AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 28, 1998.
PRE-EFFECTIVE AMENDMENT NO. 3
TO
300 EAST MAIN STREET, SUITE 1380
NORFOLK, VIRGINIA 23510
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
FREDERICK T. STANT, III, ESQ.
CLARK & STANT, P.C.
900 COLUMBUS CENTER
VIRGINIA BEACH, VIRGINIA 23462
(757) 499-8800
JOHN M. PARIS, JR., ESQ.
KAUFMAN & CANOLES, P.C.
ONE COMMERCIAL PLACE, SUITE 2000
NORFOLK, VIRGINIA 23510
(757) 624-3181
--------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
OFFERING PRICE AGGREGATE AMOUNT OF
TITLE OF SECURITIES TO BE AMOUNT TO BE PER OFFERING REGISTRATION
REGISTERED REGISTERED SHARE(1) PRICE(1) FEE(2)
-------------------------------------------------------------------------------------------------
Common Stock $1 Par Value.... 800,000 Shares $13.00 $10,400,000 $3,151.52
-------------------------------------------------------------------------------------------------
Common Stock $1 Par Value.... 120,000 Shares $13.00 $ 1,560,000 $ 460.20
-------------------------------------------------------------------------------------------------
Common Stock Purchase Warrant
and underlying Common Stock
$1 Par Value................. 62,000 Shares $14.95 $ 926,900 $ 291.98
=================================================================================================
|
(1) Estimated solely for purposes of calculating the registration fee.
(2) $3,903.70 having been previously paid.
WATERSIDE CAPITAL CORPORATION
CROSS REFERENCE SHEET
(Pursuant to Rule 481 showing the location in the Prospectus of the responses to the Items of Parts I and II of Form N-5)
ITEM NO. AND CAPTION PROSPECTUS CAPTION
------------------------------------------------------------ -------------------------------------
1. Organization and Business............................. PROSPECTUS SUMMARY; BUSINESS;
REGULATION
2. Fundamental Policies of Registrant.................... INVESTMENT POLICIES
3. Policies with Respect to Security Investments......... INVESTMENT POLICIES
4. Ownership of Voting and Convertible Securities of
Other Issuers....................................... Not required to be in the Prospectus
5. Special Tax Provisions Applicable to Registrant....... SPECIAL TAX PROVISIONS APPLICABLE TO
THE COMPANY
6. Pending Legal Proceedings............................. Not Applicable
7. Summary of Earnings................................... PROSPECTUS SUMMARY
8. Persons in Control Relationships with Registrant...... Not Applicable
9. Persons Owning Equity Securities of Registrant........ PRINCIPAL SHAREHOLDERS
10. Number of Holders of Equity Securities of
Registrant.......................................... Not required to be in the Prospectus
11. Directors and Executive Officers...................... MANAGEMENT
12. Members of Advisory Board of Registrant............... Not applicable
13. Remuneration of Directors, Officers and Members of
Advisory Board...................................... MANAGEMENT -- Remuneration
14. Indemnification of Officers and Directors............. Not required to be in the Prospectus
15. Custodians of Portfolio Securities.................... CUSTODIAN, TRANSFER AGENT AND
REGISTRAR
16. Investment Advisers................................... Not Applicable
17. Business and Other Connections of Investment Advisers
and Their Managements............................... Not Applicable
18. Interest of Affiliated Persons in Certain
Transactions........................................ MANAGEMENT -- Remuneration
19. Capital Stock......................................... DESCRIPTION OF CAPITAL STOCK
20. Long-Term Debt........................................ DESCRIPTION OF CAPITAL STOCK
21. Other Securities...................................... Not Applicable
22. Financial Statements.................................. See Item 28
23. Distribution Spread................................... Cover Page
24. Plan of Distribution.................................. UNDERWRITING
25. Use of Proceeds to Registrant......................... USE OF PROCEEDS
26. Sales Otherwise Than for Cash......................... Not Applicable
27. Information Required by Items of Part I............... See Above
28. Financial Statements Required by Item 22 of Part I.... FINANCIAL STATEMENTS
|
PART I
INFORMATION REQUIRED IN REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940
ITEM 1. ORGANIZATION AND BUSINESS.
Reference is made to the information contained in the Prospectus under the captions "PROSPECTUS SUMMARY -- The Company," "BUSINESS" and "REGULATION."
ITEM 2. FUNDAMENTAL INVESTMENT POLICIES OF THE REGISTRANT.
The following policies of the Registrant with respect to the activities described below are matters of fundamental policy in accordance with Sections 8(b) and 13(a) of the Investment Act. These policies may not be changed without the approval of the lesser of (i) 67% of the Registrant's shares present or represented at a shareholders' meeting at which the holders of more than 50% of such shares are present or represented or (ii) more than 50% of the outstanding shares of the Registrant. Undefined capitalized terms have the meanings ascribed in the attached Prospectus.
(a) The Registrant is permitted to issue the maximum amount of SBA Debentures permitted by the SBA Act and SBA regulations. The Registrant may issue SBA Debentures in the future.
(b) The Registrant is permitted to borrow money only for the purpose of investments in, and making loans to, Small Business Concerns. It is, however, permitted to finance the acquisition of capital assets used in its ordinary business operations.
(c) The Registrant is not permitted to engage in the business of underwriting the securities of other issuers. It is anticipated that all or substantially all of its investments in Small Business Concerns will be in securities that may not be sold to the public without registration, or an exemption from registration, under the Securities Act. All of the Registrant's current equity investments in Small Business Concerns are so restricted.
(d) The Registrant is prohibited from concentrating more than 25% of the value of its assets, determined at the time an investment is made, exclusive of U.S. government securities, in securities issued by companies primarily engaged in the same industry.
(e) The Registrant is prohibited from engaging in the business of purchasing or selling real estate. The Registrant may bring mortgage foreclosure actions and take title to and possession of property with respect to which it is the mortgagee in accordance with applicable mortgage foreclosure laws. Additionally, the Registrant may purchase office facilities, although, at present it leases office facilities.
(f) The Registrant is not permitted to engage in the purchase or sale of commodities or commodity contracts.
(g) The Registrant is permitted to make loans, and loans with equity features, to, as well as equity investments in, Small Business Concerns to the extent allowed by the SBA Act and SBA regulations. The Registrant is also permitted to extend credit to shareholders to finance the purchase of its capital stock.
(h) So long as the Registrant is licensed as a small business investment company, it may only conduct those activities permitted by the SBA Act and SBA regulations and policies.
ITEM 3. POLICIES WITH RESPECT TO SECURITY INVESTMENTS.
The Registrant's policies with respect to the following matters are not fundamental policies and may be changed, subject to the SBA Act and SBA regulations, by the Registrant's Executive Committee without shareholder approval.
(a) The Registrant may make investments in equity and debt securities of Small Business Concerns as approved by the Executive Committee.
(b) The Registrant has no strict policy regarding the percentage of its assets that may be invested in any specific type of security. The Registrant follows SBA regulations prohibiting an investment in any single Small Business Concern and its affiliates exceeding 20% of the Registrant's Regulatory Capital except with prior SBA approval.
(c) The Registrant does not invest in companies for the purpose of exercising control of management and does not intend to do so in the future. SBA regulations prohibit SBICs from controlling a Small Business Concern except where necessary to protect a prior investment, where there has been a breach of the financing agreements, where there has been a substantial change in the Small Business Concern's operation or when financing a start-up company.
(d) The Registrant does not invest in securities of other investment companies and does not intend to do so in the future.
(e) The Registrant intends to hold its portfolio debt securities for a minimum of five years, to the extent required by SBA regulations or until maturity. It anticipates retaining its equity investments from five to seven years.
ITEM 4. OWNERSHIP OF VOTING AND CONVERTIBLE SECURITIES OF PORTFOLIO COMPANIES.
As of December 31, 1997, the Registrant owned the following securities of portfolio companies that are convertible into voting securities. On the conversion of all such securities, the Registrant would own the following percentage of the voting securities of these portfolio companies:
TITLE OF PERCENTAGE OF
SECURITIES OWNED, PERCENTAGE OF VOTING
CONTROLLED OR VOTING SECURITIES
NATURE OF ITS HELD BY THE SECURITIES OWNED UPON
NAME AND ADDRESS OF COMPANY PRINCIPAL BUSINESS REGISTRANT NOW OWNED CONVERSION
------------------------------------------------- -------------------- ----------------- ------------- -------------
Mid-Atlantic Small Business Finance, Inc. Originator of SBA- 500 shares of 0 49
300 East Main Street, guaranteed loans to convertible
Suite 1380 small businesses preferred stock
Norfolk, VA 23510
Avery Communications, Inc. Long distance Note convertible 2.9 6.2
190 South LaSalle telephone rebilling into 280,000
Suite 1410 services shares of common
Chicago, IL 60603 stock
|
ITEM 5. SPECIAL TAX PROVISIONS APPLICABLE TO REGISTRANT.
Reference is made to the information contained in the Prospectus under the
caption "SPECIAL TAX PROVISIONS APPLICABLE TO THE COMPANY."
ITEM 6. PENDING LEGAL PROCEEDINGS.
The Registrant has no pending legal proceedings.
ITEM 7. SUMMARY OF EARNINGS.
Reference is made to the information contained in the Prospectus under the
caption "SUMMARY FINANCIAL INFORMATION."
ITEM 8. PERSONS IN CONTROL RELATIONSHIP WITH REGISTRANT.
The Registrant has no persons in a control relationship.
ITEM 9. PERSONS OWNING EQUITY SECURITIES OF REGISTRANT.
Reference is made to the information contained in the Prospectus under the
caption "PRINCIPAL SHAREHOLDERS."
ITEM 10. NUMBER OF HOLDERS OF EQUITY SECURITIES.
NUMBER OF
TITLE OF CLASS HOLDERS
-------------------------------------------------- ---------
Common Stock...................................... 87
|
ITEM 11. DIRECTORS AND EXECUTIVE OFFICERS.
Reference is made to the information contained in the Prospectus under the caption "MANAGEMENT."
ITEM 12. MEMBERS OF ADVISORY BOARD OF REGISTRANT.
The Registrant has no advisory board.
ITEM 13. REMUNERATION OF DIRECTORS, OFFICERS AND MEMBERS OF ADVISORY BOARD.
Reference is made to the information contained in the Prospectus under the caption "MANAGEMENT -- Remuneration."
ITEM 14. INDEMNIFICATION AND ELIMINATION OF LIABILITY.
The Registrant's Articles of Incorporation and Bylaws contain provisions
that govern indemnification of its directors, investment advisors/managers and
shareholders, officers, agents, employees and affiliates. These provisions
enable the Registrant to indemnify these individuals to the fullest extent
permitted by Virginia law and the SBA Act. The Registrants' Articles of
Incorporation and Bylaws have been approved by the SBA. Under its Articles of
Incorporation and Bylaws, the Registrant may indemnify any person who was or is
a party to any proceeding by reason of the fact that the person is or was a
director, officer, employee or agent of the corporation or is or was serving at
the request of the corporation in any such capacity of another corporation or
other entity against liability incurred in connection with such proceeding,
including any appeal thereof, if the individual acted in good faith and believed
(i) in the case of conduct in the individual's official capacity with the
Registrant, that the individual's conduct was in the best interests of the
Registrant or (ii) in all other cases, that the individual's conduct was at
least not opposed to the best interests of the Registrant. In addition, in the
case of any criminal proceeding, the individual must not have had reasonable
cause to believe his conduct was unlawful. Its Articles of Incorporation and
Bylaws require the Registrant to indemnify its directors and officers (and
allows the Registrant to indemnify employees or agents) who entirely prevail in
the defense of any proceeding to which they were a party because they are or
were directors or officers (or employees or agents) of the Registrant. The
Articles of Incorporation and Bylaws also provide for the advancement of
expenses incurred by the directors, officers, agents and employees described
above in connection with the defense of any action, suit or proceeding to which
such a person is or was a party because such a person is or was a director,
officer, agent or employee of the Registrant, on the receipt of an undertaking
to repay such amount, if it is ultimately determined that such person is not
entitled to indemnification. Under the Registrant's Articles of Incorporation
and Bylaws, all such determinations of indemnification and expense reimbursement
must be made by a majority of directors not party to the proceedings or
transaction in question, an independent committee not affiliated with the board
of directors or any investment advisor/manager or independent legal counsel. Its
Articles of Incorporation and Bylaws permit the Registrant to purchase and
maintain insurance or furnish similar protection on behalf of any officer or
director against any liability asserted against the officer or director and
incurred by the officer or director in such capacity, or arising out of the
person's status, as an officer or director. This insurance protection is
available under Virginia law whether or not the Registrant would have the power
to indemnify the director or officer against such liability under Virginia law.
The Registrant has purchased such insurance for the benefit of its officers and
directors.
The Registrant's Articles of Incorporation and Bylaws prohibit the Registrant from indemnifying directors and officers in connection with a proceeding by or in the right of the Registrant in which the director or officer was adjudged liable to the Registrant, although the court in which such action was brought may order indemnification of the director or officer to the extent of his reasonable expenses if it determines that the director or officer is entitled to such indemnification. Its Articles of Incorporation and Bylaws also prohibit the Registrant from indemnifying directors or officers in connection with any other proceeding charging improper personal benefit to the director or officer (whether or not involving action in his official capacity) in which the director or officer was adjudged liable on the basis that personal benefit was improperly received by him. In addition, under the Bylaws, the Registrant is prohibited from indemnifying directors and officers from liability arising from their willful misfeasance, bad faith, gross negligence or reckless disregard in the performance of their duties and obligations to the Registrant. Moreover, its Articles of Incorporation provide that the
Registrant may not indemnify directors and officers for breaches of fiduciary duties as prohibited by the SBA Act.
Under Virginia law and the Registrant's Articles of Incorporation and Bylaws, directors and officers are not personally liable for monetary damages to the Registrant for acts or omissions in their capacity as a director or officer, except in certain limited circumstances such as certain violations of criminal law and transactions in which the director or officer derived an improper personal benefit. As a result, shareholders may be unable to recover monetary damages against directors and officers for actions taken by directors or officers that constitute negligence or gross negligence or that violate their fiduciary duties. Injunctive or other equitable relief may be available.
ITEM 15. CUSTODIANS OF PORTFOLIO SECURITIES.
Reference is made to the information contained in the Prospectus under the
caption "CUSTODIAN, TRANSFER AGENT AND REGISTRAR."
ITEM 16. INVESTMENT ADVISERS.
Reference is made to the information contained in the Prospectus under the caption "BUSINESS."
ITEM 17. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISERS AND THEIR MANAGEMENTS.
The Registrant has no investment advisers.
ITEM 18. INTEREST OF AFFILIATED PERSONS IN CERTAIN TRANSACTIONS.
J. Alan Lindauer was elected President and Chief Executive Officer of the Registrant in March 1994. His annual compensation of $52,000 (and $78,000 after July 1, 1997 through December 31, 1997) was paid to J.A.L. Management, Inc., a corporation of which he is the sole shareholder. See "MANAGEMENT -- Renumeration."
ITEM 19. CAPITAL STOCK.
Reference is made to the information contained in the Prospectus under the
caption "DESCRIPTION OF CAPITAL STOCK."
ITEM 20. LONG-TERM DEBT.
The Registrant has no long-term debt.
ITEM 21. OTHER SECURITIES.
The Registrant has no authorized securities other than those described in Item 19 and Item 20.
ITEM 22. FINANCIAL STATEMENTS.
Reference is made to the information contained in the Prospectus under the
caption "FINANCIAL STATEMENTS."
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY AN OFFER TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JANUARY 28, 1998
800,000 SHARES
WATERSIDE CAPITAL CORPORATION
COMMON STOCK
Waterside Capital Corporation, a Virginia corporation (the "Company"), is offering 800,000 shares (the "Shares") of its common stock, par value $1.00 (the "Common Stock"). It is estimated that the initial offering price will be between $11.00 and $13.00 per share. See "Underwriting." The Company is a closed-end investment company licensed by the Small Business Administration as a small business investment corporation. The Company invests in equity and debt securities of small businesses. Its initial equity investments have generally been in the form of preferred stock bearing current-pay dividends between 9% and 14% annually. The Company also provides long-term loans at similar rates. Its equity and debt financings are generally coupled with warrants to acquire common stock. The Company seeks to achieve high levels of current income from preferred stock dividends and interest on loans, as well as long-term growth in the value of its net assets through appreciation of its common stock interests in portfolio companies. No assurance can be given that the Company will achieve these objectives.
Before this Offering, there has been no public market for the Common Stock. See "Underwriting" for a discussion of the factors considered in determining the initial public offering price. The Common Stock has been approved for listing on The Nasdaq SmallCap Market under the symbol "WSCC."
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.
=================================================================================================
UNDERWRITING PROCEEDS
PRICE DISCOUNTS AND TO
TO PUBLIC COMMISSIONS(1) COMPANY(2)
-------------------------------------------------------------------------------------------------
Per Share......................... $ $ $
-------------------------------------------------------------------------------------------------
Total(3).......................... $ $ $
=================================================================================================
|
(1) Does not include a warrant issued to the Underwriter in connection with this Offering to purchase 62,000 shares of Common Stock at a per share price equal to 115% of the Price to Public, exercisable for a period of four years commencing one year after the date of this Prospectus (the "Underwriter's Warrant") or the Underwriter's $100,000 accountable expense allowance. The Company has agreed to indemnify the Underwriter against certain liabilities, including liabilities under the Securities Act of 1933. See "Underwriting."
(2) Before deducting expenses and other fees payable by the Company estimated at $400,000, including the Underwriter's accountable expense allowance.
(3) The Company has granted the Underwriter a 30-day option to purchase up to 120,000 additional shares of Common Stock on the same terms and conditions as set forth above, solely to cover over-allotments, if any. If all such shares are purchased, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting."
The Shares of Common Stock are being offered by the Underwriter subject to prior sale, as, when and if delivered to and accepted by it, and subject to certain other conditions. The Underwriter reserves the right to withdraw, cancel or modify this Offering without notice and to reject orders in whole or in part. It is expected that delivery of the certificates for the Shares will be made against payment therefor on or about February , 1998 at the offices of Scott & Stringfellow, Inc., Richmond, Virginia.
Scott & Stringfellow, Inc.
THE DATE OF THIS PROSPECTUS IS JANUARY 28, 1998
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."
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.
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
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."
|
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.
