<PAGE> 1
Filed Pursuant to Rule 424(b)(1)
Registration 333-36709
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"). 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.
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UNDERWRITING PROCEEDS
PRICE DISCOUNTS AND TO
TO PUBLIC COMMISSIONS(1) COMPANY(2)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share......................... $11.00 $0.77 $10.23
- -------------------------------------------------------------------------------------------------
Total(3).......................... $8,800,000 $616,000 $8,184,000
=================================================================================================
</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 price of $12.65 per
share, 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 $10,120,000, $708,400 and
$9,411,600, 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 3, 1998 at the offices of Scott &
Stringfellow, Inc., Richmond, Virginia.
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SCOTT & STRINGFELLOW, INC.
THE DATE OF THIS PROSPECTUS IS JANUARY 29, 1998
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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> 3
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.
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<PAGE> 4
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
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<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>
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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.
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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)
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<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................................. $1,222,227 $ 9,006,227
Net unrealized appreciation on investments............................. $ 275,376 $ 275,376
Total stockholders' equity............................................. $4,434,544(3) $ 12,218,544(3)(4)
</TABLE>
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(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 the public offering price of $11 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.
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<PAGE> 6
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
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<PAGE> 7
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.
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<PAGE> 8
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 was determined by
negotiations between the Company and the Underwriter. Among the factors
considered in making this determination were 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.
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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.
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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 the
public offering price of $11, investors purchasing shares of Common Stock in
this Offering will incur immediate dilution of $0.94 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 the public offering price of $11 per share, the Company will
receive approximately $7.8 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> 11
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 at the public offering price of $11 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) 12,025,100(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) 12,218,544(1)(2)
----------- -----------
Total capitalization................ $ 4,434,544(1) $12,218,544(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> 12
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 the public offering price of $11 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 $13.8 million, or $10.06 per
share. This represents an immediate decrease in net tangible book value of $0.47
per share to existing stockholders and an immediate dilution in the net tangible
book value of $0.94 per share to investors purchasing Shares of Common Stock in
this Offering. The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Public offering price........................................................ $11.00
Net tangible book value at December 31, 1997................... $10.53
------
Decrease attributable to new investors......................... $ 0.47
------
Adjusted net tangible book value after this Offering......................... $10.06
Dilution to new investors.................................................... $ 0.94
</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 public offering price of $11 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 $ 5,689,000 39.3 $ 10.00
New investors............................... 800,000 58.4 8,800,000 60.7 $ 11.00
--------- ---- ---------- -----
Total............................. 1,368,900 100.0 $14,489,000 100.0
========= ==== ========== =====
</TABLE>
12
<PAGE> 13
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.
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<PAGE> 14
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.
14
<PAGE> 15
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 $7.8
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.
15
<PAGE> 16
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.
16
<PAGE> 17
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> 18
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> 19
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
19
<PAGE> 20
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.
20
<PAGE> 21
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.
21
<PAGE> 22
(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.
22
<PAGE> 23
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> 24
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> 25
<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> 26
<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> 27
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> 28
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> 29
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 $11 per share. 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 $11 per
share. 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> 30
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> 31
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.
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<PAGE> 32
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> 33
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> 34
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 $0.46 per
share. The Underwriter may allow, and such dealers may reallow to certain
dealers a discount, not in excess of $0.10 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 of $12.65 per share, 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> 35
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
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<PAGE> 36
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.
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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> 38
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> 39
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> 40
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> 41
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> 42
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> 43
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> 44
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> 45
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> 46
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> 47
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> 48
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> 49
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> 50
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> 51
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> 52
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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>
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UNTIL FEBRUARY 23, 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 29, 1998
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