<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 28, 1998.
REGISTRATION NO. 333-36709
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
PRE-EFFECTIVE AMENDMENT NO. 3
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................. 62,000 Shares $14.95 $ 926,900 $ 291.98
=================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
(2) $3,903.70 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 28, 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 Common Stock has been approved for listing 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 62,000 shares 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 $100,000 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 February , 1998 at the offices of Scott &
Stringfellow, Inc., Richmond, Virginia.
---------------------
Scott & Stringfellow, Inc.
THE DATE OF THIS PROSPECTUS IS JANUARY 28, 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 $300,000 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.
Nasdaq SmallCap Market Symbol........................ WSCC.
Use of Proceeds...................................... To increase Private Capital available
for investments in equity and debt
securities of small businesses, to
fund the opening of 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 $ 9,750,227
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 fund the opening of 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 Common Stock has been approved for listing on The Nasdaq SmallCap Market
under the symbol "WSCC." 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 fund the opening of 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.
13
<PAGE> 20
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 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.
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<PAGE> 21
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>
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.
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<PAGE> 22
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 $300,000 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.
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.
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<PAGE> 23
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 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
17
<PAGE> 24
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 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
18
<PAGE> 25
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. The Company anticipates purchasing an additional
$425,000 of preferred stock of this Company and acquiring a warrant ultimately
exercisable for an additional 16% of its common stock.
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 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
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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 Regulatory Capital less unfunded commitments and federal
funds) 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.
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.
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<PAGE> 27
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.
(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.
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<PAGE> 28
(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 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.
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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.
23
<PAGE> 30
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
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 Chief Financial
1501 Layden Cove Way Officer and
Virginia Beach, VA 23454 Assistant Secretary
Peter M. Meredith, Jr. ..................... 45 Member of Executive Committee
P.O. Box 11265 Chairman of the Board of Directors
Norfolk, VA 23517
</TABLE>
24
<PAGE> 31
<TABLE>
<CAPTION>
POSITION AND OFFICES
NAME AND ADDRESS AGE WITH THE COMPANY
- -------------------------------------------- --- -------------------------------------------
<S> <C> <C>
Richard G. Ornstein......................... 55 Member of Executive
524 Fisherman's Bend Committee and Director
Virginia Beach, VA 23451
</TABLE>
J. W. Whiting Chisman, Jr. has served as a director of the Company since
February 1994. Since 1988, he has been President of Dare Investment Company, a
land developer and investor in equities.
Eric L. Fox has served as a director of the Company since July 1993 and as
Secretary/Treasurer since September 1996. In 1975, Mr. Fox joined the investment
firm of Kidder, Peabody & Co. which was acquired by Paine Webber in 1995. He is
currently a Portfolio Manager of Paine Webber.
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 serves 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.
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
</TABLE>
25
<PAGE> 32
<TABLE>
<CAPTION>
POSITION AND OFFICES
NAME AND ADDRESS AGE WITH THE COMPANY
- -------------------------------------------- --- -------------------------------------------
<S> <C> <C>
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
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
555 E. Main Street
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.
26
<PAGE> 33
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 of Development for
Forward Hampton Roads and was responsible for marketing and prospect development
for the five-city region of Chesapeake, Norfolk, Portsmouth, Suffolk and
Virginia Beach, Virginia.
Richard A. Schreiber has served as a director of the Company since May
1995. Since 1994, he has been President and Chief Executive Officer of the
Virginia Eastern Shore Corporation, which is engaged in development of business
for the Eastern Shore of Virginia. Between 1980 and 1993, he was Vice President
and Chief Executive Officer of Colonial Williamsburg Hotel Properties, Inc.
Jordan E. Slone has served as a director of the Company since July 1995.
Since 1987, Mr. Slone has been Chairman and Chief Executive Officer of the
Harbor Group Companies, a diversified real estate and financial services firm.
THE BOARD OF DIRECTORS
The Company's existing Board of Directors has 22 members. The Board of
Directors recently voted to increase the number of its members to 25 , and
anticipates filling the three newly created vacancies in the near future.
Directors hold office until expiration of their respective terms and until their
successors are elected, or
27
<PAGE> 34
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
The Board of Directors has established a Compensation/Stock Option
Committee and an Audit Committee.
The members of the Compensation/Stock Option Committee are Messrs.
Meredith, Chisman and Hardee. The Compensation/Stock Option Committee reviews
compensation arrangements for management and key employees and makes
recommendations concerning compensation to the Executive Committee. It also
administers the Company's 1998 Employee Stock Option Plan and 1998 Non-Employee
Director Stock Option Plan (the "Stock Option Plans"). It also grants options to
officers and key employees and sets the exercise price, terms and other
provisions of the options granted.
The members of the Audit Committee are Messrs. Low and Frost and Ms.
Bennett. The Audit Committee recommends selection of the Company's independent
accountants and reviews 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.
EMPLOYEE INCENTIVE STOCK OPTION PLAN AND OUTSIDE DIRECTOR STOCK PLAN
Subject to shareholder approval, the Board of Directors has adopted the
Stock Option Plans for the benefit of executive and key employees of the Company
and the outside members of the Board of Directors. Under the Stock Option Plans,
an aggregate of 125,000 shares of Common Stock are available for option grants.
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 contract contains provisions protecting the Company against competition in
the Commonwealth of Virginia for a two-year period after termination of
employment.
Mr. McDonald is employed by the Company as Assistant Secretary and Chief
Financial Officer under a three-year employment contract effective January 28,
1998. In addition to a base salary of $95,000,
28
<PAGE> 35
Mr. McDonald is entitled to a bonus as determined by the Compensation/Stock
Option Committee. Mr. McDonald has been granted the option to purchase 20,000
shares of Common Stock under the Stock Option Plans at the Price to Public of
this Offering. The Company will reimburse expenses incurred in performing
services for the Company and provide health insurance benefits. The contract
contains 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
Richmond office under a one-year employment contract. In addition to a base
salary of $80,000, Mr. Louthan is entitled to a bonus as determined by the
Compensation/Stock Option Committee. Mr. Louthan has been granted the option to
purchase 10,000 shares of Common Stock under the Stock Option Plans at the Price
to Public of this Offering. The Company reimburses expenses incurred in
performing services for the Company and provides health insurance benefits. The
contract contains provisions preventing Mr. Louthan from soliciting employees of
the Company for a one year period after termination of employment.
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 Only(1)(2) 85,000 14.90
as a Group(22 persons) Beneficially and of Record 60,300 10.60
</TABLE>
- ---------------
(1) Includes 40,000 shares held by Hometown Bank & Co. for J. Alan Lindauer
Profit Sharing Plan.
(2) Includes (i) 10,000 shares held by Meredith Realty Company, L.L.C., of which
Mr. Meredith is a member, (ii) 10,000 shares held by Pomar Holding Company,
L.L.C., of which Mr. Meredith is a member, (iii) 10,000 shares held by
Goodman & Company 401(k) Profit Sharing Plan for the benefit of Mr. Frost,
(iv) 5,000 shares held by DanSan, a general partnership, of which Mr. Harris
is one of two general partners, (v) 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 and (vi) 5,000 shares held by Garden Capital Acquisitions, LLC of
which Mr. Slone is a member.
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.
29
<PAGE> 36
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.
The Common Stock has been approved for listing on The NASDAQ SmallCap
Market under the symbol "WSCC."
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
30
<PAGE> 37
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.
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.
31
<PAGE> 38
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 proposes to operate as a non-diversified closed-end investment
company.
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 who own Common Stock and substantially
all of its other 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 62,000 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
32
<PAGE> 39
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 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
33
<PAGE> 40
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 62,000 shares of Common Stock 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.
For a period of five years following the Offering, the Underwriter has the
right to designate a nominee for election to the Company's Board of Directors,
and, if elected, such director will be a member of the Company's Executive
Committee. As of the date of this Prospectus, the Underwriter has not designated
a nominee to the Board of Directors.
The Company has agreed to indemnify the Underwriter or contribute to losses
arising out of certain liabilities, including liabilities under the Securities
Act.
As of the date of this Prospectus, the Company, its officers and directors
who own Common Stock, and substantially all other 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
34
<PAGE> 41
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 any 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 any 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. From time to time, Kaufman & Canoles has
represented the Company in its investments in certain portfolio companies.
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
35
<PAGE> 42
with the Investment Act. The Company has retained Reliance Trust Company,
Atlanta, Georgia as its transfer agent and registrar.
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.
36
<PAGE> 43
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> 44
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> 45
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> 46
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> 47
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> 48
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
========== =========== ============ =========== ===========
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.
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 49
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> 50
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> 51
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> 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>
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> 53
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> 54
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> 55
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> 56
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> 57
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> 58
- ------------------------------------------------------
- ------------------------------------------------------
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.............................. 16
Investment Policies................... 21
Determination of Net Asset Value...... 22
Management............................ 24
Principal Shareholders................ 29
Description of Capital Stock.......... 29
Regulation............................ 31
Shares Eligible for Future Sale....... 32
Special Income Tax Provisions
Applicable To The Company........... 33
Underwriting.......................... 34
Legal Matters......................... 35
Custodian, Transfer Agent and
Registrar........................... 35
Experts............................... 36
Index to Financial Statements......... F-1
</TABLE>
------------------
UNTIL FEBRUARY , 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.
January 28, 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 59
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................................................... 200,000
Accounting Fees and Expenses.............................................. 24,000
Blue Sky Fees and Expenses................................................ 20,000
Accountable Expense Allowance to Underwriter.............................. 100,000
Printing Expenses......................................................... 52,000
Miscellaneous............................................................. 97
--------
Total........................................................... $400,000
========
</TABLE>
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
Kavadias, Gabriel................................... June 30, 1996 5,000
</TABLE>
S-1
<PAGE> 60
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
NAME OF SHAREHOLDER DATE OF PURCHASE COMMON STOCK PURCHASED
- ---------------------------------------------------- ------------------- ----------------------
<S> <C> <C>
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
Pariser, Carol O. .................................. June 30, 1996 1,600
</TABLE>
S-2
<PAGE> 61
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
NAME OF SHAREHOLDER DATE OF PURCHASE COMMON STOCK PURCHASED
- ---------------------------------------------------- ------------------- ----------------------
<S> <C> <C>
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 shares (i) were made to no more
than 35 non-accredited investors who, either alone or with their purchaser
S-3
<PAGE> 62
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> 63
(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.*
(9.4) 1998 Employee Stock Option Plan*
(9.5) 1998 Non-Employee Stock Option Plan*
(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.
S-5
<PAGE> 64
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.
WATERSIDE CAPITAL 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- ------------------------------ -----------------
<S> <C> <C>
* Director January 28, 1998
- ----------------------------------------
JAMES E. ANDREWS
* Director January 28, 1998
- ----------------------------------------
DONNA C. BENNETT
* Member of Executive January 28, 1998
- ---------------------------------------- Committee and Director
J. W. WHITING CHISMAN, JR.
* Director January 28, 1998
- ----------------------------------------
JEFFREY R. ELLIS
* Member of Executive Committee, January 28, 1998
- ---------------------------------------- Director and
ERIC L. FOX Secretary/Treasurer
* Director January 28, 1998
- ----------------------------------------
ROGER L. FROST
* Member of Executive January 28, 1998
- ---------------------------------------- Committee and Director
ERNEST F. HARDEE
* Director January 28, 1998
- ----------------------------------------
HENRY U. HARRIS, III
* Director January 28, 1998
- ----------------------------------------
MATTHEW JAMES
/s/ J. ALAN LINDAUER Member of Executive Committee, January 28, 1998
- ---------------------------------------- Director, President, Chief
J. ALAN LINDAUER Executive Officer and Chief
Accounting Officer
</TABLE>
S-6
<PAGE> 65
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- ------------------------------ -----------------
<S> <C> <C>
* Member of Executive Committee January 28, 1998
- ---------------------------------------- and Director
ROBERT I. LOW
* Director January 28, 1998
- ----------------------------------------
HAROLD J. MARIONEAUX, JR.
* Chairman of the Board of January 28, 1998
- ---------------------------------------- Directors, Member of Executive
PETER M. MEREDITH, JR. Committee and Director
* Director January 28, 1998
- ----------------------------------------
AUGUSTUS C. MILLER
* Director January 28, 1998
- ----------------------------------------
PAUL F. MILLER
* Director January 28, 1998
- ----------------------------------------
JUAN M. MONTERO, II
* Director January 28, 1998
- ----------------------------------------
R. SCOTT MORGAN, SR.
* Director January 28, 1998
- ----------------------------------------
JAMES W. NOEL, JR.