INCEPTION SIX MONTHS ENDED
JULY 13, 1993 YEAR ENDED JUNE 30, DECEMBER 31,
TO JUNE 30, ----------------------------------------------- -----------------------------
1994 1995 1996 1997 1996 1997
------------- ------------- ------------- ------------- ------------- -------------
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
|
AT DECEMBER 31, 1997
---------------------------
ACTUAL AS ADJUSTED(2)
---------- --------------
BALANCE SHEET DATA:
Cash and cash equivalents.............................................. $1,222,227 $ 9,750,227
Net unrealized appreciation on investments............................. $ 275,376 $ 275,376
Total stockholders' equity............................................. $4,434,544(3) $ 12,962,544(3)(4)
|
(1) Net operating income per share and net income per share are based on the weighted average number of shares outstanding for the indicated period.
(2) As adjusted to reflect the receipt and application of the net proceeds from the sale of the 800,000 Shares at an estimated price of $12 per share.
(3) Between May 1994 and February 1997, the Company sold 568,900 shares of Common Stock in a series of transactions in a private placement. As permitted by the offering documents, the Company allowed accredited investors, as defined in Regulation D of the Securities Act ("Regulation D"), to pay 50% of the subscription price of the Common Stock in cash and to finance the unpaid purchase price by a non-interest bearing recourse promissory note, payable on demand, secured by the shares of Common Stock purchased. "Total stockholders' equity" does not reflect $1,555,000 in such promissory notes receivable from shareholders. The Company has notified the accredited investors that all such notes are due and payable on or before December 31, 1999. See Note C to Financial Statements.
(4) Reflects deductions for the Underwriter's discounts and commissions of 7%, the Underwriter's accountable expense allowance of $100,000 and other estimated costs of this Offering of $300,000.
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
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.
Limited Public Market; Volatility of Stock Price.
Before this Offering, there has been no public market for the Common Stock. The Common Stock has been approved for listing on The Nasdaq SmallCap Market under the symbol "WSCC." Continued inclusion requires that the Company satisfy a minimum tangible net worth or net income standard and that the Common Stock satisfy minimum standards of public float, bid price and market makers. There can be no assurance, however, that an active public market for the Common Stock will develop or be sustained after this Offering.
The Common Stock is likely to be thinly traded with a significant differential between the bid and ask price and a highly volatile trading price that will be subject to wide fluctuations in response to factors, many of which are beyond the Company's control. These may include fluctuations in the operating results of its portfolio companies, sales of the Common Stock in the marketplace, shortfalls in revenues, earnings or other operating results of the Company, general financial conditions and other factors. There can be no assurance that the market price of the Common Stock will not experience significant fluctuations that are material, adverse and unrelated to the Company's performance.
In addition, the stock market has from time to time experienced extreme price and volume fluctuations that often have been unrelated to the operating performance of particular companies. Changes in earnings estimates by analysts and economic and other external factors and period-to-period fluctuations in financial results of the Company may have a significant impact on the market price of the Common Stock. Fluctuations or decreases in its trading price may adversely affect the liquidity of the trading market for the Common Stock.
Reliance on Management.
Management is a key factor in the successful development and operation of an SBIC. The Company depends for the selection, structuring, closing and monitoring of its loans and investments on the diligence and skill of management and members of the Executive Committee, particularly J. Alan Lindauer, the loss of whose services could have a material adverse effect on the operations of the Company. Mr. Lindauer serves as President and Chief Executive Officer, and as a Director and Chairman of the Executive Committee of the Company. Until recently, he was the Company's only full-time executive officer. Although Mr. Lindauer is a Certified Management Consultant and has experience in business evaluation and small business investing, until his election as President of the Company in March 1994, he had never served as an executive officer of an SBIC. See "Management." The Company does not maintain key man life insurance on Mr. Lindauer.
Determination of Public Offering Price.
The public offering price of the Shares of Common Stock will be determined by negotiations between the Company and the Underwriter. Among the factors to be considered in making this determination will be an assessment of the Company's results of operations, an evaluation of its management, future prospects of the Company and its industry in general, the relative price to earnings and book value ratios of securities of publicly-traded companies believed comparable to the Company, the prevailing conditions in the securities market and the current state of the economy in the United States. See "Underwriting." There can be no assurance that, after this Offering, investors will be able to sell Common Stock at or above the initial public offering price.
Expansion.
The Company intends to expand substantially its small business investment activities, both in size (with the proceeds of this Offering and, when necessary and if permitted by the SBA, with SBA Leverage), and geographic scope (by establishing a second office in Richmond, Virginia). In addition, it is investigating the possibility of restructuring its operations to enable it to pursue investment opportunities not available to SBICs because of regulatory constraints, as well as seeking to acquire SBIC-eligible investments from other investment funds. No assurance can be given that the Company will restructure its operations in this manner, or that if it does, that the restructuring will benefit shareholders. If the Company accomplishes these objectives, no assurance can be given that it will be able to develop sufficient administrative personnel, management and operating systems to manage its expansion effectively.
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.
In addition, in the future the Company may issue additional shares of Common Stock. No prediction can be made as to the effect, if any, that future issuances of Common Stock may have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of such Common Stock, or the perception that such sales may occur, could adversely affect the then prevailing market price of the Common Stock. See "Shares Available for Future Sale."
Immediate Dilution.
The amount by which the initial public offering price per share of Common Stock exceeds the adjusted net tangible book value per share of the Common Stock after this Offering constitutes dilution to investors in this Offering. At an assumed initial public offering price of $12, investors purchasing shares of Common Stock in this Offering will incur immediate dilution of $1.39 per share. See "Dilution."
Absence of Dividends.
The Company has not declared or paid any cash dividends in the past and does not expect to pay cash dividends in the foreseeable future. The Company currently intends to retain its future earnings, if any, to finance the development and expansion of its business. Any future dividend policy will be determined by the Board of Directors in light of conditions then existing, including the Company's earnings and its financial condition and requirements. See "Dividend Policy."
Possible Issuance of Preferred Shares; Anti-Takeover Provisions.
The Company's Articles of Incorporation authorize the Board of Directors to issue, without shareholder approval, 25,000 shares of preferred stock with voting, conversion and other rights and preferences that could materially and adversely affect the voting power or other rights of the holders of Common Stock. The Company presently has no plans or commitments to issue any shares of preferred stock. The issuance of preferred stock or of rights to purchase preferred stock, as well as certain provisions of the Company's Articles of Incorporation and Virginia law, could delay, discourage, hinder or preclude an unsolicited acquisition of the Company, make it less likely that shareholders receive a premium for their shares as a result of any such attempt and adversely affect the market price, and voting and other rights of the holders of Common Stock. See "Description of Capital Stock."
USE OF PROCEEDS
Based on an assumed public offering price of $12 per share, the Company will receive approximately $8.5 million, after the Underwriter's discounts and commissions and estimated expenses of this Offering. The net proceeds will be used to increase the Company's Private Capital available for investments in equity and debt securities of small businesses, to fund the opening of a second office in Richmond, Virginia, and to fund possible acquisitions of SBIC-eligible investments from other investment funds. Pending such uses, the Company intends to invest the balance of such net proceeds in short-term U.S. government securities. See "Risk Factors -- Broad Management Discretion in Use of Proceeds."
DIVIDEND POLICY
After this Offering, the Company anticipates that all of its earnings will be retained for development and expansion of its business and does not anticipate paying any cash dividends in the foreseeable future. The payment of dividends is subject to the discretion of the Board of Directors and will depend on the Company's results of operations, financial position, capital requirements, general business conditions, restrictions imposed by any financing arrangements, legal and SBA regulatory restrictions on the payment of dividends and other factors the Board of Directors deems relevant.
CAPITALIZATION
The following sets forth the equity capitalization of the Company at December 31, 1997, and, as adjusted, to give effect to the sale by the Company of the 800,000 Shares of Common Stock (based on an assumed public offering price of $12 per share) and the application of the estimated net proceeds of such sale.
This table should be read in conjunction with the Financial Statements and Notes included elsewhere in this Prospectus.
AT DECEMBER 31, 1997
---------------------------------
OUTSTANDING AS ADJUSTED
----------- -----------
Stockholders' equity:
Preferred Stock, par value $1 per share,
25,000 shares authorized; no shares issued
or outstanding or as adjusted............... $ -- $ --
Common Stock, par value $1 per share;
10,000,000 shares authorized, 568,900 shares
issued and outstanding; 1,368,900 shares as
adjusted.................................... 568,900 1,368,900
Additional paid-in capital.................... 5,041,100(1) 12,769,100(1)(2)
Net unrealized appreciation on investments.... 275,376 275,376
Undistributed accumulated earnings
(deficit)................................... 104,168 104,168
Stockholders' notes receivable................ (1,555,000) (1,555,000)
----------- -----------
Total stockholders' equity............... 4,434,544(1) 12,962,544(1)(2)
----------- -----------
Total capitalization................ $ 4,434,544(1) $12,962,544(1)(2)
========== ==========
|
(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.
DILUTION
The net tangible book value of the Company as of December 31, 1997 was approximately $6 million, or $10.53 per share of Common Stock. Net tangible book value per share is equal to the Company's total tangible assets less total liabilities, divided by the total number of shares of Common Stock outstanding. For the purpose of this section, total tangible assets include $1,555,000 in non-interest bearing recourse promissory notes executed by existing shareholders (all of whom are accredited investors) in connection with their purchase of Common Stock. After giving effect to the sale by the Company of the 800,000 Shares of Common Stock at an assumed initial public offering price of $12 per share and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by the Company, the adjusted net tangible book value of the Company as of December 31, 1997 would be $14.5 million, or $10.61 per share. This represents an immediate increase in net tangible book value of $0.08 per share to existing stockholders and an immediate dilution in the net tangible book value of $1.39 per share to investors purchasing Shares of Common Stock in this Offering. The following table illustrates the per share dilution:
Assumed initial public offering price........................................ $12.00
Net tangible book value at December 31, 1997................... $10.53
------
Increase attributable to new investors......................... $ 0.08
------
Adjusted net tangible book value after this Offering......................... $10.61
Dilution to new investors.................................................... $ 1.39
|
The following table summarizes, as of December 31, 1997, the difference between the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid by existing stockholders and by new investors at the assumed initial public offering price of $12 per share.
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
Existing stockholders....................... 568,900 41.6 $ 5,680,000 37.2 $ 10.00
New investors............................... 800,000 58.4 9,600,000 62.8 $ 12.00
--------- ---- ---------- -----
Total............................. 1,368,000 100.0 $15,280,000 100.0
========= ==== ========== =====
|
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of the financial condition and results of operations of the Company should be read together with the Company's Financial Statements and the Notes and the other financial data included elsewhere in this Prospectus. The Company's results of operations for the period from inception to June 30, 1996 are not comparable to those for the year ended June 30, 1997 because the Company did not begin its investing operations until October 1996. Because of the very limited operating results and history of the Company, there can be no assurances that the Company's historical financial performance is indicative of its future results of operations.
OVERVIEW
The Company invests in the equity and debt securities of small businesses. Its initial equity investments have been in the form of preferred stock carrying current-pay dividends between 9% and 14% annually. The weighted average dividend on its preferred stock investments is currently 12.2%. Dividend income for an SBIC is non-taxable. Its loans have been made at annual interest rates of 10%, 10% and 12%. Its investments and loans are generally coupled with warrants to purchase minority interests in portfolio companies. The Company derives most of its operating income from dividends paid on preferred stock and interest earned on loans and on its U.S. government securities. The balance of the Company's operating income is derived from application fees and processing fees received on the origination of investments.
The Company has not yet sold any securities of its portfolio companies. Accordingly, its financial statements do not reflect any realized gains or losses on these investments. It has, however, recognized unrealized appreciation on certain investments. Unrealized appreciation or depreciation of investments results when the Company adjusts the value of its investments, on a quarterly basis, to reflect management's estimate of current fair value as determined by the Executive Committee in accordance with the SBA's model valuation policy, which the Company has adopted. Any change in the fair value of loans and equity investments is reflected in unrealized appreciation or depreciation of investments but has no impact on net operating income. The Financial Statements present unrealized appreciation or depreciation on investments after deduction for applicable federal and state income taxes. Both the Company's net worth and its net income are, and will continue to be, significantly impacted by unrealized appreciation or depreciation of its investments.
RESULTS OF OPERATIONS
Years Ended June 30, 1996 and 1997
Operating Income. For the year ended June 30, 1997, operating income was $264,878. The Company derived $166,573 or 62.9% from interest received on the cash portion of its Private Capital which it had invested in U.S. government securities. The remainder of operating income was derived from interest income ($9,430 or 3.6%), dividends ($51,425 or 19.4%) and other income ($37,450 or 14.1%). For the year ended June 30, 1996, operating income was $59,517, of which $42,262 (71%) was from interest in U.S. government securities and the remaining $17,255 (29%) from other income.
Operating Expenses. Operating expenses for the year ended June 30, 1997 were $214,667 reflecting increased investment activities of the Company (which began in October 1996) and accompanying increased payroll, legal and accounting costs. Net operating income before net change in unrealized appreciation on investments and provision (benefit) for income taxes was $50,211. After a tax benefit of $12,370 reflecting early recognition of organizational expenses for tax purposes, net operating income for the year was $62,581. In the year ended June 30, 1996, operating expenses were $59,777, resulting in a net operating loss of $260 before net change in unrealized appreciation on investments and provision (benefit) for income taxes. After a tax benefit of $7,346 reflecting early recognition of organizational expenses for tax purposes, net operating income was $7,086.
Unrealized Appreciation on Investments. The Company had no unrealized appreciation at June 30, 1996 because it had made no investments. The Company had $211,700, net of taxes, of unrealized appreciation on investments for the year ended June 30, 1997. See "Unrealized Appreciation on Investments at June 30, 1997 and December 31, 1997."
Six Months Ended December 31, 1996 and 1997
Operating Income. During the six months ended December 31, 1997, the Company began to receive dividend income from the preferred stock investments it began making in November 1996. During this period, operating income was $167,311. The Company derived $37,230 (22.3%) from interest received on U.S. government securities (reflecting a decrease in cash Private Capital invested in U.S. government securities and an increase in cash investments in preferred stock of portfolio companies). The remainder of operating income was derived from interest income ($3,222 or 1.9%), dividends ($86,479 or 51.7%) and other income ($40,380 or 24.1%). For the same period in 1996, operating income was $129,077, almost all of which was interest earned on Private Capital invested in U.S. government securities.
Operating Expenses. Operating expenses for the six months ended December 31, 1997 were $119,552 (compared to $94,741 in 1996) resulting in net operating income, before income taxes, of $47,759. With a tax benefit of $15,692, net operating income was $63,451 compared to a net operating income in 1996 of $37,935. This operating income was attributable to the Company's transition from operating income based primarily on interest from U.S. government securities yielding relatively low interest income, paid monthly or more frequently, to operating income derived from higher-coupon dividends, payable quarterly, semi-annually or annually, and to increased personnel, legal and accounting fees resulting from investment activities.
Unrealized Appreciation of Investments at June 30, 1997 and December 31, 1997.
Unrealized appreciation, net of income taxes on June 30, 1997, was $211,700, comprised primarily of a $132,410 increase in the valuation of its preferred stock in the financial services industry back office and software support portfolio company and a $208,891 increase in the valuation of the 301,000 common stock warrants of the portfolio company engaged in long-distance telephone rebilling services.
In establishing these valuations, management considered several factors. These included an increase in the maximum redemption price of preferred stock reflecting increased adjusted earnings in the case of one portfolio company and the excess of market price over the exercise price of its warrants, as well as operating results, in the case of the other. The gross unrealized appreciation of $341,301 was then reduced by provision for federal and state income taxes of $129,601 payable if these securities were sold at their estimated value, leaving net unrealized appreciation of $211,700.
At December 31, 1997, the average per share trading price of common stock of the rebilling services portfolio company had increased over the June 30, 1997 price. The Company's investment was then revalued resulting in an increase of $63,676 in total unrealized appreciation, net of taxes, from $211,700 at June 30, 1997 to $275,376 at December 31, 1997.
CAPITAL RESOURCES
Since inception, the Company has funded its operations and the growth in its investment portfolio primarily through two sources of capital (i) the private placement of equity securities and (ii) cash flow from operating activities. The Company's sources of capital in fiscal years 1994, 1995, 1996 and 1997 and for the six months ended December 31, 1997 were:
INCEPTION
JULY 13, 1993 YEAR ENDED JUNE 30, SIX MONTHS
TO JUNE 30, -------------------------------- ENDED DEC. 31,
1994 1995 1996 1997 1997 TOTAL
------------- -------- ---------- -------- --------------- ----------
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
========= ======== ========== ======== ========= ==========
|
The Company believes that its cash and cash equivalents at December 31, 1997 of $1,222,227, the net proceeds of this Offering of approximately $8.5 million and its expected cash flow from operations will be adequate to fund the continuing growth of its investment portfolio through the upcoming fiscal year. In addition, if necessary, to provide the funds to continue its growth strategy, the Company may issue SBA Debentures and could incur, from time to time, short- or long-term bank financing. There can be no assurance that any such additional financing will be available on terms acceptable to the Company.
BUSINESS
The Company is a closed-end investment company licensed by the SBA as an SBIC under the SBA Act. The Company invests in equity and debt securities of small businesses to finance their growth, expansion and modernization. Its initial equity investments have generally been in the form of preferred stock bearing current-pay dividends between 9% and 14% annually. The weighted average dividend on its preferred stock investments is currently 12.2%. The Company also provides long-term loans. Its three loans have been made at annual interest rates of 10%, 10% and 12%. To date, the Company has made most of its investments in preferred stock because, as an SBIC, its dividend income is non-taxable. Its equity and debt financings are generally coupled with warrants to acquire common stock, representing minority interests in portfolio companies. The Company seeks to achieve high levels of current income from preferred stock dividends and interest on loans, as well as long-term growth in the value of its net assets through the appreciation of its common stock positions in portfolio companies.
STRATEGY
The Company seeks to provide growth capital financing to small businesses. Primarily through their experience in business and with financial institutions, management and members of the Executive Committee have developed a level of expertise in identifying and developing new investment opportunities in this market. The Company targets portfolio companies that meet certain criteria, including financial history, potential for significant growth and experienced management teams with a significant ownership interest. The Company believes the market for small commercial loans is underserved by traditional lending sources. Traditionally, small businesses have relied on commercial banks and the savings and loan industry to provide debt financing to fund growth. In the latter half of the 1980's and the early 1990's, funds from these traditional lending sources diminished as commercial banks consolidated market share and sought to limit both credit exposure and administrative expense associated with monitoring numerous small company loans. Concurrently, the savings and loan industry experienced significant structural and regulatory changes that greatly reduced the funds previously available as debt financing for small, privately owned businesses. The Company also believes that many of its competitors are also burdened with overhead, regulatory and administrative structures that hinder them from competing more effectively in this market. As a result of these fundamental changes, a significant opportunity has developed for nontraditional lenders to provide not only debt financing to, but also equity infusions in, small companies, creating the potential for attractive risk-adjusted returns.
