the offering without notice, and subject to the
terms and conditions of the Underwriting Agreement, one or more of the
Underwriters, acting through us, are severally offering to certain dealers
("Dealers") (included among whom may be any or all of the Underwriters and their
respective subsidiaries) who are members of the National Association of
Securities Dealers, Inc. (the "NASD") or foreign dealers registered under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), who shall
agree, in making sales of the Shares in the United States, to conform to the
NASD Conduct Rules, or if not so registered, shall agree not to reoffer, resell
or deliver the Shares in the United States, its territories or possessions or to
persons who they have reason to believe are citizens thereof or residents
therein, unless they comply with the NASD's Interpretation with Respect to
Free-Riding and Withholding and comply, as though they were members of the NASD,
with the provisions of Rules 2730, 2740 and 2750 of the NASD Conduct Rules and
with Rule 2420 of the NASD Conduct Rules as that rule applies to a nonmember
foreign dealer, the opportunity to purchase Shares at $ per Share (the
"public offering price") less a concession to Dealers of $ per Share. This
offer is extended to you only on behalf of such of the Underwriters as may
lawfully sell Shares to Dealers in your state.
We shall advise you by telegram, facsimile or letter of the method and
terms of the offering. Acceptance of any reserved Shares, which must be sent by
telegraph or in writing to us, received by the time specified therefor in the
offering telegram, facsimile or letter to us by the time specified therefore in
the offering communication, and any application for additional Shares, will be
subject to rejection in whole or in part. The subscription books for the
offering to Dealers may be closed by us at any time without notice and we
reserve the right to reject any subscription in whole or in part. All
subscriptions will be received subject to prior sale.
Immediately upon receipt of the aforementioned telegram, facsimile or
letter, you may reoffer the Shares purchased by you hereunder, subject to the
Underwriter's receipt and acceptance of the Shares, and upon the other terms and
conditions set forth herein and in the Prospectus. Shares purchased hereunder or
pursuant to the following sentence are to be offered to the public at the public
offering price, except that an amount not exceeding $ per Share may be
allowed to any member of the NASD (or to foreign dealers who are not eligible
for such membership but who agree to conform to the NASD Conduct Rules in making
sales to purchasers in the United States) acting as principal or as buyer's
agent, if such allowance is to be retained and not reallowed in whole or in
part. With our consent or after the books in respect of the offering to Dealers
have been closed, Dealers who are parties to the Selected Dealer Agreement and
Underwriters may deal in Shares with each other at the public offering price
less an amount not exceeding the concession to Dealers. After the Shares are
released for sale to the public, we are authorized to vary the public offering
price and other selling terms.
1
<PAGE> 2
The Shares confirmed to you are to be paid for at the public offering price
less the concession to Dealers at the offices of Scott & Stringfellow, 909 East
Main Street, Richmond, Virginia, prior to 9:00 a.m., Richmond, Virginia time, on
the Closing Date and, if applicable, the Option Closing Date, as defined in the
Underwriting Agreement, by certified or official bank check payable in next day
funds to our order against delivery of such Shares. Dealers not located in
Richmond should arrange to have a Richmond bank or correspondent accept delivery
of, and pay for, the Shares that they agree to purchase and should advise us
immediately of the name of such bank or correspondent.
In order to facilitate distribution of the Shares, we may make purchases
and sales of Shares (but are without obligation to do so) in the open market or
otherwise, for long or short account, at such prices, in such amounts and in
such manner as we may determine, and, in arranging for the sale of Shares to
Dealers, may over-allot for the accounts of the Underwriters, and may make
purchases for the purposes of covering such over-allotments. There can be no
assurance that the price of Shares will be stabilized or that stabilization, if
commenced, will not be discontinued at any time.
Your acceptance hereof shall constitute an obligation on your part to
purchase, upon the terms and conditions hereof, the Shares confirmed to you in
respect hereof and to observe all of the terms and conditions hereof. You agree
that in reoffering the Shares you will comply with all applicable requirements
of the Securities Act of 1933, as amended, the Exchange Act, and of all
applicable rules and regulations under the federal securities laws. If you fail
to pay for the Shares confirmed to you or fail to perform any of your other
obligations hereunder, we may, in our discretion and without demand, notice or
legal proceedings, and in addition to any and all remedies otherwise available
to us (a) terminate any right or interest on your part hereunder, and (b) at any
time and from time to time sell, without notice to you, any Shares then held for
your account at public or private sale at such price or prices and upon such
terms and conditions as we may deem fair, and apply the net proceeds so
realized, as determined by us, toward payment of any obligations in respect of
which you are in default, and, notwithstanding any action taken under (a) or (b)
above, or both, you shall remain liable to the Underwriters for all loss and
expense resulting from your default. At any such sale or sales, any of the
Underwriters may purchase any portion of the Shares so sold, free from any right
or interest on your part in such Shares. A default by one or more Dealers shall
not release you from any obligation hereunder.