* Director January 28, 1998
- ----------------------------------------
THOMAS A. O'GRADY
* Member of Executive January 28, 1998
- ---------------------------------------- Committee and Director
RICHARD G. ORNSTEIN
* Director January 28, 1998
- ----------------------------------------
RICHARD A. SCHREIBER
* Director January 28, 1998
- ----------------------------------------
JORDAN E. SLONE
* J. Alan Lindauer, by his name hereto, signs this Registration Statement on behalf of the
persons indicated above for whom he is attorney-in-fact pursuant to a power of attorney duly
executed by such persons and filed with the Securities and Exchange Commission.
By: /s/ J. ALAN LINDAUER
- ----------------------------------------
</TABLE>
S-7
<PAGE> 1
SECOND AMENDED AND RESTATED BYLAWS
OF
WATERSIDE CAPITAL CORPORATION
ARTICLE I
SHAREHOLDERS' MEETINGS
Section 1. Annual Meeting. The annual meeting of the
Shareholders for the election of directors and the transaction of such other
business as may properly come before it shall be held at the principal office
of WATERSIDE CAPITAL CORPORATION (the "Corporation") in the City of Virginia
Beach, Commonwealth of Virginia, or at such place within or without the
Commonwealth of Virginia as shall be set forth in the notice of annual
meeting. The meeting shall be held on the second Monday in July of each and
every year, at 8:00 a.m. or at such other date and time as is designated in
the notice of annual meeting. The Secretary shall give the notice of annual
meeting, which shall include the place, date and hour of the meeting. Such
notice shall be given, either personally or by U.S. mail, not less than ten
(10) nor more than sixty (60) days before the meeting date. If mailed, the
notice shall be addressed to the Shareholder at his address as it appears on
the Corporation's record of Shareholders, unless he shall have filed with the
Secretary of the Corporation a written request that notices intended for him
are to be mailed to a different address. Notice of annual meetings may be
waived by a Shareholder by submitting a signed waiver to the Secretary of the
Corporation either before or after the meeting, or by attendance at the
meeting.
Section 2. Special Meeting. Special meetings of Shareholders,
other than those regulated by statute, may be called at any time by a
majority of the directors or by the President. A special Shareholder's
meeting must be called by the President upon written request of the holders
of twenty percent (20%) of the outstanding shares entitled to vote at such
special meeting. Written notice of special Shareholder's meetings, stating
the place within or without the Commonwealth of Virginia, the date and hour
of the meeting, the purpose or purposes for which it is called, and the name
of the person by whom or at whose direction the meeting is called, shall be
given not less than ten (10) nor more than sixty (60) days before the date
set for the meeting. The notice shall be given to each Shareholder of record
in the same manner as the notice of the annual meeting. No business other
than that specified in the notice shall be transacted at any such special
meeting. Notice of a special Shareholder's meeting may be waived by
submitting a signed waiver to the Secretary or by attendance at the meeting.
Section 3. Quorum. The presence, in person or by proxy, of the
holders of a majority of the outstanding shares entitled to vote shall
constitute a quorum for the transaction of business at all meetings of
Shareholders. If a quorum does not exist, less than a quorum may adjourn the
meeting to a future date at which a quorum shall be present or represented.
At such adjourned meeting, any business may be transacted which might have
been transacted at the meeting as originally called.
Section 4. Record Date. The Board of Directors may fix in
advance the record date for the determination of Shareholders entitled to
notice of a meeting, or for any other purposes
<PAGE> 2
requiring such a determination. The record date may not be more than seventy
(70) days before the meeting or action.
A determination of Shareholders entitled to notice of, or to vote
at, a Shareholders meeting is effective for any adjournment of the meeting
unless the meeting is adjourned to a date more than one hundred twenty (120)
days after the date fixed for the original meeting. In such case, a new
record date must be fixed, and notice must be given to all persons who are
Shareholders as of the new record date.
Section 5. Voting. A Shareholder entitled to vote at a meeting
may vote in person or by proxy. Except as otherwise provided by the Virginia
Stock Corporation Act or the Articles of Incorporation, every Shareholder
shall be entitled to one vote for each share standing in his name on the
Corporation's record of Shareholders. Except as otherwise provided by these
Bylaws, the Articles of Incorporation, or the Virginia Stock Corporation Act,
the affirmative vote of a majority of the shares represented at the meeting
and entitled to vote shall be the act of the Shareholders.
Section 6. Proxies. Every proxy must be dated and signed by the
Shareholder or by his attorney-in-fact. No proxy shall be valid after the
expiration of eleven (11) months from the date of its execution, unless
otherwise provided therein. Every proxy shall be revocable at the pleasure of
the Shareholder executing it, except where an irrevocable proxy is permitted
by statute.
Section 7. Consents. Actions required or permitted by the
Virginia Stock Corporation Act, the Articles of Incorporation or these
Bylaws, to be taken at a Shareholder meeting may be taken without a meeting
if one or more written consents are signed by all the Shareholders entitled
to vote on the action and such consents are delivered to the Secretary.
ARTICLE II
DIRECTORS
Section 1. Number and Qualifications. The board of directors
(hereinafter, "Board of Directors" or "Board") shall consist of at least
three (3) members and not more than thirty-three (33). Directors need not be
Shareholders of the Corporation. The number of directors may be changed by
an amendment to the Bylaws adopted by the Shareholders.
Section 2. Manner of Election. The directors shall be elected
at the annual meeting of the Shareholders by a plurality vote.
Section 3. Term of Office. The term of office of each director
shall be until the next annual meeting of the Shareholders and until his
successor has been duly elected and qualified.
2
<PAGE> 3
Section 4. Duties and Powers. The Board of Directors shall
control and manage the affairs and business of the Corporation. The
directors may adopt such rules and regulations for the conduct of their
meetings and the management of the Corporation as they may deem proper, not
inconsistent with the Virginia Stock Corporation Act, the Articles of
Incorporation or these Bylaws. The Board of Directors may elect a
chairperson who shall preside at all meetings of the Board of Directors.
Section 5. Meetings. The Board of Directors shall meet for the
election or appointment of officers and for the transaction of any other
business as soon as practicable after the adjournment of the annual meeting
of the Shareholders. Other regular meetings of the Board shall be held at
such times as the Board may from time to time determine.
Special meetings of the Board of Directors may be called by the
President at any time. Upon the written request of any two directors, the
President must call a special meeting to be held not more than seven (7) days
after the receipt of such request.
Section 6. Notice of Meetings. No notice need be given of any
regular meeting of the Board. The Secretary shall serve notice of special
meetings upon each director in person or by regular U. S. Mail, addressed to
him/her at his/her last known post office address, at least ten (10) days
prior to the date of such meeting, specifying the time and place of the
meeting and the business to be transacted. At any meeting at which all of
the directors shall be present, although held without notice, any business
may be transacted which might have been transacted if the meeting had been
duly called.
Section 7. Place of Meeting. The Board of Directors may hold
its meeting within or without the Commonwealth of Virginia, at such place as
may be designated in the notice of the meeting.
Section 8. Quorum. At any meeting of the Board of Directors,
the presence of a majority of the Board shall constitute a quorum for the
transaction of business. Should a quorum not be present, a lesser number may
adjourn the meeting to some further time, not more than seven (7) days later.
Section 9. Voting. At all meetings of the Board of Directors,
each director shall have one vote irrespective of the number of shares that
he may hold. If a quorum is present for a Board meeting, the vote of a
majority of the Board, except as otherwise provided by the Virginia Stock
Corporation Act or the Articles of Incorporation, shall be the act of the
Board.
Section 10. Compensation. Each director shall be entitled to
receive for attendance at each meeting of the Board, or of any duly
constituted committee of the Board, such fee as is fixed by the Board.
Section 11. Vacancies. Any vacancy occurring in the Board of
Directors by death, resignation, or otherwise, shall be filled promptly by a
majority vote of the remaining directors at a
3
<PAGE> 4
special meeting which shall be called for that purpose within thirty (30) days
after the occurrence of the vacancy. The director thus chosen shall hold office
for the unexpired term of his predecessor and until the election and
qualification of his successor.
Section 12. Removal of Directors. The Shareholders may, by
majority vote, remove a director with or without cause at a special meeting
expressly called for such purpose. Notice of the meeting must specifically
state that the purpose of the meeting is to remove the director. Except as
otherwise prescribed by the Virginia Stock Corporation Act, a director may
also be removed for cause by vote of a majority of the entire Board.
Section 13. Resignation. Any director may resign his office at
any time by delivering written notice to the Board, the President or the
Secretary. A resignation is effective upon delivery of the notice.
ARTICLE III
OFFICERS
Section 1. Officers and Qualifications. The officers of the
Corporation shall consist of a President and a Secretary. Other officers of
the Corporation may include one (1) or more Vice Presidents, a Treasurer and
such other officers as the Board of Directors may appoint. Except for the
offices of President and Secretary, the same individual may simultaneously
hold more than one (1) office.
Section 2. Election. All officers of the Corporation shall be
elected annually by the Board of Directors at its meeting held immediately
after the annual meeting of Shareholders.
Section 3. Term of Office. All officers shall hold office until
their successors have been duly elected and have qualified, or until removed
as hereinafter provided.
Section 4. Removal of Officers. Any officer may be removed with
or without cause by the vote of a majority of the Board of Directors.
Section 5. Duties of Officers. The duties and powers of the
officers of the Corporation shall be as follows and as shall hereafter be set
by resolution of the Board of Directors:
PRESIDENT
A. The President shall preside at all meetings of the Board
of Directors, unless the Board of Directors has elected a Chairperson, and at
all meetings of the Shareholders.
4
<PAGE> 5
B. He shall present at each annual meeting of the
Shareholders and directors a report of the condition of the business of the
Corporation.
C. He shall cause to be called regular and special meetings
of the Shareholders and directors as required by the Virginia Stock
Corporation Act and these Bylaws.
D. He shall, subject to the approval of the Board, appoint,
discharge, and fix the compensation of all employees and agents of the
Corporation other than the duly elected officers.
E. He has authority to sign and execute, in the name of the
Corporation, all contracts, and all notes, drafts, or other orders for the
payment of money.
F. He shall sign all certificates representing shares.
G. He shall cause all books, reports, statements, and
certificates to be properly kept and filed as required by the Virginia Stock
Corporation Act.
H. He shall enforce these Bylaws and perform all duties
incident to his office required by the Virginia Stock Corporation Act.
Generally, he shall supervise and control the business and affairs of the
Corporation.
I. He shall, in the absence of any officer, resume any
absent officer's duties as set forth in these Bylaws.
VICE PRESIDENT
During the absence or incapacity of the President, the Vice
President in order of seniority of election shall perform the duties of the
President, and when so acting, he shall have all the powers and be subject to
all the responsibilities of the office of President, and shall perform such
duties and functions as the Board may prescribe.
SECRETARY
A. The Secretary shall keep the minutes of the meetings of
the Board of Directors and of the Shareholders in appropriate books. He
shall also keep a record of all actions taken, with or without a meeting, by
the Shareholders, Board of Directors or any committee of the Board.
B. He shall attend to the giving of notice of special
meetings of the Board of Directors and of all the meetings of the
Shareholders of the Corporation.
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C. He shall be custodian of the records and seal of the
Corporation and shall affix the seal to the certificates representing shares
and other corporate papers when required.
D. He shall keep a record of the Shareholders containing
the names of all Shareholders, their places of residence, the number and
class of shares held by each and the dates when each became owners of
record. He shall keep a record of all written communications to Shareholders
generally within the past three (3) years.
E. He shall keep all records open for inspection, daily
during the usual business hours, within the limits prescribed by the Virginia
Stock Corporation Act. At the request of the person entitled to an
inspection thereof, he shall prepare and make available a current list of the
officers and directors of the Corporation and their business addresses.
F. He shall sign all certificates representing shares and
affix the corporate seal.
G. He shall attend to all correspondence and present to the
Board of Directors at its meeting all official communications received by him.
H. He shall perform all the duties incident to the office
of Secretary of the Corporation.