The Company expects to make future investments ranging from $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.
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
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
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
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:
LEVERAGEABLE CAPITAL MATCHING RATIO SBA LEVERAGE --------------------- --------------- ------------- First $15 million 3:1 $45 million Second $15 million 2:1 $30 million Third $15 million 1:1 $15 million |
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.
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.
(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.
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.
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.
POSITION AND OFFICES
NAME AND ADDRESS AGE WITH THE COMPANY
-------------------------------------------- --- -------------------------------------------
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
|
POSITION AND OFFICES
NAME AND ADDRESS AGE WITH THE COMPANY
-------------------------------------------- --- -------------------------------------------
Richard G. Ornstein......................... 55 Member of Executive
524 Fisherman's Bend Committee and Director
Virginia Beach, VA 23451
|
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.
POSITION AND OFFICES
NAME AND ADDRESS AGE WITH THE COMPANY
-------------------------------------------- --- -------------------------------------------
James E. Andrews............................ 59 Director
109 East 40th Street
Norfolk, VA 23504
|
POSITION AND OFFICES
NAME AND ADDRESS AGE WITH THE COMPANY
-------------------------------------------- --- -------------------------------------------
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
|
James E. Andrews has served as a director of the Company since May 1997. Since 1974, Mr. Andrews has been the principal owner of Anzell Automotive, Inc., an automotive repair firm and franchisor of automotive repair shops.
Donna C. Bennett has served as a director of the Company since September 1996. She is a Vice-President of Signet Bank and has been employed since 1985 with Signet Bank in various capacities.
Jeffrey R. Ellis has served as a director of the Company since August 1997. Between 1973 and 1986, Mr. Ellis was the President and Chief Executive Officer of Ridgewell Caterers, Inc. Since 1986, he has been a private investor.
Roger L. Frost has served as a director of the Company since May 1997. Between 1956 and 1997, he was an accountant with Goodman & Company, a firm of Certified Public Accountants, from which he retired as a senior partner in 1997.
Henry U. Harris, III has served as a director of the Company since September 1997. Since 1980, he has been Portfolio Manager of Virginia Investment Counselors, Inc., a financial consulting firm, of which he is now President. Since 1991, he has been the vice-chairman of the Board of Directors of Heritage Bank & Trust.
Matthew James has served as a director of the Company since July 1993. Since 1990, Mr. James has been Director of Economic Development for the City of Portsmouth, Virginia.
Harold J. Marioneaux, Jr. has served as a director of the Company since November 1994. Since 1990, he has practiced as a dental surgeon and since 1993 has acted as a certified financial planner.
Augustus C. Miller has served as a director of the Company since August 1994. Since 1977, he has been President and Chief Executive Officer of Miller Oil Co., Inc., a distributor of fuels.
Paul F. Miller has served as a director of the Company since May 1994. Since 1987, he has served as Director of Planning and Development for the City of Newport News, Virginia.
Juan M. Montero, II has served as a director of the Company since July 1995. Since 1972, he has engaged in the private practice of general and thoracic surgery.
R. Scott Morgan, Sr. has served as a director of the Company since September 1997. Since 1995, Mr. Morgan has been Executive Vice President and Corporate Banking Manager with the Corporate Banking Group of Branch Bank & Trust Corp. Between 1992 and 1995, he was employed in various capacities with Commerce Bank.
James W. Noel, Jr. has served as a director of the Company since August 1994. Since 1993, Mr. Noel has been the Executive Director of the York County Industrial Development Authority. Between 1991 and 1993, he served in various capacities with the City of Portsmouth, Virginia.
Thomas A. O'Grady has served as a director of the Company since May 1997. In 1996, he was appointed Director of Economic Development of the City of Suffolk, Virginia. Between 1989 and 1996, he was Director 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
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.
CAPACITIES IN WHICH AGGREGATE
NAME OF INDIVIDUAL REMUNERATION WAS RECEIVED REMUNERATION
------------------ ------------------------------------------------ -------------
J. Alan Lindauer Chairman of Executive Committee, $52,000
Director, President and Chief Executive Officer
|
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,
Mr. McDonald is entitled to a bonus as determined by the Compensation/Stock Option Committee. Mr. McDonald has been granted the option to purchase 20,000 shares of Common Stock under the Stock Option Plans at the Price to Public of this Offering. The Company will reimburse expenses incurred in performing services for the Company and provide health insurance benefits. The contract contains provisions preventing Mr. McDonald from soliciting employees of the Company for a one year period after termination of employment.
Mr. Louthan is employed by the Company as Vice President and manager of the Richmond office under a one-year employment contract. In addition to a base salary of $80,000, Mr. Louthan is entitled to a bonus as determined by the Compensation/Stock Option Committee. Mr. Louthan has been granted the option to purchase 10,000 shares of Common Stock under the Stock Option Plans at the Price to Public of this Offering. The Company reimburses expenses incurred in performing services for the Company and provides health insurance benefits. The contract contains provisions preventing Mr. Louthan from soliciting employees of the Company for a one year period after termination of employment.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information as of December 31, 1997 as to each person who holds or controls 5% or more of the outstanding Common Stock:
TITLE OF AMOUNT PERCENTAGE OF
NAME AND ADDRESS CLASS TYPE OF OWNERSHIP OWNED CLASS
--------------------------- ------------- ------------------------------ ------ -------------
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
|
(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.
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
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.
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
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
loss. Because these losses are treated as noncapital losses, they are not subject to the limitation that capital losses must be offset by capital gains. Thus, they are treated as ordinary losses that may be offset by ordinary income. Generally, under the Code, an SBIC is exempt from the personal holding company tax if the SBIC is (i) licensed by the SBA and (ii) actively engaged in the business of providing funds to Small Business Concerns under the SBA Act. This exemption does not apply, however, if at any time during the taxable year, a shareholder of the SBIC owns, directly or indirectly (a) a 5% or more proprietary interest in a Small Business Concern to which the SBIC provides funds or (b) 5% or more of the value of the outstanding stock of the Small Business Concern. In applying these 5% tests, ownership by members of a individual's family (as defined in Code) is treated as ownership by that individual.
UNDERWRITING
Subject to the terms and conditions set forth in the agreement (the "Underwriting Agreement") between the Company and Scott & Stringfellow, Inc. (the "Underwriter"), the Company has agreed to sell to the Underwriter, and the Underwriter has agreed to purchase, the Shares of Common Stock at the public offering price, less the underwriting discounts and commissions set forth on the cover page of this Prospectus.
The Underwriting Agreement provides that the obligation of the Underwriter to purchase the Shares is subject to certain conditions. The Underwriter is committed to purchase all of the Shares (other than those covered by the over-allotment option described below), if any are purchased. The Underwriting Agreement also provides for the payment of a $100,000 accountable expense allowance to the Underwriter to cover expenses incurred in connection with this Offering.
The Underwriter proposes to offer the Common Stock to the public at the public offering price set forth on the cover page of the Prospectus, and to certain dealers at such price less a concession not in excess of $ per share. The Underwriter may allow, and such dealers may reallow to certain dealers a discount, not in excess of $ per share. After this Offering, the public offering price, the concession to selected dealers and the reallowance to other dealers may be changed by the Underwriter.
The Company has granted the Underwriter an option, exercisable for 30 days from the date of this Prospectus, to purchase up to 120,000 additional shares of Common Stock, at the public offering price less the underwriting discount. To the extent the option is exercised, the Underwriter will become obligated, subject to certain conditions, to purchase additional shares of Common Stock proportionate to the Underwriter's commitment. The Underwriter may exercise its right to purchase only for the purpose of covering over-allotments, if any, made in connection with the sale of the Shares of Common Stock. If purchased, the Underwriter will offer such additional Shares on the same terms as those on which the 800,000 Shares are being offered. In addition, the Company has issued the Underwriter's Warrant to purchase 62,000 shares of Common Stock exercisable at a price per share equal to 115% of the Price to Public, for a period of four years commencing one year after the date of the Prospectus. The Underwriter's Warrant, as well as the underlying shares of Common Stock, are being registered in this Offering.
For a period of five years following the Offering, the Underwriter has the right to designate a nominee for election to the Company's Board of Directors, and, if elected, such director will be a member of the Company's Executive Committee. As of the date of this Prospectus, the Underwriter has not designated a nominee to the Board of Directors.
The Company has agreed to indemnify the Underwriter or contribute to losses arising out of certain liabilities, including liabilities under the Securities Act.
As of the date of this Prospectus, the Company, its officers and directors who own Common Stock, and substantially all other existing shareholders have agreed that they will not, directly or indirectly, offer, sell, offer to sell, contract to sell, grant any option to purchase or otherwise dispose of, loan, pledge or transfer (or announce any offer, sale, offer of sale, contract of sale, grant of any options to purchase or otherwise dispose of, loan, pledge or transfer) or grant any rights with respect to any shares of Common Stock or similar securities of the Company or any securities convertible into, or exercisable or exchangeable for, any shares of Common
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
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.
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
PAGE
---------
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
|
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
WATERSIDE CAPITAL CORPORATION
(FORMERLY EASTERN VIRGINIA SMALL BUSINESS INVESTMENT CORPORATION)
BALANCE SHEETS
DECEMBER
JUNE 30, 31,
1997 1997
--------------------- -----------
(RESTATED-SEE NOTE H) (UNAUDITED)
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
=========== ===========
|
The accompanying notes are an integral part of these financial statements.
WATERSIDE CAPITAL CORPORATION
(FORMERLY EASTERN VIRGINIA SMALL BUSINESS INVESTMENT CORPORATION)
STATEMENTS OF OPERATIONS
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)
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
======= ======== ======= =======
|
The accompanying notes are an integral part of these financial statements.
WATERSIDE CAPITAL CORPORATION
(FORMERLY EASTERN VIRGINIA SMALL BUSINESS INVESTMENT CORPORATION)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NET
COMMON STOCK UNREALIZED
---------------------------------------------- ADDITIONAL APPRECIATION
SHARES SHARES PAID-IN ON
SUBSCRIBED AMOUNT ISSUED AMOUNT CAPITAL INVESTMENTS
---------- --------- ------- -------- ---------- ------------
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
========= ========= ======== ======== =========== ========
UNDISTRIBUTED
ACCUMULATED STOCK SHAREHOLDERS' TOTAL
EARNINGS SUBSCRIPTIONS NOTES STOCKHOLDERS'
(DEFICIT) RECEIVABLE RECEIVABLE EQUITY
------------- ------------- ------------ ------------
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
======== =========== =========== ===========
|
The accompanying notes are an integral part of these financial statements.
WATERSIDE CAPITAL CORPORATION
(FORMERLY EASTERN VIRGINIA SMALL BUSINESS INVESTMENT CORPORATION)
STATEMENTS OF CASH FLOWS
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)
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.
|
The accompanying notes are an integral part of these financial statements.
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:
JUNE 30, 1997 DECEMBER 31, 1997
------------- -----------------
(UNAUDITED)
Cash.................................................... $ 19,678 $ 632,332
Certificate of Deposit.................................. 100,000 --
Repurchase agreements................................... 2,209,470 589,895
----------- -----------
Total.............................................. $ 2,329,148 $ 1,222,227
=========== ===========
|
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
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.
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:
JUNE 30, 1997 DECEMBER 31, 1997
------------------------ ------------------------
COST VALUE COST VALUE
---------- ---------- ---------- ----------
(UNAUDITED)
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
|
WATERSIDE CAPITAL CORPORATION
(FORMERLY EASTERN VIRGINIA SMALL BUSINESS INVESTMENT CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
B. INVESTMENTS -- (CONTINUED)
JUNE 30, 1997 DECEMBER 31, 1997
------------------------ ------------------------
COST VALUE COST VALUE
---------- ---------- ---------- ----------
(UNAUDITED)
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
|
WATERSIDE CAPITAL CORPORATION
(FORMERLY EASTERN VIRGINIA SMALL BUSINESS INVESTMENT CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
B. INVESTMENTS -- (CONTINUED)
JUNE 30, 1997 DECEMBER 31, 1997
------------------------ ------------------------
COST VALUE COST VALUE
---------- ---------- ---------- ----------
(UNAUDITED)
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
========= ========= ========= =========
|
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:
SIX MONTHS SIX MONTHS
YEAR ENDED JUNE 30, ENDED ENDED
--------------------- DECEMBER 31, DECEMBER 31,
1996 1997 1996 1997
-------- --------- ------------ ------------
(UNAUDITED) (UNAUDITED)
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)
======== ========= ========== ==========
|
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:
DECEMBER 31,
JUNE 30, 1997 1997
------------- ------------
(UNAUDITED)
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
========= ========
|
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.
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:
PRIME SUB-LEASE
LEASE INCOME NET
-------- --------- ---------
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
======== ======= =======
|
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.
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
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:
AS PREVIOUSLY
REPORTED AS RESTATED
------------- -----------
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
|
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
PAGE
----
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
|
UNTIL FEBRUARY , 1998 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING) ALL PERSONS EFFECTING TRANSACTIONS IN COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
800,000 SHARES
WATERSIDE
CAPITAL
CORPORATION
A SMALL BUSINESS INVESTMENT COMPANY
COMMON STOCK
PROSPECTUS
Scott & Stringfellow, Inc.
January 28, 1998
PART III
ITEM 29. MARKETING ARRANGEMENTS
Reference is made to the information contained in the Prospectus under the caption "Underwriter."
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses in connection with the issuance and distribution of the securities covered hereby, other than underwriting discounts and commissions and compensation to authorized agents, are, subject to future contingencies, estimated to be as follows:
SEC Registration Fee...................................................... $ 3,903
Legal Fees and Expenses................................................... 200,000
Accounting Fees and Expenses.............................................. 24,000
Blue Sky Fees and Expenses................................................ 20,000
Accountable Expense Allowance to Underwriter.............................. 100,000
Printing Expenses......................................................... 52,000
Miscellaneous............................................................. 97
--------
Total........................................................... $400,000
========
|
ITEM 31. RELATIONSHIP WITH REGISTRANT OF EXPERTS NAMED IN REGISTRATION STATEMENT
Not applicable.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES
Between February 1994 and February 1997, the Registrant sold 568,900 shares of Common Stock, par value $1 per share, for $5,689,000 at $10 per share. There were no principal underwriters. All securities were sold pursuant to exemptions under the Securities Act of 1933 to five founders, 79 "accredited investors" and three "non-accredited" investors, as defined in the Securities Act of 1933 (the "Securities Act"), as follows:.