You agree that until termination of this Agreement you will advise us, from
time to time upon request, as to the number of Shares confirmed to you hereunder
which then remain unsold; and you further agree that, until termination of this
Agreement, you will upon our request sell to us for our account such number of
such unsold Shares as we may specify at the public offering price or, if
agreeable to you, at the public offering price less an amount not in excess of
the concession to Dealers.
We shall have full authority to take such action as we may deem advisable
in respect to all matters pertaining to the offering or arising hereunder. You
are not authorized (a) by the Company or us to give any information or to make
any representations in connection with the offering or sale of the Shares other
than those contained in the Prospectus or (b) to act as agent for the Company or
for any of the Underwriters when offering the Shares to the public or otherwise.
Nothing contained herein shall constitute the Dealers as an association or
partnership with us or with each other, or an unincorporated business or other
separate entity.
We will advise you on request of the jurisdictions under the Blue Sky or
securities laws of which counsel for the Underwriters have advised us that the
Shares have been qualified for public offering and sale, or are exempt from
qualification. We shall, however, be under no responsibility whatsoever to any
Dealer with respect to the right of such Dealer to sell the Shares in any
jurisdiction.
We have undertaken and undertake to mail copies of the Prospectus upon
receipt of written requests to the addresses stated in such requests. You
confirm that you have undertaken and undertake to do the same with regard to the
delivery of such copies to your associated persons and to other persons.
Neither we nor any Underwriters shall be under any liability (except for
our own want of good faith) for or in respect of the validity or value of, or
title to, any of the Shares, the form of, or the statements contained in, or the
validity of, the Prospectus or any amendment or supplement thereto, or any other
instruments
2
<PAGE> 3
executed by or on behalf of the Company or others, the form or validity of the
Underwriting Agreement or this Agreement, the delivery of the Shares, the
performance by the Company or others of any agreement on its or their part or
any matter in connection with any of the foregoing; provided, however, that
nothing in this paragraph shall be deemed to relieve us or any Underwriters from
any liability imposed by federal securities laws.
You confirm that you are familiar with the Interpretation of the Board of
Governors of the NASD with respect to Free-Riding and Withholding, and you agree
that you will comply with such Interpretation in offering and selling Shares to
the public.
You further represent that neither you nor any of your directors, officers,
partners or "persons associated with" you (as defined in the By-Laws of the
NASD), nor, to your knowledge any "related person" (as defined by the Rule 2710
of the NASD Conduct Rules) have participated or intend to participate in any
transaction or dealing as to which documents or information are required to be
filed with the NASD pursuant to such Rule 2710.
All communications from you should be addressed to Scott & Stringfellow,
909 East Main Street, Richmond, Virginia 23219, Attention: Syndicate Department.
Any notice from us to you shall be deemed to have been duly authorized by the
Underwriters and to have been duly given if mailed or telegraphed to you at the
address to which this letter is addressed.
This Agreement may be terminated by us at any time without notice. Upon
termination of this Agreement, all authorizations, rights and obligations
hereunder shall cease, except rights and obligations accrued or unsatisfied at
the date of termination. Notwithstanding termination of this Agreement, you
shall be liable for your proper proportion of any transfer tax or other
liability which may be asserted against us or any of the Underwriters or Dealers
purchasing Shares hereunder, based upon the claim that the Dealers, or any of
them, constitute a partnership, an association, an unincorporated business or
other separate entity.
If before the termination of this Agreement, we shall purchase, or contract
to purchase, for the accounts of the Underwriters, in the open market or
otherwise, any Shares delivered to you pursuant hereto, you shall repay to us,
for the account of the Underwriters, the concession to Dealers with respect to
such Shares, and all brokerage commissions and transfer taxes paid in connection
with such purchase or contract to purchase.
Please confirm your agreement to abide by and conform to all the terms and
conditions of this Agreement by signing and returning at once the duplicate copy
enclosed herewith.
Yours very truly,
SCOTT & STRINGFELLOW, INC.
By:
--------------------------------
Authorized Representative
Please execute the Confirmation on next page.
3
<PAGE> 4
CONFIRMATION
SCOTT & STRINGFELLOW, INC.