TREASURER
A. The Treasurer shall have the care and custody of and be
responsible for all the funds and securities of the Corporation, and shall
deposit funds and securities in the name of the Corporation in such banks or
safe deposit companies as the Board of Directors may designate.
B. He has authority to make, sign, and endorse, in the name
of the Corporation, all checks, drafts, notes, and other orders for the
payment of money, and pay out and dispose of such under the direction of the
President or the Board of Directors.
C. He shall keep at the principal office of the Corporation
accurate books of account of all its business and transactions and shall at
all reasonable hours exhibit books and accounts to any director upon
application at the office of the Corporation during business hours.
D. He shall render a report of the condition of the
finances of the Corporation at each regular meeting of the Board of Directors
and at such other times as shall be required of him, and he shall make a full
financial report at the annual meeting of the Shareholders.
E. He shall further perform all duties incident to the
office of Treasurer of the Corporation.
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F. If required by the Board of Directors, he shall give
such bond as it shall determine appropriate for the faithful performance of
his duties.
OTHER OFFICERS
Other officers shall perform such duties and have such powers as
may be assigned to them by the Board of Directors.
Section 6. Vacancies. All vacancies in any office shall be
filled promptly by the Board of Directors, either at regular meetings or at a
meeting specially called for that purpose.
Section 7. Compensation of Officers. The officers shall receive
such salary or compensation as may be fixed by the Board of Directors.
Section 8. Reimbursement of Compensation of Officers. Any
payments made to an officer of the Corporation such as salary, commission,
bonus, interest, or rent, or entertainment expense incurred by him, which
shall be disallowed in whole or in part as a deductible expense by the
Internal Revenue Service, shall be reimbursed by such officer to the
Corporation to the full extent of such disallowance.
It shall be the duty of the directors, as a Board, to enforce
payment of each amount disallowed. In lieu of payment by the officer,
subject to the determination of the directors, proportionate amounts may be
withheld from his future compensation payments until the amount owed to the
Corporation has been recovered.
ARTICLE IV
COMMITTEES
Section 1. Audit Committee. The Audit Committee shall be
responsible for the review and analysis of significant financial information
of the Corporation for the purpose of assuring that the information obtained
and presented is accurate and timely and that all appropriate disclosures are
made. The Audit Committee shall have the additional responsibility of
overseeing both the internal and external audit function and ascertaining
that effective accounting and internal control systems exist within the
Corporation. The Audit Committee shall be appointed by the Board of
Directors. The Audit Committee shall be composed of no less than three (3)
and no more than ten (10) members of the Board of Directors.
Section 2. Compensation/Stock Option Committee. The
Compensation/Stock Option Committee shall be responsible for making
recommendations to the Board concerning compensation and benefits of the
President, Vice Presidents and executives of the Corporation. In this
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regard, the Compensation/Stock Option Committee shall review and analyze the
performance of the Corporation as well as the performance of the President,
Vice Presidents and executives. The Compensation/Stock Option Committee
shall be appointed by the Board of Directors. The Compensation/Stock Option
Committee shall be composed of no less than three (3) and no more than ten
(10) members of the Board of Directors.
ARTICLE V
SEAL
The seal of the Corporation shall be as follows:
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ARTICLE VI
SHARES
Section 1. Certificates. The shares of the Corporation shall be
represented by certificates prepared by the Board of Directors and signed by
the President and the Secretary, and sealed with the seal of the Corporation
or a facsimile. The certificates shall be numbered consecutively and in the
order in which they are issued, and a record shall be maintained of the name
of the person to whom the shares represented by each such certificate is
issued, and the number and class or series of such shares, and the date of
issue. Each certificate shall state the registered holder's name, the number
and class of shares represented, the date of issue, the par value of such
shares, or that they are without par value.
Section 2. Subscriptions. Subscriptions to the shares shall be
paid at such times and in such installments as the Board of Directors may
determine. If default shall be made in the payment of any installment as
required by such resolution, the Board may, in the manner prescribed by the
Virginia Stock Corporation Act, declare the shares and all previous payments
thereon forfeited for the use of the Corporation.
Section 3. Transfer of Shares. The shares of the Corporation
shall be assignable and transferable only on the books and records of the
Corporation and by the registered owner, or by his duly authorized attorney,
upon surrender of the certificate duly and properly endorsed with proper
evidence of authority to transfer. The Corporation shall issue a new
certificate for the shares surrendered to the person or persons entitled to
receive such shares.
Section 4. Return Certificates. All certificates for shares
changed or returned to the Corporation for transfer shall be marked by the
Secretary "Cancelled," with the date of cancellation, and the transaction
shall be immediately recorded in the certificate book opposite the memorandum
of their issue. The returned certificate may be inserted in the certificate
book.
ARTICLE VII
DISTRIBUTIONS
The Board of Directors, at any regular or special meeting, may
authorize and make distributions to its Shareholders. However, no
distribution may be made if, after giving it effect: (1) the Corporation
would not be able to pay its debts as they become due in the usual course of
business, or (2) the Corporation's total assets would be less than its total
liabilities.
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ARTICLE VIII
BILLS, NOTES, ETC.
All bills payable, notes, checks, drafts, warrants, or other
negotiable instruments of the Corporation shall be made in the name of the
Corporation and shall be signed by the President and Secretary, or by at
least two other officers as the Board of Directors shall from time to time by
resolution direct, to the extent required by applicable regulations of the
U.S. Small Business Administration. No bills payable, notes, checks, drafts,
warrants, or other negotiable instruments of the Corporation shall be signed
in blank.
No officer or agent of the Corporation, either singularly or
jointly with others, shall have the power to make any bill payable, note,
check, draft, warrant, or other negotiable instrument, or endorse the same in
the name of the Corporation, or contract or cause to be contracted any debt
of liability in the name and on behalf of the Corporation except as herein
expressly prescribed and provided.
ARTICLE IX
OFFICES
The principal office of the Corporation shall be located in the
City of Norfolk, Commonwealth of Virginia. The Board of Directors may change
the location of the principal office of the Corporation and may, from time to
time, designate other offices within or without the state as the business of
the Corporation may require.
ARTICLE X
AMENDMENTS
These Bylaws may be altered, amended or repealed, or new Bylaws
adopted by a majority of the entire Board of Directors at a regular or
special meeting of the Board.
ARTICLE XI
WAIVER OF NOTICE
Whenever under the provisions of these Bylaws or the Virginia
Stock Corporation Act, any Shareholder or director is entitled to notice of
any regular or special meeting or of any action to be taken by the
Corporation, such meeting may be held or such action may be taken without the
giving of
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such notice, provided every Shareholder or director entitled to such notice
waives the notice requirement in a signed writing delivered to the Secretary of
the Corporation.
ARTICLE XII
GENDER
All pronouns shall be deemed to refer to the masculine, feminine
or neuter, singular or plural, as the identity of the party may require.
ARTICLE XIII
INDEMNIFICATION
Section 1.
"Corporation" includes any domestic or foreign predecessor
entity of the Corporation in a merger or other transaction in which the
predecessor's existence ceased upon consummation of the transaction.
"Director" means an individual who is or was a director of
the Corporation or an individual who, while a director of the Corporation, is
or was serving at the Corporation's request as a director, officer, partner,
trustee, employee, or agent of another foreign or domestic corporation,
partnership, joint venture, trust, employee benefit plan, or other
enterprise. A director is considered to be serving an employee benefit plan
at the Corporation's request if his duties to the Corporation also impose
duties on, or otherwise involve services by him to the plan or to
participants in or beneficiaries of the plan. "Director" includes, unless
the context requires otherwise, the estate or personal representative of a
director.
"Expenses" include counsel fees.
"Liability" means the obligation to pay a judgment,
settlement, penalty, fine, including any excise tax assessed with respect to
an employee benefit plan, or reasonable expenses incurred with respect to a
proceeding.
"Official capacity" means, (i) when used with respect to a
director, the office of director in the Corporation; or (ii) when used with
respect to an individual other than a director, as contemplated in Section 6,
the office in the Corporation held by the officer or the employment or agency
relationship undertaken by the employee or agent on behalf of the
Corporation. "Official capacity" does not include service for any other
foreign or domestic corporation or any partnership, joint venture, trust,
employee benefit plan, or other enterprise.
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"Party" includes an individual who was, is, or is
threatened to be made a named defendant or respondent in a proceeding.
"Proceeding" means any threatened, pending, or completed
action, suit, or proceeding, whether civil, criminal, administrative or
investigative and whether formal or
informal.
Section 2.
A. Except as provided in subsection D of this section, the
Corporation shall indemnify an individual made a part to a proceeding because
he is or was a director, officer, employee or agent against liability
incurred in the proceeding if:
1. He conducted himself in good faith; and
2. He reasonably believed:
a. In the case of conduct in his official
capacity with the Corporation, that his
conduct was in its best interests; and
b. In all other cases, that his conduct was
at least not opposed to its best
interests; and
3. In the case of any criminal proceeding, he had no
reasonable cause to believe his conduct was unlawful.
B. The termination of a proceeding by judgment, order,
settlement or conviction is not, of itself, determinative that the director,
officer, employee or agent did not meet the standard of conduct described in
this section.
C. A Corporation may not indemnify a director, officer,
employee or agent under this section:
1. In connection with a proceeding by or in the right
of the Corporation in which the director, officer, employee or agent was
adjudged liable to the Corporation;
2. In connection with any other proceeding charging
improper personal benefit to him, whether or not involving action in his
official capacity, in which he was adjudged liable on the basis that personal
benefit was improperly received by him; or
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3. In connection with any act of willful misfeasance,
bad faith, gross negligence or reckless disregard in the performance of his
duties and obligations to the Corporation.
D. Indemnification permitted under this section in
connection with a proceeding by or in the right of the Corporation is limited
to reasonable expenses incurred in connection with the proceeding.
Section 3. The Corporation shall indemnify a director, officer,
employee or agent who entirely prevails on the merits in the defense of any
proceeding to which he was a party because he is or was a director, officer,
employee or agent of the Corporation against reasonable expenses incurred by
him in connection with the proceeding.
Section 4. A. The Corporation shall pay for or reimburse the
reasonable expenses incurred by a director, officer, employee or agent who is
a party to a proceeding in advance of final disposition of the proceeding if:
1. The director, officer, employee or agent furnishes
the Corporation a written statement of his good faith belief that he has met
the standard of conduct described in Section 1;
2. The director, officer, employee or agent furnishes
the Corporation a written statement undertaking, executed personally or on
his behalf, to repay the advance if it is ultimately determined that he did
not meet the standard of conduct; and
3. A determination is made that the facts then known
to those making the determination would not preclude indemnification under
this article.
A. The undertaking required by paragraph 2 of subsection A
of this section all be an unlimited general obligation of the director,
officer, employee or agent but need not be secured and may be accepted
without reference to financial ability to make repayment.
B. Determinations and authorizations of payments under this
section shall be made in the manner specified in Section 5.
Section 5.
A. A corporation may not indemnify a director, officer,
employee or agent under Section 2 unless authorized in the specific case
after a determination has been made that indemnification of the director,
officer, employee or agent is permissible in the circumstances because he has
met the standard of conduct set forth in Section 2.
B. The determination shall be made:
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1. By the board of directors by a majority vote of a
quorum consisting of directors not at the time parties to the proceeding;
2. If a quorum cannot be obtained under paragraph 1
of this subsection, by majority vote of a committee duly designated by the
board of directors (in which designation directors who are parties may
participate), consisting solely of two or more directors not at the time
parties to the proceeding;
3. By special legal counsel;
a. Selected by the board of directors or its
committee in the manner prescribed in paragraph 1 or 2 of this subsection; or
b. If a quorum of the board of directors
cannot be obtained under paragraph 1 of this subsection and a committee
cannot be designated under paragraph 2 of this subsection, selected by
majority vote of the full board of directors, in which selected directors who
are parties may participate; or
4. By the shareholders, but shares owned by or voted
under the control of directors who are at the time parties to the proceeding
may not be voted on the determination.
C. Authorization of indemnification and evaluation as to
reasonableness of expenses shall be made in the same manner as the
determination that indemnification is permissible, except that if the
determination is made by special legal counsel, authorization of
indemnification and evaluation as to reasonableness of expenses shall be made
by those entitled under paragraph 3 of subsection B of this section to select
counsel.