NUMBER OF SHARES OF
NAME OF SHAREHOLDER DATE OF PURCHASE COMMON STOCK PURCHASED
---------------------------------------------------- ------------------- ----------------------
Hansen, Eugene W. .................................. February 7, 1994 200
Fox, Eric L. ....................................... February 7, 1994 100
Lindauer, J. Alan................................... February 7, 1994 100
Richardson, Philip W. .............................. February 7, 1994 100
Baker, Samantha L. ................................. February 7, 1994 100
Hansen, Eugene W., IRA Prudential Securities
Custodian......................................... May 6, 1994 4,800
Meredith, Peter M., Jr. ............................ November 14, 1994 500
Lindauer, J. Alan................................... November 14, 1994 500
Davenport & Co. of Va., Inc. fbo Eugene W. Hansen,
IRA............................................... December 5, 1994 500
Low, Robert I. ..................................... December 10, 1994 500
Fox, Eric L. ....................................... February 2, 1995 400
Meredith Realty Holding Company, L.L.C. ............ June 30, 1996 10,000
Chisman, J. W. W., Jr. ............................. June 30, 1996 10,000
Industrial Development Authority of York County..... June 30, 1996 5,000
White, Corbin B. ................................... June 30, 1996 5,000
JFR Reinsurance Co., Ltd. .......................... June 30, 1996 5,000
Miller, Augustus C. ................................ June 30, 1996 10,000
Virginia Beach Federal Savings Bank................. June 30, 1996 10,000
Kavadias, Gabriel................................... June 30, 1996 5,000
|
NUMBER OF SHARES OF
NAME OF SHAREHOLDER DATE OF PURCHASE COMMON STOCK PURCHASED
---------------------------------------------------- ------------------- ----------------------
Santiago, Gloria A. ................................ June 30, 1996 500
William A. Gooch Trust.............................. June 30, 1996 10,000
Nelson, J. Brock.................................... June 30, 1996 500
Scott & Stringfellow, Inc. fbo Victor Cabanas, MD
IRA............................................... June 30, 1996 5,000
Uy, Gregorio C. .................................... June 30, 1996 5,000
Miller, Jerrold L. ................................. June 30, 1996 5,000
Irwin, R. Thomas Dobson Revocable Living Trust...... June 30, 1996 5,000
Santos, Amelia L. .................................. June 30, 1996 5,000
Commerce Bank....................................... June 30, 1996 35,000
Hampton Roads Chamber Foundation.................... June 30, 1996 5,000
Ornstein, Yevrah.................................... June 30, 1996 5,000
Ornstein, Richard G. ............................... June 30, 1996 10,000
James C. Nocito, Inc. Profit Sharing................ June 30, 1996 5,000
Farrell, Paul J. & Lynne G. ........................ June 30, 1996 5,000
Andrews, J. E. ..................................... June 30, 1996 10,000
York Oil Company Profit Sharing..................... June 30, 1996 5,000
Rogelio F. Arcuino, MD Profit Sharing Plan.......... June 30, 1996 10,000
Garden Capital Acquisitions, L.L.C. ................ June 30, 1996 5,000
Domestic Virginia Partnership....................... June 30, 1996 5,000
Irving, D. P. ...................................... June 30, 1996 5,000
AutoInfo Finance of Virginia, Inc. ................. June 30, 1996 20,000
Davis Oil Company Employee Trust.................... June 30, 1996 11,000
Portsmouth Industrial Foundation.................... June 30, 1996 5,000
The Manfred and Sonya Bloch Revocable Trust......... June 30, 1996 5,000
Hall, Joseph B. .................................... June 30, 1996 10,000
Old Dominion University Research Foundation......... June 30, 1996 10,000
Old, William W. .................................... June 30, 1996 5,000
Patten, Donald N. .................................. June 30, 1996 5,000
Resource Bank....................................... June 30, 1996 5,000
Signet Bank......................................... June 30, 1996 10,000
Old Point National Bank............................. June 30, 1996 5,000
Cooper, David J. ................................... June 30, 1996 5,000
Smith, L.A. Jr. & V.K. ............................. June 30, 1996 2,000
Goodloe, Norman..................................... June 30, 1996 20,000
Kayes, Micheal T. .................................. June 30, 1996 5,000
Pallet, Claude Stanley.............................. June 30, 1996 3,000
Pomar Holding Company, L.L.C. ...................... June 30, 1996 10,000
Mastracco, Vincent J., Jr. ......................... June 30, 1996 5,000
Juanarena, Douglas B. .............................. June 30, 1996 8,000
Chisman, J. W. W., Jr. ............................. June 30, 1996 1,000
J. Daniel Ballard & Henry U. Harris III............. June 30, 1996 5,000
Ehrenzeller, Charles F. ............................ June 30, 1996 5,000
Ellis, Jeffrey R. .................................. June 30, 1996 5,000
Rumsey, Carl C. .................................... June 30, 1996 1,000
Divaris, Gerald S. ................................. June 30, 1996 1,000
Levin. Eugene M. ................................... June 30, 1996 2,500
Ross, Jess G. & Jeanne P. .......................... June 30, 1996 6,000
Dr. Gerald Einhorn, Ltd. Defined Benefit Plan....... June 30, 1996 2,500
Freidberg, Marvin S. ............................... June 30, 1996 2,500
Viola, Pat J. ...................................... June 30, 1996 1,700
Pariser, Carol O. .................................. June 30, 1996 1,600
|
NUMBER OF SHARES OF
NAME OF SHAREHOLDER DATE OF PURCHASE COMMON STOCK PURCHASED
---------------------------------------------------- ------------------- ----------------------
Viola, Emil A. ..................................... June 30, 1996 1,700
Stern, Russell T., Jr. ............................. June 30, 1996 15,000
Haynes, Patrick J., III............................. June 30, 1996 15,000
Hearring, William J. ............................... June 30, 1996 5,000
Lindauer, J. Alan................................... June 30, 1996 600
Hansen, Eugene W. .................................. June 30, 1996 200
Davenport & Co. of Va., Inc. c/f Eugene W. Hansen,
IRA............................................... June 30, 1996 14,300
Mauer, Anne R. ..................................... June 30, 1996 3,300
Hines, Angus I., III................................ June 30, 1996 3,400
Stulb, Marilyn H. .................................. June 30, 1996 3,300
Fox, Eric L. ....................................... June 30, 1996 4,500
Santoro, Frank J. .................................. June 30, 1996 5,000
Meredith, Peter M., Jr. ............................ June 30, 1996 500
Williamson, B. Yeh.................................. June 30, 1996 5,000
Virginia Eastern Shore Sustainable Development
Corporation....................................... June 30, 1996 5,000
J. M. Peterson & E. S. Lifland Trustees, Roger Frost
401(k) Plan....................................... June 30, 1996 5,000
Industrial Development Authority of the City of
Suffolk, Virginia, Inc. .......................... June 30, 1996 3,000
Economic Development Authority of the City of
Newport News, Virginia............................ June 30, 1996 5,000
Industrial Development Authority of the City of
Hampton, Virginia................................. June 30, 1996 5,000
Hometown Bank & Co. for J. Alan Lindauer Profit
Sharing Plan...................................... June 30, 1996 40,000
Montero, Juan M. II MD P.C. Profit Sharing and Money
Purchase Pension Plan............................. June 30, 1996 5,000
Falk, Charles E. Sr. ............................... July 17, 1996 5,000
Marioneaux, Stephanie J. & Harold J. ............... July 17, 1996 5,000
Angus I. Hines, Inc. ............................... July 17, 1996 10,000
Low, Robert I. ..................................... August 28, 1996 1,500
Hamlin, Janet Hale.................................. September 24, 1996 2,500
Friedman, Leslie H. ................................ September 24, 1996 2,500
Goodman & Company 401(k) Profit Sharing Plan for
Roger L. Frost.................................... February 1, 1997 5,000
----------
Total Number of Shares Outstanding........ 568,900
===================
|
The aggregate cash proceeds of Common Stock in the private placement were $3,683,000. The terms of the private placement permitted "institutional investors," as defined by SBA regulations (substantially equivalent to "accredited investors" as defined in Rule 501 of Regulation D under the Securities Act) to purchase shares of Common Stock by paying 50% of the purchase price in cash and the balance by a non-interest bearing recourse demand promissory note, secured by the purchased Common Stock. There were no underwriting discounts or commissions. The Registrant received $2,006,000 in such notes, of which $451,000 have been paid. The Company has formally demanded all reoccurring promissory notes be paid on or before December 31, 1999.
The Common Stock was sold pursuant to an exemption from registration under
Section 4(2) of the Securities Act, Rule 505 and Rule 506 of Regulation D. This
exemption was available because sales of the shares (i) were made to no more
than 35 non-accredited investors who, either alone or with their purchaser
representatives, had such knowledge and experience in financial and business matters to evaluate the merits of an investment of the Registrant, (ii) were not made pursuant to any general solicitation or general advertising and (iii) were subject to limitations on resale pursuant to Rule 502(d) of Regulation D.
ITEM 33. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED
Not applicable.
ITEM 34. UNDERTAKINGS
Subject to the terms and conditions of Section 15(d) of the Securities Exchange Act of 1934, the undersigned registrant hereby undertakes to file with the Securities and Exchange Commission such supplementary and periodic information, documents, and reports as may be prescribed by any rule or regulation of the Commission heretofore or hereafter duly adopted pursuant to authority conferred in that section.
Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "1933 Act") may be permitted to directors, officers and controlling persons of the undersigned registrant, the registrant has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the 1933 Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the mater has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the 1933 Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement is reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(H) under the Securities Act of 1933 shall be deemed to be part
of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements (incorporated by reference to the Prospectus under the caption "Index To Financial Statements"). All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto.
(b) Exhibits
(1) Amended and Restated Articles of Incorporation of the Registrant**
(2) Amended and Restated Bylaws of the Registrant.*
(3.1) Form of Lock Up Agreement.**
(3.2) Form of Stock Certificate.**
(8) The Registrant's license from the Small Business Administration.**
(9.1) Employment Agreement, dated as of December 1, 1997, between the Registrant
and J. Alan Lindauer, Jr.**
(9.2) Consent of Hoffman, Morrison & Fitzgerald, P.C.*
(9.3) Form of Warrant Agreement.*
(9.4) 1998 Employee Stock Option Plan*
(9.5) 1998 Non-Employee Stock Option Plan*
(10.1) Form of Underwriting Agreement**
(10.2) Form of Selected Dealer Agreement.**
(11) Opinion of Clark & Stant, P.C.*
(13) Financial Data Schedule.*
|
** Previously filed.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NORFOLK, AND THE COMMONWEALTH OF VIRGINIA, ON THE 9TH DAY OF JANUARY, 1998.
WATERSIDE CAPITAL CORPORATION
By: /s/ J. ALAN LINDAUER
-----------------------------
J. ALAN LINDAUER
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
(PRINCIPAL EXECUTIVE OFFICER
AND CHIEF ACCOUNTING OFFICER)
|
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
---------------------------------------- ------------------------------ -----------------
* Director January 28, 1998
----------------------------------------
JAMES E. ANDREWS
* Director January 28, 1998
----------------------------------------
DONNA C. BENNETT
* Member of Executive January 28, 1998
---------------------------------------- Committee and Director
J. W. WHITING CHISMAN, JR.
* Director January 28, 1998
----------------------------------------
JEFFREY R. ELLIS
* Member of Executive Committee, January 28, 1998
---------------------------------------- Director and
ERIC L. FOX Secretary/Treasurer
* Director January 28, 1998
----------------------------------------
ROGER L. FROST
* Member of Executive January 28, 1998
---------------------------------------- Committee and Director
ERNEST F. HARDEE
* Director January 28, 1998
----------------------------------------
HENRY U. HARRIS, III
* Director January 28, 1998
----------------------------------------
MATTHEW JAMES
/s/ J. ALAN LINDAUER Member of Executive Committee, January 28, 1998
---------------------------------------- Director, President, Chief
J. ALAN LINDAUER Executive Officer and Chief
Accounting Officer
|
SIGNATURE TITLE DATE
---------------------------------------- ------------------------------ -----------------
* Member of Executive Committee January 28, 1998
---------------------------------------- and Director
ROBERT I. LOW
* Director January 28, 1998
----------------------------------------
HAROLD J. MARIONEAUX, JR.
* Chairman of the Board of January 28, 1998
---------------------------------------- Directors, Member of Executive
PETER M. MEREDITH, JR. Committee and Director
* Director January 28, 1998
----------------------------------------
AUGUSTUS C. MILLER
* Director January 28, 1998
----------------------------------------
PAUL F. MILLER
* Director January 28, 1998
----------------------------------------
JUAN M. MONTERO, II
* Director January 28, 1998
----------------------------------------
R. SCOTT MORGAN, SR.
* Director January 28, 1998
----------------------------------------
JAMES W. NOEL, JR.
* Director January 28, 1998
----------------------------------------
THOMAS A. O'GRADY
* Member of Executive January 28, 1998
---------------------------------------- Committee and Director
RICHARD G. ORNSTEIN
* Director January 28, 1998
----------------------------------------
RICHARD A. SCHREIBER
* Director January 28, 1998
----------------------------------------
JORDAN E. SLONE
* J. Alan Lindauer, by his name hereto, signs this Registration Statement on behalf of the
persons indicated above for whom he is attorney-in-fact pursuant to a power of attorney duly
executed by such persons and filed with the Securities and Exchange Commission.
By: /s/ J. ALAN LINDAUER
----------------------------------------
|
SECOND AMENDED AND RESTATED BYLAWS
OF
WATERSIDE CAPITAL CORPORATION
ARTICLE I
SHAREHOLDERS' MEETINGS
Section 1. Annual Meeting. The annual meeting of the
Shareholders for the election of directors and the transaction of such other
business as may properly come before it shall be held at the principal office
of WATERSIDE CAPITAL CORPORATION (the "Corporation") in the City of Virginia
Beach, Commonwealth of Virginia, or at such place within or without the
Commonwealth of Virginia as shall be set forth in the notice of annual
meeting. The meeting shall be held on the second Monday in July of each and
every year, at 8:00 a.m. or at such other date and time as is designated in
the notice of annual meeting. The Secretary shall give the notice of annual
meeting, which shall include the place, date and hour of the meeting. Such
notice shall be given, either personally or by U.S. mail, not less than ten
(10) nor more than sixty (60) days before the meeting date. If mailed, the
notice shall be addressed to the Shareholder at his address as it appears on
the Corporation's record of Shareholders, unless he shall have filed with the
Secretary of the Corporation a written request that notices intended for him
are to be mailed to a different address. Notice of annual meetings may be
waived by a Shareholder by submitting a signed waiver to the Secretary of the
Corporation either before or after the meeting, or by attendance at the
meeting.
Section 2. Special Meeting. Special meetings of Shareholders, other than those regulated by statute, may be called at any time by a majority of the directors or by the President. A special Shareholder's meeting must be called by the President upon written request of the holders of twenty percent (20%) of the outstanding shares entitled to vote at such special meeting. Written notice of special Shareholder's meetings, stating the place within or without the Commonwealth of Virginia, the date and hour of the meeting, the purpose or purposes for which it is called, and the name of the person by whom or at whose direction the meeting is called, shall be given not less than ten (10) nor more than sixty (60) days before the date set for the meeting. The notice shall be given to each Shareholder of record in the same manner as the notice of the annual meeting. No business other than that specified in the notice shall be transacted at any such special meeting. Notice of a special Shareholder's meeting may be waived by submitting a signed waiver to the Secretary or by attendance at the meeting.
Section 3. Quorum. The presence, in person or by proxy, of the holders of a majority of the outstanding shares entitled to vote shall constitute a quorum for the transaction of business at all meetings of Shareholders. If a quorum does not exist, less than a quorum may adjourn the meeting to a future date at which a quorum shall be present or represented. At such adjourned meeting, any business may be transacted which might have been transacted at the meeting as originally called.
Section 4. Record Date. The Board of Directors may fix in advance the record date for the determination of Shareholders entitled to notice of a meeting, or for any other purposes
requiring such a determination. The record date may not be more than seventy
(70) days before the meeting or action.
A determination of Shareholders entitled to notice of, or to vote at, a Shareholders meeting is effective for any adjournment of the meeting unless the meeting is adjourned to a date more than one hundred twenty (120) days after the date fixed for the original meeting. In such case, a new record date must be fixed, and notice must be given to all persons who are Shareholders as of the new record date.
Section 5. Voting. A Shareholder entitled to vote at a meeting may vote in person or by proxy. Except as otherwise provided by the Virginia Stock Corporation Act or the Articles of Incorporation, every Shareholder shall be entitled to one vote for each share standing in his name on the Corporation's record of Shareholders. Except as otherwise provided by these Bylaws, the Articles of Incorporation, or the Virginia Stock Corporation Act, the affirmative vote of a majority of the shares represented at the meeting and entitled to vote shall be the act of the Shareholders.
Section 6. Proxies. Every proxy must be dated and signed by the Shareholder or by his attorney-in-fact. No proxy shall be valid after the expiration of eleven (11) months from the date of its execution, unless otherwise provided therein. Every proxy shall be revocable at the pleasure of the Shareholder executing it, except where an irrevocable proxy is permitted by statute.
Section 7. Consents. Actions required or permitted by the Virginia Stock Corporation Act, the Articles of Incorporation or these Bylaws, to be taken at a Shareholder meeting may be taken without a meeting if one or more written consents are signed by all the Shareholders entitled to vote on the action and such consents are delivered to the Secretary.
ARTICLE II
DIRECTORS
Section 1. Number and Qualifications. The board of directors (hereinafter, "Board of Directors" or "Board") shall consist of at least three (3) members and not more than thirty-three (33). Directors need not be Shareholders of the Corporation. The number of directors may be changed by an amendment to the Bylaws adopted by the Shareholders.
Section 2. Manner of Election. The directors shall be elected at the annual meeting of the Shareholders by a plurality vote.
Section 3. Term of Office. The term of office of each director shall be until the next annual meeting of the Shareholders and until his successor has been duly elected and qualified.
Section 4. Duties and Powers. The Board of Directors shall control and manage the affairs and business of the Corporation. The directors may adopt such rules and regulations for the conduct of their meetings and the management of the Corporation as they may deem proper, not inconsistent with the Virginia Stock Corporation Act, the Articles of Incorporation or these Bylaws. The Board of Directors may elect a chairperson who shall preside at all meetings of the Board of Directors.
Section 5. Meetings. The Board of Directors shall meet for the election or appointment of officers and for the transaction of any other business as soon as practicable after the adjournment of the annual meeting of the Shareholders. Other regular meetings of the Board shall be held at such times as the Board may from time to time determine.
Special meetings of the Board of Directors may be called by the President at any time. Upon the written request of any two directors, the President must call a special meeting to be held not more than seven (7) days after the receipt of such request.
Section 6. Notice of Meetings. No notice need be given of any regular meeting of the Board. The Secretary shall serve notice of special meetings upon each director in person or by regular U. S. Mail, addressed to him/her at his/her last known post office address, at least ten (10) days prior to the date of such meeting, specifying the time and place of the meeting and the business to be transacted. At any meeting at which all of the directors shall be present, although held without notice, any business may be transacted which might have been transacted if the meeting had been duly called.
Section 7. Place of Meeting. The Board of Directors may hold its meeting within or without the Commonwealth of Virginia, at such place as may be designated in the notice of the meeting.
Section 8. Quorum. At any meeting of the Board of Directors, the presence of a majority of the Board shall constitute a quorum for the transaction of business. Should a quorum not be present, a lesser number may adjourn the meeting to some further time, not more than seven (7) days later.
Section 9. Voting. At all meetings of the Board of Directors, each director shall have one vote irrespective of the number of shares that he may hold. If a quorum is present for a Board meeting, the vote of a majority of the Board, except as otherwise provided by the Virginia Stock Corporation Act or the Articles of Incorporation, shall be the act of the Board.
Section 10. Compensation. Each director shall be entitled to receive for attendance at each meeting of the Board, or of any duly constituted committee of the Board, such fee as is fixed by the Board.
Section 11. Vacancies. Any vacancy occurring in the Board of Directors by death, resignation, or otherwise, shall be filled promptly by a majority vote of the remaining directors at a
special meeting which shall be called for that purpose within thirty (30) days after the occurrence of the vacancy. The director thus chosen shall hold office for the unexpired term of his predecessor and until the election and qualification of his successor.
Section 12. Removal of Directors. The Shareholders may, by majority vote, remove a director with or without cause at a special meeting expressly called for such purpose. Notice of the meeting must specifically state that the purpose of the meeting is to remove the director. Except as otherwise prescribed by the Virginia Stock Corporation Act, a director may also be removed for cause by vote of a majority of the entire Board.
Section 13. Resignation. Any director may resign his office at any time by delivering written notice to the Board, the President or the Secretary. A resignation is effective upon delivery of the notice.
ARTICLE III
OFFICERS
Section 1. Officers and Qualifications. The officers of the Corporation shall consist of a President and a Secretary. Other officers of the Corporation may include one (1) or more Vice Presidents, a Treasurer and such other officers as the Board of Directors may appoint. Except for the offices of President and Secretary, the same individual may simultaneously hold more than one (1) office.
Section 2. Election. All officers of the Corporation shall be elected annually by the Board of Directors at its meeting held immediately after the annual meeting of Shareholders.
Section 3. Term of Office. All officers shall hold office until their successors have been duly elected and have qualified, or until removed as hereinafter provided.
Section 4. Removal of Officers. Any officer may be removed with or without cause by the vote of a majority of the Board of Directors.
Section 5. Duties of Officers. The duties and powers of the officers of the Corporation shall be as follows and as shall hereafter be set by resolution of the Board of Directors:
PRESIDENT
A. The President shall preside at all meetings of the Board of Directors, unless the Board of Directors has elected a Chairperson, and at all meetings of the Shareholders.
B. He shall present at each annual meeting of the Shareholders and directors a report of the condition of the business of the Corporation.
C. He shall cause to be called regular and special meetings of the Shareholders and directors as required by the Virginia Stock Corporation Act and these Bylaws.
D. He shall, subject to the approval of the Board, appoint, discharge, and fix the compensation of all employees and agents of the Corporation other than the duly elected officers.
E. He has authority to sign and execute, in the name of the Corporation, all contracts, and all notes, drafts, or other orders for the payment of money.