909 East Main Street
Richmond, Virginia 23219
Ladies and Gentlemen:
We hereby confirm our agreement to purchase the Shares to which the
foregoing Selected Dealer Agreement relates, subject to your acceptance or
rejection in whole or in part in case of a subscription or application in excess
of any reservation, and acknowledge that such purchase and the purchase of
additional Shares, if any, prior to the termination of the Selected Dealer
Agreement, are subject to all the applicable terms and conditions thereof. We
agree to abide by and conform to the Selected Dealer Agreement and to your
offering telegram, facsimile or letter referred to therein, and to take up and
pay for such Shares as therein provided. We acknowledge receipt of the
Prospectus relating to the Shares and we hereby confirm that in entering into
the Selected Dealer Agreement and in offering the Shares we have relied and will
rely upon the Prospectus and on no other statements whatsoever, written or oral.
We further confirm that we are a member of the National Association of
Securities Dealers, Inc. ("NASD"), or if we are not such a member, that (i) we
are a foreign dealer registered under the Securities Exchange Act of 1934, as
amended, and hereby agree that in making sales of Shares in the United States we
will conform to the NASD Conduct Rules, or (ii) if not so registered, we hereby
agree not to reoffer, resell or deliver Shares in the United States, its
territories or possessions or to any person who we have reason to believe is a
citizen thereof or resident therein, unless we comply with the NASD's
Interpretation with Respect to Free-Riding and Withholding and comply, as though
we were a member of the NASD, with the provisions of Rules 2730, 2740 and 2750
of the NASD Conduct Rules and with Rule 2420 of such rules as that Rule applies
to a non-member foreign dealer.
--------------------------------------
(Name of Firm)
By:
-----------------------------------
(Authorized Signature)
--------------------------------------
(Address)
--------------------------------------
(City and State)
Dated: ____________________, 1998
4
<PAGE> 1
EXHIBIT 1
OPINION OF CLARK & STANT
COUNSEL FOR WATERSIDE CAPITAL CORPORATION
1. The Company is a corporation duly organized, validly existing and in
good standing under the laws of the Commonwealth of Virginia, with all necessary
corporate power and authority to own or lease and operate its properties and to
conduct its business as described in the Prospectus. To the knowledge of such
counsel, the Company has all licenses, permits, clearances, certifications,
registrations, approvals, consents and franchises required to own or lease and
operate its properties and to conduct its business as described in the
Prospectus. The Company is duly qualified to do business as a foreign
corporation and is in good standing in all jurisdictions in which such
qualification is required, except where the failure to so qualify would not have
a Material Adverse Effect.
2. The Company has all requisite power and authority to enter into the
Underwriting Agreement, and the Representative's Warrant Agreement and the
Underwriting Agreement and the Representative's Warrant Agreement have been duly
authorized, executed and delivered by the Company and constitute a legal, valid
and binding obligation of the Company, enforceable against the Company in
accordance with their terms, except as enforceability may be limited by
bankruptcy, insolvency or similar laws affecting creditors rights generally or
by general equitable principles, and except that the enforceability of the
indemnification and contribution provisions set forth in Section 8 of the
Underwriting Agreement may be limited by the federal and state securities laws
or principles of public policy.
3. The execution, delivery and performance of the Underwriting Agreement
and the Representative's Warrant Agreement by the Company and the consummation
of the transactions contemplated therein, do not and will not, with or without
the giving of notice or the lapse of time, or both, (a) conflict with any terms
or provisions of the Articles of Incorporation or Bylaws of the Company, (b)
result in a breach of, or constitute a default under, result in the termination
or modification of, or result in the creation or imposition of any lien,
security interest, charge or encumbrance upon any of the assets of the Company
pursuant to, any contract, indenture, mortgage, deed of trust, commitment or
other agreement or instrument to which the Company is a party or by which any of
its assets are bound or affected; (c) violate any applicable law, rule or
regulation, or to such counsel's knowledge, any judgment, order or decree, of
any government or governmental agency, instrumentality or court, domestic or
foreign, having jurisdiction over the Company or any of its respective
properties or businesses; or (d) result in a breach, termination or lapse of the
Company's corporate power and authority to own or lease and operate its assets
and to conduct its businesses as described in the Prospectus.
4. At the date or dates indicated in the Prospectus, the Company had the
duly authorized and outstanding shares of capital stock as set forth under the
caption "Capitalization" and "Description of Capital Stock" in the Prospectus
and following the issuance of the Shares on the Closing Date, will have the
capitalization set forth under capitalization as adjusted in the Prospectus. The
description of the Company's capitalization in the Prospectus conforms in all
material respects to the instruments defining the same. There are no options or
warrants for the purchase of other outstanding rights to purchase, agreements or
obligations to issue, or agreements or other rights to convert or exchange any
obligation or security into, capital stock of the Company or securities
convertible into or exchangeable for capital stock of the Company, except as and
to the extent expressly described in the Prospectus.