Section 6. The Corporation may purchase and maintain insurance
on behalf of an individual who is or was a director, officer, employee, or
agent of the Corporation, or who, while a director, officer, employee, or
agent of the Corporation, is or was serving at the request of the Corporation
as a director, officer, partner, trustee, employee, or agent of another
foreign or domestic corporation, partnership, joint venture, trust, employee
benefit plan, or other enterprise, against liability asserted against or
incurred by him in that capacity or arising from his status as a director,
officer, employee, or agent, whether or not the corporation would have power
to indemnify him against the same liability under Section 2 or Section 3.
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I hereby certify that this is a true and correct copy of the
Amended and Restated Bylaws of WATERSIDE CAPITAL CORPORATION adopted by the
Directors on the ________ day of ___________________, 1998.
WATERSIDE CAPITAL CORPORATION
By
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<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
January 28, 1998
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
COMMON STOCK PURCHASE WARRANT ("WARRANT")
GRANTED TO
SCOTT & STRINGFELLOW, INC.
Dated as of January 29, 1998
For value received, WATERSIDE CAPITAL CORPORATION, a Virginia
corporation (the "Company"), grants to SCOTT & STRINGFELLOW, INC. a Virginia
corporation ("SSI"), or its registered assigns (together with SSI, the
"Registered Holder"), the right to purchase from the Company 62,000 shares of
Warrant Stock at a price per share of $_________. Certain capitalized terms
used in this Warrant are defined in Part 3. The amount and kind of securities
purchasable pursuant to the rights granted under this Warrant and the Exercise
Price for such securities are subject to adjustment pursuant to the provisions
contained in this Warrant.
This Warrant is subject to the following provisions to which
SSI and the Registered Holders, by accepting delivery of this Warrant or
Warrants derived herefrom, are bound:
Part 1. Exercise of Warrant.
1.A. Exercise Period. The Registered Holder may exercise
this Warrant and acquire any or all of the shares of Warrant Stock at the
Exercise Price at any time and from time to time commencing one year after the
Date of Issuance, up to and including the end of the 5th year after the Date of
Issuance (the "Exercise Period").
1.B. Exercise Procedure.
1. This Warrant will be deemed to have been
exercised when the Company has received all of the following items (the
"Exercise Time"):
a. a completed Exercise Agreement, in
the form set forth in Exhibit I attached hereto, executed by the Person
exercising this Warrant in whole or in part (the "Purchaser");
b. this Warrant;
c. if this Warrant is not registered in
the name of the Purchaser, an Assignment in the form set forth in the attached
Exhibit II evidencing the assignment of this Warrant to the Purchaser; and
<PAGE> 2
d. a cashier's or certified check (or
at Purchaser's option federal funds by wire transfer) payable to the Company in
an amount equal to the product of the Exercise Price multiplied by the number
of shares of Warrant Stock being purchased on such exercise.
2. Certificates for shares of Warrant Stock
purchased on exercise of this Warrant will be delivered by the Company to the
Purchaser within 5 business days after the Exercise Time. Unless this Warrant
has expired or this Warrant has been exercised with respect to all the shares
of Warrant Stock, the Company will (a) prepare a new Warrant, substantially
identical to this instrument, representing the rights formerly represented by
this Warrant, which have not expired or been exercised and (b) within such 5
business days, deliver the new Warrant to the Registered Holder or such other
Person designated for delivery in the Exercise Agreement.
3. The Warrant Stock issuable on the exercise of
this Warrant will be deemed to have been issued to the Purchaser at the
Exercise Time, and the Purchaser will be deemed for all purposes to have become
the record holder of such Warrant Stock at the Exercise Time.
4. The issuance of certificates for shares of
Warrant Stock on exercise of this Warrant will be made without charge to the
Purchaser for any issuance tax in respect of such transaction or other cost
incurred by the Company in connection with such exercise and the related
issuance of shares of Warrant Stock, including without limitation attorneys'
fees incurred by the Company. The Company covenants and agrees that each share
of Warrant Stock issuable on exercise of this Warrant will (i) on payment of
the Exercise Price for such shares be fully paid and nonassessable, and free
from all liens and charges with respect to the issuance and (ii) be registered
under the Securities Act of 1933.
5. The Company will not close its books against
the transfer of this Warrant (or of any share of Warrant Stock issued or
issuable on the exercise of this Warrant) in any manner which interferes with
the timely exercise of this Warrant.
1.C. Exercise Agreement. On any exercise of this Warrant,
the Exercise Agreement will be substantially in the form set forth in the
attached Exhibit I, except that, if the shares of Warrant Stock are not to be
issued in the name of the Person in whose name this Warrant is registered, the
Exercise Agreement will also state the name of the Person to whom the
certificates for the shares of Warrant Stock are to be issued, and if the
number of shares of Warrant Stock to be issued does not include all the shares
of Warrant Stock purchasable pursuant to this Warrant, it will also state the
name of the Person to whom a new Warrant for the unexercised portion of the
Warrant Stock is to be delivered.
Part 2. Adjustment for Exercise Price and Number of Shares of Warrant
Stock Purchasable or Number of Warrants. Prior to the end of the Exercise
Period, the Exercise Price, the number of shares of Warrant Stock purchasable
upon the exercise of this Warrant and the number of Warrants outstanding are
subject to adjustment from time to time upon the occurrence of any of the
events enumerated in this Part 2.
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2.A. If the Company shall (i) declare or pay a dividend
on its outstanding Common Stock in shares of Common Stock, (ii) subdivide its
outstanding shares of Common Stock, (iii) combine its outstanding shares of
Common Stock into a smaller number of shares or (iv) issue by reclassification
of the Common Stock other securities of the Company (including any such
reclassification in connection with a consolidation, merger or other business
combination in which the Company is the surviving corporation), then the number
and kind of shares of Warrant Stock purchasable upon exercise of this Warrant
shall be adjusted so that the holder of this Warrant upon exercise of this
Warrant shall be entitled to receive the aggregate number and kind of shares of
Warrant Stock or other securities of the Company that the Registered Holder
would have owned or have been entitled to receive after the happening of any of
the events described above had this Warrant been exercised immediately prior to
the happening of such event or, if earlier, any record date with respect
thereto. An adjustment pursuant to this 2.A. shall become effective on the
date of the dividend payment, subdivision, combination or issuance
retroactively to the record date with respect thereto, if any, for such event.
Such adjustment shall be made successively whenever any event listed above
shall occur.
2.B. (i) If the Company shall issue to all holders of
its outstanding Common Stock rights, options or warrants to subscribe for or
purchase Common Stock (or securities convertible or exchangeable into Common
Stock) at a price per share (or having a conversion or exchange price per
share, if a security convertible into or exchangeable for Common Stock) less
than the then Current Market Price per share of Common Stock (as defined in
2.D. of this Part 2) or without consideration, then the current Exercise Price
to be in effect after such issuance shall be reduced to a price determined by
multiplying the Exercise Price in effect immediately prior to such issuance by
a fraction, of which the numerator shall be the number of shares of Common
Stock outstanding on the date of such issuance plus the number of shares of
Common Stock which the aggregate offering price of the total number of shares
of Common Stock so to be offered (or the aggregate initial conversion or
exchange price of the convertible or exchangeable securities so to be offered)
would purchase at the Current Market Price and of which the denominator shall
be the number of shares of Common Stock outstanding on the date of such
issuance plus the number of additional shares of Common Stock to be offered for
subscription or purchase (or into which the convertible or exchangeable
securities so to be offered are initially convertible); provided, that the
provisions of this Part 2.B(i) shall not apply to the issuance of this Warrant
or to any issuance of Common Stock upon exercise of this Warrant. In case such
subscription price may be paid in a consideration part or all of which shall be
in a form other than cash, the value of such consideration shall be as
determined by the Board of Directors of the Company, which shall cause the
related shares to be fully paid.
(ii) If the Company shall distribute to all
holders of Common Stock (including any such distribution made in connection
with a consolidation or merger in which the Company is the continuing
corporation) instruments of indebtedness of the Company, assets or securities
other than its Common Stock, (excluding dividends or distributions referred to
in Parts 2.A. and 2.B.(i) above or 2.C. below), then the Exercise Price to be
in effect after such record date shall be determined by multiplying the
Exercise Price in effect immediately prior to such record date by a fraction,
of which the numerator shall be the Current Market Price per share of Common
Stock on such record date, less the fair value (as determined by the Board of
Directors of the Company) of the
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<PAGE> 4
portion of the assets, evidences of indebtedness or other securities so to be
distributed applicable to one share of Common Stock and of which the
denominator shall be the Current Market Price per share of Common Stock. Such
adjustment shall be made successively whenever such a record date is fixed;
and, if such distribution is not so made, the Exercise Price shall again be
adjusted to be the Exercise Price which would then be in effect if such record
date had not been fixed.
(iii) Any adjustment required by this Part 2.B.
shall be made whenever any such distribution is made, and shall become
effective on the date of distribution retroactive to the record date for the
determination of stockholders entitled to receive such distribution.
2.C. If the Company shall, after the date hereof, issue
and sell any shares of Common Stock, or rights, options, warrants or
convertible or exchangeable securities containing the right to subscribe for or
purchase shares of Common Stock (all of the foregoing being referred to in this
Part 2.C. individually as a "Share" and collectively as "Shares") (excluding
(i) Shares issued in any of the transactions described in Parts 2.A. or 2.B.
above and (ii) any shares of Warrant Stock), at a price per Share (determined
in the case of rights, options, warrants or convertible or exchangeable
securities, by dividing (A) the total amount received or receivable by the
Company in consideration of the sale and issuance of such rights, options,
warrants or convertible or exchangeable securities plus the total consideration
payable to the Company upon exercise or conversion or exchange thereof, by (B)
the total number of shares of Common Stock covered by such rights, options,
warrants or convertible or exchangeable securities) lower than the then Current
Market Price per Share of Common Stock (as defined in Part 2.D. below) in
effect immediately prior to such sale and issuance, then in each case the
number of Shares of Warrant Stock thereafter purchasable upon the exercise of
this Warrant shall be determined by multiplying the number of Shares of Warrant
Stock theretofore purchasable upon the exercise of this Warrant by a fraction,
the numerator of which shall be the total number of shares of Common Stock
outstanding immediately after such sale and issuance and the denominator of
which shall be an amount equal to the sum of (A) the total number of shares of
Common Stock outstanding immediately prior to such sale and issuance plus (B)
the number of shares of Common Stock which the aggregate consideration received
(determined as provided below) for such sale or issuance would purchase at the
then Current Market Price per Share of Common Stock in effect immediately prior
to such sale and issuance. Such adjustment shall be made successively whenever
such an issuance is made. For the purposes of such adjustments, the shares of
Common Stock which the holder of any such rights, options, warrants or
convertible or exchangeable securities shall be entitled to subscribe for or
purchase shall be deemed to be issued and outstanding as of the date of such
sale and issuance, and the consideration received by the Company therefor shall
be deemed to be the consideration received by the Company (plus any
underwriting discounts or commissions in connection therewith) for such rights,
options, warrants or convertible or exchangeable securities plus the
consideration or premiums stated in such rights, options, warrants or
convertible or exchangeable securities to be paid for the shares of Common
Stock purchasable thereby. If the Company shall (i) sell and issue Shares for
a consideration consisting, in whole or in part, of property other than cash or
its equivalent or (ii) sell and issue Shares together with one or more other
securities as a part of a unit at a price per unit, then in determining the
"price per share" and the "consideration received by the Company" for purposes
of the first sentence and the immediately preceding sentence of this Part 2.C.,
the Board of Directors of the Company shall determine, in its discretion, the
fair value of
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said property or the Shares then being sold as part of such unit, as the case
may be, and such determinations if made in good faith, shall be binding on the
Registered Holder. The determination of whether any adjustment is required
under this Part 2.C. by reason of the sale and issuance of any rights, options,
warrants or convertible or exchangeable securities and the amount of such
adjustment, if any, shall be made only at such time and not at the subsequent
time of issuance of Shares upon the exercise of such rights to subscribe or
purchase.