F. He shall sign all certificates representing shares.
G. He shall cause all books, reports, statements, and certificates to be properly kept and filed as required by the Virginia Stock Corporation Act.
H. He shall enforce these Bylaws and perform all duties incident to his office required by the Virginia Stock Corporation Act. Generally, he shall supervise and control the business and affairs of the Corporation.
I. He shall, in the absence of any officer, resume any absent officer's duties as set forth in these Bylaws.
VICE PRESIDENT
During the absence or incapacity of the President, the Vice President in order of seniority of election shall perform the duties of the President, and when so acting, he shall have all the powers and be subject to all the responsibilities of the office of President, and shall perform such duties and functions as the Board may prescribe.
SECRETARY
A. The Secretary shall keep the minutes of the meetings of the Board of Directors and of the Shareholders in appropriate books. He shall also keep a record of all actions taken, with or without a meeting, by the Shareholders, Board of Directors or any committee of the Board.
B. He shall attend to the giving of notice of special meetings of the Board of Directors and of all the meetings of the Shareholders of the Corporation.
C. He shall be custodian of the records and seal of the Corporation and shall affix the seal to the certificates representing shares and other corporate papers when required.
D. He shall keep a record of the Shareholders containing the names of all Shareholders, their places of residence, the number and class of shares held by each and the dates when each became owners of record. He shall keep a record of all written communications to Shareholders generally within the past three (3) years.
E. He shall keep all records open for inspection, daily during the usual business hours, within the limits prescribed by the Virginia Stock Corporation Act. At the request of the person entitled to an inspection thereof, he shall prepare and make available a current list of the officers and directors of the Corporation and their business addresses.
F. He shall sign all certificates representing shares and affix the corporate seal.
G. He shall attend to all correspondence and present to the Board of Directors at its meeting all official communications received by him.
H. He shall perform all the duties incident to the office of Secretary of the Corporation.
TREASURER
A. The Treasurer shall have the care and custody of and be responsible for all the funds and securities of the Corporation, and shall deposit funds and securities in the name of the Corporation in such banks or safe deposit companies as the Board of Directors may designate.
B. He has authority to make, sign, and endorse, in the name of the Corporation, all checks, drafts, notes, and other orders for the payment of money, and pay out and dispose of such under the direction of the President or the Board of Directors.
C. He shall keep at the principal office of the Corporation accurate books of account of all its business and transactions and shall at all reasonable hours exhibit books and accounts to any director upon application at the office of the Corporation during business hours.
D. He shall render a report of the condition of the finances of the Corporation at each regular meeting of the Board of Directors and at such other times as shall be required of him, and he shall make a full financial report at the annual meeting of the Shareholders.
E. He shall further perform all duties incident to the office of Treasurer of the Corporation.
F. If required by the Board of Directors, he shall give such bond as it shall determine appropriate for the faithful performance of his duties.
OTHER OFFICERS
Other officers shall perform such duties and have such powers as may be assigned to them by the Board of Directors.
Section 6. Vacancies. All vacancies in any office shall be filled promptly by the Board of Directors, either at regular meetings or at a meeting specially called for that purpose.
Section 7. Compensation of Officers. The officers shall receive such salary or compensation as may be fixed by the Board of Directors.
Section 8. Reimbursement of Compensation of Officers. Any payments made to an officer of the Corporation such as salary, commission, bonus, interest, or rent, or entertainment expense incurred by him, which shall be disallowed in whole or in part as a deductible expense by the Internal Revenue Service, shall be reimbursed by such officer to the Corporation to the full extent of such disallowance.
It shall be the duty of the directors, as a Board, to enforce payment of each amount disallowed. In lieu of payment by the officer, subject to the determination of the directors, proportionate amounts may be withheld from his future compensation payments until the amount owed to the Corporation has been recovered.
ARTICLE IV
COMMITTEES
Section 1. Audit Committee. The Audit Committee shall be responsible for the review and analysis of significant financial information of the Corporation for the purpose of assuring that the information obtained and presented is accurate and timely and that all appropriate disclosures are made. The Audit Committee shall have the additional responsibility of overseeing both the internal and external audit function and ascertaining that effective accounting and internal control systems exist within the Corporation. The Audit Committee shall be appointed by the Board of Directors. The Audit Committee shall be composed of no less than three (3) and no more than ten (10) members of the Board of Directors.
Section 2. Compensation/Stock Option Committee. The Compensation/Stock Option Committee shall be responsible for making recommendations to the Board concerning compensation and benefits of the President, Vice Presidents and executives of the Corporation. In this
regard, the Compensation/Stock Option Committee shall review and analyze the
performance of the Corporation as well as the performance of the President,
Vice Presidents and executives. The Compensation/Stock Option Committee
shall be appointed by the Board of Directors. The Compensation/Stock Option
Committee shall be composed of no less than three (3) and no more than ten
(10) members of the Board of Directors.
ARTICLE V
SEAL
The seal of the Corporation shall be as follows:
ARTICLE VI
SHARES
Section 1. Certificates. The shares of the Corporation shall be represented by certificates prepared by the Board of Directors and signed by the President and the Secretary, and sealed with the seal of the Corporation or a facsimile. The certificates shall be numbered consecutively and in the order in which they are issued, and a record shall be maintained of the name of the person to whom the shares represented by each such certificate is issued, and the number and class or series of such shares, and the date of issue. Each certificate shall state the registered holder's name, the number and class of shares represented, the date of issue, the par value of such shares, or that they are without par value.
Section 2. Subscriptions. Subscriptions to the shares shall be paid at such times and in such installments as the Board of Directors may determine. If default shall be made in the payment of any installment as required by such resolution, the Board may, in the manner prescribed by the Virginia Stock Corporation Act, declare the shares and all previous payments thereon forfeited for the use of the Corporation.
Section 3. Transfer of Shares. The shares of the Corporation shall be assignable and transferable only on the books and records of the Corporation and by the registered owner, or by his duly authorized attorney, upon surrender of the certificate duly and properly endorsed with proper evidence of authority to transfer. The Corporation shall issue a new certificate for the shares surrendered to the person or persons entitled to receive such shares.
Section 4. Return Certificates. All certificates for shares changed or returned to the Corporation for transfer shall be marked by the Secretary "Cancelled," with the date of cancellation, and the transaction shall be immediately recorded in the certificate book opposite the memorandum of their issue. The returned certificate may be inserted in the certificate book.
ARTICLE VII
DISTRIBUTIONS
The Board of Directors, at any regular or special meeting, may authorize and make distributions to its Shareholders. However, no distribution may be made if, after giving it effect: (1) the Corporation would not be able to pay its debts as they become due in the usual course of business, or (2) the Corporation's total assets would be less than its total liabilities.
ARTICLE VIII
BILLS, NOTES, ETC.
All bills payable, notes, checks, drafts, warrants, or other negotiable instruments of the Corporation shall be made in the name of the Corporation and shall be signed by the President and Secretary, or by at least two other officers as the Board of Directors shall from time to time by resolution direct, to the extent required by applicable regulations of the U.S. Small Business Administration. No bills payable, notes, checks, drafts, warrants, or other negotiable instruments of the Corporation shall be signed in blank.
No officer or agent of the Corporation, either singularly or jointly with others, shall have the power to make any bill payable, note, check, draft, warrant, or other negotiable instrument, or endorse the same in the name of the Corporation, or contract or cause to be contracted any debt of liability in the name and on behalf of the Corporation except as herein expressly prescribed and provided.
ARTICLE IX
OFFICES
The principal office of the Corporation shall be located in the City of Norfolk, Commonwealth of Virginia. The Board of Directors may change the location of the principal office of the Corporation and may, from time to time, designate other offices within or without the state as the business of the Corporation may require.
ARTICLE X
AMENDMENTS
These Bylaws may be altered, amended or repealed, or new Bylaws adopted by a majority of the entire Board of Directors at a regular or special meeting of the Board.
ARTICLE XI
WAIVER OF NOTICE
Whenever under the provisions of these Bylaws or the Virginia Stock Corporation Act, any Shareholder or director is entitled to notice of any regular or special meeting or of any action to be taken by the Corporation, such meeting may be held or such action may be taken without the giving of
such notice, provided every Shareholder or director entitled to such notice waives the notice requirement in a signed writing delivered to the Secretary of the Corporation.
ARTICLE XII
GENDER
All pronouns shall be deemed to refer to the masculine, feminine or neuter, singular or plural, as the identity of the party may require.
ARTICLE XIII
INDEMNIFICATION
Section 1.
"Corporation" includes any domestic or foreign predecessor entity of the Corporation in a merger or other transaction in which the predecessor's existence ceased upon consummation of the transaction.
"Director" means an individual who is or was a director of the Corporation or an individual who, while a director of the Corporation, is or was serving at the Corporation's request as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise. A director is considered to be serving an employee benefit plan at the Corporation's request if his duties to the Corporation also impose duties on, or otherwise involve services by him to the plan or to participants in or beneficiaries of the plan. "Director" includes, unless the context requires otherwise, the estate or personal representative of a director.
"Expenses" include counsel fees.
"Liability" means the obligation to pay a judgment, settlement, penalty, fine, including any excise tax assessed with respect to an employee benefit plan, or reasonable expenses incurred with respect to a proceeding.
"Official capacity" means, (i) when used with respect to a director, the office of director in the Corporation; or (ii) when used with respect to an individual other than a director, as contemplated in Section 6, the office in the Corporation held by the officer or the employment or agency relationship undertaken by the employee or agent on behalf of the Corporation. "Official capacity" does not include service for any other foreign or domestic corporation or any partnership, joint venture, trust, employee benefit plan, or other enterprise.
"Party" includes an individual who was, is, or is threatened to be made a named defendant or respondent in a proceeding.
"Proceeding" means any threatened, pending, or completed
action, suit, or proceeding, whether civil, criminal, administrative or
investigative and whether formal or
informal.
Section 2.
A. Except as provided in subsection D of this section, the Corporation shall indemnify an individual made a part to a proceeding because he is or was a director, officer, employee or agent against liability incurred in the proceeding if:
1. He conducted himself in good faith; and
2. He reasonably believed:
a. In the case of conduct in his official capacity with the Corporation, that his conduct was in its best interests; and
b. In all other cases, that his conduct was at least not opposed to its best interests; and
3. In the case of any criminal proceeding, he had no reasonable cause to believe his conduct was unlawful.
B. The termination of a proceeding by judgment, order, settlement or conviction is not, of itself, determinative that the director, officer, employee or agent did not meet the standard of conduct described in this section.
C. A Corporation may not indemnify a director, officer, employee or agent under this section:
1. In connection with a proceeding by or in the right of the Corporation in which the director, officer, employee or agent was adjudged liable to the Corporation;
2. In connection with any other proceeding charging improper personal benefit to him, whether or not involving action in his official capacity, in which he was adjudged liable on the basis that personal benefit was improperly received by him; or
3. In connection with any act of willful misfeasance, bad faith, gross negligence or reckless disregard in the performance of his duties and obligations to the Corporation.
D. Indemnification permitted under this section in connection with a proceeding by or in the right of the Corporation is limited to reasonable expenses incurred in connection with the proceeding.
Section 3. The Corporation shall indemnify a director, officer, employee or agent who entirely prevails on the merits in the defense of any proceeding to which he was a party because he is or was a director, officer, employee or agent of the Corporation against reasonable expenses incurred by him in connection with the proceeding.
Section 4. A. The Corporation shall pay for or reimburse the reasonable expenses incurred by a director, officer, employee or agent who is a party to a proceeding in advance of final disposition of the proceeding if:
1. The director, officer, employee or agent furnishes the Corporation a written statement of his good faith belief that he has met the standard of conduct described in Section 1;
2. The director, officer, employee or agent furnishes the Corporation a written statement undertaking, executed personally or on his behalf, to repay the advance if it is ultimately determined that he did not meet the standard of conduct; and
3. A determination is made that the facts then known to those making the determination would not preclude indemnification under this article.
A. The undertaking required by paragraph 2 of subsection A of this section all be an unlimited general obligation of the director, officer, employee or agent but need not be secured and may be accepted without reference to financial ability to make repayment.
B. Determinations and authorizations of payments under this section shall be made in the manner specified in Section 5.
Section 5.
A. A corporation may not indemnify a director, officer, employee or agent under Section 2 unless authorized in the specific case after a determination has been made that indemnification of the director, officer, employee or agent is permissible in the circumstances because he has met the standard of conduct set forth in Section 2.
B. The determination shall be made:
1. By the board of directors by a majority vote of a quorum consisting of directors not at the time parties to the proceeding;
2. If a quorum cannot be obtained under paragraph 1 of this subsection, by majority vote of a committee duly designated by the board of directors (in which designation directors who are parties may participate), consisting solely of two or more directors not at the time parties to the proceeding;
3. By special legal counsel;
a. Selected by the board of directors or its committee in the manner prescribed in paragraph 1 or 2 of this subsection; or
b. If a quorum of the board of directors cannot be obtained under paragraph 1 of this subsection and a committee cannot be designated under paragraph 2 of this subsection, selected by majority vote of the full board of directors, in which selected directors who are parties may participate; or
4. By the shareholders, but shares owned by or voted under the control of directors who are at the time parties to the proceeding may not be voted on the determination.
C. Authorization of indemnification and evaluation as to reasonableness of expenses shall be made in the same manner as the determination that indemnification is permissible, except that if the determination is made by special legal counsel, authorization of indemnification and evaluation as to reasonableness of expenses shall be made by those entitled under paragraph 3 of subsection B of this section to select counsel.
Section 6. The Corporation may purchase and maintain insurance on behalf of an individual who is or was a director, officer, employee, or agent of the Corporation, or who, while a director, officer, employee, or agent of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise, against liability asserted against or incurred by him in that capacity or arising from his status as a director, officer, employee, or agent, whether or not the corporation would have power to indemnify him against the same liability under Section 2 or Section 3.
I hereby certify that this is a true and correct copy of the Amended and Restated Bylaws of WATERSIDE CAPITAL CORPORATION adopted by the Directors on the ________ day of ___________________, 1998.
WATERSIDE CAPITAL CORPORATION
HOFFMAN, MORRISON & FITZGERALD, P.C.
Certified Public Accountants and Consultants
Consent of Hoffman, Morrison & Fitzgerald, P.C., Independent Auditors
We hereby consent to the use in this Registration Statement on Form N-5 of our report included herein dated August 2, 1997, relating to the financial statements of EASTERN VIRGINIA SMALL BUSINESS INVESTMENT CORPORATION and to the reference to our Firm under the caption "Experts" in the Prospectus.
/s/ Hoffman, Morrison & Fitzgerald, P.C. ------------------------------------ HOFFMAN, MORRISON & FITZGERALD, P.C. McLean, VA January 28, 1998 |
WATERSIDE CAPITAL CORPORATION
COMMON STOCK PURCHASE WARRANT ("WARRANT")
GRANTED TO
SCOTT & STRINGFELLOW, INC.
Dated as of January 29, 1998
For value received, WATERSIDE CAPITAL CORPORATION, a Virginia corporation (the "Company"), grants to SCOTT & STRINGFELLOW, INC. a Virginia corporation ("SSI"), or its registered assigns (together with SSI, the "Registered Holder"), the right to purchase from the Company 62,000 shares of Warrant Stock at a price per share of $_________. Certain capitalized terms used in this Warrant are defined in Part 3. The amount and kind of securities purchasable pursuant to the rights granted under this Warrant and the Exercise Price for such securities are subject to adjustment pursuant to the provisions contained in this Warrant.
This Warrant is subject to the following provisions to which SSI and the Registered Holders, by accepting delivery of this Warrant or Warrants derived herefrom, are bound:
Part 1. Exercise of Warrant.
1.A. Exercise Period. The Registered Holder may exercise this Warrant and acquire any or all of the shares of Warrant Stock at the Exercise Price at any time and from time to time commencing one year after the Date of Issuance, up to and including the end of the 5th year after the Date of Issuance (the "Exercise Period").
1.B. Exercise Procedure.
1. This Warrant will be deemed to have been exercised when the Company has received all of the following items (the "Exercise Time"):
a. a completed Exercise Agreement, in the form set forth in Exhibit I attached hereto, executed by the Person exercising this Warrant in whole or in part (the "Purchaser");
b. this Warrant;
c. if this Warrant is not registered in the name of the Purchaser, an Assignment in the form set forth in the attached Exhibit II evidencing the assignment of this Warrant to the Purchaser; and
d. a cashier's or certified check (or at Purchaser's option federal funds by wire transfer) payable to the Company in an amount equal to the product of the Exercise Price multiplied by the number of shares of Warrant Stock being purchased on such exercise.
2. Certificates for shares of Warrant Stock purchased on exercise of this Warrant will be delivered by the Company to the Purchaser within 5 business days after the Exercise Time. Unless this Warrant has expired or this Warrant has been exercised with respect to all the shares of Warrant Stock, the Company will (a) prepare a new Warrant, substantially identical to this instrument, representing the rights formerly represented by this Warrant, which have not expired or been exercised and (b) within such 5 business days, deliver the new Warrant to the Registered Holder or such other Person designated for delivery in the Exercise Agreement.
3. The Warrant Stock issuable on the exercise of this Warrant will be deemed to have been issued to the Purchaser at the Exercise Time, and the Purchaser will be deemed for all purposes to have become the record holder of such Warrant Stock at the Exercise Time.
4. The issuance of certificates for shares of Warrant Stock on exercise of this Warrant will be made without charge to the Purchaser for any issuance tax in respect of such transaction or other cost incurred by the Company in connection with such exercise and the related issuance of shares of Warrant Stock, including without limitation attorneys' fees incurred by the Company. The Company covenants and agrees that each share of Warrant Stock issuable on exercise of this Warrant will (i) on payment of the Exercise Price for such shares be fully paid and nonassessable, and free from all liens and charges with respect to the issuance and (ii) be registered under the Securities Act of 1933.
5. The Company will not close its books against the transfer of this Warrant (or of any share of Warrant Stock issued or issuable on the exercise of this Warrant) in any manner which interferes with the timely exercise of this Warrant.
1.C. Exercise Agreement. On any exercise of this Warrant, the Exercise Agreement will be substantially in the form set forth in the attached Exhibit I, except that, if the shares of Warrant Stock are not to be issued in the name of the Person in whose name this Warrant is registered, the Exercise Agreement will also state the name of the Person to whom the certificates for the shares of Warrant Stock are to be issued, and if the number of shares of Warrant Stock to be issued does not include all the shares of Warrant Stock purchasable pursuant to this Warrant, it will also state the name of the Person to whom a new Warrant for the unexercised portion of the Warrant Stock is to be delivered.