5. The authorized capital stock of the Company, including, without
limitation, the outstanding Common Shares, the Shares being issued, the Warrant
Stock, if and when issued, and the authorized but unissued preferred stock,
conforms in all material respects with the descriptions thereof in the
Prospectus, and such descriptions conform in all material respects with the
instruments defining the same. The information in the Prospectus insofar as it
relates to options, warrants and any other derivative or convertible security
with respect to the Common Shares and the preferred stock is true and correct in
all material respects.
6. The Common Shares outstanding immediately prior to the Closing Date have
been duly authorized and are validly issued, fully paid and non-assessable. The
Common Shares issuable upon exercise of outstanding options and warrants when
issued in accordance with the respective terms thereof, will be duly authorized,
validly issued, fully-paid and non-assessable; and none of such outstanding
Common Shares, were,
1
<PAGE> 2
and none of such issuable Shares or Warrant Stock will be, issued in violation
of any statutory preemptive rights, preemptive rights in the Company's Articles
of Incorporation or Bylaws or, to such counsel's knowledge, any other preemptive
right of any securityholder of the Company.
7. The issuance and sale of the Shares and the Warrant Stock by the Company
have been duly authorized and, when duly delivered against payment therefor as
contemplated by the Underwriting Agreement and the Representative's Warrant
Agreement, the Shares and the Warrant Stock will be validly issued, fully paid
and nonassessable, the holders thereof will not be subject to personal liability
solely by reason of being such holders, and good and valid title to the Shares
and the Warrant Stock, free and clear of all liens, claims, encumbrances,
security interests, restrictions, and defects of title whatsoever, will pass to
each of the Underwriters who have purchased such Shares and to the
Representative, if and when purchasing the Warrant Stock. None of the Shares or
Warrant Stock will be issued in violation of any statutory preemptive rights,
preemptive rights in the Company's Articles of Incorporation or Bylaws or, to
such counsel's knowledge, any other preemptive right of any securityholder of
the Company. The certificates representing the Common Shares (including the
shares to be issued by the Company) are in proper legal form under, and conform
in all respects to the requirements of, the VSCA. To the knowledge of such
counsel, neither the filing of the Registration Statements nor the offering or
sale of the Shares as contemplated by the Underwriting Agreement gives any
securityholder of the Company any rights, other than those which have been
waived, for or relating to the registration of any Common Shares or any other
securities of the Company.
8. The Common Shares (including the Shares, the Representative's Warrant
and the Warrant Stock) have been included for quotation on the Nasdaq SmallCap
Market. All previous offers and sales by or on behalf of the Company in its own
securities complied in all material respects with the provisions of all
applicable federal, state and foreign securities and corporate laws.
9. No consent, approval, authorization, order, registration, license or
permit of any court, government, governmental agency, instrumentality or other
regulatory body or official is required for (a) the valid authorization,
issuance, sale and delivery by the Company of any of the Shares, the
Representative's Warrant or the Warrant Stock, (b) the valid and legal
execution, delivery or performance by the Company of the Underwriting Agreement
and the Representative's Warrant Agreement or (c) the taking of any action
contemplated therein or in the Registration Statements or the Prospectus except
such as may be required for the registration of the Shares, the Representative's
Warrant or the Warrant Stock under the Act, the Regulations or the Exchange Act
(all of which have been obtained), or for compliance with the applicable state
or foreign securities or Blue Sky laws.
10. The statements in the Registration Statements and Prospectus, insofar
as they are descriptions or summaries of, or references to, statutes,
regulations, governmental or other proceedings, contracts, agreements, or other
documents, including without limitation (i) the Company's equity and debt
investments in its portfolio companies as described in the Registration
Statements and the Prospectus, and (ii) the description of laws, statutes,
regulations and policies in the Registration Statements and Prospectus under the
headings "Part I. Item 2. Fundamental Investment Policies of the Registrant",
"Part I. Item 3. Policies with Respect to Security Investments", "Business-SBA
Leverage", "Investment Policies", "Determination of Net Asset Value", and
"Special Income Tax Provisions Applicable to the Company" are accurate in all
material respects and present or summarize fairly the information required to be
disclosed under the Act or the Regulations. There are no contracts, agreements
or other documents required to be described or referred to in the Registration
Statements or Prospectus or to be filed as exhibits to the Registration
Statements under the Act or the Regulations that have not been so described,
referred to or filed as required. Such counsel has read all contracts referred
to in the Registration Statements or the Prospectus, and such contracts are
fairly summarized or described therein and conform in all material respects to
the descriptions thereof contained therein.