2.D. For the purpose of any computation under Parts 2.B.
or 2.C., the Current Market Price per share of Common Stock at any date shall
be deemed to be the average of the daily closing prices for the 20 consecutive
days (which are not legal holidays) commencing 20 days (which are not legal
holidays) before the day in question. The closing price for each day shall be
the mean between the closing high bid and low asked quotations of Common Stock
on the National Association of Securities Dealers, Inc., Automated Quotation
System or any similar system of automated dissemination of quotations of
securities prices then in common use, if so quoted, or if not quoted as
described above, the mean between the high bid and low asked quotations for
Common Stock as reported by the National Quotation Bureau Incorporated if at
least two securities dealers have inserted both bid and asked quotations for
Common Stock on at least five of the ten preceding days, or if the Common Stock
is listed or admitted for trading on any national securities exchange, the last
sales price regular way, or the closing bid price if no sale occurred, of
Common Stock on the principal securities exchange on which Common Stock is
listed. If none of the conditions set forth above is met, the Board of
Directors of the Company acting in good faith shall determine the Current
Market Price on the basis of such quotations and other information as they
consider appropriate, in their reasonable judgment, or, lacking such
determination, the Current Market Price shall be the fair market value per
share of Common Stock as determined by a member firm of the New York Stock
Exchange, Inc. selected by the Company.
2.E. If at any time, as a result of an adjustment made
pursuant to 2.A. above, the Registered Holder of this Warrant shall become
entitled to receive any shares of the Company other than shares of Common
Stock, then thereafter the number of such other shares so receivable upon
exercise of this Warrant shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the provisions with
respect to the shares of Warrant Stock contained in this Part 2.
2.F. Upon the expiration of any rights, options, warrants
or conversion or exchange privileges which resulted in adjustments pursuant to
2.A, 2.B. or 2.C. above, if any thereof shall not have been exercised, the
Exercise Price and the number of shares of Warrant Stock shall be readjusted
and shall thereafter be such as it would have been had it been originally
adjusted (or had the original adjustment not been required, as the case may be)
as if (A) the only shares of Common Stock purchasable upon exercise of such
rights, options, warrants or conversion or exchange privileges for the shares
of Common Stock, if any, were actually issued or sold upon the exercise of such
rights, options, warrants or conversion or exchange privileges and (B) such
shares of Common Stock so issued or sold, if any, were issuable for the
consideration actually received by the Company for the issuance, sale or grant
of all such rights, options, warrants or conversion or exchange privileges
whether or not exercised; provided that no such readjustment shall have the
effect of increasing the
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<PAGE> 6
Exercise Price or decreasing the number of shares of Warrant Stock purchasable
upon the exercise of this Warrant by an amount in excess of the amount of the
adjustment initially made in respect to the issuance, sale or grant of such
rights, options, warrants or conversion or exchange privileges.
2.G. In any case in which this Part 2. shall require that
an adjustment in the Exercise Price be made effective as of a record date for a
specified event, the Company may elect to issue to the Registered Holder of
this Warrant, exercised after such record date but before such event occurs,
the number of shares of Warrant Stock issuable on the basis of the Exercise
Price in effect prior to such adjustment and defer issuing any additional
shares of Warrant Stock until such event occurs; provided that the Company
shall deliver to such Registered Holder a due bill or other appropriate
instrument evidencing such Registered Holder's right to receive such additional
shares of Warrant Stock upon the occurrence of the event requiring such
adjustment
2.H. Unless the Company shall have exercised its election
to adjust the number of Warrants as provided in 2.I. of this Part 2, upon each
adjustment of the Exercise Price pursuant to 2.A., 2.B. or 2.C., this Warrant
shall thereafter evidence the right to purchase, at the adjusted Exercise
Price, that number of shares of Warrant Stock (calculated to the nearest
one-thousandth) obtained by (A) multiplying the number of shares of Warrant
Stock purchasable upon exercise of this Warrant immediately prior to such
adjustment of the number of shares of Warrant Stock by the Exercise Price in
effect immediately prior to such adjustment of the Exercise Price and (B)
dividing the product so obtained by the Exercise Price in effect immediately
after such adjustment of the Exercise Price.
2.I. The Company may elect on or after the date of any
adjustment of the Exercise Price to adjust the number of Warrants instead of
adjusting the number of shares of Warrant Stock purchasable upon the exercise
of this Warrant as provided in 2.H. above. Each of the Warrants outstanding
after such adjustment of the number of Warrants shall be exercisable for the
same number of shares of Warrant Stock as immediately prior to such adjustment.
Each Warrant held of record prior to such adjustment of the number of Warrants
shall become that number or Warrants (calculated to the nearest one-thousandth)
obtained by dividing the Exercise Price in effect prior to adjustment of the
Exercise Price by the Exercise Price in effect after adjustment of the Exercise
Price.
2.J. Upon any adjustment of the number of shares of
Warrant Stock purchasable upon the exercise of this Warrant or the Exercise
Price of this Warrant as herein provided, the Company shall at the expense of
the Company, within ten days after such adjustment, mail by first-class mail,
postage prepaid, to the Registered Holder of this Warrant a notice of such
adjustment(s), accompanied by a report setting forth in reasonable detail (i)
the number of shares of Warrant Stock purchasable upon the exercise of this
Warrant and the Exercise Price of this Warrant after such adjustment(s), (ii) a
brief statement of the facts requiring such adjustment(s) and (iii) the
computation by which such adjustment(s) was made.
2.K. Except as otherwise provided in this Part 2, no
adjustment in respect of any dividends or other payments or distributions made
to holders of securities upon exercise of this Warrant shall be made during the
term of this Warrant or upon the exercise of this Warrant. In
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<PAGE> 7
addition, in no event shall the Registered Holder be entitled to any accrual of
cash dividends prior to the exercise of this Warrant.
2.L. If any fraction of a share of Warrant Stock would be
issuable upon the exercise of this Warrant (or specified portion thereof), the
Company shall pay to the holder of this Warrant an amount in cash equal to the
then Current Market Price per share of Common Stock (as defined in 2.D.)
computed as of the Business Day immediately preceding the date this Warrant is
presented for exercise, multiplied by such fraction (but in no event less than
an amount equal to such fraction multiplied by the Exercise Price in effect at
such time.)
2.M. Nothing contained in this Warrant shall be construed
as conferring upon any Registered Holder the right to vote or to receive
dividends (except as otherwise provided in this Part 2) or to consent or to
receive notice as stockholders in respect of any meeting of stockholders of the
Company for the election of the directors of the Company or any other matter,
or any rights whatsoever as stockholders of the Company. If, however, at any
time during the Exercise Period and prior to the exercise of this Warrant, any
of the following events shall occur:
(i) the Company shall declare any dividend
payable in cash or in any securities upon its shares of Common Stock or make
any distribution to the holders of its shares of Common Stock;
(ii) the Company shall offer to all holders of its
shares of Common Stock any additional shares of Common Stock or securities
convertible into or exchangeable for shares of Common Stock or any right to
subscribe for or purchase any thereof;
(iii) a dissolution, liquidation or winding up of
the Company (other than in connection with a consolidation, merger, sale,
transfer or lease of all or substantially all of its property, assets and
business as an entirety) shall be proposed; or
(iv) any consolidation or merger to which the
Company is a party and for which approval of the holders of Common Stock is
required, or of the conveyance or transfer of the properties and assets of the
Company as, or substantially as, an entirety, or of any reclassification or
change of outstanding shares of Common Stock issuable upon exercise of this
Warrant (other than a change in par value to no par value, or from no par value
to par value) or as a result of a subdivision or combination;
then in any one or more of said events, the Company shall mail (or cause to be
mailed) to the Registered Holder of this Warrant, at least twenty days prior to
the applicable record date hereinafter specified, a written notice stating (A)
the date as of which the holders of record of shares of Common Stock to be
entitled to receive any such dividends, distributions, rights or warrants are
to be determined or (B) the date on which any such dissolution, liquidation,
winding-up, consolidation, merger, conveyance or transfer is expected to become
effective and the date as of which it is expected that holders of record of
shares of Common Stock shall be entitled to exchange their shares of Common
Stock for securities or other property, if any, deliverable upon such
reclassification, consolidation,
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<PAGE> 8
merger, conveyance, transfer, dissolution, liquidation, or winding up. Failure
to mail such notice or any defect therein shall not affect the validity of any
action taken in connection with such dividend, distribution, or subscription
rights, or such proposed dissolution, liquidation, winding up, consolidation,
merger, conveyance, transfer or reclassification.
2.N. Certain Events. If any event occurs of the type
contemplated by the provisions of this Part 2 but not expressly provided for by
such provisions, then the Company's Board of Directors will make an appropriate
adjustment in the Exercise Price and the number of shares of Warrant Stock
obtainable on exercise of this Warrant so as to protect the rights of the
Registered Holder; provided, however, that no such adjustment will increase the
Exercise Price or decrease the number of shares of Warrant Stock obtainable as
otherwise determined pursuant to this Part 2.
Part 3. Definitions. The following terms have the meanings set
forth below:
"Business Day" means any day except a Saturday, Sunday or
other day on which commercial banks in Norfolk, Virginia are authorized by law
to close.
"Common Stock" means the Company's voting Common Stock, $1
par value.
"Date of Issuance" means January __, 1998.
"Exercise Price" means the per share exercise price of the
Warrant Stock, which initially shall be $___________, subject to adjustment as
provided in Part 2.
"Person" means an individual, a partnership, a joint
venture, a corporation, a trust, a limited liability company, an unincorporated
organization and a government or any department or agency of any of the above
listed entities.
"Warrant Stock" means shares of the Company's voting Common
Stock issuable upon exercise of this Warrant; provided, that, if there is a
change such that the securities issuable on exercise of this Warrant are issued
by an entity other than the Company or there is a change in the number or class
of securities so issuable, then the term Warrant Stock will mean one share of
the security issuable on the exercise of this Warrant if such security is
issuable in shares, or will mean the smallest unit in which such security is
issuable if such security is not issuable in shares.
Part 4. Warrant Transferable. This Warrant and all rights under it
are freely transferable, in whole or in part, without charge to the Registered
Holder, on surrender of this Warrant with a properly executed Assignment (in
the form of the attached Exhibit II) at the principal office of the Company.
Part 5. Replacement. On receipt of an affidavit of the Registered
Holder of the ownership and the loss, theft, destruction or mutilation of this
Warrant or any certificate evidencing this Warrant, the Company will (at its
expense) execute and deliver a new Warrant of like-kind representing the same
rights represented by such lost, stolen, destroyed or mutilated certificate and
dated the Date of Issuance.
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<PAGE> 9
Part 6. Warrant Exchangeable for Different Denominations. This
Warrant is exchangeable, on surrender of this Warrant by the Registered Holder
at the principal office of the Company, for new Warrants of like tenor
representing in the aggregate the right to purchase the same number of shares
of Warrant Stock set forth in this Warrant and each of such new Warrants will
represent such portion of such rights as is designated by the Registered Holder
at the time of such surrender. Any such new Warrants issued to a Registered
Holder pursuant to this Part 6 shall be dated the Date of Issuance.
Part 7. Amendment and Waiver. Except as otherwise provided in this
Warrant, the provisions of this Warrant may be amended and the Company may take
any action prohibited in this Warrant, or omit to perform any act required in
this Warrant to be performed by it, only if the Company has obtained the
written consent of the Registered Holders of a majority of the shares of
Warrant Stock obtainable on exercise of this Warrant.
Part 8. Reservation and Issuance of Shares of Warrant Stock.
8.A. The Company shall at all times reserve and keep
available free from preemptive rights, out of the aggregate of its authorized
but unissued shares of Common Stock, for the purpose of enabling it to satisfy
any obligations to issue the shares of Warrant Stock upon exercise of this
Warrant, the full number of shares of Warrant Stock deliverable upon the
exercise of all outstanding Warrants. The Company or, if appointed, the
transfer agent for the Company's Common Stock and each and every subsequent
transfer agent for any shares of the Company's capital stock issuable upon the
exercise of this Warrant (each a "Transfer Agent") will be irrevocably
authorized and directed at all times to reserve such number of authorized
shares as shall be required for such purpose. The Company will keep a copy of
this Warrant on file with each Transfer Agent. The Company will supply the
Transfer Agent with duly executed stock certificates for such purpose. The
Company will deliver to such Transfer Agent a copy of all notices of
adjustments and certificates related thereto which are delivered to the
Registered Holder of this Warrant.