Part 2. Adjustment for Exercise Price and Number of Shares of Warrant
Stock Purchasable or Number of Warrants. Prior to the end of the Exercise Period, the Exercise Price, the number of shares of Warrant Stock purchasable upon the exercise of this Warrant and the number of Warrants outstanding are subject to adjustment from time to time upon the occurrence of any of the events enumerated in this Part 2.
2.A. If the Company shall (i) declare or pay a dividend on its outstanding Common Stock in shares of Common Stock, (ii) subdivide its outstanding shares of Common Stock, (iii) combine its outstanding shares of Common Stock into a smaller number of shares or (iv) issue by reclassification of the Common Stock other securities of the Company (including any such reclassification in connection with a consolidation, merger or other business combination in which the Company is the surviving corporation), then the number and kind of shares of Warrant Stock purchasable upon exercise of this Warrant shall be adjusted so that the holder of this Warrant upon exercise of this Warrant shall be entitled to receive the aggregate number and kind of shares of Warrant Stock or other securities of the Company that the Registered Holder would have owned or have been entitled to receive after the happening of any of the events described above had this Warrant been exercised immediately prior to the happening of such event or, if earlier, any record date with respect thereto. An adjustment pursuant to this 2.A. shall become effective on the date of the dividend payment, subdivision, combination or issuance retroactively to the record date with respect thereto, if any, for such event. Such adjustment shall be made successively whenever any event listed above shall occur.
2.B. (i) If the Company shall issue to all holders of
its outstanding Common Stock rights, options or warrants to subscribe for or
purchase Common Stock (or securities convertible or exchangeable into Common
Stock) at a price per share (or having a conversion or exchange price per
share, if a security convertible into or exchangeable for Common Stock) less
than the then Current Market Price per share of Common Stock (as defined in
2.D. of this Part 2) or without consideration, then the current Exercise Price
to be in effect after such issuance shall be reduced to a price determined by
multiplying the Exercise Price in effect immediately prior to such issuance by
a fraction, of which the numerator shall be the number of shares of Common
Stock outstanding on the date of such issuance plus the number of shares of
Common Stock which the aggregate offering price of the total number of shares
of Common Stock so to be offered (or the aggregate initial conversion or
exchange price of the convertible or exchangeable securities so to be offered)
would purchase at the Current Market Price and of which the denominator shall
be the number of shares of Common Stock outstanding on the date of such
issuance plus the number of additional shares of Common Stock to be offered for
subscription or purchase (or into which the convertible or exchangeable
securities so to be offered are initially convertible); provided, that the
provisions of this Part 2.B(i) shall not apply to the issuance of this Warrant
or to any issuance of Common Stock upon exercise of this Warrant. In case such
subscription price may be paid in a consideration part or all of which shall be
in a form other than cash, the value of such consideration shall be as
determined by the Board of Directors of the Company, which shall cause the
related shares to be fully paid.
(ii) If the Company shall distribute to all holders of Common Stock (including any such distribution made in connection with a consolidation or merger in which the Company is the continuing corporation) instruments of indebtedness of the Company, assets or securities other than its Common Stock, (excluding dividends or distributions referred to in Parts 2.A. and 2.B.(i) above or 2.C. below), then the Exercise Price to be in effect after such record date shall be determined by multiplying the Exercise Price in effect immediately prior to such record date by a fraction, of which the numerator shall be the Current Market Price per share of Common Stock on such record date, less the fair value (as determined by the Board of Directors of the Company) of the
portion of the assets, evidences of indebtedness or other securities so to be distributed applicable to one share of Common Stock and of which the denominator shall be the Current Market Price per share of Common Stock. Such adjustment shall be made successively whenever such a record date is fixed; and, if such distribution is not so made, the Exercise Price shall again be adjusted to be the Exercise Price which would then be in effect if such record date had not been fixed.
(iii) Any adjustment required by this Part 2.B. shall be made whenever any such distribution is made, and shall become effective on the date of distribution retroactive to the record date for the determination of stockholders entitled to receive such distribution.
2.C. If the Company shall, after the date hereof, issue
and sell any shares of Common Stock, or rights, options, warrants or
convertible or exchangeable securities containing the right to subscribe for or
purchase shares of Common Stock (all of the foregoing being referred to in this
Part 2.C. individually as a "Share" and collectively as "Shares") (excluding
(i) Shares issued in any of the transactions described in Parts 2.A. or 2.B.
above and (ii) any shares of Warrant Stock), at a price per Share (determined
in the case of rights, options, warrants or convertible or exchangeable
securities, by dividing (A) the total amount received or receivable by the
Company in consideration of the sale and issuance of such rights, options,
warrants or convertible or exchangeable securities plus the total consideration
payable to the Company upon exercise or conversion or exchange thereof, by (B)
the total number of shares of Common Stock covered by such rights, options,
warrants or convertible or exchangeable securities) lower than the then Current
Market Price per Share of Common Stock (as defined in Part 2.D. below) in
effect immediately prior to such sale and issuance, then in each case the
number of Shares of Warrant Stock thereafter purchasable upon the exercise of
this Warrant shall be determined by multiplying the number of Shares of Warrant
Stock theretofore purchasable upon the exercise of this Warrant by a fraction,
the numerator of which shall be the total number of shares of Common Stock
outstanding immediately after such sale and issuance and the denominator of
which shall be an amount equal to the sum of (A) the total number of shares of
Common Stock outstanding immediately prior to such sale and issuance plus (B)
the number of shares of Common Stock which the aggregate consideration received
(determined as provided below) for such sale or issuance would purchase at the
then Current Market Price per Share of Common Stock in effect immediately prior
to such sale and issuance. Such adjustment shall be made successively whenever
such an issuance is made. For the purposes of such adjustments, the shares of
Common Stock which the holder of any such rights, options, warrants or
convertible or exchangeable securities shall be entitled to subscribe for or
purchase shall be deemed to be issued and outstanding as of the date of such
sale and issuance, and the consideration received by the Company therefor shall
be deemed to be the consideration received by the Company (plus any
underwriting discounts or commissions in connection therewith) for such rights,
options, warrants or convertible or exchangeable securities plus the
consideration or premiums stated in such rights, options, warrants or
convertible or exchangeable securities to be paid for the shares of Common
Stock purchasable thereby. If the Company shall (i) sell and issue Shares for
a consideration consisting, in whole or in part, of property other than cash or
its equivalent or (ii) sell and issue Shares together with one or more other
securities as a part of a unit at a price per unit, then in determining the
"price per share" and the "consideration received by the Company" for purposes
of the first sentence and the immediately preceding sentence of this Part 2.C.,
the Board of Directors of the Company shall determine, in its discretion, the
fair value of
said property or the Shares then being sold as part of such unit, as the case may be, and such determinations if made in good faith, shall be binding on the Registered Holder. The determination of whether any adjustment is required under this Part 2.C. by reason of the sale and issuance of any rights, options, warrants or convertible or exchangeable securities and the amount of such adjustment, if any, shall be made only at such time and not at the subsequent time of issuance of Shares upon the exercise of such rights to subscribe or purchase.
2.D. For the purpose of any computation under Parts 2.B. or 2.C., the Current Market Price per share of Common Stock at any date shall be deemed to be the average of the daily closing prices for the 20 consecutive days (which are not legal holidays) commencing 20 days (which are not legal holidays) before the day in question. The closing price for each day shall be the mean between the closing high bid and low asked quotations of Common Stock on the National Association of Securities Dealers, Inc., Automated Quotation System or any similar system of automated dissemination of quotations of securities prices then in common use, if so quoted, or if not quoted as described above, the mean between the high bid and low asked quotations for Common Stock as reported by the National Quotation Bureau Incorporated if at least two securities dealers have inserted both bid and asked quotations for Common Stock on at least five of the ten preceding days, or if the Common Stock is listed or admitted for trading on any national securities exchange, the last sales price regular way, or the closing bid price if no sale occurred, of Common Stock on the principal securities exchange on which Common Stock is listed. If none of the conditions set forth above is met, the Board of Directors of the Company acting in good faith shall determine the Current Market Price on the basis of such quotations and other information as they consider appropriate, in their reasonable judgment, or, lacking such determination, the Current Market Price shall be the fair market value per share of Common Stock as determined by a member firm of the New York Stock Exchange, Inc. selected by the Company.
2.E. If at any time, as a result of an adjustment made pursuant to 2.A. above, the Registered Holder of this Warrant shall become entitled to receive any shares of the Company other than shares of Common Stock, then thereafter the number of such other shares so receivable upon exercise of this Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the shares of Warrant Stock contained in this Part 2.
2.F. Upon the expiration of any rights, options, warrants
or conversion or exchange privileges which resulted in adjustments pursuant to
2.A, 2.B. or 2.C. above, if any thereof shall not have been exercised, the
Exercise Price and the number of shares of Warrant Stock shall be readjusted
and shall thereafter be such as it would have been had it been originally
adjusted (or had the original adjustment not been required, as the case may be)
as if (A) the only shares of Common Stock purchasable upon exercise of such
rights, options, warrants or conversion or exchange privileges for the shares
of Common Stock, if any, were actually issued or sold upon the exercise of such
rights, options, warrants or conversion or exchange privileges and (B) such
shares of Common Stock so issued or sold, if any, were issuable for the
consideration actually received by the Company for the issuance, sale or grant
of all such rights, options, warrants or conversion or exchange privileges
whether or not exercised; provided that no such readjustment shall have the
effect of increasing the
Exercise Price or decreasing the number of shares of Warrant Stock purchasable upon the exercise of this Warrant by an amount in excess of the amount of the adjustment initially made in respect to the issuance, sale or grant of such rights, options, warrants or conversion or exchange privileges.
2.G. In any case in which this Part 2. shall require that an adjustment in the Exercise Price be made effective as of a record date for a specified event, the Company may elect to issue to the Registered Holder of this Warrant, exercised after such record date but before such event occurs, the number of shares of Warrant Stock issuable on the basis of the Exercise Price in effect prior to such adjustment and defer issuing any additional shares of Warrant Stock until such event occurs; provided that the Company shall deliver to such Registered Holder a due bill or other appropriate instrument evidencing such Registered Holder's right to receive such additional shares of Warrant Stock upon the occurrence of the event requiring such adjustment
2.H. Unless the Company shall have exercised its election to adjust the number of Warrants as provided in 2.I. of this Part 2, upon each adjustment of the Exercise Price pursuant to 2.A., 2.B. or 2.C., this Warrant shall thereafter evidence the right to purchase, at the adjusted Exercise Price, that number of shares of Warrant Stock (calculated to the nearest one-thousandth) obtained by (A) multiplying the number of shares of Warrant Stock purchasable upon exercise of this Warrant immediately prior to such adjustment of the number of shares of Warrant Stock by the Exercise Price in effect immediately prior to such adjustment of the Exercise Price and (B) dividing the product so obtained by the Exercise Price in effect immediately after such adjustment of the Exercise Price.
2.I. The Company may elect on or after the date of any adjustment of the Exercise Price to adjust the number of Warrants instead of adjusting the number of shares of Warrant Stock purchasable upon the exercise of this Warrant as provided in 2.H. above. Each of the Warrants outstanding after such adjustment of the number of Warrants shall be exercisable for the same number of shares of Warrant Stock as immediately prior to such adjustment. Each Warrant held of record prior to such adjustment of the number of Warrants shall become that number or Warrants (calculated to the nearest one-thousandth) obtained by dividing the Exercise Price in effect prior to adjustment of the Exercise Price by the Exercise Price in effect after adjustment of the Exercise Price.
2.J. Upon any adjustment of the number of shares of Warrant Stock purchasable upon the exercise of this Warrant or the Exercise Price of this Warrant as herein provided, the Company shall at the expense of the Company, within ten days after such adjustment, mail by first-class mail, postage prepaid, to the Registered Holder of this Warrant a notice of such adjustment(s), accompanied by a report setting forth in reasonable detail (i) the number of shares of Warrant Stock purchasable upon the exercise of this Warrant and the Exercise Price of this Warrant after such adjustment(s), (ii) a brief statement of the facts requiring such adjustment(s) and (iii) the computation by which such adjustment(s) was made.
2.K. Except as otherwise provided in this Part 2, no adjustment in respect of any dividends or other payments or distributions made to holders of securities upon exercise of this Warrant shall be made during the term of this Warrant or upon the exercise of this Warrant. In
addition, in no event shall the Registered Holder be entitled to any accrual of cash dividends prior to the exercise of this Warrant.
2.L. If any fraction of a share of Warrant Stock would be issuable upon the exercise of this Warrant (or specified portion thereof), the Company shall pay to the holder of this Warrant an amount in cash equal to the then Current Market Price per share of Common Stock (as defined in 2.D.) computed as of the Business Day immediately preceding the date this Warrant is presented for exercise, multiplied by such fraction (but in no event less than an amount equal to such fraction multiplied by the Exercise Price in effect at such time.)
2.M. Nothing contained in this Warrant shall be construed as conferring upon any Registered Holder the right to vote or to receive dividends (except as otherwise provided in this Part 2) or to consent or to receive notice as stockholders in respect of any meeting of stockholders of the Company for the election of the directors of the Company or any other matter, or any rights whatsoever as stockholders of the Company. If, however, at any time during the Exercise Period and prior to the exercise of this Warrant, any of the following events shall occur:
(i) the Company shall declare any dividend payable in cash or in any securities upon its shares of Common Stock or make any distribution to the holders of its shares of Common Stock;
(ii) the Company shall offer to all holders of its shares of Common Stock any additional shares of Common Stock or securities convertible into or exchangeable for shares of Common Stock or any right to subscribe for or purchase any thereof;
(iii) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation, merger, sale, transfer or lease of all or substantially all of its property, assets and business as an entirety) shall be proposed; or
(iv) any consolidation or merger to which the Company is a party and for which approval of the holders of Common Stock is required, or of the conveyance or transfer of the properties and assets of the Company as, or substantially as, an entirety, or of any reclassification or change of outstanding shares of Common Stock issuable upon exercise of this Warrant (other than a change in par value to no par value, or from no par value to par value) or as a result of a subdivision or combination;
then in any one or more of said events, the Company shall mail (or cause to be mailed) to the Registered Holder of this Warrant, at least twenty days prior to the applicable record date hereinafter specified, a written notice stating (A) the date as of which the holders of record of shares of Common Stock to be entitled to receive any such dividends, distributions, rights or warrants are to be determined or (B) the date on which any such dissolution, liquidation, winding-up, consolidation, merger, conveyance or transfer is expected to become effective and the date as of which it is expected that holders of record of shares of Common Stock shall be entitled to exchange their shares of Common Stock for securities or other property, if any, deliverable upon such reclassification, consolidation,
merger, conveyance, transfer, dissolution, liquidation, or winding up. Failure to mail such notice or any defect therein shall not affect the validity of any action taken in connection with such dividend, distribution, or subscription rights, or such proposed dissolution, liquidation, winding up, consolidation, merger, conveyance, transfer or reclassification.
2.N. Certain Events. If any event occurs of the type contemplated by the provisions of this Part 2 but not expressly provided for by such provisions, then the Company's Board of Directors will make an appropriate adjustment in the Exercise Price and the number of shares of Warrant Stock obtainable on exercise of this Warrant so as to protect the rights of the Registered Holder; provided, however, that no such adjustment will increase the Exercise Price or decrease the number of shares of Warrant Stock obtainable as otherwise determined pursuant to this Part 2.
Part 3. Definitions. The following terms have the meanings set forth below:
"Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in Norfolk, Virginia are authorized by law to close.
"Common Stock" means the Company's voting Common Stock, $1 par value.
"Date of Issuance" means January __, 1998.
"Exercise Price" means the per share exercise price of the Warrant Stock, which initially shall be $___________, subject to adjustment as provided in Part 2.
"Person" means an individual, a partnership, a joint venture, a corporation, a trust, a limited liability company, an unincorporated organization and a government or any department or agency of any of the above listed entities.
"Warrant Stock" means shares of the Company's voting Common Stock issuable upon exercise of this Warrant; provided, that, if there is a change such that the securities issuable on exercise of this Warrant are issued by an entity other than the Company or there is a change in the number or class of securities so issuable, then the term Warrant Stock will mean one share of the security issuable on the exercise of this Warrant if such security is issuable in shares, or will mean the smallest unit in which such security is issuable if such security is not issuable in shares.
Part 4. Warrant Transferable. This Warrant and all rights under it are freely transferable, in whole or in part, without charge to the Registered Holder, on surrender of this Warrant with a properly executed Assignment (in the form of the attached Exhibit II) at the principal office of the Company.
Part 5. Replacement. On receipt of an affidavit of the Registered Holder of the ownership and the loss, theft, destruction or mutilation of this Warrant or any certificate evidencing this Warrant, the Company will (at its expense) execute and deliver a new Warrant of like-kind representing the same rights represented by such lost, stolen, destroyed or mutilated certificate and dated the Date of Issuance.
Part 6. Warrant Exchangeable for Different Denominations. This Warrant is exchangeable, on surrender of this Warrant by the Registered Holder at the principal office of the Company, for new Warrants of like tenor representing in the aggregate the right to purchase the same number of shares of Warrant Stock set forth in this Warrant and each of such new Warrants will represent such portion of such rights as is designated by the Registered Holder at the time of such surrender. Any such new Warrants issued to a Registered Holder pursuant to this Part 6 shall be dated the Date of Issuance.
Part 7. Amendment and Waiver. Except as otherwise provided in this Warrant, the provisions of this Warrant may be amended and the Company may take any action prohibited in this Warrant, or omit to perform any act required in this Warrant to be performed by it, only if the Company has obtained the written consent of the Registered Holders of a majority of the shares of Warrant Stock obtainable on exercise of this Warrant.
Part 8. Reservation and Issuance of Shares of Warrant Stock.
8.A. The Company shall at all times reserve and keep available free from preemptive rights, out of the aggregate of its authorized but unissued shares of Common Stock, for the purpose of enabling it to satisfy any obligations to issue the shares of Warrant Stock upon exercise of this Warrant, the full number of shares of Warrant Stock deliverable upon the exercise of all outstanding Warrants. The Company or, if appointed, the transfer agent for the Company's Common Stock and each and every subsequent transfer agent for any shares of the Company's capital stock issuable upon the exercise of this Warrant (each a "Transfer Agent") will be irrevocably authorized and directed at all times to reserve such number of authorized shares as shall be required for such purpose. The Company will keep a copy of this Warrant on file with each Transfer Agent. The Company will supply the Transfer Agent with duly executed stock certificates for such purpose. The Company will deliver to such Transfer Agent a copy of all notices of adjustments and certificates related thereto which are delivered to the Registered Holder of this Warrant.