11. The Company is not in violation of, or in default under, any of the
terms or provisions of (a) its Articles of Incorporation, as amended, or Bylaws,
as amended, or similar governing instruments, or (b) except to the extent such
action would not have a Material Adverse Effect, (i) any indenture, mortgage,
deed of trust, contract, commitment or other agreement or instrument to which it
is a party or by which it or any of its properties is bound or affected; (ii)
any law, rule, regulation, judgment, order or decree of any government or
2
<PAGE> 3
governmental agency, instrumentality or court, domestic or foreign, having
jurisdiction over it or any of its properties or business; or (iii) any license,
permit, certification, registration, approval, consent or franchise referred to
in Paragraph 1 hereof.
12. There are no claims, actions, suits, proceedings, arbitrations,
investigations or inquiries pending before, or to such counsel's knowledge,
threatened or contemplated by, any governmental agency, instrumentality, court
or tribunal, domestic or foreign, or before any private arbitration tribunal, to
which the Company is a party or is threatened to be made a party that, if
determined adversely to the Company, would, in any case or in the aggregate,
have a Material Adverse Effect. Except as disclosed in the Prospectus, there are
no outstanding orders, judgments or decrees of any court, governmental agency,
instrumentality or tribunal enjoining the Company from or requiring the Company
to take or refrain from taking, any action, or pursuant to which the properties
or assets of the Company are bound.
13. The Primary Registration Statement has become effective under the Act,
as of the Effective Date and, if applicable, any Rule 462 Registration Statement
became effective under the Act upon its filing. The SEC has not issued any stop
order suspending the effectiveness of the Registration Statement, nor to such
counsel's knowledge, has the SEC instituted or threatened to institute
proceedings with respect to any such order. Any and all filings required to be
made by Rules 424, 430A and 462 under the Act have been made.
14. The Primary Registration Statement and the Prospectus, as of the
Effective Date (and any Rule 462 Registration Statement upon its filing), and
each amendment or supplement thereto as of its effective or issue date (except
for the financial statements, schedules and the notes thereto, as to which
counsel expresses no opinion) comply as to form in all material respects with,
and appear on their face to be appropriately responsive in all material respects
to the applicable requirements of the Act and Regulations.
15. The Company is in compliance with all regulations and laws applicable
to an "investment company" within the meaning of the 1940 Act and is in
compliance with all provisions of the 1940 Act. The provisions of the Articles
of Incorporation and Bylaws of the Company comply as to form in all material
respects with the requirements of the 1940 Act. The Company is not required to
register its Common Stock under the Securities Exchange Act of 1934.
16. The Company is in compliance with the requirements of the Small
Business Administration rules governing small business investment companies
("SBIC"), including the Small Business Investment Act of 1958 ("1958 Act"), and
the applicable provisions of federal and state laws or regulations governing the
activities of an SBIC. The provisions of the Articles of Incorporation and
Bylaws of the Company and the investment policies described in the Prospectus
comply in all material respects with the requirements of the 1958 Act and the
regulations thereunder.
Such counsel shall also state that they have participated in the
preparation of the Registration Statements and the Prospectus, including reviews
and discussions of the contents thereof, and while such counsel (for the
purposes of this paragraph) is not passing upon the accuracy or completeness of
the statements contained in the Registration Statements or the Prospectus, in
the course of such reviews and discussions, no facts came to its attention that
would cause them to have reason to believe that (a) the Registration Statements
or any post-effective amendment thereto, on the date it became effective,
contained any untrue statement of a material fact or omitted to state any
material fact necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading, except that such counsel
need not express any opinion with respect to the financial statements, schedules
and the notes thereto or the financial tables included in the Prospectus and the
Registration Statements, or that (b) the Prospectus on the Effective Date, on
the date it was filed pursuant to Rule 424(b) and on the Closing Date or Option
Closing Date, as the case may be, contains any untrue statement of material fact
or omits to state any material fact necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading, except that
such counsel need not express any opinion with respect to the financial
statements, schedules and the notes thereto or the financial tables included in
the Prospectus or the Registration Statements.
3
<PAGE> 4
The foregoing opinion may be limited to the laws of the United States and
the laws of the Commonwealth of Virginia and such counsel may rely as to matters
of fact upon the representations of the Company set forth in the Underwriting
Agreement and upon certificates of officers of the Company and of government
officials, all of which certificates must be satisfactory in form and scope to
counsel for the Underwriters. Counsel shall state in such opinion that its
opinion may be relied upon by counsel to the Underwriters.
4
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