8.B. Before taking any action which could cause an
adjustment pursuant to Part 2 reducing the Exercise Price, the Company will
take any corporate action which may, in the opinion of its counsel, be
necessary in order that the Company may validly and legally issue fully paid
and non-assessable shares of Warrant Stock at the Exercised Price as so
adjusted.
Part 9. Notices. Except as otherwise expressly provided in this
Warrant, all notices referred to in this Warrant will be in writing and will be
delivered personally or mailed by registered or certified mail, return receipt
requested and postage prepaid, and will be deemed to have been given when so
delivered or mailed (i) to the Company, at its principal executive offices, and
(ii) to the Registered Holder of this Warrant, at such holder's address as it
appears in the records of the Company (unless otherwise specified by any such
holder in a prior written notice to the Company).
Part 10. Descriptive Headings; Governing Law. The descriptive
headings of the several parts and paragraphs of this Warrant are inserted for
convenience only and do not constitute a part of this
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<PAGE> 10
Warrant. The construction, validity and interpretation of this Warrant will be
governed by the internal law, and not the conflicts law, of the Commonwealth of
Virginia.
IN WITNESS, the Company has caused this Warrant to be signed
and attested by its duly authorized officers under its corporate seal and to be
dated the Date of Issuance.
WATERSIDE CAPITAL CORPORATION,
A Virginia Corporation
By
--------------------------------------
J. Alan Lindauer, its President
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EXHIBIT I
EXERCISE AGREEMENT
TO:
----------------------------------------
Dated:
--------------------------------------
The undersigned, pursuant to the provisions set forth in the attached
Warrant, agrees to subscribe for and purchase ___________ shares of the Warrant
Stock covered by such Warrant and with this document makes payment in full for
such shares at the Exercise Price provided by such Warrant.
Signature
------------------------------
Address
------------------------------
------------------------------
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<PAGE> 12
EXHIBIT II
ASSIGNMENT
FOR VALUE RECEIVED, ________________________________ sells,
assigns and transfers all of the rights of the undersigned under the attached
Warrant with respect to the number of shares of the Warrant Stock covered by
such document and as set forth below, unto:
Names of Assignee Address No. of Shares
of Warrant Stock
Dated: Signature
-------------------------------------
Witness
-------------------------------------
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<PAGE> 1
WATERSIDE CAPITAL CORPORATION
1998 EMPLOYEE STOCK OPTION PLAN
1. PURPOSE
The purpose of the Waterside Capital Corporation 1998 Employee
Stock Option Plan (the "Plan") is to support the business goals of the
Company and to attract, retain, and motivate key employees of the Company by
providing incentives that closely align their interests with the interests of
the Company's shareholders. These objectives are accomplished by making
Awards under the Plan, thereby providing Participants with a proprietary
interest in the growth and performance of the Company.
2. DEFINITIONS
2.1 "Award" shall mean the grant of any form of stock option to
a Plan Participant pursuant to such terms, conditions, performance
requirements, and limitations as the Committee may establish in order to
fulfill the objectives of the Plan.
2.2 "Award Agreement" shall mean an agreement between the
Company and a Participant that sets forth the terms, conditions, performance
requirements, and limitations applicable to an Award.
2.3 "Board" shall mean the Board of Directors of the Company.
2.4 "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time, or any successor thereto.
2.5 "Committee" shall mean the Compensation/Stock Option
Committee of the Board. If at any time no Committee shall be in office, then
the functions of the committee specified in the Plan shall be exercised by
the Board.
2.6 "Company" shall mean Waterside Capital Corporation, a
corporation organized under the laws of the Commonwealth of Virginia, and
its subsidiaries, including subsidiaries of subsidiaries.
2.7 "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended from time to time, or any successor thereto.
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2.8 "Fair Market Value" shall mean as of any given date, the
average of the bid and ask prices for each of the preceding twenty (20)
business days of the Stock on the Nasdaq SmallCap Market.
2.9 "Involuntary Separation without Cause" shall mean a
termination of employment by the Company for reasons other than substantial
failure to perform duties, material violation of Company policies, unethical
activities, misconduct, fraud, or commission of an illegal act; provided,
that, Involuntary Separation without Cause does not include a resignation or
a voluntary separation from employment, in either case initiated by a
Participant.
2.10 "Participant" shall mean an employee of the Company to whom
an Award has been made under the Plan.
2.11 "Plan" shall mean the Waterside Capital Corporation 1998
Employee Stock Option Plan.
2.12 "Stock" shall mean the Common Stock, $1.00 par value share,
of the Company.
3. EFFECTIVE DATE AND DURATION OF THE PLAN.
The effective date of the Plan is January 27, 1998, subject to
approval of the Plan by the shareholders of the Company. The Plan shall
remain in effect until all Awards under the Plan have been satisfied by the
issuance of shares, but no Award shall be granted more than ten years after
the effective date of the Plan.
4. CAPITAL STOCK AVAILABLE FOR AWARDS.
The number of shares of common stock of the Company for which
Awards may be granted under the Plan shall not exceed 100,000. As soon as
possible after adoption of the Plan by the Company's shareholders, the
Company shall take whatever actions are necessary to file required documents
with the U.S. Securities and Exchange Commission and any other appropriate
governmental authorities and stock exchanges to make shares of stock
available for issuance pursuant to Awards. Stock related to Awards that are
forfeited, terminated, expire unexercised, or are settled in such manner that
all or some of the shares covered by an Award under this Plan are not issued
to a Participant shall immediately become available for Awards under this
Plan.
5. ADMINISTRATION.
The Plan shall be administered and interpreted by the Committee,
which shall consist of not less than two persons appointed by the Board from
among its members. A person may serve on the Committee only if he or she is
not eligible and has not received a grant of an Award under the Plan for at
least one year before his or her appointment and satisfies the requirements
of an "outside
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<PAGE> 3
director" for purposes of Section 162(m) of the Code. No member of the Committee
may receive Awards under the Plan. Without limiting the foregoing, the Committee
shall have full and final authority in its discretion: (i) to make, adopt,
amend, and rescind rules and regulations for the administration of the Plan;
(ii) to conclusively interpret the provisions of the Plan and to decide all
questions of fact arising in its application; (iii) to determine the employees
to whom Awards shall be made under the Plan; (iv) to determine the type of Award
to be made and the amount, size and terms of each such Award (including, but not
limited to, any restriction or condition, any schedule for lapse of restrictions
or conditions relating to transferability or forfeiture, exercisability, or
settlement of an Award, and waivers or accelerations thereof, and waiver of
performance conditions relating to an Award, based in each case on such
conditions as the Committee shall determine); (v) to determine the time when
Awards will be granted; (vi) to prescribe from time to time the form, and the
terms, provisions and conditions not inconsistent with the Plan, of any Award
Agreement; (vii) to determine whether, to what extent, and under what
circumstances cash or common stock of the Company or a combination thereof
payable or deliverable with respect to an Award will be deferred automatically,
at the election of the Board, or at the election of a Participant; and (viii) to
make all other determinations necessary or advisable for the administration of
the Plan. The Committee may designate persons other than its members to carry
out its responsibilities under such conditions or limitations as it may set,
other than its authority with regard to benefits granted to employees who are
officers or directors of the Company for purposes of Section 16 of the Exchange
Act.
6. ELIGIBILITY.
Participants shall be limited to those officers and other key
employees of the Company who are in positions in which their decisions,
actions and efforts significantly contribute to the success of the Company.
Directors of the Company who are not otherwise officers or employees of the
Company shall not be Participants.
7. AWARDS UNDER THE PLAN.
The Committee shall determine the type or types of Awards to be
made to each Participant and shall set forth in each Award Agreement the
terms, conditions, and limitations applicable to each Award. Awards may be
granted singly, in combination or in tandem. Awards may also be made in
combination or in tandem with, in replacement of, or as alternatives to,
grants or rights under any other employee plan of the Company, including the
plan of any acquired entity.
8. INCENTIVE STOCK OPTIONS.
Incentive stock options, or substitutes therefor, are options to
purchase shares of common stock of the Company which, in addition to being
subject to applicable terms, conditions, and limitations established by the
Committee, comply with Section 422 of the Code. Incentive stock options
shall be evidenced by Award Agreements which shall contain in substance the
following terms and conditions:
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<PAGE> 4
8.1 Option Price. The purchase price per share of stock
deliverable upon the exercise of an incentive stock option shall not be less
than 100% of the Fair Market Value of the stock on the day the incentive
stock option is granted, as determined by the Committee.
8.2 Exercise of Option. Each Award Agreement pursuant to which
incentive stock options are granted shall state the period or periods of time
within which the incentive stock option may be exercised by the Participant,
in whole or in part, which shall be such period or periods of time as may be
determined by the Committee, provided that the exercise period shall not end
later than ten years after the date of the grant of the incentive stock
option.
8.3 Nontransferability. Each Award Agreement shall state that
the incentive stock option is not transferable other than by will or the laws
of descent and distribution, and during the lifetime of the Participant is
exercisable only by the Participant.
8.4 Payment for Shares. Stock purchased pursuant to an
incentive stock option shall be paid for in full in cash or, unless the
Committee determines otherwise at or prior to the time of exercise, common
stock of the Company at Fair Market Value or a combination thereof, in an
amount or having a combined value equal to the aggregate purchase price for
the shares subject to the incentive stock option or portion thereof being
exercised.
8.5 Rights Upon Termination of Employment. In the event that a
Participant ceases to be an employee of the Company for any reason other than
death, disability, retirement (including early retirement) or Involuntary
Separation without Cause, all incentive stock options granted to the
Participant shall lapse forthwith or at such other time as determined by the
Committee. In the event employment ceases because a Participant dies,
retires, becomes disabled, or is Involuntarily Separated without Cause, prior
to expiration of the Participant's incentive stock option, without having
fully exercised such incentive stock option, the Participant shall have the
right to exercise the incentive stock option during its term within a period
of three months after the date employment so ceased, to the extent that the
incentive stock option was exercisable on the date employment ceased.
8.6 Individual Limitations.
8.6.1 Notwithstanding anything herein to the
contrary, to the extent that the aggregate Fair Market Value (determined as
of the time the option is granted) of stock for which any Participant is
granted incentive stock options that are exercisable for the first time
during any calendar year (under all such plans of the Company) shall exceed
$100,000 (such excess to be determined by taking incentive stock options into
account in the order in which granted), such incentive stock options to such
extent shall be treated as options which are not incentive stock options.
8.6.2 Notwithstanding anything herein to the
contrary, no incentive stock option shall be granted to any individual if at
the time the incentive stock option is to be granted the individual owns
stock possessing more than 10% of the total combined voting power of all
classes of stock of the Company or of any parent or subsidiary corporation
unless at the time such incentive
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<PAGE> 5
stock option is granted the option price is at least 110% of the Fair Market
Value of the stock subject to the incentive stock option and such incentive
stock option by its terms is not exercisable after the expiration of five years
from the date such incentive stock option is granted.
8.7 Code Compliance. Each Award Agreement pursuant to which
incentive stock options are granted shall contain such other terms, conditions
and provisions as the Committee may determine to be necessary or desirable in
order to qualify such option as a tax-favored option within the meaning of
Section 422 of the Code, or the regulations thereunder. Notwithstanding Section
16 hereof, the Board shall have the power without further approval to amend the
terms of the Plan or any Awards or Award Agreements thereunder for such purpose.
9. NON-QUALIFIED STOCK OPTIONS.
Non-qualified stock options, or substitutes therefor, are options
to purchase shares of common stock of the Company which are not intended to
comply with Section 422 of the Code. Non-qualified stock options shall be
evidenced by Award Agreements which shall contain in substance the following
terms and conditions:
9.1 Option Price. The purchase price per share of stock
deliverable upon the exercise of a non-qualified stock option shall be not
less than 100% of the Fair Market Value of the stock on the day the
non-qualified stock option is granted, as determined by the Committee.
9.2 Exercise of Option. Each Award Agreement pursuant to which
non-qualified stock options are granted shall state the period or periods of
time within which the non-qualified stock option may be exercised by the
Participant, in whole or in part, which shall be such period or periods of
time as may be determined by the Committee at the time of grant, provided
that the exercise period shall not end later than ten years after the date of
the grant of the non-qualified stock option.