8.B. Before taking any action which could cause an adjustment pursuant to Part 2 reducing the Exercise Price, the Company will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and non-assessable shares of Warrant Stock at the Exercised Price as so adjusted.
Part 9. Notices. Except as otherwise expressly provided in this
Warrant, all notices referred to in this Warrant will be in writing and will be
delivered personally or mailed by registered or certified mail, return receipt
requested and postage prepaid, and will be deemed to have been given when so
delivered or mailed (i) to the Company, at its principal executive offices, and
(ii) to the Registered Holder of this Warrant, at such holder's address as it
appears in the records of the Company (unless otherwise specified by any such
holder in a prior written notice to the Company).
Part 10. Descriptive Headings; Governing Law. The descriptive headings of the several parts and paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this
Warrant. The construction, validity and interpretation of this Warrant will be governed by the internal law, and not the conflicts law, of the Commonwealth of Virginia.
IN WITNESS, the Company has caused this Warrant to be signed and attested by its duly authorized officers under its corporate seal and to be dated the Date of Issuance.
WATERSIDE CAPITAL CORPORATION,
A Virginia Corporation
EXHIBIT I
EXERCISE AGREEMENT
The undersigned, pursuant to the provisions set forth in the attached Warrant, agrees to subscribe for and purchase ___________ shares of the Warrant Stock covered by such Warrant and with this document makes payment in full for such shares at the Exercise Price provided by such Warrant.
EXHIBIT II
ASSIGNMENT
FOR VALUE RECEIVED, ________________________________ sells, assigns and transfers all of the rights of the undersigned under the attached Warrant with respect to the number of shares of the Warrant Stock covered by such document and as set forth below, unto:
Names of Assignee Address No. of Shares
of Warrant Stock
Dated: Signature
-------------------------------------
Witness
-------------------------------------
|
WATERSIDE CAPITAL CORPORATION
1998 EMPLOYEE STOCK OPTION PLAN
1. PURPOSE
The purpose of the Waterside Capital Corporation 1998 Employee Stock Option Plan (the "Plan") is to support the business goals of the Company and to attract, retain, and motivate key employees of the Company by providing incentives that closely align their interests with the interests of the Company's shareholders. These objectives are accomplished by making Awards under the Plan, thereby providing Participants with a proprietary interest in the growth and performance of the Company.
2. DEFINITIONS
2.1 "Award" shall mean the grant of any form of stock option to a Plan Participant pursuant to such terms, conditions, performance requirements, and limitations as the Committee may establish in order to fulfill the objectives of the Plan.
2.2 "Award Agreement" shall mean an agreement between the Company and a Participant that sets forth the terms, conditions, performance requirements, and limitations applicable to an Award.
2.3 "Board" shall mean the Board of Directors of the Company.
2.4 "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, or any successor thereto.
2.5 "Committee" shall mean the Compensation/Stock Option Committee of the Board. If at any time no Committee shall be in office, then the functions of the committee specified in the Plan shall be exercised by the Board.
2.6 "Company" shall mean Waterside Capital Corporation, a
corporation organized under the laws of the Commonwealth of Virginia, and
its subsidiaries, including subsidiaries of subsidiaries.
2.7 "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended from time to time, or any successor thereto.
|
2.8 "Fair Market Value" shall mean as of any given date, the average of the bid and ask prices for each of the preceding twenty (20) business days of the Stock on the Nasdaq SmallCap Market.
2.9 "Involuntary Separation without Cause" shall mean a termination of employment by the Company for reasons other than substantial failure to perform duties, material violation of Company policies, unethical activities, misconduct, fraud, or commission of an illegal act; provided, that, Involuntary Separation without Cause does not include a resignation or a voluntary separation from employment, in either case initiated by a Participant.
2.10 "Participant" shall mean an employee of the Company to whom an Award has been made under the Plan.
2.11 "Plan" shall mean the Waterside Capital Corporation 1998 Employee Stock Option Plan.
2.12 "Stock" shall mean the Common Stock, $1.00 par value share, of the Company.
3. EFFECTIVE DATE AND DURATION OF THE PLAN.
The effective date of the Plan is January 27, 1998, subject to approval of the Plan by the shareholders of the Company. The Plan shall remain in effect until all Awards under the Plan have been satisfied by the issuance of shares, but no Award shall be granted more than ten years after the effective date of the Plan.
4. CAPITAL STOCK AVAILABLE FOR AWARDS.
The number of shares of common stock of the Company for which Awards may be granted under the Plan shall not exceed 100,000. As soon as possible after adoption of the Plan by the Company's shareholders, the Company shall take whatever actions are necessary to file required documents with the U.S. Securities and Exchange Commission and any other appropriate governmental authorities and stock exchanges to make shares of stock available for issuance pursuant to Awards. Stock related to Awards that are forfeited, terminated, expire unexercised, or are settled in such manner that all or some of the shares covered by an Award under this Plan are not issued to a Participant shall immediately become available for Awards under this Plan.
5. ADMINISTRATION.
The Plan shall be administered and interpreted by the Committee, which shall consist of not less than two persons appointed by the Board from among its members. A person may serve on the Committee only if he or she is not eligible and has not received a grant of an Award under the Plan for at least one year before his or her appointment and satisfies the requirements of an "outside
director" for purposes of Section 162(m) of the Code. No member of the Committee
may receive Awards under the Plan. Without limiting the foregoing, the Committee
shall have full and final authority in its discretion: (i) to make, adopt,
amend, and rescind rules and regulations for the administration of the Plan;
(ii) to conclusively interpret the provisions of the Plan and to decide all
questions of fact arising in its application; (iii) to determine the employees
to whom Awards shall be made under the Plan; (iv) to determine the type of Award
to be made and the amount, size and terms of each such Award (including, but not
limited to, any restriction or condition, any schedule for lapse of restrictions
or conditions relating to transferability or forfeiture, exercisability, or
settlement of an Award, and waivers or accelerations thereof, and waiver of
performance conditions relating to an Award, based in each case on such
conditions as the Committee shall determine); (v) to determine the time when
Awards will be granted; (vi) to prescribe from time to time the form, and the
terms, provisions and conditions not inconsistent with the Plan, of any Award
Agreement; (vii) to determine whether, to what extent, and under what
circumstances cash or common stock of the Company or a combination thereof
payable or deliverable with respect to an Award will be deferred automatically,
at the election of the Board, or at the election of a Participant; and (viii) to
make all other determinations necessary or advisable for the administration of
the Plan. The Committee may designate persons other than its members to carry
out its responsibilities under such conditions or limitations as it may set,
other than its authority with regard to benefits granted to employees who are
officers or directors of the Company for purposes of Section 16 of the Exchange
Act.
6. ELIGIBILITY.
Participants shall be limited to those officers and other key employees of the Company who are in positions in which their decisions, actions and efforts significantly contribute to the success of the Company. Directors of the Company who are not otherwise officers or employees of the Company shall not be Participants.
7. AWARDS UNDER THE PLAN.
The Committee shall determine the type or types of Awards to be made to each Participant and shall set forth in each Award Agreement the terms, conditions, and limitations applicable to each Award. Awards may be granted singly, in combination or in tandem. Awards may also be made in combination or in tandem with, in replacement of, or as alternatives to, grants or rights under any other employee plan of the Company, including the plan of any acquired entity.
8. INCENTIVE STOCK OPTIONS.
Incentive stock options, or substitutes therefor, are options to purchase shares of common stock of the Company which, in addition to being subject to applicable terms, conditions, and limitations established by the Committee, comply with Section 422 of the Code. Incentive stock options shall be evidenced by Award Agreements which shall contain in substance the following terms and conditions:
8.1 Option Price. The purchase price per share of stock deliverable upon the exercise of an incentive stock option shall not be less than 100% of the Fair Market Value of the stock on the day the incentive stock option is granted, as determined by the Committee.
8.2 Exercise of Option. Each Award Agreement pursuant to which incentive stock options are granted shall state the period or periods of time within which the incentive stock option may be exercised by the Participant, in whole or in part, which shall be such period or periods of time as may be determined by the Committee, provided that the exercise period shall not end later than ten years after the date of the grant of the incentive stock option.
8.3 Nontransferability. Each Award Agreement shall state that the incentive stock option is not transferable other than by will or the laws of descent and distribution, and during the lifetime of the Participant is exercisable only by the Participant.
8.4 Payment for Shares. Stock purchased pursuant to an incentive stock option shall be paid for in full in cash or, unless the Committee determines otherwise at or prior to the time of exercise, common stock of the Company at Fair Market Value or a combination thereof, in an amount or having a combined value equal to the aggregate purchase price for the shares subject to the incentive stock option or portion thereof being exercised.
8.5 Rights Upon Termination of Employment. In the event that a Participant ceases to be an employee of the Company for any reason other than death, disability, retirement (including early retirement) or Involuntary Separation without Cause, all incentive stock options granted to the Participant shall lapse forthwith or at such other time as determined by the Committee. In the event employment ceases because a Participant dies, retires, becomes disabled, or is Involuntarily Separated without Cause, prior to expiration of the Participant's incentive stock option, without having fully exercised such incentive stock option, the Participant shall have the right to exercise the incentive stock option during its term within a period of three months after the date employment so ceased, to the extent that the incentive stock option was exercisable on the date employment ceased.
8.6 Individual Limitations.
8.6.1 Notwithstanding anything herein to the contrary, to the extent that the aggregate Fair Market Value (determined as of the time the option is granted) of stock for which any Participant is granted incentive stock options that are exercisable for the first time during any calendar year (under all such plans of the Company) shall exceed $100,000 (such excess to be determined by taking incentive stock options into account in the order in which granted), such incentive stock options to such extent shall be treated as options which are not incentive stock options.
8.6.2 Notwithstanding anything herein to the contrary, no incentive stock option shall be granted to any individual if at the time the incentive stock option is to be granted the individual owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of any parent or subsidiary corporation unless at the time such incentive
stock option is granted the option price is at least 110% of the Fair Market Value of the stock subject to the incentive stock option and such incentive stock option by its terms is not exercisable after the expiration of five years from the date such incentive stock option is granted.
8.7 Code Compliance. Each Award Agreement pursuant to which
incentive stock options are granted shall contain such other terms, conditions
and provisions as the Committee may determine to be necessary or desirable in
order to qualify such option as a tax-favored option within the meaning of
Section 422 of the Code, or the regulations thereunder. Notwithstanding Section
16 hereof, the Board shall have the power without further approval to amend the
terms of the Plan or any Awards or Award Agreements thereunder for such purpose.
9. NON-QUALIFIED STOCK OPTIONS.
Non-qualified stock options, or substitutes therefor, are options to purchase shares of common stock of the Company which are not intended to comply with Section 422 of the Code. Non-qualified stock options shall be evidenced by Award Agreements which shall contain in substance the following terms and conditions:
9.1 Option Price. The purchase price per share of stock deliverable upon the exercise of a non-qualified stock option shall be not less than 100% of the Fair Market Value of the stock on the day the non-qualified stock option is granted, as determined by the Committee.
9.2 Exercise of Option. Each Award Agreement pursuant to which non-qualified stock options are granted shall state the period or periods of time within which the non-qualified stock option may be exercised by the Participant, in whole or in part, which shall be such period or periods of time as may be determined by the Committee at the time of grant, provided that the exercise period shall not end later than ten years after the date of the grant of the non-qualified stock option.
9.3 Payment for Shares. Stock purchased pursuant to a non-qualified stock option shall be paid for in full in cash or, unless the Committee determines otherwise at or prior to the time of exercise, in common stock of the Company at Fair Market Value or a combination of cash and such common stock, in an amount or having a combined value equal to the aggregate purchase price for the shares subject to the non-qualified stock option or portion thereof being exercised.
9.4 Rights Upon Termination of Employment. In the event that a Participant ceases to be an employee of the Company for any reason other than death, disability, retirement (including early retirement) or Involuntary Separation without Cause, all non-qualified stock options granted to such Participant shall lapse forthwith or at such other time as determined by the Committee. In the event employment ceases because a Participant dies, retires, or becomes disabled, or is Involuntarily Separated without Cause prior to expiration of the Participant's non-qualified stock option without having fully exercised such non-qualified stock option, the Participant shall have the right to exercise the non-qualified stock option during its term within a period of three months after the
date employment so ceased, to the extent that the non-qualified stock option was exercisable on the date employment ceased.
9.5 Cashless Exercise. To the extent permitted under the applicable laws and regulations under Section 16 of the Exchange Act and the rules and regulations promulgated thereunder, and with the consent of the Committee, the Company agrees to cooperate in a "cashless exercise" of a non-qualified stock option. The cashless exercise shall be effected by the Participant delivering to a registered securities broker acceptable to the Company instructions to sell a sufficient number of shares of stock to cover the costs and expenses associated therewith.
10. GENERAL RESTRICTIONS.
10.1 Conditions on Company's Obligations. The Company's obligations with respect to each Award under the Plan shall be subject to the requirement that, if at any time the Committee shall determine that (i) the listing, registration or qualification of the shares of common stock subject or related thereto upon any securities exchange or under any state or federal law, (ii) the consent or approval of any government regulatory body, or (iii) an agreement by the recipient of an award with respect to the disposition of shares of common stock, is necessary or desirable as a condition of or in connection with the granting of such Award, such Award may not be consummated in whole or in part unless such listing, registration, qualification, consent, approval or agreement shall have been effected or obtained free of any conditions not acceptable to the Committee.
10.2 Per Employee Limitation on Stock Options. Notwithstanding anything in this Plan to the contrary, no Participant shall receive incentive stock options and non-qualified stock options that, in the aggregate, grant the Participant the option to purchase in excess of 25,000 shares of common stock of the Company in any given year the Plan is in effect.
11. RIGHTS TO TERMINATE EMPLOYMENT.
Nothing in the Plan or in any Award Agreement or other agreement entered into pursuant to the Plan shall confer upon any Participant the right to continue in the employment of the Company or affect any right which the Company may have to terminate the employment of such Participant.
12. WITHHOLDING.
Whenever the Company proposes or is required to issue or transfer shares of common stock under the Plan, the Company shall have the right to require the Participant to remit to the Company an amount sufficient to satisfy any federal, state and/or local tax withholding requirements prior to the delivery of any certificate for such shares or, in the discretion of the Committee, the Company may withhold from the shares to be delivered shares sufficient to satisfy all or a portion of such tax withholding requirements.
13. NONTRANSFERABILITY.
No Award under the Plan shall be assignable or transferable by the Participant other than by will or by the laws of descent and distribution. During the life of the Participant, all Awards shall be exercisable only by such person or by such Participant's guardian or legal representative.
14. NON-UNIFORM DETERMINATION.
The Committee's determinations under the Plan (including without limitation determinations of the persons to receive Awards, the form, amount and timing of such Awards, the terms, provisions and conditions of such Awards, the agreements evidencing same, and the establishment of values and performance targets) need not be uniform and may be made by it selectively among Participants who receive, or are eligible to receive, Awards under the Plan, whether or not such persons are similarly situated.
15. ADJUSTMENTS.
In the event of any change in the outstanding common stock of the Company by reason of a stock dividend or distribution, recapitalization, merger, consolidation, split-up, combination, exchange of shares or the like, in which the number of shares held by Company shareholders prior to such event is affected by such event, then the Committee shall adjust the number of shares of common stock which may be issued under the Plan and shall provide for an equitable adjustment of any outstanding Award or the number or kind of shares issuable pursuant to an outstanding Award under the Plan. Notwithstanding the foregoing, all changes in the outstanding common stock of the Company shall be considered in determining the number of shares of outstanding common stock of the Company for purposes of Section 4 of this Plan.
16. AMENDMENT.
The Board may amend, alter, suspend or terminate the Plan or the Committee's authority to grant Awards under the Plan, except that any such amendment, alteration, suspension or termination shall be subject to the ratification or approval of the Company's shareholders within one year after Board action if such shareholder ratification or approval is required by any federal or state law or regulation or the rules of any stock exchange or automated quotation system on which the common stock of the Company may then be listed or quoted, or if the Board otherwise, in its discretion, determines for any other reason to submit such changes to the Plan to shareholders for approval or ratification. The amendment, alteration, suspension or termination of the Plan shall not, without the consent of a Participant, affect the Participant's rights under an Award previously granted.
17. CHANGE OF CONTROL.
17.1 Notwithstanding any other provision of the Plan, if there is a Change of Control, as defined below, of the Company, all outstanding stock options shall become exercisable immediately prior to the consummation of the Change of Control.
17.2 A "Change of Control" of the Company shall be deemed to have occurred upon the happening of any of the following events:
17.2.1 when any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), (other than the Company or a subsidiary of the Company or any Company employee benefit plan, including any trustee of such plan acting as trustee) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of securities of the Company representing twenty percent (20%) or more of the combined voting power of the Company's then outstanding securities without the consent of a majority of the Board;
17.2.2 the occurrence of any transaction or event relating to the Company required to be described pursuant to the requirements of Item 6(e) of Schedule 14A of the Exchange Act.;
17.2.3 when, during a period of two consecutive years during the existence of the Plan, the individuals who, at the beginning of such period, constitute the Board of Directors of the Company cease for any reason other than death to constitute at least a two-thirds majority thereof, provided however, that a director who was not a director at the beginning of such period shall be deemed to have satisfied the two-year requirement if such director was elected by, or on the recommendation of, at least two-thirds of the directors who were directors at the beginning of such period (either actually or by prior operation of this section); or
17.2.4 the occurrence of a transaction requiring shareholder approval for the acquisition of the Company by an entity other than the Company through purchase of assets, or by merger, or otherwise.
18. EFFECT ON OTHER PLANS.
Participation in the Plan shall not affect an employee's eligibility to participate in any other benefit or incentive plan of the Company, and any Awards made pursuant to the Plan shall not be used in determining the benefits provided under any other plan of the Company unless specifically provided.
19. COMPLIANCE WITH EXEMPTION RULES UNDER SECTION 16 OF THE EXCHANGE ACT.
It is the intent of the Company that transactions involving equity securities under the Plan by persons subject to Section 16 of the Exchange Act be exempt under Rule 16b-3 under the Exchange
Act. Accordingly, if any provision of the Plan or any Award agreement does not comply with the requirements of Rule 16b-3 as then applicable to such a transaction, such provision shall be construed or deemed amended to the extent necessary to conform to such requirements with respect to such transaction.
20. GOVERNING LAW.
The Plan and all awards made and actions taken hereunder shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia, except to the extent federal law and the rules of regulations promulgated thereunder by the SEC apply.
WATERSIDE CAPITAL CORPORATION
1998 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
1. PURPOSE.
The purpose of the Waterside Capital Corporation 1998 Non-Employee Director Stock Option Plan (the "Plan") is to support the business goals of the Company and to attract, retain, and motivate experienced and knowledgeable non-employee directors by providing incentives that closely align their interests with those of the Company's shareholders. These objectives are accomplished by awarding stock options under the Plan, thereby providing non-employee directors with a proprietary interest in the growth and performance of the Company.
2. DEFINITIONS.
2.1 "Board" shall mean the Board of Directors of the Company.
2.2 "Change in Control" shall mean the happening of any of the following:
2.2.1 when any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), (other than the Company or a subsidiary of the Company or any Company employee benefit plan, including any trustee of such plan acting as trustee) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of securities of the Company representing twenty percent (20%) or more of the combined voting power of the Company's then outstanding securities without the consent of a majority of the Board;
2.2.2 the occurrence of any transaction or event relating to the Company required to be described pursuant to the requirements of Item 6(e) of Schedule 14A of the Exchange Act.;
2.2.3 when, during a period of two consecutive years during the existence of the Plan, the individuals who, at the beginning of such period, constitute the Board of Directors of the Company cease for any reason other than death to constitute at least a two-thirds majority thereof, provided however, that a director who was not a director at the beginning of such period shall be deemed to have satisfied the two-year requirement if such director was elected by, or on the recommendation of, at least two-thirds of the directors who were directors at the beginning of such period (either actually or by prior operation of this (iii)); or
2.2.4 the occurrence of a transaction requiring shareholder approval for the acquisition of the Company by an entity other than the Company through purchase of assets, or by merger, or otherwise.
2.3 "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time or any successor thereto.
2.4 "Company" shall mean Waterside Capital Corporation, a corporation organized under the laws of the Commonwealth of Virginia and its subsidiaries, including subsidiaries of subsidiaries.
2.5 "Disability" shall mean permanent and total disability as determined under the Company's long-term disability program.
2.6 "Eligible Director" shall mean a member of the Board who is eligible for grants under the Plan pursuant to the provisions of Section 6.
2.7 "Effective Date" shall mean January 27, 1998, subject to approval of the Plan by the shareholders of the Company.
2.8 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time or any successor thereto.
2.9 "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time, or any successor thereto.
2.10 "Fair Market Value" shall mean as of any given date, the average of the bid and ask prices for each of the preceding twenty (20) business days of the Stock on the Nasdaq SmallCap Market.
2.11 "Options" shall mean non-statutory stock options granted under this Plan to purchase shares of Stock.
2.12 "Option Agreement" shall mean an agreement evidencing the grant of an Option under the Plan in such form as the Committee may prescribe.
2.13 "Participant" means an Eligible Director who has received an Option grant under this Plan.
2.14 "Plan" shall mean the Waterside Capital Corporation 1998 Non-Employee Director Stock Option Plan, as set forth herein and as it may be amended from time to time.
2.15 "Retirement" shall mean cessation of active services as a member of the Board at or after age 65, or with the consent of the Board, any early retirement date so specified.
2.16 "SEC" shall mean the Securities and Exchange Commission.
2.17 "Stock" means the Common Stock, $1.00 par value per share, of the Company.
3. ADMINISTRATION.
The Plan shall be administered by the Board. The Board shall have full and final authority in its discretion: to make, adopt, amend, and rescind rules and regulations for the administration of the Plan; to conclusively interpret the provisions of the Plan and to decide all questions or fact arising in its application; to determine the Participants to whom awards shall be made under the Plan; to determine the type of award to be made and, subject to Section 7 hereof, to determine the amount, size and terms of each such award to Participants (including, but not limited to, any restriction or condition, any schedule for lapse of restrictions or conditions relating to transferability or forfeiture, exercisability, or settlement of an option, and waivers or accelerations thereof, and waiver of performance conditions relating to an option based in each case on such conditions as the Board shall determine); to determine the time when Options will be granted; to prescribe from time to time the form and the terms, provisions, and conditions not inconsistent with the Plan, of any agreements to be entered under the Plan; to determine whether, to what extent and under what circumstances cash or common stock of the Company or a combination thereof payable or deliverable with respect to an Option will be deferred automatically, at the election of the Board, or at the election of a Participant; and to make all other determinations necessary or advisable for the administration of the Plan. The Board may designate persons other than its members to carry out its responsibilities under such conditions or limitations as it may set.
4. SHARES OF STOCK SUBJECT TO THE PLAN.
The number of shares of common stock of the Company for which Options may be granted under the Plan shall not exceed 25,000. As soon as possible after adoption of the Plan by the Company's shareholders, the Company shall take whatever actions are necessary to file required documents with the U.S. Securities and Exchange Commission and any other appropriate governmental authorities and stock exchanges to make shares of stock available for issuance pursuant to Options. Stock related to Options that are forfeited, terminated, expire unexercised, or are settled in such manner that all or some of the shares covered by an Option under this Plan are not issued to a Participant shall immediately become available for Options under this Plan.
5. ADJUSTMENTS.
In the event of any change in the outstanding common stock of the Company by reason of a stock dividend or distribution, recapitalization, merger, consolidation, split-up, combination, exchange of shares or the like, in which the number of shares held by Company shareholders prior to such event is affected by such event, then the Committee shall adjust the number of shares of common stock which may be issued under the Plan and shall provide for an equitable adjustment of any outstanding Option or the number or kind of shares issuable pursuant to an outstanding Option under the Plan. Notwithstanding the foregoing, all changes in the outstanding common stock of the Company shall be considered in determining the number of shares of outstanding common stock of the Company for purposes of Section 4 of this Plan.
6. ELIGIBILITY.
Only members of the Board who (i) are not employees of the Company or of any subsidiary or affiliate of the Company and (ii) are elected, or are subject to election, as directors by the holders of the Company's Stock are eligible to receive grants of Options under the Plan ("Eligible Director"). Any Eligible Director to whom Options have been granted and who thereafter becomes an employee of the Company or of any subsidiary or affiliate of the Company shall cease to be eligible for any further Option grants under the Plan while an employee, but shall not, by reason of becoming an employee, cease to be eligible to retain Options previously granted under the Plan.
7. SPECIAL PROVISION RELATING TO OPTION GRANTS. ALL OPTIONS GRANTED UNDER THE PLAN SHALL BE SUBJECT TO THE FOLLOWING TERMS.
7.1 Option Exercise Price. The exercise price of all Options granted under this Plan shall be the Fair Market Value of the Stock at the time of grant.
7.2 Vesting of Option. All Options granted under this Plan shall vest on the first anniversary of grant.
7.3 Exercise of Option. All Options granted under this Plan shall expire on the first to occur of: (i) one year following the date the Participant ceases to be a member of the Board for any reason; and (ii) ten years from the date of grant of the Option.
7.4 Payment of Exercise Price. Options may be exercised in whole or in part at any time and from time to time by giving written notice of exercise to the Company specifying the number of shares to be purchased. Such notice shall be accompanied by payment in full of the purchase price, either by certified or bank check, or such other instrument as the Committee may accept. Payment in full or in part may also be made in the form of Stock already owned by the Participant. If payment of the Option exercise price is made in whole or in part in the form of Stock already owned by the Participant, the Company may require that the Stock be owned by the Participant for a period of six months or longer so that such payment would not result in a pyramid exercise. No shares of Stock shall be issued until full payment therefor has been made. A Participant shall generally have the rights to dividends or other rights of a shareholder with respect to shares subject to the Option when the Participant has given written notice of exercise, has paid in full the purchase price for such shares, and, if requested, has given the representation described in Section 12.1.
7.5 Holding Period. Any other provision of this Plan notwithstanding, a Participant may not sell or dispose of any shares of Stock acquired pursuant to the exercise of an Option until at least six (6) months have elapsed from the date of the grant of the Option.
7.6 Cashless Exercise. To the extent permitted under the applicable laws and regulations under Section 16 of the Exchange Act, and the rules promulgated thereunder by the SEC, the Company shall cooperate in a "cashless exercise" of an Option. The cashless exercise shall be effected by the Participant delivering to a registered securities broker acceptable to the Company
instructions to sell a sufficient number of shares of Stock to cover the costs and expenses associated therewith.
8. NON-TRANSFERABILITY OF OPTIONS.
No Option shall be transferable by a Participant otherwise than by will or by the laws of descent and distribution and all Options shall be exercisable, during the Participant's lifetime, only by the Participant.
9. OPTION AGREEMENT.
A Participant who has received an Option grant shall not have any rights with respect to such Option unless, within thirty (30) days of the date of the Option grant, such recipient delivers an executed copy of the Option Agreement to the Company, and complies with the applicable terms and conditions of the Option Agreement.
10. ACCELERATED VESTING AND FORFEITURE.
Any other provision of this Plan notwithstanding, all shares of Stock available under any Option granted to a Participant shall automatically vest on account of (i) death of the Participant, (ii) Disability of the Participant (iii) Retirement of the Participant, or (iv) a Change in Control of the Company. In the event a Participant ceases to be a member of the Board for any other reason, shares of Stock subject to an Option which have not vested on the date of termination shall thereafter cease to be available under the Option and shall be forfeited by the Participant.
11. AMENDMENT AND TERMINATION.
The Board may amend, alter, suspend or terminate this Plan at any time and from time to time; provided, however, that the Board may not, without approval of the shareholders of the Company, increase the maximum number of shares of Stock reserved for issuance under the Plan (other than for adjustments pursuant to Section 5), materially increase the benefits accorded to Participants under the Plan or change the description of the individuals eligible to receive Options; and provided further, that no amendment of any provision of the Plan governing the amount of Stock and price under, and timing of, grants of Options pursuant to the Plan shall be made more frequently than once in any six month period, other than to comport with changes in the Code, ERISA or the rules thereunder. No termination of or amendment to the Plan may adversely affect the rights of a Participant with respect to any Option held by the Participant as of the date of such termination or amendment without such Participant's consent.
12. GENERAL PROVISIONS.
12.1 The Committee may require each person purchasing shares pursuant to an Option under the Plan to represent to and agree with the Company in writing that the Participant is acquiring the shares without a view to distribution thereof. The certificates for such shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer. All
certificates for shares of Stock delivered under the Plan shall be subject to such stock transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Exchange Act, any stock exchange or automated quotation system upon which the Stock is then listed, and any applicable federal or state securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions.
12.2 Nothing contained in this Plan shall prevent the Board of Directors from adopting other or additional award or compensation arrangements, subject to shareholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only if specific cases.
12.3 The adoption of the Plan shall not confer upon any director of the Company any right to continue as a member of the Board.
12.4 The Committee shall establish such procedures as it deems appropriate for a Participant to designate a beneficiary to whom any amounts payable in the event of the Participant's death are to be paid.
13. WITHHOLDING.
Whenever the Company proposes or is required to issue or transfer shares of common stock under the Plan, the Company shall have the right to require the Participant to remit to the Company an amount sufficient to satisfy any federal, state and/or local tax withholding requirements prior to the delivery of any certificate for such shares or, in the discretion of the Committee, the Company may withhold from the shares to be delivered shares sufficient to satisfy all or a portion of such tax withholding requirements.
14. NON-UNIFORM DETERMINATION.
The Committee's determinations under the Plan (including without limitation determinations of the persons to receive Options, the form, amount and timing of such Options, the terms, provisions and conditions of such Options, the agreements evidencing same, and the establishment of values and performance targets) need not be uniform and may be made by it selectively among Participants who receive, or are eligible to receive, Options under the Plan, whether or not such persons are similarly situated.
15. COMPLIANCE WITH EXEMPTION RULES UNDER SECTION 16 OF THE EXCHANGE ACT.
It is the intent of the Company that transactions involving equity securities under the Plan be exempt under Rule 16b-3 under the Exchange Act. Accordingly, if any provision of the Plan or any Option or Option Agreement does not comply with the requirements of Rule 16b-3 as then applicable to such a transaction, such provision shall be construed or deemed amended to the extent necessary to conform to such requirements with respect to such transaction.
16. GOVERNING LAW.
The Plan and all awards made and actions taken thereunder shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia, except to the extent federal law and the rules and regulations promulgated thereunder by the SEC apply.
EXHIBITS FOR N-5 REGISTRATION STATEMENT
OF WATERSIDE CAPITAL CORPORATION
Exhibit 11 Opinion of Clark & Stant, P.C., a Virginia Professional Corporation, as to the legality of the shares being registered.
FORM OF LEGAL OPINION
CLARK & STANT, P.C.
Attorneys and Counselors at Law
900 One Columbus Center
Virginia Beach, Virginia 23462
Telephone (757) 499-8800
Facsimile (757) 473-0395
January 29, 1998
Waterside Capital Corporation
300 East Main Street
Norfolk, VA 23510
Ladies and Gentlemen:
This opinion is furnished to you in connection with a Registration Statement on Form N-5, dated September 30, 1997 ( S.E.C. File No. 333-36709) as amended by Amendment No. 1, dated December 12, 1997, Amendment No. 2 dated January 9, 1998 and Amendment No. 3 dated January 29, 1998 (collectively, the "Registration Statement"), filed with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Act"), relating to the public offering (the "Offering") of an aggregate of 800,000 shares of common stock, $1.00 par value per share (the "Shares"), of Waterside Capital Corporation, a Virginia corporation (the "Company"), together with an over-allotment option granted by the Company to the Underwriter (as defined below) to purchase an additional 120,000 Shares and the registration of a Common Stock Purchase Warrant (the "Warrant") and the certain shares of Common Stock underlying the Warrant (the "Warrant Shares"). The Shares are to be sold, and the Warrant and Warrant Shares issued, by the Company under an underwriting agreement (the "Underwriting Agreement") between the Company and Scott & Stringfellow, Inc. (the "Underwriter").
We have acted as counsel for the Company in connection with the sale
by the Company of the Shares and the issuance of the Warrant and the Warrant
Shares. As to matters of fact material to our opinions, we have examined and
relied on (i) signed copies of the Registration Statement and all exhibits, all
as filed with the Commission, (ii) the Underwriting Agreement in the form
Warrant and the Warrant Shares. As to matters of fact material to our opinions,
we have examined and relied on (i) signed copies of the Registration Statement
and all exhibits, all as filed with the Commission, (ii) the Underwriting
Agreement in the form Warrant and the Warrant Shares. As to matters of fact
material to our opinions, we have examined and relied on (i) signed copies of
the Registration Statement and all exhibits, all as filed with the Commission,
(ii) the Underwriting Agreement in the formof all signatures and the
authenticity of all documents submitted to us as originals, the conformity to
original documents of all documents submitted to us as certified or photostatic
copies, and the authenticity of the originals of such latter documents.
Based on the foregoing, we are of the opinion that the Shares to be sold, and the Warrant and the Warrant Shares to be issued, by the Company have been duly authorized by all necessary corporate action of the Company and, when sold and issued by the Company in accordance with the terms of the Underwriting Agreement, will be validly issued, fully paid and non-assessable.
We consent to the filing of this opinion as part of the Registration Statement and to the use of our name and in the related Prospectus under the caption "Legal Matters." We also consent to the incorporation by reference of this opinion in any subsequent registration statement for the same Offering that may be filed under Rule 462(b) of the Act.
This opinion is to be used only in connection with the offer and sale of the Shares while the Registration Statement is in effect.
Very truly yours,
CLARK & STANT, P.C.
| ARTICLE 6 |
| PERIOD TYPE | 6 MOS |
| FISCAL YEAR END | JUN 30 1998 |
| PERIOD START | JUL 01 1997 |
| PERIOD END | DEC 31 1997 |
| INVESTMENTS AT COST | 2,615,889 |
| INVESTMENTS AT VALUE | 3,059,759 |
| RECEIVABLES | 0 |
| ASSETS OTHER | 71,151 |
| OTHER ITEMS ASSETS | 1,542,149 |
| TOTAL ASSETS | 4,673,059 |
| PAYABLE FOR SECURITIES | 0 |
| SENIOR LONG TERM DEBT | 0 |
| OTHER ITEMS LIABILITIES | 238,515 |
| TOTAL LIABILITIES | 238,515 |
| SENIOR EQUITY | 0 |
| PAID IN CAPITAL COMMON | 4,330,376 |
| SHARES COMMON STOCK | 568,900 |
| SHARES COMMON PRIOR | 568,900 |
| ACCUMULATED NII CURRENT | 104,168 |
| OVERDISTRIBUTION NII | 0 |
| ACCUMULATED NET GAINS | 0 |
| OVERDISTRIBUTION GAINS | 0 |
| ACCUM APPREC OR DEPREC | 275,376 |
| NET ASSETS | 4,434,544 |
| DIVIDEND INCOME | 86,479 |
| INTEREST INCOME | 40,452 |
| OTHER INCOME | 40,380 |
| EXPENSES NET | 119,552 |
| NET INVESTMENT INCOME | 127,127 |
| REALIZED GAINS CURRENT | 0 |
| APPREC INCREASE CURRENT | 63,676 |
| NET CHANGE FROM OPS | 63,451 |
| EQUALIZATION | 0 |
| DISTRIBUTIONS OF INCOME | 0 |
| DISTRIBUTIONS OF GAINS | 0 |
| DISTRIBUTIONS OTHER | 0 |
| NUMBER OF SHARES SOLD | 0 |
| NUMBER OF SHARES REDEEMED | 0 |
| SHARES REINVESTED | 0 |
| NET CHANGE IN ASSETS | 578,127 |
| ACCUMULATED NII PRIOR | 40,717 |
| ACCUMULATED GAINS PRIOR | 0 |
| OVERDISTRIB NII PRIOR | 0 |
| OVERDIST NET GAINS PRIOR | 0 |
| GROSS ADVISORY FEES | 0 |
| INTEREST EXPENSE | 0 |
| GROSS EXPENSE | 119,552 |
| AVERAGE NET ASSETS | 4,145,480 |
| PER SHARE NAV BEGIN | 6.78 |
| PER SHARE NII | .22 |
| PER SHARE GAIN APPREC | 0 |
| PER SHARE DIVIDEND | 0 |
| PER SHARE DISTRIBUTIONS | 0 |
| RETURNS OF CAPITAL | 0 |
| PER SHARE NAV END | 7.79 |
| EXPENSE RATIO | .029 |
| AVG DEBT OUTSTANDING | 0 |
| AVG DEBT PER SHARE | 0 |