9.3 Payment for Shares. Stock purchased pursuant to a
non-qualified stock option shall be paid for in full in cash or, unless the
Committee determines otherwise at or prior to the time of exercise, in common
stock of the Company at Fair Market Value or a combination of cash and such
common stock, in an amount or having a combined value equal to the aggregate
purchase price for the shares subject to the non-qualified stock option or
portion thereof being exercised.
9.4 Rights Upon Termination of Employment. In the event that a
Participant ceases to be an employee of the Company for any reason other
than death, disability, retirement (including early retirement) or
Involuntary Separation without Cause, all non-qualified stock options granted
to such Participant shall lapse forthwith or at such other time as determined
by the Committee. In the event employment ceases because a Participant dies,
retires, or becomes disabled, or is Involuntarily Separated without Cause
prior to expiration of the Participant's non-qualified stock option without
having fully exercised such non-qualified stock option, the Participant shall
have the right to exercise the non-qualified stock option during its term
within a period of three months after the
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date employment so ceased, to the extent that the non-qualified stock option was
exercisable on the date employment ceased.
9.5 Cashless Exercise. To the extent permitted under the
applicable laws and regulations under Section 16 of the Exchange Act and the
rules and regulations promulgated thereunder, and with the consent of the
Committee, the Company agrees to cooperate in a "cashless exercise" of a
non-qualified stock option. The cashless exercise shall be effected by the
Participant delivering to a registered securities broker acceptable to the
Company instructions to sell a sufficient number of shares of stock to cover
the costs and expenses associated therewith.
10. GENERAL RESTRICTIONS.
10.1 Conditions on Company's Obligations. The Company's
obligations with respect to each Award under the Plan shall be subject to the
requirement that, if at any time the Committee shall determine that (i) the
listing, registration or qualification of the shares of common stock subject
or related thereto upon any securities exchange or under any state or federal
law, (ii) the consent or approval of any government regulatory body, or (iii)
an agreement by the recipient of an award with respect to the disposition of
shares of common stock, is necessary or desirable as a condition of or in
connection with the granting of such Award, such Award may not be consummated
in whole or in part unless such listing, registration, qualification,
consent, approval or agreement shall have been effected or obtained free of
any conditions not acceptable to the Committee.
10.2 Per Employee Limitation on Stock Options. Notwithstanding
anything in this Plan to the contrary, no Participant shall receive incentive
stock options and non-qualified stock options that, in the aggregate, grant
the Participant the option to purchase in excess of 25,000 shares of common
stock of the Company in any given year the Plan is in effect.
11. RIGHTS TO TERMINATE EMPLOYMENT.
Nothing in the Plan or in any Award Agreement or other agreement
entered into pursuant to the Plan shall confer upon any Participant the right
to continue in the employment of the Company or affect any right which the
Company may have to terminate the employment of such Participant.
12. WITHHOLDING.
Whenever the Company proposes or is required to issue or transfer
shares of common stock under the Plan, the Company shall have the right to
require the Participant to remit to the Company an amount sufficient to
satisfy any federal, state and/or local tax withholding requirements prior to
the delivery of any certificate for such shares or, in the discretion of the
Committee, the Company may withhold from the shares to be delivered shares
sufficient to satisfy all or a portion of such tax withholding requirements.
6
<PAGE> 7
13. NONTRANSFERABILITY.
No Award under the Plan shall be assignable or transferable by
the Participant other than by will or by the laws of descent and
distribution. During the life of the Participant, all Awards shall be
exercisable only by such person or by such Participant's guardian or legal
representative.
14. NON-UNIFORM DETERMINATION.
The Committee's determinations under the Plan (including without
limitation determinations of the persons to receive Awards, the form, amount
and timing of such Awards, the terms, provisions and conditions of such
Awards, the agreements evidencing same, and the establishment of values and
performance targets) need not be uniform and may be made by it selectively
among Participants who receive, or are eligible to receive, Awards under the
Plan, whether or not such persons are similarly situated.
15. ADJUSTMENTS.
In the event of any change in the outstanding common stock of the
Company by reason of a stock dividend or distribution, recapitalization,
merger, consolidation, split-up, combination, exchange of shares or the like,
in which the number of shares held by Company shareholders prior to such
event is affected by such event, then the Committee shall adjust the number
of shares of common stock which may be issued under the Plan and shall
provide for an equitable adjustment of any outstanding Award or the number or
kind of shares issuable pursuant to an outstanding Award under the Plan.
Notwithstanding the foregoing, all changes in the outstanding common stock of
the Company shall be considered in determining the number of shares of
outstanding common stock of the Company for purposes of Section 4 of this
Plan.
16. AMENDMENT.
The Board may amend, alter, suspend or terminate the Plan or the
Committee's authority to grant Awards under the Plan, except that any such
amendment, alteration, suspension or termination shall be subject to the
ratification or approval of the Company's shareholders within one year after
Board action if such shareholder ratification or approval is required by any
federal or state law or regulation or the rules of any stock exchange or
automated quotation system on which the common stock of the Company may then
be listed or quoted, or if the Board otherwise, in its discretion, determines
for any other reason to submit such changes to the Plan to shareholders for
approval or ratification. The amendment, alteration, suspension or
termination of the Plan shall not, without the consent of a Participant,
affect the Participant's rights under an Award previously granted.
7
<PAGE> 8
17. CHANGE OF CONTROL.
17.1 Notwithstanding any other provision of the Plan, if there
is a Change of Control, as defined below, of the Company, all outstanding
stock options shall become exercisable immediately prior to the consummation
of the Change of Control.
17.2 A "Change of Control" of the Company shall be deemed to
have occurred upon the happening of any of the following events:
17.2.1 when any "person" (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act), (other than the Company or a
subsidiary of the Company or any Company employee benefit plan, including any
trustee of such plan acting as trustee) is or becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of
securities of the Company representing twenty percent (20%) or more of the
combined voting power of the Company's then outstanding securities without
the consent of a majority of the Board;
17.2.2 the occurrence of any transaction or event
relating to the Company required to be described pursuant to the requirements
of Item 6(e) of Schedule 14A of the Exchange Act.;
17.2.3 when, during a period of two consecutive years
during the existence of the Plan, the individuals who, at the beginning of
such period, constitute the Board of Directors of the Company cease for any
reason other than death to constitute at least a two-thirds majority thereof,
provided however, that a director who was not a director at the beginning of
such period shall be deemed to have satisfied the two-year requirement if
such director was elected by, or on the recommendation of, at least
two-thirds of the directors who were directors at the beginning of such
period (either actually or by prior operation of this section); or
17.2.4 the occurrence of a transaction requiring
shareholder approval for the acquisition of the Company by an entity other
than the Company through purchase of assets, or by merger, or otherwise.
18. EFFECT ON OTHER PLANS.
Participation in the Plan shall not affect an employee's
eligibility to participate in any other benefit or incentive plan of the
Company, and any Awards made pursuant to the Plan shall not be used in
determining the benefits provided under any other plan of the Company unless
specifically provided.
19. COMPLIANCE WITH EXEMPTION RULES UNDER SECTION 16 OF THE EXCHANGE
ACT.
It is the intent of the Company that transactions involving equity
securities under the Plan by persons subject to Section 16 of the Exchange
Act be exempt under Rule 16b-3 under the Exchange
8
<PAGE> 9
Act. Accordingly, if any provision of the Plan or any Award agreement does not
comply with the requirements of Rule 16b-3 as then applicable to such a
transaction, such provision shall be construed or deemed amended to the extent
necessary to conform to such requirements with respect to such transaction.
20. GOVERNING LAW.
The Plan and all awards made and actions taken hereunder shall be
governed by and construed in accordance with the laws of the Commonwealth of
Virginia, except to the extent federal law and the rules of regulations
promulgated thereunder by the SEC apply.
9
<PAGE> 1
WATERSIDE CAPITAL CORPORATION
1998 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
1. PURPOSE.
The purpose of the Waterside Capital Corporation 1998
Non-Employee Director Stock Option Plan (the "Plan") is to support the
business goals of the Company and to attract, retain, and motivate
experienced and knowledgeable non-employee directors by providing incentives
that closely align their interests with those of the Company's shareholders.
These objectives are accomplished by awarding stock options under the Plan,
thereby providing non-employee directors with a proprietary interest in the
growth and performance of the Company.
2. DEFINITIONS.
2.1 "Board" shall mean the Board of Directors of the Company.
2.2 "Change in Control" shall mean the happening of any of the
following:
2.2.1 when any "person" (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act), (other than the Company or a
subsidiary of the Company or any Company employee benefit plan, including any
trustee of such plan acting as trustee) is or becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of
securities of the Company representing twenty percent (20%) or more of the
combined voting power of the Company's then outstanding securities without
the consent of a majority of the Board;
2.2.2 the occurrence of any transaction or event relating
to the Company required to be described pursuant to the requirements of
Item 6(e) of Schedule 14A of the Exchange Act.;
2.2.3 when, during a period of two consecutive years during
the existence of the Plan, the individuals who, at the beginning of such
period, constitute the Board of Directors of the Company cease for any reason
other than death to constitute at least a two-thirds majority thereof,
provided however, that a director who was not a director at the beginning of
such period shall be deemed to have satisfied the two-year requirement if
such director was elected by, or on the recommendation of, at least
two-thirds of the directors who were directors at the beginning of such
period (either actually or by prior operation of this (iii)); or
2.2.4 the occurrence of a transaction requiring shareholder
approval for the acquisition of the Company by an entity other than the
Company through purchase of assets, or by merger, or otherwise.
2.3 "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time or any successor thereto.
<PAGE> 2
2.4 "Company" shall mean Waterside Capital Corporation, a
corporation organized under the laws of the Commonwealth of Virginia and its
subsidiaries, including subsidiaries of subsidiaries.
2.5 "Disability" shall mean permanent and total disability as
determined under the Company's long-term disability program.
2.6 "Eligible Director" shall mean a member of the Board who is
eligible for grants under the Plan pursuant to the provisions of Section 6.
2.7 "Effective Date" shall mean January 27, 1998, subject to
approval of the Plan by the shareholders of the Company.
2.8 "ERISA" shall mean the Employee Retirement Income Security
Act of 1974, as amended from time to time or any successor thereto.
2.9 "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended from time to time, or any successor thereto.
2.10 "Fair Market Value" shall mean as of any given date, the
average of the bid and ask prices for each of the preceding twenty (20)
business days of the Stock on the Nasdaq SmallCap Market.
2.11 "Options" shall mean non-statutory stock options granted
under this Plan to purchase shares of Stock.
2.12 "Option Agreement" shall mean an agreement evidencing the
grant of an Option under the Plan in such form as the Committee may prescribe.
2.13 "Participant" means an Eligible Director who has received
an Option grant under this Plan.
2.14 "Plan" shall mean the Waterside Capital Corporation 1998
Non-Employee Director Stock Option Plan, as set forth herein and as it may be
amended from time to time.
2.15 "Retirement" shall mean cessation of active services as a
member of the Board at or after age 65, or with the consent of the Board, any
early retirement date so specified.
2.16 "SEC" shall mean the Securities and Exchange Commission.
2.17 "Stock" means the Common Stock, $1.00 par value per share,
of the Company.
2
<PAGE> 3
3. ADMINISTRATION.
The Plan shall be administered by the Board. The Board shall
have full and final authority in its discretion: to make, adopt, amend, and
rescind rules and regulations for the administration of the Plan; to
conclusively interpret the provisions of the Plan and to decide all questions
or fact arising in its application; to determine the Participants to whom
awards shall be made under the Plan; to determine the type of award to be
made and, subject to Section 7 hereof, to determine the amount, size and
terms of each such award to Participants (including, but not limited to, any
restriction or condition, any schedule for lapse of restrictions or
conditions relating to transferability or forfeiture, exercisability, or
settlement of an option, and waivers or accelerations thereof, and waiver of
performance conditions relating to an option based in each case on such
conditions as the Board shall determine); to determine the time when Options
will be granted; to prescribe from time to time the form and the terms,
provisions, and conditions not inconsistent with the Plan, of any agreements
to be entered under the Plan; to determine whether, to what extent and under
what circumstances cash or common stock of the Company or a combination
thereof payable or deliverable with respect to an Option will be deferred
automatically, at the election of the Board, or at the election of a
Participant; and to make all other determinations necessary or advisable for
the administration of the Plan. The Board may designate persons other than
its members to carry out its responsibilities under such conditions or
limitations as it may set.
4. SHARES OF STOCK SUBJECT TO THE PLAN.
The number of shares of common stock of the Company for which
Options may be granted under the Plan shall not exceed 25,000. As soon as
possible after adoption of the Plan by the Company's shareholders, the
Company shall take whatever actions are necessary to file required documents
with the U.S. Securities and Exchange Commission and any other appropriate
governmental authorities and stock exchanges to make shares of stock
available for issuance pursuant to Options. Stock related to Options that
are forfeited, terminated, expire unexercised, or are settled in such manner
that all or some of the shares covered by an Option under this Plan are not
issued to a Participant shall immediately become available for Options under
this Plan.
5. ADJUSTMENTS.
In the event of any change in the outstanding common stock of the
Company by reason of a stock dividend or distribution, recapitalization,
merger, consolidation, split-up, combination, exchange of shares or the like,
in which the number of shares held by Company shareholders prior to such
event is affected by such event, then the Committee shall adjust the number
of shares of common stock which may be issued under the Plan and shall
provide for an equitable adjustment of any outstanding Option or the number
or kind of shares issuable pursuant to an outstanding Option under the Plan.
Notwithstanding the foregoing, all changes in the outstanding common stock of
the Company shall be considered in determining the number of shares of
outstanding common stock of the Company for purposes of Section 4 of this
Plan.
3
<PAGE> 4
6. ELIGIBILITY.
Only members of the Board who (i) are not employees of the
Company or of any subsidiary or affiliate of the Company and (ii) are
elected, or are subject to election, as directors by the holders of the
Company's Stock are eligible to receive grants of Options under the Plan
("Eligible Director"). Any Eligible Director to whom Options have been
granted and who thereafter becomes an employee of the Company or of any
subsidiary or affiliate of the Company shall cease to be eligible for any
further Option grants under the Plan while an employee, but shall not, by
reason of becoming an employee, cease to be eligible to retain Options
previously granted under the Plan.
7. SPECIAL PROVISION RELATING TO OPTION GRANTS. ALL OPTIONS GRANTED
UNDER THE PLAN SHALL BE SUBJECT TO THE FOLLOWING TERMS.
7.1 Option Exercise Price. The exercise price of all Options
granted under this Plan shall be the Fair Market Value of the Stock at the
time of grant.
7.2 Vesting of Option. All Options granted under this Plan
shall vest on the first anniversary of grant.
7.3 Exercise of Option. All Options granted under this Plan
shall expire on the first to occur of: (i) one year following the date the
Participant ceases to be a member of the Board for any reason; and (ii) ten
years from the date of grant of the Option.
7.4 Payment of Exercise Price. Options may be exercised in
whole or in part at any time and from time to time by giving written notice
of exercise to the Company specifying the number of shares to be purchased.
Such notice shall be accompanied by payment in full of the purchase price,
either by certified or bank check, or such other instrument as the Committee
may accept. Payment in full or in part may also be made in the form of Stock
already owned by the Participant. If payment of the Option exercise price is
made in whole or in part in the form of Stock already owned by the
Participant, the Company may require that the Stock be owned by the
Participant for a period of six months or longer so that such payment would
not result in a pyramid exercise. No shares of Stock shall be issued until
full payment therefor has been made. A Participant shall generally have the
rights to dividends or other rights of a shareholder with respect to shares
subject to the Option when the Participant has given written notice of
exercise, has paid in full the purchase price for such shares, and, if
requested, has given the representation described in Section 12.1.
7.5 Holding Period. Any other provision of this Plan
notwithstanding, a Participant may not sell or dispose of any shares of Stock
acquired pursuant to the exercise of an Option until at least six (6) months
have elapsed from the date of the grant of the Option.
7.6 Cashless Exercise. To the extent permitted under the
applicable laws and regulations under Section 16 of the Exchange Act, and the
rules promulgated thereunder by the SEC, the Company shall cooperate in a
"cashless exercise" of an Option. The cashless exercise shall be effected by
the Participant delivering to a registered securities broker acceptable to
the Company
4
<PAGE> 5
instructions to sell a sufficient number of shares of Stock to cover the costs
and expenses associated therewith.
8. NON-TRANSFERABILITY OF OPTIONS.
No Option shall be transferable by a Participant otherwise than
by will or by the laws of descent and distribution and all Options shall be
exercisable, during the Participant's lifetime, only by the Participant.
9. OPTION AGREEMENT.
A Participant who has received an Option grant shall not have any
rights with respect to such Option unless, within thirty (30) days of the
date of the Option grant, such recipient delivers an executed copy of the
Option Agreement to the Company, and complies with the applicable terms and
conditions of the Option Agreement.
10. ACCELERATED VESTING AND FORFEITURE.
Any other provision of this Plan notwithstanding, all shares of
Stock available under any Option granted to a Participant shall automatically
vest on account of (i) death of the Participant, (ii) Disability of the
Participant (iii) Retirement of the Participant, or (iv) a Change in Control
of the Company. In the event a Participant ceases to be a member of the
Board for any other reason, shares of Stock subject to an Option which have
not vested on the date of termination shall thereafter cease to be available
under the Option and shall be forfeited by the Participant.
11. AMENDMENT AND TERMINATION.
The Board may amend, alter, suspend or terminate this Plan at any
time and from time to time; provided, however, that the Board may not,
without approval of the shareholders of the Company, increase the maximum
number of shares of Stock reserved for issuance under the Plan (other than
for adjustments pursuant to Section 5), materially increase the benefits
accorded to Participants under the Plan or change the description of the
individuals eligible to receive Options; and provided further, that no
amendment of any provision of the Plan governing the amount of Stock and
price under, and timing of, grants of Options pursuant to the Plan shall be
made more frequently than once in any six month period, other than to comport
with changes in the Code, ERISA or the rules thereunder. No termination of
or amendment to the Plan may adversely affect the rights of a Participant
with respect to any Option held by the Participant as of the date of such
termination or amendment without such Participant's consent.
12. GENERAL PROVISIONS.
12.1 The Committee may require each person purchasing shares
pursuant to an Option under the Plan to represent to and agree with the
Company in writing that the Participant is acquiring the shares without a
view to distribution thereof. The certificates for such shares may include
any legend which the Committee deems appropriate to reflect any restrictions
on transfer. All
5
<PAGE> 6
certificates for shares of Stock delivered under the Plan shall be subject to
such stock transfer orders and other restrictions as the Committee may deem
advisable under the rules, regulations, and other requirements of the Exchange
Act, any stock exchange or automated quotation system upon which the Stock is
then listed, and any applicable federal or state securities law, and the
Committee may cause a legend or legends to be put on any such certificates to
make appropriate reference to such restrictions.
12.2 Nothing contained in this Plan shall prevent the Board of
Directors from adopting other or additional award or compensation
arrangements, subject to shareholder approval if such approval is required;
and such arrangements may be either generally applicable or applicable only
if specific cases.
12.3 The adoption of the Plan shall not confer upon any director
of the Company any right to continue as a member of the Board.
12.4 The Committee shall establish such procedures as it deems
appropriate for a Participant to designate a beneficiary to whom any amounts
payable in the event of the Participant's death are to be paid.
13. WITHHOLDING.
Whenever the Company proposes or is required to issue or transfer
shares of common stock under the Plan, the Company shall have the right to
require the Participant to remit to the Company an amount sufficient to
satisfy any federal, state and/or local tax withholding requirements prior to
the delivery of any certificate for such shares or, in the discretion of the
Committee, the Company may withhold from the shares to be delivered shares
sufficient to satisfy all or a portion of such tax withholding requirements.
14. NON-UNIFORM DETERMINATION.
The Committee's determinations under the Plan (including without
limitation determinations of the persons to receive Options, the form, amount
and timing of such Options, the terms, provisions and conditions of such
Options, the agreements evidencing same, and the establishment of values and
performance targets) need not be uniform and may be made by it selectively
among Participants who receive, or are eligible to receive, Options under the
Plan, whether or not such persons are similarly situated.
15. COMPLIANCE WITH EXEMPTION RULES UNDER SECTION 16 OF THE EXCHANGE
ACT.
It is the intent of the Company that transactions involving
equity securities under the Plan be exempt under Rule 16b-3 under the
Exchange Act. Accordingly, if any provision of the Plan or any Option or
Option Agreement does not comply with the requirements of Rule 16b-3 as then
applicable to such a transaction, such provision shall be construed or deemed
amended to the extent necessary to conform to such requirements with respect
to such transaction.
16. GOVERNING LAW.
6
<PAGE> 7
The Plan and all awards made and actions taken thereunder shall
be governed by and construed in accordance with the laws of the Commonwealth
of Virginia, except to the extent federal law and the rules and regulations
promulgated thereunder by the SEC apply.
7
<PAGE> 1
EXHIBITS FOR N-5 REGISTRATION STATEMENT
OF WATERSIDE CAPITAL CORPORATION
Exhibit 11 Opinion of Clark & Stant, P.C., a Virginia Professional Corporation,
as to the legality of the shares being registered.
FORM OF LEGAL OPINION
CLARK & STANT, P.C.
Attorneys and Counselors at Law
900 One Columbus Center
Virginia Beach, Virginia 23462
Telephone (757) 499-8800
Facsimile (757) 473-0395
January 29, 1998
Waterside Capital Corporation
300 East Main Street
Norfolk, VA 23510
Ladies and Gentlemen:
This opinion is furnished to you in connection with a Registration
Statement on Form N-5, dated September 30, 1997 ( S.E.C. File No. 333-36709) as
amended by Amendment No. 1, dated December 12, 1997, Amendment No. 2 dated
January 9, 1998 and Amendment No. 3 dated January 29, 1998 (collectively, the
"Registration Statement"), filed with the Securities and Exchange Commission
(the "Commission") under the Securities Act of 1933, as amended (the "Act"),
relating to the public offering (the "Offering") of an aggregate of 800,000
shares of common stock, $1.00 par value per share (the "Shares"), of Waterside
Capital Corporation, a Virginia corporation (the "Company"), together with an
over-allotment option granted by the Company to the Underwriter (as defined
below) to purchase an additional 120,000 Shares and the registration of a Common
Stock Purchase Warrant (the "Warrant") and the certain shares of Common Stock
underlying the Warrant (the "Warrant Shares"). The Shares are to be sold, and
the Warrant and Warrant Shares issued, by the Company under an underwriting
agreement (the "Underwriting Agreement") between the Company and Scott &
Stringfellow, Inc. (the "Underwriter").
We have acted as counsel for the Company in connection with the sale
by the Company of the Shares and the issuance of the Warrant and the Warrant
Shares. As to matters of fact material to our opinions, we have examined and
relied on (i) signed copies of the Registration Statement and all exhibits, all
as filed with the Commission, (ii) the Underwriting Agreement in the form
Warrant and the Warrant Shares. As to matters of fact material to our opinions,
we have examined and relied on (i) signed copies of the Registration Statement
and all exhibits, all as filed with the Commission, (ii) the Underwriting
Agreement in the form Warrant and the Warrant Shares. As to matters of fact
material to our opinions, we have examined and relied on (i) signed copies of
the Registration Statement and all exhibits, all as filed with the Commission,
(ii) the Underwriting Agreement in the formof all signatures and the
authenticity of all documents submitted to us as originals, the conformity to
original documents of all documents submitted to us as certified or photostatic
copies, and the authenticity of the originals of such latter documents.
<PAGE> 2
Based on the foregoing, we are of the opinion that the Shares to be
sold, and the Warrant and the Warrant Shares to be issued, by the Company have
been duly authorized by all necessary corporate action of the Company and, when
sold and issued by the Company in accordance with the terms of the Underwriting
Agreement, will be validly issued, fully paid and non-assessable.
We consent to the filing of this opinion as part of the Registration
Statement and to the use of our name and in the related Prospectus under the
caption "Legal Matters." We also consent to the incorporation by reference of
this opinion in any subsequent registration statement for the same Offering that
may be filed under Rule 462(b) of the Act.
This opinion is to be used only in connection with the offer and sale
of the Shares while the Registration Statement is in effect.
Very truly yours,
CLARK & STANT, P.C.
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<PERIOD-TYPE> 6-MOS
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<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 2,615,889
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<PER-SHARE-NAV-BEGIN> 6.78
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